Joseph M. Foster’s view on Gold and its impact on Gold Mining Companies

• Current rally in gold is led primarily by investment demand , followed by  
  demand for jewellery, dehedging by gold mining companies and buying of
  gold by Central Banks across the world

• Gold can touch US$1500 / ounce in 2011 but there may be a technical   
   correction in gold prices inthe next 6 months

• With dollar depreciating against other major currencies on account of  
  quantitative easing, the central banks are inclined towards parking reserve
  funds in Gold

Joe Foster is of the view that the following factors are leading to the steep rise in the price of gold:

1.  Since the growth in US economy is still sluggish with a high level of
    unemployment, there are fears that the US Federal Reserve will announce
    Quantitative Easing* (QE) for the second time on 3 November 2010.  
    Moreover, this easy monetary policy will be followed in 2011 and     

    probably, even in 2012 due to high unemployment, low housing demand 
    and low inflation

2.  Japan, Thailand and other emerging economies are trying to keep their
    currencies from appreciating against the US Dollar and in fact, many
    countries are devaluing their currencies

3. The looming concerns over sovereign debt issues faced by the European 
    countries and possibly,a slow recovery in these markets

4. The seasonal demand from Diwali and wedding season in India, holiday
   season in US, and Chinese New Year will increase the consumption demand
   for gold. Mostly, in the last quarter of each year, we witness a sharp
   increase in the gold prices and this year, again doesn’t seem to be an
   exception

5. Currently, large institutional investors like pension funds have very low 
    exposure to gold. For example, the pension funds have only 0.3% of their
    assets exposed to gold. Mr Foster expects  there is a lot of room for
    institutional investors to increase their exposure to gold

6. The central banks across the globe prefer Gold as an alternative to US
    Dollar as the reserve currency

Out Look on Gold Mining Companies

Gold companies are expected to have record cash flows in the fourth quarter of 2010 mainly because of the rally in gold prices. Foster opines that the Gold mining companies tend to make more cash when gold is over US$1000 / ounce. Owing to the strong cash flows, many Gold mining companies are declaring dividends. Hence, the return on investment in Gold mining business looks very attractive at the current juncture as the positive earnings will get reflected in the stock prices of Gold mining companies.

Falcon Gold Equity Fund – the feeder fund for AIG World Gold Fund

The fund is completely invested its corpus in the current rally with 12% allocation to silver mining companies and the rest to gold mining companies. As far as the allocation in terms of market capitalisation goes, about 30% of the fund is invested into small-cap companies, 31% in medium-cap companies and 34% in large-cap companies. The performance of the fund has also been boosted on account of six Mergers & Acquisition deals of Gold mining companies.

*Quantitative Easing is process whereby the central banks increase excess reserves in the banking system to buy back government bonds, mortgage-backed bonds etc. This results in excess supply of US dollar in the system.

Weekly Market Review

 The key points this week are – 

• Global: Global financial markets remained focused on the prospect of fresh stimulus; Gold touched record highs and the US dollar hit parity with the Australian and Canadian dollar as investors sought currencies of nations with higher-yielding assets; Tech stocks led the rally in Europe and US on the back of good earnings

• India – Equity: Indian equity markets retreated on the back of profit-booking at higher levels and speculation about possible central bank intervention; IIP index growth decelerated to 5.6% led by declines in capital goods activity; Companies in EM countries are likely to borrow in overseas markets to take advantage of the low rates, thereby negating some of the impact of the monetary tightening in their domestic markets

• India – Debt:  Indian bond prices surrendered gains as higher than expected inflation data led to renewed concerns of monetary tightening towards the close of week; the rupee strengthened further this week to Rs. 44.10/$

Govt looking at next round of capital infusion in PSBs

The Finance Ministry is now looking at the next tranche of capital infusion in certain public sector banks (PSBs) in a bid to strengthen them and make them market ready for raising more resources when budgetary support dries up.

The beneficiaries of the next tranche of capital infusion will be those banks where the Government shareholding is around 51 per cent, Mr R. Gopalan, Secretary, Department of Financial Services, told reporters on the sidelines of an event, organised by Oriental Bank of commerce (OBC) here on Wednesday.

He also said that the Government was conscious of the additional tier-I capital requirement prescribed under Basel-3 and would factor this while deciding on the quantum of capital support.

5 banks

At least five public sector banks – Andhra Bank, Bank of Baroda, OBC, Dena Bank and Union Bank are likely to get capital support from the Government in this tranche as the Government stake in these banks are between 51-55 per cent.

With the UPA Government committed to maintain minimum 51 per cent stake in public sector banks, those banks with the Government holding close to 51 per cent are constrained from approaching the market for fresh mop-up of capital without Centre's matching support.

Mr Gopalan said that the next capital infusion exercise will depend on the availability of resources.

“Let Government fix the availability of resources for this exercise. Once that is done, how to distribute that will be decided. It is not that every bank will be supported. Consistent with the availability of funds, some banks will be supported”, he said.

The earlier round of Government's capital infusion in PSBs happened in June. An aggregate amount of Rs 6,121 crore was committed for five PSBs as part of efforts to shore up their Tier-1 capital to a minimum of eight per cent.
The five banks were Bank of Maharashtra (Rs 590 crore), Central Bank of India (Rs 2,016 crore), IDBI Bank (Rs 3,119 crore), UCO Bank (Rs 375 crore) and Union Bank (Rs 111 crore)

This commitment of Rs 6,121 crore was part of the 2010-11 budget promised capital infusion of Rs 16,500 crore to ensure that PSBs attain a minimum eight per cent Tier-I capital by March 2011.

The Government had infused Rs 1,500 crore in four PSBs in May 2010. Before that, an amount of Rs 1,200 crore had been infused in three PSBs in March 2010.

Source: Buisiness Line

Government lists more disinvestment candidates

After public sector company Coal India's IPO, Power Grid will hit the equity markets with its follow-on offer in November this year, said the Disinvestment Secretary, Mr Sumit Bose.

And more PSU offerings are in the pipeline. “SAIL's FPO is in the process of due diligence. The Government plans to sell 5 per cent stake in ONGC and 10 per cent in IOC. We are yet to appoint a banker for IOC's public offer. We hope to complete the process (for all the three PSUs) in the first quarter of the next calendar year,” he said.

The size of the IOC public offer will be “very big” as the Government will divest 10 per cent of its stake in the company; there will also be a fresh issue of shares amounting to 10 per cent stake, said Mr Bose.

Aiming to raise Rs 40,000 crore through disinvestment this fiscal, the Government has mopped up a little more than Rs 1,000 crore through Satluj Jal Vidyut Nigam's initial public offering and around Rs 1,000 crore from the Engineers India FPO.

Mr Bose said Shipping Corporation of India, Power Grid, Hindustan Copper and Manganese Ore India are expected to make public offers in the current fiscal.
The IPO of Coal India will open on October 18. The Government is diluting 10 per cent stake to raise up to Rs 15,400 crore, making it the biggest IPO in India. The Government owns 100 per cent stake in the company. All the proceeds raised from the issue would go to the Government.

Taking into account the 5 per cent discount for retail investors, the company will raise between Rs 13,950 crore and Rs 15,154 crore, the price band being Rs 225-245.

Coal India's IPO will eclipse that of Reliance Power whose Rs 11,000-crore IPO has been till date the biggest issue made in the country.

Retail investors have been allotted 35 per cent of the shares (20 crore shares) and the employees of the company one per cent.

Coal India has decided not to have an anchor book for the issue.


Source: Business Line

Govt to raise Rs. 15,000 crore from Coal India IPO

The government will raise up to $3.5 billion from a price band of Rs. 225 to 245 for state-run Coal India’s initial public offering, the largest in the country’s corporate history.

The government is selling 631.6 million shares, or 10% stake in the world’s largest coal miner. The share sale is part of the country’s plan to divest its stakes in roughly 60 companies over the next few years.

“I think the pricing is much better than what we were expecting. We were expecting it to be Rs. 260 at the upper end,” said Ambareesh Baliga, vice president of Karvy Stock Broking in Mumbai.

“The response from institutional investors is expected to be very good,” he added.

Priced at the top end of the band, the company would be valued at $35 billion, placing it among the top Indian firms by market value. It is the seventh-largest IPO in Asia this year.

Speaking to reporters on Tuesday, the Union coal minister said the IPO would raise more than Rs. 15,000 crore.

Coal India, based in Kolkata, holds a dominant position in the fast-growing Indian market. The state monopoly produced 431 million tonnes in 2009-10 and accounts for nearly 80% of coal output in Asia’s third-largest economy.

Coal powers 75% of India’s electricity output, and annual demand is expected to swell at 11%. The country, which faces a peak-hour power deficit of nearly 14%, plans to triple its generation capacity over the next decade.

It reported earnings per share Rs. 15.60 for the fiscal ended March 2010.
According to a Reuters poll of fund managers, potential investors in state-run Coal India’s IPO had expected the issue to be priced around Rs. 250 ($5.63) a share, or 16 times trailing earnings.

China’s Shenhua Energy, the Indian miner’s closest rival, trades at 16 times earnings, while smaller Indonesian peer Adaro Energy has a price-to-earnings ratio of 20 times. US miner Peabody Energy trades at 25 times earnings.

The IPO opens on 18 October and closes on 21 October. The listing on the Bombay Stock Exchange is expected by 4 November.


Source: LiveMint

Defaulted on cheques? Your account may be closed

Those writing cheques without adequate funds in their account risk having their account blocked, a measure that will further tighten the regime around bounced cheques.

India’s largest lender, the State Bank of India , has decided to close the accounts of those customers who default on their cheques too frequently, a lead other banks are sure to follow.

An internal circular of the bank has asked officials to close the accounts of those customers whose cheques have bounced four times or more in a financial year.

The new norm will be applicable for those who do not maintain enough balances to meet their standing instructions for electronic clearing services where the bank is authorised to debit regular payments directly to their accounts.

Other banks, both public and private, may soon follow as the issue has been informally discussed amongst public sector banks, said a senior person in the Indian Banking Association (IBA).

“Banks are expected to enforce financial discipline amongst its customers,” he said, adding that a month’s notice will be issued, giving customers ample time.

The SBI directive reinforces the central bank’s attempts to penalise the deliberate default by the cheque issuer. An email sent to the bank remained unanswered until the time of filing this story.

If the information on such closed accounts is shared among banks, or with the institutions that maintain credit scores of individuals, defaulters would find it difficult to access financial services or the costs of such services will go up for them sharply.

RBI rules allow banks to stop issuing new cheque books to those customers that have had their four cheques of Rs 1 crore, or more, dishonoured for want of sufficient funds in the account.

The central bank has also issued guidelines on how much a bank can charge for bounced cheques. Private sector lender, ICICI charges `100 for every cheque returned for financial reason if deposited by the customer. The penalty amount goes up to `350 if it is issued by the customer.

There are over 30 lakh cheque bounce cases pending in the court. Cheque bouncing was made a penal offence in 1989. In a May, the Supreme Court had also said any delay in settling cheque bouncing case will cost the defaulter up to 20% of the cheque amount.

As of now, if an offence is committed by a company for dishonouring cheque under Section 138 of the Negotiable Instruments Act, all those who were directors of the company, except those exempt by the law, are held responsible.

 

Source : ET

Fresh move to invest EPF money in stocks

The labour ministry has moved to give a conditional nod to the long-pending proposal for a portion of the Employees’ Provident Fund (EPF) to be invested in the stock market.

If accepted, it could see the injection of a substantial amount of liquidity into equities.

In a communication to the ministry of finance, which has repeatedly sought the go-ahead for earmarking up to 15% of the corpus for stock market investments, the labour ministry has indicated its willingness, provided there is a guaranteed “reasonable rate of return”, a top government official close to the development said on condition of anonymity.

The labour ministry proposal, according to the same person, has the approval of the Central Board of Trustees (CBT), the apex advisory body of the Employees’ Provident Fund Organisation (EPFO), which had steadfastly opposed any move to liberalize investment norms.

The move came in response to a letter written by the finance ministry in August.

“EPF is poor man’s money. EPFO is the custodian of it. Though stock market investments can give a better return, there is possibility of losing the money. That’s why CBT has been opposing the finance ministry’s proposal,” the official said.

The labour ministry has convinced CBT to start investing 5% of the total corpus of Rs.3 trillion, provided the finance ministry guarantees a return. If the proposal falls into place, it will see an inflow of Rs.15,000 crore into the equity market, the same person added.

G. Sanjeeva Reddy, all-India president of Indian National Trade Union Congress, who is also a member of the trust said: “There was a long discussion on investing in stock market. We categorically said that if share market investment is good for employees then 5% or 10% of the money can be invested but only if government gives capital protection assurance. The share market is volatile and employees’ hard-earned money cannot be risked without proper assurance.”

However, some other trade union leaders were sceptical as to whether the finance ministry would give its nod to the proposal. Tapan Sen, secretary general of left-wing Centre of Indian Trade Unions, said: “I don’t think that the government is going to give an assurance (on capital protection and assured rate of return), which will be binding in nature.”

The finance ministry in 2008 had increased the ceiling on investment in equities by provident funds to up to 15% of the corpus from the earlier 5%, but restricted it to equity shares of firms in which derivative trades are allowed on the National Stock Exchange and the Bombay Stock Exchange.
At present, EPFO’s corpus is invested largely in government debt and bank deposits. Around half the corpus is invested in the Union government’s Special Deposit Scheme.

“The finance ministry could give the guarantee for the initial five to six years. If the result is encouraging, then the labour ministry will decide the future plan. With positive returns, the amount invested in equity markets may be increased,” the official revealed.

The official said if the money invested fetches more return than the assured rate of interest, the extra income may be divided between EPF holders and the government. “This will boost the government exchequer while keeping the EPF account holders quite happy,” he added.

Prabhat C. Chaturvedi, secretary in the labour and employment ministry, confirmed that the ministry had sent its recommendations, but declined to divulge any details.

Bhupendra Meel, associate vice-president of retirement trust solutions at AK Capital Services Ltd, said the asset class (EPF) and the equity market have certain similar characteristics in the form of a long-term horizon. “Our market has evolved and there is no harm in exploring the opportunity in the equity market. The weightage of the money going to the stock market may be small, but it should not be kept out of the option list.”
EPFO covers around 80 million employees, including any unit that employs at least 20 people. EPF account holders have been earning 8.5% returns since 2005-06.

On 15 September, EPFO decided to increase the interest rate to 9.5% for the current fiscal. This increase comes from a surplus of Rs.1,731 crore that EPFO found in its account books following the adoption of a new accounting system.

Source : Live Mint

Settle a/cs before March 31 to get interest: EPFO

 Provident fund subscribers who have inoperative accounts from their earlier jobs will not lose interest if they file an application for withdrawal of accumulated funds or transfer to an operative account before March 1, 2011 even if the settlement happens later.

The Employees' Provident Fund Organisation has decided against penalising account holders for the delays as it prepares to receive lakhs of applications for settling inoperative accounts. "We plan to give interest on PF deposits in inoperative accounts if the delay in transfers or closures is beyond one month of submission of applications from account holders," a senior EPFO official told ET.

This means that if account holders apply for transfers or closures before March 1, 2011, they will keep getting interest till the account is actually closed or transferred irrespective of when it happens. The Central Board of Trustees of the EPFO, the key decision-making body for the fund comprising representatives from the government, employers and trade unions, has decided the government would stop giving interest on accounts that have been inoperative for more than three years from the next fiscal.

While one could expect all such account holders to rush for closing or transferring their accounts, the EPFO office has not yet received many such applications. "It is obvious that subscribers want their deposits to earn 9.5% return announced this year for as long as possible. We expect maximum claims to come from February next year,"the official said.


Source : ET

FIIs scale $20bn peak for first time

Net FII inflows for the current year crossed the magic figure of $20 billion on Tuesday even as the country’s central bank sounded caution about these unabated flows. Sebi data showed that this year’s flows are already at record levels, beating the $17.7 billion net inflows recorded in 2007, just before the US subprime-led financial troubles spread across the globe.

The data showed that while the bulk of the inflows — $15.3 billion — came through the secondary market route, $5 billion was infused into the country through IPOs , QIPs, rights offers and other equity issuances by Indian companies to foreigners.

In the debt segment too net FII inflows crossed the $10 billion mark on Tuesday , Sebi data showed. This is also a new yearly high figure . While global investors are lapping up India’s growth story, some institutional dealers are worried about the fact that money from a number of smaller countries are also flowing into India through the FII channel. As a result of this, the Indian rupee is also gaining in strength against the US dollar.

Year	Inflow/Outflow (in $ bn)
2006	8.1
2007	17.7
2008	-12
2009	17.5
2010	20.3
	Source : SEBI

Entire interest income on PF to be tax-exempt

The finance ministry has assured the Employees Provident Fund Organisation , or EPFO, that the entire 9.5% interest on the accumulated corpus of account holders for the current fiscal will not be taxed, ending speculation that the government would start taxing an income that had so far been exempt.

“The finance ministry has told us that it would issue a notification as soon as the EPFO notifies the higher interest rate for the year clarifying that the entire interest on PF (provident fund) for the fiscal would be tax exempt ,” an EPFO official said.

Labour minister Mallikarjun Kharge will go through the minutes of the meeting of the central board of trustees, or CBT, of the EPFO, which decided on the higher interest rate, after which the new interest rate for the year would be notified, the official added.

The finance ministry had issued a notification on August 26, days before the CBT declared a 9.5% interest rate on PF deposits for 2010-11 , stating that up to 8.5% of returns would be tax free. This had led to protests from trade unions which demanded that whatever rate of return the EPFO announced had to be tax exempt.

“Since the notification was put up by the finance ministry before the CBT meeting, it must have been based on the assumption that the 8.5% interest rate that had been maintained in the last five years would continue this year as well,” the official said.

The EPFO declared a one percentage point higher interest for the current year after it discovered Rs 1,731 crore of surplus funds in one of its accounts.

Source : ET