SOFIA TIMES

Experience taught me a few things. One is

to listen to your gut, no matter how good

something sounds on paper. The second

is that you're generally better off sticking

with what you know. And the third is that

sometimes your best investments are the

ones you don't make.

-Donald Trump

In This Issue Market Update

Banking and Financial Services

Economy and Policy

International Outlook

Mergers and Acquisitions

Group Discussion Prep

MARKET UPDATE

Sensex gains; earnings in focus with eyes on RBI policy

The BSE Sensex rose on 8th Oct, 2013 to their highest close in

nearly two weeks, led by gains in lenders after the Reserve bank

of India (RBI) cut an overnight interest rate, further unwinding

extraordinary measures taken to defend the rupee.

Still, indexes failed to hold onto early gains of more than 1% as

broader sentiment is expected to turn cautious ahead of July-

September earnings which are expected to be weighed down by

weakening economic growth and the rupee volatility.

Weekly News Letter 14th October 2013

Sebi mulls raising MFs' minimum capital base to Rs 25 cr

The Securities and Exchange Board of India (Sebi) is considering raising the minimum capital for a mu-

tual fund to Rs 25 crore from the existing Rs 10 crore. The capital markets regulator initially wanted to

enhance the net worth requirement to Rs 100 crore. Strong protest from the segment has prompted

the Mutual Fund Advisory Committee(MFAC) to recommend raising the capital base to Rs 25 crore.

Sebi is keen on raising the minimum capital to ensure only ‘serious’ companies stay in the business. The

MFAC proposals allow some flexibility for MFs to define their net worth, said two people familiar with the

discussion.

The panel has proposed that ‘seeding’ of a fund by sponsors or promoters can be treated as capital, said

one of the two people mentioned. This means if a sponsor of an MF invests in the schemes, it would be

considered part of net worth.

Base metals to remain weak on US shutdown, Chinese overhang

Base metals (bullion market) are likely to remain under severe stress this

week following a drastic decline in risk appetite from China and the US where

traders and consumers stayed away from fresh buying.

While the government shutdown in the US due to a face-off between the Re-

publicans and the Democrats sent metals market into a tizzy, the ongoing holi-

day in China also hampered global trade amid uncertainty of traders’ move.

After a downward move, base metals led by copper recovered a bit towards

the end of last week on short-covering from opportunistic investors. In the last

one month, however, base metals largely remained range-bound in global

markets as they await directions from major economies.

BIS to make jewellery certification mandatory in metros

The Bureau of Indian Standard (BIS), the national standard body, of India, seems to

have made up its mind to implement yet another quality law, this time only for consum-

ers in metros.

Jewellery retailers in Delhi, Mumbai, Kolkata and Chennai will have to issue mandato-

rily a “card-like” certificate along with every piece of ornaments, giving gold content,

probably effective January 1, 2014. Issued by the BIS, the certificate is proposed to

contain details of all ingredients like purity of gold, type of other metals and stones, if

any. The certificate will also incorporate the photograph of the jewellery item, said the

source.

The proposed certification is over and above the ongoing practice of hallmarking in

metro cities. Like any other regulatory decisions, this has merits and demerits.

On strict implementation of this law, official sales of stolen jewellery will be restricted, as jewellers will seek certificates before entering into any deal. Also, smuggled jewel-lery will remain unsold. So, jewellers will have a fair trade practice with transparent ledgers for buy and sell of goods.

"A bank is a place that will lend you money if you can prove that you don't need it."

- Bob Hope

BANKING AND FINANCIAL SERVICES

Arundhati Bhattacharya takes charge at State Bank

At the age of 57, Arundhati Bhattacharya is the first woman to head State Bank of India.

About her career at SBI:

She joined SBI as a probationary officer in 1977.She has held a number of important positions in the

bank including Deputy Managing Director and Corporate Development Officer. She was also the Chief

General Manager for the Bangalore circle. Before taking over the reins of SBI, Arundhati Bhattacharya

was the Managing Director and Chief Financial Officer of the bank.

Areas she worked in:

She handled retail and corporate finance as well as treasury business during her tenure. Besides lead-

ing SBI Capital Markets, she also worked in the bank's New York office where she was in charge of

monitoring branch performance, overseeing external audit and correspondent relations.

Achievements:

She successfully set up three of the latest subsidiaries of SBI:

The General Insurance Arm

The Custodial subsidiary

The SBI Macquarie Infrastructure Fund

She also introduced a scheme that entitled all the employees equal insurance benefits as till then the

extent of such benefits was based on an employee's position.

Arundhati Bhattacharya is also known for her Human Resource policies. In SBI Capital Markets, She in-

troduced the provision of a sabbatical of up to 6 years for female staff on a first-come-first-served basis.

This policy helped the investment bank to retain many women executives, who otherwise, would have

quit.

Her strong point is her Collaborative leadership style and her employee friendly nature which will help

her deal with trade unions, which have opposed several management decisions, including merger of

subsidiaries, in the recent past.

Her appointment comes at a time when the bank is going through a rough patch because of slowing

economy and rising cases of corporate debt restructuring.

However, she is confident that this will pass as the bank is taking steps to improve its asset quality and it

has sufficient capital to meet regulatory norms and finance business growth.

SBI controls more than 16% of the banking business in the country and ranks among the top 50 banks

globally.

Other women successfully leading banks:

Shubhalakshmi Panse- Chirman and MD, Allahabad Bank

V R Iyer- Chairperson and MD, Bank of India

Archana Bhargava- Chairman and MD, United Bank of India

Usha Ananthasubramanian- Executive Director,

Punjab National Bank

Private Sector Banks:

Chanda Kochhar- ICICI Bank

Shikha Sharma- Axis Bank

India won't seek IMF funds in 5 years

India is not facing any financial nor economic crisis and will not approach the International Monetary Fund (IMF) for funds in the next five years. Reasons: 1. RBI has taken a series of measures to strengthen rupee and promote growth. 2. 22% of India’s GDP is external debt and India has a reserve of USD 280 billion which is 15% of GDP.

Therefore, we can pay three fourth of our debt from our forex reserves. 3. In case of extreme crisis and if the need be, we can pay off our debts in gold as we bought over $60 billion

dollar gold last year which is three fourth of our current account deficit. Even though the economy has slowed, the country's forex reserves are large enough. http://www.business-standard.com/article/economy-policy/india-won-t-seek-imf-funds-in-5-years-113101101004_1.html

Policy soon to facilitate entry of foreign banks: Raghuram Rajan, RBI Governor

The RBI is planning on a banking sector reform which would allow foreign banks to enter the Indian Market and even con-template taking over India Banks. This new policy is part of his five pillars of reforms. Rajan also stated that if the foreign banks adopt a wholly owned subsidiaries structure, they would be allowed near national treatment. But there would be two conditions: 1) The foreign country should allow the same treatment to our own banks 2) The foreign banks should either have a branch or a sub-sidiary, not both These conditions allow simplification of our regulatory func-tion. Once the foreign banks have a fully owned subsidiary, it would be allowed a lot of freedom. http://economictimes.indiatimes.com/news/economy/policy/policy-soon-to-facilitate-entry-of-foreign-banks-raghuram-rajan-rbi-governor/articleshow/24076219.cms

New bank licences: NBFCs may get priority

RBI Deputy Governor K C Chakrabarty said that for secur-ing banking licences, non-banking financial companies (NBFCs) will get priority as they have an advantage over other applicants in already having a good customer base. If they get a licence, they can easily convert themselves into a bank. In July, RBI received 26 applicants for new licences including from Tata Sons, IDFC and LIC Housing Finance. http://www.business-standard.com/article/finance/new-bank-licences-nbfcs-may-get-priority-113100901091_1.html

RBI eases cash squeeze again, cuts MSF rate

RBI had reduced MSF rate by 75 basis points in its mid-quarter policy review on September 20th indicating gradual reversal of liquidity tightening measures that were announced in July (RBI had raised the MSF rate to 10.25 per cent from 8.25 per cent, to arrest the rupee’s volatility against the dollar). In order to further ease liquidity situation, RBI reduced the MSF rate by 50 basis points to 9%. Also as around Rs.52000 crore of cash management bills are due for redemption from October 14 to October 22, this step will improve the liquidity situation and more money will be infused in the market. Some banks see the possibility of a cut in lending rates. Since the MSF rate cut has made liquidity available, spreads can be reduced for some loan segments. The cost of deposits that were high for banks will reduce due to additional liquidity. In twin moves to bring down the cost of money and ease liquidity, the RBI also announced seven-day and 14-day repo windows. After cutting the MSF rate by 50 basis points (0.5%), Raghuram Rajan is expected to hike repo rates from the current 7.5% level so that the difference between the repo rate and the MSF rate is no more than 100 basis points (1%). The differential between the two currently stands at 150 basis points (1.5%). The RBI is expected to reduce the MSF rate by another 25 basis points and hike the repo rate by 25 basis points in order to normalise the spread to 100 basis points. This monetary policy intervention is ex-pected to administered anytime between now and October 29 (monetary policy review) depending on the conditions in foreign exchange markets. MSF (Marginal Standing Facility): Marginal Standing Facility is the rate at which scheduled banks could borrow funds overnight from RBI against approved government securities. Banks can borrow funds through MSF during acute cash shortage. This measure has been introduced by RBI to regulate short-term asset liability mismatches more effectively. Basis Point: A basis point is a unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument. One basis point is equivalent to 0.01% (1/100th of a percent) or 0.0001 in decimal form. Repo Rate: Repo rate is the rate at which the central bank of a country (RBI in case of India) lends money to commer-cial banks in the event of any shortfall of funds. http://www.business-standard.com/article/opinion/raghuram-rajan-effect-working-well-for-currency-113100901249_1.html http://www.financialexpress.com/news/with-rs-pressure-easing-rbi-slashes-msf-rate-by-0.5-/1179512

http://www.business-standard.com/article/finance/rbi-eases-cash-squeeze-again-cuts-msf-rate-113100700696_1.html

ECONOMY AND POLICY

Expenditure cuts to compensate for stimulus to industry

The finance ministry is expecting savings of about Rs 50,000 crore in expenditure this financial year, which may help it meet its fiscal deficit target of 4.8% of the GDP, despite some shortfall in revenue collections, higher subsidies and additional capital infusion in banks. While about Rs 30,000 crore may remain unspent at the end of this year, against Rs 15,000 crore in 2012-13 (difference between Revised Estimates and ac-tual expenditure), Rs 15,000-20,000 crore may come by cutting Plan expenditure of ministries which fail to show utilization certificates for past funds. The finance ministry is determined to limit the fiscal deficit to 4.8% of the GDP and is trying its best to achieve this target.

More on this at http://www.business-standard.com/article/economy-policy/expenditure-cuts-to-compensate-

for-stimulus-to-industry-113101300243_1.html

RBI allows banks to borrow from multilateral agencies

The Reserve Bank of India (RBI) in a statement notified that banks can borrow from international and multilateral institutions up to 100% of their equity capital or $10 million, whichever is higher, till 30 November to fund their business needs. The move will enable banks to mobilise more funds from abroad as the domestic liquidity remains tight. Such borrowings shall be eligible for the concession-al swap facility offered by the Reserve Bank, the apex bank said. The RBI opened the swap facility for foreign currency deposits to encourage dollar inflow into the country. More on this at http://www.livemint.com/Politics/nkL1v4tbV4RoW2eCPzFw5L/RBI-allows-banks-to-borrow-from-multilateral-agencies.html

Five reasons why we shouldn't celebrate trade deficit numbers

The government officials might be in a mood to celebrate over the better than expected trade deficit num-bers. But this celebration is expected to be short lived. Lets see why 1] The fall in trade deficit is largely on account of fall in imports of non-oil and non-gold products. This is a bad sign as it signifies a slowdown in overall business activity in the country. 2] Gold imports have been strangulated by the government to control CAD. This has contributed significantly in bringing down the trade deficit and CAD. However, some relaxation in gold imports and festival season has seen a pick-up in gold imports since September end which is going to impact negatively on CAD 3] On a year-on-year basis oil imports have fallen by only 5.9 per cent but on a month-on-month basis it has come down by nearly 12.5 per cent 4] Exports growth at 11.2 per cent is commendable since it comes on the back of a 9.5 per cent growth in July and 13 per cent in August. Currency depreciation needs to be given more credit than any pick-up in de-mand. However with rupee strengthening Part of the benefit for exports has evaporated which can affect ex-ports growth going forward. 5] A US shutdown and closing of liquidity tap by the US is likely to impact not only the financial world but also manufacturing globally.

India’s trade deficit narrows to $6.7 billion

India’s trade deficit in September fell to its narrowest level in two-and-half years, raising expectations of a sharp decline in current account deficit, which could further boost the depreciating rupee. Trade deficit fell to $6.7 bil-lion last month, its lowest since March 2011, as exports continued to grow at double digits for the third consecu-tive month and imports contracted. In September, merchandise exports grew 11.15% to $27.68 billion, while im-ports contracted 18.1% to $34.44 billion. India’s current account deficit (CAD) widened sharply to 4.9% of gross domestic product (GDP) in the first quarter (April-June) of this fiscal year from 4% of GDP in the year-ago period mostly due to high gold imports In the past few months, the government has announced a number of steps to curtail imports of non-essential items and encourage capital flows to finance the CAD.

http://www.livemint.com/Politics/xjU9kcL5nU6sdghT46kC2K/Trade-deficit-narrows-to-67-bn-in-Sep-lowest-since

-March.html

INTERNATIONAL OUTLOOK

Banks guarantee $2-bn dollar loan to to the debt-laden Essar Steel

Indian lenders to the debt-laden Essar Steel have agreed to guarantee a $2-billion overseas loan for the steel-maker, which would allow it to repay a part of its Rs.31,500 crore rupee-denominated debt. The unconditional guarantee being offered by consortium, led by the State Bank of India (SBI), might well be the largest such guarantee offered in the recent past, bankers confirmed to FE. Rating agency CARE recently downgraded the company to “default” from BBB-, citing the ongoing delays in servicing of debt obligations by the company on account of its weakened liquidity position as a result of con-tinuing net losses. For more information, please visit http://www.financialexpress.com/news/banks-guarantee-2bn-dollar-loan-to-to-the-debtladen-essar-steel/1179569

Wall St Week Ahead: Debt-ceiling battle may overshadow earnings

US stock investors, hoping to leave politics aside to focus on fundamentals, aren't going to get their wish yet as lawmakers battle over raising the debt ceiling. Proof that political uncertainty was holding down markets was seen on Thursday and Friday as the S&P 500 generated two days of strong gains in advance of the weekend. Legislators will be busy negotiating raising the $16.7 trillion federal borrowing limit and reopening the federal government. If the borrowing cap is not increased by Oct 17, it could lead to a US debt default. For more information, please visit http://economictimes.indiatimes.com/markets/global-markets/wall-st-week-ahead-debt-ceiling-battle-may-overshadow-earnings/

Cyclone Phailin damage affects millions

India breathed a sigh of relief this morning as its worst cyclone in more than a decade caused wide-spread damage but moved inland without claiming the high human toll many had feared. Cyclone Phailin hit Orissa’s eastern coastal towns at speeds of more than 125 miles per hour, similar in strength of the 1999 super storm which killed more than 10,000 in the state, but according to officials only four deaths have been reported in the aftermath – a total of nine deaths. The cyclone’s intensity was described as “still strong,” but Sharat Sahu of the Indian Meteorological De-partment said it had “weakened considerably" after its landfall in Orissa. For more information, please visit http://www.telegraph.co.uk/news/worldnews/asia/india/10375607/Cyclone-Phailin-damage-affects-millions.html

U.S. to pump more oil than Russia in 2014

The United States is set to overtake Russia as the biggest oil producer outside OPEC during 2014 as shale production ramps up and helps reshape the global energy map. The International Energy Agency estimates U.S. production of oil and natural gas liquids will exceed 11 mil-lion barrels per day, making it the biggest producer outside OPEC, by the second quarter of next year. For more information, please visit http://money.cnn.com/2013/10/11/news/economy/us-oil-iea/index.html?iid=SF_BN_Lead

MERGERS AND ACQUISITIONS

WALMART, BHARTI PART WAYS

On 10th Oct 2013 billionaire Sunil Mittal-promoted Bharti Enterprises Ltd and Wal-Mart Stores Inc. have called off their Indian joint venture Bharti -Walmart, bringing to an end the troubled five-year saga of the com-pany that runs wholesale (or cash-and-carry) stores. They will independently own and operate separate retail businesses in the country. Here are 5 likely reasons for the split: 1. Retail business requires deep pockets: Bharti Airtel, the flagship of Bharti Enterprises and India's biggest mobile operator, has been struggling under a debt of $12 billion. The company reported a 14th con-secutive quarter of declining profits in June. 2. Low margins, high costs: The retail business entails high costs and narrow margins, so most big retailers in India lose money. 3. Policy uncertainty: In September 2012, the government announced that it would allow foreign su-permarket chains to take majority ownership of their local operations. But no global supermarket chain has applied to enter because of regulatory uncertainty. 4. Political uncertainty: The general elections in India are due by May 2014 and there are concerns that a BJP-led government could reverse the controversial retail reform. 5. Bribery scandal: Wal-Mart launched a global review of corruption last year and its lawyers flagged India among the countries with the highest corruption risk. The U.S. Foreign Corrupt Practices Act forbids Ameri-can firms from paying bribes. http://www.livemint.com/Companies/ZhVnG46uEx5HBJEG9I1ISP/Bharti-WalMart-go-separate-ways.html http://profit.ndtv.com/news/cheat-sheet/article-why-wal-mart-bharti-split-in-india-328426

Why Narendra Modi?

No politician in independent India has been demonized in such a relentless manner as Narendra Modi, and no politician has withstood it with as much resilience and courage as him, notwithstanding the entire Central government, influential sections of the media machinery and civil society aligned against him. Today, vast sections of civil society see in him the next Prime Minister of India. I hope he will plant more visi-ble footprints on the international seashore. He has to speak of peace and a durable solution to the Kashmir problem with the rulers of Pakistan. He must project himself as a great democratic leader of the world and a fighter for human rights and justice the world over.

A few short years ago, Modi’s ascension to the top political circles in the world’s largest democracy would have caused its own social media furor. The ambitious politician, though never convicted, has never been able to shake allegations that he failed to intervene in anti-Muslim riots that erupted in Gujarat on his watch in 2002. As many as 1000 Muslims were killed in days of violence that gripped the state, and for several years after, critics who blamed Modi for inflaming the rioters felt reasonably assured that he could never be consid-ered a viable candidate for prime minister in a nation where over 13% of the population is Muslim. In 2005, he was denied a visa to the U.S., and he has not visited the country since.

But at home, as the skilled politician built up accolades for the efficient management and relative prosperity of Gujarat, voters have kept him in power, and BJP leaders have embraced him as the best chance for the party in 2014. Many Modi detractors have watched in disbelief as support for him has risen; in one recent poll, he was preferred as the next leader of the nation over Congress political scion Rahul Gandhi, with 19% of re-spondents saying they would choose Modi as PM and only 12% saying the same for Gandhi.

Positives for Modi: In a corruption ridden country, Narendra Modi shines for his impeccable integrity. He has focused his entire energy on building in Gujarat an able administration and good governance. He has achieved phenomenal de-velopment and economic growth, and at the same time bolstered social inclusiveness. Through these he has worked hard to regain the confidence of the minorities, even as the relentless and pervasive hate campaign against him has continued unabated in the electronic media, among the fashionable intellectuals and civil so-ciety activists, who have become the media sweethearts.

GROUP DISCUSSION PREP

Narendra Modi, without taking into considerations the comments and appraisals of his political ri-vals and critics, is a political idol without a shadow of doubt. The nature of respect he commands throughout Gujarat is awe-inspiring. And after the end of Vajpayee era, he is the lone warrior standing tall in the NDA camp, often giving sleepless nights to the UPA government. He can retain the chair of CM of Gujarat as long as he wishes and presumably there is no one in the state who can give him even a close fight.

No matter how much we try to bring out the negativities in him, we cannot miss the charisma he radiates. He is the finest manager of Indian media amongst all leaders. He has excellent organiza-tional capabilities, dynamic personality and can motivate even a corpse to move with his powerful words, to name a few of his qualities. And the business stalwarts of the country seem to be in awe of him. The fact that GDP growth rate in Gujarat has been 11.05% over the past few years as against the national value of 9% is something one cannot overlook. Modi is today seen as a clean, efficient and no-nonsense administrator, an image that has been cultivated by sending messages to the right kind of audience. His model is one of ‘decentralization of planning and empowering people’.

Modi has built a reputation as an incorruptible and efficient technocrat who has electrified Gujarat's 18,000 villages - the state is the only one in India with a near 24/7 power supply - and slashed red tape to attract companies like Ford, Maruti Suzuki and Tata Motors.

Modi has nonetheless one achievement which should persuade the voters to treat him with a measure of respect. He is the only chief minister in the country who has not allowed the mischief-making Naxalites to create a niche for themselves within his state, and this despite Gujarat having a substantially large tribal population.

Negatives against Modi: Now there arises the sense of insecurity on Modi’s part. Another not-so-encouraging feature of Modi’s political personality is his ways of handling religious issues. Even when most of the Muslims and other Minority groups are claiming to be satisfied under Modi, there is still much left to be done in this area. Though he claims that he has risen above religions and castes, he is still very much the poster boy of ‘Hindutva’ and RSS. Even though Modi seems to be doing nothing wrong these days, he is still pretty much haunted by his alleged involvement in Godhra riot case; and as is truly said- ‘Corpses are not buried in politics.

The stigma that clung to him in the aftermath of the riots has not faded. Despite his achievements as an administrator, he is still viewed through the prism of the 2002 riots. However, all investiga-tions have cleared him of any personal responsibility but one of his former ministers, Maya Kodnani, was given 28 years in jail last year for her part in the killing of 97 people in Naroda Pati-ya. Opinion polls predict a close election with regional parties likely to be king-makers. Even if the BJP secures the most votes it could struggle to find partners to form a viable coalition government, especially with Modi at its head. Political observers are of the view that Modi could be rejected by Muslims and moderate Hindus. Modi’s campaigning outside Gujarat in 2009 brought out crowds but gathered few votes. Remember what Bihar Chief Minister Nitish Kumar had said: if you want to do politics in the country, you cannot stay away from skullcap and tilak. Madhya Pradesh chief minister Shivraj Singh Chouhan knows this. It will be tough going for him though in large parts of the country, particularly in the east and the south, where members of the main minority community constitute a sizeable part of the electorate. In the southern States, where the BJP has virtually no presence, the Congress’s loss cannot be the BJP’s gain. The Congress’s loss can be the BJP’s gain only in States like Madhya Pradesh, Rajasthan, Chhattisgarh, Uttarakhand, Gujarat and Delhi where the two national parties have a direct contest.

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