Sale of Reliance Industries shares by RIL’s Petroleum Trust

In the last few days, newspapers are full of reports on the sale of RIL’s shares by Petroleum Trust managed by RIL.

Many experts have commented about the impact of the transaction. RIL has also issued a communication saying “the financial impact will be reflected in the consolidated statement of the company.”

The reality is that the RIL Group has raised Rs 3,188 crore of cash from the sale. Reports on various uses of the cash, including investment in a global acquisition, are doing the rounds.

A bit of understanding of the background and the relevant accounting standards will help the readers reach the right conclusion as to how the transaction will impact RIL’s results.

First and foremost the legal entity, which sold the shares, is Petroleum Trust, and not RIL. Reliance Industries Investments and Holdings Limited, a 100 per cent subsidiary of RIL, is the sole beneficiary of Petroleum Trust. Hence the transaction will not be reflected in the standalone accounts of RIL.

However, consolidated accounts of RIL will reflect the transaction. This is in line with the RIL’s communication issued in this regard.

Transfer of shares

This leads to the critical question of s the meaning of “will be reflected in the consolidated statement of the company.” The popular understanding is that the profit will be credited to the P&L account. Before jumping to this conclusion, let us look at the facts and the relevant accounting conventions. Let us first look at how the shares came into the possession of Petroleum Trust.

Prior to merger of the earlier Reliance Petroleum and IPCL, RIL transferred its shareholding in the merged companies to Petroleum Trust. On merger, Petroleum Trust received RIL shares as per the approved exchange ratio. The other option RIL had at the time of merger was to cancel these shares. If this option had been exercised , RIL’s share capital would have been lower to the extent of the face value of the shares issued to Petroleum Trust and reserves would have been higher by an equal amount. There would not have been any impact on the P&L account.

In consolidated accounts, there is no difference between the holding and its 100 per cent group companies. Logically, no company can generate profit by issue of its own shares.

Sale of treasury shares by the group company is equal to the issue of own shares at a premium. Hence, such transactions can’t impact the P&L account.

Accounting conventions

Let us look at the accounting convention relating to treasury stock. As per international practice, buybacks can create treasury stock. However, under the buyback regulations of India, companies are not allowed to create treasury stock through buyback.

So, let us look at the international accounting standard governing the treatment of profit or loss from the trading of treasury stock. As per IAS 32, treasury stock held on the balance-sheet date has to be deducted from the share capital. Any profit/loss on sale of treasury stock during the period has to be adjusted to reserves and cannot be reflected in the P&L account. In this context, it may be noted that RIL in the consolidated accounts for 2007-08 has not deducted the treasury stock held by Petroleum Trust but has given a note on this.

From the above, logically and also as per the accounting conventions, the profit from the sale of these shares will not form part of profit for the year. But there is no doubt that shareholders could stand to benefit from the use of the cash generated from the sale.

Fund houses try to lure investors with gold ETFs

Many mutual fund houses are planning to launch gold exchange traded funds (ETFs) to cash in on the buzz around gold.

At least four fund houses are planning to launch gold funds or gold ETFs. HDFC Mutual Fund and ICICI Prudential filed draft offer documents with SEBI in September. Religare Mutual Fund is expecting SEBI approval for its gold ETF. Principal PNB Mutual Fund is planning to apply to SEBI for a gold ETF to be launched in three months, said Mr Sudipto Roy, Business Head of Principal AMC.

Gold prices were at Rs 15,865/10 gm on Wednesday closing. According to a senior industry analyst, it is only the euphoria around gold that might be prompting fund houses to launch these gold ETFs as fundamentally one does not enter a market that might be in danger of peaking. “For example, in 2007, when the market was already at the peak, we saw a large number of equity funds being launched although it was not the right time to enter the market at such high peaks,” she explained.

Gold prices have been going up in the past few months and fund houses are looking at this as an opportune time to launch gold ETFs, said Mr Krishnan Sitaram, Head of Crisil Fund Services, CRISIL. This would not only complete the product suite of these fund houses but is also a way of tapping the current investor interest in gold, he added.

While there is a section of analysts who feel investors would stay away from investing in gold ETFs at this level, some, such as Ms Lakshmi Iyer, Head of Products of Kotak AMC, feel that there is a case for investors to enter even now as gold prices could increase further. “Maybe they could wait for price dips at some intervals and then invest,” said Ms Iyer.

However, some mutual fund houses are putting their gold plans on hold. Tata Mutual Fund that had plans for a Gold ETF has shelved them. “Gold has already touched a peak and now there is lack of appetite in the market. At this point of time it doesn’t seem appropriate to launch a gold ETF,” said a Tata Mutual Fund spokesperson.

Fresh inflows into the six existing gold ETF schemes were minimal this August, around Rs 16 crore, against Rs 45 crore in July, and Rs 34 crore in June. But the assets under management of these schemes have risen since June from Rs 844 crore to Rs 904 crore in August, largely due to the rise in gold prices.

(Source: The Hindu BusinessLine)

Housing prices may go down

Global property consultancy firm, Knight Frank India, has said that prices in the residential property segment are likely to decline in a short time.

"We feel prices of residential segment may go down over a period of time," Knight Frank India's chairman, Pranay Vakil, said.

The residential segment may see a robust demand in certain markets, he said, adding that it was also a good time for property developers to invest in land.

Demand for real estate at this stage is a combination of investor-led demand and end-user demand. While investor demand is due to shift in money from equity markets, end-user demand is due to increased consumer confidence and pent-up unmet demand from the recession period. This leads to a rapid increase in demand for real estate and a corresponding increase in property prices, he said.

Today, property buyers are worried that prices may go down further after they purchase the property and projects may not be completed on time, Vakil said.

Knight Frank launched a book titled Real Investment -- a real estate investment guide for India. The book seeks to lend a helping hand by covering all the information that one may require while investing in real estate.

The book compiles the perspectives of real estate industry experts to help deepen knowledge about real estate and consider it as an asset class.

Commenting on the book launch, Vakil said, as property advisors, we continuously work with some of the best minds in the sector. We felt the need for a single credible source of information for which we brought together the best minds in the business.

This book makes the seemingly daunting task of delving into the real estate market simpler by offering tips on how to make real estate a lucrative investment option."

Indian Vintner settles court case with Australian Vintage

Indage Vintners has settled the court case filed by the Australian Vintage by giving them Australian wine as compensation for not completing the deal to buy the Loxton winery and foregoing the initial deposit.

According to a report in Indian Wine Academy, under the settlement, Australian Vintage has received an amount that would be used towards purchase of wine from Thachi Wines in South Australia, owned by Indage. The wine is in addition to the USD six million non-refundable deposit previously paid to Australian Vintage by Indage for the Loxton acquisition. Australian Vintage has retained the Loxton winery and the suit has been withdrawn.

Indage had agreed to acquire the 90,000 tonne-capacity Loxton winery in South Australia from Australian Vintage for USD 60 million in March 2008. The sale was to be completed by September 2008 but was subsequently deferred until October, 2008 when Indage had said that it would be unable to complete the purchase of the winery at the designated time but it remained committed to the acquisition.

Uninor new brand name for Telenor-Unitech JV

Unitech Wireless and Norwegian telecom operator Telenor today announced that their mobile services in India will be named 'Uninor'"The announcement of the 'Uninor' name is a significant milestone in the roll-out of the operations in India as we move closer to the launch. Within the Telenor Group's existing markets, the Uninor brand will represent our vision and core values," Telenor Group President and Chief Executive Officer Jon Fredrik Baksaas said in a statement.

The 'Uninor' name will leverage from Telenor Group's established marketing and design framework, it added.

The new name is in line with Telenor's brand strategy in other markets like Bangladesh and Malaysia, where its mobile service is being marketed under a distinct regional brand.

Unitech Wireless has recently lined up a Rs 5,000 cr bridge finance with the State Bank of India, which includes bank gaurantees and a letter of credit that would help the company fund its 22 circle rollout.

Warren Buffett sitting on billions of paper profits

Warren Buffett has done it once again. Just like he has been doing it over and over again since the start of his career as a security analyst and money manager. 'Be greedy when other are fearful, and fearful when others are greedy' goes his simple homily. But simple doesn't necessarily mean easy, just like it wasn't easy to put your hard earned money in the stock market between September 2008 and March 2009. The markets were tanking almost everyday. Fear was everywhere, gripping everyone.

But not Warren Buffett. Buffett was busy. Busy being greedy that is. Some of his bigger buys during that period were US$ 230 m in BYD Co, a Chinese car and battery maker, and US$ 5 bn of preferred stock in Goldman Sachs along with another US$ 5 bn worth of warrants in the company. The Goldman investment has since generated a US$ 2 bn paper profit for Berkshire Hathaway.

The BYD investment too has been nothing short of a bonanza. In September 26 2008, Berkshire bought 225 m BYD shares at HK$ 8 each, then worth about US$ 230 mn in total. BYD shares closed at HK$ 42.9 this Friday, thus valuing Berkshire's stake at an eye popping US$ 1.25 bn now. Yes, value investing remains as alive and kicking as it was when Buffett started his career. And as you can see above, it can be immensely rewarding for the disciplined practitioner.

Airlines hold India to ransom

Aviation is a bewildering sector. It ranks among the finest achievements of human technical progress. It also ranks among the most difficult businesses to run profitably. Little wonder then, that in a bid to demand a bailout from the government, leading airline operators in India have called for a strike on August 18.

The pioneer of low cost airlines in India, Captain Gopinath calls the step a gimmick. He says, "The business magnates, Vijay Mallya or Naresh Goyal, know the reality: airport infrastructure is costly, oil prices are high. But they started a business and took a risk...The message to airlines is that there is lot of cost cutting they can do themselves."

He adds, "They got together as a cartel and fixed price by blaming fuel surcharge. That was the beginning of airlines’ woes - occupancy fell, collections came down and losses went up." We agree. Although the government needs to do much more in making the Indian aviation sector more viable, holding the public to ransom is hardly the way for businesses to negotiate terms.

In fact, on being asked what should the Government do if the airlines insisted on the strike, Gopinath said, "The Government can arrest airlines chiefs under the Essential Services Maintenance Act - if truckers can be arrested they can do the same thing here."

What are structured settlements and how to get them?

What are Structured Settlements?

When law suits are settled, damages may be awarded in a lump sum, or a series of payments. A settlement which is awarded in a series of payments over time is called a structured settlement. Structured settlements are generally created by using a third party intermediary to provide the financing.

How to Purchase Structured Settlements?

State and federal law may restrict the sale of structured settlements, and there are many legal complications that can arise.

Since you’ll be exchanging cash for the right to receive future payments, you’ll want to make sure that you are protected.

1. Work with an established broker.

2. Look for a structured settlement financing company who is a member of the National Structured Settlements Trade Association who also places settlements with private investors.

3. Get multiple quotes to ensure you get the best deal.

4. Retain an attorney to review the agreement to ensure your interests are protected.

Compete Detailed Instruction And Tips About Purchase Structured Settlements Links can be found on the side bars and at the bottom of this page.

Benefits of a Structured Settlements

One significant advantage of a structured settlement is tax avoidance. With appropriate set-up, a structured settlement may significantly reduce the plaintiff’s tax obligations as a result of the settlement, and may in some cases be tax-free.

A structured settlement can protect a plaintiff from having settlement funds dissipated, when they are necessary to pay for future care or needs. Sometimes a structured settlement can help protect a plaintiff from himself – some people simply aren’t good with money, or can’t say no to relatives who want to “share the wealth”, and even a large settlement can be rapidly exhausted.

Minors may benefit from a structured settlement as well, such as a settlement which provides for certain costs during their youth, an additional disbursement to pay for college or other educational expenses, and then one or more disbursements in adulthood.

An injured person who has long-term special needs may benefit from having periodic lump sums with which to purchase medical equipment or modified vehicles. In some situations, it will be better for a severely disabled plaintiff to set up a special needs trust, rather than entering into a lump sum or structured settlement.

Any plaintiff who is receiving, or expects to receive, Medicaid or other public assistance, or the guardian or conservator entering into a settlement on behalf of a disabled ward, should consult with a disabilities financial planner about their situation before choosing any particular settlement option or structure.

Buffett makes his billions

We were all surprised a year ago, when Warren Buffett bought US$ 5 bn of Goldman Sachs preferred stock. After all, Lehman Brothers had just collapsed and Wall Street was tottering. Moreover, Buffett's past involvement with bankers like Salomon Brothers had turned out to be time consuming affair.

But then, he rarely passes a good deal, even if there is bad news all around. In fact, especially when there is bad news all round. The next day Buffett had said, "The price was right, the terms were right, and the people were right." Buffett also secured a margin of safety from the terms of contract - a 10% dividend and also the right to buy US$ 5 bn of common stock at a strike price of US$ 115 per share.

A year later, his decision has turned out be correct. Buffett's investment in Goldman has made Berkshire Hathaway richer by US$ 3 bn in twelve months! Given the current share price of Goldman Sachs at US$ 183, the warrants alone are worth US$ 3 bn ((US$ 183 - US$115)*45 m warrants). Of course, the warrants were not available to the ordinary investor in the US. But then, all he needed to do was buy the common stock to comfortably outperform the broader market. Easier said than done! Don't you wish that Buffett could invest for you too?

Data source: Yahoo Finance

Monsoon deficit has come in at 22%

With the monsoons season slated to end on September 30, the rains have finally begun to withdraw in many parts of the country, and will do so in the rest of the country over the next few days. They have however, left in their wake, an overall rainfall deficit of 22% and concerns about the Kharif harvest. The maximum deficiency of 34% is seen in the north-west region of India, followed by the north-east with 25%, central India with 19% and the southern peninsula with a deficit of 8%. The only positive was the month of September, which witnessed a fresh spurt in rain that benefited the already standing Kharif crops and also raised hopes about timely sowing of Rabi crops, thus alleviating the adverse effects of the deficit to some extent.