VOLUME 1, ISSUE 1

IIM K ’S FINA N CI A L
NEW SL E T T ER
20TH MARCH, 2008

FROM FY DESK
INSIDE THIS ISSUE:

We, Team FY, proudly present ers and diversion of funds

to you the first edition of towards irrigation, has been
BUDGET
ANALYSIS 2 IIMK‘s financial newsletter. the main point of discussion.
The FM‘s move towards reduc-
The objective of this newslet-
ing the financial stress on the
FIN GYAAN- ter would be to make learning
CAPITAL GAINS 2 farmers has been challenged
interesting and encourage
on various fronts. However,
sharing of knowledge amongst
the question that still remains
AROUND THE finance enthusiasts. Also this
WORLD 2 is that of who would bear the
would serve as a platform for
burden? How much shall it
obtaining expert views from
FACE 2 FACE - impact the banking sector?
A WAVE TO AG- the faculty and other industry
RICULTURAL 3
experts. The next important thing that
WAIVERS
needs to be considered is the
In this edition we intend to
FIN-TERESTING increase in budget allocation
PAST—DREAM 3 bring forward the various fac-
BUDGET towards the social sectors like
ets of the budget from differ-
health and education. How-
ent perspectives, the students,
ever the implementation of
FIN-CTIONARY 3 analysts etc.
these schemes remains ques-
Budget 2008, perceived as a tionable. Hon. Finance Minister P.
forerunner to the elections, is Chidambaram - On his way to
FIN-TRIVIA 4
Overall, though the budget present the ‗populist‘ Budget
aimed towards inclusive
aimed at being a non happen-
growth as quoted by Hon. Fi- ing event, the effects of the
nance Minister. Agricultural same were visible on the stock
waivers for the small land own- market crash down.
FIN WATCH

 1$ = Rs. 40.348
BUDGET BIG FYTE
 Inflation 5.11% 6TH MARCH 2008 | AMPHI,IIMK

 BSE -8.67% (17-20 Budget Big FYte was the first
Mar) event for the new FY coordina-
tors. This is a panel discussion
MARKET WATCH where budding analysts from
IIMK come and present their
views and opinions on the
16 budget.
15
14 Prior to the event pre budget
sessions were held where the
details of how a budget is
formed and presented were budget. Some of the points
discussed. that were discussed at stretch
were agricultural waivers and
This year the panel discussion
tax schemes.
saw an enthusiastic participa-
tion from three teams Alok & The teams were well sup-
Arpit, Divy & Gaurav G and ported by enthusiastic partici-
Ashish A & Rohit. The one and pation from the audience.
half hour session saw the
teams discuss on various top-
ics related to the just released
 IIMK’S FINANCIAL NEWSLETTER
BUDGET ANALYSIS
One of the top priorities for government
was taming inflation which remained at
around 5%. Rise in crude oil prices, dismal
performance of agriculture and excessive
capital inflows were major drivers for infla-
tion. The allotment to agriculture has been
done to increase supply side along with
inclusive growth.
Increase in (STCG) Short Term Capital
Gains Tax from 10 to 15% has been done
to monitor capital inflows and check specu-
lative flows which cause volatility in capital
market. This also means that FIIs and in-
vestors involved in short selling pay higher
taxes. Steps taken by RBI using SLR and
FIN GYAAN—WHAT IS CAPITAL GAIN?
A capital gain is income derived from the
sale of an investment. A capital investment
can be a home, a farm or a family busi-
ness . The capital gain is the difference
between the money received from selling
the asset and the price paid for it.
There are many irregularities imbedded in
the current tax treatment of capital gains.
One is that capital gains are not indexed
for inflation: the seller pays tax not only on
the real gain in purchasing power but also
on the illusory gain attributable to inflation.
The inflation penalty is one reason that,
historically, capital gains have been taxed
at lower rates than ordinary income.
Another irregularity of the tax is that indi-
viduals are permitted to deduct only a por-
tion of the capital losses that they incur,
whereas they must pay taxes on all of the
gains. That introduces an unfriendly bias in
the tax code against risk taking. When
taxpayers undertake risky investments, the
AROUND THE WORLD
1> US sub-prime crisis impacting India in a moder-
ate way – Tuesday 18 March, The Hindu
2>Fed‘s desperate moves in distressed times –
Monday 17 March, The Economic Times
3>Rupee drops to 6 – month low; further losses
seen – Monday 17 March
4>Inflation likely to inch towards 6% mark – Sun-
day 16 March
5>‘92 security scam: Broker Parekh convicted –
Friday 14 March
6>Mutual Funds—Business World Magazine 3rd
March Edition http://www.businessworld.in/
content/view/3759/3862
7>US recession to hit Indian Economy: CPM – 15
March, The Financial Express
Page 2
CRR will also be critical in curbing inflation.
taken major initiatives in agriculture, educa-
To boost growth, the FM emphasized on tion, public health, employment. To improve
consumption front by relaxing tax slabs for infrastructure, which still remains the biggest
public and cutting excise duty and CENVAT. bottle-neck for India‘s high speed growth, FM
stressed on creation of more PPPs (Public
FM‘s decision of 60,000 crore debt waiver Private Partnerships) and also approved 5
came after a dismal 2.4% growth in agricul- billion $ in SPV (Special Purpose Vehicle),
ture. Since modus operandi of financing whose funds will be used in infrastructure.
this waiver was ambiguous, share prices of
most national banks fell steeply as the Rupee appreciation has badly hit Indian
general sentiment in the stock market was exports sectors like IT sector. To curb this, an
that this waiver will result in significant exchange traded currency features market
cash outflow for these banks. will be developed to hedge the currency risk.
To emphasize on inclusive growth, FM has
government taxes fully any gain that they Take for example, the capital gains tax paid
realize if the investment has a positive on a pharmaceutical stock. The value of that
return. But the government allows only stock is based on the discounted present
partial tax deduction if the venture goes
value of all of the future proceeds of the
sour and results in a loss.
company. If the company is expected to earn
There is one other large inequity of the Rs.100,000 a year for the next 20 years, the
capital gains tax. It represents a form of sales price of the stock will reflect those
double taxation on capital formation. This returns. The "gain" that the seller realizes
is how economists Victor Canto and Harvey from the sale of the stock will reflect those
Hirschorn explain the situation:
future returns and thus the seller will pay
capital gains tax on the future stream of
A government can choose to tax either the
income. But the company's future
value of an asset or its yield, but it should
Rs.100,000 annual returns will also be
not tax both. Capital gains are literally the
taxed when they are earned. So the
appreciation in the value of an existing
Rs.100,000 in profits is taxed twice--when
asset. Any appreciation reflects merely an
the owners sell their shares of stock and
increase in the after-tax rate of return on
when the company actually earns the in-
the asset. The taxes implicit in the asset's
come. That is why many tax analysts argue
after-tax earnings are already fully re-
that the most equitable rate of tax on capital
flected in the asset's price or change in
gains is zero.
price. Any additional tax is strictly double
taxation.
Budget Related Links
1>Economic Times—March 1
http://economictimes.indiatimes.com/
“A budget is just a archivelist.cms?
year=2008&month=3&starttime=39508
method of getting 2>http://nitawriter.wordpress.com/2008/02/29/
india-budget-2008-2009/
worried before you
3>http://freemanstrikes.blogspot.com/2008/03/
spend money, as
analysis-of-union-budget-2008-09.html
well as afterwards. 4>http://news.bbc.co.uk/1/shared/bsp/hi/
“ pdfs/12_03_08bud08_impact_147.pdf
5>http://www.rediff.com/money/2008/
mar/03budget1.htm
 VOLUME 1, ISSUE 1 Page 3

A WAVE TO AGRICULTURAL WAIVERS FIN—CTIONARY

FOR—We believe they are not as 3> The amount would be offset back their due, FM is punishing
Annual Financial Statement –
bad as they look like because of against oil bonds which would them and setting up a wrong
A statement of estimated
following reasons: be spread over a period of 3 precedent. Secondly, deciding
receipts and expenditure in
1> They would help the banks years. Moreover the banks get only on basis of land‘s size is
respect to every financial year
to transfer their bad loans to rebate on the interest of the only considering partial POV.
– April 1 to March 31
government thereby boosting bad loans. So only a portion of Climate, soil fertility, irrigation
their lending capacity and re- the amount needs to be given facilities, etc are also as signifi- Cess – Additional to the basic
ducing their NPAs since almost afresh by the government. cant, but these have been ne-
tax liability, levied to meet
all of these loans will definitely - Alok and Arpit glected in selecting the needy
specific expenditure
go bad. So this would help farmers. Also, this waiver does
b a n k s FACE 2 FACE not help those farmers who Consolidated Fund – Most
have taken credit from private important government fund,
2> Farmers who would get the agencies instead of govern-
which shows the revenues
benefit can again get fresh ment. And the biggest issue is
AGAINST— The huge debt raised, money borrowed and
loans which would help them the ambiguity involved with fi-
pump in fresh money for agricul- waiver given to farmers gives nancing this waiver which has revenues from loans given by
ture. This would definitely boost out wrong signals from the gov- got stock market diving. government
p r o d u c t i o n . ernment. Firstly, instead of - Ashish and Rohit
awarding farmers who gave Contingency Fund – This 500
crore fund, which meets any
urgent and unforeseen expen-
FIN-TERESTING PAST diture, is at the disposal of the
President
1997 MBA from Harvard University New tax schemes introduced Excise Duty – A tax levied on
July 4 – NASA‘s Pathfinder and wore his trademark white New incentives given for invest- consumption of certain goods
probe lands on Mars shirt and gold bordered dhoti. ment by FIIs and NRIs Fiscal Deficit – Excess of total
Jul y 25 – KR Narayanan, the This man was Palaniappan Lowering of excise and customs expenditure over total non
first member from the Dalit Chidambaram, the then finance duties borrowed receipts
caste sworn in as President minister of India. Electronic equipment like televi- Fringe Benefit Tax (FBT) – In
August 31 – Princess Diana In 1996, Chidamabaram pre- sion became cheaper addition to wages, perquisites
dies in a car crash in Paris sented his first budget which Mass consumption items like or fringe benefits are paid to
September 5 – Mother Theresa was described by most as lack- toiletry, coffee etc became the employee. These are
dies of heart failure lustre. In 1997 he did a turn cheaper taxed under FBT

The year 1997 saw several ma- around. The Budget laid down a Overall, it was a ‗Dream Budget‘ Service Tax – Tax on services
jor events which shaped the road map for reforms. It was when it was announced, but rendered. Divided into direct
world for the good or the bad. In aligned with what he said after- later on it turned out to be a and indirect tax

India, one such event happened wards, ―The dream of 1997 was nightmare. Why, you ask? Let‘s Subsidies – Financial assis-
on February, the 28th. The Union a signal to the world that we are leave that for some other day tance provided by the Govern-
budget was presented on this ready to come out of our cocoon ment to individuals to be com-
petitive
day and it was termed as path and join the world.‖ The major
breaking or more popularly as points in the budget were as T-bills – Bonds with maturity
less than year, primarily is-
the ―Dream Budget‖. follows:-
sued to meet short term reve-
The United Front, led by Janata Lowering of income tax rate to nue and expenditure mis-
Dal with H. D. Deve Gowda as 30% matches.
the Prime Minister took over the VDS to harness ‗black money‘
country‘s affairs in the year announced
1996. Also part of this coalition Sops for the capital market.
was an individual, who was a Existing tax schemes modified,
 Page 4
Mail us at fy@iimk.ac.in
Financially Yours (FY) is the
finance interest group of IIMK.
FINANCIALLY YOURS The prime objective of FY is to
promote and develop an inter-
est in the field of finance.
Mridul M 9946103226
Through a variety of activities
Rohit J 9946102149
all round the year like holding
Saurabh K 9946102142
sessions, competitions, orga-
Viral S 9946660709 nizing seminars for Horizons
and management events for
We thank Reshma Umbarje for her Backwaters, FY facilitates the
valuable contributions learning process and encour-
age friendly competition
among fin enthusiasts.

However, being an ‗interest‘

group our efficient working
depends on the enthusiastic
participation from the stu-
dents.

With this issue of the newsletter we invite articles/interesting facts from the readers. This would be the first platform of sharing knowl-
edge amongst all the fin enthusiasts. Further look forward for suggestions and ideas for the coming academic year so that we can
plan accordingly.

FIN TRIVIA 1
1 4 5 2 7
Across: Down:
3
1. Liabilities > assets (7) 2. Contract where you pay a premium and 6 10 11
3. Gifts/bonds with redemption rate beyond 15 the latter will pay for some events (9)
years (5) 4. Excise Duty on _______ cars reduced to 8

6. Cost advantages that a firm obtains due to Nil (Union Budget 2008) (8)
9
expansion (Abbrv.) (3) 5. FTSE 100 index (7)
1
8. Capital gain + Dividend (Abbrv.) (3) 7. Public sector company having securities 3 12

9. A right by which you can possess goods of listed on stock exchange (6) 14

another until the latter fulfills the obligations (4) 11. ________ Income : Dividends obtained Solutions for Fin Trivia—
10. Money put aside by organizations to repay a by Shareholders out of post tax profits of UK
Newsletter (Reshma)
bond issue (Abbrv.) (2) companies (7) 1M 9A T I 18F 10A

12. Asset appearing as capital on Balance Sheet 2A N A L Y S T

R N 5 I T
(Abbrv.) (2) G U 11 H
M
13. A clause which asks the insured to bear a 3I I 6 F T S E
part of the claim on the occurrence of the event 4N T U M
7Y E 19A 13R T O
(Abbrv.) (2)
14A 12 E A N
14. Electronically transferring ownership of secu- M
8 R 15E 16L E A S E
rities to accounts (Abbrv.) (3)
17 C X L Y
M