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1) Going against the crowd

Devangshu Datta / New Delhi August 30, 2009, 0:45 IST

Contrarians, depending on their risk appetite, can enter aviation or maritime stocks

Stock prices are leading indicators. They bottom and start rising before the real economy does.Markets also peak earlier than the gross domestic product (GDP) growth rate. A recentexample is India in 2008-09. The stock market peaked in January 2008 (last quarter 2007-08)but GDP growth declined only in the second half of 2008-09. Of course, different sectors ledand lagged by different amounts. Auto stocks peaked before the Nifty. Real estate peakedafter the Nifty.

The majority of investors, let's call them the crowd, places great weight on trend-followingindicators, such as results. Most long-term investor will want to see a minimum of two or threequarters of earnings growth. Value investors also look for sound financial histories.

The logic is that genuine business trends last longer than two quarters. Hence, a conservative

trend-following style works much of the time. Value investors try to reduce the risk andmaximize the returns by only entering when discounts are low.

Contrarians carry the value-investor logic a step further and try to be consistently out of stepwith the crowd. While contrarians will study balance-sheets, they place more emphasis onbehavioral factors in making investment decisions. If a stock is heavily touted, the contrarianassumes that it is fully-valued. If a business is known to be in trouble, the contrarian hopes thatit has already been beaten down.

This approach carries more risks than standard trend-following approaches. A contrarian isbetting that he or she can decode crowd behaviour well enough to enter at trend-reversal

points when the crowd is wrong.

Contrarians tend to book profits too early when they exit investments. Contrarian logic can alsobe really risky when it's the basis for a short-selling strategy. The timing has to be perfect andthe losses could be catastrophic while shorting.

Arguably there is some safety factor in following contrarian long strategies. A contrarian willenter only when a stock is unfashionable and hence, low-priced. However, the counter-argument is that stocks are often low priced for reasons such as inferior past records, and poorfuture prospects.

Despite those risks, contrarian plays seem to work best in highly cyclical but sound businesseswhere the contrarian may often manage entries near the very bottom. Which sectors would acontrarian invest in right now with say, a perspective of 18-24 months? Definitely not power, ITor telecom these sectors seem to be in high fashion at the moment. Probably not real estate,media or pharmaceuticals either, after the recent price-bounces across those three sectors.

Automobiles are more promising from the contrarian viewpoint. The sector is seeing flat salesand a poor monsoon implies trucks and tractors will not do well in 2009-10. Fertilisers and

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pesticides will also not do well for the same reasons. Cement is another possibility because offtake could remain slow since it lags housing finance, and real estate.

Aviation is deep in the doldrums and apart from Jet, airport-construction and managementbusinesses like GMR, and GVK would be struggling to meet projections. Shipping along withshipbuilding, ports, offshore logistics, and so on, has also been hit very hard so there could beplays there as well. Most engineering and construction firms will also struggle in 2009-10

because infrastructure project awards have slowed.

Now there is quite a lot of overlap in the contrarian and value investor matrices. For example,some auto companies will show profit growth in 2009-10 and so will some engineering,pharma, cement and fertilisers companies. These businesses have attractive price-book valueratios and value investors would also accumulate them.

The outright contrarian would look at aviation and shipping, shipyards, offshore logistics andports because these sectors are showing fewer signs of turnarounds. There's less regulatoryconfusion, better track records and hence, less risk, in the maritime plays compared toaviation. The aviation situation could get worse before it gets better while maritime prospects

may have hit rock-bottom.

Offshore logistics has received some investment already due to the promise of NELP awardsand therefore, enhanced business prospects. However, conventional shipping, shipyards andports are likely to have longer down-cycles. All three are driven by trade and heavilydependent on global economic conditions. The high-risk contrarian will pick aviation playswhile the conservative contrarian will enter maritime stocks.

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(2) Pratip Kar: A game change for mutual funds

Pratip Kar / New Delhi September 14, 2009, 0:31 IST

Sebis decision to abolish entry loads has given mutual funds a chance to relook their modelwhich hasnt caught the fancy of retail investors in a big way.

In the olden days (by that I mean the early 1990s) when the financial markets in India werepreserving their pristine purity, and life in such markets was simple, conventional wisdom wasthat mutual funds were the appropriate investment vehicles suitable for the small investors. Butthen times changed. Our markets became modern. The word small was replaced by retail. Itwas, therefore, very interesting to note that Association of Mutual Funds in India (AMFI) thatclaims developing the Indian Mutual Fund Industry on professional, healthy and ethical linesand to enhance and maintain standards in all areas with a view to protecting and promotinginterests of mutual funds and their unit holders as one its lofty goals, still faintly echoes theremnants of the yesteryears when it describes in its web site thus a Mutual Fund is the mostsuitable investment for the common man This calls for an Aha, because the data which the

same web site has tells us a different story.

The table shows that that as of March 31, 2009, liquid and money market schemes, equity anddebt-oriented schemes account for 95 per cent of the Assets Under Management (AUM) of allthe mutual funds. Corporate, banks and financial institutions, and High Net-Worth Individuals(HNIs) accounted for nearly 80 per cent of AUMs, retail accounted for around 20 per cent ofAUMs. In the liquid and money market funds and in the debt-oriented funds, companies andbanks and financial institutions accounted for more than 80 per cent of the AUMs. The numberof such investors is much less, and it is always more economical to service them. So logicwould dictate that the fund houses would be more diligent and attentive to the 80 per centgroup than to the 20 per cent group. But where does that leave AMFIs common man?

The proliferation of the folios has another story to tell. The folios are not even a remotesubstitute for the exact number of investors, because of duplication. The portfolio numbersswelled in the last two years because of the multiplicity in the number of new schemes. Thelogic for floating more and more new open-ended schemes was simple and not a great work ofinnovative financing. Retail investors were advised by the distributors (their agents) that therewas no point in entering an open-ended mutual fund scheme when the Net Asset Value (NAV)was more than Rs 10. She would be better off waiting till the next scheme was launched. Thefund house was advised that it was relatively easy to sell a new scheme, rather than induceretail investors to buy existing schemes. So, one fund house or another launched a newscheme at regular intervals, each semantically different from the old one. For example, a

scheme could be named Strong opportunities fund and the other could be called Elevatedand strong opportunities fund and one would be a fool to not choose something which was atonce strong and elevated. This churning of funds did not matter to the distributors or the fundhouses because both were digging into the entry load charged by the funds to the investors. Inother words, it was the retail investor who was paying the distributor as well as the fund.

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Distribution of Assets Under Management by Mutual Funds

(Rs cr) No. of Folios

Liquid/Money market 90,059 171,565

Debt-oriented 197,453 28,11,097

Equity-oriented 109,513 4,17,04,428

TOTAL 397,024 4,46,87,090

All Schemes total 418,765 4,75,98,163

In Liquid, Equity and debt schemes 95% 94%

Retail share 79,756 (20%) 4,35,94,402(98%)

Corporate share 207,384(52%) 527,892(1%)

Banks/FIs share 19,074(5%) 8,066(1%)

HNIs share 86,082(22%) 556,597(1%)

(Source: AMFIs web site; all data as of March 31, 2009)

For example, in 2005, new equity schemes (NFOs) brought in an inflow of Rs 25,225 crore,

while the existing schemes had a redemption of Rs 3,274 crore. Similarly, in 2006, NFOsbrought in Rs 36,741 crore while the existing schemes lost around Rs 3,100 crore, taking thenet inflow figure to Rs 33,665 crore. In 2007, new schemes inflows were at Rs 29,287 crorewhile the net inflows were far lower at Rs 21,071 crore. Thus it was the equity NFOs whichwere bringing in the funds, rather than the inflows into the existing open-ended schemes. MoreNFOs meant more business for the distributors. It also accounts for the proliferation in theportfolios in the equity-oriented schemes for the retail segment (see table). No wondereveryone but the retail investor was happy. Does that mean that the equity schemes did not dowell? Of course they did well, but often not because of the astuteness of the fund managers,but more because of the market in general.

The fundamental purpose of regulation is not to prevent fools but to prevent people from beingmade fools of. This is where Sebi stepped in, by first abolishing entry loads for all mutual fundschemes; empowering the investors in deciding the commission paid to distributors inaccordance with the level of service received and then ensuring that there was parity amongall classes of unit holders in terms of charging exit load that no distinction be made amongunit holders should be made on the basis of the amount of subscription while charging exitloads. Besides, there would have to be full disclosures about payment of commissions. All thatSebi did was to bring the focus back on the investor the same common man which AMFIrefers to in its web site. But surprisingly, it created such an upheaval. Loss of cozyarrangements generally evokes such extreme reactions such as whining.

But Sebi has given the mutual funds an opportunity for a game change and the strategy wouldlie in using this as an opportunity and breaking existing markets and creating new ones. TheCharles Schwab Corporation showed the way when it adopted a disruptive innovation model totake advantage of US Securities and Exchange Commissions deregulation of brokerage feeson the Wall Street and became the largest discount brokerages in the world.

RBIs latest Report on Currency and Finance says that the net financial savings of thehousehold sector in 2008-09 were 10.9 per cent of GDP, lower than 11.5 per cent in 2007-08and the household investment in shares and debentures fell to Rs 19,349 crore from Rs89,134 crore. As a percentage of GDP, it fell to 0.4 per cent from 1.9 per cent. This is great

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market which the mutual funds in India have not taken advantage of. They can and have tolearn to innovate and usher in a retail revolution in mutual funds, instead of whining away overthe loss of cosy and lazy way of making money. To do this, fund houses will have to revitalisetheir business model, use technology and reach outside the familiar markets. They mustunderstand why the investors are comfortable with fixed deposits, post office schemes, NSCs,KVPs, LICs, precious metals and property in the second- and third- tiered cities and ruralareas. They have to tap these markets, integrate innovation into the mainstream of their

business strategy, and manage risks and create new markets and customers. Whoever saidthat becoming a leader in sustainable innovation was easy? But anyone who has the will to doso will surely find fortune at the bottom of the pyramid.

(The author is associated with the IFCs Global Corporate Governance Forum and the WorldBank; he was formerly the Executive Director of SEBI. Views expressed are personal.pratipkar21@gmail.com)

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(3) Surjit S Bhalla: Can RBI's forecasts be trusted?

Fiscal policy is forced to be expansionary as monetary policy is failing to performSurjit S Bhalla / New Delhi August 1, 2009, 0:45 IST

The RBI governor, Dr Subbarao, recently announced that he was seeking discussion andperhaps even criticism from within his organisation. This is definitely newsworthy and DrSubbarao should be applauded for taking this initiative. The RBI is perhaps the last of thefeudal organisations in India (along with all the political parties) and this attempt at an entryinto the 20th century is laudable. I wish Dr Subbarao luck; having worked on two RBIcommittees a decade apart (in 1997 and 2006, under the chairmanship of former DeputyGovernor and a true-blue RBI man Mr Tarapore) I can say with some experience that the RBIdoes not take lightly to anti-feudal forces.

No sooner had Dr Subbarao made his plea for dissension than the empire struck back. In itsquarterly review on Tuesday, July 21, the RBI viewed the economy in a dour manner (why soserious?). It kept tight monetary policy tight (highest real interest rates in the world if one usesthe GDP deflator) and warned of impending inflationary dangers. Believing full throttle in thisgloomy stagflation outlook, the RBI lowered the forecast for GDP growth for 2009/10 from 7.5-8 per cent (made in January 2009) to 6 per cent. Correspondingly, it raised its forecast for WPIinflation in March next year from 3 per cent to 5 per cent. These pronouncements are put intofocus by noting three facts. First, internationally, India is the only economy that is lowering itsGDP forecast, while most are debating not that GDP will be higher in 2009, but how muchhigher. Second, while all expect inflation to be higher than zero inflation, there is no centralbanker of a non-banana republic (that I know) who is forecasting this high inflation.

The third fact is perhaps the most damning. The table shows the past forecasts and the errorson both. Note that it is nobodys contention that the forecast errors should be zero. That wouldbe like forecasting the past. What is desirable is that the forecasts have randomness to themsuch that over time the errors add up to zero. Unfortunately, nothing of the sort occurs with RBIforecasts. Very consistently, the RBI under-estimates GDP growth by about 1 to 1.5 per cent it gloriously missed the entire growth acceleration between 2004 and 2007. In May 2004,the growth forecast for 2004/5 was 8.1 per cent, but in October it got lowered by 2 percentagepoints, which means that the RBI was expecting GDP growth (in October 2004) to averageonly 4 per cent for the next two quarters. It turned out to be twice that rate.

In 2008, perhaps the RBI noted its erroneous ways and started forecasting higher GDP growthfor the great crisis year of 2008/9. At the peak of the crisis (July 2008), it forecast GDP growthof 8 per cent. A month later, year-on-year industrial production was reported to be negative the very first negative number in the developing world, suggesting that the great Indian

slowdown of 2008 was almost entirely a home-grown affair (note that the world collapsed a fullthree months after the Indian collapse and after Lehman in September).

The inflation forecasts are no better, and in many respects shockingly worse. (That this mighthave something to do with the deeply flawed quantity theory of money model that the RBI useshas been commented upon ad nauseum in these columns.) The data are from quarterlyreports of the RBI. In end January 2009, which is two months before the target of the forecast(March 2009), the RBIs considered assessment was that year-on-year WPI inflation would be3 per cent. At that time, the WPI index was 229.6 and the March 2008 WPI figure was 225.5. A

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(4) Use Basics to Get Better

Yajuvender Singh / June 25, 2009, 18:10 IST

Basic Investor relations techniques, when pursed effectively hold the key to bring investorsback to capital markets. Clear, timely and easy to understand communication has alwayshelped investors to make informed decisions and will continue to do so.

Timings have been very uncertain recent past. Allspheres of economy were hit by recession, whichhas now started showing some signs of revival.One thing which has remained definite all along isuncertainty; booming economy, sudden recessionand now fresh signs of revival. There hasnt beenany race among listed companies to be the first torelease the annual results, as we just passedthrough peak financial reporting season of the

year in India. A strange silence had descendeddirectly from Silence of the Lambs to the DalalStreet. And as far as Analyst briefing goes, RSVPlist of analysts and fund managers went shorter

and shorter this time.

Financial markets worldwide have changed dramatically over last year and trickling effects onIndian listed companies are clearly visible, as the companies are showcasing theirperformance of the last financial year.

Bear phase at capital bourses worldwide since the very beginning and economic recession has

done the job very well to shake the confidence of retail investor in stock market. The effect isso grave that investors are still shaken and prefer to keep safe distance from stock market.Companies on the other hand also cursed the economic recession and then absorbed to thesituation. And this status quo has constantly and continuously added to the gap betweeninvestor and companies and further added at least to the perceived recession.

Is there something, which can change or improve this situation? Yes, there are basiccovenants of investors relations, which definitely hold the key to the situation. If your companyis in an industry that is currently plagued by recession, help investors clearly see whatdifferentiates your company from its close competitors. If your company stock is performinglow vis--vis competitors, carefully understand the bear case scenario. And then intelligently

address these concerns in all your investor communications. Be consistent in yourcommunications. In case your company stock has been hit hard by bear phase, use theopportunity to build a more suitable investor base. Not every company is a "growth" phaseforever, similarly not every company needs a base of "growth investors forever.

Nothing surprises investors more than the sudden and unexpected unfolding of events andinformation. By definition per se corporate business is dynamic world and only thing that iscertain there is uncertainty. It is this uncertainty that adds premium to risk taken by investorsby virtue of their investments. Using effective and pro-active investor communication

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approaches, companies can neutralize this uncertainty to a large extent, if cant mitigate itcompletely and reduces surprise events for investors.

The basic elements of investor relations are information and communication. Both should beright. Information should be right information and it should be communicated at right time.Financial communication is the cornerstone of the relationship with market players and key tomarket transparency and its quality is essential to the relationship of trust between issuers and

investors.

Capital market discounts everything including events, information and disclosure made byeach company Time comes and market suddenly discovers that the product developed by acompany is innovative, customers find the quality second to none and analysts find futureprojections too attractive. And all of sudden, company becomes successful at street and hogsall the limelight and results multiplication of its share price by many folds. However, for eachsuch company, there will be at least 10 other companies, whose product is equally innovativeand quality is even better and posses sound financial health and still not able to click with thestreet.

What differentiates one form the rest is investor relations. The underlying basic approaches orthemes of Investor relations are:

Understand the Investor Right Disclosure and Communication at the right time.

Understand Your Investor:

Every investor is a customer. Each and every investor is either a buyer or seller of a stock. Therole of investor relations is to persuade and convince the investor (read customer) that a rupee

invested in his/her company will appreciate faster than a rupee invested in any other companydespite the recessionary times. Persuasion should use fundamental facts intelligently.

Relationship has always built upon the trust and to gain trust of investors, companies need togo extra mile to make investor feel that they are important to company and they are notignored be the tough times or easy sailing.

Clear and Complete Disclosure

All public companies are sailing in the same boat these days as they are faced with question ofexpanding and improving communication with their investors, sell-side analysts, the financial

media and others.

Disclosure has always been the core of all investor relations practice and even the reason ofexistence of Investor Relations Function. Disclosure also should be at the core of marketingapproach of investor relations and definitely during recessionary times, when credibility andtrust are at stake. In absolute terms, disclosure implies transparency. Being transparent,disclosure will equally help all investors to know facts, business environment, performance,and practically all whats needed. Thus, all investors will at par and will have equal knowledgeto make their investment decisions.

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Right Communication:

Good investor communication is all about clear, true and transparent information.

One of major expectation of investors is good dividend percentage. This expectation causes lotof problem to companies and particularly investor relation professionals. Use pragmaticexplanation in investor communication to make investors understand the balance between

profits to be distributed as dividends and the need for profits to be reinvested precisely inrecessionary times. Same approach should be used for forecast of future earnings, if any.

The expectations of the market during recession are very low. Extra ordinary projections mayget perceived negatively. And also there may be strong reward to simply meet theexpectations. So, make achievable projections. These would need lot of persuasive marketingand make investor relations function more compelling than ever before.

Investor communication subscribe to the philosophy that good communication increases trust.It is a good philosophy because, ultimately, the better informed the investors are, the greaterthe likelihood for trust in the companys integrity, and, therefore, the greater support for the

stock even during recession.

The writer is Director Financial Data Services, Impetus InfoTech (India) Pvt. Ltd.

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the current practice, in a rising rate scenario, depositors take premature encashment of anexisting deposit, and re-deploy it at a higher rate; on the other hand, when rates are falling, thebanks are stuck with the existing high rate deposits. There is a simple, and logical, solution tothe problem: The price of the premature encashment should really be determined by the costof replacing the deposit in the current market rate structure. This would imply that when ratesare rising, the cost of premature withdrawal could even mean a negative interest rate; in thecontrary scenario, the depositor could get more than the contracted interest rate.

The other reason advanced by bankers for the stickiness of the prime rate is the linkages toagricultural and export credit. The solution is simple: If subsidized rates are to be maintained,the formula needs to be revised so as to de-link it from the prime rate.

As for monetary aggregates, I have always been puzzled by the announcements made bycentral banks of targeted growth in M3, and linking it to the banking systems deposit growth.First, the policy objectives of the two are different: In the case of M3, to limit the growth; in thecase of bank deposits, it is to increase the level in the pursuit of financial inclusion. Second,surely the cause and effect relationship is not so much from M3 to deposits as it is the otherway round deposit growth leading to M3 growth, with the central bank adjusting the reserve

requirements if it is too high? Another puzzle of course is why we still stick to M3 when mostother countries seem to be looking at interest rate as the target variable, ignoring the monetaryaggregates: This too, when in each of the three years preceding the last (i.e. 2005-06, 2006-07, 2007-08), both the targeted aggregates have been exceeded by significant margins. (Thelast fiscal was an exception to this but then it was hardly a normal year.)

It is a good thing that the central bank is appointing a committee to review the operation of thebenchmark prime lending rate system. (As argued above, there is a case to review theoperation of the LAF system.) I have often felt that one of the reforms of the PLR systemshould be to eliminate the uncertainty about the timing of a change, by making PLR changesonly on specified dates say, the first day of each quarter. To my mind, this would have two

benefits: This would help in improved asset:liability management from the interest rate

perspective; Banks will be forced to review their entire pricing structure at quarterly intervals.

avrajwade@gmail.com

mailto:avrajwade@gmail.commailto:avrajwade@gmail.com

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(6) Abheek Barua: Preparing for recovery

The RBI may be concerned about inflation but it is unlikely to put an abrupt end tomonetary accommodation- Abheek Barua / New Delhi September 14, 2009, 0:25 IST

The RBI may be concerned about inflation but it is unlikely to put an abrupt end to monetaryaccommodation, saysAbheek Barua

The revival of the monsoon in north India over the last few weeks certainly seems to havecheered the stock markets. The assumption seems to be that while the damage to the summercrop is difficult to undo, delayed rain will help the winter or rabi crop. A consensus also seemsto be emerging in the analyst community that while poor agricultural output might have asimple arithmetical impact on growth, the second-round effect on industry and services is likelyto be fairly muted. As a result, the impact on company profits could be much less than whatinitial predictions suggested.

International news has also been positive. US labor market data for August was better thanexpected for the fourth month in a row. Manufacturing indices both in Europe and the US havebeen fairly strong confirming that a recovery (even if temporary) is under way. Risk appetitehas improved as result equity prices, for example, are up across a range of markets as areother high-yielding asset markets.

I am not entirely convinced that this will sustain. For one, there is a fairly large section ofmarket analysts and academic economists who seem to believe that the industrializedeconomies are headed for another sharp dip in the business cycle. Their argument is now wellknown the current recovery is being driven by inventory restocking and stimulus that willpeter out by the year-end. The structural changes that the US economy is going through(households rebuilding their balance sheets by pushing up their savings, for instance) restraindemand not augment it. The net result is likely to be another contraction in growth in thedeveloped economies that will affect the emerging economies as well. If this happens, it couldtrigger a massive flight of capital from risky assets to the safety of US treasury bonds. Thedollar could appreciate as a result and other currencies like the rupee could come underpressure.

The double-dip scenario is a contingency we must be prepared for from the policyperspective. Thus it would be foolhardy at this stage to extrapolate the future path of growthfrom current data, however encouraging they may seem. The finance ministry has clearlydecided to wait and watch before withdrawing some of the fiscal stimuli and that seemseminently sensible. The RBI may be extremely concerned about inflation but it is unlikely to putan end to monetary accommodation abruptly. As I have argued before, the first round ofmonetary tightening is likely only in January. By that time we will hopefully have a better senseon where the global economy and the domestic economy are headed.

We must also prepare for a scenario in which the current recovery in the global economy andmarkets sustains and ramps up risk appetite further. Were that to happen, there is everychance that global capital will flood economies like India that are growing much faster than the

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rest of the world. This has implications both for the rupee and money supply and we perhapsneed to think out a clear strategy to handle this.

For one, I think it is time we jettisoned the debate on whether the RBI should or should notintervene to prevent excess appreciation of the rupee. We cannot afford overvaluation of thecurrency. While domestic markets might fetch us the base rate of 6-7 per cent, the ability togrow faster will depend on how effectively we can participate in the global recovery through

exports of goods and services. Unfortunately, every other economy in the world is likely tothink on the same lines. Our success then will depend on how effectively we can prevent therupee from appreciating against both our trading partners and our competitors.

This calls for both market intervention by the RBI and a longer-term strategy for the currentaccount. One must remember that appreciation of the rupee is not just the result of strongcapital flows. It is also the result of an inability to utilize these capital flows to feed growth. Ifcapital flows were to pick up and show signs of sustaining, it is imperative to run a largercurrent account deficit in the long term to avoid prolonged overvaluation. This in turn could belinked to the import needs of the sectors that are likely to lead the next phase of high growth infrastructure, for instance. In short, we must (at least analytically) link the need to step up

project implementation in infrastructure with the objective of preventing excessive appreciationof the currency.

If the RBI does need to intervene more aggressively in the market, how does it deal with themonetary consequence? There are two comforts on this front. First, the government is likelyto be a fairly large bond issuer in the medium term given the size of the fiscal deficit. Thiswould lead to automatic sterilization. Second, the recent financial crisis has shown that themonetary stabilization scheme (MSS) has worked rather well. The stock of sequesteredliquidity built up during the phase of excess capital flows has come in handy in dealing withboth the liquidity crisis that came in the wake of the Lehman collapse as well in funding someof the fiscal stimulus.

The benefits of sterilization and the use of MSS bonds certainly outweigh the static accountingquasi-fiscal costs of sterilized intervention. If capital flows become difficult to handle weshould not hesitate to issue another large tranche of bonds designed to suck out liquidity.

Both the prospects of sustained recovery and downturn are equally challenging forpolicymakers. The right formula might be to stick to what has worked best in the past and letprudence, not dogma, guide policy.

The author is chief economist, HDFC Bank. The views here are personal

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(7) How India survived the tsunami

BS Reporter / Mumbai September 15, 2009, 0:40 IST

A year after Lehman Brothers, the 158-year-old Wall Street investment bank, filed forbankruptcy signalling the global financial systems descent into Great Depression II theBombay Stock Exchange (BSE) Sensitive Index has risen 16 per cent, after having hit a low of8,160 in early March.

Signs of stability are visible not only in the stock markets but also in money and foreignexchange markets as prospects of faster economic growth have improved in recent weeksdespite a poor monsoon.

While the International Monetary Fund has predicted that the global economy will contract in2009, there are signs of normalcy with Japan, Germany and France coming out of recession.

In India, which grew 6.7 per cent last year, the rise in industrial output in the recent months and

revival in the services sector is expected to more than make up for the deficient rainfall, thoughthe country could fail to meet the 7 per cent growth target set by the government. Led bymanufacturing, industrial output rose 6.8 per cent in July. Although the Reserve Bank of India(RBI) has warned about the lagged impact on the services sector, indications from most of theservices segments point to healthy growth.

Citis India economist Rohini Malkani has maintained the gross domestic product (GDP)growth forecast for the year at 5.8 per cent, closer to RBIs 6 per cent, with an upward bias,adding that, At this point, it appears that the governments stimulus measures are offsettingthe impact of drought. Thus, the strong IIP (index for industrial production) numbers in Juneand July (June figure was revised from 7.8 per cent to 8.2 per cent), coupled with the base

effect kicking in from October, could result in industrial growth surprising on the upside.

The main drivers of GDP will be services and industry, which are responding to the stimulus,and not so much agriculture. In a certain way, there is delinking of agriculture and industry asthe share of agriculture in GDP is much lower and also because the rural folk are not solelydependent on the sector, especially with schemes like the National Rural EmploymentGuarantee Scheme in place, said Crisil Principal Economist DK Joshi, who has predicted agrowth of close to 6 per cent during the financial year.

The situation is slightly different today. While lending rates have softened in the currentfinancial year, there other supports in place in the form of government spending and fiscal

stimulus, inflationary pressures have clearly gathered pace and appear to be a major risk togrowth in the months ahead, said HDFC Bank Chief Economist Abheek Barua.

A year ago, on September 15, 2008, things looked different. As foreign institutional investors(FIIs) withdrew money, the Sensex fell 850 points in intra-day trade. This also put pressure onthe rupee, which fell to a two-year low of 46 against the US dollar, taking the overall declinesince April to nearly 15 per cent. Overnight call money rates hit 12.5 per cent, the highest inalmost two-and-a-half years.

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Over the next few weeks, the stock markets fell to four-digit levels, the rupee started hittingfresh lows on a daily basis and weakened to an all-time low of 52.13 in early March, and thecall rate touched a peak of 21 per cent.

As FIIs withdrew $6.42 billion (around Rs 33,000 crore) from the Indian stock markets betweenSeptember 2008 and March 2009, RBI sold $29 billion (Rs 149,706 crore) to check the rupeesfree fall and ensured that over Rs 6,00,000 crore primary liquidity was pumped into the system.

In addition, the government stepped up spending and cut tax rates to spur demand.

FIIs invested over $10 billion (around Rs 49,000 crore) into the stock markets this year, thereare expectations of the rupee appreciating, and call rates have eased to around 3 per cent.Banks do not have to access short-term funds at double-digit rates and investors do not haveto worry about the fate of the debt funds that they invest in.

While government borrowings have increased, interest rates seem to be stable given the largeliquidity in the banking system, which can be seen with banks regularly parking around over Rs1,00,000 crore through the reverse repo window, which is used to suck out liquidity. One of theworries for policymakers is the low credit off-take with companies deferring capital expenditure

due to availability of adequate capacity. For the year up to August 2009, bank credit grew14.09 per cent, the slowest in five years. The corporate performance is expected to improve inthe second quarter. But the dilemma for policymakers is the exit strategy, especially in thewake of the recent rise in commodity and food prices, which are stoking inflationaryexpectations. Food inflation is going to be the biggest challenge on the inflation front, unlessthe economy picks up, said Crisils Joshi.

For financial sector players in India, largely left unscathed by the global turmoil, a big worry ishow the regulation will pan out. The RBI Annual Report, released last month, has alreadyannounced its intention to lay down a risk management and capital adequacy framework forbank-sponsored private pools of capital such as private equity and venture capital funds. But,

unlike the United States, there is little worry on regulation of compensation packages since theexisting laws empower banking and insurance regulators to intervene in such cases.

According to Suman K Bery, director general, National Council for Applied EconomicResearch, Recent experience shows that theory is a poor guide to how financial systemswork. India has now been given a seat in the G-20 in discussing the future architecture....China's global engagement has been more committed than that of Indias and we have seenthat it has given spectacular results. But it all seemed successful until the global crisis camealong.

Indias slightly more cautious approach seemed to have protected it......After the crisis, the

contours of the financial system have been redefined and India and China are now beingasked to assume responsibility. Our salvation will be to become active supporters ofglobalisation, particularly at a time when traditional supporters like the Anglo-Saxon countriesseems to be retreating. There has to be a shift in the perception to see globalistion as a friendrather than a foe.

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Since the F&O stocks do not have any circuit filters and only margin payments are required,traders can aggressively take long or short positions. As a result, volumes in the F&O segmentare five to ten times higher than the cash market. However, settlements have to be done incash and not by delivering shares. Traders, therefore, have to come to the market to buy orsell to raise this cash and square their positions.

This act of buying and selling automatically impacts the prices in the spot market. In other

words, higher positions in the F&O market leads to abnormal price movement in the spotmarket. This, coupled with the low float, creates a situation of high volatility and, consequently,circuits are broken quite often.

Analysts point out that circuit breakers have not been successful in arresting either the steepslides or gains. In many cases, operators resume their antics with a vengeance as soon as thestipulated time is over.

THE ROAD AHEAD: Experts are of the view that halting trading completely is not the bestoption even on days when circuit breakers are hit. R H Patil, former managing director of NSE,says one possible solution is to restrict further long trades for the day rather than shutting

down the markets.

Others like M R Mayya, former executive director of BSE, suggest that markets should beclosed for sometime, but not the entire day, since providing an entry and exit is important. Herecalls the Harshad Mehta days when markets would rise and fall abnormally every day fromJune 1991 to February 1992. But we did not shut the market for a single day. Instead weimposed tighter margins, says Mayya.

One way out is for exchanges to stop trading for 15-30 minutes when circuits are broken,.When trading is resumed, higher margins could be imposed on buyers (if the market hits theupper circuit) or sellers (if the markets hit the lower circuit). And depending on the gravity of the

situation, margins could be as high as even 100 per cent. The idea is to stifle the rate ofgrowth.

Ajay Shah, senior fellow, National Institute of Public Finance and Policy (NIPFP), has anotherformula: It would be a better option to let the trades continue. I would advise something calledcall option which was used earlier as a pre-opening option. In this system brokers wereallowed to put in bids before the market opened. In a situation when trading is halted becauseof a circuit filter, the market was allowed to move into the call option mode for 10-15 minutes.Traders could place buy and sell orders, but no actual trade would take place. This helpedmarket participants to understand the trend when the market reopened.

The simplest way, many feel, is to get rid of filters on indices completely. In its place circuitfilters should be imposed on individual scrips in the F&O segment. This would allow the cashto be deployed elsewhere when an index stock stops trading.

Another suggestion is to follow the Nasdaq way: Trading in a company scrip haltsautomatically to allow it to announce important news or when there is a significant orderimbalance between buyers and sellers in a security. A trading delay (or delayed opening) iscalled if either of these situations occurs at the beginning of the trading day.

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(9) A uniform face value neededM R Mayya / June 8, 2009, 0:52 IST

SEBI should mandate a common face value for shares and end the confusion in the minds ofinvestors. However, the debate on uniform face value of shares has been going on for over

eight years now. The debate gained momentum in June 1999 when Sebi amended theguidelines relating to denomination of equity shares and allowed companies to choose the parvalue or face value of their stocks.

The recent circular issued by Securities and Exchange Board of India (SEBI) relating to theamendment to the Equity Listing Agreement mandates, inter alia, that listed companies shalldeclare their dividend on as per share basis only, as it is expected to bring uniformity in themanner of declaring dividend amongst the listed companies. The circular issued underSection 11 (1) of the SEBI Act to protect the interest of investors in securities and to promotethe development of, and to regulate the securities market has, viewed against the prevalentposition relating to the face value of shares, only added to the confusion already prevalent with

regard to the dividends that companies are declaring.

According to the recommendations, which were put on the regulator's website today, themultiple face value system creates confusion among investors. It has been noticed thatinvestors tend to look at the market price of a particular stock without knowing its face value,and the confusion is compounded when companies declare dividend as a percentage of theface value.

It was argued that the practice of declaring a percentage dividend based on a low face valuewas misleading, especially when the company has raised money at a hefty premium or whenits stock was trading at a high price in the secondary market.

Recalling history

It needs to be recalled that a large number of companies used to have varying face values. Forexample, a number of companies based in Ahmedabad used to have a face value of Rs 125while the face value of Tata Steel used to be Rs 75. The Ministry of Finance, therefore issuedin February 1981 a guideline that denomination of equity shares be fixed uniformly at Rs 10and that the denomination of the then existing shares other than Rs 10 be converted intodenomination of Rs 10. In January 1983, it was, however, clarified that denomination of sharesof Rs 100 need not be changed to denomination of Rs 10. In other words, shares of allcompanies were required to be in denominations of Rs 10 or Rs 100 only. Ever so, several

companies converted the denomination of shares of Rs 100 into that of Rs 10 on the groundthat it generated better liquidity, as also a higher value for the shares.

Confusion amplified

In 1999, SEBI was contemplating the question of doing away completely with the denominationof shares. Instead, a company would have at any point of time the notified number of shares,which would be altered only in relation to issue of bonus or right shares; ESOPs andconversion of debentures or warrants, as is the practice followed in the United States. Instead,in a strange decision, SEBI decided with the objective of broadening the investors base to

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dispense with the requirement of standard denomination of Rs 100 or Rs 10 and give freedomto companies to issue shares of any denomination but not below Re 1. Companies which haveissued shares of the face of Rs 10 or Rs 100 were also permitted to avail of this facility byconsolidation or splitting their existing shares.

As a result of the above decision, not only a number of companies coming out with IPOsissued shares in denominations other Rs 10 and Re 1, mainly in denominations of Rs 2, Rs 4

and Rs 5, but a number of existing listed companies having denomination of Rs 10 have splittheir shares mainly into denominations of Re 1, Rs 2 or Rs 5, and those with a denomination ofRs 5 into Re 1, for no rhyme or reason. One appreciates this if the price of the share is abovesay Rs 1,000 and not otherwise. Merchant bankers, who had a heyday, were mainlyresponsible for this.

Such splitting has only added to the confusion of investors. One could hear several investorslamenting that the prices of their shares have fallen, while in actuality prices have reason dueto splitting of shares arising out of a reduction in the face value of shares.

Need of the hour

Declaring dividend on per share basis as mandated by SEBI will add to the existing confusionof investors, many of whom do not understand fully the complexities of stock marketoperations. Companies with their shares in denominations of say Re 1, Rs 2, Rs 3, Rs 4 andRs 5 and Rs 10 declaring dividend of say Re 1 per share would actually be declaring dividendof 100 per cent, 50 per cent, 33.33 per cent, 25 per cent, 20 per cent and 10 per cent,respectively. One wonders how many investors would actually readily know the percentage ofdividend declared if it is in terms of per share only. In fact, several of the brokers would alsonot be able to give a ready answer, as it is just not possible to keep a track of the face value ofthousands of share traded day in and day out.

A joint meeting of the Primary and Secondary Market Advisory Committees of SEBI held abouta year ago recommended that all companies, present and future, should have shares indenomination of Re 1 only. SEBI has yet to issue a circular in this behalf. With the amendmentrequiring companies to declare dividends on per share basis only, SEBI should also issue acircular mandating denomination of shares to be only in Re 1 and end this bedlam haunting theinvestors for nearly a decade.(The author is former executive director, Bombay StockExchange)

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(10) The Satyam effect

Pooja Thakur / Mumbai January 12, 2009, 0:56 IST

The Satyam episode drags down indices as investors get into the sell mode.

The Sensex fell for a second day, as Satyam Computer Services extended declines onconcern it may have insufficient funds after chairman Ramalinga Raju said he falsified

accounts. Satyam dropped 41 percent to Rs 23.75, taking its losses to 87 percent sinceRaju on January 7 said he inflated earnings and assets by $1 billion. Larsen & Toubro,which owns a 3.95 percent stake in Satyam, dropped 7 percent, the most in almost threemonths, as the value of its investment in the software developer fell.

The Satyam incident is very negative and will be viewed as such by foreign institutionalinvestors, said Ajay Bodke, who helps manage the equivalent of $870 million in stocks atIDFC Assets Management Co. in Mumbai. This puts a question-mark on the financials ofmany other companies.

The Sensex fell 1.9 percent to 9,406.47. The index dropped 5.5 percent for the week. The S&P

CNX Nifty Index on the National Stock Exchange slid 1.6 percent to 2,873. The BSE 200 Indexdeclined 2.1 percent to 1,124.65. Nifty futures for January delivery fell 1.8 percent to 2,861.05.

Aberdeen Asset Managers and its units sold blocks of Satyam Computer on January 7, datafrom exchanges showed. Fidelity Management & Research Co., Swiss Finance Corp.(Mauritius) Ltd. and Morgan Stanley Mauritius Co. also sold shares, exchange data showed.Aberdeen was Satyams largest institutional investor as of Sept. 30, according Satyamsexchange filings.

Not very encouraging

Interim CEO Ram Mynampati said that the fourth largest Indian software services provider mayhave to restate earnings and he couldnt be sure the company had enough cash for this month.Our liquidity position is not very encouraging, Mynampati said.

Larsen, Indias largest engineering company, declined 7 percent to 720.85 rupees, the lowestsince December 3. Larsen has no plans to sell its holding in Satyam, CNBC TV-18 reported,citing chairman A M Naik.

Credit Suisse Group and other brokerages are still advising investors to buy Indian stocks.Credit Suisse maintained its overweight recommendation on the Indian market today, whileMacquarie Group raised it to overweight from neutral.

The markets rating was also raised to neutral from underweight yesterday at JPMorganChase & Co., which said the drop in share prices provided an attractive buying opportunity.

Corporate governance

Tata Consultancy Services, Indias largest software-services provider, gained today onexpectation it will gain market share as clients desert Satyam after its chairman falsifiedearnings.

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Companies with high corporate governance standards will stand to benefit from the Satyamepisode, said Bodke at IDFC. Satyams rivals will win orders at its expense.

Tata Consultancy added 6.4 percent to Rs 536.95. Rival Wipro climbed 2.6 percent to Rs250.95. Infosys Technologies, Indias second-largest provider of software services, gained 1.3percent to Rs 1,203.4. The stock is among those recommended by Credit Suisse analystsNilesh Jasani and Arya Sen, who said investors should own shares of Indian companies with

good corporate governance.

If Satyam turns out to be an isolated incident, it will be forgotten by investors after a fewweeks, the analysts said. Investors should focus less on sector allocation or standardquantitative parameters for stock selection and more on management quality.

Reliance, Tata Steel

Stocks that recorded the biggest declines on the Sensex today include RelianceCommunications, Indias second-largest phone-service provider, and Tata Steel, the nationsbiggest maker of the alloy. Sterlite Industries, Indias largest copper producer, fell 10 per cent

to Rs 271.9 the most since November 11.

Reliance Communications fell 9.5 per cent to Rs 186.85, the lowest since November 20. TataSteel dropped 8 per cent to Rs 215, the most since November 11. DLF declined 7.5 per cent toRs 216.35. Reliance Industries slid 4 per cent to Rs 1,153.25, while Jaiprakash lost 4.2 percent to Rs 68.50.

Overseas funds bought a net Rs 4.45 billion ($91 million) of Indian stocks on January 6, thenations market regulator said.

The following were among the most active shares traded on the Bombay and National stock

exchanges. Punj Lloyd dropped Rs 23 or 17 per cent, to Rs 115.35, its lowest since July 2006.The Indian engineering company fell after saying its UK unit began court proceedings againstSABIC Petrochemicals UK seeking 28.5 million pounds ($43 million) compensation.

With the compensation dispute now into the adjudication process, the entire amount is lesslikely to be recovered and Punj Lloyd could be hit by as much as Rs 3.2 per share, J.P.Morgan Securities said.

Tata Motors fell Rs 8.4, or 4.8 per cent, to Rs 165.75. Indias biggest truckmaker will stopproduction at a commercial-vehicle factory for six days as higher borrowing costs stymiedemand. The Jamshedpur plant in eastern India will close from January 12 to January 17,

Debasis Ray, a company spokesman said.

The author is a Bloomberg News columnist. The opinions expressed are her own