Journal of FInance Vol 14

8/9/2019 Journal of FInance Vol 14

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1. BETTING ON BUDGET

It should be an election budget. So, expect higher exemption limits for income tax, cuts in corporate taxand Custom duty, selective cuts in excise duty, and big spending on welfare and social schemes in thecoming budget. Finance ministers are politicians first and economists only second or third. The nextgeneral election is due in May 2009, so Mr Chidambaram will not be able to present a regular budget in

2009. Hence, Budget 2008 will be his last. It will come too long before the next election to really have asignificant electoral impact. Yet, it is politically necessary for him to satisfy Madam that he has done hisbit to get her re-elected.

On 29th of February 08, the UPA government will unveil what could be its final full-fledged UnionBudget before the next general election. This also means a tough balancing act between pre-poll populist pressures and a desire to carry forward the reform agenda by the two main architects of this politico-economic document: Prime Minister Manmohan Singh and finance minister P Chidambaram. And theyhave an almost all-new budget team to help construct a blueprint that would attempt to not just win thehearts of the electorate, but also push growth and reforms.

Heading the team is finance secretary Duvvuri Subbarao, an economist by qualification, who has thebenefit of a previous stint in the Prime Ministers Economic Advisory Council. Mr Subbarao is an AndhraPradesh cadre IAS topper of the 1972 batch. Not only was he part of the finance ministry in the early1990s when Manmohan Singh initiated economic reforms, he also spearheaded fiscal reforms in AP asthe states finance secretary.

To complement him are revenue secretary PV Bhide and expenditure secretary Sanjiv Mishra, besides thechief economic advisor in the finance ministry, Arvind Virmani (Harvard economist), and the newly-appointed advisor to the finance minister Shubhashis Gangopadhyay (Doctorate from Cornell University),who joined less than a month ago. Mr Mishra, incidentally, is the only old hand in the budget team, whicheven has new faces at junior levels. Mr Gangopadhyay and Mr Virmani, both economists of repute, havea particularly crucial role in the Budget exercise with the government facing the dual challenges of apossible inflation jump and deceleration in key sectors. Nor is news on the global front encouraging, withthe threat of recession in the developed economies looming large.

The Tax Policy and Legislation Division (TPL) and Tax Research Unit (TRU) in the Central Board ofDirect Taxes and Central Board of Excise and Customs work out tax proposals. Incidentally, thesedivisions also have new faces, barring TPL joint secretary Arvind Modi and TRU joint secretary R Sekar.

For the gross budgetary support (GBS), according to the convention, ministries put their demands (of fundrequirement in a fiscal) to the Planning Commission. The Commission prunes it and sends the derivednumber (GBS) to the finance ministry. The finance ministry which is responsible for doing the balance actbetween governments revenues and expenditures gives its recommendations on the proposed spends. The

final decision on the GBS which in a way lays down the expenditure on various government programmesis taken by the Prime Minister.

Budget session on February 25

The Budget Session of Parliament is likely to commence from February 25. As per the tentative schedulepresented to the Lok Sabha Speaker by the union government, Railway Minister Lalu Prasad Yadav willpresent the railway Budget on February 27, followed by economic survey the next day. The union Budgetwill be presented on February 29.


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1.1 Its going to be a dream budget

Four year of 8-9% GDP growth have yielded a cascade of tax revenue, with direct tax collections rising by over 40% for two years running. This gives flexibility rarely available before. Finance minister PChidambaram might spread cheer all around with the Budget 2008. A hike in the exemption limit forthose under income tax net, a hike in amount of savings you can make to qualify for tax breaks, a wide

range of tax-free instruments for investments and a rejig in tax slabs are being actively considered by theUPA government. Corporate tax payers can expect some relief in form of removal of surcharge.

This Budget of the UPA government is likely to see an estimated 17% jump in the gross budgetarysupport as public expenditure. It is understood that the Prime Minister Office (PMO) has in-principleapproved the final fund allocation from the budget. The focus of the budgetary support will clearly on thesocial sector. The allocation of funds assumes significance in the light of elections next year. It isexpected that certain ministries would get the lions share. The list includes names of:

Agriculture and cooperation ministry, Ministry of health,

Ministry of women & child welfare, Higher education, Ministry of tribal affairs, Ministry of urban employment & poverty alleviation.

Sectors like railways, urban infrastructure and power which are capable to generate their own resources would have to bear a cut in their share to enable diversion of funds to priority areas like health,education and rural development.

New tax regime of reporting income

Individuals will have to start reporting their income from all sources in due course, including tax-freeincome. The government is vetting a proposal to shift from an exemption to a deduction-based regime forreporting income. This means while computing the tax outgo, an individual has to include income fromall sources and then claim a deduction on tax-free income. The objective of the proposal, set to feature inthe new income-tax code, is to establish an audit trail. And help widen the assessee base as more peoplewill file tax returns. The proposal is also in sync with the goal of linking all transactions to PAN.

Tax on rich: Citu

Reflecting the tone of the left wishlist for the Budget, CPMs trade union wing Citu, is toeing the familiartax on rich line. In finance minister P Chidambarams ritualistic pre-budget meeting with central trade

unions, Citu will seek an end to fiscal profligacy of giving incentives or concessions to corporateindustrial houses, MNCs and SEZs. Citu wants the government to stop participatory notes in share markettransactions, enhance the rate of personal and corporate income tax for those in the higher incomebrackets and review Double Taxation Avoidance Agreements to curb speculative profiteers evading taxfor resource mobilisation. The Left trade union reiterated the demand for raising the income taxexemption limit to Rs two lakh per annum. Citu demanded budgetary support for revival of sick CPSUs.Besides, it wants budgetary support for addressing the problem of sickness and crisis in traditionalindustries such as jute, textile, handloom, coir, beedi, khadi and village industries.


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1.2 Bigger tax breaks in direct taxes

The finance ministry, which is giving final touches to the tax proposals, is likely to raise the income taxexemption limit from Rs 110,000 to Rs 125,000. Though, there is a strong pitch from all corners to raisethe exemption limit to Rs 150,000, the fear of a drastic erosion in the tax base may prompt thegovernment to follow a conservative approach. An increase of Rs 15,000 will give every tax payer a taxbreak of Rs 1,500 while a rise of Rs 40,000 in the exemption limit will provide a relief of Rs 4,000.

A final call on the direct tax proposals would be taken at the highest political level since this would beUPA governments last full budget. The 2009 budget will be a vote on account as a new government hasto be put in office in May 2009. A hike in the current investment limit of Rs 100,000 to Rs 150,000 is alsobeing looked at with a view to channelise some savings into infrastructure sector. Investments in specialinfrastructure bonds and dedicated infrastructure funds could become eligible for tax exemption.

Robust direct tax collections have once again raised expectations of tax rate cuts in the coming Budget.Exceeding indirect tax receipts for the first time, direct tax mopup looks set to cross Rs 3 lakh crore thisfiscal. The Budget estimates of an 11.8% tax (both direct and indirect) to GDP ratio is likely to beexceeded. Finance minister P Chidambaram has the luxury to bring on these changes as direct taxes haveshown a buoyant growth of over 40% +.

The government had raised the limit by Rs 10,000 in the last budget. At present, an income slab of Rs 1.1lakh to 1.5 lakh attracts a 10% tax rate while that of Rs 150,001 to Rs 250,000 attracts 20%. A 30% rate islevied on income above Rs 250,001. These slabs may be pushed upwards with an income of Rs 150,001attracting 10% and that over Rs 5 lakh attracting 30%.

The comfort provided by the robust growth in tax collections this fiscal might also prompt thegovernment to weigh the option of pruning corporate tax rates. Indias corporate tax rate now works outto 33.99%, after factoring surcharge of 10% and the education cess of 3% on top of the statutory rate. Oneoption is to slash the statutory rate, which is now 30% to close to 26%, while retaining the surcharge andeducation cess. It is clear, however, that a decision on reducing the tax rate will hinge on the eliminationof a host of exemptions which Indian companies now enjoy and acceptance by the government thateffective rate works out to just a tad over 19%, after taking into account these exemptions. Therefore, anycut in rates would have to go hand-in-hand with the elimination of these exemptions.

Relief from FBT

There is also a view that some exemption limit in terms of turnover should be prescribed for levy of FBT.Also, the finance minister is toying with a proposal to provide some relief to compensate FBT on Esops.There is a strong thinking in the government that FBT on certain items like sales promotion should bepared or done away with completely. Similarly, FBT on dealer meeting could be tweaked. Such meeting,industry has argued, are crucial in these sectors to promote sales. The move is in sync with finance

minister P Chidambarams concern over slowdown in production of fast-moving consumer goods.

Tax relief for senior citizens on rental income

Budget 2008 may bring cheer to senior citizen who let out their property on rent. The government isconsidering a proposal to exempt tax on rental income for senior citizens. At present, every age groupenjoys tax exemption of 30% on rental income. Experts feel the move would encourage house owners tolet out their properties, which lay vacant otherwise. According to government estimates around 16 millionhouses in the country which are unnoticed can come into circulation.


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1.3 Charity for a causeCharity sees the need not the cause. However, the government now wants to see the cause beforeextending tax benefits. It is examining a proposal to narrow the definition of charitable purpose to ensurethat only the trusts that carry out charitable activities are able to benefit from tax exemption. At presentthe Income-Tax Act defines charitable purpose as relief of the poor, education, medical relief, and theadvancement of any other object of general public utility.

The move follows a recent apex court decision in the case of Gujrat Maritime Board, which ruled that thepublic utility was eligible to get registered as a charitable institution. Government sources said the courtruling had created an anomalous situation, as tax benefit was given to only those institutions, whichcarried out charitable work in the nature of public goods, such as providing education or healthcare. They pointed that the courts decision could open a Pandoras Box for the income tax department, withinstitutions engaged in infrastructural development or any other such activity claiming tax exemption. Thefinance ministry wants to prevent this happening.

1.4 Initiatives to earn carbon & tax creditsCorporates using clean technologies may be in for goods news this Budget. The government is examininga proposal to provide tax benefits to corporates using clean technologies and generating carbon credits.The option being at is to incentivise the use of clean technology by giving higher depreciation benefitsagainst expenditure incurred on such technology. Moreover, the finance ministry is expected to clarify onthe treatment of carbon credits. At present, there is no clear definition in the tax laws about treatment ofcarbon credits, which are accounted for by some as capital assets and others as goods. Industry haspitched for treating them as capital assets and exempting them from capital gains tax.

Under the Kyoto Protocol, companies in developing countries earn certified emission reduction (CER) ora carbon credit for each tonne of carbon dioxide emission they avoid. These carbon credits can be sold tocompanies or governments in developed countries which are under mandatory obligation to reducecarbon gas emission. They can then offset their own targets against the CERs they purchase fromcompanies in developing countries under the UNs clean development mechanism, or CDM. CER is a growing area which is generating huge interest in the country. According to industry estimates theindustry has already invested close to Rs 60,000 crore into projects that will generate more than fourcrore carbon credits by the end of 2012.

1.5 Pass-through status for VC funds in farm sector

VC funds enjoyed the pass-through benefit on their investment across all sectors till the last budget. Thepass-through status allows earnings from VC funds to be exempted from taxes. However, the trustees who

form the fund pay a tax on the income earned through the fund. Last year finance minister decided to doaway with this exemption except for a few sectors like biotechnology; information technology relating tohardware and software development; nanotechnology; seed research and development; R&D of newchemical entities; dairy industry; poultry industry; investment in hotel-cum-convention centres; andproduction of biofuels. The government consequently restored the benefit for VC funds which invested ininfrastructure sectors enjoying a tax holiday under section 80(I) (A). These include roads, highwayprojects, water supply projects, irrigation projects, solid waste management systems, ports and airports.

However cold chains covered under a separate section 80 (I) (B) of the Act, did not qualify for thisexemption. The finance ministry is considering restoring the pass-through status for venture capital funds


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investing in the food processing industry and infrastructure facilities such as cold chains and warehouses,to give a leg-up to the sector. Development of the farm sector weighs heavy on the UPA governmentagenda. Building up food processing and cold chain infrastructure holds the key to development of farmsector in the country. According to industry estimates, the lack of cold chains in the country leads towastage of about 40% of the farm produce, causing a loss of about Rs 75,000 crore annually.

1.6 Tax sops for STPI, EOU beyond FY09

In an effort to persuade the finance ministry not to discontinue tax concessions given to software &technology parks of India (STPI) and 100% export-oriented units (EOUs) in 2009, the commerce ministryhas proposed that Budget 2008-09 should make provisions for extending the sunset clause on theconcessions beyond the stipulated date. STPIs and EOUs, which have been enjoying tax exemption forover 15 years, are set to lose it in April 2009. The ministry argued, STPIs have helped a number of smallIT companies in establishing flourishing businesses. The need to continue with the tax sops has becomemore intense in the light of the appreciating rupee.

Small and medium enterprises (SME) in the software export business may continue to enjoy income-tax benefits for some more time. The Prime Ministers Office (PMO) is expected to pitch for a specialdispensation to small exporters when the tax breaks available through the Software Technology Parks ofIndia (STPI) scheme lapse in 2009. An indication to this effect has been given to the informationtechnology ministry which has been insisting that sunset clause for STPI tax sops should be scrapped. Theconcession to SME software exports is to compensate them for rupee appreciation.

1.7 TCS net in defence contracts

The government is toying with a proposal to bring procurement contracts of defence ministry under TCS(Tax collection at source) net this budget. At present, contractual professional, technical, and othercategories are under the TDS net. TCS is applicable on paper, timber, tobacco etc.

1.8 Customs ceiling of 7.5%

Peak Custom duty on non-agricultural products is likely to be reduced to 7.5% from 10% in Budget 2008.This is in line with the countrys voluntary commitment to cut duties to the Asian levels, 4.5-5.5% by2010. This would bring down duties on several items like airconditioners, refrigerators, washingmachines, picture tubes, specified plastics and some other capital goods. If the finance minister decides topare peak duties in 2008-09, it would be the fourth consecutive year of the duty cuts. There has been acontinuous annual reduction in Custom duties since 2005-06 when duties were reduced from 20% to 15%.In the current fiscal, peak duties were bought down from 12.5% to 10% while in the year before; the

duties were reduced from 15 to 12.5%. In the last decade, the government has reduced duties by 30% withpeak Custom duty standing at a high of 40% in 1996-97. The year before, it was higher at 50%.

1.9 Lighter excise load for power companies

In what may be a power booster for companies looking to set up mega power projects, the governmentmay reduce the excise duty on power equipment and other inputs from 16% to 8%. The lower duty isintended to translate into lower operational cost for companies.


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The lower excise duty for power sector has been considered as electricity cannot have cenvat/modvat onthe finished product unlike with other product categories. The Budget is expected to address this disparityby reducing excise duty as is being done with other products that cannot have modvat. The proposal alsosuggests reducing countervailing duty (CVD) on imports of equipments required for power projects to 8%level in consonance with the lower excise duty. The move will be a big boon to the power sector as it willhelp companies to realise the governments desire of providing cheap and reliable power to theconsumers. It will also help in faster completion of projects and bring much needed interest of the private

sector into power sector.

1.10 Landholding tax

The government feels that land hoarding by developers should be immediately controlled as it is a devicefor gaining market power. The resultant increase in land prices makes affordable housing difficult for thecommon man. Hoarding hurts an economy by creating artificial scarcities. Hoarding of unrealizable anddevelopable lands must be immediately curbed through effective and deterrent taxation mechanism.

Reward for green buildings

Real estate developers constructing energy efficient (green) buildings may get tax breaks in the comingBudget. The proposal has been mooted by the ministry for environment and forests, urban developmentand power and now is under consideration. Energy Conservation Building Code is in process of beingimplemented for new commercial, institutional and large-scale residential buildings.

Reward for energy-efficient durables

The budget is likely to make energy-efficient consumer durables cheaper. The finance ministry isconsidering reduction in excise duty on air-conditioner and refrigerators from the current levy of 16%(Cenvat), depending on the level of energy efficiency achieved by the appliances. Gradation will be basedon energy efficiency star rating provided by the Bureau of Energy Efficiency (BEE) for various electricappliances. Apart from lower excise duty, energy efficiency may also be rewarded in the form ofincreased abatement allowance on retail prices. This would further reduce the impact of the duty.

The new proposal has already been endorsed by a sub-committee on financing issues for the power sectorheaded by deputy chairman Planning Commission Montek Singh Ahluwalia. The Prime Minster Office(PMO) is also keen to provide incentive for energy efficiency. The matter has already been discussed withthe finance ministry to their satisfaction.

1.11 Essential medicines set to get cheap

Prices of over 7,000 pharmaceutical brands - classified as essential medicines are likely to see a sharpfall after this budget. These medicines belong to 27 different therapeutic classes. The finance ministry isconsidering removal of the 16% excise duty on these medicines. Excise is imposed on 57.5% of themaximum retail price (MRP) printed on these medicine packs. That would mean a reduction of around10% on the retail price. There are 354 medicines that are classified as essential as per health ministryslist, which translates to over 7,000 formulation packs of specified strengths or brands in the market. Ofthe 354, about 40 molecules are price-controlled by the government, the prices of which may be revisedby National Pharmaceutical Pricing Authority (NPPA) once the government decides to remove the duty.


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1.12 Commodity Futures

Gains and losses arising out of commodity futures trading are proposed to be merged with normalbusiness income. Thos is currently not permitted, though income/losses from trading in stock derivativesare treated as normal business income. The food & consumer affairs ministry has listed this and 17 otherdemands to the PMO. The finance ministry is now looking into the demands.

To promote trading of stock derivatives, an additional proviso was inserted under Section 43 clause (5) ofthe Income-tax Act by Finance Act, 2005. It provided that eligible transactions in derivatives on arecognised exchange would not be deemed speculative transactions. It is entirely logical that suchtreatment should be extended to commodity exchanges as well. At present, the onus is on the assessee to prove that no speculative hedging has been resorted to on the commodity bourses. On the ground,though, the discretion on deciding whether the proof is adequate lies with I-T department. Consequently,there are several legal disputes over whether commex trades represent speculation or not. The solution isto amend the tax code.

1.13 SSI Products

The stage is set for further liberalisation of the small-scale sector. Small units are being subjected to morecompetition with the number of items reserved for exclusive manufacture by them being pruned to 66from the current level of 114. The number of reserved items stood at 800 till 1997.

The small-scale industries department has proposed the dereservation of stationary goods, electricalappliances, mechanical equipment and organic chemical products. The total number of items beingknocked off the reserved list is about 50. The process is a part of the policy of progressive dereservationof the sector to bring in technology and quality to the sector. Once the decision gets notified, large playerscan manufacture these items.


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2.1 PRIMARY MARKET

For investors who tasted blood with the listing of the Power Finance Corporation (February 2007) andPower Grid Corporation (October 2007), the expectations from a wave of power stocks, and particularlythe Reliance Power IPO run very high. Power Finance Corporation has risen more than 210% from itsissue price and Power Grid Corporation about 175%. The two stocks had listed on NSE at a premium of32% and 73%, respectively.

1. Investor frenzy for initial public offer

A company comparable with Reliance Power, NTPC, which listed in November 2004 at a premium of42% (NSE), has risen about 360%. Thus investor frenzy for the Reliance Power IPO is to be expected,despite several analysts writing off the issue as very expensive; book value per share at more than seventimes compared to 4.6 times for NTPC.

2. Brokerage funneling funds for IPOs via NCDs

The pipeline for the IPOs and other public offers is full from February to mid-March. So, brokerage firmshave devised a foolproof mechanism to raise funds. Such firms then lend the funds to retail and high networth investors. Brokerages are raising money through issuance of non-convertibles debentures (NCDs).

Mutual funds are the largest subscribers to the NCDs as they pocket distinctly higher (11-14%) that whatthey normally earn by investing in commercial paper or certificates of deposits (7.5-8%). This implies aclear arbitrage of at least 350 basis points. Earning an arbitrage of over 350 bps, that too for investing inpapers with a rating similar to alternatives like CPs and CDs is proving to be lucrative.

3. Pull-down effect

The Reliance Power IPO opened on Tuesday, 15th of January 08 may have generated a tremendousresponse but also had a pull-down effect on the stock markets as investors liquidated holdings toparticipate in the issue, which led to a fall in BSEs sensitive index. Market players said corporate as wellas retail investors, in their rush to invest in the IPO, pressed the sale button across the board, leading to aliquidity drain from the secondary market.

Power on, India on, goes the campaign slogan for Reliance Power. As Indias largest IPO received anoverwhelming response on day one of subscription, it seemed to be a case of Reliance Power On, DalalStreet Off. The 22.85-crore share mega issue, looking to raise Rs 10,000 crore, was fully subscribedwithin a minute of the start of bidding, making you wonder if there were any early bird prizes on offer.The electrifying reception to the IPO plunged the rest of Dalal Street into darkness. It was almost as if

every investor was liquidating a part of his profitable trades to deploy the proceeds into IPO.


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2.2 SECONDARY MARKETBlank-point rally

The crossing of a 1000-point milestone on the Sensex has long lost its novelty value. Diehard optimistsmay still be talking about how soon the index will hit the 25,000 mark, but euphoria is slowly giving wayto caution. There are reasons: It was a rally with a difference with local players and retail investorspushing up the market as FIIs, shaken by PN clampdown, were sellers in the 1000-point run.

1. Home strikes lift Sensex to 21,000 points

Make no mistake. Investors will have to be prepared to sweat it out for incremental returns hereon.Already, the Sensex has taken a little over two months to cover the 1000-point journey from 20,000 to21,000, perhaps an indication that the process of consolidation may have already gotten underway.

And even as marauding bulls lifted the 30-share Sensex beyond the 21,000 mark on Tuesday (08/01/08),the broader market was clearly under pressure. Bears reigned supreme in the midcap and small cap arena,as evident from the near 3% decline in BSE Midcap and Smallcap indices. Trading in roughly 800 stockson the BSE was frozen after there were only sellers. Of these, 622 stocks were from the B1, B2 and T-groups of BSE. The 30-share Sensex scaled a new high of 21,073.53 intra-days, before settling at20,855.12, a gain of 42.47 points over the previous close. The 50-share Nifty touched a peak of 6,357.10before finishing at 6287.85, up 8.75 points over the previous close.

Brokers expect another round of profit taking in secondline shares as investors try to cash in on some oftheir paper profits before it is too late. They said a correction was inevitable as a majority of stocks hadrun up too fast and were quoting way beyond their realistic valuations. Key risks to the market will likelybe any excesses from over-confidence.

1.1 FIIs cashing out of A-listed companies

Foreign institutional investors the main driver of the raging bull-run at the bourses seem to be of theview that it might be a good time to take some money off the table. Holdings of FIIs in many large-sizedcompanies have fallen substantially in Q3, as can be seen from the early batch of shareholdinginformation filed with the stock exchanges. FIIs have pruned their stake in 28 out of the total of 116companies. These are mostly A-group companies in which FIIs had taken large exposure. Indian Hotels,ACC, ONGC, HDFC, and banks like Axis Banks and Karnataka Banks are few notable examples whereFIIs holding has come down between 0.2% and 1.8%. The reduction in FII exposure to these companieswas despite the sustained rally in the broader market.

1.2 Core growth plunges to 5.3% in November 07

The decline in growth rate of crude petroleum, petroleum refinery products, cement and carbon steel

pulled down the growth of the six infrastructure industries to 5.3% in November 2007, compared to 9.6%in the corresponding period of the previous year. According to commerce ministrys monthly statement:

Crude oil production rose by 0.3% in November compared to a growth rate of 9.8% in November 06; Petroleum refinery production grew by 5.2% compared to 16.4% last year; Electricity generation grew by 5.8% against 8.8%; Cement production registered a growth of 4.5% compared to 11.8%; Finished steel output grew by 5.8% compared to 9.3%; and Coal production expanded by 7.7% against 4.9% in November 2006.


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For the April-November period of the current fiscal, the growth for the key sector steel, cement, power,crude oil and refinery dropped to 6% from 8.9% in the year-ago period. Experts pointed out that sincethe infrastructure sector was showing robust growth, the deceleration in the core sector was puzzling.Further since the six core industries have a combined weight of 26.7% in the Index of IndustrialProduction, it would have a negative impact on IIP figures.

1.3 Industrial growth plunges to 5.3% in November

Commerce & industry minister Kamal Nath said the sharp drop in index of industrial production (IIP)growth rate to 5.3% in November 2007 from 15.8% in November 2006 indicate a deceleration inindustrial growth, but things will improve. However, the sharp deceleration in the growth rate of IIP is asignal for the government to take a re-look at consumer spending and loosen money supply a bit, theminister said, indication the need for a possible reduction in interest rates. He stressed on the need toguard against inflation and said the calibration has to be done carefully. It is tight-rope walking.

The massive fall in the index of industrial production during November is cause of some concern thoughits probably not yet time to press the panic button. Part of this is undoubtedly due the base effect and also because Diwali fell in November 07, leading to larger number of holidays. In 2006 Diwali was inOctober. The elimination of the Diwali effect is likely to see growth moving back to the 9% average forfiscal 07-08. Capital goods production grew 24.5% indicating that India Inc is still investing. Industrialgrowth will be a couple of percentage points lower compared to 11.5% in 2006-07. One reason for theslowdown is that many sectors are operating close to capacity. This is true for sectors such as cement andsteel. Massive expansion plans are in the works, but new capacity will take time to come.

Weekly review 04/01/08 11/01/08

Sensex 20,686.89 20,827.45

Nifty 6274.30 6,200.10

2. Sensex slips below 20K

The Bombay Stock Exchange benchmark Sensex nosedived over 380 points on 16 th of January 08 toclose at below 20K level on heavy selling by foreign funds on recession worries on Wall Street, amidinvestors liquidating their holdings in secondary markets to invest in mega issue of Reliance Power. The30-share BSE barometer, which had lost nearly 477 points on 15th of January, fell further by 382.98 pointsto end at 19,868.11.

2.1 Bad news from two big global banks

When two of the most venerated financial institutions in the world Citigroup and Merrill Lynch announce big losses in the space of just three days, it is but natural that global markets should wince inunison. In both cases more worrisome than losses per se is the fear of what might yet unfold. The onlygood thing is that there seems to be no dearth of white knights willing to rush of the rescue of troubledinstitutions. The US government also seems to be seriously toying with the idea of a fiscal stimuluspackage. But whether either or both will stave off the impending crisis remains to be seen.


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3. Sensex slumps to 19K

The stock market went into a tailspin on Friday dated 18th of January 08 with benchmark Sensex fallingby 3.49% on across-the- board selling by both domestic as well as foreign investors. The 30-share BSE barometer ended the day a notch above the psychological 19,000 level at 19,013.70, a fall of 687.12points from previous close. The Sensex has fallen by 1,814 points or 8.7% during the third week.

3.1 Markets post steepest weekly losses

After a smart rally in the two initial weeks of the new calendar year, the stock markets came under a bearshadow, undergoing the biggest weekly correction due to various negative factors. Hedge funds bookedprofits to cover up their mortgage-related losses in the US markets and elsewhere. In addition FIIs, whichare supposed to allocate funds for the new calendar year, pulled out heavily in the week. All emergingmarkets witnessed heavy sell-off triggered by fears about a likely recession in the US, the worlds largesteconomy. Nearly Rs 5 trillion investor wealth was wiped out in the five-days of bear phase during thethird week. The only good news is that the Bush administration is preparing an economic-stimulusproposal to avert any US recession.

Weekly review 04/01/08 11/01/08 18/01/08

Sensex 20,686.89 20,827.45 19,013.70

Nifty 6274.30 6,200.10 5,705.30


Monday, 21st January 08 A story of bear hugs The steepest single day fall of Sensex and Nifty andtheres no telling where the mayhem will end. No ones sure whether the markets bottomed out? Or isthere more pain left?

4.1 Sensex sheds 1408

Stock exchanges have not seen anything like this in a long time. The great growth story, hyped valuationsand the IPO euphoria were forgotten in a flesh as investors realised their paper fortunes have been wipedout, brokers found they have no margins to execute orders and smaller players were faced with a grimprospects of shutting shop. An investor sitting on a profit of Rs 1 crore last week found that he owned thebroker Rs 10 lakh on Monday morning. As the Sensex suffered the biggest intra-day fall of 2,062 points,many investors found to their horror that the broker, anxious to save his own shirt, has already sold off theshares they had pledged.

Its uppermost in everybodys minds given the ferocity of the crash, which will go down as anotherBlack Monday. Nearly 95% of all traded stocks ended lower, with trading in 1,323 stocks frozen at thelower end of the circuit filter for want of buyers. Bank of India, the clearing bank, gave Rs 500 crore ofoverdrafts to brokers - to help them meet margins with bourses - as several trading terminals were frozen.Banks and corporates were also unwinding their proprietary positions, as Asian markets fell 3 - 6%.

But the panic isnt over. Fears are that when the pay-in takes place at 11.30am on Tuesday, manyinvestors will find it difficult to hand over the cheques for stocks they bought on Friday. If the marketcontinues to slide, then many investors will not get a chance to exit. And, if brokers default on payment,then exchanges will be forced to sell the shares, which have been kept as margin.


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The Sensex plunged to nearly four-month low of 16,951.50 intraday, before settling at 17,605.35 down1,408.35 or 8.5% over its previous close of 19,013.70. The 50share Nifty collapsed below the psychological 5000-mark intraday hitting a low of 4,977.10 before inching up to 5,208.80 at close,down 496.50 points or nearly 9% over the previous close. At one stage, indices were down more than10% and looked certain to trigger the lower end of the intraday circuit filter, reviving memories of May17, 2004, and May 18, 2006.

Daily review 18/01/08 21/01/08Sensex 19,013.70 17,605.35Nifty 5,705.30 5,208.80


Tuesday, 22nd January 08 No where to hide Monday mayhem on Dalal Street spilled over to Tuesday;As markets across the world melted and margin pressures at home played havoc, Sensex and Nifty sanksome more.

5.1 Sensex sheds 875 points more

The mayhem on Dalal Street continued on Tuesday with Sensex recording its biggest intraday fall of2,273.93 points, but the governments assurance about the health of the economy helped the benchmark partially recover the losses. The 30-share BSE index hit the lower circuit of 10% immediately afteropening in the morning, forcing suspension of trade for an hour. The index plunged to the low of15,332.42 in late morning trade and ended the day at 16,729.94, a net fall of 875.41 points or 4.97% fromMondays close. Similarly, the broad-based S&P CNX Nifty of the NSE recovered from its intraday lowof 4,448.50 and closed at 4,899.30 from the last close of 5,208.80, a loss of 399.30 points or 5.94%.

Market players attributed the abnormal behaviour to pressure from marginal calls, which was the main

factor for the huge fall on Monday too, rather than to development overseas. On all past occasions of bigstocks crash, a major culprit blamed to have triggered the fall is margin calls from market intermediarieslike brokers or banks. In such situation, brokers call their clients in case shares bought from borrowedmoney fall beyond a certain point. Clients must deposit additional money or sell some of their shares,which intensify the overall selling pressure.

Daily review 18/01/08 21/01/08 22/01/08

Sensex 19,013.70 17,605.35 16,729.94

Nifty 5,705.30 5,208.80 4,899.30

5.2 Left points finger at FIIs, PNs

The Left on Tuesday slammed the Manmohan Singh government for the turbulence in the stock marketwith the CPI blaming the government for the hyper volatility. The finance minister should bear themoral responsibility for the situation. The volatility in the stock market was entirely due to the unusualencouragement that government has extended to FIIs for inflating its foreign exchange reserves.

The extraordinary phenomenon reminds about Harshad Mehtas gamble when Mr Manmohan Singh wasthe finance minister. The government should refrain from asking the LIC and UTI to do a salvageoperation. It is a market phenomenon and should be left to market forces. Only malpractices must beidentified for the benefit of small investors.


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6. Sensex soared 864 points

Wednesday, 23rd January 08 The bullback begins

Stock prices rebounded almost with a vengeance on Wednesday, but that seems to have done little torestore confidence among the badly shaken broking community. Brokers turned many retail investors -

who wanted to take advantage of the recent crash to add shares to their portfolio - away as they did nothave the required credit balance in their account. Just a week ago, the same brokers had relaxed limitsgenerously to enable their clients load up on shares.

The 30-share Sensex soared 864.13 points, or a little over 5%, to close at 17,594.07, nearly erasing all the previous sessions losses. Retail investors, who were being wooed by brokerages till some days back,suddenly found out that they were no longer as welcome. Only clients who were able to pay through high-value cheques or demand drafts were being entertained. Brokers said this was necessary to prevent anydefault in the system. They have suddenly become conscious of the creditworthiness of their clients.

Daily review 18/01/08 21/01/08 22/01/08 23/01/08

Sensex 19,013.70 17,605.35 16,729.94 17,594.07Nifty 5,705.30 5,208.80 4,899.30 5,203.40

6.1 Fed cuts rate 0.75% after emergency meeting

The US central bank slashed interest rates by a dramatic three quarters of a point to 3.5% on Tuesday inan effort to prevent the US economy falling into recession. Analyst feel after further heavy losses onAsian bourses on Tuesday, taking up from where they left off Monday European investors sold offsharply in early trade, anticipating a bad day on Wall Street.

A public holiday on Monday meant the US markets were spared the rout, which hit Asia and Europe, but

indications were that New York would come under pressure on Tuesday until the Fed dramaticallyintervened. In the end the Fed simply couldnt wait another week until its next scheduled (rate) meeting.It chose to act, cutting the fed funds rate by an almost unprecedented 75 basis points to 3.5% in an attemptto shore up confidence before US stock markets open.

7. Sensex sheds 372 points

Thursday, 24th January 08 Sensex slips in choppy trade

The stock market turned weak on Thursday with the benchmark Sensex losing 372 points here afterglobal concerns worsened amid Frances second largest lender Societe General disclosing one of thebiggest ever bank frauds worth over $ 7 billion. The selling pressure began on Thursday on the domesticbourses on concerns that worries in the financial markets would only get bigger with SocGen disclosingone of the biggest ever bank frauds in the world.

Daily review 18/01/08 21/01/08 22/01/08 23/01/08 24/01/08

Sensex 19,013.70 17,605.35 16,729.94 17,594.07 17,221.74

Nifty 5,705.30 5,208.80 4,899.30 5,203.40 5,033.45


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7.1 Societe Generale

Frances second largest lender Societe Generale disclosed one of the biggest ever bank frauds worth over$ 7 billion. SocGen is a major FII investing in India. The speculations are that this development wouldaffect investment from FIIs as well, due to its major position in markets across the world. Major financialinstitutions like Citigroup and Merrill Lynch have already announced huge subprime losses.

SocGen said in a statement on Thursday that it discovered the fraud last week-end in a sub-section of itsmarket activities, where a rogue trader at futures desk took massive fraudulent directional positions in2007 and 2008 beyond his limited authority. SocGen said the trader, used his knowledge of bankssecurity systems to hide his position through a number of fictitious transactions, but has now confessed tothe fraud. The French bank has dismissed the trader. The French bank said it would raise $ 8.1 billion innew capital due to losses from fraudulent trading by one of its traders on the banks account as well as forthe write-down worth close to three billion dollars related to the US sub-prime crisis.

8. Sensex ends up record 1,140 points

Friday, 25th January 08 Bush Push

The stock market on Friday bounched back by 1,140 points, the biggest ever single day gain, buoyed byseveral positive developments, including release of solid US employment data on Thursday and the Bushadministrations $ 150-billion fiscal package leading to a sharp bounce in world markets. The rally wasalso credited to firm global cues as well as Prime Minister Manmohan Singhs statement that Indiaseconomic foundation was strong enough to sustain 9-9.5% growth despite international situation.Analysts, however, expect continued volatility until the market bottoms out amid lingering fears ofanother majors slide in the near future.

Starting on a strong footing, the Bombay Stock Exchange 30-share index rallied smartly throughout andended the day at 18,361.66, a gain of 1,139.92 points, or 6.62% from its previous close of 17,221.74. Thebroader S&P CNX Nifty of the National Stock Exchange too posted a record single-session rise of 349.90points, or 6.95%, to close at 5,383.35 from 5,033.45 previously. Indications that the government wouldinitiate monetary and fiscal measures if the current global financial turmoil threatens to dampen domesticeconomic growth also bolstered market sentiment.

Daily review 18/01/08 21/01/08 22/01/08 23/01/08 24/01/08 25/01/08

Sensex 19,013.70 17,605.35 16,729.94 17,594.07 17,221.74 18,361.66

Nifty 5,705.30 5,208.80 4,899.30 5,203.40 5,033.45 5,383.35

8.1 US economy still strong & open

US secretary of state Condoleezza Rice sought to soothe investor fears about the US economy, saying itwas resilient and sound and that Washington remained open to trade and investment. Rice urged businessleaders to have confidence in the US economy. The US economy is resilient. Its structure is sound and itslong-term economic fundamentals are healthy. The US continues to welcome foreign investment and freetrade. US president George W Bush had announced an outline of a meaningful fiscal growth packagethat boosted consumer spending and would support business investment this year.


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Monday, 28th January 08 Japan may be amid a recession

A bad news a day keeps buyers away. Thats what global equity markets have boiled down to. AGoldman Sachs report saying Japan may be amid a recession further rattled investors, already frettingabout an impending global slowdown. But Indian shares were relatively less hurt on Monday as a fresh

selling bout wiped 3-7% off markets in Hong Kong, South Korea, Singapore, Japan, Singapore andChina. Mondays weakness coming after last Fridays spectacular rally highlights the fragilesentiment in world markets as investors remain queasy about a US recession and further losses tocompanies arising from subprime debt woes.

Daily review 25/01/08 28/01/08

Sensex 18,361.66 (208.88)

Nifty 5,383.35 (109.25)


Tuesday, 29th January 08 RBI policy rates unchanged

The US and Indian situations are entirely different. The US is on the brink of a recession, if not already inthe midst of one. The Indian economy, in contrast, is likely to grow at close to 9% this year and possiblyat about 8.5% in the next fiscal. Thats hardly the kind of slowdown that warrants an easing of monetarypolicy. And most important of all, global inflationary pressures have re-emerged; indications of upsideinflationary risk are getting stronger.

Then monetary policy formulation is really all about weighing one (growth) against the other (inflationary

expectations), and taking a call. The RBI should consider cutting rates if there is a sharp slowdown inindustrial growth. The international situation following the subprime meltdown is still too uncertain; thereis no knowing for sure whether, and to what extent, large-scale dollar inflows will resume. For themoment, then, it makes more sense to wait and watch. Well, the RBI has done just that.

Daily review 25/01/08 28/01/08 29/01/08

Sensex 18,361.66 ( 208.88) (60.84)

Nifty 5,383.35 ( 109.25) (6.70)


Wednesday, 30th January 08 Spate of bad news

A month is a long time in finance markets. Not long back, proponents of the decoupling theory were ofthe view that Indian markets would continue to outperform on the back of robust earnings and domesticliquidity. Both assumptions dont seem to hold for now. Decent earnings from Indian companies havebeen overwhelmed by the flow of bad news from the US and other parts of the world. Markets acrossAsia remained in a bear grip with South Korean and Hong Kong shares falling nearly 3%.


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Indian markets cannot survive and move ahead in valuation in isolation. If global markets correct, it willreflect in our markets with varying proportion. However, we will be the first to bounce back as globalforeign markets recover. But the flow of bad news in world markets is showing no signs of abating. TheUS GDP grew 0.6% in the October-December quarter, lower than most estimates. And UBS AG,Europes largest bank by assets, reported a record loss of $ 11.4 billion for the fourth quarter after raisingwritedowns on assets infected by US subprime mortgages to $ 14 billion.

Daily review 25/01/08 28/01/08 29/01/08 30/01/08Sensex 18,361.66 ( 208.88) (60.84) (333.30)

Nifty 5,383.35 ( 109.25) (6.70) (113.20)


Thursday, 31st January 08 Fed rate cut by 50 basis point

The lukewarm global response to cut in fed rate by the US Federal Reserve is a telling commentary onwhat can happen when central banks allow themselves to be seemingly led by market. Fed chairman, Ben

Bernanke, who is less than two years into his job, faces perhaps the toughest challenge in his career.Textbook economics says he should refuse to ease the throttle and teach markets and consumers a lesson.After all, isnt their over-spending that got them here in the first place? But real life is different. Rightnow it is more important to save the US economy from going into a recession and dragging the rest of theworld along with it. Tightening can come later. Once the economy is back on its feet and growth begins tolook up, then the Fed can tighten the screws.

Daily review 25/01/08 28/01/08 28/01/08 30/01/08 31/01/08

Sensex 18,361.66 ( 208.88) (60.84) (333.30) (109.93)

Nifty 5,383.35 ( 109.25) (6.70) (113.20) (30.15)

13. Sensex up 594 points

Friday, 1st February 08 Bulls look to fight blues - Bulls bought heavily into beaten-down IT andautomobile shares in a desperate attempt to bolster overall sentiments.

There was a glimmer of hope on stock exchanges on Friday as major indices snapped a four-days losingstreak, rising around 3% over the previous close. The 30-share Sensex ended the day at 18,242.58, up593.87 points over the previous close. A dramatic recovery considering that the bellwether was down 100points at one stage during the day. The 50-share Nifty gained 179.80 points to close at 5317.25.

While the main indices surged, the rally lacked both depth and breadth, exposing the nervous moodamong investors. The pointer was the slackness in the BSE Midcap and BSE Smallcap indices, with bothof them closing marginally lower. Brokers said trading terminals at many firm are still inactive as marginoutstandings have not been cleared. Market analysts feel, fundamentally, we are on a sound footing; themarket is only going through a consolidation phase; once sentiments in world markets improves, Indiawill recover at a faster pace. The market may enter into a pre-budget rally.

Daily review 25/01/08 28/01/08 29/01/08 30/01/08 31/01/08 01/02/08

Sensex 18,361.66 ( 208.88) (60.84) (333.30) (109.93) 593.87

Nifty 5,383.35 ( 109.25) (6.70) (113.20) (30.15) 179.80


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The bourses remained in red for third straight week as the RBI disappointed investors who seemedconfused by continued high level of volatility in the past couple of weeks. US Fed had slashed key ratesby 75 basis points on January 22 followed by a 50 basis point cut on January 30. The move, however, didnot have any major impact on the market in the light of the RBIs decision to keep all key rates steady inits quarterly review on monetary policy announced on January 29.

31/08/07 (Friday) 15,318.60

28/09/07 (Friday) 17,291.10 > monthly gains: 1973.2026/10/07 (Friday) 19,243.17 > monthly gains: 1952.0730/11/07 (Friday) 19,363.19 > monthly gains: 120.0228/12/07 (Friday) 20,206.95 > monthly gains: 843.7601/02/08 (Friday) 18,242.58 < monthly loss: (1,964.37)

14. Brokerage facing big NPA crisis

At the beginning of the year 2008, retail brokerage were chasing customers with all kinds of offers, in abid to goad them to churn their portfolios more actively. And after the sensational fall in stock prices,brokers are running after their clients. They are armed with legal notices to recover their dues, known inbroking parlance as uncovered debits. The term is used to denote outstanding on which the brokers do nothave any collateral that they can seize or liquidate to recover the dues from clients.

These disputes could force many high net worth individuals (HNIs) to shift loyalties. Clients who havedefaulted at one place will go to another broker, and chances are that they will be greeted with open armsthere. Many clients mostly HNIs are refusing to pay up saying their positions were squared up eventhough they had agreed to replenish the margin money by the end of the day.

Worst hit were investors with exposure to the derivatives segments, where prices of stock futures fell ashigh as 50% in two sessions. Trading terminals at many brokerages were shut as the firms were unable tomeet margin requirements to exchanges, even after having liquidated a sizeable chunk of their clientsoutstanding positions. As a result many clients were unable to trade when the markets rebounded. Theseclients are citing this as a reason to not pay up their obligations, as they claim to have been denied achance to recover some of their losses.

14.1 Market meltdown may dash taxpayers hopes

If the stock market keeps low for sometime, the total tax collection in Jan-Mar 08 could be hit hard; poor taxcollection may lead to no relief to tax payers during Budget; while a bull market encourages people to paymore tax, a bearish market may impact total tax collection.

The recent market meltdown is widening its net now. The bear phase on stock markets may lead to a

possible slowdown in tax collection between January 1 and February 15, 2008, which, in turn, may dashtax relief hopes of millions of payers during the coming Budget. In fact, if the stock market keeps low forsome more time, the total tax collection during January-March 2008 could be hit hard.

R Prasad, chairman, Central Board of Direct Taxes said: I wont be able to comment anything on theBudget. But yes, a bull market always encourages people to pay more tax. Thats a global phenomenon.And by that logic, a bear market should impact the total tax collection. But we have not analysed so farwhether we have been hit by current market situation or not.


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2.3 INDIA

Agriculture need more support from Budget: Sharad Pawar

For the first time this year, farm growth is close to 4%. Breaking through stagnation, wheat productionhas gone up to 75 million tonne from 65 million tonne earlier. There has also been substantialimprovement in the production of other crops such as sugarcane and cotton. But even then, high-priced

imports of wheat had to be made to boost our buffer stocks for emergencies. That does not mean there isnot enough wheat to meet domestic demand. Over 60% of the people buy wheat from the open market,and if the FCI starts buying from the open market, we would distort domestic price badly. Today, there isno shortage of reasonably priced wheat supply to consumers.

The domestic demand is going up phenomenally because of the 8-9% growth-driven changing food habitsand programmes like the NREGP that give more purchasing power to rural India. We have to work reallyhard to make the National Food Security Mission (NFSM) successful to increase rice and pulses production, too. Strengthening key farm inputs is imperative if we have to once again become self-sufficient in food. We have big expectations from the Budget on increased investment in irrigation. Wehave to provide more funds, as 40% of agriculture depends on irrigation and there is a direct correlation between irrigation facilities and reduction of hunger and poverty in developed countries. To increaserainfed area output, we need huge investment in the Budget and beyond.

1. Edible oil

Globally, oilseeds are short on output and are also being diverted to biofuels. In the last two years, wehave achieved record area coverage. But in the Budget, we need to incentivise new higher yield varietiesto reduce import dependency.

2. Land holdings

About 82% agricultural land is small and marginal holdings, and 60% are rainfed farm land. About 62%of the population is still dependent on agriculture for a living. Unless we relieve pressure on land, wewont succeed in increasing production. Non-agriculture income is growing gradually, and that is a goodsign because only that can free large tracts of farm lands and allow the private sector to be incentivisedtoward making substantial investments in agriculture.

3. Quality seed

Quality seed is another key input and poor SRR for key crops is a big worry. We need to incentivisedprivate and public sectors in research. Also, seedling transplants should get a big boost in the Budget inthe form of concessions and tax incentives to greenhouses and nurseries. It saves the farmer two monthsof uncertainties and free land for planting other crops.

4. Farm credit

Farmer lobbies have asked for a cut in interest rate from 7% to 4%, but some states underwrite thatfurther. I would personally prefer inclusion of optimum farmers in the formal credit network. We have totake conscious decision that will improve the situation, but without disincentivising those that are makingregular re-payments. The Budget has to spell out a new credit direction that will increase farm creditsubstantially. Not just production loans, there is urgent need to make a distinction between investment andconsumption credit for the farmer. We have to resolve this definitely.


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5. Insurance

The farm insurance issue has not yet been resolved although there is a lot of scope for expansion and newdirections. We need to make the village as the base assessment unit. We have sent a proposal to thefinance ministry on country-wide weather-based insurance coverage, but I dont think it is comingthrough this time.

6. Imperative farm investment

Both contract farming and APMC Act changes are not happening fast enough. I am finding it difficult to break through the conventional farm sector mindset. But, 18 states and some UTs have begunimplementing the amendments. For the first time, farmers in states such as Punjab and Haryana whocould sell only to the regulated Mandi or the FCI are able to sell directly at their villages to buyers. Bothare happy. The farmer saves on transport costs and the buyer saves on Mandi taxes. But there is a lot to bedone on increasing market opportunities for the farmer, as the producer price reflects the internationalprice. We have started the process of making warehouse receipts negotiation instruments. That will meanthe producer and not the trader alone; will get a better price for produce.

7. Sops for private sector entry

Harvest losses total more than Rs 50,000 crore annually. There should be significant tax breaks and ITexemptions for promoting post-harvest technology in the private sector, especially in the North-east andin backward regions of the country. After all, the private sector has no immediate returns on investment inthis sector. Agro processing should be a focus area for the Budget. The demand for processed foods isgrowing in the country, but there have been no major incentives, even for packaging machinery andmaterials.

8. Comex, spot & futures

I am keen that the FDI issue in commodities market is resolved at the earliest. It may also be the time toreview the ban on trading of select commodities. Our wheat output is good this year and domestic priceshave been steady despite high global prices.

Shift people from agriculture to industry and service sector

Mr Chidambaram said the government will take necessary steps to ensure a 4% growth in agriculture,besides raising public expenditure in rural areas. The area and productivity of major crops like wheat andrice stagnated over the last 10 years. The need is to increase area under cultivation and productivity ofthese crops. He also said that inequality is bound to rise in the country with industry and services sectorgrowing over 10%, something that cannot be achieved in case of agriculture.

To deal with the problem of growing inequality, he said the government will adopt a two-foldapproach. This would involve ensuring maximum possible growth in agriculture besides rising publicexpenditure in health, education, drinking water and other rural sectors. The government would have tomove, away a large population from agriculture to the industry and services sectors. Country does notneed more than 10-20% population to grow food for the people.


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2.4 INDIA INC

Q3 results show acceleration in revenue, profit growth

With market gyration attracting most of the attention, the third quarter results of India Inc has taken a backseat. The market is agog with talk of the likely slowdown in the world economy and its drasticimpact on India. The corporate results for the December 2007 quarter declared so far, however, have

given no hints of a likely slowdown.

In fact, the early bird results of 427 companies show acceleration in revenue and profit growth.Surprisingly, the apparent acceleration has come after four consecutive quarters of deceleration in revenuegrowth of these companies. The results have fairly met market expectations. A look at the revenue andprofit growth trends over the last six quarters brings out some interesting points. After having been on adeclining trend, total net sales have shown a robust growth in 3rd Quarter. The good thing is that fastergrowth in net profits has been supported by an equally robust growth in net sales and operating profits.Likewise, growth in operating profit, which had been softening since last three quarters, has seenresurgence in quarter ending December 2007.

Net profit growth has also been helped by deceleration in interest costs. This may be due to recentsoftening of interest rates and completion of borrowing programmes of corporates for their capex plans.The latter is confirmed by a sharp 28% rise in depreciation allowance during the December quarter. In previous two quarters, depreciation has shown a negative growth. It also points towards the source ofacceleration in revenue growth. It seems many companies have begun to gain from the commissioning oftheir expansion projects. If this turns out to be true then we can expect further acceleration in revenue and profit growth in coming few quarters. The Q3 results have been much in lines with the marketexpectations and the current growth in earnings is likely to be maintained for the fiscal year goingforward. Experts are optimistic about the forthcoming quarters.

Economic growth tricking down to Indias poor

Finally, there is some evidence that the benefits of the economic growth may be tricking down to Indias poor. The ILOs 2008 Global Employment Trends report shows an impressive poverty reduction inSouth Asia (largely dominated by Indians). Extreme working poverty (income of less than $ 1 per day)fell by 20% in a decade (from 53% in 1997 to 33% in 2007), the greatest decrease of any region of theworld. However, the proportion of working poor (income of less than $ 2 per day) remains high, witheight out of 10 workers, 478 million people, in this category.

South Asia, led by India, created the maximum number of global net jobs (28%) in 2007. East Asia ledby China, Japan, Korea generated much lower (16%) of the global net jobs during the same period.Developed economies and EU created only 4% of the jobs in 2007. For South Asia, however, the bad

news is that most of these jobs were at the very low-end of the job pyramid. And the volume of jobsmerely reflects South Asias demographic trend rather than its economic robustness.

Contrary to the visible outsourcing-led boom, it is the industrial sector that has seen the largest increasein jobs between 1997-2007 from 15.3% to 21.7% of the total pie. In the same period the service sectorgrew 25.2 to 30.3%, less than in many other regions of the world. While there has been a rapid decreasein agriculture employment since 1997 the fastest decline in the world agriculture still employs almosthalf of all workers in the region.


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2.5 FOREIGN INSTITUTIONAL INVESTORS

India Inc deals soar 150% at 70B in 07: Grant Thornton

India Inc announced deals worth $ 70 billion in 2007, up 150% over the previous calendar year.Significantly, even though this is a mere 1.5% of the estimated value of global deals struck during theyear, in terms of actual increase, Indian companies were a much bigger contributor. Total M&A and PE

deals in India - which were $ 42 billion more than their 2006 tally- accounted for about 5% of the increasein value of global M&A deals,- which rose $870 billion last year.

The value of total deals announced in India during the year stood $ 70.14 billion as against $ 28.16 billionin 2006. The volume of deals involving Indian companies also crossed the 1,000 mark for the first timelast year. Out of the total, $ 51.11 billion was value of strategic M&A involving Indian companies, eitheras sellers or buyers, and the remaining $ 19.03 billion was the result of PE deals. These figures however,may not reflect the actual value of deals completed as some of the transactions will spill over into the nextyear, given mandatory regulatory approvals which take time.

India boasts of most PE funds

India has the most number of private equity (PE) funds operating amongst the BRIC markets, consideredthe emerging hotbed of PE action. According to Emerging Markets Private Equity Association (EMPEA)estimates, there are some 89 VC/PE firms managing 153 funds in Brazil, about 28 firms in Russia and115 in China while India has over 160 firms. About 120 of these India-focused firms are either has raisedmoney from outside India or are subsidiaries of non-Indian VC/PE firms.

Experts opine that a growing economy, especially on the domestic side, increased entrepreneurial activityand the IT/ITeS effect is attracting newer investors to the country. The huge number of experiencedtechies returning to India and setting up companies has also increased the exposure of Silicon Valleyventure firms to the country.

The increased deal activity is having its effect Another 40 firms are in the process of raising money forinvesting in Indian market. Analysts expect the country to see PE commitments of around $ 40 billion by2010-11, as more sectors in India would be open to private fund raising. And a longer history of privateenterprise in India also contributes its bit to the traction in PE play. Besides, there are more maturecompanies in India, which are attractive to PE players.

A case-by-case model to screen FDI

The government may not screen FDI based on country-specific concerns. Instead, a case-by-case modelwould be followed. To begin with, the trigger would be investors of concern to check moneylaundering and terror funding. Other triggers would be sensitive sectors and sensitive location such as

border areas. The department of industrial policy & promotion (Dipp) and home ministry are of the viewthat country-specific checks would send out wrong signals to investors in other countries.

The government cannot send out a negative signal to investors that prevent FDI from coming into India.At present, RBI and the Foreign Investment Promotion Board (FIPB) do FDI screening at the initial stage.Experts feel that the government should not apply security guidelines at this stage, which could repelinvestors. If there is a case to threat after completion of the first level of screening, the government shouldimplement its checks and balances.


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2.6 WARNIG SIGNALS

1. Global market slowdown punctures IPOs

There is always a lull before a storm. And if the global IPO activity in the first month of 2008 is anyindication, the world markets are headed for a tough session ahead. Already, the global IPO volumesdipped by more than 15% in January 2008; according to Thomson Financial research, if not for Indias

Reliance Power IPO, which raised nearly $ 3 billion, the global IPO market should have experienced amore significant decline. In January 08, IPO volumes reached $ 6.3 billion from 45 deals, while inJanuary 07 a total of $ 7.5 billion from 65 issues was raised in IPO proceeds. The January 08 volume isthe lowest since January 05.

Surprisingly, China and the US did not reach billion-dollar proceeds through IPOs in January 08. Bothnations experienced huge decline in IPO proceeds China 72.6% and the US 46.1% - as per research.According to Thomson Financial, 21 global initial public offerings were withdrawn during January 08,up from 16 in December 07. The withdrawn issues totaled $ 6.3 billion in proceeds, a three-fold increasefrom December 07 when withdrawn IPO proceeds were $ 2.1 billion.

Analysts feel, the slowdown in the global IPO market comes from the recession in the US markets, whichis having a rub-off effect on the other markets around the world. India might also see a slowdown in theIPO market. However, it is important for the market that Reliance Power IPO listing goes off well. If itdoesnt open well on the bourses, there are so many investors in leverage position that it can hurt themarket sentiment. In fact the recent volatility seen on stockmarkets has chipped off gray marketpremiums. Significantly, many IPOs which either has hit the market or coming out soon are getting nopremium in the gray market.

2. Terror funding through share markets

Union Finance Minister P Chidambaram said, Recently one case has come to my notice. It wassuspected, let me repeat suspected that this case may have some links with some persons who are underwatch. However, Chidambaram did not reveal more details or the identity of the suspect. He said, Thiscase is being investigated. But I am not in a position to give any details of the case at this stage.

3. Speed up framing FDI security norms

The home ministry, which is the nodal agency for security related matters, has been urged to speed upframing of guidelines meant to screen foreign direct investment (FDI) proposals aimed at ensuring thatnational security is not hampered. The national security advisor (NSA) has been drafting umbrellalegislation on security screening for FDI. The umbrella law on security guidelines for FDI has beenpending since some sub-committee reports are awaited. Various panels are working on the details andthey will be put together soon.

4. Subprime credit card crisis

After the subprime mortgage crisis, the US is now staring at a possible subprime credit card mess. The USbanks are now seeing higher number of defaults on credit cards. This may slow down credit card business.According to industry experts, an impending subprime credit card crisis may lead to a large negativeimpact spread over 4-5 months on Indian BPO industry. However, there may be a twist in the tale in thelong run large number of card delinquencies may lead to offshoring of debt collection processes.


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4 FINANCIAL SECTOR: TRANSFORMING TOMORROW

Companies from the finance sector are making maximum number of job offers in campus placements. Forinstance, banks are offering roles across all divisions including treasury, M&A, corporate finance, retailand operations, transaction banking, institutional banking, business banking, financial advisory andfinancial markets.

For the first time, Institute of Chartered Accountants of India (ICAI) organised a placement fair CareerAscent for its members working in the industry. With names like HDFC Bank, ICICI Group, KotakGroup, Reliance Industries, ITC, Patni, GMR Group and BPCL looked at hiring in three digits; it is surelygood times for CAs and tough times for their current employers. It was for the first time that head huntersgot an opportunity to recruit experienced CAs.

Companies that recruited aggressively during the campus placements for the new passouts in February-March and September-October 2007 participated again for more professionals. ICICI Bank alone hadrecruited 414 new CAs; Reliance picked up 138; TCS that recruited 84 CAs in the two placementsrounds; participated in Career Ascent to look for experienced hands. ITC and Morgan Stanley afterrecruiting over a dozen fresh CAs in late 2007 placements also participated in the Career Ascent.

1. FINANCIAL ADVISORS:Weigh impact on investors

Mini-derivatives contracts

BSEs unexpected early success with the sensex mini-derivatives contracts is good news for Indian stockmarkets. Both BSE and NSE launched on January 1 small lot size futures and options contracts withSensex and Nifty as respective underlying, to attract retail investors in derivatives. If MSX, the Sensexmini-futures (marketed by BSE as chotta sensex) manage to sustain interest, it will help improve the

BSEs position in the derivative segment. It will increase some sort of competition in the derivativessegment where NSE has a stranglehold over the market.

BSE has one thing going through: the Sensex still connects with retail investors more than Nifty.Therefore, as things stand, it is spirited attempt by BSE to spur derivatives trading on the exchange andthe initial reaction has been good. Ifchotta sensex clicks, we could see more product offerings, and BSEsinternational linkages would surely help.

At a larger level, these smaller lot size contracts fill a vital gap in the derivatives segment. Even retailinvestors now have an option of hedging their risks, which was not the case earlier because of the largecontract size on Nifty and Sensex. Of course, the smaller contract size could also encourage retail

speculation. While marketing these derivatives contracts to retail investors, stock exchanges should alsohighlight the risks associated.

Introducing SENSEX mini Contracts in a market of five

o Market lot of Five: Lower investment for one contracto Easy access for retail investors to Indias most popular indexo Arbitrage possible between SENSEX futures and SENSEX mini Futures


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2. WEALTH MANAGERSMap out the details to translate into benefits

Public spending must translate into expenditure on the ground

Indicating that public spending by ministries under the UPA government may not have been efficient,finance minister P Chidambaram asked financial advises to refrain from spending more than 33% of thePlan expenditure in the last quarter of the fiscal. Financial advisers are representatives of the ministry of finances expenditure department and are responsible for managing the finances of the ministry or thedepartment they are attached to. Mr Chidambaram monitored the progress with regard to flagship programmes of the government including Bharat Nirman that encompasses rural telephony, ruralelectrification, rural roads, rural housing, drinking water and irrigation. According to finance ministry,expenditure has to be spread throughout the fiscal, and not more than 33% of the Budget estimates may bespent in the last quarter of the financial year. Once allocated, funds should not be parked in a bankaccount but must translate into expenditure on the ground. Fresh funds cannot be released till such time.

MoF moots 34% cut in ministries demand

The Finance Ministry has suggested a drastic cut of 34% in the financial resources demanded to meet the

2008-09 targets. The finance ministrys pruning exercise is not across all sectors in the same proportion.Certain ministries or departments are likely to get what they desired. Given how inefficient governmentspends its money, all right-thinking people must support the finance ministrys suggestion that thedemands made by various ministries be pruned sharply. The mantra must be two-fold. One, the PlanningCommission must go through the demands with fine-toothed comb, through out/prune all demands wherethere is the slightest doubt regarding efficacy in delivery and then go to the finance ministry with areasonable wish list.

3. FINANCIAL PLANNERSValue unlocking for investors

Why some stocks defy the law of gravity

Mind you, we are talking about stocks that languish at extremely low levels. These scrips had marched toa different tune on the bourses. Even as frontline went into a free-fall, these shares were hitting the uppercircuit amidst the most bearish trading session in the history of the BSE. The reason for low volume-highprice stocks may be because these shares have not been dematerialised as of now. Promoters or investors(who are tapped in the stock) might be trying to generate interest in these shares by trading them on odd-lot counters (specifically set for paper shares). So, investors still prefer to hold them in the physical form.

Companies that are showing spurt in share price, but lesser trading activity are generally closely held

companies. No one really knows why stock prices shoot up on lower volumes. In most cases, it is purespeculation. In general, a price change on relatively low volume for a stock suggests an aberration.

An important point is that most of these stocks are traded in the trade-to-trade segment (or the T group) onaccount of the surveillance action imposed on them. T-segment implies that all transactions in the scripare delivery based in a bid to curtail excessive speculation. The exchanges trading system also displays apop-up caution message at the time of order entry in these scrips. All scrips under T group attract 100%margin while trading. It is best in the interest of investors to stay away from stocks that have very lowvolume. Unless there is sufficient volume to support the new price, it will fall, possibly faster than it rose.


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4. INCLUSIVE CEOsInnovative responses to problems

Reduction of share capital

A company normally reduces its share capital:

To return excess capital to its shareholders (company is overcapitalised); Extinguish capital, which is lost or underpresented by available assets; or To improve financial ratios of the company (e.g. return on equity) and enhance shareholder value.Under section 100 of the Companies Act, 1956, reduction of capital requires shareholder and High Courtapproval. Further it also gives rise to tax implications in the hands of company and its shareholders.

Tax impact on company

Under section 2(22) (d) of the Income-tax Act, 1961, any payment by a company to its shareholders onreduction of capital would be considered as deemed dividend to the extent to which the company hasaccumulated profits. The company would be liable to pay tax at the applicable rate (currently 16.995%).

Tax impact on shareholder

The amount distributed by the company on reduction of its share capital has two components viz.distribution attributable to accumulated profits of the company (deemed dividend) and distributionattributable to capital. The deemed dividend is exempt in the hands of shareholders under section 10(34)of the Income-tax Act. Distribution over and above the accumulated profits (after reducing the cost ofshares in the hands of the shareholder) would be taxable as capital gains or business income.

Case study

Colgate Palmolive India Ltd recently implemented a reduction of capital to return Rs 122.40 crore to itsshareholders, which was in excess of the companys operational needs, after obtaining requisiteapprovals. The company reduced the face value of the existing shares from Rs 10 to Rs 1 per share andrefunded Rs 9 per share to the shareholders.

Correspondingly, shareholders would get new shares at the reduced face value of Rs 1 per share. TheShare Capital of the company will reduce from Rs 136 crore to Rs 13.6 crore. The company said thatshareholders are benefited by the receipt of Rs 9 per share tax-free cash which would be available for re-investment. There would be no change in the shareholding (number of shares) or shareholding pattern.Also it would not impact the future dividend.

Buyback

Another alternative of returning excess cash to the shareholders is the company buying backs its sharesfrom the shareholders. However, under section 77A of the Companies Act, 1956, a company can buyback only 25% of its total paid-up share capital and free reserves by fulfilling a host of other conditions.In the buyback there is no tax implication in the hands of the company.


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5. RISK MANAGEMENT CONSULTANTSEducate Engineer and Enforce

India Development Foundation

The ministry of overseas Indian affairs is set to launch India Development Foundation, a charitable not-for-profit trust, to help channel philanthropic capital into India for developmental activities. There is hugeinterest among NRIs and PIOs across the world to give back to their country of origin through thephilanthropic and small investment route.

Creating the foundation will be a very important step in providing an organisation framework that willinvolve overseas Indians at the front-end and credible NGOs and self-help groups at the backend. Themain target sectors where the diasporic philanthropic capital will be channeled by the foundation includerural development, health, education and uplift of women and the girl child. The foundation will notreceive donations directly but act as a single window to help channel philanthropic funds from NRIs todevelopmental activities in the areas that they are interested in.

Investment -banking services to MFIs

In the first-of-its-kind venture, Washington-based Grameen Foundation promoted by Mohammed YunusGrameen Bank and Chennai-based IFMR Trust announced the launch of Grameen Capital India (GCI).GCI has a total capital base of Rs 5 crore. Grameen Foundation and IFMR Trust have a 43% stake in thecompany, and Citicorp Finance owns the balance 14% stake.

As of now, many microfinance institutions (MFIs) in India are heavily dependent on banks to raise funds.GCI plans to offer MFIs an opportunity to access low-cost funds through capital advisory services. MFIslack access to mainstream source of finance. If they directly deal with an investor, they find it difficult tonegotiate on the terms and conditions and often have to bow down to the investors wishes. However, insuch a situation, the presence of an intermediary could help improve matters.

The company plans to offer MFIs a wide range of solutions, including pooling and securitisation of assets,lone syndications, hitting the equity market with public offers, etc., through an active interaction withrating agencies, on one hand, and investors, on the other. Royston Braganza, CEO, GCI said that whilethe total demand for funds could be as high as $ 50 billion in the domestic microfinance space, the currentavailability is only around $ 5 billion. After playing the role of an arranger, GCI may also look atestablishing a wholesale fund which caters to the microfinance sector in India.

GCI would help local and global investors identify the right kind of MFIs in which they could invest,depending on their risk profiles. This could bring in a wide range of investors into the microfinanceindustry. On a global scale, there are several commercial investors like private equity, venture capital andeven socially-responsible funds are interested in investing in this sector, apart from non-resident Indians

(NRIs). In the domestic market, potential investors could include commercial banks, insurancecompanies, and pension funds etc.

One critical issue in the local microfinance industry is that there are several fragmented MFIs located infar-flung areas, which makes it imperative to have an aggregation of these disaggregated portfolios.Enhancing the quality of assets owned by MFIs also makes it economically viable for banks to invest inthese papers, thus helping them meet their targets for priority sector lending.


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6. MICROFINANCE PROFESSIONALSDeveloping alternative credit delivery models

No-frill accounts for workers enrolled for job guarantee programme

The government has started roping in public and private banks to open no-frills accounts for workers whoenroll for the flagship job guarantee scheme. The move to directly credit wages to the workers account isaimed at checking contractors swindling taxpayers money. Workers who enroll for the National Rural

Employment Guarantee would be able access their accounts through ATMs.

The idea is to plug leakage in the system. Technology can be effectively utilised to make the programmeefficient. The bank will use the technology to reach out to the beneficiaries of the scheme. The funds fromthe government will be directly credited to the accounts of the beneficiaries depending on the wagesearned. Banks will act as a payment gateway for governments funds. The government also wantscompetition among banks to reach out to the bottom of the pyramid and private banks would beencouraged to participate. The move is in line with the government commitment towards financialinclusion which fits into the rural expansion strategy of many banks.

The decision to bypass contractors in the payment process comes in the wake of the Comptroller &

Auditor General of India (CAG)s six-month performance audit of the scheme, which said only 3.2% ofregistered households could get the mandatory 100 days of employment. The average employmentprovided under the scheme has been merely 18 days.

7. CREDIT COUNSELORSResolve convertibility and recompensation issue

BSE issues show cause notices to 800 companies

Bombay Stock Exchange, the worlds biggest bourse in terms of listed firms, has issued showcause

notices to 800 companies for violating the listing agreement that also includes corporate governancenorms. BSE MD & CEO Rajnikant Patel said a large number of companies were yet to comply withClause 49 of the listing agreement on corporate governance. He added that since BSE did not have theauthority to impose penalty on companies, it has recommended Sebi to take action in many cases.

8. TECH SAVVY PROFESSIONALSTake first step to ensure efficient and reliable system

RBI ropes in HCL Comnet for IT overhaul

Its the RBIs largest IT implementations in the recent times. The central bank is setting up two large datacentre and completely overhauling its IT infrastructure to move to modern, more robust systems. Theexercise will cost RBI close to Rs 100-crore, and the contract has been awarded to software exporter HCLTechnologies. Under the terms of the contract, HCL will set up the two centres and maintain them for theRBI for seven years. A part of the contract also involves the different applications that are running acrosslocations and consolidating them at a single place on web and Java-based platforms. Of the two datacentres, one would be located at Navi Mumbai and the second will function as a disaster recovery centre,will be based at Nagpur. HCL Comnet will handle the implementation and maintenance of the project.


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9. ONE-STOP-SHOPSDedicated to offer related services under a roof

Global Advisory Council of PIO

Prime Minister Manmohan Singh has announced setting up of PMs Global Advisory Council of Peopleof Indian Origin (PIO) that would serve as a platform for the PM to draw upon the experience,knowledge and wisdom of the best Indian minds across the globe. He said, This council would comprise

of people of Indian origin from a variety of disciplines who are recognised as leaders in their r

Documents

Journal of FInance Vol 14