Date: June 2010.

Issue: 13 RNRL TO MERGER WITH RELIANCE PETROLEUM LTD.

FACULTY MENTOR July 4th, the Anil Dhirubhai Ambani group announced the merger of Reliance Natural
Resources Ltd. (RNRL) with Reliance Petroleum Ltd. (RPL) in a swap ratio of 4:1 i.e.
PROF. V R SHAHANE
every shareholder holding 4 shares of RNRL will get one share of RPL.
THE IES INVESTORZ The main reason behind the merger was the recent government policy. RNRL was created
five years ago to buy natural gas from RIL at a subsidized rate and transmit it to R-Power
AKSHATA MOHALE but Supreme Court decision on May 7 th 2010 over the RNRL-RIL casehighlighted that
only actual users of gas, such as power and fertilizer companies, are entitled to the gas.
AMIT MEHTA Supreme Court also asserted that government has ultimate control of how gas supply in
India is allocated. RNRL itself has no power projects of its own—it’s essentially trading
AMIT BHINDE
the gas—against the government’s desire to allocate gas to end-users and not traders.,
For ADAG, it was essential to merge RNRL with RPL because now RNRL have no role in
ANJANA GALA getting gas available for RPL and if left on its own, RNRL was a redundant entity without
any assets. Without the merger, RNRL’s share value would have eroded rapidly
HARDIK SHAH The merger is expected to accelerate R-Power’s plans for setting up an 8,000 mw gas-fired
power unit. Post merger, R-Power will have ownership of RNRL’s share in four coal-bed
KARAN MEHTA methane blocks and an oil and gas block in Mizoram. RNRL’s proposed shipping venture
will also come in handy for R-Power because it will be able to use the vessels for captive
MANISH GROVER usage. On the other hand, RNRL shareholders will benefit from R-Power’s generation
portfolio of 37,000 mw and its coal reserves in India and abroad
MISHA JASANI
The swap ratio of 4:1 is on the basis of valuation done by KPMG on theweighted average
of Discounted Cash Flow (DCF) , Current Market price (CMP) and book value.
PRADEEP RAGHVAN
The swap ratio was also in lines in market capitalization of the two stocks on Friday, July
RUSHABH DOSHI 2nd. RNRL’s market capitalisation was Rs 10,394 crore, nearly one-fourth of that of R-
Power’s Rs 41,979 crore.
SARATH BANGERA Experts were estimating the valuation to be done only on the basis of book value. The book
value of RNRL is Rs 12 and that of RPL is Rs 60. This could have resulted in a swap ratio
of 5 : 1
UTSAV SAVADIA
However, there was a huge disappointment among the share-holders since the market price
of RPL (Rs 175.15) was around 2.7 times of market price of RNRL (Rs 63.65). This
resulted in huge fall in price of RNRL on the next trading day, Monday, July 5 th. It slipped
QUOTE
Rs 17.35, or 27.26%, to close at Rs 46.30. It also touched an intraday low of Rs 45.50.
“I never attempt to make
money on the stock
market. I buy on the DID YOU KNOW?
assumption that they
could close the market
the next day and not Bank of America was started as Bank of Italy by Amedeo Giannini in San Francisco on
reopen it for five years.” October 17, 1904. The name was changed to Bank of America in the year 1928.
Warren Buffett
 IFRS COUNTDOWN TO APRIL 1, 2011
IFRS Convergence in India has gained significant momentum due to the issuance of the Press Announcement
by the Ministry of Corporate Affairs in January 2010. This provides great regulatory clarity in this area.
Specifically, the phased approach to IFRS convergence is extremely sensible in the context of the large
number of companies that will be impacted by the transition. Medium-sized and Smaller companies that
transition in 2013 or 2014 can learn from the knowledge and experience gained during the transition by phase
one companies. However, implementation of the same for banking, insurance and non-baking finance
companies (NBFC) has been deferred.

While the regulators have made good progress to ensure this accounting alignment, there are concerns about
the pace of progress in related areas such as taxation and other regulatory matters. Whether the changes in
accounting practices will be acceptable for tax purposes. For example, if dividend on redeemable preference
shares is charged to the profit and loss account as 'interest', will such interest be tax deductible? It is likely
that differences between book profits and taxable profits will increase due to the transition. All such
incremental differences need to be identified.

A related issue is around 'distributable profits'. For example, several types of unrealized gains such as
unrealized gains on derivatives and trading investments would be recorded through the profit and loss
account, under the IFRS converged standards. Would such 'unrealized profits' be distributable as dividends or
adjustments would be required to 'revenue reserves' per the books to arrive at the 'revenue reserves' available
for dividend distribution?

The good thing is that the above issues are not unique to India and have been dealt with in Europe and other
countries that have transitioned to IFRS. One basic approach can be to require that standalone legal entity
financial statements are prepared per one set of standards (uniformly applied by all companies); while only
the consolidated financial statements are prepared using the IFRS converged standards.

By the end of 2014-2015 only listed companies and unlisted companies which have a net worth of more than
500 crore would transition while there would presumably be lakhs of other companies which are not listed
and which are below 500 crore which would continue to be under the old Indian accounting standard. Under
IFRS there are many items in the profit and loss account which will be accounted very differently. For
example, let us take preference shares. Preference shares are treated as equity today as far as the financial
statements are concerned and therefore dividend on preference shares is treated as appropriation. It is not a
deductible item from the profits. Now under IFRS, company which follow IFRS will treat that as a charge to
the profit and loss account and would therefore probably expect to get that as a deductible item from an
income tax perspective while there would be several lakh other companies which would not charge that to the
P&L and therefore would not be entitled to that benefit and therefore the question is, do we accept that
different regime or alternatively do we have a certain provisions in the direct tax code which say that for
companies that follow IFRS, here are the additional adjustments that will be recorded to the book profits to
bring them at par with other companies that do not follow that standard.

This is matter that needs to be seriously considered by Indian regulators.

 THE WORLD OUTLOOKS AT INDIAN ECONOMY
2009 2010 2009 2010
Country/ Region Forecast Forecast Country/ Region Forecast Forecast
* * * *
Emerging and developing
World 4.6 4.3 economies 6.8 6.4
Commonwealth of Independent
Advanced economies 2.6 2.4 States 4.3 4.3
United States 3.3 2.9 · Russia 4.3 4.1
Euro Zone 1 1.3 · Excluding Russia 4.4 4.7
· Germany 1.4 1.6 Asia 9.2 8.5
· France 1.4 1.6 · China 10.5 9.6
· Italy 0.9 1.1. · India 9.4 8.4
· Spain (0.4) 0.6 · ASEAN-5 ** 6.4 5.5
Japan 2.4 1.8 Middle East and North Africa 4.5 4.9
United Kingdom 1.2 2.1 Sub Saharan Africa 5 5.9
Canada 3.6 2.8 Brazil 7.1 4.2
Other advanced economies 4.6 3.7 Mexico 4.5 4.4
(* Year on year percentage change) (**Indonesia, Malaysia, Philippines, Thailand and Vietnam)
At a time when the fears of a double dip recession has been plaguing the markets world over, the International
Monetary Fund's (IMF) upward revision of its estimates for the world economy has comes as a welcome
surprise. This is based on high frequency indicators (like industrial production, merchandise exports,
manufacturing purchasing index to name a few), which have been pointing to a diminishing rate of decline in
the global output. The good news is that the forces pulling the economy down are decreasing in intensity but
the bad news is that the forces required to pull the economy up are still weak.

World economic growth is driven by the Asian region led by China and India,due to economic activity which
has been sustained by continuousrise in exports and private domestic demand. Exports have been boosted by
the global and domestic inventory cycles and by recovery of final demand in some advanced economies.
Private fixed investment has strengthened on the back of higher capacity utilization and low cost of capital.
For the third consecutive quarter IMF has upgraded India’s economic growth forecast. IMF forecasts a 9.4%
growth in 2010 indicating that it is confident that growth will be a robust one. The government’s own
economic growth projection for the year to March 2011 is 8.5%, while that of Citi and Icrier are 8.6% and
8.4% respectively. According to IMF, India’s growth is likely to be driven by corporate investment on
account of strong profitability and easier availability of credit.
IMF forecasts growth during the December 2010 quarter to be a sizzling 10.3% year-on-year. This is more
than its forecast of China's growth rate of 9.8% during the same quarter, making India's growth rate the
highest during the quarter among all the countries listed by IMF in its update to the World Economic Outlook.
However, central bank in India and other emerging economies can't afford to take it easy. IMF data shows that
core inflation continues to accelerate. IMF retaining India’s 2011 growth forecast at 8.4%, has hedged its
current estimates by pointing out that there remain sharp downside risks on account of weaknesses in
developed economies. It cautioned that further measures in global risk aversion, especially in the euro zone,
could cause capital outflows from the Asian region thereby affecting the liquidity in these markets and
weakening of equity valuations. That could, in turn, undermine favorable financing conditions and hamper the
domestic demand.
 CHANGED BUSINESS FUNDAMENTALS FOR THE BETTER

The average
8 listed company has to comply with several laws as it goes about conducting its business. Of
these, there are three pieces of legislation that arguably have the most impact on its business. First, there is the
Companies Act, which governs the corporate form. Then there is the Income Tax Act, which taxes the income
of the company. Finally, there are indirect taxes (Excise, Customs, Service Tax, VAT, Sales Tax etc.) which
essentially tax consumption. The government is proposing several important changes in each of these areas of
late.

The Companies Bill

The new Companies Bill takes a fresh look at what companies can and cannot do. It has been tabled in the
Parliament in August this year and is currently being examined by a parliamentary committee.

The new bill has a fresh take on several issues such as insider trading, independent directors, class action
suits, public deposits, fair valuation, consolidation of financial statements, mergers & acquisitions and special
courts. One of main criticisms of the bill is that the main Act has been shortened and powers have been
delegated to ‘rules’ which will be formed under the Act.

The Direct Tax Code

The all-important Income Tax Act is set for an overhaul with the introduction of the Direct Taxes code
proposed to be launched by April, 2011. The new code stresses on simpler sections. It also proposes lower tax
rates on the basis that lower rates improve compliance.

However there are objections from several quarters regarding such areas as income from salaries and capital
gains; taxation of charitable organizations, minimum alternate tax based on assets and international taxation.
On its part, the government has assured that the suggestions regarding these areas will be incorporated in the
bill.

The Goods and Services Tax

India is set to take the most important step ever towards indirect tax reforms with the introduction of the
‘goods and services tax’ (GST) from April, 2010. It will abolish the ‘central sales tax’ and include services
under ‘value added tax’ (VAT). Hence, for the first time, state governments will be able to tax services. The
GST will have a uniform tax rate structure throughout the country. It will create a common market within
India for the first time. Another key feature of GST is that a set off on all indirect taxes paid on inputs will be
provided. It may be noted that about 150 countries around the world have GST. It has implications on the
financial relations between the Centre and states in a federal structure like India. That needs to be sorted out.

The importance of a legal framework cannot be stressed enough. It acts as the invisible infrastructure that
supports business activity. Hence, in our opinion, the government’s focus on updating business laws is
welcome. The rapidly changing business landscape in India does require a legal framework which is in tune
with the times. However, in the matters of law, the devil always lies in the details. Getting these details right
requires a sustained push from the government. It is also requires a great deal of time for the back and forth
between the various interested parties before the laws settle down.
 SOME FINANCIAL TERMS
Pre-Money Valuation: A phrase that refers to the value of a company's stock before it goes public. The term
is often used by venture capitalists.In venture capital, an estimate of the value of a privately held company
before its IPO. Venture capitalists use the pre-money valuation to help determine how much money an IPO is
likely to raise. However, the pre-money valuation is, at best, an educated guess, and there is no guarantee that
the IPO will actually raise that much. It is also called simply pre-money.

Decoupling Theory: Decoupling holds that European and Asian economies, especially emerging ones, have
broadened and deepened to the point that they no longer depend on the United States for growth, leaving them
insulated from a severe slowdown there, even a fully-fledged recession.Faith in the concept has generated
strong outperformance for stocks outside the United States. In January 2008 as fears of recession mounted in
the United States, stocks declined heavily. Contrary to what the decouplers would have expected, the losses
were greater outside the United States, with the worst experienced in emerging markets and developed
economies like Germany and Japan. Exports make up especially large portions of economic activity in those
places, but that was not supposed to matter anymore in a decoupled world because domestic activity was
thought to be so robust

Purchasing Managers Index: The Purchasing Managers Index is released on the first day of the month by the
National Association of Purchasing Managers. The PMI measures five factors in business: new orders,
inventory levels, production, supplier delivers, and employment conditions. Each of these five factors are
adjusted and weighed according to time of year and other events.A PMI over 50% means that manufacturing is
growing and expanding. A PMI under 50% means that manufacturing is declining. a PMI of 42.7% or more
over a long period of time means the economy as a whole is expanding. A PMI of 42.7% of below over a long
period of time means the economy as a whole is contracting.

Open market operations: Open market operations are the means of implementing monetary policy by which
a central bank controls its national money supply by buying and selling government securities, or other
financial institutions. Monetary targets, such as interest rates or exchange rates, are used to guide this
implementation.

Negative equity: Negative equity often occurs when a homeowner purchases a house using a mortgage and
then the economy starts to slow or home prices start to drop. After the house purchase, the value of the home
decreases below the value of the amount owed on the mortgage, causing negative equity. Negative equity is
calculated simply by taking the value of the asset less the balance on the outstanding loan.

Stock Split: Stock split is a corporate action which splits the existing shares of a particular face value into
smaller denominations so that the number of shares increase ,but , the market capitalization or the value of
shares held by the investors post split remains the same as that before the split.Splitting a stock may increase its
liquidity,since more investors are able to afford the share and the toatl outstanding shares of the company also
increase in the market.

Discretionary Cost : Cost such as that of advertising, preventive maintenance, research and development, that
a manager may eliminate or postpone without disrupting the firm's operations or affecting its productive
capacity in the short run. A discretionary cost is usually specific in amount, or is determined by a formula such
as a certain percentage of sales revenue.
 IMPLICATIONS OF CHINESE YUAN APPRECIATION

Recently, there has been a lot of news and evidence supporting the likelihood of the Chinese authorities
allowing the Chinese currency, the yuan or renminbi (CNY), to trade within a wider trading band.
Why?
China is unlikely to allow its currency to appreciate because of external pressures, such as U.S. political
pressure; It is believe China will move when Chinese policy makers deem it in their national interest. While
this is not a certainty, it is anticipate that inflationary pressures will force the Chinese authorities' hand. The
Chinese have recently conducted studies on the likely impact a stronger CNY would have on the domestic
economy.
Implications for the Chinese yuan
Presently, the Chinese maintain a managed currency regime, whereby they purchase U.S. dollars (USD) in the
open market to “peg” the value of the CNY to the USD. Should they allow the value of the CNY to trade
within a wider band, they would likely buy less USD. As this would reduce the overall demand for USD,
simple supply and demand dynamics infer that the net result may be a lower USD relative to the CNY. Said
another way, the CNY may appreciate relative to the USD.
Implications for Asian currencies and Australasia
Currencies of nations exporting to China will benefit. On a net basis, with a stronger CNY, imports into China
become cheaper; Chinese businesses and the Chinese government will be able to afford to purchase more
foreign goods with a stronger currency, likely increasing Chinese demand for these foreign goods. Analysis
suggests the likely beneficiaries are those countries whose Chinese exports make up a substantial proportion
of the exporting country's overall GDP, as well as those nations who are experiencing solid, sustainable
growth in exports to China. As such, currencies it is believe well placed to benefit from a widening of the
CNY trading band include the currencies of: Australia, New Zealand, Taiwan, Malaysia, South Korea,
Singapore, and Japan.
Implications for Commodities
Chinese demand for commodities will continue to rise over time, even if occasional economic slowdowns
might come in between (despite the recent global economic crisis, China's demand for iron ore continued to
grow at double digit annualized rates). If the Chinese allow the CNY to appreciate, commodity prices will
become cheaper when denominated in CNY, all else equal, giving China greater purchasing power; the
Chinese will be able to afford to purchase more commodities with a stronger currency, likely increasing the
demand for commodities.
Implications for the U.S. Economy
While commodity prices may be cheaper when denominated in a stronger CNY, the same commodity price
may rise when priced in U.S. dollars (USD). Officials at the Federal Reserve (Fed) seem not to be particularly
concerned about commodity price inflation, arguing that the U.S. economy is far less dependent on
commodity prices these days than in decades past. However commodity prices can have significant
implications for the U.S. economy.
When faced with a stronger CNY, Chinese exporters have a choice of either lowering the price of their exports
(sell their goods and services at the same U.S. dollar level), or alternatively, they can try to pass on what is
effectively a higher cost of doing business in the global markets.
As shown in the spring of 2008, Asian exporters have substantial pricing power. China, because of its
positioning at the higher end of the value chain within Asia is particularly well positioned. From a U.S.
economic standpoint, we expect inflationary pressures to rise should the CNY strengthen.
 INDEX OUTLOOK
GLOBAL CLOSING PRICE OVERALL MONTHLY
INDICES 31- May 30 -June % Change High Low
IMPACT COST
US Indices
Dow Jones 10136.63 9774.02 -3.57 10627.19 9726.33 Impact cost represents the
Nasdaq 2257.04 2109.24 -6.55 2341.11 2105.26 cost of executing a
Europe Indices transaction in a given
FTSE 5188.4 4916.90 -5.23 5331.5 4898.5 stock, for a specific
CAC 3507.56 3442.89 -1.84 3759.54 3343.59 predefined order size, at
DAX 5964.33 5965.52 -0.01 6330.81 5798.76 any given point of time.
Asian Indices
Nikkei 9762.98 9382.64 -3.89 10251.9 9347.07 Impact cost is a practical
Straits Times 2752.60 2835.51 -3.01 2890.09 2710.8 and realistic measure of
Hang Seng 19765.19 20128.99 1.84 20957.09 19211.67 market liquidity; it is
Taiwan Index 7373.98 7329.37 -0.60 7645.71 7048.6 closer to the true cost of
Kospi 1641.25 1698.29 3.47 1741.48 1618.57 execution faced by a
Shanghai 2592.15 2398.37 -7.47 2665.39 2382.36 trader in comparison to
Sensex 16944.63 17700.90 4.46 17919.62 16318.39 the bid-ask spread.
Nifty 5066.55 5312.50 4.85 5366.75 4961.05
It should however be
S & P CNX NIFTY – CANDELSTICK CHART emphasized that :

· Impact cost is
5400 separately computed
5350
for buy and sell
5300
Open · Impact cost may vary
5250
5200 High for different transaction
5150 sizes
Low
5100 · Impact cost is dynamic
Close
5050 and depends on the
5000 outstanding orders
4950 · Where a stock is not
4900
sufficiently liquid, a
penal impact cost is
applied

In mathematical terms it is
FREE FLOAT MARKET CAPITALISATION the percentage markup
Free-float market capitalization is defined as that proportion of total shares observed while buying /
issued by the company which are readily available for trading in the market. It selling the desired
generally excludes promoters' holding, government holding, strategic holding quantity of a stock with
and other locked-in shares, which will not come to the market for trading in the reference to its ideal price
normal course. Thus, the market capitalization of each company in a Free-float (best buy + best sell) / 2.
index is reduced to the extent of its Free-float available in the market.
E.g.: BSE SENSEX, BSE INDICES
 STUDENTS CORNER GUESS WHO IS THIS?

BHARAT BANDH, INDIA LOSSES $2.8 BN

· A day-long general strike disrupted normal business activities

across India, affecting key sectors of the economy and causing
losses anywhere between a conservative Rs.3,000 crore ($666
million) and a humongous Rs.13,000 crore ($2.8 billion) to the
country.
· The 12-hour strike called by opposition parties against the recent
`
fuel price hike thru road and rail transport and cargo handling out
of gear, particularly in the Left and Bharatiya Janata Party-ruled
states.On June 25, the government raised the prices of petrol, QUIZ
diesel and kerosene by Rs.3.50, Rs.2 and Rs.3 a litre respectively,
and increased the rates for cooking gas by Rs.35 per cylinder. 1. Which bank was once
· Over 60 long-distance trains were cancelled or disrupted, promoted by 20th Century
according to railway ministry officials. Finance Corporation and
· About 93 domestic and international flights were cancelled and Keppel Tatlee Bank of
trucks stayed off the roads. Offices were either shut or reported Singapore in India?
thin attendance in many parts of the country and markets were 2. How ABN-AMRO bank got
deserted. its present name?
· According to an estimate by a well-known non-governmental 3. Name the term used for
organization, Agni, Mumbai's lost its daily contribution to the depreciating a company's
country's gross domestic product (GDP) of about Rs.300 crore, of intangible assets?
which Rs.200 crore comes from the organized sector and the rest 4. In the world of trade and
Rs.100 crore from the unorganized sector commerce what is special
· According to the Federation of Indian Chambers of Commerce about the commissioning of
and Industry (FICCI), the total losses to the economy was Monte dei Paschi si Siena in
Italy in 1742?
Rs.13,000 crore.
· The Confederation of Indian Industry (CII) put the figure at 5. Name the first Indian woman
Rs.3,000 crore. CEO of a Foreign Bank?
· The Bharat Bandh has led to significant impact on business and 6. This term is derived from the
trade in some parts of the country. As is the case with any bandh, Greek word 'Oikanomia'
the worst affected are daily wage earners and people dependent means "House Management".
on small trade What is it?
· Bharat Bandh almost paralyzed Indian economy and eroded its 7. What is a baloon loan?
national GDP by a production loss of nearly a full day which in
monetary terms can be roughly estimated at Rs. 10,000 crore,
assuming that India's GDP would stay around Rs.50 lakh crore
with a growth rate of over 8 percent in current fiscal Send your answers for the Quiz
on our Email Id before 25TH
JULY 2010.

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