Capri Capital bets on India; plans dedicated realty fund

Large global institutional investors seem to have a developed a renewed interest for Indian realty. The latest in the list is Chicago-headquartered hedge-fund 'Capri Capital Partners' which has big plans for growing in country through its India arm - Capri Global Capital. Considering this, CNBC TV18's Manasvi Ghelani finds out what's attracting global investors to Indian realty at a time when domestic banks are shying away from exposing themselves to the sector.

With domestic investors and banks cautious of lending to the Indian real estate sector given the current economic scenario, foreign investors are coming to the rescue. So after Blackstone, its US based hedge fund Capri, which is now investing big in India through its arm - Capri Global Capital.

The company has recently signed a deal with real estate developer Monarch Universal Group to fund Rs 45 crore for two residential projects in Roadpali and Kalamboli in Mumbai.

Besides, in the last nine months Capri has invested a total of about Rs 200 crore for partnerships with Marvel Group in Pune, CHD Developers in Delhi and Ozone & Unishire Group in Bangalore.

Reports also suggest, Capri is planning to launch its first India-dedicated real estate private equity fund to raise about USD 400 million soon after the elections.

And the management says their strategy is already yielding positive returns.   

“The banks pulled back and that gave us the opportunities to step up so we had significant appointment of capital in the last 12 months. We have experienced very strong credit performance, in terms of delinquencies, they have been very low. We have been able to generate 20% of returns on monies we have let out in the market,” Quintin E Primo III, Chairman, Capri Global Capital says.

On the other hand this is good news for cash-strapped Indian developers as well.

Sanjay Dutt, Executive MD - South Asia, Cushman & Wakefield says: “It is important that you to de-risk your projects and basically have equity partnership and therefore not necessarily invest too much money from your pocket. So that has resulted in a lot of play between developers and PE firms.”

But despite this renewed interest from global investors, analysts say more needs to be done to help developers and all eyes are now on the new government's policies post elections to see if it can get in more FDI for the realty sector as well as push through REITS.

Source: http://www.moneycontrol.com/news/cnbc-tv18-comments/capri-capital-betsindia-plans-dedicated-realty-fund_1039653.html?utm_source=ref_article

Recent Trends in PE investments in Real Estate sector in India

The PE investments in real estate was recorded at $276 million (around Rs 1,638 crore) in first half of 2013 as compared to $514 million (around Rs 3,050 crore) in the same period last year. The decline in the quantum of PERE investment was essentially due to less number deals (13 in H1 2013) as the average ticket size of deals remained same.

Consultancy firm Cushman and Wakefield attributed the drop to the volatility in the market, including slower growth of the Indian economy, political stalemates and depreciation of the rupee. While, there is a strong investment sentiment for PERE transactions in India, they display a reflection of the market sentiments, where funds are looking at only embarking on projects with strong fundamentals.

Even though private equity investment in the Indian real realty has fallen nearly 50 per cent to $276 million in the first half of 2013 due to lack of good projects and weak sentiment, foreign investors are still bullish on the sector. PE funds continue to show keen interest in the market with a number of deals in discussion.

“Investors are willing to invest in real estate; however they are exploring the market for right real estate projects. We anticipate that in the next few quarters, after some regulatory and politico-economic environment are regularised, the momentum in real estate will pick up throwing open more investible options for the investors,” said Sanjay Dutt, Executive Managing Director of South Asia operations, C&W. He added, currently, it was estimated that around $2 billion is ready to be deployed in the real estate sector of the Indian market. The fund raising environment (domestic and offshore) has consistently improved with more quality capital available for the sponsors with demonstrated track record.

According to property consulting firm Cushman and Wakefield about $2 billion (Rs 11,854 crore) is available with private equity firms ready to be deployed in real estate in the next one year, but PE funds want to put in money only in those projects with strong fundamentals. According to Sanjay Dutt, despite the slowdown in the construction market and the reduced number of investible projects in India, real estate is still the fourth most-invested sector by private equity funds.

“We anticipate that in the next few quarters, after some regulatory and politico-economic environment are regularised, the momentum in real estate will pick up throwing open more investible options for the investors,” he said.

So far in 2013, the highest value PE investment was $131.6 million in Pune, followed by $67.5 million in Mumbai, $38.8 million in the National Capital Region, and $16.9 million in Bangalore.

Even data from Venture Intelligence shows that private equity-Real Estate firms made 13 investments (amounting to $318 million across 12 deals with disclosed values) during the quarter ended June 2013. The volume of investments perked up significantly from the seven investments in the same period in the previous year (which witnessed $172 million being invested across six transactions with disclosed values) and also the eight investments (worth $569 million) during the Jan-Mar 2013 quarter.

However, there is a strong growing trend towards investments in ready office space. The growing stability of the market is reflected by the continuous growth of the core investors (number and value) with over $1.3 billion (Rs 7,705 crore) invested in ready office space during the last three years.

Some recent marquee deals/developments in PE investments:

•          Pune witnessed transactions such as the Panchshil Realty and Ireo Management Ltd SEZ by Blackstone for $75.9 million (Rs 4.5 billion).

•          Ascendas Trust’s Rs 600 crore (about $110 million) acquisition of 2 million sq. ft of office space in Hyderabad from Phoenix Group was the largest investment during the second quarter of FY13. This was followed by Xander’s Rs 280 crore ($52 million) investment in Supertech’s 125 acre township project in Gurgaon and Clearwater Capital’s (along with Ajay Piramal Group non-banking financial company PHL Finance) Rs 300 crore ($50.2 million) investment to finance VGN Developers’ acquisition of a land parcel for a gated community project in Chennai.

•          In September ‘13, Kotak Real Estate fund said it had raised $200 million (Rs 1,200 crore) from select group of investors and has firmed commitments to raise $200 million more to close its $400 million eight-year tenure fund to invest in only residential properties in India’s six metros.  The fund will invest an average of $15-20 million in each project and will put in money from the first close in 10-12 projects. It is looking to generate a return of 20 percent for investors of the new fund.

•          PE Firm, Indian Property Advisors Pvt Ltd. (IPAL) is planning two funds – a Rs 300 Cr domestic fund and $250 – 300 million offshore fund, which would be raised in the second quarter of 2014. IPAL would be investing in small redevelopment projects with a turnaround of three years and will only fund for the growth capital.

The company plans to have plain vanilla equity investment rather than a structured deal.

•          Even Tata Realty has put its 780,000 sq ft IT park in Mumbai’s Goregaon suburb on the block and aims to raise Rs 800 crore through the sale of the park, while Oman’s State General Reserve Fund and the Government of Singapore Investment Corp (GIC), investment firm Temasek committed to invest $200 million in HDFC Real Estate Fund.

•          DLF, India’s largest real estate company, had initiated talks with four buyers, including leading private equity (PE) funds, for the sale of Aman Resorts, its luxury hotels chain, said a source involved in the deal. In December 2012, DLF had announced it had sold the entire stake in Aman Resorts for $300 million to Adrian Zecha, the hotel chain’s founder. Sources said Zecha had missed two payment deadlines in March and June, adding he wasn’t able to raise funds for the deal. “Adrian is still in the fray. Being a management buy-out, it is taking time to close. In the meantime, they (DLF) are also in discussions with four other buyers, including some global PE funds that are in various stages of evaluation and diligence,” the sources said. “They are not banking on one buyer for the sale. That is why they’re talking to three-four companies.”

•          The real estate fund of Morgan Stanley has abandoned plans to invest nearly $200 million (about Rs 1,240 crore) in an upcoming commercial real estate project in Mumbai after the rupees recent plunge against the dollar made the deal unrewarding, three people familiar with the development said. Morgan Stanley Real Estate Fund was working on the structured finance deal with Mumbai based Wadhwa Group since January to invest in the latter’s 1.6 million square feet office project in Bandra-Kurla Complex. Construction on the project, called ONE BKC, is due to be completed in the next 12-15 months. The fund has invested about $780 million in Indian real estate so far and the investment in ONE BKC would have been its first in a commercial property in Mumbai. Returns that were arrived at in earlier negotiations between Morgan Stanley and Wadhwa were shrinking even before concluding the deal, one of the people quoted earlier said. The hedging cost for the entire deal would have been huge. Morgan Stanley declined to comment, but Wadhwa Groups chief financial officer Srinivasan Gopalan confirmed that the proposed deal has fallen through. Wadhwa Group is now in process of raising domestic debt of over Rs 1,100 crore from Standard Chartered Bank for the project.

(Sources: First Post 1st August 2;013, Economic Times-26-Sep-2013, Live Mint 19th Sep ’13, Business Standard 28th Sep ’13, 27th July ’13)

Views of Mr P. H. Ravikumar, Managing Director, Capri Global Capital Ltd on the Mid-Quarter Monetary Policy: September 2013 announced by RBI Governor Raghuram Rajan

Markets have reacted adversely to the surprise hike in the repo rate by the Governor of Reserve Bank of India in the Monetary Policy announcement today.

The Market expectations of status quo at the worst or a cut in repo rate in my view were clearly part of the euphoria generated from out of the positive developments on several fronts during the last few weeks post the assumption of charge by Mr. Raghuram Rajan as Governor of RBI.

However, the inflation statistics and the food inflation in particular should be of serious concern to all policy makers. I believe the new Governor is sending a strong signal to markets of his unhesitating ability to take unpopular decisions if such decisions are warranted by ground realities. The Governor has sent a strong message so early in his tenure to the market “don’t take me for granted”.

The deferment in withdrawal of quantitative easing by US has given Indian policy makers a breathing space of three months at the least and six months at the best. It is important that key policy decisions to insulate the economy (to the extent possible on final QE withdrawal by US must be taken quickly even if some of these decisions are not popular).

While the tight interest rate out look continues to be on cards in the short run definitely, Reserve Bank of India will need to address the issues of sufficient liquidity in markets given that the busy season is now round the corner. The management of the currency exchange rate is the other major issue which will have to be addressed. Allowing the Rupee to strengthen beyond current levels may not be actually in the interest of the overall economy in general and exporters in particular.

Source: http://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=29590

FSI for all categories of Cessed Buildings increased to 3.00

A decision kept on hold since 2009, the state government on 26^th July 2013 announced that a floor space index (FSI) of three will be extended to all the three categories of cessed buildings (Category A, B and C). The move would certainly make it attractive for builders and developers to offer redevelopment to more than 16,000 cessed buildings.

The move is expected to provide a major boost to plans of redevelopment of such properties.

What are Cessed Buildings?

Cessed buildings - built prior to 1969 - are privately-owned old buildings in South Mumbai whose repair and maintenance are the responsibility of the Maharashtra Housing and Area Development Authority (MHADA). The tenants in these buildings pay a certain cess to the MHADA as owners have found it impossible to maintain the buildings because of low rent income.

Buildings which were constructed before 1940 are categorized as category A cessed building, Buildings built between 1940 to 1950 are categorized as Category B Buildings, and Buildings built between 1950 to 1969 are Category C buildings.

The Bombay High Court has ruled that cessed buildings in the city can be demolished and redeveloped with additional Floor Space Index (FSI) only if can be allowed only if the MHADA certifies the building as 'dilapidated'.

With this categorization Over 12,768 buildings which were constructed before 1940 are categorized as category A cessed building, about 1169 buildings built between 1940 to 1950 are categorized as Category B Buildings, and about 1058 buildings built between 1950 to 1969 are Category C buildings.

Existing Regulation on Redevelopment of Cessed Buildings

Section 33(7) of the Development Control Rules for Mumbai (DCR) lays out that if a cessed building is redeveloped, the developer can get maximum FSI of 2.5 or the FSI required to provide tenements to all the tenants in the building, whichever is more, plus some incentive FSI. The developer then rehabilitates all the tenants in the old building, and sells the extra FSI for his/her profit.

1. In case of redevelopment of 'A' category cessed buildings undertaken by the landlord or Cooperative Housing societies of landlord or occupiers, the total FSI shall be 2.5 of the gross plot area, or the FSI required for rehabilitation of existing occupiers plus 50% incentive FSI, whichever is higher. Under the new policy the developer is assured of at least 50% FSI for free sale. Also the policy enables rehabilitation of all occupants on the same plot, reducing social dislocation. 

2. Self contained flats of minimum 300 sq.ft. (As per Govt. G.R. dt. 2-3-2009, minimum carpet area admissible is 300 sq. ft. in lieu of 225 sq. ft before amendment) and maximum 753 sq.ft. carpet area are given to the old residential tenants/occupants. Shopkeepers are given an area equivalent to their old area. 

3. In case of 'B' category cessed buildings permissible FSI shall be the FSI required for rehabilitation of existing occupiers plus 50% incentive FSI.

3. As per the permissible FSI, stated above, will depend upon the number of occupiers and the actual area occupied by them, no new tenancy created after 13.06.1996 shall be taken into account, while computing the permissible FSI. Similarly, tenants in unauthorized constructions made in the cessed buildings shall not be taken into account while computing permissible FSI, i.e. the total no. of tenants/occupants should not increase after 13.06.1996. The responsibility for rehousing such tenants whose tenancy may have been created after 13.06.96 or who stay in unauthorized construction will lie solely with the NOC holder.

5. Though some buildings may belong to 'C' category (may not belong to 'A' or B' categories), they may be so dilapidated and dangerous that their reconstruction is most urgently necessary to this end, the Government has granted additional incentive FSI as per Point No.1 above for redevelopment of buildings of any category declared as dangerous, prior to monsoon of 1997.

What would change?

After the move to increase FSI for category A cessed buildings to 3.0 times, the state government on 26^th July 2013 announced that a floor space index (FSI) of three will be extended to B and C category buildings (constructed prior to September 30, 1969). Clubbing buildings that were earlier classified as category A, B and C, the state announced on that it would give floor space index (FSI) of 3 to all cessed buildings to boost redevelopment activity in the city.

Chief Minister Prithviraj Chavan, replying to a debate on the issue in the state legislative assembly, said that all categories of cessed buildings will now have an FSI of three.

Developers never paid attention to B and C cessed buildings as only A category buildings used to get that FSI. Many buildings which used to be neglected by developers for want of incentives can now go in for redevelopment.

       

In addition to the above, Fungible FSI of 35% at premium is also applicable to Cessed buildings Redevelopment. The GoM had amended the DCR to enable the tenants to get minimum 300 sq. ft and maximum 753.50 sq ft area flats post redevelopment. As per the modified DCR, the tenants will also be eligible to get further additional area upto 35% as fungible FSI applicable to all sizes of flat. The FSI can be utilized either to provide flower bed, dry balcony, nitch areas or voids or may be used for constructing bigger habitable areas.

Expected impact of the changed regulation

The amendment would benefit more than 16000 families, a majority of lower middle class who live in hazardously wrecked structures mostly in the southern areas of Mumbai. Also Category B, and C buildings which were till now neglected by builders for lack of sufficient commercial incentive would find increased interest for redevelopment. For several years, builders have been reluctant to undertake redevelopment of these buildings as the plots on which they are constructed are small and it was difficult to redevelop with an FSI of 2.5. As a result, residents continued to languish in old structures with the constant fear of the buildings collapsing.

The highest benefit of the amendment has the potential to benefit thickly populated areas of Bhendi Bazaar, Girgaon, Kalbadevi, Grant Road, Tardeo, Byculla, Dadar, Parel, Matunga, Sion, Also some of the Cessed buildings in Bhendi Bazar, Sandurst Road, Grant Road, and Byculla are identified under the category of cluster development and hence, builders are likely to bag FSI of more than 3.0 times Developers have welcomed the move, saying that it will have a major impact. “The hike was needed and it will really bolster the creation of affordable homes in the city,” said Sunil Mantri, chairman, Indian Merchants Chambers (real estate committee).

While housing activists are also happy with the decision, they want the government to look beyond just hiking FSI. “The state should beef up the corresponding infrastructure as only hike in FSI will not serve any purpose, apart from putting a strain on existing resources,” said Utsal Karani, secretary, Janhit Manch.

According to Shadaab Patel chairman and managing director of Platinum Constructions Private Limited, the recent announcement was much awaited move. “There would be creation of more housing stock, which could also result in some price correction,” he said.

However, builders want more such proactive steps.

“The next move should be single-window permissions so that approvals are processed faster,” said Sunil Mantri vice president of the National Real Estate Development Council.

Sources: The Times of India (27^th July ’13), Hindustan times (27^th July ’13), MHADA Website, MCGM Website.

Interest rates unlikely to come down in near future

P H Ravikumar has recently taken charge as managing director at Money Matters Financial Services. At a time when the Indian economy is in the throes of a slowdown and credit demand is tepid, NBFCs such as Money Matters has to watch out for delinquencies. However, Ravikumar, who has been a banking and financial sector veteran with over four decades of experience with stints at the Bank of India, ICICI Bank and NCDEX is unfazed. In an interview, Ravikumar says that loan demand from small and medium enterprises (SME) will continue to be strong and the sector is poised for robust growth once economy picks up. Ravikumar talks to Sanjeev Sharma about launching a real estate AMC, Money Matters’ name change and expansion plans for Punjab and Haryana.

Q: How do you see the market for SME portfolio in the current financial year? How has been the demand for loans so far in the current fiscal year?

A: Small and medium enterprises have been the bulwark of both services and industrial sectors. They are the largest exporters, largest providers of employment, but have the least funding from the organised financial sector. While the overall credit growth has been around 15 per cent for the banking sector, the latent demand from small and medium enterprises for funds from the organised sector will be manifold this figure. Even within the SME segment, the small and micro industries have the least support from organised financial sector. At Money Matters, the demand for loans has been strong in the first quarter of fiscal 2014. Our total loan book currently stands at around Rs 475 crore.

Q: How do you see the growth of the SME market in North India, especially Punjab and Haryana?

A: Both these states have been the drivers of the SME growth in the country. We see a steady growth at a compounded annual growth rate (CAGR) of over 18 per cent-20 per cent in this sector notwithstanding what is happening in the other parts of the economy currently. As the growth in the economy picks up over the next few years, the SME sector will grow at a compounded annual growth rate of well above 25 per cent. It is exactly for this reason that we are expanding our footprint in these geographies. We plan to open more offices in the two states based on our business growth and need to tap this potential opportunity.

Q: What is your view on interest rates? Do you see room for more rate cuts and by what extent?

A: Current macro trends —food inflation, current account deficit and the consequent pressure on value of rupee vis-à-vis major international currencies — seem to indicate that there is little room for interest rates to come down. The pressure on the operating profit levels of banks, particularly owing to level of stressed assets, also indicates that banks are unlikely to reduce their rates of interest in the near future. Unless there is dramatic improvement in the overall macroeconomic scenario, I do not see perceptible reduction in interest rates in the near future.

Q: What are the new sectors you are looking to tap for lending?

A: Residential home loans, particularly in tier II and tier III cities, revival of SMEs which are facing financial stress and specific structured corporate loans are the major segments where there is a strong latent demand for funds and can be tapped for lending.

Our current growth plans for the current calendar year can be adequately met from our own net funds. We have no borrowings at present. However, towards the end of the calendar year, we would raise funds of about Rs 250 crore to Rs 300 crore.

Q: Recently, Money Matters has entered into a strategic tie up with Capri Capital Partners LLC. (CCPL). Can you share details of this partnership?

A: CCPL is among the top one per cent of the funds - by performance in the US in their segment. They have strong skills in raising resources from various international markets and managing risks in the realty sector. We have strong knowledge of the domestic real estate market. The partnership envisages setting up of a real estate AMC which will manage projects end to end subject to various approvals. The chairperson of CCPL will also be joining the board of our company. We believe their skill sets strengthen our growth in India. Besides, we are in the process of changing our name to Capri Global Capital that will reflect our tie-up. While the Reserve Bank of India nod has come as also the shareholders’ approval, we expect the ROC approval for the name change over next two or three weeks.

Source: http://www.tribuneindia.com/2013/20130722/biz.htm#2

Money Matters Chief Becomes the First Indian Recipient of Honorary CISI Fellowship

Mr. P. H. Ravikumar, Managing Director, Money Matters Financial Services Ltd., a leading non-banking finance company, has been awarded with Honorary Fellowship of The Chartered Institute for Securities & Investment (CISI).

Mr Ravikumar is the first Indian to receive a CISI Honorary Fellowship and the award was presented at the Institute of Chartered Secretaries of India (ICSI) – CISI continuing professional development event on “Integrity Matters” in Mumbai.

Honorary Fellowship, which carries the designatory letters FCSI (Hon), is awarded by the Institute Board to those who have contributed with distinction to financial services and to the CISI. The Institute now has 51 Honorary Fellows out of a total membership of over 40,000 worldwide including the late Lord George of St Tudy, former Governor of the Bank of England, Sir Hector Sants, former CEO of the FSA, Angela Knight CBE and formerly CEO of the British Banker’s Association, Xavier Rolet, Chief Executive of the London Stock Exchange and HE Abdullah Al-Turifi, Chief Executive of the UAE Securities and Commodities Authority (SCA).

Simon Culhane, Chartered FCSI and CISI CEO said: “We are delighted to award our highest accolade to Mr Ravikumar as a valued CISI supporter and to welcome him to our elite group of ambassadors.”

Of his appointment, Mr Ravikumar said: “At the outset I am overwhelmed by the gesture of the CISI Board to nominate me as part of a small group of professionals as Honorary Fellows of the Institute. My sincere thanks to the Board of the Institute for this gesture. I am honoured and humbly accept this nomination. I am happy to be associated with the Institute in all its endeavours in seeking to promote knowledge and integrity in financial services – needed somewhat in a higher degree in the current context of events.”

For more information, visit www.money-matters.in

Mumbai Property Market

We had carried out survey of Mumbai property market and the take away points are:

Price rise despite weak property market:

This has been the case despite weak demand, the main reasons being: a) rising input cost b) delay in approvals and increase in incidental cost due to revision in plans due to change in regulation. C) Leveraged developers covering their finance cost. D) Very few developers are offering on spot discounts.

Limited near term supply to keep price high:

Only 9% properties are in ready possession. More than 60 % of projects are scheduled for delivery post 2015. Delay in possession dates of projects. Delay in projects is due to delay in approval process. Projects announced by renowned brands such as L&T, Lodha witnessed robust sales in 1QCY13.

Rates quoted on carpet area basis and 20:80 schemes offered by developers:

Most of the developers have started quoting rates on carpet area basis for better transparency. Efficiency in Mumbai apartment range between 60-70 % and super area built up is calculated as 143-150 %. No developer has officially cut base prices as yet. However, many developers project 20:80 scheme whereby buyer pays 20 % upfront while booking and 80 % on possession. Further freebies like stamp duty waivers, floor rise waivers are offered to attract buyers.

Not much rate cut benefits passed to end consumer:

Even though RBI has cut interest rates by 100 bps in last 1 year, not much benefit has been passed to end consumer. Average loan rate currently is 10.5% vis a vis 11 % in Nov 11.

1% change in interest rate result in 6-7% change in EMI for a 20 year loan.

Sales registration have shown YoY a degrowth in 19 out of 25 months ending Feb 13.

Steady growth in leave and license registration indicated more people prefer to stay in rented apartments than buying homes.

(Source: Prop Equity)

Challenges faced by SMEs in India

Small and Medium Enterprises (SMEs) contribute to economic development in various ways such as creating employment opportunities for rural and urban population, providing goods & services at affordable costs by offering innovative solutions and sustainable development to the economy as a whole. SMEs in India face a number of problems - absence of adequate and timely banking finance, non-availability of suitable technology, ineffective marketing due to limited resources and non availability of skilled manpower.

Small and Medium Enterprises (SME) play an important role in the development of a country. There are around 26 million MSME units in India, of which 13 million are SMEs. SMEs contribute nearly 45% share of manufactured output, accounting for 40% in overall exports of the country and providing employment to about 32 million people.

The performance of SMEs in India though impressive comes next to China where this sector provides employment to 94 million people with a network of 37 million units.

India has registered a high economic growth (6-9%) consistently over the last one decade. For the sustainability of this kind of growth proper nurturing of SME sector is imperative. The need of the hour is to empower the SME Sector so that it is able to take its rightful place as the growth engine of the economy.

Small and Medium Enterprises (SMEs) are often confronted with problems that is uncommon to the larger companies and multi-national corporations. These problems include the following:

Lack of IT Support

IT personnel are in high demand and are often attracted to bigger companies and MNCs. It is very difficult for SMEs to attract good IT personnel. It is even more difficult to retain them. Moreover, good IT personnel are expensive and may not be affordable by most SMEs. The current scenario offers scope for enterprises to offer standard (and customized) IT infrastructure services to SMEs on an ASP/cloud computing basis. This would ensure that individual SME does not have to commit large amount of capital to have benefits of technology. In fact, the service provider – if sufficiently innovative- can structure their own costs of services to be paid be the SME around the cash flows of the SME concerned.

Lack of IT Literacy

Many of the employees in SMEs started from the ground up after working with the company for many years. Some of them are often holding supervisory and managerial positions. These employees may not be IT literate and often have high resistance to the changes in the working process that they are comfortable with after many years. This again offers a great opportunity for institutes like the NIIT etc. basic training of the SME entrepreneurs for making them technologically literate.

Lack of Formal Procedure and Discipline

Most SMEs do not have formal procedure or often these are not documented. Furthermore, there is tendency for these procedures to change frequently. This makes it difficult for third party and newcomer to understand the existing business practices and match them with the IT process.

Management Skills:

As in case if technology, there are opportunities for service providers to train entrepreneurs on issues like internal organization structure, control and delegation, emerging opportunities and review of internal skill sets.

Lack of Financial Resources

Indian entrepreneurial effort has always been substantially debt funded. With growing globalization and sustained tight money regime over last four/five years, the debit equity ratio levels need to be brought down by SMEs. SMEs today minimum 35% to 40% owned funds as against 20% to 25% in the 1980’s and 1990’s. The lack of venture and private equity funds which meet capital fund requirements for SMEs particularly in amount below Rs.100 crores has not helped. There is a dire need to supplement the efforts of SIDBI through establishment of multiple such entities under an institutional frame work in this area since the need is very large.

As a SME/SMI, financial resources are often limited. This often forces company to select a solution, which appear to be cheap initially. However, the hidden costs will start to emerge during implementation. This sometime causes the project to be abandoned or sometime sent the company into further financial crisis.

Lack of Human Resources

Implementations of some bigger scale IT project especially those that involve business process across different departments or require large amount of initial data entries require human resource during the implementation. Some SMEs are often in the stage of frequent fire fighting and shortage of manpower. This makes it very difficult for them to allocate time to carry out implementation. Furthermore, there is always a conflict between getting the daily routing work going and to do the "Extra" IT implementation. Equally important is the need to understand that as the organization grows the skill sets needed at senior level will change.

Lack of Experience of Using Consultants

A good consultant often save time and effort, and help to prevent pitfalls during the IT projects. However, most SMEs are lacked of experience in working with consultants. The lack of knowledge in the field of IT makes them difficult in identifying good consultant for the projects. They often feel that the consultant costs are too high and they can handle it with their own staff. If the company has no staff that are experience and knowledgeable in t he IT project, avoiding external help often costs more to the company eventually.

Small and Medium Enterprises significantly contribute to industrial, economic, technological and regional developments in all economies, developed and developing, though the definitions of SMEs may vary. In India, it is estimated that there are over 1.4 million small industries, out of which about 30 per cent may relate to manufacturing. SSI sector account for about 40% of total industrial production, 35 to 40% of total exports and a significant share in employment (close to 2.5 million) and close to 8% of GDP. However SMEs or SSI sector (now called as micro, small and medium enterprises, MSMEs) are going through a transition phase including restructuring of strategies and facilities since the announcement of new policies in 1991 and thereafter progressive adoption of liberalized and globalizing policies in India. We will however continue to use 'SME' nomenclature as it is more popular, and widely accepted.

SMEs need to be vitalized for competitiveness and sustainable growth under new world trade rules and faster technological changes, including wider use of ICT (Information and Communication Technology) besides new business models. Several initiatives have been taken by the government from time to time to promote and support MSMEs, including new support measures, financing mechanisms, and gradual de-reservation of items for production. Innovations and technologies are becoming more crucial for competitiveness and sustainability of SMEs, in the emerging international trade regime. MSMEs (or SMEs) need to adopt internationalization strategies in tune with objectives and strategies and global supply chain management of transnational corporations (TNCs) or large companies

Securitisation and India

Securitisation is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling said consolidated debt as bonds, pass-through securities, or collateralized mortgage obligation (CMOs), to various investors. The principal and interest on the debt, underlying the security, is paid back to the various investors regularly. Securities backed by mortgage receivables are called mortgage-backed securities (MBS), while those backed by other types of receivables are asset-backed securities (ABS).

In India, securitisation has been for while now, the route to achieving the mandatory priority sector targets for banks both domestic and multinational. Securitisation as a market itself has evolved from being mere sale of portfolio from one organization to another to becoming complex structures in itself. This market has been in existence since the early 1990s, though has matured significantly only post-2000 with an established narrow band of investor community and regular issuers. In the early 1990s, securitisation was essentially a device of bilateral acquisitions of portfolios of finance companies. There were quasi-securitisations for sometime, where creation of any form of security was rare and the portfolios simply got transferred from the balance sheet of the originator to that of another entity. In recent years, loan sales have become common through the direct assignment route, which is structured using the true sale concept. Europe and United States has one of the most complex and developed securitisation market. India is still a small market where securitisation grew 15% over previous year in value terms. The number of transactions was also 32% higher in FY2012 than in the previous fiscal. The number and volume of retail loan securitisation (both ABS – Asset Backed Securitisation and RMBS – Residential Mortgage Backed Securitisation together), was the highest in FY2012 compared to previous fiscals, while the LSO (Securitisation of individual corporate loans or loan sell-off) issuance was the lowest ever. This in reality is an increase in volume—following a continuous decline for three years and was on account of a 26% rise in securitisation of retail loans.

In India, issuers have typically been private sector banks, foreign banks and non-banking financial companies (NBFCs) with their underlying assets being mostly retail and corporate loans.

The key objectives for Indian banks include:

·       Liquidity: Securitisation is an easy route than raising deposits that are subject to reserve requirements

·       Regulatory issues: Constrains arising out of Provisions, priority sector norms, etc.

·       Capital Relief: Major investors are mostly mutual funds (money market/liquid schemes), close-ended debt schemes and banks. Long term investors like insurance companies and provident funds are currently not active due to regulatory constraints. Foreign institutional investors are also missing due to regulatory ambiguity. As per guidelines, mutual funds are required to declare their NAV’s on a daily basis due to which they prefer the structure/asset classes which involve low pre-payment rates. The lack of domestic non-traditional hedge fund style investors to participate in equity and mezzanine tranches has led to originators holding them.

Some examples of securitisation in the Indian context are:

·       First securitisation deal in India between Citibank and GIC Mutual Fund in 1991 for Rs 160 mn

·       India’s first securitisation of personal loan by Citibank in 1999 for Rs 2,841 mn.

·       India’s largest securitisation deal by ICICI bank of Rs 19,299 mn in 2007. The underlying asset pool was auto loan receivables.

·       India’s first mortgage backed securities issue (MBS) of Rs 597 mn by NHB and HDFC in 2001.

·       Securitisation of aircraft receivables by Jet Airways for Rs 16,000 mn in 2001 through offshore SPV.

·       India’s first floating rate securitisation issuance by Citigroup of Rs 2,810 mn in 2003. The fixed rate auto loan receivables of Citibank and Citicorp Finance India included in the securitisation

·       India’s first securitisation of sovereign lease receivables by Indian Railway Finance Corporation (IRFC) of Rs 1,960 mn in 2005. The receivables consist of lease amounts payable by the ministry of railways to IRFC

·       L&T raised Rs 4,090 mn through the securitisation of future lease rentals to raise capital for its power plant in 1999.

An important change negating lot of banks from lending to NBFCs was what we observed in the ‘Master Circular by the RBI for Lending to Priority Sector’ released in July 2011, where loans by banks to NBFCs no longer qualify as Priority Sector Lending (PSL). With this change in regulation there was only one major way in which banks could meet their shortfall in priority sector lending targets, viz., acquisition of compliant portfolios from NBFCs. For the Originators’ (or NBFCs) motive in entering into these transactions was a pricing, capital relief and tenure-matched funding, apart from having an alternate fund-raising channel. This saw a neat rise in transactions involving bilateral assignment of retail loan pools of mainly including loans to Small and Medium Enterprises (SMEs) or Small Road Transport Operators (SRTOs) and micro credit.

These Bilateral assignments which account for around 75% of ABS and RMBS volume in India—continued to be the preferred route relative to conventional securitisation, given that these transactions were not covered by RBI’s guidelines of Feb 2006 on securitisation, thus making them less restrictive for originators.

That no longer is the case according to our internal estimates given that the RBI Guidelines on Securitisation issued in May 2012 that prohibit stipulation of credit enhancement for assignment transactions, thus exposing the purchasing banks to the entire credit risk on the assigned portfolio.

Priority Sector Lending targets however continue to exist and continue to get stricter and larger (MNCs with greater than 20 branches now are treated similar to domestic banks with 40% of their lending portfolio to be to the Priority Sector. And these could going forward be met at-least partly through the securitisation route, wherein credit enhancement is permitted.

Securitisation too is has its own deterrents which are high capital charge for Originators and impact of mark-to-market for the Investing Banks. Another key constraint presently is the ambiguity on the taxation of PTCs (or Pass Through Certificates), a matter which is presently sub-judice. Pending clarity on the issue, Mutual Funds—as well as several banks—are staying away from making fresh investments in PTC instruments. The microfinance industry saw 13% rise in deals involving sale of portfolio through securitisation and other bilateral transactions last financial year.

Last year, sailing through rough waters, the MFI industry managed to strike deals worth Rs 3700 crore (securitisation and direct assignments). This year, the industry is expected to have sold portfolios worth Rs 4,200 crore to banks and other financial institutions, according to data from MFIN (microfinance institutions network).

Additionally, RBI’s expected adoption of the proposals of the Nair committee on Priority Sector Lending (report submitted in February 2012) would be a key regulatory guideline which could further affect the securitization market in India.

We await further guidelines this year from the regulator – this will in addition to the changes in Priority Sector Norms affect the market in totality.