Download - Journal of FInance Vol 13

8/9/2019 Journal of FInance Vol 13

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1. CHEERS TO THE NEW YEAR!

The year 2007 has been the year of booming markets, strategic global acquisitions, strong corporate

earnings, appreciating currency and robust macro indicators, to name just a few. The march continues.

And will flow down in 2008 as well. While the economy seems to be firing on all cylinders, theres a fearthat the highs of 2007 could result in major challenges in the coming year.

The year 2007 will go down as an important milestone in Indias history. It saw the economy charting agravity defying growth curve with India joining the trillion- dollar economy club, rupee appreciatingsolidly against the dollar, stockmarkets scaling newer highs above the 20,000-mark, industrial outputsteadily climbing, India Inc making strategic acquisitions on foreign shores and posting strong earningsand a distinct rise in personal incomes and employment opportunities.

From stocks and MFs to property and gold the markets didnt disappoint Indian investors in 2007. Andnow with a euphoric year behind them, investors expectations for 2008, is obviously nothing short ofGreat. The unanimous view of experts is that stocks would remain the flavour of the times, though theycautioned investors to take informed decisions. As far as the mutual fund segment, a better variety ofproducts, transparency in pricing and a sound retail model would help expand reach and spreads of theindustry. And the real estate as an asset class had evolved big time and it has the potential to going up.

However, experts dont see any action happening on the commodities trade front. At a time when thewhole world is bullish on the commodity market, India has failed to set up a common market to join theeuphoria. Experts understood the need to make the market a vibrant part of the economy.

Trends that will shape the world

Blue will replace green due to environmental movements; Aging populations will increasingly outsmartchronic disease as generic testing and other medical break through become widely available. And realitychecks will kick in as the American tech bubble and Chinese economic bubble continue to stretch. Theseare among the trends for the near future as forecast in the report released by JWT, the largest advertisingagency in the US. The key trends highlighted in the report trends for 2008 include:

Blue is the new GreenClimate change has quickly become the driver of environmentalism 2.0, and people worldwide understandthat climate is all about the seas and the sky both blue. Watch for green to become a subset of blue, which iscoming to denote the much larger emerging spirit of good-citizen ethics.

Radical transparencyIts the new generation gap, a divide between those who relish privacy and those who want to show and tell

all. For younger generations, nothing to hide will be the new norm. But look for radical transparency totemper (at least temporary) as online exhibitionists enter higher education and the workforce.

Cooperative consumptionFractional ownership is moving beyond the shared planes of the jet-setting elite. The masses are alreadysharing everything from art to cars to designer handbags, and as technology for pooling demand andresources becomes increasingly sophisticated, this model will be applied to wider range of categories.


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Macro MonitorGrowth MomentumThe GDP growth rate may still remain at around 9% in 2008. The growth in agriculture will hold the keyfor achieving a double-digit growth in 2008 and beyond. In 2006-07, the Indian economy continued itsforward march, with the overall growth in real gross domestic product at factor cost estimated at 9.4%.India was the second highest contributor to world growth in 2006 (in Purchasing Power Parity weightedterms). Sustained high growth over the last four years has made India the third largest economy after USA

and China (measured in PPP terms), with its share in world GDP rising from 5.5% in 2002 to 6.4% in 06.

PowerThe power sector will remain extremely bullish in 2008. There has been an improvement in the growth inpower generation over the last few years. The growth during 2006-07 and April-September, 2007 was7.3% and 7.6%, respectively. In rural electrification, by the end of August 2007, 81.6% of the villages arereported to have been electrified.

AviationThe domestic airline market is getting progressively more competitive, leading to a phenomenal growth.The trend is likely to continue in 2008 too. The passengers handled at domestic terminals increased by26.5% in the first half of 2007-08 on top of 40.2% increase in the first half of 2006-07. At the same time, passengers handled at international terminals maintained growth of over 12%. April-September, 2007,also witnessed a considerable growth in import cargo handled at major airports and sea ports.

RailwaysThe profitability graph of the Indian Railways is likely to continue northward in 2008. Data on earningsof railways has shown a double-digit growth both in the passenger (12.5%) and freight (10.4%)segments during April-September 2007. While the share of passenger earnings accounted for 29.2%,freight earnings constituted 66.8% of the total earnings during April-September, 2007.

RoadsIn the road sector, 2008 looks promising and growth may come from rural segments. The NationalHighway Development Programme (NHPD), is being implemented in four phases at present. The present phases I, II & IIIA envisage improving more than 25,785 km of arterial routes of National Highwaynetwork to international standards. The four laning the 5,846 km long Golden Quadrilateral (GQ)connecting Delhi, Mumbai, Chennai and Kolkata is nearing completion.

TelecommunicationsThe sector will ring louder in 2008, particularly after the entry of new players into the segment. The grossnumber of telephone by September 2007 increased to 249 million compared to 241 million in August2007. The overall tele-density reached 21.9% in September 2007. In the wireless segment, there was anaddition of 7.8 million subscribers in September 2007 taking the subscriber base to 209 million. DuringApril-September 2007, 42.8 million total telephone subscribers were added as compared to 29.7 million

during the corresponding period in the previous year. Total broadband subscriber base reached 2.7 millionby the end of September 2007.

Core Inputs: Six industries which have a bearing on infrastructure comprising electricity, coal, steel, crudepetroleum, refinery throughput and cement, having a weight of 26.7% in index of industrial productionregistered a growth of 6.6% (provisional) as against 8.7% during April-September 2006-07. Barringrefinery throughput, none of the other industries kept pace with the overall industrial growth. It could be aconcern in 2008 if other allied factors fail to rescue these key segments.


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2. SECURITY MARKET

Year 2007

The year 07 has been yet another blockbuster year for the stock markets. The Sensex posted annualreturns of 46.6 per cent as on last Friday on December 28 this year, following gains of 46.7 per cent in

2006. While the year 2006 was focused on the large-caps, specifically the Sensex scrips, the broaderindices have performed better in 2007.

The BSE 100 and BSE 200 rose by nearly 59 per cent and BSE 500 gained over 61 per cent. But amongthe diversified indices, the BSE Small cap has gone up the most, rising by 87 per cent. The BSE Midcaphas gained 65 per cent. In 2006, both these indices had underperformed the Sensex and even the BSE 100and even the BSE 100, 200 and 500 indices.

Among the sectoral indices, the BSE Metal index has gained 12o per cent during the year, thanks to thesteel pack, with Tata Steel, Sail and Jindal Steel emerging as multi-baggers. The capital goods index has been the second best performer, giving the return of 116 per cent, as both L&T and Bhel were bigwinners. The oil and gas index comes next at 113.6 per cent, because heavyweight Reliance Industriesmore than doubled. The BSE IT index was the only loser among the sectoral indices, as it shed 13.7 percent in the year thanks to the depreciating dollar. The auto index gained 1.4 per cent due to the slow salesgrowth posted by two-wheelers and commercial vehicles. Healthcare too has been in defensive mode,gaining by just 14.4 per cent.

Just another milestone: sensex at 20k

December 2007: The benchmark indices Sensex and Nifty closed past 20K and 6K levels respectively forthe first time ever, and scaled new peaks during the month. The small and mid-cap indices too, touchednew closing peaks on sustained investment buying. The US Federal Reserves decision to lower interestrates by 25 basis points helped the market sentiment to some extent. The robust growth in IIP to 11.8 % inOctober 07 from 4.5 % a year ago also helped the Sensex end in positive terrain.

31/08/07 (Friday) 15,318.6028/09/07 (Friday) 17,291.10 > monthly gains: 1973.2026/10/07 (Friday) 19,243.17 > monthly gains: 1952.0730/11/07 (Friday) 19,363.19 > monthly gains: 120.0228/12/07 (Friday) 20,206.95 > monthly gains: 843.76

Adopt a long-term strategy

The bulls are roaring and the Sensex has taken a giant leap in the last one year. It has crossed many amilestone this year to be in the striking distance of reaching the eligible age to marry. So what should youexpect from the stock market in the year 2008? According to P N Vijay, CEO, P N Vijay FinancialServices, the bull-run at the stock market has been one long party. Weve had different runs, the HarshadMehta run, Ketan Parekh run; Reliance induced run and the IT bull market. But this time, the market isstrong on fundamentals. But as an investor what does this mean for you? It simply means that stockmarket is not a casino, if you stay invested for a long-term, then its the best of the bets.


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Outlook sunny, but subprime fears loom on markets(Dr. Mark Mobius MD, Templeton Asset Management)

2007 has been another positive year for emerging markets equities. Despite concerns regarding thesubprime crisis in the US, most stock markets were supported by a robust macroeconomic environment,surging money supply, rising commodity prices, stronger emerging market currencies, improvedcorporate earnings and significant fund flows.

Despite the overall robust market performances seen in 2007, the later half of the year was plagued withincreased volatility. Investors remained nervous due to widespread concerns over the impact on the globaleconomy of the credit crisis in the US. This uncertainty is expected to continue in the near term or at leastuntil the full extent of the subprime becomes clear.

Thus far, the subprime issue in the US has had limited impact on emerging markets. However, the impacton financial corporations, which have a direct exposure to subprime mortgages, has been significantrequiring massive injections of capital for some institutions banks like Citicorp. One concern foremerging markets is the likely impact of slower US consumer spending on their exports if the USeconomy slows dramatically. As such, volatility is expected to continue in the short term.

Within this environment, emerging markets still look attractive because they offer superior growthopportunities at historically lower risk levels due to factors such as but not limited to:

The privatisation and deregulation of key industries, Implementation of appropriate fiscal and monetary policies, Stable political environments, Improving corporate governance, The enhancement of competitiveness through removal of subsidies and reduction of trade barriers, Higher productivity because of a younger and better trained labour force, As well as a huge consumer base.Current risks however include but not limited to:

A major slowdown in the US economy, The development of any unfavorable political events, Rising inflation, Overheating concerns in China and India, As well as highly volatile exchange rates and commodity prices.Despite their rapid growth, a number of emerging market companies are undervalued when compared totheir peers in developed markets. Moreover, as a result of growth in stock markets, liquidity has also

improved significantly. In terms of individual markets, we can find value stocks in most markets sincemany markets will have at least some undervalued stocks.

Asia is the largest emerging markets region in the world and home to some of the fastest growingeconomies globally. One of the key supporting factors for investing in Asia is its robust economic growth.Emerging Asia is expected to grow 8.8% in 2008, four times more than the developed markets 2.2%forecast. In addition to the strong economic growth, per capita incomes have been rising and reformscontinue, thus improving the regions business and investment environment. And in line with thateconomic growth, earning growth is expected to be much stronger than that in the developed world. Theregion is also home to two of the fastest growing major economies in the world China and India.


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All four Bric economies are registering good GDP growth rate with China, and possibly India, recordingdouble-digit growth rate. Falling interest rates in Brazil and Russia should continue to fuel economicactivities in these markets. Inflation, while a concern in India and China, remain under control. All fourcountries continue to build up vast foreign exchange reserves. Domestic consumption is also becoming anincreasingly important factor.

While we remain positive on the markets long-term uptrend, there is no way to predict market movements inthe short-term. Moreover, it is impossible to predict how long bull market will last. No one can predict themarket direction and a bear or bull market can start or end at any time. However, the good news is that bearmarkets are shorter in duration than bull markets and bear markets go down a smaller percentage than bullmarket increases.

Watch out for the street signs

Dalal Street has proved the doomsayers wrong over the past few years. Experts predict: It may not besame in next year. The days of easy money may be over. Be prepared for lower returns. The sameforecast was on offer at the end of 2003, 2004, 2005 and 2006. But the market has been improving on theperformance every successive year. Nearly 80% of the stocks on BSE delivered positive returns since thestart of the calendar of 07. Which means even though returns in some of these stocks may have beenlower than bank deposit rates, investors would not have suffered an erosion of capital.

But if many brokers were to be believed, these statistics would be of cold comfort to many retail investors.The sharp dips in March and late July07, with each correction followed by a dramatic rise, caught manyinvestors on the wrong foot and they ended up surrendering a large part of their earlier gains after havingsold out in panic. Also, the sudden shift of focus from frontline shares to midcap and vice-versa a few timesduring the year took many by surprise. Considering that even some of the savvier operators and fundmanagers were left scratching their heads in bewilderment on occasions, one can only imagine the turmoilthat many retail investors would have faced.

Whatever the recoupling and decoupling theories doing the rounds, market gurus maintain the days ofeasy money are past, and that investors will have to sweat it out for returns in 2008. Only that investorswanting to pour their money directly into stocks will have to do a bit more of homework, if they areseeking bumper returns.

Is this as good as it called?

1. This stock is a good buy. Disclosures to the exchange reveal the promoters have been recently buyingthe shares in the secondary market. This means the stock is undervalued. Realty: Promoters buying ownshares often reflect their confidence in the business. But also check the credentials of promoters. Many

hold shares of their company in benami accounts. So it could be case of transfer of shares from thebenami accounts to official accounts.

2. I think I should subscribe to this IPO. Valuations appear expensive, and the companys track record isnot impressive. But QIB portion has been fully subscribed.Realty: In some smaller issues, FIIs are frontsfor promoters or entities set up by merchant bankers. Even in mid-sized issues, some fund managers are

said to be paid appearance fees. The managers place bids which help boost subscription figures but

have an arrangement with merchant bankers that they will not be allotted shares or will be allowed towithdraw bids.


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3. I have a report from my broker, which tells me this stock is a good short-term buy.Realty: Check theprice target and also see where you figure in the priority list of your broker. Plus, the broker would have

tipped off his privileged clients before handing over that report to his economy-class clients.

Big boys rule game despite Sebis efforts

2007 has been a good year for retail investors who held on to their investments (either greedy for morereturns or lack of will to book losses) long enough. Returns in many equity schemes of mutual funds havebeen handsome, if not comparable to the multi-baggers stocks. The eye-popping gains as a result of thebroad-based rally in second-line shares has left many investors with a feeling that perhaps even legendaryinvestor Warren Buffet could learn trick or two from them.

Needless to say, it has also been a good year for the Big Boys of the game, who have been busy skimmingoff the cream. This elite crowd includes some fund managers with a few thousand crore of assets undermanagement, bulge bracket individual investors, savvy market operators and even promoters. Sebicontinued with its efforts to provide a level playing field for all classes of investors by raising disclosurelevels and stepping up surveillance measures. As expected, the Big Boys too have been improvising ontheir techniques.

Norms for share allotment in IPOs have been tightened. But gray market operators, often hand-in-glovewith the lead managers, have managed to partly find a way around the rules. These players zero in onindividuals with PAN and demat accounts that are willing to rent these out for a fee. Gray marketoperators when apply for retail quota through these investors, with an arrangement that the shares onceallotted would be transferred to gray market players account on the day of listing. The dummy investorsget as much as Rs 3000-4500 per application of Rs 1 lakh worth of shares.

Sebi has managed to pin down a couple of notorious market operators, known to ramp up stock prices incollusion with the company management. But these operators have managed to avoid the regulatory glareand continue their activities. The tactic they have come up with is to use a chain of relatively unknownbroking firms to jack up the stock price. These fringe players are given an assurance by the kingpin thatthey will be adequately compensated for the penalty or period of suspension they may have to undergoshould they be nailed by the regulator.

The installation of Integrated Market Surveillance System (IMSS) by Sebi during the latter half of 2007has made life tougher for manipulators, given the softwares capability to throw up real-time alerts in theevent of any abnormal price moves. But that is not deterring the hardened crooks from trying their luck.Manipulators often route the transactions through a large number of entities controlled by them. It is along drawn process to establish that all these clients are part of the same group and have been in touchwith each other.

Promoters have not been far behind when it comes to making a quick buck. In one high-profile case, the promoter group dumped shares on unsuspecting small investors while abiding by the insider tradingdisclosure rule in letter. While shares prices of midcap companies have been soaring to record levels. Itwas common knowledge that quite a few promoters were fuelling the rally using their unaccounted moneystashed abroad. These funds were routed into the country through the participatory notes. This has beenchecked to some extent following the restrictions on the use of participatory notes. Retail investors woulddo well to keep these factors in mind as they look to replicate the heady success in this year 2008.


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2.1 INDIAA trillion dollar opportunity

Motilal Oswal Wealth Creation Study (2002-07) report has a discussion on how India, which is now a

one trillion dollar economy, is headed towards becoming a two trillion dollar economy in the 5 five yearsand the factors that will take India there and the picture that it paints of the next trillion dollar era

The Indian economy is on a bull run and has achieved a landmark GDP of US 1 trillion. After witnessinga lull in the initial years of the current decade, India staged a come back with a huge bang. Over the last 5years, Indias GDP more than doubled to US 1 trillion, at a CAGR of 16%. A higher GDP growth ratecombined with a lower population growth rate has led to an accelerated growth in per capita GDP.

The economy today is strong and vibrant owing to the progressive liberalisation of government policies;an increase in foreign direct investment; increased global competitiveness; investment in infrastructureand the growth in domestic as well as international demand for Indian goods and services. India ranksfourth in terms of Purchasing Power Parity, after the USA, China and Japan. India is home to theyoungest population in the world where half its citizens are under the age of 25. This growing workingpopulation in India is providing firepower to the growth of our economy.

The Next-Trillion-Dollar (NTD) Era 2007 to 2012

According to report, released in December 2007, in the next five years Indias GDP will hit US $ 2 trillion(assuming the current Re/US $ parity). The growth rate in the NTD era will be almost the same as that ofthe last 5 years. However, given the high base, the GDP added in the next 5 years will be more than thatwhich was added in the last 30 years, and twice that of the last 5 years. The report talks of the 3 typesexponentialities in the NTD ERA:

1) The Macroeconomic exponentialities:a) Consumption: Rising affluence levels will result in sustained growth for luxuries like car, air

conditioners and travel.b) Government expenditure: A quantum improvement in government finances; first time ever zero

revenue deficits for the Centre.c) Private Capex: Mega thrust on infrastructure accentuating Indias capex-led growth story.d) External Sector: Forex capital flows, which are consistently higher than the current account deficit

helping to keep interest rates benign.

2) Exponential growth in key industries: Engineering and Construction, Financial Services, WirelessTelecom, Cars, Cement and Steel

3) Exponentiality in corporate profits

With all the capex plans, India is taking the much-needed firm step forward to sustain its GDP growth.

Rising private sector participation in the Indian economy and easy access to capital (both domestic andforeign) are the two key drivers of exponentiality in Indias corporate sector sales and profits. The reportexpects corporate profits as a % of GDP to rise from 5 per cent in 2007 to 7.8 per cent in the NTD era.

Conclusion

What the report conveys is that the Indian Wealth pie is going to get bigger, and get bigger really fast. So,now is the top opportune time for investors to stake their claims by investing in Indias growth throughthe stock market. And here is three cheers to the much awaited Next Trillion Dollar era!


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2.2 INDIA INCAspiring for global leadership

The diffidence of Indian companies in the 80s gave way to reasonable confidence in the 90s. Now,theres a lot of positivism as they go global. It would not be a surprise if soon companies in the othercountries start saying, We wish our company gets acquired by an Indian company. In a number of recentdeals, it has already been proven right.

The worldview in the corporate sector globally is changing. They see India beyond just IT and Indians asgood people managers who respect merit and are smart with technology as well. There is anacknowledgement of Indian talent. The condescending attitude is changing to that of an equal level, if notoutright respect. And a pack of Indian firms with global acquisitions have to take credit for thistransformation.

Much like the Japanese wave in seventies and the Koreans a decade later, India Inc has launched a waveof attacks on global markets that have made people sit up and take notice. Even though the Chinese maydisagree, some like liquor baron Vijay Mallya prefer to call it this the Indian decade.

Indian companies have always had opportunities for serious global acquisitions, but governmentregulations were a handicap. Things have changed now because forex is not a problem, rules andpermissions do not come in the way. What you see now is just the beginning, you will see much more.India Inc can finally do what we want to do. Its a game thats only just begun.

Just how many Indian companies finally emerge, as world-beaters are hard to predict. But that hasntstopped them from aspiring global leadership. The Indian Inc has a different set of advantages:

They have an ability to relate to others in a changing world. They remained private, unlike say China and

Russia, where, when the time came to open up the economy their Governments were the big players.Besides, Indian businesses have been compelled to find knowledge often under difficult circumstances and

with limited resources. Since we didnt have large resources, we had companies that learnt to be smart

even though they were small. Scale hasnt been limitation for them. They partnered with firms globally,because they understood that scale is an outcome of being competitive in some sense (and not the other

way round).

Staying below the radar had its advantage. But now, Indian MNCs have to learn to operate under theharsh glare of global competition, where every move is now closely tracked. Thats not all. The worldmay well be a lot more open but the costs of going global are rising

One, cost of resources, such as oil, are at an all-time high. Two, increasing environmental concerns could

substantially increase the cost of doing business for companies from emerging markets. Three, reducing

the gap in technology with established rivals from the western markets is tough. Over the next few years,

we have to learn how to transpose our low cost model in other markets with equal effectiveness.

In all the talk about globalisation, Indian MNCs have to remember that the large organic growth will liesin emerging markets. The key question: how do you translate the benefits from advanced technology,improved brands and the higher marketshare, to these emerging regions? For India Inc, its a question thatwill throw up answers in the next five years.


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2.3 US ECONOMYDifficult but not depressing

There are two opinions about what may be happening in the US economy, and by extension to the rest ofthe developed world and then to the emerging economies of the world. There is widespread consensusthat the US economy will slow in 2008. The difference is about by how much? In both 2004 and 2005, theworlds largest economy had been running a bit ahead of the long-term trend value of 3%, though it had

scaled back to 2.9% in 2006. The idea that growth would be slower still in 2007 had preceded (or hadquietly subsumed) the outbreak of the subprime crisis in August 2007.

Since August 2007, the worlds financial markets and US and European lenders have taken a beating asthe subprime mortgage asset and the Collateralised Debt Obligations (CDO) structures imprudently builton weak ground started to give way. This compounded the uncertainty about the extent of the adverseeconomic implications for the US economy and the rest of the world in 2008.

First, the difficulties of banks and other intermediaries, as also the increase in risk pricing, suggested thatcredit delivery would slow and in any case happen be at higher interest rates, suggesting that USconsumer spending would slow more than expected.

Second, the decline in home prices (through the wealth effect) was set to further compress consumerexpenditure. Why Europe should follow suit was much unclear, except the premise that given thesurprisingly large exposures to US subprime assets by many European banks, a generalised outbreak ofcredit flu would sweep the Euro-zone. However, there is no homegrown problem in either the mortgageor consumer lending markets in Europe. The only place in Europe that there is a problem is in the UK.

The extreme view is that the US is headed for a recession in 2008, defined as two successive quarters ofnegative growth. It is likelihood of near recessionary conditions emerging in the US economy in 2008.That is, conditions where growth would be close to, or even below 1% rather than the recent 3% growthtrend. It must be noted that most big banks maintain growth forecasts of 1.5%. The other viewpoint is thatwhile US growth will slip, it will not do so by much. In fact, except for the home-building sector, all othersectors are doing well.

The Euro-zone has had a revival of strong growth since 2006. In the third quarter of 2007 the region grewby 2.8%, with none of the major economies of the region showing signs of weakness. From all of this theonly conclusion that emerges is that while 2008 will be a slower year, it will not be depressing. Howeverthat has implications for inflation.

Recessionary conditions in the developed world would have compressed export demand of emergingeconomies, creating possible slumps in the prices of some manufactured commodities, which price signals passed through to home markets, would have squeezed operating margins and acted as potentialdisincentives for investment. That these things will not come to pass in 2008 is good news. However, the

flip side is that the demand for crude oil, industrial raw materials and grain will not fall.

The main lesson of the past is that the world can live with $ 80-90 per barrel oil. Between November 2005and 2007, wheat prices doubled and though more acreage is coming under the crop, it is unlikely thataugmented output will soften wheat prices much in 2008-09. India is both an importer of oil and of wheat.Managing the inflationary burden of high oil and food prices will be the big challenge through 2008-09.


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2.4 THE YEAR OF LIVING DANGEROUSLYCapturing predominant trend of times with only asset classes on fire in emerging markets

Even before 2007, emerging market stocks were on their longest out-performance streak in recordedhistory. But the run has been particularly stark over the past year as stock prices in the developing worldweathered not only the turbulence in the US financial system like never before but emerged as clearmarket leaders directing global trends. In fact, the emerging market boom is the main factor that has kept

the US equity market in positive territory.

The industrials, metals and energy sectors, which mainly key off demand in China and other developingeconomies, posted double-digit gains in 2007 while all companies catering to US domestic demandperformed rather poorly financials and retailing stocks, for instance, declined more than 10%.

The performance in the marketplace was merely reflective of the new economic reality: emerging marketsaccounted for nearly half of global growth in 2007 (in current dollar terms) compared to a 16% contributionby the US. In the late 90s, the attribution for global growth was exactly the inverse.

However, just as confidence was beginning to build in the decoupling regime where emerging marketscould kick away the US ball-and-chain, fresh doubts surfaced towards the end if the year 07 about thesustainability of this new world orders. The probability of a US recession increased and emerging marketcentral banks, led by China, seemed to shift their focus from letting growth rip to curbing inflation.

The outlook for 2008 is now rather uncertain. Clichs such as: The best of the gains are behind us andIgnore the US at your own peril are back in play.

Heading into the New Year many investors stand paralysed, unsure of how to position themselves. Thereis remarkable uniformity in views but no real sense of direction. Ruchir Sharma, the Head of EmergingMarkets Equity, Morgan Stanley argue, It is worth figuring out what the prevailing consensus views arewhat can possibly go wrong. After all its the nature of markets to systematically weed out stale views.

Heres the list of the 10 most widely held beliefs in the marketplace;And also what may shake them:

1. US growth will slow sharply in 2008 and the probability of a recession is at least 50%:

An early end to the weakness in the US housing market would greatly surprise the market. A stabilisationof the housing cycle will help the US consumer soldier on and keep spending in positive territory for the17th year in a row.

Given how many businesses are currently preparing for a recession, higher-than-expected, US consumerspending will necessitate a major pick-up in production and lift US GDP growth above 2% in 2008 withstrong export growth contributing at least another 1% to economic output.

Its interesting to note that many heavy-hitters, from Larry Summers to Martin Feldstein, are terriblybearish about US growth prospects. Typically, economists have a poor track record in calling recessionsand that itself should increase the chance of a positive surprise.


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2. Japan and Europe will remain coupled with the US:

With US and emerging markets accounting for nearly 80% of the global growth this decade, analysts havestopped expecting anything from the other two major economic blocs. If domestic demand in either Japanor Europe picks up independently of the US, it would change many deeply entrenched views regardingthe economic vitality of those two regions.

3. Emerging markets can decouple from the US only to a limited extent but certainly not during a USrecession:

Despite all the decoupling evidence of the past year, conviction in such a regime runs skin deep. Just arepetition of this year during which emerging markets charted their own course even in the face ofdecelerating US growth, will again be a surprise.

4. US short-term interest rates are bound to fall significantly:

The market expects the US Federal Reserve to cut short-term rates by at least 100-basis points in 2008.An unexpected revival in US growth prospects will dramatically change the outlook for interest ratesacross the yield curve and spark a major sell-off in the bond markets.

5. Inflation is largely a food-and-energy-related problem worldwide and is unlikely to spillover:

Economists are using the template of the 1980s and 90s, when any rise in food and energy prices wastransitory and didnt feed through to core inflation, to evaluate price behaviour in the current context aswell. A broadening of inflationary pressures would upset such an assessment and lead to fears of a 1970s,when inflation was a structural supply-side problem that led to stagflation.

6. Stocks face a challenging year due to deteriorating earnings growth:

A melt-up in emerging markets stocks due to increased faith in the decoupling regime or a black-holeoutcome for the US economy in case of a deep recession offers a binominal outlook for global stocks.During the more mature phase of a bull market, volatility increases with big positive and negative returns.It should be no different in 2008.

7. Large-cap stocks will do better than small cap stocks, as the latter are more sensitive to business cyclefluctuations:

Large-cap stocks are enjoying a revival of sorts over the last few quarters and given their relatively morestable growth profile, analysts expect the trend to continue. Its hard to imagine what can trigger small-cap out-performance until a new economy cycle begins but a rally in small-cap stocks due to strongerglobal growth will stun investors.


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8. The Chinese stock market is a bubble and its best to avoid that market:

Even though the domestic market is up nearly 100% in 07 due to the strong earnings growth of Chinesecompanies; a large number of skeptics who feel a stock bubble would be truly shocked if the market goeseven more vertical in 2008; which it could if the food-inflation scare fades away and earnings growthkeeps surpassing perennially low expectations.

9. The Asian currency bloc will influence the dollars weakening more than the European currencies:

Many currency analysts are calling for a dollar bottom against the euro and very recent rise in the dollaragainst the European currency has provided those dollar bulls much hope. If the dollar resumes itsdownward trend against the euro rather than yen, many currency observers will be taken aback indeed.

10. Democrats regain the White House:

The assumption in political circle is that whoever wins the Democratic presidential nomination will walkstraight into the White House. However, there are significant negatives attached to leading DemocraticParty candidates Hillary Clinton and Barack Obama, leaving room for the Republican nominee toeventually sneak in. Both Clinton and Obama may find it tough to extend their appeal to beyond half theelectorate.

What comes through these consensus views is that investors are mostly in the muddle through camp andare not geared for any dramatic outcomes in 2008. Yet, the history of markets argues against such years.More volatile performance is the norm, particularly during the mature phase of a bull market. The year aheadcould indeed see binary outcomes. Global stocks will tear away if the US economic situation just stabilisesquickly and developing economies contribute to boom.

On the flip side, a broad-based pick up in emerging market inflation or a black-hole scenario for the USeconomy will sends stocks careening down. The odds still favour the more benign scenario, especially giventhe prevailing negative sentiments thats otherwise highly unusual for a bull market heading into its sixthyear. But it will be a year of living dangerously as the line between a bullish and a bearish regime has rarelybeen thinner with stress levels rising on both the inflation and growth fronts.


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3 MUTUAL FUND

Choose a good fund

Investment via SIP is the only way to iron out market volatilities, said Krishnamurthy Vijayan, CEO JPMorgan Asset Management. He said Indian economy is growing at around 15% (nominal GDP growth)and fund managers should try to create a portfolio that delivers at least 5% over the nominal GDP Growth

rate on an annualised basis over the long period. What are the best ways to choose a good fund? Says MrVijayan: First, look at sustainability of the business model, (which is equivalent to betting on anindividual or an organisation). I therefore look for strong systems and processes. Second, look for fundsthat have shown consistency in their portfolio (that is investment philosophy).

Investing in Thematic funds

Its the fifth year in a row and thats scary, said Dhirendra Kumar, CEO and founder, Value Research (aMF tracker). There are lot of thematic and sector funds that are doing the rounds in the form of NFOs.Are they actually for retail investors? All thematic funds have a supporting role to play and at any pointof time, should not form more than 15% of ones overall portfolio. He recommends investing in thematicfunds only if the investor personally believes in that story. He cautions that sector funds are only for thosewith special understanding of the sector under consideration and who could manage to opportunisticallytime the entry and exit of the fund. Thematic funds should not be confused with sector funds whichinvest in a single sector and do not have the flexibility to move from sector to sector.

Best equity funds

Mr Kumar recommends eight equity funds Birla Equity, DSP Equity, Franklin Prima Plus, HDFCGrowth, Kotak 30, SBI Magnum Contra, Reliance Vision and DWS Alpha Equity. Among the ELSSschemes (tax saving), Birla Equity, HDFC Tax Saver, SBI Magnum Tax Gain, Principal Tax Saving,Sundaram BNP Tax Saver are the ones to watch out for. These funds are chosen for their consistency ofperformance and above average returns. They are either four star or five star funds, indicating top ratingfor mutual fund scheme.

Get a PAN card first

Union finance ministry has told Amfi, that every investment made into a fund will compulsorily have tobe accompanied by a valid PAN card from January 1, 2008. Earlier, even proof of having applied for aPAN card was sufficient for investing in mutual funds. Amfi members are also not pleased. They believethe government should create a level-playing field among various participants in the financial system.Why only the mutual fund industry should be singled out when it is anyways in the lowest risk category.Considering that funds accept and pay money only through banks, there is a clear audit trail. And there isno question of unaccounted money coming in.

New Year Gift: Entry load scrapped on open-ended mutual fund schemes

Its raining goodies on the mutual fund industry, within days of issuing guidelines for real estateinvestment trusts and indicating a willingness to increase the total overseas investment limit by $ 2billion, the Sebi has decided to scrap the entry load on open-ended mutual funds schemes. Sometimesago, the market regulator had reduced the fee structure for open-ended schemes. Sebi chairman MDamodaran said: Mutual fund scheme is a good entry-level vehicle for first time investors. We areconstantly trying to find ways of making investment in MF schemes more friendly and attractive.


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3.1 COMMODITY MAKET2008 The year of soft commodities

If you are dabbling in the commodity market, watch out for crude oil, copper, silver and spices, saysSudip Bandyopadhyay, CEO of Reliance Money. They could surprise investors in 2008. Strictly speaking,retail investors, unlike in equity or debt markets, cant today take long-term exposure in the commoditymarket. While there are three-month futures available for certain commodities, there is also an absence of

a spot market. While Bandyopadhyay underscored the need to build a market for retail investors, he felt itwas an opportune time to do so. Historically, bull-runs are 13-17 years in commodity markets and we arejust 8 years into this cycle.

Agri or base metals

He predicts the coming year to be of soft commodities and believes agri commodities could give moreopportunities to make money. Base metal has given a CAGR of 35% in last 3 years, outperforming anyother commodity. However, future projections are more bullish on agri commodities. Base metal is purelyderivatives market, which is volatile. Whereas in agri commodities driven by local physical market; itgives an opportunity for cash to future arbitrage, which is less risky than pure derivatives position. Withbig price increases in almost all the spices in 2007, there is a likelihood that farmers may shift to spicesfor the production year of 2008 and hence have significant supply if supported well by weather.

Crude oil

Crude oil prices are anticipated to surge in the first half of 08, despite the talks of production increasefrom OPEC. A look into the supply-demand dispersion in the energy market indicates why the mostpromising supply figure from OPEC, indicating a jump of 1.8mbpd production increase, is just sufficientto bring in a surplus of only 1.1mbpd. However, historically OPEC has consistently underperformed itscall on production.

Precious metals

It may be time to hold on to the yellow metal. The view for gold is essentially bullish for 2008 backed bythe fundamentals, which keep the US dollar weak over a major part of 2008. Mine supply is not expectedto significant improve in case of gold. The official sector sales also seem to be a weakening supply factor,given the real economic crisis faced by most gold-housing countries like the US, UK and Germany. Then,there are chances of forex holdings diversification away from the dollar to bullion, which could also addto the demand and improve the bullish factor of gold. Unlike other commodities, gold is one commodityin which retail investors could take long-term positions by buying gold exchange-traded funds. Not only itis the cheapest form of buying gold (as compared to coins and bullion), it also does away with the need tohoard gold in physical form. Silver mine supply is expected to improve in 2008, thereby causing anadditional surplus to the tune of about 1,000 MT, which would keep the prices under pressure.

Base metals

The fundamental outlook is reasonably sound for base metals. Despite the current turmoil, the US willavoid recession and global economic growth will still be near 5-7% in 2008. This, together with thedestocking/re-stocking effect, suggests that LME metals demand growth could even pick up in 2008. Thesupply side should limit the downside for copper and aluminium, whereas it points to further hefty lossedfor zinc and over the longer term nickel.


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4. FINANCIAL INCLUSION: GATEWAY TO 9% GROWTH

1. Financial advisors:Bank a/c for poor is gateway to 9% growth

How can the national goal of 9% pa plus growth be translated into reality for the 250 million living belowthe poverty line and another 500 million who are barely above it? People have to work and make a living

either through self-employment or wage-employment. Wage-employment opportunities have gone upwith the National Rural Employment Guarantee Act (NREGA) programme, and an upsurge of urbanconstruction and services. Self-employment requires access to credit.

Both wage-employed and self-employed persons need access to credit and many financial services, whichare best enabled through a bank account. Payment of wages workers employed NREGA works can bedone with speed, reliability, low transaction costs and leakages, if each worker has a bank account inwhich wages are transferred periodically. A no-frill account in which NREGA wages and payments likematernity and old age support are credited periodically, become the gateway for financial inclusion.

BASIX Chairman Vijay Mahajan said, A poor landless woman like Asha Devi in Serukahi village ofMuzzafarpur district, Bihar can draw cash, not only from Axis Bank branch 30kms away, but throughmuch more accessible, mobile staff of BASIX, a microfinance institution (MFI), appointed by Axis Bankas a business correspondent under RBI guidelines.

Slowly, Asha Devi builds confidence in the system and starts to leave some amount behind in the account,and builds a saving deposit, which grows to Rs 4,400. When her husband is ill, she can draw Rs 1,000 andshe does not need to get a loan from the moneylender at 60% pa interest.

As BASIX sees Asha Devis transaction record over a period in its computerized MIS, it offers her amicro-credit loan of Rs 6,000, with which Asha Devi buys a cow yielding two-and-a-half liters of milk aday. Under IRDAs micro-insurance guidelines, BASIX has tied up with insurance companies to coverthe lives of its lakhs of borrowers like Asha Devi, and to provide health cover for critical illnessesrequiring hospitalisation and to insure livestock like Asha Devis cow.

Asha Devis husband, working as a factory hand in Shahadra, Delhi, has also been helped by BASIX toopen a bank account there and is now able to remit Rs 500 to her every month. It is done using atechnology package developed by a company called A Little World, so that using mobile phones andsmart cards she can get money within half an hour of husband sending it from Delhi. In a years timeAsha Devi plans to buy a buffalo yielding 5 liters per day. Her starting individual income of about Rs9,000 per year goes up to Rs 11,200 due to NREGA, and further to about Rs 13,000 due to the cow. Thiswill further rise to about Rs 16,600 next year when she gets the buffalo. That is a 22% compoundedannual growth rate in two years.

It is only when income of people likes Asha Devi growing at above 20% pa that we can get equitable 9%pa growth. And financial inclusion is a necessary condition for equitable growth, though not sufficient byitself. The gateway to financial inclusion for the poor is a bank account through the businesscorrespondent model. The use of mobile phone and IT is also necessary to enable remote transactions.Thus, to increase income and reduce vulnerability of its poor, not only does India have to commit capitalbut also offer a high level of regulatory, technological and organisational support.


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There is an interesting side-benefit of financial inclusion it promotes stability of the financial system. For example, when the Asian currency crisis hit Indonesia in 1997, most of its banks suffered a huge

erosion of deposits, and were hit by a high number of loans being defaulted. But one bank not only

survived, it thrived in this crisis the Unit Desa (rural division) of Bank Rakyat Indonesia saw an

upsurge in deposits as well as a slight increase in its 98% plus repayment rate. This is because the peoplein the rural economy were largely dealing among themselves, so the effect of currency depreciation and

inflation did not affect them much.

2. Wealth managersFinancial inclusion offer huge opportunity to the financial institutions

At first glance, Indias financial sector is doing extremely well. Banks have doubled their loan assets infour years and the price-to-book value of Indian banks is second only to China. But the irony is thatdespite so much growth and wealth creation, two-thirds of the country continues to have no access toorganised financial services.

According to a report by the Boston Consultancy Group (BCG), India has the second biggest number offinancially-excluded households in the world of about 135 million, which is second only to China. Indiasfinancial sector is growing very rapidly it is the fastest-growing incremental revenue pool in the world,growing at a rate faster than even china.

The building blocks for improving financial inclusions are already in place. It is for the players now to

grab the moment. Including even half of these excluded households provides an opportunity to bring in

some 60 million households into mainstream. The positive economic, not to mention social impact of this

is huge. Since much of this will be in the retail segment which is a local business, it is robust to externalshocks, says, Mr J Sinha, senior partner and MD, BCG India.

3. Microfinance professionalsDeveloping alternative credit delivery models

There has been some progress towards financial inclusion with microfinance institutions (MFIs)becoming active in rural pockets and private and foreign banks lending in the urban subprime sector. Butthere have been setbacks as well. Private and foreign banks have pulled out of the subprime segment afterfacing flak for deploying recovery agents. Besides, microfinance institutions are facing increasedregulatory scrutiny and a possible cap on interest rates.

National Bank for Agriculture and Rural Development (Nabard) has set a target to disbursing Rs 40 crorefrom its Micro Finance Development and Equity Fund scheme in 2007-08 for developing micro and smallenterprises (MSEs). Since the fund disbursement under the scheme has not picked up as per expectations,the bank has decided to accelerate the programme by capacity enhancement of micro finance institutes(MFIs), self-help group (SHGs) and non-government organisations (NGOs), which have been enlisted by

Nabard to implement the micro finance programme.

In keeping with the objective of experimenting with alternative credit delivery models for MSEs, Nabardhas constituted MFDEF to step up fund disbursement under the micro finance programme. As per thecharter of the bank, the money from MFDEF is being spent mainly for capacity building of its approvedMFIs, SHGs, NGOs, and training institutes, which have been assigned to play the role of catalysts inarranging micro finance to MSEs from banks.


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4. Tech savvy professionalsTake first step to ensure efficient and reliable system

There are enough indicators to show that the financial sector can take a big leap forward in the next twoyears in terms of financial inclusion. Two developments have made this possible. One is the penetrationof mobile telephony. The BCG report highlights the fact that many of the next billion potential customersare unlikely to have a relationship with a financial services provider but many already be tied to a telecom

provider. ICICI Bank, which pioneered ATM culture in semi-urban India, believes that the next bigopportunity lies in the villages. The bank feels that the channel for growth would be the mobile phone,which is gaining faster acceptance than any no-frill account.

Secondly, the technology gap is closing too. Even as the cost of mobile handsets is coming down, service providers are working at developing java-based applications, which will provide a simple yetcomprehensive interface for banking transactions on ordinary handsets. At the back-end too, technology isfalling into place. In 2008, most large public sector banks will have migrated from branch banking to acore banking platform. All account information in a central database will allow the bank to plug into anydistribution channel for banking transactions.

The Mangalore-based Corporation Bank, for instance, is working on a mobile e-purse, which will allowaccount holders to make payments to merchants through their mobile phones. The bank is in the processof tying up with 2,000 merchant establishments for a pilot project. With the entry of aggregators, we donot have to tie up with individual telecom companies as they provide access to all providers, says BSambamurthy, chairman, Corporation Bank.

5. Continuing learning centresIdentifying a low-cost loan

Cynics may point out that India has a long way to go in terms of general literacy, leave alone financialliteracy. But they underestimate the Indian ingenuity in dealing with numbers. Gaurang Shah, MD, KotakMahindra Life, reminisces of the days when he led an auto-finance business: We have had all kinds of people coming to us for auto loans. There were uneducated people without any knowledge of interestrates, but they would compare two loan schemes by simply adding up the total fees and installments to bepaid out under one scheme and comparing it with the total payout under another scheme. And they nevererred in identifying the low-cost loan.

6. Issues of the presentFinancial inclusion is necessary for equitable growth

The central bank has come out with a diktat asking banks to open no-frills accounts with minimum orzero balance. As a result, there is move to build a business providing financial services to those who are atpresent financially excluded. However, most private banks have introduced such no-frills accounts only

to fulfill statutory requirement and have made no effort to publicise the availability of such a product.

The last decades record growth in financial services has widened the gap between urban and rural India.Since 1999, bank deposits have grown 3.75 times to Rs 29.29 trillion, but it is the cities where bankdeposits have been piling up. The change in ideological profile of Indian banks, post-liberalisation, hasalso diluted the focus of state-owned banks on rural credit. After losing their creamy layer to privatebanks, state-owned banks have also begun to structure themselves in the form of new private banks.


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5. TAX UPDATES

1 Last date of filing return extended to Feb 29

The government is extending the due date of filing income-tax return to February 29, 2008. The Centre onFriday (14/12/07) informed the Supreme Court that the due date for filing of income-tax return was beingextended in view of the confusion regarding filing of returns on prescribed new forms ITR-1 to ITR-8 or

old Saral 2D forms. The due date is being extended for all categories of assessees in the country who wereallowed to file returns in form no 2D (Saral) and also for other assessees who may have filed returns inthe old forms on or after May 14, 2007, it said.

The government decision comes in backdrop of the confusion following a CBDT notification issued onMay 14 for the assessment year 2007-08 substituting the old return forms by eight new returns underseries of ITR-1 to ITR-8. As a natural corollary, the returns were required to be filed on the prescribedforms for the current assessment year.

However, in pursuance of the interim orders of the Allahbad high court (Lucknow Bench), Rajasthan highcourt (Jodhpur Bench) and Guwahati high court, the assessee were allowed to exercise the option offilling of returns in form No 2D (Saral) or any other old forms also. Apart from UP, Rajasthan andAssam, in some states also, the assessee may have filed returns in Saral 2D or any other old forms as wellunder the mistaken impression that they were permitted to do so.

2 CBDT reopens 400 PE & M&A deals

The spillover effect of Vodafones battle with Indian tax authorities may prove costly for several otherdealmakers. The Central Board of Direct Taxes (CBDT) has reopened about 400 cases of big and mid-sized transactions that took place during the past six to seven years. The tax department had earlierslapped a notice on Vodafone Essar, demanding capital gains tax over its acquisition of a majority stakein Hutchison Essar, Indias fourth largest mobile telephone company. The case is now locked in theBombay High Court.

According to the sources close to the development, the case include foreign corporates and PE firmsselling stakes of companies based in India and not paying any capital gains tax. One of the first such casethat the tax department is currently probing is Montreal-based Alcan Incs selling of the controlling stakein Indian Aluminium Company (Indal) to Hindalco Industries seven years ago. According to sources,significantly, there were around 300PE deals clocked in India in 2006 alone.

CBDT chairman R Prasad confirmed that department had reopened many more cases similar to that ofVodafone. Mr Prasad said We have found that there are many cases when foreign companies or PE firmssell their stake of an Indian company. Many large transactions do take place in India, but we receive notax at all. We have reopened all such cases that took place in the last six or seven years.

Finance ministry sources say that the revenue department would not like to single out Vodafone, whenthere have been many large and mid-sized transactions in the country, involving foreign companies,where the tax department received no capital gains tax. KPMGs executive director Vikram Utamsingh,specialising on M&A deals argues that companies doing transactions through tax havens like Mauritiusshould escape such a scrutiny. In most cases, a foreign company invests in India through a Mauritius-based holding company. The seller does not sell the share of the Indian company, but those of the parententity based in Mauritius. You cant ask for taxes then, he says.


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3 Unpredictable tax rulings risk to business

Unpredictable rulings by tax authorities pose the toughest tax risk challenge to corporates in the country,according to survey on Tax Risks in India conducted by PricewaterhouseCoopers (PwC). Among varioustaxes, income tax issues remained on top of corporate agenda because of its direct impact on thebottomline of a company. PwC ED Ketan Dalal said the countrys need to restructure tax administrationand improve dispute resolution mechanism, in the absence of which litigations take on an average 12-15

years to settle. Interestingly, only 16% of the firms surveyed were ready to litigate for settlement in caseof tax dispute.

4 Service charges and tips are not wages: SC

The Supreme Court ruled that tips or service charge paid by customers to the hotel staff did not amount towages and could not be taken into account for payment of premium to the Employees State Insurance(ESI) Corporation by the industrial establishment.

The ESI Corporation contended that the three-star hotel compulsorily collected 10 per cent of the total billamount as service charges and included it in the bills. The service charges so collected are distributedamong employees every quarter. The hotel had total control over the distribution of the amount and thiswas distinguishable from tips. It was in any event covered by the expression additionalreimbursement. The Supreme Court, however, ruled that the amounts received by employees were not inthe nature of wages, as they were not given to the employees under the terms of the contract ofemployment. The appointment letters expressly stated that employees were not entitled to any otherremuneration. Thus, the distribution of service charges was expressly excluded from the wages.

5 Taxhounds to sniff out evaders with STT

Securities Transaction Tax (STT) is all set to become an effective tool for generating intelligence aboutincome made from market operations. The Central Board of Direct Tax is examining ways of using theSTT data on the lines of annual information return (AIR) to nab tax evaders.

The board had, earlier this year, set up an internal committee to examine how STT data could be used togenerate intelligence on tax evaders. The committee has submitted its recommendations, which are beingexamined now. The data contained in STT returns is quite useful for verification of the genuineness of thetransactions carried by investors or trader with PAN serving as a link. With the boom in stock marketattracting many more, the income tax department feels that STT data could turn out to an effectiveintelligence tool to track tax evaders.

6 Tax sop to post office savings

This could be an early sign of what voters can expect in Budget. In a move that should please a large

number of investors, the government has brought the five-year post office time deposit account andsenior citizens savings schemes on a par with bank deposits by putting them in the Rs 1 lakh exemptionbasket. The two schemes will be able to avail tax exemption benefit under Section 80C of the Income TaxAct, 1961 from April 1, 2007.

Further, it has also announced a 5% bonus on post office monthly income account (POMIA) scheme. Thisbenefit will be available on investment made under POMIA in respect of new accounts opened under thescheme on or after December 8, 2007. Together with the bonus, the effective yield will be 8.9% as against8.3% presently available under the scheme.


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6 BANK & NBFCs2007- The year of customer service

1. RBI gets closer to clients

About 35,000 credit card customers of Citibank received free tickets worth Rs 23 crore in early 2007under the Fly fore Sure promotional campaign undertaken by bank in 2005. The customers became

lucky after the RBI about consequences if customer complaints were not redressed and commitmentsmade under the promotional scheme not honoured cautioned the bank. The RBI stepped in after receivinga deluge of complaints accusing Citibank of not keeping its promise under the Fly for Sure scheme. Thebank subsequently owned up its mistakes and decided to provide air tickets to its credit card customers.Citibank has more than three million credit card customers.

The Fly fore Sure episode allowed the RBI to go the whole hog in pursuing its customer serviceinitiatives. The central bank had set up a customer service department in July 2006. Fly for Sure was atime-bound promotion by Citibank from October 1 December 31, 2005, promising to reward thecustomers who spent a specified minimum sum using their credit cards within a specified time.

However, in March/April 2006, the bank realised that there were actualisation issues in the campaign asthe third-part service provider, to whom Citibank had outsourced the work, did not adhere to the terms ofthe agreement. Citibank immediately intervened and decided to undertake the entire process in-house. Thebanks first step consisted in a comprehensive customer contact exercise whereby it contacted all eligiblecustomers through post/phone/email and confirmed their travel preferences and ticketed them.

The RBIs customer service department has been very vigilant since the Citibank incident. Thedepartment conducts impromptu inspections at bank branches to check that customer service guidelineswere being followed. Banks should provide banking services and not get into promotional activities. Ifthey promise freebies under a promotional offer, they should honour the commitments made. Recently, abank started a scheme promising Santro cars to its customers. The RBI asked the bank to submit a list ofnames of customers to whom it gave Santro cars. This was a surprise check to ensure that the bank washonouring its promise.

The central bank, in a circular, directed the bank chiefs to train their branch level staff on customerservice related issues. This was after the RBI conducted a random inspection of bank branches toascertain whether its guidelines were being complied with. The inspection revealed that the branches wereneither aware nor were they implementing the guidelines. Some banks do not even have a customerservice committee and where such committee exists, they dont meet regularly.

The central bank has noticed that many banks have not internalised its customer service instruction. Bankofficials at some branches still insist that customers open a fixed deposit to get a locker, dont obtainnominations for deposit accounts and dont accept soiled notes.

To address the issue of growing complaints from credit card holders, the RBI has directed select banks toexplain their credit card bills to the customers.

The rising instances of social distress on account of excesses committed by banks recovery agents alsocame under the RBI scanner. It was quick to warn banks of strong regulatory actions and also issuedguidelines but for the collection agents.


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2. Trend and progress of banking in India 2006-07

In its report on trend and progress of banking in India 2006-07, RBI said, rapid credit growth in the lastthree years lead to higher slippages of NPAs in the loan portfolio of banks. The central bank has alsowarned that a crash in stock could increase bad loans even if banks do not have a direct market exposure.This is because borrowers exposed to stock markets may default if shares tumble. According to RBI, ifinterest rates rise sharply, banks will show losses in their books due to fall in the value of their bond

portfolios. A sharp rise in interest rates could also make repayment unaffordable for those who haveavailed floating rate loans. Also, the sharp adjustments in real state prices might have some implicationsfor the balance sheet of the banking sector.

RBI Deputy Governor Rakesh Mohan said, The strong demand for homes and home finance is expected

to keep property prices firm, posing a risk to the banking system, given the absence of transparency in the

real estate sector. The elevated realty prices along with non-transparency in the real estate sector maylead to an asset bubble and pose risks to the banking system.

3. Phenomenon of simultaneous volatilities

India cannot be immune to global developments but we, in the RBI, are actively monitoring the globaldevelopments, articulating our assessment as well as responses in regard to impact on India and are in astate of readiness to act, as appropriate, in a timely manner. The major reason for extraordinary vigilanceby RBI is what I would describe as simultaneous volatility in several globally significant markets, namelymoney, credit and currency markets; asset prices; and commodity prices. The current phenomenon ofsimultaneous volatilities should be viewed in the context of possible repositioning of the worldsdominant reserve currency, involving significant wealth, income and terms of trade effects.

4. Preference over PE pools of investment

While it is early days yet, bankers are witnessing a trend where companies prefer tapping into PE pools ofinvestment than opting for bank loans. A few banks report that despite sanctioned loan commitments,some of the companies have not come back for disbursal. They have instead tapped into PE investors.

Experts argue: As growth equity investors, PE investors look at high growth sectors including businessservices, healthcare, financial services and media & consumer. Traditionally, these companies, since theyare not asset-based would not have access to bank financing and instead would look to private equity.

Companies even see benefits from PE firms who also act as strategic advisors and not just sources ofcapital. PE investors provide companies with a global network required for expansion and advice on avariety of issues including strategic M&A, corporate governance, board development, etc.

However, companies generally prefer a specific debt-equity capital mix based on their risk appetite.

Hence, PE capital is unlikely to replace debt. In fact, in the long run PE investment into firms will helpcompanies expand their capital base which they can leverage further to finance their growth requirements.Even banks will be comfortable in lending to these companies with a greater capital base and establishedPE name on their boards. Therefore, PE investment will actually boost bank lending in the long term.


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6.1 SECURITY LAWS

Real Estate Investment Trust (REITs)

The Securities Exchange Board of India outlined a set of draft regulations for the functioning of realestate investment trusts, paving the way for implementation of this scheme in India. The draft includesvarious prerequisites for any entry to launch a REIT scheme, including the valuation aspect, which has

been considered a key roadblock to the launch. The market regulator said every such scheme shouldappoint an independent property valuer, who values all the real estate under the scheme after physicalverification.

One of the proposals is that the REIT should be in the form of a trust created under the Indian Trusts Act.Trustees should be either a scheduled bank, trust company of a scheduled bank, public financialinstitution, insurance company or a body corporate. A scheme should be launched by a trust and managedby Real Estate investment Management Company, with both parties having to register with Sebi.

Only close- ended schemes can be launched by the trusts, and these schemes have to be listed on the stockexchanges mentioned in the offer document.

The valuation methodology shall follow the valuation standards on properties published from time-to-time by the concerned Indian institute or the international valuation standards issued from time-to-time bythe International Valuation Standard Committee, the draft proposal said, while listing the requirements ofthe independent principal valuer.

On investment limitations, Sebi said a REIT, under all its schemes, should not have exposure to more than15% of any single real estate project. While it can buy uncompleted units in a building, which isunoccupied and non-income producing or in the course of development, the aggregate contract value ofsuch real estate should not exceed 20% of the total net asset value of the scheme at the time of acquisition.

Further, it said REIT, under all its schemes, should not have net exposure to more than 25% of all the realestate projects developed, marketed, or financed by the same group of companies. The scheme isprohibited from investing in vacant land or participating in property development activities. The marketregulator has put some restrictions on the borrowing capabilities of a REIT scheme for fundinginvestments and operating expenses.

Accordingly, a scheme cannot borrow more than one-fifth of the value of the schemes total gross assets.While the scheme can mortgage its assets for such borrowings, the REIT should disclose its borrowingpolicy in its offer document, including its maximum borrowing limit.

The market regulator said the scheme should distribute not less than 90% of its annual net profit after taxas dividends every year to unit-holders. The real estate investment trust shall determine any revaluation

surplus credited to income or gains on disposal of real estate, which shall form part of net income fordistribution to unit-holders.


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7 MISCELLANEOUS UPDATES

Urban Land Ceiling Registration Act (ULCRA), Maharashtra

The Vilasrao Deshmukh government cleared the first legislative hurdle. The Urban Land Ceiling Act, oneof the last vestiges of the socialist era, is set for a burial in Maharashtra. The long-awaited decision willunlock huge chunks of land in Mumbai and other cities in the state. Analysts estimate that close to 76,863

acres may be released in nine urban conglomerates across the state. Mumbai alone will get around 17,000acres for fresh development. Real estate activity in other cities like Thane, Pune, Nagpur, Nashik,Kolhapur, Solapur, Sangli and Aurangabad would also get a boost.

Introduced by the late Indira Gandhi during the emergency with lofty socialist objectives, ULCRA endedup serving what it was not meant for. Instead of being a tool to provide low-cost housing for the poor, theact helped politically connected builders to get land selectively released for development.

It took 22 years for the Centre and 29 years for the Maharashtra government to realise the futility ofthe Act. The Maharashtra government finally had to give in as Centre refused to sanction funds for thestates ambitious urban renewal mission. The state has nearly 88 projects, entailing an investment of overRs 25,000 crore, awaiting the Centres clearance under the Jawaharlal Nehru National Urban RenewalMission. Under the scheme, the Centre would share 35% of the project cost provided the state undertakesurban reforms. Besides this, the state has infrastructure projects worth Rs 40,000 crore lined up forMumbai, which also need the Centres assistance.

Indian Boilers (Amendment) Bill, 1994

With the passage of Indian Boiler (Amendment) Bill, 1994, in Parliament recently, private parties willnow be allowed to inspect and certify whether the boilers are fit for use or not. Also, amending themandatory inspection in every 12 months, the government has introduced flexibility in deciding when aboiler should be inspected.

The Boiler Act was formulated in 1923 because of safety concerns in commercial establishments andfactories. Way back in 1972, it was first thought that some provisions of the Act needed to be changed,and a high-powered technical committee was set up. For years, the recommendations of the committeewere discussed, but the cabinet note was moved only in 1993. The amendment Bill was introduced inParliament in 1994.

Minister of state for industries Dr Ashwani Kumar said that the amendment itself was one of the majorreforms undertaken by the government. We have done what has been pending for years. In sectors likeoil, gas and power, stopping of a boiler for inspection even for a day could lead to a loss of productionworth crores of rupees. With the advancement of technology, why do we need inspection of boiler inevery 12 months? If considered necessary it could be done earlier, but it could also be done once in say 24

months. At the same time, we have increased the penalties from Rs 1000 to Rs 1 lakh.

Congress MP and Jindal Steel and Power Ltd vice chairman & MD Naveen Jindal said that theamendment would mean a lot for Indian industries. For a long time, boiler inspectors have harassedmany industries in the name of inspecting boilers. They are very corrupt and create problems for manyindustries. We have estimated that Indian industries will be richer by at least Rs 10,000 crore every yearbecause of the new law.


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7.1 REALTY SECTORCheck out before checking in

The real estate sector has experienced a phenomenal growth over the past few years. According to ArvindParakh, CEO, corporate strategy & finance, Omaxe, the fragmented nature of the industry will changeonce more companies go public, thereby making promoters adopt a proper corporate structure. The year2008, he feels, holds a lot of opportunity and challenging times in store for the realty industry.

But if stockmarkets fire, can a realty boom be far behind? In fact, the real estate sector will be thecornerstone of the Indias growth story, said Mr Parakh. With the growing availability of cross-boardercapital, high level of entrepreneurship and a huge pent-up demand, the realty sector will see anexponential growth in the years to come, he said.

He felt that real estate as an asset class had evolved big time and it has potential of going up to 4% ofGDP. He, however, felt that the biggest challenge was to raise funds because the sector is largelyfragmented and unorganised. The sector is likely to grow up to $ 50-60 billion over the next 6-8 years. Healso understood the need for better regulation. A proper regulatory framework needs to be in place beforereal estate can emerge as an asset class.

Rent or buy

With real estate prices at all-time high, investors are unsure whether to buy a property or stay on rent. MrParakh feels this decision depends on your ability to service the debts. Ideally, for your own occupation,you may aggressively borrow a little more as it is a life-time decision to have your own property.However, if it is an investment, you should take care in choosing the amount of investment and thelocation, which would be able to appreciate in value or give enough rental income to service theobligation.

Check-in or pre-construction

Parakh believes that if you are looking for an apartment/house in the bracket of 6000-7000 per sq ft area,then ready-to-move-in flats will be a good idea. However, if you are opting for a house in the lowerbracket, then it is desirable to go for pre-construction as higher specification material of your choice can be used. He cautions that as the prices have gone up in the last two years and have not seen a majorcorrection, investment in property at todays market rates should be done with an objective of areasonable return in a period of at least three to four years.

Verify before buying

According to Parakh, while buying a house, you should verify the title of the plot and necessaryapprovals/sanction of the plans. You should also check on the necessary approvals required by the local

authorities. These approvals should be carefully inspected and the decision should not be taken onhearsay, that is, if approvals are pending or applied for. Unless the approvals are in place, you should nottake the decision of buying the house, he says, adding as an investor, it is pertinent that you should checkthe developers track record.


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7.2 TECH-TRACKIts no more hunky-dory story

Its not all hunky-dory for Indias $ 40-billion high-profile IT sector. Impending taxes, rising rupee,falling margins, expending domestic economy and zooming salaries all this and more will put IT on thewatchlist for 2008. Indias greatly admired IT sector is at the cross-roads with falling market caps andmargins, some have been predicted a downslide.

Though the global outsourcing market remains healthy as companies in the US start cutting costs tosurvive the imminent slowdown, in the short term, the smaller companies may face pressure. As thecampaign for US President Elections due for November 08 gathers steam, we may see fewer dealannouncements. This will affect hiring and salary hikes in India in IT sector.

Tech stock IT focused mutual funds are certainly not going to see a boom. But investor outlook is stillstrong on domestic BPO market and also the knowledge process outsourcing services. The KPO servicesin niche areas may attract a lot private equity. Legal and business research, clinical trials, drug discovery,Pharma research and Equity research will gain further traction and higher billing rates. Margins will begood in KPO and BPOs will try to align their business models towards KPO services, which mean lessergrowth in BPO jobs. E-governance will boom as will the domestic BPO services market. IMB hasrecently bagged an over $ 1 billion deal from Airtel and Vodafone each. Consolidation and more buyoutswill be seen as small companies exit IT and BPO. Overseas buyout will continue as a major trend.

On the Internet front, Web 2.0 will gain currency in India with more and more Indian social networkingsites becoming popular. 3D applications like Google Earth and Yahoo Maps will become popularglobally. Internet penetration will also increase. Removal of regulations on the part of government onIPTV and domestic VOIP calling fronts is likely to make the PC and broadband penetration zoom. Butsadly things are not moving very fast because of pressure from cellcos, who have vested interests.

On the IT technology trends front, we may see more and more alternative delivery models coming intoplay. Global research firm Gartner lists a set of 14 different alternative deliveries IT models, which willbecome a trend. These include:

Business process utilities, Storage as a service, Grid computing, Virtualisation, Capacity on demand, Remote management, Software as a service, Software streaming, Web platforms and User owned devicesCompanies are also buoyant on these IT trends. The enormous opportunity presented by growing andmid-size businesses will also help shape IT trends. In all, 2008 will be a great year for new tech trends ingadgets, IT delivery models and Internet. But the pillars will be IT and BPO services companies involvedin routine IT application, development and maintenance work. The rupee is expected to gain at least 5-7%in the next 12 months. It will be interesting to see how Indian companies perform under pressure. Thatwill determine the resilience of the IT companies financials, their brand equity and also their future.


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8. KNOWLEDGE RESOURCESome insights of wealth creation

The basis:

Motilal Oswal Wealth Creation Study identified the top wealth creating companies in the Indian stockmarket and was aimed to understand and identify triggers and criteria behind wealth creating companies.Each year study has been conducted to track the performance of companies for preceding 5 years andsingle out those have registered the most spectacular growth in market capitalisation.

These stocks, referred to as Most- Inquire 100, are further sieved to arrive top-10 ranking companies interms of Speed of Wealth Creation (called The Fastest); the top-10 ranking companies in terms of Size ofWealth Creation (called The Biggest); and the top-10 ranking companies in terms of their frequency ofappearance as wealth creators in studies (called The Most Consistent).

While analysing the trends in wealth creation over the last decade, Raamdeo Agrawal, Director and Co-founder, Motilal Oswal Financial Services, said that the period 2202-2007 has seen one of the highestlevel of wealth creation. Talking about market fundamentals, he said as long as the markets are in the gripof fear and rationality it remains bounded to solid earnings, solid cash flows and solid management. It isvery important that you buy good companies at right valuations.

Motilal Oswal Financial Services Ltd has been awarding wealth-creating companies over the past 11years. At a grand function held on 14th December 07, the companies were awarded on the basis ofMotilal Oswals 12th study of wealth creating companies. The chief guest for the function was Infosysco-chairman & member of the board, Nandan Nilekani.

Mr Nilekani shared with the audience the Infosys journey over the last 25 years. He recounted howInfosys was conceptualised with a modest capital of Rs 10,000 to become a 4 billion dollar company(March 2008 estimate) today. Nilekani pointed out that an investor who bought 100 shares of Infosys in1993 (when the company had its IPO at an offer price of Rs 95 per share), would today have his

investment valued at Rs 2.24 crore (market price of Rs 12,000 per share)!

The biggest wealth creators:

In terms of total wealth created, Oil & Gas industry players lead the pack, followed by banks, engineeringcompanies and IT sector stalwarts. Reliance made its way to the top to emerge as the biggest wealthcreator. Alok Agrawal, President (Finance), Reliance Industries attributed his companys exceptionalperformance to two main attributes work and hard work.

The study also reveals that large companies, which were not in the reckoning during the last five years

due to lack of profits, have now performed well. It explains, Bharti and SAIL are large companies, butwere unpopular in 2002 due to lack of profits. Low visibility of profits laid the foundation for huge wealthcreation at a rapid pace.

Invest in companies which are large yet unpopular, if the fundamentals merit your investment. Availableat low prices, these stocks are potential multi-baggers, promising considerable returns at brisk rates.


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The fastest wealth creators:

Bharat forge (BF) Utilities is the fastest wealth creator for 2002-07, with a blazing 5-year stock priceCAGR of 267 per cent. BS Mitkari, Vice President Finance, BF Utilities, attributed the companysoutstanding performance to the managements foresight and the risks taken by the company.

The study also states that in most cases, stock price CAGR have a strong correlation with the PATCAGR. However, in the case pf BF Utilities, its real estate asset holding have unlocked potential, whichhas driven its stock price rather than its earnings.

Look for companies which are sitting on gold mines in the form of real estate. As the study advises, the

real estate sector as a wealth creator in the stock market is the latest phenomenon. The future will see thissector growing bigger and faster than many others.

Most consistent wealth creators:

Wipro is the most consistent wealth creator. Keyur Maniar, Vice President, Wipro BPO contributed hiscompanys success to their focus on values and on building people intellect.

An analysis of the most consistent wealth creator over the last three years indicates that consumer-facingcompanies like FMGC, auto, financial services and pharmaceuticals have been consistently delivering.

Choose some companies from industries that are not very cyclical in nature. The non-cyclicality of

business has emerged as a key driver of steady wealth creation.

Comparative performance of the Wealthex V/S BSE Sensex:

The Wealthex is an index comprised of the top 100 wealth creator. It is compared with Sensex on the

basis of three parameters market performance, earnings growth and valuation. The Wealthexoutperforms the BSE Sensex on the basis of all three parame