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Volume 1, Issue 1 THE MONTHLY FINANCE MAGAZINE FROM IIFT KOLKATA March 2007 Volume 1, Issue 1 Page 2 Credits Idea Inception – Deepak Kundu, Rishikumar Singh Editors – Daanish I.S. Gill, Johan Jose Creativity & Design – Daanish I.S. Gill, Rajat Matta, Srinivasan Selvam This publication is solely meant for internal circulation and not for any commercial purpose. Volume 1, Issue 1 1 March 2007 The Finance Magazine, IIFT Kolkata Blame game of global financial imbalances With a huge trade surplus with USA, is China holding the world’s largest economy Inside this issue: hostage? By Gaurav Pundlik Page 4 Dude of the Month- 10 John Maynard Keynes An Introduction to the Forex Market Welcome to the market that never sleeps, Ankit Jain and Ankur Jhunjhun- wala get down to the details of what is the world’s largest yet least publically known market. Page 5 How to finance Infrastructure in India? The lighter side: 15 Infineeti takes a sneak peek at CAs Can India really use its bulging Forex reserve for funding Infrastructure? Gaurav Shekhar highlights the pitfalls of getting creative with India’s for- M & A in Focus: 17 eign currency reserves. Page 8 Tata - Corus Deal Inside I-Banking 20 Financial Inclusion 21 Carousal Fraud Market report 26 Pankaj Kothiyal and Aditya Agrawal take a look at how dubious compa- Budget Factoids 29 nies evade VAT in the European Union. Page 13 Innovative ways to improve the capital markets and classroom attendance. Page 24 Page 4 INFINEETI Meet the co-ordinators Dear Readers, There are those who are called visionaries, who are able to predict the need and tap the aspirations of those who feel bereft of a common podium to express their thoughts, their beliefs and their ideas. IIFT Kolkata felt a need for a similar podium where its students, its most important asset, are able to express their thoughts and their view-points. Ladies and Gentlemen, CASH-O-NOVA, the Finance Club at IIFT, Kolkata proudly announces the launch of its first ever in-house magazine dedicated to the cause of devel- opment of financial interests – “Infineeti”. Gone are those days, when Finance heads and its managers used to work as second fiddle acting as one of the vertical pillars of a company and acted as a support function. Now the finance heads play a very important role in strategizing the growth of the company .The recent slew of multi-billion dollar M&As, reflecting the growing appetite of Indian companies, brought to fore the need for dynamic and visionary finance heads, who understand their role the best. This magazine brings to the forefront all the happenings in and around finance. Don’t worry; we have also taken sufficient care to ensure that the magazine is fun to read. The things which you will love are the innovative instruments our writers have developed to keep your interest. Especially a small surprise in the form of the finance club’s mascot somewhere in the magazine. Read it to find out. This magazine would not have been successful without the active support of Finance club members and our batch mates at IIFT Kolkata. We are thankful to our Director, our faculty members and our adminis- trative staff to help us in providing some useful suggestions for the magazine. The coordinators are particularly thankful to Daanish and Johan for their exclusive and unparalleled support in the capacity of editors to the magazine. They have put up an excellent work and have worked distinctively, a reflection of their own styles. CASH-O-NOVA wishes its seniors at IIFT Delhi a happy and prosperous career. We hope they will be our guiding lights and help us along in our endeavors. Coordinators, CASH-O-NOVA Deepak Kundu Rishikumar Singh Volume 1, Issue 1 Page 5 The Editor’s Note Dear Reader, The thought of launching a dedicated finance periodical had long been on the minds of those involved in the activities of the finance club here at IIFT Kolkata. Hence it is with great delight that we present to you the maiden issue of IIFT Kolkata’s finance magazine, “Infineeti”. Infineeti, as the name suggest is boundless in its scope, covering the entire spectrum of the ever- expanding financial domain. Our neeti is a concerted effort to bring about a culture of financial aware- ness and expertise amongst the students of our illustrious institute. The debut issue starts with Gaurav Pundlik examining the critical role that China plays in keeping the U.S. economy afloat. Ankur and Ankit team up together to further sharpen our knowledge on the often overlooked forex market. Staying with forex, Gaurav Shekhar delves into the fallout of using India’s bur- geoning forex reserves to finance infrastructure. Our very own editor Daanish Gill takes time away from his editorial responsibilities to expound upon our ‘Dude of the Month’, John Maynard Keynes. Pankaj and Aditya expose some of the sneaky techniques used by companies in the E.U. to avoid VAT (we sus- pect this article is for your future benefit). Mergers and Acquisitions seem to be the buzzword these days, and Sumeet gets straight into the nitty-gritty of the Tata-Corus deal. Another word that rings well in our ears is I-Banking, which Ajay takes head-on. Deepak tries to simplify the technical, with inputs on ‘Financial Inclusion’. We have a little fun with both editors’ miserable attendance records and find hidden opportunity in it, as cited in an open letter to the Center Head. Rishi serves up the latest, steam- ing financial news straight out of the capital markets. And in closing, Dipendra Tulsiyan joins in with some interesting facts in run up to the much-awaited Union Budget. Looking at the content and quality of the above listed contributions, the editorial & production team at Infineeti has to stand up in applause. The final product you see before you has far exceeded any expecta- tions, thus reaffirming our notions that this batch of IIFT Kolkata 2006-08 has some inherent talent when it comes to magazine, and in recent times, film production. So congratulations to all involved. To those who first dreamt of starting this magazine, to those who re- alized that dream, to those who will read this supreme effort and spread the good word on it. As we say quite cleverly at Infineeti, we’ve come a long way, but the possibilities at Infineeti are truly infinite! Warm Regards, The Editors Infineeti Daanish I.S. Gill Johan Jose Page 6 INFINEETI “Blame Game” of Global Financial Imbalances By Gaurav Pundlik deficits by purchasing treasury The question of “How long the bonds using global economy can endure the money it gets United States’ burgeoning trade from its ex- deficit” has been giving hiccups ports. If to almost every trading partner China decides if that country. While USA not to do so, blames China for its underval- that would ued currency, the rest of the further weaken the dollar and To solve this impasse, Joseph world points towards the mas- bring down its forex reserves Stiglitz suggests “expenditure sive American trade and fiscal (presently standing at $1 tril- cuts with increase in taxes on deficit. lion). The competition benefiting Upper-income Americans and China’s trade surplus is the re- out of China’s reducing its export reduction in taxes on lower- sult of its undervalued exchange share would start investing in income Americans”. If appropri- rate. Although China has stronger currency, like the euro ately designed such combination strengthened it’s Yuan relative or hold more reserves at home. can increase the poor’s spending to the dollar and eliminated ap- Here again United states will power and reduce the deficit. He proximately $120 billion a year’s find it difficult to finance its fis- also draws our attention towards trade surplus with USA, there cal deficits, bringing the world Keynes’ idea of adopting a new seems to be no significant change order to even greater instability. international currency to reform in America’s multilateral trade Further exaggerating the prob- the global monetary system that deficit because it now buys fewer lem was the wrong execution of a will “really” make globalization textiles from China and more good idea i.e. increasing house- work. from Bangladesh, Cambodia and hold savings as the US Govern- Till then, wait and watch or... other developing countries. How- ment did by cutting taxes .This BLAME? ever stronger Yuan has made actually reduced the national imported American food cheaper savings because cost to the gov- in China, thus hitting Chinese ernment from loss of revenue farmers badly as they see their was greater than the increased incomes fall. As a counter attack- household savings. ing strategy, China might well One probable step the govern- choose to divert all money ment could have taken was to needed badly for its industrial cut its expenditure, but this production towards agricultural would have weakened the US subsidies so as to keep its farm- and global economy. To nullify ers competitive. . This step could this, the Federal Reserve may bring an imbalance in China’s have lowered interest rates to present share of agricultural encourage the debt-ridden (11.9%) and manufacturing Gaurav Pundlik American household to procure (48.1%) output as part of its more credit in the form of loans GDP; with the former increasing to pay for spending. This would and pulling down the latter. have made the common man’s China helps in financing US future even more insecure. Volume 1, Issue 1 Page 7 An Introduction to the Forex Market Ankur Jhunjhunwala & Ankit By AnkurJhunjhunwala and Ankit Jain Jain The Forex market is a nonstop cash market where currencies of nations are traded, typically via brokers. For- eign currencies are constantly and simultaneously bought and sold across local and global markets and -change rate of EUR/USD on Aug 26th, traders' investments increase or de- 2003 was 1.0857. This number is also crease in value based upon currency referred to as a "Forex rate" or just movements. Foreign exchange mar- "rate" for short. If the investor had ket conditions can change at any bought 1000 euros on that date, he time in response to real-time events. would have paid 1085.70 U.S. dollars. The main enticements of currency One year later, the Forex rate was dealing to private investors and at- 1.2083, which means that the value of tractions for short-term Forex trad- the euro (the numerator of the EUR/ ing are: USD ratio) increased in relation to the • 24-hour trading, 5 days a week U.S. dollar. The investor could now sell with nonstop access to global the 1000 euros in order to receive Ankit Jain Forex dealers. 1208.30 dollars. Therefore, the investor • An enormous liquid market mak- would have USD 122.60 more than ing it easy to trade most curren- what he had started one year earlier. cies. However, to know if the investor made a good investment, one needs to com- • Volatile markets offering profit pare this investment option to alterna- opportunities. tive investments. At the very mini- • Standard instruments for control- mum, the return on investment (ROI) ling risk exposure. should be compared to the return on a • The ability to profit in rising or "risk-free" investment. ,such as US falling markets. treasury Bond which has no default risk i.e. the U.S. government going Ankur Jhunjhunwala • Leveraged trading with low mar- bankrupt or being unable or unwilling gin requirements. to pay its debt obligation. • Many options for zero commission When trading currencies, trade only trading. when you expect the currency you are buying to increase in value relative to One example of a Forex trading the currency you are selling. If the cur- risk-free investment rency you are buying does increase in is long-term U.S. value, you must sell back the other cur- rency in order to lock in a profit. An government bonds The investor's goal in Forex trading is to profit from foreign currency open trade (also called an open posi- since there is picture or Caption describingin which a trader has tion) is a trade practically no movements. Forex trading or cur- rency trading is always done in cur- bought or graphic.a particular currency sold chance of rency pairs. For example, the ex- pair and has not yet sold or bought defaulting. Volume 1, Issue 1 Page 8 back the equivalent amount to The exchange rate also tells a Margin close the position. seller how much is received in the However, it is estimated that any- counter or quote currency when Banks and/or online trading pro- where from 70%-90% of the FX selling one unit of the base cur- viders need collateral to ensure market is speculative. In other rency. that the investor can pay in case words, the person or institution For example, an exchange rate for of a loss. The collateral is called that bought or sold the currency EUR/USD of 1.2083 specifies to the margin and is also known as has no plan to actually take deliv- the buyer of euros that 1.2083 minimum security in Forex mar- ery of the currency in the end; USD must be paid to obtain 1 kets. In practice, it is a deposit to rather, they were solely speculat- euro. the trader's account that is in- ing on the movement of that par- At any given point, time and tended to cover any currency ticular currency. place, if an investor buys any cur- trading losses in the future. rency and immediately sells it - Margin enables private investors Exchange rate and no change in the exchange to trade in markets that have rate has occurred - the investor high minimum units of trading by will lose money. The reason for allowing traders to hold a much Because currencies are traded in this is that the bid price, which larger position than their account pairs and exchanged one against represents how much will be re- value. Margin trading also en- the other when traded, the rate at ceived in the counter or quote cur- hances the rate of profit, but has which they are exchanged is called rency when selling one unit of the the tendency to inflate rates of the exchange rate. The majority of base currency, is always lower loss, on top of systemic risk. the currencies are traded against than the ask price, which repre- the US dollar (USD). The four next sents how much must be paid in -most traded currencies are the the counter or quote currency Leveraged financing euro (EUR), the Japanese yen when buying one unit of the base (JPY), the British pound sterling currency. For instance, the EUR/ (GBP) and the Swiss franc (CHF). USD bid/ask currency rates at Leveraged financing, i.e., the use These five currencies make up the your bank may be 1.2015/1.3015, of credit, such as a trade pur- majority of the market and are representing a spread of 1000 chased on a margin, is very com- called the major currencies or "the pips (also called points, one pip = mon in Forex. The loan/leveraged Majors". Some sources also include 0.0001), which is very high in in the margined account is collat- the Australian dollar (AUD) comparison to the bid/ask cur- eralized by your initial deposit. within the group of major curren- rency rates that online Forex in- This may result in being able to cies. vestors commonly encounter, such control USD 100,000 for as little as 1.2015/1.2020, with a spread of as USD 1,000. Five ways private The first currency in the exchange 5 pips. In general, smaller investors can trade in Forex di- pair is referred to as the base cur- spreads are better for Forex in- rectly or indirectly: rency and the second currency as vestors since even they require a • The spot market the counter or quote currency. The smaller movement in exchange counter or quote currency is thus • Forwards and futures rates in order to profit from a the numerator in the ratio, and trade. • Options the base currency is the denomina- tor. The value of the base currency • Contracts for difference (denominator) is always 1. There- • Spread betting fore, the exchange rate tells a buyer how much of the counter or quote currency must be paid to ob- tain one unit of the base currency. Volume 1, Issue 1 Page 9 A spot transaction both fundamental and techni- Those who contribute in giving cal— is extremely important. the information on currency deal- ing are hedge managers, foreign A spot transaction is a straight- And for people who have yet to exchange dealers located in the forward exchange of one currency learn how to FX trade, taking an major financial markets of the for another. The spot rate is the online course is paramount to get world, professional stock brokers, current market price, also called them off to a proper start. finance managers and a host of the benchmark price. Spot trans- other finance professionals. They actions do not require immediate Indeed, it can make the differ- make it their business to collect, settlement, or payment "on the ence between being successful analyze and disseminate informa- spot." The settlement date, or and getting wiped out, although tion in such a way that can be "value date," is the second busi- there is no guarantee that even used by forex dealers to buy / ness day after the "deal date" (or the best newsletter analysis ser- sell / hold the forex. "trade date") on which the trans- vice or FOREX training course action is agreed to by the two will guarantee you profits or traders. The two-day period pro- guard you against losses. vides time to confirm the agree- ment and arrange the clearing That's why global FOREX trad- and necessary debiting and cred- ing is considered to be an ex- iting of bank accounts in various tremely speculative endeavor. international locations. The people who do best at it will be methodical, have strong con- Risks trol over their impulses and emo- Although Forex trading can lead tions, are analytical to a fault, to very profitable results, there and are all around disciplined are risks involved: exchange rate individuals. risks, interest rate risks, credit risks, and country risks. Approxi- mately 80% of all currency trans- Dedicated forex firms work on the actions last a period of seven days analysis of the movement of the or less, while more than 40% last forex market. Forex signals are fewer than two days. Given the sent by a forex firm to their sub- extremely short lifespan of the scribers in order to buy and sell typical trade, technical indicators currencies. These signals are heavily influence entry, exit and called entry and exit signals for order placement decisions. the forex dealers. The firms, which send this forex signal, do Who earns and how they so after tedious and meticulous earn? research and analysis into the currencies that their dealers are Because such large sums of trading in. For example a firm money can be made playing the may send the entry and exit sig- FOREX markets, hobbyists and nals at designated time frames in full time currency traders are real time. These will remain valid quickly increasing in numbers. for a short period only after which they are going to be differ- For both amateur and pro alike, ent. getting quality FOREX(FX) analysis of the markets — Page 10 INFINEETI Financing Infrastructure through Forex Compiled by Gaurav Shekhar large and rising foreign ex- change reserves should be used to finance infrastructural invest- Infrastructure, which essentially ment has gained some credence. is the backbone of any economic The returns earned by foreign activity, the support platform on investors in India, especially which trade is carried out, covers those who come into the stock a wide scope of activities like market are quite substantial, railways, roads, ports, aviation, while the return earned by the Gaurav Shekhar logistics solutions, power, energy Reserve Bank of India from its solutions and telecom. It is esti- central bank purchased the dol- investments in relatively liquid mated that infrastructure alone lars from. Those dollars were and safe financial assets are low. provides a $150 billion opportu- purchased as part of the current The low and declining tax GDP nity in FDI. Where do these op- means of exchange rate manage- ratio and the reductions in the portunities lie? By 2012, it is en- ment, namely, open market pur- fiscal deficit, now rendered man- visaged that another 40,000 km chases by the RBI. If it had not datory through the Fiscal Re- will be developed—that’s invest- bought those dollars, as they sponsibility and Budget Manage- ment worth $50 billion. There flowed in on the capital account ment Act, have meant that pub- are opportunities in our ports of the balance of payments in lic sector capital formation, in- sector as well, where PPPs recent years when the current cluding investments in infra- (Private Public partnership) for account has been reflecting a structure, has been stagnant or 54 new berths to add capacity of surplus, the rupee would have declining in real terms. Putting 400 million tonnes are being fi- appreciated and India’s export so-called ‘idle reserves’, earning nalized. And in airports, we ex- competitiveness would have been extremely low returns, into this pect investments of about $9 bn adversely affected. Secondly, re- through PPPs. Such partner- serves held by the central bank ships are in progress in Banga- are never ‘idle’. They are in- lore, Hyderabad, Delhi and “Take national highways, vested though and the more safe Mumbai and are expected to fol- and liquid the investment in- which account for just 2% strument chosen, the lower the low in Kolkata and Chennai. There are also plans for five of the road network, yet return. Thirdly, the central bank other Greenfield airports that carry 40% of the traffic.” chooses safe and liquid invest- could involve private participa- ments because it believes that it tion. In railways, PPPs are en- would be called upon to sell visaged in new routes, railways these dollars to those who in In- activity, therefore, seems a most stations, logistics parks, cargo promising and innovative idea. aggregation and warehouses. The problem is that stated in The debate today is over the this form, the proposal is a non- mode of this finance starter, since foreign exchange Burdened with rising interest reserves cannot be used in this payments on borrowing from the manner. To start with, they re- open market, the government flect assets of the RBI against finds itself increasingly short of which it has already built rupee funds for investment and devel- liabilities in the form of rupee opment purposes. In recent payments to whosoever the months, the idea that India’s Volume 1, Issue 1 Page 11 dia’s more liberalized external securities issued by the invest- environment choose to import ment body (in our case the “The central bank is not an more. Finally, If these reservesSPV’s) at an interest rate equal investment agency it are indeed to be used for infra-to the return earned by the RBI structural purposes, there must on its investment of reserves. In chooses safe and liquid the process, the RBI’s control be an investor – public or private investments because it over money supply is not affected – who chooses to buy these dollars believes that it would be from the central bank to financesince its net asset position is un- called upon to sell these changed, it does not lose out on such imports required for new in- vestment. the return, however small, it was dollars to those who in Assume that such an investor earning on its assets, and the India’s more liberalized may be created. We may have a government obtains access to external environment scenario where the Special Pur- resources at relatively low rates choose to import more.” pose Vehicles cre- of interest ated may act as which it can investors. The invest in infra- idea, it appears, is structural pro- above assumes that the govern- for the central jects. ment is well above its balance of bank to issue and Well the above payment crisis and the excess sell in the domes- strategy will reserves represent an attempt to tic market for ru- have its share regulate the exchange rate. The pees a set of bonds of critics. The second argument can be coun- whose value is first argument tered by the fact the there would linked to the dol- against this be a continuous rollover of dollar lar, and which pro- can be that it -linked bonds, with new buyers vides a yield equal has created a replacing old ones, so that the to that earned by new set of do- total rupee value of such bonds the RBI through investment of its mestic claimants on the dollar does not change. What is more, reserves. These bonds, given their reserves that the RBI holds. Will the lower rates of interest paid low yield, would be acquired by it not disturb the stability of our on borrowing from the central those who want to hedge their balance of payments. The second bank as opposed to borrowing future dollar payment commit- argument can be about the long from the open market would ments or those who want to term nature of funds required for curb the rise in the interest bur- speculate on the rupee depreciat- Infrastructure financing. Will den on the government’s budget ing, since that would offer them the counterpart dollar-linked that is a major reason for the capital gains. For the RBI, this bonds issued by the RBI can fiscal crunch. process amounts to reducing its have a similar maturity. Those net asset holding through the involved in hedging or specula- creation of a set of liabilities, for tion would be interested in rela- which the capital risk and return tively short-term investments. is exactly matched by that on its Finally, the whole process in- dollar reserves. In lieu of this re- volves an increase in the duction, the RBI is in a position to monetized deficit of the govern- acquire additional assets without ment, which has been considered affecting the original value of its anathema by the economic re- high-powered money base. This it formers. In defense what one can is expected to do by purchasing suggest is that the strategy Page 12 INFINEETI Dude of the Month– John Maynard Keynes By Daanish Gill Englishman advocated interven- tionist government policy in an age when Laissez-Faire was the Who was he? norm. His iconoclastic policies Keynes was the son pulled Europe and of Neville Keynes, an North America out of economics professor the great depression at Cambridge Uni- and on the track of versity. He enjoyed robust economic an elite early educa- growth. Moreover, he tion at Eton, where also helped frame Daanish Gill he displayed talent in policies that helped a wide range of sub- the allied nations jects; particularly finance and win the Second World War. of the micro level acts of all its mathematics, classics and history. His abilities were His efforts were acknowledged individuals. Keynes however remarkable for their sheer diver- when he appeared on the cover stated that an economy can be- sity- Keynes later is known to of ‘Time’ magazine on 31decem- have differently from the com- have said that an economist ber 1965, nineteen years after bined behaviour of its contents- must be a mathematician, econo- his demise. in other words, an individual vir- mist, politician and sociologist If success at solving a nation’s tue could translate into a collec- all rolled into one. He entered economic problems is too altruis- tive vice. Macro level trends can King’s College, Cambridge, in tic for your tastes it would com- overwhelm Micro lever behav- 1902, to study mathematics, but fort you to know that he also iour. his interest in politics led him Classical economists stated that towards the field of economics, supply created its own demand- which he studied at Cambridge “In the long run, when demand was low, prices of under A.C. Pigou and Alfred we are all dead” goods and services fell and de- Marshall, both great economists -J.M. Keynes mand picked up due to lower in their own right. Marshall is prices. If demand was slack, pro- believed to have prompted made a fortune investing in the ducers were advised to cut wages Keynes's shift in interest from stock markets. He made im- or lay off employees- this would mathematics and classics to eco- mense amounts of money in the lower costs of produced goods nomics. Keynes received his B.A. 1920s but lost most of in the and would help pep up demand. 1905 and his M.A. in 1909. great crash of 1929, however he Keynes rubbished this claim- if made better his loss afterwards. all producers cut wages than the purchasing power of the work- Why is he considered so force (who are incidentally the great? What is Keynesian Econom- consumers as well) would be ics? eroded thus preventing an eco- J.M. Keynes is perhaps the most nomic recovery. It was aggregate influential economist of the demand that was the crucial fac- Keynes refuted the postulates of twentieth century; he is credited tor in the short run, not aggre- Classical economists, who be- with single handedly creating gate supply. To solve this conun- lieved that an economy on a the subject of Keynesian Eco- drum, Keynes advocated eco- macro level was the aggregation nomics. The unusually tall 6’6” nomic interventionist policies Volume 1, Issue 1 Page 13 where the government was to all dead." fiscal ‘Pump Priming’ called the step in and stimulate the econ- In 1932 US President Herbert new deal that built infrastruc- omy by fiscal policy, i.e. govern- Hoover did just the opposite of ture and generated jobs. When ment spending. This spending this, he sarcastically attacked there was no more infrastructure would have a multiplier effect on Keynes findings by stating to be built Keynes was rumored the economy and even a modest “Blessed are the youth, for they to say – destroy the old roads increase in government spending will inherit the national debt”. In and build new ones. The success would multiply into a consider- the depths of a the great depres- of the ‘New Deal’ helped the al- able stimulus for economic sion, he increased taxes to bal- lies win the Second World War growth. Building roads, dams ance the government’s budget. and bring USA out of recession. and ports would put money in Aggregate demand already hit, Unlike classical economists, the hands of the working classes, was subject to the tyranny of Keynes did not bank on the be- who in turn would spend it and taxation and as disposable in- lief that an economy approaches kick start the economy- This comes shrank so did the aggre- full employment equilibrium in practice was called ‘Pump Prim- gate the long term. He believed that ing’. Now the obvi- de- the long term may become the ous question arises, mand very long term. It was some where does the gov- crazy epicurean-rock star phi- ernment get the losophy- don’t sacrifice today at money that it needs the altar of to- for ‘Pump Priming’? morrow, after Raising taxes is a no all in the long brainer, as it would run we are all “Blessed are take money away dead men. the youth, for from the economy they will and hurt business inherit the confidence. Keynes But Keyne- sianism was national debt” answer to that was ridiculously simple- not merely run a deficit i.e. the “borrow, spend government should and make merry, for the deficit borrow to help an we shall meet tomorrow”. There economy out of a re- is a difference between mere cession. This would deficit spending and Keynesian- increase the na- ism. Governments had long used tional debt, but deficits to finance wars. But would power an Keynesian policy is not merely economy out of a recession giving spending. Rather, it is the propo- it an extended lease of life. I plunging USA into a recession sition that sometimes the econ- know that this sounds like fiscal within a depression. Indeed omy needs active fiscal policy. blasphemy but there far more blessed are the youth for they Further, Keynesianism recom- that meets the taxman’s eye will inherit the great depression. mends counter-cyclical policies, here. He argued that govern- for example raising taxes when Unlike his predecessor, US ments should solve short-term there is abundant demand-side President F.D. Roosevelt ap- problems rather than waiting growth to cool the economy and proached the great depression long for market forces to do it, to prevent inflation, even if there with a open mind. Advised by because "in the long run, we are is a budget surplus. Classical Keynes, he started a policy of Volume 1, Issue 1 economics, on the other hand, ar- gues that one should cut taxes when there are budget surpluses, to return money to private hands. Because deficits grow during re- cessions, classicals call for cuts in outlays—or, less likely, tax hikes. On the other hand, Keynesianism encourages increased deficits dur- ing downturns. In the Keynesian view, the classical policy exacer- bates the business cycle. In the classical view, of course, Keyne- sianism is topsy-turvy policy, al- most literally fiscal madness over and the world would have Keynesians believe that fiscal pol- probably been a predominantly “Successful investing is antici- icy should be directed towards the planned economy- the same as pating the anticipations of oth- lower-income segment of the the planned economy that we ers. “ population, because that segment Indians experienced pre 1991. is more likely to spend the money, As a person Keynes was an in- contributing to demand, than to exorable debater, with a wide “The avoidance of taxes is the save it. This however was outra- variety of knowledge in diverse only intellectual pursuit that still geously mutilated by the current fields. Bertrand Russell named carries any reward. “ US president George W. Bush, Keynes as the most intelligent who in 2001 proposed a tax cut person he had ever known, com- for the RICHEST Americans, in menting: "Every time I argued “I work for a Government I de- order to kick start the economy. with Keynes, I felt that I took my spise, for ends I think criminal.” As the richest Americans got a $1 life in my hands, and I seldom Trillion free lunch, Keynes proba- emerged without feeling some- bly turned in his grave. thing of a fool." Body of Works His Legacy. Quotes ♦ The Economic Conse- Keynes laid the foundation of quences of the Peace in modern macro economic thought 1919 and since his school of thought “By a continuing process of in- ♦ A Revision of the Treaty in emerged there hasn’t been an- other great depression in the flation, government can confis- 1922 world. The prosperity of the capi- cate, secretly and unobserved, ♦ Treatise on Probability in talistic world rests on the shoul- an important part of the wealth 1921 ders of a figurative and physical of their citizens.” ♦ A Tract on Monetary Re- giant. He rescued Capitalism in form in 1923 her darkest hour, for the only economy that flourished at that ♦ The Treatise on Money in “Capitalism is the astounding 1930 time was the USSR. Without Keynesianism, the world would belief that the most wickedest of ♦ General Theory of Employ- have looked to communism as the men will do the most wickedest ment, Interest and Money- true way forward, man’s freedom of things for the greatest good His Greatest Work over his financial affairs would be of everyone. “ ♦ How to Pay for the War Page 15 INFINEETI Carousal Fraud– How dubious companies evade VAT in the EU By Pankaj Kothiyal and The fraudsters often insert a se- goods. The goods are then Aditya Agrawal ries of companies into the supply shipped to a dock in the UK. No chain to make detection difficult. VAT is charged on that ship- Goods that are easily traded and ment. The trader now sells those have a high value and low trans- telephones to a conspirator, for "Bankers who hire money port costs, such as computer £1,100,000. He charges 17.5% hungry geniuses should components and mobile phones, VAT (as is customary in the UK) not always express sur- are particularly attractive to and the conspirator sends prise and amazement missing trader fraudsters. The £1,292,500 (being the price of the goods themselves may remain in goods plus the tax) to the trader. when some of them turn one place, but financial transac- This conspirator then sells the around with brilliant, tions give the appearance of nu- goods to a third conspirator for creative, and illegal means merous business purchases and £1,200,000, charging VAT on of making money." sales. that sale. The third conspirator Linda Davies Figures from Eurocanet, a Euro- pays £1,410,000 to the second. pean Commission sponsored pro- This may continue for many con- ject, released in September 2006, Carousel Fraud appear to show that the United Kingdom is the main victim of Carousel fraud is the repetitive this fraud, having lost an esti- (cross-border) purchase and sales mated €12.6 billion during 2005- transactions within a rapidly 6, followed by Spain and Italy changing group of companies. which each lost over €2 billion The cross-border dimension during this pe- means that VAT is riod. From De- not paid in the cember 2006, the Pankaj Kothiyal country of origin, UK is introduc- while the company ing changes to spirators; however three will suf- in the country of the way that fice for an example. The third destination disap- VAT is charged trader now sells the telephones pears without pay- on certain light, to a German company, which ment of VAT. An high-value elec- may well be innocent. No VAT is extensive and com- tronic items, to charged, and the sales price of plicated chain of help combat the £1,500,000 paid by the German transactions in fraud. company without VAT. So far several countries the conspirators have made a Modus Oper- profit of £500,000 perfectly le- is used to cover up andi what is actually gitimately on buying and selling happening. Consider a mobile telephones. trader based in In an honest operation the first It involves the con- the UK. He buys tinuous movement trader would pay £192,500 to from France a HM Revenue and Customs (the of goods between consignment of co-operating traders in different UK's VAT collection agency). mobile telephones for EU member-states, resulting in £1,000,000. He pays the French multiple tax losses. telephone manufacturer for the The second trade has collected Volume 1, Issue 1 Page 16 £210,000 in VAT, but paid phones can be used again and £192,500 in VAT, and therefore again going through the various only has to pay the difference buffers, each pass around the (£17,500) to HM Revenue and 'carousel' bringing reclaimed Customs. The third trader has VAT to the fraudsters. charged no tax on its sale, but has paid £210,000 in VAT, and can therefore reclaim £210,000 Relevance to India from HM Revenue and Customs. India does not face the immedi- Aditya Agrawal In the fraud, the first business ate prospect of facing carousel vanishes, without paying the fraud, which happens because of VAT to HM Revenue & Customs. the system of charging the VAT When the last business in the on Inter-EU sale between differ- chain collects £210,000 on the ent countries. Under the system export, all of the businesses can in vogue, in the case of trade be- vanish, £192,500 better off at the tween two VAT registered deal- expense of HM Revenue and ers in different countries, the “This entire series of Customs. As this business is re- sale is zero rated in the export- transactions can occur moved from the vanishing party ing state and the VAT tax is paid it is hard for HM Revenue and by the importing dealer at the without the goods ever Customs to show the links in the point of purchase. Input-tax leaving the dock in the chain, and thereby refuse to re- credit can be available on the fund the VAT on the export. VAT paid on imported goods UK before being when the goods are subsequently re-exported.” In terminology, each business sold. In the case of export by a described above is called a VAT registered dealer to a non- "buffer". In a real case there can registered dealer, the exporting be many buffers, all helping to dealer bills the VAT. blur the link between the final reclaim and the original im- porter, who will vanish. Furthermore the same tele- Caption describing picture or graphic. Page 17 INFINEETI A lighter look at Chartered Accountants When I told my mom that I the time sheet. My time was put wanted a professional woman as down as unoccupied. She says my wife, she got me one; a Char- that she says that she loves me tered Accountant. She uses LIFO and I tell her that I love her too. method while taking out the re- However, she never believes frigerated food. She thinks I am me. She says that there is sus- no good at figure work. Fine with ceptibility of it being a misstate- me, for now she handles the ment. Duh! She wants my repre- budget of the house. Initially she sentation on this! used to send me a bill at the Last year our house accounts month end, but when I told her got a qualified opinion I had not Compiled by that I am not her client but her kept the supporting etc. of my Sayak Dutta husband, she asks for the money purchases. Not a long time back in advance. The expenses had my brother's wedding was to be been rising steadily over the solemnized. Wedding cards had months, so one day I snooped been sent. into the papers maintained in a After some time current file. No wonder! She was I started receiv- charging conveyance and over- ing a steady time to the house budget. She is trickle of letters. crazy, I tell her but she corrects I was puzzled me. No my darling, I am the until my wife auditor. I fail to see the light. was explained Every scrap of the paper in our that external house is filed. She tells me as per evidence was some Ordinance she must keep a more reliable. copy of everything for at least She had called ten years before destroying it. I for confirma- am worried. The other day we tions from all had an hour-long fight. Later, I those to whom got to know that she had charged cards were sent. that hour to a client of hers, in When she cooks, my wife at times does not go by “I am told by one of my recipe. Where the recipe says female colleagues who is add half- married to a CA that the teaspoon vinegar, one tsp black state that auditor is a synonym scenario is even worse when salt or one teacup of water, she for crazy. the guy is a CA. Apparently ignores them. She says that they The dictionary must be outdated. are not material when taken in When we got married, she had he capitalized the wedding context of whole meal being pre- given me an Engagement Letter expenses as preliminary and I Had said how cute-how pared. She is crazy, I tell you. expenses and is writing it off Surprisingly everybody calls her sweet. Now she gives it to me every year.“ an auditor, instead. I checked every year saying that her stan- the dictionary and it did not dards state that it must be sent Volume 1, Issue 1 Page 18 anew if there is any indication that I have misunderstood the objective and scope of engage- ment. Huh! Apart from sending me the en- gagement letter once again she says I can't get rid off her just like that. She says that she has the right of being heard before I appoint someone else. It seems I must keep reading one local and another English newspaper pub- Caption describing picture or lished and circulated in the vi- graphic. cinity of our house for more de- tails. Phew! For a minute, I thought that we had jeopardized our go- ing concern status. Duh! Dare I say so?? I am told by one of my female colleagues who is married to a CA that the scenario is even worse when the guy is a CA. Ap- parently he capitalized the wed- ding expenses as preliminary expenses and is writing it off every year. Also the time he spent dating his wife before mar- rying her is still under consid- eration for valuation under AS- 26...valuation of intangible as- sets. So guys please think twice....should u really marry a CA? And yes please discount it by the appropriate rate to arrive at the present value of the risk of doing so !!!!!!! Page 19 INFINEETI Looking into Tata’s Corus acquisition: A financial perspective By Sumeet Sinha try which are below the 10% mark! Also the automobile manufacturers (which are the The Background major buyers of steel) consist of a clout of 6-7 strong global players. Thus consolidation seems inevi- The Tata Group is celebrating its table to the steel industry in a acquisition of the Anglo-Dutch sense that it gives them better steel firm Corus, and the cata- bargaining ability and shields pulting of Tata Steel into world from global price volatility. Thus steel's big-five status (by reve- it makes sense for the steel in- merger witnessed a loss of nue). This assumes significance dustry to consolidate, and the €1.152 billion. Then in 2003 as it is the biggest deal from an trend on a global scale was when Philippe Varin took charge emerging market like India. The started by Mittal’s acquisition of of Corus as CEO, things im- Tata’s paid a hefty 608 pence per Arcelor in 2006 for a sum of proved very much. Varin was share to outbid their rivals CSN €26.9 billion (at €40.44 per instrumental in reducing the by a fair margin. Because of the share). costs by € 600 million as well as high valuation given by the Strategy behind the game improving the share price from Tata’s for Corus, its shares have 40 pence to 390 pence when witnessed a major setback. In- Now coming to the topic for the Tata’s came. fact ever since the decision to discussion i.e. “Tata’s takeover of purchase Corus echoed from the Corus”, we will first try to ana- The Tata wanted Corus for sev- Tata board, the shares of Tata lyze the strategic reasons for eral strategic reasons. The urge have witnessed a loss of almost 1 was so immense that they will- crore rupees! However this is ing to go as far as 630 pence per Infact ever since the decision share for Corus (as per BW re- definitely a myopic and short term view of the market. If we to purchase Corus echoed from ports). The essential strategy for look into the global steel indus- the Tata board, the shares of Corus acquisition is to ship iron try then we have reasons to be- Tata has witnessed a loss of ore and/or low-cost crude steel to lieve that the decision by the almost 1 crore rupees! Corus' plants in Europe, which Tata’s was a well thought one. would use their technological Take for instance the worldwide Tata’s decisions and then we will know-how to turn this low-cost prices of steel: which have wit- look into the financial and other raw steel into finished products nessed extreme fluctuations on aspects of the deal. Corus was that can be sold to customers account of market fragmenta- established in 1999 following the close to them. Corus, being the tion. To add to the woes of the merger of British Steel and the second largest steelmaker in steel manufacturers is the fact Dutch Hoogovens. British Steel Europe, would provide Tata that globally both the suppliers was in turn established in 1967 Steel access to some of as well as buyers of steel are well with the merger of 12 British consolidated. For example in the national steel plants. However case of iron ore, the three global ever since the inception of Corus, players CVRD, and Rio Tinto it was in the net of some or the and BHP Billiton control over other conflict or chaos. There 75% of the market and have op- was no unanimity of the decision erating margins of close to 40%. amongst the Dutch and the Brit- Contrast this with the low oper- ish. The year following the ating margins of the steel indus- Volume 1, Issue 1 Page 20 the largest steel buyers. The ac- rate payment would depend a lot story lets see as to how the $4.1 quisition would open new mar- on the strength of the Corus bal- billion could be financed by the kets and product segments for ance sheets. Tata sons. The Tata’s could pos- Tata Steel, which would help the sibly look at divesting of their company to de-risk its busi- holdings in TCS. TCS revenues nesses through wider geographi- The Corus picture crossed the $3 billion mark in cal reach. The Tata’s have been A look at the Corus balance the third quarter of the 2006- seeking to pursue a similar sheet reveals the following pic- 2007 financial year with quar- strategy through their much ture. terly revenue of over $ 1 billion. smaller acquisitions of NatSteel As of 31st December 2006, the • Corus revenues for the year in Singapore and Millennium promoter group of TCS Ltd had a 2004 and 2005 were $18.32 Steel in Thailand. Without going shareholding of 82.49 % of the billion and $19.91 billion re- any further in the acquisition total shares of TCS. Of this the spectively. That of the Jan- from a strategy point of view, we major part was held by Tata Sep 2006 period was $14.10 will discuss as to what are the sons. Since the financials of TCS billion. options for the Tata’s to finance is strong, the Tata Sons could • Its EBITDA margins were the deal and its implications. possibly divest a part of their 10.44 and 9.34 for 2004 and shares in TCS to part finance the 2005 respectively. That for deal. Assume that of the $4.1 Financing the deal: The mil- the Jan-Sep 2006 period was billion, Tata sons decide to gen- lion $ question only 7.96. erate $1billion through equity • Its operating profits margin As per the recent reports, Tata divesting in TCS Ltd. Then as- was 7.09 and 5.89 for 2004 steel is planning to raise an SPV suming the stock price of TCS as and 2005 respectively. That to fund the financing of the deal. its 52 week high of 1399 INR, for the Jan-Sep 2006 period As per the deal, an SPV (Tata Tata sons would have to divest was 5.29%. steel UK) would be pumping in close to 3.29 percent!! • And its net profit margin was the required fund of $12.2 bil- 4.73 and 3.63 for 2004 and lion. Of this, the group holding 2005 respectively. That for company will pump in $4.1 bil- But Tata Sons should partly the Jan-Sep 2006 period was divest some of their TCS lion and the remaining 8 billion only 1.77 percent. would be financed after taking shares. In fact they have done loans from Standard Chartered, Thus it appears that current so!! ET had reported that “Tata ABN Amro, Deutsche bank and cash flows of Corus are barely Sons has sold about 8.1 million CSFB . It is reported that the sufficient to cover this, even af- equity shares of the software interest on the loan would be fi- ter considering the synergy gains company, to an undisclosed nanced through Corus cash of $350 million (as claimed by buyer. While the statement didn't flows. Interest rates on credit Tata Steel). If international steel mention the price at which the facilities for such buy-outs are prices decline even modestly, transaction was concluded, going often higher than market rates Tata Steel would have to dip into by Thursday's closing price of Rs because of the risks involved. At its own cash flows or find other 1,300 per share, the value of the an expected interest rate of 7 per sources like an equity dilution to deal could total up to Rs 1,035 cent per annum, the interest service the debt. No wonders crore ($230 million).” In fact outgo alone would be over $650 why the investors are in tizzy when Tata sons divested around million per year. Along with re- ever since the deal was made 1000 crores of their stakes in payment of principal, the annual public. TCS, rumors were abound that it fund requirement to service this was done to part finance the Corus deal. Through this trans- debt would be around $1.5 bil- Tata sons’ divestment of TCS action, the stake of Tata sons lion - assuming a 10-year repay- shares has been reduced by 0.84%. ment horizon. So the interest That being just one part of the Page 21 INFINEETI Raising debt against Tata lion’s share of 23.82 and 4.45 steel percent respectively. Other pro- Let us look at financing the deal moters held less than 1 percent by taking loan against Tata shares in Tata Steel. Suppose Steel. Tata steel currently has a that Tata sons decide to divest debt-equity ratio of close to 26 around 50% of their sharehold- percent. If it takes Rs.1000 crore ing in Tata steel (which would ($222 million) loan, then it will bring their share percentage increase the debt-equity ratio to close to 11.9 percent). By doing Sumeet Sinha 36 percent. If it takes Rs.2000 this, Tata sons could generate crore loan, the same figure would close to $706 million which could be used to partly finance the thing is that this approach may reach 46 % which is a high figure Corus deal. not gel with the shareholders as keeping in mind that it has sev- it reduces the EPS by close to 9 eral Brownfield projects in pipe- Rupees. line as well Greenfield ones in Further dilution of Tata Steel Orissa, Chhattisgarh and Jhark- Conclusions equity hand. Also the borrowing would Thus keeping the above options take a beating on the EPS which Another option could be the al- in mind as well as their affect on is one among the many dearest lotment of preferential shares to the Tata steel statistics, there is things to a shareholder. In fact Tata sons. As per March 2006 no doubt that Tata steel should an analysis by CLSA firm re- balance sheet of Tata steel, it tread a careful path while fi- veals that a market borrowing of had an EPS of Rs.60.4. If it de- nancing the Corus deal. It $1-1.8 billion could dilute the cides to follow an equity dilution should look at both the short EPS of Tata Steel by as through preferential allotment of term as well as long term impli- much as 1.4 % in FY08. cations of the decisions. For ex- Thus borrowing against ample as elaborated above, fi- Tata steel would not be pru- nancing the deal through market dent keeping in mind the borrowing by Tata steel may ap- future growth plans of the pear to be an attractive option, company and its financials. but the group should keep in Also an area of concern mind that any such option would would be the affect on the cut the wings of Tata steel to shareholders. Even if Tata raise funds in the future for fi- Steel decides to borrow, nancing their upcoming projects. then the amount borrowed Likewise every option has a should not exceed Rs.1000 bright side as well as a dark crores. shares to finance the $1 billion side. The best bet would be to kitty, then it has to allot a total finance the deal through a possi- of 98039215 shares assuming the ble dilution of Tata sons in TCS, Equity dilution of Tata Sons current market price of 459 Ru- and a further dilution of the eq- in Tata Steel pees per share. That would how- uity component of the equity The third option could be to fi- ever bring the EPS to 51.6 Ru- component of Tata steel through nance the deal through equity pees. However this approach preferential allotment of shares. dilution of Tata sons in Tata would not negatively affect the steel. As per 31st December 2006, other financial aspects and ra- the promoter group of Tata steel tios. More ever Tata steel could had 30.26 percent of the total also reserve bandwidth for fu- shares of Tata steel. Of this Tata ture loans for its Brownfield and sons and Tata motors held a Greenfield projects coming in the three states. But the biggest Volume 1, Issue 1 Page 22 Investment Banking Mantra Compiled by Ajay Chhabra Commercial Bank Vs I - Bank A commercial bank may le- In this article, we will dwell gally take deposits for checking upon what actually investment and savings accounts from con- banking is? Is it actually bank- sumers. The federal government ing? Is it an investment? If the provides insurance guarantees Ajay Chhabra nitty- gritty of investment bank- on these deposits through the ing is studied then it is clear that Federal Deposit Insurance Cor- poration (the FDIC), on amounts intermediary, and matches sell- is neither of the two. In the up to $100,000. The typical com- ers of stocks and bonds with buy- strictest definition, investment mercial banking process is fairly ers of stocks and bonds. If a com- banking is the raising of funds; straightforward. You deposit pany needs capital, it may get a both in debt and equity, and the money into your bank and the loan from a bank, or it may ask division handling this in an in- bank loans that money to con- an investment bank to sell eq- vestment bank is often called the uity or debt (stocks or bonds). "Investment Because commercial banks al- Banking Divi- ready have funds available from sion" (IBD). their depositors and an invest- Actually it is ment bank typically does not, an the term which I-bank must spend considerable is used to raise time finding investors in order to capital and obtain capital for its client. helping the The Buy-Side & The Sell-Side companies in investing and The traditional investment mergers and banking world is considered the acquisition. “sell-side” of the securities in- Capital essen- dustry. Why? Investment banks tially means create stocks and bonds, and sell money. Compa- these securities to investors. Sell nies need cash in order to ex- is the key word, as I-banks con- pand and grow their businesses; sumers and companies in need of tinually sell their firms’ capabili- investment banks sell securities capital (cash). Companies borrow ties to generate corporate fi- to public investors to raise the to finance the growth of their nance business, and salespeople cash. Investment banks also act company or meet immediate sell securities to generate com- as intermediaries in trading for cash needs. The commercial mission revenue .Who are the the clients. bank generates a profit by pay- buyers (“buy-side”) of public ing depositors a lower interest stocks and bonds? They are indi- The top 8 investment banks of rate than the bank charges on vidual investors (you and me) the world are Goldman Sachs, loans. and institutional investors, firms Merrill Lynch, Morgan Stanley, An investment bank operates like Fidelity and Vanguard, and Credit Suisse first Boston, Citi- differently. An investment organizations like Harvard Uni- group’s Global Corporate Invest- bank does not have an inventory versity and state and corporate ment Bank, J P Morgan Chase of cash deposits to lend as a com- pension funds. The universe of and Lehman Brother. mercial bank does. In essence, institutional investors is appro- an investment bank acts as an priately called the buy-side of the securities industry. Page 23 INFINEETI The main activities and units ogy. In op- An investment bank is split into erations, the so-called Front Office, Mid- any error in dle Office and Back Office. the data of The individual activities are de- the trade is scribed below: recorded and is cor- Front Office: This part of I- rected. The bank is mainly concerned with technology the capital raising, sales, trading team works research and structuring. Sales diligently Caption describing picture or and trading is the most profit- to develop graphic. able area of any I-Bank. in house Middle Office: This part is in- software for volved with risk management. carrying In risk management, the risk out the taken by the traders is analyzed various and puts a cap on the upper limit front office that a trader can trade. This pre- functions. vents the detrimental effect of the risk. Back Office: This part is in- volved in operations and technol- Financial Inclusion Compiled by Deepak Kundu “The future lies with those insurance, payments and companies who see the poor as remittance facilities by the for- their customers” mal financial system to those C.K.Prahalad who tend to be excluded . Financial exclusion in contrast Financial inclusion can be de- would include households who fined as delivery of banking ser- are denied credit in spite of vices at an affordable cost to the their demand. Deepak Kundu vast sections of disadvantaged The term ‘financial exclusion’ and low-income groups. is used in different ways. It can point in applying for a financial It includes households accessing be a broad concept related to a product because they expect to be institutional credit including lack of access to a range of fi- refused, sometimes because of a commercial banks, cooperative nancial services or a narrow previous experience of refusal, be- banks, RRBs, NABARD SHG- concept reflecting particular cause they know someone else who linkage and other self-help circumstances such as: geo- has been refused. These aspects of groups, and credible microfi- graphical exclusion; exclusion exclusion are not mutually exclu- nance institutions. on the grounds that charges sive. They will overlap and rein- and prices are prohibitively force each other, resulting in indi- Although credit is the most im- high; or exclusion from market- viduals, households and communi- portant component, financial in- ing efforts. Self exclusion is ties having little or no connection clusion covers various other fi- also important – where an indi- to mainstream banking and finan- nancial services such as savings, vidual believes there is little cial services. Volume 1, Issue 1 Page 24 The costs of financial exclu- Measures by RBI sion The Reserve Bank of India has Financial exclusion imposes sig- continued to lay stress on the nificant costs on individuals, need for financial inclusion of their wider neighborhood, and the under-privileged sections, on society as a whole. For the who have hitherto remained individual, some of the most im- outside the periphery of the portant costs associated with banking system. Through a se- financial exclusion include: ries of new measures announced in its Credit Policy for 2006-07, • Higher charges for basic fi- it has once again shown concern nancial transactions and credit for this segment of population – lack of access to a bank ac- which has not been unable to count means that certain finan- -vised to open in villages/wards draw benefits from the banking cial transactions such as money allocated to them. The State system despite the extensive transfer and cheque cashing Level Bankers Committee network of the public sector may be more expensive. (SLBC) in each state are given Banks. • No access to certain products the responsibility to ensure the RBI has advised all the banks implementation of the financial or services – a range of services, to open “No frills” accounts inclusion project by all banks, at such as contract mobile tele- through simplified Know Your least, in one district of that phones, require a bank account Customer (KYC) procedures and particular state. for regular Direct Debits. also to offer a small Over- draft/General Credit Card not Indian Experiment Initiative exceeding Rs. 25000/- to their by Indian Bank: • Lack of security in holding and storing money – operating customers. For self-help groups, Indian Bank was the first Bank solely on a cash budget leaves to implement the Financial In- “RBI has advised all the clusion Project on a pilot basis in people more vulnerable to loss banks to open “No frills” UT of Pondicherry where the or theft. accounts through simplified Bank has lead responsibility. In- Know Your Customer dian Bank implemented the con- • Barriers to employment – a (KYC) procedures and also cept first in Mangalam Village of bank account for receipt of to offer a small Overdraft/ Pondicherry on 30.12.05 which wages is a basic requirement for became the first village in India, General Credit Card not most employers. where all the households in the exceeding Rs. 25000/- to village were provided Banking their customers.” facilities. Indian Bank spear- • Entrenching exclusion – hav- headed the project and involved ing no formal banking or credit all the 144 bank branches of 37 history at all can be as much of a line of credit could be consid- Banks operating in all the 144 a disadvantage as an impaired ered. Also, other financial prod- bank branches of 37 Banks oper- credit history in accessing cer- ucts like life/asset/healthcare ating in UT of Pondicherry. Pro- tain financial services. insurance and mutual fund ject participants are: All Banks, products could be consid- Govt. Depts, Insurance Cos, ered.Banks have also been ad- NGOs & Facilitators etc. Page 25 INFINEETI Promoting Financial Educa- tion Promotion of financial literacy enables the common man to make informed decisions. Finan- cial literacy has assumed impor- tance in the changing financial environment. It helps to make selective decisions from a myriad financial products and providers available. It will provide knowl- edge to create personal budgets and enable to appreciate better possible contingencies and plan better in an appropriate manner. As regards the global practices in Financial education, UK has launched a massive campaign through its Financial Services Authority. US also established Source—Indian Bank the office of Financial Education in 2002. Conclusion Promotion of Financial Inclusion will definitely increase the out- reach of the Banking system, and will bring out new business opportunities. Contrary to gen- eral opinion, common man offers more opportunities if properly nurtured. Volume 1, Issue 1 Page 26 FUN-ance To the Center Head Caution: A rouge Capital IIFT- Kolkata J-1/14, EP/GP Block markets reformer takes Sector-5 Neo– Liberalism too far ! Salt Lake City Kolkata Subject- Intra class trading of attendance and DGPs Sir, It has come to the attention of the class that a minimum 70% attendance norm has been adopted by the administration. If what we believe is true, if ones attendance dips below 70% in any specific sub- ject, he/she shall receive an academic DGP. A DGP as you know is a ‘Deficit Grade Point’ which trans- lates into a 0.33 deduction in the grade point average for that subject. However, there is a certain amount of rigidity in the system as one person may exceed the 70% cap in one subject, but have a deficit for another subject. As a solution to this conundrum, I propose a system of Attendance and DGP trading by which a student of IIFT may trade his surplus attendance with one who has a deficit. Let me explain this by an illustration, if Ajay Chhabra (Roll No-2) has 100% attendance in Business Strategy (BS) and Dipendra Tulsiyan (Roll No-17) has a 40% figure, Dipendra may purchase the deficit of 30% from Ajay. Ajay would gladly do so as those 30% extra are lying idle on his balance sheet contributing nothing to his earnings, in return he may be able to get the attendance credits for any other class that he is incurring a deficit in from Dipendra. That was a simple example; we assumed that all classes were equal. However, in the real world some class attendance credits are rare as fundamentals of the class are weak. Boring classes, with crazed, megalomaniacal professors will naturally have lower attendance thus the supply demand equation will be skewed- i.e. demand for credits will outstrip supply of credits and that will drive the prices of such credits higher. In effect these brave souls will be rewarded by the market for the risks they have taken by attending these classes. On the other hand Harkirat Singh’s classes (IFM Classes) will enjoy high at- tendance; this will result in higher supply than demand, which will drive down prices for IFM credits. So how do we determine the relative prices? Well the answer is simple- let the market decide. We pro- pose that a market be created in the former Programme Office on the 7th floor, where IIFT students may be able to trade attendance credits. Of course finding sellers or buyers for 8-12 subjects per trimester will be a chaotic task, to address this we propose certain outstanding students of good financial backing may be made “Credit Brokers”. Their task will be to seek out buyers and sellers and aid transactions be- tween them. In return for their trouble, they will receive a 1% brokerage from both parties. Now holding a 0.01 credit for a subject makes no sense, thus we also propose a currency called a “Credit”, each class shall start with a 100 credit face value So credit brokers may accumulate 2 credits per transaction and be able after 50 or so transactions buy attendance for any class they fall in deficit. Page 27 INFINEETI Now if BS classes are badly attended their prices may rise to say 120 credits per class, however IFM classes may depreciate due to excess demand to 90 credits - So you and I can attend a class of BS and sell of the attendance for 120 credits buy a 90 credit class of IFM and hold the excess 30 credits for any future transaction. Derivatives Since an academic DGP is derived from the deficit of attendance, for tardy investors we intend to introduce trading of DGP deriva- “DGP are like manure, tives whose underlying asset is the value of the DGP and the sub- spread evenly they can do ject in which it is awarded- A high credit course DGP (Such as ITO) will sell for a higher price, as compared to a low or zero a lot of good but if piled credit DGP course. Since DGPs as of now are a rare and prized up in a little corner they possession, only an elite club of DGP holders will be able to trade in the market. Thus higher brokerages must be awarded to the will raise a stink” Credit Brokers who shall have to apply for DGP broking licenses from the certified authority. Our rationale in this regard is to al- low the common student the pleasure, nay, the right to enjoy a DGP. DGPs should no longer be the domain of a privileged elite in IIFT; small and marginal investors should be allowed access to the market. We believe that DGPs are like manure, spread evenly they can do a lot of good but if piled up in a little corner they will raise a stink. Trading DGPs will ensure inclu- sive benefits to IIFTians from all walks of life and will help build an egalitarian society on the principles of disciplinary and financial equality. Cyclical trends As I have seen in the past two trimesters, there is definitely a cyclical tendency in the market- in the be- ginning of a trimester attendance is full across the boards, while during exams, bandhs, nuclear holo- caust threats, cricket matches and rainy days attendance is patchy. To serve as a bellwether to the direc- tion of the market, we intend to introduce an attendance based index that would serve as a general indi- cator to gauge market movements. For example, if attendance is low due to a late night AC Milan match there will be low “Liquidity” in the market thus prices will spike up due to low supply and high demand and if by some miracle there is heavy attendance in class the prices will fall as supply outstrips demand- a case of high liquidity. The suggested market index will mirror all these trends the index will fall as a result of high attendance and vice versa. Thus such market conditions will be termed as bearish and bullish. Simplified, High Attendance =High Liquidity = Low Demand & High Supply = Index Falls= Bearish Market Long periods of sustained high attendance can be termed as a BEAR RAID Low Attendance= Low Liquidity= Low Supply & High Demand = Index Rises= Bullish Market Long periods of sustained low attendance may be termed as a BULL RUN Initial Public Offers There is a dilemma we face in the issue of new classes at the beginning of each trimester. How do we dis- cover prices? To address these concerns we will consider as before on Opening day minus 1(Day T-1) all subjects to be of 100 credits per class. Now we take a page out of the RBI’s books by reverting to a “When Issued market”. Traders and investors may on day T-1 buy or short sell the attendance scrip of a certain Volume 1, Issue 1 Page 28 Proposed DGP Trading in IIFT-Kolkata course, the buy and short transactions will be squared after the first class by when the scrip will be on the exchange and price discovery will have taken place. This would be a huge opportunity for the specu- lators to earn a windfall profit- information about a certain subject or instructor could be used to earn a fortune. Hence I imagine an entire market for information will be created- speculators and investors from Kolkata may try to find out about professors from their counterparts in Delhi and their seniors, to see whether their fundamentals coupled with the importance of the course could help them predict prices before the Public offer. Vision 2008 We hope that by next year we can extend our ideas to their next level of progression. Juniors should be given the ability to trade credits with their seniors- i.e. a first year student may be able to trade in DGP derivatives as well as in credits for subjects that final year students are studying- purely for speculation since they cannot attend final year classes. This will inject much needed liquidity in the market. More- over with the increase in number of students and volume of trading, the programme office alone will not suffice, we suggest the opening of trading terminals at strategic locations such as the water cooler, the top floor canteen, Gulfaam’s Cigarette shop, and with time the index numbers can be posted in the eleva- tor so as to save valuable time that can be used for not attending classes. Sir, we stand at the crossroads of a great opportunity, for once we can harness market forces to elimi- nate inequality- from now on the magic of supply and demand will ensue that all of us have equal 70% attendance. Society will no longer consist of the haves and have nots- instances of people festering with 40% attendance and others lavished with 100% will populate only the history “We suggest the opening of books. Capitalism can be a force for good and we can be at its trading terminals at forefront. I hope these suggestions can help address the situa- tion at hand and be of value in solving the attendance prob- strategic locations such as lems that mar our fraternity. the water cooler, the top floor canteen, Gulfaam’s Yours Sincerely Cigarette shop, and with Daanish I.S. Gill time the index numbers can Roll No-14 be posted in the elevator” Editor– In-Fin-Neeti With inputs from Rishikumar Singh Page 29 INFINEETI Where are the Markets headed? By Rishikumar Singh 6.63% but nevertheless it is a drop. The intervention of central “Mirror mirror on the wall, tell bank with its repo hike of 25 ba- me who is the most knowledge- sis point seems to be doing it able amongst all?” work now. All the major banks Mirror: “No one”. have undertaken a hike in its prime lending rate. The unparal- Alas, this is what can be said leled demand for housing seems about the investors who in the to be weaning away as home Rishikumar Singh frenzy of getting rich quickly loans turn more costly lending scuttled their hard earned some sense to the over- money, invested in some specula- speculated real estate prices. I Does that mean Indian Story tive stocks and found themselves was always of the view that the is over? No. Still the markets is in a blood-bath. Red was the col- real estate prices are being in its initial stage of bull run. our of the day when this article speculated and it was never a Remember, much steam is left was written. As Dalal Street good idea to be in the stocks af- before this bull run gets over. fights its battle with crucial sup- ter September 2006 run-up. May Demographically we are better port for NIFTY at 3750, its going be that can infest some sense placed and this will ensure we to be a tough call for any techni- into retail investors who in the continue our growth y-o-y at a cal analyst, leave aside me. With run-up to make quick bucks end decent rate. However currently the benchmark BSE 30 at 20x of up in the wrong stock at wrong the signs of soft-landing seems to its 2008E earnings, Indian mar- time and at wrong price. be emerging thanks to RBI rate kets are nevertheless very ex- hike. pensive compared to its peers. It The Indian growth story was re- has already taken into account “The last bull run on NYSE inforced by the appetite of In- the earnings of 2009. The market lasted for 20 years, which dian companies and their aspira- has fully valued all its index saw US emerging as the tion. Tata Steel acquired Corus components, baring a few like world power. India’s bull and catapulted to 5th largest Hindalco. run is still 4 years old.” steel maker in the world. The Let the sprinter take a breather. rules of the game are changing. If corrections do not come at Can BoJ rate hike of 25 basis The world is flat! As Tata Steel regular intervals, expect more of point added more fuel to the acquires a firm larger than its sharp and painful corrections. It fire? Perhaps not. Because still size, it signals the upsurge of In- looks like all the notions of yes- the Indian story in intact, but at dian Companies on the global teryears have been hit for a six. a cost higher than its peers. Of map. To add icing to the cake, Investors and analysts expect course many may argue that In- Hindalco acquired Novelis (a loss market-friendly budget every dia is the second fastest growing making entity presently but with time leading to a major run-up economy in the world. But they 19% market share in rolled alu- before and few days after budget. forget the fact, that FIIs are a minum production) to complete But the things look to be quite like a herd of cattle, who just its downstream value chain and bearish currently. With the gov- mop away every single penny at hedge against possible fall in ernment failing to reign in the the slightest hint and risk of aluminium price. As the maga- prices of essential commodities, stocks being over-priced. Hence zine goes to press Suzlon energy it seems the market is on slip- they continuously scout for belts itself to bid for German pery ground. The inflation num- greener pasture, which alas In- wind turbine manufacturer RE- bers are not encouraging at dia cannot provide currently. Power. Volume 1, Issue 1 Page 30 No doubt the markets showed the sectoral indices are trailing, expect super normal gains from thumbs down to these deals ow- with the metal and FMCG pack the former counter, as the car- ing to the valuations attributed being the underperformers since bon credit story is intact. The to these companies. But who ca- last many months and the most company trades at 3.9x against res? We are here for long term battered ones. FMCG generally the entire pack average of 19x growth strategy. A small slip shows some nervousness every and hence makes a compelling cannot nail down our ambition. year prior to budget. However buy. Of late the stock has under- Both the companies have set telecom has stood the test of time, performed the broad based in- their vision of global dominance and should provide great returns dex, but it is not long before the in future i.e. 2009-2010. The In- thanks to the growth story of In- markets notice its assets and dian Telecom story was rein- dia. The real estate and construc- growth rate and assigns suitable forced by the valuations placed tion companies are in for some value, and again you may be late by Vodafone in the Hutch acqui- sluggishness. The sugar sector is in entering. The downside to this sition. No doubt our own Indian trying hard to come out of deep particular scrip looks to be very company Reliance Communica- slumber but nothing strong seems limited, if any. But again the tions (a $20 billion company by to be for them on the chart. But suitable strategy will be to wait MCap) could not win the battle, my view is that since the sugar and watch approach. I expect the which would have catapulted it sector has had its share of beat- market to correct more and into big leagues and it would ings and underperformance, I do hence in the next article will have rubbed shoulders with not expect it to dip more rela- come out with some great picks some of the global big names like tively. The bottoming out is over for all of you. Till then, be cyni- Vodafone which is a $50 Billion for sugar and revival may be in cal and wary of any tips. company). But still India at 16% the offing. penetration level is under-served For short term just keep a watch as far as telecom is concerned. on the stock markets. Do not com- So what should be the strat- mit any new money into stocks. egy of Investors? Hold onto your shirts if the deal Investors are advised to hold was at higher price. But get out of metals, FMCG and Real estate An interesting anecdote is that a leg- onto their shirts if they had pur- endary investor in stock markets chased at higher prices. But still packs. parked his car aside the road and went at this level I consider the mar- For those obsessed with the con- to a cobbler to get his shoes repaired. kets to be overvalued. There ex- struction stocks I still am suppor- The gentleman with a pipe in the ists a strong support for BSE 30 tive of capital goods and infra- mouth was reading a business daily, at 13300 levels and for NIFTY it structure companies like IVRCL, when the cobbler enquired, “Sir, have looks at 3800. But these are lev- Alstom Projects, Lanco Infratech, you bought XYZ stock. Its great and els to be tested. The charts do Reliance Energy. But again these will give you great returns”. The in- indicate strong support at these stocks are of long term and small vestor, after his shoes were repaired, levels. But any breach at this investors have not much to gain in left for exchange and offloaded all his level can take BSE and NIFTY short term, but in long term can holdings. As luck would have it, the to levels of 12750 and 3650 re- expect more. markets collapsed after few days spectively. Hence these are inter- Going forward more momentum esting levels to watch. Even if a can be expected in the Telecom rally does occur before budget or pack and Sugar sectors (at least in on the crucial day, I still see it as my view and technical charts do a blip on the radar, and nothing support the thesis). The out of much needs be read into it. All pack look can be at SRF. You can Volume 1, Issue 1 Page 31 Budget Factoids By Dipendra Tulsiyan • India is 19th in the world in the size of its Budget expenditure, and spent $135 billion last year. China spent $ 424 billion and is ranked 8th, while the US has the largest budget at $2.46 trillion. • Uttar Pradesh grabs the top position in revenue contributions of Rs 19,868 crore to the Government while Bihar is the second highest in the list giving Rs 11,774 crore. • Morarji Desai was the only finance minister of India to present 10 Budgets, including five annual and one interim budget. • With the upcoming Budget likely to project a GDP growth of 13.2 per cent, India will emerge as $1 trillion economy in FY08 • All taxes in India are subject to an education cess, which is 2 per cent of the total tax payable. • The term 'budget' is said to have come from the old French word bougette, which means 'little bag.' • Out of 17 Budgets since 91-92, on 10 occasions the stock markets fell in the one month following the Budget. • RK Shanmukhan Chetty presented Independent India's first Budget on November 26, 1947. • Last year, Rs 89,000 crore was allocated as defence expenditure against Rs 18,854 crore 10 years back • The employees printing the Budget papers are kept in complete isolation in the Finance Ministry for one week before the Budget.
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