volUME 4.12 ISSUE 74 4_12.pdf · to debt restructuring for airlines. RBI has directed the banks to...

volUME4.12

ISSUE 74

September 16, 2010

5.75 %4.50 %4.00-5.90 %+8.50 % $ 285.328 billions 6.0254 %+13.8 %8.0907 %

“The ‘private sector’ of the econo-

my is, in fact, the voluntary sector; and the

‘public sector’ is, in fact, the coercive sector”

~Henry Hazlitt

about uS02 - International News

International events in the

world of finance.

02 - Students Cartoon

03 - National News

National events in the world

of finance.

04 -US Economic SlowdownNo signs of recovery yet.

05 - Rescheduling of aviation

loans by banks

07 - Investor’s check article

IPo Norms For Non-Insur-

ance Companies

contents

CHAANAKYA

is the official Finance News-

letter, released fortnightly. Its

objective is to keep each &

everyone abreast with the ac-

tivities & events in the world

of finance.

CHAANAKYA VOL 4_12

Rates

RepoReverse RepoCall rateInflation (as on 14th Sept.)Forex Reserve (as on 10th Sept.)91day T-BillIIP for July, 20106.90 GS 2019

08 - Income Tax issue of Vo-

dafone

10 - Deregulation of Saving

Bank Rate

11 - Reliance Comm. and

GTL Infra Deal

13 - Did You Know?

Debt Swaps

15 - Commodity Trading

System

17 - Alumni Speak

A peek into the corporate world

through our Alumni’s experience.

1

GRaPHs

All riches have their origin in mind. Wealth is in ideas - not

money.-Robert Collier

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“Benjamin Franklin may

have discovered electricity, but it was the man who invented the meter who

made the money.” -Earl Wilson

inteRnational news

2 CHAANAKYA VOL 4_12

by ElIzabEth JoSE, II Mba-l

student’s caRtoonBy SAChIN, II MBA - M

• Hewlett-PackardCo. has agreed to buy the security software providerArcSight forabout $1.5 billion, as it extendsa recent spreeof acquisitions and the company islookingtogrowoutsidethelow-marginpersonalcomputermarket.Itagreedtobuythedata-storagemaker3Parfor$2.07billionjustafewweeksagoafterabiddingwarwithrivalDellInc.

• ForChinathebestmeanstoavoidtradefrictionwiththeU.S.iseconomicre-balancing,ashiftfromgrowthledbyexportstodomesticconsumption-drivengrowth,WorldBankPresidentRobertZoellicksaid.

• Globalregulators,aimingtopreventanyrepeatoftheinternationalcreditcrisis,toforcebankstomorethantripletheamountoftop-qualitycapitaltheymustholdinreserve.Thebiggestchangetoglobalbankingregulationindecades,knownas"BaselIII,"willrequirebankstoholdtop-qualitycapitaltotalling7percentoftheirrisk-bearingassets,upfromjust2percentundercurrentrules.

• TheUnitedStatesjusticedepartmentislookingintoGoogle’sInc’stakeoverofairlineticketingsoftwarefirmITAsoftwareInc,todeterminewhetherthedealwouldexerttoomuchinfluenceontheonlinetravelindustry.

• Britain's Financial ServicesAuthority has finedGoldmanSachs International nearly$27million for not disclosing its investigation by theU.S.Securities andExchangeCommission.

national news


by ElIzabEth JoSE, II Mba-l

• PrivatesectorlenderICICIBankhasbeenawardedtheWorldFinanceAwards2010inthreecategories:ExcellenceinNRIservices-Worldwide,ExcellenceinRemittanceBusiness-WorldwideandExcellenceinPrivateBankingBusiness.

• Aftermonthsofdelay,RelianceIndustriesisfinallyreadytosigncontracttosupplynatu-ralgasfromitseasternoffshoreKG-D6fieldstoEssarOil'sVadinarrefineryinGujarat.Thegovernmenthadallocated0.6millionstandardcubicmetersperday(mmscmd)ofgasfromKG-D6fieldstoEssarOil'sVadinarrefinery.

• A63percentriseincapitalgoodsproductionpushedIndia'sindustrialoutputupto13.8percentinJuly,asagainst7.1percentinthepreviousmonth.

• BuoyedbytheBombayHighCourt'srecentfavourableverdictonVodafone'staxliabil-itycase,thegovernmenthasstartedexaminingsimilarmergerandacquisitiondealsforpossibletaxevasion.TheBombayHighCourtlastweeksetasideVodafone'spetitionchallengingthetaxliabilityof$2.6billiontowardscapitalgainsinits$11-billionacquisi-tionofHutchisonWhampoa's67-percentstakeinIndia.

• TheReserveBankofIndia(RBI)isconsideringfreeinguptheinterestrateonsavingsbankaccounts,whichiscurrentlyfixedat3.5%perannum.

• EmiratesTelecom,theUnitedArabEmiratesbiggestphonecompanysaiditsconsider-inginvestinginIdeaCellularLtdtoexpanditsbusinessintheworld’ssecondlargestwirelessmarket.

• Thegovernmentwillintroduceanewseriesofwholesalepriceindex(WPI)thatwillbebasedon2004-05prices.


TheNationalBureauofEconomicResearch,anacademicgroupwithacommitteethatmarksthestartandtheendofrecessions,hasyettoannounceadatefortheendofthedownturnthatstartedinDecember2007,evenafterfourstraightquartersofgrowthintheUnitedStatesofAmerica.ThisinitselfisanindicationofthecontinuedrecessioninU.S.thatendangerstheglobaleconomicstabilityinthecomingquarters.

The August update of the USA TODAY/IHS Global InsightEconomic Outlook Index shows real GDP growth, at a six-month annualized growth rate, slowing to 1.3% in NovemberthroughJanuary.Theendofgovernmentstimulusspendingandinventorybuildupcombinedwithcontinuinghighunemployment,aweak housingmarket, tight credit and high debt are behindtheslowdown.TheindexpredictsfuturerealGDPgrowth(grossdomestic product, adjusted for inflation) based on 11 leadingeconomicandfinancialindicators.

TheObamaadministrationexpectsarecordbudgetdeficitthisyearofmorethan$1.5trillion,or10.6percentofGDP,accordingtoprojectionstheWhiteHousereleasedinFebruary.TheU.S.deficitisagreaterpercentageofGDPthananyothermajorindustrializednationexcepttheU.K.,whereitisestimatedtoreach11.4percent,andIreland,whereitwillbe12.2percent,accordingtoInternationalMonetaryFundprojectionsreleasedinApril.

Stimulus FailureThe quantitative easing (QE) by the Federal Reserve was great for big banks and ithelpedtolifttheU.S.stockmarket,butitdidn’thelpthebroadereconomyatall.Whilethemonetizationofdebthelpedtokeepinterestratesartificiallylowforthebroadereconomy,thereisjustnotmuchdemandforadditionalcreditbyindebtedandunemployedpeopleand struggling businesses. In themeantime, government stimulus programs likeCashforClunkers,HomeBuyerTaxCreditandconstructionprojectsservedasashort-termboost to the economy. The programswere designed as an incentive to buy cars andhousesimmediately,anditworked,withplentyofpeoplecollectingthefreemoneyfromthegovernment.Butitalsomeansthatthisconsumerdemandisnowgoneandthefuturedemandwillbeevenlower.

Rising Unemployment, Low demand and Weak Housing marketThe simple fact is that it is impossible to force companies and households to borrowmoremoneyinordertoinvestorspend.Already,25percentofAmericanshavearuinedcreditscore(duetodefaultingtheir loanpayments), disqualifyingthemfromborrowingaltogether.Thesepeoplewon’t buyhomesevenwith zeropercent interestmortgages.TheU.S. unemployment rate rose to 9.6% (U-3 rate) inAugust, but the government’sbroadermeasureofunemploymentroseevenmoreto16.7%(U-6rate),thehighestratesinceApril.Thecomprehensivemeasureoflabourunderutilization,knownasthe“U-6”,accountsforpeoplewhohavestoppedlookingforworkorwhocannotfindfull-timejobsbutmaybeemployedinpart-timejobs,whereastheU-3unemploymentrateiscalculated

no siGns oF RecoVeRY Yet…

by GayatrIlakShMI, II Mba ‘l’


basedonpeoplewhoarewithout jobsandwhohaveactively soughtwork in thepriorfourweeksonly.Theweakjobmarkethasinhibitedgrowthinconsumerspending,whichaccountsforabout70percentoftheeconomy.Suchexpendituresroseata1.6percentpacelastquarter,downfroma1.9percentrateinthepreviousthreemonths.Thehousingmarkethasalsofalteredsinceafederaltaxincentiveforfirst-timehomebuyersexpiredinApril.Salesofpreviouslyownedhomesfell5.1percentinJunefromMay.

AdditionalstimulusmeasuresunderconsiderationInrecentmonths,Fedofficialshaveoutlinedthreespecificstimulus measures that could be used should the needarise:1)purchasemoresecurities,2)committolowerpolicyratesforlonger,and3)reducetheinterestrateonbankreserves.

The Fed’s last move in favour of easier policy came inMarch 2009, when policy makers agreed to buy $300billionofTreasuriesandmortgage-debtpurchasesto$1.45trillionwhilestartingapledgetokeepthebenchmarkrateclosetozeroforanextendedperiod.Butthisyearthecentralbankstoppedbuyingassets,raisedtherateondirectloanstobanksandshutemergency-lendingprogramsforcorporations,bonddealersandmoney-marketmutualfunds.

Accordingtoeconomists,theFed’sdecisionattheAugust10thmeetingtousecashfrommaturingmortgagebondsitholdstobuymoregovernmentdebtwashelpfulinthefaceofaweakeningeconomy.ThismovekeepstheFed’sbalancesheetfromrunningdown.Butwhatthenationreallyneedsisgrowthsupportedbyfiscalpolicythatincreasesemploymentwhichwilltranslateintomorespendingandeventuallyaturntowardsrecovery.

RescHedulinG oF aViation loans BY BanKs

By ANShuMAN ChAurASIA , II MBA ‘N’

“Rescheduledloans”refertoloans:(i) that have been restructured and renegotiated between authorised institutions andborrowersbecauseofadeterioration in thefinancialpositionof theborrowerorof theinabilityoftheborrowertomeettheoriginalrepaymentscheduleand(ii)forwhichtherevisedrepaymentterms,eitherofinterestortherepaymentperiod,arenon-commercialtotheauthorisedinstitutions.

IntheIndianAviationscenario, itsthefirstreasoncitedabove.Indianaviationsector issittingonpilesofdebtthathappenedduetoeconomicslowdownandalsoincreasedpriceslikeinfuel.Accordingtoanestimate,thecumulativedebtoftheairlineindustrystandsataboutRs60,000crores.AsofMarch,2010Air IndiahadaboutRs40,000croresdebt,whileKingfisherhadadebtofaboutRs6,000crores.SBI’saggregateexposureto theaviationsectorisaboutRs3,000croresandBankofIndia’sexposureisRs4,000crores.

InthelastweekofAugust,theRBIhadsentacommunicationtothebankswithregard


todebtrestructuringforairlines.RBIhasdirectedthebankstobeawareof thevolatileaviationsectorandthattheycomeupwithaspecialconcessionalpackageforthesector.Bankshaverefusedtorestructureloansofairlines,estimatedatoverRs60,000crore,viatheCDR(CorporateDebtRestructuring)mechanism.Themainhurdleisthat75%ofthelenders toaparticularborrowerhave tocometogether to trigger theCDRmechanism.IndianBanksAssociationnowplanstoapproachtheRBItoallowbanksrescheduleloansofairlines—suchasKingfisherAirlines,ParamountAirwaysandAirIndiawithouttreatingthemasbadassets.Theywantairlinesloansshouldbeallowedtoberestructuredinsuchawaythatloanscontinuetobetreatedasperformingorstandardasset.

Banks want RBI to allow a simple restructuring of loans outside the CDR framework.Underdiscussionarea loweringof interest rate in thebeginningand recouping it laterwhentheairlinesbecomefinanciallystronger.Airlinesalsowanttoreplacetheirhighcostrupee loanswith low-costoverseas loans.TheRBIhasallowed in thecaseofaviationsectoraspecialconcession.Bankingindustrycouldonacase-by-casebasis,subjecttotheguidelinesandparametersgivenbyRBI,looktoseehowthisindustrycouldbehelpedbyareschedulingandrestructuring.

SBIchairmanOPBhattsaidthatrestructuringwouldhelpairlinesraisefreshequity.SBIplanstoreschedulesomeloansgiventotheaviationsector,includingtheoptionofconvertingsomeofthemintoequity.

The silver lining in the black cloud: Whiledebt and fuel costs remain key issues,recent growth in passenger volumes andoperationalimprovementscanputtheaviationsector on theprofit track.A series of positivenews flows over the last few weeks haveseen aviation stocks jump 11-30 per cent.Restructuringofloans,expansionofexistingfleet,capital-raisingplans,afallinaviationturbinefuelpricesandsteadydemandoverthelasttwoquartershavebeenwelcomedbythesector.Theairlineisfindingitswaybackintoprofitabilityonaccountofhighervolumesandoperationalefficiencies.Ifthebankrestructurestheloansoftheaviationcompaniesjudiciouslythenitwillbeahugeboostforthem.Thedebtriddencompaniescanchannelizetheirresourcesefficientlytoimprovetheiroperatingefficiencies.Thisstepwilldefinitelyprovebeneficialfortheairlinecompaniesinthelongterm.Thedaywillnotbefarwhenthesecompanieswillalsoshowprofitsintheirbooksofaccounts.

"Creativity comes from zeal to do something, generally it is to make some money." B. J. Gupta


iPo noRms FoR non – liFe insuRance comPanies

After setting thehouse in order bydisciplining the insurance companiesonunit-linkedinsuranceproducts(ULIPS),theinsuranceregulatorhasnowsetitseyesonthenonlifeinsurancesector.Today insurance requirements haveexpanded in all directions, starting fromhealth in-surancetotraveltoweddinginsurance.Withtheincreasingprosperitycomesincreasedresponsibility in taking care of one’s possessions and fulfilling responsibilities.Non-lifeinsurersofferaplethoraofinsurancecoversthatalmostcoveranythingunderthesun.

Insuranceotherthan‘LifeInsurance’fallsunderthecategoryofGeneralInsurance.Gen-eralInsurancecomprisesofinsuranceofpropertyagainstfire,burglaryetc,personalin-surancesuchasAccidentandHealthInsurance,andliabilityinsurancewhichcoverslegalliabilities.TherearealsoothercoverssuchasErrorsandOmissionsinsuranceforprofes-sionals,creditinsuranceetc.

Thegeneralinsurancesectorhas21players,whichincludefourstate-ownedcompanies.Severalprivatesector insurers, includingRelianceLifeandHDFCStandardLife,haveshowninterestintappingthecapitalmarkettoaugmenttheirresourcebase.Theprivateplayersarewaitingtotaptheprimarymarketstoaugmenttheirresourcebase,asallof

themareyettobreakeven.

Currently,mostofthe22privatelifeinsurersand17non-lifeplay-ershaveforeignpartnersandtheInsuranceactcapsforeigndirectinvestmentat26percent.

AspertheInsuranceact,promotershaving26percentstakecanoffloadequityafter10yearsofoperation.Thelegislationalsoem-powersthegovernmenttoreducethemandatoryperiod.

ThesecompaniesareplanningtoraiseIPOfornon-lifeinsurancesoastoallowthemtoraisefundsfromthecapitalmarket.

AsregardstotheIPOofnon-lifecompaniestherearecertainaspectswhichwehavetofinaliseinIRDA.Thereareaspectswhichhavetobestrengthenedandimprovedalso.Theseis-sueswillbefinalizedinthenextthreeweeks.

TheIPO(InitialPublicOffering)guidelineswillbefinalizedbyapaneljointlysetupbytheSEBIandIRDA.IPOnormsfornon-life insurance firms are in the process of finalization beforetheywouldbesenttoSCADA,abodyconstitutedbySEBI,forapprovalfollowedbyafinalapprovalfromthemarketregula-tor.ThefinalguidelineswouldbereadybyearlyOctober.

by PrEEtI NathaN, II Mba ‘N’


income tax issue oF VodaFone

BY:GARGEEMUKERJEE,IIMBA‘L’Nomatterwhichwayitgoes,theVodafoneversusITdepartmenttaxcasewillhaveanindelibleimpactontheMergers&AcquisitionsthattakeplaceinIndia.InMay2007BritishTelecomgiantVodafonepaidHutchisonTelecomInternationalLtd(HTIL)$11.08-billiontobuy67%stakeinIndiantelecomcompanyHutchisonEssar.Sincethedealwasoffshore,neitherparty thought itwas taxable in India.But the taxdepartmentdisagreedandsofiledapetitionwiththeBombayHighCourt.TheBombayHighCourtruledthatIndia’staxdepartmenthasjurisdictionovertaxbillsincross-bordermergers,dismissingthepetitionsettingaprecedentforoverseasfirmslookingtobuyintoIndiancompanies.VodafonehasnowmovedtotheSupremeCourtchallengingtheBombayHighCourt judgment,whichhadupheldtheincome-taxdepartment’sshowcausenoticeaskingittopayincometaxofabout$2billion.

FacTS oF THe caSe:Vodafone’s argument:ThedealwasnottaxableinIndiaas:-• ThefundswerepaidoutsideIndiaforthepurchaseofsharesinanoffshorecompany

thatthetaxliabilityshouldbebornebyHutch.• VodafonewasnotliabletowithholdtaxasthewithholdingruleinIndiaappliedonlyto

Indianresidence.• TherecentamendmenttotheITActofimposingaretrospectiveinterestpenaltyfor

withholdinglapseswasunconstitutional.

Income tax authority’s argument: EventhoughtheVodafone-Hutchdealwasoffshore,itwastaxable:-• AstheunderlyingassetwasinIndiaandsoitpointedoutthatthecapitalassetwhich

istheHutch-EssarornowVodafone-Essarjointventureissituatedhereandwascen-traltothevaluationoftheoffshoreshares.

• Throughthesaleofoffshoreshares,HutchhadsoldVodafonevaluablerights-inthattheIndianassetandthattheoffshoretransactionhadresultedinVodafonehavingoperationalcontroloverthatIndianasset.

• TheDepartmentalsoarguedthatthewithholdingtaxliabilityalwaysexistedandtheamendmentwasjustaclarification.

• Hutchistaxableontheprofittheymadefromthesale-thatisoneaspect.Thesec-ondaspectisthatVodafoneasapayerwasliabletodeducttaxatsourcebecausetheypaidincometoHutch.

The Bombay High court:Therulingisthat:–• Indiantaxauthoritieshavejurisdictionoverthe2007Vodafone-Hutchcross-border

dealthatcreatedVodafone-Essar.• ButthetaxliabilityonVodafone,thebuyer,wouldonlybetotheextentofincomeat-

tributabletotheassetsinIndia.• TherevenuesfromtheIndianassetshaveanindirectnexuswiththegovernmentof

Indiaandarehencetaxable.However,shareswereexchangedinCaymanIslands(overseas)andthecontrollinginterestisapartofshareholding,andhence,notsub-jecttotaxinIndia.


anaLySIS:TheHighCourthasmadecertainobservationsonthecontractualarrangementbetweenthepartiesanddeducedthat:

• Whilerefutingthetheorythatthetransactionwasmerelyatransferofasingleshare,itwasobservedthattherightsandentitlementsflowingoutofholdingasharecannotbedissectedfromtheownershipoftheshare.Itobservedthattransferofasinglesharewasnottheintentofthepartiesbutitwastochangethecontrollinginterestinthebusi-ness.

• Theviewthattransferofrightsandentitlementsisintrinsictothistransactionandthattheserightsinthemselvesconstituteacapitalasset.ThenexusofcapitalassetwithIndiawascriticalindeterminingthetaxabilityofthetransaction.TheHighCourtalsoobservedthatSection9oftheActiswideenoughtocoverwithinitsambitthescopeoftheinstanttransaction.

• TheHighCourtobservedthatTDSismerelyatentativedeductionofincomesubjecttoregularassessmentandthereisnodetrimentindeducting/payingitatthisstageandconcludingtheassessmentinduecourseoftime.

ISSUeS noT aDDReSSeD:• TheHighCourtwhilenotinganextremelyimportantsubmissionoftheAssesseeregard-

ingthenon-taxabilityofthetransaction[shouldtheshareshavebeentransferredbyaMauritiancompanyonaccountoftheDoubleTaxationAvoidanceAgreement(‘DTAA’)betweenthecountries]didnotmakeanyobservationonsuchsubmissionthusitleavesscopefordebateincasesofidenticaltransactions.

• TheHighCourtalsodidnotgetintothedebateofappropriationofincomethatwouldbechargeabletotaxandleftthequantificationtothetaxofficer.Finally,whileadjudicatingonthepenaltyaspectincaseofnon-deductionofTDS,theHighCourthasagainnotmadeanyspecificobservations.

• A larger legalproposition thatemerges from thedecision is theelementof revenueloss.WhilethecourthasheldthatTDSisatentativedeductionofincomeandnotfinalassessment.Refunds,especiallytaxrefunds,inIndiaarefewandfarinbetweenandthepaceatwhichtaxassessmentsandlitigationsareconcludedisfarfromsatisfactory.

concLUSIon: ThedecisionisboundtohaveawidereachingimpactoncrossborderM&AtransactionsinvolvingIndianbusinessesforvariousreasons.TheHighCourtrulinghaslaiddownthefollowingtheoriesthattransferofinterestinabusinesswouldinitselfconstituteacapitalassetthatmaybesubjectedtotax.Section9oftheIncome-taxAct,1961iswideenoughtocoverwithinitsambitsuchtransferofinterestand‘TDS’ismerelybasedonprovisionalassessmentandaslongasnexuswithIndianfiscaljurisdictionisestablishedtherequire-mentofdeductingTDSwouldarise.ThetelecomgiantVodafonehasmovedtotheSupremeCourtchallengingtheBombayHighCourtjudgment;butitisofthebeliefthattheITdepartmenthasastrongcaseandtheHCjudgmentreflectsthesameandsotheSupremeCourtisalsolikelytoupholdthedecisionofBombayHighCourt.

deReGulation oF saVinGs BanK Rate

by NavEEN kuMar kulkarNI, I Mba N

“Economyisasavings-bank,intowhichmendroppenniesandgetdollarsinreturn.”Indianbankingsectorhasundergoneahugetransformationeversincetheindustryhasopenedup.Withtheinflationrisingonaregularbasis,RBIistakingmanystepstocounterinflationandmakethelifeofthepeoplebetterandreliable.IthastakenmanystepsinthewholeprocessandsomeofthestepstakenareincreasingthekeyrateslikeReporateandReverseReporate.OneofthenewstepstakenbyRBIisderegulatingofsavingsbankrate.InterestonsavingsbankrateistheonlytypeofdepositwhichisstillbeingregulatedbyRBI.SavingsrateisoneofthedriversofthegrowthinIndia.Thesavingsaccountfor32.5%ofGDP(2008-2009)whencomparedto22.3%tenyearsagoi.e.1998-1999andthehouseholdsector isoneoftheimportantsectorasitcontributes70%tosavings.InMarch2004, therewere59savingsandcurrentaccountsper100adultpopulations. InMarch2009,thenumberincreasedto59.ThisisoneofthemajorstepswhichwillbetakenbyRBIinthedirectiontoattaintheobjectiveoffinancialsectorreformsandtobringmorepeopleintheformalbankingsystem.

Till now, RBI used to regulate the savings bankrate.Ithasnowdecidedtofreethesavingsbankrateandgivethedecisiontothebanktodecidetherateontheirwish.Thesavingsbankrateatpres-entisfixedat3.5percentperannumfordepositsuptoRs.2LakhandfordepositsoverRs.2Lakh;itisderegulatedallowingbanktofixtheirownrate.The savings bank rate of 3.5% was fixed eightyearsagoandnot changed from then.Recently,RBIwantedthebankstogivethe interestratetotheircustomerscalculatedmonthly.

RBIAccordingtoRBI,thisisoneofthestepstakentochangethefinancialsectorandsmoothtransmissionofmonetarypolicyinthebankinterestrates.Ithasearlieraskedbankstocalculatetheirinterestratesonthedailybasis.Thiswillbeachallengetobanksandthecustomersmaynotgethighinterestrates.

BanKSThisisastepwhichwillhelpthebanks.Withthisstepthebankcannowattractcustomersandincreasetheirsavingsbankaccountholdersandcanattractmoredeposits.Itwillalsoincreasecompetitionamongthebankstooffermorevariantsofsavingproducts.

cUSToMeRSCustomerscannowhavethechoiceofgoingwiththebanktotakeasavingsbankaccountwhichgivesthemmoreinterestontheaccount.Thiswill leavethecustomerwithmany


choicestochoosefrom.So,thederegulationofsavingsbankratewillhelpthecustomerinmanywaysbutwillbringinmorecompetitioninthebankingsector.Thebankswillnowtrytoattractmorecustomersandthebestwaytoreachthecustomersisthroughmedia.So,inthecomingdaysifthederegulationfinallygetsapprovedthenwecanseedifferenttypesofadvertisementsfrombankstoattractcustomers.Theadvertisementagencieswillbecomebusyandbanksmayalsopitchinbyendorsingabrandambassadortoadvertise.

concLUSIon:- However,ifabanklendsitsnameorfloatsormanageslargeprivatepoolsofcapital,thereisaneedforadditionalcapitalrequirementstotakecareofreputation,concentrationandotherrisks.Whileitmaybegoodnewsforthecustomers,itmaynotbesuchasmoothrideforthem.Bankscouldincreaseservicechargesorevenfixhiddenchargestomaintaintheirmargins.So,Ithinktheyaregoingtoseeinterestingyettestingtimes.



Reliance communication and Gtl inFRa toweR deal

by NIvEDIta tIWary, II Mba M

InTRoDUcTIonTheproposeddeal tomerge the telecomtowerbusinessof India’s2nd largest telecomfirmReliancecommunication(Infratel)andGTLInfrastructurehasbeencalledoffbyGTLInfrastructure.ItissupposedtobeamajorsetbackforRCOMMasitwasmakingeffortstoreduceitsdebtbyapproximately$3.9billionfromtheproceedsofthisdeal.

a BRIeF LooK aT Key eVenTSInJan2010,RelianceCommunicationsgottheapprovalofthemarketregulatorsforitsproposedIPOofitstowerunitReliance Infratel. The company was valued at Rs 30,000croreinJuly2007.RCOMMwasplanningtoraiseRs.1500–2500crorebyselling3-5%stake.GTLannouncedtopayRs.48lakhpertowerforthe18000towers,anditvaluedthetowerbusiness toRs. 50,000 crore.ThedealwouldhavehelpedtheRCOMMtobidforthe3Gspectrumaggressively.InJune2010,boardofRCOMMapprovedtobringinvestorsintoitstowerunittosellasmuchas26%ofRelianceInfrateltostartaseparateinfrastructurebusiness.

RCOMMisexpectingtogetmorebusinessinthetowerindustrybyforminganindependentcompanyasitwouldbemucheasiertogetcontractsfromcompetitorsespeciallythesmallplayerswhohaverecentlyenteredthemarket,bothin2Gand3Gmarket.RCOMMtowershadatenancyratio(numberoftelecomoperatorssharingaparticulartower)of1:2andthisratioisexpectedtoreachthemarkof1:3bymid-2010,withtheentryofmanynewplayerssuchasSwan,UnitechWirelessetc.

IndusTowersistheworld’slargesttowercompanywithover100,000telecomtowers.ItisjointlyownedbyBhartiAirtel,VodafoneEssarandIdeaCellular.RelianceInfratelwhichcurrentlyownsabout50,000telecomtowersistargetingtocreatethelargestindependenttelecominfrastructurecompanynotcontrolledbyacarrier.

ForRCOMMinvestors,thelatestarrangementprovidestwobenefits—alowerdebtburdenandanopportunitytoholdsharesinanindependenttowercompanythatoperatesinthefast-expandingtelecominfrastructurefield.RCOMMhadnetdebtofnearly20,000crorerupeesasofend-March2010andpaid8600crorerupeesinMay2010for3Glicencesin13circles,takingthetotaldebttoalmostRs.33,000crorebymid-2010.

ByJune2010,RCOMMdecidedtosellitstelecomtowerstoGTLInfrastructure,theenter-prisewasvaluedover$11billionanditwouldownmorethan80,000towers.ThesharesofGTLInfrastructureroseby9percentfollowingthenews.ThedealwasexpectedtoreducethedebtofRCOMMbyapproximatelyRs18000crore.

OnSeptember6,2010GTL Infrastructureannounced that itsdealwithRelianceCom-


municationshasbeencalledoff,givingaverybigblowtotheRCOMMeffortstoreduceitsdebt.Thenon-bindingtermsheetsignedbythecompaniesexpiredonAug31,GTLsaid“Subsequentlydespiteefforts,bothpartieshaveneitherextendedthetermsheetnorenteredintoanydefinitivetransactionagreements”.Itdidnotgivespecificdetailsaboutwhythedealwascalledoff.ThesharesofbothGTLandRCOMMsawared,withGTLgo-ingdownby4.1%andRCOMMslippingdownby0.3%.OntheothersideRCOMMhavealreadyinitiatedtalkswithotherfinancialinvestorstooffburdenthetowerbusinessandreducethecompany’sdebt.

concLUSIonItcanbeassumedthatRCOMMdecidedtodoawaywiththedealtoraisemorefundsandrepayhigherdebt.ThismightnothavebeenacceptabletoGTLInfraleadingtodealbe-ingcalledoff.ItmaynotimpactRCOMMbadlyastheyarelookingforotherinvestorswhomightstillvaluethetowerbusinessveryhigh.GTLInframightjustremainasmallplayerinthetowerbusiness.

did You Know? : deBt swaPs

By AMAr. G.M, II MBA-K

Debtswapisagenerictermforanexchangeofdebtwithsomeotherasset.Examplesofdebtswapsincludetheconvertiblebond,inwhichadebt–equityswapisinitiatedbythebondholder,andthedebt–equityswappioneeredbySalomonBrothersintheUSAintheearly1980s,whencorporationsreplacedoverUS$10billionofdebtwithUS$7billionofnewequity.Thelatter,however,disappearedafter1984,probablybecausethetax-relatedincentiveceasedtoexist.

Themostsignificantapplicationofdebtswapshasbeenininternationalfinance,particu-larlyasamechanismforsolvingthedebt-servicingproblemsoflessdevelopedcountries(LDCs).

TheLDCdebtcrisisexploded in1982withMexicodefaultingon its loanpayments, fol-lowedbyotherdefaults,mostlyLatinAmerican.Thecreditorsweregenerallyinternational(largelyUS)commercialbanks.Amongthevarioussolutionsproposed,themostpopularweremarket-basedstrategieslikedebtbuybacksandvariousdebtswapssuchasdebtfordebtanddebtforequity.

Inadebtfordebtswap,thecreditorbankexchangesitsoutstandingloansforUSdollar-denominatedbondsissuedbytheLDC'scentralbank.ThesebondsareknownasBradybondsaftertheUSTreasurySecretaryNicholasBrady,architectoftheBradyPlanof1989todealwiththedebtcrisis.TheBradyPlanwasthefirsttoacceptdebtreductionasnec-essaryforapermanentsolution;therefore,Bradybondshavelongermaturitiesandlowercouponsthantheoriginal loans.However, theyhavecertainattractivefeaturessuchasliquidity,collateralization,androllingguarantees.Theliquidityisaresultofanactivesec-ondarymarket,withavolumeofUS$100billioninmid-1994.MostBradybondsalsohavecollateralizationofprincipalandimmediatecoupons,thecollateralusuallybeingUSTreasuryinstrumentsoftheappropriatematurity,andpaidforpartlybyWorldBankand


IMFloansandpartlyfromtheLDC'sownreserves.Theinterestguaranteesarerolledfor-wardcontinuously.Becauseofthiscollateralbacking,BradybondsarenormallyseniortootherLDCloans.

Adebt–equityswapisanexchangeofoutstandingLDCdebtforanequitystakeinapri-vatecorporationintheLDC,asfollows:LDCdebtispurchasedonthesecondarymarketfromthebankatthemarketprice,usuallyatadiscountfromfacevaluebyamultinationalcorporation(MNC).TheMNCthentradesthedebtclaimtothe LDC's central bank for the full face value in the localcurrency(lessthecentralbank'scut),whichittheninvestsina localcompany,veryoftenanewlyprivatizedcorpora-tion.Theinvestmentinlocalequitymustbemaintainedforaminimumnumberofyears.TheadvantagefortheMNCisthattheinvestmentismadeatasignificantdiscount,sincethediscountsprevailinginthemarketcanbequitehigh.TheLDC'sadvantageisthattheswapreducesexternaldebtwithnooutflowofforeigncurrency,andexternaldebtisreplacedbyforeigndirectinvestment.Theswapconvertsforeigndebtintoforeignequity;thisisequivalent,inacorporatefinancesetting,toreducingleverageandtherebyimprovingcreditrating.

Adisadvantage for theLDC is that its liquiditypositionmightworsenbyallowingdirectforeigninvestmentthroughswapsinsteadoffreshcapitalinflows.Theswapsmaybesub-sidizingforeigninvestmentsthatwouldhavebeencarriedoutanyway,andnotgeneratinganyadditionalinvestment.Furthermore,swapscanactuallyreduceinvestmentintheLDCthroughtheireffectoninterestrates,inflation,andothermacroeconomicvariables.Forthecreditorbanks,thereistheusualmoralhazardproblem;byencouragingswaps,theymaybehelpingreducethevalueofthedebtbyprovidingincentivestodebtorcountriestodelayrepayments.

Debt–equityswapshavebeenthemostimportanttypeofdebtreductioninstrument,ac-countingforoverUS$35billion(oralmost40percentofthetotalvolumeofdebtconver-sionsofalltypes)from1985to1993.Sincetheestablishmentofthefirstinstitutionalizeddebt–equityswapprograminChilein1985,ithasbecomeanintegralpartofexternaldebtmanagementand reduction. It startedslowlywithconversionsworthUS$500million in1985,andpeakedin1992withavolumeofUS$9.2billion.After1992,therewasadeclineinthevolume,partlybecausemarketdiscountsonLDCdebtweremuchsmaller.

Howeffectivewasthedebtconversionprograminresolvingthedebtcrisis?Onepointofviewisthatitwasverysuccessful,and"LatinAmericanborrowershaverecoveredfromthedebtcrisis".Attheotherextreme,somebelievethattheprogramhasnottackledtherootcausesofthedebtproblem.SothatwasaboutDebtSwaps.

“It isn’t so much that hard times are coming; the change ob-served is mostly soft times going. ”

~Groucho Marx


commoditY tRadinG sYstem - a candlesticK siGnal FoRte

By MooKAMBIGAI.G, II MBA M

UtilizingCandlesticksignalscanhelpaninvestordevelopahighlyprofitablecommoditytrading system. Japanese rice traders used the signals to develop the first commoditytradingsystem.Commoditiesareeasier totradethanstocksusingCandlesticksignals.Thereason issimple.Thereare feweroutside influences toaffectcommodityprices.Asuccessfulcommoditytradingsystemcanbeimplementedthroughsimplevisualanalysis.Thesignalsusedinconjunctionwithsimpleconfirmingindicatorssuchasstochasticspro-duceahighprobabilitycommoditytradingsystem.AsillustratedintheJulyWheatchart,whenthepriceofWheatwasanoversoldcondition,aBullishHaramiillustratedthetimetobuy.

Thetrendofacommoditywillusuallyremainsteadyinonedirectionuntilthestochasticsindicateanextremecondition,eitheroverboughtoroversold.ApplyingCandlesticksignalstothetrendanalysisintheseextremeconditionsmakescommoditytradingsystemverysimple.TheprobabilitiesbecomehighinthefavoroftheCandlestickinvestor.

NotehowJulyWheatstarteditsuptrendwhenthestochasticswereintheoversoldcondi-tion.ABullishHarami/SpinningTopwasthereversalsignalatthebottom.JulyWheatnowisapproaching theoverboughtarea.The indecision,SpinningTopsandDoji's, indicatelessconvictiontotheupside.ABearishEngulfingsignalshouldsignifyanuptrend.

TheCandlesticksignalsmakeforahighprofitcommoditytradingsystembecauseoftheimmenseamountofinvestmentinformationprovidedineachofthesignals.Pricesmovebasedoninvestorsentiment.

Commoditytrendshaveonebasicadvantageoverstocktrends.Onceacommoditytrend


isidentified,thetrendwillpersistinmuchbetteridentifiablemovesthanastockprice.Thereasonforthisisthatcommoditiesusuallyhavemuchfeweroutsideinfluencesthanastockprice.Acommoditypriceusuallymovesbasedonsupplyanddemand.Astockpricewillmovebasedonchangesinfundamentalelements,thestockmarketdirectioningeneral,interestratemoves,oramultitudeofotherinfluencesthatcanchangeinvestorsentiment.BeingabletoidentifystrongreversalpatternsusingCandlesticksignalsisoneofthebestcommoditytradingplatformsavailable.Commoditiesusuallymovebasedonsupplyanddemand.Theseinfluenceshaveaminimalnumberofaspects.Grainsandthesoftcom-moditiescanbeaffectedbyweather.Currenciescanbeaffectedbyeachother.ThedollarwillusuallyactinverselytotheBritishpound,theEurodollar,andtheSwissfranc.

HighlyprofitablecommoditytradingplatformscanbedevelopedwhenyouhaveCandle-sticksignalsillustratingdefinitereversalsintrends.AsillustratedintheJulyCorncontract,aDojiatthebottomfollowedbyagap-up,whenstochasticswereintheoversoldcondition,

made forahighprobability,profitable trade.Beingable to identify theobvious reversalsignalsallowstheCandlestickinvestortotakeadvantageofenteringtradesattheoptimalprices.

ThecenturiesofidentifyinghighprofitreversalsignalsarebuiltintoCandlestickformations.Thisinformationcanbeusedtoouradvantage.Whethertradingstocksorcommodities,thesignalsputtheprobabilitieshighinfavouroftheinvestor.Verysimpleandprofitablecommoditytradingplatformscanbethusestablished.

by MohIl kaPoor II Mba l

alumni sPeaK

Inthisedition,wehavewithusMr.RejoiceDanielJohn

Name: RejoiceDanielJohnNameoftheOrganizationcurrentlyworking:

FuturesFirstInfoServicesPvt.Ltd

Designation: AssociateWhatdoestheworkinvolve/WorkProfile:• ResearchreportswithdaypositionalcallsforS&P500,Eurostoxx,Crude

Oil,EuroswissInterestRate,andCrudeOilSpreads.• Intradaycallsonthemarketfortheaboveproducts.• TradingEquityOptions(BuyandWritingOptions).• LongtermpositiontradinginEnergyandEquityFutures.WorkExperience(months): 49MonthsYearofPassingout: 2006Areaofinterest: AutomatedTradingStrategywithspecific

referencetoequityanddebtmarketinstruments.

chaanakya: Canyouexplainindetailaboutyourroleandresponsibilitiesinthetradingdepartment?

Mr. Rejoice:PresentlymyprimaryrolecomprisesofheadingtheresearchdeskforCrudeoilandEquitymarkets.Dailyreportsaresentoutacrossallofficesasandwhenmarketsopen.Apartfromthesame,takeuplongertermcallsonthemarketbasedonfundamentalsandlongertermanalyticsonthemarketbasedonstrategiesmadeovertheyears.Optionstradingtakeupmostofmypartoftradecallonadailybasis.Whenjoiningtheorganization,theprimaryroleforthepersonwouldbeinintradaytradinginthemarket.She/hewillbeassignedaparticularmarketwhereonewillberequiredtotakecallson themarketbasedonpersonalviewsandavailable resources(all requiredsupportwillbeprovidedforthesame).

chaanakya: Whatatethevariousskillsthatthestudentsneedtogetequippedwithforthisrole?

Mr. Rejoice:Agoodin-depthknowledgeregardingthefunctioningofcashandderivativemarkets is a must when you begin. Fundamental understanding of how the economyfunctionsandtheflowofmoneyduringeventsdoesprovidetheindividualanaddededgeoveranewcomerinthemarket.Thestudentshouldbecapableofhandlingpressureatalltimes.Forthesameifshe/hehastheunderstandingofhowmarketsfunctionandhowtheyareinter-correlateddoesprovideamuchneededadvantage.


chaanakya:Howdoyouexpectthestudentstoapproachthegame-Trademogul?Howfarisitconnectedtotherealmarkets?

Mr. Rejoice: Theanswertothesamewouldbetreatingitveryseriouslyandasrealaspossible.Youwouldnotbeabletogetanyclosertotheactualmarketthantradingitasacareer.Thisgameprovidesyouaplatformtoexperiencetheexhilaratingfeelingwhenthemarketsarevolatileorforotherswhenit’squiet.

chaanakya:CanyoupleaseprovideuswiththeaspectsthatyouconsiderfortheintradaytradinginS&P500,Eurostoxx,CrudeOil,EuroswissInterestRate,andCrudeOilSpreads.

Mr. Rejoice: Ipersonallybelieve inabalanceapproach to theseverymaturemarkets.Many are pure technical or fundamental traders but I try and take the best from bothworlds.Priceactioncontinuesandremainsmymajoraspectwhilebothpreparingreportsand taking position in thesemarkets.Technicalswould provide an edge over others. Ipersonallybelievethattechnicalsshouldnotbethebasisoftakingatradebutareasonforconfirmingthetrade.Weshouldtryandunderstandthatallmarketsarecorrelatedinonewayortheotherandasuddenmovementinonewouldhaveanimpactintheothermarkets.Thereforebalancingananalysisofwhatcanandshouldhappenduetoasuddenchangeinsentimentsisquitecrucialinbeingabletobethefirstonetotakeacallonthemarketandhavetheadvantageasafirstmover.

chaanakya:AsanAssociatewhatareyourjobresponsibilities?

Mr. Rejoice: WouldbeeasierifIlistthemout

1.HeadingtheEquityandEnergyResearchDeskintheorganization.2.ResearchReportsforvariousmarkets.3.OptionsandlongertermcallsonthemarketandHedgingstrategies.4.AdvancedResearchintovariousmarketsandNewtradeideas.5.TestingandAutomatingTradeideas.6.RecruitmentandTraining.7.Others.

chaanakya:Whatarethedifferentcertificationsthatwillhelpstudentstounderstandthejobroleandthetrading?

Mr. Rejoice:Understandingtherigorouscoursethatthestudentsundertakeduringtheireducation.AnFRMwouldhelpthestudentandwillnotaddtothepressureoftheirongoingeducationcourse.AfterwhichaCFAwoulddefinitelyhelpalongtheway.

chaanakya:Canyoushareyourexperienceregardinganyofthechangesingovernmentregulationsandworldwidepoliticalscenariochangingyourstrategyintrading?

Mr. Rejoice: Mostoftheeffectiswitnessedintheformofliquidityinthemarket.Theliquiditycouldandwoulddryupovertimewhichwouldhaveanimpact intermsof thevolumesthatcanbetraded.Onmostoccasionswehavewitnessedthatthemarketsusuallyhasdiscountedmostofthepossibilitieswayaheadintimebeforeitactuallyhappensandwould



haveshiftedfocustothenextbestsubstituteovertime.RussianregulationonexportsoffoodgrainsovertheperioddidhaveashorttermimpactinthemarketbutthishasseentradersshifttheirfocustotheUSmarkettobeabletograbopportunityofthepossibilitiesonCME.

chaanakya: Asyoudealwithlongtermpositiontradinginenergyandequityfutures.Whataccording toyou is thepresentsituation in theU.SandEuropeanmarketsanddoyouhaveanymodelwhichtriestoassessthefutureofderivativemarkets?

Mr. Rejoice:TheUSismuchweakerthanwhatmostpeopleexpectandwewouldextendthatthisweaknessistoremainforsometime.TheEuropeanUnionisyettoshowcaseitselfasagroupandthiswilldetermineoverthecomingmonththeriseorfallofEuroasaglobalcurrency.WatchoutforpayrollandemploymentfigurerollingoutoftheUS,whichwouldgivealeadindicationtowhatishappeningintheeconomyaheadofarecoveroradoubledip.

LetusjustsaythatIwouldbetbiggeronafallatthispointratherafullrecovery.

chaanakya:AnyMessagefortheStudents.........

Mr.Rejoice:Keepyourheadsupandbereadytotakeontheopportunity.Themarketsarechangingandtheyareneverwrong,understandthatwehavetochangealongwithit.

Thereisandwillalwaysbeaworldofopportunitytomakemoneyaheadandwouldalwayssay“neverbotheraboutmakingbackthemoneyyouhavejustlostbecauseyoucan’t...

‘youonlymakenewmoney’...”

ReadandkeepyourselfupdatedonallwhatishappeningandneverbescaredtoaskQuestions.

Wishyouguysalltheverybest.


cRosswoRd

across

3. Canadiandollar.

4. Atransactionexecutedatthesamepriceasthetradeimmediatelyprecedingit,butatapricehigherthanthetransactionbeforethat.

6. NewchieffinancialofficerofAspiroAB.

Down

1. Thepowercorporationthatsigned$1MillionEquityFinancingAgreementwithEu-ropean-basedinstitutionalinvestor.

2. AtechnicalindicatorthatcomparesthenumberofadvancingstocksontheTokyoStockExchangetothenumberthataredeclining.

5. Thepriceofanounceofgolddividedbythepriceofanounceofsilver.


BuZZ woRd

one night Stand InvestmentBuyingasecuritywiththeintentionofholdingitforthelongterm,butsubsequentlypanick-ingandsellingitthefollowingday.

one-Stop ShopAcompanyoralocationthatoffersamultitudeofservicestoaclientoracustomer.Theideaistoprovideconvenientandefficientserviceandalsotocreatetheopportunityforthecompanytosellmoreproductstoclientsandcustomers.

opinion ShoppingAcompany'sactionofsearchingforanauditorwhowillgiveapositiveopinionofthecom-pany'saccountingpractices(eventhoughtheymightnotdeserveit).

Pac ManAformofdefenseusedinahostiletakeoversituation.Thetargetfirmturnsaroundandtriestotakeoverthecompanythathasmadethehostilebid.

Painting the TapeAnillegalactionbyagroupofmarketmanipulatorsbuyingand/orsellingasecurityamongthemselves to createartificial tradingactivity,which,when reportedon the ticker tape,luresinunsuspectinginvestorsastheyperceiveanunusualvolume.

Ponzi SchemeAfraudulentinvestingscamthatpromiseshighratesofreturnatlittlerisktoinvestors.Theschemegeneratesreturnbyacquiringnewinvestors.

Poison PillAstrategyusedbycorporationstodiscourageahostiletakeoverbyanothercompany.Thetargetcompanyattemptstomakeitsstocklessattractivetotheacquire.

PotTheportionofastockorbondissuethatinvestmentbankersreturntotheunderwritersotheportioncanbesoldtoinstitutionalinvestors.

“Economy is a savings-bank, into which men drop pen-nies, and get dollars in return.”


QuiZ

1.WhichFinanceMinisterhaspresentedtheBudgetthemaximumnumberoftimes?

2.`Oneclientatatime’isthetaglineusedbywhichglobalfinancialservicesplayer?

3.NiftyfuturesaretradedonthestockexchangeofwhichcountryapartfromIndia,intheNationalStockExchange?

4.Thehundred-dollarnote is thehighestdenominatedcurrency in theUS.What is itpopularlyknownas?

5.Therearesevenstocks—ONGC,Reliance,NTPC,TCS,Infosys,BhartiTele-VenturesandWipro—thatnowhaveamarketcapitalisationinexcessofRs50,000crores.Whichwasthefirststockthatcrossedthismilestone?

6.Thisexchangeenablesyoutotakebetsonpoliticsincludingelectionoutcomes,currentevents,entertainment,financialindicators,legalissuesandweather,tonameafewoftheuniquecontractsonoffer.Namethisweb-basedtradingfacility.

By ABhIjeet SINGh & DeepAK joSe 1MBA

answeRs

Quiz crossword

1:PranabMukherji2:MorganStanley3:Singapore4:Benjamin5:Hindustanlever6:www.intrade.com


ManeshPaulMani

editor-in-chief

SachinCartoon

AmuthaPriyaDnews

NiveditaTiwaryInvestors check

SonalSankhlaStudent article NithyaPrakash

Scam

Mookambigaicommodities Market

NivedithaSDebate

CliffordCardoza,SmithaJoseph&MohilKapoor

alumni Speak

team

DorinJaneQuiz & Did you Know

MantriAnkitAtulQuotes & Buzz WordsPottimSahitiReddy

crosswords

VipulJainGraph, Rates

DhanyaAnnaKurianm&ResmySebastian

Review committee

BhargavK,ApoorvJhudeley&T.B.Deekshit

creative Head & Design

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Please mail your valuable feedbacks, reviews at [email protected]

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