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SOFIA TIMES 21st October 2013

Weekly News Letter

MARKET UPDATE Mutual fund industry's profits to hit 3-year high The mutual fund industry’s profits seem poised to hit a three-year high, even as revenues have hit a five-year high, with two fund houses yet to announce their results. It is expected for 2012-13, net industry profits would stand at about Rs.860 crore for their respective past financial years, going by the results already announced and the past trends for asset managers who haven’t announced their results yet. During the financial year, 41 mutual funds made a net profit of Rs.763.66 crore, while revenue stood at Rs.4,791.88 crore, according to data from mutual fund tracker Value Research; these stand at Rs.860 crore and Rs.5,134 crore, respectively, if one considers the estimates based on average numbers in previous years for firms whose results are awaited.

In This Issue 

Market Update

Banking and Financial Services

International Outlook

Economy and Policy

Student’s Corner

Special Feature GOOD MONEY HABITS CAN CHANGE YOUR LIFE -By K.V.S Manian


HSBC to exit Indian retail broking and depository biz Hongkong and Shanghai Banking Corporation (HSBC) had decided to discontinue its retail broking and retail depository services businesses in India. It was operating these under HSBC InvestDirect Securities (India) Ltd. HSBC reviewed all options available for the business before deciding on the exit. Impacted employees will be offered a fair and equitable severance pay, in line with HSBC policy, and career transition services will be extended through a professional agency, the bank announced. It is learnt the move is likely to affect as many as 300 staffers. HSBC InvestDirect Securities (India) is an arm of HSBC InvestDirect (India), which also offers investment advisory services and securities related financing through other subsidiaries.

Crude relief With the clouds of war on Syria moving away, Brent crude oil trades at $109 a barrel, compared to $117118 in August-end. After falling below 68 to a dollar in August, the rupee has recovered to about 62. In rupee terms, this means a decline of almost 15 per cent in crude oil prices (from August lows). Analysts at Citi segross under recovery e the at Rs.140, 000 crore for FY14, based on an average crude oil price of $102 and an average of 60 a dollar for the rupee. Analysts at Credit Suisse think under recoveries would remain at Rs.105, 000-135,000 crore in FY14-15.

Sebi to issue corporate governance guidelines The Securities and Exchange Board of India (Sebi) is likely to enact a new regulation to incorporate various provisions in the new Companies Bill. In order to beef up corporate governance practice among companies, the Companies Bill stipulates strict guidelines on appointment of independent directors, related party transactions, class action suits, and corporate social responsibility (CSR) spends. According to sources, instead of a piece-meal approach, Sebi could detail various provisions pertaining to corporate governance through a new regulation. Although the Companies Act is independent of the Sebi Act, the market regulator has the jurisdiction to prescribe norms related to corporate governance for listed companies.


BANKING AND FINANCIAL SERVICES New RTGS system to improve financial market efficiency: Rajan

Raghuram Rajan's RBI gears up to launch interest rate futures

The RTGS system is used to settle interbank fund transfers by banks and their customers and is critical in facilitating orderly settlement of payment obligations. With its implementation, new regulations will replace the operating guidelines and regulations of 2004. RBI Governor Raghuram Rajan introduced a new RTGS system and said the new real time gross settlement (RTGS) system for fund transfers will improve the efficiency of the country’s financial markets. The new RTGS system is highly scalable and will have several new functionalities. It will have features such as a facility to accept future value dated transactions and options to process multicurrency transactions.

India plans to launch trading of government bond futures within the next two months as part of efforts to deepen its financial markets, according to several sources involved in the discussions with the central bank. These interest rate futures would help banks and financial firms in Asia's third-largest economy assess expectations for borrowing costs and hedge the risks of rate changes to their bond portfolios. It would also provide the country's policymakers with a valuable gauge to measure market expectations for their future rate decisions. http://www.indianexpress.com/news/raghuram-rajansrbi-gears-up-to-launch-interest-rate-futures/1184351/

EPFO settles around 8 lakh claims in Sept It was observed in a review meeting by the EPFO September 2013, the Organisation settled 7,96,759 claims in its 123 offices located throughout the country compared to 7,49,639 claims settled during September 2012, an official release said. http://www.indianexpress.com/news/epfo-settles-around-8-lakh-claims-in-sept/1184652/

Fortune names 4 Indians among world’s top 50 women business leaders Four Indian women led by ICICI Bank Chief Executive Chanda Kochhar have named among the world's top 50 women business leaders by the renowned Fortune magazine. Fortune magazine ranked Kochhar fourth in its global list of top 50 women business leaders, behind Brazilian energy giant Petrobras' Chief Executive Maria Das Gracas Foster, Turkish conglomerate Sabanci Holding's Guler Sabanci and Australian bank Westpac's chief Gail Kelly, who grabbed the first, second and third spots, respectively. In the list of top Indian women business leaders, Kochhar was followed by National Stock Exchange (NSE) CEO Chitra Ramkrishna at 17th rank, Axis Bank's chief Shikha Sharma at 32nd rank and HSBC's Naina Lal Kidwai at 42nd rank. http://www.topnews.in/fortune-names-4-indiansamong-world-s-top-50-women-business-leaders2385187

RBS preparing staff for bank split up The Royal Bank of Scotland is preparing its staff members in the UK to prepare for the government's plans to split up the bank into a good bank and a bad bank with toxic assets. Ross McEwan, the chief executive of the bank asked the staff to brace themselves as a decision is expected to be taken soon on the matter. The government has an 82 per cent stake in the Royal Bank of Scotland and indicated that the bank might be split into a good bank and a bad bank with troubled assets. The bank had recorded a profit but was facing high level of toxic assets and the government officials have been looking for ways to revive the bank. The government had appointed investment bank Rothschild in July to conduct a review on whether the bank should be separated. The UK treasury is seeking an approval from the European Union for its plans to split up the Royal Bank of Scotland (RBS) into separate entities. UK's Chancellor George Osborne had sought clearance in July for the plans to split bank. http://www.topnews.in/rbs-preparing-staff-bank-split2385141


INTERNATIONAL OUTLOOK Starbucks latest foreign target for Chinese media

Starbucks has become the latest foreign firm to be roasted by China's state-run media, with a series of accusations that the world's largest coffee shop chain is overcharging Chinese consumers. State broadcaster CCTV aired a seven-minute report criticising the firm's pricing in China, arguing that a tall latte in Beijing is more expensive than in London, Chicago and Mumbai. For more information, please visit http://economictimes.indiatimes.com/news/international-business/starbucks -latest-foreign-target-for-chinese-media/articleshow/24485903.cms

Visa, MasterCard Merchant Fee Settlement Sent to Judge

Visa Inc. (V) and MasterCard Inc. (MA)’s settlement of a merchants’ lawsuit over credit card fees, a deal that may cost the companies and banks as much as $7.25 billion, was submitted for approval to a federal judge. Plaintiffs’ lawyers today formally asked U.S. District Judge John Gleeson in Brooklyn, New York, to sign off on the agreement covering about 7 million retailers. The settlement would resolve seven years of litigation over allegations that Foster City, California-based Visa and Purchase, New York-based MasterCard conspired with major banks to fix the fees merchants pay when customers use a credit card. For more information, please visit http:// www.bloomberg.com/news/2012-10-19/visamastercard-merchant-fee-settlement-sent-tojudge.html

UK in line for £1.3bn boost following EU trade deal with Canada

Britain’s economy is in line for a £1.3bn boost after Europe reached a landmark free trade agreement with Canada. The UK is Canada’s second biggest trading partner, behind the USA, and estimates by UK Trade and Investment (UKTI) suggest that UK exports would increase by 29pc following the deal. The overall expected benefit to the EU is £7.9bn, while the Canadian economy is expected to receive a £5.6bn boost.

Tata Does a Tesco in Retail Push Barely a week after the world's top retailer Walmart ended its association with Bharti Group, its British rival Tesco has moved a step closer to entering the $450-billion Indian retail market with the Tata's launching a neighbourhood convenience store format modelled on Tesco Express. Tesco Plc, the world's third largest retailer, has a partnership with Tata Group's Trent under which it provides back-end support and retail expertise to the Indian conglomerate's Star Bazaar hypermarkets. For more information, please visit http:// articles.economictimes.indiatimes.com/2013-1017/news/43144452_1_trent-hypermarket-starbazaar-tesco-express

World’s Richest Gain $12.7 Billion as Google Shares Drop

The 100 richest people on the planet added $12.7 billion to their collective net worth this week after worse-than-forecast corporate earnings in the U.S. wiped out most of the gains global stocks had posted earlier in the week. Mexican Carlos Slim, 72, increased his fortune $1.8 billion after Telmex, the land-line unit of his Mexico City-based telecommunications company America Movil (AMXL) SAB, said on Wednesday it will begin offering high-speed Internet service without binding it with a phone line package. Slim remains the world’s richest person with a $77.6 billion fortune, according to the Bloomberg Billionaires Index.

Hewlett-Packard Ending Deal With Pre-IPO Violin Memory

Hewlett-Packard Co. (HPQ) is planning to end a deal to resell high-end storage computers from Violin Memory Inc., in a potential blow to the company as it prepares for an initial public offering. Hewlett-Packard, which supplies server computers, data storage devices and networking equipment to businesses, has been reselling Violin’s solid-state storage machines, which can quickly crunch large amounts of data, working with Hewlett- Packard’s servers. Hewlett-Packard is discontinuing the partnership in favour of its own 3PAR storage devices.


ECONOMY AND POLICY Invest or pay higher dividend: FM to tell PSUs Facing twin problems of slow economic growth and lack of fiscal space, Finance Minister P Chidambaram on Friday asked heads of public sector units (PSUs) to meet their capital expenditure plans, pegged at around Rs 1.4 lakh crore for 23 major enterprises in 2013-14, to spur the subdued activity in the economy. And, to meet their commitment on dividends. At a time, when the government cannot provide a stimulus to the industry as it faces a challenge in restricting the Centre's fiscal deficit at 4.8 per cent of GDP, the investible surplus of PSUs can come to the aid of a sluggish economy. A higher dividend by PSUs would also help the government narrow its fiscal deficit. This had widened to 75 per cent of the year’s budget estimate in only the first five months of this financial year. The government expects to raise Rs.73,866 crore from dividends this year, against Rs.55,443 crore last year. Higher dividend by PSUs may help the government narrow fiscal deficit. For more on this http://www.business-standard.com/article/economypolicy/invest-or-pay-higher-dividend-fm-to-tell-psus-113101700206_1.html

Retail inflation rises to 9.84% in September Retail inflation quickened to 9.84% in September from 9.52% a month ago, breaking the two-month downward trend and increasing the chances that the Reserve Bank of India (RBI) will increase interest rates in its monetary policy review later this month. The retail food inflation index accelerated to 11.44% in September from a month ago, mostly due to higher vegetable prices which shot up 34.9%. Data released earlier on Monday showed that India’s wholesale inflation accelerated to 6.46% in September compared with 6.1% in the preceding month because of rising vegetable prices, including that of onion which increased more than four-fold during the month. Till August both the wholesale and retail inflation numbers were showing divergent trends, with wholesale quickening and retail slowing, though it remained sticky around 10%.

India's forex reserves up $1.5 bn India's foreign exchange (forex) reserves gained $1.51 billion to touch $279.24 billion for the week ended October 11. According to the Reserve Bank of India (RBI) Weekly Statistical Supplement, India's foreign currency assets (FCA), the biggest component of the forex reserves, increased by $1.52 billion to $250.85 billion for the week under review. RBI said the FCA expressed in US dollar terms included the effect of appreciation or depreciation of non-US currencies held in reserve, such as the pound sterling, euro and yen. http://www.business-standard.com/article/economy-policy/india-s-forex-reserves-up-1-5-bn113101900378_1.html


Indian economy: Beyond the numbers Company earnings, overshadowed by the rupee’s decline and RBI steps to curb it, are yesterday’s story. Looking beyond the numbers, there is still reason for hope. While the industry production in august appears to have come down the pressure on the rupee has abated, exports have done well and the trade deficit has come down dramatically. The panic in the foreign exchange markets and the central bank’s response to it are now over. Some companies operating in the domestic market will also gain from the fact that imports have become more expensive, there are many firms that have borrowed in dollars, whose costs of servicing those loans will have increased substantially. Earnings growth is, therefore, going to be very skewed in the September quarter, depending on how much of a gain or loss a depreciating rupee brings. Overall, brokerages believe the bottom in earnings growth was reached in the June quarter and the September quarter will see a small rebound in both revenue and earnings.


STUDENT’S CORNER This section is mainly for PGP1’s. It aims at introducing and explaining Financial terms in simple and lucid language.

Futures Contracts: As the name suggests Futures are basically financial contract entered for a Pre-determined Consideration. To pay a sum of money on a future date for a said quantity of goods or services subject to the limitations that the object of the contract subsists on the aforementioned date.

We can understand this concept with an example of (Jack the farmer): Jack owned a Pen of chickens and other animals. Now as we all know maintaining a farm is a very expensive job and it seems that Jack will soon be running out of cash. Each chicken in his farm he has estimated will cost Rs.100 a bird. Now these birds will fully grow in three months’ time and they will be supplied to M/s. Jill &co. Meat processors as per his normal trading nature goes for rupees 120 each. Recently the markets of livestock have been very volatile and there have been entry of new Chicken Farms in the locality and he fears that his chicken selling price might get affected. He doesn’t want to incur any unprecedented risk and as a result was searching for a dealer to secure a deal. He approached Mr. Johnson a local dealer and struck the following deal. From the said date 3 months later M/s. Jill and Co. would buy all the chickens for a sum of 120 each. Now this is a futures contract. This can be beneficial to both the parties in the following ways: Jack

M/s. Jill & Co.

Minimizes the risk for Jack

Ensures a fixed price in the future

Gets him a fixed selling price

If markets improve probability of low cost purchases Fulfills his stock requirement need

Lower profit but Greater surety for liquid Convertibility

In the above case Mr. Johnson acts as a middle man. His function is basically to minimize the risk ensued by the two parties i.e. if the selling price falls below 120 the difference in the above mentioned case has to be paid to Jack and if the Selling price goes above 120 the difference on the said amount needs to be given to M/s. Jill & Co. His earnings are a Fixed commission on all the sales made. Please note: If the nature of the contract is too volatile or if the monetary value of said contract is too high then there can be two dealers to securitize the risk incurred by the two parties independently.


Derivatives: A derivative is a financial contract which derives its value from the performance of another entity such as an asset, index, or interest rate, called the "underlying". Derivatives are one of the three main categories of financial instruments, the other two being equities (i.e. stocks) and debt (i.e. bonds and mortgages). Derivatives include a variety of financial contracts, including futures, forwards, swaps, options. Most derivatives are marketed through over-the-counter (off-exchange) or through an exchange. There are two groups of derivative contracts: the privately traded over-the-counter (OTC) derivatives such as swaps that do not go through an exchange or other intermediary, and exchange-traded derivatives (ETD) that are traded through specialized derivatives exchanges or other exchanges. Derivatives may broadly be categorized as "lock" or "option" products. Lock products (such as swaps, futures, or forwards) obligate the contractual parties to the terms over the life of the contract. Option products (such as interest rate caps) provide the buyer the right, but not the obligation to enter the contract under the terms specified. Derivatives are used for the following:       

Hedge or mitigate risk in the underlying, by entering into a derivative contract whose value moves in the opposite direction to their underlying position and cancels part or all of it out Create option ability where the value of the derivative is linked to a specific condition or event (e.g. the underlying reaching a specific price level) Obtain exposure to the underlying where it is not possible to trade in the underlying (e.g. weather derivatives Provide leverage (or gearing), such that a small movement in the underlying value can cause a large difference in the value of the derivative Speculate and make a profit if the value of the underlying asset moves the way they expect (e.g. moves in a given direction, stays in or out of a specified range, reaches a certain level) Switch asset allocations between different asset classes without disturbing the underlining assets, as part of transition management Avoid paying taxes. For example, an equity swap allows an investor to receive steady payments, e.g. based on LIBOR rate, while avoiding paying capital gains tax and keeping the stock

CRITICISMS : 

Hidden tail risk Investment managers believe that certain risks are hedged and hence are secured and co related risk is Zero. Can get un-hedged resulting in a "phase lock-in." Situation i.e. A hedged position can become un hedged at the worst times, inflicting substantial losses on those who mistakenly believe they are protected." Financial Risks The use of derivatives can result in large losses because of the use of leverage, or borrowing. Derivatives allow investors to earn large returns from small movements in the underlying asset's price. However, investors could lose large amounts if the price of the underlying moves against them significantly. There have been several instances of massive losses in derivative markets, such as the American International Group (AIG) lost more than US$18 billion through a subsidiary over the preceding three quarters on credit default swaps (CDSs). The United States Federal Reserve Bank announced the creation of a secured credit facility of up to US$85 billion, to prevent the company's collapse by enabling AIG to meet its obligations to deliver additional collateral to its credit default swap trading partners.


Counter party risk Some derivatives (especially swaps) expose investors to counter party risk, or risk arising from the other party in a financial transaction. Different types of derivatives have different levels of counter party risk. For example:- Banks that help businesses swap variable for fixed rates on loans may do credit checks on both parties. However, in private agreements between two companies, for example, there may not be benchmarks for performing due diligence and risk analysis.  Large notional value Derivatives typically have a large notional value. As such, there is the danger that their use could result in losses for which the investor would be unable to compensate. The possibility that this could lead to a chain reaction ensuing in an economic crisis was pointed out by famed investor Warren Buffett . He called them 'financial weapons of mass destruction.' A potential problem with derivatives is that they comprise an increasingly larger notional amount of assets which may lead to distortions in the underlying capital and equities markets themselves. Investors begin to look at the derivatives markets to make a decision to buy or sell securities and so what was originally meant to be a market to transfer risk now becomes a leading indicator. 

Swapping What is Swapping? Continuing from the above example of Jack the farmer we can better understand swapping:


What Can Jack Do?

Now in the above Case we can clearly see Jack and Glen have similar quantum of loans, but they both want Contrasting needs. Jack’s lenders are not financing him further since he has taken Variable interest Rate loans. Now in these loans the following are the risks

High Capital Invested = High Interest rates (Multiple times)

Increase in Interest rate or markets

Increase Cash out Flows = Higher rate Of Default

In Glen’s case we can see He believes that the markets will drop and Interest Rates will drop hence he is attempting to decrease Cash outflows and maximize liquidity to aid his restaurant business Both Jack and Glen want the others Resources and this is the fundamental of Swapping. Swapping doesn’t mean that the parties to the loan change it only implies that the liability of payment is transferred. Now the risk is that if any one of them default the old loan becomes applicable. So there is a big element of Trust applied in this financing system.

-By

Sheehan D’souza PGP 1 Section B


SPECIAL FEATURE The following article is written by K.V.S Manian. He is the President (Consumer Banking) at Kotak Mahindra Bank. He took on the mantle of leadership of the bank since its inception in 2002. A dynamic leader, Manian ably steered the bank from its founding of a single branch to 249 branches across the country in a short span of 7 years. He played a pivotal role in the design and implementation of customer focused products and services in the bank. Manian has been instrumental in metamorphosing many business divisions into a success story at the Kotak Group. Retail Assets and Emerging Business Group are standing testimonials for Manian’s enterprising entrepreneurial spirit.


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SOFIA TIMES ISSUE 3