Shailesh J. Mehta School of Management Indian Institute of Technology, Bombay
FINSIGHT The Fortnightly Newsletter
Issue: Sep 03, 2012
Inside this Issue
Source:
COAL-GATE: The legacy of
Mint
2-4
The Economic Times
News of last 2 weeks
5-6
The Economist
Markets
7-9
Knowledge section
10-11
Check your Fin Quotient
11
scams.. where does it end?
MoneyControl.com Business Standard Deccan Herald Hindustan Times Investopedia.com
F I N S I G H T
COAL-GATE: THE LEGACY OF SCAMS...WHERE DOES IT END?
The political soap opera in Indian democracy once again hit the chart busters as the report by Comptrollers and Auditor General (CAG) on coal scam made it to the media. The report has been tabled on 17th august and it comes as the latest scam revelation amongst several chains of scams that has been charged against the ruling UPA coalition. This time noteworthy is the fact that our honourable Prime Minister Dr Manmohan Singh has adorned the hot seat. Let us have a cursory look at the facts related to this phenomenon. FACT AND FIGURES The report published on the 17th had following key highlights:
The nation faced a loss of 1.85 lakh crores
The coal fields were allotted to private companies instead of being auctioned
The policy adopted was First Come First Serve (FCFS)
142 allotments were made between July 2004 and 2006 to private and Govt. companies at a rate of Rs 50 per metric tonnes
∙
The companies which received the benefit did not start production themselves and outsourced the operations to third parties at a premium and pocketed benefits in very short time
CAG didn't mention the name of PMO and state Governments in the coal blocks allocation
22 companies have been held accused including some big names and some of them areTata Group, Naveen Jindal Group, Essar Group, Abhijeet Group, Laxmi Mittal's Arcelor, Vedanta
The allegations say that the coal blocks were allotted to 51 companies in 2006, 19 companies in 2007, 41 companies in 2008 and 32 companies in 2009.CAG was quoted saying, “Delay in introduction of the process of competitive bidding has rendered the existing process beneficial to the private companies. Audit has estimated financial gains to the tune of Rs 1.86 lakh crore likely to accrue to private coal block allottees”. It has been also alleged that Reliance Power got undue benefit of Rs 29,033 Crores when the Government allowed the use of surplus coal from blocks allotted to Sasan power plant for its other projects.
COAL-GATE: THE LEGACY OF SCAMS...WHERE DOES IT END?
ROLE OF CBI The Central Vigilance Commission (CVC) had asked the CBI to probe into the whole saga that happened between 2006 and 2009. The CBI had also been asked to complete inquiry within three months. According to CBI, they would not probe the PM, though he was the concerned portfolio holder in the given period. Their job would be to investigate- misconduct related to the allocation of blocks, misuse of coal blocks by private companies, roll of bureaucrats, officials, ministers who recommended the names of the companies. A CBI team met senior officials in the coal ministry and sought documents pertaining to the 12 coal blocks -- nine in Chattisgarh and three in Jharkhand-- besides action taken by the Ministry after it emerged that the mining work had not started at all. The time for filing a FIR after a Preliminary Enquiry (PE) was registered by the CBI on June one this year following a direction from the CVC ends this Saturday. The probe agency has not registered a case yet. As the three-month deadline for a probe on a PE was nearing, the CBI despatched some more teams to Jharkhand and was gathering relevant documents from other ministries and state governments too. The sources said Coal ministry officials had also informed the CBI that it had issued show cause notices to some of the firms which were allocated the mines for explaining the delay in conducting the mining work. Some of the firms, which were allocated coal blocks in 2005, were yet to start mining. In a related development, the CBI was also examining the past areas of operation of some of the companies which were allotted coal blocks in Jharkhand, Chattisgarh and Karnataka, the sources said. The sources claimed that some of these companies had been set up only for getting coal blocks allocated and the same was later sublet to other companies at a premium. The agency has already questioned senior bureaucrats who were overseeing allocation of coal blocks during 2005-09, the sources said. The CBI was also examining the Comptroller and Auditor General report on coal block allocation which was tabled in Parliament last week. The agency has also questioned members of the screening committee including Secretary and Joint Secretaries in the Ministry, CBI sources said. They said the questioning of the Coal secretary, who also chairs the screening committee, was done to understand the issues involved in the allocation of coal blocks during the period and so far the agency has not found any irregularities on their part.
COAL-GATE: THE LEGACY OF SCAMS...WHERE DOES IT END?
THE POLITICAL MELODRAMA The political situation has long been in a tumult in our country, courtesy the policy paralysis of UPA-2, the corrupted portfolio of Congress and other players like Baba Ramdev etc. With this latest addition to the ruling party's loss of face, quite naturally the opponents are again in a war-like mode.
A complaint was given by BJP MPs like Prakash Javadekar and Hansraj Ahir to CVC. Kejriwal was heard to opine that the beneficiary companies had "nothing to do with steel cement and power. Their motive was to sell the mines". BJP senior leader Arun Jaitley spoke on Coal-gate. The points he highlighted were that UPA can well be said the “most corrupt government� in the history of our country, plethora of evidences ranging from Bofors to the newly added Coal Gate supports that and again the resignation of the PM echoed in his voice. THE TAKE-AWAY NOTE As the cases of corruption time and again come to the fore, doing rounds in the media, the common man continues to bear the burden associated with them. Lack of a worthy opponent, dirty coalition conundrums only adds insult to injury. One wonders where it all ends. At a time when the GDP is taking unprecedented dips since liberalisation, the burgeoning current account deficit poisoning the economy, all we hear is a loss to the national exchequer worth 1.86 Crore. Time to reflect on our suffrage rights? Well the mood seems ripe!!
By- Abhishek Banerjee , SJMSOM, M.Mgt, 1st Year
News of last 2 weeks Gross Domestic Product (GDP) grew by 5.5% in the April to June quarter of 2012 Gross Domestic Product (GDP) grew by 5.5% in the April to June quarter of 2012 versus expectations of a 5.3% growth. The Q1 F Y 13 G D P growth matches the reading for the January-March 2012 period, which was the slowest growth rate since the first quarter of 2009. The economic activities which registered significant growth in Q1 F Y 13 were 'Construction' at 10.9%, 'Financing, Insurance, Real Estate and Business Services' at 10.8% and 'Community, Social and Personal Services' at 7.9%
Apple Loses Patent Lawsuit against Samsung in Japan Apple Inc. lost a patent lawsuit in Japan as a Tokyo judge ruled that Samsung Electronics Co. (005930) smartphones and a tablet computer didn't infringe on an Apple invention for synchronizing music and video data with servers. Apple was ordered by Tokyo District Judge Tamotsu Shoji today to pay costs of the lawsuit after his verdict, the latest decision in a global dispute between the technologies giants over patents used in mobile devices. Samsung shares rose, erasing earlier losses.
Sebi allows PE help to start-up IPOs for lock-in requirement With an aim to help companies set up by professionals and qualified entrepreneurs to tap capital market, market regulator Sebi has allowed them to get help from PEs and other funds to meet share lock-in requirements. As per regulations of Securities and Exchange Board of India (Sebi), promoters are required to lock-in at least 20 percent stake in the company for at least three years after allotment of shares in Initial Public Offer (IPO). Besides, any holding in excess of this minimum 20 percent promoter stake is required to be locked in for one year.
FM approves proposal for 49 percent FDI in insurance, pension sectors Finance Minister P Chidambaram has approved a proposal floated by former Finance Minister Pranab Mukherjee to raise foreign direct investment (FDI) ceiling in insurance and pension sectors to 49 percent from the existing 26 percent to boost investor confidence. However, a decision on the insurance and pension bills was deferred due to the absence of consensus in the cabinet on the issue. The bills are expected to be taken up for legislation in the winter session of the parliament if they get the cabinet nod.
News of last 2 weeks
continued..
Inflation needs to fall for RBI to cut rates Reserve Bank of India (RBI) Governor Duvvuri Subbarao said on Tuesday that inflation remains too high and needs to fall further or risk more damage to the economy, dismissing criticism of the bank's hawkish policy stance. Since cutting its main interest rate in April by a bigger-than-expected 50 basis points to eight percent, the RBI has stayed on hold, drawing complaints that high rates are burdening consumers and slowing growth.
Govt liberalises ECB norms India has eased overseas borrowing rules to allow easier access to cheap dollar funds to housing finance companies such as H D F C , small industry financier S I D B I and permitted non-resident entities to provide rating enhancement facility to Indian borrower. The move will also help boost capital flows by allowing even lower rated companies to raise dollar funds. The high level committee on external commercial borrowings (ECB) chaired by Secretary, Department of Economic Affairs Arvind Mayaram on Wednesday took a number of decisions to further liberalise the foreign borrowing norms.
RBI bats for more FDI in retail, insurance and aviation The Reserve Bank of India (R B I ) said there is a need to further improve foreign direct investment (F D I ) inflows in sectors such as insurance, retail, aviation and urban infrastructure. The central banksaid this would augment non-debt creating flows and keep the composition of India's external liabilities at a comfortable level. On the apprehensions over FDI in multi-brand retail, the R B I said international experience on the whole suggests that allowing FDI in retailing space leads to increased competition. Fiscal deficit for April-July at Rs 2.64 lakh crore Fiscal deficit during April-July reached 51 per cent of the budgetary estimate of Rs 5.13 lakh crore, raising fears of the government breaching its fiscal deficit target of 5.1 per cent of G D P for the current year. The renewed concerns will discourage the Reserve Bank of India from easing monetary policy and give the rating agencies reason to carry out their threat of downgrading India's sovereign rating to junk grade.
Markets The market tumbled on profit booking after gaining in the past four consecutive weeks. Euro zone debt worries weighed on sentiment. Investors were also concerned by the Reserve Bank of India (RBI) governor D Subbarao's speech signalling tough policies delivered in the US on Tuesday, 28 August 2012. Key benchmark indices fell in four out of five trading sessions. The BSE Sensex fell 353.65 points or 1.99% to 17,429.56.
The 50-unit S&P CNX Nifty fell 128.20 points or 2.38% to settle at 5,258.50. Foreign institutional investors (FIIs) bought shares worth net Rs 10803.90 crore in August 2012 so far (till 30 August 2012). They had purchased shares worth net Rs 10272.70 crore in July 2012. The latest data showed that the nation's GDP growth languished around its lowest in three years in Q1 June 2012. India's gross domestic product (GDP) rose 5.5% in Q1 June 2012, data released by the government on Friday, 31 August 2012, showed. The services sector grew 6.9%, industry grew 3.6% and agriculture sector grew 2.9%. Manufacturing output rose 0.2% while mining sector grew 0.1% in Q1 June 2012. Key Highlights: Raghuram Rajan appointed as finance ministry economic adviser Former International Monetary Fund (I M F ) chief economist Raghuram Rajan took charge as chief economic adviser in the finance ministry on Wednesday.
Rajan, who succeeds Kaushik Basu,
has taken charge at a time when investments and growth in the Indian economy have slowed significantly and economic reforms have been stalled due to lack of political consensus. MphasiS net up 7.2% at Rs. 208.74 cr in May-July IT and BPO services firm MphasiS on Wednesday posted a rise 7.2% in net profit at Rs. 208.74 crore for the quarter ended July, 2012, on the back of improved operational performance. The company had posted a net profit of Rs. 194.80
Markets
continued..
crore in the third quarter of last fiscal. The revenues increased to Rs. 1,355.12 crore for the quarter compared to Rs. 1,293.63 crore in the same quarter last year, the company said. J S W Steel cancels $275 mn fund raising JSW Steel Ltd has dropped plans to raise upto $275 million through
overseas borrowings as it did not get necessary regulatory clearances. But the name of relevant authority who has denied permission couldn't be known. Reliance Communications hits an all time low on bourses Share price of Reliance Communication Ltd., the mobile telephony arm of the Anil Ambani – led Reliance Group, hit its lifetime low on the bourses on 27th August 2012 when the company's stock closed at Rs. 52.15 per share on BSE, down 3.69% from its previous close.
R-Com has lost 93.82% of its market value since its stock hit a lifetime high price of Rs. 844 per share on 10 January
2008. In the same time, the Sensex has fallen 14.11%. HP posts mega loss after EDS writedown Hewlett-Packard Co. (HP) swung to an $8.9 billion quarterly loss as personal computer sales shrank again and it swallowed a huge write down linked to its $13.9 billion purchase of Electronic Data Systems Corp. It also on Wednesday reduced its full-year earnings outlook slightly to the lower end of its previous range, responding to a faltering PC market as
well as touch economic conditions in Europe and also China, where growth is slowing, too. Its shares slid more than 4% in late trading. DLF ends innings as IPL sponsor; to promote other sports The country's largest realty firm DLF has decided to end its five-year long association with cricket tournament Indian Premier League as the title sponsor and did not renew its contract that was due by last month.The company, however, said it will promote other sports and is currently exploring various such platforms for association. It had last week gifted luxury sports utility vehicle 'Audi Q5' to four Olympic medal winners from Haryana.
Markets
continued..
Currencies: The Indian rupee declined on Friday, August 31, 2012 due to risk aversion by investors across the globe ahead of Fed speech at Jackson Hole later on that day. INR opened lower by 8 paise at Rs 55.71 to a dollar and registered a high of 55.67 and low of 55.72 during the entire day. The euro slumped overnight to its lowest level in a week to 1.2486 against the US dollar as the market nervously looked to whether the U.S. Federal Reserve chief will indicate the possibility of monetary stimulus later in the day. Commodities: COMEX Gold quotes at $1660.90, up $6.10 per ounce on Friday. The counter has recovered from lows of $1652 per ounce during the course of the day. However, the MCX Gold futures are quoting at Rs 30797, down Rs 40 per 10 grams on the day. The yellow metal is still grappling with demand worries from India as the local spot prices still remain very close to Rs 31000 per 10 grams in the major trading centers of the country. According to the World Gold Council, India imported 969 tonnes gold in 2011. The council expects the country's imports in Jan-Jun to have been just 340 tonnes, down 50% from the previous year on bloated prices, high inflation and poor economic conditions. These factors are unlikely to change in the near term. Expectations for week ahead The market is likely to be volatile next week. Automobile and cement stocks will be focus as companies from these two sector start unveil monthly sales volume data for August 2012 from Saturday, 1 September 2012. In Europe, European Central Bank (ECB) holds its monthly policy meeting on euro area interest rates on Thursday, 6 September 2012. The ECB slashed its interest rates to an all-time low in July. The ECB is expected to continue its easing cycle, probably as soon as in September, to help the economic recovery of recession- and crisis-ridden members of the euro zone.
Knowledge Section Stagging: The practice of buying initial public offerings at the offering price and then reselling them once trading has begun, usually for a substantial profit. This is more commonly done by institutional investors than retail investors, because institutional investors get most of the IPO shares at the offering price. Stagging is most profitable in a hot IPO market, when the price of an IPO often rises dramatically above the offering price on the first day. It is also called flipping. Liquidity preference theory: Observation that, all else being equal, people prefer to hold on to cash (liquidity) and that they will demand a premium for investing in non-liquid assets such as bonds, stocks, and real estate. The theory suggests that the premium demanded for parting with cash increases as the period (term) for getting the cash back increases. The rate in the increase of this premium, however, slows down with the increase in term. In the language of financial trading, this theory is expressed as "forward rates should exceed the future spot rates." This concept was first expressed by the U.K. preference hypothesis. Retrocession: It is the purchase of reinsurance by a reinsurance company. This limits the risk that a reinsurance company must face, since it has purchased insurance against an event that might affect a company that it had underwritten. If a reinsurance company continues to purchase insurance it might unknowingly buy back its own risk, known as "spiraling". OIBDA (operating income before depreciation and amortization): It is a financial measure similar to EBITDA, except that it uses Net Operating Income as opposed to net income. It is calculated by adding interest, taxes, depreciation and amortization (also known as ITDA) to the company's operating income. OIBDA is used by companies more frequently, although it is still a non-GAAP measure. Some companies prefer to use OIBDA because it doesn't consider non-operating income, and therefore tends to give a better indication of income from regular operations. Straddle: It is the purchase or sale of an equal number of puts and calls, with the same strike price and expiration dates. A straddle provides the opportunity to profit from a prediction about the future volatility of the market. Long straddles are used to profit from high volatility. Long straddles can be effective when an investor is confident that a stock price will change dramatically, but cannot predict the direction of the move. Short straddles represent the opposite prediction that a stock price will not change.
Knowledge Section Continuous inventory: It is keeping book inventory continuously in agreement with stock on hand within specified time periods. In some cases, book inventory and stock on hand may be reconciled as often as after each transaction, while in some systems these two numbers may be reconciled less often. This process is useful in keeping track of actual availability of goods and determining what the correct time to reorder from suppliers might be. It is sometimes also called perpetual inventory.
Check your fin quotient 1. Who has been named as the new C.E.O. of Barclays? 2. Which organization has been recently slapped with a lawsuit for more than $1 Billion in damages by TV network New Delhi Television Ltd. (NDTV)? Why? 3. This drug maker has scrapped its potential hepatitis C treatment after participating in a test of the drug died of heart failure. Identify this drug maker. 4. Identify company whose entire stake in Cafﾃｩ Coffee Day has recently been acquired by founder 窶田hairman V.G. Siddhartha of Amalgamated Bean Coffee Trading Co. Ltd. (ABCTL)? 5. This financial ratio tells the creditors how much of the company's short term debt can be met by selling all the company's liquid assets at very short notice and is calculated as current assets less inventories divided its total current liabilities. Identify this ratio. Rush in your entries to: finesse@sjmsom.in The first few right entries will get their name featured in the next issue of Finsight. So hit the quiz fast & get yourself visible.
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