November 24, 2013 Volume 18
FinXpress Volume 18 Nov 24,2013
From The Editorial Another Week
CONTENTS
From The Editorial In focus: Co-operative banks in crisis
Another week of hectic schedule goes by with IMT continuing to live by it‘s motto of never going to sleep. The week saw a frenzy with IMT playing host to Prahlad Kakkar for an interactive session. IMT also hosted the Delhi Chapter of it‘s All India Alumni Meet.
Opinion: Markets at new highs—a Paradox Term of the Week: Bonds Market This Week
This week we bring to you the crisis in the Co-operative bank in our I focus section. The opinion speaks of the paradox of the market being at a new high. You would also find useful the term of the week section for a greater knowledge into bonds.
News Fun Corner
The markets closed in the red this week, with mixed cues being sent out by the US Federal Reserve on the timing of QE tapering. The RBI has decided to sell Rs. 1000 cr inflation indexed bonds on Nov 26, after the maiden offering in June. In a positive news for the market the FIPB approved 20 FDI proposals worth a total of $146mn. 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. Page 1
In focus
FinNiche
Co-operative Banks In Crisis —- By Divya Arora
The Co-op Bank has come close to collapse in recent months due to a £1.5 billion hole in its balance sheet, the result of its failure to detect vast liabilities rumbling away in the vaults of the Britannia building society, which it acquired in a fit of naivety and hubris in 2009. Earlier this year, the Co-op, the ―ethical bank‖, had to abort its equally hubristic bid to purchase 632 branches of Lloyds Bank when its hidden frailty was finally exposed. It now awaits its fate at the hands of its supposed saviours, hedge funds unfamiliar with the ideals of Victorian Rochdale.
and the £1.5bn black hole in its finances which has since emerged. It will also cover the Co-op‘s takeover of Britannia Building Society at the height of the banking crisis and the failed ―Project Verde‖ bid for 632 Lloyds Bank branches, as well as appointment procedures in light of the scandal surrounding Mr. Flowers. The Financial Reporting Council (FRC) said that they are making enquiries into the Co-op's financial reporting in accordance with their normal procedures and will announce when the formal investigation is started. The bank was audited by KPMG, one of the world‘s ―Big Four‖ accountancy firms. A KPMG spokesperson has reported that the bank and Co-op group had been robust and met all relevant professional standards.
The treasury has now ordered inquiry into the Co-op Bank failings. George Osborne has used new regulatory powers for first time to announce review into series of failures in banking unit dating back to 2008. It was held after the Rev Paul Flowers, the former chairman of the Co-op Bank, was arrested on Friday by West Yorkshire police on suspicion of buying Class A drugs. A catalogue of allegations linked to Mr Flowers has emerged, ranging from his expenses claims, to red flags appa re ntl y mi ssed by b anke rs, regulators and politicians.
Police searched the home of Mr Flowers in Bradford earlier this week after his offences were revealed. Since the claims it has emerged that he left the bank, where he presided over the near collapse, after concerns over his It will look back at least five years into expenses. mistakes made in the run-up to the Coop Bank‘s woes, which led to its credit rating being cut to junk status in May,
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In focus
The Manchester-based mutual, which has been shaken by allegations surrounding Mr Flowers, has written to former bank chairman to demand he repay £31,000 and stop a further £124,000 of payments due. At the same time the mutual‘s bank is conducting a forensic examination of the actions of its directors and senior managers in the run-up to the discovery of its £1.5bn capital shortfall in June. The findings from that probe will be passed to the Financial Conduct Authority, which is examining whether it can bring any enforcement actions against past directors. A review of Mr Flowers' past expenses claims has also begun, amid concerns he may have used some of the mutual‘s money for his own private affairs.
FinNiche
under those circumstances he feels right to step down now, ahead of his planned retirement in May next year. He would be replaced by Ursula Lidbetter, the group‘s deputy chairman temporarily through Co-op‘s current structural review. The entire Co-op Bank board showed a woeful lack of understanding in relation to the risks associated with the Britannia. The hedge funds now taking a leading role in the bank are unlikely to be so naïve, or so indulgent of Labour.
The Treasury-led probe will follow an e nfo rce me nt i nvesti gati o n be i ng considered by the PRA and the Financial Conduct Authority (FCA), looking at whether there were adequate systems and controls in place at the Co-op and if there was any wrongdoing by Len Wardle, the chairman of the Co- individuals, which could lead to fines operative Group, has resigned with and censures. immediate effect, bringing forward his departure by five months. He said that he led the board that pointed Paul Flowers to lead the Bank Board and
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Opinion
Markets at new highs: a Paradox —- By Ashish Agarwal
This Diwali when the Sensex reached a mark of 21321.53 there was all exuberance in the market that we are on a life-time high, but is it really so? Can the markets be judged by an index of 30 stocks like the BSE-Sensex or an index of 50 stocks like the CNX-Nifty? The answer is No. Do numbers such as these matter to investors or they are just a fallacy which just sprinkles pain on the heart of the investors. Yes we have reached new highs in nominal terms but this is not true in real terms. We have to travel a lot in order to reach a new high.
who do not understand these intricacies of the markets. So if the markets need to touch a new high it has to be in real terms accounting for inflation and not just in nominal terms as we see now.
We just saw how inflation skews our returns on the negative side, one more important aspect that needs to be understood is the opportunity cost of the money that has been invested in the markets. A new high would be characterised where an investor is adequately compensated for the risk he has taken. Looking at 2008 levels when the markets were high, does breaking that level signal a new high? This would remain a question for all the investors and this needs to be understood if one has to correctly estimate the returns generated in the period. The inflation level of 7% which persisted during the period 2008-13 is another indicator. So if an investor invested Rs 1000 in 2008 and the index bounced back to 2008 levels just as we saw in 2013, the investor has generated a negative return considering that the price of goods because of inflation has gone up by approximately 40%. This inflation adjusted return people tend to discard especially the retail investors
November 2013
Opportunity cost is the next best alternative that has been foregone by investing in the stock markets. For some people opportunity cost could be very high as they might have foregone a very good opportunity to invest in some projects like infrastructure or some business opportunity, and for some who have very little or no opportunity set with them, they have nevertheless missed the return they could have generated by investing in fixed-deposits, savings account or say government securities. So an opportunity cost for an investor could be anything between 4% 15%. This opportunity cost is also a detriment to the new highs we are talking about.
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Opinion
FinNiche
Now when we have taken all the factors of return calculation into account, can we say that we have reached a new high in nominal terms and not in real terms?
So the paradox is simple: on one hand we are at a lifetime high and on the other an investor has suffered by generating negative returns on account of inflation, opportunity cost and Wait a moment, there‘s more to it that misrepresentation of markets. we could have imagined. I would strongly disagree that Sensex and the A new high can only be achieved if the Nifty are true representatives or market can give to the investor the indicators of our Indian markets. A new return in real terms which he expects on high in these two indexes is just a account of the risk he has taken. misrepresentation of our markets even Rakesh Jhunjhunwala an avid investor in nominal terms and we are not putting in Indian stock markets recently said into account the other stocks which are that the new real highs for Indian part of our markets but not part of these markets is at a level of 6700 for Nifty, indexes. Why I am saying so is because but this is just a number and could be when an investor invests in the market, interpreted in a different way by he does so by investing in stocks and different investors and one could arrive not in indexes. Yes there are ETF‘s at different numbers by working their (Exchange traded funds) of indexes calculations out. available but how many of us really invest on these ETF‘s. The true story is that more than 70% of the stocks traded on our markets are nowhere close to their lifetime highs and have given a negative return even in nominal terms in the period 2008-13.
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FINANCIAL KNOWLEDGE
Term of the Week– Bonds —- By Pragun Aggarwal
While companies may need money to expand business, governments need it for infrastructure, social programs etc. This requirement may run into huge numbers for which these institutions issue bonds to a public market. Investors lend money in their capacity to these issuers of bonds.
Bond Rating: Helps investors determine a company‘s credit risk. For instance blue—chip firms which are safer investment have high rating while risky companies have lower ratings. Higher rating firms offer lower coupon and vice versa
The investors earn interest on their investments on a predetermined rate and schedule. The borrowed amount is returned back on the maturity date. While bonds give investors higher claim on company‘s assets as compared to equity, they carry lower risk which comes at a cost lower return.
Types of bonds Government Bonds: Classified according to the length of time before maturity, Bills -debt securities maturing in less than one year Notes - debt securities maturing in one to 10 years Bonds - debt securities maturing in more than 10 years Corporate Bonds: A company can issue bonds just as it can issue stock. Generally, a short-term corporate bond is less than five years; intermediate is five to 12 years, and long term is over 12 years. A company has a high chance/risk to default than a government and thus generally a higher coupon is attached to a corporate bond. Two types, Convertible bonds – holder can convert into stocks Callable bonds – Allows the company to redeem an issue before maturity
Characteristics
Zero Coupon Bonds: This type of bond pays no interest but instead is issued at a considerable discount Face Value/Par Value: Amount of money a holder will get back to the par value. For example, let's say a once a bond matures. zero-coupon bond with a $1,000 par value and 10 years to maturity is trading at $600; you'd be paying $600 today for a bond that Coupon Rate: The interest earned as a percentage of the on maturity will give you $1,000 in 10 par value of the bond. It might be fixed – years. fixed rate bonds or adjustable – floating rate bonds linked to an index. Maturity: The maturity date is the date in the future on which the investor's principal will be repaid.
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Financial Knowledge
News
RBI to sell Rs.1,000 Cr inflation T h e e x p l o r a t i o n p a c t b e t w e e n indexed bonds on Nov 26 Petrovietnam and ONGC Videsh Ltd would allow activities in Vietnam, India The Reserve Bank said it will sell as well as in a third country. Vietnam's inflation-indexed bonds worth Rs.1,000 Industry and Trade Ministry also signed Cr through price-based auction on a memorandum with Tata Power November 26. Interest at the rate of 1.44 Company Ltd on the construction of a per cent per annum will accrue on the USD 1.8 billion thermal power plant in indexed principal value of the bonds Vietnam's southern province of Soc from the date of original issue and will Trang, the agency said. be paid half yearly on December 5 & June 5, RBI said in a release. The RBI SSTL Q3 net loss widens to Rs.760 Cr would allot up to 20 percent of the notified amount of the bonds to eligible Telecom operator Sistema Shyam individuals and institutions as per the Teleservices reported widening of net scheme for non-competitive bidding loss to Rs 760 crore for the third quarter facility. ended September 30, 2013 mainly on This is the second round of inflation account of Forex loss and business bonds, after the maiden offering in restructuring. June. The central bank will announce The company had posted a net loss of result of the auctions on November 26 Rs.495.5 Cr for the same period a year and payment by successful bidders will ago. The revenues of SSTL, which be on November 27, it added. operates under MTS brand, also declined by about 30 percent to NHPC's Rs.2,368 Cr share buyback to Rs.284.4 Cr during the reported quarter begin from Nov 29 as compared to Rs.404 Cr in the same period a year ago. State-owned NHPC, the country's largest Hydel power producer, will commence NTPC seeks SEBI nod to raise tax-free the buyback of shares worth up to Rs bonds of Rs.1,750 Cr 2,368 crore from November 29. The company plans to buyback up to Country's largest power producer, 123,00,74,277 fully paid up equity NTPC, has sought market regulator shares of Rs 10 each at a price of Rs Sebi's approval to raise up to Rs.1,750 19.25 apiece aggregating Rs 2,368 crore Cr through tax free bonds in the current from the open market. Government financial year. holds 86.36 percent stake in NHPC. The funds raised through the issue Overall, the government plans to raise would be utilized towards funding of Rs.40,000 Cr in the current financial capital expenditure and refinancing for year (2013-14) through disinvestment. meeting the debt requirement in ongoing projects. Currently, NTPC has a Petrovietnam, ONGC Videsh sign oil capacity of nearly 42,000 MW and exploration pact targets to add about 14,000 MW to its total capacity by the end of 2016-17. State oil group Petrovietnam and the overseas unit of state explorer Oil and Natural Gas Corp have signed a memorandum on joint exploration of crude oil, the Vietnam News Agency reported on Thursday.
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FinNiche
FINANCIAL KNOWLEDGE
Market This Week The week saw markets tumbling to new lows. Both Sensex and Nifty closed in the red. It was advantage bears last week, thanks to the mixed cues sent out by the US Federal Reserve over the timing of the phased withdrawal of its $85-billion quantitative easing initiative. Experts were quick to slough off suggestions that the tapering of the easy money could happen as early as December this year. On the sector front, sugar seems to have caught the eye of the bulls and the face-off between the Government and the Mill owners is likely to go down the wire.
BSE SENSEX
SENSEX Simple Moving Averages Thirty Days Fifty Days Hundred Days Two Hundred Days
20,269.92 20,302.31 20,295.51 20,420.10
CNX Nifty
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FinNiche
FINANCIAL KNOWLEDGE
Nifty Simple Moving Averages Thirty Days Fifty Days Hundred Days Two Hundred Days
5998.91 5995.23 5997.67 6016.34
Commodities Commodity Gold Silver Crude Oil
Unit 10 grams 1 Kg 1 bbl
Rs / Unit 29865.00 44626.00 5990.00
% Change -1.35% -1.13% -1.09%
Lending / Deposit Rates Base Rate Savings Deposit Rate Term Deposit Rate
9.80%-10.25% 4.00% 8.00%-9.05%
Key Policy Rates and Reserve Ratios Bank Rate Repo Rate Reverse Repo Rate Cash Reserve Ratio Statutory Liquidity Ratio
8.75% 7.75% 6.75% 4% 23%
Exchange Rates INR / 1 USD INR / 1 Euro INR / 100 Jap. YEN INR / 1 Pound Sterling
November 2013
63.02 84.92 62.37 102.04
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FinNiche
FUN CORNER
Fun Corner FinQuiz 1.
The ———— Act does not require auditors to provide other services to the companies they audit
2.
————- refers to the valuation of securities included in a portfolio
3.
A stand-alone investment bank specializes in —————
CARTOONS Last Week Answers 1. Higher 2. Replacement method 3. More 4.Overtrading
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Volume 18 Publisher: Priyam
November 2013
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