THE SIBM FINANCIAL
January, 2013
From the Director’s Desk
Dear Readers,
I take this opportunity to present before you the first issue of The SIBM Financial, which is the monthly finance magazine of SIBM Pune being published by the Finance Study Group.
This magazine will present a good opportunity to the students of the finance batch to showcase their skills by giving them a platform to publish their articles. This will help them in widening their knowledge base and help them become good managers.
I also congratulate the members of the Finance Study Group for coming out with this magazine. I wish them luck in all their future endeavors.
Dr. Vivek Sane Director SIBM Pune
S.I.B.M. Pune
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THE SIBM FINANCIAL
January, 2013
Credits Editor
Cover Design
Aabhas Agarwal
Abrajeet Banerjee
Contributors
Akshay Angadi
Akshay Iyer
Rohan Sane
S.I.B.M. Pune
Dipesh Deshmukh
Rohit Govind
Rajat Vohra
Shrabanti Das
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THE SIBM FINANCIAL
January, 2013
Contents
1.
Dodd–Frank Wall Street Reform and Consumer Protection Act
1
2.
The Impact of CDS Trading on Mutual Funds in India
5
3.
Financial Double Trouble
9
4.
Euro Crisis Simplified
12
5.
A Report on Great Eastern Shipping Company Limited
16
6.
Geopolitical tension places oil markets on edge
20
7.
Bonus and Split Shares
23
8.
Benjamin Graham on Investment and Speculation
26
S.I.B.M. Pune
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THE SIBM FINANCIAL
Did You Know ?
Bill Gates told his Harvard University professors that he would be a millionaire by age 30. He became a billionaire at age 31 Legendary investor Warren Buffett bought a 40-acre farm at age 14 with $1,200 in savings from delivering newspapers. Apple was started in a bedroom in Cupertino, California in 1976.
January , 2013
Dodd–Frank Wall Street Reform and Consumer Protection Act -Rohan Sane
The Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into federal law by President Barack Obama on July 21, 2010. Passed as a response to the late-2000s recession, it brought the most significant changes to financial regulation in the United States since the regulatory reform that followed the Great Depression. It made changes in the American financial regulatory environment that affect all federal financial regulatory agencies and almost every part of the nation's financial services industry. Dodd-Frank proposed eight areas of regulation. Here are the major parts of the Act: • Regulate Credit Cards, Loans and Mortgages • Oversee Wall Street • Stop Banks from Gambling with Depositors' Money • Regulate Risky Derivatives • Bring Hedge Funds Trades Into the Light • Oversee Credit Rating Agencies • Increase Supervision of Insurance Companies • Reform the Federal Reserve
The Act is categorized into sixteen titles and, by one law firm's count, it requires that regulators create 243 rules, conduct 67 studies, and issue 22 periodic reports. The Act changes the existing regulatory structure, such as creating a host of new agencies (while merging and removing others) in an effort to streamline the regulatory process, increasing oversight of specific institutions regarded as a systemic risk, amending the Federal Reserve Act, promoting transparency, and additional changes.
S.I.B.M. Pune
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THE SIBM FINANCIAL
January , 2013
Did You Know ? The Act purports to provide rigorous standards and supervision to protect the economy and American consumers, investors and businesses, purports to end taxpayer funded bailouts of financial institutions, claims to provide for an advanced warning system on the stability of the economy, creates rules on executive compensation and corporate governance, and eliminates some loopholes that led to the 2008 economic recession. The major elements of securitization reform are: 1. Credit Risk Retention 2. Required Disclosures 3. Representations and Warranties Major components of Obama's original proposal, listed by order in which they appear in the "A New Foundation" outline, include: The consolidation of regulatory agencies, elimination of the national thrift charter, and new oversight council to evaluate systemic risk; Comprehensive regulation of financial markets, including increased transparency of derivatives (bringing them onto exchanges); Consumer protection reforms including a new consumer protection agency and uniform standards for "plain vanilla" products as well as strengthened investor protection; Tools for financial crises, including a "resolution regime" complementing the existing Federal Deposit Insurance Corporation (FDIC) authority to allow for orderly winding down of bankrupt firms, and including a proposal that the Federal Reserve (the "Fed") receive authorization from the Treasury for extensions of credit in "unusual or exigent circumstances";
S.I.B.M. Pune
Flatbush National Bank of Brooklyn was the first bank to issue a credit card in 1946. The weight of a standard gold bar is approximately 400 ounces, or 27.5 pounds. The first stock exchange can be traced back to Antwerp, Belgium in 1460.
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THE SIBM FINANCIAL
January , 2013
Let’s Define..
Applicable NAV NAV at which a transaction is affected. A cut-off time is set by the fund and all investments or redemptions are processed at that particular NAV. This NAV is relevant if the application is received before that cut-off time on a day. A different NAV holds if received thereafter.
Contingent Deferred Sales Charge (CDSC) A type of exit sales load which is charged when units are redeemed within a specific time period following their purchase. These charges reduce the longer the units are held.
Various measures aimed at increasing international standards and cooperation including proposals related to improved accounting and tightened regulation of credit rating agencies. At Obama's request, Congress later added the Volcker Rule to this proposal in January 2010. The following summarizes the key Volcker Rule provisions contained in the Dodd-Frank Act: 1. Prohibition on Proprietary Trading 2. De Minimis Investment: A banking entity may make and retain an investment in a fund that the banking entity organizes and offers; provided, that, it seeks unaffiliated investors for the fund; within one year of a fund’s start date, the banking entity’s investments shall not exceed more than 3% of the total ownership interests in such fund; and the aggregate of investments in all such funds does not exceed 3% of the banking entity’s Tier 1 capital. 3. Capital Requirements: Oversight agencies will adopt additional capital requirements and quantitative limits. 4. Restrictions on Affiliate Transactions 5. Required Study: Within six months of enactment, the Council will conduct a study and make recommendations regarding implementation of these measures. 6. Phase-In Period: Generally, these provisions shall take effect on the earlier of: 12 months after the date of the issuance of the final rules, or two years after the date of enactment of the Dodd-Frank Act.
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THE SIBM FINANCIAL
January , 2013
Let’s Define..
Impact and reaction This act has received contrasting reactions from the Legislation and the industry. Senator Chris Dodd, who co-proposed the legislation, has classified the legislation as "sweeping, bold, comprehensive, [and] long overdue". Richard Shelby, the top-ranking Republican on the Senate Banking Committee said that "It's an obvious conflict of interest. It's basically a case where the banks are choosing or having a big voice in choosing their regulator. It's unheard of." Barney Frank, who has proposed his own legislative package of financial reforms in the House, was quoted as saying: "Obviously the bills aren't going to be identical, but it confirms that we are moving in the same direction and reaffirms my confidence that we are going to be able to get an appropriate, effective reform package passed very soon.” On the other hand, Ed Yingling, president of the American Bankers Association, regarded the reforms as haphazard and dangerous, saying, "To some degree, it looks like they're just blowing up everything for the sake of change”. Law professor and bankruptcy expert David Skeel concluded that the law has two major themes which are "government partnership with the largest Wall Street banks and financial institutions" and "a system of ad hoc interventions by regulators that are divorced from basic rule-of-law constraints".
S.I.B.M. Pune
Balanced funds A mutual fund scheme with an investment objective of both long-term growth and income, through investment in stocks and bonds. Generally 60% is invested in stocks and 40% in bonds, in order to obtain the highest returns consistent with a low risk strategy. Benchmark A standard used for comparison. Usually to provide a point of reference for evaluating a fund's performance. The common benchmarks for equiy-oriented funds are the BSE 200 index or the BSE Sensex.
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THE SIBM FINANCIAL
Important Dates
January , 2013
The Impact of CDS Trading on Mutual Funds in India -Akshay Angadi
Quarterly Results
Recently, the Securities and Exchange Board of India (SEBI), allowed mutual funds (MFs) to participate in the credit default swap (CDS) market. This comes a year after the Reserve Bank of India (RBI) opened up the CDS market in India for corporate bonds. CDS became known during the 2008 crisis.
21st Jan
So what is a CDS?
- Asian Paints Ltd - HDFC Ltd - NTPC Ltd
Say, one of the underlying securities in your bond fund defaults on its interest and/or principal payment. In this case, the value of the bond becomes nil and your debt fund's net asset value (NAV) falls drastically. Hence you suffer a loss. But what if your debt fund had insurance?
22nd Jan
This is where a CDS agreement comes in. In a CDS agreement the buyer of the bond enters into a contract with a market maker that if there is a default by the original issuer of the bond then the market maker would make good the loss. In case of a default, your debt fund gets the money from the market maker and its NAV gets saved. In return, your MF pays a premium to the market maker. It is somewhat like buying insurance.
- Kotak Mahindra Bank Ltd 23rd Jan - Reliance Communications Ltd
A market maker is a broker-dealer firm that accepts the risk of holding a certain number of shares of a particular security in order to facilitate trading in that security. Each market maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the market maker immediately sells from its inventory or seeks an offsetting order. This process takes place in mere seconds.
S.I.B.M. Pune
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THE SIBM FINANCIAL
January , 2013
Important Dates
But as of now, not all MFs can buy CDS. As per SEBI guidelines, only fixed maturity plans (FMPs) can do so, while open-ended debt funds are not allowed yet. Moreover, only those FMPs whose tenors are more than a year can enter into a CDS. Also, the fund has to limit its exposure to a single market maker to 10% of its net assets for CDS transactions. If, during the underlying instrument's tenor, the lender defaults on interest payments, the market maker makes good the payments. If there is a default on the principal, the market maker makes good the loss.
Quarterly Results 24th Jan - Ashok Leyland Ltd
In August, the Insurance Regulatory and Development Authority (IRDA) issued draft guidelines allowing insurance companies to participate in the CDS market. The draft guidelines have allowed them to act only as users of CDS. This means that insurance companies can purchase CDS to hedge their credit risk, but can't issue them. Globally, insurance companies issue CDS as well.
25th Jan
According to the draft IRDA guidelines, CDS are not permitted on securitized assets such as mortgage-backed securities and assetbacked securities. Insurance companies are not enthusiastic about it since CDS makes sense when someone is buying a lower-rated bond and can hedge risk by buying CDS from a high-rated company. But when someone is allowed to buy only high-rated bonds, then there is little use for CDS.
- Adani Power Ltd
S.I.B.M. Pune
- Bharat Electronics Ltd 28th Jan
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THE SIBM FINANCIAL
January , 2013
Did You Know ? The CDS market in India Martha Washington appeared on a $1 silver certificate in 1886 and 1891, as well as on the back of the $1 silver certificate in 1896. She was the first to appear on U.S. currency.
Henry Ford was the first U.S. billionaire.
In the financial world, Zombies, also called living dead, are companies that continue to operate even though they’re bankrupt.
In over a year since CDS was introduced in India, there has hardly been any activity. Last year, soon after RBI allowed CDS, ICICI Bank Ltd entered into a CDS from IDBI Bank Ltd to protect its lending to Rural Electrification Corp. Ltd, or REC, (whose debt instrument ICICI Bank held). That was just a token transaction, though, to get things started. Note REC is a government-owned entity that hardly needs any insurance against it. The real CDS flavor will be felt when entities such as fund managers enter into CDS against lowrated instruments. Also, it remains to be seen what kind of market makers step in. For now, RBI has allowed domestic banks, apart from non-banking finance entities and primary dealers (those who buy and sell government securities), with a minimum financial requirement. But with banks already grappling with issues relating to gross net performing assets, it is to be seen whether they will take to CDS as this would increase their credit risk exposure. Time will also determine the pricing of these CDS. Say, a debt fund holds a debt security that carries a mark-up (the difference in yield of the security from that of a government paper; these mark-ups change marginally every day) of 300 basis points (bps). In other words, if the government security on a given day carries a yield of 8%, then this debt security carries a yield of 11%. Since the security is a risky one, the high mark-up compensates for the additional risk that the lender (the debt fund or any other entity that invests in it) takes. Coupled with the recent measures such as RBI's directive to banks to limit their investments in MFs and the finance ministry's recent advisory to government-owned banks to cap their bulk deposits, these steps aim to strengthen the corporate bond market, which in turn will open more investing avenues for debt funds.
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THE SIBM FINANCIAL
January , 2013
Did You Know ?
If the CDS premium cost is above 300 bps (say about 350 bps or so), it may not make sense for the debt fund -- all things being equal- because the debt fund stands to lose more in CDS than in reality. But if the CDS premium is less than 300 bps, it may not make sense for the market maker, all things being constant. This is all very superficial understanding; the fact is that we don't know the exact pricing mechanisms yet. On account of a lackluster debt market, CDS will not have any major impact now. But CDS might help deepen the debt markets in the long term. This could, in turn, help corporate India to easily borrow from the capital markets and thereby help reduce their cost of capital. Coupled with the recent measures such as RBI's directive to banks to limit their investments in MFs and the finance ministry's recent advisory to government-owned banks to cap their bulk deposits, these steps aim to strengthen the corporate bond market, which in turn will open more investing avenues for debt funds.
On account of a lackluster debt market, CDS will not have any major impact now. But CDS might help deepen the debt markets in the long term. This could, in turn, help corporate India to
S.I.B.M. Pune
The study of currency and the history of money is known as Numismatics.
In Japan, there is an ATM machine that heat presses each bill at 392 degrees for one-tenth of a second before its dispensed... and presto! You’ve got yourself a clean bill.
There are 191 official currencies worldwide.
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THE SIBM FINANCIAL
January , 2013
Financial Double Trouble Let’s Define..
Closed-end scheme/fund A type of fund that has a fixed number of shares usually listed on a major stock exchange. Unlike open-end mutual funds, closed-end funds do not stand ready to issue and redeem shares on a continuous basis. Price is determined by supply and demand. Custodian The organization (usually a bank) that keeps and safeguards the custody of securities and other assets of a fund.
-Dipesh Deshmukh
The term ‘Fiscal Cliff’ has lately come into use a little too often. It refers to the conundrum that the US Government will face in month of January this year. The month will mark the end of the payroll cuts provided by the Bush Administration and could also lead up to serious spending cuts(approximately $1 trillion) by the US Government (pending the negotiations between the Barack Obama administration and the United States Congress). Another factor in play is the debt ceiling, which was raised from $15.194 trillion to $16.394 trillion in 2011. The US Treasury Department expects the US Government to breach this cap around the same time as and when the Budget Control Act of 2011 comes into effect. Looking at the fact that the USA has now slowly started recovering from the worst financial turmoil the world has ever seen since The Great Depression, it is unimaginable as to what effects such levels of tax increases and spending cuts could have on the US economy. The US has now started showing signs of recovery (the US economy grew by 2 per cent in the third quarter of 2012), but it still needs a lot of push to complete the recovery process. But such measures will completely negate the recovery made during the last year. These cuts will ultimately lead to a sharp fall in private investment spending hence lowering output in response to lower demand.
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THE SIBM FINANCIAL
January , 2013
Let’s Define.. Though this will lead to a slight fall in imports, but that would in turn affect countries which are major exporters to the USA, like China and many European nations. According to World Bank estimates, an adverse unraveling of the US ‘fiscal cliff’ would dampen world trade by approx. 1.5 percentage points and would hurt the growth estimates of not only the USA but of the whole of Europe and other major economies around the world. The 2013 growth forecast for Europe is around 0.3%, and such a step will be one of the major factors pushing the Euro area further back into a recession. According to World Bank estimates, the GDP of high income countries is expected to tumble by around 1 percentage point where as that for developing countries the figure should be about 0.6 percentage points. If the negotiations succeed and the US avoids the ‘fiscal cliff’ and another set of negotiations are expected to start in order to get rid of the Debt Ceiling. But this would also mean a rapidly rising deficit (the public debt has already risen above $16 trillion and is about to breach the ceiling of $16.394 trillion). It could also result in a repeat of August 2011 when Standard and Poor downgraded the USA for failing to come up with a plausible plan to reduce US budget deficit. Supporters of the Budget Control Act of 2011 say so because it will help reduce the fiscal deficit of the USA, which, as expected by the Congressional Budget Office, is expected to hit $1.1 trillion i.e. 7.3% of GDP. If the negotiations fail and the Budget Control Act of 2011 goes into effect, analysts predict that the USA could be pushed into a recession as early as during the first half of 2013.
S.I.B.M. Pune
Cyclical stocks Stocks which rise and fall in price with the state of the economy, in such industries as construction, automobile, engineering or those affected by the international economy such as shipping, aviation, and tourism. Cyclical stocks are also stocks which are affected by the natural environment such as fertilizers and tea. Examples of non-cyclical stocks would be drugs, insurance, basic foodstuffs and many other consumer products
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January , 2013
Important Dates
Quarterly Results 29th Jan - Pidilite Industries Ltd - Dabur India Ltd - Container Corporation Of India Ltd 31st Jan - Thermax Ltd - Godrej Consumer Products Ltd EGM 30th Jan - State Bank of India
This would lead to a fall in the deficits in the short term, but inevitably the USA will have to take on huge amounts of debt at a later stage to battle the effects of the recession it will get itself into and we will see nothing but a repeat of what happened during 2008. Although there are some experts who are of the opinion that there are better ways to reduce the Deficit of a country freshly out of a recession without thrusting it back into another. A prominent example of this is Sweden, when during 1993 it implemented major policy reforms in order to move out of a severe macroeconomic crisis. During 1993, Sweden’s fiscal deficit was around 11% of GDP, along with an unemployment rate of 11%. By implementing these reforms, which included broadening the tax bracket and slashing tax rates, the Swedish Government was able to overturn the deficit to a surplus (3.6%), six years later. Whereas the Budget Control Act of 2011, aims to increase the minimum tax rate from 10% to 15%, which would bring in $1.5 trillion in additional revenues. Historically, both the parties in the Congress (Republicans and Democrats) have always reached a settlement at the very last moment, as was seen during the debt ceiling discussions in 2011. With Obama gunning to avoid the fiscal cliff and the Republicans willing to accept increased revenues but accompanied by spending cuts, it will be interesting to see if one party wins completely or if they are able to reach an amicable settlement.
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THE SIBM FINANCIAL
January , 2013
Euro Crisis Simplified -Akshay Iyer
The idea of creation of common currency for countries belonging to the European Union was formed so that there is better integration among EU countries & also there is a possibility of creation of an alternate reserve currency vis-Ă -vis the dollar. The countries which wanted to use this common currency had to sign the Maastricht Treaty which had the following clauses: 1. Inflation rate of the participating country should not be higher than 1.5% of the average inflation rate of the 3 best performing countries in Eurozone 2. The ratio to government deficit to GDP for a year should not exceed 3% 3. The ratio of government debt to GDP should not exceed 60% 4. The long term interest rate for a country should not be higher than 2% than the 3 lowest inflation states Any country that satisfied the above conditions would be allowed to use the common currency. By adopting Euro as their currency & being part of monetary union countries received a higher credit rating which helped them borrow at lower rates. As a result countries like Greece, Portugal & Italy borrowed more & more money at lower interest rates with longer maturities.
S.I.B.M. Pune
Important Dates
Dividend 23rd Jan - Tata Consultancy Services Ltd EGM 25th Jan - Sun Pharmaceuticals Industries Ltd 31st Jan - Siemens Ltd
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THE SIBM FINANCIAL
Did You Know ?
The Knights Templar between 1118 and 1307 used a cheque system to provide their pilgrims with travel funds. They worked much like modern day travellers cheques. The first banks were likely religious temples. Why? Because the security was always tight. With only a 1 in 100 chance of having a nonfatal injury or illness, the financial sector is the safest job area out there!
January , 2013
Also, there was irresponsible spending by many of these countries in areas of public welfare, wage hikes & no formalized structure which would help them earn amount of revenue that they were spending each year. It was also reported that some of the clauses of Maastricht Treaty were breached by these countries & they used creative accounting techniques to hide these discrepancies. The clauses mentioned in Maastricht treaty were broken by few member nations. Government debt instead of being limited got doubled in these years with only 5 countries having their debt below 60% of GDP. Also government deficit was not capped, with only 4 countries falling below 3%. Also a clause in the Treaty which restricted countries from being bailed out in case of economic problems got broken when a bailout package got designed for Greece, Portugal & Ireland. All these were concealed in the years prior to 2008 where the governments were able to pay timely interest on their borrowings due to well-functioning global economy. Problems surfaced in 2008, when there was economic downturn & countries were not able to make timely interest payments. It was on Jan 14, 2009 that for the first time, Standard & Poor downgraded Greek government bonds to A- , the lowest rating among Eurozone member states. It also strangely presented the start of a big crisis that was about to unravel. Now that Greek bonds were downgraded, investors started demanding a higher premium for lending to Greece, which led to an increase in their borrowing costs. This leads to a vicious cycle where a country has to pay a higher cost for borrowing which further leads to more fiscal strain, which further increases borrowing cost. S&P also predicted in October 2009 that Greek Debt would increase to 125% of GDP by 2010. As a result, it became more costly to hedge a Greek bond against default. On April 27, 2010 Greek debt was downgraded to junk status. Thus, yields on 2 year Greek bonds rose 13% up from 6.3% a few days before.
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THE SIBM FINANCIAL
January , 2013
Did You Know ? Also, the yield for 10 year bonds went above 10%. Speculators used this as an opportunity to bet on the downfall of the euro & the fact that richer northern European countries will try to rescue the smaller countries. They speculated using Credit Default Swaps or CDS, which is an instrument that lets you buy insurance on a vehicle or house you don’t own. Whenever there is damage to that vehicle or house you get compensated for it even though you do not own it. Speculators used CDS to bet that Greek bonds would lose value. If that happened investors would get compensated for it. To avoid further damage European Central Bank (ECB) started buying more of Greek bonds. Thus ECB ended up owning a lot of junk bonds which increased its risk. In countries like Greece where economic assistance was provided, the assistance came with a lot of austerity requirements which led to unrest within the country. The root cause of the crisis was the idea to have a monetary union within the member countries without the presence of a fiscal union. As a result monetary policy is designed by the central bank but fiscal policy is designed by the member countries independently. So if a country does not manage its finances with responsibility it does not have the option to devalue its currency & make its exports more competitive & find a way to earn money. Another outcome of the monetary union was that countries like Spain could not increase interest rates even though they saw a huge real estate bubble building up. One more outcome of the Euro has been that it has increased the friction between states as the southern states feel that northern states are imposing unreasonable austerity measures on them.
S.I.B.M. Pune
The word “bank” derives from the Latin banco. This was a portable bench or counter, from which medieval Italian money changers conducted their business. The first paper money to appear in North America was printed on playing cards. China was the first civilization to create paper money. Economics comes from the Greek word okonomikos which means “skilled in household management.” Women manage most households!
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THE SIBM FINANCIAL
January , 2013
Let’s Define..
The way forward Distribution Pay out to shareholders resulting from a mutual fund's realised capital gains, interest, or dividend income. A mutual fund dividend, or distribution, may be physically paid to the investor, or it may be reinvested in the fund, giving the investor more shares.
Dividend Warrant An instrument issued by companies/ mutual funds to an investor for the purpose of payment of dividends
Let Germany, Finland, France, Austria & Netherlands exit the euro & have their own common currency. This currency could have a higher value due to higher competitive nature of these countries. The remaining countries in EU could use same currency Euro but could have it devalued so as to increase their competitiveness. For this to get implemented the northern states like Germany will have to forgo significant portion of their debts that they have lent to southern states like Greece. It will also require creation of another central bank which will take care of new currency of the above states. Another solution could be to have a fiscal union among the member countries in addition to the existing monetary union. For this to be implemented a huge amount of bailout or debt haircut will have to be arranged by the richer northern states to take care of the huge debt piled up by some of these countries. This would also require countries to strictly follow the amendments of Lisbon or Maastricht Treaty which they haven’t followed till now. Depending on the solution adopted by EU will decide the fate of Euro & its existence in the future.
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January , 2013
A Report on Great Eastern Shipping Company Limited - Rohit Govind
Let’s Define..
Introduction Great Eastern S h i p p i n g Company Limited (GE Shipping) is India’s largest private sector shipping company. Two enterprising families, the Sheths and the Bhiwandiwalas, established it in 1948. It was started to transport mineral oil products, under charter, a l o n g the Indian coast. Over the years the company diversified into real estate business also but that business was sold later to the Mahindra Group (this now exists under the name of Mahindra Lif espan ). At present the company has two major businesses, which include: • Shipping: Transportation of crude oil, petroleum, gas and dry bulk. • Off Shore Division: Offshore oil exploration and production. Currently t h e company is led by Mr. K.M. Sheth, Chairman, a n d Mr. Ravi K. Sheth, Executive Director. The founding families and their immediate relatives currently hold about 27.5 % of the paid up capital of the company. Historical Milestones
Exit load The load on redemption other than the Contingent Deferred Sales Charge (CDSC) permitted under SEBI Regulations. A fee charged by some funds for redeeming or buying back fund shares. The amount sometimes depends on how long the investment was held, so the longer the time period, the smaller the charge.
The company has existed for more than sixty years and has earned a reputation for honest operation as well as for possessing an ability to face frequent ups and downs in global economic activity. It has evolved through so me diversifications and measured growth. Major historical milestones are mentioned below.
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THE SIBM FINANCIAL
Forbes Richest People
1. Carlos Slim Helu 2. Bill Gates 3. Warren Buffett 4. Bernard Arnault 5. Amancio Ortega 6. Larry Ellison 7. Eike Batista 8. Stefan Persson 9. Li Ka-shing 10. Karl Albrecht 11. Christy Walton 12. Charles Koch 13. David Koch 14. Sheldon Adelson 15. Liliane Bettencourt 16. Jim Walton 17. Alice Walton 18. S. Robson Walton 19. Mukesh Ambani 20. Michael Bloomberg
January , 2013
• 1948: Great Eastern S hipp in g Company was founded. • 1991: Following major efforts were undertaken. – Focus on replacement of old fleet and modernization of the same. – Entry into real estate business – Merger of offshore business to offshore drilling and exploration. • 1992: First to acquire ships under self-finance scheme • 1999: Sold its real estate business to Mahindra Group • 2008: The Company announced a joint venture with DOF Subsea ASA of Norway. Industry Overview Shipping industry r e f l e c t s the economic health of nations. Around 90 % of the world trade is generally done through this industry because of its cheaper rates and high efficiency. It is a catalyst f o r economic development and is also considered as the most eco-friendly method of transportation. There are mainly two classes of goods that a r e transported. • Wet bulk: Crude oil, petroleum products etc. • Dry bulk: Iron ore, coal, fertilizers etc. The shipping industry i s demand-supply d r i ve n . The rates are Higher the demands, higher determined by this relationship. are the rates. The industry demands huge capital investment, wh i ch is not only for the fixed assets but also for the skilled labor. GE Shipping has its own training establishment, which is rated as the best in the country. India has a thriving economy and it is well supported by its cargo shipping industry. About 9 0 % of the trade f r o m India is done through s h i p p i n g transport. The major challenges faced, however, by the industry a r e as follows: • Port congestion. • Lack of depth channels • Foreign collaborations
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January , 2013
Ranking within Sector As per the latest declared results, the company stands second in ranking for profits and fourth for market capitalization within the shipping sector. The table below gives the details. Company
Market Cap. Rs. Mill.
Adani Ports Essar Ports GE S h i p . Pipavav Shipping Corp.
Net EPS Profit Rs. Rs. Mill.
271,760 39,516 39,307 65,176 24,874
1,773 -710 1,433 185.2 -4,282
5.88 -1.73 9.41 0.27 -9.19
Ranking Market Cap.
Ranking Net Profit
2 3 4 1 5
1 4 2 3 5
Table 1. Sector Rankings by Market cap and Net profit Profit Performance GE shipping has been, a profitable company despite recent economic turbulence. Table 2 below shows the annual sales and profits for the last five years. Year Sale: Rs. Mill. Profit: Rs. Mill. Percentage
2008
2009
25,946 13,567 52.3 %
28,362 13,747 48.5 %
2010
2011
2012
19,142 13,762 17,096 3,958 2,664 1,433 20.7 % 19.4 % 8.4 %
GPD(nominal) rankings
1. United States 2. China 3. Japan 4. Germany 5. France 6. Brazil 7. United Kingdom 8. Italy 9. Russia 10. India 11. Canada 12. Spain 13. Australia 14. Mexico 15. Korea, Rep. 16. Indonesia 17. Netherlands 18. Turkey 19. Switzerland 20. Saudi Arabia
Table 2. GE Shipping: Five- ye a r sales and profit performance
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January , 2013
Did You Know ? Share Price Movement
The United States is the only country in the world whose paper currency and coinage is imprinted with the slogan “In God We Trust.” The public must have faith in the dollar.
The share price (High and Low) for each year is given in Table 3. The price has dropped considerably from the high of around Rs. 550 in 2008. The ‘High’ and ‘Low’ values for 2012 are up to November 2012. Currently t h e price appears to be stabilized around Rs. 250. Year
2008 2009 2009 2010 2011
High Rs. Low Rs.
564 139
316 142
393 255
352 183
285 187
Table 3. GE Shipping: Share price movement on NSE Future Prospects
It costs more to buy a new car today in the United States then it cost Christopher Columbus (and his backers) to equip and undertake three voyages to and from the new world.
With the recent financial crisis there has been a reduction in trade and hence rates have dropped by around 15 %. With the Chines economy also going through a slowdown overall drop in goods transportation activity is expected to last for at least another t w o years. However, there has been a revival in dry bulk goods segment due to stockpiling of food grain, m et a l s e t c. in China. An increase in refining capacity and global oil exploration a cti vit y is expected, which will benefit the offshore shipping segment. These factors indicate a positive outlook for the company’s future in coming years. For prospects in the immediate future, however, one has to be cautious.
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January , 2013
Geopolitical tension places oil markets on edge -Akshay Angadi After Libya’s impact in 2011, 2012 had again been notable for geopolitical disruptions to oil supply. All throughout 2012, these stimuli have affected Iran, Sudan, Syria, and Yemen and have led to an estimated 1.2 million barrels per day (mbpd) loss in output during the year. Much of this has been offset by the steady return of Libyan supply which has added around 1 mbpd. Gains in nonOPEC crude and global NGLs (Natural Gas Liquids) have also been strong this year.But it is the action of Saudi Arabia which has been the main factor dampening price pressures stemming from the supply disruptions, and making sure markets are comfortably supplied, according to a report by Samba Financial Group. Along with other GCC (The Co-operation Council for The Arab States of The Gulf) producers, Saudi Arabia has continued to increase production to offset supply disruptions, and to meet rising global demand which was expected to be up by around 1 percent in 2012, or 0.9 mbpd. Demand growth continues to be driven by emerging markets while consumption in developed economies contracts again, accentuated by the recession in Europe and the stuttering US recovery. In these circumstances, Saudi Arabia's increase in output to just over 10 mbpd since April,2012 has kept fundamental market conditions well balanced. Even with the Iranian disruptions, OPEC production had been running above the estimated call on its supply for the year 2012generally estimated at around 30.5 mbpd, and close to OPEC's own 30 mbpd quota, the report added. Despite the relatively healthy fundamentals, prices have come under renewed upward pressure as markets are worried about geopolitical risks to supply, particularly the July, 2012 implementation of sanctions on Iran, and the reduction in spare production capacity given the increase in Saudi output. Counteracting this have been concerns over the euro zone crisis and global growth.
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Did You Know ?
Doubling a penny every day over a 30 day period yields 5.36 million dollars! Federal Reserve economist Bhashkar Mazumder has shown that incomes among brothers are more correlated than height or weight. Boeing accounts for almost 2% of all U.S. exports.
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Let’s Define..
Ex-Dividend Date The date following the record date for a scheme. When a fund's net asset value reduces by an amount equal to a dividend distribution. Front-end load A one-off charge that an investor must pay at the time the units of the scheme are bought. Family Of Schemes A set of schemes with different investment objectives from a single asset management company usually allowing investors to "switch" their investments from one scheme to another at a no charge or a nominal charge.
January , 2013
But these eased off in the second half of the year after the ECB stated that it would "do whatever it takes" to preserve the euro and subsequently introduced an unlimited sovereign bond buying program. Another round of quantitative easing in the US also provided a boost. Oil prices have fluctuated over the previous year with Brent rising to a high of $121 per barrel in March, 2012 before slumping to $90 per barrel in June. Prices have recovered since and were running back over $100 per barrel in the third quarter. Brent has held within a $90-120 per barrel trading range since late 2010, and the average price for 2012 is expected to come in at close to the record $111 per barrel recorded last year, the Samba report said. Market uncertainty The oil markets head into 2013 facing continued uncertainty, much of it related to pending global political developments. The Iranian nuclear impasse remains a key issue along with the escalating threat of an Israeli air strike, and the conflict in Syria which threatens to spill over its borders. Meanwhile the modalities of the ECB bond buying program still needs to be clarified; Greece is hanging on by a thread, while the moves towards banking and fiscal union in the euro zone face many political and implementation hurdles. Demand outlook Peering through this fog of uncertainty, the Samba report said that global growth will remain muted in 2013 at around 3 percent, similar to this year, with some pick up in 2014. This assumes no country leaves the euro zone, and that US politicians curb the full impact of the "fiscal cliff". Emerging markets retain room for policy stimulus which they have already begun to activate in the face of slowing global growth and trade. This should allow them to maintain positive growth momentum, although there is likely to be general shift down in growth potential, particularly in China. In this environment annual global oil demand growth will remain at around 1 percent or approximately 0.9-1 mbpd. China and India will remain key sources of demand growth, absorbing around 450,000 bpd and 120,000 bpd respectively in 2013.
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Supply conditions Global supply conditions appear to be on line for a steady improvement in 2013-14, despite the expected continued disruption from sanctions on Iran which seem likely to be intensified this year. Assuming that there is no military confrontation sanctions should keep Iranian output constrained to around 2.7 mbpd or less, down from around 3.5-3.6 mbpd. During 2012 this supply shortfall was largely offset by higher Saudi production, but as we move through 2013 the anticipated return of Sudanese supply, increasing Iraqi production, and healthy gains in North America will increasingly take up the slack. As a result it seems likely that Saudi Arabia will need to rein in production during 2013 in order to manage what could be a growing supply overhang. Prices The expected weakening in market fundamentals and improved spare capacity outlook should exert downward pressure on prices over the next couple of years. Furthermore downside risks to the global economy remain high, with potential policy missteps over handling the US "fiscal cliff" and the on-going euro zone debt crisis threatening to drag the world back into recession. Given the sustained uncertainty, the average price for Brent will hold at around $100 per barrel this years, down from an estimated $110 per barrel in 2012, before slipping to $98 per barrel in 2014. Prices may well fluctuate sharply over the outlook period as markets respond to conflicting developments. Nonetheless the prices should remain within their current trading range of $90-120 per barrel aided by Saudi Arabia's position as effective swing producer. Given its current high production levels, the Kingdom could comfortably cut output significantly to shore up prices if necessary, and would likely act if prices were to dip below $90 per barrel for any length of time. Conversely, the Kingdom would seek to increase production should there be a supply shock and keep prices from exceeding $120 per barrel at which level global growth is likely to suffer.
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January , 2013
Let’s Define..
Growth funds Mutual funds with a primary investment objective of long-term growth of capital. Unlike income, which is somewhat regular and consistent in most cases, growth is much less certain. Growth investments, however, usually outpace the returns on income investments over the long-term (five to ten years, or longer). It invests mainly in common stocks with significant growth potential.
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Bonus and Split Shares Indian States GDP (nominal) ranking
1. Maharashtra 2. Andhra Pradesh 3. Uttar Pradesh 4. Tamil Nadu 5. Gujarat 6. West Bengal 7. Karnataka 8. Rajasthan 9. Kerala 10. Delhi 11. Haryana 12. Madhya Pradesh 13. Bihar 14. Punjab 15. Orissa 16. Chattisgarh 17. Jharkhand 18. Assam 19. Uttarakhand 20. Himachal Pradesh
-Shrabanti Das Bonus shares The word Bonus gives a feeling that the shareholder is getting something free or as a gift. This really is not the case. Yet, the shareholder does get some benefit as the share price tends to increase. Definition A bonus share is a free share of stock given to current shareholders in a company, based upon the number of shares an individual shareholder is currently holding. Following points should be noted. - While the issuance of bonus shares increases the total number of shares outstanding, it does not increase the net worth of the company. In other words it is a readjustment. The amount of capital increases and the amount of retained earnings (reserves) reduces by an equal amount. Thus, the total of capital and reserves remains same. - Although the total number of shares outstanding increases, the proportion of shares held by each shareholder out of the total remains same. - Price of the share in the market, falls after the issuance. This happens in the proportion of shares issued. Thus, if a 1:1 bonus issue occurs, the number of shares doubles and the price drops by approximately 50 %. Reason As years go by, the reserves keep increasing and though theoretically the reserves belong to the shareholders, they cannot trade those reserves. By issuing bonus shares that many more shares are available for trading for the shareholders. Though the price reduces immediately after the issue, it picks up later and increases. By issuing bonus shares, the company gives tangible ownership of the reserves to the shareholders
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January , 2013
World’s largest companies (by revenue) Example The following hypothetical example will prove useful for understanding the operation. - A company has a share capital of Rs. 100,000 divided into 1,000 shares of face value Rs. 10 each. The reserves are Rs. 300,000 making the net worth as Rs. 400,000. - Imagine that the share price is Rs. 150 pre-bonus. - Imagine the company declares a bonus in the ratio of 1:1, meaning one bonus share to be issued for every share held. - After issuance of bonus shares, the capital will be Rs. 200,000 and the reserves will be Rs. 200,000 keeping the net worth again as Rs.400,000. - The share price will drop to somewhere around Rs. 75. It is very rare to see the share price falling exactly by half. Effect The share price increases immediately on announcement to adjust for the bonus proportion. On issuance of bonus the share price drops in the proportion as explained earlier.
Share split This is comparatively a new phenomenon in India, though has been common in other countries since long.
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1. Exxon Mobil 2. Royal Dutch Shell 3. Walmart 4. Sinopec Group 5. China National Petroleum Corporation 6. BP 7. Saudi Aramco 8. Vitol 9. State Grid Corporation of China 10. Chevron 11. ConocoPhillips 12. Toyota 13. Total 14. Volkswagen Group 15. Japan Post Holdings 16. Glencore 17. Gazprom 18. Apple 19. General Motors 20. General Electric
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Let’s Define..
Growth investing A style of investing that invests in fundamentally sound businesses with the belief that they will go up in price. The stocks in this portfolio are well researched, liquid and of high quality and will usually give you a high P/E ratio and lower dividend yields in comparison to the market. Growth scheme A scheme where investments are made in equity and convertible debentures. The objective is to provide capital appreciation over a period of time.
January , 2013
Definition A split is defined as a reduction in face value of a share so that one share of earlier face value gets divided into equal parts of lesser face value. Thus, when a share of face value of Rs. 10 gets split in the ration of 1:1, one older share is converted into two new shares of face value of Rs. 5 each. Note that the net worth, capital and reserves remain unchanged but the number of shares issued changes. Reasons A split is carried out for any or all of the following reasons. - The share price of the company share may have risen to a level that is either too high or much above the price levels of similar companies. - A split reduces the price which makes it more affordable thereby increasing the trading in the shares. This benefits the small investors in particular. Effect - The stock price reduces as the number of shares outstanding increases. - The net worth remains the same and so does the market capitalization. - The stock price tends to increase after the split as trading in the stock increases. The stock price also increases after the split as the market reads it as a signal for high profitability and high demand for the share. The information given above must be qualified by the example of Berkshire Hathaway, the company run by Warren Buffet. Despite high price, and despite considerable reserves, the company has not issued bonus shares nor has the share been split. This is because Warren Buffet feels that excessive trading in the share is not desirable. He has expressed these views in a letter to his shareholders where he explains that he does not wish to have too many shareholders and is happy with the small community of shareholders of Berkshire Hathaway with whom he has been associated since long, and wishes to remain associated with them in the future too.
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Benjamin Graham on Investment and Speculation -Akshay Angadi - Aabhas Agarwal -Rohit Govind
Benjamin Graham wrote two books, in addition to some other, which have been in print for many years and have become necessary reading for all students of security analysis. The book Security Analysis, written in collaboration with Charles Dodd is an authoritative book on the subject, but is too detailed for nonprofessionals. The other book, The Intelligent Investor is for nonprofessionals. Graham, in the first chapter of The Intelligent Investor, explains the essential difference between investment and speculation and also makes a historical comparison between the two common avenues for investment viz. investment in shares and investment in bonds. Graham ends the chapter with advice to a defensive investor.
January , 2013
Let’s Define.. Inception date The end of a scheme's initial offering period and the start of the scheme's formation. Indexing An investment strategy that consists of the construction of a portfolio of stocks. It is designed to track the total return performance of an index of stocks.
Investment and speculation Graham offers a very short and simple definition of investment. According to him, investment is defined as an operation, which promises safety of principal and an adequate return based upon thorough analysis. Operations not meeting these requirements are speculative. Graham further s a y s that h e can cite a newspaper article, which mentions the word investor f o r all those who buy or sell securities, regardless of what they buy, for what purpose they buy or whether they buy for cash or on margin. He disagrees with this statement. He also compares this to the attitude of the public toward common stocks in 1948, when over 90 % expressed themselves against any purchase of common stocks.
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Inflation risk The possibility that the value of assets or income will be eroded by inflation affecting the purchasing power of a currency. Often mentioned in relation to fixed income funds as they may minimize the possibility of losing principal.
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India’s largest companies (by revenue)
1. IOC 2. Reliance 3. BPCL 4. HPCL 5. SBI 6. ONGC 7. MMTC Ltd 8. NTPC 9. Essar Oil 10. Tata Motors 11. MRPL 12. Larsen 13. BHEL 14. SAIL 15. Bharti Airtel 16. Chennai Petro 17. GAIL 18. TCS 19. PNB 20. Maruti Suzuki
January , 2013
They thought it to be unsafe and a gamble and called it speculation, which again, is incorrect. Investment in common stock can be fairly safe if carried out after a fair amount of study. For Graham, investment and speculation are two distinct issues and he does not approve the disappearance of the distinction. In any investment, there is always a risk. The returns will be available in the future and no one can predict the future with certainty. Investment means weighing the risks and an investor must realize the existence of risk or the speculative factor in his common stock holdings. Risks are inseparable from the opportunities of profit that they offer. Past market behavior Graham looks at the past to see how attitudes prevailed regarding investment in bonds (more secure) and in common stocks (less secure). In the early and mid-sixties it was recommended that the holdings should be divided between high grade bonds and leading common stocks in the proportion such that bonds are never less than 25 % or more than 75 % and vice versa. The simplest choice would be to maintain a 50-50 ratio. Depending on the market situations, this ratio may be adjusted from time to time. In 1965, the returns on high-grade bonds were 4.5 % and on good tax free bonds were 3.25 %. The dividend return from leading common stocks was about 3.2 %. This suggested caution. At normal level of market the investors initial dividend returns were between 3.5 to 4.5 % on his stock purchases, to which should be added the steady increase in underlying value of a representative stock list of about the same amount, giving a return from dividends and appreciation of about 7.5 % per year. Note that a 50-50 ratio of bonds and stocks would give 6 Since 1964, the major change has been the rise in interest rates on first grade bonds to record high levels.
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The returns o n good corporate b o n d s are a good 7.5 %. However, the dividend on good common stocks has been around 3.5 %. We see that o v e r time the future of security prices is never predictable. Almost always bonds have fluctuated less than stock prices, and investors generally could buy good bonds of any maturity without having to worry about the changes in their market value. After 1971-72, it was possible to get 8 % taxable return on good medium term bonds, 5.7 % on tax free bonds, and 6 % on short term US government issues. However, stocks were yielding only 3.5 %. A defensive investor will be able to count on the current 3.5 % dividend and approximately 4 % appreciation. The appreciation i s basically on the reinvestment by various companies of a corresponding amount annually out of the undistributed profits. Still the average returns of approximately 7.5 % are less than those of good high- g r a d e bonds. Conclusion for a defensive investor Graham concludes from the above that one cannot be certain that bonds will work out better t h a n stocks from today’s levels. The most important factor for this will be inflation. Thus, the basic compromise policy that e m e r g e d for defensive investors was, that at all times they should have a significant part of their funds in bond type holdings and a significant part a l s o in equities. However, the investor cannot hope for better t h a n average results by buying new offerings or hot issues of any sort. This is most certainly true in the long run. The defensive investor must confine himself to shares of important companies with a long record of profitable operation and good financial condition.
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January , 2013
Governor of RBI
Dr. D. Subbarao
Deputy Governors of RBI
Dr. K.C. Chakrabarty Mr. Urijit Patel Mr. Anand Sinha Mr. H.R. Khan
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Let’s Define.. To summarize, a defensive investor must:
Indexation The central government specifies an index linked to the wholesale price index. The indices of two years (year of purchase and the year of sale) are used for the purpose of computing capital gains tax. The purchase price is multiplied by the index of the year of sale and the product is divided by the index of the year of purchase. This benefit is available only if the security has been held for more than 12 months. On sale of equity-oriented mutual fund schemes, one can opt for paying tax at the rate of a flat 10% or go in for paying 20% after taking the benefit of indexation.
1. Purchase shares of well-established investment funds as an alternative to creating his own portfolio. In other w o r d s , a defensive investor should invest through good Mutual Funds. 2. Utilize one of the common trust funds operated by trust companies and banks or use services of a recognized investment counsel firm. 3. Use the concept of Dollar cost averaging, which means that the practitioner invests in common stocks the same number of dollars each month or each quarter. In this way he buys more shares when the market is low and less when it is high, and is likely to end up with a satisfactory price for his holdings. Types of Traders Aggressive investors actively manage their investments and hope to beat the market by doing so. Therefore it is very important for an investor to bear in mind that t h e r e is no method, which will guarantee a precise success or failure. There are three ways in which investors and speculators generally make money in stock market. They are: 1. Trading in the market: This usually means buying the stocks when the market has been rising and selling them when it has turned downwards. The stocks that are likely to be selected are those, w h i c h are performing better than the market average. 2. Short-term selectivity: This means buying stocks of companies which are reporting or expected to report increased earnings or for which some other favorable development is anticipated.
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Let’s Define.. 3. Long-term selectivity: Here the usual emphasis is on the excellent track record of past growth, which is considered most likely to continue in the future. In some cases the investors may choose companies, w h i c h have not yet shown impressive results but are expected to show higher earnings in the future. Stock trading, the first category above, is not based on thorough analysis and therefore does not guarantee s a f e t y of principle amount invested and satisfactory r e t u rn s. For short-term selectivity, the investor may be wrong in his estimate o f the future; or even if he is right, the current market price may already be reflecting what he is anticipating. For short-term selectivity, the current year's results of the company are generally available to everyone in the market. The next year’s results a r e predictable t o a certain e x t e n t and are under consideration by other investors also. General Advice Therefore to enjoy a reasonable chance for continued better t h a n a v e r a g e results, the investor must follow policies, which are: 1. Inherently sound and promising 2. Not popular in the stock market. Here Graham is asking the investor to depend upon his judgment and not necessarily always follow the market. Sometimes this is referred to as being a Controlled contrarian.
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Index Fund A fund that tries to mirror the performance of an index by investing in securities making up that index. (note: it is not possible for investors to actually invest in the actual index, such as the BSE 30). This is a passive management style which normally results in lower management fees. Investment Objective The stated purpose or goal of a security's operations. This term often determines the types of investments the security makes, the results expected, and the level of risk with which it is associated.
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Let’s Define.. What is investment worthy? An investment option is one, which, upon thorough analysis, promises safety of principal and an adequate return. This focuses mainly on three points Load fund A mutual fund that charges an extra sales fee on top of the other fees. Loads do not mean a fund is managed better. There are two types of loads; front-end, charged at the time of purchase and back-end, charged at the time of redemption. NRE A Non-Resident External Rupee account that NRIs can open with any Indian bank. They can use this account for making investments in India on a repatriable basis.
1. Thorough company analysis and soundness of underlying business 2. Protect against serious losses 3. Aim for good and not outstanding returns Conclusion Investors’ judgment of a company is based on established standards of value while speculators work on the fluctuations of market price. It’s always advised to own a stock with which one is comfortable, even without knowing its daily price. In 1990s people mixed up speculation with investment. There was a huge decline in holding period of a stock from around 5 years in 1973 to 11.4 months in 2002. Mutual Funds holding period dropped from 3 years in 1973 to 10.9 months in 2002 Wall Street portrayed online trading as an easy quick way to earn cash. This lucrative offer attracted the public. This led to a huge increase in day trading and speculations. The stock market was turned i nto a national video game. People who were playing this game had at their disposal vast amounts of data. However none of it was converted into useful knowledge to help in smart yet safe investments. With large quantity of data huge number of random patterns will emerge by chance due to which speculations may seem secure investment logic. All these speculations even if they might help earn a quick buck will ultimately lead to losses.
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