I

THE FINANCIAL SECTOR:

TRANSFORMING TOMORROW

1. Financial advisors
Weigh impact on investors

Financial advisors play a crucial role by enabling investors to access a large range of products, which
cater to their diverse needs. They have access to advanced technology that enables them to not only
meet investors’ demands but also add significant value to their financial assets. They assess investors’
risk appetite, and customise solutions as per investors’ risk reward profile, which would help in setting
realistic financial goals. They help in rebalancing investors’ portfolio at milestones in their life such as
bachelorhood/ early marriage, birth of kids, mid-service, towards retirement and after retirement.

However, financial advisor’ services involves a learning curve and investors have to follow a step-by-
step guide to become successful. It is important that investors be well versed with basic investment
strategies, which would help in spread evenly among various instruments. Also, the informed
investors would be mentally prepared to face negative returns, if any, due to market volatility. A
financial advisor makes sure that the product offering matches its risk/return expectations. However,
your account is at your discretions and you are free to interfere in selection of products/scrips and to
know other investment details. Further, besides the advice from the financial advisor, you are free to
use yours’ judgment.

A survey in the US reveals that investors often do not seek help unless they are forced by
circumstances. It could be birth of a child that could make investors think of child’s future and
investment for the same. Or it could be unfortunate incident like death of near and dear ones. The
survey also indicates that awareness about the importance of financial advisors’ services is more
among the well heeled investors. Others do not consider it as important. In US financial advisors
actually provide a bouquet of services. These include regular portfolio review, financial planning
assistance, retirement asset management, and investment recommendations.

In Indian case, many of the advisors are actually commission hungry distributors who often push
schemes that suit their need. The level of understanding among the front office distribution officials is
not good. This often leads to mis-selling. It is not only the single location financial distributors who
are to blame; often banks and companies play mischief by churning portfolios of its clients. Indian
mutual fund industry legs far ahead that of US in terms of distribution. While such surveys have not
been done, it is expected to be far behind in India. Birth of a revamped distribution system along with
qualified financial advisors is a crying need to protect mutual fund investors.

Financial planners
Value unlocking for investors

Investors across the globe have realised that financial planning is necessary for every individual. Even
salaried earner with little bit of savings should have a financial plan in place. And that is not
necessarily a one-time event. Fund investors indicated that investment through professional financial
advisors enhanced their decision-making, improved chances of growing their money, and given them
peace of mind about their investments.
 FINANCIAL SECTOR – TRANSFORMING TOMORROW

Wealth managers
Map out details to translate into benefits

With global financial biggies such as Goldman Sachs gearing up to manage the wealth of high
networth individuals in India, the wealth management industry is facing a serious talent shortage of
financial professionals. Experts believe that one needs both attitudinal and technical skills to be a
wealth manager; since, most customers like to deal with knowledgeable and committed wealth
managers; and security of financial and personal information is their bigger concern.

Inclusive CEOs
Innovative responses to problems

Welcome to the era of the inclusive CEO’, who embraces the concerns of board members, investors
and other constituencies. What does an inclusive CEO implies that he must be willing to engage in
dialogue with investors, employees and government; maintain transparency in his communications
and has ability to balance multiple at the times of contradictory interests. In a rapidly changing
corporate world, it is not the just the companies are changing; the CEOs as a breed too are evolving to
keep pace. The corporate boards are becoming less tolerant of poor performance of CEOs.

Risk management consultants

Educate, engineer and enforce

Small and medium exporters are taking up training courses to ride the roller-coaster currency market.
These courses have helped them in terms of fully hedging the risks and dealing in options and
forwards. The changes in the system have been so fast that exporters have not been able to adjust.
There have been instances where companies that were looking at expansion plans six month ago, are
now wondering how they will survive. Since the degree of uncertainty has increased, the margins have
come under pressure and the exporters are becoming enthusiastic about these courses.

Credit counselors
Resolve convertibility and recompensation issue

These counselors broadly cover three areas: Financial education, Credit counseling and Debt
management. Typically, these counselors conduct one-on-one sessions with financially distressed
borrowers. One of the main objectives of these centers is to create awareness among people on how to
use their finances. When you spend now and pay later, you are leveraging your future income. There
are a couple of questions to consider. First, what if for some reason the future income stops. Secondly,
what are you borrowing for? Is it to acquire an appreciating asset as a house to live in or promoting
your career by going for higher education or is to buy a luxury items and support an extravagant
lifestyle? Consumer debt is a dangerous spiral and very hard to get out of.

Microfinance professionals
Developing alternative credit delivery models

The new generation of professionals has accepted the challenge of reaching the poor in the urban
slums of metropolitan and rural India, but un-served by the banks. They are discovering a credit
vacuum, and are innovating new products and processes with which to fill it.
 FINANCIAL SECTOR – TRANSFORMING TOMORROW

As per government estimate 73% households lack access to financial system. 51.4% of the households
do not have access to any kind of financial institution. Of the remaining 27% have access to formal
financial institutions and the rest are dependent on informal creditors like private money lenders. In
all 72.7% do not have any access to formal financial institutions.

Tech savvy professionals

Take first step to ensure efficient and reliable system

The banking, financial services & insurance (BFSI) segment has been expanding much beyond its
captives, and looking at providing services and solutions, which can deliver higher value. The multiple
segments within BFSI are looking at solutions or services, which can provide them the edge in the
marketplace. For instance banking industry is looking at replacing existing technology and surround
services involved in adopting Core Banking Solutions (CBS) which include systems integration,
change management, program management, and customisation.

Continuing learning centres

Take informed decisions

Investors in the equity market are for exciting times as an increasing number of companies are hitting
the market with their initial public offerings. This requires additional evaluation skills on their part.
They must carefully examine the challenges in front of them to ensure that they do not miss out on any
opportunity while broad-basing their portfolio. Recently, there have been reports that even a university
is planning to get listed on the stock exchange. This is just one example; there are other examples
which call for a different approach. A stock exchange getting listed on another stock exchange is a
common example that has been witnessed across the world, and even mutual fund asset management
companies are planning to get listed. The result in more choices for investors requires them to explore
additional areas for information while taking decisions.

One-stop-shops
Dedicated to offer related services under a roof

One-Stop-Shop will provide all the financial services like insurance, mutual fund, debts, bonds &
debentures, bank deposits, post office schemes, stocks, paper gold, forex, foreign equity, and new
instruments which would form part of financial market. It would help to develop systematic
investment behaviour among investors to generate wealth and will not indulge in speculation. Smart
investors want to diversify and a financial advisor should be equipped with portfolio of assets where
investors can put their savings as putting all the eggs in the same basket is not advisable.

Handbook on: Basics of Financial Markets

NSE: Home
 THE FINANCIAL SECTOR

2. The future of RSEs – post demutualisation

There is virtually no trading at present at any of the regional stock exchange. Almost all of them
continue to function because of their subsidiaries, which are members NSE and BSE. And the member
of these RSEs trade on NSE and BSE as sub-brokers of the respective subsidiaries of the RSEs.
Besides most RSEs act as depository participants either directly or indirectly through their subsidiaries
and few of them run training programs for brokers and investors.

Companies listing fees payable to RSEs are huge in arrears, and many such regionally listed
companies are progressively seeking delisting from RSEs.

None of the RSEs, including the Calcutta Stock Exchange, which was always close to BSE in terms of
turnover till the mid 1990s, will be able to develop any worthwhile volume in trading in competition
with NSE and BSE. Moreover, RSEs will also have to give up their dependence on their subsidiaries
as a source of income as the stake of the RSEs in their respective subsidiaries will have to be reduced
to less than 15% of the shareholding of the subsidiary as per the recommendations of Anantharaman
Committee on “Future of RSEs – Post Demutualisation”.

Both NSE and BSE are contemplating either to create a separate trading platform for small and
medium enterprises (SMEs) under their own trading systems or to float a separate stock exchange for
the purpose. Sebi is reportedly considering formation of a separate stock exchange for small and
medium enterprises (SMEs). None of them seems to be considering associating RSEs in the third
trading platform. Even the Inter-Connected Stock Exchange of India (ISE) that has a common trading
platform with 13 RSEs seems to be not in picture.

The withering away of 20 RSEs, spread across the country, will result in a sharp deterioration of
services to the investors, as in the changed scenario members of these stock exchanges surviving as
sub-brokers of other members of NSE and BSE may not be as keen as they were earlier in rendering
services to the investors. Arbitration and redressal of investor grievance facilities offered by these
RSEs will cease to be operative.

Sebi, NSE & BSE as responsible bodies vitally concerned with development of the securities industry
and the interests of growing number of investors in the country need to give serious consideration to
the matter and evolve some strategy to ensure the survival of RSEs, particularly because hundreds of
crores of rupees spent on modernisation and automation will just be spirited away.

Regional stock exchanges: On revival path

Long forgotten as dead and buried, RSEs now appear to be rising from the ashes, thanks to the
infusion of fresh capital. RSEs have witnessed a surge on interest from both foreign and private
players to pick up stake in these exchanges.

NASDAQ, the largest electronic equity securities trading market in the US, is looking to partner with
Ahmedabad Stock Exchange (ASE). German multinational bank, Deutsche Bank is eyeing ownership
of 5% stake in the Delhi Stock Exchange (DSE). And BSE has recently picked up 5% stake in the
Calcutta Stock Exchange (CSE).

So, what has triggered the interest of such big players in RSEs, which currently survive through
floating subsidiaries and trading through sub-brokers of BSE and NSE? The answer lies in the
Corporatisation of exchanges. Today stock exchanges run like any other company. They exist and
operate to earn profits.
In India, the floodgates were opened when some of the original institutional shareholders in National
Stock Exchange – ICICI Bank, IFCI, IL&FS, PNB and General Insurance Corporation of India – sold
their 20% stake to a clutch of foreign buyers for over $ 460 million, thereby valuing the exchange at $
2.3 billion and above. The consortium of buyers comprised New York Exchange, General Atlantic,
Softbank Asian Infrastructure Fund and Goldman Sachs. There was immediate realisation that the
popular hunting ground for value picks was itself an asset waiting to be unlocked.

India traditionally had a number of local, regional stock exchanges which specialised in listing local
companies. Plus, depending on the nature of trading in that exchange, many other companies also
chose to list their shares on these exchanges. For instance, Calcutta Stock Exchange was traditionally
Number Two, after Bombay. So, Calcutta listed shares of not only many local companies but, given its
depth of trading, also attracted a large number of companies based elsewhere. Over the years, India
had about 23 recognised stock exchanges, including the two pan-national ones.

But, over time, many of these exchanges landed up in the redundancy ward. Why? One, because
listing in multiple stock exchanges meant not only complying with mandatory listing requirements of
each exchange but also meant incurring associated additional costs, including maintaining a larger
pool of administrative staff.

But, more importantly, the larger blow came from technological advances, such as the availability of
satellite links. This allowed the two large exchanges – NSE & BSE – to set up trading terminals in far-
flung places. Brokers in smaller towns who had to make do with shallow and opaque regional
exchanges, suddenly found an opportunity to trade on national exchanges which offered higher
liquidity and improved price discovery. This further reduced the attraction of regional exchanges. But,
the real death blow came in 2001 when market regulator Sebi banned badla, a home-grown deferment
product (inspired by a similar product in vogue in London). Badla was the mainstay of trading at
Calcutta, Delhi, Ahmedabad, Ludhiana and a few other exchanges (many of which indulged in this
indigenous trading form surreptitiously). In addition, the introduction of uniform trading cycle among
all stock exchanges in the same year – which reduced the arbitrage opportunities between different
exchanges across the country – future reduced the unique position of the smaller bourses.

The consolidation of stock exchanges is not unique to India. In the USA too, smaller exchanges are
being taken over either NASDAQ or New York stock exchange. The casualty list includes the trading
platforms of Philadelphia (the oldest in USA), Boston and Chicago.

One lifeline thrown by the government is the idea of allowing these smaller exchanges to double up as
commodity exchanges. Another plan is to revive an earlier scheme of using these regional exchanges
for local, smaller companies which cannot afford to go to the large exchanges. The feeling was
economic growth would create a whole new generation of small and medium-sized enterprises which
might need to access the capital market for funds but would probably be too small to figure anywhere
on the two national exchanges, where the trading is focused largely on 1,000 scrips.

With the Indian economy on an upswing, analysts expect the SMEs to play a huge role in future
exchanges. And RSEs are expected to provide these companies a stepping ladder to stardom. May be
RSEs can provide the right platform, but for this they need to advance themselves technologically.

According to Pratip Kar, former executive director of the Sebi, if RSEs want to capitalise on the influx
of foreign investments they should innovate to launch new financial products other than plain vanilla
equity trading. In the US, there are around 55 different stock exchanges. At present, there exist 18
stock exchanges in India. “May be in future, every exchange will have a distinct identity of its own.
For instance, NASDAQ in US is renowned for technology companies. Similarly, AIM at London
attracts SMEs from all over the world. RSEs need to study the pattern of transactions happening to
create their own niche and here lies their salvation.” Who knows, tomorrow the biggest IPO of the
country will be witnessed at these RSEs!
 THE FINANCIAL SECTOR

3. Mumbai - midway between London and Tokyo

Two years ago Finance Minister spoke about the strategic location of Mumbai and the intention of the
government is to position the city as regional financial centre (RFC). Mumbai was identified as the
prime location since it is situated midway between London and Tokyo, two of the top global financial
centres. The city has a time zone advantage – 4.5 hours ahead of London and 3.5 hours behind Tokyo.

Mumbai has financial infrastructure in the form of the two leading stock exchanges – NSE and BSE,
the two major commodity exchanges – NCDEX and MCX, and it houses the major regulators in the
financial sector - RBI and Sebi.

RFCs offer a wide range of international financial services but cater mainly to the needs of their
national economies. By conservative assumption, Indian households would consume international
financial services amounting to $ 70 billion a year by 2015, if GDP growth is sustained at 9%. Thus,
Mumbai can be an IFC with less reliance on foreign consumers in the initial phase.

The City of London Corporation has launched the GFC Index, which track fortunes, perceptions and
the competitiveness of major financial centres. Mumbai figures among the cities, which are not rated
highly and are reckoned as unlikely to improve in the near term.

Indeed, there is no city in the world that can become as GFC on the scale of London and New York,
within a 20-year horizon, in the way that Mumbai can. However, it alludes to the hard task ahead. A
committee was mandated to prepare the blue print for making Mumbai as a RFC. While dreaming big
is the first step towards achieving goals, a realistic assessment of Mumbai as an RFC is also necessary.

On people issues, the concerns are availability of requisite skilled personnel, business education and
the flexibility of the labour market. The third ranked centre in the GFC Index, Hong Kong has some
3000 international CFAs, 5000 solicitors and 1000 barristers. Needless to add, on this score Mumbai
has quite some distance to cover.

Quality of life is a criterion in attracting to Mumbai highly skilled professionals with international
experience. This would require some serious up-gradation of urban infrastructure including office
space, housing, transport, environment, education, leisure and entertainment.

The business environment issues cover regulation, taxation and levels of corruption, economic
freedom and ease of doing business. Anyone who has had to deal with the instrumentalities of the
government would certainly not rate Mumbai high on the parameters of ‘ease to doing businesses’.

Market access covers structural issues like capital account convertibility, limits to participation by
foreign investors in the Indian financial markets, volume and value of trading in equities, bonds and
foreign exchange, etc. It is well known that there is quite some work to be done in this regard.

Several of the 46 centres covered by the GFC Index study have successfully addressed the aspects of
competitiveness discussed above and are still far away from becoming global financial centres. Given
the momentum of the politico-bureaucratic engine in India, transforming Mumbai into an international
financial centre may remain a dream for quite some time to come.
 THE FINANCIAL SECTOR

That is, Mumbai!

Its average elevation is just about 10-15 metres from the sea level but it has several skyscrapers that
accommodate offices of domestic and multinational businesses. It spans a total area of 600 sq km and
has a population density of 22,000 per sq km. It accounts for nearly 20% of excise collections, 40% of
income ax mop-up and 60% Custom duty collections of the country. It boasts of per capita income that
is nearly three times our national average and is indisputably the commercial capital of India.

The city has generally been a peaceful ocean of men and women, on the shores of Arabian Sea and has
been a symbol of unity in diversity of the Indian culture. Starting with textiles, Mumbai witnessed
economic boom in many fields like manufacturing, shipping, banking, IT, media and films and
quickly grew to its current potion of prominence on the world map.

Rapid growth in various sectors created plenty of job opportunities and attracted migrants in large
numbers from surrounding towns as well as from distant states. Mumbai accommodates them all and
has given us many of our well-known businessmen, bankers, cricketers, singers and great actors over
the years. However, this very Mumbai has been in the news recently, for wrong reasons – of locals
versus migrant controversy.

Historically, Mumbai first gained from its natural advantage of climate conditions suitable for growth
of textile industry and then benefited by building up around the critical mass of business activities.
Good connectivity by air, sea, rail and road helped in movement of raw materials and finished goods
as well as for influx of labour. However, as business growth flattened and city’s basic infrastructure
came under pressure due to increasing population, locals started feeling the heat of industrialisation.

Politicians in the past have used this to their advantage and the same is now being attempted again.
Issuing of ID cards for local citizens, restricting inflow of migrants, driving away people of other
states or forcing everyone to follow the local language and traditions are all very parochial thoughts.
These concepts are basically flawed as they go against our Constitution that grants us freedom of
thought, expression and movement to any part of the country.

Moreover, such archaic ideas presume that growth of industry/business is not possible any further and
locals must be the exclusive beneficiaries of the past developments. We must discard all such
restrictive thinking and instead focus on creating true Special Economic Zones (SEZs) to serve as
employment generating hubs for export-led growth.

Further, international comparison shows that, Singapore, with an area of 700 sq km, has a GDP in
excess of $ 120 billion and Chinese SEZ – Shenzhen, with 320 km area, has a throughput of over $ 70
billion per year. We must aim for such productive norms and similar resource concentration while
planning the mega SEZs.

Rather than taking pride in the count of SEZs approved per state, there is an urgent need for active
intervention by the governments in identifying 10-12 blocks of 400-600 sq km each, bordering our
vast coastlines. These blocks can then be made available for development of mega SEZs complete
with air and seaport, rail / road / telecom network, power plants, warehousing, residential, educational
and recreational facilities, banks and post offices. Such mega SEZs only can help us reach our export
target by the year 2020 and also solve Mumbai kind of local-versus-migrant problems by creating
large number of attractive job options, away from Mumbai.

That is, Mumbai!

 II

SECURITY MARKETS
PRIMARY & SECONDARY MARKET

1. Follow the rules consistently

Currently, the Indian markets are in doldrums and nobody is talking of stocks or investments. Is it not
exactly the opposite of the exuberant times we were witnessing a few months back? It is true that
bottoms are made in turbulent times. But, it is difficult, if not impossible, to say when the market will
change the direction for the better.

Who knows, we might have already hit the bottom and the markets back to their upward trajectory.
So, follow the rules of the markets that will ensure reasonable wealth appreciation.

Bear in mind, you cannot have your cake and eat it too. Saving and consumption do not go hand-in-
hand. You need to plan today for the lifestyle you want after you stop working. Accordingly, save the
necessary portion of your income to invest in equities. Equities may appear risky – they go up and
down – and time is the perfect hedge against volatility.

Therefore, Rule No. 1: Plan for tomorrow, today. Start saving for it now! Stagger your investment
throughout your earning phase. Invest regularly and invest for the long term to buy in at an average
price that includes both markets’ up and down ticks.

Never wait until you have large amounts of money to invest. However small the amount you are able
to save, start early. The earlier you start, the better are your chances of making great wealth.
Remember to make great gains; time is crucial factor, as wealth creation is a factor of both the power
of compounding and the returns on your investments.

Accordingly, Rule No. 2: Start early so that the power of compounding begins sooner; time is the
magic that converts paise into rupees.

In exuberant phases, when we have earned good money from our investments, most of us get greedy,
and derivatives and futures provide an outlet for the expression of human greed. While such
instruments often satisfy the whims of human greed, if taken to unrealistic levels, irresponsible
investment in these securities can led to financial ruin.

Hence, Rule No. 3: Do not leverage, it is difficult, if not impossible, to predict short-term trends.

Buy markets, not stocks. We all know that our economy is in a secular phase of prosperity and the
stock market is the best proxy for the growth of an economy. To benefit from our soaring economy,
buy the market as a whole and not any single stock.

Consequently, Rule No. 4: Buy stocks that mirror the broader indexes, but never buy a single, or a
handful of stock exposure. This means that you need to spread your risk across various market
segments in the event a particular stock does not perform for reasons beyond the company’s control.
 SECURITY MARKETS

It is easier to predict company earnings, but difficult to predict stock prices of the same company in
the short run. Ironically, over the long term, stock prices mirror growth in a corporation’s earnings.

Therefore, Rule No 5: Look at company earnings, not at stock prices. Stock prices may tempt or give
the wrong impression of a company’s welfare. But to build real wealth in equities, you must always
rely on declared profits and facts, rather than make decisions based on stock movements.

We all tend to sell stocks when we have made profits and keep the ones that have not appreciated.
Eventually, we end up holding a portfolio of companies that are not performing! It is only human to
sell for profits and not to want to take losses.

Hence, Rule No. 6: Keep the winners, sell the losers. Stay on top of your investments. Check
constantly for stocks that are not performing and eliminate them from your portfolio if the outlook
does not seem promising. This way, you will have all winners left in your portfolio to take you to your
goals.

In exuberant times, we all tend to believe that the good times will last longer than they actually will.
And before D-day, we will be able to sell our investments that were bought at unjustified levels. Just
then, it happens that the markets turn and before we can sell out, we are left holding the bag.

For this reason, Rule No. 7: Avoid being the “biggest Fool;” it is imperative that you recognise the
difference between price and value. Buy value and not momentum.

When investing in stocks, your head should prevail over your heart. Resist the urge to get consumed
by market chatter. Ignore hot tips from dealers and friends. It is advisable to do your own home work.

As the result, Rule No. 8: Pick stocks with your brain, not your heart.

Large-caps are the ones that have already proven themselves over longer periods of time and have the
balance sheet acumen, strong cash flow and brains to manage businesses effectively according to
prevailing situations and realistic opportunities available.

Hence, Rule No. 9: Prefer large-cap stocks to small and medium-caps. Investments in small and mid-
cap stocks require expertise and strong tracking abilities, that without, your portfolio will
underperform.

Do not short sell a stock just because it is going up, and thus, one day it may come down. Newton’s
law is not applicable to the markets. What goes up does not necessarily come back down! If
companies are able to sustain earnings’ growth for long periods, then its stock may go up, up and up,
or it can ever remain high without any reason for a long period of time.

Because of this, Rule No. 10: Markets can remain irrationally up, or continually climb for the right
reasons. Therefore, never go short. It will expose you to unnecessary risks.
 SECURITY MARKETS

2. Front runners

Broad market participation, intense market strength, greater marketability and high quality business;
these are not bullet points of a power point presentation showing strengths; but the winning formula of
frontline stocks on Dalal Street. Often referred to as ‘market movers’, they decide if bulls would roar
or bears would hug stock markets on any given day. Here’s an insight into why these stocks rule over
others and the reasons behind their stable performance,

Market movers

A lot of investors confuse the identity of frontline stocks with companies that form part of National
Stock Exchange benchmark index, ‘Nifty’, and Bombay Stock Exchange benchmark index, ‘Sensex’.
Analysts point out that though most of the Nifty and Sensex stocks meet parameters, but all don’t
qualify as frontline stocks.

According to experts, frontline stocks can be best identified with characteristics of low to moderate
risk, high-quality business and high fancy among investors. Normally, their leadership position in the
industry not only helps them thrive in a deteriorating market but also outperform the benchmark in
booming markets. Generally they are the market movers. They have the capability to quickly rebound
from massive, market-wide sell off.

Delightful Mix

As a thumb rule, feel analysts, frontline stocks can comprise 50% of the total portfolio of retail
investor. If you are looking for liquidity, analysts recommend an allocation of as high 60-70%, since
exit is easy on a bad day. Eventually, they provide stability and liquidity to the portfolio.

As far as returns are considered, in s structural bull market, analysts say, we can expect these stocks to
deliver around 20-30% compounded annual average return. Though over a short-term, returns can be
negative, if the market becomes volatile. For instance, over the last three years, stocks (as on January
1, 2008) of companies such as RIL, SBI, L&T, BHEL and Bharti Airtel have all delivered average
annualized returns of 50% to 110%.

On the investment horizon, analysts believe that the investor should stay invested for a minimum
period of two-three years to reap good dividends. They are relatively stable stocks due to institutional
holdings, as most institutions are long-term players and do not take their investment decisions based
on short term volatility.

Zip Ahead

Frontline stocks deliver good returns even when the market is choppy. Experts say this is due to high
interest shown by foreign institutional investors and fund houses. These are stocks which have most of
the institutional interest and always trade at a premium against their mid and small-cap peers due to
continuous buying interest. Also, they are traded a lot and watched by many people.

On why the price of these stocks is relatively stable, analysts say that if a stock is cheap, speculators in
the market tend to buy it. And if a stock is costly, another set of speculators tend to sell it. Therefore,
the efforts of professional speculators make prices ‘fair’ and the normal investor benefits from their
efforts at zero cost. Also long-term investors feel safe to buy a liquid stock. Perhaps, that’s one of the
reasons why a driver who grabs a pole position eventually sets the track on fire and wins the race most
of the time!
 ‘
SECURITY MARKETS

Deep value stocks

They are believed to carry hidden treasure on Dalal Street. While investors call them the low-lying
unpolished gems of the stockmarket, brokers say there are big bucks to be made if you can identify
these stocks early. No prizes for guessing this, we are talking about deep value stocks which can do
wonders to one’s portfolio when market re-assesses them.

They are like any other stock traded on the exchange, but there is no hypothetical understanding to
them. These stocks generally remain neglected by the stock markets. The best (or you may call it
worst) part is that people know it’s a great story but still they don’t want to touch it. If one saw the real
estate boom in India five year back and bought into Unitech, his portfolio returns would have
multiplied phenomenally.

Analysts believe that there are two ways in which you can identify a deep value stock.

1. First, what Benjamin Graham recommends for the defensive investors in his 1949 classic –
that the stock price should not be more than 15 times its average earnings per share over the
past three years and the overall PE of the portfolio should not be more than 13. Or second, the
stock should be trading below its 10-year median PE.

2. The other things to be kept in mind is to stick with companies that have a long history of
consistent profit growth and steady dividend payouts and the fact that not every cheap stock
would turn out to a bargain.

Though opinions differ on an ideal investment horizon, most analysts agree that it should not be less
than a year and which could extend up to three to five years to reap big dividends. However, if the
stock does not give the required return even after holding for three years, there is something more than
one’s own understanding about the stock. In such a scenario, you could sell the stock and move to
something else.

Deep value stocks

 III

INDIAN ECONOMY
INDIA INC & INDIAN

1. India: the bird of gold

Services have been the star performer within the overall GDP growth story expending an average at
around 9 % p.a. since in ‘91. India’s advantage is clearly its manpower and the fact that it is a low-cost
base for operations of any kind, India will have an advantage in any sector that requires manpower.

The IT story
The driver of economic growth in our economy is IT services industry. Our country has experienced
phenomenal growth driven by this industry despite being one of the least technologically advanced
economies in the world, a country with a large population living in poverty and a country with a high
rate of illiteracy.

Telecom revolution
There was a phone for every 150 people in 1991-92. Today, 10 years after the sector was opened up,
the tele-density has improved many folds. It was the improved tele-connectivity and dropping
bandwidth prices that actually kick-started the success story of the IT sector.

The Retail boom

India has the largest number of shops in the world. Higher disposable incomes in the hands of
consumers are creating demand for all kinds of goods and services, including for items that were
considered “conspicuous consumption” till a few years ago. Retails also contribute to the development
of infrastructure and employment to people from all backgrounds.

Modern financial services

The last decade has been the transformation for the Indian financial services industry. The capital
market absorbs large inflows from FIIs and domestic investors, and feeds the financial needs of the
Indian corporates. Besides, the growth of the capital market has attracted intermediaries like private
equity and other funds that also channel large sums of money towards cash-hungry Indian industries.

Manufacturing sector

The India’s manufacturing story has yet to unfold and the Old Economy in India seems to have roared
back. The recession of mid-90s was the worst of times. Indian Inc invested heavily in modernising and
upgrading capacities and rationalising its bloated manpower. The process was painful, but the sector
emerged from leaner, meaner and fighting to fit. India Inc is once again on a capacity expansion drive.
And many Indian companies are aggressively eyeing overseas markets.

High growth generates its own momentum

The Indian economy grew a whopping 9.4% in 2006-07, beating the advance estimate of 9.2% and
pushing the absolute size of the economy to forty-lakh crore rupee or $ 1 trillion. The only time the
economy has grown faster was in 1988-89, when the growth rate touched 10.5%, recovering from a
crippling drought year before. In contrast, the growth in 2006-07 comes up on the top of a 9% growth
in 2005-06, 7.5% in 2004-05 and 8.5% in 2003-04.

Finance Minister said: “The results confirm the belief that the Indian economy has shifted to a higher
growth trajectory. High growth comes with high investment, which in turn, reinforces growth itself.”
 INDIAN ECONOMY, INDIA INC & INDIAN

2. India Inc: open for new horizons

Multiple growth engines

Before economic reforms were initiated, domestic corporates were running obstacles race under the
license regime and host of restrictive rules and regulations. Over the past decade, most obstacles have
been knocked down and corporates have been allowed to run largely unshackled.

All the economic changes nurtured India Inc, which in turn has delivered a change in lifestyles and
enormous wealth creation for the country at large. The global liquidity at competitive cost is an
opportunity to build India and becomes a fastest wealth creating country of the world.

Indian Inc is in spotlight today, as it is churning out commanding premium valuations. The investment
that India Inc is making today will yield great fruits in the next decade. Today Indian Inc can compete
with the best and win on every stage.

Corporate India has been flying high for the past few years on multiple growth engines. While
commodity cycle and outsourcings have their roots in larger global trends, others such as the
infrastructure boom and the Indian consumer story are homegrown.

In an emerging economy, the basic premise is that: “It can be a cheap location to supply goods and
services to the world.” Japan initially started as a low-cost alternative to the US and Germany, and
later went up on value curve. Korea and Taiwan followed the same route, and now China has emerged
as the factory of the world.

However, India’s success is in outsourcing, so far as more been in services, but with the revival of
manufacturing, the outsourcing story could take a large meaning over the next few years. In
manufacturing, pharmaceuticals, textiles and auto ancillaries are areas where there are companies built
on the premise of outsourcing.

Drivers of global economy

The world is not dependent on the US as it used to be in the 1980-90. Europe is growing. Asia is
growing and Latin America is growing. We see growth in many regions and there is low dependency
on the US. In the earlier period of 1960s there were economies like Germany and Japan that grew
really fast but they were very smaller than India or China, which are the today’s drivers of global
economy. China is producing a lot of things that are consumed in the West.

The Chinese supply shock is in terms of manufacturing and goods. However, the Indian supply shock
is a much longer-term issue as it deals with services. And after improving balance sheets for several
years, India’s future supply shocks will be in terms of manufacturing and goods.

Now, Indian corporates have an increased risk appetite for acquisition and expansions. A large number
of companies either announcing or already in the process of implementing large capacity expansions
or aggressive acquisitions. An unprecedented growth in the domestic economy over the last 3 - 4 years
has helped most Indian corporates to nearly double their financial numbers.

However, it still has a long way to go when compared on global scale. For the financial year ended
December ‘06, the average size of top 10 US companies was 19 times that of Indian companies in terms
of sales, and 15 times in terms of profit and 10 times in terms of market capitalisation.
 INDIAN ECONOMY, INDIA INC & INDIAN

The Tata – Corus deal

In the early hours of January 31 ’07, the Tatas outbid Brazilian rival CSN in an auction to acquire steel
maker Corus for $ 12.1 billion (and that is mind boggling Rs 54,000 crore!). This is the largest
acquisition ever undertaken by the Indian company and the second largest in the global steel industry.

The combined entity has consolidated revenues of $ 24 billion plus, making it the largest private
company. It will also be the fifth largest steel manufacturer in the world.

Interestingly, when Mr Tata got the final victory message, he was at Taj Mahal – the historic hotel
commissioned by his great uncle and group founder Jamsetji Tata. Legend says Jamsetji Tata built the
hotel after being refused entry to a British-run hotel in the late 19th century.

The importance of the transaction lies beyond the numbers. It demonstrates that Indian companies
have the financial muscle, the sophistication, and the self-confidence and emerge victorious. The
global Indian takeover has truly come of age.

This is one merger where the managements on both sides will be under enormous pressure to weld a
historical Anglo-Dutch company and its 24,000 employees into another historical company, the Tata
Steel. It is integration across 3 countries; remember Corus is an amalgam of a Dutch company and
British Steel.

The Tatas have a standard rulebook for overseas acquisition – leave the local management in charge.
The Tatas have been in the UK for years, and already employ about 3,000 people there. Also, this is an
industry they know and well. But a huge debt bomb ticking, and sheer size; they’ve never handled
anything of this size before.

History suggests that digesting large deals that creates value for the shareholders is challenging. The
challenge that Tatas have to overcome is to improve Corus’ operation margins, control costs, and get
the best practices of both sides locked into a common grid. That’s a tall order and requires financial re-
engineering, industrial re-engineering, and a mammoth human resources challenge.

Let’s take cost first. The Tatas have said they are looking for $350 million of cost savings. There is,
usually, in many older companies like Corus plenty of room to tighten costs – administrative costs,
process costs, improving efficiencies, and so on.

India has vast, untapped reserves of iron ore and coal and is currently a net exporter of steel. As Corus
has offices in various parts of the world, the Corus acquisition will boost Tata Steel’s reach in the
global market and providing access to customers in Europe and elsewhere.

The house of Tatas has shown the importance of this acquisition for them in their strategic vision. This
also shows their compulsions to retain market shares and acquire global positioning. The deal seems to
be a strategic masterstroke in the fast-consolidating steel landscape. Strategically speaking, the
acquisition fulfils a deep-seated need for Indian steel producers to find access to mature markets.

The Tata – Corus deal

 IV

THE SECURITY MARKETS

MUTUAL FUNDS

1. Saving & investment

Saving

Saving is the surplus that you set aside from your income or more commonly what is left after you
have met all your spending needs. It is generally the first step towards generating wealth. However,
many of us do not go beyond that first step of saving. Today, depending on the volatility you can
stomach and your investment time horizon, there are investment options that can offer you
significantly higher returns and help you to truly generate wealth.

Investment

Investment is laying out today’s money for more in the future. It is about performance of the
underlying assets. Success in investing is the outcome of a disciplined approach. It can broadly be
divided into three main genres: debt, equity and other physical assets.

Investments should definitely be made based on the one’s needs and goals, the return offered by
various instruments and the time frame for which one wants to remain invested.

Each of the financial product available today – ranging from bank deposits, bonds, g-secs, life
insurance, mutual funds to stocks – is structured along factors such as term, risk, and liquidity to meet
different needs.

A financial planning exercise will define financial goals, understand how distant they are, and of
course, how much will be required to meet them. Financial goals are typically major life goals, such
as child’s education, a home, a retirement corpus, and a vacation, among others. For instance, if a
35-year-old salaried man has a wife and 10-year-old son; his short-term financial goal could be a
family vacation, his medium-term goal to get his son into a good college and long-term goal to retire
with a healthy pension. For this, he could save in a bank deposit for the short term, a child education
plan to secure the child’s education, and a long-term pension plan with equity exposure for the long-
term goal. However, for a 55-year old, the child might already be earning and standing on his own
feet, and retirement might be a short-term goal. Hence, he would need to look at lower equity
component for his retirement goal.

Stock market is no different from playing a Russian roulette. Either you are lucky or you are a dead
man. The stock market for retail investors could be anything – a ground for giving kicker to portfolio
returns or a dangerous play. Fortunately, Mutual funds help in owning and managing a variety of
investments. They span from options in the relatively safe zone to the relatively high risk - high
reward zone. However, investment options are getting complicated day-by-day. The enormous
categories, various asset classes, many product innovations and hundreds of schemes, make the
investment process difficult and confusing. It’s your hard-earned money, so always look for funds that
deliver the best risk-adjusted returns.

Start by trying to understand the concept of risk: liquid funds are the schemes with minimum risk;
floating rate funds form the next level of risk; balanced funds stand between debt and equity funds;
and the equity funds carries the highest level of risk. So research your investments, remember your
goal, re-examine your risk appetite – so that your money can work as hard as you.
 MUTUAL FUNDS

Systematic investment plan

This seems to be the latest investment mantra of India’s small and conservative investors. After all,
having gone through all those years of ups and downs and experienced all sorts of volatility, they now
need some fixed and logical way of investing, which would not only promise them good returns but
also ensure their safety. A systematic investment plan seems to be a way out!

Simply put, SIP is a simple, time-honoured strategy designed to help investors to accumulate wealth in
a disciplined manner over the long period of time and plan for a better future.

SIP works on the premise of rupee cost averaging. Even seasoned investors find it difficult to predict
the ups and downs of the stock market. Hence, the best resort is to go in for a disciplined way of
buying units on a monthly or quarterly basis. By doing so, investors can avoid the temptation of timing
their investment. “Market timing” is an activity that is best left to professionals. The investor
automatically ends up buying more units at lower NAVs and lesser units at higher NAVs. Therefore,
on a net basis, investors will be able to average out their unit costs over a period of time.

Navigate carefully

It is meaningless to say that a mutual fund is cheaper just because its NAV is Rs 10 during the new
fund offer. It is not an IPO of a stock. It is just a pooling of investments to buy a large bunch of shares.
Also, there is nothing called a high NAV. After all it is simply the net market value of your
investments divided by number of units.

It is the oldest selling tricks by MF distributors: “They say that in the new fund offer, units would be
available at Rs 10 and this is as cheap as you can get”. Then there are some who ask you to sell off a
fund citing that its NAV has become a giant figure and its time to book profits. Both the statements are
meaningless. The distributor is simply peddling wrong information to sell you his funds.

Consider indirect loss of time besides an opportunity cost of staying out of the market. Much of the
gains go in vain as the deployment of the money mobilised through an NFO takes at least two-to-four
months. If the market rises further during the process, a fund manager is likely to buy the same stocks
at a higher price only adding to your costs.

Don’t churn your funds

The high incidence of churning in equity funds is alarming and is detrimental to long-term wealth
building. For fund investors, that’s a worrying sign. First, there’s a tremendous amount of pressure on
the fund manager to perform. And secondly, excessive churning harms to your long-term wealth
building. If you must switch out of a fund, make sure that’s it for a long-term goal like rebalancing
your portfolio.

Switching can be necessary at times. You cannot invest in equity and sleep over the investment. For
instance, in a situation when mid-caps aren’t doing well, investors should realign their portfolio and
move into large-cap stocks.

Short-term churning will only add to the constant pressure of keeping a tab on your investments and
worrying about its performance daily. It forces fund managers to look for riskier equity investments
and thus disturb the investment rhythm. You have to give time to your fund manager to perform and
have faith in his investment call. If you want to build wealth, stay put.
 MUTUAL FUNDS

Emergency Fund

Good planning leads to sound investments; but an important aspect of planning also involves saving
for the rainy day; because often in such times, we may have to dip into our investments, which derails
our whole financial plan and outlook. To avoid such a situation planners suggest it is necessary to
have an ‘emergency fund’, which not only acts as a buffer but also helps get through those tough
times.

Need of the hour

We may be an expert in planning and calculations, but it takes only one uncertain situation to throw
every-thing haywire. In fact, there are times when we find our self in a situation which we never
factored in or planned. And it is in these situations that a contingency/emergency fund makes things
easier for you. Analysts feel that it is better to depend on our emergency funds instead of borrowing
from friends and relatives, or sometimes from banks or credit card companies – where we can end up
repaying for years. Experts opine: If there is a buffer created for an emergency, there will not be the
additional worry about the costs of the situation and we’re free to combat just the emotional impact of
the loss.” In order to maintain the standard of living, we should keep aside funds for expenses of many
numbers of months.

Getting it right
The emergency fund should be able to support our contingency plan as and when the need arises. For
this to work out, it is necessary that we should have the right mix of financial products in our
emergency fund. Financial planners hold the view that emergency fund should be a combination of
both, our monthly expenses (say, three month expenses) and the amount which will be required in
some kind of emergency. Such a fund should be easily accessible and have high liquidity.

Liquidity refers to how quickly an asset can be converted into cash. Our house is not a liquid asset
because it could take months to sell it. Stocks are somewhat more liquid than real estate, but we can
lose money on stocks if we’re forced to sell at a time when the market is less than favourable. “Saving
accounts, liquid funds, fixed deposits and short-term bonds are all good places to stash the cash we
may need on a short notice. These are the most liquid investments. Experts believe that even though
interest on liquid investments may be barely kept up with inflation, the lower risk is worth the lower
return when we may need the money quickly.

Determining factors
Normally, people need emergency funds either in case of medical needs or retrenchment. If you have
adequate medical insurance and the insurance company offers cashless facilities, we can keep fewer
amounts in the emergency fund. Similarly, in case of retrenchment, it depends on the industry,
employability and age.

We should not use the emergency fund for daily expenses or taking a vacation or indulging in some
luxury. This should be a forbidden territory where we enter only when there is an emergency or
causality. Obviously, the need should be of a greater emergency than the one originally envisaged.
Experts hold the view that liquidity should be the top-most criteria while investing in emergency
funds, followed by capital protection. However, even within these constraints, it is possible to
optimise the post-tax returns. Around 20% of emergency fund should be total liquid cash and rest 80%
should be kept in form of FDs or liquid debt funds. Financial planners suggest that we should not
delay setting up such a fund and build it over a period of time. Do not plan for future for creation of
emergency funds. In fact, start today even with smaller amount. And we should spread it over from
high liquidity to little lesser liquid as we do not need the money in one go.

Emergency fund
 MUTUAL FUNDS

2. Bullion market

In the world of personal finance, it has been proven beyond any doubt that gold not only adds glitters
but also stabilise an individual’s portfolio. But the mode of investment – through which you can
maximise returns in bullion market – has been a constant topic of debate. Here is how we can
effectively manage our gold portfolio.

Gold Funds

Historically, gold mining stocks have evoked the fancy of investors, as compared to gold. For
instance, the GDM index, an index of gold miners, has moved up 6.5 times since 2000 as compared to
gold price, that has increased by three times during this period.

Analysts believe that by investing in a fund, which invests in gold equities, we get the dual benefit of
access to fund manager expertise and active portfolio management. Also, investing in shares of gold
mining companies – as against buying gold bullion/ETFs – provides an opportunity to benefit from the
growth potential of equities and also the strong fundamentals of gold.

Gold mining companies can grow organically or through the merger and acquisition route while gold
bullion/ETFs cannot. There is a multiplier effect on the profitability of gold mining companies with
rise in gold prices on account of operating leverage.

The major risk in investing in a fund that invests in gold mining stocks is that all the companies are
involved in the same underlying commodity. This means that if the price of this commodity weakens,
all companies will correct at the same time. In other words, the biggest risk is concentration. Besides,
the valuation of these companies can also be affected from non-gold related factors. There is the
currency risk which can effect your investments.

The Exchange Route

Exchange Traded Funds (ETFs) are those funds which buy actual physical gold reserves and the units
sold against these reserves are linked directly to the price of gold. ETFs are a pure play on gold prices.
The clear advantage of gold ETFs over physical gold is the security issue. Large quantities of physical
gold are both voluminous and difficult to store. Besides, there are no chances of adulteration while
investing in gold ETFs, which is always a concern while investing in gold bullion.

Another advantage of gold ETFs is that they can be traded easily on the stock exchange at a
transparent price and in convenient denominations, making it more ‘liquid’ investment as compared to
gold bullion. Investment in gold bullion could attract wealth tax, which is not applicable in the case of
gold ETFs. The best part is that we can convert your units to physical form after paying a small
amount as exit load. An investor should be well versed with the bullion market trends so that you can
avail of the best pricing. The factor deciding investment in gold is that the fund should have a low
expense ratio and minimum tracking error so that it is able to replicate the benchmark to fullest.

The Right Mix

Experts maintain that you should view gold or gold-related investments as portfolio diversifiers and as
a store of value in economically turbulent times when growth is a question mark and investors are
keener to hold value rather than expose themselves to risks of downside. The ultimate objective is to
capture the gold price rise and depending on the risk weightage, we can choose between gold fund and
exchange traded funds to maximise your return.
 MUTUAL FUNDS

Gold ETF

Gold exchange traded funds are mutual fund’s schemes whose units could be traded on the bourses
like any other stock. Through Gold ETFs, an investor can actually buy and sell units of gold on a
recognised stock exchange without involving delivery of ‘physical gold’ in the transaction. India’s
first gold exchange traded fund, Gold Benchmark Exchange Traded Scheme, debuted on NSE in the
month of March ‘07.

In simple words, Gold ETF is an exchange-traded fund with gold as the underlying asset. Its basic unit
will be equivalent to certain amount of gold, say 1 gram. The price of this amount of gold, say Rs
1000/- will be the price you need to buy into one unit of the ETF. The price of this unit will than move
up or down depending on the price of gold. The asset manager behind the ETF may buy an equal
amount of gold and store it. Typically, a small commission of .04% is charged for trading in gold ETF
together with a small annual storage fee.

Fund allocation for the gold as an asset class has risen to 10% from 5%, since gold take care of
inflation – a definite advantage over most of other asset classes. So, regarded as the safest haven, gold
is also a good inflation hedge. It has been proven that gold beats inflation by a safe 2%.

One good reason to invest in gold can purely be need based. If you think you are likely to buy in
future, say for marriage, then ETF allow you to start building your gold kitty in a systematic manner.

Say for example, there is a marriage in the family in two years, and you think you may need to buy
gold for that. At current prices, that is around Rs 2.4 lakh. Instead of buying all of that in one go two
years down the line, you can start doing an systematic investment plan (SIP) for yourself with gold
ETFs. You can set aside say Rs 10,000 per month for gold ETF units. That would roughly add up to
the gold you need when the day comes.

In an SIP, you are essentially avoiding taking a view on prices. It is quite possible that prices two
years down the line are say 20% lower than the current prices, but what if they are to be 20% higher?
Like in stocks, predicting prices with accuracy is a fool’s game. You eliminate price uncertainty best
when you choose a strategy, which is priced natural. SIP into ETFs is one way of doing it.

The other reason for looking at gold ETFs could be purely as a way of diversification. Consider a
typical Indian with a financial net worth of Rs 50 lakh. This will most likely have equity, debt, and real
estate in some mix. Investor may add say 5% of gold into this. A gold or forex exposure is way to play
global macro cycles.

At last the reason for using ETFs could be to speculate gold prices. Here you have a case where the
investor says, “I think gold prices can go up further, therefore I will go long (buy) gold”. A price
speculator will have a holding period in line with his view. So long as he thinks prices are likely to go
up at a good rate, he will stay invested or otherwise he will sell.

Gold ETF
 V

THE SECURITY MARKETS

COMMODITY FUTURES

A whole new investment option

What are commodities; how do I find a broker; how much cash do I need to start; does it need good
maths; how much time does it take to trade everyday; what are the trading term I need to know; is my
money safe and most importantly the big question remains: “Is commodity trading for me”. Once you
get an inside track on the commodity business, the exchange no longer looks quite so forbidding. A
commodity is not just about trading but about a whole new investment option that is waiting to take
off for those who love the idea of making money.

For long, investment portfolios in India have been dominated by equity, fixed deposits, real estate,
jewellery and bonds. As the market turns volatile and uncertain, investors can look for lucrative
options in the commodities futures market. The futures kicked back to life in ’03 after a four-decade
ban, opening up a new range of investment opportunities.

Commodity futures are a derivative market, where you buy paper that gives you the right to trade a
quantity in future (not the actual commodity itself). An efficient futures market is intended to discover
the right price based on fundamentals while ensuring that there is discipline in the market and that
there is no case of price manipulation. What is important is that the price is the true reflection of
fundamentals. Therefore, there are a lot of merits in the futures markets.

The paper with a right to trade in commodity future is important. Unlike the share of a company that
can go to bankrupt, a commodity future can never become worthless. It shows how many kilos of gold
or wheat you have actually bought or sold. Commodities are physical assets. No commodity you hold
ever becomes zero in value. As these commodities will always have some value even if the market
suddenly crashes, commodities are safer than equity in some ways. They are called commodities
because they are interchangeable with products of the same type.

To really know how a market works, you need to actually go and see what a trading terminal looks
like, how brokers work on the phones, how traders arrive at prices and what makes them carry on
despite losses. Only after seeing the sweat, confusion and elation on the faces of the real people, you
will finally know whether commodity futures make your veins tingle or your hairs stand on end. So,
visit the commodity exchange / broker in your city.

Over the past four years, there has been a multi-fold upsurge in commodity investments. Increased
interests from hedge funds, mutual funds, high net-worth individuals and retail investors across the
world have helped to develop the market. With equities playing spoilsport, investment in commodities
seems to be worthwhile option. A disciplined approach can work wonders for your investments. One
must work with strict stop-losses to mitigate risks – a trading stop-loss should be put to remain
participated in the entire rally.

There can be various modes of taking exposure in the commodity market. Positions can be taken both
on international and domestic exchanges. An investor must anticipate future price movements before
putting money in commodities. The stakes are higher in outright positional calls. However, there are
ways through which risks can be hedged by using various investing strategies. This requires capturing
different kinds of existing spreads, tapping arbitrage opportunities or taking the structured products
offered by brokers.
 COMMODITY FUTURES

Choose the right commodity

Rule number one is fixing the budget and remember you cannot afford to lose any more.

Then, decide the commodity in which you would like to trade. A wrong step at this stage may well
mean a quick end to your career as a trader. When it comes to finding your favourite commodity,
choose one you understand or with which you have some kind of link. That is rule number two. Now,
understand the tools to be applied for sorting out the commodities you can trade comfortably -

Margin money

Get the list of the margin money requirements for each commodity. You know the size of your kitty;
you can cross out those, which don’t fit your budget. You need to check both the initial margin
requirements as well as the special margin needed to keep your trading position open.

Markets vary in affordability, for instance, futures contracts in spices, sugar and grains tend to be
relatively affordable, while bullion, energy and metals are more expensive to trade.

Natural linkage

Once you have the list of commodities whose margin requirement you can afford, list out few
commodities with which you have some natural linkage and have ways of knowing more.

Tap family and friends who can alert you to tiny changes in the spot market. Yet, don’t get too bogged
down by your family’s preferences. What with the Net, TV and SMS, everyone knows everything the
minute it occurs anywhere in the world. That is both good news and bad. The good news is that there
is little likelihood of anyone taking the market for a ride on the back of insider information. The flip
side is that there are really very few opportunities left to beat the market and make a quick profit.

Volatility

Once your list of commodities is ready (keep it not more than 5), you need to get a feel of how volatile
they are. Some can be highly volatile, with prices moving very sharply and very frequently. Others
such as sugar or potatoes are relatively more stable.

If you hate a nail-biting finish to every day, then opt for a commodity that is more placid. Of course,
even those quite waters can easily get turbulent. So you can’t really afford to relax. Also less risk
means less chance to strike rich.

Liquidity

By now your list should have a handful of commodities left. But you need to do one last final check.
Make sure there is plenty of liquidity in the commodities of your choice. Otherwise, you will find no
buyers when you want to exit to the market.

The commodity market you wish to trade in should be understandable, affordable, of acceptable risk
and popular. As they say, anything that begins badly ends worse. Choosing the right commodity will
keep you safe.
 COMMODITY FUTURES

Survival tips

A target to meet; don’t chase every trade

The target is most helpful because then you can pace yourself, and if the returns have been good, often
you can even relax.

Get your ego out of the way; don’t love any position

If you don’t stick to your cut-off point and over trade, you are doomed.

Don’t be greedy; believe in a cut-loss theory

Everything doesn’t work according to fundamentals every time. When things go wrong, just cut and
get out. There will be plenty more opportunities later.

Junk your guts feel; see the facts

Data and tables are a young trader’s best friends. You should not speculate yourself. And you should
not believe in lucks. The only thing that stands with you in the rings is in-depth analysis of demand
and supply.

Keep numbers in your head to think on your feet (mental math)

You always should have the latest figure of positions and profits in your mind to know what best to do
next. Without this, you are handicapped even in the age of online exchanges.

Be strong-minded, the market is volatile

You need to be able to cope with the ups and downs without letting it affect you. Most of the trading is
now speculative and sentiment-driven. One needs to get the fundamentals straight and be tough.

Don’t trade with shallow pockets

You should have enough funds. That increases your staying power.

Stay away

You must studiously ignore those that promise instant riches, mind-boggling returns or talk about their
trading strategies are making millionaires by the dozen.

Treat the rules as morality tales rather than blueprints of your trading strategy

Always remember, that most of what you read about to trade may not really work that way in the real
world and there are no universal money-making trading strategies. Many trading strategies that you
will read in books by foreign authors cannot be applied in the Indian context because our trading rules
are different.

Survival tips
 VI

BANKING PRACTICES
TERM DEPOSITS

1. Bank fixed deposits

The era of high returns on term deposits seem to have returned. Many investors who had turned their
backs to their banks and drifted towards a more lucrative stock market are returning home. Suddenly,
FDs appear more tempting & reassuring. But read the fine print before you lock-in your money.

Having lost their sheen for many years, fixed deposits are on a comeback trail with increase in
interest rates, which is good news particularly for old and risk-averse investors. Interest rates have
sharply increased across tenures since the realty and stock boom resulted in increasing credit
demand, resulting in higher appetite of banks towards FDs to increase the deposit base. The first time
after so many years that bank deposits will fetch double-digit returns.

1. FDs allow options like monthly payout, compounding interest, sweep-in, and an overdraft
facility.

2. FDs are comparatively more liquid and have a smaller lock-in period suiting to every need.

3. Apart from the attractive rates of return, FDs being the lowest-risk investment product are
finding an active place in the investment baskets of individuals and corporate alike.

4. FDs also allow premature withdrawal & foreclosure, which is not possible in other small
saving, instruments like the PPF, NSC etc. This flexibility resulting in easy liquidity is an
attraction for many investors to park funds with banks in the form of FDs. FDs as investment
option mean safety, liquidity and assured returns to risk-averse investors.

The things are, however, slightly different this time round. Banks are very clear that they will not act
like parking lots. Many banks have tagged lock-in periods ranging from 6 – 12 months on these term
deposits. Though the investor, in dire need, can withdraw money from the bank even during lock-in
period, s/he can do it only at the cost of entire interest earned for that particular period. Banks pay no
interest on withdrawals during the lock-in period. These lock-in periods can thus be better termed as
‘zero interest period’. This is a recent phenomenon wherein banks are trying to discourage premature
withdrawals. Generally the banks have opted for zero-interest periods. Some others do not allow
premature withdrawals at all during the lock-in period. Then there are banks, which are all set to eat
up your capital on premature withdrawals by inserting a penalty of 2% on the principal amount if the
investor withdraws the investment before the expiry of the particular period.

So, read the fine print before you lock-in your money.

Higher rates on short-term bulk deposits

The spiraling returns in the bank deposit market are out-stripping the high-administered rates earned
by the post office small savings schemes. The interest rate war waged by banks to lure big deposits has
come under government scanner. Interestingly, banks are offering higher rates on shorter tenures.
Technically, long tenure deposits attract higher returns compared to the short duration deposits. There
is a degree of concern that banks’ rush to build their financials, make large loan commitments, and the
subsequent effort to mop up deposits, at whatever cost, could endanger their health. The offering of
fancy returns on deposits would eventually raise their cost of fund and squeeze spread.
 BANKING PRACTICES

2. Excluded millions

No fill accounts

The inclusion of all sections of the society in the financial system has become one of the central
planks of financial policy in developed as well as in developing countries. A key initiative for
promoting financial inclusion is the RBI’s well designed ‘no frills account’. This requires bankers, to
seek out people with no bank accounts and open these for them even if there is no deposit balance in
those accounts. In theory such accounts are linked to automatically available lines of credit of Rs
3,000. A good start has been made in this effort with Pondicherry being the first state to announce
100% financial inclusion.

In practice, in most places where the no frills account has been opened by rural banks, it efficacy as a
measure of financial inclusion is handicapped by lack of access as well as lack of information. First, if
a bank branch is located at 10-15 km away from the account holder’s location it is hardly economical
for her to travel to the branch to deposit. Second, bankers wary of loan waiver hardly ever inform the
account holders of the line of credit that could potentially save them from further indebtedness to the
local money lenders. Small wonder therefore that rural bankers report minimal activity in the no frills
bank accounts.

Business correspondents (BCs)

Another initiative propagated by the RBI is that of Business correspondents (BCs) who are supposed
to be appointed by banks as their agent to carry small banking transactions to the doorsteps of the
people. A well functioning network of BCs would, in theory, eliminate the costly trip to the branch
and result in no frills accounts becoming operational, leading to practical financial inclusion.

But, in politically correct India, any additional cost to the low-income account holder resulting from
such a service is deemed to be unfair, so the RBI circular expressly forbid banks from charging
directly for it. In effect, this means that the banks must cover the cost of the BCs out of the 4% margin
they earn from their normal banking activities. Nowhere in the world are doorstep financial services
paid for by such a small margin and the result is that in the over two years since the RBI circular on
the subject was issued, there has not been any substantial roll-out of the BC service. In the latest set of
norms on financial inclusion and extension of banking services, the central bank has notified that all
BCs must be located within 15 km of a bank branch. In metropolitan centres, the distance could be up
to 5 km. The RBI has stressed on banks conducting sufficient due diligence on the players and verify
if the persons are permanent resident of the locality.

Excluded millions

There are about 204 million households in India, of which 19 million top-tier households are well
served by banks. There are also 90 million households, which represent the next billion customers for
banks. However, business opportunities in this space are yet to be tapped effectively. Beyond this,
there are another 95 million households, which are completely outside the radar of financial
institutions. In short, financial inclusion is seen in the same manner as priority sector lending – an
obligation rather than an untapped opportunity. For banks, the bottom of the pyramid is clearly not an
attraction. It continues to be unchartered territory involving experimentation and huge operational
costs. Compare this with the telecom companies, which are making money-selling airtime to labourers
in recharge packages for as low as Rs 10. Financial inclusion in India is more spoken about, than
actually practiced. Lending a strong push to infrastructure and speeding financial literacy will
certainly help, but banks need to recognise that there is immense opportunity in this sector.
 BANKING PRACTICES

Retail lending

Lending money is the core activity of banks. As far as retail loans are concerned, many banks have
outsourced the activity to agencies marketing such loans. The result is that sanction of loans has
become a routine mechanical exercise without an assessment by a bank, resulting in defaults and
consequent need to appoint another agency to do the recovery work.

In the zeal to achieve higher business levels, assessment of borrower’s ability to repay is getting
neglected. Growth in retail credit is a good trend in the economy, which will result in overall
development of industries and service sectors. But such growth is bound to result in increased levels of
defaulters.

It is unfortunate that in our legal system defaulters are being dealt with as if they are criminals. This
approach and mindset to deal with defaulters is also on account of change in provisions of the
Negotiable Instrument Act, 1882, which makes dishonour of cheques an offence punishable with
imprisonment up to two years.

Such a provision, which was enacted to inculcate faith in the efficacy of banking operations and
credibility in transacting business, is unobjectionable.

But the provision is being used as a tool to recover loans by obtaining undated cheques from the
borrowers in advance at the time of sanction of loans. When such cheques are dated and presented for
payment by the lender, the borrower may not be in a position to provide funds to honour the cheques.
In such cases, an ordinary person may end up facing criminal prosecution for inability to repay a loan.

The disturbing trend that has developed in the financial market is the use of coercive methods of
recovery. If there is default, the lender has the right to recover the loan, but in the process of exercise
of that right, lender cannot engage musclemen and use force and intimidate such borrowers. Lenders
cannot take the law in their own hands. If their efforts to recover fail, they have to seek judicial
intervention for recovery or exercise powers of enforcement of securities.

In one case, Supreme Court has cautioned banks against use of coercive methods for recovery of
loans, and in another case on the same issue, the State Consumer Forum of New Delhi has given a
stern warning to banks that if any complaint is received against any bank alleging use of force by
recovery agents, the CEO of the bank or finance company shall face punishment of minimum
imprisonment of one month provided in Section 27 of the Consumer Protection Act, 1986.

The Supreme Court and the Consumer Forum have therefore rightly condemned the practices of banks
in engaging goondas and musclemen and the use of coercive tactics for recovery.

Retail lending
 VII

THE TAXATION
INCOME TAX RETURNS

File your tax returns: A.Y. 2007-08

The millions of income tax assessees, every year begins an exercise to collect and compile
whereabouts of their income. This year too the same drill has to be followed, but with a change.

1. Get the right form

From assessment year 2007-08, the income tax department has introduced eight new forms, four of
which are for individuals and HUFs. You may visit the portal, www.incometaxindia.gov.in to confirm
which form one need to fill up. The latest forms can be downloaded from the website. The forms for
return are assessment year specific. And thus the forms are applicable for A.Y. 2007-08 only.

Form ITR -1
Individuals having salary, pension, family pension or interest income only

Form ITR -2
Individuals/HUFs not having income from any source other than from business or profession

Form ITR -3
Individuals/HUF who is partners in firms but does not carry proprietory business or profession

Form ITR -4
Individuals/HUFs carrying on a proprietory business or profession

Form ITR -5
Firms, AOPs and BOIs

Form ITR -6
Companies other than Companies to whom Form ITR – 7 applies

Form ITR -7
Charitable/Religious Trusts, Political Parties and other non-profit organisations

Form ITR -8
Person not liable to file return of income but is liable to file a return (Return of fringe benefits)

In this context, let us now look at some of the key point’s one need to bear in mind before using the
above forms which apply to individuals:

1. ITR-1 cannot be used if the individual has any exempt income except for agriculture income and
interest income. Hence, if the individual has exempt dividend, long term capital gains, et al, than
he/she can not file ITR-1. Furthermore, ITR-1 cannot be used if income of another person like
spouse or minor child is clubbed under the Act.

2. An individual who is a partner in a partnership firm having only share of profit there from, which
is exempt under the Act, needs to use ITR-3 and not ITR-2.
 INCOME TAX RETURN

2. Count your income sources

An individual may get income from different sources such as salary, house property, profits and gains
of business or profession, capital gains, and income from other sources. When you compute your total
income, it is mandatory requirement to calculate income from each of these sources separately.

3. Records for deductions

Exemptions are available under different heads of income and as well on total income. This is an
important aspect of filing returns since it helps an individual reduce his net income and maximise
savings. It is important that the tax payer have the requisite documentary evidence / proof in relation
to these deductions. Presented below is the required documentation for each kind of deduction -

Deduction for interest on housing loan

An individual can claim deduction for interest paid on housing loan u/s 24 of the Act. The individual
should keep on record the details of his loan agreement and the certificate issued by the bank in
respect of interest paid/payable during a particular financial year. The original interest certificate for
each tax year should be preserved.

Tax deduction for investments

Perhaps the most popular deduction amongst the individual tax payers is deduction u/s 80C / 80CCC
of the Act. The popular investment options and the documentary evidence to substantiate the claim for
deduction include the following:

Provident Fund / Superannuation Fund

Form 16 or the pass book

National Saving Certificate

The NSC and a photocopy of the same after the maturity

Life Insurance Premium

Premium receipt & life insurance policy

Fixed Deposits for five years or more with a scheduled bank

Fixed Deposit certificate / copy of the same after maturity

Repayment of the principal amount of housing loan

Loan agreement and certificate of principal repayment issued by the Bank / Housing Loan Company

Sum paid as tuition fees for the purpose of full-time education of any two children of the individual –
The original receipt issued by the school, college or university in India

Sum paid as contribution to annuity plan of LIC or other insurance companies for receiving pension –
Premium receipt and the annuity policy

Mediclaim Insurance Premium

A deduction can be claimed u/s 80D for the premium paid towards medical insurance for the tax
payer, his spouse, dependent parents, and dependent children up to the limits specified. The policy
document and the premium receipt should be preserved.
 INCOME TAX RETURN

Interest on higher education loan

A deduction can be claimed on loan taken from bank for the higher education of the tax payer. Higher
education has been specifically defined in this section. The tax payer should maintain the loan
agreement with the bank, the records of interest paid in the form of annual certificate, records of
admission into the specified courses, and payment made to the education institution.

Deduction for charity donations

An individual may claim deduction u/s 80G subject to certain conditions / limits in respect of
donations made to eligible institutions. The donation receipt should be maintained and it should be
ensured that the donation receipt states such donation is eligible for deduction under the above section.

Exemption for house rent allowance

An employee can claim exemption for the rent paid by him against the house rent allowance granted
by his employer. The employee should furnish a copy of the lease agreement, copies of rent receipts
containing details of rent paid etc. to his employer to claim this deduction. He should maintain these
records in original.

Rent paid in absence of house rent allowance

A deduction up to a specified limit may be claimed by an individual who is self employed or who is
employed but who does not receive any house rent allowance from his employer. In this connection,
the copy of the lease deed, rent receipts, salary certificate / Form 16 should be maintained. Further, the
tax payer has to give a confirmation / declaration that his spouse / minor child do not own a house.

4. Clubbing of income

You should not forget to add income of a close relative like spouse or minor child, if any, while filing
the returns. It is a wrong perception that one can reduce tax liability by showing business income or
expenses in name of close relative. The only exception to this rule is if close relative possesses
technical or professional qualifications and the income is solely due to application of his/her technical
knowledge and experience.

5. Current tax slab rates

The slab rate you fall into depends on the particular case. For example, income up to Rs 1.35 lakh for
woman is exempt from tax, while for of elderly above 65 years of age, earnings up to Rs 1.85 lakh is
tax-free. For individuals not falling in these categories, no tax has to be paid on an income of up to Rs
1 lakh while 10% is paid on income ranging between Rs 1 lakh and Rs 1.5 lakh, 20% on Rs 1.5 lakh to
Rs 2.5 lakh and 30% on Rs 2.5 lakh and above. Further, a 2% education cess will be applicable to all.

6. Calculation of TDS

Throughout the year, an individual pays advance tax or tax deducted at source. One must gather all the
transactions where an individual paid advance tax before filing returns.

7. Annexure attachment

From this assessment year, an individual isn’t required to attach any document with the form
regardless of whether a refund is claimed. No documents like salary certificate, TDS certificates, tax
challans, donation receipts, financial statements, audit report, et al, need to be filed with the RoI. It
needs to be kept and maintained by the individual, which may be called for at the time of assessment.
 INCOME TAX RETURN

8. High value transactions

In the RoI, details of the following high value transactions need to be compulsorily stated, which are
ordinarily reported through AIR filed with the Income tax department by others:

a) Cash deposits aggregating to Rs 10 lakh or more in a year in a saving bank account;

b) Credit-card payments aggregating to Rs 2 lakh or more in a year;

c) Payments made for purchase of mutual funds units of Rs 2 lakh and more;

d) Payment made for acquisition of bonds/debentures issued by a co/institution of Rs 5 lakh or more;

e) Payment made for purchase of shares issued by a company of Rs 1 lakh or more;

f) Purchase of immovable property valued at Rs 30 lakh or more;

g) Sale of immovable property valued at Rs 30 lakh or more;

h) Payment made for investment in RBI bonds of Rs 5 lakh or more in a year.

One needs to carefully compile and furnish the above details in the RoI as the same can be cross
checked and matched with data in the AIR furnished by others and any mismatch between the two
could trigger an automatic inquiry/scrutiny from the income-tax department (ITD).

9. Scrutinise form

All items in the RoI must be filled in the manner indicated therein otherwise the RoI may be liable to
be held defective or even invalid.

10. Filing of return

The ROI can be filed/ submitted to the ITD in any of the following manners:

a) In paper form;
b) Electronically using a digital signature;
c) By transmitting the data in the RoI electronically and thereafter submitting the verification of the
RoI in the Form ITR-V;
d) In a bar-coded paper RoI.

The new form is not required to be submitted in duplicate. After completing the form,
acknowledgement slip attached with this form should be duly filled.

Don’t forget the due date

We have to file the return for each financial year by specified deadline. For instance, an individual is
required to file the return on or before July 31, 2007, unless the individual is carrying on
business/profession or is a working partner in a partnership firm which is subject to tax audit under
section 44AB, in which case the due date is October 31, 2007. Or else obligatory interest at 1.25% per
month of tax due is payable beyond due date.
 INCOME TAX RETURN

Tax evasion practices

Tax evasion is a very popular crime worldwide, wherein unscrupulous entities seek to profit, by not
paying taxes to the government. It is a universal crime, with only the extent thereof varying from
country to country, depending primarily upon the efficiency of the enforcement of the tax laws therein.
If tax is the price of civilisation, its evasion is anti-civilisation, which breeds further offences.

Tax evasion is not restricted to any section of the society or business. It is a mindset prevailing
amongst the large corporates, who sit on the top of the pyramid, as well as millions of entities who lie
at the bottom. The bigger ones engineer sophisticated and gigantic evasions, while the smaller ones
avoid taxes, through ingenious and often popular modes.

Such a conduct gives rise to the classic cat and mouse situation, where the determined taxman
continuously stalks and nabs the tax evader and the determined evader, like a magician; keep
conjuring newer and newer schemes to defraud the revenue.

Tax evaders should brace themselves for tough times as the department plans to intensify scrutiny of
Income-Tax returns. The tax department now uses details of transactions revealed in the AIR in
carrying out scrutiny. Also, the data on high-value purchases such as plasma TVs etc. could also be
used during scrutiny to match income and expenditure of individuals with their tax returns. Similarly,
there seems to be increased focus on searches and seizures.

Forged PAN cards

These cards are not issued by the I-T Department, but are created by miscreants. Such cards can be
used for concealing one’s real income. A person is required to quote the PAN while entering high-
value transactions. The person intending to evade tax payment can quote the number of forged PAN.
Since the PAN number quoted in the tax return one files is different from the forged one, the high
value transactions escape the tax net.

Retail quota of IPOs

Manipulators used to apply for the retail quota under fictitious names and corner the shares. Fictitious
applications are filed by the owners of multiple demat accounts. Around 30 lakh accounts were closed
down due to PAN non-compliance. The depositories are tightening the KYC norms and with
compulsory PAN. It is now, not an easy task to corner shares entitled to retail investors.

But the operators in the gray market for IPOs tell you that shares in the retail investor quota are still
being diverted. Now, there is another breed of “investors” who know nothing about the stock market,
but possess three things essential to participate in the capital market – PAN, demat and bank account.

Tax evasion practices

 VIII

SECURITY LAWS &

MISCELLANEOUS UPDATES

KYC Policy

KYC means ‘Know Your Customer’. Every intermediary is required to have a Client Identification
Program. This includes seeking information and supporting documentation about the customer’s
identity and address, besides nationality, income source, occupation etc. The KYC Policy is applicable
to all categories of investors eligible to invest such as Resident Individual Investors, NRIs, Persons of
Indian Origin (PIO), HUF, Societies, Partnership Firms, Trusts, Companies, Body Corporate, PSUs,
Banks, Financial Institutions, MFs, FIIs and such other individuals/ institutions, including any holders/
issuers of Power of Attorney.

Sole identification number

PAN is a sole identification number for all transactions in the securities market. Thus, the investors
will now have to quote PAN for all financial transactions, irrespective of the quantum of investment.
The only addition to the PAN would be an alpha-numeric prefix or suffix to distinguish different kind
of investments.

Government e-governance project

All the twenty Registrar of Companies (RoCs) are going on-line. Now, the corporates find it difficult
to take unfair advantage of the government’s bureaucratic delays. The project has built-in provisions
to identify defaulters and generate show-cause notices. The network identifies the names of the
companies to be proceeded against. Besides detecting falsification of documents and frauds, the
project would also identify promoters of over two lakh companies, which do not carry out any
business and do not comply with company law provisions.

Depository’s charges

Sebi had issued circulars reviewing the dematerialisation charges to protect the interests of the
investors and to regulate the securities market. Accordingly, no charges shall be levied on a beneficial
owner when the beneficial owner transfers all the securities lying in his account to another participant
of the same depository or to another depository. If the investors are not satisfied with the services of a
participant, they could move their demat account to another participant free of cost.

Unclaimed dividends etc

It has now become mandatory for companies holding any liabilities relating to any unclaimed
dividends/matured deposits/debentures etc for over seven years to credit the same to the Investor
Education & Protection Fund (IEPF). This is the government-promoted fund maintained to educate the
investors and create awareness amongst them about the changes taking place in the equity market,
mutual funds and related avenues of investments. Thus unclaimed dividends etc will be permanently
transferred to IEPF, and investor could not claim after seven years from the date they become due.
 SECURITY LAWS & MISCELLANEOUS UPDATES

Survival tips

Applying in issues of securities / IPOs

Read the Prospectus/ Abridged Prospectus and carefully note:

Risk factors pertaining to the Issue.

Outstanding litigations and defaults, if any.

Financials of the Issuer.

Object of the Issue.

Company history.

Background of Promoters.

Dealing with brokers & sub-brokers

Don’t deal with unregistered intermediaries

Don’t undertake deals for others.

Don’t delay payment/deliveries of securities.

Don’t get carried away by luring advertisements, if any.

Dealing in securities

Don’t undertake off-market transactions in securities.

Don’t fall prey to promises of unrealistic returns.

Don’t invest on rumors; verify before investment.

Don’t invest in penny stocks.

Don’t be misled by so called hot tips.

Don’t try to time the market.

Survival tips
 IX

REAL ESTATE
REALITY SHOW

A house of their own

By all accounts, the last 12 years have been extraordinary for the global real estate market. Prices have
soared across the world. In the UK, house prices rose more than 200 % between 1995 and 2005, and in
other countries such as France, New Zealand, Australia and Spain, between 100 and 170 %.

In key Indian cities, prices have risen much faster between 2000 and 2005. The boom started after
2000, coinciding with boom in IT and ITeS outsourcing. That was also the time when the stock market
embarked on its spectacular bull run, going from 3000 or so to near 15000. Also, several thousands of
Indians, many of them in their 25s and 30s, saw their wealth grow. It was natural that they would
begin buying what is considered the single-most important material possession by middle class
families: a house of their own. Interestingly, interest rates started their march downwards, buying an
apartment or a house became even easier for the Indian middle class.

A consistent upswing is not possible

But in less than seven years, real estate prices appear to have peaked. Interest rates continue to climb.
Prices soar to unsustainable levels. It’s time for real estate developers, investors and buyers to be
worried. A consistent upswing is not possible in any market, particularly when a large level of supply
is in the offering. In the current real estate scene, what is being observed is the stabilisation of prices.
Price stabilisation indicates that there are not many buyers for the prices quoted for various real-estate
typologies at this point of time. This may be the beginning of a vicious cycle that would haunt the
property buyers.

The biggest risk is sales to speculators

The demand in most of the markets must be through informed and healthy transactions led primarily
by investors who are seeking long-term positions or end users. Many developers, however, feel that
the biggest risk to growth in this sector is sales to speculators. The downward trend seems to be a
manifestation of offloading of housing stuck with investors and end-users.

The fancy footwork to jack up valuations

There are instances of the fancy footwork employed by real estate companies to jack up valuations and
create hype. Also, real estate developers are speculating on vacant land. They buy land from area
development authorities and keeps it vacant waiting for real estate prices to escalate.

The housing boards are the biggest speculators

Housing boards were constituted to consolidate land for development. In the old good days, they were
also the developers. Now, Boards have been consolidating and selling all available land parcels by
auctioning land at multi-time over the reserve price for the last few years. The housing boards are the
biggest speculators in the current property market.
 REAL ESTATE

The FIIs may pull out the money at a pace quicker than they invested

Rules are being twisted and financial tools manipulated to bring in foreign money into properties.
However, the FIIs may pull out the money at a pace quicker than they invested. That could not only
rattle medium and small developers (who have brought in high cost money), but also thousands of
Indians who have borrowed money to buy their second and third homes, when the market fattens, the
rental income from these properties will drop, but not the EMI or their loans.

The government policies have been aimed at cooling the market

If we take a bird’s eye view, all the policies have been aimed at cooling a heated real estate market.
Interest rates in home loans have risen several times and have almost doubled the outflow for home
buyers. Access to finance has been difficult for developers with the increasing RBI restriction. Most
apartments across the country have become larger and more expensive.

No regulator to check on untruthful claims by developers

Pre-launch of properties have been declared illegal but no mechanism has been put to create
benchmark rates for properties. Hyped-up advertising has been noticed and statements issued but no
regulator to check on untruthful claims by some developers trying to sell property to unwary buyers.
The government is trying to avert a South- East Asian like crisis where banks were affected by a
bursting of the real estate bubble.

The private sector interest in HIG and creamy layer of the MIG housing

With rising housing loan interest rates, the affordability of apartments is already coming down. At this
time, it is imperative that there should be a check on prices and incentive to build. The private sector
interest has largely been confined to HIG and creamy layer of the MIG housing. This is because there
have been excellent returns in that segment. But, for the largest segment of LIG and MIG housing
units had currently not found many takers in the private sector.

US experience

In 1990 the US experienced recession because the interest rates were too high. The housing bubble
burst because the house prices were raised so far from incomes that the inflow of new buyers into the
market stopped. It affected the builders and people who were trying to get into the market. It did not
affect people who owned a house lot three years or longer.
 X-A

INFLATION: 2007
THE BEGINNING

A real time study on inflation

Throughout the year ’06 food prices have remained high, fuelling inflation rates. The WPI- based
inflation has stayed consistently above the 5% mark since the beginning of October ’06.

It’s been a heady economic cocktail so far. With a steady and strong GDP growth, robust stock
markets, global takeovers, boom in the retail sector, and hunger for consumption, India never had it so
good. The party was on, and everyone joined in. But somewhere, somehow – something some thing
was sizzling. First it went unnoticed, but soon the pinch followed. And suddenly it looks like it’s
engulfed about everything. Potatoes to onions, pulses to cereals, milk and confectionery, consumer
durables – food prices are kissing the sky. Indeed, after three years of near double-digit growth, the
economy is showing signs of an inflationary spiral.

Global commodity prices have exerted pressure on domestic prices. At the same time, supply
constraints have emerged in some essential commodities such as wheat, pulses and edible oils.
Consequently, average inflation in 2006-07 is estimated at between 5.2 and 5.4 per cent, which is
higher than 4.4 per cent last year.

Expert says that there is some over-heating in the economy, largely because of a disproportionate
growth between the demand from the organised sector and supply from the unorganised sector. But
this is a natural phenomenon and any market will have a cycle. If you’ve had a sustained growth rate
of more than 8% over the last four years, with the structural imbalances, inflationary pressure are
bound to increase. But feel the inflation level isn’t beyond the manageable limit.

Inflation rose to a two-year high in the first week of 2007

This is the highest recorded rate since December 25, 2004. The government has also recognised that
the price rise in primary goods has pushed the inflation beyond the danger zone of 6.5% plus.

Sustained high inflation could be counter-productive and also have adverse impact on savings.
Although inflation was much higher in the 1980s and 1990s, it was against the backdrop of high
global inflation. However inflation has come down globally, and, therefore, there is a need to
moderate inflation now.

Government has stepped in to tackle the issue, particularly keeping in view that prices are rising more
than twice as fast as in China, and considerably faster than in industrialised countries:

Dutch - disease syndrome

The ‘Dutch Disease’ is an economic concept that seeks to explain the deterioration in a country’s
manufacturing sector due to a rise in exchange rate; and the resultant erosion of long-term
competitiveness of other traditional and goods sectors. Given the fact that more people are employed
in the goods sector, the human aspects of the exchange rate management should not be lost sight of.
 X-B

INFLATION: 2007
A SOCIAL ISSUE

The rising inflation is a social issue

The rising inflation is a social issue and supply-side is indeed a durable answer to inflation. More
wheat, more rice, more sugar, more pulses and more oil seeds are the answers. The dreams of 1947 are
not the same as the dreams of 1997, and the dreams of 1997 are not the same as those of 2007. In
1997, the concern was how will India take wings and fly to find a place in the world. In 2007, things
are very different. India has a place on the world map. It is the time to send signal inwards, to tell the
part of India left behind that it would be included in the growth. It is no longer possible to turn a deaf
ear to the demands of that part of India which is limping behind.

President concerns about the rising cost

It is the time of great optimism about our economic performance and prospects. The last three years
have recorded an average annual growth-rate in national income of over 8%. This augurs well for the
launch of the Eleventh Five Year Plan. But, the jubilation on the government’s record on the economic
front was tempered by the concerns about the rising costs and it’s damage-potential. He added that the
economic growth is not an end in itself. It is a means by which we hope to generate more employment,
distribute incomes more equitably across social groups and regions, and liberate the poorest of the
poor from the scourge of poverty, ignorance and disease.

Prime minister appeal to the chief ministers

Listing the anti-inflationary steps announced by the centre, like importing additional wheat and pulses,
banning export of sugar and milk powder, cutting import duties on palm and sunflower oil, releasing
additional mustard seed from Nafed under the price rise mechanism and cutting import duties of
cement and non-ferrous metals, PM told, “that the government has decided to set up a special
monitoring cell in the cabinet secretariat, in addition to the existing institutional mechanism in various
ministries, to keep a daily watch on the price situation and provide support to the state governments.”

The Prime Minister said that considering the need for curbing speculation in some of the commodities,
particularly pulse, forward market commission has banned trading in Urad and Tur.

There is, however, a need to strongly monitor the activities of anti-social persons who may indulge in
speculation and profiteering. He added that the state governments had a major role in checking prices
by curbing malpractices, profiteering and hoarding, and an efficient functioning of the PDS which will
ensure availability of essential commodities to low and middle income consumers.

Big retailers comes under PMO lens

PMO communicated to the DIPP that Prime minister wants a study to cover impact of large retailers,
both domestic majors & MNCs on economic growth, prices, farmers, consumers and manufacturers.

Inflation led to poll debacle

The Congress president Sonia Gandhi identified inflation as the primary villain. The talk of high
growth will not bring it any electoral dividend. Voters are becoming impatient; they want their lives to
improve. They want good and clean governance, employment, prosperity, security and social justice.
 X-C

INFLATION: 2007
THE SUPPLY CONSTRAINTS

Supply-side is indeed a durable answer to inflation

Import of wheat
The Centre has decided to import one million tones of wheat by July’07 to meet the shortfall in
domestic procurement. Agriculture Minister, who was replying to a question in the Lok Sabha, said
that there was no decline in wheat production and the prices paid to farmers had also been increased
from Rs 700 per quintal to Rs 850, a hike of Rs 150, which has never been made before. We are ready
to meet the shortage by imports, as we need to strengthen our food security.

Import of pulses
Agriculture minister also talked about the possibility of more import of pulses to meet the shortage,
which he blamed on ‘few parties manipulated provisions and exported pulses’. The minister said the
CBI was investigating these companies and as soon as the probe was over, criminal action would be
taken against them and they would be banned from carrying out export activities.

Later, government chopped prices of petrol by Rs 2, diesel Rs 1. The government has invoked the idea
of a ‘cascading effect’ of the fuel price cut to justify it as an anti-inflationary move. The Railways has
done its bit to calm the inflation curve, but the across-the-board reduction in passenger fares and
marginally lower freight charges are unlikely to provide any major relief from high prices.

Wheat, rice futures banned

India, the world’s second largest producer of wheat and rice, banned futures trading in the two
commodities to curb the fastest inflation in two years. A committee was constituted to study the
impact of future trading in essential commodities on consumers. Once the committee submits its
report, controversies and conflicts of views about futures trading in agri commodities will settle down.

Food security mission

Prime Minister launched a mammoth scheme to boost growth in the agriculture sector, that provide Rs
25,000 crore for new agri-initiatives launched by states over the next four years. The objective of this
special scheme is to double growth in agriculture to 4% by 2011-12. The Food Security Mission
would work towards enhancing production of wheat, rice, pulses and edible oil to ensure visible
changes in their availability over the next three years.

Cabinet committee on prices

India will soon start serious intelligence gathering in the global food market. Moves are afoot to
collect real-time information about the crop size in different countries, track all shipments and
movements of food grains and generally keep a finger on the pulse of the market. With India
increasingly dependent on the world market for food grains, fats and pulses, it has become critical for
policy makers in Delhi to anticipate price shocks and formulate appropriate strategy in advance. The
department has subscribed to the services of Agriwatch, a Web-based portal for domestic as well as
international commodity specific reports.

Corporatising mandies
Corporate mandies would be the wholesale market for agricultural produce. Under the new proposal,
government has asked to invite private participation in terminal markets to provide a state-of-the-art
linkage to farmers for selling their products at a better price.
 X-D

INFLATION: 2007
MONETARY POLICY

Gradual ballooning of assets

According to RBI governor, RBI cannot prevent the gradual ballooning of the asset prices. However,
we are operating on two levels – aggregate liquidity and aggregate interest rates. We are trying to
moderate growth and selectively make it difficult to raise resources from banks –

RBI hikes Repo Rate

Repo Rate is the rate at which it lends to banks against government bonds.

RBI increases Provisioning Norms

RBI has signaled banks to restrict the flow of credit to sectors like real estate, consumer loans and
loans against credit cards and focus on productive sectors.

RBI hikes CRR

CRR is an amount of money that commercial banks are required to park with RBI, to curb excess
liquidity, RBI has justified the move in view of the paramount need to contain inflation expectations
and in the light of the current liquidity conditions.

RBI asked banks to check whether the money lent to traders is used to hoard foodgrain
Banks have been asked to review the records of their top borrowers – both companies and NBFCs.

RBI bars NBFCs from real estate investment

The new norms state that no finance company, which is accepting public deposits, can invest more
than 10% of its net worth in land or property except for its own use. At the same time, restrictions are
imposed on investment in unquoted shares.

Silence on lowering Statutory Liquidity Ratio

SLR is essentially a credit allocation tool. By mandating that banks hold a certain percentage of their
demand and time liabilities in the form of liquid assets (over-whelmingly government securities), SLR
allocates bank credit between the corporate sector and government.

Temper lending to reality & stocks

The government asked state-owned banks to temper credit growth, which is surging at a rate of 30%,
as well as rebalance their portfolios and moderate credit flow to high risk sector like commercial real
estate, capital markets and NBFCs.

Bank’s steps to tighten loans for second homes

Buying a second home will only get tougher. Banks have started charging a higher rate of interest and
demanding stiffer margins on loans taken to buy a second or third home. The move had emanated
from RBI’s concern, which is repeatedly voiced, over a property bubble. With big money and foreign
funds chasing Indian properties, real estate has emerged as an asset class in recent years, with more
people borrowing from banks to buy second and third homes.

The liquidity-tightening measures by RBI have had a cascading impact across the financial sector.
Large banks raised lending rates, deposit rate on bulk deposits rose above 10%, bond prices crashed
and bank stocks dipped over fears of lower profit.
 X-E

INFLATION: 2007
CUT IN CUSTOM DUTY

Inflation: to hot too Handle

Capital Goods
The government moves to cut custom duties on certain categories, just a month before the Budget ‘07,
to provide some relief to user sectors and to check inflation. The reduction in custom duty on capital
goods will put pressure on domestic manufacturers to reduce prices as imports become more
competitive.

Project Imports
The cut in duties on project imports will give a boost to the upcoming ultra mega projects, which
would involve significant amount of imports

Cement
The scrapping of import duty on cement is designed to check the sharp rise in prices and ensure
availability of cement in the domestic market. The zero duty on cement may not result in the flood of
imports as importing this product is a difficult proposition due to the lack of bulk loading and packing
infrastructure at the Indian ports. Besides, domestic cement is still cheaper than the landed cost of
imported cement. But the difference may narrow to some-extent.

Metals
The custom duty cut on copper, aluminum and other nonferrous metals is expected to provide a fillip
to several user industries. Stainless steel users will be most helped by the reduction in the custom duty
rates in both stainless steel and zinc.

Cut in peak rate of customs duties

The finance minister reduced peak Customs duties to 10 per cent from the present level of 12.5 per
cent. The new peak rates are in tune with the industry’s expectation. Experts feel the duty reduction
will make the Indian industry more competitive in the global arena.

Edible oil
In a bid to rein in rising prices of edible oils, the government finally slashed Custom duty on edible
oils by 10%. The move is expected to bring down the edible oil prices by about 2 per kilo. Edible oils
have a weightage of 2.7% in the inflation index.

Further concessions on excise & custom duty

Finance minister announced fresh concessions on the excise and custom duty front, a move expected
to make a large number of industries like cement, gems and jewellery, food processing and retail,
packed foods and steel happy.

The cement industry did not respond positively to the dual excise duty regime, he said the government
had decided to replace the dual rates on cement. Consumers cannot just draw comfort on the cement
front, but also on ready-to-eat packaged foods items, Soya Bari and Biscuits, Finance minister
exempted all ready-to-eat packaged items from excise duty and biscuits whose sale price does not
exceed Rs 100 per kg.
 X-F

INFLATION: 2007
FOREX INFLOWS

Inflation: a major cause of concern

The Economic Advisory Council to the Prime Minister (EAC) sees inflation as a major cause of
concern. The EAC reckons that there is a case for controlling excessive growth in money supply.
Money supply is currently running at close to 21%, as against 16% last year. Inflation cannot be
bought down if money supply growth is high and, therefore, there is a need to keep inflation low by
restraining money supply growth.

Pressure on RBI to sterlise forex inflows

The surge in capital flows over the last few years has put pressure on the RBI to sterlise forex inflows.
This would mean that the liquidity impact created in the form of rupee released after the mop up of
forex inflows is contained by the central bank by sale of government securities.

In the process, the central bank’s balance sheet is impacted. With excess capital flows and build up of
reserves, its holdings of domestic assets (g-sec) are substituted with foreign assets. A reduction in the
quantum of government securities with the central bank will limit its ability to intervene activity
through open market operations in times of large inflows. Besides, there is also an opportunity cost
involved here as the interest foregone on domestic bonds is higher than the returns on forex assets.

Rising Asian forex threat to world

Burgeoning forex reserves of Asian countries could prove to be a threat to the stability of global
financial systems. One of the major concerns in Asia where there is lack of flexibility. It leads to
excessive accumulation of reserves, which is not sustainable in the long run. The euro is becoming
extremely attractive, as a vehicle, a transaction, an investment and a reserve currency. Shocks may be
coming, which may also impact negatively European economics.

Tightening norms to raise debts abroad

The changed guidelines for external commercial borrowings (ECBs) have lowered the cap on interest
rates at which the companies can raise loans abroad. Every year, the government fixes the maximum
interest rate at which a company can raise credit overseas. Companies with poorer balance sheets or
low credit rating may find it difficult to raise debts at lower rates. The move to lower the cap will thus
weed out smaller companies that accounted near about half of the total debt raised. The new guidelines
have disallowed realty companies from raising debts in overseas markets for the development of
integrated townships. The government move comes on the heels of RBIs apprehensions of over-
heating that could derail the economy.

PE investments lose interest rate arbitrage

The government has, in one stroke, taken away some of the sheen from private equity (PE)
investments in India. The recent directive to treat all money flowing in through the preferential share
route as debt instead of equity has pulled the plug on the interest rate arbitrage opportunity available to
PE investors so far. Apart from taking the rate arbitrage opportunity, such investments will be
subjected to end-use restrictions imposed under current ECB guidelines. For instance, such funds can’t
be used to meet working capital requirements.
 X-G

INFLATION: 2007
FOREX OUTFLOWS

Liberalisation of forex to increase outflow

Exporters and commerce ministry might cry, protesting against the strong rupee. But neither the
finance ministry nor the Reserve Bank seems inclined to pay much heed. And they should not, for
very solid reasons. The finance minister spoke about the need to encourage foreign exchange
outflows, as a way of controlling excessive build-up of forex reserves and rupee strength, and said:
We just don’t import enough.

Overseas subsidiaries
Corporates’ investment limit to float a subsidiary abroad has been raised from 200% to 300% of net
worth.

Bank loans to step-down subsidiaries

RBI has permitted Indian banks to extend credit and non-credit facilities to step-down subsidiaries,
which are wholly owned by overseas subsidiaries of Indian corporates. Many corporates had set up
such subsidiaries in recent times for overseas acquisition.

Portfolio Investment
Listed Indian companies can now invest up to 35% of their net worth as against 25% of their net worth
earlier in acquiring shares of foreign listed companies.

External Commercial Borrowing

Prepayment by corporates of their external commercial borrowings (ECBs) has been increased from $
300 million to $ 400 million without the prior approval of RBI. .

Mutual Funds
Mutual funds can now invest up to from $ 3 billion.

Individual remittance limit doubled to $ 1 lakh

A more liberal annual investment limit of up to $ 1 lakh for individuals could well mean buying into
good global blue chip stocks or property in some parts of the world. And if the limit is calculated
separately for a family of four individuals, $ 4 lakh can get you a relatively fancy property in some
countries or help build a decent portfolio.

Rates on NRI deposits slashed by 50 basis points

RBI annual policy statement said, “In the context of large capital inflows, there is a need to review the
interest rate prescriptions related to NRI deposit, viz., foreign currency non-resident (bank) (FCNR
(B)) deposits and Non-Resident (External) Rupee Account (NR (E) RA) deposits.”

Individuals allowed holding foreign exchange up to 6 months

RBI move to allow individuals hold on to foreign currency for a longer period is a small step toward
capital account convertibility (CAC). To small extent individuals holding foreign currency can take a
view on the rupee. If someone believes that the current weakness in the dollar is temporary and the
greenback may appreciate, they can hold on to their foreign exchange. Bankers feel that relaxations
are being made in context of the strong capital inflows, which are pushing up the value of the rupee.
 X-H

INFLATION: 2007
RUPEE APPRECIATION

Currency regime

The RBI fears that if it continues to buy the excess dollar inflows to keep the currency under control,
then the resulting addition to domestic money supply could be inflationary. At a time when inflation is
already running high, the RBI has chosen to step back and allow the currency to appreciate.

The current policy regime on exchange rates is at best confusing. If we have de facto moved to a more
open regime, then the RBI must also initiate measures to develop a broader and deeper market for the
Indian rupee. An overvalued currency will certainly pose a risk of India’s export story, especially as
most of our competitors continue to hold on to a policy of undervaluing their currencies.

Leading economists and policy watchers put forward reasons that could have prompted RBI to be less
hawkish is the forex inflows, which have assumed unmanageable proportions. The country’s foreign
currency reserves have now topped $ 200 billion, making it one of the largest in the world. The
strength of foreign exchange inflows has made the conduct of monetary policy really difficult. Every
time the central bank hikes interest rates to fight inflation, it makes the country more attractive to
foreign investors. Strong foreign exchange inflows increases the liquidity in the system, which causes
further increase in prices by creating higher demand at existing supply levels.

India’s policy is worthy of attention in Asia

A quiet revolution is unfolding in India and it could say much about the future of Asia’s fast-growing
economies. The rupee has gained almost 10% versus the US dollar over the last 12 months, and 18%
against the yen. The finance minister no longer seems to be fighting the tide.

Indian officials may have realised that pumping up economic growth with a weak currency is
counterproductive. It reduces the urgency of entrepreneurs in private sector to innovate. Companies
bellyaching about currencies are just looking for state help. A key reason China lacks India’s
entrepreneurial sprit is that China’s companies are, due to a weak yuan, focused on exporting goods
cheaply – not innovating and creating new ones.

A stronger rupee would make foreign goods cheaper. Indians lap up foreign goods. A stronger rupee
would jack up imports, and augment the supply of goods and services, putting downward pressure on
inflation. It would promote import of capital goods and technology. Steeped up imports would, of
course, increase the outflow of foreign exchange.

A stronger rupee would also facilitate growth of Indian ownership of assets, in India and abroad.
Indian assets in India would become more expensive for the foreigner to buy, and foreign assets would
turn cheaper for an Indian would-be acquirer. In short point is that a stronger rupee right now would
help the economy consume and invest more and to enhance Indian ownership of assets

China and Japan both work hard to keep their currencies weak. It seems that Asia learned the wrong
lesson from 1997 and that Asia is setting the stage for other financial crises, more of its own making
than the last one.
 INFLATION: 2007

Keep inflation under 5%

The central bank governor has lowered the GDP growth forecast to 8.5%, and at the same time
inflation target cut to 5% for this fiscal. The governor said: “That monetary policy, while contributing
to growth, has to maintain conditions of price and financial stability. Accordingly, the policy
preference for the period ahead is strongly in favour of reinforcing the emphasis on price stability and
anchoring inflation expectation.”

Keep inflation under 5%

The intention of the RBI is to maintain annual inflation below 5% in the medium term. The governor
quoted a World Bank study, which has analysed the growth experience of India in two phases: from
1950 to 1980 (Phase -I) and from 1980 till date (Phase -II). In both the phases, India managed to
contain inflation. This is particularly encouraging because India faced many external shocks and
associated adverse effects of imported inflation during phase II when it opened up the economy as
opposed to the closed economy environment of phase I.

RBI chief defends new 4 – 4.5% inflation target

Defending his self-imposed inflation target, RBI governor said it was essential for the country to
integrate with the global markets. The governor defended his approach saying when the country’s
financial markets were integrating with the global economy, it was essential to set targets with those
prevailing elsewhere.

Commitment to bring down inflation

Runaway inflation – the single point concern for the UPA government for the last few months – is
finally moving into softer territory. With inflation showing a steady decline, the government is now
working towards bringing it down to 5% level. Prime Minister assured Parliament that the UPA
government would be able to hold inflation within this level.

After effects of inflation:

PM’s ten-fold path: “Moralising trivia”

The Prime minister said there was an increasing tendency among industry sector to form price cartels,
which obviously went against the interests of the aam aadmi. Business is about making profits but in
socially responsible way. The prime minister, who asked the industry to be mindful of its wider social
responsibility, said the rising income and wealth inequalities if not matched by corresponding rise of
income across the nation, can lead to social unrest.

Suffering India
The CPM said the call to capitalists to cease exploitation was akin to asking for the moon. Also, the
government’s track record showed that it was more interested in ‘shining India’, and rarely cared for
the ‘suffering India’. The government should focus on people’s welfare and not to solely occupy with
corporate profits. It also drove home the point that 36 Indian billionaires were worth $ 191 billion, a
figure that made them worth one-fourth the country’s GDP. But what does it mean for the rest of
India?”

Set targets with those prevailing elsewhere

 XI

INSURANCE
LIFE INSURANCE PRODUCTS

Take careful checks

The decision to buy an insurance cover should not be based on glib talk by the agent. It should be
taken after careful checks. Your agent may exaggerate the returns and underplay various service
charges. Look out for company illustrations and not for excels sheets, which show rocketing growth
made by agents. We need to realise that protection is important. One should first opt for a term policy
that covers the basic protection. And then look that how can one start saving with an insurance plan.

1. Term plans is a pure-play for risk cover

Term insurance is a pure-play risk cover at dirt-cheap premiums. These don’t offer any money at the
end of the term on survival. Most insurance companies don’t seem to promote these products
extensively. But families are feeling the need for a good cover and hence term policies are finding
many takers. Don’t, however, take a single premium policy, as there are no tax benefits. Besides, the
lock-in deprives you of investing elsewhere for better return. And in the event of the unfortunate
happening too soon, your family will not get a refund of the unutilised premiums.

2. Money back policies

NEVER say die, Money back schemes seems to have born with the very instinct. For, despite the
introduction of new age unit-linked policies, which have taken the Indian insurance market by storm,
money back policies still continue in demand; forcing international players to join the race.

Money back policies are a part of the traditional life insurance product basket; that appealed to the
masses as the provision of periodic payouts helped the policyholder plan for expenses during the term
of the policy. The reason for the success of money back insurance is that it has evolved over time and
focus to a particular life stage need. Market leader LIC alone has at least half-a-dozen money back
plans, tailored to suit the needs of different people. So next time when you are planning to invest in a
new age insurance plan, also take a look at money backs. Who knows that they may look smarter than
their younger brothers!

3. Equity plans of unit-linked insurance plans (Ulips)

Ulip schemes work like mutual funds and the investment value of their portfolio can be tracked by
looking at their net asset values. But one fundamental difference is that expense ratio of Ulips vary
widely across insurance players. And, different cost structures affect overall investor returns.

Ulips are increasingly being aggressively sold these days due to lucrative commission structures. A
broker today makes a lifetime of commission from a policy in the first couple of years itself. Investors
often buy Ulips without understanding their cost repercussions.

Many insurance companies typically charge higher allocation charges in the initial years. Allocation
charges are similar to loads in case of mutual funds.. Let us suppose an investment of Rs 10,000 is
made in Ulips and the allocation charge is 30%. The investment that will go towards purchase of units
net of allocation charges will be only 7,000 and not Rs 10,000. However, the investment will be ever
lower than Rs 7,000 as other charges will also be deducted.
 INSURANCE

Sometimes asset management charges are more worrisome than allocation charges. Asset management
charges generally vary in the range of 0.8 – 2.25% p.a. This is charged additionally to the fund.
However, it is not easy to compare different plans on the basis of independent charges, as all charges
interplay with each other and are not independent.

Thus, a fair way to look at the total cost of availing of an Ulip is to look at the expense ratio. An
expense ratio is the annual expense of a fund, which includes all the charges made to the fund. In the
initial years, the expense ratio is steep and drops substantially over a longer period – around 2% p.a. or
even lower. This underscores the point that investment in Ulip should be done only with a long-term
perspective. It is not advisable to surrender a unit-linked policy. Apart from the surrender penalty, the
value receivable, net of allocation charges, is very low. So, it is advisable to buy Ulip with a clear
investment horizon of at least 10 to 20 years.

4. Women-specific insurance products

Insurance traditionally has been targeted at the earning members of the family. In today’s society,
however, there is no difference in the professional men and women and they both have the same
earning power and both contribute to the family kitty. Both incomes are important for family lifestyle
and standard. Therefore, it’s important that women also have insurance for themselves. There is a
strong-felt need for women to also insure and invest and, therefore, insurance companies are targeting
women with specially designed products.

LIC’s Jeevan Bharati is a special money back plan for women. It provides –

Life insurance covers throughout the term of the plan. (The premiums are payable throughout the term
of the policy or till earlier death. After at least two full years’ premiums have been paid, full insurance
cover is available even when premium are not paid for up to three years)

Periodic payments are made on survival at specified durations during the policy term.

It also cover against affliction of certain ‘female critical illnesses’ and occurrence of certain congenital
disabilities in newly born children. (Congenital disability benefit ceases at policy anniversary after the
life assured completes the age of 40 years)

It ensures guaranteed additions of Rs 50 per Rs 1000 sum assured during the first five years.

5. Keyman insurance

This promises to be a single key for many a lock. The key to success of any organisation is the
keyman. Keyman insurance provides protection to key members who are major contributories to a
company’s growth and whose absence may adversely affect the continuity of the businesses.

According to experts, keyman insurance is one of the most overlooked insurance for business, but also
one of the most important. It is quite popular in developed countries. Most of the UK’s leading
insurance companies offer keyman insurance as a development of their life and critical illness
insurance interests. The IRDA stipulated that the keyman insurance cover could be sold only through
term assurance, which combines life, accident and disability insurance policies. With the rise in
awareness and new players jumping on the bandwagon, it would surely be difficult to overlook plans
to protect one’s keyman.
 XII-A

SOME LESSONS
FROM THE LIFE OF A VISIONARY

R NARAYAN MURTHY

After some thought, I have decided to share some of my life lessons. I learned these lessons in the
context of my early career struggles, a life lived under the influence of sometimes-unplanned events,
which were the crucial that tempered my character and reshaped my future.

1. Respond systematically to chance-events is crucial

The first event occurred when I was a graduate student in Control Theory at IIT, Kanpur. At breakfast
on a bright Sunday morning in 1968, I had a chance encounter with a famous computer scientist from
a well-known US university. He was discussing exciting new developments in the field of computer
science and how such developments would alter our future. He was passionate and convincing. I was
hooked. I went straight to the library, read four or five papers he had suggested, and left the library
determined to study computer science.

Valuable advice can sometime come from an unexpected source

When I look back today at that pivotal meeting, I marvel at how one role model can alter for the better
the future of a young student. This experience taught me that valuable advice can sometime come
from an unexpected source, and chance events can some-times open new doors.

The next event that left an indelible mark on me occurred in 1974. The location: Nis railway station, a
border town near former Yugoslavia, when I was hitchhiking from Paris back to Mysore. I could not
eat because I had no local money. I slept on the railway platform until in the night when the Sofia
Express pulled in. The only passengers in my compartment were a girl and a boy. Some policemen
roughly interrupted us. The girl was led away. I was dragged along the platform into a small 8x8 foot
room with a cold stone floor, where I was held without food or water for over 72 hours.

I had lost all hope of ever seeing the outside world again, when the door opened, I was again dragged
out unceremoniously, locked up in guard’s compartment on a departing freight train and told that I
would be released 20 hours later upon reaching Istanbul. The guard’s final words still ring in my ears
– “You are from a friendly country called India and that is why we are letting you go!” The journey to
Istanbul was lonely, and I was starving.

A determined, compassionate capitalist

This long, lonely, cold journey forced me to deeply rethink my convictions about Communism. After
being hungry for 108 hours, I concluded that entrepreneurship resulting in large scale job creation was
the only viable mechanism for eradicating poverty in societies. Deep in my heart, I always thank the
Bulgarian guards for transforming me from a confused leftist into a determined, compassionate
capitalist! Inevitably, this sequence of events led to the eventual founding of Infosys in 1981.

2. The mindset one works with is quite critical

On a chilly Saturday morning in winter 1990, five of the seven founders of Infosys met in our small
office in Bangalore. The decision at hand was the possible sale of Infosys for the enticing sum of $ 1
million. After nine years of toil in the then business-unfriendly India, we were quite happy at the
prospects of seeing at least some money. I let my younger colleagues talk about their future plans.
Discussions about the travails of our journey thus far and our future challenges went on for about four
hours. I had not yet spoken a word.

We should be optimistic and confident

Finally, it was my turn, I spoke about our journey from a small Mumbai apartment in 1981 that had
been beset with many challenges, but also of how I believed we were at the darkest hour before the
dawn. I then took an audacious step. If they were all bent upon selling the company, I said, I would
buy out all my colleagues, though I did not have a cent in my pocket. There was a stunned silence in
the room. However, after an hour of my argument, my colleagues changed their minds. I urged them
that if we wanted to create a great company, we should be optimistic and confident.

3. Learning from experience be complicated

A final story: On a hot summer morning in 1995, a Fortune – 10 Corporation had sequestered all their
Indian software vendors including Infosys in different rooms at the Taj Residency hotel in Bangalore
so that the vendors could not communicate with one another. Our team was nervous. This customer
contributed fully 25% of our revenues. The loss of this business would potentially devastate our
recently listed company. Also, the customer’s negotiation style was very aggressive.

Our various arguments why a fair price – one that allowed us to invest in good people, R&D,
infrastructure, technology and training – was actually in their interest failed to cut any ice with the
customer. By 5 pm on the last day, we had to make a decision right on the spot whether to accept the
customer’s terms or to walk out. All eyes were on me as I mulled over the decision.

We would never again depend too much on any one

I communicated clearly to the customer team that we could not accept their terms, since it could well
lead us to letting them down later. But I promised a smooth, professional transition to a vendor of
customer’s choice. This was turning point for Infosys. Subsequently, we created Risk Mitigation
Council, which ensured that we would never again depend too much on any one client, technology,
country, and application area or key employee. The crisis was a blessing in disguise.

Self-knowledge
In-deed, the highest form of knowledge, it is said, is self-knowledge; what ultimately helps develop a
more grounded belief in oneself, courage, determination, and above all, humility – all qualities which
enable one to wear one’s success with dignity and grace.

A final word
When, one day, you have made your mark on the world, remember that we are all temporary
custodians of the wealth we generate, whether it be financial, intellectual, or emotional. The best use
of wealth is to share it with the less fortunate. I believe that we have all at some time eaten the fruit
from trees that we did not plant. In the fullness of time, when it is our turn to give, it behooves us in
turn to plant gardens that we may never eat the fruit of, which will largely benefit generations to come.
This is our sacred responsibility.

Hatching ideas

Most people like to lament, grieve and hypothesise about the sorry state of the world. But it is only a
select few who take up a cause that infuses a new dimension of meaning to their lives. They do this
knowing that their endevours might not always bear fruit. But when you find a cause, which could
light up your soul and fill you with a feeling of vitality every single day – it goes beyond rewards.

CA Lalit Mohan Agrawal