Involve To Evolve

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FINANCIAL SECTOR: TRANSFORMING TOMORROW
1. FINANCIAL ADVISORS:
Coaching Foundation India
Executive and business coaching has now made its formal entry into India, with the Coaching
Foundation India becoming the first recognised organisation that accredited coaches. Until now,
coaches were accredited in the US or Australia.
Development of leaders is central to an organisation’s improvement. Drawing inspirations from field

of adult learning and sport psychology, business coaching has rapidly achieved the status of a
powerful profession with immense potential. It is not about how to run the company but about
knowing and harnessing the hidden strengths. It is a personal therapeutic counselling. People should
learn and practice methods prescribed by the coaches. Coaching can unleash the potential on a one-to-
one or person-to-person basis. And its impact is a long-term one.
2. WEALTH MANAGERS
National Investment Fund (NIF)
The government launched the NIF, comprising proceeds from sale of government equity in public
sector units. The NIF, which was announced two years back, received its first funding of Rs 994.82
crore from proceeds of sale of government’s 5% stake in Power Grid Corporation of India Ltd.
Finance minister P Chidambaram, who launched the fund, handed over to the money to fund
managers: UTI Asset Management Company, SBI funds management and LIC mutual fund asset
management. All proceeds from disinvestment of central public sector enterprises will be channelised
into NIF. NIF will be maintained outside the consolidated fund of India and is to be professionally
managed to provide sustainable returns to the government, without depleting the corpus. Out of the
total corpus, 75% of the annual income of the Fund will be used to finance selected social sector
schemes, which promote education, health and employment. The residual 25% of the annual income
will be used to meet the capital investment requirements of profitable and revivable CPSEs.
3. FINANCIAL PLANNERS
Better value to small investors
India’s retail investors are still an excluded lot. While saving a small amount is a big challenge for
most low and middle-income families, the story of Sensex recording new highs fairly at short intervals
does not inspire them at all.
No wonder, the common man still prefer PPF and other small saving schemes in post offices which
give steady and fixed returns rather than risking his hard-earned money in the equity market. The
question, however, is why the government has failed to bring in more innovative products to ensure
better returns for small investors?
FINANCIAL SECTOR: TRANSFORMING TOMORROW 2
The question that emerges here is whether the government could give a better value to small investors.
In fact, the debate over possible use of provident fund kitty for getting better returns through
investment in equity still continues. The Left has been vehemently opposing any such move by the
government to allow pension fund or provident fund to be invested in stock markets. Who will take
the risk of deploying hard-earned money of lakhs of middle class families in stock market? In the
West, it has been experimented amid major controversies.
4. INCLUSIVE CEOs
Indian companies are ready to offer growth opportunities
The CEOs are hired to launch the Indian operations for the tech MNC, as they want to reach the peak
too fast and hit a plateau. There is a very rapid growth in the initial phase but once they reach the
critical mass, it becomes just an incremental growth, leaving their role less remarkable than what it is
at the beginning. As one observer puts it, the CEOs become white elephants within an organisation as
they would have come in at very high level of compensation and in the later years, this would actually
not justify their operations. So after a point, the internal opportunities are limited.
In the current scenario, Indian companies are ready to take these people and offer growth opportunities.
Explosive growth, of the kind that Indian companies are experiencing, requires enormous management
bandwidth. That encompasses talent management, building global scale, managing risk and flawless
execution. Dealing with complexities and risk of all kinds in the business has become the key to
success. Breakneck expansion, both in India and abroad, puts a premium on high quality, focused and
ethical management practices.
Two things a CEO must have?

High levels of energy & ability to multi task
5. MICROFINANCE PROFESSIONALS
An efficient identification system
One big reason for organised finance not to have reached the depth needed in India is the lack of
proper and efficient identification systems, especially for the poor. Many potential borrowers lack
primary documents such as land titles, ration cards, electricity bills or voter ID cards. Bankers hardly
lend money to people they can’t document. This gap had been hard to bridge for several decades,
despite sporadic efforts, but the technology can be used smartly to provide a simple system of
identification for the poor, illiterate and semi-literate.
It’s the smart card project of Financial Information Network & Operations Ltd. (FINO), a joint
venture of public and private financial institutions. It has issued the card to lacs of people, from
vegetable hawkers to farmers. Each week, hundreds are getting fingerprinted and photographed for the
card that brings them access to saving accounts, loans, insurance, and electronic payment services.
FINO officials, in their enrolment visits, carry a suitcase kit including a lap top computer, fingerprint
pad and camera. That means the equipment and personnel needed for creating the smart cards come in
one package and a card aspirant doesn’t have to run hither and thither to get the stuff done. The crucial
part of FINO’s smart card is that all the 10 fingers are recorded for prints, as likelihood of two persons
having similar prints in all the fingers is remote.
Financing micro dreams: Microfinance is on the lips of every banker in India today. Private equity
and venture capital investor have also taken a fancy for this growing sector that seeks to tap the credit
and other financial needs of the country’s poor and unserved populations. This has given a rare
opportunity to entrepreneurs to bring together social work and capital-led business professionalism.
It’s not hard to figure why so many funds are flocking to MFIs. There are 8 crore family takes Rs
5,000 loan. It is a huge market.
Two things you like about your job?

High entrepreneurial sprit & constant innovation
6. RISK MANAGEMENT CONSULTANTS

Soaring Sensex and appreciating rupee
The soaring Sensex and rupee seem to have crossed the government’s comfort zone. Finance minister
P Chidambaram said the strong surge in shares to record highs worried him. Similarly, the rising
rupee, at a nine-year high against the dollar, also has the government worried. The rather steep rise
in the Sensex sometimes surprises me, sometimes worries me. I don’t think the fundamentals change so
rapidly from day to day.
Our assessment is the Sensex is driven by copious flow of funds from a number of sources abroad. To
some extent, speculators are taking advantage of the Sensex, but I think things will cool down after
some time. We have constantly monitoring the situation. But, there was no need to ring the alarm bells.
This is a new situation. We are alarmed by it. We will gain mastery over managing the situation. We
must find ways to manage competitive exchange rate without hurting investments.
7. CREDIT COUNSELORS
Credit information bureaux
Credit information companies, which assign credit scores to borrowers, will soon assess source of
credit information. Once licensed by the RBI to function as credit information bureaux, they will be
permitted to mine data from the Election Commission, utilities and other service providers. Credit
information bureaux improve lending decisions of banks and financial institutions by assigning credit
scores to customers, there by stepping up fraud detection and recoveries of default payments.
Credit Information Bureau (India): The objective of the CIBIL’s Consumer Bureau, launched in April
2004, is to maximise the credit penetration and minimise defaults from individual borrowers, by
making their Credit Information Reports (CIRs). So far, CIBIL, on the basis of data gathered from
members, has been providing CIRs covering name, address, date of birth, consumer’s ID details such
as – PAN, passport, voter ID, etc., along with a record of past performance and current status of
individual’s loan and credit card accounts across various banks.
As on August 2007, CIBIL has a database of over 90 million individual borrower accounts (expected
to touch 125 million by the year end). To further simplify the decision making of credit grantors,
CIBIL is soon launching an individual’s “credit score”. Scores closer to 100 would mean, one or
more of the following – outright refusal of credit, requirement of additional security/guarantee, higher
downpayment, shorter duration and steeper interest rates.
On the contrary, with higher scores, one would be able to get better interest rates, waiver of certain
processing fees and faster disbursal of loan by the bank! Thus, it will be in everyone’s interest to get
and maintain a good credit score. Knowing that the score will “value” individuals past performance on
timely repayment of loans and the credit card dues, the road to a good score is fairly straightforward.
• First, ensure that the EMIS of all ongoing credit arrangements are paid within the respective due
dates. In case of credit cards, use of revolving credit facility is not negative by itself if the
minimum amount is paid by the due date.
• Second, explore the options to bring down the debt burden and the interest costs. This could be
done by utilising some of your savings to partly repay the debt or by shifting from floating rate to
fixed rate if interest rates have come down or by simply refinancing the loan if a cheaper
alternative is available.
• Third, never take personal loans to invest in risky business propositions or to start trading in
stocks. Such a use of borrowed funds can anytime lead to a repayment default.
• Lastly, irrespective of the bank’s evaluation of your credit worthiness, do a self-assessment on the
total monthly repayment that you can afford at your current income levels and then only commit
yourself to any additional loans. This will ensure that you do not default on repayment, which in
turn would lead to better credit score and hence easier borrowing in the future.
8. TECH SAVVY PROFESSIONALS

Trap the ocean in your puddle
All big companies are full of people who are firmly ensconced in fancy positions but are thirsty for a
bigger challenge. The extreme comfort at the top of the corporate ladder can sometimes be suffocating
to entrepreneurial people.
They are looking for one chance and one opportunity to build a knowledge society
9. ONE-STOP-SHOPS
Chanakya who guided King Chandragupta to build Mauryan Empire
From the days of Arthasastra to now, managing business has undergone a sea change. If Chanakya
etched his name in the annals of history as a person who guided King Chandragupta to build the
Mauryan Empire, it is now the age of business and executive gurus to call the shots.
The higher one goes, the lonelier you get and need professional help. The management gurus and
consultants give insights into competition, regulation aspects and work out winning strategies.
10. CONTINUING LEARNING CENTRES

Sovereign Wealth Funds (SWFs) or Stabilisation Funds
SWFs generally refer to special purpose investment vehicles created to manage national savings to
generate higher returns. The non-commodity SWFs are usually carved out of the official reserves of a
country. Countries having large balance of payments surpluses have been able to transfer excess forex
reserves to such investment vehicles.
Stabilisation funds or commodity funds are generally an outcome of mainly ‘windfalls’ from
commodity exports, more commonly petroleum products. These funds may invest in a wider range of
assets than those in which the central bank would invest the foreign exchange reserves. However, one
needs to take care of the risks, as one may have to draw such funds when such ‘windfall’ disappears
and contingencies warrant.
RBI is not in favour of setting up SWFs or stabilisation funds in India. The central bank wants the
current account deficit to be wiped out and stronger fiscal numbers before the country embarks on
such a move. The arguments in favour of such funds is that forex reserves have risen sharply, given
that from an economic perspective, the country does not need so much reserves. However, none of the
Indian players have any expertise in managing equity investments in markets overseas, according to
treasury officials. Mr Reddy said stabilisation funds and SWFs are playing an important role in global
capital flows. The operations of these funds have generated considerable interest among the policy
makers and central banks. It is essential to recognise the public sector nature of stabilisation funds and
SWFs that may be investing in India, and it is also useful to study the evolving global practices of
investee countries’ approaches to these funds.
Two things you must have in your bag?

Latest business magazines & cell charger
11. GLOBAL OUTLOOK

China’s sovereign wealth fund
CHINA’S SWF opened for business, promising not to take excessive risks and to be sensitive to
international concerns as it goes about investing $ 200 billion of the nation’s vast reserves. The
agency, called China Investment Corp ltd (CIC), has the potential to grow into one of the world’s
biggest funds but faces the short-term challenges of recruiting experienced managers and earning
enough on its overseas assets to offset the steady appreciation of its home currency the yuan.
The Strategy: The strategy of CIC will be based on active, sound management to maximise returns
within an acceptable bound of risk. Lou Jiwei, a former vice finance minister who is chairman of the
fund said CIC would have a diversified portfolio of mainly financial products overseas, while at home
it would inject funds into financial institutions.
The setting of China’s SWF is an important move by China to participate in global financial market
competition and is also a bold attempt to venture abroad. The only investment that CIC has
acknowledged is a $ 3 billion stake in US private equity house Blackstone group. A British broker,
after combing through shareholder registers, said several weeks ago that CIC had also bought a stake
in BG group, a British gas producer.
The concerns: CIC is being launched at a time of growing unease among western politicians who fear
sovereign wealth funds will build up stakes in leading companies that will give them influence in
politically sensitive sectors. Lou Jiwei said CIC would respect international practices and norms as
well as the laws and regulations in countries where it invests. CIC would set out to groom a good
image of the company. We will increase our firm’s transparency on condition of not harming our
commercial interests. Zhang Ping, deputy secretary-general of the State Council, China cabinet said a
lack of experienced fund managers and China’s fast-expending reserves, which now top $ 1.4 trillion,
posed serious challenges. Faced with constant changes in the global situation and in financial markets,
it’s an important task to study how we can better manage the reserves to facilitate our country’s
economic strategy while matching our demand for foreign payments and settlements.
12. ISSUES OF THE PRESENT

Reforms must for 10% growth: OECD
The market-based reforms since the 1980s had helped India reduce poverty. “The impressive response
of the Indian economy to past reforms should give policymakers confidence that further liberalisation
will deliver additional growth dividends.”
The target of 10% GDP growth by 2011 is well within India’s reaches if it continues to pursue an
aggressive reform agenda, including privatisation, opening up of financial and retail sectors, and
labour reforms, according to the OECD survey. India is not fully exploiting its comparative
advantages as a labour-abundant economy. The survey made a strong case for labour reforms. The
government should also consider consolidation of 46 central and around 200 state labour laws, which
are hampering employment generation in the organised sector. The OECD identified red-tape,
overstretched infrastructure, ban on FDI in certain sectors and the state governments’ poor response to
reforms as major impediments that could hold up growth.
Managing finances
It sounds cool in theory when experts advise people on managing finances. But when it comes to
practice, it’s a daunting task. Today, industry leaders across segments may be managing billion dollar
funds, but find out about their first nest eggs, right from college days to the early stage of their career.
Gary R. Bennett, MD & CEO, Max New York Life Insurance

For Gary R. Bennett, success didn’t come on a silver platter. His success story is no less than a
motivational book, which speaks volumes on how can one survive and build a future against all odds.
“I learnt it from the book of life and life taught me some interesting financial lessons,” he says.
Respect for money is what he feels is the first and foremost lesson to be learnt, when it comes to
managing your finances.
I was on my own at the young age of seventeen. I worked in a clerical position at a custom agency
during the day to run my household and I doubled up as security guard in a hospital at night, to save
something for future. Those were the hard times and it taught me the respect for the money. I built
inch-by-inch, accumulated wealth and at the age of 24, I was able to buy my first house. According to
him, one must have courage to dream, review and renew one’s goals and each one of us has the ability
to make our dreams come true. “I never forget those years of struggle that laid the foundation for my
financial success. And I am still building inch-by-inch for a better tomorrow.
It’s your learning time - Missions Seven Charitable Trust

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SECURITY MARKET: HOMEWORK FIRST
As the Sensex continued its upward march, touching new highs, finance minister P Chidambaram
urged investors to adopt a cautious approach. “My advice to investors is that they should do their
homework. And if they cannot do their homework, they should trust those who do their homework. And
for speculators, I have no advice.”
New generations of investors from small cities are also hitting big innings. The historic Indian victory
is being replicated in stock markets and is being fuelled by players from small cities. The finance
minister urge to adopt a cautious approach is a signal at the right time and in the right direction.
Choose the right path

Stock market is a place where people with money meet people with experience, and the people with
experience get money and people with money get experience. If you want to have the best of both
words then you need to choose the right path. Investing is all about temperament. Most investors falter
because they are carried away with euphoria, which forces them to react as if it’s now and never. Call
to buy, sell or even hold should be taken judiciously and diligently. So you need to control your
emotions and not invest in haste.
Get the basics right

Is it a good time to invest in equities? Should I go for mutual funds now? Is it better to stay in-cash? If
you ask any of these questions, there will be hundred different responses. But the fact remains: that
there can never be a perfect answer. And if there is any, you’re the only one who can give so. Markets
by their inherent nature are volatile. If you keep aligning your investment patterns according to market
dynamics, you’ll always struggle. Markets can never be predicted. When legendary robber Willie
Sutton was asked why he only robbed banks, his answer was rather simple: “Because that’s where the
money is”. Investors also follow a similar logic on the financial marketplace. They flock towards
assets with the strongest growth characteristics, particularly during latter stages of a bull market when
growth is in short supply.
Don’t celebrate the milestones
Unfortunately, celebrations on milestones and the attendant euphoria is largely the reason why retail
investors have missed out on the huge wealth creation by equities. For instance, many retail investors
booked profits when the Sensex had run up to 5,000 by November 2003. Those brave enough to hold
on would have found the sensex at 6,000 in January 2004. Since then it has been a long wait for the
much-expected correction. And when the correction did come, the market timing mindset required that
investors waited for the indices to fall to the levels the experts were predicting. Those levels were
never reached. The point is that if India continues to grow at the rate it has, and there is a good
possibility that it will, then various milestones will be reached sooner than later. But ascribing undue
importance to milestones is sure to result in early selling or a delay in investing, leading to sub-
optimal returns and erroneous investment decisions. Is the index is expensive at 19,000? Nobody
knows; what should the retail investor do? Depending on his/her individual risk appetite continues
investing regularly, with a multi-year timeframe.
SECURITY MARKET: HOMEWORK FIRST 8
SENSEX AT 16,000
19th September ’07.
It was vindicated once again after the US Federal Reserve – the institute that matters most in the
financial markets – cut benchmark rates to make money cheaper – inspired the global rally. The
intermediate uptrend, which started on August 17 ’07 – when the Sensex bottomed out at 13780,
continues, with the main indices climbed into new all-time high territories. Most global markets also
began their intermediate uptrends around the same time.
A cat has nine lives; the Dalal Street Bull has many more. This has been proved several times in the
past four years. Benchmark Index rises 653.63 points - Its highest single day gain in absolute terms.
Investors across markets forgot the subprime fiasco to lap up stocks, oil and gold. Dalal Street too
joined in the celebration, as the Sensex crossed yet another psychological 1,000-point mark – 16000
this time – on it’s to a new high.
A 7-7-7 rally to 16k
It took seven years, seven months and seven days for the Sensex, the stock market barometer, to travel
from 6,000 points to 16,000 points – making it fastest among the 10,000-points rallies of the index.
The Sensex had hit the 6,000 level on February 11, 2000. The current calendar year has yet seen two
1,000-point milestones – 16,000 on today and 15,000 on July 6. The previous year – 2006 – witnessed
the five such milestones between 10,000 and 14,000 levels being scaled during that period.
RIL now richest group
Along with the Sensex, which has hit a new high, the Reliance Industries Group promoted by Mukesh
Ambani has also risen to become the richest group replacing the Tata Group. The Mukesh Ambani
group companies have gained the most in recent times with the combined market cap of group
companies increasing by Rs 94,187 crore.
In the previous rally from 10k to 13k, Tata Group companies had gained the most, propelling them to
the top shot. Most of the Tata Group companies were not participating as much in the current rally
largely on account of concerns stemming from the rising rupee and higher interest rates. This has
meant that companies like TCS, Tata Motors and Tata Steel have underperformed the Sensex
It’s a Fed- Fed rally
Emerging markets with fastest growing economies have turned out to be the biggest beneficiaries of
the Federal Reserve’s rate cut even the primary objective of the US central bank’s action was to
stablise the US financial markets and limit the negative macroeconomic follow-through from the
credit crunch. The outsized gains in the stock markets is consistent with past experience when any
increase in global liquidity headed more towards asset classes exhibiting relative strength rather than
in the direction of weak performers. It is precisely such solid growth credentials that make emerging
markets even more appealing for global investors.
SENSEX AT 17,000
28th September ’07.
The BSE Sensex continued its rally, gaining a whopping 726.85 points to close at 17,291.10 point.
Valuations are not cheap, and, in some cases, they are even beginning to look a bit expensive. But
then, you never get a good growth story cheap. The key is to avoid a taking a short-term view. It is the
pace of rallies that is worrying investors, rather than valuations. If the Sensex had climbed 1,000
points in two months, people would not be too worried about valuation.
Nifty crosses 5,000
For a change, it was the Nifty that grabbed the attention, as market continued its record-breaking
spree. The NSE’s 50-share index closed marginally above the psychological 5,000-mark.
Testing times ahead
The last thousand-point spurt, from 16,000 to 17,000, has taken all in five sessions, an astonishing feat
given the relatively gloomy global economic prognostication. Fears that the subprime crisis would
drag down asset classes all over the world have proved to be unfounded, at least for now. The Fed rate
cut seems to have generated a surge of liquidity.
With the Sensex breaking past 1,000-point milestones at an accelerated pace, is it time to rejoice or
cautious? To crystal gaze on what investors should expect in near terms, listen the talks of the biggest
names on the Dalal Street. Their message is clear: The Indian growth story has enough streams left,
but be prepared for some testing times.
Politics may not be the talking point in the market for the time being, and the general perception is that
India is the least vulnerable, among emerging markets, to a likely recession in the US, but these
factors hold the key to the trend over the next 6-12 months.
“I sense trouble around the corner,” said the big bull of Dalal Street Mr Rakesh Jhunjhunwala, who
feels that markets around the globe may be underestimating the extent of the slowdown in the US
economy. “I would compare the Indian economy to the Chak De story. But I expect some hiccups over
the next one year; we could see some real testing times,” he said, adding that he expects India to
outperform in the long run.
DSP Merrill Lynch managing director Andrew Holland expects the returns from equities to be as low
as 5-10%. “I think 2008 will be a difficult year for equity market investors around the globe.” Growth
prospects, he feels, around the world do not look too good, what with many parts of Europe too
showing signs of slowdown in addition to the US. Then there is China, where the government is trying
to rein in the runaway growth in the economy. “In India, there is talk of mid-term polls and this could
prompt local companies as well as external (portfolio) investors to defer their investment plans.” And
lower interest rates globally may not be of much help either. “History has shown that emerging
markets do not do as well in a falling interest rate scenario as they do in a rising interest rate scenario.”
SENSEX AT 18,000
9th October ’07.
Rallies in reliance, REL & RCOM lift sensex to record 18327.42 infra-days, before settling at
18,280.24, a gain of 788.85 points or 4.5%, over the previous close.
At the height of the dotcom mania in 1999-00, the easiest way to maximise returns was to buy into any
stock with the suffix ‘software’ or ‘technologies’. Eight years on, the same seems to hold true for any
stock with the prefix ‘Reliance’.
As the benchmark logged its highest single-day gain in absolute terms to race past the 18,000-mark,
factors like politics, valuations and earnings appear to have become non-issue overnight. The pace of
the rally has clearly taken everybody by surprise, and it is tough to take a call as the rise has been led
by a handful of stocks.
There was high drama before the Sensex finally managed to cross the coveted 18,000 mark, as the
index come close to 18-k level and then retreated by about 50-odd points. This happened a few times,
and one thought that bears would be able to halt the bulls at the doorstep of the psychological mark of
18-k, as they had done twice last week. But once the index crossed 18-k, there was frantic short
covering, which then powered the rally further.
Sebi registered hedge funds to invest in India
Capital market regulator Sebi has finally lifted the embargo on hedge funds, albeit in a calibrated way.
In the last fortnight six hedge funds have been registered with the regulator. The hedge funds that have
registered are a mix of old and new funds.
They can now invest directly in Indian stock rather than through the more expensive P-notes. The
broad objective is to ensure that all investors come through the front door in a transparent manner to
invest in stocks here.
Indian has been the most favoured investment destination: JP Morgan report
Indian has been the most favoured investment destination amongst emerging markets so far this year.
JP Morgan report states that Indian equities have outperformed emerging markets in September ‘07.
And India will continue to attract foreign investors in large numbers.
Following the Fed rate cut in the US, FIIs invested $ 4 billion in September, driving the market up
14%. Though currency movements have had a telling effect on exporters and IT companies, it has
opened a world of money minting opportunities for foreign investors.
Rupee appreciations allow FIIs to take back more dollars than what they bring in. This can be added to
the share price growth driven by fundamentals.
SENSEX AT 19,000
15th October ’07.
Last day correction was a distant memory as the 30-share Sensex surged 639.63 points to close above
19k for the first time, at 19,058.67. The subject of discussion in most dealing houses was not about
valuations, politics or earnings. It was about when the market would touch the 20,000 mark and
whether that would be the peak. The market does not appear overbought even at current levels. Such
optimism may not appear misplaced given that the tide wave of FII money is not showing any signs of
ebbing yet.
The first million is always the hardest to make, the rest come looking for you. It’s taken four years for
the sensex to touch its first 1,000 mark in 1990, and just four days to sprint from 18,000 to 19,000.
Investors and bystanders continue to watch with disbelief as the index shattered each successive 1000-
mark with a growing ease. Does it make sense? Where it’s headed? How long cans it last? Sections in
the market are beginning to ask these questions and the finance minister has already sounded a word
of caution. But even as the stunning rally has baffled most market watchers, bulls are not showing the
slightest sign of exhaustion.
To a great extent, a rupee has made it a self fulfilling prophecy, with more foreign money coming to
catch the currency upside, pushing frontline stock like Reliance Energy (+13%), Reliance
Communication (+5%), Tata Steel (+7%), ONGC (+9%), SAIL (+15%) and HDFC Bank (+4%) to
new peaks. And while it did not touch a new high, index heavyweight Reliance Industries (+4%) was a
major contributor to the rally. RIL, REL and RCom have been the driving force of the last 2,000-
points rally in the Sensex. The meteoric rise in the price of these three stocks over the last one-month
has sparked a debate over valuations, but bears appear wary of going short on these stocks.
Brokerage house Goldman Sachs has downgraded its rating on RIL to neutral, saying the current price
levels did not offer an attractive entry point. “While we remain long-term positive on RIL, primarily
on the back of its E&P (exploration and production) potential, we believe the market is now already
pricing in future exploration success into next 3-4 years – increasing downward risk from current
levels, in our view.
There have been a fair amount of downgrade reports. But fund managers are in no mood to heed the
calls for restraint, and so far they have been proven right. Secondly shares kept pace with the rise in
top-tier stocks, something that had not been witnessed for sometime. Lack of market breadth had been
a cause for worry, but even that is now showing signs of improvement.
Finmin thinks something amiss
A record high foreign fund inflow into the stock markets is a matter of concern to the government.
Surging foreign fund inflows worries the government as a rapidly appreciating rupee could slow down
exports and hurt the economy. Exchange rate and export competitiveness are in the focus of the policy
makers now as inflation appears to be under control well below 4%.
SOMETHING AMISS
India has attracted inflows from all sources, including portfolio inflows, FDI and external commercial
borrowings. The inflows need to be converted into rupee funds to use them in local markets. But it
could also generate excess rupee funds in the system and put inflationary pressure on the economy.
The central bank, which is also the country’s monetary authority, then intervenes in the market and
mops up the excess inflows with the aim of maintaining the level of the currency at the desirable
levels. Despite mopping up huge inflows, the dollar is still weakening against the rupee. RBI has a
choice of instruments to intervene in the currency markets to achieve its objectives.
• The most popular method has been through the sale of bonds and mop-up of excess funds. But
with RBI’s stock of bonds almost exhausted, the government has floated special bonds under its
market stabilisation scheme (MSS) that help RBI manage liquidity.
• In a scenario marked by strong inflows, the central bank hikes the reserve requirements so that
banks keep aside a higher amount of deposits they mobilise as reserves with the central bank and
in the process restricts the money supply. The central bank also hikes benchmark policy rates (repo
rates) in an attempt to tighten money supply.
• But, of late, there seems to have been a change in the central bank’s intervention strategy,
considering that each instrument has its own limitations. RBI has been treading a path rarely used
by it. Treasury managers say that the central bank has been, of late, intervening in the forward
market and managing the rupee. It is reported to have bought dollars in the spot market and sold it
at a future date. The central bank has a major advantage in intervening through the forward market
because it has the option of rolling over the forward contracts.
A major concern today is the appreciating rupee as it has created a dual problem of affecting exports
and creating monetisation issues for the RBI. The situation is not very different from what the euro
zone is facing where the euro is strengthening against the dollar, albeit more freely, and the fear of
loss of competitiveness lingers. It is the same feeling in India too with the exporters getting worried
that their competitiveness will be eroded in case the rupee continues appreciating. However, the RBI
has bigger problems with rising forex inflows than the exporters. So, the RBI should concentrate more
on tackling the monetisation part of the dollars rather then stem the appreciation.
In the clamour over the sharp appreciation of the rupee, one note-worthy fact appears to have
been missed by most. Barring the Malaysian ringgit and the Indonesian rupiah, and currencies
from few strife-ridden areas, almost every other currency has gained against the US dollar.
With a weaker dollar and rising risk appetite of global investors being the dominant themes in the
global foreign exchange markets, emerging market currencies are facing the heat of appreciation. The
US Federal Reserve’s decision to cut the benchmark interest rate and the discount rate by 50 basis
points each, in September 2007, triggered a huge fall in the dollar vis-à-vis most currencies; Emerging
markets, which had come into the limelight in July this year, as a fallout of the dwindling risk appetite
from global investors, have now resumed the position of being recipient of forex inflows.
It is also needs to be noted that none of the central banks in emerging markets have enforced any
change in their benchmark rates, so as to discourage foreign investors as yet. Intervening in the forex
market does not seem to be a very feasible option, given that this strategy ends up infusing more cash
into the system. In the current scenario, it is likely that central banks of the emerging markets will let
their currencies appreciate against the dollar. The other way out could be to liberalise capital
outflows, which although may not serve the purpose effectively in the present context, but may reap
benefits a while later.
The US dollar continues to remain the world’s most accepted currency in most parameters, despite the
growing acceptance of the euro, as noted by a report released by Standard & Poor’s. In terms of
market share, the US dollar continues to dominate foreign exchange trading activities, as most forex
trades are quoted with one leg as the dollar.
Resource-rich countries could move from the dollar as a base for the commodities they produce to
protect their earnings as the dollar’s slide accelerates. The debate about commodity denomination
has already heated up over the past few months.
David Murrin, chief investment officer of UK-based Emergent Asset Management thinks the chances
of a re-denomination are high, but that it could take some time. “I can see countries like Russia trying
to price commodities in some other currencies.” He said, “Keep your eyes open, for when and how
rebasing starts to creep in.”
The move away from dollars has already started in Iran, which said that about 85% of its oil exports
were being sold in non-US dollar currencies. Many other commodity-producing countries have or
are talking about diversifying their reserves away from the dollar.
The potential for the dollar’s downtrend to pick up speed is high and that’s what they (the US) want.
They’ve opened the door to a lower dollar simply because it’s their job to keep up the illusion that
asset prices in the United States are high. The problem for the US for many years has been its
current account deficit at around 5.5% of the gross domestic product. Overseas investors have
financed it by buying US assets such as stocks and bonds. But if investors started to believe that
US assets were over-priced, then confidence could quickly disappear and leave the US on the
verge on bankruptcy.
There are too many people and too few resources, there are too many of us fighting over the same
resources… We’re facing a huge global crunch in terms of natural resources. In previous times,
countries have gone to war over natural resources. This time, so far, there are no guns or tanks. The
ammunition is money accumulated by resource-rich countries like China and Russia over the past few
years. “Now there are few places to expand.” China has gone into Africa; you could go to Antarctica.
Earlier this year, Russia planted a national flag in the Arctic, home to vast untapped gas and oil
reserves.
“A way to stimulate your economy is to let the currency go” Murrin said, adding that this ploy
could be dangerous as it could further fuel inflation in an environment of rising commodity prices.
Murrin thinks the commodity Bull Run could continue for another “20 years as least”. “What I think
as alarming, is we’re behaving as if we’re at the end of the cycle.”
LOWER CIRCUIT IN SENSEX
Wednesday: 17TH October 2007
Trading on both exchanges was suspended for an over, less than a minute after the session began.
Barely Rs 168 crore worth of shares had changed hands on the BSE and NSE when trading was
temporarily halted after the indices breached the first trigger point for the day’s circuit filter on the
downside. Memories of April 2004 were revived as the Sensex plunged 1,743.96 points, or 9.1%. The
Nifty also tumbled 524.15 points, or 9.2%, following the curbs proposed by the stock market regulator
late on Tuesday on offshore instruments known as participatory notes to moderate capital inflows.
Finance minister intervened decisively on Wednesday morning after the Sensex and Nifty hit the
lower circuit in early trading. Mr Chidambaram ruled out a ban on participatory notes (PN) and said
that Sebi’s aimed at moderating capital inflows and the proposals were aimed in the interest of
investors across all categories. Yesterday’s Sebi decision is part of the series of steps that have been
taken to moderate capital inflows. We are not in favour of banning PNs. We have not banned PNs. We
have simply placed a cap on the proportion of money coming through PNs vis-à-vis the total assets
under management and the derivatives position. While inflows had an impact on the rupee, the inflows
were also contributing towards a sharp upward movement of the market.
Bulls took comfort from finance minister’s assuring words, and when trading resumed at 10.55, share
prices got on to the recovery path quickly. At one stage, it almost seemed that bulls would recoup their
entire losses, staging one of the most dramatic comebacks ever. However, the Sebi proposals seeking
curbs on PNs clearly seems to have unnerved a section of foreign funds. The BSE sensex finally
settled down 336.04 points over the previous close. And the Nifty closed down by 108.75 points over
the previous close.
Mr Chidambaram’s intervention certainly appears to have worked. But, the finance minister made it
clear that the Sebi consultation paper, with or without some changes, will become a regulation from
October 25 ‘07. “The decisions that have been announced by Sebi are good decisions, good step in the
long term interest of the investors, good for the capital markets. They are meant to moderate the
capital inflows, which were very copious and have an impact. The index has risen 1000 points in just
four trading sessions. I want to assure all investors that what has been done was a necessary step and
in the interest of everyone, retail, broker, high net worth individual, institutional investors everyone.
PNs are derivative instruments issued against an underlying security (shares or derivatives). These are
issued by foreign portfolio investors registered in India to overseas clients who may not be eligible to
invest in the markets here. The holders of PNs gain from the capital appreciation in the underlying
security. Sebi’s announcement is the culmination of a long discussion between the market regulator,
central bank and the government. The share of PNs as a percentage of total foreign portfolio flows
rose from 32% last year to 51.6% by August 2007. The outstanding value of PNs with underlying as
derivatives is 30% of the total outstanding (Rs 353,284 crore) at Rs 117,071 crore.
RBI has already called for a ban on incremental or fresh issuance of PNs. The RBI proposal is fallout
of the desperate battle that the monetary policy authorities are fighting in face of unprecedented
inflows. The inflows had major monetary policy consequences since RBI has to sterlise the rupee
released as a result of buying up dollars.
Left wants PNs off the block
The turbulence in the stock market has drawn the Left into another confrontatation with UPA
government, with the CPM backing the RBI’s recommendation to completely prohibit PNs. The CPM,
which made the demand at the time when the government was trying to assure the FIIs that PNs were
not banned, alleged that the discussion paper released by the Sebi reflected the “tentative attitude” of
the Government in regulating financial entities, especially the FIIs. It said the Sebi proposals aimed
merely at reducing the proportion of non-transparent instruments like overseas derivative instruments
(PNs) in the total assets under custody of the FIIs.
The recommendation of the Tarapore Committee of phasing out PNs altogether has not been accepted.
The fact that even such a half-hearted measure by the Sebi has led to massive pull-out of funds
participating a huge fall in the market only reflects the defiance of the FIIs towards regulatory
institution in India. The CPM said the finance ministry was ignoring the advice of the RBI to phase out
PNs “through which unregistered entities are pushing in huge funds into the capital markets and
engaging in speculative activities”.
The CPM tried to drive home the point that financial markets across the world were facing turmoil
following the sub-prime mortgage crisis in the US. The CPM asked the government not to allow
financial entities that are unwilling to meet the disclosure norms to participate in the Indian capital
markets. “The UPA government should realise that the surge in FII inflows into India, encouraged by
rupee appreciation and interest rate hike can eventually have serious adverse consequences.”
The CPM has been asking the government to reverse the capital account liberalisation measures
initiated by the erstwhile NDA government and demanded that concrete steps be taken to reduce the
vulnerability of the financial system to the flow of speculative capital, as was promised in the NCMP.
Government addresses FII concerns
Finance Minister P Chidambaram said the government will consider giving more time than 18 months
for FIIs and sub-accounts that have issued PNs against derivatives to wind down their position. He
also said the government will invite views from investors on how to simplify registration rules for FIIs.
The minister said Sebi proposed restrictions on PNs is in consultation with a few leading FIIs though
not necessarily with their consent.
We did anticipate criticism. We are open to extending the 18-month period suggested in Sebi’s draft
discussion paper on offshore derivative instruments. We will also solicit the views of FIIs and other
potential investors on how to simplify the registration norms for FIIs. He said that Sebi’s latest move
on restricting fund flow through PNs is only aimed at moderating the abundant fund flow into the
country. There are indeed concerns about the quality of capital coming via PNs.
There is one view that they should be banned. The government has not accepted it. The issue of
quality of funds can be addressed separately. The immediate concern is to keep our exchange rates at
competitive levels. The idea behind proposing restrictions on PNs is to moderate the copious inflows
that is driving rupee up against the dollar to record high levels. The government has no intention to
ban a class of investors or instruments at all.
USE FRONT DOOR TO ENTER
Market regulator Sebi said it had enough responses from foreign investors to move ahead with plans to
restrict the use of surrogate investment notes by foreigners. It cleared 16 FII applications and said
measures to curb issuance of PNs are not intended to curb capital inflows coming through the front
door. The Sebi said that application process to register as a foreign investor took just a few weeks.
Mr Damodaran also made it clear that there was no proposal to extend the 18-month time limit
provided for FIIs to liquidate their holding of PNs beyond 40% of their asset portfolio. He also said
proprietary sub-accounts must be registered with the regulator.
We believe, we have adequate responses to take the process (of registering new entities) forward, the
Sebi chairman told the video conference attended among others by Goldman Sachs, Merrill Lynch and
Kotak. He emphasised that he wanted FIIs to come through the front door. The scenario of FIIs now
investing in India in some other name will change. With regard to sub-accounts that want to register,
Mr Damodaran said that sub-accounts only for P-notes trades would not be permitted. He also said a
single group can register multiple entities in India. Sebi wanted to expedite the process of registration
and needed details on the time band required.
All that Sebi is seeking to do is bring all P-note’s transactions into the Indian jurisdiction by telling the
PN investors to register as FIIs and come through the front door rather than as hidden sub-accounts.
To this end, Sebi chief M Damodaran has assured quick registration system and has even said he
would take a relook at all procedural hassle. So all the Sebi chairman is telling the PN investors is
please come through my front gates, which are wide, open for you.
Arbitrage game ends for FIIs
Currently, most investments through P-notes are made by entities through sub-accounts opened by
registered FIIs. These four to five FIIs are the key beneficiaries of the present system of investments
through P-notes by unknown individuals and corporate bodies abroad who invest through sub-
accounts. These FIIs legitimately control close to 85% of all derivative investments done through sub-
accounts. These are complex derivatives based on Nifty or even individual stocks in India.
The curbs on P-notes have virtually ended a flourishing business of many leading FIIs. Observers said
the brokerage fees for offshore P-notes transactions were nearly four times higher than those
prevailing in the onshore market in India. Sources said some of the big FIIs had been running parallel
mini-exchanges outside the country, allowing one P-note holder to sell to another through the books of
the FIIs. These FIIs had a vested interest in maintaining a situation where they could play an arbitrage
game and charge higher fees for providing investors with an indirect access to the Indian markets.
Investors were also willing to pay a premium because of the freedom to remain anonymous if they
invest through P-notes. Sources said P-notes were not the only instrument through which FIIs were
making a killing. The day when Sebi issued draft norms for restricting P-notes, FIIs went short on
Indian ADRs listed on the NYSE and the NASDAQ. While there was panic the next day in India, FIIs
covered the short position at every low level, making big profits for themselves.
TIME TO LOOK AT BIG PICTURE
Though Cassandras have started proclaiming doom for the market, after Sebi’s proposal on PN, the
ground realities have hardly changed. A section of market participants claim that foreign investors
are on a “quit India” movement, but the fact is that FIIs remain bullish on Indian markets and the
economy, and even predict exciting times ahead over next three or four years.
Look beyond the near-term worries. China and India have developed a taste for stocks, something we
will not see replicated on such a scale again in our professional lifetime. The growth is here. China
and India are forecasted to have the strongest growth – around 9 – 11 per cent over the next few years,
while the regional average is slightly above 6 per cent. They are the largest economies, at $ 3,250 bn
and $ 1,125 bn respectively. Elsewhere in the world, there is not much growth, a situation that does
not appear likely to change. Merrill Lynch forecasts 1.4% GDP growth for the US next year, 1.0 % for
Japan and 2.3 % for Europe.
The move to curtail investments through PNs was always on cards and in all fairness it is not entirely
misplaced. If Indian investors cannot operate under a veil of secrecy in the equity market, then surely
the regulatory body is justified in insisting that foreign investors be subject to similar norms. After all,
greater transparency is not only desirable, but is also essential for smooth functioning of any market in
the world. Those who believe that PNs should not have been touched are apprehensive that this move
might lead to a huge outflow of foreign funds and thereby trigger a long bear market. If – and it is
rather unlikely – this section is proven right, then it will just mean that there is no real conviction
about foreign investors’ fascination with India Story. And if that is the case, then this money could
have flown out at any point of time in the future as well. Who would this section, which is currently
laying all the blame at the doorstep of the regulator, then blame?
But if the India story is well and truly alive – which it is – then many of these anonymous investors
should have no problem revealing their identities and entering the market to participate in what many
global market pundits call the ‘best story’ in the world. After all, the only change that has taken place
is Sebi decision to ensure that the criteria for investing in the Indian market is the same regardless of
whether the source of money is Indian or global. If this were to happen, it would just be one more step
towards a better-regulated market, which provides a level-playing field for one and all and where
capital flows, are a consequence of long-term rather than short-term prospects.
Also, everyone would do well to remember that it is not a market regulator’s job to facilitate bull runs
or prevent bear phases. Its job is merely to ensure that the market functions in an orderly fashion and
without the existence of irregularities.
Lastly, the origins of the current rally can be traced back to the discovery of India’s potential as a
future economic giant amongst global investors few years back. Any sharp outflows will impact the
stock market over the near term. Though, the run-up in the stock market has pushed the valuation of
the stocks, however, a look at the historical valuations indicates that earnings growth of Corporate
India has helped in brining valuations down to reasonable levels even as the index scaled new peaks
over the past few years. So, long-term fundamentals continue to be strong in terms of economic and
earning growth.
REVERSE SWING
23TH October 2007
It was a day when the fat cats were caught on the wrong foot. Having gone short to put pressure on
the government and partly driven by the bets that the P-note crisis could worsen sentiments, they were
suddenly hit by a reverse swing..
These players, primarily the issuers of P-notes, rushed to cover their short positions with Sebi clearing
the registration of several FIIs. As they scrambled to cover up short positions, the market clocked in
the biggest single-day gain in absolute terms. The 30-share BSE Sensex hit an intra-day high of
18,542.41 before setting at 18,492.64, a gain of 878.85 points, or 5% over the previous close. And it’s
not just FIIs who were taken aback by the dramatic run, leading market operators too said to have
burnt a hole in their pockets on account of short positions.
Indian regulators, in particular the finance ministry and Sebi, have done a remarkable job over the last
few days of communicating the changes in the rules governing PNs. There were clarifications and
several rounds of dialogue with investors. The exercise has clearly succeeded in convincing most
foreign investors that capital controls were not on the agenda. This was crucial because the
international media had picked up on the ‘capital controls’ angle. The sensex rose 879 points, as Sebi
was able to convince investors that it was serious about easing the registration process for FIIs.
In any case, the main issue is not one of the hidden identities of PN holders. On the contrary, it is one
of creating a more transparent framework. The move by the Sebi must be described rightly as one that
is pro-market and pro-globalisation. The Sebi’s move to create a more open system has been
welcomed by almost all players in the market in India and abroad. Why the Sebi proposals are being
welcomed, you may ask, simply because it seeks to broadbase the market which is currently the
monopoly of four to five large FIIs who are registered investors in the Indian stock market.
25TH October 2007
Sebi bans fresh issue of P-notes in derivatives
Market regulator Sebi announced new rules to regulate foreign investments through instruments like
participatory notes. The rules will be effective from Friday 26 October 2007. In derivatives, FIIs and
their sub-accounts cannot issue fresh P-notes and will have to wind up their current position in 18
months. In the spot market, FIIs will not be allowed to issue P-notes more than 40% of their assets
under custody. The reference date for calculating such assets will be September 30. Those FIIs who
have issued P-notes of more than 40% of their assets could issue such instruments only if they cancel,
redeem, or close their existing PNs. Those FIIs who have issued P-notes less than 40% of their assets
under custody can issue additional instruments at the rate of 5% of their assets.
Mr Damodaran said while the exercise is aimed at strangulating flow of anonymous funds into the
Indian equity market, as of now there was no evidence of terror funding flowing into the capital
markets. On a mechanism to check terror funding in stock markets coming in the shape of corporate
entities, Mr Damodaran said: “… security market regulation is not an answer for everything. There are
other agencies to look into this.”
FM hints at more capital controls
The government will not hesitate to take more measures to curb surging capital inflows without
hurting growth if required. The Finance Minister said that any such steps would have to wait for an
analysis of the results of the new controls on P-notes. I have said one of concerns is the very strong
increase in capital flows. Without hurting investment, we would like to take some measures to
moderate inflows. Sebi has taken some measures. We would like to wait and see what their impact is
on capital inflows.
Friday: 26TH October 2007
Index return to 19K
Stock markets rose for the fifth day in a row on Friday with the benchmark BSE Sensex surging to all
time trading high of 19,276.45 and ended the day at 19,243.17 points after market regulator Sebi
allowed more overseas investors to enter the bourse. The 30-share Sensex gained 472 points. L&T, the
country’s biggest engineering firm, rose 12% to Rs 3876.90 while rival BHEL gained 6.2% to Rs
2,431.75, SBI, the biggest lender, added 7% to settle at Rs 2083.95.
Domestic investors turned active amid indications that P-note holders and hedge funds seemed
interested in getting registered as FIIs. This week, 18 sub-account entities have registered as FIIs. The
regulator on Tuesday decided to allow more foreign investors like pension and university funds to
invest in Indian stock while regulating inflows through PNs. Contrary to concerns about the likely
pullout by FIIs after the development, overseas portfolio investors were seen hectically covering
shorts in Futures and Options, prompting domestic investors to join the bandwagon. FIIs and retail
investors will be more active and the market will see long-term investments.
Sensex scores biggest weekly gain
The benchmark Sensex registered the biggest weekly gain of 1683.19 points and touched an all-time
closing high of 19,243.17 in a wild bull charge during the week. The sensex rally throughout was
credited to strong global cues as well as the market regulator Sebi’s clarification on Monday that the
proprietary sub-accounts will be allowed to register within a day.
The market sentiments was also enlivened by robust second quarter results announced by some
companies like L&T, BHEL, Lupin, DHFL, India Cement, Castrol India and JSW Steel; and sub-
accounts resulted in a rush of applications and clearance of 18 cases within the week.
Bourses surged consistently on the back of hectic short covering by Foreign Institutional Investors in
view of the expiry of derivatives series on October 25 and indications that PN holders and hedge funds
are interested in getting registered as FIIs. The market regulator decided to allow more foreign
investors like pension and university funds to invest in Indian stocks while regulating inflows through
PNs. While Finance Minister P Chidambaram said the government would like to take some measures
to moderate the inflows without hurting investments.
JUST ANOTHER MILESTONE: SENSEX AT 20K
Monday: 29TH October 2007: A fresh peak of 20,024.87 points intra-day
It took the index a little over 20 years to reach the first 10,000 mark, but just a little over 20 months to
double that score. Since, policy uncertainty over instruments through offshore derivative instruments
(ODIs) and participatory notes (P-notes) having been reduced, the stock market has resumed its
upward march with gusto.
The Sensex tore past the psychological 20,000 mark towards the fag end on Monday’s session.
Nothing seems to worry local investors, who feel the index can go up further. The Sensex vaulted to a
fresh peak of 20,024.87 before settling at a closing high of 19,977.67, up by 734.50 points.
The mood on the Dalal Street is celebratory, even the most die-hard bulls are baffled by the ongoing
frenzy. Significantly, it’s the local institutions that are in the driver’s seat. According to Kotak
Mahindra Bank CEO Uday Kotak, most foreign entities are reluctant to sell their P-notes, fearing they
may not get a chance to buy back. He also felt that some Chinese money might be entering India
through FIIs. The absence of big selling by FIIs has prompted domestic players to buy, which along
with some short covering has pushed the Sensex up. The bounce could also be because most investors,
including hedge funds, are likely to hold on to PNs and ODIs for as long as possible. So in absence of
any real selling pressure, the only way for the markets is up.
Right now the redirection of liquidity to India and China is driving up markets. Also it is not just the
emerging market funds, which are now investing in India. Global funds or sector specific funds are
putting into Indian companies because the market cap of the biggest Indian companies has become
very large, making it impossible for funds with mandates to invest in companies of a certain market
cap and above to ignore them.
The concerns about valuations persist, though some players feel that the old valuation parameters may
no longer be applicable. “Valuations look a little above the historical fair value, says ICICI Prudential
AMC chief investment officer Nilesh Shah. However, compared to China, they look fairly reasonable.
We are seeing a paradigm shift in valuation benchmark.”
Tuesday: 30TH October 2007: A fresh peak of 20,238 points intra-day
The stock market on Tuesday went on a roller-coaster ride with the barometer Sensex first scaling a
new peak 20,238 points and later settling in sub-20K area on alternate bouts of buying and selling
across sectors. Many bank stocks fell following RBI’s decision to hike the amount of depositors’
money that banks must keep in reserve. Besides, selling pressure emerged across other sectors later in
the day. The index failed to close above this milestone even on Tuesday.
REGULATORY CHECKS
Managing capital inflows
Finance minister P Chidambaram said India needed to put in place appropriate regulations and risk
management systems to manage the enormous capital flows. “Today in India, we have a problem of
enormous capital inflows. This is a completely new situation for us. We welcome capital but we must
learn how to manage and absorb it. We need to put in place appropriate regulations and appropriate
risk management systems.
Referring to the subprime mortgage crisis in the US that rattled financial markets worldwide in July
and August ’07, Mr Chidambaram said perhaps one of the reasons why the crisis hit the US economy
was because regulation fell behind innovation. “I came to the conclusion that perhaps one of the
reason why the sub-prime mortgage crisis hit the US economy was because regulations fell behind
innovation. We don’t want (our) regulations to fall behind innovation.”
Noting that India had reaped fruits of globalisation especially in trade, where its exports had seen 20%
growth last few years, he expressed concern over rise in protectionism in the developed world. “We
have gained immensely through the globalisation of trade. In recent years, our exports have grown an
average 20% a year. Yet there are some aspects that worry us. Firstly, the rise of protectionist
tendencies in some advanced economies and secondly, even as we find tariff barriers being reduced,
we also find new non-tariff barriers being erected.”
Sterilisation tax to stem ECB flows
The central bank and finance ministry are working on a concept paper that will look at the feasibility
of levying a sterilisation tax on external commercial borrowings. The apex bank has had to sterilise a
lot of liquidity (local currency) released into the system. It loses about 3% on such sterilisation efforts
– the difference between what it earns on deploying reserves in mainly US treasury and the interest it
pays in the domestic market for sucking out liquidity through the issue of government securities.
The idea possibly is to pass on some of the sterilisation cost to those going in for ECBs. Also, this will
increase the cost of borrowing and thereby minimise the interest rate arbitrage that prompts domestic
companies to borrow abroad. Higher interest rates in the country have forced corporates not just to
borrow less, thereby impacting the credit offtake of local banks.
Auction of foreign loans quota
Another idea being explored is the auction of ECBs, something the Russians have been doing quite
successfully. Since many corporates are vying for the limited ECB quota, the needier may be willing
to pay an extra fee by way of auction to access foreign loans.
RBI is working on a concept paper on these measures, which could be explored as an option in future
if capital inflows go out of hand.
Back to school - Missions Seven Charitable Trust

3
INDIA: THE BOTTOMLINE IS GROWTH
Finance Minister P. Chidambaram said that India’s economy had hit an “anchor” growth rate of
8.5% and more likely looking at 9%. But he undermined the need to drive growth deeper and wider as
he defined the need for rural employment guarantees. Growth is not an end but a means to an end.
Growth is not sufficient but necessary.” I do believe we will grow at 9%”. “If there is some
turbulence, it will fall to this side of 9%... Foreign investors should proceed on the assumption that the
anchor rate of growth will be in the range of 8 to 8.5%.
Looking at the current financial year, the Finance Minister said the most pessimistic rate could be
8.6%. “Does 8.6% look negative to anyone? I think it will be closer to 9%.” He dismissed suggestion
that capital flows into India were erratic, and spoke of a “secular rising graph” in it.
Chidambaram was also confident of presenting the next budget, despite speculation that an early
election or political trouble. He hedged words on whether it will be a populist budget. “It will be a
budget which will continue the efforts of the past four budgets.” “There is no reason to change course.
There is every reason to stay the course.”
He compared output statistics of steel, rice and wheat with China to emphasise that India had a long
way to go in boosting productivity and prosperity, but noted that India was fast heading towards a
situation where its labour force and work-force would be equal in number, suggesting that even if
people were deployed in less desirable jobs, they would not be jobless. “Can we make that India our
India? I believe we can. The bottomline is growth.”
Chidambaram’s Ten Commandments to build India
1. Not be beholden to anyone
2. Not make for ourselves any ideology
3. Not make wrongful use of any religion, for no religion will tolerate anyone who misuse it
4. Remember every day that we work, because work is worship
5. Honour our senior citizens
6. Not commit or condone any crime
7. Value knowledge and build a knowledge society
8. Not deprive the poor of their rights
9. Not do anything to hurt our fellow citizens or the environment
10. Not covet public property or anything that belongs in common to all the people
INDIA: THE BOTTOMLINE IS GROWTH 23
A POOR RICH COUNTRY, TRY TO MAKE IT RICH
India is making efforts to turn “a poor rich country” into an economic powerhouse and make the
country rich with an open polity and an open economy, says it’s Finance Minister P Chidambaram.
Relating what he called the “story of a poor rich country” the minister said he has faith in future
generations as “more and more Indians – especially young Indians – have discovered the virtues of an
open polity and an open economy.”
Our effort is to turn India into an economic powerhouse and make India rich. While my generation
which pearheaded the crossover will do its best, I have faith that the next generation of Indians, and
the generation after that, will eliminate the scourge of poverty and make India rich. Then, the poor rich
country would have deserved its inheritance. Going a long list of things that make India rich and poor
at the same time, Chidambaram said:
• India is rich because of its natural resources; it is poor because it is unable to exploit those
resources efficiently and profitably.
• India is rich because of its native entrepreneurial talent; it is poor because many policy and
procedural hurdles stand in the way of the entrepreneurs.
• India is rich because its people are hardworking, resilient and pragmatic; it is poor because
often commonsense is devoured by ideology.
‘Undoubtedly, India is challenged’ with the government facing the challenge of leveraging the huge
natural and human resources to en-sure rapid economic growth, he said describing growth as the best
way to eliminate poverty. With growth, we have a chance to wipe out the stigma of abject poverty, and
our people can enjoy the advantages of being citizens of an increasingly prosperous country. With out
growth, India will remain a poor rich nation.
For well over three decades after independence, India adopted a model of economic development. The
State was the principal driver of the economy and the economy itself remained closed to the rest of the
world. India GDP grew at an average rate of 3.5% in those lost decades; he said recalling that it
required a balance of payments crisis in 1991 to jolt India out of its slumber. Then “brushing aside the
prediction of doom, the people embraced the new paradigm of an open and competitive economy.”
“The India story had begun. It is an unfolded saga and we have added many chapters, but it was not
easy in the 1990s and it is not easy now either,” Chidambaram said describing the first decade of the
new millennium as “the best since independence.” In the seven years beginning 2000-01, India’s GDP
has grown at an average rate of 6.9%. Since 2003-04, the growth rate has moved to a higher plane and
the average has been 8.6%. 2006-07 was a splendid year with the GDP recording a growth of 9.4%.
One would have thought that the challenge of development – in a democracy – would become less
formidable as the economy cruises on a high growth path. “The reality is the opposite.” Democracy –
rather, the institutions of democracy – and the legacy of the socialist era have actually added to the
challenge of development. For instance, several infrastructure projects like airports, seaports, dams
and power stations and mineral-based industries such as steel and aluminium faced violent protests
over land acquisition.
A new policy on compensation, rehabilitation and resettlement would be translated into law and yet “I
have asked myself whether it would be possible in India to start and complete a project like the Three
Gorges dam, and my conclusion is that it would not be possible. The challenge on the human
development front is equally daunting with education – apart from healthcare – being the most
formidable, he said, as “the early development models that we inherited are simply in-compatible with
the demands of a globalised economy.”
Financial services next engine of growth: FM
India has said its growth story, steered by IT and telecom so far, will shift gear towards financial
services to drive expansion. “It is our intention to make financial services the next growth engine for
India,” said finance minister P Chidambaram. As the economy becomes more open and trade intensity
increases, big financial flows would be intermediated in the country.
India is a purchaser of international financial services; there is an opportunity for the country to
become a provider of these services as well. He cited a report that these services were valued at $ 13
billion a year and would rise to $ 48 billion by 2015. A government-constituted committee had
submitted its recommendations on making Mumbai an international financial centre. “It is, therefore,
our intention to make Mumbai an international financial centre,” he said, adding the report is in the
public domain and the process of building a consensus on the key recommendations is on.
The outlook for the economy is positive. The factors driving the growth are domestic consumption,
rise in investment, increase in employment and increase in productivity of both labour and capital. I do
not foresee a change for the worse in the factor. While there are risks such as crude oil and commodity
prices, we are confident we would be able to manage the risks without hurting the process of growth.
Different governments have steered reforms through the past 16 years. The policy and practices have
yielded the results. Since 1991, both foreign institutional investment and foreign direct investment
have recorded a sustained and secular rise. At the current exchange rate, India is a trillion-dollar
economy, he said, adding that outflows and inflows together account for nearly 106% of GDP.
Enabling capital market reforms
The finance ministry may not focus only on Mumbai while initiating crucial financial sector reforms
for developing an International Financial Centre (IFC) in India. The government is not going to create
an IFC. It will only implement enabling capital market reforms. If Karnataka or Gujrat provide first-
grade infrastructure, Bangalore or Surat can become IFCs. If Mumbai gets its act together, it also can
become an IFC. It is more about financial sector reforms than issues related to Mumbai. If government
amends the SEBI Act or the RBI Act, it does not apply only to Mumbai, it applies to all cities.
EASE OF DOING BUSINESS
India has become a better place to do business with easier cross-border trade and greater credit
access. The country has moved up 12 notches to 120 in the index of 178 nations listed in World Bank’s
2008 edition of doing business. Singapore, for the second year running tops the aggregate rankings on
the ease of doing business. China has moved up 9 places to the 83rd rank.
The survey notes that India provides better access to credit by expending credit bureau coverage to
individuals as well as businesses. It introduced an electronic registry for security rights granted by
companies. Traders can now submit custom declarations and pay custom fees online before the cargo
arrives at the port. This reduces time lag by 7 days. It takes 18 days to meet all administrative
requirements to export, down from 27. Overall, south Asia picked up the pace of regulatory reform
over the past year to become the second-fastest reforming region in the world, on par with the speed of
reform in the countries of the OECD. Emerging markets across the board have registered an absolute
increase in ranking because of fast track reforms. These countries have made reform of business
regulation a policy objective, giving an impetus for new business start-ups. The report finds that equity
returns are highest in countries that are reforming the most, regardless of their starting point.
The ranking are based on 10 indicators of business regulation that track the time and cost to meet
government requirements in business start-up, operation, trade, taxation, and closure. The ranking do
not reflect such areas as macroeconomic policy, quality of infrastructure, currency volatility, investor
perceptions, or crime rates. However, to close the business in India is woefully slow, taking 6-10 years
against the OECD average of less than 2 years. On taxation, the country slipped 7 places. On an
average, there are 60 tax-related payments a business has to undertake per year here against OECD’s
average of 15. While India’s position on labour reforms is understandably low at 86th, its worst
performance comes in the wake of enforcing contracts where it is ranked 177th. What this means that it
takes four years for a district court to intervene in a dispute between two commercial establishments.
City Prosperity Index
Riding on the high quality of life, transportation infrastructure and overall labour force contributing to
its economic growth, Delhi has emerged on top among 48 Indian cities, including Mumbai, as the best
place to reside, according to a report by Ernst & Young. The report, which took into consideration 57
parameters before arriving at the conclusion, said between Delhi and Greater Mumbai, the national
capital takes the lead on city prosperity index due to its lower population and hence higher per capita
income. On the business environment index as well, Delhi out scored all other cities as it has a large
workforce and more number of management graduates, people employed in trade and services and
other business activity as compared to most of the other major cities such as Mumbai, Chennai and
Bangalore. On the infrastructure index, Delhi has arguably the best infrastructure in India. However,
on the urban governance index, Greater Mumbai scored at the top, leaving Delhi at the second spot.
Ernst and Young report places both Delhi and Greater Mumbai in the same bracket when it comes to
quality of life index. They have a large supply of hotel rooms as well as multi-model public transport
system. These cities have the best possible leisure activities available in the country.
Be a part of financial literacy mission – Missions Seven Charitable Trust

4
INDIA INC: OPEN FOR NEW HORIZONS

RELIANCE INDUSTRIES: STRATEGIC SHIFT
RIL will concentrate on buyouts; partnerships and the agriculture sector in future and build huge
capacities with big-ticket investments. Mukesh Ambani listed five fundamental strategic shifts in
Reliance, which includes the following as pillars of its future game plan:
• Inorganic growth,
• Partnerships,
• Foray into agri and rural sectors,
• Innovation and
• Building sustainable growth
RIL has earmarked about $ 12 billion (Rs 48,000 crore) for investment on refining, petrochemical and
exploration and production (E&P) over the next four years to further increase capacities. Investing
about $ 8-9 billion on Jamnagar complex alone, the company will ramp up its Paraxyline and ethylene
capacity. Mr Ambani also assured small shopkeepers and venders that RIL’s retail operations would in
no way jeopardise their interests.
Reliance Retail ties-UP with Apple

Reliance Retail has entered into an exclusive marketing and distribution deal with the $ 19.3 billion
Apple of iPods and Mac computers for standalone outlets. Reliance Digital would call the first store
iStore. This is the first time that Apple is partnering a big corporate house for distribution anywhere in
the world. The iStore would be standalone showroom selling Apple products ranging from Macintosh
computers to iPods and later, after its India launch, its latest cult offering I-phone.
Reliance Citigroup to form NBFC

In a big-bang foray into the consumer finance space, Reliance Retail is entering into a joint venture
with Citigroup for setting up a nonbanking finance company (NBFC). The NBFC, which marks the
coming together of India’s largest business group and one of the world’s largest service groups, will
largely deal in loans and credit cards for Reliance Retail customers. The company is eager to get into
consumer finance in a big way. If it has announced investments of Rs 25,000 crore in its retail venture,
it might as well facilitate easy purchase of goods.
LN Mittal in refinery, petrochemical complex, exploration and production
The LN Mittal group has signed a memorandum of understanding (MoU) with HPCL, French oil
major Total, Gail and Oil India for jointly developing a $ 6-billion refinery-cum-petrochemical
complex in Vishakhapatnam. The 15 million tonne per year refinery project also include a 1 million
tonne olefins and aromatics complex. The exact equity structure and project cost would be decided
after the feasibility studies are completed. Mr Mittal has already picked up a 49% stake in HPCL’s $
3.6-billion Bhatinda refinery. He has also evinced interest in venturing into the exploration and
production sector. The LN Mittal group may participate in the forthcoming round of bidding
exploration blocks under the NELP-VII.
INDIA INC: OPEN FOR NEW HORIZONS 27
NAVRATNA PUBLIC SECTOR UNITS
The moniker of ‘navratnas’ for India’s biggest public sector companies is proving to be a fitting one.
In the last one year, the government has become wealthier by over Rs 314,000 crore or $ 78 billion
thanks to the appreciation in the stock prices of the public sector undertakings and new listings. And
that’s not all; the government earned a cool Rs 16,000 crore as dividend from the 58 listed central
PSUs just last year alone. Or to put it differently, every ‘aam aadmi’ is now notionally richer by
around Rs 2900 as compared to a year ago thanks to listed PSUs.
The total market value of government holdings in PSUs is now almost $ 210 billion a 60% increase
over the previous year. Besides a booming Sensex, new listing such as Power Grid Corporation,
Central Bank, Indian Bank and Power Finance Corporation have powered this increase in wealth. Just
to put things in perspective, the amount is equal to a fifth of India’s GDP and over half of the
country’s public debt. If the government decides divest its entire holdings and distribute the money, a
typical Indian family will get a one-time windfall of Rs 38,000. The appreciation in government net
worth would have been higher even higher if not for their refusal to increase retail fuel prices. The
policy of subsidised fuel has significantly depressed the market capitalisation of oil & gas majors such
as ONGC, Indian Oil, Bharat Petroleum and Hindustan Petroleum.
Now, compare the dividend returns with government initial investments in these companies. At the
end of June ’07, the government contribution to the equity capital of these 58 PSUs works out to be
around Rs 31,000 crore. if we consider the fact that in a majority of the cases government subscribed
to the equity capital of PSUs at par value, the dividend-yield itself works out to be over 50% every
year and the capital appreciation is over 26 times.
There have been a number of star performers in the Government portfolio. The biggest contributor to
GoI wealth has been NTPC. The market value of government holding in the power major is now $ 23
billion, which is an increase of $ 13 billion. Next in line is minerals and metals trader MMTC, which
has contributed $ 11 billion to the rise in government’s net worth.
The once mired under a mountain of debt and steeped in losses Steel Authority of India (SAIL), is
now one of the biggest wealth creators in the business. The market capitalisation of the SAIL has more
than doubled in last one year to nearly Rs 68,000 crore. This has created an additional wealth worth $
10 billion for the government. Other big contributors include recently Power Grid Corporation, Bharat
Heavy Electricals and State Bank of India and Power finance Corporation.
Future success depends upon managing the constantly changing, volatile environment
The market cap to revenue ratio of Indian companies such as Infosys, ICICI Bank, Bharti Airtel, and
Tata Motors was far greater than their global peers such as Accentura, Citigroup, AT&T, and General
Motors and far from worried about growth prospects in the future. The essential challenge facing
Indian companies, revolved around their ability to manage hyper growth. Future success depends upon
managing the constantly changing, volatile environment.
Harvard dons Tarun Khanna and Krishna Palepu

Take a crash course of financial literacy – Missions Seven Charitable Trust
5
INDIAN: INVESTING ABROAD
Indians investing overseas prefer putting their money in real estate rather than exotic investment
products. With eyes firmly on the Indian growth story, most investors are, in fact, not looking at other
investment options abroad.
Outflows such as remittances are geared to balance the relentless capital inflows into the country. The
government allows remittances of 2 lakh by resident Indian and real estate is the top investment choice
under this window so far.
However, the limit of $ 2 lakh per individual is far from being used. Prior to September 25 ’07, this
limit was half the current amount. High net-worth individuals (HNIs) in the country however are taken
in by the India growth story. They are not willing to look beyond the country.
According to the Asia-Pacific Wealth Report published by Merrill Lynch and Capgemini, there were around
83,000 HNIs in India at the end of 2005, up 19.3% from the previous year. This growth rate was the
second highest among all countries and markets globally. HNIs are defined as individuals with net
financial assets of at least $ 1 million, excluding their primary residence and consumables.
Analysts say the trend of Indian investing in real estate overseas is driven by the fact that demand for
housing in those countries is drying up. The sub-prime crisis and a cooling housing market overseas
have contributed to this. And the trend has been now towards Indians investing in property. But
procedure hassles remain, with unclear taxation policies. Fund managers complain there are no clear
guidelines on the way the money has to be invested. Though many banks and service providers have
relationships with brokers overseas, there could be problems in remitting money.
Apart from real estate, investment options available to Indians include equities, currency and
commodity derivatives. Operational bottlenecks, including taxes and lack of clarity on procedures;
dissuades fund managers from offering other exotic global investment products here. It is not clear
whether all types of products can be distributed in India. Who are parties distributing these products
also remain grey area.
Information improves public services: US study in India
The finding, reported in week’s Journal of the American Medical Association, could be an overlooked,
relatively easy way to boost health and wellbeing in developing countries around the world. In India
and many other developing countries, central and local governments provide a variety of public
services in areas of health and education.
Simply informing the poor about government-provided free or low-cost health, educational, and social
services can help them take greater advantage of public services. The study found informed villagers
went for more prenatal exams and supplements, more vaccination, paid lower school fees and held
more village council meetings.
Keep informed – Missions Seven Charitable Trust

6
FOREIGNERS
DRAGON EFFECT: CHINA INTO AFRICA
The China bogey has prompted India to aggressively pursue its strategic and economic agenda in
Africa. Though India has already scaled up its African safari in the last two years, it has now decided
to further speed up the process as China has launched $ 1 bn Africa development fund.
Minister of state for industries Ashwani Kumar said that India would now increase its presence in the
African continent, and South Africa would act as the gateway. “Already, India’s investment in South
Africa has increased substantially in the last few years, and the presence will now increase manifold.
China has been aggressively pursuing its Africa policy. We can’t sit idle.”
In fact, the creation of the Africa fund by China was one of the eight mechanisms for assisting Africa
under the aegis of President Hu Jintao himself. No wonder, the two-way trade between China and
Africa surged from about $ 4 bn in 1995 to $ 40 bn in 2005.
Significantly, India’s top leadership too has been cultivating good relations with most African nations
with a special emphasis on South Africa. Prime Minister Manmohan Singh, who undertook a two-
nation visit to the continent to boost bilateral relations with Nigeria, and trilateral ties between India,
Brazil and South Africa, had displayed India’s sincerity in following the policy.
India Inc too has explored business opportunities in South Africa in particular. According to the data
available with India’s industry ministry, the Tata Group, UB Group, M&M, Ranbaxy, Cipla, Godrej
and Ashok Leyland are some of the top Indian investors in South Africa. Even CEOs from top South
African companies are showing keen interest in India’s growth story. We may expect more economic
interactions between India and South Africa.
Poor law and order hits India Inc’s safari dreams
The growing incidents of crime in South Africa could play a spoilsport for Indian business
establishments making inroads into the African market. Though no crime has been targeted towards
Indian entrepreneurs or representatives of India Inc based in the country’s business capital of
Johannesburg or other prime cities, the lack of adequate security has been a concern for all those who
intend to do business in the country.
Indian companies are currently handling projects worth $ 2 billion in South Africa alone. Council
general of India at Johannesburg Navdeep Suri said that incidence of crime had been a concern. “Yes,
this is a problem, but you can’t forget that it is a transition phase for South Africa from the days of
Apartheid to a democratic regime. Also, what has compounded the problem of crime here is the
growing migration from the neighbouring countries. However, for Indian business, it is just one
negative point against nine positives.
Incidentally, people in the heart of the city are shot at just for a mobile phone or $ 100. Incidents of
robbery, street hooliganism and theft are rampant in all South African cities. It’s mostly petty crimes,
which make our lives difficult. All Indian business representatives live in highly secured places. They
often avoid lonely streets or walk at night.
FOREIGNERS 30
FDI ASSISTENCE CENTRES
To boost FDI inflows, the government has decided to set up FDI assistance centres across the globe.
These centres, to be set up in all major countries, would provide a ground to foreign investors to
interact with Indian officials. They would be educated on how to go about investing in India, provided
sector-specific details and clarifications on various laws relating to investment in the country.
To start with, the department of industrial policy and promotion (DIPP) has framed the policy for
setting up facilitation centre in 10 countries. The policy has been sent to the finance ministry for
clearance, as huge expenditure is required for setting up such facilitation centres. It also needs enough
funds to sponsor tours of officials so that they visit these countries to educate investors. Once the
policy is through, DIPP would establish links with respective embassies for facilitation of the scheme.
External affairs ministry is supportive of the move, as it would encourage FDI inflows. The objectives
of the country-specific facilitation centres would be attending investment queries from individual
investors, promoting joint ventures and business collaborations, encouraging visit of business
delegations, organising road shows, domestic and international publicity for marketing India and
providing incubation services to investors.
Under the scheme, 10 investment promotion centres would be established in the US, Japan, Taiwan,
UK, Germany, Singapore, France, South Korea, Switzerland and Italy. Industry chambers like
Confederation of Indian Industries (CII) and Ficci would also be associated in the functioning of the
centres. There is a possibility that the chambers may also become stakeholders in the project. There is
a gap between the country’s potential to attract FDI and actual FDI inflows. The facilitation centres
would aim at removing the shortcoming through active involvement of the Centre, states and industry
bodies in promotional activities.
Despite rise in PE buys, deal size still small
Even as private equity (PE) funds pour billions of dollars into India, the average size of a PE deals in
the country stands at a meager $ 18.5 million. Not only that, it has grown marginally from the average
deal size of $ 14.96 million last year.
According to data by Thomson Financial, there have been 178 deals worth $ 3.3 billion struck this
year till mid October ‘07, with an average size of $ 18.56 million. Though there have been a few large
PE transactions in India and the total amount of PE funding has significantly increased in the last few
years, the average size of a PE deal in India has remained more or less stagnant. This means that while
there have been a few large PE deals, the bulk of the deals continue to be very small.
Limited resources, unlimited ambitions - Missions Seven Charitable Trust

7
WARNING SIGNALS
BLACK MONDAY
The 20th anniversary of the stock market’s brutal 1987 crash has triggered explosive debate about
whether today’s raging, yet dubious, bull market in world stocks is headed for the same fate.
After all, investors know all too well that there is a persistent common thread in each and every
financial crisis over the last 20 years: excesses have caused all collapses. Many economists and
investors call them “bubbles.” Just look at the current examples:
• MSCI’s main index of world stocks is up 14% in 2007 and notched double-digit gains in three of
the past four years.
• China’s Shanghai Composite Index has more than doubled this year on top of a 130% gain in’06.
• MSCI’s index of Asia-Pacific stocks excluding Japan has risen more than 40% so far this year, and
it up 260% since the end of 2002.
• In the United States, where stocks in October ’07 completed the fifth year of a Bull Run market,
the bubble is of a different variety. Here, it happens to be in the housing and credit markets, whose
deterioration continues to threaten world financial markets and rattle nerves.
“All asset bubbles formed and imploded for the same reason: naïve extrapolation,” said Jeffrey
Gundlach, chief investment officer of TCW Group in Los Angeles, which manages assets $ 160-bn.
“Choose your crash,” Gundlach said. “Some of us witnessed the collapse in precious metals in 1980.
More folks probably can recall the emerging market debt crisis of 1998. All but the most
inexperienced among us lived through the tech stock and corporate bond debacles which opened this
decade.” Gundlach is referring to American homeowners who in this cycle took advantage of rock-
bottom interest rates, buying a slice of the property boom. That was aided by Alan Greenspan’s
Federal Reserve, which slashed benchmark interest rates to 1% in 2003 to pump the economy back to
life after the 2001 dot-com bubble burst.
But then the Fed raised rates 17 times, ending the cycle in late June 2006, when it had taken the fed
funds rate back up to 5.25%, and the housing boom lost steam. Delinquencies are still rising on
subprime mortgages and defaults piling up at record rates as home prices sink, pressuring consumers’
desire to spend.
The housing turmoil continues to exact a heavy toll on hedge funds and Wall Street banks that used
leverage to invest in pools of bonds tied to the risky subprime mortgage market.
But while the good times in housing and credit markets are over, the lessons from this and
the past boom-to-bust cycles or crashes continue to reverberate. “A continuous rotating
bubble is the result of wealth creation,” said Tom Sowanick, chief investment officer of
Clearbrook Financial LLC in Princeton, New Jersey.
WARNING SIGNALS 32
“Think about Nikkei 1989, the savings and loan crash of the early 1990s, ORANGE County and
Mexican peso crisis, LTCM and Asian Tigers, the tech wreck and corporate scandal of 2000-
2001, and now the credit bubble. Rotating bubbles are the nature of capitalism.”
Wall Street sinks on ’87 crash anniversary
New York: Caterpillar Inc’s warning that housing slump was infecting the wider economy, sent US
stocks tumbling by the most in more than two months on Friday, 19th October,’07, in a drop that was
made unnerving as it marked the 20th anniversary of the 1987 crash. The Dow fell nearly 367 points
after Caterpillar, the world’s top maker of earth-moving construction and mining equipment, said the
US economy will be “near to, or even in, recession” next year. Several industries it serves are in
recession, it said.
The Dow Jones industrial average was down 366.94 points, or 2.64 percent, to end at 13,522.02. The
Standard & Poor’s 500 Index was down 39.45 points, or 2.56 percent, at 1,500.63. The Nasdaq
Composite Index was down 74.15 points, or 2.65 percent, at 2,725.16. It was the worst percentage
drop for the Dow and the S&P 500 since Aug 9, the day the European Central Bank injected money
into the banking system to help calm markets after French bank BNP Paribas froze three funds that
invested in US subprime mortgages. The NASDAQ had its biggest daily percentage drop since the
global market rout on Feb 27.
GLOBAL ECONOMY
Follows a uniform path during a decade
The global economy has followed a remarkably uniform path over the past fifty years.
• Typically, a new economic cycle gets underway at the start of each decade and the rising growth
tide initially lifts all the boats.
• Midway through the decade, central banks begin tightening monetary policy in order to pre-empt
any inflation breakout.
• Higher interest rates always lead to financial turmoil in some part of the system.
• Central banks then begin to adopt an easing bias, as the priority shifts to avoiding a wider crisis
especially when inflation is usually not a major issue as yet.
• This sets the stage for a bubble in the few asset classes unaffected by the crisis as they never in
need of extra liquidity.
• By the end of the decade, the whole cycle begins to unwind with inflation ending being a more
general problem as productivity gains diminish, leading a more concentrated central bank action.
WARNING SIGNALS 33
POLITICS & GLOBAL LIQUIDITY
Can politics play spoilsport is the biggest question plaguing Indian stock market. And according to an
Enam Strategy report, politics and factors pertaining to global liquidity will have a significant impact
on Indian equities market.
Considering the aggressive overtures by the Congress & the Left on the Indo-US nuclear deal, there is
a high probability of mid-term polls. If there is going to be an election, most probably it would be in
the period February and April ‘08. As a matter of fact, Congress party is already in a pre-poll mode. It
has got into the act of electoral appeasement by dishing out various pro-people schemes on a platter.
Slush-pools of liquidity would be another factor that would decide where the market is heading.
According to Enam, the RBI has four options to arrest steeping liquidity. It could resort to:
• Hiking CRR (which could be detrimental to bank landing and margins),

• Restrict external borrowings,
• Issue MSS bonds or
• Indulge in daily reverse repo auctions (incurring some cost to the central bank).
The report expected that RBI to maintain neutral stand as rising inflows have left it with an inflow to
the tune of $ 11 billion over the past one week; MSS ceiling has already been raised 4 times to $ 50
billion; CRR hike is still the most potent option.
The question being asked is what is preventing RBI from softening despite the wall of liquidity? The
RBI will need a strong moral argument. Falling IIP numbers may just provide the alibi for RBI to
move from neutral to softening bias by early 2008.
So, what would be the near-term worries for Indian market? Changes in US slowdown, politics,
inflationary pressures and corporate capex in times of rising interest rates could be the unsettling
factors. As far as a concern over US Slowdown goes, India is not directly linked to US slowdown.
Compared to other markets, which is more dependent on external consumption, commodity and
property, the impact of a US slowdown on India would be marginal. Taking inflation into account,
good monsoons and higher agri-productivity should alleviate pressure on food prices. An early
election would turn out to be a risk factor for markets only in the near term, the Enam report notes.
Taking a wider view, the key to watch out for is any ‘disorderly’ fall of the USD, As Fed rate cuts will
pour even more liquidity & weaken the USD vs Asian currencies. The 50 bps cut by Fed was merely
an insurance (to contain damage to aggregate demand) – and will only temper growing deflationary
trend and not fuel inflation, assure the report.
On Indian market, the report says, “India remains the best bet in a slowing world”. Our economy has a
growth trajectory of 8% (+) for next few years. India is a well-diversified market and is relatively well
insulated to global turbulence. Our valuations are not excessive at 18x forward vis-à-vis the average
emerging market PEs of 13-14x, given the quality of growth.
WARNING SIGNALS 34
OIL & MARKET TURBULANCE
Volatility in global oil prices and over-leveraged equity markets could lead to a slow down in the
world economy, which now appears to be unavoidable, finance minister P Chidambaram said while
addressing a panel of the World Bank in the US.
World real GDP growth was over 5% last year, primarily due to a robust performance of the Asian
economies, notably China and India, supported by most of the industrial countries and emerging
markets. However, recent financial market turbulence triggered by the crisis in sub-prime residential
mortgage market has enhanced the risk of a global credit crunch, which may adversely affect the
global economy in the coming years. If growth in industrialised economies slows, it will have an
adverse impact on the prospects of emerging and developing economies through reduced demand for
their exports.” The government of India has recently revised its export target due to the appreciating
rupee, which the government fears may slow down economic growth.
Mr Chidambaram’s comments come in the wake of high consumer price inflation (over 7% in India)
and record high global crude oil prices that is touching $ 90 a barrel and thereby building pressure on
the government to raise state-decided domestic oil prices. Provisional figures on inflation measured by
the wholesale price index indicated a record five years low in the week ending October 06 ’07.
Most of the world economy is now operating near or above potential. The housing market corrections
underway in US and inflationary pressure forcing central banks to tighten their policies and continued
imbalances in some major economies may contribute further to the risk of a slowdown.
“So far, action on major policy adjustments that is necessary for an orderly mitigation of these risks
has not been taken. If the deficit or surpluses of countries with largest imbalances continue to expand,
the impending threat of counter-productive protectionist measures is real and can not be disregarded.”
Inflows that are beyond the normal absorptive capacity of economies exert upward pressure on the
exchange rates, which have implications for competitiveness. “Countries have responded with a
combination of measures, including sterlised intervention and active management of the capital
account.”
Mr Chidambaram urged the World Bank to give greater focus on the changes in the global aid
architecture and the international financial markets, which impact elements of the Bank’s service
package. “Private financial flows often do not flow to the region which are lagging or the people who
are the poorest. Similarly, Trust funds are often focused on particular areas and may not encompass
the entire gamut of activities required for the poorest regions. Both of these impact the elements of the
service package that the World Bank offers. We feel that these elements would need greater focus
from the Bank to ensure its continued relevance going forward.” He also urged the WB to emphasise
on the financial services it provides as the fundamental and paramount service.
Two things: that blows your fuse?

Internal politics & lack of integrity
WARNING SIGNALS 35
INFASTRUCTURAL PROJECTS
Slippages on all fronts
The slow progress of infrastructure projects is worrying Prime Minister Manmohan Singh. Reviewing
the progress in power, roads, ports, telecom and railways, the Prime Minister’s Office (PMO) said the
progress of projects under the Common Minimum Programme (CMP) revealed slippages on all fronts.
Power
In power, capacity addition between April and September ’07 has, at 2895 Mw, been less than a third
of the targeted 10,000 Mw. As a result the power ministry has scaled down the annual target from
17,000 Mw to 14,000 Mw. The 11th Plan target has also been revised downwards from 78,577 Mw to
71,000 Mw.
Road
In roads, under the National Highway Development Programme (NHDP), deadlines for the first phase
of the Golden Quadrilateral (GQ), involving four laning of 5,846 km of national highways covering
the four metros, have been revised twice. NHAI officials say that even till June 2008 they will only be
able to complete 98 per cent of the stretches. This should have been done in 2006. Similarly, only 11
per cent of NHDP Phase II to upgrade national highways connecting the north –south and east-west
axes, is complete. It is to have been completed by December 2008.
Shipping and ports
In shipping and ports, the process of identifying projects under a programme to enhance private
investment has just begun – two years after the National Maritime Development Programme (NMDP)
started. This is largely because of delays by the 12 major ports in sending feasibility studies to the
ministry.
Railways
In the railways, dedicated rail freight corridor project has been delayed by nearly two years. No
construction has started through it has a deadline of 2012. Delays are largely the result of differences
between the finance ministry and the ministry of railways on financing the project.
Red-tapism
A section of Indian industry, under the Federation of Indian Chambers of Commerce & Industry
(Ficci), says India’s GDP growth, already high at 9%, could rise by another two or three per centage
points if regulations are simplified. “We have a maze of around 3,000 central statutes, of which
approximately 450 deal directly or indirectly with economic and commercial decision-making.
WARNING SIGNALS 36
CRISIL RATINGS
Corporates downgrades in excess of upgrades
As an acquisitive India Inc borrows heavily to achieve step-up growth, its creditworthiness has taken
a beating. For the first time in five years, the number of corporates downgrades by Crisil is in excess
of upgrades. This does not mean that companies are on the road of default. What it indicates is that
these companies could be in trouble if they cannot manage their acquisitions and expansions
Largely the increasing risk appetite of corporate managers drove the downgrades during first half of
2007-08. Six of the seven downgrades during the first half were due to acquisitions, or large-debt-
funded capacity expansions, marking a sharp reversal in the hitherto improving trend of corporate
India’s credit quality.
It is not just the money borrowed for overseas acquisition that is putting pressure on the corporates’
balance sheets. Galloping input costs, coupled with high-interest costs may lead to pressure on
companies’ profitability margins, in turn affecting credit quality.
Two of the high profile downgrades during the year included the revision of Tata Steels rating
following its $ 13-billion acquisition of UK-based steel company Corus, and Hindalco Industries, after
it acquired Canada’s Novelis for $ 3.5 billion. Both Tata and Hindalco made the acquisitions through
the leveraged buyout route. In other words, they used assets of the acquiree company as a security to
raise resources for the purchase, even as it downgraded the companies. The downgrades reflect the
trade-off between growing rapidly through heavy borrowing and creditworthiness.
The downgrades are typically one or two notches and are unlikely to result in defaults immediately,
since most Crisil-rated companies remain in the high investment grade. The distribution of the Crisil
ratings shows that the number of companies in the ‘AAA’ rating category increased significantly to
44% in FY08 from 29% in FY03. No Crisil-rated instrument has defaulted during the past 33 months.
This is the longest period without defaults in more than a decade.
The manufacturing sector accounted for most of the rating action in FY08, with one upgrade and five
downgrades. Among infrastructure companies, there were two downgrades in the first half of 2007-08.
The downgrades were the result of large capacity expansions. There were no upgrades or downgrades
among companies in the financial sector.
The aggressiveness of Indian corporates’ growth plans is also illustrated by a study of about 70 Crisil-
rated companies with a total turnover of Rs 2.6 trillion. The study reveals that the total planned capital
expenditure between FY08 and FY10 is expected to be nearly 1.4 times the aggregate net worth of
companies as on March 31, 2007. This is in comparison to figure of 0.6 times for the period FY05 to
FY07.
WARNING SIGNALS 37
VANISING COMPANIES
Grievance redressal mechanisms
At the recently held month-long investor awareness camps, organised by the MCA with professional
bodies, the Institute of Chartered Accountants of India (ICAI) and the Institute on Company
Secretaries (ICSI), complaints about untraceable companies topped the list of grievances.
Despite the crackdown, now spanning almost a decade, the regulators – the ministry of corporate
affairs (MCA) and Securities Exchange Board of India (Sebi) – have not yet successful in containing
the menace of vanishing companies. Many remain untraceable even after filing first information
reports against directors of such companies.
Most of those who attended these camps across the country were retired people, who had invested
their life’s savings in shares and deposits of these companies during the mid-to-late nineties, lured by
the fancy returns they promised. Many investors continue to be clueless about the existence of
grievance redressal mechanisms; while others were not sure which body they should approach. And
this, in spite of investor education programmes organised by the regulators. One can only hope that the
situation would change in the term as the government intensifies the investor education programme.
Sure, there are signs that awareness of redressal mechanisms has improved, but there is still a long
way to go. For instance, traffic in terms of user and grievance registration has surged on
investorhelpline.in. The web portal is one of the two websites funded by the Investor Education and
Protection Fund (IEPF) of the MCA, the other being watchoutinvestors.com.
Not surprisingly, a large number of grievances registered on the portal pertain to companies that are
not reachable at the last known address. The numbers, however, prove that the oversight mechanism
of the two regulators and the Stock exchanges is not working efficiently. For the record, the MCA has
published a list of violators on its website and newspapers. Some of these vanishes companies are said
to have reappeared under a different name.
For the situation to improve, the regulators need to review and overhaul the oversight mechanism. The
test for declaring a company vanished has to be tightened. Currently, a company is declared to have
vanished only if it fails all the three tests, viz, it has not complied with the listing and filing
requirements of the stock exchanges and registrar of companies for two years, has not sent
communication to the exchange for two years or if its office is not located at the address of the
registered office available with the stock exchange. Such tests allow many companies to escape being
declared vanished.
This apart, investor education and awareness need to become sharper and the message more hard-
hitting to ensure that people act cautiously. Investors too need to learn to do their homework on a
company before making an investment decision, rather than being swayed by false promise, since the
regulators and government cannot rescue them every time there is trouble. More importantly,
companies and mutual funds need to become more responsive and responsible to the shareholders and
investors, addressing grievances as quickly as possible.
WARNING SIGNALS 38
GLOBALISATION INDEX 2007

India is second least globalised in world
Amid all the hoopla around India emerging as one of the world’s fastest growing economies and
figuring in the list of the most attractive destination being eyed by World Inc, the country has been
names as the second least ‘globalised’ nation. The index is based on figures for 2005, the most recent
year for which data is available.
International consultancy and research firm AT Kearney in a joint report with US-based magazine
Foreign policy has ranked India at the 71st position in its annual ranking of the world’s most
globalised nations “Globalisation Index 2007”. Foreign Policy is the premier award-winning magazine
of global politics, economics, and ideas. The 2007 edition of the Globalisation Index is its largest and
most comprehensive version of the ranking to date. An additional 10 economies were added since last
year, for a total of 72. The index accounts for 97% of the world’s GDP and 88% of the world’s
population.
The Globalisation Index is an annual study, which assesses the extent to which nations are becoming
more or less globally, connected taking into account 12 variables grouped into four categories –
• Economic integration,
• Personal contact,
• Technological connectivity and
• Political engagement.
The list of 72 countries is topped by Singapore for the 3rd consecutive year, followed by Hong Kong,
the Netherlands, Switzerland and Ireland in the top five. India fell 10 places from its 61st position in
2006. The country was placed at the 2nd bottom position last year as well in the list of 62 nations. This
year 10 countries have debuted on the index and all of them have come at ranks higher than India.
AT Kearney said that India low position is despite the country’s service export and total trade rising
by more than a third. “India’s standing as a premier offshoring destination with a booming economy
often masks the fact that 70% of its population lives in rural areas.” Despite a doubling of Internet
users in 2005, only 5% of India’s population has access to the Internet and less than half its population
is attached to the power grid.
The Netherlands raised four places to third, followed by Switzerland and Ireland at fourth and fifth.
The United State dropped four spots to seventh overall, despite its continued strength in the index’s
technology score. Index newcomers Jordan and Estonia ranked ninth and tenth, respectively.
The world’s fastest growing economy China fell 15 places in this year’s expanded index to 66th rank.
“China’s decline is in part a result of lower trade growth compared to the previous year – possibly as
the country shifts its emphasis to domestic demand-led growth – and a decline in the political index
due to smaller increase in contributions to UN peacekeeping operations.
WARNING SIGNALS 39
Globalisation Index Rankings
Singapore Australia France Taiwan Mexico Tanzania
Hong Kong Austria Croatia Philippines Colombo Russia
Netherlands Belgium Bulgaria Costa Rica Senegal Pakistan
Switzerland N Zealand Japan Morocco S Arabia Bangladesh
Ireland Norway Spain Poland Thailand Turkey
Denmark Finland Panama Ukraine Argentina China
US Czech Rep. Portugal Chile Egypt Brazil
Canada Slovenia Slovakia Uganda Sri Lanka Venezuela
Jordan Israel Ghana Greece Nigeria Indonesia
Estonia Germany Italy Tunisia Peru Algeria
Sweden Malaysia S Korea Botswana S Africa INDIA
UK Hungary Romania Vietnam Kenya Iran
PM call for crash programme on literacy - Missions Seven Charitable Trust

8
MUTUAL FUND
TO EXIT OR NOT
As an educated investor, we all like to understand the multiplicity of any financial product that we
invest in. and the same stands true when it comes to investing in mutual funds (MFs) – we diligently
check out the current NAV, size of the fund, fund manager and so on. But while exiting our current
fund, we often find ourselves debating whether we should continue with our existing scheme and invest
somewhere else or should we give more time to the fund to prove it worth. Well, if you’re caught in
same dilemma – whether to stick with your current MF scheme or opt out for greater pastures, here
are some tips to help you decide…
Fund Objective
The ‘Fund Objective’ is the fundamental attribute of any MF scheme, as it provides the investor an
insight on whether the fund will fit in with their risk profile or not. Investment style and objectives are
one of the key parameters. Experts believe that in case the investor feels that the investment style
offered by a particular fund manager is not consistent with his existing financial plans, exiting may be
considered. Also, you can think of exiting if your original investment objective has been achieved.
Growing fund size

In India, the average size of leading equity funds have grown over the years, whereas 10 years ago a
Rs 200-crore fund was considered big, today some funds have assets in excess of Rs 3000 crore. As
the market capitalisation and investment universe increases, a growing fund size should not be a
problem. However, some mutual fund schemes may have few large investors whose entry/exit may
result in large inflow/outflows. In case of sudden large inflows, though sufficient time may be
available with the fund manager to invest, sometimes in an anxiety to invest early, the fund manager
may invest in such other stocks, which may create portfolio imbalances in the short term. At other
times, fund manager may be compelled to sell quite a few good quality stocks in order to meet the
large redemption requirements. The investor should avoid such equity funds, which have large
investors and whose entry/exit could create portfolio imbalances.
Performance
International research shows that 80% investors look at only the absolute return, 14% compare
performance to a benchmark index and just 6% compare a fund’s performance to its peer group funds.
Performance needs to be evaluated carefully. According to experts, it is advisable that you should
compare the portfolios delivery on the three parameters of risk, time and goals achievements once in
every year.
Level of risk
Experts feel that if the fund does not fit in with your financial plan, it would be prudent to exit and not
to hold on for performance reasons alone. A fund may be giving high returns with very high risk and
volatility, which may not meet the investment criteria of an investor. In such a case, an investor would
be well advised to seek a fund that has a lower level of risk with similar or somewhat lower return
characteristics. Like fund managers seek to create efficient portfolio at every level of risk, investors
should also look forward to create optimised and efficient portfolios that maximise their returns
potential at their determined level of risk.
MUTUAL FUND 41
INDEX FUNDS
For Indian industry, it has never been so good. Earnings growth looks good and if the macro
economic scenario is any indication, the local industry appears to be on a growth trajectory similar to
what the US industry and economy enjoyed for a long spell. But like the American investors, will the
Indian retail investors also miss the gravy train?
Statistics show that in mature markets such as US, actively managed fund managers are increasingly
finding it difficult to beat the index. Even back home the local fund managers no longer find it easier
to beat market returns year after year.
Index funds invest in the benchmark index like Sensex or Nifty in the same proportion as the index. It
is easy for investors to earn juicy returns: All they have to do is piggyback Corporate India Inc in a
diversified, low expense way. And an index fund would do your job.
There are many considerations that determine the investment strategy in mutual funds. In fact, at a
time when the stock markets are booming, it’s all the more important to decide whether to invest in
index funds or actively-managed funds. Of course, the votaries of security would always vouch for
index funds, but some others feel that by not investing in actively managed funds, you miss out on the
best of stock market returns. Well, if you are also in similar dilemma, here’s an insight on what you
need to know to make the best of your index fund.
Index investing
Experts believe it is very important to select the right index since there is no active stock picking and
the investment is done in the same composition as the index composition. Hence, the returns are
totally dependent on that. While selecting an index, the investor needs to take into account his
investment style – sectoral investing, large cap investing and others, and accordingly select an index.
Also, you need to choose an index that is expected to outperform other market segments. However,
since most available index funds are benchmarked against the Nifty or Sensex, there are not many
options to choose from. Experts feel that in India, index funds haven’t yet made a mark as an
investment category since active fund managers have been outperforming the benchmark indices.
Advantages of index investing
• The most obvious advantage is that an index fund doesn’t have to pay for expensive analysts and
frequent trading. This simply means that since no fund manager is involved, the charges are less as
compared to actively managed funds
.
• The other advantage in investing in such products includes simplicity, lower portfolio turnovers
and no-style drift.
• Another advantage is that an investor has to face less risk on his investment in index funds, as a
broad index is considerably less volatile than specific stocks or sectors.
• Index funds are ideal for investors who prefer to take only market risk and not a fund manager
risk.
`MUTUAL FUND 42
In a developing market like India, where the returns from the equity markets have been outperforming
all other asset classes in the last three-four years, the holding period of index funds has been lower
than any other mature market. Most analysts believe that generally index fund’s investment should be
from a long-term view and the investors need to stay invested to even out the tracking error’s effect.
You can also search for some better options such as index plus funds (approximately 80% portfolio
made of index, and 20% portfolio made of other stocks than index). These funds aim to generate index
plus returns while maintaining the low risk character of the index-fund. Not many funds are available
currently, but this is one category where a lot of money can flow in, once the Indian market matures
on the lines of developed markets.
However, there are inherent disadvantages of index investing. Index fund can under perform when
compared to active management, as an index composition is not dynamic enough to reflect market
realities (thereby losing out on potential returns). Also, index funds cannot outperform the target
index. While investing in an index-related product exposes you only to market risk in a fast growing
country like India, you might end up losing out on potential returns that come through in-depth
research for identifying opportunities ahead of market.
Distributors for lack of financial incentives are not interesting in hawking such products. Mutual funds
get lesser asset management fee; so even they are not interested. So, index funds are not so popular.
Also, it is easier to sell greed. Investors are lured by higher returns and often in their exuberance; they
jump risk metrics and go straight away for riskier products. While it might take a while before the
investors understand the importance of Warren Buffett’s words, at least asset management companies
ought to offer this option to investors.
No-Load Funds
Sebi had issued a discussion paper on no-load mutual funds schemes and invited comments from
investors and industry alike. While investors have welcomed the recommendations, the industry has
expressed reservations, as there is heavy dependence on the distributors to sell mutual fund schemes.
Financial Planning Standards Board India (FPSBI), an umbrella body representing mutual funds,
banks and insurance companies has called the Sebi recommendations on the introduction of no-load
funds, consumer centric. However, the board added that it might not be viable to introduce the
recommendations in their present form. “Such a measure, if implemented in its present form, is likely
to hamper the growth of the mutual fund industry.” The financial planners’ board has recommended
the introduction of variable load funds, depending on client needs. “There should be no prescriptive
notions of what should or should not be charged. Since all investors may not have the same need for
financial advice, the need should be priced between the buyer and the seller.”
LIC MF removes entry load from index fund: LIC MF AMC has said it will not charge entry load
on investment made in LICMF Index Fund-Sensex Plan, Nifty Plan and Sensex Advantage Plan.
However, those exiting the fund within 180 days of investment would have to pay an exit fee of 0.5
per cent. Earlier, the fund charged 2.25 per cent entry load on investment of less than 10 million
rupees and none above that.
Safe updates: Keep undated - Missions Seven Charitable Trust

9
DERIVTIVES
FUTURE & OPTIONS
F&O are market instruments belonging to a category called derivatives. As the name suggests,
derivatives are contracts between two or more parties of a security whose value is dependent upon or
derived from an underlying assets. One need not pay the entire amount for trading in an asset in
derivatives market but can do so by just paying a small fraction of the cost. While profits here may be
phenomenal, the same stands true for losses too.
As dynamics as the market is; there are strong views on this market segment. Critics claim these
instruments make the market more volatile and less transparent and abode of speculators; the
supporters’ view derivatives as an essential tool for transferring risk to those who are willing to take it.
What are your Futures?
A futures contract is an agreement between two parties that entails one to sell and other to buy a
stipulated quantity and grade of an underlying asset at a mutually agreed price, on or before a given
date in the future. The underlying asset can be a commodity, currency, security, index, interest rate or
any other specified item. The seller of a future contract, called “short,” agrees to make delivery to the
buyer, called “long,” which agrees to receive it.
Futures can be used either to hedge – such as a wheat producer could exercise this to lock in a certain
price for the produce by taking the long position, hence reducing reduce risk – or to speculate on the
price movement of the underlying asset to make profit. Their value reflects the future expectations
about the market movement.
Hence, if you buy (go long) a future contract and the price goes up, you profit by the amount of the
price increase times the contract size; if you buy and the price goes down, you lose an amount equal to
the price decrease times the contract size. The opposite applies for short position.
Futures contract are not for individual shares but for a lot, which is different for different shares and is
determined from time to time. At any particular time, contracts are open for three consecutive months.
The contracts are usually settled on the last Thursday of every month by which all open positions have
to be closed. Another special feature of future is their ‘marked to market’ arrangement. This requires
daily settlement of all gains and losses as long as the contract remains open. At the end of the day,
gains and losses are calculated and passed to the gaining or losing accounts. Finally, upon expiry of
contract, the accounts are settled either by delivery or a final cash payment (called cash settlement).
Yet another way of squaring off is by taking a position opposite to the original.
What are your Options?
Options are contracts that give buyers (called purchaser) the right – and not an obligation – to buy or
sell a specified quantity of an underlying asset at a predetermined price (strike price) on or before the
specified date. The buyer has to pay a premium for acquiring this right. On the contrary, the seller
(called writer) gets the premium for undertaking the obligation to buy or deliver the underlying asset
or buyer wish. The potential loss of the writer can be quite huge while if the buyer of the contract
decides not to exercise his right, he tends to lose just the premium paid.
DERIVTIVES 44
• Put option:
Put options give the buyer the right, but not the obligation, to sell an underlying asset at the strike
price until contract expires. The buyer of a put might be hedging his risk against a contrary position in
cash market or might be a trader expecting the asset price to fall below the strike price.
• Call option:
Buying a call option means getting the right to buy shares at a specific price by paying a premium to
the seller. A call becomes more viable as the price of the underlying asset or stock appreciates.
Let’s take an example: Suppose you buy a call option of 1,000 shares of ABC Ltd at a strike price of
Rs 50 per share by paying a premium of Rs 5 expiring in November. This contract gives you the right
to buy the lot on or before November 29, the last Thursday of the month at Rs 50, irrespective of its
price in spot market on that date. You stand to make a profit if spot prices move above Rs 55 (Strike
price + premium), which is paid to you by the seller of contract. Instead, if the share price falls, you
need not worry as you can deny executing the contract. Thus, you don’t loose anything more, except
the premium that you have already paid. The converse is true for put option.
What lies behind?

A long-term retail investor might not feel the need for entering this segment but they are very
important financial tool for other category of investors. Derivatives also provide arbitrage
opportunities to short term traders. Even if you don’t deal in them directly, it is worth knowing about
the dynamics of this financial instrument as they have a big impact on other financial markets,
including prices in spot category.
They are excellent tool for mitigating risk if you are ready to pay a premium for it. Contrary to cash
market, where one is required to have, say Rs 1 lakh to own shares worth the amount, trading in
derivatives allows you to trade in same number of shares by committing as little as Rs 10,000. Guess it
right and you gain in multiples but if your guess goes wrong your investment can be swept out totally.
This is the ‘long’ and ‘short’ of it. It’s your ‘call’ now.
New Instruments: Long term derivatives
Having imposed restrictions on fresh investments through participatory notes (PNs), the government
is now working with market regulator Sebi to identify new instruments like long-term derivatives to
attract investors through the regulated route.
This is being done mainly to discourage complex derivatives of nine months and above being traded
outside the country by foreign investors through PN route. Sebi’s proposals were aimed preliminary at
preventing exotic derivatives based on Nifty and blue chip Indian stocks being traded through the PN
route. Such derivatives don’t exist in the Indian market. The idea is to bring all such transactions
within Indian jurisdiction, benefiting Indian players and improving tax revenues.
The government and Sebi are in discussion for introduction of new instruments on the stock exchanges
to attract quality investments. At present the duration of derivative products both index and stocks is
three months. Long-term derivative products with duration of up to one year are quite popular
overseas. The premier derivatives exchange in US, the CME Group, has a daily turnover of $ 4.4
trillion. In comparison to that the premier exchange where derivatives in India are traded, NSE, is well
below 5% of this amount ($ 220 billion a day).
Walking alone isn’t risky for the one who dares - Missions Seven Charitable Trust
10
MISCELLANEOUS UPDATES
MNP FOR CONSUMER SOVEREIGNTY
After attacking the department of telecom (DoT) on spectrum allocation policy, the Competition
Commission of India (CCI) has now told the DoT that mobile number portability (MNP), which allows
a subscriber to retain the number even after changing the service provider, needs ‘urgent
consideration’ as it is of vital importance to competition and consumer sovereignty.
“It (MNP) is crucial element for providing choice to consumers and for maintaining competition in the
telco markets. It will reduce the consumer’s dependence on the existing service provider. Therefore,
competition dimension and consumer interest would be better served by allowing number portability
unless there are very specific and good reasons for not doing so.
The issue needs urgent consideration,” the commission has told the telecom department and other key
ministries. The Commission has also brought the issue to the attention of other wings of the
government like the finance ministry, Planning Commission and the corporate affairs ministry.
The CCI is of the view that it is only voicing the concerns of a large number of mobile phone users
who are dissatisfied with their service providers, but are reluctant to subscribe to another company’s
service, as they have to forego their existing mobile number.
The Commission’s only endorses the result thrown up by numerous market surveys, which reveal that
up to 50% of all mobile users in India are unhappy with their operator, and are willing to switch to
another service provider, if allowed to retain their number. Number portability has so far been
introduced in Australia, Korea, Japan, Canada, the US, the UK, most of Europe and Pakistan.
According to reports, its introduction has been followed by up to 50% subscribers switching operators
in most of these countries.
Indian telcos have been vehemently opposing the introduction of mobile number portability argue that
it would cost several thousand crores to upgrade their networks to implement this. They have also said
that the market is not mature to support MNP and this be introduced only when the country achieves a
high telecom penetration. India’s current tele-density is less than 20%.
The conflict between competition regulators and other sector regulators and government policies is a
global one, with various countries witnessing its consequences in one way or the other. In India, the
saga has just begun, as the CCI soon be able to enforce the Act.
CCI, like most other competition regulators in the world, believe that sectorial regulators would do
well to deal with financial, technical and quality aspects with a view to taking care of the interests of
investors and consumers and even the public at large, but not with competition per se.
It is largely accepted theory that it sometimes needs an external (regulatory) intervention to create and
protect vigorous competition, which is touted as an antidote to the so-called ills and suicidal
tendencies of free market. Paradoxically, almost every act of deregulation aimed at freeing the market;
seem to necessitate a new form of regulation, often with anti-competitive effects.
MISCELLANEOUS UPDATES 46
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI)

Vision 2021
Accounting professionals who silently play a pivotal role in shaping the financial health of business
houses would now come under the limelight. The Institute of Chartered Accountants of India (ICAI)
has decided to honour its member for demonstrating excellence, playing an exemplary role in industry
and creating value for their company’s stakeholders on a sustainable basis.
As a part of its strategy to popularise the profession, the institute has decided to institute awards to add
glamour to the profession. The ICAI, the apex body of over 1.40 lakh CAs, is in the process of
recasting the profession in the light of the changing environment.
Institute is working on “Vision 2021 document”, which aims at reinventing the profession in light of
changing expectations of stakeholders, challengers, changes in competitive environment and emerging
models of civic society.
Meanwhile, to meet the demands of industry and open new avenues for its members and students, the
ICAI is set to launch new placement platforms. The apex body of CAs would organise campus
placements for candidates who are yet to clear their final exams. It will also provide a platform to
headhunters to recruit experienced CAs, who are looking for new opportunities. With the economy
growth setting in two digits, an acute shortage of CAs is felt by corporates. To overcome this situation,
the institute has decided to organise a ‘career ascent’.
The event would include providing job opportunities to the semi-qualified candidates who have
completed their CA intermediate or PE-II examination and also their articleship training, but are yet to
pass their CA final examination. It is also an event to provide CAs in industry having 3-10 years of
experience with growth and career prospects enabling them to achieve full potential ensuring them the
careers that best suit their skills sets.
The institute is already conducting campus placements for fresh pass outs. It is for the first time that
CA students would be able to participate in the campus recruitment. The move would be a boon for
candidates who have the studied CA course, but have not been able to clear the final exams.
The award ceremony and career ascent would take place in Mumbai during the four-day event
corporate forum in mid-January. ICAI would award launch categories such as CA business leader-
corporate, CA business leader-SME, CA young leader, CA professional manager-public
sector/government sector, CA professional manager-international.
The Institute is planning make it an annual affair and position it as one of the most reputed awards
in the world of finance and accounting. During the event, Fin-Summit, a three full-day industry-
focused event would also be held on IT, construction and investment banking industries.
MISCELLANEOUS UPDATES 47
UB GROUP
Sporty Inroad
UB Group core business is liquor, which is highly regulated in terms of communication. Vijay Mallya,
chairman of the group bets big on games people play. He has pulled out all the stops to keep the brand
alive. He’s taken his Kingfisher brand to other categories (airlines). And the Kingfisher beer and
airline brand is increasingly making its presence across an array of sports. All the sports that Mr
Mallya endorses are long-term in nature with a strong lifestyle component.
UB sporting events are full of brio, replete with fashion, frills and fun. Then Kingfisher punchline –
king of good times – becomes the most enduring ambassador of the brand across sports. Here, the
choice of sports that UB endorses gains credence.
Entrepreneur-run businesses are different from professionally run companies. Nobody can take a 10-
year call in a Pepsi or Coke. But at the UB group, the decision of Vijay Mallya cannot be questioned,
and he can marry his personal goals with professional goals quite easily. One may even look at his
foray into sports bearing speed in mind. He owns a stud farm with over 250 racehorses, 200 classic
vintage cars, several yachts and private jets. He has also won trophies on professional car racing
circuits and has race Jaguars, Ferraris, Alfa Romeos and Mercedes Benz in his collection.
Mr Mallya’s sporty inroad is an endeavour to plunge headlong into a larger activation platform for his
brands. Think of the prestigious Kingfisher Derby in Bangalore. On the other hand, his pure-play sprit
brand, McDowell’s, has a long association with another premium racing event, the McDowell Indian
Derby in Mumbai. Mr Mallya sits as one of the pioneers of horseracing in the country.
Mr Mallya was quick to realise that across categories, for netting young consumers sports seemed to
be the ideal fit. His sprit brand McDowell owns Mohan Bagan Footwall Club, archrivals of yet
another UB brand, the Kingfisher East Bengal Club. Owing two oldest football clubs in soccer-crazy
Bangal has strengthened UB’s base in the east. Take for instance, the Kingfisher East Bengal Club. “If
you open any Kolkata paper, you’ll find East Bengal players sporting Kingfisher-branded jerseys/
shirts, on a daily basis, which gives the brand huge mileage;” Ditto for McDowell’s and Mohan Bagan.
Also consider the six-year-old McDowell’s Signature Club Golf Championship, India’s largest golf
tournament. Now Signature is a premium sub-brand of McDowell’s and, therefore, a natural extension
to a premium-sporting event.
In tennis, the Kingfisher brand seems firmly embossed too with the Kingfisher Airlines Tennis Open,
which in its second year has attracted many of the world’s top ranking players. Kingfisher also owns a
tennis stadium in Bangalore that has served as training ground for many a young talent in India.
It’s all focused spends around lifestyle sports in a country where affluence is on a new high. Also, he’s
been the chairman of the Federation of Motor Sports Club of India since 1990 and is bent on bringing
F-1 to the country. He recently even bought a 50% stake in the Dutch Formula One team Spyker for $
120 million through a consortium, Orange India Holdings, which he formed with Michiel Mol,
director of Formula 1 at Spyker. This year alone, he has flown in world F-1 great Ralph Schumacher
twice to India, and has been pumping in Rs 3-4 crore on motorsports every year over the decade.
Change your views - Missions Seven Charitable Trust

11
INVOLVE-TO- EVOLVE
LEARN SOMETHING NEW
K V Kamath
If it wasn’t for his parents, Kundapur Vaman Kamath might have ended up with the family business of
manufacturing roofing tiles on the outskirts of Mangalore. While they were convinced that education
was the key to the future, they also wanted their son to stay close to home. As a result Mr Kamath,
despite having paid his fees at the prestigious Benares Hindu University, joined the fourth batch of the
Karnataka Regional Engineering College (KREC).
1. The years at KREC saw Kamath spend the daily two-and-half-hour break running the family
business, which turned out to be his first brush with entrepreneurship. But the real change for
him came in 1969 when he heard about the IIMs. Though B-Schools were not perceived as the
vehicles for change, they were accepted even then as the next level of education.
2. IIM brought a shift in outlook. According to Mr Kamath, while engineering in those days was
learnt largely by rote, in IIM (A) the learning was through experience and theory followed.
3. Postgraduate at IIM (A) also prompted Kamath to take up a job at ICICI to gain some
experience. “I don’t necessarily believe in destiny, but if I had not worked with S Nadkarni
(the fifth chairman of ICICI) in my early career I would not be what I am,” says Mr Kamath.
Mr Nadkarni brought out the entrepreneur in me, where I learnt the nuts and bolts of the
financial service industry while working with them.
4. The next three years of working with N Vaghul were a crash course, which took me to a
completely different plane. Every morning, I walked into Vaghul’s room at half past eight and
something new pop up. If ICICI has taken innovative thinking and fearlessness for scale as a
core competence, the credit for this goes entirely to Mr Vaghul, says Mr Kamath.
The initial grounding taught Mr Kamath the need to constantly learn something new.
A game-changing experience for him was the realisation that he would be obsolete within a year.
“If you do not have the humility to accept this obsolescence, you are setting up a false pretence and
if everyone below you do just that, then it is a recipe for disaster.
INVOLVE-TO-EVOLVE 49
NR NARAYANA MURTHY
Infosys First
He has followed a simple mantra most his life, Infosys first.

Everything else – family, friends and personal pursuits – follows.
By any yardstick, the achievements of NR Narayana Murthy can be cause for envy. In just 25 years,
he has raised a start-up into $ 4-billion giant of a company that rewards its employees as much as its
stock holders; made it a model for other start-ups to emulate; and most importantly held it up as a
company that puts ethics before profits.
For Mr Murthy, Infosys courses through his blood stream – even after he steeped out of an executive
role. Though he is now Infosys’ non-executive chairman and chief mentor, he travels the globe adding
value to brand Infosys and providing all external connects to the company – be it top clients or
academic institutions.
Yet, in less than four years, he will disengage more or less completely. “At 65, one has to step out
completely and the rule that we have will not be changed or altered for the sake of anyone,” he said.
What then, does he plan to do when he retires? For once, Mr Murthy, who is never lost for words, was
stumped. He paused and said, “I do not know. May be taking up one of the several teaching
assignments I have been offered.”
Last year, when he gave up all executive duties at Infosys when he turned sixty, he shifted his office
from corporate block to his old office in the Heritage block, the first building Infosys built on its 80-
acre Bangalore campus. He sits there whenever he is in Bangalore – that is about 10 days in a month –
amid shelf after shelf of books, neatly indexed, a large television and loads of personal memorabilia.
“I have not read all the books in my collection,” he admitted, “But I have read the preface or
introduction in every volume.”
The story of Infosy continues to be a case study for B-school and never ceases to amaze – of how a
bunch of middle class guys got together to set up a company largely fuelled by vision and virtually
nothing for capital, how they adopted a simple, yet practical business philosophy. “We decided we
will earn respect by being ethical and straightforward,” Mr Murthy said.
Mr Murthy credits his founder colleagues for the success of Infosys;

And points out that it would not be what it is but for their sacrifices.
INVOLVE-TO-EVOLVE 5O
KNOWLEDGE IS THE KEY

Vision 2023
There is much to celebrate. As finance minister P Chidambaram said: “What India has achieved is
truly commendable and it has given someone like me the confidence to walk in any city in the world
with my head held high. In the last four years, the Indian economy had grown by 8.6% and in the last
two years by 9.2%. The race is getting faster and more intense. We want to continue at this rate. If we
do so, by 2015, we would have doubled our per capita income and by 2023, we would have become a
middle income country.”
India, which has seen its growth rate vault from a mere 3.5%, three decades ago, to an average of 9%
in the past two years, could well top the 10% bar. We must get on with the business of building the
country. Making a pitch for India’s greater integration with the world, the finance minister said: “Can
be secede from the world? If we want to be part of the world, we must accept its rules.”
Mr Chidambaram, who is upbeat about the ability of India Inc; to help turn the country into a middle
income nation by 2023; reckons that India should remain steadfast in pursuing its goals; there are
organisations like OECD that have recognised the latent potential. OECD in the recent report
projected that the Indian economy could grow annually at 10% provided the country stuck to the
reforms script.
And even as he complimented India Inc for its demonstrated capacity to create world-class companies,
to expand globally, and to grow both organically and inorganically, he appealed to the captains of
Indian industry to contribute more to society. Look at the world outside your company. Show your
capacity to give, to care, and to share, for India’s less privileged. Not just as compassion, but as a
public-private partnership to build India’s much-needed human capital to sustain growth.
The government has set a challenge before you to adopt 1,396 ITIs across the country. By the end of
the fiscal year, I would like to have a list of 1,396 companies that have adopted these it is; Can each of
you help a school become a true school and one primary health centre, to make a difference; Can each
of you ensure that trees are planted on the roads that you live in?”
The minister said a country’s identity is built by its society. While identity as a community is inherited
and its laws and constitution identify that of a nation, the people build the identity of the society.
“India is part of a larger globalised society. Each nation has to harness its resources and innovate.
India’s identity lies in a knowledge society.”
But, building such a society cannot be tasked to the government alone. What the FM wants, therefore,
is for India Inc to adopt each of the 1,396 ITIs in the country besides building good schools and
supporting primary health centres. The minister said he would like to see Corporate India contribute
towards building a society where all children are able to enrol in schools, complete primary education
and go on to acquire vocational skills. Today, almost 5% of the country’s children, totalling one crore,
are out of school and 27% of the school-going kids are dropouts after class five. “There is a world
outside your companies. You have built world-scale capacities. It is now your turn to build a society –
a true school.”
It’s the beginning – Missions Seven Charitable trust

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1

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