Recession

Definition
A period of general economic decline; specifically, a decline in
GDP for two or more consecutive quarters.

In economics, a recession is a general slowdown in economic activity over a sustained period of

time, or a business cycle contraction.[1][2] During recessions, many macroeconomic indicators
vary in a similar way. Production as measured by Gross Domestic Product (GDP), employment,
investment spending, capacity utilization, household incomes and business profits all fall during
recessions.

. A recession is a decline in a country's gross domestic product (GDP) growth for two
or more consecutive quarters of a year. A recession is also preceded by several
quarters of slowing down

US Sub-Prime Mortgage Crisis: 'An

Unknown Unknown

Introduction

Sub-prime stories continue to pour in. There is gloomy forecast that the US sub-prime
mortgage crisis might convert into recession that could be as great as the Great Depression
of 1930's that lasted over a decade. The sub-prime crisis that started in 2004 and 2005 is
extended to the current economic cycle world over.

In US, homeowners select a mortgage lender who gives the loan after inquiring the
borrower's creditworthiness and the property that serves as collateral. The lenders resell
these loans to investors or Wall Street firms, who in turn bundle thousands of mortgage
loans from different lenders into mortgage backed securities. These securities are often
sliced and diced into different structures like Collateralized Debt Obligations (CDO), rated by
rating agencies like Moody's, S&P, Fitch etc. and are finally sold to institutional investors
worldwide- mutual funds, banks, hedge funds, central banks and pension funds.

The US mortgage-backed securities market is the largest fixed income market in the world,
with over $8 trillion outstanding followed by US treasury market with around $5 trillion
outstanding.
These mortgages do not create any problem for lenders until the mortgagers fulfill their
commitments in time. But with rising payment obligations, sub-prime mortgagers ran for
foreclosures. Sub-prime mortgage refers to the lending by the banks and other financial
institutions to borrowers with poor or no credit history or variable income flows. Borrowers
with the higher-than-average risk profile because of low creditworthiness are charged a
higher interest rate for loans. These loans are considered sub-prime.

Source: Office of Federal Housing Enterprise Oversight

Causes of Bubble in the housing market:

• The demand for housing like any other commodity is dependent on demand and
supply. So, the increase in disposable income and decline in interest rates on
mortgages encouraged home ownership among US consumers.
• The bubble burst when the demand decreases while the supply increases.
• The increase in interest rates in US makes homeownership costlier for some buyers
leading to defaults and foreclosures adding to supply in the market.
• Similarly a decline in the general level of economic activity in US lead to less
disposable income in the hands of consumer leading to decline in demand.

According to Bryson, US sub-prime market accounts for about 20% of the total US
mortgage market. The heat of sub-prime crisis is not limited to US but is faced world-over.
Though, China holds more than $250 billion and Japan holds close to $200 billion of
mortgage backed securities, but the worst affected nation is UK because China and Japan
have very low exposure to corporate mortgage-backed-securities where sub-prime
mortgage sits. UK held $44 billion in corporate MBS accounting for the bulk of its exposure
to US mortgages making it most susceptible to risk after the shocks. So far, losses have
been reported from France, Germany, China, Australia, Japan and U.K. in addition to US.
But this is just the tip of iceberg. There are likely to be many more casualties over the next
two years.
Origin: Cause of Sub-Prime Crisis

In the recent times, many sub-prime mortgages are offered at below the market rate of
interest-that marks the beginning of crisis. But the seeds of the crisis were sown long back
by Alan Greenspan, ex-chairman of Federal Reserve Bank. The inflationary policies of
Greenspan are largely responsible for the defaults in the US housing market. His plan to
pump billions of dollars in the economy via lower interest rates paved the path for the
economic slowdown.

Source: Federal Reserve, Bureau of Economic Analysis

The interest rates have declined from the high of 6.5% in 2000-01 to a low of just above
1% in 2003-04 before it started moving north. US middle income class saw it as golden
opportunity to expand its stagnated income. Consumers took these mortgages with the
hope to re-finance them after a few years at an affordable rate of interest. These mortgages
are in-turn packaged into pools and sold as high-yielding securities to the investors.
Investors even started borrowing money from the market to invest in high-yielding
securities. This massive borrowing spree and uncalculated investment created a bubble in
the market. By the time this bubble burst, it left millions of people in hell.

Greenspan's moves were aimed at masking the economy from the piling current account
deficit. According to the Bureau of Economic Analysis (BEA), current account deficit (the
broadest measure of the U.S. balance of trade in goods, services, and payments to the rest
of the world) stood at $835 billion in the first quarter of 2006. This burgeoning US current
account is financed by capital account inflows. It means that US must attract a net capital
inflow of $70 billion per month to finance the current account deficit!!!!!

But how long can US depend on China and Japan to finance its trade deficit? The trade
deficit is desirable and sustainable until it leads to an increase in productivity but if the
excess expenditure are used met the consumption needs of the economy, it will further
create the problem of repayment. China and Japan have huge trade surplus with US. The
Asian Tigers instead of ploughing back its surplus in domestic economy were purchasing T-
bills to prevent depreciation of their currencies. This helps China to maintain an export-led
growth strategy. China's forex reserves stood at $1.2 trillion as on 31 March 2007. US
consumers maintain their level of consumption owing to cheaper imports due to overvalued
currency. But at the same time, it is creating the problem of excess consumption in the
domestic economy. But once the Asian Tigers and Arab countries stop investing in US T-bills,
it might create the problem of financing current account deficit.

When the dollar rises in value, U.S. exports become more expensive and import prices fall.
Between 1995 and 2002, the dollar gained about 30% in value. This made imports costlier
for US and they delayed their consumption expenditure and put the surplus money in non-
tradables and since, they are not subject to international trade, their prices shot up. Here
starts the creation of bubble in the US housing market.

The excess demand in the market pushed the housing prices to new heights. Rising prices,
in turn, have a substantial affect on the spending of the consumers. US consumers lured by
the increasing value of their homes went on borrowing spree. They started borrowing
money for consumption by mortgaging their property.

But, two events that were assumed to have a low probability in a booming market in fact
happened: first, interest rates increased and second, home prices began falling. This led to
sub-prime mortgages resetting at shockingly high rates, with homeowners missing
payments and foreclosing accounts. As a result, financial institutions holding mortgage-
backed securities incurred losses and had to sell their assets to meet margin calls.

The slides of sub-prime crisis dates back to 30 June 2004 when Federal Reserve began the
cycle of interest rate hikes that increased the cost of borrowings from the lowest levels
registered since 1950s. It has increased it 17 times in a row before it paused in July

Table: Prime rates charged by banks in US

Date Interest Rate Date Interest Rate

June 2004 4.00 July 2005 6.25
July 2004 4.25 Aug 2005 6.50
Aug 2004 4.50 Sep 2005 6.75
Sep 2004 4.75 Nov 2005 7.00
Nov 2004 5.00 Dec 2005 7.25
Dec 2004 5.25 Feb 2006 7.50
Feb 2005 5.50 Mar 2006 7.75
Mar 2005 5.75 May 2006 8.00
May 2005 6.00 July 2006 8.25

Finally, crisis broke out in March 2007, when the shares in New Century Financials, one of
the largest sub-prime lenders in US were suspended amid fears that the firm is heading for
bankruptcy. On April 2 2007, New Century Financials filed for bankruptcy after it was forced
by its backers to purchase billions of dollars of bad loans. Another US-based sub-prime firm
Accredited Home Lenders Holding said it would pass on $2.7 billion of its loans at a heavy
discount. GE also decided to sell its sub-prime lending arm, WMC Mortgage, a subsidiary of
GE Money, it brought in 2004. Bear Stearns, a Wall Street firm and the topnotch player in
mortgage-backed securities market for over a decade, had to close down two hedge funds
that lost over 95% of Net Asset Value (NAV).

Possible Solution

Now, the problem is-Can US come out of the current account deficits? The answer to this
question calls for radical change in the economic policies of US. To keep the trade deficit
from widening further, exports must grow 55% faster than imports. But in the facet of
slowdown in the US economy this growth in US export seems impeccable without
depreciation of dollar.

The gradual decline in the dollar and improvement in the current account deficit would
provide the best outcome for the economy. An important point that should be noted is that
US accounts for 30% of the global consumption, so any decline in demand from the US
economy might create global recession. The only option left for the trading partners is to
come forward to help US to correct its trade deficit. According to Financial Times, "The
Group of 20 leading rich and emerging market nations have agreed on a co-ordinated effort
to reduce the global trade imbalances by cutting the US fiscal deficits, reforms to boost
growth in Europe and Japan and increasing exchange rate flexibility in Asia". But China one
of the major trading partner of US, has refused to come to the rescue of US. Though China
has increased the float margin of Yuan from 0.3% to 0.5% but it laid down the US demand
to make it flexible. In an interview with the Financial Times, Li Ruogu, the deputy governor
of People's Bank of China, warned the US not to blame other countries for its economic
problems.

A major problem surfaced post sub-prime crisis is that credit markets have stopped working
normally. There is sharp increase in the short term interest rate owing to tightening liquidity
position in the market as banks are setting aside cash as a precaution against further losses
from their bad investments and have become far more cautious about lending. In economic
terms, the crisis that evolved is liquidity crunch. The creditworthy borrowers are unable to
obtain the credit and the holders of risky assets are fleeing from the market to park their
funds in safer assets such as T-bills. Federal Reserve Board has finally come as the lender of
last resort to the rescue of borrowers when it pumped in $24 billion and another $38 billion
in the economy on August 9 and August 10, 2007. It announced 50 basis points deduction
in the discount rate on August 17, 2007. The European Central Bank (ECB) has also injected
$131 billion (more than double of $61 billion injected in the market post 9/11 attacks) in
the market on August 9, 2007.

Despite Fed intervention, there is uncertainty in the market whether the sub-prime will
become full-blown crisis. The positive is Fed and ECB had injected billions of dollars into the
market to eliminate liquidity crunch. But the penultimate question is-Whether Fed will
intervene to bail out faltering institutions? If it does, it may encourage irresponsible
business practices but if it stays away, it might lead to economic disaster

Impact of global recession on India

RECESSIONS ARE the result of reduction in the demand of products in the global market.
Recession can also be associated with falling prices known as deflation due to lack of demand of
products. Again, it could be the result of inflation or a combination of increasing prices and
stagnant economic growth in the west.
Recession in the West, specially the United States, is a very bad news for our country. Our
companies in India have most outsourcing deals from the US. Even our exports to US have
increased over the years. Exports for January have declined by 22 per cent. There is a decline in
the employment market due to the recession in the West. There has been a significant drop in the
new hiring which is a cause of great concern for us. Some companies have laid off their
employees and there have been cut in promotions, compensation and perks of the employees.
Companies in the private sector and government sector are hesitant to take up new projects. And
they are working on existing projects only. Projections indicate that up to one crore persons
could lose their jobs in the correct fiscal ending March. The one crore figure has been compiled
by Federation of Indian Export Organisations (FIEO), which says that it has carried out an
intensive survey. The textile, garment and handicraft industry are worse effected. Together, they
are going to lose four million jobs by April 2009, according to the FIEO survey. There has also
been a decline in the tourist inflow lately. The real estate has also a problem of tight liquidity
situations, where the developers are finding it hard to raise finances.

IT industries, financial sectors, real estate owners, car industry, investment banking
and other industries as well are confronting heavy loss due to the fall down of global
economy. Federation of Indian chambers of Commerce and Industry (FICCI) found
that faced with the global recession, inventories industries like garment, gems,
textiles, chemicals and jewellery had cut production by 10 per cent to 50 per cent.

What causes it?

An economy which grows over a period of time tends to slow down the growth as a part of the
normal economic cycle. An economy typically expands for 6-10 years and tends to go into a
recession for about six months to 2 years.

A recession normally takes place when consumers lose confidence in the growth of the economy
and spend less.

This leads to a decreased demand for goods and services, which in turn leads to a decrease in
production, lay-offs and a sharp rise in unemployment.

Investors spend less as they fear stocks values will fall and thus stock markets fall on negative
sentiment.

Stock markets & recession

The economy and the stock market are closely related. The stock markets reflect the buoyancy of
the economy. In the US, a recession is yet to be declared by the Bureau of Economic Analysis,
but investors are a worried lot. The Indian stock markets also crashed due to a slowdown in the
US economy.
The Sensex crashed by nearly 13 per cent in just two trading sessions in January. The markets
bounced back after the US Fed cut interest rates. However, stock prices are now at a low ebb in
India with little cheer coming to investors.

Current crisis in the US

The defaults on sub-prime mortgages (homeloan defaults) have led to a major crisis in the US.
Sub-prime is a high risk debt offered to people with poor credit worthiness or unstable incomes.
Major banks have landed in trouble after people could not pay back loans.

The housing market soared on the back of easy availability of loans. The realty sector boomed
but could not sustain the momentum for long, and it collapsed under the gargantuan weight of
crippling loan defaults. Foreclosures spread like wildfire putting the US economy on shaky
ground. This, coupled with rising oil prices at $100 a barrel, slowed down the growth of the
economy.

How to fight recession

Tax cuts are the first step that a government fighting recessionary trends or a full-fledged
recession proposes to do. In the current case, the Bush government has proposed a $150-billion
bailout package in tax cuts.

The government also hikes its spending to create more jobs and boost the manufacturing and
services sectors and to prop up the economy. The government also takes steps to help the private
sector come out of the crisis.

Past recessions

The US economy has suffered 10 recessions since the end of World War II. The Great
Depression in the United was an economic slowdown, from 1930 to 1939. It was a decade of
high unemployment, low profits, low prices of goods, and high poverty.

The trade market was brought to a standstill, which consequently affected the world markets in
the 1930s. Industries that suffered the most included agriculture, mining, and logging.

In 1937, the American economy unexpectedly fell, lasting through most of 1938. Production
declined sharply, as did profits and employment. Unemployment jumped from 14.3 per cent in
1937 to 19.0 per cent in 1938.

The US saw a recession during 1982-83 due to a tight monetary policy to control inflation and
sharp correction to overproduction of the previous decade. This was followed by Black Monday
in October 1987, when a stock market collapse saw the Dow Jones Industrial Average plunge by
22.6 per cent affecting the lives of millions of Americans.
The early 1990s saw a collapse of junk bonds and a financial crisis.

The US saw one of its biggest recessions in 2001, ending ten years of growth, the longest
expansion on record.

From March to November 2001, employment dropped by almost 1.7 million. In the 1990-91
recession, the GDP fell 1.5 per cent from its peak in the second quarter of 1990. The 2001
recession saw a 0.6 per cent decline from the peak in the fourth quarter of 2000.

The dot-com burst hit the US economy and many developing countries as well. The economy
also suffered after the 9/11 attacks. In 2001, investors' wealth dwindled as technology stock
prices crashed.

Impact of a US recession on India

A slowdown in the US economy is bad news for India.

Indian companies have major outsourcing deals from the US. India's exports to the US have also
grown substantially over the years. The India economy is likely to lose between 1 to 2 percentage
points in GDP growth in the next fiscal year. Indian companies with big tickets deals in the US
would see their profit margins shrinking.

The worries for exporters will grow as rupee strengthens further against the dollar. But experts
note that the long-term prospects for India are stable. A weak dollar could bring more foreign
money to Indian markets. Oil may get cheaper brining down inflation. A recession could bring
down oil prices to $70.

Between January 2001 and December 2002, the Dow Jones Industrial Average went down by
22.7 per cent, while the Sensex fell by 14.6 per cent. If the fall from the record highs reached is
taken, the DJIA was down 30 per cent in December 2002 from the highs it hit in January 2000.
In contrast, the Sensex was down 45 per cent.

The whole of Asia would be hit by a recession as it depends on the US economy. Asia is yet to
totally decouple itself (or be independent) from the rest of the world, say experts.

Causes of economic recession

An economic recession is primarily attributed to the actions taken to control the money supply in
an economy. The Federal Reserve is the agency responsible for maintaining the delicate balance
between money supply, interest rates, and inflation. When this delicate balance is tipped, the
economy is forced to correct itself.
The Fed sometimes deals with these situations by dumping huge amounts of money supply into
the money market. This helps to keep interest rates low, even as inflation rises. Inflation is the
rise in the prices of goods and services over a period of time. So, if inflation is increasing, it
means that goods and services are costing more now than they did before. The higher the level of
inflation, the smaller the percentage of goods and services is which can be bought with a certain
amount of money. There can be many contributing factors for inflation, which include but are not
limited to increased costs of production, higher costs of energy, and/or the national debt.

In an environment where inflation is prevalent, people tend to cut out things like leisure
spending. They also budget more, spend less on things they usually indulge in, and start saving
more money than they did. As people and businesses start finding ways to cut costs and derail
unneeded expenditures, the GDP begins to decline. Then, unemployment rates will rise because
companies start laying off workers to cut more costs, because consumers are not spending like
they were. It is these combined factors that manage to drive the economy into a state of
recession.

This set of circumstances, coupled with the ability of people to get access to greater amounts of
loan money due to extremely lax loan practices, creates a cycle of unsustainable economic
activity that will eventually grind an economy to a near halted existence. You could also say that
a recession is actually caused by factors that might stunt the growth that is available from the
short term benefits to an economy that can be brought about by such things like spiking oil prices
or even war. And while these are very short term in nature usually, they have been known to
correct themselves quicker than the full blown recessions that have happened in the past.

Effects of economic recession

Generally, an economic recession can be spotted before it actually happens. There are ways to
spot it before it actually hits by observing the changing economic landscapes in quarters that
come before the actual onset. You will still see GDP growth, but it will be coupled with signs like
high unemployment levels, housing price declines, stock market losses, and the absence of
business expansion. When an economy sees more extended periods of economic recession, it
goes beyond a recession and is declared that the economy is in a state of depression.

The only real benefit of an economic recession is that it will help to cure inflation. In fact, the
delicate balancing act that the Fed struggles to pursue is to slow the growth of the economy
enough so that inflation will not occur, but also so that a recession will not be triggered in the
process. Now, the Fed performs this balancing act without the help of fiscal policy. Fiscal policy
is usually trying to stimulate the economy as much as is possible through such things as lowering
taxes, spending on programs, and ignoring account deficits.
How to tackle the global slump?
“Our economy is shrinking, unemployment rolls are growing, businesses and families can’t get
credit and small businesses can’t secure the loans they need to create jobs and get their products
to market,” Obama said.

“With the stakes this high, we cannot afford to get trapped in the same old partisan gridlock.
The following measures can be adopted to tackle the recession:

• Tax cuts are generally the first step any government takes during slump.
• Government should hike its spending to create more jobs and boost the manufacturing
sectors in the country.
• Government should try to increase the export against the initial export.
• The way out for builders is to reduce the unrealistic prices of property to bring back the
buyers into the market. And thus raise finances for the incomplete projects that they are
developing.
• The falling rupees against the dollar will bring a boost in the export industry. Though the
buyers in the west might become scarce.
• The oil prices decline will also have a positive impact on the importers.

India Inc heading for recession: Morgan Stanley

MUMBAI: Morgan Stanley has joined the growing list of broking houses saying that India Inc is
heading for a
recession with earnings growth
slowing alarmingly.

The investment bank’s sample of 105 companies reported a 29% fall in net earnings for the
quarter ended September 2008, an all time low. This compares with a trailing five-year quarterly
average growth of 28%.
Analysts say that rising interest rates and a growing dependence on debt have started taking a toll
on the profitability of Indian firms, with interest costs almost doubling within the space of an
year.

A recent report by Morgan Stanley puts the growth of earnings of sensex constituents at 5.5%
Year-on-Year (YoY) on an aggregate basis, behind its analysts’ forecasts and its worst
performance since June 2002.

Looking at earnings revisions at the end of the quarter, the broking house says that the earnings
season produced “negative surprises with negative earnings” revisions for F2009 for all sectors
but financials.

“The key problem for net profit growth was the declining share of net financial income in pre-tax
earnings and the rising depreciation expense. Other income fell YoY whereas interest costs rose
at their fastest pace in history,” the report authored by Ridham Desai of Morgan Stanley said.

Morgan Stanley had revised down F2009 earnings for nine out of 10 sectors and for market
aggregates at the end of the season. Downward revisions outstripped upward revisions 2:1 at the
end of the season versus where earnings were at the start of the season.

Morgan Stanley says that at the sector level, the best performances came from Utilities and
Technology. The laggards versus the aggregate numbers were Consumer Discretionary, Energy,
and Healthcare. Save for Technology and Financials, all sectors reported a slippage in operating
margins YoY, it notes.

“The pace of capex over the past two years is finally showing up in capital charges on the
income statement. Even as depreciation expense rose and net financial income turned down,
lower growth in tax provisions helped YoY net profit growth, but it still slipped to a five-year low
of 11% excluding the energy sector,” the report said.

Morgan Stanley estimates that including the energy sector, YoY net profit fell a whopping 29%
while over the past five years, net profit growth has averaged nearly 28% (30% ex-Energy).

A global liquidity crisis in the wake of the collapse of Lehman Brothers Holdings in September
hit India, too, and banks raised their lending rates aggressively in past two months.

They were also not comfortable in lending to companies when liquidity tightened. RBI has since
cut its policy rate by 150 basis points and asked banks to lend more freely to companies.
Whether this will translate to better days for India Inc remains to be seen.
.

Indian Scenario

US economy has registered a growth of 1.9% in first quarter of 2007 against the projected
rate of 2.7%. A consumption-led slowdown in US economy will have an impact on its trading
partners.

Indian economy has registered a robust growth rate of 9.3% in 2006-07 and the projections
for 2007-08 are quite optimistic. India's exports may record a decline if the US slows down.
In 2006-07, approximately 15% of India's exports were directed to US. The negative impact
of the slowdown in exports can be partly offset by export of services.

On the financial side, Indian banks and financial institutions have a very low level of
exposure to US mortgage backed securities. So, it is highly unlikely that India will bear
brunt of US sub-prime mortgage crisis. But the sub-prime crisis has sent the equity markets
into a tailspin. Indian markets have crashed by 10.13% over the past one month (July-
August) before recovering back to normal grounds. The hedge funds are winding-up their
positions in the domestic market to make up their losses in US sub-prime mortgage
market.

On the credit side, Indian corporates have raised about $15 billion from external sources in
the first five month (Jan-May) of 2007. At the extreme, Indian corporates could face higher
cost of borrowings due to increasing credit market spread. Companies would have to tap
into the domestic credit market as an alternative, thereby exerting upward pressure on the
interest rates. This could carve down the growth rate.

But the question arises- Is there any sub-prime market in India? Lending to real estate and
construction sector has been increasing at an annualized rate of 40-50% in the last 5 years.
Is Indian housing sector a replica of US real estate sector? Reserve Bank of India, in the
recent times, has taken a tough stance on lending to real estate sector. It has increased the
exposure limit from 100% to 150% on bank's lending to housing or real estate sector. And,
given the huge demand of real estate especially from IT and retail sector, it does not seem
that the Indian markets are imitating the US housing market.

It is premature to comment on the extent of these repercussions given the short life of the
crisis. However, the spillover of the US financial crisis to the Indian economy may not be
significant enough to overwhelm the positive economic momentum already in place.
The Asian Face of the Global Recession C.P.
Chandrasekhar & Jayati Ghosh
Delegates to the World Economic Forum at Davos this year came despondent and
left in despair. Both the discussions and the new evidence released at and during
the Forum indicated that the global crisis was not just bad, but worse than originally
anticipated. One damaging projection came from the IMF in its January 2009 Update
to the World Economic Outlook, which declared: “Global growth in 2009 is expected
to fall to half percent when measured in terms of purchasing power parity and to
turn negative when measured in terms of market exchange rates. This represents a
downward revision of about 1¾ percentage point from the November 2008 WEO
Update.” (Chart 1)
Chart 1: IMF's revised projections of global growth 2009-10 (%)5.23.40.533.82.2-0.62.1-
101234562007200820092010Per centPPP BasisMarket Exch.Rates

Moreover, data released in recent months by the US Bureau of Labour Statistics

points to a sharp fall in non‐farm employment in the US in recent months (Chart 2).
The monthly decline in nonfarm payroll employment touched 598,000 in January
when the unemployment rate rose from 7.2 to 7.6 percent. Nonfarm employment
has declined by 3.6 million since the start of the recession in December 2007, and
about a half of this decline occurred in the past 3 months (Chart 3). The impact this
would have on demand would only aggravate the recession.
Finally, there is evidence that the global recession led by contraction in the US is
transmitting itself through global trade. Export growth from the advanced
economies is projected to fall from
a positive 5.9 per cent in 2007 and 3.1 per cent in 2008 to a negative 3.7 per cent
in 2009. But this trend is not restricted to the developed countries. The relevant
figures for the emerging and developing economies are 9.6 per cent, 5.6 per cent
and ‐0.8 per cent. (Chart 4). It is small recompense that growth is projected to
rebound sharply in 2010. Such projections are suspect, since the IMF has made it a
habit of putting out optimistic projections and then revising them downwards.
Chart 2: Total US nonfarm employment, January-December 2008
In fact, fear of a long recession stems not just from the distressing developed
country figures. It is also triggered by evidence that the recessionary trend is
affecting Asia as well. Developing economies in Asia, which as a group grew at 10.6
per cent and 7.8 per cent in 2007 and 2008, are now expected to grow at just 5.5
per cent or 1.6 percentage points lower than projected as recently as November last
year. Japan was already contracting by 0.3 per cent in 2008, and is projected to see
that figure falling to ‐2.6 per cent in 2009. But the three growth engines in Asia, the
ASEAN‐5, China and India also now seem to be badly affected by the crisis. The
ASEAN‐5 economies, which grew at 6.3 and 5.4 per cent in 2007 and 2008, are now
projected to grow at 2.7 per cent in 2009 (down 1.5 percentage points from the
November 2008 estimates). The corresponding figures for China are 13.0, 9.0 and
6.7 per cent (1.8 percentage points) and for India are 9.3, 7.3 and 5.1 per cent (1.2
percentage points). Moreover, the IMF has predicted a damaging immediate future
for South Korea, with its economy projected to contract by 4 per cent this year.
Estimates from national sources and elsewhere are less pessimistic than the IMF,
but there is consensus that outside the US it is Asia where the recession is biting
most. This is reflected in
 available estimates on rising employment. According to official Chinese figures,
more than 20 million rural migrant workers have lost their jobs and returned to their
homes as a result of the global economic crisis. According to these estimates, by
January 25, 15.3 per cent of China's 130 million migrant workers had lost their jobs
and left coastal manufacturing centres to return home. And the aggregate figure of
migrant job loss does not include those who stayed back in cities in search of new
jobs.
India too has made a feeble effort at estimating the impact of the downturn on
employment. An official survey by the Labour Bureau focuses on 8 sectors (Mining,
Textile & Textile Garments, Metals & Metal Products, Automobile, Gems & Jewellery,
Construction, Transport and the IT/BPO industry) to arrive at an estimate of job loss
as a result of the economic slowdown in the country. In these sectors it sampled
units employing 10 or more workers to make its estimates.
Chart 3: Absolute Monthly Change in US nonfarm employment, January
2008 to January 2009('000)-72-144-122-160-137-161-128-175-321-380-597-577-
598JanFebMarAprMayJuneJulyAugSeptOctNovDecJan

The survey covered 2581 out of the sampled 3000 units of which 1168 were from
the Textile & Textile Garments industry, followed by 752 in Metals & Metal Products,
242 in IT/BPO, 132 in Automobiles, 104 in Gems & Jewellery, 103 in Transportation,
19 in Mining, and 61 in Construction. Based on this limited sample, the total
estimated employment in all the sectors covered by the survey went down from
16.2 million during September 2008 to 15.7 million during December 2008, implying
a job loss of about half a million (Table 1). The actual decline in employment if
coverage and method were better is likely to be much higher.
However, the survey does suggest that employment fell in every month during this
period. After September, 2008 employment in all industries declined at an average
rate of 1.01 per cent per month. A comparison of employment in export and non‐
export units indicates that employment
declined at an average monthly rate of 1.13 per cent in the case of the former, as opposed to
0.81 per cent in the latter (Table 2), pointing to the direct role of the global slowdown. Table 1:
Trends in Average Employment, India (million)
Period Average Employment %age change
September,08 16.2
October,08 16 ‐1.21
November,08 15.9 ‐0.74
December,08 15.7 ‐1.12
Average Monthly change ‐1.01
Recession in India: Challenges &
Opportunities Galore
The global economic recession has taken its toll on the Indian economy that has led to multi-
crore loss in business and export orders, tens of thousands of job losses, especially in key sectors
like the IT, automobiles, industry and export-oriented firms. It has also shaken up the investment
regime, which is being restructured, with the telecom sector likely to be declared off-limits for
foreign investors.

Although the next two years or more are expected to usher in a difficult phase for the national
economy, there are silver linings still amid the dark clouds looming on the horizon. The stimulus
package unveiled by the central government should boost exports, especially to the Gulf states,
which are still awash in petro-dollars, even if the oil prices have plummeted from $142 to $42
within six months.

Restrictions on exports of food, textiles and construction material to the Gulf have jacked up the
prices there. Easing on export curbs should be welcome news to some 30 million people in that
region. The scope and size of the export market to Saudi Arabia, the biggest market in the GCC,
will be discussed later in this article.

Before the crisis erupted, there were more than 1500 software firms in the country, while the
employee base of the sector had grown to 553,000 (from 415,000 in FY 06). More than 1300 IT
companies were operating in Bangalore alone.

This sector has been adversely affected by the global crisis-a fact acknowledged by Bangalore-
based Infosys Technologies Co-Chairman, Nandan M. Nilekani. He believes that even though the
tech sector would see the impact of the economic slowdown in terms of growth rate, the IT
industry will continue to grow and recruit manpower.

Interestingly, his observation finds support from the Manpower Employment Outlook Survey
which ranks India second after Peru in terms of the recruitment programme. The survey, which
covered 33 countries, reveals that although the global slowdown will certainly impact the hiring
plans of employers in India over the next three months, it has the second strongest hiring
capacity globally, with a Net Employment Outlook of 19 percent.

This outlook represents a sharp decrease of 24 percentage points quarter-over-quarter and 27

percentage points year-over-year. Of the 33 countries covered by the survey, employers in Peru
have been found to be the most upbeat with Net Employment Outlook of 24 per cent. Peru is
followed by India, Costa Rica, Canada, Romania, Colombia, South Africa, Australia, Poland, the
United States and China. The slowest hiring activity is expected in Singapore and Taiwan.

As for the IT industry, Nasscom had initially projected a 21-24 per cent growth rate for the
current financial year, but the software association revised it downward in the wake of the global
financial meltdown. Nasscom will complete the ‘review process’ of the FY09 export growth
targets, sometime in December.

Similar was the projection of Infosys, when it lowered its dollar revenue guidance for FY09 by
six percentage points. It now expects revenue to be between $4.72-4.81billion. “There is a global
scenario which is unprecedented and it will have an impact on everyone. But the IT industry has
demonstrated time and again that it is resilient enough to deal with these challenges,” said a
Nasscom spokesman.

But for now heads continue to roll in the IT sector. In February this year, Tata Consultancy
Services (TCS) had asked about 500 employees to leave due to non-performance. Patni
Computer Systems (PCS) has already laid off around 400 employees, or nearly 3% of its 14,800
workforce, on the same ground, while IBM Corp. followed suit in the case of 700 freshers.
Wipro, the country’s third largest IT exporter, is considering firing 3,000 employees over
performance-related issues. However, this is yet to be confirmed by the company.

More trouble seems to be in store for this sector. This time the news is that the relatively liberal
visa regime in the US that enabled IT services companies to send employees on client work is
under review following the job losses in the US. The United States Citizenship and Immigration
Services (USCIS), the visa controlling agency, is tightening the screw on screening and issuing
L1 visas and L1 extensions.

L1s are three-year visas meant for intra-company transfers, with some 50,000 Indians estimated
to be currently in the US on these visas. About a third of them are coming up for renewal this
year for a further two-year extension.

Nasscom has said that the proposed legislation by the US House of Representatives to restrict the
use of L1 visas by Indian companies will affect the Indian IT industry in the long term, as about
10 per cent of Indian software professionals in the US avail themselves of L1 visas.

Away from IT firms, the IT-Enabled Services sector may also face the crunch, since a majority of
Indian IT firms derive 75% or more of their revenues from the US. Thus, if the Fortune 500
companies slash their IT budgets, Indian firms could feel the heat. The sector should review its
priority and focus on product innovation (as opposed to merely providing services). If this is
done, India can emerge as a major player in the IT products category as well.

As a result of putting all their eggs in one basket, developers, consultants, trainers, team leaders
have all become victims of the recession facing the IT/Ites sector. A fresh entrant-the bloggers-
are in for trouble as well. With corporate budgets getting trimmed, professional bloggers may be
the next to come under the hatchet.
Advertisements, sponsored listing and ‘pay per post’ have been affected by the slowdown. For
Pranav Dharma, a part-time blogger, the recession has shrunk ad contracts. “I was running an ad
campaign on my blog for the past three months. When time came for extending the contract, the
advertiser said they are re-evaluating the contract campaigns due to the slowdown.”

However, business process outsourcing firms believe they will be less impacted by the global
crisis than their IT counterparts, since they are involved in facilitating day-to-day operations.
Avinash Vashistha, MD of technology consultancy firm Tholona, says the slowdown impact on
BPOs will be limited. “BPOs are about core transactions and day-to-day functioning and clients
will find it tough to delay these projects or make cuts in them,” adding that applications support
and maintenance and project implementation services of IT may be slashed by over 30 percent.

Currently, processing services account for 60% of the industry, while the rest comes from core
services (business analysis, financial planning etc). Last year the ratio was 70:30 and it’s likely to
be in the 50:50 range next year. Also, the share of voice-based services has fallen from 95 % two
years ago to 80% now and is expected to slide further. India will not be much affected, since it
accounts for only 5% of the global voice market.

Industry-wide indications after September are also uniformly gloomy. There are reports of
significant declines in output of automobiles, commercial vehicles, steel, textiles,
petrochemicals, construction, real estate, finance, retail activity and many other sectors. Exports
fell by 12 percent in dollar terms in October, while core industries slowed to 3.4 % during the
same month from 4.6 % a year ago.

Giving his assessment, Jasjit Sawhney, CEO, net4 India Ltd., told the SME Times: “The major
impact of recession or economic slowdown is with the small exporters and importers in the
country as most of them are facing the problem of heavy duties.”

Continuing further, he observed: “The US slowdown will immensely hit the mid-sized IT
companies and also the big players to some extent. On the higher end, you have scenarios where
people are cutting back on contracts. They are reducing the fees per manpower in their
contracts.”

A survey of 125 companies by the commerce department in New Delhi has revealed that Indian
companies lost export orders worth Rs.1,792 crores during August-October 2008 and were
forced to lay off 65,000 workers.

The manufacturing sector, especially the auto industry, has also sustained a severe hit. As a
result, the global credit rating agency, Standard &Poor’s (S&P) has downgraded Tata Motors
rating for the foreign market. The company witnessed a 30 % drop in sales in India compared to
last year.

The manufacturing sector had been calling for action in this regard to cushion the recessionary
impact. In the meantime, it has impacted the entire spectrum of the automobile industry. Dunlop
India Ltd, for instance, asked all 1,171 permanent employees at its Sahagunj unit and 917 staffers
at Ambattur (in West Bengal ) “not to report for work” for an indefinite period.
What’s strange about this management move is that it is an ‘informal directive’ with neither
suspension of work (mandating a notice period) nor a lay-off, that obliges the management to
pay the basic salary and a portion of the dearness allowance. The Dunlop management,
meanwhile, will pay each employee a monthly allowance to support their families.

As the company’s senior executive Pawan Kumar Ruia put it: “The tyre market is facing a slump
due to the global meltdown, forcing us to take the decision. The Tatas have left Singur. We do not
want to ruin our chances by operating the factory now. We could have announced a shutdown.
But we didn’t take that route. Instead, we are working on a revival package and have asked the
workers to stay away for the time being.”

The textile giant, VF-Arvind, has started releasing employees, especially from the imported
brands section, as there are few takers. Around 80 employees have been pink-slipped under its
downsizing programme. An offshoot of this impact is being felt on warehouses, which are being
vacated due to inventory control.

Along with warehouses, other sectors of the real estate market have also tumbled, with property
prices dropping by 10-15% in addition to various incentives that are being offered. For NRIs,
this is the prime time to invest in the real estate market, which is bound to rally once it gets over
the hump.

On the educational front, bank officials point out that there is no impact yet on the grant of loans
for higher education. Students of IIM, IIT, medicine, engineering and other professional courses
continue to receive educational loans repayable after the student has completed his/her course.

Foreign students, too, will stay put, since security measures are being beefed around hotels,
prestigious institutes and other places frequented by foreigners. Countries from Southeast Asia
and the West have also advised their nationals to consider deferring their visit to India till the
situation improves.

In line with this policy, the Singapore government issued a temporary travel ban on
schoolchildren coming to Bangalore for a leadership conclave. The Malaysian government has
also cautioned its citizens against travelling to India for the time being. However, new
educational projects could be on hold for a while, since the banks’ lending rates continue to be
high despite the stimulus package.

The tourism sector has been affected, too. Hotels have already reported 20-25 % cancellation
from international tourists who were booked to visit over the next one year. Airlines, including
low cost carriers (LCCs), may lower their fares by 10-12 % to extend the benefit of lower fuel
prices to the customers and rein in the sagging demand.

With hotel occupancy levels and room rates dipping by 20 % and 50 % respectively in just two
weeks, the sector is clamouring for a substantial cut in luxury tax slabs. The industry also wants
that the luxury tax on rooms be charged on the actual rates rather than on the printed rack rates.
According to market sources, guests are paying 20-25% higher room rates because of this tax
structure.
The reduced purchasing power of Indian consumers in the current situation has revved up
competition among shopping malls. They now have to step up their ad spend along with
discounts to lure consumers who have restricted their shopping list to essentials, such as food and
other consumables. After all, the purchasing power of 350 million Indians cannot be glossed
over. Together with the package of incentives offered by the government to kick-start the
economy, good management practices and self-imposed check on profiteering, the retail sector
can hold its own.

However, for the time being, the growth of this sector will be stunted as overseas investors will
be on guard for two reasons. The financial meltdown has burnt a hole in millions of Indian
pockets. With their shopping budget on a tight leash, one should not expect overseas malls to
make forays into the Indian market anytime soon. The second important factor is that overseas
retailers, especially from the US and other western countries, would not like to take the plunge
given the fact that the terrorist attacks in Mumbai on selected targets were politically motivated.

All these factors will have to be weighed in by an overseas investor till the economic and
security situation improves. The Prime Minister’s National Security Council (NSC) is
coordinating efforts between various government departments to finalise draft legislation which
is being piloted by national security advisor M K Narayanan. The thrust of this legislative
exercise is to boost national security by restricting foreign investment in sensitive areas like
ports, airports, defence equipment and telecom.

The proposed law will be drafted on the model of the Exxon-Florio Act of the US which arms the
US government with powers to block acquisition of any American company by a foreign
investor. This Act gained international attention during 2006 when Port Dubai’s attempt to
acquire a majority stake in the US for ports management was blocked by the US Congress citing
security reasons.

Prior to the terrorist attacks, India was in a comfortable position with Foreign Direct Investment
flows shooting up by a whopping 124% during the first five months of 2008-09 to $14.6 billion.
Despite the global financial turmoil, it is set to surpass the FDI target of $35 billion during 2008-
09. “The country will achieve about $35-40 billion in the current fiscal. The first quarter has
crossed $ 10 billion. Last year, it was $24 billion for the entire fiscal year,” a senior official in
Department of Industrial Policy and Promotion (DIPP) said.

The sectors that attracted maximum FDI inflows in 2007-08 were services, telecom, housing,
construction activities, real estate, electrical equipment, computer software and hardware. The
year before, India ranked fourth after China, Hong Kong and Singapore as a major investment
destination in Asia.

The situation on the ground has since changed in the aftermath of economic recession and the
current security threat. The government has already unveiled a Rs.300,000 crore package to
pump prime the economy with specific measures for various sectors.

This amount is to be spent on revitalizing stake holders such as exporters, housing, infrastructure
and textiles. A four-percent cut in Value Added Tax has also been announced to help the
corporate sector in general. This apart, additional allocation has been made towards various
incentives for exporters, guarantee of export credit, full refund of service tax to foreign agents
and refund of service tax under the duty drawback scheme.

Relief for exporters includes a 2% interest subvention up to March 2009 for pre- and post-
shipment export credit for all exports. Additionally, a Rs.350-crore booster for schemes like
Market Development Assistance (MDA) and Market Assessing Scheme has been granted to help
exporters develop new markets. This will be applicable to all exporters. As a result of these
measures, the Centre’s direct tax collection in November was Rs.10,347 crore against Rs.16,189
crore in the same month last year, a fall of 36 %.

Given the market turbulence that will grip the world economy in 2009, there is no prospect of a
quick turnaround in India. Broadly, the 4% relief on ex-factory cost is likely to result in ex-
showroom price reduction in the range of Rs.8,000 to Rs.45,000 for different passenger vehicles
(cars and SUVs).

Similarly, prices of cars, two-wheelers and commercial vehicles are set to come down by around
3.5 percent due to duty cut announced by the government. Almost all the major manufacturers,
including Maruti, Hyundai, M&M, Tata Motors, Ford, Skoda and TVS said they would be
passing on the benefits of the reduced duty to customers immediately.

The techno-savvy group will also benefit as the IT hardware industry has decided to pass on the
4% across-the-board excise duty cut to consumers which will help bring down the prices of IT
products like TFT monitors, printers and projectors as well as computers and notebooks.

With this, desktops and notebooks will attract 8% excise duty, while all other hardware
equipment would attract 10%, according to MAIT executive director Vinnie Mehta.

In the construction sector, ACC Ltd., the country’s biggest cement manufacturer, slashed prices
by up to Rs.5 on account of reduction in cement prices by 4 %. The demand for appliances,
consumer electronics, apparel, and other products is still huge and can be tapped by adopting
appropriate pricing strategies. This should be possible thanks to the 4 % cut in excise duty and
subsidy on export credit.

Other measures in the offing include easy access to the credit market for exporters, textile
manufacturers and farmers collectively to the tune of Rs.9,000 crore. Of the total outlay, a
Rs.4,000 crore line of credit will be extended to the National Housing Bank (NHB) and a similar
allocation for the Exim Bank. The remainder of the rescue package will be utilised for the relief
of farmers and infrastructural projects.

Besides these measures, a public-private partnership (PPP) could be launched to tap the
investment potential in various sectors. Health tourism is one of them. In the past, most of the
patients coming to India were from the SAARC region. However, in the aftermath of Nov. 26
terrorist attacks, this catchment area will dry up necessitating a new market. There needs to be a
shift in priority towards the Gulf states, with more focus on medical tourism combined with the
pleasures of sun, sea and sand plus visits to spas and wildlife sanctuaries as part of the itinerary.
These nationals are already coming to India for manpower recruitment. Air-India and other
airlines operating on the Gulf sector should coordinate with the Indian diplomatic missions in the
Gulf states, so that applicants going there for visa endorsement could also be handed tourist
brochure in Arabic along with their passports. This facility should also be available at the offices
of national carriers of India and the GCC states.

It is important to remember that while upscale Gulf citizens prefer the US, western and some
West Asian countries (UAE, Egypt and Lebanon) as their tourist destination, only the budget-
conscious group comes to south Asia. Malaysia has emerged as a hot spot for Arab tourists due to
its lush greenery, spas and overall picture postcard look, which they rave about.

Given the availability of talented professionals along with the added attraction of the cheap cost
factor, a coordinated drive could go a long way in bringing more Gulf tourists to India, especially
for health and eco-tourism. It is worth noting that whereas a heart valve replacement surgery
would cost $10,000 in Thailand, $12,500 in Singapore, $ 200,000 in the US and $ 90,000 in
Britain, in India it would just cost $8,000.

As for overseas investment, the remittance channels are beginning to diversify. Apart from FDI,
third countries like Mauritius and Cyprus are serving as conduits for channeling foreign
investment into India. Mauritius thus emerged as the top investing country in India during 2007-
08, with inflows from there more than doubling to $1.6 billion from $578 million in 2006-07.
The total FDI inflows into the country in April-June period amounted to $10.073 billion, nearly
$1 billion more than the total in 2005-06.

Another major player was Cyprus, which became the eighth-largest FDI contributor to the Indian
economy, up from the 14th slot in the list of top source countries a year ago. It has benefited
from the European tax regime by becoming the favoured destination for facilitating FDI into
India.

As recently as July this year, the IMF foresaw the world economy growing at 3.9 percent in
2009, advanced economies at 1.4 percent and developing countries at 6.7 percent. By early
November (just four months later) these forecasts had been slashed down to 2.2 percent, minus
0.3 percent and 5.1 percent, respectively. The official estimates of India’s GDP growth for the
first two quarters of 2008/9 stayed above 7.5 percent, with future projections indicating the same
growth trajectory.

According to the Executive Summary of Angel Broking’s “India Education Sector Report2008″,
“India’s GDP has grown at a compounded grate (CAGR) of around 8.5 % over FY 2003-08,
growing at over 8% in four of the five fiscals. GDP growth in FY 2007 accelerated and came in
at an impressive 9.6%. Even for FY 2008, India logged in GDP growth of 9%, commendable by
any standards. This makes it a hat-trick for India’s GDP, which has now recorded in excess of 9%
GDP growth in each of the last three fiscals.”

Yet, the report expresses dismay over India’s literacy rate of just 61%, ranking the country “a
disappointing 172nd. In fact, there is a huge requirement of talent in the field of hospitality, IT
services, retail, financial services and aviation, to name a few. We believe India will have to
significantly gear up its educational infrastructure to meet this demand.”

In this context, an Indian Institute of Technology survey points out that every IIT alumnus has
created 100 jobs and that every rupee spent on an IIT-ian has “created an economic impact of Rs
50 at the global level, half of which is India’s share.” The study is a global Internet-based survey
that attempts to gauge the impact of IIT-ians on the global economy across areas like
entrepreneurship, scientific and technological achievement, social transformation, research,
educational and business leadership.

But challenges still remain. One of these is the massive scale of corruption that has diverted
crores of tax payer’s money into the pockets of corrupt politicians and officials. This has strained
the economy, tarnished India’s image abroad, and sapped the investor’s confidence.

Another problem is the sluggish bureaucracy that taxes an investor’s patience to the hilt. There is
no active single window clearance mechanism in place where business decisions could be
expedited. Therefore many potential investors have been moving away to greener pastures in the
country or outside. Bangalore, which once served as a magnet for investors due to its operational
efficiency, among other factors, has nose-dived on several counts, including poor infrastructure,
traffic bottlenecks, culture of corruption and casteism. It is losing out to Andhra Pradesh and
Tamil Nadu as the country’s IT hub.

If these challenges represent one side of the coin, there are opportunities galore on the other. The
stimulus package that the Centre is offering to the state governments presents an exciting
opportunity to the private sector to resume exports to the Gulf states as Indian exporters are
being offered credit facilities.

For exporters from Hyderabad, now is the time to strike a deal in view of the incentives being
offered. In this context, it is worthwhile considering the Saudi market which, unlike a major
segment of the international market, still remains vibrant as it gears up for the expansion mode.

Right now, the growth areas are real estate, renewable sources of energy, especially solar, and
seasonal market like pilgrimage, when nearly 2.5 million pilgrims become consumers of
electronic, household and food items that are available at cheap prices. The immense market
potential of the Haj season should not be underestimated, since the impact of recession will be
felt at least over the next two years or more.

On the export front, Indian businessmen might be interested to note that Alshoula Holding and
Bayt Al-Mal Investment, two major Saudi investment companies, signed in October this year an
agreement with Awan Real Estate Investment & Development Company to execute an ambitious
$ 2 billion real estate project in Riyadh for setting up a shopping complex in the Saudi capital.

Covering an area of 2.348 million square meters, the project will have 3,350 commercial shops
and 1,380 housing units designed to meet the requirements of Saudi citizens. It will also have 97
palaces, while residents of these housing units will have access to recreational facilities.
According to Suleiman Al-Qamlas, chairman of Bayt Al-Mal, investment in the Saudi real estate
sector is projected to increase in the coming years. He points out that Riyadh alone needs 5.5
million housing units by 2020, with annual requirement standing at 145,000 houses, while
Jeddah needs 18,000 new houses annually. He estimates real estate financing in the GCC
countries at about $750 billion and real estate loans at around $1.3 trillion.

Similarly, in the non-oil energy sector, new windows of opportunity are opening in the sun belt
countries like Saudi Arabia which are among the sunniest of the lot, with temperatures shooting
up to 50 degrees C during summer.

In March this year Saudi Arabia’s oil minister, Ali al-Nuaimi, went on record as saying that the
country hopes to find its place under the sun as a solar power in addition to being among the top
oil exporters. It has already set up a solar village near Riyadh for harnessing solar energy for
heating and lighting purposes. With oil prices ruling currently at $42 bpd, down from a high of
$147 bpd in July this year, Saudi authorities are seeking to diversify their energy base away from
oil.

Such a course of action is also dictated by the need for illuminating homes in far-flung desert
areas beyond the power grid. The other imperative is to provide power for small projects coming
up in remote townships as Saudi Arabia strives to promote such units for extending the benefits
of oil boom to the interior of the country. While solar firms have already sprung up in the
Kingdom, there is space for others as well in this burgeoning market.

In this context, Surana Ventures Ltd of Hyderabad, the city’s new kid on the block in the field of
solar energy, should stay tuned to new developments on the anvil. The company has begun
production of solar modules in the 3 watt to 220 watt range with an installed capacity of 20 MW
per annum. Set up in Hyderabad in February this year with an investment capital of around
Rs.300 crores, the company is a joint venture between Surana Telecom & Power Ltd and
Bhagyangar India Ltd.

Narendra Surana, Managing Director, Surana Group, points out that production of solar cells
would begin in three-four months, now that module production has got under way. The Andhra
Pradesh Industrial Infrastructure Corporation Ltd recently allotted 25 acres of land for the project
within the Fab City, Hyderabad.

The export-oriented facility is coming up in a SEZ-designated area and will enjoy fiscal benefits.
Around 10 acres of land will be utilized initially with the remaining area allocated for future
expansion. Its joint venture partner, Eco Progetti from Italy, will supply a 19-mw solar
photovoltaic cell production line, while a 38-mw module facility will be sourced from P. Energy
SRL. It could contact the Economic and Commercial wing of the Indian Embassy in Riyadh by
logging on to its website www.indianembassy.org.sa for customs duties on products exported to
Saudi Arabia as well as other rules and regulations.

As for dealers in food and consumer items, Haj is the right time to export their goods to the
Kingdom. To this end, they need to contact the Consulate General of India in Jeddah by logging
on to its website, which contains useful information on doing business with Saudi Arabia. This is
an exciting time of challenges and opportunities. Only those with a strong will, sound
technological base and innovative solutions can ride out the crisis.

Recession in India
Global economic meltdown has affected almost all countries. Strongest of American, European and
Japanese companies are facing severe crisis of liquidity and credit. India is not insulated, either. However,
India’s cautious approach towards reforms has saved it from possibly disastrous implications. The truth is,
Indian economy is also facing a kind of slowdown. The prime reason being, world trade does not
functions in isolation. All the economies are interlinked to each other and any major fluctuation in trade
balance and economic conditions causes numerous problems for all other economies.

According to official data, industrial growth in august has plummeted to mere 1.3% compared to the same
month in 2007. That definitely is cause of concern for policy makers and industries. This data also raised
fear of low GDP growth of India. It is being suspected that, our country will face huge problems in
achieving even 7.5% growth rate in this fiscal.

1.3 percent industrial growth is the lowest IIP (index of industrial production) data ever registered since
last ten years. April-august industrial growth rate is 4.9% which is also the lowest for the first five months
of a financial year in 14-year period except 1998 and 2001. To make matters worse, a member of the
PM’s economic advisory council and director of the National Institute of Public Finance and Policy have
confessed that India is going through industrial recession.

Several crucial sectors of Indian economy are likely to face serious problems in coming months. Foremost
among them is real estate sector. The demand for houses have reduced significantly and property prices
across India has registered 15-20% fall. Things are likely to get worst as another 20 percent drop in prices
is quite possible in coming six months. The woes of real estate have spread to construction industry as
well. Because of less demand for houses, construction companies are going to suffer big time. Financial
services segment is also likely to be a major victim of economic slowdown because of less demand for
credit and reduced liquidity in market.

These three segments account for almost one third of services GDP and because of their current and
impending plight, attaining 7.5% GDP growth in this current year is quite improbable. Industrial slowdown
will also affect transport services. Transport companies are likely to witness drastic fall in their business
and profits. Global recession will also lead to less tourists coming to India.

Broking houses put on the (de)mat

The finance minister may have offered a string of tax rebates and opened the floodgates for
investment, but he has also made an
attempt to rein in the animals of the stockmarkets. While the lurking subprime crisis, coupled
with fears of IPO recalls & failures, have kept the Dalal Street on tenterhook, the FM’s move to
increase short-term capital gains tax (less than 12 months) from 10% to 15% can be seen as an
effective mechanism to inculcate long-term investment habits.

This move has, however, not gone down well with the brokerage industry, which has already
seen a steep decline in the demand for demat accounts in the second month of 2008. After an
euphoric January, when against the backdrop of country’s biggest initial public offering(read
Reliance Power), a record number of demat accounts were opened, the Valentine’s month had no
love for brokerage houses. A volatile bourse led to a drop in demand for demat accounts by 30-
40%.

But love’s labour is still not lost. Companies such as Religare Securities, Motilal Oswal
Securities, Angel Broking, & SMC Global Investment are now conducting regular investor
education seminars and launching investor-friendly publications to sustain the momentum in the
stockmarkets. According to Vikas Vasal, partner, KPMG India, the increase in short-term capital
gains tax by 5 basis points is not something significant.

“The market going down was more of a sentimental reaction to the decision. A lot of investors
burnt their fingers in anticipation of short-term gains from the markets. In that earnest, the
decision was in the right direction, which would help develop investment habits amongst the new
investors. Basically, the move by FM will impact the day traders. The volumes may get impacted
in short-run but eventually markets should stabilise over a longer period of time,” feels Vasal.

According to Rajesh Kumar Singh, assistant vice-president, head, retail sales & internet trading
of SMC Global Investment, it would be a mismatch to compare business recorded in February
with January. “It was an unusual January when demand surpassed all expectations. What fuelled
the demand on the bourses was new entrants in the market who came for the sake of Reliance
Power IPO.”

“Individuals opening demat accounts with multiple brokers anticipating high returns. Another
reason was aggressive marketing by the brokers as quite a few of them offered free demat
accounts,” Singh explains. More than 17,000 demat accounts were opened with SMC in January,
which was almost four times the average demand in any month (4,000 per month). Religare
Securities also treaded a similar path. While January saw close to 50,000 demat accounts being
opened, February had the numbers shrinking to around 35,000.

“The past few weeks have been choppy. But we expect the success of GSS America IPO and
REC, which draw positive response from the markets, will help restore the confidence of new
investors,” says Shachindra Nath, group chief operating officer, Religare Enterprises. For Motilal
Oswal Securities, the story has been no different.

The company witnessed a 30% decrease in demand for demat accounts in comparison to January.
“However, it was a positive growth of 25%, when compared to numbers recorded in December.
The one obvious reason is the fall in investors sentiment across the globe and year-end tax
planning,” says Manish Shah, head, retail equities & derivatives, Motilal Oswal.

The brokerage house has now lined up seminars as a regular feature to educate the investors.
“We educate them in terms of their risk appetite. Profiling is a key. The publication is issued to
an investor on opening a new account. It educates them on dos and dont’s in stockmarkets and
risk reward information,” Shah adds.
Vinay Agrawal, executive director, equities – broking, Angel Broking, feels that the drop in
numbers is insignificant. He believes that a couple of good IPOs will help the demand curve to
cross the January benchmark again. For Angel Broking, February yielded 28,689 demat
accounts, a fall of 30% in numbers recorded in February when 41,663 demat accounts were
opened.

Recession: India's prospects in 2009

The global financial and economic crisis keeps getting worse. A couple of weeks back the giant
Citibank had to be bailed out with several hundred billion dollars in cash and guarantees from the
US authorities ("Citi never sleeps"�but apparently its management dozed off during some
crucial decisions last year).

Last week America reported November job losses of more than 530,000, the biggest single
month figure since 1974, taking the US unemployment rate to 6.7 percent, the highest in 15
years.

The US, Eurozone, UK and Japan are now officially in recession, in the sense of having
experienced two successive quarters of negative growth. Several analysts predict that the rate of
contraction of the US economy in this final quarter of 2008 may be at an astonishing annual rate
of 4 to 5 percent.

Similar pessimism pervades the other two largest economies in the world: Europe and Japan.
There is enormous uncertainty about the depth and duration of the current global recession. But
the majority of expert opinion now concedes a substantial likelihood that this will be the worst
recession since the Great Depression of the 1930s.

Both the severity of the financial crisis and its massive collateral damage to the real economy
have confounded the optimists over the past year. Quite often, experts claimed that "the worst of
the financial crisis is behind us", only to be bush-whacked by the next big bail-out or credit
seizure.

Equally remarkable, and much worse in impact, has been the speed at which the cumulating
financial crisis has throttled real economic activity since summer 2008. The rapid onset of
recession in industrial (advanced) countries has clearly overwhelmed the forecasting abilities of
many institutions, including the IMF.

As recently as July this year, the IMF foresaw the world economy growing at 3.9 percent in
2009, advanced economies at 1.4 percent and developing countries at 6.7 percent. By early
November (just four months later) these forecasts had been slashed down to 2.2 percent, minus
0.3 percent and 5.1 percent, respectively.

Global meltdown: Complete coverage

For its projections of US economic growth in 2009, the IMF swung from plus 0.8 percent in July
to minus 0.7 percent in November! And it's a safe bet that if the IMF were making a fresh set of
projections for 2009 today, all these numbers would look even worse.

Nor does the recent "advance release" of the global outlook for 2009 by UNCTAD provide any
succour. Like the IMF, the UNCTAD foresees global growth at just over 2 percent in 2009 at PPP
weights and at only 1 percent at market exchange rates. The latter number means that global
growth in 2009 is expected to be at only about a quarter of the pace enjoyed in 2006 and 2007.

Both institutions forecast severe damage to world trade, which is expected to expand at only 2
percent in 2009 as compared to over 9 percent in 2006 and 7 percent in 2007. For the Asian
giant, China, both the IMF and UNCTAD expect growth to slow to about 8.5 percent in 2009
from the scorching 12 percent pace of 2007. Interestingly, several China-based analysts foresee
much sharper deceleration.

What about India? How bad will it get for us? The official estimates of GDP growth for the first
two quarters of 2008/9 stayed above 7.5 percent. However, industry-wide indications after
September are uniformly gloomy.

There are reports of significant declines in output of automobiles, commercial vehicles, steel,
textiles, petrochemicals, construction, real estate, finance, retail activity and many other sectors.
Exports fell by 12 percent in dollar terms in October and advance information points to a similar
decline in November. After September, the economy seems almost to have gone over a cliff.

When available, the official data are likely to record a sharp slowdown in the second half of the
year, possibly steep enough to drag full year growth in 2008/9 to below 7 percent. What's more,
given the strongly recessionary conditions expected to prevail in the world economy in 2009,
there is no prospect of a quick turnaround in India. Indeed, on a tentative basis, I would suggest
that we might be lucky to achieve GDP growth of even 6 percent in 2009/10.

What about economic policy? Can we not deploy monetary, fiscal and exchange rate policies to
insulate our growth momentum from adverse external conditions? The short answer is: only to a
limited degree. I outlined the main arguments last fortnight (BS, November 27).

Monetary policy had already been aggressively loosened by early November and the RBI
provided a further, well-balanced package last Saturday, notably including a 1 percent cut in the
repo and reverse repo rates.

Given the continued high rate of CPI inflation through October (latest data) and, perhaps more
significantly, recent pressures on the exchange rate, the present scope for further policy rate
reductions appears limited. That situation might change if external imbalances improve if a
falling oil import bill and slowing non-oil imports outweigh the drop in export earnings and if
capital flows stabilize.

On the fiscal front, the government had pretty much exhausted the available fiscal space through
its record Rs 237,000 crore (4.5 percent of GDP) supplementary demand in October. Though
undertaken for quite different reasons, its timing may turn out to be quite fortunate.

Against this background the government was wise to limit last Sunday's "fiscal stimulus" to a
modest affair, totaling only about Rs 30,000 crore (Rs 300 billion), out of which two-thirds was
for "additional plan expenditure", which may not be fully spent this fiscal year.

It may be far more important to actually spend the already budgeted plan expenditure effectively.
If international oil and fertilizer prices stay at present levels, implying low or negligible subsidy
rates (looking ahead) on price-controlled domestic sales, then there may be a case for a larger
stimulus next year. Much will depend on the trajectory of revenues and other expenditures in a
slowing economy.

While such unprecedented monetary loosening and massive supplementary expenditures will
definitely help, they will not fully neutralize the negative impact of the severe global financial
and economic crisis on India's exports, investment and consumption.

With over 60 percent of global GDP having toppled into recession, a significant deceleration of
India's economic growth is simply unavoidable. After all, we share the same planet as America,
Europe and Japan (and a rapidly slowing China). In this context a 6 percent economic growth in
2009/10 will be pretty good...if we achieve it.

Industry worried over impact of US

recession on India
The industry and economists are worried over the impact of recession in
the US on exports and stock markets, as the US is India's largest market
for goods and services. The National Bureau of Economic Research of the
US has now admitted that the country has been in recession
for a year.Economists point out that the US recession comes against the
backdrop of the merchandise exports falling in October for the first time in
five years and stock market indices dipping over 50 percent over the last
year."Exports in October were 12 per cent lower than in the same month of
2007. This is a clear indicator of the effect of recession in the US and
Europe on India," said Mr D. K. Joshi, Chief Economist,
Credit Rating Information Services of India Ltd(CRISIL)."The global
economic slowdown has also result edin a lower demand in their
economies and only few buyers are coming to India now. This has also led
to af all in the prices of export goods," he added.Cumulatively, exports
totalled$108 billion in the first seven months, giving rise to doubts whether
the target of$200 billion for the fiscal
Investors Awareness

Regulatory
Framework

The Indian Capital Market is governed by various Acts, Rules and Regulations (main on
being mentioned herewith) and primarily supervised by the Securities and Exchange Board
of India (SEBI) which came into being in 1988. SEBI supervises the role of the stock
exchanges (like BSE, NSE, etc.) and the depositories (CDSL & NSDL) for the overall
development of capital market environment in India and also monitors and regulate their
activities. SEBI is responsible to the Government of India and comes under the direct
preview and supervision of the Ministry of Finance.
• Indian Contract Act, 1872
• The Companies Act, 1956
• Securities Contracts (Regulation) Act, 1956
• Securities Contracts (Regulation) Rules, 1957
• Securities and Exchange Board of India Act, 1992
• SEBI (Stock Brokers & Sub-Brokers) Rules, 1992
• SEBI (Stock Brokers & Sub-Brokers) Regulations, 1992
• SEBI (Insider Trading) Regulations, 1992
• SEBI (Prohibition of Fraudulent And Unfair Trade Practices Relating to Securities
Markets Regulations, 1995
• The Depositories Act, 1996

Trading Account
Code

A client is required to sign the client registration requirement with the broker with whom he
agrees to trade. Each Client is provided with a Unique Client Code wherein all his
transactions of buy and sell of securities will be executed

Right to
trade
 To trade in any segment, a client must have the right to trade in that particular segment.
This right is received from the Exchange after signing the requisite documents along with
the supporting documents as required by the regulatory authorities.

Derivatives Market
Derivative is a product whose value is derived from the value of one or more basic variables
called bases in a contractual manner. The Futures & Options market being a highly
leveraged market, it is of utmost importance that rules governing Margins and MTM
collections are not violated.
Towards this end NSE Risk Management System has a real time system for calculation of
margins and exposure on positions taken by clients and Clearing Member.
Product Offer in Derivatives:
1. Futures on Individual Securities
2. Options on Individual Securities
3. Futures on NIFTY Index
4. Options on NIFTY Index

Important Terminology in Derivatives Market:-

1. Futures:- Future contract is an agreement between two parties to buy or sell an assets at
a certain time in the future at a certain price.
2. Option: - Option are of two Type: - Call And Put. Calls give buyer the right but not the
obligation to buy a given quantity of the underlying assets, at a given future date. PUTS
give the buyer the right but not an obligation to sell a given quantity of the underlying assets
at a given price on or before a given date.
3. Hedging (Calendar Spread):- A Calendar spread is a position in an underlying with one
maturity which is hedged by an offsetting position in the same underlying with a different
maturity. For Example a short position in a Nov future contract on Reliance and a long
position in the Oct future contract on Reliance is a Calendar Spread. Calendar Spread
attract lower margins because they are not exposed to market risk of the underlying.
Calendar Spread effect is remove during the last 5 days of the Expiry of the contract.
4. Contract Cycle: - The Period which a contract trades. The Contracts on the NSE Have 3
Months cycles which expires on the last Thursday of the month.
5. Expiry Date:- It is the date specified in the future contract. This the last day on which the
contract will be traded, at the end of which it will be cease to exist.
6. Initial Margin: - This is the amount that must be deposited in the margin
account at the time a future Contract is first entered into is known as Initial Margin.
7. Exposure Margin: - This is some what lower then the initial Margin . This
margin is charge in case if the client carried forward its open position for the next

Equity Market
The equity trading is offered on both BSE and NSE segment, on T+2 settlement cycles.
Certain Term in Equity Market:-
1. Gross Exposure: - Gross Exposure is the combination of Buying Exposure as well as the
Selling Exposure.
2. Buying Exposure: - Buying Exposure is the amount upto which the client can buy the
shares and keep its open position.
3. Turnover Exposure:-Turnover limits restricts sum of buy and sell value of the client.
Turnover is the total trading that takes place through out the day. It is always calculated in
such a way that the transactions entered by the client is added up to come to the actual
position
4. Transaction for delivery: - It means the client intends to give full
(fund) consideration for his purchases or give full delivery for his
sales for settling the trade. In case of delivery sale transactions, the
shares available in his demat account of CDSL will only be
considered. In case of delivery purchase, clear funds available in his
ledger will only be considered. Transactions for delivery are also
referred to as Investment Transactions. 5. Transaction for trading
(Intraday):- It means the client will square off his purchase or sale
position before the cut off time and will not take or give delivery of the
shares transacted. Transactions for trading are also referred to as
Trading Transactions. Surveillance Check of the Orders
Placed by the Client

In case of Cash Market:-

• Exposure
• M2M
• Maximum Single order Quantity
• Maximum Single order value
• Minimum Single order Quantity.
• Minimum Single Order value.

If the Client Orders pass through all the Surveillance Check then the client gets order
confirmed and the same is Executed if the price and time match with the opposite counter
Party.
In Case Of F&O market:-
 • Margin Available
• M2M

If the Client Orders pass through all the Surveillance Check then the client gets order
Confirmed and the same is Executed if the price and time match with the opposite Counter
Party.

Type of Risk
All investments involve some form of risk. Consider these common types of risk and
evaluate them against potential rewards when you select an investment.
Industry/sector risk: - Industry risk relates to uncertainties caused by particular features of
the industry sector in which a company operates.
Exchange risk: - A number of companies generate revenues in foreign currencies and may
have investments or expenses also denominated in foreign currencies. Changes in
exchange rates may, therefore, have a positive or negative impact on companies which in
turn would have an effect on the investment of the fund.
Credit Risk: - In short, how stable is the company or entity to which you lend your money
when you invest? How certain are you that it will be able to pay the interest you are
promised, or repay your principal when the investment matures?
Market Risk: - At times the prices or yields of all the securities in a particular market rise or
fall due to broad outside influences. When this happens, the stock prices of both an
outstanding, highly profitable company and a fledgling corporation may be affected. This
change in price is due to "market risk". Also known as systematic risk.
Inflation Risk: - Sometimes referred to as "loss of purchasing power." Whenever inflation
rises forward faster than the earnings on your investment, you run the risk that you'll
actually be able to buy less, not more. Inflation risk also occurs when prices rise faster than
your returns.

Settlement
Settlement No. :-
Each trading day have a unique settlement no. and the trade on that can be identified with
the help of that settlement date.
Settlement Process:-
1. In case of Cash Market: - Transaction in cash market is settled on T+2 Basis. After that
every client is required to make the payment of its debit for purchase or can take out the
payout of its credit in case of sell.
2. In case Of FO Segment: - All Future and options contract are cash settled on T bases.
Power Of Attorney:-
If the Investor sign the POA (Power of Attorney) in that case whatever share which the
investors sold are directly place by the broker itself if the shares are lying in client DP or the
Broker Beneficiary account
Auction:-
Whenever any client sold there shares it the obligation of that client to make the
arrangement of delivery of that shares to its respective broker so that it can place the
shares to the exchange. But in case if the shares which are sold by the client are delivered
short by the clients and which have to go to the exchange are auctioned by the exchange.
Final Bill for the auction is entering on T+5 Bases.
Payout Shortage:-
Sometime it happens that shares are short delivered by the exchange to the client in such
case on T+3 exchange give opportunity to take participate in the auction market and then
on T+4 (in case of BSE) and T+5( in case of NSE) shares are delivered to the client by
exchange.

Margin/Payment Collection
1. In case of Cash Market: - As per Exchange all the Investors are suppose to make the
payment of its buying on T+2
2. In case Of FO Segment: - All the investors are required to make the payment of there
MTM, Margin shortfall on T+ 1 Bases.

DOs and Don’ts for investors

Investing in Derivatives

DOs Don’ts

Go through all rules , regulations, bye- • Do not trade on any product without
laws and disclosures made by the knowing the risk and rewards associated
exchanges with it.
Make ensure that the contract note has
been issued by the ARG’ s authorized
person only,
Pay the brokerage/ payments/ margins
etc. to the ARG or authorized person only.
Ensure that for every executed trade you
receive duly signed contract note
highlighting the details of the trade along
with your unique client-id
Ensure receipt for collateral deposited
with ARG towards margin
Go through details of Client-Broker
Agreement and know

your rights and duties.

Be aware of the risk associated with

your positions in the market and
margin call by ARG.

Collect/pay mark to market margins

on your future position on a daily
basis.

Dealing with Brokers & Sub-brokers

DOs Don’ts

State clearly who will be placing orders on your • Do not pay more than the approved brokerage.
behalf. • Do not undertake deals for others.
Insist on client registration form to be signed by you • Do not neglect to set out in writing, orders for hig
before commencing operations. value given over phone.
Insist on contract note/conformation memo for • Do not sign blank delivery instruction slip(s) whil
trades done each day. meeting security pay in obligation.
Insist on bill for every settlement. • Do not accept contract note/ confirmation memo
Ensure that name of ARG, trade time and number, signed by any unauthorized person.
transaction price and brokerage are shown distinctly • Do not delay payment/ deliveries of securities.
on the contract note.
Insist on periodical statements of accounts.
Issue cheques / drafts in favor of ARG.
Ensure receipt of payment/ deliveries within 48
hours of payout.
In case of disputes, file written complaint to
Customer Grievances within reasonable time.
In case of sub-broker disputes, inform the H.O.
about disputes within 6 months.
Familiarize yourself with the rules, regulations and
circulars issued by stock exchanges/ SEBI before
carrying out any transaction.

Dealing in Securities
DOs Don’ts
 Complete all the required formalities of opening an • Do not trade on any product without knowing the
account properly (Client Registration, Client and rewards associated with it.
agreements forms, etc.) • Do not hesitate to approach the proper authoritie
Read and properly understand the risks associated redressal of your doubts/ grievances.
with investing in securities/ derivatives before • Do not leave signed blank Delivery Instruction S
undertaking transactions. of your Demat account lying around carelessly or
Ask all relevant questions and clear your doubts with anyone.
your R.M. before transacting.
Be vigilant in your transaction.
Insist on a contract note for your transaction.
Verify all details in contract note, immediately on
receipt.
Crosscheck details of your trade with details as
available on the exchange website.
Scrutinize minutely both the transaction and the
holding statements that you receive from ARG’s
Depository Participant.
Keep copies of all your investment documentations.
Handle Delivery Instruction Slips (DIS) Book issued
by DP’s carefully.
Insist that the DIS numbers are-printed and your
account number (client id) be pre stamped.
Pay the margins required to be paid in the time
prescribed.
Deliver the shares in case of purchase within the
time prescribed.
Be aware of your rights and responsibilities.
In case of complaints approach the right authorities
for redressal in a timely manner. “These Policies are
subject to changes from time to time as per decided by
ARG Management.”

21
Broking and

UNIT 7 BROKING AND TRADING IN EQUITY

Trading in Equity
Objectives
The objectives of this unit are to:
l highlight regulations related to broking and trading in equity in India;
l indicate role of self-regulation vis-a-vis legislative regulation of securities
market; and
l discuss the trading practices in equity market.
Structure
7.1 Introduction
7.2 Security Contract (Regulation) Act, 1956
7.3 Regulation on Brokers and Sub-Brokers by SEBI
7.4 Self-Regulation
7.5 Trading in Equity
7.6 Summary
7.7 Self Assessment Questions
7.8 Further Readings
7.1 INTRODUCTION
Stock brokers play an important role in securities market transactions. They act as an
intermediary between buyers and sellers of securities, who would otherwise need to
spend lot of time and cost in their search of buyers and sellers. Liquidity is improved
with the presence of active stock brokers, who through their network, either in open
outcry hall or in computer trading systems are constantly in touch with other brokers.
Some brokers also create market by giving two way buy-sell quotes. The process of
buy-sell discovery, which is one of the most important features of the stock market is
achieved with the help of stock brokers. Without stock broking community, it would
be impossible to run the stock market transactions, which now runs into billions.
Yet another problem of direct dealing is credit risk associated with counter parties of
transactions. Broker to a large extent takes out such risk of trading by becoming a
member of clearing house/corporation and restrict their dealings only with the
members of clearing house/corporation. Clearing house/corporation generally assures
performance of trade even though a member of clearing house fails to perform the
contract. Since brokers deal with crores of Rupees, there is a need to regulate them.
Regulations covers registration of brokers, capital adequacy, inspection of records and
punishment in case of any violation of regulations. In this unit, we will cover the
regulation relating to stock brokers and trading of equity. Stock market transactions
and stock brokers are governed by Securities Contract (Regulation) Act, 1956 and
stock brokers are in addition governed by SEBI Regulations and self-regulations.
Initially, we will cover these regulations before discussing the market practices
relating to stock market operations.
7.2 SECURITY CONTRACT (REGULATION) ACT, 1956
Securities Contract (Regulation) Act 1956 and the rules made there under, namely in
Securities Contract (Regulation) Rules, 1957 are the main laws governing securities
market trading.
22
Financial Market:
Operations and Services
The preamble to the Securities Contract (Regulation) Act states that it is ‘an act to
prevent undesirable transactions in securities by regulating the business of dealing
therein, by prohibiting options and by providing certain other matters connected
therewith”. This Act provides for the direct and indirect control of virtually all
aspects of securities trading and the running of the stock exchanges. The Act makes
every transaction in securities in any notified State or area illegal and punishable by
fine and/or imprisonment if it is not entered into between or with members of a
recognized stock exchange in the state or area. It also makes every such securities
contracts void.
The Act thus prohibits the existence of other than recognised stock exchanges and
provides the mechanism of recognizing stock exchanges. Application to the Central
Government for recognition must include a copy of the rules relating in general to the
constitution of the stock exchange and in particular to, among other things, the
admission into the stock exchange of various classes of members, the exclusion,
suspension, expulsion and readmission of members, and the procedure for registration
of partnership as members. In determining whether to grant recognition, the Central
Government may make whatever inquiry is necessary and impost in the rules and
bye-laws of the stock exchanges whatever conditions are required to ensure “fair
dealing” and to “protect investors”. These conditions concern, inter alia, the
qualifications for members, the manner in which contracts are to be entered into and
enforced, the representation of not more than three Central Government nominees on
the board of the stock exchange, and the maintenance of books and record by
members and their audit by chartered accountants. The Central Government has the
power to impose further conditions, other than in the rules, such as limiting the
number of members. Finally, the Central Government has the power to unilaterally
withdraw recognition.
After it recognizes a stock exchange, the Central Government exerts regulatory
control over it. Periodic reports are furnished to the Central Government. Certain
books and records are maintained for a period of five years. The Central
Government can make an inquiry itself, or through an appointed third party, into the
affairs of a stock exchange or any of its members. All officers, directors, members
and others who have had dealings in the matter under inquiry are required to produce
requested documents, statements, or information.
The Central Government retains control over the stock exchange’s bye-laws and its
rule amendments. A stock exchange, subject to previous Central Government
approval, has the authority to make bye-laws for the regulation and control of
contracts and the regulation of trading. Similarly, no rule amendments have effect
until they are approved by the Central Government. The Central Government,
furthermore, has the power to direct stock exchange to amend its rules; and if it fails
to do so, the Government may directly amend such rules. The Securities Contract
(Regulation) Act grants the Central Government power to supersede governing body
of a recognised exchange. The suspension of business may be complete or subject to
conditions. Suspensions may not last more than seven days initially but may be
extended from time to time. The Central Government may supersede the governing
body of any exchange by declaration and then appoint any person or group of persons
to exercise and perform all the power and duties of the governing body.
Other powers granted to the Central Government include the ability to stop further
trading in specified securities for the purpose of preventing undesirable speculation,
and the power to compel a public company “ in the interest of the trade or in the
public interest” to list its securities on any of the recognized exchanges.
23
Broking and
Trading in Equity
Activity 1
i) What is a recognised stock exchange?
......................................................................................................................
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......................................................................................................................
ii) Name any three important reasons to have stock exchanges.
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iii) State some of the recent changes in SCRA relating to derivatives contracts.
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