Obama threatens fight with banks on new risk rules

By Jeff Mason and Kevin Drawbaugh Jeff Mason And Kevin Drawbaugh – Thu Jan 21, 6:07 pm ET
WASHINGTON (Reuters) – U.S. President Barack Obama threatened to fight Wall Street banks on Thursday with a new proposal to limit financial risk taking, sending stocks and the dollar tumbling.
Obama, a Democrat who is struggling to advance his agenda after a key election loss this week, laid out rules to restrict some banks' most lucrative operations, which he blamed for helping to cause the financial crisis.
"If these folks want a fight, it's a fight I'm ready to have," Obama told reporters at the White House, flanked by his top economic advisers and lawmakers.
"We should no longer allow banks to stray too far from their central mission of serving their customers," he said.
Financial sources said Treasury Secretary Timothy Geithner had hesitations about the proposals, concerned that good economic policy was being sacrificed for politics.
But a White House official said the plan had the unanimous backing of Obama's economic team.
"We should no longer allow banks to stray too far from their central mission of serving their customers," Obama said.
After a mixed first year as president, Obama took a tough, populist-tinged stance aimed at revving up his political base by exploiting anger over Wall Street excess.
The proposals, which require congressional approval, would prevent banks or financial institutions that own banks from investing in, owning or sponsoring a hedge fund or private equity fund.
They would also set a new limit on banks' size in relation to the overall financial sector that would take into account deposits -- which are already capped -- as well as liabilities and other non-deposit funding sources.
The proposed rules also would bar institutions from proprietary trading operations, unrelated to serving customers, for their own profit.
Proprietary trading involves firms making bets on financial markets with their own money rather than executing a trade for a client. These expert trading operations, which can bet on stocks and other financial instruments to rise or fall, have been enormously profitable for the banks but can hold huge risks for the financial system if the bets go wrong.
The White House blames the practice for helping to nearly bring down the U.S. financial system in 2008.
The White House said it wants to coordinate with international allies in its implementation of the measures.
POPULIST MOVE HITS SHARES
Big financial institutions criticized Obama's move.
"Trading, proprietary or otherwise, did not lead to the financial crisis," said Rob Nichols, president of the Financial Services Forum, a lobbying group for CEOs of firms such as Goldman Sachs and JPMorgan Chase.
He said the government should be focused on better risk management, corporate governance and other forms of regulatory oversight, "rather than arbitrarily banning certain activities, or setting arbitrary size limits."
Obama's move is the latest in a series to crack down on banks and follows a devastating political loss for his party in Massachusetts on Tuesday, when a Republican captured a U.S. Senate seat formerly held by the late Democratic Senator Edward Kennedy, potentially imperiling his domestic agenda.
Bank shares slid and the dollar fell against other currencies after Obama's announcement.
JPMorgan fell 6.59 percent, helping push the Dow Jones Industrial average down 2 percent.
Citigroup Inc fell 5.49 percent and Bank of America Corp fell 6.19 percent while Goldman dropped 4.12 percent despite posting strong earnings on Thursday.
Ralph Fogel, investment strategist at Fogel Neale Partners in New York, said the move would have a major impact on big-name brokerage firms like Goldman Sachs and JPMorgan.
"If they stop prop trading, it will not only dry up liquidity in the market, but it will change the whole structure of Wall Street, of the whole trading community," he said.
Underscoring the high level of public anger at banks, a majority of 1,006 Americans surveyed in a Thomson Reuters/Ipsos poll said executive pay was too high.
White House economic adviser Austan Goolsbee said the proposals were not designed to be punitive. He said they aimed to end the concept that some banks were "too big to fail" and to show that when such firms "mess up, they die."
Before his announcement, Obama met with Paul Volcker, the former Federal Reserve chairman who heads his economic recovery advisory board and who favors putting curbs on big financial firms to limit their ability to do harm.
The House of Representatives approved a sweeping financial regulation reform bill on December 11 that included a provision that would empower regulators to restrict proprietary trading. The Senate has not yet acted on the matter.
Obama proposes tough limits on largest banks
Washington Post Staff Writer Friday, January 22, 2010
President Obama expanded his new offensive on Wall Street on Thursday, proposing rules that would impede the growth of the largest banks and bar them from making what he called "reckless" investments.
The proposal comes as the administration is shifting from its year-long effort to save financial firms toward a new willingness to confront them with explicit prohibitions on activities that fueled the economic crisis. In essence, Obama is now aiming to force the firms to choose between the federal benefits that come with being a bank and the unbridled pursuit of profits.
After opposing proposals such as hard limits on executive bonuses, the administration is embracing a tougher line -- more evidence that Obama has the industry in his sights as he seeks to show Middle America that he feels its economic pain.
Obama's plan would bar banks from making investments that are not intended to benefit customers, including the creation of proprietary investment funds solely to benefit employees and shareholders. New limits also would make it difficult for the largest banks to become any bigger, effectively stopping domestic expansion at well-known companies such as Bank of America and J.P. Morgan Chase.
While the proposed restrictions are narrower than the now-defunct law that segregated Wall Street trading from commercial banking for much of the 20th century, they share a similar goal: to subsidize banking -- which the administration considers vital to the economy -- without having taxpayers subsidize highly speculative activity.
Flanked by the members of his economic team in the Diplomatic Reception Room of White House, Obama chastised the chief executives of the nation's largest financial firms for sending what he called an "army of industry lobbyists" to fight his efforts to reform the banking sector.
"My message to leaders in the financial industry is to work with us, not against us," the president said. "If these folks want a fight, it's a fight I am ready to have."
Wall Street responds
Wall Street has responded to the administration's increased hostility with its own change in temperature. Bankers howled last week when Obama proposed a fee on big banks to recoup losses from the government's $700 billion program to bail out financial firms. Several executives said Thursday that they regretted their support for -- and campaign donations to -- Obama.
"I wish I could take my vote back," said one executive at a large bank. He spoke on the condition of anonymity because his firm barred public comments on the matter.
As the industry seeks to defeat proposals to rein in banks, companies may now be free to spend more money on political campaigns after a Supreme Court decision Thursday reversed some key restrictions on political advertising by big businesses. Unless Congress acts quickly to reassert these limits, banks and other financial firms will be allowed to support congressional candidates who oppose Obama's bank proposals.
Bank stocks fell Thursday as investors reacted to the president's proposal. Goldman Sachs shares fell 4 percent in trading on the New York Stock Exchange. Citigroup dropped 5.5 percent, Bank of America fell 6 percent, and J.P. Morgan Chase dropped 7 percent.
The proposal is part of the White House's election-year strategy to repair damage done to Obama's image during his first months in office, when he helped bail out the banking industry, senior advisers said. The president's top political aides are hoping to set the stage for a sharp contrast with Republicans, who have historically opposed government prescriptions for private businesses.
"He had to help Wall Street in order to save Main Street," a top Obama adviser said, describing the White House's message for the midterm congressional elections. "Every time we announce an economic policy that Wall Street does not like, the Republicans are standing right there with Wall Street, defending them."
Republicans offered a muted response to the president's proposal, suggesting they recognize the political dangers of siding with big banks when there is a 10 percent unemployment rate, depressed housing prices and increased voter anger.
The White House wants Congress to incorporate the proposals into the sprawling financial reform legislation that passed the House. Rep. Barney Frank (D-Mass.) and Sen. Christopher J. Dodd (D-Conn.), who are overseeing the legislation in their respective chambers, stood with the president as he spoke and then issued statements of support. Frank noted that the House bill gave regulators the discretion to impose similar requirements, but he expressed support for stronger language mandating that regulators take action.
Rebounding banks
White House advisers said the president has become more aggressive in recent weeks as it became clear that the big banks that received large amounts of government aid to stay afloat a year ago had rocketed back to profitability by making the same kind of risky investments that had gotten them in trouble.
Obama's announcement came as Goldman Sachs reported blockbuster earnings of $13.4 billion for 2009, the largest annual profit in the company's history. The firm sharply reduced the share of revenue devoted to bonuses but still pledged to pay an average of $498,000 per employee -- up 37 percent from 2008.
"When I see soaring profits and obscene bonuses . . . it's exactly this kind of irresponsibility that makes clear reform is necessary," Obama said.
Several industry representatives said they were concerned by the president's increasingly stern language, saying that the issues at stake are complicated and deserve to be discussed.
"There is a lot of concern in the banking industry, and by that I mean all banks, about the turn in the tone of the debate," said Edward L. Yingling, president of the American Bankers Association.
Obama officials said they did not discuss the new proposal with the industry before the president's remarks, a break with how the administration has announced its previous financial reform proposals. Treasury Secretary Timothy F. Geithner had dinner Wednesday night with several bank executives, but did not mention the president's plans. The executives learned about the proposal as early news reports about the proposal began appearing via e-mail shortly after the meal.
Staff writers David Cho and Brady Dennis in Washington and Tomoeh Murakami Tse in New York contributed to this report.
Obama seeks tighter limits on banks' reach
‘If these folks want a fight, it's a fight I'm ready to have,’ president says
WASHINGTON - President Barack Obama stepped up his campaign against Wall Street on Thursday with a far-reaching proposal for tougher regulation of the biggest banks.
"We have to get this done," Obama said at the White House. "If these folks want a fight, it's a fight I'm ready to have."
The stock market reacted by dropping more than 200 points by midday as shares in Bank of America, Citigroup Inc. and JPMorgan Chase & Co. each fell by more than 5 percent.
It was a stern, populist lecture from the president to Wall Street for what he perceives as its abandonment of Main Street. Obama said the government should have the power to limit the size and complexity of large financial institutions as well as their ability to make high-risk trades.
He said it wasn't appropriate that banks have been able to run these trading operations with the protections afforded to regular banking services.
"We have to enact commonsense reforms that will protect American taxpayers and the American economy from future crises," Obama said. "For, while the financial system is far stronger today than it was one year ago, it's still operating under the same rules that led to its near-collapse."
Joining Obama for the announcement were former Federal Reserve Chairman Paul Volcker, who heads the president's Economic Recovery Advisory Board, and William Donaldson, chairman of the Securities and Exchange Commission under President George W. Bush. Volcker and Donaldson have advocated stronger restrictions on banks.
Overhauling financial rules is the one issue on Obama's legislative agenda that appears still alive after Democrats' devastating loss Tuesday in the Massachusetts Senate race. The White House is renewing Obama's demand for an independent consumer financial protection agency as part of any overhaul. That's one of the major sticking points in the Senate; the House has passed its version already.
The new proposal from Obama intends to limit speculation by commercial banks and to keep financial institutions from growing so big that they pose a risk to the economic system.
"When you see more and more of the financial sector basically churning transactions and engaging in reckless speculation and obscuring underlying risks in a way that makes a few people obscene amounts of money but doesn't add value to the economy — and in fact puts the entire economy at enormous risk — then something's got to change," Obama said in an interview released Thursday by Time magazine.
'Fat cats' Obama has branded bank executives as "fat cats" and proposed a fee on large banks to cover shortfalls in the government's $700 billion financial rescue fund.
Expanding on earlier measures, Obama endorsed Volcker's proposal to restrict proprietary trading by commercial banks. That would separate commercial banks from investment banks, a line blurred a decade ago by the repeal of the Depression-era Glass-Steagall Act.
This restriction would affect some of the biggest banks,
including Bank of America Corp., Goldman Sachs and Citigroup Inc.
"The better answer is to modernize the regulatory framework and not take the industry and the economy back to the 1930s," said Scott Talbott, chief lobbyist for the Financial Services Roundtable, an industry group that represents large Wall Street institutions.
Goldman Sachs Group Inc. said Thursday it earned $4.79 billion in the fourth quarter as its trading business again outdistanced the rest of the industry. The company rewarded its employees with $16.2 billion in salaries and bonuses for 2009, 47 percent more than the previous year but still lower than many had expected.
There was a new urgency in the Senate to respond to the voter anger at Wall Street and bank bailouts that helped propel Republican Scott Brown to victory in Massachusetts for the seat long held by Democratic Sen. Edward M. Kennedy, who died in August.
Brown's victory gave Republicans 41 votes, enough to mount successful filibusters and prevent Democratic legislation on health care or climate change from getting final votes.
But financial regulations could survive.
Administration officials believe that while Republicans may seek to block other aspects of the president's agenda, Senate GOP leader Mitch McConnell of Kentucky is considering making financial regulations an exception.

Market tumbles as key earnings disappoint

Disappointing Q3 results from frontline companies sparked a sell-off on the bourses today, 21 January 2010. The market extended losses for the third straight day. Shares from sectors related to infrastructure were the worst hit. Asian markets were mixed as bullish economic data from China raised concerns Beijing may tighten policy. The BSE 30-share Sensex was provisionally down 423.82 points or 2.43%. The market breadth was extremely weak as small and mid-cap stocks underwent correction after a recent solid surge. L&T led decline in capital goods stocks after the engineering & construction major reported fall in third quarter sales revenue. Power equipment major Bharat Heavy Electricals also declined sharply as its third quarter revenue growth fell short of market expectations. ICICI Bank, too, was under selling pressure as third quarter net profit declined. Power generation stocks dropped as investors shuffled their portfolios ahead of the upcoming mega follow-on-public (FPO) offer of NPTC. Banking shares were reeling under selling pressure ahead of the Reserve Bank of India's monetary policy review meet on 29 January 2010. Shares from metal, realty sectors and PSU stocks were not spared either. The IPO of Jubilant Foodworks ended on Wednesday, 20 January 2010, with an oversubscription of 31.11 times. Foreign institutional investors (FIIs) made a beeline for the IPO. FIIs put in bids for 25.56 crore shares as compared to 71.41 lakh shares reserved for the qualified institutional investors segment as a whole. The strong response from FIIs indicates that global liquidity remains ample. The food price index rose 16.81% in the 12 months to 9 January 2010, while the fuel index was up 6.34%, the government said on Thursday. The rise in food price index was lower than an annual rise of 17.28% in the previous week. The annual wholesale inflation rose to 7.31% in December 2009, compared with 4.78% in November and 6.15% a year ago. Finance minister Pranab Mukherjee said on Wednesday the government was taking steps to contain inflation. The situation is constantly under review, he said. He also promised more measures to check the rise in the prices of essential commodities. Food prices will cool off in 1-2 months and inflation will turn around, finance ministry's chief economic advisor Kaushik Basu said in a newspaper interview published on Wednesday. The Reserve Bank of India will hold its quarterly monetary policy review on 29 January 2010 and is widely expected to increase the cash reserve ratio (CRR) requirements for banks, but economists are divided on when it will raise interest rates. CRR is the level of cash that banks must keep in deposit with the central bank. Food prices rose near 20% in December from a year earlier, their highest in 11 years. Monthly inflation may touch double digits by March 2010, Chief Statistician Pronab Sen told Television media on Tuesday. Union food and agriculture minister Sharad Pawar on Wednesday suggested that the prices of milk and related products were set to rise because of the demand-supply mismatch. Aggregate results of 336 companies showing an 64.70% advance in net profit on 12.5% rise in sales in quarter ended December 2009 over the quarter ended December 2008. Excise, customs and service tax collections are continuing to show a negative growth. Excise duty collections between April to December 2009 are down by 13% at close to Rs 70,000 crore. Revenues by way of customs duty are also down by a whopping 28% at around Rs 59,000 crore while service tax collection is also down over 6% with the government collecting slightly over Rs 36,000 crore. This takes the total collection of indirect taxes in the first nine months to about Rs 1,66,000 crore, down by 18% as compared to last fiscal. The government has set itself a target to collect around Rs 2,70,000 crore by the end of fiscal year ending March 2010. Meanwhile, the government reportedly proposes to ease the norms for foreign direct investment (FDI) approval. Presently projects worth more than Rs 600 crore require the final approval of the Cabinet Committee on Economic Affairs (CCEA). The department of industrial policy and promotion (DIPP) has proposed that this ceiling be raised to anywhere between Rs 1,000 crore and Rs 1,500 crore. The new norms are likely to be notified after the introduction of a consolidated FDI policy framework on 1 April 2010. FDI inflows increased to $27 billion in 2008-09 from $3.2 billion in 2004-05. During the period April-September 2009-10, FDI inflows reached $15 billion. The government has set a target of achieving $50 billion annual FDI by 2012 and $100 billion by 2017. Economic growth will accelerate this year, Commerce and Industry Minister Anand Sharma said on Tuesday as he demanded better access to China's markets to help exports. Sharma's call for greater access for goods comes amid a widening trade gap between the two countries. Trade between the two grew rapidly to $50 billion in 2008, making China India's second-largest trading partner, but fell back to $43 billion in 2009 as global trade declined. Sharma called for more Chinese direct investment in India, especially in infrastructure, while noting that Indian firms are already present in China. European shares rose on Thursday, continuing a choppy week for trading, with miners recouping some sharp losses made in the previous session. Key benchmark indices in Germany, France and UK were up by between 0.27% and 0.42%. Asian markets were trading mixed today. Key benchmark indices in Hong Kong, Singapore, and Taiwan were down by between 1.13% and 1.99%. Japan's Nikkei 225 index rose 1.22% led by technology shares. South Korea's Seoul Composite index was up 0.45%. China's Shanghai Composite added 0.22%. Chinese data released Thursday were largely in line with expectations, showing economic growth powered higher in the fourth quarter, putting the full-year figure above forecasts. But inflation surprised to the upside, suggesting fiscal and monetary policy tightening could be ahead. China's gross domestic product expanded at a rapid rate of 10.7% in the fourth-quarter of 2009 from the year-earlier period, pushing the full-year economic growth rate to a better-than-expected 8.7%, according to official data released Thursday. Developing Asian economies face the risk of asset bubbles or overheating as the region's growth outpaces the rest of the world this year, the World Bank said in a report today. In South Asia, policy makers will be particularly responsive to signs of building inflationary pressures because of a strong aversion to food-price increases, the World Bank said. US markets ended sharply lower on Wednesday, 20 January 2010, as earnings and the dollar's gains clipped the market's momentum. In earnings, Bank of America disappointed investors with a loss of $5.2 billion, which was worse than expected. Among others, Morgan Stanley's earnings fell short of analysts' expectations, but Wells Fargo posted an unexpected profit. The Dow Jones industrial average lost 122.28 points, or 1.1%, to 10,603.15. The S&P 500 index fell 12.19 points, or 1.1%, to 1,138.04, and the Nasdaq Composite Index fell 29.15 points, or 1.3%, to 2,291.25. Trading in US index futures indicated the Dow could fall 11 points at the opening bell on Thursday, 21 January 2010. US stocks futures were firm earlier in the global day. The World Bank raised its forecast for global growth in 2010 but warned that the recovery may lose momentum in the second half of the year as government stimulus programs wind down and unemployment persists. The world economy will expand 2.7% this year after the worst recession since the end of World War II, compared with an estimate in June of a 2% expansion, the Washington- based poverty-reduction agency said today in an annual report. Growth may reach 3.2% in 2011, the bank said. The World Bank report also includes figures on last year's downturn, with an estimate that the global economy declined 2.2%, compared with the 2.9% decrease projected in June. Growth in emerging nations is expected to reach 5.2% this year, compared with a June estimate of 4.4%, the bank said. China will expand 9% this year and India 7.5%, it said. The World Bank also raised its forecast for US growth in 2010 to 2.5% growth, after predicting 1.8% in June. Japan's gross domestic product will expand 1.3% this year, more than the 1% predicted in June. The euro area's economy is forecasted to grow 1%, compared with the earlier estimate of 0.5% expansion. Speaking to a news agency on the anniversary of his first year in office US President Barack Obama urged lawmakers on Wednesday to agree quickly on core elements of healthcare reform, signaling he might support a scaled-back overhaul after his Democrats lost a key Senate seat. Obama acknowledged that voter anger helped carry Republican Scott Brown to a stunning victory in Tuesday's Massachusetts election which has imperiled the president's healthcare effort and the rest of his legislative agenda. The White House said it may retool its strategy for selling Obama's agenda while pressing ahead with his priorities of job creation, climate change and financial regulatory reform as well as healthcare. Meanwhile British Prime Minister Gordon Brown in an article published in Asian Lite magazine marking the 60th anniversary of India becoming a republic said India is a 'modern global success story' that is marching toward prosperity. Brown further said the relationship of one of the world's oldest democracies with one of the largest owes its foundations to our proud historic ties. As per provisional closing, the BSE 30-share Sensex was down 423.82 points or 2.43% to 17,050.67. The Sensex opened unchanged from its previous close at 17,474.49, which was the day's high. Sensex fell 449.23 points at the day's low of 17,025.26 in late trade The S&P CNX Nifty was down 128 points or 2.45% to 5093.70 The market breadth, indicating the overall health of the market was extremely weak. On BSE, 2369 shares declined as compared with 579 that rose. A total of 51 shares remained unchanged. The total turnover on BSE amounted to Rs 6327 crore as compared with Rs 4893 crore by 14:25 IST Bharti Airtel (down 2.93%), Tata Motors (down 2.84%), and HDFC (down 2.94%), edged lower from the Sensex pack. Mahindra & Mahindra was the lone gainer from the 30-member Sensex pack. India's top tractor maker by sales gained 0.34% to Rs 1149.75. The stock staged a pullback from day's low of 1136.50. The company announces its Q3 December 2009 results on 25 January 2010. India's largest car maker by sales Maruti Suzuki India fell 1.25% on profit booking. The company announces its Q3 December 2009 results on 29 January 2010. High beta infrastructure shares were the worst hit in today's sell-off. India's largest engineering & construction firm by sales Larsen & Toubro (L&T) slumped 6.63% to Rs 1527.95 and was the top loser from the Sensex pack. L&T said profit after tax from ordinary activities rose 15% to Rs 696 crore in Q3 December 2009 over Q3 December 2008. Gross sales revenue declined 6% to Rs 8139 crore. The result was announced during trading hours today, 21 January 2010. India's largest power equipment maker by sales Bharat Heavy Electricals (Bhel) fell 4.26%. The company's the net profit rose 35.67% to Rs 1072.59 crore on a 17.28% rise in total income to Rs 7422.51 crore in Q3 December 2009 over Q3 December 2008. The result was announced during trading hours today, 21 January 2010. Power generation stocks declined as investors shuffled their portfolios ahead of the upcoming mega follow-on-public (FPO) offer of NPTC. Tata Power Company (down 4.69%), Reliance Infrastructure (down 2.66%), CESC (down 2.01%), Torrent Power (down 2.77%), Reliance Power (down 2.36%), and NHPC (down 2.30%), declined. India's largest power generation firm by total capacity NTPC was down 1.55%. The company FPO remains open between 3 and 5 February 2010. The pricing has not yet been announced by the company. Japirakash Associates (down 2.48%), Lanco Infratech (down 5.52%), GMR Infrastructure (down 1.84%), Punj Lloyd (down 4.91%), and GVK Power Infrastructure (down 2.29%), declined. Realty shares were not spared either. DLF (down 2.69%), Unitech (down 2.29%), HDIL (down 3.98%), Indiabulls Real Estate (down 3.90%), and Omaxe (down 3.84%), declined. India's largest private sector bank by net profit ICICI Bank lost 3.32%. The bank's net profit declined 13.44% to Rs 1101.06 crore on a 25% fall in total income to Rs 7762.71 crore in Q3 December 2009 over Q3 December 2008. The result was announced during trading hours today, 21 January 2010. India's largest bank by net profit and branch network State Bank of India lost 1.76%. India's second largest private sector bank by net profit HDFC Bank slipped 2.26% after its American depository receipt shed 1.56% on Wednesday. Metal stocks declined after LMEX, a gauge of six metals traded on the London Metal Exchange, fell 2.12% on Wednesday, 20 January 2010. Hindalco Industries (down 1.06%), Tata Steel (down 0.70%), Hindustan Zinc (down 3.09%), Sesa Goa (down 3.96%), and National Aluminum Company (down 4.42%), edged lower. India's largest non-ferrous metal producer by sales Sterlite Industries India lost 3.70% after its American depository receipt or ADR dropped 5.23% to $18.11 on the New York Stock Exchange on Wednesday, 20 January 2010. Index heavyweight Reliance Industries (RIL) shed 1.97% to Rs 1056.25. Reports indicated that RIL is unlikely to raise its offer price to take a controlling stake in LyondellBasell Industries. Lyondell's current restructuring plan values it as high as $15.5 billion. Recently, RIL had reportedly sweetened its initial $12.0 billion offer to about $13.5 billion for acquiring LyondellBasell. RIL will announce its Q3 result on Friday, 22 January 2010. India's largest oil exploration firm by sales Oil & Natural Gas Corporation was down 1.98% to Rs 1140, off day's high of Rs 1180. The company is scheduled to announce its Q3 December 2009 earnings today, 21 January 2010. As per analysts estimates ONGC will fork out Rs 3,497 crore towards auto fuel subsidy in the third quarter of the current fiscal. India's second largest mobile services provider by sales Reliance Communications (RCom) fell 0.99%. As per reports, the company has written to the Department of Telecom (DoT) asking it to reject the report submitted by the Government-appointed auditors. In a 28-page letter to the DoT, the company said that the report was based on uncorroborated facts and contrary to the all norms of audit and professional conduct. Earlier the independent auditor - Parakh & Co - appointed by the DoT to examine the accounts of RCom had concluded that the company has under-reported revenues of Rs 2,799 crore to the Government, resulting in under-payment of Rs 315 crore as license fee and spectrum charges during 2006-08. IT stocks succumbed to selling pressure in late trade after a firm start. The rupee fell to two-week lows against the dollar today, 21 January 2010. India's largest IT exporter by sales Tata Consultancy Services fell 0.85% to Rs 772, off day's high of Rs 790.90. The third quarter earnings unveiled by the company after trading hours on 15 January 2010 surpassed market estimates as demand for outsourcing surged and prices stabilised, fuelling hopes of recovery in the showpiece sector. India's second largest IT exporter by sales Infosys fell 1.39% to Rs 2616, after hitting a day's high of Rs 2663. On 12 January 2010 Infosys raised its full-year revenue and profit outlook after strong Q3 results and on improving trend for outsourcing orders. India's third largest software services exporter Wipro lost 2.21% to Rs 709.40, easing from day's high of Rs 739. The company's consolidated net profit rose 21.26% to Rs 1217.40 crore on 4.17% rise in total income to Rs 7055.80 crore in Q3 December 2009 over Q3 December 2008. The company announced the results before trading hours on 20 January 2010. Chief Financial Officer Suresh Senapaty said in a statement that the key financial services sector had bounced back on the back of strong outsourcing demand. The partially convertible rupee was at 46.01/02 after falling to 46.06 in early deals, which was its lowest since 6 January 2010. It had ended at 45.93/94 per dollar on Wednesday, 20 January 2010. A weak rupee boosts operating profit margin of IT firms as the sector derives a lion's share of revenue from exports.

Noida Toll Bridge Company Limited----Results better then expectation;

Noida Toll Bridge Company Limited (NTBCL) declared its Q4FY09 results; which
were better than the market expectations. Led by higher traffic, NTBCL reported
strong 15.4% YoY growth in net sales to Rs 205 mn. EBIDTA growth however
was higher at 21.6% YoY to Rs 145.3 mn. The company has changed its
depreciation policy to units of usage method against straight line method leading
to write back of deprecation thereby resulting in net profit of Rs 105.7 mn as
against Rs 66.5 mn during the corresponding previous period.
Increasing traffic and revised toll rates augur well for the growth prospects of
the company going forward.

Net sales driven by higher traffic
NTBCL winessed 15.4% YoY rise in net sales to Rs 205 mn primarily led by
higher traffic which has increased to nearly 1,00,180 vehicles per day against
91,570 during the corresponding previous quarter.Mayur Vihar Link which became operation in January last year has seen
improvement in traffic to 13,632 against 12,350 vehicles per day last year.
Increased development of NOIDA along with congestion at adjoining bridges has
resulted in company reporting 17.2% CAGR in traffic during the last four years.
With more new dwelling planned in Noida, the traffic is expected to grow further.
We expect traffic to grow over 7% CAGR over the next three years.

Cost control measures resulted in better EBIDTA margins
Led by cost controls initiatives, NTBCL resulted in 21.6% YoY increase in
EBIDTA, though O & M charges have increased owing to addition of Mayur Vihar
Link, other administrative charges have seen a decline resulting in 360 bps
improvement in EBIDTA margins to 73.3%.
Higher Net profit owing to revised depreciation policy
NTBCL has changed its depreciation policy w.r.t. DND flyway to units of usage
method under which company will amortise its toll asset based on number of
vehicles using the project facility based on the traffic study done by M/s Halcrow
Consulting India Pvt. Ltd (Independent consultant).
Based on the independent professional expert’s advice, the estimated useful life
of the Bridge has been revised to 100 years against 62 years earlier. Consequent
to the change in the estimated useful life, the charge for depreciation/
amortization has been reduced by Rs 49.70 million for the year resulting in
increased profit during the current financial year. This has resulted in write back
of depreciation to the tune of Rs 22.9 mn during the quarter. Led by higher
EBIDTA and lower depreciation, net profit during the quarter witnessed 59% YoY
increase to Rs 105.7 mn against Rs 66.5 mn during last year.---- L.kannan

Nse to exclude 50 stocks from F&O after expiry of existing contracts..

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Gas Authority of India Ltd. (CMP:Rs.260, FY10E - PE : 11x)

Huge expansion ahead, pipeline network to nearly double in next

3-4 years

During the management meet, GAIL has indicated that the company is very bullish on

the growth of natural gas market in India, and to capture the full benefit, GAIL is

continuing the huge capex plan planned earlier. The company is in the process of

expanding the gas pipeline network from 7000 km currently to 12500 km in next 3-4

years at a capex of around Rs 200 bn. As far as financing is concerned, the company

has already tied up for Rs 120 bn and we don’t expect any difficulty in financing the rest

considering comfortable debt/equity ration and huge investments in ONGC and other

listed companies.

Three of the major pipelines are being completed in phase 1, which will be ending in

2010. In addition, GAIL has planned 3 more pipelines in phase 2, which will be completed by

2012.

Post the expansion total transmission capacity will increase from 150 mmscmd to 300

mmscmd, which will be sufficient to transport all the available gas which includes RIL

gas as well as gas expected from new LNG capacities. Combined with revenue from

petrochemicals, the company has ambitious plan to increase the topline to Rs 50,000-

Rs 60,000 crore by the end of 11th five year plan from current levels of around Rs

23,000 crore.

Sufficient spare capacity available, expect at least 2/3rd of RIL gas

to flow through GAIL network

Management also clarified the market’s doubts regarding lack of spare capacity in HBJ

pipeline, and clarified that sufficient spare capacity is available and the company expects

at least 2/3rd of KG D6 gas to flow through its network. In addition, the company is also

mapping the progress of laying pipelines with incremental gas supply coming in to

ensure that whenever incremental gas supply comes in, the company is ready with the

gas transmission infrastructure to transport it to end customers. GAIL also indicated

that there is sufficient spare capacity for the first 40 mmscmd coming out from RIL , and stated that HBJ and DVPL pipelines together have 15 mmscmd spare capacity,

which will be enhanced by another 10 mmscmd by end of FY10. With 8 mmscmd

expected to flow through GAIL’s AP pipelines and another 8 mmscmd through DUPL

pipeline in Maharashtra, GAIL aims to transmit at least 30 mmscmd of KG gas once

production ramps up to 40 mmscmd.

Tariff charges for existing pipelines expected to remain at current

levels

GAIL management is confident on the issue of regulatory risk to pipeline tariffs, and

stated that they see no reduction in tariffs of the core HBJ/DVPL network following

introduction of regulation on the ground that these were decided in the past by the

government itself. This is in-line with our estimate of flat transmission tariffs gong forward.

Company focusing on increasing petrochemical capacity

In addition to gas transmission, another segment on which the company is betting big

is petrochemical segment, which contributes nearly 50% to the bottom line. Currently

GAIL has a total petrochemical capacity of 440000 MT in Pata, which will increase to

500000 MT with the commissioning of 6th furnace. The company is looking to double

the

Capacity of Pata plant in next 4-5 years. Also, the company ahs plans to set up one

petrochemical plant outside India, which according to our view will take a long time to

materialize.

CGD and E&P the next growth driver

Going forward, Gail is also focusing on city gas distribution front. The company already

operates CGD networks in several key cities via nine JVs, and plans to

expand this further to more cities. E&P is another area where GAIL is seeking

diversification and is actively bidding for NELP blocks. Currently the company has stake

in 30 blocks, and in future if there is any success in exploration efforts, we expect

significant re-rating of the stock.

No plans to list Gail gas

GAIL has spun off gas marketing business into a new company, which was on the

expected lines as the company was already keeping separate books for both the

businesses. GAIL will focus only on transmission and petrochemical business, and the

new company GAIL Gas (GGL) will run the marketing and city gas distribution

businesses from the next fiscal year. GGL will take over GAIL India’s marketing activities

like the city gas projects. The new entity will also distribute and market CNG for vehicles,

piped natural gas for domestic or industrial use and and auto LPG both in India as well

as abroad. It also plans to set up retail CNG and LNG outlets across the country

We do not see any impact on financials of the company as it is simply an accounting

exercise, and moreover the company has denied any plans to list the company on the

bourses. We see this move as purely a move to meet the policy guidelines as according

to the policy guidelines issued by the Petroleum and Natural Gas Regulatory Board,

GAIL had to split its gas transportation business from the marketing and the trading

business. The policy was drawn to prevent unfair competition that resulted from the

ability of integrated companies like GAIL to cross-subsidise its activities.

Valuations

After the recent run up, the stock is trading at 12.5x and 11x FY09E and FY10E earnings

respectively. Although we are bullish over the long term prospects of the company keeping

in view the huge upside in transmission volumes, over the near term in next 1-2 years,

we expect growth to remain muted mainly on account of poor performance of

petrochemical and LPG business. Petrochemical and LPG business, which currently

contributes around 50% to its profits are still in the downturn, and expected to remain

under pressure till global situation improves. Going forward, from FY08-FY11, we expect

earnings of the company to grow at a muted CAGR of 6.6% in spite of assuming 15.4%

CAGR in gas transmission volumes from 85 mmscmd in FY08 to 130 mmscmd in FY11.

In view of muted growth expected in next 2 years, s. Keeping in mind the decent gains posted by the stock

in the recent market rally. ------L.KANNAN

Dishman Pharmaceuticals & Chemicals Ltd (CMP:Rs.97, FY10E - PE : 4x, )

New drug unit to improve CRAMS operations

Dishman Pharmaceuticals & Chemicals Ltd (Dishman), is setting up a Rs.350mn US

FDA and MHRA approvable drug formulation unit at the Bavla plant in Gujarat. In fact,

this facility will be designed to provide complete package of CRAM services, right from

Contract research to Dosage forms, satisfying the entire drug life cycle. The company

plans to finance this investment through internal cash accruals.

Following this arrangement, Dishman is in the process of finalizing a deal with a client

for orders which will account for 30% of the unit’s capacity from its inception. This unit

will however make drugs on a contract basis for its clients. The company has no plans

to enter the generic formulations market.

Multiple expansions to power earnings

Dishman, during FY09 commissioned 4 new plants at its Bavla facility, of which one

has been exclusively apportioned to manufacture Eprosartan API for Solvay that has

increased the Eprosartan capacity from 60tpa to 200tpa. On the similar lines, the

company has assigned one of its other plants to meet the requirements of AstraZeneca’s

14 API supply agreement. Another, two plants have been visited by large MNC pharma

companies like GSK, Pfizer, Novartis and have expressed their interest in entering into

manufacturing contracts going forward.

Alongside, the new Bavla Hi-Potency facility (which is under construction and will

manufacture cancer products for Carbogen-Amcis) is expected to start its operations

from June 2009 ensuring robust earning visibility. Further, additional traction is expected

out of the China facility which is likely to be commissioned from July 2009.

On top of the recent facility expansions (which is the prime indicator growth in CRAMS

business model), the new set up of Rs.350mn drug formulation unit at Bavla indicates

huge potential awaiting in the CRAMs segment for the company. Likewise the recent

agreement with Europe based - Polpharma for co-operative & joint API development

ensures additional contract research & manufacturing business flow for Dishmans’

new facilities.--- L.KANNAN