1.

PETTY CORRUPTION
Petty corruption hits as hard as grand one

No country, particularly in the developing world, can afford to ignore the prevalence of petty corruption if
its efforts to reduce poverty and improve the record on human development are to yield the desired
progress. Petty corruption, particularly in the form of bribes to access government-sponsored healthcare
and education, and subsidised food and fuel takes away from the poor income they would have otherwise
used for essential consumption such as food.

A survey of Bangladesh, India, Nepal, Pakistan and Sri Lanka found that health workers often demand
bribes for admission to hospital, to provide bed or to give subsidised medicines. In one Indian city, a
social audit revealed more than half the respondent had to pay bribes in government hospitals. Also, in a
survey in Rajasthan, nurses were to be found in their posts in villages only 12% of the time.

India’s record on human development is very disappointing – on the UNDP’s Human Development Index
of 177 countries for 2005, the nation ranked a poor 128. With high rates of absenteeism by teachers and
health workers, the objectives of programmes such as Sarva Shiksha Abhiyan and National Rural Health
Mission would be badly undermined. The United Nations Development Programme (UNDP) report
‘Tackling Corruption, Transforming Lives’ has pointed out that petty corruption hurts the poor the most,
i.e., in all these instances; it is the poor who pay a bigger price.

The real price of corruption is not paid in currency. The true costs are eroded opportunities, increased
marginalisation of the disadvantaged and feelings of injustice. It undermines efforts to reduce poverty –
by diverting goods and services targeted for the poor to well-off and well-connected households who can
afford to bribe officials. The poor also lose out when they have to pay bribes, since they cannot afford
small amount, which represent high proportion of their income.

Although corruptions can be categorised into two forms, grand and petty. Corruptions in the petty form
affect larger number of people. Petty corruptions can be just as grand corruption, hitting hard especially at
the poor. In that form, corruption involves smaller amounts but more frequent transactions. Hence calling
it petty is really a misnomer. Unfortunately, the myth that nothing can be done to curb corruption seems
to be nearly as pervasive as correction itself. Innovative ideas need to be employed to reduce its
occurrence. Countries would need to address the problem at all levels of government and private sector –
reforming institutions and processes so as to reduce the opportunities for corruption while creating
effective systems for detecting malpractices and punishing offenders.

That apart, UNDP’s report cautions countries against assuming that the corruption would diminish as their
economies grow. International experience suggests otherwise. A direct link between prevalence of
corruption and growth is yet to be firmly established. Studies cited by the report show that 10% increase
in corruption perception leads to 2.8% reduction in growth rate in Africa, 2.6% in Latin America and
1.7% in Asia. To anyone who goes by a checklist of does and don’ts for curbing corruption, India appears
to have a good record. But a checklist alone does not help to estimate the extent of corruption or to curb it.

However, to permanently reduce occurrence of corruption, there is no shortcut to educating people about
their rights and empowering them to demand what they are entitled to. That would require all stakeholders
to work together – government, the private sector, civil society, and the media. Individuals must also
assert themselves as citizens and consumers. And as corruption is not confined to country borders, it is
necessary for solutions to be a global responsibility to be shared by international organisations and
multinational companies, international banks and aid agencies alike.
2.1 SECURITY MARKET
“Keep your fingers crossed which way the Sensex might swing”

These are turbulent times on D Street. With global financial markets struggling in the midst of a
recessionary grip – rising oil prices, crumbing stock markets, falling corporate earnings, et al – it’s
definitely not what most financial planners were expecting, after signing off 2007 on a promising note.

In fact, the year started with a deep correction on the bourses and is now witnessing an ever increasing
rise in inflation, with the numbers creeping towards the 12% mark vis-à-vis a comfortable 4 - 6% range in
the larger part of 2007. With income on any investment seem after factoring in inflation, the actual returns
on equities may witness a sharp dip this year. But all’s not lost yet. If experts are to be believed, the
‘picture’ may have a happy ending. Here’s how:

The year 2008 surely is a reality check for the markets. While stock valuations were a concern when the
market was hitting new highs till few months back, it is not the case now. With valuations on your side,
investors can have a fresh look at equities. Inflation will be a concern in the near term with rising prices of
oil, steel and other commodities, but one should understand that equity is the best investment avenue to
fight inflation. And with soaring inflation, it becomes all the more imperative for investors to park
additional investible surplus in equities.

Experts feel that even in subdued market situation, one can make money provided one is careful about
what one chooses. Analysts say that the upside for the market in the near term looks capped with rising
commodity prices, margins coming under pressure and a moderation of demand due to high inflation. But
one can still find pockets of effective investments. The stock market by its very nature is cyclical. What is
called a bear phase may well be the onset of a new bull-run and vice-versa. Year 2008 might be a tough
year after a strong five-year bull-run for stock markets but this doesn’t mean the growth story for equity
market is over. Analysts feel the common mistake that investors make is to become bullish in rising
market situation and bearish in falling markets. They should be doing exactly the opposite.

1st week of June ‘08 – Sensex slips below 16k

On Monday, it did not take much for the already demoralised bulls to take fight. The 30-share Sensex
slumped 352.39 points, or 2.1%, to close at 16,063.18, just above the psychological 16,000 mark. And on
Tuesday Sensex breached the 16K mark.

Daily review 30/05/08 02/06/08 03/06/08 04/06/08 05/06/08 06/06/08

Sensex 16,415.57 (352.39) (100.62) (447.77) 254.93 (197.54)
Nifty 4,870.10 (130.50) (23.70) (130.30) 91.35 (49.15)

Weekly review 30/05/08 06/06/08 Points Percentage

Sensex 16,415.57 15,572.18 (843.39) (5.14%)
Nifty 4,870.10 4627.80 (242.30) (4.98%)

On Wednesday, Sensex tumbled further 447.77 points or nearly 3%, to close at 15,514.79. Ending weeks
of speculation, retail fuel prices were finally hiked. The 10% hike in petrol, diesel and LPG prices largely
triggered the negative sentiment. To everyone’s surprise the quantum of the petrol hike was way ahead of
the market expectations and has been the highest ever hike announced by the government, largely driven
by economic compulsions keeping the political interests on the backseat.
 SECURITY MARKET

2nd week of June ‘08 – Sensex slips below 15k intra-day on Tuesday

Has the India growth story run its course for now? That was the thought troubling investors on Monday as
the 50-share Nifty slumped to an 8-month low and the Sensex slipped below psychological 15,000-mark
intra-day, breaching the low of January 2008 in the process. The weak sentiment was mainly driven by
extreme negative global cues seen in US and against the backdrop of a sharp rise in global crude prices.
Also RBI’s action of hiking the repo rate by 25 bps contributed to the negative market sentiment.

Daily review 06/06/08 09/06/08 10/06/08 11/06/08 12/06/08 13/06/08

Sensex 15,572.18 (506.08) (176.85) 296.07 64.88 (60.58)
Nifty 4627.80 (126.85) (51.15) 73.80 15.75 (22.25)

Weekly review 06/06/08 13/06/08 Points Percentage

Sensex 15,572.18 15,189.62 (382.56) (2.26%)
Nifty 4627.80 4,517.10 (110.70) (2.39%)

3rd week of June ‘08 – Sensex slips below 15k

Capital markets witnessed another round of heavy unwinding during the week with both Nifty and Sensex
again touching new lows of 2008. The market sentiment was impacted severely due to weak global cues
coming in from the US and Asian markets which saw a deep correction throughout the week. The rise in
crude prices and a big negative surprise on the domestic inflation front spooked the Indian markets
completely, resulting in a big panic and adding fuel to the fire in further impacting the market sentiments.

Daily review 13/06/08 16/06/08 17/06/08 18/06/08 19/06/08 20/06/08

Sensex 15,189.62 206.20 301.08 (274.59) (334.32) (516.70)
Nifty 4,517.10 55.40 80.50 (70.60) (78.15) (156.70

Weekly review 13/06/08 20/06/08 Points Percentage

Sensex 15,189.62 14,571.29 (618.33) (4.07%)
Nifty 4,517.10 4,347.55 (169.55) (3.75%)

4th week of June ‘08 – Sensex slips below 14k

At the start of this calendar, market gurus predicted that bears might soon vanish from D Street. 6-months
on, it is the bulls that have become the endangered species. For the first time in 10 months, the Sensex
slipped below the significant 14,000 mark intra-day trade on Tuesday. Last time the Sensex fell below
14,000 was on August 21, ‘07. Oil above $ 141 a barrel was enough in deepens the gloom on Friday.

Daily review 20/06/08 23/06/08 24/06/08 25/06/08 26/06/08 27/06/08

Sensex 14,571.29 (277.97) (186.74) 113.49 201.75 (619.60)
Nifty 4,347.55 (81.15) (75.30) 61.55 63.20 (179.20)

Weekly review 20/06/08 27/06/08 Points Percentage

Sensex 14,571.29 13,802.22 (769.07) (5.28%)
Nifty 4,347.55 4136.65 (210.90) (4.85%)
 SECURITY MARKET

5th week of June ‘08 – Sensex below 13,500

Weekly review 27/06/08 30/06/08 Points Percentage

Sensex 13,802.22 13,461.60 (340.62) (2.47%)
Nifty 4136.65 4040.55 (96.10) (2.32%)

Monthly review
Month March ‘08 April ‘08 May ‘08 June ‘08
Date 31.03.08 30.04.08 30.05.08 30.06.08
Sensex 15,644.44 17,287.31 16,415.57 13,461.60
Points Base 1,642.87 (871.74) (2,953.97)
Percentage Base 10.50% (5.04%) (18.00%)

A single factor regime

The India’s equity market registering one of its worst ever first-half performances; while blow-off in the
oil-led commodity complex has contributed in a major way to the near 15% decline in global equity
markets, India’s further 20% relative underperformance is entirely due to its high exposure to oil imports.

The current scenario is analogous to the 1999-2000 periods, when equity market trends were driven solely
by exposure towards the technology sector. India benefited from the tech-driven regime but now finds
itself at the wrong end in the oil boom. In the current context, it’s all about rewarding economies that are
net exporters of commodities. Local fundamental factors have played a marginal role in determining
market trends. Investors are wasting their time waiting around weakly inflation data or the monthly
industrial production numbers to figure out which way the market is headed. All that’s relevant is the
price of oil. The prevailing regime is uni-dimensional as it revolves only around the price of oil.

What this will suggests is that if and when oil prices turn, the broader markets most afflicted by the oil
price shock will rally the hardest. So regardless of inflation or economic data, the catalyst for a turnaround
in the fortunes of Indian equities is a reversal in the price of oil. Once oil settles down and the market
stops obsessing about its daily price gyrations, a new investment regime in which more fundamental
factors such as core inflation and long-term growth prospects can gain ascendancy.

Until then we are all effectively oil traders. Taking a directional view on black gold is what matters.
Unfortunately for equity investors, the news on the oil front has been increasingly disheartening. Despite
widespread signs of demand destruction, the price of oil remains stubbornly high. It is almost as if the
message from the marketplace is that oil prices need to get to such as egregious level that global
economic demand cracks decisively.

As was the case with the tech boom in the 1990s, price action tends to get very violent towards the final
stages of a bull-run and leads to all sorts of extrapolative forecasts involving ever-higher price targets. It’s
hard to forecast when such psychology will break. History suggests regimes in which a single factor
overwhelms market behaviour are eventually unsustainable. However, till the parabolic move in oil is
over, market participants need care about just that variable in making all decisions.
2.2 INDIAN ECONOMY
Emerging markets are likely to take the lead now

The last decade has seen high growth and low inflation, mainly driven by productivity gains as
developing economies integrated with developed world. Now, excess global liquidity has finally resulted
in inflation surging across the world.

The big change in the last decade’s world economic growth was the participation of countries like China,
Russia and Eastern Europe, which were moving away from socialism / communism growth model to the
laissez- faire / private property rights form of economic growth model, in a globalised world. The
developed world, on the other hand, was unable to tap the gains of growth in an efficient manner and the
search for higher returns by developing resources locally, led to over-leveraging and over investing which
resulted in the subprime crisis. Had these gains been deployed in the emerging markets, the growth cycle
would have lasted longer.

Over the past few months, we have seen the severity of the subprime crisis. Interestingly, the US Federal
Reserve Bank responded by reducing rates as well as by providing the financial institutions with ways and
means type of funding support. The primary driver for this action was to ensure financial market stability,
which is the backbone of any well-developed and well-functioning economy. The world economy has
seen the credit contraction and consequent reduction of risk appetite, but the availability of the Fed Fund
has not led to any significant shrinkage of liquidity.

The last decade’s growth has lead to development of the emerging markets and the per capita demand for
commodities (including oil) had been moving up consistently. The increasing demand pressure, coupled
with the infusion of temporary excess liquidity by the US and European Central Banks, is the primary
driver to spark off a rally in relatively illiquid primary article commodities and oil markets.

At the global level, there are two broad ways of tackling the challenges. The first would require an action
of reduction of excess liquidity from the central banks. This would be addressing the problem from the
supplier of capital. The second would be tackling the challenge from the countries that are the primary
driver of demand. The first will involve a lot of painful adjustment in the developed world – contributors
to global excess liquidity and the second will involve pain in the EM’s – primary driver of growth
currently. A pragmatic solution would obviously lie somewhere in the middle as neither of the above
solutions in isolation are likely to work. We are likely to witness the following.

The leading financial institutions are going through the step-adjustment process of making down
subprime assets and raising fresh capital to meet the capitalising requirements for including these off
balance sheet assets. As the capitalising process gets completed, the liquidity support funds will start
flowing back from the financial markets to the US and European Central Banks. These outflows of
liquidity will lead to shrinkage of global liquidity. The EM Central banks will have to take measures to
curtail local liquidity and consequently curtail the demand side. Once both the process are under way, we
are likely to see the trigger of the second round of risk aversion in the financial markets, and the
correction of the bubbles created by global excess liquidity. They will, however, have to take care that
raising rates to tackle the demand side locally, with no reduction in global liquidity, will only push the
EM’s into stressful conditions with a less than satisfactory handle on the domestic inflation.

The financial markets will then witness the puncturing of the commodity as well as the EM real estate
bubbles. It is only after these financial adjustments, the financial market will go through a period of
consolidation and lay the foundation for the next round of world economic growth. The sheer difference
in the GDP growth rates of the EMs vis-à-vis developed world will shift resources in favour of the EMs.
2.3 INDIA INC
Companies’ valuations have taken a beating, vulnerable to takeover threats

Valuations of many companies have taken such a beating that their stocks are now available at a sharp
discount to their book values in the current market. Some of these companies, particularly those with huge
quality assets and good profitability record, may be vulnerable to takeover threats if their promoters do
not own sufficient stakes to thwart such attempts. Such possibilities, however, also depend on many other
factors like the industry background and growth potential.

Analysts say: The market price to book value (BV) ratio has fallen below one for about 900 BSE-listed
companies, after their shares fell sharply amid a choppy market since January this year. Some of them
might be genuinely undervalued while others could have been out of market favour because of declining
prospects. Price/BV ratio is one of the parameters to evaluate a company from the investment point of
view. BV is net worth (equity plus reserve) divided by number of shares.

According to analysts, low price/BV ratio does not necessarily mean that a company is good for
investment or acquisition, as sometimes book value does not reflect a true picture of financial health. If a
company earns huge one-time extraordinary income in a particular year, its earnings, reserves and book
value are also boosted to that extent. As such income is non-recurring; investors need to study prospects
of the company before taking a call.

The parameter, however, is not of much use in a bull market like the recent one, when valuations are
driven more by sentiments than fundamentals. Also, some analyst feel book value as a tool to evaluate a
company may have lost its importance with investors now adopting a forward-looking approach to value
any company in the market. So, in the recent boom, shares of many companies rose sharply, even before
they could become operational and start earnings profits.

DLF’s buyback

After losing more than 71% of its market cap in the past six months, the country’s largest real estate
developer DLF has announced a buyback of its shares. The company is likely to spend Rs 500 crore on
the buyback, which will result in around 1 crore shares (0.6% equity stake) getting extinguished. The
company is likely to buy shares from the market over a period of several months, stretching to a
maximum of six months, at the market determined prices. It could be inferred from the proposed
investment that the company is looking at an average acquisition price of Rs 500 per share, which is lower
than DLF’s issue price of Rs 525. The promoter group holds 88.17% stake in DLF. As per Sebi norms,
promoter holding beyond 90% could trigger delisting proceedings. Therefore, buyback options is limited
to acquisition of around 3 crore shares, which will hike promoters’ stake to 90%.

Value signal from buyback

DLF’s surprise share buyback announcement after its stock touched a 52-week low of Rs 350 suggests
that the management feels the realty major’s share price has fallen below its fair value. With stocks of
many companies having fallen 50-60% over the past few months, this could trigger more such buybacks,
and even hostile acquisitions. In fact, some high-profile buybacks – Reliance infrastructure, ICI, SRF, and
Mastek – are already underway. Companies usually buy back their shares when they think they are
undervalued, they have idle cash or want to give out stock options without diluting equity. In the case of
DLF, the near 70% drop from its peak is the trigger for the company deciding to buy back shares. By
purchasing and extinguishing its shares, the company would boost earning per share.
 INDIA INC

However, it’s important to note that a buyback announcement does not necessarily mean the company in
question would actually buyback shares to the extent announced. Depending on the market price and its
valuation call, the company could even do a part buyback. In that sense, buybacks may merely be a signal
to investors and not a material support to stock price.

Investors would, however, do well not to take increasing buyback offers to mean that the market is close
to its bottom. Just as in a bull-run exuberance takes shares to well past their fair value, in the downturn
pessimism tends to drop them much below what is justified by their fundamentals. For corporates,
particularly those who have surplus cash, low share prices are an opportunity for changing the capital
structure of the company and enhancing shareholder return. It also helps them to get rid of unproductive
cash, and reduces the risk of cash-rich companies making wasteful investments or imprudent acquisitions.

Videocon eyes Archies

Archies, the leader in India’s greeting cards market, has attracted some unwelcome attention from
Videocon. Over the past few months, the Videocon group controlled by Venugopal Dhoot has sent feelers
to Moolchandanis – the family which owns Archies Ltd – for a possible buyout deal. But with
Moolchandani reportedly demanding a high price, Videocon is taking a hard-line stance. It is learnt that
entities owned by Dhoots have picked up over 4% shares of Archies from the open market in the past one
month. The Videocon group’s game plan is unclear at this stage. Given that the Moolchandanis control
well over 51% in the listed company, Dhoots are unlikely to make much headway unless the promoters of
Archies (or, any faction in the family) decides to sell its stake to Dhoots.

Dividend yields up significantly

Even as the stock market meltdown has sucked out investor’s wealth from Dalal Street, it has opened up a
possible investment option. Many firms’ dividend yields have shot up to 5-10% levels. Though dividend
yield-led investment strategy tends to underperform in a bull market, it is considered a defensive strategy
in a market which is showing bearish tendencies, as it is currently. Dividend yield is calculated as the
dividend announced divided by the stock price. Assuming other things constant, a high dividend yield
stock is seen a value pick.

For instance, if a stock is priced at Rs 50 and the company has declared a dividend of Rs 3 per share it
works out to be 6% dividend yield. An investor can get that return by investing in the stock to figure
among the shareholders as on the record date fixed by the company for paying dividends.

Dividend yield can go up through two ways: actual dividend payout shooting up or stock price moving
down. While the companies have not increased dividend outflow substantially for 2007-08 the yields have
gone up largely due to stock prices falling along with the overall market. Some of the stocks have dropped
pretty significantly which makes it important for investors to choose stocks which have some business
fundamentals so that the money made through dividends does not get neutralised by the loss coming from
decline in stock price.
2.4 INDIANS
Global pathways

What do you do when home market gets choppy? Shop outside. In fact, even though global forces are
increasingly influencing the Indian economy and capital markets, people prefer to invest locally here.
Reasons: Analysts say it is largely due to lack of understanding of global markets trends and
apprehensions of a volatile market which have changed the investor beliefs and behaviour; Or perhaps
made him more cautious in his approach.

Experts argue: When we look at the Indian market, we see people taking the extreme risk. They live in a
world of high returns and high risks. You earn in this economy, your pensions are in this economy, and
your investments are also in the same economy. So, you are running high concentration risk.

Having a global portfolio doesn’t necessarily mean that you’d get caught in the sub-prime crisis or
currency fluctuations. Financial planners believe that global investments are a necessary component of a
balanced portfolio. So, if you’ve an offshore exposure, it acts as a diversification tool and helps to even
out any big losses on the home ground. But before you make your global foray, it’s important to
understand the dynamics of the investment tool you prefer to use.

Today, the investment opportunities abroad are a mix of various products that you can choose from. You
can get exposure through themes such s domestic and international equities, bonds, real estate,
commodities and other alternative assets such as art, wine and luxury collectibles. Typically, traditional
investments such as equities and bonds should be allocated sizeable share before distributing the
remaining amount amongst alternative assets.

In developed markets, investors place up to 50% of their financial portfolios in overseas assets. Given that
global investment is new to India, an allocation of at least 20% to overseas assets will give an optimum
decrease in risk and growth in returns. Global markets are at least 50-100 times bigger than Indian capital
markets. However, it is important to pick the right manager with experience, presence and track record
before you venture overseas.

BRIC & beyond

The Big Four – Brazil, Russia, India and China, famously known as BRIC – have caught the fancy of
investors worldwide in recent years. But little do investors realise that there exist promising markets
beyond BRIC too, which are slowly but surely making their presence felt in world markets. In fact,
countries such as Colombia, Mexico, Chile, Turkey, South Africa, Indonesia and South Korea are some
examples of the budding markets, which analysts think will lord the future. Here’s an insight into the
emerging stories worldwide, where you can multiply your earnings over the next decade.

Why invest outside BRIC, when these markets are already delivering consistently good returns. Analysts
say the answer lies in the unique opportunity the new markets are offering. These markets are expected to
grow like BRIC did in the new millennium as they enter an era of fast-track reforms. For instance
Colombia is an interesting market to explore. It is rich in resources and manpower. And now with the
country stabilising politically, it can prove to be a dark horse in the world markets.
2.5 FOREIGN FINANCIAL INSTITUTIONS
FDI facing testing times may miss targets

Commerce minister Kamal Nath’s target to attract FDI worth $ 35 billion this fiscal year may be a little
too ambitious, giving the unraveling global growth story. For one, the number and value of mergers and
acquisitions (M&A) transactions have slumped. Besides, liquidity is drying up as several central banks
have tightened their monetary policy and companies are facing trouble raising reasonably priced debt to
part finance acquisitions. That apart, the global economy is slowing and there are not enough compelling
reasons at this stage to invest in creating new capacities.

Having said that, the government is understandably optimistic as foreigners invested $ 3.74 billion in
projects in India in April. Daiichi Sankyo is set to acquire control in Ranbaxy in a deal worth $ 4.6 billion
and there are projects in pipeline.

However, the Organisation for Economic Cooperation and Development (OECD) countries, that account
for a large slice of foreign investment made in India, have hinted that their FDI outflows would decline in
the current calendar. The OECD projection is based on the slump of international M&A activity in the
first half of the current calendar year and the almost one-to-one relationship between FDI flows and
international M&A activity. The value of international M&A in the first half of the current calendar year
has reportedly declined by a third, compared to the same period last year.

In a recent report, the OECD suggests that FDI outflows from the bloc would decline by $ 680 billion or
37% from their 2007 levels, if the sharp slowdown in M&A activity in the first half of 2008 carries
through to the second half of the year. That would imply that the outflows might decline to the level seen
in 2006. Last calendar was an exceptionally good year, with FDI inflows to and outflows from OECD
reaching record highs. The total outward FDI from OECD rose 51% and inflows from this block to the
developing countries rose almost 30% to a record $ 471 billion. Brazil, Russia, India, China and South
Africa accounted for approximately 50-60% of outflows to the developing countries.

Already, preliminary data on OECD FDI flows for the Q1 of 2008, compared to the last quarter of 2007,
show that outward investments from the bloc have decreased and inward investment was slowing.

This development has implication for countries such as India that receive much of their FDI inflows from
the OECD countries. In 2007-08, of the $ 24.6 billion FDI inflows into India, nearly two-third came from
OECD countries, assuming investments transiting through Mauritius were actually originated from
companies in the OECD countries, according to data published by the industry ministry.

The OECD report states that historical relationship between developing country inflows and changes in
OECD outflows suggests that the 37% drop in outflows could result in a decline of 40% in developing
country inflows to around $ 240 billion in 2008, “barring other offsetting factors”. The report adds the
possibility that “the worst is over” could improve the outlook for 2008, and if that happens, its
assumptions of international M&As and by extension FDI performance may be too pessimistic. Further
increased flow of FDI between developing countries could also mute the impact of eventual slowdown in
outward FDI flows from the OECD. The OECD report concludes that the relevant question at this stage is
not whether OECD FDI inflows will retreat from the records achieved in 2007, but rather by how much.

As for India, it would be safe to conclude that with the government and the RBI forcing a compression of
demand in their bid to control inflation, the investment climate is getting gradually gloomy.
3.1 MUTUAL FUND
Time MFs put money into the market

The Indian stock markets should ideally reflect the strength of the domestic economy and corporate
fundamentals rather than get totally swayed by the risk perception of FIIs. FIIs net sales of about $ 6.1
billion (year to date), does not in any way mean that the economy has lost stream. Spiralling inflation,
partly due to the surge in prices of crude oil and other commodities, and monetary tightening will slow
growth, but not enough to take the economy downhill. Nor does it warrant large-scale selling on the stock
market. Almost all stocks have been hammered down by the bears, and many blue-chips are trading at
prices close to their 52-week lows. But then, stock markets are not for the faint-hearted.

In volatile conditions, investments made with short-term horizon are bound to give negative returns.
Staying invested in the medium-to-long term will be rewarding; the sensex and Nifty have returned about
30-31% a year over the past five years, even after erasing nearly all the gains made over the past one year.
Retail investors would do well to invest through mutual fund schemes – the best managed diversified
equity scheme delivered about 52% a year over the past five years.

AMCs have overall been net buyers this year. But with uninvested funds and cash equivalent estimated at
more than Rs 20,000 crore in hand, AMCs have the potential to change the sentiments in the market.
Retail investors in MF schemes have not rushed to redeem their investment this time. Instead, many
continue to make fresh investment in schemes. That should provide fund managers some comfort. And
therefore, rather than wait for positive developments on policy making, fund managers must step up
active buying. Retail investors can also seize the current market conditions to strengthen their portfolio
with blue chips, which are now available at reasonable valuation.

Paperless MF transaction to make its mark soon

This could take some time in coming, but will certainly revolutionise the way in which mutual fund units
are transacted. Indian fund houses are coming together to set up an electronic platform, exclusively for
trading mutual fund units. This could on the lines of Indonext, a platform on the BSE specifically for
small and mid-cap stocks. To enable better penetration of mutual funds in the hinterland and making the
process of investing more convenient, they are also planning to use wireless technology, once regulations
are conducive. Amfi plans to make the use of wireless mobile technology feasible, so that a person
situated in the remote corner of the country can access the platform. RBI had recently said mobile phone
owners in the future will be allowed to transfer funds from their accounts to another mobile phone owner
across networks and service providers. The Amfi is hopping that this facility can be eventually tapped
while transacting in MFs.

It’s been a long time since funds have been looking for ease, efficiency and effectiveness while selling
funds. An electronic platform is one of the easiest ways to bring down the cost of reaching out to
investors across the country. Amfi has been discussing the platform with vendors in India and abroad and
is looking at getting the software up and running within the next two to three years. Fund houses feel that
the current process where investors have to go via a distributor (or indeed directly) is extremely
cumbersome. For instance, if an investor in Chandigarh wants to invest in Templeton funds through a
registrar based at Chennai, the forms actually moves from Chandigarh to Chennai. The platform is aimed
at reducing such unnecessary paperwork to a bare minimum. Transactions conducted through the platform
will also be more secure and safe for the investor concerned. The Amfi plans to make use of the
recommendations of the SMILE committee that was headed by PJ Nayak, an exhaustive study on easing
the IPO application process.
3.2 COMMODITY MARKRT
Supper Bubble

George Soros, the billionaire financier witheringly described before the US lawmakers the boom in
commodity markets as a “supper bubble” that could result in instability. His comments come amid an
intensifying debate about whether fundamentals i.e. supply and demand or speculators are the main force
driving the sharp increase in commodity prices.

Lehman Brothers estimated that total assets under management in commodity indices have ballooned
from $ 70 billion at the start of 2006 to $ 235 billion by mid April this year. It calculates that of the $ 165
billion increase; $ 90 billion is due to new financial inflow with the remaining $ 75 billion stemming from
price appreciation. According to Mr. Soros, we are currently experiencing the bursting of a housing
bubble and at the same time a rise in oil and other commodities that has some of the hallmarks of a
bubble. He has linked these two developments in a “super bubble”.

The president of the European Central Bank, Jean Claude Trichet, called on oil producers and consumers
to learn from past mistakes if world economies were to avoid a repeat of the high inflation and
underemployment that followed the first global oil shock in 1973. That year is widely acknowledged as
an economic watershed, a time when OPEC oil embargo led to a spiral of higher prices, recession in
world economies and a wrenching contraction in the early 1980s that finally put an end to a decade of
sharp inflation. No one whether the consumers or oil suppliers, would want to repeat that history.

Trichet added: “There is a joint interest in behaving as properly as possible. In the entire South-East-Asia,
policymakers are facing their toughest economic challenge in a decade – surging inflation and slowing
down of growth. The governments are yet to embrace the proven micro-economic policy response –
aggressive monetary tightening. Instead, they are favouring stop-gap administrative measures such as
price caps on essential commodities, based on, probably, an inappropriate logic.

Oil and the seven myths

Myth 1: The oil price surge is due to a drop in output growth.

While there is some reason to be genuinely concerned about long-term supply constraints in oil, growth in
production has not hit a wall as yet. Global oil supplies have been increasing 2% annually over the past
five years and supply of crude is more than adequate to meet demand this year as well. Still the market is
worried that the dependence on OPEC supply has recently been growing as estimates for North Sea and
Russian crude production have been steadily declining. In addition, global spare capacity has fallen to 2%
of production from the historic average of 3% to 5%. But this hardly justifies the doubling in oil prices
over the past year. The last time prices rose as such a meteoric pace was in the 1970s when there were
actual supply disruption.

Myth 2: Emerging market demand is main detriment of oil prices.

Unlike most other commodities, where China is indeed the price-setter, OECD demand is still the most
relevant factor when it comes to oil. The US consumes 25% of the global oil compared to 9% for China.
US oil demand has contracted by 5% so far this year, as demand destruction is in the works. While it is
hard to get a fix on latest Chinese demand, growth in oil demand is unlikely to be as high as the 5%
annual run-rate of the past five years, given the marginal slowdown in China’s economy.
\
 COMMODITY MARKRT

Myth 3: Emerging market demand is price inelastic.

For every commodity, demand destruction sets in at some point. In the 1960s and ‘70s, the re-
industrialisation of Japan and Europe propelled commodity prices higher, but at a certain juncture, the
demand for the commodity recoiled. For the previous oil price boom, the breaking point was in late 1979
when the total spend on that commodity exceeded 7% of the global GDP.

Over just the past ten years, the weight of oil in the global economy has moved from a low of 1.5% of
GDP to over 7% of GDP again. The experience of the 1980s could be instructive in the current context as
well. Even as Japan and Europe continued to grow strongly in the 1980s, oil consumption remained
essentially flat through that decade as both the regions strived to achieve better fuel efficiency and
switched to alternative sources of energy, such as nuclear power.

With governments in many emerging markets finally raising oil prices at the retail level this year, oil
demand is bound to decrease. As a case in point, the Indonesian government is budgeting a 10% decline
in volume growth for 2008 on the back of a 30% adjustment in oil prices.

Myth 4: Better standards of living in developing countries will only increase oil consumption..

As the demand patterns of the 1980s show, when oil gets too expensive consumers look for different
sources of energy and succeed in finding them. A similar move has been underway with nearly 90% of
the growth since 2004 in new ‘oil’ capacity coming from bio-fuels, synthetic oil and natural gas liquids.
Furthermore, higher per capita incomes are often associated with greater energy efficiency and the
increased urbanization projected for emerging markets could even translate into lower per capita oil
consumption with greater use of mass transportation.

Myth 5: The tidal fund flow into oil and other commodity products will keep raising their prices in
financial markets.

Asset allocation into commodity funds has risen dramatically over the past year, with the total influx in
the first quarter of 2008 exceeding the total inflow of 2007. Many commentators argue that this trend has
a long way to go as total allocation to commodity-related assets is still below 5% of total financial assets.
Late last year, during the heady months of the emerging market boom, similar arguments were bandied
about with regard to a potential re-rating of emerging markets stocks. Yet, the realty is that while
momentum can drive markets for a while, flows can quickly reverse once it becomes apparent that the
underlying fundamentals are deteriorating; indeed this is the case with the Indian and Chinese equity
markets this year. Even if pension plans keep increasing their strategic allocation to commodities, the
process is likely to be gradual and spread over time.

Myth 6: Retail gasoline and diesel prices in emerging markets such as India are too low by global
standards.

The retail prices of petrol and diesel vary greatly across the world, reflecting the very different tax
structures implemented by each country. Venezuela reportedly sells gasoline at a mere 3 cents per litre
while Turkey charges $ 2.80 for a litre. India’s latest price for petrol is in line with the global average,
although it is lower by 30% for diesel. Still, at $ 0.85 per litre, India is selling diesel at a more expensive
price than China.
 COMMODITY MARKRT

The key difference between China and India is that the latter cannot afford to keep subsiding oil prices or
further cutting taxes on oil products due to the large fiscal deficit. China doesn’t face the same
compulsion to raise prices as it is running a fiscal surplus amounting to nearly 1% of GDP. If the
incumbent government had been more sensible in spending the revenue windfall from the runaway
growth of the past four years, then it would be in a much better shape to absorb the global oil price shock.

Myth 7: A 1970s-style decade lies ahead for the global economy.

Until late 2007, the rise in oil prices did not pose a problem for the global economy, in contrast to the
1970s, when oil price increase largely represented a supply shock. In this decade, it is mainly a reflection
of booming economic demand in the developing world and till last year any major inflationary impact
was offset by high productivity growth in the global economy.

Over the past six months, the price of oil has risen at its fastest pace in recent history even as global
economic demand has slowed due to fears of supply shortages. So, the situation today is more analogous
to late 1979 instead of 1970s – the oil price shock has already happened with prices again rising by 900%
over the past decade. The global economy is at a point similar to 1979 when demand and the price of oil
started to decline.

Over the last 30 years, every major oil price setback has been demand, not supply-led. Now with evidence
mounting to suggest that demand is eroding – from the collapse in SUV sales in the US to a change in the
subsidy regime in many developing countries – it’s only a matter of time before the psychology of ever-
rising oil prices breaks on the marketplace.

Securing future:
Sowing seeds of success

The one big takeaway from upheavals in the global economy is that no one is willing to leave it all to the
market anymore. Countries are on global hunt to secure for themselves supplies of all commodities –
metals, energy and food – that they consider of strategic importance for their future development.
Governments have realised that it is often impossible to predict supply squeezes, which can occur due to
causes below their radar. That makes protecting a country’s supply pipeline from drying up.

No country scalded by volatile international market in recent months wants to depend on international
trading companies and vagaries of fluctuating prices. Nations want to be self-reliant rather than be caught
between paying the extortionate prices demanded by a handful of global trading companies and watching
their economies decelerate. It’s the dig-your-own-pump-rather-than-rely-on-elusive-municipal-tanker
approach to life on a global scale.

Take China, it is ensuring direct crude oil supply from Sudan. It is talking to the Democratic Republic of
Congo to secure mining rights there. Beijing also plans to encourage Chinese companies to buy farmland
abroad, particularly in Africa and South America, to help guarantee food security. China already has
similar policies to boost offshore investment by state-owned banks, manufacturers and oil companies.

China is certainly not alone. The sudden squeeze in global rice market and primary supplier India’s ban
on exports raised basmati prices so high that Saudi Arabia, the richest oil giant has decided to buy farms
in Africa to grow its own rice and breed livestock.
 COMMODITY MARKRT

In the coming days, we should see more countries queuing to sign investment pacts with African nations.
Everyone is choosing Africa because land values are very, very inexpensive, compared to other
agriculture-based economies such as Brazil. Plus Africa has a wide variety of agro-climate zones.

India itself is among those seeking to augment local supplies with self-owned resources overseas. Public
sector oil marketing companies plan to invest in Brazilian ethanol to supplement local supply and protect
against failure of Indian cane crop. A handful of Indian edible oil companies may use Exim Bank loans to
buy 10,000 hectares of fertile farmland to grow soyabean, maize and sunflower in Uruguay and Paraguay.
Another veg oil company is buying palm plantation in Indonesia to cut out middlemen.

None of these investments will come cheap. Government in the race to buy farm and energy assets
overseas will face stiff competition from giant hedge funds and transitional trading companies that are
also trying to snap up farm, energy and mining assets. These megaliths have deep pockets and deeper
ambitions. There are reports three institutional investors, including the giant Blackrock Fund group in
New York, are separately planning to invest hundreds of millions of dollars in agriculture, chiefly
farmland, from sub-Saharan Africa to the English countryside.

There is considerable interest in what market men are calling ‘owning structure’ – like United States
farmland, Argentine farmland, and English farmland – wherever the profit picture is improving. There
appear to be two motives behind this investment drive by financial institutions and companies.

One, it is a bolder and longer-term bet that the world’s need for food will greatly increase. Two, by
owning land and other parts of the agricultural businesses, these new investors can legitimately call
themselves hedgers and slip out of the net cast to curb speculators and other financial investors on
commodity bourses. What is not clear is whether in the long term these financial investors want to
actually dabble in growing food or simply want to have a direct link with the physical supply of
commodities and thereby reduce their punting risks.

The last 18 months have shown that demand for most commodities continues to run ahead of supply and
high prices are not crimping demand unlike before. Commodity supply has not yet responded sufficiently
to this surge in raw material usage, and though investment is pouring in, it has yet to make an impact.

In a global village, strikes, technical disruption, droughts, export taxes, hedge funds are among the dozens
of global events that hit millions of lives and livelihoods while sovereign governments look on helplessly.
International trade may be growing rapidly but no elected government wants to have to beg for food, fuel
and metals. Ultimately it is all about a desperate desire for more control in dangerous times. Our strategic
resources are at heightened risk from growing demand, fragmented supply chains, climate change,
political turmoil and volatile financial markets. When whole populations are feeling vulnerable,
governments have to move swiftly with strategic defence mechanism. It’s the old Reagan nuclear missile
shield against the Evil Empire in a new avatar.

Price band mechanism

Finance Minister P Chidambaram has advocated adopting a ‘price band mechanism’ to cool down the
global rise in international oil prices. There is a need for the oil industry to re-assert its leadership in price
formation and not remain a passive spectator of speculation and paper trading in oil. The global
hydrocarbon community must address this situation through appropriate supply side responses.
 COMMODITY MARKRT

There is ample evidence that large financial institutions, pension funds, etc. have channelised billions of
dollars – into commodity derivatives. These financial institutions are unregulated and highly opaque. The
demand for oil generated by these funds is purely speculative demand. In our view, the time has come for
producers – especially OPEC – and consumers to wrest control over oil trading from the hands of the
speculators.

Need for higher margin calls at energy derivatives

It is right to expect that “appropriate supply-side responses”, read steeped-up oil production, would calm
the flaring price trend. But the fact remains that speculative activity in oil can reportedly be done on the
cheap. At the New York Mercantile Exchange (NYMEX), the premier energy future market, the initial
margin requirement to generate 1,000 barrels of crude, valued at well over $ 100,000, is just about $
3,375! The low margin is one reason why at NYMEX and the Inter-Continental Exchange, average daily
contracts added up to nearly 800 million barrels per day (a contract corresponds to 1,000 barrels) of oil
last year. Note that the average daily global production in 2007 was only 86 million barrels. The sustained
purchases of oil futures appear to have created a parallel demand for crude.

Oil boils to $ 141 on global jitters

Fuelled by recent geo-political factors – Israel’s threats of bombing Iran and ethnic unrest in Nigeria –
crude oil crossed $ 141 per barrel on Friday the 27th June, 2008. Worse, it is now expected to cross $ 150
per barrel in a month. This was a day after OPEC President Chakib Khelil predicted that crude oil prices
are likely to rise between $ 150 and $ 170 a barrel.

Senior Israeli government functionaries have cautioned Iran that its nuclear installations could be attacked
any day. “If Iran continues with its program for developing nuclear weapons, we will attack it. The
sanctions are ineffective.” Iran, which has taken on these threats head on, has begun preparing for any
such exigency. According to a senior industry source lased in Dubai: “Iran is already making
arrangements and has started storing crude in very large crude carrier (VLCCs) in the high seas. The trade
has it that Iran already moved about 13 such VLCCs carrying crude.” VLCCs have a holding capacity of
almost 2 million barrels.

The ethnic strife in Nigeria too has taken a toll on the country’s production. It is estimated that Nigeria’s
production is down by almost 300,000 barrels a day. All these factors have led to some supply squeeze in
the short term. While speculation is estimated to have added about $ 8- $ 10 to global price, the geo-
political threats have added a premium of almost $ 22 a barrel to the oil price, an analyst said.

Oil jumped over $ 140 also because Libya threatened to cut production, although it controls just 2% of the
total output. Libya – that holds Africa’s largest reserve of oil – may cut down on output because of a US
legislation that allows terror victims to seize assets of foreign governments as compensation. “In times
like these, every marginal change in production results in higher prices”.
4. FINANCIAL SECTOR: TRANSFORMING TOMORROW
Behaviour impacts your returns

When it comes to investing, we are often our own worst enemies. The greed and fear factor easily cloud
our judgement; being too afraid to lose leads us to take prejudiced action; biases in how we interpret and
process the information can lead to sub-optimal decisions.

1. FINANCIAL ADVISORS:
Weigh impact on investors

Behavioural finance

Stock market is often perceived as a person: it has moods, it can be bad-tempered or exuberant, it can
overreact one day and make amends the next day and so on. So the question is can psychology really help
us understand the financial markets better? Can be improve our investment decisions and profits using the
psychology of investing? The answer is yes. How? The idea is simple: Investors are not as rational as the
standard economic theory assumes; they are not rational being, they are human beings. Frequently
emotions prompt us to make decisions that may not be in our rational financial interest.

The psychology of investing is better understood through the emergence of a fascinating new field called
behavioural finance. Behavioural finance pairs emotions with investments and shows how emotions and
cognitive errors can cause disasters in our investment decisions. In stock markets, behavioural finance can
help explain situation such as why we hold on to stocks that are crashing or are ridiculously overvalued,
jump in late and buy stocks that have peaked in a rally just before the price declines, take desperate risks
and gamble wildly when our stocks descend.

2. FINANCIAL PLANNERS
Value unlocking for all stakeholders

Common mistakes

Much of financial theory is based on the notion that individuals act rationally and consider all available
information in the decision-making process. However, researchers have uncovered a surprisingly large
amount of evidence that this is frequently not the case. Dozens of examples of irrational behaviour and
repeated errors in judgment have been documented in academic studies. The evidence reveals repeated
patterns of irrationality, inconsistency, and incompetence in the ways human beings arrive at decisions
and choices when faced with uncertainty.

Investors tend to be overconfident in their ability to make decisions in an uncertain world. We often set
unrealistic investment goals. Most of us often find it difficult to distinguish between luck and skill.
Studies show that men consistently overestimate their own abilities in many areas including athletic skills,
abilities as a leader, and ability to get along with others. Money managers, advisors, and investors are
consistently overconfident in their ability to outperform the market; however, most fail to do so.

People typically give too much weight to recent experience and extrapolate recent trends that are at odds
with long-run averages and statistical odds. They tend to become more optimistic when the market goes
up and more pessimistic when the market goes down.
 FINANCIAL SECTOR: TRANSFORMING TOMORROW

3. RISK MANAGEMENT CONSULTANTS

Educate – Engineer and Enforce

Opportunities comes packaged with additional risk

Behavioural finance is important and can help us in making smart investment decisions. But it would be a
misconception to say that behavioural finance means people could beat the market. Behavioural finance
doesn’t say: There’s easy money. Go after it. It simply pairs emotions with investments and shows how
emotions and cognitive errors can cause disasters in our investment decisions.

And although there’s a potential profit opportunity there, it comes packaged together with additional risk.
And although behavioural finance offers no investment miracles, it can help investors train themselves
how to be watchful of their behaviour and, in turn, avoid mistakes that will decrease their personal wealth.

Behavioural finance provides a platform to learn from people’s mistakes, to modify and improve their
overall investment strategies and actually profit from identifying these mistakes. Even experienced
advisors are susceptible to making the judgment errors identified by behavioural finance research. The
only solution to avoiding this error is discipline. Set realistic goals for portfolio’s long-term return

4. WEALTH MANAGERS
Map out the details to translate into benefits

The comfort of crowed – herd mentalities

To humans, a group offers safety. Let’s take an example from the Internet bubble of 2000. “My stocks
were simply not going anywhere. My friends were investing in the information technology stocks and
making a lot of money. There was so much excitement about these stocks. I did not understand much
about IT companies but I bought stocks of IT companies; but soon regretted it, as I lost 70% of portfolio
value”. This is where behavioural finance helps in as it says that when everyone is excited about the
market, you should be extremely cautious.

Share prices are not just based on economic values but also on psychological factors that influences the
market sentiments. Share prices are often far too volatile to be explained by fluctuations in economic
factors such as dividends or earnings. Much of the volatility can be explained by fads and fashions that
have a great impact on investor decisions.

Wealth managers advise investors to use their own analysis and judgement rather than following the
crowd. Don’t invest in companies you don’t understand. From the earlier example, many investors may
say of the Internet bubble, “I had my doubts about IT stocks, but everyone else seemed so sure they were
winners.” This is what is usually seen in the stock markets ‘herding behaviour’. Most of the times, others
influence our own investment decisions, against our better judgement. And this happens with the so-
called experts of stock markets too.

In fact, studying Warren Buffett’s investment career, it has been said that his greatest advantage is not one
of analysis, but rather his willingness to be anti-social.
 FINANCIAL SECTOR: TRANSFORMING TOMORROW

5. CREDIT COUNSELORS
Resolve convertibility and recompensation issue

Basic human trait

People often see their own choices as rational and frequently trade on information they believe to be
superior and relevant, when in fact it is not and is fully discounted by the market. This results in frequent
trading and consistently high volumes in financial markets that many analysts find puzzling. On one side
of each trade is a participant who believes he or she has superior information and on the other side is
another participant who believes his/her information is superior. Yet they can't both be right.

The tendency to gamble and assume unnecessary risks is a basic human trait. Entertainment and ego
appear to be some of the motivations for people's tendency to speculate.

In summary markets invariably move to undervalued and overvalued extremes because human nature falls
victim to greed and/or fear.

First, investor believed that the market frequently mispriced stocks. This mispricing was most often
caused by human emotions of fear and greed. At the height of optimism, greed moved stocks beyond their
intrinsic value, creating an overpriced market. At other times, fear moved prices below intrinsic value,
creating an undervalued market."

6 TECH SAVVY PROFESSIONALS

Take first step to ensure efficient and reliable system

Failure & Successes

People often forget failures and, even if they don’t, they tend to focus primarily on the future, not the past.
People also tend to remember successes, rather than failure, thereby unjustifiably increasing their
confidence. There is a strong general tendency to filter out the bad and the failed and to focus on the good
and the successful.

People generally remember failures very differently from successes. Successes are due to one’s own
wisdom and ability, while failures were due to forces beyond one’s control. Thus, they believe that with a
little better luck or fine-tuning; the outcome will be much better next time.

The tendency to remember our good decisions and forget the bad ones is commonplace. We also tend to
believe if our last decision or two was correct, then we possess special market-beating capabilities.

For instance, in the bull-run we witnessed in 2007 and mid-January 2008. Almost everyone in the stock
market had become an expert. Everyone’s stock recommendation was generating exorbitant returns.
Irrespective of the overvaluations, people thought that the Sensex will still zoom over 30,000 levels and
their stocks will keep generating higher returns. But then, we all know what happened. Markets bombed
in late January and tumbled further in the following months, correcting 30-40% from its all-time highs.
Over confidence and greed navigated the investment decisions and rationality was lost in the process.
 FINANCIAL SECTOR: TRANSFORMING TOMORROW

7. MICRO-FINANCE PROFESSIONALS
Developing alternative credit delivery models

Touchy-feely syndrome

Investors and analysts are particularly overconfident in areas where they have some knowledge. However,
increasing levels of confidence frequently show no correlation with greater success. Also, Investors and
analysts strongly favour investing in companies that they are familiar with. They prefer familiar stocks
even though there may be no rational reason to prefer the familiar stock over other comparable stocks that
the investors and analysts are unfamiliar with. Analysts describe the "touchy-feely syndrome" as the
tendency for people to overvalue things they've actually "touched" or selected personally. For instance,
analysts who visit a company develop more confidence in their stock picking skill, although there is no
evidence to support this confidence.

8. INCLUSIVE CEOs
Innovative responses to problems

Prospect Theory

People often placed different weights on gains and losses and on different ranges of probability. They are
much more distressed by prospective losses than they are happy by equivalent gains. Some analysts
concluded that investors typically consider the loss of $1 dollar twice as painful as the pleasure received
from a $1 gain. So, people respond differently to equivalent situations depending on whether it is
presented in the context of losses or gains. Analysts found that people are willing to take more risks to
avoid losses than to realise gains. Faced with sure gain - most investors are risk-averse; but faced with
sure loss investors become risk-takers.

9. ONE-STOP-SHOPS
Dedicated to offer related services under a roof

Fear of regret

People tend to feel sorrow and grief after having made an error in judgement. Investors avoid selling
stocks that have gone down in order to avoid the pain and regret of having made a bad investment. Some
Analysts feel: Investors follow the crowd and conventional wisdom to avoid the possibility of feeling
regret in the event that their decisions prove to be incorrect. Similarly, many analysts believe that money
managers and advisors favour well-known and popular companies because they are less likely to be fired
if they under-perform.

In summary, people trade for both cognitive and emotional reasons. They trade because they think they
have information when they have nothing but noise, and they trade because trading can bring the joy of
pride. Trading brings pride when decisions turn out well, but it brings regret when decisions do not turn
out well. Investors try to avoid the pain of regret by avoiding the realization of losses, employing
investment advisors as scapegoats, and avoiding stocks of companies with low reputations.
 FINANCIAL SECTOR: TRANSFORMING TOMORROW

10. CONTINUING LEARNING CENTRES

Take informed decisions

Decision making process

Psychographics describe psychological characteristics of people and are particularly relevant to each
individual investor's strategy and risk tolerance. An investor’s background and past experiences can play a
significant role in the decisions an individual makes during the investment process.

For instance, women tend to be more risk averse than men and passive investors have typically became
wealthy without much risk while active investors have typically become wealthy by earning it themselves.
The Bailard, Biehl & Kaiser Five-Way Model divides investors into five categories:

1. "Adventurers" are risk takers and are particularly difficult to advice.

2. "Celebrities" like to be where the action is and make easy prey for fast-talking brokers.

3. "Individualists" tend to avoid extreme risk, do their own research, and act rationally.

4. "Guardians" are typically older, more careful, and more risk averse.

5. "Straight Arrows" fall in between the other four personalities and are typically very balanced.

11. GLOBAL OUTLOOK

World is a village

Scapegoat

The dynamics of the investment process, culture, and the relationship between investors and their advisors
can also significantly impact the decision-making process and resulting investment performance.

Full service brokers and advisors are often hired despite the likelihood that they will underperform the
market. Researchers theorise that an explanation for this behaviour is that they play the role of scapegoat.

In Fortune and Folly: The Wealth and Power of Institutional Investing, William M. O'Barr and John M.
Conley concluded that officers of large pension plans hired investment managers for no other reason than
to provide someone else to take the blame and that the officers were motivated by culture, diffusion of
responsibility, and blame deflection in forming and implementing their investment strategy.

The theory is that they can protect their own jobs by risking the manager’s account.

If the account underperforms, it is the manager’s fault and they can be fired, but if they over perform they
can both take credit.
 FINANCIAL SECTOR: TRANSFORMING TOMORROW

12. ISSUES OF THE PRESENT

Freedom to get & fail in the system of free enterprise

Bipolar behaviour

Collective sentiment over economy and market can change quite dramatically. One moment you are
upbeat about everything, brimming with optimism. Within no time, sentiment goes into a reverse gear of
sorts. High oil prices and inflation in general have adversely affected the outlook for India’s economy and
the overall sentiment has changed from being upbeat to somewhat worrisome. This is visible in the
generally weak stock market volumes.

It can also be seen in the movement of the exchange rate – sudden depreciation of the rupee – as well as
the behaviour of capital flows. Policymakers too are turning schizophrenic as finance ministry suddenly
decided to ease up foreign debt inflows into India, even allowing a more liberal limit for foreign
investment in government debts. This was anathema during the whole of 2007, the RBI and finance
ministry were preoccupied solely with how to stop excess foreign capital flooding the economy. Now, the
capital flows are slowing down more than they should.

Similarly, over the past two years, businesses had become convinced that the exchange rate would only
appreciate given India’s robust growth story. The sentiment that the rupee would appreciate forever has
somewhat changed now. It is more realistic to imagine that the rupee could move the other way for a
while even if the growth story remains intact.

The question of redemption

Retail investors in mutual funds (MFs) have displayed surprising maturity, staying invested in equity
schemes despite the sharp fall of the stock markets from mid-January. However, it is too early to conclude
that Indian have graduated to becoming long-term investors in equity and equity MFs.

Experience shows that retail investors panic whenever markets go into a tailspin, cashing out part of, if
not all, their investment in equities and equity MFs. Such behaviour hurts investors and MF schemes.
Also, liquidation of positions held by MFs only serves to further weaken sentiments in markets. The 11%
decline in asset under management (AUM) of MFs in June from the May level was caused mainly by the
fall in the stock prices and not by large scale redemption, a nightmare most fund managers fear when
stock markets tumble. Redemption pressures were experienced by the liquid funds, as companies
withdrew money for advance tax payments. As liquid funds are designed to be short-term plans, offering
reasonable returns, withdrawals, which are seasonal in nature, should not be a cause for much concern.
5. BANKING PRACTICES
Learning lessons from subprime crisis

What implications does the turmoil in global financial markets have for Indian financial sector reforms?
Consider the broadly accepted cause of the crisis. The financial sector in the US offered excessive credit
to the housing sector, financed with excessive short-term leverage. The combination was explosive – as
house price growth slowed, credit losses mounted, financial institution balance sheets looked increasingly
shaky and opaque, and it became harder for them to roll over their borrowing. Excessive credit and
excessive leverage led to funding difficulties, problems that are now spilling over to the rest of the
economy as credit is tightened.

What broad lessons can India draw from this crisis? Perhaps the most important lesson is that a narrow
focus on rules can lead regulators to miss the bigger picture.

o Large banks in the US had seemingly adequate levels of risk weighted regulatory capital. Yet banks
changed their balance sheets dramatically over the last three years, investing in highly rated structured
products financed with volatile short-term commercial papers. Because only a little capital is required
to hold the AAA tranches of structured mortgage products, and they paid relatively higher returns for
the capital employed, banks loaded up on them.

o Banks also set up off-balance sheet structures, financed with short-term debt, again with little capital
backing them.

The regulators were overly fixated on seeing that rules on capital norms being met, without seeing the
large picture that many banks were going to the riskiest structures consistent with the rules. Excessive
growth of the balance sheet, or of off-balance-sheet financing, even if capital requirements are being met,
should trigger a discussion between the regulator and the regulated and possible sanctions.

A broader perspective, not focusing on the letter of the regulation but also on sprit, may help limit excess.
The Committee on Financial Sector Reforms, which recently put out its report for public comment on the
Planning Commission web site, advocates more ‘sprit’ or ‘principles’ based regulations in India. This
does not mean a laissez faire atmosphere with no rules, where anything goes. Instead, it means an
approach where the resources of the regulator are not wasted in pursuing every minor violation of a rule,
but instead devoted to understanding the broader strategy of the regulated.

In India, change will have to start with the legislation governing the regulators, where the
micromanagement starts. For instance, the requirement that banks obtain regulatory approval for a range
of routine business matters, including opening branches, remuneration to board members and even
payment of fees to investment bankers managing equity capital offerings, is enshrined in the Banking
Regulation Act. This legislation needs to be rewritten to focus on broad aims and objectives, leaving more
room for regulators to determine their course of action, within the broad mandate. This is not unchartered
territory even in India. Sebi’s insider trading law, for example, operates on broad principles.

Sprit-based or principle-based regulation should start at the very top and eventually percolate lower as the
top sets precedents. Indeed, its greatest benefits will come when regulators learn from the regulated
instead of imposing their own, more limited views. Self-monitoring and confession by the regulated
would reduce the strain on regulatory capacity. As the relationship between the regulator and the
regulated becomes more cooperative, efficiency and stability in the system will improve. In sum, we need
smarter regulation, not necessarily more regulation. This will help the country control a fast moving
financial system, without killing innovation or growth with excessive and ultimately futile regulations.
6.1 TAX UPDATES
E-Payment of tax

The words of Benjamin Franklin still hold true: “In this world, nothing is certain but death and taxes.”
Under the provisions of the Income tax Act, 1961 (the Act), a person is required to pay tax not only on
his/her/its income, but also of others (in the form of tax deducted/ withheld at source) to the government.

Tax has been defined under section 2(43) of the Act to include income-tax and fringe benefit tax (FBT)
on certain specified expenses incurred by an employer directly/ indirectly for or on the benefit of the
employees under section 115WA of the Act. Further, tax also includes advance tax, regular tax, self-
assessment tax, interest, penalty and TDS.

Recently, the law relating to payment of tax was amended. Let us examine the change and more
importantly, its implications.

The recent change

Recently, the Income-tax (Fourth Amendment) Rules, 2008 was issued by the Central Board of Direct
Taxes (CBDT) vide notification no. 34/ 2008 dated March 13, 2008 whereby, under rule 125 of the
Income-tax Rules, 1962 (the Rules), with effect from April 1, 2008, the following persons shall pay tax
electronically:

Company

Person (other than a company) to whom the provisions of section 44AB of the Act apply discussed
hereunder:

 Person carrying on business having gross turnover/sales from business exceeding Rs 40 lakh
 Person carrying on profession having gross receipt/income from profession exceeding Rs 10 lakh
 Others carrying on business of civil construction (section 44AD), playing/hiring/leasing goods
carriage (section 44AE), retail business (section 44AF), exploration of mineral oils (section 44BB)
and turnkey power projects (section 44BBB) showing income lower than deemed rate/amount of
profit/gains as specified in the above referred sections.

For the above purpose, ‘pay tax electronically’ means payment of tax by way of internet banking facility
of the authorised bank or credit or debit cards.

E-Payment through banks

As per the tax information network website of the Income-tax department, e-payment facilities are
available to the taxpayer who has a net-banking account with any of the following banks: Axis Bank,
State Bank of India, Punjab National Bank, Indian Overseas Bank, Canara Bank, Indian Bank, Bank of
India, Corporation Bank, State Bank of Bikaner & Jaipur, State Bank of Travancore, State Bank of
Indore, Vijaya Bank, HDFC Bank, Oriental Bank of Commerce, State Bank of Patiala, Bank of Baroda,
IDBI Bank, State Bank of Mysore, Bank of Maharashtra, State Bank of Hyderabad, State Bank of
Saurashtra, Union Bank of India, Allahabad Bank, Dena Bank, Syndicate Bank, ICICI Bank, United Bank
of India and UCO Bank.

Thus, taxpayers will now have to deal with not only e-filing of return of income/FBT and e-filing of TDS
returns but also e-payment of tax.
 TAX UPDATES

SEZ land acquisitions under I-T scanner

Land acquisition by special economic zones (SEZ) has come under tax scanner. The income tax
department has upped the ante on tax deduction at source (TDS) on payment made for purchase of land
for these projects. Inspections and surveys by the I-T department have revealed that in several recent SEZ
land transactions; there was no deduction of tax. TDS in such cases has to be deducted at the rate of 1%
for payments exceeding Rs 15 lakh.

Though most companies that plan to set up a SEZ largely acquire land their own, they also form a special
purpose vehicles (SPVs) with state agencies or even acquire land through these bodies. Any such entity
buying land has to deduct tax while making payment when sale deed is registered. Besides these project
implementing authorities, public utilities implementing projects under fast-track authorities will be under
the watch in cases where implementation is not done directly by the state government.

TDS on SEZ land acquisitions issue figured at the annual conference of chief commissioners and directors
general of income tax. Officials have been instructed to specially watch out for such transactions for
additional revenue mobilisation in the current fiscal. There has been an increased focus on the TDS by I-T
department, which created a separate directorate to monitor collections under this head. The government’s
TDS collections grew by 51% in 2007-08 to Rs 1, 06,700 crore from the mere 2.36% in 2004-05.

The Prevention of Money Laundering (Amendment) Bill, 2008

The Union Cabinet gave its approval for introduction of prevention of Money Laundering (Amendment)
Bill, 2008 in Parliament. According to this amendment, it will be mandatory for financial intermediaries
to report all suspected transactions involving international transfers to the financial intelligence unit
(FIU). At present, only banks and other financial institutions have to report suspicious transactions on a
regular basis to the FIU under the finance ministry. The bill will give more teeth to the legislation with
provisions for punitive action for money laundering.

The Prevention of Money Laundering Act, 2002 (PML Act) was enacted in 2002 and enforced in 2005 to
prevent money laundering and provide for attachment, seizure and confiscation of proceeds of crime
obtained or derived, directly or indirectly from money laundering.
6.2 SECURITY LAWS UPDATES

Enemy property

A small advertisement, tucked away in the inside pages of The Economic Times recently, invited bids for
266 shares of United Breweries, which were being offered on a right basis by the company and had been
renounced by their original holder. There was only one hitch: the company was not inviting the bids.
Neither was any individual shareholder inviting the bids. An arm of the government called the “Custodian
of Enemy Property for India” was inviting the bids.

But, who is the custodian and why is he offering these shares? A little bit of history first. This office was
created under the Enemy Properties Act, 1968, soon after the 1965 war between India and Pakistan. The
Act empowered the government to set up a custodian to look after “enemy property”. This was a term
employed to confiscate all properties- whether movable (such as shares or bonds) or immovable (such as
building, apartments or land) – that belonged to people who had chosen to move to Pakistan or
Bangledesh (then East Pakistan). Remember this was a war situation and anybody with any links to the
enemy state had to be declared as an enemy. Pakistan had promulgated a similar act, which continued
even in Bangladesh – albeit under a different nomenclature – after the country gained independence from
Pakistan rule in 1971.

So, all properties across India, which were owned by, or even managed on behalf of, Pakistani nations
between September 26, 1965 and September 26, 1977, are now vested with the custodian. At current
reckoning, this office manages 2,943 cases of enemy property which includes both real estate assets as
well as financial assets like securities, shares, debentures, bank balances (such as fixed deposits and other
amounts lying in the enemy national’ bank accounts) and provident fund balances. In addition, the
custodian also manages two banks – Habib Bank and National Bank of Pakistan. The custodian receives
income from these investments – in the form of rent, dividend, and interest on securities – and re-invests
it in 364-day T-bills. In the past the custodian has used proceeds from these investments to part-
compensate Indian nationals and companies claiming to have lost property in Pakistan. Like a good
mutual fund, the custodian also receives a 2% of the investment proceeds as asset management fee.

The current market value of these assets is the subject of immense speculation, especially given the bull-
run in real estate and the stock markets. This custodian’s holdings include blue chips such as Wipro, Tata
Motors, Tata Power, Tata Steel, Tata Chemicals, Tata Coffee, ACC, Cipla, Shaw Wallace, United
Breweries, Birla Corporation, Grasim, India Cement, Hindustan Unilever, State Bank of Bikaner and
Jaipur, State Bank of Hyderabad, Ashok Leyland and Reliance Energy, among others. Various reports
have made varying estimates about the market value of assets, with the highest being Rs 10,000 crore.
Pakistan is believed to have already liquidated all assets seized from Indian nationals and companies.

Transmission of shares

Market regulator Sebi is expected to accept most of the recommendations of the group that was formed to
look into the matter relating to transfer of shares of deceased shareholders. This will pave the way for
quick transmission of shares and benefit those who have inherited them in physical form. “The companies
would have to fix a threshold limit of 200 shares or Rs 1 lakh whichever is higher, for transmission of
shares after submitting the standardised documents. Companies would require an affidavit, deed of
indemnity and a no-objection certificate in case there are other legal heirs. The threshold limit will have to
be adhered to by all listed companies. Companies that have a higher threshold can continue with that,”
6.3 INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
The impact on Indian corporates

The use of IFRS as a universal financial reporting language is gaining momentum across the globe. Over
a 100 countries in the European Union, Africa, West Asia and Asia-Pacific regions either require or
permit the use of IFRS. The Institute of Chartered Accountants of India (ICAI) has recently released a
concept paper on Convergence with IFRS in India, detailing the strategy for adoption of IFRS in India
with effect from April 1, 2011. This has been strengthened by a recent announcement from the ministry of
corporate affairs (MCA) confirming the agenda for convergence with IFRS in India by 2011. Even in the
US there is an ongoing debate regarding the adoption of IFRS replacing US GAAP.

Adopting IFRS by Indian corporates is going to be very challenging but at the same time could also be
rewarding. Indian corporates are likely to reap significant benefits from adopting IFRS. The European
Union’s experience highlights many perceived benefits as a result of adopting IFRS. Overall, most
investors, financial statement preparers and auditors were in agreement that IFRS improved the quality of
financial statements and that IFRS implementation was a positive development for EU financial reporting.
(2007 ICAEW Report on ‘EU Implementation of IFRS and the Fair Value Directive’).

There are likely to be several benefits to corporates in the Indian context as well. These are:

⇒ Improvement in comparability of financial information and financial performance with global peers
and industry standards. This will result in more transparent financial reporting of a company’s
activities which will benefit investors, customers and other key stakeholders in India and overseas;

⇒ The adoption of IFRS is expected to result in better quality of financial reporting due to consistent
application of accounting principles and improvement in reliability of financial statements. This, in
turn, will lead to increased trust and reliance placed by investors, analysts and other stakeholders in a
company’s financial statements; and

⇒ Better access to and reduction in the cost of capital raised from global capital markets since IFRS are
now accepted as a financial reporting framework for companies seeking to raise funds from most
capital markets across the globe. A recent decision by the US Securities and Exchange Commission
(SEC) permits foreign companies listed in the US to present financial statements in accordance with
IFRS. This means that such companies will not be required to present separate financial statements
under Generally Accepted Accounting Principles in the US (US GAAP). Therefore, Indian companies
listed in the US would benefit from having to prepare only a single set of IFRS compliant financial
statements, and the consequent saving in financial and compliance costs.

However, the perceived benefits from IFRS adoption are based on the experience of IFRS compliant
countries in a period of mild economic conditions. The current decline in market confidence in India and
overseas coupled with tougher economic conditions may present significant challenges to Indian
companies.

IFRS requires application of fair value principles in certain situations and this would result in significant
differences from financial information currently presented, especially relating to financial instruments
and business combinations. Given the current economic scenario, this could result in significant
volatility in reported earnings and key performance measures like EPS and P/E ratios. Indian companies
will have to build awareness amongst investors and analysts to explain the reasons for this volatility in
order to improve understanding, and increase transparency and reliability of their financial statements.
 INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

This situation is worsened by the lack of availability of professionals with adequate valuation skills to
assist Indian corporates in arriving at reliable fair value estimates. This is a significant resource constraint
that could impact comparability of financial statements and render some of the benefits of IFRS adoption
ineffective.

Although IFRS are principles-based standards, they offer certain accounting policy choices to preparers of
financial statements. For example, the use of a cost-based model or a revaluation model in accounting for
investment properties. This could reduce consistency and comparability of financial information to a
certain extent and therefore reduce some of the benefits from IFRS adoption. IFRS are formulated by the
International Accounting Standards Board (IASB) which is an international standard-setting body.
However, the responsibility for enforcement and providing guidance on implementation vests with local
government and accounting and regulatory bodies, such as the ICAI in India. Consequently, there may be
differences in interpretation or practical application of IFRS provisions, which could further reduce
consistency in financial reporting and comparability with global peers. The ICAI will have to make
adequate investments and build infrastructure to ensure compliance with IFRS.

In addition to the above, there are several impediments and practical challenges to adoption of and full
compliance with IFRS in India. These are:

⇒ The need for a change in several laws and regulations governing financial accounting and reporting in
India. In addition to accounting standards, there are legal and regulatory requirements that determine
the manner in which financial information is reported or presented in financial statements.

 For example, the Companies Act, 1956 determines the classification and accounting treatment for
redeemable preference shares as equity instruments of a company, whereas these may be
considered to a financial liability under IFRS.

 The Companies Act (Schedule VI) also prescribes the format for presentation of financial
statements for Indian companies, whereas the presentation requirements are significantly different
under IFRS.

 Similarly, the Reserve Bank of India regulates the financial reporting for banks and other
financial institutions, including the presentation format and accounting treatment for certain types
of transactions.

• The recent announcement by MCA is encouraging as it indicates government support for the
timetable for convergence with IFRS in India. However, the announcement fells short of
endorsing the roadmap for convergence and the full adoption of IFRS that is discussed in ICAI’s
concept paper. In absence of adequate clarity and assurance that Indian laws and regulations will
be amended to confirm to IFRS, the conversion may not gain momentum.

⇒ There is a lack of adequate professionals with practical IFRS conversion experience and therefore
many companies will have to rely on external advisors and their auditors. This is magnified by a lack
of preparedness amongst Indian corporates as this may be viewed simply as an accounting issue which
can be left to the finance function and auditors. While, it should be noted that IFRS conversion will
improve a fundamental change to an entity’s financial reporting systems and processes. It will require
a detailed knowledge of the standards and the ability to consider their impact on business transactions
and performance measures. Further, the conversion process will need to disseminate and embed IFRS
knowledge throughout the organisation to ensure its application on an ongoing basis.
 INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

⇒ Another potential pitfall is viewing IFRS accounting rules as “similar” to Generally Accepted
Accounting Principles in India (Indian GAAP), since Indian accounting standards have been
formulated on the basis of principles in IFRS. However, this view disregards significant differences
between Indian GAAP and IFRS as well as differences in practical implementation and interpretation
of similar standards. Further, certain Indian standards offer accounting policy choices which are not
available under IFRS, for example, use of pooling of interest methods in accounting for business
combinations.

There is an urgent need to address these challenges and work towards full adoption of IFRS in India. The
most significant need is to build adequate IFRS skills and an expansive knowledge base amongst Indian
accounting professionals to manage the conversion projects for Indian corporates. This can be done by
leveraging the knowledge and experience gained from IFRS conversion in other countries and
incorporating IFRS into the curriculum for professional accounting courses.

Ultimately, it is imperative for Indian corporates to improve their preparedness for IFRS adoption and get
the conversion process right. Given the current market conditions, any restatement of results due to errors
in the conversion process would be detrimental to the company involved and would severely damage
investor confidence in the financial system.
7. LIVING WITH INFLATION
Stepping on tear gas

Increase in oil prices set to fuel inflation

The government finally hit the bullet on fuel price hikes and raised retail prices from Wednesday, i.e., 4th
of June 2008 midnight. Petrol prices will increase by Rs 5 a litre, diesel Rs 3 a litre and cooking gas Rs 50
a cylinder. The price hike is estimated to have a direct impact of 0.6% on inflation as the increase on
diesel has been restricted to just Rs 3 a litre. Meanwhile, the two biggest challenges for the government is
to manage inflationary expectations and bail out cash-strapped oil companies.

The bailout package will, however have a huge bearing on the fisc. The government has taken a huge hit
by foregoing taxes on crude oil and other products even as it reduced excise duties on petrol and diesel.
The revenue loss of Rs 22,600 crore, about 8% of indirect taxes, will put a huge pressure on the fisc as
government borrowings will go up. Experts said the government’s FRBM targets will definitely be under
pressure. Oil bonds of Rs 135,000 crore (almost 3% of the GDP), though an off-budget item, will increase
the interest burden for the government.

Fin Min issues guidelines on expenditure

The finance ministry has issued stern guidelines to the ministers and departments to slash down the
wasteful expenditure, particularly administrative and travel. Prime Minister Manmohan Singh also wrote
to his cabinet colleagues to cut down on wasteful expenses. The idea behind the austerity drive is to send
out the right signal across the government machinery so that wasteful expenditure is checked. The finance
ministry also advised government departments to consolidate existing schemes this year, the second of the
11th Five-Year Plan, instead of coming out with new schemes.

Direct tax collections estimate to be hiked to Rs 4L crore

Close to the heels of introducing stringent austerity measures to control wasteful spending, the
government is now eyeing collections from direct taxes. Finance minister P Chidambaram said the budget
estimate of Rs 365,000 crore for direct tax collections would be revised ‘substantially’. The new target
could be set at around Rs 400,000 crore. “Given the actual collection during 2007-08 at Rs 314,468 crore,
I have asked the Central Board of Direct Taxes to quickly revise upwards the (budget) estimate. The
estimate will no longer be Rs 365,000 crore. The CBDT will meet over the next couple of days and
increase the estimate.”

Complimenting the income tax department for record tax collection, Mr Chidambaram said during the
four years of UPA government, the collections had tripled from Rs 105,088 crore in 2003-04. The cost of
tax collection had also come down to 0.54%, which was the lowest in any jurisdiction in the world. The
government was emphasising on voluntary tax payment and this was evident in the increase in Tax
Deduction at Source (TDS) (51%), advance taxes (33.6%) and self assessment tax (62%) last fiscal, while
post assessment declined by 5%. FM P Chidambaram issued instructions to prosecute people who has
stopped filing returns for the past three years or have never filed one.

Inflation at 8.24%, may rise further

There is no respite from rising price yet. The Wholesale price-based annual rate of Inflation rose to 8.24%
for the week ended May 24, it’s fastest since August 2004. Economists say: Once the recent increase in
price of petroleum products enters the calculation, it could well go beyond 9%. Inflation has now
accelerated for the seventh week running.
 LIVING WITH INFLATION

Bumper kharif may help crop inflation

A bumper Kharif crop may soften the inflation that touched a 45-month high at 8.24% for the week ended
May 24 due to rising prices of food articles and metals. A timely onset of monsoon has brightened the
chances of a good kharif crop – paddy, oilseed like soyabean and groundnut, maize and pulses like urad
and moong – which have contributed to a higher inflation.

Food articles and other agri-products have a weight of 15% in the wholesale price index (WPI) while
manufactured products for which agri-products are raw materials carry a weight of 11.5%. Thus, agri-
products account for almost one fourth of the index. In India kharif crops, which are sown between June
and September, account for more than half the total grains production. Kharif output was estimated at 120
million tonnes during 2007-08. According to industry watchers, kharif output is likely to exceed this
figure provided the monsoon maintains its pace and is well distributed. Centre for Monitoring Indian
Economy MD Mahesh Vyas feel that kharif prospects look good and as and when the arrival of these
crops starts in the market (normally in October) it will reduce inflationary pressures.

RBI ups repo rate 25 bps

In another inflation-combating effort that will put pressure on banks to revise deposit rates, the RBI on
11th June, 2008 increased the repo rate or the rate at which it lends to banks, by 25 basis points to 8 per
cent. It, however, left the reverse repo rate unchanged. The move, applicable with immediate effect, will
put further pressure on liquidity that is already under strain with the first installment of advance tax due
on June 15. While State Bank of India raised deposit rates, the additional pressure on liquidity may force
other players to follow suit.

Inflation shoots up to 7-year high of 8.75%

Inflation rose to a seven-year high of 8.75% in the last week of May, as compared to 8.24% in the
previous week. This is the fastest rise in inflation since February 2001. In the week ended May 31, prices
of primary articles – with a weight of 22% in the index – moved up by 0.9% on the back of costlier eggs,
condiments and spices, urad, barley, fruit, vegetables, mutton, milk and wheat. Non-food article prices too
rose in the week. Manufactures food products like rapeseed and mustard oil, cottonseed oil, groundnut oil,
rice bran oil and coconut oil too rose during the week.

Prices of beverages, tobacco, textile, paper and leather products, chemicals, non-metallic minerals,
machinery and machine tools too rose in the range of 0.2% to 3.9%, with the highest increase seen in
textile products. Fuel prices remained steady. The official data released by the commerce ministry also
revised the inflation for the week ended April 5 to 7.71%, up from 7.14%, suggesting that the latest figure
too could be understated. However, the worst is yet to come. The latest data released do not factor in the
fuel price increase or the electricity tariff hike in some states. When these get reflected in the index,
inflation is expected to go up further.

Inflation jumps to 14-year high of 11.05%

The wholesale price inflation shot up to a 13-year high of 11.05% in the week ended June 7, ’08. The
steep hike in the price index, almost 2.3% as compared to the previous week has been primarily fueled by
a sharp increase in industrial and motor oil fuel prices. The unexpected spurt in inflation rates has taken
even economists and policymakers by surprise. The increase in fuel prices were expected to push inflation
figures to double digit but 11% plus figures was beyond estimation.
 LIVING WITH INFLATION
Inflation to hit GDP

Industry associations have said inflation at 11.05% poses a great threat to the country’s economic growth.
Ficci said the recent hike in petrol and diesel prices has increased transportation costs, which in turn has
contributed to the inflationary pressures. Expressing concern over inflation, Assocham said many things
seem to have gone beyond the hands of the government.

India Inc resorts to desperate measures to beat inflation: It’s time for India Inc to tighten its belts.
Companies across, including consumer goods and services, have begun resorting to drastic measures to
cope with bitter pill that’s double-digit inflation. Deferring hiring, minimizing travel costs by opting for
video-conferencing, experimenting with work-from-home initiatives, cutting down on entertainment
allowances, inking long-term contracts with suppliers and bulk-buyers or centralised sourcing to cushion
raw material costs are some of the initiatives being tried out, besides regular practices like fine-tuning
efficiencies.

Economists looking at historical data for clues

Economists say: First, look at the historical trend in inflation. The fuel price index had recorded an
average rise of 18% in 2001-02. However, overall inflation remained at a moderate level of 5% largely
due to a marginal rise in the prices of manufactured products. This was because firms chose to bear the
burden of higher costs rather than passing it on to end users while setting for lower operating profit
margins which were 10.6% in FY01 compared to 12% in the previous year.

But over a decade ago in the high inflation year of 1995-96, manufacturers did not compromise on their
margins. Profit margins geared up to 15% even though inflation ranged above 11% during that year. But a
series of interest rate hikes which followed broke the back of the industry. Over the next couple of year’s
industrial growth decelerated. The industrial growth for manufacturing industry slid to 4.4% during FY99
from a high of 14% in FY96.

The relatively high credit growth coupled with high inflation and monetary tightening makes it tempting
to compare the present situation with the macro economic scenario of 1995-1999.

Shubhada Rao, chief economist of Yes Bank says that the structural changes in the Indian economy since
then is reflected in the form of strong consumption demand coupled with resilient investment demand,
which negates the chances of a massive deceleration in industrial production. And unlike the scenario of
95-96, when excess capacities were built up by Indian industry, there are no such indicators now although
there have been concerns about the economy overheating. Besides the gearing ratios of top firms is still
reckoned to be comfortable. So are forex reserves, inflows are far more stable now, with items like
remittances by the Indian diaspora and services exports being more permanent in nature and account for a
bigger share of inflows now. The fiscal position of both the states and the centre is far healthier now
although there are signs of a slight deterioration given the recourse to issuance of oil and fertiliser bonds
and farm loan waiver.

Eight is the beast for Indian consumers

Numerology may have little to do with microeconomics, but the eighth year of every decade appears to
bring bad news for the Indian consumers. Over the last three decades, 1988, 1998, and now 2008, have
witnessed big bites on the consumer’s wallet with inflation in all these years figuring in double digits. The
year 2008 also brings to an end a period of unprecedented low consumer inflation which started in 1999.
 LIVING WITH INFLATION

Interestingly, the bite of inflation in the eight year of each decade since 80s came on the back of an
opposite trend in the 70s when consumer inflation was very low. For industrial workers 1978 actually was
a year of deflation when the price index dropped. Inflation for agricultural labourers and urbanites also
averaged a modest level of 2.5% and 4% in 1978, one of the lowest annual consumer inflation that the
country witnessed ever since.

More crude shocks could be in store

Driven by spiraling global crude oil prices, the government said it was considering all options and would
look at whether another round of increase in auto fuel prices and duty cuts is required. The last price
revision and the bailout package for the oil cos was announced on June 4 which has contributed largely to
the rally in inflation rates to double-digit figures. The revision in prices was pegged at crude prices of
about $ 127 a barrel. Prices have moved on since then and are hovering around $ 135 per barrel.

Inflation jumps to 11.42%

Inflation moved up to 11.42% in the second week of June. Official data released on 27th of June also
revised the provisional WPI-based inflation upward by 66 basis points to 8.23% in the third week of
April. The latest figure has started capturing the second-round effect of the increase in government-fixed
auto fuel announced earlier this month. Inflation stood at 4.13% in the same week a year ago.

Iron and steel catalyse rise in inflation: The prices of iron and steel have posed a 33.69% increase over
the corresponding week last year. The spurt in prices has largely contributed to higher inflation this week.

Inflation blues? But wheat, pulses & edible oil are cheaper: Inflation figures giving you sleepless night;
here’s something to cheer you up. Prices of a few essential household items actually fell compared to their
prices a month earlier.

BoP current a/c shows deficit in Q4

A Spiralling oil price has cast a shadow on India’s macro numbers. After eight years, the country recorded
a deficit in its fourth-quarter current account in the country’s balance of payments. A sliding stock market
and a major slowdown in debt offerings only add to the sense of gloom.

For the first time after 2000, the current account in the balance of payments during the fourth quarter of
2007-08 has ended in a deficit despite a 36% rise in income from services and remittances from Indians
abroad. The current account in the balance of payments measures the net position of a country’s exports
and imports of goods and services. A deficit implies that imports far outpace exports and a reversal of the
trend of a surplus for long has been attributed mainly to the surge in oil prices. According to the latest
provisional data released by the RBI, the current account deficit was $ 1,041 million during the quarter-
ended March ’08 compared with a surplus of $ 2,563 million in the same period last year.

The silver lining however is in the form of remittances by overseas Indians. Remittances touched a new
high and even net FDI which continued to be robust despite a huge growth in outbound FDI. The overall
balance of payments for the quarter ended in a surplus of $ 24.99 billion ($ 20.45 billion) on the back of
better capital inflows of $ 25.4 billion ($ 17.13 billion) during the quarter. Government managers reckon
that it is too early to set off the alarm bells.
 LIVING WITH INFLATION

Steel makers agree to cut prices, check hoarding

Rising prices of steel once again spurred the government machinery into action with the steel ministry
getting the entire major producer to agree for a set of stringent administrative action to check price rise
and curb inflationary pressure.

Steel secretary R S Pandey said: “Steel prices have gone up at the retail level largely on account of undue
speculation and hoarding. Steel producers have now agreed to take a series of administrative measures to
ensure that products are not sold at unreasonable prices. These measures would show its impact within a
week, by when we hope that steel prices may soften.”

He said steel producers have agreed to review their dealership and trading arrangements and have decided
to contain both direct and indirect exports of products that would improve domestic availability and
dissuade speculators and hoarders. According to the agreement reached at the meeting, producers of pipes
and tubes have decided to reduce the price of these items by 10% and cap the price at 48,000 per metric
tonne with immediate effect. This price would continue until the primary producers raise the price.
Currently, the price of pipes is around 53,000 per tonne. They decided to start a system of MRP (for HR,
CR, and galvanised products) wherein the prices of all products would be mentioned in advance by the
company. Over charging by the dealers would lead to suspension of dealership. In addition, steel
producers have assured further cut in export of steel products to balance the demand supply gap.

No review of fuel prices for 3 months

Consumers can have a sigh of relief for the time being as the government plans to take up a review on oil
prices only in October. This would mean that consumers would remain insulated from the impact of the
rising global crude oil prices for the next few months. This commitment to protect consumers comes even
as global oil prices touched a new high at $ 145/barrel.

Inflation jumps to 11.63%

Costlier food and manufactured products – coupled with the weaker rupee – pushed up the annual
inflation rate to a 13-year high of 11.63% for the week ended 21. Indicating that WPI may have already
scaled 12%, the government revised the inflation figure measured for the week ended April 26 to 8.27%
as compared to the provisional estimate of 7.61% - an increase of 66-basis point.

The government meanwhile, reiterated its commitment to tame inflation with minimum injury to growth.
“One question that people ask often is that if indeed there is a trade-off between growth and containing
inflation, where the government stands.” Finance secretary D Subba Rao said: “When inflation is above
11.5%, the priority of any responsible government is certainly to reduce inflation. There is no doubt about
it. However, the endeavour is to see that growth is not compromised”.
8.1 MISCELLANEOUS UPDATES

RIL to become largest energy company

Billionaire Mukesh Ambani promoted Reliance Industries will become one of the largest energy
companies in the world after its refinery and offshore gas fields begin production. Chairman Mukesh
Ambani said at the company’s 34th AGM: “Reliance is now on the verge of a quantum leap in one of its
several growth platform: energy. Two very large projects, founded on the energy growth platform, will be
commissioned on the second half of this financial year. They will mark a historic milestone in Reliance’s
leap to global heights. The $ 5.7 billion refinery at Jamnagar with capacity of 27 mmt per annum will
create the largest refinery site in the world once it starts before December this year.

India Inc puts off Rs 60,000-cr investment

The telltale signs of slowdown in the business cycle are becoming evident. With money getting costlier,
several Indian corporates are pushing back plans to raise close to Rs 60,000 crore for expansion of
existing units as well as construction of Greenfield projects. Bankers said among the investment decisions
that have been deferred for now include those involving a state-owned power company, a refinery major
besides two steel firms. Besides, a close to 20 other companies had postponed their investment decisions.
Chandra Kochhar, joint MD of ICICI Bank, one of the biggest lenders, said that over the last three months
“we have not seen new projects in the pipeline. A new pipeline is not getting created”. ICICI Bank has
often spoken of projects worth over $ 700-billion in pipeline to indicate robust demand.

Broking firms

Though stocks of most broking firms have recovered after the market slump, clouds of pessimism
continue to hover. Falling trading volumes, lack of investor participation, absence of leveraged trading
and reduced working capital loans are working against brokerage firms. A major talking point is the sharp
dip in trading volumes since the crash in January this year. For instance, the cash segment on the NSE had
logged a turnover of Rs 4.47 lakh crore in January ’08. This has dipped to Rs 2.8 lakh crore in February,
Rs 2.53 lakh crore in March and Rs 2.7 lakh crore in April. Lower volume testifies to the lack of
confidence among investors, most of whom have suffered bruising losses in January. With investor
participation waning out, it will be tough times ahead. Brokerages had a money-minting opportunity in
margin financing. But now there are few takers for the facility. The problem is that brokerages do not
have access to funds from banks, since banks are not lending even half of what they allowed in November
and December. Broker firms borrowed at a higher rate of interest, which passed on to clients. Prior to
January, with the market buoyant, investors had fallen to the temptation of taking positions through
margin financing option of brokers. But with the sharp fall and resultant losses, investors are also not
showing any keenness to avail themselves of margin funding options from broker.

Stock volatility greater at long investment horizons: Study

When stocks markets are on the upswing, volatility in the indices tend to gradually decline, note the
pundits. Also, volatile markets have a tendency to be on the downside. Further, it is generally perceived
that stock returns are less volatile over longer investment horizons. The long-run volatility of stocks is
clearly of interest to investors, especially now that stock indices seem to be on the downward spiral. A
recent working paper in finance finds that stocks are “actually more volatile” over the long-term. The
research finds that long-horizon stock investors ‘face more volatility’ than those focused on the short-
term. The study underlines the need for sound asset-allocation and informed stock picking to properly
take into account market variance and volatility.
8.2 REALTY SECTOR
Realty prices could crumble soon

The recent fall of realty stocks on the bourses reflected the first signs of trouble ahead for the industry.
Fuel price hike and lower IIP (index of industrial production) numbers were setbacks to the sector and
now double digit growth in wholesale prices-based inflation has emerged as a serious threat to the sector,
which has been cooling off, in recent times.

Market experts predict further softening of prices. Even though prices have corrected by 10-20% and even
beyond in some regions, it not yet touched the bottom. It is advisable to wait till at least the year-end to
buy homes. However, since many developers are holding on to prices and even operating as a cartel in
some prime pockets like Mumbai, postponing purchase decisions may not really be a solution. Despite the
fact that volumes have fallen sharply, established developers are clearly unwilling to drop prices.

Many Mumbai based developers have raised funds through PE route. The surplus funds these developers
have raised allow them to hold on to properties with our releasing the same into the market, thus creating
an artificial demand supply mis-match in the system. Liquidity crunch has already forced developers to go
in for high interest loans. While the primary market for real estate has virtually dried up. Private equity
players are also following a very cautious approach. Only those developers who have internal cash flows
and have not gone for recent land acquisitions will be able to sustain these tougher times.

Shocking Realty

Real estate developers see further slowdown in demand and price correction due to RBI’s move to raise
interest rate. Caught between sluggish demand and rising cost of capital and construction, developers are
deferring launch of new projects. Some even fear that ongoing projects may get delayed.

There is no alternative to credit. Land transactions have dried up due to developers’ inability to bring
funds. The fund-raising plans of developers have also changed and some have limited their expansion
plans. Some developers, especially smaller ones, also fear that their project might get stuck due to
unavailability of funds. The bank credit had already dried up for small developers and they now fear
rising interest rate will further increase their borrowing cost from NBFC’s or private money lenders.

Tough to buy, tougher to rent

Realty prices might be showing signs of easing, yet it tough to buy a house. Prices are still high and loans
are getting expensive. Renting a property is also getting dearer. According to analysts and developers
residential rentals are hardening, registering a 10% growth. The demand for rented residential space is
high as India has very low residential rental yields hovering around 3-6% (that is, given the high prices,
people prefer to live on rent rather than buy a property). At the same time home loan interest rates are
around 11% to 13%. While new property sales are slowing down, rentals are showing an upward trend.

Though new supply is being added to the pool of residential properties, it hasn’t really helped in stablising
rents. New supply is not coming in the preferred centrally located residential areas. Also maintenance and
construction costs have gone up in the last one year. All this has contributed to higher rentals. Developers
feel that residential rentals will not be hit in the short run. Demand hasn’t waned for quality houses and
the market is still buoyant. Till the time the jog market is healthy and disposable incomes don’t go down
drastically, rentals will keep moving up; though the rentals will plateau out in the long run.
8.3 POWER SECTOR
India will need 335 GW power by 2017

With soaring crude oil prices, it is time for the Indian power sector to become less dependent on
international fuel supplies and start exploring substitute. If India continues to grow at an average rate of
8% for the next ten years, power demands may rise from the present 120 gigawatt (GW) to 315-335 GW
by 2017, 100 GW higher than current estimates, states a six-month long study ‘Powering India: The Road
to 2017’ by McKinsey & Company’s Electric Power and Natural Gas Practice. A radical approach is
required to increase the capacity and meet such demand.

India, an emerging superpower is progressing towards being a service-led economy rather than being
driven by agrarian economy. Supply and production have increased but demand has doubled. The first
step towards meeting demands was the Electricity Act 2003, the National Electricity Policy, the Ultra
Mega Power Projects, Accelerated Power Development and Reform Programme, the Integrated Energy
Policy and the National Tariff Policy, 2006. Also, State Electricity Boards (SEBs) have been
recapitalised. According to the study, the demand can only be met through a five-fold to ten-fold rise in
power production. This means the investments in the power sector will increase over $ 600 billion (Rs 24
lakh crore) in the next ten years. These Acts have resulted in transparency regarding tariff determination
and other regulations and also attracted many private players towards the sector.

As the standard of living increases, so does the consumption. This is one of the three key reasons for rise
in power supply demand. Consumer demand across rural and urban sector is growing at 14% over the
next ten years whereas India’s GDP growth is just 8% a year.

The second reason is the government’s plan to provide electricity by 2012. This means 23 million below
poverty line (BPL) households should be added in the power grid. According to the 2001 census, 125,000
villages need to be connected to the power grid.

The third reason is the 24X7 supply of electricity to consumers who suffer scheduled power cuts for many
hours a day for load shedding and the industrial demand to switch to expensive diesel-based power.

The report, however, says that even in the case of best development trajectory, India will be able to add
only 160-180 GW by 2017.

Govt panel may suggest easier norms to fund power projects

Tying up finances for power projects of large business houses like Tatas, Reliance, GMR, Lanco could
get easier as a government panel is planning to recommend removal of group exposure norms followed by
banks while releasing funds for such projects. RBI norms restrict the ability of commercial banks to
expand their exposure to any corporate group by prescribing limits for such funding. At present, the credit
exposure ceiling is 15% of the bank’s capital funds (equivalent to net worth) in case of a single borrower
and 40% of capital funds in case of a borrower group.

Restrictions on group exposure norms is one of the issue that is being considered by the sub-committee of
the group of ministers on financial issues related to the power sector. The sub-committee is finalising its
report and it would address group exposure norms. Deputy Chairman of Planning Commission Montek
Singh Ahluwalia heading the sub-committee is looking at various issues concerning financing power
projects. The move for relaxing group exposure norms follows huge financing requirements for the sector.
9. Knowledge Resource
HOSTILE TAKEOVERS AND MERGERS
Ranbaxy family sells entire stake to Daiichi

The Indian promoters of Ranbaxy, the Singh family, have agreed to sell their stake to Daiichi Sankyo
Company Ltd of Japan in one of the largest deals in the Indian pharmaceutical space. The all-cash deal is
valued at $ 4.6 billion (Rs 19,780 crore) which will see Daiichi acquiring 51% in Ranbaxy, India’s largest
domestic drug company, at Rs 737 a share, a 53.5% premium to the average daily closing price on the
NSE for three months ending June 10, 2008 and 31.4 per cent to the June 10 closing price. This price puts
Ranbaxy’s enterprise value at $8.5 billion. The Singh family will divest its 34.8 per cent stake and the rest
will come through a combination of a preferential equity allotment plus the mandatory open offer for up
to 20% of Ranbaxy’s shares. The acquisition is expected to be completed by the end of March 2009.

Ranbaxy CEO Malvinder Singh said: This deal reflects the future direction of the Indian pharmaceutical
industry. With the kind of opportunities and challenges before us, every drug maker should redesign their
business models. This is a significant milestone in our mission of becoming a research-based international
pharmaceutical company. Ranbaxy will become the top generic company in Japan in few years. The
acquisition will catapult Daiichi from the world’s 22nd largest pharmaceutical company to the 15th. The
deal provides instant market access to over 60 countries through Ranbaxy’s marketing network. Daiichi
currently is present in 21 countries.

Daiichi president and CEO Takashi Shoda said: The deal has provided us an excellent opportunity to
enter emerging markets like India. Daiichi will leverage Ranbaxy’s marketing strengths.

However, analysts feel: Daiichi acquisition of Ranbaxy, may spur hostile takeovers and mergers in India’s
Rs 50,000 crore pharmaceutical industries. This deal will unlock the real value of Indian generic
pharmaceutical companies, and trigger more such deals. Already companies such as Aurobindo Pharma,
Cipla Ltd and Orchid Chemicals usually figure in the list of companies that are takeover targets of
multinational pharmaceutical companies, but valuations were deterring the deals.

Mylan-Matrix deal and Dabur’s acquisition earlier show that global pharmaceutical companies are
looking at India in a big way recognising the country as an important destination for the global industry.

Globally, big pharmaceutical companies are shutting down their facilities and are moving their business to
low cost countries. Strict norms on effluent treatment are another reason for them to close down
manufacturing facilities and move to low cost countries. India’s ability to manufacture drugs at almost
one-eighth of the global prices, availability of English speaking quality scientist personnel with chemistry
skills are some of the important factors which attract big pharmaceutical companies to India. As against
this, the rising manufacturing costs and dwindling pipeline of new drugs are worrying global
pharmaceutical companies to off-shore manufacturing to locations such as India.

Indian drug makers were prevented from bringing out copycat or generic versions of the patented drugs
after the country bought in product patent regime in 2005. The drug discovery process involves billions of
dollar investment and it is impossible for most of the Indian drug makers to pursue original drug
discovery process. Margins are thin in the case of global generic business, due to intense competition.

Expert say; Small players will have to exit this business and only those companies having their business
model intact and right can remain in generic business in future. If promoters of India’s largest drug
company felt it better to exit business after many years of attempts to make the company one of the
largest in the world in their businesses, then there are serious issues with our drug policy.
 HOSTILE TAKEOVERS AND MERGERS

The government and other authorities should seriously think about it. It is unfortunate and shocking to
believe that Ranbaxy is going to become part of Japanese pharmaceutical company. Its promoters may
have thought of exiting this business with the handsome premium they are getting than going through the
rigours of complex pharmaceutical manufacturing processes. This deal will, at least for sometime, end the
euphoria on Indian pharma going global and conquering the world.

How Ranbaxy & Daiichi fell in love

It began with the Ranbaxy management looking for an investor for its R&D unit and ended up with them
a buyer for the parent company. Sometime around March ‘08, Ranbaxy CEO Malvinder Singh and COO
Atul Sobti met Daiichi Sankyo executives in Tokyo to explore the possibility of a partnership for the
Indian drug major’s new drug discovery research (NDDR) business, which it planned to demerge into a
separate company. Like other Indian pharma companies, Ranbaxy had announced its decision to hive off
this unit and company executives were in talks with several companies for an alliance in R&D.

But Daiichi had other ideas. It expressed its interest to buy into Ranbaxy. Daiichi was in the process of
setting up a wholly owned subsidy in the country, headed by another ex-Ranbaxy executive D Vijendran.
The Japanese company planned full-fledged operations in India and had long term plans. Ranbaxy has a
strong presence in the Japanese generic market and Daiichi was aware of its strengths.

Mr Malvinder Singh was lukewarm to the proposal. But when he came back to India, he discussed the
proposal with his close confidents, including his younger brother and Fortis HealthCare CEO Shivinder
Singh and Religare CEO Sunil Godhwani (who is also called the third pillar of the Ranbaxy promoter
group). Both felt Daiichi’s proposal could be examined and should not be dismissed outright. And so
discussions began quietly and at high levels.

Tax on Ranbaxy-Daiichi deal:

Stock Market deal will save 1,000 crore tax

As usual, the deal agreement says the 34.8% holding of promoters will be sold through a stock exchange
transaction. But there’s a catch: only if the Ranbaxy share price touches a minimum of Rs 729 which is
presently trading in the range of Rs 525-575, will the promoters be able to sell their stake at Rs 737 per
share to Daiichi Sankyo. This is because Indian laws allow block deals only at a price that is 1% more or
less than the market price of previous day’s closing price.

An off-market transaction would invite 10% capital gain tax, 1% surcharge and an additional 3% tax on
the surcharge. But block deals done through the stock market will mean the promoters will have to pay a
nominal STT of 0.125%. A stock exchange transaction will result in the promoters saving over Rs 1,000
crore which they would have to pay if this was an off-market transaction. The promoters will, therefore,
hope the Ranbaxy stock price reaches the magical figure of Rs 729 before the transaction is executed.
That, however, depends on the movement of stock. It will decide whether the Singh family will transfer
its 34.8% stake to Daiichi through direct off-market sale or through negotiated deals on stock exchanges.

Considering that the stock market has been going through a bear phase, legal sources are uncertain
whether the Singh family will be able to conclude the proposed transaction through negotiated deals on
stock exchanges. It is however, learnt the company will opt for an onscreen transaction and wait for its
share price to touch Rs 729 and execute the sale to adhere to Sebi rule. The moment the share price
touches the minimum level of Rs 729; they will do the transaction onscreen.
 HOSTILE TAKEOVERS AND MERGERS

Ranbaxy promoters may go for bulk deal to skirt tax

The Ranbaxy promoters are likely to use the ‘bulk deal’ route to sell their shares to Daiichi Sankyo. This
will allow them to sell their stake shares on the stock exchange without being bounded by the price
restriction of a ‘block deal’ and without having to pay long-term capital gains tax of around Rs 1,000
crore. As mentioned above, that there is a clause in the agreement between Ranbaxy promoters and
Daiichi Sankyo that says the promoters’ holding will be sold through a stock exchange transaction. A
stock exchange transaction of this kind can be done either through a ‘block’ or a ‘bulk’ deal.

A block deal transaction has to be done at a price, which is close to the existing market price. A Sebi
circular dated September 2005 said a trade with a minimum quantity of 5 lakh shares or having a
minimum value of Rs 5 crore executed through a single transaction on the stock exchange will constitute
a ‘block deal’. This block deal is subject to conditions like time period of trade, delivery-based trading
and more significantly a price range that is not to exceed 1% of the existing market price of closing price
of the stock on the previous day.

However, the bulk deal route offers a way out. As per a circular dated January 2004 on the disclosure norms
for large stock deals, all transactions in a scrip where the total quantity of shares bought or sold is more
than 0.5% of the number of equity shares of the company listed on the exchange are bulk deals. This is
applicable even when the deal is struck through multiple transactions as long as the cumulative share under
consideration exceeds the 0.5% threshold. In the case of Ranbaxy, the transaction would necessarily come
under the scope of bulk deal as the total stake being sold is more than 34%. The bulk deal circular of 2004
does not impose any price range condition.

Public announcement to the shareholders of Ranbaxy Laboratories Limited (16th June 2008)

This public announcement (‘PA’) is being issued by ICICI Securities Limited, (The ‘Manager to the
Offer’) for and on behalf of Daiichi Sankyo Company Limited (‘Daiichi Sankyo’ or the ‘Acquirer’)
pursuant to Regulation 10 and 12 and as required under the SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 1997 as amended (‘The Regulations’)).

1. The offer

1.1 This offer (the ‘Offer’) is being made by the Acquirer to the equity shareholders of the Ranbaxy
Laboratories Limited (hereinafter referred to as ‘RLL’ or the ‘Target Company’) in compliance with
Regulation 10 and 12 of the Regulation. The offer is subject to the receipt of certain approvals as
described below in Section “Statutory approvals for the offer”.

1.2 There are no ‘Person Acting in Concert’ within the meaning of Regulation 2(e) (1) of the
Regulations in relation to this Offer. However, due to the applicability of Regulation 2(e) (2) of the
Regulations, there could be certain entities deemed to be Person Acting in Concert with the Acquirer.

1.3 On June 11, 2008, the Acquirer entered into a Share Purchase and Share Subscription Agreement (the
SPSSA) with (a) Mr Malvinder Mohan Singh; (b) Mr Shivinder Moan Singh; and (c) Others
(collectively referred to as the ‘Seller’) and RLL.
 HOSTILE TAKEOVERS AND MERGERS

Under the SPSSA, the sellers have committed to sell to the Acquirer their collective holdings of
129,934,134 fully paid-up equity shares (the ‘Sale Shares’) representing 34.81% of the total current
issued, subscribed and fully paid-up equity capital of RLL at a price of Rs 737/- (Rupees Seven Hundred
Thirty Seven only) (the ‘Negotiated Price’) per fully paid up equity share in cash (the ‘Acquisition’). The
total consideration payable for the Sale Shares is Rs 95,761,456,758 (Rupees Ninety-five billion seven
hundred sixty-one million four hundred fifty-six thousand seven hundred fifty-eight only). As per the
stock exchange filing by RLL, the sellers belong to the promoter group of the Target Company.

The SPSSA also provides for the issue and allotment by RLL to the Acquirer (the ‘Subscription’) of
46,258,063 fully paid-up equity shares of face value Rs 5/- each (the ‘Subscription Shares’) representing
11.03% of the post-equity-issuance, subscribed and fully paid-up equity capital of RLL and the issuance
of 23,834,333 warrants of RLL (the ‘Warrants’), each Warrant exercisable for one equity share of face
value of Rs 5/- each of RLL.

The subscription price for each Subscription Share and the exercise price of each Warrant are Rs 737/-
(the ‘Subscription Price’). The issuance is subject to a special resolution being passed to approve the issue
of the Subscription Shares and the Warrants, under Section 81(1A) of the Companies Act, 1956. as
amended, and other applicable provisions, at the extraordinary general meeting (the ‘EGM’) of the
shareholders of RLL to be convened on July 15, 2008 and the receipt of certain approvals as set forth in
detail in the Section ‘Statutory approvals for the Offer’.

1.4 Pursuant to the signing of the SPSSA, the Acquirer proposes to acquire up to 92,519,126 fully paid-up
equity shares of face value Rs 5/- each from the remaining shareholders (other than the parties to the
SPSSA) of the Target Company (the ‘Offer Size’), representing 20% of the Emerging Voting Capital of
RLL at a price of Rs 737/- (the ‘Offer Price’) for each fully paid-up equity share of RLL, payable in cash
and in accordance with the Regulations, subject to the terms and conditions mentioned in the Offer. This
Offer is neither conditional nor subject to any minimum level of acceptance. The Acquirer will acquire all
the shares that are validly tendered in accordance with the terms of the Offer, up to 92,519,126 equity
shares at the Offer Price.

1.5 RLL and the Sellers have accepted a period of exclusivity under the SPSSA and have undertaken not
to sell all or any portion of the business of RLL, its shares or all or substantially all of the assets or to
demerge or transfer any business or division of RLL. On the completion of the purchase by the Acquirer
of all of the Sale Shares or the completion of the Offer, whichever is later, the board of directors of the
Company will be re-constituted such that it will consist of 10 members, of which a combination of 4
independent and non-independent directors (including Mr Malvinder Mohan Singh) will be nominated by
the Sellers and 6 independent and non-independent directors will be nominated by the Acquirer.

Mr Malvinder will remain the Chief Executive Officer and Managing Director of RLL and will also
become the Chairman of the Board of RLL. The Sellers are also bound by non-competition obligations
for which they neither have received nor will receive any additional consideration from the Acquirer.

1.6 The shares of the Target Company are presently listed in India on the BSE and NSE. Based on the
information available on the website of the NSE and the BSE, the equity shares of the Target Company
are frequently traded on both the BSE and the NSE in terms of the Regulations. In the 26 weeks and the 2
weeks preceding the date of this PA, the shares of the Target Company are more frequently traded on
NSE within the meaning of Regulation 20(5) of the Regulations.
 HOSTILE TAKEOVERS AND MERGERS

1.7 The Offer Price of Rs 737/- per equity share is justified in terms of Regulation 20(4) of the
Regulations as it is higher of the following:

(a) The negotiated price Rs 737.00

(b) The Subscription price Rs 737.00

(c) The highest price by the Acquirer for any acquisition [including by way of allotment
in a public or rights of preferential issue] of equity shares of the Target Company
during the 26-week period prior to the date of the public announcement Nil

(d) The average of the weekly high and low of closing price of the equity shares of the
Target Company on NSE during the 26 weeks preceding the date of the public
announcement Rs 444.08

(e) The average of the daily high and low prices of the equity shares of the Target
Company on NSE during the two weeks preceding the date of the public
announcement Rs 533.51

The Acquirer has neither acquired nor been allotted any shares in the Target Company in the 12 months
period prior to the date of this PA.

1.8 As of the date of this PA, the Acquirer does not hold any equity shares of RLL.

1.9 This is not a competitive bid.

1.10 As of the date of this PA, the Manager to the Offer does not hold any equity shares of RLL.

2. Statutory Approvals for the offer

2.1 The Offer is subject to the Acquirer obtaining the following approvals:

a. Approval of the Reserve Bank of India (the ‘RBI’) under the Foreign Exchange Management Act,
1999 (‘FEMA’) and pursuant to the RBI’s Master Circular No. 02/2007-08 dated July 2, 2007.
The Acquirer will file an application with the RBI for its approval for the transfer of equity shares
tendered pursuant to the Offer and for acquisition of the Sale Shares.

b. Approval of the Foreign Investment Promotion Board (‘FIPB’), Department of Economic Affairs,
Ministry of Finance, India for acquisition and subscription of shares of the Target Company by the
Acquirer as required by Press Note No. 1 (2005 Series) dated January 12, 2005, and in relation to
such other matters as the Acquirer deems advisable in connection with the Acquisition,
Subscription and the Offer.
 HOSTILE TAKEOVERS AND MERGERS

c. Approval of the anti-trust authorities in Japan, the United States of America, the European Union,
China, Taiwan, Ukraine, South Africa and any other jurisdiction as may be applicable, in respect
of the Acquisition, the Subscription and the Offer.

As of the date of the PA, the Acquirer is in the process of applying for the above said approvals.

2.2 To the best knowledge and belief of the Acquirer, as of the date of the PA, other than as set forth
above, no statutory approvals are required to acquire the shares tendered pursuant to the Offer. In terms of
Regulation 27 of the Regulations, the Acquirer will not proceed with the Offer if the statutory approvals
that are required are not obtained.

2.3 To the best knowledge and belief of the Acquirer, as of the date of this PA, the Acquirer does not
require any approvals from financial institutions or banks for the Offer.

2.4 Notwithstanding the foregoing in this Paragraph 2, if any additional approvals are required in respect
of the Offer, the Acquirer will apply for such approvals at the appropriate time.

2.5 In case of delay in receipt of any statutory approval(s), SEBI has the power to grant an extension of
time to the Acquirer for payment of consideration to the tendering shareholders, subject to the Acquirer
agreeing to pay interest for the delayed period as directed by SEBI in terms of Regulation 22(12) of the
Regulations. Further, if the delay occurs on account of willful default by the Acquirer in obtaining the
requisite approvals, Regulation 22(13) of the Regulations will become applicable.

3. Option to the Acquirer in terms of Regulation 21(3)

3.1 As a consequence of the Offer, the public shareholding will not reduce to a level below the limit
specified in the listing agreement with the stock exchange for the purpose of listing of the Target
Company on a continued basis.

4. Other terms of the Offer: A schedule of the activities pertaining to the Offer is given below:

Activity Day Date

Specified Date Friday June 27, 2008

(Specified date is only for the purpose of determining the names of

shareholders as on such date to whom the Letter of Offer will be sent
and all owners (registered or unregistered) of the shares of the
Target Company (except the Acquirer and the Sellers) are eligible to
participate in the Offer anytime before the close of the Offer)

Last date of the competitive bid, if any Monday July 7, 2008

Date for dispatch of Letter of Offer to the Shareholders of Target Thursday July 31, 2008
Company
 HOSTILE TAKEOVERS AND MERGERS

Date of opening of the Offer Friday August 8, 2008

Last date for revising the Offer Price/ Offer Size Thursday August 14, 2008

(As per the Regulations, the Acquirer may revise the price upward up
to seven working days prior to the closure of the Offer. If the Offer
Price is revised upwards, the same would be informed by way of
public announcement in the same newspapers in which PA has
appeared. The Acquirer would pay such revised price for all shares
validly tendered any time during the Offer and accepted under the
Offer)

Last date for withdrawing acceptance from the Offer Thursday August 21, 2008

(Shareholders who have accepted the offer by tendering the requisite

documents, in terms of the Public Announcement / Letter of Offer, can
withdraw the same upto three working days prior to the date of the
closure of the offer)

Date of closing of the Offer Wednesday August 27, 2008

Date of communicating rejection/acceptance and payment of September 10,

consideration for accepted Shares Wednesday 2008
The people can cry much easier than they change
www.mi7safe.org

Alka Agarwal
Promoter of Mi7 & SAFE

Financial Literacy Mission

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Missions Seven Charitable Trust

120/714, Lajpat Nagar, Kanpur - 208005
Phone 0512-2295545, 9450156303, 9336114780

E mail at: safe@mi7safe.org

Safe Financial Advisor Practice Journal: July 2008