Journal of FInance Vol 16

1.
STAY ETHICAL
The biggest question before most start-up entrepreneurs in India is how to tackle corruption in the
government and a propensity for unethical behaviour among, at least, a section of employees, vendors,
customers, competitors and everybody else. Unfortunately, many business leaders choose the easier
answer. They factor in some amount of cheating at all levels and start playing by the system. They
vigorously take part in cutting corners – be it in taxes, product quality, paying out liabilities or in their
treatment of employees. They bribe their way through. They cheat to avoid being cheated.
In the short term, these practices save money and thus look attractive. With everybody else also in the
game, it becomes easy to justify one’s poor conduct by blaming it on the society. In the long term,
however, this race to the bottom hits back with a cancerous force. Employees figure out that the boss has
lost the moral high ground and start imitating in their own dealing with the company. It may start as an
inflated expense bill or a quickly stolen long-distance call, but the cheating spreads in scope and reach.
Customers, government officials, shareholders and all other stakeholders imbibe the poisonous sprit and
resort to I-Squeal-Before-You-Do game. Exploitation becomes the norm and the company self-destructs.
Some victims end in the start-up stage, while others hold on longer and go bust only after they become
Enrons or Arthur Andersons. But fail they do.
It may be the tougher path, the road less traveled, but good ethics is an important element for long-term
survival. To build this ecosystem, an entrepreneur must start by formally writing down a code of conduct
for all employees and be the first to start practicing it. Such a code of conduct must be fully aligned with
the personal value system of entrepreneur and it helps if one is honest to start with. It is painful to see
entrepreneurs say they are in business to make money. I tell them, first define what money is. Is it just the
currency notes or is it the wealth of goodwill and respect you build for your company.
Just like financial, marketing or production plans are written down, a company needs to write down its
ethical policy too, say business mentors. This will communicate the code of conduct across the
organisation, offer an objective frame of reference and stipulate proper responses for specific situations
that arise. For this reason, a code of conduct is a highly customised document for each company,
reflecting its own peculiar needs.
The ethical code is a generic guide based on values and principles, but a code of conduct is the specific
does and don’ts of corporate behaviour. So, it helps to start by defining the business’ value system and
then get down to finding answers for specific situations that may arise. A successful code of conduct of
conduct starts with a top-down approach. It all starts with the actions of the entrepreneurs. The set of all
choices that the leader makes eventually becomes the code and culture of the company. However, it
should not stay top-down for ever. There should also be a feedback system that lets employees shape the
tone of the code and take the firm’s objectives further.
The biggest danger is to have a code of conduct, but not implement it vigorously. There are many
companies that have one set of rules on paper and another set of rules in practice. Again, this deception
may prove profitable in the short term but over time, all those coming into contact with the firm will
realise its true worth and pay it back in its own coin. As big companies realised that markets reward
companies seen as ethical, they have unleashed a marketing propaganda to manage their image along
ethical lines, without changing their core business practices. A code of conduct is not merely a smart
marketing tool, but a deeper value that guarantee all stakeholders a predictable, fair and uncompromising
behaviour pattern. The reward for the entrepreneur is a good night’s sleep.
“It is better to lose a billion dollars than a good night’s sleep.” … NR Narayana Murthy
2.1 SECURITY MARKET
Where do we go from here?
India & China may be the flavour of the world, but when it comes to performance of their stock exchange
indices in 2008, they are doing the worst in Asia. While the Bombay Stock Exchange’s National Index
(popularly known as BSE 100 index) dipped by 16.08% during the first two months of 2008, the Shanghai
Stock Exchange’s Shanghai A Index slipped as much as 17.36% during the same period. A comparison of
major market indices in Asia by Thomson Financial reveals that none of the indices posted positive
returns during the said period.
According to analysts, the bad performance of these indices is largely due to the late correction in India
and China. Even though the global markets witnessed a slowdown in December ‘07, emerging markets
like India and China carried on till January ‘08. In case of India, the correction happened only after the
first fortnight of January ‘08. Experts think that it would be unfair to pinpoint fingers on any particular
reason for this fall – there are speedbreakers on the road, and a bigger one has come across this time.
While there’s no one-size-fits-all solution, here is some advice that small retail investors can use to
mitigate the nightmares they are enduring…
Take a long, hard look
There’s no point in burying head in the sand like an ostrich and waiting for a miraculous rebound. An
active interest in the state of affairs is a must. The first thing you should do is to take a long, hard look at
your portfolio. Having done that, get rid of the momentum stocks. After all, with the momentum gone, it’s
time for these stocks to go as well. The rule is simple: ‘Never hold on to something that you wouldn’t buy
now’. Never ‘hope’ or ‘pray’. It is either a ‘buy’ or a ‘sell’. So it doesn’t matter at what price you bought
such stocks – just dump them and collect whatever cash you can.
Having lost money in the market, it is but natural that you may have decided to stay away from it totally.
That, however, is not such a smart thing to do. As any seasoned investor will tell you, the best time to buy
is during bear market. That said, it is important to keep returns expectations realistic and ensure that you
get into stocks, which have a sound business model and a visible cash flow.
Remember to go easy in equities. With global turmoil, you would do well not to assume that the market
has bottomed out. Just because the stock you were planning to buy has fallen to 50 from 100, doesn’t
mean that it cannot go to 25. So, try and enter in a staggered manner. In times such as these, as the saying
goes: ‘cash is king’. Investors should not be too obsessed with the level of Sensex, but concentrate on the
fundamentals of the stocks that they hold. This is because the index does not necessarily reflect what is
happening with your stock. So, let analysts talk about Sensex; while you track your stock.
There will be end of the carnage
Lastly, and most importantly, the fact remains that we had an absolutely unbelievable and overtly
extended bull run of around five years. During this period, the Sensex went up seven times, with most
stocks going up exponentially. This couldn’t have continued till eternity. But at the same time, this
doesn’t mean the end of the world. Equity markets always swing between over exuberance and absolute
despair. So, don’t lose heart; there will be end of the carnage. But to enjoy the fruit of the next boom,
invest in fundamentally sound companies and always have a substantial amount of cash in hand. For,
while you can buy a future multi-bagger today, tomorrow it may end up being a lot cheaper.
SECURITY MARKET… 3
Post budget: Sensex fell below 17000
1st week of March ’08 – On Monday sensex fell 900 points
The 30-share Sensex closed the day at 16,677.88, down 900 points from the Budget-day. The broader
Nifty index lost 270.50 points to close below the psychological 5,000-mark at 4,953. The 50-share index
has now fallen considerably below its 200-days moving average (DMA) of 5,052, which technical
analysts claim is a sign of a bear market.
Dalal Street had no time to get over budget blues. Increase in the short-term capital gains by 50%, and the
proposal to treat STT as business expenditure could dry up further liquidity. A downswing in world
markets, bearish call by legendary investor Warren Buffet, and a scary subprime loss estimate of $600
billion (up from $400 billion a month ago) pulled down markets by 5% on Monday.
Rupee slumps to 5-month low: The meltdown in equity markets pushed the rupee down by 1% to five-
month low on Monday. When FIIs sell their holding in the equity market, they end up purchasing dollars
from the forex market. In addition, dollar demand from oil companies, non-intervention from the RBI and
exporters not selling dollars caused the rupee to weaken sharply. The local currency ended the day at
40.40/41 levels, down from Friday’s closing levels of 40.01/02 against the US dollar.
Sensex fell a further 338 points on Tuesday:
Monday’s drop in the indices underscored the fact that even the best-performing economies are not
immune to global turmoil in the short run. Emerging markets continue to be seen in the ‘high-risk, high-
return’ category. The instinctive reaction of fund managers is to move money out of ‘risky’ asset’. The
wealth effect caused by the loss of market capitalisation may have an adverse impact at the premium end
of the consumer durable market.
ICICI takes subprime hit: The ripples of subprime have touched Indian high street banks, ICICI, the
country second-largest bank, has announced a mark-to-market loss $ 74 million for Q4, after having
already provided $ 189 million in the previous quarters. The country’s biggest bank, SBI, and other state-
owned players with overseas offices such as BOI and BOB will also have to step up provisionings on
their investments in securities that have been hammered by the credit crunch.
Sensex sheds 566 points on Friday:
Dalal Street doesn’t care much for bargains, one might think. Stocks that were quoting at giddy valuations
two months ago are finding few takers at half those prices. One explanation is that investors do not think
the flow of bad news – both globally and locally – is over yet. Bear tightened their stranglehold on equity
markets across the world on Friday as fears over a recession in the US intensified. Indian shares were not
spared either with Sensex slipping below the psychological 16,000 mark. At home, adding to the gloom
was the inflation figure breached the critical 5% mark to hit a 9-month high of 5.02%. Other key worries
include a higher than-expected slowdown in corporate earnings, and early elections that could throw up a
hung Parliament. The result was that the Sensex ended Friday at 15,975.52 down 566 points over the
previous close, after hitting 15,689.92 intra-days. Dealers now see 15,332.42 – the January low – as a
critical support level.
Daily review 29/02/08 03/03/08 04/03/08 05/03/08 06/03/08 07/03/08

Sensex 17,578.72 (900.84) (337.99) 202.19 Holiday (566.56)
Nifty 5,223.50 (270.50) (88.75) 57.15 Holiday (149.80)
Weekly review 29/02/08 07/03/08 Points Percentage

Sensex 17,578.72 15,975.52 (1603.20) (9.12%)
Nifty 5,223.50 4771.60 (451.90) (8.65%)
Footprints of a bear phase:
Adverse Global factors and fears of economic slowdown amid inflation above RBI’s tolerance level
pulled down the BSE Sensex by a huge 9% or 1,603 points over the week under review, making it the
biggest post-budget weekly fall. The week also left behind footprints of a bear phase with the US
economic data released on Friday showing a fall in employment in February.
Crude oil prices also remained above 100 dollar level and the US credit crisis continued to cast a shadow
on the global economy. BSE Sensex breached 16k level for the first time after September 17, 2007,
raising fears of a bear phase. Analysts viewed the Nifty fall below 4,803 as a strong indication of a bear
phase for the markets as both the key indices already have breached the crucial 50-week moving averages
and there is no positive trigger at present.
Sensex fell below 16000
2nd week of March ’08 – On Thrusday Sensex fell 770 points, hits 6 -1/2 - month low
The 30-share Sensex crashed to an intra-day low of 15,228.99 before closing at 15,357.35, down 770.63
points, or roughly 5%, below the previous close. This is the lowest closing since August 31,’07. Experts
feel that it is clearly fear psychosis on display; investors are selling on news without even understanding
what the news means. The over-owned stocks were bearing the burnt of the selling fury, a sign of panic
feeding on itself. Hopes that the stalled stock market engine might roar back to life anytime soon have
faded as Wednesday’s industrial output data suggest that the economy is moving into slow gear.
Month 31/08/07 28/09/07 26/10/07 30/11/07 28/12/07 01/02/08 29/02/08 13/03/08

Sensex 15,318.60 17,291.10 19,243.17 19,363.19 20,206.95 18,242.58 17,578.72 15,357.35
Points Base 1,973.20 1,952.07 120.02 843.76 (1,964.37) (663.86) (2,221.37)
A flood of liquidity made a mockery of fundamentals in the last quarter of previous calendar, and now a
torrent of bed news in first quarter of new calendar ’08 – real and imaginary – threatens to do the same,
but in reverse. Major Indian benchmarks crashed to a six-month low on Thrusday, the March 13, 2008,
weighed down by the gloom in world markets. According to investment strategist, “When there was an
aberration in valuation at 21,200 plus, people believed in the India 10-year growth story; in just about two
weeks all that has been cast to history books.”
Speculation of a likely recession in the US has been rife for some time, and the talk now is that some large
global financial institutions may go under as fallout of subprime crisis. It could silly to believe that a Fed cut
would help global market… the problem would not interest but insolvency.
Bush admits slowdown: President George Bush acknowledged “our economy has slowed” as American
employer slashed 63,000 jobs in February, the most in last five years, but claimed a stimulus package
could help stem the tide. I know this is a difficult time for our economy. But we recognised the problem
early and we provided the economy with a booster shot.” The stimulus package that US Congress passed
this year will send tax rebates to American taxpayers by spring, and Bush urged them not to save it. When
the money reaches the American people, we expect it to boost consumer spending.
Industrial engines misfires slow to 5.3% in January: Industrial growth fell sharply to 5.3% this January
compared to 11.6% in January ‘07. The IIP that showed some bounce last December with a 7.6% growth
slipped yet again due to the slowdown in consumer durables and capital goods. More worrying, the
business confidence seems to have slumped and investment climate turned pessimistic. On month-on-
month basis - January over December ’07 - capital goods output declined by 19%; clearly, corporate
houses are going slow on their investment plans; projects in various stages of execution may see
completion, but those on drawing boards may be deferred till an upturn in overall growth is evident.
Carlyle Capital in $ 16.6-billion debt default: Carlyle Capital, an affiliate of private equity firm Carlyle
Group, is in default on about $ 16.6 billion of debt and said its lenders would likely take possessions of its
remaining assets. The only assets held in its portfolio were US government agency AAA-rated residential
mortgage-backed securities. The news provided a new sign of stress in global credit markets and affected
asset prices and sentiments worldwide. Analysts said the news would deepen the gloom over a global
credit crisis that emanated from the US housing downturn.
Daily review 07/03/08 10/03/08 11/03/08 12/03/08 13/03/08 14/03/08

Sensex 15,975.52 (51.80) 199.43 4.83 (770.63) 403.17
Nifty 4771.60 28.80 65.50 6.10 (258.40) 122.20

Sensex 15,975.52 15,760.52 (215.00) (1.34%)
Nifty 4771.60 4745.80 (25.80) (0.54%0
An edgy weekend:
This could well be an edgy weekend. While short covering and buying of battered frontline shares helped
prop up the Sensex on Friday, Monday could be another day. A few hours after the market closed in the
positive territory – up about 400 points (2.6%) after Thursday’s 5% drop – traders came to know that
Wall Street investment bank Bear Sterns was in trouble and a full-blown salvage was underway with JP
Morgan and New York’s Federal Bank trying bail it out. The US market slipped soon after it opened, and
fears are that there could be more subprime skeletons, and there is some more pain left in the market. It’s
expected to go down on Monday.
An edgy week ahead:
The crisis-ridden US financial system is expected to keep investor sentiment jittery this week too. With
top US investment banks set to reveal the extent of losses in their quarterly results this week, the
uneasiness is apparent, especially after Bear Sterns’ announcement on Friday of a liquidity crisis
prompting it to secure an emergency loan from JP Morgan Chase. The announcement pulled down US
stocks on Friday, which is expected to rub-off on Asian markets including India on Monday. US markets
ended 1-2% lower on Friday. Finally, Wall Street’s fifth-biggest securities house, Bear Stern, was sold to
JP Morgan for just $ 240 million (less than Rs 1000 crore).
An unwinding of yen-carry-trade: Hedge funds are reeling under the impact of the US credit crisis, and
what has aggravated the situation is the unwinding of yen-carry-trade – a transaction where large
investors borrow at low interest in yen to buy stocks across markets. This event assumes significance to
Indian investors as several investment banks and hedge funds have been liquidating their stock positions
in emerging markets including India to offset losses in credit markets.
Sensex fell below 15000
3rd week of March ’08 – On Monday Sensex fell 951 points
As key Asian markets fell 3-5% and the US dollar sank to record lows against the euro and Swiss
following the collapse of Bear Sterns, India could not escape the blow. Much of the slide was caused by
the firesale of Bear Sterns’ holdings in Indian shares, causing the 30-share Sensex to breach the
psychologically crucial 15,000-marks, to close 14,809.49, down 951.03 points, or 6%, over the previous
close. This is the second-biggest intra-day fall for the Sensex.
Interestingly, the FII selling, though large in absolute terms, hasn’t exactly been brutal till now. Since
January ‘08, FII have sold around $ 4 billion – over 20% of what they invested in 2007. While FIIs hold
around $ 150 billion worth of stocks and only 3% of that has been reallocated, what has really changed is
the sentiments and absence of fresh inflows.
Even though the world’s major indices have shown a downward trend, the Sensex, in the past two
months, has witnessed the worst meltdown. On January 10, the sensex had reached its highest at
21,206.77 points and since it has dropped by 30.50%. The 951-point fall has beaten the Shanghai
Composite Index (SCI) in the race of downfall. In the same period, the SCI has shown a fall of 30.47%.
DJ Industria was at 12,931 points on January 10 this year, which closed on 11,832 points on last Friday.
This shows only a decrease of 8.5%. NASDAQ fell by 12.25%, London FTSE 100 fell by 13.91%. In the
emerging market, Taiwan’s index witness decrease of only 3.38%, Brazil BOVESPA has fallen by 5.51%.
As per market experts, the fall in the market is due to some domestic reason like constant slow down of
IIP, currency and losses of the companies in the forex derivatives. Even the political scenario is affecting
the Sensex. Stock brokers are asking clients to refrain from buying anything for the time being.
Institutional investors and market operators are wondering how to exit some of their sizeable loss-making
positions. The 30% fall of the sensex again underscores that equities pes se are a risky asset class and the
stock market is a place for those able to ride the troughs.
Eyeing global cheers with suspicion:
At the start of the year, a whiff of good news was enough to send bulls into a buying frenzy. But of late,
they are eyeing every positive development with suspicion, fearing it may turn out to be a trap in disguise.
Market watchers feel that all of us simply playing the wait and watch game. So much so that even the
0.75-percentage-point benchmark rate cut by Fed policymakers fell short of traders’ bet for at least a full
percentage point gain in India on Wednesday.
Daily review 14/03/08 17/03/08 18/03/08 19/03/08 20/03/08 21/03/08

Sensex 15,760.52 (951.03) 23.97 161.37 Holiday Holiday
Nifty 4745.80 (242.70) 29.90 40.95 Holiday Holiday

Sensex 15,760.52 14,994.83 (765.69) (4.89%)
Nifty 4745.80 4573.95 (171.85) (3.62%)
Fed rate cute by 75-bps: The anticipated 75-basis-points reduction in the Fed funds rate by the US Federal
Reserve saw markets revive worldwide. While BSE sensex ended the day 161.37 points up, other Asian
markets too closed higher. The bigger question now is whether this recovery will form part of a trend or
turn out to be another of those ‘dead cat bounces’ that market have seen over the past few weeks.
The Fed has now cut rates by an aggressive three percentage points since mid-September, including two
percentage points, since the start of the year. Each move has been followed by a brief rally and then a
decline. With the Fed funds rate at 2.25%, real interests rates in the US are now zero, if not negative.
Whether this will be enough to stimulate demand, and restore confidence in the inter-bank market
remains to be seen.
The flip side, of course, is that the Fed is slowly running out of options. There is also the risk that in its
anxiety to shore up confidence in the financial system the Fed may ‘over-correct’ – a view expressed by
President George W Bush in New York last Friday. The Fed has been walking tightrope between
managing inflation expectations on the one hand and shoring up economic growth on the other for fairly
long now; with Tuesday’s rate cut the stakes have increased.
High risks are, as a rule, accompanied by high returns:
Investors need to take informed decision when taking a position in the market. The weakness in the US
economy is now seen as a recession and the country is facing its worst financial crisis. But, there is no
such crisis in India’s growth story, the moderation in IIP notwithstanding; India and China continue to
grow at a higher rate than other emerging market. The steep fall has made valuation of companies
attractive, and therefore presents a long-term buying opportunity. That is not to say that there are no more
downside risks in the near-to-medium term. No one knows yet if the worst of the US subprime crisis is
behind us. No doubt, developments in the US market will hurt our markets. Yet, we expect the Indian
markets to come out the woods given that our long-term growth story is a compelling one.
Earnings beat subprime fears: Lehman Brothers and Goldman Sachs, two major investment banks that
declared their fourth-quarter results for 2007 on Tuesday, reported lesser than-anticipated losses,
suggesting the worst might be over. Morgan Stanley on Wednesday reported that resilient trading results
helped it exceed lowered expectations by a wide margin. This is the second good news to the market.
Better-than-expected results from Goldman Sachs, Lehman Brothers and Morgan Stanley spurred a rally
in financial shares and helped ease worries about additional bank failures.
Visa raises $ 17.9 b in record IPO: Visa Inc, the world’s largest credit card network, raised a record $ 17.9
billion through an IPO also on Tuesday, suggesting confidence may be returning. Visa burned its name
into the record books for the US IPO as investors seized on its growth potential and lack of direct
exposure to the global credit crisis. San Francisco-based Visa, sold 406 million class of common stock for
$ 44 per share, above the forecast range of $ 37 to $ 42.
Market won’t be in a sell-off mode for long:
Empirical studies show that markets get overtly skittish and volatile during correction period or cyclical
‘bear’ phases. A few months ago, the market was almost irrepressible as it reached for new historical
highs, fulfilling the sage comments by successful investors that tops are made in exuberant times.
Notably, the opposite is also true in turbulent times. The markets won’t be in a sell off mode for long, and
favourable prices on account of the flurry of knee-jerk selling, will prove too compelling for smart
investors. At present, the heart is ruling the head, but when it comes to prudent investments, it is always
the head that succeeds. To conclude, the risk-reward ratio is skewed in favour of the buyer at this
juncture, and the real risk at these levels is minimal, despite a contrary perception in the market.
Sensex regain 16000
4th week of March ’08 – On Monday Sensex up 294 points, Ends above 15k
Dalal Street turned buoyant after a long weekend with the benchmark Sensex gaining nearly 294 points to
end the day at 15,289.40, riding on a surge in banking stocks. The index crossed the crucial 15,000-level
for the first time since March 17 when it fell sank this level on heavy selling triggered by global clues.
The Nifty of the NSE firmed up by 35.90 points to end at 4609.85.
On Tuesday, bulls back with a bang – Sensex records gain of over 928 points to regain 16,000:
It is either famine or feast on Dalal Street these days. A rally in world markets, and back home, a rare
buying binge by FIIs fired up the benchmark indices by over 6% on Tuesday. Short covering in Nifty
futures ahead of the settlement expiry on Thursday further helped the bulls’ cause.
But is the market now on the long path of recovery? Most brokers are skeptical. They say institutional
buyers are avoiding momentum plays – the practice of buying into stocks just because they are rising –
and focusing only on fundamentally sound stocks available at throwaway valuations. FII bought over Rs
1200 crore worth of shares at the net level. But market watchers say it is too early to conclude if overseas
investors have reversed their bearish view on India.
Tatas clinch Jaguar-Land Rover for $ 2.3-billion: Ford Motors on March 26 handed over the keys of its
marquee brands Jaguar-Land Rover (JLR) to Tata Motors for about $ 2.3 billion in an all-cash deal.
ICICI, Jaypee Infra in Rs 1,150-cr deal: ICICI Bank entered into Rs 1,150-cr equity-cum-debt with Jaypee
Infratech, which is to build and operate the 165-km, six-lane Taj Expressway linking Noida and Agra.
Sixth Pay Commission recommends 23-55% hike: The Sixth Pay Commission has submitted its report to
the government-recommending hike in salaries of central government officials in the range of 23-55%.
The commission has recommended continuation of five-day week but said that the government offices
should remain closed only on three national holidays. All gazetted holidays would be abolished and
compensated by the increasing number of restricted holidays from two-eight days.
On Friday sensex up 355 points:
Snapping the losing streak of the last two days, the BSE Sensex gained over 355 points on Friday on
revival of buying support in fundamentally strong stocks. Trader’s sentiments turned firm following
reports of a rising trend in Asian stock markets, discounting a reversal trend in the US markets.
Daily review 19/03/08 24/03/08 25/03/08 26/03/08 27/03/08 28/03/08

Sensex 14,994.83 294.57 928.09 (130.66) (71.27) 355.75
Nifty 4573.95 35.90 267.65 (48.65) 1.40 111.75

Sensex 14,994.83 16,371.29 1376.46 9.18%
Nifty 4573.95 4942.00 368.05 8.05%
Relief rally lifts Sensex by 9%:
The long bear phase seems to have ended as the stock markets witnessed an impressive relief rally lifting
the benchmark sensex by 9% in the week under review amid a host of negative factors. Both the key
indices, Sensex and Nifty, registered their second highest point-wise gains in a week on the back of hectic
short covering as the derivatives contract concluded on March 27. FIIs too were net buyers in cash during
the week. The rally was across the board and helped all the sectoral indices to gain 4 to 13% over the
week. Even the IT counter found heavy-buying support. Taking a cue from a smart rise in advance tax
payment, analysts expected fairly good increase in the fourth quarter corporate earnings.
Monthly review on last Friday

Month 31/08/07 28/09/07 26/10/07 30/11/07 28/12/07 01/02/08 29/02/08 28/03/08
Sensex 15,318.60 17,291.10 19,243.17 19,363.19 20,206.95 18,242.58 17,578.72 16,371.29
Points Base 1,973.20 1,952.07 120.02 843.76 (1,964.37) (663.86) (1207.43)
Sensex slips below 16000
5th week of March ’08 – On Monday 31st of March 2008 Sensex down 726 points
Not a day goes without some bad news. And lately, much of it is homegrown. On the heels of rising
inflation and slackening industrial output comes the impending change in accounting norms requiring
Indian companies to disclose losses arising out of derivative contracts. The market is clueless as to how
many companies have signed such deals; nobody knows which entity will throw up a nasty surprise in its
fourth quarter numbers. And that has only added to the already long list of worries.
More and more companies providing for mark-to-market (MTM) losses on derivative trading has become
a matter of concern among investors, resulting in new guidelines by Institute of Chartered Accountants of
India (ICAI). There are fears that corporate earnings could come under cloud of MTM losses, which, in
turn, would lead to some correction in valuations already reeling under pressure of the current slump.
Market participants, however, feel that this would bring transparency in corporate disclosures. Still the
dominant concern at present is inflation, which is at a 13-month high. India was the worst performer in
Asia on Monday, with a sell-off in banking shares pulling down equity benchmarks by over 4%. The 30-
share Sensex shed 726.85 points, while 50-share Nifty ended down 207.50 points over the previous close.
31st review 28/03/08 31/03/08 Points Percentage

Sensex 16,371.29 15,644.44 (726.85) (4.44%)
Nifty 4942.00 4734.50 (207.50) (4.20%)
Monthly review
Month 31/08/07 31/03/08
Sensex 15,318.60 September October November December January February 15,644.44
2.2 ‘INDIA’ AND ‘BHARAT’
Growth is barren without to farms, farmers: PM
I spent the first twelve years of my life in a poor, dusty and backward village of undivided Punjab. I still
have vivid recollection of life in such a village. We had no sanitation, no drinking water supply, no
electricity, no schools, and no doctors. I had to trek a long distance to get to school. To bridge the
developmental divide between town and country, between ‘India’ and ‘Bharat’ as some refer to it, has,
therefore, been a lifelong obsession for me. I would like to see the day when a farmer feels his life is no
worse than that of a city dweller.
The importance of agriculture in our economy can hardly be overstated. Reversing the prolonged
slowdown in this sector is essential for our goal of inclusive growth, for ensuring that growth benefits all
sections of the society and all regions of our vast country. The growth rates of agriculture in the last
decades have been poor and are a major cause of rural distress in some parts of our country.
Farming is increasingly becoming an unviable activity, particularly due to the nature of landholdings.
Small and marginal farms have become an unviable proposition and till we make farming as a whole
viable at this scale, it would be virtually impossible to reduce rural poverty and distress. We must
recognise that in the long run, we have no option but reduce the pressure of population on land and
provide employment opportunities in the industrial sector. Only labour-intensive and regionally dispersed
industrialisation will facilitate this.
Growth story can’t be written with Left-hand
Mr Chidambaram said that “some 60 members of Parliament” were trying to hinder India’s economic
progress. “Some 60 members of Parliament find fault with whatever me and Mr Manmohan Singh do for
economic growth. They say that the economic growth is irrelevant and only a small group of people had
benefited from the growth.
What do they want us to do? Do they only want to distribute poverty in this country? Those who say the
market growth is irrelevant and those who say the growth only helps the rich are the worst enemies of the
poor. The finance minister went on to explain that poverty can be wiped out only if the current growth
rate is sustained. They say that the economic growth is irrelevant and only a small group of people had
benefited from it, but if we continue to grow close to 9%, by 2020 India’s per capita income will be $
2000 and by 2050 it will be $ 16,000. If this growth rate continues,
I will provide Rs 15,100 crore for Sarva Siksha Abhiyan and Rs 8,000 crore for the midday meal scheme
next year. Mr Chidambaram said the UPA government was able to implement many development
programmes for people only because of the high growth rate. If we continue to grow at this rate, India will
be among the most prosperous countries in the world.
2.3 INDIAN INC: EXPENDING HORIZONS
Indian tiger rides Jaguar
An iconic deal in the history of India Inc; the culmination of Ratan Tata’s personal vision; the one deal
that will catapult Tata Motors from an emerging Indian company into the global big league of auto majors
and reinforce the global perception of India Inc as a leader in international business, and not just in IT.
Yet, the final lap of Group Tata’s long-drawn-out bid to acquire Jaguar Land Rover from Ford for $ 2.3
billion in cash was a bit of an anti-climax – compared to Tata’s Corus deal. It was almost hush-hush. Hold
the bubbly, we’re told the celebration will happen in due course, but for now, no fireworks. It seems that
the parents of a deal that’s been officially shrouded in silence through the tortuous nine months of
gestation are just glad to have the baby born with all its fingers and toes intact. In open for business
Britain, the headlines are already calling the Tatas the ‘Corus-owners’, and not the Indian auto company.
Tata Motors is now officially the proud parent of the Jaguar, and its sister the Land Rover.
In a statement, Ratan Tata, said: “We are very pleased at the prospect of Jag and Land Rover being a
significant part of our automotive business. We aim to support their growth, while holding true to our
principles of allowing the management and employees to bring their experience and expertise to bear on
the growth of the business. Tata Motors MD Ravi Kant said: “The $ 2.3-billion acquisition is being done
through bridge financing, via a syndicate of banks. The bridge finance will be replaced by long-term debt
at an appropriate time. There is also going to be disinvestment of Tata Motors’ stake in some our
subsidiaries in the next few months. We are in the process of identifying the subsidiaries.”
R-Power buys Indonesia coal mine
Reliance Power, the flagship power company of Anil Dhirubhai Ambani Group, has struck a deal to buy
out a coal mine in Indonesia, in South Sumatra. The valuation of the coalmine based on its reserves is
estimated to be in the region of Rs 20,000 crore. Indonesia presents an attractive market for Indian
companies due to its proximity. Besides, Indonesia coal is better in quality than Indian coal with lesser
ash content and higher calorific value. The coal mine, which has resources of 2 billion tonnes, is spread
over 100,000 acres equivalent to Greater Mumbai Area. The geenfield coalmine, which has already been
declared a discovered asset, will be the prime source of fuel for Reliance’s power project in
Krishnapatnam, Andhra Pradesh. It is estimated that the Krishnapatnam ultra mega power project would
require 14-15 million tonnes of coal every year. Although the coal from this mine would be bought in for
the Krishnapatnam project, it would also fuel other coal-based power projects of the company.
Reliance Power is understood to have acquired 100% interest in the coalmine for about Rs 1,000 crore.
Experts say this coal mine could be compared to one of the largest coalmines in the country – the Gevera
coalmine in Chhattisgarh – that has reserve of 1.2 billion tonnes and is producing around 35 million
tonnes annually. Given that the acquired mine has resources of 2 billion tomes, production from this mine
is expected to be more than the largest mine in India. The acquisition is significant as is competing with
energy hungry countries like China to acquire stakes in oil and coal blocks and secure energy security.
Tata Power, another leading power company that won the first imported coal-based power project at
Mundra, has also bought a 30% stake in a coal company, Bumi, in Indonesia. Other power and steel
companies are also keenly looking at Indonesia coal reserves. In fact, the coal special purpose vehicle
(SPV) formed by five leading public sector undertakings, including NTPC, is also likely to make its first
coal acquisition in that country.
2.4 FOREIGN INVESTORS
Shaken & deterred
Tremors of the crash on Dalal Street are being felt on Deal Street. While January ’08 saw the largest
number of deals even in a single month with 116 transactions, the figure shrunk by 40% in February ’08.
This was led by a sharp decline in private equity (PE) and venture capital (VC) transactions, which more
than halved compared to January with a number of funds reportedly pulling out after signing the term
sheet for investments.
Foreign funds take shelter under ‘warehousing’ deal
Huge blocks of shares continue to change hands amid volatile market conditions. Nothing unusual about
that, except that quite a few of those “block deals” could be “friendly transaction”, as foreign fund
managers try to minimise the hemorrhaging of their portfolio. Dealers say that foreign funds have taken to
temporarily parking their shares with other market participants due to the prospect of further fall in share
prices. There is always a prior understanding of the price of sale and the subsequent price of buyback. The
transaction will be reversed when market conditions improve. They would compensate the entity (who is
buying the shares) through some means, mostly monetary.
Listed company buyers count losses after slide show
It’s all about timing. That’s what world’s biggest PE funds and some of the country’s largest companies
have learnt the hard way. Their investments in listed companies between September and mid-March have
led to losses of thousands of crores. Clearly, their advisors and investment bankers got it all wrong. They
are counting losses with short-term returns on investment turning turtle and many witnessing the value of
the target company dropping by 50% or more since they invested. The list of marquee investors who
couldn’t anticipate the fall include the likes of Blackstone, Warburg Pincus, Walt Disney, Holcim, Tata
Sons and Orient Global – all of whom lost over Rs 100 crore each.
Among the recent strategic acquirers, Walt Disney increased its equity stake in UTV Software through a
mix of equity and convertibles. The deal was struck at Rs 860.79 per share. Given UTV’s current price of
Rs 756 per share, it translates into a 12% drop in value for the US Company. Walt Disney should consider
it lucky; its notional loss on this investment would have piled up higher had it invested before the market
meltdown of Jan ’08. Given the size of the deal, Disney has made Rs 100 crore loss on this transaction.
Cement giant Holcim’s timing was worse. It picked additional shares in Ambuja Cement in October ’07
at Rs 149 per share, or 18% higher than the current price of the cement maker. It loss on this transaction is
pegged at close to Rs 135 crore. Tata Group’s holding arm Tata Sons, which picked 7.34% in Praj
Industries as a financial investor, lost about Rs 190 crore on its Rs 337-crore investment due to 56% drop
in the share price of the solution provider to ethanol plants.
Among PE investors, Blackstone was the most active in 2007 and also the biggest loser. It signed the
single largest loss-making deal last year, given the drop in valuation of one of its buyouts – Gokaldas
Exports. The deal, struck at Rs 275 per share, translates into a loss of about 240 crore for Blackstone.
Some other significant loss-making PE deals include Warburg Pincus – Havells (about Rs 136 crore,
including the convertibles issue) and Orient Global Tamarind, which picked 4.9% stake in Yes Bank for
Rs 330 crore at Rs 225 per share. Other notable loss-making deals include Blackstone – Allcargo Global
Logistics, Baring Private Equity – JRG Securities, Apex Partners – Apollo Hospitals and a group of
investors including Tatas and UAE’s Al Bateen Investments in Development Credit Bank.
2.5 US RESCUE PLANS
Where no Fed has gone before
The Federal Reserve has stretched its mandate up, down, and sideways to prevent a financial market
deluge. Now it appears to be stretching the English language a bit as well. What the Fed is calling a $ 29
billion “loan” to help finance JP Morgan Chase’s purchase of Bear Sterns looks much more like a $ 29
billion investment in securities owned by Bear. Although the Fed insists that it isn’t technically buying
any assets, in practical terms it’s doing exactly that. All this adds up to a big and unacknowledged step up
in the central bank’s financial intervention with Wall Street investment banks.
The Fed, of course, is the only part of the government with the speed, power and flexibility to arrest a
bout of market panic. By rapidly intervening in mid March to keep Bear from filing for bankruptcy; it
may well have prevented a series of cascading failures that could have severely damaged the financial
system and the economy. To understand what’ going on, go back to the weekend of March 15-16, when
the Fed encouraged JP Morgan to buy Bear Sterns at a fire-sale price to keep Bear from going under and
dragging other banks down with it. Even at $ 2 a share, JP Morgan wasn’t willing to do the deal because
lots of Bear’s assets, despite having an investment-grade rating, were worth almost zero in the then-
skittish marketplace. So the Fed got creative. It set up an arcane arrangement that will give JP Morgan the
full appraised value for some of Bear’s assets if JP Morgan succeeds in acquiring Bear.
Here’s how it works: A Delaware-based limited liability Company will be set up to receive, upon
completion of the merger, $ 30 billion in various Bear holdings, such as mortgage-backed securities. The
Fed will lend $ 29 billion to that company, which will pass all the money along to JP Morgan, Bear’s new
owner. JP Morgan itself will lend $ 1 billion to the Delaware Company.
Bernanke, Republicans to discuss US economy: Federal Reserve Chairman Ben Bernanke is scheduled to
meet with Republican leaders in the US House of Representatives on 1st April 2008 to discuss the US
economy and housing market problems. In announcing the meeting, House Minority Leader John
Boehner sketched a dour economic situation: “The economy is struggling and American families and
small businesses are increasingly feeling the squeeze of rising costs of living – at the pumps, in the
grocery stores, and paying the bills in the office or at the kitchen table. Boehner added House Republicans
wanted to work with Bernanke, the Bush administration and Democrats in Congress ‘to stop threats to
economic growth and American prosperity, both in the short-term and in the long-run.” Boehner was a
key player in negotiating on a $ 168 billion economic stimulus plan that was approved in early February
’08. Congress returns on 31st March 2008 from a two-week recess. There are several measures pending
that aim to help US homeowners now facing foreclosure and to further stimulate the economy.
Bush readying mortgage aid plan to help hardpressed borrowers: The Bush administration is finalising a
plan to rescue thousands of homeowners facing foreclosure by helping them re-finance into more
affordable loans. The proposal is aimed at assisting borrowers who owe their banks more than their homes
are worth due to declining home prices. If enacted it would mark the first time the White House has
committed federal dollars to help the most hard-pressed borrowers. Under this plan, the Federal Housing
Administration (FHA) would encourage lenders to forgive a portion of these loans and issue new, smaller
loans in exchange for the backing of the US government. Two lending Democratic law-makers have
recently proposed a similar program to expand the FHA so that it absorbs more failing mortgages once
lenders have erased some of the loan amount. Bush administration officials said they believe they can
accomplish some of the same goals of the legislation through regulatory changes. The plan could dampen
criticism from Democrats, who say the administration has so far been more concerned while helping Wall
Street than with aiding those who are losing their homes in the foreclosure crisis, which threatens to push
the economy into a deep recession.
3. COMMODITY MARKET
Global commodity market on fire
February has been cracker of a month for global commodity markets. From a 40% leap in coal and 24%
in rice to 13% in aluminium, fuel, food, fibre, and metals have seen an unprecedented double-digit jump
in global prices. And don’t expect things to cool off anytime soon. International supply shortages and
investment fund inflows are fanning a wildfire that is likely to rage for some time to come.
Rice leapt 24% due to limited export supplies, deteriorating prospects for the next crop, and the impact of
higher wheat prices. Wheat rose almost 15% due to record low stocks and poor winter-wheat crop
prospects in southwest US and northern China. Maize rose almost 8% due to concerns that wheat and
soyabean prices will limit planting and cause year-ending stocks to decline. Coffee robusta and arabica
prices jumped 16% and 12.5%, respectively, reflecting tight supplies in Vietnam and India, and the effects
of earlier dry weather in Brazil. Cocoa for chocolates rose about 14% to a 24-year high, as a shortfall is
expected to persist this year, partly due to dry weather in January in Cote d’Ivoire and Ghana. Even sugar
rose 13% due to increased use of Brazilian sugar cane for ethanol and the consequent drop in exportable
sugar supplies. According to latest World Bank data, potassium chloride, TSP and DAP fertiliser prices
surged 41%, 35% and 17% respectively, continuing their gains of the past several months due to high
energy prices, reduction capacity constraints and strong demand fueled by high commodity prices.
Soyabean oil and palm oil, which are close substitutes, rose about 12% and 11% respectively, on fears
that China’s weather-related soyabean crop losses will raise Chinese imports. Palm kernel oil and coconut
oil, which are close substitute, increased 9% on increased import demand and supply tightness.
Among the really big movers, coal prices soared 43% on a series of supply shortfalls in China and
Australia due to bad weather and concerns about South African exports. Crude oil prices rose 3% in
February, to average $ 93.4/bbl, and reached $ 100/bbl in early March, with US WTI reaching nearly $
106/bbl. Crude oil inventories have increased seasonally but remain relatively low, and geopolitical issues
continue to raise concerns about supply. OPEC decided on March 5 to again leave production levels
unchanged, worried about slowing demand. OPEC ministers argued that the market is well supplied and
the high prices are due to significant flow of funds into the commodity market. The organisation will not
meet until September 9th, and this has provided further support to prices.
Lead jumped 18% on falling stocks, strong battery demand in China, and weather-related supply
reductions, also in China. Aluminium prices rose 14% due to power cuts to energy-intensive smelters in
China and South Africa, which reduced production. Copper increased by almost 12% on falling stocks, a
pick-up in China’s imports, and expected tight supply conditions this year. Silver climbed 10% on strong
investment demand, led by a switch out of other financial assets, and as a hedge against the falling dollar
and rising inflation.
Is it a commodity bubble?
Commodity prices have been rising for three years and are up another 30% in 2008. Normally a global
slowdown reduces commodity demand and causes a price crash. Things are very different today for
various reasons. First, China and India now account for a big chunk of world GDP. Even in a recession,
China will grow at may be 9% and India at 7-8%, so demand for commodities will keep rising. Second,
faulty policies have dampened supply response to rising demand. Stiff environmental rules have delayed
the opening of new mines the world over, and most US states still ban offshore drilling.
As for agro-goods, government norms for mixing ethanol with petrol in the US and edible oils with diesel
in Europe have diverted substantial acreage from foods to fuel, reducing food availability. This has been
exacerbated by two droughts in Australia. These factors caused most of the price rise in 2007. But
suddenly a new actor, the US Fed is spurring inflation in 2008.
Many central banks view inflation control as their main function. But US Fed chief Bernanke seems
determined to fight the coming recession with an avalanche of liquidity, ignoring inflationary risks in
pursuit of growth. US interest rates have been slashed faster than ever before, new windows of liquidity
have been opened, and the Fed is now offering treasuries in exchange for dubious mortgage-backed
securities. In effect, the Fed may become a market maker in mortgage-backed securities.
Such extraordinary measures to fight the recession have led the financial world to believe that inflation
control has ceased to be the Fed’s priority. The slashing of US short-term interest rates from 5.25% to 3%
has had no impact on long-term rates, which remain high in anticipation of inflation. Naturally, hedge
funds have dumped equities and are piling into commodity futures, driving up prices.
This is beginning to look like another asset bubble. It may burst if US growth remains sluggish
throughout 2008. If the boom-and-bust occurs, many will blame speculators. Yet the fault lies in
significant measures with the policies of sundry governments on minerals and biofuels, plus the US
preference for growth over inflation control.
Commodity market - steady gains spoil arbitrage game
The difference between the international and domestic prices poses a good opportunity for traders to play
on the difference, termed as arbitraging. Indian investors are not allowed to trade directly between the
domestic and international markets. However, many investors trade through offices set up in tax-free
zones like Dubai and continue to take advantage of price differentials. This is how transactions work
arbitrage: If a trader takes buy a position in the domestic market, he takes a sell position in the
international market at the same time. When the price rises, he sells his domestic position, and buys silver
in the international futures. The difference he makes in the transactions is usually his profit. In the current
rally, however, the international prices have risen at a much higher rate than the domestic prices because
of the strong rupee and weak dollar. This has made the difference in the parity price much wider, hence
wiping out notional profits of the investors. Since January, silver has risen by close to 57% in the
international market. The Indian price in comparison has risen only by 38%.
Gold, silver nosedive on profit booking
Gold experienced a free-fall on 20th of March ’08, as stockist booked profits in line with similar trends in
global markets. In Mumbai, the prices of the metal plunged by Rs 905 to Rs 12,075 per 10 gm, the level
last seen on February 26. Gold has lost Rs 1,420 in the past three consecutive trading sessions in the
financial capital of the country. The trading sentiments in bullion markets were so weak that silver
recorded whopping losses. In Mumbai, ready silver fell to Rs 22,890 per kg, revealing a whopping loss of
Rs 2,025 in a single day. In international markets, the prices started to tumble on 19th of March; a day
after Fed cut its main rate by 75 bps to 2.25% and said sign “of inflation expectations have risen”. Traders
go long on commodities as a bet against high inflation. When inflation is seen within desirable limits, they
start unwinding their position, pulling the prices down.
FMC mulls commodity-trading fee to meet budget

Forward Markets Commission, the newly autonomous commodities market regulator, is planning to levy
a fee on trading to partly meet its own budget. However, it may wait and watch the impact of
commodities transaction tax (CTT) on the market before deciding on the actual amount.
4. FINANCIAL SECTOR: TRANSFORMING TOMORROW
Indian Banks
1. FINANCIAL ADVISORS:
Weigh impact on investors
Subprime hits
The ripples of subprime have touched Indian high street banks, ICICI, the country second-largest bank,
has announced a mark-to-market hit of $ 263 million in its loan and investment exposures. The SBI and
other state-owned players with overseas offices such as BOI and BOB will also have to step up
provisionings on their investments in securities that have been hammered by the credit crunch. .
According to ICICI Bank joint MD Chanda Kochhar, these are only mark-to-market losses. As the money
comes back, the losses will get recouped over a four-year period. The $ 263 million hit on overseas credit
derivative exposures has arisen because ICICI has been selling credit default swaps (CDS) to foreign
banks lending to Indian companies. CDS is an insurance product against which ICICI earns a premium. In
return, the risk of the Indian company defaulting is transferred to ICICI rather than the original lender.
These instruments and other instruments like credit-linked notes can be traded. Their market value has
declined because of the subprime crisis.
It is not a huge surprise that ICICI Bank has been hit by the crisis originating from the subprime market.
In a globalised world it is naïve to expect that Indian banks can escape a global malady. Indeed as we
open up further and our banks, both in India and abroad, take more exposure to overseas risks. We must
be prepared for more such losses. Given that many Indian banks, especially the PSBs have a great many
more overseas branches than ICICI, the possibility of there suffering similar losses cannot be ruled out.
The derivative risk
The government says Indian banks had an Rs 127-lakh crore exposure to derivatives as on December
2007. This is sure to set alarm bells ringing, coming close to ICICI Bank declaring mark-to-market losses
on foreign credit derivatives and fixed income investments. A substantial portion of the reported Rs 127-
lakh crore exposure of banks is likely to be plain forex hedges. And a large chunk of the headline figure is
back-to-back derivatives – a bank writing a derivative contract for a corporate with another bank.
However, there is no denying that currency gyrations and widening credit spreads could cause serious
problems with a non-trivial percentage of this exposure.
Credit derivatives and fixed income investments, for instance, are sure to yield mark-to-market losses
because of widening international credit spreads even when there may not be any deterioration in the
underlying asset quality. Similarly, speculative currency or commodities exposure could have singed
some players given the sudden movement in commodities prices and weakening of the dollar against most
currencies. The silver lining, if one can call is that corporate balance sheets are strong and in most cases
losses won’t be crippling.
India’s increasing integration with global markets – through trade, global sourcing of inputs, overseas
investment by corporates, foreign borrowings and expansion of Indian banks overseas – means that
exposure would have to be hedged. What is needed is the better system of controls. Banks should think
twice before selling exotic derivatives to customers who have no clue about the risks.
FINANCIAL SECTOR… 18
2. RISK MANAGEMENT CONSULTANTS

Educate – Engineer and Enforce
Call on derivatives accounting
The accounting regulator (ICAI) said that it received quarries from various quarters on whether corporate
houses need to disclose their exposure to derivative instruments now since the accounting standard AS 30
covering them need to be compulsorily followed only three years from now. Some even suggested: that
companies need not disclose them.
Our position is that companies have to disclose their exposure to foreign currency derivatives as per the
principle of prudence enunciated in accounting standard one, which requires companies to provide for
losses in respect of all outstanding derivative contracts at the balance sheet date by making them to
market. This removes the possibility of companies not disclosing derivative losses in the transition period
– from now to 2011 – under any pretext.
The country’s accounting regulator clarified that its announcement on derivative accounting was to ensure
that companies report their estimated losses from foreign currency derivatives as per already existing
norms. However adoption of new standard on financial instruments – AS 30 – would allow companies to
provide the future gains as well as losses on foreign currency derivatives as per their fair market value,
while following the existing norms of accounting prudence – AS 1 – will force them to provide for only
losses and not gains. That it if they do not adopt the new standards; they will not have the flexibility to
provide for future gains. Therefore, net profit may be lower.
Tighter Accounting Norms
As the dollar slipped below 100 yen for the first time since 1995, hundreds of corporates and institutions
were exposed to a brutal currency market. On Thursday, the March 13, ‘08, the dramatic surge in yen (as
well as Swiss franc) activated several high-risk structures, like ‘knock-in’ options, which were lying
dormant for months in corporate treasuries – a development that could compel rule makers and regulators
to harden their stand. The yen has appreciated 8% in the last 20 days and 12.3% since December 26,’07.
Corporate will face tough questions from auditors and soon find it hard to mask their derivative losses. On
the other hand, bankers fear RBI may slap a general provisioning requirement on their derivatives books –
a move that would hurt profitability but help cushion future losses. Even though derivatives accounting
for corporates will be mandatory only in 2011, the accounting regulator (ICAI) has said that auditors to
take a hard look at derivatives exposures of companies on the basis of accounting prudence.
While banks have tighter derivatives accounting norms (unlike corporates) and are required booking the
mark-to-market losses. (A mark-to-market loss is the hit a firm has to take if it cancels the contract today
– a figure that most corporate do not disclose in their balance sheets). However, Banks do not make any
provisioning on such exposures the way it is done for a regular loan account. Chances are the central bank
will insist on some provisioning to take care of the credit risk, besides asking for daily reporting of
certain currency positions. (Credit risk is the hazard a bank faces if a corporate refuses to pay when a
derivatives bet goes wrong.)
3. TECH SAVVY PROFESSIONALS

Take first step to ensure efficient and reliable system
Avert the derivative mishap
Amid mounting tension in the currency market over more and more corporates taking banks to court for
derivative losses, to argue that they have entered into derivative contracts where banks never quite
disclosed the risks. Interestingly, a few of these companies belong to large corporate groups with
comparatively sophisticated treasuries. Banks feel that a certified copy of the resolution passed by the
board of the corporate to authorise the transaction and nominating a person to deal with banks will
strengthen their argument.
4. FINANCIAL PLANNERS
Value unlocking for all stakeholders
ICICI Bank’s Small ticket personal loans
ICICI Bank had moved into this segment a couple of years ago offering small-ticket loans of around Rs
10,000-30,000. Interest rates on STPL were as high as 48%. The Bank has now decided to exit this ‘high-
risk’ space a couple of months ago owing to the rising defaults in the segment.
ICICI’s collection agency is handling the portfolio until it identifies a suitable buyer. The move will help
ICICI Bank mitigate the losses on the portfolio. The bank’s total STPL portfolio size is estimated to be
around Rs 3,000 crore, of which the bank intends to sell Rs 2,000 crore. ICICI Bank is understood to have
sounded off a couple of foreign banks to buy its Rs 2,000 crore small-ticket personal loans (STPL)
portfolio. By acquiring the portfolio, new entrants in the retail banking space will be able secure a
foothold in the market. Almost 70% customers in the portfolio will be good customers and it will enable
the player to sell other products to the same customers.
Banks look to toss out bad loans, but bidders’ not biting right price
The bad loan market has become active in the last couple of years after the RBI permitted NPA trading
among banks. Entities interested in acquiring NPAs have been on the rise since then. Likewise, more and
more state-owned banks are showing confidence in disposing a part of their stressed portfolio through this
route. Arcil and Kotak Mahindra are the two most dominant players in this field.
With the fiscal year coming to an end, many banks are looking at selling bad loans to spruce up their
balance sheets. The list includes State Bank of India, Allahabad Bank and UCO Bank. SBI and Allahabad
Bank are keen to sell bad loans of Rs 200 crore each, while UCO Bank plans to sell about 260 crore worth
NPAs. While some banks are entering one-to-one deals, others plan to auction stressed assets. Among the
major one-to-one deals, ICICI Bank sold about Rs 300 crore stressed loans to Asset Reconstruction
Company of India and another Rs 300 crore to Kotak Mahindra Bank a few months back. However,
pricing has emerged as a key hurdle for banks while auctioning loans. Many banks have failed to sell their
bad loan portfolio, as the bids were lower than the reserve price. For instance, SBI’s Rs 1,000-crore
auction failed to take off because the bank was not happy with the bids.
5. INCLUSIVE CEOs
Innovative responses to problems
The farmers’ loan waiver package
Banks will sport a healthy balance sheet. Union finance minister P Chidambaram said Rs 60,000 crore
will be provided in cash to banks over three years to settle the burden of the loan waiver. “I have already
provided 10,000 crore and will provide another Rs 15,000 crore immediately after June 30, 2008. Another
Rs 15,000 crore will be given in 2009-10, Rs 12,000 crore in 2010-11 and Rs 8,000 crore in 2011-12.”
The finance minister said the provision of loan-waiver would be fully “front-loaded” for the cooperative
and regional rural banks considering liquidity problems faced by them. I am happy to announce that the
farmers’ accounts will be cleaned up by June 30 this year. The disbursement of funds to the lending
institutions will be spread over a period of 36 months, beginning July 2008.
Elaborating on the mobilisation of resources to meet the package, Mr Chidambaram said it could include
a host of sources like tax revenues, non-tax revenues (dividends, interests, royalties and fees), non-debt
capital receipts, i.e., recovery of loans and advances, premium on the sale of sequestered assets, and initial
listing of public sector enterprises, and additional borrowings. Financing of the package should be
relatively easy given the buoyancy in revenues and efforts at expenditure restructuring. Since I have
already been able to find Rs 10,000 crore to kickstart the farmers’ relief fund, announced as part of the
third supplementary for this year, this will reduce the burden in future years.
Provisional estimates indicate that the relief to be offered will be around Rs 60,314 crore, comprising Rs
50,524 crore of debt-waiver to small and marginal farmers and Rs 9,790 crore as relief to other farmers as
a one-time settlement at 25% of their overdues. Provisional estimates also indicate that about three crore
small and marginal farmers and one crore other farmers will benefit if they have overdues as on
December 31, 2007. In terms of percentage, relief to small and marginal farmers would comprise 84% of
the total package, and the balance of 16% would be relief to other farmers. In terms of institutions, an
estimated 55% of the package will be to borrowers from cooperative institutions, 35% to borrowers from
scheduled commercial banks and 10% to borrowers from RRBs.
Debt relied fund:
The government has approved the setting up of a Farmers’ Debt Relief Fund with an initial corpus of Rs
10,000 crore to implement the farm loan waiver scheme. The government will initially provide Rs 10,000
crore to the Fund, which has been earmarked in the supplementary demands for grants for 2007-08.
Another Rs 50,314 would augment the fund crore in the next four years to compensate the banks and
other lending institutions on account of losses resulting from farm loan waiver scheme.
6. CREDIT COUNSELORS
Resolve convertibility and recompensation issue
Tier- I capital
All banks operating internationally are required to have tier-I capital amounting to 6% of risk-adjusted
assets. Any parameter below this level will make a bank ineligible to participate in any international trade
or finance operations.
The finance ministry knows better the actual condition of health of many high profile banks in India.
UTI’s loss was Rs 10,000 crore and IFCI’s loss was Rs 6,000 crore. Today UTI is finished. And IFCI is
defunct. The same fate may well await some more banks.
What is needed is solidity, which will come by capital alone. And why plan to provide for in the future?
What banks need is capital today and not a promise for the future. Our budget writer’s writ may run
across the country, but such authority does not extend to alter international rules and Basel II norms.
Are we going back to the situation that prevailed in 1991 when letters of credit of banks were not
accepted internationally unless, accompanied by an unequivocal guarantee from the RBI, that the LCs be
would honoured. When UTI/IFCI faltered, banks were asked to give support. Now who will support the
banks? And who will ensure payment to depositors.
Do we not know that all depositors of Banaras State Bank amalgamated with Bank of Baroda in June
2002 have not still got their full money back? Is it not time to take care and look after bank depositors
who have parked Rs 3100,000 crore in banks in India?
The FM must make clear announcement of farm loan waiver that 100% of the Rs 60,000 crore will be
giving outright grant or by injecting capital. If not, this may ruin banking industry in India. It is not just a
question of Rs 60,000 crore, but the borrowers of balance Rs 240,000 crore of agriculture loans may take
the cue and show symptoms, which may further jolt the banking industry in India.
SARFESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest)
Act, 2002, the most effective instrument to recover bank’s dues, is not applicable to any security interest
created in agriculture land. So, by and large, no coercive action is either possible or feasible against a
defaulter of agricultural loan in the banking sector.
Why have we landed ourselves in this situation? Financial indiscipline is the answer. It is for this reason
that the cost for the laudable objective of extricating our farmers from distress is being sought to be
passed on to the banks through the back door.
7. WEALTH MANAGERS
Map out the details to translate into benefits
Limit the borrowings by government
The budget estimates of revenue receipts for 2008-09 are Rs 602,935 crore. Of this amount 87.25% is
going to be wiped out by debt servicing. This hardly leaves any leeway for incurring huge expenditure
that the finance minister has proposed. Where will the funds come from? Simply by borrowing or printing
currencies or combining a mix of both!
Consider this: the outstanding debt position of the government of India (GoI) at the end of 2007-08 was
estimated to be Rs 2744,141.74 crore. Debt position for 2008-09 has been estimated to be Rs 3062,612.48
crore. Thus, debt of GoI in one year (from 31/03/08 to 31/03/09) is destined to overshoot hugely! The
strategy is thus clear. Mortgage the future to raise resources for the present. It is with such borrowed
resources that various expenditure – plan as well as non-plan – are being incurred. The buoyancy in
revenue collection is being enmeshed in debt servicing! Are we not heading for an internal debt trap?
8. FINANCE PROFESSIONALS
Developing alternative credit delivery models
ICICI Bank’s in Rs 1,150 crore deals with Jaypee Infratech
India’s largest private sector bank, ICICI Bank, has entered into a Rs 1,150 crore equity-cum-debt deal
with Jaypee Infratech, which will build and operate the 165-km six-lane Taj Expressway linking Noida
with Agra. ICICI Bank has decided to pick up 1% stake in Jaypee Infratech for Rs 250 crore, valuing the
company at Rs 25,000 crore. The bank will also provide Rs 900 crore as long-term loan to the company.
In addition to ICICI Bank’s 1% shareholding, a Jaypee employee trust holds 1% in Jaypee Infratech. The
company plans to shortly place 3% equity with other investors. The parent company Jaiprakash
Associates will hold the remaining 95% for the moment; and will go public at the appropriate time.
Jaypee Infratech has the rights for developing of 25 million sq metres at five or more locations along with
the proposed Taj Expressway. The land could be used for commercial, amusement, industrial, institutional
and residential purposes. Jaiprakash Associates has also signed the concessional agreement with the UP
authorities for the Rs 40,000-crore Ganga Expressway project and deposited Rs 1,491 crore as bank
guarantee. Jaypee Ganga Infrastructure Corporation will implement the 1,047-km, six-lane, access-
controlled Ganga Expressway, which will link Greater Noida with Ballia in eastern UP.
9. GLOBAL OUTLOOK
New licence to foreign banks
The RBI on Monday, the 18th of February 2008, said a license has been issued to the Swiss banking
group. This is the first time since 2002-03 that RBI has issued a new license to a foreign bank. The last
foreign bank to enter the country was Antwerp Diamond Bank. UBS had applied for a banking license
around four years ago. Now the UBS has been permitted to go ahead with opening a branch. The banking
license would help UBS in its fixed income and foreign exchange business.
The RBI on Tuesday, the 27th of March 2008, granted another licences to two Singapore banks – DBS and
United Overseas Bank (UOB). UOB has received the RBI nod for opening its maiden branch in the
country in Mumbai. DBS, Singapore’s largest bank, has received RBI clearance to open another eight
branches in the country. DBS is currently the only Singaporean bank to have operations in the country. It
opened a representative office in Mumbai in 1994, which was upgraded to a full branch in March 1995. It
currently has two branches in Delhi and Mumbai. This is the first time that a foreign bank has received so
many bank branches at one go.
In turn, the Monetary Authority of Singapore (MAS) has approved a full bank licence to State Bank of
India with privileges to establish up to 25 outlets, including ATMs and offer full range of financial
services. This makes SBI the first Indian bank to get a qualifying full bank (QFB) status in Singapore.
The licence will enable the country’s largest bank to kick off retail operations in Singapore. Currently,
SBI has only one branch in Singapore and does not have any access to retail deposits.
10. CONTINUING LEARNING CENTRES

Take informed decisions
Easier entry norms
A committee was set up by the Planning Commission to propose the next generation of financial sector
reforms, chaired by Raghuram G Rajan. The committee is set to suggest easier entry norms for the
banking sector, measures to revitalise public sector banks, allow a more active role for local banks with a
view to ensuring more financial inclusion, make priority sector obligations more meaningful, liberalise
branch licensing/ATM policies, allow greater capital inflows to increase liquidity in financial markets,
beef up credit information system and credit infrastructure among a slew of measures even as it urges a
more transparent macroeconomic framework.
11. ISSUES OF THE PRESENT

Freedom to get & fail in the system of free enterprise
The lead bank scheme
State-owned banks run the risk of losing lucrative government business if they fail to fulfil their
developmental obligations. In a recent meeting with the heads of select PSU banks on revamping the lead
bank scheme, RBI governor Yaga Venugopal Reddy said government business would be auctioned if
PSBs don’t fulfil their mandate as “lead bank” in district allotted to them.
The hint was clear: develop your districts or part with government business. RBI introduced the lead bank
scheme in 1969 to ensure cooperation and coordination among financial institutions and government
departments in developing efforts. The apex bank has decided around 600 districts among 28 PSU banks,
which are required to play an active role in financing and developing them. For the first time, banks are
faced with a choice as tough as this. Government business involves salary and pension payments and
expenditure payments of various ministries. Banks facilitating these payments earn fee income besides
benefiting from a free float.
5 TAX UPDATES
Prudent financial planning
Be an early bird:
Now, that the finance minister has put more money into your pocket this financial year by revising the tax
slabs. You could reap dividend by investing the money through some prudent financial planning.
Financial planners recommend that you should do should do advance planning; ideally at the beginning of
a year. Set aside funds right in the first month (April) to invest in tax-saving instruments. What most
people don’t realise is that if they do some number crunching at the beginning of a financial year, they
could end up saving a lot more money.
Depending upon the income level in tax slabs this financial year, an individual could save anything
between Rs 4,000 and Rs 45,000. These savings can be effectively utilised to make additional investments
for future returns. You could claim deduction on premium paid for life insurance policies and other
eligible investment and expenses under Section 80C upto Rs 1-lakh. It is advisable that you buy health
insurance policies especially cashless health insurance policies for self and family. For the same, you
could claim deduction available under Section 80D for the premium paid on health insurance for self and
family upto Ts 15,000, besides an additional deduction of Rs 15,000 in case of parents (Rs 20,000 in case
one or both parents are senior citizens, thanks to new Budget proposals)
Young executive generally have more risk taking appetite and fewer financial commitments. Therefore,
they can invest more in equity and mutual funds. For a recently married middle-level executive, investing
in a house is the best option, which, besides being a great asset also provides psychological comfort for
the whole family. Also, it is a good time to invest in retirement plans and take life insurance policies.
In case of a senior middle-level executive with kids, financial planners advise insurance policies for kids
to meet their education and other major expenses. Also he or she may invest in mutual funds, through the
SIP route for long-term financial needs of his kids. For a senior executive who has to marry off his
daughter, financial planners advise consolidation of funds. They should move their investments out of the
equity and mutual funds and park their funds in debt instruments or in bank FDs.
Strategy ahead:
You should follow the golden rule of not putting all your eggs in one basket. Financial planning is a wide
term. It can be divided into strategic and practical planning. While strategic planning should be for a long
term, at least 20-30 years, practical planning should be done for the financial year in question, keeping in
mind what to expect in terms of taxation, income sources and impact on your lifestyle. You should make
any changes in the strategic planning only when you need to change the overall structure. But when it
comes to practical planning, it should prepare the grounds for your overall strategic plans. Thus,
depending upon your age, income and other factors, you should invest judiciously in a right mix of asset
class – equity, mutual funds, property, PPF, bank deposits, gold etc.
However, before deciding on your practical plan, you should know if your income would rise, how is it
going to change your lifestyle and after calculating the expenses you should know the amount you have
for investment. Work out your cash flows, so as to optimise your investment. This would stand you in
good stead as you will not have any idle cash. You should be financially educated before going to a
financial planner or decide to do financial planning on your own. Simply put, it means that you should
have some basic knowledge about financial planning, about your taxes and what are the forms that need
to be filled up. After all you don’t want to get surprised at the end of the day.
6. LIVING WITH INFLATION
The latest inflation figure is above the 4.1% projected in the Economic Survey for 2007-08. Inflation is
inching up while the economy is growing a shade slower than the impressive 9.3% recorded in the first
quarter of the fiscal. Sensing the trend, the government has reiterated its commitment to ensure “growth
with price stability” even as the economy grew at 8.4% in the third quarter.
The wholesale price-index inflation raced past RBI’s tolerance level to a 10-month high of 5.2% in the
week ended February 23, 2008 on the back of costlier food, textile and machinery. Inflation was at 6.2%
in the corresponding week last year. The RBI governor said, “The large segments of the poor tend to reap
the benefits of high growth with a time lag while the rises in prices affect them instantly. Monetary policy
makers face multiple challenges at once from the turmoil in financial markets, exchange rate shifts and
unprecedented inflationary pressures due to food and energy prices.”
Inflation hits 9-month high at 5.11%
Wholesale price-based inflation rose to a nine-month high of 5.11% for the week ended March 1,
compared to the previous week’s 5.02%. The increase was on account of a rise in the prices of non-food
articles such as raw rubber, cotton, mustered seed and some manufactured products such as edible oil,
ghee, and groundnut oil and aviation turbine fuel. This is the second week in a row when the inflation rate
crossed the 5%, the target set by RBI for this fiscal. Inflation was at 6.51% in the corresponding period
last year. Expert feels inflation has become a cost-push rather than demand-pull phenomenon.
Attributing the rise in inflation to the increase in prices of imported commodities, FM P Chidambaram
said the government is ready to take fiscal measures to control it while trying to make the country self-
sufficient in key items. He also expressed hope the new WIP index, which is being formulated, will take
into account the current baskets of goods and services to reflect inflation more accurately.
Inflation soars into uncomfortable territory
Wholesale price-based inflation breached the RBI’s tolerance level of 5% for the third time in a row,
recording an eleven-month high of 5.92% for the week ended March 5 compared to 5.11% in the previous
week. Inflation was at 6.51% in the corresponding period last year. The 0.81% rise over the previous
week was due to essential items like fruits & vegetables and pulses as well as manufactured items like
imported oil and mustard oil becoming dearer. The government, which is in a bind over rising prices, is
working on a warfooting to contain the price line.
Edible oil import duties cut to lower prices
India, the world’s biggest vegetable oil buyer after China, cut import duties on 20th of March ’08 on some
edible oil, including crude palm, to improve supplies and ease prices as inflation hit a 10-month high. The
country consumes 11 million tonnes of edible oil a year, helped by imports of six million tonnes. It buys
palm oil from Malaysia and Indonesia and soyoil from Brazil and Argentina.
LIVING WITH INFLATION… 26
Limited policy options with the Government
The wholesale price index (WPI) has climbed to an 11-month high of 5.92%. If the high international oil
prices had been fully passed through, the inflation rate would have gone way beyond 7%. The WPI has
clearly entered a highly sensitive zone, politically speaking. As the opposition parties begin to up the ante
on food prices, the government’s focus is expected to remain firmly on bringing inflation under control.
But there is only so much the government can do if global prices of good, oil and other commodities are
firming up. You can ban edible-oil exports, drop import duties on palm oil; put an export tax on steel, but
there is a limit to which India can insulate itself from global price trends.
Every growing economy is facing these supply constraints. Food supply cannot increase substantially in
the near term. Oil prices have been rising for quite a while. The inflation rate for manufacturers too has
climbed to 5.4%. In fact, few realise core inflation in India has been above 4.5% for quite some time now.
Even in China the Producer Price Index, representing manufacturing prices, has been above 6%. So we
have a situation where prices of food, oil and manufactures are rising together.
Paradoxically, a slowdown in the economy may help in moderating the prices of manufactures. The UPA
government would rather prefer a more moderate growth rate with inflation under control. Small
businesses reeling from high interest rates were hoping the RBI would supplement the finance minister’s
fiscal effort by a small cut in the bank-lending rate. The finance minister too had indicated his bias for a
cut sometime ago. But with the inflation rate at 5.92%, and expectations of further rise in food prices, it is
doubtful whether the central bank will answer the prayers of small manufacturers anytime soon.
Export duty no solution
The reported move to roll back domestic steel prices by slapping a 10% export duty on all grades of
finished steel is retrograde and worse. The plan to penalise exports could well discourage production
across the board. So, instead of dampening prices, this could stem output and needlessly make our
fledgling steel exports dearer. It would be akin to shooting oneself in the foot, in policy terms. In fact,
steel exports account for a very small part of the total output. To suggest that exports are jacking up steel
prices is to thoroughly ignore the ground reality. The way ahead surely is to better match supply with
demand and bring down prices with increased production.
Inflation sings at 6.68%
Initial rate stood at 6.73% on February 3, 2007, due to high prices of essential commodities, including
vegetables, edible oil, food items and also metals. During the week ended March 15 this year, it touched
6.68%, compared to 5.92% a week ago. It was 6.56% during the corresponding period last year. Now it is
at 13-month high at 6.68%.
Growth not at cost of Inflation: FM
The finance minister said the government would curb price rise through a combination of fiscal, monetary
and supply-side measures. If that mean we have to live with slightly lower growth rate, so be it.
The finance minister virtually admitted that imports alone would not curve inflation. A country as large as
India can never be dependent on importing food. We have to be nearly self-sufficient in every item we
consume. Last year, we imported small quantities of wheat. This year can we import wheat? Every
country in the world has banned exports, even if we want to, we cannot import wheat.
We also have to curve inflationary expectations. When wholesalers or retailers hoard wheat or rice, they
are feeding inflationary expectations. One of the ways to bring down inflationary expectations is to
increase the cost of funds and thereby make it difficult for traders to hoard commodities. We are growing
and we are consuming more, so in a way we are contributing to the rise in prices.
India not alone in fighting surging inflation
Consumers in India are not the only one who has to pay more for essentials such as food, housing and
energy. Rather, Indian consumers appear to be relatively protected from the impact of the spiraling prices
of food, energy and commodities as compared to their counterparts in other emerging nations such as
China and Russia. In China, consumer price index rose 8.7% in February 2008 compared to 2.7% a year
ago due to elevated prices of food. Likewise, in Russia prices climbed 12.7% from 7.6% in February ‘07.
The developed world has also not been spared from the rise in prices. Japan today reported that the
consumer prices rose at the fastest pace in a decade, with core prices, which exclude fruit, fish and
vegetables, climbing 1% in February from a year earlier. The euro area too has seen prices rise faster;
3.3% in February 2008 against 1.8% a year ago and in the US, consumer price index rose by 4% against
2.4% in the same period a year ago.
CCP emergency meet to discuss inflation
Concerned over the rising cost of living indicated by the wholesale price index that raced past 6% in mid-
March, the government has convened an emergency meeting of the Cabinet Committee on Prices to
discuss possible solutions. The committee is chaired by the Prime Minister and has members including
finance minister P Chidambaram, agriculture minister Sharad Pawar, commerce minister Kamal Nath and
deputy chairman of the Planning Commission Montek Singh Ahluwalia. Unbridled rise in commodity
prices could be a threat to the ruling coalition bracing itself for general election next year.
Central govt’s worries ballooning with inflation
With the left and components of the ruling alliance like RJD seeking immediate steps to combat inflation,
the Cabinet Committee on Prices will have to find a way to steer a course between higher prices and a
slowdown. What is more worrying for the Congress that the issue could put the party in the anti-aam admi
column? This fear saw the party urging the government to take measures to protect the interests of low-
income earners, who are affected most by growing inflation. The middle class, who commands
considerable clout in shaping public opinion, too, is angry with the government. The spiraling inflation
has dashed hopes of any cut in the interest rate. The wrath of the aam admi and the middle class can have
dangerous consequences for the Congress as, in less than two months; it has to face an election in
Karnataka. The average voter in Karnataka or elsewhere may not be sympathetic to party if it persists
with the argument that high inflation is a global problem.
Meeting inflation
• Cabinet Committee on Prices meets on Monday (31/03/08) to assess the factors responsible for
soaring prices;
• Committee of secretaries to meet on Tuesday (01/04/08) to discuss price scenario;
• Group of ministers on prices headed by Pranab Mukherjee to meet on Wednesday (02/04/08) to

review prices of rice, wheat and procurement of edible oil;
• Prime Minister Manmohan Singh has called a meeting of state chief ministers to discuss price rise.
The unexpected surge in inflation to a 13-month high of 6.68% for the week ended 15th March 2008 has
cast a pall of gloom over policy circles. All though of high single digit growth of 9% or so has been
pushed back; the government’s top priority is to rein in prices. The task acquires urgency, as there’s little
over a year to go to the next general elections. Indian voters are known to be merciless when punishing
governments unable to deliver on the price front. Unfortunately, there aren’t too many policy options
available for the government. With global prices of food and oil showing little sign of cooling, the
pressure on the wholesale price index from both primary articles and energy prices is likely to continue.
Add to that the recent increase in metal prices that has spilled over into higher prices for manufactured
products (up 0.9% during the week ended 15 March) and the outlook on the price front is distinctly bleak.
More so as price pressure are likely to intensify over the coming months as inflationary expectations get
more firmly entrenched.
Govt set to roll out big duty cuts to cool prices
The government on Monday, the 31st of March 2008, said it is considering elimination of import duties on
a host of items, mainly food products, to improve their supply and rein in rising inflation; “in fact
bringing them to zero, if necessary,” commerce and industry minister Kamal Nath told reporters, ahead of
the crucial meeting of the Cabinet Committee on Prices (CCP).
On steel, which has witnessed a sharp rise in the past few months, Mr Nath said the government would
have to “calibrate duties to allow imports”. He said the demand from the construction industry for both
steel and cement has to be met.
He added that CCP would consider all these issues. Removal of export subsidy on sugar and cotton is also
under active consideration of the government. Mr Nath said that the government has already slashed
import duty on edible oils, including palm oil, from 45% to 20%. Besides, stringent conditions have been
imposed on exports of non-basmati rice while export incentives under the duty entitlement pass book
(DEPB) scheme on 40-50 items, including steel and chemical products, have been withdrawn.
7. LIFE INSURANCE
Reforms in Insurance sector
The next stage of reforms in the insurance sector has been initiated, with Irda giving the go-ahead for
major changes in the investment regulation norms for insurance companies. The overhaul of the
investment norms, cleared by the Irda board, will give more freedom to insurance companies to invest in
fixed-income instruments such as mortgage-backed securities (MBS).
This will help companies diversify their risks and also reduce the strain on capital. For policyholders, it
would mean higher yields on investment. The investment under MBS – structured loan instruments where
cash flows from home loans are pooled together and converted into marketable securities – will fall under
the approved investment category. They will qualify as investment under the housing sector. However,
these investments will be subject to industry’s exposure norms. This means insurance companies can only
invest upto 10% of their portfolio in MBS.
Competition among companies will also hot up now, with Irda giving the first-level clearance for three
new life joint-venture companies: Aegon Religare Life Insurance, DLF and Prudential Financial Inc and
Canara Bank, HSBC and Oriental Bank of Commerce. In the non-life business, a similar clearance has
been given to joint venture between Telecom service provider Bharti and Axa of France. Second-level
clearance has been given to the proposed joint venture between Shriram and Sanlam group of South
Africa in the non-life business.
MF prudential norms for Ulips
Irda have also built in more prudential requirements such as exposure norms for Ulips. Exposure norms
have been made mandatory for Ulips, which are akin to mutual funds in design and have an added
insurance cover. The idea is to mitigate the possible risk arising from investments in a few companies.
Irda has also aligned the exposure norms of public and private sector insurance companies.
The investment risk in Ulips is generally borne by the policyholders, so minimising the contagion risk is a
regulatory concern. The policyholder makes gains or losses on the investment, depending on the
performance of the fund. Most insurers offer a wide range of funds to suit the policyholder’s investment
objectives, risk profile and time horizon. Different funds have different risk profiles. The potential for
returns also varies from fund to fund.
When Irda first unveiled its investment guidelines, Ulips were non-existent and most investments by
insurance companies were in government securities. However, the introduction and sudden popularity of
Ulips has changed the scenario. In recent years, most of new money coming into insurance goes into
Ulips with many policyholders choosing the equity option. Ulips are similar in design to mutual funds and
have an added insurance cover for which the premium is paid through cancellation of units.
Mutual funds scheme are subject to exposure limits by Securities & Exchange Board of India (Sebi). In
terms of the guidelines, a MF cannot invest more than 10% of its capital in a single company. Also, a
mutual fund cannot hold more than 10% of the shares of a company. Such measures are aimed at ensuring
that unitholders are protected if an invested company goes bust. For investing in very large companies,
the exposure limits are not a problem. The limits are a constraint when it comes to investing in small
companies where even a tiny investment could be more than 10% of the company’s equity capital.
LIFE INSURANCE… 30
Solvency margin in life term products
The Irda slashed solvency margins by two-third for companies offering the life term products either on a
group basis or on an individual basis. Solvency margin refers to the ability of an insurance company to
pay claims. The move will reduce the cost of capital and enable companies to offer such products at
affordable premiums. It will also ensure a higher insurance penetration in the country. Earlier, for a sum
assured of Rs 10,000, policyholders in the age group of 25-30 years were charged a premium of Rs 25.
However, insurance companies had to allocate Rs 32 towards the solvency margin requirement, thus
making pure risk products unviable. With the cut in solvency margin requirement, life insurance
companies will have to allocate only Rs 12. This would lead to a drop in the premium for policyholders.
The LIC health plan
The Insurance Regulatory and Development Authority (IRDA) are questioning the tax benefit in Life
Insurance Corporation’s (LIC) first health insurance policy. The insurance regulator has sought
clarification from LIC on claims of tax exemption for premium paid for ‘Health Plus’, the country’s first
unit-linked health insurance policy.
LIC officials said that they were not making any claims with respect to tax exemptions. However, at the
time of launch, officials had said that as per section 80D of the Income Tax Act, deduction from income
would be available for premium paid for a scheme on the health of an assessee or his dependents,
provided such scheme was from a company approved by IRBI, and that this scheme was a health scheme.
In the past, tax breaks were available only for government-approved mediclaim schemes. But following
liberalisations, this clause was substituted to include all health insurance schemes. LIC executive director
(actuarial) GN Agarwal said that the corporation had filed the product application under the regulation for
health cover, which is eligible for Section 80D benefits. Besides offering health insurance, even the
accumulated funds are to be used for meeting medical expenses such as domiciliary treatment. The
brochure for LIC’s health plans states that tax benefits are subject to the existing tax laws.
Reliance health plan
Reliance Life, which launched its health plan ‘Health+Wealth’ close on the heels of LIC’s ‘Health Plus’ is
upfront on the tax claims. The company has said that the risk premium will be eligible for tax exemptions
under Section 80D of the Income Tax Act while the rest of the premium is eligible under Section 80C.
Whether the premium qualifies for Section 80C or 80D makes all the difference. For most taxpayers,
there is little or no headroom to make further investments under Section 80C. This is because the section
bunches all investments under an overall limit of Rs 1 lakh. This includes employee contribution to PF,
PPF, long-term bank deposits, life insurance, ELSS, and housing loan principle. On the other hand,
section 80D is almost never fully utilised, even the tax breaks are available up to Rs 15,000 only.
LIVING WITH INFLATION
WWW.MI7SAFE.ORG
Alka Agrawal
Promoter of Mi7 & SAFE
Financial Literacy Mission

A crash course of literacy
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: April 2008

Journal of FInance Vol 16

Încărcat de

Informații document

Descriere originală:

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Journal of FInance Vol 16

Încărcat de

Drepturi de autor:

Formate disponibile

1.

Take a long, hard look

There will be end of the carnage

Post budget: Sensex fell below 17000

1st week of March ’08 – On Monday sensex fell 900 points

Sensex fell a further 338 points on Tuesday:

Sensex sheds 566 points on Friday:

Daily review 29/02/08 03/03/08 04/03/08 05/03/08 06/03/08 07/03/08

Weekly review 29/02/08 07/03/08 Points Percentage

Footprints of a bear phase:

Sensex fell below 16000

Month 31/08/07 28/09/07 26/10/07 30/11/07 28/12/07 01/02/08 29/02/08 13/03/08

Daily review 07/03/08 10/03/08 11/03/08 12/03/08 13/03/08 14/03/08

Weekly review 07/03/08 14/03/08 Points Percentage

An edgy week ahead:

Sensex fell below 15000

3rd week of March ’08 – On Monday Sensex fell 951 points

Eyeing global cheers with suspicion:

Daily review 14/03/08 17/03/08 18/03/08 19/03/08 20/03/08 21/03/08

Weekly review 14/03/08 19/03/08 Points Percentage

High risks are, as a rule, accompanied by high returns:

Market won’t be in a sell-off mode for long:

Sensex regain 16000

On Friday sensex up 355 points:

Daily review 19/03/08 24/03/08 25/03/08 26/03/08 27/03/08 28/03/08

Weekly review 19/03/08 28/03/08 Points Percentage

Relief rally lifts Sensex by 9%:

Monthly review on last Friday

Sensex slips below 16000

31st review 28/03/08 31/03/08 Points Percentage

Growth is barren without to farms, farmers: PM

Growth story can’t be written with Left-hand

Indian tiger rides Jaguar

R-Power buys Indonesia coal mine

Shaken & deterred

Foreign funds take shelter under ‘warehousing’ deal

Listed company buyers count losses after slide show

Commodity market - steady gains spoil arbitrage game

Gold, silver nosedive on profit booking

FMC mulls commodity-trading fee to meet budget

The derivative risk

2. RISK MANAGEMENT CONSULTANTS

Call on derivatives accounting

Tighter Accounting Norms

3. TECH SAVVY PROFESSIONALS

Avert the derivative mishap

ICICI Bank’s Small ticket personal loans

The farmers’ loan waiver package

Debt relied fund:

Limit the borrowings by government

ICICI Bank’s in Rs 1,150 crore deals with Jaypee Infratech

10. CONTINUING LEARNING CENTRES

Easier entry norms

11. ISSUES OF THE PRESENT

The lead bank scheme

Inflation hits 9-month high at 5.11%

Inflation soars into uncomfortable territory

Edible oil import duties cut to lower prices

Limited policy options with the Government

Export duty no solution

Inflation sings at 6.68%

Growth not at cost of Inflation: FM

India not alone in fighting surging inflation