Telecom story comes a full circle for the Ambani family…
The decision by RCOM to sell out to Reliance Jio was, in a way, a blessing in disguise for the ADAG Group. RCOM had been deep in debt to the extent of Rs.42,000 crore and the deal for the sale of its towers to Brookfield as well as the Aircel merger deal had been called off. With the Chinese lenders breathing down their neck, RCOM really did not have too many options. In a way the merger does mark the Ambani family coming full circle in telecom…
Reliance Telecom story…
The Reliance telecom story began way back in 2003 when they launched the CDMA business across India in a very big way. The CDMA platform was supposed to be more robust and more suited to data usage. Things soured after a few years. The business split into the ADAG and the MDAG groups in 2005 with the entire telecom business going to the ADAG Group. The troubles for the CDMA business started soon after that. Firstly, CDMA as a telecom technology did not live up to its promise. That put a lot of upfront investments in the technology at risk. Secondly, during the heady days of 2006-07 RCOM had borrowed heavily and the tariffs were not able to keep pace with that. The last nail was the introduction of Jio services in India which led to a massive price competition and forced other telecom companies to follow suit. It also resulted in a spate of mergers with the RCOM-Jio merger being in the most recent.
It gives an exit for RCOM…
It is as yet not clear how the RCOM business will shape up post the merger deal. As per the deal, Jio will take over nearly Rs.36,000 crore of debt leaving RCOM with just Rs.6000 crore of debt in its books. In exchange, RCOM will sell its entire towers business, its optical fiber network and spectrum to Reliance Jio. RCOM was already under pressure from the Chinese lenders who had initiated bankruptcy proceedings against RCOM. The cooling period offered to its other domestic lenders was anyways expiring by end of 2018. That really did not leave much of elbow room for RCOM. More importantly, the ADAG group can now focus on its 3 core focus areas of infrastructure, defence and financial services.
Value accretive for Jio…
The good news is that Jio is really flush with cash from its parent’s oil business. The acquisition saves Jio tower rentals to the tune of Rs.1500 crore per annum. It also provides a captive customer base and the complete spectrum as well as the tower assets and the optical fiber network of RCOM. This will largely fit into Jio’s aggressive plans going ahead. The final price is expected to be closer to Rs.24,000 crore, which is quite small compared to what Jio has already invested in telecom. For the MDAG group it may be, in a way, a return to where they started off from!
Markets Converge
SEBI takes a step to bring equity and commodity markets closer
One of the key announcements in the last Board meeting of SEBI prior to the Union Budget focused on a variety of critical issues. While there was focus on the WhatsApp leaks of results and better governance in rating agencies, the big news was the proposal to bring about greater convergence among the stock exchanges. SEBI Board has actually permitted equity exchanges and commodity exchanges to offer cross listing of products. Here is how…
Widens the competition…
Currently, India has specialized bourses with the NSE and BSE focusing on equity and F&O and the MCX and the NCDEX on commodities. What SEBI now plans is to open up all the business to all the exchanges. Theoretically, NSE and BSE will be allowed to offer trading in commodities from October 2018. At the same time, MCX and NCDEX will also be permitted to offer trading in equities and F&O. Effectively, this will open the entire market for more competition. This was a challenge in the past when the commodity futures were regulated by the FMC and equity and F&O was regulated by SEBI. With both the businesses now coming under SEBI purview, these kind of cross linkages are perfectly possible. This will also be a boon for institutions in commodities. NSE and BSE have a strong institutional franchise and that can be effectively leveraged for commodities. Both FIIs and MFs can start off on commodities.
What about specialization?
In reality, however, this cross listing could be much more complex. Globally, financial markets are specialized. In the US the NYSE and NASDAQ focus on equities while CME and CBOT focus on the commodities. This specialization is good as it brings about more of best practices in the Industry. There is one more challenge in India. The commodity spot markets continue to be regulated by the respective states with SEBI only regulating the commodity futures and options market. That leaves the risk of dual regulation open in case of the commodity markets. That could also hinder the participation of institutions in spot-futures arbitrage business.
Operational benefits for sure…
The benefits emanating from this cross listing could actually be a lot more fundamental in nature. Firstly, brokers will be able to operate equity and commodity businesses with a single unified license. Secondly, the need to house the commodities business under a separate company will no longer be relevant. Thirdly, for brokers the compliance function could become more unified; saving them cost and resources. Above all, investors and traders will stand to benefit immensely. They will be able to synergize their equity and commodity trading better and trade with a single account. The real benefits of the move could be operational!
Mumbai Fire
Raises bigger questions about the nature of urban growth…
The catastrophic fire in the Lower Parel area of Mumbai on 28th midnight once again highlighted how many of the buildings in large cities are being potential tinder boxes. This was all the more pronounced considering that it was just a couple of months after the horrific stampede at the Lower Parel station. The regular inquiries and punishment will be meted out; at least that is what the city administration has promised. But in the process let us not miss the bigger picture.
Lack of urban planning…
Walk through any of the large cities in India like Mumbai, Delhi, Chennai, Pune or Bengaluru and the immediate impression is of an urban sprawl that is bursting at its seams. The reasons are not far to seek. Rapid urbanization has been the story in the last 40 years with most of the jobs being created in urban centers. The farm crisis has only worsened the situation and aggravated the migration to urban centers. The population in most Indian cities has been beyond what the infrastructure can handle. The result is that there are compromises on open spaces, there is a compromise on fire fighting, the focus is on more ROI considering the steep rents, modifications are made illegally etc. This has led to poor FSI ratios and cramped spaces that become tinder boxes. This is true of most of the urban cities across India. Mumbai has only highlighted these risks.
Greater compliance needed…
The key to urbanization is a very strong rule of law. Successful urban centers like Singapore, Hong Kong, Tokyo and Berlin have managed to strike this delicate balance quite well. A strong rule of law, very strong institutional framework, and smart management of cities are factors that make urban centers successful. More importantly, the entire system of licensing, fire compliance, open spaces etc should be enforced. Corruption at a basic level should be handled more stringently to avert cases where businesses can willfully flout the rules of the game. Better compliance and rule of law will be a good starting point for urban sprawls.
How about better infra?
Most of the Indian municipalities are fairly rich and funds are hardly the constraint. A greater focus is required on public transport, better drainage, quality roads etc. All these contribute to safer roads. A city becomes wealthy when the majority uses the public transport rather than driving private cars. That is what separates well managed cities. The tragedies in Mumbai serve to highlight that India is simply unprepared for the rapid urbanization. Unless these basic issues are addressed urgently, such death traps will continue to open up. One hopes the tragedy is used as a warning signal to set the house in order!
