Personal Finance Magazine Moneylife 16 June 2011 by Moneylife Digital

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16 June 2011

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They are cheap, but can you put your life on them? The first definitive study

+ Term Life

Insurance Survey

FUNDS 22

– Bank Deposits Vs MIPs – Exchange Traded Funds

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STREET BEAT 36 – Aurobindo Pharma – KPR Mill

ML FOUNDATION SEMINARS 58

– Choosing Your Health Plan – Right to Information

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Volume6,Issu e 8 3June–16June 2011 DebashisB asu Editor& P ublisher editor@moneylife.in SuchetaD alal ManagingE ditor suchetadalal@yahoo.com EditorialC onsultant DrN itaMukher jee

Editorial, Advertisement, Circulation& S ubscription Office 315,3 rdFl oor,H indS ervice Industries Premises,Of fV eerS avarkarMarg,S hivaji Park,D adar(W ),Mumbai -400028 Tel:022244410 59/60 Fax:02224442771 E-m ail:mai l@moneylife.in E-m ail: sales@moneylife.in Subscriptione-m ail subscribe@moneylife.in Pune JitendraGar sund “SANSHREY”,N anaiB augS ociety, BTK awadeR oad,Ghorpadi , Pune-41 1036 Mobile:9881309801 E-m ail:j rg.pune@gmail.com NewD elhi DDAFl ats,J-3/66,K alkaji, NewD elhi-1 10019 Chennai 14,Mi anS ahib,II ndS treet, NearMadras YouthH ostel,C hepauk, Chennai-600005 Tel:0 44 4215 5442 Bengaluru 1st Floor,13/1,7 thMai nR oad, 1 C ross,S aibabanagar,S rirampuram, Bengaluru-560 021 st

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RNIN o:MA HENG/2006/16653

Letters to the Editor WHERE ARE WE HEADED? I recently read a report which said that India is one of the most corrupt countries in the world. This is quite bad. But we must put it in perspective. We must identify the real nature and scale of corruption. The real Write to the Editor! The only investment that Win jewellery corruption amount runs enhances your face value. into several lakhs of crores of rupees per year! Who is responsible? Neither the government official, nor the politician. It is the big corporates who are responsible. They loot our Congratulations Narsimhan Srinivasan! public assets. When mines Your letter to the Editor wins a Surat Diamond gift. (coal, iron ore or oil & Keep writing! Keep winning! gas and spectrum) along with other public assets are disposed of at one-tenth of the cost—or even less—it’s the large corporates who are ordering the politicians. And politicians just run to deliver… like good commission agents. In fact, top businesses decide who will become ministers: those politicians in power who will give them free rein in the plunder of this country. The system which they are running will try its best to divert our attention and raise other red herrings. Wealth built over the generations is going out of our hands and into the hands of a few greedy businessmen. But nobody in the media talks of this and so none of us knows about the vast scale of the loot and plunder which is being done by large businessmen (not ordinary small businesses—but the monopolies at the very top), to rape this country. The wealth of the country is being sold at such a rate that it creates the illusion of GDP growth. But we must remember that this is the wealth which should have served us for decades. These mines will be productive for decades. And they are all being given away over a few years. Soon they will all be gone to leave us permanently poor. We must look at the bigger picture. We are creating a system where the common m mmon man is i driven di into a corner and made a pitiably ade desperate. As a result, t t, for the sake of his survival, he willingly grabs the only available opportunity y of work—the glorious u us ‘opportunity’ of working like a slave for f the interests of the big business u usiness class. They might be becoming super-rich due to the assets they have looted from m us and the exploitative labour which w they ``

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LETTERS

` subject us to. But we will be so desperate that we won’t

care. We won’t challenge the system in which things are so one-sided. For us, our primary concern will be to ensure our survival, to get out of our desperate situation! And so we will be grateful to our looters. At least they are providing us the bare essentials for survival. Welcome to reality! God and CAG (the Comptroller and Auditor General of India) help us please. Narsimhan Srinivasan, by email

INDIAN F1: CRASH COURSE? I read the article “Formula None” by Veeresh Malik (Moneylife, 19 May 2011). I just wanted to add my observations on the sport and the forthcoming India F1 (Formula One) in October. At the outset, I wish its debut in India well. However, after having personally seen F1 events at KL (Kuala Lumpur) and Monte Carlo, I think we are biting off more than we can chew. The entire play is not in allotting a large tract of land or getting a good international track specialist to design the track. For example, in KL, you can see at least half a million or more people converge on the city from all over the world—the hotels, airport and local transport are swamped (the security set-up is geared up for this)—and it works year after year. Second, one needs to know that each team carries equipment and cars that can fill up two large jumbos (and there are a minimum of 20 teams) and each team carries at least 50-60 professionals— mechanics, machine radio & electronics experts, time-keepers, drivers and what have you. Even today, I experience at least half-an-hour landing delays over Delhi. So where is the infrastructure to cater to this mammoth event? And this event is spread over three days—Q1, Q2 (the first and second quarter finals) and the grand final (normally held on Friday, Saturday and Sunday). To top it all, Delhi’s local security is bad—the capital has the dishonourable label of being called the ‘rape capital’ of the country. During an F1 event, in the evenings over the final weekend, the city hosting the championship is full of people at restaurants, bars and clubs—a few watering

holes are virtually hijacked by specific teams—where competing team supporters avoid visiting in good spirits, lest they get booed out when sporting their rival team colours. Tickets start selling internationally months in advance—over the Internet; through agents as well as directly by the F1 Association. As I write this, tickets for the Delhi event have not even been put up for sale. Watching F1 live, even on television, is an experience; watching the event unfold on the track is unforgettable. One would then lose the flavour of watching the event on a TV screen, as at least 20 powerful engines roar (each at around 24,000rpm or revolutions per minute) with speeds topping 350km/h. Even your earplugs fail and you lose sense of speed... (I must share with Moneylife readers an embarrassing experience— the first time I went for an F1, I carried a pair of binoculars... By the time you adjust your focus to view a particular car, it’s gone—in a split-second. Now I realise why some spectators were staring at me). We just hope this is not another debacle in the making. Good luck and God bless India. Anand Desai, MultiConsult (P) Ltd, Mumbai, by email

BRAIN GAIN I am a neuro-psychiatrist by profession and my initial impression regarding financial magazines, including Moneylife, was that they are meant for bankers, stockbrokers and big businessmen and, hence, loaded with financial jargon which is incomprehensible for a financially illiterate doctor like me. This was the case until I laid my hands on one of the latest issues of Moneylife (19 May 2011), my curiosity aroused by R Balakrishnan’s article on ULIPs (unit-linked insurance plans) titled “No Child’s Play”. It came just at the right time since I was planning to invest in ULIPs for securing my son’s future. The article has made me better informed about the pros and cons of children’s plans. Indeed, it is the parent and not the child who needs to be covered by ample life insurance. This brings me to the basic question of lack of financial literacy among professionals. For instance, I, and many more doctors like myself, are woefully unaware of the basic

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LETTERS

` knowledge regarding

reality about money Bulls and bears are Write to the editor! rotation under the guise insurance, mutual funds, unpredictable. Invest in diamonds. Win jewellery of online surveys. provident funds and Neeraj Verma, other investment options. Bengaluru, by email In this context, the initiative by Moneylife Foundation to promote SAVING DISGRACE financial literacy is The repo/reverse repo commendable. rates are increasing in Write to the editor. If your letter is the best, You’ll My suggestion is that India. However, interest Win Surat Diamond jewellery. Moneylife should start rates on savings bank a column dedicated deposits remain the to giving the very basic information about different same. The Reserve Bank of India (RBI) increases repo/ investment plans. This will help you reach out to a reverse repo rates which enable banks to increase their much larger number of readers across all walks of life. BPLR (benchmark prime lending rate) and interest rate Dr Gulbahar S Sidhu, Pasricha Hospital, Adarsh on loans. However, the RBI has completely ignored the Nagar, Jalandhar, Punjab, by email need to instruct banks to raise interest rates on savings bank deposits. RBI’s policy is against the interest of Thank you for your kind comments. We certainly millions of bank depositors and the common man. don’t think we write for bankers, stockbrokers and big I have observed that, for the past two-three years, businessmen. They are too ‘sophisticated’ for personal RBI has been protecting banks, but has been acting finance magazines. Or so they think. against the interest of general depositors including We have a section called Earning Curve, which is a CASA (current account & savings account) depositors. learning section and has a variety of interesting articles Therefore, banks are against deregulation of interest on that throw light on the basics of investing. In the light savings bank deposits. of your suggestion, we will try to create a section on Jagdip H Vaishnav, C/33 Parvati Mansion, 214 our website which gives basic information (although DB Marg, Mumbai – 400 007, by email we have always felt that since this information is HELP US TO HELP YOU available elsewhere and Moneylife offers its readers a unique service—helping easily accessible, why redress grievances on a best-effort basis. However, we duplicate it?). Could have limited resources to devote to this effort and can you please help us by only pursue complaints that come to us by email. We letting us know various request readers to please send us crisp complaints, with questions that come to all the facts on email (not as an attachment) and send your mind at random us the supporting documents, only if we ask for them. about financial products? We cannot handle physical letters. — Editor We can then publish some articles on those HOW TO REACH US Letters to the Editor can be emailed to editor@moneylife.in or issues. can be posted to: The Editor, Moneylife Magazine, Unit No. 315, 3rd By the way, one of Floor, Hind Service Industries, Off Veer Savarkar Marg, Dadar (W), the finest authors on Mumbai 400 028 or faxed to 022-24442771. Letters must include investing (and other the writer’s full name, address and telephone number and may be edited for clarity or space. topics) is Dr William Bernstein, a neurologist! Look New Subscriptions & Customer Service forward to doing a literacy seminar for doctors and For new subscription requests, complaints about current others in Jalandhar. — Editor subscription and books, write to subscribe@moneylife.in or

SCAM BREAK I personally congratulate the Moneylife team for writing a fantastic analysis about the biggest scam of the decade, Speak Asia. I am sure your article will enlighten many more people who want to know the

to Subscription Manager, Unit No. 315, 3rd Floor, Hind Service Industries, Off Veer Savarkar Marg, Dadar (W), Mumbai 400 028 or call 022-24441059-60 or fax to 022-24442771. Advertising For information and rates, email us at sales@moneylife.in or call 91-022-24441059-60.

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One year of financial literacy, one year of pro-investor & pro-consumer advocacy

54 SPEAKERS 5471 ATTENDEES 66 EVENTS 5561 MEMBERS 1 FOUNDATION In just one year, Moneylife Foundation has enriched many lives with unique events, opinions, actions and advocacy initiatives

It’s Only the Beginning Moneylife Foundation financial literacy events have covered: • Credit Cards

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LETTER

ISSUE CONTENTS

16 June 2011

FROM THE

EDITOR Life on the Line

ompare, click and buy? If you thought that buying insurance over the Internet—and getting the right policy and optimum premium— was as simple as that, you have another think coming. Our Cover Story will show you the pitfalls and downside of buying policies online. Just because premium is low, it does not mean that you have the best insurance cover. We have not limited our study on insurance to online policies alone. We conducted a survey on term life insurance among a large sample size (1,455) of Moneylife readers. The survey is one of the most comprehensive ones ever conducted in India on insurance buyers. What’s more, it again proves that Moneylife readers are prudent—and they do not follow the herd by buying a policy just because it has a lower premium. The survey throws up an important point—even the netsavvy, prudent and financially-literate Moneylife readers are not taking to online policies in a hurry. Just 26% of our respondents, who form the perfect target audience for online policies, were willing to consider using an online channel to buy term life insurance. Our Cover Story does not stop at the pros and cons of online insurance channels. It is all very well to offer an excellent policy, great after-sales service and optimum premium but the health of the insurer should be an important criterion as well—as witnessed in the 2008 crash in the US when insurers were found to be highly overextended. Clever advertising is not enough to convince the to-be-insured to go in for a policy—a huge 65% are concerned over the financial status of their insurers; and the public sector behemoth LIC is among the most trusted. This despite the fact that LIC hands out expensive policies; credibility is a key factor. To round off our comprehensive coverage on insurance in this issue, we also bring you details on an exclusive seminar held by Moneylife Foundation on buying the right health insurance. After a seminar at Gurgaon the Foundation will make its second foray outside Maharashtra with a seminar at Kolkata. If you cannot attend, visit our website for more... Debashis Basu

26 Cover Story

Online Term Plans

Online term plans are cheap, but can you put your life on them? Debashis Basu and Raj Pradhan dig deep and get you the answers

13 Current Account – Lax US laws allow scores of fraudulent Chinese companies the glamour of American listing through reverse mergers. Many are now collapsing – Speak Asia has grown rapidly since Moneylife first wrote about it in October 2010. Will it fold up now?

17 LOOSE CHANGE Moneylife Quiz; Soundbites

More skeletons from CB Bhave’s tenure; Will the capital market watchdog watch the IPO process? Governance Deficit: Shareholders pay the price

20 Different Strokes Pyramid marketing companies are looting the public easily, while the government watches. Many countries have banned them outright Disclaimer: Moneylife has a policy of not allowing its editorial staff to buy and sell stocks that are written about in the magazine. All personal transactions in individual stocks are subjected to internal disclosure rules.

MONEYLIFE | 16 June 2011 | 10

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CONTENTS Here’s why you should click on www.moneylife.in neeyli Exclusive News

Get the latest on business & corporate news and other developments in the financial world

Get Insights

Investing Lessons: Being a contrarian is tough but rewarding

Keep track of short-term market movements and long-term trends to know what’s coming

22 Fund Pointer

• •

– An average monthly income plan is a double-edged sword and comes off worse than bank FDs. But a few are worth considering – More and more fund houses are launching ETFs

Momentum

Dish TV gained 14% and Bank of India jumped 9%, while Orchid Chemicals plunged 7%

Time for Bonding?

Beyond 60 Bangkok: the Bright Lights

Long Term

Jaideep Mukerji stays clear of the tourist paths of Thailand’s bustling capital and takes a leisurely river cruise—for an adventurous look at one of Asia’s largest cities

Asian Paints surged 8% and TCS gained 1%, whereas Jain Irrigation tumbled 14%

STOCKS

36 Street Beat

INSURANCE

46 Insurance Trends • • •

Dhan Suraksha Express: A term of 10 years Retiresurance: Conservative investors will still prefer bank FDs Aviva i-Life: Is it sustainable?

AUTO

There are no fundamental reasons to expect a sustained rally

Content.indd 3

TRAVEL

Medium Term

Shriram Transport Finance jumped 12%, while CMC tumbled 17%

Rising interest rates have created unusual opportunities. Look at the Tata Steel ‘perpetual’ bond that yields over 11%

Right Health Insurance at the Right Price: 17 May 2011 How To Use the RTI Act Effectively: 14 May 2011

STOCKGRADER 41

SMART MONEY

Traders’ Market

EVENTS

Foundation 58 Moneylife Seminars

FUNDS

WHICH WAY

Sumaira Abdulali recounts her fight against noise pollution

56 Earning Curve

Daily Market Forecast

Aurobindo Pharma: The stock is valued low now, given its strong growth prospects; KPR Mill: Stable growth makes this a good pick; Shree Renuka Sugars: The stock has fallen sharply. Is it cheap now?

Not 50 Noise, OK Please SAVING AND INVESTING

Our leading analysts and columnists dissect the issues that are impacting you. Read the Moneylife magazine articles and join in for discussions

POWER OF ONE

BEYOND MONEY

66 Bridging the Divide

Jyoti Sachade collects new and old jewellery—of every kind— and distributes them to girls from orphanages

47 Corrupt, but Arrived!

DEPARTMENTS

The crooked and the famous manage to squeeze in and out of their luxury limos while we still have barefoot managers, finds Veeresh Malik

Letters ............................ 4 Book Review .................... 54 Money Facts .................... 63

5/28/2011 4:30:02 PM

www.moneylife.in If you haven’t clicked on the Moneylife website yet, here’s e’s why yyou ou sshould. TOP of the LIST News you had better not miss Moneylife Investigations Speak Asia has collected and distributed payments from nearly two million member panellists amounting to over Rs250 crore, through some of the country’s largest public and private banks, and has transferred about Rs1,000 crore abroad.

news 16 reasons why you must visit the Moneylife website

HAVE YOUR SAY Vote in the Moneylife poll on the top issues of the week Should multi-level marketing (MLM) schemes be banned?

22%

MARKET WATCH Stay ahead of the indices 76%

Know not just what happened but the likely direction, day after day, week after week

Yes S&P CNX NIFTY

Pay for Delay

Can’t Say

Because your opinion makes the change...

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Banks must pay Rs100 a day penalty for a delay in reimbursement of failed ATM transactions beyond 12 days from receiving a complaint, according to RBI rules.

Speed Money The Formula 1 circus is driving a real estate scam in Noida that will be bigger than 2G and CWG.

ML FOUNDATION

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Recent & Upcoming Events 5480

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>> Investor Empower Yourself, for the first time in Kolkata on 4 June 2011

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>> Get the right mediclaim at the right price >> How to use the RTI Act eﬀectively

5300 06 May-11

16 May-11

26 May-11

>> Become a free member of the Foundation, please visit mlfoundation.in

MONEY WISE The right and the wrong options >> JP Morgan launches a fund to let you invest in US large-caps. But who would want to pay 2.5% for a fund that has returned 2.58% over the past five years?

WEB EXCLUSIVE On issues that matter to you

>> Retail interest shrinking: Mutual funds have lost 22.61 lakh folios over two years >> Price factor: Buying gold and silver from banks? Think again >> Raining gold funds: Religare, SBI and HDFC jump into the fray. But is this the right time to buy? TO GET THIS AND MORE...

to the Daily Newsletter

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William Gamble

Anil Thakraney

Vinita Deshmukh

Sudhir Badami

He is president of Emerging Market Strategies, and has been a global investing expert for over 20 years. He is also an international lawyer and economist.

Mr Thakraney is a veteran advertising expert and has been editor of a number of leading publications, and branch creative director at Lowe & Partners.

She was editor, Intelligent Pune, a publication that addresses civic and social issues. She has used the RTI Act to inspect files in various oﬃces at regular intervals.

Mr Badami has been an activist against noise pollution. He has campaigned for better civic infrastructure especially Mumbai Bus Rapid Transit System.

5/28/2011 4:55:30 PM

CURRENT ACCOUNT

U S - L I S T E D REVERS E M ERGE RS

Painting It Red Lax US laws allow scores of fraudulent Chinese companies the glamour of American listing through reverse mergers. Many are now collapsing

undreds of small Chinese companies have entered the US markets through reverse mergers. Many of them, it appears, have phoney financials. For Chinese companies to register on the Shanghai Stock Exchange is an arduous task. The easier route for them is to merge with US companies and list on a US exchange. What usually would take a year or more in China is completed in a few weeks in the US. Chinese companies merge with defunct or nearly defunct US public companies which, at any given time, hold thinly-traded penny stocks. By merging with such American companies, Chinese companies become instantly public. Ironically, while lax US laws are allowing suspect Chinese companies the glamour of US listing, smart US investors also find it a great opportunity to take advantage of short-selling these dubious companies and make a killing. Investment companies have identified these fraud companies listed on the US exchanges and have gone short on the scam-ridden stocks to register huge profits. Kerrisdale Capital is one such company which identified these reverse merger frauds that had allowed it to generate an amazing 89.1% return (gross of fees) and 73.2% net, beating the performance of the S&P 500 Index by about 68% in the March 2011 quarter. The top five contributors to Kerrisdale Capital were the shorts on the Chinese reverse merger fraud companies. Since its inception in

July 2009, Kerrisdale has grown by 299.5% (net of fees), up to the quarter ended March 2011. Look at some examples of reverse-merger frauds. China MediaExpress Holdings Inc (CCME) was able to dupe Deloitte Touche Tohmatsu—one of the top four auditing firms worldwide, to audit its 2010 financial statements. It was also able to con CV Starr & Co, the private equity firm run by former AIG (American International

away from owning Chinese reverse merger stocks. Hence, there has been a huge decline in prices. Another example is the case of China Education Alliance (CEA). Apparently, the company’s websites do not work, despite the fact that CEA is an online education provider and its websites are the company’s main revenue-generating assets. Videos show that the main www. edu-chn.com and www.pk1234567. com websites have non-functioning payment methods and are full of broken links and HTML errors. The company’s websites receive a fraction of the visitor traffic generated by comparable sites, such as those operated by China Distance Education Holdings (DL), which reports lower revenue and lower margins than CEA, despite

Dubious Chinese companies are taking advantage of easy listing on the NYSE

Group, Inc) chairman Hank Greenberg, to purchase a large stake in the company. Starr is now suing CCME. By duping them, this Chinese company was able to lure investors. The shares were touted on sites like Yahoo! that cater to retail investors. The company even had its own Facebook page. CCME had margins, revenue growth and return on capital that defied common sense and were too good to be true. The company was much smaller than what the SEC (US Securities and Exchange Commission) filings indicated. It was when Deloitte resigned that the Chinese ‘fraud-cap’ space began to implode. Investors are now staying

having functioning websites, a larger number of Web assets, operational payment schemes and no broken links. The company’s training centre in Harbin (the capital and largest city of Heilongjiang Province in northeast China) was found to be barren of desks and teaching equipment. The company’s local filings with the Chinese government show that the online business generated less than $1 million in revenue in 2008. CEA has had four non-reputable auditors since it went public in 2004. The company also raised capital in 2009 at an irrationally low valuation without providing a sensible rationale for the capital requirement. ``

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Audits are undertaken before two companies merge but many of these audits are about as reliable as the income figures claimed by the Chinese company. It appears that the financials are, at times, verified by equally fake audit firms. Auditing a Chinese business has its own set of issues. There are language barriers and vast cultural differences. American auditors, therefore, have a tough time verifying the financials claimed by the newlymerged company. Auditors cannot be held for wrongdoing apart from negligence. The fraud may be unravelling now. A recent Kerrisdale letter notes: “As one of the first funds to expose scams within the US-listed Chinese reverse merger universe, we benefited from our intimate knowledge of the sector. Most of the frauds exposed this quarter contributed to our returns in some shape or form, as did equity declines in many Chinese ‘fraud-caps’ that were not exposed. “Shorts like us have long argued that SAIC (State Administration for Industry & Commerce of China) filings provide meaningful datapoints on whether certain Chinese

companies are scams and that SEC financial statements are not worth the paper they’re printed on. Rather, investors need to conduct independent diligence on these companies to verify whether their business claims are accurate.” As per the Kerrisdale letter, the Chinese ‘fraud-cap’ space imploded in the March quarter. Chinese reverse merger stock scams

Amazingly, this kind of fraud is going on full scale in the world’s most litigious society. How and why have the SEC and the NYSE allowed this to go on?

“

were down anywhere from 10% to 80%; many stocks were down 50%+. On average, one or two frauds were exposed per week; long, detailed reports were put out by several research firms. In the first three weeks of January, more than half-a-dozen US-listed Chinese companies have been the subject of published fraud

allegations. On 22nd May, Deloitte Touche Tohmatsu Ltd resigned from Longtop Financial Technologies Ltd (LFT), a Hong Kong-based financial software company, because of the “falsity of the company’s financial records in relation to cash at bank and loan balances (and possibly in sales revenue).” Also, it experienced “deliberate interference by certain members of the Longtop management” in the audit process, including ‘unlawful detention’ of audit files. Amazingly, this kind of fraud is going on full scale in the world’s most litigious society. How and why have the SEC and the NYSE (New York Stock Exchange) allowed this to go on? Kerrisdale analyses the situation as follows: “Shareholders apparently hold stocks in a US-based firm which holds a share of the Chinese subsidiary run by Chinese management. US investors, therefore, have no legal recourse to the Chinese management teams committing fraud even though the US firm is regulated by US regulators. The Chinese management team committing fraud is not governed by US laws. The only way to prevent fraud is to establish an appropriate extradition treaty between China and the US which will allow the US regulators to apprehend and punish the guilty Chinese management teams. This being a difficult task and not likely to happen any time soon, foreign companies will continue to take advantage by filing fake financials with the SEC and listing on the US exchange,” according to Kerrisdale. All this looks surreal to us. We thought Indian regulators and auditors were lax. If the SEC and NYSE can allow such fraud to go on, it shows how much worse it can be for Indian investors. As the Americans would say: “You ain’t seen nothin’ yet.”

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CURRENT ACCOUNT

C H A I N- ma r ke t ing S C HEM E

a panellist can buy up to 21 subpanels. The panellist can encash the reward points earned through bank transfer which requires him to pay minimum 3% or $7.5 as It has grown rapidly since Moneylife first wrote about it in charges towards the money transfer. October 2010. Will it fold up now? Several people claim to have earned lakhs of rupees just by completing online surveys. However, prima company is registered in Singapore hen Moneylife first exposed and, according to media reports, has facie, it appears to be just a money Speak Asia (on our portal circulation scheme under the pretext a small office there with very few in October 2010), we had said of online surveys. The surveys employees. that this was another multi-level are a sham. The company and its marketing (MLM) scam in the management failed to name a single The Scam making under the pretext of online client that had commissioned the The online survey scheme is surveys. Since then, Speak Asia has surveys. Its CEO, Mr Kumar, even simple. The company asks new grown into a network of around apologised at a press conference customers to pay $120 (standard) 1.9 million panellists with a money held in Mumbai on 16 May 2011 generating scheme of about Rs1,600 or $220 (premium) for becoming for citing ICICI Bank, Bharti Airtel, a panellist for one year. However, crore, advertising lavishly in the Bata and Nestlé as the company’s it maintains that this payment is mainline print media and even towards subscription charges for an clients. during IPL (Indian Premier League) cricket match telecasts. Are the days of this overambitious scheme numbered? Speak Asia has been collecting large sums of money by rapidly enrolling people with the promise of incredible payments for simply filling out online surveys. Although Speak Asia says that it is not offering any scheme to ‘doubleyour-money’ in a short time, all its panellists admit that they have enrolled for the scheme only to earn easy money. The company says it started its operations in India in May 2010. However, according to our information, the ‘online Speak Asia has collected large sums of money by promising people incredible payments survey’ scheme came to India in About 85% of the 1.9 million e-magazine, Surveys Today. As an February 2010 after duping people panellists enrolled had paid in Bangladesh. According to its chief ‘additional benefit’, the company sends two surveys every week to the Rs11,000 each. The company has executive Manoj Kumar, as of endcollected about Rs1,600 crore just April 2011, Speak Asia had enrolled panellists and pays $10 (Rs500), as from the subscriptions. According reward points for each completed around 1.9 million panellists; to company officials, their clients survey. In short, the panellist can about 15% of them have registered pay them money for conducting the earn Rs52,000 in a year by just without paying any fees. We learn surveys; that should yield additional filling up two surveys every week. from our investigations—and this revenues. However, Mr Kumar told In addition, Speak Asia also has been confirmed by Speak Asia media persons that the company offers binary income, where the Online Pte Ltd officials—that the panellist can buy additional IDs for remitted Rs325 crore from India company is not registered in India and distributed around Rs250 crore and does not have any establishment himself or add more people below to its panellists. It also spent Rs50 `` his panel. As per our information, or office in the country. The

Will Speak Asia Be Silenced?

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BOTTOMLINE BY MORPARIA

CURRENT ACCOUNT

ads, agency fees and brand building and earned a net profit of Rs15 crore. The company’s panellists have paid Rs68 crore as tax from the Rs250 crore they received from Speak Asia. Not all the figures make sense. Even the total of the remitted amount plus money it paid to its panellists, ad expenses and net profit (about Rs650 crore-Rs718 crore, including the tax amount) is way below the money it earned (Rs1,600 crore) through subscriptions. Not to mention the money it claims to have earned from its clients as fees for surveys. Speak Asia does not have any answers for the mismatch. According to media reports, the ministry of corporate affairs (MCA) with the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) have started an investigation into

their unviable business model. The business runs until they manage to get new members who keep the revenues growing. However, once new member registration falters, money flow slows down and cracks start appearing in the business. This is when the company stops paying money or defaulting on dues before shutting shop and vanishing. One Not all the figures major feature of MLMs is that make sense. Even the remitted amount they benefit only those who have joined at the earliest; the rest end plus money it paid to its panellists, ad up as loser. All MLMs or pyramid or Ponzi schemes work on a simple expenses and net math—many losers pay for a few, profit is way below selected winners. As we have been the money it earned saying at Moneylife Foundation (Rs1,600 crore) seminars: “If it looks too good to be true, it usually is.” Stay away from any company or any interest litigation (PIL) filed by scheme that promises you huge or Bharat Jago, an NGO. A majority of companies that use unrealistically high returns. Sadly, even educated people find such multi-level marketing (MLM) have schemes irresistible. often failed in the long run due to Speak Asia. Bharatiya Janata Party’s national secretary, Kirit Somaiya, has filed a case against Speak Asia with the Economic Offences Wing (EoW) of the Mumbai Police. The Bombay High Court has issued summons to five officials of Speak Asia in connection with a public

“

` crore-Rs60 crore on promotions,

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LOOSE CHANGE

Surprise Gift for Quiz winners from:

Moneylife Quiz - 103 Another quiz to tickle your brain. The answers to this quiz are in this very issue. The winner will be chosen by a lucky draw from correct entries. The answers will be published in the next issue. Send in your answers to quiz@moneylife.in with the Quiz no., your name, address and telephone number before 12 June 2011. 1. “Private Equity Performance: Returns, Persistence and Capital Flows,” paper was authored by whom? a. Steve Kaplan and Antoinette Schoar b. Mario Thomas c. George Soros d. John Atkinson 2. Wat Phra Kaeo is famous for what? a. Royal coronations b. Emerald Buddha statue c. State banquets d. Silver Buddha statue 3. In which year was the first ‘No Horn Day’ held by Awaaz Foundation? a. 1998 b. 2002 c. 2008 d. 2010 4. When did Aurobindo Pharma start its operations? a. 1955-56 b. 1967-68 c. 1979-80 d. 1988-89 5. When did KPR Mill group venture into garment exports? a. 1989 b. 1996 c. 2001 d. 2005 6. Mamata Charitable Foundation was set up by whom? a. Kavita Shah b. Jyoti Sachade c. Baba Amte d. Mamata Deshpande 7. Who is the author of the book The Art of Contrary Thinking? a. Benjamin Graham b. Charles Thomas c. John Grantham d. Humphrey Neill 8. Who is the chief executive officer of MyInsuranceClub.com? a. V Tripathi b. Sanjay Viswanand c. Deepak Yohannan d. Chandan Sheth The answers to Moneylife Quiz-102 are: • 1-a. Vijay Athavale • 2-d. 6 June 2002 • 3-a. Tony Hsieh • 4-b. Rabobank group • 5-c. Rs50,000 • 6-a. Ngultrum • 7-b. 2008 • 8-d. October 2007 In all, 11 readers got all the answers right last time. The winner of Quiz-102 is R Ravichandran from Chennai. Congrats Sir! You will get a surprise gift from Surat Diamond Jewellery.

Sound Bites “The person who lives in there (Antilla) should be concerned about what he sees around him and [ask] can he make a difference. If he is not, then it’s sad because this country needs people to allocate some of their enormous wealth to finding ways of mitigating the hardship that people have. We are doing so little about the disparity [in India]” – RATAN TATA, CHAIRMAN, TATA GROUP, in The Times, London

“If you spend your time and money in the real world, you’re probably going to learn a whole lot more than what you would at business school, most of which is wrong” – JIM ROGERS, PRIVATE INVESTOR, to www.investmentu.com

“The IITs and IIMs are excellent because of the quality of students not because of quality of research or faculty” – JAIRAM RAMESH, UNION ENVIRONMENT MINISTER, in The Times of India

“A few months ago, (Fed chairman) Ben S Bernanke, PhD, the former chairman of the Princeton economics department, stood before the cameras of CNBC and said that the Russell 2000 is making new highs. The Russell! He sounded like another stock jockey” – JIM GRANT, AUTHOR, to Associated Press

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Exclusive news, the stories behind the headlines and the truth between the lines by Sucheta Dalal

SEBI

More Skeletons From CB Bhave’s tenure

n September 2010, I wrote that CB Bhave would leave behind an ‘extremely controversial legacy’. While this was countered by interested parties, the biggest warts of his tenure are out on public display in less than three months after he demitted office. The first to go was SEBI board’s decision to declare two orders against the National Securities Depository Ltd (NSDL) as void (or non est). Under pressure from the Supreme Court, the SEBI board reversed its own earlier decision; it will have to inform the apex court about the action it plans to initiate against the depository. On 25th May, the Competition Commission of India (CCI) issued a 140-page order against the National Stock Exchange (NSE), finding it guilty of misusing its dominant position and indulging in unfair trade practices in currency derivatives. This was in response to a complaint filed by MCX-SX (MCX Stock Exchange) that NSE was killing competition by charging zero fees on forex derivatives, by using its near monopoly in the capital market and high fee structure to subsidise the new business. SEBI refused to act against this blatant predatory

pricing by NSE, forcing MCX-SX to approach CCI. MCX-SX, the market leader in forex derivatives, suffers huge losses every day because it is forced to maintain parity with NSE and not levy transaction fees in order to retain customers. Isn’t it ironical that SEBI, which under Mr Bhave’s watch had no issue encroaching on the insurance regulator’s turf, had no time to supervise NSE’s actions? It also failed to act when NSE suddenly found problems with Financial Technologies’ broker front-end software (which had an 85% market share) when it was promoting its own rival product. Finally, while Mr Bhave has been correctly lauded for eliminating front-end loads on mutual funds, the action drove smaller mutual fund investors out of the market. This was because there was no easy mechanism for them to pay miniscule fees to independent financial advisors (IFAs). SEBI simply ignored the issue and allowed hundreds of IFAs to go out of business.

IPO s

Manipulation Rules Will the watchdog watch the IPO process?

he capital market watchdog needs to work overtime to

restore confidence in the primary capital market before it is too late. Moneylife Foundation, our not-forprofit initiative for financial literacy, recommends that retail investors should simply avoid initial public offering (IPOs), except maybe those of public sector undertakings being offered at a discount. After all, stocks of over 225 companies that have listed in the past few years are trading at a discount to the offer price. In November 2009, I had pointed out how a dull IPO market was the happy hunting ground of extortionists and blackmailers. In 2009, these operators were able to put in 4,000-5,000 applications before issue closing. They then blackmailed the promoter to pay them a cash premium to the issue price, failing which they would withdraw their applications, causing the issue to fail. Our sources said that investment bankers were part of the racket and played on promoters’ greed to raise public money at the highest price. In May 2011, SEBI halted the listing of Vaswani Industries after its IPO. SEBI’s action apparently triggered a demonstration in front of one of its Gujarat offices from financiers who were angry at their funds being blocked pending listing. This happened after 3,000 retail applicants withdrew their applications and others issued stoppayment orders. It is a repeat of the 2009 story and shows that a ``

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A MB A N I BROT HERS

Governance Deficit Shareholders pay the price

orporate governance enthusiasts finally have a meaningful case study in how both Ambani groups are paying a price for their far-fromglorious reputation. Even the Mukesh Ambani group, with its huge financial muscle, big vision and project implementation prowess, hasn’t quite convinced serious investors that it can be trusted. This is reflected in its sadly sagging stock price. The Anil Ambani group is yet to recover from a series of disasters—the Reliance Power IPO (initial public offering) fiasco (its shares trade at one-fourth the offer price), the Rs50 crore consent order filed with SEBI (Securities and Exchange Board of India) with curbs on fund raising and, more recently, its involvement in the 2G scam. The impact of reputational damage is most obvious in Reliance Mutual Fund (RMF). Our mutual fund survey in an earlier issue (Moneylife, 19th May) revealed that people’s perception of the fund house significantly trails

` sleeping watchdog is slowly waking

up to the mischief. Again, SEBI needs to inspect the systems and processes of depositories as well as intermediaries to check weaknesses

the consistently good performance of its schemes. This is startling when compared with HDFC Mutual Fund which enjoys a reputation premium far in excess of the performance gap between the two fund houses. It is the same with the Mukesh Ambani-controlled flagship, Reliance Industries Ltd (RIL), which has an insider trading investigation looming over it and is seen as arm-twisting the government over gas pricing. Even the promise of ‘next wave’

value creation and transformation through a Rs50,000-crore investment in broadband revolution hasn’t enthused investors. RIL made a stunning entry into this segment by acquiring a 95% stake in Infotel Broadband, after it had bagged 22 circles in the auction for broadband wireless access (BWA). Sources say that like with Reliance Infocomm, which was Mukesh Ambani’s dream

in KYC (know your customer) norms that allow thousands of fake applications to be controlled by three or four large operators in Ahmedabad. While SEBI collected

project, the broadband rollout will be combined with extremely low-priced tablet devices that the company plans to purchase in bulk. There is talk of a 650-town rollout in the first year, with free voice (nationally) and Internet access. (This, however, may fall foul of the competition rules). Clearly, investors are not impressed. Its stock price has been stagnating for several years and foreign institutional investors (FIIs) are steadily reducing their holding, despite Reliance’s massive weightage in all stock indices. FII holding has dropped over the years from a high of around 23% to 17% in the past five years. Ironically, even positive moves, like Mukesh Ambani’s decision to cap his salary at Rs15 crore and forgo a massive Rs23.75 crore, were quickly drowned out by comments like Ratan Tata’s reflections to The Times, London, on his billion dollar high-rise home, towering above the slums of Mumbai. At the height of the war between the Ambani siblings, Mukesh’s close aides used to say that he is determined to do business differently—but clearly the group is still struggling to get there.

tens of crores of rupees through disgorgement and consent orders filed by those accused in the IPO scam, it has ignored its primary job of stopping extortion.

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DIFFERENT STROKES SUCHETA DALAL

PY RAM ID S C HEM ES

Daylight Robbery Pyramid marketing companies are looting the public easily, while the government watches. Many countries have banned them outright

If that weren’t enough, the Supreme Court of India n any given day, hundreds of pyramid marketing schemes are cashing in on the greed, ignorance observed, in the case of Kuriachan Chacko and Ors. Vs. and poor financial literacy of millions of State of Kerala (JT2008(7)SC614) that promoters of people to rob them of their hard-earned savings. In the the scheme (aka, pyramid) knew they were making ‘tall absence of proper legislation, regulation or registration promises’ which would only work for some time. And, requirements, these schemes are able to operate quietly that they were operating on the basis that ‘Paul can be and fly below the radar to build up unsustainable robbed to pay Peter’ but, “ultimately, when there is a pyramids, project a credible business model and large mass of Peters, they will be left in the lurch without payment structure and a cult-like environment to keep any remedy as they would by then have been deceived people hooked. They come into public gaze only when and deprived of their money.” So the principle of what the payments stop coming in and the founders inevitably constitutes a dubious lure is enshrined in the statute and ratified by the apex court. decamp with the money. Why then do pyramid marketing schemes proliferate They are considered outright frauds and are banned in dozens of countries including the US, UK, Canada, with impunity in India? Because, although there is China, Iran, Mexico, most of the European Union, South a Union statute barring money circulation schemes, it is for state governments and Africa, many Latin American and the police to initiate action. And East Asian countries as well as Although there is a Union most pyramid schemes work to Australia, Nepal and Sri Lanka. statute barring money On the other hand, countries circulation schemes, it is for ensure that influential people in government and the police are part such as Singapore ban pyramid state governments and the companies but permit multi- police to initiate action. Most of their network. For instance, when City Limouzine, a Mumbailevel marketing (MLM) or direct pyramid schemes work to Ponzi scheme, folded up selling firms to operate, subject ensure that influential people based after three years, it was discovered to stringent regulation. The in government and the police that almost 6,000 policemen had difference between the two is are part of their network been entrapped by its promise of subtle and even big MLM names, high returns. Even Speak Asia, such as Amway, Tupperware and Avon, are often viewed with a great deal of suspicion which has triggered a national furore, has been enrolling and face frequent litigation. Worse, many a time, it is policemen. A worried police official in Mumbai has claimed that only influential people, such as doctors even started a blog to warn fellow officers not to be or teachers, who are able to recruit more and more fooled by the scheme. Over the past decade, the only decisive action against distributors, make money. India, however, is a happy hunting ground for pyramid schemes has been initiated by the Andhra Pradesh police, mainly under DIG (deputy inspectorpyramids as well as MLMs. On paper, we have a statute and a Supreme Court general) of police, VC Sajjanar. He went after Japan judgement to stop pyramids on their tracks. Section 2 Life (which sold magnetic mattresses for a whopping (c) of the Prize Chits and Money Circulation Schemes Rs1.32 lakh), Gold Quest (sold what it claimed were (Banning) Act, 1978, specifically covers all schemes two numismatic coins at Rs30,000) and a few others. promising quick and easy money based on enrolment of The Orissa police also blocked a similar scheme that raised over Rs1,000 crore from the poorest villages not `` new members.

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DIFFERENT STROKES SUCHETA DALAL

matches. Ironically, all it did was to stir up a huge initiated action under the Money Circulation Act, along controversy and force the somnolent RBI and the with Section 420 of the Indian Penal Code as well as ministry of corporate affairs to launch an investigation. relevant sections of the Drugs and Cosmetics Act, 1940, ‘Coercive persuasion’ and ‘brainwashing’ are charges and the Drugs and Magic Remedies Objectionable often made about pyramid schemes. It would explain the large number of Speak Asians who post abusive (Advertisement) Act, 1954. Clearly, with no blanket ban or registration and emails against anyone who questions the credibility of regulatory supervision, pyramid companies can operate its dubious claims. While its minimum joining amount freely until they collapse. The police, in most states, is Rs11,000, there are innumerable examples of people especially Mumbai, initiate some desultory action only irrationally joining Speak Asia with four to 10 IDs (read when investors throng to file complaints after the more on the scheme in Current Account, page 15). Clearly, this cannot be allowed to continue. In a cheques stop coming in. Even the Reserve Bank of country with low general literacy India (RBI), maintains a Sphinxand abysmal financial literacy, the like silence (as in the case of Speak Over the past decade, government cannot act after people Asia) or, at best, writes to chief the only decisive action secretaries of various states to against pyramid schemes have been looted in broad daylight. That is why Moneylife Foundation, initiate action (e.g., after Moneylife has been initiated by the our not-for-profit affiliate, has wrote to the RBI repeatedly about Andhra Pradesh police, sent a representation to the prime Gold Quest). mainly under DIG (deputy minister seeking an outright ban While the government refuses to act, pyramid schemes are getting inspector- general) of police, on all pyramid marketing schemes. more brazen, more sophisticated VC Sajjanar. He went after Even those who call themselves a and are running global operations. Japan Life, Gold Quest and part of the Indian Direct Selling a few others Association and are lobbying for Also, unlike in the past, when such legalising MLMs must be subject to dubious schemes flew below the radar and spread quietly, Speak Asia, registered in statutory registration, regulation, scrutiny and clearance Singapore, was in a tearing hurry. It offered a stunning by the Securities and Exchange Board of India (SEBI) or return of 500% by getting people to fill meaningless the RBI before starting operations. So far, the only action is an investigation launched surveys and enroll new ‘panellists’—each of whom would pay Rs11,000 to join. Its declared intention was by the ministry of corporate affairs. The Mumbai police to enrol one crore people by the end of 2011. And it have registered a complaint filed by Kirit Somaiya, was creating a cult-like following with a mega event at former member of Parliament, but is waiting for a Speak Goa that had Bollywood artists and singers entertaining Asian to complain about not receiving payment. When the panellists, between super-charged speeches by its that happens, it will be too late to recover any money. officers. Speak Asia claimed a Singapore registration and also hired a top PR agency (LinOpinion of Lintas) Sucheta Dalal is the managing editor of Moneylife. Subscribers to launch an advertising blitz in newspapers and on get free help in resolving their problems with select providers of television during IPL (Indian Premier League) cricket financial services. She can be reached at suchetadalal @yahoo.com

` too far from the Bangladesh border. In many cases, they

Just married? What about financial security ever after? Take the right financial vows Once every fortnight

For subscription offers that are a steal, look for a form elsewhere in this issue or our website at www.moneylife.in

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MUTUAL FUNDS POINTERS

B A NK F I X E D DEPOS IT S Vs M IP s

Neither Monthly, Nor Income An average MIP is a double- edged sword and comes off worse than bank FDs. But a few are worth considering

onthly income plans (MIPs) are pitched as an interesting mutual fund offering. They are sold to investors who want a regular stream of income, every month. A typical MIP invests almost 85% of its assets under management (AUMs) in debt and keeps a small equity exposure for the upside. Investors earn a marginally better return than a portfolio that is exposed purely to debt—if the market is up. If the interest rate goes sideways to down, and equity markets go sideways to up, MIPs will more than meet their expectations. But do MIPs really succeed in providing investors with the regular income that they seek from such schemes? What is different in these schemes compared to other fund offerings? What has been the record of the various MIPs currently available? Moneylife examined these questions and the answers we

got were not very different from what we usually unearth about performance of other mutual fund schemes—the average performance of MIPs will not cheer you up. You have to choose the right MIP—if at all you are interested in the product—very carefully. First of all, the moniker ‘MIP’ is a misnomer. Many MIPs do not provide a regular monthly income. They cannot; simply because neither debt nor equity can guarantee anything, with unchanging regularity, especially over one to three years. When interest rates rise, the value of debt falls. At such times, if the equity part performs well, the return may be protected but this is not certain. Let’s see what MIPs have actually done for investors over various time periods (five years, three years and one year). The CRISIL MIP Blended Fund Index is the benchmark used by all the schemes.

Five-year Returns Schemes Best Reliance MIP-Growth HDFC MIP-LTP-Growth Canara Robeco Monthly Income Plan-Growth Birla Sun Life MIP-Savings 5-Growth HSBC MIP-Savings Plan-Growth Worst Kotak Monthly Income Plan-Growth BNP Paribas MIP-Growth JM MIP-Growth Baroda Pioneer MIP Fund-Growth Sundaram MIP-Moderate-Growth

Launched

Return

13 Jan-04 26 Dec-03 4 Apr-88 1 May-04 24 Feb-04

11.43% 11.08% 10.79% 9.92% 9.49%

2 Dec-03 27 Sept-04 18 Sept-03 8 Sept-04 19 Jan-04

4.54% 4.36% 3.90% 3.26% 4.55%

Source: Mutual Funds India. All schemes benchmarked against CRISIL MIP Blended Index which returned 7.41% over the past five years

There were six MIPs, which were among the top 10 in all the three time periods—HDFC MF Monthly Income Plan-Long Term Plan, HDFC Multiple Yield Fund, HDFC Multiple Yield Fund-Plan 2005, Birla Sun Life Monthly Income and Canara Robeco Monthly Income Plan and Reliance MIP–Growth. (See table). Consider 8% as the average bank fixed deposit (FD) rate over the past five years. Over a five-year period, there were 17 schemes (out of 36) that yielded a return of more than 8%; in the three-year period, there were 16 schemes (out of 43) which delivered a return of more than 8%. In the one-year period, only one scheme (HDFC MIP-LTP) has given a return of more than 8%. MIPs, like other mutual fund products, should be bought only for the long term. You have to lock in your investment for at least three to five years to get a few extra percentages of return—which usually comes from a rising equity market. But some funds have been terrible performers even over the long run—Baroda Pioneer MIP Fund (3.42%, 3.26% in three years and five years, respectively); BNP Paribas (3.03% and 4.36%); ING MIP Fund-Growth (4.24% and 4.86%); JM MIP (2.82% and 3.9%); Kotak Monthly Income Plan (3.88% and 4.54%); SBI Magnum MIP (3.84% and 4.86%) and Sundaram MIPModerate (4.22% and 4.55%). ``

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MUTUAL FUNDS POINTERS

Even during a period when the equity market performs well and interest rates are range-bound (as has been the case in the past five years), MIPs can end up delivering much lower returns than the post-tax return from FDs. In FDs, an investor has an assurance that whatever the future interest scenario may be, he will get a certain interest rate on the FD. On the face of it, the flexibility of the MIP fund manager to buy debt and stocks that he prefers may seem like a tool to earn

higher returns, but the reality has turned out to be different. The worst part is that these funds are usually bought by people who are no longer working and depend on the monthly income from their investments. MIPs are riskier than pure debt funds because of their equity component. While they offer the opportunity to earn higher returns than those from pure debt funds, these may be lower, if the equity component performs poorly, as MIPs

usually invest in blue-chip stocks only. MIPs are better than FDs on the tax front since dividends are tax-free in the hands of investors, while interest on FDs is taxable. But, again, even after taking the tax component into account, FDs have often proved to be better than the average MIP. There are only a handful of MIPs which have understood what serious asset management is all about—and you should stick to them.

E X C H A N G E TRADE D F UNDS

Religare Mutual Fund has launched Religare Nifty Exchange Traded Fund, an open-ended ETF that will

for ETFs with sector focus. It has filed offer documents to launch Axis Metal ETF, Axis FMCG ETF, Axis Banking ETF and Axis Energy ETF. They are all first of their kind. Last year, Motilal Oswal had launched its own ETF called MOSt Shares M50. ETFs are like index funds—they represent the underlying index. But unlike normal mutual funds, for which investors issue a cheque and get units, ETF units are listed on the stock market and are available for trading. They are sold through brokers and investors pay brokerage and demat charges. Should you consider these ETFs as part of your portfolio? Ask yourself: What do these ETFs offer that you cannot get from the hundreds of existing schemes?

New Rush

New Game

More and more fund houses are launching ETFs

Type of ETFs Energy, FMCG, Metal Gold

cores of exchange traded funds (ETFs) are available but many more are constantly being created. At least six fund houses are planning to launch gold ETFs. UTI, Kotak, DSP, ICICI, Tata and Benchmark are all launching gold ETFs, exactly the way they launched mid-cap funds and multi-cap funds one after another in mid-2000. Gold ETFs are electronic financial products, which will hold physical gold and will (hopefully) track gold prices.

Nifty Small-cap S&P 500 and Mid-Cap

Fund Houses Axis Mutual Fund UTI, Kotak, DSP, ICICI Prudential, Tata and Benchmark Religare and Birla Sun Life Benchmark Motilal Oswal

Moneylife Compilation

track the stocks represented in the S&P CNX Nifty. Last year, Birla Sun Life had filed an offer document with SEBI to launch Nifty ETF, an identical product. Axis Mutual Fund is all set to enter the growing market

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23 | 16 June 2011 | MONEYLIFE

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5/27/2011 9:40:15 PM

SMART MONEY R BALAKRISHNAN

F IXE D-INC OM E INVE S TMENTS

Time for Bonding? Rising interest rates have created unusual opportunities. Look at the Tata Steel ‘perpetual’ bond that yields over 11%

he measures of Reserve Bank of India (RBI) to money in FDs or FMPs, the duration is short (one to combat inflation by monetary tightening have three years) and, after that, the returns may not be so thrown up interesting investment opportunities attractive. Currently, an FMP enjoys a tax arbitrage in fixed-income products. We are bombarded with SMSs which would vanish after June 2011. I have cited the example of Tata Steel bonds due to and emails about bank deposits that offer 10%-11% their attractive features. There are other instruments annual interest for a year or two. Some companies are raising money through long-term available with varying yields. The sad fact about these bonds (of 5 to 10-year tenures or longer) with aggressive bonds is lack of pricing transparency. Also, bonds continue to have ‘minimum’ trade offerings. Tata Steel recently raised nearly Rs1,500 crore by way of ‘perpetual’ bonds. It means no repayment of sizes. Tata Steel bonds are traded in single deal sizes of Rs5 lakh (face value of the bonds). It is imperative principal ever, unless the company is wound up. The bonds carry a ‘coupon’ rate of 11.80% pa, that the regulators remove these stupid ‘ticket’ size payable every six months. Tata Steel has also put in a considerations for debt instruments. Only then will the clause (a ‘call’ option) which enables it to repay (at its debt market expand. So would awareness. The other interesting thing is that there is no tax instance alone) at the end of 10 years, the principal in full. In case it does not repay at the end of 10 years, the deducted at source on the interest that would come to the investor in bonds. These are interest rate gets automatically in demat form, so are easier to revised to 14.80% pa! “Assuming interest rates manage as well. Alas, Tata Steel did not make move down, the value of Once interest rates start a retail issue. It placed all the these bonds will increase. declining, prices of these bonds bonds with insurance companies, would go up. So, after a year, if funds, banks and other wholesale Plus, there is no tax interest rates go down by half merchants. deducted at source. And, a percent, the price of the bond The bond is listed and ‘traded’ on the exchanges (Bombay Stock these instruments beat bank would go up by nearly Rs3 (in Exchange, I think). So, now one fixed deposits on returns” the Tata Steel example). So over a one-year period, you would has to pay a price of anything around Rs107 or thereabouts (a premium of Rs7) to buy have got a return of nearly 14%-15%! Of course, the risk it. Even after paying this premium, the yield works out is that prices can go down, if interest rates keep rising. In to 11% pa, if one assumes a 10-year repayment. If there which case, one continues to enjoy the promised interest is no repayment, the simple yield would be Rs11.80 on rate on the instrument. What is the risk? An instrument like this one from every Rs107 (or whatever price one pays). This compares very well with bank fixed deposits Tata Steel would turn out to be disadvantageous, if, at (FDs) and fixed maturity plans (FMPs) of mutual funds. the end of 10 years, the economy is in such a bad shape If interest rates come down, as I hope they will, I am that interest rates go up to 18%-20%. So, it is best to put only that part of one’s portfolio getting a great opportunity to lock into a high yield for 10 years! And I would sincerely pray that at the end in such instruments that is earmarked for low-risk, of the 10th year, the company gets into some problems predictable returns. which would make repayment impossible and the bond gets into the 14.80% interest slot! Today, when I put The author can be reached at balakrishnanr@gmail.com

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COVER STORY

Online term plans are cheap, but can you put your life on them? Debashis Basu and Raj Pradhan dig deep and get you the answers

f one cell-phone model costs Rs5,000, and another, with the same features, costs Rs12,000, it is not hard to see which one you would go for. But if one insurer charges Rs5,000 as premium for a term plan and another insurer charges Rs12,000 for a plan with similar features, what would you do? Your instinct would prompt you to go for the cheaper one. But wait till you read the whole story. For starters, how about having to face an issue such as this: “Are the rates from online term insurance a bait for customers? Is it less for selling and more for publicity?” asked a Moneylife reader when the ‘cheap’ premium paid for his online term insurance jumped by 25% after he underwent a medical test. This reader was attracted by the low premium and had already paid the premium advertised during online purchase. After the medical test, he was left wondering whether to pay the balance 25% or to decline the insurance offer and request for a refund

(after deduction of medical test cost). Either way, there was a loss. Another reader had to wait for almost one-and-a-half months for his papers to be collected by the insurance company and issue the policy document. It took several reminder calls to the company about the payment that was already made, but the to-be-insured had no policy contract in hand because the insurer hadn’t bothered to collect his documents. ‘Online term plan’ is a new concept that has grabbed attention due to premiums that are amazingly low compared to other plans. Aegon Religare (the plan is dubbed ‘iTerm’) is offering a sum assured of Rs50 lakh for Rs5,350 of annual premium for someone who is a non-smoker and 27 years of age. It was the cheapest in the market until Metlife launched Met Protect. And, by all accounts, rates may go lower still. At least, they may not head higher. ``

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COVER STORY

Aviva Life Insurance recently launched its ‘i-Life’ online term plan with a minimum cover of Rs25 lakh with no upper limit and a maximum term of 35 years. At Rs4,046, the premium is the lowest in the market today (20% lower than its next competitor) which points to a clear trend of premiums becoming even more unrealistic, but offering a bonanza for customers. By contrast, a similar term plan, (bought offline) from Life Insurance Corporation of India (LIC) would cost you Rs12,650. (See the table for a comparison of premium and other features). Online term plans have suddenly become irresistible for those who understand the importance of the purest and best form of risk protection, and who also know that

they should not mix their investments and insurance. But, before you fall for the charms of low-priced term plans, think about the many issues that are not so apparent. Start with the premise that there are no free lunches in this world. Instead of grabbing the online term plan from Aviva, Metlife or Aegon, think about the pitfalls and downside. Ask yourself: how is it that new entrants and loss-making companies like Aegon and Aviva are able to offer something that LIC, which is profitable and has been around for decades, cannot? Are they indulging in ‘predatory’ pricing? If so, what are the implications for you? Indeed, low premium is only one factor in the insurance process. Going for the cheapest would be ``

Comparison of Select Term Plans for Rs50 lakh Insurer

Product

Max Tenure (yrs)

Max Age (yrs)

Premium (Rs)

Riders Accidental Death

Critical Illness

Accidental Disability

Premium Waiver

Online Plans Aviva Life MetLife Aegon Religare Kotak Life ICICI Pru Life IndiaFirst Life Future Generali

i-Life Met Protect iTerm e-Preferred iProtect Anytime Smart Life

35 35 25 30 30 30 30

70 70 65 70 75 70 68

4,046 5,184 5,350 5,350 5,515 5,838* 8,934

Y N N N Y N Y

N N N N N N N

N N N N N N Y

Aviva Life Kotak Life SBI Life Bharti AXA Life MetLife ICICI Pru Life IDBI Federal Aviva Life Birla Sun Life Max New York Aegon Religare Canara HSBC Bajaj Allianz HDFC Life

Life Shield Platinum Preferred Smart Shield Elite Secure Suraksha Plus Pure Protect Termsurance Life Shield Plus High Networth Platinum Protect Level Term Pure Term New Risk Care II Term Assurance

52 30 30 25 35 30 30 30 30 30 30 30 40 30

70 70 70 75 70 75 75 65 75 75 75 74 65 65

6,342 6,425 7,110 8,548 8,769 9,108 9,225 9,376 9,431 9,431 9,541 1,1030 11,057 11,294

Y Y Y N Y N N N N Y N Y Y Y

Y Y Y N Y N Y Y Y Y N Y Y N

Y Y Y N Y N Y Y Y Y N Y N Y

N N N N N N N Y N N N N N N

Star Union Dai-ichi Reliance Life ING Vysya LIC Tata AIG Bharti AXA Life Sahara India

Premier Protection Term Plan Term Life Amulya Jeevan Raksha Secure Confident Sahara Kavach

25 30 30 35 25 25 20

65 65 75 70 60 60 65

11,550 11,971 12,484 12,650 12,905 13,015 16,005#

Y Y N N Y N N

N N N N Y N N

Y Y N N Y N N

N Y** N N N N N

Oﬄine Plans

Term life plan options for Rs50 lakh sum assured for a 27-year-old non-smoker male based in Mumbai for a policy term of 25 years. *For Rs49 lakh sum assured (max limit); **Waiver of premium rider is in-built with no extra charge; #Policy term is 20 years; Source: Moneylife Research

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COVER STORY

` justified if your claim is processed and paid without

hassles. If there are glitches in claim processing for no fault of yours, even the lowest premium becomes a dead loss. This is so not only because the whole purpose of taking a cover is defeated, but also because of what is called an ‘opportunity loss’—if you were with another insurer, you could have got your claim accepted, though the premium you paid would have been higher. Clearly, the capacity and intention of the insurer to pay a claim is more important than the low-priced product it is offering. Remember, unlike the products and services that we use (which offer instant performance to the buyer), a financial product, especially an insurance policy, is only a promise—one of payment to the nominee if the buyer expires. Life insurance purchase should give you peace of mind and not sleepless nights wondering if the insurance company will really pay at the moment of truth—your death claim. There is no easy way to figure out in advance whether the insurance company will reject your claim(s) or not. We can start by examining whether the current online term plan premiums are ‘unrealistically’ low. A 200% Variation! The table shows the wide variations in the rate for term plans bought online and offline, not only between two insurance companies, but also between online and offline plans of the same company. How can a policy of Aviva carry a premium of Rs4,046 and that of LIC carry a premium of Rs12,650—200% more! According to Deepak Yohannan, chief executive officer, MyInsuranceClub.com, “The large variations have come about as a result of the launch of online term insurance plans. It is probably for the first time that a price war is being played out in the life insurance segment. We have seen the same in other financial products and even in general insurance, but never in the life insurance segment. This is clearly because of increased competition and the desire to break into a large untapped market. These are very good signs for the consumer as huge financial savings are being passed on to the customer. It was Aegon Religare which started this with the superinnovative iTerm plan. The rest are being forced to follow and rightly so.” V Viswanand, director & head—products and persistency management, Max New York Life Insurance, says, “Premium amounts for term plans are derived by assuming certain critical factors such as level of expense, commission, cost of life cover, investment return on assets, persistency and allowing for a certain level of profitability. These assumptions vary across companies and are usually dependent on the way the business is procured. The underwriting strategy of the company is

also an important factor in the determination of prices.” Sanjay Tripathy, executive vice-president and head of marketing and direct channels, HDFC Life, has the same explanation: “Key factors such as expected mortality rates, operating expenses, persistency expectations and underwriting standards are taken into income (calculation) for deciding upon the premium for our term plan. Our premiums reflect our current persistency and claims experience. In fact, we are in the process of refining our term plan premiums. Comparison of online term plans against regular term plans is not appropriate since the underlying demographics for both the products are very different.” But these are general statements and may create more confusion. A keen buyer would ask: Why would assumptions on expenses, cost of life cover, investment return and persistency differ so widely across companies which are all drawing upon the same data and working in the same economic environment? Are insurance companies throwing darts? On another note, what makes online plans so much cheaper? Policybazaar.com mentions on its website, “ICICI Pru iProtect term plan is an online term plan which is cheaper since you save on agent’s commission.” This too is a half-truth. The highest-premium (not online) term plans in policybazaar.com are four times more expensive than the lowest premium online term plans. The agent commission of 30% to 40% of the first premium cannot account for this difference. Moreover, in subsequent years, the agent commission is only 2% to 7%. It does not justify such a big difference in premiums for the full policy term. Frankly, if commissions accounted for such a high difference, why can’t online mediclaim products offer such huge discounts?

Dr P Nandagopal, CEO & MD, IndiaFirst Life Insurance

IndiaFirst Life Insurance has launched an online term insurance ‘Anytime Plan’ to compete with the likes of Aegon Religare’s iTerm. According to Dr P Nandagopal, CEO & MD, IndiaFirst Life Insurance, “Commission ``

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COVER STORY

TERM PLAN

Who Wants It? A term plan is the best form of protection

ife insurance is a ‘push’ product, but have you ever seen life insurance companies advertising term plans or agents pushing them? A random interaction with an insurance agent will reveal that term life is not even oﬀered or discussed in most cases. Even when customers ask for them, agents are vague about them which is their way of dissuading customers. Why is this so? First, low premium income for insurance companies translates into low commissions for agents. Second, Indian customers generally view premium as a ‘waste of money’ because they naturally hope that nothing untoward will happen to them. For the premium they pay, they want something back from the insurance company. Term plans carry low premium for insurance companies, low commissions for agents and don’t pay anything to insurers. All this has

` and expenses are not the main reasons for such a big

difference in premium.” Here is the main reason, according to him: “The expected mortality of the targeted segment is one of the main reasons for low premium for online products. Insurers expect net-savvy, financiallysecure individuals to lead a healthy lifestyle and also to have access to better hospitals so that the person lives a longer life even if it means lying in a sickbay. The preferred customers will be from software, the financial services field and other well-paying careers. The other aspect is that educated, savvy people understand the importance of proper declaration of medical conditions as well as giving correct information in the proposal form. There have been studies in mortality experience among different groups within the same organisation and it has been observed that mortality for employees with lower rank are sometimes as high as four times the mortality for the higher ranked employees. Customer segmentation makes a huge difference in the premiums offered by insurers.” An online customer is presumed to be of better

ensured that term plans are the best-kept secret of the insurance world. The market is dominated by unit-linked insurance plans (ULIPs) which mainly put money in the stock market in diﬀerent proportions and traditional plans which mainly put money in debt instruments. The worst part is that a majority of customers taking ULIP or traditional plans remain underinsured since a part of their premium is going into investments. The premium earmarked for protection is too low. To get proper protection, their premiums would have to be much higher. Some policyholders have taken traditional policies more than 20 years ago for Rs1 lakh—which is meaningless given the current inflation rate. Life insurance is a way to provide for your dependents in case of your untimely death. It’s a method of transferring your financial responsibility to someone else (the insurer) when you are no longer around. This protection comes at a cost—the premium. If you live a long and healthy life, just count your blessings and forget the money that you paid as premium. Term life is the purest and best form of risk protection.

‘quality’ as s/he has better access to health care and quality of life which is reflected in the vast difference in the mortality rates of online term plans. The other aspect is the distribution cost (in the form of commissions, etc), which is not loaded in online term plans. Many insurers offer these plans only for certain cities so that they narrow down the customer segment and avoid rural areas where mortality rates will be higher. Aviva Life’s i-Life online term plan is available only in 33 cities. ICICI’s Pru iProtect online is offered only in 55 cities in India. It can be purchased offline in other places in India, but at an additional premium. Customers living in locations prone to natural calamities or having hazardous occupations will have to pay extra premium. Women pay 15% to 20% less premium than men. According to Mr Viswanand, “Max New York Life Platinum Protect term insurance has introduced three underwriting categories based on lifestyle to provide better rates for maintaining a healthier life. An individual can avail of up to 36% reduction in premium rates depending upon his lifestyle.” ``

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COVER STORY

If an insurance company is selective about its customers, there is bound to be a better claims experience. LIC, on the other hand, has its customer base spread out all over India and its clientele is a truly heterogeneous group. The wider the group, continuous mortality experience will be surely on the higher side. There are other factors that may allow an insurer to offer lower premium rates. It could be due to reinsurance of their portfolio by the life insurer. An insurance company reinsures approximately 90% of the high-sum assured policies. A reinsurer has a bigger base across different countries to mitigate its risk, but it can still get squeezed if due diligence is not done while reinsuring. According to Chandan Khasnobis, appointed actuary, IndiaFirst Life Insurance, “IRDA (Insurance Regulatory and Development Authority) reduced the solvency margin of term life insurance from 0.3% of sum assured to 0.1% of sum assured in March 2008. This meant that insurers benefitted (they could hold lower reserves) and, hence, could afford aggressive premium pricing.” The other reason could be that a new entrant into the insurance business may be excessively keen on market penetration and may price its products at a loss. Mr Viswanand adds, “The other aspect and probably the most important one is a company’s business philosophy which links to profitability assumptions for pricing products. Some (insurers) may believe that once a customer is acquired through a lower-priced product,

they can cross-sell other profit-making products to the customer. However, others may believe that a term product has to be profitable by itself.” If you listen to Rituraj Bhattacharya, head–product development, Bajaj Allianz Life Insurance, an important factor to bear in mind is that prices from the same company may vary due to changing conditions and

Rituraj Bhattacharya, head–product development, Bajaj Allianz Life

assumptions. “We launched ‘New Risk Care II’ in 2008 when the assumptions in terms of mortality, reinsurance terms, interest rates and expenses were different from now. This kind of pure term plan would require frequent re-pricing in order for a player to stay competitive. We may launch a pure term plan by tweaking some of the features in current plans. Moreover, issues like the ``

O NL I N E M EDIC L AIM

Sorry, Only 20% Off If online customers carry lower risk, why are they not getting a much cheaper rate?

ealth insurance (mediclaim and other products) offer no difference in premium for online purchase. It is unlikely that there will be any major discounts in the future for online health insurance. It could be a maximum of 20% (this figure is based on conversations that Moneylife has had with different general insurers). As mentioned earlier, online term life insurance is offered at a huge discount due to the profile of customers they are choosing. Educated, net-savvy customers will need good healthcare facilities and, hence, it is unlikely that online health insurance products can be offered at a discount to them. Advances in medical science will increase longevity, but may not necessarily lead to be er health for all.

According to Subrahmanyam B, vice-president and head, health vertical, Bharti AXA General Insurance, “We will oﬀer online mediclaim in two-three months. As far as discounts are concerned, since we would be in a position to save on acquisition costs by oﬀering policies online, we would like to pass this on to our customers. However, this is subject to approval from the regulator.”

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COVER STORY

ArƟficially Low? iTerm vs iMaximize Age

Aegon Religare iTerm Premium (Rs)

Mortality Factor for Aegon Religare iMaximize ULIP

Aegon Religare iMaximize ULIP Mortality Charges (Rs)

5,350

1.104

5,520

5,350

1.11

5,550

5,350

1.112

5,560

5,350

1.112

5,560

5,350

1.127

5,635

5,350

1.162

5,810

5,350

1.213

6,065

5,350

1.28

6,400

5,350

1.363

6,815

5,350

1.461

7,305

5,350

1.574

7,870

5,350

1.703

8,515

5,350

1.861

9,305

5,350

2.043

10,215

5,350

2.216

11,080

5,350

2.385

11,925

5,350

2.581

12,905

5,350

2.822

14,110

5,350

3.11

15,550

5,350

3.446

17,230

5,350

3.828

19,140

5,350

4.257

21,285

5,350

4.732

23,660

5,350

5.255

26,275

5,350

5.824

29,120

Aegon Religare iMaximize ULIP mortality charge for Rs50 lakh sum assured for a 27-year-old non-smoker male for a policy term of 25 years. For proper comparison of mortality charges with iTerm premium, the fund value of the ULIP is ignored.

` channel of distribution opted (through the Internet,

brokers or individual agents) and targeted segment can impact the premium rates,” he says. A big game changer will be when LIC brings in its online term insurance products. Term life is a minuscule business for LIC and its brand value is enough to pull customers who will not settle for anything other than LIC term life insurance. An online term plan of LIC will give us the best picture of pricing. Understated Mortality Charges? One of the most important components of the price of term plans is assessment of mortality. Life insurance companies use the Indian Assured Life Mortality Table

1994-96 prescribed by IRDA for calculating mortality charges. However, the mortality factor used by Aegon Religare iMaximize ULIP is much lower than what is suggested by this table. The number of claims for each life insurer may be different from what the industry perceives as the average. Therefore, insurers are allowed to base their mortality rates on their own claims experience. (See Table: iTerm vs iMaximize Charges). The most surprising conclusion is that the premium on Aegon Religare iTerm in the 25th year is lower than even the first year mortality charges for its own online ULIP! In both cases, there is no agent (online) and the profile of customers is the same; hence, such a huge difference in the mortality charges between online term policies and online ULIPs is baffling. Either the customer is paying ‘unrealistic’ low premium for online term insurance or s/he is paying too much for ULIP mortality charges. We asked Aegon Religare about this glaring discrepancy, but they did not respond to our queries. It is not just Aegon Religare; all the low-priced online term plans have the same feature. There could be a case for non-online ULIPs to charge higher mortality charges. It has got to do with the customer segment (larger population), less stringent underwriting, lack of medical test in many cases due to low sum assured and the ULIP customer being more interested in investments rather than insurance. But all that should account for 20%-30% higher mortality charges for ULIPs. Add that, and the online term insurance premium still looks unrealistically low. Last September, IRDA came up with a new set of guidelines for ULIPs. Mortality charges were left out of its ambit; hence, insurers could escalate them by 10% to 20% and recover the charges from the customer. How many ULIP customers know about how much of their premium is going towards mortality charges? After all, it is not as transparent, as the premium for term life is one amount to be paid annually, whereas the ULIP has changing mortality factor every year. Too Good To Be True? Moneylife’s analysis of the factors that contribute to making online term plans inexpensive indicates that the scenario is almost too good to be true and may not last. Mr Yohannan of MyInsuranceClub.com says, “There are sceptics who scoff at this (online term life premium), claiming it to be unsustainable—only time will tell. At least it has forced the large players to sit up and play the game with the new rules being set by others. Complete disruptiveness is at its best and I think the life insurance industry will see a lot more and it will not all be restricted to pricing.” ``

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COVER STORY

Mr Khasnobis of IndiaFirst Life Insurance elaborates, “Online term life insurance premiums are bordering on the aggressive, if not overly aggressive. They have no track record and hence only time will tell who is right and who is wrong.” Moneylife spoke to different people from the insurance industry, including actuaries. Could cheap online term life premiums become ‘unviable’ if the assumptions go wrong? And there are far too many assumptions that can go wrong. The fact is that the mortality tables of 199496 are based on LIC’s experience over several years. The scientific basis of the tables is being undermined by assumptions that may not hold true. The new mortality

Deepak Yohannan, chief executive officer, MyInsuranceClub.com

tables are going to be released soon to replace the Indian Assured Life Mortality Table 1994-96 which are expected to witness a drop in mortality charges by only 15% to 20% due to higher life expectancy. There could be an increase in mortality rates in younger ages due to higher rates of accident deaths and lifestyle-related diseases.

Claims Data for Older Life Insurers 09-10 Company (launch year)

Claims Repudiated (%)

Claims Settled (%)

Claims Pending (%)

LIC (1956)

1.21

96.53

1.41

ICICI Prudential (2000)

3.27

90.17

6.56

ING Vysya (2001)

4.26

89.30

5.82

Kotak Mahindra (2001)

4.39

86.97

8.64

HDFC Life (2000)

4.67

91.14

4.20

Bajaj Allianz (2001)

5.20

88.18

6.63

Metlife (2001)

5.94

82.54

11.29

Reliance Life (2002)

7.05

89.07

3.82

9.75

87.11

3.14

10.62

89.09

0.24

Aviva (2002) Birla Sun Life (2001) Max New York (2000)

12.31

65.51

22.18

Tata AIG (2001)

12.93

78.17

8.76

SBI Life (2001)

14.75

83.27

1.96

Claims Data for New Life Insurers 09-10 Company (launch year) Star Union Dai-ichi (2009)

Claims Repudiated (%)

Claims Settled (%)

Claims Pending (%)

58.33

36.67

Sahara India (2004)

6.84

63.06

30.10

IndiaFirst (2009)

7.69

53.85

38.46

DLF Pramerica (2008)

Canara HSBC (2008)

16.13

38.71

45.16

Shriram Life (2005)

19.73

39.54

40.74

Bharti AXA (2006)

22.20

77.80

IDBI Federal (2007)

23.81

49.52

26.67

Future Generali (2007)

29.36

38.85

31.79

Aegon Religare (2008)

IRDA’s 2009-10 statistics show that 2% of policies can lead to death claims. The number of policies sold in 2009-10 was 53.2 million and the number of settled death claims was 726,000 (individual) and 306,000 (group). What if online term plans lead to 2% death claims? Insurance companies would make losses—they simply won’t have enough money to pay for death claims. This could lead to high claim rejections, unless, of course, promoters infuse more capital and new business premium collections become robust. There is nothing to suggest that an insurer will deliberately reject claims, but some may be temped to use technical grounds for rejection. If insurance companies suffer losses on cheap term online plans, they may quote some fine print and reject claims. Should you worry about it? We have to assume that if a customer buys life insurance in ‘utmost good-faith’, there is nothing to worry. Make sure you disclose health conditions, family medical history, details of occupation, and other insurance policies. Also, fill the proposal form yourself and get any incorrect information on the policy document corrected. Life insurance companies can even repudiate a claim if the policyholder dies in an accident, if the policy was purchased with false information about smoking. The accident may not have any relation with smoking, but it is a technical point which will be used for not paying the claim. It is not uncommon for the insurer to ask for the nominee to provide proof of relation with the deceased policyholder and even verify past medical records at the time of a death claim. The repudiation ratio is crucial because lower claims denied especially for a company in business for a long time is good from the customer’s point of view. The missing data is repudiation of claims by insurers for early claims (within three years of buying insurance). ``

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I ns u r a n c e c om panies

Are Life Insurance Companies Healthy? Claim-paying ability of the insurers is one of the factors that needs to considered

nsurance companies are supposed to be experts in managing risk but many in the US and Europe did a poor job of it in 2007-08. In India, the insurance regulator enforces a solvency margin to be set aside towards potential claims liability, in case the insurer goes bust. This solvency margin has to be declared every year to IRDA. While comparing insurers, you should consider the company which can be gauged by its solvency margin. (Solvency margin is the surplus of liquid assets that all life insurance companies must stash away and hold to meet any policy claims that may arise). If there is a really adverse claims ratio due to unrealistic premiums, it is possible that an insurance company may go bankrupt. There are lower chances of adverse claims ratio across products, so policyholders have less to worry about. The solution to protect the insured is for IRDA to formulate a detailed plan of action and set up a policyholder protection fund to which every insurer should contribute every year from the premiums received, and this fund should be independently managed by the trustees appointed by IRDA. IRDA has given leeway to term products by reducing the solvency margin to improve term life insurance penetration in India. How it will impact the financial status of insurers is yet to be seen. The overall solvency margin specified by IRDA for life insurers is the higher of 150% of liquid assets or Rs50 crore. This implies that the capital and value of the assets of insurance companies has to be at least 1.5 times more than the insured liabilities.

` LIC pays 95% of non-early claims within 15 days and

has about 5% of early claims repudiated. According to industry experts, early claims should not have a repudiation ratio of more than 10%. Poor underwriting standards, lack of health condition disclosure and fraudulent claims could be some of the reasons for high repudiation ratios. It is difficult to comment on repudiation ratio of newer insurers without having cases of claim repudiation reversed by higher authorities. Customers will have to make their own decision about purchase of life insurance products. So, what should you do? Low online premium

Solvency Situation Insurance company

Solvency Margin Ratio-March 2009

Solvency Margin Ratio-March 2010

Aegon Religare

1.93

2.66

Aviva Life

5.91

5.12

Bajaj Allianz

2.62

2.68

Bharti AXA Life

2.07

1.68

Birla Sun Life

2.44

2..11

Canara HSBC

5.74

2.58

DLF Pramerica

1.71

1.67

Future Generali

3.17

2.34

HDFC Life

2.58

1.8

ICICI Prudential

2.31

2.9

6.11

4.05

IndiaFirst

IDBI Federal

Not in operation

5.27

ING Vysya

2.26

1.79

LIC

1.54

Max New York Life

3.04

3.22

MetLife

2.27

1.65

Kotak Mahindra

2.69

2.79

2.5

1.86

Reliance Life Sahara India

3.6

4.5

SBI Life

2.92

2.17

Shriram Life

3.05

2.69

Star Union Dai-ichi

2.53

7.46

Tata AIG

2.51

2.11

Life insurers’ solvency margin over the past couple of years

According to Mr Viswanand, “Some of the new entrants have solvency margin requirements within the absolute Rs50-crore limit which also enables them to price more competitively.” If true, this is something of a concern.

for term insurance looks like a good deal. But ease of purchase and lower premium that online terms offer should be the last factors on your mind while buying life insurance. However, if you fulfil the criteria set by online term life insurers to get the online premium quoted, can trust private insurers, are ready to go through the hassles of getting an online term insurance policy issued, find LIC premiums unaffordable, and don’t need an agent, then go with online term insurance. Else, go for LIC or any other insurer by paying higher premium. Remember, life insurance is not optional for most of us; it is a necessity. So, it is important not to take chances.

33 |16 June 2011 | MONEYLIFE

Cover Story.indd 9

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COVER STORY

Mo ne y l i f e S urvey

Life Term Our online survey shows that Moneylife readers are cautious; and consider term life insurance a good product

ur survey on term life insurance shows that Moneylife readers are surprisingly prudent; they go in for term life insurance in large numbers. This finding contradicts the common assumption that customers don’t know about term plans; they don’t ask for them, since agents don’t offer them; and insurance companies

1. Have you purchased term life insurance?

Yes-67%

Can’t Say-1%

No-32%

are not keen to sell them. The Moneylife online survey received responses from 1,455 readers, the largest so far. Of these, 67% were buyers of term life insurance and a high 80% felt that term life is the best insurance product. As many as 44% of the respondents believe that insurance is an investment and they would prefer to have the premiums which they have paid returned to them, if they are alive at the end of the policy. While our readers seem to be a savvy bunch, the fact is that insurance agents normally don’t push term policies; 56% of the respondents have not come across an agent who is actively selling term life policies. When it came to choosing a life insurer, Life Insurance Corporation of India (LIC) stands heads and shoulders `` 5. Do you think LIC term life insurance (though expensive) is better than that of private insurance companies?

Yes-44%

Can’t say-21%

No-33%

No Response-2%

Two-thirds of respondents have purchased term life insurance.

One-third of the respondents don’t find LIC term life insurance better than that of private insurers.

2. Do you think term life is the best insurance product?

6. Will you buy/recommend term life insurance on the basis of lowest premium?

Yes-80%

Can’t say-12%

No-8%

Yes-48%

Can’t say-10%

No-39%

No Response-3%

4 out of 5 respondents think that term life is the best insurance product.

48% of the respondents would buy/recommend term life insurance on the basis of lowest premium.

3. Do you think it’s better to go for term policy that gives you back your premium, if you’re alive till the end of the policy?

7. Do you worry about the financial status of the newer insurance companies?

Yes-47%

Can’t say-8%

Yes-65%

Can’t say-9%

No-44%

No Response-1%

No-23%

No Response-3%

47% of respondents think that it is better to go for a term life insurance that gives the premium back, if they are alive till the end of the policy.

Around two-thirds of the respondents are worried about the financial status of the newer insurers.

4. Have you come across an insurance agent who is actively selling term life policy?

8. Do you think it is better to buy term life insurance through an online channel?

Yes-38%

Can’t say-4%

Yes-26%

Can’t say-17%

No-56%

No Response-2%

No-55%

No Response-2%

More than half of the respondents have not come across an agent who is actively selling them a term life policy.

Only 26% of the respondents think it is better to buy term life insurance through online channels.

MONEYLIFE | 16 June 2011 | 34

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COVER STORY

` above the rest. As many as 44% of the respondents felt

that LIC is preferable to private insurance companies— even if the former is more expensive for term life policies. Almost half (48%) of the respondents are enticed into buying the lowest premium term life insurance which is not the right approach. A high 65% of the respondents are concerned about the financial status of the newer insurance companies; this confirms their overwhelming faith in LIC. The online channel to purchase term life is yet to catch up in a big way. Only 26% of the respondents were willing to consider it as an option. Barely 28% of the respondents were willing to recommend it to relatives and friends. There were only 63 cases where a respondent knew someone personally, who had filed a death benefit claim on a term life policy which had originally been purchased online. The claim settlement was favourable in 35 of these cases. Online Buyers: Of the 1,455 respondents, as many as 20% (over 300) had purchased insurance policies through an online channel. On the issue of whether the online term life buying process was smooth, the responses were

9. Will you recommend online term life insurance to your relatives and friends?

Yes-28%

Can’t say-12%

No-58%

No Response-2%

split down the middle. Fifty per cent felt it was smooth; an equal number found the process difficult. Readers must note that a medical check-up is required even for online purchase, depending on the customer profile; 177 respondents out of 323 had to go for a medical check-up; 93 respondents out of 320 said that the policy premium increased at the time of policy issuance in an online purchase of term life insurance policy. Only 90 respondents out of 332 have purchased riders on the policies that they purchased online—indicating riders are not the key deciding factors for savvy online buyers. — Inputs by N Madhavan

Online Term Insurance Buyers 12. Was the online buying smooth (including document submission and issuance of policy in reasonable time)?

Yes-50%

No-50%

Half of the online buyers found the online process smooth. 13. Did you have to undergo a medical test before the policy was issued for your online purchase?

Yes-55%

No-45%

More than half of the respondents don’t want to recommend online term life insurance to their relatives and friends.

55% of the online buyers had to undergo a medical test before the policy was issued for online purchase.

10. Do you know someone who has filed a death benefit claim for online purchased term life insurance?

14. Did the premium offered for online purchase increase at the time of actual policy issuance?

Yes-4%

Can’t Say-1%

No-95%

Yes-29%

No-71%

4% of the respondents know someone who has filed a death benefit claim for term life insurance purchased online.

29% of the online buyers say that the premium for online purchase rises at the time of policy issuance.

11. If yes, what is the status of the claim?

15. Did you purchase any riders along with your online term life insurance?

Settled-56% Rejected-25%

Pending-19%

Out of the claims filed for online purchased term life insurance, a little over half have been settled.

Yes-27%

No-73%

Over one-fourth of the online buyers purchased riders with online term life insurance.

35 |16 June 2011 | MONEYLIFE

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STOCKS STREET BEAT

Unbiased & Methodical Stock Picking that Works!

A U R O B I NDO P HARM A

In Good Health

tio n St or ies of Pr ice Ma nip ula

The stock is valued low now, given its strong growth prospects

ne of the largest vertically-integrated pharmaceutical companies in India, Aurobindo Pharma, has a robust product portfolio spread over major product areas encompassing anti-retroviral (ARV) drugs, antibiotics, gastroenterological formulations, anti-diabetes and anti-allergic drugs with manufacturing facilities approved by all major health authorities in the developed and developing world, for active pharmaceutical ingredients (APIs) and formulations. It has a global presence with its own infrastructure, strategic alliances, subsidiaries and joint ventures. Aurobindo Pharma was founded in 1986 by PV Ramaprasad Reddy, K Nityananda Reddy and a small, highly-committed group of professionals. It started operations in 1988-89 with a single unit manufacturing semi-synthetic penicillin (SSP) at Pondicherry (now Puducherry). Aurobindo Pharma created a name for itself in the manufacture of bulk actives, where Indian companies had competitive advantage in the early 1990s. It then entered into the high-margin specialty generic formulations segment and developed a global marketing network. Aurobindo Pharma’s international operations cater to over 100 countries with offices in China, Brazil, Japan, the Netherlands, South Africa, Thailand, UK, USA and Russia. The company’s vision is to become Asia’s leading and one of the top 15 generic pharma companies in the world by 2015. For the fiscal 2010-11, net revenues at Rs4,133.10 crore were up 27.1% from Rs3,252.30 crore in the previous fiscal. Operating profit was Rs957.20 crore compared to Rs749.60 crore, a growth of 27.7%. Profit after tax (PAT) stood at Rs593.80 crore against Rs525.80 crore a year earlier. Its formulations business grew by 30.8% in FY10-11, driven ``

Exelon Infrastructure cture (Rs75) (R Exelon Infrastructure is ostensibly engaged in oil trading and infrastructure development. In February 2011, it announced plans to set up a coal-based 350MW power plant in Andhra Pradesh. The company’s revenue for the past nine quarters ranged between Rs5.63 crore in the March 2009 quarter and Rs14.33 crore in the March 2011 quarter. Operating profit (Rs)

Exelon Infrastructure 65

651%

50 35 20 5 Dec-10

Feb-11

May-11

was between Rs22 lakh in the March 2009 quarter and Rs38 lakh in the March 2011 quarter. In the June 2010 quarter, operating profit was at Rs1.08 crore and revenue at Rs12.07 crore. Amazingly, despite such shaky fundamentals, the stock soared 651%—from Rs9.85 on 8 December 2010 to Rs73.95 on 20 May 2011. With the exchanges and the regulator being somnolent, operators are having a field day.

Recommended Price Rs145

MONEYLIFE STOCK IDEAS

THAT WORK

Moneylife Issue 25 February 2010

109%*

Exit Price Rs263

(Stop Profit triggered on 25 November 2010)

(EXCEL CROP CARE)

* Annualised returns

MONEYLIFE | 16 June 2011 | 36

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STOCKS STREET BEAT

Unbiased & Methodical Stock Picking that Works!

` by the US and ARV segments. US formulations grew by 30.4%

year-on-year (y-o-y) to Rs1,190 crore. The ARV segment grew by 40% to Rs694 crore during the year. The API segment posted growth of 12.5% y-o-y to Rs1,802 crore. For the full year, gross margin declined to 46.9% compared to 49% in FY09-10. As on 31 March 2011, a total of 134 abbreviated new arug applications (ANDAs) have been approved in Sept-10 Dec-10 Mar-11 the US, including 32 Sales* 1,050.43 1,156.61 1,058.57 tentative approvals. In OP* 267.31 303.07 231.68 FY10-11, 21 new ANDAs 24% were approved by the Y-o-Y Sales Growth 27% 43% 42% USFDA (17 final and four Y-o-Y OP Growth 29% 44% tentative); additionally, 22% OPM 25% 26% two earlier tentativelyOP: Operating Profit, Y-o-Y: Year-on-Year, OPM: Operating Profit Margin approved ANDAs received *Figures in Rs crore final approvals. Drug Hug On 23rd May, Aurobindo Pharma (Rs) received a warning 275 Aurobindo Pharma letter from the US 250 health regulator with 225 regard to its antibiotics manufacturing unit 200 in Hyderabad. The 175 company had earlier 150 received an import alert Nov-10 Feb-11 May-11 in February this year from the US Food and Drug Administration (USFDA) for its cephalosporin-producing Unit VI located at Chitkul Village, in Hyderabad, Andhra Pradesh. In global markets, the company aims at retaining and ``

tio n St or ies of Pr ice Ma nip ula Frontline Business ss Solutions Solu (Rs26) Frontline Business Solutions provides valueadded solutions and services in staffing, sales and marketing of telecom, financial products and back-office processes. The company’s financials in the past nine quarters have been miserable. It posted nil revenue in the September 2009, December 2009 and June 2010 quarters and revenue in the other quarters ranged from Rs3 lakh in (Rs)

Frontline Business Solutions 30

2482%

0 Jun-10

Nov-10

May-11

the March 2009 quarter to Rs10 lakh in the March 2011 quarter. It reported operating losses from the March 2009 to December 2009 quarters and had an operating profit of Rs3 lakh in the March 2011 quarter. A company with such absurd financials saw its stock soar 2482%—from Rs0.98 on 29 June 2010 to Rs25.30 a piece on 20 May 2011. Yet, the regulators have not noticed the manipulation!

Recommended Price Rs125

MONEYLIFE STOCK IDEAS

Moneylife Issue 23 September 2010

THAT WORK

109%*

Exit Price Rs150

(Stop Profit triggered on 29 November 2010)

(AHMEDNAGAR FORGINGS)

* Annualised returns

37 | 16 June 2011 | MONEYLIFE

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STOCKS STREET BEAT

` enhancing cost-efficient leadership

in semi-synthetic penicillin, cephalosporin, newer anti-infectives and lifestyle-disease drugs. It plans to achieve this by improving process efficiencies, adopting global scale manufacturing and using cost-effective market networks throughout South East Asia, Africa and Latin America. Aurobindo’s revenues for the March 2011 quarter grew by 24% to Rs1,058.57 crore and operating profit by 42% to Rs231.68 crore. Average revenues and operating profit for the past five quarters reported a growth of 23% each. Its operating profit margin in the last quarter was 22% while its average operating profit margin for the past five quarters was 21%. Based on annualised results for the March 2011 quarter, the company’s market-cap to revenue was 1.34 and market-cap to

S H R E E R ENUKA S UGARS

Bitter Truth The stock has fallen sharply. Is it cheap now?

he stock of Shree Renuka Sugars had hit Rs124 sometime in January 2010. At the time of writing, it has fallen to Rs59, barely above its 52-week low of Rs51. Renuka is the best sugar company in India and there is nothing wrong with the company’s management or its future. The stock got sold oﬀ because it reported a 20% decline in revenue for the March 2011 quarter, at Rs1,248.90 crore, and its operating profit declined by 53% to Rs135.10 crore. There is a sugar surplus around the world which has led to this fall in the

Unbiased & Methodical Stock Picking that Works!

operating profit was 6.10. Both these are very attractive. Return on net worth for FY10-11 was a decent 23%. The company has also recommended a final dividend of 100% on its shares having a face value of Re1 each, subject to shareholder approval. The stock is worth buying at the current market price.

KPR MILL

Fit Knit Improved performance and stable growth make this a good pick

irupur-based KPR Mill is one of the leading manufacturers of readymade knitted apparel, cotton knitted fabric and yarn in

company’s revenue. While the domestic sugar industry is driven by a demandsupply mismatch due to cyclical changes, Renuka is an integrated operator across the entire sugar chain with a presence in ethanol, bio-fertilisers and energy. The company is currently the fifth-largest

the country. The company has a presence across the entire value chain—from fibre to fashion, including production of yarn and fabric, designing, dyeing and manufacturing of readymade garments. This makes it less vulnerable to the ups and downs of the yarn market which affect most mills. KPR Mill’s journey into textile sector began way back in 1984. The group ventured into garment exports in 1989. KPR Cotton Mills Pvt Ltd, now known as KPR Mill, was incorporated in March 2003. Beginning with 50,784 spindles in 2004, KPR Mill currently has a total manufacturing capacity of around 212,064 spindles which produce 54,000MT (million tonnes) of yarn per annum. The company also has 205 circular knitting machines to produce 21,000MT of fabrics per annum and 63 million ``

(Rs)

100 90

Contrarian Call Introducing an occasional series on stocks that have been beaten down too much or are being ignored

sugar producer in the world, among the top manufacturers in India—the largest sugar market—and one of the largest sugar refiners across the globe. Based on the March 2011 quarter results, the company’s market-cap to revenue was 0.83 times and market-

80 70 60 50 May-10

Shree Renuka Sugars Nov-10

May-11

cap to operating profit was 7.64 times. The company’s return on net worth, annualised for the depressed March quarter net profit, was a low 7%. The stock is unusually depressed and should do well over the long term.

MONEYLIFE | 16 June 2011 | 38

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STOCKS STREET BEAT

` pieces of readymade knitted apparel

per annum along with dyeing facility to process 23MT of fabric per day. Quantum Knits Pvt Ltd is a wholly-owned subsidiary of the company. Quantum is its exclusive knitted garment manufacturing unit, knitting fashion trends for consumers across the world. Among the largest garment manufacturing facilities in India, Quantum has a capacity to produce 52 million pieces per annum in double shift. KPR has more than 1,000 regular domestic clients for yarn and fabric. Its international client list includes Carrefour, Kiabi (France), C&A (Germany), Ethel Austin (UK), Bandos (Switzerland) and Mothercare (UK). Among the company’s competitors are Alok Industries, Spentex Industries, Gokaldas Exports and Maxwell Industries. KPR Mill entered the capital market some time in August 2007. After three years, the stock is quoting slightly below its listed price. In May 2011, KPR Mill added 25 windmills with a combined capacity of 21.25MW (megawatts) to its current 40MW, lifting its wind power generation capacity to 61.25MW to support its compact spinning capacity expansion. The addition of 25 windmills would not only help the company meet its power requirements, but will also reduce its power costs significantly. For the financial year ended 31 March 2010, KPR Mill recorded a consolidated net profit of Rs50.43 crore compared to Rs10.10 crore in FY08-09. In the same period, the company’s

Unbiased & Methodical Stock Picking that Works!

consolidated net revenues rose to Rs803.20 crore from Rs718.17 crore. In FY09-10, the company’s consolidated earning per share (EPS) increased to Rs13.38 from

Sales* OP*

Jun-10 Sept-10

Dec-10

241.94

244.56

287.51

60.93

62.40

69.74

Y-o-Y Sales Growth

32%

28%

42%

Y-o-Y OP Growth

68%

104%

47%

OPM

25%

26%

24%

OP: Operating Profit, Y-o-Y: Year-on-Year, OPM: Operating Profit Margin *Figures in Rs crore

Chill Mill (Rs)

205

KPR Mill

195 185 175 165 155 145 Nov-10

Feb-11

May-11

Rs2.68 in FY08-09. The company’s consolidated net profit for the December 2010 quarter stood at Rs33.58 crore compared to Rs20.20 crore in the December quarter of 2009. Consolidated net revenues rose to Rs288.61 crore against Rs196.88

crore; its standalone EPS increased to Rs8.73 from Rs5.33 in the December 2009 quarter. The challenges faced by garment manufacturers like KPR Mill include fluctuations in cotton prices that affect the subsequent fall in cotton yarn prices which, in turn, put margins under pressure. In the third week of May, yarn prices declined to Rs225/kg from Rs280/ kg in April for the benchmark variety. The fall in prices was mainly due to higher yarn inventory pile-up and reduced exports. In the same period, cotton prices, too, have dropped to Rs42,000 per candy (356kg) from the peak of Rs62,000/candy in April. The reasons for the decline in yarn exports are the withdrawal of the duty drawback facility and DEPB (duty entitlement pass book) benefits on cotton yarn exports last year, as well as the imposition of a 10.3% excise duty on manufactured garments. This discouraged exports, as prices in international markets too have come down from their peak levels of February-March, squeezing export margins. Sagging demand for cotton yarn has forced mills to go for a production cut of 33.33% (1/3rd) of the existing daily production. Over the past five quarters, KPR Mill reported an average growth in revenues and operating profit of 26% and 106%, respectively. Its average operating margin is 23%. Its market-cap to revenues is 0.54, while its marketcap to operating profit is just 2.23 times. Consider buying the stock at the current market price.

Disclaimer: Street Beat stocks are selected from over 1300 stocks in the Moneylife database. This report is for informational purpose only. None of the stock information, data and company information presented herein constitutes a recommendation or a solicitation of any offer to buy or sell any securities. Information presented is general information that does not take into account your individual circumstances, financial situation or needs; nor does it present a personalised recommendation to you. Individual stocks presented may not be suitable for you. Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and the information may be incomplete or condensed. All opinions and estimates constitute our judgement as on the date of the report and are subject to change without notice. Past performance is no indication of future results. Investors must do their own research before acting on them. Exit Strategy: Please exit if the stock closes 20% below the purchase price. This is called stop loss. However, if the market price is above 50% of the purchase price, exit if the stock falls by 20%, below any day’s closing price. This is called stop profit. Data Source: Centre for Monitoring Indian Economy’s Prowess database.

39 | 16 June 2011 | MONEYLIFE

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STREET BEAT WHICH WAY

Debashis Basu

Traders’ Market

with Rs1,150, given the current headwinds. In March 2011, it was Rs1,050. For that kind of slow growth scenario, investors should be willing to pay not more There are no fundamental reasons to than 14 times the EPS which leads us to a Sensex level expect a sustained rally of 16,000. If the market goes below that, or if any event pushes it below 16,000, we would consider the market or the past four months, you would have noticed a ‘buy’ again. that our long-term call has been neutral. This The fact is that Indian stocks are still at a premium. means that we don’t think the market climate Let’s look at relative valuation. At the current level of supports putting more money into equities. Of course, 18,000, the Sensex is sporting a P/E of 15.6. The S&P there would always be individual stocks that would 500 of the US is around 1,300 now for an expected do well but the gust of favourable wind on the sails earnings of $100 for the Index in 2011 which yields a of the market, which was there since March 2009, has P/E of 13. That makes the US market inexpensive by its disappeared. The long-term timing model that we own historical levels. The two previous occasions when use had flashed negative in January 2011, remained the P/E of S&P 500 was as low as this were in 1990 and negative in February, turned positive in March and 1994 and stocks rose sharply. In fact, it is now possibly April has been negative again in May. even cheaper compared to those two occasions The headwinds, identified several times in because, back then, interest rates on US government this column, have been rising interest rates and bonds were 7%-8%. Today, decelerating earnings growth. government bonds yield 3%. Of course, there comes a time Why should Indian equities With interest rates ruling so low, when even with lower earnings be priced higher than stocks look even cheaper. growth, the market would look something like the S&P 500? Why should Indian undervalued. What is that point? Indian bonds are yielding equities be priced higher than Our Cover Story “Bull Doze” in 8.2%+ which makes something like the S&P 500? the previous issue threw light on equities look unattractive Indian bonds are yielding that—how to time your long-term 8.2%+ which makes equities buying. Here is the math. look unattractive. Investors The market always looks would have ignored that, if the growth ahead and discounts the future differential between India and earnings. (There are times US was huge. It is not. The when investors are in the grip S&P 500 is estimated to of irrational exuberance or deep deliver 13% growth in 2012 pessimism. At those times, they lose and Indian stocks are poised sight of what’s ahead.) But at calmer to deliver 10%. With interest rates high times—like the one we are in now—a and no momentum in earnings, why should Indian one-year earning per share (EPS) is a stocks be at a premium? Our conjecture is reliable estimate on which to pin value. that it will be a traders’ market for many The consensus Sensex EPS for March Medium-term: — months to come. 2012 is about Rs1,250. This consensus is Long-term: — (Feedback at editor@moneylife.in) probably wrong and we could end up

investment that is

not subject to market risks

Attractive gifts, invitation for events and free online help. For a subscription offer that is unique, look for a form elsewhere in this issue or on our website at www.moneylife.in

MONEYLIFE | 16 June 2011 | 40

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STOCKGRADER MOMENTUM

Corrosive Deals

45%

Compounded Annual Return

Dish TV gained 14% and Bank of India jumped 9%, while Orchid Chemicals plunged 7% Gainers: Dish TV India’s net loss of Rs37.05 crore in the quarter ended March 2011 was lower than the net loss of Rs60.58 crore in the quarter ended March 2010. Sales rose 42.80% to Rs432.04 crore in the reporting quarter against Rs302.54 crore during the quarter ended March 2010. Dish TV gained 14% in the fortnight. Japanese financial services company Orix Corporation is in talks with TPG Capital to buy the private equity firm’s holding of 20% in Shriram Transport Finance (STF), in a deal which could be valued at over Rs3,000 crore. STF soared 9%. Bank of India plans to raise funds through a share sale in the current fiscal. The Bank’s board approved a proposal to issue up to 18 crore equity shares either through a rights issue, follow-on public offer, qualified institutional placement or depository receipts. The stock jumped 9%. Titan Industries surged 5%, while HDFC Bank rose 2%. Mortgage lender HDFC (Housing Development Finance Corporation) rose 1%, whereas Hindalco Industries ended flat. Losers: Orchid Chemicals & Pharmaceuticals generated 32% growth in its consolidated revenues for FY10-11. The company has surpassed its annual sales growth guidance by 9%. It posted an operating profit of Rs419 crore against an operating loss of Rs156.50 crore in Company

RS Grade

Funda Grade

Final Grade

Entry Date

Dish TV India

06 Aug-10

Sadbhav Engineering

Titan Industries

FY09-10. The company has guided sales of approximately Rs2,250 crore (a 25% increase over the sales of FY10-11) and 24% operating profit margin for the current fiscal. The stock plunged 7%. The Serious Fraud Investigation Office (SFIO) has recommended prosecution of Sesa Goa on nine grounds, including over- and under-invoicing of exports/imports of over Rs1,000 crore. The SFIO recommendation comes after an investigation that lasted one-and-a-half years which found the iron-ore exporter over-invoicing import receipts of coking coal by Rs14.60 crore and also sales of iron-ore by Rs42.51 crore, while under-invoicing exports by Rs1,002 crore. Sesa Goa tumbled 5%. India has put off further exports of sugar until it assesses the harvest next season as the country uses its stock from the biggest surplus in the last three years to build its inventories. PTC India nosedived 10%, while Shree Renuka Sugars fell by 5%. Sintex Industries declined 1%. Changes: We are replacing PTC India with Educomp Solutions. Note: Please read our changed methodology for grading stocks (given below). We have also added a column showing returns since the stock’s appearance in the table. Returns from new stocks added are counted after one issue.

Return*

Company

RS Grade

Funda Grade

Final Grade

Entry Date

55%

Sesa Goa

21 Jan-11

28 Apr-11

-2%

GSK Consumer

29 Apr-09

170%

16 Apr-10

103%

Bank of Baroda

29 Apr-09

157%

Sintex Industries

01 Apr-11

13%

HDFC Bank

04 Mar-11

Cadila Healthcare

12 Nov-10

14%

Fed-Mogul Goetze

28 Apr-11

Federal Bank

13 May-11

Oracle Financial Serv

23 Dec-10

-4%

Educomp Solutions

27 May-11

—

Orchid Chemicals

28 Apr-11

Return* -16%

M&M

28 Apr-11

-9%

Bhushan Steel

28 Apr-11

-14%

HDFC

15 May-09

69%

Hindalco Industries

23 Jul-10

25%

Bank of India

21 Jan-11

-6%

Shriram Transport

18 Feb-11

-7%

Shree Renuka Sugars

06 Aug-10

-13%

EID-Parry (India)

12 Nov-10

-20%

-9%

*Non-annualised

Methodology: Momentum Stockgrader is a fortnightly ranking of stocks, based on two key factors that drive stocks—one, market-related or quantitative and, two, fundamental. The quantitative factor is the relative strength (RS), which is a stock’s relative outperformance during the past 10 weeks over select companies. For arriving at fundamental grades, we have used only operating profit growth and sales growth over three quarters. For momentum stocks, RS carries a higher weightage. Focus only on stocks with final grade A. When we include a stock in the grader, it is based on the fortnightly closing price of the scrip that coincides with our issue and that would be the entry price. Similarly, when we drop a stock from the grader, it is based on the closing price on Friday, as we go to print.

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STOCKGRADER MEDIUM TERM

Frost Bite

45%

Compounded Annual Return

Shriram Transport Finance jumped 12%, while CMC tumbled 17% and Whirlpool fell by 8% Gainers: Shriram Transport Finance Company (STFC), Titan Industries and Dabur India have been included in the MSCI India Index with effect from 31st May, among other stocks. STFC jumped 12% while Titan Industries climbed 6% in the fortnight. Dabur will invest up to Rs200 crore this fiscal to expand operations which will include setting up of three new factories— one each in South Africa, Kenya and Sri Lanka—by next year. Dabur gained 10%. Tata Consultancy Services rose 1%, while Ranbaxy Laboratories rose 3%. Losers: Life Insurance Corporation of India (LIC) has issued a notification awarding a contract to CMC for the implementation of its LIC-Aadhaar project. CMC tumbled 17%. Unichem Laboratories has recommended a final dividend of Rs2.80 (140%) per equity share of Rs2 each, for the year ended 31 March 2011. Unichem’s March 2011 quarter sales growth was 2%; operating profit fell by 43%. The stock skidded Company

RS Grade

Funda Grade

Final Grade

Entry Date

Return* 159%

14%. Whirlpool of India expects revenue growth of around 20% for FY11-12. It expects that the growth will be in terms of value, as volume growth appears to be under pressure. The surge in input costs and successive interest rate hikes are expected to affect demand. The company has also launched a new range of ‘Protton World’ refrigerators in the frost-free segment. The stock fell 8%. Changes: We are replacing Axis Bank, Bank of Baroda, Dr Reddy’s, Hindalco Industries, Jain Irrigation, Punjab National Bank, Shree Renuka Sugars and STFC with Linc Pen & Plastics, Munjal Auto, SEL Manufacturing, Vivimed Labs, Kajaria Ceramics, Orient Paper, Time Technoplast and Supreme Industries. Note: Please read our changed methodology for grading stocks (given below). We have also added a column showing returns since the stock’s appearance in the table. Returns from new stocks added are counted after one issue.

Company

RS Grade

Funda Grade

Final Grade

Entry Date

Return*

Petronet LNG

29 Apr-09

Dabur India

01 Apr-10

38%

Kajaria Ceramics

26 May-11

—

Seshasayee Paper

01 Apr-10

33%

Munjal Auto

26 May-11

—

Linc Pen & Plastics

26 May-11

—

Suprajit Engineering

11 Nov-10

-11%

Orient Paper & Inds

26 May-11

—

Lupin

29 Apr-09

208%

United Phosphorus

12 May-11

-1%

Titan Industries

01 Apr-10

126%

Ipca Laboratories

20 Jan-11

-3%

HDFC Bank

29 Apr-09

106%

Oracle Financial Serv

23 Dec-10

-4%

Sun Pharmaceutical

29 Apr-09

78%

CMC

23 Dec-10

-14%

TCS

10 Jun-10

51%

Amara Raja Ba eries

28 Apr-11

11%

Supreme Petrochem

27 May-10

39%

Cadila Healthcare

20 Jan-11

Siemens

27 May-10

23%

Ranbaxy Laboratories

20 Jan-11

-10%

Supreme Industries

26 May-11

—

SEL Manufacturing

26 May-11

Time Technoplast

26 May-11

—

Orchid Chemicals

20 Jan-11

—

— -13%

Vivimed Labs

26 May-11

Bajaj Auto

03 Feb-11

HCL Technologies

29 Apr-09

284%

HDFC

29 Apr-09

86%

Nestlé India

29 Apr-09

131%

Whirlpool of India

11 Nov-10

-28%

CRISIL

29 Apr-09

124%

Unichem Laboratories

29 Apr-09

-3%

*Non-annualised

Methodology: Medium Term Stockgrader is a fortnightly ranking of stocks, based on two key factors that drive stocks – one, market-related or quantitative and, two, fundamental. The quantitative factor is the relative strength (RS), which is a stock’s relative outperformance during the past 26 weeks over select companies. Our grading methodology of fundamental factors includes two key scores, growth score (GS) and value score (VS), carrying equal weightage. We then combine the RS grade and fundamental grades. Focus only on stocks with final grade A. When we include a stock in the grader, it is based on the fortnightly closing price of the scrip that coincides with our issue and that would be the entry price. Similarly, when we drop a stock from the grader, it is based on the closing price on Friday, as we go to print.

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STOCKGRADER LONG TERM

Rich Colour

46%

Compounded Annual Return

Asian Paints surged 8% and TCS gained 1%, whereas Jain Irrigation tumbled 14% and Power Grid fell by 6% Gainers: Asian Paints is building new capacities and has planned a capex of Rs900 crore for the current fiscal, higher than the Rs150 crore capex of the previous fiscal. The stock rose by 8% during the fortnight. IT company Tata Consultancy Services (TCS) is entering the markets of Russia, Ukraine and Belarus. TCS has signed a partnership agreement with the Russian integrator Universal KUBE. The partners’ first client was Binbank which introduced Tata’s automated system. The stock rose by 1%. Losers: Jalgaon-based Jain Irrigation Systems’ (JISL) proposed non-banking financial company (NBFC) will be operational by September. The NBFC will fund farmers’ purchase of JISL’s products. The stock tumbled 14%. In May, Adani Enterprises said that it had agreed to buy Abbot Point Coal Terminal in Australia for $2 billion. The deal, which would be funded by debt, has Standard Chartered as the arranger.

The stock fell by 5%. Power Grid Corporation of India will invest about Rs18,500 crore in the year ending March 2012 to add to the electricity-hungry country’s transmission capacity. Power Grid has cut its capex target in year ended March 2011 by 8% to Rs11,900 crore as Indian power projects are delayed awaiting environmental clearances and coal allocation. The stock fell by 6%. Changes: We are replacing Bank of Baroda, Dr Reddy’s, Canara Bank, Axis Bank, Jain Irrigation, Shree Renuka Sugars with Shoppers Stop, Berger Paints, Emami, Marico, Petronet LNG and Godrej Consumer Products. Note: Please read our changed methodology for grading stocks (given below). We have also added a column showing returns since the stock’s appearance in the table. Returns from new stocks added are counted after one issue.

Company

RS Grade

Funda Grade

Final Grade

Entry Date

Ador Fontech

29 Apr-09

566%

Titan Industries

03 Feb-11

18%

Emami

26 May-11

—

Lupin

29 Apr-09

208%

Hindustan Unilever

25 Nov-10

Nestlé India

29 Apr-09

131%

Orchid Chemicals

25 Nov-10

-9%

Asian Paints

27 May-10

42%

Ranbaxy Laboratories

20 Jan-11

-10%

Castrol India

28 Apr-11

CMC

23 Dec-10

-14%

Berger Paints India

26 May-11

—

Karur Vysya Bank

10 Jun-10

-22%

Return*

Company

RS Grade

Funda Grade

Final Grade

Entry Date

Cairn India

29 Apr-09

85%

Return*

ITC

27 May-10

36%

Cadila Healthcare

20 Jan-11

Petronet LNG

26 May-11

—

Adani Enterprises

29 Apr-09

187%

Shoppers Stop

26 May-11

—

GSK Pharmaceuticals

29 Apr-09

98% 78%

Marico

26 May-11

—

Sun Pharmaceutical

29 Apr-09

Godrej Consumer

26 May-11

—

Ambuja Cements

19 Aug-10

11%

Cummins India

12 May-11

-3%

SRF

27 May-10

36%

Ipca Laboratories

20 Jan-11

-3%

Bajaj Auto

03 Feb-11

TCS

29 Apr-09

264%

M&M

28 Apr-11

-11%

CRISIL

29 Apr-09

124%

HDFC

01 Apr-10

16%

HDFC Bank

29 Apr-09

106%

Power Grid Corp

03 Feb-11

-3%

*Non-annualised

Methodology: Long Term Stockgrader is a fortnightly ranking of stocks, based on two key factors that drive stocks: one, market-related or quantitative and, two, fundamental. The quantitative factor is the relative strength (RS), which is a stock’s relative outperformance during the past 26 weeks over select companies. The fundamental factor includes growth score (GS) and value score (VS). GS is based on operating profit growth and sales growth. VS is calculated considering market-cap as a multiple of five quarters of average sales and operating profit, as well as latest Return on Net Worth (RoNW). The long-term list carries more large-cap stocks. Focus only on stocks with final grade A. When we include a stock in the grader, it is based on the fortnightly closing price of the scrip that coincides with our issue and that would be the entry price. Similarly, when we drop a stock from the grader, it is based on the closing price on Friday, as we go to print.

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“You Can’t Time the Market.” Maybe.

21,100

18-31 Jan ‘08

12-25 Oct ‘07

It is easy to describe market moves. It is hard to predict them which is why fund managers tell you that you “The huge over-speculation... cannot time the market. You will get vivid descriptions should now lead to some painful correction...” of the past everyday from business channels and the 6 -19 Jun ‘08 next day from newspapers. You will get sensible and “Time for a Break?” occasional predictions from only one source. You know 2-16 Aug ‘07 what’s more valuable 9-22 Nov ‘07

17-31 Jul ‘08

15 Feb-1 Mar ‘07

17,325

“Time to Go Neutral” “The market may correct “We don’t have a forecast” 10%-15% before the next move up” “If the government moves to slay the monster of inflation, stocks will suffer collateral damage”

23 Apr-7 May ‘06

“A new downleg may start soon”

28 Mar-10 Apr ‘08 31 Aug-13 Sept ‘07

13,550

“Is the market due for a fall?”

2-15 J

“A short-term bottom may be very near”

16-29 Mar ‘07

“A Rally Now?”

“Weakness h 4-17 August ‘06

“The panic looks done for now”

9,775

Sensex “Might the markets be ready to surprise us on the upside?” “Expect another leg of stock market rally”

6,000 Apr-06

Jul-07

Nov-08

We have no compulsion to issue breathless market calls like TV channels or brokers, who make money by getting you to trade frequently. We are a fortnightly magazine. But we don’t issue market calls every fortnight. Moneylife market calls are infrequent. But they have been reasonably accurate so far. But, of course, the past is no guide to the future.

Sensex.indd 2

5/27/2011 9:06:40 PM

13-26 Aug'10 18-31 Dec‘09

23 Apr-6 May'10

The Coming Decline

Short-term Top?

4-17 Dec‘09

Time To Sell? 19 Jun-2 July ‘09

Headed Down?

“Is the market about to crack?”

6 Nov-19 Nov ‘09

11-25 March '10

31 July-13 Aug ‘09

“We have no Forecast”

A Buyers' Market

2-15 Jan ‘09

“Buy the dip”

27 Feb-12 Mar ‘09

eakness has resurfaced” “A Breakdown?”

30 Jan-12 Feb ‘09

“A weak rally now”

Nov-08

13-26 Mar ‘09

“Another weak rally”

Feb-10

May-11

Moneylife Stock Analysis

KNOW WHAT’S COMING

Sensex.indd 3

5/27/2011 9:07:58 PM

Insurance Trends New products, regulations, features and options, interpreted from your perspective ULIP

Dhan Suraksha Express: Short Duration A term of just 10 years

tar Union Dai-ichi has launched Dhan Suraksha Express ULIP (unit-linked insurance plan) with policy term of 10 years. The tenure is certainly low from the insurance point of view, but death benefit of fund value plus sum assured is good. The mortality charges are also among the lowest. The minimum ticket size is Rs15,000 pa which is affordable for the average middleclass customer. The investment options have been kept simple. The growth option has 40% to 100% in equity while the balanced option has 0% to 60% in equity. The plan comes with optional riders like accidental death, total and permanent disability benefit and critical illness benefit. Premium allocation charge and policy administration charge is in line with other ULIPs which means they are not low over the period of five years or more. The minimum sum assured is 10 times the annual premium for less than 45 years of age; it is seven times the annual premium for others. The maximum sum assured is 15 times the annual premium

for age less than 45; 12 times the annual premium for age 45-50 and only seven times the annual premium for age above 50.

PE NSION ULIP

IDBI Federal Retiresurance: Target Unclear Conservative investors will still prefer bank FDs

DBI Federal Retiresurance Milestone Pension Plan is a single-premium pension ULIP. Only Life Insurance Corporation of India has come out with a regular premium pension ULIP after the 1 September 2010, ULIP changes by Insurance Regulatory and Development Authority (IRDA). All other pension ULIP products offered today are single-premium which helps insurers to be on the safer side for guaranteeing 3% to 6% returns per annum. If this product had been launched last year, it may have got some response. In the current high interest rate scenario, it is unlikely to evoke interest. The minimum premium is a hefty Rs1 lakh. The premium allocation charges (0.50%pa) and policy administration charges (0.1% p.m. for five years and Rs60 p.m. thereafter) are on the lower side.

These charges are zero for premium of Rs25 lakh and above. There will be fund management charge of 1.25%pa and investment guarantee charge of 0.25%pa. One of the investment options of the product is 0%-10% exposure to equities and equitylinked instruments, but it also means that the company will take a conservative approach to be able to offer guaranteed returns. IDBI Federal recently launched a traditional pension plan called Retiresurance Guaranteed Pension Plan which may give better returns than the pension ULIP. If a customer chooses a 25-year term, the current rate for 25-year government securities (8.6%) will be guaranteed for the company’s traditional pension plan. IRDA will come up with changes to pension ULIP regulations soon. This is because pension ULIPs are not selling. The customer will be better off waiting for the future regulatory changes.

ONLINE TERM

Aviva i-Life: The Cheapest Is it sustainable?

viva Life Insurance launched i-Life online term plan with 20% lower premium than its next competitor. It boasts a Rs1-crore life cover at less than Rs22 per day. Is it a gimmick, considering that online term life insurance premium is already at rock bottom? It has a minimum cover for Rs25 lakh with no upper limit and a maximum term of 35 years. Aviva Life’s i-Life online term plan is available only in 33 cities to restrict the target segment. It has an accidental death benefit rider where an additional sum equal to the sum assured is payable in case of accidental death.

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PERSONAL BUSINESS AUTO

THE BEEMER Our politicians would rather step into this wagon

LUX URY CA R S

BUT ARRIVED!

ts brilliance in design and understated elegance was never displayed better than when Suresh Kalmadi strode into the brand new CBI (Central Bureau of Investigation) headquarters in an Audi A8 Stretch limo to the full glare of every television channel in the country. The quality and precision of workmanship in this all-aluminium luxury car probably ranks amongst the best in the automobile world. But, when you probe deeper, the one question that emerges is this: How does anyone get hold of such an expensive car, if all s/he was doing for the past few decades was service to the nation as a senior political leader? Mamata Banerjee, who has just won West Bengal, has been around as long—but she still moves around in an old Zen.

Reporting or writing on this subject is very upsetting to the takers and the givers, which also includes those who would manufacture and trade in these sorts of luxury cars, and does not work very well in the established media. And it was a grand conspiracy of silence too, until the Internet came and shook things up, giving people like me the freedom to write, be published and most importantly—be read. Globally. Pretty much everybody being hauled up for corruption, lately, is getting there in a luxury car. From, as they say, ‘a particular country’. So, not just pollution, but why is it that certain brands of luxury cars, usually German, are so visibly and inextricably linked with global corruption in newly

The crooked and the famous manage to squeeze in and out of their luxury limos while we still have barefoot managers, finds Veeresh Malik wealthy countries? Therein lies the story of ‘WaBenzies’, a term now finding favour in India also, as in: “Oh, look, there’s another WaBenzi heading for Vijay Chowk for a day of Zero Hour walk-outs in the Big Round House.” I first learnt about WaBenzies in the early 1980s, in Iran (postRevolution), when a group of new-age Iranian diplomats sat and explained the direct link between oil wealth and expenditure on expensive cars, preferably German, by the now-decimated Iranian WaBenzies, while a complete shipment of brand new imported BMW cars which we had brought on our ship rotted on the jetty in Khorramshahr. The new regime had decided that they did not know what to do with them right away, but was quietly taking them ``

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PERSONAL BUSINESS AUTO

` away for future usage anyway. Big

expensive German cars, I was told, were considered okay—because they did not have the ‘colonial’ and ‘imperial’ taint that so many of the British brands like Rolls-Royce, Bentley, Jaguar and Aston Martin had. Italian cars were unreliable; the French made fast but uncomfortable cars; the Koreans had not landed as yet; and Japan was still famous for small cars and smaller bikes. American luxury cars, according to a nation about to get rid of most consumer products made by ‘The Great Shaitan’, were simply rubbish. Going back further into history—Mercedes launched, most

NEW HYU N DAI VER N A

famously, the stretch ‘Pullman’ 6-door version of its 6.3-litre V-8engined ‘600’ limo in the 1960s. Yes, the Indian government picked one up too, before it was found to be too ostentatious for the President, and it was then sold off through STC (State Trading Corporation), to find its way to a garage in Pune. One unconfirmed rumour had it that a few years after it had been bought, some amazing high-tech for those days—bugging devices—had been found inside it which is why the powers-that-be in India went back to Ambassador cars built and then re-built from the ground upwards in front of them. (The preferred imported

WHEELER- DEALERS Why do they prefer Bentleys?

brand in the Rashtrapati Bhavan garages, currently, is BMW, mainly for when foreign visitors are in town; otherwise, it is usually locallymade Ambassadors and Tata Safaris. Very pragmatic—even the jammers can be seen mounted on these domestic brands). ``

Maruti D’Zire/Tata Indigo range to over Rs15 lakh for the Toyota Corolla Altis/Honda Civic range. In terms of what these cars do for you, the experience is almost the same, and on being shut comes straight from this too is narrowing down every the movies, and there is an afterday—barring external size and boot sales and service network in India space. which is fast catching up with that Engine size, effective delivered of leader Maruti’s. What is it going power, resale value, and most to do to the car market, currently going through a bit of a slump, offset of all—interior comfort and trim levels—are also almost the same, at the same time by a slowdown in regardless of whether the original components and sub-assemblies cost was Rs6 lakh or Rs16 lakh. from Japan? In the middle of all this, Hyundai Here’s a prediction—the range in prices for cars of about the same size has plunked its Verna at prices ranging from Rs7 lakh through till is now from around Rs6 lakh Rs10 lakh or so, depending on for the engine, trim levels and other parameters. Is this a smart move, and will this car compete with the costlier cars of around the same size, while giving an aspirational edge to those who have bought cheaper cars of about the same size too? Go to a showroom, take a look, and let us know what you think. The money, on this one, is on Hyundai’s Verna.

The Money’s on This One

he other automobile launch of the fortnight has to be the new Hyundai Verna which has finally made it to India a year or so after it was launched elsewhere in the world. It is, by all means, a fantastic car—which is certainly going to give the other contenders in its range a major inferiority complex, as well as a run for their money. With lines that are, to put it mildly, very striking and handsome. And sporting interiors that look as though they came from a car costing at least twice as much. But most of all, with a range of engines in petrol and diesel which are absolutely stateof- the-art, providing all the technological brilliance that was associated with other costlier manufactures. The car sounds great, the solid ‘click’ the doors make

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PERSONAL BUSINESS AUTO

But that was when India was still a socialist country. Before we got our Indian WaBenzies. The original WaBenzis did much better. Their preferred wheels nowadays are, for example, the long-wheelbase Mercedes-Benz S600L, usually kitted out with a 7.3-litre V-12 multi-turbo engine. About seven metres long, its basic price is around $150,000—but extras are usually around thrice that. Again, fitting out is extra, for example, to ‘B7’ standards, capable of withstanding armoured attack k by AK-47s, grenades, landmines—even ven more if anti-bacterial and antichemical protection is sought. Robert Mugabe has a few. They are also fitted with a CD player, movies, the Internet and anti-bugging devices. At five tonnes, they do about 2km/l. And d have to be followed by a tanker truck for refuelling. All over Africa, ica especially in countries where there is a lot of oil, mineral, diamond or other wealth—you see fleets and fleets of huge expensive German cars. Idi Amin had three Pullmans. Zaire’s Mobutu had a few dozen and kept six especially for his lake-house holiday home, Master Sergeant Samuel Doe of Liberia had 60. The list goes on, but yes, for a Continent divided into over 50 countries on the basis of colonial and imperial ‘ownership’, that was a lot of German cars. As the managing director of one of these companies in India explained it to me once, after a

• The term originated in Kenya, but spread all over Africa • Our WaBenzies are politicians and VVIPs • Their vehicles of choice are top- end German makes

schnapps too many, many these luxury cars and their dealerships played a multiple role. They got them very close to those in power. In many cases, these cars were reportedly bugged, so they helped people get information for other business activities from Germany. And most of all, they set benchmarks for corruption, as the wealthier the country became—the more the WaBenzies spent on expensive cars.

While the rest of the country went bananas. Thus—‘banana republic’, where there are a lot of WaBenzies! To understand this some more, you have to realise that the term ‘WaBenzi’ which originated from the Kenyan part of Africa but spread to the rest of the Continent like bushfire, has become an accepted title. Essentially a Swahili term for ‘Big Men of Africa’, the reference in the middle pertains to the visible habits of their leaders and politicians in buying bigger and heavier cars, of h a particular brand. Here, in India, too, we are now getting a new class cla of WaBenzies. Of course— they also have the option of Porsche, Audi, BMW, A Aston Martin, Martin JLR (Jaguar Land Rover), L Maserati and M other othe luxury brands—though the Japanese Lexus is still running shy of entering India. And never mind the order book, the three German manufacturers now even have a new patron Saint in India, the biggest WaBenzi of them all, our very own minister for heavy industries, Praful Patel, Esq. At a recent function in Delhi he actually launched a new model of a BMW car.

Veeresh Malik started and sold a couple of companies, is now back to his first love—writing. He is also involved actively in helping small and midsize family-run businesses re-invent themselves.

What’s Your Bahana for Not Subscribing? I I I I I I

Auto New.indd 4

am not interested in honest & insightful advice on money matters never have any problems with banks, credit-cards or insurance always invest on the basis of tips from friends and brokers prefer to keep my money in a bank and let it be eroded by inflation would rather spend two year’s of knowledge on one evening of eating out always buy from the newsstands

For subscription offers that are a steal, look for a form elsewhere in this issue or our website at www.moneylife.in

5/23/2011 6:34:44 PM

POWER OF ONE SUMAIRA ABDULALI

NOISE POLLUTION

Noise, Not OK Please Sumaira Abdulali recounts her fight against noise pollution

n most countries, noise is recognised as a health hazard and efforts are made to keep it within limits. And, according to recent Central Pollution Control Board data, Mumbai is the noisiest city in the world. So, to bring it down is going to be a long battle because the awareness level about noise pollution in India is abysmal. I began my campaign against noise pollution in 2002, with a public interest litigation (PIL) against an amendment to the Noise Pollution (Regulation and Control) Rules, 2000—allowing noisy loudspeakers to continue until midnight. The PIL was inspired and guided by my uncle, Saad Ali, who had been working for several years for effective legislation against noise pollution along with Dr Yeshwant Oke and Dr Prabhakar Rao. Thanks to their combined effort the noise rules were first notified in 2000, but there was no enforcement mechanism or awareness among authorities or citizens on the need to enforce them. Since I had no experience with legal intervention, I began hesitantly with my uncle’s guidance, but soon realised that a PIL can be a very powerful tool, when used along with the Right to Information (RTI) Act, citizens’ campaigns, awareness and advocacy with government. In 2003, we had our first breakthrough by way of a court order to enforce ‘Silence Zones’, and to compel the police to set up a dedicated telephone number to receive citizens’ complaints. Although this empowered people to complain about noise, it didn’t really help. In the next few years, I realised that without

dedicated guidance, citizens would soon lose their fight against noise pollution. I then realised that it was time to set up an NGO to take up noise related issues in a more systematic manner, to partner with other NGOs and also conduct awareness programmes in schools and colleges. Awaaz Foundation, thus, came into existence. Once this happened, I also began to record area-wise noise levels to create the first database on environmental noise in the country. A little later, state-level pollution control boards (PCBs) have also started recording environmental noise. These days, Mumbai leads the war against noise in India. Unfortunately, it is still an uphill task to get politicians and law-enforcing authorities to recognise the ill-effects of allowing a free rein to a few raucous people. My goal is to work towards uniform enforcement of noise rules so that the majority of citizens, who enjoy peace and quiet (and are guaranteed this under Constitutional law) are able to enjoy these rights without being deafened by excessively noisy firecrackers or loudspeakers which are part of our social gatherings and ‘enjoyment’. Unfortunately, one person’s enjoyment may have serious effects on a large number of others, including death. Traffic and untrained drivers who honk unnecessarily even in residential areas or Silence Zones are a continuous source of noise. Often, people deliberately fit vehicles with horns that are beyond safe decibel levels; auto-rickshaws tamper with silencers to ``

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POWER OF ONE SUMAIRA ABDULALI

software uses data like population density and traffic patterns and road widths to predict existing and future do it for a lark. It is the job of the regional transport noise levels across the city. It can predict noise levels office (RTO) to ensure that drivers learn basic traffic when changes are made to existing land use such as discipline before getting a licence and to make sure that adding a flyover or a heliport and also predict the vehicles have functional silencers and do not use highnumber of people who would be affected. Awaaz decibel/multi-tone horns such as reverse horns (which Foundation, which has been recording noise levels in are triggered while backing up). But, as we all know, Mumbai since 2003, recommended noise-mapping of this rarely happens. Mumbai to the government of Maharashtra in 2006. In Although Awaaz Foundation’s PIL on traffic noise response, the government has conducted a pilot study is still pending in the Bombay High Court, there have near Sahar Airport, the first step towards creating a been other successes. We held the first ‘No Horn Day’ noise map. It should be speeded up—noise in our cities along with the Mumbai Traffic Police in 2008; this has is galloping out of control. been replicated in several other cities. Maharashtra Controlling noise in Mumbai without a noise map has also amended the development control rules (after is comparable to controlling land our PIL) to make noise barriers a use without a map. The MMRDA mandatory part of new flyovers (Mumbai Metropolitan Region in Mumbai. Last year, the union Development Authority) is revising ministry of environment and forests Mumbai’s development control (MoEF) also accepted all our (DC) plan in 2013 and this would recommendations and amended be an ideal time to integrate a noise the noise pollution rules to make map into the new DC plan. Noisethem more stringent. They now mapping has the potential to be cover traffic and construction noise replicated in other Indian cities and for the first time. The MoEF set become a useful planning tool in up a National Noise Monitoring the rapid growth of metropolitan Network which will initially record areas. New infrastructure projects noise levels at fixed locations in should have noise reduction as an seven cities across India. While these The draft integral part of the plan, during the are good beginnings, they are not Firecracker Rules of construction phase and final use, enough on their own. including realignment of proposed Noise-mapping is the preferred the Mumbai Police new road and rail projects, if method to inform governments and (submitted to the necessary. New airports should citizens about existing and projected Bombay High Court be planned in accordance with noise levels in the EU (European in 2009) should be noise parameters, including zoning Union) cities. The ‘Noise Mapping notified immediately restrictions. Additional sources England’ project is complete in many of noise (such as helipads atop, cities of the UK including London Sumaira Abdulali or in close vicinity to, residential and is carried out by Defra (the Anti-noise Activist buildings) should not be permitted department for environment, food in already noisy areas. The draft and rural affairs) using LIMA, a Firecracker Rules of the Mumbai Police (submitted noise-mapping software. (Visit http://services.defra.gov. to the Bombay High Court in 2009) should be uk/wps/portal/noise for more details.) notified immediately. The government should organise Indian cities can benefit from noise-mapping as they community Diwali celebrations and gradually phase out are among the noisiest in the world and inadequate private use of firecrackers (apart from a few crackers data is a severe impediment to noise reduction. Current which are less polluting and safe for use). Noisy and data, including that generated by the National Noise dangerous crackers on public roads and in private Monitoring Network, PCBs (pollution control boards) residential societies should not be permitted. and non-government organisations, are physically The noise-mapping study should be carried out monitored and represent specific times and locations. immediately and its recommendations integrated into They have a limited capacity to predict future noise the new DC plan of Mumbai and, subsequently, in levels and integrate noise into city-planning measures other Indian cities. and/or long-term noise-reduction measures. The LIMA

` get a slightly better fuel efficiency and motorcyclists

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BOOKS

Passive Investing Wins. OK? The Quest for Alpha has collected the best array of evidence in favour of passive investing

here are dozens of books on the superiority of passive investing or buying index funds (that simply buy and hold stocks of an underlying index at a low cost for the long term). A few months ago, I had promised to review one that is completely different from others. Here it is. The uniqueness of The Quest for Alpha by Larry Swedroe is that it collates the conclusions of dozens of studies and comments of money managers and analysts to highlight how every kind of professional money management— mutual funds, hedge funds, pensions funds and private equity (including venture capital, buyouts and mezzanine financing)—leads to results that are poorer than market indices. This is a breakthrough approach and worth paying attention to. I am highlighting just one study under each category. Swedroe refers to several studies across different time periods. Mutual Funds: In a 2002 study, Mark Carhart and three colleagues analysed the performance of 2,071 equity funds for the period 19621995. They found that the average actively managed fund underperformed its appropriate passive benchmark on a pretax basis by about 1.8% per THE QUEST annum. This study built on FOR ALPHA the work of an earlier Carhart LARRY E SWEDROE paper, “On Persistence in Bloomberg Press Mutual Fund Performance.” Pages 190; $27.95 The study concluded that: • Past performance of active managers is a poor predictor of their future performance. • Expenses reduce returns on a one-for-one basis and explain much of the persistent long-term underperformance of mutual funds. • Turnover reduces pre-tax returns by almost 1% of the value of the trade. Carhart’s Conclusion: “While the popular press will no doubt continue to glamorise the best-performing mutual-fund managers, the mundane explanations of strategy (asset-class allocation, not individual stock selection) and investment costs account for almost all of the important predictability in mutual fund returns.”

Pension Funds: “The Performance of US Pension Plans” (2007) covered 716 defined benefit plans (1992-2004) and 238 defined contribution plans (1997-2004). The authors found that returns relative to benchmarks were close to zero. They also found there was no persistence in pension plan performance—the same outcome we saw with mutual funds. Also, neither fund size, nor company stock holdings were factors that drove performance. It was not that large pension plans are handicapped by size. Small plans did no better. Importantly, the authors concluded: “We show striking similarities in net performance patterns over time, which makes skill differences highly unlikely.”

Perhaps the most asked question I receive about market efficiency and passive investing goes something like this: “But how do you explain Warren Buffett?” The answer is simple. I tell them if, when they look in the mirror, they see Warren Buffett, go ahead and seek the Holy Grail of alpha. If they don’t, give up the quest and play the winner’s game Hedge Funds: The 1999 study, “Offshore Hedge Funds: Survival and Performance 1989-95” by Stephen J Brown, William N Goetzmann and Roger G Ibbotson, found that most of the funds had underperformed the S&P 500 Index. There was no evidence of a persistent ability of managers of a particular kind to earn returns in excess of their benchmark. An article in Forbes by columnist David Dreman presented a performance index of 2,600 hedge funds (1,500 domestic and 1,100 international) for the period from January 1993 to October 1998. After subtracting fees, the average annualised return of the hedge funds was 13.4%, trailing the 19.9% return of S&P 500 by 6.5%. The 2006 study, “The A, B, Cs of Hedge Funds: Alphas, Betas and Costs” by Roger G Ibbotson and Peng Chen of Ibbotson Associates, covering the period from January 1995 through March 2006, found that the average hedge fund had returned 9% per year, lagging ``

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BOOKS

` S&P 500 by 2.6% per year. This study includes the

bear market of 2000-2002 (market circumstances under which hedge funds are supposed to perform best). Private Equity: According to Venture Economics (which provides research, information and analysis on the venture capital and private equity industry), private equity (overall) returned 13.8% for the 20-year period ending 30 June 2005, outperforming S&P 500 by 2.6% per annum. However, venture capital investments are riskier than investing in S&P 500 and can be better compared to something similar such as small-cap value stocks. While private equity outperformed S&P 500, it underperformed the 16% return of small-cap stocks. The returns of three sub-sectors of the private equity market—venture capital, leveraged buyouts (LBOs) and mezzanine financing—tell the same story. LBOs involve acquiring business using mostly debt and a small amount of equity, with debt being secured by the assets of the business. Mezzanine financing is late-stage venture capital investment, usually the final round of financing prior to an initial public offering (IPO). As later stage investment, mezzanine financing is less risky. Thus, capital provided in mezzanine financing is, typically, less costly than earlier-stage investments. On the whole, venture capital (the riskiest of private equity investments) just matched the 16% return of small-cap value stocks. Because of its higher risk, early-stage venture capital (also known as seed capital) provided the highest return—20.2%. Laterstage venture capital underperformed the returns of small-cap public equities, returning 13.8%. LBOs also returned 13.8%, and mezzanine financing returned just 9.1%. “Private Equity Performance: Returns, Persistence and Capital Flows,” a paper authored by Steve Kaplan and Antoinette Schoar, analysed private equity funds launched between 1980 and 1997. Although the data covered the period ending in 2001, the authors found that the average private equity fund had, net of fees, returns roughly equal to the return of S&P 500. Many more studies on active indexing and quotes from practitioners abound in the book; all of these lead to the incontrovertible conclusion that actively managing money has been tough for the average fund manager. One cannot but agree with what Warren Buffet (the best of active investors) said in 2009: “So many investors, brokers and money managers hate to admit it, but the best place for the average retail investor to put his or her money is in Index Funds.” — Debashis Basu

Build Your Nest Egg Will you have enough after you retire?

ardly anyone plans for retirement systematically. It takes time and skill—unfortunately, finance is a subject that does not interest most. But the rare few, who do plan even 15 years before retirement, manage to do very well. This book shows how to do it. In the early part, the author emphasises assessing the size of the corpus available and needed for the retirement period and planning early. Madhu Sinha suggests long-term investment planning and reducing taxes in the early years of financial planning. Compounding as a means to multiply money is the primary thrust in the early years. Subsequently, she explores the investment avenues available—from small savings schemes of the government to mutual funds to direct equity exposure. Financial planning, specifically for retirement, forms the fourth and the most important chapter, on the investment of the retirement corpus. The author says that asset allocation—dividing your portfolio mainly into debt and equity—is the key to success in retirement planning. She recommends a diversified approach and explains the importance of equity in retirement investing. Once the person is older, she should be risk-averse RETIREMENT and move away from equity PLANNING to monthly income plans and MADHU SINHA systematic withdrawal plans (on McGraw-Hill equity-based investments). Sinha Pages 202; Rs325 also discusses reverse mortgage as a viable option of retaining residential property for your sunset years while getting regular income from the same property. If you don't have such a house, regular annuities and pension plans are recommended. The book is exhaustive and the author has assumed a low level of financial literacy on the part of the reader. The examples and case studies compare favourably with the retirement calculators available on the Internet—free of cost. Seasoned investors are introduced to financial calculators and the use of Microsoft Excel on a computer. Case studies are extensive, although some have minor computational errors. This book is for financial planners, but will be useful for all individuals wanting to plan their long-term investments well. — N Madhavan

55 | 16 June 2011 | MONEYLIFE

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Learn the basics of saving and investing

Earning Curve

I NVE S T I N G L ES S ONS

Be a Contrarian It’s tough but rewarding

arren Buffett said “Be fearful when others are greedy and be greedy when others are fearful.” Contrarian investors, like Warren Buffett, sell when others are buying and buy when others are selling. Decisions of common investors are usually dominated by greed. They become bullish when the market rallies strongly and they panic and get out when prices crash. This overreaction causes price aberrations which are exploited by contrarian investors. Sir John Templeton, the legendary investor, was a contrarian. In 1939, when World War II was breaking out, he bought $100 worth of every stock selling ‘cheap’ on the New York Stock Exchange, held it over a few years and made a killing. James Montier, a member of GMO’s (Grantham, Mayo, Van Otterloo & Co) asset allocation team, says holding a contrarian view and following it is one of seven immutable laws of investing. He points out that humans feel safe being a part of the herd—social exclusion is as painful as physical pain therefore, being a contrarian is like having your arm

broken on a regular basis. To be a successful contrarian requires guts, knowledge of market dynamics and sound financial analysis. A contrarian uses his judgement to make a contrary move against the crowd when logic proves that the majority is wrong. As Benjamin Graham, the legendary author, said, “Even the intelligent investor is likely to need considerable willpower to keep from following the crowd.” Deciding when to enter a contrarian trade requires fortitude and confidence.

Montier says that focusing on value investing will lead you to be a contrarian. Value investing focuses on acquiring stocks when they are ‘cheap’ under the assumption that the price will correct and will return to the normal P/E. A contrarian investor would be buying when others are selling and assets are cheap and selling when others are buying and assets are expensive, asserts Montier. David Dreman, a pioneer of contrarian investment strategies, explains: “I buy stocks when they are battered. I am strict with my

discipline. I always buy stocks with low price-earnings ratios, low price-to-book value ratios and higher-than-average yield. Academic studies have shown that a strategy of buying out-of-favour stocks with low P/E, price-to-book and priceto-cash flow ratios outperforms the market pretty consistently over long periods of time.” This concept is similar to Montier’s first law—margin of safety, which focuses on buying shares at a discount to their intrinsic value. But identifying such a situation is difficult, as powerful psychological forces would prevent us from following a contrarian strategy. The truth is all of us can’t be contrarian investors; it defeats the very principle. But it’s advisable to watch our step to avoid being part of a financial massacre. As Rick Rule, founder of Global Resource Investments (GRI), puts it, “You are either a contrarian or a victim.” In any case, it is good to remember what Mark Twain has written about being part of the crowd: “Whenever you find yourself on the side of the majority, it’s time to pause and reflect.” Studies in behavioural finance confirm that group members tend to take a riskier position than its individual members, on an average, would have taken. Humphrey Neill, author of the book The Art of Contrary Thinking says, “When everybody thinks alike, everyone is likely to be wrong.” A contra investor himself, Humphrey mentions in this book that a ‘crowd’ is influenced by emotions while an individual thinks with his brain. Therefore, consensus opinion of investors, provoked by the ‘noise’ of the media, causes them to behave illogically and make bad decisions.

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ML FOUNDATION EVENTS

THE RIGHT HEALTH INSURANCE AT THE RIGHT PRICE

‘Insurance is not an investment for returns’ How does the health insurance system operate and how to make the best use of it? The audience at a packed Moneylife FoundaƟon seminar got to know from the experts who shared their knowledge

he cost of healthcare is galloping and, with insurance firms lobbying to increase premiums, it has become essential for those seeking to buy health insurance to have a better understanding of how to go about it. This was the consensus at a wellattended seminar on ‘How to get the right health insurance cover at the right price’, hosted by Moneylife Foundation on 17 May 2011 at Vanita Samaj, Dadar in Mumbai. Introducing the subject of the seminar, Debashis Basu, Trustee, Moneylife Foundation, said that healthcare costs are galloping at

A participant wants to know about top-up policies

20% per annum, which is twice the rate of inflation. Insurance companies, unable to cover the higher costs of operations, were lobbying for an increase in premiums. In this harsh demand-supply health insurance environment, the biggest victims are senior citizens, individuals, employees of small and medium enterprises, consultants or selfemployed people who do not have the benefits of group health insurance schemes. In fact, less than 15% of the Indian population today has some form of healthcare. Mr Basu

stressed that health insurance is for unforeseen contingencies; it should not be treated as an investment for returns, and so, more and more people should get themselves insured. “Buying health insurance is like getting into a marriage,” said Mahavir Chopra, head-eBusiness and personal lines at Medimanage Insurance Broking. “It’s usually difficult to find the perfect product for all your requirements—just like it is impossible to find a perfect match in marriage.” Mr Chopra explained that if insurance companies were to provide everything that a customer requires, the cost of such a product would be unaffordable. Hence, he emphasised that it is essential to focus on getting the major burden covered instead of trying to get many more items included. He listed the following issues that need to be kept in mind: The younger you are, you have more choices; it is desirable to look for the basics and cut out the frills; clearly understand the inclusions and exclusions as described in the policy; it is necessary to go long ``

MONEYLIFE | 16 June 2011 | 58

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ML FOUNDATION EVENTS

` term and keep the maximum

renewal age in mind; know the company from which you are buying the insurance. Mr Chopra also cautioned against making comparisons of any sort, whether it is between public and private insurance companies, or between policies and premiums. Sudhir Sarnobat, co-founder and CEO of Medimanage, pointed out that medical insurance in India is often restricted to hospitalisation coverage and needs to evolve to preventive healthcare. For instance, no insurance policy covers routine health check-ups, whether it is eye check-ups, dental treatments, or periodic tests. He also referred to the careless attitude towards medical insurance wherein people wait to fall ill before actually bothering about getting insurance. “They think ‘I am healthy, I will buy when I need it’ which is like digging a well when the house is on fire.” Mr Sarnobat explained that with the breakup of the joint family system, an increase in lifestyle diseases, the increase in individual income levels and the choice in health insurance products, individuals should not hesitate to spend on the cost of mediclaim. Or, better still, focus on preventive care by improving one’s lifestyle. KS Sankar of Medimanage said that although he had empathy with the customers who had grievances, it must be remembered that health insurance is a participative mechanism and people must work with the insurance company. When it comes to issues to be raised with the insurance regulator, customers must come together and create ‘a collective voice’, especially through organisations like Moneylife Foundation. The session ended with a pertinent set of questions from an inquisitive audience.

HOW TO USE THE RTI ACT EFFECTIVELY

“Start by being transparent at home” RTI acƟvist Bhaskar Prabhu gave the audience a crash course on the RTI Act

n 14th May, Bhaskar Prabhu, convenor of the Mahiti Adhikar Manch, spoke at a seminar organised by Moneylife Foundation on the proper use of the RTI (Right to Information) Act. He said, “70% of the RTI applications are filed by government employees, asking about why they did not get promoted or why they have been transferred. Citizens should understand that the RTI is much more than that.” Mr Prabhu gave the audience a crash course on the RTI Act, explaining its salient features, the restrictions and exceptions, methods of filing appeals and reviews and the rights of information seekers. He explained which institutions could be called ‘public authorities’, what can be considered ‘public information’, in what format information can be demanded and what are considered ‘records’. He gave several tips about filing RTI applications and eliciting satisfactory information. “It is the citizen’s right to demand that public authorities

maintain records in a way which facilitates the RTI Act. Ask for a good recordkeeping system,” he said. He also said that in case someone opts for inspecting documents while seeking voluminous information, he must insist that the files/records made available to him be properly indexed and catalogued. “If the authorities resist, fight with them. They are bound to give you information in an accessible form,” Mr Prabhu said. He outlined the hurdles to dissemination of information and the ways to counter them. He also talked about why public authorities should be proactive in disseminating information and how public awareness can be raised about the legislation. Mr Prabhu’s talk perfectly supplemented Moneylife Foundation’s earlier seminar on the same topic which was addressed by Ashok Ravat, eminent civic activist. Mr Ravat had also talked about the proper and responsible use of this Act.

Bhaskar Prabhu, convenor, Mahiti Adhikar Manch, addresses the participants at the workshop

59 | 16 June 2011 | MONEYLIFE

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SPENDING TRAVEL

K O

Beyond the Bright Lights Jaideep Mukerji stays clear of the well-trodden tourist paths of Thailand’s bustling capital and takes a leisurely river cruise—for a completely refreshing, diﬀerent and adventurous look at one of Asia’s largest ci es

city that is visited by thousands upon thousands of travellers from India holds out a lot to discover and experience, in addition to the basic city-sightseeing offered by the package tour companies. Travel to Bangkok during the Songkran festival, usually in midApril, and then spend time exploring the lesser-known parts of the city by canal boat and one will have a completely different and refreshing look at one of South East Asia’s largest cities. One of the high spots of the Thai calendar is the annual New Year or Songkran celebration, a national holiday that lasts for three days and falls on or around 13th April when the sun moves into Aries. The word Songkran originates from Sanskrit and means ‘beginning of the solar year’. The holiday-loving Thais, therefore, get to celebrate New Year three times each year— the Western New Year on 1st January, the Chinese New Year in February and the Thai New Year in April. Before Thailand adopted the Roman calendar in 1940, Songkran was calculated on the basis of solar calendar which varied from one year to the next. Now, the Songkran days in Bangkok are fixed and are from 13th to 15th April of every year. Having fun is a big part of Thai culture, and having fun amidst the scorching heat of April is no exception. The hottest month of the year sees the entire country go crazy in friendly water-fights and street parties that last nearly a week. During the ``

WAT SUTHAT’S MAIN TEMPLE THE GALLERIES ARE LINED WITH GOLDEN BUDDHAS

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PIPING HOT, OFF THE SIDEWALK THAI STREET FOOD IS SIMPLY DELICIOUS

SPENDING TRAVEL

` Songkran festival, most office buildings, banks as well as family-run

shops and restaurants shut down completely, although shopping malls usually remain open. Thai street food, always delicious, becomes an even more attractive option during this time since most restaurants are closed. Songkran is also Thailand’s major festival for family reunions, temple visits and annual house-cleaning. Many Thais utilise the holidays for spending time with families and friends. Traditionally, Thais perform the ‘Rod Nam Dum Hua’ ritual on the first day of Songkran which is officially the National Elderly Day. During the ritual, younger people pour scented water into the hands of their parents and elders as a mark of respect and receive the blessings of the older folk. The second day of Songkran is officially the National Family Day. Thais get up early and give alms to Buddhist monks and then, ideally, spend the rest of the day with the family. An important religious ritual on Songkran is ‘Bathing the Buddha image’ during which devout Buddhists pour fragrant water over Buddha statues, both at the temple and at home. Traditionally, Thais would politely pour a bowl of water on members of the family, their close friends and neighbours to symbolically wash off all misfortunes in the past year and to welcome the New Year. Now, as Songkran has taken a more raucous and modern note, the bowl of water has gradually become a bucket or a garden hose or even, water-guns, while the holiday spirit is now shared amongst local residents and tourists alike. The festival, somewhat like India’s Holi, has turned into a water-throwing funfest in which anyone and everyone is liable to get a thorough drenching from young people waiting in ambush at street corners—a blessed relief during the hottest month of the year. Traditionally, during the festival period, Thais visit temples to offer food to the monks and to participate in bathing ceremonies for Buddha images. Another custom is the releasing of small fish into rivers and canals. This merit-making act is thought to come from m the old practice of collecting small fish from dried-out pools, to keep and later release back into the wild. Traffic in Bangkok, usually a nightmare, is at its quietest during Songkran, as many of the city’s inhabitants usually return to their upcountry homes for the long holidays and the roads are remarkably traffic-free. Travelling to Bangkok during this fun-filled d festival period, I spent a couple of days exploring Bangkok’s gkok’s early history, when life in the capital still revolved around und the Chao Phraya River and its offshoot khlongs (canals). ls). While modernisation has changed the Chao Phraya riverscape, adding gleaming high rises and imposing concrete oncrete structures to the picture, the khlongs retain much of their heir charming character. A leisurely river cruise through Bangkok’s equivalent ent of the back alleys allows you to view the city’s traditional onal neighbourhoods with children bathing, elderly people in balconies watching life go by and couples sitting on steps eps ``

THE WAT ARUN A MAJOR TEMPLE, ALONG THE CHAO PHRAYA RIVER

61 | 16 June 2011 | MONEYLIFE

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SPENDING TRAVEL

` dipping their feet in the cool waters

of the canal. The Chao Phraya River provides a great way to get around, since many of the major tourist sites are easily accessible from the River. In Bangkok, the River is a major transportation artery for a network of river buses, cross-river ferries and water taxis, also known as ‘long-tails’. More than a dozen boat lines operate regular commuter services on the rivers and canals of the city. The Chao Phraya River Express operates a regular boat service up and down the river. Like a public bus on the water, the fares are extremely cheap and you can get just about anywhere for 11 baht to 25 baht (about 16 to 37 in Indian rupees) depending on the distance. There are piers next to many of the riverside hotels. The new service, specifically for tourists, is the ‘Chao Phraya Tourist Boat’ which uses newer and more comfortable boats serving just those piers of interest to tourists. The price structure is different and you must purchase a one-day river pass for 150 baht (about $5) which entitles you to an unlimited number of trips on the same day. The Grand Palace situated on the main Chao Phraya River is an obvious starting point for a riverbased sightseeing tour of Bangkok’s highlights. Started in 1782, the complex is a collection of buildings that span over 1.5 sq km; within the grounds is the Wat Phra Kaeo, known for the famous statue of the Emerald Buddha. Sitting on a golden altar, it is carved from green jade and is only about 30 inches high. Do not miss the fearsome looking yakshas that guard the entrance to important parts of the palace and golden statues of the kinnara, a celestial musician, half-human and half-bird, adopted from Buddhist and Hindu mythology. Although Thailand’s King Bhumibol does

not reside here any longer, the Palace is still very much in use as many royal rituals are performed here by the King every year. Other royal ceremonies celebrated here are coronations, royal funerals, marriages and state banquets. The Palace grounds also contain the offices and buildings of the Bureau of The Royal Household, the Office of the Private Secretary to the King and Royal Institute of Thailand. The Wat Arun or the Temple of the Dawn is another major temple easily accessible from the water route. Wat Arun was built in the early 19th century and its tower is the highest in Thailand—measuring 265 ft. The tower, or prang, is covered with pieces of Chinese porcelain and its beauty is best appreciated from the river at a distance. The temple gets its name from the Indian god of dawn, Aruna. Amongst the superb statues of the Buddha inside are some that record the most important stages of his life, at birth (north), in meditation (east), preaching his first sermon (south) and entering Nirvana (west). Another temple that I found impressive, although completely away from the regular tourist trail, was the Wat Suthat, a royal temple classified as a first grade temple, one of only six such temples in Thailand. Started by King Rama I in 1807, the temple was not completed until the reign of King Rama III in 1847. Thee main temple of Wat Suthat contains ns the Sakyamuni Buddha’s image and d the surrounding galleries are lined with golden Buddhas. Give a go-by to the well-trodden tourist trails, buy yourself a oneday Tourist Boat river pass and explore the cultural treasures located along the canals and waterways of Bangkok. Discover a city that has so much to offer, particularly if you travel during the Songkran festival. — With Veeresh Malik

ESSENTIAL NTIAL FACTS S A KINNARA THE ICONIC MAN- BIRD FIGURES IN THE ROYAL PALACE

When To Go: Although a popular tourist destination, most visitors skim Bangkok’s cultural surface and llimit im themselves to what the mass tour operators sell them. op There is a wealth lth of ccultural sites and treasures to explore iin n this city using cheap and convenient public transport.

Getting There: There are direct flights to Bangkok from each of India’s metro cities. There are convenient connections from most other cities in India.

Visas: Indian nationals are given a visa on arrival at the airport, provided their stay is for 15 days or less and they have confirmed prepaid hotel reservations and a return air ticket. There is a visa fee payable.

Where To Stay: Whe It is easyy to book Bangkok hotels online. e. (The (Th official Thai Tourism website h has as a wealth of information and includes des a hotel-booking facility: www. tourismthailand.org). Language is not a problem, as English is commonly spoken.

MONEYLIFE | 16 June 2011 | 62

Travel.indd 4

5/23/2011 6:43:55 PM

MONEY FACTS STOCKS

INDIAN MARKET TRENDS

FUND FLOWS

The Sensex declined 3% and the Nifty fell by 2% in the fortnight. The ML Micro-cap Index declined 4%, the ML Largecap Index, the ML Mid-cap Index and the ML Small-cap Index fell by 3% each and the ML Mega-cap Index shed 2%.

Foreigners: Foreign institutional investors were net sellers of equities (Rs4,812.20) crore in the fortnight. They sold stocks worth Rs24,924 crore.

Share Prices, November 2010 =100

50 -710

110 -1,470

FII Net Investments (Rs Crore)

-2,230 100

-2,990 -3,750 13 May-11

26 May-11

Indians: Domestic institutional investors were net buyers of stocks in the fortnight. They offloaded stocks worth Rs9,075.69 crore.

400

80 Nov-10

Feb-11

May-11 200

ML Mid-cap ML Large-cap

ML Small-cap ML Mega-cap

Index MLMega-capIndex Nifty Sensex MLLarge-capIndex MLMi d-capIndex

Nifty Sensex

ML Micro-cap 0

13 May

26 May

+/(-)

-200

98.69

96.86

- 2%

-400

5,544.75

5,412. 35

- 2%

18,531.28

18,044.64

- 3%

100.51

97.79

- 3%

95.57

92.80

- 3%

GLOBAL MARKET TRENDS 71,000

MLS mall-capIndex

88.15

85.39

- 3%

MLMi cro-capIndex

87.18

83.57

- 4%

Mega-cap Gainers/Losers

13 May

26 May

Change

641.75

720.65

12%

StateB ankofIndi a

2,649.65

2,188.85

- 17%

Large-cap Gainers/Losers

13 May

26 May

Change

EclerxS ervices

703.9

825.55

17%

Sanwaria Agro Oils

80.35

64.65

- 20%

13 May

26 May

Change

ManIndustri es

110.6

138.75

25%

ISMT

49.45

38.65

- 22%

-600

DII Net Investments (Rs Crore)

13 May-11

26 May-11

Bovespa

69,200 67,400

Shriram Transport Finance Co

65,600

Mid-cap Gainers/Losers

Small-cap Gainers/Losers

13 May

26 May

Change

63,800 62,000 Nov-10

Feb-11

May-11

The Bovespa gained 1%. All other global indices fell. The Shanghai Composite tumbled 5%, the Hang Seng declined 2% and the Nikkei fell 1%. Index

13 May

26 May

63,235

64,099

FTSE

5,926

5,881

- 1%

Bovespa

+ / (-)

ShalimarP aints

341.30

692.40

103%

Nikkei

9,649

9,562

- 1%

MICE lectronics

23.70

17.85

- 25%

Korean Composite

2,120

2,092

- 1%

13 May

26 May

Change

Dow Jones Ind Avg

12,596

12,403

- 2%

Nasdaq Composite

2,828

2,783

- 2%

Micro-cap Gainers/Losers Diamines& C hemicals

76.40

99.70

30%

AnkurD rugs& P harma

53.40

36.80

- 31%

Hang Seng

(AllP ricesi nR s)

23,276

22,901

- 2%

Taiwan Weighted

9,007

8,788

- 2%

Shanghai Composite

2,871

2,737

- 5%

63 | 16 June 2011 | MONEYLIFE

Money Fact.indd 2

5/28/2011 4:51:29 PM

MONEY FACTS STOCKS

What’s H

ML SECTORAL TRENDS

Construction, EPC and infrastructure stocks were in demand. Valecha Engineering soared 11%, Mundra Port & SEZ jumped 10%, L&T surged 7%, Tantia Constructions gained 3% and KNR Constructions rose 2%. 13 May

26 May

+/-

ML Con_EPC_Infra Index

Companies ValechaE ngineering

90.80

100.85

11%

2,300

MundraP ort& S EZ

138.20

151.90

10%

Larsen& Toubro

2,160 20,20

1,528.80

1,638.35

Tantia Constructions

66.15

68.25

KNRC onstructions

101.30

103.15

SupremeInfra

1,880

233.95

IonE xchange

1,740 1,600 Nov-10

Feb-11

May-11

234.90

130.95

129.50

-1%

PratibhaIndustri es

52.40

51.60

-2%

ABGInfral ogistics

176.80

174.05

- 2%

IL&FS Trans Networks

198.95

194.95

-2%

Sugar stocks received a beating. Balrampur Chini Mills nosedived 21%, Bajaj Hindusthan tanked 11%, KM Sugar Mills declined 9% and Dwarikesh Sugar Industries slipped 8%. 13 May

26 May

BalrampurC hiniMi lls

71.40

56.75

BajajH industhan

69.55

UgarS ugarW orks

15.40 3.59

KMS ugarMi lls

+/-21%

ML Sugar Index

61.95

-1 1%

3,100

13.85

-10%

3.25

-9%

TriveniE ng& Inds

38.75

35.15

-9%

RenukaS ugars

61.50

56.25

-9%

DwarikeshS ugar

70.40

64.50

-8%

UttamS ugarMi lls

35.55

32.70

-8%

KCPS ugar& Inds

16.35

15.10

-8%

ParrysS ugarInds

123.20

113.90

-8%

2,840 2,580 2,320 2,060 1,800 Nov-10

Paints

6% Sugar

Retail

3% RealE state

- 8% - 8%

Con_epc_infra

1% Oil& Gas

- 7%

ConsP roducts

1% Airlines

- 7%

Odds

1% Banks

- 6%

INSIDER TRADES

N T

Companies

ML Sectoral Trend

AllP ricesi nR s

What’s

Stocks of paint companies gained 6%, retailers rose 3%, constructionEPC-infra stocks and consumer products’ stocks added 1%. On a negative note, sugar and real estate stocks declined 8% each, oil & gas and airlines fell 7% and banks were down 6%.

Feb-11

May-11

AllP ricesi nR s

BULK DEALS Date

Company

Buyer

Seller

Rs Cr

25May-1 1

JSWE nergy

IspatIndustri es

Sangita S Jindal

163.01

19May-1 1

DalmiaB haratE nt

JMFi nancialV entures

Dharti Invst and Hldgs

18May-1 1

GSS America

BeaumarisInv estments

RDMKImpexP vt

5.10

20May-1 1

CarolInfo

CartierLea finP vt

SatyaS ecurities

3.75

18May-1 1

Golden Tob

ProgressiveS tarH ldgs

ManMohanD amani

0.76

25May-1 1

ImpexFerro

RishabhS tocksP vt

ConcastIspat

0.64

16May-1 1

AnkitMetal

HariS Tibrewala

RishabhS tocksP vt

0.52

17.99

The Bank of New York Mellon Corporation bought 4,92,828 shares in Rolta India (stake up to 12.14%). SBI Mutual Fund bought 2,00,000 shares in Jyoti Structures. P Divya, one of the promoters of Nelcast, bought 34,179 shares in the company (stake up to 7.70%). Rajendra Shah, nonexecutive independent director of Wockhardt, bought 25,000 shares in the company (stake up to 0.06%). AK Jain, promoterdirector of ISMT, bought 51,900 shares in the company (stake up to 2.23%). Ashwini Kumar, chief operating officer of Nitesh Estates, bought 72,118 shares in the company (stake up to 0.10%). PR Ramasubrahmaneya Rajha, non-executive chairman of Ramco Industries, bought 13,07,900 shares in the company (stake up to 8.8%). R Durgadoss sold 19,903 shares of Consolidated Construction Consortium (stake down to 0.12%). Polestar Healthcare and Realtech Pvt Ltd sold 6,81,140 shares of The Paper Products. Veena Talwar sold 4,79,926 shares of The Paper Products. R Sridhar, MD, Shriram Transport Finance Company, sold 16,000 shares of the company (stake down to 0.04%).

MONEYLIFE | 16 June 2011 | 64

Money Fact.indd 3

5/28/2011 4:51:48 PM

MONEY FACTS COMMODITIES

INDEX TRENDS

COMMODITY TRENDS

MCX Commodity Indices

Cotton

Particulars

13 May

27May

Change

52- Week High

52- Week Low

Metal

4,392.01

4,594.88

4,926.75

3,146.90

Comdex

3,381.48

3,507.45

3,739.05

2,591.65

Agri

2,519.42

2,599.37

2,989.16

2,120.50

Energy

3,140.14

3,224.81

3,585.96

2,434.89

COMMODITY FOCUS Gold (Rs/10gm) 23,000 22,400

he agriculture ministry said the government should take an early decision on raising the export cap on cotton from 5.5 million bales (170kg each) to 7 million bales in order to protect farmers and the handloom sector. There is a case for enhanced cotton exports due to high domestic production and global shortage of the natural fibre. The government had allowed export of 5.5 million bales of cotton in the 2010-11 marketing season (OctoberSeptember); the quantity has already been shipped.

21,800 21,200

Steel

20,600 20,000 Jan-11

Mar-11

May-11

Deepening concern over debt default by Greece spurred demand for gold as a safe-haven investment in the fourth week of May. Fitch downgraded Greece’s credit rating to B+ from BB+, a level described as junk status. The Comex gold futures surged to near $1,540 levels erasing off its early May losses when it had fallen way below $1,500. Domestic gold futures also surged tracking the global prices but the MCX (Multi Commodity Exchange of India) gold futures remained subdued with gains of less than 1% in the fourth week of May.

MCX PRICE TRENDS Particulars

Active Contract

10May2011

24Ma y2011

Change %

High

Low

ccording to World Steel Association, global crude steel production in April 2011 went up by 5% year-on-year to 127MT. Recording a growth of over 8.6%, India produced 6.15MT steel in April 2011 against 5.831MT in the same month last year. China’s crude steel production for April 2011 was 59MT, up 7.1% compared to the same month last year. Due to disruption caused by the earthquake and tsunami, Japan produced 8.4MT, a decrease of 6.3% vis-à-vis April last year.

Global Commodities SilverR s/kg

Jul-1 1

58,688

55,051

- 6.20

74,560

31,500

Coffee

GoldR s/10gm

Jun- 11

22,148

22,382

1.06

22,856

19,710

CrudeOi lR s/barrel

Jun- 11

4,665

4,468

- 4.22

5,192

4,266

CopperR s/kg

Jun- 11

403.50

403

- 0.12

471.75

386.80

NickelR s/kg

May-1 1

1,119.30

1,033.90

- 7.63

1,343.90

1,005.30

ZincR s/kg

May- 11

97.30

97.85

0.57

116.70

91.75

LeadR s/kg

May-1 1

105.30

112.75

7.08

135.25

99.35

NaturalGasR s/mmBtu

May- 11

189.60

196

3.38

211.20

179.80

Others CPOR s/10kg

May-1 1

518.90

527.40

1.64

580

500

MenthaOi lR s/kg

May- 11

923.30

898.20

- 2.72

1,072

895.30

SugarMK olR s/100kg

Jun- 11

2,739

2,654

- 3.10

3,130

2,652

Potato Agra Rs/100kg

Jun-1 1

551.20

522.60

- 5.19

622

520

CardamomR s/kg

Jun- 11

970.40

847.50

- 12.66

1,149.90

832.50

ndia’s coffee exports are expected to decline by 16.7% to 240,000 tonnes in the 2011-12 crop year (October-September) due to lower production and tight carry-over stocks, the US Department of Agriculture said in the Coffee Annual Report. India is estimated to make an overseas shipment of 288,600 tonnes in the ongoing 2010-11 coffee year ending September, it said. The country’s total coffee output may drop slightly to 288,600 tonnes in 2011-12, against 305,000 tonnes in the previous season. 65 | 16 June 2011 | MONEYLIFE

Money Fact.indd 4

5/28/2011 4:54:05 PM

BEYOND MONEY

bridging THE DIVIDE Jyoti Sachade collects new and old jewellery—of every kind—and distributes them to girls from orphanages. She also distributes donated appliances to the have-nots, reports Savita Narayan

MAMATA CHARITABLE FOUNDATION A/4 Dhanlaxmi Park, Right Bhusari Colony, Paud Road, Pune – 411 038 Tel: 98225 42419 www.mamatacharitable foundation.salem360.in mamatacharitable foundation@yahoo.co.in

“I

collect anything people want to donate—new and old, even artificial jewellery,” says Jyoti Sachade. “When girls from orphanages go to school, they see their classmates wearing jewellery. Jewellery for these children is considered an extravagance, but it certainly is not. You should see the shine in their eyes when they receive the donated jewellery. That joy satisfies me.” Ms Sachade started her work in 2007 with the registration of Mamata Charitable Foundation. Her initial motivation was to channel the surplus from the haves to the have-nots who could not even meet basic needs. Beginning with her own belongings and donations of toys and clothes from friends, the huge response has resulted in 110 tempo-loads of despatches until now. The articles have gone primarily to organisations that do not receive government grants and to people who need them the most. Orphanages, old-age homes, adivasis, HIV+ patients, the mentally retarded, destitute children, polio patients and several others are the beneficiaries. They are located all over Maharashtra, Gujarat and Delhi, and cities like Mumbai, Jabalpur, Varanasi. Baba Amte’s ashrams have also been recipients. All donations are welcome: furniture, utensils, cycles, food grains, clothes, household appliances (such as TVs, fridges, ovens), toys, games, books in any language, stationery, medicines, medical aids, showpieces—anything at all which is in usable condition. Ms Sachade maintains a record of all donations received. She checks if the proposed recipient is genuine and notes their present and future requirements. What is received, who gives, and how much cannot be predicted. When she receives donations that match the recipient’s requirement, they are forwarded appropriately. People usually donate on special occasions such as festivals, births,

marriages and death anniversaries. “I am a bridge between the rich and the poor,” says Ms Sachade. Several other activities are undertaken by the Foundation. Ms Sachade conducts free computer classes for underprivileged children. She has set up a library for them. Another ongoing activity is a literacy drive for adults. ‘Ajobaanchi Aaraam Kurchi’ (grandparents’ easy chair) is a proposed day-care centre for the elderly. Employing a caretaker to look after the elderly at home does not guarantee safety; nor can everyone afford it. She is looking for funds to start the facility with all the required comforts—cots, mattresses, indoor games, space for taking walks, TVs, etc. Ms Sachade also proposes to start facilities for the mentally- and the physically-challenged after she finds a bigger place. She also wants to start a selfemployment scheme where sewing machines are provided, donated fabric is stitched and then distributed among orphans. A future plan is to provide ambulance services. The Foundation is on the lookout for larger premises for these activities. Since its inception, Ms Sachade’s three-bedroom flat has been the centre of activity and storage space of donated items. With exponential growth of the Foundation’s activities, the space is now inadequate. Additional space is required as is a corpus fund for financing the Foundation’s work. Cash donations that contribute to the corpus are now accepted. The donations in kind required are: sugar, cooking oil, milk powder, dal, chana and bathing soap. Unstitched cloth is needed throughout the year. Ms Sachade maintains meticulous accounts of all donations to ensure transparency of transactions. Though essentially a onewoman operation, she has people to provide administrative and caregiver assistance. All donations to the Foundation are exempt under Section 80 (G) of the Income-Tax Act. People can also make donations online to Bank of Maharashtra; A/c name: Mamata Charitable Foundation; A/c No. 60028676264; IFSC No.MAHB0001208.

MONEYLIFE | 16 June 2011 | 66

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