Indian equity markets consolidate, but FIIs confident    Aug 06, 2010

Weekly Facts
	Close	Change	%Change
BSE Sensex	18,172.83	180.8	1.01%
Re/US$	46.19	0.4	0.75%
Gold Rs/10g	18,030.00	585.0	3.35%
Crude ($/barrel)	82.33	6.7	8.87%
FD Rates (1-Yr)	5.75%-6.50%

Impact

In the month of July 2010, the Indian equity markets (BSE Sensex) continued to show its indecisive movement depicting a consolidation, but nonetheless ended the month in green by mere 167.4 points (0.9%). The cool-off in the IIP number to 11.5% in May 2010 (data released in July 2010), from 16.5% in April 2010 also attributed in this lacklustre upside movement.

But nonetheless, the Foreign Institutional Investors (FIIs) continued to exude confidence on the long-term prospects of the Indian economy, and bought net to the tune of Rs 16,617 crore in the Indian equity markets; as compared Rs 10,508 crore (net buying) in June 2010.

We believe that continious participation by the FIIs in the Indian equity markets, reveals their confidence in the long-term economic prospects of India. Hence, in our opinion investors should also continue to stay invested with a long-term perspective, and infact continue to invest (in a staggered manner - through Systematic Investment Plans (SIPs)) in the Indian equity markets.

Impact

State-owned insurers and corporate hospitals will restore with immediate effect, cashless medical claims for the treatment of emergency cases. The emergency cases would include treatment for cardiac surgery, intensive care and trauma.

Thus now, this will lead to a wave of relief for the policyholders, who were bearing the brunt of a decision by New India Assurance Co. Ltd., Oriental Insurance Co. Ltd., United India Insurance Co. Ltd. and National Insurance Company to stop cashless insurance reimbursements in a few big hospitals on July 1, 2010.

Earlier, State-owned general insurers had fumed over the fact that the hospitals were overcharging the customers which resulted in losses for them (general insurers). According to Mr. G. Srinivasan, Chairman and Managing Director of United India Insurance Co. Ltd., at present health insurance claims make up for about 115% of their company’s premium. Moreover, with operational expenses, these claims have been running into 140%, for the past 4-5 years.

Agreeing to general insurer’s dilemma, Dr. Naresh Kumar Trehan - Chairman and Managing Director of Medanta said "Insurance companies have legitimate concerns, as the premium collection is disproportionate to the payment they make to hospitals. But there may be only sporadic cases of overcharging by some hospitals and charges vary depending on the medical expertise and services."

IRDA Chairman - Mr. Hari Narayan, expressed his views on this saying that the current dispute is a commercial transaction between hospitals and insurers. IRDA would step in only if there is a breach in contract between policyholders and insurer.

We believe that there is a need to have a long-term solution to this cashless medi-claim issue, which has surfaced due to self-centric interests of doctors and hospitals. In our opinion, IRDA should come up with stringent regulations and even define certain terms such as hospitalisation cost, critical illness and fees charged by doctors, which will preclude the malpractice of hospitals and doctors in charging the insured on the basis of value of health cover and cash facilty available.

Impact

Keeping the interest of the policyholders at the forefront, the Insurance Regulatory and Development Authority (IRDA) is contemplating to make health insurance products more flexible. The proposed changes would enable policyholders to switch their insurer with the benefit of pre-existing diseases (if any), being covered from the first year of change itself. Thus if a policyholder has completed four years under a health policy with a particular insurer, and wishes to switch to another insurer, the policyholder will be covered for all the pre-existing diseases from the first year under the new policy without having to wait for another four years.

It is noteworthy that at present, pre-existing diseases are covered only after the completion of four years in a policy.

For senior citizens, who have been covered (till retirement) under a group mediclaim by their employers, but did not have an individual health cover; shall also be automatically covered by an insurer when they buy an individual health policy.

Reacting on this issue Rahul Agarwal, Managing Director and CEO of Optima Insurance Brokers, said "There should be portability in products. When there is such flexibility, insurance companies are always on their toes. This will force insurers to review their claim management and there will always be a pressure to perform better".

However on this Mr. Sanjay Datta - Head of health insurance at ICICI Lombard, feels that to carve out such a product will not be easy, and the entire industry will need to sit together and sort out difficulties.

We believe that if such an inititative is implemented (by IRDA), it will be a sigh of relief for the policyholders, as this will enable them to swtich from insurers who do not provide the right services and moreover charge a high premium. Also in our opinion, having such portability in health insurance products would garner healthy competition among insurers and provide a level playing field for them.

INTERVIEW

After the first quarter review of Monetary Policy for 2010-11, Reserve Bank of India Governor Dr. D. Subbarao expressed his views on key issues like inflation, liquidity management and new bank licenses, in an interview with the Economic Times.

On inflation, Dr. Subbarao mentioned that the RBI does not have an upward bias on the targeted 6% inflation. The targeted inflation number was forecasted taking into account the progress of monsoon (which will have a dampening impact on food prices), pace of deregulation of fuel prices for new petroleum products and other demand side factors. However, being a little wary about capacity utilisation, he said, "It is not at its cyclical peak but we are very close to that". But nonetheless he believes that, spare capacity around the world could lead to softening of prices.

On liquidity management, Dr. Subbarao said that the banks would respond to the policy rate changes in a phased manner and not change the rates immediately. In his view it is important that the right signals (policy rate changes) are transmitted, but there were good reasons why it has not been so. One reason for this is the sluggish demand for credit and also some concerns regarding transmission from Benchmark Prime Lending Rate (BPLR) system to the Base Rate system. But he believes that if credit demand picks up, liquidity becomes tighter and policy actions start playing out, both the deposit and lending rates will start firming-up, with former (deposit rates) going up first. He expects the current liquidity situation (as a result of 3G auction), to fade off by the month end.

On the issue of new banking licenses, he expressed that the discussion paper is on track, and is expected by the first week of August 2010. He mentioned that presently a number of issues are coming up such as - What should be the entry level capital? What should be the promoters’ capital? What should be the dilution norms? Whether should we allow corporates and Non-Banking Finance Companies (NBFCs) to come in etc.; but being confident he said RBI will marshal international and own experiences in catering to these issues.

AND OTHER NEWS...

• According to a proposal put forth by Indian policy makers, very soon offer documents of Initial Public Offerings (IPOs) would soon be disseminated in different regional languages.
  
  However the exact translation of these documents in other Indian languages may be quite difficult as it is a legal document.

• The IRDA has barred Maruti Suzuki India Ltd (the nation’s largest passenger car maker), from selling motor insurance to its customers. In order to circumvent this, Maruti is looking to float a general insurance firm with a local partner. This order from IRDA comes in the wake of complaints from general insurance companies that the Maruti service stations have been inflating the bills and pushing them (general insurance companies) into losses through hefty claims.

• Oxigen Services Pvt. Ltd, (a microfinance company) will provide savings bank account facility to the unorganized sector in collaboration with the State Bank of India (SBI). To carry out banking transactions, Oxigen Services Pvt. Ltd. will set up kiosks. It will open around 75,000 kiosks in the first phase in the peripheral areas of Delhi-NCR and Mumbai. "This kiosk-based banking model will provide the necessary ease and comfort to customers", said Pramod Saxena - Chairman and Managing director of Oxigen Services Pvt. Ltd.

• The Central Board of Trustees (the apex decision-making body of retirement fund manager) and Employees’ Provident Fund Organisation (EPFO) will meet on September 4, 2010 to decide on the interest rate for depositors for 2010-11. It is likely to be fixed at 8.5%.

• In order to provide a quick and efficient grievance redressal mechanism (to solve policyholder’s grievances), the IRDA issued guidelines for insurance companies to implement them with effect from August 1, 2010.
  
  As per the diktat, the insurer should resolve the grievance within two weeks of the receipt and insurance company should have system to receive both voice calls and emails and send a letter of resolution. Failing which will attract penalty. They (insurer) should also provide the policyholders about how he or she may pursue the complaint, if dissatisfied with the resolution. The policyholders should respond within eight weeks from the receipt of the resolution stating whether they are satisfied or not.

• The guidelines pertaining to the public offer by general insurance companies would be finalised by IRDA in a couple of months. "As regards the non-life companies, a lot of work has to be done on valuation and (guidelines) should be ready in a couple of months," said IRDA chairman, J. Hari Narayan.

• Motilal Oswal Mutual Fund ’s first scheme ‘MOStSharesM50’ got listed on the National Stock Exchange (NSE). MOStSharesM50 is a fundamentally weighted Exchange Traded Fund (ETF) based on NSE’s Nifty Index.

• The former Federal Reserve Chairman, Alan Greenspan has raised concerns of a ‘quasi-recession’ in the US on the back of home prices declining. Mr. Greenspan said, "We’re in a pause in a recovery, a modest recovery, but a pause in the modest recovery feels like a quasi-recession". He didn’t rule out the possibility of a double-dip recession if home prices go down.

• In order to boost money transfer facilities, the Central Bank of India launched a portal named CENTFAST2INDIA, which will enable NRIs residing in United States of America (USA) to transfer money to India through internet banking. The minimum amount per remittance is fixed at USD 5,000, and the beneficiary will receive money within 3 working days as a direct credit to his account with the Central Bank of India. The portal is launched in collaboration with Bank of New York Mellon, New York.

• HSBC Purchasing Managers’ Index (HPMI) for India (based on the survey of 500 companies) edged up to 57.6 in July, 2010, from 57.3 in June 2010. Interestingly this is the sixteenth consecutive month that the HPMI has been above the 50 level mark that divides growth from contraction.

• Mr. Ajay Piramal, Chairman of Piramal Healthcare Ltd., expressed his interest to enter the insurance sector, one of the fastest growing segments of the Indian financial sector. Piramal Heathcare Ltd. is set to receive Rs 17,600 crore from selling off two businesses and a part of this corpus may be invested into the insurance sector.

• Liquid Plus category of mutual funds are likely to face increased volatility in the near future due to new valuation norms which require the fund houses to mark-to-market securities with maturity of over 91 days. AMCs are likely to incorporate a higher percentage of securities with less than 91-day maturity in Liquid Plus funds in order to tide over the volatility concerns. Investors would enjoy less volatility and tax arbitrage but this would affect the returns generated from such (Liquid Plus) funds.

• As the rural housing loan market carries immense potential, LIC Housing Finance (LICHF) plans to enter into the rural housing loan market early next year, with a minimum ticket size of Rs 4 – 5 lakh. The company intends to enter in the said market by setting up a subsidiary company.
  
  At present housing loan market’s penetration in the rural area is mere 7-8%, whereas in the urban area it is 37%.

• According to an assessment by the Prime Minister's Economic Advisory Council (PMEAC), India will move closer towards being a $2 trillion economy. The PMEAC is of the view that the economy would reach $1.72 trillion by 2011-12 provided the GDP grows at 9%. Exports, services (transportation and telecom in particular) and manufacturing sectors will be the key to achieving this target.

New Issues

• Bajaj Corp. Ltd has introduced an Initial Public Offering (IPO) of 45 lakh equity shares (net issue to public will be 36.9 lakh equity shares). The offer will be open from August 2, 2010 to August 5, 2010, and the price band for the IPO is Rs 630-660. The company intends to use the proceeds for expansion purposes.