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

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

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

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 ?

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

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

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 ?

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)