Vol 18

8/9/2019 www.journaloffinance.in Vol 18

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1. ILL-CONCEIVED STATEMENTSSomething missing

US President George Bushs statement that rising food consumption in fast-growing India and China is amajor cause of the rapid increase in world food prices is both ill-timed and ill-conceived. The statementcomes at a time when there is a need for food-production and cooperation in easing global supply anddistribution of food.

Currently many food-producing economies have gone somewhat into a panic mode and are putting curbson grain exports. It is a problem that needs a rational global response. The US could have played apositive role in this. Bushs statement will not help the cause at all. On the contrary, it may provoke somefood-producing countries to put further restrictions on trading of agricultural items.

Bushs statement lacks the rigour of facts. The United Nations data released by Food and AgricultureOrganisation (FAO) reveals that American cereal consumption has grown close to 12% since 2006compared to less than 2.5% increase in cereal intake by India and China, the world average being 2.6%.So, cereal consumption in the US is way higher than the world average, largely because it has beenencouraging diversion of large quantities of grains like maize, into bio-fuel production.

The classic theory of demand, the foundation on which other principles of economics are built, states that prices are determined, other things being equal, by the demand and supply forces in the market. The

current spiralling of agricultural commodity prices is also by and large justified on the same logic.

However a look at the supply-demand data of agricultural commodities reveals a different picture: theglobal scenario has not changed that drastically to warrant such spiralling prices.

There have been umpteen columns analysing the effects of substitution, diversion of food crops for bio-fuel, etc. on prices. Still something was missing in the whole casual loop till the subprime crisis in the US,and the recent sharp fall of sensex. These events bought out the definitive link between the financialmarket and the commodity market and provided the missing plank. The link is the speculators, whoseneeds are simple: just need to make money. So when the financial sector is in the mood of embrace themin its bearish hug, they deftly move away and sit on the bull riding high in the commodity market! Andthey are not disappointed.

However, what is important is the impact of their games on the real economy. As players in the financialmarket, their activities do not impact the real economy much; in fact everybody is happy when the sensexis northward bound. The same activity in the commodity market, however, brings cheer to only thoseplayers. This is because the underlying is a commodity that is very much real. Add to this the impact ofsubstitute. For example, crude prices breached the $ 135 per barrel mark mainly due to speculators. Thisled to a greater demand for its substitute, namely bio-fuel products, which in turn increased their rawmaterial prices and fuelled more speculative activity in the now booming commodity market.

Earlier it is said that unlike the real sector, the financial sector is global and shocks are felt immediately.However, the recent experience in both the financial and the commodity markets prove otherwise. Theshocks felt at CBOT or BURSA gets transmitted, in real time, across the globe, whereas the shocks of theUS subprime crisis is being dissipated with a definite delay. So, the impacts of commodity shocks are farreaching and fast. What is needed is to develop the immune systems in order to provide a protective shieldagainst the vagaries of markets; a sort of decoupling of the real and financial sectors domestically, atleast. Our immune system lies in the development of the real sector. Growth led by growth in financialsector will certainly boost the overall GDP, but may not sustain without growth in the real sector.


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ILL-CONCEIVED STATEMENTS

Lipsky warned that the recent pickup in inflation rates around the world in part reflected the impact ofhigher energy and commodity prices. This inflation speed-up must be taken seriously as it createspotentially significant challenges to economic stability that could undermine prospects for resorting thecombination of solid growth and low inflation that prevailed earlier in the decade. To put the issuestarkly, inflation risks have reemerged as a global challenge following a long absence.

He called on governments to initiate steps to encourage investment in energy, reduce biofuel subsidiesand improve agricultural policies. He said the IMF was also working to help developing countries thathave been worst affected by the commodities hikes and to develop strategies that can be adopted bymember countries. Lipsky said that, in the IMFs view, policies will need to adjust both to the reality ofpermanent relative price shifts and, in some cases, to a broader resurgence in inflation.

BRIC meeting scheduled to find solution

At a time when the US and EU are blaming food and oil shortages on countries like India and China,foreign minister of India, Brazil, Russia and China will be meeting soon in a small town in Russia todiscuss the issue of biofuel, energy security, food security, global financial trends, and impact of theslowdown of the US economy.

Food security and increasing prices were bought into the international limelight when food riots broke outin some parts of the world. The developing countries have argued at the WTO that the fault lies withindustrialised countries which are using agriculture subsidies to undercut the agriculture output of othercountries leading to reduced food production.

India is likely to argue that one country cannot be held responsible for the rise in food prices and there is a

need for a global approach to resolve the issue. In this scenario, the meeting of the BRIC countries comesat an opportune time and is being seen as an opportunity for the four countries to provide their ownassessment of key economic issues facing the world.

Plan, Preserve or Parish

We are watching the death of just-in-time (JIT) school of inventory management. Since the beginning ofagriculture, farmers have recognised the need to manage stocks of grains to prevent starvation in times ofscarcity. In the Hebrew Bible, the Egyptians were directed to stockpile seven years of harvests inpreparation for seven years of famine.

We hadnt come too far from that. To ensure food security, many countries stockpiled strategic gainreserves. Grains are an easy-to-store and nutritious way to provide the basic needs of a population facinga food emergency until alternative food supplies can be arranged. But in the late Eighties, managementGurus began chiding companies for locking up resources in inventories. The guiding principle was dontwaste time, energy and cash in stockpiling inputs when you can get suppliers to deliver at the precisemoment your factory needs them.


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To be fair, JIT did appear to make sense 10 years ago. With rapid developments in IT, freight handling,shipping and ample supply; it was the sensible thing to do. At around the same time, IMF and the WorldBank began preaching the wisdom of liberalised agriculture trade. So governments in the worlds topgrain consuming and exporting nations brought into the JIT-argument.

The US dismantled its strategic grain reserves with the 1996 Farm Bill. By year 2000, China haddiscarded its low-quality, low-value grain reserves. India reduced its buffer stock norms in 2004. The EUhad intervention stocks of 16.5 million tonne at the start of 2005-06. By April 2008, they were whittleddown to only 236,000 tonne corn held in Hungaria. Overall, the EU grain ending stocks in 2007-08 willbe down to 27.1 mt compared to 46.1 mt just two years earlier, all of this in commercial hands.

For the private sector, the cost of holding stocks, use of JIT and years of readily available global suppliesprovided incentives to reduce stock holding. Over the last decade, the shift toward more liberalised tradereduced trade barriers and facilitated trade, which in turn reduced the need for individual countries to holdstocks. Since 1999, the global stock-to-use ratio for the aggregate of grains and oilseeds declined fromabout 30% to less than 15% currently.

But it took only 24 months, a bull run in crude oil and a couple of bad harvests to bring votaries of JIT totheir knees. Any policy maker today, banking on just-in-time delivery of food or raw materials can onlyappear quixotic. Its simply too dangerous. The global aggregate stock-to-use ratio for grains and annualoilseeds is the lowest since 1970. Stocks in major exporting countries are particularly low. Obviously,importing countries are anxious because they now have fewer sources. Even a relatively small importorder from Egypt makes CBoT jump. This has scared importing countries into buying additional supplies,even at record high prices.

In Asia, the World Bank constantly assured the Philippines, even as recently as last year, that self-sufficiency in rice was unnecessary, and that the world market would take care of its needs. Now thegovernment is in a desperate plight: Its domestic supply of subsidised rice is nearly exhausted and itcannot import all it needs because traders asking prices are too high.

When there is no guarantee of how oil prices, weather, politics or hedge funds will move tomorrow, howdo you feed your population? The answer is suddenly staring at us in the face.

Across the world government are junking JIT. Stocking up is the new mantra. There is a clamour toincrease strategic grain reserves in the US, China, Russia, Indonesia and India, to name a few.

As, Dennis Olson from the Institute for Agriculture and Trade Policy says: Strategic reserves would helpreduce the dangerous volatility that can harm everyone. Simultaneously, the market is slowly realising

that it needs to pay people to hold stocks to be consumed in future. Traders are showing a willingness topay carrying cost in grains such as wheat to help build up inventories. You can see that in the way priceof far month contracts is slowly rising above expected future spot prices.


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Crude prices at record high

The inflation is the name of the game. The fires of oil prices surges sweep across the globe and nobodywill come out unscathed. But there will be winners and losers. Crude oil at $ 135 per barrel this is thestuff of fantasy for the commodity punter and a nightmare for the rest. The explanation put forward forwhy price of oil has been going up so much can be categorised into: rising demand from India and China;

fear of supply disruption, i.e., geopolitical risk; fall in the US dollar; and thin supply cushions becauseinadequate investments were made in the nineties when oil prices were falling.

However, these arguments do not explain why oil prices are where they are. Global demand for oil between 1980 and 2003 grew by 1.3% to 1.6% per annum. In 2004 it soared 3.9%, mostly becauseChinese consumption jumped and partly because US consumption rose. In 2005 world demand growthwas more again modest at 1.7%. In the course of these two years, crude oil prices doubled. In US dollar,this at the end of 2005 was $ 61. In 2006 world demand grew by 1.1% and in 2007 by just 0.9%. But pricetoday has touched $ 135/bbl. Thus while world oil demand rose by just 1% p.a. crude prices shot up morethan double in US dollar terms over the past two years.

So, first, oil demand at the aggregate level has not been blowing. Second, the geopolitical risk, there weretensions and conflicts aplenty in the past several years; thus there is a kind of plausibility in the argument.Till November 2007 there was a risk of something happening about Iran and this was offered up thereason for oil rising past $ 90/bbl. Since the US National Intelligence Estimate cleared the air on that, andwith conditions in Iraq clearly improved, there is no current crisis that can be used to explain geo-political premiums. There is some substance to the argument that investments lagged in the nineties, buthardly adequate to explain why output cannot keep pace with demand rising at 1% annually.

The answer lies elsewhere. To reverse the decline in oil prices in the fall of 2006, after the Lebanon war,OPEC cut its production quota by 1.2 mb/d in November 2006 and by another 0.5 mb/d in February 2007.That is a total of 1.7 mb/d, taking 2% of global output off the market. Normal market forces thus have

nothing to do with this calculating and adept leveraging of monopolistic powers in a market where thenegotiating powers of the consumer nations are depressed. Oil exporters have discovered that the ineptconsumers of today can live with $ 100 plus /bbl. The waters have been thoroughly tested at $ 60, $ 70, $80 and now $ 100, $ 110, $ 120, $ 130 plus per barrel.

The whole idea thrives on scarcity : When we speak of future trading in commodities, we may bereferring to a situation in which traders and hoarders buy out the produces cheaply and then raise pricesby creating false scarcity. The most appropriate, and therefore the worst, example of this has been theastronomical rise in the price of crude oil. A US senate panel has not only conducted an enquiry but alsohas come to the definite conclusion that the uncontrollable surge in crude prices is without doubt theoutcome of Hedge funds having taken bets worth $ 12 trillion and more on oil futures. That this could

raise the price of crude to over $ 200 a barrel in the next four to five months seems no longer animplausible or impossible proposition.

An April 24 report on the Dow Jones online Financial News notes that oil speculators have offered to buymore than the producers can produce, and even artificially raising prices among themselves. This spike,clearly, has nothing whatsoever to do with the actual scarcity or not of a commodity. Commodities arebeing traded on in this profligate manner because stocks and shares have failed to deliver.

Crude prices at record high


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2.1 SECURITY MARKETGreat returns are invariably made by investing amid panic and pessimism

Equities have traditionally outperformed all assets classes over a longer period of time. In a growingeconomy like India, exposure to equities is essential in the overall asset allocation of every investor. Ofcourse, many investors know this. But there are still many others, who havent joined the ring as yet,waiting for an opportune time. In fact, the recent correction from the heady level of 21,000 is an

opportunity that first-timers need to capitalise on.

Yes, the times are uncertain and markets have been highly volatile. But remember most successfulinvestors have made money by investing in uncertain times. Thats because perceived risk and actual riskseldom go hand in hand. At 21,000 Sensex level, the actual risk was much higher but optimism was at itspeak. Similarly, at around 15,000-16,000 levels (with a correction of close to 25% in the benchmark indexand that of around 30-40% in many fundamentally sound stocks), the actual risk was far lower butpessimism was written all over. Clearly, sentiments tend to overshoot fundamentals in both the directions.

Notwithstanding the recent correction and continued volatility, the long-term bullish outlook on equitiesin India remains intact. Fundamentally, even after factoring in the recent deterioration in the macro-economic environment domestically, India would continue to be among the fastest growing economieswith a growth of around 8% in 2008-09. The GDP growth would be supported by the continued upturn inthe investment cycle, spending on infrastructure and industrial capital expenditure. On the other hand, thedemand push will be aided by boosting consumption through a lower personal tax and the implementationof the Sixth Pay Commissions generous recommendations.

The reasonably decent Q4 results and expectations of a normal monsoon this year should provide therequired trigger for bringing about a change in the overall market sentiment. Consequently,notwithstanding the volatility in the short term, we believe that Indian equity markets will providehandsome returns and outperform the other asset classes in the longer term. Keep the faith.

APRIL 2008:Inflation fails to dent market mood

The Indian stock markets seem to be outperforming even as inflation is hitting new highs. Indiaoutperformed the emerging and Asia Pacific markets in April 08 after three successive months ofunderperformance finished the month as the sixth best performing emerging market.

However, India has been among the worst performing emerging markets since the beginning of the year

and despite the strong performance in April, year to date, India ranks twenty third out of 25 emerging

markets, according to Morgan Stanley.

According to the Morgan Stanley, FII flows in the future market remained strong in April 08 for thefourth month running. Domestic institutions turned into marginal buyers after large scale selling inMarch. FIIs have bought $ 6.5 billion worth of stocks and derivatives since the start of 2008 (12% higherthan the corresponding period last year) whereas domestic institutions have bought $ 1.6 billion.

In April, cash trading volume (number of shares) rose 8% month on month (MoM), after falling for threesuccessive months, although it is still off 40% from its December 2007 peak. Trading volumes in valuealso rose by 3% MoM, but they are still 44% below is January 2008 peak. Market breadth gained a further27% MoM in April but remains 27% below its January high.


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SEURITY MARKET

1st week of May 08 trade on single day out of two Sensex shoots up 313 points to 17,600

Inflation fully discounted again:Inflation rose yet again to scorching 7.57% for the week ended April 19 registering a 42-month high. However, there are some signs that the rise in the price index ismoderating. Strong procurement of wheat to the tune of 154 lakh tonnes for the governments buffer stock

is likely to dampen inflationary expectations somewhat. Reacting to inflation numbers, Finance Ministerprovided hope by saying current inflation is likely to be contained.

It may appear that above a certain point, inflation is actually a good thing for the stock market. Even asinflation climbed to a 42-month high; Sensex shot up 313 points on Friday. Markets again discountedinflation concerns with global markets showing signs of stability. On 30th April, the Reserve Bankssurprise decision to keep the key lending rates steady in its annual monetary policy had cheered themarket. Another major development was the Federal Reserves meeting on 30 th April. The Feds rate cutby 25 basis point taking it to 2% from 2.25% earlier followed by a surprise decline in US jobless rate onlyshowed positive signs for economy after several months of stagnation.

Daily review 30/04/08 01/05/08 02/05/08Sensex 17,287.31 0 312.81

Nifty 5,165.90 0 62.30

Weekly review 30/04/08 02/05/08 Points Percentage

Sensex 17,287.31 17,600.12 312.81 1.77%

Nifty 5,165.90 5,228.20 62.30 1.19%

WEEK AHEAD:The tests over, now wait for reaction

Last week there were two economic events lined up the RBI credit policy on 29 th April and the US Fedmeeting on 30th April, which were keenly awaited by the markets. Both these events passed off smoothly.Both these factors had a positive impact on our markets which saw both the Sensex and Nifty cruise inpositive territory.

Moving ahead, the markets now seem to be in a more vibrant mood considering that two key macroeconomic events are through smoothly and corporate results are by and large positive, although profitmargins in select sectors have been impacted by higher input and interest costs. Nevertheless, the sense isthat despite competitive pressures, earnings growth for Sensex companies would still be in the range of15-16% annually for FY09E which is attractive.

With the corporate results season getting more or less completed, the market focus would now hereon beon the forthcoming monsoons and how quickly the government reins in inflationary trends in theeconomy. However, inflation levels are likely to remain high for the next two to three weeks before wesee some noticeable improvement. Also, currently the market sentiment is edgy and slightly cautioustowards equities from all market participants such as FIIs, domestic mutual funds and HNIs. The retailinvestors may find opportunity to buy in to fundamentally strong companies that have lost groundsignificantly along with the market.


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SEURITY MARKET

2nd week of May 08 Sensex down 4.90%

Daily review 02/05/08 05/05/08 06/05/08 07/05/08 08/05/08 09/05/08

Sensex 17,600.12 (109.22) (117.89) (33.70) (258.66) (343.58)

Nifty 5,228.20 (35.95) (47.60) (9.15) (53.80) (99.10)


Sensex 17,600.12 16,737.07 (863.05) (4.90%)

Nifty 5,228.20 4982.60 (245.60) (4.72%)

The capital market during the week mirrored the weak US market trends and closed on a negative note.Clearly, two events which impacted market sentiments were the unrelenting sharp rise in crude oil prices touching a record high level of $ 124 a barrel and the rupee falling sharply by 3% in a span of justfour days from 40.61 per $ to 41.74 per $ during the week.

Rising crude prices coupled with a weakening rupee, are definitely not good signs for India as thesewould lead to higher trade deficit since the country still imports 70% of its crude oil requirement.Already, Indian oil PSUs are losing around Rs 450 crore daily on account of under recoveries. Severaluser industry segments such as aviation, automotives, fertilisers, FMGC and pharmaceuticals are expectedto bear the burnt of higher inputs costs as they go ahead.

Nevertheless, despite the short term pains, India still remains a strong economy and is now structurally ina much stronger position, leading the people to believe that the GDP growth will still average around 9%during 2008 which is not bad as compared to other Asia-Pacific countries. Interestingly a recentresearch study by Barclays Wealth UK has indicated that India would become the eighth wealthiest nationby 2017 in terms of a significantly large number of Indians becoming dollar millionaires over the nextdecade with the entire wealth held by these households likely to total an estimated $ 1.7 trillion. A majorcomposition of these assets is likely to find its way into financial assets, especially in Indian equities,which puts India in a sweetspot when compared to global peers.

WEEK AHEAD:Markets attain normalcy as volatility subsides

The renewed stability in markets is here to stay, after months of turmoil, if indicators in the futures andoptions segment are any thing to go by. The volatility index or VIX on the NSE an indicator ofinvestors perception of future volatility has sustained below the 30 levels for over a week now, for thefirst time since the crash that happened mid-January. The VIX is a measure of the amount by which anunderlying Index is expected to fluctuate, in the near term, based on the order book of the underlyingindex options. India VIX is based on option prices of components on the Nifty 50 Index.

Usually, when market volatility is high, volatility index tends to rise. As volatility subsides, option pricestend to decline, which in turn causes volatility index to decline. Traders prefer options to futures involatility times, as losses are limited in case of option buyers. In the beginning of this year, before themarket crashed, Index was at 25-28 levels. The index thereafter jumped to over 50 levels in the last weekof January and subsequently traded in 40s, with the benchmark Nifty melting roughly 30% from its high.On Friday, the volatility indicator closed at 27.53 points.


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SEURITY MARKET

3rd week of May 08 Sensex up 4.17%

Daily review 09/05/08 12/05/08 13/05/08 14/05/08 15/05/08 16/05/08

Sensex 16,737.07 123.83 (108.04) 225.49 375.19 81.40

Nifty 4982.60 30.05 (54.85) 53.95 103.50 42.45


Sensex 16,737.07 17,434.94 697.87 4.17%Nifty 4982.60 5157.70 175.10 3.51%

The rally during the week has cheered the bulls. However, the time gap between the market recoveriesthis time after correction has given them a reason to rethink if the rally will continue.

Past analysis has shown that the recovery time after the market corrects (nearly 15%) from their peak hasbeen going down steadily. Market participants say this time around, the correction was quite steep andlocal and global sentiments were badly affected. Even if there is not much bad news that comes, it mighttake a while before the market touches its new peak.

WEEK AHEAD:Momentum-driven rally

The Indian capital markets witnessed a typical momentum-driven rally last week with indices closing inpositive territory. A large part of this momentum was triggered due to the continued depreciation of theIndian rupee during this week, taking the rupee to a low of $ 42.92 and finally closing at $ 42.53 by theend of the week.

The other soothing factor for the markets was the cooling-off effect from higher crude prices which, after

touching a high of $ 126 a barrel, came off by 2% during the week to close at around $ 124 a barrel.

Both these developments were strong enough for the markets to overshadow the steep fall in IIP numbersdeclared, to 3% during March 2008, with annualised IIP numbers growing slower at 8.1% in fiscal 2007-08 from 11.6% last year.

Experts estimate that Indian GDP growth is likely to slow down. On the positive side, however, they stillmaintains that Indias external fundamentals continue to remain robust enough to withstand a wide rangeof potential shocks, especially from sudden reversals in short term capital flows and any sharp globalslowdowns.

On the domestic macro front also, expectations of a record wheat crop during the current year and arrivalof normal monsoons a week ahead before the June 1, 2008, deadline are all positive indications thatinflationary levels are likely to cool off in the near term.

However, the market rise during the last week was not supported by healthy volumes both from the FIIsand domestic mutual funds. Domestic institutional support is yet to be seen at current levels and FII flowsare also not expected to rise significantly in the near term. So, during the week ahead, the markets arelikely to move in a narrow range and continue to display edging in the absence of any new triggers.


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SEURITY MARKET

4th week of May 08 Sensex down 4.50%

Daily review 16/05/08 19/05/08 20/05/08 21/05/08 22/05/08 23/05/08

Sensex 17,434.94 0 (204.76) 12.98 (336.05) (257.47)

Nifty 5157.70 0 (52.75) 12.70 (92.20) (78.90)


Sensex 17,434.94 16,649.64 (785.30) (4.50%)Nifty 5157.70 4,946.55 (211.15) (4.09%)

With crude oil prices touching a high of $ 135 a barrel and the US Fed comments indicating slowereconomic growth with higher inflationary trends likely in 2008, the market agony is being tested to thelimits. Incidentally, crude prices which came off by 2% last week, saw a spurt of almost 8% this weekfrom previous week level, on news reports that US inventories of crude had depleted sharply.

Rising crude oil and food prices are proving to be a deadly combination for the US economy increasingfears of a longer recession. Mirroring these fears, the US Markets displayed a high degree of nervousnessand negativity during the week. The Indian markets last week continued to remain edgy and displayed anarrow range bound movement during this week with the indices closing in negative territory.

WEEK AHEAD:Looking for triggers

Clearly, the present market mood indicates that everyone is keenly awaiting key positive triggers likegood monsoons and lower inflation numbers to boost the present sentiment which has been impacted by aseries of negative news flows coming in from rising crude prices, increased rupee depreciation andweaker US markets.

On the domestic macro front, the monsoons are bow keenly being awaited by the market as this remainsthe only big positive trigger in the short term. Also, with a higher agriculture growth expected this year,hopefully the rising trend in food prices, which has contributed largely to the sharp spike in inflationarylevels, would get arrested. However, we may have to wait for at least a couple of months before we seesome noticeable improvement here.

While valuations of most large cap stocks have turned reasonable of late, the short term upside potentialhas also been capped. This is also one of the key reasons that money flows both from domestic mutualfunds and FIIs are lacking in a big way and this is apparent from the shrinking volumes both in the cashand derivative segments.

Trading in such shallow markets is extremely risky, with the risk reward ratio completely against marketplayers and more so in a market which is extremely hungry for positive news flows at this point of time.

The Indian capital markets are likely to remain in indecisive mode and continue moving in a narrow rangein the coming week until there is more clarity on near term domestic news triggers such as monsoons,inflation numbers and the rupee movement.


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SEURITY MARKET

5th week of May 08 Sensex down 1.41%

Daily review 23/05/08 26/05/08 27/05/08 28/05/08 29/05/08 30/05/08

Sensex 16,649.64 (301.14) (72.91) 249.78 (209.11) 99.31

Nifty 4,946.55 (71.50) (15.25) 58.55 (83.05) 34.80


Sensex 16,649.64 16,415.57 (234.07) (1.41%)Nifty 4,946.55 4,870.10 (76.45) (1.55%)

The Indian markets continued to remain volatile and directionless during the week with the indicesclosing in negative territory. More importantly, the market movement was driven significantly bydomestic issues such as the quantum of oil price hike expected from the government, impact of risingpetrol and diesel prices on existing high inflationary levels and increased volatility coming in the form ofMay F&O series which concluded on last Friday.

The US markets, however, remained moderately positive during the week consequent upon the Fedsannouncement of the Q1FY08 GDP growth being much batter at 0.90% from the earlier estimated 0.60%levels during April 08. Also US home sale data during April 08 for the first time saw a rise of 3.3%which has turned positive after a span of six months since October last year. Both these events had apositive impact on markets which saw the Dow closing the week on a positive note.

There is also good news on domestic economic front. The fourth quarter GDP growth for fiscal 2007-08came in at a healthy 8.8%, taking the GDP growth rate for the year as a whole to 9%. First time sinceindependence, the economy has grown at an average of 9.3% over a period of three years. Also, the RBIin a recent move has liberalised the ECB norms for inflow of external debt capital, clearly signaling theintent to rein the softening rupee and providing adequate liquidity to corporates to sustain growth in thecurrent business environment.

The week ahead is a crucial period ahead for the markets while markets have largely discounted the highinflationary levels, the oil price hike is expected to be moderate and may not be very harsh on consumers.

MONTHLY REVIEW

Month March 08 April 08 May 08

Date 31.03.08 30.04.08 30.05.08

Sensex 15,644.44 17,287.31 16,415.57

Points Base 1,642.87 (871.74)

Percentage Base 10.50% (5.04%)


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2.2 INDIAN ECONOMYSill on roll: GDP scores a hat-trick with 9% growth in FY08

The Indian grew at the rate of 9% in 2007-08, faster than the advance estimate of 8.7%, according toCentral Statistical Organisation (CSO). The economic growth was 8.8% in the fourth quarter endingMarch 31, 2008, though interest rates at six year highs hit consumer demand and investment. Theeconomy grew 9.7% in Q4 of 2006-07.

With this, the compound annual growth rate for the last four year has touched 8.9%. Growth averaged9.3% over the last three years. The economy grew 9.6% in 2006-07 and 9.4% in 2005-06. These arehistoric figures and prompted finance minister P Chidambaram to confidently assert a GDP growth rate of8.5% in the current fiscal. He also promised to take corrective measures to address the slowdown inmanufacturing.

The total value of goods and services produced in the economy this is what GDP measures at currentmarket prices stood at Rs 47.13 lakh crore. The population in 2007-08 stood at 113.8 crore, which yields a per capita GDP of Rs 41,416. At constant prices (1999-2000), the per capita income moved up to Rs24,321, representing an increase of 7.8% during 2007-08.

Mr Chidambaram said: It is matter of great satisfaction that 2007-08 has returned a growth rate of 9%.As the year progressed, doubts were expressed on whether we would complete the year with a growth of9%. I had said on many occasions that the economy would grow at close to 9%. Now, it has turned out tobe 9% and this improves the UPAs average for four years at 8.9%.

Economists feel that the strategy now being followed was not strictly a trade-off between inflation andgrowth. The external commercial borrowing norms have been eased a bit with rupee being in the comfortzone. The growth numbers are on the expected lines and matches the Plan panels and RBIs forecast. Theview now seems to be to drive growth while containing inflation. However, the current financial year ismore difficult. Agriculture has grown by 4.6% to 4.7% in 2007-08. It would be difficult to grow on such ahigh base. Investment is going to continue to pose some problem of financing and some projects may getdelayed. The ECB easing has been done to primarily address this. So we will grow, but needs to be seenat what rate as mood is not so upbeat.

Mr Chidambaram said: the gross fixed capital formation in 2003-04 was 28% and 32.2% in 2004-05.This grew to 35.5% in 2005-06 and to 35.9% in 2006-07. Investment as a proportion of GDP has gone upby 9.3% in four years. This has never happened before in Indias history. The minister said this growthcoupled with rise in per capita means that more is available in the hands of people.

Reliance Energy finishes fifth of buybackThe Anil Dhirubhai Ambani-controlled Reliance Energy has completed a fifth of its total targeted share

buyback at a cost of Rs 400 crore. The promoters belief that shares were undervalued after the Januarycrash in the stock market had prompted them to announce the buyback. Before January crash in the stockmarket, shares reached a high of Rs 2632. The company intends to buy back equity shares worth Rs 2,000

crore from the open market. As per earlier estimates, the transaction was to enable promoters to hike

their stake by close to 2%. Since the commencement of the buyback on March 25, 2008, Reliance Energyhas so far bought back 30 lakh equity shares. When a company buys back its shares from the open

market, those shares are extinguished and subsequently the shareholding of the promoters increases.


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2.3 INDIA INC: EXPENDING HORIZONSBillion-dollar club

Its the first time the two stars of the new economy, telecom and IT, have managed to enter what was untilnow an exclusive preserve of the old economy. The fantastic four of new age India Inc Bharti Airtel,Reliance Communications, TCS and Infosys have finally made it to corporate Indias Ivy League. Aleague where the only way to gain admission is to post profits of over a billion dollars.

All four companies figure in list of 10 companies that generated more than $ 1 billion in net profit (PAT)during FY08 based on available results. Last year, a mere six companies managed to make the cut. Withonly 1,000 companies having declared results, there is a good chance that this time the list could see manymore new entrants.

A detailed comparison between telecom and IT throws up some interesting facts about how these two neweconomy bellwethers got to the billion-dollar club. Though the two sectors have entered the listsimultaneously, this mammoth milestone was achieved much faster by the two telecom Moghuls, Bhartiand RCom, than it was by their IT counterparts, Infosys and TCS. This reflects the breathtaking speedwith which the telecom revolution has taken place, given that it was software and not telecom that hasbeen at the helm of the new age economy for much of the last two decades.

Bharti, which was incorporated in 1995, took 13 years to reach the mark, while RCom took just aboutfour years after its separation from Reliance Group in 2004. Even if we consider the year 2001 when theReliance Group decided to venture into the telecom space, RCom has taken just over seven years to post abillion dollars in profit.

In contrast for the IT industry it has been a long march. TCS which was incorporated in 1968 has takenover four decades while Infosys though faster still took a quarter of a century plus to reach the milestone.

However, in the euphoria following the success of the new economy, it would be unwise to forget that thelist is still dominated by the old economy bellwethers. Reliance Industries, Indias biggest private sectorcompany, is right there on top of the list with $ 4.8 billion and is followed by the countrys largest bankState Bank of India, which clocked $ 2.2 billion in profits.

Anil Agarwals Vedanta group has put up an impressive showing with both group companies, Sterlite andHindustan Zinc, having broken into this listing. Among the 10 companies on the list, DLF, the real estategiant that was listed last year, saw the sharpest jump in its profits with RCom taking second place.

REC conferred Navratna statusThe government granted Navratna status to Rural Electrification Corp (REC), giving it financial andadministrative autonomy. The department of public enterprises (DPE) has issued the order for giving the

coveted status to REC, which will now be able to expand its electricity business in the rural areas. REC isworking throughout the country with big network. It is a pioneer in the area of rural electrification. RECis the 16th PSU to have been named as the Navratna firm. The company can now take decisions of

investing up to Rs 1,000 crore or 15% of its net worth independently.


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2.4 INDIANS > NETIZENS49- million Indians logon to internet in 2008

Call it the democratisation of internet in India. Every one in 10 urban Indians (12%) is now net connected;over two-third (70%) of all internet users reside outside metros; and across urban and rural India. Internetusing population is evenly spread across all socio-economic classes (SEC). Whats more, over 70%internet users prefer to access the net in Indian languages, with English users at just 28% down from 41%

in 2007. The number of urban net users has increased by 33% in the last one year, 30 million to 40million.

There are over 49-million internet users in the country. Urban users account for the bulk of it, 40 million,with rural net users numbering 9 million. Regular net users, defined as anyone accessing the net at leastonce a month, number around 35 million (30-million urban and 5-million rural). Internet penetration (as% of population) has crossed double-digit in urban India at 12%, up 3% from 9% last year, and rural penetration stands at 4.5% according to online research & advisory firm JuxtConsults India Online2008 - an offline survey of over 12,500 households across 40 cities and 160 villages countrywide togauge the online behaviour of Indians.

Surprisingly women account for less than a fifth, just 17.6%, of the 49-million odd Indian netizens. Thefemales net representation is just marginally higher for urban India at 18.2%.

What explains this adverse female skew in internet usage? A seemingly unrelated figure in the surveymay perhaps hold some clues. The survey says that over half of all net users (51%) in the country aresalaries employees in the corporate world. Is internets low traction among Indian women a result of theirlower representation in corporate jobs compared to men?

CA ads may create new category

In months to come, your tax consultants name might carry more snob value than the Louis Vuitton inyour wardrobe. Courtesy the new advertising permissions by profession governing body, the friendlyneighbourhood chartered accountant can now choose to morph into super brand.

India-based finance professionals including the CAs, and company secretary (CS), who have beenallowed to advertise services and areas of expertise, are set to evolve as a new category in the advertisingindustry one that is led by an individual as a brand. The decision by the Institute of CharteredAccountants of India to let their member advertise might unwittingly shift the advertising focus toindividuals. If an individual can support large-scale advertising, it could emerge as a new category.

There will be significant impact when professionals advertise. Financial industry is one industry which isdepends to a great extent on individual expertise. Also, financial product is one category where thecommon man requires huge amount to help in saving and planning investments. The guidance aspect is

increasingly becoming important and hence the advertising around it is likely to evolve. People wouldwant to know of a specialist who is ready to offer guidance services. Amarjit Chopra, chairman,accounting standards board said that advertising enables ICAI members to project themselves on a biggerplatform rather than create a marketing blitz. Initially, only mid-sized accounting and auditing firms arelikely to capitalise on this (change of law). Small firms may not come forward aggressively since ICAImight allow advertisement only in print medium, which is very expensive.


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2.5 FOREIGN INSTITUTIONAL INVESTORSPE turns to open market as valuation tumble

With primary deals slowing down, private equity (PE) firms are tapping the secondary market route topick stakes in listed companies. The PE firms are picking small stakes from the open market to eitherenter a new firm or increase their exposure in existing portfolio companies. In some cases, this strategycould be linked to bringing down the average cost of acquisition given that the PE funds originally

invested in the respective companies when valuations were sky-high.

Some of the recent cases include buyout firm Apax Partners picking shares from the open market inhealthcare services provider Apollo Hospitals, Standard Chartered Private Equity buying additional sharesof M&M Financial Services and New Vernon in recently listed Shriram EPC. This apart, UK-basedPromethean has picked shares from the open market in EIH, which operates the Oberoi Groups hotels.

A strategy to pick shares from the open market is more commonly used by foreign institutional investorswho are typically stock traders and get in and out of a stock frequently. As against, this PE funds have aninvestment period ranging from 3-10 years and usually invest in a listed firm through a preferentialallotment of fresh shares or other convertibles like warrants. The difference between the two routes ofinvestment is that in the latter the shareholding pattern changes as the total number of shares increases.This could result in decrease in promoter holding unless they issue shares to themselves as well.

In case of Apollo Hospitals, Apex Partners picked 1.87% stake last month to take its total holding to14.52%. It had originally picked 11.41% in Apollo Hospitals through a preferential allotment in October2007. Apex had acquired this stake at a price of Rs 605/share in a deal worth Rs 426 crore. In contrast, itssecondary market deals were struck at a price between Rs 505 and Rs 550 per share.

Blackstone is also believed to have taken the secondary route to hike stake in Gokaldas Exports.Blackstone, which had acquired a majority stake in the textile firm as a part of its buyout from the local promoters, had come up with an open offer for additional 20% stake. While it had acquired a 67.89%stake in total including the shares mopped up during the open offer, it added another 0.39% stake in Aprilto take the cumulative holding to 68.28% according to market disclosures.

The PE firms have taken the secondary market route not just to add stake but also to enter a newcompany. Last year, Promethean had picked a 8.5% stake in Nitco Tiles through open market purchasesand had even secured a board seat in the firm. Moreover, sometime back the firm had also picked aminority stake in leading listed hospitality company EIH.

In some cases funds which sealed pre IPO deals also picked stake in the company after it went public. Forinstance, New Vernon Private Equity upped its shareholding in the Chennai based engineering andconstruction company Shriram EPC, post-IPO. Before the IPO, New Vernon held 4.62% in Shriram EPCwhich had come down to 4.08% during the public offer. The PE firm picked another 1.06% on the date of

listing of Shriram EPC.

Family businesses invite PEs as strategic partnerTight liquidity conditions may have dented private equity investments in large corporates, but closely-

held family businesses in India are increasingly bringing in PE firms as strategic partners. Volume of PEdeals in mid-sized family businesses has been growing sharply. Since, such businesses are more

professional now. In India, PE funds have emerged as a growing option for funds as the young generation

in business families are open to bringing in PE funds as strategic partners.


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2.6 WARNING SIGNALSIndustrial growth slumps to 6-year low in March

The sharp drop in industrial production in March08 to a six-year low of 3% may have triggered fears of aslowdown but economists are still holding onto an 8%-plus growth projection for 2008-09. The optimismamong policymakers and economists, however, is not shared by industry players, who believe that highinterest rates and rising input costs have started impacting demand.

High inflation, however, rules out any possibility of rate cuts to stimulate growth. Industrial production,as measured by the Index of Industrial Production (IIP), grew at a disappointing 3% in March 2008compared to 14.4% in March 2007. As a result, industrial production growth slipped to 8.1% in 2007-08from 11.6 in 2006-07.

The industrial slowdown is largely because of the sharp drop in manufacturing, which has a high weightin IIP. Manufacturing grew 2.9% in March 2008 against 16% in March 2007. Even electricity (3.7%) andmining (3.8%)

The industrial growth for March 2008 is the lowest since February 2002. But the government has verylittle leverage to boost growth. Crisil principal economist DK Joshi says: In view of high inflation aswell as inflationary expectations looming over the economy due to spiraling crude and commodity pricesalong with the depreciating rupee, maintaining price stability will be difficult task for the central bank.Thus, expecting any kind of rate cut is completely out of question.

There is a silver lining, though, in that part of the drop appears to be because of the base effect industrialgrowth in March 2007, the base for calculating growth in March 2008, was unusually high.

Rising inputs costs threaten growth

Despite apparent moderation in macroeconomic activity, corporate topline growth appears to be holdingfirm. Rising costs and higher extraordinary expenses have taken a toll on profitability though. An ETintelligence Group analysis of January- March 2008 quarterresults of 799 companies shows net salesgrowth at 21.6% y-o-y, which is marginally higher than the topline growth in the previous two quarters,but lower than the 25.5% growth in the April-June 2007 quarter. Net profit growth has, however, fallensharply in theJanuary- March 2008 quarterto 18.8% against 40% in the previous quarter.

As expected, sharp increase in expenses, namely raw material costs, have caused operating profit growth(profit before depreciation, interest and extraordinary items) to fall sharply to 26.16% from more than40% in the previous quarter. And unlike in the previous quarters where strong growth in other income provided support to earnings, in this quarter, growth in other income was a lot lower at 27.9%. Theextraordinary expenses (read derivative losses) further ravaged the earnings. These charges on profit grew130% to Rs 1,262 crore for these 799 companies.

Citigroup aims to sell $ 400-billion assetsCitigroup, the largest US bank, said it aims to shed $ 400 billion of assets over the next two or three

years, in a drive to become more efficient. Citi, hit hard by subprime mortgage meltdown and ensuing

turmoil, said it has about $ 500 billion of legacy assets. It said it expects to reduce this amount to lessthan $ 100 billion within two to three years. Although Citi said previously it plan to shed assets to boost

its capital position, the magnitude of sales worries analysts and is likely to prompt fresh speculation of a

break-up of the Wall Street giant.


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3.1 MUTUAL FUNDFund houses are reiterating their positive outlook for the future

What goes up must come down. Thats the law of gravity for you. Investors in the stock market will beable to empathise with this maxim, given that at all that was earned in the last six months of 07 waswashed off with the first tsunami of 08. The period from January to March 08 can be described asbrutal, with the Sensex and Nifty losing over 20% each since close on New Years Eve.

A bad quarter for the market justifies a bad quarter for the mutual fund industry as well. Almost all themutual fund schemes have registered dizzying falls and posted negative returns in each of the threemonths of the quarter. Equity diversified or balanced funds, contrarian or sector themes, index funds ormid-caps schemes across the board faced the wrath of a falling market. The falls have been pretty sharp,with net asset values of most schemes being eroded by 20-30%. However, monthly income plans (MIPs)and income schemes, which have little or no correlation with the equity market, have offered somerespite. MIPs registered a marginal fall of 1-2% and income funds, though positive in the first two monthsof the quarter, disappointed in March. The damage, however, was not severe, with the fall in mostschemes being less than a percent.

The market slowdown has hit the MF industry not only in terms of returns, but also in terms of assetcollections. Through fund houses did not witness heavy redemptions, investor reluctance for freshinvestments, both for existing and new schemes, was evident. The industrys assets under management(AUM), at Rs 505,152 crore for March 08, are the lowest in the past six months. But this setback has notdampened the spirits of the MF players. And there is more than one reason to justify this sentiment.

Despite low collections by the new schemes launched during January-March08, the industry remainsupbeat about launching new products. So, while ICICI Prudential launched its Focused Equity Funds,Sundaram has come out with theme funds, which target the banking and financial services sector, as wellas the entertainment industry. Giving due consideration to the slowdown in the equity market and takingadvantage of rising gold prices, AIG investment launched its World Gold Fund, which invest in stocks ofgold mining companies across the globe. Reliance Quant plus Fund was also launched after the marketcrashed. It wont be correct to call this a new launch since Reliance is converting its index fund into aquant fund. Quant uses mathematical models to select stocks, thereby reducing the sentimental risks ofstock-picking. For those who trust machines over men to manage their money, these funds are justanother step in the ladder of innovation in the MF sector.

So, be it bears or bulls, the MF industry seems unperturbed. MF industrys confidence is reflected notonly in the variety and number of products, but also in terms of the new players seeking entry into thisbusiness. Just 15 years ago, this industry was the oligopoly of a few public sector companies, the mostprominent among them being UTI. Privatisation made headway only in 1993, with Kothari Pioneer beingthe first private sector fund house.

Today, we already have 33 MF players, which include well-known global asset management brands. Andthis number is still increasing. While Mirae Asset Management made its debut early this year, nearly adozen new fund houses are set to launch their products in due course. These include Bharti-AXA,Religare-Aegon, Edelweiss, DLF-Prudential and Bajaj Finserv.

Weve come far, but theres still a long way to go. Even after 55 years of MF history, India lags global peers in terms of AUM and number of players. But the industry has many opportunities, which arewaiting to be explored. Where on the one hand, there are many potential customers to be tapped, on theother, billions of rupees locked in pension funds are waiting to see the light of the stock market via MFs.With such opportunities on the horizons, the futures bright for this industry.


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3.2 COMMODITY MARKETFutures ban no panacea for inflation: Assocham

The governments decision to expand the ban on futures trading to cover potatoes, soyabean oil,chickpeas and rubber would not help in bringing inflation down, feel Indian Inc. The real culprit is virtualstagnation in food production since 1999, says a study by Assocham. The study says that rather thanbanning futures trading, the government should ensure high volumes and strong liquidity in the futures

market to stabilise prices. The study comes close on the heels of a study by Planning Commissionmember Abhijeet Sen which has not recommended scrapping of the ban on futures trading in keycommodities. After the report was submitted, the government expanded the ban on potatoes, chickpeas,soyabean oil and rubber.

The ban on futures trading in rice and wheat has not helped. Prices of these foodgrains have only

increased. Assocham president Venugopal Dhoot said, When experience shows results to the contrary,how can we expect the ban on items like potatoes and soyabean oil to help in reducing inflation.

Without speculation, there is no opportunity for risk management. The chamber feels that too muchregulation is hampering the functioning of the commodity futures market and this was highlighted in thecase of urad and tur. Rumours of ban in trading drove away market-makers and this resulted in lowvolumes and wide price swings. It is important to realise that futures market and physical markets areinfluenced by a common set of factors supply and demand. An efficient futures market is merely areflection of the future spot markets. Hence the ban on futures trading is devoid of economic logic.While population is growing at 1.9% per annum, foodgrain production is stagnating. Hence consumptionof cereals has declined from a peak of 468 gm per capita per day in 1990-91 to 412 gm per capita per dayin 2005-06, indicating a decline of 13%. In other words, the writing was on the wall and efforts shouldhave been made to improve production and supply.

Is it a premature start?

Futures trading was reintroduced in India as part of financial liberalisation policy, which has beenpursued since 1992. Being the last mile in the road to financial liberalisation, after all the other segmentssuch as banking, capital markets, insurance, NBFCs and so on were opened up; the logical corollary wasto extend the same to the commodity sphere. The response of the market has been quite remarkable asseen by the enthusiasm shown in all the commodity segments. The challenge has really been to take thebenefits to the farmers level so that they can gain from futures trading. We have seen a fair participationof end-users in areas such as pulses, edible oils, cereals and spices, where processors and dealers areparticipating on the exchanges.

Farmers in some areas are gradually getting aware of futures prices, which are being disseminated by theexchanges. This is an important step before direct participation, which is the final goal. Further, theexchanges have made some significant advances in the creation of infrastructure like warehousing,

grading and assaying, which is in the short supply in the country. However, while the progress has beensatisfactory, the absence of integration with the disparate spot markets is a challenge to overcome.

The important point here is that in any venture, especially as complex as commodities, there wouldalways be problems in terms of misconceptions, absence of market integration, efficient price discoveryand so. It is also true that in the capital market, the spot market developed before the derivatives market,which made things easier. In the commodity space, the derivatives have come before the so calledintegrated spot market. The route is different and probably difficult, but, a start has to be made sometime. Therefore, no time is premature on the road of innovation.


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4. FINANCIAL SECTOR: TRANSFORMING TOMORROWMarket mechanics

1. FINANCIAL ADVISORS:Weigh impact on investors

A zero sum game

There are no free lunches and money-making is never a simple task. Investment needs patience anddiscipline. One has to give time for the stocks to perform, as the share price is only a proxy of thefinancial health of the company, which unfolds gradually.

There is no reason why someone else should tell one to buy a stock. If by telling some one to buy thestock, share price moving up, it is to the advantage of the person giving the tips. The tipper is alwaysinterested to increase his share prices where he has some financial interest, or else he is distributing theshares. A broker makes money by either through buying and selling stocks. Following blindly the tipsthus is a sure way to move to pits of doom.

When a retail investor buys a television or refrigerator, he checks three shops to get the lowest price.

Similarly the retail investor needs to check why he is buying a stock, what that share represents. Theeffort to know the company does not mean the investor must know the financial performance of thecompany, but at least he must know if the company actually exists, whether they are profitable or not. Theinformation is available easily through internet.

In summary, any investors in the stock market must understand that there is risk in the market to earnsuperior return. To judge the risk, he needs to be informed: he has to do the due diligence as he does toacquire any other assets. If he only follows tips, he is at the mercy of market, which is a zero sum game.Sooner he is going to lose, because someone at this cost has made the quick buck.

2. FINANCIAL PLANNERSValue unlocking for all stakeholders

Retail shareholding shrinking

The share of individual investors in Indian companies has been shrinking steadily so much that theaverage individual shareholding in private sector companies has dipped to around 13% and public sectorcompanies, about 2%. According to a study of top BSE 200 Indian companies, among private sectorcompanies, Bharti Airtel (1.2%), GVK Power (2%), Educomp Solutions (2.1%), Sobha Developers(2.1%) and Tata Communication (2.2%) are languishing at rock-bottom levels with regards to individualshareholders. In the PSU list, National Aluminium, Hindustan Zinc, Neyveli Lignite, ONGC and SAIL

have 0.7%, 1.5%, 1.5%, 1.7% and 1.8% respectively as public shareholding.

Policy changes over the years have played a major role in edging out small investors from the market. Theconcept of public listed companies has been hugely diluted. Public offer as a % of a companys equitycapital has been bought down from 75 to 25% and in some cases to just 10%. Taking a view on dwindlingshare of minority stakeholders, the Finance Ministry has floated a concept note, seeking public commentwith regards to mandatory raising public shareholding (including institutional investors) from 10% to25%. The move is expected to increase public participation, transparency and overall governance in themarket. Currently, only 7 out top 200 Indian firms have public shareholding in excess of 25%.


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MARKET MECHANICS

3. WEALTH MANAGERSMap out the details to translate into benefits

Minimum required public float

The concept note had proposed that if for any reason, public holding reduces below 25%; the promoters,management and the company may be jointly and severally be liable to bring it to 25% within three

months or face action including delisting.

The government now feels that three months is too short a time. It is now evolving a phase out schedulewhich is more workable and may not lead to sudden fall in share valuations due to offloading of promoterstake in one go. The stock exchange data show that despite reservation of 35% for retail at the publicissue stage, the public hold about 13% of the capital. Therefore, if the government finally decides on 25%minimum floating shares, then a further dilution of 12% on an average has to be made. For this, thefinance ministry is likely to grant around three to five years. The exact percentage to be diluted in a yearwould be finalised only after the government decides the minimum required public float.

Private placement, ESOP wont count as public: The government also proposes to tighten the definition of

public holding in a listed company. Promoters who disguise their stake by making preferential allotmentsto closely-linked companies, which are now classified as public holding, may soon lose this flexibility andmay have to offload such stake in favour of the public. The new norms that the government is workingmay also strip employee stock options of the status of public holding as employees are closer to thecompany than the public. This would ensure that promoter and other entities closer to the promoter andenjoying greater rights than the public cannot eat into the publics share in a listed company. The idea isto infuse more liquidity into the market and reduce volatility due to concentration of shares in few hands.

4. INCLUSIVE CEOsInnovative responses to problems

Apply now, pay later

As part of its efforts to narrow the time between the allocation of shares in a public issue and their listing,the Sebi gave an in principal nod to marking lien on bank account as an alternative mode of payment inpublic and right issues.

What this means is that the application money will remain in the bank account of the applicant till theallotment is finalised; thus eliminating the cumbersome process of refunds for the unallotted portion.Until the allotment of shares, the investor cannot use those funds even though no physical transfer ofmoney has taken place at the time of application (of shares). Once the allotment is made, the registrar can

instruct the bank to transfer funds, based on the number of shares that has been assigned to an investor,and remove the lock on the funds.

Sebi hope to eliminate the movement of instruments both ways as application money and refund, thushastening the whole IPO process. Sebi chairman CB Bhave, had said that he wants to kick off the primarymarket reform process exercise by cutting down the time between a companys public issue and its listingfrom 21 days to seven days. The approval to marking lien on bank account should be seen as the first stepin that direction. There have been innumerable instances of delayed refunds in the past, even in the publicissues of reputed corporates. At times, the issue could be genuine, while often, the companies delay therefund process so that they can earn interest on those funds for some time.


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MARKET MECHANICS

Cross-margining

In a move that will help stock market investors and brokers use their margin funds efficiently, the Sebigave approval to cross-margining across the cash and derivatives segments.

What this means is that if an investor is buying a stock in which he already has a short position in thefutures segment, he will not have to pay margin twice over. In its circular, the capital market regulator has

said that for positions in the cash market that have corresponding offsetting positions in the stock futures,value at risk (VaR) margin shall not be levied on the cash market position. However, it will be only to theextent of the off-setting stock futures market positions.

For instance, assume that an investor wants to buy 1200 shares of ACC. He is already holding a shortposition of 1000 ACC shares in the futures segment. Any losses due an intra-day fall in the price of ACCshares will be neutralised by gains on the corresponding short-positions held by the investor in the ACCstock futures. This means that is the value of the transaction, that faces potential volatility risk, is of onlythose 200 shares (1200 shares minus 1000 futures) that do not have a corresponding short position.Accordingly, the exchange will levy the VaR margin only on two hundred shares.

5. TECH SAVVY PROFESSIONALSTake first step to ensure efficient and reliable system

Fraud detection system

Call it a red alert for companies indulging in fraudulent practices. As part of its Gen-next e-governanceinitiative, the government is developing a system which will provide early warning signals on corporatefrauds. The system will look for possible trends of fraudulent practices using company data filed with theministry of corporate affairs.

According to estimates, India is losing a whopping $ 40 bn per year because of corporate frauds, which ismore than 4% of the countrys gross domestic product. The early warning system, which is going to bemechanised in nature, will help ministry to detect frauds at early stages.

The ministry has begun working on the system after the successful launch of the MCA 21 initiative which provides both citizens and corporate an easy and secure on-line access to service including filing andregistration. The ministry said: As we have all the data in an on-line format, it wont be difficult toanalyse those and detect frauds at early stages.

The frauds include those committed for the country, and those against the company such as embezzlementof funds and payroll frauds which, in turn, affect the bottom-line of a company. The proposed early fraud

detection system would check the books of accounts to find out whether any company is resorting tofraudulent practices which will adversely affect interest of shareholders, employees and others.

At present, various government agencies including intelligence bureau under the ministry of home affairs,and Central economic intelligence bureau and financial intelligence unit, both under the finance ministry,detect frauds in financial sector. According to the initial concept, if the early warning system detectsevidences or any trends indicating frauds or cheating, the ministry will have the right to initiate aninspection under the provisions of Companies Act, 1956. The data on frauds will also be passes over tovarious Central government agencies dealing with money laundering, auditing and other financial frauds.


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MARKET MECHANICS

6. CREDIT COUNSELORSResolve convertibility and recompensation issue

Manipulation of shares on the first day of listing

Few investors had heard about the stock, fewer still took notice when it delisted from stock exchanges

seven years ago. But on 21st May 2008, when the share of Royal Finance listed under a new name KGNIndustries, it gained instant fame, and notoriety.

In what will go down as an outrageous to manipulate a low-priced stock, shares of KGN Industries(formerly known as Royal Finance) opened at Rs 72 and went on to touch an incredible Rs 55,000 withintwo hours on the first day of relisting; All this, with just 827 shares changing hands.

This wild swing in share price immediately caught the attention of the stock exchange surveillancedepartment which suspended trading in the stock at 12.20pm. Surveillance officials then met in theevening to discuss the issue and made enquiries with the promoters about the price rise. Late in theevening, BSE issued a release saying further investigations will be carried out, but trading in the stock

will resume on next day at an adjusted price of Rs 5,216.30.

The incidence has once again put the spotlight on the manipulation of shares on the first day of listingsince the intra-day circuit filters are relaxed to enable better price realisation.

However, manipulators often use the opportunity to ramp up stock prices. Last year, capital marketregulator Sebi had proposed to introduce a 20% circuit filter on the first day of relisting for companiesthat had undergone corporate restructuring. But the regulator is yet to take a final view on it.

Z group belongs to a list of violators

It appears to be a busy season for stock manipulators. On 21 st May, KGN Industries shares soared to anunbelievable Rs 55,000 on relisting after nearly seven years. A day later, another obscure firm, SylphTechnologies, which last traded at Rs 0.80 a share at the time of its delisting five years ago, climbed to anintra-day high of Rs 800 on relisting, before setting at Rs 200.

The common thread running across these cases in that both stocks figure in Z group of the BSE theexchanges hall of shame for firms violating listing norms and both companies have no fundamentalsworth mentioning.

While these two Z group stocks made headlines because of the bizarre levels to which they rose, brokers

claim that price fixing is also routine in quite a few stocks in the T group in which only delivery-basedtransactions are allowed because of lack of liquidity.

In many stocks, the shareholding pattern disclosed to the stock exchanges is not what it appears to be.Shares held under the heading of corporate bodies are usually indirectly controlled by the promoters -either through own holding companies or those owned by close relatives. As a result, actual publicholdings are very low, making the stocks an easy target for price rigging.


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MARKET MECHANICS

7. MICRO-FINANCE PROFESSIONALSDeveloping alternative credit delivery models

Portfolio management services

Sebi has enhanced the net worth requirements for entities providing portfolio management services. Now,

an entity seeking to register as a portfolio manager will need to have a net worth of Rs 2 crore, four timesthe previously stipulated level of Rs 50 lakh.

Existing portfolio managers with a net worth of less than Rs 2 crore at present, will have to increase it toat least Rs 1 crore within a period of six months and thereafter to the prescribed net worth of Rs 2 crore inthe next six months.

Also, portfolio managers have also been barred from pooling the resources of their clients and floating ascheme on the lines of a mutual fund. They would be required to keep assets of each client separately andnot in a pooled manner. The portfolio managers have been given six months time to convert theiroperations managed on a pool basis to individual basis.

The portfolio management services (PMS) schemes are generally pooled in nature today due to theoperational conveniences. The small ticket size like retail type are pooled and given the benefit of largesize with diversification and economical way of handling. It facilitates buying and selling at ease in bulk providing the benefit of size, cost and time. The brokerage incurred on such large pool will be onwholesale basis, and therefore cheaper than retail brokerage. The purchases of shares are allotted pro-rataon the same day to all the clients. This also ensures minimum documentation and facilitates easyoperations for the portfolio managers. Sebis new norm banning the pooling of clients assets by portfoliomanagers under their portfolio management services (PMS) has flustered most players who have citedincrease in costs as well paperwork as key negatives to the move.

However, Sebis new norm has many positives to it:

For PMS clients, it clearly means more transparency. They will be able to track and trace trades andensure there is no manipulation in their account. Indias capital market in the past two decades has manyinstances of the flagrant violation of regulatory norms for PMS by various market participants.

The new norms are also welcome at a time when the number of high worth individuals (HNIs) in India issharply going up and the need for PMS is on the rise.

In a non-pool system, it would be very difficult for anybody to mask proprietary trades as client trades orproprietary losses as client losses.

Moreover, clients with higher portfolio values could now expect to get some level of customisation ratherthan get bunched up with the rest.

Also, due to the recent stock market boom, a number of small outfits have propped up providing PMSservices, many of which followed lax reporting practices.

The new non-pool system automatically raises reporting standards.


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MARKET MECHANICS

8. RISK MANAGEMENT CONSULTANTSEducate Engineer and Enforce

INDIA VIX

In a milestone for Indian stock markets, the National Stock Exchange recently launched the countrys first

volatile index India VIX. The index, also known as investor fear gauge and fear index reflectsinvestors best prediction of near term market volatility. Till now, there was no indicator to predict marketvolatility or gauge the extent of uncertainty. But with the launch of VIX, this void has been filled. Heresa lowdown on the intricacies of this index, and why you should follow it to gain that elusive insight.

VIX value provides the expected fluctuation perceived by the market over the next 30 calendar days. InIndia, it is calculated using the methodology adopted by Chicago Board Options Exchange (CBOE).CBOE offers volatility indices based on S&P 500, Dow Jones S&P 100, NASDAQ, and Russell 2000.

From the near and mid-month options bid and offer prices of Nifty 50 index options, a volatility figure iscalculated which denotes the expected volatility in the near term. Typically a high VIX (increased

volatility) is taken as an indicator that investor fear has increased, whereas a low value is interpreted thatinvestors are being complacent.

The volatility index starts rising during times of financial stress and lessens as investors becomecomplacent. In fact, during period of market turmoil, the VIX spikes higher, largely reflecting the panicdemand for puts as a hedge against further declines in stock portfolios. During bullish periods, there isless fear and therefore less need for portfolio managers to buy puts. Currently, VIX index is not tradablein the Indian market and its rates are provided at the end of the day.

Why track?

Market moves are a function of sentiment and one of the indicators of sentiment is volatility. Increase anddecrease in volatility are always a signal of the extent of fear within the sentiment.

For instance, when the fear is high, volatility is always high in the stock markets. India VIX indicates howtraders and investors feel about the immediate future.

As a retail investor, you can plan effective entry and exit in stocks.

The volatility index is more relevant for short-term investors and traders, who are reliant on marketsentiment to a large extent. However for a long-term investor, the underlying fundamentals are moreimportant from a medium to long-term perspective.

An investor can utilise the volatility index for multiple purposes. It depicts the consensus of the market onthe expected volatility and is helpful in predicting market uncertainty. An investor can balance his risktaking help of VIX. Further, you can use it for identifying mis-priced options. For instance, if VIX risessharply, you can avoid taking long position in derivative products. You can also use it as guidinginstrument for hedging portfolio, by buying options.

However, cautions using it as a sole indicator to predict the market direction. VIX is only one of thesentiment indicators that guides in market direction.


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9. CONTINUING LEARNING CENTRESTake informed decisions

Pyramiding:

Portfolio leveraging is a method of raising loans where investors leverage on their own fund portfolio toraise a loan that will be reinvested in the market, either in mutual funds or stocks.

Super portfolio leveraging is leveraging again on an already-leveraged portfolio, also called pyramidingare done by investors who have high return funds, stocks and gilted instruments. The investor is safe tillthe time the portfolio yields decent returns more than the interest payable on the leveraged portion.

The more money you have, the more debt you take is an old adage that is coming into play in portfolioleveraging. According to analysts, investors had pledged their fund portfolios when the market and the NAV of the portfolio were at the peak. Investors had taken loans from NBFCs attached to theirbrokerages to extend their presence in the market.

According to fund managers, bulge-bracketed investors pledged their mutual fund portfolios often run

into crores of rupees to reinvest in mutual funds and stocks. With mutual funds logging huge losses andequities maintaining a downturn, big-ticket investors have become willing victims to MF leveraging.

Adding to their woes, MFs have logged their worst quarterly returns in over a decade. The entire spectrumof equity mutual funds has seen erosion in returns of 20-55% over three months. When the NBFCs see thevalue of underlying asset depleting, they ask the investor to meet the differential in hard cash. If theinvestor fails to do so within the deadline, the NBFC asks its broking arm to redeem the entire portfolio.

10. ONE-STOP-SHOPS

Dedicated to offer related services under a roof

PO small saving rates may be on par with banks

Theres good news for those investing in post office small savings schemes. The government isconsidering an increase in interest rates offered by these schemes to bring them on a par with fixeddeposit schemes of commercial banks. Interest rates offered by post office small savings schemes rangefrom 3.5% to 7%, depending upon the term of deposit, while banks offer about 8.5% interest on similarschemes. Only term deposits for more than six years earn 8% in the case of post office while comparableschemes of banks offer 9.5% to 10%.

There has been a sharp fall in the post office small saving schemes, particularly in the term deposits,monthly income account and senior citizen saving schemes continuously for the past three years. Unlessinterest rates of small saving schemes are revised upwards, there may not be any change in the presentsituation due to which post office small saving schemes will keep losing their attractiveness rapidly.

The government has recently taken some steps to make postal savings attractive and this includes a 5%bonus on monthly income scheme (MIS) and tax exemption on investment in 5-year term deposit andsenior citizen schemes. These measures, however, have not proved sufficient to bring the shine back onpost office small savings. Very few people in rural areas come within the income tax net and tax benefitdoes not appeal to them, it is felt.


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MARKET MECHANICS

11. GLOBAL OUTLOOKWorld is a village

Black money in grab of FDI

Many Indian businessmen have discovered that the neatest way to bring back money stashed abroad is to

show it as foreign direct investment (FDI) in a small unlisted firm that few would notice. It involves astring of transactions that not only escapes the regulatory radar but also has a touch of legitimacy. But justwhen they seemed to have perfected the practice, small change in banking rules could complicate mattersfor such money laundering.

The laundering trail, honed by experts in tax and foreign money laws, begins with a simple overseasinvestment allowed by the Reserve Bank of India under its liberalised remittance scheme. The investment,which can be up to $ 200,000, is made to float a shell company in Dubais Free Trade Zone. Thats thefirst step. Owning such a company is no big deal no tax is paid, regulations are simple, and hundreds ofprofessionals are available to tell you how to go about it.

Once done, the undisclosed money lying with banks in the tax havens in other parts of the world is brought into the Dubai Company, which just holds it in a bank account. The next step is to bring themoney back home. And here lies the shady ingenuity of the transaction.

To make this happen, the protagonist of the story, whose money is now lying with a Dubai company, setsup a firm anywhere in India or uses one of its existing unlisted firms to get the money back. The way thishappens is that the Dubai Company buys the shares of the Indian firm at a hefty premium. A highpremium allows you to bring in as much as money as possible, and also ensures the firms capital post-transaction is within the authorised capital, so that no extra charge is paid to the local authorities.

The money that comes in is the form of FDI through the automatic route, where the inflow is not

scrutinized by the government agency or the Foreign Investment Promotion Board. With this, the DubaiCompany becomes the predominant shareholder of the firm. The final step is buying out the shareholdingof the Dubai Company. This happens after a year to avoid suspicion. However, when the Indian firm buysout the Dubai Company a transaction that restores control back to the local shareholders it pays only asmall fraction of the price it received a year ago.

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

ILLIQUID securities

The Home Trade scam that rocked the bond market in 2002: besides reaffirming the banker-broker nexusin a chain of deals, exposed co-operative banks as the financial systems weakest link. Six year later, therules of the game have changed; cooperative banks have cut new deals while the same tribes of brokershave found ways to mask their identities and the smarter ones have spotted smaller banks to dump illiquidsecurities. The latest mischief has drawn the RBIs attention.

Since April 08, a team of RBI auditors has been inspecting the investment books of co-op banks inGujarat to trace irregular transactions between brokers and entities controlled by the intermediaries.


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The move followed a tip-off from Nabard, the apex institution for rural credit that Orissa State Co-opBank has taken Rs 30-crore hit after buying deep discount bonds at prices way above the market price.

Further enquiries by Nabard revealed that state co-op banks of Himachal Pradesh and Karnataka have cutsimilar deals, though their sizes were smaller. These co-op banks have bought zero-coupon deep discountbonds from brokers at off-market rates. These are long-dated papers (10-20 years) issued and traded at a

big discount from par value. Paying Rs 70 for a bond that on maturity will give Rs 100 may appear as aprofitable deal, but it isnt. The fair value which can be calculated in standard excel sheet formats canactually be Rs 60. The broker or its front entity may be buying the paper at Rs 60 or below only to palm itoff to a co-op bank at Rs 70. Here, the bank takes a mark-to-market hit of Rs 10. Indirectly, the co-opbank ends up funding the broker.

Z-security syndrome

The recent abnormal price movement in a couple of stocks that relisted after a gap of many years againunderscores the need for more firmness in dealing with the Z group stocks of the Bombay StockExchange. Ii is time Sebi and the stock exchanges came up with an equitable strategy of cleaning the Z

group it houses thousands of companies that are in default of the listing agreement or are perceived tobe risky because of their weak fundamentals that sees frequent price manipulations.

KGN Industries stock recently relisted after nearly seven years at a price of Rs 72 and subsequentlysoared to Rs 55,000 on thin volumes. Sylph Technologies, last traded at Rs 0.80 a share five years ago,climbed to an intra-day high of Rs 800 on relisting. Clearly, something is amiss here; fundamentals do not justify these prices. KGN Industries reported a profit of Rs 1.5 crore for 2007-08 while Sylph had aturnover of Rs 15.8 lakh for quarter ended March 2008. Obviously, low floating stock, because of fewerdematerialised shares available, has made manipulation easier. BSE is investigating the case. It should notallow trading in such stocks where floating stock is limited, even if temporary.


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5.1 BANKING PRACTICES

ICICI loan paper

ICICI Bank-originated securitised paper has been downgraded by rating agency Crisil, following higher-than-expected defaults. The rating agency said that it has downgraded the securitised paper issued bylargest private bank ICICI Bank, which comprised personal loan and car loan. According to sources, a

large chunk of these securities are currently held by mutual funds.

The two series of pass-through certificates A13 and A14 in the asset back securities (ABS) pool wereissued by ICICI Bank in March 2007 have been downgraded from AAA to AA. The outstandingamount in the series A13 was Rs 105.73 crore and it has a residual maturity of 33 months while that incase of A14 was Rs 98.23 crore with a residual maturity of 43 months. Meanwhile, rating to 16 otherPTCs in the ABS pool has been reaffirmed to AAA.

In a statement to media, Crisil has said, Delinquency levels for the pool in the 12 months sincesecuritisation have been higher than expected, with collections significantly below expectations. This hasled to the rating revision on series A13 and A14, which have longer tenors than the other rated PTCs.However, at AA (so), the PTCs continue to enjoy a high degree of credit protection.

In its recent reports on retail assets, Crisil had noted that delinquencies, across all retail asset categories,have gone up and is likely to further increase in 2008-09. It said that housing loans constitute over half ofthe total retail loans in India. Gross NPAs in home loans increased to 2.2% in March 2007 from 1.8% in2005, while Crisil expects these to increase to 2.7% in 2008-09. Car and commercial vehicle assetsegments comprise of one-third of total retail loans. Crisil has estimated that gross NPAs in thesesegments in 2008-09 would be around 3% for car loans and 5.5% for commercial vehicles.

RBI pulls up ICICI over I-Venture investments

The

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