Friday 30 March 2018

Ministry of Civil Aviation invites EOI tender for Air India sale

Air India divestment
Source - Airplane Pictures

Air India Expression of Interest has been released by the government. The government hopes to announce EOI winner on May 28. Then, the government would proceed with RFP and RFQ. Aviation experts suggest that the complete sell-off will be done before December 2018.

The government has decided to retain a 24 percent stake in Air India and Air India Express, as part of its divestment in the state-owned airline. The government is also proposing divesting 50 percent of its stake in Air India Sats Airport Services. The divestment is to be carried out through an open competitive bidding process.

Air India is the national flag carrier of our country with a significant market position in the domestic and international aviation market. Air India along with Air India Express has 42.8% share of international traffic to and from India among Indian carriers and 16.9% share amongst international carriers. With the competition increasing from new players in India's domestic aviation market, Air India's domestic market share has been reduced to 12.3% recently. 

Air India, being the oldest commercial airplane, has extensive reach at smaller airports. Air India, a prestigious star alliance member operates to/from 54 domestic locations and 39 international destinations. The world's longest direct flight, from Indira Gandhi International Airport in Delhi to San Francisco is operated by Air India. Air India has an operated fleet of 115 aircraft as on December 2017, comprising of Airbus and Boeing. The Air India Express, the low-cost carrier operates from 16 domestic and 13 international locations.

Air India SATS is a 50:50 joint venture between Air India Limited, and SATS Limited. As part of the Indian Government's initiative to upgrade its airports to world-class facilities and attract more airlines to fly into India, AISATS was formed with the vision to provide world-class airport services in ground and cargo handling that exceed customers’ expectations. Since the start of its operations in 2008, AISATS has provided hassle-free and comprehensive solutions to its customer airlines in international airports at Bengaluru, Delhi, Hyderabad, Mangalore, and Trivandrum. AISATS has more than 7000 employees.

The government is proposing a strategic divestment of the airline by transferring management control and sale of 76 percent of its equity share capital in Air India. Ernst and Young is the transaction advisor to the government on the divestment process.

The bidder should have a minimum net worth of 5,000 crore rupees and the requirement is subject to certain conditions depending on the class of entities. Among others, the Civil Aviation Ministry has said that each consortium member should have a positive profit after tax in at least three of the immediately preceding five financial years from the EoI deadline. The bidder will have to keep the name 'Air India' for a specified number of years mentioned in RFP proposal. The last date for submission of EoI is May 14 and intimation to the qualified interest bidders will be made on May 28. Bidding can be done as a single player or as part of a consortium.

CAPA, an aviation think-tank has said that Air India may get 6 to 8 bidders.

- Chaitanya Kulkarni

Source - Ministry of Civil Aviation.

Saturday 24 March 2018

EESL subsidiary acquires UK based Edina for Rs 493 crore

EESL India Edina UK

Energy Efficiency Services Limited (EESL), a joint venture of four National Public Sector Enterprises under administrative control of Ministry of Power, Government of India, today announced its acquisition of Edina, a leading supplier, installer and maintenance provider for combined heat and power (CHP), gas, and diesel power generation solutions in the United Kingdom (UK). The £55 million (INR 493 crore) acquisition is the first-of-its-kind venture by an entity under the Ministry of Power, Government of India and is effected through its UK subsidiary, EnergyPro Assets Limited (EPAL).

Edina has around a quarter of UK gas engine market share and turns over around £100m. EESL plans to use its acquisition both to grow the CHP market in India via ‘as-a-service’ models, and simultaneously tap into the UK energy services market. With a business experience of over 30 years, Edina services over 400 customers, providing bespoke containerized solutions that reduce customers’ energy costs and carbon emissions, while also providing a continuous and reliable power supply, from sites in the UK, Ireland, and Australia. Edina is the sole distributor of MWM gas engines in the UK and Ireland, and of Perkins diesel engines in Ireland.

“We are excited about this new venture and about harnessing the capabilities of a company that has a long history of successfully implementing combined heat and power technology. Leveraging Edina’s unique bespoke approach with our proven, innovative business models for scaling energy efficiency solutions across international borders, we are confident in the potential of this partnership to scale trigeneration technology adoption and to transform CHP market in India. The acquisition is therefore also an important strategic step in our continued efforts towards facilitating India’s energy security and sustainable energy supply.” - Saurabh Kumar, Managing Director, EESL.

EESL aims to tap into UK’s £6 billion (INR 53,782 crore) energy efficiency market, expanding the offering in the energy service contract model for CHP technology. On the other, EESL intends to bring CHP technology to India, providing an integrated service offering to industries that would enable them to receive equipment maintenance, electricity, heat and power at no upfront costs for technology installation.

EESL is implementing a global strategy and commitment to invest £150 million (INR 1,343 crore) through EPAL into energy services business opportunities in the UK, EU and North America between 2017 and 2019. EESL’s investment plan takes forward the commitment made by PM Modi and UK's May for an enhanced ‘Energy for Growth’ Partnership between the two countries.

Source - Press Release

Tuesday 13 March 2018

NPCIL and EDF sign agreement for World's largest Nuclear Power Plant.

Jaitapur Nuclear Plant in Konkan, Maharashtra will have 6 European Pressurised Reactors (EPR). The agreements were signed between Nuclear Power Corporation of India Limited and France's Electricite De France. Once completed, the plant will produce 9.6 GigaWatt clean electricity.

In presence of PM Modi and France's Macron, Nuclear Power Corporation of India Limited (NPCIL), the government-owned Indian energy company, signed an Industrial Way Forward Agreement for the implementation of six EPR reactors at the Jaitapur site in India. Jaitapur is set to be the biggest nuclear project in the world, with a total power capacity of around 10 GW.

The agreement defines the project’s industrial framework, the roles and responsibilities of the partners, as well as a planned timetable for the next steps. Despite having 80% land acquisition done, the locals in Jaitapur in Konkan area are protesting the project over misinformation spread by regional political parties and NGOs. Some fear that the technology is unused in the world. It is partially untrue as 2 EPR is under construction in France, 1 in the UK and another 1 in Taishan, China. Also, nuclear power technology is not new to India. As of today, there 22 nuclear reactors operating in India.

Under the terms of the agreement, EDF will act as a supplier of the EPR technology. EDF will undertake all engineering studies and all component procurement activities for the first two reactors. For the other four units, the responsibility for some purchasing activities and studies may be assigned to local companies. EDF will also provide NPCIL with its valuable experience from the construction of EPR reactors.

EPR reactor at Taishan, China

In its capacity as owner and future operator of the Jaitapur Nuclear Power Plant, NPCIL shall be responsible for obtaining all authorizations and certifications required in India, and for constructing all six reactors and site infrastructures. EDF and its industrial partners will assist NPCIL during the construction phase.

This industrial framework has already been approved in India and will be bolstered by the complementary skills and experience of the partners involved. In this manner, the knowledge and expertise required to operate the plant can be readily shared. It will also pave the way for the industrial involvement of Indian companies in the project, opening up possibilities for partnerships within the French nuclear power sector. In this way, the project will be developed in line with Indian policies “Make in India” and “Skill India”, with the ever-increasing participation of local companies, reaching a potential 60% for last two of the six reactors.

NPCIL and EDF have signed agreements with French and Indian players for setting out operation foundation for the Jaitapur project. The first such agreement, signed with Assystem, Egis, Reliance and Bouygues, covers the installation of an engineering platform for studies that fall within the scope of the Jaitapur project. EDF will hold 51% of the joint-venture and will be responsible for engineering integration. The second agreement, signed with Larsen&Toubro, AFCEN* and Bureau Veritas, covers the creation of a training centre compliant with standards for the design and construction of equipment for the nuclear industry (RCC codes). The objective is to train local companies on the technical standards applicable to the manufacture of equipment for the Jaitapur project.

Acting as head of the French nuclear power sector, EDF entered into exclusive negotiations with NPCIL in 2016 and in the same year it issued its first technical-commercial proposal for the development and construction of six EPRs. Jaitapur is in Maharashtra state and will be the largest nuclear power site in the world. EPR reactors - with a generating capacity of 1600 MW per unit - are particularly suitable for a country undergoing rapid growth and equipped with a mature electricity system such as in India.

- Chaitanya Kulkarni

Source - Electricite De France, Press Release

Monday 12 March 2018

Shadow Banking's continuous Rise is risk to Global Stability

Chongquing, China
Skyline of Chongqing city in China

Shadow Banking has become an unstoppable force

A decade later after 2008 Financial Crisis, the global economy is now waiting for a turnaround. The average world GDP has picked up some momentum. Although, economists from independent rating agencies believe that the double-digit growth for developing economies is yet a few years away. As the economy looks to improves, shadow banking funding seems to the next big threat to the global stability. In a simple language, shadow banking is when you have someone that does banking without being a bank.  Someone takes deposits from people and then lends it out. The concept is similar to a Ponzi scheme. Individuals or group of individuals fund corporates without the jurisdiction of the regulator or the government. When loans from registered lending channels like banks turn to NPAs within a few months, can we imagine the risk which shadow banks take?

Growth in global bond, real estate and money market funds continued to swell the world’s shadow banking sector, a watchdog that coordinates financial regulation for the G20 big economies said in its report. The value of the global shadow banking market increased by 7.6% in 2016 to $45.2 trillion, according to the Financial Stability Board (FSB) Global Shadow Banking Monitoring Report 2017.

According to the report, the $45.2 trillion figure represents 13 percent of the total financial system assets of the 29 covered jurisdictions, which represent 80 percent of the world’s GDP. The report now includes Luxembourg for the first time, bringing the total number of jurisdictions to 29.

Shadow Banking is China's magic wand to prosperity. But, what are the risks?

Also for the first time, the FSB report assesses the involvement of non-bank financial entities in China in credit intermediation that may pose financial stability risks from shadow banking. The reason that shadow banking is popular in China is that the regulated state-owned banks pay lousy interest rates and they only loan to large state-owned companies.  If someone can pay better interest rates and make loans to people that can't get loans through the normal banking system, they can make a lot of money. But, funding comes with risks too. A major default could trigger a domino effect panicking local investors which may, in turn, result in a major financial crisis in China.

China and Luxembourg contributed $7 trillion and $3.2 trillion, respectively, to the $45.2 trillion figure. Public lending may not trigger systemic risk in high capita countries like Luxembourg, Cayman Islands, Netherlands etc. Rich individuals can take risks to multiply their wealth by funding newly incorporated companies. The same system cannot be implemented countries in China, India or Thailand where per capita income is low.

With Chinese economy slowing down, Xi Jinping has tightened the regulation on shadow banking individuals and groups. Chinese daily South China Morning Post reported that the companies that had committed to buying overseas assets are now finding it hard to complete the deals amid China’s financial clean-up of its shadow banking activities and banks’ reluctance to extend loans. China, being a $10 trillion dollar economy may not face not any systemic risk. But, a range of defaults by investors abroad may destroy individual investors and medium-sized corporates.

- Chaitanya Kulkarni

Source - Financial Stability Board

Friday 9 March 2018

RBI fines three banks for holes in the banking system

Nirav Modi Vijay Mallya Jatin Mehta

Rs 29,000 crores... India's top 3 'Bhagodas' namely Nirav Modi, Vijay Mallya and Jatin Mehta duped India's state-owned and private banks and escaped India. These fraudsters have sought a safe stay in fugitive-friendly colonies of the UK. Former RBI deputy governor Subir Gokarn compared bank's bad loans to cancer. If not treated, the patient would die.
As of September 2017, nine of India’s 21 state-owned banks have more than 15% gross bad assets. IDBI Bank Ltd continues to top the list with almost one-fourth of its loans turning bad (24.98%). Followed by IDBI, the Indian Overseas Bank has 22.73% bad loans, then followed by UCO Bank (18.74%), United Bank of India (18.8%), Bank of Maharashtra (18.54%), Central Bank of India (17.27%), Dena Bank (17.23%), Oriental Bank of Commerce (16.3%) and Corporation Bank (15.28%). India's largest lender, the State Bank of India has 9.83% bad loans.

The holes in India's banking system calls for tougher laws and fixed accounting standards. Recently, the cabinet approved the establishment of National Financial Reporting Authority. The decision aims at the establishment of NFRA as an independent regulator for the auditing profession which is one of the key changes brought in by the Companies Act, 2013. The need for establishing NFRA has arisen on account of the need felt across various jurisdictions in the world, in the wake of accounting scams, to establish independent regulators, independent from those it regulates, for enforcement of auditing standards and ensuring the quality of audits to strengthen the independence of audit firms, quality of audits and, therefore,  enhance investor and  public confidence in financial disclosures of companies. 

The Modi government also plans to pass The Fugitive Economic Offenders Bill 2018 in the budget session. The Bill makes provisions for a Court ('Special Court' under the Prevention of Money-laundering Act, 2002) to declare a person as a Fugitive Economic Offender. A Fugitive Economic Offender is a person against whom an arrest warrant has been issued in respect of a scheduled offence and who has left India so as to avoid criminal prosecution, or being abroad, refuses to return to India to face criminal prosecution. only those cases where the total value involved in such offences is 100 crore rupees or more, is within the purview of this Bill.

RBI fines 3 banks for holes in the banking system

The Reserve Bank of India has stepped in the detailed scrutiny of banks processes after the PNB disclosure of Nirav Modi scam.

The RBI has imposed a monetary penalty of ₹ 30 million on Axis Bank for non-compliance with the directions issued by RBI on Income Recognition and Asset Classification (IRAC) norms. The penalty was imposed for not following RBI directions in assessment regarding Non Performing Assets as per Banking Regulation Act 1969.

State Bank of India, India's largest lender has imposed a monetary penalty in reference to currency chest inspection by RBI in 2 of its branches where counterfeit notes were found. The State Bank of India has been imposed a fine of ₹ 4 million by RBI for non-compliance with the directions issued by RBI on Detection and Impounding of Counterfeit Notes.

State-owned India Oversea Banks was fined ₹ 20 million for flouting Know Your Customers norms. A fraud was reported it one of its branches and bank officials failed to explain the regulator on why it should not be fined.

The scams are here to stay, at least for a few years. Banking think tanks need to make process design that prohibits anybody taking advantage of the system. Technologies like Blockchain, Big Data, FinTech and government regulation like Aadhaar linking and NFRA may be a ray of hope.

- Chaitanya Kulkarni