December 22, 2013 Volume 22
FinNiche
FinXpress
FinXpress Volume 22 Dec 22, 2013
From The Editorial
CONTENTS
From The Editorial In focus: US FED Tapering Opinion: Independent Directors Term of the Week: Bitcoin Market This Week News Fun Corner
An eventful final placement week at IMT passed with whopping number of students getting placed in the week. With the efforts of Placement Committee members and hard work by IMT students, the placement week ended on a positive note with top companies from various sectors like automobile, investment banking, IT, pharmaceutical, retailing etc offering reputed profiles to IMT students. IMT’s flag is held high by students who have received Pre Placement Offers and successfully converted Pre Placement Interviews. Campus is still abuzz with placement related activities since a lot of esteemed recruiters are expected to visit the campus in coming days. Club FinNiche wishes heartiest congratulations to all those who have been placed and wishes good luck to those whose right company is yet to visit the campus. In this edition of FinXpress, we have the Opinion section on “Independent Directors” and In Focus section on “US FED Tapering”. Do look over the ‘News of the Week’ section for further noteworthy news. The ‘Market of the Week’ covers the latest trends in the market this preceding week. We hope you enjoy the various articles in this edition of FinXpress. We look forward to your comments, acknowledgements and your criticisms regarding our online magazine. Do let us know if you want to have any additional section(s) in our special editions of Finxpress. Happy Reading!!!
Regards, The Editorial Team FinNiche Club
Disclaimer: FinXpress takes no responsibility for the opinions expressed in the magazine. December 2013
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FinNiche
In Focus
US FED Tapering By Ashish Agarwal
The US central bank on Wednesday said it will reduce its $85 billion a month in bond purchases by $10 billion starting in January 2014. For a change, markets rallied after the Fed announcement and the Dow Jones Average ended at a record high, registering its best day in two months.
more borrowing and spending in the US. Wednesday's decision signals better prospects for the US economy and labour market. The Fed estimates that economic growth will be between 2.8 per cent and 3.2 per cent next year as against 2 per cent in 2013
Here are 10 things that you should 6. know about Fed tapering: 1.
The Fed has decided to reduce the quantum of bond buying per month from the next year. So, it would reduce its monthly asset purchases by $10 billion to total $75 billion
Bernanke blamed the slow recovery in the US economy to extensive damage from the housing bust and tight budgets at all levels of government. He also blamed the anaemic pace of the recovery on "some bad luck", saying Europe's debt troubles slowed the global economy at a critical time
2.
Though the Fed will cut back on 7. bond purchases, it plans to hold its key short-term rate near zero at least until unemployment falls below 6.5 per cent. Fed's outlook on rates was interpreted as more dovish than expected leading to a rally in stock markets.
The asset purchases by the Fed have stoked anxiety that they could unleash inflation or fuel hard -to-detect asset price bubbles. Even some within the Fed have worried the bond purchases could have unintended and economic costly effects
3.
The immediate trigger for the Fed's 8. decision to taper its massive bond buying was a recovery in the US job market, Bernanke said. The Fed predicts the unemployment rate in the US will dip as low as 6.3 per cent next year and 5.8 per cent in 2015. It's now at a five-year low of 7 per cent 9. The bond buying, also known as the quantitative easing program, or QE, was launched 15 months ago to kick-start hiring and growth in the US economy, which was recovering slowly from the Great Recession. The Fed's first QE program was launched in the 10. midst of the 2008 financial crisis
The unprecedented money-printing has helped drive stock markets in the US and many other countries to record highs and sparked sharp gyrations in foreign currencies, including a drop in emerging markets this year as investors anticipated an end to the easing
4.
5.
The Fed policy meeting was the penultimate one of Bernanke's tenure. His second four-year term as chairman of the central bank expires on January 31, just two days after the close of the Fed's first policy meeting of 2014 Janet Yellen, the Fed's vice chair is positioned to succeed Bernake and is supporting the bond purchases
The QE helped keep long-term interest rates low to encourage
December 2013
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FinNiche
Opinion
The Independence of Independent Directors —— By Mukul Gupta
The Code of Corporate Governance ("Code") AT Principle 2 recommends that there should be a strong and independent element on the Board, which is able to exercise objective judgement on corporate affairs independently, in particular, from Management. The Code further provides that the independent directors should make up at least one-third of the Board. Independent directors are those who are neither members of the family, employees of the company, advisors, customers or suppliers. The new Companies Act has many additional provisions regarding independent directors. The million Dollar question however is, are the independent directors actually independent or is term independent director itself an oxymoron? Many critics of corporate governance argue that you can either be a director or independent, but not both. In the recent months of government scandals, the importance of independence
outside director to raise an issue that may be sensitive to the family or founder. The appointment of an independent director differs in the private and the public sector. In the private sector, one has to be trusted and well known by the promoter group to be invited to join the board as an independent director. In public sector companies however, where government is the promoter, the appointments are made not by the minister in charge of the PSU and not the chairman. This leads to lots of bureaucracy and nepotism. A lot of influence and "sifarish" are required to become an independent director in a PSU. How can these people be expected to be really independent? It is like getting invited to dinner at a friend's house, and then being critical of the food served. Another major challenge for independent directors is the asymmetry of information. Promoters and managements have far more information and knowledge regarding the affairs of a company and more resources at their disposal compared to independent directors. The promoters and managements also have more financial stake in decisions and, therefore, protect their interests vigorously. These make the job of an independent director very difficult, but not impossible. Within a general climate of graft, is it fair to hold the corporate sector to higher governance standards?
Further, is a director who is also himself a substantial shareholder, but not a majority shareholder, of the company to be considered independent? Will this not give rise to a principle-agent problem where the has become even more evident. The role of director works towards improvement of his independent director, in part, is to act as a own wealth rather than wealth of watchdog on the promoters and the shareholders. management of the company and protect minority shareholders' interests. Having a majority of independent directors allows outside directors to feel they have support in raising contrary points of view. Otherwise it may be difficult for a single
December 2013
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FinNiche
TERM OF WEEK
BITCOIN-DEMYSTIFIED —- By V.V.Raviteja
Bitcoin is a unique combination of symbols generated by a computer network and controlled by nobody. A study projects that it may end up powering 10% of the global e-commerce and a possibility of becoming one of the three popular means of money transfer. Taking cue from this already diversified business accepts it and even potential drug deals are concluded on its basis.
transaction and carry out a currency exchange requires 48 hrs. Moving ahead, we need to understand that Bitcoin is a double edged sword and should be considered to be brought under regulation in the near future. The reason is it cannot be easily taxed and a possibility of even using it for illicit purpose. Besides this implementation of a better Blockchain management systems will ensure a sustainable future for this alternative currency.
Currently it is traded at $1,100 with a money supply constraint of 21 million coins. Similar to its peer it is also subjected intense value fluctuations and people invest in speculating higher returns. Bitcoin payment processing is Bitcoin runs off an open source peer to also on rise given the fact that the fees peer network which is an open source charged is substantially lower than and supply is governed by mathematical credit cards. rules. The process of earning these is called mining, where the users solve various cryptographic problems over these networks. Each coin has a unique encrypted id and stored in an electronic wallet which also have a unique id, In case of theft of wallet data coins are also lost. This feature of it avoids the double spend problem of any unregulated currency. To expedite upon this one cannot claim to have possession of money more than the actual money. This encryption and signature system allows two people to conduct a transaction where Bitcoin will be placed in a third party’s account whose identity is not revealed. Blockchain is considered to be the heart of Bitcoin as it checks each and every transaction carried out across the world and eliminates any possible duplicates. This system is considered to be so fool proof that to carry out a fraudulent practise we need to compromise over half the computers of p2p network. In spite of this trading on Bitcoin network has picked so fast that verifying each
December 2013
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FinNiche
FINANCIAL KNOWLEDGE
NEWS Credit policy review: RBI keeps repo rate unchanged at 7.75% Reserve Bank of India governor Raghuram Rajan took the market completely by surprise on Wednesday, keeping the repo rate unchanged in the face of overwhelming expectations of an increase citing the tenuous state of the economy and hopes that food prices may be declining. India is struggling with sluggish economic growth, which dropped to a decade-low 5% in the year to March. Growth was 4.4% in the first quarter and 4.8% in the second and getting the FY14 figure back up to last year's levels or past that will need a much stronger showing in the second half, something that both finance minister P Chidambaram and Rajan expect. Rajan reiterated this hope on Wednesday.
investments in inventory by the private sector, as well as gains in fixed investments, exports and non-federal government spending. The rate was negatively impacted by lower federal government spending and an increase in imports. Petrol price hiked by 50 paise, diesel by 11 paise In the wake of increasing international prices of gasoline and spike in dealer’s commission, the petrol price has been increased by 50 paise and the diesel by 11 paise. The new rates are effective from Saturday.
This unprecedented move came in light due to dealer asking a hike in commission on petrol and diesel by 48 paise/litre and 0.32 paisa/litre respectively. The revised cost of diesel from Friday midnight in Delhi would be SEBI soon to make IPO grading Rs.53.76 per litre and Rs. 60.79 per litre voluntary in Mumbai. Seven years after introducing the concept of grading Initial Public Offering RBI outlines action plan to tackle (IPO), SEBI has decided to soon make NPAs this concept voluntary because IPO RBI has proposed stringent norms to grading hasn’t helped in the efficient deal with the problem of rising NPAs price discovery in the past. across banking sector. “There is a unanimous view now that Guidelines include: IPO grading should not be compulsory. Banks to classify accounts into We will consider that... we are likely to Special Mention Accounts (SMAs) if take it up in one week or 10 days,” said the payment is overdue for a Securities and Exchange Board of India month (This won’t attract (Sebi) chairman UK Sinha at a seminar additional provisioning). on investment banking. RBI will set up a central repository of information on all loans of more US GDP grew 4.1% in Third quarter, than INR 5 crore value and make more than previously estimated this available to all lenders. According to the recent data released by NBFCs will be allowed to sell their Bureau of Economic Affairs, real gross bad loans, these entities, along domestic product — output produced in with private equity firms, are now the United States — actually grew at a also allowed to participate in the rate of 4.1% in the third quarter, up NPA auction process. from BEA’s previous estimate of a 3.6% growth rate. The final results are also a NPA continues to be the biggest concern gain over the second quarter’s 2.5% that public sector banks are facing GDP growth. today and the steps gives a clear signal that RBI is determined to recover this The BEA said the increase reflect money December 2013
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FinNiche
FINANCIAL KNOWLEDGE
Market This Week The third week of December was one where the Sensex rose 1.76 percent, or 365.46 points, from 20,714.26 to end at 21,079.72. The broader Nifty rose 1.72 percent, or 105.90 points, to end at 6,274.25. The biggest news this week was the QE tapering announced by the Fed, which decreased the bond purchases to $75 billion. This didn’t have a huge impact on the Indian market, due to its better preparedness as pointed out by the RBI. The rupee also managed to change its path of losses on account of strong foreign fund flows. Overall the investors were positive towards the market, on account of its positive reactions to the news of QE tapering.
BSE SENSEX
SENSEX Simple Moving Averages Thirty Days Fifty Days Hundred Days Two Hundred Days
20,711.54 20,747.27 19,856.44 19,692.71
CNX Nifty
December 2013
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FinNiche
FINANCIAL KNOWLEDGE Nifty Simple Moving Averages Thirty Days
6157.87
Fifty Days
6166.77
Hundred Days Two Hundred Days
5922.68 5895.56
Commodities Commodity
Unit
Rs / Unit
% Change
Gold
10 grams
28554
0.74
Silver
1 Kg
44007
0.41
Crude Oil
1 bbl
6192
0.82
Lending / Deposit Rates Base Rate
10.00%-10.25%
Savings Deposit Rate
4.0%
Term Deposit Rate
8.0%-9.05%
Key Policy Rates and Reserve Ratios Bank Rate Repo Rate
8.75% 7.75%
Reverse Repo Rate
6.75%
Cash Reserve Ratio Statutory Liquidity Ratio
4% 23%
Exchange Rates INR / 1 USD
61.98
INR / 1 Euro
84.75
INR / 100 Jap. YEN
59.57
INR / 1 Pound Sterling
101.25
December 2013
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FinNiche
FUN CORNER
Fun Corner FinQuiz 1.
_________ is widely used by the borrowers to ascertain firm's debt capacity and also enable them to determine the bond rating.
2.
A company in a 30% tax bracket has return on assets (ROA) equal to 16% and asset turnover ratio equal to 2, the firm's operating profit margin is ——————
3.
Economic value added is a measure of the dollar value of a firm's return in excess of its __________ cost.
4.
__________ earnings is defined as the real flow of cash that a firm could pay out without impairing its productive capacity.
5.
A company has a price-earnings (P/E) ratio of 20 and return on equity (ROE) of 15%, the firm's market-to-book-value ratio is __________
CARTOONS Last Week Answers 1. Call Money Market 2. $7,410 3. Written Down Value Method 4. Agency Cost 5. Cross Over Rate
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Volume:22 Publisher: Priyam Khattar
December 2013
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