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FROM THE EDITOR’S DESK AUG 2010 MONEY MANAGER
India has been the talk of the town for the past few decades as it has amazed the pundits around the
world through its growth rate, its presence at global forums as well as robustness of its financial set
up. The investors around the world through their investment patterns have given the Indian markets a
literal “thumbs up”. This can be witnessed through the large amount of capital inflows in the recent
past. At the same time, the Indian economic policies have been appreciated by one and all because of
it inherent strengths as well as strong fundamentals. If the ability of the Indian markets to successfully
tackle a downturn of such magnitude surprised everyone, its high rates of growth after just a year of
the crisis has left everybody spellbound. But it doesn‟t mean that there are no cynics. Some have
downplayed India‟s successful recovery as fallout of its relative detachment from the global economy
whereas some feel that India escaped as its population has inadequate access to credit thus lower
exposure to risk. So, whatever may be the reason, there is little doubt that story of Indian financial
markets is not just interesting but it‟s also captivating.
Money Manager 8 with its theme, “Unleashing India: The Story of Indian Financial Markets” is a
humble attempt on our part to narrate this story through the prism of industry as well as academia.
This edition has tried to capture views from different quarters that more than just influence the way
the market behaves. The interviews present international outlook on the Indian market and provide
macroeconomic insights on the government policies. The articles from the academia give financial as
well as regulatory view of the Indian financial developments. The student articles through its variety
and conceptual clarity have touched down upon different aspects of Indian economy. We have also
incorporated articles that relate finance with our day-to-day activities be it poker or relationships.
On behalf of the Money Manager team, I would like to express our deepest gratitude to the eminent
personalities who shared their views and perspectives on this theme, the distinguished faculty who
kindly agreed to judge the student entries and our sponsors of this edition, UBS AG Hong Kong. We
thank you, our discerning and ever supportive readers, for the encouragement and succour you have
provided us. We hope that this edition of Money Manager will add value through its variety of
offerings.
Acknowledgements
We at The Finance & Investments Club, IIM
Calcutta would like to sincerely thank all those
who have been instrumental in helping us
release this edition of „The Money Manager‟.
THE
We‟d like to thank our sponsors, UBS for their
support and encouragement. Their patronage
MONEY
and contributions have helped create a much
richer and more appealing Money Manager, one MANAGER
that we hope the readers will enjoy.
Contents
Cover Article : Indian Fi‐ 56 Arm Chair Investing on Nifty: A P/E
Based Approach.
nancial Markets 60 Why the Indian Markets Will Not Fail
Expert Opinion
The Lighter Side of Fi‐
6 An Outlook on Indian Markets nance
UBS
65 On Bonds and Bondings
9 The Changing Face of Indian Markets
Dr. Golaka C. Nath
67 Great Poker Players Make Great Trad‐
12 IFRS : Internationalizing Indian Accounts ers, Or Do They?
Prof. Asish K. Bhattacharyya
Financial Crossword
14 Viewing Reforms Through The Regulatory
Prism
Prof. V.K. Unni
Editorial Articles
17 The Basics of Base Rate
20 ULIPs: Whose Product Is It Anyway?
23 Financial Inclusion in India
27 What Drives Indian Equity Markets?
31 Oil Price Deregulation
Student Articles
36 Exchange Traded Funds (ETF) : Opportuni‐
ties to Deepen
41 Mutual Funds Industry in India
45 Developed Corporate Bond Market in
India
51 Capital Accounting Convertibility: Is India
Ready?
MONEY MANAGER AUG 2010 PREFACE
Preface
The Money Manager was started with an aim to collect
the views of students, practitioners and academicians on
the current developments and most relevant issues in
finance. Its stated objective was to provide a platform
for management students to express their views on all
areas of finance from private equity to capital markets,
corporate finance to insurance.
1
COVER ARTICLE AUG 2010 MONEY MANAGER
Cover Article : Indian Financial Markets
Since the beginning of this decade the Indian A multitude of reasons surface when we probe
capital markets have been receiving global at- these shortcomings of the Indian Capital mar-
tention due to the improving macroeconomic kets. The primary market which used to be the
fundamentals. The presence of a great pool of retail investors’ favorite investment avenue and
talent, rapid integration with the world economy an entry point till a few years ago, has been
and liberalization measures taken by the govern- dwindling of late. This was reflected in the re-
ment have increased India’s global competitive- cent IPO’s of some public-sector firms, which
ness and have helped the capital markets grow have traditionally enjoyed a sound and safe in-
by leaps and bounds. In this issue we take a look vestment image among public investors. Retail
at the major turning points and focus on the Investor participation in the market remains dis-
most recent developments in the markets. mal even in the secondary market. To put the
picture in perspective, the Indian retail investor
The major revolution in the capital markets saves over $300 billion but allocates less than 5
started with the establishment of the Securities per cent to financial market instruments other
and Exchange Board of India (SEBI), the regu- than low return bank deposits. Even in terms of
latory authority for Indian securities market in geographical spread, more than 90 per cent of
1992. It aimed at protecting the investors and exchange trade is largely confined to 10 cities
improving the infrastructure of capital markets and 100 companies.
in India. Since then a flurry of improvements
have been initiated by the Government of India
and the SEBI which has resulted in transition of
exchanges to screen-based order matching sys-
tems for better transparency, dematerialization
of shares, online trading facility and adoption of
market oriented economic policies. This led to
faster and cheaper transactions, and increased
the volumes traded by many folds. This along
with the liberalization measures undertaken by
government since 1993 has helped deliver India
on the global platform. This decade has also
seen the rise of the derivatives markets which
are now being used by many Indian corporations
for hedging their risks. Mobile phone banking
being implemented around the country indicates The biggest reason for this lackluster allocation
that much of the system is at the Internet age to capital markets remains lack of confidence
and beyond. However despite these efforts our and limited financial literacy. In the last two
markets have not been able to reach the levels decades, India has seen scams and frauds which
desired. Even now less than 1 per cent of our has left the investor nervous. The allocation
population invests directly in the equity market. fraud of Yes bank IPO where multitude of retail
In terms of depth, participation and geographical accounts were opened by a single investor to get
spread, Indian capital markets are nowhere close maximum allocation through retail route rather
to the developed nations; not even close to their than HNI route is one such example. It repre-
Asian counterparts. sented not only the pervasiveness of the menace
2
MONEY MANAGER AUG 2010 COVER ARTICLE
but also the inability of our legal and financial ding in initial and follow-on public offers are
control systems in dealing with it. It takes an era unnecessarily long and enquire redundant data
to uncover a scam of this magnitude in any which can be done away with. There are various
country. To punish the perpetrators takes even proposals currently being discussed by SEBI’s
longer in India! Compensation if any is hard to Primary Market Advisory Committee to remove
come by. Several such scams have left the Indi- these details from the forms and make them
an investor suspicious of the capital markets and more investor friendly.
those with weaker hearts have instead chosen to
invest in the low return fixed deposit schemes. The SEBI in its role of protector of investors and
Regaining their confidence will require speedy capital market regulator recently got into a battle
indictments and compensation for which an with the IRDA over regulation of ULIPs. Earlier
overhaul of the legal system is required. There last year, SEBI had banned entry loads on Mutu-
has been some good news on that front with the al funds which made the product unprofitable
recent disgorgement of undue profits from the for the insurance agents. They focused their at-
IPO scam and compensation to the wronged in- tention on the new product called ULIPs which
vestors. Whether it will be enough to entice the still had entry loads ranging from 15-20%. Dur-
retail investor, only time will tell. ing the last year, the premium collected from
The Government and SEBI have been doing these products was a total 20 billion dollars
which is about 60% of the net FII inflows of the
previous year. This huge amount of money,
most of which is invested in the capital markets,
was not under the purview of the SEBI. This
prompted SEBI to ban 14 private insurers from
selling any new ULIP product without register-
ing with SEBI. Although the verdict has ended
with the court siding with the IRDA and ULIPS
still remain under its purview, it has helped be-
ing the truth about this product in front of inves-
tors who would now think twice before invest-
ing in them. An overhaul in the nature of these
products is being contemplated without which
the product may die a natural death due to all the
bad publicity it has gathered during this battle.
For more information on the battle between
SEBI and IRDA do check out the article
‘ULIPS: Whose product is it anyway?’ in the
current issue.
their part by spreading investor education and
using product innovation and technology to Indian debt market
bridge the urban-rural divide for a more equita-
ble and inclusive growth. The dwindling interest Debt Market plays a very critical role for any
in the primary markets can also be rejuvenated growing economy which need to employ a large
by allocating higher retail portion in the IPO and amount of capital and resources for achieving
simplifying the procedures and cost of opening the desired industrial and financial growth. The
Demat accounts to encourage people beyond the Indian debt market is today one of the largest in
top 10 centers to invest directly in equities. Cur- Asia which includes government securities, pub-
rently, the application forms being used for bid- lic sector undertakings, other government bod-
3
COVER ARTICLE AUG 2010 MONEY MANAGER
ies, financial institutions, banks and corporate. among the Indian corporations rather than the
In most of the economies of the world the debt domestic corporate bonds. A slew of reasons
markets have been more popular than the equity have been cited for this, most notably, the
markets. However in India the reverse remains lengthy issuance procedure for public issues, the
true. The debt markets had been plagued by ex- information disclosure requirements, higher
cessive controls and administered rates to pave costs of public issues and inability of the public
way for any development. Before1992, only a segment in handling larger issues. However, the
handful of institutions participated in the gov- most important factor remains that the corporate
ernment bond market with no trading activity on bond market remains a cheap source of funds
any exchange and a system of administered only for AAA rated paper. This limits the num-
rates. Money was lent according to the plan pre- ber of entities which would find it profitable and
pared by the government of India and any fall- cheaper to raise money by this route. As a result,
out of the plan was funded by issuance of more the corporate bond segment is dominated only
government bonds. by very credit worthy PSU’s. The biggest inves-
tors in this segment of the market, namely LIC,
The exponential growth of India’s government GIC and UTI prefer to hold the instruments to
bond market during last decade can be attributed maturity, thereby truncating the supply of paper
mainly to structural changes pioneered by the in the market. If there ever was a need to devel-
Government and the Reserve Bank of India to op the corporate bond market, its time has quite
improve transparency in market dealings, meth- definitely come.
od of primary auctions, deepening the market
with new market participants like Primary Deal- Indian authorities are targeting an increase in
ers, borrowings at market determined rates, and infrastructure spending of some $500 billion
creating technology platforms like NDS to rec- during the current five-year plan which cannot
ognize the institutional characteristics of the be financed through the usual bank loan route.
market. In the wake of deregulation of interest Most of the resources raised by banks are by
rates as part of financial sector reforms, there way of deposits, which are short-term in nature,
was a need for introducing hedging instruments while infrastructure projects have a long-
to manage interest rate risks. RBI introduced gestation period creating an asset liability mis-
Over the Counter hedging instruments like Inter- match. This kind of financing can only be ar-
est Rate Swaps (IRS), Forward Rate Agreements ranged by the bond market.
(FRA), Interest Rate futures(IRF), zero coupon
bonds, convertible bonds, callable (put-able) Going forward the emphasis in the debt market
bonds and step-redemption bonds over the years. shall remain on financial innovation by means of
newer products within a sound regulatory and
However the same kind of impetus has been supervisory framework. In 2010, India has pro-
lacking in the corporate bond markets in India. posed to introduce exchange-traded rupee op-
As a result this, major source of corporate fund- tions and interest-rate futures based on a wider
ing is all but non-existent. The corporate in India range of debt securities and step up efforts to
still prefer to borrow on loans from financial further develop a derivatives market that can
institutions which they can keep on their books help investors guard against financial risk.
at book value rather than by bonds which need Bourses will be permitted to introduce dollar-
be marked to market. These financial institutions rupee options and futures based on two- and five
divert the huge domestic savings which never -year government bonds and 91- day treasury
find way into the equities market, for corporate bills. The Reserve Bank of India also plans to
consumption. Even the foreign currency borrow- finalize regulations for customized foreign-
ings by way of FCCB’s and ECB’s are favorites exchange derivatives.
4
MONEY MANAGER AUG 2010 COVER ARTICLE
About the Author :
Smitalee Prusty is a 2nd year PGP student at IIM Calcutta. She holds a masters degree in Mathematics and
Computing from Indian Institute of Technology Kharagpur. She can be reached at smitalee@gmail.com
5
EXPERT OPINION AUG 2010 MONEY MANAGER
An Outlook On Indian Markets
An interview with UBS
SEBI has proposed new takeover norms. of non-compete fee for determining the
According to you what are the likely final offer price are welcome steps as
implications of its introduction on the capital these would lead to better price discovery
market activity in the Indian Equity for minority shareholders and ensure
markets? equitable treatment for all shareholders
We believe that by increasing the trigger point Will the new takeover norms affect the
for making an open offer 15% to 25% will help attractiveness of the Indian firms as takeover
Indian companies to get meaningful funding targets or will it prevent sham bids? Which of
with out worrying about hitting the open offer the two seems more probable?
limit..
We view the new proposed take over norms as
Also, many strategic investors such as PE, progressive and inline with international
overseas corporate will be able to increase standards. We do not think these norms will
their existing stake in Indian companies to impact the attractiveness of Indian firms as take
25% with out reaching the open offer over targets. Rather, we think that the
limit. attractiveness will be determined by the
domestic market growth story and the
The proposal to increase the open offer company’s fundamentals.
size to 100% from current minimum 20%
will only bring serious players to the table. Also, as mentioned above, we think that
provisions such as open offer size of 100% will
Another positive outcome of the 100% only solicit interest from serious players who
open offer size means that it is easier for will be attracted by domestic market
the company to delist instead of the fundamentals.
cumbersome process of reverse book
building. With Coal India IPO expected to hit the
markets by October, and the Government
We believe use of volume weighted making it mandatory for listed companies to
average price (VWAP) and the inclusion raise public shareholding to 25%, how well
6
MONEY MANAGER AUG 2010 EXPERT OPINION
do you think the markets are prepared to How big of a concern is the uptrend in
handle so much weight on market liquidity? inflation in India. Do you think that RBI has
been proactive enough in controlling inflation
The minimum 25% public shareholding rule or do you think it needs to hike rates again?
primarily impacts public sector enterprises
(PSUs) as our analysis of BSE 500 companies Inflation is one of the primary concerns for
suggests that out of the total amount needs to be Indian capital markets. Foreign institutional
raised to comply with the rule, ~86% will have investors are looking at inflation figures very
to be raised by PSUs. closely. We expect WPI inflation rate to decline
towards 5-6% levels by fiscal year-end. Our
We believe that PSU divestment in FY11 India Economist, Philip Wyatt, in his report in
either through complying by 25% public his note India: Inflation Zenith dated 2 July
shareholding rule or through other primary 2010 looked at 4 main angles - aggregate
sector offerings (IPOs) will not hamper demand, WPI measurement, global price
stock market momentum because of the pressures and re-pricing of oil & food – and
following factors: concluded that:
We believe Indian stocks will continue to India is at or close to the peak in headline
attract flows from FIIs and domestic inflation and over the next 12 months the
insurance companies, driven by positive rate should drop.
momentum in data points such as quarterly
GDP, earnings growth, good monsoon, If oil prices turn out to stabilise, then fuel
government policies, and better fiscal price deregulation is a distraction. The real
situation. issue is that high food price inflation
should drop lower because it simply
We expect domestic institutional investors mirrors oil inflation trends with a lag.
to continue to support public sector
divestment in FY11. Domestic investor Absent fuel price deregulation distortions
demand (including insurance companies) and new official indices we would expect
contributed 63% to PSU divestment WPI inflation rate to decline towards 5-6%
proceeds in FY10. by fiscal year-end.
There was significant FII interest (more But in reality the 1-2% impact of the jump
than 30% of total subscriptions) in four of -up due to deregulation could be partly
the six PSU public offerings in FY10. FIIs offset by a drop-down due to the
invested 16.6% in total PSU offerings in introduction of a new index, otherwise the
FY10. new WPI should be little different.
7
EXPERT OPINION AUG 2010 MONEY MANAGER
ratio (CRR) by 100bp to 6% and the policy would be a good investing strategy in today's
interest rate corridor, repo rate and reverse repo markets?
rate, by 100bp and 125bp respectively (repo and
reverse repo at 5.75% & 4.50%). The recent We remain bullish on India stocks with Mar11
hike of repo and reverse repo rates on 27 July Sensex target of 22,000. We believe that the
2010 also again shows RBI’s resoluteness to combination of several positive factors such as a
fight inflation proactively. good monsoon, government policies, a better
fiscal situation, lower inflation outlook, and
But it has much further to go to wind back its earnings growth will enable Indian stock
easy money of 2008-09. Market yields have markets to re-rate further from current levels.
risen to reflect this situation and upward
pressure on local rates should persist, 3m t-bill Our key overweight sectors are banks,
yields have risen from 3-3.5% at the low to 5- infrastructure, power and real estate while our
5.5% today. We expect monetary tightening to key underweight sectors are consumer goods, IT
continue in FY11 till nominal rates move up and services and Telecom.
more in line with inflation trends.
There have been big concerns on the credit
quality with regards to the funds raised by
the telecom sector in India, especially after
the mega spending in the 3G auctions. Do you
think such concerns are warranted?
8
MONEY MANAGER AUG 2010 EXPERT OPINION
The Changing Face Of Indian Markets
An interview with Dr. G. C. Nath
Dr. Golaka C Nath is a Senior Vice President at the Clearing Corporation of India Ltd.
(CCIL). He has over 21 years of experience in the banking and financial sector, having
previously worked with the National Stock Exchange of India Ltd. and Vijaya Bank. In
the past, he has worked on a World Bank Project on “Developing Bond Market in
South Asia”. He has also provided secretarial service to the High Powered Committee
on “Corporate Bonds and Securitization” appointed by the Ministry of Finance,
Government of India.
Inflation has become the biggest challenge for Yes high inflation is not sustainable for high
the Indian economy right now. Where do you growth as equilibrium will break as per
see the inflation rate going in the next few economic theory. Spiralling inflation will
months? destabilize growth in the long run and the cost
will be castratropic at times. We have seen in
It is, no doubt, a very important negative factor Latin American countries - It took a very long
for the economy which has the potential for time for these economies to come back on the
destabilising growth expectations. It is a growth trail with lot of pain and support from
challenge to control inflation with the present US due to political reasons. We can not expect
policy prescription. We have to understand that such kind of assurance. Our infrastructure can
initially inflation started with supply side not sustain growth rate of 9% in the long run. In
constraints and mostly in food but later my opinion, if we can achieve an 8% long term
percolated to other non-food sector. Today fuel growth with this infrastructure, it should be
accounts for a large part of the inflation. Both good enough. Given the non-equitable
food and fuel inflation are difficult to control distribution of development, we should do better
unlesss and until we take some structural to control inflationary pressure as it wipes out
decisions to augment the supplies. A good wealth from poor faster than the rich.
monsoon may bring some respite. However,
monetarily speaking, you can not control In the recent past we witnessed an
inflation with unlimited supply of liquidity at unprecedented liquidity crunch due to 3G
5%-6% repo rate when inflation is more than and Wireless broadband auction. But even
10%. More monetary tightening is required if this development didn't result in any change
we have to monetarily control inflation. in spending cycle of the government. Do you
think that there should be a change in the
It has been witnessed especially in the Indian current spending policy?
context that the high growth period is
followed by a period of high inflation. Do you Spending policy is well defined for the
think that we should compromise our growth government and it is desirable that Govt.
to rein in inflation? If yes then should it take maintains the planned expenditure schedules.
place because the Indian growth is Liquidity crunch is a temporary problem and it
inequitable in nature but the inflation will change as government pays out salaries,
pervasive? What impact could it have on the funding for various departments. However,
economic recovery? government should restrain its non-plan
9
EXPERT OPINION AUG 2010 MONEY MANAGER
expenditure so that it will not have an impact on be easily traced today and provides a negative
the market. Money goes out and comes back. As incentive for traders to do that. In illiquid stocks,
the auction of 3G and BWA was not a routine the order book is very thin. Hence traders can
inflow, Government took its time to allocate talk to each other and execute a deal at an
funds in excess of their budgeted figures from agreed price which may be away from the
such auctions. In the long run, the auction market. However, with the MTM system in
proceeds will be helpful to reduce our fiscal place for centralised settlement, this can be
deficit. controlled to a large extent. But pricing an
illquid security away from the curve will finally
After the base rate system, there are now go the the books even if you charge margins. It
talks of freeing up of interest rates of savings is a longer call. But given the systems in palce
account. Do you think that it is really needed today in India, it is extremely difficult to
and what could be its probable implications? manipulate the market without the regulator
knowing it.
Yes, freeing of SB interest rate is required. It
will create competition and customers will have The foreign banks have a dominant market
better resouces. However, as it is, banks provide share in the bond markets as well. Do you see
swipe–in facility to most of their customers and this as an outcome of existing regulations
hene SB accounts earn better return. Changing being too stringent for the national banks or
SB interest rate will further this process. it is due to the local banks lacking the
required capabilities? Should their
Do you see the setting up of the Financial participation be encouraged even if it
Stability and Development Council (FSDC) as requires comprising with the existing
a threat to the autonomy of the financial regulations?
sector regulators?
It is the strategy and policy of a bank that drives
The scope is not properly defined and it is its participation in the market. If you have a buy
going to create a lot of confusion in future. The and hold policy, you will rarely trade, you will
autonomy of the regulators will be questioned. I dump at least 25% of NDTL in HTM category.
personally do not agree with the proposal. To Foreign banks follow their parent system which
my mind FSDC will be a political intereference is generally a mark to market kind of system for
in the working of independent regulators as all portfolio. Hence there is an incentive for
Finance Ministry will be putting its hand trading. Further, the compensation structure also
everywhere and at times will interefere in day to is responsible for trading. More I trade, more
day workings of the regulators. profit I possibly generate which increases by
bonus. Given the current US legislation putting
Even though bond markets are not as easily lots of restriction on proprietary trading, things
and frequently manipulated as equity will change so some extent. However, we have
markets but still the possibilities of to also acknowledge, the skillset in foreign
misconduct remain. Can you tell us the banks will be far better in quality than the public
probable ways in which manipulation occurs banks. Most of the students from top institutes
and what are the steps that the regulators like IIMs amd IITs will surely not look at public
intend to take in order to avoid them? banks as a career but they will jump to join a
foreign bank irrespective of its global reputation.
Manipulation can happen in many ways, So PSU banks have to manage with what ever
specifically in less liquid markets like India. skill set they get with their limited resource
However, due to the surveillance system, it can allocation for compensation.
10
MONEY MANAGER AUG 2010 EXPERT OPINION
What are the steps that are needed to of the guys buy and hold. So STRIPS will take
encourage the participation of retail investors time to pick up. We have to understand that a
in the debt markets or you are happy with the STRIP is more risky than a bond of similar
status quo i.e. limited participation of retail maturity due to interest rate sensitivity. Products
investors? like CDS will come at some point in time.
However, it will be difficult to have successful
Retail investors do not come to this market very market for these products. In a plain vanila OTC
easily. Education is very important for retail derivatives product where banks are allowed to
investors. Given many competing products, few participate, PSU banks have negligible market
investors will be willing to put their money in a share (less than 0.5%) while they hold about
30 year bond with 8.32%. Globally, you hardly 65% of the total banking assets in the country.
find retail investors in this market, the way you When they are reluctant to come to this simple
find them in Mutual funds or equity market. I do plain vanilla product, I do not expect them to
not see Indian retail investors coming to this come to more complicated markets like CDS
market in next 10 years or so. immediately. It may go the OTC derivatives
way – concentration of few banks.
The major chunk of Indian bond market is
comprised of government bonds. What have Disclaimer: The views presented here are solely
been the main hurdles in developing an of Dr. Golaka C. Nath and have no relation to
equally liquid corporate bond market? What CCIL.
can be done to develop the corporate bond
market?
11
EXPERT OPINION AUG 2010 MONEY MANAGER
IFRS : Internationalizing Indian Accounts
An article by Prof. Asish K. Bhattacharyya
Asish K. Bhattacharyya, D.Phil., is Professor, Finance and Control,
Indian Institute of Management Calcutta (IIM-C). Prior to joining
IIM-C, he was the Technical Director, Institute of Chartered
Accountants of India, and a senior faculty member at the S.P. Jain
Institute of Management and Research, Mumbai. Besides, he has
about 20 years experience in the industry. A Fellow of the Institute
of Chartered Accountants of India, Professor Bhattacharya is a
member of the accounting committee of IRDA.
International Financial Reporting Standards adopted accounting standards, which are fully
(IFRS) are issued by International Accounting converged with IFRS. India is committed to
Standards Board (IASB), which is an arm of implement accounting standards fully
IFRS Foundation, a global body headquartered convergent with IFRS by April 1, 2011. As per
in London. Earlier it was known as International the road map issued by the Ministry of
Accounting Standards Committee (IASC). IASC Corporate Affairs, NIFTY 50 companies,
was formed in 1973. IASC was dissolved in the SENSEX 30 companies and companies whose
year 2001 to form IFRS Foundation. Accounting net worth was more than INR 10,000 million
standards issued by IASB are called IFRS. will apply accounting standards fully convergent
Accounting standards issued by IASC are called with IFRS. For convenience, in subsequent
International Accounting Standards (IAS). IFRS paragraphs we shall refer those standards as
refers to the complete set of IFRSs issued by INFRS.
IASB, IASs issued by IASC and not withdrawn
by IASB and interpretations issued by the
Interpretation Committee of IASB and
interpretations issued by the Interpretation
Committee of IASC and not withdrawn by
IASB.
With the globalization of capital markets, the
need of a single set of high quality,
understandable, enforceable and globally
accepted international financial reporting
standards was felt. Accordingly, a movement for
convergence of national accounting standards Convergence
with IFRS began. The movement gained
momentum in the year 2000, when the Internal Convergence gives flexibility to carve out of
Organisation of Securities Commission IFRS some accounting principles, methods and
(IOSCO) assessed and approved the Core disclosures and also to carve in some accounting
Standards issued by IASC. More than 100 principles, methods and disclosures to address
countries (including European Union) have unique requirements of the country and to
12
MONEY MANAGER AUG 2010 EXPERT OPINION
13
EXPERT OPINION AUG 2010 MONEY MANAGER
Viewing Reforms Through The Regulatory Prism
An article by Prof. V. K. Unni
Dr. V.K. Unni, faculty member of IIM Calcutta, currently holds the Max
Planck Fellowship instituted by Max Planck Society Germany. He also has the
rare distinction of serving in the Fulbright Fellowship Selection Panel for three
consecutive terms. He has been consulted on various projects/initiatives
undertaken by Columbia University, European Commission, German Ministry
of Research, IIT Bombay, IIT Kharagpur, Microsoft Corporation, Herbert
Smith LLP, UNCTAD, etc. He is an alumnus of the prestigious International
Visitor Leadership Program established by US Department of State.
India which got its independence from Great with economies of scale. The Constitution of
Britain in 1947 used an economic model of self India also played a major role in forcing the
reliance which continued for almost 45 years. policymakers to subscribe to laws like MRTP.
During this period India, tried to put certain The Indian Constitution has a chapter dealing
barriers on foreign trade, which also included a with directive principles that provides overall
ban on foreign investment. During those days guidance in state policymaking and this includes
the fundamental policy objective for the the concept that the economic system should
government was to have economic self-reliance function in a manner that does not lead to the
whereby the country’s economy was supported concentration of wealth in the hands of a select
by domestic resources rather than international few.
investments.
During the initial decades, India’s economic
The common perception at that time was that development strategy was inward-looking and
public ownership of basic industries was very there were numerous industrial licensing
crucial to ensure development in the interest of requirements, widespread public ownership of
the whole nation. Since it was believed that heavy industry, very high tariff barriers, tight
global trade was biased towards developing restriction on the operations of foreign firms and
countries, the policy of the government was on imports and exports through laws like FERA
aimed at self-sufficiency in most products and excessive bureaucratic control.
through import substitution. The government
made sure that the role of Foreign Direct In the year 1991 India was forced to make many
Investment (FDI) in the country would be a major changes in its earlier approach because of
marginal one by enacting laws like Foreign the grave balance of payment crisis which it had
Exchange Regulations Act (FERA) and to face. Thus India slowly began to embrace the
Monopolies and Restrictive Trade Practice Act globalization model which essentially was
(MRTP). FERA limited foreign equity premised on the idea that national economies
participation at forty percent so as to restrict were intertwined and any barriers imposed on
foreign exchange outflows arising out of trade would stifle national development. In the
dividend and royalty payments. MRTP Act years which followed after 1991 the government
prevented large enterprises from being continued with the process of systematic
developed which eventually disallowed the economic reforms, which marked a clear
companies from reaping the benefits associated departure from the four decades of planning
14
MONEY MANAGER AUG 2010 EXPERT OPINION
15
EXPERT OPINION AUG 2010 MONEY MANAGER
regulations always attract significant attention effect on competition. However the provisions
from the business community. To SEBI’s credit in the law dealing with combinations are yet to
it has been trying to innovate with various new be notified
regulations and have introduced fresh avenues
for raising capital like Qualified Institutional Conclusion
Placements (QIP) and Indian Depository
Receipts (IDR). Needless to mention, the economic liberalization
has triggered the need to have a set of new
With regard to the regulations affecting the regulations which can match the spirit of free
foreign exchange market there has been enterprise, entrepreneurship and risk taking. It is
significant changes post 1991. Foreign quite evident that the policy makers are trying
Exchange Management Act (FEMA) has hard to make many of the laws consistent with
replaced the draconian FERA. Reserve Bank of this objective. India has undoubtedly done
India (RBI) has been given to mandate to reasonably well in the last two decades on this
regulate the capital account foreign exchange front. However with one-third of the world's
transactions done by any person resident in India poor and one billion people, India desperately
and any person resident outside India. Thus RBI needs rapid growth and employment
has issued numerous regulations in the field of opportunities to eliminate poverty further and
foreign investments and this broadly covers sustain the recent income increases. For India to
areas like FDI, investments made by foreign achieve its realistic rate of growth, the
institutional investors under the portfolio government needs to implement regulations
investment scheme, investments made by Non which correctly embody its potential. Till then
Resident Indians under the portfolio investment India the sleeping giant will have its existence in
scheme, investments by venture capital funds a near somnolent state.
etc. Similar regulations have been framed to
deal with overseas investments made by Indian
companies in joint ventures and subsidiary
companies. Regulations framed under FEMA
have been highly successful in bringing foreign
investment to the country and it has also played
a significant role in facilitating the overseas
investments made by Indian companies.
16
MONEY MANAGER AUG 2010 EDITORIAL ARTICLES
The Basics Of Base Rate
There hardly is an adult nowadays who hasn't paying a higher rate. This was because there was
felt the need or has gone ahead to avail a loan. no transparency involved in the process of
You can blame it on the increasing consumerism arriving at BPLR and the large firms could arm-
or the inflationary forces. Anyways, I am not twist their way to lower rates.
going to discuss the rate of inflation or
conspicuous consumption rather I will focus on So let me now define Base Rate System (BRS)
the rate of interest on these loans. These rates in a little detail. BRS is a system to fix interest
were affected by a major change that took place rates for borrowers which will serve as the
on the 1st of July, 2010. This happening was; minimum rate for all loans i.e. a bank can't lend
"coming into effect of Base Rate System". below the base rate. As was the case with BPLR,
each bank can have its own Base Rate. Its basis
of calculation will mainly include cost of
deposits, profit margin etc.
Base Rate=a+b+c+d
a - Cost of Deposits=Dcost
b - Negative Carry on CRR and SLR= [{(Dcost−
SLR*Tr)/ (1− CRR+SLR)} *100– Dcost]
c - Unallocatable Overhead Cost= (Uc / Dply)
100
d - Average Return on Net Worth= [(NP/NW) *
(NW/TL)] 100
Where:
So, the first question that would come to our Dcost Cost of Deposits
minds would be, why was a new system needed? D: Total Deposits= Time Deposits + Current
To answer this, I will first explain the old Deposits + Saving Deposits
regime. The rate that took the centre stage in the Dply: Deployable Deposits =Total deposits less
previous era was Base Prime Lending Rate share of deposits locked as CRR and SLR
(BPLR). BPLR indicated the rate of interest at balances,.e. =D* (1− CRR+SL )
which banks lent to favoured customers, i.e., CRR: Cash Reserve Ratio
those with high credibility. So, one might be SLR: Statutory Liquidity Ratio
tempted to say that it was the best available rate Tr: 364 T-Bill Rate
of interest. BPLR of SBI was 11.75% in Jun'10. Uc Unallocatable Overhead Cost
But unfortunately almost 70% of the loans NP : Net Profit
carried an interest rate below BPLR. So what NW : Net Worth = Capital + Free Reserves
was so unfortunate about it? The disturbing TL : Total Liabilities
aspect was cross-subsidization. The blue chip
companies walked away with lowest of rates Negative carry on CRR and SLR balances arises
whereas the SME compensated for them by because the return on CRR balances is nil, while
17
EDITORIAL ARTICLES AUG 2010 MONEY MANAGER
the return on SLR balances (proxied using the BPLR as the ceiling rate for loans up to Rs.
364-day Treasury bill rate) is lower than the cost 2 lakh has been withdrawn which reinforces the
of deposits. third point.
Unallocatable overhead cost for banks could It could prove to be a blessing in disguise
include aggregate employee compensation for alternative short term debt instruments like
relating to administrative functions in corporate Commercial Papers (CP) or non-convertible
office, directors' and auditors' fees, legal and debentures (NCD) or Certificate of deposit
premises expenses, depreciation, cost of printing (CD). This system can also lead to innovation in
and stationery, expenses incurred on the fixed income markets with products being
communication and advertising, IT spending designed to suit the needs of the lenders and
and cost incurred towards deposit insurance. borrowers
The Base Rate has to be revised every quarter. But even BRS has its share of doubts and
Though so far an option is available to the concerns:
existing borrowers to move to the BRS price The banks can still provide benefits to the
from the BPLR one, but in near future a sunset large borrowers by say paying higher interest
clause from RBI might make the transfer rates on their deposits though large borrowers
mandatory. Most of the PSB (public sector would normally not keep high deposits as loan
banks) have announced their base rate as 8% interest rate will always be higher than deposit
whereas SBI has declared 7.5% as its rate. On rates.
the other hand private banks like ICICI have Why quarterly revision, why not daily even
pegged it at 7.5% and HDFC has fixed it at when computerization (of above 85%) is the
7.25%. norm at the Indian banks?
It could lead to banks shying away from
So, let's point out some of the advantages of this lending (with low interest rates) rather they
new system: might prefer investing in CP or CDs.
This could usher into a era of interest rates Segments which are perceived as more risky
that are set by scientific methods which was not may see their effective lending rates going up.
the case with BPLR Excluding the agri-loans, loans to banks’
An effort has been made towards own employees, loans against deposits from the
transparency in the interest rate calculation for purview of BRS is a dampener
the loans i.e. the credit spread above the Base The announced base rates expose the
Rate which could be different for different types cartelization of banks else how come most banks
of customers will have to be calculated in a have the exactly same base rates or the
transparent manner. difference being in multiples of 25 basis points?
Cross-subsidization as evidenced from the
SMEs paying higher interest rates to compensate
for the low rates of blue chip firms has finally So, the road ahead for the Base Rate would be to
caught the attention of the policy makers. link it apart from the fully covered cost plus
It could lead to a "rate war" thus lowered rate, to a benchmark rate like 5YR sovereign
cost of borrowings esp. for SME can't be ruled Bond Rate. Now, both will be dynamic as the
out. rates would be monthly reset and it would take
A transparent regime will result in credit into account all possible costs a Bank can incur
worthy customers availing loan at suitable rate for running its business. This would be a big
who may have been refused loan in the past improvement from the past regime as BPLR did
regime. nothing of the sort and the method was also not
18
MONEY MANAGER AUG 2010 EDITORIAL ARTICLES
known to public. This would make the system same or a similar security) cost of average CP/
scientific. As macroeconomic indicators could CD could be very high as they have a life cycle
have a more pronounced and immediate impacts of 3 months. So, a banker has to find a loan
on the lending rates now so dynamic regulations customer if it wants to survive competition."
would be the need of the hour.
With banking having an oligopolistic structure
As Mr. G.C. Nath, Sr. V.P., CCIL (Clearing and their business dealing in homogeneous
Corporation of India) while sharing his insights products, most banks offer the same kind of
on BRS says, “Daily revision of Base rates is rates for deposits - a few bps here and there.
not advised because the regulatory cost will Also due to competition, banks also try to keep
drastically increase by doing the same. And you the customers with them. The customers
do not get much benefit as we do not expect compare rates across banks and then bargain
banks to increase their deposit rates on daily with banks for the best rate. So, cartelizations of
basis - neither other cost increase on daily basis. banks say they forming groups like PSU banks,
So, quarterly reset is fine as it maps with the foreign banks, private banks, co-op banks, etc.
policy announcements." So we may continue and developing some kind of informal structure
with quarterly revision of Base Rates in near to deal with various issues could still be the
future as well. Though the trade-off remains as a norm.
one-year cost might not have reflected the
current cost while a three-month cost may not So whether BRS will be the dawn of a new era
reflect the historic cost. or will it prove to be an exercise in futility? For
now it would be safe to say that “Only time will
Mr. Nath adds that roll over (reinvesting funds tell.
from a mature security into a new issue of the
About the Author :
Saket Saurabh is a 2nd year PGP student at IIM Calcutta. He holds a bachelors degree in Electronics and
Communication Engineering from National Institute of Technology, Patna. He can be reached at
ss.nitp@gmail.com. He maintains a blog at http://saketvaani.blogspot.com
19
EDITORIAL ARTICLES AUG 2010 MONEY MANAGER
ULIPs : Whose Product Is It Anyway ?
Earlier this summer, when IPL frenzy had cov- So why was SEBI, the capital market regulator
ered the cricket fanatic nation, teams were bat- so concerned about regulating an insurance
tling to win yet another T20 championship, it’s product – in this case ULIPs. Well, the genesis
organizers and team owners fighting legal bat- of this issue lies in an August 2009 verdict by
tles off the field, there was another battle unfold- SEBI which banned the entry loads on Mutual
ing in the financial circles: the tussle between Funds. Entry load is the commission that an in-
SEBI (Securities and Exchange Board of India) vestor has to pay while purchasing units of a
and IRDA (Insurance Regulatory and Develop- mutual fund. After this verdict, entry loads on
ment Authority) for the right to regulate ULIPs Mutual Funds had to be cut down to as low as
(Unit Linked Insurance Plans). This episode has 0.5-1%. In contrast, ULIPs had entry loads rang-
brought to fore various issues surrounding this ing from 15-20%. One of the biggest assets of
product. The size of the market for life insurance MFs is their wide distribution network which
products in India, estimated to be the fifth larg- can reach out to a large number of investors.
est in the world, is over $40 billion and growing However, with the reduction in the upfront com-
at a rapid pace of over 30% per annum. ULIPs missions, selling Mutual Fund units was no
account for over 80% of the business in this longer a very attractive proposition for the
market. Through this article we will give an agents in this distribution network. This is where
overview of ULIPs, the much publicized tussle ULIPs came into the picture. As these products
between the two regulators over this, the recent still continued to have large upfront commis-
changes brought about by IRDA and its impact sions, most distributors shifted their attention
on the life insurance industry and the investors. from selling MFs to selling ULIPs.
20
MONEY MANAGER AUG 2010 EDITORIAL ARTICLES
perspective, the net FII inflow in the previous cashment of investment units, were exorbitant.
fiscal was around $32 billion. The effect that In some cases, surrender charges went up to as
FIIs can have on the movement in the Indian high as 90% if the policy was surrendered in the
markets has been well documented. So, the bur- first three years. IRDA had already started the
geoning size of the ULIP products meant that process of instituting more stringent rules to
SEBI essentially had no control over a major overcome these aspects of ULIPs. However, the
investor segment in the capital markets. This events over the past few months precipitated in
finally culminated in SEBI’s April 10 order ban- some sweeping changes being suggested by the
ning 14 private insurers from selling any new regulator. Let’s analyze some of the new guide-
ULIP product without registering with SEBI. lines it has provided on the product and its pos-
sible impacts on the insurers and the investors:
Was SEBI justified in putting in place this ban?
The main contention by SEBI was that ULIPs Increasing the Lock-in Period to five years
ultimately are investment products. As men- from the current three.
tioned earlier, they have a very significant in- To spread out the front end expense over
vestment in the capital markets. So, it does make the lock-in period. This is good news for
sense to bring such products under the purview the investors as it would insure that the
of the capital market regulator. But a couple of insurance seller is not ‘mis-selling’ the
things regarding SEBI’s ban order stuck out. product to realize short term gains.
Firstly, it quite conspicuously left out the public Capping the surrender charges to 15% of
sector insurers (read LIC) from the ambit of the fund value as well as in absolute terms.
ban. Given the size of these insurers, it’s hard to Again, this would be beneficial for the in-
explain why they were treated differentially than vestors as they would now incur a smaller
the private insurers. Secondly, the manner in cost while switching from one policy to
which it placed the ban. It should never have another. However, this would mean a big
been a unilateral decision. The insurance regula- loss in revenues for the insurers. Accord-
tor IRDA was not kept in the loop while taking ing to estimates, around 25-30% of the
this drastic step which ultimately gave rise to the policies lapse within the current lock-in
bitter public dispute between the two regulators. period of three years with surrender charg-
es ranging from 50%-90%. This combined
The central government had to finally step in to with the spreading out of the entry load
resolve this turf war between the regulators. The would mean a significant reduction in the
verdict was finally ruled in favor of IRDA with revenues of the insurers as well as an in-
the government promulgating an ordinance to crease in their time to break even.
amend existing laws to include ULIPs under the The risk cover has been increased to at
life insurance business. So what next for ULIPs? least 10 times the annual premium being
This highly publicized tussle brought various paid. This would mean that the insurers
aspects of ULIPs into limelight. There already would have to set aside larger capital
were a number of concerns being raised by vari- which would dampen their profitability. It
ous stakeholders regarding some of the prob- would also deter marginal companies from
lems this product had. First of all, it had a signif- entering in this segment.
icant entry load – as high as 30% in some cases.
This encouraged distributors to push the product So it is quite evident that the new regulations,
to the investors and often led to misrepresenta- which the insurance companies are required to
tion of information related to the product in or- comply with by September 1st, would serve to
der to sell more and more of them. Secondly, the reduce the attractiveness of ULIPs for these
surrender charges, imposed on premature en- companies. However, looking on the positive
21
EDITORIAL ARTICLES AUG 2010 MONEY MANAGER
other products like Mutual Funds whose popu- these changes, only time will tell. But I have a
larity had waned significantly over the past year. strong feeling that after MFs and ULIPs, it’s
And most importantly, the investors will most time for another new kid on the block. An year
certainly be better off with these changes. On from now, the dialectic may shift to yet another
how the insurance companies would deal with product. But again, only time will tell.
References
http://economictimes.indiatimes.com/articleshow/6069224.cms
http://economictimes.indiatimes.com/personal‐finance/insurance/analysis/Ulip‐norms‐Insurers‐may‐
have‐a‐long‐wait‐to‐break‐even/articleshow/6116820.cms
http://www.journaloffinance.in/?p=806
About the Authors
Aditya Damani is a 2nd year PGP student at IIM Calcutta. He holds a masters degree (Integrated) in Mathe-
matics and Scientific Computing from Indian Institute of Technology Kanpur. He can be reached at ad-
ityad2011@email.iimcal.ac.in.
Priyesh Jaipuriar is a 2nd year PGP student at IIM Calcutta. He holds a bachelors degree in Computer Sci-
ence and Engineering from Indian Institute of Technology Kharagpur. He can be reached at priyeshjaipuri-
ar@gmail.com
22
MONEY MANAGER AUG 2010 EDITORIAL ARTICLES
Financial Inclusion in India: A myth or possibility
Financial inclusion, one of the cornerstones of general financial awareness exacerbates their
inclusive growth, aims at the extension of bank- condition.
ing services to the deprived and marginalized Credit might be needed either to meet some exi-
sections of society, who have so far been denied gencies or to pursue entrepreneurial ideas. In the
access to credit facilities by banks. It is to be latter case, many enterprising individuals, with
achieved by ensuring timely availability of viable entrepreneurial ideas, are unduly denied
cheap credit to the needy, particularly those be- opportunities to pursue their dreams for lack of
low poverty line. Other aspects are likely to in- funds.
clude extension of banking services such as
bank accounts (savings, checking), insurance, Several questions need to be addressed to identi-
mortgages and financial planning. fy the scope of financial inclusion in India:
a) How much is the Government of India, with a
Indian economy has been growing at a rapid fiscal deficit of 6.6% [2] in 2009-10, willing to
pace. It witnessed a GDP growth rate of 7.4% in invest in this initiative? What should be its role?
2009-10 [1], the second highest among sizeable b) What should be the criteria for loan approval
economies of the world in that fiscal year, and or rejection?
was only marginally affected by the recession- c) Is financial inclusion through business corre-
ary trends in the developed world. To make the spondence model, as proposed in the Union
growth more equitable and to ensure that the Budget, a viable idea and what is the profit po-
benefits of economic growth trickle down to the tential?
deprived sections of society, the Government of d) Should there be some laws and regulations?
India has adopted a multi-pronged approach to Or can banks be incentivized into lending?
facilitate inclusive development. Various e) Who bears the responsibility for bad debt, the
schemes targeting rural employment, education, bank or the government of India?
access to information, financial inclusion, rural f) What infrastructure, technology, and supple-
electrification, healthcare and sanitation, rural mentary changes are needed to support this initi-
infrastructure and food security have been ative?
launched to enable the masses, especially those g) What should be the mode of development?
below poverty line, to empower themselves and Should it be public led, private led or through
become both a beneficiary of and a contributor PPP?
to the Indian growth story.
The 2010-2011 Government of India budget
Currently, approximately ten percent of Indians provides for recapitalization of regional rural
hold ninety percent of the resources. While banks, increased targeted agricultural credit
loans are easily available to the affluent, banks flow, allowing people affected by natural calam-
are generally unwilling to give loans to the poor ities more time to pay their debt off, extension
because of the costs and risks associated with of banking facilities to habitations having popu-
the recovery of debt. Thus, the poor have no oth- lation of more than 2000 by 2012, insurance and
er option than to knock at the doors of unscrupu- other services to be provided through Business
lous local money lenders, who charge exorbitant Correspondence model, and augmentation of
interest rates. Unable to service the interest, they Financial Inclusion Fund and Financial Inclu-
lose all their possessions, fall into a debt trap, sion Technology fund [3].
and at times end up working as bonded labor or
even committing suicides. Lack of education &
23
EDITORIAL ARTICLES AUG 2010 MONEY MANAGER
Therefore, the government, despite its current charge a commission fee from the bank for each
focus on reducing fiscal deficit, looks committed new account opened and for each transaction
to the cause of promoting balanced growth. It (deposit) that takes place. They can start doling
should develop plans to monitor the implemen- out credit to the needy after a thorough inspec-
tation of the schemes so that corruption is mini- tion and interrogation into the potential use of
mized and taxpayers' money is well utilized. The funds. They will need to periodically monitor
UIDs could be used to introduce greater trans- any misappropriation of funds and the recovera-
parency in the overall lending process. bility of the loans. The agents of the BC (if the
BC is not an individual), trained not harass the
Generally, the person seeking loan is too poor to poor for debt recovery, will be paid a fraction of
offer anything as a collateral. Also, the interest the revenue earned by the BC from the bank,
rate has to be low, unlike in the subprime loans based on the services they render. The BCs must
provided in the US at high interest rates. There- actively pursue only those cases where the loss
fore, banks should base their lending criteria on
the viability or sustainability of the proposed
utilization of funds and not on the basis of per-
sonal wealth of the individual seeking loan. A
delicate balance has to be struck between easy
approval process of the loans without much red
tape and examination of the potential of credit
recovery. Single window clearance facility for
loan approval should be setup. The banks must
be friendly and flexible even if an idea is not
viable to be supported, and must encourage the
loan seeker to come up with more viable alterna-
tives, instead of discouraging him/her by out
rightly rejecting the loan. Banks should also be
flexible to extending the deadlines for paying off
the debt on a case to case basis.
24
MONEY MANAGER AUG 2010 EDITORIAL ARTICLES
lot projects to assess the effectiveness of the ide- tion of UID would eliminate corruption occur-
as aimed at promoting financial inclusion. It also ring through fake job cards in NREGS. A
has a role in making the environment more con- NREGS worker might work on digging ponds or
ducive for lending by providing tax subsidies to wells to promote water harvesting, which in turn
BCs and banks involved in the business. Initial will help to reduce dependence on monsoons.
profits generated by banks and BCs, if any, and Reduced dependence on monsoons will lead to
the interest expense on loans taken by the poor stability in food production, thereby boosting
should be exempt from tax. The government rural economy. Better rural economy would ena-
should underwrite to cover some percentage of ble the rural youth to invest further in their edu-
the debt recovery losses incurred by the banks cation and computer literacy. Greater percola-
and BCs by providing them government bonds tion of IT will empower the masses and help
(GSecs). Outstanding banks and BCs who pro- them seek better price for their produce. Better
vide exemplary service and deliver excellent education would help them understand the im-
results and individuals who utilize the loans for portance of saving. They would also be able to
constructive purposes should be identified and use RTI to enquire into the utilization of funds
rewarded. allocated for their respective villages and high-
light any irregularities. It would also help in re-
Gradual proliferation of technology such as ducing class differences, prejudices and biases
ATMs, internet infrastructure for online banking prevalent in our society. Better living standards
and facilities such as mobile banking to reach in rural areas would also help prevent mass exo-
out to those who live in far flung areas is needed dus of rural population into cities in search of
to make the financial services accessible to all. better means of livelihood.
The Government of India set up two funds [3]
dedicated to this cause: The recent success of microcredit and micro-
finance, pioneered by Mohammad Yunus of No-
Financial Inclusion Fund, for capitalizing the bel Prize fame, in Bangladesh, gives us hope.
BCs, imparting financial education and literacy, Micro-insurance also presents a big opportunity,
supporting pilot projects aimed at achieving fi- where the farmers could insure their losses in
nancial inclusion. case of crop failure. India has close to six lakh
villages [4]. The rural economy presents a low
Financial Technology Inclusion Fund, for set- profit, but a largely untapped mass market.
ting up banking technology infrastructure, such Therefore, if the concept is successful in the ini-
as ATMs & Kiosks, mobile banking facilities tial phases, private players would also gradually
and IT infrastructure for internet based banking enter. A more prosperous rural India is a win-
in backward areas. win situation for all.
These funds should be utilized judiciously and However, banks and bank correspondents must
voluntary tax-free donations and anonymous be cautious to guard against complacency and
donations, with no upper limit, should be sought negative practices. The whole concept of finan-
from well-off people for augmenting the funds. cial inclusion will be defeated if the banks don’t
All the aspects of inclusive growth are mutually act in good faith. They should treat everyone
reinforcing and should not be viewed in isola- equal and not give preferential access to funds to
tion. For example, working under NREGS the rich farmers and rural corporate households.
would provide the much needed finances to the Also, private banks entering this business should
rural people. Some of them would deposit these be monitored closely as they might tend to devi-
funds in banks and these funds would eventually ate from the social equity aspect and focus more
be used to provide credit to the needy. Introduc- on the profits. Therefore, public private partner-
25
EDITORIAL ARTICLES AUG 2010 MONEY MANAGER
ship model could also be pursued, with in- actual losses could be periodically monitored at
creased responsibility of oversight on the public each level through reports generated using data
agency. Therefore, even though the idea is risky, warehousing and MIS technologies, the problem
the government must make all efforts to see it areas identified and corrective steps taken. Once
through despite some initial losses. Several hier- the rural economy could be put on the platform
archical monitoring levels must be set up, start- of growth, it would prove to be a self-
ing from villages, blocks, and going up to dis- perpetuating engine. All it needs is a helping
tricts, states and center where the potential and hand.
References :
http://economictimes.indiatimes.com/news/economy/indicators/Manufacturing-helps-GDP-grow-74-in-FY10/
articleshow/5996613.cms
http://www.business-standard.com/india/news/2009-10-fiscal-deficit-stands-at-66gdp/396788/
http://indiabudget.nic.in/ub2010-11/bh/bh1.pdf
http://www.financialexpress.com/news/The-disappearing-Indian-village/660376/
http://www.fino.co.in/news-pdf/Performance%20Of%20The%20Business%20Model%20-%20A%20Mixed%
20Bag%20Aug%2028.pdf
http://rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=2718
http://www.deccanherald.com/content/20513/campus-corner.html
About the Author :
Vipul Singh is a 1st year PGP student at IIM Calcutta. He holds a bachelors degree in Computer Science and
Engineering from Indian Institute of Technology Kanpur. He can be reached at sinvipul@gmail.com
26
MONEY MANAGER AUG 2010 EDITORIAL ARTICLES
What Drives Indian Equity Markets ?
Introduction
agricultural products will go up and affect the
consumers drastically. It might lead to a condi-
India's equity markets hold one of the keys, if
tion of drought in several states of India which
not the key, to the country's future growth trajec-
forces the government to drop import tax on a
tory. A growing and increasingly complex mar-
number of commodities. It also causes shortage
ket-oriented economy, and its rising integration
of water supply for production of power and
with global trade and finance, require deeper,
electricity. Electricity shortage has a strong ef-
more efficient and well-regulated financial mar-
fect on almost all sectors, which also causes de-
kets. The Indian Equity Market is the third big-
lay in productions or increase in costing of prod-
gest market in Asia after China and Hong Kong.
ucts. Less rain affects the purchasing power in
As of March 2009, the market capitalization was
the rural areas and contract demand for products
around $598.3 billion (Rs 30.13 lakh crore) [1]
and services. This is not good news for FMCG
which is one-tenth of the combined valuation of
companies which depend on agricultural and
the Asia region.
rural market.
Today, Indian stock markets have become in-
Inflation and Interest Rates: Although higher
tensely technology and process driven, giving
inflation rates spur higher growth rates but the
little scope for manipulation. Electronic trading,
vast disparity of income in Indian population
digital certification, straight through processing,
makes it impossible for the poorest in India to
electronic contract notes, online broking have
buy basic commodities. In times of raging infla-
emerged as major trends in technology. Risk
tion, by increasing the base interest rate, RBI
management has become robust thus reducing
attempts to lower the supply of money by mak-
the recurrence of payment defaults. Product ex-
ing it more expensive to obtain. This reduces the
pansion taken place in a speedy manner. Indian
amount of money in circulation, which works
equity markets now offer, in addition to trading
to keep inflation low. It makes borrowing mon-
in equities, opportunities in trading of deriva-
ey more expensive, which affects how consum-
tives in futures and options in index and stocks.
ers and businesses spend their money; for busi-
In this article, we will look at what are the major
nesses, this leads to higher interest expenses (for
factors that affect the Indian equity markets and
those with a debt to pay) & lower earnings from
how do they do so. These can be broadly classi-
their consumers & hence lower profits. Since a
fied into 2 categories: Internal & External
stock price represents the sum of all the ex-
pected future cash flows from that company dis-
Internal Factors
counted back to the present, the stock price falls.
Monsoons: In India, agriculture provides
Government Policy and Political Factors: The
around 70% of employment either directly or
political situation, stability & commitment of the
indirectly. This is the major reason for the eco-
government to structural reforms in the econo-
nomic growth of India to depend on Monsoon
my greatly affect the market sentiments. Dereg-
season. Monsoon season in India starts from
ulating an industrial sector will have a positive
June and continue till September. A good mon-
impact on the stock market. War periods and
soon means government can ease restrictions on
periods of a stagflation and unemployment are
the export of wheat and rice, boost output of
likely to have telling effects on the stock market
grain and oil seeds and help calm inflation. On
performance and the economy may be headed
the other hand, scarce rainfall implies prices of
towards a recession.
27
EDITORIAL ARTICLES AUG 2010 MONEY MANAGER
28
MONEY MANAGER AUG 2010 EDITORIAL ARTICLES
reliant on Foreign Trade & Foreign Investors, outside of the one in which it is currently invest-
the impact of a recession in one country perco- ing [4]. These include hedge funds, insurance
lates down to all the linked industries. As we companies, pension funds and mutual funds.
saw recently, due to fears of Greece defaulting The growing Indian economy has resulted in
on its loans, there was a huge FII/FDI withdraw- several FIIs to invest in Indian equity markets.
al from the Indian Equity Market as well. In FIIs are, however, a short term investment and
2008, the collapse of one bank in US led to a can have bidirectional causation with the returns
“Liquidity Crunch” all over the world. We were of other domestic financial markets such as
slightly better protected from the recent finan- money markets, stock markets, and foreign ex-
cial meltdown, largely because of the still large change markets. Hence understanding the dy-
role of the nationalized banks and other controls namics of FII is very important for any emerg-
on domestic finance. But this is likely to change ing economy. A sudden withdrawal by FIIs
in the near future. leads to a sharp depreciation of the rupee. FDI
and FIIs are generally preferred over other forms
of external finance, because they do not create
any debt, they are non-volatile and their returns
depend upon the projects financed by the inves-
tor [5].
29
EDITORIAL ARTICLES AUG 2010 MONEY MANAGER
References :‐
http://en.wikipedia.org/wiki/List_of_stock_exchanges
http://en.wikipedia.org/wiki/Market_sentiment
BSE Annual Capital Market Review Report 2003
http://www.investopedia.com/
Role of Institutional Investors in Indian Stock Markets, S.S.S. Kumar
Statistics released by SEBI (http://www.sebi.gov.in/)
About the Author :
Mayank Mishra is a 1st year PGP student at IIM Calcutta. He holds a bachelors degree in Mechanical Engi-
neering from Indian Institute of Technology Bombay. He can be reached at mayank06.iitb@gmail.com
30
MONEY MANAGER AUG 2010 EDITORIAL ARTICLES
Oil Price Deregulation: What it entails for the Indian Economy?
Oil price regulation has been a hotly debated shrinking profits and declining cash flows
and contentious issue that the Government has caused by delays in government compensation
faced over the last many months. Oil Price de- for selling fuels below cost. The subsidies were
regulation, proposed by the Empowered Group creating a fiscal deficit to the tune of $25.6 bn.
of Ministers (EGoM) on the recommendations The step was therefore natural for the govern-
of the Kirit Parikh Panel, is not something that ment if it intended to aggressively pursue its
has suddenly occurred to the current establish- agenda of “inclusive development” for all sec-
ment. The BJP-led NDA government had decon- tions of the society. Schemes like the NREGA
trolled petrol and diesel prices on April 1, 2002, were suffering as a substantial amount of budget
and they were being revised every fortnight for allocation had been earmarked for oil subsidies.
nearly 21 months. However, political compul- In view of all these factors the government de-
sions forced the then establishment to abandon cided to go ahead with the deregulation of petrol
the practice just a few months before the general and diesel prices, the outcome of which was an
elections in May 2004. Subsequently the NDA increase of Rs 3.50 a litre for petrol and Rs. 2.50
was voted out of power and the Congress led a litre for diesel. Before revision, oil marketing
UPA, propped by the Left emerged as the ruling companies (OMCs) were making under-
combination. Suddenly, no one seemed interest- recoveries of Rs.3.73 a litre on petrol, Rs.3.80
ed in talking about price deregulation anymore. on diesel, Rs.17.92 on kerosene, and Rs.261.90
A ten-worded anti-disinvestment statement a cylinder on domestic LPG [2]. Post-revision
clearly stated the intentions of the Left – that as there would be almost no under-recovery on pet-
long as the government had their backing, eco- rol, but the OMCs will still incur a loss of
nomic reforms were an anathema. With a reas- Rs.1.50 and Rs.15 a litre on sale of diesel and
suring victory of the Congress in 2009 and the kerosene respectively, and Rs. 227 on a cylinder
near annihilation of the Left, things looked set to of LPG. However, even the existing changes in
change – reforms that had been earlier put on the prices will go a long way in improving the con-
backburner were expected to be carried out. Ma- fidence of an already bleeding oil industry.
jor reforms were expected in a number of sec-
tors including oil and gas. The government did
not disappoint India Inc. and promptly set up the
Kirit Parikh Panel which advocated the follow-
ing in its report:
Total decontrol of oil prices (both diesel
and petrol), and
Immediate increase in prices of kerosene
by Rs 6 per litre and LPG rates by Rs 100
a cylinder.
31
EDITORIAL ARTICLES AUG 2010 MONEY MANAGER
briefly mentioned above, will be on the ket in India, which is growing in terms of
fiscal deficit of India – it currently stands the quantity of oil products sold annually.
at Rs. 4.34 lakh crores (around $90.4 bn)
[3]. India’s reliance on oil imports stands Increased competition in this sector is ex-
roughly at 75% its energy needs and the pected to lead to greater efficiency. Previ-
government sets fuel prices to cushion the ous precedence is available in the form of
poor from inflation. The decision to dereg- reforms in telecom sector. Telecom re-
ulate will help mobilise an amount of forms led to increased competition and
around Rs. 1.3 lakh crores (around $27 bn) market efficiency with the end consumer
which is close to 30 % of total deficit. Al- being the ultimate beneficiary.
so, in the last fiscal year ended March 31,
India spent 149.5 billion rupees (3.35 bil- Newer technologies of alternate fuel
lion U.S. dollars), or nearly 1.5 percent of source cars may get a fillip owing to in-
all public expenditure in subsidies to oil, creasing fuel prices and the need for
compared with initial estimates of 31.1 cheaper transportation solutions.
billion rupees. This is a substantial ex-
penditure and will be written off as a result However some negatives will also result out of
of this price increase. this, chief among them being:
As already mentioned, increased availabil- The change in oil prices will have a trickle
ity of funds for its social policies is going -down effect on the whole economy in
to be a major impact – the NREGA and general. As a result, inflation figures are
the Right to Education Bill, to just men- going to be affected unless price pressure
tion a few, need a substantial inflow of of essential commodities ease from the
funds for their continued sustenance. supply side. At a time when the govern-
ment is already battling double-digit food
Deregulating prices will cut down revenue inflation and a fuel inflation of almost
losses in public sector oil companies – 20% in the week ended June 26, 2010, in-
both upstream and downstream. Also, the creasing fuel prices will only add to the
move will improve cash flows of the pub- burden of the people. Headline inflation in
lic oil marketing companies (OMCs), and June was 10.55%, and this can be ex-
the private companies can now expect a pected to go up in the near future. Also an
level playing field to compete with their upward movement of 90 to 100 basis
public counterparts. Private refiners and points on the wholesale price index is ex-
marketers like Reliance and Essar Oil are pected.
already considering and evaluating options
to restart their petrol pump stations and Industries that will bear a direct impact of
improve on existing distribution infra- this will be sectors such as
structure to cater to a larger market. Also, Auto
the improved cash flows will have a direct Transportation
bearing on the credit ratings of PSUs. Crude oil based input industries such
as chemicals, manmade textiles
International OMCs, which are currently (polyester) and pharma companies
represented in India through the limited
presence of Shell, will be following this Distribution based businesses such as
keenly since it has the potential to open FMCG and cement would also bear the
the doors for them to enter the retail mar- brunt as high speed diesel has also seen a
32
MONEY MANAGER AUG 2010 EDITORIAL ARTICLES
33
EDITORIAL ARTICLES AUG 2010 MONEY MANAGER
References :
http://economictimes.indiatimes.com/news/news-by-industry/energy/oil-gas/Kirit-Parikh-panel-for-freeing-
petrol-diesel-prices/articleshow/5531478.cms
http://www.hindu.com/2010/06/27/stories/2010062763900800.htm
http://beta.profit.ndtv.com/news/show/apr-jan-fiscal-deficit-soars-34-to-rs-3-5-lakh-cr-28299
http://www.thehindubusinessline.com/2010/07/01/stories/2010070152241000.htm
http://www.stockmarketsreview.com/recommendations/
oil_price_deregulation_report_on_the_path_of_reforms_20100701_18642/
http://radicalnotes.com/journal/2010/07/13/the-political-economy-of-oil-prices-in-india/
http://petroleum.nic.in/reportprice.pdf
http://www.deccanchronicle.com/business/diesel-price-won%E2%80%99t-be-deregulated-centre-009
http://marketpublishers.com/lists/7603/news.html
http://www.dnaindia.com/money/report_deregulation-of-oil-likely-to-improve-price-stability_1401308
http://economictimes.indiatimes.com/articleshow/5533705.cms
About the Author :
Abhinav Gupta is a 1st year PGP student at IIM Calcutta. He holds a bachelors degree in Computer Science
and Engineering from Indian Institute of Technology Kharagpur. He can be reached at
guptaabhinav94@gmail.com
34
Student Articles
Winning Articles
1st Prize
Exchange Traded Funds (ETF): Opportunities to Deepen
Akshay Mishra (LSE), Sailesh Pati (IIM-A) & Tuhin Chatterjee (IIM-B)
2nd Prize
Mutual Funds Industry in India
Abhishek Rawale & Saurabh Rai (IIM-B)
3rd Prize
Developing Corporate Bond Market in India
Jaideep Singh, Ritambara Vasudeva & Shefali Omer (MDI Gurgaon)
STUDENT ARTICLES AUG 2010 MONEY MANAGER
Exchange Traded Funds (ETF): Opportunities to Deepen
Introduction to Current Structure What are ETFs
of Indian Capital Markets
An ETF is an investment fund that tracks a bas-
Post Liberalization in 1990s, India’s capital mar- ket of assets. These could be an index, a com-
kets have transformed themselves with SEBI modity or a basket of commodities. ETFs are
being established in 1992. With establishment of essentially chunks or pieces of portfolios that
NSE in 1994, competition in the markets in- investors trade in instead of stocks.
creased and the volume of transactions increased Tracking is achieved by holding all the securi-
significantly and new instruments emerged. ties which make up the class, and in the same
For over a century, India’s capital markets, proportions. ETFs can be traded like a stock
which consist primarily of debt and equity mar- wherein prices experience changes throughout
kets, have increasingly played a significant role the day as they can be bought and sold almost
in mobilising funds to meet public and private anytime during the day.
entities’ financing requirements. The advent of
exchange-traded derivative instruments in 2000, Figure 1 - Global ETF asset growth, as at end of Aug
such as options and futures, has enabled inves- 2009
Source: ETF Research and Implementation Strategy
tors to better hedge their positions and reduce Team, Barclays Global Investors, Bloomberg
risks
Essentially India’s capital markets deal with
three types of Instrument
1. Debt
2. Equity
3. Derivatives (Exchange traded derivatives
started in 2000)
In the Debt market, government bonds dominate
due to high fiscal deficit which has crowded out
the corporate bonds which are still small in size.
India’s Equity markets in India are vibrant and
broad based. However there is a need to broaden
the shareholder pattern and bring in more insti-
tutional investors. Second, Participation in Indi-
an markets by retail investors is also low. Indian
households are ultra conservative with about
50% of savings deposited in banks and 18% in
provision and pension funds. A mere 5% are in-
ETFs were first introduced in 1989 but its
vested in stock exchange. A joint survey by the
growth has picked up only in the last 10 years
Securities and Exchange Board of India and Na-
wherein the assets under management in ETFs
tional Council for Applied Economics Research
in Europe and the US have grown at an average
(SEBI-NCAER) in March 2003 estimated that
annual rate of 40% over the last decade. Figure
only 13 million households out of the total 177
1 shows the growth in global ETF assets since
million surveyed have investments in the capital
the start of the decade. Global ETF assets
markets.
reached $725 billion by end 2008. Morgan Stan-
Exchange Traded Funds (ETF) ‐ ley estimates, global ETF assets should be worth
36
MONEY MANAGER AUG 2010 STUDENT ARTICLES
37
STUDENT ARTICLES AUG 2010 MONEY MANAGER
3. Tax efficiency: ETFs are more tax- Figure 2 - Investment Preferences of Indian Investor
efficient than mutual and index funds due
to their transaction structure. During ETF
creation, there are no tax-implications as
all transactions are in kind (no cash trans-
fer takes place). The institutional investor
deposits a block of securities in exchange
for ETF shares which are then sold in the
market. During redemption of large hold-
ings, ETF shares are redeemed with shares
having the lowest cost basis in the fund,
thereby minimizing capital gains tax for
the ETF. In contrast mutual and index
funds may have to sell securities they hold
for redemption claims, which results in
capital gain tax. Thus existing investors
are affected due to tax implications from
the ones exiting the fund, which is not the Source: Sebi Handbook of Statistics, 2008
case in ETFs.
Figure 3: Mutual Funds - NAV in Rs. Cr
Transparency: ETFs provide transparency to
investors by disclosing their holdings on a daily
basis. The transparency prevents price manipu-
lations and help investors make informed deci-
sions.
Opportunities in Indian Market
Traditionally Indian investors have been con-
servative with over 50% preferring to keep their
savings in bank deposits as shown in Figure 2.
In the last five years, mutual funds have grown
at a CAGR of 35% indicating that this is the pre-
ferred medium for Indians investing in capital
markets (Figure 3). Despite this rapid growth,
penetration of mutual funds among retail inves- Source: Sebi
tors has been quite low. In a recent survey by
KPMG, this has been mainly attributed to lack In this scenario, ETFs provide a much simpler
of knowledge among investors in understanding and hassle-free medium for Indian investors to
and selecting from various complicated schemes obtain the same benefits which they would get
(Figure 4). in a mutual fund. Considering the low trading
volumes of ETFs in India relative to their for-
eign counterparts, the first step needed to make
this happen is to create awareness about ETFs
among retail investors. Secondly, investors need
to be provided with more portfolio choices when
38
MONEY MANAGER AUG 2010 STUDENT ARTICLES
investing in ETFs. Currently there are about on- case of major index trackers and actively traded
ly 16 ETFs traded in India. This is in sharp con- commodities. But tracking small-cap stocks or
trast to developed capital markets like US and corporate bonds which are thinly traded be-
Europe which have 706 and 753 listed ETFs re- comes infeasible for passive strategies as the
spectively. A good starting point would be the number of securities required to replicate the
portfolio allocation of MSCI India relative to sector/index becomes too low and requires arti-
MSCI World (Figure 5). Sectors like IT and En- ficial structuring. In such cases, active manage-
ergy which have relatively higher weightage in ment of the fund remains the only viable solu-
the index should be given higher priority by in- tion. This is also the prime reason why many
stitutional investors while developing sector spe- product categories in India are under-
cific ETFs. represented in terms of ETF availability. There
are issues, however, with active management.
Figure 4 - KPMG survey “Active” management, by its very nature, would
require a higher fund management fee from in-
vestors – thus making it unattractive for them.
Also, the real-time nature of ETFs is affected if
the security-selection strategies are intended to
be applied during intra-day trading. It remains to
be seen whether a trade-off between letting go
of some of the inherent advantages of ETFs and
having a more diversified set of ETFs which
represent most sectors in India is feasible or not.
39
STUDENT ARTICLES AUG 2010 MONEY MANAGER
remedy this issue, it requires an increase in the to represent all the sectors of the equity markets.
number of ETFs operating in India – which can
lead to standardization of the financial structures Exchange capabilities: As mentioned earlier,
being used to replicate individual securities. ETF replication may require, at times, innova-
tive financial engineering. This requires multiple
Fragmentation of equity markets: The tradi- capabilities of the exchanges the ETFs are being
tional stronghold of ETFs has been the equity traded on: (1) All the constituent products mak-
markets. However, the equity markets in India ing up an ETF structure must have a significant
are extremely fragmented – the stocks compris- volume-base on the exchange, (2) the exchange
ing the popular indices such as the BSE30 and should allow the decomposition of a unit ETF
the S&P CNX Nifty are heavily traded while the order into its constituent products automatically
small-caps are thinly traded leading to ineffi- – which will lead to reduced transaction costs,
cient tracking. This is a problem encountered in more efficient straight-through processing and
the developed markets as well. However, in less redundant margin account maintenance.
those markets, the extreme liquidity of the deriv- Most exchanges in India are not sophisticated
atives market allows for efficient replication. enough to allow such features. In the absence of
Therefore, unless the exchange-based deriva- these, active management of ETFs and higher
tives market in India itself matures to allow hy- fees remain the only option to replicate com-
brid securities to be traded, there will always be plex/thinly-traded securities.
a challenge for ETF managers
References
www.world-exchanges.org
http://www.nseindia.com/content/products/etfmktwtch_All.htm
About the Authors
Akshay Mishra is a graduate student in the Department of Finance at the London School of Economics
and Political Science. He completed his B.Tech and M.Tech in Mechanical Engineering from IIT
Kharagpur and can be contacted at A.Mishra2@lse.ac.uk
Sailesh Pati is a second year MBA student at IIM Ahmedabad. He completed his B.Tech and M.Tech in
Electronics Engineering from IIT Kharagpur and can be contacted at saileshp@iimahd.ernet.in
Tuhin Chatterjee is a second year MBA student at IIM Bangalore. He completed his B.Tech and M.Tech
in Chemical Engineering from IIT Kharagpur and can be contacted at tuhin.chatterjee08@iimb.ernet.in
40
MONEY MANAGER AUG 2010 STUDENT ARTICLES
Mutual Funds Industry in India
Abstract could be channelized in the mutual
funds sector as it offers a wide investment op-
Mutual funds in India now have the flexibility to tion. The rapid growth of tier I and tier II cities
invest in derivatives and foreign securities. But in India augurs well for this sector. India has
do such investment strategies benefit the mutual been amongst the fastest growing markets
fund performance? This article answers the for mutual funds since 2004, witnessing a
question through an empirical study of equity CAGR of 29 percent in the five-year period
diversified mutual funds. We find that most In- from 2004 to 2008 as against the global
dian mutual fund managers do not employ de- average of 4 percent.
rivatives in their portfolios. The decision to use
derivatives is associated with fund size and Usage of Derivatives in India
number of fund managed by Asset Management
Company. Also, the extent of derivative usage The last decade has witnessed a significant
was found to be solely dependent on fund size. growth in the number and the variety of deriva-
It was found that use of derivatives did not im- tive instruments available to investors in India.
prove the performance of funds significantly. The options available for investors in India are
Equity derivatives, fixed income derivatives and
foreign currency derivatives. Nevertheless, there
Mutual Fund Industry in India has been little participation of institutional in-
vestors in derivatives market even though mutu-
The Mutual Funds industry is considered as one al funds have been allowed to invest in deriva-
of the most dominant players in the world econ- tives by SEBI since 2006. The intensity of deriv-
omy and is an important constituent of the finan- atives usage by any institutional investor is a
cial sector. It has witnessed startling growth in function of its ability and willingness to use de-
terms of the products and services offered, re- rivatives for either risk mitigation or for risk
turns churned, volumes generated and the num- trading. A study of derivatives usage by mutual
ber of international players. The market has funds in India throws up some interesting ques-
graduated from offering plain vanilla and equity tions like - do the funds that use derivatives have
debt products to an array of diverse products returns better than those funds that do not? What
such as gold funds, exchange traded funds factors influence the ‘decision to use deriva-
(ETF’s), and capital protection oriented funds. tives’ and the 'extent of usage’? Does derivative
The major benefits of investing in a mutual fund usage have a positive impact on selectivity and
are to capitalize on the opportunity of a profes- timing skills of mutual funds?
sionally managed fund by a set of fund manag-
ers who apply their expertise in investment. It The article reports the findings of our empirical
also gives the investors an opportunity to invest study aimed at answering the above questions
in a variety of stocks without incurring high and compares the return characteristics of funds
transactional costs. that use derivatives to those that do not. Our fo-
cus is on three alternative ways such investment
With India being one of the fastest growing strategies by fund managers may affect the dis-
economies in the world, the mutual funds sector tribution of a mutual fund’s returns:
is expected to have huge growth potential. With Funds that invest in derivatives may have higher
a saving rate of more than 35% of GDP and or lower risk than funds that do not invest in de-
80% of the population who save, these savings rivatives.
41
STUDENT ARTICLES AUG 2010 MONEY MANAGER
42
MONEY MANAGER AUG 2010 STUDENT ARTICLES
usage is independent of the number of funds in performance is achieved with lower market ex-
the family also. It depends only on the size of posure. Again, there is no significant difference
the fund. Again, economies of scale play a sig- in the performance of users and non-users of
nificant role. The fund size plays a significant funds.
role in deciding the extent of derivative expo-
sure. So, we can conclude that the decision to Selectivity and timing skills
use derivatives and extent of usage is related to
economies of scale and users are more likely to To establish the hypothesis that the usage of de-
be funds that belong to a large family of funds rivatives had any substantial effect on the timing
having a large fund size. of investments by mutual fund, we extended the
CAPM model by incorporating a factor that cap-
Risk return profile tures market increases. This factor is defined as
the square of the market excess return.
To assess the risk return profile of users versus
non-users, the returns of the mutual funds over This model allows for separation of timing skills
past one year were compared with the market in fund management.
returns. The performance of users and non-users
were compared on parameters like Sharpe ratio, Both users and non-users of derivatives show a
Treynor ratio and Jensen alpha. The risk free negative timing coefficient indicating that they
rates used were the Government of India 91 day
T-bill rates. Market rate used is the monthly re-
turn on Nifty over past one year.
If we look at the returns of the funds and com-
pare the key ratios, following results were ob-
tained:
It can be observed that there is no significant did not time the market efficiently. The timing
difference between the Sharpe ratio for users skill of users of derivatives was found to be
and non-users of derivatives indicating that ex- worse than that of non-users.
posure to derivative does not lead to superior
performance in terms of volatility adjusted re- Conclusion
Performance Criteria Users Non-users
We find that most Indian mutual fund managers
Beta 0.831 0.903
do not employ derivatives in their portfolios.
Jenson’s Alpha 0.556 0.203 Only 19.3% of the 273 funds in our sample use
Sharpe Ratio 0.402 0.377 derivatives. The results are generally consistent
Treynor Index 4.338 4.566 with the findings in Koski and Pontiff (1999),
who report that 20.8% of US equity fund man-
agers employ derivatives in their funds. We also
turns. The Jensen’s alpha is the measure of per- find that, for funds that invest in derivatives, the
formance of interest for well diversified inves- use of derivatives as a percentage of a fund’s
tors. Both users and non-users of derivatives in- total holdings are moderate, with averages of
dicate a positive alpha, indicating that they per- 8.4%.
form better than the market owing to their diver-
sified portfolios. A positive alpha for users of We find some evidence that the decision to use
derivative funds indicates is evidence of superi- derivatives is associated with fund size and
or performance. The Treynor Index indicates if number of fund in the fund family. The extent of
the fund outperforms the risk free rate and if the
43
STUDENT ARTICLES AUG 2010 MONEY MANAGER
derivative use was found to be solely dependent mutual funds are modest and the use of deriva-
on fund size. Surprisingly, in terms of returns - tives does not adversely affect fund return and
the use of derivatives did not improve the per- risk profiles. Our findings are of particular im-
formance of funds. Users of derivatives did not portance to regulatory agencies as well as mutu-
exhibit superior timing skills when compared to al funds investors. We believe that the evidence
non-users. presented herein can lessen regulators’ concern
about the abuse of derivatives by mutual funds
We view our results as evidence that the inci- in India.
dence and extent of derivatives usage by Indian
References
Koski Jennifer Lynch, Pontiff Jeffrey, 1996, How Are Derivatives Used? Evidence from the Mutual Fund In-
dustry, Financial Institutions Centre 96-27
Delib Daniel N., Vermaa Raj, 2000: Contracting in the investment management industry: evidence from mutual
funds, Journal of Financial Economics 63 (2002) 79–98
Emilia Garcia-Appendini and Thomas A. Rangel-Hilt, 2009, Do derivatives enhance or deter mutual fund risk-
return profiles? Evidence from Italy, CAREFIN Research Paper No. 7/09
About the Authors
Abhishek Rawale: The author is a Second Year student of Post Graduate Program in Management at
Indian Institute of Management, Bangalore. After completing his Bachelor of Engineering (Computer
Science) from Netaji Subhas Institute of Technology (NSIT), New Delhi, he worked in the Semiconductor
Industry for three years. He can be reached at abhishek.rawale08@iimb.ernet.in.
Saurabh Rai: The author is a Second Year student of Post Graduate Program in Management at Indian
Institute of Management, Bangalore. Prior to this he completed his Bachelor of Technology (Mechanical
Engineering) from Institute of Technology, BHU. He did his summer internship at ICICI Bank. He can be
reached at saurabh.rai08@iimb.ernet.in.
44
MONEY MANAGER AUG 2010 STUDENT ARTICLES
Developing Corporate Bond Market in India
govt securities. The dominance of equities and
Abstract banking system can be gauged from the fact that
since 1996, India's stock market capitalisation as
For developing countries like India, a liquid cor- a percentage of GDP has increased to 108%
porate bond market can play a crucial role in from 32.1%, while the banking sector's ratio to
supporting economic development. Despite ex- GDP has risen from 46.3% to 78.2% in 2008. In
istence of a support structure necessary develop- contrast, the bond markets grew to a modest
ment of Corporate bond market, the market in 43.4 percent of GDP from 21.3 percent. Of this
India cripples due to lack of a well structured corporate bonds account for around 3.2% of
primary and secondary market, issuers and well GDP and government bond market accounts for
defined regulations. In the paper we intend to 38.3% of GDP. (Figure 1)
cover these problems and the correctives
measures that have been taken till date and les- Source: RBI
sons that can be learnt from countries like Aus-
tralia and Korea. India’s government bond market stands ahead of
Introduction
Capital market in any country consists of equity
and the debt markets. Within the debt market
there are govt securities and the corporate bond
market. For developing countries, a liquid cor-
porate bond market can play a critical role in
supporting economic development as
45
STUDENT ARTICLES AUG 2010 MONEY MANAGER
floating rate instruments, convertible bonds, the companies can avoid the lengthy issuance
callable (put-able) bonds, zero coupon bonds procedure for public issues. Second is the low
and step-redemption bonds. This has brought a cost of private placement. Third, the amounts
that can be raised through private placements are
variety that caters to a wider customer base and
typically larger. Fourth, the structure of debt can
helps them maintain strike a risk-return balance. be negotiated according to the needs of the issu-
er. Finally, a corporate can expect to raise debt
from the market at finer rates than the PLR of
banks and financial institutions only with an
AAA rated paper. This limits the number of en-
tities that would find it profitable to enter the
market directly. Even though the listing of pri-
vately placed bonds has been made mandatory, a
proper screening mechanism is missing to take
care of the quality and transparency issues of
private placement deals.
Figure 2
Figure 4
Source: RBI
46
MONEY MANAGER AUG 2010 STUDENT ARTICLES
47
STUDENT ARTICLES AUG 2010 MONEY MANAGER
48
MONEY MANAGER AUG 2010 STUDENT ARTICLES
Like in Australia, GOI bonds in India are an efficient government bond market.
also purchased by insurance companies Thus its development is the first step in
and gratuity funds. They hold these bonds developing corporate bonds.
till maturity. As such there is no secondary
market for these bonds. Essential market infrastructure and institu-
tional arrangements are the basic require-
The Forex market in India is to be deregu-
lated to attract foreign investors. As of ment for the development of efficient bond
now the forex market is highly regulated markets. Korea introduced many systems
by RBI. India needs to develop cross cur- such as a Dutch auction system, a reopen-
rency swap market so that the foreign in- ing and marked-to-market system and a
vestors can hedge their investment. How- primary dealer system. Moreover it also
ever this will bring instability to the Indian took steps to develop the futures repur-
currency in the beginning.
chase market for government bonds. These
India can also construct Bond Indices to institutional and legal infrastructures and
provide a benchmark for investment. This framework in a very short period were
will also make the bonds acceptable able to induce liquidity in the market.
among the retail investors.
Instead of being satisfied with OTC mar-
Policy lessons from the Korean ket, Korean Government took real steps to
corporate bond market promote electronic trading. It introduced
ETS (electronic trading system) for the
government bond market. It was mandato-
Unlike, many developing economies including ry to trade in benchmark issues using the
India, corporate bond were lot more popular in system. This has not only improved trans-
Korea, basically because of the reluctance of the parency but also liquidity in the market.
government of Korea to issue government
bonds. Moreover, the bonds issued by compa- Many companies in India are not able to
nies were guaranteed by government as such issue bonds because of low rating. Korea
they were risk free. Corporate bond market in also faced the same problem after the IMF
Korea has weathered crisis in late 1990s and Crisis. To overcome this problem it used
early 2000s but has recovered afresh from each securitization and credit guarantee meth-
crisis, stronger. Korean bond market grew both ods. This helped even small companies to
in quality and size due to various government raise funds not only from domestic market
reforms even in the midst of various crisis. Es- but also from the international market.
tablishment of market infrastructure and en-
hancement of overall liquidity and transparency
of the primary and secondary market has helped
in the long run.
49
STUDENT ARTICLES AUG 2010 MONEY MANAGER
References
Asia Bond Monitor- ADB, April 2008
Bank for International Settlements. 2006. ‘‘Developing Corporate Bond Markets in Asia.’’ BIS Papers No.26,
February.
India’s Bond Market-Development and Challenges Ahead, Stephen Wells and Lotte Schou-Zibell, Working
paper series on regional economic integration no.22, ADB, December 2008.
CS Update, august 2008, ICSI
Equity and corporate debt report 2007, RBI
An overview of the Australian corporate bond market by Ric Battellino and Mark Chambers, Reserve Bank of
Australia
About the Authors
Jaideep Singh has done his mechanical engineering from Delhi College of Engineering, Delhi. He is
currently pursuing his MBA from Management Development Institute, Gurgaon. He has consistently been
among top students and has also won prizes in various inter B-school competition
Ritambara Vasudeva after graduating in Eco.(Hons) from Indraprastha College, Delhi University, is
pursuing her MBA from Management Development Institute, Gurgaon. She is a member of Monetrix,
Economics and Finance club of MDI.
Shefali Omer has done her B.Com from Kanpur University. She also secured an A.I.R. 28 in CA-CPT
and has cleared CA-PCE. She is currently pursuing MBA from Management Development Institute,
Gurgaon. She is a member of Monetrix, Economics and Finance club of MDI, Gurgaon
50
MONEY MANAGER AUG 2010 STUDENT ARTICLES
Capital Account Convertibility: Is India Ready?
Abstract: flows. Thus, CAC for Indian economy refers to
the abolition of all restrictions with respect to
Background movement of capital from India to different
Capital Account Convertibility for the Indian countries across the globe and vice versa. Move-
economy refers to the abolition of all re- ment towards FCAC will ensure that all non-
strictions with respect to movement of capital residents i.e. corporate and individuals would be
from India to different countries across the treated equally. This would mean removal of the
globe and vice versa. The Reserve Bank of In- tax benefits accorded to NRIs via special bank
dia, in consultation with the Government of In- deposit schemes.
dia, appointed a committee chaired by S.S. Tar-
apore to set out a roadmap towards adopting full Evolution of Capital Account Con‐
CAC. This article, while evaluating India’s vertibility in India:
readiness towards capital account liberalization,
examines India’s performance on the precondi- In 1994 August, the Indian economy had to
tions laid down by the Tarapore committee [1] adopt the present form of Current Account Con-
in 1997 and the feasibility of the Tarapore Com- vertibility, on account of compulsions by the
mittee [2] recommendations. The article also International Monetary Fund (IMF) Article No.
attempts to analyse the effect of CAC on the VII. The primary objective behind the adoption
Indian economy in the backdrop of the financial of CAC in India was to make the movement of
crisis. capital and the capital markets open and inde-
pendent so that it would exert less pressure on
Conclusions
the Indian financial markets. The proposal for
India has not met most of the prerequisites set
the introduction of CAC was present in the rec-
by the Tarapore committee. India is not yet
ommendations suggested by the Tarapore Com-
ready for full Capital Account Convertibility but
mittee appointed by the Reserve Bank of India
it should prepare a robust roadmap for adopting
in 1997.
CAC in future. Adoption of the second Tarapore
committee recommendations still remains infea-
The status of Capital Account Convertibility in
sible as the preconditions set by the committee
India for various non residents is as follows:
in the prior period itself have not been met.
Even as moving to fuller convertibility of cur-
For Foreign Corporate and Institutions, there is
rency may benefit the capital markets, the possi-
bility of a financial/currency crisis cannot be reasonable amount of convertibility
completely ruled out since India’s financial inte- For non-resident Indians, there is approximately
gration is still in its nascent stage. an equal convertibility, but one accompanied by
procedural and regulatory impediments
For individuals, foreigners other than PIOs,
Overview of Full Capital Account
there is near zero convertibility
Convertibility: Objectives of CAC in the Indian Context:
To facilitate growth in the economy by
Full Capital Account Convertibility implies free- minimising the cost of equity and debt
dom of currency conversion in relation to capital
capital
transactions in terms of both inflows and out-
To improve the efficiency of the Indian
51
STUDENT ARTICLES AUG 2010 MONEY MANAGER
financial sector through greater compe- India’s Performance on the above criteria post-
tition, thereby minimising the interme- 2000:
diation costs
The fiscal deficit to GDP ratio came below the
To provide opportunities for diversifi-
4% mark only in 2006-07 followed by 3.3% in
cation of investments by residents 2007-08. However, due to the fiscal stimulus
measures adopted by the Government of India in
Concomitants for a move to Full 2008-09, the fiscal deficit to GDP ratio in-
creased to 6.8%, the highest since 1998-99. This
Capital Account Convertibility: indicates that India has performed poorly on the
fiscal front. Considering that the target of 3.5%
The fiscal-monetary policies, exchange rate deficit set out by the Tarapore committee has
management, prudential, regulatory and supervi- only been accomplished once, this criterion
would not be a stable one in judging India’s
sory safeguards and measures for development
readiness to adopting Full Capital Account Con-
of financial markets, all assume importance. The vertibility.
implementation of these measures and the pace
of liberalisation are a simultaneous process. Three Years’ Average Inflation Rate
Pre-Conditions of Full CAC in India: Tarapore
Committee Recommendations (I) During 1997-2000, the average inflation rate
The 1997 committee had laid down the follow- decreased continuously from 5.6% to 4.5%.
However, since 1999-2000, the average inflation
ing preconditions to be satisfied before India
rate has hovered above the 5% limit, which is
adopted CAC gradually (over a period of 3 years above the recommended band set by the Tara-
from 1997-2000) pore Committee.
a. Gross Fiscal Deficit/GDP ratio to come
down to 3.5%
b. The annual average rate of inflation for the
previous 3 years to lie between 3-5%
c. Gross Non-Performing Assets of public
sector banks to come down to 5% in 2000
from 13.7% in 1997
d. Average Cash Reserve Ratio should come
down to 3%
52
MONEY MANAGER AUG 2010 STUDENT ARTICLES
Average Effective Cash Reserve Ratio Thus, India has not met most of the prerequisites
set by the Tarapore committee for moving to-
wards full Capital Account Convertibility. Bar-
ring the NPAs of the Public Sector Banks which
have come down drastically, India has per-
formed poorly on other fronts, including on the
fiscal front. The Fiscal Responsibility and Budg-
et Management Act (FRBM) was enacted to
eliminate the revenue deficit and to reduce the
central fiscal deficit to 3% by March 31, 2009.
However, due to the economic stimulus package
unveiled by the government in response to the
acute economic slowdown, there has been a
sharp increase in the central fiscal deficit and as
a result, the FRBM Act has been temporarily
The lowest level of average CRR has been in the suspended.
year 2003-04, at 4.5%. The average CRR is well
above the Tarapore committee’s prescribed limit Adequacy of Reserves:
of 3%. It is only in the year 2009-10, that the
CRR has come down drastically due to fears of The adequacy of reserves is considered an im-
the slowdown, but it still remains higher than the portant parameter for capital account liberaliza-
floor. Hence, this criterion is not met while eval- tion as it helps in gauging an economy’s ability
uating India’s readiness to adopting full Capital to withstand external shocks. The RBI has been
Account Convertibility. pursuing a policy of maintaining an adequate
level of foreign exchange reserves to meet In-
Debt-Servicing Ratio dia’s import requirements, unforeseen contin-
gencies and liquidity risks. Compared to US
$5.8 billion in the financial year 1990-91, India
now has a foreign reserve base of $283.6 billion
(as on December 18, 2009). Thus, from an im-
port cover of just 2 months in 1990-91, India
now has an import cover of more than 14
months, which is way above the prescribed
‘safe’ level of 6 months. The Reserves/Debt-
Service ratio has also shot up from 0.5 to 7.2
over the period, which indicates a comfortable
level of debt servicing using the foreign reserves
during periods of exigency. India’s total foreign
The panels indicate that the debt servicing ratio has never reserves well exceed India’s overall external
touched the required 20% limit set by the Tarapore com- debt.
mittee.
53
STUDENT ARTICLES AUG 2010 MONEY MANAGER
Tarapore Committee II: Recom‐ amid global turmoil, that share of P-notes has
fallen to 15.55%)
mendations The DTAA is needed to promote International
trade. Hence, it can only be abolished if full cap-
The second round of Tarapore committee set up ital account convertibility is implemented simul-
to suggest a roadmap for full Capital Account taneously, else there are expected to be serious
Convertibility came out with the following set of repercussions in term of our exports
recommendations: The ECB limit was increased to $500 million
a. The sequential full Capital Account Con- but that was more in response to the liquidity
vertibility to be adopted in three phases: crunch rather than moving towards capital ac-
2006-07 (Phase-I), 2007-09 (Phase-II) and count convertibility. The present government
2009-10 and 2010-11 (Phase-III) has been thinking of rolling back this increased
b. FIIs to be banned from investing fresh ceiling.
capital through the issue of fresh Participa-
tory Notes; PNs to be gradually phased out Possible Hiccups:
c. Industrial houses to be allowed and en-
couraged to set up banks a. The effect of a financial crisis on the Indi-
d. Discriminatory tax treaties (such as Dou- an economy with full capital account con-
ble Tax Avoidance Treaty or DTAA) to be vertibility is difficult to predict. Other
abolished, since they are incompatible economies with full capital account con-
with the concept of capital Account Con- vertibility are highly coupled with the
vertibility world economy. This means that global
e. For resident corporates, the ceiling for fi- problems directly impacted these domestic
nancial capital transfer abroad to be re- economies as well. The recent examples of
laxed from 25% of their net worth Ireland and Iceland are not very encourag-
f. External Commercial Borrowing limit per ing.
annum to be increased b. There is no clarity regarding the regulatory
g. Ceiling for loans and borrowings by resi- measures required to prevent abuse of cap-
dent banks from overseas banks to be re- ital account convertibility. Speculators are
laxed from 25% of their unimpaired tier-I known to move markets recklessly and
capital increase the risk for common investors.
54
MONEY MANAGER AUG 2010 STUDENT ARTICLES
towards full account convertibility still seems Exhaustive studies conducted by international
infeasible. Even as advancing to fuller converti- rating agencies prove the point that full capital
bility of currency may benefit the capital mar- account convertibility by itself does not make a
kets by bringing in cheaper capital, the possibil- country a more attractive investment destination.
ity of a financial/currency crisis cannot be com- More important parameters in this respect are a
pletely ruled out since India’s financial integra- strong financial sector and fiscal rectitude. The-
tion is still in its nascent stage. The recent global se are exactly the signposts that the Tarapore
meltdown hasn’t helped either. As of now, India committee has advocated. With many signposts
needs a rigorous regulatory and monitoring body that are difficult to reach, it is unlikely that India
which would have an effective system for inter- will move towards fuller convertibility by adher-
vening at the right time to ensure domestic sta- ing to the path and the timelines set out. In that
bility and prevention of disruption in the Indian respect, the value of the Tarapore committee
capital markets. It can be concluded that India is report might well lie in its emphasis on crucial
not yet ready for full Capital Account Converti- procedural and macroeconomic issues rather
bility, but it should prepare a robust roadmap for than Full Capital Account Convertibility per se.
adopting CAC in future.
References
http://dbie.rbi.org.in
Indiastat.com/banksandfinancialinstitutions/3/stats.aspx
rbi.org.in
Indiastat.com/economy
Tarapore Committee Report on Capital Account Convertibility in India, 2006
“Why capital Account Convertibility in India is Premature” Williamson (2006)
“Capital Account Convertibility and Risk management in India”, Amadou N.R.Sy, IMF Working Paper
WP/07/251
About the Authors
Gaurav Anand is presently pursuing Post Graduate Diploma in Management from Management
Development Institute, Gurgaon. He can be reached at pg09gaurav_anand@mdi.ac.in
Hitesh Seth is presently pursuing Post Graduate Diploma in Management from Management
Development Institute, Gurgaon. He can be reached at pg09hitesh_s@mdi.ac.in
Srikanth Rayasam is presently pursuing Post Graduate Diploma in Management from Management
Development Institute, Gurgaon. He can be reached at pg09srikanth_r@mdi.ac.in
55
STUDENT ARTICLES AUG 2010 MONEY MANAGER
Arm‐chair Investing on Nifty: A P/E based approach
Introduction EPS is 12% and the current EPS is 100, then it is
estimated that the EPS at the end of five years
from now will be 176. Also, assume that the cur-
If you’re a Warren Buffet or a Rakesh Jhunjhun- rent stock price is 1500 (PE of 15).
wala, or any experienced investor with both the
knowledge and time to study the market, you Then we examine the average Price-Earnings
would be better off handpicking stocks and Ratio (PE) of the stock over the last 10 years.
monitoring them. But what if you wanted the We assume that this average will be sustained
thrill of investing in the stock market, and yet over the next few years. Based on this assump-
not spending too much time pouring over the tion, we estimate the future price of the stock (in
business pages each day? This P/E based ap- our case five years from now) by multiplying
proach to investing in Exchange traded funds the future EPS with the historical average PE
hopes to achieve that. It does not claim it can ratio. If the historical average PE of the stock in
beat the returns of careful handpicking. It’s a our example is 18, then the future price of the
method for the busy executive, with better than stock is expected to be 3168 (176X18). Of
SIP returns. course, there are no guarantees but past record
demonstrates that for high quality stocks, this is
Conceptual Framework usually the case.
The next step is to estimate the expected return
on our investment. In our example, we have the
This is inspired by an excellent book
option to buy the stock at current market price of
“Buffetology” written by Mary Buffet, the
Rs. 1500 with an expectation that the stock price
daughter-in-law of the legendry investor Warren
at the end of five years will be Rs. 3168. The
Buffet. Mary Buffet explains that Warren Buffet
rate of return on this investment works out to
views stocks as bonds with variable rate of inter-
16.12% per annum.
est (returns). The main difference between a
Finally, we compare the expected rate of return
fixed income instrument (e.g. fixed deposits or
on the stock with the risk free return available in
bonds) and stocks is that while fixed income in-
the market over the same period. Let us assume
struments offer a fixed rate of return, the stocks
that the rate of return on five year fixed deposits
offer variable returns. However, the returns from
is 7%. We can now see that the investment in
high quality, well established stocks can be pre-
stock is expected to yield much higher return
dicted with a fair degree of certainty. The proce-
(16.12%) than the return on fixed deposit. In
dure for calculating the expected returns from
such a situation, it is better to invest in stock ra-
high quality stocks with established track record
ther than fixed deposit. So our decision is made!
is described below:
We will invest in stock.
Firstly, we need to examine the average growth
However, what happens if the current market
of the earning per share (EPS) of the stock over
price of the stock is 2200 (PE of 22)? In that
a long period (usually 10 years). It is assumed
case, the expected rate of return from investment
that the average growth in EPS over the last 10
in stock will yield only 7.56% per annum, just a
years will be sustained over the next few years
shade higher than the 7% return on fixed depos-
(5 to 10 years). Based on this, we estimate the
it. Now we are not sure whether we should in-
future EPS of a stock by compounding the cur-
vest in stock or fixed deposit. Is it worth taking
rent EPS at the average EPS growth rate. For
the risk of investing in stock if we are getting
example, if the 10 years average growth rate of
only 0.56% % higher return but with uncertainty
56
MONEY MANAGER AUG 2010 STUDENT ARTICLES
that we may even lose a part of our capital. Per- the index funds. For all these reasons, we
haps not. Therefore, we would invest in stock decided to invest in NIFTY Bees.
only if the expected return from the stock is sig- We examined the last 10 years data and came up
nificantly higher than the return on fixed depos- with following facts:
it. In our case, we have assumed that we would 1. Average growth rate of the EPS of NIFTY
not invest unless the expected return from the over the last 10 years is 13 % per annum. For
stock is at least 10% per annum. The example future, we have assumed 12% per annum, to be
above shows that if invest when the PE levels on conservative side.
are low, then we get higher returns. Also, it fol- 2. Average PE over last 10 years has been
lows that when the PE levels are high, it makes around 18.
sense for us to sell the stock and book profits, as 3. The highest level of PE is just over 28 and
the expected return from that point onwards are lowest level is just over 10. Only twice in the
likely to be lower and we are better off switch- last 10 years, have these levels been reached.
ing to investment in risk free instruments i.e. Most of the time, PE hovers in the range of 15-
fixed deposit. 20, with sporadic upwards and downwards
Figure 1 below shows this more clearly.
Our methodology is based on the above ap-
proach. We have replaced individual stocks with As mentioned earlier, we decided that we will
an exchange traded fund (NIFTY Bees), also not invest in stock (NIFTY BeeS in our case)
called ETFs. An index fund offers better diversi- unless the expected rate of return is at least 10%.
fication and therefore reduces the risk of invest- Based on above historical data, the investment
ment. The index fund represents investment in in NIFTY BeeS is expected to yield 10% or
high quality and large mid cap stocks with ex- more return, if we invest when the PE levels are
cellent liquidity. The ETF has very low expense 19.75 or less. Therefore, we decided that we will
ratio and can be easily bought and sold over in- invest in stock if the PE is 19.75 or less. If PE is
ternet, which makes it very easy for a busy exec- higher, then we are better off keeping money in
utive to invest in. The research has shown that a cash fund, which gives low returns (we have
over a long period of time, most other types of assumed 4%) but does not suffer from the risk of
funds (diversified equity funds or sectoral funds) loss of capital. We chose cash fund over fixed
are not able to beat the performance of deposits because it is much easier to get in and
out of cash funds. Also, the after tax return on
cash fund is quite similar to return on fixed de-
posits.
Exhibit 1
57
STUDENT ARTICLES AUG 2010 MONEY MANAGER
Exhibit 2
58
MONEY MANAGER AUG 2010 STUDENT ARTICLES
der SIP, we sometimes got returns as high as However, the differences and some advantages
41%, but then sometimes as low as 6%, with a of the above discussed method are 1) Use of
standard deviation of 0.11. With our method we cash while not invested in stock, instead of fixed
had a narrower range, in between 11 and 38%, deposits, which have their own inherent risks 2)
with a standard deviation of 0.08. Our returns Entry/Exit loads of a managed fund 3) No flexi-
were more consistent and predictable and still bility in adjusting PE trigger values to suit an
gave a higher overall return over a 10 year peri- individual’s personal risk propensity 4) last but
od. What more do we want? not the least, the thrill of doing it yourself!
There exist funds like FT India Dynamic PE Ra-
tio Fund of Funds (FTDPEF), which follow a *A P/E of 19.75 means that at current market price, the
similar methodology. stock is giving a return of 5.06%. However, the EPS, gets
compounded at the rate of 12% per annum (historical),
thus giving us an average return of 10% over a 5 year pe-
riod.
About the Author
Puneet Gupta is presently pursuing Post Graduate Diploma in Management from Indian Institute of
Management Bangalore. He can be reached at puneet.gupta09@iimb.ernet.in
59
STUDENT ARTICLES AUG 2010 MONEY MANAGER
Why the Indian Markets Will Not Fail
Abstract: The paper tries to understand the In- Indian financial history dates back to the days of
dian Financial markets with respect to the Indi- Arthshastra who developed a sophisticated taxa-
an people. It explores the risk assuming tenden- tion system and laid the foundations of what we
cy of Indians and links it to their investment and call today a sophisticated financial system.
saving patterns and behavior. This along with
the history of the markets is used to analyze a James Wilson is considered as the father of the
linkage between the two. Finally, it brings out Indian Financial system whose roots originate
that inherent nature of the Indian markets and its from the British Empire. He gave India its first
constituents which will keep the market afloat ever Budget that brought stabilization amidst the
despite the volatility and cyclicity. chaos. His other pioneering works include cen-
tralization of the financial control and creation
of a system of taxes. The Indian financial Mar-
ket has evolved since then from half a dozen
Introduction brokers in 1839 to more a million brokers today.
The early nineties’ financial market was domi-
A market, as defined by the Merriam Webster nated by commodities trading and cities like Ah-
dictionary, is “a meeting together of people for medabad and Bombay gained commercial im-
the purpose of trade by private purchase and sale portance.
and usually not by auction”1. Extending the def- As industrialization proliferated, the need for
inition, a financial market can thus be defined as official trading houses developed and this gave
a market for the exchange of capital and credit2 birth to various regional stock markets during
that helps businesses grow and also helps inves- the 1940s. At present there are 21 stock ex-
tors make money3. The financial market com- changes in India excluding the NSE and OTCEI.
prises of all vehicles of investment – the stock The evolution and current state
market, the bond market, the commodities mar-
ket and the foreign exchange market. They can There have been much turbulence in the Indian
also be classified into money markets (which markets like the various scams, world economic
include short term financial instruments) and recessions but Indian economy has evolved a
capital markets (which include long term finan- long way due to the various reforms and prudent
cial instruments) policy moves.
The Indian financial market – A brief history The financial market today provides the much
Sl.No. As on 31st 1946 1961 1971 1975 1980 1985 1991 1995
December
1 No. of 7 7 8 8 9 14 20 22
Stock Exchanges
60
MONEY MANAGER AUG 2010 STUDENT ARTICLES
4 Capital of Listed 270 753 1812 2614 3973 9723 32041 59583
Cos. (Cr. Rs.)
5 Market value of 971 1292 2675 3273 6750 25302 110279 478121
Capital of Listed
Cos. (Cr. Rs.)
6 Capital per 24 63 113 168 175 224 514 693
Listed Cos. (4/2)
(Lakh Rs.)
7 Market Value of 86 107 167 211 298 582 1770 5564
Capital per Listed
Cos. (Lakh Rs.)
(5/2)
8 Appreciated value 358 170 148 126 170 260 344 803
of Capital per
Listed Cos. (Lak Rs.)
needed fuel for growth of the Indian economy. considerable amount of change in India. On
Our regulatory framework has strengthened as proper observation of the saving trend in India
the financial system has become more and more we can see that in the earlier years, household
complex. savings in the physical assets used to dominate
the domestic saving in the country. But slowly
A peep into the Indian mind the saving trend in India changed.
61
STUDENT ARTICLES AUG 2010 MONEY MANAGER
(Rs. in Crore)
Item 2003- 2004- 2005- 2006- 2007- 2008-
04(P) 05(P) 06(P) 07 08(P) 09#
Financial Saving (Gross) 380090 435706 588656 650412 715994 746865
a) Currency 42675 36977 51954 66274 81278 93056
b) Deposits 145657 161416 278985 319385 374088 436710
i) With Banks 141973 158393 274704 311215 360727 409678
ii) With Non-banking Compa- 3803 3370 4567 1516 3751 13453
nies
iii) With Cooperative Banks and -6 -134 -64 131 266 133
Societies
iv) Trade Debt (Net) -114 -213 -222 6523 9345 13446
c) Shares and Debentures 492 4967 29008 58598 89134 19349
i) Private Corporate Business 4275 6124 7851 23755 31565 31124
ii) Banking 111 263 290 206 766 995
iii) Units of Unit Trust of India -8586 -3146 -444 -310 -324 -2737
iv) Bonds of Public Sector un- 173 176 172 237 328 446
dertakings
v) Mutual Funds (Other than 4519 1550 21139 34709 56799 -10478
UTI)
d) Claims on Government 87372 106420 86755 19198 -28315 -23479
i) Investment in Government 28469 21313 14390 1654 -14714 -33879
securities
ii) Investment in Small Savings, 58903 85106 72364 17544 -13601 10400
etc.
e) Insurance Funds 52240 69572 83340 114851 128930 150337
i) Life Insurance Funds 49427 65577 79426 110965 124422 145876
ii) Postal Insurance 1098 1414 1215 2200 2729 2594
iii) State Insurance 1715 2581 2699 1686 1779 1868
f) Provident and Pension Funds 51655 56354 58615 72106 70878 70891
Memo:
GDP at Market Prices (at cur- 2760224 3121414 3531451 4129173 4723400 5321753
rent prices)
Source: Economic Survey 2007-08
62
MONEY MANAGER AUG 2010 STUDENT ARTICLES
It can be seen from the above data that house- modes finally find their way into the financial
hold savings (individual, non-corporate business markets by investment bankers and traders.
and private collectives) and private savings Thus, a part of the risk by higher savings is done
(joint stock companies and cooperative institu- away with.
tions) have increased at the expense of public
savings which have declined by almost 109 Indian markets are thriving well because of the
times in percentage terms over a period of two ability to mitigate the above risk by modes of
decades. This has been aided by growth in con- savings which aid in doing so. This also forms
sumerism and a liberalized environment the basis for optimism in future where a growing
(increased internal and foreign competition as savings rate may prove to be a blessing in dis-
well as FDI in various sectors). guise: it fulfills the purpose of financial invest-
ment prudence and also satisfies the investment
Over a period of rising savings rate in the econo- needs of the economy.
my and household savings constituting more and
more of the total pie, it is an obvious disad- So Why the Indian markets will not
vantage for a growing economy like India. In Fail
light of a further rise in savings rate caused by
multiple factors in future, an obvious risk for the Indian investor population consists of a con-
financial markets is apparent. More so, with the servative mix of people, dominated by risk
Indian psyche which is slightly risk averse and averse individuals. Our financial institutions like
tends to favor savings as per the above distribu- RBI are known to be conservative amongst the
tion, the apparent risk seems greater. various economies of the world. Although stock
market is an important part of our financial sys-
But, over the years, the composition of house-
tem, the volatility does not truly reflect the fi-
hold savings has undergone a transition. Earlier,
nancial soundness of the system. This can be
savings in financial instruments dominated the
inferred because of the observations which show
savings in financial assets but at present, the
that these short term investments are just a part
trend has reversed and almost 52% of the house-
of their robust and versatile project portfolio.
hold savings are in physical properties as com-
According to Clarence Wong (Head- economic
pared to 44% around the 1990s. But as the sav-
research and consulting, Asia at Swiss Re), “The
ings rate has risen substantially, a fall of a few
fact that only around 10 per cent of Indians are
percentage points does not mean much of a re-
covered by any form of pension scheme helps us
duction. Infact, with an increase in household
understand the low financial risk tolerance of
savings which may be held either in the form of
Indian respondents.”
liquid assets like currency bank deposits and
gold or financial assets like shares, securities or These risk averse individuals along with a small-
policies, it indirectly helps as savings in these
er percentage of risk lover population constitutes
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STUDENT ARTICLES AUG 2010 MONEY MANAGER
a healthy mix of investors for the country. The ulators, Indian financial markets did not suc-
strength of well balanced investor population cumb to the global recessionary waves and will
was tested during the recession and it is because continue to thrive successfully.
of the prudence shown by the investors and reg-
References
1. http://www.merriam-webster.com/netdict/market
2. https://www.rbfcu.org/NB/html/Investments/Dictionary_F.htm
3. http://useconomy.about.com/od/themarkets/a/capital_markets.htm
4. http://toostep.com/trends/investment-trends-in-india
5. http://www.nytimes.com/2008/12/18/world/asia/18iht-letter.html?_r=1
6. http:// finance. mapsofworld. Com / savings /india/rate.html
7. Salam, M. A., & Kulsum, U. (2000). Savings Behaviour in India: An Empirical Study.
8. Binswanger, H. P. (1980). Attitudes toward Risk: Experimental Measurement in Rural India. American
Journal of Agricultural Economics,Vol. 62, No. 3 , 395-407.
9. Shetty, S. L., & Menon, K. A. (1980). Savings and Investment without Growth. Economic and Political
Weekly, Vol. 15, No. 21 , 927-936
10. Ferrari, A., & Dhingra, I. S. (2008). India's Investment Climate : Voices of Indian Business. The World
Bank
11. BUREAU, E. E. (2006, Feb 28). Story behind India’s savings, investment boom. Retrieved Jan 29, 2010,
from The Indian Express: http://www.indianexpress.com/res/web/pIe/full_story.php?content_id=88731
12. Spastic Markets. (2005, July). Shareowner, 18(6), 5,22. Retrieved January 30, 2010, from ABI/INFORM
Global. (Document ID: 865581741)
13. Berg, W. (2006). The Indian Stock Market. Retrieved Jan 29, 2010, from Ezine Articles: http://
ezinearticles.com/?The-Indian-Stock-Market&id=118673
14. Vadlamannati, K. C. (2009). Indian Economic Reforms and Foreign Direct Investment: How Much Differ-
ence Do they Make to Neighbours? South Asia Economic Journal 2009; 10; 31 , 31-59.
About the Authors
Akanksha Verma is a Comp. Sc. Gold Medalist from SGSITS Indore. She has rich experience in the
financial services division of USA. She has cleared the Level 1 FLMI Insurance certification. She is a
writer and a poetess.
Shalin Gupta a Mech Engg Silver Medalist from Pantnagar Univ. possesses in-depth problem solving and
quantitative skills. His stint with Maruti exposed him to operational and financial linkages. He is a
guitarist and an active member of SPIC MACAY.
Udayan Bhattacharya is an IT Engg from BMSCE Bangalore. He has worked with reputed clients
across the world. He has a knack in financial modeling and has handled various aspects of project
management. He is a ‘Sangeet Visharad’ and an excellent badminton player.
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MONEY MANAGER AUG 2010 THE LIGHTER SIDE OF FINANCE
On Bonds And Bondings
Have you ever tried to find out what similarities Any fin guy would tell you that fixed income is
do the financial instruments have with our day- one of the most specific areas of finance. So, if
to-day activities? Some might be wondering for you don’t aim to be an I-banker and thus intend
the logic behind this question whereas some to turn the page over, I would still request you to
might say that it’s too obvious as the instru- join me in this exploration.
ments are meant to take care of our day-to-day
financial needs depending upon our incomes and First of all, why the need for fixed income mar-
risk taking capabilities. Let me put a more spe- ket exists? The answer is the need an alternative
cific question; what are the similarities between to the volatile equity markets. Aren’t relation-
Fixed Income instruments and relationships in ships too aimed at helping you counter the va-
real life? Before you start guessing let me sim- garies of loneliness? They help in sharing happi-
plify the task by defining the two terms. By ness as well as sorrows thereby mitigating the
fixed income instruments, I mean those financial upheavals in life thus mirroring the impact of
instruments that help you earn low but fixed re- debt markets on your returns. Let’s us now focus
turns on your investments thereby reducing your on the characteristics of a debt instrument say
risk. The most well known example is bond. On bond. The longer the maturity of the bond the
the other hand by relationships, I mean those more risks it entails so greater are our expecta-
existing between a boy and a girl or a man and a tions in terms of yields. On the same lines, a
woman. I am counting out relationships arising long-term relationship is much more demanding.
out of family ties, friendships or those existing If you still doubt me, ask any husband who has
between same sexes. In better words let’s limit
ourselves to those relations that might culminate forgot his anniversary or wife’s birthday. On the
into marriages. other hand a short duration instrument like T-bill
finds many takers even at low yields as in short
term relationships that prosper because of low
level of commitments.
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THE LIGHTER SIDE OF FINANCE AUG 2010 MONEY MANAGER
when you find a man or a woman falling for a the CRR (credit reserve ratio) and SLR (statuary
partner because of features like his/her attractive liquidity ratio) requirements? Can we find an
looks or his/her bank balance. Though one bene- analogy in the money markets for the disco-
fits materialistically but they result in frequent theque where guys and girls are desperate to let
break-ups due to incompatibilities as is the case their hair down after a tiring day with a few
with corporate bonds which have much higher dance rounds sometimes resulting in a few casu-
rate of defaults. al or serious relationships? I think we can. With
DJ controlling the Disco through his set, it’s the
Some of you who have a Facebook (social net- RBI who makes the market participants dance to
working site) account would have come across its tune in the money markets.
the option of “it’s complicated” while filling
your relationship status. In such complex rela- And if you thought that only the fixed income
tionships one isn’t sure of the future prospects of market allows you to diversify through instru-
the companionship. In short, they are indecisive ments of varying maturity and returns, think
and thus face a lot of anxiety. Similar is the case again. The Casanovas and the playboys have
with complex instruments in debt market that mastered the art long ago by romancing multiple
enhance the risk attached to your investments as beauties at a given time.
outcomes are very unpredictable. The advent of
technology has impacted the markets as well as By the way, aren’t relationships also known as
relationships. On one side virtual platforms like bonds?
social networking sites, chat rooms etc. facilitate
real life relationships and on the other hand we
have dematerialised securities being traded on
electronic avatars like NDS-OM (negotiated
dealing systems-order matching) which is an
electronic, screen based, anonymous, order driv-
en trading system for dealing in G-Secs. Though
NDS-OM brings transparency to the trading sys-
tem but same can’t be said of the online relation-
ships.
About the Author :
Saket Saurabh is a 2nd year PGP student at IIM Calcutta. He holds a bachelors degree in Electronics and
Communication Engineering from National Institute of Technology, Patna. He can be reached at
ss.nitp@gmail.com. He maintains a blog at http://saketvaani.blogspot.com
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MONEY MANAGER AUG 2010 THE LIGHTER SIDE OF FINANCE
Great Poker Players Make Great Traders, Or Do They?
Poker is a microcosm of all we admire and dis- tion about your opponents’ hands. The more the
dain about capitalism and democracy. It can be information, the more the chances you will win.
rough-hewn or polished, warm or cold, charita- There are two ways to do it: You calculate the
ble and caring, or hard and impersonal, fickle odds, the implied odds, and the probability of
and elusive, but ultimately it is fair, and right, making your hand and go about in a logical and
and just. - Lou Krieger scientific manner as to how you play a given
hand. The other is deducing information about
Have you ever had a chance to play a hand of your opponents – through his playing style, his
poker? Did you ever think poker can be one of betting pattern, his body language and the myri-
the best training grounds for wannabe traders? ad other signals which he might be giving out
Increasing number of hedge funds and broker- even without his knowledge – and controlling
age houses are looking to recruit from the most your emotions. These two ways of eliciting in-
unusual of a talent pool – the poker players. formation and taking a decision are never re-
There is a growing awareness that a great poker warding, when practiced in isolation.
player has all the requisite skills that a success-
ful financial trader needs: a calculated and ra- In fact, it would suffice to say, you will never
tional approach to risk, ability to take quick de- make money in the long run if you are extraordi-
cisions under intense pressure, discipline and a nary in one and come a cropper in the other.
good memory. This article delves into the psychological issues
involved in playing poker and likens it to the
Before we get into the litany of how poker helps real-world trading decisions.
in honing your skills as a trader, here is a quick
snapshot of what poker is. Poker is a set of card
games of which the most famous is the No-
Limit Texas Hold ‘Em where each player is
dealt two cards initially and a set of five
‘community’ cards is dealt on the table which is
common to all the players. There are four rounds
of betting – first, immediately after you are dealt
the first two cards (called the pre-flop), second –
after the first three community cards (called the
flop) are dealt and the final two rounds of bet-
ting after each of the fourth and the fifth card are
dealt (called the turn and the river respectively).
You can either check or bet or raise or call or
fold at any point in the game.
As Frank Murtha, a behavioral finance consult-
Information Asymmetry ant puts it point-blank, “The stock market and
Texas Hold ‘em are games of investing based on
There is a substantial element of information incomplete and unfolding information. The goal
asymmetry in a poker game. And that’s precise- of each is to accumulate wealth by making deci-
ly the reason why poker is so hugely popular. sions based on that information.”
You have a bit of information on the current
hand and you need to solicit or deduce informa- The best way to play a game of poker is to
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THE LIGHTER SIDE OF FINANCE AUG 2010 MONEY MANAGER
68
MONEY MANAGER AUG 2010 THE LIGHTER SIDE OF FINANCE
your opponent forms a better hand right at the Seeing patterns where none exists is another of
river. You curse yourself, if only I had bet a lit- the major emotional errors. A famous study by
tle more, he would have folded earlier. two professors – Werner DeBondt of DePaul
University and Richard Thaler of the University
Many poker pros concede that the most difficult of Chicago – showed that investors relying on
thing to master is the art of folding in poker. To past information and market return patterns be-
call it quits when it ought to be quit. When fac- came over-optimistic about past winners and
ing themselves in a situation where they have a over-pessimistic about past losers. But in reality
feeling of regret, a large majority of players do the stock returns patterns never repeated.
either of the following two: They bet large even
on very weak hands else they play so tightly that Holding onto losers
they don’t win as much as they could have, even
on very good hands. According to behavioral finance, loss aversion
refers to the individual’s reluctance to accept a
loss. And when seen from the loss aversion
framework, even though a stock might have
come down considerably from its cost price, in-
vestors tend to hold it, hoping that it will recov-
er. Relate this to a poker player, who, even
though on a losing spree, keeps taking re-buyins
and keeps on playing hoping that he will win
one big hand which will make up his losses.
And, so goes on the search for that one elusive
hand like those French searching eternally for
that elusive Scarlet Pimpernel.
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THE LIGHTER SIDE OF FINANCE AUG 2010 MONEY MANAGER
playing good poker is in your circle of control. how good a player or trader you are. And re-
‘Bad beats’ are a way of life. You can’t pick member, in the long run, the theory of probabil-
winners all your life. But if your decisions are ity is always true. Always. And as your Strategy
based on solid research, then you are bound to Professor would have it, “Hope is never a strate-
make money in the long run. gy.”
Any smart player will know – the short run nev-
er matters. It’s the long run which determines
References :
http://economics-files.pomona.edu/GarySmith/PokerPlayers.pdf
http://articles.chicagotribune.com/2010-01-31/news/1001280626_1_professional-poker-players-poker-face-
poker-table
http://www.kiplinger.com/features/archives/how-texas-hold-em-simulates-investing.htmlhttp://
www.bloomberg.com/apps/news?pid=newsarchive&sid=alximP6.Eta8
About the Author :
Sethu Chidambaram is a 2nd year PGP student at IIM Calcutta. He can be reached at csethu@gmail.com
70
MONEY MANAGER AUG 2010
Financial Crossword
Across Down
2.To assume financial responsibility for or guarantee 1.A derivative security issued by the company that gives
against failure the holder the right to purchase securities from the issuer
6.A writedown in the valuation or return of an asset to at a specific price within a certain time frame
partially forgive a debt 3.When a parent company sells a portion or all of its inter-
11.A psychological phenomenon whereby people do est in a subsidiary to the public in an IPO
something primarily because other people are doing it 4.A fund that tracks an index, but can be traded like a
12.Recurring stream of fixed payments over a specified stock
period of time 5.A condition of slow economic growth and relatively
13.A trade where you borrow and pay interest in order to high unemployment
buy something else that has higher interest 7.The process of removing coupons from a bond and then
14.To pledge securities as collateral for a loan when the selling the separate parts as a zero coupon bond and inter-
same securities have already been pledged for another est paying coupons
loan 8.A procedure used to calculate the zero-coupon yield
16.A measurement of the income distribution of a coun- curve from market figures
try's residents, helps define the gap between the rich and 9.The amount of benefit that is associated with physically
the poor owning a particular good, rather than owning a futures
17.The gradual elimination of a liability, such as a mort- contract for that good
gage, in regular payments over a specified period of time 10.Instruments used by foreign investors or hedge funds
18.The synthetic collateralized debt obligation at the heart that are not registered with the SEBI
of SEC charges against Goldman Sachs 15.A condition in which distant delivery prices for futures
20.Degree of similarity between a given time series and a exceed spot prices
lagged version of itself over successive time intervals 19."A financial product that offers you life insurance as
21.An option with a built in mechanism to expire worth- well as an investment like a mutual fund "
less should a specified price level be exceeded
AUG 2010 MONEY MANAGER
Financial Crossword
Send in your entries for the Financial Crossword to
moneymanager.abc@gmail.com. Cash prizes worth
INR 5000 await the top three entries!
www.ubs.com/graduates