By Gillian Tett
Published: December 28 2006 22:01 | Last updated: December 28 2006 22:01
When bright sparks at ABN Amro, the Dutch bank, recently invented an innovative debt product, it triggered a wave of Star Wars jokes. For the eggheads christened their brainchild – which has taken credit markets by storm this winter – a CPDO.
It stands for constant proportion debt obligation but, with a name like that, some bankers quip, it might be a new friend for R2D2 and C3PO, the robots from the films.
Welcome to the world of complex finance, a sector now so rich in abbreviations it leaves even seasoned financiers, as well as investors, scratching their heads.
A couple of decades ago, when new financial products hit the markets, banks gave them names. A host of new words crept into the investment bible over the years, such as “options”, “swaps” or “puts”.
These days, it seems, bankers cannot be bothered to name their creations. Instead, the trend is to wrap financial products in sets of initials almost as unwieldy as the products themselves. Thus the credit markets are full of CDOs (collateralised debt obligations), ABSs (asset backed securities), CDSs (credit default swaps), LCDSs (loan CDSs) and even the ABCDS (a CDS of an ABS).
Then there are CLOs (collateralised loan obligations), ECOs (equity collateralised obligations) and the recently arrived CDO2 and CDO3 (CDOs of CDOs of CDOs).
A longer-standing abbreviation is the CMBS (commercial mortgage backed securities) or its cousin the RMBS (residential mortgage backed securities), not to mention Reits (for real estate investment trusts).
This month Bank of America produced the Aldo (adjustable liabilities debt obligation), which is designed to compete with the CPDO. Bankers, however, sometimes call these “reverse CPPIs” (standing for constant proportion portfolio insurances) just to be more confusing still.
Some investors blame the “alphabet soup” on the fact that many bankers in complex finance have been trained in science and mathematics. Others suspect that bankers are just making life complicated to exude an aura of mystery – and justify fat fees.
Another factor driving the trend is broader acceleration
of the global financial innovation cycle. Low interest rates have left investors scrambling to find new ways to earn returns – and banks are responding by inventing products at such a furious pace, they barely have time to think up names.
“There is greater investor demand for products using derivatives – that drives the alphabet soup,” says Bob Pickel, head of the International Swaps and Derivatives Association (best known as the ISDA).
The soup is expected to thicken in 2007. Satyajit Das, a former derivatives trader who is now a consultant, says he is tempted to produce a spoof product called an unspecified fund obligation – or UFO.
Friday, December 29, 2006
Wednesday, December 13, 2006
Oil & Gas 101 - ABC of Industry
In this article, I will examine one of the most relevant industries of our era - petroleum. We will review the basics - constituents of petroleum, geology and then explore how oil drilling works and the later stages of completion and production. The content on the processes and geology have been extracted from several books and websites.
I have come across a lot of professionals working on specific segments of the industry - economists, investment bankers, consultants. These professionals provide some valuable advice to the industry participants, but many fail to understand the basics of the industry - like, what are the traps in the sedimentary basins where petroleum is found or the different types of technologies used in the drilling. Ofcourse, you can create your fancy financial models even without knowing the nitty gritty details, but it is always useful to have this knowledge and to speak in the language of a person in the industry.
Further articles will also explore the deal making process in the industry - how the land rights are allocated and the different types of deal structures among the industry partners.
Oil ExplorationOil is a fossil fuel that can be found in many countries around the world. In this section, we will discuss how oil is formed and how geologists find it.
Forming Oil
Oil is formed from the remains of tiny plants and animals (plankton) that died in ancient seas between 10 million and 600 million years ago. After the organisms died, they sank into the sand and mud at the bottom of the sea.
Over the years, the organisms decayed in the sedimentary layers. In these layers, there was little or no oxygen present. So microorganisms broke the remains into carbon-rich compounds that formed organic layers. The organic material mixed with the sediments, forming fine-grained shale, or source rock. As new sedimentary layers were deposited, they exerted intense pressure and heat on the source rock. The heat and pressure distilled the organic material into crude oil and natural gas. The oil flowed from the source rock and accumulated in thicker, more porous limestone or sandstone, called reservoir rock. Movements in the Earth trapped the oil and natural gas in the reservoir rocks between layers of impermeable rock, or cap rock, such as granite or marble.
These movements of the Earth include:
Folding - Horizontal movements press inward and move the rock layers upward into a fold or anticline.
Faulting - The layers of rock crack, and one side shifts upward or downward.
Pinching out - A layer of impermeable rock is squeezed upward into the reservoir rock.
Finding Oil
The task of finding oil is assigned to geologists, whether employed directly by an oil company or under contract from a private firm. Their task is to find the right conditions for an oil trap -- the right source rock, reservoir rock and entrapment. Many years ago, geologists interpreted surface features, surface rock and soil types, and perhaps some small core samples obtained by shallow drilling. Modern oil geologists also examine surface rocks and terrain, with the additional help of satellite images. However, they also use a variety of other methods to find oil. They can use sensitive gravity meters to measure tiny changes in the Earth's gravitational field that could indicate flowing oil, as well as sensitive magnetometers to measure tiny changes in the Earth's magnetic field caused by flowing oil. They can detect the smell of hydrocarbons using sensitive electronic noses called sniffers. Finally, and most commonly, they use seismology, creating shock waves that pass through hidden rock layers and interpreting the waves that are reflected back to the surface.
In seismic surveys, a shock wave is created by the following:
Compressed-air gun - shoots pulses of air into the water (for exploration over water)
Thumper truck - slams heavy plates into the ground (for exploration over land)
Explosives - drilled into the ground (for exploration over land) or thrown overboard (for exploration over water), and detonated
The shock waves travel beneath the surface of the Earth and are reflected back by the various rock layers. The reflections travel at different speeds depending upon the type or density of rock layers through which they must pass. The reflections of the shock waves are detected by sensitive microphones or vibration detectors -- hydrophones over water, seismometers over land. The readings are interpreted by seismologists for signs of oil and gas traps.
Although modern oil-exploration methods are better than previous ones, they still may have only a 10-percent success rate for finding new oil fields. Once a prospective oil strike is found, the location is marked by GPS coordinates on land or by marker buoys on water.
Preparing to Drill
Once the site has been selected, it must be surveyed to determine its boundaries, and environmental impact studies may be done. Lease agreements, titles and right-of way accesses for the land must be obtained and evaluated legally. For off-shore sites, legal jurisdiction must be determined.
Once the legal issues have been settled, the crew goes about preparing the land:
The land is cleared and leveled, and access roads may be built.
Because water is used in drilling, there must be a source of water nearby. If there is no natural source, they drill a water well.
They dig a reserve pit, which is used to dispose of rock cuttings and drilling mud during the drilling process, and line it with plastic to protect the environment. If the site is an ecologically sensitive area, such as a marsh or wilderness, then the cuttings and mud must be disposed offsite -- trucked away instead of placed in a pit.
Once the land has been prepared, several holes must be dug to make way for the rig and the main hole. A rectangular pit, called a cellar, is dug around the location of the actual drilling hole. The cellar provides a work space around the hole, for the workers and drilling accessories. The crew then begins drilling the main hole, often with a small drill truck rather than the main rig. The first part of the hole is larger and shallower than the main portion, and is lined with a large-diameter conductor pipe. Additional holes are dug off to the side to temporarily store equipment -- when these holes are finished, the rig equipment can be brought in and set up.
Setting Up the Rig
Depending upon the remoteness of the drill site and its access, equipment may be transported to the site by truck, helicopter or barge. Some rigs are built on ships or barges for work on inland water where there is no foundation to support a rig (as in marshes or lakes). Once the equipment is at the site, the rig is set up. Here are the major systems of a land oil rig:
Power system
large diesel engines - burn diesel-fuel oil to provide the main source of power
electrical generators - powered by the diesel engines to provide electrical power
Mechanical system - driven by electric motors
hoisting system - used for lifting heavy loads; consists of a mechanical winch (drawworks) with a large steel cable spool, a block-and-tackle pulley and a receiving storage reel for the cable
turntable - part of the drilling apparatus
Rotating equipment - used for rotary drilling
swivel - large handle that holds the weight of the drill string; allows the string to rotate and makes a pressure-tight seal on the hole
kelly - four- or six-sided pipe that transfers rotary motion to the turntable and drill string
turntable or rotary table - drives the rotating motion using power from electric motors
drill string - consists of drill pipe (connected sections of about 30 ft / 10 m) and drill collars (larger diameter, heavier pipe that fits around the drill pipe and places weight on the drill bit)
drill bit(s) - end of the drill that actually cuts up the rock; comes in many shapes and materials (tungsten carbide steel, diamond) that are specialized for various drilling tasks and rock formations
Casing - large-diameter concrete pipe that lines the drill hole, prevents the hole from collapsing, and allows drilling mud to circulate
Circulation system - pumps drilling mud (mixture of water, clay, weighting material and chemicals, used to lift rock cuttings from the drill bit to the surface) under pressure through the kelly, rotary table, drill pipes and drill collars
pump - sucks mud from the mud pits and pumps it to the drilling apparatus
pipes and hoses - connects pump to drilling apparatus
mud-return line - returns mud from hole
shale shaker - shaker/sieve that separates rock cuttings from the mud
shale slide - conveys cuttings to the reserve pit
reserve pit - collects rock cuttings separated from the mud
mud pits - where drilling mud is mixed and recycled
mud-mixing hopper - where new mud is mixed and then sent to the mud pits
Derrick - support structure that holds the drilling apparatus; tall enough to allow new sections of drill pipe to be added to the drilling apparatus as drilling progresses
Blowout preventer - high-pressure valves (located under the land rig or on the sea floor) that seal the high-pressure drill lines and relieve pressure when necessary to prevent a blowout (uncontrolled gush of gas or oil to the surface, often associated with fire)
Drilling
The crew sets up the rig and starts the drilling operations. First, from the starter hole, they drill a surface hole down to a pre-set depth, which is somewhere above where they think the oil trap is located. There are five basic steps to drilling the surface hole:
Place the drill bit, collar and drill pipe in the hole.
Attach the kelly and turntable and begin drilling.
As drilling progresses, circulate mud through the pipe and out of the bit to float the rock cuttings out of the hole.
Add new sections (joints) of drill pipes as the hole gets deeper.
Remove (trip out) the drill pipe, collar and bit when the pre-set depth (anywhere from a few hundred to a couple-thousand feet) is reached.
Once they reach the pre-set depth, they must run and cement the casing -- place casing-pipe sections into the hole to prevent it from collapsing in on itself. The casing pipe has spacers around the outside to keep it centered in the hole.
The casing crew puts the casing pipe in the hole. The cement crew pumps cement down the casing pipe using a bottom plug, a cement slurry, a top plug and drill mud. The pressure from the drill mud causes the cement slurry to move through the casing and fill the space between the outside of the casing and the hole. Finally, the cement is allowed to harden and then tested for such properties as hardness, alignment and a proper seal.
New Drilling Technologies
The U.S. Department of Energy and the oil industry are working on new ways to drill oil, including horizontal drilling techniques, to reach oil under ecologically-sensitive areas, and using lasers to drill oil wells.
Drilling continues in stages: They drill, then run and cement new casings, then drill again. When the rock cuttings from the mud reveal the oil sand from the reservoir rock, they may have reached the final depth. At this point, they remove the drilling apparatus from the hole and perform several tests to confirm this finding:
Well logging - lowering electrical and gas sensors into the hole to take measurements of the rock formations there
Drill-stem testing - lowering a device into the hole to measure the pressures, which will reveal whether reservoir rock has been reached
Core samples - taking samples of rock to look for characteristics of reservoir rock
Blowouts and Fires
In the movies, you see oil gushing (a blowout), and perhaps even a fire, when drillers reach the final depth. These are actually dangerous conditions, and are (hopefully) prevented by the blowout preventer and the pressure of the drilling mud. In most wells, the oil flow must be started by acidizing or fracturing the well.
Once they have reached the final depth, the crew completes the well to allow oil to flow into the casing in a controlled manner. First, they lower a perforating gun into the well to the production depth. The gun has explosive charges to create holes in the casing through which oil can flow. After the casing has been perforated, they run a small-diameter pipe (tubing) into the hole as a conduit for oil and gas to flow up the well. A device called a packer is run down the outside of the tubing. When the packer is set at the production level, it is expanded to form a seal around the outside of the tubing. Finally, they connect a multi-valved structure called a Christmas tree to the top of the tubing and cement it to the top of the casing. The Christmas tree allows them to control the flow of oil from the well.
Once the well is completed, they must start the flow of oil into the well. For limestone reservoir rock, acid is pumped down the well and out the perforations. The acid dissolves channels in the limestone that lead oil into the well. For sandstone reservoir rock, a specially blended fluid containing proppants (sand, walnut shells, aluminum pellets) is pumped down the well and out the perforations. The pressure from this fluid makes small fractures in the sandstone that allow oil to flow into the well, while the proppants hold these fractures open. Once the oil is flowing, the oil rig is removed from the site and production equipment is set up to extract the oil from the well.
Extracting the Oil
After the rig is removed, a pump is placed on the well head.
In the pump system, an electric motor drives a gear box that moves a lever. The lever pushes and pulls a polishing rod up and down. The polishing rod is attached to a sucker rod, which is attached to a pump. This system forces the pump up and down, creating a suction that draws oil up through the well.
In some cases, the oil may be too heavy to flow. A second hole is then drilled into the reservoir and steam is injected under pressure. The heat from the steam thins the oil in the reservoir, and the pressure helps push it up the well. This process is called enhanced oil recovery.
With all of this oil-drilling technology in use, and new methods in development, the question remains: Will we have enough oil to meet our needs? Current estimates suggest that we have enough oil for about 63 to 95 years to come, based on current and future finds and present demands.
I have come across a lot of professionals working on specific segments of the industry - economists, investment bankers, consultants. These professionals provide some valuable advice to the industry participants, but many fail to understand the basics of the industry - like, what are the traps in the sedimentary basins where petroleum is found or the different types of technologies used in the drilling. Ofcourse, you can create your fancy financial models even without knowing the nitty gritty details, but it is always useful to have this knowledge and to speak in the language of a person in the industry.
Further articles will also explore the deal making process in the industry - how the land rights are allocated and the different types of deal structures among the industry partners.
Oil ExplorationOil is a fossil fuel that can be found in many countries around the world. In this section, we will discuss how oil is formed and how geologists find it.
Forming Oil
Oil is formed from the remains of tiny plants and animals (plankton) that died in ancient seas between 10 million and 600 million years ago. After the organisms died, they sank into the sand and mud at the bottom of the sea.
Over the years, the organisms decayed in the sedimentary layers. In these layers, there was little or no oxygen present. So microorganisms broke the remains into carbon-rich compounds that formed organic layers. The organic material mixed with the sediments, forming fine-grained shale, or source rock. As new sedimentary layers were deposited, they exerted intense pressure and heat on the source rock. The heat and pressure distilled the organic material into crude oil and natural gas. The oil flowed from the source rock and accumulated in thicker, more porous limestone or sandstone, called reservoir rock. Movements in the Earth trapped the oil and natural gas in the reservoir rocks between layers of impermeable rock, or cap rock, such as granite or marble.
These movements of the Earth include:
Folding - Horizontal movements press inward and move the rock layers upward into a fold or anticline.
Faulting - The layers of rock crack, and one side shifts upward or downward.
Pinching out - A layer of impermeable rock is squeezed upward into the reservoir rock.
Finding Oil
The task of finding oil is assigned to geologists, whether employed directly by an oil company or under contract from a private firm. Their task is to find the right conditions for an oil trap -- the right source rock, reservoir rock and entrapment. Many years ago, geologists interpreted surface features, surface rock and soil types, and perhaps some small core samples obtained by shallow drilling. Modern oil geologists also examine surface rocks and terrain, with the additional help of satellite images. However, they also use a variety of other methods to find oil. They can use sensitive gravity meters to measure tiny changes in the Earth's gravitational field that could indicate flowing oil, as well as sensitive magnetometers to measure tiny changes in the Earth's magnetic field caused by flowing oil. They can detect the smell of hydrocarbons using sensitive electronic noses called sniffers. Finally, and most commonly, they use seismology, creating shock waves that pass through hidden rock layers and interpreting the waves that are reflected back to the surface.
In seismic surveys, a shock wave is created by the following:
Compressed-air gun - shoots pulses of air into the water (for exploration over water)
Thumper truck - slams heavy plates into the ground (for exploration over land)
Explosives - drilled into the ground (for exploration over land) or thrown overboard (for exploration over water), and detonated
The shock waves travel beneath the surface of the Earth and are reflected back by the various rock layers. The reflections travel at different speeds depending upon the type or density of rock layers through which they must pass. The reflections of the shock waves are detected by sensitive microphones or vibration detectors -- hydrophones over water, seismometers over land. The readings are interpreted by seismologists for signs of oil and gas traps.
Although modern oil-exploration methods are better than previous ones, they still may have only a 10-percent success rate for finding new oil fields. Once a prospective oil strike is found, the location is marked by GPS coordinates on land or by marker buoys on water.
Preparing to Drill
Once the site has been selected, it must be surveyed to determine its boundaries, and environmental impact studies may be done. Lease agreements, titles and right-of way accesses for the land must be obtained and evaluated legally. For off-shore sites, legal jurisdiction must be determined.
Once the legal issues have been settled, the crew goes about preparing the land:
The land is cleared and leveled, and access roads may be built.
Because water is used in drilling, there must be a source of water nearby. If there is no natural source, they drill a water well.
They dig a reserve pit, which is used to dispose of rock cuttings and drilling mud during the drilling process, and line it with plastic to protect the environment. If the site is an ecologically sensitive area, such as a marsh or wilderness, then the cuttings and mud must be disposed offsite -- trucked away instead of placed in a pit.
Once the land has been prepared, several holes must be dug to make way for the rig and the main hole. A rectangular pit, called a cellar, is dug around the location of the actual drilling hole. The cellar provides a work space around the hole, for the workers and drilling accessories. The crew then begins drilling the main hole, often with a small drill truck rather than the main rig. The first part of the hole is larger and shallower than the main portion, and is lined with a large-diameter conductor pipe. Additional holes are dug off to the side to temporarily store equipment -- when these holes are finished, the rig equipment can be brought in and set up.
Setting Up the Rig
Depending upon the remoteness of the drill site and its access, equipment may be transported to the site by truck, helicopter or barge. Some rigs are built on ships or barges for work on inland water where there is no foundation to support a rig (as in marshes or lakes). Once the equipment is at the site, the rig is set up. Here are the major systems of a land oil rig:
Power system
large diesel engines - burn diesel-fuel oil to provide the main source of power
electrical generators - powered by the diesel engines to provide electrical power
Mechanical system - driven by electric motors
hoisting system - used for lifting heavy loads; consists of a mechanical winch (drawworks) with a large steel cable spool, a block-and-tackle pulley and a receiving storage reel for the cable
turntable - part of the drilling apparatus
Rotating equipment - used for rotary drilling
swivel - large handle that holds the weight of the drill string; allows the string to rotate and makes a pressure-tight seal on the hole
kelly - four- or six-sided pipe that transfers rotary motion to the turntable and drill string
turntable or rotary table - drives the rotating motion using power from electric motors
drill string - consists of drill pipe (connected sections of about 30 ft / 10 m) and drill collars (larger diameter, heavier pipe that fits around the drill pipe and places weight on the drill bit)
drill bit(s) - end of the drill that actually cuts up the rock; comes in many shapes and materials (tungsten carbide steel, diamond) that are specialized for various drilling tasks and rock formations
Casing - large-diameter concrete pipe that lines the drill hole, prevents the hole from collapsing, and allows drilling mud to circulate
Circulation system - pumps drilling mud (mixture of water, clay, weighting material and chemicals, used to lift rock cuttings from the drill bit to the surface) under pressure through the kelly, rotary table, drill pipes and drill collars
pump - sucks mud from the mud pits and pumps it to the drilling apparatus
pipes and hoses - connects pump to drilling apparatus
mud-return line - returns mud from hole
shale shaker - shaker/sieve that separates rock cuttings from the mud
shale slide - conveys cuttings to the reserve pit
reserve pit - collects rock cuttings separated from the mud
mud pits - where drilling mud is mixed and recycled
mud-mixing hopper - where new mud is mixed and then sent to the mud pits
Derrick - support structure that holds the drilling apparatus; tall enough to allow new sections of drill pipe to be added to the drilling apparatus as drilling progresses
Blowout preventer - high-pressure valves (located under the land rig or on the sea floor) that seal the high-pressure drill lines and relieve pressure when necessary to prevent a blowout (uncontrolled gush of gas or oil to the surface, often associated with fire)
Drilling
The crew sets up the rig and starts the drilling operations. First, from the starter hole, they drill a surface hole down to a pre-set depth, which is somewhere above where they think the oil trap is located. There are five basic steps to drilling the surface hole:
Place the drill bit, collar and drill pipe in the hole.
Attach the kelly and turntable and begin drilling.
As drilling progresses, circulate mud through the pipe and out of the bit to float the rock cuttings out of the hole.
Add new sections (joints) of drill pipes as the hole gets deeper.
Remove (trip out) the drill pipe, collar and bit when the pre-set depth (anywhere from a few hundred to a couple-thousand feet) is reached.
Once they reach the pre-set depth, they must run and cement the casing -- place casing-pipe sections into the hole to prevent it from collapsing in on itself. The casing pipe has spacers around the outside to keep it centered in the hole.
The casing crew puts the casing pipe in the hole. The cement crew pumps cement down the casing pipe using a bottom plug, a cement slurry, a top plug and drill mud. The pressure from the drill mud causes the cement slurry to move through the casing and fill the space between the outside of the casing and the hole. Finally, the cement is allowed to harden and then tested for such properties as hardness, alignment and a proper seal.
New Drilling Technologies
The U.S. Department of Energy and the oil industry are working on new ways to drill oil, including horizontal drilling techniques, to reach oil under ecologically-sensitive areas, and using lasers to drill oil wells.
Drilling continues in stages: They drill, then run and cement new casings, then drill again. When the rock cuttings from the mud reveal the oil sand from the reservoir rock, they may have reached the final depth. At this point, they remove the drilling apparatus from the hole and perform several tests to confirm this finding:
Well logging - lowering electrical and gas sensors into the hole to take measurements of the rock formations there
Drill-stem testing - lowering a device into the hole to measure the pressures, which will reveal whether reservoir rock has been reached
Core samples - taking samples of rock to look for characteristics of reservoir rock
Blowouts and Fires
In the movies, you see oil gushing (a blowout), and perhaps even a fire, when drillers reach the final depth. These are actually dangerous conditions, and are (hopefully) prevented by the blowout preventer and the pressure of the drilling mud. In most wells, the oil flow must be started by acidizing or fracturing the well.
Once they have reached the final depth, the crew completes the well to allow oil to flow into the casing in a controlled manner. First, they lower a perforating gun into the well to the production depth. The gun has explosive charges to create holes in the casing through which oil can flow. After the casing has been perforated, they run a small-diameter pipe (tubing) into the hole as a conduit for oil and gas to flow up the well. A device called a packer is run down the outside of the tubing. When the packer is set at the production level, it is expanded to form a seal around the outside of the tubing. Finally, they connect a multi-valved structure called a Christmas tree to the top of the tubing and cement it to the top of the casing. The Christmas tree allows them to control the flow of oil from the well.
Once the well is completed, they must start the flow of oil into the well. For limestone reservoir rock, acid is pumped down the well and out the perforations. The acid dissolves channels in the limestone that lead oil into the well. For sandstone reservoir rock, a specially blended fluid containing proppants (sand, walnut shells, aluminum pellets) is pumped down the well and out the perforations. The pressure from this fluid makes small fractures in the sandstone that allow oil to flow into the well, while the proppants hold these fractures open. Once the oil is flowing, the oil rig is removed from the site and production equipment is set up to extract the oil from the well.
Extracting the Oil
After the rig is removed, a pump is placed on the well head.
In the pump system, an electric motor drives a gear box that moves a lever. The lever pushes and pulls a polishing rod up and down. The polishing rod is attached to a sucker rod, which is attached to a pump. This system forces the pump up and down, creating a suction that draws oil up through the well.
In some cases, the oil may be too heavy to flow. A second hole is then drilled into the reservoir and steam is injected under pressure. The heat from the steam thins the oil in the reservoir, and the pressure helps push it up the well. This process is called enhanced oil recovery.
With all of this oil-drilling technology in use, and new methods in development, the question remains: Will we have enough oil to meet our needs? Current estimates suggest that we have enough oil for about 63 to 95 years to come, based on current and future finds and present demands.
Sunday, December 10, 2006
The new tribes of polyglot finance
Indeed, a very pertinent article! The second last paragraph is what a few of us Indian bankers are trying to change. Ofcourse, this will come along with the growth of our own companies and economy and as we gain a leverage and bargaining power in the world markets.
- Parshu
By Gillian Tett
Published: December 8 2006 19:48 | Last updated: December 8 2006 19:48
When derivatives traders collect their bonuses next month, many of the “hurrahs” will be uttered in French. For though Wall Street is popularly viewed as the cradle of high finance, a curious feature of today’s financial world is that derivatives whiz-kids often hail not from the US, but France.
Some of these are found at French banks, such as BNP Paribas or Calyon; others at non-French groups, such as Barclays or JPMorgan. Either way, this Gallic bent highlights a bigger truth that politically correct banks hate to admit: namely that national patterns still exist in today’s financial jungle.
While places such as the City of London are now admirably polyglot, the distribution of these “immigrants” is uneven. “The City is extremely diverse but there are pockets of [national] concentration, particularly in sales,” says Avinash Persaud, a seasoned City observer.
Take the French. They have become prominent in complex finance, it is whispered, because numeracy is highly respected within French culture. “France has a very good educational system for producing derivatives traders,” notes Shaun Wainstein, London head of equity derivatives at BNP Paribas.
A love of abstract reasoning also helps with research skills: officials at Fitch credit rating agency, for example, have noticed a high proportion of French analysts in their London ranks. Russians are also over-represented in complex finance, perhaps reflecting a cultural emphasis on numeracy. Greeks punch above their weight in derivatives, too. India is another fertile source of whiz-kids. Indeed, some US banks now hire more graduates from the subcontinent than from Harvard.
Germans, however, are notably under-represented in complex finance. For while their education system produces brilliant scientists, these rarely want to leave academia or industry. British culture, by contrast, might have less respect for numeracy – but those eggheads who do emerge often head for the City. It is also relatively rare to see an Irish derivatives trader, though the Irish are plentiful in sales roles, which require charm. Spanish, Italians, British and French also appear whenever interpersonal skills matter, such as in advisory work.
Anglo-Saxons, meanwhile, arguably appear in most categories. But the place where Americans (and, to a lesser extent, the British) are notably over-represented is the upper echelons of investment banks, which remain dominated by white, male faces, in spite of the banks’ “diversity” rhetoric.
Of course, for every stereotype, exceptions abound. Just look at Anshu Jain, the high profile (Indian) head of investment banking at Deutsche Bank. Nevertheless, even with a meritocracy – or perhaps because of it – national patterns are likely to stay, as long as educational differences abound. Vive la différence, as the French derivatives traders might say.
The writer is the FT’s capital markets editor
Copyright The Financial Times Limited 2006
- Parshu
By Gillian Tett
Published: December 8 2006 19:48 | Last updated: December 8 2006 19:48
When derivatives traders collect their bonuses next month, many of the “hurrahs” will be uttered in French. For though Wall Street is popularly viewed as the cradle of high finance, a curious feature of today’s financial world is that derivatives whiz-kids often hail not from the US, but France.
Some of these are found at French banks, such as BNP Paribas or Calyon; others at non-French groups, such as Barclays or JPMorgan. Either way, this Gallic bent highlights a bigger truth that politically correct banks hate to admit: namely that national patterns still exist in today’s financial jungle.
While places such as the City of London are now admirably polyglot, the distribution of these “immigrants” is uneven. “The City is extremely diverse but there are pockets of [national] concentration, particularly in sales,” says Avinash Persaud, a seasoned City observer.
Take the French. They have become prominent in complex finance, it is whispered, because numeracy is highly respected within French culture. “France has a very good educational system for producing derivatives traders,” notes Shaun Wainstein, London head of equity derivatives at BNP Paribas.
A love of abstract reasoning also helps with research skills: officials at Fitch credit rating agency, for example, have noticed a high proportion of French analysts in their London ranks. Russians are also over-represented in complex finance, perhaps reflecting a cultural emphasis on numeracy. Greeks punch above their weight in derivatives, too. India is another fertile source of whiz-kids. Indeed, some US banks now hire more graduates from the subcontinent than from Harvard.
Germans, however, are notably under-represented in complex finance. For while their education system produces brilliant scientists, these rarely want to leave academia or industry. British culture, by contrast, might have less respect for numeracy – but those eggheads who do emerge often head for the City. It is also relatively rare to see an Irish derivatives trader, though the Irish are plentiful in sales roles, which require charm. Spanish, Italians, British and French also appear whenever interpersonal skills matter, such as in advisory work.
Anglo-Saxons, meanwhile, arguably appear in most categories. But the place where Americans (and, to a lesser extent, the British) are notably over-represented is the upper echelons of investment banks, which remain dominated by white, male faces, in spite of the banks’ “diversity” rhetoric.
Of course, for every stereotype, exceptions abound. Just look at Anshu Jain, the high profile (Indian) head of investment banking at Deutsche Bank. Nevertheless, even with a meritocracy – or perhaps because of it – national patterns are likely to stay, as long as educational differences abound. Vive la différence, as the French derivatives traders might say.
The writer is the FT’s capital markets editor
Copyright The Financial Times Limited 2006
Wednesday, December 6, 2006
India-Arab CEOs summit to explore biz alliances
- Economic Times December 05, 2006
NEW DELHI: About 100 Indian CEOs will be in Dubai Thursday to explore business alliances and strategies with their counterparts from the Arab world at a day-long summit.
The first India-Arab World CEO Summit, being organised by the United Arab Emirates (UAE) ministry of economy, will provide an opportunity for CEOs "to flirt with various proposals for better collaboration to boost two-way flow of investments", said Khalid Al Malik of Tatweer, a subsidiary of Dubai Holding.
Dubai Holding is a semi-government owned company with seven entities each with several subsidiaries. Among the major projects handled by the company are Dubai's Internet City and Media City.
Representatives from 22 countries from the Arab world would be taking part in the summit, which is slated to become an annual event.
"As India charts the roadmap for higher economic growth, infrastructure investment remains a major goal, while we in the Arab World are looking for investment opportunities particularly in technology.
"In the era of globalisation, the summit will help CEOs to explore how we can mutually benefit," Al Malik, who is also CEO of Moutamarat, a conference organising subsidiary of Dubai Holding, said.
Promoted by UAE Minister of Economy Sheikha Lubna bint Khalid Al Qassimi, the event is being managed by Moutamarat with the Confederation of Indian Industry (CII) as partner.
"The knowledge-based event will provide a platform for exploring opportunities and networking, and help explore strengths of different countries. We see lot of opportunities in India and this platform will help us build bridges between India and the Arab World," said Al Malik.
"Part of the Arab world's efforts to strengthen ties with Brazil, Russia, India and China or the BRIC initiative, the initiative aims for closer cooperation with the four economies as part of the globalisation strategy," he said.
India would be hosting the second summit in 2007. Moutamarat is exploring possibilities of holding a similar exercise with Chinese CEOs next year. This would be followed up with meetings with Brazilian and Russian CEOs, possibly in 2008.
Based on a knowledge report by global consultants Mckinsey and Ernst & Young, Al Malik said the plan was to have at least two CEO summits every year. The platform is also expected to help CEOs to voice views on investment hurdles and get speedy redressal.
NEW DELHI: About 100 Indian CEOs will be in Dubai Thursday to explore business alliances and strategies with their counterparts from the Arab world at a day-long summit.
The first India-Arab World CEO Summit, being organised by the United Arab Emirates (UAE) ministry of economy, will provide an opportunity for CEOs "to flirt with various proposals for better collaboration to boost two-way flow of investments", said Khalid Al Malik of Tatweer, a subsidiary of Dubai Holding.
Dubai Holding is a semi-government owned company with seven entities each with several subsidiaries. Among the major projects handled by the company are Dubai's Internet City and Media City.
Representatives from 22 countries from the Arab world would be taking part in the summit, which is slated to become an annual event.
"As India charts the roadmap for higher economic growth, infrastructure investment remains a major goal, while we in the Arab World are looking for investment opportunities particularly in technology.
"In the era of globalisation, the summit will help CEOs to explore how we can mutually benefit," Al Malik, who is also CEO of Moutamarat, a conference organising subsidiary of Dubai Holding, said.
Promoted by UAE Minister of Economy Sheikha Lubna bint Khalid Al Qassimi, the event is being managed by Moutamarat with the Confederation of Indian Industry (CII) as partner.
"The knowledge-based event will provide a platform for exploring opportunities and networking, and help explore strengths of different countries. We see lot of opportunities in India and this platform will help us build bridges between India and the Arab World," said Al Malik.
"Part of the Arab world's efforts to strengthen ties with Brazil, Russia, India and China or the BRIC initiative, the initiative aims for closer cooperation with the four economies as part of the globalisation strategy," he said.
India would be hosting the second summit in 2007. Moutamarat is exploring possibilities of holding a similar exercise with Chinese CEOs next year. This would be followed up with meetings with Brazilian and Russian CEOs, possibly in 2008.
Based on a knowledge report by global consultants Mckinsey and Ernst & Young, Al Malik said the plan was to have at least two CEO summits every year. The platform is also expected to help CEOs to voice views on investment hurdles and get speedy redressal.
India's blossoming economy
Dec 4th 2006From the Economist Intelligence Unit ViewsWire
But there are fears of tough times ahead
The acceleration of economic growth in India recently has generated upbeat assessments that Asia's other giant is finally becoming as dynamic as China, but also warnings that the economy is overheating. With GDP growth in the July-September quarter rising to 9.2% year on year, the headline news is encouraging. But there are crucial differences to the picture in China. Inflation has nearly doubled over the past 12 months. Equity and housing markets look overbought and the current account has moved sharply into deficit. Besides interest-rate hikes by the Reserve Bank of India (RBI, the central bank), little is being done by the government to orchestrate a soft landing.
GDP growth has been above 8% in six of the last seven quarters, and in the first half of the current fiscal year (April-March) it reached 9.1%, the fastest pace since economic liberalisation was begun in 1991. The second-quarter growth figure is better than the Economist Intelligence Unit had expected; consequently we are going to revise our full-year growth forecast (which currently stands at 8.4%) upwards.
That said, the economy is increasingly at risk to overheating, as a number of indicators suggest. The stockmarket has spiked, with the benchmark Bombay Sensex index rising more than 50% in the past year (and fourfold in the past three years). Property prices have soared in a number of cities. And—unlike in China, where inflation remains subdued—the cost of living has been rising at a worrying rate. The rate of headline inflation has nearly doubled in the past year as strong consumer demand, itself buoyed by wage inflation, is putting upward pressure on prices. The wholesale price index showed inflation running at 5.3% in early November, only just off the upper limit for the year specified by the RBI of 5.5%. We expect this limit to be broken, with inflation averaging 5.6% this year.
The RBI has acknowledged the risk of overheating and has been tightening monetary policy steadily, raising its benchmark repo rate (the rate at which the RBI adds funds to the banking system) 100 basis points in the past year, to 7.25%, and the reverse repo rate (the rate at which the RBI drains money from the banking system) 75 basis points to 6%. The RBI's next move will probably be a 25-basis-point increase in the reverse repo rate, to 6.25%, possibly before the central bank's next scheduled official policy announcement on January 30th 2007.
It is debateable whether this alone will be sufficient to ease inflationary pressures, however. The economy is running near or above capacity, and the RBI has noted that production must rise at a pace sufficient to match overall GDP growth if further inflationary pressures are to be avoided. Capacity is rising swiftly—we expect industrial production growth to exceed GDP growth this year and rise by 9.6%—but it is not certain that this can meet soaring domestic demand.
This highlights another difference from China, namely that in India domestic demand, not exports, is driving growth, fuelled by steady wage inflation. This (helped by a fair amount of trade liberalisation) has led to a surge in imports, turning a current-account surplus only three years ago into a substantial deficit in 2006, a swing equivalent to about 4% of GDP. In October the trade deficit hit a record US$6.2bn for the month, more than double the US$2.9bn seen in the same month in 2005. This has exacerbated imported inflation, as have high oil prices (although surging portfolio and direct investment, and high levels of remittances, have mitigated any downwards pressure on the rupee).
There is a case to be made that concerns about overheating are themselves overcooked. Much of the rise in inflation recently can be attributed to short-term supply constraints, such as a shortage of key foodstuffs thanks to an erratic summer monsoon. The government has said as much, claiming that future harvests will ease inflationary pressures (although a lack of investment in the agricultural sector is a long-term problem; in the second quarter agricultural output rose only by 1.7%, year on year, the slowest pace in one and a half years). The soundness of India's banking system means it does not share Chinese-style concerns about the future viability of loans being extended to finance soaring investment (and high credit growth has not had a direct impact on inflation).
However, lured by the prospect of finally catching up with China's growth performance, the government and the RBI are in danger of persisting with an accommodative, growth-oriented strategy that could be storing up problems for the future. Besides the RBI's rate hikes, little is being done to orchestrate a soft landing. The government has tried to ameliorate the rising cost of living by cutting domestic fuel prices (on November 29th), but this has more to do with the need to keep the electorate happy ahead of upcoming elections in four key states than with addressing the underlying causes of inflation.
Future policy is likely to stay accommodative, although a variety of measures—including steps to ease supply-side pressures, moral suasion, or prudential regulations to tame specific sectors—could be employed to lead the economy towards a soft landing. The danger is that if the RBI decides to act more aggressively in future it could trigger a sharp slowdown. Nonetheless, the government is unlikely to do much to jeopardise what Palaniappan Chidambaram, the finance minister, has called "a moment to savour" in India's modern economic history.
But there are fears of tough times ahead
The acceleration of economic growth in India recently has generated upbeat assessments that Asia's other giant is finally becoming as dynamic as China, but also warnings that the economy is overheating. With GDP growth in the July-September quarter rising to 9.2% year on year, the headline news is encouraging. But there are crucial differences to the picture in China. Inflation has nearly doubled over the past 12 months. Equity and housing markets look overbought and the current account has moved sharply into deficit. Besides interest-rate hikes by the Reserve Bank of India (RBI, the central bank), little is being done by the government to orchestrate a soft landing.
GDP growth has been above 8% in six of the last seven quarters, and in the first half of the current fiscal year (April-March) it reached 9.1%, the fastest pace since economic liberalisation was begun in 1991. The second-quarter growth figure is better than the Economist Intelligence Unit had expected; consequently we are going to revise our full-year growth forecast (which currently stands at 8.4%) upwards.
That said, the economy is increasingly at risk to overheating, as a number of indicators suggest. The stockmarket has spiked, with the benchmark Bombay Sensex index rising more than 50% in the past year (and fourfold in the past three years). Property prices have soared in a number of cities. And—unlike in China, where inflation remains subdued—the cost of living has been rising at a worrying rate. The rate of headline inflation has nearly doubled in the past year as strong consumer demand, itself buoyed by wage inflation, is putting upward pressure on prices. The wholesale price index showed inflation running at 5.3% in early November, only just off the upper limit for the year specified by the RBI of 5.5%. We expect this limit to be broken, with inflation averaging 5.6% this year.
The RBI has acknowledged the risk of overheating and has been tightening monetary policy steadily, raising its benchmark repo rate (the rate at which the RBI adds funds to the banking system) 100 basis points in the past year, to 7.25%, and the reverse repo rate (the rate at which the RBI drains money from the banking system) 75 basis points to 6%. The RBI's next move will probably be a 25-basis-point increase in the reverse repo rate, to 6.25%, possibly before the central bank's next scheduled official policy announcement on January 30th 2007.
It is debateable whether this alone will be sufficient to ease inflationary pressures, however. The economy is running near or above capacity, and the RBI has noted that production must rise at a pace sufficient to match overall GDP growth if further inflationary pressures are to be avoided. Capacity is rising swiftly—we expect industrial production growth to exceed GDP growth this year and rise by 9.6%—but it is not certain that this can meet soaring domestic demand.
This highlights another difference from China, namely that in India domestic demand, not exports, is driving growth, fuelled by steady wage inflation. This (helped by a fair amount of trade liberalisation) has led to a surge in imports, turning a current-account surplus only three years ago into a substantial deficit in 2006, a swing equivalent to about 4% of GDP. In October the trade deficit hit a record US$6.2bn for the month, more than double the US$2.9bn seen in the same month in 2005. This has exacerbated imported inflation, as have high oil prices (although surging portfolio and direct investment, and high levels of remittances, have mitigated any downwards pressure on the rupee).
There is a case to be made that concerns about overheating are themselves overcooked. Much of the rise in inflation recently can be attributed to short-term supply constraints, such as a shortage of key foodstuffs thanks to an erratic summer monsoon. The government has said as much, claiming that future harvests will ease inflationary pressures (although a lack of investment in the agricultural sector is a long-term problem; in the second quarter agricultural output rose only by 1.7%, year on year, the slowest pace in one and a half years). The soundness of India's banking system means it does not share Chinese-style concerns about the future viability of loans being extended to finance soaring investment (and high credit growth has not had a direct impact on inflation).
However, lured by the prospect of finally catching up with China's growth performance, the government and the RBI are in danger of persisting with an accommodative, growth-oriented strategy that could be storing up problems for the future. Besides the RBI's rate hikes, little is being done to orchestrate a soft landing. The government has tried to ameliorate the rising cost of living by cutting domestic fuel prices (on November 29th), but this has more to do with the need to keep the electorate happy ahead of upcoming elections in four key states than with addressing the underlying causes of inflation.
Future policy is likely to stay accommodative, although a variety of measures—including steps to ease supply-side pressures, moral suasion, or prudential regulations to tame specific sectors—could be employed to lead the economy towards a soft landing. The danger is that if the RBI decides to act more aggressively in future it could trigger a sharp slowdown. Nonetheless, the government is unlikely to do much to jeopardise what Palaniappan Chidambaram, the finance minister, has called "a moment to savour" in India's modern economic history.
Chinese PF money may find way to Indian realty
Thought this was interesting ...
MUMBAI: One really doesn’t know how Indian security agencies will react to this. Sources in the Indian real estate sector say the Chinese government is planning to invest part of the corpus from its state-run provident and social security funds in the Indian realty sector to maximise gains from one of the fastest growing markets in the world. Although the sources were vague on the exact size of investment that could likely find their way into Indian real estate, it is estimated that China has over 3 trillion yuan in social security funds that covers pensions, unemployment insurance, medical care and work injury compensation. Beijing is learnt to have asked three leading fund managers to scout for possible markets and sectors to invest its money and India is one of the shortlisted countries. The move assumes significance as the Indian government had recently expressed its reservations on Chinese investment in the local shipping and telecom sectors. Chinese investment in the development of Kerala’s Vizhinjam port has been delayed, while a similar case of feet dragging has also been witnessed in the telecom sector. Efforts by China’s telecom companies Huawei and ZTE to partner state-run BSNL’s expansion plans have also been much delayed due to inaction. “Smart money is looking for returns globally and it is no exception that money from China is likely to be invested in Indian real estate,” said a senior executive with one of India’s leading realty companies. “In real estate, most of the funds being invested is from the pension sector which is long term; hedge fund money is typically short term. But many Indian companies didn’t expect China to come in this field,” he added. Industry sources say the reason for China’s interest in Indian real estate is the fast rate of returns, about 15% to 20%, which is higher than most similar markets across the globe. In fact, the internal rate of return from retail projects is about 25%. Guru Ramakrishnan, founding partner of Old Lane, a US-based investment fund, said: “Structural supply and demand imbalances are the key factors driving the continued march up in Indian real estate prices. There is a shortfall of over 350 million square feet of commercial space for India’s services businesses between now and 2010, and a deficit of 19 million units in the residential segment.”
Old Lane recently floated an India-dedicated real estate fund with a corpus of more than $500 million. While the overall real estate sector has seen a rise in demand, there is growing interest in Indian retail. Mumbai-based brokerage firm SSKI Research expects organised retail to reach a market size of $35 billion by 2010 requiring retail space of about 212 million square feet. It is not the only time that global funds have been queuing up for India. Recent reports suggest that foreign investors have been shying away from traditional markets such as South Korea and going towards emerging markets such as Taiwan, Russia, China and India.
MUMBAI: One really doesn’t know how Indian security agencies will react to this. Sources in the Indian real estate sector say the Chinese government is planning to invest part of the corpus from its state-run provident and social security funds in the Indian realty sector to maximise gains from one of the fastest growing markets in the world. Although the sources were vague on the exact size of investment that could likely find their way into Indian real estate, it is estimated that China has over 3 trillion yuan in social security funds that covers pensions, unemployment insurance, medical care and work injury compensation. Beijing is learnt to have asked three leading fund managers to scout for possible markets and sectors to invest its money and India is one of the shortlisted countries. The move assumes significance as the Indian government had recently expressed its reservations on Chinese investment in the local shipping and telecom sectors. Chinese investment in the development of Kerala’s Vizhinjam port has been delayed, while a similar case of feet dragging has also been witnessed in the telecom sector. Efforts by China’s telecom companies Huawei and ZTE to partner state-run BSNL’s expansion plans have also been much delayed due to inaction. “Smart money is looking for returns globally and it is no exception that money from China is likely to be invested in Indian real estate,” said a senior executive with one of India’s leading realty companies. “In real estate, most of the funds being invested is from the pension sector which is long term; hedge fund money is typically short term. But many Indian companies didn’t expect China to come in this field,” he added. Industry sources say the reason for China’s interest in Indian real estate is the fast rate of returns, about 15% to 20%, which is higher than most similar markets across the globe. In fact, the internal rate of return from retail projects is about 25%. Guru Ramakrishnan, founding partner of Old Lane, a US-based investment fund, said: “Structural supply and demand imbalances are the key factors driving the continued march up in Indian real estate prices. There is a shortfall of over 350 million square feet of commercial space for India’s services businesses between now and 2010, and a deficit of 19 million units in the residential segment.”
Old Lane recently floated an India-dedicated real estate fund with a corpus of more than $500 million. While the overall real estate sector has seen a rise in demand, there is growing interest in Indian retail. Mumbai-based brokerage firm SSKI Research expects organised retail to reach a market size of $35 billion by 2010 requiring retail space of about 212 million square feet. It is not the only time that global funds have been queuing up for India. Recent reports suggest that foreign investors have been shying away from traditional markets such as South Korea and going towards emerging markets such as Taiwan, Russia, China and India.
Monday, December 4, 2006
Kick-starting corporate bond markets
A modern economy cannot run on love and fresh air. It runs on modern practices,” said the finance minister, P Chidambaram, speaking in Hyderabad earlier this month.
He was bang on, except that in one major area — the corporate bond market — there’s little sign of modern practices being introduced. This, despite the fact that it’s close to a year since the Patil committee set out a detailed roadmap on what needs to be done to energise the market.
It’s also close to 10 years since the East Asian crisis that saw Asian governments resolve to develop their corporate bond markets as a cushion to deal with volatile capital outflows. But with the exception of Japan, none of the others, including India, has made much progress.
Indeed India today ranks last among the BRIC economies, Brazil, Russia, India and China, with outstanding corporate debt of little over $2 billion compared to Brazil’s close to $4 billion, Russia’s $10 billion and China’s $12 billion, according to IMF estimates (2004).
This is surprising since both government as well as financial market players have often expressed their eagerness to see a well-functioning corporate debt market in place. So what gives? Why have we not been able to make any progress? More important, is there any way of putting the pieces in place?
The main problem, as a finance ministry official speaking at the just concluded World Economic Forum confessed, is that there are just too many obstacles — political, legal and policy-related — to the emergence of a vibrant corporate bond market.
To begin with, there are 78 laws, starting from the definition of a corporate bond, that need to be amended. Unfortunately, given the glacial pace at which legislative changes happen in our country, none of that is going to happen overnight.
Some changes can, of course, be incorporated in the new Companies Bill. But there are other changes that would not only need amendments to various Acts but would also require a supporting institutional machinery to be put in place.
For instance, holders of corporate bonds are not sure they will be able to enforce their rights in case of default by bond issuers. So unless there is a complete overhaul of the role and responsibility of debenture trustees and of bankruptcy law and procedures, it is unlikely they will be attracted to the market.
Yet given our huge infrastructure deficit — it is estimated India will need $320 billion for infrastructure projects over the Eleventh Plan period — we desperately need to bring our moribund bond market to life.
The reason is three-fold: the inability of government to invest on this scale; the demise of development financial institutions that provided long-term money in the past; and the inability of banks to extend term finance beyond a point, since the bulk of their funds is of much shorter duration. Consequently, the bulk of infrastructure financing will have to be through corporate bond issues.
The government, therefore, has two choices. Either it can wait till it gets all the necessary legislation in place before it does anything. Or, as with much else in the Indian context, it can plunge in.
Do whatever is possible immediately and then keep tweaking the system as the situation evolves. This is what it has done in a number of areas, notably value-added tax (VAT), where we pushed ahead with a far from perfect VAT and yet have not fared too poorly as a consequence.
The process is definitely messy and is fraught with frequent policy contradictions. But it is better than waiting endlessly for everything to become picture perfect before taking the first step. More so given the Indian predilection to debate issues endlessly.
So, what are the immediate changes that can give a boost to the market? As the first step, the government needs to encourage more players and simultaneously, take steps to improve liquidity and transparency so that secondary market transactions become easier.
In the equity market, automated nationwide real-time trading and settlement, depositories and an active regulator transformed the Indian equity markets. If the same can be replicated in the case of corporate bonds, there is no reason why the bond market cannot be transformed.
Fortunately, there some signs of movement on the ground. The finance ministry has got Cabinet approval to remove the legal ambiguities over asset-backed securitisation. This will enable special purpose vehicles to issue asset-backed securities for trading and will partially address the issue of poor volumes on the supply side, apart from improving the quality of paper.
The RBI could contribute by relaxing its existing guidelines on securitising debts. It could also incentivise corporates to issue bonds rather than resort to cash credit facilities by advising banks to offer a lower rate of interest on bonds.
On the demand side, pending pension and insurance sector reform that would bring in more players seeking long-term paper, investment guidelines for existing superannuation funds could be relaxed in line with those for employees PF. It could also raise the FII limit for investment in corporate bonds.
The issue of states levying varying stamp duties, making trading cumbersome, could be addressed by Sebi mandating that all bond issues as well as subsequent trading should be in demat form, as with equities. Section 8A of the Indian Stamp Act 1899 already has an enabling provision to this effect. TDS (tax deducted at source), another irritant, could be done away with as has been done for government securities.
Sebi can help with easier listing requirements, shelf prospectuses and less stringent disclosure requirements for already listed entities so that the edge that private placements have over public issues vanishes. It can ask exchanges to create a centralised database.
True, some niggling turf battles between Sebi and the RBI remain. But these are essentially over derivatives and can be addressed later. K Kamaraj, the Congress president through the ’60s and ’70s had a stock answer to sticky problems: parkalam (let’s see). It held him in good stead and might do likewise for compatriot, P Chidambaram. So let’s start with a cash market and see!
He was bang on, except that in one major area — the corporate bond market — there’s little sign of modern practices being introduced. This, despite the fact that it’s close to a year since the Patil committee set out a detailed roadmap on what needs to be done to energise the market.
It’s also close to 10 years since the East Asian crisis that saw Asian governments resolve to develop their corporate bond markets as a cushion to deal with volatile capital outflows. But with the exception of Japan, none of the others, including India, has made much progress.
Indeed India today ranks last among the BRIC economies, Brazil, Russia, India and China, with outstanding corporate debt of little over $2 billion compared to Brazil’s close to $4 billion, Russia’s $10 billion and China’s $12 billion, according to IMF estimates (2004).
This is surprising since both government as well as financial market players have often expressed their eagerness to see a well-functioning corporate debt market in place. So what gives? Why have we not been able to make any progress? More important, is there any way of putting the pieces in place?
The main problem, as a finance ministry official speaking at the just concluded World Economic Forum confessed, is that there are just too many obstacles — political, legal and policy-related — to the emergence of a vibrant corporate bond market.
To begin with, there are 78 laws, starting from the definition of a corporate bond, that need to be amended. Unfortunately, given the glacial pace at which legislative changes happen in our country, none of that is going to happen overnight.
Some changes can, of course, be incorporated in the new Companies Bill. But there are other changes that would not only need amendments to various Acts but would also require a supporting institutional machinery to be put in place.
For instance, holders of corporate bonds are not sure they will be able to enforce their rights in case of default by bond issuers. So unless there is a complete overhaul of the role and responsibility of debenture trustees and of bankruptcy law and procedures, it is unlikely they will be attracted to the market.
Yet given our huge infrastructure deficit — it is estimated India will need $320 billion for infrastructure projects over the Eleventh Plan period — we desperately need to bring our moribund bond market to life.
The reason is three-fold: the inability of government to invest on this scale; the demise of development financial institutions that provided long-term money in the past; and the inability of banks to extend term finance beyond a point, since the bulk of their funds is of much shorter duration. Consequently, the bulk of infrastructure financing will have to be through corporate bond issues.
The government, therefore, has two choices. Either it can wait till it gets all the necessary legislation in place before it does anything. Or, as with much else in the Indian context, it can plunge in.
Do whatever is possible immediately and then keep tweaking the system as the situation evolves. This is what it has done in a number of areas, notably value-added tax (VAT), where we pushed ahead with a far from perfect VAT and yet have not fared too poorly as a consequence.
The process is definitely messy and is fraught with frequent policy contradictions. But it is better than waiting endlessly for everything to become picture perfect before taking the first step. More so given the Indian predilection to debate issues endlessly.
So, what are the immediate changes that can give a boost to the market? As the first step, the government needs to encourage more players and simultaneously, take steps to improve liquidity and transparency so that secondary market transactions become easier.
In the equity market, automated nationwide real-time trading and settlement, depositories and an active regulator transformed the Indian equity markets. If the same can be replicated in the case of corporate bonds, there is no reason why the bond market cannot be transformed.
Fortunately, there some signs of movement on the ground. The finance ministry has got Cabinet approval to remove the legal ambiguities over asset-backed securitisation. This will enable special purpose vehicles to issue asset-backed securities for trading and will partially address the issue of poor volumes on the supply side, apart from improving the quality of paper.
The RBI could contribute by relaxing its existing guidelines on securitising debts. It could also incentivise corporates to issue bonds rather than resort to cash credit facilities by advising banks to offer a lower rate of interest on bonds.
On the demand side, pending pension and insurance sector reform that would bring in more players seeking long-term paper, investment guidelines for existing superannuation funds could be relaxed in line with those for employees PF. It could also raise the FII limit for investment in corporate bonds.
The issue of states levying varying stamp duties, making trading cumbersome, could be addressed by Sebi mandating that all bond issues as well as subsequent trading should be in demat form, as with equities. Section 8A of the Indian Stamp Act 1899 already has an enabling provision to this effect. TDS (tax deducted at source), another irritant, could be done away with as has been done for government securities.
Sebi can help with easier listing requirements, shelf prospectuses and less stringent disclosure requirements for already listed entities so that the edge that private placements have over public issues vanishes. It can ask exchanges to create a centralised database.
True, some niggling turf battles between Sebi and the RBI remain. But these are essentially over derivatives and can be addressed later. K Kamaraj, the Congress president through the ’60s and ’70s had a stock answer to sticky problems: parkalam (let’s see). It held him in good stead and might do likewise for compatriot, P Chidambaram. So let’s start with a cash market and see!
Sunday, December 3, 2006
Foreign Direct Investment in Infrastructure and construction-development projects
2005
With a view to catalysing investment in townships, housing, built-up infrastructure and construction development projects, the Indian government allows FDI up to 100% under the automatic route (which would include housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure).
There are some restrictions such as the minimum area of development under each project, minimum capitalization of $10m and a maximum duration of 5 years for 50% of the project.
With a view to catalysing investment in townships, housing, built-up infrastructure and construction development projects, the Indian government allows FDI up to 100% under the automatic route (which would include housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure).
There are some restrictions such as the minimum area of development under each project, minimum capitalization of $10m and a maximum duration of 5 years for 50% of the project.
Saturday, December 2, 2006
US listing loses some of its value
Investors are paying sharply lower premiums for shares of foreign companies listed in the US, following a 2002 crackdown on corporate malfeasance, according to new academic research.
The findings are expected to be cited in a report due to be released by the Committee on Capital Markets Regulation, a private sector group studing the impact of regulation on the competitiveness of US financial markets, an issue new US Treasury Secretary Henry Paulson has emphasized.
Foreign companies whose shares are listed both in their home market and on a US stock exchange traditionally trade at a higer vlauation relative to book value, or the accounting value of its assets, than domestic peers that aren't cross-listed. That premium might result from the greater trust investors place in a company that has met US listing standards, or the deeper market for its shares a US listing brings.
The premium for listing in the US in addition to the home stockk market has dropeed sharply since 2002, according to Luigi Zingales, a finance professor at the University of Chicago's graduate business school and a member of the capitla markets committee.
He measured the advantages of listing in the US by tracking the difference between market value - the price at which a company's stock is trading - and book value. If a cross-listed company traded at 150% of book value, and a similar company from the same country that was listed only on a home market traded at 120% of book vlaue, the "valuation premium" was 30 percentage points.
The premium averaged 51 percentage points from 1997 to 2001, then dropped to 31 percentage points between 2002 and 2005, he found.
In theory, investors might pay more for shares of a company that meets more stringent rules because of good corporate governance. But Mr. Zingales found the premium fell most sharply for companies from countries with well-regarded corporate governance standards, such as Japan, Hong Kong, Canada and the UK. That implies investors saw more costs than benefits in a US listing after 2002, he said.
By contrast, companies from countries with poor corporate governance, such as Italy and Turkey, saw little change or an increase in the premium for cross-listing. That suggests investors felt the additional benefit of such companies meeting the post-2002 regulations equaled or outweighed the extra cost. Mr. Zingales measures corporate governance quality according to how well minority shareholders are treated relative to controlling shareholders....
- Wall Street Journal Exclusive
The findings are expected to be cited in a report due to be released by the Committee on Capital Markets Regulation, a private sector group studing the impact of regulation on the competitiveness of US financial markets, an issue new US Treasury Secretary Henry Paulson has emphasized.
Foreign companies whose shares are listed both in their home market and on a US stock exchange traditionally trade at a higer vlauation relative to book value, or the accounting value of its assets, than domestic peers that aren't cross-listed. That premium might result from the greater trust investors place in a company that has met US listing standards, or the deeper market for its shares a US listing brings.
The premium for listing in the US in addition to the home stockk market has dropeed sharply since 2002, according to Luigi Zingales, a finance professor at the University of Chicago's graduate business school and a member of the capitla markets committee.
He measured the advantages of listing in the US by tracking the difference between market value - the price at which a company's stock is trading - and book value. If a cross-listed company traded at 150% of book value, and a similar company from the same country that was listed only on a home market traded at 120% of book vlaue, the "valuation premium" was 30 percentage points.
The premium averaged 51 percentage points from 1997 to 2001, then dropped to 31 percentage points between 2002 and 2005, he found.
In theory, investors might pay more for shares of a company that meets more stringent rules because of good corporate governance. But Mr. Zingales found the premium fell most sharply for companies from countries with well-regarded corporate governance standards, such as Japan, Hong Kong, Canada and the UK. That implies investors saw more costs than benefits in a US listing after 2002, he said.
By contrast, companies from countries with poor corporate governance, such as Italy and Turkey, saw little change or an increase in the premium for cross-listing. That suggests investors felt the additional benefit of such companies meeting the post-2002 regulations equaled or outweighed the extra cost. Mr. Zingales measures corporate governance quality according to how well minority shareholders are treated relative to controlling shareholders....
- Wall Street Journal Exclusive
Thursday, November 30, 2006
The Pension bonanza
We could soon see an explosion in domestic institutional investments with the finance ministry permitting investment of pension fund assets into equity markets. This will not only put the pension fund into balance but also help in the explosion of the already high equity markets in India. The rise of pension fund deficits and regulatory change has finally brought new thinking on investment strategy for the public pension schemes.
The centrally managed funds carry assets reaching nearly 4% of the GDP amounting $30bn. The diversification in the investment strategy into equities and corporate bonds will be a very important development and a move for the funds towards liability driven performance targeting.
More on this in the coming blogs
The centrally managed funds carry assets reaching nearly 4% of the GDP amounting $30bn. The diversification in the investment strategy into equities and corporate bonds will be a very important development and a move for the funds towards liability driven performance targeting.
More on this in the coming blogs
Monday, November 27, 2006
Tapping Middle East capital
Many of my entrepreneur friends in India keep asking me for sources of funding from private equity houses and venture capitalists. The large investment houses in the Middle East Gulf could potentially be a very good form of financing for business initiatives in India.
There are many reasons for a successful partnership between the two regions - the Gulf is filled with a lot of expatriate professionals originating from India and several Indians occupy senior positions in the investment houses there. The locals in the Gulf understand the culture very well owing to their long relationship with the subcontinent. The currency of Bahrain, for example, was the Indian rupee till the early 1970s. Indian companies are experiencing great growth momentums and this could provide great returns for these investment houses. Indian companies can have access to a relatively cheap source of capital from a neighbouring region.
More than talking about the merits and demerits, I would like this to be a source of information for Indian companies about the Gulf region. Below is a list of some of the biggest funds in the region. Please contact me if you need additional information
Funds:
Al Madina for Non Listed Companies Fund
Technology Venture Fund
New Enterprise Fund
MENA Real Estate Development Fund
Abraaj North Africa Fund
Infrastructure and Growth Capital Fund
Fortune Management PE Funds
Barada Investment I
Boubyan International Real Estate Fund
Al Masdar Renewable Energy Fund
Injaz Mena Private Equity Funds
DIB / DWP Family of Funds
Al Tawfeek Private Equity Fund
India Fund
GCC Infrastructure Fund
EFG-Hermes Oil & Gas Fund
The Carlyle Group MENA Fund
EMP ENergy Fund
Fortis - Fransabank PE Fund
IT Ventures II
NCB Private Equity Fund
KPC Renewable Energy Fund (NET)
Evolvance Private Equity GCC Fund
Evolvance Educational Fund
Byblos Private Equity Fund
MENA Infrastructure Fund
NBK Capital Equity Partners
DIB-DPW Telecom, Media, & Technology Fund
DIB-DPW Global Energy Fund
Delta Capital MENA Telecom Fund
Euro-Mediterranean Fund (ALTERMED)
Noor Secondary Fund I
Alf Yad 1
Shefa HealthCare Fund E.C.
Ryada Islamic Private Equity Fund / Capital Private Equity Fund
Frontier Opportunities Fund I
Gulf Springs Real Estate Fund
Carnelian I
Growth Gate
Technology Development Fund II
Horus Agri Fund
Catalyst Private Equity
Arab Technology Ventures
Zad Communication and Technology Fund
TNI Private Equity Fund
Levant Capital
Al Rajhi Real Estate Fund
SAGIA ICT Fund
Abraaj-BMA Pakistan Buyout Fund LP
The Pre-IPO Fund
Global Opportunistic Fund II
Technology Development Fund
JD Capital
Ascent Medical Technology Fund II
GCC Energy Fund L.P.
Gulf Capital
Private Equity Fund
Capital Morocco LP
MENA Small and Medium Enterprises (SME) Fund
The Jordan Fund
Horus Private Equity II
Saraya Real Estate Mena Fund
Middle East Real Estate Opportunities Fund II
Middle East Real Estate Opportunities Fund
Markaz Energy Fund
Abraaj Buyout Fund II
GCC Real Estate Fund
AGRAM Fund
Markaz Real Estate Fund
The Markaz / Hamilton Lane Technology Fund
Capital North Africa Venture Fund
Ithmar Fund II
IDB Infrastructure Fund L.P.
HSBC Private Equity Middle East
Maghreb Private Equity Fund II
Abraaj Real Estate Fund
MENA Capital Private Equity Fund I
SHUAA Partners Fund I, L.P.
Kuwait Private Equity Opportunities Fund
Swicorp Joussour Fund
Amwal Al Khaleej Commercial Investment Company
Accelerator Technology Fund
Intaj Capital
Swicorp Emerge Invest
AlArabi PE Fund
Intel Capital Middle East and Turkey Fund
EuroMena Fund
The Buildings by Daman
Lebanon Real Estate Development Fund, L.P.
Athar Al Majd Diversified Private Equity Fund I
National Technology Enterprises Company NTEC
Aqar Management I
IT Ventures
KFH Venture Capital Fund
MENA Water Ventures
Eagle One Real Estate Investment Company (Holding)
Tuninvest Innovation
Jordan Hi-Tech Venture Fund
Injazat Technology Fund
Ithmar Fund I
Capital Morocco Fund
MENA Direct Investment Fund
Buyout Fund I
Middle East Technology Fund (METF)
IT Concord-Mist Technology Venture Capital Fund Limited
Egyptian Direct Investment Fund Limited
Tuninvest Magreb PE Fund
Tuninvest International Ltd
Tuninvest International SICAR
Tuninvest Tunisie SICAR
Commercial Int'l Investment Company
Tuninvest
Daman Iraqi Opportunities Fund
Minah Ventures
Horus Private Equity Fund
Estithmaar Ventures TMT Fund, LP
LI Venture Holding SAL
There are many reasons for a successful partnership between the two regions - the Gulf is filled with a lot of expatriate professionals originating from India and several Indians occupy senior positions in the investment houses there. The locals in the Gulf understand the culture very well owing to their long relationship with the subcontinent. The currency of Bahrain, for example, was the Indian rupee till the early 1970s. Indian companies are experiencing great growth momentums and this could provide great returns for these investment houses. Indian companies can have access to a relatively cheap source of capital from a neighbouring region.
More than talking about the merits and demerits, I would like this to be a source of information for Indian companies about the Gulf region. Below is a list of some of the biggest funds in the region. Please contact me if you need additional information
Funds:
Al Madina for Non Listed Companies Fund
Technology Venture Fund
New Enterprise Fund
MENA Real Estate Development Fund
Abraaj North Africa Fund
Infrastructure and Growth Capital Fund
Fortune Management PE Funds
Barada Investment I
Boubyan International Real Estate Fund
Al Masdar Renewable Energy Fund
Injaz Mena Private Equity Funds
DIB / DWP Family of Funds
Al Tawfeek Private Equity Fund
India Fund
GCC Infrastructure Fund
EFG-Hermes Oil & Gas Fund
The Carlyle Group MENA Fund
EMP ENergy Fund
Fortis - Fransabank PE Fund
IT Ventures II
NCB Private Equity Fund
KPC Renewable Energy Fund (NET)
Evolvance Private Equity GCC Fund
Evolvance Educational Fund
Byblos Private Equity Fund
MENA Infrastructure Fund
NBK Capital Equity Partners
DIB-DPW Telecom, Media, & Technology Fund
DIB-DPW Global Energy Fund
Delta Capital MENA Telecom Fund
Euro-Mediterranean Fund (ALTERMED)
Noor Secondary Fund I
Alf Yad 1
Shefa HealthCare Fund E.C.
Ryada Islamic Private Equity Fund / Capital Private Equity Fund
Frontier Opportunities Fund I
Gulf Springs Real Estate Fund
Carnelian I
Growth Gate
Technology Development Fund II
Horus Agri Fund
Catalyst Private Equity
Arab Technology Ventures
Zad Communication and Technology Fund
TNI Private Equity Fund
Levant Capital
Al Rajhi Real Estate Fund
SAGIA ICT Fund
Abraaj-BMA Pakistan Buyout Fund LP
The Pre-IPO Fund
Global Opportunistic Fund II
Technology Development Fund
JD Capital
Ascent Medical Technology Fund II
GCC Energy Fund L.P.
Gulf Capital
Private Equity Fund
Capital Morocco LP
MENA Small and Medium Enterprises (SME) Fund
The Jordan Fund
Horus Private Equity II
Saraya Real Estate Mena Fund
Middle East Real Estate Opportunities Fund II
Middle East Real Estate Opportunities Fund
Markaz Energy Fund
Abraaj Buyout Fund II
GCC Real Estate Fund
AGRAM Fund
Markaz Real Estate Fund
The Markaz / Hamilton Lane Technology Fund
Capital North Africa Venture Fund
Ithmar Fund II
IDB Infrastructure Fund L.P.
HSBC Private Equity Middle East
Maghreb Private Equity Fund II
Abraaj Real Estate Fund
MENA Capital Private Equity Fund I
SHUAA Partners Fund I, L.P.
Kuwait Private Equity Opportunities Fund
Swicorp Joussour Fund
Amwal Al Khaleej Commercial Investment Company
Accelerator Technology Fund
Intaj Capital
Swicorp Emerge Invest
AlArabi PE Fund
Intel Capital Middle East and Turkey Fund
EuroMena Fund
The Buildings by Daman
Lebanon Real Estate Development Fund, L.P.
Athar Al Majd Diversified Private Equity Fund I
National Technology Enterprises Company NTEC
Aqar Management I
IT Ventures
KFH Venture Capital Fund
MENA Water Ventures
Eagle One Real Estate Investment Company (Holding)
Tuninvest Innovation
Jordan Hi-Tech Venture Fund
Injazat Technology Fund
Ithmar Fund I
Capital Morocco Fund
MENA Direct Investment Fund
Buyout Fund I
Middle East Technology Fund (METF)
IT Concord-Mist Technology Venture Capital Fund Limited
Egyptian Direct Investment Fund Limited
Tuninvest Magreb PE Fund
Tuninvest International Ltd
Tuninvest International SICAR
Tuninvest Tunisie SICAR
Commercial Int'l Investment Company
Tuninvest
Daman Iraqi Opportunities Fund
Minah Ventures
Horus Private Equity Fund
Estithmaar Ventures TMT Fund, LP
LI Venture Holding SAL
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About Me
- Parshu
- I am an investment banker based in the far east, Hong Kong. My education and work has taken me to numerous countries around the world, and that imbibes me a very strong passion for traveling, exploring new places and cultures. I am curious about history and how different societies have evolved over time. Two other interests of mine are hiking, and I have just put up a new blog related to this, and also an activity that was introduced to me as a child, but have seriously got into it just recently - yoga.