Editorial Preamble

1 GLOBALISATION GAINS
It’s a prosperity enhancement in rich countries

Are developing countries benefiting as much as the developed countries from decades of global trade
liberalisation? Even if they are, what about their gains from globalisation-induced enhanced flows of
finance, ideas, labour and technology?

These questions are more pertinent now considering that the West is strategising to scupper the WTO’s
Doha Round promise to focus on (equitable) ‘development’. A paper written by Stanford University
visiting professor T N Srinivasan, and published by the Commonwealth Secretariat discusses the situation
of least developed and land-locked countries in the global (globalised) economic system.

It quotes WTO data to show that even after the removal of systemic biases against trade and the
dismantling of barriers since mid-80s, India’s share in world merchandise trade increased by only 0.5%
over two decades – from 0.5% in 1983 to 1% in 2006. In 1948, soon after the conclusion of GATT,
India’s share was much higher at 2.2%.

More generally, the paper said the total share of world merchandise trade for Mexico, south and central
America, Middle East, Africa and Asia (excluding Japan) that together broadly cover the developing
world, was 31.4% in 1948, 26.8% in 1983 and 35.4% in 2006. If south east Asia, which has been more
open since 1960s, and China, which opened in 1978 are excluded, the share of the remainder of this group
was 27.1% in 1948, 19.8% in 1983 and 19.6% in 2006.

The paper also refers to World Bank data that suggests a similar recent trend: “It is clear that although
the period after 1980 is one of growing integration of the developing world with the world trade –
certainly it halted the decline and has in fact, raised the export share of the developing world – the gain in
export share has largely been in China and south east Asia. Africa and south and central America have
experienced a steady decline in their share of the world trade ever since 1948.”

One point that is relevant in the context of this paper, however, is that the advances made by some
developing countries are because of their individual efforts to cut costs and increase global
competitiveness on the export front, rather than globalisation-induced liberalisation per se. China’s
spectacular rise in the field of world trade, despite being late and rather-reluctant adherent to the
principles of free trade, can be ascribed mainly to the unequalled productivity gains achieved by that
country in the last few years. The fact is that even some (extended) periods of protectionism with regard
to specific sectors, at the risk of being dubbed an undisciplined member in the global community of
countries, would stand a country in good stead. China’s success is not the only case to prove this point.

India is not able to benefit significantly from world trade liberalisation because the industries here,
especially the manufacturing industry, continue to be hamstrung by high power costs, rigid labour laws,
poor infrastructure facilitation and the intransigent bureaucracy that frustrates the industry’s attempts to
be agile in response to the world markets even as the rules and regulations are being formally liberalised.

More pertinently, the paper says it is doubtful that a meaningful global partnership for development exists at
present. Multi-dimensional character of development raises problems even in defining a developing country,
since a country could be developed in some dimensions and not in others. Undeniable, isn’t it?
 GLOBALISATION GAINS

Free trade breakdown

The Doha negotiations, promising freer trade, broke down, ostensibly over a small technicality in
safeguard rules. In reality, the talks collapsed because nobody – not Europe, not the US, China, India, or
the other main developing countries – was willing to take the political short-term hit by offending
inefficient farmers and coddled domestic industries in order to create greater long-term benefits for
virtually everyone. And they broke down because we really don’t care. After a few exasperated editorials,
the world has pretty much dropped the subject and gone back to its usual concerns.

This is foolish. Establishing significantly freer trade would help the world combat almost all of its biggest
problems. For an astonishingly low cost, we could improve education and health conditions, make the
poorest people richer, and help everybody become better able to tackle the future.

When the Doha trade round was launched shortly after September 11, 2001, there was plenty of
international goodwill. But a recent Financial Times/Harris poll in the US, Germany, France, the UK,
Italy, and Spain found, people – nearly three times more – are likely to say that globalisation is negative
than positive. Recently, the Copenhagen Consensus project gathered some of the world’s leading
economists to decide how to do the most good for the planet in a world of finite resources. The panel –
including five Nobel laureates – found that one of the single best actions the planet could take would be
completing the Doha negotiations:

What we often fail to realise is that the story only start from here. As economies open up, as countries do
what they do best, competition and innovation drive up rates of growth.

More competition means that previously sheltered companies must shape up and become more productive,
innovating simply to survive.

Having more open economies allows more trade in innovation, so that new companies can almost instantly
use smart ideas from around the globe.

This means that over time, the advantage of moving towards freer trade grows dramatically bigger to many
trillion of dollars of annual benefits. And the benefits would increasingly accrue to the developing world,
which would achieve the biggest boosts to growth rates.

We have seen three very visible cases of such growth boosts in three different decades. South Korea
liberalised trade in 1965, Chile in 1974, and India in 1991; all saw annual growth rates increase by several
percentage points thereafter. If we recast these benefits as annual instalments, a realistic Doha outcome
could increase global income by more than $ 3 trillion every year throughout this century. And about $
2.5 trillion annually would go to today’s developing countries every year, or $ 500 a year on average for
each individual in the Third World, almost half of whom now survive on less than $ 2 a day.

There would, of course, be costs. Freer trade would force some industries to downsize or close, although
more industries would expand, and for some people and communities, the transition would be difficult.
Yet the overall benefits of a successful Doha Round would likely be hundreds of time greater than these
costs. Free trade promises few benefits now and huge benefits in the future. Global fear about free trade
leaves the planet at risk of missing out on the extraordinary benefits that it offers. Free trade is good not
only for big corporations, or for job growth. It is simply good.
 GLOBALISATION GAINS

Most Asians were dead in 1950

Sensible estimates of world and country incomes

Knowledge about the true level of a country’s income serves many purposes. It informs us about present
and future economic power, about the magnitude of poverty, etc. It can also inform us about the
possibility of when a country, e.g. India might host Olympics.

But how do we know the true comparable income of a country? Should be use incomes measured in a
common currency, for example US dollars? Most likely not; because one would often get ridiculous
results; by this method, we would have concluded that India was richer by 10% in March 2007 compared
to a month earlier. If you recall, that was the month that in a flight of fancy the Ministry of Finance
allowed the rupee to appreciate by 10%. [Gee whiz, some people thought – if we let the currency
appreciate just 20% a year, India would be ahead of China in the next few years. And we would have zero
inflation to boot!].

Economists have long recognised the proclivity of politicians (and markets) to do unusual things. Hence,
the development of data on the purchasing power parity (PPP) basis. This exercise was started in 1970
with 10 countries (including India) and is repeated every decade or so. The last such exercise was
conducted in 2005 and covered more than 100 countries. According to the “new” PPP estimate, Asian
incomes are about 41% lower. Stated differently, the new income estimates imply that most Asians were
dead in 1950.

Something very peculiar is going on here, or as Shakespeare would say, something rotten has happened in
Asia. Alone among the vast number of countries, the new income estimates for Asia are wildly off –
incomes are reported to be 41% lower, and it does not matter whether India and China are included or
excluded. And no one has come up with any explanation for this radically off the wall estimate of
incomes for Asia. But there are rumours. Could it be that this was an attempt by the international
organisation, and China, to portray China as not so rich in order that its exchange rate did not appear so
deeply undervalued? Exchange rates tend to appreciate with an increase in per capita income; a lower
estimate of PPP income would suggest a lower magnitude of revaluation for the yuan.

These are only rumours; if there is an alternative, more benign reason for the strange data for Asia,
perhaps the World Bank, IMF, (and the agency responsible for the Asian estimates, the Asian
Development Bank) could provide with an explanation.

There are other more serious implications if we accept the new data at face value – problems for the world
much greater than the undervaluation of the Chinese exchange rate. The most important implication is
that the new estimates of income result in incredibly low incomes for most of Asia in 1950; Incomes low
enough to suggest that most Asians were dead in 1950.

The World Bank defines a person as poor if he consumes, on average, less than $ 1.08 per day in 1993
prices. This level of consumption is a bare minimum level, a level consistent with bare survival. But
according to the new data, all of Asia had an average level of consumption of only 0.71 1993 PPP$ per
day. But maybe only some people were very poor in Asia. Not so; the average consumption of the bottom
80% of the Asian population was 0.49 or less than half the absolute minimum poverty line. Are these
numbers plausible? If yes: than you must not be reading it on planet Earth.
2.1 SECURITY MARKET
Contrarian world of investing

It is a blend of value investing with aspects of behavioural finance. It tends to be bearish when the market
is bullish and vice versa. Welcome to the world of contrarians – who believe in going against the wind.
Although it is never easy, remember what doesn’t kill you makes you stronger. Here’s an insight into the
contrarian world of investing, what you need to know and how you can learn this art to be successful.

For the uninitiated, contrarian showcases your ability to identify companies that have robust business
models which are fundamentally sound, but are grossly undervalued in the stock market. In such companies,
the net profit margin is consistent and rising, general trend is upwards, book value is high, and the market
price to book value is lower multiple. These stocks, in fact, belong to a sector that is likely to on a growth
trajectory in time to come.

Contrarian investing works both for investors who follow markets regularly as well for those who don’t,
but only a certain times, and not always. There are many renowned investors such as Warren Buffett and
John Marks Templeton who are contrarian investors, but following them may not pay dividends unless
you are able to decode market dynamics.

The simplest contrarian rule would be to invest when markets are low and there is general disinterest
towards the stock market – which is a time like now. Good stocks will always be good, they may not
double your money in 20 days but they will multiply many folds in 20 years. Think about buying stocks
like making an investment into ownership of business. Think about your investment as a seed you have
planted to grow a money tree. Don’t treat buying stocks like buying furniture. However, thinks that you
should read Benjamin Graham or Warren Buffet’s letter to shareholders of Berkshire Hathaway to
understand the basic principles.

1st week of August ‘08 – Markets show resilience despite negative bias

Daily review 31/07/08 01/08/08

Sensex 14,355.75 300.94
Nifty 4,332.95 80.60

Weekly review 31/07/08 01/08/08 Points Percentage

Sensex 14,355.75 14,656.69 300.94 2.10%
Nifty 4,332.95 4,413.55 80.60 1.86%

The Indian markets are showing greater resilience despite negative bias after the RBI credit policy and
continued rise in inflation number to 11.98%. Nevertheless, some key positives were the continued
softening in crude oil prices, now ranging around $ 123-124 barrel, which now clearly looks set for a
further downtrend amidst reports that US oil consumption has recently shown a negative growth.

2nd week of August ‘08 – Sensex crosses 15K mark despite inflationary concern

Daily review 01/08/08 04/08/08 05/08/08 06/08/08 07/08/08 08/08/08

Sensex 14,656.69 (78.82) 383.20 112.47 43.75 50.57
Nifty 4,413.55 (18.20) 107.50 14.70 6.30 5.65

Weekly review 01/08/08 08/08/08 Points Percentage

Sensex 14,656.69 15,167.82 511.13 3.49%
Nifty 4,413.55 4,529.50 115.95 2.63%
 SECURITY MARKET

3rd week of August ‘08 – Market ends five-week positive rally on inflationary concern

Daily review 08/08/08 11/08/08 12/08/08 13/08/08 14/08/08 15/08/08

Sensex 15,167.82 336.10 (291.79) (119.01) (368.94)
Nifty 4,529.50 90.90 (68.15) (23.20) (98.35)

Weekly review 08/08/08 14/08/08 Points Percentage

Sensex 15,167.82 14,724.18 (443.64) (2.92%)
Nifty 4,529.50 4,430.70 (98.80) (2.18%)

4th week of August ‘08 – Market declined for the second successive week

Daily review 14/08/08 18/08/08 19/08/08 20/08/08 21/08/08 22/08/08

Sensex 14,724.18 (78.52) (101.93) 134.50 (434.50) 157.76
Nifty 4,430.70 (37.65) (24.80) 47.50 (131.90) 43.60

Weekly review 14/08/08 22/08/08 Points Percentage

Sensex 14,724.18 14,401.49 (322.69) (2.19%)
Nifty 4,430.70 4,327.45 103.25 (2.33%)

5th week of August ‘08 – Sensex in recovery mode, gains 163 points

Daily review 22/08/08 25/08/08 26/08/08 27/08/08 28/08/08 29/08/08

Sensex 14,401.49 48.86 31.87 (185.43) (248.45) 516.19
Nifty 4,327.45 7.90 2.15 (45.40) (78.10) 146.00

Weekly review 22/08/08 29/08/08 Points Percentage

Sensex 14,401.49 14564.53 163.04 1.13%
Nifty 4,327.45 4,360.00 32.55 0.75%

Monthly review
An indecisive movement in the index and stocks

Month March ‘08 April ‘08 May ‘08 June ‘08 July ‘08 August ‘08
Date 31.03.08 30.04.08 30.05.08 30.06.08 31/07//08 29/08//08

Sensex 15,644.44 17,287.31 16,415.57 13,461.60 14,355.75 14,564.53

Points Base 1,642.87 (871.74) (2,953.97) 894.15 208.78

Percentage Base 10.50% (5.04%) (18.00%) 6.23% 1.45%

 SECURITY MARKET

Nothing is lost, everything is transformed

At time when it’s easy to despair about the persistent bear market regime, the line by Antoine Lavoisier,
the father of modern chemistry, is rather instructive; “Nothing is lost, everything is transformed.” The
history of market too suggests that no regime lasts forever and merely evolves over time.

The high-growth, low-inflation bull market from 2003 to 2007 gave way to a stagflation-induced bear
market late last year. Now it seems we are entering a low-growth and declining-inflation regime, which
may not lead to a strong bull market rally, but should be broadly supportive of equities, with plenty of
value-oriented investment opportunities around. However, a 20% peak-to trough decline in the US market
and a 30% fall in emerging markets are representative of an average bear market.

A typical market cycle: Despite all the gloom about how this time it is different, as the credit-crisis led
downturn is not just of the garden-variety, the fact is global equities are currently tracking a typical
market cycle. In a typical cycle, growth and momentum stocks usually do well at the later stages of an
economic expansion and commodities in particular keep outperforming until economic activity cracks
decisively. A resulting fall in commodity prices than takes the heat off inflation and ends the monetary
tightening phase, which in turn signals the bottom of a bear market and a new beginning.

Value strategies usually perform well during the early stages of the market recovery. Over the past couple
of years, paying attention to valuation metrics yielded poor results as money kept chasing momentum
strategies. The momentum bubble started to burst late last year with the Chinese and Indian equity
markets de-rating on the back of inflation concerns. However, instead of disappearing, momentum money
got concentrated in the commodity complex, stretching the relative outperformance of commodities
stocks to levels never before seen in history.

While Chinese equity investors for much of this year have been questioning the sustainability of the
economy’s growth path in the face of a commodity led inflation surge, commodity traders have been
virtually manic about the demand growth in China. These disconnect between sentiment in commodity-
importing equity markets such as China and the commodity trading pits could obviously not carry on.

For one, it’s amazing to see that in the emerging market universe, consumer stocks account for less than
10% of total market capitalisation while commodity stocks comprise more than 35%. Such a large gap is
irrational as the source of growth for both consumer and commodity-related stocks is theoretically the
same – the so-called insatiable demand of the emerging market consumer. The last time a sector
represented such a large portion of the total emerging market capitalisation was in early 2000 when tech
and telecom companies comprised nearly 40%.

With commodity related stories on one side, almost everything else is cheaply available. For instance,
Turkey’s stock market is a mere 25% of its economy, smaller in value than leading global oil companies.
Similarly, the stock markets of many oil-consuming countries are so badly crushed that they no longer
capture the size of their economies. These gaps are bound to close as investors begin to focus more on
value characteristics.

Commodity bulls counter that many stocks in that sector are hardly expensive as they are trading at low
price-to-earnings, or P/E ratios. The problem with this argument is that the P/E ratios based on forward
earnings are currently misleading as earnings estimates are predicted on high commodity price forecasts.
If commodity prices revert to their marginal cost of production, these stocks are far from cheaper.
 SECURITY MARKET

Focusing on P/E ratios turned out to be a fatal mistake for many investors in US financial and home-
building stocks as earning estimates were inflated due to mispricing of the underlying assets. In fact, P/E
ratios are a much too simple and often useless analytical tool in both bull and bear markets.

Equity markets are currently in a transition phase where the last vestiges of the high growth regime, i.e.
commodity stocks, are losing momentum and yet the confidence is lacking to bid up the value plays in the
form of consumer and financial stocks. And, as is often the case at major turning points, volatility in some of
the commodity prices such as oil is very high and after having seen oil prices go vertical many market
participants are still scared of betting on an extended oil price decline.

Forming tops and bottoms is a complex and time-intensive process. Equity investors want some evidence
of a turnaround in the inflation numbers and want to see a further taming of the oil beast before jumping
in to buy. In the weeks ahead, such favourable news is likely to materialise. Even then, investors will rely
on low valuations for support and favour sectors on that basis. The key lesson from history is that there is
always some game to play in the marketplace as all is never lost and the game just transforms over time.

Money is a Beautiful Flower

Park Hyeon Joo, the founder Chairman of South Korea based Mirae Asset Financial Group, the biggest
Mutual Fund Company in South Korea has in his autobiography ‘Money is a Beautiful Flower’ suggested
a three-pronged approach to investing – always understand what you are investing in, invest for the long
term and don’t follow the crowd.

The Indian capital market probably offers an ideal ground for following the above approach, at this stage.
There is an uncanny similarity between the current Indian capital market scenario regarding retail
participation and when Mr. Park started Mirae. Until Mirae came on the scene, Korean stock buyers were
mostly gamblers – from short-term investors who bought stocks and then took profits or losses within a
matter of days or weeks. Most Koreans kept their savings in bank deposits of government bonds.

Today, within a period of 10-years, South Korean retail investors are amongst the most savvy financial
market investors in the world. There is a lesson to be learnt from this South Korea story as conditions are
ripe for Indian retail investors to start thinking about stock market investing (directly or through Mutual
Fund, PSM or Ulips) and reap the benefits of the Indian economic growth. We must have the insight to
anticipate the future with long term prospect and strategy.
2.2 CURRENCY FUTURES
Coming soon to a broker near you

Finance minister P Chidambaram on Friday, 29th August, 2008 launched trading in currency futures at the
National Stock Exchange. Over 5,000 contracts were traded in the opening minutes. First trade took place
at Rs 44.1500 to a dollar. NSE sources said more than 300 members and 11 banks have so far registered
for participation in the currency futures segment and numbers is likely to go up.

For the uninitiated, currency futures (or fx futures or foreign exchange futures) is an standardised contract,
traded on an exchange, to buy or sale an underlying asset (exchange rate in this case) at a certain date in
future at a specified price today – i.e., how much a currency is worth in terms of the other. Therefore, you will
soon be able to open a currency futures trading account with your broker, buy (or sell) US dollar-rupee
exchange rate futures and aim to make money on your view.

Currency futures were initially created in the early 1970s in the US as a tool for commodity importers,
exporters and traders so that they could hedge their currency risks. In fact, currency futures were
introduced on the back of abandonment of the gold-exchange standard (the gold-standard itself flopped
after the First World War) and after discarding the fx rate mechanism in favour of market driven rates.

You know that the US $ was worth Rs 40 a short while ago and is now worth Rs 44. This erosion of the
rupee dented the balance-sheets of many an importer. At any time, importers and exporters would have
liked to hedge but were forced to go to banks for hedging their currency risk – whose systems were, to put
it mildly, opaque. Fx futures markets are going to be as transparent and hopefully as liquid as the Nifty or
Gold or Crude is. And exchange-traded markets are globally accepted to be easier to regulate and manage.

Though the only contract initially listed may be the Re-US $ contract and though the size of the contract
may be only $ 1,000 to start with, this step will lay the foundation for India’s full-fledged entry into the
world’s biggest financial market – currency futures. In fact, this contract size will help to get retail traders
to provide liquidity. The limit per client will be small, given that $ 25 million is the member’s limit and
may currently not attract large players (who will continue to use over-the-counter markets via banks) but
surely it is a beginning that will lead to higher limits.

Like commodity futures markets in India, the liquidity will be provided by retail traders and HNIs till
such time the regulators are convinced of the infrastructure and process execution. The RBI has allowed
banks and brokers as the first participants to start currency futures. Banks will also help provide liquidity
to the markets. Brokers’ membership will, of course, be stringently regulated with criteria like net worth,
track record and reputation. Corporates too can trade, but may have to make suitable disclosures in their
annual reports and to their shareholders – and they are expected to hedge, not speculate. FIIs are not
allowed now, but will soon be when the market reaches some stability and depth. The idea is to not have
large players sway the exchange rate due to order size.

Because the underlying is a financial asset, they come under the category of ‘financial futures’. The
regulator will be SEBI and the contracts will be listed as a separate segment. This market is a price-
discovery and risk-management mechanism and is not meant for physical exchange of currency.

Being a new market, except a shortage of trained, certified personnel initially but apart from that, we
don’t foresee any reason why currency futures markets in India will not be larger than other futures
markets soon. They will lead to a more transparent, competitive trading system and a less sterilised rupee.
Over a period of time, we can aim to become a centre for currency futures trading and be the financial hub
for Asia. This is a step towards full convertibility of the rupee. And this is not the last stop. Another
important market is soon going to get open up. You know what’s next – interest rate future!
2.3 INDIAN ECONOMY
Economy seen growing only at 7.7% in FY09

The Prime Minister’s Economic Advisory Council (EAC) chairman C Rangarajan on Wednesday,
13/08/08 has projected a growth rate of 7.7% for fiscal 2008-09. While this revised growth rate is slower
than both its earlier estimate of 8.5% and the average of 8.9% over the past four years, it would still make
India the second fastest growing major economy in the world. The other observations of EAC are as
follows -

Industrial output growth which was 5.2% in the first quarter of the current fiscal is expected to be 7.5%
in 2008-09 as a whole, down from 8.5% last year, as per the EAC forecast.

The current account deficit is likely to hit a record high of 3.2% of GDP (it was only 3.1% in the crisis
year of 1990-91). Ballooning oil import bill and a decline in capital flows are pushing current account
deficit (CAD) to an all time high. The estimated CAD for the year is $ 41.5 billion. In the first and second
quarters of 2008-09, deficit could be over 4.5% of GDP, declining in the last two quarters. The silver
lining now is that forex reserves stand at over $ 300 billion.

Trade deficit is likely to widen to 10.4% of GDP in 2008-09 compared to 7.7% in 2007-08. Merchandise
imports would grow to $ 332 billion (despite deceleration) with the country’s oil import bill growing due
to high crude prices. Exports would grow to $ 205 billion, leaving a deficit of $ 127 billion. The council
expects export growth at $ 22.5% while imports growth would be higher.

Capital flows would decline to $ 71 billion in 2008-09, far lower than the previous year’s level of $ 108
billion. Despite the decline, it is estimated the net addition to forex reserves would be $ 30 billion. The
panel’s assessment is that volatility cannot be ruled out during the remaining months of the year, and the
government can relax ECB norms since other capital flows would slow down. Policy makers may,
however, need to be prepared to face a situation of greater volatility in capital inflows on account of the
uncertain external environment.

Inflation may rise to 13% before it starts to taper off. A tighter monetary policy, adopted to counter high
inflation, has increased borrowing costs and depressed demand. More importantly, the outlook is unlikely
to improve anytime soon. Even as the economy takes the burnt of global shocks such as high oil, food and
commodity prices, tight monetary policies on the home front are likely to continue for a while – till
inflation cools down to a more comfortable level. Keeping in mind the pressure of domestic aggregate
demand interacting with exceptionally high international commodity prices, the tight monetary stance has
to be maintained for the balance part of 2008-09.

Farm growth is likely to slow down by more than a half in 2008-09, mainly triggered by scanty rainfall
in some parts of the country during July. We project that GDP originating in agriculture and allied
activities is likely to grow by 2% in 2008-09, less than what it has done in the previous three years. In
2007-08, the farm sector growth stood at 4.5% while it was 3.8% in 2006-07 and 5.9% in 2005-06. The
lower projection is due to the base effect of very high growth in 2007-08 and the weak South-West
monsoon over peninsular, central and western India in July. The report said the resumption of rain since
last week of July in the affected areas has the potential of significantly limiting crop damage.

The Prime Minister’s Economic Advisory Council has sounded a note of caution on the “off-budget”
liabilities of the government and said that fiscal situation no longer looks stable and sustainable.
 INDIAN ECONOMY

NCAER downgrades growth forecast to 7.8%

Economic think tank National Council for Applied Economic Research (NCAER) has also projected
moderation in economic growth at 7.8% for the current fiscal. The 1% point downward revision is
attributed to recent hike in interest rates, rising inflation and crude oil prices and reduction in private
investment by about Rs 60,000 crore.

Economy likely to grow at around 8%

Finance minister P Chidambaram said he was confident that the economy will grow close to 8% this
fiscal. He added: “If the prime minister’s Economic Advisory Council pegs it (economic growth) at 7.7%,
I can confidently say it will be close to 8%”.

GDP growth in Q1 slows to 7.9%

Indian economy grew by 7.9% in the first quarter (April – June) of the current fiscal, the slowest in the
past three-and-a-half years. The economy had grown by 9.2% in the first quarter of 2007-08. This tally
with the Prime Minister’s Economic Advisory Council’s growth forecast for this fiscal at 7.7%.

– Significantly, growth in investment expenditure has fallen to 9%. Investment growth had been in
double digits all through FY04-FY08. However, fixed capital formation remains strong at 32.3% of
GDP, against 32% a year ago.

– Industry with a weightage of 26.6% grew 6.9%. Manufacturing, the largest sub-segment of industry,
grew just 5.6% in Q1, almost half of 10.9% in Q1 of last fiscal. In fact, manufacturing growth rate has
been falling Q-after-Q, 5.8% in the Q4 of 2007-08 and 9.2% in the quarter before that. A sharp drop
in growth in manufacturing and electricity generation pulled down overall GDP growth. Electricity,
gas and water sector grew by 2.6% in Q1 of current fiscal compared to 7.9% in Q1 of last fiscal.

– There was something to cheer though. The agriculture, with weightage of 17.8% in GDP, grew by a
good 3%, belying the expectation that high 4.4% Q1 growth of last year would be a dampener.

– Services, with 55.6% weightage, propped up overall growth by moving up 10.2%. While overall
services growth also moderated from 10.6% Q1 of last year, most of the sectors continued to post
double digit growth. Construction threw up a pleasant surprise. Despite anecdotal evidence of a
slowdown, construction sector grew by 11.4% as against 7.7% in quarter a year ago. Financial
services, hotel and communication grew at a lower rate of 9.3% and 11.2% respectively in Q1 of ‘08.

Finance minister P Chidambaram exuded confidence that for the entire fiscal, the economy would grow at
close to 8%. Economists, meanwhile, said the slowdown was consistent with the policy aim of slowing
down growth to contain inflation.

D. K. Joshi, principal economist Crisil said, “I think the data is not surprising. It was RBI’s aim to bring
down growth which is reflecting in the GDP figures. However, agriculture has done reasonably well
growing to 3% on the back of 4.4% growth. Serve sector growth has also performed well. The only cause
of concern is the slowdown in generation of electricity, the demand for which is always increasing.
 INDIAN ECONOMY
EAC is downplaying the magic of the market

Economic growth means change, and change does involve myriad risks, including structural impediments
and plain deceleration in the trend rates. Already, the signals in Economic outlook for 2008-09, the growth
in the Indian economy would be 7.7%, as against an estimated 9% notched last year. But could it be that
the Economic Advisory Council to the prime minister is not adequately accounting for innovation,
entrepreneurship and knowledge spillovers, and is thus in effect underestimating the dynamics of growth?

It’s time to see corporates as knowledge producing and exchanging entities that are very much involved
with seeking custom and meeting the myriad demands of the marketplace. The wealth creation in a body
corporate is verily a function of its ability to generate new knowledge to better meet demand, to create
new demand segment or indeed entirely new markets. Even if we assume that the knowledge at hand has
no a priori economic value in an organisational setting, the very process of venturing can make it deemed
highly valuable indeed. The fact is we are more entrepreneurial, enterprising and, generally speaking,
comfortable with the idea of profit-earning than ever. As, global surveys rank India very highly when it
comes to entrepreneurship, the Economic outlook appears to be downplaying the magic of the market.

Rating downgrade not worrisome: Finance minister

Fitch revised the outlook on India’s long-term local currency issuer default rating to negative from stable
because of fiscal pressures while retaining the rating at BBB- (low credit risk). The revision of the local
currency outlook is based on the central government’s fiscal position in 2008-09, combined with
noticeable increase in government debt issuance to finance subsidies not captured in the Budget.

Analysts said, “Lowering by Fitch would in normal times have impact only on rupee-denominated
securities, but in the present uncertain times it would also have some effect on interest rates on external
commercial borrowings, stock markets and bonds.” Finance minister downplayed the lowering of India’s
credit outlook by global rating agency Fitch, saying it is not a cause of worry as economic fundamentals
are strong. Distinguishing between a rating and outlook, Chidambaram said what Fitch has done is to take
one step down on the outlook from stable to negative, but the rating remains the same for the country.

What is outlook? Outlook is simply a view of the future. This is based on the context of the world
economy and the Indian economy. Outlook can easily change in a month or two. If the objective
conditions change, outlook can also change. Finance minister P Chidambaram further said when this
government came into office, many of the rating agencies have a negative outlook, but they changed it to
stable and one or two even to positive.

On fiscal concerns raised by Fitch, he said fiscal deficit targets given in the Budget would be met this
fiscal. “I have said every year. Nobody believed me during the year, but at the end of the year we have not
only met (Budget deficit) targets but bettered them also. Even for 2007-08, the actuals are better than the
revised estimates. This year also the Budget deficit would be met.”

Heed warnings of Rating Agencies – The good thing about warnings from global rating agencies
whether Fitch or S&P or Moody’s, is that it might make the government pause and reconsider its policies.
The bad thing is that after their lapses during the East Asian crisis, the wave of corporate bankruptcies of
which Enron was the prime example and now the subprime crisis, rating agencies are now so badly
discredited that their views no longer count for very much.
2.4 INDIA INC
Cost-cutting drive
Reliance Industries

India’s largest conglomerate Reliance Industries has initiated an ‘austerity drive’. The company has for its
retail venture issued diktats on unnecessary travel, mode of travel, courier dispatches, use of stationary in
office, use of cabs and type of accommodation while on tour and the number of times employees can have
tea and coffee. Even top managers have been asked to use AC Indica cars instead of luxury sedans on
outstation tours. These measures could be extended to the mainline oil and gas business as well. While no
formal directives have been issued for this business, advisories to cut down avoidable costs are in place.

Reliance Retail (RRL) is taking its austerity drive seriously and has described it as a “mission”. In a
communication posted on the RRL intranet, a senior HR manager has said, “Let us stop all unnecessary
and avoidable expenses, challenge every cost element and every person who is incurring it and
completely protect the interest of our organisation. Had the company not been so serious, some of the
cost-cutting measures would have sounded comical. It has decided to issue only blue and black ball pens.
Employees are being encouraged not to print in hurry to avoid unnecessary wastage of papers. Reliance
has also issued some strict pantry rules. Tea and coffee are on self-service basis; it will be served only in
meeting rooms and visitors’ rooms and water bottles will be filled only once in a day in morning.

Despite being highly profitable, RIL has always been prudent about costs. Its refinery project in
Jamnagar, for instance, and even its deepwater exploration project in the Krishna Godavari region have
set world records in low execution costs. It is thus not a surprise that RIL has taken up high costs as a
major issue, especially in RRL. The company which promised to invest Rs 26,000 crore in its new retail
venture and hired thousands of people (some with astronomical salaries), has now asked its formal heads
to justify their respective employee strength and the role each employee has in the retail venture.

ICICI Bank

Caught in an atmosphere of uncertain growth and rising costs of essential services, India’s largest private
sector bank is cutting costs aggressively. ICICI Bank is shifting thousands of jobs from Mumbai to
Hyderabad. It is cutting down on banking hours in many branches and curbing staff reimbursements such
as phone and conveyance bills. Conveyance and phone expense limits have been met with a stiff ceiling.
From being virtually limitless, the conveyance limit is now Rs 3000 and phone bill limit is Rs 750.

ICICI Group human resources head K Ramkumar said, “As we grow, we will eliminate inefficiencies.
Logically, it is a better idea for us to move to Hyderabad, from where we can handle our back office and
technology functions more cost-effectively.” The call centre at Hyderabad already has 2500 executives.
Currently, ICICI Bank’s two call centres in the Andheri and Thane belt in Maharashtra employ between
1800 and 2000 people. K Ramkumar added: “We will consolidate operations not just based in Mumbai,
but also Chennai, Bangalore, etc. and take them to Gadchibowli financial district in Hyderabad. In two to
three years, the Hyderabad centre will grow much larger and employ more people.”

ICICI has also revised branch timings across India. Many branches will now shut earlier. Branches in
smaller towns will function for a shorter period of time to cut down electricity costs. Ramkumar said, “It
doesn’t make sense for the bank to keep branches in ‘C’ and ‘D’ class towns open beyond a certain limit.
But obviously, just because a small-town branch will work from 9am-2pm or 9am-6pm, doesn’t mean that
the same will be implemented in a metro. We will continue to be an ‘8 to 8’ bank in these areas.” Certain
branches in areas where the bank is generating better business have been upgraded to 12 hour-workdays.
 A profile-changing deal
Axon deal will help Infosys beat US slowdown

Infosys, a declared suitor in the market for a long time now, has finally found a match. The company is
set to acquire UK-based Axon Group, a SAP Consulting Services Company listed on the London Stock
Exchange, for about $ 753 million (Euro 407.1 million) in an all-cash deal. This will be the biggest
overseas buyout by an Indian IT company, eclipsing cross-town rival Wipro’s $ 600-million acquisition
of Infocrossing last year. Axon has been looking for a possible suitor over the last one year and it is
believed that Citi group showed the deal most of the A-listers in the Indian Tech sector with Euro 350
million as some sort of a floor price to talk a deal.

Commenting on the acquisition, Infosys CEO S Gopalakrishnan said, “We will leverage the capability
(Axon), and with our global reach, this will help in large deals participations. Axon with around 2,000
employees, provide consultancy services to MNCs with SAP as their strategic enterprise platform with
clients such as BP and Xerox. Axon gets around 55% of its revenue from UK with the rest coming from
the US and Asia-Pacific. Now, Infosys also gets a delivery centre in Malaysia.

Infosys has offered Euro 6 per share, which is a 33.1% premium over Axon’s six-month average stock
price. Infosys is making an all-cash offer to acquire Axon’s 100% shareholding, including 18.1%
promoter stake, in a move to take the company private. The Indian software services giant, with close to $
1.8 billion in cash reserves, is hoping to complete the formalities by November 2008.

Infosys’ all-cash acquisition of the British consulting firm Axon, which has a big market share in
implementing of SAP AG’s enterprise software, should help the company move up the value chain by
growing its consulting business. It would also diversify the company away from the slowing down US
market, which still contributes over 60% of its revenues.

Indian IT companies have wanted to break their linearity of growth – revenue growth is a function of
employee head count, a big concern given the already large numbers – by diversifying into higher-end
services such as consulting, package implementation, systems integration and products. They have had
some success, but strong relative share-changing organic growth is difficult to come by because of the
dominant presence of global majors in high-value services. The share of consulting and package
implementation, for instance, in Infosys’ revenues has of late been almost stagnant at around 23%.
Standalone consulting share is not available but a few quarters ago it was only about 5%.

The $ 753-million acquisition, the largest by an Indian IT firm, is a significant one for Infosys. Axon’s
2,000 employees would increase Infosys’ on-site consulting capabilities substantially, particularly in the
fast-growing SAP space. Moreover, the acquisition gives the company access to Axon’s clients, which
includes some big names such as BP and Xerox, opening up the possibility of cross-selling services to
these companies.

Valuations are always a concern in large acquisitions. Though in this case, Infosys appears to have paid a
fair price, twice the annual revenues as against the three-time norms for acquisition in this space a while
ago. But Axon’s 15% operating margins, half of Infosys’, are a dampener. Infosys should manage to
improve those by offshoring some work to India. Moreover, this acquisition allows Infosys to get rid of
unproductive cash, which earns less relative to returns the company earns on the business capital. That
should improve ratios and, thereby, valuation. But these are mundane concerns. This is a profile-changing
deal for the company with a significant non-material side to it.
2.5 INDIA
Globalising leadership

Canadian Carol Borghesi had 26 years of experience in customer service before she was hired by mobile
service provider Bharti Airtel, to work in India. Borghesi, who has also been through a senior position
with British Telecom (BT), says she came to the country to be part of the action.

After working in Shanghai, Swedish national Marcus Wilhelm moved to Chennai chief operation officer,
Photon Infotech. Compared to China he says India holds the edge when it comes to talent. Many like
Marcus and Borghesi have landed in the country to work. From a few hundred expats over the past five
years, their numbers have increased manifold today. More importantly, several top expat executives have
arrived recently, not only to oversee Indian operations, but also to build global teams.

Cisco relocated one of its top executives, chief globalisation officer William Elfrink to India. The
company has chosen India as the site for a globalisation centre. Elfrink says: “The country is more vibrant
and adventurous in its pursuit of excellence than ever before, and our decision to locate our Globalisation
Centre East in India definitely highlights the country’s growing importance in the world.”

Boeing appointed Ian Thomas as president of Boeing India. He leads the company’s enterprise – wide
India team. Other names include Brooks Entwistle, MD&CEO, Goldman Sachs (India) Securities, Trevor
Bull, MD, Tata AIG Life Insurance, Rob Hennin, VP & country manager, India, American Express Bank,
Phil Nelson, VP, Technology & back office operations, AOL, India. The list goes on.

What is spurring companies to hire experienced expats? It is the demand for professionals with
international experience combined with a shortage of top talent. India’s strategic importance alone is
sometimes sufficient to attract executives, as more Indian companies go global and more global firms
target India as a strategic growth market.

India’s corporate sector is increasingly looking for people with global exposure, who can handle complex
businesses that blend both domestic and international operations. Recent estimates show that India needs
over 1,000 CEOs across industries, many of them in new sectors such as special economic zones,
aviation, airport management, media, communications, real estate and retail.

Among those who are also being tapped are several NRIs. Typically between 35 and 45 years of age,
these returnees are armed with a more aggressive western outlook, ‘can-do’ attitude and exposure to
working within foreign culture. They are being given the opportunity to build a higher profile than they
would, if they were to remain overseas, and view the India experience as a critical part of their resume.
Local technology firms increasingly see the benefits of bringing in returnees as a means to calibrate or
even raise internal standards at home. Returnees also bring inside knowledge of global supply chains and
venders, and a large global network of clients. Already, the number of foreign nationals working for top-
tier Indian technology firms hovers around 3%.

Talent acquisition and talent development are, of course not new to India. However, India needs to focus
more on leadership because it is time for India to grow exponentially and align globally at the same time.
The need for so many good people has led companies to provide learning and development opportunities
for talented executives, and to invest in a pipeline of future leaders. As companies grow and accumulate a
strong and diverse pool of good talent, the role of top management teams will evolve in India, with equal
emphasis on business growth and talent development. A clear differentiator for companies will be a
management team who can successfully do this with a global perspective.
2.6 FOREIGN INSTITUTIONS
Can we do anything to prevent a subprime crisis?

A year ago, the subprime crises blew up in the US. Policy makers in the US and elsewhere have been
engaged in a grim battle to contain its fallout. Can we do anything to prevent such crisis? One view is that
boom-bust cycles are integral to the free market economy and that we should stand back and let
institutions fail. But the immediate consequences of such a policy – a deep and long recession – are so
serious that no government has the stomach for it.

Another view is that it is hard to call a bubble correctly – we know there is a bubble only after it has burst.
Once the bubble bursts, policy-makers should step in to limit the damage, as they done in the present
crisis. The danger with this approach is that public intervention to limit the damage stores up worse
problems for the future (moral hazard) so that we end up facing even graver crisis down the road.

A third school looks for preventive medicine. Lessons from the subprime crises promise a rich field for
researchers. Robert Shiller, professor of Yale, wades into the field with the sub-prime solution
(Princeton). Shiller proposes three types of solutions – One, better information; Two, new markets for
risks; Three, new retail risk management institutions.

Better information

Some of his proposals for better information are familiar enough – more disclosure from financial
institutions; an improved database on individuals’ economic and medical history; a financial watchdog
that will ensure consumer safety in financial products.

Shiller has some new proposals as well. He wants low-income individuals to be provided advice on the
basis of fixed hourly fees – that will be eligible for tax benefits. At present, the advice they get is from
people who sell products and who collect a fee from the providers of those products. Naturally, such
advice tends to be biased. But how do we get people to opt for paid services when they can get free
advice from sellers of products? How do we ensure that advice provided for a fee is of the right quality?

Shiller also wants financial contracts to have certain clauses that will protect consumers who cannot read
the fine print. A more interesting proposal is requiring asset prices to be quoted in inflation-adjusted
terms. Shiller contends that if this had been done housing buyers in the US would not thought that homes
would be spectacular investments. Note that both these proposals mean more stringent regulations.

New markets for risks

Shiller advocates the creation of new markets for risks - Housing futures, he says would help contain a
speculative bubble by creating opportunities for short sellers. But such markets, which Shiller helped
launch, have failed to take off in the US. Besides, this does seem a bad time to sing the virtues of short
selling – we have seen the havoc this can create at American financial institutions.

Risk-management institutions

Shiller’s third suggestion is the creation of new retail risk-management institutions. One is what he calls
‘continuous workout mortgages’ – mortgages on which terms are continuously adjusted in response to
changes in borrowers’ incomes and conditions in the housing market. If the borrower’s ability to pay
drops, the terms would be revised downwards accordingly. Shiller contends that this it what happens in
bankruptcy anyway, so he is only proposing a more orderly adjustment.
 FOREIGN INSTITUTIONS

He thinks there are ways to address the moral hazard implicit in such an arrangement – the borrower
losing the incentive to earn or under-reporting his income. Another retail institution Shiller urges is home
equity insurance. By putting a floor on home prices, it would prevent panic sales of homes and sharp
collapses in home prices in a downturn.

These are ideas that what would go some way towards making home ownership safer for large numbers of
people. But one cannot resist the impression that Shiller takes too narrow a view of the subprime crisis.
The crisis is not just about a collapse in housing prices and people losing their homes. In itself defaults on
subprime loans would not have posed a problem for the US economy. The subprime crisis has ballooned
into financial crisis because it impacts financial institutions that have leveraged exposures to subprime
contracts.

Another subprime crisis is an unlikely as a plane crashing into a tall building in the US – the problem will
arise in some other form. We need to address the broader issue that underlies the subprime crisis: how to
ensure that regulation keeps pace with innovation? This means the focus for reform has to be on financial
institutions and the regulatory architecture, not just protection of the consumer.

Several factors have kept the world economy from keeling over. The Fed has bailed out large financial
institutions and has been quick to provide liquidity even to investment banks. The US treasury has
provided a large fiscal stimulus. Central banks have coordinated their actions well. Many banks in the
western world have managed to raise capital from emerging economies to offset their losses. Emerging
economies, whose weight in the global economy has increased over the years, have sustained growth
thanks to strong domestic demand.

Fed officials voice growth doubts, point to rate hold

Two TOP Federal Reserve official have voiced concern about weak US economic growth for the rest of
2008 and said inflation, while a worry, should start to fade over time. The comments by Chicago Federal
Reserve Bank president Charles Evans and Atlantic Fed Bank President Dennis Lockhart suggested the
Fed is in no hurry to start raising interest rates while the economy in a funk.

Lockhart even said he would not rule out cutting rates if circumstances warrant – unusual at the time
when Fed watchers almost uniformly expects the central bank’s next move to be rate increase. Financial
markets recently have pared back on ideas that the Fed will start raising benchmark interest rates soon to
tamp down inflation. Bets on a quarter-point increase to the 2% federal funds rate by year-end are running
at about one chance in three.

A weak second half: Lockhart and Evans were united in forecasting weak second-half economic growth,
especially as the impact of the federal stimulus package starts to fade. Evan said: “The second half of
2008 will likely to extremely sluggish.” Growth will probably not return to a near-trend level of 2.5-3%,
annualised, until 2010. Evans added the current 2% federal funds rate was “not especially stimulative” to
growth. Lockhart said economy in the second half could be “quite weak” with “risks to the downside”.
2.7 WARNING SIGNALS
Stop Excessive Energy Speculation Act

Over the last few months, there have been shrill protests in the US Congress against the free run of
speculators in the nation’s energy futures. A new bill, Stop Excessive Energy Speculation Act, has been
introduced, designed to pare trading volume. The Bill vastly broadens the US Commodity Futures
Trading Commission’s regulatory purview and also orders the CFTC to distinguish between “legitimate”
and “nonlegitimate” traders. Legitimate firms are those trying to manage their price risks; and the
nonlegitimate are “speculators” purely in it for the money. Those in the latter category will face position
limits that restrict the contracts they can hold at one time.

In the words of Senator Byron Dorgan, the Bill will “wring the speculation out of the market.” Wall Street
is alarmed because the Bill can potentially drive away volumes from US bourses to overseas exchanges.

Luckily for traders, the regulator (CFTC) is now batting for them. In its interim report on crude oil, an inter-
agency task force on commodity markets says physical demand-supply factors are responsible for price rise
between January 2003 and June 2008.

Though the volume of trading in crude oil has increased by about sixfold since 2000 and coincided with
the price rise, the task force believes the real culprit is lag in supply.

“The world economy has expanded at its fastest pace in decades, and that strong growth has translated
into substantial increases in the demand for oil, particularly from emerging market countries. On the
supply side, the production of oil has responded sluggishly, compounded by production shortfall
associated with geopolitical unrest in countries with large oil reserves. As it is very difficult to rely on
substitutes for oil in the short term, very large price increases have occurred as the market balances supply
and demand,” the report says.

Speculators don’t mastermind, simply respond to oil market: Moreover, instead of punters moving
the markets, price changes are deciding trader moves. “If a group of market participants has
systematically driven prices, detailed daily position data should show that group’s position changes
preceded price changes”.

“The task force’s preliminary analysis, based on the evidence available to date, suggests that changes in
futures market participation by speculators have not systematically preceded price changes. On the
contrary, most speculative traders typically alter their positions following price changes, suggesting that
they are responding to new information – just as one would expect in an efficiently operating market.”

The price shock was in fact necessary to re-align demand-supply. “Under such tight market conditions, it
is often the case that only large price increases can re-establish equilibrium between supply and demand.
Consequently, large or rapid movements in oil prices are not inconsistent with the fundamentals of supply
and demand; such price movements, by themselves, do not indicate that prices have become divorced
from fundamentals.

Further, if speculative positions, rather than fundamentals, were pushing prices upward, then inventories
would be expected to rise. To date, there is no evidence of such an accumulation; in fact, known inventory
levels have declined,” the task force says.
 WARNING SIGNALS

Analysis of trading data by the task force shows that fastest growth in open interest was certainly among
non-commercial traders or speculators. But they were holding spread positions, which mean combining long
positions in one month with short positions in another month.

Thus, while the long positions of speculators have increased, their short positions also have increased. So
the market was not being pulled in one direction.

Additionally, although the net long positions of non-commercial traders have increased somewhat since
2004 – which some market observers have hypothesized has pushed prices up – the proportion of those
positions has been relatively constant as a share of open interest over the last few years, undercutting that
hypothesis,” the report says.

The report quotes non-public CFTC trading data which shows that commodity swap dealers have held
roughly balanced long and short positions in the crude oil markets over the last year and actually held a net
short position over the first five months of 2008 – that is, swap dealers’ futures position would have
benefited more from price decreases than from price increases like the ones experienced in the last few
months. Moreover, any pressure exerted by the long positions of swap dealers’ commodity index clients has
largely been offset by the short positions of the dealer’ other clients.

In short, speculators have had little to do with the price rise over last five and half years. Instead of
masterminding the bull-run, most punters typically altered their positions after the market shifted. So they
were in reaction mode like other market participants.

In particular, the positions of hedge funds appear to have moved inversely with the preceding price changes.
This suggests instead of being villains of the piece, their positions might have provided a buffer against
volatility-inducing shocks.

The inviolable law of futures markets is that it takes two to tango. That is, the value of contracts agreed to by
sellers anticipating that prices will fall must equal the value of contracts agreed to by buyers anticipating
prices will rise. Put simply, there is no such thing as “excessive speculation”.

Though US Congress is keen on finding a whipping boy, any curbs on “excessive” speculation could
therefore harm the very players it is trying to protect.
3.1 MUTUAL FUND INDUSTRY
Make a fast buck from MFs without spending a penny

Many companies have perfected the art of making a fast buck from mutual funds without investing a
penny. They do this by playing around with the cut-off timing set by fund houses for accepting cheques
from investors.

This is how it works: companies and some high net worth investors give cheque to buy units of liquid-
plus MF schemes just before the weekend, when there’s no money in their current account. They enjoy
free returns for two days, fund their accounts on Monday morning, stay invested for a few more days and
then switch to a new scheme to play the game all over again.

For mutual funds, it’s like offering the NAV of the scheme to the investor without receiving any money.
It’s similar to a bank paying interest on a non-existent deposit. Fund houses know the game, but are
unwilling to spoil their ties with big investors.

Here is a typical sequence of events:

Friday, 2.30pm: A corporate gives a cheque to invest in a liquid-plus MF scheme. At this point, there’s
no money in the company’s bank account.

Saturday: The investor gets Friday’s closing NAV (NAV roughly indicates the price of a mutual fund
unit).

Sunday: Investors gets Saturday’s NAV, which includes accrued interest. The scheme invests in fixed
income securities, which carry a fixed interest coupon. This is also why NAVs of such schemes inch up
over the weekend.

Monday: The investor funds its bank account so that when the MF presents the cheque, it is honoured.
The MF cannot deposit the cheque before Monday since high-value cheques are not cleared on Saturdays.

Tuesday & Wednesday: The Company stays invested in the liquid-plus scheme.

Thursday, 2.30pm: The investor directs the MF to switch the investment from liquid-plus to a liquid
scheme. A liquid scheme invests only in securities with less than one-year maturity while a liquid-plus
has papers of more than one-year as well.

Friday: The Company gives a redemption order for the liquid scheme units. Almost simultaneously, it
gives a fresh investment in a liquid-plus scheme. Again, there’s no money in company’s account.

Saturday, Sunday: Enjoys free NAV.

Monday: The money from the redemption order gets credited to the company’s bank account. The money
also helps in honouring the cheque that was given on Friday for investing in the liquid-plus scheme.
3. COMMODITY MARKETS VS. FINANCIAL MARKETS
Life beyond oil.com

Price action on the financial markets of late has resembled the Brownian movement; at one level it appears
as if nothing is happening but just beneath the surface a lot of particles are churning that may suggest the
character of the market is indeed changing. While global equity prices at the aggregate level have been
virtually unchanged over the past month, the real story is that almost every trend which defined the first
half is turning on its head, thereby setting the stage for an end to the bear market regime.

Also, there are fundamental reasons in play that suggest a pronounced bear market in oil and other
commodities has begun. The third quarter of this year will probably mark the first time in the current
global expansion that oil consumption growth turns negative on a global basis. Oil demand in OECD
countries is now contracting at 3% on a year-over-year basis. With the OECD still accounting for more
than 50% of global demand, even if emerging market demand continues to grow at an unlikely pace of
3%, it will not prevent overall oil consumption from declining. Furthermore, there’s growing evidence to
suggest China is joining the economic slowdown and global industrial production growth could slip to
below 2% by year-end – an environment that has typically been hostile for all commodities including oil.

Changes in demand patterns of oil tend to be very sticky. If history is any guide, then the price of a
commodity reverts to its marginal cost of production once demand for it turns negative. In the case of oil,
that price would at best be $ 80 a barrel. The $ 80 level also marks the point where the oil prices went into a
spiral last November and started to destabilise global equities.

Of course, the oil bulls argue that focusing on demand pattern is misleading as the real problem is that
crude supply is struggling to grow. While there is some merit in that argument, given the rapid depletion
of existing oil fields and limited spare capacity, the most important point to remember is that whenever oil
demand has turned negative, it has always led to a bear market regardless of the supply situation.

While the oil trend to grab the headlines, a much less discussed but even more significant development
with regard to the inflation outlook in emerging markets is the recent behaviour of agriculture
commodities. Prices of several commodities from wheat to rice are down by over 30% from the high
point in March-April this year. Just as hysteria was building on how the world is running out of food –
and all sorts of Malthusian arguments were being lousily bandied about such as “the world is losing one
hectare of arable land every 8 seconds” and that “only 3% of the world’s surface is arable” – it seems a
massive supply response was on its way that has now led to a sharp decline in agricultural prices.

Based on these trends, it’s likely that inflation is close to rolling over globally. The base effects are
expected to become favourable by the fourth quarter of 2008 as the commodity price surge began in
August last year. And if commodity prices continue on their downward trajectory, a lot of the inflation
angst should dissipate by the end of the year.

A meaningful improvement in the global inflation profile will undoubtedly be positive for equity markets.
To be sure, commodity prices are currently falling due to rising concerns that global growth is slowing
with the red-hot emerging markets too coming off the boil. This begs the obvious question of whether
equity markets will be able to rally in the face of a slowing global economy. Historically, stock prices
almost always move ahead of the turning point (6-months before) in the economic and earnings cycles.
Valuation measures such as the P/E ratio are very sensitive to change in inflation and interest rates; they
usually expand first in anticipation of a better economic outlook and earning growth follows.
 Mining companies in bubble territory

Commodity prices have suffered their largest monthly drop in 28 years in July 2008 led by crude oil
prices which have nose-dived more than $ 20 from an all-time high of $ 147.27 a barrel. Deutsche Bank’s
strategists are predicting that lower oil demand in the US and Europe coupled with an increase in oil
production in Saudi Arabia, would cause oil prices to fall below $ 100 a barrel by the start of 2009.
Lehman Brothers is also forecasting lower oil prices, while Goldman Sachs, Merrill Lynch and Barclays
Capital continue to sanguine. Of late, trading volumes in West Texas Intermediate crude oil have been the
lowest of 2008, also magnifying the market’s moves, as investors desist from making decisive bets.

The Jeffries-Reuters CRB Index, a basket of 19 commodity futures, has lost 10.1%, its largest monthly
decline since it fell 10.5% in March 1980, amid worries about lower economic growth hurting demand for
raw materials. Natural gas, corn, wheat and freight costs have plunged in July 2008 between 10% and
30% from record level set earlier. Fears of a global slowdown have also hit the cost of shipping goods.
The Baltic-Dry Index, the global benchmark for shipping commodities such as iron ore and grains, fell for
15 consecutive days in July 2008, its longest losing streak since mid-2005.

According to law of physics, a particle in motion does not always remain in motion. As a bull market
ages, stock groups turn down one by one, until even the strongest roll over. That may now be happening
to energy and other commodity-related stocks. According to PwC; while the commodities boom appears
to be going strong, higher prices for energy, labour, materials, transport and contractors all contributed to
the rise in mining costs. Many of the increased costs, such as higher wages, taxes and royalties, will not
necessarily go down if metal prices drop leaving mining companies with a permanently higher cost of
production. Are mining industry stocks in ‘bubble territory’?

According to Mark Bristow, CEO of Randgold Resources (a gold minor), the mining industry is creating
a dotcom-style of bubble of companies with dizzying valuations but making no money. He says that the
industry has not grown at all in terms of production. It has simply got larger capitalisation and lesser
profits. Margins are being squeezed by the rise in oil prices. In addition, as valuations outstripped proven
resources and revenues, governments were becoming increasingly annoyed since returns were accruing to
foreign investors with negligible or no tax reaching their treasuries. This was the rationale behind the
moves of various countries to raise the royalties minors are charged, to ensure a flow of income to the
government based on the amount of metals mined rather than a company’s financial performance.

Of late, there have been marked reversals in a number of basic foodstuffs. And a sharp drop in the Baltic
Dry Index, a measure of commodity shipping costs.

Besides, gold, normally a reliable indicator of inflation concerns, remains well below its mid-March 2008
levels. My research shows that the oil bubble should burst by September 2009, taking various commodity
and food prices down with it. On the way down, momentum investors erase about 75% of the gains they
built on the way up. Since stock markets normally tend to discount financial news more in advance, I
believe the discounting has started now, as the headwinds to commodity prices have started making their
presence felt for the first time. So, this would be the right time to rush into the beaten-down value stocks,
populated by the out-of-shape financial stocks”.
4. FINANCIAL SECTOR: TRANSFORMING TOMORROW
Money, Honey

Divide to multiply. This seems to be the latest philosophy of Indian ultra high net-worth individuals
(UHNIs). UHNIs, families with legacy wealth, and young billionaire entrepreneurs are now hiring
services of multiple portfolio management outfits to manage their wealth. Unavailability of product
breadth, lack of open architecture and missing trust in revealing their wealth portfolios has resulted in
UHNIs opting for several service providers.

1. FINANCIAL ADVISORS:
Weigh impact on investors

Long-term focus on building client relationships

Financial advisors feel that due to the nascent nature of the industry, most financial services were add-on
distribution of products by commercial banks or broking outfits to their clients. Due to the nature of such
offerings, most clients experienced a surfeit of products without actually getting value addition in terms of
customised solutions addressing their needs.

In response to this, as a self-protective measure, and due to the lack of comprehensive solutions from one
provider, clients had no recourse but to go to several service providers. It is a natural tendency of an
investor to shop around for the best possible investment solution for his money.

Lack of quality advisors who can manage large relationships in the market today is an area, which needs
immediate attention. There are supply side constraints on building a pool of such quality advisors due to
rapidly changing market environment, which suddenly changes in business dynamics. The firms follow
short-term focus in a hurry to get revenues and ignore the long-term focus on building client relationships.

2. WEALTH MANAGERS
Map out the details to translate into benefits

In-house strong product manufacturing capabilities

Wealth managers feel that HNIs are now hesitant to completely depend on a relationship manager of
commercial banks and brokerages. Also the life span of a relationship manager in an organisation is not
very high. Therefore they prefer to make investments through different relationship managers from
different companies. The problem also lies with these firms since very few follow an open architecture
and thus are not able to meet all the needs of clients for their investments. Also every firm doesn’t have a
strong product manufacturing capabilities to develop products in-house.

Wealth managers blame firms for following a transaction approach with their clients and not a
relationship approach, which is hurting the prospects and making clients venture out to different firms as
each has its unique proposition.

Experts think that whether a client stays with one wealth manager or decides to diversify his portfolio
mainly depends on the stage of wealth creation. With growing wealth, clients need more sophisticated
solutions and providers that match their profile accordingly. Wealth growth rate is around 24% annually
in India. Thus, it’s also a case of the wealthier an individual gets, the more complex their financial needs.
 FINANCIAL SECTOR: TRANSFORMING TOMORROW

3. FINANCIAL PLANNERS
Value unlocking for all stakeholders

HNIs see future in exotic oil products

Indian HNIs have discovered new instruments to grow their wealth. Exotic oil products overseas such as
crude-oil futures and oil exchange traded funds (ETFs) are their theme for the season. Investment in the
oil products space overseas has seen a 10-fold rise during the last few months. Some would even say that
it’s the eagerness of the HNIs to invest in such products, which is driving up oil prices globally.

The reasons are not hard to see. Many of these HNIs actually lost considerable amount of money in the
January crash on Dalal Street this year. They are now trying to make up for the losses by investing in
crude oil futures and oil ETFs to book quick profits.

With the equity markets continuing to remain volatile, HNIs are reluctant to take more exposure in
equities. Though the RBI does not allow banks to offer any product, which is non-rupee denominated, but
some companies in the financial services are offering such products. It is not surprising that Indian HNIs
are now actively speculating in oil futures and oil ETFs. They are savvy investors who are looking to
sense every opportunity they can seize from the markets.

4. INCLUSIVE CEOs
Innovative responses to problems

HNIs parking money in natural resources, space age vehicles

Natural resources as an investment avenue are also attracting HNIs. Exotic products such as investment in
space opportunities, agriculture funds and water funds have caught the fancy of superrich who are looking
to diversify their portfolios and mitigate risks following stock market meltdown.

Financial planner outfits say investment by HNIs in such products has increased manifold owing to
increased volatility in the capital markets. HNIs who have allocated large sums for traditional products
such as private equity, film industry, art funds and pre-IPO placements want to diversify their portfolio
and invest in natural resources. HNIs are aware natural resources are fast depleting and investing in
them will reap huge benefits.

Investing in water will go into companies involved in purification of water and holding water resources;
and investment in agriculture will go to agriculture funds putting money in Latin American ethanol
companies. However, that’s not all; HNIs are participating in the space story. HNIs are aware: “there
exists a Space Foundation index that tracks the performance of 31 publicly-traded companies that derive a
significant portion of their revenue from space-related activities.
 FINANCIAL SECTOR: TRANSFORMING TOMORROW

5. ONE-STOP-SHOPS
Dedicated to offer related services under a roof

Tailor-made products

To get rich is hard and to stay wealthy harder. And since the stock markets are passé and real estate in the
doldrums, wealth managers companies are now thinking of new places where wealth can be parked to
reap the best returns. Wealth Advisors are now coming up with bouquet of niche products. They have
introduced a strategic portfolio for its HNI clients where they need to invest a minimum of Rs 10 crore
with a lock-in period of three years. They then invest this amount to buy a select five to seven emerging
stocks. These stocks typically belong to mid-cap space and have been chosen after a lot of research.

The buck doesn’t stops at Dalal Street; it has new found its way into the world of glamour and glitter –
Bollywood. Wealth Advisors have linked their clients’ money to the fortunes of Bollywood production
houses where a Good Friday means that your money doubles triples or even quadruples with every box
office collection. A wealth management company launched a media fund exclusively for super HNI
client, in which the fund invests in film production and other such avenues to provide the benefit of this
innovative alternative asset class.

6. GLOBAL OUTLOOK
Global pathways

Indian rush to buy real estate & stock abroad

It seems the US sub-prime lending crisis has come as a boon for Indian HNIs. An increasing number of
affluent Indians are now eyeing property in the States. With the sub-prime crisis badly hitting the US
economy, property prices have fallen by nearly 35-40%. This makes properties in the US a much sought
after proposition for the Indian investors.

Falling home prices in the US is making properties within the reach of well-to-do Indians. The properties
rates in major cities like Manhattan are currently comparable to those of Mumbai- predominantly South
Mumbai. Mostly Indians with existing professional connections in the US are showing interest, as they
have the means to leverage the opportunity.

Wealthy Indians are also buying property in Dubai, a favourite location besides Malaysia. Their flush of
funds are also diversifying their stock portfolio to include either the shares of global blue-chip firms or
investing in the units of mutual fund schemes, which have an exposure to several emerging markets.
Besides, more Indians are gifting to their relatives abroad and loosening their purse strings to see the
world or educate their kids overseas. Still, the amount that has gone out of the country is nothing
compared to over $ 25-bn that has come in annually as inward remittances by the Indian diaspora. Yet,
notably, the trend is picking up fast.
 FINANCIAL SECTOR: TRANSFORMING TOMORROW

7. RISK MANAGEMENT CONSULTANTS

Educate – Engineer and Enforce

Look for the next investment bubble

One thing we know for sure about today’s global economy is that there is always an investment bubble
somewhere. If you get in early enough, you can make a fortune riding the boom. So, with property prices
collapsing faster than a tent on a stormy day and with the oil-and-commodity bandwagon gone, where
should investors be looking for the next big thing? There are five areas worth thinking about: Old Europe,
automobiles, stock broking, the dollar, and private islands.

Anyone looking at the financial markets over the last 20 years would have noticed one common thread:
Something is always the flavour of the month. Investors spot a trend, and everyone piles in until
valuations become overextended and the whole thing collapses in a heap bankruptcies and lawsuits.

At the turn of the decade, we saw the bubble in dot-com shares. More recently, we have witnessed
the same in real estate – fuelled by the availability of subprime mortgages – as well as in oil, food
and commodities.

We have been buying frenzies in the much-hyped Bric economies – Brazil, Russia, India and
China. And there have been bubbles in financial instruments, such as collateralised debt
obligations, that helped trigger the subprime meltdown. Along the way, we have some minor
bubbles in the things purchased by the people who made money out of the other bubbles. Look at
how the price of art or English Premier League soccer teams has scored.

Adding China and India to be the developed world is going to mean commodities get more
expensive. And yet the natural-resources boom took that upward-sloping graph and assumed it
carried straight on into the sky.

So where are the next bubbles? You need to find something where there are solid reasons for expecting
good growth, but which can also be puffed up into mega-trend once some smart investment bankers get to
work on it. Here are some places to start looking, bearing in mind that bubbles come in five basic types:
places, industries, financing, currencies and luxuries.

First, the place: Old Europe – Forget about the Brics. The next decade will belong to the FIGs – France,
Italy and Germany. We have written them off for so long that we’re in danger of forgetting that all three
have been among the richest societies in the world for more than 1,000 years. As the Chinese and Indian
middle classes expand, they will spend money on the kind of upmarket, design-led, history-rich products
the FIGs are so good at making. After the credit crunch, their mix of stable, export-led, self-financing
growth will look more attractive than the debt-fuelled UK and UK models.

Next, the industry: automobiles – It has been almost a century since we last witnessed a gold rush in cars,
suggesting it’s high time for a replay. After oil prices reached records, some of the world’s smartest
people began looking more seriously at creating cheap and non-polluting electric cars. If they crack it, a
few hundred million vehicles will be replaced within a few years. Think about the fortune of music
industry made when we replaced our vinyl records with compact discs and then multiply it by 10,000 or
more. It sure sounds like a boom.
 FINANCIAL SECTOR: TRANSFORMING TOMORROW

How about the financial bubble? That will be stock broking. It’s so long since it was in fashion, there
aren’t even many left in business. Most are just divisions of investment banks. And yet, there are now
thousands of companies with shattered balance sheets from the credit crunch. They need advisors who
have strong relationships with investors and can raise money for their clients by selling shares. That what
stockbrokers used to do. If you are smart, quietly shut down that hedge fund, and become a stockbroker.
In a few years, USB, AG will pay a fortune to buy you out.

The currency bubble will involve the dollar. The markets have kicked it around for a long time, and yet by
next year it may well be the US that has the world’s strongest economy. The weak dollar will spark an
export boom. Pretty soon we’ll be describing the US as the new Germany – an export-led, manufacturing
economy, held back only by the reluctance of its consumers to spend money.

8. TECH SAVVY PROFESSIONALS

Take first step to ensure efficient and reliable system

Program trading

Arbitrage Jobbers – The job is to spot price discrepancies whenever they exist. This could be anomalies
in the prices of stocks between NSE and BSE, a significant difference between prices of stock futures and
the spot markets, or between index futures and the basket of their underlying components.

Jobbers specialise in buying and selling large quantities of shares at a small margin. As long as jobber is
able to buy the lower-priced securities and sell the higher priced ones, he makes a profit.

On a really good day, these jobbers take home about Rs 5,000, after adjusting for the various trading
charges. On a bad day, they hand out Rs 3000 to his employer. Their dues are settled on a daily basis in
cash. However, the days of making good money by arbitrage jobbers appear to have been consigned to
distant memory. And the biggest threat that jobbers now face to their livelihood is technology.

This June, the National Stock Exchange said it would now allow “decision support tools/ algorithms,
wherein the orders may be placed for execution for two or more securities/contracts as the case may be in
capital market and/or futures & options segment simultaneously”. In layman terms, it is the green signal
for ‘program trading’ by institutional investors in the Indian market.

The program could be something as basic as “buy Infosys’ shares and sell the futures if the premium
exceeds 0.5%. It could be more complex, involving many scrips and conditions. Like “if rupee falls below
43 to the dollar buy the basket of BSE IT index at market price and sell all oil marketing shares.”

Once program trading takes off in a big way, arbitrage jobbers will be fighting emotionless software
programs for their daily bread. And the battle will be one-sided. A software code can analyse thousands of
scrips simultaneously and zoom in on arbitrage opportunities much faster than the jobbers manning
trading terminals. Having spotted the break, the software will execute the trade in a fraction of a second
before the arbitrageur can even react.
 INANCIAL SECTOR: TRANSFORMING TOMORROW

9. CREDIT COUNSELORS
Resolve convertibility and recompensation issue

Reverse arbitrage

With the futures of many key index stocks quoting at a significant discount to spot prices, some
aggressive foreign fund houses are learnt to be borrowing shares to cash in on the situation. These players
borrow the shares for an interest charge, sell them in the market, and simultaneously buy an equivalent
quantity of the futures of the stock, which are available at a discount. The entire transaction is known as
reverse arbitrage in market parlance. The difference between the sale price of the shares and the purchase
price of the futures is the profit for the foreign fund house. This difference, also called spread, has to be
wide enough for the investor to be able to lock in a neat profit after paying the interest charge on the
borrowed shares. Profits are locked in the moment the trade is initiated. And if the spread starts
narrowing, the position can be closed out with some sacrifice to the initial profit.

As the name suggests, reverse arbitrage is the exact opposite of what most foreign funds were practising
in a rising market till December 2007. Futures were then quoting at a premium to the spot price. So these
foreign funds would sell the stock futures and simultaneously buy an equivalent amount of the stock, the
difference being their profit. Then, depending on the spread, they would either carry forward those
positions to the next settlement cycle or reverse them at the expiry of the prevailing cycle. There was no
risk, since the other protected each leg of the trade, and the spread mostly remained constant.

Take for instance, ONGC share, on July 4, was quoting at Rs 876.50, while the July futures were quoting
at Rs 844. If an investor already owns ONGC shares, he can sell his holding and buy an equivalent
amount of futures, thereby locking in a profit of Rs 28-30 per share (after adjusting for brokerage
charges). Then, depending on the spread, he can either carry forward the positions to the next derivative
settlement cycle or reverse them at expiry of the current cycle. Even if the investor were to borrow ONGC
shares, he would still make a profit of Rs 20-25 per share after adjusting for the borrowing costs.

Reverse arbitrage tends to drag down prices in a scenario where there is not enough buying support. Stock
future quoting at a discount means investors are bearish in their outlook on the stock prices. So when
shares are sold to capture the arbitrage opportunity, the prophecy becomes self-fulfilling. The same
mechanism was in force, but in the opposite direction, when the market was rising. When investors were
selling futures and buying shares, indices would rise as a result of the cash market purchases.

Interestingly, none of the borrowing happening through the securities lending borrowing scheme (SLBS),
started by the Sebi in April. Why? Dealers said: “SLBS is too transparent.” If (market) operators get to
know that institutions are heavily short on a certain stock, they will try to move the price in the opposite
direction and force the institutions to cover up their position. The other reason is the high upfront margins,
and the rigidity in the tenure of the contract. Since both the lender and borrower are global players, such
agreements are entered into outside India.

Market watchers are baffled by the steep discount, which many stock futures are currently quoting at. One
reason could be the reduced number of players in the derivative segments. Fewer participants mean
arbitrage opportunities are available for longer. But there are conspiracy theories too. Some brokers
alleged the steep fall in stock futures is being precipitated by basket selling of stock futures by some FIIs
in a bid to pull down the index. It can not be a coincidence that the discounts are wider in stocks which
are illiquid but at the same time have a significant weightage in the index,” said a trader, referring to stock
futures of Wipro and ONGC. The disparity is much lower in the case of liquid index stock such as RIL.
FINANCIAL SECTOR: TRANSFORMING TOMORROW

10. CONTINUING LEARNING CENTRES

Take informed decisions

Margin trading - Double trouble

Double gain, double pain; this is how the concept of margin trading can best be described. As the name
suggests, margin trading enables you to trade with borrowed funds/securities or, in other words, by paying
only a part of the total investment amount. It is, in fact, a leveraging mechanism which enables you to
take exposure in the stock market over and above what is possible with your own resources.

However, while margin trading increases your buying power, it enlarges your risk as well; in a way,
amplifying your gains and losses to the same degree. That is why it is still not a recommended way of
trading, although the lure of big money has always drawn investors into the lap of margin trading. So
much so that an increasing number of small investors are now giving in to the temptation of this high-risk
trading strategy which had traditionally attracted only short-term punters and deep-pocketed investors.

To understand the mechanism of margin trading more clearly, let’s take the case of Sunil Mehra who buys
600 shares of XYZ Co at Rs 400, using the margin finance facility. Assuming his broker offer him 50%
leverage on the transaction, Mehta effectively pays only half the total transaction amount (Rs 120,000 out
of Rs 240,000) at the time of purchase. The balance is borrowed from the broker/ bank. Now, if the share
price rises to, say, Rs 450 after a few days, Mehta would be richer by Rs 30,000 (minus the interest that
he would have to pay to the broker/ bank for the borrowed money) and the bank/ broker would gain to the
extent of the interest amount on the funds borrowed.

However, if the share price drops to Rs 360, Mehta would be incurring a loss of Rs 40 per share, exposing
his financier to more risk if the share price were to plummet further. It is typically during such time that
the broker is forced to make margin calls to clients, asking them to either deposit more money into their
account or sell some of the securities in their account to meet the margin shortfall. Now, if the Mehta fails
to make good the margin shortfall, his broker would sell his shares for the stipulated amount in
consideration. Thus, apart from losing his investment, Mehta would also stand to lose the opportunity to
make any profit in the future, were the share prices to recover.

However, if you look at the same transaction with out the margin trading facility, you will realise that
though it trims the profits, it effectively reduces the risk when the share price slides. If the Mehta had not
used the margin trading facility while buying shares, he would not have liquidated his holding when the
market corrected. It is another matter that unlike the previous transaction, he would have been able to buy
only 300 shares. Thus, given that margin trading can lead to inflated profits and losses, experts advice that
it should be opted only by traders with a high-risk appetite. Risk- averse or general investors should better
keep off from it. Thus given the complexities of margin trading you should invest only if you have an
above average understanding of the market. Otherwise your losses would be more than your gains.
Experts advise investors to put only that much money which they can afford to lose. This is just to ensure
that one’s life-long earnings are not wiped out through this process!

Systematic Trading System used with a lot of discipline may one way to transact with margin trading
facilities. The important aspect of this system is that human emotion is not involved in this and all buying
and selling triggers are generated by software based on the scientific analysis of historical market trends.
 FINANCIAL SECTOR: TRANSFORMING TOMORROW

11. ISSUES OF THE PRESENT

Freedom to get & fail in the system of free enterprise

Dark horse set to change face of equity trade

Deep, dark pools, dark algorithms, smart order routers, and top secrecy forces of the ‘light’ side taking on
the ‘dark’ side. Sounds like a plot for a Star Wars sequel, but isn’t. It’s just one of the biggest structural
changes in equity trading to hit the American and European markets in 20 years, and is threatening the
very existence of exchanges like LSE, NYSE and Euronext. It already accounts for 12% of all American
equity trades daily and is expected to rise exponentially.

The wave is now sweeping through Europe and the ‘lit’ side – main exchanges like LSE and Euronext –
are launching their own dark pools to take on competition from their biggest customers. The trend is
moving to Japan now and is expected to inevitably find its way to Asia. ‘European equity trading is going
through the biggest structural change since the Big Bang’. Dark pools, to put it simply, are essentially
trading platforms and exchanges that match block institutional orders, bypassing the main exchanges
completely in off-market deals, and don’t publish stock quotes.

The geeky jargon in the circuit is primarily because it’s been made possible by increasing sophisticated
technology like algorithmic trading tools. Algorithmic trading, says one study, will account for more than
50% of all shares that change hands in the US by 2010. Why dark pool? Since most bids and offers on
say, LSE, NYSE or NASDAQ, are shown publicly, trading on these exchanges is like “playing poker with
an open hand”. Dark pools, by contrast, guarantee absolute anonymity and secrecy to buy-side traders
worried about revealing their strategies, accesses available liquidity outside the exchanges, and are only
reported to the light side post-trade.
5. BANKING SECTOR
MNC Banks

At the start of the century, India was just one of the many outposts for most global banks. Asia was
recovering from the crisis and most multinational banks were reviewing their options. India hardly
registered as its contribution to profits was minuscule. Eight years later, India is among the top 10 markets
for the three top foreign banks in India – Citigroup, Standard Chartered and HSBC – whose global
presence ranges from 70 to 100 branches.

StanChart, which always had a strong India association, made only $ 122 million profit in 2001. For the
first half of 2008, profits from India were at $ 606 million. For Stan Chart, India is now the second-largest
market after Hong Kong, contributing 23% to group profits. The same goes for larger banks like HSBC,
where India is now the ninth-largest in the first half of 2008. In 2000-01, HSBC had reported a net profit
of Rs 200 crore, while its’ profits for 2007-08 was Rs 1,192 crore.

The grapevine has it that India is among the top seven revenue generators for Citigroup globally. Citi,
which does not break up its global profits geographically, made Rs 1,804 crore net profit in 2007-08. On
the conglomerate basis, the net profits were Rs 2,596 crore. The perception of India is a far cry what it
was at the turn of the century. Then, countries like Malaysia, Thailand and Indonesia looked more
lucrative, which was seen incapable of delivering despite the potential. India has moved for all MNCs
from a conceptual market of high promise to a market that delivers. Despite the slowdown, the underlying
India trend is still solid. Most forward-looking MNCs recognise that.

In a past couple of years, MNCs have focused on corporate and investment banking (CIB), which
contributes to bulk of profits following multi-billion-dollar acquisitions by India Inc. India, is among the
biggest revenue generators in Asia for Citi, StanChart and ABN Amro in the space. It is the largest
wholesale banking market for Stan Chart, both in terms of profits and revenues. For Citi too, India was
one of the largest revenue generators in the CIB space in 2007 in Asia.

Though, the foreign banks had to face competition from large Indian banks like ICICI and State Bank of
India, but this time the game was so big that MNCs got their CEO to help swing the deal in their favour.
As Indian banks globalise, the competition is likely to increase. But, unless they become truly global, it
will be difficult for them to replace foreign banks. Besides, they should also understand the
comprehensive risks associated with overseas transactions.

One big advantage that the top three banks had was the rise of the Indian bankers. Citi has the largest pool
of Indian bankers, with over 300 Indians at various senior positions across the globe. It is the same in
StanChart. Of its 75,000 employees, over 20,000 are Indians making up the largest nationality. Indians are
only second to British in the bank’s top 200 managers globally.

While opportunities have gone up, so have the barriers. Most foreign banks feel the much-anticipated
opening up of the banking industry for foreign competition in 2009 will not happen on the scale
demanded. A host of foreign banks has picked up stakes in private banks as part of a foot-in-the-door
policy. This will allow them to build up positions if banking is opened up further. Other than the top three
banks, the market is also keeping a close eye on Royal Bank of Scotland, JP Morgan, BNP Paribas and
ING, among others. The credit crisis has taken toll on the expansion plans of some of the MNCs.
However, unlike at the time of the Asian crisis, it is unlikely that any of these banks would shut shop.
This is why even as the subprime crisis rages on; foreign banks are still queuing up to enter India.
 BANKING SECTOR

Education loan

If you are facing difficulties in getting an education loan, you can bank on finance minister P
Chidambaram to help you. Keen to enable students to realise their dreams, the government has allowed
them to directly contact the finance minister or finance ministry officials if a public sector bank denies an
education loan without genuine reasons.

Public sector banks have been directed to ensure that criteria like location of residence or age should not
come in the way of a student in availing education loans. The PSBs are directed not to create objections in
issuing loans as long as the area of residence of the student and the bank branch are in the same district. In
other words PSU bank branch cannot reject an education loan application on the ground that residence of
the student, the educational institution or the guarantor is not in the same locality.

In many cases, residence of an education loan applicant is at a different place from that of the guarantor.
Banks usually insist that both the guarantor and the candidate should be residing under the area of a single
branch, which is impractical. So directions are issued to all banks with an aim to remove this ambiguity.

Many students had written to the finance minister, seeking his intervention and all the genuine cases have
been resolved. Now a senior officer of joint secretary rank has been designated to address all education
loan-related grievances addressed to the finance minister or the ministry. PSU banks have also been told
that age should not be cited as criteria for rejecting educational loans. This means that even a 35 or 45-
year-old can avail an education loan.

Banks can no longer insist that the place of residence of the student and the college concerned should fall
under the concerned ‘branch area’ for availing a loan. The branch area of a bank is usually between a
radius of six and eight kilometres, though there are no set rules for it and it varies from bank to bank and
location to location. In contrast, district area in most cases has a radius of 30-40 kilometres.

Genuine reasons for denial of loan include past track record of the candidate. The pro-student rules do not
apply for courses not recognised by any statutory body like UGC, AICTE, the central government and
state government.

RBI sounds note of caution on growth of emerging markets

Even as analysts talk about India continuing to be the second-fastest-growing economy, Reserve Bank of
India has sought to inject some caution. The central bank has said that the resilience of India and other
emerging markets cannot be guaranteed. In its annual report for 2007-08, RBI pointed out that outlook on
capital flows to the emerging markets remains uncertain. While emerging markets have remained resilient
so far, there is uncertainty as to how long and to what extent the divergence of growth performance
between advanced economies and emerging economy will persist in future.

The RBI has also pointed out the global slowdown could have its impact on services sector since Indian
BPO and IT enabled services are mainly dependent on external market conditions. On one hand cost
cutting measures in developed countries might increase outsourcing to India but on the other hand a
reduction in IT spending in these economies might work against BPO and IT enabled services. As global
slowdown has hit the financial services industry the most, outsourcing activities to India may decline as
the financial services companies reduce their geographical operations.
6.1 TAX UPDATES

Sportsmen face higher TDS

Sportspersons will have to cough up more tax upfront. The Central Board of Direct Taxes (CBDT) has
expanded the scope of professional services to cover sportspersons, umpires and referees, making them
liable for a higher tax deduction at source (TDS) at the rate of 10% against 1 - 2 %.

The move, however, will not hurt sportspersons who are amateurs and do not play for commercial gain as
a separate exemption has been provided this. Put simply, when the country’s Olympic medal winners –
Abhinav Bindra, Vijendra Kumar, and Sushil Kumar – receive reward from various governments, they
wouldn’t have to pay tax on them.

As per notification, the CBDT has categorised services rendered by sportsperson, umpire and referees,
coaches and trainers, team physicians and physiotherapists, event managers, commentators, anchors and
sports columnists as professional services. The professionals were covered by Section 194C of the
Income-Tax Act, which made them eligible for a lower TDS rate of 1-2%. With this notification, they
would now be covered under 194J of the I-T Act. As per the provision, if the fee for professional or
technical service contract undertaken by any of the professionals exceeds Rs 20,000, tax has to be
deducted at 10% at the time of payment by the contract awardee. The government had hiked TDS rate
from 5% to 10% in Budget 2007. Currently, persons rendering medical, engineering or architectural,
accountancy, technical consultancy and interior decoration services are covered under the provision.

Although the move that comes close on the heels of the India Premier League (IPL) tournament will cover
all sportspersons, it is likely to hurt cricketers the most. It may be pointed that the tax deducted can be
claimed as a refund after filing I-T return if the taxpayer has no liability. However, it is an irritant as it
blocks one’s funds for a short period of time. TDS is seen as a noninvasive way of collecting tax and the
government is giving special emphasis on this. CBDT has created a special directorate to monitor TDS
collections that have been growing by over 50%.

Suspicious Transaction Reports

Stockbrokers will have to alert the government on all customer transactions where the deal size is not in
line with a client’s declared income. The proposed rule, spelt out by the finance ministry to some top
brokers at a meeting last month, will be a key aspect of the anti-money laundering policy for market
intermediaries. At a meeting – attended by six institutional brokers and 10 retail brokers along with
officials from Sebi, NSE and BSE – senior officials of the financial services group were asked by the
financial Intelligent Unit (FIU) – why brokerages were not submitting suspicious transaction reports
(STRs) to FIU. Significantly, transactions pertaining to market manipulation and insider trading also need
to be reported to FIU as suspicious trade. The meeting was called of to discuss compliance status of the
prevention of money laundering Act, 2002, (PMLA) by the broking industry.

Treaty shopping

To check ‘round tripping’ – routing of funds overseas to bring them back through tax havens like
Mauritius – and resultant tax evasion. The government has stepped up scrutiny of foreign direct
investment (FDI) proposals. Seven proposals, especially those involving FDI from Mauritius and Cyprus,
have been put on hold recently. The finance ministry wants to prevent ‘treaty shopping’ or use of funds
based in tax havens like Mauritius to evade capital gains tax using double taxation avoidance treaties.
6.2 SECURITY LAWS UPDATES

Shoddy merchant bankers

Capital market regulator Sebi is set to impose penalties on half-a-dozen top investment bankers for
shoddy work while handling public offerings over the past few years. The regulator’s market
intermediaries regulation and supervision department (MIRSD) has uncovered serious shortcomings in
the due diligence process for IPOs and right issues besides open offers carried out by I-bankers.

In some cases, merchant banker had not even verified that the plant and machinery of the companies
whose issues they had managed. Besides, litigation against the company directors were not mentioned in
the public issue documents. Errors were also noticed in the financial details provided in the papers.

Due diligence refers to the examination and independent verification of material and financial facts and
statements of companies seeking to raise capital. It is the responsibility of merchant bankers to ensure
regulatory compliance in the run-up to a flotation and to check for allotment of shares and refunds to
investors post-issue. According to Sebi officials, in several cases, bankers have not followed the
prescribed procedures while conducting due diligence. Sebi chairman CB Bhave said that one of the
issues that Sebi was looking into was to make merchant bankers more responsible post-issue.

Sebi is reportedly mulling stiff penalties on some of the country’s top merchant bankers for failing to
carry out proper due diligence in public issues managed by them. That merchant bankers continue to fail
in their duties despite the regulator pulling them up periodically suggests the need for harsh deterrent
punishment.

Ever since the Comptroller of Capital Issues was abolished in early 1990s, the Indian financial market has
increasingly functioned on the ‘caveat emptor’ principle. It means buyers, beware; exercise due diligence
while making investments. But it does not absolve the seller or other intermediaries of wrongdoing in the
case of misrepresentation and fraud.

Indeed, Sebi has prescribed a code of conduct that makes merchant bankers responsible for “verification
of the contents of prospectus and the letter of offer in respect of an issue and the reasonableness of the
views expressed therein”. This due diligence is extremely critical in a caveat emptor set-up as, at least
theoretically, investment decisions are supposed to be based on the information made available.

In fact, many investors tend to form a first impression of an issue merely on the basis of their perception
of merchant bankers running it. Association of big-ticket merchant bankers with an issue is seen as some
sort of assurance about the quality of the issue and the authenticity of the information in the offer
document. That trust stands betrayed, if charges of serious shortcoming in due diligence are true. IN
SOME CASES, Sebi has found that the merchant bankers have not even verified the details of fixed
assets of companies that were raising equity from public. It is not surprising then that hundreds of
companies have disappeared after raising capital.

Part of the reason is that merchant-banking business tends to be cyclical and merchant bankers want to
make the most of any primary market boom, even if it means overextending themselves. Mandates are
often won through personal relationships, extraneous pressures and not necessarily competence. This
concoction leads to shoddy and hurried work. Unfortunately, there are no alternatives available.
Therefore, the regulator must now step in to restore credibility to the IPO process. It must impose and
legally sustain heavy financial penalties and even cancel licenses in the case of grave offences.
 Private funds may have to appoint investment gurus

Private provident funds, superannuation funds and gratuity funds that manage the savings of employees of
a large number of corporate houses may soon have to appoint an asset management company or
investment advisor to ensure that they deploy the savings of their employees efficiently. Presently, in
these trusts, people who are not essentially professionals make investment decisions. These decisions
make a difference in the financial health of a lot of people who are in their twilight years. Such
investment decisions have a direct bearing on the livelihood of these people. The finance ministry had, in
September 2007, issued draft guidelines on the proposed investment pattern for such trusts.

Now, the finance ministry notified the change in the investment pattern of non-government provident
funds, superannuation funds and gratuity funds that will be effective from April 1, 2009. According to the
new investment pattern, Central Government Securities, State Government Securities and Units of Gilt
Mutual Funds will be merged into a single category and up to 55% of the corpus can be invested in these
instruments. It has also provided a flexible ceiling for various categories of instruments instead of fixed
investment ceiling. The amendments to investment pattern have also included new categories of
instruments such as rupee bonds of multilateral agencies and money market instruments.

The government has permitted non-government provident funds (PFs) and other private provident funds
to invest 15% of their corpus in equities on which futures and options (F&O) trades are available. Further,
trusts have been given flexibility of exceeding the investment ceiling up to 10% of the limit prescribed
during the year. This means that the funds can invest 16.5% of the corpus in equities or 60.5% in
government securities but have to unwind the position later in the year. Also, the Trustees of these funds
have been allowed freedom to exit from rated financial instruments when their rating falls below
investment grade. At present, some private funds have the option to invest 5% of the corpus in equities
but most trusts have opted to stay away from it.

Central PF Commissioner A. Viswanathan said: “EPF funds are not being included for the time being”.
Despite several attempts by the finance minister to get the EPFO to invest in equities to maximise returns,
the organisation has not accepted the suggestion. He said that the main impact of these new guidelines
would put pressure on the trustees, as someone will have to take a call as to what equity to buy. “No
trustee would like to take the risk. Hence, hiring fund managers and fund gurus would become a reality”.

Coming close on the heels to let professional fund managers to manage PF balances, the new guidelines
should translate into better yields on savings. This is good news for a large number in the non-government
organised sector for whom the PF is the only old-age security. But only if liberalisation goes hand in hand
with better supervision and monitoring of PFs! The fact is the bulk of the PF corpus is with the
Employees Provident Fund Organisation (EPFO) which has consistently refused to invest in equities. So
the new guidelines are unlikely to benefit the vast majority of PF subscribers.

Any liberalised regime creates, at best, an enabling environment. It is unlikely to improve the actual
return for many EPF subscribers. For that much more needs to be done. For one, the present system needs
to be completely overhauled. Today, accounts in both the EPFO and many exempt PFs (that manage their
own funds, under authorisation from the EPFO) are in a mess. Transparency and accountability must
replace the present opacity. It will be a while before we see light at the end of the tunnel.
7. INFLATION AT WORK

John Maynard Keynes famously said, “In the long run we are all dead”. Defenders of markets sometimes
admit that they do fail, even disastrously, but they claim that markets are “self correcting”. During the
Great Depression, similar arguments were heard: governments need not do anything, because markets
would restore the economy to full employment in the long run. But, in the long run, we are all dead.
Markets are not self-correcting in the relevant time frame. No government can sit quiet when the country
goes into recession or depression, even when caused by excessive greed or mis-judgment of risk by
security markets and rating agencies.

Containing inflation in India is not a matter of choice for policy makers; rather, it is a matter of necessity.
Rising prices affect a vast majority of the population. Therefore, it is imperative that the policy makers
take all possible steps to curb its further rise. Given the predominantly monetary phenomenon that it is,
the RBI is the first stop of the policy makers to address this issue. Hence, tightening the monetary policy –
by tightening liquidity in the market – is certainly a move in the right direction. Commodity prices are
coming down from their peak of a few months and this may bring inflation down. However, much more
needs to be done to impact the supply side of the problem.

Industry growth falls to 5.4% in June

It raises slowdown fears

The deceleration in the industrial production in June 2008 (5.4%) is consistent with the RBI’s intent to
cool the overheated economy. The apex bank had in its recent quarterly review emphasised the need to
“urgently address aggregate demand pressures”. Against this backdrop, the slowdown is very much in
order and consistent with the immediate goal of checking rampant inflation.

However, the sectoral growth trend seems to suggest that the high interest rate regime may be depressing
investment activity more than causing consumption demand to dampen. While the y-o-y growth in
production of capital goods has dropped 5.6% in June 2008 from over 23% a year ago, the production of
consumer goods, both durable and non-durable, has rebounded sharply to 12.2%. This jump in growth of
the production of consumer goods could be an aberrant one-time effect of the fiscal incentives – loan
waiver, pay commission award and tax exemptions. The slowdown in the domestic capital goods
production could be due to the requirements being met through imports. Growth on non-oil imports this
year has been quite robust at over 27% and capital goods constitute a significant portion of this.

Amid general industrial slowdown, these mixed signals from IIP numbers call for some pause in the
monetary tightening, till a clearer picture is available. This does not necessarily mean a let up on the vigil
on inflation. Though headline inflation is likely to continue to increase because of the base effect, the drop
in crude prices and that of the other commodities has also provided some breathing space. It would cause
inflationary expectations to moderate even if prices do not come down immediately.

Inflation spirals to 16-yr high

It touches 12.63%

India’s annual rate of inflation zoomed to a 16-year high of 12.63% for the week ended August 9, 2008 as
compared to 12.44% the week before, but finance ministry said prices had stabilised. “Prices of essential
commodities which include food grain, pulses, edible oil, vegetable, dairy products and some other
products including kerosene, soap and safety matches have more or less stabilised.”
 INFLATION AT WORK
Law of Inflation
Whatever goes up will go up some more

The law of inflation, it would seem, holds that whatever goes up will go up some more. It’s reason
enough for central banks to chalk out appropriate monetary policy, to dampen price trends and lower
inflationary expectations. A recent research paper at the USA Federal Reserve is on the policy
implications of focusing on ‘headline’ and ‘core’ inflation.

It notes that the headline rate is about estimates of total inflation in an economy, while the core inflation
measure excludes food and energy prices. The paper suggests that using the headline inflation rate for
policy purposes by the monetary authority can be distorting. It can actually duel a much larger rise in core
inflation. In tandem, the process of stabilising core inflation rate is seen as more optimal policy.

The fact remains that certain central banks, such as the Bank of England and European Central Bank, do
focus on headline inflation both for framing policy objectives, and as an operational guide as well. Other
central banks, such as the US Fed, appear to be relatively more concerned with core inflation trends, at
least when it comes to describing the basis for policy decisions.

Here in India, the context is a bit different in the headline versus core inflation debate. Indian central bank
track wholesale prices for policy purposes, quite unlike the practice abroad of keeping tab of consumer
prices to guide policy moves. Also, there are glaring distortions in domestic oil prices – incomplete pass-
through, relatively high retail taxes and the like. Further, the monetary transmission mechanism is known
to be weak, and financial markets for currency, bonds etc remain underdeveloped, and very much work in
progress. Still, the headline and core figures are relevant, against the backdrop of high oil prices. The
Reserve Bank of India does respond in policy terms to headline inflation.

The paper suggests that focusing on headline inflation may even contribute to greater volatility in actual,
realised headline rates than the alternative of focusing on core inflation. The modeling simulation in the
study involves competitive wholesale producer that use energy in combination with other inputs, and sell
their output to retailers. What’s posited is that energy shocks could cause headline and core inflation to
diverge in such a way that policies oriented towards stabilising the former could exert markedly different
effects on the economy. Many inflation-targeting central banks, it is noted in the paper, have an explicit
goal of adjusting policy so that their forecast of inflation reverts to a tentative target within a specific
period, say, two or three years.

The practice, generally, is to outline the policy objective in terms of a measure of headline inflation, for a
simple reason that it high degree of “public visibility” tends to make the task of central bank
communication much easier. But while it is generally agreed that reacting to realised core and headline
inflation would imply very different policy actions consequent to energy price shocks, it is often
presumed that responding to a forecast of either headline or core inflation would have similar operational
implications for the conduct of policy. However, in the case of a rather temporary energy price shock, the
difference between the forecast of headline and core inflation can have important implications for
monetary policy, it is averred in the paper.

Specifically, the research suggests that policies that respond to forecasts of core and headline inflation
lead to “significantly different reactions,” with attendant effects on output and inflation economy-wide.
Now, broadly speaking, either policy appears to succeed in keeping a forecast of headline inflation near
baseline levels over the “medium-term.” But the macroeconomic effects are “considerably different” over
shorter horizon, with consequent effects on output and growth. In parallel, the policy of responding to a
forecast of core inflation seems by and large in sync with optimal policy under simulation.
 INFLATION AT WORK

In sharp contrast, the policy that responds to a forecast of headline inflation, the study suggests, fuels a
large and persistent output gap. Core inflation remains significantly above baseline levels even beyond a
year, and there are other untoward effects, such as persistent wage inflation. However, the rule responding
to a forecast of headline inflation seems somewhat useful when the main objective of a central bank is to
control variability in headline inflation. But even in such a policy setting, the rule appears to make sense
on the assumption that economic agents do correctly read the underlined trends. With more realistic
assumptions, and agents unsure if the energy shock is more permanent, the rule responding to a forecast
of headline inflation may cause realised headline inflation to repeatedly digress from target rates, induce
“large and persistent deviations” in core inflation and widen the output gap.

The paper does imply that plausible conditions, policy responding to a forecast of core inflation appears to
exhibit better “stabilising properties” both of routine operations and communication strategies of central
banks.

Crude, food help bring down Inflation to 12.4%

Inflation declined to 12.40% for the week ended August 16, 2008. Annual rate of inflation based on
wholesale prices stood at 12.63% a week earlier, and at 3.99% year ago. The WPI declined for the first
time in 28 weeks. The decline in inflation is largely on account of the drop in the global crude prices and
marginal easing of prices of fruit, vegetables, eggs, meat and fish. A finance ministry statement said,
“there are some early signs of moderation of inflation’. Economists, however, cautioned that it may be too
early to assume that the declining trend had set in.

Inflation dips marginally to 12.34%

Inflation declined to 12.34% for the week ended August 23, 2008. Annual rate of inflation based on
wholesale prices stood at 12.40% a week earlier, and at 3.94% year ago. Inflation declined for the second
week in a row to 12.34% as many food products, including fruits and vegetables, turned cheaper, and
prompting the government to say that its efforts seem to have started yielding results.
8.1 MISCELLANEOUS UPDATES

The fine art of managing a global workforce…

It’s been a year since the merger, and the Tata Steel group is well on the way of becoming a globally
integrated operation. Corus chief executive officer Philippe Varin explains how creating a common vision
can inspire a professional and passionate workforce to pull together.

Diversity management: Managing a global workforce is about managing diversity. With globalisation,
diversity management has become essential for maximising business opportunities and meeting
challenges. And one condition for successful diversity management is to have a common vision. When
Corus and Tata Steel came together in April 2007, both companies felt they could better compete and
succeed in a rapidly changing world if they combined their strengths. In the last year, a lot of work has
gone into developing and enduring vision for the combined Tata Steel group.

Common vision: Our shared vision is one developed by the board, the executive team and a number of
others within the Tata Steel group. I have been personally immersed in the process and care deeply about
it. This vision will be achieved through the commitment, pride and passion of our workforce and is a call
to action and to building a future we can all be proud of. Our vision is to become the world steel
benchmark for both value creation and corporate citizenship. Being a leader in corporate citizenship in
about providing a safe workplace, respecting our environment, caring for our communities and
demonstrating high standards; here we can genuinely claim to be better than many of our competitors.

Our workforce: We now have a fantastic opportunity for creating through our vision, a magnet for
change and a creative tension so that we are all on the same page, working in the same direction and
contribution to the same goals. This process now allows us to forge better links with our 80,000 people
across 50 different nationalities to have a truly global diverse organisation.

New option

Growing Indian economy is increasingly throwing up demand for new skill sets. And educational
institutes are discovering a new opportunities in niche and unheard of courses to meet that demand. From
Tata Institute of Social Sciences’ PG degree in social entrepreneurship, J K Business School’s MBA in
Corporate Social Responsibility (CSR), scores of institutes and colleges are identifying needs for new
courses in professional education. CSR as a discipline is popular today, not just globally, but also in India.
Sensing a trend,

Tata Institute of Social Sciences launched a course on social entrepreneurship around a year back. The
two-year course aims at training and developing leaders for wealth generation with social progress in
social sectors and non-profit markets. J K Business School’s MBA in Corporate Social Responsibility
(CSR) was launched in 2006. Students learn about CSR and work with companies specially SMEs, to sort
out their problems. Companies in the SME segment often confuse CSR with merely spending money in
social projects and there have been issues with carrying out such efforts even when they want to do it.

Meanwhile, Welingkar Institute of Management, Mumbai, plans to roll out a diploma programme in
judiciary management in the next two months. The introductions of most of these courses are led by huge
demand from the industry which requires professional help in the concerned domain. This could just be a
beginning. As emerging new sectors throw up new challenges, India Inc would look for relevant skill to
meet them; and there in lies opportunities for educational for educational institutes.
8.2 GSM 3G NETWORKS

Gear up for 3G life. A far more meaningful retailing, socialising, banking, blogging, movies watching and
more will come your way via 3G mobile services. The mobile value added services (MVAS) players are
going all out to offer content, which, to say the least, will change social habits forever.

So, be it your favourite Saas Bahu serial last night or Sachin swinging his bat, you can watch it all up
while on way to office. Or, you could make a video call to your boss to tell him you are caught in the
traffic jam (some things just may not change!). Be it TV, matrimony, classified or job interviews, most
web content may be ported to the mobile phone, once 3G kicks in mid-2009. The $ 2-billion MVAS
sector gearing up for just that.

In 3G bonanza, which will offer very high-speed mobile wireless services (@384 kbps while in a moving
car to 2mbps while walking or stationary) is all set to kick off a new ecosystem in mobile advertising,
mobile TV and mobile content. So, you may be able to see a video of an apartment or a car you are
planning to buy on your mobile screen. It will definitely give a boost to the stagnant m-commerce market.
Matrimony and dating sites may also get a boost where people will be able to see each other via the
mobile before meeting. 3G is likely to give a sigh of relief to gaming experts too.

RCOM float $ 500m tender for 3G rollout

Reliance Communications is all set to float a $ 500-million tender for GSM 3G networks. The tender
covers equipment supply and serving for commissioning of the 3G network. The vendors include Huawei,
Alcatel Lucent, Nokia Siemens Network, ZTE and Ericsson. The move comes just days after the
government unveiled the 3G policy, which listed out the frequency bands as well as the auction procedure
for these frequencies. At present RCOM is predominantly a CDMA-based operator.

Currently, all mobile services offered in the country run on second generation (2G) networks. RCOM
already offers second generation GSM service in eight circles and holds licences for remaining 14 circles
also. RCOM got a pan-India GSM licence in December 2007 and the department of telecom (DoT)
allotted it GSM spectrum for the 14 circles earlier this year. The company plans to launch second
generation GSM services in the top cities in these 14 circles by the year-end. Earlier this year, RCOM had
awarded a nationwide 2G GSM rollout contract for electronics valued at about $600 million to Chinese
telecom network major Huawei for these 14 circles. The 3G networks will be overlaid on the 2G networks
that are nearing completion.

Finmin asks DoT to put 3G policy on hold

In a move that may delay the rollout of 3G services in the country, the finmin has asked the department of
telecommunication (DoT) to put the 3G policy on hold as it was not consulted on the financial
implications of the guidelines. The financial ministry has said the DoT has contravened an earlier Cabinet
decision which had stipulated that spectrum pricing would be mutually finalised by both ministries. In a
bid to drive home the seriousness of the issue, the finance secretary D Subbarao told the DoT that as per
the Transaction of Business (TOB) Rules, it is mandatory to have consultations with the finance ministry
‘as a pre-condition to all issues which have financial implications’.

Earlier this month, communications minister A Raja unveiled the 3G policy, which would help telecom
operators to offer high end services. Mr Raja had announced price of Rs 2,020 crore for auction of pan-
India 3G spectrum for GSM operators and about Rs 505 crore for pan-India WiMAX radio frequencies.
9.1 INSURANCE
How to assess if you are under-insured?

Life insurance has moved from protecting life to protecting lifestyle. Today, there is a choice of
innovative products that meet financial needs at each at each stage of one’s life stages – be it marriage
when one assumes responsibility to protect one’s family, or at the birth of a child when one assumes
added responsibility towards family or when one is preparing for a comfortable retirement. Simply put,
financial needs can be classified into four broad categories:

• First is protection, which ensures that if anything was to happen to you, your family continues to be
financially protected and maintain the same lifestyle.

• Second need is that of saving, which means that one should be able to generate required corpus to
meet responsibilities, such as higher studies of your child, buying a house, etc.

• Third need is that of retirement. With the average age of post-retirement life increasing, planning for
comfortable retirement is becoming increasingly important.

• The last need is that of investment, which helps build wealth.

The first step in buying insurance is to adequately assess ones ‘needs’ – what is my life stage (age, family,
etc.) and what are my responsibilities ( protecting my income, children’s education and wedding, buying a
house, retirement, etc.)? How much corpus will I require to meet such financial responsibilities and how
do I plan them so that even if I am not around, my family can still sail through these milestones? Often we
find these to be tough questions to answer, but we must remember that they are fatal if ignored.

If assessing your financial need while buying insurance is important, the adequacy of insurance protection
is equally critical. We are often led to think, ‘Am I adequately insured?’

Consider the example of a 35-year person (call him Ramesh), who needs to protect his family against any
mishap that may happen to him. Let’s assume that Ramesh’s expenses are Rs 50,000 per month (Rs
6,00,000 per annum), which he needs to protect. In other words, Ramesh needs to buy a protection plan
(commonly known as term life) that would, in case of his death, give a corpus which when invested, is
sufficient to give his family a return of Rs 6,00,000 per annum. Assuming that the investing instrument
(bank fixed deposit, mutual fund or any other such instruments) gives an annual return of 10%, then
Ramesh needs to have a protection (sum assured) of a minimum of Rs 60,00,000 (6,00,000 x 100/10 = 60
lakh). In case the returns are that of 7.5%, he needs a sum assured of Rs 6,00,000 x 100/7.5 = Rs 80 lakh).

Clearly, if Ramesh does not have a sum assured of Rs 60,00,000/- (assuming investment give a return of
10%) he is under-insured. More often than not, we do not think (or do not want to think) what will happen
when we are gone – especially when one has not mat all life stage responsibilities. Though the family
goes through the emotional trauma, financial burden leads to additional pain. One has no remedy for the
emotional pain, but smart financial planning can certainly ease the financial pain.

If one is under-insured, it could lead to a slip in family’s lifestyle in case of an eventuality. The family
may need to compromise on various fronts to make the ends meet. These could include slipping to lower
grade house (to save on rent), lower grade schooling for your children, cutting of expenses, including
food, medical, entertainment and many more such expenses. Clearly, while life insurance is critical to
meet financial responsibilities, adequate insurance cover is the key for meeting your responsibilities. So
having a cover is not enough – having adequate cover is critical.
9.2 KNOWLEDGE RESOURCE
Foreign investment

Any investment flowing from one country into another is foreign investment. A simple and commonly-
used definition says financial investment by which a person or an entity acquires a lasting interest in, and
a degree of influence over, the management of a business enterprise in a foreign country is foreign
investment. Globally, various types of technical definitions – including those from IMF and OECD – are
used to define foreign investment.

The Indian government differentiates cross-border capital inflows into various categories like foreign
direct investment (FDI), foreign institutional investment (FII), non-resident Indian (NRI) and person of
Indian origin (PIO) investment. Inflows of investment from other countries are encouraged since it
complements domestic investments in capital scarce economies of developing countries. India opened up
to investment from abroad gradually over the past two decades, especially since the landmark economic
liberalisation of 1991. Apart from helping in creating additional economic activity and generating
employment, foreign investment also facilitate flow of technology into the country and helps the industry
to become more competitive.

FDI and FII

FDI is preferred over FII investments since it is considered to be the most beneficial form of foreign
investment for the economy as a whole. Direct investment targets a specific enterprise, with the aim of
increasing its capacity/productivity or changing its management control. Direct investment to create or
augment capacity ensures that the capital inflow translates into additional production. In the case of FII
investment that flows into the secondary market, the effect is to increase capital availability in general,
rather than availability of capital to a particular enterprise. Translating an FII inflow into additional
production depends on production decisions by someone other than the foreign investor – some local
investor has to draw upon the additional capital available via FII inflows to augment production.

In the case of FDI that flows in for the purpose of acquiring an existing asset, no addition to production
capacity takes place as a direct result of the FDI inflow. Just like in the case of FII inflows. In this case
too, addition to production capacity does not result from the action of the foreign investor – the domestic
seller has to invest the proceeds of the sale in a manner that augments capacity or productivity for the
foreign capital inflow to boost domestic production.

There is a widespread notion that FII inflows are hot money – that it comes and goes, creating volatility in
the stock market and exchange rates. While this might be true on individual funds, cumulatively, FII
inflows have only provided net inflows of capital.

FDI tends to be much more stable than FII inflows. Moreover, FDI brings not just capital but also better
management and governance practices and, often, technology transfer. The know-how thus transferred
along with FDI is often more crucial than the capital per se. No such benefit accrues in the case of FII
inflows, although the search by FIIs for credible investment options has tended to improve accounting and
governance practices among listed Indian companies.

According to the Prime Minister’s Economic Advisory Committee, net FDI inflows amounted to $ 8.5
billion in 2006-07 and is estimated to have gone up to $ 15.5 billion in 07-08. The panel feels FDI inflows
would increase to $ 19.7 billion during the current financial year. FDI up to 100% is allowed in sector like
textile or automobiles while the government has put in place foreign investment ceilings in the case of
sector like telecom (74%). In some areas like gambling or lottery, no foreign investments are allowed.
 KNOWLEDGE RESOURCE

According to the government’s definition, FIIs include asset management companies, pension funds,
mutual funds, investment trusts as nominee companies, incorporated/institutional portfolio managers or
their power of attorney holder, university funds, endowment foundations, charitable trusts and charitable
societies. FIIs are required to allocate their investment between equity and debt instruments in the ratio of
70:30. However, it is also possible for an FII to declare it a 100% debt FII in which case it can make its
entire investment in debt instruments. The government allows greater freedom to FDI in various sectors
as compared to FII investments. However, there are peculiar cases like airlines where foreign investment,
including FII investment, is allowed to the extent of 49%, but FDI from foreign airlines is not allowed.

Restriction on FIIs in India

FII can buy/sell securities on Indian stock exchanges, but they have to get registered with stock market
regulator Sebi. They can also invest in listed and unlisted Securities outside stock exchanges if the price at
which stake is sold has been approved by RBI. No individual FII/sub-account can acquire more than 10%
of the paid up capital of an Indian company. All FIIs and their sub-accounts taken together cannot acquire
more than 24% of the paid up capital of an Indian Company, unless the Indian Company raises the 24%
ceiling to the second cap or statutory ceiling as applicable by passing a board resolution and a special
resolution to that effect by its general body in terms of RBI press release of September 20, 2001 and
FEMA Notification No. 45 of the same date. In addition, the government also introduces new regulations
from time to time to ensure that FII investments are in order. For example, investment through
participatory notes (PNs) was curbed by Sebi recently.
 BRIDGING THE GAP

www.mi7safe.org

Alka Agarwal
Promoter of Mi7 & SAFE

Financial Literacy Mission

A crash course of literacy

Missions Seven Charitable Trust

120/714, Lajpat Nagar, Kanpur - 208005
Phone 0512-2295545, 9450156303, 9336114780

E-mail at: safe@mi7safe.org

Safe Financial Advisor Practice Journal: September 2008