US FINANCIAL CRISIS:Effect on India Corporates.

By | September 17, 2008

Globalisation today seems like a double edged sword. If we were celebrating the big way in which major FIIs of the world were queuing up to invest in the Indian stock markets and also in major projects through FDIs, today, that same investment looks like a big burden. What we used to say with pride yesterday of “being globally aligned” seems like a curse now.

The collapse of the USA financial markets has unleashed a wave of uncertainty, we don’t know which bank or financial institution or mutual fund or insurance company might announce bankruptcy. If Lehman and Merrill could collapse, nothing more would now come as surprise, its just that people want this precipitation to get over and done with, so that we can salvage what we can from the debris and once again look at rebuilding.

For the Indian markets, this crisis of confidence is huge. We are still trying to ascertain the damage and like the rest of the world, do not know what more lies ahead. The day the news broke, there was a virtual meltdown across the board but the maximum brunt was borne by the banking, finance or NBFC stocks, realty and IT stocks. It was too early for the banks to come forth and state their damage but the markets knew that it would be substantial.

EFFECT ON INDIAN BANKS:
The worst affected is the private sector bank, ICICI Bank, its exposure is to the tune of $80 million, which it invested in Lehman’s senior bonds. The bank has issued a statement saying that it had already made provisions of $12 million on these bonds and a further $28 million worth of provisioning might be required if 50% recovery is assumed. SBI has an exposure of around $55 million (Rs256 crore) and PNB $5 million to Lehman. Bank of Baroda’s exposure is less than $10 million. Bank of India is stated to have a direct exposure of $11.33 million.

One will soon seen banks issuing statements, stating that its exposure is minimal and its impact on the profitability would not be too much. But surely, the impact would be there and profitability will take a hit. At such times, we cannot help but wonder how our hard earned money, which we park with the banks, manages to earn such losses?

EFFECT ON NBFCs:
The effect on portfolio management services is expected to be huge. Even when Bear Stearns had collapsed, there wasn’t this sense of panic and surely confidence was intact. Today, investors have lost complete faith. They are just too scared to go even bottom fishing in this market. The feeling is that this bear phase is for the long run, no one knows where the bottom is, so they feel why invest now when there might be an opportunity later? This psyche of the investors is bound to hit the business of these NBFCs. As such these NBFCs were seeing a slowdown due to lower demand from customers and challenging market conditions, The collapse just made things worse.

EFFECT ON REALTY/INFRA PROJECTS:
Now this is going to be the most troubled. Lehman and Merrill have invested through FDIs in many projects in India, in realty and infrastructure. Those projects which have received the full amount earmarked for the project are safe. But what about those, who are yet to get the promised funds? Surely their projects lay in a lurch today. Unitech has also gone on record stating that it has received Rs.740 crore and has closed the deal with Lehman Brothers. DLF Assets raised US$200 million in 2007 as equity from Lehman Brothers, the company says that the money has been received but equity is yet to be transferred. In HDIL, Lehman, through its Hong Kong subsidiary, had signed a written agreement to float a SPV for developing a project in Dharavi. That lies in uncertainty now.

Lehman had also invested $80 million in Bangalore-based SEZ Gandhi City and was likely to hike its share to $300 million. Ashok Piramal’s Peninsula Land has inked a JV with Lehman, which will have a stake of 75% is to bring in Rs.5 billion, to invest in various realty projects of Peninsula. What happens to that now?

Lehman has a 28.41% stake in KSK Energy. The above shares are locked in for a period of one year from July 05, 2008 (the date of IPO allotment) and cannot be sold in the stock market till the expiry of the said period. But does this rule hold true when Lehman goes bankrupt?

Similarly, Merrill Lynch has taken a 12.74% in Resurgere Mines.

EEFECT ON PRE-IPO PLACEMENTS:
Apart from the projects, the biggest threat is for projects which currently seeking pre-IPO placements. With a fear psychosis gripping all, and FIIs yet to ascertain the losses on which they are sitting on, it is going to become difficult for companies, vying to set up mega projects but seeking pre-IPO placements with reputed FIIs. Lack of any takers for pre-IPO stakes would mean delays. Yes, there will be other invesors who would be willing to buy stakes but would now expect it at far below the prevailing market rates. But will that again be ecnomically viable?

Adani Power is currently looking at placing 4.4-5% stake of its equity with private equity investors. Jet Airways had planned to raise $400 million from private placement with institutions. ICICI Securities planned to offload 15% of its stake to raise $1 billion. What happens to their IPOs now?

Morgan Stanley Private Equity is to pick up a 30.4% stake in Biotor Industries for Rs.240 crore ($53 million). Will that happen now? Tata’s Ginger Hotel chain planned to offload 20% of its stake to raise $75-100 million for expansion of its no-frills hotel chain Ginger. Retail chain group – Subhiksha which also nurtures plans of going public is seeking FII investment for its 9% stake and was hoping to raise $80-100 million(Rs.400 crore). Will these investments come through?

This does not bode well for the market as it is the primary which feeds the secondary market. The primary market is an indicator of the economic activity and now, with pre-IPO funding also expected to face an uphill task, IPO markets could come to a grinding halt for some time.

AIG might have been pulled back from the brink of bankruptcy but it indicates the deep rooted trouble in the US financial markets. The collapse of Lehman and Merrill is sure to have far reaching consequences in India. We can only hope that this is the end of the dark tunnel though the road to light is dark, long and winding.

NB:Article is compiled

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