January-The Financial Bulletin

VOLUME 20, ISSUE I

30th January 2013

The Financial Bulletin M

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WILL THE DEMAND FOR GOLD EVER DECLINE IN INDIA? THE REASON FOR THE FAILURE OF IPO IN INDIA.

COVERAGE OF PANTALOONS AND WIPRO DEMERGER STORY JOURNEY FROM 1991 TO 2012.

WHERE ARE WE NOW?

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FROMTHE THEEDITOR’S EDITOR’S DESK DESK FROM The Financial Bulletin Issue:: I Volume: XX January 2013

Advisor Dr V Narendra Faculty Co-ordinator Dr. S Vijaylakshmi Student Co-ordiantor Roshni Nair

Dear Readers Happy new year to all the readers of The Financial Bulletin. We hope you had a fresh start to the new year. In order to celebrate the 20th Issue of the newsletter, we bring to you articles from a plethora of genres.

We congratulate to the winners of the “Article of the month” award, Mr Neeraj Gupta and Mr. Anurag Mishra for their article on Demergers: the route to unlock value.

To start with, we have an interesting coverage on the year 2012 and how is it similar to 1991. The writer shares amazing similarities and describes how history repeats itself.

Why pharmaceutical industry in India is called the best bet in the troubled economic times ? How does mergers or demergers effect the Industry?

Why are WIPRO and Pantaloons on the path of demerging? Does it really add value? Why do Indians all over the world have so strong inclination towards gold? What is so special about this yellow metal? Why is fiscal cliff in US called a bitter medicine? What are the recent innovations in the financial services industry and how does it make a difference?

In order to get your questions answered, READ ON!

Happy Reading.

Editor Komal Jain

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CONTENTS 29 Current Account Deficits ARTICLE OF THE MONTH:

-by Karan Chauhan

04 Demergers-The route to

33 Innovation In Financial

unlock value.

Services

- by Neeraj Gupta & Anurag Mishra

-by Rahul Jain

10 Sorosian Reflexivity TheoryAn investigation in the Indian Markets -by Aniket Parikh

14 2012 another 1991 ?

-by Anindo Chakraborty

21 Cooperatives, Microfinance and the poor -by Bhavi M Patel

36 Tax benefits from mutual funds -by Shyam Mange COVER STORY

39 The ‘Golden’ Dilemma -by Sanchalak Basu

45 The dismal performance of IPOs in India -by Chaitanya Gandhi

24 Indian Stock Market, all set for a new high.

-by Sanket Narkhede

26 Microfinancing/Self Help

48

Why pharmaceutical is the best bet for India in troubled economic time?

groups

-by Siddhartha Banerjee

-by Chandra Sekhar

52 Fiscal Cliff-

A Bitter Medicine

-by A Sindhuja & Y. Venkata Achyuth

55 The Financial Detective, Contract note -by Kshitz Keshav Bhardwaj

57 Rupee Depreciation: Who gains or who lose?

-by Pardeep Kaur

Kumar

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C O V E R

S T O R Y

Demergers: The route to unlock value Demerger by definition is a business

entity. If the parent entity holds a majority

strategy in which a single business is broken

stake in the demerged entity, the resulting

into components, either to operate on their

company is referred to as the subsidiary.

own, to be sold or to be dissolved. A demerger allows a large company to split

India Inc. has recently witnessed a spurt of

off its various brands to invite or prevent an

demergers like Provogue, Zee Telefilms,

acquisition, to raise capital by selling off

Cinemax, Wipro, Reliance Industries etc. In

components that are no longer part of the business's core product line, or to create separate legal entities to handle different operations.

One of the prime reasons why large corporate houses go in for demerger is to increase the role of specialization in the particular

segment.

In case

of

large

conglomerates, demerging entities often are the

departments/businesses

which

are

growing at an impressive rate and have

this write-up on demergers, we

“How does demergers unlock value and affect shareholders in case of Wipro and Pantaloon”

shall have a look at the demergers

of

Wipro

and

Pantaloon because they are the most recent ones. We shall also have a look at questions like – Is demerger a route to unlock value? and What is

there for shareholders and the company in the demerger?

Wipro’s Demerger: A Win-

substantial potential. Therefore, in a sense a

Win Deal

demerger is the reverse of a merger.

On

November

1,

2012,

Wipro

had

Demerger therefore is a form of restructure

announced a demerger plan to hive off its

in which shareholders or unit holders in the

non-IT businesses into a separate com-

parent company gain direct ownership of

pany. As per the demerger plan announced,

the demerged entity or the subsidiary

Wipro wished to hive off three units -

entity. The company or entity that ceases to

Wipro Consumer Care & Lighting, Wipro

own the entity is called the demerging

Infrastructure Engineering and Wipro GE

© Money Matters Club, IBS Hyderabad.

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Healthcare Private Limited - into a separate unlisted company called Wipro Enterprises. Together, the three units contributed 14 per cent to Wipro's revenue. The IT business, which contributes 86 per cent of revenue, will remain a publicly listed company. In FY12, IT business contributed 96 per cent to the operating profit. And on December 29, 2012, Wipro got shareholders’ nod for demerger.

The demerger step looks obvious at this stage because Wipro’s non-IT businesses have achieved a critical mass. A delay would have made it difficult for Wipro to separate its IT & non-IT businesses.

Another reason which could have prompted Wipro’s board to take the demerger route is that when it comes to acquisitions, IT companies come cheaper than FMCG companies, in terms of price/sale.

Normally, an IT company is valued at 1 to 1.5 times its annual sales turnover, while an FMCG company costs 2-3 times, at times even 7-8 times. This is because the brand value weighs more when it comes to FMCG business. Since, Wipro’s shareholders come with an IT mindset; they are unlikely

to take kindly to high valuations for acquisition of FMCG companies. It is pertinent to mention here that Wipro’s Consumer Care business has made numerous acquisitions. It has bought brands like Glucovita, Chandrika, Yardley and North West Switches & Unza Holdings. WCCL acquired LD Waxson Group, a Singapore-based FMCG company, as recent as December 2012. Therefore there is little doubt in the fact that a demerger would make both the IT & the non-IT businesses leaner and meaner.

Another rationale that supports Wipro’s demerger is that all the three non-IT business units generate enough cash in their balance sheets every year. This is the reason why once the separation is

com-

plete, Wipro Enterprises would be a debt-free company with healthy cash flows. This will give Wipro Enterprises necessary impetus to go all out when acquisition opportunities will come its way.

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Apparently, low profitability of Wipro’s

12 months and shall be redeemed at

non-IT business was also a big reason for

a value of Rs.235.20.

the demerger.

Wipro’s non-IT business

accounts for 14 per cent of the company's turnover but only 6 per cent of its operating profit. Thus it was widely presumed that Wipro’s non-IT business was pulling back Wipro's bottom line. The reason behind this is that Return on Capital Employed (ROCE), for the IT and non-IT business is quite different. For example, while Wipro “The demerger as proposed is a win-win deal for promoters .”

Consumer Care & Lighting's ROCE is about 19 per cent, it is much higher in the case of IT. Coming to the terms of the deal proposed by

3.

Exchange the equity shares of Wipro

Wipro, the terms of the demerger are

Enterprises and receive as considera-

complex enough to keep the sharehold-

tion equity shares of Wipro Limited

ers thinking. Wipro has offered its share-

held by the Promoter. The exchange

holders the following options –

ratio will be 1 equity share in Wipro

1.

Receive one equity share with face value of Rs.10 in Wipro Enterprises

2.

Limited for every 1.65 equity shares in Wipro Enterprises Limited.

for every five equity shares with face

Digging deep into this complex deal, Wipro

value of Rs.2 each in Wipro Limited

investors, if they choose preference shares,

that they hold.

will get roughly Rs 47.7 after one year for

Receive one 7% Redeemable Preference Share in Wipro Enterprises, with face value of Rs.50, for every five equity shares of Wipro Limited that they hold. Each Redeemable Preference Share shall have a maturity of

each Wipro share. At today’s prices, this is roughly Rs 43.4 per share. Investors thus get 12.1 per cent compensation for letting go of the non-IT business. And if they opt for equity in Wipro Enterprise and swap it with the promoters, they would again make

© Money Matters Club, IBS Hyderabad.

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a gain of about 12.1 per cent on the

Wipro.

transaction.

businesses were part of an IT giant, these

Rough calculations carried out for the deal shows that Wipro is valuing its non-IT businesses at about Rs 10,900 Crores, which means a price-earnings multiple of about 29-30 times the net profit for this business.

Now, this is a generous valuation taken up

by Wipro and this valuation is aimed at providing investors a good price for their exit.

And

because

Wipro’s

non-IT

businesses didn't got as much visibility as the other companies in their sectors enjoyed.

Also, the shareholders are not taken for a ride with the demerger. They are well compensated for letting go off the non-IT business. The valuation of the non-IT business also is quite generous. On the other side, the demerger deal is a win-win deal for Wipro. There is no doubt in the fact that the deal has been well crafted to suit each

Needless to say, the demerger as proposed

and every stakeholder.

by Wipro is a win-win deal for promoters.

If the investors opt for the preference shares, Wipro will get access to preference capital at the cost of 7 per cent a year, which is more or less at par with the market rates for preference capital. But more investors opting for preference shares will also mean a smaller equity base, boosting Earnings Per Share (EPS) for Wipro Enterprises.

And if the investors opt for equity shares instead of preference shares, promoters of Wipro will get a chance to reduce their own holdings in the listed IT Company.

This will make sure that they meet the government’s minimum public shareholding norms of 25 per cent, without selling in the market.

Pantaloon’s Demerger: Synergizing Operations Another demerger to have happened recently is that of Pantaloon. Future Group demerged the fashion business of its two entities namely Future Ventures India Ltd. (FVIL) and Pantaloon Retail India Ltd. (PRIL) into a new entity named ‘Future Fashion’. This will help the companies to focus on their respective businesses more effectively. The appointed date for the deal is January 1 2013 and it will take around 6-8 months to complete the deal. After the demerger, PRIL will hold as

In conclusion, we can say that the demerger

its core business brands like Big Bazaar and

deal is happening at the right time for

Food Bazaar while FVIL will focus on the

© Money Matters Club, IBS Hyderabad.

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food and FMCG sector which includes

the company. Currently PRIL has a debt of

brands like Fresh & Pure, Premium Harvest

Rs. 3700 Crore on its book. It will transfer

etc. Also, the new entity Future Fashion will

debt of Rs. 1226 Crore to the new entity

focus on operating retail chains with domes-

Future Fashion. Fashion business already

tic and global brands. FVIL will transfer

has debt of 200 Crore. So total debt on the

fashion brands like Scullers, Urbana, Urban

books of Future Fashion will be of Rs. 1426

Yoga

etc.

Fashion.

to

Key

Future

Crore

financial

and

PRIL’s debt

aspects of this demerger are

will

as follows:

down to Rs.



2474 Crore.

The new entity Future

Another

Fashion Ltd. will be

reason

listed . 



for

demerger is

The share exchange

the

interest

ratio will be 1 equity share of Future

that Aditya Birla Nuvo Ltd. has shown in

Fashion Ltd. for every 3 equity shares

owning a majority stake in PRIL. ABNL

held in PRIL and 1 equity share of

would invest Rs. 1600 Crore in Pantaloon’s

Future Fashion Ltd. for every 31

retail business. This deal got the approval of

equity shares of FVIL.

Competition Commission of India (CCI) on

Post demerger, 49.8 % in the new entity will be held by PRIL, 30.5 % in the new entity will be held by shareholders of FVIL and 19.7 % will be held by PRIL as a corporate entity.



come

Post demerger, Future Ventures India Ltd. will change the face value of its shares from Rs. 10 per share to Rs. 6 per share.

December 27, 2012. Another rationale for demerger is the new challenges and opportunities that await the company after 51 % FDI in Multi-Brand retail was approved by the Government.

For the shareholders of PRIL and FVIL, it is a beneficial move as they will get shares of this new entity in addition to their existing shares in PRIL and FVIL. After the clearance of the demerger by CCI the share

The major reason for this demerger is that

price of Pantaloon retail India Ltd. (PRIL),

PRIL’s management wants to deleverage

has reached to Rs. 255 per share on 30th

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December from 235 per share on 27 Decem-

and for the company itself by demerger will

ber which shows investors are bullish on

be at risk. But as of now this demerger looks

this stock. It is also beneficial for the exist-

to be a good deal for both the Future Group

ing stockholders of PRIL as now company

and its Shareholders .

is less leveraged; so on one hand their dividend earning will increase because now

Contributed by:

there will be less interest expenditure and on the other hand it will decrease the risk involved in the investment as now debt equity

NEERAJ GUPTA

ratio of the company will be reduced.

PGDM(2011-13)

Also, PRIL sold its investment worth

XIME, Bangalore

Rs.295 Crore in the quarter ended 30 September 2012. This shows that the company is in desperate need of cash to reduce its debt. Now after transfer of some debt to the new entity and after Rs. 1600 Crore investment by ABNL, PRIL doesn’t need to sell its existing investments. Therefore PRIL

ANURAG MISHRA PGDM(2011-13)

will be in a better position to provide more XIME, Bangalore

returns to its shareholders .

The only concern for the Future group as a whole is that it is transferring a debt of Rs. 1426 Crore to a new entity. If this entity fails to operate as intended or if it fails to generate profit due to economic slowdown, Future Group as the parent company would be in trouble. The other concern for the shareholders of FVIL is that company is reducing face value of its shares from Rs. 10 to Rs. 6 and as a result shareholders may oppose the demerger. If these circumstances arise, entire value created for shareholders

Š Money Matters Club, IBS Hyderabad.

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SOROSIAN REFLEXIVIT Y THEORY-An investigation in the Indian markets India is no longer the world’s largest de-

imperfect

perceptions

mocracy. With an electronically unified

which in turn, mould a flawed reality,

world, the financial markets have seized that

thereby distorting reality even further. This

podium. A plethora of securities and anony-

analogy when extended to the financial mar-

mous, yet a huge number of participants,

kets, has successfully explained the extreme

reaffirm this claim. Every buy and sell deci-

nature of boom-bust sequences.

sion representing a vote, with

its

weight of

take decisions based upon the feedback we receive

monetary

from our environment, how-

capital backing it. However

as

Graham

ever it is impossible for us to

Benjamin noted,

cognize the environment in

this

democracy places

its entirety. Also we in turn

no

act upon the surroundings,

demands on the qualifi-

thereby distorting the present

cation of its voters, lead-

scenario further. This leads

ing to vagaries, mis-

to herd movements being

chief’s and at times a crescendo

of

reactions,

The theory states that we

age

differing purely in the amount

affect

dragged

greed

followed by an avalanche of panic.

This was the premise upon which George Soros established his theory of Reflexivity.

The theory tries to explain the various asset pricing vagaries in terms of a generic approach.

levels,

on

to

obscene

until

it

becomes

immensely unsustainable, leading to a flip in the dynamics of the situation.

But this is easily comprehensible, growls the gentle reader. However the important thing that he misses out is that, the theory goes further to claim that these votes cast, in

The theory claims perfect knowledge as

terms of buy and sell orders, affects the very

impossible. It then goes on to explain how

fundamentals of the asset (generally it im-

© Money Matters Club, IBS Hyderabad.

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plies the enterprise backing the listed eq-

increased valuation of collateral boosts

uity), which goes on to influence the reality,

credit expansion, which in turn permits

hence the perception and so on.

companies to further their collateral valua-

The very natural question that arises is, how can public opinion affect the fundamentals?

tions ultimately causing an “Over Expansion” of credit.

Till now public opinion is seen as a partial

This is amply visible in the last half decade

unilateral function of these fundamentals.

history of Indian Corporations. Today the

Although this though is revolting, the fol-

reason for a slump in the performance of

lowing shall satiate the reader.

Indian Corporations is not only a weak

We

need

to

understand

that,

credit

global and economic structure, but also

availability is a function of past corporate

painful and inevitable cost of borrowed

fundamentals and interest rates. Assuming

capital, that is wrecking havoc with the fi-

low interest rates and a liberal monetary pol-

nancials of Once-Upon-A-Time Aristocrats

icy, initial credit availability, being propor-

of Indian Commerce.

tionately lower than the ensuing installments, shall be reasonably easy. This credit is subscribed on-to by enterprises, so as to generate higher economic value.

It is here that, this theory claims that

An interesting debt structure was a Foreign Currency Convertible Bond (FCCB). These were

issued

by

several

companies

(Educomp, Suzlon to name a few), these were generally listed overseas, issued in

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Dollars, entitled the bond holder to a low

prices,

5% interest rates (generally) and were con-

expectation of a further appreciation in

vertible into a specified amount of shares

pricing. However it was with access to this

above a certain conversion price, which if

very “cheap” credit, that the companies

not having achieved, were payable entirely

posted record results, which made them go

in principal upon the date of expiry.

into overdrive mode and since there seemed

The FCCB’s were considered a win-win situation for both parties, since they allowed companies access to money with low cost of

boosted

lender

confidence,

in

no clouds on the horizon, the basic premise that trees don’t grow to

the sky, was

forgotten. The improved results saw thei

capital and the lenders a high premium in

way into the valuations, which further en-

the exercise price thereby compensating the

abled credit for the enterprise. Thereby con-

low yields. However, this was at a time

structing a “self reinforcing” feed-back loop.

when the Global scenario was ingratiating (Circa 2006), Indian Economic Scenario on a high tide, and a low interest rate policy.

Fitch India Ratings estimates that of the 19 companies that have defaulted on

The companies were already trading at a

FCCBs or restructured them, 12 may expect

heavy premium and to anticipate the same

a recovery in the range of 0% to 30% with a

for several years to come in the future is an

median recovery period of around five

understatement for “Wishful Thinking”. So

years. In the remaining seven cases, the re-

how exactly did this circle carry on?

covery may be 30% to 100% in three to five

Careful observation reveals the trick. It is

years.

human psychology to respond positively to

Now that the party is over (although the

positive reinforcement. The inflated share

hangover

still

© Money Matters Club, IBS Hyderabad.

persists),

this

entire

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experiment in real time, once again reaffirms the legendary insight and scope of this beautiful philosophy. This also serves as a guiding lighthouse during periods of excesses , the reversal of which can be highly profitable, monetarily and stimulating, mentally to the wise and the alert. To sum it up in a nutshell, market movements often follow the adage“Avoid hangovers, keep drinking” - Warren Buffett (On irrationality)

Contributed by:

ANIKET PARIKH IIT-K

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2012 another 1991?

1991 is perhaps the most significant year in the history of Indian Economy. It was in 1991 when the now prime minister and the then finance minister Dr. Manmohan Singh introduced the economic reforms of Liberalization, Globalization and Privatization that saved India from external bankruptcy.

Hit by the global economic slowdown and financial turmoil in the Euro zone, India’s growth rate has taken a major block. There are also various internal factors which are contributing to the low GDP growth.

The current economic crisis in India is very reminiscent of the 1991 crisis. While some argue that the current economic crisis is a repeat of the 1991 crisis, others put the counter argument that the economy is very different in 2012 from 1991. Let us look at both of these one by one

Resemblance to 1991 : The worrying factors 

Fiscal Deficit: The fiscal deficit was at 5.56% of GDP in 1991-92. In 2011-12 it was at 5.9%. This figure is showing a dangerous similarity (see below).

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Current Account Deficit: The current account deficit was at 3% of GDP in 1991 and in March 2012, its value was 4.3% Analyzing the trend in CAD% for the past years, we see that how it has risen substantially



Currency Depreciation: The similarity between trends in rupee depreciation between 1991 and 2012 is also alarming. From Jan 2011 to Jul 2012 the INR depreciated by 21.7 % while the INR , from Jan 1989 to Jul 1991, depreciated by 23.5 % against USD .

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Inflation: With the trade off between growth rate and controlling inflation for a growing economy, RBI has had difficulties in adjusting the necessary rates. With the government following expansionary budget, there is a lot of money in the market, making controlling inflation a very difficult problem. In the below chart we see the progress of India’s CPI inflation since 1991.

Differences with 1991 

Exports: India exports were worth 22443 Million USD in July of 2012. Historically, from 1994 until 2012, India Exports averaged 8464.26 Million USD reaching an all time high of 30418.00 Million USD in March of 2011 and a record low of 1805.00 Million USD in May of 1994. Exports amount to 22% of India’s GDP. Gems and jewellery constitute the single largest export item, accounting for 16 percent of exports. India is also leading exporter of textile goods, engineering goods, chemicals, leather manufactures and services. India’s main export partners are European Union, United States, United Arab Emirates and China. The chart below shows the phenomenal growth of Indian exports which can be mainly attributed to the economic reforms of 1991.

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GDP: The Gross Domestic Product (GDP) in India was worth 1847.98 billion US dollars in 2011, according to a report published by the World Bank. The GDP value of India is roughly equivalent to 2.98 percent of the world economy. Historically, from 1960 until 2011, India GDP averaged 368.84 billion USD reaching an all time high of 1847.98 billion USD in December of 2011 and a record low of 36.61 billion USD in December of 1960. The chart below shows the phenomenal growth of Indian GDP since 1991 showing how big an economy has India become.

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Debt as a percentage of GDP: This is one of the factors that India has managed to control magnificently. With the euro zone battling high debt to GDP ratios and many countries like Greece battling default and bailouts saving many countries, India has been able to control its this factor well. We can easily get the good picture here by comparing the charts of India and USA .

We see that while US debt to GDP ratio increased by 77.5% since 2002, India’s Debt to GDP ratio decreased by 15.8% .

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Forex Reserves: India’s Forex reserves have increased substantially. Back in 1991, India had forex reserves that could cover just 2 weeks of imports, while India’s forex reserves can cover about 9 months of imports .(See Below. Source: RBI database)

We can safely say that the comparison of situations in 2012 and 1991 is not really justified at this stage. In 1991, the economic situation in India was crippled. With no globalization, India was an isolated country. Since then, India has come a long way in the global economic scenario with investments and increasing business confidence. The country has a much bigger and stronger banking system today. Compared to 1991, in terms of infrastructure, we are in a far better off position to bring about regulations needed in the economy more efficiently. Also unlike 1991, the market determines rupee's exchange rate which invariably is our great strength. Financial markets today are more resilient and robust than what they were in 1991 But with the global economic meltdown, subprime crisis, eurozone crisis, Arab spring, increasing crude oil prices, the financial world is in turmoil. With the recent scams in India and some non encouraging principles like GAAR (General Anti Avoidance Rules), we see the investor confidence in India slowly going down which is reflected in the falling FDI and FII

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We see the decreasing GDP annual growth rate over the past few quarters. Despite reaching highs of 10.1, 9.4, 9.6 it has now come less than 6.

Even while analyzing the IIP growth rate, we see that it reached heights when the reforms were brought about, but has reduced substantially with IIP growth rate of 0.1% in month of July So government cannot afford to relax. The FDI reforms that were brought about recently is a step in the correct direction. What happened in 1991 was that India came out of its comfort zone to bring about major reforms which transformed the picture of India. We need similar strong decision making now, to boost the investment environment in India and restore the growth structure, if our government doesn’t address this, we may see another 1991 coming.

Contributed by: ANINDO CHAKRABORTY Batch of 2012-14 IMT, Ghaziabad

Š Money Matters Club, IBS Hyderabad.

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COOPERATIVES, MICROFINANCE AND THE POOR

In order to meet the credit needs of the rural

due to fundamental dilemmas they face due to

households the formal cooperative structure

trade-offs involved in growth and equity, and

came into existence more than a century ago.

equity and decentralization. Some also feel that

Though the concept of the cooperatives has

cooperatives might succeed if they get a backup

gone far and wide now, their basic motive of

of proper policy support and guidance of pro-

reaching out to the poor has remained

gressive leadership.

unserved till date. A recent

Cooperatives of today are

policy measure of linking

modeled on the German

these cooperatives with the

Raiffeisen system to help

mushrooming

free

microfi-

farmers

from

the

nance institutions is an-

clutches of moneylenders.

other initiative to make

Even the Cooperative so-

these

cieties Act of 1904 in In-

cooperat ives

pro-poor

in

t heir

dia was passed with the

operations.

primary objective of en-

Experts have had divergent views on how use-

couragement of individual thrift and mutual co-

ful the cooperatives indeed are to the poor. In a

operation among members with a view to utili-

socialist system, cooperatives are essentially

zation of their combined credit, by the aid for

seen as instruments of transformation of soci-

intimate knowledge of one another’s needs and

ety. In a capitalist system, cooperatives are

capacities and of the pressure of the local public

seen as attempts to correct the excesses of pri-

opinion. Adoption of microfinance is a more

vate enterprises. In mixed economy systems

recent of the long drawn efforts to reform the

like India’s cooperatives help serve the welfa-

cooperatives. Such a linkage serves the twin

rist objectives of the state like poverty allevia-

goals of making cooperatives more inclusive

tion and empowerment. However, there are

while also improving the business prospects of

also a certain group of experts who feel that

the cooperatives. Microfinance uses unconven-

cooperatives are able to do justice to the cause

tional methods to mobilize poor and provide

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them access to credit, savings and insurance

and sustenance and in the absence of social

facilities. The group method adopted by mi-

intermediation processes the groups may not

crofinance solves the problem of collateral

emerge uniformly in quality and quantity.

faced by formal agencies and poor. The

Cooperatives are formal institutions while

main principles of microfinance being mu-

microfinance institutions are essentially in-

tual cooperation, joint liability and peer

formal and the former may not be able to

monitoring coupled with informality, small

promote the latter on a scale unless

size and homogeneity of membership of

supported by appropriate agencies. Had the

groups, would help ensure better recovery,

cooperatives continued with original Raif-

reduce risk and cost of intermediation. This

feisen model guideline this problem would

increases the reach of cooperatives by ruling

not have arisen but that is not the case. Both

out the problem of collateral, while also

in the formation of SHGs and in their inter-

helping them scaling-up and increasing their

nalization, the cooperatives would face con-

dividends in terms of increased lending and

tradictions and challenges for a meaningful

assured recovery.

integration. Moreover, the cooperatives that

However, the policy also has several chal-

have lost their pre-eminent position now

lenges and contradictions. Microfinance is a

have to compete with other formal agencies

more a neo-liberal phenomenon and may not

which are also keen to scale up in microfi-

suit the welfarist goals of inclusion and pov-

nance. How far the SHGs will be able to

erty alleviation. Microfinance SHGs need

help cooperatives in terms of their business

considerable resources for their emergence

is another major question in the linkage

Š Money Matters Club, IBS Hyderabad.

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programme.

By March 2010, 69.53 lakh SHGs had been linked to financial institutions with an estimated coverage of 97.35 million households. Of this, about 10.79 lakh SHGs have been linked to cooperatives (15.5%) covering about 15.11 million households, having mobilized a savings of about Rs. 1225 crores, while the total outstanding loan of SHGs of cooperatives comes to Rs 1729 crore by March 2010. At all-India level, the average number of SHGs linked to primary agriculture cooperative societies (PACS) comes to 11.4, while at the district credit cooperative bank (DCCB) level is very low at 3405 only. However, SHGs have increased the membership of PACS by an estimated 1.51 crore which makes about 10.76% of total PACS members, and bulk of this number is women and poorer sections of rural household. But the loan outstanding of PACS SHGs is only 2.26% of the total outstanding loans of PACS. Given that the proportion of credit-linked SHGs is less than half of the total SHGs linked, the impact on credit business is still quite weak. While the overall impact of SBLP appears insignificant on the business position of cooperatives, but states having relatively intensive effort by the cooperatives under SBLP will definitely have better potential.

the linkage leave much to be desired especially given the enormity of financial exclusion.

Even two decades after implementation of the SHG-bank linkage programme (SBLP), the cooperatives are found playing only a supplementary role in it. The apparent delay in promoting SLBP among the cooperatives and in creating a suitable legal environment has also made the cooperatives lax in taking the required initiatives. Despite the drawbacks and limitations, it would be worthwhile to pursue the linkage further. The aim of these efforts should be to both consolidate the efforts as well as to overcome the constraints faced.

Contributed by:

The historical experience of reforming the cooperatives had not yielded the expected results. The emerging experience with regard to linking cooperatives with microfinance indicates that the outcome now is no different. The overall results of

Š Money Matters Club, IBS Hyderabad.

BHAVI PATEL PRM 32 INSTITUTE

OF

RURAL

MANAGEMENT, ANAND. (IRMA)

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I N D I A N S T O CK MA R KE T, A L L SET FOR NEW HIGH? Indian stock markets have been very kind in

US Fiscal cliff a important issue not only

giving us around 26% return in both nifty &

for US but for world economies as well has

sensex indexes in the year 2012. Whereas

reached a solution which created a good

markets around the world hasn’t been that

hope around at least for a while, FII’s

good. Smallcap and midcaps were proved

money has been the support for Indian eq-

favorites in the last year. Few good hopes

uity markets so anything not in favor for

building around the governance of India

US fiscal cliff would have resulted in nega-

made the markets move higher in the last

tive way for the Indian equity markets. But

year.

A

things turned

strong

have out

in

start in 2013

favor which will

has

made

attract

more

the expecta-

money

from

tion level to

FIIs in to Indian

go

equity

much

markets

for

for sure, keep-

year

ing short term

ahead. FII’s

strong momen-

interest has

tum intact.

higher the

been increasing which has been witnessed in

RBI third quarter monetary policy can be a

first couple of weeks buying figures, but the

major trigger for the markets in coming

question lies is can markets deliver the same

days. As a cut in interests rate is expected

kind of performance in 2013 as well? It’s a

around the corners, which can work in fa-

big question, which can’t be answered at the

vour of markets. With the positive expecta-

start of the year but definitely can be ana-

tion from the policy, banks stocks have al-

lysed from the current scenario and upcom-

ready shown some decent rallies. Positive

ing events which can directly or indirectly

outcome from the policy can keep the mar-

affect the Indian Equity markets.

kets trading with positive trend.

© Money Matters Club, IBS Hyderabad.

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Solution to US Fiscal cliff, Probable Inter-

view of few technical analysts nifty’s all-

est rate cuts, are these factors enough for

time high would act as a major hurdle.

the markets to make all time new high for

Markets tried the same to break in 2010 as

the year? People have started talking about

well but couldn’t do that well. So even this

23k++ for Sensex, even 7000 mark on

time it would be a tough job .In a way rally

Nifty by end of the year are the levels

seen in the last six months is really strange

talked about. Practically looking at it, it

as markets overlooked some major factors

looks far above expectations .As Indian

but considered few small positive develop-

economy is having more concerns than

ment quite seriously. So once the overall

these couple of highlighted issues. When

scenario & its positivity fades out things

markets rallied in the big bull run 2007,

may look completely different than today’s

inflation wasn’t a concern Indian economy

condition. In this overall positive momen-

was growing at a much higher pace than

tum nifty can definitely inch higher till its

today. Economies around the world were in

all time high but breaking and sustaining

a much good shape than their current con-

above it will definitely won’t be easy.

ditions. From the mid of 2012 market

Some strong actions from government to

started their upward movement as Indian

take the economy growth rate to a consid-

government showed signs of overcoming

erable good rate and other global events in

its policy paralysis attitude, By taking

support with it will only make the overopti-

some major steps on encouraging FDI in

mistic views about the index predictions

retail industry. At the same time FDI in

which are talked about possible. Let’s hope

insurance, aviation sectors would be some-

for the best.

thing markets would be expecting from the government in current year. Being a coali-

Contributed by:

tion government passing every major bill is nothing less than a big challenge.

Indian Equity markets have quite big challenges in front of it. It won’t be easy for markets to overcome these hurdles. As per

Sanket Narkhede MMS, Ist year MET’s

Institute

of

Management.

Disclaimer: The views & image used or expressed in the above article are based on personal observations that may go wrong. One should make his/her own judgment after reading it for which writer will not be held responsible.

© Money Matters Club, IBS Hyderabad.

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MICROFINANCING/SELF-HELP GROUPS ( r u r a l d e v e l o p m e n t a n d p a n c h aya t i r a j ) It is ordinarily agreed that one of the most

the idea of social collateral is popularized

important instruments of poverty manage-

through the group lending programs. To

ment would be the feasible expansion of

overcome this problem, group lending is

Institutional credit facilities to a large major-

considered as a definitely safer option. Since

ity of individuals who neither have adequate

the group has much better access to local

pledge nor credit history to secure a loan. In

information it is possible for the group to

order to allocate this problem, governments

make a distinction between a risky and a

in many developing countries pursued the

safe borrower. The lender has to design

program of subsidized credit until the 1980s.

some incentive (threat) scheme for the group

However, the experiences were mostly dis-

to utilize the information in the interest of

astrous. Moreover, unnecessary administrative difficulties, a complex formal credit system, bureaucratic sprawl, unchecked corruption and unhealthy political pressure added salt to the wound. The credit-subsidy programs failed to

Group lending programs should be promoted since they have much better access to local information and they can hence make distinction between risky and safe borrowing.

the bank. Thus, the group will, in effect, act as an agent of the lender.

If the group is held responsible for non-performance of any one of the group members, then it would simply raise the cost of default and, because of peer monitoring, the re-

promote banking culture among the target

payment rate would improve. While group

group and proved inadequate to motivate

lending with joint liability has emerged as

them to be self-dependent (Morduch 1999;

an effective instrument to ensure the finan-

Varman 2005).

cial viability of micro lending, the potentials

In order to solve the problems of rural

of other instruments may also be explored as

credit, two aspects deserve close attention:

well.

(a) Easy access to loans for the poor (both

Congruity with human nature enhances the

for production and consumption purposes)

relevance and utility of human development

(b) Financial viability of the lending institu-

initiatives. So far, the self-help groups

tions.

(SHG) have turned out more successful in

To achieve both these ends simultaneously

the rural societies where the social sanction

Š Money Matters Club, IBS Hyderabad.

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parameter is rather strong. In the absence of

2.

To develop SHGs, in an attempt to

social control the joint liability clause is dif-

reduce their reliance on NGOs and to

ficult to enforce as effective monitoring is

demonstrate how the whole task of

impossible.

delivering financial services through SHGs can be made more efficient.

3.

To judge the ‘quality’ of the SHGs, in terms of the poverty of their members, and the quality of the banks’ service to them.

4.

To analyze the social and economic characteristics of the existing SHG members in various states of our country and finally resolve it.

The importance of the topic, and the scale of existing experience, is such that it would The key to all such initiatives has been train-

have been both desirable and possible to

ing and capacity building of various stake-

carry out a substantial and wide ranging

holders including the SHG members them-

study, which might be expected to produce

selves, the range of which is growing at a

statistically reliable findings and conclu-

fast pace.

The strategy involved forming

sions which could be used with confidence

SHGs of the poor, encouraging them to pool

as a basis for changes in policies and pro-

their thrift regularly and using the pooled

grams. The time and specifications allowed

thrift to make small interest bearing loans to

for the current study, however, were not

members, and in the process learning the

such as to allow this.

nuances of financial discipline.

SHGs are no more than a new marketing

Under this heading we have to focus on

channel, which banks have adopted because

the following things:

it enables them to serve a market segment,

1.

To develop the need and scope of

namely poor men and women, which they

fresh initiatives for SHGs in their own

were previously unable to reach. The chan-

communities for bank linkage at low

nel development costs have thus far been

cost and in a short time.

covered from a number of different sources, and it is important to note that the promotion

© Money Matters Club, IBS Hyderabad.

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costs of all the SHGs promoted by scheduled commercial banks, and most promoted by RRBs until recently, have been borne by the banks themselves. There is a great deal of discussion as to whether microfinance reaches the so-called ‘poorest of the poor’, and whether, if it does, it benefits them. It seems to be generally agreed that the main beneficiaries of microfinance are ‘the economically active poor’ . It is not clear whether the SHG system reaches very poor people as effectively as the more internationally familiar Bangladesh Grameen Bank system, which is of course also being used in India and is growing, albeit from a smaller base, as rapidly as the SHG system. (Friends of Women’s World Banking, ibid. pp.20-21). SHG promotion is not difficult, and it does not need a bank branch manager to promote an SHG. Bank management must realize this, and lower level branch staff should be trained and encouraged to perform this task. The ‘social’ aspects of SHGs are not the banks’ direct concern, but they must be regularly monitored in order to avoid ‘client drift’ away from the poor.

Contributed by:

CHANDRA SEKHAR Indian Institute of Information Technology and Management, Gwalior.

© Money Matters Club, IBS Hyderabad.

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CURRENT ACCOUNT DEFICITS: a problem or a long term solution Current Account of an economy reflects the net position of the four account heads of an economy i.e. Goods, Services, Income and Current transfers. It is the reflector of all the trade that happens in an economy and its net debit or credit position tells us about the state of the respective economy, both on

provide funding for domestic consumption

its own and in comparison to other world

and investment tomorrow.

markets.

Let us try to discuss different situations

In the general terms, a country in deficit is

where in the Current account Deficit no

said to be investing more than it is saving

longer seems a problem but a solution to

and is using resources from other econo-

the latent problems of - lack of productiv-

mies to meet its domestic consumption and

ity, excessive domestic consumption due

investment requirements.

to the easy credit availability, etc:

But the principal question is whether

More Imports - A strong foundation to

having a current account deficit is wor-

an economy's Productivity and yield

risome or not?

A provident economy with a far sighted

Well, sometimes. But more often than not,

approach may import more than it exports,

a current account deficit helps in making

with the ultimate goal of producing fin-

an economy fundamentally stronger and

ished goods for export. This will raise the

developed by using the foreign investment

country's

for increasing its competencies. It can also

(current

be considered as a sign of a strong econ-

deficit) but the coun-

omy that is a safe haven for foreign funds.

try will plan to pay

When an economy is in a state of reform or

off

transition, or is pursuing an active strategy

excess of imports at a

of growth, then running a deficit today can

later time with the

the

CAD account

temporary

Š Money Matters Club, IBS Hyderabad.

“The principal question is whether having a current account deficit is worrisome or not?�

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proceeds made from future export sales.

of economy. But, Investments from abroad

The proceedings from these sales would

usually have a positive effect on the local

make an entry on the CREDIT side of

economy because, if used prudently, they

the current account. So, when an econ-

provide for increased market value and

omy is running a deficit today to invest in

production for that economy in the future.

increasing its future production capabili-

This will allow the local economy eventu-

ties, then it can compensate for the deficit

ally to increase its exports and, again, re-

by getting revenues from the increased ex-

verse its current account deficit.

ports in future.

And moreover, this kind of deficit is con-

Long Term Future Investment in For-

sidered as a positive sign of a efficient,

eign Assets

strong and transparent local economy, in

When a country invests abroad in other

which foreign money finds a safe haven for

country's foreign assets to earn the return

investment in the local economy. For ex-

income on investment , then the outing

ample, in the US capital markets, “Flight

funds are recorded as a debit entry in the

To Quality” mechanism was seen when

Financial Account (a component of Bal-

“Quality Assets- US treasury bonds &

ance of Payment) and the income earned

stocks” were sought out by investors who

is recorded as the credit (Income compo-

faced losses in Asian market crisis.

nent of Current account) in the current ac-

Planned Spending with enough income

count. So, sometimes a current account deficit coincides with depletion in a country's foreign reserves (limited resources of foreign

currency

available

to

invest

abroad).

Sometimes governments spend more than they earn, due to unplanned economic policies.. Money may be spent on costly imports while no investment is done to increase

the

productivity

or

economic

Liabilities owed to Foreign Investors

strength. Or, it may be acknowledged as a

The foreign investors invest in the domes-

priority by the government to spend on the

tic country so as to reap the benefits of re-

defence forces rather than economic pro-

turn on investment. And this claim of the

duction. Whatever be the reason, a deficit

foreign investors on the domestic economy

will occur if credits and debits do not bal-

makes a debit entry in the current account

ance. But when government spends

© Money Matters Club, IBS Hyderabad.

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wisely in those areas which will increase

age of GDP has been rising. In fact the per-

its economic strength and will generate

centage in FY12 was as high as 4.2%. Now

prospects for increasing the future produc-

in Q2FY13, it has touched an all time high

tivity - by investing in major infrastructural

of 5.4 percent of GDP.

projects & other return generating areas,

India is suffering from a serious current account deficit which appears to be because of the twin problems of decreased savings, caused by reckless fiscal policy, and evidence of falling competitiveness of exports.

Trade deficit widened due to a significantly higher contraction of exports than imports. The trade

Source: The Economist

deficit increased to US$48.3 billion in

then running a current account deficit will bring more prosperity in the nation with future growth.

India’s Current Account Deficit In the current Economic slowdown, when it comes to GDP growth, India has been doing at par with its BRIC peers, especially when US and Europe were entangled in the spiral of Recession.

Fig: Increase in Trade Deficit in Q2FY13

But on various other parameters, India has been lagging behind. One such factor is Current Account Deficit. India has the worst current account deficit, while coun-

Q2FY13 compared with US$44.5 billion in Q2FY12, an increase of nearly 8.6 percent.

tries such as China and Russia have current account surpluses. In the past few years,

So, in India, the Current account deficit

India's current account deficit as a percent-

will lead to a big problem of balance of

Š Money Matters Club, IBS Hyderabad.

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payments in the near future if not tackled

help reduce external liabilities and increase

properly which will ultimately affect its

credits from abroad. And the economy will

Foreign Exchange reserves also. Despite an

remain fundamentally strong if it is wisely

inflow of the foreign direct investment and

investing its savings and prudently using

portfolio investment, the foreign exchange

its borrowings in increasing its Productiv-

reserves had declined by US$ 0.2 billion in

ity and future income.

Q2FY13 due to high Current account deficit. It means India should invest its borrowings wisely to boost its production capacity

Contributed by:

and maintaining the sustainable nature of its development GDP and future growth.

KARAN CHAUHAN

Conclusion So, a deficit is not necessarily always bad for an economy, especially for a developing economy or an economy under reform: an economy sometimes has to spend money to make money. Competitive problems can be reflected by an excess of imports over exports, on the other hand a highly productive economy can be reflected by deficit due excess of investments over savings. If the deficit reflects low savings rather than high investment, it could be caused by a poor fiscal policy or a high domestic consumption. Without knowing which of these factors are responsible, it makes little sense to talk of a deficit being “good” or “bad”. To run a deficit prudently, however, an economy must be prepared to finance this deficit through a combination of sustainable means that will

© Money Matters Club, IBS Hyderabad.

NITIE, Mumbai.

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INNOVATION IN FIN A NCIA L SERVICES Financial services play a dominant role in

where parameters like R&D spending, no. of

economies and besides their own signifi-

patents and many more are used as a yard-

cance, their proper functioning is essential

stick.

for the well-being of the entire economy.

In financial services, innovation takes the

Financial services face a paradox: they are

shape of new products and services (e.g.

simultaneously considered a mature industry

new securities, new payment instruments,

with few innovation opportunities and yet

online brokerage services), new processes

they display particularly dynamic innovative

(e.g. credit scoring models, electronic

behavior.

money processing, implementation of SEPA – Single Euro Payments Area), new forms of organizations (e.g. branchless banks, alliances with telecommunications providers and mobile network operators, internal improvement projects, such as lean and six sigma projects for financial services), and new ways of interacting with customers (e.g.

Internet banking, use of social networks and

A financial innovation is defined as a new

smart phone applications).

product or service, a novel organizational

More of the financial service innovations

form, or new processes that reduce costs or

have been good (ATM, debit card, money

risks or that improve quality. Rapid innova-

market funds, interest rate, currency swaps,

tion contributes to the dynamic efficiency of

etc.) except few (credit default swaps, struc-

the financial sector, which ultimately affects

tured investment vehicles) which have been

the overall growth of the economy. There is

blamed for the recent financial crisis. But

a dearth of empirical studies on innovation

such innovation helped mask or exacerbate

in financial services. This can mainly be

certain bad actions; but was clearly not a

contributed to the lack of measuring pa-

major cause in itself.

rameters unlike in manufacturing sector

Š Money Matters Club, IBS Hyderabad.

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CHALLENGES AND SOLUTIONS

challenges mentioned above, there are addi-

Since innovation is cross functional and

tional hurdles which Financial Services has

more of line management, it makes it more

to address.

difficult to handle. According to recent stud-

One major hindrance comes in the form of

ies, Innovation in finance services is much

heavy regulations in financial services. It

more challenging and complex than in pro-

limits what new products can be made avail-

duction environment. Reasons being the ex-

able and to whom you are allowed to com-

pectation of financial success in short-term

municate with. It even puts restriction on

and lack of a definite organizational struc-

consulting its entire employee base for inter-

ture. The innovation process can be a long

nal feedback and recommendation as in the

one, especially in the eyes of financial com-

case with SEC regulations. Another matter

panies looking for short-term execution with

of concern to the customer and enterprise is

short-term financial results, therefore very

the security of data. It can be a serious head-

few companies have dedicated budgets and

ache for the institutions to prevent any data

organizations towards a formalized process

leakage as individuals are much worried

for the generation of ideas, their evaluation

about it.

and eventual implementation. There is no specific responsibility allocation for innova-

Also mostly innovation has been associated

tion. This can be solved by setting up dedi-

with the major institution in most economies

cated R&D department or Innovation de-

like Goldman Sachs, JP Morgan chase, or

partment which is currently lacking in finan-

deutsche bank. But now, in china, some

cial service sector. Social factor like individ-

small to mid size institutions are also quite

ual ideas never come out. According to

active in innovation. They recommend the

McKinsey Global survey, 67% of executives

innovation factory model which encom-

in the financial-services industry view the

passes product innovation, channel innova-

need for increased innovation necessary to

tion, marketing innovation and management

meet long-term and short-term performance

innovation. They have realized the impor-

goals. Mostly, Organizations puts a barrier

tance of innovation as a key differentiator in

for such employees to structure their innova-

the backdrop of fierce competition in finan-

tions and work upon them. While many or-

cial service landscape.

ganizations regardless of industry face the

Š Money Matters Club, IBS Hyderabad.

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There are two important aspects associated

the different “outside” information and ana-

with the innovation issues in any institution.

lyze upon it .

One may be termed as internal and other as external. Problems associated with the inno-

AN EXAMPLE

vation in finance service are that it has stan-

UBS, a Switzerland based financial service

dard and efficient organization structure

institution has realized the importance of

which sometimes leads to innovation failure.

innovation. A group within the company’s

This event can be a setback for the employ-

investment bank division came up with a

ees and organization in terms of long term

movement to prioritize innovation as never

benefits.

before. They tried to showcase the ideas of collective employees. They did it by devel-

This can be sorted out by rewarding system

oping a bright idea-powered intra company

for employees, promoting ideas sharing and

community called UBS idea exchange.

storing across the various domain of the in-

Starting with mere 50 employees it focused

stitutions. It would help the employees to

on corporate transparency in the beginning

contribute more and work as a innovation

stage. Later on, it opened up to all the em-

team rather than an individual input. An in-

ployees and focused on the ideas sharing for

novative council, centralized research sys-

innovation and management purpose. How-

tem, dedicated fund and other business unit

ever, it took considerable time from each

responsible for innovation can be a good

department owner and expert to go through

option for various organizations.

such large no. of ideas but it has resulted

Role of social media like facebook, You-

into hundreds of ideas currently in develop-

Tube, twitter, MySpace would greatly play

mental stage and many cost saving improve-

an important role. They would provide a

ments and much more.

platform to source the customer’s information to the financial institution. This information would be the beginning point for

Contributed by:

them to work upon and achieve the goal of

RAHUL JAIN

certain innovation in financial services. To deal with security and privacy concerns, an organizational structure within the organization itself is required. It would take care of

© Money Matters Club, IBS Hyderabad.

Batch of 2012-14 IIFT, Kolkatta

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TAX BENEF I T S F ROM MUT UAL FUNDS A Mutual Fund is pool of money which is

Capital Gain is an appreciation in the

supplied by investors and which is invested

value of the asset at the time of sale. For

on their behalf in investment instruments

computing the capital gains, the differ-

like stocks and bonds, according to prede-

ence between the sale price of one unit

fined objectives. The investors in the mutual

and the cost of purchase of the original

fund are known as unit-holders. A profes-

unit will be the capital gain. Suppose a

sional manager known as the fund manager

unit is purchased at Rs 100 and is sold at

who belongs to an Asset Management Com-

Rs 120, then the capital gain is Rs 20 per

pany (AMC) is appointed to take investment

unit. Capital gains arising from the sale

decisions and manage the pool of funds.

or redemption of units held for a period

Some AMCs are Birla Sun Life Mutual

of less than 12 months are considered as

Fund, Templeton Mutual Fund, Reliance

short term capital gains. Whereas units

Mutual Fund, HDFC Mutual Fund, Principal

held for more than 12 months give rise to

Mutual Fund etc.

long term capital gains.

Tax Benefits

Short Term Capital Gains (STCG):

Tax saving is done so that a person saves

STCG on Equity Mutual Funds is 15%.

more for him and pays less to the govern-

A non equity scheme is taxed as per the

ment. Investing in mutual funds have

individual investors tax slab. So if the tax

several tax advantages.

bracket is 30%, and a debt fund is sold within 1 year, you will pay commensurate tax on your gains.

Long Term Capital Gains (LTCG): There will be no tax on LTCG arising from the sale of units of equity-oriented funds. In case of capital gains arising from non-equity funds like debt funds, tax shall be charged at 10% of capital gains without indexation benefits or 20%

Š Money Matters Club, IBS Hyderabad.

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of the capital gains with indexation benefits.

Wealth Tax: Under the Wealth Tax Act, mutual fund units are exempted totally from Wealth Tax .

Tax Deduction at Source: For the dividend paid by the mutual fund to the unit holder, no TDS is deducted. Also there are no provisions under the income tax act according to which TDS is required to be deducted from the sale proceeds of the units. The unit holder gets the entire sales consideration at the applicable NAV’s less the load and no TDS. Equity Linked Saving Scheme (ELSS) These schemes are popularly known as tax savings funds. They offer a double advantage of capital appreciation and tax benefits. These schemes offer tax benefits to the investor under provisions of Section 80C of the Income Tax Act, 1961. These types of funds are diversified equity funds which have a lock-in-period of three years. Investments made upto Rs. 1,00,000 per year are exempted from payment of income tax under Sec 80C. Particulars

Without ELSS/ 80C Tax Saving Investment

With ELSS / 80C Tax Saving

Gross Total Income

Rs.7,50,000

Rs.7,50,000

Exemption Under Section 80C

Nil

Rs.1,00,000

Total Income

Rs.7,50,000

Rs.6,50,000

Tax on Total Income

Rs.80,000

Rs.60,000

Tax saved on Investment

Nil

Rs.20,000

Source: www.sbimf.com Main advantage of ELSS is liquidity. It has a short lock-in-period of 3 years, comparing with NSC and PPF which have a maturity period of 6 years and 15 years respectively. Also since it is an equity linked scheme it has high earning potentials. Investor can opt for dividend option and get some gains during the lock-in period. Investors can also select Systematic Investment Plan, as a small investment made periodically is always better than a lump sum amount at a time.

Some important parameters that need to be evaluated before you consider a tax saving fund are:

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Performance: Investors must evaluate the fund on the NAV returns. The fund must have a very good performance vis-a-vis the benchmark index and its peer groups

2.

Expenses: The expense ratio is the ratio of the total expenses of the scheme to the average net assets of the fund. It indicates the efficiency and the cost effectiveness.

The lower the ratio more is the efficiency of the fund as lower expenses give more returns

3.

Investment Approach: Investors should also consider the experience and expertise of the fund manager. An experienced fund manager will be able to choose the best investment option for the fund and align it with the objective of the investors .

Top five tax saving bonds are: Rank

Scheme Name

PERFORMANCE

Expense Ratio

1 month % 3 month % 6 month %

1 year %

3 year %

1.

Principal Tax Savings Fund

1.59

9.78

19.73

39.54

5.24

2.03

2

Reliance Tax Saver (ELSS) Fund – Growth

1.77

6.54

14.13

37.28

9.62

1.91

3

Reliance Equity Linked Saving Fund -

1.34

4.21

12.91

36.72

9.26

2.41

4

DSP BlackRock Tax Saver Fund – Growth

2.07

8.69

18.34

36.11

7.46

2.31

5

ICICI Prudential RIGHT Fund – Growth

2.29

10.08

19.62

35.74

14.3

2.49

Source: 11th January, 2013, mutualfundsindia.com These were the tax benefits from mutual funds and the factors that an investor must be considered while choosing a tax saving fund.

Contributed by: SHYAM MANGE MMS (2012-14) METIOM, Mumbai © Money Matters Club, IBS Hyderabad.

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The ‘Golden’ dilemma h o w

t o m a n a g e t h e n a t i o n ’ s i n s a t i a b l e d e m a n d f o r t h e y e l l o w m e t a l ?

It is well known that Indians have a love

world’s largest importer of the metal. In

affair with gold that goes back millennia.

the financial year 2011-12, India im-

The yellow metal has been a symbol of

ported 655 tonnes of gold worth a whop-

power, wealth and mystique for generations

ping $56 billion, about 70 % greater than

of Indians through centuries. Its appeal tran-

the $33 billion it spent on gold imports

scends the barriers of language, religion and

the year before. There are reasons beyond

caste that otherwise divides the nation. Long

culture and tradition that have fuelled the

ago, when the Romans arrived on the shores

latest Indian gold rush. Gold has emerged

of India looking for spices and silk, there

has an attractive investment option as it

was precious little they could give in return

has produced decent returns in rupee

to the Indian merchants. So they bought

terms in the past few years. Also dismal

their wares with the only thing that Indians

returns from financial instruments like

wanted even back then, gold coins.

stocks and mutual funds (before the last

In the recent years, the people’s affinity for gold has become a serious problem for the Indian government and economic planners. The country, which produces little gold domestically, is already the

market rally post Sept’2012) coupled with rampant inflation have eaten into the savings of the public and forced them to turn to gold as a natural hedge. Moreover the fact of the matter is that gold is one of the very few asset classes that has univer-

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sal acceptance and provides liquidity to the common man, with minimum transaction costs. All these factors have led to an inflated import bill which has pushed up the current account deficit and resulted in downward pressure on the rupee.

Table 1: Global Gold Supply and India’s Demand for Gold Year

Global Gold Supply (Tonnes)

Gold Demand from India (Tonnes)

Growth of Global Gold Supply (%)

Growth of Gold Demand from India (%)

2006

3559

707

-11.8

-10.7

2007

3554

716

-0.1

1.3

2008

3657

679

2.9

-5.1

2009

4146

743

13.4

9.4

2010

4274

871

3.1

17.2

2011

4030

975

-5.7

11.9

2012

4130*

1079*

2.5

10.7

(Source: RBI, Report of Working Group to Study the Issues Related to Gold Imports and Gold Loans by NBFCs, Jan 2013) *Estimates The above table shows that while the global supply of gold has been pretty much flat over the past few years, the demand from India has increased steadily. The gold demand in the year 2012-13 is expected to be lower because of the increase in import duty to 4% and slower growth in the economy. The chart below shows how gold has outperformed other asset classes in the recent past. The fact that bulk of gold transactions happen on a cash basis and unlike other financial instruments, is devoid of documentation requirements and tax hassles, has only added to its attractiveness.

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Table 2: Returns of various domestic assets

Source: Bloomberg Table 3: Gold imports for India relatively price inelastic

Source: DGCI&S and World Gold Council The spike in gold imports has created two basic problems in macroeconomic management.

First, it worsens the trade deficit which in turn leads to high current account deficit. India’s CAD for the financial year 2011-12 stood at 4.2 per cent of GDP at $78.2 billion, an alltime high figure. To put things in perspective, a CAD of 2.5 to 3 per cent of GDP is considered sustainable for India, which can be financed through portfolio inflows. Gold contributed nearly 30 per cent of trade deficit during 2009-10 to 2011-12, which is significantly higher than 20 per cent during 2006-07 to 2008-09. Secondly, gold is a commodity which

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on its own does not add any productive capacity to the economy. It’s either stored in lockers or gets converted into jewellery. Hence, rising gold imports causes diversion of funds from productive financial assets to a non-productive asset.

Table 4: Gold Imports and Current Account Balance ITEM

2008-09

2009-10

2010-11

Current Account Deficit (US $ billion)

-38.2

-46.0

-78.2

Current Account Balance as Ratio of GDP(%)

-2.8

-2.7

-4.2

Net Gold Imports (US $ billion)

24.3

34.4

49.2

Net Gold Imports as % of GDP

1.8

2.0

2.7

Net Gold Imports as ratio of CAB

63.6

74.8

62.9

Source: DGCI&S Rise of Gold Loans and Gold Backed Instruments With the rapid rise of gold imports, the gold loan market has grown explosively in India.

The number of gold loan NBFCs as well their branch network and the volume of gold pledged have shown explosive growth. To accommodate such rapid growth, the NBFCs have resorted to large scale borrowings from banks, which have given rise to concerns about systemic stability among regulators. Huge borrowing of public funds through banks by these NBFCs has given rise to ‘Concentration Risk’ as more than 90% of the assets of these companies are in the form of gold jewellery loans. In order to mitigate such risks, the RBI in March 2012 raised the required Capital Adequacy Ratio (CAR) of these companies to 14% and capped the Loan-to-Value (LTV) ratio to 60%. A recent expert committee constituted by the RBI has recommended raising the LTV ratio to 75%.

Along with gold loans, investor interest in other gold backed instruments have increased manifold, the principal among them being the Gold ETFs.

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Table 4: Explosive Growth of Gold Loans

Source: RBI, Report of Working Group to Study the Issues Related to Gold Imports and Gold Loans by NBFCs, Jan 2013 According to the Association of Mutual Funds in India (AMFI), assets under management (AUMs) under gold ETFs have more than doubled to Rs 9,886 crore as on March 31, 2012, from Rs 4,400 crore reported in March 2011, showing a year-on-year growth of 124 per cent. Other than ETFs, other popular instruments include Gold Futures, Gold Systematic Investment Products (SIPs) and Gold Savings Funds.

Table 5: Growth of Gold ETFs

Source: Association of Mutual Funds in India (AMFI)

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The Way Forward The Government and the RBI needs to come up with measured steps to restore balance to the situation. The most obvious measure of increasing import duties might not be the best way forward as this would only encourage gold trade though unauthorized channels.

Some of the measures that might be considered are*: a) Introduction of new gold backed financial products like Gold Deposit Scheme where gold taken as a deposit is recycled for meeting domestic demand and given back at the time of maturity and Gold Pension Product where the customer surrenders his gold to the bank in lieu of streams of monthly payments till his death. b) Liberalize gold loan norms of banks and NBFCs to increase monetization of idle gold stock. c) Setting up of Bullion Corporation which may function as a backstop facility providing liquidity for lending against gold.

Contributed by:

SANCHALAK BASU XLRI, Jamshedpur

*RBI, Report of Working Group to Study the Issues Related to Gold Imports and Gold Loans by NBFCs, Jan 2013

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THE DISMAL PERFORMANCE OF IPOs IN INDIA The performances of Initial Public Offerings that have been floated in the past few years have raised many concerns. An empirical study shows that there were 118 IPOs listed in the last three years. Out of these, 72 issues are trading below their issue price. The prices of 25 stocks fell between 25% and 50%, whereas price of 21 stocks has fallen by 50%-75%. There has been a furore in SEBI over this dismal performance more than 60% of the IPOs. IPOs in India have reduced from an investment product which used to sell after intense valuation, research and in-depth return potentiality analysis to an investment product which sells because of expertise in public relations. There are quite a few scripts in which this phenomenon can be observed.

Reliance Power

Source: www.moneycontrol.com

Reliance Power was issued at Rs. 450 in February, 2008. Today it is valued at Rs. 92. In the five year period it has reduced by about 80%.

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Index

Levels at the time of Issue

Current level

Change %

Sensex

16,500

19,000

15.15%

Nifty

2,500

2,300

-8.00%

Realty Index

3,300

2,050

-37.88%

DB Realty reduced at phenomenal rate as compared to the market and at a higher rate as compared to the Realty Index.

Punjab & Sind Bank

Source: www.moneycontrol.com

Punjab & Sind Bank was issued at Rs. 120 in December, 2010. Today it is valued at Rs. 71. In the two year period it has reduced by about 41%.

Index

Levels at the time of Issue

Current Levels

Change %

Sensex

20,000

19,000

-5.00%

Nifty

2,850

2,300

-19.30%

Bankex

13,000

14,000

7.69%

Hence even Punjab & Sind Bank has declined at a much higher rate as compared to the market indices.

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As can be seen the above cases, the stock prices have declined more than the index and hence more than the average decline in the market. This is because the stocks were highly overpriced in the first place. The prices rarely justified the potential of the company as can be deduced from observation. This results in the distortion of the information resulting in massive losses to the investors.

knowledge dissemination at the earliest

The root cause of this evil is lack of effec-

stage. The basic course on financial mar-

tive investor education and absence of

kets must be incorporated in the school

stricter due diligence by the merchant

curriculum so that the citizens of the coun-

bankers. In this respect U.K.Sinha, Chair-

try are made aware of the basic model of

man, SEBI said “Some of those IPOs gave

the system. This will result in an increase

us the impression that due diligence was

in the average level of awareness amongst

not being done. There were assertions be-

the citizens and deter the ponzi schemes for

ing made about physical assets being in

good.

place and those physical assets were found to be never there to begin with.�

SEBI (Securities Exchange Board of India)

Contributed by:

is the regulating body which has the onus

CHAITANYA GANDHI

to ensure the investor protection and promote the investor education. Current SEBI is taking measures in this respect by ap-

Jamnalal Bajaj Institute of Management Studies (JBIMS)

pealing and enforcing the merchant bankers and the investment bankers to adopt stricter norms of valuations and due diligence, imposing hefty fines on the miscreants etc.

The need of the hour is to promote the investor awareness by including the basic

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Why pharmaceutical sector?

Introduction:

Macro factors driving the Pharmaceutical

Indian pharmaceutical sector at present

industry:

ranks among the top few countries in terms of volume and accounts for nearly 10% of the global production. According to industry experts it is on the threshold of becoming a

Why Pharmaceutical sector is the best bet for India in the troubled economic time?

a) Growing middle class: India’s population which is currently at 1.2 billion is growing at a faster rate than China and is set to surpass China’s population by 2050. This is

major global market in the years to come. In this dissertation an analysis has been made to identify the factors that enable this industry to emerge as the one of the best performing industry in future.

Emerging markets driving the growth: From the analysis made by IMS Health it can be seen that developed pharmaceutical markets are featuring low growth [Fig1] due to an array of factors like patent expiries , regulatory restrictions, pricing

Fig: 1: Growth rate of pharmaceutical

challenges and a dry pipeline of new

sector in different markets

drugs. As the markets in North America, Europe and Japan are slowing down the pharmaceutical companies are gradually focusing on emerging markets like India, China, Brazil, Russia and Mexico to discover new growth opportunities.

It has been estimated that these emerging markets would account for about 40% of the incremental growth of the global pharmaceutical industry in future.

a very important factor which propels growth

of

the

pharmaceutical

sector.

Besides, India has a middle class population which has grown very rapidly from 25 million in 1996 to 153 million in 2010. If the economy continues to grow at the present rate and the literacy level keeps improving, around 34% of the population is set to join the middle class in future. So we can assume that a surging middle class coupled with a

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rising income level will sustain a reasonably

healthcare, building more hospitals and in-

high growth level.

creasing public expenditure on healthcare from 1% to 2-3% of the GDP. These initiatives along with the steady

growth

of

healthcare

insurance sector have a positive effect on pharmaceutical sector.

Currently nearly 80% of the healthcare expenditures are financed out of the pocket. This is a serious limitation for the people belonging to lower and middle inFig: 2- Middle class population as a per-

come groups with low disposable income.

centage of the total population

Till 2007, the government run General In-

b) Change in the types of the diseases:

surance Company happened to be the main health insurance provider for that little per-

Indians are undergoing a gradual shift in the

centage of our population who could afford

disease profile. The acute disease segment

to have health insurance. It was in 2007 the

which is related to public hygiene and sani-

insurance sector in India was opened to pri-

tation is growing at a steady rate; but due to

vate insurers, when Insurance Regulatory

increase in affluence and changes in the life

and Development Authority (IRDA) elimi-

style of the people there is an emergence of

nated tariffs on general insurance. The pene-

chronic disease segment which includes dis-

tration of general insurance in Indian market

eases like diabetes, cardio-vascular disorder

has dramatically increased since then. It is

and nervous system disorder. This trend is

estimated that by 2015 nearly 60 million

likely to continue and thus there will be an

people will be covered under insurance.

increasing demand for therapeutic drugs for

[Fig 3]

this type of diseases.

d) Availability of cheap labors and low

c) Favorable government policies and growth of healthcare insurance: Indian government has taken initiatives

infrastructure costs: India provides largest English speaking workforce in the whole world. This thing

that are aimed at enhancing local access to

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produce some of the cheapest drugs in the world. e) Potential for expansion: The domestic pharmaceutical sector is underdeveloped till now. So far the domestic pharmaceutical sector accounts for only 0.7% of the country’s GDP. This leaves a room for development and expansion in this sector as India’s growth rate for the year Fig -3: Penetration of Healthcare insur-

2013 is expected to be around 6 %.

ance in India

Investment scenario in pharmaceutical

Source: ISI Analytics, Healthcare Industry

sector:

coupled with a reasonably low wage rate provides a competitive of Indian pharmaceutical manufacturers over the other producers. The figure below substantiates

In recent times the domestic pharmaceutical sector has attracted investments in the form of mergers and acquisitions. The investment scenario

looks

promising since a cumulative foreign investment

worth

US $ 1.71 billion has

taken

place

since 2001. Apart from this the government

has

planned to set up a venture capital fund

this fact.

of worth US$ 639 million to promote re-

Apart from this India enjoys a cost advan-

search and development in pharmaceutical

tage in the infrastructure costs which is

sector.

about 40% lesser than USA and European countries. These factors enable India to

Key segments that will drive growth of the sector in future:

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The following analysis made by Mckinsey

due to a subdued demand. Therefore,

India and PWC reveals the segment wise

considering the fact that the pharmaceutical

growth evaluation of the pharmaceutical

sector has performed consistently in the past

sector.

and most of the macro economic factors are in its favor, it has the potential to emerge as the best bet for investment in the current economic scenario.

The above analysis shows that the estimated size of the domestic Pharmaceutical sector,

Contributed by:

which was US$ 12.6 billion in 2009, is set to become US$ 55 billion even if the base growth rate of 15% is considered.

Siddhartha Banerjee PGDM(2012-14) IFMR, Chennai

Conclusion: Currently the Indian economy is going through a troubled time with a mounting fiscal deficit and huge current account deficit impacting the overall growth. The industrial activities of late are badly affected by the weak investment scenario. Key infrastructure industries are struggling owing to unfavorable investment environment and regulatory bottlenecks, which have badly hurt the confidence of the investors.

The service sector also has started showing slowdown in growth owing to the inter linkages it has with the industrial activities and

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Ramprakash B. PGDM(2012-14) IFMR, Chennai

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FISCAL CLIFF: a bitter medicine “the one thing that I think, hopefully, in the new year, we will focus on is seeing if we can put a package like this together with a little bit less drama, a little less brinksmanship, not scare the heck out of folks quite as much” - Barack Hussein Obama II This was a statement of 44th President of

deficit decreases with decrease in the gov-

the USA on the New Year day of 2013.

ernment spending or decrease in transfer

The statement was about the most awaited

payment or increase in tax revenue. This is

“Fiscal Cliff Deal”.

the root for discussion on Fiscal Cliff.

US Treasury borrowed trillions of dollars over the decade from the foreign investors to finance two long wars and promote economic growth by fiscal stimulus. The Federal reached the current debt limit of $16.39 trillion USD. Since the Federal government

has

reached the borrowing capacity, the US Treasury is taking extraordinary meas-

Fiscal Cliff is a combination of expiring tax cuts and decrease in the government spending

across

various

departments

aiming at sharp decline in budget deficit.

The origin of the word fiscal cliff is ambiguous because some refer it to Goldman Sachs, Federal Reserve Chairman Ben Bernanke etc.

ures to raise money. The Bipartisan Pol-

The most important component of the

icy centre forecasts that the debt ceiling

fiscal cliff is the Bush Era Tax cuts which

would have to be raised between $ 0.73

include lower tax rate and reduction in

trillion USD and $ 1.25 Trillion USD to

dividend and capital gain taxes. These tax

extend the government’s borrowing ca-

cuts have expired at the end of 2012. The

pacity through 2013.

effect of this would be increase in long

If Congress cannot raise the debt limit, then the Fed should reduce its spending or increase tax. If the government is unable to take these actions it would force to default or delay some of the financial

term capital gain tax rates from 15% to 20%, and qualified dividend rates from 15% to individual marginal tax rate. Gift Tax exemptions and tax on estates would also be affected.

commitments. To avoid this, the Fed has

Another major component discussed in

to reduce the budget deficit. Budget

Budget Control Act of 2011 includes many

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factors. The temporary Social Security

permanent the Bush tax cuts for individuals

Pay roll tax has also expired at the end of

earning less than $400,000 USD per year

2012 and increased the tax from 4.2% to

and couples earning less than $450,000

6.2%. Fiscal cliff was proposed to include

USD per year. It brought back the top tax

across the board spending cuts, reversion

bracket from 35% to 39.6% which was

of

present before the Bush Era.

Alternate

expiration

Minimum

of

measures

Tax

(AMT),

delaying

the

Medicaid sustainable growth rate, expiration of federal unemployment benefits.

Also many itemized reductions were to phase out; child tax credit, earned income credit and American opportunity credit

The deal cuts $737 billion from fiscal deficits in the coming ten years. This is very small compared to the deficit that USA would be accumulating during the same period.

were to be reduced. The proposed tax

This calls upon for the implementation of

brackets were 15%, 28%, 31%, 36% and

the second dimension of the fiscal cliff i.e.

39.6% as against the existing 10%, 15%,

decreases in government spending and

25%, 28%, 33% and 35%.

transfer payments. But the bill extends the

According

to

this

proposal

the

Congressional Budget Office forecasts the budget deficit to fall from $1.1 Trillion to $0.2 Trillion USD by 2022. However it

government spending for two months to delay the threat of sequestration, a series automatic across the board cuts in Federal spending.

also estimates the GDP and disposable

The above deal has impact on many

income of the people to decrease leading to

groups. The economic winners and losers

a loss of 3.4 million jobs increasing the

are starting to become clear. Some of the

unemployment rate by roughly 1.2%.

many groups who would be winners are

The Democrats favored the increase in taxes while the Republicans favored more spending cuts. However they were ready to compromise on many critical issues to bring the US economy to a normal state.

NASCAR which gains $70 Million USD due to the extension of Tax Breaks Law, milk drinkers due to the nine month extension of Farm Bill, semi wealthy people who earn between $250,000 to $400,000, the long term unemployed as Obama has

The actual fiscal cliff varied from the

pushed the benefits to 99 weeks, those

proposed in many aspects. It

wealthy, elderly bachelor uncles because

made

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the Democrats proposed 55% tax on the

Contributed by:

Gits which were more than $1 Million but now Gits under $ 5.12 Million are free from tax.

A SINDHUJA

The losers would be very wealthy people

IIM, Raipur

since the marginal tax rate for these people has increased and also there is an increase on capital gains and dividends.

The next sufferers being the Hospitals as the Taxpayer Relief Act prevented the existing 27% cuts on treatment.

The entire discussion brings us to a kind

Y. VENKATA

of comparison between the European

ACHYUTH

Union and US government acts to

KUMAR

stabilize the economy. The first of the similarities would be the addiction of kicking down the can as far as possible as seen when the Fed postponed implementation of spending cuts. The second clear similarity would be finding temporary solutions instead of correcting the root causes of the deficit. The US is not concentrating on the “entitlement” reforms or rationalizing the US’s complex

tax

code

because

both

the

Democratic and Republic parties are driven by their respective party’s extremists. The third parallel is that the politicians in both the regions are not being honest to the voters and not telling them what it takes to come out of an economic crisis. © Money Matters Club, IBS Hyderabad.

IIM, Raipur

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Rupee Depreciation: Who gains and who loose?

Indian currency Rupee is losing its market

prices. Economists are keeping their eyes on

value in international market. Increasing fis-

the areas who are making these conditions

cal deficit and declining currency value are

worst. Persistent inflation, current account

the two big problems for Indian Finance au-

deficit, continued global uncertainties, capi-

thority. The battle between Indian Rupee

tal account flows, interest rate differences

and dollar was on a long run and the weak-

and lack of reforms are the key reasons for

est fall was 55.26/27 per dollar as since No-

the depreciation of currency.

vember 29.This depreciation is expected to continue more in the upcoming time due to

the mixed global market trends.

This is an alarming situation for Indian economy .Increasing fiscal deficit is forcing RBI to change its policies. Authorities are trying to bridge the gap of fiscal deficit. Following the same trend, RBI has increased the custom duties on imported gold. It will result as extra earnings for the economy but

Depreciation leads to costlier imports. As India imports most of the fuel oil, gold and

metals from outside, it has to pay more for the same deal. Apart from this, declining oil prices in international market will not give any relief to Indian economy. Due to the volatility of currency, investors will not be interested in Indian market. These will add further pressure to the economy.

on the other hand it will increase the gold

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According to International Monetary Fund (IMF) representative Arvind Virmani, depreciation in not a bad news for Indian economy but it will have some implications. If the economy is not performing well, followed by Rupee depreciation, it is a good sign. For countries like China depreciation is good as these countries are export oriented. More money will be received by people working in IT professionals on converting dollar into rupee. Gold and International fund investors could gain profit. Travel and tourism industry will also get the high revenue.

Euro zone crisis and decline demand in developed nations result as the key reason for the declining growth rate of Indian as well as the Chinese economy. A sharp appreciation of the rupee seems unlikely at the moment because of weak fundamentals, lack of policy decisions.

Contributed by: PARDEEP KAUR PGP (Batch of 2012-14) Vanguard Business School, Bangalore.

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Contract Note Contract Note is a confirming note that

number issued allows to cross check the

contains the details of a stock exchange

transactions.

deal, the deal which is sent by a broker to his client. The contract note should have the clear indication of the time and date of the deal, the price received/paid, the total value of the deal and the stamp duty. The stamp duty clause is there if it’s a purchase of the shares. It also carries the amount of commis-

The broker should dispense the contract note within 24 hours. It should be signed by the authorized signatories. In case if it’s the digital mode then it should be digitally signed. The details like the exact transaction price and Quantity etc should be mentioned.

sion charged by the broker. With the

Contract note is very important for a rational

technological advancements there days the

investor. This helps one to calculate the

contract note are emailed.

Long term/Short term Capital gains. Also

This is a legally enforceable document. So one can use this document can be used for the settlement of the trades. There are many transactions going on in a stock exchange;

helps in the reconciliation of the Demat Holding statements. Contract note helps to obtain the information related to the Income tax returns.

contract note comes with the details that enable the holder (investor) to spot the transaction.

Contributed by:

Broadly the purpose of the contract note is the recording of the transactions, keeping the details of the transaction in writing (legal entity) , also to act as the bill of the brokerage that is being charged , trade

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KSHITZ KESHAV BHARDWAJ MBA, Batch of 2014 IBS, Hyderabad

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