GBS - FINANCE DEPARTMENT

Inflation In India Crosses Double Figures

2010-06-18T11:24:00.002+05:30

From 9.59% in the month of April 2010, the Inflationary Trend in India touched 10.16% in May 2010.The Economists are of the opinion that the rising foodstuff & metal prices account for this upward trend. The Deputy Chairman of the Planning Commission, Mr. Montek Singh Alhuwalia remarked that the Reserve Bank of India should take steps to curb the rising inflationary trend.

The price of foodstuffs increased 16.49% in the month of May 2010.The price of wooden articles increased due to an increase in the price of commercial plywood. The prices of metals increased by 3.4%, stainless steel by 26%, steel plates & strips by 14%. The price of tea increased by 21%.

On 27.07.2010, the RBI will publish the monetary Policy Report. In that the RBI may state the measures to be taken to curb rising inflationary trends. In April 2010, the Industrial Products increased by 17.6%. Mr C.Rangarajan, Chairman of the Financial Advisory Committee to the Prime Minister, commented last week that the RBI should keep an eye on the rising inflationary trends and should not be content with the rising Industrial Products.Mr. Alhuwalia remarked that he fully agrees with Mr. Rangarajan.Mr. Alhuwalia further remarked that at the close of the year the inflationary trend would come down. The Prime Minister Mr. Manmohan Singh is also of the opinion that the inflationary trend will touch 5%-6% towards the close of the year. Mr. Kaushik Basu, Chief Financial Advisor to the Govt. of India, feels that, if the prices of Fuel are kept out of the Government Regulation, the inflationary trend will at first be on the rise but will come down within 6 months.

Contributed By:
Prof. Jayanta Mitra
(Globsyn Business School)

Financial Crisis In Europe - Will It Affect Indian Stock Market?

2010-05-12T18:42:00.001+05:30

The Deputy Governor of Reserve Bank of India, Mr. Subir Gokorno has expressed his fear that the recent Financial Crisis in Greece & other European Countries can affect the Indian Stock Market. Attending a conference in Kolkata on Monday, Mr. Gokorno commented that few foreign investments might back off from the Indian Stock Market, due to the above financial crisis. He added that though Investors may withdraw their capital from the market, the crisis would not last long. He added that in comparison to the Dollar, the Rupee would be further devalued on account of the above crisis.

Talking about the rising inflationary trend of foodstuff prices, Mr. Gokorno expressed hope that it could be controlled within a few days. He mentioned that everyone is looking forward to the Monsoons, likely to come in the month of June 2010. A good monsoon, he added, will eventually control the upward rising inflationary trend of the foodstuffs & other items. The Reserve Bank of India will very shortly publish a Report citing reasons for the upward rising inflationary trends.

Contributed By:
Prof. Jayanta Mitra
(Globsyn Business School)

Reverse Mortgage - Ray of Hope for the Aged

2010-01-11T10:28:00.001+05:30

An English proverb says “ An old man has 3 friends: an old wife, an old dog & the money in the bank.” However majority Indian senior citizens don’t even have a penny left in the bank, at the flag end of their lives. Their only asset is the residential house they live in .If their children don’t stay with them or if they stay in a foreign country, it poses problems for the senior citizens as to whom they should transfer the ownership right of the house property. This is becoming a social problem for countries like India & China. To help senior citizens solve such problems, the concept of Reverse Mortgage has emerged as a “ Friend in Need’’.

Reverse Mortgage is basically a home loan scheme. This scheme does not provide loans for buying house properties. The main aim of this scheme is to provide lump sum amount/ regular incomes for senior citizens, which they can obtain by mortgaging their house properties, subject to certain conditions. The senior citizens are not required to repay the loan amount in their lifetime. After death or whenever the senior citizen decide to leave the house property, the bank sells off the property and gets repayment of the loans given. If there is any surplus left after settling off the loan amount, it is handed over to the borrower or to his designated legal representatives. Revaluation of the house property under the mortgage is done within an interval of few years and if on account of the revaluation the value increases, the borrower has a fair chance of increasing his income. At any point of time, if the borrower so desires, he/she can clear off the loan amount with interest and get back the ownership of his/her house property. After the death of the borrower, the legal representatives of the borrower can get back the ownership of the house property, by clearing off the loan amount with interest to the bank.

A number of Tax benefits can be obtained from Reverse Mortgage. Since the house property is mortgaged & not transferred, a one-time lump sum amount received from the project is not considered as Capital Gains & hence no Income Tax is required to be paid. Again regular incomes received on account of the mortgage is not considered as Income & as such no Income Tax is required to be paid on these receipts. Thus this project is fully tax-free.

The concept of Reverse Mortgage started way back in 1929, during the Great Depression in England. Though Reverse Mortgage is very popular in the USA & other developed Western Countries, it is yet to gain popularity in India.

Few Banks & Financial Institutions like National Housing Bank, Dewan Housing Finance Limited, State Bank of India, Punjab National Bank, Indian Bank & Central Bank are offering Reverse Mortgage Projects. On & from 10.12.2009,Central Bank started a new Reverse Mortgage project by name “Swabhiman Plus” for Senior Citizens.

It is expected that the concept will gather momentum in the years to come.

Contributed By:
Prof. Jayanta Mitra
(Globsyn Business School)

Double Decline Method of Depreciation

2009-08-17T18:57:00.001+05:30

The Double Declining Balance Depreciation Method is more or less a method similar to Straight Line Method but with a difference. For finding it, we first need to calculate depreciation by using Straight Line Method. We shall then figure out the total % of the asset that is depreciated in the first year and double it. That same % is multiplied by the remaining balance to be depreciated each subsequent year. The value will be lower than the Straight Line charge at some point, at which the double declining method will be scrapped and the Straight Line used for the remainder of the asset’s life.

An illustration will clarify the concept:

Suppose Tara Ltd purchased a Machinery for Rs 10,000 with a Residual value of Rs 1,000 and an Effective Life of 5 Years. We first proceed to calculate the Straight Line Depreciation Rate, which will be=100% / 5 years=20%. We need to double this rate and hence get 40% as the Double Decline Rate.For the First Year, Depreciation on the Machinery will be=40/100 x10000=4000.Therefore, Depreciated Value at the beginning of the Second Year will be= 10,000-4,000=6000.For the Second Year, Depreciation on the Machinery will be=40/100 x 6000=2400.Therefore, Depreciated Value at the beginning of the Third Year will be =6000-2400=3600.For the Third Year, Depreciation on the Machinery will be=40/100 x 3600=1440. Therefore, Depreciated Value at the beginning of the Fourth Year will be=3600-1440-=2160.For the Fourth Year, Depreciation on the Machinery will be=40/100x2160=864.Depreciated Value at the beginning of the Fifth or Last Year will be=2160-864=1296.For the Fifth/Last Year Depreciation will be the difference between the Depreciated Value and the Residual Value. Therefore, Depreciation will be=1296-1000=296.Thus the Accumulated Depreciation over the 5 years will =4000+2400+ 1440+864+296= Rs 9000.This figure plus the Residual Value of Rs 1,000 will give us the Original Value of the Machinery of Tara Ltd i.e.9000+1000=10000.The peculiar feature of Double Decline Method is that in determining the depreciation per annum, the Residual Value is not considered. Another striking feature is that the book value of the depreciated asset is never allowed to go down below the Residual Value.

Contributed By:
Prof. Jayanta Mitra
(Globsyn Business School)

Private Equity Funds - Shift from Real estate to Education and Health ?

2009-08-11T11:51:00.003+05:30

Fund raising by real estate sector focussed private equity funds have declined 61 per cent to USD 17 billion till May this year, as investors turned cautious.

According to a report by global research firm Preqin, PE investments till May this year has seen private equity real estate funds raise USD 17 billion, a reduction of 61 per cent on the same period in 2008. PE fund raising till May 2008 stood at USD 44 billion. The report said that with the slump in demand in the realty space, PE investors are being cautious and are making fewer commitments.

Although fund raising across the entire private equity real estate industry has declined sharply, the fall is particularly noticeable for funds targeting Asia. Fund raising by the Asia focussed funds declined 83 per cent over the year-ago period to USD 1.36 billion till May this year. The funds had raised USD 11 billion till May 2008.

However, even in slowdown, sectors like education and healthcare are perceived as recession proof. A report released by Venture Intelligence, a firm that tracks VC & PE activity, has found that over 80% of fund managers were game for investing in education companies with good track record. In the current uncertain economic environment, the attractive and predictable rates of return of the education industry, is serving as a magnet for PE investors.

India has a young population and there is huge emphasis on education. Opportunities exists right from pre-school level training to university and vocational training courses Matrix which had in 2008 invested in Tree House education a pre-school institute has now reported to have put in Rs 1oo Crore in FIITJEE, a preparatory training institute for professional courses. Educom Solutions one of the high flier of the stock market is currently trading around Rs 4000 per share. A few PE firms have reportedly bought stake in the Co.

Already, investments valued at $300 million has been made in this sector. Also, with a potential market size of $40 billion for private educational institutions, the sector appears to be lucrative for investors.

Recently, Religare Enterprises signed a joint venture agreement with Milestone Capital for managing a Rs 600 crore healthcare and education fund. Investment banker Hemendra Kothari recently sold his 10% remaining stake in DSP Merrill Lynch and plans to enter the healthcare and education sectors.

Despite the overall optimism, investors have their set of concerns, the topmost being the regulatory uncertainty surrounding "for profit" ventures in the K-12 (kindergarten to higher secondary) and higher education segments and the lack of scalability of ventures in "non formal" segments. Over half of the fund managers surveyed by Venture Intelligence felt that regulatory hurdles are a significant deterrent to the free flow of investments into the education.

Contributed By:
Prof. J. N. Mukhopadhyay
(Globsyn Business School)

Source: Economic Times & Business India

Hedge Funds likely to increase its presence in India

2009-06-24T10:01:00.002+05:30

Very few hedge funds are currently registered as FIIs in India. Some of these funds were allowed registration after a scrutiny of the track record of fund managers and were perceived as more of an exception to the rule.

Cayman islands, the Caribbean offshore financial centre and a favourite tax haven of money managers, is one of the most popular offshore fund jurisdiction for funds. Cayman, with its investor-friendly laws, has emerged as the most-favoured jurisdiction for fund formation, and is currently the fifth-largest banking centre in the world.

Cayman, has been admitted as a member of the International Organization of Securities Commissions (IOSCO), the global standard setter for securities markets. The move could encourage SEBI to give hedge funds - most of which are registered with Cayman - direct access to the Indian market.

Some countries either do not allow investment vehicles from non-IOSCO member countries to be sold in their jurisdictions or will require greatly-enhanced due diligence which makes it more difficult to do business with those jurisdictions. The IOSCO membership will remove these impediments and expected to open up markets for Cayman-domiciled securities providers.
As CIMA gets an ordinary member recognition from IOSCO, it may open up an opportunity for several hedge funds and investment funds to seek direct registration with SEBI as an FII rather than use other indirect access routes like third party FIIsThe development comes at a time when emerging markets are competing with each other to attract the huge liquidity created through money infusion by central banks across markets. So far in 2009, India has seen net FII inflows of little over $5 billion.

Contributed By:
Prof. J. N. Mukhpadhyay
(Globsyn Business School)

Source : Economic Times

Potential to become India’s largest M&A

2009-05-27T12:52:00.003+05:30

India’s largest mobile phone company Bharti Airtel is in talks to acquire a 49% stake in Africa’s largest telco MTN to create an entity with revenues of about $20 billion and over 200 million subscribers. The combined entity will be amongst the top five operators globally. MTN will get a 36% economic interest in Bharti in return for offloading the minority stake. The deal size is estimated to be worth over $23 billion.

The Indian telco said the deal would be achieved through a scheme of arrangement. As per the talks, MTN would acquire about a 25% post-transaction economic interest in Bharti for an effective consideration of approximately $2.9 billion in cash and newly issued shares of MTN equal to approximately 25% of the currently issued share capital of MTN.

MTN would acquire approximately a 25% post-transaction economic interest in Bharti for an effective consideration of approximately USD 2.9 billion in cash and newly issued shares of MTN equal to approximately 25% of the currently issued share capital of MTN.
Bharti would acquire approximately 36% of the currently issued share capital of MTN from MTN shareholders for a consideration of ZAR 86.00 in cash and 0.5 newly issued Bharti shares in the form of Global Depository Receipts ("GDRs") for every MTN share acquired which, in combination with MTN shares issued in part settlement of MTN’s acquisition of approximately a 25% post-transaction economic interest in Bharti, would take Bharti’s stake to 49% of the enlarged capital of MTN. Each GDR would be equivalent to one share in Bharti and would be listed on the securities exchange operated by JSE Limited.

The broader strategic objective would be to achieve a full merger of MTN and Bharti as soon as it’s practicable to create a leading emerging telecom operator which today would have combined revenues of over $20 billion and a combined customer base of over 200 million customers.

Contributed By:
Prof. J. N. Mukhopadhyay
(Globsyn Business School)

Source: The Economic Times

$ 1 trillion Toxic Assets – Will the recovery plan work ?

2009-03-31T09:24:00.002+05:30

The term "toxic asset" is a nontechnical term used to describe certain financial assets when their value has fallen significantly and when there is no longer a functioning market for these assets, so that they cannot reasonably be sold. This term became common during the financial crisis that began in August 2007. Toxic assets played a major role in that crisis. When the market for such assets ceases to function, it is described as "frozen".

Markets for some toxic assets froze in 2007, and the problem grew significantly worse in the second half of 2008. Several factors contributed to the freezing of toxic-asset markets. The values of the assets were very sensitive to economic conditions, and increased uncertainty in these conditions made it difficult to estimate the value of the assets. Banks and other, major financial-institutions were unwilling to sell the assets at significantly reduced prices, since lower prices would force them to significantly reduce their stated assets, making them appear insolvent.

US Treasury Secretary Timothy Geithner has unveiled a plan aimed at persuading private investors to help rid banks up to $1 trillion in toxic assets that that are seen as a roadblock to economic recovery.

The US treasury has invited private entities and individuals to buy some of the toxic assets in the bank books at rock-bottom prices. The banks have partially marked these assets to the market and booked huge losses in recent quarters. There are additional incentives for investors to buy these assets at heavily marked-down prices.

The private investor is being asked to bring in less than 10% of the acquisition cost and the treasury is willing to fund the remaining 90% or more. Also, the government is ensuring private investors could walk away if the value of these assets falls further. So there is no further downside for the private investor.

There are many problems with such a scheme. It has been debunked by a Nobel prize winning economist as “cash for trash”. The main flaw in the scheme is that there is no knowing whether banks such as AIG, City and Goldman have fully marked these assets down to their real value. Over 60% of the housing derivatives were traded and acquired outside the exchange in over-the-counter deals. Since there is no liquidity, one cannot ascribe any value to them.

The treasury plan seeks to discover a price with private partnership. But nobody is sure whether any reasonable price will be discovered for these toxic assets. The biggest irony is that the treasury is trying to discover a price by allowing the private investor a nine-fold leverage! Is this sustainable for US citizens, already over-leveraged.

The Fed's Term Asset-Backed Securities Loan Facility, or TALF, received lukewarm response heightening fears private capital will also shun the government's toxic-asset plan amid public outrage over outsized executive bonuses.

A closer examination of the US treasury plan would suggest that the scheme might need a lot more fine-tuning before it is able to provide some succour to the ailing American banking system.

Contributed By:
Prof. J. N. Mukhopadhyay
(Globsyn Business School)

New Package of Government of India to Revive the Indian Economy from Recession

2009-01-01T10:44:00.003+05:30

On 16.12.2008, the Indian Bankers Association held a meeting in which it was decided that the rate of interest on loan taken would be slashed. At the same time, rates of interest were also lowered for small & medium term business loans. However private banks like HDFC, ICICI did not specify anything with regard to lowering of interest rates. Experts are of the opinion that they too will soon adopt the policy of nationalized banks.

The Government of India, to revive the economy, has taken a number of decisions to increase the flow of money in the economy. The price of petroleum has been reduced, a stimulus package of Rs 30,000 Crore of Rupees has also been declared by the Government of India. Even after all these, the Export Sector & Housing Sector got due attention from the RBI, which declared Rs 9,000 Crore package for these sectors. Amidst these, the Repo Rate was lowered by the RBI.That was done when RBI started bargaining with the banks with regard to lowering of interest rate. The final shape was obtained in the meeting of the Indian Bankers Association on 16.12.2008.

At the end of the meeting, the Chairman of SBI, Mr. O.P.Bhatta said, the nationalized banks will charge interest on Housing Loan @ 8.5% p.a. up to a loan of Rs 5,00,000 & would charge 9.25 % interest p.a. on loans between Rs 5,00,000 to Rs 20,00,000.Presently on an average the current rate of interest on loan is more than 10%. The new rate of interest will come into effect from 16.12.2008. Thus from 16.12. 2008 to 30.06.2009,whoever take housing loan, will have to pay interest at the above-mentioned rate. Bhatta further added that the revised rate will apply only to the new home loan takers & that the rate will remain fixed for the coming 5 years. After the fifth year, judging the market scenario, the loan takers can convert their loans into fixed or floating terms. Loan processing fee & prepayment penalty are also waived. Along with it the loan takers will also get free life insurance policy. Even the initial percentage of the amount required to be arranged by the loaners for Project Finance, has been reduced. It has now been decided that upto a project loan of Rs 5,00,000,the loaners are required to arrange 10 % of the project loan & between Rs 5,00,000 to Rs 20,00,000 project loan, they are required to arrange 15%. Till 16.12.2008, the margin fixed by the banks was 25%.

To revive the small & medium industries, Bhatta has talked about the decision to reduce the rate of interest by 100 basis point i.e. by 1%. To provide employment opportunities, the banks have decided to expand their business activities & appoint new employees (staffs). LIC & Nationalized banks, jointly have decided to create new employment opportunities to the tune of 45,000, the bank sources said.

The Finance Ministry stated that on account of the new package the burden of Rs 15,000 to Rs 20,000 Crores would ultimately fall on the shoulders of the nationalized banks. Naturally the banks will not be interested in further slashing of the interest rates. The Real Estate, it seems is not interested in the new package. They feel that in Metros it is not possible to get a home within Rs 20,00,000. Hence the loan takers of these Metros will fall outside this package. As a result, the demand for Real Estate during recession and the decision to increase the inflow of cash will remain unfulfilled. But the Finance Ministry is not accepting this theory. They feel that even during recession, the Real Estate price is bound to fall.

The Labour Minister Mr. Oscar Fernandez stated that during August 2008 to October 2008, 65,000 employees have lost their jobs on account of recession. So to create employment opportunities the Government now relies heavily on public sector undertakings.

Contributed By:
Prof. Jayanta Mitra
(Globsyn Business School)

Federal Reserve Of USA Slashes Interest Rate To Zero - Will It Help India?

2008-12-19T11:06:00.003+05:30

To tide over the effects of Recession, the Federal Reserve, the Central Bank of the USA, has slashed the rate of interest on loans, taken from the Federal Reserve, to zero. This seems like following the ten-year-old Japanese Model, in which rates of interest were also slashed to zero. The Federal Reserve has stated that the rates of interest taken from them would range between 0% to 0.25%. In other words, the US banks & other Financial Institutions will now practically get Interest Free Loan from the Federal Reserve. As a result of this step, the Investment Cost in the American Economy will be reduced & at the same time people will be encouraged to spent rather than save. The US Economists are of the opinion that they now expect the common people to invest in Share Markets, Mutual Funds etc rather than keeping money in the Banks. The experts are of the opinion that this process will slowly revive the US Economy. Economists are also of the opinion that the slashing of the interest rate will help India boost up her Export Trade since the slashing process will reduce the price of the dollar in relation to the rupee as well as other major currencies of the World. This will definitely help India to boost up her Exports.

Contributed By:
Prof. Jayanta Mitra
(Globsyn Business School)

Should Redeemable Preference Shares be treated as Debt or Equity?

2008-12-11T10:17:00.001+05:30

Corporate houses that have issued redeemable preference shares are treating them as equity capital.

As per the International Financial Reporting Standards (IFRS), redeemable preference shares should be shown under the head long-term financial liability on the liability side.

The company law, in contrast, requires them to be classified as equity capital on the liability side.

The Institute of Chartered Accountants of India (ICAI) had suggested in its standards on financial instruments that companies treat them as long-term liability.

The changes would have impact on the bottom lines of companies negatively. Classifying redeemable preference shares under long-term financial liability will have an impact on the net profit of the company because it will change the way dividend paid on such shares is accounted for. If a redeemable preference share were treated as equity, the returns to those holding the instrument would be in the nature of dividends. On the other hand, if it were treated as long-term liability, the same would be interest, which would be an expense that would lower profits, at the same time it will reduce the tax burden of the company to some extent.

Hence should Redeemable Preference Shares be treated as Debt or Equity?

Contributed By:
Krishnendu Ghosh
(Globsyn Business School)

I Bank Crisis. Why?

2008-10-17T10:07:00.005+05:30

B School Grads dream of joining I Banks. Suddenly with the meltdown, we find that many respected I banks have evaporated and some are on the brink.

This paper attempts to analyze some of the probable reasons.

Financial Over-Leveraging - when loan and investment books are significantly larger than its capital. With $ 25 billion, some I banks were doing business of more than $500 billion. Leveraging is good. Over- Leveraging is bad, very bad.

Disclosure Issues – Many I Banks even in its last conference call with investors, gave no clue that it was actually on the brink.

High-Risk Nature of the Loans and Investments - I Banks play advisory role but slowly over the years, their proprietary books have multiplied. They also organize big loans for their clients for funding acquisitions. At times, they take positions, only to hive off the securities to other clients. In a crisis, they may not get the opportunity to down-sell such positions.

I Banks started buying mortgage loans from other banks, and then packaged them to sell bonds against the loan pool. Often they added cash to make the loan pool more attractive, so that the bonds can be sold at a higher price. By selling these structured bonds, it raised money and freed capital. But when homebuyers started defaulting, these bonds lost their value. It all began like this, and then the virus spreads across markets.

Sub-Prime to Prime - When an I Bank faces a redemption pressure, and if it sells the mortgage-backed bonds, whose prices have fallen, it will not raise as much as was earlier expected. So, it sells some of the other good assets or bonds which may have nothing to do with mortgages. But since the bank starts dumping these assets, prices of these assets also dip. This is when the crisis spreads from subprime to prime.

Strange Accounting of Complex Derivatives - All banks are required to mark-to-market (MTM) their investments. So, a drop in price leads to the MTM loss. Many of the instruments are over-the-counter derivatives, which are struck on a one-to-one basis between two parties. For a complex derivative a bank does construct a model, and feeds the available market price of these variables in the computer, to arrive at what the market price of the derivatives could or should be. This is an artificial model-generated price. This is called the mark-to-model against mark-to-market.

Illiquid Instruments - An MTM loss can be provided only if there’s a ‘market’. When there is no market, the bigger problem is how does one provide for the losses. The trouble is when the bank actually goes out to sell the derivatives, it discovers that there are no takers. And, even if there are buyers, they are willing to pay just a fraction. In other words, there is a sea of difference between the price that is being offered in the market and the high artificially-generated price thrown up by the computer model. Once there is a financial crisis of this magnitude, banks may refrain from lending to each other, fearing that the money would get stuck, compounding the crisis. So, when the bank ends up selling the instrument or unwinding these complex derivatives, the loss suffered is far in excess of the mark-to-model loss. Such extra losses on multiple of securities and multiple portfolios can wipe out the capital of the bank.

Contributed By:

Prof. J. N. Mukhopadhyay

(Globsyn Business School)

Reference: The Economic Times

Barclays Mops Up Lehman Brother’s Business In North America

2008-09-25T09:46:00.002+05:30

Barclays, the major Global Financial Services Provider Company, took over bankrupt Lehman’s business in North America. More than 10,000 employees of Lehman Brothers, engaged in different capacity will now be employed in the amalgamated company of Barclays & Lehman. The Court of Bankruptcy, having given green signal to the takeover, Lehman’s North American business comprising of Fixed Income, Equity Sales, Selling & Distribution, Research, Investment Banking etc, will now run in full swing. In a statement, Barclays stated that though the amalgamated business will now run in the name of “ Barclays Capital”, but since Barclays has already purchased the goodwill name of Lehman, it can use that name as & when it deems fit.

Contributed By:

Prof. Jayanta Mitra

(Globsyn Business School)

The AIG Incident: WHY??

2008-09-23T12:41:00.004+05:30

Given the crisis on Wall Street and the focus on American International Group Inc., one of the world's largest insurers, everybody is suddenly talking about counterparty risk.

What is counterparty risk, and why is it now an issue?

In the simplest terms, counterparty risk is the chance that the person on the other side of a deal - the counterparty - won't be there when it's time to pay up. Take an example most people can relate to: Selling a home. There's always the chance that when it comes time to close the deal a month or so down the road, the buyer won't show up or won't have the money.

In financial markets, traders and banks are constantly thinking about counterparty risk. When they make a deal to buy or sell, they often look at the credit rating of the party on the other side of the transaction. If the credit rating is high, they will go ahead with the deal. If the credit rating isn't so hot, they might ask for additional guarantees or collateral. Or maybe they won't do business with the counterparty at all, which is what happened to Lehman Brothers and Bear Stearns in their last days.

How does that relate to what's happening at AIG?

As an insurer, AIG expanded into the business of selling insurance against bond defaults, probably figuring it wasn't that much different than underwriting life or home insurance. AIG provided the insurance through derivative contracts known as credit default swaps. The problem for AIG is that it looks as if there could be a lot of claims at once because of a wave of defaults on mortgages and also by companies such as Lehman Brothers, Fannie Mae and Freddie Mac. By some estimates, the firm could face losses of $25-billion (U.S.) on the swaps.

How does a credit default swap work?

Credit default swap is like an insurance policy. In fact, it is an insurance policy. Suppose you own bonds issued by XYZ Corporation and you want to hedge against the possibility of a default. The credit default swap market has developed over the years to allow you to do that. You would enter into a contract with say an insurance company that would sell you a "policy" that would make you whole if XYZ defaulted. The contracts usually run for five years and you pay an annual premium for the coverage. AIG is a big insurance company and they issued a lot of these contracts. They allowed their customers to "swap" to them the risk of XYZ defaulting.

If XYZ's situation worsened, be it real or imagined, a new credit default swap would cost more to enter into and the value of the existing one would change. The issuing company has to mark the value of the existing contract to the current market and that is one of the reasons why AIG has taken such huge markdowns the past few quarters.

And these markdowns are just that, markdowns. If XYZ doesn't default during the life of the insurance policy, then the markdown will be marked back up. AIG has said that the economic risk they see is much smaller than the markdowns they have taken. That may be but I don't know they have any more insight into the fortunes of a GM, Lehman, Merrill or Washington Mutual than the rest of us ( I don't know if AIG has written contracts on these companies. Using them as examples only.) This was probably a poor business decision to enter this business. There really isn't a bad risk in the insurance business. There is bad pricing of that risk.

How did AIG end up in this situation?

The company worked through the weekend to raise capital by selling subsidiaries, but ended up rejecting bids from private equity firms and instead appealed to the U.S. government for a loan. The government said no and told AIG and the rest of Wall Street to seek a private sector solution. Banks such as Goldman Sachs Group Inc. have been asked by the U.S. Treasury to try to come up with as much as $75-billion to lend to AIG, but there are questions about the feasibility of that plan. That pushed the ball back into the U.S. government's court and it was seeking a solution last night.

Why would a failure at AIG potentially be more trouble than at Lehman?

For the world financial system, AIG is a powder keg because of its CDS contracts. Lehman was a big player in the market, but it was both a buyer and a seller, so its net exposure is relatively small as many contracts cancel one another out. AIG is primarily a seller of credit default swaps, meaning there are many players who are depending on AIG's ability to pay up on insurance policies

Contributed By:

Arjun Pal

(Knowledge Cell - Globsyn Business School)

Bank of America Takes Over Merrill Lynch

2008-09-19T10:00:00.004+05:30

Bank Of America Corporation has agreed to acquire Merrill Lynch & Co. Inc for US $ 44 Billion in a deal, that will give the US Bank the world’s largest brokerage. Recently Merrill had been hit hard by the Credit Crisis & has written down more than US $40 Billion. Bank of America is paying US $ 29 a share price, 70 % premium to Merrill’s share price on 12.09.2008, although Merrill’s shares were trading at US$ 50 in May and over US$ 90 at the beginning of June2007.The deal had been approved in the last year by the Directors of both the Companies. Merrill Directors will join the Bank Of America Board. It is quite likely that after this Take Over, the Market Participants will gradually lose interest in other Investment Banks.

Contributed By:

Prof. Jayanta Mitra

(Globsyn Business School)

Lehman Brothers Bankrupt - End Of A 158 Years Old Company

2008-09-16T18:41:00.004+05:30

US Investment Bank Lehman Brothers Holding Inc said that it plans to file for Chapter 11, i.e. Bankruptcy. But the Chapter 11 filing will not include its Broker –Dealer operations & other units, including Neuberger Berman. Recently, Lehman Brothers were facing utmost difficulties in tiding over situations relating to Mortgages & Asset Backed Securities of $ 46 Billion, Low Credit Rating, problems in raising Capital and last but not the least lack of Investors confidence. Lehman Brothers, which stood firm in the financial crisis of World Wars, succumbed to the Global Credit Crunch. European Share Prices are bound to go down following Lehman’s Bankruptcy. US Dollars went down 2.3 % to 105Yen, from 107.86 late on 12.09.2008. While the Euro dropped to 152.26 Yen from 153.43.To curb the situation that may arise from collapse of Lehman, the Federal Reserve launched a series of emergency measures on 14.09.2008 to calm down the trading discrepancies in the Financial Markets. Nearly 3000 Employees of Lehman Brothers in Asia, excluding the Indian Back office, are waiting anxiously & nervously to hear their fate. A Lehman executive, in Singapore, who did not want to disclose his identity, told Reuters over telephone “I guess we will have to wait for the marching orders.”

Contributed By:

Prof. Jayanta Mitra

(Globsyn Business School)

Emerging Real Estate Markets

2008-09-15T17:16:00.004+05:30

Despite worldwide spiral inflationary trends and economic turmoil in the USA, emerging Real Estate Markets are experiencing growth like never before. On 2ND December 2008,Investors, Developers & Planners are invited to discuss the opportunities in emerging markets. Leading Experts in Real Estate Investments will speak at the “ Real Estate in Emerging Markets Forum”, on that day at the Harmonie Club in New York City. Real Estate Investment Experts predicts the following: -

Emerging Economies account for 30% of World GDP & by 2015 they will account for 50%.
Emerging Markets had a Current Account Surplus of more than US$600 Billion & total Foreign Exchange Reserves exceeding US$ 2.7 Trillion
Young Professional Workforce, Rising Income & an expanding Middle Class is driving urbanization beyond the Traditional Metro Cities.
China leads the way experiencing nearly 10% growth, India follows closely with about 8%, Russia about 7% and Brazil at 4%.
It is anticipated that over the next decade, US$ 22Trillion will be spent on Infrastructure in the emerging markets, as accelerating urbanization creates demand for power, electricity, water & transport networks.

Contributed By:
Prof. Jayanta Mitra
(Globsyn Business School)

Retail Loans: The Major Concern for banking industry

2008-09-10T14:35:00.007+05:30

Bankers anticipate a rise in bad loans, especially in the retail segment after the latest bout of interest-rate tightening. Senior bankers are bracing for higher delinquencies in the personal and consumer loan portfolio of banks besides credit cards, as the impact of higher interest rates start to bite. The burden of repayment is expected to hurt those who have taken small-ticket loans.

Recently, credit rating agency Crisil had warned of a rise in delinquencies in the retail portfolio of banks, with rising interest rates. Higher rates could lead to a slowdown in lending. It is too early to comment on whether interest rates have peaked and may taper off in the near term, rising interest rates will certainly impact the growth of the lending business, but may not impact the quality of credit. Credit is expected to grow by 15% this year, of which, retail loans are expected to rise only by 5-10%. However, corporate credit will continue to grow at a significant pace.

The Indian economy would grow at 7.5-8%, which is still quite robust compared with other countries. Not only this, such a growth rate is sustainable for Indian economy and there is an opportunity for this to rise further. The first lot of delinquencies may be felt in the unsecured loans portfolio, including credit cards, personal loans and consumer durable finance. It may be seen in mortgage loans and loans given to small-and-medium enterprises in the next phase.

The other issue worrying bankers now is the possibility of a single-borrower defaulting across multiple banks. Higher interest rates are causing individuals to borrow from several lenders at the same time and there is a high possibility of them defaulting too. The next 8-12 months may see this phenomenon rising, especially in the personal loan segment.

According to a recent report by credit rating major Crisil, the asset quality of retail loans extended by commercial banks in the country is set to deteriorate. The report said that bad loans, or non-performing assets (NPAs) in retail loans will rise to 4% of the total loans over the next two years, from 2.7% as of March 2007.

The increasing exposure to higher-risk customers is mainly through personal loans and credit card receivables, it has said. These are unsecured in nature and now form 17% of the total outstanding retail loans in March 2007, up from 6% in 2004. Housing loans constitute over half of the total retail loans in India. Bad loans in home loan portfolio increased to 2.2% of the total loans in March 2007, from 1.8% in 2005. These are expected to increase to 2.7% in the financial year 2008-09.

Car and commercial vehicle asset segments comprise one-third of the total retail loans. Crisil estimates that gross NPAs in these segments have increased to 2.3% and 4%, respectively, as of March 2007, from 0.9% and 3.2%, respectively, in 2005. In 2008-09, these numbers are seen at 3% for car loans and 5.5% for commercial vehicles. The slowdown in recovery efforts, following the controversy over recovery methods of some players, resulted in a sharp spike in delinquencies during September-October 2007.

Contributed By:
Arjun Pal
(Knowledge Cell - Globsyn Business School)

RISK MANAGEMENT : THE PRESENT INDUSTRY NORM

2008-08-13T12:37:00.002+05:30

The $7.1 billion rogue-trading scandal at French banking giant Societe Generale reported on the beginning of this year (Jan 21, 2008) shows how risk management in the industry became during the recent market boom.

“Over the past few years, risk management has been an oxymoron. Banks haven't been doing it," said Larry White, professor of economics at New York University's Leonard N. Stern School of Business. "They thought that all the extra return they were getting was because they were the smartest, not because they were taking a lot of risk and were just being lucky."

“That's what good management is about," he added.

SocGen stunned financial markets when it revealed that a single trader, Jerome Kerviel, lost $7.1 billion of the bank's money in one of the largest-ever frauds by a rogue employee. The company said the Paris-based trader used his knowledge of the bank's control procedures "to conceal these positions through a scheme of elaborate fictitious transactions."

Jerome Kerviel, the 31-year-old Paris-based trader who worked on Soc Gen’s European equities derivatives desk, was less than seven years into the job. Rather his annual salary of $140,000 was pretty routine for middling traders. Most puzzling of all, he does not seem to done it for personal gain. Yet his actions cost the bank $7 billion and forced it into an emergency $7.8 billion cash call on shareholders.

It was explained by the bank that Mr. Kerviel’s role on the trading desk was that of an arbitrageur, which meant that he was entrusted to purchase one portfolio of stock index futures and at the same time sell a similar mix of index futures, but with a slightly different value. The object of arbitrage is to try to make profits from these differences in value. Because the value gaps between similar financial instruments are usually very small and temporary, this type of activity typically involves trading in very high total nominal amounts. Mr. Kerviel’s fraud, according to the bank, consisted of placing sizable, real purchases in one portfolio but creating fictitious sales transactions in the second, offsetting portfolio. This gave the impression to risk managers that the risks in the first portfolio were hedged, when in fact they were not. As a result, the bank wound up exposed to huge one-way bets, or long positions. Instead of hedging, which was his job, Mr. Kerviel was effectively speculating with the bank’s money.

Each time one of Mr. Kerviel’s trades was questioned, he would describe it as a “mistake” and cancel the trade, Mr. Mustier said. “But in fact, he then replaced that trade with another transaction using a different instrument” to avoid detection, he said. Mr. Mustier also said that Mr. Kerviel’s fake trades did not fall into an identifiable pattern.

Soc Gen seems to have weathered the storm better, despite the significantly larger amount involved ($7 billion as against $1.4 billion in Leeson’s case). That’s partly because of more deft handling of the situation (it discovered the problem over the weekend but waited to unwind its position before it went public) and partly because its shareholders rode to the rescue. If shareholders had not obliged and news of the bank’s problems had leaked out, it could well have triggered a run on the bank and a payments crisis, exposing entire banking system to huge risk. Ironically, there are fewer things modern banks take more seriously than risk management. On paper that is. And in the complex world of financial engineering where no one quite understands many transactions, it is easy to pull the wool over everyone’s eyes. The fraud raises a number of questions about modern financial architecture — from regulation to incentives to the nature of the work that encourages people to work as lone wolves rather than in teams.

There is no substitute for personal integrity. We’ve known that all along. Yet each time there is a major fraud, as at France’s second largest bank, the 140-year old Societe Generale, we look for reasons and then for ways to try and prevent the next fraud. Yes, banking is about taking risks. Typically banks take short-term deposits that are repayable on demand and lend longer term. Thus there is a maturity mismatch in that when the depositor demands his money back, the bank must be in a position to repay it even though it may have lent the money. Banking in its simplest form is about managing this risk. Over the years however, banks have begun to take on more and more risks. And since higher risks usually mean higher rewards, there is a built-in incentive to do so. This has been aggravated by a compensation structure that directly rewards those who undertake huge risks like dealers in complex derivative instruments relative to those in the back-office who do the relatively unglamorous job of monitoring. Ideally banks themselves must steer clear of excessive risks. But since that is unlikely to happen — the hunger for more and more profits combined with blind faith where each bank thinks its systems are foolproof rules this out — we need to devise a better way. Till then, the next fraud will never be very far away.

Contributed By:

Arjun Pal

(Knowledge Cell - Globsyn Business School)

After Effects of RBI's Credit Policy

2008-08-08T18:40:00.005+05:30

The Governor of the Reserve Bank Of India, Mr Y. V. Reddy announced its Credit Policy on 29.07.2008.Two measures were taken :-

1) Repo Rate - that is the rate at which the RBI lend funds to Banks, have been increased from 8.5 % to 9%

2) The Cash Reserve Ratio (CRR) - that is the proportion of their deposits that Banks have set aside with the RBI has been increased from 8.75 % to 9%

The First Measure will make the Loans expensive. The expansion plans of the Industries will be hampered. For an ordinary person, it will increase the EMI (Equated Monthly Instalment) payments of the Housing Loans, taken by mortgaging properties on Floating Rates of Interest. The immediate impact of this will be lower demand for Consumer Loans. Also the booming Retail Financing will stop.

The Second Measure will squeeze Liquidity out of the system & will have similar effects. As a consequence of this Monetary Tightening, GDP growth will suffer. The Equity Markets will be in doldrums. Bombay Stock Exchange SensitiveIndex (Sensex) fell from a high of over 21,000 in January 2008 to 14,500 when the RBI's Credit Policy Review was released. There will be no takers for the Initial Public Offers (IPO). Hence RBI's Liquidity Squeeze may have a bigger impact in 2009-2010.These drastic measures will not bear fruits if the crude oil prices rise to $140 per barrel. With General Elections knocking at doors, it is quite normal that the voters will revolt against the rise in prices, when the inflation will exceed their tolerance levels. The result being a change of the Government. Currently HDFC & ICICI have raised their loan rates by 75 basis points. Real Estate prices have fallen. Automobile & 2 Wheeler Companies are slowing down their production. Indian Economy is slowly going down in the ''Quick Sand of the Inflation".

Contributed By:

Prof. Jayanta Mitra

(Globsyn Business School)

Fair Value or Historic Cost?

2008-07-18T23:53:00.000+05:30

Over the past few years, this question has been increasingly asked and pondered over. It is constantly debated whether historic cost actually provides the investor with the information required to make good decisions. There are strong views in favour of fair value measurement, proposing that it is a more current view on an asset's or liability's true value on the current transaction date. The fair value of an asset is the amount at which an asset can be purchased or sold between willing parties in a current transaction. The fair value of a liability is the amount at which a liability can be settled between willing parties in a current transaction. Fair value excludes any forced sales or settlements and does not include liquidations.

Is the historic cost of an asset/liability any indication of the value at which it can be sold/settled in the future?

In today's market, it is hard not to agree that an asset's historic cost is no longer relevant.

Janine Pakiry
Asst. Vice President
(Financial Control)
Lehman Brothers

International Financial Reporting Standards

2008-07-16T10:24:00.002+05:30

I recently attended a seminar on IFRS (International Financial Reporting Standards) addressed by a lot of distinguished speakers. I am giving below a summary of it.

Accounting is the language of business. With globalisation, IFRS will emerge as the common language by which companies across countries will do business. (With the decline of USA as a superpower, US GAAP is likely to be replaced by IFRS).
The current accounting system is rule based and based on historical cost. IFRS is based on principles. No court order of any country will be able to supersede IFRS.
India has agreed to accept this by 2011. Since accounts also have one-year-old data, it means Indian companies have to be IFRS compliant by 2010. A great deal of preparation will be necessary long before the adoption date.

By adopting IFRS, Indian companies can bridge the Atlantic divide, integrate and then participate in the global economy.

The advantage for Indian companies adopting IFRS will be ease in doing business with global clients, particularly in USA and Europe. These countries do not trust the accounts of Indian companies, nor most of the small to medium size auditors who audit these accounts. It will also mitigate the risk premium built by investors who are not conversant with Indian accounting standards.
Moreover, foreign investors are more likely to invest in firms whose accounting is similar to accounting of the country of the investors.
In the area of M&A, accounting for intangibles like goodwill with indefinite useful life need not be written off in IFRS leading to declaration of higher profits. An impairment test has to be done by the management of the company, whose judgement will be supreme.

There will be nothing like "extraordinary income" in IFRS.

Much more non – accounting information will be included and the judgement of the management will be of paramount importance in several matters. Doing away with the schedule XIV rule for depreciation is just one of the many examples.

Contributed By:

Prof. J. N. Mukhopadhyay

(Globsyn Business School)

Economy in the Grip of Spiral Inflation - Should We Invest?

2008-07-03T14:52:00.007+05:30

With the Indian Economy experiencing 11% spiral inflation, an average Indian previously buying essentials for Rs100 now paying Rs111, the burning prices of edible oil/lentils/cooking gas/fish & vegetables making deep holes in our pockets, bus/tram/taxi/auto fares on rise - situation is really grave. In this scenario the burning question is: Should we invest and if at all we do so, where should we invest to get good returns? The following avenues may really prove profitable in this situation: -

PPF (Public Provident Fund): The PPF carries 8% interest per annum & the interest is fully tax-free. In addition tax exemption benefit u/s 80 of the Income Tax Act 1961 can be availed. A maximum amount of Rs 70000 can be invested in the PPF.A minimum amount of Rs 500 p.a. need to be deposited in this 15-year term fund.
Fixed Deposits With Banks: The present interest rate on Bank Deposits vary between 8.45% & 9%. Senior citizens will get between 8.70% to 9.50%. However interest on FD with Bank is taxable but the Principal amount can be withdrawn before the term period.
Mutual Fund Fixed Maturity Plan (FMP): This is a Debenture / Bond based fund and is more or less similar to FD with banks. The term period can extend up to 3/6/12/14 months. The present rate of interest on 3 months FMP, after tax deduction is 8.41% p.a.
Postal Monthly Income Scheme (MIS): Presently, Postal MIS lost its importance after the Bank Interest hike.8% rate of interest is currently offered & 5% Bonus can be obtained after its 6 years term period.
Shares: Most risky of all investments but since the market is on the downswing, this period can be a good time for investment in IT, Pharmaceuticals, Fast Moving Consumer Goods (FMCG) Shares.
Equity Based Mutual Fund: Risky like shares, but investment in Yield Fund at this stage can be profitable.

Contributed By:
Prof. Jayanta Mitra
(Globsyn Business School)

The American Dream…

2008-06-26T10:34:00.004+05:30

There are many, many different types of people living in the United States, but most of them have heard of or believe in the “American Dream”. The promise of living in the United States has always been work hard, earn money, and build a better future for you and your families. Will the American Dream survive the next 50 years? Given the uncertain economic conditions today, will people continue to believe in it?

Here is the link to an interesting article I read, that got me thinking and talking about this interesting topic:

http://edition.cnn.com/2008/TECH/06/16/suburb.city/?iref=mpstoryview

Sheena Malik
Controller
Stedfast Financial, New York

Should Ranbaxy promoters have sold out?

2008-06-18T18:43:00.001+05:30

Ranbaxy has been an example of the rise of an Indian MNC.

After many years of acquiring some big companies globally, it was a role reversal to see the promoters of Ranbaxy deciding to sell their controlling stake of 34.8% for Rs10,000 crores at Rs 737 per share ( 31.4% premium over the company’s closing share price on the same day).

If the Daiichi Sankyo’s acquisition of Ranbaxy leads to a stronger company in this globalised era, and can also retain its name and country of origin then it may give a fillip to the rise of Indian MNC. However, if it becomes Daiichi India, with no trace of Ranbaxy then it may become one less Indian MNC.

The company reported an operating income of more than Rs 4000 crores and a net worth of more than Rs 2000 crores for FY 2008. The company also commanded respect in our stock market enjoying a P/E ratio of 34. It has a total debt-equity ratio of 1.4 and long term debt-equity ratio of 0.9. This gave it scope to raise resources both from the equity market as well as the bond market.

The promoters may have very good reasons for selling their controlling stake, but overall I feel a little sad that Ranbaxy promoters sold the controlling stake.

Prof J N Mukhpopadhyaya

(Globsyn Business School)

Emerging Financial Management

2008-06-18T09:19:00.002+05:30

The old practice of compliance Accounting and management thereof has undergone remarkable metamorphosis in recent times in view of severe competition, globalization, price -wars and tough Govt. regulations across the world.

However, managerial focus to stay viable and profitable on a continuous basis defying all hurdles has become so forceful in present times that the entire world of finance and the people who manage finance are devising new ways and means to map continuity , profitability and value addition in business whilst countering risks and uncertainties.

The financial management of to-day is to ensure the company takes right decisions in various crucial matters which are cost effective, most reasonable and entails minimum risk .This, in other words, is accounting for managerial decisions and evaluation thereof. The other requirements being investors' / shareholders' value addition , evaluating the value chain of the business, business continuity mapping, business risk mapping and finding ways and means for their mitigation.

Since most companies are becoming global now, the need for effectively managing international transactions is also an emerging area. This entails currency swaps, interest rate optimization and hedging of currency fluctuations .These in turn needs advance planning, adequate market judgment and financial market analysis. Adequate knowledge of international trade and financing thereof is, thus, called for on the part of a CFO.

As more and more companies are going for mergers & acquisitions, company valuation has emerged as a significant responsibility of a CFO. This entails organizing due diligence, understanding future potentials and assessing intrinsic worth thereof .CFOs in the past were seldom involved in these functions. Further, many mergers/ acquisitions are across the countries, hence, determing the valuation and the evaluation process has to have some kind of uniformity with regard to treatment as well as disclosures of items of income & expenditure and assets & liabilities. This calls for adequate knowledge on the part of CFO, apart from Indian GAAP and the Indian Accounting Standards, of US GAAP or any other GAAP and Accounting Standards thereof, as may be required, for necessary conversion. Moreover, as the concept of fair value accounting is gaining ground, the transition towards IFRS seems inevitable. Thus preparation of Accounts and making the disclosures thereof under IFRS is also an emerging area for a present day CFO. With the formulation of trade guidelines under WTO, the whole gamut of Accounting Policies / Standards will undergo change across the nations, thus, calling for additional responsibilities on the part of a CFO to manage finance and business under a new dimension.

With the emergence of big corporations with huge investments involving many shareholders, managing investors’ expectation and the need for their protection also has become an important function of the CFO in recent times. This entails proper disclosure of financial information as per plethora of Govt. Rules / Regulations to cater to investors right to information.

Finally, as the business has to continue with an expected return on capital invested, the management of the future functionalities and its financial implications has to be articulated as correctly as possible. This entails establishing probabilities and expected values on the key functions of the business and projects the most likely scenario and manages the same with vigor and stamina. This is also an emerging area for the present day CFO.

Contributed By:

Pratap Chakravarty
(Head Finance & Company Secretary)
Jost India Auto Component (P) Limited

Should Human Assets Be Included in the Balance Sheet of a Company ?

2008-06-02T12:08:00.005+05:30

Though your Balance Sheet is a model of
What balances should be,
Typed and ruled with great precision,
In a type that can see ;
Though the grouping of the assets
Is commendable and clear,
And the details which are given more
Than usually appear,
Though investments have been valued
At the sale price of the day,
And the Auditors Certificate shows
Everything O.K.
One asset is omitted and its worth
I want to know,
The asset is the value of the Men
Who run the show.

Author: Sir Mathew Webster Jenkinson

Contributed By:
Prof. Jayanta Mitra
(Globsyn Business School)

Can Government of India Control Inflation?

2008-05-29T16:53:00.000+05:30

The Reserve Bank of India, says that its prime mandate is to contain inflation. RBI had earlier indicated that an inflation rate between 4.5% and 5% was comfortable for the Indian economy. In the last few weeks, inflation has overshot that threshold and is inching towards the double-digit mark. The wholesale price index (WPI) inflation, which was 3.8% in January, rose to7.41% by March 29. It then eased to 7.1% for the week ending April 5 but rose again to 7.33% the following week. In the near future, there is no hope that it will come down. McKinsey & Co, in a recent survey, found that 64% of the Indian executives polled, were apprehensive about the inflation going up in the next six months.

Experts believe that the Government of India (GoI) will resist raising interest rates since the interest rate differential with the U.S. is already quite large, they would not want to widen it any more. To control inflation, one of the things that the GoI is trying to do is set price ceilings and quantitative controls. However, these techniques have historically been unsuccessful not just in India, but elsewhere as well. Not only these are difficult to administer, but also these methods are outdated. Surely, there is a need to curb price rise, as the monetary policy would not be altered at this point in time because of foreign investments, etc. The government is constrained by what is called the impossible trinity of international finance (the perceived irreconcilability of the three objectives – capital freedom, exchange rate maintenance and independence of monetary policy).

The government has been negotiating with cement and steel manufacturers, (almost) forcing them to restrain prices. "It is my view that cement manufacturers and, to some extent, steel producers are behaving like a cartel," Chidambaram told Parliament in late April. Steel companies are also pointing to rising input costs. An uneasy truce has been reached with the manufacturers agreeing to maintain the current level of prices for a few more months. But the truce would collapse if companies see their profits in the red.

The government has implemented several other steps, including various export bans and import duty cuts and revision of the annual export-import policy. For example, this year, cement exports were banned and all incentives on the export of primary steel were withdrawn. The export target for 2008-09 has been revised to $200 billion – an increase of 23% over the $155 billion achieved in 2007-08. This was short of the $160 billion target for the year.

Increase in steel and cement prices results in pressure on user industries. The country’s largest two-wheeler manufacturer, Hero Honda, has hiked prices for its products. The car manufacturers are also being forced to the wall. The Tata Group's Rs. 100,000 ($2,500) Nano, the inexpensive car due to roll off the assembly lines soon, may be impossible to manufacture at such a low price.

Avik Mukherjee

Globsyn Business School

At What Rate Will India's GDP Grow in 2008?

2008-05-29T16:11:00.001+05:30

The BSE sensitive index (Sensex) touched an all-time high of 21,207 on 10^th January 2008 and our FM Mr. P. Chidambaram said that the outlook was very positive for India and her GDP is all set to grow at 9% this year. The analysts were having a ball and predicted that Sensex would scale 25,000 in no time. The Governor of Reserve Bank of India (RBI), Dr. Y.V. Reddy, it was reported, was considering a cut in the interest rate to boost investment. The stock analysts were rejoicing about the decoupling theory: How the stock markets in rapidly-growing economies like India and China would be unaffected by the imminent slowdown in the U.S. India was living a dream.

The dream was short-lived and much to all’s astonishment, the Indian markets crashed. The first quarter of the calendar year 2008 was the worst since 1992. Market indices have tumbled 28% in dollar terms and some stocks have lost more than 50% of their values.

Now opinions differ widely on GDP growth in 2008-09. The Delhi-based Oxus Research & Investments is the most optimistic and maintains that 9% is still achievable. Deutsche Bank pegs it at 8.4% while UBS does it at 8.2%. In the middle ground are the Asian Development Bank (8.0%), the International Monetary Fund (7.9%, for calendar 2008) and Lehman Brothers (7.6%). HSBC, JP Morgan Chase and Morgan Stanley are among the least optimistic and estimate a growth of 7%. Meanwhile, rating agency CRISIL has made a downward revision of its estimate to 8.1% from an earlier forecast of 8.5%.

Avik Mukherjee

Globsyn Business School

Does India measure inflation accurately?

2008-05-28T16:10:00.002+05:30

Inflation means a sustained increase in the aggregate or general price level in an economy. In simple words, it means that prices of goods are increasing.

In recent times, the burning issue is inflation, which is (figuratively speaking) making a hole in the consumers’ pockets. The latest figure of inflation, which is released by the government, is 7.83%. However, does India measure inflation accurately?

Of the two accepted methods for calculating inflation viz., Wholesale Price Index (or WPI, i.e., the index that is used to measure the change in the average price level of goods traded in wholesale market) and Consumer Price Index (or CPI, i.e., a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers), India uses WPI to measure inflation, whereas, all the major countries in the world use CPI to measure inflation. Now I am not saying that since many countries use CPI to measure inflation, India should also do the same. However, it is more logical to use CPI to measure inflation. The prime reason is that CPI gives us an idea that how much is the price rise actually affecting the consumers. WPI does not properly measure the exact price rise an end-consumer will experience because, as the same suggests, it is at the wholesale level. Whereas the WPI is supposed to measure impact of prices on business, India uses that to measure the impact on consumers. Another problem with WPI calculation is that more than 100 out of the 435 commodities included in the Index have ceased to be important from the consumption point of view. So, are we right to use WPI to measure inflation?

Avik Mukherjee
Globsyn Business School

Dividend Stripping

2008-05-28T11:43:00.002+05:30

Dividend stripping is the purchase of shares just before a dividend is paid, and the sale of those shares after that payment, ie. when they go ex-dividend. This may be done either by an ordinary investor as an investment strategy, or by a company's owners or associates as a tax avoidance strategy.

For an investor, dividend stripping provides dividend income, and a capital loss when the shares fall in value (in normal circumstances) on going ex-dividend. This may be profitable if the income is greater than the loss, or if the tax treatment of the two gives an advantage.

For further reading:

http://www.mutualfundsindia.com/divstrip.asp

Contributed by:

Veena Vishwanathan

Globsyn Business School

Lady Macbeth Strategy

2008-05-28T10:13:00.001+05:30

A corporate-takeover strategy with which a third party poses as a white knight to gain trust, but then turns around and joins with unfriendly bidders. (A white knight is a company that makes a friendly takeover offer to a target company that is being faced with a hostile takeover from a separate party. The knight in shining armor gallops to the rescue!)

Such a strategy is called a Lady Macbeth strategy because Lady Macbeth, one of Shakespeare's most frightful and ambitious characters, devises a cunning plan for her husband, the Scottish general, to kill Duncan, the King of Scotland. The success of Lady Macbeth's scheme lies in her deceptive ability to appear noble and virtuous, and thereby secure Duncan's trust in the Macbeths' false loyalty.

Contributed by:

Veena Vishwanathan

Globsyn Business School

An example of foreign exchange risk

2008-05-26T12:04:00.004+05:30

Where some of the assets of an enterprise are not determined in the currency of its home country, foreign exchange risk or exposure risk arises. Owing to the exchange rate fluctuations, loss arises when domestic currency is exchanged for a foreign currency in relation to business proposed to be undertaken. The occurence of exchange risk can be explained as follows:

An Indian entrepreneur enters into a contract for the purchase of machinery with an American supplier, payment to be made after 3 months. Exchange rate at the time of contract was 40.00/$1. Value of machinery is $50,000. The value of Indian rupee declines to $42.00/$1 after 3 months.

Amount paid to US exporter at the time of contract (US $) = $ 50,000

Amount to be paid to US exporter at spot rate (INR) = $50,000*Rs.40 = Rs. 20,00,000

Amount paid to US exporter at future rate (INR) = $50,000*Rs. 42 = Rs.21,00,000

Therefore, loss suffered = Rs. 21,00,000- 20,00,000 = Rs. 1,00,000

Contributed by:

Veena Vishwanathan

Globsyn Business School

Foreign Bonds

2008-05-26T11:41:00.002+05:30

A "foreign currency" bond is a bond that is issued by an issuer in a currency other than its national currency. Issuers make bond issues in foreign currencies to make them more attractive to buyers and to take advantage of international interest rate differentials.

Foreign currency bonds have a vocabulary of their own. Bonds issued in foreign currencies are given the names listed beside the currencies below:

"Yankee Bonds" for US dollars
"Samurai Bonds" for Japanese Yen
"Bulldog Bonds" for British pounds
"Kiwi Bonds" for New Zealand dollars

Veena Vishwanathan

Globsyn Business School

Triangular Arbitrage

2008-05-26T11:18:00.004+05:30

The process of converting one currency to another, converting it again to a third currency and, finally, converting it back to the original currency within a short time span. This opportunity for riskless profit arises when the currency's exchange rates do not exactly match up. Triangular arbitrage opportunities do not happen very often and when they do, they only last for a matter of seconds. Traders that take advantage of this type of arbitrage opportunity usually have advanced computer equipment and/or programs to automate the process.

As an example, suppose you have $1 million and you are provided with the following exchange rates: EUR/USD = 0.8631,

EUR/GBP = 1.4600 and

USD/GBP = 1.6939.

With these exchange rates there is an arbitrage opportunity:

Sell dollars for euros: $1 million x 0.8631 = 863,100 euros.

Sell euros for pounds: 863,100/1.4600 = 591,164.40 pounds.

Sell pounds for dollars: 591,164.40 x 1.6939 = $1,001,373 dollars

$1,001,373 - $1,000,000 = $1,373

From these transactions, you would receive an arbitrage profit of $1,373 (assuming no transaction costs or taxes).

Contributed by:

Veena Vishwanathan

Globsyn Business School

Balance Sheet of Life

2008-05-26T10:59:00.006+05:30

Prof. Jayanta Mitra
Globsyn Business School

Understanding some of the rules of Time Value of Money

2008-05-26T10:40:00.000+05:30

Rule Of 72

A rule stating that in order to find the number of years required to double your money at a given interest rate, you divide 72 by the compound return . The result is the approximate number of years that it will take for your investment to double. For example, if you want to know how long it will take to double your money at 12% interest, divide 72 by 12 y ou get six years.

Rule of 69

If you are inclined to do a slighly more involved calculation, a more accurate rule of thumb is the rule of 69. According to this rule, the doubling period = 0.35 + 69/ Interest rate

Hence , if the interest rate is 12%, the doubling period = 0.35 + 69/12 = 6.1 years

Contributed by:

Veena Vishwanathan

Globsyn Business School

What is Reverse Mortgage?

2008-05-26T09:58:00.000+05:30

In the Union Budget 2007-08, a proposal to introduce 'Reverse Mortgages' was put forth. In a regular mortgage, a borrower mortgages his new/existing house with the lender in return for the loan amount (which in turn he uses to finance the property); the same is charged at a particular interest rate and runs over a predetermined tenure. The borrower then has to repay the loan amount in the form of EMIs , which comprise of both principal and interest amounts. The property is utilised as a security to cover the risk of default on the borrower's part.

In the reverse mortgage, senior citizens (borrowers), who own a house property, but do not have regular income, can mortgage the same with the lender (a scheduled bank or a housing finance company-HFC). In return, the lender makes periodic payment to the borrowers during their lifetime. Inspite of mortgaging the house property, the borrower can continue to stay in it during his entire life span and continue to receive regular flows of income from the lender as well. Also, since the borrower doesn't have to service the loan, he need not bother about repaying the 'borrowed amount' to the lender.

To read more, http://in.loans.yahoo.com/

Veena Vishwanathan

Globsyn Business School

How is credit score calculated?

2008-05-26T09:44:00.000+05:30

The credit score, commonly referred to as FICO Score is a proprietary tool created by the Fair Isaac Corporation. This is not the only way to get a credit score, but the FICO score is the measure that is most commonly used by lenders to determine the risk involved in a particular loan. Due to the proprietary nature of the FICO score, the Fair Isaac company does not reveal the exact formula it uses to compute this number. However, what is known is that the calculation is broken into five major categories with varying levels of importance. These categories, with weight in brackets, are

payment history (35%),
amount owed (30%),
length of credit history (15%),
new credit (10%) and
type of credit used (10%).

The payment history category reviews how well one has met one's prior obligations on various account types. It also looks for previous problems in one's payment history such as bankruptcy, collections and delinquency.

The amount one currently owes to lenders - while this category focuses on one's current amount of debt, it also looks at the number of different accounts and the specific types of accounts that one holds. The longer one has a good credit history, the better. Also, people who apply for credit a lot probably already have financial pressures causing them to do so, so each time one applies for credit, one's score gets dinged a little.

It is important to understand that one's credit score only looks at the information contained on one's credit report and does not reflect additional information that one's lender may consider in its appraisal. For example, one's credit report does not include such things as current income and length of employment. However, because one's credit score is a key tool used by lending agencies, it is important that one maintains and improves it periodically.

Contributed by

Veena Vishwanathan

Globsyn Business School

Picking The Right Mutual Fund

2008-05-23T16:56:00.000+05:30

Identifying Goals and Risk Tolerance: Are long-term capital gains desired, or is a current income preferred? Will the money be used to pay for college expenses, or to supplement a retirement that is decades away? Identifying a goal is important because it will enable you to dramatically whittle down the list of the more than 8,000 mutual funds in the public domain. In addition, investors must also consider the issue of risk tolerance. Identifying risk tolerance is as important as identifying a goal.

Style and Fund Type: If the investor intends to use the money in the fund for a longer term need and is willing to assume a fair amount of risk and volatility, then the style/objective he or she may be suited for is a long term capital appreciation fund. Conversely, if the investor is in need of current income, he or she should acquire shares in an income fund. Of course, there are times when an investor has a longer term need, but is unwilling or unable to assume substantial risk. In this case, a balanced fund which invests in both stocks and bonds, may be the best alternative.

Charges and Fees: Some funds charge a sales fee known as a load fee, which will either be charged upon initial investment or upon sale of the investment. A front end load/fee is paid out of the initial investment made by the investor while a back end /fee is charged when an investor sells his or her investment, usually prior to a set time period, such as seven years from purchase. The investor should look for the management expense ratio. The ratio is simply the total percentage of fund assets that are being charged to cover fund expenses. The higher the ratio, the lower the investor's return will be at the end of the year.

Evaluating Managers/Past Results: As with all investments, investors should research a fund's past results. To that end, the following is a list of questions that perspective investors should ask themselves when reviewing the historical record:

Did the fund manager deliver results that were consistent with general market returns?
Was the fund more volatile than the big indexes (meaning did its returns vary dramatically throughout the year)?
Was there an unusually high turnover (which can result in larger tax liabilities for the investor)?

This information is important because it will give the investor insight into how the portfolio manager performs under certain conditions, as well as what historically has been the trend in terms of turnover and return. For this reason, prior to buying into a fund, it makes sense to review the investment company's literature to look for information about anticipated trends in the market in the years ahead.

Size of the Fund : However, there are times when a fund can get too big. A perfect example is Fidelity's Magellan Fund. Back in 1999 the fund topped $100 billion in assets, and for the first time, it was forced to change its investment process to accommodate the large daily (money) inflows. Instead of being nimble and buying small and mid cap stocks, it shifted its focus primarily toward larger capitalization growth stocks. As a result, its performance has suffered. It makes the process of buying and selling stocks with any kind of anonymity almost impossible.

Bottom Line: Selecting a mutual fund may seem like a daunting task, but knowing one's objectives and risk tolerance is half the battle. If one follows this bit of due diligence before selecting a fund, one will increase one's chances of success.

http://www.investopedia.com

Veena Vishwanathan

Globsyn Business School

The Wacky World of Mergers & Acquisitions

2008-05-20T16:44:00.000+05:30

Mergers, acquisitions and takeovers have been a part of the business world for centuries. In today's dynamic economic environment, companies are often faced with decisions concerning these actions - after all, the job of management is to maximize shareholder value. There are several ways that two or more companies can combine their efforts. They can partner on a project, mutually agree to join forces and merge, or one company can outright acquire another company, taking over all its operations, including its holdings and debt, and sometimes replacing management with their own representatives. It’s this last case of dramatic unfriendly takeovers that is the source of much of M&A’s colorful vocabulary.

Dawn Raid

During a dawn raid, a firm or investor aims to buy a substantial holding in the takeover-target company’s equity by instructing brokers to buy the shares as soon as the stock markets open. By getting the brokers to conduct the buying of shares in the target company (the “victim”), the acquirer (the “predator”) masks its identity and thus its intent. The acquirer then builds up a substantial stake in its target at the current stock market price. Because this is done early in the morning, the target firm usually doesn't get informed about the purchases until it is too late, and the acquirer now has controlling interest.

There are some popular ways by which a company can protect themselves from a predator. These are all types of what is referred to as "shark repellent".

Golden Parachute: This measure discourages an unwanted takeover by offering lucrative benefits to the current top executives, who may lose their job if their company is taken over by another firm. Benefits written into the executives’ contracts include items such as stock options, bonuses, liberal severance pay and so on.

Greenmail: A spin-off of the term "blackmail", greenmail occurs when a large block of stock is held by an unfriendly company or raider, who then forces the target company to repurchase the stock at a substantial premium to destroy any takeover attempt. This is also known as a "bon voyage bonus" or a "goodbye kiss".

Macaroni Defense: This is a tactic by which the target company issues a large number of bonds that come with the guarantee that they will be redeemed at a higher price if the company is taken over. If a company is in danger, the redemption price of the bonds expands, kind of like macaroni in a pot!

People Pill: Here, management threatens that in the event of a takeover, the management team will resign at the same time en masse. This is especially useful if they are a good management team; losing them could seriously harm the company and make the bidder think twice. On the other hand, hostile takeovers often result in the management being fired anyway, so the effectiveness of a people pill defense really depends on the situation.

White Knight: This is a company (the “good guy”) that gallops in to make a friendly takeover offer to a target company that is facing a hostile takeover from another party (a “black knight”). The white knight offers the target firm a way out with a friendly takeover.

Source: http://www.investopedia.com

Veena Vishwanathan

Globsyn Business School

Ten golden rules of Dalal Street

2008-05-15T12:13:00.000+05:30

Wealth making in the market has more to do with discipline and the power of time to compound growth than being smart at stock picking and timing the markets just right. To help you in your quest to make wealth in our markets, the following 10 golden rules of markets that will virtually ensure reasonable, steady wealth appreciation have been suggested.

Rule No 1: Plan for tomorrow, today. Start saving for it now! Stagger your investments throughout your earning phase. Invest regularly and invest for the long term to buy in at an average price that includes both markets’ up and down ticks.

Rule No 2: Start early so that the power of compounding begins sooner; time is the magic that converts paise into rupees. In exuberant phases, when we have earned good money from our investments, most of us get greedy, and derivatives and futures provide an outlet for the expression of human greed. While such instruments often satisfy the whims of human greed, if taken to unrealistic levels, irresponsible investment in these securities can lead to financial ruin.

Rule No 3: Do not leverage, it is difficult, if not impossible, to predict short-term trends.
Buy markets, not stocks. We all know that our economy is in a secular phase of prosperity and the stock market is the best proxy for the growth of an economy. To benefit from our soaring economy, buy the market as a whole and not any single stock.

Rule No 4: Buy stocks that mirror the broader indexes, but never buy a single, or a handful of stock exposures. This means that you need to spread your risk across various market segments in the event a particular stock does not perform for reasons beyond the company’s control.

Rule No 5: Look at company earnings, not at stock prices. Stock prices may tempt or give the wrong impression of a company’s welfare. But to build real wealth in equities, you must always rely on declared profits and facts, rather than make decisions based on stock movements. We all tend to sell stocks when we have made profits and keep the ones that have not appreciated. Eventually, we end up holding a portfolio of companies that are not performing! It is only human to sell for profits and not to want to take losses.

Rule No 6: Keep the winners, sell the losers. Check constantly for stocks that are not performing and eliminate them from your portfolio if the outlook does not seem promising. This way, you will have all winners left in your portfolio to take you to your goals.

Rule No 7: Buy value and not momentum. When investing in stocks, your head should prevail over your heart. Resist the urge to get consumed by market chatter. Ignore hot tips from dealers and friends. It is advisable to do your own home work.

Rule No 8: Pick stocks with your brain, not your heart. Large-caps are the ones that have already proven themselves over longer periods of time and have the balance sheet acumen, strong cash flow and brains to manage businesses effectively according to prevailing situations and realistic opportunities available.

Rule No 9: Prefer large-cap stocks to small- and medium-caps. Investment in small and mid-cap stocks requires expertise and strong tracking abilities, that without, your portfolio will under-perform. Do not short sell a stock just because it is going up, and thus, one day it must come down. If companies are able to sustain earnings’ growth for long periods, then its stock may go up, up and up, or it can even remain high without any reason for a long period of time.

Rule No 10: Markets can remain irrationally up, or continually climb for the right reasons. Therefore, never go short. It will expose you to unnecessary risks.

Adapted from: http://economictimes.indiatimes.com
Veena Vishwanathan

Globsyn Business School