Hoping For A Festive Revival - Nirmal Bangbeyondmarket.nirmalbang.com/issue56/Download/magazine.pdf · 2012. 6. 28. · Through the Vibrant Gujarat Summit, the state government has

The IMF, in its World Economic Outlook, has

lowered its forecast for world growth and cited significant risks to the economic outlook

For Pr ivate Circulat ion Volume 1 Issue 56 10th O c t ’11

It’s simplified...Beyond Market 10th Oct ’11 3

DB Corner – Page 5

Satanic VersesThe IMF in its World Economic Outlook has lowered its forecast for world growth and cited significant risks to the economic outlook – Page 6

Rate Hikes: No End In SightIn the current scenario where inflation refuses to be tamed and global concerns continue to worsen with each passing day, rate hikes seem to be an inevitable option for the RBI – Page 9

Sharp ForesightAlthough certain rules for the setting up of new banks seem a bit unfair, it is not without reason that the RBI is treading cautiously – Page 12

Vibrant Gujarat Gets Future ProgressiveInvestor-friendly policies, uninterrupted power supply, road connectivity and availability of trained workforce are reasons enough for corporates to flock to the western state of Gujarat – Page 16

Hoping For A Festive RevivalVehicle companies are expecting sales to rise during the festive season, but hike in interest rates and fuel prices could halt their upward journey – Page 20

Government’s Co(a)ld ShoulderDespite the immense potential of the coal sector, key challenges and issues are stopping this industry from growing to the hilt – Page 23

For Memory’s SakeThe growing number of patients suffering from Alzheimer’s is indicative of the tremendous opportunity offered by this segment to pharma companies – Page 26

Dena Bank: In A Favourable PositionA large number of factors seem to be favouring the growth trajectory of the Gujarat-based public sector bank – Page 28

Fortnightly Outlook For Commodities – Page 32

Fortnightly Outlook For Currencies – Page 33

Wooing Foreign InvestorsThe announcement to permit QFIs to invest in mutual fund schemes will enable them to have direct access to the Indian mutual fund industry, thus widening the class of investors in the Indian capital market and also help in reducing the volatility in the markets – Page 34

Advising The AdvisorsThe concept note on the regulation of investment advisors proposes certain positive practices for advisors and distributors, thus aiding investors in choosing the right products for their investment portfolios – Page 38

Important Statistics for the Fortnight Gone By – Page 40

A Mind of Its OwnThe knowledge of behavioural finance can help market participants to recognize and avoid bias and errors in their decisions – Page 44

Volume 1 Issue: 56, 10th Oct ’11

Editor-in-Chief & Publisher: Rakesh BhandariEditor: Tushita NigamSenior Sub-Editor: Kiran V Uchil

Art Director: Sachin KambleJunior Designer: Sagar Padwal

Marketing & Operations:Savio Pashana

We, at Beyond Market welcome your views, comments and feedback. Do help us to grow better as per your liking. This is our attempt to reach you better while crossing horizons...

Web: www.nirmalbang.com [email protected] No: 022 - 3926 8047

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Research Team: Sunil Jain, Kunal Shah, Michael Pillai, Sunit Mehta, Vikash Bairoliya, Silky Jain

PROPHECY OF DOOM

Tushita NigamEditor

The repercussions of the financial crisis of 2008 can be felt even today. Despite the revival in growth due to the huge bailouts by western banks, fiscal stimulus and easy monetary policies, the threat of economic imbalances, debt defaults by countries and burgeoning inflation persist. The financial mayhem, evident from the growing debt numbers, coupled with slow growth, is affecting large economies like the US and Europe. The irony, however, is that the economies that were actually trendsetters are now being looked at rather suspiciously.

The recent report on the outlook for the world economy by the IMF is testimony to these issues. In its report, the IMF has lowered its forecast for world growth and also mentioned the various reasons that could play spoilsport. According to the chief economist at the IMF, the world economy has entered into a “dangerous new phase”.

Since the IMF is looked upon by nations around the world due to the role it plays in fostering global monetary cooperation, securing financial stability, facilitating international trade, promoting employment and sustainable economic growth and reducing poverty around the world, this report by the organization is very significant. We have tried to decipher this report in our cover story.

In this issue, we have also shed light on the recent rate hike announced by the RBI with the aim to control rising inflation and other issues that continue to be impediments to economic growth of India.

There is also an interesting article on how Gujarat, also known as the ‘land of the legends’, has attracted investments not only from within the county but also from international investors on the back of factors like strategic location, business-friendly policies, robust infrastructure, superior manpower and abundant natural resources, to name a few. Through the Vibrant Gujarat Summit, the state government has managed to garner investments from all over the world and facilitate expansion of local companies overseas. Further, focused initiatives have helped Gujarat achieve tremendous growth, leaving behind all the other states in the country as far as development is concerned.

Sectorally speaking, there are articles on banking, automobile and coal industries, among others. The piece on the banking sector elaborates on the cautious approach undertaken by the RBI in doling out new banking licenses. As far as the auto industry goes, companies are going all out to woo customers during the festive season to revive sales. And despite the immense opportunities offered by the coal sector, several challenges still weigh heavily on the industry.

Apart from these, there is an article on the investor-friendly initiative undertaken by the market regulator, the Securities and Exchange Board of India (SEBI). It recently proposed a concept note on regulating investment advisors. This concept paper is also aimed at clarifying the role of the middlemen involved in the process, thus helping investors make the right investment decisionS.

It’s simplified...Beyond Market 10th Oct ’114


Overall, the marketslook weak at the moment.

Disclaimer It is safe to assume that my clients and I may have an investment interest in the stocks/sectors discussed. Investors are required to take an independent decision before investing. Investment in equity is subject to market risk. Our research should not be considered as an advertise-ment or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing.

Nifty: 4,752.35Sensex: 15,792.41(As on 5th Oct ’11)

he previous fortnight saw two key announcements that will have a bearing on the Indian economy.

In the first one, the Reserve Bank of India (RBI) hiked key interest rates in line with expectations with the aim to control inflation, which continues to worry policymakers.

Secondly, the government announced a 32% increase in its borrowing plan for the second half of the current fiscal year ending March ’12 and cited the lower-than-expected cash surplus at the start of the financial year and revenue shortfall under the small savings scheme for the move. However, this increase in borrowing costs is likely to negatively impact banking stocks.

Overall, the markets look weak at the moment. The Nifty has strong support at the 4,680 level. If this level breaks, then market participants are advised to avoid buying.

Instead, they should sell at every rise in the next fortnight until there is any positive news at both the global and domestic levels.

Fresh buying should be considered only after the quarterly results are announced. The street expects the quarterly results of India Inc to be volatile, especially due to foreign exchange movement and the depreciation of the Indian rupee.

T Companies with higher exposure to foreign exchange debt and imports will have a negative impact, while those into exports are likely to benefit from the rupee depreciation.

The sharp correction in metal and crude oil prices too may add to the volatility, because of which companies will be forced to book inventory losses. Traders and investors also need to watch out for the developments in the Euro zone as the debt crisis remains a cause of concern.

The European government is looking at lending support to the banks and leveraging its bailout fund - the European Financial Stability Facility (EFSF) - to prevent them as well as other nations from being affected, in case Greece defaultS.

The IMF, in its World Economic Outlook, has

lowered its forecast for world growth and cited significant risks to the economic outlook

he global economic uncertainty is getting murkier and murkier with each passing day. Recently

the US Fed talked about significant risks to the US economic growth in the back drop of the global environment and its internal issues.

Few days back Washington-based international financial institution, the International Monetary Fund (IMF) in its report on the world economic outlook started with the theme of “slowing growth, rising risk”. In its opening remarks, it says relative to

T the previous world economic outlook presented in April, the economic recovery has become more uncertain.

The world economy suffers from the confluence of two adverse developments. The first is the slower recovery in advanced economies since the beginning of the year, a development largely failed to be perceived as it was happening. The second is the large increase in fiscal and financial uncertainty, which has been particularly pronounced since August. And each of these developments is worrisome.


It says with accumulating signs of weaknesses in key advanced economies, including the bad news about the US economy over the past couple of months, equity markets have fallen sharply and equity price volatility has jumped up too and prices for strong sovereign bonds and gold have risen - all signs that investors have become more cautious about the prospects for the major advanced economies.

The US economy has been in the news over the past couple of months. The US government passed the debt ceiling bill raising the debt limit to $14.3 trillion or (equal to its size of GDP) in July ’11. The move allowed the US government to borrow more and thus accommodate monetary easing. This came along with the downgrade of the US sovereign debt rating from AAA to AA+.

GROWTH & DOWNSIDE RISKS

The IMF has cut the world economic growth forecast by 30 basis points for the current calendar year to 4% and 50 basis points for the next year to 4% as compared to its estimates in June this year.

However, more than economic growth, which is more or less coming down, the IMF draws attention towards the uncertainty and the downside risk to the global economy.

The IMF said that the global economy is in a dangerous new phase. Global activity has weakened and become more uneven, confidence has fallen sharply recently and downside risks are also growing.

It projects that the real GDP growth in the advanced economies, which includes the US, Europe, Japan and others could expand at an anaemic pace of about 1.6% in calendar year 2011. This is almost 150 basis point

lower than the GDP growth of 3.1% in the year 2010.

More importantly, this is the base case scenario that there are downside risk to these estimates, which means if some of the concerns or risks mentioned in the report come true, growth could even be lower.

downside scenario where different factors have been analyzed to present the magnitude of the impact. Broadly, the scenario includes the kinds of shocks that could arise mainly in three regions including the European countries, the US as well as emerging Asian economies.

First is the ongoing crisis in the Euro zone, which already seems to be running beyond the control of policymakers. The shock is to bank capital, reflecting primarily recognition of losses on holdings of public debt but also of other losses on loans arising from the macroeconomic fallout.

The report also says that vulnerable sovereigns are prone to a sudden loss of investor confidence in their debt sustainability if fundamentals deteriorate sharply. European banks have a large exposure to the sovereign debts of countries, which are in the news for the wrong reasons, including the risk of default.

With this background the chances of recapitalization is low considering that the investors will become risk-averse. Further, the IMF report says that these banks rely on wholesale funding, which is prone to freezing during financial turmoil. This is also the reason why trouble in a few sovereigns could quickly spread across Europe. And from there it could move to the United States by way of US institutional investors’ holdings of European assets – and to the rest of the world.

In the US, according to the report, the shock scenario has two components. Of this, first is slower potential output growth, which could be lower than the expected growth in the economic activity. The economic activities in the US have already softened and pressure is seen in the housing markets and employment generation.

2009

World

US

Euro

Japan

China

India

-0.7

–3.5

–4.3

–6.3

9.2

6.8

2010

5.1

3

1.8

4

10.3

10.1

2011

4

1.5

1.6

–0.5

9.5

7.8

2012

4

1.8

1.1

2.3

9

7.5

Economic Growth (%)

It said that risks to the outlook remain large and downside risks dominate upside risks. The probability of global economic growth-now pegged at 4%- below 2% is appreciably higher than April ’11 when the world economic outlook was presented.

FEAR OF THE UNKNOWN

The report highlights that the markets have clearly become more sceptical about the ability of many countries to stabilize their public debt. The worries, which were till some time lilted towards the few small countries on the periphery of Europe, have spilled over to other regions like Japan and the US, among others in the developing world on the back of fresh concerns over economic growth.

Further, the evolving sovereign crisis in the developing world has translated into worries about the impact on the banks, which holds these sovereign bonds, mainly in Europe. With the uncertainty about the debt, the concerns over the flow of liquidity and tight lending have surfaced. The IMF in its report has prepared a

Source - IMF



There could be further pressure as a result of fiscal consolidation. This could be accompanied by accelerated de-leveraging and savings resulting into lower spending. Second is the resulting increase in loan losses, which could be the mortgage portfolio of banks. According to the report, the reasons for the shock in emerging Asia could probably be loan losses on account of poor lending decisions in the past. Furthermore, the corporate risk premium attached to emerging Asian economies is closely correlated with the rise in the risk premiums in the Euro zone and the United States, which was also seen during the collapse of the Lehman Brothers.

In such a scenario, the IMF report says that global risk aversion would rise sharply and funding rates for banks and non-financial corporations would shoot up to varying degrees. Further, emerging market economies would suffer from the slump in commodity prices and a sudden reversal in capital flows.

FALLING BACK IN RECESSION

Under the aforesaid scenario, given the limited room for monetary and fiscal policy in advanced economies to respond vigorously, a serious global slowdown would ensue, which would undo much of the progress since the end of the Great Recession.

Commodity prices and global trade and capital flows are likely to decline abruptly, dragging down growth in the emerging and developing economies. The US and the Euro zone would fall back into recession.

As it happened in the 2008 crisis, the cascading impact of lower economic activities and falling confidence could lead to further correction in the global trade, commodity prices and the

equity markets could globally correct, which essentially means the countries with higher exposure to commodities as a per cent of their overall economy could suffer and drag the economic growth down further.

BANKING: THE ROOT CAUSE

During 2008-09, the financial crisis was due to the falling housing prices and in turn increase in non performing assets (NPAs) or erosion in the bond portfolio led to banks and financial institutions to default or ask for support one after the other. The latest IMF outlook report again emphasizes on banks and the need for adequate capitalization.

The IMF report said that stock prices have fallen. These will adversely affect spending in the months to come. Indeed, the numbers for the month of August indicate that this is already being witnessed.

Low underlying growth and fiscal and financial linkages may well feed on each other and this is where the risks are. Low growth makes it more difficult to achieve debt sustainability and leads markets to worry even more about fiscal stability. Low growth also leads to more non-performing loans and weakens banks.

Downside risks are very real. Under the most optimistic assumptions, growth in advanced economies will remain low for some time. During that time, banks have to be strengthened, not only to increase bank lending and baseline growth, but also to reduce risks.

EMERGING MARKETS

As seen in the recent months, the IMF report says that the emerging markets will have to deal with volatile capital flows. Indeed, some are close to overheating, although prospects are

more uncertain again for many others. In its different risk scenarios, it feels emerging markets may suffer more adverse export conditions.

The IMF expects the world trade growth in volumes to drop from almost 13% in 2010 to 7.5% in the current year and 5.8% next year. In fact, exports growth from emerging and developing economies will come down drastically from 13.6% last year to 7.8% next year.

2009

Exports

Advanced

Economies

Emerging And

Developing

Economies

World Trade

Volume

–11.9

–7.7

–10.7

2010

12.3

13.6

12.8

2011

6.2

9.4

7.5

2012

5.2

7.8

5.8

Growth (%)

Source - IMF

Low exports, coupled with lower commodity prices could create challenges for low income countries. For the Indian economy it says that real GDP growth could fall from 10.1% in calendar year 2010 to 7.8% in the current year and 7.5% next year. More importantly, it also expects consumer prices to cool down from the 2010 levels but will remain at elevated levels around 8.6% till next year.

In India, the IMF expects activities to be supported by private consumption. However, it feels that investments are expected to remain sluggish, reflecting, in part, recent corporate sector governance issues and a drag from the renewed global uncertainty and less favourable external financing environment. It also highlights that the key challenge for policymakers is to bring down inflation, which is running close to double digitS.

RATE HIKES:NO END IN SIGHT

In the current scenario where in�ation refuses to be tamed and global concerns continue to worsen with each passing day, rate hikes

seem to be an inevitable option for the RBI

nother rate hike at the mid-quarter review of the monetary policy on 16th September was

anyone’s guess. Provided, they had kept track of the economic numbers which flowed after 26th July, when the Reserve Bank of India (RBI) conducted its first quarter monetary policy review this year.

From 7.8% in the quarter ended

A March ’11, the GDP growth decelerated to 7.7% in the quarter ended June ’11, a stark 1% decline from 8.8% in the corresponding quarter a year ago.

Next, the index of industrial production (IIP) slowed down to around 3.3% in July from 8.8% year-on-year (y-o-y) in June. On a cumulative basis, during April-July ’11, the IIP numbers increased by

5.8% compared with an increase of 9.7% in the corresponding period of the previous year. The inflation that is measured in the form of wholesale price index (WPI) was on a roll with a year-on-year rise from 9.2% in the month of July to 9.8% in August ’11.

While experts believed that the RBI would pause after hiking interest rates



11 times since March ’10, the macroeconomic numbers proved those predictions wrong. With inflation continuing to be a burgeoning worry, the RBI delivered 25 basis points (hundred basis points make a per cent) hike in the repo rate – the rate at which banks borrow from the central bank.

Thus, the 12th interest rate hike led the repo rate to increase by a cumulative 350 basis points since March ’10; it now stands at 8.25% and the reverse repo rate – the rate at which banks park their excess liquidity with the central bank - now stands at 7.25%.

After announcing the monetary measure, the RBI said that since its policy review of 26th July, the global macroeconomic outlook has worsened. “There is a growing consensus that sluggishness will persist longer than expected,” said the Reserve Bank of the country in its policy release.

“Domestically, even as many indicators point to moderating growth, both headline and non-food

manufactured products inflation are at uncomfortably high levels. Crude oil prices remain high. Food price inflation persists, notwithstanding a normal monsoon,” the RBI’s policy release added.

The RBI is hoping that stabilization of energy prices and moderating domestic demand would ease inflationary pressures towards the later part of 2011-12.

However, in the current scenario, with the likelihood of inflation remaining high for the next few months, rising inflationary expectations continue to be a key risk. “This makes it imperative to persevere with the current anti-inflationary stance,” said the RBI, justifying the ongoing hawkishness it has been maintaining.

In the readings for the month of August, inflation with respect to primary articles and fuel groups edged up significantly. The y-o-y non-food manufactured products’ inflation rose to around 7.7% in August ’11 from 7.5% in the month of July ’11, suggesting the prevalence of persistent demand pressures.

Oil marketing companies raised the price of petrol by `3.14/ litre with effect from 16th September. This, according to the RBI, will have a direct impact of 7 basis points on the WPI, in addition to the indirect impact with a lag.

In the RBI’s view, the latest repo rate hike is expected to reinforce the impact of past monetary policy actions to contain inflation and anchor inflationary expectations. In its guidance, the RBI has said that the monetary tightening carried out so far has helped in containing inflation as well as anchoring inflationary expectations to a certain extent, though currently both remain at levels that are beyond the Reserve Bank’s comfort zone.

The central bank reiterated that as the monetary policy operates with a lag, the cumulative impact of the policy actions should now be increasingly felt in further moderation in demand as well as the reversal of the inflation trajectory towards the later part of 2011-12.

“As such, a premature change in the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions. It is, therefore, imperative to persist with the current anti-inflationary stance,” said the central bank.

And the global developments are no less crucial. Less than two weeks from the RBI’s quarterly review in July, ratings major Standard & Poor’s downgraded the United States to AA+ from its prized AAA rating it held earlier. And then the concerns over the sovereign debt problem in the Euro zone have added further uncertainty to the prospects of an economic recovery.

In the second quarter (April to June)

Effective Since Reverse Repo Rate Repo RateCash Reserve Ratio (CRR)

19 Mar'10

20 Apr'10

24 Apr'10

02 Jul'10

27 Jul'10

16 Sep'10

02 Nov'10

25 Jan'11

17 Mar'11

03 May'11

16 Jun'11

26 Jul'11

16 Sep'11

3.50 (+0.25)

3.75 (+0.25)

3.75

4.00 (+0.25)

4.50 (+0.50)

5.00 (+0.50)

5.25 (+0.25)

5.50 (+0.25)

5.75 (+0.25)

6.25 (+0.50)

6.50 (+0.25)

7.00 (+0.50)

7.25 (+0.25)

5.00 (+0.25)

5.25 (+0.25)

5.25

5.50 (+0.25)

5.75 (+0.25)

6.00 (+0.25)

6.25 (+0.25)

6.50 (+0.25)

6.75 (+0.25)

7.25 (+0.50)

7.50 (+0.25)

8.00 (+0.50)

8.25 (+0.25)

5.75

5.75

6.00 (+0.25)

6

6

6

6

6

6

6

6

6

6

Movements In Key Policy Rates In India

Source: Reserve Bank of IndiaNote: Figures outside the parentheses are in percentage and those in parentheses indicate change in policy rates in percentage points.


of 2011, the global economy has slowed down considerably. On 20th Sept ’11, the International Monetary Fund (IMF) unveiled the World Economic Outlook (WEO) where it said that growth, which had been strong in the year 2010, decreased in the year 2011.

The IMF forecasted world growth to be about 4% in 2011 and also 4% in 2012. This is down from 4.5% for both years that the IMF had predicted in April.

“Now, 4% may not sound too bad, but, again, the recovery is very unbalanced,” Olivier Blanchard, International Monetary Fund’s Economic Counsellor and Director of Research Department said at the WEO briefing.

“For the year 2011, we see growth of 6.4% for emerging market countries, which is a good number. But only 1.6% for advanced economies,” Blanchard added.

With uncertainty being the name of the game across the global markets the sharp increase in financial volatility has been prevalent for some time now.

“What has happened is that the markets have become more sceptical about the ability of policymakers to stabilize the government’s public debt,” explained IMF’s Economic Counsellor Blanchard.

Worries have spread from countries at the periphery of Europe, to countries in the core of Europe, and then to other nations. Even economies like Japan and the United States of America have not been spared.

Worries about sovereigns have translated into worries about the banks that are holding these sovereign bonds, mainly in Europe. And these

worries have resulted in a partial freeze of financial relations with banks that are keeping high levels of liquidity as well as tightening monetary lending.

A day after the WEO, the IMF issued its Global Financial Stability Report, where José Viñals, IMF’s Financial Counsellor and Director of the Monetary and Capital Markets department said that since IMF’s previous report, financial stability risks have increased substantially, reversing the progress that had been made over the previous three years. “So we are back in the danger zone,” said Viñals.

As we have moved into a new political phase of the crisis, several shocks have recently buffeted the global financial system, including unequivocal signs of a broader global economic slowdown, the French market turbulence in the Euro zone and not to forget the credit downgrade in the US.

“This has thrown us into a crisis of confidence, which is being driven by three main factors: weak growth, weak balance sheets and weak politics,” maintained Viñals.

“Developments in the global economy over the past few weeks are a matter of serious concern,” said the RBI. Growth momentum is weakening in the advanced economies amidst heightened concerns that recovery may take longer than expected.

“Although India’s exports have performed extremely well in the recent period, this trend is unlikely to be sustained in the face of weakening global demand,” the Reserve Bank of India warned.

“This, combined with the slowing down of domestic demand, to which

the monetary policy stance is also contributing, suggests that risks to the growth projection for the year 2011-12 made in the July review are on the downside now,” said the RBI.

But global factors have already pushed the Indian rupee to a 28-month low at 49.90 a dollar and also drawn the RBI to step in and intervene in order to stem the rupee’s free-fall, which shed nearly 5% against the US dollar in just 10 trading sessions.

The gravity of the situation is justified by the fact that the RBI did not intervene in the foreign exchange markets for nine successive months until July.

Subir Gokarn, Deputy Governor of the RBI, during his visit to the US, informed a television channel that volatility in the currency exchange rate had become ‘a part of the game’ and the central bank would intervene to the excessive volatility in the currency under control.

But in the middle of moderating growth, higher interest rates and stubborn inflation, a volatile Indian rupee would simply augment the woes of the RBI as much as to that of India Inc.

And for the monetary policy in the ensuing quarters, the central bank’s action will depend heavily upon a host of ‘known unknowns’ like further developments in domestic growth and inflation dynamics, developments in the global financial situation as well as movement of commodity prices at the international level, to mention a few.

In all probabilities, the wider market expectation of aggressive monetary policy easing, beginning this year, appears to be thoroughly misplaced for the momenT.


he Reserve Bank of India has been treading cautiously with regards to banking licences. The

numbers speak for themselves. In the past two decades, only 12 new banking licences have been granted to the existing players.

However, it is now a well established fact that a number of corporate players are seeking to make a footprint in the banking industry.

With the Finance Minister’s 2010 budgetary announcement of granting new banking licences, hopes have only built up further. Conglomerates such as the Tatas, Birlas, Ambanis, and Mahindras are all in the fray.

The Non Banking Financial Companies (NBFCs) such as L&T Finance Holdings, Srei Finance, Sundaram and Bajaj Finserv are also believed to be in the race.

RBI, however, is still holding the cards close to its chest. It was only at the fag end of August that it came out with draft guidelines with regards to new banking licences. Even then it was a measured move.

The RBI Governor D Subbarao made no bones about the fact that in the current framework of rules and regulations, corporate entities, if allowed to open banks, would have a ready source of funds.

Nevertheless, it has put out the draft guidelines that are stringent to say the least. Is the RBI justified in making such cautious moves? We take a closer look at some of the major suggestions made by the RBI.

OWNERSHIP ISSUES

Firstly, the RBI said that any existing financial company will be allowed to transform into a bank or an

T independent promoter can start from scratch as long as they have the minimum initial capital of ̀ 500 crore, a minimum capital adequacy ratio of 12% and the ownership and management is different for the promoter company and the bank.

Besides, the promoter seeking to set up a bank is required to have an impeccable track record of 10 years, sound credentials and must have run the business with integrity.

However, those entities that have more than 10% income from real estate, construction or broking will not be considered eligible for the opening of a new bank.

While the RBI is obviously thinking about the risk factors involved in businesses such as these, there seems to be a strong objection to the same.

Brokers especially have strong views against this. They say that they are in fact the most regulated entities in the country and are under strict vigil of the Securities and Exchange Board of India (SEBI).

Besides, those in the broking business have a keen sense of finance and economy and are perfect candidates for opening up of new banks, some experts argue.

In addition to this, the fact that the bank is not only going to be removed by a separate holding company and will be directly under the jurisdiction of the central bank, seems to be quite an unfair clause.

HOLDING FORT

The RBI further stipulates that the promoters have to set up a wholly-owned non co-operative holding company (NOHC). This NOHC will, in turn, be the holding company for the new bank as well as

other financial subsidiaries of the promoter such as life insurance, general insurance or the asset management company.

According to legal experts, this is a smart move by the RBI as it not only gets direct supervision of the bank but also strengthens its holds on the financial sector.

The RBI also says that the NOHC shall hold at least 40% stake in the banks and this has to be locked in for a period of five years. If the shareholding is beyond 40%, it has to be brought down to 40% within a maximum period of two years from the date of licensing of the bank.

The shareholding of the NOHC should further be brought down to 20% of the paid up capital within ten years and 15% in 12 years and maintained at this level, thereafter.

Although it is not clear why the RBI is insisting on maximum shareholding now and also minimum shareholding over a period of 15 years, it may be deduced that the maximum shareholding clause has been introduced since the RBI wants to ensure accountability from the promoter’s end in the initial years.

The other salient clause that the RBI has suggested is with regards to foreign holding. Any non resident shareholding from FDI, FII or NRI shall not exceed more than 49% for the first five years from licensing the new bank.

The RBI further stipulated that no non resident shareholder would be allowed to hold more than 5% of the total paid up capital of the bank. This, however, does not seem to provide a level-playing field for the new banks that will be set up as the existing banks have a foreign shareholder ceiling of 74%.


The foreign shareholder policy should be uniform across all banks, according to the legal experts. INDEPENDENT PERSPECTIVE

On corporate governance, the RBI lays down a stringent policy with regards to independent directors. It says that at least 50% of the NOHC should be independent directors.

The RBI mentions that these directors ought to be totally independent of the promoter, promoter group and all their customers and suppliers.

Further, the RBI specifies that no other financial entity that is functional under the NOHC will be allowed to undertake any activity that the new bank has under its ambit.

If there are any overlapping activities they have to be moved to the bank with proper notification to the RBI. The central bank will also specify terms and conditions if the situation so arises.

While the RBI lays a lot of emphasis on the independent director clause, experts say that this covers a miniscule portion of corporate governance required for banks.

While it is definitely not an easy task on hand, the RBI has to ensure quality

when it allows people to enter the banking system, which can be called the backbone of the economy. It cannot be a decision based on size or shareholding pattern and independent directors. Having said that, there is the crying need to open up the banking sector. This will encourage competition and result in customers getting better loans and deposits that can be customised to their needs.

PROS AND CONS

With new players in the field, innovation in product design will come to the fore and customers will stand to benefit.

We have seen innovations such as gold loans, the brainchild of a few NBFCs and innovation on home loans, such as 0% prepayment charges on home loans that has been introduced by Axis Bank.

Many such innovations may come up thanks to the entry of new players and, thus competition. The other benefit the borrower might have is that of lower interest rates. With more players in the field, banks may offer better financial deals or offer valuable partnerships on auto loans and mortgages. Overall, it will

be beneficial for customers. The RBI has been of the opinion that if new banking licences have to be granted, they have to encourage financial inclusion. There is some truth to this.

The banking penetration in India is abysmally low with mortgage at 7% of the total GDP as compared to 23% in other developing countries and over 80% in the US. But the onus should be as much on the existing players as it should be on the new bank. It is evident that very few will qualify on this ground.

Going by the track record of the RBI, banking experts say that although there are many who want to be in the banking industry, it does not look like the RBI will grant more than four to five licences at the most. A lot of filtering will be applied to pick those who are serious about their venture.

Although some clauses do seem a tad unfair at this point in time, it is not without reason that the RBI is treading cautiously now.

The Banking Act needs to be amended before these licences are granted in the first place and there seems to be no hurry to do that. Signals indicate - the floodgates will not open anytime sooN.

regular investments keep worries away

an apple a day keeps the doctor away

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Vibrant Gujarat Gets Future Progressive Investor-friendly policies, uninterrupted power supply, road connectivity and availability of trained workforce are reasons

enough for corporates to flock to the western state of Gujarat

ujarat government’s promotional tag line ‘Destination Gujarat’ seems to be true at least

in the case of corporate investments. Be it the Tatas or the Ambanis, all big

G corporate names are making a beeline to the state, citing the state’s reputation of being India’s most business-friendly destination.

Here is a look at the recent

investments announced by large corporates in Gujarat. In January ’11, when Gujarat chief minister Narendra Modi inaugurated the fifth chapter of the Vibrant Gujarat Global Investors Summit, heads of top companies,



made it clear that Gujarat is the state where they want to be. Consider this: the inaugural session of the investor summit alone saw investment announcements of around `1.96 lakh crore by India Inc.

The largest investment was announced by Ahmedabad-based billionaire Gautam Adani, chairman of the Adani Group, who said the group would invest `80,000 crore in the power, petroleum and port sectors. Adani Group is planning to construct two new ports at Hazira and Dholera in Gujarat.

Anil Ambani, chairman of the Reliance-Anil Dhirubhai Ambani Group or R-ADAG, has committed to investing `50,000 crore in the next five years for setting up gas and coal-based power projects and cement plants at Kutch, Porbandar and Junagadh in Gujarat.

Prashant Ruia, group chief executive of the Essar Group of companies said his group is looking to invest `30,000 crore in power, ports, water infrastructure and for expansion of its oil refinery at Vadinar. Gujarat.

AM Naik, chairman of Larsen & Toubro Ltd, announced an investment of `15,000 crore in infrastructure projects. Ajit Gulabchand, chairman of HCC Group, said HCC would invest `12,000 crore to set up a renewable energy park at its proposed waterfront city at Dholera Special Investment Region, being developed on the lines of Lavasa.

Automobile manufacturer General Motors also said it was investing $100 million (`450 crore) to enhance production capacity at its Halol plant to 1,05,000 units annually from 85,000 units per year at present.

So, what is it that attracts domestic and global investors to Gujarat?

Corporates say that speedy approvals is one of the reasons why they are investing in Gujarat.

“States usually take 90 days to 180 days to give clearances for land and other issues. When we were in the process of moving our Nano project to Gujarat, the state government gave us the clearances in just three days. It has never happened before,” Ratan Tata said in 2009 at the Vibrant Gujarat Global Investors’ Summit that is held every two years.

The Tata Group has already invested `30,000 crore in the state and has said it will continue to invest there.

Chanda Kochhar, the Managing Director and Chief Executive Officer of ICICI Bank agrees with Tata. “What makes Gujarat so attractive is that the state has reached double digit growth rate for many years on a sustainable basis,” she said at the summit in January this year.

Companies say the investor-friendly policy of the Gujarat government, 24/7 power supply, road connectivity, availability of trained workforce, large consumer base and a simple and transparent procedure have lured them to the state.

Through the state-owned Gujarat Investment Corporation Ltd, the government has in fact taken initiatives to attract investors by offering beneficial services such as providing financial assistance to the investors for diversifying, expanding their business establishments and offering different financial packages. Interestingly, Jamnagar, Surat, Bharuch, Kutch and Vadodara districts in the state of Gujarat account for more than 80% of the large projects commissioned in the state from 1st Sept ’07, according to a state government study, which points

to a skewed development, where a few districts corner a large share of the investments.

Jamnagar accounts for 26% of the large projects commissioned in the state, Surat (20%), Bharuch (17%), Kutch (9%) and Vadodara (8%). Each of the districts has a different reason for being popular investment destinations in Gujarat.

Surat has always been an industrial hub, Baruch is part of the golden corridor for industry, Baroda is well connected, Jamnagar is the refining capital of India and Kutch has a lot of free land available. This is, however, typical of development patterns in most states, where a few districts attract maximum investment.

A 2009 report by Deutsche Bank said Gujarat offers the best investment potential among all the states and union territories in the country, measured on socio-economic and infrastructure factors.

“It seems that economic development and geographical proximity belong together, possibly also as a result of connecting infrastructure links,” Deutsche Bank said.

The proof of Gujarat’s aggressive wooing of investments is the fact that it has toppled Maharashtra as the leading state as far as domestic investments are concerned.

According to data released by the Centre’s Secretariat for Industrial Assistance, Gujarat has emerged as the preferred destination for domestic investors who invested `9,44,417 crore in the state between August ’91 and March ’11.

On the other hand, states like Maharashtra attracted `8,10,864 crore worth of investments, Andhra Pradesh- `7,84,066 crore, Karnataka -


`7,03,798 crore and Tamil Nadu - `3,93,477 crore.

In fact, even FDIs may now go to Gujarat, with global investors choosing Gujarat over other states thanks to the proactive approach adopted by their government.

Regular investment conclaves conducted by the Gujarat government is attracting both domestic and foreign investors. According to Gujarat government data, four Vibrant Gujarat Investor Summits have attracted investments of over $400 billion.

Modi has been meeting with international investors to convince them to invest in the state. For instance, in March, this year, Modi, met top CEOs from European companies in New Delhi. The meeting was part of an interactive session held between the Gujarat government and the European Business Group India.

The session was attended by leading companies including BAe Systems, Veolia Water India Pvt Ltd, Vodafone, BP, Dassault, EDF, IKEA, Rio Tinto and Halcrow India, Shell Hazira and Alstom. The whole point of the meeting was to get European companies to invest in the state.

Modi has partially succeeded in bringing FDI to the state since it already has investments from few European companies such as Heubach, BASF, Bayer, Siemens, Linde AG, Lanxess, Duravit, Pharmacia, Perstorp, Cheminova, and Sanofi Aventis.

The US is also not far behind. Recently, on 22nd September, billionaire investor Warren Buffett said US-based specialty chemicals maker Lubrizol Corporation, a wholly-owned subsidiary of Buffett’s

investment company, Berkshire Hathaway Inc, will set up a chlorinated polyvinyl chloride industrial unit, in partnership with Ahmedabad-based Astral Poly Technik, at the Gujarat Industrial Development Corporation (GIDC) complex in Dahej.

Lubrizol will initially invest about $245 million (`1,177 crore) in Gujarat. “Considering the investor-friendly environment, transparent policies and best infrastructure facilities in Gujarat, we have chosen the state for setting up of the first unit,” Tom Frubus, chief of Lubrizol Corporation (USA), said while announcing the investment.

Dahej is already a major chemical hub, with India’s largest petroleum, chemicals and petrochemicals investment region being developed in this area.

Gujarat has particularly been successful in attracting investments from automobile companies. On 1st September, French carmaker, PSA Peugeot Citroen SA, signed a Memorandum Of Understanding, with the Gujarat government to set up an integrated manufacturing facility at an investment of `4,000 crore at Sanand, Gujarat.

The firm had been scouting for land for its India entry for the past few months in Tamil Nadu, Andhra Pradesh and Gujarat. “The availability of greenfield land and ready infrastructure are a couple of reasons for us to choose Sanand for the plant. Moreover, it is the enterprising nature of Gujarat that attracted us to the state,” Philippe Varin, chairman of the managing board, PSA Peugeot Citroen, said.

Earlier, in July Ford India, the local unit of the Michigan-based Ford Motor Co had said it will set up its

second manufacturing facility in India at Sanand for a total investment of `4,000 crore. In fact, Sanand, a small town 40 km away from Ahmedabad, is now counted among India’s prominent auto hubs such as Pune in Maharashtra and Sriperumbudur in Tamil Nadu. The Gujarat government has been focusing on Sanand to develop the region as an auto-engineering hub because of its proximity to Ahmedabad.

According to media reports, Gujarat Industrial Development Corporation (GIDC) has acquired 5,000 acres of land from farmers in villages around Sanand to give to automobile companies interested in setting up a plant there.

The other advantage is that Sanand is part of a special investment region, which allows companies that invest there to benefit from tax incentives and a fast-track approval process.

Gujarat government statistics reveal that by 2014, Sanand is likely to have an installed capacity of 6,55,000 cars annually after the two plants become functional (Peugeot and Ford).

It is expected that in all Gujarat would have a manufacturing capacity of 7,65,000 cars per annum by 2014, going by the estimates by automakers. This compares favourably to Tamil Nadu’s annual installed capacity of 1.28 million cars and Maharashtra’s capacity of 6,10,000 units.

Very recently, Maruti Suzuki, India’s largest carmaker said it will invest $1.3 billion to set up a one million capacity per annum plant, in Gujarat. The carmaker has not yet finalized its plans but if it does, then Gujarat might just pip Tamil Nadu as the auto hub of IndiA.

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HOPING FORA FESTIVE REVIVAL

Vehicle companies are expecting sales to rise during the festive season, but hike in interest rates and fuel prices could halt their

upward journey

he automobile industry had been reeling under falling sales since quite some time. And to make matters worse, the Reserve Bank of India

(RBI) in its monetary policy review hiked repo rates for the 12th time in the past 18 months and the oil marketing companies too hiked fuel prices in September.

However, auto companies are planning to turn the tide in their favour by launching a slew of car models during the festive season of Navrati and Diwali. Indian original equipment manufacturers (OEMs) Maruti Suzuki, Tata Motors, Toyota and Hyundai, among others, are leaving no stone unturned to push sales. In August and September, the Indian markets have been flooded with cars from automobile manufacturers like Toyota Kirloskar Motor India,

T



Honda Siel Cars India Ltd (HSCIL), Hyundai Motor Company, Nissan Motor India Pvt Ltd, Tata Motors Ltd, Mahindra & Mahindra Ltd and Renault India Pvt Ltd, to name a few.

Interestingly, in the first half of this year there are more new launches in the passenger cars and two-wheeler segments, as compared to the same period in the previous year.

According to SIAM (Society of Indian Automobile Manufacturers), in the first half of this fiscal, there were over 13 new launches in the passenger cars and two-wheeler segments, respectively as well as three refreshed variants in both the segments, whereas last year there were more refreshed variants of passenger cars.

At the same time, there were more refreshed variants than new models. Companies launched seven new passenger car models and 15 two-wheeler models in the first six months of the previous fiscal.

Some of these companies have already launched their passenger cars in the domestic market. Not to be left behind, Tata Motors also launched the refreshed fuel efficient and power variants of the Indica as well as Indigo cars. The top three manufacturers – Maruti Suzuki India Ltd, Tata Motors and Hyundai Motor India – reported over 20% decline in their sales. Maruti’s sales slumped by around 19% as labour problems bogged operations at its Manesar plant, where the new Swift cars are manufactured.

The general slowdown in demand also affected sales of its existing small car models Alto and Wagon R. Increased stocks of Tata’s Nano with dealers resulted in a fall of 1,202 units in the sales of the model, which is

one-fifth of its average monthly sales in 2010-11. Industry analysts are expecting the two events – hike in repo rates and fuel price rise – to hit mini car and sub-four metre car segments in particular owing to deferment or cancellation of purchases by first-time buyers. Automakers on the other hand are likely to provide more incentives to boost sales. But, it is not going to be easy. Car sales in the country fell by about 10% in August ’11 compared to a growth of 33% in the corresponding period last year. With rising interest rates and high fuel prices, buyers are deferring their decision to purchase cars. Despite increased discounts and incentives from car manufacturers (OEMs), sales of existing models remain tepid. Car sales of OEMs, other than the top three, however, grew 31% on the strength of new models and price reduction. While new models such as Volkswagen Vento, Toyota Etios and Liva continued to garner consumer interest, sales of Honda City rose by 37% in August, after an 8% reduction in its price in June ’11. According to analysts, rising interest

rates and high fuel prices dampened the demand in August, despite the fact that it marks the beginning of the festive season. Any delay in model launches in the second half of 2011-12 will further dent car demand in the months to come.

Around eight new models are expected to be launched in the remaining part of the fiscal, including few concepts at the upcoming Auto Expo in January ’12. The year-on-year (y-o-y) growth of the passenger car industry is expected to be lower at around 8% to 9% as compared to around 13% to 14% in the same period in the previous year, as these are months when the sales peaked in the country. Maruti Suzuki India Ltd (MSIL), the leader in the passenger car segment, is expected to be severely hit due to the impasse between the company’s management and the workers at the Manesar plant.

The sales of models like the new Swift, A-Star and SX4 have been impacted due to the strike. However, the company had said that it has enough stock of SX4 and A-Star. “The SX4 diesel has a waiting period of around 2-3 weeks. But we at

Passenger CarManufacturer

New Model Refreshed Variant

Maruti Suzuki

Hyundai

Honda

Toyota

GM (Chevrolet)

Mahindra and Mahindra

Renault

Nissan

Ford India

Tata Motors

Skoda Auto

Force Motors

Volkswagen

New Swift

Eon (to be launched)

Brio

Etios Diesel and Liva Diesel

Beat Diesel

XUV500

Fluence Sedan, Koleos SUV

Sunny

New Ford Fiesta

New Tata Vista, New Tata Sumo

Laura RS, Rapid (yet to be launched)

Force One SUV

-

-

Verna Fluidic

Honda City, New Jazz

-

-

New Bolero

-

-

-

Tata Indigo e-CS VX, Tata Aria 4X2

Fabia Active

-

New Jetta, Polo Breeze & Vento Breeze

Some Of The Passenger Car Launches In H1 2011-12

Source: Company Data


present have enough stocks for the petrol SX4 and the A-Star,” Maruti Suzuki India Ltd had said. Maruti Suzuki has received over one lakh bookings for the Swift model, which is a good sign. But Maruti has managed to improve production to a little over 700 cars a day across its two plants in Manesar. But even at this rate, customers will have to wait for about five months for the petrol version and more than six months for the diesel version. Company officials say the Swift customer is loyal and would not switch to other models. But, with the waiting period extending to six months, some switchover to rival brands cannot be ruled out. Further there will be more challenge for Maruti Suzuki India Ltd in the hatchback segment, where it is the market leader in India.

Honda has launched its first small car Honda Brio, while Hyundai is expected to launch Hyundai Eon in the second week of this month. The company has started bookings for the car and is targeting first-time buyers who want to buy a spacious and stylish car with good fuel economy. The new launches will further spell worries for Tata Motors, whose sales of passenger cars have been falling since the last four months. The cumulative sales of Tata Motors for the fiscal are at 1,10,148 units, lower by 21%. The company is now banking on the new Indica and new Indigo eCS to rev up sales during the festive season. The only positive for Tata Motors is growth in the sales of commercial vehicles, where it has over 62% market share. Cumulative sales of commercial vehicles in the domestic market for the fiscal are 1,96,887

units, a growth of 17% over last year. Cumulative light commercial vehicles sales are 1,18,808 units, a growth of 23% over last year, while medium and heavy commercial vehicles sales stood at 78,079 units, a growth of 8% over last year. Meanwhile, Tata Motors is planning to raise US $500 million as external commercial borrowings to fund working capital requirements and offset high interest debt with a long-term low interest rate.

Similarly, the board of Suzuki Motor Corporation, the majority shareholder in Maruti Suzuki is looking at options other than the state of Haryana and Delhi NCR for its new plant, including states like Gujarat. Mahindra & Mahindra also aims to break into the league of global OEMs with the launch of its global sports utility vehicle, the XUV 500, which has been developed by the company’s research and development centre situated in Chennai.

The SUV expected to be priced between `12 lakh to `14 lakh will be simultaneously launched in South Africa, Western Europe, Australia and South America. The only silver lining in the domestic automobile industry at present is the growth in commercial vehicles as well as the two-wheelers segment, which is expected to continue with the growth in infrastructure and increase in focus on rural penetration by two-wheeler manufacturers.

The two-wheeler industry grew by around 16% with sales of over 5.35 million for the April-August ’11 period. The sales are expected to grow, but with some caution. An independent automobile industry expert said, “The repo rate hike that would lead to higher interest rates will predominantly affect the urban two-wheeler market, as sales of a majority of two-wheelers are dependent on credit.

The sales of high-end motorcycles - 150cc and above and cars will see double impact in the urban market, as compared to the rural market where the vehicles are purchased in cash. Good monsoon across the country will drive vehicles sales in the rural market this festive season.”

The expert further said that with the fuel price hike, people from the urban market would start chasing fuel-efficient motorcycles and scooters instead of two-wheelers with powerful engines. Further, it will be interesting to see how Hero MotoCorp Ltd, formerly Hero Honda, will launch the country’s first dirt bike and a gearless scooter model called the Maestro in this month.

The models, the first after the 26-year partnership between the Munjals-owned Hero and Japan’s Honda came to an end, will sport Hero’s new brand identity. With an engine displacement of 180cc, the dirt bike will be Hero MotoCorp’s first in the niche segmenT.

Motorcycle New Model Refreshed Variant

Yamaha

Hero MotoCorp

TVS

Royal Enfield

YZF-R15

Impulse, Maestro (both yet to launched)

Max4R, TVS Star City

Classic Chrome, Desert Storm

FZ, FZ-S & Fazer

-

-

-

Some Of The Two-Wheeler Launches In H1 2011-12

Source: Company Data


Despite the immense

potential of the Coal

sector, key challenges

and issues are stopping

this industry from

growing to the hilt

ne of the basic natural resources needed to sustain India’s growth story is coal. Its

significance as an input for generation of power is immense. And its availability has become scarce and price dear. Hence, conservation and judicious use of coal is becoming an important task for corporations and government bodies.

As Indian companies grow in leaps and bounds and penetrate deep into unheard pockets of the country, the requirement of coal for generation of power would increase considerably. Of all the natural resources such as oil, natural gas, hydro and nuclear, coal is highly used as the primary source of energy.

According to an estimate, coal is the dominant source of energy in India and meets 52.4% of energy requirements, followed by oil and natural gas, which meet 41.6% of the total primary energy requirement of the country. However, the present

Osituation of coal availability is not very uplifting. Even though India has one of the largest coal reserves, it is not able to emerge as a very strong energy producer. Instead, it is struggling to meet its increasing domestic demand. A study conducted by the Indian Planning Commission and the Coal Ministry revealed that India’s total coal consumption was expected to increase from around 510 metric tonnes in 2007-08 to 550 metric tonnes by 2008-09. India is yet to reach this consumption limit. Huge amount of investment is needed for such consumption.

The existing regulatory framework restricts private sector players from

coal mining and other activities related to the production of coal. More than 90% production of coal is with the central and state governments. Hence, regulatory hurdles are one of the chief reasons for the inadequate coal policy that has failed to address the country’s strong coal consumption needs. Through a low-down on India’s coal industry, we would be discussing about the key challenges and issues that mar the growth of this industry at a time when requirement of power for consumption is becoming necessary and crucial. COAL: AN ESSENTIAL INPUT India ranks third among the world’s

GOVERNMENT SCO(A)LD

SHOULDER

’


leading coal-producing countries. In India, around 70% of the total production is used for the generation of power, while the remaining is used by the steel, cement, chemicals and heavy industries, to name a few.

It is estimated that India produces 310 million tonnes of coal annually and imports around 25 million tonnes. In the last five years, commercial energy consumption in India has increased to around 68%. This, however, when seen in terms of per capita consumption, is very low, especially when one compares this with developed countries.

At present, the per capita primary energy consumption in India is about 243 Kilograms Oil Equivalent (kgoe)/year. Experts believe that this consumption is very low in comparison with the per capita primary energy consumption in developed countries.

One argument that strengthens this belief is the fact that energy consumption has a strong correlation with economic growth. In addition to this, limited reserves of petroleum and natural gas also grant validity to the argument that coal would emerge as a crucial natural resource in the coming years. Not to mention that it is cheap and relatively abundant than other natural resources. Despite such reigning importance of coal, there are many irregularities in terms of lack of clarity of policies of governments and local mafia (some with Marxist leanings), which have squeezed out substantial unaccounted coal from the system. ISSUES AND CHALLENGES One of the serious concerns for India’s coal industry is strong government control. This results in taxes and duties that continue to be

levied on imports and distribution of coal. Besides this, there is also limited private investment in the buying of coal mines as well as supplying coal to customers.

Experts believe that the privatization of the sector is important and the easiest way of providing access to this natural resource to companies and other consumers alike. Such has been irregularities in the government policies that foreign investment in the sector is permitted only on a case-to-case basis.

Hence, the industry needs pointed and clear reforms. Reforms that address issues related to large-scale investment in increasing mining capacity and improve the quality of coal. Also it is believed that in order to thin the gap between demand and supply of domestic coal, the government should facilitate smooth import of coal.

The government’s eleventh plan had a whole range of coal sector reforms such as setting up of a coal regulator, ramping up captive production, commercializing, auctioning of blocks and increasing the share of e-auction, among others.

Hardly any of these reforms have been implemented into the system. This has given weight to the oft-repeated assertion that powerful coal lobby is preventing India from emerging as the largest energy producer in the world. Besides these issues, the one indigenous problem that has obstructed the natural production of coal and its equivalents is stiff opposition of Maoists. In India, the Southern and Eastern regions are coal-rich.

In these regions in India, there are several pockets where people

propagate Marxist ideology. These groups have differences over use of land ownerships, corruption and illegal mining.

Due to stiff opposition from these groups, many coal mining projects - both government and private sector companies - have got derailed and stopped midway. The government has been unable to weed out these elements and, hence, these elements pop up abruptly and jeopardize many coal projects in these areas even after most governmental clearances have been acquired by the companies. Recently, a new concern that is serving as a huge obstacle in coal projects is from the government’s side itself. The environment ministry has identified ‘Go’ and ‘No-Go’ areas arguing that forests are being cut at a rapid pace, wildlife corridors are being destroyed and one should be more sensitive towards this.

The environment ministry has found many captive blocks under the ‘No-Go’ category. Though corporations promise afforestation for occupying space of dense forest of a region, most of their projects just don’t take off. Industry experts believe that only special recommendations and the passing of a cogent coal bill in the parliament could remove these loopholes in the system.

Special recommendations on price reforms for coal and electricity, freeing-up of commercial relations between buyers and sellers, rationalizing quality standards, increasing productivity as well as profitability, attracting investment for the coal industry, enhancing environmental performance and intensifying competition, are pointers that are gaining prominence among industry expertS.

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The growing number of patients su�ering from Alzheimer’s is indicative of the tremendous opportunity o�ered by this segment to pharma companies

ith nearly 30 million people worldwide diagnosed with A l z h e i m e r ’ s

disease, it is a scourge of the modern day health care and is projected to quadruple to 120 million people by 2050, which is incidentally the population of Japan.

The elderly population is growing at the fastest pace in China, India, south Asia and western Pacific regions. Already 58% of people with dementia live in developing countries. But this number is likely to rise to 71% by

W 2050 due to the addition of more number of patients owing to better disease detection, rise in income levels to detect and treat the disease and better social support by government and health agencies.

France, Germany, Italy, Japan, Spain, the UK and the US have a high number of patients suffering from Alzheimer’s disease. Usually, people over sixty are at the risk of Alzheimer’s disease. But few cases of the early onset of the disease among people in their forties or fifties are being reported.

In India, nearly three million people suffer from Alzheimer’s disease and the number is predicted to double by 2030, clearly demonstrating the immense opportunity this segment holds for the pharma sector. Presently, 30-35 branded and generic drugs are available to treat dementia.

Some drugs have even proven symptomatic benefits. However, there are mainly four drugs - donepezil hydrochloride (aricept), rivastigmine (exelon), galantamine (reminyl), memantine (ebixa) made by Eisai/Pfizer, Novartis, Shire Pharma


Ebixa, Excelon and Namenda may become the next blockbuster drugs after Aricept. Till last year, Aricept was the world’s best selling drug but lost patent protection in November ’10, a milestone which will be followed by a rapid loss in sales.

But there are other drugs which have the potential to become blockbuster drugs. Namenda, Exelon have shown tremendous growth in the market and become blockbusters in 2010. Ebixa, a drug by the Memantine Group, is expected to have a billion-dollar market by 2014. Given the growth in Alzheimer’s patients, the outlook for this segment is excellent.

TREATMENT OF THE ALZHEIMER’S IN INDIA

At present, there are no specific tests to positively confirm the diagnosis of Alzheimer’s or dementia. There are hardly any standard practice guidelines and treatment centres in India. Several new treatments are being initiated, while some are nearing the late stages of clinical trials. Within 2 - 3 years, pharma companies will know if one or more of these treatments can help slow the progression of Alzheimer’s. There are currently 934 clinical trials recruiting, underway or recently completed related to the Alzheimer’s disease.

A lot of herbal preparations are available for diagnosing Alzheimer’s disease. Turmeric in curry may explain Alzheimer’s low occurrence. Indian scientists in UK and India are examining the ancient Indian ayurvedic medicine for possible use in drugs to treat Alzheimer’s disease.

Researchers say ayurveda works in the same way as conventional drugs for boosting mental agility in the disease. They found that the plants used in ayurveda acted to improve memory and concentration in patients

suffering from Alzheimer’s. Researchers from King’s College, London and Jadavpur University, Calcutta studied five plants commonly used in ayurvedic medicine and found that the plants acted to prevent the breakdown of neurotransmitters, improving memory and concentration in people with Alzheimer’s disease. Scientists are now trying to identify the chemical compounds responsible for the same so that they can be used to develop more effective drugs.

Suven and Aurobindo are also getting approvals for molecules for this disease. This would help the market to grow and Indian patients would get these drugs at affordable prices. As more players enter the market with generics, the noise level would increase and more awareness and detection camps would help tap this segment, resulting in a large number of psychiatrists taking up Alzheimer’s disease as a focused specialty practice. Ultimately, the patient, especially those from low income groups and rural areas would benefit.

WAY AHEAD

Nearly 4% of the population of India suffers from Alzheimer’s or dementia as against 10%-15% of those in the 60-plus age group in the US. However, this figure may touch 21% by 2050. India is home to more than 70 million people over the age of 60 years according to the 2001 census.

In 2010, nearly 3.7 million Indians were reported to be suffering from dementia and the total cost of treatment was `14,700 crore. This is expected to double by 2030 and the cost may rise three-fold. By 2015, the Alzheimer’s market is expected to be close to `300 crore. Hence, Indian pharma companies can make the most of this opportunitY.

(Janssen) and Lundbeck - that can help control Alzheimer’s disease.

Earlier, only branded drugs were available in the market. Following the expiry of patents, some of the drugs are being manufactured and sold in India by companies like Aurobindo, Dr Reddy’s Laboratories, Sun Pharmaceuticals, Ranbaxy, Alkem, Torrent, Glenmark, etc.

Indian companies are manufacturing and selling generic drugs globally only after they receive ANDA approvals. There are no innovative drugs by Indian companies. Suven is the only company that is developing innovative drugs. It has milestones (phase II and III clinical trials) to cross and get NDA approvals, which is a long way to go (2015-16).

As the Indian population continues to grey, life expectancy increases and awareness about the disease increases, the projected growth would likely continue in double digits (18% to 20%) on a higher patient base. As per ORG IMS-MAT, the accounted market in India has a size of about `140 crore and a CAGR of 25%.

To keep pace with this growth, Suven has undertaken research for a drug for Alzheimer’s to an advanced stage, but needs funding to continue doing the same. If the proof of concept of the drug is strong, the company might succeed, thus catapulting it to the global market.

As per industry reports, more than 35 million people are expected to suffer from Alzheimer’s disease by 2015 worldwide. By 2050, 59% of the world’s Alzheimer’s cases will live in Asia. The global Alzheimer’s disease market is expected to cross the US $19 billion-mark by 2015.

Aricept sales are expected to fall after losing its patent in November ’10.


A large number of factors seem to be favouring the growth trajector y of the Gujarat-based public sector bank

ublic sector lender Dena Bank is a prominent name in the industry, with a network of 1,297 branches, 507 ATMs and 12 extension counters as on 30th Jun ’11. On the said date, it had a

total business of `1,03,973 crore. The bank is mainly concentrated in the state of Gujarat. It has a major presence in rural areas. In fact, nearly 56% of its branches are situated in rural and semi-urban areas. Its head office is situated in Mumbai.

P

Source: Company Data, Nirmal Bang Research

Dena Bank:In A FavourablePosition

24%26% 21%

26%19%

21%

0%5%10%15%20%25%30%

0

50000

100000

150000

200000

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012E FY 2013E

R`

in C

rs

Business Growth

Business Growth

INVESTMENT RATIONALE

Sustained Growth Above Industry Average

Dena Bank has been able to sustain growth in advances above industry average. The bank’s advances have grown at a CAGR of 25% over FY07‐11 compared to a CAGR of 20% in the industry. Going forward, we expect advances to grow at a CAGR of 20.5% for FY11‐FY13E.


Major Exposure In The State Of Gujarat

The state of Gujarat has grown at a rate of 11% in 2011 as compared to the all-India average growth of 9%. Between 2005 and 2010, the real GDP growth in Gujarat has been 11.3%, highest among all the states in India.

Dena Bank has a major presence in Gujarat. Approximately 41% of the total branches are located in Gujarat. We believe that higher exposure in the state will help the bank to garner higher CASA and enjoy better advances growth.

Change In Mix: Focus On High Yielding Assets

Historically, Dena Bank’s loan portfolio has inclined towards corporate lending contributing above 50% of the total advances. However, the bank has now shifted its focus more on the small and medium enterprise (SME) and retail segment to exploit the potential in these high-yielding segments.

Currently, agriculture, SME and retail segments contribute approximately 43% of the total current loan book. We believe the bank’s advances will be achieved through high-yielding SMEs and the retail portfolio. The bank is targeting a growth of around 25% in its retail portfolio for FY12E.

Strong CASA

Dena Bank’s strength lies in having a very strong concentration of its branches in CASA-rich regions of western India.

Approximately 65% of the Bank’s branches are located in western India and the bank also has a strong presence in rural and semi‐urban areas, which gives the bank access to low‐cost deposits, thus helping the bank in garnering higher current and saving account (CASA) ratio. Dena Bank has been able to register one of the highest CASA ratios among PSU banks.

Protection Of NIMs

With increasing interest rates and cost of deposits, the NIMs (net interest margins) of the bank are expected to remain under pressure.

However, a recent equity infusion of `600 crore will help the bank to maintain margins in FY12E. The management is confident that the bank will be able to maintain NIMs at around 3% for FY12E. Nevertheless, we factor in a 20 bps decline in margins for FY12E.

Source: Company Data, Nirmal Bang ResearchSource: Company Data, Nirmal Bang Research

Dena Bank Advances V/s Industry Advances CASA Of PSU Banks (FY11)


Net Interest Margins

26% 25%23%

26%19% 21%22%

17% 17%22%

18% 20%

0%5%

10%15%20%25%30%

2008 2009 2010 2011 2012E 2013EDena Bank Advances Industry Advances

45.3%38.5% 35.4% 35.0% 33.5% 28.7% 24.5% 28.3%

0%10%20%30%40%50%

2.9%

2.4%

3.1% 2.9% 2.9%

0.00%0.50%1.00%1.50%2.00%2.50%3.00%3.50%

0

500

1000

1500

2000

2500

3000

FY 2009 FY 2010 FY 2011 FY 2012E FY 2013E

` in

Crs

NII NIMs

Asset Quality To Remain A Cause Of Concern In The Near Term

Asset quality has been a cause of concern for the public sector bank, Dena Bank. But with increasing efforts taken by the bank to recover and minimize new slippages, the bank has been able to maintain its NPA levels in a comfortable zone.

The bank has set up recovery teams and specialized monitoring systems to take care of the asset quality. This has started showing good results as recoveries have increased. The bank further expects higher recoveries in FY12E.

However, there are some near-term concerns that the bank is facing currently. Dena Bank has an extremely high exposure of approximately `9,000 crore in the power industry. Of this huge amount, around ̀ 6,000 crore (March ’11) are to State Electricity Boards (SEBs) on a short‐term working capital basis.

SBI

PNB

Dena

Ban

k

Cent

ral B

ank

Alla

haba

d Ba

nk

Bank

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arod

a

Bank

Of I

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Cana

ra B

ank


The current outlook for SEBs is not very positive. The bank management has become cautious due to this and is focusing on reducing its exposure to SEBs. This is evident from the fact that the bank has been successful in reducing its exposure to SEBs from `6,000 crore in March ’11 to `5,180 crore in June ’11.

Moreover, the bank has not yet shifted to a 100% system-based NPA recognition. The bank still has to migrate its ‘`50-lakh and below’ portfolio to system-based NPA recognition. This constitutes around 18% of the total advance portfolio of the bank.

As observed by the performance of other banks, we believe that migrating to a system-based NPA recognition can lead to higher slippages. However, the management of the bank is confident that the slippages will not be higher and it aims to reduce its gross NPAs from around 1.8% in FY11 to 1.6% in FY12.

Going forward, we expect gross NPAs and net NPAs of the bank to remain higher in FY12 owing to the reasons mentioned here.

However, we are of the opinion that Dena Bank will witness a substantial improvement in the quality of its assets on the back of recoveries, the right steps taken to

Focus On Non-Interest Income

The bank’s non-interest income has shown dismal growth and had been a point of concern for the bank. However, the management is confident of a revival in its non-interest income in the coming quarters.

The bank is leveraging its relationship with its current customer base to increase the non-fund based business, which will, in turn, increase the fee-based income of the bank. The bank has tied up with all the top mutual fund houses in the industry to distribute their products through the bank’s branches.

The bank is also focusing on core banking solution (CBS) to enable its customer’s branch banking. Moreover, the bank is focusing on recoveries, which will further boost the bank’s bottom line performance.

RISKS AND CONCERNS

o In the event of the macro‐economic scenario worsening again, there is a strong possibility of higher‐than‐expected NPA provisions.

o A change in the management of the bank could impact the bank’s strategic target leading to a phase of uncertainty for the bank.

VALUATIONS

We expect Dena Bank to improve its core operating metrics, going forward, driven by focus on its liability franchise along with operating efficiency. Dena Bank is currently trading at a very attractive valuation in the banking space.

Dena Bank has been able to sustain growth in advances above industry average and has a major presence in the state of Gujarat, which has the highest GDP among all the states in India.


NPA Movement

Financials

Op. profit (`crs) Margin % PAT (`crs) EPS (`) P/E (x) Adj BVPS (`) P/ABV (x) ROE %

FY 10AFY 11AFY 12EFY 13E

8411,2241,4801,768

49.80%53.30%56.00%56.50%

511612679816

17.8218.3420.3724.48

4.794.664.193.49

7392

108126.2

1.170.930.8

0.68

21.40%19.50%17.20%17.80%

Growth %

3.10%60.30%14.40%18.50%

NII (`crs)Year

1,1001,7632,0172,390

2.13% 1.80% 1.87%1.90%

1.85%

1.08%1.21% 1.24% 1.16% 1.09%

0.00%

0.90%

1.80%

0200400600800

100012001400

FY 2009 FY 2010 FY 2011 FY 2012E FY 2013E

` in

Crs

Gross NPA Net NPA GNPA (%) NNPA (%)

Higher exposure in Gujarat, increasing focus on high-yield retail credit, strengthening of its balance sheet, coupled with lower operating costs would improve efficiency and drive earnings of Dena Bank, going forwarD.

contain fresh slippages by way of constant monitoring as well as adequate provisions that would be provided by the bank itself.


COMMODITYFUTURES

COMMODITYFUTURES

COMMODITYCrude Oil $98/barrel

Nickel$28,000/tonne

Pepper`25,000/quintal

Silver $32/troy ounce

Zinc $2,100/tonne

Aluminium $2,450/tonne

Chana`2,500/quintal

Copper $8,500/tonne

Jeera`14,000/quintal

Cardamom `1,000/kg

Gold $1,500/troy ounce

Guar Seed `3,200/quintal

Our research goes beyond numbers to identify the forces that affect the kundali of commodities - global events, domestic issues, and everything in between. Which is why, our predictions have invariably come true on several occasions, proving that we are among the best in the industry when it comes to commodity trading.

Predicting Accurate Results.Consistently.


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deficits than previously forecasted, as the country moves closer to securing an 8 billion euro ($10.7 billion) aid payout needed to avoid default. Prime Minister George Papandreou’s Cabinet also passed 6.6 billion euros of austerity measures recently to cut the 2012 deficit to 6.8% of the GDP, missing the 6.5% goal previously set with the EU, International Monetary Fund and the European Central Bank, known as the troika .

Going forward, we expect gold prices to remain buoyant as we have not seen any major liquidation in the ETF holdings. Strong ETF holdings suggest that the investment interest is still strong in the yellow metal. We recommend going long in gold at $1,600-$1,620 per ounce on the COMEX for a target of above $1,720 per ounce on the COMEX until the next fortnight.

INDUSTRIAL METALS

Prices of industrial metals once again had a very weak session. Copper prices tumbled to trade below $6,800 per tonne on the London Metal Exchange. This is a 35% correction from its all-time high level in Febru-ary this year. Most industrial metals are set to display their worst quarterly performance since the crisis of 2008. Despite labour unrest in major copper-producing mines, prices failed to sustain upper levels.

South African miner Metorex, the takeover target of Chinese metals group Jinchuan said its copper output for the three months to end-September rose 15% from the previous quarter.

Global aluminium prices cannot fall much further, with as much as two-fifths of the global production

already unprofitable and demand likely to hold up, a senior executive at RUSAL, the world’s largest producer of the metal, said.

Aluminium tops the list among base metals in terms of consumption growth prospects, followed by nickel, zinc, copper, lead and lastly tin, according to CRU, an independent research agency.

Going forward, we do not expect any respite for base metals. They still look weak based on bleak manufacturing PMI numbers from across the globe. Looking at the price levels and the quantum of demand, we still do not feel that base metals are cheap. We expect copper prices to test $6,500 per tonne to $6,400 per tonne on the LME until the next fortnight.

CRUDE OIL

Crude oil prices fell sharply from $90 per barrel to $77 per barrel in the last fortnight. The downside was majorly supported by the slowdown in the global economic growth, increasing threats that Greece would default and expectations of low oil demand from the world’s top oil consumer.

Meanwhile, Libya too restarted oil production and will start exporting half of its total oil production by the end of November. The projected pace for oil demand is lower this month due to a less optimistic outlook for global economic growth.

We expect more weakness to continue in oil prices due to macroeconomic indicators showing weakness around the globe, raising concerns for lower oil demand and improvement in the situation in Libya. Any major upside should be used as a good selling opportunity for the coming fortnighT.

FORTNIGHTLY OUTLOOK FOR COMMODITIES

M ost international commodities reacted rather sharply to growing debt

concerns in the Euro zone, led by Greece, tumbling Asian currencies and the strength in the US dollar index. Despite recent positive US jobs data and US ISM manufacturing data, we haven’t seen any kind of buying in several commodities.

Gold prices too tumbled losing its safe-haven stature. Silver prices followed the broad base metals complex, which witnessed their worst quarterly performance since 2008. Crude oil prices, though relatively strong, saw a weak trading fortnight as tumbling equities and easing tensions in the middle-east nations reduced issues related to supply, in turn, leading to a selloff in crude oil.

PRECIOUS METALS

After a volatile trading session in mid-September, we saw a huge crash in both gold and silver prices this fortnight. After reaching an all-time high of $1,920 per ounce on the COMEX, gold prices corrected by more than 16.5% to trade at $1,600 per ounce. Silver prices were worst hit with prices trading at $26 per ounce from a recent high of $44 per ounce on the COMEX, accounting for a 40% correction in the previous fortnight. However, because of the strength in the US dollar against the Indian rupee, the fall was not as steep as was seen in the international markets. The strength in the US dollar against major international currencies can be majorly attributed to the massive correction in bullion prices.

The Greek government said it passed a new budget backed by its interna-tional creditors, including larger


investors remained sceptical about the long-term solutions for European peripheral countries.

Higher CPI numbers too did not support the currency and expectations of a rate cut was largely ruled out. The coming fortnight is very crucial for the Euro zone as the markets await the final contours of an enhanced EFSF. On the other hand, troika (IMF, EU and ECB) will decide upon the next tranche of aid to Greece.

Currently, investors are very sceptical about the Euro zone and with every disappointment, investors are going short on the EUR/USD pair. With a bearish outlook on the pair, we expect the EUR/USD pair to trade in the range of $1.2850 to $1.3350.

The sterling was broadly under pressure in line with the euro. It fell to $1.54 from $1.57 against the US dollar in the last fortnight. Rising expectations of additional quantita-tive easing weighed on the exchange rate as the Bank of England showed willingness to expand its monetary policy further.

The central bank looks set to increase its efforts to stimulate the ailing economy in order to avoid falling back into a recession. Going forward, we may see a sustained downward pressure on GBP/USD against the backdrop of broad strength in the US dollar, coupled with deteriorating outlook for the UK economy.

The fundamentals are weak for UK and any rally should be considered as a selling opportunity. The likely range for the pound for the fortnight is $1.55 to $1.52 with a downside bias.

The Japanese yen broke the usual appreciation trend towards the end of

the fortnight. The US GDP came in better-than-expected at 1.3% for the June quarter. This development gave the US dollar some positive ground against the Japanese yen and the JPYINR pair surged to 77.25.

However, quarter-end exporters’ dollar selling came in at these levels. On the economy front, the newest Tankan economic survey for major Japanese industries in Q3 showed welcome improvement in the manu-facturing sectors. In the coming fortnight, we expect the Japanese yen to be in the range of 76 to 78.

The Indian rupee remained under tremendous pressure, depreciating by almost 8% to 10% in the last month. Capital outflows, coupled with the dollar squeeze in the Asian markets led to a sharp decline in the rupee.

The RBI reiterated that it won’t intervene to protect any particular level. However, it will intervene in the Forex market only to control the intraday volatility of the rupee.

According to data from SEBI, FII outflows since 20th September is $1,706 million from equity and debt markets. The weakness in rupee is likely to continue in the coming fortnight as the run on the US dollar may lead to further weakness in overall Asian currencies.

On the economic front, the current account deficit for June quarter came in at $14 billion against $12 billion in the corresponding period last year. Additionally, fiscal numbers point to a higher-than-estimated fiscal deficit for the current financial year. Both the external and internal factors indicate a weaker rupee in the short-term. The USDINR pair may test the levels of 49.90-50.00 in spoT.

FORTNIGHTLY OUTLOOK FOR CURRENCIES

I Investors continued to shelter themselves in safe havens like the US dollar and US treasur-ies in the wake of persistent

global growth concerns and the European debt crisis. The US dollar index, a broad measure of the dollar’s performance against six major curren-cies, rallied to 79.75 from 77.

The IMF forecasted the world econo-mies will grow at a much slower pace for another one-and-a-half year. Moreover, no concrete words came from the European Union, causing more pain to risky assets.

Macro-economic indicators are show-ing weakness around the globe. PMI numbers of developed markets are indicating slower growth in all the industries. Unemployment rates in the US and Europe are high at around 9.1% and 10%, respectively. The housing sector weakness continued in the US and UK leading to poor consumer spending. Also, inter-bank lending rates continue to reflect lack of confidence in the money markets.

All concerns, coupled with the ongoing dollar squeeze make the dollar a good bet. The dollar index is likely to test the mark of 81 in the coming fortnight.

The euro made a nine-month low against the US dollar, the worst hit among all the major currencies. The single currency is under immense pressure on account of contagion fears in the European economies.

Investors went short on every rally on the euro, which led to a sharp fall from $1.38 to $1.3160 within two weeks. Though the German parlia-ment passed the enhanced EFSF (European Financial Stability Facility) with a vast majority, the


The announcement to permit QFIs to invest in mutual fund schemes will enable them to have direct access to the Indian mutual fund industry, thus widening the class of investors in the Indian capital market and also

help in reducing the volatility in the markets

Wooing Foreign Investors


n accordance with the announcement made by Finance Minister Pranab Mukherjee in his 2011-12

budget speech, the finance ministry has decided to permit Qualified Foreign Investors (QFIs) to invest up to $10 billion in equity and debt schemes of mutual funds through the direct route – holding mutual fund units in a demat account through a depository participant (DP) that is registered with the SEBI and the indirect route – holding mutual fund units via the Unit Confirmation Receipt (UCR) issued by an overseas UCR issuer.

An additional amount of $3 billion can be invested in debt funds in the infrastructure sector. Investment by QFIs will propel the markets, decrease volatility and boost infrastructure spending.

“To liberalize the portfolio investment route, it has been decided to permit mutual funds that have been registered with SEBI to accept subscriptions from foreign investors who meet the KYC (know your customer) requirements for equity mutual fund schemes,” Mukherjee had said in his budget speech.

He said, “This would enable mutual funds in India to have direct access to foreign investors as well as widen the class of foreign investors who would invest in the Indian equity market.”

THE DIRECT ROUTE:DEPOSITORY PARTICIPANT (DP) ROUTE

This route will be operated through a separate single rupee pool bank account to be maintained by the depository participant (DP). Dividend payments will be directly remitted to the overseas accounts of the QFIs. QFIs can open a single demat account with a DP in India. However, they are

I not allowed to open a bank account in the country.

Process Flow When QFIs Come For Subscription Through The Direct Route

Step 1: The Qualified Foreign Investors shall place a purchase/ subscription order mentioning the name of the mutual fund scheme with its depository participant and remit foreign inward remittances in any permitted currency directly to the single rupee pool bank account of the DP.

Step 2: The DP, in turn, shall forward the purchase order to the concerned MF and remit the money to the MF’s scheme account on the same day as the receipt of funds from QFIs. In case of receipt of money after business hours, DP shall remit the funds to MF scheme account by the next business day.

Step 3: The mutual fund house shall process the order and credit units of the mutual fund scheme into the demat account of the QFIs. If for any reason the units are not allotted, the mutual fund house/ depository participant shall ensure that the money is remitted back to the QFI’s designated overseas bank account within three working days from the date of receipt of subscription of money in the single rupee pool bank account of the depository participant.

How Redemptions Take Place In The Direct Route Method

Step 1: QFIs can redeem through delivery instruction on the receipt of instruction from QFIs. The DP shall process the same and forward the redemption instructions to the MF. Upon receipt of instruction from DP,

the MF shall process the same and credit the single rupee pool bank account of the depository participant with redemption proceeds. Step 2: In case no fresh purchases are made, the money shall be remitted by the DPs to the designated bank’s overseas account of the QFIs within two working days from the date of the receipt of money from the MF in the pooled bank account.

However, the DP can make fresh purchase of units of equity and debt schemes of the mututal fund (if so instructed by the QFIs) out of the redemption proceeds received, provided that payment is made towards such purchase within two working days of the receipt of money from the mutual fund house in the pooled bank account. THE INDIRECT ROUTE:UNIT CONFIRMATION RECEIPT (UCR) ROUTE

Domestic mutual funds can open foreign currency accounts outside India for the purpose of receiving subscriptions from QFIs as well as for redeeming UCRs. The UCR will be issued against units of domestic MF equity schemes and would be non-tradable and non-transferable.

There are four parties under this route - QFIs, UCR issuer (based overseas), SEBI registered custodian (based in India) and mutual fund house. QFIs can subscribe/redeem only through the UCR Issuer.

The mutual fund house shall appoint one or more UCR issuing agents overseas and one SEBI-registered custodian in India. UCR issuer appointed by the fund house shall act as an agent of the mutual fund.

The rupee denominated units of the


MF would be held as underlying by the custodian in India in demat mode against which the UCR issuer would issue UCR to be held by QFIs. Units purchased and redeemed through UCR issuer shall be settled on gross basis and under no circumstances shall be netted against other investors of UCR issuer.

Process Flow When QFIs Come Through The UCR Route

Step 1: In case of a mutual fund house opening a bank account overseas, the UCR issuer shall forward the order of QFIs to the MF/ custodian. Upon receipt and transfer of funds to India, the mutual fund shall issue units to the custodian and the custodian in turn intimate the UCR issuer to issue UCR to the QFIs.

In case of redemption, the UCR issuer shall confirm the receipt of redemption request to the MF and custodian. On receipt of the instruction, the MF shall process the same and transfer the redemption proceeds to the MF overseas bank account for making payments to the designated overseas bank account of the QFIs. Step 2: In case the MF receives money in India from the UCR issuer, the UCR issuer shall forward the purchase order to the mutual fund and custodian and remit the funds into the MF scheme account (in rupee terms).

Upon the receipt of funds, the mutual fund shall issue units to the custodian

and the custodian shall, in turn, confirm to the UCR issuer to issue UCR to the QFIs.

In case of redemption, the UCR issuer shall confirm the receipt of redemption request to the mutual fund and the custodian.

Upon the receipt of instruction, the mutual fund house shall process and remit redemption proceeds to the UCR issuer, which in turn, shall remit the redemption proceeds to the designated bank account of the QFIs. Investments under both the routes will be monitored on a daily basis. The investment under both the routes will be in units which are directly issued by domestic mutual funds and no secondary market purchases would be allowed. Further, SEBI, the regulator has also allowed QFIs to invest an additional amount of up to $3 billion under both the routes in domestic mutual fund debt schemes which invest in infrastructure debt of minimum residual maturity of five years within the existing ceiling of $25 billion for

FII investment in corporate bonds that have been issued by the infrastructure companies in the country. The Secutiries Exchange Board of India has also said that a mutual fund can accept subscriptions from QFIs till investments under both the routes reach $8 billion in equity mutual fund schemes and $2.5 billion in debt mutual fund schemes.

The remaining limit of $2 billion in equity schemes and $0.5 billion in debt schemes would be auctioned by the capital markets regulator through a bidding process. The move may act as a further boost to MFs as it might get more inflows and will be managing funds for global investors. Some industry players also believe that this move might ease the pressure on the mutual fund industry which came about after the SEBI scrapped entry loads in 2009.

However in order to get inflows from foreign players, Indian fund houses should be able to convince and market themselves outside the country to attract such investorS.

Who Is A Qualified Foreign Investor (QFI)? QFI means a person resident in a country that is compliant with Financial Action Task Force (FATF) standards and that is a signatory to the International Organization of Securities Commission’s (IOSCO’s) Multilateral Memorandum of Understanding. That person should also be non-resident of India and currently is not registered with the SEBI as a Foreign Institutional Investor or a sub-account.

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The concept note on the regulation of investment advisors proposes certain positive practices for advisors and distributors, thus aiding investors in choosing the right

products for their investment portfolios

etail investors, who sometimes used to get unwarranted financial advice resulting in huge

losses on their investments, is set to change as markets regulator, Securities and Exchange Board of India (SEBI) is planning to regulate financial advisors and distributors selling financial products. The concept paper on the regulation of investment advisors released by the

R SEBI recently proposed some positive practices for the advisors and distributors, which might help investors chose right products for their portfolios. The regulator has invited public comments on the draft guidelines before 31st October. The markets regulator plans to regulate investment advisors through a Self-Regulatory Organization (SRO) which will look into issues relating to financial products

mis-selling, violation of code of conduct, conflict of interest, etc. The SRO set up for the regulation of investment advisors shall follow the rules laid down by the respective regulators for products falling under their purview. Individuals in the advisory business would have to register themselves with the SRO and have to comply with its rules and regulations. Besides individuals, even portfolio managers

Advising The Advisors


they will be prevented from styling themselves as financial advisors and will have to call themselves as agents only. The SEBI’s decision to regulate the advisors is being done mainly to protect the conflict of interest among financial distributors.

Investment advisors or their representatives would be required to do adequate risk profiling of the client before any investment service is provided to them. Based upon the risk profiling performed by the investment advisor or their representative, suitable investment advice should be provided to the client.

The records of such risk profiling and investment advice should be maintained by the investment advisor. Currently with no proper availability of records, investors are, therefore, not in a position to produce proof of any false practices.

The concept paper is intended to clear the confusion among investors about wealth managers, private bankers, and portfolio managers. It also states that advisors should be strictly identified as ‘investment advisors’ and not by names like wealth managers or private bankers. Besides, they should be highly qualified.

“This causes much confusion as to their role and responsibility. Hence the (proposed) regulations will provide that no person can carry on the activity of offering investment advice unless he is registered as an investment advisor under the regulations,” said SEBI.

According to the paper, currently distributors play a dual role as agents of both the investor and the financial product manufacturer, getting paid from both ends. Such divided loyalty is not in the best interest of stakeholders and results in a situation where the distributor is loyal only to

himself, churning investors' portfolios and squeezing more commission from the manufacturer. Investment advisors cannot receive any money from anyone other than clients and must clearly indicate fees and charges payable along with detailed information about their businesses, history and terms and conditions for advisory. They cannot outsource any activity except research reports and shall not be liable for civil and criminal liability for their advice unless negligence or mala-fide intention is established. Also advocates and chartered accountants who provide advice in their respective professions are out of the domain. It also leaves out newspapers and the broadcast media.

Additionally, stock brokers and sub-brokers, who provide investment advice without charging any fees and any person offering only insurance broking under the regulations of the Insurance Regulatory and Development Authority (IRDA), will not be covered under the proposed investment advisor regulation. The concept paper has proposed that all investment advisors will act only in the best interest of their clients (fiduciary responsibility). In case they provide other services such as broking, dematerialization of shares, etc, they should maintain a Chinese wall between advisory and other services and must disclose them to the client, said SEBI. However, a final decision will be taken only after looking into the public comments. But the path chosen by the regulator will lead to advisors selling right products to the investors and not feed them with unwanted products which might hurt their pockets and prevent them from achieving their financial goalS.

who only provide investment advice would have to register with the SRO. It is always seen that selecting between an agent and an advisor may be problematic for investors since no proper guidelines regarding their qualification or eligibility are in place yet. However, several investors have begun running a proper background check on the distributor or advisor before seeking any financial advice. The SEBI, in its concept paper, has proposed a minimum qualification without which an individual cannot work as a financial advisor. It has proposed that an individual needs to be either a chartered accountant, an MBA in finance or needs to hold a similar qualification or should have at least 10 years of relevant experience in the field. The regulatory order also states that in addition, individuals would be required to have a certification from SEBI-approved organizations such as the National Institute of Securities Markets (NISM). In case of advisory services from banks, at least two key personnel from the bank would be required to have relevant experience and suggested certification. The person who interfaces with the customer should declare upfront whether he is a financial advisor or an agent of the product manufacturer. If he is an advisor, he would be subject to the Investment Advisors Regulations and would require a much higher level of qualification. He would act as an advisor to the investor on all financial products. He would receive all payments from the investor and there would be no limits on these payments.

On the other hand, there will be agents who will be associated with the manufacturer and would receive remuneration from them. However,


CHANGE IN PRICE AND OPEN INTEREST

Nifty FuturesBank NiftyACC LtdAmbuja Cements LtdAxis Bank LtdBajaj Auto LtdBharti Airtel LtdBharat Heavy Electricals Ltd#Bharat Petroleum Corporation LtdCairn India LtdCipla LtdDLF LtdDr Reddy's Laboratories LtdGAIL (India) LtdGrasim Industries LtdHCL Technologies LtdHDFC LtdHDFC Bank LtdHero MotoCorp LtdHindalco Industries LtdHindustan Unilever LtdICICI Bank LtdIDFC LtdInfosys LtdI T C LtdJindal Steel & Power LtdJaiprakash Associates LtdKotak Mahindra Bank LtdLarsen & Toubro LtdMahindra & Mahindra LtdMaruti Suzuki India LtdNTPC LtdOil & Natural Gas Corporation LtdPunjab National BankPower Grid Corporation of India LtdRanbaxy Laboratories LtdReliance Communications LtdReliance Capital LtdReliance Industries LtdReliance Infrastructure LtdReliance Power LtdSteel Authority of India LtdState Bank of IndiaSesa Goa LtdSiemens LtdSterlite Industries (India) LtdSun Pharmaceutical Industries LtdTata Motors LtdTata Power Co Ltd*Tata Steel LtdTata Consultancy Services LtdWipro Ltd

Company Name Price(`)

OpenInterest

Price(`)

OpenInterest

Changein Price

(`)

Changein Price

(%)

Changein OpenInterest

(%)

Changein OpenInterest

4942.459385.601031.95

142.651052.151577.75

386.20340.28660.05274.00291.20192.60

1457.00409.75

2157.40378.55654.45468.35

2210.05141.65347.20864.05108.40

2197.25196.55521.30

64.70452.25

1631.20783.10

1072.50162.00262.05930.30

94.40489.60

79.95388.35807.85436.30

77.45108.00

1866.30222.15839.30125.75489.10145.20

99.35449.75984.25324.85

2869330020759251056750

13768000549175011907508777000

12937500915000

150020003827000

22942000626750

1308000459500

22205005459500

170975001873750

1783200012913000

871000022048000

285400015884000

376350040424000

3968500553875035885002990000

2152600022869000

363700078800002383500

221020003493000

128932504408000

24282000864600056391257434000

48700021368000

242450035105000

921750019617500

53960003953500

4857.759182.601098.90

148.10990.05

1524.35382.65319.40679.85271.70285.45196.05

1467.10418.65

2281.75399.75632.95456.45

1964.95124.40335.50841.00109.60

2471.80195.55475.80

70.45447.00

1324.10811.50

1082.95165.15269.10924.00

97.35511.85

72.45321.55791.95379.70

77.95100.20

1857.75193.35832.40109.40465.35152.85

97.00392.90

1042.40332.10

208149001987725

89275011070000

623000010005008945000

10050625823500

165780002959000

23871000574500993000395750

16400005844000

158937501036250

2017900094000008869750

173980002337125

137500003613000

284920003223500697775029375002344250

1507400014724000

362350045680002455000

224720006346000

112170005612000

17554000783600053356257532000

37450023618000

255950039951250

786750020810000

41422503236000

-84.70-203.00

66.955.45

-62.10-53.40

-3.55-20.8819.80-2.30-5.753.45

10.108.90

124.3521.20

-21.50-11.90

-245.10-17.25-11.70-23.05

1.20274.55

-1.00-45.50

5.75-5.25

-307.1028.4010.45

3.157.05

-6.302.95

22.25-7.50

-66.80-15.90-56.60

0.50-7.80-8.55

-28.80-6.90

-16.35-23.75

7.65-2.35

-56.8558.15

7.25

-7878400-88200

-164000-2698000

738250-190250168000

-2886875-91500

1576000-868000929000-52250

-315000-63750

-580500384500

-1203750-8375002347000

-3513000159750

-4650000-516875

-2134000-150500

-11932000-7450001439000-651000-645750

-6452000-8145000

-13500-3312000

71500370000

2853000-16762501204000

-6728000-810000-303500

98000-1125002250000

1350004846250

-13500001192500

-1253750-717500

-1.71-2.166.493.82

-5.90-3.38-0.92-6.143.00

-0.84-1.971.790.692.175.765.60

-3.29-2.54

-11.09-12.18

-3.37-2.671.11

12.50-0.51-8.738.89

-1.16-18.83

3.630.971.942.69

-0.683.124.54

-9.38-17.20

-1.97-12.97

0.65-7.22-0.46

-12.96-0.82

-13.00-4.865.27

-2.37-12.64

5.912.23

-27.46-4.25

-15.52-19.6013.44

-15.981.91

-22.31-10.0010.51

-22.684.05

-8.34-24.08-13.87-26.14

7.04-7.04

-44.7013.16

-27.211.83

-21.09-18.11-13.43

-4.00-29.52-18.7725.98

-18.14-21.60-29.97-35.62

-0.37-42.03

3.001.67

81.68-13.0027.31

-27.71-9.37-5.381.32

-23.1010.53

5.5713.81

-14.656.08

-23.23-18.15

12 Sept'11 03 Oct'11CHANGE IN PRICE AND OPEN INTEREST OF THE NIFTY 50 COMPANIES

Source: NB Research#BHEL goes ex-split in the ratio of 5:1, *Tata Power goes ex-split in the ratio of 10:1


MUTUAL FUND, FII ACTIVITY AND NIFTY

Source: NB Research

Date MF Net*12 Sep'1113 Sep'1114 Sep'1115 Sep'1116 Sep'1119 Sep'1120 Sep'1121 Sep'1122 Sep'1123 Sep'1126 Sep'1127 Sep'1128 Sep'1129 Sep'11

FII Net *-94.00-62.00

-147.20107.00149.80-78.60

-109.20216.10-41.00

8.6037.10

194.60-156.90

--

-219.80-779.60-369.60

-9.20166.80394.60

-4.00378.70333.70

-1234.60-1189.80-1006.80

88.70251.90

4946.804940.955012.555075.705084.255031.955140.205133.254923.654867.754835.404971.254945.905015.45

Nifty

*Net activity in Equity

This graph and data represent the Mutual Fund and FII activity that took place in the last fortnight, whether the Fund Houses were buyers or sellers.

MF Net , FII Net & Nifty

MF FII NIFTY (RHS)

BULK DEALS

Ex Company Client

Price (`)

Date Quantity % of EqTrade

BSEBSEBSEBSEBSEBSEBSEBSEBSEBSEBSEBSEBSEBSEBSEBSEBSEBSEBSEBSEBSEBSEBSEBSE

13 Sept'1114 Sept'1114 Sept'1115 Sept'1116 Sept'1116 Sept'1119 Sept'1121 Sept'1126 Sept'1126 Sept'1126 Sept'1126 Sept'1126 Sept'1127 Sept'1127 Sept'1127 Sept'1127 Sept'1128 Sept'1128 Sept'1128 Sept'1130 Sept'1130 Sept'1130 Sept'1130 Sept'11

Gloster LtdIndia Securities LtdNandan Exim LtdChandni Textiles LtdLe Waterina Resorts & Hotels LtdThambbi Modern Spinning Mills LtdIndia Securities LtdEntegra LtdFutura Polyesters LtdBloom Dekor LtdBeryl Drugs LtdBloom Dekor LtdExcel Infoways LtdFutura Polyesters LtdShekhawati Poly-Yarn LtdGodrej Properties LtdPasupati Fincap LtdLKP Finance LtdLKP Finance LtdClaris Lifesciences LtdUT LtdUT LtdBGIL Films & Technologies LtdEmco Ltd

Joonktollee Tea & Industries LtdEssar Teleholdings LtdChiripal Industries LtdMonaecum Properties Pvt LtdSangam Agro Agencies Pvt LtdAsset Reconstruction Co I LtdEssar Teleholdings LtdMW Infra Developers Pvt LtdR Raheja Properties Pvt LtdShalibhadra Steel Pvt LtdAddo Constructions Pvt LtdDarshit Hydro Power Project Pvt LtdSatyaprabhu Infrastructure Pvt LtdR Raheja Properties Pvt LtdNayan Impex Pvt LtdGodrej Industries LtdPasupati Olefin LtdKBS Realtors Pvt LtdEvans Fraser And Company (India) LtdWF Asia Fund LtdProgressive Star Finance Pvt LtdLend Lease Company India LtdFelex Enterprises Pvt LtdPurna Properties And Investments Pvt Ltd

SellSellBuySellBuySellSellSellBuySellSellSellSellBuyBuySellSellSellBuySellSellBuySellBuy

15423248000000

455490725000004100000

7314147500000

60000005307311

260390133547100000500000

4435106500000790000

52623300000300000934106275000275000150000780000

5.895.481.001.556.151.275.425.619.674.342.601.671.598.082.271.131.122.292.291.463.003.002.341.20

Traded

274.1061.95

2.631.945.39

11.4761.0025.00

5.0115.7512.7615.7511.80

5.5922.60

630.0015.4175.0175.01

110.019.979.976.90

55.90

Close

310.7060.00

2.601.945.89

11.4757.4527.15

5.6015.7514.0515.7511.79

5.6522.60

639.2015.4979.9579.95

119.4510.1010.10

6.6354.20

MAJOR BULK DEALS WHERE OVER 1% OF EQUITY WAS TRADED FROM 12th Sept ’11 TO 3rd Oct ’11

Bulk deals take place from normal trading windows that brokers provide and can be done any time during trading hours. In a bulk deal, the total traded quantity exceeds 0.5% of the number of equity shares of a company.

Source: NSE and BSE

465047004750480048504900495050005050510051505200

-1400

-1200

-1000

-800

-600

-400

-200

0

200

400

600

12 Sep'11

15 Sep'1120 Sep'11

23 Sep'11

28 Sep'11


Scheme Name

Absolute % (Point to Point)

2 Weeks

NAV(3rd Oct'11)

MoversFranklin Infotech(G)ICICI Pru Technology(G)DSPBR Technology.com(G)Birla SL New Millennium(G)ING OptiMix Asset Allocator Multi FoF(G)LaggardsBirla SL CEF-Global Agri-Ret(G)Birla SL CEF-Global Multi Commo-Ret(G)Mirae Asset China Advantage-Reg(G)DSPBR World Mining-Reg(G)Birla SL CEF-Global Prec Metal-Ret(G)

55.456815.270027.844016.620014.8479

13.039311.1373

8.05809.1344

13.2972

2.60521.93591.27301.03340.2606

-17.8415-15.2677-15.1879-14.1907-12.4764

Equity Schemes

MOVERS AND LAGGARDS IN MUTUAL FUND SCHEMES

Debt Schemes MoversEscorts Income Plan(G)Birla SL Medium Term-Reg(G)Taurus Dynamic Income Fund(G)Escorts ST Debt(G)Tata FIPF B3-Reg(G)LaggardsICICI Pru Advisor-Moderate(G)ICICI Pru Advisor-Cautious(G)Canara Robeco InDiGo(G)Escorts Income Bond(G)IDFC Asset Alloc-Mod(G)

33.005011.852810.666615.234513.8819

24.475718.921711.703629.904311.2043

0.76720.74710.54200.47550.4181

-2.6319-1.5833-1.2254-1.1556-1.1138

Balance SchemesMoversKotak Equity Arbitrage(G)IDFC Arbitrage Plus-Reg(G)Reliance Arbitrage Advantage(G)JM Arbitrage Adv(G)Religare Arbitrage(G)LaggardsEscorts Balanced(G)Kotak BalanceLIC Nomura MF Children(G)Escorts Opp(G)UTI CCP Advantage(G)

15.307012.143710.823314.310213.3757

54.782019.9250

9.144426.647914.9970

0.92700.41090.38300.35630.3346

-5.5818-4.8245-3.7999-3.6998-3.6071

Source: NB Research

Disclaimer The information provided here has been obtained from various sources and is considered to be authentic and reliable. However,

Nirmal Bang Securities Private Limited is not responsible for any error or inaccuracy in the same.

SMS ‘BANG NRI’ to 54646 | nr i@nir malbang.com | www.nir malbang.com

38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400001. Tel: 3926 8600 / 01; Fax: 3926 8610,

The knowledge of behavioural �nance can help market participants to recognize and avoid bias and errors in their decisions

A MINDOF ITSOWN


o you know who the biggest enemy of a trader or an investor is? No, it is not inflation or

high interest rates, or global factors and not even market operators. The biggest enemy of a trader or an investor is his or her own mind.

It is a known fact that the markets thrive on two major human emotions – fear and greed. However, human emotions like hope, despair, regret, pride and optimism, among others too play a major role in affecting the psyche of an investor.

Till few decades back, emphasis was laid on studying the stock markets from a fundamental or a technical point of view instead of emotional factors. It was only recently that a relatively new concept of looking into these human emotions and studying the effects of human psychology on the overall outcome of profit or loss in the markets in an investor’s life was put forth. This concept is known as behavioural finance.

BEHAVIOURAL FINANCE

The study of behavioural and cognitive psychology that affects the financial decision-making process is known as behavioural finance. There are numerous concepts under behavioural finance and it would be almost impossible to cover all of them in one or two articles. So what we have done is handpicked some of the key concepts that an investor comes across in everyday trading, to help him understand the causes and effects of each and how we can control them to emerge winners in the markets.

PROSPECT THEORY

Imagine a scenario wherein you give a child four chocolates and tell him that he has to give two chocolates to his younger sister. Now imagine a

D second scenario wherein you give the child two chocolates and tell him he can keep both of them for himself.

Which scenario, in your view, would be considered more favourably by the child? Rational thinking says that there should be no difference in his emotions as the end result is that the child is left with a net of two chocolates. But it is not so. Research shows that the child reacts more favourably to the second scenario.

In the same manner, a straight `1,000 profit is viewed differently from a `2,000 profit followed by a `1,000 loss in the stock market. In the second scenario, even though the net profit is still ̀ 1,000, it is not viewed positively as the effect of the loss is much more than the profit on the trader’s mind. This effect is popularly known as Loss Aversion.

The theory states that humans perceive gains and losses differently. The pain of loss is much more than the pleasure of a gain. In fact, it is said that the pain of a loss is almost three times more than the pleasure of a gain of the same value. This is why we see that we are quick to lock-in our profits, however small. But we let our losses run for long. This is because we cannot bear the pain of a loss.

This is also the reason why in a panicky situation, investors shift their funds to bank fixed deposits where they are assured of 8% to 10% guaranteed returns and avoid investing in the stock markets where even though the returns can be as high as 30% to 50%, the risk of capital erosion is equally high, which can cause pain.

Remedy The best piece of advice is to look at the net figure of profit minus loss and not focus on each entity in its singularity. Also, remember that the

stock market is a risky place and that loss is an integral part of trading. And if you do not take risks, you will not reap rich rewards. Finally, set a time frame for your investments and do not exit before that time.

GAMBLER’S FALLACY

How many times have we restrained ourselves from buying a stock or have sold off our holdings just because it has moved up in 5 to 6 consecutive trading sessions in a row thinking that it cannot go up any further and that the next trading day would be a down day for the stock? We guess many a times. But to your surprise, it goes up the next trading day and even the next one, as well.

In a gambler’s fallacy, a trader thinks that after an event or a series of events has occurred, the likelihood of it occurring again is very less, even though it is an arbitrary event. A gambler’s fallacy is the worst enemy of a trader. After a series of losses, an investor feels that his streak of bad luck is coming to an end and a U-turn is just round the corner and he keeps on investing and betting more and eventually ends up losing everything.

This normally happens with traders who tend to look for stocks that are trading at or near their 52-week lows, because they feel that the stock cannot go down any further and the only way is up. But how many times have we seen the stock moving downwards and forming new 52-week lows with each passing day?

Remedy Investors should bear in mind that the stock market is a game of probability and that past events do not change the probability that certain events will occur in the future and there is always a 50:50 chance of it recurring. Rather than just blindly predicting that the trend will reverse, investors should do



their homework and wait for clear-cut technical and fundamental signals that the trend has actually reversed before entering any trade.

ANCHORING

A very interesting concept in behavioural finance states that we tend to hold on to certain events or figures and use them as anchors or reference points on which we base our investing decisions. This is quite common and almost everybody will identify with this example. Suppose you have bought a stock at ̀ 100 and it rises to ̀ 140, yet you wait for it to rise further. But the stock price starts falling instead and reaches `70. You then decide to get out of it if it reaches `100 again. But when it does really reach `100, you do not sell it. Instead, you say that you will wait for it to reach `140 again. This is because the recent high of `140 has been anchored in your mind.

Anchoring is a means for investors to justify their decisions. Because the price of `140 is anchored in the investor’s mind, he feels that it is the correct valuation for the stock and the market forces are undervaluing it. According to him, the stock will reach the right price of `140, sooner or later. What investors do not realize is that the fundamentals of the company or some such factors could have deteriorated and that is what is being shown in the price of the stock.

Repeated exposure to certain numbers or events can also cause anchoring. So, if you have heard one or more technical analysts on TV say that if the Nifty breaks 5,000 on the downside it can go as low as 4,700, your mind gets fixated on the number. Once the Nifty breaks the 5,000-mark, even though the stock you want to buy is available at a very cheap rate, you still do not buy it because you feel that the markets are

going to fall to as low as 4,700 and you may get the stock even cheaper. Eventually you miss your bus.

Remedy a. Forget the highs and lows.b. Do your homework properly. Plan your entry and exits in advance and stick to it.c. Keep a sharp eye on any news regarding internal changes or those revolving around the company or the industry on the whole.

ENDOWMENT EFFECT

Suppose your friend has gifted you a digital camera worth `5,000 for your birthday. But since you already have a digital camera of your own, you decide to sell it off. At what price would you sell it for? Obviously, for nothing less than `5,000 even though you have not spent a single rupee to purchase the camera.

Now consider a second scenario. You are in need of a digital camera and instead of gifting you the camera, you friend offers to sell it to you. You know that the price of the camera in the market is `5,000. What is the price that you are willing to offer to your friend to buy the camera? Most of us would be willing to offer just `4000 or even less. Why then are we not ready to sell for less than `5,000 and want to buy it at a lesser price?

This is called the Endowment Effect, which states that humans believe that something that belongs to them is much more valuable than something that belongs to others. Humans experience a lot of pain when parting with objects they own. Hence, we note that we press the ‘buy’ button very easily but pressing the ‘sell’ button is very difficult. Thus, if you have bought a stock at `100, you would ideally not part with it if you are not getting `120 or more.

Endowment is the reason why people hold on to their losing stocks. They feel that just because they own it and have bought it at a certain price, the sell price that they are demanding is justified and anything less than that would be doing injustice to the stock. This right price may never come and they are stuck with the stock for life.

Remedy Plain and simple. Do not get married to your stock. Be prompt to lock-in profits and do not hesitate to book losses when needed.

CONFIRMATION BIAS

People tend to think only in a manner that suits their preconceived notions or thoughts. Hence, when processing information they focus only on information that confirms with their line of thinking. Any contradiction or opposing thoughts are comfortably ignored. This is known as Confirmation Bias.

For example, if you have a preconceived notion that only low P/E and high beta stocks are multibaggers in the long run, you will search only for those stocks that fulfil these two criteria.

Furthermore, once you have identified such stocks, you will reaffirm your argument by focussing only on the positive news surrounding these stocks such as high net profit, increased sales, etc. Any negative news about the stock is completely ignored. This sort of view can prove to be very disastrous as it provides only a one-sided view and obliterates the complete picture.

Remedy Carefully process all the news about a stock - positive as well as negative. Assess all the pros and cons, weigh the risk to reward ratio and only then take an informed decisioN.

Contact: 022-39268088e -mail: [email protected]

www.nirmalbang.com

EQUITIES | DERIVATIVES | COMMODITIES* | CURRENCY | MUTUAL FUNDS# | IPOs# | INSURANCE# | DP 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400001. Tel: 3926 8600 / 01; Fax: 3926 8610,

Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. Through Nirmal Bang Securities Pvt. Ltd. *Through Nirmal Bang Commodities Pvt. Ltd. #Distributors investment in securities is subject to market risk. investment in securities is subject to market risk

The most intelligent strategy in Chess is to be ready with the next move. Similarly, currency trading involves moves that are a combination of knowledge and skill, backed by years of experience.Currency Derivatives Trading with us keeps you a few steps ahead, always.

Date: 22nd July, 2011.Venue: Hotel Centre Point,

Nagpur.

LEARN THE ART OFCOMMODITY INVESTING

LEARN THE ART OFCOMMODITY INVESTING

Exchange Partner

BeyondPresent

&



BEYOND MANDIVISITS NAGPUR

Traders and investors can take advantage

of the opportunities in commodity

complex by using expert guidance and

timely advice

Nirmal Bang Commodities Pvt Ltd, in association with Zee Business, had organized Beyond Mandi, the investor education camp at Hotel Centre Point in Nagpur on 22nd July with the aim to educate traders and investors on the art of investing in commodities by bringing market participants and industry experts on a common platform and thus helping the former to take right investment decisions through sharp insights and guidance.

At the camp, Anjani Sinha, MD & CEO of the National Spot Exchange and Kunal Shah, Head – Commodity Research at Nirmal Bang Commodities Pvt Ltd deliberated about the immense opportunities in the commodities complex. Purshottam Kawade, president of the Maharashtra Suvarnakar Association was also present on the occasion.

Amish Devgan started the event by introducing the panelists and explaining the objective behind the camp.

The first speaker of the day, Anjani Sinha informed the audience about MCX and how it has become one of the premier commodity exchanges in India. He further told them about the various products offered by the exchange and also its plans to launch new instruments to meet investor needs.

“MCX-promoted NSEL has also launched certain instruments in the e-series segment for small and retail investors. One of them is e-gold, which is gaining popularity since it is easily convertible into physical gold and subsequently into jewellery and can be stored conveniently,” said Sinha.

He added that e-gold would benefit those who seek to invest systematically or those who want to save money for important events like marriage. Other e-series products include e-gold, e-silver, e-copper, e-lead and e-zinc. NSEL plans to take the total number of commodities in the e-series segment to 20.

Sinha also dwelt on the benefits of NSEL, especially the way it has helped the people of Vidarbha in trading in cotton. He said commodity traders can also avail of the Warehouse Receipt Financing from banks empanelled with NSEL against commodi-ties deposited in the warehouses.

Anjani Sinha,MD & CEO of NSEL

Amish Devgan, Commodity Editor andAnchor at Zee Business

Anjani Sinha is the MD & CEO of National Spot Exchange Ltd (NSEL). He has over two decades of experience and deep knowledge of commodity derivatives and spot markets. His previous stint was with the Ahmed-abad Stock Exchange. Prior to that, he was associated with the Bombay Commodity Exchange Ltd, Interconnected Stock Exchange of India Ltd (ISEI) and Magadh Stock Exchange.


Kunal Shah, Head of CommodityResearch at Nirmal BangKunal Shah serves as the Head of Commodity Research at Nirmal Bang. He closely tracks precious metals, base metals, energy and agricultural commodities. He addresses seminars on the outlook of commodities across the country. He appears regularly on business channels. He is also sought by the print media and wire services, on a regular basis. Prior to Nirmal Bang, he was associated with Motilal Oswal Commodities Pvt Ltd, where he managed the research desk.

After Kunal Shah’s talk, the discussion was thrown open to the audience for a round of questions and answers. The next Beyond Mandi camp was held in Indore on 19th August this year.

The next speaker to carry forward the event was Kunal Shah. Explaining the reason behind conducting the commodity camp in Nagpur, Shah said Nagpur is quite big in terms of commodity trading. He further said concentrated orange juice is one of the biggest traded agricultural commodities on the NYBOT.

“Even without the participation of FIIs, MFs and insurance companies, the markets are growing at a phenomenal pace,” said Shah. “Internationally, commodities are treated as an asset class.”

According to him, commodity prices cannot reach zero or negligible levels. He said the future of commodities is bright because of the growing population of India, which will result in the rise in prices as India’s acreage is on the decline.

He made a presentation on the reasons for the upward movement in commodities between 2000 and 2010, except the recessionary years of 2001 and 2008.

In 2010, commodities had beaten all other asset classes, including equities and currencies. Even though, a correction was witnessed in the equity markets this year, the commodity market has managed to outperform.

The current scenario is very similar to the one seen after WWI when Germany had printed large amounts of currency notes, which resulted in the rise in commodity prices. At present, prime economies around the world are increasing their supply of money in the markets, which is pushing the prices of commodities, elaborated Shah.

The ongoing rally in the markets is mainly due to increased liquidity in the commodity markets. This rally is not due to supply constraints and is not driven by market forces alone, Shah maintained.

He went on to explain the sovereign debt problem in Greece, Portugal, Ireland, Italy and Spain. The bond yield in these countries has been on the rise since these nations do not have money, he said.

Talking about individual commodities, Shah expressed a strong outlook for gold. But he said he was not optimistic about silver since industrial activity had subdued.

As far as base metals are concerned, he said there have been positive data from China. However, its biggest markets – USA and Europe – are currently facing a slowdown. Fundamentally, lead is the weakest among metals, he said. However, he remained bearish on crude.

According to him, cumin has strong fundamentals due to robust demand from China. He cautioned investors against having high exposure in the commodity futures market. “People must not try to predict the markets by seeing charts alone. They should study fundamentals too,” said Shah, adding that stop loss is an important tool and must be used. Most importantly, investors must control their greed and fear, he addeD.

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Hoping For A Festive Revival - Nirmal Bangbeyondmarket.nirmalbang.com/issue56/Download/magazine.pdf · 2012. 6. 28. · Through the Vibrant Gujarat Summit, the state government has