Finsight 01-September 2013

From the Editor’s Desk It gives us immense pleasure to bring forth the issue of “Finsight” on the eve of “Finance Continuum2013”. “Finsight” is Finance magazine of Shailesh J. Mehta School of Management, IIT Bombay. Finance is a key area of focus for SJMSOM. SJMSOM envisions to create leaders of tomorrow, who have ability to respond to dynamic environment created by fast pace of change in the markets.

Theme for this years’ Finance Continuum is “Global Financial Architecture”.

Economies across the world faced difficulties due to the global financial crisis, triggered by the subprime crisis in the USA. Effects of this near-meltdown were felt in geographies ranging from the Americas and Europe to India and the rest of Asia. The G20 has been foremost in championing the need for revamping and strengthening the international financial system. Among the areas to be addressed are financial regulatory and oversight mechanisms, macroeconomic policies, free trade, and the establishment of an institution that monitors and works towards improving the global monetary and financial system. These components together will contribute to the much needed stability of the international financial system. The various articles of this magazine delve deeper into various aspects of such a global financial architecture.

The magazine focuses on various current issues across the world like the depreciating rupee, the problem of credit crunch in China, growing energy demand in China and its potential consequences, the NSEL crisis, poverty line definition and the resulting numbers game, analysis of the new companies act and many more. Finsight also brings some more good reads for you in this issue in the form of knowledge section and news section. News section covers the financial news of the last month of different sectors.

We hope it proves to be a good read to you while providing you with latest happenings in the financial world.

Towards the end of this brief note, we would like to thank our readers for your constant support and appreciation. Kindly keep pouring in your suggestions and feedback to finesse@sjmsom.in.

Regards, Finesse, The Finance Club, Shailesh J. Mehta School of Management, IIT Bombay

Contents Editorial team Kabir Maini Vinay Acharya Archana Choudhary Pranavi Jakkam Ananth S Anuradha Ganesh Anuj Shah Anubhav Sood Students take on various finance domains

Articles

Bhuvanesh S Deepan S Honey Bhushan Kaustubh Kirti Rishi Ramesh Shachi Shah Yatharth Grover

The stock prices have gone for a wild ride.

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Finance bytes(p-31)

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When the country opened its economy in 1991, it was widely hoped that this is the point from which India would take the path of high growth and development like those of the other East Asian nations. The start of the journey was rugged, as the growth rate from 1991 to 2004 did not surpass the so called “Hindu rate of growth” by any considerable margin. But after that, the country witnessed unprecedented growth, even touching 10% for some time. Suddenly, GDP was the buzzword and India was the talk of time. The arrival of BRICS, especially India, was prophesized by every single analyst in the world. Now, all these “not so distant” events seem so distant. Keeping aside the recent slowdown in economy, our aim is to analyse India’s journey towards high growth and the conversion into its aim of inclusive growth.

But did the decades of high growth really put India on the path of actual development? Are we on a similar track as the other Asian economies that went through different phases of development?

The Cover Story of Finsight dives deep to bring out these answers for you.

Comparative Analysis of India and East Asian economies: We will start by analysing the various economic outcomes for selected Asian countries around their dates of initial ‘take-off’ into periods of high growth. The year of take-off for comparator Asian countries based on IMF (2006) are identified as 1979, 1973, and 1967 for China, Indonesia, and Korea respectively. For India, the year of take-off is 1991, when major economic reforms began. In the next section we will compare these countries based on different parameters.

1. Per Capita Income: Figure 1.1 shows that India was growing at similar rates as other Asian economies before take-off.

After take-off, it kept pace with Indonesia, but China and Korea grew much faster.

We have to keep in mind that China, Indonesia and South Korea has completed 33, 39 and 46 years respectively after the take-off while India has completed hardly 20 years. China is able to maintain its high growth rate even after 33 years while India has started deviating from this path.

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2. Share In World Trade: In Figure 1.2, an index of a country's share of world trade is plotted, with year 0 based on the earlier take-off definition (1979, 1973, 1967, and 1991 for China, Indonesia, Korea, and India respectively). Interestingly, India's growth in its share of world trade is similar to China's and greater than Indonesia's at similar periods after take-off. India's openness is also evidenced by the trade to GDP ratio, which exceeded 55 per cent in 2011. By contrast, this ratio is only 31 per cent for the United States.

10 percentage point share of overall employment would move out of agriculture in the next 10 years, bringing the share of employment in agriculture down to about 40 per cent.

4. Share of employment in Industry:

The takeaway from the evidence we have examined thus far is that India's growth performance has been similar to that of some fast-growing Asian economies at similar stages after take-off, but not as spectacular as China's.

Interestingly, despite being seen as a trade laggard, India has grown more open to trade at about China's pace.

3. Share of employment in agriculture: India certainly has a bigger share of employment in agriculture today than the other Asian countries, but perhaps only because it has not had as many years since take-off. Figure 1.3 suggests that the employment share in agriculture in India is coming down at a similar pace as in the other Asian economies (though Korea seems to have a lower share of people in agriculture from the time we have data). Extrapolating into the future, if India followed China's or Indonesia's path, about a

If we compare the situation in the industry sector, we see greater differences (see Figures 1.4 and 1.4a). While the growth in India's share of employment in industry seems to be on par with the growth of other Asian economies at similar stages (with the exception of Korea), the surprising fact is that India's share of value added in industry has not grown to keep pace with its share of employment--it has in fact recently fallen. Contrast this picture with China's where the share of value added in industry has always been very high relative to its share of employment, or Indonesia's and Korea's where the share of value added has kept increasing as the share of employment has increased (e.g. for Indonesia) or even decreased (e.g. for Korea). The alarming conclusion is that while workers are being added to industry in India, the productivity of the jobs they are going into has not been high.

In part, this is because the data we work with treats low-productivity construction as a part of industry, and the booming construction sector has accounted for a large share of the jobs created in the industry. However, an additional problem is that few of the jobs in the industry are formal or

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being created by the comparatively more productive large firms.

5. Share of employment in service:

Though the service sector commands more than 50% of share in GDP but share of employment in services has been growing very slowly when we compare to other nations.

Flying Lessons: 1991 was the year when the Indian economy is said to have finally taken off towards the road which has earlier been traversed by other lead East Asian economies. We tried to cover the journey of India in terms of Per Capita Income, Share in World Trade and Employment in Agriculture, Service and Industry. After having even a cursory glance at the analysis it can be

surmised that, though India witnessed high growth after the take-off but there remains a huge gap in its fundamental.

What happened in 1991-92 was that the government deregulated and liberalised a number of sectors and allowed entrepreneurship to bloom. At the same time, it also conducted a huge amount of reforms in the financial sector.

However, real sector reforms were not fully focussed on. Indian promoters went for the quickest and the fastest growth at the lowest risk.

One set of people went into low or medium technology, where deployment of capital was is not high. Others went to realty and service industries. Very few went into core middle manufacturing, which involves huge capital, technology imports and tie ups.

Agriculture has been the main employment provider but its share in employment has not kept pace with its value creation. Where share of employment is 59% for agriculture sector, its share in GDP is just 14.5%. This is not the case with other Asian nations where the share of agriculture in employment is compatible with its wealth creation. It indicates that we have ignored a sector that provides employment and livelihood to more than half the Indian population.

The service sector has been a shining poster of India’s growth story. It has an impressive and enviable growth rate. But when it comes to employment creation, performance of the service sector has been lacklustre compared to other Asian economies.

Economic growth will only be meaningful when it touches and strives to improve each and every life. This is only possible when we can create jobs which add value not only to the economy but also to the society and individuals. Until now, we have failed to achieve this goal, since we embarked on a path of growth without making our fundamentals strong. The fundamental lies in Agriculture and Industry sector and unless we don’t address the problem at a ground level we

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will always be laggards coming in behind the other Asian nations.

India as a country has unlimited potential given its huge demographic dividend. The need of the hour

is to tap this dividend in the right manner with the right policies at the right time.

Dollar VS Rupee The Indian rupee, which was at par with the American currency at the time of independence in 1947, hit a record low of 61.80 against the dollar recently. This means the Indian currency has depreciated by almost 62 times against the greenback in the past 66 years. The currency has especially witnessed a large volatility in the past two years. This volatility became acute in the past three months, affecting major macro-economic data, including growth, inflation, trade and investment. Managing volatility in the currency markets has become a big challenge for the economic policy makers in the country. The central bank as well as the government has taken a series of measures to curb the volatility in the markets.

There are several factors for the continuous slide of the rupee. But the recent bout of weakness is fuelled by the prospect of the unwinding of the bond purchase programme of the US Federal Reserve. The US Federal had been printing money to bolster its economy.

Now that there are signs of some strength in

the US economy, it may start winding down the programme of adding more money into the system. A possible winding down of the asset purchase programme and improvement in the health of US economy will strengthen the US dollar. Investors will withdraw investments from emerging markets such as India in the short term and chase assets in the US, since assets in the strengthening US economy are seen as attractive. The outflow of money from emerging markets may lead to currency weakness. FIIs (Foreign Institutional Investors) pulled out nearly `550 Crores stock on Wednesday taking the June outflows to about `9000 Crores.

The second most important factor is the widening of CAD. Our CAD was 6.5% of GDP in the December quarter but fell to 3.6% in the following quarter limiting the fiscal year deficit to 4.8% of the GDP. Two factors have been named for that. One is the import of Gold. India is one of the largest consumers of gold and the heavy import of gold widens CAD as the government had to provide for dollars for every ounce of gold imported. The other factor is crude oil imports. India imports more than 75% of its crude oil requirements.

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Lastly, there has been a shift of FII’s from the Indian markets during the current financial year. FIIs help the economy by injecting a high inflow of dollars into the Indian market. As per a recent report, the share of India’s FII in the developing markets has decreased considerably. As FII’s are taking their investments out of the Indian markets, it has led to an increased demand for dollars, further leading to a spiralling spree.

The Fast Moving Consumer Goods like soaps and shampoos require imported raw material.

The cost pressure on companies will lead them to revise the prices of their products.

The prices of pulses and oil which are largely imported are going to see a rise in prices.

“Crude palm oil prices set the pace for prices of other edible oils. It is imported in large quantities and any rise in its prices will add to the inflationary pressure”, warns Arvind Chari, fund manager, fixed income, Quantum Asset Management.

The dollar price rise adds more to the deficit in the trade. It means that Indian imports exceed its import. The rupee has weakened against the dollar which means you spend more rupees to get that dollar. Large Indian imports like crude oil, fertilizers, medicines and iron ore have become costlier. The rising petrol and diesel prices have affected transportation charges. Similarly, a consumer has to get prepared for higher grocery bills.

Students heading abroad should get prepared to shell out more for their education and living expenses. Students taking loans for 5

their overseas education too will be affected.

They get their loan in Indian rupees but have to pay in foreign currency. “They may also fall short in funds as the loan would have been taken according to their initial requirements.

In such a scenario, either the student’s personal contribution will have to increase or he will have to ask the bank to increase the loan amount”, says Ashutosh Khajuria, President, Treasury, Federal Bank.

Subbarao: How has he left us??

Changes in Repo Rate Since Sep 2008

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Dr D Subbarao, Governor of RBI walks out of his office in September this year. His five year tenure leaves an important mark on economists to discuss how the monetary policies of RBI helped to counter one of the biggest financial mess of our times. His tenure is marked with many strong policies and tussles with his involvement with the government which more or less shapes his true report card of how he actually came out to be.

With the following analysis we would try to picture his position in being detrimental in rowing Indian economy out of the crisis.

Dr.Subbarao became the 22nd Governor of RBI after his brief spell in World Bank (1994-2004) and Prime Minister’s Economic Advisory Council (2005-2006). He was pronounced as the governor 2008 when the entire financial world was on its knees facing the world’s worst financial crisis of all times. When the crisis struck in 2008, the financial meltdown in the western countries led to a domino effect which affected the Indian economic system. India due to its policy of not letting money get parked in Real Estate helped it averse the crisis at that time but later on faced the after effects of the crisis in the later parts of 2010 which was characterized by falling GDP growth and Inflation reaching double digits.

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GDP Growth Rate Since 2008

economic circles however he kept faith in his polices and continued to implement them.

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What followed was a media spectacle where Dr. D. Subbarao came forward and followed his core agenda to bring down inflation as the means to control the crisis. The purchasing power of the people had to be withdrawn to control inflation.

He took one of the strongest measures where he kept increasing the Repo rate to suck out cash from the economy.

The increasing Repo Rate strategy helped to some extent and brought down inflation level to around 7% by the end of 2011. However by this time the GDP growth rate of India had slipped to a decade low of around 4%, which further added to Subbrao’s criticism of maintaining a balance between growth and inflation.

By 2011 the Euro debt crisis had also kicked in which further added to the woes of the economy and further slipped the GDP growth to an all-time low of 3.2%. At this juncture the finance minister was loggerheads with Subbarao to boost economy by bringing down interest rates to infuse cash into the system. However Subbarao did not allow any hike in the interest rates. He believed that high lending rate would pull India out of recession. He insisted that the role of RBI was to control inflation while boosting growth is something that needs to be controlled by the government by formulating fiscal policies. His anti-Keynes viewpoint drew a lot of criticism from the

Apart from the troubles of GDP and inflation the recent depreciation of rupee has been another major concern for Dr. D. Subbrao. The depreciation of rupee has made imports costlier and thereby widening our current account deficit and increasing our external borrowings. The depreciation of rupee is also causing FII’s to leave which has taken a hit on our GDP. In this regard Dr.Subbrao has taken a firm stance by selling some amount of forex reserves and maintaining high interest rates despite immense pressure from the government and external sources.

In the end I would like to conclude by saying that Dr. D. Subbrao’s tenure has been marked by 7

various ups and downs. He has been wrongly criticized for being the reason for the economic woes of the country. He had used a conservative approach in withholding the economic policies of the country. People tend to forget that the economies all around the world are not at a much better position. There is persisting unemployment in the Eurozone countries and the job scenario in the US is also not under control. All these factors are playing a primary role in the current situation

of the Indian economy. The poor monetary policies of the government have also played a huge role in bringing the Indian economy to such dismay. We should realize the importance of the Subbrao’s position at such a crucial juncture. He might not have stabilized the Indian economy at one of its worst but rowed us through pretty well.

He had done his assignment well by keeping hopes alive of finally coming out of this crisis that we are currently facing.

The NSEL Crisis What is NSEL? National Spot Exchange Ltd. (NSEL) is a pan-India level, demutualized electronic spot exchange for commodities which was set up by Jignesh Shahheaded Financial Technologies India Limited (FTIL) and National Agricultural Co-operative Marketing Federation of India Limited (NAFED). It is similar to Multi Commodity Exchange (MCX), National Commodity and Derivatives Exchange (NCDEX) and R-Next and has a market share of 99%.

NSEL started live-trading on October 15, 2008.

NSEL was a pioneer in introducing demat-delivery based instrument products known as e-Series in commodities like gold, silver, copper, zinc and lead. At present, NSEL is operational in 16 States in India and provides delivery-based spot trading in 52 commodities.

Government organizations like Food Corporation of India, Cotton Corporation of India, HAFED, MMTC, and NAFED have also used this platform to sell various commodities.

What had happened and Why? What is this fuss all about?

NSEL was engulfed in a crisis after it stopped trading in all contracts, other than the e-Series contracts and initiatives like e-auction and eprocurement for government agencies on July 31, 2013. It also deferred delivery and settlement of contracts for 15 days. This raised concerns over the possible defaults of Rs 5,600 crore dues to about 13,000 investors which caused the shares of NSEL's promoter, Financial Technologies (India) Ltd (FTIL) to crash by 64.5%.On August 5, there was news in the media of ban on E-series by the 8

government. As a precautionary measure, NSEL suspended its trading thus leading to complete shutdown of the exchange.

Although NSEL was founded to offer a spot market for commodities, in 2007 it secured approvals from the government to offer products that had characteristics of one-day forward contracts on the conditions that there would be no short-selling and that all outstanding positions will be settled by delivery. However, NSEL allowed roll-over of forward contracts as there was no delivery period prescribed by Forward Contracts Regulation Act (FCRA), 1952.

NSEL had introduced products with characteristics that were in violation with the rules and regulations governing these exchanges. NSEL launched contracts with more than 11 days tenure (Some contracts had a T+25 and T+35 day settlement cycle. The exchange also reportedly allowed members to do short selling.

The suspension came after the government noticed that NSEL was offering commodity contracts where settlement was done beyond the

allowed eleven day delivery period for spot markets.

Source: Moneycontrol.com In February, 2012, the government noticed this happening and brought NSEL under the purview of Forward Markets Commission (FMC), the commodities market regulator. But this didn’t have much effect. This continued until the Ministry of Consumer Affairs (MCA) and the FMC asked NSEL to stop launching new contracts until further orders on July 12, 2013. The FMC also sought an undertaking to settle all existing contracts by their due dates. A week later, NSEL reduced the delivery periods of all its contracts over 11 days to 10 days and on July 31 it stopped pay-out to the brokers.

The FMC also found that there was short selling in some of these contracts where contracts were being sold by individuals even without the ownership of the underlying commodity.

A set of commodity stockists would sell their warehouse receipts to investors for an immediate payment. They would sometimes also enter into arrangements with them to buy-back the commodity after a 25-35 day period and give a return of 12-14 % to the investors. The stockists would hence receive cheap financing whereas investor would get good returns. This soon turned into a system where speculators would sell commodities without actually holding the underlying stock.

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They attracted investors who didn’t understand the markets but were ready to lend money to fund such trades.

Since majority of these trades took place in commodities such as raw wool and castor-seed that were not widely traded, there was limited public information available to the investors to check if these trades were actually correct.

At the root of this fiasco is the shoddy regulation of the commodity markets by the government and related agencies. The spot commodity exchange is not under the regulation of FMC or the Central government. It comes under the purview of the state government. There was no clarity as to who regulated the spot markets. It was the department of consumer affairs which took action on NSEL. In response to the government’s directive the NSEL had cut the tenure of its contracts to below 11 days. But there is no clarity as to whether these are acceptable.

Unlike bodies like SEBI, FMC doesn’t have powers to act. Amendment of Forwards Contracts (Regulation) Act, 1952, which aims to provide more autonomy to FMC, is still pending for the last many years. Because of these reasons, trading in commodity futures is a game of speculation in India. It is no longer being used for its original purpose of serving as a hedging medium.

What Next?

There are around 13,000 investors including 7,000 small investors whose Rs 5,400 crore are stuck in the NSEL. After discussions with 24 borrowers, NSEL has submitted a calendar of payment to 13,000 investors over eight months to March, 2014 with FMC.

Starting August 16th, there will be pay-in every Friday and pay-out every subsequent Tuesday. As per the plan, Rs 3,494.4 crore would be settled this year in weekly instalments of Rs 174.02 crore and another Rs 860 crore will be paid in ten weekly instalments of Rs 86.02 crore each during January-March quarter next year. Yet, there is a shortfall of Rs. 1220 crore which NSEL is trying to recover.

Also, some brokers and portfolio managers have come under regulatory scanner for luring HNIs and other investors to trade on NSEL with a promise of high returns. There are complaints that these brokers offered returns of up to 15 per cent to their clients, by asking them to place one-day buy orders followed by immediate sell orders to be executed in next few days. Also, fund managers have been accused of diverting funds from their equity and derivative portfolios to trade in the more lucrative commodity markets.

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the bourse be merged with its promoter firm FTIL which according to them is a stronger company.

Also on background of rising voices from investors and brokers, a task force comprising nominees from multiple agencies, such as the Income Tax Department, the Enforcement Directorate and SEBI has been set up task in the Finance Ministry to probe the issue. However, the task force won’t have any legal authority. They can only give recommendations.

A group of investors met Food and Consumer Affairs Minister, K V Thomas and demanded that

All in all, this episode is less to do with NSEL but more about credibility and integrity of the unregulated exchanges. Events like these cause a massive loss of already dwindling confidence of investors. Strict regulation is the only way forward.

Do comebacks really matter in the corporate world??

Some of the big comebacks in the history of the corporate world can be attributed to the comebacks of the founders of the company to their own company after being retired or being ousted from the company. Some of the renowned names of this class are Steve Jobs of Apple Inc., Michael Dell of Dell (He succeeded his successor Rollins as the CEO in 2007), Howard Schultz and the latest being N. R. Narayana Murthy of Infosys Limited.

Let us assume business as a single separate entity as per the entity concept of the accounting principles. The first question that comes to our mind when we listen to news related to comeback is ‘why should they come back?’ The honest answer is because ‘the business needs them’ and not because ‘the people need them’. When the

business loses it track and path, it looks for someone who could put it back on the right path again. But if that guidance can be given only by its founding father, then the comeback of these founders becomes inevitable.

What do these people bring with them? Is it experience or Brand figure or money that comes to rescue? It could be any of the above mentioned, but another important thing that they bring with them is the business. Business is all about binding to your core competencies and core assets.

The Apple Story: Many know Steve Jobs was fired from Apple Inc. in 1985. But the reality is he was not fired but was 11

demoted and later he resigned after 5 months.

But what happened to Apple’s growth after his resignation. What happened to Apple’s Inc. after his return?

2008 2006 2004 2002 2000 1998 1996

Apple had a growth of less than 25% growth between the period 1991 and 1995 reaching $ 11 billion. in 1995. After which the sales started to fall by over 40 % during 1996-97.

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It was Steve Jobs who regained the fortunes for Apple Inc. after his company NeXT was brought by Apple in 1997. He became the iCEO (interim CEO) with a symbolic salary of $1 per annum. He brought back the values of innovation and excellence in design with which the sales of Apple Inc grew at a rate of -16%, 3% and 30% till 2000.

Then in 2001 they recorded sales of $ 5.3 billion which was -33% growth of the previous year. But Steve made sure that the business is on the right path and the innovation and brilliance in design keeping in mind the core value of Apple Inc. Then they slowly regained and their sales were at $ 108.249 billion with a CAGR of 35.21 % in 2011 when Steve Jobs passed away.

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The fig 1.1 shows the growth of sales of Apple Inc.

108249 65225 36537 32479 24006 19315 13931 8279 6207 5742 5363 7983 6134 5941 7081 9833 11062 9189 7977 7087 6309 5558 5284 4071 2661 1902 1918 1516 983 583

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Year

Apple Inc. went public in 1980 @ $22 per share.

For three consecutive years from 1982, Apple’s annual sales grew at 69%, 54% and 27%. The period between the years 1985 and 1990 was the financial golden age of Apple Inc. recording an average annual growth rate of over 30% over five years. From 1990, the board of directors made radical changes in the strategy which resulted in maintaining high level of spending on R&D at the same time moving downwards in terms of price.

Apple Inc Gross Sales in $mn From 1982 to 2011

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Sales in $mn

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Fig 1.1 Gross Sales growth of Apple Inc. from 1982 to 2011 Source: http://faculty.london.edu/chigson/casestudies/pd fs/apple.pdf So, what is going to be the future of Infosys after the return of one of the founders N. R. Narayana Murthy?

Infosys Technologies Limited was founded by seven engineers in 1981 with just $250. NRN was the CEO of the company till 2002. During his tenure, Infosys marked many milestones like going public in 1992, touching $ 100 million revenues and listing in NASDAQ in 1999 and touching $ 500 million within a span of 3 years in 2002. In 2006, he retired from the services of 12

Infosys as he turned 60 and served as additional director and continued as chairman and chief mentor of Infosys. The most notable thing is Infosys earned $ 1 billion profit during the year of 2008 during the great economic recession. In 2011, he retired from the executive operations of Infosys.

During the year 2011 to 2012 Infosys was growing at a pace slower than it is predicted by NASDAQ. Infosys has the policy of forecasting lesser numbers in terms of growth percentage and exceeding the prediction at the end of the term where forecasting is made. But Infosys during that period was not able to achieve the growth rate forecasted by its top management. So, the onus of setting the company back on pace was on the cofounder Mr. S.D. Shibulal, who was then the Chairman and CEO of the company. But the added pressure questioned the efficiency of Shibu as the CEO of the company. NRN came to the rescue saying that the other CEOs of the company had the advantage of NRN being the mentor.

22% from the financial year ended March, 2011 to March, 2012. And during the next year the operating income incremented at a rate of 15% (Approx.) but the expenses recorded a whooping rate of 66.33%.

This is one of the important reasons which forced the board members to think of bringing back the father of Infosys to rescue. But the environment in which NRN has taken charge is a very challenging environment. It cannot be attributed to the environment in which Steve Jobs took charge of Apple Inc. It is mainly because of two reasons. The first one being, change in the environment from the time when NRN made Infosys grew dramatically till 2002. The second one being he was not in an executive role for the past 11 years. He may not be well equipped with the current trends and the IT spending at the age of 68. But the second reason can be allayed by Rohan Murthy, Ph.D., in Computer Science, young and energetic at 30, who has joined as the Executive assistant of NRN.

But what happened in 2013 is that Infosys was continuously recording growth rate lesser than the rate predicted by the NASDAQ in a challenging environment where its competitors TCS, Cognizant and HCL are growing at a faster pace.

Financial Ended

Year Operating Cost of Sales (In Income (In Rs. Cr) Rs. Cr) March, 2011 25385 12644 March, 2012 31254 15481 March, 2013 36765 25750

Source: http://money.rediff.com/companies/InfosysLtd/13020007/profit-and-loss

But what are the implications of this change. The shareholders welcomed the comeback of Infosys by the increase in the share value which has been falling quite a time. The employees have expressed a boost in the morale of the company after the return of Mr. Murthy. Shibulal and Kris were elated after NRN accepted their request to be back in executive role.

In the above table we can see that the operating income rose at 23% at the same time costs rose at 13

coin. Infosys has renounced of its founder’s own policy of retiring from executive roles at the age of 65. Also, one of the important long held policies of not bringing family members of the founders into Infosys was also taken back. Infosys and NRN known for living up to the promise are no longer very true.

Is everyone happy about the return of NRN? The answer is no. There is always another side of the

So, the growth of Infosys is a wait and watch scenario as the environment is very challenging for the IIT and IT-ES industry. Even though Infosys has renounced some of its policies, it is always for the greater good. Let us hope for yet another NRN era for Infosys in turn for the entire software industry.

China credit crunch It seems almost impossible that China, which had been almost bullet proof to the 2008 crisis, is facing a credit crunch today. China's banks were caught in a credit squeeze that began in late May due to a combination of factors that ranged from lower capital inflows to mismatch of banks' shorter-term funding with their longer-term lending. In June, Chinese banks were in for a rude shock when the interest rates for borrowing hit

30% compared to the typical rates of 2.5%. The shock was sharp but short. The Shibor shock (Shanghai Interbank Offered Rate, a benchmark interest rate) raised immediate fears of bank defaults. It also highlighted broader concerns about liquidity excesses in China, where the supply of credit has been growing faster than the economy. We’ll see what caused the sudden credit squeeze.

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A credit crisis can be caused due to irresponsible lending by banks which may choke the money supply if there is not much cash left to lend. Banks usually keep cash in reserve both to satisfy regulatory requirements and to meet their obligations. In case of shortage of money, they borrow cash from other banks that have more than they need. Although banks can run out of money, the country cannot. China’s central bank, the People’s Bank of China (PBOC), can “print” how much ever Yuan it wants. It can diffuse this freshly created money into the system by buying foreign currency, bonds or other safe financial assets. It can also reduce the SLR, CRR requirements. But when China’s banks ran short of cash in June, the central bank was reluctant to infuse liquidity into the system. Sometimes, central banks are not keen on printing more money if there are fears of inflation. But inflation in China is quite low, estimates for July inflation in a Bloomberg News survey of 47 analysts ranged from 2.5 % to 3.2 %. The PBOC was apprehensive about the rampant lending by shadow banking system. It was the sneaky shadow banking sector which caused the subprime crisis of 2008 and if left unchecked there could be trouble for china. A lot of banks were running out of cash because they had given a lot of long term loans while financing with short term loans. Because of this there was a shortage of cash reserves with the banks and they were forced to borrow from each other to satisfy the CRR/SLR requirements. Banks can get away with this kind of overstretch and mismatch if they know they can always borrow easily and cheaply. This is exactly why the PBOC wanted to shake the complacency of the shadow banking sector by creating a cash squeeze.

Although the move weakened the shadow banking sector it also caused an unexpectedly severe cash crunch. As interest rates spiked, the central bank was slow to react or to clarify its intentions. That allowed fear and uncertainty to spread. Eventually the central bank did intervene,

ordering big banks to lend to smaller ones and promising to stabilise the market.

What are the implications of the imminent slowdown in China?

Over the last decade, China has perhaps been the biggest engine of growth, not just in Asia, but across the world. As China slows, so will a great many other countries that rely on trade with China to fuel their own growth. The economies in India and China are slowing down and that’s making the situation worse with the kind of monetary tightening seen in these countries.

While the economies in Asia are slowing down, there looks like little chance of liquidity improving.

We are seeing all-time lows at the present time which is a cause for concern.

Some of the other problems of China are the increase in the NPAs of banks, decrease in domestic funding & decline in the demand for loans. There has been a significant rise in property prices over the decade and PBOC has to deal with this probable real estate bubble, because they are worried about asset bubbles. All this paint a bleak picture of the future of china. If we look beyond the veil of liquidity and credit crunch, we can see that all these problems are because of pessimistic investor sentiments and future outlook of the Chinese economy. Not many FIIs or foreign 15

investors are investing in China. There are concerns about the competitive advantage of the ‘made in china goods’ as nowadays countries like Mexico, Argentina produce cheaper goods. When the borrowing costs go up, the production costs also go up which is then passed on to consumers.

China will also be hit by the QE tapering by US who has indirectly benefitted China. Keeping all this in mind and the credit crunch, it is safe to say that China’s era of double digit growth is over, at least for a few years. China is expected to grow by about 6% in 2014.

China: Growing Energy Demand In a global economy consumption of any form is linked with increase in job scenario. Today the world has come to such a juncture that it has become imperative for every country to create more and more jobs. Several underlying related facts related to job creation loose voice under such circumstances. People tend to undermine important facts just for the sake of cooking up economic books. Recently the data related to the oil production of the world was released. In has been predicted that by October this year China is going to surpass US and become the largest importer of oil in the world. The prices of oil have

sky rocketed close to $110 a barrel and are going to grow continuously. China’s sudden rise is going to have a long term impact for the energy security

of the world. (Brent Crude Oil is sourced from North Sea. Source: http://www.isover.com/QA/Green-facts-global-challenges/Will-the-price-ofoil-decrease) China is going to surpass US as the key importer of crude by the end of the year. Its imports are expected to grow to the levels more than 11 million barrels per day which will be a near 13% rise from what was the growth in 2011. This rate is going to grow continuously. Over the same period the growth of consumption of crude in US will grow to nearly 13 million barrels per day. The US crude daily consumption peaked at 20.8 million in its boom years

in 2005, however dropped soon after. In 2005 the demand for crude in China was nearly fifty per cent of what the US demands today. The Chinese economy 16

has expanded from leaps and bounds in double digits since then and reached the current levels. The American energy consumption has however contracted all this time.

these countries are going to utilise. The energy demand of the crude is going to go up and there is no effective cap on that consumption.

High rate of energy consumption also sends countries outside in search of energy. While the Western economies have become crippled due to the current financial crisis, the Chinese economy is trying to make the most of it. Chinese imports have started affecting the entire geopolitics of the world. China has put itself in buying up assets in countries in Central Asia, Africa, Canada and South America. The assets that have been bought are however miniscule compared to amount of production capacity of international oil companies.

China’s sudden growth in energy consumption raises the serious issue- the case of carbon emissions.

Countries like China and India refused to commit anything in the Copenhagen Accord in December 2010 to cut down emissions. They have used their status as being developing nations in only agreeing to try to

However these assets are being funded by cheap loans provided by the Chinese Central Banks.

Moreover the biggest underlying factor is these expeditions are being funded by the great appetite of 1.2 billion people which is going to grow continuously in the coming years.

bring down emission of greenhouse gases to their

It is very important to grasp the magnitude of the

2005 levels by 2020. However a reduction in emission

problem. The usage of oil is going to exponentially rise

level is no way related to the amount of energy that

in the coming years. It has been predicted by US’s

17

Energy Information Administration, International

problems that we will face once the oil resources burn

Energy Outlook 2013 even though the usage of

out. However the media is defining the event in a

renewable resources would rise in the coming years,

different perspective. People are not discussing the

population of India and China are going to put a big

event of China becoming the largest importer of oil in

strain on the consumption of crude. The world

the world as an alarming signal of energy crisis. It is

consumption rate will grow by nearly 56% by the end

being portrayed as a sign of growing economy. Media

of 2040. It is quite clear that high energy usage

is adamant in pointing out that increased oil

dictates who runs the world. High appetite for energy

consumption is a big sign of the growth in economy.

consumption of the US was the reason behind the

Media is talking about the increase in job creation.

wars waged by the US in the Middle East for the past

Peaking oil demand was projected as increase in

ten years. However the world is no longer unipolar.

consumption in all economies. We need to change

Both the Chinese and the America consumption

that outlook. There is more to the world that is in the

volume have reached monstrous levels. Their

present. Economies have to plan accordingly for the

consumption is expected to rise in the coming years.

future. Renewable energy resources have to be

Therefore this leaves us with a food for thought.

tapped judiciously keeping in mind future energy crisis

The depleting crude oil resources are going to create

that we may lead ourselves into.

18

The 5 Key Features of the New Companies Act An Analysis The new Companies Act primarily focuses on the areas of management autonomy and investor protection. The Companies Act 1956 was unable to meet the new requirements of the economic environment currently prevalent in India. To address the needs for an accelerated economic growth the new companies act is introduced by the Government of India. The bill includes some of the revolutionary changes that have been long awaited. Transparency in corporate governance and accountability of auditors has also been paid good attention while drafting the bill. Provision for investor protection such as Class Action Suit which was already present in many countries has been finally introduced in India.

135 in the new Companies Act mandates a qualifying corporation to spend at least 2 % of average net profit made in the preceding three financial years, in CSR activities. A qualifying company that fails to spend the amount are required to explain the reason for their failure in the report of the board of directors.

According to Ernst and young, about 3000 companies in India would qualify for mandatory CSR activities as per the new law and would bring about $2 Billion of spending in CSR activities. The CSR activities can be focused on any of the following areas as per the Schedule VII and should include at least one: 1) Eradicating extreme hunger and poverty 2) Promotion of education 3) Promoting gender equality and empowering women 4) Reducing child mortality and improving maternal health 5) Combating [HIV], [AIDS], malaria and other diseases 6) Ensuring environmental sustainability 7) Employment-enhancing vocational skills

MANDATORY CSR ACTIVITIES By passing of the new Companies Act India would join list of countries such as Sweden, Norway, The Netherlands, Denmark, France, and Australia that has mandated CSR activities for corporations. The clause

8) Social business projects 9) Contribution to the Prime Minister’s National Relief Fund

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However, sceptics have noted the mandate of CSR activities by the government, is not a good policy. CSR activities are voluntary in nature. However mandating CSR would make the activities more of a duty being delivered, rather than an inspirational activity. When the voluntary aspect of conducting CSR activities is lost, the spending could be considered as just as an additional tax burden. This only exacerbates an already high corporate tax rate in India. According to KPMG the corporate tax rate in India is 32.45% which is higher than a global average of 24.09%. Further addition of 2% for CSR activities might make India an unattractive place for investments. Thereby, there is the need for CSR activities to remain as a voluntary rather than a mandatory task for corporations.



“Investors in US, using the provision for Class Action Suit, sued Satyam and claimed a compensation of Rs. 675 Crore in settlement for the loss incurred by them due to the scam.” 

APPOINTMENT AND ROTATION OF AUDITORS The new companies act will introduce provision for appointment of auditors for five consecutive years.

However, as public stake is involved in listed companies, the act also has provisions that ensure that auditors do not serve for a longer time for such companies. A listed company can appoint an individual as auditor for one five year term and an auditing firm for two consecutive five year term.

There is cooling period of five years before the same auditor or auditing agency can be appointed.

One important change in the law is that the auditors are made more accountable to punish an auditor, if found guilty of abetting or colliding in fraud. Such auditor shall be removed and will get debarred for a period of five years. This would put a check on any fraudulent activities engaged by the corporate. Also to ensure independence from the company, auditors are prohibited from holding any interest in the company or its subsidiary or have any business interest with the company.

CLASS ACTION SUITS This is a huge step to ensure investor protection. Class Action Suit would ensure that the investors could take action when incidents such as the Satyam Scam occur.

The implications of not having a provision such as the Class Action Suit were huge. Satyam lured investors to invest in the company by showing fudged financial statements by showing inflated revenues. Around 300,000 retail investors in India lost about Rs. 5000 Crore in the case. Whereas, investors in US, using the provision for Class Action Suit, sued Satyam and claimed a compensation of Rs. 675 Crore in settlement for the loss incurred by them due to the scam.

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Class action is a right to members or deposit holders or their representatives to file an application before a tribunal for restraining a company from some specified acts. The shareholders or depositors can claim



“According to Ernst and young, about 3000 companies in India would qualify for mandatory CSR activities as per the new companies act and would bring about $2 Billion of spending in CSR activities” 

damages against a company, directors, auditors, experts and advisors for their wrongful conduct.

NATIONAL COMPANY LAW TRIBUNAL The Government shall be forming National Company Law Tribunal (NCLT) that will have jurisdiction over corporate restructuring proposals. Several judicial and quasi-judicial powers will be transferred to NCLT. The primary difference between a court and a tribunal is that a court is governed by detailed statutory rules and evidence and a procedure is involved in decision making process, whereas a tribunal can create its own procedures for decision making. However it could be concluded that by the institution of NCLT the government intends to reduce the delays in corporate law proceedings.

ONE PERSON COMPANIES One of the new concepts that is present in many

countries that has found its way into the new Companies Act is the One Person Company. With the passing of the bill, a company could float of just one person who is both its director as well as its shareholder. There is provision by which the original member of the company can appoint a nominee who takes over the company on the actual owner’s incapacity to deliver his duties, thus enabling a perpetual life for the company. However the major hurdle in setting up a One Person Company is the high tax rate of 30%

21

Crossing the Poverty Line There is a saying in Hindi “Iss paar Kuaan aur uss paar khai” – one way leads to a well and the other to a pit.

India’s poor are finding themselves in a very similar situation. According to the latest estimates of the Planning Commission, the poverty ratio, or the population of the poor in the country, dipped to 21.9% in 2011-12 from 37.2% in 2004-05; a reduction of 15% which roughly results into the transition of 180 million people above the poverty line prompts one to wonder, what line have they actually crossed.

The Planning Commission’s Estimation: The Plan panel had used the Suresh Tendulkar Committee's methodology, which factors in spending on health and education besides calorie intake to arrive at a poverty line for cities and villages. As per the Tendulkar Committee’s estimate, people whose consumption of goods exceeds 33 INR in cities, and 27.20 INR per day in villages are not considered poor. The report said the number of people living below the poverty line has shrunk to 21.9 per cent in

2011-12 from 37.2 per cent in 2004-05 on account of increase in per capita consumption. Also, rural poverty has declined faster than urban poverty.

Reality Check: The poverty line drawn up in the early 1970s was on the basis of the consumption expenditure level of a household in which per capita calorie consumption was 2,400 kilocalories (kcal) in rural areas and 2,100 kcal in urban areas. By 2009-10, after meeting all essential non-food expenses (manufactured necessities, utilities, rent, transport, health, education), 75.5 per cent of the rural population could not consume enough food to give 2200 calories per day, while 73 per cent of the urban population could not access 2100 calories per day. The comparable percentages for 2004-05 were 69.5 (rural) and 64.5 (urban), indicating a substantial poverty rise. Given the rapidly rising cost of privatised health care, education and utilities (electricity, petrol, gas), combined with high food price inflation and lack of food security, it is hardly surprising that the bulk of the population is getting more 22

impoverished, and its nutritional level is declining faster than before.

Problem with Planning Commission’s estimation: The Commission simply applied price indices to bring forward the base year monthly poverty lines of 49 INR (rural) and 56 INR (urban) in 1973-74. The Tendulkar committee did not change this aspect; it merely altered the specific index. Price indexation does not capture the actual rise in the cost of living over long periods. For example, a fairly high level government employee getting Rs. 1,000 a month in 1973-74 would get Rs. 18,000 a month today if the salary was indexed. The fact that indexing does not capture the actual rise in the cost of living is recognised by the government itself by appointing decadal Pay Commissions which push up the entire structure of salaries — an employee in the same position today gets not Rs. 18,000 but a four times higher salary of over Rs. 70,000. Yet poverty estimates continue to maintain the fiction that the same standard of living can be accessed by the poor by merely indexing the original poverty line.

Lowering the standard: To show a better performance, a school can lower its benchmark. i.e. if the pass percentage is 70% at 50% passing marks then it could be improved to

80% by lowering the benchmark to 40%. If we continue lowering the passing marks further and so ad infinitum, it is eventually bound to record 100 per cent passing and zero failures.

This case is exactly the same with the official poverty lines analogous to the passing marks; the poverty lines have been lowered continuously below the standard over a very long period of 40 years. ‘Poverty’ so measured is bound to disappear from India even though in reality it may be very high and worsening over time.

Worsening deprivation: The Commission’s monthly poverty line for urban Delhi state in 2009-10 is Rs. 1040 — but a consumer spending this much could afford food that gave only 1400 calories a day after meeting all other fast rising expenses. The correct poverty line is Rs. 5,000 for accessing 2100 calories, and a staggering 90 per cent of people have been pushed below this, compared to 57 per cent below the correct poverty line of Rs. 1150 in 2004-05.

Fifty five per cent of the urban population cannot access even 1800 calories today, compared to less than a quarter in that position a mere five years earlier.

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Way forward: Though the government claims that its welfare

programme is not linked to the Planning Commission’s poverty estimation method and it will make use of Socio-economic census to estimate the target beneficiary of its social welfare programme, the Planning Commission’s figure still is very important.

This figure gives the thumbs up to the government’s welfare programme, hence boosting up the complacency of the government machinery. Many of the government’s welfare programmes are not trickling down to their intended beneficiary. Food

inflation is shooting up and making nutrition the object of luxury which is out of reach for the average

Indian. The need of the hour is to reach out to as many people as possible, and not exclude them by drawing a virtual poverty line. The Government needs to do a reality check and draw a real poverty line, even at the cost of India’s image in the global community. The Indian people are too important to be dragged into some imaginary number war.

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Redressing Gross Domestic Product Is that the way Ahead?

Recently the United States of America (USA) decided to rewrite the financial history of the world. The US decided to change the way it interprets the term Gross Domestic Product (GDP). It has decided to switch to a new definition of GDP which may make its GDP look rosier and probably redress its financial statements. After the introduction of this new policy (July 2013) American books are going to be re-written right from 1929. How will it affect us and what is the strategy of US behind this new definition is what we are going to discuss in this article. The US

introduced the concept of Gross Domestic Product just after Second World War when the IMF and World Bank were setting up. The US was the guiding economic power in the world at that time. It helped set up the Bretton Wood system and standardised the economic indicators in all countries by the introduction of the term GDP. However, it seems that America has seen a need to redress its definition of GDP. America no longer remains the driving economic factor of the world. Recent economic crisis of 2008 has exposed its vulnerabilities to the world and to its own people. By changing the definition of GDP how it

proposes to build its name is a thought to ponder upon.

For the last sixty years since the introduction of GDP, it has been used as an important indicator to measure the level of economic activity in an economy. It has become such an essential part of the economic jargon that today every economy be it a growing one or a backward one measures their economy in terms of GDP. Developing countries like India and China completely rely upon the targets they set in terms of their GDP growth rate. Similarly the crisis level in the Euro zone countries is also measured as a fraction of their GDP. People use the terms GDP and economy interchangeably today. Inherently, the GDP of any country measures the market value of all the goods and products produced in an economy. There are broadly three defined methods to calculate the value of GDP. GDP can be calculated as defined above by adding the entire value of all the goods and products produced in the economy. It can also be calculated by an expenditure approach and the income approach.

Expenditure approach considers that all the goods produced in the economy are in some way or the other utilised within that economy. Henceforth measuring the expenditure within the country helps in calculating the GDP of that country. Similarly income approach measures the total income of all the producers with in the country.

25

Gross Domestic Product was an indicator to calculate the entire production of the country. It was never supposed to be so wrongly used as an indicator as it is done today. Measuring the economic growth has more to do with the social development than its economic counterpart. GDP has a myopic approach in

nation. As a hypothetical illustration, if we assume that GDP measures the amount of electricity used in a house then it doesn’t focus on whether the electricity used is actually put to a beneficial use or not.

The case of US rewriting its method to define GDP is a classic example of how much importance countries give to GDP. The recent declaration of the US to change the way it is going to calculate GDP speaks about the inclination of American government to redress its financial blunders and probably to put up a rosier picture. The American government has decided to add all the intangible assets into its GDP numbers.

The implications of the above decision are enormous.

Intangible assets include the money spent on making movies, research and development. Previously, the money spent on research and development was used to feature in the form of products that were sold

which it defines the growth of an economy. It does not talk about the real growth. It does not talk about the literacy rates or rising levels of employment in an economy. It talks more about industrial production.

Even though the GDP of a country may reflect it in economic terms but it is never able to estimate the exact amount that is spent on each individual in the

when the research team were able to derive one.

However, with the current choice of definition all industries are going to look pretty different from what they look now. It is estimated that more than 400 billion US dollars would be added to the American GDP. This is nearly a 3% jump in the GDP numbers. To visualise it in a much better sense, adding 400 billion 26

USD to the current size of American economy is like adding a country like Poland to its existing economy.

What this redress is going to do to the American economy is interesting. It will put a much better picture of the current state of its economy. Individual data of all the industries would state that the country is advancing at leaps and bounds. America is currently standing at a debt to GDP ratio of about 107. Putting an intangible asset of about 400 billion USD to its GDP value would definitely change the way world and its own people will perceive the American economy. It is proposed that the debt to GDP ratio of the American economy would come under 100 after the inclusion of intangible assets to its GDP. American government is definitely going to reap loads of benefit by the new picture that it is going to portray in front of the world.

In reality, this change is not actually beneficial to anyone. It may delay the current problems of numbers but would definitely leave a big question mark for its future. Though, US may have tried to catch up with its debt through this new methodology

but this whole beautification is not going to stay for a much longer time. Its debt will catch up sooner or later and at that time America would definitely be in a much greater fix.

Today the world progress is defined more in terms of GDP numbers rather than the sustainable provisions made for people in the third world countries. Though, America may have been able to portray itself on a higher success rate but in terms of true growth rate this is mere eyewash. GDP is never going to be the right indicator of economic growth. It is never going to be an exact parameter when it comes to the quality of lives of people. It will always remain a mere indicator of the levels of production whether we include intangibles assets or not. This insight should be a food for thought for everyone. What kind of standards do we have to set to bring in the human index into the definition for growth??

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Losing the Shine Once the shining poster of Indian manufacturing sector: Automobile Industry is now the main contributor in pulling the IIP (Index of Industrial

announcing production cutbacks to reduce inventory and the first signs of layoffs emerging as sales continue to skid. In the year ended 31

Production) number down. Industry has seen sales decline year-on-year for eight months in a row. Sales have fallen short of Siam’s (Society of Indian Automobile Manufacturers) forecasts for five quarters on the trot and industry is facing the harshest downturn in at least 12 years for India’s automobile industry. The bad news has been piling up thick and fast, with automobile makers

March, car sales in India declined 6.7% to 1.89 million units from 2.03 million in the previous year. It was the first yearly drop since 200001, when sales fell 7.73% from the previous year.

The decline deepened in the first quarter of the current financial year, with car sales falling by 10.4% against Siam’s expectations of an increase of up to 5%. In June alone, car sales fell 9% to 28

139,632 units. Overall the picture looks gloom for automobile industry. The decline is more disheartening against the backdrop of increases of 8.93% in Brazil and 14.72% in China in passenger vehicle sales during January-May. Both emerging market economies are grouped along with India in the BRICS group, which also includes Russia and South Africa.

that downturn has something to say about the sustainability of India’s high growth story.

Journey of high growth Between 2005-06 and 2010-11, which covers most of India’s high growth era, passenger car sales grew at a scorching 15.2 per cent per annum. High GDP growth rate, easy availability of credit, ample liquidity, increase in purchasing power of average Indian and low inflation was some of the factors which drove the sales of automobiles to an unprecedented high level. The high growth rate of automobile industry contributed considerably in overall growth rate of manufacturing sector. Gradually automobile industry became the mirror of economic health of nation.

High growth – how much sustainable?

There are many reasons why this trend in the passenger car industry must be disconcerting for the government. The industry was in a sense the poster child of reform, delivering not just high growth performance, but also significant foreign investment, new products, better technology, some exports and competition that kept prices down. So the setback in this industry is far more significant than a sector-specific downturn. Rather

This is especially true because of the stimulus that drove manufacturing production and construction during India’s high growth years. Retail credit that went to finance housing investment, automobile purchases and durable consumption boomed during those years with the ratio of bank credit to GDP rising from around 20 to more than 50 per cent. It was this private debt financed expansion in demand that was an important explanation of the boom. In the case of the passenger car industry too, the principal factor driving demand and sales was access to credit. Being a commodity that has resale value and can therefore serve as collateral for the loan financing its purchase, the automobile is a prime candidate for debt finance.

Banks being keen to lend, middle class consumers who might have had to wait to accumulate adequate purchasing power, were now free to obtain credit and acquire the commodity immediately. Thus, after housing, the area in which personal loans have increased substantially is for purchases of automobiles, resulting in a rapid increase in vehicle ownership. This factor was principally responsible for the explosion in demand, sales and production.

Current downturn: After enjoying the high growth rate of more than 10%, sector witnessed a fall of 4.7 per cent in 2011-12, before collapsing last financial year. The decline in demand must partly be because of the 29

difficulty to sustain the credit-driven growth. The problem with a credit boom is that it feeds on Itself. Periods when the economy is booming

boosts confidence, leading to excess credit provision by lenders convinced that default is unlikely. This leads to an expansion of the

universe of borrowers to an extent where the proportion of potential defaulters or subprime borrowers exceeds some critical level. When either evidence of overexposure or signs of rising default emerge, the retreat of overexposed lenders can be sudden. That is possibly happening in India, where a host of other indicators like inflation, a rising current account deficit and a weakening rupee are sapping confidence. This tendency can be cumulative, since slowing growth is accompanied by rising default.

In sum, what’s happening in automobile industry mirrors the overall picture of Indian manufacturing industry as well as Indian economy. Sustainability is the key to keep moving at the right path and fledgling economy like India cannot afford to divert from sustainable path.

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FINANCE BYTES In 2011- 12, only 21.9% of Indians were below poverty line The proportion of people living below poverty line ( BPL) has come down from 37.2 per cent in 2004- 05 to 21.9 per cent in 2011- 12 — a decline of 15.3 percentage points in a period that roughly coincides with the first eight years of the United Progressive Alliance ( UPA) rule at the Centre. The figures announced on 23rd July 2013, however, are based on the poverty line of 2011- 12 that assumes only those people who spent less than 27.2 per day in villages and ₹ 33.33 in urban areas were poor.

In absolute terms, 137.4 million people were lifted above the poverty line over the seven- year period. Compared with 407.2 million poor people in 2004- 05, the number came down to 269.7 million in 201112 — a reduction of 33 per cent.

Less campus hiring this year: Nasscom IT outsourcing firms are likely to hire less during on-campus placement this year, according to industry body Nasscom, as companies shift towards greater off-campus or ‘just-in-time’ hiring instead. This comes in the wake of several software services exporters having issues in on-boarding freshers— a side-effect of the economic slowdown taking its toll. Several companies are expected to reduce the

number of people they hire from colleges to 40 per cent of total annual recruitment compared with 60 – 70 per cent earlier. According to Mr. Mittal, companies will now split their hiring cycles into two periods—on-campus hiring starting in September, and then later ‘just-in-time’ hiring in the MayJune period.

India, Israel negotiating FTA Israel is negotiating with India the contours of a Free Trade Agreement (FTA), said Eli Belotsercovsky, Director of Economic Relations with India and China in the Israeli Ministry of Foreign Affairs. Israel’s trade with China is about $8 billion, compared to $5 billion with India. Diamonds accounted for about 30-40 per cent of the two-way trade between the two countries.

Nearly two-thirds of Israeli exports are hi-tech products.

Tata Motors Australia

makes

foray

into

Tata Motors has announced its entry into Australia under a new independent distributor, Fusion Automotive, which will exclusively market and distribute the Tata Motors brand in Australia. A statement from Tata Motors said that through Fusion Automotive, it would introduce its range of light commercial vehicles (LCVs) in the 4X2, 4X4, single and crewcab variants, with Euro V Turbo diesel 31

engines. The statement said Fusion Automotive planned to appoint dealers across Australia and reach 13 dealers by the end of the year and further to 25 dealers over the next 12 months.

Mohanty is President of ICAI Suresh Chandra Mohanty had been elected as the new President of ICAI, The Institute of Cost Accountants. Mr. Mohanty, who replaces Rakesh Singh, has been elected for 2013-14. A. S. Durga Prasad would be the new VicePresident.

GM recalls 1.14 lakh units of Chevrolet Tavera In one of the biggest vehicle recalls in the country, General Motors India recalled 1.14 lakh units of its multipurpose vehicle Chevrolet Tavera, manufactured between 2005 and 2013, to address emissions and specification issues. “General Motors India (GMI)... is voluntarily recalling the Chevrolet Tavera BS-3 (2.5L variant) and BS-4 (2.0L variant) from model years 200513 to address emissions and specification issues,” the company said in a statement. The company had informed the government authorities of an emissions issue involving the Tavera BS-III and an issue with the Tavera BS-IV meeting certain specifications, it added. The 1,14,000 affected vehicles will be repaired free of charge at GMI’s 280 dealers.

TCS completes acquisition of French firm Tata Consultancy Services (TCS) completed the acquisition of French IT services company Alti. The deal, valued at 75 million euro (around Rs.530 crore) with all-cash. Alti is a privatelyheld company with revenues of 126 million euro in 2012 and is regarded as one of the top five system integrators of SAP solutions in France. Its customers include several top French corporations in the banking, financial services, luxury, manufacturing and utilities sectors.

Google unveils new Nexus 7 Google introduced a sleeker version of its Nexus 7 tablet as the Internet company escalated its battle with Apple and Amazon.com in the mobile computing market. Google also announced a $35 device — Chromecast — that will let you watch Netflix, YouTube and other content on a highdefinition TV. Simply plug the Chromecast into the TV’s HDMI port, and it’ll display content from your phone, tablet or laptop. The Chromecast is available right away, while the new Nexus 7 devices go on sale in the U.S. on Tuesday. It is available in Google’s online store and various other retailers. The extra firepower added to the second generation of Nexus 7 tablets will come with a higher price. A model with 16 gigabytes of storage will sell for $229, a 32

$30 per increase from the original Nexus 7 released a year ago.

Maruti to make foray into LCV segment Maruti Suzuki India (MSI) has decided to make a foray into light commercial vehicles. It is expected to launch its first LCV model within two years. “It was planned in our original agreement (with SMC) in 1982 that the Carry LCV would be launched in India. But, at that time, due to poor response from the market, it was shelved,” Maruti Suzuki India (MSI) Chairman R. C. Bhargava told reporters here. The situation had changed now, he said. And, the board had given the go-ahead for the launch of LCV in India, he added.

Natco Pharma gets favourable ruling Natco Pharma has obtained a favourable ruling from a U.S. Court that paved way for launch of generic Copaxone used for treating multiple sclerosis during May, 2014. “The company is pleased to announce the US Court of Appeals for the Federal Circuit ruling, reversing a district court’s finding related to Teva’s U.S. Patent for Copaxone,” Natco Pharma said in a filing to the Bombay Stock Exchange. This would mean that Natco could launch the generic Copaxone through its marketing partner Mylan Inc, during May, 2014, subject to Food and Drug Administration (FDA) approval, it added.

Copaxone (Glatiramer Acetate) is used in the

treatment of relapsing-remitting multiple scleroses, Natco Pharma said.

The product is estimated to have clocked revenues of about $3.45 billion during 2012 in the U.S. market, it added.

FIPB clears Jet-Etihad deal with riders The government, on 29th July, gave a conditional go-ahead to Jet Airways to sell 24 per cent stake to Abu Dhabibased Etihad Airways for Rs. 2,058 after Etihad submitted an amended shareholders’ agreement (SHA) and commercial co-operation agreement (CCA). As part of the conditional clearance, Jet Airways has been asked to seek prior approval of the government for any changes to be made in the SHA with Etihad, and also for any change in shareholding pattern of the company. The FIPB clearance also came with a rider that all shareholder disputes and disputes under the SHA would have to be adjudicated under Indian law as opposed to English law that was proposed in the revised SHA submitted just before the FIPB meeting. Any other arbitration can happen under English law. In addition to this, Jet-Etihad will have to submit new articles of association before the deal is put before Finance Minister P. Chidambaram for approval and then brought before the Cabinet Committee on Economic Affairs (CCEA).

33

BMW unveils electric car i3

Neil Mills quits as SpiceJet CEO

German luxury car maker BMW Group launched the first production series of its all-electric ‘i3’ city car simultaneously in Asia, Europe and the U.S. The company said it saw huge potential in India for the BMW i3 and was in talks with the government on the issue of sustainable mobility. While it will be priced at 35,000 euro in Europe, the i3 will cost $41,350 in the U.S.

Neil Mills, who steered SpiceJet as it became one of the top- three domestic airlines in the past three years, has quit as CEO of the low- cost carrier. Mills did not respond to calls and a company spokesperson called the development a market rumour. But sources confirmed his resignation had been accepted. A source said Mills was leaving the airline as he was not getting operational freedom to run the organisation. Mills had joined the Kalanithi Marancontrolled airline in October 2010 from FlyDubai. He had succeeded Sanjay Aggarwal, who was moving to Kingfisher Airlines. But, since last September, Mills had been as MD. After Chief Commercial last month, Mills’ is the second resignation by a key official of the airline in recent times.

Oil companies decline to sign PSC for Egypt blocks The Petroleum and Natural Gas Ministry has conveyed to the Ministry of External Affairs (MEA) that the Indian consortium comprising Gujarat State Petroleum Corporation (GSPC), Hindustan Petroleum Corporation Limited (HPCL) and Oil India Limited (OIL) has ‘unanimously’ decided not to sign the concession agreement for the two offshore oil exploration blocks of South Quseir and South Sinai located in the Gulf of Suez and Red Sea in Egypt.

Citing changed circumstances and the unstable conditions prevailing in Egypt, the Petroleum Ministry has said the three companies, which were awarded the blocks in 2008 round of bidding held by Egypt, will not be signing the production sharing contracts (PSCs). In its communication to the Petroleum Ministry, the MEA had pointed out that at present GSPC and GAIL (India) were operating in Egypt.

Ministry to regulate airfares through CCI Ticket pricing by airlines is set to come under scrutiny, with the civil aviation ministry roping in anti- trust watchdog Competition Commission of India (CCI) to keep in check indiscriminate airfare increases in domestic aviation. The ministry, which will soon make operational an economic cell to monitor domestic airlines’ pricing mechanism, is looking at forwarding reports to CCI to take corrective action in the event of discrepancies in airfares. Civil Aviation Minister Ajit Singh said: “The airfare monitoring cell 34

is ready and will soon be commissioned under the aegis of the ministry. The economic cell would analyse data on tickets sold by airlines under different price buckets and make the information public to bring in transparency in airfare pricing. In case there are discrepancies, it would be referred to CCI.” He clarified the ministry would not attempt to regulate fares and would continue to allow airlines to determine fares based on market dynamics.

However, if discrepancies surface in ticket prices from an analysis of data by the economic cell, it would be reported to CCI for commensurate evaluation and action.

Seizure of smuggled gold zooms 365% in Q1 After a two- decade lull, gold smugglers seem to be back in business in India, thanks to recent hikes in import duty on gold — from about one per cent to eight per cent in 18 months. In the April- June quarter of this financial year, seizure of smuggled gold hit ₹ 59.82 crore — an increase of 365 per cent over ₹ 12.86 crore in the same period a year ago. In volume terms, the increase would be even higher, because the average gold price in the quarter came down 6.6 per cent from that in the same quarter last year.

Seizure of the yellow metal in 2012- 13 had doubled from the previous year to

₹ 99.34 crore. This year, revenue authorities expect this to rise 150 per cent over last year to around ₹ 250 crore. Further spike in seizures is expected in the coming quarters on the back an increase in import duty in June — from six per cent to eight per cent — as well as the Reserve Bank of India’s ( RBI’s) recent measures to curb gold imports.

US regulator tightens drug approval norms Pharmaceutical companies operating in the US might be in for a significant rise in development cost of generic products from next year. That’s because the US Food & Drug Administration ( FDA) has mandated companies to give data — including on safety, efficacy and stability —for three batches of products, instead of one at present, while seeking drug approvals in that country. The move was expected to increase the cost — by up to three times in cases where ingredients used were expensive — as well as the time taken for various studies. One batch of a drug product contains approximately one million units of medicines.

Major domestic drug makers like Sun Pharma, Lupin, Dr Reddy’s, Cadila Health and Ranbaxy annually file 15- 20 generic drug applications each, seeking approval from the US drug regulator.

Even smaller companies like Torrent Pharma and Alembic file five to 10 35

abbreviated new drug applications ( ANDAs) every year. Given that Indian companies are major suppliers for generic drugs and the US is the biggest market for them, the move, going forward, is set to have amounting cost impact on their businesses.

Publicis to merge with Omnicom to form $ 35- bn advertising giant Publicis Groupe SA and Omnicom Group Inc have agreed to merge in an all- stock deal to create the world’s largest advertising company, toppling market leader WPP Plc. Shareholders of Paris- based Publicis and New Yorkbased Omnicom would each hold about 50 per cent in the new entity, to be called Publicis Omnicom Group, the companies said in a joint statement on Sunday. Publicis CEO Maurice Levy and Omnicom’s John Wren will become coCEOs. The companies, which together had $ 23 billion in revenues in 2012, will have a combined market value of $ 35 billion. The alliance will bring agencies, including Omnicom’s BBDO Worldwide and Publicis’ Leo Burnett and Saatchi & Saatchi, under one roof, extending their presence in every major market. The transaction will also give the owners more clout to negotiate for their clients better ad rates for media placements on television, the internet and in print, at a time when the global advertising industry is showing signs of a recovery.

The transaction is the biggest in the ad world. Last July, Japan’s Dentsu Inc had

agreed to take over Aegis Group Plc for about $ 4.9 billion.

Indian Grand Prix may crash out of Formula One calendar for 2014 About two years after the first Indian Grand Prix motor race was organised, realty group Jaypee stares at losing the right to host the much- sought- after Formula One ( F1) race in Greater Noida. The F1 management might terminate mid- way its five- year contract, which ends in 2015, over taxation issues. Formula One chief, Bernie Ecclestone, told Reuters the Indian Grand Prix was likely to be dropped from next year’s F1 calendar due to political reasons. “Is India going to happen next year? Probably not,” he said at the Hungarian Grand Prix. Asked why, Ecclestone replied: “The reason is very political.” Ecclestone draws up the annual calendar and usually presents it to the governing International Automobile Federation for approval in September.

Jaypee Group had organised the first grand prix at Buddh International Circuit, Greater Noida, in 2011, and the second the next year. The third edition, the 16th round of the 19- race championship, is scheduled for October 27. Both the races in India have been won by Red Bull’s triple world champion, Sebastian Vettel.

Probe ordered into spot exchange fiasco 36

A major crisis erupted at National Spot Exchange Ltd. (NSEL) on Thursday after it suspended most trades on its platform, prompting the government to order an enquiry by commodity regulator Forward Market Commission (FMC) even as the Securities and Exchange Board of India (SEBI) began a separate probe amid a crash in shares of the two listed group companies.

Cabinet clears disinvestment of 10 % in IOC The Cabinet Committee on Economic Affairs, on Thursday, approved the proposal for sale of 10 per cent government stake in Indian Oil Corporation (IOC), which is likely to fetch around Rs.3,840 crore to the exchequer at the current market price.

The stake sale would happen through the offer for sale route. This decision was taken at a meeting chaired by Prime Minister Manmohan Singh.

Centre de-links spectrum operational permits

from

The government, unveiled the longawaited unified licence norms that provide for de-linking of spectrum from operational permits, and allows companies to offer services using any technology. The new licence regime will also allow companies to offer intra and inter-circle roaming, but bars operations from acquiring subscribers in areas where they don’t own licence.

All telecom companies will have to

migrate to the new licensing regime upon expiry of their current permits.

They will have to pay a licence fee of 8 per cent of annual revenues from telecom services. Telecom companies would be allowed to offer mobile and fixed-line services using any technology. They can also provide Internet TV services. The new licences will be valid for 20 years, and would be renewable for another 10 years.

Govt stake sale in three companies fetches Rs.395 cr In a boost to the government’s disinvestment programme, stake sale offers in Neyveli Lignite Corporation, State Trading Corporation (STC) and ITDC, on Friday, got fully subscribed, garnering Rs.395 crore for the exchequer. The 3.56 per cent stake sale in NLC fetched Rs.360 crore to the exchequer with all of the shares being picked up by five Tamil Nadu government firms.

Besides, the sale of 5 per cent stake, or 42.88 lakh shares, in ITDC fetched over Rs.30 crore. Another Rs.4.54 crore came in from STC disinvestment of 1.02 per cent, or 6.13 lakh shares. The stake sale would now make the three PSUs compliant to the minimum 10 per cent public holding norm of market regulator SEBI. Post-stake sale, the government’s holding in the PSUs has come down to 90 per cent.

World Bank debars Indian firm 37

The World Bank has debarred Consulting Engineering Services (India) (CES) for five years on charges of fraud and corruption in a National Highways project in India. The decision follows a World Bank investigation and review of poorly performing road construction contracts under the bank-financed project, for which CES was the supervision consultant, the bank said in a statement. CES will not qualify for any contract financed by the World Bank Group during the five-year debarment, which came into effect on 2nd August 2013.

World Bank debars Indian firm The World Bank has debarred Consulting Engineering Services (India) (CES) for five years on charges of fraud and corruption in a National Highways project in India. The decision follows a World Bank investigation and review of poorly performing road construction contracts under the bank-financed project, for which CES was the supervision consultant, the bank said in a statement. CES will not qualify for any contract financed by the World Bank Group during the five-year debarment, which came into effect on 2nd August 2013.

154 firms come under scanner for financial fraud The government, on 5th August 2013, said a probe had been ordered to look into complaints of financial fraud against 154 companies, including those

connected with Saradha Group.

“Complaints have been received against 154 companies/ organisations during the last three years,” Corporate Affairs Minister Sachin Pilot said in a written reply to the Rajya Sabha, adding that scrutiny of the balance sheets and other documents in these cases had been ordered. As per the list provided by the minister, complaints of financial fraud have been received against 10 Saradha Group entities, including Saradha Realty, Saradha Agro Development, Saradha Exports and Saradha Garden Resorts & Hotel. The list also includes names of 14 entities related to Rose Valley Group, including Rose Valley Industries, Rose Valley Marketing and Rose Valley Hotels and Entertainment. Vaishnavi Corporate Communication, Speak Asia, Reebok India, Alchemist Infra are other companies against whom complaints have been received.

LIC investment in Gitanjali: FinMin seeks details The Finance Ministry has sought details from the Life Insurance Corporation (LIC) pertaining to its investment in Gitanjali Gems. The Department of Financial Services has asked for details of investment in Gitanjali to ascertain if the investment had any ‘malafide intention’, sources said. Details have been sought after complaint received on the sharp fall in the stock price of Gitanjali Gems. LIC, the biggest domestic institutional investor in the 38

stock market, held 4.36 per cent stake in Gitanjali Gems during the January— March quarter, which rose to 4.89 per cent as of June 30.

A reformist-economist to play central banker The appointment of Chief Economic Advisor Raghuram G. Rajan as the next Reserve Bank of India Governor after D. Subbarao completes his tenure on September 4 has been hailed by one and all, particularly India Inc. which has been at the receiving end of the perceived hawkish policy pursued so far by the central bank. Prime Minister’s Economic Advisory Council Chairman C. Rangarajan has also lauded Dr. Rajan’s selection as an ‘excellent’ choice.

Infosys slapped with hiring lawsuit, accused of discriminating against nonSouth Asians Nearly nine months after IT firm Infosys settled two American lawsuits, the company is in legal soup again. A Wisconsin-based IT professional has filed a lawsuit against Infosys, alleging that she was not hired for a position in the United States because of her nationality.

The company, however, has categorically denied the allegations.

Brenda Koehler, an IT worker with over 15 years industry experience, has alleged that while she was qualified for the position to which she applied,

Infosys discriminated against her and chose to hire an individual of South Asian descent for the position. She has also claimed that the company systematically discriminates against people of non-South Asian descent.

Report on new textiles policy by Oct. The expert committee headed by Ajay Shankar to formulate a new national textiles policy is likely to submit its report by October this year.

“The government constituted an expert committee in June to review the National Textiles Policy 2000, and formulate the National Textiles Policy 2013.

The policy will give a direction to the sector as a whole, and address the needs of the industry for 21st century trade operations. The panel is headed by National Manufacturing Competitiveness Council (NMCC) member secretary Ajay Shankar,” Minister of State for Textiles Panabaaka Lakshmi said in a written reply to the Lok Sabha.

Net direct tax collections up 10 % in four months Net direct tax collections went up by 10.37 per cent to Rs.1.17 lakh crore during the April-July period of the current fiscal year as against Rs.1.06 39

lakh crore mopped up during the same four months of 2012-13. The growth in gross direct tax collections, however, was higher with a rise of 13.27 per cent to Rs.1.57 lakh crore during April-July this fiscal, up from Rs.1.38 lakh crore garnered in the same period of the previous fiscal.

FMC gets more teeth The government on Wednesday said it had issued a notification giving more teeth to regulator Forward Markets Commission (FMC) to ensure that the NSEL settled Rs.5,600 crore in dues to investors. NSEL is facing the problem of settlement after it suspended trade in one-day forward contracts on July 31 following the government direction.

“We have given more powers to FMC to handle the NSEL settlement issue.

The situation is under control,” Food and Consumer Affairs Minister K. V. Thomas told reporters on the sidelines of a FICCI event.

A notification has been issued on August 6 giving wide ranging set of powers to the FMC to ensure settlement of dues at NSEL, said Consumer Affairs Secretary Pankaj Agrawala who was also present at the event.

“Settlement of all one-day forward contracts at NSEL shall be done under the supervision of FMC and any order or direction issued by the FMC in this

regard shall be binding on the NSEL,” the notification said Companies Bill passed Rajya Sabha, on Thursday, ratified The Companies Bill, 2012, as passed by the Lok Sabha about eight months ago. As and when consented to by President Pranab Mukherjee, the new legislation will replace the 57-year-old Companies Act, 1956. Piloting the Bill, Corporate Affairs Minister Sachin Pilot said the new regime would seek to usher in more transparency and governance in the corporate bodies besides creating the necessary environment for growth in the present global structure. The Bill, as ratified by Parliament, prescribes an expenditure of 2 per cent of profits on CSR (corporate social responsibility) activities in their respective areas of operation. These would have to be outcome and timeline-driven with details posted on websites.

NTPC arm to supply 250 MW of power to Bangladesh from next month Supply of 250 MW of power to Dhaka will commence next month. Stateowned NTPC Vidyut Vyapar Nigam (NVVN), a subsidiary of NTPC, is expected to start supplying power to Bangladesh from September. NVVN has been nominated as the nodal agency for supply of power to Bangladesh. The development comes close on the heels 40

of Bangladesh Joint Secretary (Power), Mohammad Anwar Hossain, handing over the sovereign guarantee to NVVN CEO Nand Kishore Sharma in Dhaka on August 7. A sovereign guarantee is an instrument of payment security against supply of the 250 MW for 25 years from various power stations of NTPC under the Power Purchase Agreement (PPA) signed between NVVN and BPDB in February last year. The energy agreement with Bangladesh is on similar lines with other neighbours like Bhutan, Nepal and Sri Lanka.

Carlos in $9.6 b bid for Dutch telecom KPN America Movil SAB, owned by Mexican billionaire Carlos Slim, will launch a 7.2 billion euro ($9.6 billion) bid for the part of Dutch telecom company Royal KPN NV it doesn’t already own, in a challenge to a rival offer for KPN’s prized German mobile group E-Plus.

Movil’s 2.40 euros per share bid for KPN announced Friday offers a 20 per cent premium on Thursday’s closing price, valuing the company’s stock at around 10.3 billion euro, and the 70 per cent it doesn’t already own at 7.2 billion euro.

Apple gets import of select Samsung products banned Apple won a partial victory in its longrunning patent dispute with Samsung when a U.S. administrative panel found Samsung in violation of two Apple patents and blocked imports of some

Samsung devices. But the U.S. International Trade Commission cleared Samsung on four other patents in dispute. President Barack Obama’s administration has 60 days to veto ITC rulings. Over the week-end, the administration invalidated a June order that sided with the South Korean company and banned imports of Apple’s iPhone 4 and a variant of its iPad 2. The patents involved in Friday’s ruling aren’t related to that June order.

Samsung Electronics Co. and Apple Inc. are in a global legal battle over smartphones. Apple argues Samsung’s Android phones copy vital iPhone features. Samsung is fighting back with its own complaints.

Biocon launches drug for treating psoriasis Indian biotech major Biocon announced that it had launched its first biologic drug for psoriasis, which affects about 10-20 million Indians. The drug against the disease, which attacks the immune system, will be about half the price of similar drugs offered by multi-nationals in the country, said Chairman and Managing Director Kiran Mazumdar-Shaw. ALZUMAb, which took the company 10 years to develop, is available in India at Rs.7,950 a vial.

She claimed the drug was the world’s first “novel” anti-CD6 antibody to treat psoriasis. Ms. Shaw said the cheaper biologic would enable poorer patients 41

to access a cure for psoriasis.

“Currently, the Indian market for biologics is very small, but the availability of a cheaper option would expand the size of the market,” she said. The company was in talks with foreign companies for “partnerships” to reach out to global markets.

Exports in July up 11.64 % Exports clocked 11.64 per cent growth in July, the highest recorded in nearly two years.

Imports dipped by 6.2 per cent.

However, the trade deficit stood unchanged at the $12.2 billion level that was witnessed in June. While exports soared to $25.83 billion in July, imports declined to $38.1 billion. Gold and silver imports, which dipped by 34 per cent to $2.9 billion in July from $4.4 billion in the same period last year, helped to maintain the trade deficit at the June level.

Bill to amend SEBI laws tabled in Lok Sabha The government tabled a bill in the Lok Sabha to replace the ordinance to provide more powers to capital market regulator Securities and Exchange Board of India (SEBI). The Securities Laws (Amendment) Bill, 2013, introduced by Minister of State for Finance Namo Narain Meena, seeks to amend the Securities and Exchange Board of India Act, 1992, the Securities

Contracts (Regulation) Act, 1956 and the Depositories Act, 1996 IKEA identifies four States for stores Swedish furniture major IKEA has identified Haryana, Andhra Pradesh, Maharashtra and Karnataka to set up single-brand retail stores as part of its Rs.10,500-crore investment in India.

The company’s plan was conveyed by CEO Mikael Ohlsson, who met Commerce and Industry Minister Anand Sharma here on Monday, sources said.

The firm has incorporated its Indian subsidiary as IKEA India Ltd Facebook users in India up 5 % The number of monthly active users of Facebook in India has shot up by 5 per cent to 82 million for the April-June period of this year. The Californiabased social networking giant had 78 million users in India in the JanuaryMarch period.

Eurozone exits recession The eurozone climbed out of recession at last with surprisingly strong growth of 0.3 per cent in the second quarter led by Germany and France, the European Union said on Wednesday.

But the European Commission warned that tough structural reforms must be pursued without let-up and in the longterm if the fruits of sustained growth are to be reaped 42

New US jobless claims fall to 6 year low New claims for U.S. unemployment insurance benefits fell last week to their lowest level in six years, a fresh sign of labour market tightening. Initial jobless claims totalled 320,000 in the week ending August 10, compared to 335,000 the previous week. The fourweek moving average continued to push lower, to 332,000, compared to nearly 370,000 per week a year earlier.

The last time the weekly figure came in below that was on October 6, 2007, just before the country plunged into economic crisis and the deepest recession since the 1930s.

German Finance Ministry recognises bitcoin as currency Key aspects of the bitcoin, a popular online currency, have been recognised for legal and tax purposes by Germany, newspapers reported Saturday.

Currently, 1 bitcoin is valued at about $110 Rolls-Royce launches Wraith Rolls-Royce announced the launch of ‘Wraith’, touted as the most powerful model from the stable of the super luxury car maker, in India, with price starting at Rs.4.6 crore (ex-showroom Delhi). “The Wraith, which is a luxury four-seater, is the most dynamic and powerful Rolls-Royce ever built. It’s a key product for the company,” RollsRoyce General Manager, Emerging Markets Asia, Herfried Hasenoehrl, said

while introducing the car which is capable of gliding from 0-100 km/h in 4.6 seconds. The company at present sells Ghost (Rs.3.6 crore onwards) and Phantom (Rs.6.1 crore onwards) models in the country, and is also looking to expand its dealerships here.

RBI penalises 6 PSB’s for violating KYC RBI penalises 6 PSB’s for violating KYC, anti-money laundering normsAllahabad Bank, Bank of Maharashtra, Corporation Bank, IDBI Bank, Dena Bank and Indian Bank were charged for non-adherence to guidelines like customer identification procedure, risk categorisation, periodical review of risk profiling of account holders, periodical KYC updation Debt levels of top ten Indian business houses in financial year 2013 have gone up by 15% Debt levels of top ten Indian business houses in financial year 2013 have gone up by 15 per cent compared to the previous year, according to a report

by Credit Suisse. According to the report, gross debt of Adani Group, Essar Group, GRM Group, GVK group, Jaypee Group, JSW Group, Lanco Group, Reliance ADA Group, Vedanta Group rose accumulating from Rs.54,7,361 crore to Rs.6,31,024.7 crore in the period under reference, 43

the report(Credit Suisse) said. For most of them, the debt increase has outpaced capex and asset sales are yet to take off. The rising stress is visible with some loans of Lanco, JPA, and Reliance ADA already being restructured,” Credit Suisse Securities Research said. “Many companies’ loans are 40-70 per cent foreign-currency dominated, therefore, the sharp depreciation of the rupee is adding to their debt burden.

RBI eases portfolio schemes for NRI

investment

RBI eases portfolio investment schemes for NRI such as equity and debt to pull in foreign currency .India’s sovereign credit ratings (BBB) outlook remained negative on S&P ratings as currency depreciation is negatively impacting investor’s confidence. This statement came as the rupee slided to 64.11 record low against a dollar. BBB is the lowest investment grade and a downgrade would mean pushing the country’s sovereign rating to junk status making overseas borrowings by corporates costlier.

Govt of India and World Bank signs $ 100 million deal The Government of India and the World Bank signed a $ 100 million credit agreement for providing assistance to Low Income Housing Finance Project aimed at helping low income households to secure loans to

purchase, build or upgrade their dwellings. Ban of duty free televisions in India The government banned duty free import of flat screen television by air travellers with a view to control down sliding rupee which declined below the 63 level against US dollar. Apart from this, in order to contain the Current Account Deficit (CAD) and control the declining value of rupee the government has raised duty on gold, platinum and silver to 10%.

Indians continue saving despite of inflation Indians continue to be known as good savers. Even a rise in retail rate of inflation (consumer price index – CPI) did not deter them from saving their hard earned money. The gross financial saving stood at around Rs 10.97 lakh crore in 2012-13 as against Rs 9.57 lakh crore in 2011-12, an increase of nearly 15 percent year-on-year.

RBI refrained from tweaking the policy (repo) rate The Reserve Bank of India (RBI) governor D Subbarao stood with the majority opinion of the Technical Advisory Committee (TAC) and refrained from tweaking the policy (repo) rate in the first quarter (April44

June) of the monetary policy review announced on July 30. The repo rate at which banks borrow money from the RBI stands at 7.25 percent and the cash reserve ratio, the amount of total deposits banks park with RBI, is at 4 percent.

Committee formed for boosting MSME

Investors and hedge funds from abroad, rose to Rs 1.48 lakh crore (about USD 24 billion) in July. Till a few years ago, P-Notes used to account for more than 50 per cent of total FII investments, but their share has fallen after SEBI tightened disclosure and other regulations for such investments.

The government is contemplating additional incentives for the MSME sector with a view to boost exports and to help arrest the decline in value of rupee, which has breached 63 to a dollar mark. The panel had suggested fiscal and non-fiscal incentives including enhanced interest subsidy of 4 percent from the existing 3 percent, to boost exports from MSME sector.

The committee has also suggested relaxation of RBI's external commercial borrowings norms, to allow all categories of MSME engineering exporters to raise ECBs for import of capital goods and equipment.

Investments rose through P-Notes Investments in Indian shares through participatory notes (P-Notes), a preferred route for High Net worth

45

REFERENCE SECTION Currents Assets: A balance sheet account that represents the value of all assets that are reasonably expected to be converted into cash within one fiscal year in the normal course of business. They are assets that can be easily converted into cash to pay outstanding debts and cover liabilities without selling Fixed Assets. Inventories, Sundry Debtors, Cash & Cash Equivalents are carried under current assets on the Balance Sheet.

Current Liabilities: Liabilities are debts owed by a business to other parties. In accounting, the liabilities will be shown on the balance sheet.

Debts that are due within one fiscal year or during the annual operating cycle of the business are called current liabilities. These are debts that will be paid using current assets or by securing new financing. Examples are notes payable, longterm debts payable, accrued expenses and accounts payable. Current Long term debt payable within one year is also considered Current Liabilities.

Amortization/Depreciation: It is the process of allocating the cost of long-lived plant assets other than land to expense over the assets’ estimated useful lives. Businesses depreciate long-term assets for both tax and accounting purposes. For accounting purposes, depreciation indicates how much of an asset’s value has been used up. For tax purposes, businesses can deduct the cost of the tangible assets they purchase as business expenses. Amortization is a term generally used in US-GAAP for depreciating intangible assets.

Contingent Liability: Contingent liabilities are liabilities that may or may not be incurred by an entity depending on the outcome of a future

event such as a court case. These liabilities are recorded in a company's accounts and shown in the balance sheet when both probable and reasonably estimable. A footnote to the balance sheet describes the nature and extent of the contingent liabilities. The likelihood of loss is described as probable, reasonably possible, or remote. The ability to estimate a loss is described as known, reasonably estimable, or not reasonably estimable.

Inventory: Inventories are the raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business's assets that are ready or will be ready for sale. Inventory represents one of the most important assets that most businesses possess, because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company's shareholders/owners.

The following equation expresses company's inventory is determined:

how

a

Beginning Inventory + Net Purchases - Cost of Goods Sold (COGS) = Ending Inventory The accounting method that a company decides to use to determine the costs of inventory can directly impact the balance sheet, income statement and statement of cash flow. There are three inventory-costing methods that are widely used by both public and private companies:

First-In, First-Out (FIFO) This method assumes that the first unit making its way into inventory is the first sold. For example, let's say that a bakery produces 200 loaves of bread on Monday at a cost of Rs 10 each, and 200 more on Tuesday at Rs 12 each. FIFO states that if the bakery sold 200 loaves on Wednesday, the COGS is Rs 10 per loaf (recorded on the income statement) because that was the cost of each of the first loaves in 46

inventory. The Rs 12 loaves would be allocated to ending inventory (appears on the balance sheet).

Last-In, First-Out (LIFO) This method assumes that the last unit making its way into inventory is sold first. The older inventory, therefore, is left over at the end of the accounting period. For the 200 loaves sold on Wednesday, the same bakery would assign Rs 12 per loaf to COGS, while the remaining Rs 10 loaves would be used to calculate the value of inventory at the end of the period.

Deferred Tax Asset/Liability: Deferred tax is an accounting concept (also known as future income taxes), meaning a future tax liability or asset, resulting from temporary differences or timing differences between the accounting value of assets and liabilities and their value for tax purposes.

Deferred tax liabilities: Deferred tax liabilities generally arise where tax relief is provided in advance of an accounting expense, or income is accrued but not taxed until received. Examples of such situations include: 

a company claims tax depreciation at an accelerated rate relative to accounting depreciation



a company makes pension contributions for which tax relief is provided on a paid basis, whereas accounting entries are determined in accordance with actuarial valuations

Deferred tax Assets: Deferred tax assets generally arise where tax relief is provided after an expense is deducted for accounting purposes. Examples of such situations include: 

a company may accrue an accounting expense in relation to a provision such as bad

debts, but tax relief may not be obtained until the provision is utilized 

a company may incur tax losses and be able to "carry forward" losses to reduce taxable income in future years

Difference b/w Gross Profit, Operating Profit and Net Profit In accounting, gross profit or sales profit is the difference between revenue and the cost of making a product or providing a service, before deducting overhead, payroll, taxation, and interest payments.

Operating Profit: The profit earned from a firm's normal core business operations. This value does not include any profit earned from the firm's investments (such as earnings from firms in which the company has partial interest) and the effects of interest and taxes. It is basically the profit earned after deducting all operating expenses of the firm from the revenue figure.

Net Profit: Net profit or net income is a measure of the profitability of a venture after accounting for all costs. In accounting, net profit is equal to the gross profit minus overheads minus depreciation minus interest payable for a given time period minus taxes. A common synonym for ‘net profit’ while discussing financial statements is the bottom line. This term results from the traditional appearance of an income statement which shows all allocated revenues and expenses over a specified time period with the resulting summation on the bottom line of the report.

EBITDA An acronym for earnings before interest, t axes, depreciation, and amortization. It is a nonGAAP metric that is measured exactly as stated.

All interest payments, tax, depreciation and amortization entries in the income statement are 47

reversed out from the bottom-line net income. It purports to measure and allow to compare profitabilities of companies by cancelling effects of different assets bases (by cancelling depreciation), different takeover histories (by cancelling amortization often stemming from goodwill), effects due to different tax structures as well as the effects of different capital structures (by cancelling interest payments).

It is different from Operating Expense in the way that it considers non operating incomes of the company and doesn’t account for depreciation expense.

Ratio Analysis Liquidity Ratios Liquidity ratios attempt to measure a company's ability to pay off its short-term debt obligations.

This is done by comparing a company's most liquid assets (or, those that can be easily converted to cash) to its short-term liabilities. In general, the greater the coverage of liquid assets to short-term liabilities the better, as it is a clear signal that a company can pay its debts that are coming due in the near future and still fund its ongoing operations. On the other hand, a company with a low coverage rate should raise a red flag for investors as it may be a sign that the company will have difficulty running its operations, as well as meeting its obligations.

The biggest difference between each ratio is the type of assets used in the calculation. While each ratio includes current assets, the more conservative ratios will exclude some current assets as they aren't as easily converted to cash.

1. Current Ratio The current ratio is a popular financial ratio used to test a company's liquidity (also referred to as its current or working capital position) by deriving the proportion of

current assets available to cover current liabilities.

The concept behind this ratio is to ascertain whether a company's short-term assets (cash, cash equivalents, marketable securities, receivables and inventory) are readily available to pay off its short-term liabilities (notes payable, current portion of term debt, payables, accrued expenses and taxes).

Current Ratio = Current Assets/Current Liabilities 2. Quick Ratio The quick ratio - aka the quick assets ratio or the acid-test ratio - is a liquidity indicator that further refines the current ratio by measuring the amount of the most liquid current assets there are to cover current liabilities. The quick ratio is more conservative than the current ratio because it excludes inventory and other current assets, which are more difficult to turn into cash. Therefore, a higher ratio means a more liquid current position.

Quick Ratio = (Cash & Equivalents + Shortterm investments + Accounts Receivable)/Current Liabilities In general, quick ratios between 0.5 and 1 are considered satisfactory, as long as the collection of receivables is not expected to slow.

3. Cash Ratio The cash ratio is an indicator of a company's liquidity that further refines both the current ratio and the quick ratio by measuring the amount of cash, cash

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equivalents or invested funds there are in current assets to cover current liabilities.

Cash Ratio = (Cash + Cash Equivalents + Invested Funds)/Current Liabilities The cash ratio is the most stringent and conservative of the three short term liquidity ratios (current, quick and cash). It only looks at the most liquid short-term assets of the company, which are those that can be most easily used to pay off current obligations. It also ignores inventory and receivables, as there are no assurances that these two accounts can be converted to cash in a timely matter to meet current liabilities.

Solvency Ratios Solvency ratios measure the degree to which the business relies on debt financing. Solvency ratios measure the stability of a company and its ability to repay debt. These ratios are of particular interest to bank loan officers. They are important since solvency ratios give a strong indication of the financial health and viability of the business.

1. Debt to Equity Ratio The debt-equity ratio compares a company's total liabilities to its total shareholders' equity. This is a measurement of how much suppliers, lenders and creditors have committed to the company versus what the shareholders have committed. Lower value of the ratio indicates that the company is using less leverage and has a stronger equity position.

Debt to Equity ratio = Total Liabilities/ Shareholders’ equity 2. Financial Leverage ratio Financial leverage ratio (a.k.a. leverage ratio) measures the amount of total assets

supported for each one money unit of equity. For example, a value of 3 for this ratio means that each Re. 1 of equity supports Rs.3 of total assets. The higher the financial leverage ratio, the more the leveraged the company is in the sense of using debt and other liabilities to finance assets. This ratio is often defined in terms of average total assets and average total equity.

Financial leverage ratio = Average total assets/Average total equity 3. Debt to Asset Ratio Debt-to-assets ratio measure the percentage of total assets financed with debt. For example, a debt-to-assets ratio of 0.40 or 40 percent indicates that 40 percent of the company’s assets are financed with debt. Generally, higher debt means higher financial risk and thus weaker solvency.

Debt-to-Assets Ratio = Total debt/Total assets

Activity Ratios Activity ratios are also known as asset utilization ratios or operating efficiency ratios. These ratios measure how well a company manages various activities, particularly how efficiently it manages its various assets. Activity ratios are analyzed as indicators of ongoing operational performance – how effectively assets are used by a company.

These ratios reflect the efficient management of both working capital and longer-term assets.

Since efficiency has a direct impact on liquidity, some activity ratios are useful in assessing liquidity.

1. Receivables Turnover The Accounts Receivable Turnover Ratio measures the number of time accounts 49

receivable turned over during a time period.

A higher ratio indicates a shorter time between making a sale and collecting the cash. The turnover of receivables is computed by dividing the credit sales by the average receivables outstanding. When credit sales figure are not available, we can still compute the turnover using net sales.

The assumption here being that almost all the net sales of the company are on credit basis. This assumption is close to reality in most industries and companies.

Receivables turnover ratio = Sales/Average accounts receivable 2. Inventory Turnover The Inventory Turnover Ratio measures the number of times inventory “turned over” or was converted to sales during a time period. It may also be called the Cost of Sales to Inventory Ratio. It is a good indication of purchasing and production efficiency. In general, the higher the ratio, the more frequently the inventory turned over. A company with a perishable inventory, such as a grocery store will have a high inventory turnover ratio. Conversely, a furniture store might have a low inventory turnover ratio.

Inventory turnover ratio = Cost of goods sold/Average Inventory

3. Payables Turnover The Accounts Payable Turnover Ratio measures the number of time accounts payable turned over during a time period. The ratio reveals how quickly the company pays its bills. A high ratio means there is a relatively short

time between purchase of goods and services and payment for them. A low ratio may be a sign that the company has chronic cash shortages.

For purpose of calculating these ratios, an implicit assumption is that company is makes all its purchases using credit. If the amount of purchases is not directly available, it can be computed as cost of goods sold plus ending inventory less beginning inventory. Alternatively, cost of goods sold is sometimes used as an approximation of purchases.

Payables Turnover = Total supplier purchases/Average accounts payables

Profitability Ratios Profitability ratios provide information on the amount of income from each dollar of sales.

These ratios give users a good understanding of how well the company utilized its resources in generating profit and shareholder value. The long-term profitability of a company is vital for both the survivability of the company as well as the benefit received by shareholders. It is these ratios that can give insight into the all important “profit”. Basically, it is the amount of profit (at the gross, operating, pre-tax or net income level) generated by the company as a percent of the sales generated.

1. Gross Profit Margin A company's cost of sales, or cost of goods sold, represents the expense related to labor, raw materials and manufacturing overhead involved in its production process.

This expense is deducted from the company's net sales/revenue, which results in a company's first level of profit, or gross profit. The gross profit margin is used to analyze how efficiently a company is using its raw materials, labour and manufacturingrelated fixed assets to generate profits. A 50

higher margin percentage is a favourable profit indicator.

Gross profit margin = Sales – Cost of goods sold/Sales (Revenue) 2. Operating Profit Margin The operating profit margin is the ratio of operating profit (a.k.a. EBIT, operating income, income before interest and taxes) to sales. By subtracting selling, general and administrative (SG&A), or operating, expenses from a company's gross profit number, we get operating income.

Management has much more control over operating expenses than its cost of sales outlays. Thus, investors need to scrutinize the operating profit margin carefully.

Positive and negative trends in this ratio are, for the most part, directly attributable to management decisions.

Operating profit margin = Operating income/Sales

3. Net Profit Margin The net profit margin is the ratio of net income (a.k.a. net profit) to sales, and indicates how much of each dollar of sales is left over after all expenses. It measures the overall efficiency of production, administration, selling, financing, pricing and tax management. Net profit margin shows the result of overall operation of the firm.

This ratio indicates how profitable a company is by comparing its net income to its average shareholders' equity. The return on equity ratio (ROE) measures how much the shareholders earned for their investment in the company. The higher the ratio percentage, the more efficient management is in utilizing its equity base and the better return is to investors.

Return on equity = Net income/Average Sharholder’s equity

Valuation Ratios Valuation ratios can be used by investors to estimate the attractiveness of a potential or existing investment and get an idea of its valuation. Investment valuation ratios attempt to simplify the evaluation process by comparing relevant data that help uses gain an estimate of valuation.

1. P/E ratio The price/earnings ratio (i.e. P/E ratio) is the best known investment valuation indicator.

The financial reporting of both companies and investment research services use a basic earnings per share (EPS) figure divided into the current stock price to calculate P/E multiple (i.e. how many times a stock is trading (its price) per dollar of EPS).

P/E ratio can fluctuate significantly depending on economic and market conditions. The ratio will also vary widely among different companies and industries.

Net profit margin = Net profit/Sales 4. Return on Equity

Price/Earnings Ratio = Stock Price per Share/Earnings per share 51

2. EPS EPS or earnings per share is simply the amount of earnings attributable to each share of common stock. In isolation, EPS does not provide adequate information for comparison of one company with another.

Two types of EPS are generally calculated: Basic EPS and Diluted EPS. Basic EPS provides information regarding the earnings attributable to each share of common stock. Diluted EPS includes the effect of all the company’s securities whose conversion or exercise would result in a reduction of basic EPS; dilutive securities include convertible debt, convertible preferred shares, warrants and options).

3. Dividend per share The sum of declared dividends for every ordinary share issued. Dividend per share (DPS) is the total dividends paid out over an entire year (including interim dividends but not including special dividends) divided by the number of outstanding ordinary shares issued.

Dividend per share = (Sum of dividends over a year - Special Dividends)/(Shares outstanding during the year) Dividends over the entire year must be added together for a proper calculation of DPS, including interim dividends. Special dividends are dividends which are only expected to be issued once so are not included. The total number of ordinary shares outstanding is sometimes calculated using weighted average of reporting period.

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