Money Matters | September 2012 | 1

A Finance Newsletter

A Finance Forum & Pratibimb Initiative

Volume 1, Issue 1 September 2012 A Finance Newsletter

MONEYMATTERS

Does Financial Literacy Help to Demystify the Complexity of Financial Products?

By Prof. Kushankur Dey

T. A. Pai Management Institute, Manipal

Finance Forum in association with PRATIBIMB presents

Should banks worldwide be given more autonomy or regulation?

By Mr. Prasenjeet Aacharjee

T. A. Pai Management Institute, Manipal

Sector analysis, Global Cues, Macroeconomic Weather Barometer, Headlines and much more...

By Finance Forum

T. A. Pai Management Institute, Manipal

Money Matters | September 2012 | 2

Does Financial Literacy Help to Demystify the Complexity

of Financial Products?*

by Prof. Kushankur Dey, T. A. Pai Management Institute, Manipal

It is time to recapitulate the repercussions of financial products complexity on a common investor’s life once he burnt his fingers. Does he wait for another good monsoon for reaping a better harvest? Is it time for him to ponder over his own mistakes and misconceptions about the past investment? Does regulator adopt a kaleidoscope to scrutiny the tyranny of investors because of ‘irrational exuberance’ of fund houses and market makers? Would financial models be sacrosanct in transforming the sophistication of human brain into a simple and parsimonious replica of the reality? Probably, it is difficult for a CFO like Richard Felix of Morgan Stanley or noted ‘pokers’ game modelers, George Soros or Hamilton to give a cogent and single answer to all these enquiries. While developed nations like U. S. or Europe or/and U. K. have started following developing nations like India and other third world countries by encouraging their citizens for ‘forced saving’ and ‘thrift’ management on account of financial turmoil and sovereign risk way back in 2008, however, complexity in regulating financial markets has been persistent even post financial crisis. On the other hand, India is still thinking whether the country should relax the checks and balances on the entry of hybrid financial instruments like leverage buy outs, collateralized mortgaged products or even asset-backed securities through mezzanine financial services and many more. Having a mixed – economy, high level co-ordination committee on financial services and development has become a watch dog on movement of capital or financial resources in the India’s economy. Moreover, they proposed Financial Advisers Bill, 2012 for promoting the market for advice to both naïve and experienced investors. In other words, a regulatory approach has been framed to financial product advice and distribution. This adoption is only for educating and protecting investors from the clutches of unscrupulous product manufacturers (investment houses) and distributors (merchant bankers or underwriters or/and authorized dealers) in the markets. No doubt, the growth in products available to the investor financial market has provided more choice and formal control over household financial decisions than ever before. This has placed greater demands on consumers to be more financial literate in order to improve decision making. To this end financial literacy education is a key objective of many governments. Understanding the barriers to financial literacy is a global issue which is not necessarily affected by cultural, social or legal differences. However, many a time problem of plenty confuses investors or even makes them complex which results in creation of dissonance during post investment period. One should give compliments to CNBC, especially Mr. Udayan Mukherjee who has paved the way for increasing financial products and services awareness among investors. NSE has also extended its support to promote the literacy programme. However, they have yet to touch rural and suburb for this. One strong assumption behind this is that financial literacy education improves investor behavior in relation to

financial products and services. Nonetheless, there is limited evidence that demonstrates a causal link between financial education, financial literacy and investment decisions. Canada might be progressive among others as Toronto University had promoted an Individual Finance and Insurance Decision centre quite a few years back. Indeed, a variety of studies show that the actions of individuals who are financial literate does not necessarily mean they will demonstrate good financial behavior. Therefore, this cover article conjectures the effectiveness of financial literacy programmes, to investigate the reliability of the assumed relationship between participants in such programmes and financial behaviors. To obtain the expected behavior of investors, several critical areas need to be addressed at times. First and foremost, the aims and goals of financial literacy programmes could not only educate investors about the products and services but throw lights to individuals’ psychological biases and limitations that they as human creatures cannot easily or frantically avoid. Hence, familiarity with behavioral finance has become important and included as finance elective in B-Schools’ course curricula. We should be grateful to Daniel Kahneman and Amos Tversky for their path breaking research in 1979 for gauging investors’ decision making process towards financial markets offerings. Investors’ financial capabilities are also linked with intelligence and emotional quotient of individual investor which probably Kahneman and Tversky pointed out to the brilliance of ‘mental accounting’ of investors. Second, regulation of financial offerings sold to investors can be increased with the aim of protecting or insulating investors or a group of investors from windfall gain or colossal loss due to their confusion, ambiguity or inappropriateness in understanding the products. In crux, investors should be advised to transcend their boundary of calculative rationality to strategic rationality wherein they would be count on both opportunism and networking. Third, product suitability or criteria for adoption for investors is a major concern in most financial markets and prudent approach is to regulate or/and redesign product information offerings. Last but not the least, the quality, impromptu and capability of the financial planning and management profession in catalyzing to plug the financial literacy gap has prompted reform, not only in Australia through the Cooper Superannuation System Review and the financial planning reform agenda, but also internationally through the Dodd-Frank reform bill in the U.S. and changes to Investor Credit Act in the U. K. and proliferation of emerging markets to safeguard the interests of small, tiny investors, for instance, India. Finally, it is the practice which will spill the beans not the dozens of theory. As long as academia benefits the investors by providing right inputs at right time, investors will be positive in their attitude and demonstrate their learning adequately in the market.

Money Matters | September 2012 | 3

Should banks worldwide be given more autonomy or

regulation?**

by Prasenjeet Aacharjee, T. A. Pai Management Institute, Manipal

A financial institution serves two primary functions which is

essential for operation of a smooth aggregate economy. First,

they are creators of assets. These assets can be obtained from

various sources such as government, fiscal deficit or from

private sector .Second is they are responsible channeling of

savings resources to a higher purpose which can be achieved

by developing the capability to use idle balances and providing

depository services in order to finance lending activity. Put in

plain terms, it assumes liabilities and makes loans.

Financial institutions, in particular banks, are structurally

vulnerable because they finance projects which cannot be

accurately valued by short-term liabilities and try to provide

services which are mutually beneficial to borrowers and savers.

With this background, let us look at why most of the countries

have experienced poor performance of Banks in the last two

decades.

The rate of bank failures has really shot-up during the 2007–

2012 global financial crisis. It threatened of total collapse from

large financial institutions, the bailout of financial institutions

by governments, and downturns in stock markets around the

world. The U.S. Senate's Levin–Coburn Report asserted that

the crisis was the result of high risk, complex financial

products; undisclosed conflicts of interest; the failure of

regulators, the credit rating agencies, and the market itself to

rein in the excesses of Wall Street; the liberal use of Gaussian

copula function ; failure to track data provenance ;

the repeal of the Glass–Steagall Act effectively blurred the

distinction between investment banks and depository banks in

the US; Credit rating agencies and investors failed to accurately

price the risk involved with mortgage-related financial

products; Governments failed to adjust their regulatory

practices to address 21st-century financial markets.

The financial crisis and housing bubble bust highlight the fact

that banking industry and financial system as a whole were

very fragile and could not withstand the any of the crises. Also,

banking industry is more fragile than other industries. Failure

of major bank can have a trickledown effect on other banks

which brings into picture the systemic risk. However, greater

fragility of the banking industry simply implies "handle with

greater care” and not higher brokerage rate or failure rate. It

leads to conclusion that they need to be regulated.

However, historically it has been proved that regulations do

not always improve functioning of the banks. It has happened

before that many regulations were introduced with an intention

to make the banks more robust and provide protection against

their fragility but unintentionally increased the fragility of

banks and their failure rate. Many poorly designed and

mispriced safety net under banks for depositors, first through

the Federal Reserve's discount window lender of last resort

facilities in 1914, and then reinforced by the FDIC's deposit

guarantees in 1934, market discipline on banks was reduced

substantially. It resulted in increased risk exposures by banks

and reduction in their capital ratios. As emphasized by Kane

(1989, 1995a and b), Severe principal-agent problems were

introduced by the establishment of the Federal Reserve and

FDIC in the U.S. So, while it still remains a million dollar

question as to whether banks need more regulation or

autonomy in the long run, banks definitely needs to be

regulated in the short term and be granted regulated autonomy

in the medium term.

**Authored by Prasenjeet Aacharjee, Student PGP-2,

Batch-2011-13, T. A. Pai Management Institute, Manipal

and views expressed in the article is purely personal and

does not reflect any effective or ineffective administrative

decision of any organization, if mentioned in this article.

He can be contacted at prasenjeet.13@tapmi.edu.in.

*Authored by Prof. Kushankur Dey, T. A. Pai

Management Institute, Manipal and views expressed in the

article is purely personal and does not reflect any effective

or ineffective administrative decision of any organization,

if mentioned in this article. He can be contacted at

kushankur@tapmi.edu.in.

Money Matters | September 2012 | 4

Snapshot of market

Rising petrol prices and interest rates saw overall sales

volume growth drop to 9.94% YoY basis with the

exception of M&M even as the top line grew by 14.03%.

RBI slashed repo rate by 50 basis points to 8% and SLR

by 100 basis point to 23% providing much needed

relief to the liquidity deficit.

Higher price realization and extended demand due to

delayed monsoon resulted in aggregated sales growth

of 18% and operating profit growth of 21% on YoY

basis.

Lower IIP (Index of industrial production) growth lead

to poor performance of companies with high inflation,

interest and increased raw material costs being the

prime reasons for low performance.

Domestic coal demand supply gap has increased

significantly while delay in clearances and tightening of

environmental norms has further aggravated the

problems.

The operating profits of all non-ferrous players

declined due to lower realizations and higher input

costs, leading to overall earnings de-growth of 12.3%.

BHEL, the only capital goods company in the Sensex,

performed much better with earnings growth of 12.8%

owing to sturdy revenue growth on strong execution

and forex gains on INR depreciation.

The sector contributed 8.3% to incremental Sensex

earnings. FMCG companies reported an earnings

growth of 24.6%.

This is the year when the industry is set to reach a

significant milestone – aggregate revenue for FY2012 is

expected to cross USD 100 billion.Within the global

sourcing industry, India was able to increase its market

share from 51% in 2009, to 58% in 2011.

Sector Analysis

Automobile

Banking

Cement

Infrastructure and Reality

Power

Metals and Mining

Capital goods

FMCG

IT-BPO

Money Matters | September 2012 | 5

Concerns over global growth environment to persist

Concerns over a slowdown in global growth continue to

persist amidst negative growth in the Euro zone and

slow pace of recovery in the US. According to initial

estimates, GDP growth in the Euro zone contracted by

0.2% YoY during 2QCY2012 while recovery in the US

has been sluggish as GDP growth during 2QCY2012

decelerated to 1.5% YoY. Headwinds from de-growth in

the Euro area have adversely affected the momentum

of growth in emerging economies due to weak demand

for exports in international markets and volatility of

capital inflows. China's official Purchasing Managers'

Index (PMI) for manufacturing declined below the 50-

level threshold to 49.2 in August, signalling contraction

on account of slowing new orders. Monetary policy

tightening due to high inflation environment in

emerging markets has led to dampening of domestic

demand and moderation in growth to lower-than-

expected levels.

Global Cues

Macroeconomic Barometer

The real GDP growth for 1QFY2013 increased to 5.5%,

marginally higher than the 5.3% growth in the previous

quarter driven by construction and financing,

insurance, real estate and business services.

Agriculture, forestry and fishing reported a growth of

2.9% in 1QFY2013 as against a growth of 1.7% during

the previous quarter owing to positive growth in

production of wheat , cotton , sugarcane and cereals,

although the production of rice and oilseeds marked a

significant decline. Inflation for the month of July 2012

eased to 6.9% from 7.25% in June 2012 but Inflation in

food articles continues to remain at double-digit levels.

The net equity inflows from FIIs in the month of July

soared to a five-month high of US$2bn after slowing

down considerably since February. The Indian equity

markets continued to take positive cues from global

events in spite of a weak economic and political

environment on the domestic front. The markets

extended their gains in the month of August 2012

driven by expectations of an increase in global liquidity

flows. On the external trade front, trade deficit in the

month of July2012 stood at US$15.5bn as compared to

US$10.3bn during the month of June 2012. Credit

ratings agencies such as Standard and Poor's (S&P)

and Fitch have revised India's rating outlook from

stable to negative. Further deterioration in the fiscal

balance coupled with slowing growth, faltering

industrial production, high CAD and logjam in policy

reforms are factors that S&P would take into account

for taking a call on downgrade of the economy's

sovereign rating from the lowest investment grade

'BBB-' to speculative grade. The Reserve bank of India

cut the statutory liquidity ratio (SLR) on 31st July,

2012, from 24 to 23 per cent. Cash reserve ratio as on

11th August , 2012. is 4.75 %. Considering the need to

support the growth impulses, the key policy repo rate is

kept on 8 per cent.

Money Matters | September 2012 | 6

Duty on power gears imports

The government decided to slap a 21 per cent duty on

imports of power equipment, mainly to protect

domestic companies from cheap Chinese shipments.

The Cabinet approved 5 per cent basic customs duty, 12

per cent counter-veiling duty and 4 per cent special

additional duty on import of power gears.

ITC to invest Rs 25,000 cr in 5-7 years, plans

health products

ITC Ltd. unveiled an ambitious strategy to invest

Rs.25,000 crore in the next 5-7 years in a slew of

ventures including a foray into the health and nutrition

R&D space. According to chairman Yogi Deveshwar,

the company is currently working on 40 projects and

awaiting clearances for few more.

RBI cuts SLR, GDP forecast

The Reserve bank of India cut the statutory liquidity ratio (SLR) on 31st July, 2012, from 24 to 23 per cent. The SLR cut could enhance liquidity in the system by about Rs62, 000 crore. The banks also lowered the country’s GDP growth forecast to just 6.5 per cent in 2012-2013 from the earlier estimate of 7.3 per cent , and raised inflation forecast to 7 per cent by March 2013 from earlier 6.5 per cent.

FDI from Pakistan allowed

The government finally allowed foreign direct investment (FDI) from Pakistan in all sectors barring defence, space and atomic energy.

Bain Cap acquires stake in Genpact

Private Equity player Bain Capital Partners agreed to

purchase around 68 million common shares of

Gurgaon-based Genpact for $1 billion from investors

General Atlantic and Oak Hill Capital Partners. With

this transaction, Bain would hold 30 per cent stake in

Genpact , whereas General Atlantic and Oak Hill would

continue to hold each 5 per cent stake, down from

earlier 20 per cent each.

Cognizant beats Infosys

For the first time, Cognizant Technology Solutions

overtook Infosys in quarterly revenues. It also became

the second-largest software company in the country

after Tata consultancy Services during the quarter

ended June 2012.

RIL gets conditional nod

The management committee that oversees operations

of Reliance Industries KG-D6 block conditionally

accepted the budget for three years starting 2010-

2011.It also conditionally approved ‘declaration of

commerciality’ for three finds in the block. Meanwhile ,

Goldman Sachs said that RIL could potentially attain a

market capitalization of $46.6 billion.

PE investments decline

Private Equity firm’s investment fell 34 per cent to

$1,616 million in the second quarter of 2012 against

$2,447 million in the second quarter of 2011, according

to PwC India report.

IMPORTANT HEADLINES

Money Matters | September 2012 | 7

ADR -American Depository receipt GDR -Global Depository Receipt SDR-Special Drawing Rights CAGR-Compounded Annual Growth Rate CAR-Capital Adequacy Ratio CRR-Cash Reserve Ratio PLR-Prime lending rate CASA-Current Account Savings Account NEFT-National Electronic Fund Transfer RTGS- Real Time Gross Settlement NII -Net Interest Income NOF- Net Owned Funds OTC-Over-the-counter CRAR-Capital to Risk-weighted Assets Ratio

ACRONYMS

TERMS OF THE ISSUE

Cross-border listing – The practice of listing shares in a company on the stock exchange of different countries in order to create a larger market for the shares. This is a necessary procedure because the securities houses and stock brokers of one country cannot normally deal through the exchanges of another. The practice has led to the creation of multinational securities houses. Fungibles – Interchangeable goods, securities etc. that allow one to be replaced by another without loss of value. Bearer bonds and banknotes are examples. Open-market operations- The purchase or sale by a government of bonds in exchange of money. This is a main mechanism by which monetary policy in developed economy operates. To buy(or sell) more bonds the government must raise (or lower) their price and hence reduce (or increase) interest rates.

Debt/Equity Ratio -- It is a measure of the debt capacity of a company (also called gearing or financial leverage). It indicates what proportion of equity and debt the company is using to finance its assets. Hedge Fund -- The primary aim of this fund is to reduce volatility and risk while attempting to preserve capital and deliver positive returns under many market condition. Over-the-counter (OTC) -- OTC is to trade financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. It is contrasted with exchange trading, which occurs via facilities constructed for the purpose of trading ( i . e . exc h a ng es ) , s uc h as fu t ures exchanges or stock exchanges.

Money Matters | September 2012 | 8

The Finance Forum at TAPMI is an initiative to acquaint the students to the world of finance and transfer the knowledge about the various domains of the financial sector through various formal and informal events. This forum believes in imparting knowledge about finance in an offbeat manner which is evident from the variety of innovative games organized. In the month of July, the forum concluded its selection process which saw a large number of students from first year apply for the forum and finally a team of 10 finance enthusiasts was selected that immediately got down with planning and execution of activities scheduled for the year. To encourage knowledge sharing and expertise among students, Finance Forum had organized a guest lecture delivered by Mr. Rajesh B V (DGM-Corporate Advisory) who also happens to be one of our alumni. With more than 13 years of experience in a variety of sectors, he touched upon various aspects of corporate finance, consulting and delved in depth on areas like valuations and business plan preparation. The junior team got their first hands on experience when they organized Money Bhai, a weeklong event which required teams to trade in a simulated Stock Market scenario with a virtual corpus of Rs. 2,500,000. The game saw a zealous participation by more than 80 teams from the first year students. Finance Forum also had the privilege to be associated with International Conference for Banking and Finance 2012 which was organized by TAPMI at Bangalore from 9th August to 11th August 2012 in hotel The Atria. It was a privilege to host Dr. Jay Ritter, Cordell Professor of Finance at the College of Business Administration, University of Florida as chief guest at the conference. It was a truly enlightening experience for all the senior members of Finance Forum as the conference saw a confluence of pre-eminent faculties from across the world present their select research papers on various topics spanning across banking and finance. Well into second half of the year, the entire team of Finance Forum is now gearing up for the upcoming flagship event, Horizon 2012. Conceived last year, the conclave will bring together finance professionals from investment banks, commercial banks, mutual fund houses, credit rating agencies, business houses as well as academicians, alumni, and students to discuss recent trends and emerging issues in the industry, the challenges and opportunities they present and the way ahead. It will also act as forum for

budding entrepreneurs and students in the field of finance to interact with preeminent business leaders. The central theme of this year’s conclave is “The New Economic Order Post Crisis: Political Reforms, Regulations and Inclusive Growth” and it promises to enrich the participants with deep musings and intellectual simulations on all dimensions of the theme through panel discussions and speaker sessions. Latest Events by Finance Forum

Finance Forum Team members: Ankit Agarwal

Nikhil A Baid

Nitin Jindal

Nishith Maheshwari

Raghavendra Rao

Ramaa Rao

Varun Sharma

Vidhi Jain

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