Personal Finance Magazine Moneylife 2 June 2011

SUCHETA DALAL ON:

REGULATING REGULATORS: AN IMPOSSIBLE TASK? Personal Finance Magazine

SEBI ALLOWS HSBC MF TO GET AWAY

VIJAY TEXTILES: WATCHDOG SPINS A YARN

2 June 2011

Rs 25

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Muted growth in corporate profit, a US slowdown, a stronger dollar and reduced FII inflows… bulls have a lot going against them. If the market crashes, when should you buy?

FUNDS 24

Bank Fixed Deposits Vs Bond Funds

STREET BEAT 34 – LIC Housing Finance – Mahindra Finance

ML FOUNDATION 59

Safe Smart Gurgaon &

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Volume6,Issu e 7 20May–2June 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

Kolkata 395, Lake Gardens, Kolkata - 700 045 Tel:03324221 173/4064 4318 Hyderabad C/oR ajnidev, 15-2-16,1 stFl oor,S hop No.9, (BesideR amdasP aper Mart), GowligudaC haman, Hyderabad-500 012 Moneylife is printedandpubl ished by DebashisB asuonbehal f of Moneywise Media Pvt Ltd and printed at MagnaGraphi cs,101C&D, GovernmentIndustri al Estate, Kandivli (West),M umbai - 400 067 andpubl ishedat315, 3rd Floor, HindS erviceIndustri es Premises, Off VeerS avarkarMar g, Shivaji Park, Dadar(W ),Mumbai - 400 028 Editor:D ebashis Basu

RNIN o:MA HENG/2006/16653

Letters to the Editor ETHICAL ADVERTISING The Advertising Agencies Association of India has adopted a resolution to usher in more ethical values to the ads created by the industry. In this connection, I wish to draw your attention to the ad series being aired on TV channels by Cadbury titled, “khane ke baad, meethe Write to the Editor! mein kuch meetha ho jaye”. The only investment that Win jewellery enhances your face value.

One ad shows a little girl being given a platter with chocolate during dinner.

I know many households who prohibit children from eating chocolates because they think that it will harm their health, especially their Congratulations BV Krishnan from Bengaluru! teeth. Now this ad conveys Your letter to the Editor wins a Surat Diamond gift. the opposite message: Give Keep writing! Keep winning! chocolates to children to encourage them to eat. Is this an ethical advertisement?

You had highlighted the ear-splitting ‘Brrr’ ad of Coca-Cola. This ad is so offensive, that I doubt whether it can do anything to increase the sales of Coke! But this is pushing the tolerance of viewers to the limit.

Another ad that comes to mind is that of Apex Ultima. This commercial used to open with an ear-splitting yell. I wrote to Asian Paints about this. Fortunately, they have now reduced the decibel level of the yell.

Using religious rituals in ads is another handy ruse for agencies in India. They do not stop to consider if they are actually offending the sensitivities of viewers by using religious themes and rituals. One example is the ad by Havells India in which they use a plastic wire to perform a fire sacrifice. Again, the use of sacred mantras in this ad is also very offensive. Creators of advertisements are prepared to go to any length to grab the attention of viewers. They have to, in order to stand out from the clutter. However, despite their declaration that they will follow ethical benchmarks, I doubt if they will bring in any significant self-regulation. I think the time has come for thee public to force them to do so.

I am not clear whether heer there th is i any regulation of ad content tent now.

One urgently needed regulation should be that the audio level of the ad should not be higher than the media content of any y channel. Right now, the t ads are at least twicee as loud as the programme content. ontent.

I request you to highlight hllight these issues in your magazine. m You can invite the opinions p pinions and comments from otherr viewers ``

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LETTERS

` also by publishing this letter, if it will help.

Why is the Advertising Standards Council of India allowing such ads to be aired?

BV Krishnan, 302, 5th Main, Kalyan Nagar 2nd Block, Bengaluru – 560 043, by email

GRAFT: A HYDRA-HEADED MONSTER Hats off to Anna Hazare for the great movement he was able to launch for eradication of corruption in the country. The support he got from the people shows that the country is fed up with corruption. He achieved what every citizen talked or dreamt about—but none had the courage to start a movement. With his efforts, the Jan Lokpal Bill will now become a reality, after being kept on hold for over two decades.

But the question is whether what is achieved is enough. The Jan Lokpal Bill, when finalised and passed as a Bill into law by Parliament, will curb corrupt practices only after it is passed.

What we really need is a move which will put an end to existing corrupt practices.

Corruption exists at two levels—among bureaucrats and politicians. As far as bureaucracy is concerned, one of the root causes of corruption is the discretionary powers conferred on bureaucrats and government officials under various laws, but without proper accountability. Just imagine, if the World Cup trophy could be held up at a Customs checkpoint, and no action has been taken against the officials responsible, what more can one expect?

Therefore, apart from the proposed Lokpal Bill, we also need some changes in our legal structure so as to prevent—if not entirely eradicate—such causes of corruption. Those who criticise Anna Hazare, dub his action as ‘blackmail’. Even if you do so, what is wrong with such ‘blackmail’ as long as his move is for the betterment of the country?

ML Bhakta, Kanga & Co, Readymoney Mansion, 43, Veer Nariman Road, Fort, Mumbai – 400 001, by email

ROT AT THE TOP The Cabinet has many ministers who have faced corruption charges. Corruption has increased whenever the Congress Party has been in power—the NCP

(Nationalist Congress Party) is just an offshoot of the Congress. We also have some ‘non-resident’ ministers! Whenever Sharad Pawar makes a statement, commodity prices go up. When commodities are in short supply, why are they not imported? It would not be wrong to call Mr Pawar an utter failure. His name has cropped up in the Lavasa and Shahid Balwa cases.

Leave alone the Congress, the BJP (Bharatiya Janata Party), SP (Samajwadi Party), BSP (Bahujan Samaj Party), RJD (Rashtriya Janata Dal) and the various Dravidian parties have been mired in numerous controversies. The Lokpal Bill’s official draft is toothless. Activist Anna Hazare had managed to galvanise the nation. The public—especially the youth—now look down upon almost every politician.

It won’t be a surprise if India witnesses an uprising of the kind that has swept the Arab nations. Though honest, our prime minister has proven to be spineless.

Besides the passing of a comprehensive Lokpal Bill, our nation needs an independent Constitutional investigating and prosecuting agency—an independent entity like CAG (Comptroller and Auditor General of India) or Election Commission of India—for effective and quick justice to be delivered.

Vishwanath Poddar, 82/3A, Ballygunge Place, Kolkata – 700 019, by email

CHECK CORRUPTION I have read the article “Keep Up the Momentum” (Moneylife, 5 May 2011). The Anna Hazare movement against corruption has caught the imagination of the people of India and they are getting restless to see the Jan Lokpal Bill enacted into law soon. But there are many hurdles to cross, given the sharp political divide in the country and the many acrimonious scenes and walkouts we witness in Parliament on a regular basis.

I believe that pressure should be brought on the government to enact legislation which will arrest the circulation of black money in the system. The people’s movement should bring pressure on the government (especially the finance ministry) to: 1) Demonetise high-denomination notes (Rs500 and Rs1,000) and make it mandatory to de-recognise transactions (especially in land deals) involving

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LETTERS

` payments above

controversial luminaries Bulls and bears are Write to the editor! is constituted to appoint Rs50,000 unless made unpredictable. Invest in diamonds.

Win jewellery persons in independent by cheques or demand agencies like the CVC drafts; (Central Vigilance 2) Close the Commission), Election Participatory Notes (PN) Commission, and for route for investment by selection of SC and High FIIs (foreign institutional Court judges. There investors) in the stock Write to the editor. If your letter is the best, You’ll should be no government market (it is believed Win Surat Diamond jewellery. involvement in the that the FII investment appointment to these posts. in India is the money of politicians and businessmen GR Chari, Hyderabad, by email routing their money through the havala route and bringing it back to India through the PN route); Correction: 3) De-recognise companies that are registered in In our Cover Story (Best Fund Houses, 19 May 2011), Mauritius—it is a tax-haven and a conduit for we had considered all the new fund offers (NFOs) investment in India; and with various options from various mutual fund houses 4) Remove discretionary powers allotted to MPs separately. This has pushed up the actual number of (members of Parliament) and ministers (including the NFOs, detailed on page 25 of the issue, because all prime minister and chief ministers) for allotment of the options like ‘growth’ or ‘dividend payout’ for the government land and other such freebies. same scheme were not clubbed together. However, this While the Jan Lokpal Bill is in the works, these four has not changed the overall Moneylife ranking at all steps can be easily implemented with follow-up action to bring in effective changes to the electoral law, which, for any fund. This is because all NFOs have the same multiple options and also the weightage given for inter alia, should lay down qualifications of candidates NFOs was the least compared to the other parameters for getting elected to Parliament and state legislatures. in our analysis. The error is regretted. — Editor There should be a maximum age limit for politicians and more transparency for funding of elections. It is not sufficient to ask MPs/MLAs to file a declaration HELP US TO HELP YOU of income/wealth—the purpose must be to go deeper Moneylife offers its readers a unique service—helping and examine the sources of such income. We find redress grievances on a best-effort basis. However, we leaders of various parties and relatives of deceased have limited resources to devote to this effort and can politicians trying to gain political recognition, declaring only pursue complaints that come to us by email. We huge assets overnight. It is high time we digitised land request readers to please send us crisp complaints, with records with a time-bound all the facts on email (not as an attachment) and send plan, given our competence us the supporting documents, only if we ask for them. in the IT sector.

We cannot handle physical letters. — Editor What we are seeing today is the unholy nexus HOW TO REACH US Letters to the Editor can be emailed to editor@moneylife.in or between big business can be posted to: The Editor, Moneylife Magazine, Unit No. 315, 3rd and politicians—the 2G Floor, Hind Service Industries, Off Veer Savarkar Marg, Dadar (W), scam is a great example.

Mumbai 400 028 or faxed to 022-24442771. Letters must include Fortunately, today, we the writer’s full name, address and telephone number and may be edited for clarity or space. can say, with some New Subscriptions & Customer Service conviction, that we have For new subscription requests, complaints about current at least two bodies doing subscription and books, write to subscribe@moneylife.in or an exemplary job—the to Subscription Manager, Unit No. 315, 3rd Floor, Hind Service Industries, Off Veer Savarkar Marg, Dadar (W), Mumbai 400 028 Supreme Court (SC) and or call 022-24441059-60 or fax to 022-24442771. the Election Commission Advertising of India. But if corruption is allowed to increase For information and rates, email us at sales@moneylife.in or call further, even these bodies may be affected. It should be 91-022-24441059-60. ensured that a National Commission comprising non-

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Presents

Venue: CALCUTTA ROWING CLUB 15, Rabindra Sarobar, Kolkata - 700 029, West Bengal

Saturday, 4 June 2011 at Kolkata

Registration and Tea (9:30am-10:00am)

Session One (10:00am-10:30am) Opening remarks by Union Bank on bank-customer issues (10:30am-11:45am) ‘How To Be Safe with Your Money’ Sucheta Dalal, Trustee, Moneylife Foundation (11:45am-1:00pm) ‘How To Be Smart with Your Money’ Debashis Basu, Trustee, Moneylife Foundation Lunch (1:00pm-2:00pm)

Admission Free Hurry! Limited Seats!

Registration on a first-come-first-served basis!

Contact: Tapash Mukherjee – 9830474231 Supriyo Banerjee – 9836813939 Moneylife Kolkata Office – 033-40644318 mail@mlfoundation.in www.moneylife.in

Session Two (2:00pm-2:30pm) Wills & Nominations Sucheta Dalal, Trustee, Moneylife Foundation (2:30pm-3:15pm) Plain Truths about Mutual Funds Debashis Basu, Trustee, Moneylife Foundation (3:15pm-4:00pm) Q&A Session Followed by Tea

Supported by

LETTER

ISSUE CONTENTS

2 June 2011

FROM THE

EDITOR Bull Lull

A

t the time of writing, the Sensex is around 18,500. In effect, over a year, the Sensex has delivered a return of just 3%. Go back to October 2007. That was the month when the index first crossed 18,500. It has been three-anda-half years now and the index has not budged higher. Are the bulls dozing? This, of course, is how markets move. While the Sensex looks extremely volatile on a daily and weekly basis, over a long period of time, it moves slowly and has delivered a compounded annual growth of 17% over 20 years.

So, where do we expect the market to head? Here is a bearish scenario. We are in a situation of rising inflation, increasing interest costs, declining corporate profit growth, a US slowdown, a stronger dollar and, finally, reduced money flows into risky assets. If they all come together, a Sensex level of around 16,000 would be on the cards. This seems surprising but markets do have a way of surprising us—both on the upside and downside. The silver lining to a market crash? At a Sensex of 16,000, Indian equities would become really cheap, given their long-term growth potential.

The less bearish scenario is that the market moves in a band of 17,500 and 19,000 for months. That would mean correction through time as opposed to correction through price, as may happen in the first scenario. Either way, we will keep you posted on what to do.

In May, Moneylife Foundation had its first event outside Maharashtra. The seminar, organised efficiently by Indiabulls, drew a packed audience of about 300 people. We were overwhelmed by the response and now intend to engage savers in major cities around the country.

The next one would be in Kolkata. See you there.

Another thing. If you can organise a group of people (around 200) either at a worksite or a campus, we would be glad to come and hold a seminar for you.

Debashis Basu

28 Cover Story Bull Doze

Muted growth in corporate profit, a US slowdown, a stronger dollar and reduced FII inflows… bulls have a lot going against them. If the market crashes, when should you buy?

12 Current Account – SEBI’s plan to outsource investor complaints will further alienate it from investors – The market rally of 2009-10 attracted few new folios – Should you buy insurance from agents, banks or on the Net? – BMC has gone extravagant with its ‘makeover’ plans for Five Gardens, in Mumbai, which needed no transformation

19 LOOSE CHANGE Moneylife Quiz; Soundbites

20

SEBI found HSBC Mutual Fund guilty, but it allowed the MF to get away; Nothing happens to SEBI officials even after shoddy investigation and false accusations

22 Different Strokes Regulators may continue with their whimsical ways if investors don’t assert their rights & demand accountability from politicians 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.

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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

POWER OF ONE

School 50 ABusSafeSystem The story of a successful fight to put in place a safe transport system for school-going children

Get Insights

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

TRAVEL

Ancient 56 Bhutan: Kingdom, Youngest King

Daily Market Forecast

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

FUNDS

Bank Fixed Deposits Vs 24 Bond Funds If you think returns from bond funds will trump those from bank FDs, you have another think coming

STOCKGRADER 39 Momentum

SMART MONEY

Federal-Mogul soared 17%, while Shriram Transport Finance plunged 17%

Market: 26 Stock To Buy or Not To Buy

Medium Term

CMC gained 6%, whereas Whirlpool slipped 13% and Punjab National Bank fell 9%

That is the question even for longterm investors today

Long Term

STOCKS

Hindustan Unilever surged 6% and Nestlé India rose 1%, while Ambuja Cements plunged 16%

34 Street Beat LIC Housing Finance’s biggest advantage is that it can tap semi-urban and rural areas of India; Mahindra Finance plans to ramp up its offices to 597 by the end of this fiscal WHICH WAY

a 38 InStupor A sideways market needs an earnings boost PLANNING TOOL

ML FOUNDATION EVENTS

& Smart 59 Safe in Gurgaon The New Gurgaon event marks the beginning of Moneylife Foundation’s foray into cities outside Maharashtra SAVING AND INVESTING

INSURANCE

46 Insurance Trends • • • •

E-insurance: Insurers will save money. Will they pass it on?

After joining a PPN, some hospitals are dodging cashless claims Insure Smart Plan offers one of the lowest mortality rates Defined Growth Endowment Plan will fetch just 3.25%

61 Earning Curve Mean Markets: Why this time is never different BEYOND MONEY

of 66 Moments Happiness Kshana organises entertainment shows for the ‘forgotten’ sections of society

AUTO

Secured, 44 Finances Future Planned

48 Top-end Car Sales

A comprehensive personal finance management software and financial planning tool.

Sales are not in top gear; expensive autos are trying to be all things to all people, says Veeresh Malik

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Jaideep Mukerji steps back in time as he travels through South Asia’s tiny kingdom, untouched by the ravages of civilisation

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

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CURRENT ACCOUNT

I NVE S T O R I N T E RE S T

SEBI’s Hands-off Approach First, the regulator’s moves caused dwindling market participation. Now, its plan to outsource complaints will further alienate it from investors, writes Sucheta Dalal

I

n one of the first decisions under UK Sinha’s tenure as chairman, the Securities and Exchange Board of India (SEBI) has reportedly decided to outsource its investor helpline service to a 500-seater third-party call centre.

This will be in addition to handing over the processing and maintenance of investor grievances to an outside agency. Is this a sign of improved efficiency or abdication of responsibility?

The preamble to the SEBI Act reads: “An Act to provide for the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith or incidental thereto.”

Clearly, investor protection is the first objective and market development and regulation

Why does current SEBI chairman UK Sinha want to lean on call centres?

functions arise from the first objective. How does the regulator protect investors if the job of interacting and engaging investors, hearing their issues, detecting patterns in investor complaints or a

systemic issue is outsourced to call centres?

Ironically, the same media report says that SEBI does not want market intermediaries to outsource their core investor-sensitive functions.

Over the past two decades, SEBI’s biggest failure has been its insensitivity to investors’ issues. It has not kept its ears close to the ground. Rather it has always framed policies in consultation with market players—investment bankers, large companies and their lawyers or accountants, overlaid by the wisdom of government officials.

This attitude follows a pattern: SEBI frames rules that cause hardship or losses to investors for several years; it acts only when the number of complaints is large enough or leads to litigation; often, this kneejerk action is extreme and causes further harm to investors.

Consider just three examples that Moneylife has focused on for six years: transmission of shares, power of attorney and the commission paid to distributors. In each case, SEBI acted long after the issue was brought to the attention of various SEBI chairmen. But SEBI’s action was too late to correct the systemic damage and erosion of investor confidence.

Moneylife has repeatedly pointed out that India’s investor population has declined from 20 million in 1992 (according to official reports) to just eight million (equity and mutual funds) according to the D Swarup Committee report 2009.

This data never fails to startle policymakers, because we are fooled by the 20x increase in the Sensex, speculative trading turnover of over Rs1,00,000 crore a day, the 24x7 media coverage on stock markets and the increase in initial public offerings (IPOs), mutual fund schemes, etc. When confronted with the data, some seek a break``

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up; others want to know where investors are putting their money.

In fact, the details are available in official numbers. Bank deposits have increased from 32% of total household savings (RBI data) to 51% in 2007-08 (at the peak of the bull run). In contrast, investment in shares/debentures and units of Unit Trust of India has declined from 14% to 13% in the same period— despite the 20x rise in the Sensex and scores of mutual funds and public issues making their debut.

The market has risen only on the back of foreign investment.

Indian investors have been steadily fleeing the market, despite the apparent spread of ‘equity cult’ and the government hasn’t even noticed. This will only get worse if

SEBI decides to outsource its core function of listening to investor issues and resolving them.

Before SEBI hands out any outsourcing contracts, it must have a public discussion on the process of collating daily/weekly and monthly reports from these agencies.

These cannot be mechanical feedback about complaints and their redressal. The reports must flag all issues which have more than 10 complaints on the same subject or the same company/market intermediary. The reports must be made public and also placed before the SEBI board with an action plan followed up with an action-taken report.

The question is will the SEBI board, the finance ministry and the

standing committee of Parliament on finance listen? It is interesting to contrast this with how the Reserve Bank of India (RBI) had drastically cut investor complaints during Dr YV Reddy’s tenure. He increased the number of banking ombudsmen; expanded the scope of issues they would handle; told banks that repeated complaints on the same issue would be treated as a class-action. His masterstroke was that he appointed serving RBI general managers to be ombudsmen.

This ensures that a big swathe of RBI’s senior officials is personally sensitised to customer issues as well as banks’ perspective and that RBI has a better record of handling customer complaints than other financial regulators.

MU T U A L F U NDS

2008 to July 2009 was a gloomy market period; new folios added in this period fell to 26.5 lakh— contributing just 2.2 lakh new folios every month.

From August 2009 to July 2010, markets bounced back, the contribution increased only

marginally by 80,000 new folios per month, taking the yearly total to 36 lakh, when the figure actually should have mirrored the rising period between August 2007 and July 2008 and the new folio numbers should have soared to the levels hit in 2007-08.

The 2009-10 market rally attracted few new folios, finds a CAMS study

C

omputer Age Management Services (CAMS), a registrar & transfer agent for mutual funds (MFs), has studied trends in new folio creation. It says that after the abolition of entry-loads, the monthly average for new folio creation has improved. But what CAMS has actually done is compare the trend in new folio creation in a falling market with that of a rising one. The data analysed from August 2007 to July 2010 shows that new folio creation does not mirror the Sensex movement. In the first period (from August 2007 to July 2008), when markets soared, 84.7 lakh folios (an average of approximately 7 lakh new folios per month) were added. The period from August

New Folio Creation Trend 18 16 14 12 10

Sensex

8 6 4 2 0 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sept-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sept-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10

Low Folio

Number of New Folios including Channel/Paper/Online (in lakh)

`

Source: CAMS Survey

13 | 2 June 2011 | MONEYLIFE

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B U Y I N G I N S URANC E

The Right Channel Should you buy insurance from agents, banks, over the Web... or other sources? Raj Pradhan explores

The Issues

• Agents would need to play a more evolved and pivotal role •

Banks and agents will want to sell what suits their objectives

• An insurance broker scores over online purchase because he is representative for your insurance transactions

Banks: They routinely sell unitlinked insurance plans (ULIPs) as products with a ‘guaranteed return’, persuading even retired people to move their money out of bank fixed deposits for the sake of their own commissions. Try opening a tax-saving fixed deposit and see how bank employees dissuade you from doing so with offers for a highest NAV (net asset value) ULIP or single-premium ULIP for tax savings. A relationship manager or a wealth manager working with a private bank has a ‘target’ to meet. Every bank customer with a sizeable deposit is a target for these managers to sell an insurance product, a structured product or a portfolio management scheme (PMS) and earn commissions.

According to Avadhoot Mavlankar, principal officer, Shinrai Insurance Broking Services, “Banks should be regulated more stringently than any other intermediaries, as they already have an advantage over others due to the nature of their business. For example, a bank providing home finance makes it mandatory for the loan applicant to take a home loan or life insurance cover through them.”

Agents: There are 30-lakh odd insurance agents in India serving every nook and corner of the country. Amitabh Chaudhry, managing director and chief executive officer, HDFC Life says, “We believe that agents who are looking for a long-term relationship with the life insurance industry will thrive, while others will be slowly weeded out. We expect large

The broker does not get paid by the customer and, hence, the cost is same for the customer.

The advantage is getting unbiased advice on different insurance companies and their products

“

“

I

n an era of hi-tech distribution channels using mobile, Internet, distance marketing and other innovative channels, how should you be buying your insurance (health and life)? From banks, from individual or corporate agents, brokers, financial planners & advisors or online portals?

Insurance is an important financial product, but it is difficult to find the right one for you due to the multiplicity of choices and complexities of the products as well as the bias of banks and agents to sell what suits their objective. The charges (and, hence, premium) and features vary and comparison is difficult—almost impossible.

Moreover, bancassurance and agency channels are restricted to selling insurance products from only one life and one general insurance company. Here are some factors that may help you choose the right channel.

— Girish Malik, vice president (life), Nandi Insurance Broking

structural changes in the operation of the agency model. Agents would need to play a more evolved and pivotal role—as financial advisors—in the entire financial planning exercise of an individual.”

IRDA (Insurance Regulatory and Development Authority) chairman, J Hari Narayan, recently said at an insurance seminar organised by the Federation of Indian Chambers of Commerce & Industry “The agency, in its traditional form, has vanished from many markets in the world and I don’t see why India will be an exception to this.”

The withering away of the agency channel will affect the livelihood of agents. But this is ``

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future. The truth is that life insurers with dominant bank backing have slowly increased their agency workforce substantially—and even new entrants having bancassurance support are planning to double the number of agents in a year.

These include Star Union Daiichi, IDBI Federal and IndiaFirst Life Insurance. According to Shrigopal Jhunjhunwala, member of the Chairman’s Club for Agents, Life Insurance Corporation of India, “Life insurance is sold and not bought. Individual agents like me are available 24x7 and offer a personal touch. Life insurance is a long-term contract and I remember customers’ previous histories which is not possible for banks due to high turnover of bank personnel.”

Brokers: An insurance broker is someone who represents you for your insurance transactions, unlike an insurance agent, who represents the insurance company. A broker can provide you with quotes from different insurance companies for comparison, ensuring that you receive the best deal possible.

Brokers also assist you in claims processing; some brokers like Medimanage Insurance Broking will help to get cashless approval during hospitalisation by coordinating with the third party administrator (for health insurance). Brokers are required to possess a broker’s licence which normally indicates that the broker would have had more training and experience than an agent. Girish Malik, vice president (life), Nandi Insurance Broking, says, “The broker does not get paid by the customer and, hence, the cost is the same for the customer. The advantage is getting unbiased advice on different insurance companies and their products. Moreover, we offer after-sales service for help in claims processing, just like agents.”

as brokers or independent financial advisors (IFAs) will gain relevance.”

Online portals suffer from severe drawbacks, including absence of contact personnel to support claims processing. This is true for health and life insurance. Insurance is a promise of future payment. Health insurance claims can be followed up by the policyholder (if he survives hospitalisation), but death claims for life insurance will need the nominee to make numerous rounds of an insurance office, if there is no agent to support the nominee.

No matter which channel you buy insurance from, there are some factors you should keep in mind— the most important one being: study the insurance claim settlements, not just the cost of the policy. An insurance policy should not be preferred for ease of payment, or the lowest premium option. The key benefit of a policy is ease of claims settlement—whether it is health or life insurance. As we said, after-sales service is most important in an insurance policy. According to Amish Aggarwal, certified financial planner, PersonalFN, As markets “We recommend term life plans become mature, from only those companies which have completed at least five years other channels, since their inception. After that, such as brokers we look at the profitability, claims or independent settlement history of the insurer and financial advisors how much premium they charge for (IFAs) will gain the policy. The premium charged relevance by the insurance company should — Kshitij Jain, managing justify their claims settlement ratio. director and chief executive If a company is charging lower officer, ING Life Insurance premium, but its claims settlement history is poor, then we do not recommend it. However, we do not Other Channels: According to mind considering a company that Kshitij Jain, managing director and charges a higher premium, provided chief executive officer, ING Life, it has strong fundamentals and has a “Life insurance remains an advicehigher claims settlement ratio.” based product which requires wellKeep these factors in mind trained and professional people while choosing a channel to buy servicing customers. As markets become mature, other channels, such insurance.

A broker can give information to the best of his knowledge and experience with different insurance firms. It is possible that an insurance company may even catch the broker off-guard—like the hefty premium increase of 500% by Reliance HealthWise policy. Buying health and life insurance from brokers is an option worth exploring. It is important to talk with a few brokers before finalising your choice, as your experience may vary with each one.

“

“

` unlikely to happen in the near

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P u b l i c i n t ere s t

Five Gardens, being a ‘Heritage Grade III precinct’—among other attributes, these precincts comprise structures that evoke architectural, aesthetic or sociological interest— Brihanmumbai Municipal Corporation has gone was allocated a sum of Rs8 crore in extravagant with its ‘makeover’ plans for Five Gardens, a the 2009-2010 civic budget.

Mumbai landmark, which needed no transformation, finds The work at Five Gardens Shukti Sarma. Citizens are fighting back started in January 2011 and picked up a surprisingly hectic pace. Work orders for items for garden ‘A’ and one single contractor. If this is so, he civic authorities in Mumbai garden ‘B’ describe replacement one can only imagine the wasteful have been taking up numerous of old lamp posts at a cost of expenditure they will incur.” beautification programmes across Rs50,000 each, inclusive of fittings It has been reported that the city over the past few years and wiring. Even the lawns were to beautification plans were initially even as the basic infrastructure left out of the civic budget proposals be relaid in one of the gardens at a of the metropolis crumbles. Now, last year by municipal commissioner cost of Rs10 lakh. inquisitive residents and activists Thirty-one new lamp posts were Swadheen Kshatriya. He suggested are finding out that these projects installed in garden ‘A’. In garden ‘B’, are not cheap—and they may not be that civic finances were not robust and chose to focus on completion of which had only four lamp posts in worth the cost, after all. core projects instead. However, this the middle, 33 new lamp posts have The facelift for Shivaji Park, in central Mumbai, is one of the larger was altered by the Shiv Sena mayor been put up, many of them along Shraddha Jadhav, who is authorised the sidewalks. Five Gardens earlier ongoing projects. In the Wadala had BEST (Brihanmumbai Electric area, not very far from Shivaji Park, to change the proposals up to a renovation has been taken up at the limit of Rs75 crore, with allocations Supply and Transport Undertaking) lamp posts. The BMC claims that popular Five Gardens. Work is more for beautification of playgrounds, the new lamp posts are ‘antiques’ gardens, jogging parks and traffic or less complete in two of the five `` and it has paid a total of Rs7.40 islands. parks; new lamp posts have been installed, new benches laid out and BREAKING NEWS pathways spruced up.

Five Gardens did not deserve this treatment The re-modelling of the parks startled some of the residents of the generally quiet Parsi Colony, where Five Gardens is located. A couple of them used RTI (Right to Information Act) route to inquire about details of the work and the cost involved. Nitin Desai and Ashok Ravat found out that the lamp posts, which are short in size, cost Rs50,000 each and that the civic authorities paid Rs30,000 for each of the benches. Already, about Rs30 lakh has been spent on the work in two (of the five) parks and many residents are wondering whether this was necessary at all.

Mr Desai told Moneylife, “The Brihanmumbai Municipal Corporation (BMC) wants to BENCH MARK LET THERE BE LIGHT... similarly renovate other popular The old benches were good. Still the BMC bought new BMC paid Rs50,000 for a single lamp benches which cost Rs30,000 each post! This is a dark deal gardens across the city through this

Up the Garden Path

T

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CURRENT ACCOUNT

` lakh for the lamp posts and a

further Rs7.67 lakh for the wiring.

These so-called ‘antique’ lamp posts are the fad in new housing constructions across the city. Similar wrought-iron ones are available even at some big hardware outlets which are quoting about Rs2,000 per lamp, and about Rs10,000 for the iron post. And why were the concrete benches—originally donated by the Ghanshyamdas Saraf Trust—that were perfectly functional, pulled out and replaced with sleek street furniture which cost Rs30,000 a piece? The explanation given was that the new wood-and-iron benches coordinate well with the ‘antique’ look of the lamp posts. Twenty-nine new benches have been fitted in garden ‘A’ at a cost of about Rs9 lakh.

Then again, these have been placed in clusters, a change from the previous linear arrangement.

“These have now become

BOTTOMLINE BY MORPARIA

hangouts for antisocial elements,” says Mr Desai. And to think that the architect who prepared the renovation plan had boasted that the face of Five Gardens would be transformed with an international

ORIGINAL CONCRETE The footpath was to be paved with granite

look! Following the questions raised by residents and activists, the work has been put on hold.

Mr Desai says that the footpath that goes around garden ‘B’ is probably one of the few decentlymaintained pavements one finds in the city. Still, this was also to be

changed as part of the beautification plan. The footpath was to be paved with granite and this work would have cost about Rs20 lakh. But the activists did not allow it, and the original concrete paving was retained, with minor touching-up which cost only Rs5 lakh.

Such elaborate, expensive renovation work would require protection and maintenance. But activists say that there is no evident provision for this. Residents are also worried over the likely influx of people to the gardens after the renovation and the impact this could have on security here. “Parsi Colony is a sleepy area, and after sunset, it is very quiet,” Mr Ravat says.

“The only people hanging around at night in the area are vagabonds and goons. Residents can use the park only in the early morning.

The luxurious benches and lighting will provide the perfect setting for vagabonds to pass their time.”

MONEYLIFE | 2 June 2011 | 18

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LOOSE CHANGE

Surprise Gift for Quiz winners from:

Moneylife Quiz - 102 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 29 May 2011.

1. Who is the founder-director of Vsoft Solutions & Consultancy? a. Vijay Athavale b. Shriram Godbole c. Ashwin Shah d. Avadhoot Malvankar 2. From which date did the Model School Bus Service commence? a. 7 March 1995 b. 5 May 1998 c. 15 January 2001 d. 6 June 2002 3. Who is the CEO of Zappos? a. Tony Hsieh c. Frieda Jackman

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b. Keith Jaguar d. Kevin Freiberg

4. De Lage Landen Financial Services Inc is a wholly-owned subsidiary of which company? a. CasaRolla group b. Rabobank group c. IndiUs group d. New India group 5. What is the minimum annual premium of the Insure Smart Plan launched by Canara HSBC Oriental Bank of Commerce Life Insurance? a. Rs10,000 b. Rs25,000 c. Rs50,000 d. Rs75,000 6. What is the currency of Bhutan? a. Ngultrum b. Rupee c. Yuan d. Kyat 7. In which year was Kshana registered as an NGO? a. 2005 b. 2008 c. 2010 d. 2011 8. When did the Sensex cross the 18,500 mark for the first time? a. August 2000 b. January 2002 c. April 2005 d. October 2007 The answers to Moneylife Quiz-101 are: • 1-a. 1919 • 2-c. Noshir Dadrawala • 3-a. Life Insurance Corporation of India • 4-b. 1988 • 5-b. General San Martin • 6-c. April 2006 • 7-d. 25 April 2011 • 8-c. Neville Tuli

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I don’t teach them to use a blow dryer” – JAWED HABIB, FASHION HAIR STYLIST, in DNA

“CEOs of big multinational companies are not so much worried about corruption. They say in a society, in a democracy where there is fast growth, certain amount of corruption is accepted, is acceptable, will be there” – DEEPAK PAREKH, CHAIRMAN, HDFC, on CNBC-TV18

“There has to be a market and then only you can protect the investors. If there is no industry and no market, whom do you protect? The question is: do we want to benefit from the growth of the economy? Will we reach out to retail investors or not?”

– UK SINHA, CHAIRMAN, SEBI, in Mint 19 | 2 June 2011 | MONEYLIFE

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

REGULATION

KM Abraham’s Investor-unfriendly Order SEBI found HSBC Mutual Fund guilty, but a member of SEBI allowed the Fund to get away

A

dogged two-year battle by senior citizen Venkat Subramanian and his wife Anuradha Venkatasubramanian with HSBC Mutual Fund against a mindless order of the Securities and Exchange Board of India (SEBI) holds out hope for those who chose to fight dodgy decisions by market intermediaries and regulators.

In the October–November 2008 period, the senior-citizen couple invested a hefty Rs2.52 crore in a ‘safe short-term plan’ of HSBC Gilt Fund with an average portfolio maturity of seven years, as opposed to a ‘long-term plan’ that is also offered with a 20-year average maturity portfolio. In February 2009, they noticed that the monthly statement showed a sharp 10% dip in the net asset value (NAV) in just three days. On inquiry, they learnt that HSBC had unilaterally wound up its ‘long-term’ plan and merged it in the ‘short-term’ one, whose term was enhanced to 15 years.

It also changed the benchmark

index from ‘I sec Si-Bex’ to ‘I sec composite index’ and dropped ‘short-term’ from the name.

The couple demanded an exit option at NAV before the merger, but were refused. In March 2009, they exited the scheme but filed a complaint. SEBI’s whole-time member Dr KM Abraham heard the case and issued a strange order which provided no relief to the investors, forcing them to file an appeal. In May, the Securities Appellate Tribunal (SAT) said in its order that it was “really amazed that the whole-time member” had failed to issue directions to HSBC

marred by the fact that SAT did not think it fit to ask the Fund to cover the investors’ cost of fighting their way through a SEBI complaint and then an appeal. In effect, even this positive order will not force any introspection at SEBI about its duty to protect investors. Still, while this order can perhaps be attributed to thoughtlessness, the one described below is downright devious.

REGULATION

When Will the Regulator Be Held Accountable?

Nothing happens to SEBI officials even after shoddy investigation and false accusations

Mutual Fund even after recording a finding that it had changed the scheme in a way that affected unitholders’ interest, and also had not complied with the SEBI regulation to offer them an exit option at the NAV prevailing before the merger.

The SAT order, in favour of the investors says, “We are satisfied that the whole-time member grossly erred in not issuing the appropriate directions in this regard.”

This happy situation is, however,

I

n an astonishing case, decided on 28 April 2011 by SAT, it appears that SEBI needlessly harassed and penalised a company by falsely accusing it of unfair trade practices.

SEBI accused Vijay Textiles, a Secunderabad-based company of making two false/misleading corporate announcements in February 2005 about an export order of Rs20 crore it had received from Simran Enterprises of Europe.

SEBI alleged that the announcement led to a spurt in the stock price allowing one of the promoters ``

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` to sell a substantial chunk of his

shareholding at a huge profit. SEBI also alleged that the company had failed to inform stock exchanges that the export order had failed to materialise and slapped a penalty of Rs25 lakh under two identical, but separate, show-cause notices under its Fraudulent and Unfair Trade Practices regulation.

An appeal to SAT brought to light the following facts. Vijay Textiles had, indeed, informed stock exchanges that the export order had failed to fructify. In fact, it had even mentioned it in a newspaper advertisement on 28 October 2006 along with its unaudited financial results.

As for the allegation that it was trying to ramp up its share price (to allow a promoter to exit at a profit), the company pointed out that its share price had been on the rise since October 2004 due to a series of positive announcements.

It set up a design studio, split its shares (announced in November 2004), announced a 40% interim dividend in January 2005, a 2:1 bonus in February 2005 on improved financial performance, and it also announced plans to set up a 12,000 sq ft retail showroom in Hyderabad.

SAT agreed that Vijay Textiles had not made any false announcement. “We wonder what kind of an investigation was carried out when a public announcement in this regard was made by the company which not only appeared

on the website of the BSE (Bombay Stock Exchange) but had also been published in a financial newspaper Business Standard,” asks the order.

It also agreed with the company that a bonus announcement and improved profitability was more likely to have caused the stock price to soar than the Rs20-crore export order. The SAT order wonders about SEBI’s false charge that the stock exchange had not been informed about the failure of the export order. It is important to note that SEBI lawyers ‘strenuously’ argued their case, even when ‘confronted’ with evidence. SEBI’s

SEBI penalised Vijay Textiles accusing it of unfair trade practices

claim that the promoter profited from the price rise was also struck down with proof that he had been selling off small chunks of his holding long before the export order announcement.

While the SEBI order was set aside with such harsh observations about the regulator’s ‘investigation’, SAT again failed to impose any costs on SEBI. SEBI’s action against Vijay Textiles has us wondering whether it is a case of gross incompetence

or deliberate harassment. Either way, those responsible for poor investigation and adjudication will pay no price for damaging the company’s credibility with its false charges.

The action seems more sinister when seen in the context of issues raised by former SEBI board member Dr Mohan Gopal in a letter to the prime minister. He says, “major violations” established through investigation “are excused without punitive action through opaque consent orders and faulty adjudicator orders favouring wrongdoers—in such cases review

by SAT would never be sought” because neither SEBI nor the wrongdoer wants it. He specifically points out to how a company guilty of “criminal market manipulation” was let off by a whole-time member asking it to “be more careful in future”. (We believe this refers to the Zee group’s role in the Ketan Parekh scam).

Such unbridled power, without any supervision or consequences, to harass intermediaries through false allegations or let them off with a warning or a slap on the wrist based on ‘other considerations’ can unleash terror among market intermediaries. Is it any surprise then that hardly anybody is ever willing to speak against regulatory policies or decisions? These two shameful SEBI orders, which were struck down by SAT, illustrate why investors are losing faith in the capital market.

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DIFFERENT STROKES SUCHETA DALAL

Unac c ount abl e Re gulators

Cancerous Caucus The recent capricious record of the SEBI top brass has shown that Indian regulators may continue with their whimsical ways if investors/savers don’t assert their rights and demand accountability from politicians

I

f the board of directors of a regulatory body wantonly subverts regulatory processes; if a board comprising representatives of regulatory bodies (like RBI, SEBI or the ministry of corporate affairs) cannot ensure good governance and fair play, can we expect any better from the listed companies that they regulate? Who will discipline a regulator that fails to discharge its responsibilities?

These are the broader issues arising from an explosive letter written on 24 December 2010 by Dr Mohan Gopal, a former member of the board of the Securities and Exchange Board of India (SEBI), to the prime minister (PM) of India. It must worry all of us that the PM and the finance minister (FM) have faced no pressure from our Parliamentary system to respond to Dr Gopal’s charges or initiate corrective action.

In fact, Dr Gopal’s letter became public only because Subhash C Agarwal, an intrepid activist, accessed it using the Right to Information (RTI) Act. Yet, the core issue of equity, justice and the regulator’s accountability finds no discussion in the media.

But, before going into Dr Gopal’s charge about how an “informal clique of current and serving bureaucrats, SEBI officials, lawyers and corporate interests orchestrated a subversion of the due process of law”, here is the background.

In the IPO (initial public offering) scam of 2006, SEBI indicted the National Securities Depository Ltd (NSDL) along with banks, registrars, brokers and investors for allowing a cabal of market manipulators to corner big chunks of the retail investment quota in scores of IPOs. While banks and other intermediaries were punished, NSDL, which was then headed by CB Bhave, decided to contest SEBI’s charges. Later, when the government appointed Mr Bhave as SEBI chairman, the finance ministry decided to ‘ring-fence’ him from

the NSDL-SEBI litigation issue by asking a two-member bench of the SEBI board to investigate and decide the issue. The bench comprised Dr Mohan Gopal (who also heads the National Judicial Academy at Bhopal and has taught at the Harvard Law School for over a decade) and ex-RBI deputy governor V Leeladhar.

The ‘ring-fence’ developed huge holes when the bench did not play to the script to exonerate NSDL. Instead, it upheld some charges and questioned why NSDL’s systems were not robust enough to detect the scam. Moneylife has extensively documented the subsequent saga of suppressing the report, humiliating Dr Gopal, and the scandalous board meeting which spuriously declared orders against NSDL as void, or ‘non est’. Remember, most other intermediaries indicted in the IPO scam have been punished or have paid consent/disgorgement charges to settle their cases; banks bore the brunt of the scandal by not being allowed to open new branches during 2006-08, a period when the economy witnessed accelerated growth. Only the two depositories had gone unpunished; a couple of others are in litigation with the regulator.

Since SEBI has now done a U-turn and upheld the Gopal-Leeladhar bench orders, this column will focus on the ‘four structural flaws’ that allowed a cabal of ‘former and serving bureaucrats’ to vitiate and subvert the regulatory framework.

• Unprofessional Discharge of Quasi-judicial Functions: Writing about “inadequate transparency, public accountability and parliamentary oversight,” Dr Gopal says, “one of the most shocking and unprecedented actions” by the SEBI board was to set aside quasijudicial orders which can only be subject to ‘judicial review’. He points out that a non-judicial person (TV Mohandas Pai), representing a regulated entity (Infosys), with a clear conflict of interest (the board ‘generously excused’ the fact that Infosys does business with NSDL) chaired the crucial meeting instead of other regulators who were on the SEBI board. SEBI’s whole- ``

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DIFFERENT STROKES SUCHETA DALAL

` time directors, who reported directly to the ‘ring-fenced’

chairman, were allowed to participate in the decision, although it had been specifically decided earlier to keep them out. More importantly, Mr Pai decided to ignore the opinion of none other than JS Verma, former chief justice of India, who had issued a statement that SEBI’s action “violated established legal and Constitutional principles”, although it was submitted by Dr Gopal in his capacity as a board member of SEBI. • Ineffective Framework Law Enforcement: Dr Gopal highlights the fact that the SEBI Act allows overlapping enforcement and punitive provisions, with the result that intermediaries can be bullied and harassed by subjecting them to “multiple proceedings without a clear distinction between them.” We, at Moneylife, too have repeatedly pointed out that ‘major violations’ “are excused without punitive action through opaque consent orders and faulty adjudicator orders favouring wrongdoers—in such cases, review by SAT (Securities Appellate Tribunal) would never be sought” because neither SEBI nor the wrongdoer wants it. In addition, Moneylife (10 March 2011) wrote about how some intermediaries (including many repeat offenders) are let off with ‘administrative warnings’ which, unlike consent orders, aren’t even recorded.

• Flawed Governance Structure: Dr Gopal raises many governance issues showing how the finance ministry dominated and dictated actions at SEBI and that many of its senior officials had no domain expertise. Worse, for the past six years, two successive SEBI chairmen have ensured the loyalty of executive directors (EDs) heading the legal department by keeping them on a short leash through a three-year contract. While the legal department is most sensitive, we are just as concerned about the fact that the new SEBI chairman will bring a brand new team of his own loyalists to head all senior positions. The EDs heading the two important portfolios of investigation and mutual funds are on

their way out and so are two whole-time members after the new chairman’s appointment. These four and the ED-law were seen as core loyalists of the previous chairman. A new team again forming a coterie around the new chairman is hardly healthy for the capital market.

Add to this, Dr Gopal observed, that there is no framework for whistleblower protection and so he was subjected to “retaliation and attack without any protection.” He also touched upon the fact that SEBI tends to be hostile to investor voices (including those in the media) “unless they are friendly in which case selective patronage may be extended to them.”

• Poor Oversight: SEBI will continue to get away with such capricious actions, because it has no public accountability, little transparency in its functioning and poor Parliamentary oversight. Dr Gopal points out that board meetings of the US Securities and Exchange Commission (SEC) as well as US Senate hearings are open to the public. Not so in India. Even the proceedings of the standing committee of Parliament on finance are shrouded in secrecy, except for its reports which are tabled in Parliament, but usually so late that they cease to have much actionable value. Most members of the committee have little knowledge of finance or the capital markets and are in no position to counter the submissions made by SEBI, the RBI or any other financial regulator. Even that would not have been an issue, if our parliamentarians had made an attempt to engage with activists, investors and civil society to understand issues that affect them and raise them with the regulator. Only if investors/savers assert their rights and demand accountability from politicians will this state of affairs change.

Sucheta Dalal is the managing editor of Moneylife. Subscribers get free help in resolving their problems with select providers of financial services. She can be reached at suchetadalal @yahoo.com

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MUTUAL FUNDS POINTERS

B a n k F I X ED De pos it s Vs Bond F unds

No Interest in Bonding If you think returns from bond funds will trump those from bank fixed deposits, you have another think coming

T

provide the best opportunity to gain from interest rate movements.

However, before you decide to jump in, it is worth asking: How do these merits of bond funds and their performance stack up against FDs? Let’s evaluate the scenario since 2004. In 2004, out of 31 bond funds, 23 outperformed, seven underperformed while only one had just equated its benchmark—giving average overall returns of 9.27%, while the benchmark CRISIL Composite Bond Fund Index gave a return of 8.77%, and the one-tothree year bank FD rate for 2004 was around 5%. In 2005, out of 33 bond funds, 24 outperformed and nine underperformed. These funds gave an average return of only 1.12%; the CRISIL Composite Bond Fund Index gave a return of 0.04%—the FD rate for 2005 was around 5.4%.

In 2006, out of the total of 37 bond funds, 24 outperformed and 13 underperformed. These funds gave a 4.14% return on an average, while the CRISIL Composite Bond Fund Index for the same year gave a return of 3.27% and bank ``

he corpus invested by mutual Is it worthwhile pulling out some money from FDs to put it into bond funds in bonds is much funds? The advantages of bond larger—almost eight times— funds are well-touted—lower risk than in equities. Bonds should also and steady income, in addition to be a very important part of your asset mix. So, are mutual funds that liquidity of investments. During an economic slowdown, it is believed invest in bonds preferable to bank that bond funds tend to perform fixed deposits (FDs)? better than other investments.

The features of bank FDs are According to mutual fund houses, better known than the trends and bond funds are considered better performance of bond markets, than FDs because bond funds especially when the interest rate scenario is volatile. This is because the bond market is practically closed Falling Interest Rates—Good for Bonds to individual investors. If you want to buy, say, an 8.5% Government of Average Return of Bond Funds Average Bank FD Rate India (GoI) 2020 bond, you will not 20% be able to because it is not traded like the shares of Reliance in small 15% quantities by millions of investors.

Bonds are sold in large blocks 10% of crores of rupees, among large institutional investors like banks and corporate treasuries. But there is a 5% way to participate in that market— through bond funds (also known as 0% income funds). Bond fund managers 1997 1998 1999 2000 2001 2002 2003 are professionals who know which bonds to buy and when to offer you Source: Reserve Bank of India; Mutual Funds India professional management of fixedIn 1997, bank FDs were fetching 12% and corporate FDs 17%.This was income securities.

The question is: How have bond unsustainable; growth stalled and interest rates went on a long slide.This was ideal for bonds which did far better than FDs funds performed vis-à-vis bank FDs?

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MUTUAL FUNDS POINTERS

Benchmark Return Average Bank FD Rate Percentage of Bond Funds that outperformed average FD rate each year

Rising Interest Rates— Good for FDs 10%

100%

100%

80%

8% 6% 51%

60%

59% 41%

4%

40% 20%

2% 14% 3%

0% 2004

2005

11%

0%

3%

2006

2007

2008

2009

2010

2011

Source: Reserve Bank of India; Mutual Funds India

From 2003 onwards, strong GDP growth resumed, demand for money went up and so did interest rates. Bonds did miserably for many years as shown by the number of bond funds that beat bank FD rates each year ` FD delivered returns of 6.3%. In

2007, there were 38 bond funds of which 32 outperformed and six underperformed. These funds yielded average returns of 5.11% compared to the CRISIL Composite Bond Fund Index, which gave a return of 3.75%, and bank FDs delivered 8.3%.

In 2008, out of 39 bond funds 23 outperformed and 16 underperformed. These funds gave an 8.02% average return compared to the CRISIL Composite Bond Fund Index which gave 8.18% return, while bank FDs delivered 8.5%.

Next year, there were 44 schemes of which 31 outperformed and 13 underperformed. These schemes gave an average return of 9.34%; the CRISIL Composite Bond Fund Index gave a return of 7.33%—and bank FDs delivered 8.4%. In 2010, out of 51 funds, 31 funds outperformed, while 20 underperformed. These funds fetched an average return of 5.62% compared to the CRISIL Composite Bond Fund Index which

gave a return of 5.18%. In 2011, of the 63 funds, 39 funds outperformed and the 24 underperformed. These funds gave an average return of 5.72% compared to the CRISIL Composite Bond Fund Index which gave a return of 5.04%. Returns from bank FDs for 2010 and 2011 were 6.5% and 7%, respectively.

Clearly, bond funds have never earned higher than bank FDs— except in 2004 and 2009.

The comparison is a bit tricky because comparison of all returns has to be on a post-tax basis. Equity mutual funds are tax-free and longterm capital gains on equity shares are also tax-free. But fixed income is taxed and at different rates for different instruments. Tax on income from FDs attracts the normal rate of taxation for individuals, while it is not so for bonds. Bonds held for over a year attract long-term capital gains tax. Plus, since it is an asset held for the long term, the cost is adjusted upwards to give indexation benefit to the holder.

Even adjusted for these tax breaks, bond funds don’t deliver a significantly higher return. This means that there is no need to pull out money from FDs and put it into a bond fund. But the bigger issue is that the principal in an FD is risk-free and return is non-volatile.

But the return from a bond fund can go down sharply, if the bond fund manager does not time an interest-rate cycle properly. Even the best of bond managers have their ups and downs. There can also be a situation that you need money exactly at the time when the fund is down. You may have to withdraw your money against your wish. So, while a particular bond fund may sport a five-year return of 9%, your effective return may be lower, if you cannot hold on for five years at a stretch. But the return from an FD won’t create a dent in your pocket. An FD with major scheduled banks is practically zero-risk and liquid. You can take out the money whenever you want to.

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SMART MONEY R BALAKRISHNAN

S T OC K M ARKET

To Buy or Not To Buy That is the question even for long- term investors today

O

ur stock markets seem to have got stuck in a range. On the BSE (Bombay Stock Exchange), the Sensex neither breaches the 20,000 mark convincingly nor falls low enough to make buying attractive. Corporate results, being announced for the full year ended March 2011, seem to be in line with market expectations. Voices expressing concern on the valuations as well as the possibility of more attractive opportunities elsewhere do not seem to have reduced the cash coming in to our markets. Valuations are not low, pricing in earnings growth of over 20% year after year.

Inflation is sticky and refuses to come down. Gold, silver, crude and global stocks are all moving up. Some metals have lost lustre; but, overall, there is no sense of caution.

As I write this, news is out that KV Kamath is taking over as chairman of Infosys Technologies. This company deserves a re-look for reasons other than valuation. This decade would, perhaps, see the exit of its original team of founders with no dominant shareholder in charge. Some large company could make a takeover attempt on it.

I would like to keep an eye out for companies where families are likely to sell out—Camlin is one. Mergers and takeovers are not possible in the Indian context, unless there is a willing seller. Else, look for takeover attacks on companies like Infosys or L&T (Larsen & Toubro) where there is no dominant ownership. The other factor likely to keep valuations in check is the Reserve Bank of India’s (RBI) actions that would make borrowing expensive. Instead of attacking inflation from the supply side (a long-term solution rather than a quickfix one), the government is trying to make borrowing more expensive. This will make capital spending more expensive and lead to postponement of projects. Sectors like construction will be adversely affected. So, the RBI will contribute its bit in keeping profit growth down for many Indian companies.

In this environment, consumer companies and cashsurplus companies (like multinationals) will do well.

Unfortunately, the stocks in this pack are not exactly cheap. Operating margins of capital goods and labourintensive sectors are under pressure as increasing wage

costs become a concern. Service sectors, like banking and IT, are facing a shortage of competent people and are managing to add headcount by compromising on quality. All in all, there is reason to believe that while things look okay, there is no reason to be very bullish.

Our markets are driven by the inflow/outflow of FII (foreign institutional investors) money and political crises and corruption do not worry the institutional investor. How else does one explain the fact that stocks of companies, whose key executives have been put behind bars, continue to trade at expensive valuations?

Gold and silver continue to defy gravity and are heading towards bubble territories. Excess currency supply and a weak global economy are pushing up gold and silver. Withdrawal of stimuli would surely dent global growth. Rating agencies are threatening to downgrade US and Japan. Food inflation is a global concern. The US is facing jobless growth and a declining currency. But global stock markets are strong. This is a case of excess money in the world trying to find safe havens and some money chasing higher returns from riskier markets like India or Brazil. It looks like a case of too much money going around and no one wanting to miss the party as asset prices rise. In such a context, where global money flows into our markets which are robust, a significant decline may not happen.

Many investors are waiting for a crash that would throw up a buying opportunity. The markets seem to be testing their patience. This market is surely not good for domestic mutual funds which would underperform in this scenario. They will sit on cash and not have the conviction to be fully invested at these valuations. In this market, it is best to keep new money away from equity markets. Fixed income still offers around 9%-9.5% yield. That takes care of a near 2,000-point rise in the BSE Sensex over one year. Sure, it does not satisfy greed and, perhaps, may not beat inflation, but could help to save on any significant downside if the FIIs (some of it could be Indian money illegally routed through the FII route) decide to take a powder.

The author can be reached at balakrishnanr@gmail.com

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COVER STORY

Muted growth in corporate profit, a US slowdown, a stronger dollar and reduced FII inflows… bulls have a lot going against them. If the market crashes, when should you buy? Analysis by Debashis Basu

N

othing lasts forever—least of all a bull market that is battling rising interest rates and inflation.

And what a bull market we have had since the dark depressed days of October 2008 when the Sensitive Index (Sensex) had hit 7,697 and meandered in a 2,000-point range for the next four months before embarking on an explosive rally from 8,047 on 6th March all the way to 21,108 on 5th November! But it is time to bid goodbye to such a long persistent rally.

While the good news is that the Indian economy is still growing fast—in all likelihood at a rate higher than what the official data suggest—large gains from the market are probably a thing of the past. We are in for a period of average gains for an extended period.

As it is, the bull run of the past two years masks

an important fact. At the time of writing, the Sensex is around 18,500. In this long run-up of the past two years, we had already crossed 18,000 in April 2010. In effect, a year is over and what has the Sensex delivered? A return of 3%. Once again, this proves that returns from the stock market are lumpy in nature. Take an even wider perspective. The first time the Sensex crossed 18,500 was in October 2007. It has been three-and-a-half years now and the index has not budged higher.

This may come as a surprise to many but, indeed, while the Sensex looks extremely volatile on a daily and weekly basis, over a long period of time, it moves slowly.

The periods of rapid bursts which we saw in 20032008 happen only once, or maybe twice, in any person’s investing lifetime. ``

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COVER STORY

`

For most other periods, the markets trend in a broad range, in line with growth and valuation. If they are near the top of the range, they go down on negative events.

If they are near the bottom of the range, they rally on positive events. By all accounts, we are somewhere near the middle of the range—and amidst a scenario of slowly deteriorating fundamentals and macro environment.

Is the time right for the bear to strike?

The (bull) story so far…

The bear has long been in hibernation, as it does when macroeconomics favours a rally. And nothing favours

a market rally more than rising GDP (gross domestic product) growth, low inflation and low interest rates.

Ed Easterling explains this concept of market valuation in Unexpected Returns and, more recently, in Probable Outcomes (see box Financial Physics for the concept).

This has been the story of India so far. Rising economic growth, coupled with low interest rates and low inflation (by Indian standards), has ensured a nice upward tilt in stock prices for the past two years.

What additionally helps in such a situation are increasing speculative inflows, as bullish punters get more confident that good times are here and would continue.

This situation has received a jolt recently because both inflation and interest rates seem to be ratcheting up uncontrollably.

While the positives about the Indian economy are here for all to see, these negatives (inflation and interest rates) seem menacing—like the hidden part of an iceberg which can only be imagined. Short-term investors have turned nervous, wondering how big the iceberg would be, especially since there are global worries as well— from China to the Middle East and Europe to the US. But, before we discuss whether the vicious swipe of the bear is imminent, let’s look at the positives of the

India story that tend to get lost periodically due to a plethora of negative events.

The Positives Not even the most diehard bear can ignore the positives of India. Public and private investment, private consumption and government expenditures are still creating a virtuous cycle of growth. There are two visible signs of these. One, labour/employee shortage and rising wages in virtually every segment of business and industry. This shows how well businesses are doing and also why additional consumption coming from increased employment is set to grow. Two, high consumption across all levels of the population, especially in semiurban and rural areas, which is creating a tremendous offtake for consumer durables and consumer products.

The consumption growth is spurred by the multiplier effect of capital investments in large projects and revenue expenditures of the government which has doled out generous inflation-adjusted pay hikes.

Another big development has been the sudden surge of foreign direct investment (FDI) which has been playing catch-up to the billions of dollars foreign institutional investors (FIIs) have been bringing in. Suddenly, a few big-ticket FDI deals have changed the picture, putting India in a different league altogether. Posco of South Korea has committed about $13 billion for its steel project in Orissa. Posco seems to be interested in another $7-billion project in Karnataka. The deal between Reliance Industries and British Petroleum can bring in $14 billion and we are suddenly looking at a very comfortable liquidity and balance of payments situation.

So the stagflation as witnessed in the mid-1990s, caused by tight money supply, seems unlikely right now.

Among the most telling statistic of the India growth story is the buoyancy in tax revenues, come what may.

The indirect tax collection figures have been revised upwards again. Indeed, we are seeing the exact opposite of what was witnessed in the 1990s: at every stage, the government seems to be underestimating the revenue collection. Between April–December 2010, customs duty collection increased by 68%, excise duty collection increased by 33%, service tax (which now accounts for about 10.07% share of the tax cake) posted 18% growth and corporate income-tax collection was up 25% over the same period last year. Meanwhile, the export target for FY10-11 has been revised upward to $230 billion from $200 billion. In January 2011, alone engineering exports have grown by 70%. Exports from special economic zones between April and December 2010 were up 47%.

There are other positives as well. Granaries are ``

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COVER STORY

` overflowing and food-grain production would hit its

second-highest level in history. Wheat production would be a record. Such robust economic activity needs to be continuously funded. Bank credit was up 24% during February 2011, over the same period last year.

The Negatives The positives are, of course, known and are factored into the stock prices. The question is: Can we extrapolate the future from the recent past? Is the India growth story immune to the many negatives that have suddenly hit us in the last two months?

First, let’s take a look at oil prices. Crude oil has

ma r k e t drive rs

Financial Physics How inflation, economic growth and stock prices are interlinked

M

arkets are influenced by human behaviour ac ng in herds; so it is tough to formulate laws that can explain market ac on, much less predict it accurately.

But Ed Easterling has an interes ng theory which he calls ‘financial physics’. Financial physics explains the interac on among the principles of economics and finance as the drivers for secular stock markets. In the financial physics model, two elements of economics—economic growth and infla on—drive the two financial components of the stock market, viz, corporate earnings and stock prices.

In the first set of correla on, economic growth is the fundamental driver of earnings growth which, in turn, is the primary driver of the stock market over the long term. Higher growth and higher infla on should increase corporate earnings. If infla on only bumped up earnings, the stock market would respond accordingly and move higher; but it does not.

This is where the second factor comes into play. While infla on increases earnings, it also affects the price levels of financial assets and the price level of a financial asset influences subsequent returns. Rising infla on increases the level of returns required by investors, thereby causing prices to decline. Stock prices fall as the present value of future earnings declines. To get a higher rate of return from stocks, investors tend to pay a lower price for future earnings (i.e., lower P/Es). In effect, infla on drives down P/E and, thus, offsets the infla on-driven growth in EPS. Historically, the years with higher infla on and defla on tend to have a low P/E. When infla on is high,

spiked into the $100+ range since the civil war started in Libya, after steadily climbing since February 2009. The spike was the combined result of demand, easy money that fuelled speculation in all commodities, and fresh fears that the world would run out of oil since no new large fields are being discovered.

The more worrying negative is the combined headwinds of rising inflation and interest rates. Look at the chart on page 31 which captures the data of 400 companies in the Moneylife sample that have declared their results for FY10-11 so far. Interest cost and raw material costs have shot up by 31% each, leading to a squeeze in net profit growth to just 10%. Some ``

investors should expect that P/E would be low. If we are in a situa on of higher-than-average-P/E, prices will fall—o en, despite growing GDP and earnings. Similarly, in a scenario of defla on, the future growth rate for earnings and dividends turns nega ve and the value of stocks falls. Thus, both higher infla on and defla on cause P/E to decline.

Higher infla on also reduces the purchasing power value of an investment por olio. Thus, high infla on brings in low returns and lessens the value of what’s le . Easterling’s market valua on theory firmly makes the market level

Economics & Finance UNCERTAINTY #1

REAL GDP

DRIVEN UNCERTAINTY #2

INFLATION

P/E RATIO

NOMINAL GDP

EPS

Source: www.CrestmontResearch.com

STOCK MARKET

rela ve to the infla on rate—not a level that is arbitrarily anchored to a long-term average. This is precisely what is happening in the market today.

There are fears of rising infla on which are reflected in P/E compression—despite rising EPS (earnings per share) and GDP growth.

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` companies have reported as much as a 55% rise in raw

material costs in the March 2011 quarter.

The Reserve Bank of India has turned hawkish, at last, after hoping for a year that the monster of inflation would be tamed. It delivered a bigger-than-expected 50-basis point rise in interest rates on 3rd May, openly declaring that slaying the inflation monster is a priority

Cost Pressures

% growth in March 2011 quarter over March 2010 quarter

35% 30%

29%

31%

25% 20%

22%

15%

15%

10%

10%

5% 0% Sales

RM Cost

Interest

OP

NP

fundamentals of the US, which drives global sentiment; flow of money (again mainly from the US); and, finally, Indian valuation levels. Let’s look at each of these.

Winds from the West Market forecasts are notoriously hard to pull off; one person who has been getting it broadly right for the past 40 years (though his forecasts are usually a few years before time) is Jeremy Grantham of the investment firm Grantham, Mayo, Van Otterloo & Co (GMO) which manages over $100 billon in assets. Two years before the 2008 meltdown, Grantham wrote: “The First Truly Global Bubble: From Indian antiquities to modern Chinese art; from land in Panama to Mayfair; from forestry, infrastructure, and the junkiest bonds to mundane blue chips; it’s bubble time... The bursting of the bubble will be across all countries and all assets... no similar global event has occurred before.”

He was proved right. In 2000, Grantham looked at 10 years ahead and predicted that the Dow Jones Industrial Average would underperform, even crash. The Dow crashed from around 12,000 to 7,181 in October

Source: Centre for Monitoring Indian Economy

In the March quarter 400 companies among the Moneylife database of 1,333 companies have reported just 10% rise in net profit, despite 22% rise in sales, due to a 29% rise in raw material cost and 31% rise in interest cost

even at the cost of tardy economic growth. Banks have been quick to raise the cost of borrowing and this will bump up repayment instalments of housing loans. This may even dent consumption which we seem to have taken for granted.

Inflation, like a lot of other things, is now transmitting globally very quickly. China is battling inflation— with the same monetary tightening tools. Analysts are expecting another 50-basis point hike a few months later and this might hurt expansion plans. Since the economy is operating almost at full capacity, the next big growth impulse was supposed to come from expansion. A setback at this stage of the investment cycle will have an impact on growth.

Meanwhile, the market has turned wary of companies that are unable to pass on higher costs (such as steel and cement), which have been hit by the rising cost of petroleum coke and power. What the market is really not able to fathom is how long this phase will last. And that’s advantage bear.

What we have discussed so far are economic fundamentals that have a direct bearing on corporate earnings. The fundamentals make sense up to a point.

Beyond those, there are three factors: economic

Jeremy Grantham of the investment firm Grantham, Mayo, Van Otterloo & Co

2002; went up to 14,000 in late 2007 and ended the decade at 10,500. Grantham’s other prescient big call was betting against Japan in 1986—three years early.

Among the dozens of forecasters we read, it is GMO’s research and Grantham’s market views that are among the finest. You can ignore the millions of words available on the Internet on the US market and simply cut the chase and read Grantham. It would be enough. What is he saying now?

In April, Grantham wrote why commodity prices will rise much further over the long term (which is bad for equities) and, in May, he wrote that it’s time to be defensive on US stocks because high commodity prices, the disruptive global impact of the Japanese disaster and the possible end of quantitative easing (QE) by the ``

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COVER STORY

` US Federal Reserve Board (Fed) would undermine the

speculative fervour that is pushing stocks higher.

“Investors should take a hard-nosed value approach, which at GMO means having substantial cash reserves around a base of high-quality blue chips,” wrote Grantham.

Last year, Grantham had written that there is no scope of serious US recovery till 2016. He predicted that “over the next seven years... US stocks as a group will deliver annualized real returns between 1.1% and 2.9%,” citing the following reasons for this: 1. Too much consumer debt; increased savings, spending drop; 2. Banks offloaded trillions of toxic debt, increasing Federal debt; 3. Stimulus failing, housing crashed, no appreciation, confidence lost; 4. Banks undercapitalized, overleveraged; more trouble ahead; 5. State/local governments squeezed, tax revenues down 30%; 6. High unemployment; few tricks left to stimulate jobs; 7. America’s trade imbalances are killing the dollar, our economy; 8. European governments crashing; incompetent management; 9. Global loss of confidence in all currencies, including the dollar; 10. Aging populations; rising Medicare, Social Security costs.

Not surprisingly, despite hundreds of billions of dollars of stimulus, job additions have not been robust, retail sales are weak and housing starts are still at rock-bottom. If the US slows down again, it will have a significant negative economic impact on the global economy. That’s one more bearish factor.

What does all this have to do with speculation?

You could have a situation of slow US decline and continued rally in emerging markets—provided there is cheap money to push up riskier assets like commodities and equities in emerging markets. But what if that money flow reduces? It is notoriously difficult to pinpoint future global money flows; but here is our sense, given the recent rout in commodity and equity markets everywhere except the US. By all accounts, a major factor in creating a massive rally all over the world from early September 2010 was QE2—Ben Bernanke’s massively stimulative monetary programme to prevent the US economy from falling back into a double-dip recession. The low-cost US money flew to attractive emerging markets like India. After all, the

Nifty was at 5,408 on 27 August 2010. From there, it embarked on a 15% rally in just four weeks to hit almost 6,200, an acceleration that was purely caused by the QE2 steroid distributed liberally by Mr Bernanke. That acceleration led many to project new highs for the Indian market. The impact of the steroid is wearing off.

We are back to the August 2010 level. All emerging markets are down and commodities have started their

On Steroids Base Price June= 100

160 150 140 130 120 110 100 90 Jun-10

Nov-10

May-11

Gold

Dow Jones 30

Nifty

MSCI

Crude

Copper

US Federal Reserve chief Ben Bernanke ignited a global rally in commodities and equities in September 2010

own sharp downturn since early May 2011. The pump & dump operation of traders is over. Indeed, in anticipation of the withdrawal of QE2 after 30th June (which has only worked to take asset prices higher), traders may be taking short positions on everything that had prospered under QE2. We are counting on a three-four months of sell-off, with the market bottoming sometime in August.

What would push risky assets downwards is a ``

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COVER STORY

` hardening dollar. Surprised? The asset class that has

suffered the most from QE2 has been the US dollar. With the Fed funds rate at near zero, while interest rates are rising around the world, the dollar has declined sharply.

As the dollar fell more, one-sided bets piled up, expecting a further crash.

As happens, the rubber-band had been stretched too far. And a snap-back dollar rally has started. It could well be that the US plays catch-up with interest rates and the dollar goes up, putting tremendous pressure on commodities and emerging markets.

We have possibly seen the first signs of this in early May when the Dollar Index jumped and equities of emerging markets, crude, copper, gold and silver all

slumped. That was the first dose of reality. A lot more is in store if the dollar strengthens.

So, we do have the perfect recipe for a bear market, given that so many fundamental factors are ranged against us. Add rising inflation, rising interest cost, declining corporate profit growth, a US slowdown, a stronger dollar and, finally, reduced money flows into risky assets—and the most headstrong bull would be rocked back.

That, of course, sets up a scenario where Indian equities become cheap again, given their long-term growth potential, if they reach a certain level. What is that level? We would say, a Sensex level of around 16,000 (Please see Section on Value Buying below).

Va l u e b u y ing

A bear market bottom…

If the market goes down, when should you step in?

E

xcept under abnormal market condiƟons, the Sensex moves in a P/E band of 13-22. When the expected earnings growth is strong, investors rush into stocks, bidding market P/E to 22+. When there are tremendous headwinds to corporate earnings, earnings may sƟll grow, but stock prices would come down and the Sensex P/E will get compressed to around 12-13.

In case of extreme mania, the P/E can shoot to double these levels too. It happened during the Harshad Mehta scam in 1992 and again in 1994 when the foreign insƟtuƟonal investors ‘discovered’ India and threw all cauƟon to the winds taking the market P/E to 57.

Conversely, when pessimism is extreme, or there is an extraneous shock, the market P/E can come down to below 10 based on the expected EPS. It has at least happened thrice in the past 20 years—in November 1998 (during the Asian crisis), in May 2004 (when the BJP-led government was voted out) and once in October 2008 (during the US meltdown).

Where are we now on the valuaƟon count? For FY1112, we expect the Sensex EPS to be around Rs1,150, based on a 10% rise in EPS next year, factoring in all the current macroeconomic problems. This translates into a P/E of 16.1. The market is not expensive but is not cheap either, especially since earnings growth will be only 10%. Expect the Sensex to be trading in a band of 23,000 (P/E of 20), if earnings seem to bounce back to a 20% range and 15,000 (P/E of 13), if things worsen further.

Sensex P/E high/low 26 23 20 17 Average P E 15.36

14 11 8 ’02

’03

’04

’05

’06

High PE

’07

’08

’09

’10

’11

Low PE

Except under abnormal market conditions, the Sensex moves in a P/E band of 13-22

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STOCKS STREET BEAT

Unbiased & Methodical Stock Picking that Works!

L I C H O U S I NG F INANC E

Home Run

tio n St or ies of Pr ice Ma nip ula

Strong semi- urban and rural reach Farmax India (Rs5) s5) Manufacturer and distributor of FMCG products Farmax India’s reveneus grew from Rs8.44 crore in the March 2009 quarter to Rs21.41 crore in the December 2010 quarter and operating profit rose from Rs78 lakh in the March 2009 quarter to Rs2.77 crore in the June 2010 quarter. It fell in the next quarter and was steady in the subsequent four quarters. Farmax’s operating profit fell

L

IC Housing Finance (LICHF), one of the largest housing finance companies, was started by the Life Insurance Corporation of India (LIC) in 1989. LICHF’s biggest advantage is that it can tap semi-urban and rural areas of India (with its huge network), and offer a level of service that market leaders like HDFC, State Bank of India (SBI) and ICICI Bank cannot easily match.

The company is headquartered in Mumbai and has a network of six regional offices, 13 back offices and 181 marketing units across India. In addition, it has a vast resource pool of direct sales agents, home loan agents and customer relationship associates which helps extend its marketing reach. The company has representative offices in Dubai and Kuwait to cater to NRIs (non-resident Indians) in the Middle East.

LICHF’s reputation took a knock in late 2010, when it was embroiled in the ‘bribe-for-loan’ scam. Eight top-ranking officials, including the company’s chief executive officer (CEO) Ramachandran Nair, were arrested by the Central Bureau of Investigation (CBI) in November 2010 on charges of bribery and collusion with unnamed realty developers. The CBI said that the officials had allegedly colluded with a non-banking financial company (NBFC) to sanction large corporate loans to realty developers, overriding mandatory conditions for such approvals along with other irregularities. To contain the reputation damage caused by the scam, LICHF has stopped financing project developers, according to a top official. It may resume lending, but such loans would be approved on a case-to-case basis.

For the quarter ended March 2011, LICHF reported a 41% increase in interest earned on a standalone basis at Rs1,293.70 crore; the interest cost also increased by 41%

(Rs)

45

Farmax India 30

89% 15

0 Nov-10

Feb-11

May-11

once again to Rs1.22 crore in the December 2010 quarter. For some reason, the stock steadily rose from just around Rs5 in June 2009 to Rs46 in early November 2010, a rally of 820%. From that peak, in just six months, the stock crashed by 89%—from Rs43.45 on 10 November 2010 to Rs4.63 on 10 May 2011. Unsurprisingly, the pump and dump operation has escaped the notice of BSE, NSE and SEBI.

``

Recommended Price Rs18

MONEYLIFE STOCK IDEAS

THAT WORK

Moneylife Issue 8 April 2010

88%*

Exit Price Rs28

(Stop Profit triggered on 26 November 2010)

(SURYA PHARMACEUTICAL)

* Annualised returns

MONEYLIFE | 2 June 2011 | 34

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Unbiased & Methodical Stock Picking that Works!

` to Rs873.34 crore, taking the net interest income (NII) of the

company up by 41% to Rs420.35 crore. The PBT (profit before tax) stood at Rs429.52 crore, up by 44%, while provision for taxes rose 36% to Rs114.74 crore. Net profit for the March 2011 quarter stood at Rs314.77 crore, up by a solid 47% y-o-y (year-onyear). During Q4 FY1011, total loan sanctions and disbursements were Rs5,803 crore and Rs6,794 crore, respectively, a growth of 25% and 34%, Sept-10 Dec-10 Mar-11 respectively. Net interest Sales* 1,100.22 1,213.12 1,354.29 margin (NIM) for Q4 OP* 313.37 116.47 393.53 FY10-11 stood at 3.45% against 3.30% for Q4 Y-o-Y Sales 32% 38% 41% FY09-10.

Growth For the year ended Y-o-Y OP Growth 39% -46% 34% March 2011, LICHF OPM 28% 10% 29% reported 36% increase OP: Operating Profit, Y-o-Y: Year-on-Year, OPM: Operating Profit Margin in interest earned on a *Figures in Rs crore consolidated basis at Rs4,469.66 crore while Solid Brick the interest expended (Rs) increased by 29% to 275 Rs3,097.71 crore, LIC Housing Finance 250 taking the NII of the company up by 55% 225 to Rs1,371.95 crore.

200 The company’s PBT stood at Rs1,289.95 175 crore, up by 42%. Tax provisions increased 150 29% to Rs320.65 crore.

Nov-10 Feb-11 May-11 The net profit for the ``

tio n St or ies of Pr ice Ma nip ula Lee & Nee Softwares ares (Exports) (E (Rs23) Lee & Nee Softwares (Exports) is supposedly engaged in IT business viz,“software development, enterprise resource planning solutions, Web designing and applications, call-centre solutions and medical transcription.” But, all this is hogwash, as the company’s financials show.

It reported operating losses in the quarters March 2009 to September 2010 and in March (Rs)

25

Lee & Nee Softwares (Exports) 20

1188%

15 10 5 0 Oct-10

Jan-11

May-11

2011. In the quarter ended 31 December 2010, the company reported an operating profit of Rs15 lakh. Revenues ranged from Rs2 lakh in the March 2009 quarter to Rs1.80 crore in the March 2011 quarter. Incredibly, the company’s stock soared 1,188%—from Rs1.58 on 18 October 2010 to Rs20.35 on 10 May 2011. The regulator or the bourses couldn’t care less. So much for keeping an eye on manipulation!

Recommended Price Rs87

MONEYLIFE STOCK IDEAS

Moneylife Issue 8 April 2010

THAT WORK

65%*

Exit Price Rs125

(Stop Profit triggered on 9 December 2010)

(TAMIL NADU NEWSPRINT)

* Annualised returns

35 | 2 June 2011 | MONEYLIFE

Stock-Streetbeat.indd 3

5/13/2011 9:04:55 PM

STOCKS STREET BEAT

` last fiscal stood at Rs969.29 crore,

up by 47% y-o-y. During the previous fiscal, LICHF sanctioned and disbursed loans totalling Rs22,603 crore and Rs19,912 crore, registering a growth of 25% and 34%, respectively, over the previous year. The outstanding mortgage portfolio as on 31 March 2011 was Rs51,090 crore against Rs38,081 crore on 31 March 2010, a 34% growth. Gross NPAs (nonperforming assets) stood at Rs242 crore or 0.47% on 31 March 2011 against Rs263 crore or 0.69% in the previous fiscal. Net NPAs were Rs15 crore or 0.03% against Rs46 crore or 0.12% for these periods.

NIM for the whole year jumped to 3.08% (2.70% for the previous year). Return on net worth for the fiscal 2010-11 was a healthy 23%. The Board of LICHF has recommended a dividend of 175% for the fiscal ended 31 March 2011.

LICHF’s average revenues and operating profit over the past five quarters were up 32% and 29%, respectively. Its average operating profit margin was 25%. Based on the annualised results for the March 2011 quarter, the company’s market-cap to revenue is 1.90 times and market-cap to operating profit is 6.55 times. It expects 25% growth in loan disbursement in FY11-12 and a spread of 1.7%1.8% and NIM of around 2.7%.

Buy the stock at Rs150.

Unbiased & Methodical Stock Picking that Works!

M AH INDRA FINANCE

Geared for Growth A powerful rural thrust

M

ahindra & Mahindra Financial Services (Mahindra Finance), promoted by Mahindra & Mahindra, offers a range of financial services to people residing in rural and semi-urban regions in India.

The company provides loans for sports utility vehicles (SUVs), tractors, cars, two-wheelers, threewheelers, commercial vehicles and construction equipment. The company also provides loans for the purchase of used cars, SUVs, commercial vehicles and tractors.

Mahindra Finance commenced financing for utility vehicles in 1993. The company has a network of 547 offices and over 90% of its branches are now connected online. The company has widened its network of collection executives who use GPRS (general packet radio service)-enabled hand-held devices. This provides for more effective communication as well as better collections.

The company has positioned itself between the organised banking sector and local moneylenders, offering its

customers competitive, flexible and speedy lending services.

Among its competitors are Cholamandalam Investment & Finance, DCM Financial Services, IDFC (Infrastructure Development Finance Company), Manappuram General Finance & Leasing, Shriram City Union Finance, etc.

The company’s subsidiaries include Mahindra Insurance Brokers, Mahindra Rural Housing Finance and Mahindra Business & Consulting Services Pvt Ltd. Mahindra Insurance Brokers provides insurance solutions to retail customers as well as corporates. Mahindra Rural Housing Finance provides easy, flexible and cost-effective loans for buying, renovating, extending and improving homes in rural India.

It also offers loans for a range of personal requirements including weddings, children’s education, medical treatment, furniture, consumer durables, working capital needs for agriculture, etc. Mahindra Rural Housing Finance operates in Gujarat, Maharashtra, Andhra Pradesh, Karnataka, Tamil Nadu and Kerala. Mahindra Business & Consulting is engaged in captive staffing and provides allied services.

For the fiscal ended 31 March 2011, Mahindra Finance recorded a standalone net profit of Rs463.10 crore against Rs342.70 crore in FY10-11. In the same period, ``

Recommended Price Rs165

MONEYLIFE STOCK IDEAS

THAT WORK

Moneylife Issue 8 April 2010

36%*

Exit Price Rs214

(Stop Profit triggered on 1 February 2011)

(Seshasayee Paper)

* Annualised returns

MONEYLIFE | 2 June 2011 | 36

Stock-Streetbeat.indd 4

5/13/2011 9:05:23 PM

STOCKS STREET BEAT

` Mahindra Finance’s consolidated

net profit stood at Rs493.66 crore compared to Rs356.09 crore.

Mahindra Finance’s disbursements registered a growth of 62% at Rs14,420 crore for FY10-11 compared to Rs8,915 crore in the previous year. While maintaining its leadership position as the largest retail financier for semi-urban and rural markets, the company has significantly improved its performance as a car financier and has increased its presence in the heavy commercial vehicles and construction equipment sectors.

The company’s continued focus on reducing NPAs (non-performing assets), coupled with buoyant rural cash flow, enabled it to improve assets quality.

During FY10-11, Mahindra Insurance Brokers registered a growth of 65% in its income at Rs51.8 crore against Rs31.4 crore in the previous year. Its profit after tax (PAT) rose by 96% at Rs21.8 crore against Rs11.1 crore registered for the previous year.

Mahindra Rural Housing Finance disbursed Rs203.60 crore during the year ended 31 March 2011 against Rs90.60 crore disbursed during the previous year. The company’s PAT stood at Rs8.90 crore during FY10-11, compared to Rs2.20 crore in the previous year.

During the fourth quarter ended 31 March 2011, Mahindra Finance’s standalone net profit grew to Rs156.55 crore from Rs140.23 crore in the corresponding period last year. In the same period, the company’s consolidated net profit stood at Rs165.66 crore against Rs143.97 crore in the

Unbiased & Methodical Stock Picking that Works!

corresponding period last fiscal. In the March 2011 quarter, Mahindra Finance’s standalone total income

Sept-10

Dec-10

Mar-11

Sales*

469.56

520.34

591.63

OP*

168.27

167.58

238.91

Y-o-Y Sales Growth

33%

32%

28%

Y-o-Y OP Growth

75%

26%

15%

OPM

36%

32%

40%

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

Top Gear (Rs)

825

Mahindra Finance

785 745 705 665 625 Nov-10

Feb-11

May-11

from operations increased to Rs591.62 crore from Rs463.61 crore while its consolidated total

income from operations rose to Rs613.43 crore from Rs472.56 crore. In the March 2011 quarter, Mahindra Finance formed a joint venture with US-based De Lage Landen Financial Services Inc (DLLFS) a wholly-owned subsidiary of the Rabobank group. DLLFS specialises in asset-based financing programmes for equipment manufacturers, dealers and distributors.

The challenges faced by the company include achieving IT (information technology) connectivity with its offices in rural areas which the company expects to improve in the near future. It plans to deploy a customer relationship management (CRM) system to enable it to cross-sell other products and services as well as to improve credit and market risk management.

Mahindra Finance aims to target 30%-35% growth in disbursements this fiscal, besides establishing 50 more branches in rural India. The company has been maintaining a 30%-35% growth rate over the years and hopes to maintain this in FY11-12. It also plans to ramp up its offices to 597 from the current 547 by the end of this fiscal.

Over the past five quarters, Mahindra Finance reported an average growth in revenues and operating profit of 27% and 49%, respectively. Its average operating margin is 36% and return on net worth is 19%. Its market-cap to revenues is 3.15, while its marketcap to operating profit is 7.80 times. Consider buying the stock at Rs600.

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.

37 | 2 June 2011 | MONEYLIFE

Stock-Streetbeat.indd 5

5/13/2011 9:05:49 PM

STREET BEAT WHICH WAY

Debashis Basu

In a Stupor

was a reluctant low-volume fall. But, of course, we have witnessed selling on every rise. Indeed, over the past 13 days, the market was up only for two days. On every A sideways market needs an earnings trading day of last week, the rallies have been met with boost decisive selling. But the big sell-off I was anticipating has not happened. ast fortnight, I had pointed out how a lower The market is poised at an interesting level. From dollar and Ben Bernanke’s pledge to the world 6,338 in early January, the Nifty has corrected in three that rates will stay lower for long should have phases, each time making a lower top. The first phase sparked a re-run of what we repeatedly saw in the Alan saw the index go down to 5,690 from where it rallied Greenspan era—higher values of all assets—but it to 6,181, lower than the previous high. Then a bigger didn’t. It only invited a sell-off. I wondered whether the sell-off took the index to 5,177, a lower bottom. A relationship between low US rates and risk assets has sharp two-week rally followed in mid-March when the broken down. If risk assets don’t rise when rates are Nifty went to 5,944, again a lower high. If the decline low, several asset classes are headed down, especially continues, we will see a lower bottom, at around 4,800, read with another one of Bernanke’s statements—that possibly because of some external events and/or the there would be no quantitative easing (QE) round sudden strength of the dollar which will lead to lower three. I had suggested that we should expect a 10%prices of most assets.

15% decline across the board in There is a second possibility. virtually everything except gold, The Nifty may meander in the which remains supported by a weak The market is lapsing range of 5,300-5,700 for an dollar and crude oil (propped by into a lull. Participation extended period, maybe until early geopolitical issues). of retail investors is July when results for Q2 FY11-12 However, speculative trades, declining. There’s a are due. If corporate earnings are based on the dollar’s weakness, limit on how much better than those in the March have been so rampant that not foreigners can buy quarter, we may see renewed only was there a 10% decline in buying. There is an old Wall Street copper, zinc and other metals but saying: “Sell in May and go away.” even crude. Gold got sold off Indeed, on an average, the market has and rebounded because of its done far better in the Augustpeculiarity—it’s a currency play.

December period than in Meanwhile, as happens when the the April-August period. As markets move sharply towards one summer heat rises across end, the dollar rebounded—a quick India, the Indian market is 5% rally that has unnerved the dollar getting into a snooze. Increasingly, bears and commodity bulls. participation of retail investors is declining and The Indian market has held up there is a limit to how much foreigners can much better than I had expected buy. They have been selling a bit in May during this period of adjustment. The Medium-term: — and just that has caused a 5% slump.

Nifty and the Sensex have suffered a 5% Long-term: — (Feedback at editor@moneylife.in) decline over the past two weeks and it

L

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 | 2 June 2011 | 38

Which way.indd 1

5/13/2011 8:50:09 PM

STOCKGRADER MOMENTUM

Healthy Tonic

49%

Compounded Annual Return

Federal-Mogul soared 17% and Sintex Industries gained 5%. Shriram Transport Finance plunged 17% Gainers: Federal-Mogul Goetze (India) posted a 32.10% growth in standalone net profit for the quarter ended March 2011 to Rs14.99 crore from Rs11.35 crore in the same quarter last year. Net sales for the quarter rose 27.91% to Rs257.08 crore, while total income for the quarter rose 24.14% to Rs259.45 crore, compared to the year-ago period. The stock soared 17% in the fortnight. Sintex Industries reported a 30.64% rise in net profit to Rs357.56 crore in the year ended March 2011 against Rs273.70 crore during the previous fiscal. Sales went up by 30.11% to Rs2,615.97 crore in the year under review compared to Rs2,010.55 crore earlier. The company’s shares were up 5%. Cadila Healthcare’s quarterly net profit surged 50.4%, beating estimates, on robust growth in sales coupled with forex gains. The company reported a consolidated net profit of Rs179 crore on net sales of Rs1,169 crore for the January-March period. The rise in profit was also boosted by foreign exchange gains of Rs16.01 crore in the March 2011 quarter compared to a loss of Rs1.11 crore last year. The stock gained 4% in the fortnight.

Orchid Chemicals also gained 3%, while PTC India remained unchanged.

Losers: Shriram Transport Finance reported a Company

RS Grade

Funda Grade

Final Grade

Entry Date

Dish TV India

A

A

A

Sadbhav Engineering

A

A

A

Titan Industries

A

B

A

consolidated net profit growth of 39% to Rs1,217.11 crore in the year ended 31 March 2011 compared to Rs873.03 crore during the corresponding previous fiscal. Income from operations was up by 20% to Rs5,341.90 crore in the year under review as against Rs4,435.94 crore in the year-ago period. But the stock plunged 17% in the fortnight. Bank of India is planning to re-enter the mutual fund (MF) business by January 2012. The Bank is scouting for a strategic partner for the venture and is likely to finalise its partner by the end of the second quarter and will hold a majority stake in the business.

Earlier, in 1990, the Bank had entered the MF business, but subsequently got out of it.

The scrip fell 13%. Bhushan Steel reported a 19.5% rise in Q4 FY10-11 net profit at Rs287.9 crore while income from operations was Rs1,966 crore over Rs1,608 crore for the same period a year ago. The scrip tanked 9%, Mahindra & Mahindra (M&M) too fell by 9% and Sesa Goa was down 5% in the fortnight.

Changes: We are adding Federal Bank.

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.

RS Grade

Funda Grade

Final Grade

Entry Date

Return*

Company

Return*

06 Aug-10

36%

Sesa Goa

B

A

B

21 Jan-11

-12%

28 Apr-11

-2%

Bank of Baroda

B

B

B

29 Apr-09

170%

16 Apr-10

94%

Bhushan Steel

B

B

B

28 Apr-11

-12%

Sintex Industries

A

B

A

01 Apr-11

14%

Shriram Transport

B

B

B

18 Feb-11

-15%

Orchid Chemicals

A

B

A

28 Apr-11

-2%

HDFC

B

C

B

15 May-09

67%

Oracle Financial Serv

A

B

A

23 Dec-10

-6%

Hindalco Industries

B

C

B

23 Jul-10

25%

GSK Consumer

A

C

A

29 Apr-09

177%

HDFC Bank

B

C

B

04 Mar-11

2%

Fed-Mogul Goetze

A

C

A

28 Apr-11

14%

Federal Bank

A

C

A

13 May-11

—

Cadila Healthcare

A

D

A

12 Nov-10

PTC India

B

A

B

01 Apr-11

M&M

B

C

B

28 Apr-11

-10%

Bank of India

B

C

B

21 Jan-11

-14%

17%

Shree Renuka Sugars

B

D

B

06 Aug-10

-9%

-1%

EID-Parry (India)

B

D

B

12 Nov-10

-17%

*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.

39 | 2 June 2011 | MONEYLIFE

Momentum.indd 2

5/13/2011 9:13:52 PM

STOCKGRADER MEDIUM TERM

Losing Interest

45%

Compounded Annual Return

CMC gained 6% and Petronet rose 2%, while Whirlpool slipped 13% and Punjab National Bank fell 9% Gainers: CMC gained 11% in the fortnight. Amara Raja Batteries increased 6%. Petronet LNG has sealed a long-term contract with Exxon Mobil for buying 1.5 metric tonnes per annum (mtpa) of liquefied natural gas, starting 2015. The gas would come from Gorgon (Western Australia).

The stock rose by 2% for the fortnight.

CRISIL rose 1%.

Losers: Whirlpool of India and Bajaj Auto tumbled 13% and 11%, respectively in the fortnight. According to Punjab National Bank (PNB) an increase in interest rates on savings bank accounts to 4% would hit its net interest margin by 15 basis points.

The Reserve Bank of India in its annual monetary policy (2011-12) raised the interest rate on savings accounts from the earlier rate of 3.5%. PNB fell by 9%. Axis Bank fell by 6%. HCL Technologies and the Madras University have started ‘First-Right-toPlacement’ initiative. HCL Technologies will get the Company

RS Grade

Funda Grade

Final Grade

Entry Date

Return*

first chance to interview students on various campuses affiliated to the University across three districts of Tamil Nadu. HCL Technologies fell 3%. Lupin fell 4% while Suprajit Engineering fell 3%, respectively. Dabur India has entered the mint candy market with ‘Hajmola Mint Masti’. Its launch extends the footprint of the Hajmola brand, in line with Dabur’s strategy of expanding its market share in the confectionery category. This stock fell 2%. Jain Irrigation Systems was honoured with the Dun & Bradstreet (D&B)Rolta Corporate Awards 2010 in the ‘plastic and plastic products’ category. The awards felicitate corporate India’s leading companies in various sectors. The stock fell 1%.

Changes: We are adding United Phosphorus.

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

A

A

A

29 Apr-09

163%

Oracle Financial Serv

A

C

A

23 Dec-10

-7%

Titan Industries

A

A

A

01 Apr-10

110%

CMC

A

C

A

23 Dec-10

-13%

Supreme Petrochem

A

A

A

27 May-10

42%

Cadila Healthcare

A

D

A

20 Jan-11

7%

Suprajit Engineering

A

A

A

11 Nov-10

-9%

Bank of Baroda

B

A

B

29 Apr-09

169%

Lupin

A

B

A

29 Apr-09

195%

Bajaj Auto

B

A

B

03 Feb-11

8%

Nestlé India

A

B

A

29 Apr-09

136%

PNB

B

B

B

29 Apr-09

124%

HDFC Bank

A

B

A

29 Apr-09

104%

Axis Bank

B

B

B

29 Apr-09

116%

TCS

A

B

A

10 Jun-10

48%

Jain Irrigation Sys

B

B

B

29 Apr-09

80%

Siemens

A

B

A

27 May-10

23%

Sun Pharmaceutical

B

B

B

29 Apr-09

74%

Orchid Chemicals

A

B

A

20 Jan-11

-4%

Hindalco Industries

B

B

B

03 Feb-11

-21%

HCL Technologies

A

C

A

29 Apr-09

289%

HDFC

B

C

B

29 Apr-09

87%

CRISIL

A

C

A

29 Apr-09

121%

Unichem Lab

B

C

B

29 Apr-09

11%

Seshasayee Paper

A

C

A

01 Apr-10

38%

Ipca Lab

B

C

B

20 Jan-11

-8%

Dabur India

A

C

A

01 Apr-10

25%

Whirlpool of India

B

C

B

11 Nov-10

-24%

Dr Reddy’s Lab

A

C

A

27 May-10

20%

Shriram Transport

B

D

B

29 Apr-09

191%

Ranbaxy Lab

B

D

B

20 Jan-11

-15%

Shree Renuka Sugars

B

D

B

03 Feb-11

-32%

Amara Raja Batteries

A

C

A

28 Apr-11

6%

United Phosphorus

A

C

A

12 May-11

—

*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.

MONEYLIFE | 2 June 2011 | 40

Medium Term.indd 2

5/13/2011 9:12:22 PM

STOCKGRADER LONG TERM

On the Block

47%

Compounded Annual Return

Hindustan Unilever surged 6% and Nestlé India rose 1%, while Ambuja Cements plunged 16% Gainers: State Bank of India, Bank of Baroda and an unnamed non-banking financial company are reported to be frontrunners for the Hindustan Unilever (HUL) building in Churchgate (Mumbai) which was put on the block a few months ago for Rs500 crore. HUL stock surged 6% in the fortnight. Adani Enterprises will buy Australia’s Abbott Point Coal Terminal for around $2 billion. The terminal is in Queensland which was hit hard by a series of floods last year. The stock rose 2%. Nestlé India and Karur Vysya Bank climbed 1% each.

Losers: Ambuja Cements and Ador Fontech plunged 16% and 14%, respectively. Cairn Energy Plc may have to extend the deadline for concluding its sale of 40% equity in its Indian unit—Cairn India— to Vedanta Resources as a ministerial panel vetting the deal is unlikely to meet as per the schedule.

Cairn Energy chief executive Bill Gammell met oil minister S Jaipal Reddy on 11th May to press for a decision before the 20th May deadline that his firm and Vedanta have set for concluding the $9.6-billion deal. Cairn, which had earlier set 15th April as the deadline for concluding the sale, made a big cry saying that timelines were sacrosanct and could not be extended. The stock fell by 4%. Sun Pharmaceutical Industries tumbled 7%; while ITC and Dr Reddy’s Laboratories tanked 4% each.

Asian Paints fell 1%. Castrol India and Ipca Laboratories also fell 1% each.

Changes: We are adding Cummins India.

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

Company

RS Grade

Funda Grade

Final Grade

Entry Date

Ador Fontech

A

A

A

29 Apr-09

502%

ITC

A

C

A

27 May-10

33%

Lupin

A

A

A

SRF

A

A

A

29 Apr-09

195%

Power Grid

A

C

A

03 Feb-11

3%

27 May-10

43%

Hindustan Unilever

A

C

A

25 Nov-10

1%

Titan Industries

A

A

A

03 Feb-11

9%

Orchid Chemicals

A

C

A

25 Nov-10

1%

M&M

A

A

A

28 Apr-11

-11%

Dr Reddy’s Lab

A

C

A

20 Jan-11

-4%

TCS

A

B

A

29 Apr-09

257%

CMC

A

C

A

23 Dec-10

-13%

Bank of Baroda

A

B

A

29 Apr-09

169%

Karur Vysya Bank

A

C

A

10 Jun-10

-20%

Nestlé India

A

B

A

29 Apr-09

136%

Adani Enterprises

A

D

A

29 Apr-09

202%

Asian Paints

A

B

A

27 May-10

30%

GSK Pharmaceuticals

A

D

A

29 Apr-09

99%

Cadila Healthcare

A

B

A

20 Jan-11

7%

Ambuja Cements

A

D

A

19 Aug-10

7%

Cummins India

A

B

A

12 May-11

Bajaj Auto

B

A

B

03 Feb-11

8%

Castrol India

A

B

A

28 Apr-11

-4%

Canara Bank

B

B

B

29 Apr-09

193%

Ipca Laboratories

A

B

A

20 Jan-11

-8%

Axis Bank

B

B

B

29 Apr-09

116%

Return*

—

Return*

CRISIL

A

C

A

29 Apr-09

121%

Jain Irrigation Sys

B

B

B

29 Apr-09

80%

HDFC Bank

A

C

A

29 Apr-09

104%

HDFC

B

C

B

01 Apr-10

16%

Cairn India

A

C

A

29 Apr-09

81%

Shree Renuka Sugars

B

C

B

05 Aug-10

-8%

Sun Pharmaceutical

A

C

A

29 Apr-09

74%

Ranbaxy Laboratories

B

D

B

20 Jan-11

-15%

*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.

41 | 2 June 2011 | MONEYLIFE

Long Term.indd 2

5/13/2011 9:10:24 PM

“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?”

2-1

“A short-term bottom may be very near”

16-29 Mar ‘07

“A Rally Now?”

“Weakness 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

Oct-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.

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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 8

Headed Down?

“Is the market about to crack?”

may

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

Weakness has resurfaced” “A Breakdown?”

30 Jan-12 Feb ‘09

“A weak rally now”

Oct-08

13-26 Mar ‘09

“Another weak rally”

Feb-10

May-11

Moneylife Stock Analysis

KNOW WHAT’S COMING

Sensex.indd 3

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PERSONAL FINANCE PLANNING TOOL

P E R S O N A L F INANC E S OF T WARE

Finances Secured, Future Planned A comprehensive personal finance management software and financial planning tool. Raj Pradhan reviews both Vsoft Solutions & Consultancy (P) Ltd, helps in document management, tracking the investment mix and analysing ‘what-if’ scenarios. This tool also helps in creation of wills, helps in asset allocation, has a reminder facility and aids financial planning.

The idea of Vault was developed due to a real case where the earning

“

We created Vault to help people inculcate financial discipline in their lives. VinPlan has been created with the serious financial planner in mind

“

T

his is the time when people scramble to figure out what they have earned in the previous fiscal (2010-11) so that their tax calculation can be done correctly—either on their own or with the help of a chartered accountant. In either case, the legwork to get all the numbers—for interest, dividend, stock sale (for capital gain/loss), salary (along with tax deducted at source—TDS)—has to be done by each person. There is no genie that can do this for us.

Every taxpayer has to examine bank statements from multiple banks, mutual fund statements and salary slips to figure out the state of their finances for the previous fiscal.

The best tax-planning option is to be proactive and keep a tab on consolidated financial holdings. One should also ensure that money is not falling through the cracks due to ignorance. Often, people forget to deposit cheques or don’t realise that, sometimes, their stock purchase is not reflected in their demat accounts, because this sum may be inadvertently lying in the broker’s pool. Apart from money, people find it difficult to keep track of expiry dates of important documents like passports, drivers’ licences and even forget the passwords of numerous email addresses that they might have.

There are a number of online tools for managing all these, but there are always concerns over Internet security. Vault, offered by

Vijay Athavale Founder-director, Vsoft Solutions & Consultancy

member of a family died and the family was clueless about his investments, bank accounts and insurance details. It took a long time for them to collect all the information and they still lost a lot of money due to lack of information. It was sad that the very purpose for which the man had worked—to secure his family’s finances—was itself defeated.

According to Vijay Athavale, founder-director, Vsoft Solutions & Consultancy, “We created Vault to help people inculcate financial discipline in their lives.”

Important modules in Vault are an expense-tracker and a portfoliotracker. The tool is valuable for different classes of customers. A customer, who lives from pay-cheque to pay-cheque and who possesses minimum financial assets, will find the expense-tracker module more useful. This module helps a user to get a grasp of expenses in different categories and take steps to properly utilise available funds. On the other hand, for a relatively well-off customer who may not feel the need to keep a tab on his daily expenses, the portfolio-tracker will be the most important tool. This tool helps to ensure that a customer’s assets are earning decent returns as well as ensuring portfolio management—like proper asset allocation in debt and equity investments.

The report module has cash/ bank summaries, account statements, balance sheets, monthly income & expense statements and reports to be submitted to tax consultants. It also has a ‘bank-statement import’ feature. Vault downloads rates of shares (on the Bombay Stock Exchange and the National Stock Exchange of India) and mutual funds listed in India—along with global gold and silver rates from the Internet—and updates of the software for an annual subscription fee of Rs999. The software is ``

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PERSONAL FINANCE PLANNING TOOL

` available for a free one-month trial

(from www.myvault.in). The price varies from Rs1,499 to Rs3,999. It is available on a pen-drive (or a hard disk version) and in two versions of ‘standard’ and ‘premium’.

The approach for finding the appropriate asset mix is based on the customer’s profile. The customer can choose the varying level of importance of certain asset classes— like those based on emotional needs (a house in a customer’s hometown, for example) to the need to optimise capital gains (from, say, stocks or mutual funds). Apart from the level of importance as detailed above, there are levels of risk criteria for each asset class. The tool suggests an appropriate asset mix, based on customer inputs.

The unique value proposition of Vault is that it is deployed on a pen-drive, needing no installation.

The software can be used on any Windows-based PC as the dataa as well as the software reside on the pen-drive itself, making it portable table and secure. Vault helps to secure ure a family by maintaining precisee information about personal finances so that, in the unfortunate event of death, the family simply has to use the he pen-drive which contains all the critical information. They can bring the Vault pen-drive to Vsoft’s soft’s office. Upon signing a consent form and attaching the death certificate, cate Vsoft’s support team will retrieve the password and also offer a free consultation session so that matters can be handed over to the family's consultant.

Financial Planning Software Vault also includes a basic financial planner. Separately, Vsoft has recently launched a ‘VinPlan’ tool for advanced financial planning and insurance needs. While the Vault software is based on actual

financial information, the VinPlan software can be used to do financial planning based on forecasted income, liabilities and expense levels. The data can be keyed in, taking into account inflation for different expense categories, income growth and future asset performance.

Vault can be used on any Windows- based PC as the data as well as the software reside on the pen- drive, making it portable and secure Annual commitments can also be entered, such as investments in instruments like public provident fund and so on.

VinPlan also allows the user to enter asset switches and inflows. An asset switch is one where a customer

envisages selling off an asset in the future (say, for a wedding expense) and transferring it to another asset (like cash holding or a bank deposit).

VinPlan also allows the user to key in the current income-tax rates. The software will automatically project the income-tax payable, based on these rates. Mr Athavale says, “VinPlan has been created with the serious financial planner in mind.

It allows iterative creation of plans until the correct balance is found.

It is designed to assist the user in

arriving at insurance cover need, based on several criteria.”

VinPlan’s unique selling proposition is the module for insurance. It asks the user to enter rates at which the family of the client may be able to invest the insurance proceeds (in the unfortunate event of death of the client). It allows for three different rates of insurance investment: ‘conservative’, ‘moderate’ and ‘aggressive’. The insurance requirement is based on three criteria —‘Income Replacement’ method, ‘Expense Fulfilment’ method and the ‘VinPlan Calculated’ method. Under the Income Replacement method, the software assumes that the client wants to cover his/her income only.

No consideration is given for the expenses, investments, etc. Under the Expense Fulfilment method, the software simply calculates the insurance required to cover the expenses taking into account factors like inflation.

Under the ‘VinPlan infla Calculated’ method, the software Calculat takes into int account income, expenses, investments and commitments in also al before arriving at the insurance need. in The software is available in three different versions with annual licence fees—the singleann user version (allows creation v of up to t three plans for Rs900); standard version (allows creation of up to 100 plans for Rs2,700) and enterprise enterpris version (allows creation of unlimited plans for Rs9,000). Annual licence fees will include updates of the application and an annually updated tax calculator. The software is available for a free one-month trial (from www.vinplan.com).

Vault is targeted at individual customers while VinPlan is targeted at financial planners. The company hopes that financial planners will use VinPlan to plan their customer’s financial future and then get them to use Vault.

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Insurance Trends

insurance companies are not quite convinced about how the electronic dematerialisation process would work, and have concerns about data security. Moreover, there is no trading of insurance policies in demat form and, hence, this facility may be of limited use for the customer.

New products, regulations, features and options, interpreted from your perspective

MEDICLAIM

E-INSURANCE

Cashless: Still in Trouble?

Insurance in Demat Insurers will save money.

Will they pass it on?

I

n a move to lower the costs for insurance companies and bring transparency to policyholders, the Insurance Regulatory and Development Authority (IRDA) has issued guidelines for creating insurance repositories and electronic issuance of policies. It will help insurers to save costs on printing and dispatching policies.

Policyholders will benefit from the ease of purchase, as identity and address proof need not be submitted every time a policy is purchased from the same or a different insurance company. It will also be easier to effect changes regarding address, nomination and so on. Provision of these services without extra cost for policyholders is certainly welcome, but will the insurer pass on the cost savings to customers by offering lower premiums? It is unlikely, because insurance companies will be paying the ‘insurance repositories’ for maintaining the data in an electronic format. The savings on dematerialisation of stocks has not been passed on to customers, i.e.,

shareholders; so why would it be any different this time?

In the guidelines, the regulator said that it will grant licences to and regulate ‘insurance repositories’ which will act as service providers to life insurance companies. The repositories will be connected to all insurance companies. The repository will give a unique number to every individual and all his policies will come under that account. It will hold all types of policies, including life, health, motor and group

covers. The data maintained by the repository will include history of the claims of the individual. It will also have the names of the beneficiary, assignees and nominees.

There could be questions about the security of data with the insurance repository. IRDA wants the insurance repository to put in place measures to safeguard the privacy of the data maintained and adequate systems to prevent manipulation of records and transactions. A few

Even after joining a PPN, some hospitals are still dodging cashless claims

S

tate-owned insurance companies are threatening to punish 30 hospitals in Mumbai for making their patients choose the ‘reimbursement’ system of insurance over the convenient ‘cashless’ scheme. The ‘reimbursement’ helps hospitals to get instant payment from the customer and avoids the negotiated rates agreed with government insurers to be part of the preferred provider network (PPN). In the past, hospitals used to prefer ‘cashless’ claims as it allowed them to charge higher fees by way of additional tests and higher-cost equipment used.

Clearly, there is a reversal in the trend after the government insurers took a tough stand allowing hospitals to be on PPN only after they agreed on the costs for 41 procedures. The fixed rates may be lower than what hospitals may want from customers and, hence, they are avoiding ‘cashless’ treatment. Insurers, at their end, are trying to take steps to ensure that customers get a ‘cashless’ option. They are insisting that hospitals take an undertaking from the patient that s/he has willingly opted for the reimbursement ``

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INSURANCE TRENDS

` service. Other initiatives would be

to put information about ‘cashless’ options for customers in the hospital premises.

Will the insurance companies expel the erring hospital from a PPN in the future? Policyholders can also be proactive to check with the insurance company or third party administrator (TPA) about whether a hospital is on the PPN or not.

They can also get this information from the insurance company’s website which has latest information on PPN hospitals. If the hospital is a part of the PPN, policyholders can insist that the hospital accept ‘cashless’ treatment.

H I G H E S T N AV UL IP

Another One Insure Smart Plan offers one of the lowest mortality rates

C

anara HSBC Oriental Bank of Commerce Life Insurance has launched an unit-linked insurance plan (ULIP)—Insure Smart Plan.

The minimum premium is a hefty Rs50,000 annually with no

maximum limit. It provides the option of highest NAV guarantee fund or non-guaranteed fund with options to invest in equity and debt in different proportions. The policyholder cannot switch from non-guaranteed fund to NAV guaranteed fund. The highest NAV

Guarantee Fund provides an element of guarantee on investments to customers with lower risk appetite,” Mario Perez, director (sales, marketing & products) of Canara HSBC OBC Life said. This will also mean very poor returns on your investment.

guaranteed option has premium payment term of five years. The highest NAV is tracked for a period of seven years. On maturity at the end of 10 years, the highest NAV at the end of seven years or NAV at the end of 10 years is used for calculating the fund value. The plan will offer a loyalty addition of 1% of your total fund value at maturity.

It is based on the prevailing NAV at maturity and not highest NAV at the end of seven years. “NAV

The mortality rates offered by the plan are one of the lowest in the industry. Premium allocation charge and policy administration charge are in line with other ULIPs which still means they are not low over the period of five years or more. The minimum sum assured is 10 times annual premium for age less than 45, while it is seven times annual premium for others. The maximum sum assured is 35 times annual premium, subject to underwriting.

rate of return is low, but there is insurance benefit in case of death.

The Plan offers guaranteed addition every year (increasing every five years) and loyalty The ‘Defined Growth additions on maturity. There is Endowment Plan’ from Star an option for single premium, Union Dai-ichi will fetch but it is substantially high, in just 3.25% line with traditional plans. For example, a policyholder of age 40 with a policy term of 15 years he ‘Defined Growth and sum assured of Rs1.5 lakh Endowment Plan’ from Star will pay an annual premium of Union Dai-ichi allows a customer Rs14,045. The death benefit to know how much he would receive on the maturity date on the increases from Rs1.5 lakh from very date of taking the policy. The year one with a predefined

T R A DI T I ONAL P L ANS

Poor Returns

T

guaranteed addition every year.

If the policyholder expires during the policy term, the sum assured (Rs1.5 lakh+predefined guaranteed addition) is paid. On maturity of the policy, the sum assured plus the guaranteed addition comes to Rs2.85 lakh. There is a loyalty addition of Rs3,750. The policy has optional riders like accidental death & total permanent disability and critical illness benefit. The policy term is 15, 20, and 25 years. It is available from the age of 12 years to 60 years. There is also a 2% discount on the premium rates for women.

47 | 2 June 2011 | MONEYLIFE

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PERSONAL BUSINESS AUTO Photo: PTI DEALS ON WHEELS Peter Honegg, MD & CEO, Mercedes-B enz India during the launch of the new series SL-350 and GL-500 in New Delhi

T O P -E N D CA R S A L E S

LAPS of LUXURY Since sales are not in top gear, makers of expensive automobiles are trying to be all things to all people, says Veeresh Malik

M

ercedes-Benz had a very interesting ‘launch function’ for two more variants of their cars in Delhi. In this case, the SL-350 and GL500, a huge sedan and an SUV (sports utility vehicle), respectively—with a price tag of around Rs1 crore. So did Audi, with the new A7 sedan, as well as a couple of new variants of existing cars like the A8. BMW is expected to do the same soon with some of their biggies.

Jaguar, meanwhile, continues with ‘soft launches’ of its new, big expensive cars. In all cases, there seems to be a new approach—appeal to the aspirational but undefined word called ‘luxury’—which has been the subject of more than one discussion here previously.

But, this time, Mercedes-Benz is trying something different. Their new man in India, Peter Honegg (MD & CEO), has openly declared that it wants to be seen as something other than a car for elderly people, and hopes to attract younger people with their re-jigged and refreshed variants. How they will be all things to all people, especially when sales are still in the hundreds per month on a national basis, is unknown. One thing is certain, anybody who is anybody, and is about to go to jail for corruption, is often spotted heading there in a luxury car—like Suresh Kalmadi did in an Audi.

Now, whether that is aspirational or not has not been

declared as yet, but it just might make a new format for advertising campaigns, or fit into the concept of free advertising.

But here’s one aspect they may have got wrong— more and more elderly people appear to be going in for cars and bikes that make them appear younger, at least in their own minds. If sales data for those who are buying super-bikes is to be believed, then it is the 40+ category of wealthy people who seem to be going in more for these symbols of youth than younger people.

This pretty much leaves the younger lot trying to figure out what to buy if they don’t want to appear to be part of the older set.

This is a bit tricky. Not so long ago, things were so simple—there was a waiting list for everything, and Mercedes-Benz had a monopoly. Those mindsets are hard to break, it seems, despite new bosses.

A U T O T H E FT S

Impounded Stolen Cars: Give Them a Miss

I

t now seems that monopolies, even in stolen cars, are also coming adrift. Internecine warfare is fine,

``

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PERSONAL BUSINESS AUTO

SPA RE PAR TS SH O R TAGE

find brilliance in bringing up the rear in India. Honda, of course, is in a league of its own with a brand and product value in India that defies logic.

Now, both Ford and GM seem to be getting ahead in numbers, while Toyota has, once again, found a reason—the unfortunate tsunami in Japan has curtailed n the subject of spare parts, it seems Ford has the delivery of critical components. This has, for some learnt from its past travails in India, and has really brought down the price of most of its fast-moving spare reason, convinced the boffins at Maruti Suzuki that the great Indian desire for a Japanese brand will transfer to parts. On the other hand Maruti, which at one time them automatically. scored high with its reasonable Maruti ruti genuine automat Will that happen? A few points— parts (MGP) programme, seems Maruti Suzuki is now considered an to have botched things up due Ma Indian brand in India, especially after it to royalty issues. Strange are the Ind emerged from being a governmentways of automobile companies, e run especially when they usually refuse r joint-venture company. So there is nothing ‘automatic’ about an intrato comment on such subjects, Japanese shift of loyalties. But, more leaving people like us with no option on J than that, Hyundai is coming in with but to head to shops to ask around.. a huge range of new models across all There is a theory doing the rounds nds price points—and, if street buzz is to be on this—all three top automobile believed, is launching its own spare parts players in India make more cars in India ndia believe price wars—as it builds up a decent number than they do anywhere else, and that’s at’s off used cars in India, it will have to do that, Maruti Suzuki, Tata Motors and Hyundai. d i FORD The firm has brought down the to keep resale values going.

The global leaders, on the other hand, price of most of its spare parts So, here’s the buying tip for this and that’s Toyota, General Motors (GM) summer—check out where your manufacturer is and Ford—are (to be polite)—amongst the also-rans in India. Especially Toyota which, for the past few decades, headed with spare parts prices, especially as popular perceptions are metamorphosing. has only been making excuses on why it continues to

If It’s Broke, You Can’t Fix It

O

` but it seems to have gone over the top. Reportage on

the subject is problematic—this whole matter about stolen imported cars being seized by the Directorate of Revenue Intelligence (DRI), was written about in Moneylife (13 January 2011, “Numbers Game”). As of now, the jury is out on whether there are 30-40 cars or around 300-400 vehicles, but we do know that about four dozen have already been seized and the rest are being ‘investigated’. No brand exempted, it seems. The number of motorcycles is also supposed to be high.

In addition, unconfirmed reports point to some of these stolen cars being used without registration plates or with dummy plates on television shows as well as in movies, in India and abroad. There is also talk about the direct involvement of at least one popular actress who has strong relationships in, and with, England. But, despite being debugged by the best, it appears that many of these stolen cars have reportedly been fitted with tracking and bugging devices which went undetected, because of which locating their geographical positions was not difficult. But once found, getting them back to

the genuine owners or recovery agents is difficult due to the vast variety of laws which have been broken. These include simple grand auto theft, international trading in stolen goods to counterfeiting documents and evading duties, as well as operating them under fake documents.

So, if you bought a luxury car which was not really kosher, then just hiding it won’t be enough—chances are that the car (or bike) is constantly talking to an eye in the sky somewhere. And, more than that, repeating everything you may have said inside that car, too. This author has heard of a few cases where such luxury cars have simply been dismantled and there are now a whole lot of spare parts available for potential buyers.

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.

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POWER OF ONE INDRANI MALKANI

M ode l S c hool Bus Service

A Safe School Bus System The story of a successful fight to put in place a safe transport system for school-going children. Starting a series on ordinary citizens who took on the system—and won

F

or every mother, the thought of braving the city traffic to see her children off to school and back home safely is a source of anxiety. As a mother of a school-going child in Mumbai, I had felt very strongly that there is an urgent need for an orderly, safe and efficient transportation system for children, especially for children studying in schools located in congested areas and with limited road access.

The year was 2002. Residents of Little Gibbs Road in Malabar Hill complained about the terrible congestion caused by cars dropping and picking up children from the nearby Cathedral and John Connon Infant School.

Similarly, in the Fort area, where the main School is located, offices situated around the School’s premises were up in arms, complaining to the principal Meera Isaacs about the congestion on the roads and the noise.

Being the secretary of the advanced locality management (ALM) group of Little Gibbs Road, I had to look into the matter. I met the then deputy commissioner of police (traffic) Himanshu Roy and, together, we visited the sites during the peak congestion hours to see for ourselves the prevailing situation and suggest possible options.

Mr Roy and I discussed various options and narrowed them down to a single proposal—to put more children on school buses. We then approached Ms Isaacs and she promptly agreed to the proposal and took a bold decision to advocate that all children avail of the bus service provided by the School. Having agreed to this decision, I observed that the existing bus service of the School was grossly inadequate for the project. Only 24% of the students used the school bus service. Parents preferred to drop and pick up their children themselves because buses often took long-winding routes and were in a deplorable condition.

My son was also in this School and travelled on such a bus. Setting up the Model School Bus Service was not easy. The sheer number

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Power of One.indd 2

of children to be fetched from their homes ranging from as far away as Bandra, and as near as Oval Maidan and Malabar Hill, was too large for any single bus operator to handle.

I set about preparing the concept paper and the process to implement a Model School Bus Service which would address the issues of safety and efficiency of transporting the school children. Advertisements were placed in local papers asking for school bus service providers to contact the School. Thirty eight bus operators responded, and a meeting was held in the School to elaborate on the requirements of the proposed bus service. The first gauntlet was thrown at me by the existing bus operator of the School. He challenged me that the proposed bus service and the standards I was proposing would never succeed. I told him if he could not deal with it, he should leave. He did at the time. After the service started, he was back within three months—on my terms.

As per my concept document, the school issued circulars to parents and data, such as addresses and other relevant details, were obtained and collated. All this information about the students was fed into the programmed software.

A common standard agreement including rules, services and conditions was drawn up; this was signed by the principal on behalf of the student body and each contractor. ``

Model School Bus Service—A safe and efficient system for transporting school children

5/10/2011 9:08:23 PM

POWER OF ONE INDRANI MALKANI

`

considerably. Having a common bus The data obtained from the service brings together children from students formed the basis for diverse backgrounds and, from a formulating the bus routes. Every young age, they learn to use public night, for two weeks, around transport. Moreover, regular service 11:30pm with a flask of coffee, I inculcates a sense of punctuality. would leave home along with my After the success of the Model route planner to study the lanes and School Bus Service, many school by-lanes of Mumbai and identify principals invited me to set up this buildings by names and return at Model Service in their schools. Now around 5am. I needed to know the comes the question: How does one road conditions and how the cars make it possible for all types of were parked at night. This was schools, with children of various necessary to plan the halting of the economic backgrounds, to avail of buses for children to board the bus in a school bus service that is safe and the morning. The massive exercise of efficient? The only way is to make timing the duration of each route and this model service a government the interval of travel between stops policy which is the biggest challenge was the result of several trial runs. for me.

Finally, the service commenced on 6 In 2008, the principal secretaryJune 2002. It has been well accepted They have the budgets, transport invited me to make a by parents and the student body and, the first gauntlet was presentation of the Model School despite some initial resistance, now thrown at me by the Bus Service. Children of many 94% of the students are availing of existing bus operator bureaucrats, judges and ministers use the bus service. it; so officials realised that this tried Two crucial factors that have of the School. He and tested model would be the basis encouraged me to go ahead with the challenged me that the of formulating safe and coordinated project—Ms Isaacs’s tremendous proposed bus service transportation of school children all faith in me, which was evident in her and the standards I was over Maharashtra. Accordingly, a resolve to give unstinting support, committee was formed comprising and the enthusiasm of the traffic proposing would never top bureaucrats and myself through a police personnel to ensure the success succeed government resolution. of this service. The great pride the Working with the top bureaucrats traffic constables and their officers and ministers in charge of transport feel about this Model School Bus Indrani Malkani and education is a huge learning Service, which they identify as their Civic Activist experience. In the process, I faced very own, is an incredible experience several roadblocks that seemed to crop that I cherish.

The traffic police was very strict in disallowing up all too often. Being an optimist helped tremendously. cars from entering the approach roads to the schools. I When we break the job down into specific tasks, we can remember when some parents would try to send their see what needs to be done and how long it might take us. children in a lal-batti car, the constables on duty would I had to remind myself of this constantly and have my wits turn to me with questioning eyes. I told them to do their about me, along with lots of patience and a huge dose of duty and that nothing will happen to them. I stood by common sense. It is 2011, the work has not yet ended but I am determined to see that the policy is finalised their side while they took action.

I had my share of parental verbal attacks too. On and also implemented correctly. I believe in consultation, many occasions parents would make demands which not confrontation, with the authorities. They have the were not possible to be acceded to or were not in the budgets, the manpower and the authority to implement interest of other students and I had to say a firm no. As change. Civil society—you and I—have to share with a result, I earned several amusing nicknames. Despite all the authorities our aspirations and the changes it needs. this, the service has proved a success and has reduced My firm belief is that once we delineate achievable goals traffic congestion, achieving free-flowing vehicular traffic and start a movement, the will and power to sustain it around the schools. Noise pollution levels have gone down automatically follows.

“

“

51 | 2 June 2011 | MONEYLIFE

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BOOKS

Too Little The story of a small car that could have been something big

Y

ou have heard this story before. Ratan Tata, chairman, Tata group, got the idea that India needs an affordable car, “looking at what is a pretty familiar sight in India, an entire family travelling on a scooter with three or four family members.”

But why give this book a title like ‘Nanovation’?

What Kevin and Jackie Freiberg have accomplished is charting the course that the Nano took from the inception stage to the final, delayed, rollout. The authors do a commendable job, packing in all that went into making the world’s most affordable car, but they could have avoided the flattering tone that they adopt when they describe Ratan Tata and the Tata group. Of course, the group is known for its excellent corporate social responsibility (CSR) standards right from inception, much before the term became fashionable, and the ideals that they have been following—so far.

But, thanks to the recent controversy around the Radia tapes, the hagiographical accounts in this book, surrounding Ratan Tata, sound hollow now. “I would hope my successors never compromise... and never allow the Tata Group NANOVATION to join the growing number KEVIN AND JACKIE of companies which have shed FREIBERG their values, forgotten their (& DAIN DUNSTON) integrity and closed their eyes Penguin on ethical standards,” Tata has Pages 350; Rs450 been quoted as saying. That’s out of context, we presume, because the main context today is corruption and nothing beats the 2G scam which has sullied the Tata name.

A few passages in the book are downright wrong.

This reviewer has visited Bombay House (the Tata group’s south Mumbai headquarters) a number of times, and never, ever, have I “stepped over a couple of stray dogs that sleep on the beautiful marble floors of the entryway where it is cool.” Humans cannot get into the hallowed portals of the Tata headquarters without a valid entry-pass, and canines are definitely not allowed.

Nanovation is littered with blurbs which should

actually be part of a corporate motivational speaker’s PowerPoint slides (“Does your organisation have a history of attempting big things that are far out of reach or a history of going for the small win?” or “Feel no shame about ideas that don’t work—learning what doesn’t work is as important as learning what does”).

This work insists that the real reasons for owning a four-wheeler are “personal pride, status in the community and bragging rights.” There is no disputing these reasons. But that is precisely the problem with the Nano. It is perceived to be a car for those with a limited budget; in no way can you claim ‘bragging rights’ or ‘status in the community’ if you are seen in a Nano.

Not yet.

Nano’s price point has long since crossed the Rs1-lakh mark; but it is an affordable car, as yet.

However, it will still create a dent in the pocket of a potential buyer with limited funds. The Nano is actually more of a second car for those who don’t want to take their gas-guzzling sedan to the friendly neighbourhood grocer.

As the book says, Tata Motors hit the sweet spot with its Ace which cornered a decent share of the market. The idea of the Ace was born when Girish Wagh, (now VP and head-small car project, Tata Motors) was told by a customer, “You (Tata Motors) reduce the 407 to half its size, half its price and double the fuel efficiency. We will buy that.” Mr Wagh went ahead with this suggestion and the Ace was born. And bought. But the point is that Tata has not been able to hit the sweet spot with the Nano. The car’s sales crossed the 10,000-mark for the first time in April this year, after a quite a few caught fire and there were production delays. Tata Motors had a monthly target of 15,000 Nanos in 2011. The company is still hit by constraints in supply of parts and subdued demand.

The company is planning a new small car to be positioned between the Nano and its own Indica. Ratan Tata, this book says, is asking people ‘throughout’ the Tata group, “What’s the next Nano?” Well, he really shouldn’t. The future belongs to vehicles that will run on renewable sources of energy, electricity being the first option, and working prototypes are already out globally.

Nanovation is the story of a car that was over-hyped.

The book covers the hype and is rich in detail. But the Nano definitely cannot “teach the world to think big.”

— Devarajan Mahadevan

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BOOKS

Building Block

Brand Stand

Here’s how you can deliver happiness... and rake it in

A

G

lobally, companies struggle to integrate the latest business themes into their operations and spend huge amounts paying consultants for advice. Some companies seem to have embodied these ideas into their DNA. One such is an American company Zappos, an online retailer.

Typical of the case-study method used by business schools, many have looked to ‘replicate’ its good practices. Here is a first-person account of its trials and tribulations—a part of any organisation’s growing process—and its successes. The CEO of Zappos, Tony Hsieh, narrates the story of his enterprise in this book. It captures his entrepreneurial spirit, the growth of his enterprise as well as the context of his business—the US economy and the state of technology from the 1990s. It’s important to understand these contextual details if replication of a successful management model is the objective. Hsieh starts the narration with his childhood experiences—of wanting to make money chasing pie-in-the-sky kind of dreams. Like many of today’s successful businesspeople, Hsieh was an entrepreneur, innovator and achiever from a young age. He lets you in on his ‘enterprises’ through high school, Harvard undergrad education and then the inception and buyout of his first major company, LinkExchange, which made his first millions.

After selling LinkExchange, Hsieh dabbled in various projects, from poker to investing, before he realised that building companies was his passion. So he entered a young, struggling Zappos, betting most of his fortune on its success.

Hsieh’s team got Zappos off the ground after several trials. The second part of the book focuses more on Zappos’ internal operations. Zappos DELIVERING has three priorities: customer service, culture, HAPPINESS and employee training & development. Hsieh TONY HSIEH describes how Zappos uses each for competitive Hachette India advantage. This section goes through each of Pages 254; Rs499 Zappos’ 10 core values in detail, with employee anecdotes. His main message is: “concentrating on the happiness of those around you, increases your own happiness dramatically.”

Regular readers of business books would find little that is new by way of information or ideas; it is its lively narration and anecdotes that hold your interest. The character-building episodes of his personal life that Hsieh describes are the stuff of any business book but his verve, passion and openness are what set this autobiography apart. Also, Hsieh’s admission of his own mistakes—and what he learnt from them—is very engaging; so are his many, many insights into career planning for employees and getting the best from them. It is this which makes the Zappos’ story a fun place to start learning the basics of corporate culture. It also has great tips on effective use of social media. — Dr Nita Mukherjee

uthors MG Parameswaran and Kinjal Medh clearly adulate their profession, advertising, and it shows in Brand Building Advertising (McGraw-Hill; Pages 200; Rs625). The book explains concepts and also presents case studies.

‘How Advertising Works’, ‘Celebrity Endorsements’ and ‘Promotions in Car Marketing’ are articles that flesh out these concepts. The ‘FCB Grid’, explained in detail for different products, is a powerful advertising and communication development tool. The tome also briefly touches upon the future of Indian advertising and the advent of new media—especially digital marketing.

The meat of the book is in the case studies which have been tested in brand management courses taught by the authors at various business schools.

All these campaigns have increased sales and improved brand equity. These advertisements have been winners at the Effie Awards for Advertising Effectiveness.

The book features 12 cases broadly classified into three groups: consumer products, consumer durables and services. Fundamentals of brand building in advertising are common across all products, but the nuances change with parameters like product class and the competitive scenario.

For example, the Amul Ice Cream case study (‘Real Milk–Real Ice Cream’) explains how ice-cream was transformed from being a pure ‘fun’ product to a nutritious one in the eyes of young mothers. Tata Indigo was advertised as a luxury product in the sedan segment from an Indian manufacturer—Tata Motors. The Indigo launch strategy hit the bull’s eye and Indigo became the largest selling car in its class. Following the UTI campaign, UTI’s image as a mutual fund had improved across all key parameters, especially service and professionalism.

‘UTI Country’ became a catch phrase.

This book will be useful for young advertising professionals and management students. — N Madhavan

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TIGER’S NEST THIS MONASTERY WAS DESTROYED BY FIRE IN 1998 AND COMPLETELY REBUILT

SPENDING TRAVEL

B H U TA N

ANCIENT KINGDOM, Youngest King Jaideep Mukerji steps back in Ɵme as he travels through South Asia’s Ɵny kingdom, untouched by the ravages of civilisaƟon

TSECHU DANCERS ELABORATE HATS AND COSTUMES PROVIDE COLOUR DURING FESTIVALS

B

hutan–India’s neighbouring country, is the only country in the world where there are no traffic lights, few traffic crossings and where police boxes are decorated with dragons. It is also the least urbanised country in South Asia with only a few motor vehicles, no high-rise buildings and no symbols of Western modernity. When you travel to Bhutan, you certainly get the feeling that you have stepped back in time. An air of mysticism surrounds Bhutan’s attractions, from centuries-old dzongs (fortresses) unique to the area, to medieval monasteries. Bhutan is a landlocked country approximately 300km long and only 150km wide, situated along the southern slopes of the Himalayan range. The country remains cautious in its contact with the outside world and the flow of tourists into the country is tightly regulated while the government makes great efforts to preserve and strengthen the country’s religious and cultural traditions.

Although archaeological exploration has been limited, evidence of civilization in the region dates back to at least 2000 BC. The original Bhutanese, known as the Monpa, are believed to have migrated from Tibet.

THE NATIONAL STUPA BHUTAN IS RENOWNED FOR ITS BUDDHIST LANDMARKS

The traditional name of the country since the 17th century has been ‘Druk Yul’, Land of the Drukpa or the Dragon People, which is officially portrayed on the country’s flag.

For centuries, Bhutan was made up of feuding tribal regions until it was unified under King Ugyen Wangchuck in 1907. The British exerted some control over Bhutan until India’s independence. Up to the 1960s, Bhutan chose to remain largely isolated from the rest of the world. Its people carried on with a traditional way of life, farming and trading, preserving

``

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SPENDING TRAVEL

` a culture which had remained intact for centuries. After

China invaded Tibet in 1958, Bhutan strengthened its ties with India in an effort to avoid Tibet’s fate. New roads and other connections to India were built and, in the 1960s, Bhutan undertook social modernisation, abolishing the caste system, emancipating women and enacting land reforms.

In 2005, King Jigme Singye Wangchuk, Bhutan’s fourth hereditary ruler, outlined plans for the country to shift to a two-party democracy. In December 2006, he abdicated in favour of his son, the Crown Prince Jigme Khesar Namgyal Wangchuk who became the fifth Druk Gyalpo (monarch) of Bhutan and head of the Wangchuck dynasty. Jigme Khesar Wangchuck was

itself but, instead, drove to a viewing point in the valley from where one can see Takstang in the distance through the mist high up on the cliff opposite.

The following morning, I headed east along a scenic mountain road to Thimphu, the country’s tiny capital located at 7,600ft in a broad green valley surrounded by terraced rice fields. The town of about 40,000 people built along traditional lines is the administrative centre of Bhutan since the 1950s. The main street of Thimphu, Norzim Lam, is lined with shops of all descriptions, mainly stocking goods imported from India and China.

The main places of interest in Thimphu can easily be seen in a couple of days starting with a visit to the ‘viewpoint’ (if it’s clear), followed by the zoo,

SHOPPING AT PUNAKHA

PUNAKHA VALLEY

THE MARKETS IN THE DRAGON KINGDOM ARE A SIGHT TO WATCH

BHUTAN’S FORMER WINTER CAPITAL IS FAMOUS FOR ITS IDYLLIC BEAUTY

crowned king in November 2008 and at the age of 30, he is the world’s youngest monarch.

I took the Bhutanese airlines, Druk Air, Airbus 319 flight from Delhi via Kathmandu to Paro in western Bhutan, set in what is considered the most beautiful of the country’s main valleys at an elevation of about 7,500ft. The dominant feature of Paro is undoubtedly the Paro Dzong (fortress/monastery) set high above the Paro Chu River with spectacular views up and down the Paro Valley. Paro Dzong is a typical dzong, and its form is copied by other buildings across Bhutan. It was originally built in 1646, but has been destroyed a number of times, sometimes by fire, other times by earthquakes. Today, it houses the National Museum of Bhutan which displays intricately painted thangkas (hand-painted wall hangings), traditional costumes, stamps (even talking stamps) and objects from archaeological excavations.

Located further up the valley is the well-known Takstang or ‘Tiger’s Nest’ monastery which was completely destroyed by fire in 1998 and has, since, been rebuilt. On the cloudy afternoon of my visit, I chose not to go for the two-hour hike to the monastery

the Memorial Chorten, the National Institute for Traditional Arts and Crafts, the Institute of Traditional Medicine, the Folk Heritage Museum, the Post Office (Bhutanese stamps are famous), and the National Library which houses the world’s largest book.

The impressive Tashicho Dzong located beside the river in Thimphu is the seat of the Bhutanese government. The present modern building is a rebuilt version of a dzong that was here since 1641 and it retains many of the features of the original dzong. It now houses all the government ministries, the throne room of the King, the National Assembly chambers as well as the nation’s largest monastery with over 2,000 monks in residence. The Bhutanese are passionate about chilli, almost every village roof is a deep red colour—covered by a layer of chillies laid out to dry.

The national dish, ‘ema datshi’ is vegetarian, made from yak cheese and chilli. No trip to the Dragon Kingdom is complete without sampling this tasty, but hot, offering.

Departing from Thimphu, I drove through forests of pine and cedar to the 10,300ft high Dochu La pass with panoramic views north to the snow-covered peaks of the high Himalayas. A long descent finally brought us to ``

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SPENDING TRAVEL

` Punakha located at a relatively low altitude of 4,265ft

in a dry valley. Punakha produces most of the oranges and fruits grown commercially in Bhutan and, despite the warmer climate and the possibility of growing an endless variety of produce, the population of the valley remains remarkably low.

Until recently, Punakha was the winter capital of Bhutan and it is still the winter headquarters of the National Monk of Bhutan (Je Khempo) and his followers who move here every winter. The Punakha Dzong was built strategically at the junction of Pho Chu and Mo Chu (the Sun and Moon) Rivers in 1637 to serve as the religious and administrative centre of this region. The dzong was damaged by four major fires and an earthquake—though fully restored, it remains frequently closed for visitors. I had timed my Bhutan visit to coincide with one of the ‘tsechus’ or monastery festivals where masked dances depicting the events from the life of Padmasambhava, the eighth century Buddhist teacher, are staged. The tsechu provides the local people with an occasion to gather, dress up, and enjoy in a festive atmosphere. Family members travel great distances from villages by foot over passes and along mountain trails to be reunited. It is also an occasion for people to receive blessings from a lama or Buddhist monk and watch sacred dances performed by trained monks wearing ornate costumes and impressive masks.

Every year, tsechu dates are chosen by the National

When To Go:

Although the country is quite small, Bhutanese weather varies from location to location depending upon the elevation. Spring and autumn are the best seasons to visit Bhutan. Punakha is an exception as it is in a lower valley and is pleasant even during winter. In winter, you can enjoy better views of snow-capped mountains and clear blue skies.

Monk Body of Bhutan based on the lunar calendar and Buddhist astrological charts. Paro has one of the grandest tsechus in Bhutan during April; colourful ones are also held in Thimphu, Trongsa and Jakar. Driving over a series of passes over the Black Mountains, I reached the small town of Trongsa and then drove further east to the Bumthang Valley deep in the heart of Bhutan. The journey to this less-visited part of Bhutan gives one an insight into a medieval way of life that has changed little over the centuries. Development has brought education, healthcare and electricity, but the local small farm-based economy, that has kept the locals self-sufficient over centuries, remains largely unchanged.

Reaching Jakar town, I spent two days soaking in the sights, sounds and colours of one of the largest tsechus held in Bhutan. With blowing of horns and beating of drums, monks wearing black hats entered the courtyard followed by a dazzling display of swirling brocade dresses, masks and colourful banners. During intervals, clowns (atsaras) added some lightness to the serious religious atmosphere with their crazy antics.

Getting to the end of my stay, I travelled by road through the southern Himalayas, descending gradually to the border town of Phuntsholing busy with equal numbers of Bhutanese and Indians. From Phuntsholing, a five-hour drive takes you to the Indian airport of Bagdogra with flight connections to all parts of India.

— With Veeresh Malik

ESSENTIAL FACTS

Visas:

Indian nationals travelling from India to Bhutan do not need a Bhutan visa.

A current Indian passport or an election ID card is required at immigration to obtain an entry-permit. You need to take with you two passport-size photographs.

Where To Stay:

Travel arrangements within Bhutan have to be made through a Bhutanese tour operator who arranges accommodation, transport, guides and complete travel support.

A list of operators, travel itineraries and information is available on www.abto. org.bt and also on www.tourism.gov.bt

Currency: AN INTERSECTION AT THIMPHU EVEN THE CROSSROADS ARE FREE FROM ASIA’S CRAZY TRAFFIC

Getting There:

By air with Druk Air from Delhi and Kolkata to Paro in western Bhutan. By road from Bagdogra airport to Phuntsholing (5-6 hours) and then onwards to Paro or Thimphu.

The Bhutanese currency is called Ngultrum (Nu) and is equal to the Indian rupee. Credit cards (American Express and Visa) are accepted by only a few establishments. The Indian rupee is accepted all over Bhutan.

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ML FOUNDATION EVENTS

Safe & Smart in Gurgaon

A

larger-than-expected number of people thronged Moneylife Foundation’s first-ever seminar in north India—at New Gurgaon on Saturday, 7 May 2011. Many participants were from the national capital; some others from various places in the National Capital Region (NCR); some came even from as far off as Ludhiana, Chandigarh, Allahabad and a couple of other northern ern cities.

More than 300 people registered early y for the day-long ‘Investor, stor, Empower Yourself’ rself’ programme, held eld at the lush Town & Country Club venue, with ith the support of Indiabulls iabulls Financial Services. ices.

Additional chairs airs were arranged and, yet, quite a few people had d only standing place through the first session. n.

Some unregistered guests had to be turned away even. We promise to accommodate them at the next session.

New Gurgaon is a pocket of the new-rich, aspirational Indians and the seminar helped them understand the key principles of investment, how to stay alert for fraudulent investment schemes and to make a personal effort to learn to be safe while making more with wit their hard-earned money.

The sessions were we conducted by Sucheta Suc Dalal, trustee, Moneylife M Foundation and managing editor, Moneylife; Moneylif Debashis Basu, trustee, t Moneylife Foundation F and editor, edi Moneylife, Mone and Sachin Chaudhary, Cha whole-time wh director, d Indiabulls Housing

The huge success of the seminar indicates that there is no dearth of people who want to know more about how to save and invest smartly—and safely—and stay informed about their rights as investors. The event marks the beginning of Moneylife FoundaƟon’s foray into ciƟes outside Maharashtra Finance. The panellists engaged the participants with their plentiful insight and solid experience.

North Indians have traditionally been investors in gold and property.

After decades of instability and upheaval—whether it was the Partition, re-drawing of state boundaries or militancy in the Punjab—the people are witnessing an economic revival. Over the past few years, growing incomes have led them to look for newer avenues of investment. But, like in most parts of the country, many have been lured by a variety of unregulated schemes and unguaranteed projects that have left them short-changed. As is the case of their investment in numerous buildings that have remained on large, attractive highway hoardings, or just lovely images in newspaper `` advertisements. So people are

Gagan Banga, CEO, Indiabulls Financial Services, setting the tone of the seminar

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ML FOUNDATION EVENTS

` now looking for ready-to-move-in

properties. Even investment in gold is increasingly being done through mutual funds.

For the participants, the seminar was an enlightening exercise about the super-normal returns that are never paid and attractively marketed schemes (like ‘Speak Asia’) that are most likely a repeat of hitherto shattered ‘plantation’ dreams that vanished without a trace. While such experiences have made many cautious, it was evident from the issues and questions that participants raised that people are more financially aware today and there is a new interest in sound investing.

The educated urban middle class is reluctant to take up equity investment in a big way, either directly or through mutual funds, although there are investments and savings products from credible institutions with built in safety which will give excellent results over the long term. But, without an understanding of the wealthcreating and wealth-preservation aspects of each investment product and also their possible pitfalls, one can end up with serious losses.

This is where seminars like the one organised by Moneylifee Foundation can help. They enlighten en average investors with basic and d advanced knowledge of how to be safe and smart with their money. y.

The panel of presenters— nters— Ms Dalal, Mr Basu and d Mr Chaudhary—focused ed on all aspects of savings and nd investment with the help lp of detailed presentations. ns.

Ms Dalal spoke on how w to keep your money safe fe which includes avoiding ng chain schemes like Speak ak Asia that is currently the rage. She also offered essential tips on n

borrowing and use of credit cards.

Mr Basu spoke on risk and returns of various investment options— from gold to bank deposits to real estate and equity. In the second session, Mr Basu spoke about how to invest in mutual funds and Ms Dalal spoke on the technical aspects of bequeathing your savings through a Will. Mr Chaudhary made a candid and interesting presentation on how to invest in property. The presentations focused on the principles of managing one’s money—acquiring a better understanding of the risks and benefits of the various financial products available in the market and developing a patient and consistent approach that will help investors grow their wealth. The session concluded with a lively interaction with the packed audience that wanted to know more about all investment options and also wanted to learn how to check out whether their financial advisors and relationship managers have been offering them products that are in their best interest. Many of these products turned out to be detrimental.

Moneylife Foundation conducts such seminars and workshops regularly. The programmes are free of cost and participants are invited to become members of the Foundation. The membership is

A participant poses a question to the panellists

The questions just kept coming...

free. Encouraged by the programme and benefiting from the knowledge gained, many participants underlined the need to hold such programmes for many more people, perhaps even through video conferencing and over the Internet for those who cannot make it to the venues. Some suggested organising the seminars in Hindi and regional languages, to usher in financial literacy and investor empowerment for a larger number of people.

Since it started 15 months ago, Moneylife Foundation has hosted 51 personalities from various fields to educate and guide those interested at 63 events, towards its goal of empowering investors.

The Foundation’s membership has crossed the 5,395 mark within this short period.

Sachin Choudhary, Director, Indiabulls Housing Finance

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Learn the basics of saving and investing

Earning Curve

I NVE S T I N G BAS IC S

Mean Markets Why this time is never different

S

ir John Templeton, the legendary investor-turned-philanthropist, identified the four most expensive words in investing as ‘this time, it’s different’. Before every major crash, like the Great Depression, post-Enron, after 9/11, the dotcom and housing bubble burst, high valuations have been justified arguing that “this time, it’s different.”

A great example was the case of Irving Fisher, an American economist, who was extremely famous in his times—perhaps the first celebrity economist granted the first Yale PhD in economics in 1891. But he will be known forever for what he said before the 1929 crash. He famously predicted, three days before the crash, “Stock prices have reached what looks like a permanently high plateau.” Irving Fisher stated on 21st October of that year that the market was “only shaking out of the lunatic fringe” and went on to explain why he felt the prices had still not caught up with their real value and should go much higher.

On Wednesday, 23rd October, he announced at a banker’s meeting, “security values in most instances

were not inflated.”

Similarly, when the dotcom bubble was raging, astronomical prices of dotcom companies with no revenues were justified because “this time it’s different.”

In 2007, housing prices were not expected to decline, because over the previous 30 years, housing prices had never fallen in the US— at all places and at the same time.

Fisher argued before the 1929 crash that the market would remain high

However, both the long-run data for the US and the experience of other markets where house prices had soared relative to income would have shown that the US wasn’t any different from the rest of the world, and that a crash in housing prices was a serious possibility.

“Whenever you hear talk of a new era, you should behave as Circe instructed Ulysses when he and his crew approached the Sirens: have a friend tie you to a mast,” says James Montier, a member of Grantham, Mayo, Van Otterloo & Co (GMO) asset allocation team (GMO is a top investment

management firm). ‘This time is never different’ is the second of the seven immutable laws of investing written by Mr Montier.

When assessing the ‘this time it is different story’, it is important to take the widest perspective possible, he points out. For example, if an individual had looked at the past 10 years’ data for the price of gold, he would conclude that the price of gold never falls.

This seems to be true in terms of our experience as well. Who remembers gold prices having crashed? But there have been periods when Indian gold prices have been held up because of currency weakness and not because the false dictum: “Gold prices never crash.” The yellow metal went up from around Rs4,000/10gm in the year 2000 to around Rs20,000/10gm in 2010. In dollar terms, gold did crash from around $850 in 1980 to $257 in 2001.

Rising gold prices are now sought to be justified by arguments that the dollar will lose its reserve currency status and high inflation is on its way. That may well be the case, but just when it seems that gold will not fall, because “this time it’s different,” gold will start crashing.

Over and over again (like this time), differential logic is used to justify high valuations. But just as trees don’t touch the skies, markets are mean-reverting. Meaning, all prices would move back to their average value. As Benjamin Graham, the legendary author, value investor and Warren Buffett’s mentor wrote: “The stock market will continue to be essentially what it always was in the past—a place where a bull market is inevitably followed by a big bear market.” So, the solution is to formulate a plan, stick to it and when you hear next that ‘this time it’s different’, run for the exit.

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LIST PRICE: `1,200 MONEYLIFE PRICE: `1,000

Two priceless books of autobiographical narrative that candidly reveal the unique thought processes, untiring efforts and colourful anecdotes of top achievers such as Ratan Tata, Amitabh Bachchan, Mukesh Ambani, Aditya Puri, Rajiv Bajaj, RA Mashelkar, Keki Dadiseth, Geet Sethi and others.

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Book Ad.indd 1

5/13/2011 5:13:42 PM

MONEY FACTS STOCKS

INDIAN MARKET TRENDS

FUND FLOWS

The Sensex declined 4% and the Nifty ended 5% lower in the fortnight. The ML Small-cap Index also ended 5% down. The ML Mega-cap Index, the ML Micro-cap Index, the ML Large-cap Index and the ML Mid-cap Index all ended 3% lower.

Foreigners: Foreign institutional investors were net sellers of shares (Rs2,520.40 crore) in the fortnight.

They pumped in Rs20,646.20 crore.

245

Share Prices, November 2010 =100

-55

110

-355 -655

100

FII Net Investments (Rs Crore)

-955 90

-1,255 2 May-11

12 May-11

Indians: Domestic institutional investors were net buyers of stocks (Rs3,732.32 crore) in the fortnight.

They pumped in Rs11,526.10 crore.

80

1,020

70 Nov-10

Feb-11

May-11 785

ML Mid-cap ML Large-cap

ML Small-cap ML Mega-cap

Index

Nifty Sensex

550

29 Apr

12 May

+/(-)

315 80

MLM ega-capIndex

94. 54

92.11

- 3%

MLM icro-capIndex

78.42

76.36

- 3%

MLLa rge-capIndex

94. 19

91.49

- 3%

MLM id-capIndex Sensex Nifty

86 .17

83.38

- 3%

19,135. 96

18,335.79

- 4%

5,749. 50

5,486.15

- 5%

80.83

76.92

- 5%

MLS mall-capIndex

DII Net Investments (Rs Crore)

ML Micro-cap

Mega-cap Gainers/Losers

29 Apr

12 May

Change

UnitedB reweries

463.30

563.60

22%

Shriram Transport Finance Co

774.90

645.50

- 17%

Large-cap Gainers/Losers

29 Apr

12 May

Change

2,038.40

2,257.55

11%

SREIInfrastruct ure Finance

51.70

41.10

- 21%

Mid-cap Gainers/Losers

29 Apr

12 May

Change

ManIndustri es( India)

83.05

111.30

34%

ConsolidatedC onstruction Consortium

47.50

35.40

- 25%

-155

2 May-11

12 May-11

GLOBAL MARKET TRENDS 71,000 Bovespa

69,600 68,200

CMC

Small-cap Gainers/Losers

29 Apr

12 May

Change

66,800 65,400 64,000 Nov-10

Feb-11

May-11

The Bovespa fell 3%, the Shanghai Composite fell by 2% and the Nikkei shed 1%. The Nasdaq Composite and the Taiwan Weighted remained unchanged.

Index

29 Apr

12 May

+ / (-)

Taiwan Weighted

9,008

9,034

0%

Nasdaq Composite

2,874

2,863

0%

Dow Jones Ind Avg

12,811

12,696

- 1%

9,850

9,717

- 1%

VaibhavGems

33.50

42.90

28%

AlliedD igitalS ervices

90.95

58.60

- 36%

Nikkei

29 Apr

12 May

Change

FTSE

6,070

5,945

- 2%

Shanghai Composite

2,912

2,844

- 2%

23,721

23,074

- 3%

2,192

2,123

- 3%

66,133

64,003

- 3%

Micro-cap Gainers/Losers Aplab

31.75

42.45

34%

CelebrityFashi ons

12.60

10.32

- 18%

Hang Seng

(AllP ricesi nR s)

Korean Composite Bovespa

63 | 2 June 2011 | MONEYLIFE

Money Fact.indd 2

5/14/2011 3:04:38 PM

MONEY FACTS STOCKS

5

What’s H

T

ML SECTORAL TRENDS

Shares of consumer product companies witnessed good buying. Hindustan Unilever jumped 6% and Jyothy Laboratories climbed 4%, whereas ColgatePalmolive and Panasonic Energy India settled unchanged.

Companies

29 Apr

12 May

+/-

ML Consumer Product Index

Hindustan Unilever

285.20

301.40

6%

300

Jyothy Laboratories

207.10

215.55

4%

Godrej Cons Products

376.30

387.00

3%

72.35

73.95

2%

414.80

423.70

2%

290

LincP en & Plastics Emami

280

Colgate-P almolive

270

904.35

PanasonicE nergy

260 250 Nov-10

Feb-11

May-11

907.75

68.00

68.10

0%

P&GH ygiene

2,000.55

1,988.30

- 1%

GilletteIndi a

1,834.65

1,819.00

- 1%

DaburIndi a

101.20

99.05

5

Companies

29 Apr

12 May

AmbujaC ements

158.20

133.65

-16%

+/-

ML Cement Index 750

127.20

1 10.60

-13%

1,112.80

986.10

-1 1%

22.10

19.60

-1 1%

ShreeD igvijayC em

1 1.69

10.42

-1 1%

IndiaC ements

99.30

88.70

-1 1%

SaurashtraC ement

21.00

19.00

-10%

BarakV alleyC em

AndhraC ements

14.65

13.38

-9%

HeidelbergC ement

50.05

45.95

-8%

GujaratS idheeC em

1 1.95

10.98

-8%

720 690 660 630 600 Nov-10

2% Petrochemicals

Lifestyle& Lei sure

2% Cement

- 11% - 9%

Airlines

1% Sugar

- 9%

Plastics

1% Non-ferrousm etals

- 8%

Garments

0% Financial services

- 7%

INSIDER TRADES

Stocks of cement companies were punished. Ambuja Cements plunged 16%, JK Cement tumbled 13%, ACC, Barak Valley Cements and Shree Digvijay Cement tanked 11% each, while Saurashtra Cement declined 10%.

ACC

ConsP roducts

-2%

N T

JKC ement

ML Sectoral Trend

0%

AllP ricesi nR s

What’s

Consumer products and lifestyle & leisure stocks gained 2% each, airlines and plastics added 1% each, while garments ended unchanged. On the other hand, petrochemicals’ stocks declined 11%, cement and sugar sectors were down 9% each and financial services fell 7%.

Feb-11

May-11

AllP ricesi nR s

BULK DEALS Date

Company

Buyer

Seller

Rs Cr

10May-1 1

AnsalP rop

MaviInvestmentFund

InvestmentP rofessionals

06May-1 1

JhaveriFl exo

MarsFi ncomP vt

RajulS Jhaveri

0.50

06May-1 1

LloydE lectric

RenuP unj

MayaR aniP unj

2.64

03May-1 1

Ravinay Trad

RanisatiD ealerP vt

SatishK umar Agarwal

0.43

12May-1 1

VaxH ousing

KailashS Agarwal

BanwarilalH S aharan

0.08

13May-1 1

AmulyaLeas

ShaktiH otelsP vt

NikkiS ecuritiesP vt

0.12

09May-1 1

GomtiFi nlease

Sunita Agrawal

AdityaV B agadia

0.04

11.05

Leela Lace Software Solutions Pvt Ltd bought 3,00,000 shares in Hotel Leelaventure (stake up to 4.64%). Kajaria Exports bought 4,05,000 shares in Kajaria Ceramics (stake up to 19.57%).

Shailesh Haribhakti, independent director of Dhanalakshmi Bank, bought 10,000 shares in the company. Cresta Fund bought 50,000 shares in Sudar Garments (stake up to 5.24%). Paresh C Zaveri, non-executive director of Aurionpro Solutions, bought 10,000 shares in Aurionpro Solutions (stake up to 10.71%).

Ninad Karpe, managing director of Aptech, bought 1,16,444 shares in the company (stake up to 0.25%). Chetan Kajaria, joint managing director and wholetime director of Kajaria Ceramics, sold 2,40,000 shares in Kajaria Ceramics (stake down to 0.69%).

Versha Devi Kajaria sold 70,000 shares of Kajaria Ceramics (stake down to 1.49%). AK Kajaria (HUF) sold 95,000 shares of Kajaria Ceramics (stake down to 1.22%).

BS Sahney sold 21,453 shares of NRB Bearings (stake down to 3.1%). Reliance Capital Trustee Company sold 80,900 shares of Talwalkars Better Value Fitness (stake down to 6.69%).

MONEYLIFE | 2 June 2011 | 64

Money Fact.indd 3

5/14/2011 3:04:48 PM

MONEY FACTS COMMODITIES

INDEX TRENDS

COMMODITY TRENDS

MCX Commodity Indices

Rubber

Particulars

29 Apr

13May

Change

52- Week High

0%

52- Week Low

Agri

2,528.56

2,519.42

2,989.16

2,110.09

Comdex

3,726.64

3,381.48

-9%

3,739.05

2,566.68

Metal

4,873.94

4,392.01

-10%

4,926.75

3,146.90

Energy

3,550.91

3,140.14

-12%

3,585.96

2,377.39

COMMODITY FOCUS Copper (Rs/kg) 475

ndia’s rubber production rose by 6% to 56,800 tonnes in April compared to 53,500 tonnes in the corresponding month last year, while consumption grew to 82,500 tonnes from 78,250 tonnes in April 2010, according to the Rubber Board. But, export of rubber in April fell 53% to 1,043 tonnes against 2,227 tonnes in the corresponding month of the previous year.

Oilseeds

455

O

435 415 395 375 Jan-11

Mar-11

May-11

On 13th May, copper for delivery in three months on the London Metal Exchange (LME) closed at $8,790/ tonne—from $8,275/tonne on the previous day—due to improved growth data in euro-zone GDP (gross domestic product) and as the dollar fell against the euro. Taking a cue from the LME, copper for delivery in June at the Multi Commodity Exchange rose to Rs465.35/kg with a business turnover of two lots.

Market experts feel that copper may fall on account of weak demand, as China is taking steps to curb inflation.

MCX PRICE TRENDS Particulars

I

Active Contract

26 Apr2011

10Ma y2011

Change %

High

Low

Global Commodities SilverR s/kg

Jul-1 1

67,271

58,688

- 12.76

74,560

31,500

GoldR s/10gm

Jun- 11

21,884

22,148

1.21

22,856

19,710

CrudeOi lR s/barrel

May- 11

4,995

4,610

- 7.71

5,223

3,898

CopperR s/kg

Jun- 11

431.95

403.50

- 6.59

471.75

393

NickelR s/kg

May-1 1

1,197.50

1,119.30

- 6.53

1,343.90

1,082.40

ZincR s/kg

May- 11

102.10

97.30

- 4.70

116.70

91.75

LeadR s/kg

May-1 1

115.55

105.30

- 8.87

135.25

99.35

NaturalGasR s/mmBtu

May- 11

199.30

189.60

- 4.87

211.20

179.80

Others CPOR s/10kg

May-1 1

515.60

518.90

0.64

580

500

MenthaOi lR s/kg

May- 11

1,065.20

923.30

- 13.32

1,070

920

Potato Agra Rs/100kg

May-1 1

580.20

612.20

5.52

780

547.20

SugarMK olR s/100kg

May- 11

2,685

2,735

1.86

3,074

2,673

CardamomR s/kg

May- 11

1,029.80

927.90

- 9.90

1,128.50

882

ilseed production is likely to touch a record high of 30.25 million tonnes (MT) in the crop year 2010-11 from 27.80MT in the corresponding period last year due to favourable monsoon and a marginal increase in oilseeds acreage.

Oilseeds acreage has increased to 9.50 million hectares in 2011 from 9.30 million hectares last year.

Sugar

T

he government has issued export orders for nearly 91,685.91 tonnes of sugar to 83 mills till the end of May out of the total 500,000 tonnes that the government has allowed for export under Open General Licence.

Production is expected to reach 24.5MT in the 2010-11 sugar year (October-September) compared with 19MT last year.

Tea

T

ea exports fell to 11.90 million kg in March against 23.49 million kg in the year-ago month due to weak demand from overseas markets, according to Tea Board. In the first three months of CY2011, exports fell to 39.62 million kg from 53.99 million kg in the same period of 2010. India’s tea production rose to 56.73 million kg in March as against 49 million kg in the same month last year.

65 | 2 June 2011 | MONEYLIFE

Money Fact.indd 4

5/14/2011 3:04:58 PM

BEYOND MONEY

moments of HAPPINESS Shukti Sarma discovers an NGO which organises quality entertainment shows for the ‘forgotten’ sections of society

I

n Sanskrit Kshana means ‘moment’.

The aim of the NGO bearing this name is to spread moments of happiness to people who are underprivileged and are forgotten by their more fortunate counterparts. Kshana organises quality entertainment shows for old-age homes, orphanages, spastic societies and other institutions.

The unique idea of offering entertainment to these ‘forgotten’ people came to founder Ritesh Thakkar in 2001 during a college fest. Mr Thakkar was a member of the organising committee and, after the college fest, the group thought of doing more free performances for the needy. “I was staying with my uncle that time,” he said, “when he went to a blind home, it occurred to me that people in such institutions need entertainment and socialising more than others because they are cut off from the rest of the world.” That is when an enthusiastic group of seven or eight students decided to take up the idea seriously.

Kshana was registered as an NGO in 2008, but the preceding years had got it considerable popularity. Since 2001, Kshana has done over 100 entertainment events for its target audiences with a social theme and touched thousands of lives. Its first performance was for Swami Vivekananda Vocational Training Centre. “In the initial days, we experienced a lot of difficulties,” said Mr Thakkar. “People never considered entertainment as a serious mission. They were more inclined to donate for other conventional philanthropic programmes.”

But, with time, Kshana’s appeal grew KSHANA with other NGOs and institutions, who CHARITABLE TRUST contacted it for organising programmes for Akash Deep Society, the people it worked with.

C-708 MHADA, Today, many corporates seek out Versova, Andheri West, Kshana to aid them in their CSR (corporate Mumbai – 400 058 social responsibility) initiatives. Kshana Tel: 98207 50480 generally puts up a series of performances kshana.mumbai@gmail.com and conducts workshops on subjects like Website: kshana.org personality development, meditation and

laughter therapy. Of the founding members, only three have stayed back with the organisation. Volunteers help the members to conduct programmes and workshops, and manage the institution. Kshana also hires spot volunteers for its shows. Most of its committee members are professionals.

There are financial analysts, entrepreneurs, engineers and students. Kshana does not require full-time commitment.

“We aim to provide quality entertainment,” said Mr Thakkar, “and we insist on professional performers. There are many artistes who readily perform for free or minimal fees, and are regular at our programmes.” Apart from professionals, Kshana also puts up performances in which children from orphanages and other charitable institutions participate. There are skits, dance shows, orchestras, games and magic shows. “We plan around three events every two months. The duration of events is anything between three to five hours depending upon the theme,” says Mr Thakkar. The members normally visit the places in advance to figure out the theme and the types of events that would gel with the place and people. Recently, Kshana collaborated with ICICI Prudential for a workshop at Sanjivani Children’s Home in Virar. During Diwali last year, Kshana went to Assisi Bhavan, an old age home in Goregaon, a Mumbai suburb.

“There were interactive shows, orchestra and yoga workshops. But the icing on the cake was a retro 1950s-style musical programme which was appreciated by the residents of the home,” said Mr Thakkar.

Kshana’s recent visit to Assisi Bhavan saw the residents of the old-age home brimming with excitement. There was flower-pot painting, movie screening, and a party afterwards. “Entertainment is an important component of human life,” said Mr Thakkar. “We may not notice it, but a life devoid of it is very sad.”

One may volunteer for performing in Kshana’s programmes or aiding in their workshops, or donating money for their activities or sponsor individual events. All donations are exempt under Section 80 (G) of the Income-Tax Act.

MONEYLIFE | 2 June 2011 | 66

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