MUMBAI MASALA APRIL 14, 2007: SEBI OPENS DIRECT MARKET

UNCLAS SECTION 01 OF 04 MUMBAI 000136 SIPDIS SIPDIS DEPT PLEASE PASS TO USTR/AADLER E.O. 12958: N/A TAGS: ECON EFIN PHUM PGOV IN SUBJECT: MUMBAI MASALA APRIL 14, 2007: SEBI OPENS DIRECT MARKET ACCESS, CII ANNUAL CONFERENCE, SUPREME COURT HEARS CASE ON SALWA JUDUM, SURAT TEXTILE FACTORY VISIT ¶1. (U) Sensitive But Unclassified. Please treat accordingly. -- SEBI Ushers in Direct Market Access for Institutional Investors -- Confederation of Indian Industries Annual Conference in Mumbai -- Supreme Court Hearing Draws Attention to Controversial Salwa Judum Movement in Chhattisgarh -- Textiles Lead Boom in Surat, Gujarat's Diamond Town SEBI Ushers in Direct Market Access for Institutional Investors -------------- -------------- ¶2. (U) On April 3, 2008, the Securities & Exchange Board of India (SEBI) issued a circular to the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) proposing to allow the direct market access (DMA) facility for domestic and foreign institutional investors. This facility allows these investors to use the broker's infrastructure to directly access and place their orders on the trading system of the two exchanges. Currently, all investors have to give their buy/sell orders to brokers and these orders get executed only after the broker enters them into the stock exchange's system. ¶3. (U) SEBI has for now, limited the direct market access facility to institutional investors, but the stock exchanges have the discretion to extend this facility to other categories of investors in the future. This step will likely enhance trading volumes and market participation as Foreign Institutional investors (FIIs) and domestic institutions like mutual funds and insurance companies will be able to immediately execute trade orders in real time. These investors can now execute algorithm-based, or "quant" trading, which enhances liquidity and market efficiency by seeking arbitrage opportunities often found in less-traded securities. The automation of the trade order process will also give operational freedom and greater control over trading execution strategies. (Some institutional investors have complained about "front-loading," in which the broker keys in matching trades before those of their client.) The DMA facility also reduces the risk of errors in manual order entries, provides greater transparency, increases liquidity and lowers impact costs for large orders, and facilitates better audit trails. The speed of execution of deals via the DMA facility enables the use of decision support tools/algorithms for trading to quickly determine hedging and arbitrage opportunities. ¶4. (U) Ambrish Singh of Enam Securities, one of India's largest brokerage firms, told Congenofff that this proposal will allow investors and traders to execute their trades - either manually or through algorithm-based trading - from outside India by using the propriety system of approved dealers. For this reason, Singh expected that this move will be good for derivative markets - which see about $10 billion/day in trade volumes - and will bring in more market participants. He expected that this would benefit established brokerage houses in India at the expense of smaller dealers, who would not be able to develop their own in-house proprietary trading systems. The Vice President for Legal Affairs at Merril Lynch echoed these sentiments, and said that FIIs especially will appreciate this move, as they can invest directly in the market, with no time lag. In addition, investment banks can also offer this facility to their clients, one that is normally provided in mature capital markets. Confederation of Indian Industries Annual Conference in Mumbai -------------- -------------- ¶5. (U) On April 4, the Western Region chapter of the Confederation of Indian Industries (CII) hosted their annual conference titled "Challenges for a Higher Growth Economy." All speakers at the conference were confident that India would continue to grow and maintain a high growth trajectory. Nevertheless, they acknowledged that internal and external challenges could cause the country's growth rate to slacken and that inclusive growth is a distant dream. ¶6. (U) K V Kamath, Chairman of ICICI Bank, believes that India can grow at 8-10 percent levels for the next 17-20 years. He said that India is experiencing "transformational growth" which he explained is similar to the growth that had earlier MUMBAI 00000136 002 OF 004 transformed the economies of South-east Asia and China. He admitted that global linkages relating to high oil prices and commodity prices, the sub-prime crisis, possible U. S. recession and high inflation, will cause economic growth in India to slacken, but he believes that the extent of coupling of India with the world economy is significantly less. He noted that India is not dependent on foreign capital for financing investment; the country is not an export economy and is only dependent on a few critical imports like oil. He believes that the services sector which accounts for 60 percent of India's GDP will experience an assured growth rate of 6 percent annually. Kamath acknowledged that growth in the manufacturing sector which accounts for around 20 percent of the GDP may slacken but he believes that the strong growth in the service sector would create opportunities for manufacturing as well. For these reasons, Kamath continued, "overall growth will be robust enough to carry on the growth momentum even if some sectors in India are impacted by external factors." ¶7. (U) U K Sinha, Chairman & Managing Director of UTI Asset Management Company, said that fiscal prudence and financial sector reform impede higher growth. He believes that the government's commitment to fiscal discipline through control of the volume and direction of expenditure and disinvestment in government and state-owned companies can add 2 percentage points to GDP growth. Sinha noted that 70 percent of Indians have no bank account, 80 percent have no insurance, 88 percent have no access to pension plans, and 77 percent of the Indian populations have loans from sources other than banks. Therefore new regulations and new financial products are needed, he continued. The development of a corporate bond market, foreign exchange liberalization, and financial sector reforms, can add 1-2 percentage points to GDP growth, Sinha contended. ¶8. (U) Kevan Watts, the President of DSP Merrill Lynch, predicted that India will "soft land" to 8 percent real GDP growth next year provided the world de-couples from the possible ¶U. S. recession. If this does not happen, then India's GDP will grow at 6.5 percent in real terms, he continued. Watts said that inflationary pressures caused by excess liquidity, high oil prices and a bad winter crop causing stagflation, and supply shocks dampening the investment climate are the biggest challenges to world growth. Nevertheless, Watts believes that India will continue to grow at a healthy rate as the country has enough liquidity to support growth for many years. However, inclusive growth remains a challenge for India, he added. ¶9. (U) All speakers at the conference emphasized the urgency for skill-building for the huge Indian workforce which has been touted as an asset for sustained economic growth. Lt General S S Mehta, the Director General of CII, pointed out that India had 380 million children aged 6-16. He noted that the country's demographic dividend is not everlasting. If these children are not trained, they will become a demographic liability, he warned. Kamath stated that "the education system in India is not aligned to the aspirations of a skilled India,; he was referring to the educational systems inability to support both skilled manufacturing andskilled support jobs but a proper educational system was needed to keep the economy growing." Fitting the right skills to the right people will create job opportunities, empower them financially, and help the economy to grow, he continued. This leads to inclusiveness and sustained growth, Kamath added. Sinha agreed with Kamath and cautioned that the demand of the Indian industry is not likely to be met by the level of skill available today. He praised the current Budget's initiative to set up 6,000 nodal elementary schools in the country which will improve education at the grassroots level. Nevertheless, he called for trade and industry to play a greater role in creating skill sets and educating the younger generation. SUPREME COURT HEARING DRAWS ATTENTION TO CONTROVERSIAL SALWA JUDUM MOVEMENT IN CHHATTISGARH -------------- ¶10. (U) On April 15, Indian Supreme court will again hear arguments from the Government of India (GOI),Government of Chhattisgarh (GOCH) and civil society petitioners about the legality of "Salwa Judum" (an all party village defense initiative against Naxalites) in the Dantewada district of central Indian state of Chhattisgarh. Supreme Court judges hearing the petition remarked March 31, "The allegation is that MUMBAI 00000136 003 OF 004 the state is arming private persons. You can deploy as many police personnel or armed forces to tackle the menace. But, if private persons, so armed by the state government, kill other persons, then the state is also liable to be prosecuted for abetting murder." Though these remarks were widely reported by the print media as an indictment of "Salwa Judum", in reality, they are just "obiter dicta", remarks made during an ongoing hearing. They are not an order. ¶11. (U) The hearing is the result of a "Public Interest Litigation" against Salwa Judum filed by three social scientists in 2007. Their wish is that government should disband the camps and allow tribals to go to their villages for sowing season. The first hearing on this petition took place on March 31 in the Supreme Court. GOCH argued that tribals are staying in the camps out of their own volition and would find it unsafe to return to villages. GOCH police chief Vishwaranjan told the Rediff internet news portal that in fact, in addition to the 29 official camps, villagers have themselves established several informal camps. GOI counsel told the Supreme Court on March 31 that GOI is willing to appoint an independent monitoring agency to survey camp conditions. ¶12. (U) The camps are the result of the marches in 2005 by Chhattisgarh Congress party and Leader of the Opposition Mahendra Karma of tribals against Naxalite activities. Fearing reprisals from Naxalites, the tribals, who had participated in the marches, moved to government organized rudimentary refugee camps near towns. ¶13. (U) Various human rights groups such as Asian Human Rights Coalition (AHRC),People's Union for Civil Liberties as well as GOI's National Commission for Protection of Child Rights visited the camps in 2006 and 2007 and wrote about the abysmal conditions there. AHRC estimates that about 45,000 tribals are currently in these camps. The housing is primitive, food rations meager, and health and education services non-existent for camp inhabitants. ¶14. (U) The other important point of contention between GOCH and civil society is the hiring of tribal youth as special police officers (SPO). Civil society groups say these are child soldiers, while GOCH contends that these are youth guarding the camps for minimal salary. Civil society groups have also argued that special police officers are guilty of terrorizing villagers who were not part of Salwa Judum, while GOCH contends that SPO are essentially guarding IDP camp peripheries and do not carry out active police tasks. (In 2006, and 2007, the SPOs have been killed with regularity in Naxalite attacks on IDP camps, which points to their not being well-armed.) ¶15. (U) Congenoffs will follow the Supreme Court hearings over the next few months because the fate of Salwa Judum could have important implications for state-sponsored anti-terrorist initiatives throughout India. Textiles Lead Boom in Surat, Gujarat's Diamond Town -------------- -------------- ¶16. (U) In an extensive tour of the facilities in Surat, Gujarat, Congenoffs witnessed why Surat is called Western India's boomtown. During a tour of the facilities of the Pratibha Group, Congenoffs learned about the manufacture of synthetic textiles. Rakesh Chaudery, Group Director of the Pratibha Group, explained that the nylon fabric manufactured in Surat starts as plastic. This is then spun until it is ten times thinner than human hair. The resulting fiber is then spliced together to make fabric. At another facility in Surat, chemical dyes are then added to the fabrics to color them; the company also sells dyes for other manufactuers. At still another facility, the fabric is embroidered. ¶17. (U) Chaudery was very candid about the business. He stated that despite booming sales the company's managers were constantly looking to reduce costs. The prime cost that the company is trying to reduce is the cost of raw materials so despite the rising rupee the rising cost of crude oil has more than made up for any benefits that the rising rupee could supply. He laughed that his blood pressure rises and falls as the price of crude oil rises and falls. Briefly explaining the production process, Chaudery explained that crude oil is refined into benzene which is then used to make another organic chemical compound called caprolactam; this product is then used to make MUMBAI 00000136 004 OF 004 nylon chits which are the main raw material that is imported for the nylon manufacturing process. Chaudery said that to continue to cut costs the company was looking at backward-integration and would begin to manufacture nylon chits on-site soon and thus begin to import caprolactum. By continuing to backward-integrate the company would continue to cut the value-added cost of production that was absorbed by outside vendors. He explained that the company currently imports nylon chits from China and Taiwan as well as Thailand and Germany. Once the backward-integration is complete, the company will import the caprolactum from China and Taiwan. ¶18. (U) When speaking of his dye business, he said that the raw materials for this are also crude oil based. However, 70-80% of the raw materials are locally produced, some in Gujarat by Reliance Industries which has a monopoly in the Indian market for some of the chemicals. Besides using the dyes on his own fabrics, he stated that the company sold 90% of the products domestically while exporting a few niche products like fluorescent dyes and particular shades of yellow. He said that the massive supply at comparatively little cost that China produces keeps him from exporting more. ¶19. (U) Other managers of the Pratibha Group estimated that 350 textile processing plants existed in the Surat with 30,000 small-scale power looms that produced an estimated 50,000 square meters of fabric every day. Asked about the booming economy in Surat, they noted that much of the credit went to the immense improvement in power supply Gujarat had seen in recent years. In addition, they noted that they have been able to conduct business without bureaucratic hassles and if a hassle does arrive they can send an e-mail to the Chief Minister's office and receive a reply within 24 hours. They also noted they are having constant problems recruiting employees and increasingly they are relying on migrants, usually men, from Orissa, Bihar, Maharashtra and Uttar Pradesh for labor. OWEN