Inve

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s November 2010, Volume: 6

Sensex 20156.89 Nifty 6071.65 Dollar 44.80 Gold 20120.00 Silver 40360.00 Crude Oil ($) 86.34

Investeurs Consulting P. Limited

S-16, U.G.F, Green Park Ext. New Delhi-110016, www.investeurs.com

INSIDE

• Current Chronicles • Cover Story – Micro

Finance • Open Forum – Multi

Dimensional Bilateral Relationship

• Emerging Markets • Outlook – Gold • Financial Q • In Focus – Dilma

Rousseff

State-run PowerGrid Corporation's follow-on public offer

was oversubscribed 10.67 times till 1 pm on the final day

of the issue,12th November generating demand worth a

whopping Rs 81,092 crore. FPO through which the

government is looking to garner Rs 7,600 crore, has

received bids for 898.4 crore shares against 84.17 crore

shares on offer, More…

Tata DOCOMO, the GSM arm of Tata Teleservices Limited,

announced the launch of its 3G services in India. It will be

the first telecom player to have launched these services

after the spectrum allocation. Players like Bharti Airtel,

Vodafone, Reliance Communications and others are to yet

announce the launch.

More…

Videocon Industries along with US-based Liberty Mutual

Group-- a leading global property and casualty insurer with

2009 revenues in excess of $31 billion-- signed a joint

venture agreement to enter the non-life insurance

segment. The joint venture will provide personal and

commercial insurance products through a range of

distribution channels. More…

Index of Industrial production Industrial growth almost

halved to 4.4 per cent in September against 8.2 per cent a

year ago, pulled down by slow-down across segments.

However, Industrial growth in the first half of this fiscal,

as measured by the Index of Industrial Production (IIP),

stood at 10.2 per cent against 6.3 per cent a year ago.

More…

The state-owned Bharat Sanchar Nigam (BSNL), which

suffered a Rs 2,611-crore loss last fiscal, the first in the

company’s history, has decided to auction surplus

capacity on its long-distance network to private

companies, as it attempts to open up new revenue

streams. More…

Glenmark Pharmaceuticals is close to become the first

Indian company to develop an original novel chemical

entity (NCE) to treat diseases.

An NCE is a molecule developed in the early drug

discovery stage, which after undergoing clinical trials

could translate into a drug that could be a cure for some

disease . More…

Current Chronicles

Newspapers are buzzing with such reports,

which were not thought of half a decade back.

Proponents of microfinance must have never

envisaged crossing paths with equity

investments. But, of late, that has become

order of the day (see box at end of the article)

Private equity investments in this domain

have been of $230 million in the past two

years, & future looks even more promising.

Indian microfinance institutions (MFIs) have

reportedly attracted private equity investment

totaling INR 3.86 billion (USD 84 million)

between January and June of this year – an

increase of approximately 15 percent over the

first half of 2009. Such massive investment in

a socially oriented sector like microfinance

forces one to wonder if this has become a

business of generating gains on the back of

underprivileged.

Understanding the basics first. Microfinance

or microcredit has been always a part of the

domestic financial scene, albeit diminutive. It

hogged the limelight, for the first time in

2006, when the Nobel Peace Prize went to

Bangladesh's Muhammad Yunus and his

Grameen Bank, which championed the cause

of lending out tiny, unsecured amounts to

poor. Since then the idea has catapulted in to

serious money domain with a social rider.

MFIs' business model of high interest rates,

and near-zero defaults have drawn investors

from around the world. This coupled with a

wide client base, both existing & future,

turns it in to a virtual goldmine for the

investors. No wonder then, that, Singapore’s

Temasek, CLSA Capital and International

Financial Corp to private equity firms

Sandstone Capital, Unitus and Matrix, has

placed their bets on Indian microfinance

companies, as, SKS, Share Microfin,

Spandana, Ujjivan among others. Further

there has been a surge in the number of

microfinance focused funds like the Lok

Capital Group, Bellwether Microfinance Fund

and Aavishkaar Goodwell, among others.

These funds are dedicated to investing in the

equity of Microfinance Institutions (MFIs) in

India,

Symbiosis

As with investments in other industries, this

too, is a symbiotic relationship, where, both

investors, & the investee (MFIs) stand to be

benefitted. For private equity investor, the

attraction of MFIs lies in two sets of figures:

interest rates ranging from 30% to 60% and

repayment rates exceeding 95%. Together,

they make MFIs extraordinarily profitable.

“Derive from the Deprived?”

Cover Story

“Private Equity in Micro Finance”

Bhartiya Samruddhi Finance

Limited (BSFL), a MFI and a part

of the BASIX group, sold an INR

2.5 billion (the equivalent of USD

56.3 million) stake to a group of

undisclosed private equity firms.”

“Venture capital firm Canaan

Partners has invested

approximately Rs 45 crore in the

Chennai headquarted Equitas

Microfinance.”

“MicroVentures India, a private

equity fund that invests in

microfinance institutions (MFIs),

recently loaned INR 30 million

(approximately USD 680,000) to

Indian MFI Swadhaar Finserve.”

previously unbanked individuals to efficiently

access deposit accounts, government disbursals,

insurance products, and even secure payment

platforms have been launched as a direct result of

investor support. PE investments, also, serve to

strengthen balance sheets, demand better

corporate governance practices, thereby, resulting

in stronger organizations. We have examples of the

constructive role played by private equity in other

sectors. From technology to telecommunications to

more recent, clean technology, PE investments

have contributed handsomely to overall

productivity of various emerging sectors.

In nut shell, private equity brings along scalability,

accountability & transparency in operations.

Where does the poor figures?

In such a win-win scenario for both MFIs, & PE

players, one often forgets to factor in the real

drivers of the sector: the poor. What lies in there

for them to gain out of this relationship?

Advocates of PE investments talk of higher

investment in technology, and superior

competition amongst for-profit MFIs due to

increasing participation of private capital which

will result in lower interest rates, a higher quality

of service, and a greater diversity of products.

Positive impacts of PE investments are aplenty, but

so are its pitfalls. Biggest concern is about the

expectations of extraordinary growth rates by the

investor. Many fear that this will eventually lead

to drift from original goal of MFIs: lending to

marginalized sections of society. As bigger loan

sizes tend to reduce transaction costs, lending

policies may lead to targeting of more well-off

segments of the population who can service

bigger loans, thereby, defeating the very

purpose of microcredit.

The other disquiet is slightly opposite to the

first one. PE fund inflow induced aggressive

lending i.e. too much micro credit may lead to

over-indebtedness of borrowers, and eventual

trapping in to a vicious circle of new loans for

servicing older ones. This came in to lime light

when numerous suicides were reported in

Andhra Pradesh.

Now, where?

Concerns around private equity in microfinance

are valid, but, some levy should be attributed to

the prudence of the investor. A default prone

loan portfolio, no matter how large, is of no use.

This ensures that the interests of private capital

are aligned with those of the recipients of MFI

credit - both parties benefit from growing a

quality loan portfolio, promoting greater

operational efficiencies and technological

sophistication, and ultimately from accessing

public capital markets. These benefits all serve

to lower the operating costs of the MFI,

therefore resulting in a lower cost of capital and

Cover Story “Private Equity in Micro Finance”

MFIs have emerged as an investment hot spot

for Private Equity (PE) due to its rapid growth

and high returns, growing at a Compound

Annual Growth Rate (CAGR) of 105 per cent in

the last five years.

The sector covers 100 million people

worldwide with a total loan portfolio in excess

of US$40bn. Initially, growth has been on the

back of the traditional funding sources, like

grants & donations, but had it not been for

commercial capital participation, portfolio

escalation would not have been this massive.

Rapid growth demands higher investments.

Donation driven & bank led capital sources are

unable to meet investment requirements of an

industry growing at 75% per annum. Over the

past two years, the five largest MFIs in the

country have been the beneficiaries of

approximately US$180m in private equity

investment, which has helped them to grow

their combined active client bases from 2.2

million to over 4.7 million, a compound

annual growth rate of 45%. Four of these

organizations are now serving well over a

million active clients each. Private equity is no

longer option, but, rule of the game.

Then there are additional advantages of

private equity investments too. Numerous new

business models, like, the branchless banking

technologies currently enabling millions of

Cover Story “Private Equity in Micro Finance”

more efficient service for the end client.

The fact is that with billions of individuals still

outside the purview of financial services,

representing an estimated demand of US$300bn

in loans, the future role of commercial capital will

be even more critical. It has become indispensable

to the growth of microcredit and subsequent

achievement of its entire potential. Quite simply,

there is nowhere near enough grant capital

available to meet the funding requirements of the

world's microfinance institutions (MFIs) as they

continue to scale.

Logically, now the question should not be

“Whether to involve PE firms in the microfinance

sector?” but, “How can we build regulatory

mechanisms so as to ensure the best interest of

the beneficiaries?”

Op

en

Fo

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m

A multi-dimensional Bilateral Relationship Relations between nations are shaped by a

complex interplay of a variety of factors —

historical, geographic, political, economic,

cultural, strategic and so on. Governments

operate within given circumstances and it takes a

lot of political energy on the part of any head of

government to alter the nature of a bilateral

relationship based purely on government-to-

government interaction and relations.

Indeed, as Prime Minister Manmohan Singh told a

meeting of the US-India Business Council in

November 2009, “In today’s economically

integrated world, economic relationships are the

bedrock on which social, cultural and political

relationships are built. A strategic relationship

that is not underpinned by a strong economic

relationship is unlikely to prosper. On the other

hand, a web of economic relationships intensifies

both business-to-business and people-to-people

contacts, promoting a deeper and better

understanding between countries. That is the

kind of relationship we wish to see with this great

country, the United States.”

The bilateral relationship between countries that

is the “country-to-country” (C2C) relationship is a

sum of three distinct, even if interacting, aspects

of such bilateral relations. These three are:

people-to-people (P2P), business-to-business (B2B)

and government-to-government (G2G). The

equation can be stated simply as P2P+B2B+G2G =

C2C.

It is, in fact, possible to arrive at a quantitative

guesstimate of the intensity and importance of

the bilateral relationship between various

countries based on this simple formula. It is

possible to undertake a more sophisticated and

quantitatively satisfying exercise by trying to

measure each component in terms of some

broad indicators, the way the UNDP’s Human

Development Report estimates the Human

Development Index by using proxies for health,

education and livelihood status of people.

Thus, the number for P2P can be estimated

from information pertaining to tourism

data, migrant population, number of front-

page stories in print media, or minutes of

television time devoted to news from that

country, popularity of cuisine and culture,

interaction in sports and so on. In a

democracy, the media’s view of other

countries is shaped by all the three

variables, that are P, B and G, and the

media, in turn, shapes thinking at all three

levels.

BILATERAL RELATIONSHIP INDEX (BRI)

Country P2P B2B G2G C2C

United States 5 4 3 12

China 2 3 2 7

Russia 2 2 4 8

Britain 4 4 3 11

France 3 4 3 10

Germany 2 4 3 9

Japan 3 3 3 9

South Africa 2 3 3 8

Pakistan 4 1 1 6

NOTE: The scale for each component is 1 to 5, so the highest value that can be reached is 15 and the low est value is 3, ruling out the possibility of zero.

The B2B variable can be more easily estimated

using data relating to trade, investment,

movement of professionals and workers, joint

ventures and so on. It is more difficult to

quantify G2G, but one can use proxies like

defence purchases/sales, bilateral summits, trade

treaties, cooperation in high-technology and

strategic industries.

Based on these numbers, a Bilateral Relationship

Index (BRI) can be constructed and countries

ranked in order of their importance for India.

Take 10 countries that figure prominently in the

media, and see how they rank on a 1 to 5 scale of

importance. In P2P rankings, the US, Britain and

Pakistan would figure fairly high for different

reasons. The P2P interactions between India and

China, Russia, Germany and even Japan would be

much lower.

In the B2B ranking, the US would now be at the

top, along with countries like Britain, France and

Germany. China, of course, does more trade with

India than most but it would figure lower in

ranking because of the structure of trade, and the

limited extent of real B2B partnership. Japan lags

behind only because it has been a latecomer and

has been a hesitant investor till recently.

However, it is easy to see both China and Japan

improving their ranking on the B2B scale.

In G2G, Russia still remains at the top but with

the growing strategic engagement and

increasing defence cooperation between India

and the US, and now with the decision of the

Obama administration to lift high-technology

export controls, the US is likely to move up very

quickly on the G2G ranking. Indeed, 10 years

ago the G2G score for the US would have been a

lowly 2 or even 1, against the backdrop of post-

Pokhran-II sanctions imposed against India.

It is a testimony to the fundamental change in

the relationship, first initiated by Prime Minister

Atal Behari Vajpayee and President Bill Clinton

and then accelerated by the strategic

partnership launched by Prime Minister

Manmohan Singh and President George Bush

that the G2G score for India and the US will

undoubtedly go up. But whether it will be stuck

at 4 or go all the way up to 5 will depend on the

level of “trust” that President Barack Obama is

able to inject into the G2G relationship.

President Obama started off brilliantly with a

well-crafted letter written to Prime Minister

Singh in September 2008, even when he was on

his campaign trail, wherein he said: “I would like

to see US-India relations grow across the board

to reflect our shared interests, shared values,

shared sense of threats and ever-burgeoning ties

between our two economies and societies.”

Open Forum

But through his first year in office,

President Obama did and said things that

diminished the trust quotient.

More recently, President Obama has been

trying to retrieve lost ground and take the

relationship back to where his predecessor

had left it. If he can convince Prime Minister

Singh that he means what he says now,

unlike when he wrote that letter in 2008,

his visit can be declared a success. Winning

the trust of India’s Parliament, when he

addresses it today, the way Dr Singh won

over the US Congress in July 2005 (with 35

interruptions of applause in a 39-minute

speech), is the key to getting the G2G

number to 5!

(Source: Business Standard)

Emerging Markets Commodity Prices May Trigger Former

Soviet Rally: Russia Credit

Russian and Kazakh debt is catching up with

the rest of emerging markets as commodities

prices rise after the U.S. decision to add

money to the economy. Russia’s government

bond due in 2015 climbed after the Federal

Reserve pledged Nov. 3 to buy $600 billion in

Treasury securities through next June,

pushing the yield to 2.848 percent today, close

to a record low. Benchmark bond yields in

Brazil and South Africa, two other emerging-

market commodities exporters, reached two-

week and 10-day highs in the same period.

Russia firms up huge natural gas deal with

S.Korea

Russia will ship at least 10 billion cubic metres

(350 billion cubic feet) of natural gas a year to

South Korea from 2017 under a preliminary

deal to be signed 17th November, Moscow's

energy giant Gazprom said.

Commercial talks will start next month on the

deal, Gazprom head Alexey Miller told

reporters on the sidelines of a visit by

President Dmitry Medvedev to Seoul.

When the initial agreement was signed in 2008,

an official quoted by Yonhap news agency said

the gas imports would be worth about 90

billion dollars over three decades.

New deal to help indebted consumers in South

Africa

With credit-related court backlogs still sky high

and 47% of credit active consumers in arrears;

industry players on 11th November unveiled a

comprehensive set of voluntary measures to

streamline the debt review process. Proposed

measures include greater transparency between

credit providers and debt counselors, as well as

revised repayment terms for over indebted

consumers. These terms have been agreed at

industry-wide level - a serious compromise by

the banks which have until now opposed every

case.

Philippine Stocks to Extend Asia's Worst Loss

on Valuation

The Philippine benchmark stock index, Asia’s

worst performer this month, will extend losses

for the rest of 2010 as investors speculate a

recent rally was overdone, Macquarie Group Ltd.

said. The Philippine Stock Exchange

Index jumped 15 percent in September; the

biggest advance in more than eight years, as the

economy expanded and investors sought higher

yields amid near- zero benchmark interest rates

in the U.S.

Now, six straight days of losses have dragged the

gauge down 4.7 percent this month, trailing

a 3.9 percent advance by the MSCI Asia

excluding Japan Index. Foreign investors have

sold $17.9 million more Philippine shares than

they bought this month, following record net

purchases of $631.5 million in October, based

on data compiled by Bloomberg going back to

1999.

Bolsa Mexicana Changes Rules to Increase

Trading by Foreigners

Bolsa Mexicana de Valores SAB, operator of

Mexico’s main stock and derivatives

exchanges, has changed rules to make it easier

for foreign trading firms to buy and sell from

outside the nation.

The exchange operator is introducing market

access services to attract more firms such as

U.S. high-frequency traders, who already

facilitate more than 20 percent of equities

volume in Mexico, Chairman and Chief

Executive Officer Luis Tellez said in an

interview at Bloomberg’s headquarters in New

York. Tellez said he sees the proportion of

trading handled by those firms rising to about

50 percent in the next two years.

Outlook The price of gold powered to an all-time high of

$1,419 per ounce as continued global

uncertainty coupled with abundant liquidity

(with the promise of more!), a sign the yellow

metal is gaining acceptance as a form of

investment. In tandem, the price of gold in the

domestic market hovered at close to Rs. 20,000

per 10 gm.

As governments cut interest rates and boost

spending to fight the worst recession since

World War II, investors worldwide have rushed

to buy bullion as a hedge against inflation and

currency debasement. Gold holdings in

exchange traded funds are at record levels.

Gold is one commodity for which Indians have

an insatiable appetite. It has tremendous

demand in the peak of festive season. The high

global price has done nothing to curb domestic

demand.

In 2009, total Indian gold demand reached $19

billion, or Rs. 974 billion, which accounts for 15

per cent of the global gold market. After scaling

the $1,000 mark in September 2009, gold is

now up 40% in little over a year. That is almost

double the approximately 20% return from the

stock market in the year.

Gold has risen a lot and, hence, those who want

to invest can wait for a correction, in the short

term. Logic behind that are positive effects of

second dose of quantitative easing (QE2) on the

US economy, which would result in growth,

thereby, reducing gold’s appeal for hedging,

and subsequent profit booking will bring a

much needed correction.

In the long run, however, outlook remains

bullish. One leg of this bull market ended at

$1030 in March 2008 when other assets saw

a melt-down after the sub-prime crisis. After

that gold market corrected by 45% and

followed an up-move from 2001 low and

ended at October 2008.

Currently, we are in the third leg of the long

run bull market. According to the prevalent

projected targets, we get the first target at

$1,867 and the second target at $2,587.

These are still conservative targets. A blow-

out rally in gold has a much higher target

above $3,000. This is on the back of massive

weakening in the dollar due to previous dose

of quantitative easing. That is extremely

bullish for gold. Gold’s prices are expected

to rise until the US Fed’s policy is

normalized.

The 2008 peak of $1,030 will be the key

long-term support for gold. The positive

outlook for this metal and its ability to reach

higher levels will be negated only if it closes

strongly below the support band between

$1,000 and $1,030.

Call Rates as on 12th November 2010 → 5.90% -

6.74%

Commodities

Aluminum (1 kgs) 108.65

Copper (1 Kg) 392.40

Zinc (1 kg) 108.65

Steel (L) (1000kg) 25800

As on 12th November 2010

Forex Forward Rates against INR as on November 12, 2010 Spot Rate 1 mth 3 mth 6 mth US 44.72 45.04 45.54 46.18 Euro 61.32 61.76 62.42 63.26 Sterling 71.78 72.28 73.06 74.05 Yen 54.41 54.82 55.44 56.26 Swiss Franc

45.87 46.22 46.74 47.43

Source: Hindu BusinessLine

Libor Rates as on November 12, 2010 Libor % 1 mth 3 mth 6 mth 12 mth US 0.25 0.29 0.44 0.76 Euro 0.81 0.99 1.23 1.51 Sterling 0.57 0.74 1.03 1.49 Yen 0.12 0.20 0.40 0.63 Swiss Franc 0.13 0.17 0.24 0.52 Forward Cover % as on November 12, 2010

1 mth 3 mth 6 mth US 8.71 7.44 6.62 Euro 8.33 7.14 6.35 Sterling 8.30 7.17 6.38 Yen 8.94 7.60 6.86 Swiss Franc 9.02 7.60 6.85 Source: Homefinance.nl

Outlook on Gold

Financial Q 1. The first general purpose credit card was issued

by _________.

2. "We are number 2. Why go with us? Because we

try harder". Which brand was this No.2?

3. Areez Khambatta in Ahmedabad is credited

with being the man behind which famous

Indian brand?

4. Which is the first Indian company to be listed

on the NASDAQ?

5. Following the huge success of Hotmail and its

eventual sellout to Microsoft, what is the name

of the new venture planned by Sabeer Bhatia?

6. Which company is behind the creation of

Computer Mouse?

7. Which management term is derived from the

Greek word which means "Art of the General"?

8. The head of this business family is conferred

the honorary title of The Earl of Iveagh. Which?

9. M.M.Hasham's family business of rice exports

was lost when the Government nationalized it

in 1941. Undeterred he plunged into the oil

business and founded Western India Vegetable

Products. At the time of his death his company

was doing reasonably well with their two

established brands called Sunflower and Camel.

His son took over and they have now entered a

new field under what name?

In Focus Brazilian Iron Lady: Dilma Rousseff

History was made in Brazil on 1st November 2010, when it elected its first

female president. Dilma Rousseff, an economist & a former Marxist rebel who

was jailed and tortured during Brazil's military dictatorship, won 56% of the

votes to head a country which is expected to become world’s fifth largest

economy by 2016. A tough & resolute bureaucrat, she’s widely recognized as

Iron Lady in Brazil due to her fierce determination. Her campaign has been

labeled as an ode to outgoing president, Mr. da Silva’s illustrious tenure which

saw economic prosperity in the country. However, her acumen, & resolve

resulted in a former state secretary of energy of Rio Grande do Sul being

handpicked by Mr.da Silva, himself, as his successor. Her arrival could not

have been timed better with economy & the country, as a whole, in a good

shape. She has cleared first hurdle: how she takes from here, mainly in

education & poverty, remains an open question.

(1)Bernard H. Bass (2) Network 18 (3) Samsung (4) Microsoft (5) HDFC bank (6) BMP Paribas (7) Lenovo (8) October 19 (9) Porsche (10) E.F. Schumacher

Answer of Quiz: 5