The Capitalist | Govt to face shortfall of Rs1 trillion? No problem

The Capitalist | Govt to face shortfall of Rs1 trillion? No problem
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First Published: Thu, Feb 12 2009. 01 59 AM IST

Updated: Thu, Feb 12 2009. 01 59 AM IST
It is now clear that the government will face a tax shortfall of Rs1 trillion in the current fiscal year. If one adds to it other profligate disbursements (loan waivers, subsidies, etc.), this could push India’s deficit financing to perilous levels.
This could potentially crowd out investment in infrastructure, prolonging the downturn, and also eventually pushing up inflation and interest rates.
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Such a shortfall could impact India’s credit rating, making access to foreign funds more difficult. It could also hurt the revival of capital markets that desperately need foreign investment to rebound.
Can the government make good this deficit? Yes, but not without political will. Unfortunately, it will mean hurting the pockets of some prominent politicians as well.
So, despite the possibility, collecting this low-hanging fruit may actually be impossible.
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A change of guard
The news began doing the rounds in May that Hongkong and Shanghai Banking Corp Ltd (HSBC) would soon be clinching a deal with Infrastructure Leasing and Financial Services Ltd (IL&FS) for purchasing its brokerage firm, IL&FS Investsmart Ltd (IIL) for $261 million.
Last week HSBC confirmed the deal worth Rs1,084.5 crore for a 73.21% equity stake. But a look at the exchange rate confirmed the deal had been concluded in May, when the dollar was Rs41.5. It appears that 26.8% (or veto rights over special resolutions) of the equity still remains with existing investors.
The bank’s staff began confirming this deal a month ago. First, the IL&FS technical team was transferred to the rolls of HSBC. At the same time, HSBC began informing its high net-worth clients that online share trading was now possible through IIL. which had become a part of the bank. Now the bank is set to confirm that it will change the name of IIL.
IIL was set up in 1997 and has 300 offices in India. It services 150,000 shareholders, at least 10,000 commodity customers and 130 institutional clients. For HSBC, this acquisition allows it to combine banking and investment services.
The bank currently has 47 branches in India and present in 26 locations. It is not clear if the IL&FS outlets will now be treated as branches of HSBC by the Reserve Bank of India.
HSBC becomes the third foreign bank to acquire a retail broking business in India. Earlier, BNP Paribas SA acquired Geojit Securities, and Standard Chartered Bank bought 49% of UTI Securities Ltd.
It is still unclear whether the deal will involve IL&FS Investment Managers Ltd (IIML), yet another subsidiary of IL&FS which is listed on the stock exchanges and touted on its website as one of the oldest (set up in 1989) and the largest private equity fund managers in India, with at least $1.9 billion management.
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Real estate and foreign funds
In an unrelated development last month, India’s Foreign Investment Promotion Board (FIPB) allowed IL&FS Investment Advisors Llc. (IIA), a Mauritius-based private equity arm of IL&FS, to pick up a 60% stake for Rs300 crore in Mumbai-based developers HBS Realtors.
With politicians reckoned to be the largest investor class (directly or otherwise) in India’s real estate, such clearances should have been expected. There are also fears that the non-performing assets (NPAs) of some Indian banks could rise if big real estate firms such as DLF Ltd and Unitech Ltd are allowed to languish.
FIPB also cleared several other real estate-related deals: Nand Khemka-promoted Sun Group with Qatar’s Barwa Real Estate Co. and Ajay Piramal’s real estate fund Indiareit’s acquisition of 15% stake in Mumbai-based developer Neptune Group for around Rs300 crore.
Unitech, too, plans to raise $560 million from private equity funds,
In fact, IL&FS appears to have become an important firm for bailing out the country’s real estate market.
In January last year, IL&FS-controlled real estate firm, IIML, invested Rs300 crore for a 50% stake in a township project being developed by New Delhi-based Uppal Group.
In December last year, after the real estate meltdown began, IIML announced that it had mobilized $895 million (nearly Rs4,500 crore), much more than the $525 million it got in its first real estate fund in April 2006, promising investors a 25% return. News reports say that 50% of the subscription came from US-based investors.
On 19 January, market conditions permitted it to mobilize just $225 million instead of the targeted $400 million for its growth equity fund Tara India Fund III.
As of that date, the fund said it had “invested $64 million in five deals” meant to provide growth capital to domestic companies across manufacturing, information technology, media, logistics and infrastructure services.
But why should any investor anywhere in the world invest in a real estate fund under current market conditions? We are still looking for answers.
R.N. Bhaskar runs a company with significant interests in distance learning and examination certification and writes on corporate and business policy issues. Comments on this column are welcome at capitalist@livemint.com
Graphics by Ahmed Raza Khan / Mint
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First Published: Thu, Feb 12 2009. 01 59 AM IST