Beyond Market - Issue 81

7/30/2019 Beyond Market - Issue 81

1/51

For Private Circulat ion Volume 1 Issue 81 02nd

While the purpose behind the setting up of the FSLRC

was to rewrite and streamline the nancial sector laws,

its recommendations seem a little too ambitious, and

only time will tell if they will bear fruits


2/51

Contact At: 022 3926 9140,

e-mail: [email protected]


3/51Its simplified...Beyond Market02nd May 13

DB Corner Page 5

Food Security Or Electoral Gimmick

While the government is confident that the National Food Security Bil

sail through in the Parliament, critics dismiss it as a stunt and are seek

reforms in PDS before the implementation of this Bill Page 6

Fine-tuning The Law

While the purpose behind the setting up of the FSLRC was to rewrite astreamline the financial sector laws, its recommendations seem a little

ambitious, and only time will tell if they will bear fruits Page 10

A Short-term Hiccup

Despite the recent carnage, mid-cap stocks still look good from a long

perspective Page 14

BRICS: Banking On Development

BRICS countries are mulling the formation of a new development bank

aims to fund infrastructure and allied projects throughout developing

nations Page 17

A Growing Evil

Non-repayment of subsidized loans given to farmers through Kisan Cr

Cards by state-owned banks could result in rising number of NPAs PaSweeter Than Before

After much deliberation, the government has finally announced a par t

decontrol of the sugar sector, which is hoped to make the business mo

viable and attract large scale investments too Page 22

Going Places, Literally

At a time when the hotel industry is witnessing a slowdown, the vacat

ownership sector is growing steadily against odds Page 25

Face Off

The expos by onlin e m aga zin e cobrapost.com only highl igh ts the ram

corruption in the banking industr y, with no one showing the courage

the problem - Page 28

Aegis Logistics Ltd: Going The Extra MileA leader in oil, gas and chemical logistics, Aegis Logistics Ltd is expand

liquid and auto gas business, which augurs well for the company, goin

forward Page 31

A Smart Gain

By making r ight investment decisions, home owners can avail tax exem

on capital gains incurred by them Page 36

Back In The Game

Despite having fallen out of favour with investors, close-ended funds a

and can be considered by investors Page 39

Important Statistics For The Fortnight Gone By Page 42

Past Lessons To Chart A Better Future

Market participants can learn from their past mistakes and take right i

ment decisions Page 43

Animal Kingdom Of A Different Kind

A different species of investors, much similar to animals found in the w

participate in the markets Page 46

Important Jargon For The Fortnight Page 49

olume 1 Issue: 81, 02nd May 13

Editor-in-Chief & Publisher:Rakesh Bhandari

Editor: Tushita Nigam

Senior Sub-Editor: Kiran V Uchil

Art Director: Sachin Kamble

Junior Designer: Sagar Padwal

Marketing & Operations:

Divya Bhurat, Shreelatha Gollavathini

We, at Beyond Market welcome your views,

comments and feedback. Do help us to grow

better as per your liking. This is our attempt to

reach you better while crossing horizons...

Web: www.nirmalbang.com

[email protected]

Tel No: 022 - 3926 804 7

HEAD OFFICE

Nirmal Bang Financial Services Pvt Ltd

Sonawala Building, 25 Bank Street,

Fort, Mumbai - 400001

Tel. 022-3926 7500/7501

CORPORATE OFFICE

B-2, 301/302, Marathon Innova,

Off Ganpatrao Kadam Marg,Lower Parel (W), Mumbai - 400 013

Tel: 022 - 3926 8000/8001

Research Team:

Sunil Jain, Kavita Vempalli,

Dipesh Mehta, Anand Shendge,

Manav Chopra, Vikas Salunkhe



Tushita Nigam

Editor

A well-framed law for the financial sector is of utmost importance to the economic growth of a country. Realizing the needto simplify and update the existing financial laws in the country, the government of India had appointment a panel headed by

Justice BN Srikrishna. To that effect, the Financial Sector Legislative Reforms Commission (FSLRC) was set up to frame

regulations for the financial sector. The main aim of the Commission was to bring about efficiency and to put in place a

structured regulatory framework.

In March this year, the Commission submitted its recommendations to the Finance Ministry. Since then the recommendations

have been a topic of debate among financial regulators and experts. In our cover story we have discussed the recommenda-

tions of the FSLRC in detail and have tried to explain whether or not it will prove beneficial to market participants, the

markets and the country on the whole.

The other topics that have been covered in this issue include the National Food Security Bill and critics views on the same,

the recent carnage seen in mid-cap stocks and what an investor should do in such a scenario, the recently held BRICS summit

and its key takeaways as well as the issue of growing debt burden on state-owned banks due to Kisan Credit Cards, among

other topics.

We have also covered the recent announcement by the government regarding the partial decontrol of the sugar sector, the

vacation ownership industry in India and the need to enforce a regulatory framework to prevent

money laundering in the banking sector.

The Beyond Basics section features two very interesting articles. While one is on the different

ways individuals can avail tax exemptions on capital gains, the other article is on re-introduction

of close-ended mutual fund schemes by fund houses that are seeing the current market situation

as an opportunity to bring back such funds to the market.

Do not miss the Beyond Learning section as it features an article on how market participants

should analyze their past trades to make better and rewarding investment decision.

As you skim through the issue, you will come across a new series in the magazine, aptly named

Beyond Words where we have explained frequently occurring yet, not-so-commonly used terms

from the financial world. Learning is a never-ending process and, hence, it is our constant endeav-

our to simplify the financial world for our readers and make reading a pleasurable experiencE.

DEFINING ROLES


5/51

and investment perspectives.

The Reserve Bank of India monetary

policy meet and remaining earnings

results for Q4FY12-13 are likely to

give direction to the markets in the

coming fortnighT.

Its simplified...Beyond Market02nd May 13

DisclaimerIt is safe to assume that my clients and I may have an investment interest in the stocks/sectors

discussed. Investors are required to take an independent decision before investing. Investment in

equity is subject to market risk. Our research should not be considered as an advertisement oradvice, professional or otherwise. The investor is requested to take into consideration all the risk

factors including their financial condition, suitability to risk return profile and the like and take

professional advice before investing.

he German manufacturing

data contracted for the first

time in five months,

raising fears that the

European Central Bank (ECB) may

reduce interest rates at its meeting

next month.

In India too, the Reserve Bank of

India may reduce interest rates in itsmonetary policy review on the back

of better-than-expected Wholesale

Price Index (WPI)-based inflation,

which hit a 40-month low of 5.96% in

the month of March.

Inflation is expected to decline further

due to the recent correction witnessed

in the prices of crude oil as well as

other commodities.

The fourth quarter earnings results of

TIndia Inc have been in line with

expectations or above it, the results

for IT sector have been mixed.

Market participants are advised to

buy on declines and they can look at

buying around the 5,860 level on the

Nifty, with support at the 5,820 level.

On the upper side, the Nifty is likelyto touch the 6,120 level if it crosses

the 5,940 level.

Aurobindo Pharma Ltd (LTP:

`190.20), Lupin Ltd (LTP: `684.70),

United Phosphorus Ltd (LTP:

`138.60), Mahindra & Mahindra

Financial Services Ltd (LTP:

`228.80), MRF Ltd (LTP:

`13,588.60) and United Spirits Ltd

(LTP: `2,045.95) are some of the

stocks that look good from trading

Market participantsar e advised to buy on decl

Nifty: 5,871.45

Sensex: 19,286.72

(As on 26th Apr 13)


7/51

was cleared by the cabinet last month.

Given its importance, the NFSB has

created much interest, debate and

media attention in the national as well

as international arena.

CONTEXT

Despite high economic growth in the

past one decade, India is not well

placed on few of the social

development parameters.

India has not done enough to reduce

hunger among children. Take for

instance the global hunger index

released by the International Food

Policy Research Institute for the year

2012. It places India in the 65th

position among 79 countries.

All other BRICS (Brazil, Russia,

India, China and South Africa)

countries have performed better than

India in dealing with hunger. In fact,

India ranks below neighbours Sri

Lanka, Pakistan and Nepal.

Figures from the United Nation (UN)

are even more startling. According to

the UN, India has 29% of the 872.9

million undernourished peopleglobally, as measured in 2004-05.

India has 49% of the worlds

underweight children and 34% of the

worlds stunted children.

Around one-third of Indias

population, that is 400 million people,

still lives below the poverty line as on

2010 as per World Banks definition

of $1.25/day.

The above figures are paradoxical.

India currently has an all time high

food production which co-exists with

mass hunger. India in 2011-12, hit

record high food grain production of

over 252 million tonnes, with recordproduction of wheat, rice and cotton.

Even production of sugarcane, fruits,

vegetables and milk increased

appreciably in the past few decades.

In fact, since the green revolution of

the late 1960s India has become self

sufficient in food grain production at

the national level. Though India faces

deficit in production of pulses and oil

seeds, she is more or less selfsufficient in cereals.

Then what has gone wrong and what

explains the paradoxical situation that

India is in currently! Clearly the

problem lies in distribution and not

production. India produces enough

but cannot make it available to the

needy. Food security at the micro

level remains a challenge for India,

both in terms of quantity and

nutritional value.

PDS AND ITS PROBLEMS

The government ensures food

security through various schemes and

thus provides food or food grains to

the needy.

The Public Distribution System is a

means of distributing food grain and

other basic commodities at subsidized

prices through fair price shops orration shops.

The scheme has been in existence for

a long time now and has gone through

many changes. It is the heart of the

food security system in India. If India

has avoided a famine-like situation

post independence, the credit goes to

the PDS network. There are over 5

he Union Government has

cleared the National Food

Security Bill (NFSB) and

it is ready to be introduced

in the Parliament, which reopened for

work on 22nd Apr 13.

The NFSB, which is touted as the big

mummy of all welfare schemes of theUPA government, entitles 67% of

Indias population - 75% rural and

50% urban, to low cost food grains.

Finance Minister P Chidambaram in

this years budget has set aside

`10,000 crore for incremental cost for

NFSB over and above the food

subsidy to emphasize the

governments commitment to

implementing the food security

scheme in the country.

The NFSB is an outcome of a promise

made to the people of India by the

UPA government for winning the

general elections of 2009. Just like

right to education (RTE) or right to

work (NREGA), the Bill seeks to

make food security a legal

entitlement to the people of India.

The Bill further hopes to reform the

existing Public Distribution System(PDS) and explore innovative

mechanisms such as cash transfer and

food coupons for efficient delivery of

food grains.

The standing committee gave its

recommendations on the Bill in

January this year and subsequently

the modified version of the initial Bill

T

While the government is condent that the

National Food Security Bill will sail through in

the Parliament, critics dismiss it as a stunt and

are seeking reforms in PDS before the

implementation of this Bill




lakh fair price shops across India.

While the reach of PDS is

commendable, it is fraught with

controversies. A lot of families below

the poverty line have not been

enrolled. They dont have ration cards

and, hence, suffer exclusion.

Further, cases of bogus ration cards

and illegal hoarding of food grains

which are later sold in the black

market are plenty. Quality of grains,

leakage, corruption, lack of

transparency, accountability and a

proper grievance redressal

mechanism are the many problems

facing the existing distribution system

in the country.

PDS is jointly operated by the Centre

and state governments. The Centre

takes care of procurement of food

grains, storage and transportation.

State governments do the last mile

connectivity by identifying priority

households and distributing food and

food grains through the network of

ration shops.

In order to correct the shortcomings

of PDS, the government has beenundertaking reforms, both in

recognizing target beneficiaies and

distribution. Use of technology has

been encouraged. In 1997, the

existing PDS system was streamlined

to be called as targeted PDS (TPDS).

TPDS divides the population into

three heads - BPL (below poverty

line) above poverty line (APL) and

AAY (Antyodaya Anna Yojana or

poorest of poor).

Around 180 million households - 65

million below poverty line (BPL) and

115 million above poverty line (APL)

category families - get subsidized

rations under the public distribution

system through fair price shops.

Under the current public distribution

system, BPL and AAY families get 35

kg of food grains per month, while

allocations for APL families range

between 15 kg and 35 kg. Currently,

rice is supplied to AAY families at

`3/kg, BPL families at `5.65/kg and

APL families at `8.30/kg. Wheat is

sold at`

2/kg to AAY families, whileBPL gets wheat at `4.15/kg and APL

at `6.10/kg. NFSB hopes to distribute

at lower costs than TPDS.

NATIONAL FOOD SECURITY

BILL

The Bill proposes to provide 5 kg of

food grains to an individual every

month rice at `3/kg, wheat at `2/kg

and cereals at `1/kg. Further for AAY

households, the bill entitles 35 kg offood grains per month. There will be

revision in the rates after three years.

Further, under the Bill, pregnant

women (during pregnancy and six

months after child birth) and kids

between six months to six years will

be eligible for free meals. Women

would be paid`6,000 in installments

as maternity benefits.

Target beneficiaries would be decidedby state governments, while the

criteria to exclude 33% of the

population would be provided by the

Planning Commission. The state

government will have to pay

allowances if it fails to provide these

grains to the intended beneficiaries.

About 62 million tonnes of food

grains would be required to

implement the Bill, while food

subsidy is around at `1,24,747 croreat 2013-14 costs, which is `23,800

crore higher than the existing level.

IMPACT ON GOVERNMENT

FINANCES

Currently, food subsidy contributes to

40% of the overall subsidy outgo of

the government and experts believe

that with the roll out of the Food

Security Bill, food subsidy will swell

to 50%. Rising food subsidy could

worsen the governments finances,

especially at a time when the

economy is growing at its slowest

pace in a decade.

The Centres food subsidy has more

than tripled in the past six years, from

about `24,000 crore in 2006-07 to an

estimated`88,977 crore in 2012-13.

The plan may further increase the

governments Food Subsidy Bill.

In addition to the risk of higher fiscal

bill for the government, the need for

godowns to stock food grains is dire

as it is well known that food grains rot

in the open due to lack of properstorage facilities.

Even as fiscal deficit will increase for

the government, some economists

have a different view on the Food

Security Bill. They feel that the

increase in subsidy may not be as

huge as it is made out to be.

Incremental food grains procurement

under NFSB would be 4-5 million

tonnes. Since around 10% to 15% offood grains are siphoned off through

loop holes in PDS at the state

government level, experts think that

with the modernization of PDS and

inclusion of steps like Aadhaar,

National Population Register (NPR),

leakages will be corrected. This will

in fact help rein in food subsidy and

help better targeting.

OTHER CONCERNS

Since the existing public distribution

system has failed in its mandate of

efficient food security, reliance on the

same for NFS is a concern.

This raises doubt that the scheme

could be more of an electoral

gimmick and economically

misguided. Questions are also raised



whether such food security schemes

are a sensible use of public money

given high fiscal deficit that the

government is desperately trying to

tame at the moment.

Further, the Bill entitles food grains

like wheat, rice and millets andignores benefits of high nutritional

grains like cereals and pulses, which

would actually help eradicate

malnourishment in children.

It is well known that rural tastes have

been moving towards healthy food in

the recent past. In fact savings on

food in rural India may stoke demand

across other categories and create

sustained inflationary pressures.

The other concern that is equally

shared by every one is the impact the

Bill will have on price distortion in

the market, leaving little for private

traders. Farmers fear nationalization

of agriculture as well as loss ofbargaining power.

They dread that they will have to rely

more on government for selling their

produce. Further, in case of a

drought-like situation, the

government will have to import food

grains, which will take away the title

of India being self sufficient in food

grain production.

Internationally the move has been

condemned as they fear over usage of

agri-land, which would be bad in the

longer run.

While the Bill in its current form

throws a lot of financial and

operational challenges, a highermalnutrition level amid high overall

national prosperity has made such a

scheme imperative.

If implemented, the scheme, that is,

the National Food Security Bill would

be one of its kind in the world

catering to such a huge population. It

will also set a precedence for various

other developing nationS.

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with the next move. Similarly, currency trading

involves moves that are a combination of knowledge

and skill, backed by years of experience.

Currency Derivatives Trading with us keeps you a few

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10/51

t present Indias financial

law is fairly complex and

dated. The Reserve Bank

of India (RBI) Act and

the Insurance Act date back to 1934

and 1938, respectively. The Securities

Contract Regulation Act was enacted

in 1956. The world of finance has

changed radically since then.

Although these laws have been

amended in a piecemeal fashion from

time to time, the underlying

foundation remains unchanged. This

has led to unintentional regulatory

gaps, overlaps, inconsistencies and

regulatory arbitrage. A revamp in the

overall law was long overdue.

AWhile the purpose behind the setting up

of the FSLRC was to rewrite and

streamline the nancial sector laws, its

recommendations seem a little too

ambitious, and only time will tell if they

will bear fruits

Keeping in mind the importance of

the financial sector in Indias growthand the systemic risk involved in

financial management, the

government had appointed a panel

headed by Justice BN Srikrishna to

frame regulations for the financial

sector. And to that effect the Financial

Sector Legislative Reforms

Commission (FSLRC) was set up in

the year 2011. After two years, the

commission submitted its

recommendations to the Finance

Ministry in March 13. The

recommendations have become a

subject of debate among finance

professionals, regulators, experts and

the media.

THE RECOMME NDATIONS

The panel has recommended an

Indian Financial Code containing

450 clauses and six schedules, which

replaces the bulk of the existing

financial laws. In all, the commission

has suggested seven agencies and

each of them will have distinct

functions as mentioned in this article.




UNIFIED FINANCIAL

AUTHORITY (UFA)

The FSLRC proposes a single agency

called the Unified Financial Authority

(UFA), which will subsume

regulators of capital markets,

commodities markets, insurance and

pension sector.

The need for a unified agency was felt

in the context of the jurisdictional

tussle witnessed between SEBI and

IRDA over ULIP a few years back.

The regulatory overlap led to

confusion at the cost of market

development and consumer interest.

Merging the different regulators will

lead to an exchange of information,

which will further lead to greater

transparency. The general functions

of UFA will include making

regulations, issuing guidance to

financial service providers and

supervising their conduct and taking

appropriate enforcement actions to

deal with violations.

All financial firms except banking

will come under the UFAs domain. It

will also take over the work of

organized financial trading from the

RBI in areas connected to the bond

and currency derivatives and from the

Forward Markets Commission

(FMC) for commodity futures. Thus,

the UFA will provide a common

Being a complex subject and a

collective work of many people, the

FSLRC was subject to debate and

disagreements within the panel.

Four members of the ten-member

panel have submitted their dissents on

a few proposals. The dissents range

from authorization requirements for

financial service providers to subduedrole of the RBI and increasingly

active role of the finance ministry in

the area.

In the following paragraphs we will

discuss the various agencies as

envisaged by Financial Sector

Legislative Reforms Commission in

more detail.

Agency Functions

A Unified Financial Authority (UFA) which will

merge Securities & Exchange Board of India

(SEBI), Forward Markets Commission (FMC),

Insurance Regulatory Development Authority(IRDA) and Pension Fund Regulatory and

Development Authority (PFRDA).

Reserve Bank of India (RBI)

Financial Sector Appellate Tribunal (FSAT)

Resolution Corporation (RC)

Financial Redressal Agency (FRA)

Public Debt Management Agency (PDMA)

Financial Stability And Development Council

The UFA will make regulations and issue

guidelines for equities, commodities and

insurance and pension products. It will provide a

common platform for financial trading inequities, government bonds, currencies,

commodity futures and corporate bonds.

The RBI will be a monetary authority and a

banking regulator. It will no longer do debt

management for the government and it will no

longer regulate NBFCs.

Existing Securities & Appellate Tribunal (SAT)

will be subsumed in FSAT. FSAT will hear

appeals against other agencies.

The existing Deposit Insurance & Credit

Guarantee Corporation (DICGC) will be

subsumed in RC. It will address the failure of

financial firms and protect consumers.

The FRA would address consumer complaints

across the entire financial system.

The PDMA will raise resources for the

government by selling bonds.

It will collect data and identify potential

systemic risks.



platform for financial trading in

equities, government bonds,

currencies, commodity futures and

corporate bonds.

The argument against the UFA is that

it covers a wide spectrum, each

requiring a different set of domainexpertise. A one size fits all

approach may not suit different

markets. Securities, commodities,

currencies, insurance as well as

pension funds have different

economic functions.

The UFA takes inspiration from UKs

Financial Services Authority (FSA).

The FSA is seen as a failure in the UK

and is on its way out and being split

into the Prudential RegulationAuthority and the Financial Conduct

Authority. While the intention of the

UFA is noble, it could lead to

regulatory ineffectiveness.

RESERVE BANK OF INDIA (RBI)

Perhaps the most debated part of the

draft regulation is the provision for

the Reserve Bank of India (RBI).

Critics of FSLRC have gone to the

extent of saying that the FSLRC willclip the wings of the RBI.

The RBI will be the monetary

authority and banking regulator. The

FSLRC says that NBFC and housing

finance companies should be taken

out of the purview of the RBI.

Further, rules for all inward-flowing

money will be made by the

government while, all outward

flowing rules will be made by theRBI. This will essentially mean that

the RBI will have no role in foreign

exchange management and thereby in

exchange rates and foreign reserves.

Further, the debt management office

will be separated from the RBI.

The FSLRC recommends that the

Monetary Policy Committee (MPC)

have eight members. In addition to

the Governor of the RBI and an

executive member of the board of the

RBI, there will be five external

members, two to be appointed by the

Union government in consultation

with the RBI governor and three by

the Union government.

In addition, a representative

expressing the views of the ministry

of finance will participate but not

have voting rights.

It is feared that a lot of regulatory

power will move from the RBI to the

Finance Ministry. The monetary

policy will be decided by the

Committee (including five members

nominated by the government) andnot by a single individual (Governor)

as done today.

The FSLRC is of the opinion that the

central bank must be given a

quantitative monitorable objective

(price stability or growth) by the

government. Experts believe this will

increase transparency and enhance

accountability for the RBI but at the

same time give the government more

say in the monetary policy.

FINANCIAL SECTOR

APPELLATE TRIBUNAL (FSAT)

The new finance code has drawn up a

single judicial tribunal for the

financial sector called the Financial

Sector Appellate Tribunal (FSAT).

The present Securities & Appellate

Tribunal (SAT) will be subsumed in

FSAT. The FSAT will hear appealsagainst the RBI (for its regulatory

functions), the unified financial

authority, decisions of the FRA,

against the central government in its

capital control functions and some

elements of the work of the FSDC and

the Resolution Corporation.

In a great leap towards bringing

transparency in judicial functioning in

India, the proceedings will be

recorded and published.

RESOLUTION CORPORATION

(RC)

The resolution framework under theFSLRC will be provided by a

Resolution Corporation. It will deal

with an array of financial firms such

as banks and insurance companies.

The existing Deposit Insurance &

Credit Guarantee Corporation

(DICGC), which insures customers if

a bank fails, will be subsumed in RC.

The objective of RC would be to

address the failure of the financial

firms and to protect consumers. A keyfeature of the Resolution Corporation

will be speed of action.

The Corporation will concern itself

with all financial firms that make

highly intense promises to

consumers, such as banks, insurance

companies and pension funds.

FINANCIAL REDRESS AGENCY

(FRA)

All consumer complaints about any

financial product from bank deposits

to exotic derivative products will be

handled by a common Financial

Redress Agency.

Consumers will be able to approach

the Financial Redress Agency (FRA),

which will be a single unified agency

spread across all sectors to look into

complaints of aggrieved consumers.

This would feature a low-cost process

through which the complaint of a

consumer against a financial firm

would be heard and remedies

awarded to the complainant. It will set

up a nationwide machinery to become

a one-stop shop where consumers can

carry their complaints against all

financial firms.



PUBLIC DEBT MANAGEMENT

AGENCY (PDMA)

Currently, the role of debt

management is split between the RBI

and the central government, with the

former managing market borrowings

for the government and the lattermanaging external debt.

The FSLRC proposes a Public Debt

Management Agency (PDMA),

which will do both tasks for the

government. The PDMA should

minimize the cost of borrowing of the

government in the long run.

The PDMA should co-ordinate the

Central government borrowing

calendar with the borrowings of Stategovernments to ensure that the

auctions of new issues are

appropriately spaced.

The government would be the key

decision-making body for PDMA.

Fostering a liquid as well as efficient

market for government securities

should be an integral function of the

Public Debt Management Agency.

FINANCIAL STABILITY ANDDEVELOPMENT COUNCIL

(FSDC)

The FSLRC panel has suggested that

the FSDC be made a statutory body

with more powers. It will be headed

by the finance ministry.

The FSDC will set up a financial data

management centre that will collect

information from all regulators and

keep a watch on how each financialconglomerate is doing. It will not be a

regulator but work as a monitoring

and supervisory agency.

The FSDC will assimilate and

transmit a system-wide financial data.

This database will serve to assist the

FSDC in conducting research on

systemic risk as well as study

system-wide trends.

OTHER RECOMMENDATIONS

Consumer Protection

The existing doctrine of caveat

emptor, meaning buyers beware of

consumer protection will see it

change to sellers beware if the

FSLRC goes through.

The buyers beware doctrine holdsthat since the buyer has been given all

information relating to a product, the

buyer is to be made responsible for all

risks associated with the product after

its purchase.

After FSLRC, a significant burden of

consumer protection will be placed

upon financial firms.

Few rights for customers as drafted in

the financial code are financialservice providers must act with

professional diligence; protection

against unfair contract terms;

protection against unfair conduct and

protection of personal information.

These rights essentially mean that

every citizen has a right to be

provided suitable advice or

recommended suitable products from

financial service providers.

The financial firms will be legally

required to act in the best interest of

consumers and that consumers will

have legal recourse in case they have

been sold unsuitable products or

given unsuitable advice.

By incorporating these rights, the

consumers would be empowered to

move a court of law in case this rightis denied to them. While the penalties

for wrongdoers are not clear yet, the

Bill if passed and becomes a law,

could tilt the field in favour of the

financial consumers .

At present many public sector

financial firms [for example the Life

Insurance Corporation of India (LIC)

and the State Bank of India (SBI)] are

rooted in a specific law.

The Commission recommends that

they be converted into companies

under the Companies Act, 1956. This

would help enable

ownership-neutrality in regulation

and supervision.

The Financial Sector Legislative

Reforms Commission has proposed

that financial sector laws be reviewed

every three years.

The review will consist of an analysis

of costs and benefits of regulations. It

remains to seen whether the

recommendations would be taken in

toto given the dissenting voices

within the panel and among experts

and institutions involved.

But, if the draft becomes a law, some

provisions have the potential to do

exceptional justice to customer

protection and systemic risk: the mainreasons why financial laws are being

drafteD.

COCKROACH THEORY

It is a market theory that suggests that when a company reveals bad news to the public, there may be many more related

negative events that are yet to be revealed. The term comes from the common belief that seeing one cockroach is usually

evidence that there are many more than those that remain hidden.


14/51

AShort-Term

HiccupDespite the recent carnage,

mid-cap stocks still look good from a long-term perspective




Besides, poor economic scenario

means bad news for companies which

are highly leveraged, hitting them in

terms of profitability. However, even

if one jots down all these points and

looks at the cumulative impact, there

is still not enough argument to explain

such a fall in mid-cap companies,especially in cases where

fundamentals of these companies still

remains strong.

THE EPICENTRE

The crash in mid-cap stocks punished

mostly those investors who kept on

averaging the cost of purchase at

lower prices in the hope of recovery

and valuations turning attractive. But

most of these investors have lostheavily and those who went on a

buying spree with the leveraged

money are now swearing to invest in

mid caps as many of them are now

trading at historical lows and there is

no buyer even at lower prices.

In the absence of retail and

institutional buyers in the market,

liquidity in mid caps has dried

drastically. As many are still sitting on

losses, the recovery in share prices isonly looked at as an opportunity to

exit, thus leading to more supply.

Mid caps came into limelight largely

around December last year and

January this year as a result of sudden

optimism about the Indian equity

markets led by policy push and heavy

buying by foreign investors in the

Indian equity markets.

This led to a strong build up in themid-cap space, which was considered

to be the key beneficiary of recovery

in markets and the economy. This is

also the period when a lot of investors

as well as operators started leveraging

and building their positions in the

mid-cap space.

Besides operators and investors, in

many cases the promoters too were

riding the rally. Many of the Indian

companies promoters were

leveraged. They pledged their shares

at higher prices as security to lenders

who provided them personal or

corporate loans.

In a poor economic environment

when most of the options to raise

funds were limited, a number of

companies raised additional funds to

manage their day to day businesses

from banks and NBFCs. In fact

financial institutions, especially

NBFCs started insisting on further

pledging of shares as security for

fresh and existing loans.

In many cases pledging of sharesreached high levels. Promoters of

many mid and small-sized companies

pledged their shares to the extent of

60% to 90% to borrow and provide

additional securities.

The real issue began when the

markets started correcting around the

Union Budget. The initial correction

in share prices compelled promoters

to provide even more shares as

security to financiers owing to thefear of losing control and crash in

share prices.

NBFCs or financial institutions were

in a comfortable position till the time

there was enough security and loan

was covered with adequate number of

shares. However here share prices of

those companies were the prime

driver of collaterals needed.

If the share price falls, the companieseither have to provide more security

or the NBFC threatens to sell the

pledged shares in the open market to

recover their loan amount.

Not just promoters, even market

operators who typically hold large

quantities of a particular company

were overleveraged. In many cases

he sudden fall in share

prices of mid-cap

companies over the past

few months has become a

cause of worry for most investors,

including retail as well as high-net

worth individuals (HNIs).

Share prices of mid-cap companies

have crashed over 30% to 70% over

the last three months and many of

them have completely eroded both the

market capitalization and the faith of

the investors.

More importantly the carnage in

mid-caps took many by surprise as no

one was able to explain the sudden

correction in share prices. The gravity

of the event in fact led to a probe bymarket regulator Securities and

Exchange Board of India (SEBI) to

check if correction in prices is due to

some irregularity or involvement of

operators in manipulating the prices.

LESS TO DO WITH

FUNDAMENTALS

Most market participants believe that

the carnage in the mid-cap space has

less to do with the fundamentals ofthe companies.

Apart from this, there is certainly a

growing worry that lower economic

growth is likely to dent the financial

performance of mid-cap companies.

That is because large corporates

across different sectors are facing

growth issues which will also cast its

shadow on the growth of mid-cap

companies, especially ancillarycompanies, which cater to various

larger players.

Both investment and consumption

has come down and there is less hope

of a revival given the impending

elections next year and other issues in

terms of export demand as well as

interest rates.

T



their shares too were pledged with

financiers for loan, which was taken

for higher exposure.

So, even in cases where the promoters

were solvent enough, they were

forced to sell in the market if the

operators finances were in a badshape, leading to a correction which

could not be explained by many.

WEAKNESS IN THE SYSTEM

This weakness in the mid-cap space

was visible and quite apparent. And

especially when volumes and

participation in the market was low,

mid caps were prone or susceptible to

any adverse situation.

Initially in January and February the

correction in mid caps started

selectively where one or two

companies were in the news for heavy

selling, which later on spread to other

counters when FIIs started

withdrawing money from the Indian

equity markets.

In the absence of real buyers, mid

caps started to crack and operators

took advantage of the situation. Whenthe markets knew the prices were

crashing, operators and market

participants jumped into the wagon

and shorted many stocks, especially

in the futures and options segment,

leading to acceleration in correction.

Even more so, as share prices started

to crack, pledged shares of both

operators and promoters started

getting liquidated. The financiers due

to the lack of security and inability ofoperators to meet enough margins

started to sell stocks in the open

market, which led to a sudden fall in

the mid-cap space.

This could not be restricted to a few

companies only as investors started to

liquidate other companies in their

portfolio in the hope of mitigating

their losses in one counter and started

selling others as well, leading to a

wider sell off.

The problems accentuated and

reached such an extent that stock

exchanges and market regulator SEBI

immediately started talking about aprobe into the matter to find out about

any irregularities and manipulations,

as many believed that it was led by

market operators or was a result of

sell offs by a select group or

individuals who wanted to take

advantage of the situation and make

quick money.

But this too impacted sentiments

badly and the fear of manipulation led

to more selling, which in the absenceof enough liquidity created mayhem

in mid cap stocks.

IS THERE MORE PAIN?

Now the real question is whether

there is more pain in this space. There

is a feeling among market participants

that a lot of distress selling has

already taken place. And since the

prices are now stabilizing, share

prices should not crash further. Butthat does not assure of any weakness,

which is expected to continue.

There will be recovery and those

whose stocks that were sold in a hurry

due to lack of money will come back

to cover them. But that also will

initially happen in cases where there

is value and fundamentals of

companies are strong.

More importantly the selling tookplace irrespective of fundamentals,

which is why the share prices in most

cases are trading at attractive

valuations. In many cases the

valuations have become compelling

and stocks are offering good dividend

yields. This is a good sign considering

that it could support share prices from

any further decline.

At the time of heavy selling,

valuations were largely ignored by

the markets. But during stability, the

markets will again go back and look

at valuations in comparison to the

companies own fundamentals.

WHAT CAN INVESTORS DO?

At this point in time buying mid caps

could be both an opportunity and a

trap. Keeping these things in mind,

investors should stick with quality

and not jump to buy them just because

the stock is trading at a lower price.

Instead, an intensive check on

fundamentals of companies and

valuations could provide some clue.

Companies with high debt andexcessive pledging of shares by

promoters should be avoided.

Companies which have solid business

in terms of assets, brand and cash

flows should attract attention.

Investors who want to avoid any

decision making and go through the

entire research process could

probably take a different route. They

can choose and invest in a good

mid-cap mutual fund scheme, whichhas a good track record in terms of

performance, especially during the

recent carnage in the mid-cap space.

A mutual fund scheme of a reputed

fund house and a reputed mutual fund

manager should score high in the

minds of investors and could help to a

great extent.

There is a belief that may be over the

next one year mid caps may notperform well given the several issues

about liquidity, participation and

fundamentals of the company and

economy, but valuations at which

some of these companies are trading

are at a historical low. This is why,

from the long-term perspective, these

could be attractive options compared

to their large-cap peerS.


17/51

n 2009 when the first BRIC

(Brazil, Russia, India, China)

summit was held in Russia, it

was mocked at and called as an

insignificant meeting between a few

countries. As years passed and

alliances between member countries

grew, the West, which was going

through an economic turmoil, sat upand took notice.

By then, BRICS (now including

South Africa) had shifted its focus to

Asia and Africa and when the 5th

BRICS summit was held on 27th

March 13 in Durban, South Africa,

every developed country in the world

was watching closely. BRICS was no

I

BRICS countries are mulling the formation of a new devel-

opment bank, which aims to fund infrastructure and allied

projects throughout developing nations

longer a small gathering of a select

few countries.

Statistics will help understand the

significance of BRICS. BRICS

countries represent almost 3 billion

people, with a combined nominal

GDP of US $14.9 trillion as of 2013,

which in simpler terms means about40% of all the people on planet earth,

15% of global trade and 25% of the

worlds GDP.

The story of BRICS summit started

with the meeting of foreign ministers

of the initial four BRIC states (Brazil,

Russia, India, and China) in New

York in September 06, which was

followed by a series of high-level

meetings and finally a full-scale

diplomatic meeting, which was held

in Yekaterinburg, Russia, on 16th

May 08, which placed the foundation

of the BRICS summit.

On 16th June 09, the first ever BRIC

summit was held in Yekaterinburg.The focus of the first summit was on

how the four countries could better

co-operate with each other in terms of

development as well as on improving

the global economic situation.

South Africa began its efforts to join

the BRIC group in 2010 and became

an official member of the group on




support African countries in their

industrialization process through

stimulating foreign direct investment

(FDI), knowledge exchange, capacity

-building as well as diversification of

imports from Africa.

Experts believe the decision to makeBRICS summit Africa-centric was

taken because BRICS nations want to

position South Africa as the gateway

to Africa, which will take them a step

ahead of the West. This also suits the

purpose of South Africa, which has

growing designs for dominance over

other African countries.

It is important to note that almost 25%

of FDI from China, Russia and India

goes to Africa. In the next few years,China plans to give Africa $20 billion

in loans.

Interestingly, parallel to the BRICS

summit, a BRICS business forum was

also held, which discussed issues

related to infrastructure, energy,

financial services and

agro-processing. Following the

recommendation of this forum, a

BRICS Business Council has been

formed which will comprise of fivetop business leaders from each of the

member states.

South African billionaire, Patrice

Motsepe has been appointed as the

Chairman of the business council for

this year. This council will meet twice

a year and submit a report at each of

BRICS annual summits. Experts

believe that this council is a

significant step to boost intra-BRICS

trade, which reached US $350 billionin the year 2012.

Apart from the council, there was a

discussion on linking BRICS

countries through a high-capacity

optic fibre cable network of 28,400

km. This will remove the

dependency on developed countries

as interconnection points by

providing a direct route among

BRICS countries, said South

Africas President Jacob Zuma.

However, the center of the discussion

at the summit was the idea of creating

a BRICS-led development bank,

which was proposed by Indias PrimeMinister Manmohan Singh at the

BRICS summit held in New Delhi, in

the year 2012.

The proposal saw some resistance in

New Delhi, but in Durban all member

countries agreed upon the creation of

the development bank. Para 9 of the

declaration states: Following the

report from our Finance Ministers

(FMs), we are satisfied that the

establishment of a New DevelopmentBank is feasible and viable. We have

agreed to establish the New

Development Bank.

While details of the bank have not

been finalized, it is expected that the

bank will have an initial capitalization

of $50 billion, with focus on

infrastructure development. Many

experts see the move as a challenge to

the dominance of the dollar.

As South African President Jacob

Zuma stated, (Leaders agreed) to

enter formal negotiations to establish

a BRICS-led new development bank

based on our own considerable

infrastructure needs, which amounts

to around US $4.5 trillion over the

next five years, but also to cooperate

with other emerging markets and

developing countries in future.

A few experts believe that the bankwill have an inward-looking

structure, which will gradually form a

credit line for countless projects on

which trade will be conducted

between the developing nations with

no role for US dollars.

The downside is that a deadline and

expected roadmap on creation of a

24th Dec 10. When South Africa

successfully hosted the latest BRICS

summit in March, this year, it proved

that it had the capability of becoming

a full member of BRIC.

This year at the BRICS summit

Indias Prime Minister ManmohanSingh in a statement to the media after

the plenary session of the summit

informed, The BRICS platform has

evolved tremendously since the first

summit at Yekaterinburg in 2009. Our

agenda encompasses diverse areas,

including global economic

developments, peace and security,

reforms of political and economic

institutions of global governance,

international trade, sustainable

development and food as well asenergy security. We have just

concluded very fruitful discussions on

many of these issues.

Thanks to host country, South Africa,

the theme of the summit was -

BRICS and Africa: Partnership for

Development, Integration and

Industrialization. A declaration

called the eThekwini Declaration

and Action Plan was issued after the

fifth BRICS summit at Durban inSouth Africa. The declaration

underlines the need to widen and also

deepen co-operation between the

BRICS countries.

The declaration has an assertive ring

to it: Paragraph 3 of the eThekwini

Declaration states, We will hold a

retreat together with African leaders

after this summit The retreat is an

opportunity for BRICS and African

leaders to discuss how to strengthencooperation between BRICS

countries and the African continent.

To further enhance trade among

BRICS countries and other African

countries, para 5 of the eThekwini

declaration mentions, Within the

framework of the New Partnership for

Africas Development (NEPAD), we



physical, functioning bank has not yet

been finalized. Also, there are many

issues which remain unsolved, which

could mean that the formation of the

bank could be a slow process.

Another significant development at

the latest BRICS summit was thediscussion regarding the

establishment of a financial safety net

by pooling foreign exchange reserves.

The members agreed to create a US$

100 billion Contingent Reserve

Arrangement (CRA) by trading in

their currencies for some transaction.

This fund will safeguard member

states from short-term liquidity

pressures, thereby strengthening

financial stability.

However, the timeline for this fund

has not been set and though

declaration states that the

establishment of the CRA with an

initial size of US $100 billion is

feasible and desirable subject to

internal legal frameworks and

appropriate safeguards, many

experts believe that this sum is too

modest compared to half a trillion

dollars mobilized for the new firewallfund at the International Monetary

Fund (IMF).

Taking the economical development

issue further, BRICS also agreed to

promote green economy to fight

global warming and climate change.

The delegates signed a multilateralagreement on climate cooperation and

the green economy according to

which the nations will co-operate

with each other in terms of technical

and financial support to address the

dangers of climate change in

developing nations.

On the issue, Indias Prime Minister

Manmohan Singh said, We need to

respond to all the persistent

weaknesses that threaten the worldeconomy All of us need to work

together for the green economy and

cooperation in energy, food security,

health care and education.

On a political level, as stated in

paragraph 20 of the declaration,

China and Russia reiterate the

importance they attach to the status of

Brazil, India and South Africa in

international affairs and support their

aspiration to play a greater role in theUnited Nations.

However, some experts believe that

their promise falls short due to

Japans role in the G4. Indias Prime

Minister Manmohan Singh met

Chinese President Xi Jingping for the

first time at a high level meet after the

change in leadership in China. He

also met Russian President VladimirPutin regarding the issue of

Kundankulam reactor where he

assured Putin that the first unit of the

reactor will be operationalized by

next month.

As per the action plan, the summit

will be followed by several

year-round meetings and discussions

between ministers and businessmen

of member nations to further increase

trade and co-operation betweenBRICS countries.

According to experts, the summit

really was a success in many ways as

the eThekwini Declaration is in a way

similar to the Delhi Action Plan

declared in the year 2012 at the New

Delhi BRICS summit, which was

largely fulfilled. In Durban, further

progress in discussion was seen on a

broad range of subjects but in terms of

deliverables, not much was achievedat the summiT.

ANGELINA JOLIE STOCK INDEX

An index made up of a selection of stocks from companies associated with actress Angelina Jolie. Seen as one of the

worlds most influential celebrities, some analysts believe that companies connected with Jolie will outperform their

competition.

The index was created by Fred Fuld of Stockerblog.com; it includes stocks of movie studios and producers that have hada connection with Angelina Jolie, such as Sony, Viacom and Time Warner. Because Jolies films usually earn large

box-office revenues and the companies that produce these movies should have higher profits.

ASSET VALUATION RESERVE

It is the capital required to be set aside in order to cover a company against unexpected debt. The asset valuation reserve

serves as a backup for equity and credit losses. A reserve will have capital gains or losses credited or debited against the

reserve account. Usually the asset reserve consists of two components, a default component and an equity component. The

default component protects future credit related losses and includes arrangements for corporate debt securities, preferred

stock, mortgage backed securities, etc.



ndias agrarian economy has

been facing a long-standing

problem of non-availability of

institutional credit for farmers

of the country.

Over the past few years, farmer

suicides have been on an alarming

rise, because they have not been able

to come out of the clutches of moneylenders at large who suck the very life

out of them.

Even in places where institutional

credit is available, farmers are unable

to get loans either because interest

rates are too high or the stringent

credit appraisal process does not

qualify them for institutional credit.

I

N o n - r e p a y m e n t o f s u b s i d i z e d l o a n s g i v e n t o

f a r m e r s t h r o u g h K i s a n C r e d i t C a r d s b y s t a t e - o w n e d

b a n k s c o u l d r e s u l t i n r i s i n g n u m b e r o f N P A sA

GrowingEvil

GOOD INTENTIONS GONE

AWRY

To put an end to the woes of such

farmers, the government had

launched the Kisan Credit Card

(KCC) scheme over a decade ago to

enable them to avail of timely credit

to make purchases for agricultural

activities during the crop season.

Further, with the government turning

the heat on public sector banks to

push such schemes, nearly 20.3

million cards were issued till March

12. However, this has given rise to

another problem, which is of lenders

facing the onslaught of rising bad

loans from this sector.

According to latest estimates by

public sector banks the outstanding

amount on such cards stands at `2

trillion, and may well rise in the days

to come, posing a systemic risk to the

financial services sector.

The banking sector is already reeling

under the pressure of bad loans

which have risen persistently. At theend of December 12, the gross NPAs

of the banking sector stood below

`1,80,000 crore, a rise of 43% over

last years `1,25,000 crore.

So far corporates have largely been

responsible for the rise in the number

of bad loans in the banking sector. But

it seems as if there is yet another



With the government perpetually

setting tough targets for agricultural

lending, there is little hope that this is

a one off thing which can be stamped

out soon. The exposure of banks to

agricultural activities stood at `5.6

trillion in the beginning of the

calendar year and the government hasalready proposed to increase the farm

credit target to `7 trillion for FY14.

For public sector lenders, it is a

double whammy. On one hand the

government keeps turning the

pressure on with regards to increasing

its farm credit portfolio, and on the

other hand it is witness to the fact that

the KCC scheme is not being utilized

in the manner it was conceptualized.

For instance, a Kisan Credit Card is

supposed to work like any of our

normal credit cards except for the fact

that the farmer is expected to make

farm-related purchases. The

repayment tenure is 12 months (a two

crop cycle) following which, the loan

should be treated as an NPA.

WHO WILL SHOULDER THE

BLAME?

However, it has been noted that the

farmers in question use Kisan Credit

Cards to fund weddings in the family

or to meet medical expenses.

Once the repayment tenure is over

they come and plead with the lenders

and if the lender pressurizes him to

repay, he threatens to commit suicide.

Lenders are therefore scared to

implement even standard recovery

mechanisms in such cases as they

tend to be politically sensitive and

may put their heads in the line of fire

owing to the same.

Some bankers closely associated withagricultural lending blame the

government for interest rate subsidies

that have been provided to farmers,

which has encouraged them to misuse

schemes like Kisan Credit Card for

the purpose of consumption for all

reasons other than agriculture.

Certain bankers even go to the extent

of stating that some farmers do not

deliberately repay the loans, knowing

that the lenders are helpless and willnot be able to recover the money

without the will of the farmer himself.

It is no secret then that the UPA

governments farm loan waiver of

`70,000 crore announced in Budget

2008 was a major reason why it could

return to power in 2009 elections. As

we stand at the threshold of yet other

general election, it seems as though

the UPA government is going all out

to please the voters and will do littleto address such concern.

However if bankers, regulators and

the government work in tandem and

realize that there is a veritable risk

from rising bad loans of Kisan Credit

Cards, the banking and financial

services sector may be facing the

threat of a downgrade yet agaiN.

problem pertaining to bad credit

which can soon become bigger than it

seems now.

The countrys largest public sector

commercial bank - State Bank of

India with the largest exposure to

such KCC loans (to the tune of`44,000 crore) has already seen 5% of

these loans turn bad, raising the

heckles among other public sector

bankers too.

Another worrying trend is the practice

of evergreening on such loans by

lenders themselves. Even when a

farmer is unable to repay his debts, he

is given a fresh loan to meet his

payment requirements. The lender

seems happy to start a new loan cyclebecause even though bad loans are

increasing, it is not reflected in the

books till such time as the credit limit

on these Kisan Credit Cards is always

on a rise.

ARE BANKERS TURNING A

BLIND EYE?

This explains the reason why

outstanding loans on KCC have risen

about 30% in the last two years andthe number of cards issued has gone

up by around 13% over the past year.

Although there are no statistics to

establish that the bad loans are rising

due to evergreening, those in the

know state that there is enough reason

to worry now that this ongoing trend

is on an uptick.

BEAR SQUEEZE

A change in market conditions that forces pessimistic investors attempting to profit from price declines to buy back an

investment at a higher price than they sold it for. A bear squeeze can be an intentional event created by certain players in

the investment markets, usually central banks or market makers.

ACQUISITION INDIGESTION

It is a slang term describing an acquisition or merger in which the companies involved have trouble integrating with one

another. Acquisition indigestion may also describe a situation in which the purchasing company has difficulty making the

most of a takeover.


22/51

Sweeter

Than Before




consider going long in selective sugar

company stocks.

After years of reluctant hope and

months of speculation, the Indian

governments Cabinet Committee on

Economic Affairs finally approved

the partial decontrol of the sugarindustry. The proposal seeks to

abolish the levy-sugar mechanism,

under which private millers have to

sell a specified quantity of the

sweetener to the government at

concessional rates.

As per the new policy, the quarterly

release mechanism of sugar has been

dropped, which allows sugar mills to

sell sugar into the domestic market or

to export at will. The move isexpected to free up cash flows for

mills and allow them to better meet

their cane payments to farmers, thus

removing one of the major barriers to

good farmer-miller relationships,

which may in the end lead to less of a

swing in cane plantings and more

steady sugar production.

The policy also aims to end the levy

for sugar whereby mills are no longer

required to sell 10% of their sugarproduction at a 40% discount to

market price to supply to subsidized

stores set up by the government.

However, there is a catch here. The

government has mentioned that levy

obligation has been dropped only for

two years. Obviously the new central

government that will come to power

in 2014 will take a final call on this.

And the political situation at that

point in time will decide the fate ofthis particular rule.

The decision taken on 14th Apr 13

will eliminate the levy obligation

from the current season. So, sugar

produced after September 12 is not

subject to the levy. It also sets up a

new tendering system whereby states

will buy sugar for the Public

Distribution System (PDS) from mills

through a transparent process, but

prices are capped at `32.

As PDS sugar is sold at `13.50, the

central government will offset the

`18.50 difference for two years.

Though it was discussed that thefinance ministry might increase

excise duties on sugar at the mill gate

to help compensate for the

governments new financial burden

that will pay to keep, that decision has

not been made yet. Therefore, the

government must shoulder the burden

of the extra `2,500 crore per year to

subsidize PDS sugar.

Obviously, the dropping of the levy

obligation will boost profit margins ofsugar companies significantly.

Industry pundits estimate total

savings to be in the range of `3,000

crore. The Indian Sugar Mills

Association says that the two

decisions combined could lead to an

additional growth of 20% to 25% for

the industry.

Sugar production in the country is

estimated to touch 24.6 million

tonnes in 2012-13 marketing seasonending 30th September with the

cumulative turnover of`80,000 crore.

The current sugar market has the

potential to double up and reach `1.6

lakh crore in the next five years, says

an industry expert.

Indias sugar sector is gearing up for a

surge in mergers and acquisition

activities, big investments and

exciting retail products as the

governments decision to easecontrols has revved up the worlds

biggest market for the sweetener.

Currently, major players in the sugar

industry are all domestic firms such

as Bajaj Hindhusthan, Shree Renuka

Sugars, Dhampur Sugar, Balrampur

Chini, EID Parry and Mawana

Sugars, among others. After the

he government recently

announced its decision to

partially decontrol thesugar sector. This

announcement brought cheer to the

sugar industry. In fact, the Sugar

Index outperformed the CNX Nifty

50 index by more than 10% in the first

week of April, the week the news

became public.

The Sugar Index, comprising

frontline sugar stocks, gained close to

9% during 11 trading sessions ending

12th Apr 13. During this time period,the broader market remained in the

red. The CNX Nifty 50 Index fell by

approximately 2% in the

corresponding time period.

T

After much deliberation, the

government has nally

announced a partial

decontrol of the sugar

sector, which is hoped to

make the business more

viable and attract large scale

investments too

75

80

85

90

95

100

105

2/1/2013 13/02/2013 28/03/2013

Sugar Index

Year-to-Date (YTD)

Performance Of Sugar Index

Source: BSE

In view of the structural change in the

industry, investors from this sector

need to keep a close eye on the

upcoming developments and could

W

of sugar stocks



decontrol policy of the government,

the sector is likely to see more merger

and acquisition activities. Overseas

players like Olam International,

Cargill and Noble Group are looking

at occupying a bigger pie of the

Indian sugar industry.

Foreign firms have been calling top

industry people as they are lured by

the size of the `80,000 crore market,

which is expected to double up in five

years. Trade sources say potential

investors are eyeing opportunities in

detail and have a preference for

business in top producer Maharashtra

although they are suspicious of

politically meddlesome UP.

As a result of all these positivedevelopments, sugar stocks have

surged upwards, beating negative

trends of the overall market in the

month of April. Bajaj Hindusthan,

Shree Renuka Sugars and Balrampur

Chini Mills shares surged by 7.30%,

7.07% and 4.02%, respectively on the

day the news was made public. Part of

the overall impact had already been

factored in before the news. Some

momentum gained in stock pricesafter the news.

Though the positive news will boost

investor sentiments in the sugar

industry, there are some concerns that

need to be looked at carefully. The

relaxation in levy regulation is

applicable only for two years and it is

not clear what will happen from the

third year onwards.

Secondly, the control of sugarcane

pricing still rests in the hands of select

states. Depending on the political as

well as investment-friendly situation

of the individual states, companies

benefits would vary.

Hence, investors need to carefully

look at the plant location of individual

sugar companies and its existing

relationship with the government,among others. This means that the full

benefit of a free market is yet to be

realized for sugar investorS.

Peer Comparison

Source: BSE

15

20

25

30

35

40

45

50

55

Shree Renuka Sugars

Bajaj Hindusthan

Balrampur Chini


25/51

espite the lull in the

hospitality and leisure

industry, companies in

the business of vacationownership have performed better than

those from the hotel industry in the

past one-and-a-half years.

Be it cash flows from operations, debt

or growth in revenues, these

companies have done relatively better

than their peers from the hotel and

hospitality industry.

D

At a time when thehotel industry iswitnessing a slowdown,the vacation ownershipsector is growing

steadily, against odds

Let us understand the factors

responsible for the growth of the

vacation ownership industry and

subsequently its importance from an

investment point of view.

THE BASICS

According to the data presented by

RCI, a global leader in vacationexchange platform with over 4,000

affiliated resorts in approximately

100 countries, the vacation ownership

industry in India is growing at a

healthy rate of 18% every year since

the last five years.

In India itself there are 52 companies

that are into vacation ownership.

GoingPlaces,

Literally




Boston-based market research firm,

found that flexibility and variety were

among the most popular reasons cited

for the importance of selecting a

resort affiliated with an exchange

vacation company.

It says, Both prospective consumersand current owners want to have a

wide selection of vacation options to

choose from and to be able to travel at

different times throughout the year.

This shows that the future of vacation

ownership in India is a long success

story that would unfold in a strong

way in times to come.

THE FACTS

One of the chief reasons for the hugeacceptance of the vacation ownership

concept in India is its dependence on

domestic travel. In the last five years,

even though outbound travel in India

has been affected, travel within the

country is growing well. This has

lifted the financial performance of

vacation ownership companies in the

recent years. This performance when

juxtaposed with hotel companies is

exceptionally good.

Mahindra Holidays, which has a 72%

market share of Indias vacation

ownership market, has shown

reasonably better growth than hotel

companies. The companys net sales

in the last five fiscals have grown at a

compound annual growth rate

(CAGR) of 13%, while its net profit

has shown a CAGR growth of

approximately 5%.

In comparison with this, the financialperformance of Indian Hotels

Company, one of the largest players

in the hotel industry, has deteriorated

in the last five fiscals. Its net profit

has declined by a CAGR of 44%,

while its net sales has grown at a

meagre rate of 4% in the same period.

Vacation ownership companies have

also done well on cash flows from

operations. And their growth in cash

flows is far better than their hotel

counterparts. Cash flow from

operations of East India Hotels (EIH),

which is one of the largest premium

hotel companies, has been flat in the

last five years.

On the other hand, Mahindra

Holidays cash flow from operations

has grown at a CAGR of 45% in the

same period. Also, in terms of

leverage, vacation ownership

companies have lighter balance sheet

than hotel companies.

Sterling Holidays Resorts, which has

been cutting its losses in the last few

years, has virtually no debt on itsbooks. Even Mahindra Holidays has a

negligible debt of `8 crore as of

FY12.

Due to their dependence on domestic

consumption theme, vacation

ownership companies have been

recording better business than most

hotel companies whose revenues are

impacted due to weak foreign tourist

arrivals. Foreign tourist arrivals in the

last five years has grown at a lowCAGR of 4.1%.

In the same period, the vacation

ownership segment has grown by

18% every year in the last five years

and the number of resorts in the

country grew by 33% to 104 in 2012.

Interestingly, the average occupancy

rates of these companies has been

over 70%. A study by Cushman &

Wakefield foresees Indias timeshare

industry to grow at an annual rate of16% between 2006 and 2015.

Besides, hotel companies have been

expanding their room inventory at a

time when the demand in the

hospitality industry has been weak.

As a result of this, revenues of hotel

companies have been dwindling in

the last five years.

These companies have 102 resorts

and provide close to 5,000 rooms. The

annual maintenance fee of resorts

provided by these companies is in the

range of`7,000- `10,000/week.

Clocking 18% every year in the last

five years is no mean feat for anindustry, which is relatively nascent

in comparison with well-established

hotels across all segments.

In the US too, RCI notes that there is

a huge acceptance for vacation

ownership companies. One of the

findings of a survey conducted by

RCI says, Strong ownership

satisfaction, high household incomes,

a desire for repeat purchases and a

propensity for frequent travel werejust a few of the many reasons

responsible for optimism in the

vacation ownership industry.

The RCI study also stated that few

owners felt their vacation plans were

being impacted by economic

slowdown and there were more

owners who intended to keep their

vacation ownership plans intact and

running, going forward.

The study also found that more

owners were taking vacations and

there were very few who were cutting

back on travel expenses. The RCI

survey also revealed that 83% of

respondents were satisfied with their

current vacation ownership, while a

considerable 62% reported that they

owned two weeks or more of vacation

ownership per year.

It was also found that the owners whointended to acquire vacation

ownership not only plan to acquire

more vacation ownership but also had

a huge purchasing power. The survey

also suggested that these people were

more than 1.2 million consumers.

Another study conducted by

Chadwick Martin Bailey, a



At present, the supply of rooms in the

industry has grown at 23%, while the

demand has been steady at 21% at an

average occupancy rate of 57%. To

make matters worse, untoward

incidents related to foreign tourists in

the country, especially women have

also affected foreign tourists arrivalsin recent months.

In times of slowdown, in comparison

with the hotel business, vacation

ownership businesses have been

doing well.

At present, Sterling Holidays Resorts

has been making losses on a

consolidated basis. Despite the fact

that the company has been making

losses, it has been able to reduce itslosses in the last one year by

streamlining of its operations and by

making timely strategic investments

by private equity investors.

At present, the size of the time-share

industry in India is `750 crore. In the

United States, the time-share industry

forms 2% of its travel and tourism

industry. Industry experts believe that

even if one assumes the share of

time-share industry in India to

become 1% of its travel and tourismindustry, it would turn out to be a

`3,800 crore industry. This shows the

potential growth of the vacation

ownership industry in the countrY.

EQUITIES | DERIVATIVES | COMMODITIES* | CURRENCY | MUTUAL FUNDS | IPOs | INSURANCE | DP# # #

QUALAT NIRMAL BANG, YOURE MORE THANJUST A BUSINESS ASSOCIATE,

YOURE AN EQUAL PARTNER.

Contact Person: Gaurav Mohta - 07738380299 & Nilesh Sonawane - 07738380027

Address: B-2, 301/302, 3rd Floor, Marathon Innova, O. G. K. Marg, Lower Parel (W), Mumbai - 400013.

BSE SEBI REGNNo. INB011072759, INF011072759& INE011072759, NSE SEBI REGNNo. INB230939139, INF230939139&INE230939139 DPSEBI REGN. No NSDL: IN-DP-NSDL-136-2000, CDS(I)l: IN-DP-CDSL-37-99, AMFI REGN. No. arn-49454NCDEX REGN. NO. 00362, FMCCode-0075, MCXREGN. No. 16590, FMC Code-MCX/TCM/CORP/0490, MCXSX-INE260939139, PMS-INP000002981

Disclaimer: Insuranceis a subject matterof solicitation. Mutual Fundinvestments aresubject to market risk. Please read thescheme-related document carefullybefore investing. Securityis subject tomarket risk. Pleasereadthe Dos and Donts prescribed byCommodity Exchangebefore trading. ThePMSService is not offeringfor commoditysegment. *ThroughNirmal BangCommodities Pvt. Ltd. #Distributors

Registered Offi ce: 38-B, Khatau Buildin g, 2nd Floor, Alkesh Dines h Mody Marg, Fort, Mumbai - 400 001. Tel: 39268600 / 8601; Fax: 39268610, Corporate Offic e: B-2, 301/302, 3rd Floor, Marathon Innova, Off Ganpatra o Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel.: 39268000 / 8001 Fax: 39268010

www.nirmalbang.com


28/51

The expos by online

magazine cobrapost.c

only highlights the ra

corruption in the ban

industry, with no one

showing the courage

the problem

FACEOFF




estimated that globally the yearly

damage attributed to money

laundering practices can range

between 2% and 5% of the global

GDP. The amount of loss in actual

terms maybe between $800 billion

and $2 trillion in a single year! In

India, official statistics state that theFinancial Intelligence Unit in India

has received a paltry number of

30,000 transactions that seem

suspicious in FY12.

In comparison to the size of the

banking industry in the country, this

number seems miniscule. What

makes it even more difficult to

believe is that we have strong and

resilient systems is a contradiction put

forth by another government agency,the Central Bureau of Investigation.

In the beginning of 2012, a senior

CBI official had revealed that Indians

have $500 billion of illicit money

stashed away in tax havens abroad.

One might argue that in a country full

of scamsters where a new scam is

unearthed every other day, this may

not be alarming and perhaps does not

impact retail customers of these banksdirectly, but that is akin to the ostrich

burying its head in the sand to run

away from a problem it is facing.

The truth is that when such reputed

financial institutions credibility is

under scrutiny, the retail investors

trust is breached and that is not a

happy situation to be in.

A PAPER TIGER?

How can one be at peace with the

thought that the bank one puts his

hard earned money in is party to

financial terrorism? Expectedly the

stock prices of banks named in the

expose tumbled between 1% and 4%

in single trading sessions as news of

the expose hit the market.

Unfortunately though, the response

by both the banking regulator as well

as the banks involved, was nothing

Documents

Beyond Market - Issue 81