Volume 1, Issue 6
March 26, 2011
Vinod gupta school of management, IIT KHARAGPUR High Dividend Yield Companies Back in Demand
About Fin-o-Menal Fin-o-Menal is the weekly Financial News Letter of VGSoM which is publ i sh ed by Finte`est, the Finance Club. Come, Take Finte`est!
Interest
in
Editors Harish Thangaraj Lavanya Rajasekaran Dhiru Rabha
Rates This Week
44.70
62.98
71.70
6.82
Editors Note This month end special issue of Fin-o-Menal is a Four Page Issue. A big Thank You to the Contributors.
The Global Economic Crisis has made investors risk averse. Investors have become very selective about choosing the right stock and are looking for early gains, thereby mitigating loses in the long term. The result is corrections in stocks of companies with a good dividend payout ratio, irrespective of any increase in earnings. Dividend yield is equity dividend per share divided by the stock price. High dividend paying companies have been able to better resist the downward price pressure and thus, are a natural choice of investors in the present volatile market. High Dividend Yield helps guard against the risks associated with Capital Appreciation in the long term. Under the present market situation, these firms have managed
correction despite their stable earnings. For instance, Shipping Corporation of India (SCI) has underperformed the benchmark indices by over 22% in the past three months, but is currently trading at attractive valuations offering a potential dividend yield of over 6.5%. Book Value, P/E Ratio and growth prospects of the company are analysed for mid-caps and small caps that do not pay high dividends. As such, consistent performance indicators and high dividend yield are the best way to choose a stock. Thus, it is important that investors look at dividend yield in conjunction with future business prospects and cash flows of the company and if the dividend yields sustain, investors will definitely be rewarded handsomely. (Contributed by Nilesh Kumar)
Tax Reforms in State Level Budgets Indian Taxation system is undergoing a huge transformation with the introduction of DTC (Direct Tax code) and GST (Goods and Services Tax). The new tax reforms are under discussion and will be implemented soon. Progress on GST implementation has been slow because of conflict between the state and central governments upon the revenue sharing model. With the introduction of FRBM (Fiscal Responsibility and Budget Management Act), states have to reduce the huge fiscal deficit. To reduce deficit, states are undergoing tax reforms to increase tax collection. Delhiâ€&#x;s state budget has proposed to increase the registration tax on diesel run passenger cars by 25%. Delhi government has proposed this tax citing the recommendations of Kirit Parikh Committee. Kirit Parikh committee suggests that diesel run passenger cars should pay a onetime expense to the exchequer as they take advantage of the highly subsidized fuel. It is a game-changing step and other states can
take a cue from this and can come up with some innovative mechanisms so that subsidies can reach the target people. Maharashtraâ€&#x;s state budget has proposed to increase the stamp duty on non-delivery based transactions in equity and commodities. Stamp duty is largely subject to the state, with different states having different rates for stamp duties. Differential stamp duties in land transactions do not result in shifting of transactions from one state to another because of immovable characteristic of land. But with differential stamp duties on equities and commodities transactions, volumes can shift from Maharashtra to other states with lower stamp duties. This will result not only in a revenue loss to the government but also in loss of jobs. Jobbers, algo traders and proprietary traders may lose their jobs as jobs can get shifted to states with lower tax rates. Hence, a uniform tax structure should be imposed across all the states to ensure that tax rates do not influence business. (Contributed by Harsh Bansal)
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Volume 1, Issue 6
Markets this week Index
BSE
NSE
Opening Value (Mar 14)
18816
5654
Closing Value (Mar 18)
18439
5437
Change
+2.00%
+3.99%
(As on March 25, 2011)
Commodities this week Commodity
`
Unit
GOLD
20839
10 gm
SILVER
55455
Kg
OIL
4744
Barrel
(As on March 25, 2011)
Sectors this week Indices
Value
BSE IT
6344.62
AUTO
8848.00
BANKEX
12926.07
BSE PSU
8762.11
METAL
15842.68
(As on March 25, 2011)
March 26, 2011
Shareholders and their rights To protect the interest of the shareholders in the ruthless territory of Capital markets, SEBI provides several rights as a shareholder of a company. Basic knowledge of these rights can help in taking decisions and understand the implications better. Right to dividends- Every shareholder is a part owner of the company. As such they have the right to receive part of profit in the form of dividends. Right to benefits- Companies also rewards its shareholders in different ways. Sometimes existing shares are repurchased at rates higher than the market price. Bonus shares for the existing shareholders are also given at times. New stock offerings are first offered to the existing shareholders in the proportion of their existing holdings. Voting rights- Shareholders can exercise their voting rights in the company‟s annual general meeting. This enables them to participate in the decision making process of
the company. These rights are proportional to the holdings in the company. Shareholders can also choose a proxy to vote for them. But preferred shareholders do not have the right to vote except when their rights are getting affected. Disclosure of Information- Shareholders have the right to be informed about the general functioning of the company and the health of the company. The company annual reports containing its income statement, balance sheets, cash flow statements etc serves the purpose. Apart from this, the minutes of the general meeting has to be sent to the shareholders. Collective rights- Shareholders have the right to appeal against the company if they suspect some mismanagement or an attempt to alter their rights. They can form a group and appeal to the Company Law Board (CLB) for investigations into the affairs of the company. (Contributed by Gautam Gogoi)
The rupee’s dances with the dollar To quote American poet John Ciardi, a rupee saved is 90 paisa earned. But the Indian rupee rose on Monday, from a 10-week low touched in the previous session, supported by local share gains and dollar inflows, towards the Manganese Ore India Ltd (MOIL) Initial Public Offering. The prognosis is that the rupee will continue to stay strong for some time to come. This seems to run counter to the pessimism about our economic growth prospects and analyst‟s dark forecasts about them. The question is if the rupee will be able to maintain its recent surge against the dollar or not, and also what strengthens the rupee‟s valuedomestic conditions or global. The answer could be both but what is less clear is which is more dominant. At a press conference to announce changes to the foreign policy for 2009-14 Commerce Minister Anand Sharma said that India‟s export for 2010-2011(FY 11) should touch 200 billion dollars. However, he acknowledged that the trade deficit will be around 120 billion dollars for the year. Data from the US, which accounts for more than a third of India‟s exports and foreign trade, suggests that slowdown is in progress. Also, fiscal tightening in European countries could impact the demand for Indian exports. When all the factors are taken together, the net effect is likely to be a worsening exchange rate or, as economists
put it, there is a greater bias for depreciation or erosion in the rupee‟s value. There is another school of thought that believes that risk aversion in the developed countries could increase the capital flows to India. Global Equity markets are another source of capital flows, and they are doing well too. The recent Tsunami in Japan may as well increase the attractiveness of India as a destination for global capital. The Ireland bail-out package is also a positive for rupee. The Indian market regulator on Friday released the long-awaited auction details of an enhanced Foreign Institutional Investment (FII) debt limit and set the sale date on Dec 2. Dealers cheered the auction decision as they expect foreign investors to hedge their debt exposure in the forward dollar market, which can push up the premium once the auction starts. The Commerce Minister‟s steps-extending Standard Operating Procedure given to exporters-have made people cross their fingers and wonder how India‟s fiscal balance sheet will look like at the end of the year. If things go well on these front-good advance tax collections, for instance, the prospects of rupee may look even brighter. That said, it may be early to believe what Miss Prism said to Cecily in Oscar Wilde‟s „The Importance Of Being Earnest‟: “The chapter on Rupee you may omit. It is somewhat too sensational.” (Contributed by Jayati Singh)
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Volume 1, Issue 6
Did You Know? The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s. It was the longest, most widespread, and deepest depression of the 20th century. Unemployment rose 607% and industrial production fell nearly 50% in the US.
International Markets this week
US Dow Jones
London LSE
12220
5901
Japan Nikkei 225
HongKong Hang Seng
9536
22300
(As on March 25, 2011)
March 26, 2011
A Rendezvous With warren buffet Aditya Zutshi, Second year MBA, recently had the opportunity to interact with Warren Buffett, the man who's better than any other at making money and giving it away, during his first visit to India. Accompanying Mr. Buffet was Mr. Ajit Jain, an alumnus of IIT Kharagpur and seemingly his most trusted manager at Berkshire Hathaway. He graduated in 1972 from the IIT Kharagpur and was a resident of the Azad Hall of Residence. This interaction was organized by NDTV TV Channel and was telecast live. The program named „India Questions‟ was targeted to give an opportunity to the students to ask questions to the third richest person in the world. Warren Buffett when asked that why he stayed away from investing in India all these years, said that he stayed away from India as he did not understand the Indian companies so well. It was a mistake and he can make a decision on investment in India at anytime in the future. The audience was very excited to hear about his plans to invest in India in the near future. Buffett said that on landing in India, he found the country pretty much what he expected. With booming economy and his company‟s plant in Bangalore expanding very rapidly, he found people very cordial and made some new friends in a short time. He said that he had a lot of fun too and despite a hectic schedule, he looks forward to all that is to come. To give an idea on how easy it is for him to make money, Berkshire Hathaway chairman
Warren Buffett said that he was earning $15 a second every day from just his investment in Goldman Sachs during the 2008 financial crisis. Having a great sense of humour, Buffet joked that he would hide in a cave to avoid the buy back, since he is earning millions of dollars in dividends! Warren Buffett said that they have never ever invested in a Private Equity firm and have never bought a business with the idea of reselling it. Whereas Private Equity has an exit strategy, Buffett mentioned that he had an entrance strategy. On insider trading, Buffett said that Wall Street also has its own grey areas. Any rise in the market always leads to chances of money making and practices like insider trading occur in other countries also. The audience asked Buffett and Ajit if they had sleepless nights post big investment. To this they answered that they sleep like a baby and even wake up every hour and cry. Buffett mentioned that he has no regrets about his life and considers himself to be very lucky. He mentioned that if you love your work, every day feels as if you‟re not working. He also told that for tough questions in life, one should try to find answers by oneself. He promised the audience that doing this, the life would become very different. He also said that it is extremely important to have those people work with you who like you as a person. Overall the interaction was quite enriching and motivating for a soon-to-be-manager! (Contributed by Aditya Zutshi. Read more at www.adityazutshi.com)
Quote Un-Quote
"Bill Gates told me that IIT is the place to look for talent " - Warren Buffet, the 80-year-old CEO of US conglomerate Berkshire Hathaway and the world’s third richest man, recalling a conversation he had with Bill Gates in 1991, over attracting talent from India.
Toon of the week
Q u i c k Q u o t e : Money can‟t buy happiness; it can, however, rent it. — Author unknown
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Volume 1, Issue 6
March 26, 2011
Warren Buffet’s Radical idea to deal with india’s black money The Swiss Banks release of the controversial data pertaining to money in their accounts whose sources have not been verified or, more simply, BLACK MONEY, did not come as a surprise to us Indians. In an embarrassing distinction, India has got the top slot among nations by a huge margin, in the global list of Nations having vast amounts of black money stacked outside the country. It is estimated that Indians have accumulated almost $1500 billion in various Swiss Bank accounts, Tax havens and nations with deliberately lax/secretive banking laws. We are followed by Russia, a usual suspect, but at a distant $470 billion. UK with $390 Billion, Ukraine with $100 Billion and China with $96 Billion were the other major sources of black money worldwide. The money which rightfully belongs to its honest, hardworking, industrious citizens is lying in the Swiss bank accounts of its corrupt politicians, bureaucrats and industrialists; it must be really demoralizing and demeaning for the majority of Indians who are really poor, without basic benefits like health and education. This insanely large amount of money is sufficient to cover 13 times our national debt, or 40% of our total GDP (Purchasing Power Parity wise). What is even more amazing is that if the government stops collecting taxes, this amount is enough to sustain us for next 30 years, which exhibits the sheer size of this amount! There are reasons aplenty for this dubious distinction that India has received. Huge amounts of money started leaving the country into these Swiss-banks in the early 70‟s because of the unrealistic tax regime of the prevailing governments where peak tax rates were as high as 97.5%. This was nothing short of “daylight robbery”. Apart from that, many prevail-
ing activities, like smuggling of goods, over-production in factories and its subsequent non-reporting in account books thrived because of the short-sightedness of the government of a socialist-closed economy. All the money naturally went off the books and got stacked outside the nation, and kept doing so, earning even more interest. Apart from this, corruption, which sadly has always been the corner-stone of Indian bourgeois awakening, also is a major contributor to this pile of black money, be it the kickbacks earned by our corrupt politicians or the hidden earnings of our bureaucrats. A very innovative suggestion to fight this menace of black money has been coined recently by the legendary investorphilanthropist Warren Buffet. Rather than trying the age old formula of asking the black money owners to voluntarily come forward and declare their assets, so that the government collect the requisite tax amount from them and turn the money into „white‟ (the voluntary disclosure scheme) or forcibly freezing their identified bank-accounts, Buffet has suggested the very opposite. He says that these mega rich people who own tons of black money must be allowed to put that money to philanthropic use, without questioning their identity or source of money. According to the legendary Buffet, a child who gets a vaccine that can save his or her life will not question the source of the money that paid for the vaccine. It is both interesting as well as a very radical idea. With the sheer amount of black money lying unproductive, it really seems very reassuring that how many million children may be saved from diseases with that money, or how many vaccines may be produced or invented with that. (Contributed by Harsh Vyas)
Inflation and the Interest rate co-relation Domestic and global factors are conspiring to darken India's once-shining growth outlook, with inflation and sluggish investment likely to keep economic expansion well below the government's target of 9% in the coming year. India's inflation eased less than expected in January to 8.23%, holding well above the Reserve Bank's comfort zone and reinforcing expectations it will raise interest rates at its March policy review. The wholesale price index (WPI), the country's main inflation gauge, rose in the year through January more than the 8.05%. Wholesale food prices jumped 15.7% in January compared with 13.6% in December, leading to fears that food inflation was leading to sustained price rises in other sectors of the $1.3 trillion economy. India suffers from the highest inflation of any major Asian economy even after seven rates rises in a year and analysts doubt a 7% target for the end of March set by the Reserve Bank of India can be reached when price pressures are spreading from food and fuel deeper into the economy. The strength of inflationary pressures is visible from the fact that despite significantly high statistical base effect... headline inflation just eased by about 20 bps. The central bank said last year it would be comfortable with inflation between 5% and 6%. But it raised its forecast for the end of the current fiscal year to 7% after its last policy meeting in January. The RBI on Thursday raised its short-term lending and borrowing rates by 25 basis points in a bid to rein in inflation. It was the central bank's eighth rate hike since
March 2010. The short-term lending, or repo rate, has been increased from 6.50% to 6.75%, while the short-term borrowing rate (reverse repo) has been raised to 5.75% from 5.50%. Increase in rates by RBI is expected to make loans, including housing, auto and corporate loans, dearer. Keeping in view the liquidity situation, the central bank has kept the cash reserve ratio (CRR), the amount which lenders are required to keep with the RBI in cash, unchanged at 6%. However, the RBI has raised inflation projection to 8% for March-end against 7% estimated earlier. After a slight moderation in January, headline WPI inflation reversed in February 2011, accompanied by a sharp increase in non-food manufactured products inflation. Based on the current and evolving growth and inflation scenario, the Reserve Bank is likely to persist with the current anti-inflationary stance. The RBI has been one of the most aggressive central banks in Asia in unwinding its easy monetary policy, raising policy rates seven times in less than a year. But the rapid contraction hit industrial output, whose growth slowed to a 20month low in December. Prices of government bonds fell after the inflation data, as a reaction to the rate increase at the central bank's mid-quarter policy review on March 17. The government also is increasingly worried that high inflation could eat into growth by denting investor confidence, which is already at a low owing to the numerous scams and scandals. (Contributed by Arvind Mahor)
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