Tuesday, December 27, 2005

Why is risk management important?

December 27, 2005, www.rediff.com

Corporations operate in a dynamic environment. Hence the future remains uncertain to a large extent, allowing for fate to play a part in the results that are achieved by the companies.
However, the role of fate has reduced considerably over the years. With the help of probability theory and careful evaluation of the environment, companies are now able to predict, to some extent, the various risks that may have a critical impact on their business.
The primary objective of any company is to maximise shareholders' wealth. The shareholders appoint agents (read managers) who take various investing and financing decisions to achieve the firm's objectives. The main criteria are to maximise returns and minimise risks related to any decision.
The point of discussion in this article is the part of decision-making that deals with minimising risk. Ignorance or mismanagement of risk will result in loss of shareholders' wealth and loss of reputation apart from other undesirable consequences.
A number of cases have occurred in the recent past which very well brings to light the lack of foresight and pro-activity on the part of the management in managing risk.
'Risk management' therefore is an integral part of managing a business. From the recent devastation in the United States, we have come to realise that companies like Wal-Mart and Home Depot, which have active risk management programmes in place were much better poised to deal with hurricane Katrina than the government or other companies who have not yet embraced the advantages of risk management.
Companies face various types of risks. Some may be external in nature, which are not under the direct control of the management, like the political environment, the changes in exchange rates or the changes in interest rates. The others may be internal in nature which the management can control to a great extent, for example risks associated with non-compliance in financial reporting or non-compliance with labor laws.
A company would need to identify the risks that it faces in trying to achieve the objectives of the firm. Once these risks are identified, the risk manager would need to evaluate these risks to see which of them will have critical impact on the firm and which of them are not significant enough to deserve further attention.
The critical risks that could have adverse impact on the firm's business are then given maximum importance and strategies are formulated to deal with them or hedge against them.
The entire process of identifying, evaluating, controlling and reviewing risks, to make sure that the organisation is exposed to only those risks that it needs to take to achieve its primary objectives, is known as 'risk management.'
Risk management is a proactive process, not reactive. The best example is Shell Oil which has many offices in the New Orleans region but dealt with hurricane Katrina rather well due to the rigorous risk management procedures that it has in place.
Risk cannot be eliminated. However, it can be:
Transferred to another party, who is willing to take risk, say by buying an insurance policy or entering into a forward contract;
Reduced, by having good internal controls;
Avoided, by not entering into risky businesses;
Retained, to either avoid the cost of trying to reduce risk or in anticipation of higher profits by taking on more risk, and;
Shared, by following a middle path between retaining and transferring risk.
There are various tools available to the management to manage risks. Some of them being, derivative products like Forwards, Futures, Options and Swaps. The others involve having better internal controls in place, due diligence exercises, compliance with rules and regulations, etc.
Reserve Bank of India Governor Dr Y V Reddy has been stressing the need to disclose the risk management practices followed by the companies for sometime now and rightly so. It is very important for the investors to know if the companies in which they are investing are managing the risks as efficiently as they claim to maximise returns.
Infosys, for example, gives a detailed outline of the various risks facing their business, the policies of the company regarding each of them, the measures that are taken to deal with these risks, the implementation of strategies to manage risks and finally their review process.
However, there are large numbers of companies which are still ignorant or chose to ignore the importance of risk management and deal with situations as and when they arise. It is time the management of such companies sits up and takes note of the risks that their company faces.

Tuesday, October 4, 2005

The woes of US airlines

October 04, 2005, www.rediff.com

Seems like just yesterday when I was pacing the corridors of the Detroit airport early this year, waiting for the connecting flight to Syracuse, New York. Every other plane taking off from the runway was the trademark silver and red Northwest carrier, with dozens more standing in a row on a side.
Then comes the shocking news on September 14, that the carrier which made its presence felt in almost every city of the eastern coast of United States has filed for bankruptcy. Coincidentally, Delta Air Lines, third largest airline in America filed for bankruptcy on the same day.
The woes of America's airlines seem never-ending. On the one hand, the airlines of the emerging nations are growing by leaps and bounds with open skies treaties, more routes being covered and more players coming in into the market. On the other, the airlines industry of some of the developed economies, especially America, has been facing exceedingly difficult times since the start of this century.
Airline companies are a symbol of national pride for many countries. So, the government in many cases tries to bail out the troubled company. But, despite that, names like Swiss Air and Sabena of Belgium became history during the first round of crisis post September 11 attacks on the World Trade Center twin towers, which sent the insurance costs soaring for the airlines.
In the US, the government put together an aid of $15 billion (all taxpayers' money) to help the ailing industry then. United and US Airways filed for bankruptcy soon after the terrorist attacks. United Airlines is still under the chapter 11 proceedings and US Airways closed its merger plans with America West Airlines a week back (September 27) to emerge from the second round of its bankruptcy.
The other reasons that were blamed then were the downturn in the US economy, the foot-and-mouth disease, SARs epidemic, and the gaining importance of the low cost carriers like Ryanair and Jet Blue. What followed were fierce job cuts, cost cutting measures and restructuring.
The second round, now, is more worrisome. The trouble this time around is soaring oil prices. Fuel being the major expense for airline companies, cost of jet fuel at an average of $110 per barrel, post Katrina and Rita, is scary. Around 18% of the refineries (in terms of capacity) in US had to shut down due to the hurricanes.
This time around, even low-cost carriers like Jet Blue, Independence Air and Southwest are being hit very hard as the fuel costs remain same for them too. Jet Blue, a profitable company, has recently announced that this quarter it will lose money. Independence Air announced on September 30 that it will lay off 600 employees, 18% of its workforce. It is also resorting to cutting down flight schedules to cut costs.
Southwest Airlines, the most profitable airline company in US, however has hedged its position by entering into very long term contracts to purchase fuel.
American Airlines, the number one carrier in US, had to cancel a number of flights temporarily after a failed attempt to pass on some of the high fuel costs to the customers. Continental Airlines has announced that it will also increase the fares and many other airlines might have to follow suit.
Surprisingly, the US airlines industry is not undergoing any consolidation. It seemed imminent in 2001-2002, but nothing major happened. In this second phase too nothing major is in view. The only know proposed merger, that of US Airways and America West Airlines, is still under the lens. It is to be seen if the merger can successfully turn around US Airways which carries the burden of being in the midst of the worst-ever times for the airlines industry and the highest-ever cost of fuel.
Philip Baggaley, a senior airline credit analyst with Standard & Poor's, puts it rightly, "Airline mergers are very difficult. They require a lot of cooperation from labor, management attention and financing. All those things are in short supply when you're just struggling to survive."
Three out of the five major airlines in US are under chapter 11 bankruptcy code. What is to be seen is whether the industry will see a major overhaul and consolidation or will the government be willing to bail out the industry from the rising fuel prices.
In any case, the whole industry needs to spread its wings for prayers to tide over the difficult times.

Tuesday, June 28, 2005

All you want to know about bonds

June 28, 2005, www.rediff.com, Co-author-Vivek Kaul

Individuals have surplus funds in the form of savings which they want to invest. Companies need funds to undertake good projects with high returns. Companies provide individuals with instruments to invest their savings in.
One such instrument is corporate bonds. Similarly, governments also need funds for various developmental projects. Further, the government also needs to raise money to finance the fiscal deficit. They too tap the savings by issuing various kinds of bonds.
Characteristics of a bond
A bond, whether issued by a government or a corporation, has a specific maturity date, which can range from a few days to 20-30 years or even more. Based on the maturity period, bonds are referred to as bills or short-term bonds and long-term bonds.
Bonds have a fixed face value, which is the amount to be returned to the investor upon maturity of the bond. During this period, the investors receive a regular payment of interest, semi-annually or annually, which is calculated as a certain percentage of the face value and know as a 'coupon payment.'
A story goes that in the old days, bond certificates used to come with coupons to claim interest from the issuer of the bond; hence, the name coupon payments. However, nowadays, with paperless issues of scrips (demat), coupons are no longer in use, but the name has stuck and the interest payments are still known as coupon payments.
Issuing a bond
The government, public sector units and corporates are the dominant issuers in the bond market. The central government raises funds through the issue of dated securities (securities with maturity period ranging from two years to 30 years, long-term) and treasury bills (securities with maturity periods of 91 or 364 days, short-term).
The central government securities are issued for a minimum amount of Rs 10, 000 (face value). Thereafter they are issued in multiples of Rs 10,000. They are issued through an auction carried out by the Reserve Bank of India.
State governments go about raising money through state development loans. Local bodies of various states like municipalities also tap the bond market from time to time. Bonds are also issued by public sector banks and PSUs. Corporates on the other hands raise funds by issuing commercial paper (short-term) and bonds (long-term).
Bonds can be issued at par, which means that the price at which one unit of the bond is being sold is same as the face value. Alternatively, they can be issued at a discount (less than the face value) or a premium (more than the face value).
For example, a bond with a face value of Rs 100, if issued at Rs 100, is said to be issued at par. If it is issued at, say, Rs 95, it will be said to have been issued at a discount and conversely, if issued for, say, Rs 110, at a premium.
Banks are the largest investors in the bond market. In the low-interest scenario that prevailed, it made more sense for banks to invest in government bonds than to give out loans. Mutual funds, in order capitalise on low interest rates, started a good number of debt funds that mobilised a significant amount of money from the investors.
Thus, mutual funds emerged as important players in the bond markets. However, in the recent past with the interest rates on their way up, the performance of debt funds has not been good and so the presence of mutual funds in the bond market has been limited.
Foreign institutional investors are also allowed to invest in the bond market, though within certain limits. Also, regulations mandate provident funds and pension funds to invest a significant proportion of their funds mobilised in government securities and PSU bonds.
Hence, they continue to remain large investors in the bond market in India. The same holds true for charitable institutions, societies and trusts.
Since January 2002, individuals categorised by RBI as retail investors can participate in the auction carried out by RBI. They can submit bids through banks or primary dealers to invest in these securities on a non-competitive basis.
The minimum bid has to be for an amount of Rs 10,000 (and there on in multiples of Rs 10,000) and a single bid cannot exceed Rs 1 crore (Rs 10 million).
Secondary market
Bonds issued by corporates and the Government of India can be traded in the secondary market. Most of the secondary market trading in government bonds happens on the negotiated dealing system (an electronic platform provided by the RBI for facilitating trading in government securities) and the wholesale debt market (WDM) segment of the National Stock Exchange.
Corporate bonds and PSU bonds can also be traded on the WDM. The secondary market transactions in the bond market for the year 2003-04 was Rs 27,21,470.6 crore (Rs 272,147.06 billion), an increase of 36.6 per cent over the previous year.
Of this, government securities accounted for 98.4 per cent of the total turnover. The number of retail trades in the year 2003-04 formed an insignificant 73 per cent of the total number of trades (189,518) in the secondary market.
Returns from the bond
The return on investment into bonds is in the form of coupon payments, as already mentioned before, and through capital gains. Capital gain occurs when the bond is bought at a discount. Bonds bought at a premium would result in capital loss.
And bonds bought at par would have no capital gain or loss. Together, the total return is known as the Yield from the bond. Let us explain this with the help of an example. Let's say, that an investor buys one unit of a Long-term bond issued by a Company X Ltd for Rs 95 (i.e at a discount).
The face value of the bond is Rs 100. The coupon is 5 per cent per annum, paid annually, and the maturity period of the bond is two years.
This means, that the investor will get a payment of Rs 5 every year (calculated as 5 per cent of the face value) and at the end of the second year, he will receive Rs 100, the face value. The yield on this long-term bond can be calculated by solving for r in the equation below.
95 = 5/(1 + r) + 5/(1 + r)2 + 100/(1 + r)2
We get r=7.8%
If we notice, in the above equation, the coupon payments are fixed, the face value is fixed; the maturity of the bond is fixed. Hence the yield from the bond effectively depends on the price of the bond.
The price of the bond is determined by the issuer, by taking the market forces into account. For example, if the price of a similar bond is Rs 94 in the market (all other characteristics being same) no one will be willing to pay Rs 95 for the bond being issued by company X (assuming similar risk as well).
Hence, company X must ensure that the price, at which they are offering their Bond, is competitive with similar bonds in the market, and should provide similar yield to the investors.
Interest rate risk
Price and Yield share an inverse relationship. When price is high, yield is lower and when price is low, yield is higher (As can be seen in the way equation 1 would work). This brings us to the problem of Interest rate risk faced by bonds.
If the government suddenly decides to raise the prevailing interest rates, the expected yield from bonds held by the investors would go up. This would result in a drop in the price of the bonds. And if the investor wants to sell the bond for some reason, instead of holding it till maturity, he will have to suffer a capital loss.
On the contrary, if the interest rates are falling, the price of the bonds will rise and the investors can sell their bonds at higher prices in the secondary market than the price at which they bought the bond initially.
The reason for this inverse relationship is that, when interest rates are raised, the newer bonds issued by the government and the corporates, other investments like fixed deposits, post office savings schemes, et cetera offer greater return, with more or less the same kind of risk.
So an existing bond becomes less attractive. Investors want to sell off their existing investment in bonds and switch to other more attractive investments. The selling pressure in the bond market causes the prices of the bonds to drop. Similarly, when interest rates are dropped, price of bonds increases due to increase in demand.
Over the last few years the treasury departments of banks in India have been responsible for a substantial part of profits made by banks. Between July 1997 and Oct 2003, as interest rates fell, the yield on 10-year government bonds fell, from 13 per cent to 4.9 per cent. With yields falling, the banks made huge profits on their bond portfolios.
As the reader must have realised by now, bonds are not really a retail investor friendly type of investment. In our next article we will take a look at what is probably the friendliest form of investment for the retail investor, the mutual fund.

Monday, May 23, 2005

All you want to know about financial options

May 23, 2005, www.rediff.com. Co-author-Vivek Kaul

Options are the most popular class of derivatives around the world. But, surprisingly, options are not very popular in India. At present option contracts are available on 108 individual stocks and the Nifty and CNXIT Indices.
The index options and stock options together account for just 12 per cent of the derivatives market segment on National Stock Exchange. In this article, we will try and explain the trading mechanism of options contract in a simple manner.
Options are contracts which give the holder or the buyer of the contract the right to buy (Call option) or sell (Put option) the underlying at a certain price (strike or exercise price) at a certain date (expiry date) or within a certain period in future. (For details, see All you wanted to know about derivatives).
However, the holder is not obligated to buy or sell the underlying. Thus, an option gives the holder a cushion from any unfavourable price movements in the underlying and also allows the holder of the contract to take advantage of any favorable price movements.
This flexibility of course comes at a premium. The buyer of the option is required to pay a premium to the seller of the option in order to acquire this option.
There are two major types of options. These are American Options and European Options. American options allow the holder the flexibility to exercise the option at any time before the expiry.
On the other hand, European Options allow the holder to exercise the option only upon expiry. Needless to say, American Options give more flexibility to the holder.
The underlying in case of financial options can be either an index or the stock of an individual company. An option contract, whose underlying is the stock of an individual company, is known as stock option.
Similarly, if the underlying is a stock market index, the contract is known as an Index options contract. On the National Stock Exchange, the index options are European in nature i.e. they can be exercised only upon expiry, where as the stock options are American in style, i.e. they can be exercised any time before the expiry.
The seller of the option contract is known as the writer of the contract. He receives the premium from the buyer, and that is his maximum profit in all circumstances as we will see later.
But the losses can be unlimited for a person who is writing an option. Lets see understand all this with the help of an example.
Call Options
Let us look at an investor (say, Mr Bull) who believes that the share price of Infosys is going to rise. So on May 13, 2005, he decides to buy 100 shares of Infosys which are selling for say Rs 2,040. His investment will be Rs 204,000. The person sells the shares on May 26, 2005 when the share price is Rs 2,100.
The profit for Mr Bull, will be 100*(2,100-2040) = Rs 6,000 on an investment of Rs2,04,000. This implies a return of 2.9 per cent.
Now instead, lets say Mr Bull buys Infosys Call options at a premium of Rs 40 per option (100 is the minimum contract size for stock options on NSE, although the contract size varies from stock to stock) from an investor (say, Mr Bear) who expects the price of the Infosys stock to fall. The premium paid by Mr Bull to Mr Bear is Rs 4,000 (Rs 40*100).
The Call options give Mr Bull the right to buy 100 shares of Infosys at Rs 2,040 (strike price) each from Mr Bear, upon expiration on May 26, 2005. The value of the contract stands at Rs 204,000 (Rs 2040*100).
Now, if the price of an Infosys share is Rs 2,100 each (spot price) on the expiry date, the holder of the option contract, i.e. Mr Bull will exercise his option. Mr Bear will have to hand over 100 shares of Infosys to Mr Bull at the strike price, i.e. Rs 2,040.
Mr Bull can then sell these shares in the market for Rs 2,100 and make a profit of Rs 6,000 (as he makes a profit of Rs 60 per share). But since all the financial derivative contracts on NSE are settled in cash, no delivery of the underlying is made.
Hence, the contract will be settled by the seller of the option paying an amount of Rs 6,000 to the buyer of the contract. The Rs 6,000 is calculated as the difference between the spot and the strike price, multiplied by the number of options.
The net profit of the buyer will be Rs6,000 less the premium paid (Rs 4,000), i.e. Rs 2,000. Mr Bull makes a profit of Rs2,000 on an investment of Rs 4,000, i.e. return of 50 per cent.
Mr Bull, the buyer of the option will exercise his option in two cases: a) when he makes a profit (As has been clearly shown in the above example) b) when he can minimize his loss.
Lets say on May 26, 2005 (the expiry date), the spot price of Infosys is Rs 2,070 (instead of Rs 2,100 in the earlier example). Mr Bull exercises his option. Mr Bear pays Mr Bull Rs 3,000 [(Rs.2070-Rs.2040)*100].
But Mr Bull has already paid Mr Bear a premium of Rs 4,000.So he makes a loss of Rs 1,000. But if he had not exercised his option he would have made a loss of Rs 4,000. So even though he ended up making an overall loss it made more sense for him to exercise the option.
Given this, it always makes sense for the buyer of the Call option to exercise the option as long as the spot price (on the expiry date) is greater than the strike price. Since the stock option traded on NSE are American options, Mr Bull can exercise the option on any day before expiry.
On the other hand, if the spot price of Infosys on the expiry date, is less than the strike price, lets say Rs 2,000, the investor will not exercise the option and let it expire.
In this case, his maximum loss is Rs 4,000; the amount of premium that he had paid. Thus, the loss is limited to the premium paid, and gain can be unlimited, depending on how much greater the spot price of the share on the date of the expiry of the option is vis a vis the strike price.
The position will be reversed for the seller of the option. The seller of the option is obligated to buy or sell the underlying if the buyer decides to exercise the option.
So the loss for the seller of the option is unlimited (The greater the spot price is vis a vis the strike price, the greater the loss for the seller of the Call option). Also, the seller will have to pay an initial margin to the exchange. This is because the seller of the contract can have unlimited losses.
So to prevent any default from the seller, the exchange takes this margin, which is refunded upon the expiry of the contract. Just like in the futures contracts, the seller's account is marked to market (MTM) on a daily basis.
The seller is liable to pay to the exchange on a daily basis any loss due to the change in the price of the contract and receives any gains. (For details, see All about financial futures).
In the above example, the seller will sell the option for a premium of Rs 4,000. Plus he will have to pay an initial margin of say 10 per cent of the contract value to the exchange, which will be Rs 20,400 (10% of Rs 204,000, the value of the contract). This is of course refunded when the contract expires.
On final settlement, the seller will have to pay the buyer the difference between the exercise price (Rs 2,040) and the market price of the share(Rs 2,100), multiplied by the number of options (Rs 100), i.e. Rs 6,000 (Rs 60*100).
But, his maximum profit can only be the amount of premium received, i.e. Rs 4,000. In spite of this, the seller sells the option because he thinks that the price of Infosys will fall and the buyer will not exercise the option, thus he can easily pocket the Rs 4,000 premium received.
Put Options
Put option is bought by an investor who believes that the share price of a company is going to fall. The counterparty is a person who believes that the share price of the same company is going to rise, hence he writes a Put option.
The Put option works exactly opposite to the Call option. The buyer of the Put option will exercise the option if the share price drops below the exercise price. His profit will be the difference between the exercise price and the spot price at maturity, less the premium paid for the option.
For the writer of the Put, the maximum profit is once again only the premium received, but the loss is equal to the difference between the exercise price and the spot price, multiplied by the number of options. Call options in India are more popular than Put options.
There are various combinations of Options, which are used to make money in different circumstances. But the fact remains that derivatives in general and options in particular are fairly risky investments (As our examples have shown).
Investors should invest in them if and only if they have a fairly good understanding of the stock market, the economy and the instrument itself. Happy investing.

Monday, May 16, 2005

All you want to know about financial futures

May 16, 2005, http://www.rediff.com/, Co-author-Vivek Kaul

The Securities Contract Regulation Act (SCRA) was amended in December 1999 to include derivatives within the definition of securities.
The passage of this Act made derivatives legal as long as they were traded on a recognized stock exchange. Exchange Traded Financial Derivatives were introduced in India, in June 2000, on the National Stock Exchange and the Bombay Stock Exchange.
The beginning was made with index futures contracts based on S&P CNX Nifty Index (Nifty) and BSE Sensitive Index (Sensex). Since then, the rise in the turnover of derivative contracts traded on NSE has been exponential (See graph, data source: http://www.nseindia.com/).
It is worth mentioning here that NSE has around 99.5% of the market share of exchange traded financial derivatives market in India.
Stock futures and Index futures are two of the most popular contracts traded on NSE, having a market share of 59% and 29% (by turnover) respectively of the total derivatives market segment. In this article, we will concentrate on the trading mechanism of the futures contracts.
Trading mechanism of futures contracts
A futures contract gives the holder the right and the obligation to buy or sell the underlying at a certain price upon maturity. The underlying in case of a financial futures contract can either be an index or the stock of an individual company.
(For further details refer to our article All you wanted to know about derivatives!)
A futures contract, whose underlying is the stock of an individual company, is known as stock futures. Similarly, if the underlying is a stock market index, the contract is known as an Index Futures contract.
Let us understand futures trading with the help of an investor (say, Mr Bull) who is of the opinion that the stock market will go up in the days to come. He wants to take advantage of this.
The market is represented by an index. An index constitutes of various stocks from different sectors that trade in the market. Each stock has a certain weightage in the index and depending on the movement of these stocks the index moves up or goes down.
To cash in on the rising markets, Mr Bull can invest in stocks that constitute the index in a proportion that is equivalent to their proportion in the index. However, investing in all the member companies of the Index will be a very expensive and a time consuming process.
The alternative is to invest in Index futures. So Mr Bull decides to invest in Nifty futures. Let us say that Nifty is currently at 2,000 mark. Mr Bull gets into a futures contract, expiring on August 25, 2005, to buy 200 units (The permitted lot size of Nifty futures contracts is 200 and multiples thereof) of Nifty Index at Rs 2,010.
Let us say that the initial margin that the investor needs to pay is 10%. Thus, the initial investment is only 10% of 200 times 2,010 (Rs 4.02 lakh, the value of the contract); which is Rs 40,200.
For any market to work, every buyer needs a seller. So the other side of the coin is an investor (say Mr Bear), who believes that the market will go down in the days to come. Mr Bear gets into a futures contract, expiring on August 25, 2005, to sell 200 units of the Nifty index at Rs 2,010. The seller also has to pay an initial margin of 10%, hence his initial investment is also 10% of 200 times 2,010; which is Rs 40,200.
Before we go any further, we will need to understand an important feature of futures contracts, Mark-to-Market (MTM). MTM is a fancy term used for adjusting the value of an investor's investment on a daily basis.
This means that the difference between the settlement price (the closing price of the futures contract) of the previous day and the settlement price of today is settled in cash daily. Any gain or loss made by the investor on a day has to be settled in cash.
Taking the example further, let us look at the table below to see how MTM works:
Table 1: Mark-to-Market (From Mr Bull's perspective)
Exercise Price
Daily Closing Price of Index futures
Difference to be (paid)/received in cash
On the first day, gain or loss is calculated as the difference between the Exercise Price and the Settlement price (The Closing Price of the futures contract).

From the second day onwards, the gain or loss is calculated as the difference between previous day's settlement price and today's settlement price.










Expiration day

On the expiration date, the final settlement is the difference between previous day's settlement price and the spot price (Spot Price is the current market price of the underlying at any point in time) of the underlying. In this example, the spot price of the index is Rs 2,080 on expiration date.
In the above example, on the first day, the settlement price is 2000, so Mr Bull will have to pay Rs 10 per of contract (Rs 2,000 - Rs 2,010) i.e. a total of Rs 2,000 for 200 contracts to the exchange.
The exchange in turn passes on this money to Mr Bear, who holds an opposite contract and thus has made a profit. On the second day of the futures contract, the settlement price is Rs 2,025. So Mr Bull in this case gains Rs 25 (Rs 2,025 – Rs 2,000) per contract, i.e. a total of Rs 5,000 for 200 units of contract.
In this case Mr Bear has to pay Rs 5,000 to exchange which will be passed onto Mr Bull. All this settlement is done with the help of intermediaries (known as Clearing Members).
In India, all the exchange traded financial derivatives are cash settled. This is because physical delivery would be highly inconvenient or impossible. For example, in the case of an index futures contract, physical delivery would mean delivering the shares of the components of the index, in the weights that it placed on them in calculating the index.
Also, it would involve enormous amount of regulatory and administrative formalities.
Upon the expiration of the contract, a final settlement is made where the investor gets back his initial margin, along with the gain or loss on the last day.
The gain or loss on the last day is calculated as the difference between the previous day's settlement price and the spot price of the underlying (in this case the index) in the cash market.
Now suppose upon the expiry of the contract on August 25th, the index is at the 2,080 mark. Mr Bull will receive his initial deposit of Rs 40,200 plus the gain on the futures contract. The gain will be (2,080-2,010)*200 units, i.e. Rs 14,000.
There are some brokerages charges to be paid for trading in futures contracts, which are 2.5% of the contract value. Thus the net gain will be Rs 14,000 less 2.5% of Rs 4,02,000 (Rs 10,050). The profit for Mr Bull will be Rs 3,950 (Rs 14,000 – Rs 10,050). The return is 9.8% on the investment of Rs 40, 200 for Mr Bull.
Now look at Mr Bear. For him, the losses far exceed the gains made my Mr Bull. Mr Bear not only has to bear a loss of Rs 14,000 due to the movement of index in direction opposite to his expectations, but he also has to pay the brokerage charges.
The brokerage charges are once again 2.5% of the contract value (which is Rs 10,050). Hence the total loss for Mr Bear is Rs 24,050 (Rs 14,000 + Rs 10,050). A loss of 59.8% on an investment of Rs 40,200.
This is the reason why derivatives are considered very risky investments. While there are opportunities to get higher returns, the losses can far exceed the gains if the strategy goes wrong.
At present individual stock futures contracts are offered on 87 stocks. Investments in stock futures contracts work in similar way as the index futures.
In this article, we have tried to look at exchange traded financial futures contracts as a tool of investment. The popularity of futures contracts in India is contrary to the trend in other parts of the world, where option contracts are more popular than the futures contracts.
We think that one reason behind options not picking up in India could be because options are more complicated to trade in. With this in mind, we will devote our next article to simplifying options trading for our readers.

Tuesday, April 19, 2005

All you wanted to know about derivatives!

April 19, 2005, www.rediff.com, Co-author-Vivek Kaul

'By far the most significant event in finance during the past decade has been the extraordinary development and expansion of financial derivatives. These instruments enhance the ability to differentiate risk and allocate it to those investors most able and willing to take it - a process that has undoubtedly improved national productivity growth and standards of living.' -- Alan Greenspan, Chairman, Board of Governors of the US Federal Reserve System.
Understanding Derivatives
The primary objectives of any investor are to maximise returns and minimise risks. Derivatives are contracts that originated from the need to minimise risk.
The word 'derivative' originates from mathematics and refers to a variable, which has been derived from another variable. Derivatives are so called because they have no value of their own. They derive their value from the value of some other asset, which is known as the underlying.
For example, a derivative of the shares of Infosys (underlying), will derive its value from the share price (value) of Infosys. Similarly, a derivative contract on soybean depends on the price of soybean.
Derivatives are specialised contracts which signify an agreement or an option to buy or sell the underlying asset of the derivate up to a certain time in the future at a prearranged price, the exercise price.
The contract also has a fixed expiry period mostly in the range of 3 to 12 months from the date of commencement of the contract. The value of the contract depends on the expiry period and also on the price of the underlying asset.
For example, a farmer fears that the price of soybean (underlying), when his crop is ready for delivery will be lower than his cost of production.
Let's say the cost of production is Rs 8,000 per ton. In order to overcome this uncertainty in the selling price of his crop, he enters into a contract (derivative) with a merchant, who agrees to buy the crop at a certain price (exercise price), when the crop is ready in three months time (expiry period).
In this case, say the merchant agrees to buy the crop at Rs 9,000 per ton. Now, the value of this derivative contract will increase as the price of soybean decreases and vice-a-versa.
If the selling price of soybean goes down to Rs 7,000 per ton, the derivative contract will be more valuable for the farmer, and if the price of soybean goes down to Rs 6,000, the contract becomes even more valuable.
This is because the farmer can sell the soybean he has produced at Rs .9000 per tonne even though the market price is much less. Thus, the value of the derivative is dependent on the value of the underlying.
If the underlying asset of the derivative contract is coffee, wheat, pepper, cotton, gold, silver, precious stone or for that matter even weather, then the derivative is known as a commodity derivative.
If the underlying is a financial asset like debt instruments, currency, share price index, equity shares, etc, the derivative is known as a financial derivative.
Derivative contracts can be standardized and traded on the stock exchange. Such derivatives are called exchange-traded derivatives. Or they can be customised as per the needs of the user by negotiating with the other party involved.
Such derivatives are called over-the-counter (OTC) derivatives. Continuing with the example of the farmer above, if he thinks that the total production from his land will be around 150 quintals, he can either go to a food merchant and enter into a derivatives contract to sell 150 quintals of soybean in three months time at Rs 9,000 per ton. Or the farmer can go to a commodities exchange, like the National Commodity and Derivatives Exchange Limited, and buy a standard contract on soybean.
The standard contract on soybean has a size of 100 quintals. So the farmer will be left with 50 quintals of soybean uncovered for price fluctuations.
However, exchange traded derivatives have some advantages like low transaction costs and no risk of default by the other party, which may exceed the cost associated with leaving a part of the production uncovered.
Some of the most basic forms of Derivatives are Futures, Forwards and Options.
Futures and Forwards
As the name suggests, futures are derivative contracts that give the holder the opportunity to buy or sell the underlying at a pre-specified price some time in the future.
They come in standardized form with fixed expiry time, contract size and price. Forwards are similar contracts but customisable in terms of contract size, expiry date and price, as per the needs of the user.
Option contracts give the holder the option to buy or sell the underlying at a pre-specified price some time in the future. An option to buy the underlying is known as a Call Option.
On the other hand, an option to sell the underlying at a specified price in the future is known as Put Option.
In the case of an option contract, the buyer of the contract is not obligated to exercise the option contract. Options can be traded on the stock exchange or on the OTC market.
History of derivatives
The history of derivatives is surprisingly longer than what most people think. Some texts even find the existence of the characteristics of derivative contracts in incidents of Mahabharata. Traces of derivative contracts can even be found in incidents that date back to the ages before Jesus Christ.
However, the advent of modern day derivative contracts is attributed to the need for farmers to protect themselves from any decline in the price of their crops due to delayed monsoon, or overproduction.
The first 'futures' contracts can be traced to the Yodoya rice market in Osaka, Japan around 1650. These were evidently standardised contracts, which made them much like today's futures.
The Chicago Board of Trade (CBOT), the largest derivative exchange in the world, was established in 1848 where forward contracts on various commodities were standardised around 1865. From then on, futures contracts have remained more or less in the same form, as we know them today.
Derivatives have had a long presence in India. The commodity derivative market has been functioning in India since the nineteenth century with organized trading in cotton through the establishment of Cotton Trade Association in 1875. Since then contracts on various other commodities have been introduced as well.
Exchange traded financial derivatives were introduced in India in June 2000 at the two major stock exchanges, NSE and BSE. There are various contracts currently traded on these exchanges.
National Commodity & Derivatives Exchange Limited (NCDEX) started its operations in December 2003, to provide a platform for commodities trading.
The derivatives market in India has grown exponentially, especially at NSE. Stock Futures are the most highly traded contracts on NSE accounting for around 55% of the total turnover of derivatives at NSE, as on April 13, 2005.
Risk Management Tools
Derivatives are powerful risk management tools. To illustrate, lets take the example of an investor who holds the stocks of Infosys, which are currently trading at Rs 2,096.
Infosys options are traded on the National Stock Exchange of India, which gives the owner the right to buy (call) shares of Infosys at Rs 2,220 each (exercise price), expiring on 30th June 2005. Now if the share price of Infosys remains less than or equal to Rs 2,200, the contract would be worthless for the owner and he would lose the money he paid to buy the option, known as premium.
However, the premium is the maximum amount that the owner of the contract can lose. Hence he has limited his loss. On the other hand, if the share price of Infosys goes above Rs 2,220, the owner of the call option can exercise the contract, buy the share at Rs 2,220 and make profits by selling the share at the market price of Infosys.
The upward gain can be unlimited. Say the share price of Infosys zooms to Rs .3,000 by June 2005, the owner of the call option can buy the shares at Rs 2,220, the exercise price of the option, and then sell it in the market for Rs 3,000.
Making a profit of Rs 780 less the premium that has been paid. If the premium paid to buy the call option is say Rs 10, the profit would be Rs 770.
Looking Forward
Derivatives are an innovation that has redefined the financial services industry and it has assumed a very significant place in the capital markets.
However, trading in derivatives is complicated and risky. The derivatives have been blamed for the loss of fortunes at many times in history. We will look at derivatives as a vehicle of investment available to investors, risks and returns associated with them, in our next article.

Wednesday, April 13, 2005

A guide to right investment

April 13, 2005, www. rediff.com, Co-author-Vivek Kaul

What would you prefer: Rs 10,000 right now or Rs 10,000 five years from now?
Common sense tells us that we should take Rs 10,000 today because we know that there is a certain time value of money. The Rs 10,000 received now provides us with an opportunity to put it to work immediately and earn a certain return on it.
A single rupee today is worth more than a single rupee a few years down the line. Given this, households that have surplus funds in the form of savings want to invest those funds so that the value of the funds over the years does not go down.
There are various forms of investments at the disposal of individuals. These include real assets like a house, a car, a television, or financial assets like stocks in companies, bonds, units of funds, et cetera.
Traditionally, term deposits in banks, post office savings schemes, bonds and common stocks are the most accessible forms of investments available to the investors. Term deposits, post office savings schemes and bonds give a fixed return over a period of time.
Risk and Return
Investors would typically want to invest in an asset, which gives them maximum return on their investment. However, life is not as simple as that. Different assets come with different risk profiles.
Risk in a practical way can be defined as the chance that the expected outcome may not happen and the actual outcome may not be as good as the expected outcome.
For example, the risk of driving a vehicle too fast may lead the driver getting a speeding ticket or it might even lead to an accident. The New Oxford Dictionary of English defines risk as 'a situation involving exposure to danger.' Thus risk is always looked at in negative terms.
In case of investments the definition of risk is much broader. Risk in case of investment can be defined as the likelihood that the investor will receive a return on his investment that is different from the return he expects to make.
So risk not only includes bad outcomes when the returns are lower than what was expected, but it also includes good outcomes when returns are more than expected.
When investors are making an investment they expect to earn a certain return over the period the investment is made. But their actual returns may be different from the expected return and this is the source of risk.
For example, an investor invests a certain amount in a fixed deposit for a period of one year and expects a return of 5% (i.e. the interest on a one year fixed deposit that the bank gives is 5%). At the end of one year when the investment matures the investor will get a return 5%. So this is a risk less investment.
Instead of investing in the fixed deposit, the investor decides to invest the same amount of money in a particular stock. The investor having done his research expects say a return of 25% in one year's time (dividend and capital gains).
The actual return over this period might turn out to be greater than 25% or lesser. The company may not pay the dividend on time or the price of the stock may not rise as much as was expected. Herein he carries the risk. The actual return is not guaranteed.
The figure 1 below shows the returns analysis of BSE Sensex over a period of 9 years, from 1997 to 2005. We can clearly see that the returns have varied from a negative 21% to positive 73% over these years. On the other hand, the returns on treasury bills (Treasury bills are securities with maturity period of less than or equal to one year. Issued by the government) just varied from about 13% to around 5% in 2004 (See figure 2).
So, treasury bills give a fixed return over a period of time but common stocks do not. So, investors demand a premium from the common stocks for taking on extra risk.
In India, the investors on an average demand a premium of around 10.5% above the risk free rate. The risk free rate is generally taken to be the rate of return on treasury bills, as they are considered virtually risk free.
Common stocks are riskier because of various reasons. For one, the companies are not obligated to pay a dividend to the common stock holders, and secondly, in the case of liquidation, shareholders are the last to get paid after all the other security holders have been paid.
Thus the decision to invest in an asset with maximum return becomes difficult, as high returns come with high risk. The task of investment becomes formidable for the investors who must balance the returns from and risk involved in an asset.
Alternative investments
A major part of the household savings gets channeled into the so called traditional investments like fixed deposits (FDs), post office saving schemes, Public Provident Fund (PPF), etc.
But since the mid-90s interest rates have come down considerably and investments like FDs have been giving lesser return than the existing rate of inflation, or just a few basis points above the rate of inflation.
For example, the current inflation rate prevailing in India is around 5.1%, whereas the largest bank of India, the State Bank of India offers a return of 5.00% on deposits for more than 182 days but less than 1 year.
The rate for deposits of more than 1 year but less than 3 years is 5.5%. Another disadvantage with such forms of investment is that the lock in period is considerably high.
However, many other forms of investments are available to investors. Exchange traded funds, derivatives, real estate, gold, art, are just a few of the alternatives. With the spread of technology, investing in some of these alternative investments has become comparatively easier than before.
These investments are also good means of diversification. Diversification refers to the act of reducing risk by spreading the total investment across many different investments.
The idea of diversification is very old. It has even been mentioned by Shakespeare as early as the 16th century in his one of the most celebrated plays, The Merchant of Venice:
'My Ventures are not in one bottom trusted,Nor to one place; nor is my whole estateUpon the fortune of this present year;Therefore, my merchandise makes me not sad.'-- Antonio in Merchant of Venice, Act I, Scene 1
This shows that merchants did realise the importance of not putting all their eggs in one basket early on.
Diversification and investment in alternative forms of investments have become more important in recent times when the stock markets have proven to be more volatile and the government bonds are barely able to match the inflation rate.
Investors are looking to put their money in assets which give decent returns even if the stock markets are tumbling. For example, the value of a piece of art may rise if the inflation is on the rise irrespective of the performance of stock markets.
Similarly, gold does well in time of global tension. In this way, even if the investor loses money in the stock market, it is offset by the gains in his alternative investments.
A lot of these alternative investments have consistently given a higher return than the traditional investment securities.
For example, the real estate investments in the National Capital Region of Delhi have consistently provided a return of more than 10% over the last three years, in both the commercial and residential segments.
This is much more than the 5-6% return provided by government bonds and fixed deposits. At the same time, the returns are not as volatile as that witnessed in the stock markets.
But many of these investment types still remain a mystery to the investors. This is a first in a series of articles through which we hope to explain the nature of various forms of such alternative investments that are available to the investors.
Figure 1: Returns of BSE Sensex over 9 years Source: The graph has been compiled from yearly closing price data on http://www.bseindia.com/ (The returns for 2005 is up to April 8th, 2005) Figure 2: Returns of Government of India Treasury Bills over 9 years Source: The graph has been compiled from the Bloomberg Data Terminal using Government of India Treasury Bills Index (The returns for 2005 is up to April 8th, 2005)

Monday, April 11, 2005

What Indian financial markets need

April 12, 2005, www.rediff.com

The series of financial crises that swept through many parts of the developing world during the 1990s and, more recently, the problems plaguing financial markets in the United States, the European Union and Japan have raised serious questions about the regulatory environment of the financial markets globally.
Unfortunate events of the decade of nineties and the beginning of the 21st century have led us to believe that regulators around the globe have failed to achieve their primary objectives of 'maintaining systemic stability' and 'protecting interests of the retail customer.' Be it the Brazilian, the Argentine or the East Asian crises; be it Enron, WorldCom or US-64; the retail investors have taken the brunt of it all. Economies have been wiped out.
The financial sector plays an important role in the economy of any nation. A well-regulated and well-developed financial sector is vital to achieving the most basic need of efficient allocation of scarce resources.
The main objectives of any regulator are to improve market efficiency, enhance transparency, and prevent unfair practices.
In the financial sector, the achievement of these objectives would mean increase in resource mobilisation, enhanced access to financial products and services, and sustained economic stability. The International Monetary Fund recognises the need for 'resilient, well-regulated financial systems for macroeconomic and financial stability in a world of increased capital flows.'
"The crises that have swept emerging market nations in recent years should have left no-one in any doubt about the importance of a strong and well-regulated financial sector, in dealing with capital flows that can be very large and reverse very quickly." -- IMF Managing Director, Stanley Fisher, June 2000.
I now look at a few events that shook the financial markets and the challenges they pose to the regulators.
The events and the challenges
In the aftermath of the East Asian crisis the regulators in many countries have been engaged in reforming the international financial architecture to deal with dangers facing the financial markets which have been enhanced due to globalisation and liberalisation of economies.
The dynamic growth in capital markets following the liberalization of financial markets in many countries occurred without domestic economy and financial weaknesses as well as the regulatory and supervisory frameworks being taken fully into account.
The events of September 11, 2001 too shook markets across the globe. The main financial market response was a flight to quality as investors' appetite for risks fell. All major stock markets experienced rapid, sharp price declines in the immediate aftermath of the event.
Insuring the investors against terrorism became another challenge for the regulators.
Investor confidence is a critical factor to the growth and success of the capital market, and on a larger scale, critical to economic stability. Confidence in some capital markets has deteriorated, partly because of corporate governance transgressions that have been under global scrutiny.
Accounting controls have been on the top of the mind of regulators since a series of accounting scandals such as ENRON, WorldCom and more recently, HealthSouth, in the USA. The European Union is also looking towards tighter accounting controls after the insolvency of dairy giant Parmalat due to irregular accounting practices.
The point to note here is that the accounting scandals in the US occurred at a time when the disclosure norms in the US were very stringent and well defined. According to Commissioner Paul Atkins of US Securities and Exchange Commission, these accounting scandals have resulted in the erosion of a staggering amount of $5 trillion from the capital markets.
Investors around the globe are asking the question, 'If it can happen in the US, why not elsewhere?' The challenge to the regulator is, therefore, to reassure investors that such abuse of the system will not be allowed to become the norm.
The need to implement and follow the rules not only by the letter, but also by the spirit is evident. Hence, corporate governance has become the most debated topic amongst the regulators recently.
The Indian scenario
The Indian stock markets are now amongst the best in the world in terms of modernisation and the technology. India was among the few countries, which was not badly effected by the contagion effects of the Asian crisis of 1997. Policy makers attribute this to the slow and cautious pace of capital account liberalisation.
However, it has also been a decade marred with scams, which were huge even by international standards, revealing the many gaps in our regulatory regime.
In 1991, a group of stockbrokers, headed by key trader 'Big Bull' Harshad Mehta artificially jacked up prices of worthless securities to rake in Rs 5,000 crore (Rs 50 billion). The Sensex came tumbling down after the scam story broke out on April 23, 1992. Fortunes were lost overnight. As a result, the ambit of the Securities Exchange Board of India, the stock exchanges and regulatory financial institutions was widened.
Nearly a decade later, after a 'dream budget' by Yashwant Sinha, the then finance minister, on February 28 2001, the Bombay Stock Exchange index rose initially but thereafter crashed. Nearly 700 points were lost in eight trading sessions leading to erosion in market capitalisation of Rs 146,000 crore (Rs 1,460 billion).
This erratic behaviour was once again traced to a handful of brokers, wishing to trap a leading 'bull', Ketan Parekh, who had manipulated prices of shares of a few select companies in information technology, communication and entertainment sector.
Units of US-64, the flagship scheme of Unit Trust of India --the largest public sector mutual fund in India, dropped from a peak of Rs 19 to Rs 5.81 in January 2002. Middle class people and retirees were the hardest hit because of the irregularities.
The recurrence of financial 'scams' periodically exhibits the helplessness of regulators, particularly the SEBI and the Reserve Bank of India. "It is easier to build a modern stock exchange from scratch than change century-old trading practices," says Jayanth Varma, a former board member at SEBI. Traders loathe any change in the market because many thrive on its imperfections.
Against this backdrop, the regulatory bodies are making endeavours to bring up the Indian market to international standards. It is working towards making India a global benchmark for capital market development.
The road ahead
Today-- with the 'feel good' factor about India in the global arena rising, increased confidence of the investors in the Indian market, Sensex looking more attractive than ever before, foreign exchange reserves at an all-time high of more than $140 billion -- is the most vulnerable period for the regulators of the Indian financial sector, particularly SEBI and RBI.
Major steps towards reforms, liberalisation and globalisation have been taken in the 1990s, now the hiccups need to be sorted out. Maintaining stability is of prime concern. The time seems ripe to address the gaps in the regulatory framework, when the times are relatively good and peaceful. Prevention is better than cure.
Some of the issues that need the regulators' attention and action in the Indian financial markets are:
Participation and education of retail investors: Encouraging and protecting the rights of retail investors is an important issue. In Indian markets it is a challenge to get these investors to participate in the securities markets.
Also, as new instruments like the derivatives are being introduced in the market, the emphasis on investor education should also be enhanced. Then the issue of providing a level playing field for these investors also remains so that there is continued confidence in the market.
Liquidity: Even though the shares of companies listed on major stock exchanges are fairly liquid, the options market suffers from illiquidity.
Enhancing liquidity in the options markets to facilitate trade at reasonable prices is required to encourage investors to hedge their portfolios and to facilitate companies to manage their risks.
Accounting and financial reporting norms: Financial disclosure requirements in India are not at par with international accounting practices in spite of attempts made by the Institute of Chartered Accountants of India. Good accounting and corporate standards need to be backed up by high moral and ethical standards by accounting and the corporate world.
Corporate governance: With sophistication in the marketplace, the demand for improved corporate governance by public companies will also increase. Ensuring high confidence of the investors in the business so as to improve investment levels through good corporate governance is a must.
Adopting a suitable framework of corporate governance and the extent of observing the framework in practice is an issue that requires to be addressed.
Technology: Regulators must keep up with the sophistication in market technology and new market structure. Enforcement cases will become more complicated as market manipulation and other misconduct are now also conducted on the Internet, making it more difficult to be detected.
A robust system ensuring good surveillance against cyber crime should be updated from time to time. Also, whether a demutualized exchange should be regulated as any other listed company, or as a utility, will be a challenge for the regulators.
Integration with other financial markets: The adoption of international best practices, sharing more information with the regulatory bodies globally and co-operation with international bodies is important. Global benchmarks should be adopted through education, assistance and advisory services to its members.
Organisations such as International Organization of Securities Commissions, the Bank of International Settlement, the Joint Forum and the Financial Stability Forum have led initiatives to introduce best practice or international benchmarks in regulation to counter global vulnerabilities such as weaknesses in market foundations, uncertain growth prospects, difficulties in surveillance and enforcement of financial conglomerates and increased investor risk aversion.
Former prime minister Atal Bihari Vajpayee summed up the requirement of the Indian financial markets, after the Ketan Parekh scam came to light. He told regulators to make markets safer for investors and called for more rigour in the market place.
"We need markets that are known for their safety and integrity. We need knowledgeable investors. And we need to build a sustainable, high-growth economy which will ensure better living conditions for our people, now and in the future," Vajpayee said.
"I urge all of you -- regulators, market intermediaries and investors -- to join hands to make our capital market the safest places to invest in the world," he had said. "While the technology and the regulatory framework of capital markets has improved, I am pained to say the standards of corporate governance have not kept pace. We have come across far too many instances of companies that have raised money from the market by creating hype and then defrauding their investors," he said.
Former finance minister Jaswant Singh added that more teeth recently given to SEBI offered it the legal right to impose sterner penalties on violators of stock market rules.
Investors will be the ultimate beneficiaries of all these changes in the marketplace. Investors will have more choices and information on investment products, easier accessibility to any market they wish to trade on, and better and cheaper services from intermediaries.
The new generation of investors will become increasingly sophisticated as market information becomes widely available. However, the complexity of the new markets also means that investors must know their own risk appetite before entering the market.

Monday, March 21, 2005

Do corporates give back to the society?

March 21, 2005, www.rediff.com, Co-author-Vivek Kaul

Every now and then, some event occurs that makes people sit up and take notice. Regulators start working overtime. Public talks and panics. Media makes money.
Ponzi schemes of the early 20th century, the Barings's debacle, Shell's tryst with North Sea, Union Carbide, Nike, Enron, WorldCom. . . the list can go on; every time there is a fiasco, more rules, more regulations and greater accountability are stressed upon.
But this does not stop corporations from committing frauds, exploiting the environment and eroding billions of dollars of stakeholders' wealth.
As the list of frauds grows, the number of books focussing on values, spirituality and personal development, on the bestsellers lists too rises. This trend makes us ponder over a very fundamental question: 'Do new age managers have their basic values in place?'
This question is justified because of the increasing number of reports in the media about corporate frauds, excessive executive remuneration, greed leading to loss of shareholders wealth and corporate crime.
Profits, money, share prices are the key words in any company. Keep your eyes on these key words, take decisions to increase them; this is what is told to the future managers and expected from present management.
As long as they achieve this, nobody questions the means. Shareholders are happy and managers are well fed.
But, for how long can this worship of profits and thirst for power go on? Even though the financial statements may remain unblemished, the company will begin to reflect the lack of morals and values.
The rise of a new phenomenon
An organisation receives inputs from the society and environment in the form of workforce and raw materials, and sends output to the society in the form of goods and services. Thus, an organisation exists because of the society.
In order to survive, the business in turn must take care of the society and the environment. This realisation has led to an increasing focus by firms on examining their social responsibilities and the development of a new term in management: Corporate Social Responsibility (CSR).
The World Business Council for Sustainable Development has defined CSR, as 'the ethical behaviour of a company towards society. CSR is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large.'
From top to bottom
CSR can be undertaken with a good blend of ethics, accountability and good governance. Ensuring the verbatim fulfillment of all the codes of corporate governance is not enough. The Enron fraud occurred despite meticulously following all the corporate governance norms advocated by the Securities and Exchange Commission of US. Moral and ethical behavior is important.
This behaviour needs to percolate to the entire organisation, from the top down. The task rests on the shoulders of the chief executive officer of the company. Responsibility is a state of mind. It cannot be enforced upon somebody. It has to be felt. It has to be experienced in the culture of an organisation.
Ethical behavior of the top management, acting in the goodwill of the public at large, keeping greed at bay and results in building a sustainable business, whereas if the management starts worshipping money, the end can be delayed but not avoided.
The benefits
Gone are the days when industry was driven by supply. Raw material was available in plenty. We are witnessing a period where inputs to an organisation are getting more and more scarce. Natural resources have been depleted and labour has become costly. Thus it is in the self-interest of the company to undertake CSR.
If the environment is not taken care of, where will the raw materials come from? If the employees are not taken care of, they will work for someone who does take care of them.
The financial health of a company in the long term depends to a large extent on factors such as environment protection and responsiveness to the society. The other various benefits that may accrue to the company can be in the form of enhanced visibility, reputation and loyalty of employees, customers, suppliers, lenders and investors.
One such example is the initiative by the State Bank of India to allow and encourage commercial sex workers in Sonagachi, Kolkata (one of the largest red light areas in Asia) to open savings account with the bank.
Ashok Dutta, one of the forces behind this initiative, also the general secretary of the bank's staff association, says, "On the one hand, you can call it social service. You can also say that this is an initiative by SBI employees to mobilise deposits."
The beginning
"The wealth gathered by Jamsetji Tata and his sons in half a century of industrial pioneering formed but a minute fraction of the amount by which they enriched the nation. The whole of that wealth is held in trust for the people and used exclusively for their benefit. The cycle is thus complete; what came from the people has gone back to the people many times over." -- JRD Tata
One of the first industrial houses of India, the Tata Group has been involved in philanthropic initiatives in the form of educational institutions, healthcare services, infrastructure and community development, and various other welfare activities through the various trusts endowed by the founders of the group.
Every year the Tatas spend a substantial sum of money maintaining the city of Jamshedpur. The fact that they have survived when the business houses, which started more or less at the same time, are long dead and gone, speaks volumes of the importance given to CSR by the Tatas.
This is the story of just one such industrial house. Many other industrial houses that set shop early on, like the Birlas, the Godrej Group, etc. have contributed richly to the society.
Going through the bad phase
Then came the sudden wave of industrialisation, which swept the entire nation with the urge to make more, sell more, and earn more. In the post-Independence licensing era, the businesses were more concerned about obtaining licenses and quotas.
This was also an era of very high taxes. As the story goes JRD Tata had to sell some amount of his assets every year to pay taxes. The businessmen could either pay taxes and go bust or operate in the black economy.
The period also saw the politician-businessman nexus develop. Each of them needed the other to survive. The businessman needed licenses to do business and the politician needed money to fight elections. In such a situation the concern for the society at large was lost.
It would not be fair to blame the corporations entirely. We as consumers, the society, the investors, and the government. . . we all failed to question the means by which corporations were achieving their ends.
The decade of nineties saw radical changes in the way the businesses operate in India. With the economy opening up, competition came in.
Established businesses, which had till then operated as monopolies, saw their profits dwindle. The media boom gave information to the consumers. The consumers had choices now and they began making decisions based on the information they had.
And this is when the corporations began to realise the need to take care of all the stakeholders rather than just the shareholders.
The revival: A ray of hope
'We must do something for the community from whose land we generate our wealth.' -- Brijmohan Lall Munjal, CMD, Hero Honda.
Social consciousness is the new leitmotif of the Indian corporations. Greed is no longer good as has been demonstrated by the fall of a few great American corporations.
Some of the family-owned business enterprises (FOBEs) in India have regularly maintained a certain level of expenditure for social and charitable causes. The Tatas lead this list. The Aditya Birla Group comes next.
But what comes as a surprise is the fact over the years Reliance group has upped its spending on corporate philanthropy.
Reliance founder chairman late Dhirubhai Ambani always said that Reliance's primary objective was creating shareholder value, although very late in life he did remark in an interview that he should have done more social work during his lifetime.
The increased spending of Reliance is because of that. A few FOBEs undertake a lot of charitable work but do not divulge the details.
ITC has also been involved with social initiatives. It is been involved with integrated watershed development and farm and social forestry. ITC, working with NGOs, has also tried to organise village women into micro credit groups.
Group members have been encouraged to create savings corpus by making monthly savings and this corpus is then used to give out loans to group members.
What is heart-warming is to see that the new generation of companies is increasingly realising the importance of giving back to the society.
Leading the pack are Infosys, Wipro, Hero Honda and Bharti Enterprises. These companies have taken various initiatives to promote and support the environment, education, health, cultural harmony and welfare in the society.
The Infosys Foundation in the past has provided Rs 38 lakh of financial assistance to war widows in various parts of India. It has also been involved with the construction of a super speciality hospital and reconstruction of schools in Andhra Pradesh and Karnataka.
The Azim Premji Foundation run by the Wipro chairman in his personal capacity is working on the universalisation of elementary education. As the Web site of the Foundation says: 'The Foundation believes that the only way to sustained Universalisation of Elementary Education is to improve the quality of learning in schools. All efforts will therefore be directed at interventions, partnerships and communications towards guaranteeing learning in the school.''
The road ahead
It is still to be seen whether the concept of CSR develops into a giant or will it fade away as quickly as its rise. One thing is sure that many large corporations have started taking CSR seriously, working with NGOs, government and voluntary workers to look at the problems plaguing the society and environment.
Whether they do so in the days to come remains to be seen. But a good start has been made and one does feel optimistic on this front.
For CSR to be more than a buzzword in the days to come top management support will be essential. Also as of now the best companies of India are serious about CSR, but in the days to come this seriousness needs to spread to other companies as well.

Tuesday, March 15, 2005

For God's sake, harness forex reserves now!

March 15, 2005, www.rediff.com, Co-author-Vivek Kaul

Foreign Exchange reserves are basically held to achieve a balance between demand for and supply of foreign currencies.
The reserves also help in maintaining confidence in monetary and exchange rate policies and enhancing the capacity of the central bank to intervene in forex markets.
They help build a capacity to absorb shocks in times of crisis and provide the confidence that the economy is well placed to meet all external obligations. Also, reserves provide the security of backing domestic currency through external assets.
Further, it helps the country maintain the investor confidence required to attract the much-needed FDI in crucial sectors of the economy. The country also benefits by using the excess reserves to repay its liabilities.
India's foreign exchange reserves hit a record high in recent years and are currently placed at $137.55 billion as on the week ending March 4, 2005. Since the inception of economic reforms, forex reserves have risen continuously. However, the forex reserves in the past two years have been rising exponentially.
The swelling of forex reserves has become a macroeconomic issue. Policymakers, independent analysts and politicians have expressed some worry regarding the deluge of dollars into our economy over the past two years.
Nearly 50 per cent of our current forex reserves have been built up in the past 2 years. The question being asked is how have the reserves been built up, and whether they would start dwindling.
Some experts seem to suggest that the quantum of dollar flows is not explained by normal economic activity such as foreign direct investment, portfolio investment in stock markets, money sent by Indian workers abroad and bank deposits made by non-resident Indians.
So where is the forex coming from?
Analysis of components forming the inflows suggest that the upswing is mainly attributable to the resurgence in exports, increase in capital inflows (including foreign investment), stronger rupee and the reduction in the current account deficit.
It is possible that the substantial part of the forex inflows could be funds that have been held abroad over the years by the Indian business class.
Historically, Indian businesses, with some help from public lending institutions, have been known to over-invoice project imports and use it as an instrument to keep some money out of the country. Some of these funds may be coming back into the country, as confidence in the domestic economy, in the medium term has grown stronger.
The persisting weakness in the western economies, primarily the United States, has added to this reverse flow of funds.
Private transfers -- inward remittances by a large number of Indians who live abroad -- to families, into Foreign Currency Non-Resident (FCNR) accounts, and real estate, also represent a large portion of the inflows.
Furthermore, Indian companies today are able to raise debt and equity in foreign markets, and do so far more effectively than they could in the past. This again explains a part of the increasing forex reserves.
All this indicates that a good part of the increased dollar inflows are here to stay. The assessment by some analysts that these dollar inflows are merely in search of the interest rate differential that prevails between the US and India and can exit anytime is not entirely correct.
Although fund managers are parking their money in India due to the advantage they get from the positive interest rate differential, a lot of these funds, just as in other Asian economies, have come seeking a more permanent parking space.
The high reserves have certainly provided the much-required boost to investor confidence and given India a good image abroad.
India's forex reserves have been at a comfortable level for quite some time now, even after the traditional approach of assessing adequacy of foreign exchange reserves in terms of import cover has been broadened to include some important parameters, such as size, composition, risk of capital flows and international uncertainty.
With high reserves, high exports, and increasing foreign direct investment inflows, the economy is all set to ride the trajectory of higher growth. Thus, instead of worrying about the cost of holding such high reserves, the government would be better off capitalising on them to improve the country's image.
Intentions seem to be good. Prime Minister Manmohan Singh and Finance Minister P Chidambaram both send out the right signals about their commitment to development and providing the right environment for development. But, sadly, action seems to be missing.
So, what are the ways in which resources can be utilised in the most effective manner?
For one, there is definitely a case for revisiting and resetting the timetable for capital account convertibility. It is rather unfortunate that the debate has been put on the backburner.
It is time for the Reserve Bank of India to take a stand on whether it wants to follow the example of China and move towards a controlled exchange rate regime or is it ready to let the rupee float and dump its policy of buying the dollars to check the rupee from appreciating.
Being a developing economy with a large and growing manufacturing sector, our import demand is going to be continuously high in the coming years and we will need large forex reserves to meet this demand, especially when export growth may not be able to keep pace with import demand.
Further, if the economy grows at 8 per cent, and there is a revival in investment leading to an increase in import demand, all the excess reserves will stop accumulating.
The high foreign exchange reserves can be used to allow higher import of capital goods and technology to support the growing economy and for development purposes. Another alternative use of the reserves could be to use part of the inflows to replace external commercial borrowings.
Thus, the contradictory situation, where there is more commercial borrowing (large forex inflows) and lack of demand for domestic rupee resources, can be avoided.
A sizeable proportion of resources, taking the stock of forex reserves available, can be used for domestic investment in both the medium and long term.
A great debate on this issue seems to be going on these days and the present government seems to be more than inclined towards this proposal.
The government should also allow Indian residents to open foreign exchange -- say, dollar-denominated -- deposits in domestic banks. At present this is allowed with a lot of restrictions.
Another way to utilise these huge forex reserves would be to follow an aggressive policy in investing overseas, and outward FDI. Recent announcements are definitely steps in the right direction in this regard.
A lot of restrictions on investing in foreign markets have been relaxed. However, further steps need to be taken to further facilitate Indian companies to acquire foreign companies and brands by signing more bilateral investment and double taxation treaties.
While on the one hand so much can be done with the reserves, on the other hand the costs of reserve accumulation are rising, especially when accompanied by sterilisation.
Reserve accumulation means a poor country is lending money very cheaply to the United States and Europe. If the same resources were harnessed for investment, economic growth would accelerate, inflation would diminish, and the welfare gains would increase.
Unfortunately there is not enough happening to create sufficient demand for dollars. This has resulted in an appreciating rupee, which the country does not exactly want.
The reserves may not really be of that much concern if we are aiming for 8 per cent growth. In such a scenario, imports will also increase and we may not be looking at such a big import cover after all.
Therefore, the time has come to think up policy measures that would create greater import demand and widen the current account deficit. The policies must ensure that the piled up reserves are used to attain greater economic growth.
The debate on capital account convertibility should be restarted without any further delay. The government must also initiate aggressive FDI and trade policy reforms, promote exports aggressively and use the India Brand Equity Fund to create the India brand to boost export growth.
All this should be done with various components of the forex reserves in view. Devising an appropriate strategy to make productive use of reserves is as important as providing incentives for larger inflow of forex.

Friday, February 11, 2005

Chinese currency: How it hits India

February 11, 2005, www.rediff.com

China has once again proven its mettle. The Bull cannot be bullied.
The Group of Seven industrialised nations might have thought that they can extract a promise from China's minister of finance Jin Renqing to revalue the yuan or let it float freely. But their efforts were in vain.
China is as strong as ever in its conviction to wait till the infrastructure and the brainpower is ready to support a free-floating currency in the country.
What is beyond comprehension is, instead of asking China to revalue yuan, why not take a re-look at the huge current account deficit of the United States, a staggering $164.7 billion in the third quarter of last year, and find ways to solve that issue!
The G7 nations make it sound as though an undervalued Yuan is the only cause for all the woes of their economies. But, as we read on, we see that though it may not be the only cause all their woes, it definitely is a big one.
China has been riding the big waves of growth at an envious 9 per cent plus rate of growth in the last two decades. It is all set to become an economic superpower in the years to come.
The world markets are flooded with China manufactured products, boosting the manufacturing industry in China, hence exports. One reason for this growth in exports has also been the pegged currency of China. China pegged its currency to the dollar in 1994, at 8.24 yuans per dollar.
Analysts claim that now the yuan is as much as 40 per cent undervalued. While the dollar continues to weaken, the Chinese exporters are taking advantage of the peg and growing by leaps and bounds.
On the other hand, the other G7 countries are facing the brunt of the depreciating dollar, making their exports expensive. Adding to the misery is the realisation that poorer countries like China and India are financing their ever-increasing current account deficits.
Central banks of countries like China and India, who are experiencing a huge inflow of dollars in their economies, are buying up the dollars to maintain the demand of dollars, and investing them in US Treasury backed securities like Treasury Bonds and Notes.
This has led to low yields on these assets having an effect on many industrialized nations who hold huge numbers of these assets. Hence the pressure on China to revalue the yuan, so that it will not need to buy back as many dollars, and in turn will not need to invest them in US treasury assets.
This will drive down the demand for these assets, reducing their price and increasing their yield. So much for the Chinese policy on the yuan!
India is another country which is making its presence felt at many of the similar forums like the G7 meet. The fact that it was invited to the G7 meet itself is a proof. Finance Minister P Chidambaram proclaimed his support for flexible exchange rate regimes and India's commitment to globalisation.
This when the Reserve Bank of India has been actively engaged in the sterilisation of dollars to prevent the Rupee from appreciating!
The RBI's policy of buying up the dollars to keep the rupee from appreciating rapidly seems fair enough when looked at from the exporters point of view. India competes with China in many sectors directly; say textiles and steel to name a few.
Now given that the yuan is pegged to the dollar, letting the rupee appreciate will reduce the price competitiveness of the Indian exporters.
But when looked at from the other angle, India being a growing economy, its imports are all poised to increase in the future, with increased investment in technology, infrastructure and development related projects.
Also, a lot of India's exports have a huge import content to it and gains on these imports would cover the loss on the export of the final product to a great extent, if the rupee were allowed to appreciate freely.
One challenge before the government would be to liberalise the imports in such a way so that benefit can be taken of the appreciating rupee without jeopardizing certain sectors, which can be badly hurt from competing imported products.
Liberalising imports can not only create greater demand for dollars, but also boost developmental activities in India.
So far, RBI has chosen to protect exporters over liberalising the imports. Now many exporters in India claim that even if the rupee were to appreciate further -- Chinese exporters claim the same in case of an appreciation of yuan -- their products would still be competitive due to their quality.
If this is the case, then letting the rupee appreciate should not be very damaging to the exporters. Another point in favour of the exporters is the growing derivatives market in India, which gives an avenue to the exporters to manage the risk due to an appreciating rupee.
One thing is for sure: not only are the industrialised nations keeping their fingers crossed that China will revalue the yuan, even India is keenly watching China in this regard.
And it is to India's benefit to support the G7 nations in asking China to revalue the yuan. RBI's move towards further liberalisation of the economy can depend to a large extent on any move by China towards this step.
Chidambaram rightly gave his support to the G7 nations by commenting: "The consensus among economists is that flexible exchange rates are an important factor of strength in the macro policy framework."
The point to be emphasised is that both China and India are growing very fast. There is a feel good factor about both these countries. Governments need to make sure that this growth is matched by right and timely investment in technology and infrastructure or else the countries will not be ready to handle the growth after some point of time.
Foreign investors already complain of the legal and investment environment in the both the countries. The only way to go is up. Any further decline in these aspects could prove too expensive for all the stakeholders.

Sunday, January 16, 2005


From 6th January 2005 to 15th January 2005, I traveled with a tour group called trekamerica. The group included 12 people (including me). 5 Koreans, 2 Britons, 1 Australian, 1 Estonian, 1 German, 1 Indian (me) and 1 American (tour leader).

More than anything else, interacting with this group for 10 days, made me conscious of my Indian origin, the fact that I do not have white skin (or yellow), my lack of knowledge about my own culture and religion, the fact that I know more about a foreign language than my own language, and that I am different. Though not as different as the others want me to be.

The tour started from a Hotel in Los Angeles early morning on the 6th. The German and the tour leader, being the only guys in the group, had a bad start. They had to load our entire luggage in the van. We tried helping, only to drop our bags on each other's heads. We head straight to San Diego.

San Diego (6th and 7th)
The Sea World is huge. Pardon me comparing the Sea World to the Underwater world at Singapore. I suppose comparisons become imperative when you have seen two similar places. Even though the Sea World has many more shows, is much bigger, in my opinion the underwater world at Singapore showcases the marine animals in a much better way and has many more species there. Anyways, let's get back to the Sea World. There are some very good rides and shows. Especially the performances by the killer whales and the dolphins are spectacular. And from the top of the rides, we got a very good view of the entire Sea World.

By the time we finish enjoying the rides and shows at Sea World, its sunset time. So we hurry to the Crystal Pier at Pacific Beach to catch the sunset and the surfers. Not too good. Have had better view in other places. It was cloudy and drizzling. Still, got to see many surfers fighting against the waves.

At night, we did some of the craziest things in my life. Camped at a place called "Campland at Bay". It was cold and wet. Does anybody ever camp in such weather? It was fun putting up the tents and rolling out sleeping bags. The team leader, David, cooked bean burritos for us. Then the eleven of us got on top of the van, as David drove us to the beach, which was just five minutes from the camp. We had to struggle to avoid getting hit by palm trees on the road. For all of us on top, it was a good experience, with chilled air seeping through our skins. It reminded me of the trucks and buses full of people in Bihar, going to see a mela.

On the beach we burnt woods and sat around it. We were carrying folding chairs! Played beach volleyball and frisby.

The night was extremely cold with rain all through.

The next day was a free day in San Diego. It was a horrible day. There was so much rain that I just wanted to sit in a cafe, read and drink coffee. But forced myself to go to Balboa park, Gas Lamp
Quarters and Horton Plaza. Everything was wet and didn't enjoy anything. The only thing that I enjoyed was watching "Meet the Fockers" at Horton Plaza. Sitting in the theatre for 2 hours was a
relief from the wet weather outside.

San Diego is supposed to be one of the most beautiful places in California. And it is. In spite of the weather.

Went for dinner at the Dick's near Gas Lamp Quarters. Now this was some experience. I have never seen a place like this before. The customer service is known to be really bad. The waiters throw the
tissues, menu, food, everything at you. Talk really harshly and rudely. The people keep fighting with each other for food, throwing balls of tissues at each other. I really enjoyed it. There was live
music, which was really live. If you don't applaud after a piece, the singers swear at you.

Cowboy Camp, Sonoran Desert (8th and 9th)
It was a long drive from San Diego to the Cowboy Camp at Sonoran Desert. Spent the whole day in the van, sleeping. I volunteered to make dinner for everyone. Made my usual aloo gobi and tamatar ki
chutney. Everybody liked it. The food also brought with it discussion on vegetarianism. And questions like "why are you a vegetarian? is it because of religion?"....Am I a vegetarian because I am a Hindu? As far as I know, even Bengali's are Hindus. But they are not vegetarians. So why am I a vegetarian? Just because my family has always been vegetarian?....I have no satisfactory answer.

It was good sitting by the fire and enjoying the dry weather. Everybody started getting drunk and I went to sleep.

Next day was a beautiful day too. Very sunny. It was a treat to be riding the horse through the hills and the desert, with sunlight on my face and body, after days of rain. It was very scenic too. The
cactuses are huge and high in this place.

Also got a chance to have a tete-a-tete with Betty and Rusty. They are the owners of the cowboy camp at which we were camping. Rusty is one of the oldest cowboy's alive in the area. He is fit as a fiddle at 95. Says he feels like 16. He says that Betty has grown old as she doesnot smoke or drink. So, according to him, she is not able to cope with him. Betty herself must be 80 plus. Though she is very active and even pretty. They have lived in this place all their lives.

They asked me a lot of questions about India. About Hinduism. They had heard about the Tsunami. So were very curious about India. Tsunami has brought India on everybody'd lips for the time being. They also asked me what is the holy scipture for Hindu's called. Just like its Bible for the Christians. Which is our holy scripture? Is it the Bhagvad Gita? Is it the Vedas? Is it the Puranas? Which one is it? I do not know.

The toilets in the camp were a nightmare. The Americans call them pit toilets. There is a huge hole. You just sit on top of it and do whatever you have to. No need to flush. How convenient! And you could have a shower by the well in the open! No hot water!

In the evening, we shooted cans and bottles with real bullets and guns! Gosh! Its tough to shoot. The noise can blow your ear drums. After that- Lassoeing, also called roping. I am bad at it. Very bad.
Could not rope the horse even once.

At night we had a traditional cowboy dinner, cooked by Betty on the wood and coal fire. It was delicious. I especially loved the smell and the taste of smoke in my food. Dessert was once again cooked in the same fire- chocolate cake. Yummy again. After dessert, entertainment provided by Betty and Rusty again. Betty was great on the guitar, and has a very good voice as well. Rusty, I guess, would have been a good singer once upon a time. But I could not understand a word he sang
because of his old age. Overall a great experience.

The next day was traditional cowboy breakfast with homemade bread. As we packed our tents, Betty presented me with an old horseshoe as she was fascinated by my stories about India and kind of liked me.

Grand Canyon (10th and 11th)
We drive to Montezuma Castle National Monument. Its a fraud. How can they call just pieces of bricks and rocks kept together a national monument? There is nothing to be seen. These are supposed to be the ruins of castles built by Indians. But they are really ruined. Drive some more and reach Grand Canyon. Bad Weather. Its almost dark, so there is no scope of seeing the canyon. We check into the hotel rooms. The rooms are really good. Soak into the bathtub. After spending two
days in the cowboy camp without shower, this feels like heaven. Spent the night talking to friends on the phone and playing cards with the Korean girls.

Next day the bad weather continues. So could not see the sunrise and the sunset on the canyon. But whatever little I could see of the canyon, was breathtaking. We were on the South rim of the Canyon
(Tusayan). Went on a short hike on the Bright Angel Trail. The trail was slippery and washed out in many places because of the rain and the snow.

Probably the best view of the Canyon that I had was in the IMAX Theatre (7 storeyed screen) in Tusayan. The images of the Colorado River and the Canyon looked very different from what we saw. Grand Canyon is certainly the greatest natural phenomenon that I have seen till date. Want to come back here some day in the summers and see the Canyon as was shown in the theatre.

On 12th morning, we were supposed to leave early for Vegas. But, the weather was unexpectedly good. So we decided to have another look at the Canyon, sans the fog. And if yesterday was breathtaking, the view today cannot be described. The sky was clear, no snow, no fog. We got
some great views of the Grand Canyon.

Las Vegas (13th and 14th)
We reached Las Vegas around 3 in the afternoon, via the historic route 66. You have to experience Vegas to know what it is. The place has a totally different feel to it. Its different from any other city that I have seen, or heard about.

We did Vegas in style. Starting with a buffet at Luxor, which had more than 200 dishes. I myself tried more than 20 of them. It included all the different cuisine that you can think of....not exactly though. Sadly, there was no Indian food! Then a Limo was waiting to drive us through the strip and downtown Vegas. My first ride in a limo. It makes you feel grand. Watched the Fremont Street Experience show in downtown Vegas. Then hopped on to the Limo and off to Rio to catch the Masquerade in the sky show. Not only did we watch the show, we also participated in the show. I participated in a live Vegas show, dancing on a decorated trolley in the sky! Amazing experience. Hop on to the limo again and now to Bellagio hotel and casino. We watched the water fountain shows there. Its certainly the best water fountain show in the world! I was so enchanted by it that I watched three shows in a row. And I watched it from the arcade where the Ocean's eleven team had stood towards the end of the movie.

Then to MGM Grand. Nothing much. Then to New York New York. We danced till early morning hours in the Coyote Ugly Club and then off to our hotel where I gambled off $10, playing various stupid games and lost all the money!

Walked on the strip the whole of next day. Absorbing the grandeur of Las Vegas. From Bellagio to Flamingo, Luxor to Excalibur, New York New York to Mandalay Bay, MGM Grand to Stratosphere, Circus Circus to Treasure Island. On foot for more than six hours. Came to the hotel and now is the time to go Bungy jumping. Nervous. Excited. Go there. The tower from which I had to jump was 171 ft high. Saw the others jump. I can't do it. I just can't do it. I'll have a heart attack if I do. Back out. Didn't have the courage to jump inspite of everyone else trying to coax me into doing it.

Come back to the hotel. Gamble some more. Lose some more money. I am broke. Living on the edge again. Had Mexican dinner. Very good and different from anything I have had earlier.

Death Valley National Park (14th Jan)
Desert can be so beautiful? I didn't know till I saw the Death Valley! We went from point to point, seeing different faces of the desert. Badwater Basin- The lowest point below sea level in the Western
Hemisphere. 85m below sea level. It had Sodium Chloride crusts formed on the sand, which shone like crystals in the sun.

The Golden Canyon. As the name suggests, canyons formed due to the flow of the river. And Golden in colour. Shines like newly polished gold in the sun.

Camped at Stovepipe Wells Campground. Dave cooked brownie for us in the fire. And the Korean girls made special Korean food. Both were good.

And yes, there were so many stars in the sky. I was seeing stars in the US for the first time!

Sitting by the fire, watching the stars, eating brownie and drinking coffee, Enelie and I started talking about our countries. She definitely did not know much about Estonia. But I was surprised at how
little I myself know about India! It was an eye opener. Will try to read more about India in the future!

Next day we spent the whole day in the van, travelling from Death Valley to Los Angeles. Dave dropped me at Anaheim, from where Micky picked me up. And my trip came to an end. Back to Irvine and then back to Syracuse. The End.