BBC director-general resigns over Newsnight fiasco

The BBC was on Sunday likened by one of its veteran broadcasters to “a rudderless ship heading towards the rocks” after its new Director General George Entwistle was forced to resign over his handling of a report falsely implicating a former adviser to the former Tory Prime Minister, Margaret Thatcher, in a child abuse scandal.

Mr. Entwistle, who had been in office for just 54 days, quit after Prime Minister David Cameron warned against a “witch-hunt” over sex abuse allegations and Chris Patten, chairman of the BBC Trust, called the report “shoddy journalism” amid calls for his own resignation.

The controversial report, telecast on the BBC’s flagship current affairs programme Newsnight on November 2, was based on an interview with a man called Steve Messham who claimed that he had been abused by a Tory grandee in a north Wales care home during the 1970s.

The report did not name anybody but appeared to point towards Robert Alistair McAlpine (now Lord McAlpine), a former Tory party treasurer and adviser to Ms. Thatcher. Soon the Internet was buzzing with messages mentioning his name. Lord McAlpine dismissed the allegation as “wholly false and seriously defamatory” and threatened to sue the BBC.

Mr. Messham, meanwhile, admitted that he had been mistaken and apologised to Lord McAlpine.

Shambolic interview

Mr. Entwistle’s fate was sealed when in a shambolic interview on BBC’s Today programme, he admitted that he had been unaware of Newsnight allegations, giving the impression of a man totally out of his depth. Within hours, he was standing outside Broadcasting House in central London to announce his resignation.

With Lord Patten by his side, Mr. Entwistle said that as the man “ultimately responsible for all content, and in the light of the unacceptable journalistic standards” at Newsnight, he had decided that “the honourable thing to do is to step down from the post of director general.”

Lord Patten called for a “thorough, radical, structural overhaul” of the BBC and said that a new director-general would be appointed within weeks.

The row came as the BBC was already facing criticism for suppressing a Newsnight investigation into a sex abuse scandal allegedly involving late Jimmy Savile, once one of its most pampered celebrity performers.

The programme was axed at the last minute, allegedly to avoid a clash with BBC’s Christmas tribute to Savile — two months after his death last October.

Dollar tumbles against euro after Barack Obama win

TOKYO: The dollar tumbled against the euro in Asian forex trade after President Barack Obama won a second term following a nail-biter White House race.

The euro bought $1.2869 in Tokyo, up from $1.2788 earlier Wednesday and $1.2814 in New York late Tuesday. The greenback was also weaker against the yen, at 80.03 yen compared with 80.34 yen in New York.

An Obama victory was seen among traders as a dollar-selling cue as it may suggest further easing measures by the US Federal Reserve, after the central bankBSE -2.04 % ushered in a $40 billion monthly bond-buying programme to spur the world’s biggest economy.

“Investors have been factoring in his win and adjusting their positions likewise,” said Kengo SuzukiBSE 0.32 %, forex strategist at Mizuho Securities in Tokyo.

“The issue now is the uncertainty surrounding the US fiscal cliff, and how a divided Congress will deal with the issue,” he added.

The so-called fiscal cliff, which will see the government sharply cut spending and hike taxes, is due to take effect on January 1 unless politicians find a compromise on reducing budget deficits.

However, Takumi Nomura, a senior dealer at Bank of Tokyo Mitsubishi UFJ, said the dollar may get some support, with an incumbent Obama seen as better able to address the issue more quickly than a newly-elected leader.

Institutional investors call Wipro demerger a fair deal

BANGALORE: Wipro’s demerger of its non-IT businesses has received a thumbs-up from institutional shareholders in the company, contrary to claims by a proxy advisory firm.

“Over the past week, we have been meeting investors in WiproBSE -1.11 % and all of them appreciated the de-merger and the way it is being done,” said Viju George, executive director at the equities-brokerage arm of JP Morgan, an institutional investor in Bangalore-based Wipro, India’s third largest IT services company. “I don’t understand where the bit about shareholder angst is coming from.” Another institutional investor, CLSA, said the demerger “favoured minority shareholders, probably a first in restructuring of any kind in corporate India.” Recently, Mumbai-based proxy-advisory Stakeholders Empowerment Services had suggested that the hived-off entity should ideally be listed for minority shareholders to fully benefit.

On November 1, Wipro carved out its non-IT businesses, which contribute 14% to its $7.3 billion revenues and 6% of its operating profits, into a private company called Wipro Enterprises. Besides giving the IT business a sharper focus, the demerger will help Azim Premji to pare his stake to 75% in compliance with Indian laws that require the public to own at least 25% in listed companies. “It doesn’t matter whether you’re an individual investor or an institutional holder, there is no reason to be concerned,” said Sandeep Muthangi, vice-president at IIFL Capital. In effect, CLSA advised its clients that the promoter is taking out 6% of profits but is offering additional value of about 12% to existing shareholders who chose to exchange shares in the unlisted company for Wipro shares.

Shareholders could receive one share of Rs 10 face value in Wipro Enterprises for every five Rs 2 shares of Wipro, or opt for one 7% redeemable preference share in Wipro Enterprises with face value of Rs 50 for every five Wipro shares. Redeemable share will fetch Rs 235 at maturity in one year. Alternatively, investors could exchange the equity shares of Wipro Enterprises for Wipro shares held by the promoter, at an exchange ratio of one Wipro share for every 1.65 Wipro Enterprises shares. “We are sure the shareholders will appreciate the rationale and fairness of the scheme as they get a better and deeper understanding of the scheme,” Wipro said in a statement. “We are encouraged by the positive response received so far from the investors, financial analysts and media.”

Some shareholders may want to hold the shares in the unlisted entity assuming it is primarily in the consumer business, which is a growth sector in the economy, but will have limited options of realising full value as that company is not listed. JP Morgan, however, said the new entity is a “hodge-podge” including other unrelated businesses besides consumer business, and thus may not make much of an investment case.

Mallya gets lifeline, loses Royal Challenge

Dealing a shot of good news, international liquor major Diageo, on Friday, announced its decision to acquire 53.4 per cent stake in Vijay Mallya-owned United Spirits Ltd. (USL) for Rs.11,166.50 crore.

Diageo announced from London that it had entered into agreements with United Breweries (Holdings) Ltd. and USL to acquire 27.4 per cent stake in USL for Rs.5,725 crore at Rs.1,440 a share. Shares of USL closed at Rs.1,343.25 on Thursday.

UB Holding and associate companies will sell 19.3 per cent stake to Diageo and a large part of this money will directly go to UB Holdings, which will de-leverage its balance sheet.

The board of directors of USL has cleared a proposal to make a preferential allotment of USL shares, amounting to 10 per cent of the company’s enlarged share capital, to Diageo at Rs.1,440 a share. The proceeds from this will go into clearing a part of USL’s debt of Rs.8,300 crore.

After this stake sale, the UB Holdings group’s shareholding in USL will come down to 14.9 per cent.

Following completion of these agreements, Mr. Mallya will continue as Chairman of USL, and UBHL. He will work with Diageo to build the USL business in India.

Open offer to buy 26 % stake

Since these agreements trigger the Securities and Exchange Board of India’s takeover code, Diageo will launch an open offer to buy 26 per cent stake from the public at Rs.1,440 a share.

The open offer will cost Diageo Rs.5,441 crore. Shareholders need to approve this proposal.

On completion of this process, Diageo will hold a total of 53.4 per cent stake in USL with an aggregate cost of Rs.11,166.50 crore.

“It is completely a win-win for both. I am personally very happy that finally the dream has come true,” UB Group Chairman Mr. Mallya said in a conference call with journalists from London.

He made it clear that the money generated from this deal would not be utilised to revive Kingfisher Airlines as had been widely speculated.

“I have now done what I think is best for my spirits business and, of course, we will also address the needs of Kingfisher Airlines, but these will be done separately for the good of the company and its stakeholders,” Mr. Mallya added.

“I have had a long association with Diageo and, therefore, I am confident that this winning partnership with Diageo provides USL with the best possible platform for future growth,” he said. “I am delighted to remain part of that journey as Chairman of USL as we work together to build continued value for the shareholders of USL and UBHL,” Mr. Mallya said.

Family jewel?

He denied that he sold his family jewel (USL) “I have not sold my family jewel, only embellished them,” he said.

Diageo’s COO Ivan Menezes said the acquisition USL’s shareholding was fully aligned with the company’s strategy to build its presence in the world’s faster growing markets besides enhancing its position as the world’s leading premium drinks company.

He said UB group’s manufacturing and distribution capabilities and Diageo’s marketing and brand building capabilities would be a unique combination.

“As a result of the agreements, we will be well positioned to take the growth opportunities presented by a spirits market where growth is driven by the increasing number of middle-class consumers. The combination of USL’s strong business with the capabilities which Diageo brings as the world’s leading premium drinks company will ensure that USL continues to lead the industry in India,” Paul S. Walsh, Chief Executive of Diageo, said in a statement. Diageo has asked the UB group to release all security interests over USL shares to be acquired by it.

Good news

Analysts said this was the best Mr. Mallya could have done. “He is pushed to the wall to sell stake and there is no other choice. The deal is in line with market expectation and he fetched more money than expected. It is good for the company,” said market analyst Ambarish Baliga.

The entire deal is expected to complete in early 2013. Diageo will fund the acquisition through existing cash resources and debt.

Diageo and MR. Mallya have entered into a MoU to form a 50:50 joint venture which will own United National Breweries’ traditional sorghum beer business in South Africa.

They are also considering the possibility of extending this joint venture to maximise opportunities in Africa and Asia (excluding India).

USL shares closed with a gain of 1.22 per cent at Rs.1359.70 on the BSE.

United Spirits’ brands include Royal Challenge, Directors Special, Signature whisky; Black Dog scotch and White Mischief in vodka.

Volkswagen plans small car for India

German automobile major Volkswagen is considering extending its portfolio and introducing a small car and a sports utility vehicle (SUV) or multi purpose vehicle (MPV) in the Indian market.

Volkswagen makes and sells its Polo and Vento cars here, and recently introduced its `Refresh’ models to coincide with the festive season.

In an interaction with The Hindu, Arvind Saxena, Managing Director, Volkswagen India – Passenger Cars, Volkswagen Group Sales India, admitted that though Volkswagen was fairly represented in India, the gaps in the company product line were smaller cars. Mr. Saxena said that Volkswagen would certainly consider a premium car below ‘Polo’ for the Indian market, as “small cars would continue to remain a dominant part of the Indian market.”

Premium tag

“However I am not sure if we would consider low-cost cars because getting viable products at that price would be very difficult to support with our brand expectation. There are certain expectations from Volkswagen as a brand – sturdy, safe vehicles which are good to drive etc. To meet these attributes, you cannot really go down to that price point. So though our product could be an entry level or small car, it would not be low-cost,” he said.

Mr. Saxena said that within the utility vehicle (UV) segment, what is growing here is the lower end of the multi-utility vehicle (MUV), MPV in the Rs. 9-13 lakh range.

“As of now, we have no offering in this band but are investigating different products and would decide at an appropriate time.”

Action areas

Mr. Saxena believed that looking forward, growth could come from mid-and-premium small cars and the SUV/MPV segment which would become dominant. “We have seen that the sales volumes in India stay in the smaller cars while growth is much higher in the SUV/MPVs. Clearly the action areas are these two,” he said.

Risk management, a serious business

For banks and their corporate customers, management of currency and interest rate risks has always been a daunting but absolutely vital task. It has become particularly challenging today. The global financial crisis that began in 2007 has vastly exacerbated the market risks. There has been an exponential increase in volatility both in terms of dimension and direction in all classes of financial assets. In the new environment, institutions — both financial and non-financial — have to reckon with movements of currency and interest rates in ranges hitherto not seen and certainly not anticipated. Almost all the conventional and non-conventional methods of containing risks failed, some, as in the case of U.S. housing market, spectacularly and with disastrous consequences for the entire world.

A very erudite speech on the topic “Managing currency and interest rate risks” was delivered by Harun R. Khan, Deputy Governor of the Reserve Bank of India, at a seminar in Bombay recently.

Pointing out how financial market risks affected the real economy, he said that the big increase in volatility had induced uncertainty which, in turn, had a negative impact on the real economy as well. Financial and non-financial companies, unable to anticipate their future, are adopting a more cautious approach to their business planning and employment policies.

Heightened volatility, the new normal?

It is unlikely that volatility will subside anytime soon. In the post-crisis period, the global economy was initially propelled by the big developing economies which more than offset the lacklustre performance of the advanced economies. However, the global slowdown has now caught with India and China, too. The International Monetary Fund (IMF) is just one of the global institutions to lower its forecast for the world economy during the current year.

The slowdown has created uncertainty, which, in turn, had to be countered by some highly unconventional monetary and fiscal policies in the advanced economies. For instance, the extremely loose monetary policy followed by the American Federal Reserve, has the potential to flood the global economy with liquidity. That will have as yet unknown consequences. Global commodity prices could go up, in turn, fuelling imported inflation in countries such as India.

On the other hand, India might be able to tap global capital flows to a larger extent than now. However, given the all-pervasive uncertainty, capital inflows will also be volatile. This is already having repercussions on the exchange and money markets in India.

India’s growing integration with the rest of the world is another factor. It is no longer possible to shield the domestic economy from the vagaries of the global economy. Global risks are now easily transmitted to the Indian economy through a variety of routes — trade, finance, commodity prices and confidence channels. The end result is always heightened volatility.

The government and the RBI have taken a number of steps to help banks and corporates deal with the volatility. Most of these aim to increase the supply of dollars to hopefully iron out fluctuations.

But this might be a case of being extremely short-sighted. For instance, the measures to encourage short-term external debt flows will cause serious funding mismatches if used for long-gestation projects. They might also lead to a ballooning of debt repayments over the near-term. In that event, interest and exchange rate risks will increase.”

RBI’s genuine concerns

Measures to augment supply of foreign exchange are one aspect. But the RBI’s current worry is two fold. (1) Many corporates are deliberately or out of ignorance not hedging their foreign currency exposures. According to recent estimates, almost 50 per cent of total outstanding exposures are unhedged. This is an alarming situation. It can not only devastate the concerned company’s balance-sheet but can pose major threats to the macro economy.

(2) Closely related are the second set of worries which arise from the fact that many companies are exploiting the rules to speculate rather than hedge. For some of these companies, foreign exchange risk management becomes a ‘profit centre’, akin to whatever core business they have. In its most basic form, exposures are left unhedged, the objective being to (hopefully) profit from exchange rate movements. Given the current volatility, many of those hopes have come crashing down. Over the past few years, derivative instruments have been used for generating profit rather than to mitigate risks. In nearly all the cases, companies, which gambled on exchange rate, have come to grief.

There is obviously a case for educating customers on the dangers of misusing hedging instruments as well as sterner steps. The RBI has recently suggested that banks should monitor the unhedged positions of their lenders and, if need be, penalise them by charging a higher rate.

In its recent credit policy review, the RBI has pointed out that large unhedged foreign currency exposures have resulted in accounts becoming non-performing assets (NPAs). They are, therefore, a risk to them as well as the financial system. A stringent monitoring of the exposures is, therefore, called for. Among other measures, banks can consider stipulating a limit on unhedged positions of corporates on the basis of policies approved by respective bank boards.