SUCHETA DALAL ON: SEBI: A RESHUFFLE ON THE CARDS
Personal Finance Magazine
PAPERLESS TRADING: ONLY ON PAPER
CORRUPTION IN THE PRIVATE SECTOR
7 April 2011
Why is gold on a massive bull run? Will it last? Should you buy gold as an investment? If so, what are the cheapest and best options? The most exhaustive and definitive study on gold ever
Gold: All Told Final Cover Page_133.indd 2
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Volume 6, Issue 3 25 March – 7 April 2011 Debashis Basu Editor & Publisher firstname.lastname@example.org Sucheta Dalal Managing Editor email@example.com Editorial Consultant Dr Nita Mukherjee
Editorial, Advertisement, Circulation & Subscription Office 315, 3rd Floor, Hind Service Industries Premises, Off Veer Savarkar Marg, Shivaji Park, Dadar (W), Mumbai - 400 028 Tel: 022 2444 1059/60 Fax: 022 2444 2771 E-mail: firstname.lastname@example.org E-mail: email@example.com Subscription e-mail firstname.lastname@example.org Pune Jitendra Garsund “SANSHREY”, Nanai Baug Society, BT Kawade Road, Ghorpadi, Pune - 411 036 Mobile: 9881309801 E-mail: email@example.com New Delhi DDA Flats, J-3/66, Kalkaji, New Delhi - 110 019 Chennai 14, Mian Sahib, IInd Street, Near Madras Youth Hostel, Chepauk, Chennai - 600 005 Tel: 044 4215 5442 Bengaluru 1st Floor, 13/1, 7th Main Road, 1 Cross, Saibabanagar, Srirampuram, Bengaluru - 560 021 st
Kolkata 395, Lake Gardens, Kolkata - 700 045 Tel: 033 2422 1173/4064 4318 Hyderabad C/o Rajnidev, 15-2-16,1st Floor, Shop No.9, (Beside Ramdas Paper Mart), Gowliguda Chaman, Hyderabad - 500 012 Moneylife is printed and published by Debashis Basu on behalf of Moneywise Media Pvt Ltd and printed at Magna Graphics,101C&D, Government Industrial Estate, Kandivli (West), Mumbai - 400 067 and published at 315, 3rd Floor, Hind Service Industries Premises, Off Veer Savarkar Marg, Shivaji Park, Dadar (W), Mumbai - 400 028 Editor: Debashis Basu
RNI No: MAHENG/2006/16653
Letters to the Editor OUR JANUS-FACED LEADERS Many Indians may not be aware, but the UN Convention against Corruption was adopted by the UN General Assembly on 31 October 2003. Back then, it was opened for signatures of member countries on 9 December 2003. This Convention mandates that the Write to the Editor! signatories will return The only investment that Win jewellery the money collected via enhances your face value. worth Rs1,000! corruption to the country of origin. The Indian government signed this Convention on the very last day—14 December 2005. This delay of two years in itself Congratulations JN Mamtora from Vadodara! raises doubts about the Your letter to the Editor wins a Surat Diamond gift government’s intentions. worth Rs1,000. Keep writing! Keep winning These were further confirmed when we saw what happened thereafter. All signatories were given a timeline of five years from the date of signature to get the Convention ratified by their respective Cabinets and Parliaments. And, as you may have guessed by now, our HONEST prime minister (PM) has done NOTHING so far to get the Convention ratified even by his Cabinet. Manmohan Singh says that we will not let the “guilty go unpunished” (for the various scams that have recently hit the nation). But our current laws allow a maximum punishment of three to six months for corruption; and there is no provision for recovering the tainted money from the corrupt. You may wonder why the punishment is so light. This is so because the British, when they were ruling us, were the most corrupt people at that time. So, they framed such a weak provision (for prevention of corruption), under the Indian Penal Code (1860). And our then PM, Pandit Nehru, on 14 August 1947 had signed 18 volumes of the Transfer of Power Act with Lord Mountbatten which, inter alia, said that the British legal, educational, health and other systems will continue even after our ‘Independence’. Similarly, it was the British who owned automobiles then. So, even today, if you shoott someone dead, you may get death or life imprisonment. meent. But even if you kill 10 people by crushing hiing them under your car, you may at most get a few months of imprisonment. I believe that those who are rapists, highly corrupt, dangerous polluters or those see playing with the lives of other h her people by mixing toxic substances s stances with food should be publicly ly hanged till death. There should be special s fast-track courts for these o offences ffences ``
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` which must deliver judgements in 90 days, at the
maximum. Countries like the US and Canada have around 3.6% of GDP (gross domestic product) as money (currency notes) in circulation. South Korea has about 2.5%. In India, as against a GDP of about Rs56 trillion; our money in circulation is about Rs10 trillion. Obviously, there is a lot of money flushing around in our system for our corrupt leaders to play games like hawala, a la Hassan Ali Khan. While it is difficult to lay your hands on Rs5 notes, the Reserve Bank of India (RBI) has been more than liberal in printing Rs500 and Rs1,000 notes, as can be seen from RBI’s own data about the number of notes printed (denomination-wise) every year. The only way to come out of this situation is to elect those who are free from corruption and who have the guts and willingness to end this malaise. For more details on the UN Convention against Corruption, please visit: http://en.wikipedia.org/wiki/United_Nations_ Convention_against_Corruption JN Mamtora, Vadodara, by email
BUDGET BLUES The inference I have drawn, from the views of various groups, especially senior citizens of various categories with whom I’m associated, common taxpayers do not have anything to cheer about the Union Budget 2011-12. It’s rather unfortunate that Pranabda has just played the game of ‘divide and rule’ and that too with the important elderly population! In the Railway Budget, Mamatadi has cut the women senior citizens slab to 58 years from 60 years. Here are the other lacunae in the Budget as I see them: • The Budget makes health check-ups and treatment in certain categories of hospitals costlier, due to the imposition of service tax. • The rise of Rs20,000 in exemption limit for general taxpayers will result in a tax relief of Rs2,060 per year, i.e., Rs171.66 per month; while the rise of Rs10,000 in the exemption limit for senior citizens of the age group from 65 to 79 will result in tax saving of Rs1,030
per year, i.e., Rs85.83 per month. To call this move a ‘relief’ is ridiculous, indeed. • At a time when the cost of living has gone up more than 50% during the last year due to uncontrolled inflation, what matters for the ‘aam aadmi’ can never be the GDP and ‘growth’ statistics or exemption from filing income-tax returns. • We need tough measures to control inflation and bring down the cost of living which the finance minister was expected to deliver but has failed to. Subrahmanian SH, by email
TA-TA, TATA PHOTON! I am a regular user of the Tata Photon (prepaid data card). I was shocked to find what many companies do to fleece their customers. I was shocked to find that at every stage, the company is rounding off (data usage) to the nearest megabyte (MB). They do not round off usage on a day-wise Transaction Date
Total Consumed (MB)
Amount Charged (Rs)
basis. In fact, if you use the data card for a few minutes, you are charged for one MB. In the table above, my total consolidated usage is 53MB—but I have been charged for 56MB. Under the plan I have opted for, every 1MB is equal to Re1. Imagine the money being ‘skimmed’ from thousands of users every day! Is this fair? M Navarathan, 1st floor, 39 (Old No 18) MB Street, Ellis Road, Chennai - 600 002, by email
NBFC GOLD LOANS Nowadays, we find many finance companies granting gold loans. The day is not far off when finance companies will run away with your gold, as they hold margins of 40% to 50%. To create customer
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` awareness, we request
could have the insurance cover till death. Likewise, senior citizens could be spared the agony of filing returns—surely, the government would not be losing much through this gesture, as not many would be falling under this category. Actually, the government would serve the aam aadmi
your team to publish at least one article on this subject. Sanjay Prabhu, by email Please refer to our ‘Cover Story’ on “Gold: All Told” on page 28. Please also refer to our earlier articles in our section ‘Borrowings’, “Loan against Gold” (Moneylife, 26 August 2010) and in section ‘Crosshairs’, “Manna, Pure & Simple” (11 March 2010). — Editor
SENIOR CITIZENS’ PLIGHT Kudos for publishing such a lively ‘Cover Story’: “Manifesto for Retail Investors and Senior Citizens” (Moneylife, 10 March 2011). Your analysis outlining some of the reasons for the dwindling number of retail investors was simply superb, to say the least. Equally effective is the analysis of the issues concerning senior citizens. In fact, senior citizens often get a raw deal from all—banks (where no loans are sanctioned); insurance companies (where insurers fail to provide health cover to them when they need it most) and public hospitals (where red-tape and corruption is rampant and the elderly are unable to run around). The woes of senior citizens begin right from the day they retire from service as different government departments have different age criteria for eligibility for concessions. On top of this, this year’s Budget has come out with one more category, ‘Very Senior Citizens’ (of 80 years and above). The Railways has lowered the age for granting travel concessions to 58 years. While this is welcome, wouldn’t it be better if there is one common age for classifying senior citizens, say 60? Instead of tinkering around with minor issues like age, the government should focus on doing something concrete. For instance, the government could ensure that senior citizens who hold a valid mediclaim policy
much better this way. V Raghuraman, by email
A BIG THANK YOU We would like to thank you profusely for giving coverage to our organisation (Each One Teach One Charitable Foundation) in your esteemed magazine. We will reach out to a large number of needy children in the near future. Awareness about us through magazines like Moneylife will go a long way in helping us attain our goal. Deepak Nagwanshi, Off TJ Road, Opposite Sunder Tower, Hirji Baug, Sewri (West), Mumbai - 400 015, by email
HELP US TO HELP YOU Moneylife offers its readers a unique service—helping redress grievances on a best-effort basis. However, we have limited resources to devote to this effort and can only pursue complaints that come to us by email. We request readers to please send us crisp complaints, with all the facts on email (not as an attachment) and send us the supporting documents, only if we ask for them. We cannot handle physical letters. — Editor
HOW TO REACH US
Letters to the Editor can be emailed to firstname.lastname@example.org or can be posted to: The Editor, Moneylife Magazine, Unit No. 315, 3rd Floor, Hind Service Industries, Off Veer Savarkar Marg, Dadar (W), Mumbai 400 028 or faxed to 022-24442771. Letters must include the writer’s full name, address and telephone number and may be edited for clarity or space. New Subscriptions & Customer Service For new subscription requests, complaints about current subscription and books, write to email@example.com or to Subscription Manager, Unit No. 315, 3rd Floor, Hind Service Industries, Off Veer Savarkar Marg, Dadar (W), Mumbai 400 028 or call 022-24441059-60 or fax to 022-24442771. Advertising For information and rates, email us at firstname.lastname@example.org or call 022-24441059-60.
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ROUND TABLE 5 April 2011
Health Insurance Portability FREE ADMISSION
What will it take to succeed?
Insurance Regulatory and Development Authority (IRDA) is going to start health insurance portability from July 2011. There are several concerns about how it will work and whether it will really work. We are initiating public debate on this important regulatory change and propose to send a Position Paper to IRDA with your concerns and suggestions to ensure that health insurance portability guidelines are comprehensive and implementable. Make your voice heard in shaping health insurance portability guidelines
Registration and Tea: 3:30pm | Session: 4pm-6pm Venue: Rachana Sansad, 278, Shankar Ghanekar Marg, Near Ravindra Natya Mandir, Prabhadevi, Mumbai – 400 025
Panel of Speakers
M Ramadoss chairman and managing director, New India Assurance Co Ltd
Dr P Nandagopal chairman and managing director, IndiaFirst Life Insurance
Fali Poncha insurance industry veteran and chairman, IRICS insurance brokers
Ashvin Parekh partner, national leader – global financial services, Ernst & Young
Pawan Singhal director – legal and regulatory aﬀairs, Max Bupa Health Insurance
Sudhir Sarnobat director – Medimanage insurance brokers
We look forward to meeting you on 5th April Contact: Dione/Judith on (022) 2444 1058-60 or mail us at email@example.com
(Registration on first come, first served basis)
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7 April 2011
EDITOR Behind the Glitter
o the monetary purists, gold is a shining symbol of eternal value, at a time when the Western governments are debasing their currencies by printing billions of dollars of paper money. Gold is deeply ingrained in the Indian psyche as an emblem of security and wealth. And its price has gone up five times in 10 years. Combine the three factors and the mind is ready to accept gold as an investment. Thousands of crores of rupees have been funnelled into gold exchange traded funds. And now there are expensive gold fund of funds as well. Is it wise to buy gold now? That depends on whether you consider gold to be inexpensive. The only way any asset can be valued fundamentally is as a multiple of the income it yields. This is how bonds and stocks are valued. But gold does not yield anything and so it cannot be valued this way. Any asset that does not yield anything (like a painting) has a value but it is a speculative value, determined purely by what the next buyer will pay. Gold is supposed to be a little different—a financial asset—since at one time it was used as a currency. But even then, there is no clarity about how a metal, that has long been abandoned as a currency, should be valued. In the hundreds of articles that appear every month on why you must have some money invested in gold, there is never a debate on the difficulty of valuing gold. While it is impossible to know when gold is undervalued, it is not difficult to figure out the periods when gold rises and when it doesn’t. All these issues have been discussed in the ‘Cover Story’ this time, including a threadbare analysis of the best option to buy gold. By our reckoning, this is the most comprehensive and definitive study on gold, packed with facts and conclusions that are sure to surprise you. We look forward to your valuable feedback. Debashis Basu
28 Cover Story Gold: All Told
Gold is not an investment, but a speculative asset, influenced mainly by the dollar and US interest rates, explains Debashis Basu with a detailed analysis. But if you do want gold in your portfolio, we identify the cheapest and best options, in a companion piece
12 Current Account – A shareholder’s bitter experience with Hindusthan Development Corporation Ltd – Builders are offering to pay for pre-EMIs. What does it mean to you? – Over the past decade, the correlation between returns from fine wine and crude oil returns was 90%
19 LOOSE CHANGE Moneylife Quiz; Soundbites
SAT orders expose SEBI‘s caprice; Demat is expensive for small investors; SEBI gets ready for changes in top management
22 Different Strokes The private sector wants corrupt netas and babus to be pulled up. Corruption in the private sector is as rampant, but never discussed Disclaimer: Moneylife has a policy of not allowing its editorial staff to buy and sell stocks that are written about in the magazine. All personal transactions in individual stocks are subjected to internal disclosure rules.
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CONTENTS Here’s why you should click on www.moneylife.in Exclusive News
Get the latest on business & corporate news and other developments in the financial world
Our leading analysts and columnists dissect the issues that are impacting you. Read the Moneylife magazine articles and join in for discussions
Spanking 52 Superbikes: New Deals on Wheels Ditch your kick-start, rusty throttles and hard-to-shift gears. Riding one of the new superbikes—now swamping Indian markets—requires a completely different set of skills, discovers Veeresh Malik ML FOUNDATION EVENTS
Daily Market Forecast
Keep track of short-term market movements and long-term trends to know what’s coming
24 Investor, Blame Thyself
44 Grinding On
While advisors have to adhere to ethical norms, too many investors are bent on making it worse for themselves
Sideways eways movement may not be limited ted to weeks but years
56 International Women’s Day Deena Mehta, the lone woman member on BSE’s board of directors, says that keeping women and children out of the financial arena is something a family cannot afford today
Chindia 26 The Fad Mirae’s India-China Consumption Fund’s investment theme looks good only on paper STOCKS
STOCKGRADER 45 Momentum
Colonial Heart 60 The of North America
Mexico is a perfect blend of traditional culture and colonial legacy, says Jaideep Mukerji, as he explores the country’s historic buildings, majestic monuments and imposing cathedrals
EID Parry surged 6% while Shriram Transport Finance tumbled 10% Ipca Labs rose 4% and Nestlé gained 3% while TCS declined 4% and Infosys fell 1%
Orchid rose 8%, while Karur Vysya Bank and Hindustan Unilever declined 6% each
With a strong presence in engines, Greaves has bucked the downtrend in the capital goods sector; Gujarat State Petronet is well poised to tap into natural gas sector
50 Insurance Trends – Highest NAV ULIPs – Chola General ‘Penalised’ – Third-party car insurance pool is too small – Birla Sun Life’s Foresight ULIP – Keep an eye on settlement ratios
for the 66 Wheels Differently-abled What happens when a loved one suddenly needs wheelchair support after an accident, injury or illness? Access 4All is the answer
DEPARTMENTS Letters ............................ 4 Book Review .................... 58 Money Facts .................... 63
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CORPORA TE GO VER N AN C E
Taken for a Ride A shareholder’s bitter experience with Hindusthan Development Corporation Ltd
n December 2005, Vishwanath Poddar, a Kolkatabased investor, filed an application under the RTI (Right to Information) Act seeking a copy of the legal opinion, if obtained, and the decision taken on his request to file a review petition before the Calcutta High Court and copy of order sheet of the concerned file related to Hindusthan Development Corporation Ltd (HDCL, now called Malanpur Steel Ltd). The CPIO (central public information officer), in reply, stated that the concerned file was untraceable. Mr Poddar feels that there is a nexus between the government organisations and the HDCL management. Moneylife had sent an email with questions to RP Mody, HDCL chairman, for the company’s point of view; we have received no reply, so far. When we followed up the case with a phone call to the HDCL office at Kolkata, there was a certain Anil Agarwal who took the call. But Mr Agarwal declined to answer the questions, saying that “the company was a sick company for the last 12 years and was already with the BIFR (Board for Industrial & Financial Reconstruction).” He added that “he was not interested in contributing to the article with his answers.” HDCL had a number of closely-held investment companies—NBFCs (non-banking financial companies)—and some manufacturing companies. The shareholding of all these companies was inter-linked. Mr Poddar had brought to light the alleged fraudulent nature of the Scheme of Arrangement (Scheme) (28 February to 1 March 2000) before the ministry of corporate affairs, the CVC (Central Vigilance Commission), SEBI (Securities and Exchange Board of India), various public sector banks and FIs (financial institutions), well before the hearing of the case in the Calcutta High Court (on 25 April 2000). Mr Poddar has only a small stake—a few hundred shares—and he has already spent a considerable amount of money, time and energy, to see that justice is delivered. He could not afford to fight at the courts. Obviously, he was frustrated at the turn of events. He also filed an application with the BIFR, seeking its consent that his case before the consumer forum for recovery of his money invested in debentures is proceeded with. But so far, there has
been no communication from BIFR on the fate of his application. The Scheme between HDCL and Hindusthan Engineering Industries Ltd (HEIL), as approved by the Calcutta High Court, provided for transfer of all other units—including the engineering unit comprising these plants—Dalhousie Jute Co; Petrocarbon & Chemicals Co, Kolkata; Insulators & Electricals Co with its head office (HO) at Bhopal; Cyanides & Chemicals Co with its HO at Nariman Point (Mumbai); General Engineering works comprising two plants with its HO at Barakhamba Road (New Delhi); the corporate office (including the shares department at Kolkata and the corporate planning & co-ordination office (at New Delhi) of HDCL, to HEIL. Only the Madhya Pradesh Iron & Steel Company (MISC) unit was retained by HDCL under the order of the High Court. Ironically, the debenture liability has been allocated to HDCL, but the reserve generated has been allocated to HEIL. In all fairness, HEIL, the transferee company, ought to have been made liable to pay to HDCL the difference between the assets and liabilities of the transferred entities as reduced by the aggregate face value of shares to be issued by it. The share exchange ratio fixed is low—for every nine shares of HDCL, two shares of HEIL are allotted and seven shares of HDCL (the transferor company which has only the MISC unit) will remain with the HDCL shareholder. The MISC unit has stopped production and has been closed and sealed under a BIFR order. Debtor companies of the HDCL group had 87% to 98% of their respective total investments in HDCL alone. However, Mr Poddar told Moneylife that the money lent out by HDCL to group NBFCs was used in acquiring shares of HDCL itself by these group companies—a clear violation of the Companies Act. It is significant to note that RP Mody, director of HEIL, was chairman of HDCL until he resigned with ``
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` effect from 9 March 2000 (to avoid disqualification
under Section 274(1) (g) of the Companies Act) just before the company defaulted on its instalment payment of debentures. RP Mody is head of the HDCL group and owns directly or has indirect interest in voting powers of HDCL, HEIL and all debtor NBFCs and other companies of the group—this gives him control or significant influence over these companies. Mr Poddar also found that the suspension of production and operations and layoffs in MISC was done much prior to HDCL’s presentation before the Calcutta High Court in June 1999. HDCL retained only the MISC unit which was closed, laid off employees, and the factory premises were seized and sealed by the authorities. A few years before 1997, HDCL granted loans to a number of closely-held NBFCs of the group. These NBFCs used these loans mostly for acquiring HDCL shares. Each of these NBFCs has substantial holding in HDCL. The promoters’ controlling stake in HDCL and in another group company HEIL is through these group NBFCs. On the face of it, these cases appear to have been filed only to get remission of interest—just the accrued interest had accumulated to more than 150% of the principal sum. HDCL did not file an appeal against the order in the winding-up cases as any prudent person would have done, says Mr Poddar. In fact, HDCL has filed an appeal to protect its interests in the case of winding up of a company not related to the group. The case brings to light another case of how government-controlled institutions play with small investors’ money (as told to Moneylife by Mr Poddar). The UTI (Unit Trust of India) held 14,91,884 secured debentures—series VII of Rs100 each and 49,22,002 secured debentures—series IX of Rs50 each in HDCL; in both the series of debentures, UTI was paid one instalment less than what was paid to other holders on redemption. Despite this, UTI voted in favour of the Scheme and swapping of the release of Mumbaiheadquartered Cyanides & Chemicals Co with the MISC unit. The UTI investment outstanding in the series II of debentures is supposedly over Rs30 crore (as on 31 March 2000); this entire amount has now become unrecoverable. Life Insurance Corporation of India (LIC) and LIC Housing Finance (LIC HF) are also believed to be holding debentures in HDCL as representatives of both LIC and LIC HF attended the debenture-holders’ meeting on 22 February 2000 and 7 March 2000 and voted in favour of the Scheme. General Insurance
Corporation (GIC) also granted a loan to HDCL and also approved the Scheme. The MISC unit is shown as ‘operational’ even in 1999-2000, and approximately Rs49 crore is accounted as a loan from HEIL for running the MISC unit in HDCL’s books. The sum appears exorbitant for running a unit under closure and layoffs, especially when compared with the expenses incurred (relating to the MISC unit) in earlier years. The notice of meeting of shareholders to consider the Scheme was not sent to all shareholders. The report of the chairperson contained names of group companies whose votes constitute as high as 99.94% of positive votes; a vast number of shareholders were indicated as ‘present’ but did not vote. As HDCL defaulted in debenture redemption and got registered with the BIFR, it did not reply to Mr Poddar’s demand of debenture redemption. Mr Poddar told Moneylife that he had invested in the debentures series IX of the company. He filed his case before the district consumer forum under the Consumer Protection Act. The company Serious Fraud took shelter under Investigation Section 22(1) of Office should the Sick Industrial examine this Companies (Special case. It involves Provisions) Act, banks, FIs and 1985. This Section HDCL debentureprovides that no holders. The suit/proceedings amount involved is for recovery of over Rs300 crore money against any industrial company, referred to BIFR, shall lie or proceed with the entity and the proceeding case was suspended until the BIFR proceedings were completed. However, he came across a ruling of the National Consumer Disputes Redressal Commission that the Sick Industrial Companies (Special Provisions) Act, 1985 will not have any validity under the Consumer Protection Act. This ruling was cited by Mr Poddar in the district forum and he won his case against HDCL. The company’s appeal against the case was dismissed. The company paid back the debenture redemption amount with interest to him in November 2009. This is surely a case which deserves to be investigated by the Serious Fraud Investigation Office. The amount involved concerning various banks, FIs and HDCL debenture-holders alone is over Rs300 crore and it has become bad and unrealisable since the company is registered under BIFR. — N Madhavan
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home loa ns
Hidden Discount Builders are offering to pay for pre-EMIs. What does it mean to you?
xperts believe that real-estate prices have escalated so sharply within such a short period that pressure for a correction is increasing. There is a counter view that builders will not lower prices as input costs have increased significantly. However, sales have dwindled in expensive areas like south Mumbai. Secondly, some builders are quietly waiving the payment of what is called ‘pre-EMIs’ (equated monthly instalments) as part of their promotional efforts which is one way of saying that prices are coming down. The builder will agree to pay the pre-EMIs to housing loan companies. With sales of flats decreasing, many builders such as Manjeera Constructions, Indu Projects, Aliens Group and Parsvnath Developers are offering such schemes to boost sales.
How does this work and should this be a consideration while buying or taking a loan to buy a home? When an individual takes a housing loan, s/he has to repay the loan in EMIs over a period of, say, 15 years. If the borrower goes in for the option of an advance disbursal facility (ADF), the entire loan amount will be disbursed to the builder, and the borrower will have to start paying the EMIs
immediately. This is even before the construction is complete and the borrower takes possession of the house. If the borrower takes the preEMI option (a more conservative approach), the loan will be disbursed in tranches, based on the builder’s progress in completion of the project. The pre-EMI payments
will be during the period of land development and construction by the builder. The disbursement will be complete by the time the borrower takes possession of the home. During this period, the borrower must pay pre-EMIs, i.e., simple interest on the total amount disbursed to the builder. This will continue on a monthly basis until the actual EMIs become applicable, i.e., when the borrower takes possession of the home. The rate of interest used in calculating the pre-EMI may vary from bank to bank. Once the regular EMI payments begin, the borrower will be eligible for tax deduction on the pre-EMIs paid up to a period of five years in equal proportions. If the construction of the property is not complete by 31st March of a financial year, then no benefit is available for that financial year. When the borrower makes tranche payments during the period of pre-EMIs towards the principal amount borrowed, the principal outstanding will be reduced by the housing loan company. But there will be no tax benefit on these tranche payments. Only when the EMI payments begin, will the borrower benefit on the principal component of the EMI. It is always better to buy a house with a pre-EMI option. But the decision about how much to pay for an apartment must be based on many considerations, especially how much you can really borrow. Remember, a builder’s offer to waive a few pre-EMIs does not mean much of a discount. It is far better to bargain for a discount in the apartment value itself and reject the ‘generous’ offer of the builder to waive a few pre-EMIs. — N Madhavan
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COM MODITY MAR KET R ETU R N S
Global Liquidity y Over the past decade, the correlation between returns from fine wine and crude oil returns was 90%
nvestors are dumping bonds; that’s at’s old hat. If you are looking for returns, ns, you have to look much beyond the markets. rkets. And if you go along with the trend d in China, you should raise a toast to a barrel of oil... with a glass of fine wine! The Chinese are tanking up on oil, and Shanghai’s nouveau riche are not stashing away fine wine in a cellar.. The wealthy Chinese—there were a lot of them out there, at the last count—are celebrating elebrating the mainland’s economic miracle by b guzzling li gallons ll of wine. According to a recent White Paper published by Serhan Cevik and Tahsin Saadi Sedik of the International Monetary Fund, macroeconomic factors are key drivers of commodity prices in emerging
BOTTOMLINE BY MORPARIA
markets. But here comes com this heady fact: from 1990 to 2010, the correlation between fine wine and crude oil staggering 90%! returns was a stagge the IMF White Paper, there is According to th little difference in the two commodities, at least from an investment standpoint. High net-worth investm individuals (the party extends much beyond constantly on the look for a new China) are co high; wine aand crude are helping them fuel investing passion. their invest might argue that storing wine in a You m cellar is a much more difficult and timeconsuming consumi process than filling up (and transporting) a barrel of crude oil. After transpor all, Somali Som pirates are tougher to handle than a gaggle of giggling Chinese tourists ga high in a Parisian bar on some who get h Sauvignon Blanc, Cabernet Sauvignon, Chardonnay or Pinot Noir. But investors with would have got the same returns deep pockets w ffrom iinvesting i iin wine. i But before you try your luck in wine, note that the IMF paper suggests that both crude oil and fine wine are ‘Emerging Market Lite’ investments. So let commodity traders dabble in oil and let aficionados sip their wine. — Devarajan Mahadevan
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LOOSE CHANGE Surprise Gift for Quiz winners from:
Moneylife Quiz - 98 Another quiz to tickle your brain. The answers to this quiz are in this very issue. The winner will be chosen by a lucky draw from correct entries. The answers will be published in the next issue. Send in your answers to firstname.lastname@example.org with the Quiz no., your name, address and telephone number before 3 April 2011. 1. In which year was the Great Temple of the Aztecs unearthed? a. 1920 b. 1900 c. 1978 d. 1850 2. Which company is now known as Malanpur Steel Ltd? a. Hindusthan Development Corporation Ltd b. Hindu Transport Ltd c. Karma Steel Ltd d. Bharat Copper Ltd 3. How much of one’s money does the new fund offer by Mirae aim to invest in Chinese companies? a. 20% b. 35% c. 70% d. 50% 4. How many months did it take Arvind Prabhoo to design the vehicle that makes it easier for the disabled to travel? a. Seven b. Two c. One d. Ten 5. According to the World Gold Council report, how many tonnes of gold did India import in 2010? a. 250 tonnes b. 120 tonnes c. 500 tonnes d. 963.10 tonnes 6. How much penalty has the Insurance Regulatory and Development Authority levied on Cholamandalam General Insurance? a. Rs5 lakh b. Rs2 lakh c. Rs7 lakh d. Rs9 lakh 7. How many respondents to the India Fraud Survey admitted that “organisations pay bribes to win and retain business”? a. 50% b. 31% c. 75% d. 65% 8. Who is the founder of Comet Media Foundation? a. Sunita Arya b. Kartiki Narayan c. Vidya Balan d. Chandita Mukherjee The answers to Moneylife Quiz-97 are: • 1d. Viva • 2-c. 25th June • 3-b. 12% • 4-a. Hindsight Bias • 5-c. Very Senior Citizens • 6-a. Platinum • 7-a. Heinrich Harrer • 8-b. Justice MC Chagla In all, 27 readers got all the answers right last time. The winner of Quiz-97 is P Rajya Lakshmi from Guntur (Andhra Pradesh). Congrats Madam! You will get a surprise gift from Surat Diamond Jewellery.
Sound Bites “For India, there is a clear risk that the nuclear deal, with $150 billion worth of total potential import contracts, could end up as the single largest moneymaking scheme ever unveiled” – BRAHMA CHELLANEY, PROFESSOR, THE CENTRE FOR POLICY RESEARCH, in Mint
“Rajiv Gandhi had said, before the economic reforms of 1991, that only 15% of money allocated for public welfare is translated into useful results. The rest is wasted in one form or another. Fifteen years after those reforms... Rahul Gandhi estimated the same high level of wastage of resources” – ARUN MAIRA, MEMBER, PLANNING COMMISSION, in The Economic Times
“If the economy gets better, I’m gonna make money in commodities. If it doesn’t get better, I’m gonna make money in commodities because they’re gonna print more money, huge amount of money” – JIM ROGERS, SUCCESSFUL PRIVATE INVESTOR, on Bloomberg TV
“The public may take a grim view of corrupt administrative officers. But in the case of businesses, higher fees or commissions are seen as part of the market mechanism” – C GOPINATH, PROFESSOR, SUFFOLK UNIVERSITY, in The Hindu Business Line 19 | 7 April 2011 | MONEYLIFE
3/17/2011 10:09:13 PM
Exclusive news, the stories behind the headlines and the truth between the lines by Sucheta Dalal
Capricious Obstructions SAT orders have exposed SEBI‘s caprice
everal orders of the Securities Appellate Tribunal (SAT) have begun to expose the capriciousness of the Securities and Exchange Board of India’s (SEBI) dealings with intermediaries and investors. A glaring example was a recent appeal by accounting major PricewaterhouseCoopers (PwC) which enjoys little public sympathy after repeated gross professional failures culminating with the massive Satyam fraud. Yet, even in this case, those who attended the hearing say that SAT was forced to ask SEBI to give PwC a fair trial and also said that it was unfair of SEBI to seek reasons for the cross-examination which is a matter of right. SEBI was asked to give the accounting firm access to all the documents procured and relied upon. It could well be that PwC is finding ways to delay the trial. After all, its attempt to settle the issue by paying a fine and filing consent proceedings was turned down by the regulator. SEBI has also turned down PwC’s request to delay proceedings until the Central Bureau of
Investigation (CBI) completed its hearings. This makes it even more imperative for SEBI officials not to provide opportunities for further delay and add to the cost of litigation through trivial obstruction. There are nearly a dozen instances where SAT has pulled up the regulator for capricious actions. One realty company even filed an appeal because SEBI would not permit inspection of documents by its advocates. Similarly, in another recent case, SEBI was told that it could not use the wide provisions
reasonable time frame is notorious. Unfortunately, individual litigants were helpless in the face of such behaviour since the finance ministry has exercised no oversight over the regulator in the past five to six years.
S T O CK M A R K E T
Forgotten Premise Demat may be a boon for traders but, for small investors, it’s expensive
of Section 11B to issue directions to impose punitive orders against intermediaries and investors, unless it was important to ensure the orderly functioning of markets. In that case, a SEBI member had issued a compensation order under these provisions. SEBI’s propensity to issue orders under Sec 11B and refusal to complete hearings within a
aperless trading and dematerialised trading are undoubtedly a boon for secondary market traders, because it ensures clean and efficient transfer and delivery of shares. However, in the 15 years since the National Securities Depository Ltd (NSDL) was set up, we seem to have lost track of some basic issues raised by investors. The NSDL and, hence, also the Central Depository Services (India) Ltd (CDSL) are both highcost operations, where investors pay hefty annual maintenance charges to depository participants (DPs) to hold their shares in dematerialised form. Often, the shares owned by investors were either thinly traded or not traded at all. Some were suspended by the bourses for transgressing listing rules. In all these situations, investors saw no ``
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` reason to dematerialise the shares
and pay an annual maintenance charge which would steadily erode value from their already negligible worth. It is an issue that has irritated long-term investors for over a decade; several investor associations have taken it up with the depository. When challenged on the high costs, NSDL’s founder chief CB Bhave had one stock answer, that investors who intend to hold shares for the long term would be better off saving money by holding them in physical form. They should have them dematerialised only if they intended to sell their holding. When it was repeatedly pointed out to him that investors of defunct companies face a double blow—they pay annual charges for worthless shares or shell out more money to rematerialise them into physical shares—Mr Bhave had no answer. In all these cases, it was suggested that the depositories ask companies to bear a part of the cost, because they have saved a lot of money by shutting down their share transfer departments after the depositories came into existence. However, in a decade at NSDL and another three years at SEBI, Mr Bhave simply ignored this most sensible idea. A few weeks ago, a media report, ignorant of this history, wrote that 200 companies listed on the Bombay Stock Exchange have been transferred to the trade-
for-trade (t-f-t) segment because half their investors prefer to hold physical shares. Apparently, they fall foul of the BSE’s ‘public demat holding norm’. Clearly, nobody can force investors to pay for holding paperless shares they purchased in the pre-depository era. Maybe companies whose shares are in the t-f-t segment can come forward to bear annual maintenance costs for their shareholders. Or, better still, with a new chairman at SEBI, this investor grievance can receive fresh consideration and a sensible and long overdue resolution.
whose terms are coming to an end. Simultaneously, the finance ministry is seeking answers to realty acquisition by the duo in the same complex in which a stock exchange had acquired substantial assets. But those are not the only changes. Insiders say that four executive directors are reportedly looking for assignments outside SEBI including heads of secondary markets, mutual funds and law boards. Given Mr Sinha’s quiet manner of working, the changes are expected to be gradual but inevitable.
Change of Guard in the Offing SEBI is getting ready for several changes in top management
hile corporate India is quietly calling for a re-look at the independence of regulators, SEBI is getting ready for several changes in top management. The government has already started the process of finding new members. When Mr Bhave was the SEBI chief, he was specifically asked if he would like the then whole-time members (WTMs) to be given an extension. He said no. We have a copy of one such letter. This time too, we learn that UK Sinha is inclined to see new WTMs replace KM Abraham and MS Sahoo
If true, this raises an important issue. An independent regulator is credible only if its actions are fair and consistent. Unfortunately, the past two SEBI chairmen treated SEBI like a short-term political office by bringing in a team of loyalists to head all important divisions with the result that their actions were often seen as biased and fickle. Hopefully, the new SEBI chairman will work at restoring the regulator’s credibility.
21 | 7 April 2011 | MONEYLIFE
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DIFFERENT STROKES SUCHETA DALAL
C O R P O R ATE GO VER NA N CE
Private Sector’s Bribe-giving The private sector wants corrupt netas and babus to be pulled up. Corruption in the private sector is as rampant, but never discussed
ast week, KPMG, the consulting major that specialises in forensic accounting, released yet another survey on bribery and corruption which claims to reveal “how the Indian corporate sector is battling corruption and at the same time looking for ways to play a greater role in improving the system to ensure a thriving business environment in India.” Given the public mood and the many corruption scandals that have rocked the nation, the headline findings are predictable. More interesting are the nuggets of truth tucked away in the report. For instance, 99% of the respondents believe that corruption skews the playing field and allows less capable firms to bag contracts. But only 68% admitted that “many cases of corruption were induced by the private sector” and 31% of respondents to the India Fraud Survey admitted that “organisations pay bribes to win and retain business.” KPMG correctly points out that Indians focus on the bribe-taker and not the bribe-giver; hence, “corporates do not shy away from adopting corrupt practices” and “tend to overlook the implications of encouraging bribegiving and often look only at the short-term benefits achieved.” The real story about India’s rampant corruption lies here. KPMG warns that as Indian companies access the global capital market (in fact, many top Indian companies already have a large global footprint through overseas acquisitions), this attitude could land them in trouble. Foreign statutes, such as the UK Bribery Act 2010 and the US Foreign Corrupt Practices Act, not only focus on the bribe-giver but, in the aftermath of the global financial crisis of 2008, their regulators are keen on redeeming themselves through strict enforcement and making examples of some of the most respected names in business and finance. But is India Inc willing to introspect? Or is it happy to take advantage of public anger to blame the government? A couple of months ago, a group of eminent citizens complained about the ‘governance deficit’ and large-scale corruption that’s preventing the
benefits of economic development from percolating to the poor. Yet, when the US charged Rajat Gupta (ex-CEO of McKinsey & Co worldwide) with insider trading, simple governance processes went out of the window. The Indian School of Business (ISB), Hyderabad, whose directors seem to have a propensity to fall foul of governance rules, decided that Mr Gupta will not resign from its board. Corporate India joined the chorus, even though Mr Gupta himself stepped away from all the big global boards until the case against him was decided. Mr Gupta may well be innocent; it is corporate India’s attitude to the action against him that is hypocritical. Their message is: the rules of good governance should apply to others, not to the power-elite. Why should it? After all, only 45% of those surveyed by KPMG believe that corruption has impacted their business or growth adversely; those affected are probably the relatively honest businessmen. Also, when nearly 90% of the respondents do not think that corruption has reduced their ability to access funds in the domestic financial market and 84% say it has no impact on accessing funds globally, where is the pressure on corporate India to clean up its act or focus on its own contribution to India’s corruption? In fact, private sector corruption is not limited to bribing the government to get contracts; it is rampant even in its dealings with contractors, consultants and its hiring practices. It is fairly widespread in India’s best companies but never admitted or discussed publicly. The reason is obvious. While the Central Vigilance Commission or the Comptroller and Auditor General of India provide scope for investigation, action and whistleblowing in government/public sector organisations, there is no oversight mechanism in private companies. Worse, the fat payment to directors on corporate boards only encourages silence rather than good governance. In my experience, when told of dubious management practices, most directors promise to investigate and come back with excuses for the management rather than push for good governance. ``
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DIFFERENT STROKES SUCHETA DALAL
` They know which side the bread is buttered.
Private sector companies actively encourage corruption in two ways—by paying bribes to bag contracts, or pretending not to pay bribes, knowing full well that they have simply outsourced the bribe-giving to lobbyists, public relations (PR) firms, event managers, consultants, lawyers or accountants they employ. One could argue that private-sector corruption is born out of the need to feed rent-seeking of politicians and bureaucrats. After all, employees who are asked to ferry bags of cash or provide other forms of ‘entertainment’ to venal netas and babus are hardly likely to be paragons of honesty while dealing with their own companies. Even our blue-chip companies are not immune from dubious practices when it comes to HR (human resources), advertising, PR, training and consultancy of various types. And corruption is especially rampant in the financial sector, despite high salaries and bonuses earned by fund managers, bankers and brokerage firms. Here are a few examples. • A consultant blew the whistle on a kickback demanded by the HR manager of a revered corporate house. The chairman sacked the HR chief, but the consultant also lost the assignment. In another case, the managing director of a large corporate house subtly nudged an independent marketing consultant to prepare an adverse inquiry report against a certain executive, although the inquiry showed otherwise. When he refused to play ball, he was slowly eased out. Lesson: Silence is golden and consultants who blow the whistle against corrupt and devious practices suffer financial damage and lose business. • The corrupt nexus with HR firms is evident in hiring mediocre MBAs from management schools. Since admissions and the collection of fat fees depends on successful placements, some business schools pay HR managers to hire their students on the understanding that they may be sacked in six months, says a
disgusted professor at a leading management institute in Pune. The companies pay the price. Similarly, many companies are ever eager to push up entry level salaries, since it ensures an automatic upward pay revision across the company. • The head of an independent HR consultancy unhappily admits that kickbacks are the norm in his industry. Another banker told me about a nice racket between a ‘star’ finance professional and head-hunter who hopped jobs every year, with higher sign-on bonuses each time. The bonus was split with the head-hunter, who ensured that the executive switched jobs before any organisation ever had a chance to assess his performance. • The nexus between a little-known broker and LIC Housing Finance led to a series of arrests mainly because of their brazenness. But bankers have innumerable anecdotes about chartered accountants on the boards of public sector banks who swing loans for specific companies for a price. Many of them are now powerful enough to influence the appointment of bank chairmen. The public manifestation of such corruption leads to situations where private airlines hire pilots with fake flying credentials, a private hospital fails to notice that an unqualified person is masquerading as a doctor, and body-shopping IT (information technology) companies merrily accepted fake engineering degrees until the US embassy began to embarrass them by verifying and rejecting visas for such candidates. Isn’t it ironical that corporate India wants better regulation, transparency and whistle-blowing for the public sector, when there has never been a survey or honest assessment of the primary bribe-givers—private sector companies? Sucheta Dalal is the managing editor of Moneylife. Subscribers get free help in resolving their problems with select providers of financial services. She can be reached at suchetadalal @yahoo.com
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23 | 7 April 2011 | MONEYLIFE
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F IN AN C IAL ADVIC E
Investor, Blame Thyself While advisors have to adhere to ethical norms, too many investors are bent on making it worse for themselves
am thankful to Dipak Joshi, a reader of Moneylife, who sent us a link to http://www.fsa.gov.uk/pubs/ guidance/gc11_01.pdf. It is an attempt by the authorities in the UK to guide independent financial advisors (IFAs) to be more transparent in their work. It is basically the effort that the IFA has to make to understand the risk that his prospective client is willing and able to take. It is imperative that our regulators insist on something similar. This topic assumes great significance in our markets. I am seeing a disturbing trend where more and more ‘advisors’, especially the corporate ones, are offering an increasingly complex range of so-called ‘structured’ products as PMS (portfolio management services). Apart from this, complaint boards are packed with instances of individuals who wanted fixed deposits but were sold unitlinked insurance plans (ULIPs) by their bank relationship managers. Recently, I saw someone pushing a ‘Silver PMS’ product. The offer document clearly states that some part of the money is going to be invested in a debenture issued by a finance company, with ‘indicative terms’. The ‘terms’ were complex and even most savvy finance professionals will not understand the product. A sales guy was hawking this as a ‘principal-protected’ product to his clients, when it clearly was not such a product. There was no guarantee for such a thing.
Investors have to change too… I also notice pigheadedness among many clients, who think that they know everything and refuse to share their financial status with their advisors. To help an advisor give you better advice, it is imperative that you share complete information. You cannot go to a doctor
and remain silent on your past ailments. If you do, you will not get fair advice. And, often, any advice that is professionally given, but based on incomplete facts, is bound to be wrong. No investor also wants to know about the downside of any product. I have met investors from across the spectrum, whose only interest is the possible upside in any product or share price. Most of them believe that the law of gravity is not applicable to anything financial. They never ask any probing questions. Most investors, on the other hand, think that an IFA or a broker is a cheat and, before buying a product, will check about the broker’s or IFA’s commission with another one. Most high net-worth investors are savvy about broker earnings, know the fund houses and check the commission rates with them. They insist on pass-backs from the agents. The IFA or the agent has no choice. This being the structure, the IFA or the advisor finds the client an easy kill for any product. The investor never worries about the downside of a product. Many have invested in complex structures involving real estate, commodities, etc and, on maturity, have barely managed to get their principal back. It is stupid of people to fall for these ‘principal-protected’ products. For example, if someone sells a product of a three-year tenure, with 85% invested in a bank fixed deposit, a ‘capital-protected’ structure is ready. The 85% will mature into 100% of the original amount over three years at less than 5% returns. The balance 15% is used by the producer to buy/sell in the options derivatives or commodities markets. Why not simply do it directly? If you are putting Rs10 lakh into a ‘capital-protected’ product, what you are doing is paying a management fee on 85% of the money to be put into a bank FD! Why ``
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` don’t you directly play with 15% (i.e., Rs1.50 lakh) in
the casino—or in any other form of gambling that you want to bet on? So, the investor, who is otherwise so suspicious of the IFA, gets sold the most complex products, simply because she is either too afraid to ask about all the details or just gets carried away by the term ‘capital-protected’! Such investors forget that every investment has a downside. The risk can be anything from zero to 100% of the amount invested. Investors should ask specific questions and ask the producer/advisor to put it down in writing. Someone tells you that the product is ‘capital-protected’; you finally find that the product is ‘capital-protection oriented’. There is no guarantee or assurance. Recently, I met a corporate investor, who wanted to invest only in FMPs (fixed maturity products) backed by bank certificates of deposit (CDs). And, in his greed, he was scouting. He found a distributor who promised him ‘indicative’ yield of slightly above 10% per annum and also a full 1% kickback. The tenure was 14 months. I wonder what he has got for himself. Typically, the maximum maturity for a bank CD is 12 months. And the pass-back generally is less than half a percent. I found out that the FMP was investing predominantly in corporate debentures of 14-month maturity with no assurance of credit quality. The greed of the corporate investor made the agent sell him something that was not appropriate for his risk appetite. And greed (getting the pass-back) ensured that the investor would keep his mouth shut about the kind of risk his firm has taken. I urge all investors to think about the downside of each and every financial product before they invest.
Unless they think through this, they are going to be in for a huge, nasty surprise. Someone wanted me to construct for him a portfolio with an ‘assured’ 15% annual return. The gentleman was in his late 60s. Most brokers told him that stock markets give that kind of return. Alas, he found that they do not, on a year-on-year basis. Investors have to understand that stock market returns follow no rules. One year can be 70% up and another can be 50% down. Yes, a point-to-point measurement over 20 years or more may get you a number of 15% in compounded returns. In this case, the 60+ gentleman was probably better off with a monthly income plan (which would give him a 10%-12% annual return in most circumstances) rather than investing in an equity fund. Even here one cannot guarantee a month-on-month payout. So, for this gentleman, probably, a fixed deposit or a corporate bond was more suitable. For him, protection of principal and a monthly payout were critical. If the gentleman had taken some time out before committing his money to equity funds, he would not have had to sell out at a loss, because cash flow was important for him. He also got taken in by the ‘upside’ potential of equities and got blinded to the downside. It is best that the consumer/investor spends as much time on his investments as is possible, to understand the downside of each and every product. Please educate yourself about the ‘worst-case scenario’ and then take a call. Then, you will not be surprised by the fickle world of investments.
No investor wants to know about the downside of any product. I’ve met investors, whose only interest is the possible upside in any product or share price
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What’s Your Bahana for Not Subscribing? I am not interested in honest & insightful advice on money matters I never have any problems with banks, credit-cards or insurance companies I always invest on the basis of tips from friends and brokers Finance bores me to tears I would rather spend two years of knowledge on one evening of eating out I always buy from the newsstands
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25 | 7 April 2011 | MONEYLIFE
3/17/2011 10:07:30 PM
MUTUAL FUNDS POINTERS
New fund o f f er
The Chindia Fad
irae Asset Management has come out with a new fund offer (NFO) that aims to put as much as 35% of your money in Chinese companies and 65% in Indian companies. The theme is a popular one—the rising consumption in these two emerging economies is what dominates all business discussions these days. Although there are many mutual funds that promise to invest abroad, this scheme will focus on sectors and companies benefiting from the consumption-led demand that is driving the world’s fastest-growing economies, India and China. Should you be considering investing in this Fund? Bear in mind that the India-China Consumption Fund, an open-ended, equity-oriented scheme, is based on some fallacies. According to Mirae, the consumption theme will be the engine of sustainable growth made possible by higher per capita income, disposable surplus and growing urbanisation. India and China are supposed to be at the inflexion point of the consumption J-curve (where consumption initially falls, but then rises to higher than the starting point), with our country’s strong propensity to consume basic goods and services and China’s strong demand for luxury goods. This investment theme is attractive… only on paper. After all, on a per-capita basis, China is still one of the poorest countries. It doesn’t even make it to the top 100. And it is growing fast. India is similarly on a rising consumption curve. But investing is more complex than chasing economic growth. Following a macro theme, however attractive, will not automatically lead to superior investment performance. Over the past 10 years, China has recorded much faster growth. Many successful foreign investors like Jim Rogers don’t want to put even a cent into India. Even if China and India are mentioned in the same breath, nobody pretends that India will be chosen to host the Olympics, even in the next two decades. But how have the two well-known stock market indices of the two countries performed over the past decade?
Over the past 10 years, India’s Sensex has gone up by 429% and Shanghai’s main index, the Shanghai Composite, is up by just 52%. Why is China’s stock market down in the dumps, unable to beat inflation, when Chinese consumption has surely surged in leaps and bounds over the decade—possibly much more than India’s? It is foolish to argue that higher GDP (gross domestic product) growth is a reason to invest in a country. The only criterion is whether stocks are cheap or expensive. That is why, in 2007-08, India’s GDP growth rate was 9.20% and the Sensex return was 26%—whereas in 2009-10, GDP growth rate was 7.40% and the Sensex return was 77%.
Source:Yahoo India Finance
Mirae’s India-China Consumption Fund’s investment theme looks good only on paper
Sensex vs Shanghai Composite 400 300 200 100 0 Feb-01
Indian consumer stocks are very overvalued. Mirae has cleverly defined the consumption theme widely enough to include everything from discretionary consumption to food, tourism and hospitality. This elasticity may help Mirae move from one stock to another easily, but you are then not exactly getting the exposure to ‘consumption’. Finally, the scheme does not add anything to your portfolio by way of diversification—at a lower risk. After all, the bulk of the money, 65%, will be invested in Indian equities. If you want to carry such a large exposure to Indian equities, there are many consistently wellperforming funds to choose from. The risk of investing through a Korean fund manager in Chinese stocks is something you can do without. We have written in the past why investing in funds which invest in foreign equities is not worth the risk. If you still want exposure to foreign equities, several options are already available. We are unable to see how Mirae’s stock-picking skill in Chinese stocks is especially superior. — Debashis Basu and Megha Vora
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3/16/2011 1:03:47 PM
Gold: All Told Gold is not an investment, but a speculative asset, inf uenced mainly by the dollar and US interest rates, explains Debashis Basu with a detailed analysis. But if you do want gold in your portfolio, we tell you the cheapest and best options, in a companion piece
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TION MONEYLIFE FOUNDA
t is hard to get an educated Indian to pay some attention to the relative merits of different financial products. But if you mention gold, it’s another story. A mind that is bored of trying to understand the usefulness of stocks as a tool for long-term wealth creation quickly falls for the allure of gold—for obvious reasons. Unlike ‘financial’ products such as stocks and mutual fund units, you can touch and feel gold. It has a strong emotional appeal. It can be converted into jewellery and passed on. Gold is tried, tested and true. On top of this, Indians simply love gold. According to a World Gold Council report, India imported 963.10 tonnes of gold in 2010 compared to 578.50 tonnes in 2009—a 67% rise even on higher prices. Through the ages, Indians have been buying and gifting gold. The acceptability of gold is unparalleled. And, over the past decade, gold and silver have witnessed a massive bull run. Now, if you take a ‘hot’ product and place it before a receptive mind what do you get?
It is a common belief that gold offers good returns over the long term. Not true. Since 1991, gold is up just 8.9% on a compounded annual basis. That hardly beats a recurring deposit scheme! Chart 1
All that glitters... Rs/10gm 21,000
help spread financial literacy & promote advocacy In just over a year since our inauguration, we have enrolled more than 4,500 members and conducted 54 workshops Hundreds have benefited from our grievance-redressal efforts. We have addressed: — Financial Issues Faced by Senior Citizens — Issues Faced by Retail Investors If you have benefited from our work, and if you would like to support our effort to educate savers, please donate to the Moneylife Foundation to help expand our nationwide financial literacy initiatives. *Donations to Moneylife Foundation are eligible for tax benefits under Sec. 80G of the Income-Tax Act 1961 (50% tax exemption). Please send a Cheque/Demand Draft in favour of ‘MONEYLIFE FOUNDATION’ accompanied by a letter indicating if it is a corpus donation. We will also need your Name, Address, Contact No., Email and PAN card details in order to send you the tax-exemption certificate.
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With the wonderful benefit of hindsight of sharply rising prices, gold is being peddled as worthy of investment. From well-meaning financial planners who have no understanding of financial history, to mutual funds that are out to claw in as much of assets as possible, to wealth managers happy to peddle a product that is both hot and easily bought, gold is drawing serious money. Gold exchange traded funds (ETFs) have amassed Rs4,000 crore in India so far and billions overseas. The chant is just getting louder. Gold must be part of your investment portfolio. Should it? Since almost everything that you hear about investing is based on myths and false ``
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The f rst thing to understand about gold is that you cannot value it logically. This is because nobody pays you any income for your gold down to some cold hard logic about gold and do some number crunching on returns from gold? Indians believe that gold (like real estate) always increases in price. This is true. But let that not lead to blind belief. If you don’t know by how much gold has gone up over the past 20 years or why, it would really be blind belief—that gold always goes up. Chart 1 shows the 20-year performance of gold from January 1991 to December 2010. The compounded annual growth rate (CAGR) is just 8.96%—hardly better than the returns from fixed-income products like bank deposits. Over the same period, the CAGR of the Sensex has been 16.31% (See chart 2). If you are putting money in gold as an investment, it would be quite foolish— unless, of course, gold gallops in the future. Will it? That takes us to the heart of this story: what influences gold prices. It will also answer the second point—of gold being a hedge against inflation (short answer: it is not!). Valuing Gold The first thing to understand about gold is that you cannot value it logically. This is because nobody pays you any income for your gold. If you invest in real estate you can get rent. If you put your money in a fixed deposit, you get interest. If you buy stocks, you get a dividend. Anything that produces a stream of cash can be valued through P/E ratios, yields and capitalisation rates and be compared over time to determine whether it is cheap or expensive. Gold produces no cash flow. There is no analytical way to value an asset that doesn’t produce cash flow. In fact, it inflicts a negative cash flow—for storing it. Anything that cannot be valued is valuable only to the extent of the price the next buyer will pay for it. That makes it a speculative product, not an investment product. This is why ace speculator George Soros has said: “Gold is the ultimate asset bubble.” The price of gold goes up and down depending on external factors, not on the factors intrinsic to gold. What are these external factors? 1. Value of the US Dollar: Gold, like most commodities, is priced in US dollars. Other things being equal, gold prices will go up if the dollar is weak or perceived to be weak. The dollar is, indeed, perceived to be weak now. The previous occasion when the dollar was seen
to be weak was in the late 1970s in the aftermath of the Vietnam War, Iranian revolution, rising oil price, etc. Gold had shot up from $100 to $850 during that period. Now, let’s go a little deeper into the first factor. What pushes the value of the dollar down? One of the key reasons is real interest rate, that is, interest rate minus inflation. How does this work into the price of gold? 2. Real Interest Rate of Dollar Assets: The real interest rate is the risk-free return on money, minus inflation. The dollar is not only used to buy goods and services; dollardenominated assets like US Treasuries are an asset class for institutions and the rich to earn real interest on safe principal. When real interest rate of dollar assets, like ``
arren Buﬀe has never bought gold as an investment. A few years ago, this is what he said about gold. Gold gets dug out of the ground in Africa, or some place. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” In March 2011 he told CNBC: “If you took all the gold in the world, it would form a cube 67 feet on a side, worth h $7 trillion. For that same amount of money, you could ould own other assets with far greater producti ve power, including all the tive farmland in the US, about 1 billion acres, which is worth $2.5 trillion, illion, seven Exxon Mobil’s (XOM), the largest capitalized company est in the US and you would still have $1 trillion in walking around money left over. Instead of producing any income or dividends, gold just sits there and nd shines, le ng you ou feel like you are King Midas.
` beliefs and untested assumptions, how about getting
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If the US continues to recover, interest rates may rise. If it is more than inf ation, gold will crash. To whom would you sell your gold ETF then? 4% and US Treasury yield is 2%, holders of Treasuries are suffering 2% real erosion. Hence, gold price will go up. It has little to do with inflation. If inflation is 7% and US Treasury yields 9%, the holders of US Treasuries are enjoying a real interest income of 2% and, in that case, gold will not go up—even though inflation has sharply moved up to 7%. At various times in history, gold has failed to be a hedge against inflation. In short, as long as negative real interest rate situation continues, gold will remain strong and worth a speculative purchase. We will come back to this issue at the end of this article. 3. Value of the Rupee: In India, the price of gold is measured in rupees. Since gold is easily transportable, the price is uniform worldwide (other than local taxes). So, if the rupee is weaker against the dollar, the price of gold ` US Treasuries, is down and running close to inflation,
gold gains in value. Why? Remember gold offers no cash flow and, to own it, you have to give up interest on dollar assets that are as good as gold. If you don’t have to give up anything (when inflation is higher than Treasury yield), gold suddenly becomes more important in comparison. Over the past 30 years, gold has had a huge bull run, followed by a huge bear market, followed by a huge bull market. Note the table below. It pinpoints when and why gold has enjoyed a bull run. When the
The Only Time Gold Shines
Need gold at the end of 10-20 years? Sorry, gold would be a terrible investment even after a massive run-up over the last 10 years. Buy index funds. Over the past 20 years, the Sensex is up 16% vs just 8.9% of gold Chart 2
Sensex vs Gold
Base January 1991 = 100 2,100
Median Real Interest Rate
Gold Price +/-
Source: US Federal Reserve; Not including dividends
interest rate is positive (middle part), there are no takers for gold. When real rates are negative (inflation is higher than interest rates), dollar assets are unattractive and so one is sacrificing nothing by buying gold. This was the situation in the 1970s and again in the last decade. In such periods, money loses purchasing power, investors seek ‘hard assets’ like gold and real estate and shun equities. The close correlation between negative real interest and gold prices is mistakenly seen as a correlation between inflation and gold. As we have highlighted, if inflation is
Source: BSE & RBI
will go up by that much. This is precisely why Indians don’t remember that gold prices had crashed from a high of $850 per ounce in 1981 to $250 per ounce in 2001 over a period of 20 years. During this period, the US dollar kept getting stronger. In 1981, $1 was Rs8 and, today, it is around Rs45. This is what pushed the price of gold up in Indian rupees even though gold declined by ``
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` 70% during this period.
So, any time you find that the price of gold is up, one of two things (or both) must be true: either the dollar has declined due to lower real interest rate (pushing up gold prices) or the rupee has declined against the dollar (pushing up the rupee price of gold). It has little to do with the fourth factor (demand and supply) mistakenly touted as the main factor behind the rising price of gold. 4. Demand & Supply: Indians supposedly have a huge appetite for gold. Indeed, gold imports by India and China have been booming. But this is not new. India has been buying gold for thousands of years and the world has not run out of the yellow metal. India’s steady and continuous purchase of gold could not stop gold from declining 70% in 20 years between 1981 and 2001. Buy, Sell or Hold? Clearly, gold is not an investment product. If you invest in gold, you cannot be passive about it, expecting a smooth rise year after year. Gold does well only under certain economic conditions—when real interest in the US is negative to zero. This has been the situation for a decade now and nobody knows how long it will continue. If it does, gold will go up. There is a strong belief that the US Federal Reserve will be unable to raise interest rates because that will kill economic recovery. And, even when
the Fed starts raising rates, if it lags the inflation rate, as had happened in the 1970s, gold would rise higher still. These macroeconomic factors are difficult for anybody to track, sitting here in India. As against this, there is a huge downside risk. If the US continues along the path of recovery, at some stage, interest rates will rise. If it is ahead of inflation, gold will crash. And it would be interesting to know whom you would sell your gold ETF to at that time. Global speculation in gold has been so huge that the gold ETF SPDR Gold Shares is the seventh-largest holder of physical gold in the world. If its holders decide to sell (or are forced to sell; think of hedge-fund liquidations), there will be panic in the market, since there are no natural buyers of gold, only speculative buyers. Finally, there is an emerging factor that may dictate the price of gold in future—China. If the condition in the US worsens and China decides to switch its investments from US Treasuries to gold, at least partially, gold price rise will become parabolic. As our comprehensive and indepth analysis of gold shows, there are only speculative forces pushing up the price of gold, something that is beyond the grasp of an average saver. If so, there is simply no logical reason for them to invest in gold. There is speculative merit aplenty—as long as you know when to pass it on to the next sucker.
Looking for the cheapest and best op on to invest in gold? Raj Pradhan oﬀers a guide
n the previous piece, we have explained why gold is not an investment; it only moves with the dollar and rupee exchange rate and, most importantly, the negative real interest rate in the US. Most of us will not be able to track these factors. In fact, it is a blind bet to invest in gold without understanding any of these factors, because when these macrofactors change, gold will fall like a stone, leaving you baffled. However, you may still need to buy gold for specific occasions, such as your child’s wedding. For this, you may be looking for the best options to invest in gold, bearing in mind the cost, storage and ease of buying and selling. The table alongside provides a complete guide to the different options. We have excluded the futures market which is for hedgers and speculators. But, before we discuss the various options in detail, remember that when its prices are at a record high, going for lump sum investment is a bad idea. A systematic investment plan (SIP) is a better way to invest in gold. Even so, SIP is not ``
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Gold Buying OpƟons Key Issues
Exchange Traded Funds (ETFs)
Gold Fund of Funds (FoFs)
Jewellers and banks
Many mutual funds
National Spot Exchange
Reliance MF, Kotak MF
Bank, jewellers’ timing
Varies from jeweller to jeweller. Banks also mark up the price
Transparent—traded on the exchange
Transparent—traded on the exchange
Transparent as it invests in gold ETFs
Linked to world gold prices
Linked to Indian gold prices
Linked to gold ETFs
Jeweller, not bank
Through NSEL brokers
Redeemed with same AMC (asset management company)
Reliance–(2% before one year). Kotak—2% before six months; 1% before one year
Returns in One Year
Lower than market price
Will follow global prices of gold
Will follow Indian prices of gold
Will follow gold ETF returns
Capital Gains Tax
Before three years, short-term capital gains tax. After three years, long-term capital gains tax at 20% with indexation or 10% without indexation
Before one year, short-term capital gains tax. After one year, long-term capital gains tax at 20% with indexation or 10% without indexation
Before three years, short-term capital gains tax. After three years, long-term capital gains tax at 20% with indexation or 10% without indexation
Before one year, short-term capital gains tax. After one year, long-term capital gains tax at 20% with indexation or 10% without indexation
Regular demat (CDSL/NDSL)
New demat (CDSL/NDSL)
Not applicable, unless you get a bank locker for storing, or buy insurance
1.5% expense ratio allowed, even though most ETFs now charge 1%. Plus demat charges
None as of now. Only demat charges
1.5% expense ratio allowed
1% VAT (value-added) tax on purchase
0.25% to 0.85% depending on broker
0.25% + Rs11 per lakh
Similar to buying and selling equities
Only a few brokers offer online trading
No, if there is no demat
Remat (conversion to physical gold)
Allowed after paying delivery charge and coin-making charge (Rs200/10gm each) and VAT of 1%
1gm of gold
1gm of gold; ½gm of gold allowed by Quantum MF
1gm of gold or 100gm of silver
Reliance–SIP of Rs100 per month, Kotak–SIP of Rs1,000 per month. Rs5,000 is the minimum opening investment
Can occur 90%-92% in gold and keep the rest in liquid funds
Same as gold ETFs
Security of Asset
Fund house responsible
Fund house responsible
Source: Moneylife Research
` the best option. If your need for gold is after 10 years
and the gold price at the end of 10 years is lower than the prices from today till the end of the 10-year period, an SIP will yield less amount of gold than the gold you can purchase at the end of 10 years, as a lump sum for your child’s wedding. Physical Gold and Silver Why go for it? • For those paranoid about losing physical control
of gold, this is the best option. All other forms of gold holdings are just paper gold/silver and you are dependent on some other entity to manage your gold and its security can never be 100%, even with all the regulations in place. • Gold does not take much space due to high density. Why not? • Gold has impurities from iridium and ruthenium as well as uncertainty of carat information when you buy `` gold. An untrained eye cannot spot the difference.
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If you have physical gold and wish to earn interest on it as well as participate in capital gains (or losses), you can deposit it in the Gold Deposit Scheme of the State Bank of India ` • A customer has to look for a reputed jeweller, look for
certification which authenticates the purity of gold or the Bureau of Indian Standards (BIS) Hallmark. Gold buying is not as easy as it was in the times gone by. • Fear of theft and, hence, need for proper storage space and possibly insurance. • Your selling price will always be lower than the market price. • Most physical transactions of gold happen in cash. Customers try to avoid VAT (value-added tax) (1%) by paying cash or black money is used to purchase gold. Gold sales are also transacted in cash to avoid paying capital gains tax. It’s hard to justify the money if there is an income-tax audit or a cross-check of an entity’s books. Huge cash deposits or withdrawal from bank accounts are subject to questioning. Insist on taking receipt for gold purchase after paying VAT and pay capital gains on profits to avoid getting caught (even if you buy and sell in cash). In case you are cheated by a jeweller, you cannot file a complaint without a receipt. Impurities Iridium or ruthenium may be embedded in what you call ‘gold’. On an average, a piece of jewellery or a bar of gold contains nearly 5%-6% of the impurity. Even as late as in 2006, there were few checks for iridium or ruthenium impurities. Neither the traditional approach
of rubbing on a touchstone nor the X-ray fluorescence (XRF) machines for testing gold purity detected these impurities. There was extensive adulteration at that time and the damage has already been done. BIS issued a circular to all hallmarking centres to re-calibrate their XRF machines to look for iridium and ruthenium. Hallmarked gold sold between 2001 and 2006 could be of spurious quality. The worry is that new cheaper impurity may replace those. Less than half of the gold sold in India is hallmarked. In small towns and villages that consume two-thirds of India’s gold, hallmarking is absent. Moneylife spoke to a few jewellers on 100-gram Swiss bullion (99.9% pure), which revealed that the market has spurious bullion too. Whenever this writer went to sell gold in the past, jewellers would invariably say: “Market is volatile; we can pay only so much.” The spread between the price they sell to you and buy back from you is very wide, to protect their profits. Small jewellers will offer better prices for your gold, but they are only intermediaries as they sell it to dealers immediately. If the amount is high, the payment may get delayed. Also, your gold is subject to their testing by a machine or any other way. Both of these carry risks for you. If you possess physical gold, hold on to it, unless you need cash for emergencies. If you need physical gold for goals in life (totalling less than 5%-10% of your assets), buy physical certified/hallmarked gold with a receipt. If you are an investor, use other options as detailed below. Gold ETFs Why go for it? • Easy to buy and sell, provided volumes are high (this is true mainly of Gold Benchmark Exchange Traded Scheme). • There is no wealth tax and, hence, this option is a good one for high net-worth individuals (HNIs). Why not? • The expense ratio of 1%-1.5% is high when gold does not move much (the last decade was an exception). • You cannot get physical gold. • Price spreads are high and liquidity is low. After record ``
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volumes in recent months, volumes in gold ETFs seem to have nosedived in February 2011 to 50,000 units compared with the last six months’ average of over 106,000 units a day. • Gold ETFs will not appeal to those interested in gold as a status symbol. There are worries—unfounded, as yet—whether gold ETFs have enough gold backing them. Gold ETFs are backed by gold which is kept with a custodian of repute. Recently, SEBI has made it mandatory for auditors of gold ETF schemes to physically verify the gold which gives a reasonable assurance to investors that gold ETFs are backed by physical gold. NSEL’s e-Gold/e-Silver Why go for it? • It’s the only way to buy non-physical silver. • There used to be annual recurring expenses, but these have been removed. • Remat to physical gold is allowed after paying VAT, delivery charges and making charges. • Price is transparent and liquidity more than gold ETFs. Why not? • Wealth tax is an issue for HNIs. You will also have to pay wealth tax of 1% (on amounts over Rs30 lakh) if the total value of your taxable wealth (together with the market value of e-Gold) exceeds Rs30 lakh. • The exchange is new (started 17 March 2010) and hence the track record is not that long. Also, a grievance redressal mechanism may not be in place. • You need a new demat account. Launched a year ago by the National Spot Exchange, (NSEL) e-Gold had annual recurring expenses of 0.40% and storage charges of Rs0.60/unit/month for holding in demat form. Towards the end of the year, players did away with all the charges. It’s great news for customers, especially for big players who don’t have to spend anything on storage or any annual charge that could be hefty for large customer holdings. The question is: How will the NSEL manage all the expenses—especially for storage and insurance? Brinks Arya, the designated vaulting agency, is fully insured. At any given point of time, e-Gold units are fully backed by an equivalent quantity of gold kept with its vaulting agency. If an individual wants to take physical delivery of e-Gold units, she can take it in multiples of 8gm, 10gm,
100gm and 1kg. To start with, the Exchange has delivery centres at Ahmedabad, Delhi and Mumbai. There are plans to open delivery centres in other cities. NSEL is in talks with over 100 jewellers across the country to facilitate conversion of e-Gold and e-Silver in demat form directly into jewellery items. Anjani Sinha, managing director and CEO of NSEL, told Moneylife: “A number of jewellers have evinced interest in this facility. The registration process is on, and will be completed with over 100 empanelled jewellers spread across the country, by the end of the current financial year.” This move would benefit small customers immensely in terms of savings in gold and silver jewellery, as such investors preferred jewellery items to coins and bars. Mr Sinha, however, cautioned that the Exchange would not guarantee purity and making charges (the fee for converting a gold item into jewellery), as these fell beyond its purview. Making charges vary depending on jewellery design and trends. Therefore, that has to be negotiated by clients with the jewellers. Gold Fund of Funds Why go for it? • No demat needed. This is an advantage for small investors who don’t want to be bothered by demat accounts and associated charges. • You can use SIP for smaller amounts. Why not? • The charges will be higher than gold ETFs (in some cases) or e-Gold. • The Reliance scheme has 2% exit-load for redemption within one year. The Kotak scheme has 2% exit-load for redemption before six months; 1% after six months and before one year. Reliance Mutual Fund has so far collected Rs500 crore from 200,000 investors under its gold FoF. Those who don’t invest in equities and, hence, avoid opening demat accounts may buy into this scheme. The convenience of SIP and small investment opportunity is another lure for retail customers. Will gold FoFs or even gold ETFs be beneficial for someone accumulating gold for life goals like a child’s marriage? When there is need for physical gold, there is no remat. The customer has to sell her gold FoF/ ETF holdings and then go out to buy gold. There will be short/ long term tax that will eat into the amount of gold you can buy for meeting your goal. If, on the other ``
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The return is 15% on your scaled investment in the Golden Harvest Savings Scheme of Tanishq. There is no tax and no KYC but there are serious limitations ` hand, you purchase physical gold by creating your own
SIP, there is no tax incidence, assuming that the gold is retained after your child’s marriage. The e-Gold remat feature also offers a similar advantage. SBI Gold Deposit Scheme If you have physical gold and wish to earn interest on it you can deposit it in the Gold Deposit Scheme (GDS) of the State Bank of India (SBI) or jeweller schemes. You will get more gold back than your deposit if you leave it with them for a fixed duration. Also, if gold value increases over the period, your gold becomes more valuable at the end of the term. Why go for it? • The interest on this deposit is tax-free. Also, there is no wealth tax for the duration of deposit which is beneficial for HNIs. • You don’t have to worry about safety. The gold will become part of the Indian Mint for the duration of deposit. • There is no worry of default as SBI deposits in the Indian Mint can be trusted. Why not? • The minimum amount is 500gm and may be out of reach for the common man. The main depositors are temple trusts. • The interest rate for a three-year deposit is 1%, for four years it is 1.25% and, for a five-year tenure, it is 1.5%. It’s not great. • You will not get your jewellery back in the same form. SBI melts the deposited gold to check the purity and then converts it into bars. Depending on the results, SBI sends a gold deposit certificate within 90 days. The Bank bears all expenses associated with this process. The gold is returned in bar/bullion or equivalent cash. If you deposit in bar or bullion, the Scheme is more beneficial. There could still be a small loss according to the weight evaluation as per the Indian Mint. • Withdrawal before three years attracts a 0.5% penalty. Jeweller Gold Deposit Schemes Why go for it? • High interest of 7.5% offered by jewellers.
• Tiny amounts of gold can be deposited. • No worry about safe keeping. Why not? • The schemes are unregulated. If the jeweller shuts shop, you cannot turn to anyone for help. • You will not get your jewellery back in the same form. Gold is melted and reused. There will be some difference in weight calculation in the process. If you deposit in coin or bullion, the scheme is more beneficial as you can expect to get the full weight credited. Gold Purchase in Instalments Tanishq of Titan Industries has the ‘11+1 Plan’ under the Golden Harvest Savings Scheme. According to the Plan you pay in instalments for a fixed duration (11 months) and the jeweller will pay the last instalment. With this amount, you can buy gold anywhere in India from any Tanishq showroom at the end of the year. Why go for it? • The return works out to over 15% on your scaled investment in the 11+1 Plan of the Scheme. According to the Tanishq website, over 3.5 lakh customers have invested in this Scheme. • No tax deducted as there is no interest involved. No hassles like Know Your Customer (KYC) norms. Why not? • Doing it with Tanishq is fine but these schemes are unregulated. If your jeweller shuts shop, you cannot turn to anyone for help. • You cannot buy gold coins/bars, silver coins and solitaires under the Golden Harvest scheme. You can only buy their jewellery, which normally carries a 12% to 20% making charge and wastage. You are buying it at a rate that is prevailing at the time of buying. So, if you believe gold prices are going to rise, you are better off with gold ETFs or e-Gold. This is a complete summary of the different options to buy gold. The problems with gold are impurity and security. Also, despite all the regulations, no investment vehicles like gold ETFs, e-Gold, gold FoF or physical gold can be scam-proof or assured to be free of any impurities in the underlying gold. E-Gold looks like the best option today. It is cheaper, easy to buy and lets you get physical gold without any hassles of storage.
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One in five don’t know how to invest in gold
ur readers are aware of gold as an investment but don’t know the best option. We conducted a survey of our readers on different gold investment options. We received 1,064 responses. Our survey on gold tells us that two out of three
1. Do you buy gold regularly?
4. Will you deposit your gold in such a scheme?
Yes-21% One out of three respondents buys gold regularly.
Almost 50% of the respondents will not deposit their gold in Gold Deposit Scheme of SBI.
5. Do you invest in gold deposit schemes offered by wellknown jewellers?
No-46% Can’t Say-33%
2. Do you buy gold as:
respondents believe that gold prices will continue to rise over the next year. Only one in three invests in gold regularly. Half of the respondents buy gold in jewellery form which means they are consumers rather than investors. One in three is aware of the SBI Gold Deposit Scheme and one in five will actually deposit gold in such a Scheme. This is remarkable because SBI had withdrawn this Scheme in the past due to poor response. It may be that people are interested in GDS today due to security of gold storage as well as trust in SBI or the Indian Mint. Only one in ten invests in gold deposit schemes offered by jewellers, even though the interest offered by jewellers ``
Only 10% invest in gold deposit schemes offered by well-known jewellers.
6. Do you invest in unregulated gold deposit schemes of jewellers because:
100 0 Investment
None of the above
Almost half of the respondents (46.85%) buy gold as jewellery.
3. Are you aware of the Gold Deposit Scheme of SBI?
Two-thirds of respondents are unaware of Gold Deposit Scheme of SBI.
They are safer-2% Earn higher returns-2% Both-5% Don’t invest with jewellers-91% High returns and safety are considered equally important. 7. Are you aware of jewellery purchase schemes offered by major jewellers such as Titan?
Surprisingly, 55% of respondents are unaware of jewellery purchase schemes offered by major jewellers.
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` is much more than the interest offered in the SBI Gold
Deposit Scheme. Those investing in gold deposit schemes offered by jewellers do so for higher returns; they also feel that it is safe. Both the reasons have been given equal importance. Almost half of the respondents are aware of jewellery purchase schemes offered by jewellers such as Tanishq (Titan), but surprisingly only 15% will invest in such schemes and it is more because of ease of payment rather than better returns or tax savings. However, there is one factor that comes as a relief to us because majority of respondents are playing safe when buying physical gold—85% of respondents look for hallmarked (certification of purity) when buying gold bars or jewellery. 8. Do you look for hallmarked (certification of purity) gold when you invest in gold bars/jewellery?
13. Do you know about e-Gold?
85% of respondents look for hallmarked (certification of purity) gold when they invest in gold.
9. Do you invest in gold exchange traded funds (ETFs)?
Almost half the respondents invest in gold ETFs; 48% of respondents feel that it is the same as buying physical gold in demat form and 47% of respondents feel that it is not more expensive than buying physical gold. Gold ETFs have found its place with investors who do not think it is more expensive or different from physical gold in demat form and the same number are aware of a market regulator for these schemes. Only one in three know about e-Gold. About 38% of respondents are aware of charges for the Reliance Gold Savings Fund. According to the respondents, the best options were: gold ETFs (36%); physical gold (28%); e-Gold (13%); none (3%) and a whopping one in five don’t know. This is the reason for our ‘Cover Story’.
More than half of the respondents (55%) don’t invest in gold ETFs.
Only one in three respondents knows about e-Gold.
14. Which is a better investment option?
450 400 350
10. Do you think buying gold ETFs is the same as buying physical gold in demat form?
Yes-48% No-36% Not applicable-16%
Almost 50% of respondents think buying gold ETFs is the same as buying physical gold in demat form.
11. Do you think gold ETFs charge more (in commission & costs) and are these more expensive than buying physical gold?
Yes-32% No-47% Not applicable-21%
32% of respondents think that buying gold ETFs is more expensive than buying physical gold.
12. Do you know who is the market regulator for gold ETFs?
Shockingly, 55% of respondents don’t know who is the market regulator for gold ETFs.
50 0 Physical gold
36% of respondents consider gold ETFs as the best option, beating physical gold. 15. Are you aware of the charges for the Reliance Gold Savings Fund?
Only 38% of respondents are aware of the charges for the Reliance Gold Savings Fund.
16. Do you expect gold prices to continue to rise over the next year?
Yes-66% No-10% Can’t Say-24%
Two out of three respondents hope that gold prices would continue to rise.
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GREAVES CO TTO N
Powerful Engine With a strong presence in engines, Greaves has bucked the downtrend in the capital goods sector
e had written about Greaves Cotton (GCL) in Moneylife (issue dated 14 January 2010). At that point, we had recommended buying the stock at around Rs46. Currently, the stock is trading at around Rs84. It may be worth looking at again. GCL has five business divisions: automotive, agricultural equipment, construction equipment, auxiliary power and industrial engines. The company has a specialised division for marketing high-technology marine systems and various aviation and electronic applications. Its competitors include Cummins India, Atlas Copco India, Kirloskar Brothers, Swaraj Engines and Wartsila India. The automotive division manufactures and markets automotive engines for Piaggio, Mahindra & Mahindra and Tata Motors, among others. The agricultural equipment division manufactures lightweight and portable petrol/kerosene engines and assembles pumps at its facility in Gummidipoondi (Tamil Nadu). GCL also manufactures a wide range of implements such as diesel pump-sets, power tillers and mini-agro equipment to enhance farm productivity. These engines are popular for agriculture applications like power sprayer, pump-sets and power reapers. GCL is expected to benefit from the increased focus on irrigation projects and agriculture, apart from the rising demand for its gensets, because India’s power deficit is nowhere close to being bridged. It also continues to benefit from increased government spending on subsidy given to farmers for purchase of agriculture equipment. The industrial engines division makes fuel-efficient engines used in marine, agricultural equipment, fire fighting pump-sets, ``
tio n St or ies of Pr ice Ma nip ula Bafna Spinning Mills & Exports (Rs2) Incorporated in February 1990, Bafna Spinning Mills & Exports produces cotton yarn mainly for exports. Its entire production is tied up with companies in the UK and Indonesia. The company’s shares plunged 68% to Rs1.69 a piece on 9 March 2011 from Rs5.31 per share on 8 October 2010. Revenues in the June 2010 quarter were Rs16 lakh while operating profit was (Rs)
Bafna Spinning Mills & Exports 5
4 3 1 0 Sept-10
Rs7 lakh. In the September 2010 quarter, operating profit increased to Rs11 lakh on revenues of Rs16 lakh. However, financials in the December 2010 quarter contracted to the levels of the June quarter; revenues were Rs15 lakh and operating profit was Rs7 lakh. With the share price at such low levels and absurd financials, it is high time the regulators took notice of the company’s scrip movement.
Recommended Price Rs276
MONEYLIFE STOCK IDEAS
Moneylife Issue 25 March 2010
Exit Price Rs300
(Stop Profit triggered on 4 May 2010)
(NAGARJUNA AGRICHEM )
* Annualised returns
MONEYLIFE | 7 April 2011 | 40
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STOCKS STREET BEAT
Unbiased & Methodical Stock Picking that Works!
` mining & construction, material handling (cranes, forklifts), rail
cars, road sweepers, etc. The auxiliary power division manufactures diesel engines used in retail outlets, commercial complexes, hotels, hospitals, small and medium enterprises, etc. Engines contribute 85% to the company’s topline; the rest comes from construction equipment like concrete mixers and concrete pumps. Auto engines constitute over half of the Jun-10 Sept-10 Dec-10 company’s turnover. The construction equipment Sales* 347.70 378.39 419.22 division manufactures OP* 45.43 59.86 71.29 equipment like transit Y-o-Y Sales Growth 45% 27% 22% mixers, concrete pumps, Y-o-Y OP Growth 79% 35% 22% batching plants, among OPM 13% 16% 17% others, used in power projects, ports, roads, high OP: Operating Profit, Y-o-Y: Year-on-Year, OPM: Operating Profit Margin *Figures in Rs crore rise buildings, bridges, etc. GCL has two overseas Heavy Machine offices in the UK and (Rs) China and one subsidiary 100 company in Germany. For the financial 95 year ended June 2010, GCL’s standalone net 90 profit stood at Rs117.97 crore compared to Rs56 85 crore in the financial Greaves Cotton 80 year ended June 2009, Oct-10 Dec-10 Mar-11 an increase of almost 110%. During the same period, the company’s standalone total revenue increased 29.43% to Rs1,347.21 crore from Rs1,040.80 crore. In FY0910, the company’s revenues from the engine segment stood at Rs1,144.07 crore compared to Rs867.87 crore in FY08-09. In ``
tio n St or ies of Pr ice Ma nip ula Pithampur Steels s (Rs8) Pithampur Steels (now Nardhana Infrastructure), is into infrastructure and realty. In the year ended March 2010, the auditors had mentioned that the firm does not have an internal audit system commensurate with the size and nature of business. Its financials in the past three quarters were abysmal. Revenues in the June 2010 quarter were Rs6.20 crore and (Rs)
Pithampur Steels 35
operating profit was Rs2 lakh. Operating profit in the next quarter was the same (Rs2 lakh); revenues were Rs16.21 crore. Financials in the December 2010 quarter worsened. It recorded an operating loss of Rs34 lakh while its revenues fell marginally to Rs15.10 crore. With no proper audit system in place and absurd financials, the stock plunged 83% in the period between 11 May 2010 and 11 March 2011.
Recommended Price Rs47
MONEYLIFE STOCK IDEAS
Moneylife Issue 20 May 2010
Exit Price Rs66
(Stop Profit triggered on 25 November 2010)
* Annualised returns
41 | 7 April 2011 | MONEYLIFE
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STOCKS STREET BEAT
` the same period, the company’s
infrastructure equipment segment’s revenues increased to Rs146.88 crore from Rs126.35 crore. In the December 2010 quarter, GCL’s net profit stood at Rs44.35 crore compared to Rs32.69 crore in the corresponding quarter last year, a growth of around 36%. Net revenues rose 21.79% to Rs419.22 crore from Rs344.20 crore in the corresponding quarter last year. During the same period, sales from the engine segment increased to
Greaves Cotton has a strong balance sheet with almost zero debt Rs350.39 crore from Rs295.52 crore, while its infrastructure equipment segment’s revenues rose to Rs48.34 crore from Rs36.04 crore. GCL, which has a strong balance sheet with almost zero debt, is well equipped to undertake future growth opportunities as well. However, the company faces the risk of high prices of input commodities, although it has been able to pass on price hikes to OEMs (original equipment manufacturers). In February 2011, GCL signed a five-year agreement with Mahindra & Mahindra for supply
Unbiased & Methodical Stock Picking that Works!
of single-cylinder engines for their three-wheelers. According to the agreement, GCL will be the single source supplier for 100% needs of M&M for their three-wheelers. The company plans to build a new engine manufacturing plant at Aurangabad (Maharashtra) with an investment of Rs100 crore to meet the growing demand for engines. The company’s average growth in revenues and operating profit over the past five quarters has been 36% and 84%, respectively. Its average operating margin is 16% and return on net worth is 27%. Its market-cap to revenues is 1.24, while its market-cap to operating profit is 7.28 times. The stock has a rich dividend yield of 4.11%, while its price to earning ratio is 17.60. Buy the stock at around Rs75.
GU J A R A T S T A T E P E T R O N E T
In the Pipeline Natural gas will fuel vital sectors of India’s economy. And GSPL is well poised to tap into this sector
e had written about Gujarat State Petronet Ltd (GSPL) in our ‘Cover Story’ (Moneylife, 19 November 2009). At that time, the stock was trading at around Rs79. (Currently, the stock price is
around Rs96). The stock may be worth looking at again. GSPL, a subsidiary of Gujarat State Petroleum Corporation, has taken a lead in developing energy transportation infrastructure in Gujarat and connecting major natural gas supply sources and markets with healthy demand. It is the first company in India to transport natural gas on an open access basis and is a pure natural gas transmission company. GSPL wants to develop a seamless pipeline network across Gujarat, connecting various suppliers and users. The supply chain of natural gas includes traders, producers and LNG terminals; and end-users are industries (such as power, fertilisers, steel, chemical plants) and local distribution companies. GSPL has 1,573km of gas pipeline in operation in the Hazira-Vadodara-AhmedabadKalol-Himmatnagar-MehsanaRajkot-Morbi-Anjar-Jamnagar corridor, which transports over 35 million metric standard cubic metres per day (mmscmd) of gas and has 450km of gas pipeline under execution. Total operational length of its pipeline project as on 1 January 2011 was 1,692km. In 2009, India was the world’s fourth largest consumer of energy, after the US, China, and Russia. But India’s consumption of energy, on a per capita basis in that year, was ``
Recommended Price Rs51
MONEYLIFE STOCK IDEAS
Moneylife Issue 12 March 2009
Exit Price Rs71
(Stop Profit triggered on 23 June 2009)
(IL&FS ENGG & CONSTRUCTION)
* Annualised returns
MONEYLIFE | 7 April 2011 | 42
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STOCKS STREET BEAT
` one of the lowest in the world,
according to a report by CRISIL Risk & Infrastructure Solutions. Over the past few years, demand for energy has risen in India along with India’s economic
Y-o-Y Sales Growth
Y-o-Y OP Growth
OP: Operating Profit, Y-o-Y: Year-on-Year, OPM: Operating Profit Margin *Figures in Rs crore
Strong Network (Rs)
Gujarat State Petronet 120 110 100 90 Oct-10
growth. Gas is currently not a very important fuel in India’s overall energy mix. However, gas consumption is expected to grow at 4.2% per year on an average from 2006 to 2030. The Indian natural gas market is relatively underdeveloped. By fiscal 2024-
Unbiased & Methodical Stock Picking that Works!
25, the share of natural gas could increase to 20% of total primary energy consumption, according to Hydrocarbon Vision 2025. The main factors for increase in gas consumption are expected to be macro-economic conditions and policies, price and availability of alternative fuels, expansion of gas-related infrastructure, development of policies in respect of carbon emissions, identification of new uses of gas, programmes for the implementation of city gas distribution networks and the fastevolving regulatory environment. It is expected that natural gas will continue to play a predominant role in sectors like power generation, fertiliser, compressed natural gas (CNG) & piped natural gas (PNG) distribution, refineries, commercial segments and in almost all industrial sectors. Overall demand in India for gas is projected to increase from 209.6 mmscmd in FY09-10 to 343.5mmscmd in FY14-15 and 464.4mmscmd in FY22-23. Demand for gas in Gujarat is projected to grow from 85.4mmscmd in the fiscal ended March 2010 to 122mmscmd in the financial year ending March 2015. Currently, the state has the most developed natural gas market in India. It not only has competing natural gas suppliers but also competing pipeline network operators. Rapid industrialisation, proximity to supply sources and developed natural gas transportation infrastructure have resulted in Gujarat emerging as the largest natural gas consuming state in the country; more than
35% of India’s total natural gas is consumed in Gujarat. GSPL intends to expand its grid to 2,200km reaching all the 25 districts of Gujarat, thereby enabling companies to gain the benefits of an environmentfriendly fuel. GSPL recorded a 4% revenue growth in the December 2010 quarter at Rs279.52 crore, up from Rs268.49 crore in the corresponding quarter of the previous year. Operating profit for the third quarter of the current fiscal also rose by 4% to Rs262.31 crore compared to Rs253.05 crore in the year-ago period. Operating profit margin in the third quarter was 94%, marginally up from 92% in the previous quarter. GSPL’s average revenue and operating profit growth in the
GSPL is the first company in India to transport natural gas on an open access basis and is a pure natural gas transmission company past five quarters was an excellent 51% and 58%, respectively. Based on the annualised results for the December 2010 quarter, its marketcap to revenues was 5.03 times and market-cap to operating profit was 5.36 times. Return on net worth for the financial year ended 31 March 2010 was 26%. It declared a dividend of 10% for the last fiscal. The stock is worth buying at around Rs85.
Disclaimer: Street Beat stocks are selected from over 1300 stocks in the Moneylife database. This report is for informational purpose only. None of the stock information, data and company information presented herein constitutes a recommendation or a solicitation of any offer to buy or sell any securities. Information presented is general information that does not take into account your individual circumstances, financial situation or needs; nor does it present a personalised recommendation to you. Individual stocks presented may not be suitable for you. Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and the information may be incomplete or condensed. All opinions and estimates constitute our judgement as on the date of the report and are subject to change without notice. Past performance is no indication of future results. Investors must do their own research before acting on them. Exit Strategy: Please exit if the stock closes 9% below the purchase price. This is called stop loss. However, if the market price is running above the purchase price, exit if the stock falls by 20% from the highest daily closing price. This is called stop profit. Source: Centre for Monitoring Indian Economy’s Prowess database.
43 | 7 April 2011 | MONEYLIFE
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STREET BEAT WHICH WAY
rally. Stocks ride on three factors: earnings, liquidity and sentiment. Earnings have not been bad at all for the December 2010 quarter and, despite dire Sideways movement may not be limited to predictions by analysts for the March 2011 quarter, advance tax payments have been excellent. Money had weeks but years gone out of the market in January and March this year and it would take a fresh round of terrible local news nother two weeks are over and the Sensex and for another large exodus. In any case, around 16,000, the Nifty have remained where they were. This the Sensex would look inexpensive. is symbolic of things to come. Two weeks ago, That takes us to what’s driving the market over the the Sensex was at 18,486 and the Nifty was at 5,538. short term—the third factor, that is, sentiment. As you At the time of writing, the Nifty is at 5,450 and the can see, we are in a narrow trading zone. The market Sensex is at 18,200. The market has been stuck in this would rise when feeling relieved of a domestic or a range from the week ending 4th February. Volatility is global issue and fall when something adverse appears low, volumes are down and there is no sign of a clear on the horizon. For four months now, there has been direction. only adverse news—starting with the scams and In the previous issue, I had suggested that after then high oil prices and now Japan. All that has been a small move up, the market would either run out of factored into the current price. steam and become languid or Now, all we need is a slight bit of start dropping sharply. Stocks The market is fully positive news for this market to have chosen to remain listless. valued and will move up rally 5% or so. Or, all we need is Foreign investors are putting no negatives for a few days in money into India in drips and with earnings and down a row. that has kept the market from with bad news—all in a Longer term, however, declining. Interestingly, while we 2,000-point range on the the market will have to find are unable to head higher, we Sensex. It may resemble equilibrium between earnings seem to be immune to bad news the years 1994-98 and valuation. If the March quarter too. When there was mayhem earnings are robust (around 18%in the global financial markets 20%), we will have a rally. If the in the aftermath of Japan’s results are just about OK (around 15%), we disaster, Indian stocks were will see the market selling off to a resilient. On Monday, 14th level of 16,000 on the Sensex and March, stocks rose sharply. On 4,800 on the Nifty. In any case, in the Tuesday, the market came back absence of dire economic news, we from a huge downward opening are in for years of sideways movement. gap. Tighter credit policy on The market is fully valued and will move up with Thursday, 17th March made only a earnings and down with bad news—all in small dent on the market. Does this a 2,000-point range on the Sensex. It may mean that the market is forming a Medium-term: — resemble the years 1994-98. base to leap higher? Long-term: — (Feedback at firstname.lastname@example.org) It could well be that we have a quick
investment that is
not subject to market risks
Attractive gifts, invitation for events and free online help. For a subscription offer that is unique, look for a form elsewhere in this issue or on our website at www.moneylife.in
MONEYLIFE | 7 April 2011 | 44
Which way.indd 1
3/17/2011 9:52:07 PM
Compounded Annual Return
EID Parry surged 6% while Shriram Transport Finance tumbled 10% and Shree Renuka Sugars declined 7% Gainers: The Indian direct-to-home (DTH) market is penetrating households at a fast pace according to the latest report from research and analytics firm, RNCOS. DTH subscribers in India are expected to grow at a compounded annual growth rate (CAGR) of around 14% during 2011-2013. Based on this optimism, Dish TV India gained 4% in the fortnight. Watch and jewellerymaker Titan Industries’ capital expenditure for the next financial year is likely to be around Rs100 crore part of which will be used for expansion and maintenance of the stores it currently owns. Titan Industries had 646 stores in operation across India as of February-end. Less than 15% of the stores are company-owned; the rest are franchisees. Titan Industries rose 3% in the fortnight. Prices of 62 drugs, mainly used for treating diabetes and tuberculosis, have been raised, while the rates of 14 other medicines have been reduced by the National Pharmaceutical Pricing Authority (NPPA). But the drug pricing regulator has left prices of 21 drugs unchanged after a fresh review of the pricing of key medicines at its meeting held recently. The NPPA, which considered the rates of 19 drugs for the first time, reviewed the prices of drugs used in the treatment of diabetes, allergy, malaria, diarrhoea, asthma and hypertension as well as some antiseptics. Cadila Healthcare ended flat. EID Parry surged 6% in the fortnight. Bank of Baroda advanced 3%, while Bank of India rose 1% in the fortnight. Losers: Shriram Transport Finance Company is likely to borrow Rs3,000 crore to expand lending. It plans to
increase its equipment financing business and boost assets under management to Rs5,000 crore by the end of March 2013 from the current level of around Rs300 crore. The stock tumbled 10% in the fortnight. Contrasting views between the food ministry and agriculture ministry over the production and yield numbers are holding up the export of 500,000 tonnes of sugar under the open general licence (OGL), despite the industry pressing for it. The food ministry has sought a clarity on the sugarcane production and yield numbers before allowing exports, while the agriculture ministry wants exports to be allowed. Shree Renuka Sugars declined 7% in the fortnight. Global iron ore prices are expected to fall in the near term due to oversupply following the devastating earthquake in Japan on 11th March. Goldman Sachs forecast modest 4% oversupply in the traded (seaborne) market in 2013, growing to a surplus of 147 million tonnes (12%) in 2014. Sesa Goa fell 5%. Home, auto and corporate loans are likely to become more expensive in the next fiscal, following the Reserve Bank of India’s decision to raise key policy rates by 25 basis points on 17th March. The short-term lending (repo) rate now stands at 6.75% and the borrowing (reverse repo) rate at 5.75%. HDFC declined 3%.
Note: Please read our changed methodology for grading stocks (given below). We have also added a column showing returns since the stock’s appearance in the table. Returns from new stocks added are counted after one issue.
Dish TV India
Shree Renuka Sugars
Bank of Baroda
Bank of India
Oracle Financial Serv
Methodology: Momentum Stockgrader is a fortnightly ranking of stocks, based on two key factors that drive stocks—one, market-related or quantitative and, two, fundamental. The quantitative factor is the relative strength (RS), which is a stock’s relative outperformance during the past 10 weeks over select companies. For arriving at fundamental grades, we have used only operating profit growth and sales growth over three quarters. For momentum stocks, RS carries a higher weightage. Focus only on stocks with final grade A. When we include a stock in the grader, it is based on the fortnightly closing price of the scrip that coincides with our issue and that would be the entry price. Similarly, when we drop a stock from the grader, it is based on the closing price on Friday, as we go to print.
45 | 7 April 2011 | MONEYLIFE
3/17/2011 9:57:28 PM
STOCKGRADER MEDIUM TERM
Compounded Annual Return
Ipca Labs rose 5% and Nestlé gained 1% while TCS declined 2% and Infosys fell 1% Gainers: Ipca Laboratories’s new formulations manufacturing unit at a special economic zone in Indore has received the UK health regulator’s approval for good manufacturing practices. The stock rose 5% over the fortnight. Nestlé India has chosen Himachal Pradesh for its ninth manufacturing facility (for chocolates & noodles) in the country, with proposed investment between Rs400 crore-Rs500 crore. The FMCG major also plans to add capacity to its existing units in Punjab, Haryana, Goa and Karnataka, and set up a new R&D facility in Haryana. The company had budgeted investments of Rs1,800 crore over the next three years. Nestlé gained 1%. Siemens Healthcare Diagnostics has merged (the business and undertaking) with Siemens with effect from 14th March. The parent company Siemens rose 2%. Losers: Around 350 Japanese-based expats of Infosys, India’s second-largest software services exporter, are returning to India. Infosys fell 1% over the fortnight. HCL Technologies said that its employees ‘were safe’. The stock ended flat. Tata Consultancy Services Company
(TCS), India’s largest computer-services business, is ready to bring its Indian employees in Japan back home and move its Japanese staff and their families to safer locations. TCS has also signed a multi-year and multi-million dollar IT infrastructure deal with Dutch technical consultancy firm Royal Haskoning to support international growth. The project covers end-to-end IT infrastructure services, to be provided from TCS’ global delivery centres in the Netherlands, Hungary and India. However, the scrip fell 2%. Jain Irrigation Systems may launch its qualified institutional placement soon. The company has an enabling resolution to raise funds by selling 3.31 crore shares and has 61 lakh warrants that the promoters can convert at Rs228.15 per share. It is targeting Rs700 crore from the proposed issue. Jain Irrigation too fell 2%. Note: Please read our changed methodology for grading stocks (given below). We have also added a column showing returns since the stock’s appearance in the table. Returns from new stocks added are counted after one issue.
Bank of Baroda
Shree Renuka Sugars
Jain Irrigation Sys
Dr Reddy’s Lab
Oracle Financial Serv
Whirlpool of India
Methodology: Medium Term Stockgrader is a fortnightly ranking of stocks, based on two key factors that drive stocks – one, market-related or quantitative and, two, fundamental. The quantitative factor is the relative strength (RS), which is a stock’s relative outperformance during the past 26 weeks over select companies. Our grading methodology of fundamental factors includes two key scores, growth score (GS) and value score (VS), carrying equal weightage. We then combine the RS grade and fundamental grades. Focus only on stocks with final grade A. When we include a stock in the grader, it is based on the fortnightly closing price of the scrip that coincides with our issue and that would be the entry price. Similarly, when we drop a stock from the grader, it is based on the closing price on Friday, as we go to print.
MONEYLIFE | 7 April 2011 | 46
Medium Term.indd 2
3/17/2011 9:56:12 PM
STOCKGRADER LONG TERM
Compounded Annual Return
Orchid rose 8%, while Karur Vysya Bank and Hindustan Unilever declined 6% each Gainers: The minister of state for commerce and industry, Jyotiraditya Scindia, in a written reply to the Lok Sabha on 14th March, has said that the government will protect the interests of the domestic drug industry while finalising the free trade pact agreement with the European Union (EU). India has been opposing a TRIPS (Trade-Related Aspects of Intellectual Property Rights) Agreement in any bilateral free-trade pact, as the move could render a lot of generic medicines and software illegal. Orchid Chemicals & Pharmaceuticals and Ranbaxy Laboratories rose 8% and 4%, respectively in the fortnight. Volatility in prices of crude-oil-based products has led paint manufacturers to revise prices. In FY10-11, Asian Paints has revised prices five times across different categories of paints. Asian Paints ended 2% up. Bengaluru-based Canara Bank is at an advanced stage of getting licences to expand its business in Qatar, Johannesburg and Frankfurt. The Bank is also planning to expand its operations in Nairobi and Nigeria. Canara Company
Bank rose 4% in the fortnight. During the second week of March, Adani Enterprises (formerly known as Adani Exports) bought its first cargo of Russian coal. Adani Enterprises ended flat. Power Grid Corporation of India also ended flat in the fortnight. Losers: Karur Vysya Bank (KVB) may increase the ceiling of foreign investors’ holdings in the equity of the Bank from 24% to 35%. KVB declined 6% in the fortnight. Hindustan Unilever (HUL) is planning to set up a ‘customer innovation’ centre in Mumbai. HUL fell 6%. Lupin’s Japanese unit Kyowa Yakuhin will donate ¥10 million to the Japanese Red Cross. Kyowa Yakuhin’s plant has remained unaffected by natural disaster; all 355 personnel are safe. Lupin fell 1%. Cigarette and consumer goods maker ITC Ltd also declined 1%. Note: Please read our changed methodology for grading stocks (given below). We have also added a column showing returns since the stock’s appearance in the table. Returns from new stocks added are counted after one issue.
Dr Reddy’s Lab
Karur Vysya Bank
Shree Renuka Sugars
Bank of Baroda
Jain Irrigation Sys
Power Grid Corp
Oracle Financial Serv
Methodology: Long Term Stockgrader is a fortnightly ranking of stocks, based on two key factors that drive stocks: one, market-related or quantitative and, two, fundamental. The quantitative factor is the relative strength (RS), which is a stock’s relative outperformance during the past 26 weeks over select companies. The fundamental factor includes growth score (GS) and value score (VS). GS is based on operating profit growth and sales growth. VS is calculated considering market-cap as a multiple of five quarters of average sales and operating profit, as well as latest Return on Net Worth (RoNW). The long-term list carries more large-cap stocks. Focus only on stocks with final grade A. When we include a stock in the grader, it is based on the fortnightly closing price of the scrip that coincides with our issue and that would be the entry price. Similarly, when we drop a stock from the grader, it is based on the closing price on Friday, as we go to print.
47 | 7 April 2011 | MONEYLIFE
Long Term.indd 2
3/17/2011 9:55:42 PM
“You Can’t Time the Market.” Maybe.
18-31 Jan ‘08
12-25 Oct ‘07
It is easy to describe market moves. It is hard to predict them which is why fund managers tell you that you cannot time the market. You will get vivid descriptions of the past everyday from business channels and the next day from newspapers. You will get sensible and occasional predictions “Time for a Break?” from only one source. You know what’s more valuable 2-16 Aug ‘07
“The huge over-speculation... should now lead to some painful correction...” 6 -19 Jun ‘08 9-22 Nov ‘07
17-31 Jul ‘08
15 Feb-1 Mar ‘07
“Time to Go Neutral” “The market may correct “We don’t have a forecast” 10%-15% before the next move up” “If the government moves to slay the monster of inflation, stocks will suffer collateral damage”
23 Apr-7 May ‘06
“A new downleg ma start soon”
28 Mar-10 Apr ‘08
31 Aug-13 Sept ‘07 13,550
“Is the market due for a fall?”
“A short-term bottom may be very near”
16-29 Mar ‘07
“A Rally Now?”
“ 4-17 August ‘06
“The panic looks done for now”
Sensex “Might the markets be ready to surprise us on the upside?” “Expect another leg of stock market rally”
We have no compulsion to issue breathless market calls like TV channels or brokers, who make money by getting you to trade frequently. We are a fortnightly magazine. But we don’t issue market calls every fortnight. Moneylife market calls are infrequent. But they have been reasonably accurate so far. But, of course, the past is no guide to the future.
3/17/2011 7:38:51 PM
13-26 Aug'10 18-31 Dec‘09
23 Apr-6 May'10
The Coming Decline
Time To Sell? 19 Jun-2 July ‘09 Jul ‘08
“Is the market about to crack?”
ownleg may soon”
6 Nov-19 Nov ‘09
11-25 March '10
31 July-13 Aug ‘09
“We have no Forecast”
A Buyers' Market
2-15 Jan ‘09
“Buy the dip”
27 Feb-12 Mar ‘09
“Weakness has resurfaced” “A Breakdown?”
30 Jan-12 Feb ‘09
“A weak rally now”
13-26 Mar ‘09
“Another weak rally”
Moneylife Stock Analysis
KNOW WHAT’S COMING
3/17/2011 7:39:39 PM
Insurance Trends New products, regulations, features and options, interpreted from your perspective ULIPS
Highest NAV ULIPs Finally, IRDA wants greater disclosure on these
RDA (the Insurance Regulatory and Development Authority) is seeking greater disclosure for highest NAV (net asset value) products from insurers. The specific data the regulator has asked for includes the name of the products, fund size, premium and the number of polices for all guaranteed linked and nonlinked products, among others. The regulator might come up with additional disclosure norms to check mis-selling of products by agents. IRDA is also looking at how these funds are being sold. Unlike other insurance products, where approval is required from the actuarial and life departments, guaranteed products have to get additional approval from the finance department of IRDA. Moneylife has all along maintained that ‘highest’ NAV unit-linked insurance plans (ULIPs) give suboptimal results and cause confusion for customers. The most important point to understand is that insurance companies are guaranteeing NAVs and not returns!
Are these two different? Yes. The NAV is a number at a point in time, whereas returns happen over a period of time. For instance, your 10-year plan may have hit an NAV of Rs14 after five years. At that point, it is the highest NAV. This Rs14 is guaranteed for the next five years. What if the NAV remains at Rs14 for the next four years, or goes down to Rs13? You would still get this NAV of Rs14. But Rs14 happens to be just a 4% return over 10 years!
Chola General ‘Penalised’ A Rs5-lakh fine for violating guidelines on licensing of corporate agents
RDA has levied a penalty of Rs5 lakh on Cholamandalam General Insurance for violating the provisions of various regulations, guidelines and circulars. This penalty has been slapped on the insurer due to the violation of guidelines issued on licensing of corporate agents which stipulates that if a corporate agent terminates its agreement with one insurer before entering into a corporate agency agreement with another insurer, it has to seek specific
written approval of the regulator. The insurer should also not pay any amount other than the permitted agency commission to the corporate agent as per current guidelines. This is a violation of Regulation 10(1) (vi) (ii) of the Insurance Advertisement and Disclosure Regulations, 2000 which permits a third party to share information about its members and collect compensation based on sales. However, payment of compensation for solicitation by third-party entities is not covered under this Regulation.
Driving Up? Third-party car insurance pool is too small
otor insurance cover has two components: own damage and third-party insurance. While premium rates for own-damage cover were de-tariffed by the insurance regulator in 2007, IRDA still regulates third-party premium rates. In case of third-party insurance, the premium earned by all companies is pooled and the losses are split proportionately. IRDA’s audit of the third-party motor insurance pool (which compensates accident victims and is mandatory for all vehicle owners) revealed that the pool reserves have to be significantly augmented to meet the higher compensation amount that needs to be paid to victims of road accidents. IRDA has stipulated that all general insurance companies increase these reserves in a phased manner over a period of three years. They should also restrict their expenditure in terms of bonuses and incentives and bear ``
MONEYLIFE | 7 April 2011 | 50
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` this requirement in mind when
raising additional capital. IRDA has noticed that certain unhealthy competitive practices have emerged in the de-tariffed market and has instituted steps accordingly. The regulator had recently revised third-party motor insurance premium and this new finding may need additional hike in premiums.
Birla Sun Life’s Foresight ULIP Highest NAV plus entry at the lowest NAV of the year
irla Sun Life has launched an innovative unit-linked insurance plan (ULIP). It is a combination of the highest NAV (net asset value) concept along with entry at the lowest NAV of that year. The highest NAV is recorded on any day in seven years (say, the 1st calculation). The lowest NAV concept is a separate calculation made for five years wherein the premiums are invested at the lowest NAV of that year. The highest NAV in five years is used to calculate gains with respect to the lowest NAV entry of each year for the premium paid (say, the 2nd calculation). We cannot assume that this 2nd calculation will yield more money than the 1st calculation. This is simply because the duration for the 2nd calculation is five years and for the 1st calculation, it is seven years. An investment that is mainly in debt funds will increase its NAV over time. The maturity value at the end of a policy term of 10 years is the greater of the two calculations above (the 1st calculation and the 2nd calculation), or the fund value at the end of the policy.
Keep an eye on repudiation ratio Insurance becomes pointless if your claim is rejected
uying an insurance policy is easy. There are dozens of agents who will sell one to you. The key test of an insurance policy is whether you can get your claims settled. This is is captured by ‘claims settlement ratio’, that is, the number of claims settled against the claims received. The data from insurers on this score is interesting. LIC tops the list of claims settled, followed d by HDFC Life and ICICI Pru Life. Among the worst is Canara HSBC which has settled just 38% of the cases in 2009-2010 and kept a huge 45% of the claims pending. Among the large
insurers who are not settling their claims easily are Aegon Religare and Future Generali. The ‘claims repudiated ratio’ is another important number to watch. It is the number of claims rejected against the claims received. Aegon Religare is at the top of this list. It has rejected as many as 44% of the claims last year while Future Generali rejected more than 29% of the claims. Life insurance companies that commenced business recently are bound to have lower bo settlement and higher se pending claims. This is because any death claim made within three years of policy issuance gets scrutinised closely. But high clo rejection of claims j is surely a cause for concern. Insurance company inefficiencies, poor underwriting practices, incorrect details in policy forms and fraudulent claims can lead to a rejection.
Claims League Company
ICICI Pru Life
ING Vysya Life
Birla Sun Life
Source: IRDA Annual Report 2009-10
51 | 7 April 2011 | MONEYLIFE
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PERSONAL BUSINESS AUTO
SUP ERB IK TWO-WHEEL ER S
SPANKING NEW DEALS WHEELS ON
Ditch your kick-start, rusty throttles and hard-to-shift gears. Riding one of the n swamping Indian markets—requires a completely different set of skills, discovers
his column has long neglected two-wheelers, for a simple reason. Your correspondent grew out of them long ago—when the home comforts of air-conditioning, good audio and windscreens keeping out pollution and noise, scored over the romance of the counter-proposal of open highway dust in the hair and insects in the mouth. Certainly, two-wheelers were great fun. I still remember the first motorcycle I owned, an Ideal Jawa 250cc, with a rounded fuel tank. The height of ‘cool’ was to get it modified. With different shaped ‘easy rider’ type high-rise handlebars which made it absolutely uncontrollable after it touched a moderate 50-60km/h. Subsequently, there has been a nodding acquaintance with the large number of motorcycles and scooters which have made the whole bike scene so colourful and affordable—as well as brought about a feeling that the new generation treats them as they would a disposable ball-point pen. But then, an old flame always remains desirable. So, when I was
invited to try out a powerful new motorcycle, I simply could not resist—though I am now older and wiser. It was with some trepidation, therefore, that one tried a new generation ‘superbike’. ‘Tried’ is the operative word, because it is simply not possible to do more than that the first time around—try to sputter around slowly and very carefully. The big thing that is the challenge is not the power that they throw out, or the size and weight—both those aspects can be handled if the basics are there, implanted into the chromosomes. What has really changed is this whole business of extremely sensitive and immediate responses, requiring reflexes long since gone rusty. Let me explain. At one time, not too long ago, all motorcycles had a throttle, which operated by virtue of twisting the right hand around it. This was then linked either by a cable or a series of linkages which took their own sweet time to inform the engine about the intentions of the rider, giving him enough time to get ready
for the hoped-for surge forward. There were also gears, which were changed by moving one of the feet through several improbable manoeuvres; and that was half the fun. Today, the whole game is controlled or aided by electronic wizardry hidden somewhere behind the extensive plastic and chrome, reacting to the least hint of touch— absolutely instantaneously! Being closer to the scene of action, the road, the response and adrenaline rush is something that has to be experienced to be believed. Plenty of superbike brands are already present in India; more are entering. It is impossible to try to name all of them—and to name a few of them would be unfair. So, the best advice this column can give is to suggest that you look around in your city and head for a test-ride. Tip: Second-hand superbikes are often good value for money, especially if they haven’t been through serious accidents or misused. There are plenty of hobby bikers who will maintain their wheels to perfection, but will also ``
MONEYLIFE | 7 April 2011 | 52
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KES he new superbikes—now vers Veeresh Malik ` want to move on to something newer.
They should be your target sellers. However, do check the documents very carefully and, if you are the finicky sort, buy a brand new one for peace of mind.
ELECTRIC VEH IC L ES
hile on the subject of twowheelers, let me return to another favourite—electric batteryoperated cars, vans and scooters. Fuel prices are most certainly on their way up. Vehicle ownership and running costs are most certainly on their way up too. But what is hurtling downwards faster than dictators are falling lately, is the cost of batteryoperated vehicles—not just because
of lower duties and taxes in the latest Budget but also because of lower costs, overall, due to more competition. A decent battery scooter, good enough for all the normal day’s work at home or office, is now in the Rs15,000-Rs20,000 range. With 12-18 month warranties thrown in, and costs being close to nil, most of these China-sourced kit wonders are brilliant value for money, especially as they don’t require registration or driving licences. But it is in the electric car space that we expect to see some good options in the next one year or so. Of course, the Reva is there already. The vehicle is now part of the Mahindra stable—getting a bit long in the tooth, but a viable alternative all the same. However, it is the GM Chevrolet Spark as well as the Mahindra Reva ‘NXR’ and the ‘NXG’ (two variants to be launched by the end of this year, both of which promise more space inside and range outside) that one is eagerly looking forward to. With promises of 120km-200km driving range, and more space inside, these are likely to be technologically far superior to the existing crop of electric four-wheelers. Think keyless entry and start, dual or multiple charging ports for faster recharging, built in Internet-based communication and safety tools and top speeds exceeding 120km/h. All that with a stop-go acceleration which will leave most other cars gasping in its wake, without the smell of exhaust, though. Prices are expected to be in the Rs3 lakh–Rs3.5 lakh range, and that’s not taking into account the savings on taxes and duties, as well as lower registration costs. Now, all we need is an electric Tata Nano—not just in Geneva but also in India.
S H O W R O O M T H E FT
Brand New Plot
t is usually not all that easy to steal brand-new luxury cars from automobile showrooms. Close relatives of politicians who did so are not doing so any more. The cars available for trials usually have tracking devices and also a person accompanying them. And then, of course, there is the security of seeing that the potential buyer has some identification; maybe, a vehicle of his own in the parking lot. Every which way, the fact remains that there is not much a thief can do even if he manages to get past all these and steal a new unregistered vehicle from a showroom. However, if reports are to be believed, all this has changed. The sudden growth over the past few years of the luxury car business has had an unexpected fallout—a big delay in getting hold of (sometimes) difficult-to-obtain spare parts. It would take months, for example, to replace a windscreen, in some cases. A brand new stolen car, then, makes for a very comfortable and easy resource for spares. That is what seems to be happening lately.
Veeresh Malik started and sold a couple of companies, is now back to his first love—writing. He is also involved actively in helping small and midsize family-run businesses re-invent themselves. The Mahindra Reva 53 | 7 April 2011 | MONEYLIFE
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ML FOUNDATION EVENTS
MO N EYL IF E F O U N DATIO N WO R K S H O P O N I N T E R N A T I O N A L WO M E N ’S D AY
“Sticking to fixed deposits will not help, because inflation will eat away your money” Deena Mehta, the lone woman member on BSE’s board of directors, says that keeping women and children out of the financial arena is something a family cannot afford today
omen definitely make better investors, because investing, by definition, is a game of common sense and patience—which women possess in spades,” said Deena Mehta, the lone women member on Bombay Stock Exchange’s (BSE) board of directors, while speaking on the occasion of International Women’s Day at the Moneylife Foundation on 8th March. She said that keeping ng women and children out of the financial arena is something a family cannot afford today. “Simply sticking to fixed deposits will not help, because inflation will eat away your money. oney. Understanding the market is necessary; y; and it is not difficult. If you can take ke the pains to learn, not only will you u make money, you will also contribute te to family fortunes,” said Ms Mehta. ehta. Almost all families are financially sick today,
MONEYLIFE | 7 April 2011 | 56
because they don’t pay attention to their financial health, she said. “Women must educate themselves about investing in the market, because if you miss the market, you are missing a lot, and losing a lot of money in the process,” she said. She also gave some handy tips on how to start investing. “Read the newspapers, and start tracking companies,” she said. “Start with a small amount and low-risk with low risk products. And, remember, invest only smile. what you can spare to waste,” she added with a smil Many international studies have shown that women are wiser in investing and manage finances better—be it at home or at the workplace. India’s top banks have seen prominent women administrators Lal Kidwai, Chanda and heads like Naina Kochhar, Ranjana Kumar, Kalpana et al. Morparia, However, finance and, in general, economics, are `` Deena Mehta, director, Bombay Stock Exchange
3/17/2011 8:54:28 PM
ML FOUNDATION EVENTS
` viewed as a predominantly masculine field. Ms Mehta
explained how historically, stock markets have been an exclusive arena, where there were entry barriers for women. Hence, till date, few women have entered the markets. Mass participation in markets (even by men) is only a recent phenomenon. Busting the ‘men-only’ myth about finances, Ms Mehta said, “Most men have zero understanding of financial management, and (are) bad planners. That doesn’t apply only to husbands, but fund managers as well. So question the man-of-the-house as well, because there is a good chance that he is not doing his work properly, or is clueless about what should be done.” At the event, Moneylife Foundation also felicitated three women achievers: Preeti Telang, general manager of Swadhaar FinAccess, which helps urban poor women save money and advocates financial literacy among them; Chandita Mukherjee, award-winning short documentary film-maker and founder of Comet Media Foundation, which develops media for promoting joyful learning and fostering scientific spirit; and Nikita Ketkar, founder of Masoom, which supports youth studying in Mumbai’s night schools. Moneylife has covered these NGOs in its ‘Beyond Money’ section (Swadhaar FinAccess in Moneylife, 22 April 2010 issue, Comet Media in 6 December 2007 issue and Masoom in 4 November 2010 issue). Ms Telang spoke about the work of Swadhaar FinAccess. She said, “There are many schemes for women in rural India, but very few for slum-dwellers in urban areas. It takes a lot of persuasion for the government and banks to start zero-balance savings accounts and issue an ATM card for them. Together, we have tried to teach these women about banking, so that they can deposit their small day-to-day savings easily.” Ms Telang said that the NGO currently reaches out to 8,000 women and, by 2012, it aims to cover 30,000 slum-dwellers. Chandita Mukherjee spoke about the need to foster alternate media for education and create innovative learning processes. She said, “There is a need to make learning enjoyable and move beyond rote learning, as well as reach out to those who don’t have access to Preeti Telang, general manager, Swadhaar FinAccess
education. It is important to incorporate new, modern teaching techniques, and we are working towards that.” Chandita is an award-winning independent filmmaker and has been part of various film committees, and her interest lies in promoting scientific outlook and learning about India’s technological heritage. Comet Media makes communication materials in a range of media, conducts workshops for teachers and students, and is now exploring the area of community radio which is still very new in India. Nikita Ketkar talked about the need to foster night schools, which are the only means of learning for many poor students who work during the day. She said, “We have 600 students currently and plan to spread out to the whole of Maharashtra. We are asking the government to open night schools in other states also, because there are many youngsters who have to work during daytime to support themselves.” Ms Ketkar held administrative positions in DRDO (Defence Research & Development Organisation), Air Headquarters and in the NCC (National Cadet Corps) Directorate before starting Masoom. This NGO addresses the infrastructure needs of night schools and seeks to enhance the quality of education to improve the learning environment and the future prospects for the less-privileged students. To involve the students and their parents, regular workshops are organised where the parents and teachers come together—thus the bridge is being narrowed by such meets, she said. Deena Mehta said, “We do not realise, but it is the NGOs which make the country liveable. We all know what kind of gaps exist in public administration. We should thank civil society organisations that take up the responsibility to help people and better our lives.” Last year, on the occasion of International Women’s Day, Moneylife Foundation had felicitated Indrani Malkani, who started the Model School Bus Service, and is involved in a host of other projects; noted environmentalist and founder of Awaaz Foundation, Sumaira Abdulali; and noted civic rights activist from Bandra (a Mumbai suburb) and chairman of the H West Ward Citizen’s Forum, Anandini Thakoor (Moneylife, 22 April 2010).
Chandita Mukherjee, founder, Comet Media
Nikita Ketkar, CEO, Masoom
3/17/2011 8:55:12 PM
Straight from the Heart A collection of John Bogle’s writings suffused with wit, wisdom, humanity and plain common sense about money
n 1960, when John Bogle was 31 years old, he was diagnosed with an incurable heart disease. He got himself a pacemaker but as Dr Bernard Lown, his heart specialist, described later, Bogle was “afflicted with a bizarre electrical derangement of the heartbeat, threatening catastrophic cardiac arrest—a guillotine about to drop. I gave him the brutal verdict and he was undaunted. He lives his life intently and with exuberant energy. A sense of humor lightened the morbid reality, and he joked that playing squash with a portable defibrillator close by unnerved every opponent.” “But the inevitable DON’T COUNT ON IT! downward spiral of my heart JOHN C BOGLE disease continued,” Bogle Wiley writes in his new book. Pages 603; $29.95 “Cardiac arrests and paddles
First Lady Cornelia Sorabji was dubbed an ‘Anglicised’ Indian—but she was not at home with the British
ho was Cornelia Sorabji? An imperialist, feminist or social reformer, she defies easy classification… She was a pioneer in many ways—the first woman barrister from India, the first woman graduate from Bombay University, the first woman in the world to read law at Oxford. She was the darling of the British aristocracy, opposed to swaraj and the radical reformist fervour, but no less a crusader against injustice, especially for the purdahnasheens, for whom she worked selflessly. However, her achievements get overshadowed by her debate with MK Gandhi, her conservatism, her association with Katherine Mayo and differences with Sarojini Naidu; one who became the spokesperson for the women behind veils. As a result, historians conveniently forgot her or dismissed her as just another
on my chest. Physical activity fades away. The right side of the heart no longer pumps. Death’s shadow draws near.” This continued for some 36 years after the first diagnosis of his heart trouble. In 1996, Bogle was eligible for a heart transplant. Some 15 years later, his acquired heart “thumps away minute after minute, like the beat of a jungle drum.” This personal anecdote comes on page 583 of a 600-page book. I have read a lot on Bogle and didn’t know about this aspect of his life. And he narrates this story not to recount his life but to pay homage to four of his heroes and mentors—Walter Morgan, a pioneer of finance, economist Paul Samuelson, Peter Bernstein, a financial economist and, of course, his heart specialist Dr Lown. It is astounding what John Bogle has achieved in one lifetime with such a serious heart ailment. He has pioneered a new area called index funds, after being almost thrown out from the fund company he helped grow. Today, Vanguard is the largest fund company, managing $130 billion, and is the only true mutual structure among mutual funds. But business success is not why Bogle stands out. He is known as ‘Saint Jack’ ``
‘Anglicised’ Indian. But she was not at home with the British either. Richard Sorabji, her nephew and author of this book, deserves applause for telling the story of a forgotten character, which gives us a glimpsee of one of the most neglected areas of India’s colonial history, that of social reforms for women outside the Bengali elite. Opening Doors is not simply a biography of Cornelia Sorabji; it is a nuanced and truthful historical account which, through the story of an individual, tracks the changing political and social mindset of the British rule and Indian nationalism. Understanding Indian feminism and history is incomplete without OPENING DOORS Cornelia’s story. She occupied a RICHARD SORABJI position very different from her Penguin Books contemporaries, Pandita Ramabai Pages 484; Rs499 and Rukhmabai. Nor could she fit ``
MONEYLIFE | 7 April 2011 | 58
Book Review.indd 2
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` of the financial services industry, the conscience-keeper of Wall Street.
John Bogle has spent an entire career fighting for individual investors against the dark forces of Wall Street. Bogle’s latest book Don’t Count on It! is a collection of 35 essays which draw from his deep wisdom and vast experience. Those who have read Bogle’s earlier books (three of which have been reviewed in Moneylife), would know the themes Bogle has been agitated over for the past four decades. This book covers all of those: • The rapacious charges of financial intermediaries and the actively managed funds; • The disgraceful failure of the financial industry to abide by traditional fiduciary standards; • Waste of intellectual talent on financial manipulation rather than projects useful to society; and • The dominance of short-term speculation over investing. The first part of the book focuses on what Bogle calls “Investment Illusions”—the consequences for investors when they fail to understand the simple arithmetic of investing. He discusses the perils of numeracy. The second section “The Failure of Capitalism,” shows how US business practices have degenerated over the years to the detriment of the common man. The third section “What’s Wrong with Mutual Funds” exposes the killing impact of high costs and excessive churning on investor returns. The subsequent chapters espouse the virtues of index funds, entrepreneurship and idealism for the new generation. The wit, humility, vast erudition and passion to be on the side of individual investors, despite the perilous state of his heart, make Bogle an extraordinary human being. This book captures the mission of a rare financial visionary. — Debashis Basu
` in with Annie Besant and Sarojini Naidu. While the others stood for
radical change—religious, political and social—Cornelia straddled a difficult position, seeking a conservative and gradual approach that was at odds with the drastic turn of events. Richard Sorabji’s research is painstaking, and the wealth of detail he presents is astonishing. But what lets him down is his pedestrian style of writing, and his epistolary approach. Chapters have too many sub-headings, and he treats each aspect of Cornelia’s life separately, that leads to repetition. He lingers on irrelevant subplots. Footnotes and appendixes add to the bulk. The structure appears fragmented and does not make for a smooth narrative. But, in the end, Opening Doors remains a wonderful historical account. Biography is a tricky genre, and Richard Sorabji doubles the risk by choosing a neglected character who is also a relative. But probably, only a family member would understand Cornelia’s perspective and emotions. As Richard Sorabji claims, Cornelia cannot be understood without knowing about her family, friendships and battles that shaped her. There are extensive quotes from Cornelia’s memoirs and letters to bring to life an immaculate and determined woman, whose emotions and beliefs created havoc with her life and career. Sorabji doesn’t glorify; nor admonishes; he examines with sympathy why a woman so brilliant landed up on the wrong side of history. — Shukti Sarma
Quick Quirks A light take on economics
f there is any Indian writer who comes close to overshadowing Cyril Northcote Parkinson, the British naval historian who came up with Parkinson’s Law (‘work expands so as to fill the time available for its completion’), it has to be Madan Sabnavis. From the “Economics of Flyover Construction” to the “Oddness around Us”, the author has managed to piece together almost all the “quirks that we come across in our lives, which are significant as they highlight our own fickleness.” He reserves his sharp wit to cut through the many absurdities that we come across in our daily life. Eco-Quirks is full of quotable gems. Here is one: “A ‘critical economist’ is an oxymoron.” Or, if you like, “Observing human behaviour is fascinating, especially when money is involved.” But this passage ECO-QUIRKS might be the best one MADAN SABNAVIS Tata McGraw Hill in the book: “Would Pages 305; Rs350 you ever have realised that the person who is advising you on the TV to buy or sell may be actually telling you to do just what he wants you to do?” That’s what we at Moneylife have been constantly alerting our viewers about— stay clear from the talking heads on television, especially the familiar faces that give you stock ‘tips’ on the idiot box. This writer is frank, simple and as straightforward as they come—these are his own words... “The issues (covered in the book) are not really novel, and the reader is bound to feel that he knew this all along even before reading the lines on the subject.” To describe or dissect this book any further would really be a spoiler. One can only end with the quote from Scott Adams (of The Dilbert Principle) that graces the book’s ‘Corporate Quirks’ chapter—“People are idiots.” — Devarajan Mahadevan
59 | 7 April 2011 | MONEYLIFE
Book Review.indd 3
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M E X I C O
Mexico is a perfect blend of traditional culture and colonial legacy, says Jaideep Mukerji, as he explores the country’s historic buildings, majestic monuments and imposing cathedrals
exico—one of the world’s fastest growing economies—is a culturally rich country with diverse ethnic groups and land that varies from tropical jungles to snow-capped volcanic peaks. It was in Mexico that Aztec culture of the 13th to 16th century and the ancient Mayan culture from 2000 BC to the 16th century flourished and reached a degree of sophistication. With the Spanish conquest of 1521 began the colonial period that left a rich legacy of historic buildings, monuments and
STEEPED IN ARCHAEOLOGICAL SPLENDOUR
cathedrals—not to mention the Spanish language itself. The largest ethnic group in present-day Mexico are the ‘Mestizos’ of mixed Spanish and native ancestry. Apart from the Mestizos, there are 56 different indigenous groups who retain their sense of distinct identity, largely because of their rural isolation. The Mexican government recognises that these groups need special economic assistance for their cultures to survive. I began my journey with Mexico City, the largest city in the Americas and the world’s third largest metropolitan `` area by population
located in the Valley of Mexico, a large valley in the high plateaus at the centre of Mexico at an altitude of 7,350ft (2,240 metres). Mexico City is the political, cultural and financial centre of the country. Listed as a World Heritage Site is the Zocalo (or central plaza) in the heart of Mexico City, one of the largest city squares in the world that has been a gathering place for Mexicans since Aztec times. Later, during Spanish times, the square served as the venue for the swearingin of viceroys, royal proclamations and military parades. Today, Independence Day ceremonies and ``
MONEYLIFE | 7 April 2011 | 60
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COLONIAL PÁTZCUARO: A ROYAL CITY
HEART OF THE CITY
WITH JANITZIO ISLAND IN THE BACKDROP
` religious events (such as the festivals
of Holy Week and Corpus Christi) are held here. In one corner is the Templo Mayor or Great Temple of the Aztecs. Unearthed in 1978, the Temple was once the holiest shrine of the Aztecs. In the centre of the square is a flagpole with an enormous Mexican flag that is ceremoniously raised and lowered each day and carried into the National Palace. One of the most recognisable landmarks in downtown Mexico is a victory column located on a roundabout named the Angel of Independence or El Ángel. El Ángel was built to commemorate the 100th anniversary of Mexico’s War of Independence in 1910. Later, it was converted into a mausoleum for the most important heroes of that War. Around 300km and a threeand-a-half hour drive west of the capital is Morelia, a city which was declared a UNESCO World Heritage Site in 1991 for its well-preserved colonial buildings and layout of the historic centre. Once known as the City of Pink Stone, the heart of historic Morelia is the cathedral and its surrounding square, the Plaza de Armas. The first church on the site was built in 1577 with earth and wood. The present cathedral built
of pink ‘cantera’ stone was finally completed in 1744 and has two 60-metre high towers that dominate the skyline of Morelia and are the second tallest Baroque towers in Mexico. Inside the cathedral, the baptismal font made of silver in the 19th century was used to baptise Mexico’s first emperor, Agustín de Iturbide. At the start of the 20th century was added a musical organ from Germany which has 4,600 pipes and is one of the largest in Latin America. The cathedral sponsors a sound & light show every Saturday after 8pm. Surrounding the square are shops selling souvenirs and cafés where one can get either a simple cup of delicious Mexican coffee or an elaborate meal; all the while, you are serenaded by the traditional Mexican mariachi bands. Spicy fruit-salads, a variety of tacos, beans and local-style sandwiches are easily available from street vendors. With several hotels conveniently located within walking distance of Morelia’s central square, it is easy to stay, eat and explore the historic centre... all on foot. The ‘artesanal’ or local handicraft emporium is located in an old convent restored in 1979 and now used as the Culture House of
Morelia. In several rooms converted to workshops, you can see artists creating local handicrafts, and in the connected Mask Museum, is a collection of masks originating from all 20 states of Mexico. From Morelia, I drove 65km south to Pátzcuaro, a large town founded in the 1320s located on the shores of a lake bearing the same name. Pátzcuaro has retained its colonial and indigenous character since then and has been named as one of the ‘100 Historic World Treasure Cities’ by the United Nations. Pátzcuaro has worked hard to retain its traditional colonialindigenous look and, unlike Morelia, houses in Pátzcuaro are made of adobe and wood and generally have red-tiled roofs. Cobblestone streets dominate the town centre down to the shores of the lake. The town square is surrounded by covered walkways filled with shops selling a wide variety of crafts, many in bright colours. Pátzcuaro is the market hub of the region, with people from the smaller villages bringing in their own crafts such as copperware, black pottery, musical instruments, baskets and wooden crafts. The town square is called the Plaza Vasco de Quiroga or the Plaza ``
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` Grande. The Plaza Grande was
ESSENTIAL FACTS S Why Go There: Mexico is a tourism-friendly er country with over ge sites 30 world heritage sites. It is a colourful melting pot of different cultures and ethnic groups and has good hotels and efficient low-cost domestic airlines. Chichen Itza has just recently been internationally voted as one of the new Seven Wonders of the World. Explore the ‘Visit Mexico’ website at www.visitmexico.com Getting There: The US and European airlines offer flights to Mexico City and to Cancun, via the US or through major European gateway cities. Visas: Tourist visas are easily available from the Mexican Embassy in New Delhi. Complete details and the application form are available online from the Mexican Embassy website. As of May 2010, holders of a valid visa for the US (any nationality) do not require a separate visa for Mexico. Where To Stay: Although it is easy to book hotels and tickets for domestic air travel within Mexico online, it is recommended that you go through a recognised Mexican tour operator who will be able to provide you with complete travel support in a country where the main language is Spanish. I made my travel arrangements directly with www.condorverdetravel.com, one of the most experienced travel operators.
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dedicated to Vasco de Quiroga in 1964, when a fountain containing a bronze statue of the bishop was placed in the centre. The Plaza is p ssurrounded by old, stately ash trees aand colonial-era mansions with quaint cafés at the street level. It is q eeasy to spend a few hours sitting and watching the local people go about w their daily routine. Pátzcuaro sits on the southern edge of Lake Pátzcuaro which still has important economic and cultural significance for the town. Associated with Pátzcuaro are a number of islands, the best-known of which is Janitzio, meaning ‘corn hair’. It is recognisable through the 40-metre statue of José María Morelos y Pavón that is on the top of the hill. Underneath the statue is a series of murals about the life of this Mexican hero. There are four other islands in the lake. La Pacanda is in the center. This island has a small pond in it with carp and ducks. Yuneén (meaning ‘half moon’) Island is near the centre. Its attractions include its vegetation, traditional houses and cabins for visitors. Urandenes is closer to Pátzcuaro and consists of three islands surrounded ded by canals in which white hite fish are raised. Residentss here fish with butterfly nets. Tecuena is the smallest island in the lake; the name means eans ‘good honey’. The docks at Pátzcuaro have boats that travel el to these islands. Returning rning to Mexico City, I took ok a flight with one of the low w cost airlines, of which there ere are several to choose from, rom, to Cancun, a seaside resort esort packed with hotels located cated on the Caribbean an coast of the Yucatán Peninsula of southern Mexico. Archaeological logical
remains dating back to some 3,000 years show that before the arrival of the Spanish in the area, Yucatán was the centre of the Mayan civilisation. The ruins of over a hundred Mayan sites of varying sizes can still be found on the peninsula including the well-known ones of Chichen Itza and Uxmal. Around 240km west of Cancun is perhaps the most stunning of the many Mayan ceremonial sites and the second-most visited place in all of Mexico. The famous and World Heritage Site of Chichen Itza contains many impressive stone buildings and pyramids in different states of preservation of which the most important ones have been restored. The buildings of Chichen Itza are grouped in a series of complexes once separated from each other by a series of low walls. The best known of these complexes is the Great North Platform set which includes the monuments of El Castillo, the Temple of Warriors and the Great Ball Court. The best known and iconic pyramid called ‘El Castillo’ or ‘the castle’ is roughly g y at the centre of the site. Climbing it is quite a challenge c are rewarded and those who make it ar of the with a spectacular view o Itza and the entire site of Chichen Itz countryside. A trip surrounding countryside quite the inside the pyramid is qu the dark and opposite though since th corridors and unbearably humid corrid chambers can be too much mu for some people to bear. Early morning, before befor the Chichen rush of tourists begins, C Itza is a magical place. I had the opportunity to wander around the site for two hours before befo the gates watching the were opened and w massive pyramid take shape t through the lifting liftin fog is an experience I will w not soon forget. — With W Veeresh Malik EL ÁNGEL THE ANGEL OF INDEPENDENCE
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MONEY FACTS STOCKS INDIAN MARKET TRENDS
The Sensex closed 1% down; the Nifty was flat. The ML Largecap Index gained 2%; the ML Mid-cap Index and the ML Mega-cap Index were unchanged. On the other hand, the ML Small-cap Index and the ML Micro-cap Index lost 1% each.
Foreigners: FIIs were buyers (Rs16,447.80 crore) and sellers (Rs14,772.50 crore) of stocks; ending as net buyers of equities worth Rs1,675.30 crore.
Share Prices, September 2010 =100
FII Net Investments (Rs Crore)
110 290 120 100 -50 -220
Indians: Domestic institutional investors bought stocks (Rs7,556.39 cr) and sold stocks (Rs6,415.60 cr), emerging as net buyers (Rs1,140.79 cr).
570 70 Sept-10
ML Mid-cap ML Large-cap
ML Small-cap ML Mega-cap
Index ML Large-cap Index
DII Net Investments (Rs Crore)
ML Mid-cap Index
ML Mega-cap Index
GLOBAL MARKET TRENDS
ML Micro-cap Index
ML Small-cap Index
Small-cap Gainers/Losers Maxwell Industries Bilpower Micro-cap Gainers/Losers
(All Prices in Rs)
9,300 8,900 Sept-10
Due to the Japanese crisis, the Nikkei dived 15% and the Nasdaq Composite tumbled 6%, while the Shanghai Composite settled flat. Index
Dow Jones Ind Avg
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MONEY FACTS STOCKS
ML SECTORAL TRENDS
Stocks of crude oil refining companies were in demand during the fortnight. Essar Oil jumped 11%, Mangalore Refinery and Petrochemicals and Reliance Industries surged 7% each, Chennai Petroleum Corporation gained 6%.
ML Refineries Index
660 620 580 540 500 Sept-10
Indian Oil Corp
Shares of non-ferrous metal companies were punished. Nissan Copper plunged 7%, Sterlite Industries declined 4%, Hindalco Industries fell 3% and Hindustan Copper dipped 2%. Companies
ML Non-ferrous Metal Index
1,140 National Aluminium
1,080 1,020 960 900 Sept-10
ML Sectoral Trend Refineries
5% Printing & Publ
Pap & Pap products
3% Non-ferrous metals
2% Financial services
All Prices in Rs
Stocks of crude refining companies rose 5%; airlines advanced 4%; paper & paper products gained 3%; healthcare stocks added 2%. Stocks of printing & publishing companies declined 6%; education fell 5%; and packaging and financial services stocks were down 3% each.
All Prices in Rs
BULK DEALS Date
United Brew Hldg
Albulla Investment Fund
Morgan Stanley Mauritius Co
Paramount Pharma Pvt
The Swastik Safe Deposit & Invt
SRS Real Infra
SRS Housing Finance
ARSS Infra Proj
Investrick Securities (India) Pvt
Ashita B Parekh
Shaktiman Steel Casting Pvt
Sanjaykumar J Poddar
Link Holdings P Ltd
OP Lohia, CMD of Indo Rama Synthetics, bought 3,04,480 shares of the company (stake up to 23.14%). Asit A Patel, executive director of Gujarat Apollo picked up 40,000 shares (stake up to 8.30%). SmallCap World Fund purchased 4,61,084 shares in Tilaknagar Industries (stake up to 8%). K Ajith Kumar Rai, CMD of Suprajit Engineering, purchased 64,340 shares (stake up to 37.39%). Sandip Somany, joint MD of HSIL Ltd, purchased 50,000 of the firm’s shares (stake up to 4.4%). Shahzaad Dalal, nominee director and member of the audit committee of Den Networks, purchased 10,000 shares of the company. Janmejay R Vyas, CMD of Dishman Pharmaceuticals purchased 48,032 shares of the company (stake up to 31.32%). Durgamba Investment Pvt Ltd purchased 20,000 shares in KCP Sugar and Industries Corporation (stake up to 36.81%). Utpal Sheth, partner of Chanakya Value Creation LLP, purchased 30,000 shares in Praj Industries (stake up to 0.06%). Prakash M Sanghvi, CMD of Ratnamani Metals & Tubes, purchased 2,88,125 shares in the company (stake up to 7.22%).
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MONEY FACTS COMMODITIES
MCX Commodity Indices
COMMODITY FOCUS MCX Copper Future Price (Rs/kg) 475 440 405 370
he government has hiked the fair and remunerative price (FRP) of sugarcane by 4.2% to Rs145/quintal for the 2011-12 season, commencing October. The FRP of sugarcane for the 2010-11 season was Rs139.12/ quintal. The sugar season runs from October to September. The decision was taken in the second week of March. FRP is the guaranteed minimum price for sugarcane farmers. However, sugar mills are free to offer a higher price. FRP is fixed after taking into consideration margins, risk, cost of production and transportation as well as profit of sugarcane farmers.
At the Multi Commodity Exchange, copper futures prices for delivery in April closed to Rs436.30/kg on 17th March, as speculators strengthened their positions amid a slightly improved trend at the London Metal Exchange (LME). Copper had gained 1.1% to Rs421.65/kg in the previous session. Likewise, the metal for delivery in June gained 75 paise, or 0.18%, to Rs427/kg, with a business turnover of 140 lots. Analysts said trade sentiment turned better at the domestic futures market as copper prices strengthened at the LME.
MCX PRICE TRENDS Particulars
Global Commodities Silver Rs/kg
Crude Oil Rs/barrel
Natural Gas Rs/mmBtu
Mentha Oil Rs/kg
uring the 2009-10 season, the crop was cultivated on 797,000 hectares; this has declined to 700,000 hectares in the current year. During 2010-11, the crop output was 6.81 million tonnes (MT). In Gujarat, once this crop was cultivated on 275,000-300,000 hectares during 2005-06; it declined to 155,600 hectares this year. Production stood at 9.18MT in 2007-08 which had come down to 7.17MT in 2008-09. Gujarat witnessed a decline in production from 3.30MT in 2007-08 to 2.66MT in 2008-09.
xports went up almost double to 545,000 tonnes during February compared with the year-ago period— they were 218,000 tonnes in February 2010. During October-February period of 2010-11 oil year, exports rose by 93.93% to 2.59 million tonnes against 1.33 million tonnes in the corresponding year-ago period. Japan, Vietnam, Indonesia are the major importers of Indian soyameal at 732,000 tonnes, 601,000 tonnes and 286,000 tonnes, respectively. 65 | 7 April 2011 | MONEYLIFE
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wheels for the DIFFERENTLY-ABLED What happens when a loved one suddenly needs wheelchair support after an accident, injury or illness? Access 4All is the answer, says Dolly Mirchandani
ACCESS 4ALL Prabhoo Ghar, 26, Hanuman Cross Road No 2, Vile Parle (East) Mumbai: 400057 Tel: 9869542980 reservations@access4all. co.in www.access4all.co.in
ay back in 1988, I was driving my car when I met with an accident. I was paralysed neck down and became a quadriplegic. I went to the US for rehabilitation and then returned to India. It was then that I realised the lack of facilities for the disabled in India because we don’t consider them a part of the mainstream, whether for education, work or entertainment. For instance, if they want to go to a mall, school or station, travel is difficult since sufficient disabled-friendly services are not available,” says Arvind Prabhoo, the man who went on to set up Access 4All, a unique and much-needed service that provides crucial in-city travel service for the disabled and makes them mobile. After his return to India, Arvind kept searching for a vehicle that would make travel easier for the disabled and at a reasonable cost. He says, “The disabled don’t want to use an ambulance; it is for those who are ill. I wanted a vehicle that appears similar to others, but modified to meet the needs of the disabled.” He looked at many vehicles, especially sports utility vehicles (SUVs), but most of them were expensive. Then, in 2007, Tata Motors in partnership with Renault launched the Winger, a multi-purpose vehicle suitable for urban transport that was easily adaptable at an affordable Rs6 lakh. And Access 4All started taking shape in Arvind Prabhoo’s mind. He first approached an expert to modify the Winger, but was told it would cost a hefty Rs10 lakh, so he decided to modify it on his own. Arvind had no technical background; besides, he wasn’t able to do the physical work himself. But he knew what he wanted—a vehicle to suit people with different kinds of disabilities. The Chhatrapati Shivaji Maharaj Smarak Samiti, a public trust in Vile Parle (a western
suburb of Mumbai), of which Arvind is the vice-president, agreed to fund the Winger’s purchase and modification costs. So Arvind hired a mechanic, an electrician and a person for doing up the upholstery to modify the Winger. A ramp was attached to the vehicle for wheelchair access; also installed were a GPS (global positioning system) with LED (lightemitting diode) displays for the hearing impaired and a speaker-sound system to let the visually impaired know where they are. According to Arvind, building an iron ramp that was easy to pull out and which folds on the underside of the car, was the most time-consuming modification. The ramp locks into place once it is pulled out to allow a wheelchair to be safely pushed over it. The original seating was completely modified to fit three wheelchairs and three regular seats that can fold up against the sides when not in use. Arvind’s own disability gave him key insights into the design. For instance, he says wheelchair passengers should be seated against the direction of movement. He explains, “A paralysed person like myself is pushed forward every time a driver hits the brakes suddenly and it’s painful on the neck. But when I am facing the rear, I get pulled backwards and the headrest cushions the impact.” It took Arvind seven months to design the vehicle and the modification cost was as much as the cost of a brand new Winger. In 2008, Arvind was set to start Access 4All as a wheelchair accessibility van service with trained staff, providing transport to disabled people all over Mumbai. With two vehicles and a team of 10, Access 4All rents these specially-modified vehicles and has tie-ups with major hotels for pick up and drop facilities to various locations. The vehicle can be hired for the entire day (Rs1,600 per day for 80km) or for shorter runs. “Access 4All seeks to provide services to disabled people; not to make profit,” adds Arvind. He wants to take this service to other cities as well, but will need all the help he can get to get more vehicles and modify them.
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REGISTERED WITH THE REGISTRAR OF NEWSPAPERS FOR INDIA UNDER NO. MAHENG/2006/16653 POSTED AT PATRIKA CHANNEL SORTING OFFICE MUMBAI 400001. Licenced to Post without Pre-Payment Licence No. - MR/TECH/WPP-149/WEST/09-11. Postal Registration No: MH/MR/WEST/184/2009-2011