january-the financial bulletin

M O N E Y M A T T E R S C L U B - T H E O F F I C I A L F I N A N C E

C L U B O F I B S , H Y D E R A B A D

The Financial Bulletin

30th January 2013 VOLUME 20, ISSUE I

WILL THE DEMAND FOR GOLD

EVER DECLINE IN INDIA?

THE REASON FOR THE

FAILURE OF IPO IN INDIA.

JOURNEY

FROM 1991 TO

2012.

WHERE ARE

WE NOW?

COVERAGE OF PANTALOONS

AND WIPRO DEMERGER STORY

FROM THE EDITOR’S DESK P a g e 2

FROM THE EDITOR’S DESK

The Financial Bulletin

Issue:: I

Volume: XX

January 2013

Advisor

Dr V Narendra

Faculty Co-ordinator

Dr. S Vijaylakshmi

Student Co-ordiantor

Roshni Nair

Editor

Komal Jain

Dear Readers

Happy new year to all the readers of The Financial Bulletin. We hope you had a fresh start to the new year. In order to celebrate the 20th Issue of the newsletter, we bring to you articles from a plethora of genres.

We congratulate to the winners of the “Article of the month” award, Mr Neeraj Gupta and Mr. Anurag Mishra for their article on Demergers: the route to unlock value.

To start with, we have an interesting coverage on the year 2012 and how is it similar to 1991. The writer shares amazing similarities and describes how history repeats itself.

Why pharmaceutical industry in India is called the best bet in the troubled economic times ? How does mergers or demergers effect the Industry? Why are WIPRO and Pantaloons on the path of demerging? Does it really add value? Why do Indians all over the world have so strong inclination towards gold? What is so special about this yellow metal? Why is fiscal cliff in US called a bitter medicine? What are the recent innovations in the financial services industry and how does it make a difference?

In order to get your questions answered, READ ON!

Happy Reading.

P a g e 3 V O L U M E 2 0 , I S S U E I

CONTENTS

ARTICLE OF THE MONTH:

04 Demergers-The route to

unlock value.

- by Neeraj Gupta & Anurag Mishra

29 Current Account Deficits

-by Karan Chauhan

33 Innovation In Financial

Services

-by Rahul Jain

36 Tax benefits from mutual

funds

-by Shyam Mange

10 Sorosian Reflexivity Theory-

An investigation in the Indian

Markets

-by Aniket Parikh

14 2012 another 1991 ?

-by Anindo Chakraborty 21 Cooperatives, Microfinance

and the poor

-by Bhavi M Patel

24 Indian Stock Market, all set

for a new high.

-by Sanket Narkhede

26 Microfinancing/Self Help

groups

-by Chandra Sekhar

COVER STORY

39 The ‘Golden’ Dilemma

-by Sanchalak Basu

45 The dismal performance of

IPOs in India

-by Chaitanya Gandhi

48 Why pharmaceutical is the

best bet for India in troubled

economic time?

-by Siddhartha Banerjee

52 Fiscal Cliff- A Bitter Medicine

-by A Sindhuja & Y. Venkata Achyuth

Kumar 55 The Financial Detective,

Contract note

-by Kshitz Keshav Bhardwaj

57 Rupee Depreciation: Who

gains or who lose?

-by Pardeep Kaur

C O V E R S T O R Y

D e m e r g e r s : T h e r o u t e t o

u n l o c k v a l u e

P a g e 4

Demerger by definition is a business

strategy in which a single business is broken

into components, either to operate on their

own, to be sold or to be dissolved. A

demerger allows a large company to split

off its various brands to invite or prevent an

acquisition, to raise capital by selling off

components that are no longer part of the

business's core product line, or to create

separate legal entities to handle different

operations.

One of the prime reasons why large

corporate houses go in for demerger is to

increase the role of specialization in the

particular segment. In case of large

conglomerates, demerging entities often are

the departments/businesses which are

growing at an impressive rate and have

substantial potential. Therefore, in a sense a

demerger is the reverse of a merger.

Demerger therefore is a form of restructure

in which shareholders or unit holders in the

parent company gain direct ownership of

the demerged entity or the subsidiary

entity. The company or entity that ceases to

own the entity is called the demerging

entity. If the parent entity holds a majority

stake in the demerged entity, the resulting

company is referred to as the subsidiary.

India Inc. has recently witnessed a spurt of

demergers like Provogue, Zee Telefilms,

Cinemax, Wipro, Reliance Industries etc. In

this write-up on demergers, we

shall have a look at the

demergers of Wipro and

Pantaloon because they are

the most recent ones. We shall

also have a look at questions

like – Is demerger a route to

unlock value? and What is

there for shareholders and the company in

the demerger?

Wipro’s Demerger: A Win-

Win Deal

On November 1, 2012, Wipro had

announced a demerger plan to hive off its

non-IT businesses into a separate com-

pany. As per the demerger plan announced,

Wipro wished to hive off three units -

Wipro Consumer Care & Lighting, Wipro

Infrastructure Engineering and Wipro GE

“How does

demergers

unlock value

and affect

shareholders

in case of

Wipro and

Pantaloon”

© Money Matters Club, IBS Hyderabad.


Healthcare Private Limited - into a separate unlisted company called Wipro Enterprises. Together,

the three units contributed 14 per cent to Wipro's revenue. The IT business, which contributes 86 per

cent of revenue, will remain a publicly listed company. In FY12, IT business contributed 96 per

cent to the operating profit. And on December 29, 2012, Wipro got shareholders’ nod for demerger.

The demerger step looks obvious at this stage because Wipro’s non-IT businesses have achieved a

critical mass. A delay would have made it difficult for Wipro to separate its IT & non-IT businesses.

Another reason which could have prompted Wipro’s board to take the demerger route is that when it

comes to acquisitions, IT companies come cheaper than FMCG companies, in terms of price/sale.

Normally, an IT company is valued at 1 to 1.5 times its annual sales turnover, while an FMCG

company costs 2-3 times, at times even 7-8 times. This is because the brand value weighs more when

it comes to FMCG business. Since, Wipro’s shareholders come with an IT mindset; they are unlikely

to take kindly to high valuations for acquisition of FMCG companies. It is pertinent to mention here

that Wipro’s Consumer Care business has made numerous acquisitions. It has bought brands like

Glucovita, Chandrika, Yardley and North West Switches & Unza Holdings. WCCL acquired LD

Waxson Group, a Singapore-based FMCG company, as recent as December 2012. Therefore there

is little doubt in the fact that a demerger would make both the IT & the non-IT businesses leaner

and meaner.

Another rationale that supports Wipro’s demerger is that all the three non-IT business units generate

enough cash in their balance sheets every year. This is the reason why once the separation is com-

plete, Wipro Enterprises would be a debt-free company with healthy cash flows. This will give

Wipro Enterprises necessary impetus to go all out when acquisition opportunities will come its way.


P a g e 6

Apparently, low profitability of Wipro’s

non-IT business was also a big reason for

the demerger. Wipro’s non-IT business

accounts for 14 per cent of the company's

turnover but only 6 per cent of its operating

profit. Thus it was widely presumed that

Wipro’s non-IT business was pulling back

Wipro's bottom line. The reason behind this

is that Return on Capital Employed

(ROCE), for the IT and non-IT business is

quite different. For example, while Wipro

Consumer Care & Lighting's ROCE is about

19 per cent, it is much higher in the case of

IT.

Coming to the terms of the deal proposed by

Wipro, the terms of the demerger are

complex enough to keep the sharehold-

ers thinking. Wipro has offered its share-

holders the following options –

1. Receive one equity share with face

value of Rs.10 in Wipro Enterprises

for every five equity shares with face

value of Rs.2 each in Wipro Limited

that they hold.

2. Receive one 7% Redeemable Prefer-

ence Share in Wipro Enterprises, with

face value of Rs.50, for every five

equity shares of Wipro Limited that

they hold. Each Redeemable Prefer-

ence Share shall have a maturity of

12 months and shall be redeemed at

a value of Rs.235.20.

3. Exchange the equity shares of Wipro

Enterprises and receive as considera-

tion equity shares of Wipro Limited

held by the Promoter. The exchange

ratio will be 1 equity share in Wipro

Limited for every 1.65 equity shares in

Wipro Enterprises Limited.

Digging deep into this complex deal, Wipro

investors, if they choose preference shares,

will get roughly Rs 47.7 after one year for

each Wipro share. At today’s prices, this is

roughly Rs 43.4 per share. Investors thus

get 12.1 per cent compensation for letting

go of the non-IT business. And if they opt

for equity in Wipro Enterprise and swap it

with the promoters, they would again make

“The demerger as proposed is a

win-win deal for promoters .”



Wipro. And because Wipro’s non-IT

businesses were part of an IT giant, these

businesses didn't got as much visibility as

the other companies in their sectors enjoyed.

Also, the shareholders are not taken for a

ride with the demerger. They are well

compensated for letting go off the non-IT

business. The valuation of the non-IT

business also is quite generous. On the other

side, the demerger deal is a win-win deal

for Wipro. There is no doubt in the fact that

the deal has been well crafted to suit each

and every stakeholder.

Pantaloon’s Demerger:

Synergizing Operations

Another demerger to have happened re-

cently is that of Pantaloon. Future Group

demerged the fashion business of its two

entities namely Future Ventures India

Ltd. (FVIL) and Pantaloon Retail India

Ltd. (PRIL) into a new entity named

‘Future Fashion’. This will help the

companies to focus on their respective busi-

nesses more effectively. The appointed date

for the deal is January 1 2013 and it will

take around 6-8 months to complete the

deal. After the demerger, PRIL will hold as

its core business brands like Big Bazaar and

Food Bazaar while FVIL will focus on the

a gain of about 12.1 per cent on the

transaction.

Rough calculations carried out for the deal

shows that Wipro is valuing its non-IT

businesses at about Rs 10,900 Crores, which

means a price-earnings multiple of about

29-30 times the net profit for this business.

Now, this is a generous valuation taken up

by Wipro and this valuation is aimed at

providing investors a good price for their

exit.

Needless to say, the demerger as proposed

by Wipro is a win-win deal for promoters.

If the investors opt for the preference shares,

Wipro will get access to preference capital

at the cost of 7 per cent a year, which is

more or less at par with the market rates for

preference capital. But more investors

opting for preference shares will also mean

a smaller equity base, boosting Earnings

Per Share (EPS) for Wipro Enterprises.

And if the investors opt for equity shares

instead of preference shares, promoters of

Wipro will get a chance to reduce their

own holdings in the listed IT Company.

This will make sure that they meet the

government’s minimum public sharehold-

ing norms of 25 per cent, without selling in

the market.

In conclusion, we can say that the demerger

deal is happening at the right time for


P a g e 8

food and FMCG sector which includes

brands like Fresh & Pure, Premium Harvest

etc. Also, the new entity Future Fashion will

focus on operating retail chains with domes-

tic and global brands. FVIL will transfer

fashion brands like Scullers, Urbana, Urban

Yoga etc. to Future

Fashion. Key financial

aspects of this demerger are

as follows:

The new entity Future

Fashion Ltd. will be

listed .

The share exchange

ratio will be 1 equity share of Future

Fashion Ltd. for every 3 equity shares

held in PRIL and 1 equity share of

Future Fashion Ltd. for every 31

equity shares of FVIL.

Post demerger, 49.8 % in the new

entity will be held by PRIL, 30.5 % in

the new entity will be held by share-

holders of FVIL and 19.7 % will be

held by PRIL as a corporate entity.

Post demerger, Future Ventures India

Ltd. will change the face value of its

shares from Rs. 10 per share to Rs. 6

per share.

The major reason for this demerger is that

PRIL’s management wants to deleverage

the company. Currently PRIL has a debt of

Rs. 3700 Crore on its book. It will transfer

debt of Rs. 1226 Crore to the new entity

Future Fashion. Fashion business already

has debt of 200 Crore. So total debt on the

books of Future Fashion will be of Rs. 1426

Crore and

PRIL’s debt

will come

down to Rs.

2474 Crore.

Another

reason for

demerger is

the interest

that Aditya Birla Nuvo Ltd. has shown in

owning a majority stake in PRIL. ABNL

would invest Rs. 1600 Crore in Pantaloon’s

retail business. This deal got the approval of

Competition Commission of India (CCI) on

December 27, 2012. Another rationale for

demerger is the new challenges and opportu-

nities that await the company after 51 %

FDI in Multi-Brand retail was approved by

the Government.

For the shareholders of PRIL and FVIL, it

is a beneficial move as they will get shares

of this new entity in addition to their

existing shares in PRIL and FVIL. After the

clearance of the demerger by CCI the share

price of Pantaloon retail India Ltd. (PRIL),

has reached to Rs. 255 per share on 30th



December from 235 per share on 27 Decem-

ber which shows investors are bullish on

this stock. It is also beneficial for the exist-

ing stockholders of PRIL as now company

is less leveraged; so on one hand their

dividend earning will increase because now

there will be less interest expenditure and on

the other hand it will decrease the risk in-

volved in the investment as now debt equity

ratio of the company will be reduced.

Also, PRIL sold its investment worth

Rs.295 Crore in the quarter ended 30 Sep-

tember 2012. This shows that the company

is in desperate need of cash to reduce its

debt. Now after transfer of some debt to the

new entity and after Rs. 1600 Crore invest-

ment by ABNL, PRIL doesn’t need to sell

its existing investments. Therefore PRIL

will be in a better position to provide more

returns to its shareholders .

The only concern for the Future group as a

whole is that it is transferring a debt of Rs.

1426 Crore to a new entity. If this entity

fails to operate as intended or if it fails to

generate profit due to economic slowdown,

Future Group as the parent company would

be in trouble. The other concern for the

shareholders of FVIL is that company is re-

ducing face value of its shares from Rs. 10

to Rs. 6 and as a result shareholders may

oppose the demerger. If these circumstances

arise, entire value created for shareholders

and for the company itself by demerger will

be at risk. But as of now this demerger looks

to be a good deal for both the Future Group

and its Shareholders .

Contributed by:

NEERAJ GUPTA

PGDM(2011-13)

XIME, Bangalore

ANURAG MISHRA

PGDM(2011-13)

XIME, Bangalore


P a g e 1 0

India is no longer the world’s largest de-

mocracy. With an electronically unified

world, the financial markets have seized that

podium. A plethora of securities and anony-

mous, yet a huge number of participants,

reaffirm this claim. Every buy and sell deci-

sion representing a vote,

with its weight age

differing purely in the

amount of monetary

capital backing it. How-

ever as Benjamin

Graham noted, this

democracy places no

demands on the qualifi-

cation of its voters, lead-

ing to vagaries, mis-

chief’s and at times a

crescendo of greed

followed by an avalanche of panic.

This was the premise upon which George

Soros established his theory of Reflexivity.

The theory tries to explain the various asset

pricing vagaries in terms of a generic

approach.

The theory claims perfect knowledge as

impossible. It then goes on to explain how

imperfect perceptions affect reactions,

which in turn, mould a flawed reality,

thereby distorting reality even further. This

analogy when extended to the financial mar-

kets, has successfully explained the extreme

nature of boom-bust sequences.

The theory states that we

take decisions based upon

the feedback we receive

from our environment, how-

ever it is impossible for us to

cognize the environment in

its entirety. Also we in turn

act upon the surroundings,

thereby distorting the present

scenario further. This leads

to herd movements being

dragged on to obscene

levels, until it becomes

immensely unsustainable, leading to a flip in

the dynamics of the situation.

But this is easily comprehensible, growls the

gentle reader. However the important thing

that he misses out is that, the theory goes

further to claim that these votes cast, in

terms of buy and sell orders, affects the very

fundamentals of the asset (generally it im-

S O R O S I A N R E F L E X I V I T Y

T H E O R Y - A n i n v e s t i g a t i o n i n

t h e I n d i a n m a r k e t s


P a g e 1 1 V O L U M E 2 0 , I S S U E I

plies the enterprise backing the listed eq-

uity), which goes on to influence the reality,

hence the perception and so on.

The very natural question that arises is, how

can public opinion affect the fundamentals?

Till now public opinion is seen as a partial

unilateral function of these fundamentals.

Although this though is revolting, the fol-

lowing shall satiate the reader.

We need to understand that, credit

availability is a function of past corporate

fundamentals and interest rates. Assuming

low interest rates and a liberal monetary pol-

icy, initial credit availability, being propor-

tionately lower than the ensuing install-

ments, shall be reasonably easy. This credit

is subscribed on-to by enterprises, so as to

generate higher economic value.

It is here that, this theory claims that

increased valuation of collateral boosts

credit expansion, which in turn permits

companies to further their collateral valua-

tions ultimately causing an “Over Expan-

sion” of credit.

This is amply visible in the last half decade

history of Indian Corporations. Today the

reason for a slump in the performance of

Indian Corporations is not only a weak

global and economic structure, but also

painful and inevitable cost of borrowed

capital, that is wrecking havoc with the fi-

nancials of Once-Upon-A-Time Aristocrats

of Indian Commerce.

An interesting debt structure was a Foreign

Currency Convertible Bond (FCCB). These

were issued by several companies

(Educomp, Suzlon to name a few), these

were generally listed overseas, issued in


P a g e 1 2

Dollars, entitled the bond holder to a low

5% interest rates (generally) and were con-

vertible into a specified amount of shares

above a certain conversion price, which if

not having achieved, were payable entirely

in principal upon the date of expiry.

The FCCB’s were considered a win-win

situation for both parties, since they allowed

companies access to money with low cost of

capital and the lenders a high premium in

the exercise price thereby compensating the

low yields. However, this was at a time

when the Global scenario was ingratiating

(Circa 2006), Indian Economic Scenario on

a high tide, and a low interest rate policy.

The companies were already trading at a

heavy premium and to anticipate the same

for several years to come in the future is an

understatement for “Wishful Thinking”. So

how exactly did this circle carry on?

Careful observation reveals the trick. It is

human psychology to respond positively to

positive reinforcement. The inflated share

prices, boosted lender confidence, in

expectation of a further appreciation in

pricing. However it was with access to this

very “cheap” credit, that the companies

posted record results, which made them go

into overdrive mode and since there seemed

no clouds on the horizon, the basic premise

that trees don’t grow to the sky, was

forgotten. The improved results saw thei

way into the valuations, which further en-

abled credit for the enterprise. Thereby con-

structing a “self reinforcing” feed-back loop.

Fitch India Ratings estimates that of the 19

companies that have defaulted on

FCCBs or restructured them, 12 may expect

a recovery in the range of 0% to 30% with a

median recovery period of around five

years. In the remaining seven cases, the re-

covery may be 30% to 100% in three to five

years.

Now that the party is over (although the

hangover still persists), this entire



experiment in real time, once again reaf-

firms the legendary insight and scope of this

beautiful philosophy. This also serves as a

guiding lighthouse during periods of ex-

cesses , the reversal of which can be highly

profitable, monetarily and stimulating, men-

tally to the wise and the alert. To sum it up

in a nutshell, market movements often fol-

low the adage-

“Avoid hangovers, keep drinking”

- Warren Buffett (On irrationality)

Contributed by:

ANIKET PARIKH

IIT-K


P a g e 1 4

1991 is perhaps the most significant year in the history of Indian Economy. It was in 1991 when the

now prime minister and the then finance minister Dr. Manmohan Singh introduced the economic

reforms of Liberalization, Globalization and Privatization that saved India from external bank-

ruptcy.

Hit by the global economic slowdown and financial turmoil in the Euro zone, India’s growth rate

has taken a major block. There are also various internal factors which are contributing to the low

GDP growth.

The current economic crisis in India is very reminiscent of the 1991 crisis. While some argue that

the current economic crisis is a repeat of the 1991 crisis, others put the counter argument that the

economy is very different in 2012 from 1991. Let us look at both of these one by one

Resemblance to 1991 : The worrying factors

Fiscal Deficit: The fiscal deficit was at 5.56% of GDP in 1991-92. In 2011-12 it was at

5.9%. This figure is showing a dangerous similarity (see below).

2 0 1 2 a n o t h e r 1 9 9 1 ?



Current Account Deficit: The current account deficit was at 3% of GDP in 1991 and in March

2012, its value was 4.3% Analyzing the trend in CAD% for the past years, we see that how it

has risen substantially

Currency Depreciation: The similarity between trends in rupee depreciation between 1991 and

2012 is also alarming. From Jan 2011 to Jul 2012 the INR depreciated by 21.7 % while the

INR , from Jan 1989 to Jul 1991, depreciated by 23.5 % against USD .


P a g e 1 6

Inflation: With the trade off between growth rate and controlling inflation for a growing

economy, RBI has had difficulties in adjusting the necessary rates. With the government fol-

lowing expansionary budget, there is a lot of money in the market, making controlling infla-

tion a very difficult problem. In the below chart we see the progress of India’s CPI inflation

since 1991.

Differences with 1991

Exports: India exports were worth 22443 Million USD in July of 2012. Historically, from

1994 until 2012, India Exports averaged 8464.26 Million USD reaching an all time high of

30418.00 Million USD in March of 2011 and a record low of 1805.00 Million USD in May

of 1994. Exports amount to 22% of India’s GDP. Gems and jewellery constitute the single

largest export item, accounting for 16 percent of exports. India is also leading exporter of

textile goods, engineering goods, chemicals, leather manufactures and services. India’s main

export partners are European Union, United States, United Arab Emirates and China. The

chart below shows the phenomenal growth of Indian exports which can be mainly attributed

to the economic reforms of 1991.



GDP: The Gross Domestic Product (GDP) in India was worth 1847.98 billion US dollars in

2011, according to a report published by the World Bank. The GDP value of India is roughly

equivalent to 2.98 percent of the world economy. Historically, from 1960 until 2011, India

GDP averaged 368.84 billion USD reaching an all time high of 1847.98 billion USD in De-

cember of 2011 and a record low of 36.61 billion USD in December of 1960. The chart below

shows the phenomenal growth of Indian GDP since 1991 showing how big an economy has

India become.


P a g e 1 8

Debt as a percentage of GDP: This is one of the factors that India has managed to control

magnificently. With the euro zone battling high debt to GDP ratios and many countries like

Greece battling default and bailouts saving many countries, India has been able to control

its this factor well. We can easily get the good picture here by comparing the charts of India

and USA .

We see that while US debt to GDP ratio increased by 77.5% since 2002, India’s Debt to

GDP ratio decreased by 15.8% .



Forex Reserves: India’s Forex reserves have increased substantially. Back in 1991, India had

forex reserves that could cover just 2 weeks of imports, while India’s forex reserves can cover

about 9 months of imports .(See Below. Source: RBI database)

We can safely say that the comparison of situations in 2012 and 1991 is not really justified at this

stage. In 1991, the economic situation in India was crippled. With no globalization, India was an

isolated country. Since then, India has come a long way in the global economic scenario with in-

vestments and increasing business confidence. The country has a much bigger and stronger banking

system today. Compared to 1991, in terms of infrastructure, we are in a far better off position to

bring about regulations needed in the economy more efficiently. Also unlike 1991, the market de-

termines rupee's exchange rate which invariably is our great strength. Financial markets today are

more resilient and robust than what they were in 1991

But with the global economic meltdown, subprime crisis, eurozone crisis, Arab spring, increasing

crude oil prices, the financial world is in turmoil. With the recent scams in India and some non en-

couraging principles like GAAR (General Anti Avoidance Rules), we see the investor confidence in

India slowly going down which is reflected in the falling FDI and FII


P a g e 2 0

We see the decreasing GDP annual growth rate over the past few quarters. Despite reaching highs

of 10.1, 9.4, 9.6 it has now come less than 6.

Even while analyzing the IIP growth rate, we see that it reached heights when the reforms were

brought about, but has reduced substantially with IIP growth rate of 0.1% in month of July

So government cannot afford to relax. The FDI reforms that were brought about recently is a step

in the correct direction. What happened in 1991 was that India came out of its comfort zone to

bring about major reforms which transformed the picture of India. We need similar strong deci-

sion making now, to boost the investment environment in India and restore the growth structure,

if our government doesn’t address this, we may see another 1991 coming.

Contributed by:

ANINDO CHAKRABORTY

Batch of 2012-14

IMT, Ghaziabad



In order to meet the credit needs of the rural

households the formal cooperative structure

came into existence more than a century ago.

Though the concept of the cooperatives has

gone far and wide now, their basic motive of

reaching out to the poor has remained

unserved till date. A recent

policy measure of linking

these cooperatives with the

mushrooming microfi-

nance institutions is an-

other initiative to make

t h e s e c o o p e r a t i v e s

p r o - p o o r i n t h e i r

operations.

Experts have had divergent views on how use-

ful the cooperatives indeed are to the poor. In a

socialist system, cooperatives are essentially

seen as instruments of transformation of soci-

ety. In a capitalist system, cooperatives are

seen as attempts to correct the excesses of pri-

vate enterprises. In mixed economy systems

like India’s cooperatives help serve the welfa-

rist objectives of the state like poverty allevia-

tion and empowerment. However, there are

also a certain group of experts who feel that

cooperatives are able to do justice to the cause

due to fundamental dilemmas they face due to

trade-offs involved in growth and equity, and

equity and decentralization. Some also feel that

cooperatives might succeed if they get a backup

of proper policy support and guidance of pro-

gressive leadership.

Cooperatives of today are

modeled on the German

Raiffeisen system to help

free farmers from the

clutches of moneylenders.

Even the Cooperative so-

cieties Act of 1904 in In-

dia was passed with the

primary objective of en-

couragement of individual thrift and mutual co-

operation among members with a view to utili-

zation of their combined credit, by the aid for

intimate knowledge of one another’s needs and

capacities and of the pressure of the local public

opinion. Adoption of microfinance is a more

recent of the long drawn efforts to reform the

cooperatives. Such a linkage serves the twin

goals of making cooperatives more inclusive

while also improving the business prospects of

the cooperatives. Microfinance uses unconven-

tional methods to mobilize poor and provide

C O O P E R A T I V E S , M I C R O F I N A N C E

A N D T H E P O O R


P a g e 2 2

them access to credit, savings and insurance

facilities. The group method adopted by mi-

crofinance solves the problem of collateral

faced by formal agencies and poor. The

main principles of microfinance being mu-

tual cooperation, joint liability and peer

monitoring coupled with informality, small

size and homogeneity of membership of

groups, would help ensure better recovery,

reduce risk and cost of intermediation. This

increases the reach of cooperatives by ruling

out the problem of collateral, while also

helping them scaling-up and increasing their

dividends in terms of increased lending and

assured recovery.

However, the policy also has several chal-

lenges and contradictions. Microfinance is a

more a neo-liberal phenomenon and may not

suit the welfarist goals of inclusion and pov-

erty alleviation. Microfinance SHGs need

considerable resources for their emergence

and sustenance and in the absence of social

intermediation processes the groups may not

emerge uniformly in quality and quantity.

Cooperatives are formal institutions while

microfinance institutions are essentially in-

formal and the former may not be able to

promote the latter on a scale unless

supported by appropriate agencies. Had the

cooperatives continued with original Raif-

feisen model guideline this problem would

not have arisen but that is not the case. Both

in the formation of SHGs and in their inter-

nalization, the cooperatives would face con-

tradictions and challenges for a meaningful

integration. Moreover, the cooperatives that

have lost their pre-eminent position now

have to compete with other formal agencies

which are also keen to scale up in microfi-

nance. How far the SHGs will be able to

help cooperatives in terms of their business

is another major question in the linkage



programme.

By March 2010, 69.53 lakh SHGs had been linked

to financial institutions with an estimated cover-

age of 97.35 million households. Of this, about

10.79 lakh SHGs have been linked to cooperatives

(15.5%) covering about 15.11 million households,

having mobilized a savings of about Rs. 1225

crores, while the total outstanding loan of SHGs

of cooperatives comes to Rs 1729 crore by March

2010. At all-India level, the average number of

SHGs linked to primary agriculture cooperative

societies (PACS) comes to 11.4, while at the dis-

trict credit cooperative bank (DCCB) level is very

low at 3405 only. However, SHGs have increased

the membership of PACS by an estimated 1.51

crore which makes about 10.76% of total PACS

members, and bulk of this number is women and

poorer sections of rural household. But the loan

outstanding of PACS SHGs is only 2.26% of the

total outstanding loans of PACS. Given that the

proportion of credit-linked SHGs is less than half

of the total SHGs linked, the impact on credit

business is still quite weak. While the overall im-

pact of SBLP appears insignificant on the business

position of cooperatives, but states having rela-

tively intensive effort by the cooperatives under

SBLP will definitely have better potential.

The historical experience of reforming the coop-

eratives had not yielded the expected results. The

emerging experience with regard to linking coop-

eratives with microfinance indicates that the out-

come now is no different. The overall results of

the linkage leave much to be desired especially

given the enormity of financial exclusion.

Even two decades after implementation of the

SHG-bank linkage programme (SBLP), the

cooperatives are found playing only a supple-

mentary role in it. The apparent delay in pro-

moting SLBP among the cooperatives and in

creating a suitable legal environment has also

made the cooperatives lax in taking the re-

quired initiatives. Despite the drawbacks and

limitations, it would be worthwhile to pursue

the linkage further. The aim of these efforts

should be to both consolidate the efforts as

well as to overcome the constraints faced.

Contributed by:

BHAVI PATEL

PRM 32

INSTITUTE OF RURAL

MANAGEMENT, ANAND.

(IRMA)


P a g e 2 4

Indian stock markets have been very kind in

giving us around 26% return in both nifty &

sensex indexes in the year 2012. Whereas

markets around the world hasn’t been that

good. Smallcap and midcaps were proved

favorites in the last year. Few good hopes

building around the governance of India

made the markets move higher in the last

year.

A strong

start in 2013

has made

the expecta-

tion level to

go much

higher for

the year

ahead. FII’s

interest has

been increasing which has been witnessed in

first couple of weeks buying figures, but the

question lies is can markets deliver the same

kind of performance in 2013 as well? It’s a

big question, which can’t be answered at the

start of the year but definitely can be ana-

lysed from the current scenario and upcom-

ing events which can directly or indirectly

affect the Indian Equity markets.

US Fiscal cliff a important issue not only

for US but for world economies as well has

reached a solution which created a good

hope around at least for a while, FII’s

money has been the support for Indian eq-

uity markets so anything not in favor for

US fiscal cliff would have resulted in nega-

tive way for the Indian equity markets. But

things have

turned out in

favor which will

attract more

money from

FIIs in to Indian

equity markets

for sure, keep-

ing short term

strong momen-

tum intact.

RBI third quarter monetary policy can be a

major trigger for the markets in coming

days. As a cut in interests rate is expected

around the corners, which can work in fa-

vour of markets. With the positive expecta-

tion from the policy, banks stocks have al-

ready shown some decent rallies. Positive

outcome from the policy can keep the mar-

kets trading with positive trend.

I N D I A N S T O C K M A R K E T , A L L

S E T F O R N E W H I G H ?



Solution to US Fiscal cliff, Probable Inter-

est rate cuts, are these factors enough for

the markets to make all time new high for

the year? People have started talking about

23k++ for Sensex, even 7000 mark on

Nifty by end of the year are the levels

talked about. Practically looking at it, it

looks far above expectations .As Indian

economy is having more concerns than

these couple of highlighted issues. When

markets rallied in the big bull run 2007,

inflation wasn’t a concern Indian economy

was growing at a much higher pace than

today. Economies around the world were in

a much good shape than their current con-

ditions. From the mid of 2012 market

started their upward movement as Indian

government showed signs of overcoming

its policy paralysis attitude, By taking

some major steps on encouraging FDI in

retail industry. At the same time FDI in

insurance, aviation sectors would be some-

thing markets would be expecting from the

government in current year. Being a coali-

tion government passing every major bill is

nothing less than a big challenge.

Indian Equity markets have quite big chal-

lenges in front of it. It won’t be easy for

markets to overcome these hurdles. As per

view of few technical analysts nifty’s all-

time high would act as a major hurdle.

Markets tried the same to break in 2010 as

well but couldn’t do that well. So even this

time it would be a tough job .In a way rally

seen in the last six months is really strange

as markets overlooked some major factors

but considered few small positive develop-

ment quite seriously. So once the overall

scenario & its positivity fades out things

may look completely different than today’s

condition. In this overall positive momen-

tum nifty can definitely inch higher till its

all time high but breaking and sustaining

above it will definitely won’t be easy.

Some strong actions from government to

take the economy growth rate to a consid-

erable good rate and other global events in

support with it will only make the overopti-

mistic views about the index predictions

which are talked about possible. Let’s hope

for the best.

Contributed by:

Sanket Narkhede

MMS, Ist year

MET’s Institute of

Management.

Disclaimer: The views & image used or expressed in the above article are based on personal observations that

may go wrong. One should make his/her own judgment after reading it for which writer will not be held

responsible.


P a g e 2 6

It is ordinarily agreed that one of the most

important instruments of poverty manage-

ment would be the feasible expansion of

Institutional credit facilities to a large major-

ity of individuals who neither have adequate

pledge nor credit history to secure a loan. In

order to allocate this problem, governments

in many developing countries pursued the

program of subsidized credit until the 1980s.

However, the experiences were mostly dis-

astrous. Moreover, unnecessary

administrative difficulties, a com-

plex formal credit system, bureau-

cratic sprawl, unchecked corrup-

tion and unhealthy political pres-

sure added salt to the wound. The

credit-subsidy programs failed to

promote banking culture among the target

group and proved inadequate to motivate

them to be self-dependent (Morduch 1999;

Varman 2005).

In order to solve the problems of rural

credit, two aspects deserve close attention:

(a) Easy access to loans for the poor (both

for production and consumption purposes)

(b) Financial viability of the lending institu-

tions.

To achieve both these ends simultaneously

the idea of social collateral is popularized

through the group lending programs. To

overcome this problem, group lending is

considered as a definitely safer option. Since

the group has much better access to local

information it is possible for the group to

make a distinction between a risky and a

safe borrower. The lender has to design

some incentive (threat) scheme for the group

to utilize the information in the interest of

the bank. Thus, the group will, in

effect, act as an agent of the lender.

If the group is held responsible for

non-performance of any one of the

group members, then it would sim-

ply raise the cost of default and,

because of peer monitoring, the re-

payment rate would improve. While group

lending with joint liability has emerged as

an effective instrument to ensure the finan-

cial viability of micro lending, the potentials

of other instruments may also be explored as

well.

Congruity with human nature enhances the

relevance and utility of human development

initiatives. So far, the self-help groups

(SHG) have turned out more successful in

the rural societies where the social sanction

M I C R O F I N A N C I N G / S E L F - H E L P

G R O U P S

( r u r a l d e v e l o p m e n t a n d

p a n c h a y a t i r a j )

Group lending

programs should be

promoted since they

have much better

access to local

information and

they can hence

make distinction

between risky and

safe borrowing.



parameter is rather strong. In the absence of

social control the joint liability clause is dif-

ficult to enforce as effective monitoring is

impossible.

The key to all such initiatives has been train-

ing and capacity building of various stake-

holders including the SHG members them-

selves, the range of which is growing at a

fast pace. The strategy involved forming

SHGs of the poor, encouraging them to pool

their thrift regularly and using the pooled

thrift to make small interest bearing loans to

members, and in the process learning the

nuances of financial discipline.

Under this heading we have to focus on

the following things:

1. To develop the need and scope of

fresh initiatives for SHGs in their own

communities for bank linkage at low

cost and in a short time.

2. To develop SHGs, in an attempt to

reduce their reliance on NGOs and to

demonstrate how the whole task of

delivering financial services through

SHGs can be made more efficient.

3. To judge the ‘quality’ of the SHGs, in

terms of the poverty of their members,

and the quality of the banks’ service to

them.

4. To analyze the social and economic

characteristics of the existing SHG

members in various states of our coun-

try and finally resolve it.

The importance of the topic, and the scale of

existing experience, is such that it would

have been both desirable and possible to

carry out a substantial and wide ranging

study, which might be expected to produce

statistically reliable findings and conclu-

sions which could be used with confidence

as a basis for changes in policies and pro-

grams. The time and specifications allowed

for the current study, however, were not

such as to allow this.

SHGs are no more than a new marketing

channel, which banks have adopted because

it enables them to serve a market segment,

namely poor men and women, which they

were previously unable to reach. The chan-

nel development costs have thus far been

covered from a number of different sources,

and it is important to note that the promotion


P a g e 2 8

costs of all the SHGs promoted by scheduled commercial banks, and most promoted by RRBs

until recently, have been borne by the banks themselves. There is a great deal of discussion as

to whether microfinance reaches the so-called ‘poorest of the poor’, and whether, if it does, it

benefits them. It seems to be generally agreed that the main beneficiaries of microfinance are

‘the economically active poor’ . It is not clear whether the SHG system reaches very poor peo-

ple as effectively as the more internationally familiar Bangladesh Grameen Bank system,

which is of course also being used in India and is growing, albeit from a smaller base, as rap-

idly as the SHG system. (Friends of Women’s World Banking, ibid. pp.20-21). SHG promo-

tion is not difficult, and it does not need a bank branch manager to promote an SHG.

Bank management must realize this, and lower level branch staff should be trained and en-

couraged to perform this task. The ‘social’ aspects of SHGs are not the banks’ direct concern,

but they must be regularly monitored in order to avoid ‘client drift’ away from the poor.

Contributed by:

CHANDRA SEKHAR

Indian Institute of Information Technology and Management, Gwalior.



Current Account of an economy reflects the

net position of the four account heads of an

economy i.e. Goods, Services, Income and

Current transfers. It is the reflector of all

the trade that happens in an economy and

its net debit or credit position tells us about

the state of the respective economy, both on

its own and in comparison to other world

markets.

In the general terms, a country in deficit is

said to be investing more than it is saving

and is using resources from other econo-

mies to meet its domestic consumption and

investment requirements.

But the principal question is whether

having a current account deficit is wor-

risome or not?

Well, sometimes. But more often than not,

a current account deficit helps in making

an economy fundamentally stronger and

developed by using the foreign investment

for increasing its competencies. It can also

be considered as a sign of a strong econ-

omy that is a safe haven for foreign funds.

When an economy is in a state of reform or

transition, or is pursuing an active strategy

of growth, then running a deficit today can

provide funding for domestic consumption

and investment tomorrow.

Let us try to discuss different situations

where in the Current account Deficit no

longer seems a problem but a solution to

the latent problems of - lack of productiv-

ity, excessive domestic consumption due

to the easy credit availability, etc:

More Imports - A strong foundation to

an economy's Productivity and yield

A provident economy with a far sighted

approach may import more than it exports,

with the ultimate goal of producing fin-

ished goods for export. This will raise the

country's CAD

(current account

deficit) but the coun-

try will plan to pay

off the temporary

excess of imports at a

later time with the

C U R R E N T A C C O U N T

D E F I C I T S : a p r o b l e m o r a

l o n g t e r m s o l u t i o n

“The principal

question is

whether having a

current account

deficit is

worrisome or

not?”


P a g e 3 0

proceeds made from future export sales.

The proceedings from these sales would

make an entry on the CREDIT side of

the current account. So, when an econ-

omy is running a deficit today to invest in

increasing its future production capabili-

ties, then it can compensate for the deficit

by getting revenues from the increased ex-

ports in future.

Long Term Future Investment in For-

eign Assets

When a country invests abroad in other

country's foreign assets to earn the return

income on investment , then the outing

funds are recorded as a debit entry in the

Financial Account (a component of Bal-

ance of Payment) and the income earned

is recorded as the credit (Income compo-

nent of Current account) in the current ac-

count. So, sometimes a current account

deficit coincides with depletion in a coun-

try's foreign reserves (limited resources of

foreign currency available to invest

abroad).

Liabilities owed to Foreign Investors

The foreign investors invest in the domes-

tic country so as to reap the benefits of re-

turn on investment. And this claim of the

foreign investors on the domestic economy

makes a debit entry in the current account

of economy. But, Investments from abroad

usually have a positive effect on the local

economy because, if used prudently, they

provide for increased market value and

production for that economy in the future.

This will allow the local economy eventu-

ally to increase its exports and, again, re-

verse its current account deficit.

And moreover, this kind of deficit is con-

sidered as a positive sign of a efficient,

strong and transparent local economy, in

which foreign money finds a safe haven for

investment in the local economy. For ex-

ample, in the US capital markets, “Flight

To Quality” mechanism was seen when

“Quality Assets- US treasury bonds &

stocks” were sought out by investors who

faced losses in Asian market crisis.

Planned Spending with enough income

Sometimes governments spend more than

they earn, due to unplanned economic poli-

cies.. Money may be spent on costly im-

ports while no investment is done to in-

crease the productivity or economic

strength. Or, it may be acknowledged as a

priority by the government to spend on the

defence forces rather than economic pro-

duction. Whatever be the reason, a deficit

will occur if credits and debits do not bal-

ance. But when government spends



wisely in those areas which will increase

its economic strength and will generate

prospects for increasing the future produc-

tivity - by investing in major infrastructural

projects & other return generating areas,

Source: The Economist

then running a current account deficit

will bring more prosperity in the na-

tion with future growth.

India’s Current Account Deficit

In the current Economic slowdown,

when it comes to GDP growth, India

has been doing at par with its BRIC

peers, especially when US and Europe

were entangled in the spiral of Recession.

But on various other parameters, India has

been lagging behind. One such factor is

Current Account Deficit. India has the

worst current account deficit, while coun-

tries such as China and Russia have current

account surpluses. In the past few years,

India's current account deficit as a percent-

age of GDP has been rising. In fact the per-

centage in FY12 was as high as 4.2%. Now

in Q2FY13, it has touched an all time high

of 5.4 percent of GDP.

India is suffering from a serious current

account deficit which appears to be

because of the twin problems of

decreased savings, caused by reck-

less fiscal policy, and evidence of

falling competitiveness of exports.

Trade deficit widened due to a

significantly higher contraction

of exports than imports. The trade

deficit increased to US$48.3 billion in

Fig: Increase in Trade Deficit in Q2FY13

Q2FY13 compared with US$44.5 billion in

Q2FY12, an increase of nearly 8.6 percent.

So, in India, the Current account deficit

will lead to a big problem of balance of


P a g e 3 2

payments in the near future if not tackled

properly which will ultimately affect its

Foreign Exchange reserves also. Despite an

inflow of the foreign direct investment and

portfolio investment, the foreign exchange

reserves had declined by US$ 0.2 billion in

Q2FY13 due to high Current account defi-

cit. It means India should invest its borrow-

ings wisely to boost its production capacity

and maintaining the sustainable nature of

its development GDP and future growth.

Conclusion

So, a deficit is not necessarily always bad

for an economy, especially for a develop-

ing economy or an economy under reform:

an economy sometimes has to spend

money to make money. Competitive

problems can be reflected by an excess

of imports over exports, on the other hand

a highly productive economy can be re-

flected by deficit due excess of invest-

ments over savings. If the deficit reflects

low savings rather than high investment, it

could be caused by a poor fiscal policy or

a high domestic consumption. Without

knowing which of these factors are respon-

sible, it makes little sense to talk of a defi-

cit being “good” or “bad”. To run a deficit

prudently, however, an economy must be

prepared to finance this deficit through a

combination of sustainable means that will

help reduce external liabilities and increase

credits from abroad. And the economy will

remain fundamentally strong if it is wisely

investing its savings and prudently using

its borrowings in increasing its Productiv-

ity and future income.

Contributed by:

KARAN CHAUHAN

NITIE, Mumbai.



Financial services play a dominant role in

economies and besides their own signifi-

cance, their proper functioning is essential

for the well-being of the entire economy.

Financial services face a paradox: they are

simultaneously considered a mature industry

with few innovation opportunities and yet

they display particularly dynamic innovative

behavior.

A financial innovation is defined as a new

product or service, a novel organizational

form, or new processes that reduce costs or

risks or that improve quality. Rapid innova-

tion contributes to the dynamic efficiency of

the financial sector, which ultimately affects

the overall growth of the economy. There is

a dearth of empirical studies on innovation

in financial services. This can mainly be

contributed to the lack of measuring pa-

rameters unlike in manufacturing sector

where parameters like R&D spending, no. of

patents and many more are used as a yard-

stick.

In financial services, innovation takes the

shape of new products and services (e.g.

new securities, new payment instruments,

online brokerage services), new processes

(e.g. credit scoring models, electronic

money processing, implementation of SEPA

– Single Euro Payments Area), new forms

of organizations (e.g. branchless banks, alli-

ances with telecommunications providers

and mobile network operators, internal im-

provement projects, such as lean and six

sigma projects for financial services), and

new ways of interacting with customers (e.g.

Internet banking, use of social networks and

smart phone applications).

More of the financial service innovations

have been good (ATM, debit card, money

market funds, interest rate, currency swaps,

etc.) except few (credit default swaps, struc-

tured investment vehicles) which have been

blamed for the recent financial crisis. But

such innovation helped mask or exacerbate

certain bad actions; but was clearly not a

major cause in itself.

I N N O V A T I O N I N F I N A N C I A L

S E R V I C E S


P a g e 3 4

CHALLENGES AND SOLUTIONS

Since innovation is cross functional and

more of line management, it makes it more

difficult to handle. According to recent stud-

ies, Innovation in finance services is much

more challenging and complex than in pro-

duction environment. Reasons being the ex-

pectation of financial success in short-term

and lack of a definite organizational struc-

ture. The innovation process can be a long

one, especially in the eyes of financial com-

panies looking for short-term execution with

short-term financial results, therefore very

few companies have dedicated budgets and

organizations towards a formalized process

for the generation of ideas, their evaluation

and eventual implementation. There is no

specific responsibility allocation for innova-

tion. This can be solved by setting up dedi-

cated R&D department or Innovation de-

partment which is currently lacking in finan-

cial service sector. Social factor like individ-

ual ideas never come out. According to

McKinsey Global survey, 67% of executives

in the financial-services industry view the

need for increased innovation necessary to

meet long-term and short-term performance

goals. Mostly, Organizations puts a barrier

for such employees to structure their innova-

tions and work upon them. While many or-

ganizations regardless of industry face the

challenges mentioned above, there are addi-

tional hurdles which Financial Services has

to address.

One major hindrance comes in the form of

heavy regulations in financial services. It

limits what new products can be made avail-

able and to whom you are allowed to com-

municate with. It even puts restriction on

consulting its entire employee base for inter-

nal feedback and recommendation as in the

case with SEC regulations. Another matter

of concern to the customer and enterprise is

the security of data. It can be a serious head-

ache for the institutions to prevent any data

leakage as individuals are much worried

about it.

Also mostly innovation has been associated

with the major institution in most economies

like Goldman Sachs, JP Morgan chase, or

deutsche bank. But now, in china, some

small to mid size institutions are also quite

active in innovation. They recommend the

innovation factory model which encom-

passes product innovation, channel innova-

tion, marketing innovation and management

innovation. They have realized the impor-

tance of innovation as a key differentiator in

the backdrop of fierce competition in finan-

cial service landscape.



There are two important aspects associated

with the innovation issues in any institution.

One may be termed as internal and other as

external. Problems associated with the inno-

vation in finance service are that it has stan-

dard and efficient organization structure

which sometimes leads to innovation failure.

This event can be a setback for the employ-

ees and organization in terms of long term

benefits.

This can be sorted out by rewarding system

for employees, promoting ideas sharing and

storing across the various domain of the in-

stitutions. It would help the employees to

contribute more and work as a innovation

team rather than an individual input. An in-

novative council, centralized research sys-

tem, dedicated fund and other business unit

responsible for innovation can be a good

option for various organizations.

Role of social media like facebook, You-

Tube, twitter, MySpace would greatly play

an important role. They would provide a

platform to source the customer’s informa-

tion to the financial institution. This infor-

mation would be the beginning point for

them to work upon and achieve the goal of

certain innovation in financial services. To

deal with security and privacy concerns, an

organizational structure within the organiza-

tion itself is required. It would take care of

the different “outside” information and ana-

lyze upon it .

AN EXAMPLE

UBS, a Switzerland based financial service

institution has realized the importance of

innovation. A group within the company’s

investment bank division came up with a

movement to prioritize innovation as never

before. They tried to showcase the ideas of

collective employees. They did it by devel-

oping a bright idea-powered intra company

community called UBS idea exchange.

Starting with mere 50 employees it focused

on corporate transparency in the beginning

stage. Later on, it opened up to all the em-

ployees and focused on the ideas sharing for

innovation and management purpose. How-

ever, it took considerable time from each

department owner and expert to go through

such large no. of ideas but it has resulted

into hundreds of ideas currently in develop-

mental stage and many cost saving improve-

ments and much more.

Contributed by:

RAHUL JAIN

Batch of 2012-14

IIFT, Kolkatta


P a g e 3 6

A Mutual Fund is pool of money which is

supplied by investors and which is invested

on their behalf in investment instruments

like stocks and bonds, according to prede-

fined objectives. The investors in the mutual

fund are known as unit-holders. A profes-

sional manager known as the fund manager

who belongs to an Asset Management Com-

pany (AMC) is appointed to take investment

decisions and manage the pool of funds.

Some AMCs are Birla Sun Life Mutual

Fund, Templeton Mutual Fund, Reliance

Mutual Fund, HDFC Mutual Fund, Principal

Mutual Fund etc.

Tax Benefits

Tax saving is done so that a person saves

more for him and pays less to the govern-

ment. Investing in mutual funds have

several tax advantages.

Capital Gain is an appreciation in the

value of the asset at the time of sale. For

computing the capital gains, the differ-

ence between the sale price of one unit

and the cost of purchase of the original

unit will be the capital gain. Suppose a

unit is purchased at Rs 100 and is sold at

Rs 120, then the capital gain is Rs 20 per

unit. Capital gains arising from the sale

or redemption of units held for a period

of less than 12 months are considered as

short term capital gains. Whereas units

held for more than 12 months give rise to

long term capital gains.

Short Term Capital Gains (STCG):

STCG on Equity Mutual Funds is 15%.

A non equity scheme is taxed as per the

individual investors tax slab. So if the tax

bracket is 30%, and a debt fund is sold

within 1 year, you will pay commensu-

rate tax on your gains.

Long Term Capital Gains (LTCG):

There will be no tax on LTCG arising

from the sale of units of equity-oriented

funds. In case of capital gains arising

from non-equity funds like debt funds,

tax shall be charged at 10% of capital

gains without indexation benefits or 20%

T A X B E N E F I T S F R O M M U T U A L

F U N D S



of the capital gains with indexation benefits.

Wealth Tax: Under the Wealth Tax Act, mutual fund units are exempted totally from Wealth

Tax .

Tax Deduction at Source: For the dividend paid by the mutual fund to the unit holder, no TDS

is deducted. Also there are no provisions under the income tax act according to which TDS is

required to be deducted from the sale proceeds of the units. The unit holder gets the entire sales

consideration at the applicable NAV’s less the load and no TDS.

Equity Linked Saving Scheme (ELSS)

These schemes are popularly known as tax savings funds. They offer a double advantage of

capital appreciation and tax benefits. These schemes offer tax benefits to the investor under

provisions of Section 80C of the Income Tax Act, 1961. These types of funds are diversified eq-

uity funds which have a lock-in-period of three years. Investments made upto Rs. 1,00,000 per

year are exempted from payment of income tax under Sec 80C.

Source: www.sbimf.com

Main advantage of ELSS is liquidity. It has a short lock-in-period of 3 years, comparing with

NSC and PPF which have a maturity period of 6 years and 15 years respectively. Also since it is

an equity linked scheme it has high earning potentials. Investor can opt for dividend option and get

some gains during the lock-in period. Investors can also select Systematic Investment Plan, as a

small investment made periodically is always better than a lump sum amount at a time.

Some important parameters that need to be evaluated before you consider a tax saving fund are:

Particulars Without ELSS/ 80C Tax

Saving Investment

With ELSS / 80C Tax

Saving

Gross Total Income Rs.7,50,000 Rs.7,50,000

Exemption Under Section

80C

Nil Rs.1,00,000

Total Income Rs.7,50,000 Rs.6,50,000

Tax on Total Income Rs.80,000 Rs.60,000

Tax saved on Investment Nil Rs.20,000


P a g e 3 8

1. Performance: Investors must evaluate the fund on the NAV returns. The fund must

have a very good performance vis-a-vis the benchmark index and its peer groups

2. Expenses: The expense ratio is the ratio of the total expenses of the scheme to the

average net assets of the fund. It indicates the efficiency and the cost effectiveness.

The lower the ratio more is the efficiency of the fund as lower expenses give more

returns

3. Investment Approach: Investors should also consider the experience and expertise

of the fund manager. An experienced fund manager will be able to choose the best

investment option for the fund and align it with the objective of the investors .

Top five tax saving bonds are:

Source: 11th January, 2013, mutualfundsindia.com

These were the tax benefits from mutual funds and the factors that an investor must be

considered while choosing a tax saving fund.

Contributed by:

SHYAM MANGE

MMS (2012-14)

METIOM, Mumbai

Rank Scheme Name PERFORMANCE Expense

Ratio

1 month % 3 month % 6 month % 1 year % 3 year %

1. Principal Tax

Savings Fund

1.59 9.78 19.73 39.54 5.24 2.03

2 Reliance Tax

Saver (ELSS)

Fund – Growth

1.77 6.54 14.13 37.28 9.62 1.91

3 Reliance Eq-

uity Linked

Saving Fund -

1.34 4.21 12.91 36.72 9.26 2.41

4 DSP Black-

Rock Tax

Saver Fund –

Growth

2.07 8.69 18.34 36.11 7.46 2.31

5 ICICI Pruden-

tial RIGHT

Fund – Growth

2.29 10.08 19.62 35.74 14.3 2.49



It is well known that Indians have a love

affair with gold that goes back millennia.

The yellow metal has been a symbol of

power, wealth and mystique for generations

of Indians through centuries. Its appeal tran-

scends the barriers of language, religion and

caste that otherwise divides the nation. Long

ago, when the Romans arrived on the shores

of India looking for spices and silk, there

was precious little they could give in return

to the Indian merchants. So they bought

their wares with the only thing that Indians

wanted even back then, gold coins.

In the recent years, the people’s affinity

for gold has become a serious problem

for the Indian government and economic

planners. The country, which produces

little gold domestically, is already the

world’s largest importer of the metal. In

the financial year 2011-12, India im-

ported 655 tonnes of gold worth a whop-

ping $56 billion, about 70 % greater than

the $33 billion it spent on gold imports

the year before. There are reasons beyond

culture and tradition that have fuelled the

latest Indian gold rush. Gold has emerged

has an attractive investment option as it

has produced decent returns in rupee

terms in the past few years. Also dismal

returns from financial instruments like

stocks and mutual funds (before the last

market rally post Sept’2012) coupled

with rampant inflation have eaten into the

savings of the public and forced them to

turn to gold as a natural hedge. Moreover

the fact of the matter is that gold is one of

the very few asset classes that has univer-

T h e ‘ G o l d e n ’ d i l e m m a h o w t o m a n a g e t h e n a t i o n ’ s i n s a t i a b l e

d e m a n d f o r t h e y e l l o w m e t a l ?


P a g e 4 0

sal acceptance and provides liquidity to the common man, with minimum transaction

costs. All these factors have led to an inflated import bill which has pushed up the cur-

rent account deficit and resulted in downward pressure on the rupee.

Table 1: Global Gold Supply and India’s Demand for Gold

(Source: RBI, Report of Working Group to Study the Issues Related to Gold Imports and

Gold Loans by NBFCs, Jan 2013) *Estimates

The above table shows that while the global supply of gold has been pretty much flat

over the past few years, the demand from India has increased steadily. The gold demand

in the year 2012-13 is expected to be lower because of the increase in import duty to 4%

and slower growth in the economy. The chart below shows how gold has outperformed

other asset classes in the recent past. The fact that bulk of gold transactions happen on a

cash basis and unlike other financial instruments, is devoid of documentation require-

ments and tax hassles, has only added to its attractiveness.

Year Global Gold

Supply (Tonnes)

Gold Demand

from India

(Tonnes)

Growth of

Global Gold

Supply (%)

Growth of Gold

Demand from

India (%)

2006 3559 707 -11.8 -10.7

2007 3554 716 -0.1 1.3

2008 3657 679 2.9 -5.1

2009 4146 743 13.4 9.4

2010 4274 871 3.1 17.2

2011 4030 975 -5.7 11.9

2012 4130* 1079* 2.5 10.7



Table 2: Returns of various domestic assets

Source: Bloomberg

Table 3: Gold imports for India relatively price inelastic

Source: DGCI&S and World Gold Council

The spike in gold imports has created two basic problems in macroeconomic management.

First, it worsens the trade deficit which in turn leads to high current account deficit. India’s

CAD for the financial year 2011-12 stood at 4.2 per cent of GDP at $78.2 billion, an all-

time high figure. To put things in perspective, a CAD of 2.5 to 3 per cent of GDP is consid-

ered sustainable for India, which can be financed through portfolio inflows. Gold contrib-

uted nearly 30 per cent of trade deficit during 2009-10 to 2011-12, which is significantly

higher than 20 per cent during 2006-07 to 2008-09. Secondly, gold is a commodity which


P a g e 4 2

on its own does not add any productive capacity to the economy. It’s either stored in

lockers or gets converted into jewellery. Hence, rising gold imports causes diversion of

funds from productive financial assets to a non-productive asset.

Table 4: Gold Imports and Current Account Balance

Source: DGCI&S

Rise of Gold Loans and Gold Backed Instruments

With the rapid rise of gold imports, the gold loan market has grown explosively in India.

The number of gold loan NBFCs as well their branch network and the volume of gold

pledged have shown explosive growth. To accommodate such rapid growth, the NBFCs

have resorted to large scale borrowings from banks, which have given rise to concerns

about systemic stability among regulators. Huge borrowing of public funds through

banks by these NBFCs has given rise to ‘Concentration Risk’ as more than 90% of the

assets of these companies are in the form of gold jewellery loans. In order to mitigate

such risks, the RBI in March 2012 raised the required Capital Adequacy Ratio (CAR) of

these companies to 14% and capped the Loan-to-Value (LTV) ratio to 60%. A recent

expert committee constituted by the RBI has recommended raising the LTV ratio to

75%.

Along with gold loans, investor interest in other gold backed instruments have increased

manifold, the principal among them being the Gold ETFs.

ITEM 2008-09 2009-10 2010-11

Current Account Deficit (US $ billion) -38.2 -46.0 -78.2

Current Account Balance as Ratio of GDP(%) -2.8 -2.7 -4.2

Net Gold Imports (US $ billion) 24.3 34.4 49.2

Net Gold Imports as % of GDP 1.8 2.0 2.7

Net Gold Imports as ratio of CAB 63.6 74.8 62.9



Table 4: Explosive Growth of Gold Loans

Source: RBI, Report of Working Group to Study the Issues Related to Gold Imports and

Gold Loans by NBFCs, Jan 2013

According to the Association of Mutual Funds in India (AMFI), assets under management

(AUMs) under gold ETFs have more than doubled to Rs 9,886 crore as on March 31, 2012,

from Rs 4,400 crore reported in March 2011, showing a year-on-year growth of 124 per

cent. Other than ETFs, other popular instruments include Gold Futures, Gold Systematic

Investment Products (SIPs) and Gold Savings Funds.

Table 5: Growth of Gold ETFs

Source: Association of Mutual Funds in India (AMFI)


P a g e 4 4

The Way Forward

The Government and the RBI needs to come up with measured steps to restore balance

to the situation. The most obvious measure of increasing import duties might not be the

best way forward as this would only encourage gold trade though unauthorized channels.

Some of the measures that might be considered are*:

a) Introduction of new gold backed financial products like Gold Deposit Scheme where

gold taken as a deposit is recycled for meeting domestic demand and given back at the

time of maturity and Gold Pension Product where the customer surrenders his gold to

the bank in lieu of streams of monthly payments till his death.

b) Liberalize gold loan norms of banks and NBFCs to increase monetization of idle gold

stock.

c) Setting up of Bullion Corporation which may function as a backstop facility providing

liquidity for lending against gold.

Contributed by:

SANCHALAK BASU

XLRI, Jamshedpur

*RBI, Report of Working Group to Study the Issues Related to Gold Imports and Gold Loans by NBFCs, Jan 2013



The performances of Initial Public Offerings that have been floated in the past few years have

raised many concerns. An empirical study shows that there were 118 IPOs listed in the last

three years. Out of these, 72 issues are trading below their issue price. The prices of 25 stocks

fell between 25% and 50%, whereas price of 21 stocks has fallen by 50%-75%. There has been

a furore in SEBI over this dismal performance more than 60% of the IPOs.

IPOs in India have reduced from an investment product which used to sell after intense valua-

tion, research and in-depth return potentiality analysis to an investment product which sells be-

cause of expertise in public relations. There are quite a few scripts in which this phenomenon

can be observed.

Reliance Power

Source: www.moneycontrol.com

Reliance Power was issued at Rs. 450 in February, 2008. Today it is valued at Rs. 92. In the

five year period it has reduced by about 80%.

T H E D I S M A L P E R F O R M A N C E

O F I P O s I N I N D I A


P a g e 4 6

DB Realty reduced at phenomenal rate as compared to the market and at a higher rate as

compared to the Realty Index.

Punjab & Sind Bank

Source: www.moneycontrol.com

Punjab & Sind Bank was issued at Rs. 120 in December, 2010. Today it is valued at Rs.

71. In the two year period it has reduced by about 41%.

Hence even Punjab & Sind Bank has declined at a much higher rate as compared to the

market indices.

Index Levels at the time of

Issue

Current level Change %

Sensex 16,500 19,000 15.15%

Nifty 2,500 2,300 -8.00%

Realty Index 3,300 2,050 -37.88%

Index Levels at the time of

Issue

Current Levels Change %

Sensex 20,000 19,000 -5.00%

Nifty 2,850 2,300 -19.30%

Bankex 13,000 14,000 7.69%



As can be seen the above cases, the stock

prices have declined more than the index

and hence more than the average decline in

the market. This is because the stocks were

highly overpriced in the first place. The

prices rarely justified the potential of the

company as can be deduced from observa-

tion. This results in the distortion of the

information resulting in massive losses to

the investors.

The root cause of this evil is lack of effec-

tive investor education and absence of

stricter due diligence by the merchant

bankers. In this respect U.K.Sinha, Chair-

man, SEBI said “Some of those IPOs gave

us the impression that due diligence was

not being done. There were assertions be-

ing made about physical assets being in

place and those physical assets were found

to be never there to begin with.”

SEBI (Securities Exchange Board of India)

is the regulating body which has the onus

to ensure the investor protection and pro-

mote the investor education. Current SEBI

is taking measures in this respect by ap-

pealing and enforcing the merchant bank-

ers and the investment bankers to adopt

stricter norms of valuations and due dili-

gence, imposing hefty fines on the miscre-

ants etc.

The need of the hour is to promote the in-

vestor awareness by including the basic

knowledge dissemination at the earliest

stage. The basic course on financial mar-

kets must be incorporated in the school

curriculum so that the citizens of the coun-

try are made aware of the basic model of

the system. This will result in an increase

in the average level of awareness amongst

the citizens and deter the ponzi schemes for

good.

Contributed by:

CHAITANYA GANDHI

Jamnalal Bajaj Institute of Management

Studies (JBIMS)


P a g e 4 8

Introduction:

Indian pharmaceutical sector at present

ranks among the top few countries

in terms of volume and accounts for

nearly 10% of the global produc-

tion. According to industry experts

it is on the threshold of becoming a

major global market in the years to

come. In this dissertation an analysis has

been made to identify the factors that en-

able this industry to emerge as the one of

the best performing industry in future.

Emerging markets driving the growth:

From the analysis made by IMS Health it

can be seen that developed pharmaceuti-

cal markets are featuring low growth [Fig-

1] due to an array of factors like patent

expiries , regulatory restrictions, pricing

challenges and a dry pipeline of new

drugs. As the markets in North America,

Europe and Japan are slowing down the

pharmaceutical companies are gradually

focusing on emerging markets like India,

China, Brazil, Russia and Mexico to dis-

cover new growth opportunities.

It has been estimated that these emerging

markets would account for about 40% of

the incremental growth of the global phar-

maceutical industry in future.

Macro factors driving the Pharmaceutical

industry:

a) Growing middle class:

India’s population which is currently

at 1.2 billion is growing at a faster

rate than China and is set to surpass

China’s population by 2050. This is

Fig: 1: Growth rate of pharmaceutical

sector in different markets

a very important factor which propels

growth of the pharmaceutical sector.

Besides, India has a middle class population

which has grown very rapidly from 25 mil-

lion in 1996 to 153 million in 2010. If the

economy continues to grow at the present

rate and the literacy level keeps improving,

around 34% of the population is set to join

the middle class in future. So we can assume

that a surging middle class coupled with a

W h y p h a r m a c e u t i c a l

s e c t o r ?

Why

Pharmaceutical

sector is the best

bet for India in

the troubled

economic time?



rising income level will sustain a reasonably

high growth level.

Fig: 2- Middle class population as a per-

centage of the total population

b) Change in the types of the diseases:

Indians are undergoing a gradual shift in the

disease profile. The acute disease segment

which is related to public hygiene and sani-

tation is growing at a steady rate; but due to

increase in affluence and changes in the life

style of the people there is an emergence of

chronic disease segment which includes dis-

eases like diabetes, cardio-vascular disorder

and nervous system disorder. This trend is

likely to continue and thus there will be an

increasing demand for therapeutic drugs for

this type of diseases.

c) Favorable government policies and

growth of healthcare insurance:

Indian government has taken initiatives

that are aimed at enhancing local access to

healthcare, building more hospitals and in-

creasing public expenditure on healthcare

from 1% to 2-3% of the GDP.

These initiatives along with the

steady growth of healthcare

insurance sector have a positive

effect on pharmaceutical sector.

Currently nearly 80% of the

healthcare expenditures are fi-

nanced out of the pocket. This is a

serious limitation for the people

belonging to lower and middle in-

come groups with low disposable income.

Till 2007, the government run General In-

surance Company happened to be the main

health insurance provider for that little per-

centage of our population who could afford

to have health insurance. It was in 2007 the

insurance sector in India was opened to pri-

vate insurers, when Insurance Regulatory

and Development Authority (IRDA) elimi-

nated tariffs on general insurance. The pene-

tration of general insurance in Indian market

has dramatically increased since then. It is

estimated that by 2015 nearly 60 million

people will be covered under insurance.

[Fig 3]

d) Availability of cheap labors and low

infrastructure costs:

India provides largest English speaking

workforce in the whole world. This thing


P a g e 5 0

Fig -3: Penetration of Healthcare insur-

ance in India

Source: ISI Analytics, Healthcare Industry

coupled with a reasonably low wage rate

provides a competitive of Indian pharma-

ceutical manufacturers over the other pro-

ducers. The figure below substantiates

this fact.

Apart from this India enjoys a cost advan-

tage in the infrastructure costs which is

about 40% lesser than USA and European

countries. These factors enable India to

produce some of the cheapest drugs in the

world.

e) Potential for expansion:

The domestic pharmaceutical sector is un-

derdeveloped till now. So far the domestic

pharmaceutical sector accounts for only

0.7% of the country’s GDP. This leaves a

room for development and expansion in this

sector as India’s growth rate for the year

2013 is expected to be around 6 %.

Investment scenario in pharmaceutical

sector:

In recent times the domestic pharmaceutical

sector has attracted investments in the form

of mergers and acquisitions. The investment

scenario looks

promising since a

cumulative foreign

investment worth

US $ 1.71 billion

has taken place

since 2001. Apart

from this the gov-

ernment has

planned to set up a

venture capital fund

of worth US$ 639 million to promote re-

search and development in pharmaceutical

sector.

Key segments that will drive growth of

the sector in future:



The following analysis made by Mckinsey

India and PWC reveals the segment wise

growth evaluation of the pharmaceutical

sector.

The above analysis shows that the estimated

size of the domestic Pharmaceutical sector,

which was US$ 12.6 billion in 2009, is set

to become US$ 55 billion even if the base

growth rate of 15% is considered.

Conclusion:

Currently the Indian economy is going

through a troubled time with a mounting

fiscal deficit and huge current account

deficit impacting the overall growth. The

industrial activities of late are badly affected

by the weak investment scenario. Key

infrastructure industries are struggling ow-

ing to unfavorable investment environment

and regulatory bottlenecks, which have

badly hurt the confidence of the investors.

The service sector also has started showing

slowdown in growth owing to the inter link-

ages it has with the industrial activities and

due to a subdued demand. Therefore,

considering the fact that the pharmaceutical

sector has performed consistently in the past

and most of the macro economic factors are

in its favor, it has the potential

to emerge as the best bet for

investment in the current eco-

nomic scenario.

Contributed by:

Siddhartha Banerjee

PGDM(2012-14)

IFMR, Chennai

Ramprakash B.

PGDM(2012-14)

IFMR, Chennai


P a g e 5 2

This was a statement of 44th President of

the USA on the New Year day of 2013.

The statement was about the most awaited

“Fiscal Cliff Deal”.

US Treasury borrowed trillions of dol-

lars over the decade from the foreign in-

vestors to finance two long wars and

promote economic growth by fiscal

stimulus. The Federal reached the cur-

rent debt limit of $16.39 trillion USD.

Since the Federal government has

reached the borrowing capacity, the US

Treasury is taking extraordinary meas-

ures to raise money. The Bipartisan Pol-

icy centre forecasts that the debt ceiling

would have to be raised between $ 0.73

trillion USD and $ 1.25 Trillion USD to

extend the government’s borrowing ca-

pacity through 2013.

If Congress cannot raise the debt limit,

then the Fed should reduce its spending

or increase tax. If the government is un-

able to take these actions it would force

to default or delay some of the financial

commitments. To avoid this, the Fed has

to reduce the budget deficit. Budget

deficit decreases with decrease in the gov-

ernment spending or decrease in transfer

payment or increase in tax revenue. This is

the root for discussion on Fiscal Cliff.

Fiscal Cliff is a combination of expiring

tax cuts and decrease in the government

spending across various departments

aiming at sharp decline in budget deficit.

The origin of the word fiscal cliff is am-

biguous because some refer it to Goldman

Sachs, Federal Reserve Chairman Ben

Bernanke etc.

The most important component of the

fiscal cliff is the Bush Era Tax cuts which

include lower tax rate and reduction in

dividend and capital gain taxes. These tax

cuts have expired at the end of 2012. The

effect of this would be increase in long

term capital gain tax rates from 15% to

20%, and qualified dividend rates from

15% to individual marginal tax rate. Gift

Tax exemptions and tax on estates would

also be affected.

Another major component discussed in

Budget Control Act of 2011 includes many

F I S C A L C L I F F : a b i t t e r

m e d i c i n e

“the one thing that I think, hopefully, in the new year, we will focus on is seeing if we

can put a package like this together with a little bit less drama, a little less brinksman-

ship, not scare the heck out of folks quite as much”

- Barack Hussein Obama II


http://en.wikipedia.org/wiki/Budget_Control_Act_of_2011


factors. The temporary Social Security

Pay roll tax has also expired at the end of

2012 and increased the tax from 4.2% to

6.2%. Fiscal cliff was proposed to include

across the board spending cuts, reversion

of Alternate Minimum Tax (AMT),

expiration of measures delaying the

Medicaid sustainable growth rate, expira-

tion of federal unemployment benefits.

Also many itemized reductions were to

phase out; child tax credit, earned income

credit and American opportunity credit

were to be reduced. The proposed tax

brackets were 15%, 28%, 31%, 36% and

39.6% as against the existing 10%, 15%,

25%, 28%, 33% and 35%.

According to this proposal the

Congressional Budget Office forecasts the

budget deficit to fall from $1.1 Trillion to

$0.2 Trillion USD by 2022. However it

also estimates the GDP and disposable

income of the people to decrease leading to

a loss of 3.4 million jobs increasing the

unemployment rate by roughly 1.2%.

The Democrats favored the increase in

taxes while the Republicans favored more

spending cuts. However they were ready to

compromise on many critical issues to

bring the US economy to a normal state.

The actual fiscal cliff varied from the

proposed in many aspects. It made

permanent the Bush tax cuts for individuals

earning less than $400,000 USD per year

and couples earning less than $450,000

USD per year. It brought back the top tax

bracket from 35% to 39.6% which was

present before the Bush Era.

The deal cuts $737 billion from fiscal

deficits in the coming ten years. This is

very small compared to the deficit that

USA would be accumulating during the

same period.

This calls upon for the implementation of

the second dimension of the fiscal cliff i.e.

decreases in government spending and

transfer payments. But the bill extends the

government spending for two months to

delay the threat of sequestration, a series

automatic across the board cuts in Federal

spending.

The above deal has impact on many

groups. The economic winners and losers

are starting to become clear. Some of the

many groups who would be winners are

NASCAR which gains $70 Million USD

due to the extension of Tax Breaks Law,

milk drinkers due to the nine month exten-

sion of Farm Bill, semi wealthy people

who earn between $250,000 to $400,000,

the long term unemployed as Obama has

pushed the benefits to 99 weeks, those

wealthy, elderly bachelor uncles because


P a g e 5 4

the Democrats proposed 55% tax on the

Gits which were more than $1 Million

but now Gits under $ 5.12 Million are

free from tax.

The losers would be very wealthy people

since the marginal tax rate for these

people has increased and also there is an

increase on capital gains and dividends.

The next sufferers being the Hospitals as

the Taxpayer Relief Act prevented the

existing 27% cuts on treatment.

The entire discussion brings us to a kind

of comparison between the European

Union and US government acts to

stabilize the economy. The first of the

similarities would be the addiction of

kicking down the can as far as possible

as seen when the Fed postponed

implementation of spending cuts. The

second clear similarity would be finding

temporary solutions instead of correcting

the root causes of the deficit. The US is

not concentrating on the “entitlement”

reforms or rationalizing the US’s com-

plex tax code because both the

Democratic and Republic parties are

driven by their respective party’s ex-

tremists. The third parallel is that the

politicians in both the regions are not

being honest to the voters and not telling

them what it takes to come out of an

economic crisis.

Contributed by:

A SINDHUJA

IIM, Raipur

Y. VENKATA

ACHYUTH

KUMAR

IIM, Raipur



Indian currency Rupee is losing its market

value in international market. Increasing fis-

cal deficit and declining currency value are

the two big problems for Indian Finance au-

thority. The battle between Indian Rupee

and dollar was on a long run and the weak-

est fall was 55.26/27 per dollar as since No-

vember 29.This depreciation is expected to

continue more in the upcoming time due to

the mixed global market trends.

This is an alarming situation for Indian

economy .Increasing fiscal deficit is forcing

RBI to change its policies. Authorities are

trying to bridge the gap of fiscal deficit. Fol-

lowing the same trend, RBI has increased

the custom duties on imported gold. It will

result as extra earnings for the economy but

on the other hand it will increase the gold

prices. Economists are keeping their eyes on

the areas who are making these conditions

worst. Persistent inflation, current account

deficit, continued global uncertainties, capi-

tal account flows, interest rate differences

and lack of reforms are the key reasons for

the depreciation of currency.

Depreciation leads to costlier imports. As

India imports most of the fuel oil, gold and

metals from outside, it has to pay more for

the same deal. Apart from this, declining oil

prices in international market will not give

any relief to Indian economy. Due to the

volatility of currency, investors will not be

interested in Indian market. These will add

further pressure to the economy.

Rupee Depreciation: Who gains and who loose?


P a g e 5 6

According to International Monetary Fund (IMF) representative Arvind Virmani,

depreciation in not a bad news for Indian economy but it will have some implications. If the

economy is not performing well, followed by Rupee depreciation, it is a good sign. For

countries like China depreciation is good as these countries are export oriented. More

money will be received by people working in IT professionals on converting dollar into

rupee. Gold and International fund investors could gain profit. Travel and tourism industry

will also get the high revenue.

Euro zone crisis and decline demand in developed nations result as the key reason for the

declining growth rate of Indian as well as the Chinese economy. A sharp appreciation of the

rupee seems unlikely at the moment because of weak fundamentals, lack of policy

decisions.

Contributed by:

PARDEEP KAUR

PGP (Batch of 2012-14)

Vanguard Business School, Bangalore.



Contract Note is a confirming note that

contains the details of a stock exchange

deal, the deal which is sent by a broker to

his client. The contract note should have the

clear indication of the time and date of the

deal, the price received/paid, the total value

of the deal and the stamp duty. The stamp

duty clause is there if it’s a purchase of the

shares. It also carries the amount of commis-

sion charged by the broker. With the

technological advancements there days the

contract note are emailed.

This is a legally enforceable document. So

one can use this document can be used for

the settlement of the trades. There are many

transactions going on in a stock exchange;

contract note comes with the details that

enable the holder (investor) to spot the

transaction.

Broadly the purpose of the contract note is

the recording of the transactions, keeping

the details of the transaction in writing

(legal entity) , also to act as the bill of the

brokerage that is being charged , trade

number issued allows to cross check the

transactions.

The broker should dispense the contract note

within 24 hours. It should be signed by the

authorized signatories. In case if it’s the

digital mode then it should be digitally

signed. The details like the exact transaction

price and Quantity etc should be mentioned.

Contract note is very important for a rational

investor. This helps one to calculate the

Long term/Short term Capital gains. Also

helps in the reconciliation of the Demat

Holding statements. Contract note helps to

obtain the information related to the Income

tax returns.

Contributed by:

KSHITZ KESHAV

BHARDWAJ

MBA, Batch of 2014

IBS, Hyderabad

Contract Note


All rights reserved.

Money Matters Club, The official finance Club of IBS Hyderabad.

To subscribe for a personal copy, do write to us at:

[email protected]

Visit us at for further information.

http://moneymattersclub.weebly.com/

WE’RE ON THE WEB!

EXAMPLE.COM

january-the financial bulletin

Documents