Finance subsidiary is first out of L&T cradle

When the monolithic AT&T was carved up into eight companies in 1984, the original ‘Ma bell’ gave birth to seven subsidiaries called ‘baby bells’. These seven subsidiaries became leaner, more efficient machines and went on to outperform the parent company and the broader market.

On Thursday, Indian monolith Larsen & Toubro (L&T) announced the initial public offer (IPO) of one of its babies — L&T Finance Holdings — atRs51-59 a share.

Expectations are history will repeat itself.

“It is always good to separate your son and allow him to grow in a free environment. Making it independent will be a positive and help the company grow better,” said D D Sharma, vice-president - retail research, Anand Rathi Financial Services.

“Such cases have often resulted in value unlocking in the case of other corporate. This is a trend, which is expected to repeat itself for L&T Finance,” said John Perinchery, senior analyst at Asian Markets.

Analysts are also drawing parallels with Reliance Industries —- ironically a company that attempted to take over Larsen and Toubro during the time of Dhirubai Ambani in the late 1980s and early nineties. After Dhirubai passed away, the brothers Anil and Mukesh Ambani split their empire in 2006 when the total market capitalisation of the group was Rs1.58 lakh crore. The subsequent listing of spin-offs and value unlocking that followed has resulted in the capitalisation of the two brothers to increase to Rs3.64 lakh crore today.

In addition to the potential for value-unlocking, L&T’s listings are also because the company is becoming unwieldy, say analysts.
L&T has 10 operating divisions, including engineering, ship-building, information technology, power and railway projects.

“The company is becoming too big to handle and difficult to value as well,” said one analyst, seeking anonymity.

The first of the issues will be open from July 27-29, with the main institutional investors, called anchor investors, coming in on July 26.

The company will raise Rs1,245 crore through the issue which will result in a dilution of up to 17% in the stake of the parent company.

“The share price of Larsen and Toubro includes a valuation of Rs.118-137 for L&T Finance. The spin-off could result in a growth in the business which could also positively impact the share-price of the parent company as well,” said Deven Choksey, managing director at K R Choksey Securities.

L&T Finance had raised an additional Rs.330 crore by a pre-IPO placement of shares with Capital International at a share price of Rs55.

The total Rs1,575 crore is lower than the planned Rs1,750 crore, a reduction which is said to be based on weak market conditions. 
The proceeds of the IPO will be used to repay a Rs345 crore debt from the parent company as well as infusion of capital into the asset and infrastructure financing companies of Rs515 crore and Rs485 crore, respectively.

There is a Rs50 crore reservation for employees, who will be given a Rs2 discount on every share. There is an additional reservation of Rs120 crore for its shareholders.

The two rating agencies, which graded the IPO, have both given it a grade of 5, indicating strong fundamentals.

The merchant bankers involved in the issue are JM Financial Consultants, Citigroup Global Markets, HSBC Securities and Capital Markets, Barclays Securities, Credit Suisse Securities and Equirus Capital.

L&T has four subsidiaries, which are into asset financing, infrastructure financing, a mutual fund business and an infrastructure developer which has been set up to focus on working capital financing for corporate borrowers.

The next subsidiary in line for a listing may be L&T Infrastructure Development Projects Ltd (L&T IDPL), which develops roads, bridges, ports and other infrastructure, and might just have the scale required for a listing, said R Shankar Raman, senior vice-president, Larsen and Toubro.

“We could see a listing from the company over the next 12-24 months,” he said.

L&T has come a long way since its two founders set up base in an office so small that only one of them could use it at a time. Henning Holck-Larsen and Soren Kristian Toubro, school-mates in Denmark started the company in 1938.

Obama picks former Ohio attorney general to head consumer agency

WASHINGTON — President Obama said Sunday that he would nominate Richard Cordray, the former attorney general of Ohio, to lead the new Consumer Financial Protection Bureau, passing over Elizabeth Warren, the Harvard Law professor who was the driving force behind the agency's creation.

Cordray came to national attention for his aggressive investigations of mortgage-foreclosure practices while he was attorney general. He had already joined the watchdog agency, which starts formal operations on Thursday, as the leader of its enforcement division.

The decision to pass over Warren — who conceived the bureau, championed its creation and orchestrated its establishment for the last year as a White House adviser — reflects political realities.

Her candidacy was passionately supported by liberal members of Congress and consumer advocacy groups. But she never won the full support of the president or his senior advisers, particularly Treasury Secretary Timothy Geithner, in part because of her independence and outspokenness, which at times put her at odds with the administration.

Also, since last year Obama has been trying to rebuild relations with the business community after the fights early in his term over health-care and financial regulations. And Republicans have vowed to block her nomination because they say that her criticisms of the banking industry showed a lack of fairness.

Putting a director in place is critical because the agency will not gain the full measure of its powers until the Senate confirms a nominee. The agency will be able to supervise the compliance of banks with existing laws, but the Dodd-Frank financial legislation that created the agency dictates that it cannot write new rules or supervise other financial companies without a director.

Republicans made clear on Sunday that they were no more likely to confirm Cordray than Warren. Forty-four Republican senators have signed a letter saying they would refuse to vote on any nominee to lead the bureau, demanding instead that Democrats agree to overhaul the agency's management structure to replace a single leader with a board of directors.

"Until President Obama addresses our concerns by supporting a few reasonable structural changes, we will not confirm anyone to lead it," Sen. Richard Shelby, R-Ala., who is the ranking member on the Banking Committee, said Sunday in a written statement. "No accountability, no confirmation."

Some of Warren's supporters expressed support for Cordray.

"Elizabeth Warren was the best qualified to lead this bureau that she conceived — and we imagine Richard Cordray would agree," said Stephanie Taylor, a consumer advocate who led an online campaign that collected 350,000 signatures on a petition calling for the president to nominate Warren. "That said, Rich Cordray has been a strong ally of Elizabeth Warren's, and we hope he will continue her legacy of holding Wall Street accountable."

Warren plans to return to teaching at Harvard in the fall, an administration official said.

Cordray, 52, joined the consumer bureau in December after narrowly losing a re-election bid for Ohio attorney general to Michael DeWine, a Republican who suggested during the campaign that Cordray was anti-business.

In an interview at the time, Cordray described his new federal job as a layover, saying, "I do expect to be running for office in the next cycle."

After more than a decade in private practice and local political office, Cordray won a special election in 2008 to become Ohio's attorney general and soon started a series of high-profile investigations of financial companies.

He accused the insurance company Marsh & McLennan of publishing fictitious quotes to suppress competition. He accused credit-ratings agencies of overstating the value of mortgage-backed securities, resulting in massive losses for their investors, including Ohio pension funds. He accused Bank of America of acquiring Merrill Lynch without telling investors the full extent of the investment bank's problems.

FINANCE: Government Debt and You

With the August government debt ceiling approaching, you may be concerned about what it means to you, your financial security and the probable outcome. While guessing exactly what politicians will do is impossible, it is widely believed that not extending the debt limit could result in a worse financial situation than we just went through. For this reason alone, we believe the following solutions and results are most probable.

Since 1917, the debt limit has been increased numerous times, usually associated with great political drama. If history repeats, the outcome will be a compromise. For the average investor, the probable result will be higher taxes for those in the upper-income ranges as well as higher taxes on dividends and capital gains. Budget cuts will most likely impact older Americans as Medicare and Social Security pose the greatest future financial challenges to the country if not addressed. And with the end of the Federal Reserve monetary easing programs (QE2), interest rates are naturally expected to rise.

The summary outcome appears to be a compromised “fix” at the expense of those who are older and those who are wealthier. If this is the case, you need to be prepared to have saved enough and that you are protected sufficiently against higher taxes and increased interest rates.

Without diving into particulars, the issues are straight forward, our government has been running huge deficits and we are maxed out on the national “credit card.” We have only a few options which span the spectrum of increasing our “limit” once again or making tremendous spending cuts mixed with increased taxation. Some combination seems to be the direction we are heading toward.

Regardless of the solution or political party posturing, the numbers indicate that the budget cannot be balanced strictly by cutting discretionary government spending. If we cut 100% of the non-defense discretionary spending, that would only account for half of the current deficit according to the government budget reports. Well, then how about cutting 100% of defense? That does not do it either. You would have to cut 100% of defense along with 100% of Social Security and then you cover the deficit.

From all the reports and numbers we have reviewed, it does not appear as though the budget can be balanced without spending cuts to Social Security, defense, Medicaid and Medicare while increasing taxes as well. This is our conclusion, what do others say on the matter?

Last December the Deficit Commission issued a report that was supported by 11 of 18 members with the following major points. Discretionary spending levels should be cut to pre-2008 levels with increases at 50% of inflation (thus not keeping up with price increases…a further “cut”). A recommended 15 cent gasoline tax for a few years. A cut to corporate and individual tax rates but taking back some mortgage deductions and tax benefits associated with municipal bond interest, dividends, capital gains and health insurance. While increasing Social Security age eligibility and making reforms to Medicare and Medicaid.

 The “Ryan Plan” focuses on spending controls to Medicare and Medicaid (mostly State driven to put them in control to promote hopeful efficiency). Then some kind of subsidized health care premium program along with some similar Deficit Commission recommendations for cuts to taxes but a reduction to some tax breaks. Social Security and defense spending seems to be largely untouched.

The President’s plan focuses on tax increases, lower interest costs and the majority of savings coming from non-defense discretionary, defense and medical programs. His proposal already assumes the repeal of the Bush era tax cuts already set to expire on their own in 2013.

So why not just cut some spending and increase taxes to fix this today? If the “fix” was immediate, the last recession would seem like a walk in the park as the economic hit would be too great. The reason why we believe the politicians will address this “appropriately.”

So what is the most likely scenario? Your guess is as good as anyone but we would expect a rise to the debt limit associated with some kind of budget limitation. This will kick the can down the road into 2012 where we have the same argument again. But from all the proposals and reviews from both sides of the aisle, the themes are clear. As a society we will have to save more for ourselves, rely less on government, pay more in taxes, especially those over $250k of earnings and expect less benefits coming from Social Security, Medicare and Medicaid. And every government program will be under fire, including defense which has to be cut as well.

When the family hits financial troubles, everyone feels it. From top to bottom, we all need to chip in on this one…and for a long time. Save more, protect your portfolio, globally diversify, position for higher taxes and stay tuned for changes and remain nimble

U.S. Treasury Debt Manager Miller Nominated for Finance Post

Mary Miller, the U.S. Treasury Department official responsible for managing public debt, is the Obama administration’s nominee for chief of domestic finance.

Miller, 55, would replace Jeffrey Goldstein, the Treasury’s undersecretary for domestic finance, who plans to leave the department at the end of this month. If she is confirmed by the Senate for the promotion, Miller would advise Treasury Secretary Timothy F. Geithner on policy issues concerning the U.S. banking and financial systems and regulation.

As assistant secretary for financial markets since February 2010, Miller manages the Treasury’s public debt and oversees the offices of federal finance, capital markets and government financial policy. Earlier today she reiterated the Treasury’s projection that U.S. authority to borrow under the $14.29 trillion debt limit would expire on Aug. 2.

Miller previously worked 26 years at T. Rowe Price Group Inc. in positions including director of the fixed-income division.

One of Goldstein’s responsibilities has been coordinating the Financial Stability Oversight Council, a group of regulators charged with preventing a financial crisis. The council is led by Geithner and includes Federal Reserve Chairman Ben S. Bernanke.

Bank of America nears settlement of mortgage lawsuit

Bank of America is completing an agreement to pay $8.5 billion to settle a lawsuit by investors who purchased mortgage securities that soured when the housing bubble burst, representing what is likely to be the single biggest settlement tied to the subprime mortgage boom and the subsequent financial crisis of 2008.

The settlement would wipe out the company's earnings in the first half of this year, while encouraging powerful private investors to extract payouts from other banks that bundled troubled home loans and sold them as sound investments.

The proposed settlement is with a group of large investors including Pimco and BlackRock, as well as the Federal Reserve Bank of New York. Together they hold $56 billion in mortgage-backed securities from Bank of America, based in Charlotte, N.C.

The securities affected by the deal come from Countrywide Financial, the subprime mortgage lender whose practices have come to symbolize the excesses of the housing boom. Bank of America bought Countrywide in 2008.

The settlement goes beyond the securities owned by these investors, however. It covers nearly all of Countrywide's first-lien mortgages, which total $424 billion worth of original, unpaid principal balances. As a result, investors beyond those that are concluding the settlement stand to benefit.

Once it is approved by the company's board, the settlement will require court approval. Bank of America is expected to take a $5 billion after-tax charge in the second quarter to cover the payout.

The $8.5 billion settlement represents just a portion of the bank's total exposure to faulty mortgage bonds, much of which comes from the Countrywide loans.

Last fall, analysts warned that the toll of legal action from the investors and other private holders could total tens of billions of dollars, but the proposed deal would lift some of that uncertainty.

While the board has yet to approve the settlement, both sides are aiming to have it done by Thursday, according to a person close to the negotiations. Bank of America would deliver the money to the trustee for the securities, Bank of New York, which would distribute it to the institutional investors.

Bank of America does not anticipate having to raise capital or sell stock to raise the money for the settlement.

Still, other risks loom from the fallout of the subprime mortgage crisis — for Bank of America and its giant peers. All 50 state attorneys general are in the final stages of settling an investigation into abuses by the biggest mortgage servicers and are pressing the banks to pay up to $30 billion in fines and penalties.

What's more, insurance companies that backed many of the soured mortgage-backed securities are also pressing for reimbursement, arguing the original mortgages were underwritten with false information and did not conform to normal standards.

Bank of America, JPMorgan Chase, Citigroup and Wells Fargo have the greatest exposure to the legal claims over the faulty mortgage bonds. Together, they are likely to absorb roughly 40 percent of the industry's mortgage-related losses.

The huge settlement represents a sharp turnabout from the combative position that Bank of America's CEO, Brian Moynihan, initially adopted last fall when the legal effort by the investors began.

Not long after that, however, the bank started negotiations with the investor group, led by a Houston lawyer, Kathy Patrick. And in January, it reached a settlement with Fannie Mae and Freddie Mac, the government-controlled housing giants, to buy back $2.5 billion in troubled mortgages.

Personal Finance: Credit card offers are back

Seem like you're seeing more credit card offers lately? You aren't dreaming.

Targeting everyone from teenagers to 80-somethings, credit card companies are cranking out more offers, especially to those with good credit ratings.

Lee Marengo, a retired state employee in Sacramento, said she and her husband have been getting lots of tempting credit card offers in the mail.

A longtime credit card user who faithfully pays off her balance each month, the 84-year-old is getting "wonderful" offers for rewards cards, such as a Chase Visa that dangles 5 percent cash-back on gas, groceries and pharmacy purchases.

Marengo typically only uses one card but, "If something new and better comes along, by golly, I'm gonna grab it."

She's certainly not alone in getting credit card offers.

During the recession, card issuers kept a low profile. They got hammered by record rates of defaults by consumers who couldn't pay off their monthly balances. They also got pinched by new consumer protections in the federal Credit CARD Act that clamped down on late payment fees, interest rates and other charges.

But that's old news. Today, as the battered economy starts to heal, credit card defaults and late payments are lower. Banks have adjusted to the new landscape, amping up efforts to grab new consumers.

"There are a lot more mailings going out. The competition among credit card issuers has definitely stepped up," said Bill Hardekopf, CEO of LowCards.com, an online credit card comparison site. "They are sending out many more solicitations, especially to the most sought-after customers: those with good to excellent credit scores."

The spike in credit card mailings was significant this past year, says Anuj Shahani, who oversees tracking services for Synovate, a global market research firm. Direct mailings from credit card companies skyrocketed from 1.39 billion in 2009 to 2.82 billion in 2010, a whopping 103 percent increase.

"With the CARD Act in place and the economy doing better, credit card mailers have come back with a bang and are making up for some lost ground," said Shahani in an email. "We expect to see a modest rise in mailings for 2011."

Credit cards that offer rebates or rewards are where competition is most intense, says Hardekopf. "Issuers are offering some great deals out there, especially in miles and cash back. That is what excites consumers."

But if you're contemplating a new credit card, do your homework. Here are some tips:

Balance vs. no balance

You have to know which camp you're in, says Tim Chen, CEO and founder of NerdWallet.com, a Redwood City-based credit card comparison site.

If you don't carry a monthly balance, get a rewards card. They typically have an annual fee but offer airline miles, cash-back on purchases (groceries, dining, etc.) or discounts at certain stores.

If you do carry a balance, generally go for cards with the lowest interest rate.

Read the fine print

No matter what kind of card you apply for, be sure to read the disclosures first. Otherwise, you might get hit with surprise fees later. For instance, a company that brags it has no "annual fee," might instead charge an "application fee," says Ken Lin, CEO of CreditKarma.com, a Bay Area-based credit card site.

"If you take 20 minutes to read the disclosures, it can save you several hundred dollars," said Lin.

Watch out for terms/fees

Many new cards entice people to switch by offering to move your outstanding balance to a new card with a lower rate. But those so-called "teaser rates" usually last only six months or so. Or they can disappear entirely and be replaced by a sky-high rate if you fail to make a monthly payment on time.

For instance, let's say you've got a $2,000 balance on your credit card that's charging 20 percent APR. You get an offer to transfer your old balance to a new card that's only charging 6 percent. Sounds good, eh?

But look at the details: There's an upfront fee of 3 percent. On a $2,000 balance, that's $60. "Not the end of the world," notes Lin, but it's still money out of your pocket.

And if you don't pay on time every month, that super-low interest rate could jump to nearly 30 percent, the typical "penalty pricing" rate. In the end, you could be worse off than if you kept your original card.

Choose rewards wisely

If you buy a lot of gasoline, look at a card that pays cash back. Or if you fly for business or vacations and live in a Southwest Airlines city like Sacramento, it might be worth getting the airline's credit card to rack up miles.

But note that some cash-back rewards are capped, say $250 a year for gasoline purchases.

NerdWallet's Chen likes to tell how he scooped up 225,000 airline miles in one year by signing up for three cards: 75,000 bonus miles each for an American Airlines card from Visa and American Express. And a Capitol One card that did a match-my-miles promotion.

And he didn't get hit with annual charges.

"The fees were waived for the first year, so I just canceled the cards after I got the miles."

With his miles he's flying to Greece this summer.

That's not the kind of consumer that credit card companies are looking for, needless to say.

Every time you apply for a credit card, your credit score can get dinged. That's why it's best to do your homework before applying for too many cards. And if you have a card with a long history of good payments, don't cast it aside just because you see a better-looking deal out there. Hang onto it for the long-term benefit to your credit score.

Best tip: Always pay your credit card bill on time. "If you do, you're gonna save a lot of money. If you don't, that's where they get you," says CreditKarma's Lin.

By:- http://onlinemoney-foryou.blogspot.com 

IRDA issues draft guidelines for life insurers' IPO

Insurance companies which have completed 10 years of operations are now eligible to go for initial public offer (IPO).

Prior to filing of the draft document for issue of share capital or making public offer with the Securities and Exchange Board of India (SEBI), the insurance company should take a “formal approval” from the Insurance Regulatory and Development Authority (IRDA).

For approval, the insurer should have maintained a satisfactory regulatory record, J Hari Narayan, Chairman, IRDA, said in the draft guidelines on Issues of Capital and Disclosure Requirements (ICDR) for life insurance companies announced on Tuesday.

The objective of the public issue could be to augment solvency requirement and general corporate purposes.

Financial statements for a period of last five years should be provided along with gross premium, cross-selling, operating expenses ratio, investment yield, liability of future policy benefits and manner of arriving at unrealised gain/loss.

In addition to meeting the disclosure norms laid down by SEBI in ICDR regulations, any insurance company should also disclose risk factors specific to the insurance companies.

An overview of insurance industry, disclosure of financial statements, particulars about the issue and insurers should also be provided.

The risk factors to be mentioned in the offer documents should cover risks arising out of insurance risk (mis-estimation and fluctuations in the frequency of claims) besides market, credit, liquidity and operational risks, the guidelines said.

The guidelines would come into force after their notification in the Gazette, IRDA added.

At present, there are 24 life insurance companies approved by IRDA while about four/five of them would have completed 10 years of operations..

Diesel-electric buses' trial start by year-end: Tata Motors

Tata Motors is preparing diesel-electric hybrid buses for user trials by the State Transport Undertakings (STCs) by end of this year and could launch it subsequently, company officials said on Friday.

“We're developing a diesel-electric hybrid. Once that is ready, we expect to see higher demand for hybrids from STCs,” Mr Ravi Pisharody, President, Commercial Vehicles, Tata Motors.

The automaker expects such buses to find favour with STCs around the country, because of their low running costs and reduced emissions. Though the company is already running few CNG-electric hybrid buses on trials in Mumbai (BEST) and Delhi (DTC), it believes that the wider availability of diesel fuel makes diesel-based hybrids a more attractive choice across the country.

PRICING

Another company official added that the diesel-electric buses will be launched by end of the year and will be cheaper than the CNG-electric buses. They, however, did not mention the exact pricing of either product, but said that the high import content makes the product very expensive.

“We have not yet priced the product. We hope to localise key components like the battery, though this will depend on demand. With mass production in the country, prices should come down. We expect some policy support from the Government, especially through their new initiative on electric vehicles and hybrids,” Mr Pisharody said.

Much like the CNG-electric hybrids, the diesel-electric hybrid Starbus will have a smaller diesel engine than conventional buses, resulting in both lower emissions and a drop in fuel consumption. The electric motor will work with the diesel engine to power the bus. However, the challenge for the company would lie in reducing the gap in pricing over traditional buses.

Mr Pisharody said that the company has also bagged an order for 10 hybrid buses from the city of Madrid, Spain. This will be supplied by Tata Motors' wholly-owned European subsidiary, Hispano Carrocera.