Recession won’t stop netas

By M H Ahssan

Politicians’ Calls For Funds In The Election Season Disgust Business Leaders

Industry heads in the state are gearing up for an election ritual they have come to dread: calls for funds. They say if market rumours are any indicators then political parties have pegged the spending on each MLA at Rs 5 to Rs 10 crore, depending on the candidate and the constituency. “They will obviously get the money by drilling a hole into our pockets,” says an industrialist.

Businessmen say the 2009 election would drain them like no other election did for they are dealing with two debilitating factors — severe recession and a greater number of political parties in the fray this election season.

“With so many different parties seeking funds and our business in doldrums, it just makes things that much more difficult for us,” says an industry senior. They also say they fear saying no to any political party because in these times of coalition governments, one doesn’t know which party could emerge as an important one in the new government.

By now most industry heads are familiar and disgusted with the modus operandi of fund generation. They say that secretaries of senior politicians simply sit down with business directories, call up business houses on their board lines, ask for the chairman or the managing director and within seconds of being connected make their demand for money. “They don’t request. They simply order. If you refuse to cooperate, they start blackmailing you,’’ says an industrialist. Apparently the ‘revenge’ that parties seek could range from a planned exercise such as a sales tax raid to the more filmy knee-jerk form of sending local goons to disrupt work at a project site.

“During the last election, soon after I declined to contribute funds, my work virtually came to a stand still. From my building plan to deviations, the sanctioned plan, the authenticity of my land documents, everything was questioned by various government bodies,” recalls a builder. Needless to say, he admits to reaching a ‘compromise’ soon so that work could resume.

While calls for funds are yet to begin during this election season, the pressure to turn in favours is already mounting. “You don’t give a job to a candidate referred by them and they get raids conducted,’’ rues a senior industrialist pointing out to how he began diverting his business investments to Bangalore, to possibly insulate himself from the political mess here.

Businessmen complain that political affiliations are being imposed on them, largely based on their caste and creed. “If business is related to a particular political party, it causes great discomfort. We are technocrats, entrepreneurs and do not wish to be identified with any party. I will do whatever is right for the company and not for some political interest,” says the head of a firm.

“The business community definitely has a relationship with political parties but this kind of political interference in business is simply not done,” asserts an industry senior. He adds that of late, business houses have been buzzing with incidents of a vindictive nature for not having turned in a favour to a political party.

Saudi Govt Tightens Noose On Cover-up Business Of Expats

By Fauzia Arshi / Jeddah

Atleast 50,000 small and medium Indian businessmen will suffer a great loss if the 'cover-up' business will close in this peak Ramadhan period. According to the Saudi Labor Ministry’s campaign against illegal foreign workers has led to the closure of several “cover-up” shops run by expats in the name of their Saudi sponsors. As per the ministry report, cover-up business in the Kingdom is estimated at more than SR 230 billion. Many shops in different parts of the Kingdom, including Jeddah, Riyadh, Dammam, Makkah and Madinah have been found closed with “For Sale” boards hanging on them, as they could not correct the status of workers.

Recession won’t stop netas

By M H Ahssan

Politicians’ Calls For Funds In The Election Season Disgust Business Leaders

Industry heads in the state are gearing up for an election ritual they have come to dread: calls for funds. They say if market rumours are any indicators then political parties have pegged the spending on each MLA at Rs 5 to Rs 10 crore, depending on the candidate and the constituency. “They will obviously get the money by drilling a hole into our pockets,” says an industrialist.

Businessmen say the 2009 election would drain them like no other election did for they are dealing with two debilitating factors — severe recession and a greater number of political parties in the fray this election season.

“With so many different parties seeking funds and our business in doldrums, it just makes things that much more difficult for us,” says an industry senior. They also say they fear saying no to any political party because in these times of coalition governments, one doesn’t know which party could emerge as an important one in the new government.

By now most industry heads are familiar and disgusted with the modus operandi of fund generation. They say that secretaries of senior politicians simply sit down with business directories, call up business houses on their board lines, ask for the chairman or the managing director and within seconds of being connected make their demand for money. “They don’t request. They simply order. If you refuse to cooperate, they start blackmailing you,’’ says an industrialist. Apparently the ‘revenge’ that parties seek could range from a planned exercise such as a sales tax raid to the more filmy knee-jerk form of sending local goons to disrupt work at a project site.

“During the last election, soon after I declined to contribute funds, my work virtually came to a stand still. From my building plan to deviations, the sanctioned plan, the authenticity of my land documents, everything was questioned by various government bodies,” recalls a builder. Needless to say, he admits to reaching a ‘compromise’ soon so that work could resume.

While calls for funds are yet to begin during this election season, the pressure to turn in favours is already mounting. “You don’t give a job to a candidate referred by them and they get raids conducted,’’ rues a senior industrialist pointing out to how he began diverting his business investments to Bangalore, to possibly insulate himself from the political mess here.

Businessmen complain that political affiliations are being imposed on them, largely based on their caste and creed. “If business is related to a particular political party, it causes great discomfort. We are technocrats, entrepreneurs and do not wish to be identified with any party. I will do whatever is right for the company and not for some political interest,” says the head of a firm.

“The business community definitely has a relationship with political parties but this kind of political interference in business is simply not done,” asserts an industry senior. He adds that of late, business houses have been buzzing with incidents of a vindictive nature for not having turned in a favour to a political party.

The Benefits of Loyalty Cards For Your Business

By M H Ahssan

If you are a business owner looking for opportunities to build your customer base than look no further. This article will discuss the benefits of loyalty cards in your business. It does not matter if you own a restaurant or a retail outlet both can reap the rewards of a good loyalty card. A loyalty card is very similar to a credit card or debit card. They are the same size and look the same. The difference is a loyalty card will have your logo and business information written all over it. In addition the loyalty card will only offer the benefits to your customer that you program on it. Lets look at some of the great benefits that loyalty card offer your customer and in return you.

If you own a restaurant or a coffee shop loyalty cards can greatly benefit you. The first way that this happens is with advertising. Every time your customer pulls out his or her loyalty card they are advertising your business to a potential nearby customer. It puts your brand out there each and every time the loyalty card is pulled out of a wallet or purse. Most importantly your loyalty card rewards well loyalty. You can see very often these days' restaurants and coffee shops offering loyalty cards that reward you after you have bought so many sandwiches or various cups of coffee. This creates a bond between you and the customer. If they can buy 5 sandwiches from you and get the 6th one free than they are more likely to avoid the competitor and eat from you until they get their free sandwich.

If you own a retail outlet the loyalty card is equally valuable and beneficial. You still have the same opportunity of advertising through the card and perhaps drawing in a few additional customers. As anyone who has ever owned or managed a business knows there is no better advertising than word of mouth. It is vital that you do everything possible to create customer loyalty and encourage them not only to return to your establishment but bring their friends and family as well. Loyalty cards can assist you with this. If you offer your customer a discount card after they have purchased a certain amount of product than you are encouraging loyalty.

You can see this type of loyalty in use everyday in retail outlets, restaurants, coffee shops, department stores and grocery stores. Many different types of business can benefit from a loyalty card. By forming this bond with your customer they feel that you are giving them something for free for their loyalty to your establishment. Everyone is drawn to things that are free. Everyone wants to spend their hard earned money where they know they are appreciated. The bottom line is loyalty cards drive return traffic to your business. When you build customer loyalty that customer is more likely to recommend you to an associate. The rewards of loyalty cards in your business cannot be underestimated.

The 'King Of Multiplexes' - PVR’s Ajay Bijli

Ina candid interview with India Television, a new arm of India News Network recently, the 'King of Multiplexes' opens his heart.

For someone who runs a company which is in the ‘business of happiness’, 45-year-old Ajay Bijli confesses to taking things far too seriously than he should. “I need to enjoy the work a bit more. I have to learn that art. I am just taking things too seriously,” says Bijli with a smile, as he takes us through his journey of starting out as a youngster in his family’s trucking business to running a single screen theatre to now leading PVR Ltd, the film entertainment company which has become the country’s largest multiplex operator.

Bijli has just pulled off a coup of sorts, acquiring rival Cinemax of the Kanakias for a total of Rs. 543 crore, post-open offer. This acquisition would, in a single shot, propel PVR to pole position among multiplex operators, ahead of rivals like INOX-Fame and the Indian film exhibition business of Anil Ambani-controlled BIG Cinemas. In all, the PVR-Cinemax combine will have 351 screens across the country with 87,493 seats across 85 properties and 36 cities. This translates into entertaining a staggering 5.3 crore customers every year.

Sitting in his room on a rainy winter morning at PVR’s Gurgaon headquarters designed partly on the lines of a PVR theatre—complete with popular movie lines like Mogambo khush hua and Hasta la vista, baby inscribed on the glass panes of the cabins—Bijli displays the restlessness of a child who has just got a prized toy but is keen to grow the collection.

“Our vision is that PVR should be the number one in film entertainment and remain leaders in the exhibition space. As long as PVR exists, we should always have some cinema under construction, and so I don’t like to put numbers to these things,” he says, adding that at PVR, the culture is never to talk about being the first or pioneers, but rather to look ahead and keep growing.

Though he is reluctant to quote figures, Bijli does say that in the next 12-18 months, the PVR-Cinemax combined screen count should ideally touch 500 screens.

The acquisition apart, PVR’s own organic rollout involves adding another 120 screens over the next 14 months and, including the Cinemax pipeline, the final number should stand at around 480 after the rollout. But 500 is an immediate milestone Bijli will be happy with, he concedes.

“One can always dream, but let’s see how things work out. We would also like to be a $1 billion company in terms of market capitalisation. Overseas, entertainment companies have that kind of size; so why not in India? But I am not driven by market cap,” he says. “It’s a moving target all the time for us. And most importantly, for now the task at hand after this acquisition is to focus on integration and do a great job of our organic rollout plan.”

Bijli’s gameplan is to make PVR a highly differentiated retail entertainment company which has cinemas as its main magnet, with an ecosystem of retail entertainment feeding off the core cinemas business. “We want our own unique positioning where the fulcrum is exhibition.

But we want to focus on good, high quality stuff. I am fascinated by what the House of Tata has done across very diverse businesses with quality and trust as the major elements of their business. So we feel if any of our businesses carries the signature that it’s part of PVR, it should have quality. With quality will come quantity.”

The early years
For someone who started off in his family’s trucking business in 1988 after finishing college, Bijli was sincere enough in giving that his best shot like a dutiful son, though he never quite enjoyed it. “It was my father’s passion and also my grandfather’s. But I wasn’t finding my feet and wasn’t even sure if this was what I wanted to do,” he confesses. It was after he got married in 1990 that he spoke to his father and told him that he wanted to do something of his own, in addition to the family business. It was then that Bijli’s love affair with the cinemas business began.

His father had acquired Priya cinema in Delhi in 1978, and by then the property had lost some of its reputation, since it was unable to screen top-of-the-line movies and was also burdened with controlled ticket prices and taxation. By contrast, rival movie theatres like Chanakya and Archana were doing well. Bijli then decided to try his hand at running Priya.

One of the first things he did was to bring in English movies. “I didn’t have much of an education, but common sense told me that maybe English movies would do well since the demographics of the area—RK Puram, Vasant Vihar and Som Vihar—pointed to that. I also managed to get a lucky break with some Hollywood studios.” However, the Hollywood people told Bijli that Priya would need to be refurbished before the movies could be screened there.

And so, inspired by Sterling Theatre of what was then Bombay, he went about giving Priya a new lease of life. He installed a Dolby sound system at the theater, added color to the grey interiors by giving it a dash of pink, got the toilets cleaned up and provided uniforms to the staff. The strategy worked and after the initial hiccups, Priya began doing very well. Added to this success was the pleasant surprise of a partial decontrol of ticket prices and Bijli’s fledgling cinema business was off to a good start.

“My father was very supportive, and by 1992, I was involved in both the trucks and cinema businesses. Cinema was like a hobby,” he recalls. However, this happy patch didn’t last too long, and Bijli lost his father that year. “I had to go back to the trucking business then, since there was no one to look after it. I worked like a dog through the day and in the evening I’d come to Priya,” he says. “That was my outlet, my respite. I also didn’t want to let down my English distributors and kept an eye on aspects like cleanliness and the sound and projection systems at Priya.”

If it was trucks during the day, by evening Bijli and his wife would land up at Priya and even sell tickets and put up posters to wind down and relax. Clearly, the romance of the cinema was where his heart lay.

But adversity struck again, and a devastating fire left the trucking business ravaged and the family shattered, both financially and otherwise. “We had lost a lot of money and had to settle claims. It was then that I told my mother that I wanted to do something more on the cinemas side. I had seen multiplexes abroad and wanted to do similar things in India. My mother told me to do what my heart wanted,” Bijli recalls.

The roadshow begins
By then, Priya had grown into becoming quite a hub around the area, leading to other food and retail outlets coming up around it. McDonald’s, Nirula’s, Archies and other stores came in around the theater and Bijli saw the area as having the potential of a Delhi version of Times Square or Leicester Square. At the same time, he was keen to get into the multiplexes business. But there was one problem: he didn’t have a clue how to go about it.

It was then that one of the Hollywood distributors told him to get in touch with Australian media major Village Roadshow, which was keen to get into India at the time. “I flew to Singapore and met John Crawford who was the Asia managing director of Village Roadshow. We literally did some number-crunching on a napkin-type paper and a 60-40 joint venture was agreed upon,” Bijli says. He would have 60 percent in the venture.

The market was just ripe for the multiplex model. English releases were coming to Indian cinemas very late since there was an acute shortage of screens. If a movie did well, the trend was to keep it running for several weeks, creating a backlog of new releases.

“I reckoned if a multiplex came in, we could release several movies at the same time and bring in the new movies earlier. The only challenge was whether Indian audiences, which were used to the massive 1000-seater cinemas, would take to the smaller screens and theaters with fewer seats. But I guessed we could get movie-loving audiences in anyway,” says Bijli.

The new JV, called Priya Village Roadshow, presented its own challenges. The Australian partner was keen to get the venture off the ground, but Priya was already doing very good business as a single-screen cinema and Bijli didn’t want to convert that into a multiplex. “I somehow wanted Priya to remain a single-screen theater to take on Chanakya and compete on the big blockbusters. So we started looking for other properties.” It was then that the Ansals offered Bijli the Anupam cinema at Saket, another Delhi locality, since they didn’t want to run it themselves. Bijli then took it on lease and the first multiplex, a four-screen one, was born, with the strange-sounding name Priya Village Roadshow Anupam 4.

“There were kilometre-long queues when we opened. And our campaign was very explicit: four cinemas under one roof, 24 shows a day, multiple cinema complex. Everything had to be clearly explained,” says Bijli. The efforts were worth it, and the cinema started doing very well, encouraging them to expand. More locations were found in Delhi and a phase of expansion followed, with Sonia theater being converted to PVR Vikaspuri and Payal to PVR Narayana.

Opportunity in adversity
By 2000, Priya, which needed refurbishing, was revamped and given a big push for more blockbusters. “Though Village Roadshow asked me why I was going back to a single-screen format, I was keen to take on Chanakya and so revamping Priya was a practical decision,” explains Bijli. By that time, the company had 12 screens.

True to Bijli’s career path, a new adversity presented itself in 2001, when the 9/11 attacks changed the global business environment forever. Village Roadshow didn’t want to expand any further and decided to exit India, leaving Bijli to work things out on his own. “The parting was, however, very amicable and the PVR brand was born out of the exit agreement,” says Bijli.

In the meantime, about Rs. 100 crore of projects, totalling about 50 screens, had been committed by the company which had signed up with a number of malls being announced at the time. Inspired by the large eight-,nine- and ten-plexes which Village Roadshow had constructed overseas, Bijli had decided to plunge fully into expansion mode. However, most of those projects were in various stages of being rolled out—either in excavation or construction mode—so the actual expansion was still some time away.

“Most of these projects were still pieces of land, I had no partner and I had to fund the Village Roadshow exit too by buying out the 40 percent stake,” recalls Bijli. It was then that he decided to consult good friend and mentor Sunil Mittal of Bharti who advised him to consider speaking to private equity players.

“I was very lucky to meet Renuka Ramnath of ICICI Venture who put in Rs. 40 crore. We couldn’t buy property like other competitors who were announcing projects and decided to run only on a lease model. Matching equity with debt, we raised about Rs. 80 crore which was enough to see us through. I sold some personal property and put part of the money into the business. We bought out Village Roadshow.”

As PVR began finding its feet in the new environment, new projects began opening up. The Forum Bengaluru property—an 11-screen multiplex—opened to a phenomenal response and turned out to be a game-changer for PVR. Properties at Juhu in Mumbai and MGF Gurgaon also added power to the growth momentum and PVR was firmly on the road to growth.

A scorching pace
Always hungry for growth, the initial responses to his new properties added to Bijli’s hunger even more. “The five-year-out for the PE became a three year out and we came out with an initial public offer in 2006, where ICICI Venture part-exited at a great multiple. We got in Rs. 128 crore into the company, added some debt and had a total of Rs. 250 crore plus positive cash flows and were ready to grow further.”

Then followed an aggressive rollout plan which involved 120 screens and a much greater recognition and acceptability for the PVR brand nationally. “We decided we didn’t want to be known as a north Indian brand and so we went national aggressively, setting up projects in Hyderabad, Mumbai and Chennai apart from Delhi,” says Bijli. As the market for multiplexes opened up, developers and consumers warmed up to PVR. Equally, new competitors with deep pockets were entering the multiplexes game, bolstered by the action which the sector was witnessing. With Anil Ambani buying into Adlabs, the game changed once again.

Says Bijli: “Here was a deep-pocketed guy who came in. So while on the one hand you feel good that there’s testimony that you’re not doing something completely wrong since a major player has come into the segment, you also wonder how to take on such strong competitors. INOX was also a strong contender. But we decided to keep chugging along.”

Flirting with film-making
As competition heated up and the game got more intense, Bijli decided he wanted PVR to become more than just an exhibitor. That’s when the studio bug bit him. “This was a period where I wasn’t too happy with our positioning. INOX and BIG had more screens and I had this idea of moving away from the pure play exhibitions business to becoming a studio. We lost our focus,” confesses Bijli bluntly.

Ironically, his flirtation with movie-making started off well, with PVR Pictures, the movie arm, producing the mega hit Taare Zameen Par with iconic film star Aamir Khan who also directed the movie. The PVR-Aamir Khan Productions partnership backed this up with another big hit, the teenybopper love story Jaane Tu Ya Jaane Na, and PVR Pictures looked all set to help realize Bijli’s studio dream.

PVR even raised equity for the movies play with J.P. Morgan and ICICI Venture backing it. However, following the initial successes, the film production business floundered with some poor performances followed by the disastrous showing of the ambitious Ashutosh Gowariker-directed Khelein Hum Jee Jaan Sey in 2010. That pushed Bijli back several notches.

“There were some other flops, but Khelein…was a tsunami. Almost Rs. 30 crore was wiped out from our profits. We were extremely discouraged,” recalls Bijli. “Rather than creating scale in our core business, we had looked at backward integration. It is only logical provided you do a good job of each vertical and your core business doesn’t suffer.”

Regrouping quickly, however, Bijli and his top team at PVR decided to get back to what they knew and did best: film exhibition. Lessons learnt, the focus was back on the core business and its expansion. “The good thing about us is setbacks always motivate us to do better. So we said, let’s just focus on our core and go mad. This is where our passion lies. We then grew really fast, signed up the best locations and kept growing.”

The Cinemax factor
As PVR grew, inorganic growth was also an obvious option. An opportunity came about when Fame, the Shroffs-owned multiplex chain, was on offer. However, that deal was sealed by PVR’s rival INOX Leisure. Says Bijli: “The Fame deal was on the table but we couldn’t pay what INOX could. We have respect for INOX, but we thought we would also have our opportunity later.”

That opportunity came in November 2012, when the Cinemax deal presented itself. The Kanakias, who owned Cinemax, wanted to exit and PVR, which had already consolidated its position after the movie-making debacle and had a robust pipeline of screens under construction, decided to finally go ahead and do the deal. “We said, let’s just go all out. And our private equity partners L Capital and Renuka Ramnath’s Multiples backed us on it. This will be a game-changer for PVR,” declares Bijli.

Adds Pramod Arora, Group President, PVR: “Cinemax was one of the companies which was available and exciting in terms of the numbers that they were generating: the profitability per seat and the overall profits. This is the fit that we were waiting for. This acquisition means a lot for us in terms of getting more strength in the market. The objective has been to have meaningful market share in whichever markets we are present in.”

Despite the fact that PVR’s organic growth pipeline is strong, the next big leap, Arora says, could only have come through an acquisition. “People who have really good organic growth are the ones who can aim at taking a shot at inorganic growth. You can’t grow banking only
on organic growth.”

Concurs Sanjeev Kumar Bijli, Joint Managing Director, PVR, who took the strategic call together with his brother Ajay: “Organically you can grow only so much. It is dependent on the real estate sector, when developers announce and make malls, availability of space, rentals and external factors. But in the Cinemax case, there was someone well-managed and profitable, looking at an exit. For us, it’s a focus area and we were looking at growing.”

The acquisition, which has two stages—the first, a 69 percent purchase and then an open offer for another 26 percent—is being funded by way of equity infusion of Rs. 260 crore in all from the promoters, L Capital and Multiples Alternate Asset Management, the latter run by Renuka Ramnath. While the promoters will put in Rs. 25 crore, Rs. 82 crore will come from L Capital and Rs. 153 crore from Multiples. Following the deal, the holding of the Bijlis will go down from 40.2 percent to 32 percent, while the two PE investors will hold 15.8 percent each.

The backing of the PE investors clearly added muscle to PVR’s ability to do the deal. Admits Bijli: “It would have been very difficult for us to pull off the acquisition on our current balance sheet. We are fortunate to have big investors who have always backed us.”

The market has received the deal enthusiastically, but some obvious challenges remain. In a report put out after the acquisition was announced, ICICIdirect says: “This deal may result in synergies in terms of better bargaining power with producers and distributors as well as cost savings. Given that Cinemax has been acquired at an expensive valuation of 16.1x FY14E EPS, this would result in equity dilution and increase in debt while synergies may take time to play out.”

Broking firm Edelweiss, though, is optimistic of PVR’s clout after the acquisition. “Post this deal, PVR will be the largest multiplex operator in India with 351 screens, well ahead of peers. Also, ability to execute the deal without putting a significant strain on the debt level is a laudable positive,” the firm says in a note. However, a ‘key negative’, it says, is a dilution of about 36.7 percent of minority shareholders. “Also, we need to monitor how PVR manages the two brands—PVR and Cinemax—and possible concentration of screens in some geographies,” the report adds.

Allaying concerns, Nitin Sood, CFO, PVR, says: “We have made a full barter of the deal and at the same price we are also making an open offer to buy the stake from the shareholders. We have given them full value of the stake we required from them. So I think, from the investors’ point of view, there is no concern; they are extremely happy with the price they have got.”

Consolidation and integration
Former rivals and those who know the business view PVR’s pace of growth and the Cinemax acquisition as commendable. Shravan Shroff, who was once Bijli’s rival when he owned the Fame chain of multiplexes, is all praise for PVR. Says he: “The acquisition is a very smart move. Like a cheetah, PVR pulled it off without any noise, and did so very quickly without anyone knowing about it. Though it has stretched the company, it’s a good combination of debt and equity and has created a big difference with competition.”

Shroff, who is a shareholder in PVR and swears he won’t sell his holdings worth about Rs. 4 crore, adds that the acquisition makes eminent sense, since the intensity of construction of new malls is far lower now and hence organic growth is going to be slow. “The pace of growth of new malls is at least 25-30 percent slower compared to seven years ago. I would therefore give PVR ten on ten for doing this deal,” says Shroff.

Keen to keep moving, Bijli says he cannot afford to rest just because he has done the Cinemax deal. “The market has become dynamic, others can also consolidate. I am also focusing on organic growth a lot. Integration is top of the agenda for us now. The Cinemax deal was a big one. We now have to focus on getting economies of scale and profit maximisation, sponsorships, higher food & beverages (F&B) revenues and ticket income.”

Bijli is also focusing on how best to integrate the culture and brands of the two companies. “The brand is much more than the logo. A lot has to happen. The formal acquisition of control happened only on January 8. We are now conducting an audit and teams are going out and examining the properties. We will then decide on the branding and other areas. But we’ve acquired the Cinemax brand anyway.”

Adds Sanjeev: “For now, focusing on maintaining the numbers and the profitability in Cinemax—and analyzing the numbers there—are top priorities. We are also talking to the team and meeting and motivating them, assuring them things are the way they were. We are also learning from each other. Cinemax is a very well-run company with high profitability, processes and systems. We are trying to apply best practices of both to the common entity. We are also looking at enhancing the numbers of the common entity.”

Having seen ups and downs in his career, Bijli is also acutely aware that his position as the leader in terms of number of screens can change anytime. More than number of screens, the focus must be on profitability and return on capital employed. “Someone else can consolidate. Things can change quickly,” he says. “This is one six we had to hit. Now we’ll take singles, twos and fours. We’re not in a hurry. You should be careful how you manage your growth.”

Already, there’s talk of INOX eyeing a takeover of Essel Group’s Fun Cinemas chain, which could again intensify the multiplexes game. Ask Bijli whether he’s interested in Fun too, and he says emphatically: “We don’t want to bite more than we can chew. I am happy to say we’re not looking at anything more right now. We have lots of projects under construction and an organic growth plan, apart from integrating Cinemax.”

Retail entertainment focus
Having burnt his fingers in movie-making, Bijli is keen to focus on what PVR knows best—exhibition and related retail entertainment. So, the multiplexes play will clearly be the dominant contributor to revenues, together with distribution through PVR Pictures, a 100 percent subsidiary of PVR Ltd. Alongside, there is the bowling joint venture with Thailand’s Major Cineplex Group—BluO—a smaller piece, but which fits in with the
larger strategy.

BluO, Bijli points out, has to be pushed more than cinemas which, in a sense, is marketed automatically owing to the nature of the business. “But BluO has to work hard to create a buzz,” he says. “It’s not a scale business.” Currently, PVR operates five BluO centers which Bijli says are doing well. The group does not open BluO centers in malls which don’t house PVR cinemas. “The bowling alleys have to be located in spaces of around 40,000 sq. ft. and we work on low rentals.”

Despite its comparatively smaller size in the overall picture (a topline of about Rs. 35 crore), PVR Pictures is now the largest independent distributor for Hollywood in India and is betting on the fast-growing independent Hollywood studios. With a sharp focus on Hollywood blockbusters, PVR Pictures now has a pipeline with a visibility of 35-40 Hollywood movies under production which will be released over the next two to three years.

Says Kamal Gianchandani, Group President, PVR Pictures: “The films business is showing an upswing in spite of the slowdown. During January-December 2012, the gross collections were close to Rs. 700 crore for Hollywood films in India, compared to Rs. 400 crore in 2009. This shows the tremendous growth of the Hollywood space.” PVR Pictures has a large slice of this business, with films like Broken City, Midnight’s Children, The Reluctant Fundamentalist and Zero Dark Thirty being distributed by it. There’s a robust Hindi film pipeline as well. Gianchandani says the aim is to release at least 24 films every year, or two a month. 

And with the Cinemax acquisition, PVR Pictures’ clout just got stronger, with 351 of the 2000 screens across the country belonging to the PVR-Cinemax combine. Besides, there is a estimated requirement of a phenomenal 20,000 screens in the future, something which can only be good news for the distribution business. The PVR-Cinemax ecosystem will now account for as much as 40-45 percent of the overall India box office pickings for Hollywood releases. Not surprisingly, Gianchandani says the distribution piece is expected to grow
anywhere between 25-35 percent in FY14.

Forever innovative
Despite the big acquisition and the scorching growth pace he has set for PVR, Bijli remains a cinema builder at heart. No wonder his eyes light up every time he speaks of the latest offerings—be it a new design, new technology or changes he is bringing in on the F&B front.

“We’re now keen to do a very good job of creating a brand which people admire. Any way you slice it and dice it, you should see quality. Whether it is the consumer, investor, distributor, employee, developer, any stakeholder. We want to create a very admirable company,” says Bijli, showing us the designs of the huge ‘tulips’ with the names of movies embossed on them which are the highlight at the PVR Orion lobby in Bengaluru or the imported LED chandelier which he is installing at the new PVR at Phoenix Market City, again in Bengaluru. 

“Innovation is critical. I am fascinated by companies like Samsung and Apple. The consumer is always looking for some innovation,” says Bijli. So whether it’s the on-screen experience at the high-end PVR Director’s Cut, installing ticketing ATMs, introducing pre-ticketing F&B at Pune (which he says has significantly boosted spend per head from Rs. 45 to Rs. 65 there), getting a DJ to play live film music or introducing technical advancements like IMAX or Enhanced Cinema Experience (ECX) at his multiplexes, Bijli is always up to something as far as improvements go.

“These could be little things or major technological innovations which the industry dictates. I am happy to see something is always being done in the black box, which is the auditorium,” he says. The next exciting thing for him is the imminent installation of a state-of-the-art sound system at a new PVR opening in Andheri, Mumbai. “If an ordinary audi has 20 speakers, this will have 120, including on the ceiling,” he says, excitedly.

Says Shroff: “I have found Ajay passionate about the business. He gets into building cinemas almost as if he is building his own house.”

The demands of a chief executive notwithstanding, Bijli says he’d rather be spending his time looking at cinema and seat designs and artworks, while his team and the financial investors break down the hard numbers. “I am privileged to have a great team. I have a great CFO, a great company secretary and a good legal team. I have heavy duty financial investors who take care of the financial matters. I want to just focus on the business,” he says. Agrees Shroff: “He has an excellent team. They are smart and do detailed work.”

The PVR way
Bijli says he is both hands-off and hands-on as a manager. “The top team of Pramod, Gautam [Dutta, COO] and Nitin take care of the heavy lifting. But some things I want to touch and feel and they leave that to me. I don’t want to lose sight of building cinemas.”

He says though the decision on where to build cinemas is typically taken by him or Sanjeev, the team too sometimes does the groundwork and signs up new locations because ‘they know the madness’. But once they have signed up for a location, either Bijli or Sanjeev always has a look at it.

“Once they finalise the shell, Sanjeev or I get into the picture in terms of how many screens it will have, the design, the legroom and the demographics; whether it will be a luxury cinema, an IMAX or an ordinary one. Once it is built, then again I am hands-off”, Bijli explains.

Thereafter, the marketing, F&B and positioning is handled with Chief Operating Officer Dutta coming into the picture. Later, the Bijlis only get in on strategic discussions with the team.

How does he divide work with brother Sanjeev? Says Bijli: “We both handle the exhibition business together. PVR Pictures is handled by Sanjeev. I got into it only when we were making movies.”

This apart, Bijli himself handles the bowling business and the two brothers divide new verticals between themselves.

The bustle at PVR is palpable. Top executives are constantly on the move, checking out new locations, auditing existing Cinemax sites or striking new deals across the country, including in tier II and III cities. Not surprising, since PVR is expecting to clock a 30-40 percent growth in FY14 on an investment of Rs. 250 crore which it has in the pipeline. “About 1.2 times of whatever you invest is generally added to the topline,” he says. As a group, PVR, together with Cinemax, will end FY13 with about Rs. 1100 crore in terms of topline. Of this, about Rs. 650 crore is likely to come from exhibition, about Rs. 35 crore from distribution and Rs. 40 crore from the bowling business. Cinemax will bring in around Rs. 400 crore more.

For now, investors seem to be buying the PVR story. Shroff says he started buying PVR stock last year and is continuing to do so. “They are miles ahead of the competition in terms of smartness and passion. If PVR is number one, the competition begins only from number six. The gap for me is that much,” he asserts.

Having started off with a single screen cinema, is he satisfied now that he is the undisputed king of the multiplexes? “I hope that can happen. It hasn’t yet sunk in,” Bijli says candidly. “Now there’s a different kind of restlessness. It’s now about integration and doing a good job. People should see the difference in the first quarter results. The restlessness never ends.”

Did Manappuram insider bail out just before RBI deposit ban?

The curious case of Manapurram Finance, the loans-against-gold company that was recently pulled up by the Reserve Bank of India (RBI),  keeps getting murkier.

On Monday, 6 February, the RBI barred Manappuram and a related sole proprietary firm from raising public deposits, but even before the news was out, the wife of one of the company’s non-promoter independent directors was selling shares in the company.

Sarada Sankaranarayanan, wife of independent director AR Sankaranarayanan, sold 5,00,000 shares in the market at a price of Rs 57.75 through their broker Geojit BNP Paribas on 6 February before the RBI information was put in the public domain. Sale of shares continued the next day, when the same promoter sold another 8,63,000 shares at Rs 48.17. The shares opened lower when the market came to know about the ban.

Total proceeds from the sale on the first day work out to Rs 2.89 crore while on the second day it was Rs 4.16 crore. The average price of sale for the transactions works out to Rs 51.68 and the total proceeds added up to Rs 7.04 crore. The share currently trades below the average sale price at Rs 46.40, down 6 percent.

Does this sale amount to insider trading, when a member of the board sells shares before news that can have a material impact on the share price is widely disseminated?

Meanwhile, HNN  has reported that the central bank is contemplating regulating the gold loans sector. This is could be in the form of limits on the loan that a gold loan firm can give as a percentage of the value of the loan.

The RBI may also restrict the maximum interest that a gold loan firm can charge its customers, and also the penalties that gold loan firms can impose, HNN reported.
Gold loans bubble is sure to pop sooner than later
The business of lending money at usurious rates against the collateral of gold is booming.  Banks and non-banks are currently dishing it out at the rate of 1,20,000 new loans a day – yes, a day!

At last count, the business was reckoned to be worth Rs 80,000 crore and growing at the rate of over 70 percent for non-bank finance companies and around 35 percent for banks.

Between last year and this year, the two big boys of the gold business, Muthoot Finance and Manappuram Finance, have grown like gangbusters: the former by 96 percent, and the latter by 170 percent.

There are two reasons why this boom is showing no signs of flagging. One is the fall of microfinance institutions, which have been in a tailspin ever since Andhra Pradesh issued an ordinance last year regulating interest rates and curbing strong-arm methods of loan collection. These loans have thus gotten tougher.

Secondly, with gold prices zooming, borrowers have discovered that they can raise more money with the same collateral. Last year, around this time, international gold was just over $1,200 an ounce. On Tuesday, it was more than $1,875. That’s more than a 50 percent rise in a year – besting all other asset classes.

What this means is that if you as a borrower had raised Rs 6,000 by pledging Rs 10,000 worth of gold jewellery last year, the same pledge can help you raise an additional Rs 3,000 today.

And that seems to be what borrowers are doing. For example, Muthoot Finance, one of the market leaders, saw the average ticket size of its gold loans rise 24 percent in the past four quarters when gold prices rose 17 percent, according to a Kotak Securities research report.

Manappuram Finnance, according to Edelweiss Securities, saw gold loans rise 20 percent against an increase in gold stocks of 13 percent. This means 7 percent of the rise in loans is related to the price of the gold (or its ticket size), rather than more gold being brought in as collateral.

People are borrowing more against the same gold.

This is fine as far as it goes, but it could have a huge downside if the gold price suddenly starts falling. Remember, the US sub-prime crisis had its roots in people who borrowed more from banks when the values of their properties were rising before the 2008 crisis. When the real estate market collapsed after the Lehman bust, banks were stuck with huge bad loans – and borrowers with unserviceable debt.

Nothing like that may happen with gold, since everyone is bullish on the metal against the backdrop of the uncertainties over global growth, and worries about the future of the dollar and the euro. Gold is the only safe haven left.

But every surge in gold prices inevitably leads to a fall at some point when the rise has to be digested by the market. When gold prices zoom, many people also cash in. India has 15,000 tonnes of private gold — or maybe even twice as much. There is no guarantee that some of that gold won’t be sold to book profits, thereby bringing prices down.

The short point is this: while the long-term trajectory of gold is up, the short-term cannot be predicted. And gold loans are anything but long-term. According to Edelweiss, over 52 percent of gold loans are taken for less than three months. Only 13 percent is longer-term (above one year).

There are six reasons why the gold loans business needs to start getting cautious from now on.

One, gold prices could peak anytime, and when it starts falling – as it surely will at some point – loan defaults will start rising. Since the average loan size for Manappuram is around Rs 70,000, quite clearly the borrowers are not the rich. Muthoot says its average ticket size is Rs 30,000-35,000. They probably come from the middle and lower middle classes, where vulnerabilities are higher.

Two, the industry is too concentrated in the south. Some 75 percent of Manappuram’s business is in the south. The microfinance business hit a speedbreaker precisely because it had put all its eggs in one basket – Andhra Pradesh. The gold loans business is not so bad, but concentration in the south is still too heavy for comfort.

Three, growth rates will start slowing down progressively as the business grows. Rates of 100-200 percent are more or less over. Muthoot is likely to see its annual rate drop from 96 percent last year to 43 percent in 2011-12, says Kotak.

Four, competition is growing. Interest rates are high since gold lenders are essentially competing with money lenders. At lending rates of 20-22 percent for non-banks and a bit lower for banks, the margins are simply too mouth-watering. Almost all finance companies are planning to get into gold loans, with Mahindra Finance being a recent entrant last year. Indiabulls is another.

Five, there is a possibility of greater regulatory intervention. Given the scale of the business, the Reserve Bank is keeping a wary eye cocked on this business. Earlier this year, it said that bank loans to non-bank finance companies given against the collateral of gold will not be treated as priority sector lending. This pushed up interest rates by 1-2 percent immediately. More regulatory action may follow, if the central bank starts worrying about the possibility of a gold loan bubble building up in the system.

Six, private companies lend against lower margins. Unlike banks, which lend 55-65 percent of the value of gold mortgaged, private companies give out higher proportions of 70-80 percent. This means the safety margins are thinner for them. Moreover, with the RBI getting into the action, they are having to borrow from the market at higher costs to fund their loan-books. Muthoot Finance is currently in the market to raise non-convertible debentures at 12.25 percent.

At Rs 80,000 crore and growing, the gold loan business has reached a stage where growth will slow down, competition will thin down margins, and the risks grow steadily higher.

In Andhra it only took a couple of suicides among the poor to earn the wrath of the government and bring the business down crashing. Recoveries are now less than 20 percent among microfinance lenders.

Gold is different, but it too cannot defy the laws of economics forever. The loan bubble cannot continue to build indefinitely.

Focus: NRI Entrepreneurs Flocking Back To Homeland

As per a joint research report, as many as 60% of the NRIs have returned to India to explore business opportunities.

Enjoying the perks of not only being the world’s largest democracy but a country with untapped and unlimited growth potential, India is suddenly witnessing a surge in ‘Reverse Brain Drain’ trend. Though no research is currently available to quantify actual number of returnees, it is estimated that thousands of highly educated and skilled people are returning home every year.

Stressed Broking Industry Seeing A Blow, Many Shuts

By Sachin Lovade / Mumbai

In 2010, Ritesh Shah (name changed), just out of a Mumbai college, decided to test his luck in the stock-broking business. The timing looked perfect: The market had rebounded after one of its most turbulent phases, as the crisis sparked by a global economic slowdown since January 2008 seemed to have ebbed.

Shah, a commerce graduate, believing that to be the best time to start a business, went about expanding operations across of the country. Now, three years later, he has decided to get out of broking operations. “Broking was just not working out. There’s no money in it,” he says.

Prudence Is Key For India's Bank Hopefuls

Will a severely under-banked country like India, where financial inclusion has been more of a utopia (what with virtually half of India's population not having any bank accounts), see a change for the better? Don't count on it now, though the Reserve Bank of India (RBI) has, after years of deliberations, laid down norms for granting new banking licenses. However, what is important to note here is that pragmatic policy making (I would resist myself from calling every policy initiative as reform) is finally back in the limelight. 

India's banking sector is dominated by as many as 27 state-run banks, which control approximately 75% of the country's gross credit. Only recently have some foreign banks and a handful of private banks, like ICICI Bank, HDFC Bank and Axis Bank, emerged as important players in the segment, as RBI continued to be extra cautious in providing entry to the private sector so as to ensure stability of the financial system. 

Over the past two decades, the RBI has allowed only 12 new banks, and that in two phases, with the most recent license being issued to Yes Bank Ltd in May 2004. 

Last Friday, RBI came out with its much-awaited final guidelines on the New Banking License, approximately three years after the announcement in this regard made in the Budget speech of 2010-2011 by the then Finance Minister, Pranab Mukherjee. 

Some of the key final guidelines for the licensing of new banks in the private sector are as follows:

• All companies or groups, whether private or public sector entities, are eligible to set up a bank, though only through a wholly owned non-operative financial holding company (NOFHC). With this provision, the bank's business would not be impacted by the company's or group's existing business.
• The entity or group should have a past record of sound credentials and integrity. The company should also have a healthy financial track record of 10 years. Further, the RBI may also investigate the above matter and check the veracity of the claims. With this, only companies that have a good financial track record, excellent management team and good corporate governance would be eligible for a license.
• The minimum capital required to start up is 5 billion rupees (US$93 million), of which the NOFHC shall hold a minimum voting stake of 40% of the paid-up equity capital that will be locked in for a period of 5 years. Going ahead, its stake shall be bought down to 15% within 12 years. Also, the aggregate foreign holding in the new bank shall not exceed 49% in the first five years. Further, the bank's shares should be listed on the stock exchange within three years of the commencement of its business. This clause would result in better efficiency in the management's working and their decision-making abilities.
• At least 50% of the bank's board should be independent directors. And, if a promoter and its group were from a non-banking background, then the independent directors would serve as the most important people on the board.
• The NOFHC and the bank should not have any exposure to the promoter group and its other entities. This would insulate the bank from various other risks that are associated with other businesses and check the practice of giving concessions or incentives to the promoter group in case they are in need of funds. This is the crucial part of the guideline.
• The bank shall open at least 25% of its branches in unbanked areas (population of up to 9,999 as per the latest census data) and comply with the priority sector lending targets (40% of total advances) and respective sub-targets (agriculture, small and medium-sized enterprises etc) as applicable to the existing domestic banks. This would further strengthen the overall aim of financial inclusion in the country.
• Existing non-banking financial companies, if eligible, may be permitted to promote new banks or convert themselves into banks. Similarly, state-owned enterprises can also apply for banking licenses. 

Clearly, the RBI seems to believe that there should be level playing field for any aspirant, irrespective of their current line of business. Interestingly, in January, the International Monetary Fund in its report on India, "Financial System Stability Assessment Update", felt that India, given the international experience, would be better off not allowing industrial houses from promoting and owning banks. 

Even the RBI's final guideline differed from the draft guideline circulated by it in August 2011 when it said that it was not in favor of allowing companies that earned at least 10% of their revenues from real estate and broking business to apply for new bank licenses. 

The final guideline issued by the RBI should be lauded, as it is practical, non-discriminatory (ie any existing business can get the license if it adheres to all the laid down norms) and has enough checks and balances in place to ensure prudence. This guideline will ensure that the financial services businesses of the banks and their promoters are shielded from the risks emanating from the group entities of promoters. 

It is also important to note that although the guidelines have been laid down, granting of licenses will still remain subjective and not every corporate entity that follows the guidelines will get a license. In fact, the final guidelines mention that, "promoter/promoter groups' business model and business culture should not be misaligned with the banking model and their business should not potentially put the bank and the banking system at risk on account of group activities such as those which are speculative in nature or subject to high asset price volatility". 

This means that the RBI is well aware of the systemic ricks involved and would prefer to play it safe. The entry criteria, as laid down by them, which include the number of years of existence with a financially sound and successful track record along with the capital structure to be followed, would mean that not many aspirants can meet the criteria. And, even if they do, the check on the business model and culture would further help in narrowing down the list. 

The government has for long been nudging the RBI to allow new entrants to the banking system. The primary goal is to push for financial inclusion as the success of the government's cash transfer scheme crucially hinges on financial inclusion. The cash transfer scheme allows direct transfer of cash directly to the subsidy beneficiaries (that is, those who are entitled to the subsidized products) rather than supplying subsidized products. Selling subsidized products leads to leakage due to faulty targeting as well as corruption in delivering the subsidized goods. 

However, instant and widespread banking sector penetration should not be expected in the wake of this guideline. With the rumblings of the global financial crisis still reverberating across the world, the RBI (which must be complemented for being able to shield India's banking sector admirably from being impacted by the crisis) is justified in being cautious to the point of being paranoid. It is better to be safe than sorry. 

India's flawed diamond dream

By M H Ahssan

India, having elbowed aside Antwerp in the international diamond cutting and polishing business, is looking to boot the Belgian city from its perch as capital of the world’s diamond market.

About 80% of the world’s rough diamonds and half its polished diamonds are bought and sold in Antwerp, home to 1,500 retail and wholesale diamond companies and four diamond exchanges. Six decades ago, the city was home to all the world’s diamond exchanges. Four remain, while 20 have sprung up in other parts of the world, including Dubai and Mumbai.

Indian traders arrived in Antwerp in the mid-1970s, challenging the centuries-long control by Orthodox Jews of the diamond trade there. By the 1990s, the Jews were ready to surrender and Indians today account for two-thirds of Antwerp’s US$36 billion diamond trade, with the Jewish share of trade reduced to just 25% from 70% two decades ago.

The Indian diamantaires (as Antwerp’s diamond traders are called) belong to a few hundred families, many related by marriage, from the Jain community from Palanpur, a small village in Gujarat. They are recognized for their entrepreneurial talent and in a trade that runs on trust, the Indians - like the Jews before them - have benefited from close family ties.

The Indian diamantaires started at the bottom end of the business, working on low-quality rough diamonds that existing big players weren’t interested in. Then they outsourced the cutting and polishing business to India - the cost of labor was 80% lower back home; the finishing work went to family-owned businesses in Mumbai and the Gujarat port city of Surat. Larger profit margins enabled the Indian diamantaires to invest and expand and they climbed the value chain, buying and selling pricier stones until they soon overtook their Jewish counterparts in the trade.

Yet even with Indians dominating the trade in Antwerp, the city’s decision-making business councils remained elusive to them for several years. That began changing in 2003 when two Indian diamantaires were elected to Antwerp’s High Diamond Council, the governing body of the city’s diamond industry. In 2006, Indians won five of the six elected seats on the 11-member board.

Surat meanwhile emerged as the center of the diamond cutting and polishing business, to the point that 92% of the world’s diamonds are now cut and polished there and the 800,000 workers involved earned India $11 billion in exports last year. Antwerp now has a bare 800 cutters and polishers, down from 25,000 in the 1970s.

Having eclipsed Antwerp in the cutting and polishing business, Indian diamond traders want to make Mumbai the world’s diamond hub. They have the backing of the Indian government, which announced zero duty on import of polished diamonds last year, when almost $2 billion worth of cut and polished diamonds were imported. That will give a further boost to the diamond jewelry-making business.

The Reserve Bank of India, meanwhile, is helping traders by allowing advance payment without any bank guarantee for procurement of rough diamonds from five miners - Rio Tinto, BHP, Angola's Endiama, and Russia's Alrosa and Gokhran. The commerce ministry has also held talks with governments of diamond mining countries to secure a stead long-term supply of roughs - or uncut stones.

The Bharat Diamond Bourse, a single window operation facility and dedicated custom house to boost trade, is being built. Intended to be among the most modern and secure diamond trading hubs in Asia, it is being touted as India’s answer to the Antwerp Diamond Center.

The purchase of diamonds direct from miners helps to reduce India's dependence on trading hubs other than Antwerp, such as London, and cut intermediary costs, while it may help to ensure long-term supplies from Russia and mining countries in Africa, at the same time reducing the role of the sales and marketing arm of South African giant De Beers, the Diamond Trading Corporation, which controls 80% of global trade in rough diamonds.

In 2006, Diamond India Limited, which consists of members of the diamond trade, was set up to source and procure roughs directly from Russia, Botswana, South Africa, Angola and others and sell them to Indian manufacturers.

Import of rough diamonds from Russia has already started. The purchases are being made from state-owned Russian firms such as Alrosa and Gokhran. According to reports, Indian importers have been ordering diamonds worth about $10 million to $12 million directly from Russia and that amount could soar. "We are ready to buy up to $1 billion worth of diamonds annually from Russia," Praveen Shankar Pandya, convenor for rough sourcing at the Gems and Jewelry Export Promotion Council, has said.

To encourage stronger partnerships in Africa, India will offer in return for uncut stones training in diamond cutting and polishing and help to build local industries by providing technical assistance.

All that, however, may not be enough to overcome the obstacles standing between India's diamond firms and their dreams. Not least is the country's own bureaucracy, typified by the lethargic progress of the Bharat Diamond Bourse project. Perhaps as damaging, industry watchers say the diamond industry in Mumbai is not transparent, with hawala transactions (or informal value transfer systems) common, while security is far from what is available at other trading centers.

Indian bureaucracy
The involvement in the trade of numerous government officials adds to costs and inefficiency. Instead of a one-window interaction with the government, diamond companies in India have to deal with multiple ministries and at central, state and local level. Value added tax has to be paid - only to be returned, though only after the government has held on to it for a while; diamond traders complain this is effectively a block on funds.

Recent developments have also taken the polish from India’s ambitions. The supply of roughs is slowing and likely to worsen following a decision by De Beers to cut out out several Indian sightholders (clients) under its global rough diamond distribution plan. A strengthening rupee and the economic slowdown in the US too have taken their toll.

The rupee gained against the world's leading currencies last year, notably 12.3% against the US dollar, undermining the competitiveness of India's diamond jewelry exports. Exports to the US, which accounted for 60% of diamonds exported from India in the 2006-07 financial year, fell almost 50% from 12 months earlier, a decline aggravated by a 6.5% import duty on diamond jewelry from India though not applicable to countries like Thailand.

The impact on orders has been felt in the polishing business, with around 2,000 polishing units in Surat being closed in recent months, according to business daily, Mint, citing Pravin Nanavaty, a member of the Gujarat Hira Bourse, an association of diamond traders from that region.

African diamond producing countries are meanwhile considering imposing exports duties of 5-7%, which will drive up the cost for Indian imports of roughs; at the same time African producers are demanding that polishing units be set up on their soil, which will force the further closure or relocation of Surat’s polishing units.

India’s share of the diamond processing business, which stands at 57% now (in value terms), could shrink to 49% by 2015, according to a survey by consulting firm KPMG,

India's polishers also face intensifying competition from other countries. China is expanding its cutting and polishing business, and with over 30,000 polishers stands second only to India. It has been processing larger diamonds for jewelry making and importing roughs worth about $1 billion a year. Several Indian companies have in fact set up polishing units in south China.

Dubai is also challenging India's ambitions, attracting diamond traders with new facilities and incentives such as tax holidays. Helping the Gulf state, and unlike Antwerp which is bound by EU rules, Dubai is far more lenient regarding the transfer of money.

The progress of Dubai's Almas (Diamond) Tower perhaps best captures the difference in ambition and determination between the two country's diamond businesses. Work on the Almas Tower began in 2005; it was completed on schedule in December. In comparison, Mumbai's Bharat Diamond Bourse, conceived in 1992 and due to be completed in 1996, has yet to get off the ground. The new deadline for the bourse’s opening is early 2009.

India's flawed diamond dream

By M H Ahssan

India, having elbowed aside Antwerp in the international diamond cutting and polishing business, is looking to boot the Belgian city from its perch as capital of the world’s diamond market.

About 80% of the world’s rough diamonds and half its polished diamonds are bought and sold in Antwerp, home to 1,500 retail and wholesale diamond companies and four diamond exchanges. Six decades ago, the city was home to all the world’s diamond exchanges. Four remain, while 20 have sprung up in other parts of the world, including Dubai and Mumbai.

Indian traders arrived in Antwerp in the mid-1970s, challenging the centuries-long control by Orthodox Jews of the diamond trade there. By the 1990s, the Jews were ready to surrender and Indians today account for two-thirds of Antwerp’s US$36 billion diamond trade, with the Jewish share of trade reduced to just 25% from 70% two decades ago.

The Indian diamantaires (as Antwerp’s diamond traders are called) belong to a few hundred families, many related by marriage, from the Jain community from Palanpur, a small village in Gujarat. They are recognized for their entrepreneurial talent and in a trade that runs on trust, the Indians - like the Jews before them - have benefited from close family ties.

The Indian diamantaires started at the bottom end of the business, working on low-quality rough diamonds that existing big players weren’t interested in. Then they outsourced the cutting and polishing business to India - the cost of labor was 80% lower back home; the finishing work went to family-owned businesses in Mumbai and the Gujarat port city of Surat. Larger profit margins enabled the Indian diamantaires to invest and expand and they climbed the value chain, buying and selling pricier stones until they soon overtook their Jewish counterparts in the trade.

Yet even with Indians dominating the trade in Antwerp, the city’s decision-making business councils remained elusive to them for several years. That began changing in 2003 when two Indian diamantaires were elected to Antwerp’s High Diamond Council, the governing body of the city’s diamond industry. In 2006, Indians won five of the six elected seats on the 11-member board.

Surat meanwhile emerged as the center of the diamond cutting and polishing business, to the point that 92% of the world’s diamonds are now cut and polished there and the 800,000 workers involved earned India $11 billion in exports last year. Antwerp now has a bare 800 cutters and polishers, down from 25,000 in the 1970s.

Having eclipsed Antwerp in the cutting and polishing business, Indian diamond traders want to make Mumbai the world’s diamond hub. They have the backing of the Indian government, which announced zero duty on import of polished diamonds last year, when almost $2 billion worth of cut and polished diamonds were imported. That will give a further boost to the diamond jewelry-making business.

The Reserve Bank of India, meanwhile, is helping traders by allowing advance payment without any bank guarantee for procurement of rough diamonds from five miners - Rio Tinto, BHP, Angola's Endiama, and Russia's Alrosa and Gokhran. The commerce ministry has also held talks with governments of diamond mining countries to secure a stead long-term supply of roughs - or uncut stones.

The Bharat Diamond Bourse, a single window operation facility and dedicated custom house to boost trade, is being built. Intended to be among the most modern and secure diamond trading hubs in Asia, it is being touted as India’s answer to the Antwerp Diamond Center.

The purchase of diamonds direct from miners helps to reduce India's dependence on trading hubs other than Antwerp, such as London, and cut intermediary costs, while it may help to ensure long-term supplies from Russia and mining countries in Africa, at the same time reducing the role of the sales and marketing arm of South African giant De Beers, the Diamond Trading Corporation, which controls 80% of global trade in rough diamonds.

In 2006, Diamond India Limited, which consists of members of the diamond trade, was set up to source and procure roughs directly from Russia, Botswana, South Africa, Angola and others and sell them to Indian manufacturers.

Import of rough diamonds from Russia has already started. The purchases are being made from state-owned Russian firms such as Alrosa and Gokhran. According to reports, Indian importers have been ordering diamonds worth about $10 million to $12 million directly from Russia and that amount could soar. "We are ready to buy up to $1 billion worth of diamonds annually from Russia," Praveen Shankar Pandya, convenor for rough sourcing at the Gems and Jewelry Export Promotion Council, has said.

To encourage stronger partnerships in Africa, India will offer in return for uncut stones training in diamond cutting and polishing and help to build local industries by providing technical assistance.

All that, however, may not be enough to overcome the obstacles standing between India's diamond firms and their dreams. Not least is the country's own bureaucracy, typified by the lethargic progress of the Bharat Diamond Bourse project. Perhaps as damaging, industry watchers say the diamond industry in Mumbai is not transparent, with hawala transactions (or informal value transfer systems) common, while security is far from what is available at other trading centers.

Indian bureaucracy
The involvement in the trade of numerous government officials adds to costs and inefficiency. Instead of a one-window interaction with the government, diamond companies in India have to deal with multiple ministries and at central, state and local level. Value added tax has to be paid - only to be returned, though only after the government has held on to it for a while; diamond traders complain this is effectively a block on funds.

Recent developments have also taken the polish from India’s ambitions. The supply of roughs is slowing and likely to worsen following a decision by De Beers to cut out out several Indian sightholders (clients) under its global rough diamond distribution plan. A strengthening rupee and the economic slowdown in the US too have taken their toll.

The rupee gained against the world's leading currencies last year, notably 12.3% against the US dollar, undermining the competitiveness of India's diamond jewelry exports. Exports to the US, which accounted for 60% of diamonds exported from India in the 2006-07 financial year, fell almost 50% from 12 months earlier, a decline aggravated by a 6.5% import duty on diamond jewelry from India though not applicable to countries like Thailand.

The impact on orders has been felt in the polishing business, with around 2,000 polishing units in Surat being closed in recent months, according to business daily, Mint, citing Pravin Nanavaty, a member of the Gujarat Hira Bourse, an association of diamond traders from that region.

African diamond producing countries are meanwhile considering imposing exports duties of 5-7%, which will drive up the cost for Indian imports of roughs; at the same time African producers are demanding that polishing units be set up on their soil, which will force the further closure or relocation of Surat’s polishing units.

India’s share of the diamond processing business, which stands at 57% now (in value terms), could shrink to 49% by 2015, according to a survey by consulting firm KPMG,

India's polishers also face intensifying competition from other countries. China is expanding its cutting and polishing business, and with over 30,000 polishers stands second only to India. It has been processing larger diamonds for jewelry making and importing roughs worth about $1 billion a year. Several Indian companies have in fact set up polishing units in south China.

Dubai is also challenging India's ambitions, attracting diamond traders with new facilities and incentives such as tax holidays. Helping the Gulf state, and unlike Antwerp which is bound by EU rules, Dubai is far more lenient regarding the transfer of money.

The progress of Dubai's Almas (Diamond) Tower perhaps best captures the difference in ambition and determination between the two country's diamond businesses. Work on the Almas Tower began in 2005; it was completed on schedule in December. In comparison, Mumbai's Bharat Diamond Bourse, conceived in 1992 and due to be completed in 1996, has yet to get off the ground. The new deadline for the bourse’s opening is early 2009.