December 29, 2013 Volume 23
FinNiche
FinXpress
FinXpress Volume 23 Dec 29,2013
From The Editorial EXAM FEVER
CONTENTS
From The Editorial In focus: The New Normal of Indian Economy Opinion: NASDAQ Compensation Term of the Week: Green Shoe Option Market This Week News
It had been a grueling week for IMT both because term end exams and a cold wave sweeping the campus. Though both were as tough as anticipated, nothing deters IMT and buzz is still on for new year eve. Ever heard about Green Shoe Option or do you think NASDAQ should compensate for its technical glitch or want to know about the new normal of the Indian Economy, well that’s what we bring you with this week’s term of week, opinion section and in focus. On the market front we had seen the wall street hitting a bull run while our own Sensex remained largely bullish on account of strong FII buying. Amid concerns that India’s fiscal deficit may cross 5% and GDP estimates of more then 7% from planning commission. We bring you a gist of market indices and detailed news analysis through our news and market of week.
Fun Corner
We hope you enjoy the articles in this edition of FinXpress. We look forward to your comments, acknowledgements and criticism regarding our magazine.
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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IN FOCUS
FinNiche
The New Normal of Indian Economy —- By Aditya Vikram Agrawal
The big poser after the results of the second-quarter GDP results was whether it had marked a bottoming out of the economy or was it the new normal? If the second is true, then even if the growth figures improve in subsequent quarters, to touch 5-5.5% levels, we would have to forget the magic years of awe-inspiring figures. Now we would have to content with moderate figures.
Consumption-led growth of the early 21st century, courtesy exceptionally-docile global conditions and fiscal and monetary stimulus doled out in the aftermath of the financial crisis, has its limits. A supplyconstrained economy like ours needs investment-led growth.
Otherwise, it is only a matter of time before India hits a roadblock that forces a growth slowdown. And worse, give rise to That’s not going to be easy. where should tensions that could threaten the social we try to bounce back to: an fabric of a society stretched taut at the unsustainable GDP growth of 9% or a best of times. more sustainable 6-7%? Back in the heydays of close to 9% GDP growth, well The potential growth rate of an economy respected economic commentators used is not constant but dynamic. It is a to argue that “9% growth and 7% function of its level of capital formation, inflation is better than 6% growth and 4% social and physical infrastructure, quality inflation”. of governance and, now increasingly, a function of the global environment. Reality has proved otherwise. Today there However, any attempt to push ahead of is no doubt we would have been better off this number, without creating the had we grown at a consistent 6-7 % with investments needed, will only lead to 4% inflation for a few years before trying overheating and render growth to raise our growth trajectory. In unsustainable. hindsight, we erred in thinking we could wring out growth through ever looser Unfortunately, in our obsession with the fiscal and monetary policies, without GDP growth rate, we are unwilling to engaging in deeper structural reform, accept that growth is not a discrete ignoring crucial issues like reforms in process. It is like running a marathon. markets like land and labour. One cannot run a marathon like a sprint. Each government builds on the structure Growth has virtually halved in two years created, not only by its immediate to 5% in 2012-13 — the lowest level in a predecessor but by all previous decade — and is not expected to be any governments. better this year. But, it is not catastrophic if it creates the base for a Where would we be without the steel sustainable, long term non-inflationary frame of the public sector created during growth period. the Nehruvian years or the reforms initiated by the Narasimha Rao Faced with a choice between a government? Likewise, where would we sustainable, but lower, growth with low be without the massive national highway inflation, and brief spurts of high growth development project and reform measures and high inflation, what should the like opening up insurance and, more Indian Government do? If advanced importantly, fiscal consolidation, under countries continue to reflate their the NDA? The biggest problem with India economies, India might benefit from a remains that instead of attempting heavy brief upside. But unless investment picks lifting, we keep trying quick fixes. up and supply bottlenecks ease, it will once again run up against inflation. This leads us back to the question which was first asked—Is this the new normal? December 2013
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FinNiche
Opinion
NASDAQ COMPENSATION —- By Jagriti Kalra
Nasdaq OMX Group Inc. has finally consented to compensate the firms on December 31 in relation to the claims of the botched technical glitch during the Facebook Inc.’s May 2012 initial public offering (IPO). It previously said it would pay up to $41.6 million in claims to the various market participants that had lost money when the glitch in the Nasdaq's system during the IPO prevented timely order confirmations for many traders, leaving them unsure about their exposure for hours and, in some cases, it extended to few days also which was a major issue. The exchange operator in a note to traders on Friday said a total of $41.6 million in claims qualified for compensation, even though market makers estimated they lost $500 million collectively.
After the Nasdaq outage, as the need of the hour permitted the US Securities and Exchange Commission called the head of all of the exchanges to Washington to discuss the ways to strengthen critical market infrastructure and improve its resilience when technology fails. Other major glitches include BATS Global Markets' botching of its own market debut, which it had to abandon, just months before Facebook's IPO. And on August 6, the exchange operator faced an outage on one of its markets of nearly an hour. CBOE Holdings Inc experienced a glitch in April that shut down the Chicago Board Options Exchange, the No. 1 US stockoptions market, for half a day, preventing trading in options on two of the US market's most closely watched indexes. At Intercontinental Exchange Group's NYSE Euronext unit, a bug in new software being rolled out in September briefly led to a trading halt across US options markets. A handful of trades are busted due to these minor glitches at the exchanges. A single 10 min hault can create a havoc as and specifics around the trades as well as the traders losses could not be determined. They disturb the overall financial peace of the various countries.
Firms that qualified for compensation had to agree till December 23 not to sue Nasdaq exchange over the IPO in order to be eligible for a one-time voluntary payout.
During peak hours, stock traders use complex algorithms to generate millions of messages per second about what they’re buying, selling or canceling. But a spate of high-profile technology glitches has proved that these algorithms don’t always interact without a hitch, and regulators should force market players to test their technologies before unleashing them on the world.
Nasdaq was fined $10 million by the US Securities and Exchange Commission (SEC), the largest fine ever for an exchange, the case was just one of a raft of highprofile technology glitches that have plagued exchanges in recent years. Until recently, the issue was moot. The historical view was that the government did In August, a software bug paralyzed not need to intervene but now the stock thousands of Nasdaq-listed stocks exchange authorities have proposed that marketwide for three hours. This happened the exchanges should abide by certain just few days after a technical problem at minimum testing standards for their Goldman Sachs sent a flood of erroneous technology, and coordinate their testing orders to the US equity options markets. with trading firms.
December 2013
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FinNiche
FINANCIAL KNOWLEDGE
Green Shoe Option —- By Bhanu Chokhani
Green shoe option is the provision provided price of the share: in the underwriting agreement wherein the In case the shares are trading at a underwriter can issue more shares than price lower than the offer price, the initially planned. Also referred as Overstabilizing agent would start buying allotment option, this option was named the shares from the money that is after Green Shoe Company for which this lying in the bank account. Hence by was first used in 1960. The Green Shoe buying the shares from the market option is a clause in the underwriting while others are selling kind of negate agreement of an IPO, which allows to sell the falling prices and stabilizes share additional shares, usually 15%, to the prices. The share so bought are given public if the demand exceeds expectations to the promoters from whom the and the stock trades above its offering shares were bought for over-allotment. price. Other case could be that the price of the shares starts to rise. In such a How Green-Shoe Option Works ? case, the stabilizing agent won’t buy As already mentioned above, green shoe the shares from the market. Instead option works on the concept of overthe company can exercise their green allotment of shares. Let us understand it shoe agreement and issue new shares with the help of an example. Say, for to the stabilizing agent who will return instance, a company is planning to issue these shares to the promoters. 100,000 shares but due to high demand it actually issues 115000 shares. Point to be noted is that company did not actually Since these options protect both company as well as shareholders against falling issue extra 15000 shares. price, hence it is quite commonly used as a The 15000 shares that are used for over- hedging mechanism by the companies allotment are the ones that are borrowed issuing fresh equity. One famous example from the company’s promoters with whom where Green-Shoe Options were used was the stabilising agent enters into a separate during Facebook IPO release. contract. For the subscriber of the public issue, it makes no difference whether the Pros and Cons of Green-Shoe Options company is allotting the shares from the The flexibility to respond quickly to rising or 100000 freshly allotted shares or from the falling demand for the shares is a huge one that are borrowed from the promoter. positive of the green shoes. For the issuer To an investor, a share is just another and the accompanying banks there is the share. possibility to place a maximum number of shares that may be extended at the same Though for the company the situation is time acting as a risk buffer. Thus, in the completely different. The money received case of low demand the exercise of the the company from over-allotment of the green shoes is simply waived and can still shares has to be kept in a separate account be a successful. known as GSO bank account. If the green shoe is connected with the The task of the stabilising agent starts only issuance of new shares, there is an after the shares are allotted and their appropriate exercise of its dilutive effect on trading starts on stock exchange. While other shareholders, which is often seen trading, two possibilities could arise for the negatively.
December 2013
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FinNiche
FINANCIAL KNOWLEDGE
Market This Week Indian shares are expected to remain firm as Wall Street hits record highs while foreign investors look set to end the year as strong net buyers. Foreign Institutional Investors (FIIs) have bought around $2.5 billion in shares as of Thursday in December, bringing their net purchases for the year so far to around $19.9 billion. The gains could allow indexes to post a second consecutive yearly advance, with the NSE index up 6.9 percent so far this year, compared with a 27.7 percent gain in 2012.
BSE SENSEX
SENSEX Simple Moving Averages Thirty Days Fifty Days Hundred fifty Days Two Hundred Days
20,803.82 20,796.17 19,881.23 19,731.28
CNX Nifty
December 2013
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FinNiche
FINANCIAL KNOWLEDGE Nifty Simple Moving Averages Thirty Days
6188.49
Fifty Days
6183.30
Hundred fifty Days Two Hundred Days
5926.63 5905.47
Commodities Commodity
Unit
Rs / Unit
% Change
Gold
10 grams
28564
-0.04
Silver
1 Kg
45154
0.84
Crude Oil
1 bbl
6261
1.00
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
61.85
INR / 1 Euro
85.00
INR / 100 Jap. YEN
58.82
INR / 1 Pound Sterling
101.96
December 2013
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FinNiche
Financial Knowledge
NEWS India's GDP growth rate likely to hit 7.5-8 per cent in 2014: Montek Planning Commission Deputy Chairman Montek Singh Ahluwalia has said India's economic growth rate is expected to be at 7.5-8 per cent next year. "We have become globally integrated and we can't do for India independently. The problem consists of one third from domestic factors and two-third from global factors," he said. Mr Ahluwalia said India's growth rate shot up in 1960-70s and picked up in 1990s. He was speaking at the ninth V Narayanan Memorial lecture at Sastra University Srinivasa Ramanujan Centre in Kumbakonam, Tamil Nadu on Friday. The reforms are to be carried gradually in large diverisifed highly democratic country and to bring changes it takes time, he said. In a five-year period during 2000s, it went up to 9 per cent. In 2008, the financial crisis crept in and the growth rate came to 6 per cent, it went to 9 per cent in 2009, and then to 9.3 per cent. In 2011, the rate again went down to 6.2 per cent and in 201213 to 5 per cent. The global economy is turning around and will be better in 2014. India's growth rate will be 7.5-8 per cent post-election, irrespective of who is in power, Mr Ahluwalia concluded. Top Bitcoin operator halts trade after RBI warning India's biggest Bitcoin trading platform said on its website Friday it had suspended operations after the central bank warned against the risks of using virtual money. BuySellBitCo.in closed its platform, citing an advisory by the Reserve Bank of India issued on Christmas Eve highlighting the risks of trading in digital currencies. BuySellBitCo.in said on its website that the move was "to protect the interest of our customers". The central bank's warning comes after Bitcoin, which can be stored either virtually or on a user's hard drive and offers a largely anonymous payment system, had begun
December 2013
gaining popularity in India. The emergence of Bitcoin and other virtual currencies in India has come despite a traditional preference for assets backed by property and other tangible goods. "There is no underlying or backing of any asset for virtual currencies and as such their value seems to be a matter of speculation," the central bank said in its December 24 advisory. The "huge volatility in the value of virtual currencies has been noticed", it added. At the last rate posted by BuySellBitCo.in, which was conducting about Rs. 1.2 crore worth of Bitcoin transactions monthly, according to Indian media, one Bitcoin was selling for Rs. 48,039 ($776). The dollar worth of a Bitcoin has rocketed from just cents in 2010 to a $1,200 peak in early December, but has since fallen back. India's fiscal deficit to touch 5.2 per cent in FY14: Crisil Rating agency Crisil on Monday said the Indian government will overshoot its fiscal deficit target of 4.8 per cent by 0.40 per cent this fiscal year (FY14) and suggested state-run companies should dip into their cash reserves to narrow the gap by paying extra dividends. Given the current scenario, wherein the front loading of expenditure has resulted in 84.4 per cent of the budgeted fiscal deficit target being hit by November, Crisil said it expects the fiscal deficit to touch 5.2 per cent. "The Centre can reduce its fiscal deficit by as much as Rs. 20,000 crore this fiscal by using cash reserves of public sector units," Crisil's research wing said in the note. It said the top 20 public sector undertakings will have a cash reserve of Rs. 1,60,000 crore by March 2014 and are "comfortably placed" to pay a special dividend. "We estimate these companies are well placed to distribute 40 per cent of the corpus (Rs. 64,000 crore) as dividend without impacting growth plans," it said. This amount will be Rs. 27,000 crore more than the dividend paid by the companies in last year and
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FinNiche
Financial Knowledge
NEWS after calculating the stake of the government in the companies, will result in excess revenue of Rs. 20,000 crore. "The Rs. 20,000 crore additional income would approximate 20 basis points of the fiscal deficit, which can help the government reach closer to its stated fiscal deficit target of 4.8 per cent," it said. CCI to clear projects worth Rs. 10 lakh crore, growth to revive: Cabinet Secretary Exuding confidence that India's growth will bounce back, the government on Friday said it has approved 287 stalled projects worth Rs. 5.5 lakh crore and 250 such projects worth Rs. 10 lakh crore would be cleared shortly. "So far there has been resolution at some level or the other of about almost 300 projects with the total investment of Rs. 5.55 lakh crore...this process is an ongoing one and we have about another 250 projects with an investment of over Rs. 10 lakh crore," Cabinet Secretary Ajit Kumar Seth said in Delhi. The government has been trying to ease the regul ato ry bu rden an d si mpli fy procedures to boost infrastructure projects, he said. "Guidelines on mergers and acquisitions (for the telecom sector) are also being worked out and we are confident that by the end of January, the next round of auctions (spectrum) will begin...the sector will definitely find itself on the path of further growth," he said. "Lot has been done in the power sector. We have approved the guidelines for pricing and pass-through of higher cost of imported coal and the issue of signing fuel supply agreements (FSAs) has also been resolved and 157 FSAs have been signed this year," he added. Mr Seth asked the industry to invest more in research and development as "this is an area where we need to catch up fast".
December 2013
Cyprus tax row: India set to start income tax office in island nation, says report As part of its strategy to combat black money, India will soon operationalise its first-ever income tax office in Cyprus to tackle funds flowing from the island nation even as it mulls rolling back su s pe nsi o n o f t ax be ne fi ts o n investments made from that country. Final approvals from the Prime Minister's Office (PMO) have been obtained to post an IRS officer as First Secretary in the country, one of the mai n sou rces o f fo reign di rect investment (FDI) into India, and also at seven other foreign locations including France, Germany, Netherlands, Japan, UAE, UK and USA where operations will begin next month. The government had decided to set up the Income Tax Overseas Units (ITOUs) in these eight countries as part of its multi-pronged strategy to combat blackmoney and streamline flow of investments from these nations into India. Two such ITOUs are already operational in Mauritius and Singapore. But in November this year, India classified the island nation as a notified jurisdictional area and suspended the tax benefits. Following the notification by the Finance Ministry, all payments made to Cyprus attracted a 30 per cent withholding tax and Indian entities receiving money from there were required to disclose the source of funds. India took the decision to withdraw tax benefits on grounds that Cyprus was not providing information requested by tax authorities under the taxation treaty. After this decision Cyprus had said the Indian government has agreed to withdraw a notification that suspended tax benefits for investments from the island nation but this is subject to the foreign nation adopting the global convention on exchange of tax information.
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FinNiche
FUN CORNER
Fun Corner FinQuiz 1.
He is the pioneer in mutual fund industry and often referred as the Father of Index Fund investing. He created the first S&P 500 Index fund. Identify this famous person?
2.
Name the first Indian woman CEO of a Foreign Bank?
3.
Name the term used for depreciating a company's intangible assets?
4.
Which bank is promoted by 20th Century Finance Corporation and Keppel Tatlee Bank of Singapore in India?
5.
In the world of trade and commerce what is special about the commissioning of Monte dei Paschi si Siena in Italy in 1742?
CARTOONS
Last Week Answers
1. Interest Coverage ratio 2. 8.0% 3. Opportunity 4. Economic 5. 3
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Volume Publisher: Rajat Kochar
December 2013
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