Ringing in cash

Cut in revenue sharing adds to the bullish tinge to Bharti's profitability

The reduction in revenue sharing amounts for cellular operators will free up a sizeable amount of funds which will most likely be passed on to the consumers.

The benefits will start accruing from the next fiscal (01 April, 2004) and while the main beneficiary will be BSNL (Rs 560 crore), gains to other operators will not be meagre by any standard. Bharti is expected to gain around Rs 130 crore and MTNL around Rs 100 crore.

The sops will lead to a reduction in revenue sharing by 2 per cent in metros ('A' circle) and 4 per cent in non-metro circles. In the metros, the cell companies shared 12 per cent of their gross revenues with the government, while in the 'B' and 'C' circles the revenue sharing was at 10 per cent and 8 per cent.

For Bharti, the revenue sharing metro circles will now be 10 per cent and in the other circles 6 per cent and 4 per cent. The extent of benefit can be seen from the fact that of Bharti's customer base of around 5 million, approximately half are in Delhi and Mumbai, while the rest are distributed in the non-metro cities, mainly in Punjab and Karnataka.

The cut in revenue sharing adds an even more bullish tinge to Bharti's profitability since in the last 3 months, it has added around 1 million subscribers across India, despite the competition from the WiLL services.

Bharti's finances will receive a further boost if the proposal to hike the FII ceiling is hiked to 79 per cent from the current 49 per cent. Foreign holding in Bharti is currently at 47 per cent including 16 per cent held by Singtel.

With the improvement in profitability, Bharti can now look forward to a considerable jump in performance next year. Small wonder the stock jumped 9.44 per cent jump on Wednesday.

Arbitrage funds

Mutual funds are allowed to hedge using derivatives "" but are they allowed to arbitrage? That's the big question which the Securities and Exchange Board of India (Sebi) has not yet answered. At least two mutual funds have put in their applications for arbitrage funds, but there's no word about their fate from the market regulator.

Arbitrage funds function in the following way: when the futures are at a premium and the cash price is at a discount the fund will short the futures and go long in the cash and this is locked in till the date of expiry, when the prices converge.

When used as a hedge, the futures exposure will be merely safeguarding the funds' own exposure in the cash market. However an arbitrage fund will use the discrepancies in the prices prevailing in the two markets to make money. So the investors' returns will be pegged to what the fund can earn by way of arbitrage.

Under the current Sebi guidelines there is no problem, as hedging to extent of 100 per cent of the cash exposure is allowed. However a recent committee set up by Sebi has recommended that mutual funds can hedge their portfolios only to the extent of 50 per cent of their cash exposures.

This has not been accepted by Sebi nor has it been rejected by it, but meanwhile the regulator has not approved the proposed arbitrage schemes either.

Incidentally the arbitrage funds will work only in a bull market where it will function like a super debt fund and give returns of between 10 to 14 per cent. It can function even in a flat market with decent returns. But it will not function in a bear market - for the simple reason that one cannot buy the futures and sell the cash.

In a bear market, therefore, the arbitrage fund will have to be run as a plain equity fund.

The whole idea of introducing the arbitrage fund in a bull market is to give returns above that which a normal debt fund gives, which is now in the range between 6 to 9 per cent. It's time Sebi makes up its mind on this innovative new product.

With contributions from Sameer Ranade and Janaki Krishnan