Know risks before the plunge

This article was originally published in Postnoon on April 13th, 2012


http://postnoon.com/2012/04/13/know-risks-before-the-plunge/43256

On my way to ISB on Monday, I saw a motorcyclist speeding on the Gachibowli road hit a car taking a u-turn. The car was damaged and the motorcyclist suffered good deal of injuries. On enquiry, the rider said that he was in a hurry to meet his sister who was not well.

This got me thinking about the risks people take in their lives. Even though we read about accidents due to speeding very frequently, we still drive fast to save a few minutes. A cricketer tries to hit a six with every ball, taking the risk of getting caught on or near the boundary.

An investor faces similar risks. In order to earn higher returns, investors often take risks which may not be compatible with either their risk appetite or risk taking ability.

Taking a sip of the coffee, Prof. Nicky asks Srikanth, “Have you watched the movie 3 Idiots?”

Srikanth: Of course. Who hasn’t?

Prof. Nicky: Do you remember the scene where ‘Virus’, summoned Raju and Farhan to his office and told them to leave the company of Rancho?

Srikanth, proudly: I remember the entire movie, dialogue by dialogue. I’ve watched it 23 times.

Prof. Nicky: And how many times have you read Yasaswy’s book on investments?

Srikanth, descending down to the earth: Uhhh… Prof. I was about to start reading it the coming weekend… I Uhhh… thought… uhhhh…

Prof. Nicky: Ok. Coming back to 3 Idiots. So what was ‘Virus’ trying to explain to Raju and Farhan by comparing the income of their families with that of Rancho’s?

Srikanth: Ummm… I guess he was trying to tell them that they cannot afford to be thrown out of the course as passing and getting a good job was very important for them. Their families were not as well to do as Rancho’s.

Prof. Nicky: Exactly. This means that they do not have the risk taking ability, even though they have the appetite. Generally youngsters, with lesser responsibilities, single status, have more appetite to take risk.

Srikanth: But an investor wants returns. How are all this connected to returns?

Prof. Nicky: Alas, that what the investors don’t understand and that’s what I am trying to explain to you. There are different asset classes like Bonds, Equities, Commodities, Gold, Derivatives, Art and Artifacts, Real-Estate, etc, available for an investor to invest in. Each one of them has a risk profile of their own.

I can see that I am losing you. Let me explain.

Risk has a negative connotation in our day to day life, but not entirely so in the case of Investments. The uncertainty or deviation from expected returns is known as risk in the case of investments.

For example, if you invest in the shares of Reliance Industries Limited, with an expectation to earn 20 per cent return in one year, an actual return of — 30 per cent is a deviation from the expectation, just as a return of 30 per cent.

If you take the case of fixed deposit in a bank, you get as much as you expect. So it is riskless, unless the bank goes bankrupt. But in the case of Reliance, your returns would depend on the performance of the company, the dividends, the future projects etc. So the uncertainty is much more.

Srikanth: I get it. So if I do not have the risk taking ability, I should not put my money in risky assets. But if I do have the risk taking ability as well as the appetite for it, I can invest in risky assets, though I should be aware of the risks that I am taking.

Prof. Nicky: Ah… there you go… Perfect… I couldn’t have put it better!

Value investing and the margin of safety

Co-Author: Mallikarjun Gaddam


This article was originally published in the business section of rediff.com on April 13th, 2012
http://www.rediff.com/business/slide-show/slide-show-1-special-value-investing-and-the-margin-of-safety/20120413.htm

During early 2009, a mutual friend, Nicky, who is an expert on Value Investing, asked us to invest in the shares of Patni Computer Systems Limited.


Each of us bought 100 shares on his insistence. The share price of Patni was around Rs 97 on the day we traded. Today, the price of Patni shares are Rs 490 each and each one of us has made a cool profit of over 400 per cent in about two years.

Of course, we are grateful to our friend. But we are also very intrigued by the concept of value investing. We went back to Nicky with loads of questions.

Nicky: Value Investing is basically putting your money in stocks which are trading at prices lower than they are worth.

The important thing to keep in mind is that, the market may take a long time to realise the worth of the stock and hence you might have to wait for a long time before you can sell the stocks and realise the profits. During this period, you must not panic even if the stock price falls, as that would be a temporary phase.

Nupur: But how do you know which stocks fall in this category?

Nicky: The key is the balance sheet. Start looking for smaller companies, small-to-mid-cap, that are trading at a discount to their intrinsic values. These stocks are generally.

Mallikarjun: But how do we know which stocks are trading at a discount to their intrinsic value?

Nicky: Let me take you through how I discovered that Patni was a 'value' investment. Patni had a market capitalisation of Rs 1,300 crore (Rs 13 billion) in February 2009, with almost zero debt.

They had investments and cash worth Rs 1,177 crore (Rs 11.77 billion) and Rs 293 crore (Rs 2.93 billion) respectively. This alone translated to Rs 108 per share, 11 per cent more than its market price per share at that time.

Nupur: That is excellent from our investment perspective. But why was their stock price lower than Rs 108 then?

Nicky: That is because a lot of really good companies are often neglected and are out-of-favour with the investors due to their lack luster performance in a particular period. They are often a misunderstood group of companies.

Mallikarjun: So we must thank you for identifying Patni and believing in the company and its long-term potential.

Nicky: Actually Benjamin Graham would frown on me for asking you to make the investment at Rs 97.

We both looked at Nicky, perplexed by his last statement. We clearly thought that we bought at a great price!

Nicky: Graham, the father of value investing, believed in a rule of thumb. He called it the "margin of safety". He would buy companies which traded at a minimum of 33 per cent discount on their Net-net working capital.

Mallikarjun: Net-net Working Capital?

Nicky: Yes. Graham calculated Net-net Working Capital as the difference between the Current Assets of a Company and its total liabilities (long term plus short term). Then he would take 67 per cent of this value to calculate the stock price at which he would want to buy the stock.

Adopting this method, Graham would buy the shares of Patni at Rs 90 only, calculated as per the balance sheet of Patni on December 31, 2008.

Graham did this to avoid any risk of losing money. Intrinsic value is often very subjective, and depends on the assumptions of the person doing the calculation. In order to protect ourselves from the uncertainty of the true intrinsic value, the margin of safety should be large enough.

You must not feel that you took any unnecessary risk though. As in the case of Patni, the investments and cash made up for almost 65 per cent of the total assets. This means that the quality of assets that Patni had, was very high.

In contrast, there are other stocks which might meet the margin of safety requirements as per Graham, but their assets might constitute more of inventory and debtors. Inventory might become obsolete and debtors might become bad debts.

Thus the quality of assets and the industry also needs to be considered before deciding if the stock is a 'value stock' or not.

Nupur: Your explanation does not mention earnings anywhere. Does it mean that earnings are not a consideration in value investing?

Nicky: No way am I stating that earnings are not relevant to value investing. Earnings reflect the efficient use of assets deployed, represented by asset turnover, inventory turnover ratios.

The analyses of these are important to know if the company has the potential to perform in the long term. Earnings and balance sheet figures together go a long way in ensuring that as investors we do not lose.

Nupur and Mallikarjun chuckle together: Well, as the sage of Omaha says: "The first rule is not to lose. The second rule is not to forget the first rule"!

Do cash holdings impact funds' performance?

Co-Author: Dhruva Raj Chatterji, Senior research analyst at Morningstar India

The article was first published in the Economic Times, April 12th, 2012

http://economictimes.indiatimes.com/personal-finance/savings-centre/analysis/do-cash-holdings-impact-funds-performance/articleshow/12631347.cms

The debate whether cash calls of actively managed funds have worked in their favour or not has been on for a long time. We tried to delve deeper and check if equity funds in India observe better performance when holding higher cash during market downturns; or do they end up missing out on sudden upturns in the market.


In India, fund houses like Escorts, Reliance, Sahara and Taurus are known to take cash calls, with cash holdings in excess of 20% on many occasions. It should be noted here that the excess cash holdings played out mostly in the period of 2008-09, when the financial crisis was underway.

Post that period, cash calls by most funds have tempered down substantially-but then again, so has the adversity in stock markets.

On the other hand, fund houses like Fidelity, Franklin Templeton, HDFC and Tata have maintained lower cash holdings, in the range of 4-8%, over the past five-year period, across most of their funds.

Taking two categories of equity funds -large-cap and small- & mid-cap -we compared the highest cash holding funds with the lowest cash holding funds. In the case of large-cap funds, the numbers reveal that the top 20 high cash holding funds held about 9% more cash on average than the bottom 20 cash holding funds over the past five years, but have earned about 1.2% lower returns (annualised) than them over the same period.

The performance is particularly poor over the 3-year period, where their returns are about 7% lower than those funds with lesser cash holdings, within the large-cap category.

We find a similar pattern in the case of small- & mid-cap funds - although much starker. It seems that the top 10 funds with the highest cash holding within this category earned about 5.5% less (annualised) than the bottom 10 funds with lower cash holding over a five-year period. Over three- and one-year periods, they earned approximately 9% (annualised) and 6% lesser, respectively.

Cash also seems to have a varying impact, depending on the category of funds. Large-cap funds, by virtue of investing in more large and liquid stocks, are able to buy and sell the shares quickly, and hence the role of cash becomes less important.

On the other hand, in the case of small- or mid-cap funds, keeping excess cash might mean losing out on an upswing, as the lower liquidity of these shares would result in the prices zooming up due to any sudden demand. The vice-a-versa is also true.

That is, in the case of illiquid stocks, selling might not be easy when there is a redemption pressure or a downturn. This probably explains the higher historical average cash holdings of mid-cap funds when compared to their large-cap peers.

We observe that the key risk in taking cash calls lies in deploying it at the right time. Fund managers often miss out on a sudden upturn.

Clearly higher cash holdings have resulted in lower fund returns in the following months, especially when the markets have turned around very suddenly. Again, here the impact seems to be starker within the small/mid cap fund category, where there are instances when the funds with high cash holdings have underperformed those funds with lowest cash holdings, by more than 3% (on average) in the following month.

On a closing note, besides the cash holding, there are other important factors, too, which have a bearing on the performance-like the quality of the fund management team, the processes in place etc.

However, avoiding high cash calls and remaining more invested across market cycles do point towards a more disciplined approach in investing. Moreover, the approach helps to neutralise the risk of being caught on the wrong foot, especially in the event of a sudden upswing in the market.

As legendary fund manager Peter Lynch once said: "Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves."

Why the annual Budget is like a bikini

With Vivek Kaul
The article was originally published in www.rediff.com on April 10th, 2012


http://www.rediff.com/business/slide-show/slide-show-1-special-why-the-annual-budget-is-like-a-bikini/20120410.htm

Five things you did not hear the Finance Minister Pranab Mukherjee say in the budget speech.


"Statistics are like a bikini. What they reveal is suggestive, but what they conceal is vital," said Aaron Levenstein, an American professor of business management. And not Navjot Singh Sidhu as we Indians tend to believe. The annual budget of the government of India is also like a bikini. A lot it is revealed about it through the budget speech made by the Finance Minister, but the vital aspects lay hidden in the budget document. Here are five things you did not hear the finance minister Pranab Mukherjee say in the budget speech he made a few weeks back.

1. The government of India in the financial year 2011-2012 (i.e. the period between April 1, 2011 and March 31, 2012) spent 65% more than what it earned:
That the government spends more than it earns, we all know. This difference, known as the fiscal deficit, is expressed as percentage of the gross domestic product (GDP). For the financial year 2011-2012, the fiscal deficit of the government of India stood at 5.9 per cent of GDP. But this number somehow does not convey the grimness of the scenario that the government of India is in.

The expenditure for the year 2011-2012 has been estimated to be at Rs 1,318,720 crore (Rs 13,187.2 billion). In comparison the government's income for the year is at Rs 7,96,740 crore (Rs 7,967.4 billion). This works out to a difference or fiscal deficit of Rs 5,21,980 crore (Rs 5,219.8 billion). Hence in simple English the government spends 65.5 per cent more than what it earns.

When we compare the situation in this way we come to realize that the government is spending much more than what it earns. If you or me were to do that we would be in trouble pretty soon. The government as we shall see has a longer lifeline.

2. The fiscal deficit of the government of India has gone up by more than 300% in the last five years:
For the financial year 2007-2008 (i.e. the period between April 1,2007 and March 31, 2008) the fiscal deficit stood at Rs 1,26,912 crore (Rs 1269.12 billion), against Rs 5,21,980 crore (Rs 5,219.80 billion) for the financial year 2011-2012. Now what does that tell you? In a time frame of five years the fiscal deficit has shot up by nearly 312 per cent.

During the same period the income earned by the government has gone up by only 36 per cent to Rs 7,96,740 crore (Rs 7,967.4 billion).

When expenditure is expanding nearly 9 times as fast as your income, it can't be a good thing. No wonder, the finance minister gave that piece of information a miss.

3. The fiscal deficit target for the financial year 2012-2013 (i.e. the period between April 1, 2012 and March 31,2013) is likely to be missed:

When the finance Pranab Mukherjee gave his budget speech in February last year, he had set the fiscal deficit target for the financial year 2011-2012, at 4.6 per cent of GDP. He missed his target by a huge margin when the real number came in at 5.9 per cent of GDP. The major reason for this was the fact that Mukherjee had underestimated the level of subsidies that the government would have to bear.

He had estimated the subsidies at Rs 1,43,750 crore (Rs 1,437.5 billion) but they ended up costing the government 50.5 per cent more at Rs 2,16,297 crore (Rs 2,162.97 billion). The finance minister had underestimating the subsidy level of the three main categories of food, fertilizer as well as oil.

This has been the case in the past as well. In 2010-2011 (i.e. the period between April 1, 2010 and March 31, 2011) he had estimated the oil subsidies to be at Rs 3,108 crore (Rs 31.8 billion). They finally came in 20 times higher at Rs 62,301 crore (Rs 623.01 billion). Same was the case in the year 2009-2010 (i.e. the period between April 1, 2009 and March 31, 2010). The estimate was Rs 3,109 crore (Rs 31.09 billion). The real bill came in nearly eight times higher at Rs 25,257 crore (Rs 252.57 billion) (direct subsidies + oil bonds issued to the oil companies).

Similar underestimates have been made for the financial year 2012-2013, to project a fiscal deficit of 5.1 per cent of GDP. The total subsidies bill has been estimated to be at Rs 1,90,015 crore (Rs 1,900.15 billion) a good 12 per cent lower than the subsidy bill for the year 2011-2012.

The government has constantly underestimated the cost of subsidies and there is no reason to believe that it would not be the same for this year as well. Oil prices are unlikely to go down, and inflation is also not seen slowing down. Hence it is most likely that the government will miss its fiscal deficit target for this year as well. The only way to cut this bill is to cut the level of subsidies, and that is unlikely to happen. As a known stock bull said on TV the other day, even Saudi Arabia doesn't sell kerosene at the price at which we do. And that is why a lot of kerosene gets smuggled into neighbouring countries and is used to adulterate diesel and petrol.

4. The government is in a huge debt trap:
The fiscal deficit target for the financial year 2012-2013 has been set at Rs 5,13,590 crore (Rs 5,135.9 billion). The government raises this money from the financial system by issuing bonds which pay interest and mature at various points of time. Of this amount that the government will raise, it will spend Rs 3,19,759 crore (Rs 3,197.59 billion) to pay interest on the debt that it already has. Rs 1,24,302 crore (Rs 1,243.02 billion) will be spent to payback the debt that was raised in the previous years and matures during the course of the year 2012-2013.

Hence a total of Rs 4,44,061 crore (Rs 4,440.61 billion) or a whopping 86.5 per cent of the fiscal deficit will be spent in paying interest on and paying off previously issued debt. What this means is that new debt is being issued to pay off old debt and pay interest on it.

The situation is similar to that of an individual who takes new loans to pay off older loans or rotates credit card debt across his various credit cards. The government can keep doing this for a long period of time because in the worst possible scenario it can print money and repay the debts that have accumulated and in the process reduce the value of the domestic currency. This is what many governments in the developed world are doing right now. You and I can't do this and ultimately will fall prey to debt collectors or will end up behind bars!

5. Interest rates will continue to be high:
As explained above the government finances its fiscal deficit by issuing bonds on which it pays interest. Who buys these bonds? These bonds are primarily bought by banks which by law need to invest 24 per cent of their deposits in such bonds.

At the same time the government is also competing with private companies and you and I for this money. The banks have the option of lending their deposits to companies and also give it out to individuals in the form of car loans, home loans, credit cards, personal loans etc. Hence the government has to offer a higher rate of interest on its bonds. Given this, the rate of interest charged by banks on all other forms of loans goes up because they are more risky than lending to the government.

Hence if the government is offering a rate of interest of 8 per cent on its bonds, then the banks are likely to charge more on all other forms of loans that they make. So the next time the finance minister talks about the interest rates going down, be skeptical. The interest rates cannot go down as long as the fiscal deficit doesn't go down and that doesn't seem to be happening any time soon.

Vivek Kaul is a writer and can be reached at vivek.kaul@gmail.com.

Let your money grow

This article was first published in Postnoon on April 6th, 2012
http://postnoon.com/2012/04/06/let-your-money-grow/41858

Laxmiamma has been putting away the Rs500 that she saves every month, under her mattress. This has been going on since 2002. She likes the smell of money whenever she picks up the mattress. She likes to keep counting them. She likes their fading color; it indicates that she has been saving since really long and speaks volumes about her discipline!


Somewhere in her heart, Laxmiamma has the desire to buy back the gold bangle that she had to sell off when her husband took seriously ill some 25 years back and the family needed the money for his treatment. The bangles were a wedding gift from her grandmother and had 25 gms of gold. They were her pride. She felt like a queen when she wore them.

Alas, there is still a long way to go. She only has Rs61,500 (500*12*10yrs3months)under the mattress. Two years back when she had gone to the Jeweller, he told her that it would cost her Rs40,000. When she went with Rs40,000 to him, he said that the price of gold has gone up and it will cost 60,000. Three months back when she went with Rs60,000 to him, he said that now the bangle will cost Rs70,000. “If this is the way the price keeps going up, I’ll never be able to buy those bangles”, thought Laxmiamma with tears welling in her eyes.

This is the story of a lot of us. While prices keep going up, our income and savings do not go up in the same proportion. And this is where Prof. Nicky enters the scene.

Prof. Nicky does not promise to solve all your financial problems or make money grow on trees. Prof. Nicky gives simple tips on money and investment, which might help ease your situation.

Enter Laxmiamma and Prof. Nicky.

Prof. Nicky: Laxmiamma, why do you keep your money under the mattress? Does it grow there? And what if there is a thief in the house one day? Why do you take the risk of keeping it at home? Why don’t you invest it? In this way, the money is not only safe, it grows too! Yes, money can grow if invested well.

Laxmiamma: “You mean keep it in the bank?”

Finance

Prof. Nicky: That is the easiest way to invest. You could at least start by putting your money in the bank. Infact, you would have been able to buy your gold bangles by now if you had invested your money in a recurring deposit with a bank every month. By now you would have Rs84,682/- (using 6% p.a. interest and the Future Value of Annuity Formula) in your account instead of Rs61,500/- under the mattress.

With popping eyes, Laxmiamma asks, “Really?”

Prof. Nicky: Really. You might actually have earned even more, if you had invested in other assets like Equities, Mutual Funds, Bonds, and Derivatives. In the past ten years, the Equity indices have given over 400% returns in India. Of course with return comes risk, but one must balance the two and invest in asset classes where they are comfortable with the risk.

Laxmiamma: I understand that I should invest. And I am going to start by putting my money in the bank from now on, rather than under the mattress. But pray do tell me more about risk and return and these other asset classes that you have mentioned.

Prof. Nicky: I will tell you that in this column some other time. Till then, why don’t you think about risk and return in our day to day affairs?

Not a Populist Maneuver

The Union Budget of FY2012-13, presented by the Finance Minister Mr. Pranab Mukherjee, resulted in the market closing 1.19% in red. Most of the sectoral indices, except FMCG and Consumer Durables closed in red. India Inc has called this budget “a missed opportunity”.


The expectations from the Budget were low to begin with. But, while the expectations were low, wishlist was long. The table below is an example of the wish list of a few industries.

Sector Wishlist

Cycles
*Abolition of all duties

Infrastructure
*Revive power sector. Extend benefit under Sec. 80IA
*Exemption from MAT.
*Lift the $30 bn annual cap on External Commercial Borrowing temporarily.
*Take a call on the no-go criterion for the coal blocks.
*Bring more private players into mining

Health Care
*Import duty cuts on import of equipments, drugs and chemicals.
*Declare it a 'National Priority Sector'.
*Make it a part of the infrastructure sector so that it can avail loans for infrastructure financing institutions.
*Increase the medical reimbursements exemption limit from Rs15,000 to Rs1,00,000/-

Viscose Rayon
*Reduce excise duty from 10.3% to 0.
* Retain S.A.D in lieu of Sales Tax.

Branded garment
*Remove 10.5% Central Excise Duty.
*Refund of Excise Duty on lines similar to refund of duties of input and finished goods.

SSI
*Increase in exemption limit from Rs1.5cr to Rs5cr.

MSME
*Provide more reliable and accessible internet broadband.

Real Estate
*Single-window clearance mechanism for real estate projects.
*Better clarity on the indirect taxes being levied on developers.
*Development of a viable Real Estate Investment Trust (REIT).
*Make rental business attractive for investors.

Source: Compiled from various industry associations and news reports


Everyone wanted this budget to be “not a populist maneuver”, but in the same breath, they would roll out a series of exemptions and sops that they wished for from the budget.

One thing is for sure. This budget is not a populist maneuver and as the market reactions point out, Mr. Finance Minister has not been able to satisfy everyone. And this is exactly what works in his favor.

As we can see, almost every industry wanted tax sops to continue, duties and taxes to reduce or be removed. But the finance minister has stuck to tackling the burgeoning fiscal deficit and concentrating on key areas of infrastructure, education, health and food.

There is effort to contain the outflows on subsidies, containing them to 2% of the GDP. There is emphasis on removing bottlenecks for the coal, mining, roads and energy sectors, and various customs reliefs and duty cuts have also been proposed for these sectors. Create capacities for storage, increasing supplies, reducing duties and customs in the agricultural sector are truly welcome. The allocations for education and health related schemes have also gone up by more than 20% overall.

The ‘aam aadmi’ does not get too much, but should not be disappointed as well.
Within limits, the budget has put something in their pockets too without taking away much. The income tax exemption limit has gone up to Rs2,00,000/- The limit for tax exemption on interests earned has gone up from Rs5,000 to Rs10,000/- The retail investor gets an incentive to invest in the stock markets, through the Rajiv Gandhi Equity Savings Scheme. Service Tax had been increased by 2% but then it was inevitable as the service tax was reduced in 2008 as sops given to tide over the financial crisis.

Black money and tax avoidance have been frowned upon. Amendments to Fiscal Responsibility and Budget Management Act, 2003, have been announced.

The government is embroiled in corruption charges, the mandate of the people in the recently held state elections was not encouraging, and the so called allies are not being too helpful either. Not much is expected from the financial year 2013-14 budget as the country goes to elections in 2014, assuming that the UPA government manages to hold on till then.

This was the only chance for Mr. Pranab Mukherjee, to push for reforms, save some face by doing it, and bring India back on the growth trajectory. While there are many sectors that are disappointed for not getting any sops, the finance minister has done a pretty good job within his constraints.

Reining in the Fiscal Deficit

The government is embroiled in corruption charges, the mandate of the people in the recently held state elections was not encouraging, and the so called allies are not being too helpful either. Not much is expected from the financial year 2013-14 budget as the country goes to elections in 2014, assuming that the UPA government manages to hold on till then.


So the budget being presented tomorrow by Finance Minister Pranab Mukherjee, might be the only chance to push for reforms, save some face by doing it, and bring India back on the growth trajectory. One of the primary concerns this year is to rein in the Fiscal Deficit.

Last year, Mr. Mukherjee had said that the government would target a budget deficit of 4.6 per cent for 2011-12, compared with the 5.1 per cent expected for 2010-11. We are nowhere close to the targeted figures. Subir Gokarn, the Deputy Governor of RBI has predicted that the Fiscal deficit would be close to 7% by the end of March 2012.

The government badly missed their own revenue and expense predictions. Government borrowing has been increasing. This has resulted in high interest rates. On the one hand the government is not able to control expenses; on the other hand, it is not doing much to improve revenues.

The four areas, which are being talked about and are very likely, the budget may target to rein in the fiscal deficit are Subsidies and welfare schemes, Foreign Direct Investment, non-tax revenues and tight fiscal management policies. Let’s look at the state of and the challenges facing each one of these areas.

Subsidies and welfare schemes: Year after year, the government has rolled out more and more subsidies (fuel, food, fertilizers) and welfare schemes (MNREGA, NHRM) for the people that have now turned into giants, with ever increasing appetite for cash. Various subsidies account for close to 3% of the GDP!

On the one hand, the government spends close to Rs55,000cr in food subsidies every year, on the other, the estimated wastage of food in an year is close to 60 million tones, approximately 20% of the total production. The prices of diesel and fertilizers are far from reality and decontrolling them or reducing the subsidy might result in early polls. Apart from this, there is lack of transparency about how the money is spent on various welfare schemes. Accountability and achieving the targets should be the key words in such schemes, but they are not!

Foreign Direct Investment: FDI in aviation, retail, insurance, and infrastructure are all pending since long and need urgent attention. There are benefits to be gained from FDI apart from the capital, in terms of technology, expertise, backward and forward linkages etc.

Simplifying processes for the foreign investors, reducing the number of days taken to conduct business and set up operations could all go a long way in attracting investors. Though it might now be difficult to build consensus in the Parliament and it may be impossible to push through bills like FDI in multi- brand retail.

Non-tax revenues: Divestment or sale of stake in Public Sector Undertakings is one way to raise money without putting burden on the common man. The Government failed miserably in this last year. The recent example of investors shying away from ONGCs follow-on public offering and LIC being ordered to pick up the shares to save the offer from falling through is a case in point.

Tight fiscal management policies: Except the Non-Direct Tax collections, the government has fallen short on almost all other forms of Revenues collection. The estimated shortfalls for the FY2011-12 are Rs20,000cr in Direct Taxes, Rs35,000cr in Non-Tax revenues, Rs27,000cr in Divestments and Rs37,000cr in Non-Debt Capital.

The expenditure has been as budgeted to a great extent, in fact it might be lower than budgeted as on the year end. With transparency and good governance, proceeds from divestment could go up. Measures to improve the tax and non-tax collections have to be put in place, including coming down heavily on corruption, which might be leading to money going into private coffers rather than the exchequer. Voluntary Disclosure Schemes or Amnesty Schemes could be put in place to encourage people to bring back the black money stashed away in tax havens.

Overall it seems that the fiscal deficit situation that we have gotten into is mainly due to mismanagement and poor planning. Taking calculated and tough stand and having clarity in the policies will definitely help rein in the fiscal deficit.

Budget Wish List

The Union Budget of FY2011-12, presented by the Finance Minister Mr. Pranab Mukherjee, resulted in the market going up by close to 3% and breathing a sigh of relief for not having been burdened with more taxes or duties. Ofcourse, there was nothing to rejoice about at the same time. But at least status quo does not imply being worse, if not better!


The expectations from the Budget of FY2012-13 are low and the stage is set with the monetary policy review dampening the sentiments of the markets today. While the expectations are really low, wishlist from the Budget is long. And that might work in Mr. Mukherjee’s favor, if his budget shows even a slight sliver of hope for reforms.

Everyone wants this budget to be “not a populist maneuver”, but in the same breath, they roll out a series of exemptions and sops that they wish for from the budget. One thing is for sure. This budget will not be a populist maneuver, because whatever Mr. Finance Minister does, he will not be able to satisfy everyone. The table below is an example of the wish list of a few industries.

Sector Wishlist

Cycles
*Abolition of all duties

Infrastructure
*Revive power sector. Extend benefit under Sec. 80IA
*Exemption from MAT.
*Lift the $30 bn annual cap on External Commercial Borrowing temporarily.
*Take a call on the no-go criterion for the coal blocks.
*Bring more private players into mining

Health Care
*Import duty cuts on import of equipments, drugs and chemicals.
*Declare it a 'National Priority Sector'.
*Make it a part of the infrastructure sector so that it can avail loans for infrastructure financing institutions.
*Increase the medical reimbursements exemption limit from Rs15,000 to Rs1,00,000/-

Viscose Rayon
*Reduce excise duty from 10.3% to 0.
* Retain S.A.D in lieu of Sales Tax.

Branded garment
*Remove 10.5% Central Excise Duty.
*Refund of Excise Duty on lines similar to refund of duties of input and finished goods.

SSI
*Increase in exemption limit from Rs1.5cr to Rs5cr.

MSME
*Provide more reliable and accessible internet broadband.

Real Estate
*Single-window clearance mechanism for real estate projects.
*Better clarity on the indirect taxes being levied on developers.
*Development of a viable Real Estate Investment Trust (REIT).
*Make rental business attractive for investors.

Source: Compiled from various industry associations and news reports

As we can see, almost every industry wants tax sops to continue, duties and taxes to reduce or be removed. But the finance minister has no magic wand and must tackle the burgeoning fiscal deficit. Hence, exemptions and indirect-tax reductions may seem farfetched. Though, the budget may actually pave way to implement the Direct Tax Code (DTC), taking at least small strides this year.

Increasing the personal income tax limit from Rs1.8/1.9 lakhs to Rs3 lakhs, increasing the Sec80c exemption limits, hiking the slabs for tax rates will all put more disposable income in the kitty of the common man.

Rising inflation, rising prices of food, petrol, LPG, had the households scrambling to cope throughout the last year and they do not expect this year to be different. The common man is worried about the sky rocketing education and healthcare costs, rising housing costs and declining amenities. They are looking at Mr. Pranab Mukherjee to ensure that they can plan their monthly budget with more precision and have improved standards of living.

Create capacities, reduce wastage, improve infrastructure, to increase supply in the agricultural sector. Have more clarity on the prices of fuel. People are confused. Are the Oil prices really independent? Will the diesel prices be deregulated? Why are we paying more and getting less of everything?

All these questions concern the common man and giving income tax sops alone may not be enough to enthuse them to vote you back Mr. Finance Minister.

Aliens Developers Pvt. Ltd. return our money

Facts:

Total Amount paid to Aliens till date - Rs 25 lakhs plus

Booked the flat in-  Nov-06

Promised Date of Delivery -  3 years i.e November 2009

Delay as on Feb 2012 - 2 years 4 months

Discussion for cancellation of flat initiated in - Apr-11

Formal letter to cancel booking given in-  Jun 2011( 2 months delay was due to Aliens not giving the resale/booking cancellation form on time. We sent back the form in two days)

According to the sale agreement, our money should have been returned in - 45days

No. of mails (only reminder mails) that we have sent to get our money back - 17
No. of times that we have visited their office to get our money back - 11

No. of phone calls that we have made to them to get our money back - lost count

No. of days that we had to wait to get to speak (only speak, NOT meet) to the Managing Director, Mr. Hari Challa - More than 2 months

All this inspite of both of us having very demanding jobs. We are not even accounting for the man hours lost, lost time with our daughter, and the emotional and mental stress that we are experiencing in the entire process.


They have given us 5 post dated cheques starting from May 2012 onwards to repay MY money. Reason: They needed to pay to HUDA. Using our money to pay to HUDA? Is that how companies work? I have spent 12 years analyzing companies and financial markets. These are tell tale signs!

This happened in November 2011 (8 months after the initiation of the talks). But we need our money urgently. So we requested to speak to Hari Challa. It took 2 months to get to speak to him.

Hari Challa offered to pay the rent of the house we are living in currently, or to pay us interest when we finally got to speak to him after chasing for more than 2 months. But all we are asking for is to repay our principal. That’s All. Not a penny more. Not a penny less. He promised to pay us Rs2lakhs per month till the month of May, and from then onwards the previously given post dated cheques would be honoured.

Forget about the interest that we would have earned on the Rs25lakhs over the years, even if they had returned our money within 45days of the letter of cancellation of booking, at the going Fixed Deposit rates, we would have earned an interest of Rs1.8lakhs till date. And as per the contract, for delay (leaving the grace period of 6 months), they should have paid us Rs3/-(much lower than the industry standards) per SFT per month, amounting to close to Rs1.2lakhs. But we are not asking for all this. We are just asking for our principal.

To get the Rs 2lakhs per month agreed y Hari Challa, we have made numerous phone calls, 2 visits to their office, written emails. We could get a DD of Rs 2 lakhs at the end of all this. But they have refused to give post dated cheques for the rest of the months. For the balance cheques, they made several commitments, every time it was TOMORROW. Broke each of their commitments.

If the MANAGING DIRECTOR’S word cannot be trusted, what kind of company is this? What kind of people work in this organization? Do we need to call them, visit them, and email to them these many times each month to get our own money back?

And Mr. Hari Challa wants to build a WORLD CLASS company. Indeed. He should be ashamed to even utter those words. With cronies of the likes of Suresh working for him, its not far before he is dragged to court by some disgruntled customer.

As Naseeruddin Shah says in the movie A Wednesday, its not that we can’t do things to hurt them (i.e take them to court or send goons or publisize what they are doing), its just that we are so caught up in our day to day work, that we do not have the time or the energy to do it. But there is a limit to tolerance. While people like us cannot resort to goons, we can surely take advantage of technology.

So as a first step, we are posting this on my Blog.

In the second step, it will go to the mailing list of our respective companies’ employees and contacts.

In the third step, we will post this on facebook, orkut and twitter. Including on the facebook account of Hari Challa. Let his friends also read about his world class company and him.

In the fourth step, we take this to the media.

Fifth and final step, gandhigiri. We will stand with placards in front of their office to get our money back.

It is sad that we even have to think of all this. We would glad just take our money and have nothing to do with Aliens ever. But they are forcing us to resort to all this. We are educated and busy people. We are ashamed that we have had to deal with people like Suresh who cannot even be called human, to say the least.

It is our earnest request to all the potential home buyers to not even consider any of the properties of Aliens.

Funding for agri-biz sector

This article was published in Hindu BusinessLine on February 6th, 2012
http://www.thehindubusinessline.com/industry-and-economy/taxation-and-accounts/article2863213.ece

Think venture capital and private equity funding and IT, Telecom and Bio-Technology industries crop into our heads, followed by humongous returns like 10,500 and 1,692 times the initial investment in the case of Body Shop and Apple Computers. In the year 2011, the PE and VC deals in India totalled close to $11.26 billion, up about 25 per cent from that of 2010

(www.ventureintelligence.in; investments in real estate excluded). In spite of the turmoil in the financial markets, the inflow of PE and VC funds have seen a decent increase during the last year. Most of the investments have gone to the IT and ITES and BFSI sectors.

However, a miniscule amount has also made its way into the agri-business domain. There were 11 deals, totalling $116.8 million in 2010 and 10 deals worth $89.16 million in 2011 for agri-related businesses, a decline of approximately 24 per cent.


WHY INVEST

Given that agriculture is far from the kind of characteristics that a funding agency looks for in a business, viz, new, upcoming, at least 300-400 per cent returns, the above statistics is not surprising. However, knowing that agriculture is seeing a genuine revival in India, with many business houses getting into agri and related businesses on a big scale, the need for funds in this sector cannot be denied.

Agriculture contributes about 20 per cent to the nation's GDP and accounts for 50 per cent of the workforce. But, what is it that will attract the PE and VC funds to this sector? First, demand for agri commodities is increasing and will continue to increase as the world at large becomes more conscious about food for all.

Secondly, the need to innovate in this sector becomes more important as less and less land is available for agriculture with each passing day. Thirdly, an agri business does not mean farming alone. It includes investment across the value chain starting right from the agri inputs, agri output, agri produce distribution and agri services including finance in several sub-sectors within the agri business such as agriculture, horticulture, dairy, fisheries, poultry and meat etc. So within the gamut of agri businesses, there is a lot of scope.

Fourth, entry of large business houses in this sector offers more organisation and structure to the sector and scope for collaborations and consolidations.

WHY STAY AWAY

Howard Van Auken and Clyde Kenneth Walter of Iowa State University in their paper, “Facilitating the Flow of Capital to Niche Agricultural Producers in Rural Markets” published in Small Business Institute Journal in the year 2010, rightly point out that “Availability of capital has historically been a challenge in rural markets.

Niche agricultural producers face a daunting task when trying to raise capital because they commonly have business models that are not well understood by providers of capital and, thus, they are considered high risk”.
It is true that most of the PE and VC funds by virtue of having been promoted by Silicon Valley protagonists, understand computer software, hardware and bio-technology, but may not understand agriculture or related businesses. They may be experts at knowing about bugs and viruses, implementation issues, but may be totally unaware about the quality of soil or the pesticides needed to control certain pests.

Also, the gestation period may be pretty high for agri-businesses with cyclicality built in. In comparison to knowledge based businesses, agri-businesses are not only difficult to scale up, but also time consuming. This is against the PE and VC funds characteristics which typically look to exit in 5-6 years.

Barring a few bigger players, agriculture primarily comprises of relatively unaware farmers, who might look at the entire process of obtaining funding as a hassle. Similarly, capital providers might perceive them to be too risky because of the size and unorganised nature of their operations.

Another major hurdle is that, the VC and PE firms generally look at larger ticket sizes. To elaborate, in the past 10 years, there have been 3,667 non-agri PE and VC deals in India, with an average size of $17.28 million each. Compare this with 62 deals in the agriculture domain with an average deal size of $11.14 million each, over the last ten-year period.

What Now

The market is definitely responding to the needs of the sector with dedicated funds like India agri business fund by Rabo bank and Omnivore Capital by Godrej Agrovet coming up. The key is to build in or include the social benefit/impact angle when doing the project evaluation. Also, a lot needs to be done to educate, organise and assist the capital-seekers so that they can benefit from such funds. Here, regulators will need to take a lead. Unless they help the sector organise and seek co-financing, it would be very difficult for the VC and PE providers to finance every single capital seeker individually.

Stocks dance to downgrade tune

This article was published in the Hindu Business Line on 23rd January 2012. The link is
http://www.thehindubusinessline.com/todays-paper/tp-others/tp-taxation/article2823782.ece

Credit Rating Agencies (CRAs) have been around since more than a century. In India, the first CRA CRISIL was started in collaboration with the international CRA Standard & Poor's (S&P) in 1988.


The role of the CRAs has been important in the investors' decision making process. However, international credit rating agencies like Moody's, S&P and Fitch have been under the scanner in the last decade for failing to signal the downfall of giants like Merrill Lynch (2007) and Enron (2001). The incorrect high ratings for these giants resulted in loss of credibility of these agencies.

CONSERVATIVE RATINGS

The Indian counterparts CRISIL, ICRA, FITCH, CARE and Brickworks are known to be relatively more conservative in their ratings. Maybe that is the reason why there have been only cases of rating upgrades amongst all NSE-listed companies in the last decade.

My friends, Chakrapani Chaturvedula and Nikhil Rastogi, from IMT Hyderabad and I studied the credit rating changes by CRISIL, ICRA, FITCH and CARE in all the NSE-listed companies for the last ten years.

We investigated the impact of credit rating changes viz. upgrades, downgrades, reaffirmations, withdrawals and initiations on the stock prices of the respective companies.

These ratings are supposed to convey the future prospects of the company and other relevant information about the company to the investors. They are supposed to act as “independent auditors” who provide a “certificate of creditworthiness” to the companies.

The companies have a tendency to delay the release of negative information or hide them. And since the reputation of the agencies is more at stake in case of incorrect higher ratings, they spend more resources to find negative information about companies. In such a scenario, a downgrade by an agency is of immense importance to the investors in their decision making process.

We find that downgrades result in significant abnormal losses (due to selling pressure) for the investors. The graph shows a downward trend for the cumulative abnormal returns after the event. We see that from the day of the downgrade (day zero), the prices fall almost 5 per cent on an average in the next 10 days.

HOW STOCKS REACT

The result of our study is also evident in a recent event when Moody's downgraded the outlook of the Indian banking system from ‘stable' to ‘negative'. We saw the banking stocks lose heavily in the days to follow.

Within the next 10 working days, the CNX Bank index had fallen by 16 per cent. Apart from downgrades, no other actions by the credit rating agencies had any impact on the stock prices.

Contrary to our expectations, we find that there is no significant negative impact of withdrawal and no significant positive impact of initiation on the stock prices.

These could be because the market might have already anticipated withdrawals and initiations much before the actual act.

Hence, on the day and after the day of the act, there is no new information being brought into the market. The number of upgrades (only 10) during the period was too few to meaningfully conclude anything.

Continuing with the story of the outlook for the banking system in India, S&P actually upgraded the rating of the Indian banking system just the day after the Moody's downgrade. In spite of that, the banking sector stocks continued their downward slide.

This once again showed that the market reacts to bad news swiftly in order to avoid losses. But it does not react to good news in the same magnitude.

With SEBI seeking more disclosures from the CRAs on the factors and process which results in the ratings, we anticipate that the rating changes will become more meaningful in the future as investors will then be able to make more informed decisions, especially in the case of conflicting ratings from different agencies.

Rate hikes and rising food prices

Originally published in the Hindu Businessline on 31st October 2011. The article was co-authored by Malini Anand (freelance writer). HBL somehow missed her name.

http://www.thehindubusinessline.com/features/mentor/article2582871.ece?homepage=true&ref=wl_home

Dr D. Subbarao, Governor of the Reserve Bank of India (RBI), is in a Catch-22 situation. If he doesn't raise interest rates, he stands accused of doing nothing to tame inflation. But if he does raise interest rates, his ability to control inflation, as the general public sees it, is rather limited. As can be seen from the graph below, the increase in interest rates by RBI hasn't necessarily resulted in an easing of inflation in past few years in India.

The Wholesale Price Inflation for September 2011 stood at 9.72 per cent. Fuel and Food, which together comprise 22 per cent of this index, have been a major reason for the increase. Fuel and Power inflation increased to 14.09 per cent, due to Rs 3.14-rise in the price of petrol on September 1, 2011. Food inflation was at 10.6 per cent in the week ending October 8, as against 9.32 per cent in the week before that, providing no relief to the aam admi.

Interestingly, food forms nearly 14 per cent of the Wholesale Price Index, and increasing the interest rates simply isn't the solution to controlling the food prices. There are several reasons for this.

Higher rural income
First and foremost, rural India is eating better. This is primarily because of a surge in rural income. As analyst Akhilesh Tilotia of Kotak Institutional Equities points out in a report titled ‘This Time is Ripe', the total income in rural India has gone up by 138 per cent to Rs 6,81,400 crore during a five-year period ending in 2009.
It need not be said this is primarily because of the Mahatma Gandhi National Rural Employment Guarantee Scheme, which has led to a significant flow of money into rural India.

Over and above this, the United Progressive Alliance is getting for the next Lok Sabha elections with the introduction of the Food Security Bill. The Bill is currently up for discussion and draft guarantees food to priority households i.e. those below the poverty line, as well as other poor families who have been classified as ‘general households'.
This move if and when it goes through is expected to drive food prices up all over the world, because of the sheer numbers (population) that we have.

There are other problems as well which will continue to drive food prices up in the years to come. A report brought out by DWS Investments suggests that “dramatic increases in the irrigation of crops across northern India have substantially depleted the region's groundwater. This would mean lesser water for irrigation across the Gangetic plain which produces a major part of the grain that India consumes.”

Grain and food production is also threatened by other long-term factors. One is the continued expansion of some of our biggest cities at the cost of taking over agriculture land. As environmentalist Mr Lester Brown writes in Outgrowing the Earth: The Food Security Challenge in an Age of Falling Water Tables and Rising Temperatures, “As a country industrialises and modernises, crop land is used for industrial and residential development.Secondly, as rapid industrialisation pulls labour out of the countryside, it often leads to less double cropping.”

Shrinking acreage
In fact the world is running out of land for agriculture. The world renowned hedge fund manager Mr Jeremy Grantham explains this in his newsletter titled Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever, “Only Brazil, and perhaps the Ukraine, has really large potential increments of output. Elsewhere, available land is shrinking. We have, though, had impressive productivity gains per acre in the past, and this has indeed helped a lot. But, sadly, these gains are decreasing.”

What also does not help is the prospect of higher atmospheric temperature.

Crop ecologists use a rule of thumb that for each 1-degree-Celsius rise in temperature above the optimum during the growing season, we can expect a 10-per cent decline in grain yields.”

As Brown points out “In India, the giant Gangotri Glacier, which helps keep the Ganges river flowing during the dry season, is retreating. The Ganges is, by far the largest source of surface water irrigation in India.”

Many of the above factors are already translating into almost doubling the Price of Food Index, Dhaanya, at NCDEX, the leading agricultural commodities exchange in the country.

The factors are way beyond the control of Mr Subbarao and he cannot do anything about it by increasing interest rates. So, will his interest rate hikes bring down the inflation rates? We doubt!

NJY: The Visionary

Mr. N J Yasaswy, NJY for most of us, passed away on Saturday October 8th, 2011. The founder of ICFAI, was of 62 years.


I had gone on my honeymoon to Srinagar. On our way from Srinagar to Pehalgaon, on a foggy chilly morning, we stopped for tea amidst the mountains. Just next to the tea shop, there was a small office with a board, IFEN (ICFAI Flexi Education). I laughed. And then marveled at the reach and penetration of ICFAI.

True to the vision of NJY, ICFAI reached, touched and penetrated into every conceivable market for Business education in India. I recall NJY telling us in one of the meetings, “Everyone is entitled to education. Isn’t an average student entitled to higher education in the Business domain? Does one have to crack the CAT and be the top 2,000-3,000 in a country where almost 10 lakh graduates want to pursue an MBA every year?” 
These were not merely words; he actually made a Business education possible for everyone. From 2 years full time MBA, to part-time and distance MBA, to executive MBA, he offered them all under the ICFAI umbrella. He has left behind an empire of 11 ICFAI Universities, 8 Icfai Business Schools, and many more Icfai National Colleges.

I joined ICFAI in 2002 as a Doctoral student. Just a week into the program, before meeting the man himself, accounts of his brilliance reached my years. I was told that he was the all India 1st rank holder for CA, CS and ICWA. And that the ICAI still kept his answer scripts as model answer scripts on their website. Well I never checked it myself.

But, I did not need to Whether he was the 1st rank holder in all three (CA, CS and ICWA) or not and whether ICAI kept his answer scripts as model papers or not, the man was a genius. Being a teacher, I am used to talk more and listen less. But when he spoke, everyone listened. Including me. Out of Respect and Awe. Not Fear.

I had the opportunity to interact with him on numerous occasions. Over the years, I happened to be in various committees and would meet with him in the review meetings very frequently. He used to take a lot of pride in the smallest of achievements of any of the ICFAI constituents. His eyes would twinkle as he would tell us about the Icfai cases appearing in many foreign author books, or ICMR making money through adsense, or ICFAI Tripura being a threat to the local Universities in North East. He had Big Dreams for ICFAI.

Last year when I was leaving IBS Hyderabad, I had met him and chatted with him for more than an hour. I was a bit skeptical at first. I was nervous that he might get angry, or he might not understand my reason for leaving. But I was so very wrong. He was extremely happy for me. He told me that I am doing the right thing. He told me that it was important for me to go outside the Icfai system and prove myself and that I was taking a good decision in concentrating my efforts on research, which also gave me the flexibility to focus on my family.

His consent and his approval of my decision meant the world to me. He told me that I was welcome to rejoin IBS after my stint at ISB. For any employee, this would be the greatest compliment, that she is welcome back in the same organization. And NJY, the founder of ICFAI, himself gave me that compliment.

The man is no more. But he has touched the lives of lakhs of people, Icfai alumini, faculty, staff, prospective students and the Indian corporates. We are all grateful to him for his vision and his creation. May his soul rest in peace.

The Economic Spiral

The last quarter (July-September) has seen most of the economic indicators going for a roller coaster ride in India. In September, Interest Rate was increased yet another time and the Oil Marketing Companies increased the Oil prices once again. Inflation has touched newer heights and the Index of Industrial Output (IIP) plunged to a 21 month low in July.

The rupee has been plummeting on average and the stock market indices have been volatile to say the least.
IIP growth decelerated sharply to 3.3% in July 2011 from 8.8% in June 2011, and from 9.9% in July 2010. The uncertainties in policymaking and the increasing loss of credibility of the UPA government are causing many companies to defer their investment and expansion plans.

The IIP compiled in India has in its scope the Mining, Manufacturing and Electricity sectors. The increasing dependence of the government on debt leaves no doubt in the minds of the companies that the government will not be able to spend on infrastructure and give boost to the economy if need be.

Increasing the interest rates makes borrowings more expensive for the companies and individuals. Hence they postpone or cancel their expansion plans. This results in depleted producer sentiments and reduced capital spending. This in turn results in a further lower IIP.

Owing to high costs of borrowing, a few companies might resort to layoffs or pay-cuts, leaving individuals with lower disposable income. Also, higher interests on deposits might lure individuals to save now and consume later. Both, lower disposable income and higher savings, results in lower consumption, leading to lower sales and profits, lower production, lower IIP, hence, lower stock prices. Looming threat of the US and European nations going back into recession is not helping the situation.

The exports to these nations are bound to be hit. While a falling rupee will benefit the exporters, the demand itself might drop.
The impact of an oil price increase on inflation cannot be ignored as well. It must be noted that increased oil prices directly result in an increase in inflation as it is a major component of the Consumer Price Index. It also results in increased airfares, shipping costs, public transport etc., thereby indirectly increasing the inflation further.

By letting the OMCs increase the price of oil, the government is contributing to a further rise in inflation on one hand, and adding salt to the wounds of the common man by further increasing the interest rates to control the same inflation.

Mr. Pranab Mukherjee was quick to point out that petrol has been deregulated and it is the OMCs who have in their review decided to increase the price. True. But then, who reviews and makes the decisions for these companies? And who benefits from such decisions?

It is clear from Table 1 that the Government being the majority shareholder in these companies, must be approving the price rises. Also, these companies distribute whopping amounts as dividends, not to mention the contribution to the exchequer in the form of taxes and duties (see table 1)!

Table 1:

Source: CMIE prowess database and Annual Reports of the companies

In the year 2010-2011, the amount of subsidies towards petroleum products doled out by the central government was Rs38,400 crores (source: union budget 2011-2012). A look at table shows that the OMCs together pay much more to the government in the form of taxes, duties and dividends.

Our central banker Mr. Subbarao claims that the rise in interest rates would curb inflation. Figure 1 clearly shows that increasing the interest rates have not been able to rein in the inflation in the past one year. So yet another rise in interest rate seems to be in vain.

Figure 1:

What seems to be the case is that the inflation in India is demand driven. So the need of the moment would be to ensure supply, increased productivity and efficiency rather that curbing the demand.

Curbing the demand would not help in achieving the growth targets. It would push the country into a slow growth or recessionary phase. That would be a real shame, considering that we have one of the brightest economists and a man responsible for the India
turnaround story as our current Prime Minister.
Source: RBI

Bourses, competition and technology

http://www.thehindubusinessline.com/industry-and-economy/taxation-and-accounts/article2523500.ece


These are interesting times for the Indian Stock Exchanges. We might see a new player in the stock exchanges arena soon, MCX-Stock Exchange (MCX-SX). Since long, MCX-SX's application has been pending with the Securities Exchange Board of India (SEBI) for a license to operate as a full- fledged stock exchange.

National Stock Exchange (NSE), since its inception in 1994, has revolutionized capital markets in India. Due to initiatives taken by NSE, the Indian markets are now more efficient. NSE has monopoly in the futures and options and wholesale debt markets and is the clear market leader in equities and gold ETF trading. 

This forced financial intermediaries to use technology which provides data feeds from NSE for all segments. On the other hand, BSE has more than 7,000 companies which are not listed on NSE, and hence traders were forced to separately work on BSE's online trading platform (BOLT).

Competition between exchanges

In addition, the Multi Commodity Exchange of India (MCX), market leader in commodity derivatives, provided its feed on software called ODIN, developed by its parent company (Financial Technologies). While intermediaries found it difficult to switch between softwares, they had no choice.

These technological woes of the brokers seem to be ending as competition between the exchanges intensifies. While a monopoly does enjoy economies of scale, but competition is always good for the end users. The fear of losing a customer to a competitor propels the companies to innovate, serve and optimize.

Owing to a recent development, wherein the Bombay High Court advised the SEBI to settle its dispute with the MCX-SX regarding its ownership structure which is preventing SEBI from allowing it to become a full fledged stock exchange, in a move to combat the almost certain entry of MCX-SX in the equity and derivatives trading arena, arch rivals, NSE and Bombay Stock Exchange (BSE) are joining hands to provide their stock price feeds through a single trading platform.

In another development just two months back, the Competition Commission of India (CCI), armed with the new competition law which became fully enforceable in the month of June this year, slapped a fine of Rs 55 crore on NSE for waiving transaction charges and abusing its dominant position in the Currency Derivatives (CD) segment. NSE has now obtained a stay by the Competition Appellate Tribunal (Compat) on the penalty, but has ended its zero-pricing policy with effect from August 22nd, 2011. In the same order, the CCI had instructed NSE to share its application programme interface code (APIC) with ODIN users.

Also, Financial Technologies (FTL), the promoter company of MCX and MCX-SX, a global leader in providing exchange and trading technology platforms and solutions, launched DMA (Direct Market Access) live a couple of days back. DMA live will provide clients with greater control and direct access to their trades, reducing transaction costs, increasing speed and efficiency of transaction.

More exchanges

This is meant to benefit the financial institutions and brokers. On one hand the consolidation of exchanges continues, on the other hand new exchanges are successfully capturing market share. Key to their success is technology.

Researchers are still trying to find an answer to whether fragmentation is good or bad for the investors. Maureen O'Hara and Mao Ye in their research paper, “Is market fragmentation harming market quality?”, published in the Journal of Financial Economics in June 2011, find that “fragmentation affects all stocks; more fragmented stocks have lower transactions costs and faster execution speeds; and fragmentation is associated with higher short-term volatility but greater market efficiency, in that prices are closer to being a random walk”.

Their results show that “fragmentation does not appear to harm market quality” and “are consistent with US markets being a single virtual market with multiple points of entry”. However, in the US there is the National Market System (NMS) linking all the different exchanges and investors can see prices of all the markets, compare and then choose the best.

MCX-SX, the potential new player in the exchange industry in India, with the backing of a global leader in exchange and trading technology (FTL), may change the game for the existing Indian players, NSE and BSE.