Diageo, which is the majority shareholder in USL with a 54.78 per cent stake, however, added that it would continue to be in control of USL even if it were to lose the title of the over one crore shares. (Reuters)

World’s largest spirits maker Diageo could lose title to over one crore shares of United Spirits Ltd (USL) worth over Rs 3,235 crore at current market price in case of ‘adverse’ ruling on several winding up petitions filed against Vijay Mallya-led United Breweries Holdings Ltd (UBHL) from which it had bought the shares.

Diageo had purchased the shares amounting to 6.98 per cent stake in USL from UBHL as part the USD 3 billion deal in 2012 through which it had gained majority control in the Indian spirits maker.

The share sale was, however, challenged in the courts by lenders to UBHL, which had defaulted on loans.

“…adverse results for Diageo in the proceedings … could, absent leave or relief in other proceedings, ultimately result in Diageo losing title to the 1,01,41,437 USL shares acquired from UBHL,” Diageo informed shareholders in its annual report of 2015.

Based on the current share price of USL at Rs 3,193.35 apiece, the 6.98 per cent stake is worth Rs 3,238.51 crore.

Diageo, which is the majority shareholder in USL with a 54.78 per cent stake, however, added that it would continue to be in control of USL even if it were to lose the title of the over one crore shares.

“Diageo believes it would remain in control of USL and be able to consolidate USL as a subsidiary regardless of the outcome of this litigation,” the company said.

Diageo, under a share purchase agreement (SPA) with UBHL and various other sellers, had acquired 21,767,749 shares (14.98 per cent) in USL for a total consideration of Rs 3,130 crore, including the 1,01,41,437 shares from UBHL.

Prior to the acquisition from UBHL on July 4, 2013, the High Court of Karnataka had granted leave to UBHL to enable the sale to Diageo to take place notwithstanding the continued existence of five winding-up petitions that were pending against UBHL on November 9, 2012, being the date of the SPA.

“Additional winding-up petitions have been brought against UBHL since November 9, 2012, and the Leave Order did not extend to them,” Diageo said.

At the time of the completion of the UBHL share sale, the Leave Order remained subject to review on appeal, the company said.

Explaining why the company went ahead with the share purchase despite pending litigations, it said: “… it was considered unlikely that any appeal process in respect of the Leave Order would definitively conclude on a timely basis and, accordingly, Diageo waived the conditionality under the SPA relating to the absence of insolvency proceedings in relation to UBHL and acquired the 10,141,437 USL shares from UBHL at that time.”

Earlier this year, a 17-bank consortium led by SBI had initiated the process of taking over physical possession of the Kingfisher House, worth Rs 100 crore.

Mallya has been under scanner over issues at his various group companies, including USL, where he has sold the controlling stake to UK-based Diageo.

UK-based Diageo has spent nearly USD 3 billion for a controlling stake of about 55 per cent in United Spirits Ltd (USL). The company had first acquired 25 per cent in USL from Mallya-led UB Group in late 2012, while it bought further shares from non-promoters last year.

In April this year, Diageo-controlled USL Board said it has “lost confidence” in Mallya after an internal probe and a forensic inquiry by PwC revealed alleged fund diversion to Kingfisher and other UB group entities.

USL said “various improprieties and legal violations” were found in the probe into loans given to UB Group firms and it asked Mallya to quit the board.

However, Mallya rejected the charge against him and said Diageo has contractual obligations to support him.

In July, 2015, USL alleged irregularities and potential violations of law in diversion of funds by UB Group and said it is initiating process to recover dues of Rs 1,337 crore.

FPIs withdrew a net sum of Rs 6,109 crore from equities, while they pulled out Rs 773 crore from the debt markets during September 1-11, according to depositories data.

Foreign investors have pulled out nearly Rs 7,000 crore from the capital markets in about two weeks mainly on account of a combination of global and domestic issues.

This comes on top of a record net outflow of Rs 17,428 crore from equities last month. This was the highest net outflow by foreign portfolio investors (FPIs) in a single month since 1997.

The segregated data prior to 1997 was not available.

FPIs withdrew a net sum of Rs 6,109 crore from equities, while they pulled out Rs 773 crore from the debt markets during September 1-11, according to depositories data.

Market experts attributed the huge outflows to sustained global risk-off trend along with concerns over economic slowdown in China and currency devaluation by the world’s most populated country.

Besides, China’s weak PMI and lower GDP growth dampened sentiments in India. Moreover, the stance of the US Fed continued to affect investor sentiment, they added.

However, analysts believe that the outflows are unlikely to continue for a long time.

The growth data showed the economy grew at 7 per cent in April-June, from 7.5 per cent in the preceding quarter.

Not just that, Nikkei India Manufacturing PMI stood at 52.3 in August, as against 52.7 in July, a sign that the sector grew at a slower pace.

Since the beginning of the year, FPIs have made a net investment of Rs 21,413 crore in equities and Rs 37,931 crore in debt markets.

In a conversation with Financial Express online, Harshad Patil, chief investment officer, Tata AIA Life said the market offers an attractive entry point for a long-term investor with a 3-5 year view and hence can be considered by an investor for allocating more towards equity at these levels as long as they have a 3-5 year time horizon.

Indian equity market looks attractive from a long term perspective with the current valuations at reasonable levels. In a conversation with Financial Express online, Harshad Patil, chief investment officer, Tata AIA Life said the market offers an attractive entry point for a long-term investor with a 3-5 year view and hence can be considered by an investor for allocating more towards equity at these levels as long as they have a 3-5 year time horizon. Excerpts from the interview:

Q. Concerns over slowdown in China and pending domestic reforms unnerved foreign institutional investors in August as they pulled out over Rs 17,000 crore from Indian equities during the month. The amount is higher than the outflow witnessed during the global financial crisis in October 2008. In the present market condition, can we see foreign money coming into domestic equity market this year?

A. The month of August saw the Indian equity markets weighed down by global uncertainties due to yuan devaluation, sell-off in commodities and domestic factors such as a sub-par monsoon and political stalemate resulting in an unproductive monsoon session of the Parliament. Given the confluence of these factors, it is true that the foreign institutional investors (FIIs) have pulled out a fair chunk of their year-to-date inflows in the month of August. However, it is heartening to note that the domestic institutional investors-both insurance companies and mutual funds have bought roughly the same quantum of Indian equities in August.

I am hopeful that the FII inflows will continue this year as more clarity emerges on the imminent interest rate hike in the US and as Chinese currency and equity markets stabilise.

Q. How do you see metal stocks in context with China slowdown?

A. We see that the global commodities are trading well into their cost curves and historically they have found support at these levels. While a knee jerk reaction of metal stocks in the near term on account of a slowing Chinese economy cannot be ruled out, we expect a rebound in this beaten down sector in the medium term as the global economic growth firms up. Any support from the government can act as a catalyst to change the sentiment in this sector.

Q. Sensex declined below 25,000-mark for the first time in the past 15 months on September 7 and it was just 700 points higher from the level when Modi-government was formed. Can we see further correction from here onwards? Where do you see Sensex and Nifty by the end of this calendar year?

A. We would not like to put down a number for the benchmark indices but do believe that the reforms undertaken by the government has set a firm platform for a 8 per cent growth trajectory over the next three years. This sustainable high growth environment does act as a catalyst for kick starting corporate earnings which in turn will drive the benchmark indices to an higher range over the next three years.

Q. How do you rate Modi-government in terms of economy and reforms?

A. The government has initiated a series of reform measures over the last year by increasing FDI limit in key sectors like defence and insurance, successfully undertaking transparent coal and telecom auctions, deregulating diesel prices, rolling out the direct benefit transfers for targeting LPG subsidy, Jan Dhan Yojana for financial inclusion and increasing the spends in key infrastructure sectors such as roads, railways and power.

Some of these initiatives are constrained by high gestation periods to deliver optimal outcome in the near term but they do provide a strong base for sustainable high growth in the coming years. Going forward, structural reforms such as GST as and when rolled out, will open up more space for a high growth environment. To the government’s credit the reforms, though incremental, has been continuous, sustainable and focused towards raising the trajectory of economic growth.

Q. With the announcement of smart cities, which sector may get the maximum push going forward and why?

A. Smart city project will act as catalyst providing opportunities to a host of sectors. Technology enabled solutions in e-governance, IT connectivity and digitalisation offer opportunities for corporate in the IT space even as urban infrastructure focused companies will find ample opportunities in ensuring clean water and solutions around sanitation including solid waste management. A slew of companies across sectors will benefit from initiatives to assure electricity supply, ensure efficient urban mobility and public transport, focus on affordable housing, enhance safety and security of citizens, target state of the art solutions in health and education.

Q. What is your investment strategy in the present markets? What advice do you want to give to investors who are stuck with their investment plans in the ongoing correction?

A. Indian equity market looks attractive from a long term perspective with the current valuations at reasonable levels. In the short to medium term, the direction of the market would continue to be determined by FII flows as well as key macro events shaping the country’s economic agenda. In the current scenario, we continue to be invested in stocks that are relatively undervalued, offer strong visible earnings growth and have managements with proven corporate governance practices. We would evaluate stock opportunities based on growth outlook. We have a suitable mix of growth and value stocks in our portfolio and would look to invest in stocks that offer growth at reasonable price valuations.

We would advise the investors to take the near term volatility of the equity markets in their stride and stay invested. We are positive about the Indian economy in the long term and would recommend that the policy holders stay invested over the long term for wealth creation. Moreover, we believe that the market offers an attractive entry point for a long-term investor with a 3-5 year view and hence can be considered by an investor for allocating more towards equity at these levels as long as they have a 3-5 year time horizon.

Q. What are the factors which put pressure on domestic equity markets this year? Which factors may give direction to markets in near future?

A. The equity markets have had to bear the brunt of global uncertainties, sub-par monsoons and muted earnings of India Inc over the last six months. The markets will be in better shape as clarity emerges on the US Fed’s lift-off of interest rates, as the Chinese markets stabilise and as the earnings of corporate India improve due to lower input cost due to benign commodity prices, a favorable base effect and as companies in a host of sectors benefit from a series of reforms initiated by the government over the last year  or so.

Q. As corporate earnings remained muted in the first quarter of the ongoing financial year. How do you see second quarter for corporates in terms of profitablity and revenue growth? 

A. The earnings are likely to be tepid in the near term as the improvement in the macro environment would take some time to percolate into corporate earnings. The benefits of lower raw material costs however, has started reflecting positively on the margins and profitability for a cross section of companies across sectors and this trend could play itself out in a greater measure over the next few quarters. We believe that while revenue growth may remain muted in the immediate quarters, the earnings growth can see meaningful upgrades over 12 months.

BSE Sensex and NSE Nifty snapped four week losing streak as PM Narendra Modi’s meeting with the India Inc, short coverings, value buying amid key decisions taken by the Cabinet supported market sentiments for the week ended September 11. (Reuters)

The BSE Sensex and NSE Nifty snapped four week losing streak as PM Narendra Modi’s meeting with the India Inc, short coverings, value buying amid key decisions taken by the Cabinet supported market sentiments for the week ended September 11. During Sept 4 and Sept 11, Sensex gained 408.31 points, or 1.62 per cent, at 25,610.21 while Nifty closed the week 134.25 points, or 1.75 per cent, higher at 7,789.30.

Barring the Consumer Durables index (down 1.31 per cent), BSE FMCG index (down 1.30 per cent) and BSE Healthcare index (down 1.26 per cent), all other sectoral indices on the Bombay Stock Exchange ended in green. The BSE Auto index surged the most — 3.91 per cent at 17,647.98, followed by BSE Realty index (up 3.75 per cent at 1,288.86), BSE Capital Goods index (up 3.36 per cent at 1,5951.38) and BSE Power index (up 3.23 per cent at 1,785.80).

Vinita Mahnot, equity research analyst, Hem Securities, said, “Prime Minister meeting with industrialists, low level buying and short covering helped markets to jump over 1.5 per cent during the week.”

Dipen Shah, head of private client group research, Kotak Securities, said, “Markets ended the week with gains of around 2 per cent on benchmark indices. The gains came on the back of stability in global markets, especially China. The Chinese Premier calmed sentiments during the week, which helped stabilise markets. The postponement of GST was taken in the stride.”

According to National Security Depository Ltd (NDSL) data, foreign institutional investors remained net sellers in the equity markets last week as they sold shares worth Rs 3,010.65 crore during the period.

In the BSE 100 index, Power Grid Corporation of India, IDFC, Crompton Greaves, Mahindra & Mahindra Financial Services, ICICI Bank, Mahindra & Mahindra, Hindalco, Tata Power and State Bank of India were some the companies which touched their new 52-week low during the week.

During the week gone by, Director General Safeguards (DGS) recommended 20 per cent safeguard duty on steel imports, which gave much needed relief to the entire steel sector to safe guard against cheap imports from China, South Korea and Japan. Handsome growth of 36 per cent in the month of August in Indirect Tax collection growth raised the hopes for 7 per cent plus growth rate for the year. Factory output figures (IIP data) which came after market hours on Friday grew 4.2 per cent in July against 0.9 per cent a year ago.

On the IIP data, Debopam Chaudhuri, chief economist, ZyFin Research, said, “This is a positive surprise with the general expectations being around 3.5 per cent.”

The major event next week is the US Fed meeting. There is uncertainty in global market on whether the US Federal Reserve’s first interest rate hike in a decade will come at Fed’s monetary policy meeting next week. According to market experts, a hike in interest rate in the US is likely to drain liquidity from emerging markets like India and redirect it to developed economies.

For the next week, Jimeet Modi, CEO, SAMCO Securities, said, “The coming week shall be volatile due to Fed meeting and traders can remain on the sidelines and wait till the outcome is discounted.”

Lenders to Amtek Auto have formed a joint lenders’ forum (JLF) to formulate a corrective action plan (CAP) for its Rs 6,500-crore term loans, sources told FE, adding that the JLF will also decide on the company’s request for extra funds of Rs 785 crore.

In March 2015, the company’s standalone gross debt stood at R7,844 crore, up from R7,036 crore in the same period last year. In three months to June 2015, it reported a net loss of R158 crore on the back of R866 crore in revenues. Its interest outgo stood at R237 crore in the same period.

The additional funding, lenders said, will allow the company to repay its bondholders, the date of redemption for which is September 20. Bankers said although the CAP for term loans is yet to be finalised, extending fresh credit to the company is almost certain.

“Out of the total R800 crore due for redemption on September 20, around R15 crore is to retail investors. The company is ready to pay the retail investors, but has sought fresh loans to repay institutional investors,” said a lender.

Investors include lenders like Axis Bank, Syndicate Bank and Corporation Bank. Other like IDBI Bank and Bank of Maharashtra have term loan exposures and have not invested in the bonds. Amtek Auto — part of the Amtek Group — is headquartered in New Delhi and is an integrated automotive component manufacturers in India.

The company has facilities in India, Europe and North America and manufactures components for auto as well as non-auto sectors such as the railways, specialty vehicles, aerospace, agricultural and heavy earth moving equipment.

Share of Amtek Auto rose as much as 75% in intraday trade on Friday on reports that the company may look to sell stake in overseas business to cut debt.

However, the scrip pared some gains to close 53.6% higher at R46.70 on the BSE. The company’s managing director, John Flintham, told a business news channel that they may look to sell stakes in overseas business to pare debt. “We have a debt-reduction programme,” Flintham told the channel. “We will sell minority stake in overseas businesses, which are profitable and owned 100% by Amtek Auto.”

Sales of non-core assets may fetch about $500-600 million, he said. The company’s overseas businesses earn $1.8 billion in revenue and their equity value is about $2 billion, Flintham told the channel, adding that it is planning to sell between 25% and 40% to raise as much as $600 million.

Amtek Auto’s troubles began when CARE Ratings suspended its credit rating last month. According to Bloomberg, this was followed by two Indian debt funds run by JPMorgan Chase & Co, which had invested in Amtek’s rupee bonds, to stem redemptions after a string of investors demanded their money back.