Monday, August 17, 2009

Double Decline Method of Depreciation

The Double Declining Balance Depreciation Method is more or less a method similar to Straight Line Method but with a difference. For finding it, we first need to calculate depreciation by using Straight Line Method. We shall then figure out the total % of the asset that is depreciated in the first year and double it. That same % is multiplied by the remaining balance to be depreciated each subsequent year. The value will be lower than the Straight Line charge at some point, at which the double declining method will be scrapped and the Straight Line used for the remainder of the asset’s life.

An illustration will clarify the concept:

Suppose Tara Ltd purchased a Machinery for Rs 10,000 with a Residual value of Rs 1,000 and an Effective Life of 5 Years. We first proceed to calculate the Straight Line Depreciation Rate, which will be=100% / 5 years=20%. We need to double this rate and hence get 40% as the Double Decline Rate.For the First Year, Depreciation on the Machinery will be=40/100 x10000=4000.Therefore, Depreciated Value at the beginning of the Second Year will be= 10,000-4,000=6000.For the Second Year, Depreciation on the Machinery will be=40/100 x 6000=2400.Therefore, Depreciated Value at the beginning of the Third Year will be =6000-2400=3600.For the Third Year, Depreciation on the Machinery will be=40/100 x 3600=1440. Therefore, Depreciated Value at the beginning of the Fourth Year will be=3600-1440-=2160.For the Fourth Year, Depreciation on the Machinery will be=40/100x2160=864.Depreciated Value at the beginning of the Fifth or Last Year will be=2160-864=1296.For the Fifth/Last Year Depreciation will be the difference between the Depreciated Value and the Residual Value. Therefore, Depreciation will be=1296-1000=296.Thus the Accumulated Depreciation over the 5 years will =4000+2400+ 1440+864+296= Rs 9000.This figure plus the Residual Value of Rs 1,000 will give us the Original Value of the Machinery of Tara Ltd i.e.9000+1000=10000.The peculiar feature of Double Decline Method is that in determining the depreciation per annum, the Residual Value is not considered. Another striking feature is that the book value of the depreciated asset is never allowed to go down below the Residual Value.

Contributed By:
Prof. Jayanta Mitra
(Globsyn Business School)

Tuesday, August 11, 2009

Private Equity Funds - Shift from Real estate to Education and Health ?

Fund raising by real estate sector focussed private equity funds have declined 61 per cent to USD 17 billion till May this year, as investors turned cautious.

According to a report by global research firm Preqin, PE investments till May this year has seen private equity real estate funds raise USD 17 billion, a reduction of 61 per cent on the same period in 2008. PE fund raising till May 2008 stood at USD 44 billion. The report said that with the slump in demand in the realty space, PE investors are being cautious and are making fewer commitments.

Although fund raising across the entire private equity real estate industry has declined sharply, the fall is particularly noticeable for funds targeting Asia. Fund raising by the Asia focussed funds declined 83 per cent over the year-ago period to USD 1.36 billion till May this year. The funds had raised USD 11 billion till May 2008.

However, even in slowdown, sectors like education and healthcare are perceived as recession proof. A report released by Venture Intelligence, a firm that tracks VC & PE activity, has found that over 80% of fund managers were game for investing in education companies with good track record. In the current uncertain economic environment, the attractive and predictable rates of return of the education industry, is serving as a magnet for PE investors.

India has a young population and there is huge emphasis on education. Opportunities exists right from pre-school level training to university and vocational training courses Matrix which had in 2008 invested in Tree House education a pre-school institute has now reported to have put in Rs 1oo Crore in FIITJEE, a preparatory training institute for professional courses. Educom Solutions one of the high flier of the stock market is currently trading around Rs 4000 per share. A few PE firms have reportedly bought stake in the Co.

Already, investments valued at $300 million has been made in this sector. Also, with a potential market size of $40 billion for private educational institutions, the sector appears to be lucrative for investors.

Recently, Religare Enterprises signed a joint venture agreement with Milestone Capital for managing a Rs 600 crore healthcare and education fund. Investment banker Hemendra Kothari recently sold his 10% remaining stake in DSP Merrill Lynch and plans to enter the healthcare and education sectors.

Despite the overall optimism, investors have their set of concerns, the topmost being the regulatory uncertainty surrounding "for profit" ventures in the K-12 (kindergarten to higher secondary) and higher education segments and the lack of scalability of ventures in "non formal" segments. Over half of the fund managers surveyed by Venture Intelligence felt that regulatory hurdles are a significant deterrent to the free flow of investments into the education.

Contributed By:
Prof. J. N. Mukhopadhyay
(Globsyn Business School)

Source: Economic Times & Business India

Wednesday, June 24, 2009

Hedge Funds likely to increase its presence in India

Very few hedge funds are currently registered as FIIs in India. Some of these funds were allowed registration after a scrutiny of the track record of fund managers and were perceived as more of an exception to the rule.

Cayman islands, the Caribbean offshore financial centre and a favourite tax haven of money managers, is one of the most popular offshore fund jurisdiction for funds. Cayman, with its investor-friendly laws, has emerged as the most-favoured jurisdiction for fund formation, and is currently the fifth-largest banking centre in the world.

Cayman, has been admitted as a member of the International Organization of Securities Commissions (IOSCO), the global standard setter for securities markets. The move could encourage SEBI to give hedge funds - most of which are registered with Cayman - direct access to the Indian market.

Some countries either do not allow investment vehicles from non-IOSCO member countries to be sold in their jurisdictions or will require greatly-enhanced due diligence which makes it more difficult to do business with those jurisdictions. The IOSCO membership will remove these impediments and expected to open up markets for Cayman-domiciled securities providers.
As CIMA gets an ordinary member recognition from IOSCO, it may open up an opportunity for several hedge funds and investment funds to seek direct registration with SEBI as an FII rather than use other indirect access routes like third party FIIsThe development comes at a time when emerging markets are competing with each other to attract the huge liquidity created through money infusion by central banks across markets. So far in 2009, India has seen net FII inflows of little over $5 billion.

Contributed By:
Prof. J. N. Mukhpadhyay
(Globsyn Business School)

Source : Economic Times

Wednesday, May 27, 2009

Potential to become India’s largest M&A

India’s largest mobile phone company Bharti Airtel is in talks to acquire a 49% stake in Africa’s largest telco MTN to create an entity with revenues of about $20 billion and over 200 million subscribers. The combined entity will be amongst the top five operators globally. MTN will get a 36% economic interest in Bharti in return for offloading the minority stake. The deal size is estimated to be worth over $23 billion.

The Indian telco said the deal would be achieved through a scheme of arrangement. As per the talks, MTN would acquire about a 25% post-transaction economic interest in Bharti for an effective consideration of approximately $2.9 billion in cash and newly issued shares of MTN equal to approximately 25% of the currently issued share capital of MTN.
  • MTN would acquire approximately a 25% post-transaction economic interest in Bharti for an effective consideration of approximately USD 2.9 billion in cash and newly issued shares of MTN equal to approximately 25% of the currently issued share capital of MTN.
  • Bharti would acquire approximately 36% of the currently issued share capital of MTN from MTN shareholders for a consideration of ZAR 86.00 in cash and 0.5 newly issued Bharti shares in the form of Global Depository Receipts ("GDRs") for every MTN share acquired which, in combination with MTN shares issued in part settlement of MTN’s acquisition of approximately a 25% post-transaction economic interest in Bharti, would take Bharti’s stake to 49% of the enlarged capital of MTN. Each GDR would be equivalent to one share in Bharti and would be listed on the securities exchange operated by JSE Limited.
The broader strategic objective would be to achieve a full merger of MTN and Bharti as soon as it’s practicable to create a leading emerging telecom operator which today would have combined revenues of over $20 billion and a combined customer base of over 200 million customers.

Contributed By:
Prof. J. N. Mukhopadhyay
(Globsyn Business School)

Source: The Economic Times

Tuesday, March 31, 2009

$ 1 trillion Toxic Assets – Will the recovery plan work ?

The term "toxic asset" is a nontechnical term used to describe certain financial assets when their value has fallen significantly and when there is no longer a functioning market for these assets, so that they cannot reasonably be sold. This term became common during the financial crisis that began in August 2007. Toxic assets played a major role in that crisis. When the market for such assets ceases to function, it is described as "frozen".

Markets for some toxic assets froze in 2007, and the problem grew significantly worse in the second half of 2008. Several factors contributed to the freezing of toxic-asset markets. The values of the assets were very sensitive to economic conditions, and increased uncertainty in these conditions made it difficult to estimate the value of the assets. Banks and other, major financial-institutions were unwilling to sell the assets at significantly reduced prices, since lower prices would force them to significantly reduce their stated assets, making them appear insolvent.

US Treasury Secretary Timothy Geithner has unveiled a plan aimed at persuading private investors to help rid banks up to $1 trillion in toxic assets that that are seen as a roadblock to economic recovery.

The US treasury has invited private entities and individuals to buy some of the toxic assets in the bank books at rock-bottom prices. The banks have partially marked these assets to the market and booked huge losses in recent quarters. There are additional incentives for investors to buy these assets at heavily marked-down prices.

The private investor is being asked to bring in less than 10% of the acquisition cost and the treasury is willing to fund the remaining 90% or more. Also, the government is ensuring private investors could walk away if the value of these assets falls further. So there is no further downside for the private investor.

There are many problems with such a scheme. It has been debunked by a Nobel prize winning economist as “cash for trash”. The main flaw in the scheme is that there is no knowing whether banks such as AIG, City and Goldman have fully marked these assets down to their real value. Over 60% of the housing derivatives were traded and acquired outside the exchange in over-the-counter deals. Since there is no liquidity, one cannot ascribe any value to them.

The treasury plan seeks to discover a price with private partnership. But nobody is sure whether any reasonable price will be discovered for these toxic assets. The biggest irony is that the treasury is trying to discover a price by allowing the private investor a nine-fold leverage! Is this sustainable for US citizens, already over-leveraged.

The Fed's Term Asset-Backed Securities Loan Facility, or TALF, received lukewarm response heightening fears private capital will also shun the government's toxic-asset plan amid public outrage over outsized executive bonuses.

A closer examination of the US treasury plan would suggest that the scheme might need a lot more fine-tuning before it is able to provide some succour to the ailing American banking system.

Contributed By:
Prof. J. N. Mukhopadhyay
(Globsyn Business School)

Thursday, January 1, 2009

New Package of Government of India to Revive the Indian Economy from Recession

On 16.12.2008, the Indian Bankers Association held a meeting in which it was decided that the rate of interest on loan taken would be slashed. At the same time, rates of interest were also lowered for small & medium term business loans. However private banks like HDFC, ICICI did not specify anything with regard to lowering of interest rates. Experts are of the opinion that they too will soon adopt the policy of nationalized banks.

The Government of India, to revive the economy, has taken a number of decisions to increase the flow of money in the economy. The price of petroleum has been reduced, a stimulus package of Rs 30,000 Crore of Rupees has also been declared by the Government of India. Even after all these, the Export Sector & Housing Sector got due attention from the RBI, which declared Rs 9,000 Crore package for these sectors. Amidst these, the Repo Rate was lowered by the RBI.That was done when RBI started bargaining with the banks with regard to lowering of interest rate. The final shape was obtained in the meeting of the Indian Bankers Association on 16.12.2008.

At the end of the meeting, the Chairman of SBI, Mr. O.P.Bhatta said, the nationalized banks will charge interest on Housing Loan @ 8.5% p.a. up to a loan of Rs 5,00,000 & would charge 9.25 % interest p.a. on loans between Rs 5,00,000 to Rs 20,00,000.Presently on an average the current rate of interest on loan is more than 10%. The new rate of interest will come into effect from 16.12.2008. Thus from 16.12. 2008 to 30.06.2009,whoever take housing loan, will have to pay interest at the above-mentioned rate. Bhatta further added that the revised rate will apply only to the new home loan takers & that the rate will remain fixed for the coming 5 years. After the fifth year, judging the market scenario, the loan takers can convert their loans into fixed or floating terms. Loan processing fee & prepayment penalty are also waived. Along with it the loan takers will also get free life insurance policy. Even the initial percentage of the amount required to be arranged by the loaners for Project Finance, has been reduced. It has now been decided that upto a project loan of Rs 5,00,000,the loaners are required to arrange 10 % of the project loan & between Rs 5,00,000 to Rs 20,00,000 project loan, they are required to arrange 15%. Till 16.12.2008, the margin fixed by the banks was 25%.

To revive the small & medium industries, Bhatta has talked about the decision to reduce the rate of interest by 100 basis point i.e. by 1%. To provide employment opportunities, the banks have decided to expand their business activities & appoint new employees (staffs). LIC & Nationalized banks, jointly have decided to create new employment opportunities to the tune of 45,000, the bank sources said.

The Finance Ministry stated that on account of the new package the burden of Rs 15,000 to Rs 20,000 Crores would ultimately fall on the shoulders of the nationalized banks. Naturally the banks will not be interested in further slashing of the interest rates. The Real Estate, it seems is not interested in the new package. They feel that in Metros it is not possible to get a home within Rs 20,00,000. Hence the loan takers of these Metros will fall outside this package. As a result, the demand for Real Estate during recession and the decision to increase the inflow of cash will remain unfulfilled. But the Finance Ministry is not accepting this theory. They feel that even during recession, the Real Estate price is bound to fall.

The Labour Minister Mr. Oscar Fernandez stated that during August 2008 to October 2008, 65,000 employees have lost their jobs on account of recession. So to create employment opportunities the Government now relies heavily on public sector undertakings.

Contributed By:
Prof. Jayanta Mitra
(Globsyn Business School)