Tej Web World

The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934.The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated.Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India.

The Reserve Bank’s affairs are governed by a central board of directors. The board is appointed by the Government of India in keeping with the Reserve Bank of India Act.

The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as:“…to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.”

Monetary Authority

• Formulates, implements and monitors the monetary policy.
• Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors.

Regulator and supervisor of the financial system

• Prescribes broad parameters of banking operations within which the country’s banking and financial system functions.
• Objective: maintain public confidence in the system, protect depositors’ interest and provide cost-effective banking services to the public. The Banking Ombudsman Scheme has been formulated by the Reserve Bank of India (RBI) for effective redressal of complaints by bank customers.

Manager of exchange control

• Manages the Foreign Exchange Management Act, 1999.
• Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.

Issuer of currency

• Issues and exchanges or destroys currency and coins not fit for circulation.
• Objective: the main objective is to give the public adequate supply of currency of good quality and to provide loans to commercial banks to maintain or improve the GDP(Gross Domestic Product).

The basic objectives of RBI are to issue bank notes, to maintain the currency and credit system of the country to utilize it in its best advantage, and to maintain the reserves. RBI maintains the economic structure of the country so that it can achieve the objective of price stability as well as economic development, because both objectives are diverse in themselves.

Developmental role

• Performs a wide range of promotional functions to support national objectives.

Related functions

• Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker.
• Bank to banks: maintains banking accounts of all scheduled banks

The Reserve Bank of India performs this function under the guidance of the Board for Financial Supervision (BFS). The Board was constituted in November 1994 as a committee of the Central Board of Directors of the Reserve Bank of India.

Objective

Primary objective of BFS is to undertake consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies.

Constitution

The Board is constituted by co-opting four Directors from the Central Board as members for a term of two years and is chaired by the Governor. The Deputy Governors of the Reserve Bank are ex-officio members. One Deputy Governor, usually, the Deputy Governor in charge of banking regulation and supervision, is nominated as the Vice-Chairman of the Board.

BFS meetings

The Board is required to meet normally once every month. It considers inspection reports and other supervisory issues placed before it by the supervisory departments.

BFS through the Audit Sub-Committee also aims at upgrading the quality of the statutory audit and internal audit functions in banks and financial institutions. The audit sub-committee includes Deputy Governor as the chairman and two Directors of the Central Board as members.

The BFS oversees the functioning of Department of Banking Supervision (DBS), Department of Non-Banking Supervision (DNBS) and Financial Institutions Division (FID) and gives directions on the regulatory and supervisory issues.

After demerging the cement business from Grasim Industries, the Aditya Birla group has decided to merge the new cement subsidiary with group firm UltraTech Cement Ltd.

Grasim Industries’ decision to restructure its cement assets into a separately listed entity, with the ultimate aim of merging it with UltraTech’s cement business, is seen in a positive light. However, while the deal looks beneficial from a long-term perspective, analysts believe that there are no immediate gains. But, they expect shareholders of UltraTech Cement to gain marginally from a possible re-rating in the near-term.

Grasim Industries demerged its cement business into Samruddhi Cement Ltd, a wholly-owned subsidiary of Grasim, as part of its restructuring plan, where Grasim’s shareholders would receive one equity share of Samruddhi for every one share they held in Grasim. Grasim has taken the first step towards consolidating its cement business into one entity, creating a new holding company.

Grasim plans to hive-off its cement assets, excluding its 54.78 per cent stake in UltraTech Cement, into Samruddhi Cement effective October 1, 2009. The shareholders of Grasim will get a share each of Rs 5 each in the new company, aggregating to 35 per cent (or 9.17 crore shares), while Grasim will continue to control Samruddhi with a 65 per cent stake (17 crore shares).

Later, Samruddhi will seek a separate listing, though it will be for a short-period, as consequent to approval of concerned authorities as well as shareholders of Grasim and UltraTech, the cement businesses of Samruddhi and UltraTech are planned to be merged to form India’s largest cement company with an installed capacity of nearly 50 million tonnes per annum (mtpa). Post merger, Grasim is estimated to have a controlling stake of about 60 per cent in the larger cement entity

The move is designed to ensure Grasim’s majority stake in, and continued support to, the rapidly growing cement business; while simultaneously, providing Grasim shareholders direct participation in the pure play cement company.

Whilst Grasim’s commitment to fund growth of cement business remains unabated, the demerger opens up new choices for financing this growth.” Eventually, it will also help create a platform for potential consolidation. All of which, should help maximise shareholder value in the long-run.

Grasim, meanwhile, would continue to focus on its VSF business, which so far provided a large part of the cash-flows to grow the cement business. Grasim is setting up a new Rs 1,000 crore project in Gujarat, which will increase its VSF capacity by 80,000 tpa. VSF, along with other businesses accounted for a third of profits of Grasim’s standalone numbers in FY09. Post demerger, Grasim will operate the VSF and other small business and have cash and investments worth Rs 1,500 crore. Analysts say, its ability to effectively utilise this cash and operating profits of over Rs 700 crore annually, will have a bearing on the value accretion for its shareholders, going ahead.

What needs to be watched is the merger ratio between Samruddhi and UltraTech. While the market is currently according similar valuations to the cement business of the two companies (adjusted for the different face values), in Grasim’s case, a few believe that there could be some upside in the form of a slightly better valuation given to Samruddhi due to its larger size and ownership of a profitable white cement business.

While the move is in the right direction, the concerns regarding the potential over-supply situation and soft cement prices loom large for the cement industry. In this context, many analysts believe that Grasim is fairly valued while they see gains of up to 10 per cent for UltraTech from current levels.

Ultratech Cement Ltd has announced that Ultratech Cement Ltd has received a consolidation proposal from Samruddhi Cement Ltd a wholly owned subsidiary of Grasim Industries Ltd.

Grasim has proposed to de merge its cement business to Samruddhi pursuant to a scheme of arrangement under Sections 391-394 of the Companies Act 1956, subject to necessary approvals.

The board of directors of UltraTech Cement  approved in-principle the merger proposal of group company Samruddhi Cement with itself.

The company has appointed Bansi Mehta & Company for the valuation exercise and UBS as investment banker.

The company expects the valuation report by the first week of November, and the board will meet again as soon as it receives the report.

The entire process will be completed within seven to nine months. Extra care will be taken to protect the interest of Grasim investors.Clearing misgivings that Grasim would be reduced to a holding company of the cement business, Mr Birla said the re-rating of UltraTech post-merger would more than make up for the loss, if any, incurred by Grasim shareholders.

While UltraTech commands an enterprise value of $110 a tonne, Ambuja Cement and ACC are rated at $147 a tonne, while it is $160 a tonne for Shree Cement. UltraTech will be re-rated substantially post-merger.

Grasim will continue to invest in cement through UltraTech though the mode of investment (debt or equity) will be decided at the appropriate time. The group does not propose to add any new business to Grasim as it wants to retain its identity of a textile company.

At Recessionary times ,when even the Economies of developed nations struggled to survive,Indian Economy,despite being a developing country,managed to sustain the inflation.Almost none of the Indian Companies were severly affected.The Regulations & Policies deployed by the Government combine with stimulus packages aideie the Economy to Fight the Recession.Compared to other Economies,only few jobs were lost,which were quickly recruited back.     According the latest financial market news, India has seen a steep growth in the recent time defying all the turbulence caused by the economic slowdown. Touching the mark of US$ 1.04 trillion, India’s market capitalization has gained the whopping ninth position in the entire world.

The overall magic has occurred due to the optimistic government reforms and continuity in policies which have given the Indian stock market a great boost. With this, the Indian economy is all set to witness a turn-around within then next six to nine months and as the breaking news indicate the financial world is abuzz with the latest in the Indian capital market reforms. This indicates that Indian companies shall see a huge rise in money nurtured from the IPOs in the fiscal year 2010. Moreover, as the economic experts indicate that the bulk liquidity that has flooded into the economic system is central banks driven and this same liquidity finds its way into the stock markets too.

Despite slowing from highs of 8% to 9% growth, India’s economy will grow close to 6% in 2009. Amid domestic and global liquidity crunch, large domestic savings and corporate retained earnings are financing investment. Sluggish labor market and wealth effects have hit urban consumption. But low export dependence, a large consumption base and the high share of employment (two-thirds) and income (one-half) coming from rural areas has helped sustain consumption. Pre-election spending, especially in rural areas, and high government expenditure, are also pluses. Timely monetary and credit measures have played a key role in improving private demand, liquidity and short-term rates and reducing the risk of loan losses. Credit is largely channeled by domestic banks, especially state-controlled ones, which have low loan-to-deposit ratios and little exposure to toxic assets

India’s economy has been one of the stars of global economics in recent years, growing 9.2% in 2007 and 9.6% in 2006. Growth had been supported by markets reforms, huge inflows of FDI, rising foreign exchange reserves, both an IT and real estate boom, and a flourishing capital market.

The Centre s stimulus package, the first installment of which was announced at the end of last year to kick start the economy, has seen the desired results with the country being resilient to the overall global economic slowdown. Sectors like automobile, which were witnessing sluggish sales, have started looking up with eight consecutive months of higher sales leading the industry body, Society of Indian Automobile Manufacturers (Siam) announcing double digit growth in the current fiscal. In fact, the country may beat its own record of the highest sales set in 2006-07. Things are looking up in sectors like steel, cement and consumer durables. FE spoke to a cross section of India Inc leaders to assess whether it s time for the government to withdraw the stimulus package. The overwhelming response was that though the signals were bright, the government should carry on for some more time with the stimulus. The consensus was the RBI should carry on with the soft interest rate regime. Akhil Gupta, deputy group CEO and MD, Bharti Enterprises: Unlike most developed economies, India did not have to resort to any major fiscal stimuli. The Indian economy did not face the distress the other economies did and, expectedly, has been among the first to recover. Considering the relatively low level of fiscal stimulus, it would be prudent to let this continue for some time so that all uncertainties about our economic health are completely removed; and after that it should be withdrawn gradually . Swati Piramal, director, Piramal Healthcare: The stimulus has really worked well as reflected in double digit growth in industrial production. These measures should be continued for another one and two years . Ravi Sud, CFO, Hero Honda Motors: The government s stimulus package was timely, and certainly helped industry to grow. However, with so much liquidity in the system, there is likely to be pressure on inflation. If interest rates go up, it would also put pressure on growth. Fiscal deficit also remains a concern, and the government has to address it sooner than later . Pawan Goenka, president (automotive sector), Mahindra and Mahindra said, We believe that the stimulus package should continue. Any disturbance in the current positive momentum could easily reverse the current positive trend . Rajiv Dube, president (passenger cars), Tata Motors (TATAMOTORS.BO : 618.9 -2.65): Call of the industry is for the stimulus packages to continue. The world is not off the recession yet and if you see many of the countries that had floated stimulus packages are continuing with them. Indian authorities have been prompt with their support to the industry and have set an example in front of the world . RC Bhargava, chairman, Maruti Suzuki India: Numbers are going up in relation to last year when sales were very low. Since the growth that we ve seen is a two-year growth, the government support in the form of stimulus should not be withdrawn at this time as it will badly impact the customer sentiment and ability to purchase. Moreover, as uncertainty over interest rate and commodity prices continues to prevail, the government should continue the stimulus package. HS Lheem, managing director, Hyundai Motor India: Stimulus package by the government in the past has been helpful for the automobile industry. But with the scrappage incentive coming to an end in most EU countries, Centre s support in the form of stimulus package is needed to keep export on the growth path .

In wake of the present economic slowdown and the stimulus package announced by the Government, CII conducted a snap poll to analyse the impact of various initiatives, announced as part of the first & second  stimulus packages on the Micro, Small & Medium Enterprises (MSMEs).

The findings of the snap poll revealed that as part of the First stimulus package, the Reduction in CENVAT by 4%, followed by Interest rate cut of 0.5% for small and 1% for micro enterprises by PSU banks, Export support by interest subvention of 2 %, Reduction in lock in period under Credit Guarantee scheme  from 24 to 18 months and Additional Plan Expenditure of Rs 20,000 crores, will  have a beneficial impact for the MSMEs.

The structural transformation that has been adopted by the national government in recent times has reduced growth constraints and contributed greatly to the overall growth and prosperity of the country. However there are still major issues around federal vs state bureaucracy, corruption and tariffs that require addressing. India’s public debt is 58% of GDP according to the CIA World Fact book, and this represents another challenge.

During this period of stable growth, the performance of the Indian service sector has been particularly significant. The growth rate of the service sector was 11.18% in 2007 and now contributes 53% of GDP. The industrial sector grew 10.63% in the same period and is now 29% of GDP. Agriculture is 17% ofthe Indian economy.

Growth in the manufacturing sector has also complemented the country’s excellent growth momentum. The growth rate of the manufacturing sector rose steadily from 8.98% in 2005, to 12% in 2006. The storage and communication sector also registered a significant growth rate of 16.64% in the same year.

Additional factors that have contributed to this robust environment are sustained in investment and high savings rates. As far as the percentage of gross capital formation in GDP is concerned, there has been a significant rise from 22.8% in the fiscal year 2001, to 35.9% in the fiscal year 2006. Further, the gross rate of savings as a proportion to GDP registered solid growth from 23.5% to 34.8% for the same period.

The government has been concerned about the impact of the global financial crisis on the Indian economy and a number of steps have been taken to deal with this problem,” an official statement said.

The steps taken by the Reserve Bank of India to pump in sufficient liquidity in the financial system are being “supplemented by fiscal measures designed to stimulate the economy. In recognition of the need for a fiscal stimulus the government had consciously allowed the fiscal deficit to expand beyond the originally targeted level.”

As part of steps to create demand in the economy that is expected to grow by over 7 per cent, “the total spending programme in the balance four months of the current fiscal year, taking plan and non-plan expenditure together is expected to be Rs 300,000 crore (Rs 3,000 billion).”

Having assured stability of the financial system, the government said it has focussed its attention on countering the impact of the global recession on India’s economic growth.

“The economy will continue to need stimulus in 2009-2010 also and this can be achieved by ensuring a substantial increase in plan expenditure as part of the budget for next year,” it added.

The measures also included the government departments being allowed to seek replacement of government vehicles within the allowed budget, in relaxation of extant economy instructions.

“The government is keeping a close watch on the evolving economic situation and will not hesitate to take any additional steps that may be needed to counter recessionary trends and maintain the pace of economic activity,” it added.