Chaanakya 4_07

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vol UME

4.07

ISSUE

69

JULY 1st, 2010

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3

5

12

17

19

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Commodities Article

Investors check

Buzzword

Did You Know

Debate

Alumni Speak

Quiz & Crossword

Repo

Reverse Repo

Call rate

Ination (as on 14th June)

Forex Reserve (as on 25th June)

91day T-Bill

IIP (as on 11th June)

6.90 GS 2019

5.25 %

3.75 %

3.50 - 5.50 %

+ 10.16 %

$ 275.969 billion

5.3653 %

17.6 %

8.0907 %

1

CONTENTS

QUOTES

Rates

GRaPHs

Well, you know, Iwas a human being

before I became a

businessman-GEORGE SOROS

Its not your salarythat makes you rich,

its your spending

habits.-CHARLES JAFFE

44

44.4

44.8

45.2

45.6

46

31-Mar 1-Ap r 5-Ap r 6-Ap r 7-Ap r 8-Ap r 9-Ap r 12-Apr 13-Ap r

Rs/$

Rs/$

15000

15200

15400

15600

15800

16000

31-Mar 01-Apr 05-Apr 06-Apr 07-Apr 08-Apr 09-Apr 12-Apr 13-Apr

Gold(per 10 gram)

Gold(per 10 gram)

80

82

84

86

88

90


Oil(per bbl)

Oil(per bbl)

1000000

1500000

2000000

2500000

3000000

5100

5200

5300

5400

5500

31-Mar

01-Apr05-Apr 06-Apr07-Apr08-Apr 09-Apr12-Apr 13-Apr

future rates

open interest

5,000.00

5,100.00

5,200.00

5,300.00

5,400.00

5,500.00

16,500.00

17,000.00

17,500.00

18,000.00

18,500.00


se nse x n ifty

15000

15200

15400

15600

15800

16000

15-Apr 16-Apr 19-Apr 20-Apr 21-Apr 22-Apr 23-Apr 26-Apr 27-Apr 28-Apr 29-Apr

Gold(per 10 gram)Gold(per 10 gram)

80

82

84

86

88

90

15-Apr 16-Apr 19-Apr 20-Apr 21-Apr 22-Apr 23-Apr 26-Apr 27-Apr 28-Apr 29-Apr

Oil(per bbl)

Oil(per bbl)

16000

16500

17000

17500

18000

17-May 20-May 25-May 28-May

Gold(per 10 gram)

Gold(per 10 gram)

68

70

72

74

76

78

17-May 20-May 25-May 28-May

Oil(per bbl)

Oil(per bbl)

17200

17400

17600

17800

18000

15-Jun 17-Jun 21-Jun 23-Jun 25-Jun 29-Jun

Gold(per 10 gram)

Gold(per 10 gram)

72

74

76

78

80


Oil(per bbl)

Oil(per bbl)

45

45.4

45.8

46.2

46.6

47


Rs/$

Rs/$

8000000

14000000

20000000

26000000

32000000

5100

5200

5300

5400

5500

1 5 -J un 1 7- Ju n 2 1 -J un 2 3 -J un 2 5- Ju n 2 9 -J un

future rates

5,100.

5,200.

5,300.

5,400.

5,500.

17,200.00

17,400.00

17,600.00

17,800.00

18,000.00


se nse x nifty

Student

Cartoon

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inteRnational news

Leaders at the G20 summit in Canada have agreed to cut national budget decits by

2013 while endeavouring to promote economic growth.

Japans new government has pledged to slash corporation tax from 40% to nearer

25% and beat deation to achieve stable economic growth of 2% a year.

Chinas pledge for a more exible Yuan will slow nations exports this year, adding to

difculties that include the European Debt crisis and rising costs.

Volcker rule provision of Wall Street reform legislation being nalised by congress

would put a lid on domestic mergers and acquisitions by the largest US banks.

Finance Minister Pranab Mukherjee asked the central and western states and public

sector banks to extend mainstream banking facilities to the poor, small farmers and

micro-entrepreneurs.

RIL, RNRL sign revised new gas supply master agreement which would pave the

way for gas allocation to power plants being set up by Anils group company - Reli-

ance Power Ltd.

As Reserve Bank of India (RBI) has set July 1 as the date from which the base rate

regime will come into effect, the countrys largest lender State Bank of India (SBI) has

hinted that the banks base rate would be around 7.5 per cent.

The World Bank is committed to supporting Indias development agenda through the

record annual lending of 9.3 billion dollars for the current nancial year.

Insurance Regulatory and Development Authority (IRDA) announced drastic chang

es to Unit Linked Insurance Plans (ULIPS) cutting agent commissions, increasing

the lock-in period and making it a more risk-based product and also harmonise the

character of these popular investment schemes with that of designated long-termsavings schemes like provident funds which are eligible for tax exemption at the time

of withdrawal.

2

national news

By Elezabeth Merin Mathew, MBA-L

By Elezabeth Merin Mathew, MBA-L

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Globally commodities derivatives exchanges have existed for a long time. The CBOT andCME are two of the oldest derivatives exchanges in the world. The CBOT was established

in 1848 to bring farmers and merchants together. Initially, its main task was to standardisethe quantities and qualities of the grains that were traded. Within a few years, the rstfutures-type contract was developed.

Speculators soon became interested in the contract and found trading in the contract to bean attractive alternative to trading the underlying grain itself. In 1919, another exchange,the CME was established. Now futures exchanges exist all over the world. On these ex-changes, a wide range of commodities and nancial assets formed the underlying assetsin various contracts. The commodities included pork bellies, live cattle, sugar, wool, lumber,Copper, aluminium, gold and tin.

The few most popular and heavily traded are the: London Metals Exchange (LME), London New York Mercantile Exchange (NYME), NewYork Chicago Mercantile Exchange (CME), Chicago Chicago Board Of Trade (CBOT), Chicago London International Financial Futures And Op-tions Exchange (LIFFE), London

Tokyo Commodity Exchange (TOCOM), Tokyo Winnipeg Commodity Exchange, Canada.

TOP 5 MOST TRADED COMMODITY EXCHANGES

Commodity markets are varied around the World but all trade in similar commodities. Thetop 5 commodity markets (according to volumes) around the World include: New York Mercantile Exchange USA Tokyo Commodity Exchange Japan NYSE Euro next EU

Dalian Commodity Exchange China Multi Commodity Exchange India

NEWYORK MERCANTILE EXCHANGE

The New York Mercantile Exchange (NYMEX) is the worlds largest physical commodityfutures exchange, located in New York City. It is a primary trading forum for energy prod-ucts and precious metals. The exchange is in existence since last 132 years and performstrades trough two divisions, the NYMEX division, which deals in energy and platinum and

the COMEX division, which trades in all the other metals.

The New York Mercantile Exchange handles billions of dollars worth of energy products,metals, and other commodities being bought and sold on the trading oor and the overnight

3

By Mookambigai, MBA-N

Commodity eXCHanGes oF tHe woRld

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electronic trading computer systems. The prices quoted for transactions on the exchangeare the basis for prices that people pay for various commodities throughout the world.

Trading hours are in U.S. Central Time, the time in Chi-cago, where CME Group is headquartered, with oneexception: hours for Euro zone HICP futures and op-tions are in London time. The trading hours differ fromcommodity to commodity and it opens at 9:05 to 13:45and for some it starts at 7:55 A.M.

Commodities traded: Light sweet crude oil, NaturalGas, Heating Oil, Gasoline, RBOB Gasoline, Electric-ity Propane, Gold, Silver, Copper, Aluminium, Platinum,Palladium, etc.

TOKYO COMMODITY EXCHANGE

The Tokyo Commodity Exchange (TOCOM) is the second largest commodity futures ex-change in the world. It trades in to metals and energy contracts. It has made rapid advance-ment in commodity trading globally since its inception 20 years back. One of the biggestreasons for that is the initiative TOCOM took towards establishing Asia as the benchmarkfor price discovery and risk management in commodities like the Middle East Crude Oil.

TOCOMs recent tie up with the MCX to explore cooperation and business opportunities isseen as one of the steps towards providing platform for futures price discovery in Asia forAsian players in Crude Oil since the demand-supply situation in U.S. that drives NYMEX isdifferent from demand-supply situation in Asia. In Jan 2003, in a major overhaul of its com-puterized trading system, TOCOM fortied its clearing system in June by being rst com-modity exchange in Japan to introduce an in-house clearing system. TOCOM launchedoptions on gold futures, the rst option contract in Japanese market, in May 2004.

Commodities traded: - Gasoline, Kerosene, Crude Oil, Gold, Silver, Platinum, Aluminium,Rubber, etc.

LONDON METAL EXCHANGE

The London Metal Exchange (LME) is the worlds premier non-ferrous market, with highlyliquid contracts. The exchange was formed in 1877 as a direct consequence of the in-dustrial revolution witnessed in the 19th century. The primary focus of LME is in provid-ing a market for participants from non-ferrous based metals related industry to safeguardagainst risk due to movement in base metal prices and also arrive at a price that sets thebenchmark globally. The exchange trades 24 hours a day through an inter ofce telephonemarket and also through an electronic trading platform. It is famous for its open-outcry trad-ing between ring dealing members that takes place on the market oor.

Commodities traded: Aluminium, Copper, Nickel, Lead, Tin, Zinc,Aluminium Alloy, NorthAmerican Special Aluminium Alloy (NASAAC), Polypropylene, Linear Low Density Poly-ethylene, etc.

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yUan ReValUation

5

Yuan revaluation: Meaning & Implication

Introduction:

Latest news in the nancial papers was about China revaluing Yuan. So, let us try andunderstand what it actually means and the economic and nancial implications of it.Before understanding the implications, let us rst understand the two important termswhich is necessary to answer the questions that follow.

What is Currency Revaluation?

A deliberate upward adjustment in the ofcial exchange rate established, or pegged, bygovernment against a specied standard, such as another currency or gold. Revaluation

occurs exclusively in xed currencies, when the currency in question is pegged to anothercurrency. A government generally revalues its own currency when it wishes to make ad-justments to its peg to another currency.

What is Currency Devaluation?

It is the active decision of a government to reduce the value of its own currency vis-a-visother currencies. Currency devaluation occurs exclusively for xed currencies, or a curren-cy that is pegged to another currency. Governments often devalue their own currencies tomake their exports less expensive in foreign markets. If a company exports its products for

the same price in the local (devalued) currency, it is cheaper for consumers to buy thoseproducts in their own currency. If the currency is devalued it makes the countrys exportsless expensive in foreign markets.

Chinas Previous and current Move:

During the previous decade, Chinas Currency was pegged to the U.S. dollar at 8.28 RMB.On July 21, 2005, it was revalued to 8.11 per U.S. dollar, following the removal of the pegto the U.S. dollar. The revaluation resulted from pressure from the United Stated and theWorld Economic Council.The Peoples Bank of China also announced that the Renminbi

would be pegged to a basket of foreign currencies, rather than being strictly tied to theU.S. dollar, and would trade within a narrow 0.3 percent band against this basket of curren-cies. China has stated that the basket is dominated by a group of international currenciesincluding the U.S. dollar, euro, Japanese yen and South Korean won, with a smaller pro-portion made up of the British pound, Thai baht and Russian ruble.Last week the Chineseallowed the Yuan to oat a little vis-a-vis the dollar. The currency did move from that 6.82rate that it had remained for the last 23 months.

History of Chinas Currency:

The Renminbi was rst issued shortly before the takeover of the mainland by the Com-munists in 1949. One of the rst tasks of the new communist government was to end thehyperination that had plagued China near the end of the Kuomintang era.

By Niveditha Tiwary, MBA-M

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6

During the era of the command economy, the value of the RMB was set to unrealistic val-ues in exchange with western currency and severe currency exchange rules were put inplace. With the opening of the mainland Chinese economy in 1978, a dual track currencysystem was instituted, with Renminbi usable only domestically, and with foreigners forcedto use foreign exchange certicates. The unrealistic lev-els at which exchange rates were pegged led to a strong

black market in currency transactions.

In the late 1980s and early 1990s, the PRC worked tomake the RMB more convertible. Through the use ofswap centres, the exchange rate was brought to realis-tic levels and the dual track currency system was abol-ished.

The RMB is convertible on current accounts, but not capital accounts. The ultimate goalhas been to make the RMB fully convertible. However, partly in response to the Asian Fi-

nancial Crisis of 1998, the PRC has been concerned that the mainland Chinese nancialsystem would not be able to handle the potential rapid cross border movements of hotmoney, and as a result, as of 2003, full convertibility remains a distant goal.

Exchange Rate of the American Dollar vs. Chinas currency (Renminbi):

Chinas view:

The decision over Yuan revaluation becomes more political when some external pres-sures from the USA, Japan and Europe have intensied over the last two years, the Chi-nese authorities, nevertheless, are still reluctant to revalue the Yuan further. They insistthat Chinas banking system and nancial institutions must be improved before oating theYuan is considered. This may also be due to a fear of los-ing further competitiveness in Chinas exports followinga de facto appreciation of the Yuan since 1997. The ex-port sector has become more signicant in keeping theeconomy to grow, particularly when the unemploymentcreated by widespread layoffs from state owned enter-prises and sustained deation continue to develop.

National sovereignty is another concern that the Chi-nese authorities have to consider, since conventionallythey believe that the value of a countrys currency is aninternal issue so it should not be intervened by exter-nal pressures. A case against the Yuan revaluation hasalso emerged, particularly from the Chinese side. The Chinese authorities have arguedthat rstly the countrys foreign reserves are largely a result of the hot money, inows offoreign capital hoping to instantaneously capitalize on a Yuan revaluation, rather than longterm foreign direct investment in capital projects. In addition, China believes that tradesurplus is increasingly due to slowing imports, rather than growing exports. As investmentin xed capacity has declined, so has the demand for equipment and machinery, much ofwhich is imported.

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In addition, while Chinas trade surplus with the US exceeded $200 Billion in 2005, Chinaruns a decit with most other countries it trades with. Should the Yuan be signicantlyrevalued, China will face stronger competition from its Asian developing economies inthe markets of North America, Europe and Japan, as well as in these economies them-selves.

United States view:

Within the United States, the issue of appreciating the RMB is controversial. Manufactur-ers and textile producers are in favour of appreciating the RMB. However, many Americancompanies that depend on mainland Chinese factories to supply inexpensive products andcomponents, such as aerospace companies, computer manufacturers, discount retailers,and other companies are against appreciating the RMB. Furthermore, many economistshave pointed out that manufacturing jobs have been declining in the United States fordecades. Some people have suggested that blaming the lack of job growth on the valueof the RMB is merely a convenient misdirection on the part of the vested interests. Many

people in US feel that the large trade decit is due to the China.

Financial Consequences of revaluating or oating Chinas currency:

The nancial consequences of free valuation are complicated. Many economists believethat appreciation of the Yuan would cause the PRC government to buy fewer United Statestreasury bonds, causing bond prices to fall and bond yields to rise, hampering improve-ment in the U.S. economy. The ensuing depreciation of the US dollar might price oil out ofthe reach of the American economy, causing stagation, a collapse of US oil dependantindustries, massive unemployment and other dire economic consequences.

The Chinese economy is not growth driven and thus is not able to drive the world growtheven with its own higher growth rate. There are other problems with this government in-vestment and export driven economy such as fear of overheating and property bubble.The depegging of Yuan will help focus the Chinese economy on domestic demand andbalance it. If the domestic demand in China improves and other currencies are competitivewith Yuan then China can be able to drive the world economy.

Conclusion:

Thus the current Chinese move to revalue its currency and oat it partially against the dol-lar seems to be a smart and rather diplomatic move just before the G20 meeting in Torontobut it did add some optimism in Washington that Beijing may be getting closer to allow theYuan appreciate amid intensifying pressure to make a move.

As far as India is concerned there wouldnt be any major impact on India of the Yuansrevaluation. Indian exporters see only small immediate gains from the marginal 2.1% re-valuation of Yuan, but hope that if the Chinese authorities allow the Yuan to oat againstthe dollar even within the tight 0.3% daily band, there could be some respite from the low

prices at which Chinese exporters virtually dump their products in the global market. Thusa strong Yuan would benet Indian exports as it would make prices of Chinese goods morerealistic.

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ABSTRACT:

Enrons collapse is generally viewed as a morality tale - the natural result of managerialgreed, a clueless board, and feckless gatekeepers. But none of these aspects of the storyclearly distinguishes Enron from other major rms during the bubble era of the late 90s. Thismaterial identies certain economic facts from the many moving parts that was Enron, andorganizes them along two main threads. The rst describes Enrons major businesses, andthe incentives and constraints under which the managers of those businesses operated.

The second thread describes the basic nancial engineering tools developed by Enronsnance department. These threads are then woven into the timeline of Enrons ultimatecollapse. What emerges is a tale of how bad bets that resulted in good outcomes cameto be viewed by top management and the board as bets worth repeating on an ever-larger scale. Early success in highly risky ventures were ramped up and duplicated, underperverse incentives, into a nancial disaster. The rm then doubled down on that disasterwith non-economic hedges developed by the nance group.

The CFO, in a wholesale breach of his duciary responsibilities, including corruption ofvarious gatekeepers, managed to cloak the poor qualityof his hedges and his motivation in creating them. Thisduplicity prevented top management or the board from

fully recognizing or acting upon the danger that thosehedges posed to Enrons survival, until it was too late.The political and economic reactions to Enron are usefullyviewed in terms of these distinguishing elements of itsfailure.

Some facts and gure about company:-1.Enron, the 7th largest U.S. company in 2001,led forbankruptcy in December 2001.2.Enron investors and retirees were left with worthless

stock.3.Enron was charged with securities fraud (fraudulent manipulation of publicly reported)4.On October 16, 2001, in the rst major public sign of trouble, Enron announces a hugethird-quarter loss of $618 million.5.On October 22, 2001, the Securities and Exchange Commission (SEC) begins an inquiryinto Enrons accounting practices.6. On December 2, 2001, Enron les for bankruptcy.

How did the scandal happen?

Enron was formed in 1985 by Kenneth Lay after merging Houston natural gas andInter North. Several years later, when Jeffrey Skilling was hired, he developed a staff ofexecutives that, through the use of accounting loopholes, special purpose entities and

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tHe enRon sCandal

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poor nancial reporting, were able to hide billions in debt from failed deals and projects.Chief Financial Ofcer Andrew Fastow and other executives were able to mislead Enronsboard of directors and audit committee of high-risk accounting issues as well as pressureAndersen to ignore the issues.

Enrons stock price, which hit a high of US$90 per share in mid-2000, caused shareholders

to lose nearly $11 billion when it plummeted to less than $1 by the end of November2001. The U.S. Securities and Exchange Commission (SEC) began an investigation, andDynegy offered to purchase the company at a re sale price. When the deal fell through,Enron led for bankruptcy on December 2, 2001 under Chapter 11 of the United StatesBankruptcy Code, and with assets of $63.4 billion, it was one of the largest corporatebankruptcy in U.S. history.

Many executives at Enron were indicted for a variety of charges and were later sentencedto prison. Enrons auditor, Arthur Andersen, was found guilty in a United States DistrictCourt, but by the time the ruling was overturned at the U.S. Supreme Court, the rm hadlost the majority of its customers and had shut. Employees and shareholders receivedlimited returns in lawsuits, despite losing billions in pensions and stock prices.

As a consequence of the scandal, new regulations and legislation were enacted toexpand the reliability of nancial reporting for public companies. One piece of legislation,the Sarbanes-Oxley Act, expanded repercussions for destroying, altering, or fabricatingrecords in federal investigations or for attempting to defraud shareholders. The act alsoincreased the accountability of auditing rms to remain objective and independent of theirclients

Base rate implementation by Banks and its Impact on Borrowers

The RBI announced the guidelines on the new base rate system for banks which will replace theexisting system of Benchmark Prime Lending Rates (BPLR) effective from 1st July. This systemwas supposed to come in effect on 1st April but was deferred on bankers request.The base rate system will replace the BPLR system with effect from July 1 In order to givebanks some time to stabilize the system of base rate calculation, banks are permitted to changethe benchmark and methodology any time during the initial six month period i.e. end-December2010 --RBI

Benchmark Prime Lending Rates (BPLR) -The Existing system

It is the interest rate that commercial banks charge their most credit worthy customers. Accordingto RBI, banks are free to x the BPLR with the approval of their respective boards. Banks are freeto decide the BPLR but their interest rates have to have a reference to the BPLR xed.

9

Base Rate imPlementation

By Emili Mathew, MBA-N

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10

New Base rate system

This system sets a limit for the banks, below which no banks would be allowed to give commercial

loans. Base rate will be xed on the basis of cost of funds and other expenses to service the

customers. Benchmark base rates will be reviewed every 3 months.

The proposed replacement of the current BPLR with base rate system came as many banksabused the current BPLR and provided loans to corporate below this rate. The problem in the caseof BPLR is that when the interest rate falls, banks do not cut the PLR and therefore the borrowersdo not get the benet of fall in the interest rates. But when interest rates rises, they increase thePLR which lead to rise in variable rates also.

The replacement of BPLR with new base rate system will- Increase the transparency in lending It will force the banks to cut their base rates automatically if the interest rate in the market falls. It will benet the borrowers who borrow at variable rate which is pegged against the benchmark

rate.

Impact of the Base Rate implementation on Borrowers

In case banks choose the external market benchmark rate instead of the base rate as theirbenchmark rate, the borrower benets from any of the lower market interest rates. But to be on thesafer side, borrowers should not expect that the interest rates will come down as the new systemis implemented. This might not happen as there are several factors that determine the actual rateoffered.

Actual rate charged will be base rate plus borrower specic charges including product specic

operating cost, credit risk premium and tenure premium.Just because the base rate is lower than the previously used prime lending rate does not mean theborrowing cost for individuals will come down. Banks have full freedom to use any methodology tocompute the base rate or the minimum below which they will not be permitted to lend money. So,one cannot be sure of how benecial this system can be.

Benets that borrowers can get after implementing the base rate system are:

Transparency: In this new system, it will be clear to individuals what rate is being charged whichwill increase transparency and bring additional clarity.

More choices available: If there are difference in bank base rates and borrower specic ratesthen there will be a choice available to the clients.

The base rate will impact the variable loans on consistent basis. This will happen because atpresent the interest rate on loans is linked to other rates like PLR or BPLR. The interest rate onloans will be linked to the new base rate and hence a change in this rate will impact the loanseeker.

The base rate system would be applicable for all new loans and for those old loans that come forrenewal. In case existing borrowers want to switch to the new system, the RBI guidelines said an

option should be given to them before expiry on mutually agreed terms with zero charge.Ultimately, the base rate system can benet the borrowers only if banks compute the base ratesappropriately keeping in mind the interests of the borrowers.

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11

new UliPs noRms issUed ByiRda

Introduction:

On 18th June 2010, Government of India settled the two-month long tussle between IRDAand SEBI by ruling that Unit-linked Insurance Products (ULIPS) will be governed by theInsurance Regulatory and Development Authority (IRDA). The law ministry issued an or-dinance amending the RBI Act 1934, Insurance Act 1938, SEBI Act 1992 and SecuritiesContract Regulations Act 1956, clarifying that life insurance business will include any unit-linked insurance policy or scripts or any such instruments.ULIPs are those insurance products the value of which is linked to market price of thestocks in which a part of the money is invested.

New ULIPs Norms:

The Finance Ministry while ruling in favor of IRDA had recommended certain changes tomake the product more investor friendly. Some of the changes in the investment-cum-insurance products were, increased minimum insurance cover, capping of overall andsurrender charges and a minimum guaranteed return for pension plans.Consequently, IRDA has brought about certain changes in the structure of ULIPs whichwill be effective from 1st September, 2010.

They are as follows: Minimum guaranteed annual return of 4.5% on pension plans. Increased lock in period to ve years. Minimum insurance cover increase to ten times the annual premium for people below theage of 45 years. Even distribution of charges across the lock in period. A ceiling on maximum reduction in yield (the difference between gross and net yields)after the lock in period. A minimum mortality or health cover provided by all ULIPs other than pension and annu-

ity products.

Implications:

1. Increased lock in period from three years to ve years, including the top up premiums,will make UILP a long term instrument with better risk protection.2. Elimination of high front ending of expenses; all the charges will have to be evenlydivided across the lock in period. During this period, no residuary payments on policieswhich have lapsed, been surrendered or discontinued will be made.3. Capping of overall and surrender charges (IRDA has already capped the overall charge

on ULIPs from January 1) will reduce costs; caps have been applied on the difference fromthe fth year to the end of the policy term (3 per cent for a 10-year policy and 2.25 per centfor a 15-year policy).

By Sanjeeb Saha MBA-K

Gargee Mukherjee, MBA-L

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4. Stringent guidelines for capping expenses; small regular premium policies might becomeunviable. Thus, a large proportion of people who pay premium of less than Rs15,000 or so ayear (constitute about 35-40% of total policies sold by life insurance companies) will suffer.Again, the commission structure may not sustain an agents income which in turn may affectthe sales of the product.

The increased lock in period will reduce the exibility of the product; this issue has been ad-dressed by allowing loans on ULIP. The loan amount will not exceed 40% of the net assetvalue (NAV) where equity instruments > 60% of the total share and 50% of NAV where debtinstruments > 60 % of the total share.

Conclusion:

Apparently the new circular benets the investors. The measures taken by IRDA will addmore value to the policy holder and make the products more transparent. This will also im-prove persistency and provide long term and sustainable income streams for distributors.

The full impact of these steps on the industry players is yet to be ascertained as further clari-cations on certain clauses have to be made.

BUZZwoRds

Baby Bills

A nickname given to the hypothetical companies that would have formed if the JusticeDepartment had broken up Microsoft Corporation.

Bo Derek

A slang term used to describe a perfect stock or investment. In 1979 hit movie 10, ac-tress Bo Derek portrayed the perfect woman, or the perfect 10.

Stabilizer

An economic policy or program that increases or decreases automatically to offset the cur-rent economic trend without government assistance.

Chastity Bond

A bond designed to prevent unwanted takeovers by having a maturity that is activatedonce a takeover is complete.

Aunt Millie

A slang term for an uneducated or unsophisticated investor. The term is considered a de-rogatory remark in the nancial sector, often used to refer to poor investment choices.

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Food inFlation

By Gaurav Jain , MBA-K

Shekhar Gupta, MBA-K

For every percentage increase in food prices, an additional 16 million people arethreatened with hunger.- P. Chidambaram, Home Minister.

India uses the Wholesale Price Index (WPI) to calculate and then decide the ination ratein the economy. Most developed countries use the Consumer Price Index (CPI) to calculateination. The set of 435 commodities and their price changes are used for the calculation.The selected commodities are supposed to represent various strata of the economy and aresupposed to give a comprehensive WPI value for the economy. Individual WPI values for allthe 435 commodities are calculated and then the weighted average of individual WPI gures

are computed to arrive at the overall WPI.

Commodities are given weightage depending upon their inuence in the economy. The WPIis calculated on a weekly basis and the CPI is on a monthly basis. This is the reason whyIndia uses the WPI system.Government claimed that the food ination was the result of threeforces that are completely out of the governments controlthe cost and push effect, the de-mand and pull effect and the control over stock supply. All the three factors causes the foodination to rise and the government can only take steps to ensure it is under control.

Why food prices are soaring in India?

1. The Ration shops/ Supply company markets are not supplying the grains and sugar givenby the government to the common man. Holding is a common phenomenon seen in rationshops/petrol pumps, and those materials are then sold to other shops through Black.2. The main cause is, nowadays people are not cultivating vegetables because now they arepracticing Flat culture -- farmers sell their lands to Landlords, who in turn make Flats/malls,so agriculture land is converted to commercial land.3. The prot margin in cultivation is less for the farmer; actually heavy margin is there forsuppliers /middle distributors; thus actual farmer is getting only 4 rupees, even if a vegetable

is selling in a vegetable stall for 16 rupees.4. Prices of most pulses too, are high due to a supply-demand mismatch. Currently, there isa shortage of 4 million tonnes of pulses in India and the impact of late monsoon on the plant-ing of Kharif pulses is also weighing on the prices.5. Climate-related changes do affect the availability of food items, but the current rise in thefood bill is too steep to attribute only to the weather.6. With the government affecting a hike in fuel prices, food prices have shot up even fur-ther.

What can be done?

1. Overhaul institutions like the Indian Council of Agriculture Research (ICAR), AgricultureUniversities and the food distribution systems.

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2. Stringent punishment for Black hoarders.3. Address Global Warming and Climate Change.4. Conserve every drop of water.5. Universal consensus on Genetically Modied food.6. Connect farmer and the end user.7. Proper enactment of the Rural Employment Guarantee Act.8. Special Agricultural Zones (SAZ) in line with Special Economic Zones (SEZ).9. Control population, in turn to control the future demand.10. Small and marginal farmers should have equal access to credit, fertilizer, improvedseeds, pesticides, electricity, and water.

The extraction of liquidity from the economy due to the 3G Spectrum has forced the Govern-ment to bring in more liquidity in the means of Government Securities buy back and similarmethods which further causes the food ination to rise.

14

Goldman saCHs and tHe GReeK deBt CRisis

By Samson Sujinder, MBA-K

In the previous issue of Chaanakya, we got a clear understanding of the ongoing Europeandebt crisis. This particular article throws the spotlight on the role of Wall Street giant Gold-man Sachs in the events that led to the bankruptcy of Greece.

The euro membership rules place strict caps on the size of government decits relative to

a national economy as part of its EU Maastricht framework. The Eurozone rules dictatethat governments must keep a countrys decit below 3 per cent of its GDP and must havea total debt of not more than 60 per cent of GDP - rules that Greece did not keep to, evenduring the economic boom!

Goldman Sachs has been the most important of more than a dozen banks used by theGreek government to manage its national debt using derivatives. The banks traders cre-ated a number of nancial deals that allowed the country to raise money to cut its budgetdecit now, in return for repayments over time or at a later date, thereby masking the trueextent of the nations off-balance sheet debt gures by pushing part of their liabilities into

the future.

A deal struck between Goldman Sachs and the Greek government in early 2002 involvedcross currency swaps in which government debt issued in dollars and yen were swappedfor euro debt for a certain period to be exchanged back for their original currencies at a laterdate. Such cross currency swaps are commonplace in the nance world, but in the Greekcase Goldman Sachs devised a special kind of swap with ctional exchange rates (arti-cially low rate) which enabled the Greeks to receive a far higher sum than the actual euromarket value of the 10 billion dollars/yen transacted thereby arranging additional credit to

the tune of 1 billion dollars which was an up-front payment of Goldman Sachs to Greece.This credit wasnt disclosed in the countrys nancials and hidden from Eurostat (the EUsofcial statistics agency). While it arranged the swap, Goldman also sought to buy insur-

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ance on Greek debt and engage in other trades to protect itself against the risk of a defaulton those swaps! Goldman Sachs meanwhile made a unique prot by charging a mammothcommission for the deal ($ 300 million) and then proceeded to cunningly sell the swap tothe National Bank of Greece for even higher prot in 2005 thereby ridding itself of all netexposure to a default on Greek debt.

Post the swap deal that allowed the government to hide its decit, Goldman Sachs earned$24 million dollars by underwriting bonds sales to raise $15 billion for Greece. These bondsin turn were used as collateral for further borrowings from the European Central bank(ECB). No mention was made about the swaps in the sales prospectus documents of the10 bond sales the bank arranged thereby hiding the inherent risks involved from investorsand regulators.

Moreover the swap deals were hidden from public view and were undisclosed in the countrysnancials as they werent considered as loan entries. In all its efforts to obscure Greecesdebt, the rules were circumvented legally hence punitive action against the savvy bank is

doubtful despite the long term damage it aficted on a nation for the sake of prot.These revelations have thrown more bad light on the investment bank that is already beingcriticized for its role in the recent sub-prime mortgage crisis and its controversial nancialproducts such as CDOs (Collateralized debt obligations) and CDS (Credit default swaps).

How did Goldman Sachs manage to arrange the deal, make substantial prot margin fromit, hedge the whole credit exposure (by buying insurance on the default of Greece) andeventually underwrite Greek debt issues without revealing the deal to investors and getaway scot free? This scandal highlights once more the conicts of interest which still have

not been resolved in the nancial system. More investigations are required to know whatexactly happened, but, if suspicions are conrmed, this kind of attitude from investmentbanks like Goldman Sachs represents a problem in terms of ethics and poses a threat tothe trust needed for the functioning of nancial markets.

15

PaRtial deReGUlation oF FUel PRiCes

By Sanjeeb Saha, MBA-K

Gargee Mukherjee, MBA-L

Introduction:

On 25th June 2010, in a major decision to bring petroleum products in line with marketrates, the government freed petrol from all pricing controls. Diesel prices have been par-tially deregulated in the sense that further increases will be made by the public sector oilmarketing companies (OMCs) only in consultation with the Ministry of Petroleum and Natu-ral Gas. As of now petrol price has been hiked by Rs 3.5/liter and diesel price by Rs 2/liter,households will have to pay an additional Rs 35 per cylinder and cooking fuel kerosene willbe dearer by Rs 3/liter. This hike was necessitated by the rising gulf between the cost of

production and the retail prices

State oil rms currently lose about Rs 215 crore per day on selling fuel below the imported

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cost. At present, petrol is being sold at Rs 3.73/liter below its cost, diesel at a loss of Rs 3.80/liter, kerosene at Rs 18.82/liter and domestic LPG at a discount of Rs 261.90 on every 14.2-kg cylinder.

Such decontrol rst happened in April 2002 ,when the NDA government was in power butwas later rolled back - partly by the NDA and then fully by the UPA - when oil prices started

rising.

Implications:

Petrol & Diesel:

The partial implementation of Kirit Parikh Committee recommendation will improve thecash ow for OMCs and reduce their borrowings. This, in turn, will greatly reduce their inter-est burden and increase net prot.

Decontrolling will entail a greater role for the private sector with the government forcingits PSUs to sell at below cost prices, private rms like Reliance stopped retail sales severalyears ago. Now that prices are getting back to free market levels, these rms are likely to beback in business. In 2006, Reliance had a 13-14% market share in diesel sales. Getting backthat market share and more could take just a couple of years, maybe less.

PSU oil rms have about half the gross renery margins that RIL has, as they have mucholder and smaller reneries. If they still lose Rs 15000-20000 crore this year, in addition tothe Rs 55000 crore they already lost over the previous ve years, there will probably be no

hope for modernization. But still it would benet the PSUs as they had projected to lose Rs74300 crore in revenues in 2010-11 scal and after the hikes, they will be saddled with Rs53000 crore of losses instead.

The three OMCs namely, Indian Oil, BPCL and HPCL will now be able to compete freely.On the combined turnover of Rs 530,000 crore, if they can generate even 5% net prot, allthree companies could gure in the list of Indias top 10 prot making companies. This willboost their share prices and benet retail investors by way of attractive dividends.

Kerosene & LPG:

The government would continue to heavily subsidize both kerosene and LPG. Kerosenerates went up by Rs 3/liter, the rst increase in the poor mans cooking fuel in more than 8years to cut government subsidies. But basically it is a waste of money because, only 1.3%of all rural households use kerosene for cooking. Interestingly, while the number of house-holds using kerosene fall a third between 1999 and 2005, the government cut the keroseneallocations under the PDS by just 13%.

Economy:

Fuel accounts for a quarter of Indias estimated $25.6 billion subsidy bill.The oil industrysderegulation is essential to maintain the scal health of the country, which has a decit targetof 5.5% of GDP for FY11.

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In the short term, concerns on inationary pressures caused by the fuel price hikes couldbe deterring. It is anticipated that such price hike may increase the ination rate by 0.9 -1%.RBI may be prompted to monetary tightening by increasing policy rates before a policyreview on July 27 in order to control inationary pressure and if that does not happen, wemay see a 50 basis points increase in both policy rates.

Conclusion:

Increase in fuel prices generally has a depressing effect on the economy. But as fuel hasa very low elasticity of demand, it tends to pull out resources from other forms of expendi-ture to compensate the extra outow. Despite the hike, retail fuel prices in India continueto remain lower than those in most European and South Asian countries. Pricing of fuelhas traditionally been a highly politicized issue because of its direct impact on the public

transportation cost and food ination. Probably, this was a much needed bold measureand the government has taken the rst step in the right direction.

did U Know

History of Taxation

The history of taxation can be traced back to time immemorial and it is not a recent devel-opment by any means. A thorough research on the history of taxation system shows thattaxes were levied on either on sale or purchase of merchandise/livestock.

Further, the history of taxation suggests that the processof levying and the manner of tax collection were not or-ganized. But it suggests that all historical leaders andhead countrymen collected taxes to run its authority. Inother words taxes on income, sale, purchase and prop-erties were collected to run the ruling Government ma-

chineries.

Further, these taxes were collected to meet their mili-tary and civil expenditure and also to meet the commonneeds of the subjects like maintenance of roads, drain-age system, government buildings, administration andother functions of the region. This laid the foundation for the Indian Tax machinery.

There were no homogeneous tax rate structures. It depended on the production capacity

and the type/ nature of the commodities. The tax rates varied according to the quantum ofannual production. These taxes were collected in cash or in kind and it entirely dependedon the type of commodity or service on which it was levied upon.

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For example, there was a very common practice of selling food crops and cash

crops to government machineries against no money.

The history of taxation suggests that these were doneto store government buffer stocks to meet emergencies.Taxes were levied on all classes of citizens, like actors,

dancers, singers and even dancing girls.

Taxes were paid in the form of gold-coins, cattle, grains,raw-materials and even by rendering personal service.

In India, the tradition of taxation has been in force sinceancient times. It nds its references in many ancientbooks like Manu Smriti and Arthasastra. There hasbeen a perfect mixture of direct taxes and indirect taxes.

Indias history of taxation suggests existence of a large and composite taxable popula-tion. With the advent of the moguls in India, the country witnessed a sea of change in thetaxation system.

Although, they also practiced the same norm of taxation, it was more homogeneous inits structure and mode of collection. The period of British rule in India witnessed someremarkable changes in the whole taxation system.

Even though it was highly in favour of the British government and its exchequer, it incor-porated modern and scientic method of taxation tools and systems. In 1922, the country

witnessed a paradigm shift in the overall system. An administration and taxation systemwas set up. The Indian taxation system thereafter witnessed rapid growth and modern-ization.

The financial capital is being concentrated by corporations, institutional investors, and even ourpension funds, and being reinvested in companies that repeat this process because it provides the

highest return on that financial capital.

- PAUL HAWKEN

A persons credit report is one of the most important tools consumers can use to maintain theirfinancial security and credit rating, but for so long many did not know how to

obtain one, or what to do with the information it provided.

- RUBEN HINOJOSA

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19

deBate

By Paul george, MBA-N

FOR / YES

How much debt does Greece owe?

$367 billion to other European countries.

How much does Ireland owe?

$865 billion.

How much does Spain and Italy owe?

$1 trillion each (mainly to France Britain andGermany).

How will France, Britain and Germany

recover this money?

They have to be bailed out but the questionis who would bail them out.

How seriousis the Euro

crisis for the

rest of the

world?

The initial con-cern when theGreece crisiserupted per-tained to thenancial mar-kets and sov-ereign credibility. These are still serious is-sues as there are apprehensions of othercountries joining the fray, with Spain nowbecoming the epicentre of the crisis.

But the real concern is, how will growth inthe real sector be affected? The EC says

that there has been positive growth in thisregion in the rst quarter, thus dispelling thefear of a recession. The IMF has projected

AGAINST / NO

When the RBI Governor was confrontedwith a similar question last week, he quotedProblem is in Europe, not in US; this is anexample to show how condent the globalmarkets are to tackle this as a minor issue.

To support this statement there are ve eurozone countries in the top 10 GDPs of theworld, but still all ve GDPs put together isnot more than the GDP of USA alone.At rstglance its not obvious that there should bea crisis in Europe at all. Even if Greece wereto default on its debt and this would mostlikely be a rescheduling or a restructuringrather than a large-scale cancellation of the

bulk of Greeces debt.

This would involve a relatively small amountof money compared to the resources thatthe EU has available to bail out any affectedbanks.And Spains debt is much smaller,relative to its economy, than that of Greece:its about 60% of GDP, well below the EUaverage of 80%

As the origin of the problem lies in scal pol-icy, condence needs to be re-establishedthere. Strong and coordinated signals mustbe sent out to the public about the ability ofthe weak states in the Euro zone to put theirscal situation in order, accepting the impo-sition of strong monitoring and discipline onscal policy by the Unions institutions. Thatis exactly what the ECB is doing by conduct-

ing the Stress Tests to their prime banksand ensuring the condence is restored.Moreover sovereign debt crisis has been

WILL EURO CRISIS LEAD TO GLOBAL RECESSION?

By Bhargav K, MBA-J

Rajdeep Rathi, MBA-JAnvin Allen , MBA-NCaroline jacob , MBA-N

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a growth of 1% for the year after a negativegrowth number last year. However, all thebailout packages for these countries, startingwith Greece (bailout package of 140 billion,of which 40 billion came from the Interna-tional MonetaryFund, and therest from theother euro-zonecountries) havea commitmentof scal tighten-ing. A rollback inspending levels

will have an im-pact on demand.

The rest of the world will feel the effects of theEuro crisis via these important channels:

The crisis will lower growth in Europe, amarket toward which about a quarter of worldexports are destined. It will lead to further Euro depreciation,sharply reducing prots from exports to Eu-rope while also increasing competition fromthe continent. The crisis will add greatly to the volatil-ity of nancial markets and will lead to boutsof risk aversion. Another important point here is that thecrisis could deal a mortal blow to many fragilenancial institutions.

A failure to contain the crisis will raisethe alarm on sovereign debt in other indus-trial countries and inevitably in any exposedemerging market.

The collapse of the nancial system as weknow it is real, and the crisis is far from over.The aws in the euro have the potential todestroy the 27-nation European Union. A re-cession next year is almost inevitable given

the current policies.

with Greece for many years. There is noth-ing intrinsic about such crisis, that they needto become important shocks to the broaderglobal economies.

European Union was formed with the mo-tive of doing trade within its group in a prot-able manner and help each other during thecrisis situation. Its motive is well served dur-ing this current crisis through the $ 1 trillionbailout package for the Greece government.The European Union is similar in nature tothat of India in the way of its structure. In-dia constitutes of 29 states and Euro zone

constitutes 27 countries, some are poorand some are rich, so any weakness in onestate can be set off against the strengthsof the other state. Similarly, in Europe thecrisis of PIIGS country can be made betterby the performing economies like Germany,France and Britain among others.

Ination, which is the major indicator of eco-nomic well being, is at moderate levels of1.4% to 1.6% in the Euro zone. The exportsof Euro zone has reached to high of 3% af-ter 44 months during the month of May. EuroCentral Bank has reduced the interest ratesto a record low of 1% to reduce the burdenon the euro zone governments. Euro zoneGDP is still projected to grow at a rate of1.2% for the current nancial year.

United States of America which is the majoreconomy in the world constitutes only 13%of its GDP as exports, of this only 20% isexported to Europe. The dollar has beenstrengthening off late. These facts stressmore on the healthiness of the global econ-omy leader and its rippling effect.

So,It will take some time to cross this badtime in its economic cycle but will surely

emerge as a stronger union.

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By SMITHA JOSEPH

CLIFFORD CARDOZA

MOHIL KAPOOR

alUmni sPeaK

In this edition, we have Mr. MAHIDHARA DAVANGERE to give us insights on corporatelife.

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Chaanakya: What does your job involve?A) Pramartha Investment Partners is a Boutique Investment Bank. As an Investment

Consultant, my job involves identifying investment opportunities to our clients - both insti-tutional and Private.

Chaanakya: As an investment consultant what are the various factors you take into con-sideration before you offer your service?A) Understanding the clients requirement becomes the foundation on which we custombuild our services. We build a Risk matrix of every client. Each case is different and theclients nancial risk appetite keeps constantly changing.

Chaanakya: Can you share your experience about how it has been in the corporate world

initially and the changes those you underwent?A) I started off as an Ofcer in Citi nancials where I did Credit analysis which involvedqualifying a customer for his eligibility to avail a personal loan. From there I moved to Oc-wen and joined the company as an Underwriting Analyst. Here my role involved dealingwith US Mortgage Underwriting and Due Diligence process, particularly w.r.t. Post Clos-ing Analysis of Mortgage Loans before they enter the Secondary MarketIn My last job I worked as a Senior Equity Analyst in Indian Ocean Rim Asset Manage-ment analysing Australian Small Cap Stocks, building Financial Models ( including RatioAnalysis, Forecasting, Quantitative Research, compliance research etc), building com-

plex excels models (using VBA Macros) to forecast and analyze the Stock Market.My stint as an Equity Analyst gave me immense exposure to the world of Investments andit paved the way to open my own rm.

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Chaanakya: What can you suggest to the students who are looking for a job prole as youare into now?

A) To work or to start an Investment Consultancy you need to start thinking about buildingyour knowledge base and your own brand. Dont just think MBA is the end of the world andthat it will take you places. You have to constantly upgrade your skills. You have to come

out of the traditional paradigms of studying a particular subject, rather you should think ofknowledge as inter-disciplinary. Keep your minds open to learning.

Chaanakya: What has made you to take up many other courses after MBA? What othercertications or add on courses have you done and how have they helped you in gettinga job or retaining one?A) Updating ones knowledge is paramount, especially given the fact that the factors thataffect markets keep changing and there is simply too much information to process. Most ofthe courses I pursued after my MBA were correspondence courses mainly to supplementmy knowledge at work and also to increase my credibility in the market. I did MFC (Master

of Finance and Control) to understand Accounting in a better fashion. Mathematics wasalways my passion and having strong mathematical background is a plus point in invest-ment eld. Keeping this in mind I completed my MSc (Maths) simultaneously.I am currently pursuing Actuarial studies from Institute of Actuaries, UK leading to Fellow-ship in Actuaries (At present. there are only about 200+ Actuaries in India). I am also acandidate member in the CFA (Chartered Financial Analyst) program of the CFA Institute(US) which is considered Gold Standard in investment profession. This will lead me to beone of the very few Investment Actuaries in the country which will in turn help me the edgeto run my Investment Firm.

Chaanakya: The placements for the senior students start a few months from now. How doyou think should the students start preparing themselves for the placements?A) If you already have work experience I dont need to tell you much on how you need toprepare for your interview. However for both Freshers and experienced candidates it isextremely important that you know about yourself and your goals clearly. Get acquaintedwith current affairs and know your subject matter very well. Read about the company forwhich you are attending for interview, if it was in news recently and also have a look attheir website and their products and services. It is always better to prepare a write upabout yourself and get yourself ready with possible interview questions before hand as it

will add to your condence.

Chaanakya: As a recruiter what are the qualities, qualications, additional certicationsthat you would look for as a minimum criteria?A) This is a very subjective question. I only try to see if the candidate is right person for thejob, irrespective of the qualication he or she has. Nevertheless, dont stop learning andupgrading your skill. Otherwise, you may get your rst job and move on. But you may soonbecome stagnated, once another new generation takes over!

Thank you and all the best

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Quz

Across

5. GIC special investments,the private equity arm of Singapore Governments GIC has an-nounced a 380 crore infusion in whichHealthcare6. Allows issuer to extinguish the noteat a pre-determined time.

Down

1. Credit Default Swaps are usuallymeasured as the cost incurred to insurehow many dollars against the risk of de-fualt.2. Temporary reduction in the sellingprice of an item to stimulate demand orto drive a competitor out of the market.3. Among the Euro zone countries,whichcountrys bond spread has remainedstable and low within the bloc during

June2010.4. A member of a stock exchange whowas hammered and expelled from the membership for being unable to meet nancial orcontractual obligation.

Identify The Logos.

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Crr

1 2 3

4 5

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ar

Quz

Crr

Manesh Paul Mani Editor-in-Chief

Sachin Cartoon

Amutha Priya D News

Nivedita Tiwary Investors check

Poornima Sasikumar Student Article

Nithya Prakash Scam

Mookambigai Commodities Market

Niveditha S Debate

Clifford Cardoza

Smitha Joseph &

Mohil Kapoor Alumni Speak

Amar G M Quiz & Did You Know

Mantri Ankit Atul Quotes & Buzz Words

Pottim Sahiti Reddy Crosswords

Vipul Jain Graph, Rates

Bhargav K Design and Editing

Pradeep Thangavel Compiling and Editing

Dhanya Anna Kurian

Resmy Sebastian Review Committee

1. Grameen Bank

2. NABARD

3. Bank of Japan

4. IndusInd Bank

5 BNP Paribas

t

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