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Shailesh J. Mehta School of Management Indian Institute of Technology, Bombay

Finsight The Fortnightly Newsletter

Issue: April 1, 2012

Inside this Issue


Ÿ The curious case of Vodafone 2-3

Ÿ Mint

Ÿ News of last 2 weeks


Ÿ The Economic Times

Ÿ Markets


Ÿ The Economist

Ÿ Knowledge section


Ÿ Check your Fin Quotient


Ÿ Campus buzz


Ÿ Ÿ Financial Express Ÿ Business Standard Ÿ BusinessLine Ÿ


The curious case of Vodafone After a four-year long court battle and several crore rupees spent on advisory and lawyer fees Vodafone won a long pending tax battle when the Supreme Court said its purchase of an Indian telecom company from Hutch was not taxable in India., the Supreme Court ruled in January that the company did not have to deduct tax at source (TDS) on its purchase of Hutchison Essar shares in an offshore deal. The court held that since the tax provisions were not applicable to a deal that done offshore, Vodafone did not have to deduct tax on the capital gains made by Hutchison. But the proposed changes in tax law by Finance Minister in budget will essentially overturn a Supreme Court judgment in the Vodafone tax case by making the amendments retrospective all the way to 1962.The budget not only clarifies that capital gains will have to be paid on share transfers done offshore where the underlying asset is an Indian one, but also this applies retrospectively all the way to 1962.

Twist in the Tale With the Supreme Court not entertaining the review petition filed by the govt. against the Jan 20 ruling, the tax collected will be refunded, as stated by Corporate Affairs Minister, Mr Salman Khurshid. The government has had to refund Rs.2,500 crore along with four per cent interest to the British telecom major. But that's only for now, in keeping with the existing tax laws of the land. The moment the relevant amendment contained in the Finance Bill, 2012 to plug the loopholes in the Income Tax Act is approved by Parliament, the tax demand of over Rs. 11,000 crore will get reactivated again and Vodafone will have to automatically pay the amount without even the need for a fresh notice. The Finance Ministry believes so for the simple reason that, if challenged again from the legal angle, the Supreme Court will have to go by the law of the land as the legislation would stand amended with retrospective effect to bring such structured deals under the tax net.In fact, even as the proposed changes are part of the Direct Taxes Code (DTC) which is slated for implementation from 2013-14, the Finance Minister chose to make the amendment a part of his budget for 2012-13 with the objective of clarifying the legislative “intent� of I-T Act, 1961 on taxation of overseas deals involving domestic assets.

The curious case of Vodafone contd... The Supreme Court held in Vodafone's case that “controlling interest” is not a capital asset. Budget 2012 proposes to amend the definition of “capital asset” to include controlling interest in an Indian company. It states that any rights in or in relation to an Indian company, including rights of management of control or any other rights whatsoever will deemed to be regarded as “capital asset”.

India not a tax haven Following the apex court's verdict against the Centre raising a Rs. 11,000-crore withholding tax demand on Vodafone for its $ 11 billion acquisition deal with Hutchison-Essar in 2007, the government's primary aim is to plug the loopholes which help companies escape the tax net through aggressive tax planning. Even as the amendment is being viewed as a regressive measure that would impact foreign direct investment (FDI), the Finance Minister and his officials have reiterated over the past few days since the budget presentation that India, which is bound by double taxation avoidance agreements (DTAAs) with scores of sovereign countries, should not be seen as a “no tax” country or “tax haven.” According to taxation experts, the retrospective changes in the I-T Act will have a bearing on hundreds of Vodafone-type overseas deals and unless tax intent is made clear, it could lead to a “fiscal crisis,” as the Finance Minister said a few days ago. There is merit in that argument, when viewed in the larger interests of the country. In any case, the business environment will still remain friendly, as U.S.-India Business Council (USIBC) president Ron Somers noted at a CII event in Mumbai. “Vodafone kind of cases sent a wrong signal to investors. It is a little regressive in nature. However, we believe this is one-off case and the overall business environment will remain investor-friendly,” he said. These circumstances have led Vodafone to consider a number of courses of action both in India and Internationally. Vodafone could invoke the Bilateral Investment Treaty. The Company believes that if the proposed changes in the tax law are implemented, it would constitute the breach of the treaty, allowing it to claim damages of an equal amount from the government as compensation. Till now, the finance ministry has refused to budge and its seems likely that the matter will again go to court, whatever may be the outcome of the case, it will also be significant for other multi-national companies including Kraft Foods, SABMiller and AT&T Inc, which also face potential tax demands in India over cross-border deals but this episode has surely made the intent of the Indian Govt clear and established that India is not a tax haven.

News of last 2 weeks L&T Finance buys Fidelity's mutual fund business L&T Finance Holdings, the financial services arm of capital goods major Larsen and Toubro, will buy out Fidelity Asset Management Company, the 15th largest mutual fund in India. Financial details of the transaction were not

disclosed in the announcement though market sources peg the deal at over Rs500 crore. The acquisition, which is subject to regulatory approvals, is routed through the subsidiary, L&T Finance. This is the second acquisition by the company in the mutual fund space. It had earlier acquired DBS Chola to enter the mutual fund arena in 2010. With this acquisition, Larsen & Toubro is set to become the 13th largest mutual fund in India. Fidelity set up base in India in 2004 and manages $212 billion —over Rs10 lakh crore —worth of assets under management (AUM) globally. Foreign direct investment norms for Indians relaxed The Reserve Bank of India (RBI) announced a slew of revisions aimed at liberalizing the norms for direct investment abroad by Indian residents. These include liberalization in regulations on qualification shares, professional services rendered and Esop (employee stock option plan) schemes.

The central bank has removed the cap of one per cent on resident individuals acquiring qualification shares for holding the post of a director in a foreign company. It has also decided to grant general permission to resident individuals to acquire shares of a foreign entity in part or full consideration for professional services rendered to the foreign company or in lieu of a director's remuneration. Sebi unveils norms to check systemic r i s k o f a l g o t r a d i n g Based on recommendations of technical advisory committee (TAC) and secondary market advisory committee (SMAC), it has been decided to put in place broad guidelines for algorithmic trading in the securities market, the Securities

and Exchange Board of India (Sebi) has said in a notification. SEBI said exchanges should ensure that all algorithmic orders, software driven automated order execution engines, are routed through broker servers located in India and have appropriate risk-control mechanism emanating from algorithmic orders and trades.

News of last 2 weeks continued... Eurozone builds $1 trillion financial firewall for larger economies The eurozone nations have reached a deal to build up a massive 800-billioneuro (around $1.1 trillion) financial firewall to prevent the two-year-old sovereign debt crisis from engulfing larger economies such as Spain and Italy.The finance ministers of the 17 nations using the single currency agreed on Friday at the start of a twoday meeting in Copenhagen to bolster the firepower of eurozone's financial bailout fund to 700 billion euros.It will be done by bringing together the temporary European Financial Stability Facility (EFSF) and the permanent fund European Stability Mechanism (ESM), which has an initial funding capacity of 500 billion euros. LIC pumps in Rs 2317 cr in four PSU banks The state-owned Life Insurance Corporation (LIC) has pumped in Rs 2,137 crore in four public sector banks through the preference share route. Life insurance monolith LIC has pumped in Rs 1,037 crore in Bank of India (BOI), Rs 650 crore in Union Bank of India(UBI), Rs 302 crore in Indian Overseas Bank(IOB)and Rs 148 crore in the United Bank of India. All these banks have issued preferential shares to the LIC. The infusion of capital is expected to help the PSU lenders to enhancing their lending activity and meet the capital adequacy norms India ranked 9th among top 10

manufacturers India continued to hold on to its position among the world's top 10 manufacturers even as a slowdown has hit the sector during the second half of the ongoing fiscal. The latest United Nations Industrial Development Organisation ( UNIDO ) report on Industrial Statistics shows that India along with other BRICS contributed around one fifth to the global manufacturing value added during the quarter ended Dec 2011. Healthcare expert nominated for World Bank Presidency US President Barack Obama nominated Dr Jim Yong Kim, KoreanAmerican physician and 17th President of Dartmouth College, an Ivy League institution.

He was a co-founder and executive director of Partners In Health, a nonprofit health care organization working for poor. He has also worked s director of WHO's HIV/AIDS department. Obama said, "It's time for a development professional to lead the world's largest development agency� while nominating him.

News of last 2 weeks continued... Cash-rich PSUs shower dividends on govt The cash-strapped government has received a windfall of more than Rs 16,000 crore by way of interim dividends from public sector undertakings (PSUs) in the current financial year 2011-12. The government's coffers have received a boost worth Rs 16,767 crore from interim dividend declared by 17 stateowned companies. Templeton plans $300 mln emerging markets fund Franklin Templeton is looking to raise $300 million for a fourth private equity fund that will provide growth capital to companies in emerging markets.

The fund, which will have a six-year lifespan like previous funds, will have a sub-tranche for Asia investments, said Managing Director Ong Tek Khoan. About one-third of the Asian tranche is likely to be invested in China, with the balance split equally between India and Southeast Asia, he added. SBI and Societe Generale form custodial service joint venture State Bank of India, the largest lender of India took a major step for its future growth by rolling out its custodial service operations in the country. SBI has formed a joint venture with France

based Societe Generale Securities Services in which the lender holds 65 per cent stake while Societe Generale owns remaining 35 per cent stake. SBI, in a statement, said that the JV would prove helpful for domestic as well as foreign institutional investors for providing them complete suite of security services. Moody's downgrades Union Bank of India Rating agency Moody's on Monday downgraded the rating for Union Bank of India (UBI) by a notch, owing to weak asset quality and inadequate loss-absorption capacity In the revised ratings, bank financial strength (BFSR) has been cut from 'D+' to 'D', while global local currency deposits were cut from Baa2/Prime-2 to Baa3/Prime-3. World Bank to help fire up India's infrastructure development World Bank has said it will extend full financial support to India to help enhance the abysmal level of infrastructural development in the country in the 12th Five Year Plan that begins next fiscal. The World Bank president Robert B Zoellick, who begins his fifth and last official visit to India on Monday, has expressed intent to discuss innovative methods of financing with Indian leaders during his stay.

Markets Key benchmark indices snapped five-week losing streak and eked out small gains in the week ended Friday, 30 March 2012. A rally on Friday, 30 March 2012, triggered by comments from Finance Minister Pranab Mukherjee that holders of participatory notes, or P-notes, will have no tax liability in India on the investments they make in the local equity market, helped market recover losses suffered earlier during the week. The market fell in three out of five trading sessions in the week ended 30 March 2012. Volatility was high as traders rolled over positions in the futures & options (F&O) segment from March 2012 series to April 2012. The BSE Sensex gained 42.46 points or 0.24% to 17,404.20 in the week ended Friday, 30 March 2012. The S&P CNX Nifty rose 17.35 points or 0.32% to 5,295.55. The previous week ending on Friday, 23 March 2012 also saw Sensex fell by 0.6% and S&P CNX Nifty 0.74% to end at 5278 due to uninspiring budgetary proposals and weak global markets. Currencies:The rupee NIFTY suffered the worst fall in four months, shedding 3.68 percent in March, hammered by investor jitters over the impact of high global oil prices on an economy still licking the the wounds of a fierce inflation battle that has crimped growth and widened deficits. The rupee ended at 50.87/88 to the dollar and 67.89 against Euro.CLSA has maintained its rupee target to be 55/$ for 2012. Key Highlights: 타 A new set of tax norms, the General AntiAvoidance Rules ( GAAR) comes into effect from next week (April 1, 2012. Under this, the income tax department will have the power to deny individuals and entities the benefits of any tax avoidance treaty that may presently exist. 타 Pranab Mukherjee said on 30thMarch that

the government doesn't intend to levy any tax on the holders of Participatory Notes (P-Notes). A lack of clarity on taxation of P-notes has contributed to the recent volatility in the domestic share market. PNotes are instruments issued by registered foreign institutional investors to overseas investors, who wish to invest in the Indian stock markets without

registering themselves with SEBI. 타 The UPA government appeared to stave off a fresh crisis on 22 March 2012 after the national auditor played down suggestions of a Rs 10.67-lakh crore revenue loss to the exchequer due to faulty allocation of coal mining blocks. A leaked draft report of the CAG alleged that by not auctioning mines allotted to private and state-run firms, the government may have engendered revenue losses of truly epic proportions dwarfing all previous scams. But the Prime Minister's Office sprang into action and released a letter from the auditor saying the information was half-baked and misleading.

Markets continued... Key Highlights: Ÿ Reserve Bank of India (RBI) stepped in on Friday to buy up to Rs.10,000 crore ($1.95 billion) of bonds through open market operations on Friday 30th March in order to boost liquidity in the Banking system. Ÿ A Reuters poll conducted over the past week showed investors still expect the Sensex to end the year at 19,500 points, for a gain of 26 percent for calendar 2012, but concerns about the government's finances and its political stability remain prominent risks. Ÿ RIL has reorganised its finance operations under two different chief financial officers for the first time in its


37-year-old history. According to reports, V Srikanth, who joined RIL from Citibank as deputy chief financial officer (CFO) in August 2010, has been elevated as CFO, placing him on an equal footing with the incumbent Alok Agarwal. RIL has also divided responsibilities between the two finance heads, reports suggest. Ÿ The yield on the benchmark 10-year Government bonds climbed on Wed 28th March after the Centre said that it will borrow 65% money from the market in the first half of FY13. The Union Government plans to raise Rs. 3.7 trillion through bond sales during AprilSeptember 2012. Commodities: MCX Gold June initially moved sharply higher but found very strong Resistance at 28880 levels. Later prices fell sharply towards 28501 levels and finally closed marginally

Ÿ lower from the previous weeks closing levels. Spot gold has fallen below the 200-day

simple moving average again and formed a death cross, a technical sell sign, for the second time in less than four months Ÿ MCX Silver May found strong resistance at 57949 levels and closed at 56801 levels. Ÿ MCX Crude April found resistance at 5510 levels. Later prices fell sharply breaking both the support levels, and finally closed at 5273. Global Markets: Ÿ World equity markets end the quarter with double-digit gains, as reports showing the U.S. economy and consumer sentiment still on the road to recovery helped buoy prices. Ÿ The Dow and the S&P 500 closed out their best first quarter since 1998 and the Nasdaq had its best first-quarter performance since 1991, largely on the back of improving domestic economic data. Dow Jones closed at 13212 and NASDAQ at 3091levels on week ending March 30th. Ÿ Spain presented a budget projected to save more than 27 billion euros in 2012 through spending cuts and revenue increases, while euro zone finance ministers agreed to raise their financial firewall to contain the region's debt crisis. Spain's budget and the rescue fund move were largely expected by markets, and a spike in the euro against the dollar faded to a more modest rise.

Knowledge Section Ÿ Asset-backed security (ABS) A debt

instrument that is collateralized by specific financial assets that generate the cash flow used to service the debt instrument. Asset-backed securities are normally marketable – that is, transferable to third parties in market transactions. Ÿ Collateralized debt obligation (CDO) A

special purpose entity set up to own a pool of securities or loans, divide the pool's cash flows into tranches based on risk, and sell investors bonds that represent an interest in a particular tranche. The securities may be mortgage-backed securities or other similar securities. The tranches are designed to redistribute the risk of default. "Senior" tranches are considered the safest. Interest and principal payments are generally made in order of seniority, so that junior tranches offer higher coupon payments to compensate for additional default risk. Ÿ Credit default swap (CDS) In effect, an

insurance contract. The buyer of t h e s wa p m a k e s p e r i o d i c payments to the seller of the swap in return for protection against a possible "credit event" affecting the value of a specified asset. The seller agrees to buy the specified asset from the buyer at par in the event of a credit default. The asset is typically some type of security, such as a corporate bond, CDO, or mortgage-backed security. Neither the buyer nor the seller typically owns the security – i.e., credit default swaps are derivatives. Ÿ Special purpose vehicle (SPV) A legal entity (usually a limited liability company) created to fulfill a narrow or temporary objective. The SPV typically holds a portfolio of assets such as mortgage-backed securities or other debt obligations. The SPV exists to hold the assets and issue a new set of claims on the assets, making the sponsor of the SPV remote from its activities.

Check your Fin Quotient 1) Which bank is promoted by 20th Century Finance Corporation and Keppel Tatlee Bank of Singapore in India? 2) He is the pioneer in mutual fund industry and often referred as the Father of Index Fun investing. He created the first S&P 500 Index fund. Identify this famous person? 3) What is an unusual service offered by Bank of Baroda at Tirupati? 4) Name the first Indian woman CEO of a Foreign Bank? 5) Which successful investor is popularly known as "The Oracle of Omaha"? Last Issue’s correct Answers 1)Brazil 2)Tokyo Stock Exchange 3)Sensitive Index 4)NASD 5)SIX Swiss Exchange

Rush in your entries to:

Folks with all correct entries Amit Yadav, SJMSOM Abhishek Bhola,SJMSOM Ankit Goel, NMIMS

The first few right entries will get their name featured in the next issue of Finsight. So hit the quiz fast & get yourself visible.

Campus Buzz Mr. S. Gurumurthy a leading economist, columnist and adviser who is known to have played a key role in resolving the disputes between various corporates in India has honored IIT Bombay with his presence and an enlightening lecture on Indian Economy on 15th of March.

His talk on” Indian Economy - A Reflection of our Ethos, our Principles” has highlighted the links between economics and cultural aspects of nations. He explained how Indian psyche has been dominated by western view of Indian nation and urged students to think from a different standpoint. He stressed on the concept of family in Indian culture and how it has been strength of our economy for decades. The talk gave a lot of takeaways and a fresh perspective on Indian economy for students.

Another eminent personality in the field of finance, Prof R Vaidyanathan, professor Finance at IIM Banglore visited the campus on 22nd March and delivered a lecture on “Emerging Trends in Global Markets and Implications for India”. Drawing from his rich experience in various roles in Indian regulatory bodies and corporate sector, he talked about the shifting of power from west towards the emerging economies.

He gave excellent insights on the future drivers of India’s growth. According to him the unorganized sector is the real driving force of Indian economy. He also hailed the common Indian housewife for the savings she does and explained how it will be the key source of financing for future infrastructure and capacity building in India.

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Finsight April 1, 2012  

This is the fortnightly newsletter of Finesse, The Finance club of SJMSOM, IIT Bombay

Finsight April 1, 2012  

This is the fortnightly newsletter of Finesse, The Finance club of SJMSOM, IIT Bombay