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BUSINESS
Lehman Brothers crisis to affect portfolio investment in
India
By
Devajit Mahanta
The tsunami in the US financial markets following the sell-out of the
94-year-old Merrill Lynch, the bankruptcy of Lehman Brothers Holdings Inc
(LBHI) after 158 years in business, and debt rating downgrade of American
International Group Inc (AIG) have made a huge impact on the Indian stock
markets on September15. The Bombay Stock Exchange’s Sensitive Index, or
Sensex, declined as much as 3.5 percent. The index is heading for its first
annual loss since 2001.
The Dow Jones industrial average lost more than 500 points, more than 4
percent, its steepest point drop since the day the stock market reopened
after the September 11, 2001 Trade Centre demolished. The fear of a global
slowdown drove oil prices to below $90 a barrel, down almost 40% from the
record high of above $147 per barrel in July 2008. These U.S. financial shock waves took place as U.S.
voters, who rank the economy as their top concern, prepare to elect a new
president in seven weeks. Presidential candidates John McCain, a
Republican, and Democrat Barack Obama, suggested immediately stern financial
regulation. Obama termed it as one of the serious financial crisis after
the Great Depression of the 1930s. Former Federal Reserve Chief Alan
Greenspan described that this is the “once-in-a-century” financial crisis,
and it could continue to destroy more shareholders wealth.
Global financial crisis following the collapse of US investment bankers Lehman Brothers will
adversely impact the portfolio investment in India. India’s
rupee fell to a two-year low on speculation turmoil on Wall Street will heighten
risk aversion among global investors, boosting sales of emerging market
assets. Unfortunately, the declining rupee means this benefit is unlikely
to reach consumers. Lehman Brothers’ the USA’s oldest investment bank
although it is ranked the fourth largest , 26,000 employees started to
clear out their offices Sunday as the Wall Street securities firm files for
bankruptcy. The loss of the two storied firms means the disappearance of
100,000 jobs since the start of the credit crisis a little more than a year
ago. It would certainly impact Indian IT and the affected investment banks
may pull out their outsourcing arrangements which in turn affect service
providers in India
which also means that many would be loosing their jobs. The collapsed
companies are from the BFSI (banking, financial services and insurance)
sector of the US
economy. BFSI companies outsource most and spend most on IT sourcing.
Lehman, Merrill and AIG are the leading customers of India’s IT
biggies. Simply, impact on Indian IT companies we can say in two ways:
Companies like TCS, Wipro, Infosys and Satyam would lose business worth
hundreds of cores and companies like NIIT and Patni (which are partly owned
by the likes of Merill Lynch and Lehman Bros) may see erosion of
stakeholders value. Well, we can see an opportunity in the long- term
outsourcing companies will be forced to change focus from BFSI (banking,
financial services and insurance) to Pharma, Telecom and Manufacturing.
Focus on the domestic IT opportunities and reduce operating costs by moving
out of the metros into the hinterland of small towns. Unfortunately, Indian
IT companies have become addicted to plucking low hanging fruit, and
thinking operationally and tactically; not strategically.
The turmoil in the US
financial market prompted the Reserve Bank of India to impose payment
restrictions on Indian entities of Lehman Brothers. AIG India shares are
currently split between Tata and AIG, with the former holding 74 per cent
and the latter retaining the remaining 26 per cent. On March 31 (2008)
Insurance Regulatory and Development Authority (IRDA) report determined
that both companies had satisfactory solvency margins and were capable of
covering liabilities.
Considering the gravity of the situation, the IRDA has already asked TATA
to submit its status report so that investors wealth are protected.
Moreover, the Indian Finance Minister P Chidambaram on Thursday night
issued a statement asking the investors not worry in the backdrop global
financial crisis.
Readers can send their feedback at devajitmahanta@gmail.com
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