India to welcome FDI in to local airline industry

India’s airline industry which caters to one of the world’s fastest growing market, has reported significant losses of £1.63 billion during recent years due to the increased fuel prices. Five of the India’s major airlines have reported losses. Mr. Vijay Mallya who owns Kingfisher airlines announced significant losses in his airline which stopped its budget airline service, Kingfisher red in last September saying they no longer intend to compete in low cost airline market since the cost have risen high with the increased fuel prices.

Considering the downturn in the industry the Indian government is considering opening the Indian commercial aviation sector for the foreign direct investors which was blocked before. Last month a group of senior ministers of Indian government had agrees to allow foreign airlines to purchase stakes of Indian  domestic airlines which will enable to raise much needed capital for crashing airlines to survive. Moreover, Amber Dubey the director of aviation of global consultancy firm KMPG has stated that apart from the besides fulfilling the required funds it will also give Indian airlines the access to the international exposure and the managerial expertise from global market leaders.

Further, with the government’s decision to open Indian aviation industry for the foreign direct investments the domestic industry can be benefited in number of different ways. Apart to the managerial expertise the FDIs bring in the sophisticated technologies in to the country which will enable the local competitors the access to obtain overseas resources and technologies. Additionally, FDIs will also bring employment benefits as in more employment opportunities, knowhow and improved skills which will create more job opportunities to the Indian citizens and also increase the employability of existing employees. It will also extend the local capital market as in if the foreign investors reinvest the money they generated in the Indian market the economy will be strengthened with more capital injections.

On the other hand by allowing the foreign companies to enter in to Indians market, adverse effects might be created on the domestic completion in India as a result of the brand strength of the global market leaders. The influences by the foreign companies in to India may affect the decision of the government later on and it will cause a loss of national autonomy in the country. Moreover India been an Asian country with the involvement of western airlines in to the market conflicts may create on the cultural issues and based on the environmental damage.

In my opinion the Indian government has to take more in depth evaluation of the positive and negative consequences of taking off the barriers to FDIs to enter in to the market. Can’t the domestic airlines survive without the international funding? If the fuel cost is the major issue behind the losses they made, why can’t the Indian government get involved in controlling the fuel prices in more effective way particularly beneficial to the airlines?                                                                                   
                                                                                 

Bowleven shares rose 70% following a takeover bid

Last Friday the share prices of the Bowleven were soared up by 70% following a potential takeover bid leaked to the market. Dragon Oil, a Dubai based oil company who is a major player in the industry has showed the interest of acquiring the share capital of its small rival Bowleven which has been undergoing the projects of exploration of oil and gas in the west part of Africa presently. Immediately after the leakage of the news the share prices of Bowleven has risen to 128.25 which was an increase of 73% from the existing prices. However still the confirmation is due by 16th of March whether Dragon oil will go ahead with the takeover offer or not.

This indicates the efficiency of the market where the investors react in a quite prompt manner following the leaked information. Anticipatory price movement leads the market price of shares to rise even before the occurrence of the particular event. In fact, in today’s sophisticated market with the availability of access to wide range of information sources investors start reacting very quickly.

However this is relatively a rare incident in the recent history since with the effect of economic down turn the mergers and acquisitions were not used to take place quite often. Moreover, during the year 2010 the share price movements have fallen down by 30% compared to the previous year. The number of takeover deals took place during the year 2009 were 118 which used to be 144 previous year. Out of the takeover bids took place 24 and 44 deals were leaked to the market before the actual incident take place during respective years.

During past couple of years Financial services authority UK (FSA) has been taking number of steps to avoid such leakages of information to market, but looking at this from a different perspective the evasion of leaking sources by FSA might also make the market more volatile through the shocks created by fresh formal information. It might cause sudden ups and down in the share prices instead of the smooth growth or decline created by the gossip and rumors arose. In my opinions that would be even worse than the current situation since it will make the market far volatile and risky.

Is the CEO's bonus actually based on the performance?

The chief executive of BAE systems, Ian kings was paid a bonus imbursement of £2.3 M for years ended 2010 which. If we compare it against the statistics before two decades, the CEO of British aerospace was paid £23 000 annual bonus payments in 1978. Relatively, the current level is a rise of 8000%. Theoretically, if the bonus of the chief executive’s is linked with the performance, is it possible to detect an actual growth in performance similar to the increase in bonus paid?

Moreover, 3000 employees of BAE were redundant as a result of its decision to quit from UK civil aviation industry there employees are supposed to be compensated by the UK government under the UK defense procurement rules. There for the question arises is it fair enough for CEO paid bonus payments while the tax payer of UK bears the cost of redundant employees.

BAE defends its decision by stating that they have achieved a better performance in 2010 than the anticipated level and they bonuses are determined to attract and retain the talented executives. However the effectiveness of this argument can be questioned. Have the talent of these executives actually caused to boost the performance of BAE in line with the bonus they are paid.

Further, considering the management structure of BAE, similar to the most of other companies the remuneration of CEO is determined by a three member committee of non-executive directors which is quite acceptable. But on the other hand the CEO, Ian King is a member of the committee who decides the remuneration of non-executive directors.  In fact, it’s each of them deciding each other’s pay. Even though the remuneration committee states that the ‘reports last year was highly commended for it transparency ’, the effectiveness of the current structure is not satisfactory according to the corporate government practices. The independence of the remuneration committee seems not adequate up to the established corporate governance standards.

The issue arising here is what is the optimum level of bonus to keep satisfied both of criteria which are shareholder wealth maximization and attracting the talent. Even though BAES attracted the experts in the industry is it possible to retain them without an increase in the remunerations year by year. As a result of the prevailing competition, the remuneration of top executive is more likely to be increased merely with the aim of retain them in company even without a boost in performance or growth in share prices of the company. The responsibility of remuneration committee in regard to this issue is to determine the bonus payments of the executive based on appropriate performance targets. Additionally, more independency has to be implemented among the non-executive directors and CEO when determining each other’s remunerations.

Do the state owned UK banks deliver value to their shareholders?

UK vice chancellor has accepted the bonus imbursement of the CEO of Royal Bank of Scotland (RBS) as a sensible payment. Even though the validity of this could be questioned by the UK government since it owns 82% of the capital of RBS, Prime Minister David Cameron has refused to take such action stating it would cause a political influence in to the bank’s operations. The government’s argument on the issue is the best way to get back the money is to pretend in a way it does not own the bank.

However the UK government decision on this could be questioned whether it makes use of its authority to deliver the value to the actual shareholders of RBS who are the tax payers. According to the corporate agency theory the management of the state owned banks could act in their own interests overlooking the ultimate corporate objective which is to deliver value to its shareholders. As a responsible party it’s the obligation of the UK government to take necessary controls with the use of its power in order to protect the value to the tax payers who are the actual residual risk takers who are entitled to lowest level of power.

During the economic downturn in 2008 the UK government took over the ownership of number of banks including RBS, Lloyds TSB, Northern Rock, HBOS, Bingley and Bradford and established UK financial investment (UKFI) to manage the stakes in the acquired banks. They have recruited the experts from private sectors with aim of maximizing the return to the shareholders. The prime objective of UKFI is to deliver and protect the value to the tax payer. But the viability of this objective is arguable with its decision undertook to sell off the Northern Rock stakes to the Virgin group last year. My opinion is the UK government should play a more stronger role in banking sector with the use of its authority and more established corporate governance practices.