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In Focus: Dell's Privatisation Opinion: Indian Economy Term of Week: ESOP
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January 19, 2014
Volume 26
A Normal Week
As the students get back into the groove of studies, the new term slow-
ly moves on to become a regularity. The week saw the Lohri celebra-
tions being played out in the amphitheater. Club FinNiche would also
like to extend its warmest greetings for Lohri to all its readers. As a
number of students start preparing for their upcoming final joining and
others for professional examinations, the need for financial knowledge
becomes paramount. Club FinNiche, as always takes up the challenge
to keep you updated and sensitize you with the latest happenings
around the world.
This week we bring to you a review of the future of Dell after Quarter
into it’s privatization. The Opinion section takes a look into the chang-
ing faces of Indian Economy in the year 2014. The Term of the Week
grabs the nitty-gritty's of the Employee Stock Option Scheme. Do look
over the ‘News of the Week’ section for the noteworthy news for the
week. The ‘Market of the Week’ covers the latest movements in the
market this preceding week.
We hope you enjoy the various articles in this edition of FinXpress. We
look forward to your comments, acknowledgements and your criticisms
regarding our online magazine.
Happy Reading!!!
Regards,
The Editorial Team
FinNiche Club
From The Editorial FinXpress
Volume 26
Jan 19, 2014
FinXpress
Disclaimer: FinXpress takes no responsibility for the opinions expressed in the magazine.
FinNiche
January 2014 Page 1
CONTENTS
From The Editorial
In Focus: A Quarter after
Dell’s Privatisation
Opinion: Indian Economy in
2014
Terms of The Week:
Employee Stock Option
Scheme
Market This Week
News
Tips & Experiences
Page 2
IN FOCUS
The markets watched as investors led by
Carl Ichan on one side collided forces with
Michael Dell and Silver Lake on the other. It
was a tumultuous battle which finally
ended with the latter gaining control of the
$57 billion behemoth - Dell Inc. There are
both defenders and attackers of the move
that saw the Texas based computer
technology company go private for $24.4
billion.
Michael Dell's plan to take the company
private was motivated in part, to give him
much needed flexibility to rejuvenate the
company "without the obligations of public
reporting, shareholder expectations,
quarterly targets, and other limitations of
operating as a public company". However,
according to a study done between 1997
and 2006 on 105 UK listed firms which
were taken private, after layoffs and sales of
assets, the gap in revenue per employee
between these firms and a control group
actually widened by more than triple. Thus,
there will be lots of layoffs in the days to
come.
The PC market is seeing a gradual decline.
According to IDC, PC companies sold 10%
fewer PCs in 2013 than they did in the
preceding year. The market is facing stiff
competition or more realistically being
hammered by portable substitutes like
smartphones, tablets and cloud computing
which are seeing double digit growth every
year. However, Michael Dell is betting big
on the PC market. He believes that not just
a desktop or laptop, but PCs will now be a
variety of devices and his company has
great scale advantage and is gaining share
in the category.
In Dell’s case, some analysts suggest that
once it’s private, Dell can migrate to a
software and services model. That is
however easier said than done. The
presumed exemplar of such a
transformation, IBM (IBM), still earns a
surprisingly high proportion of its profit
from a mainframe business that has been
revived by the growth of big data and the
disappearance of most of the company’s
mainframe competition. Furthermore, a
private Dell will likely have to service a
sizable debt load, presumably hobbling any
efforts to make significant acquisitions or
major investments in R&D to accelerate its
move into software and services.
Another notable point of concern is the
piles of debt taken as financing and the
increased role of Silver Lake in the day to
day functioning of the company. In such a
case, who would act as the real CEO?
Michael Dell? Silver Lake? Or some other
debt financer?
However, many critics also argue that the
deal was made for Michal Dell's legacy.
When Michael Dell started the company in
1984 for $1,000, it was his hunger for
success that drove the company's ideology.
It helped the company to be one of the front
runners in the PC market. Thirty years
hence, Michael Dell is a well known name
in the Silicon Valley. He has advantages of
a global footprint, recognition, connections
and a brand name. If he is successful in
transforming Dell, he will be known as a
"The CEO who changed Dell". Otherwise, he
will go down as a mere footnote in history
books.
FinNiche
A Quarter After Dell's Privatisation
January 2014
PAGE 3
OPINION
The story of the Indian economy in 2014
could be played as a result of the coming
general election.
The domestic economic situation is not a
pretty picture: there is no growth recovery
in sight even as consumer price inflation
continues to hover around double digits.
So there is little room for a stimulus to
economic activity right now.
A monetary stimulus will be risky at this
time when the Reserve Bank of India (RBI)
has to calm down the inflationary fires that
are left unattended for too long. A couple of
more interest rate hikes in the coming
months are quite possible, despite the
surprise decision by the Indian central
bank to not to further increase rates in
December.
A fiscal stimulus will also be bought with
risks. The finance ministry is struggling to
keep the fiscal deficit within its budgeted
figure, especially since tax revenues have
fallen behind targets because of the growth
slowdown. So the finance ministry has to
compress expenditure.
The government can at best try to ease the
economic situation through executive
decisions supporting large investment
projects that have been frozen for long.
A lot depends on how the Congress party
interprets the results of the recent state
elections when it got defeated. One
possibility is that they may see voter
dissatisfaction as a response to high
inflation. Then there are good chances that
the government will cooperate with the
Indian central bank in keeping a lid on
domestic demand, with a combination of
higher interest rates and lower government
spending.
The other possibility is that the political
leadership may see the loss of economic
momentum as the major reason for the
voter revolt, in which case it could be
tempted to pour money into populist
schemes that it believes could win votes.
The history lesson as well as the basic
political instincts of the Congress
leadership clearly suggests that Congress
might yet be again tempted to throw fiscal
deficit to the winds despite the presence of
high inflation. Global investors will not be
impressed if India lets its fiscal deficit
overshoot the budgeted target or allows
inflation to further drift up. Nor will global
credit agencies be cheering these in any
case.
There are glimmers of hope, however. The
current account deficit has thankfully
shrunk because of administrative
measures to compress gold imports as well
as more robust export growth following the
depreciation of the rupee as well as buying
of dollars from the market. So the Indian
economy seems to be in a better position
than a few months ago to handle this new
aftermath of instability in the financial
markets globally.
Policymakers in New Delhi and Mumbai
have done well to ensure that India is in a
better position to deal with global volatility
than it was in July. However, the big worry
is whether India can maintain external
stability without such artificial props.
The current confidence could be severely
tested in the middle of 2014 a lot depends
on the results of the national elections.
FinNiche
INDIAN ECONOMY IN 2014
—- By Jagriit Kalra
JANUARY 2014
Page 4
FINANCIAL KNOWLEDGE
Employee stock option scheme is an
instrument used by the company to attract,
retain and motivate its employees. These
schemes basically involve the issue of
shares at a discount as compared to the
market price to its employees as part of
their employee compensation. Under the
Employee stock option scheme, employees
and not the promoters or those employees
who belong to the promoter group are given
the stock option. Stock option is a right
given to an employee by the employer,
where on account of exercise such option
the employee will get some securities
(shares) in the employer company, within a
stipulated period, at a pre-determined
price. The major advantage of stock options
is that it develops a sense of belonging to
the company and thus contributes
effectively to the growth of the company.
SEBI has issued guidelines for Employee
Stock Option Scheme, namely SEBI, (ESOS)
Guidelines 1999, as per which only those
employees who are permanent employees of
the company are eligible for this scheme.
An employee who is a promoter or belongs
to the promoter group shall not be eligible
to participate in ESOS. Moreover, a director
who either himself or through his relatives
or body corporate, holds more than 10 per
cent of the outstanding equity shares of the
company, shall not be eligible. The
company cannot offer any ESOS as part of
its employee compensation, unless it
constitutes a compensation committee
which consists of directors, majority of
which are independent directors.
Again, the company cannot offer any ESOS
to its employees unless the shareholders
approve of it by passing a special resolution
at a general meeting. The notice for the
meeting must be accompanied by an
explanatory statement giving all
particulars of ESOS such as the total
number of options to be granted ,the class
of employees to whom it is granted, period
within which the ESOS to be exercised, the
maximum number of options to be issued
per employee etc. If however, in any one
year, the ESOS offered to the identified
employees equals or exceeds one per cent of
the issued capital, then it must be approved
by a special resolution of the shareholders
in a general meeting. The exercise price of
the shares under the ESOS is determined
by the companies after conforming to
accounting policies.
There is a minimum one year lock in period between the grant of options and vesting of options. And till the shares are issued on exercise of options, the shareholder does not have the right to dividend or vote. The board of Directors in their Directors Report shall give all details about the ESOS and at the AGM, shall place before the shareholders, a certificate from the auditors stating that the scheme has been implemented as per the SEBI guidelines and it accordance with the resolution of the company passed in a general meeting.
FinNiche
EMPLOYEE STOCK OPTION SCHEME
—- By Vipul kumar Singh
January 2014
Page 5
FINANCIAL KNOWLEDGE
Gold will rally, but silver will do
better Jim Rogers
The yellow metal took a big hit in 2013,
registering its biggest drop in last three
decades, as the super cycle in
commodities got challenged and the
basket made a U-turn.
"There are huge shorts that have
developed in precious metals as you
know. So, it's overdue for a rally. We
had a big drop in 2013. Everybody got
negative, everybody got short. So, we
are going to have a rally," says
Commodities Guru Jim Rogers.
"After the rally, the year will see it going
down again and hopefully finally we will
make a nice bottom and we can buy
gold again," he says. "I would prefer
silver to gold. I am not buying either at
the moment. Silver is down 60% from
its all-time high, gold is down 30-35%
from its all-time high. But i won;t buy
just because they are down," says Jim
Rogers.
Metal stocks may feel the heat as the
China shows signs of fatigue
Indian investors are twitching rather
nervously and glancing across the
border, hoping to see the Chinese
dragon breath fire again. But there's not
much hope coming from the dragon: the
economic data that's coming out of
India's giant northern neighbour isn't
all that encouraging for Dalal Street.
The rally in Indian metal stocks, which
surged in the July-September quarter
last year on hopes of China's resilience,
is seen coming to a halt. Market data
shows that the ET Metal Index has ..
Singapore hires Delhi-based Dataflow
Services to verify documents of
Indians
Singapore has hired a New Delhi-based
firm to ferret out Indians who
present fake documents in their work
p e r m i t a p p l i c a t i o n s .
Manpower Ministry has hired Dataflow
Services last month to conduct random
checks on education certificates,
employment history and scrutinise
births and marriage certificates of
Indian nationals working in Singapore,
The Straits Times reported today.
Aviva appoints JP Morgan, Deutsche
Bank to sell India JV stake
Aviva, the UK-based life insurer, has
appointed JP Morgan and Deutsche
Bank to sell its stake in the Indian joint
venture Aviva Life Insurance with
Dabur's founding family members, the
Burmans, said two persons familiar
with the development, adding that the
company is valued at Rs 1,100 crore.
The insurance sector has been hobbled
by slowing growth, regulatory
restrictions and the capital-intensive
nature of the industry.
Aviva's 26% stake may be sold either to
another global insurer or to the
Burmans. The UK company joins a
growing tribe of multinational insurers
which are quitting India either because
of their troubles back home, or due to
their disappointment of not being
allowed to raise their holding beyond
26% in India. "Aviva has given out the
mandate to JP Morgan and Deutsche
Bank to sell India business," said a
person close to the development. The
company has performed poorly, and has
slipped to 13th in the rankings table
with its total premium income falling
11% last fiscal to Rs 2,140 crore.
FinNiche
NEWS OF THE WEEK
January 2014
Page 6
FINANCIAL KNOWLEDGE
Other income cushions RIL’s Q3 net
Reliance Industries reported a nearly
flat profit of Rs 5,511 crore due to the
falling gasproduction and refinery margi
ns for the December quarter but beat
analysts estimates as earnings from
investments and lower finance costs
compensated for a drop in operating
income. However, the oil-to-retail
conglomerate saw its revenues rise
10.5% to Rs 106,383 crore due
to higher prices of its products and a
marginal surge in volume.
Life insurers grapple with spike in
frauds
Insurance frauds are on the rise and a
number of life insurance companies are
reporting a sharp increase in cases of
fraud and misrepresentation of facts
with respect to selling of the product.
That's not all. The number of
unauthorized agents purporting to
represent companies has also risen
exponentially. For instance, during the
first half of 2013, nearly 50% of
customer complaints received by PNB
MetLife India was linked to fraud by
unauthorized agents. "This is a big
concern for the industry and regulator,
and both are working to educate the
customers and take action against
people resorting to such malpractices,"
Rajesh Relan, MD and country
manager, PNB MetLife India, said.
Obama signs $1.1 trillion spending
bill, rider for Pakistan aid
WASHINGTON: US President Barack
Obama has signed a $1.1 trillion
spending bill that puts conditions on
continuation of American aid to
Pakistan. "Goodness gracious, that is a
big piece of business. That is a big bill,"
Obama said as he signed the bill
yesterday that funds the federal
government through the end of
September. The 1,582-page bill passed
by both the House of Representatives
and the Senate requires a certification
from the Secretary of State and the
Defence Secretary that Pakistan is co-
o p e r a t i n g w i t h t h e U S i n
counterterrorism efforts against the
Haqqani Network, Quetta Shura
Taliban, Lashkar e-Tayyiba, Jaish-e-
Mohammed, al-Qaeda, and other
domestic and foreign terrorist groups.
18 killed, several injured in a
stampede in Mumbai
At least 18 persons were killed in a
stampede in South Mumbai area in the
wee hours on Saturday , officials said.
The incident occurred after 1 AM in the
Malabar H i l l a r ea whe re an
overwhelming crowd had gathered to
pay last respect to the departed
spiritual leader of Dawoodi Bohra
community, Dr Syedna Mohammed
Burhanuddin, a civic official told PTI.
The Syedna passed away here yesterday
at 102. His followers had started
thronging his residence at the Hill after
learning of his death. Over 40 people
were injured in the stampede, the
sources said. The injured have been
admitted to the Saifee Hospital.
FinNiche
NEWS
January 2014
Page 7
FINANCIAL KNOWLEDGE FinNiche
Market This Week
This week market showed significant weakness as the benchmark indexes closed low.
The CNX-Nifty closed at a loss of around 57 points and BSE Sensex at a loss of around
201 points. Whereas Six Sensex companies add Rs 32,064 crore in m-cap, Infosys was
the top gainer and posted a 21.4% rise in net profit and raised its revenue growth
outlook for this financial year. However LIC cut stake in Infosys to 3.71% and sold
shares worth Rs 2,600 crore.
SENSEX Simple Moving Averages
BSE SENSEX
CNX Nifty
January 2014
Thirty Days 20978.55
Fifty Days 20824.64
H0undred and Fifty Days 20012.36
Two Hundred Days 19869.31
Page 8
FINANCIAL KNOWLEDGE FinNiche
Bank Rate 8.75%
Repo Rate 7.75%
Reverse Repo Rate 6.75%
Cash Reserve Ratio 4%
Statutory Liquidity Ratio 23%
INR / 1 USD 61.54
INR / 1 Euro 83.3424
INR / 100 Jap. YEN 59.00
INR / 1 Pound Sterling 101.0841
Commodity Unit Rs / Unit % Change
Gold 10 grams 29265 (0.80)
Silver 1 Kg 45136 (1.33)
Crude Oil 1 bbl 5777 (-0.07)
Base Rate 9.80%-10.25%
Savings Deposit Rate 4.0%
Term Deposit Rate 8.00%-9.00%
Nifty Simple Moving Averages
Commodities
Lending / Deposit Rates
Thirty Days 6246.02
Fifty Days 6193.64
Hundred and Fifty Days 5954.91
Two Hundred Days 5940.12
Key Policy Rates and Reserve Ratios
Exchange Rates
January 2014
FinNiche
Fun Corner
Fin Quiz
1. ________ effect suggests that the stock market overreacts to relevant news, so
that extreme investment performance is reversed.
2. The book-to-market effect refers to the finding that firms with high ratios of
book value to market value tend to have annual returns ______________ than
returns for firms with lower ratios.
3. Empirical findings generally show that a typical common stock mutual fund has
a ______________. alpha
4. __________ term denotes the ratio of alpha to standard deviation of residual
return?
5. X invested in a project which has a 0.8 chance of doubling his investment in a
year and a 0.2 chance of halving his investment in a year. The standard
deviation of the rate of return on this investment is ————?
CARTOONS
FUN CORNER
Page 9
**Rush in your entries to : [email protected]
The right entries will get their name featured in the next
issue of FinXpress. So hit the quiz fast & get yourself
visible among 1000 odd in the campus.
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Volume Publisher: Rajat Kochar
January 2014
Last Week Answers
1.Chicken Market
2.Dundee Mutual Funds
3.UPS
4.Asset Tripping
5. Fiat money