Journal of FInance Vol 19

8/9/2019 Journal of FInance Vol 19

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1. PETTY CORRUPTIONPetty corruption hits as hard as grand one

No country, particularly in the developing world, can afford to ignore the prevalence of petty corruption ifits efforts to reduce poverty and improve the record on human development are to yield the desiredprogress. Petty corruption, particularly in the form of bribes to access government-sponsored healthcareand education, and subsidised food and fuel takes away from the poor income they would have otherwise

used for essential consumption such as food.

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

Indias record on human development is very disappointing on the UNDPsHuman Development Indexof 177 countries for 2005, the nation ranked a poor 128. With high rates of absenteeism by teachers andhealth workers, the objectives of programmes such as Sarva Shiksha Abhiyan and National Rural HealthMission would be badly undermined. The United Nations Development Programme (UNDP) reportTackling Corruption, Transforming Liveshas pointed out that petty corruption hurts the poor the most,i.e., in all these instances; it is the poor who pay a bigger price.

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

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

That apart, UNDPs report cautions countries against assuming that the corruption would diminish as theireconomies grow. International experience suggests otherwise. A direct link between prevalence ofcorruption and growth is yet to be firmly established. Studies cited by the report show that 10% increasein corruption perception leads to 2.8% reduction in growth rate in Africa, 2.6% in Latin America and1.7% in Asia. To anyone who goes by a checklist of does and donts for curbing corruption, India appearsto have a good record. But a checklist alone does not help to estimate the extent of corruption or to curb it.

However, to permanently reduce occurrence of corruption, there is no shortcut to educating people abouttheir rights and empowering them to demand what they are entitled to. That would require all stakeholdersto work together government, the private sector, civil society, and the media. Individuals must alsoassert themselves as citizens and consumers. And as corruption is not confined to country borders, it isnecessary for solutions to be a global responsibility to be shared by international organisations andmultinational companies, international banks and aid agencies alike.


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2.1 SECURITY MARKETKeep your fingers crossed which way the Sensex might swing

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

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

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

Experts feel that even in subdued market situation, one can make money provided one is careful aboutwhat one chooses. Analysts say that the upside for the market in the near term looks capped with risingcommodity prices, margins coming under pressure and a moderation of demand due to high inflation. Butone can still find pockets of effective investments. The stock market by its very nature is cyclical. What iscalled a bear phase may well be the onset of a new bull-run and vice-versa. Year 2008 might be a toughyear after a strong five-year bull-run for stock markets but this doesnt mean the growth story for equitymarket is over. Analysts feel the common mistake that investors make is to become bullish in risingmarket situation and bearish in falling markets. They should be doing exactly the opposite.

1st week of June 08 Sensex slips below 16k

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

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

Sensex 16,415.57 (352.39) (100.62) (447.77) 254.93 (197.54)

Nifty 4,870.10 (130.50) (23.70) (130.30) 91.35 (49.15)

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

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

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


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SECURITY MARKET

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

Has the India growth story run its course for now? That was the thought troubling investors on Monday asthe 50-share Nifty slumped to an 8-month low and the Sensex slipped below psychological 15,000-markintra-day, breaching the low of January 2008 in the process. The weak sentiment was mainly driven byextreme negative global cues seen in US and against the backdrop of a sharp rise in global crude prices.

Also RBIs action of hiking the repo rate by 25 bps contributed to the negative market sentiment.

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

Sensex 15,572.18 (506.08) (176.85) 296.07 64.88 (60.58)

Nifty 4627.80 (126.85) (51.15) 73.80 15.75 (22.25)


Sensex 15,572.18 15,189.62 (382.56) (2.26%)

Nifty 4627.80 4,517.10 (110.70) (2.39%)

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week of June 08 Sensex slips below 15k

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

Daily review 13/06/08 16/06/08 17/06/08 18/06/08 19/06/08 20/06/08Sensex 15,189.62 206.20 301.08 (274.59) (334.32) (516.70)

Nifty 4,517.10 55.40 80.50 (70.60) (78.15) (156.70


Sensex 15,189.62 14,571.29 (618.33) (4.07%)

Nifty 4,517.10 4,347.55 (169.55) (3.75%)

4th week of June 08 Sensex slips below 14k

At the start of this calendar, market gurus predicted that bears might soon vanish from D Street. 6-monthson, it is the bulls that have become the endangered species. For the first time in 10 months, the Sensexslipped below the significant 14,000 mark intra-day trade on Tuesday. Last time the Sensex fell below14,000 was on August 21, 07. Oil above $ 141 a barrel was enough in deepens the gloom on Friday.

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

Sensex 14,571.29 (277.97) (186.74) 113.49 201.75 (619.60)

Nifty 4,347.55 (81.15) (75.30) 61.55 63.20 (179.20)


Sensex 14,571.29 13,802.22 (769.07) (5.28%)

Nifty 4,347.55 4136.65 (210.90) (4.85%)


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SECURITY MARKET

5th week of June 08 Sensex below 13,500


Sensex 13,802.22 13,461.60 (340.62) (2.47%)

Nifty 4136.65 4040.55 (96.10) (2.32%)

Monthly reviewMonth March 08 April 08 May 08 June 08

Date 31.03.08 30.04.08 30.05.08 30.06.08

Sensex 15,644.44 17,287.31 16,415.57 13,461.60

Points Base 1,642.87 (871.74) (2,953.97)

Percentage Base 10.50% (5.04%) (18.00%)

A single factor regime

The Indias equity market registering one of its worst ever first-half performances; while blow-off in the

oil-led commodity complex has contributed in a major way to the near 15% decline in global equitymarkets, Indias further 20% relative underperformance is entirely due to its high exposure to oil imports.

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

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

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

As was the case with the tech boom in the 1990s, price action tends to get very violent towards the finalstages of a bull-run and leads to all sorts of extrapolative forecasts involving ever-higher price targets. Itshard to forecast when such psychology will break. History suggests regimes in which a single factoroverwhelms market behaviour are eventually unsustainable. However, till the parabolic move in oil isover, market participants need care about just that variable in making all decisions.


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2.2 INDIAN ECONOMYEmerging markets are likely to take the lead now

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

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

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

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

At the global level, there are two broad ways of tackling the challenges. The first would require an actionof reduction of excess liquidity from the central banks. This would be addressing the problem from thesupplier of capital. The second would be tackling the challenge from the countries that are the primarydriver of demand. The first will involve a lot of painful adjustment in the developed world contributorsto global excess liquidity and the second will involve pain in the EMs primary driver of growthcurrently. A pragmatic solution would obviously lie somewhere in the middle as neither of the abovesolutions in isolation are likely to work. We are likely to witness the following.

The leading financial institutions are going through the step-adjustment process of making downsubprime assets and raising fresh capital to meet the capitalising requirements for including these off balance sheet assets. As the capitalising process gets completed, the liquidity support funds will startflowing back from the financial markets to the US and European Central Banks. These outflows ofliquidity will lead to shrinkage of global liquidity. The EM Central banks will have to take measures tocurtail local liquidity and consequently curtail the demand side. Once both the process are under way, we

are likely to see the trigger of the second round of risk aversion in the financial markets, and thecorrection of the bubbles created by global excess liquidity. They will, however, have to take care thatraising rates to tackle the demand side locally, with no reduction in global liquidity, will only push theEMs into stressful conditions with a less than satisfactory handle on the domestic inflation.

The financial markets will then witness the puncturing of the commodity as well as the EM real estate bubbles. It is only after these financial adjustments, the financial market will go through a period ofconsolidation and lay the foundation for the next round of world economic growth. The sheer differencein the GDP growth rates of the EMs vis--vis developed world will shift resources in favour of the EMs.


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2.3 INDIA INCCompanies valuations have taken a beating, vulnerable to takeover threats

Valuations of many companies have taken such a beating that their stocks are now available at a sharpdiscount to their book values in the current market. Some of these companies, particularly those with hugequality assets and good profitability record, may be vulnerable to takeover threats if their promoters donot own sufficient stakes to thwart such attempts. Such possibilities, however, also depend on many other

factors like the industry background and growth potential.

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

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

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

DLFs buyback

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

Value signal from buyback

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


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INDIA INC

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

Investors would, however, do well not to take increasing buyback offers to mean that the market is close

to its bottom. Just as in a bull-run exuberance takes shares to well past their fair value, in the downturn pessimism tends to drop them much below what is justified by their fundamentals. For corporates, particularly those who have surplus cash, low share prices are an opportunity for changing the capitalstructure of the company and enhancing shareholder return. It also helps them to get rid of unproductivecash, and reduces the risk of cash-rich companies making wasteful investments or imprudent acquisitions.

Videocon eyes Archies

Archies, the leader in Indias greeting cards market, has attracted some unwelcome attention fromVideocon. Over the past few months, the Videocon group controlled by Venugopal Dhoot has sent feelersto Moolchandanis the family which owns Archies Ltd for a possible buyout deal. But with

Moolchandani reportedly demanding a high price, Videocon is taking a hard-line stance. It is learnt thatentities owned by Dhoots have picked up over 4% shares of Archies from the open market in the past onemonth. The Videocon groups game plan is unclear at this stage. Given that the Moolchandanis controlwell over 51% in the listed company, Dhoots are unlikely to make much headway unless the promoters ofArchies (or, any faction in the family) decides to sell its stake to Dhoots.

Dividend yields up significantly

Even as the stock market meltdown has sucked out investors wealth from Dalal Street, it has opened up apossible investment option. Many firms dividend yields have shot up to 5-10% levels. Though dividendyield-led investment strategy tends to underperform in a bull market, it is considered a defensive strategy

in a market which is showing bearish tendencies, as it is currently. Dividend yield is calculated as thedividend announced divided by the stock price. Assuming other things constant, a high dividend yieldstock is seen a value pick.

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

Dividend yield can go up through two ways: actual dividend payout shooting up or stock price movingdown. While the companies have not increased dividend outflow substantially for 2007-08 the yields havegone up largely due to stock prices falling along with the overall market. Some of the stocks have dropped

pretty significantly which makes it important for investors to choose stocks which have some businessfundamentals so that the money made through dividends does not get neutralised by the loss coming fromdecline in stock price.


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2.4 INDIANSGlobal pathways

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

made him more cautious in his approach.

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

Having a global portfolio doesnt necessarily mean that youd get caught in the sub-prime crisis orcurrency fluctuations. Financial planners believe that global investments are a necessary component of abalanced portfolio. So, if youve an offshore exposure, it acts as a diversification tool and helps to evenout any big losses on the home ground. But before you make your global foray, its important tounderstand the dynamics of the investment tool you prefer to use.

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

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

BRIC & beyond

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

Why invest outside BRIC, when these markets are already delivering consistently good returns. Analystssay the answer lies in the unique opportunity the new markets are offering. These markets are expected togrow like BRIC did in the new millennium as they enter an era of fast-track reforms. For instanceColombia is an interesting market to explore. It is rich in resources and manpower. And now with thecountry stabilising politically, it can prove to be a dark horse in the world markets.


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2.5 FOREIGN FINANCIAL INSTITUTIONSFDI facing testing times may miss targets

Commerce minister Kamal Naths target to attract FDI worth $ 35 billion this fiscal year may be a littletoo ambitious, giving the unraveling global growth story. For one, the number and value of mergers andacquisitions (M&A) transactions have slumped. Besides, liquidity is drying up as several central bankshave tightened their monetary policy and companies are facing trouble raising reasonably priced debt to

part finance acquisitions. That apart, the global economy is slowing and there are not enough compellingreasons at this stage to invest in creating new capacities.

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

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

In a recent report, the OECD suggests that FDI outflows from the bloc would decline by $ 680 billion or37% from their 2007 levels, if the sharp slowdown in M&A activity in the first half of 2008 carriesthrough to the second half of the year. That would imply that the outflows might decline to the level seenin 2006. Last calendar was an exceptionally good year, with FDI inflows to and outflows from OECDreaching record highs. The total outward FDI from OECD rose 51% and inflows from this block to thedeveloping countries rose almost 30% to a record $ 471 billion. Brazil, Russia, India, China and SouthAfrica accounted for approximately 50-60% of outflows to the developing countries.

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

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

The OECD report states that historical relationship between developing country inflows and changes inOECD outflows suggests that the 37% drop in outflows could result in a decline of 40% in developingcountry inflows to around $ 240 billion in 2008, barring other offsetting factors. The report adds the possibility that the worst is over could improve the outlook for 2008, and if that happens, itsassumptions of international M&As and by extension FDI performance may be too pessimistic. Furtherincreased flow of FDI between developing countries could also mute the impact of eventual slowdown inoutward FDI flows from the OECD. The OECD report concludes that the relevant question at this stage isnot whether OECD FDI inflows will retreat from the records achieved in 2007, but rather by how much.

As for India, it would be safe to conclude that with the government and the RBI forcing a compression of

demand in their bid to control inflation, the investment climate is getting gradually gloomy.


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3.1 MUTUAL FUNDTime MFs put money into the market

The Indian stock markets should ideally reflect the strength of the domestic economy and corporatefundamentals rather than get totally swayed by the risk perception of FIIs. FIIs net sales of about $ 6.1billion (year to date), does not in any way mean that the economy has lost stream. Spiralling inflation,partly due to the surge in prices of crude oil and other commodities, and monetary tightening will slow

growth, but not enough to take the economy downhill. Nor does it warrant large-scale selling on the stockmarket. Almost all stocks have been hammered down by the bears, and many blue-chips are trading atprices close to their 52-week lows. But then, stock markets are not for the faint-hearted.

In volatile conditions, investments made with short-term horizon are bound to give negative returns.Staying invested in the medium-to-long term will be rewarding; the sensex and Nifty have returned about30-31% a year over the past five years, even after erasing nearly all the gains made over the past one year.Retail investors would do well to invest through mutual fund schemes the best managed diversifiedequity scheme delivered about 52% a year over the past five years.

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

Paperless MF transaction to make its mark soon

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

Its been a long time since funds have been looking for ease, efficiency and effectiveness while sellingfunds. An electronic platform is one of the easiest ways to bring down the cost of reaching out toinvestors across the country. Amfi has been discussing the platform with vendors in India and abroad and

is looking at getting the software up and running within the next two to three years. Fund houses feel thatthe current process where investors have to go via a distributor (or indeed directly) is extremelycumbersome. For instance, if an investor in Chandigarh wants to invest in Templeton funds through aregistrar based at Chennai, the forms actually moves from Chandigarh to Chennai. The platform is aimedat reducing such unnecessary paperwork to a bare minimum. Transactions conducted through the platformwill also be more secure and safe for the investor concerned. The Amfi plans to make use of therecommendations of the SMILE committee that was headed by PJ Nayak, an exhaustive study on easingthe IPO application process.


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3.2 COMMODITY MARKRTSupper Bubble

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

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

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

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

Oil and the seven myths

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

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

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

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

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COMMODITY MARKRT

Myth 3: Emerging market demand is price inelastic.

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

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

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

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

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

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

financial markets.

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

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

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


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COMMODITY MARKRT

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

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

Until late 2007, the rise in oil prices did not pose a problem for the global economy, in contrast to the1970s, when oil price increase largely represented a supply shock. In this decade, it is mainly a reflectionof booming economic demand in the developing world and till last year any major inflationary impactwas offset by high productivity growth in the global economy.

Over the past six months, the price of oil has risen at its fastest pace in recent history even as globaleconomic demand has slowed due to fears of supply shortages. So, the situation today is more analogousto late 1979 instead of 1970s the oil price shock has already happened with prices again rising by 900%

over the past decade. The global economy is at a point similar to 1979 when demand and the price of oilstarted to decline.

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

Securing future:Sowing seeds of success

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

No country scalded by volatile international market in recent months wants to depend on internationaltrading companies and vagaries of fluctuating prices. Nations want to be self-reliant rather than be caughtbetween paying the extortionate prices demanded by a handful of global trading companies and watchingtheir economies decelerate. Its the dig-your-own-pump-rather-than-rely-on-elusive-municipal-tankerapproach to life on a global scale.

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

China is certainly not alone. The sudden squeeze in global rice market and primary supplier Indias banon exports raised basmati prices so high that Saudi Arabia, the richest oil giant has decided to buy farmsin Africa to grow its own rice and breed livestock.


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COMMODITY MARKRT

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

India itself is among those seeking to augment local supplies with self-owned resources overseas. Publicsector oil marketing companies plan to invest in Brazilian ethanol to supplement local supply and protect

against failure of Indian cane crop. A handful of Indian edible oil companies may use Exim Bank loans tobuy 10,000 hectares of fertile farmland to grow soyabean, maize and sunflower in Uruguay and Paraguay.Another veg oil company is buying palm plantation in Indonesia to cut out middlemen.

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

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

One, it is a bolder and longer-term bet that the worlds need for food will greatly increase. Two, byowning land and other parts of the agricultural businesses, these new investors can legitimately callthemselves hedgers and slip out of the net cast to curb speculators and other financial investors oncommodity bourses. What is not clear is whether in the long term these financial investors want toactually dabble in growing food or simply want to have a direct link with the physical supply ofcommodities and thereby reduce their punting risks.

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

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

shield against the Evil Empire in a new avatar.

Price band mechanism

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


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COMMODITY MARKRT

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

Need for higher margin calls at energy derivatives

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

Oil boils to $ 141 on global jitters

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

Senior Israeli government functionaries have cautioned Iran that its nuclear installations could be attackedany day. If Iran continues with its program for developing nuclear weapons, we will attack it. Thesanctions are ineffective. Iran, which has taken on these threats head on, has begun preparing for anysuch exigency. According to a senior industry source lased in Dubai: Iran is already making

arrangements and has started storing crude in very large crude carrier (VLCCs) in the high seas. The tradehas it that Iran already moved about 13 such VLCCs carrying crude. VLCCs have a holding capacity ofalmost 2 million barrels.

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

Oil jumped over $ 140 also because Libya threatened to cut production, although it controls just 2% of thetotal output. Libya that holds Africas largest reserve of oil may cut down on output because of a US

legislation that allows terror victims to seize assets of foreign governments as compensation. In timeslike these, every marginal change in production results in higher prices.


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4. FINANCIAL SECTOR: TRANSFORMING TOMORROWBehaviour impacts your returns

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

1. FINANCIAL ADVISORS:Weigh impact on investors

Behavioural finance

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

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

2. FINANCIAL PLANNERSValue unlocking for all stakeholders

Common mistakes

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

Investors tend to be overconfident in their ability to make decisions in an uncertain world. We often set

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

People typically give too much weight to recent experience and extrapolate recent trends that are at oddswith long-run averages and statistical odds. They tend to become more optimistic when the market goesup and more pessimistic when the market goes down.


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FINANCIAL SECTOR: TRANSFORMING TOMORROW

3. RISK MANAGEMENT CONSULTANTSEducate Engineer and Enforce

Opportunities comes packaged with additional risk

Behavioural finance is important and can help us in making smart investment decisions. But it would be amisconception to say that behavioural finance means people could beat the market. Behavioural financedoesnt say: Theres easy money. Go after it. It simply pairs emotions with investments and shows howemotions and cognitive errors can cause disasters in our investment decisions.

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

Behavioural finance provides a platform to learn from peoples mistakes, to modify and improve theiroverall investment strategies and actually profit from identifying these mistakes. Even experiencedadvisors are susceptible to making the judgment errors identified by behavioural finance research. Theonly solution to avoiding this error is discipline. Set realistic goals for portfolios long-term return

4. WEALTH MANAGERSMap out the details to translate into benefits

The comfort of crowed herd mentalities

To humans, a group offers safety. Lets take an example from the Internet bubble of 2000. My stockswere simply not going anywhere. My friends were investing in the information technology stocks and

making a lot of money. There was so much excitement about these stocks. I did not understand muchabout IT companies but I bought stocks of IT companies; but soon regretted it, as I lost 70% of portfoliovalue. This is where behavioural finance helps in as it says that when everyone is excited about themarket, you should be extremely cautious.

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

Wealth managers advise investors to use their own analysis and judgement rather than following the

crowd. Dont invest in companies you dont understand. From the earlier example, many investors maysay of the Internet bubble, I had my doubts about IT stocks, but everyone else seemed so sure they werewinners. This is what is usually seen in the stock markets herding behaviour. Most of the times, othersinfluence our own investment decisions, against our better judgement. And this happens with the so-called experts of stock markets too.

In fact, studying Warren Buffetts investment career, it has been said that his greatest advantage is not oneof analysis, but rather his willingness to be anti-social.


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5. CREDIT COUNSELORSResolve convertibility and recompensation issue

Basic human trait

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

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

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

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

6TECH SAVVY PROFESSIONALSTake first step to ensure efficient and reliable system

Failure & Successes

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

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

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

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


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7. MICRO-FINANCE PROFESSIONALSDeveloping alternative credit delivery models

Touchy-feely syndrome

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

8. INCLUSIVE CEOs

Innovative responses to problems

Prospect Theory

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

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

Fear of regret

People tend to feel sorrow and grief after having made an error in judgement. Investors avoid sellingstocks that have gone down in order to avoid the pain and regret of having made a bad investment. SomeAnalysts feel: Investors follow the crowd and conventional wisdom to avoid the possibility of feelingregret in the event that their decisions prove to be incorrect. Similarly, many analysts believe that money

managers and advisors favour well-known and popular companies because they are less likely to be firedif they under-perform.

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


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10. CONTINUING LEARNING CENTRESTake informed decisions

Decision making process

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

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

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

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

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

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

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

11. GLOBAL OUTLOOKWorld is a village

Scapegoat

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

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

InFortune and Folly: The Wealth and Power of Institutional Investing, William M. O'Barr and John M.Conley concluded that officers of large pension plans hired investment managers for no other reason thanto provide someone else to take the blame and that the officers were motivated by culture, diffusion of

responsibility, and blame deflection in forming and implementing their investment strategy.

The theory is that they can protect their own jobs by risking the managers account.

If the account underperforms, it is the managers fault and they can be fired, but if they over perform theycan both take credit.


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12. ISSUES OF THE PRESENTFreedom to get & fail in the system of free enterprise

Bipolar behaviour

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

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

capital flows are slowing down more than they should.

Similarly, over the past two years, businesses had become convinced that the exchange rate would onlyappreciate given Indias robust growth story. The sentiment that the rupee would appreciate forever hassomewhat changed now. It is more realistic to imagine that the rupee could move the other way for awhile even if the growth story remains intact.

The question of redemption

Retail investors in mutual funds (MFs) have displayed surprising maturity, staying invested in equityschemes despite the sharp fall of the stock markets from mid-January. However, it is too early to conclude

that Indian have graduated to becoming long-term investors in equity and equity MFs.

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


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5. BANKING PRACTICESLearning lessons from subprime crisis

What implications does the turmoil in global financial markets have for Indian financial sector reforms?Consider the broadly accepted cause of the crisis. The financial sector in the US offered excessive creditto the housing sector, financed with excessive short-term leverage. The combination was explosive ashouse price growth slowed, credit losses mounted, financial institution balance sheets looked increasingly

shaky and opaque, and it became harder for them to roll over their borrowing. Excessive credit andexcessive leverage led to funding difficulties, problems that are now spilling over to the rest of theeconomy as credit is tightened.

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

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

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

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

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

In India, change will have to start with the legislation governing the regulators, where themicromanagement starts. For instance, the requirement that banks obtain regulatory approval for a rangeof routine business matters, including opening branches, remuneration to board members and even payment of fees to investment bankers managing equity capital offerings, is enshrined in the BankingRegulation Act. This legislation needs to be rewritten to focus on broad aims and objectives, leaving moreroom for regulators to determine their course of action, within the broad mandate. This is not unchartered

territory even in India. Sebis insider trading law, for example, operates on broad principles.

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


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6.1 TAX UPDATESE-Payment of tax

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

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

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

The recent change

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

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

hereunder:

Person carrying on business having gross turnover/sales from business exceeding Rs 40 lakh Person carrying on profession having gross receipt/income from profession exceeding Rs 10 lakh Others carrying on business of civil construction (section 44AD), playing/hiring/leasing goods

carriage (section 44AE), retail business (section 44AF), exploration of mineral oils (section 44BB)and turnkey power projects (section 44BBB) showing income lower than deemed rate/amount ofprofit/gains as specified in the above referred sections.

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

E-Payment through banks

As per the tax information network website of the Income-tax department, e-payment facilities areavailable to the taxpayer who has a net-banking account with any of the following banks: Axis Bank,State Bank of India, Punjab National Bank, Indian Overseas Bank, Canara Bank, Indian Bank, Bank of

India, Corporation Bank, State Bank of Bikaner & Jaipur, State Bank of Travancore, State Bank ofIndore, Vijaya Bank, HDFC Bank, Oriental Bank of Commerce, State Bank of Patiala, Bank of Baroda,IDBI Bank, State Bank of Mysore, Bank of Maharashtra, State Bank of Hyderabad, State Bank ofSaurashtra, Union Bank of India, Allahabad Bank, Dena Bank, Syndicate Bank, ICICI Bank, United Bankof India and UCO Bank.

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


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TAX UPDATES

SEZ land acquisitions under I-T scanner

Land acquisition by special economic zones (SEZ) has come under tax scanner. The income taxdepartment has upped the ante on tax deduction at source (TDS) on payment made for purchase of landfor these projects. Inspections and surveys by the I-T department have revealed that in several recent SEZ

land transactions; there was no deduction of tax. TDS in such cases has to be deducted at the rate of 1%for payments exceeding Rs 15 lakh.

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

TDS on SEZ land acquisitions issue figured at the annual conference of chief commissioners and directorsgeneral of income tax. Officials have been instructed to specially watch out for such transactions for

additional revenue mobilisation in the current fiscal. There has been an increased focus on the TDS by I-Tdepartment, which created a separate directorate to monitor collections under this head. The governmentsTDS collections grew by 51% in 2007-08 to Rs 1, 06,700 crore from the mere 2.36% in 2004-05.

The Prevention of Money Laundering (Amendment) Bill, 2008

The Union Cabinet gave its approval for introduction of prevention of Money Laundering (Amendment)Bill, 2008 in Parliament. According to this amendment, it will be mandatory for financial intermediariesto report all suspected transactions involving international transfers to the financial intelligence unit(FIU). At present, only banks and other financial institutions have to report suspicious transactions on a

regular basis to the FIU under the finance ministry. The bill will give more teeth to the legislation withprovisions for punitive action for money laundering.

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


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6.2 SECURITY LAWS UPDATES

Enemy property

A small advertisement, tucked away in the inside pages of The Economic Times recently, invited bids for266 shares of United Breweries, which were being offered on a right basis by the company and had beenrenounced by their original holder. There was only one hitch: the company was not inviting the bids.

Neither was any individual shareholder inviting the bids. An arm of the government called the Custodianof Enemy Property for India was inviting the bids.

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

So, all properties across India, which were owned by, or even managed on behalf of, Pakistani nations between September 26, 1965 and September 26, 1977, are now vested with the custodian. At currentreckoning, this office manages 2,943 cases of enemy property which includes both real estate assets aswell as financial assets like securities, shares, debentures, bank balances (such as fixed deposits and otheramounts lying in the enemy national bank accounts) and provident fund balances. In addition, thecustodian also manages two banks Habib Bank and National Bank of Pakistan. The custodian receivesincome from these investments in the form of rent, dividend, and interest on securities and re-investsit in 364-day T-bills. In the past the custodian has used proceeds from these investments to part-compensate Indian nationals and companies claiming to have lost property in Pakistan. Like a goodmutual fund, the custodian also receives a 2% of the investment proceeds as asset management fee.

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

Transmission of shares

Market regulator Sebi is expected to accept most of the recommendations of the group that was formed tolook into the matter relating to transfer of shares of deceased shareholders. This will pave the way forquick transmission of shares and benefit those who have inherited them in physical form. The companieswould have to fix a threshold limit of 200 shares or Rs 1 lakh whichever is higher, for transmission ofshares after submitting the standardised documents. Companies would require an affidavit, deed ofindemnity and a no-objection certificate in case there are other legal heirs. The threshold limit will have tobe adhered to by all listed companies. Companies that have a higher threshold can continue with that,


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6.3 INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)The impact on Indian corporates

The use of IFRS as a universal financial reporting language is gaining momentum across the globe. Overa 100 countries in the European Union, Africa, West Asia and Asia-Pacific regions either require orpermit the use of IFRS. The Institute of Chartered Accountants of India (ICAI) has recently released aconcept paper on Convergence with IFRS in India, detailing the strategy for adoption of IFRS in India

with effect from April 1, 2011. This has been strengthened by a recent announcement from the ministry ofcorporate affairs (MCA) confirming the agenda for convergence with IFRS in India by 2011. Even in theUS there is an ongoing debate regarding the adoption of IFRS replacing US GAAP.

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

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

Improvement in comparability of financial information and financial performance with global peersand industry standards. This will result in more transparent financial reporting of a companysactivities which will benefit investors, customers and other key stakeholders in India and overseas;

The adoption of IFRS is expected to result in better quality of financial reporting due to consistentapplication of accounting principles and improvement in reliability of financial statements. This, inturn, will lead to increased trust and reliance placed by investors, analysts and other stakeholders in acompanys financial statements; and

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

However, the perceived benefits from IFRS adoption are based on the experience of IFRS compliant

countries in a period of mild economic conditions. The current decline in market confidence in India and

overseas coupled with tougher economic conditions may present significant challenges to Indiancompanies.

IFRS requires application offair value principles in certain situations and this would result in significantdifferences from financial information currently presented, especially relating to financial instrumentsand business combinations. Given the current economic scenario, this could result in significantvolatility in reported earnings and key performance measures like EPS and P/E ratios. Indian companieswill have to build awareness amongst investors and analysts to explain the reasons for this volatility inorder to improve understanding, and increase transparency and reliability of their financial statements.


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INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

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

Although IFRS are principles-based standards, they offer certain accounting policy choices to preparers of

financial statements.For example, the use of a cost-based model or a revaluation model in accounting forinvestment properties. This could reduce consistency and comparability of financial information to acertain extent and therefore reduce some of the benefits from IFRS adoption. IFRS are formulated by theInternational Accounting Standards Board (IASB) which is an international standard-setting body.However, the responsibility for enforcement and providing guidance on implementation vests with localgovernment and accounting and regulatory bodies, such as the ICAI in India. Consequently, there may bedifferences in interpretation or practical application of IFRS provisions, which could further reduceconsistency in financial reporting and comparability with global peers. The ICAI will have to makeadequate investments and build infrastructure to ensure compliance with IFRS.

In addition to the above, there are several impediments and practical challenges to adoption of and full

compliance with IFRS in India. These are:

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

For example, the Companies Act, 1956 determines t

Documents

Journal of FInance Vol 19