Niveshak January 12

THE INVESTOR VOLUME 5 ISSUE 1 January 2012

Will the yen dream run come to an end?>> Pg. 08

is gold an investor’s paradise? pg. 20

Niveshak

AUDITORS

WATCH DOGS or BLOOD HOUNDS

Disclaimer: The views presented are the opinion/work of the individual author and The Finance Club of IIM Shillong bears no responsibility whatsoever.

F R O M E D I T O R ’ S D E S K

NiveshakVolume V

ISSUE IJanuary 2012

Faculty MentorProf. N. Sivasankaran

Editorial TeamAkanksha BehlAkhil Tandon

Chandan GuptaHarshali Damle

Kailash V. MadanNilkesh Patra

Rakesh Agarwal

Creative TeamAnuroop Bhanu

Venkata Abhiram M.

All images, design and artwork are copyright of

IIM Shillong Finance Club

©Finance ClubIndian Institute of Management

Shillong

www.iims-niveshak.com

THE TEAM

Dear Niveshaks,

2011 has not been very pleasant for the business world, as majority of both the developed and the developing nations have failed to experience rampant growth. Come 2012, we are again heading for a bumpy economy, and the harbin-gers of growth seem to be miles away.

The Euro Zone occupied the center-stage in the geo politics arena for almost the entire year. The repercussions of the debt of these countries have been felt by economies all across the globe. While the depth and duration of the slowdown in the European union being difficult to be quantifiable, a continued credit crunch, sovereign-debt problems, lack of competitiveness, and fiscal austerity imply serious problems. The United States, which was on the brink of another major slowdown in 2011, has of late shown signs of recovery, both in terms of output and employment.

The outlook for the developing economies doesn’t seem to be very encourag-ing. The South East Asian giants- India and china have been revising its growth objective from time to time, and growth in china has been curtailed to a single figure level. India has been battling with a low Industrial production and inflation in the latter half of the year, and the depreciation of the home currency has been a major concern.

However, with a spur in NRI deposits, owing to deregulation of NRI deposit rates, and the hefty selling of dollars by the reserve bank, the rupee has become is emerging…revise this sentence. The Industrial production data for the month of November has provided a ray of hope, and all the efforts of the government in combating inflation are finally bearing fruit. Amidst such a situation, the World Bank has slashed the world GDP growth forecast for 2012 to a paltry 2.50%, and 3.40% for 2013. Given the uncertainty prevailing, and importance of euro zone in international business, the future of euro will play be a major role in determining how the world economy will shape up in this year. Thus, the coming year will yet again test the mettle of our economists, financial analysts and business tycoons.

This issue brings to you an exclusive view on the credibility of accountants in the contemporary world. This issue also features an exclusive interview with Mr. Swapnil Dakshindas, a Senior Manager at one of the Big Four Audit firms. The article of the month throws light on the appreciation of yen, and this issue also features other articles on Gold as a lucrative investment, commodity markets and the viability of ‘Real Estate Investment Trusts’ as an investment avenue. The classroom section explains the concept of ‘Insider Trading’.

We would like to thank all the readers for their valuable articles, crossword entries and appreciation e-mails. It is only because of readers’ constant support and encouragement that Niveshak has been such a great success. On these closing thoughts, I on behalf of the entire team of Niveshak would like to wish you all a happy and unforgettable 2012.

Please send in your suggestions and feedback at [email protected] and as always, stay invested.

Team Niveshak

C O N T E N T S

Niveshak Times04 The Month That Was

Article of the month 08 Will the Yen dream run come to an end?

Cover Story

11 Auditors - Watchdogs or Bloodhounds?

Perspective 18 Commodity market: Prove your ‘metal’

Finsight

20 Is Gold an Investor’s paradise?

Fingyaan16 Assessing Real Estate Investment Trusts (REITs) as an investment

CLASSROOM23 Insider Trading

He speaketh 14 Mr. Swapnil Dakshindas

January 2012

FDI up by 56% and Indirect taxes collec-tion rises by 16.1% FDI in country went up to $2.53 billion in No-vember 2011 showing an impressive growth of around 56%. The cumulative flows for the April-November period reached $22.83 billion up by 62.81 per cent from $14.02 billion a year ago. The FDI for the current financial year is expected to cross the mark of $30 billion, far ahead of the $19.43 billion of FDI inflow for the last fiscal year. Services, housing and real estate, construction activities, computers and hardware, power and telecom are some of the sectors that see the maximum inflow of funds during this period.

Another good news came for the struggling In-dian Economy when the Chairman of Central Board of Excise and Customs ( CBEC) S K Goel an-nounced an impressive 16.1% growth in Indirect tax collection to Rs 2,85,787 crore during April-December against the collection of Rs 2,46,168 crore in the same period last year. The indi-rect tax collection in three quarters of 2011-12 is about 72.7 per cent of the Budget Estimates of Rs 3,92,908 crore, showing CBEC is well on track to meet the budget estimates this financial year.

Government modifies import duty struc-ture of gold and silver

As per notification by Government of India the import duty structure of gold and silver has been changed from specific to ad valorem with effect from 17th January,2012. The import duty on gold has been pegged at 2% on the value of gold as against the existing charge of Rs 300 per 10 grams while the same on silver has been changed to 6% of the value from the prevailing Rs 1500 a kg. The move is likely to curb exorbi-tant import of precious metals which has result-ed in huge outflow of dollar outside India. The

change is expected to rake in an additional Rs 600 crore for the exchequer during the remaining months of the fiscal as per Finance Ministry es-timates. “The old rates were fixed 4-5 years ago. In the last few years, prices have increased sub-stantially so the change has been made to bring duties in line with market prices,” said Central Board of Excise and Customs (CBEC) Chairman S K Goel. The decision is expected to fuel the prices of gold and silver in the market. The dia-monds also will now attract an import duty of 2% on the value.

Reliance Communications gets into $1.18 billion refinance deal with Chinese banksReliance Commu-nications said on 17-jan-2012 that it has secured loans from a host of Chinese banks including Industrial and Com-mercial Bank of China , China Development Bank Corp, Export Import Bank of China and other banks to refinance $1.18 billion worth of out-standing foreign currency convertible bonds of Rs 654 conversion price due for redemption on March 1. The maturity period of loan would be of seven years at interest cost of about 5 percent. The news has come as a relief to the Reliance Communications that has reported falling prof-its for eight straight quarters. The company is also in talks with various international giants to strike a deal for its tower business so as to repay its huge debt of around $ 6.5 billion.

China’s economy down to single digit growthChina’s economy has registered a single digit growth rate of 9.2 % as compared with the 10.4% growth in 2010. However it beats the govern-ment target of 8% growth rate. According to offi-cial projections the growth of economy is further expected to come down to around 8.5 per cent in 2012. Ma Jiantang, Chief of China National Bureau of Statistics (NBS), told the media that as per the preliminary statistics, China’s GDP reached 47.16 trillion yuan ($ 7.26 trillion) in 2011.

The Niveshak Times


IIM, ShillongTeam NIVESHAK

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Aviation Ministry to initiate the process of allowing foreign airlines to invest in the local aviation industryAviation Ministry said in a statement that it would soon initiate the process of opening up the Indian aviation sector for investment by the foreign airlines up to a stake of 49%.The foreign investors are allowed to invest up to 49% in the domestic airlines but foreign airlines are barred from the same. A meeting between Finance Min-ister Pranab Mukherjee and Civil Aviation Min-ister Ajit Singh in this regard also decided to release Rs 150 crore for payment of portion of pending salaries and allowances of Air India em-ployees, including pilots. The decision brings a relief to the cash strapping Indian airlines which are already under a huge debt and are expected to lose up to $3 billion in the fiscal year that ends in March.

Citigroup’s profits up by 6% from the pre-vious year

Citigroup posted a profit of $11.3 billion in 2011, 6% more than the previous year. The CEO of the company, Mr. Vikram Pandit, is very happy with the

solid performance of the company in 2011 and stated that the company has reached its key benchmarks in the consumer business segment. However, there was a sharp fall of 33% in the revenues of Citi’s asset management and bro-kerage business to $6.4 billion. The firm also reported fourth quarter earnings, which fell to $1.16 billion, down from $1.2 billion in the same period in 2010.

France Downgraded by S&P, Gold to strengthen there afterFrance, the second-biggest economy of the Euro-zone, can no longer boast about the AAA credit rating like Germany, which still retains it. S&P downgraded France’s credit rating by one notch to AA+. It stated that France’s unemployment rate was high, around 9%, due to its high gov-ernment debt and a rigid labor market. There is a possibility of another downgrade this year

or next if efforts at budget consolidation policy and organizational restructurings falter. France is trying to reduce around 1.7 trillion euros of debt. However, this downgrade would raise its borrow-ing costs at such a time. Higher costs could make the EFSF, which i s meant to prevent t h e credit contagion, less effective in stemming the euro crisis. However, there is a possibility that this downgrade of France may make people rush to the yellow metal again which could lead to higher prices of Gold. Financial planners have recommend investors hold 5-10% of their portfo-lio in gold as part of their asset allocation.

Investment proposals in India plunged 45%Investment proposals in India plunged 45 per cent to a five-year low in 2011 as companies ceased projects citing administrative disturbanc-es, a move which could deteriorate the growth in 2012. In 2011, the new investment proposals in the country stood at 10.46 trillion rupees as compared to 18.88 trillion rupees in 2010. Ac-cording to Prime Minister Manmohan Singh, In-dia’s economy is likely to grow at about 7 per cent this fiscal year, lower than the 7.5 per cent growth the government forecasted last month.

3rd consecutive week for negative food inflationFood inflation in India stood at – 0.42 per cent for the week ended January 7, 2012, remaining neg-ative for the third consecutive week. This was mainly due to fall in prices of onion and veg-etables. Onion prices fell by 75.42 per cent while potato prices were down by 23.48 per cent. Over-all vegetables’ prices went down by 45.81 per cent compare to the same period last year. How-ever, other food products became more expen-sive. Price of pulses went up by 14.27 per cent while for milk it grew by 11.48 per cent. Fruits and cereals also became more expensive on an annual basis. According to experts, the decline in food inflation will be a major incentive for the RBI to resort to the option of cutting key interest rates in the future.

The Niveshak Times

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© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

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MARKET CAP (IN RS. CR)BSE Mkt. Cap 58,91,508Index Full Mkt. Cap 28,31,879Index Free Float Mkt. Cap 13,86,220

CURRENCY RATESINR / 1 USD 50.39INR / 1 Euro 65.31INR / 100 Jap. YEN 65.27INR / 1 Pound Sterling 77.97

POLICY RATESBank Rate 6%Repo rate 8.50%Reverse Repo rate 7.50%

Market Snapshotwww.iims-niveshak.com

RESERVE RATIOSCRR 6%SLR 24%

LENDING / DEPOSIT RATESBase rate 10%-10.75%Deposit rate 8.5% - 9.25%

Source: www.bseindia.com www.nseindia.com

Source: www.bseindia.com

Source: www.bseindia.com22nd December 2011 to 20th January 2012

Data as on 20th January 2012

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arket Snapshot

BSEIndex Open Close % ChangeSensex 15,546 16,739 7.67%

MIDCAP 5,141 5,680 10.48%Smallcap 5,517 6,277 13.78%AUTO 8,019 8,819 9.98%BANKEX 9,353 10,912 16.67%CD 5,293 5,801 9.60%CG 7,974 9,807 22.99%FMCG 4,056 4,035 -0.52%Healthcare 5,822 6,169 5.96%IT 5,652 5,500 -2.69%METAL 9,457 11,198 18.41%OIL&GAS 7,879 8,325 5.66%POWER 1,776 2,078 17.00%PSU 6,345 7,227 13.90%REALTY 1,375 1,708 24.22%TECK 3,328 3,293 -1.05%


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Will the Japanese Yen dream run come to an end?

Here we talk of the most developed and the third largest economy of the world - Japan. There are vari-ous factors that govern the valuation of a currency ranging from the economic outlook, macroeconomic conditions and trade relations to political stability. The Japanese Yen has enjoyed a dream run from the period between mid 2007 to where the currency ap-preciated in general despite volatility in the process. Even though the economic indicators in were not in its favor ,from a low of around 120 , Yen has stabi-lized to about 78 at present(Fig. 1). Since the past 6 months, there has been speculation in the market that the Yen has reached its peak and owing to the grim economic conditions, the currency is bound to depreciate.

Japan is basically an export driven economy and hence due to the global financial crisis (2008), there was an overall drop in demand for the Japanese goods and the appreciated Yen made the exports too dear for the consumers abroad. This led to a

steep fall in the growth rate which went down to a low of -5% in the year 2010, indicating that the gross domestic output was shrinking (Fig. 2) .The fall in the growth rate led to a decrease in inflation (Fig. 3) which should have been a positive sign for a grow-ing economy but not so in the case of Japan as the currency deflated by 2-3 % in the 2009-10 and the economy contracted.

Till now, Japan had enjoyed a positive balance of trade but the appreciated Yen ensured that the Japa-nese exports plummeted as compared to the im-ports leading to an overall negative balance of trade of -684 Billion Yen ($8.7 billion) in 2011.

The overall contraction is also aided by the fact that the local manufacturers are setting up production plants outside for cheaper labor and lower costs of production. The industrial output was predicted to be –13% for the previous quarter and it was actually -7 %. The outwardly movement of the production houses aided the problem of high unemployment and low exports.

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Welingkar institute of ManageMent,MuMbai

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Will the

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Fig. 1: Relationship between yen and dollar (Jan 2007 to present)


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The natural rate of unemployment in Japan is 2.6% but it never went below 4 % in the previous years. To add to its woes, Japan has one of the world’s old-est populations and the working population of the country is predicted to decline over the next few de-cades. A continuously increasing population in the

age bracket of 55-64 is all set to enjoy pension and medical benefits leaving a huge void in the work force that cannot be sustained by the younger work force. Such a scenario also leads to a decrease in the domestic consumption and an increase in the government expenditure.

In such a grim economic outlook it was quite strange that the appreciation of Yen in the Forex markets continued unabated .A major reason could be that around the same time, the dollar was weakening

which could be attributed to the fact that US econ-omy suffered a severe recession post 2007 when its sub-prime crisis went to an unsustainable level. On the other hand, the Japanese Yen was perceived as a stable currency and became a safe haven for in-vestors, triggering its rise .The further appreciation

of the currency led to more investment in Yen by investors and speculators as it continued to yield positive results. Hence the appreciation of the Yen was more due to financial and speculative reasons than the country’s own economic outlook leading to the formation of a bubble around it.

Time seems to be literally running out for Japan as the debt to GDP ratio stands at 492%. Out of this, the sovereign debt contributes approximately 213% which is the highest in the world. The tax revenues

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Fig. 2: GDP growth rate of Japan from 1970 to present

Fig. 3: The decreasing inflation rate from July 2008 onwards

Fig. 4: Relationship between trade balance and current account Fig. 5: Ratios of overseas production

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generated by the government have been declining constantly in relation to the ever-increasing budget deficit .The reduction in revenue generation can be attributed to the rise of unemployment which is coupled by a variety of factors and the increase in the budget deficit is largely due to an increase in the government spending. The Tsunami on March 11, 2011 hit a massive blow to the already crippling economy, adding huge expenses for the government for the redevelopment work. The Japanese govern-ment also borrowed close to $2.87 billion from the Eurozone for the same.

Japan is already sitting on a pile of huge debts and the maturity amount for none of them is less than 40000 billion Yen ($512 billion) for the next 4 years till 2015.The biggest chunk of debts have to be paid in the year of 2011 amounting to 120000 yen ($1538 billion). Considering the huge foreign reserves of Ja-pan ($1.3 trillion) the repayment of the debt should not be a problem but at this stage the economy is sliding and the government is not able to generate more revenues due to factors ranging from unem-ployment, reduction in workforce, contracting ex-ports to increasing expenses and so on. If the similar situation continues and the gap between the budget deficit and revenues increases, the economy will keep becoming shakier. High debt is good for posi-tive economic times but when the economy takes a downturn the same is bound to turn into a major sore point.

The Japanese government has tried to intervene in the Forex markets to help the Yen depreciate but the effects were short lived. Hence the Bank of Japan re-cently announced an expanded asset purchase pro-gram (aka quantitative easing) that could raise the eyebrows of even the most liberal proponents of QE. The expanded program includes purchase of real es-tate investment trusts, exchange-traded funds and lower quality corporate bonds in order to facilitate some depreciation.

Thus, we see that the Japanese Yen has enjoyed an appreciated value for quite some time due to market and speculator sentiments in a volatile global situa-tion. Since the appreciation was not due to the high growth of the economy it was unnatural for the cur-rency to appreciate so strongly. All the above data strongly indicates that Japan is touted to face some tough economic times ahead and it really needs some real out of the box solutions in order to get out of this quagmire. The stabilization of the Yen shows that it has reached its peak and the specula-tors do not see any reason for further investment as they do not see the gains any further. Moreover, the strengthening of the dollar can accelerate Yen’s fall as the speculators would like to once again move to a safe haven. The depreciation of Yen would be a blessing for Japan as it is the only way it can expand its economy.

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Fig. 6: Unemployment rate in Japan

Fig. 7: Japan debt maturity timeline


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External Auditors•External Audit enables an auditor to express an opinion about the financial statements of the or-ganization

•They report to the Shareholders of the organiza-tion

•They are independent from the management of the organization

Need for an auditAudit helps the shareholders to understand if their investment is in safe hands. Not all inves-tors are financially literate and they need help to have a check on the financial performance of the company and hence arises the need for an audit. All companies are statutorily required to prepare and maintain accounts which are then scrutinized by the auditor who certifies them.

The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the finan-cial statements are prepared, in all material re-spects, in accordance with an applicable financial reporting framework. In the case of most general purpose frameworks, that opinion is based on whether the financial statements are presented fairly, in all material respects, or give a true and fair view in accordance with the framework.

The Audit report includes a paragraph mentioning the management responsibilities. The standard

Cover Story

teaM niveshakRakesh Agarwal & Harshali Damle

Auditing is an important tool that the sharehold-ers use to evaluate the operations and ensure the safety of their investment in a particular company. However, in the recent past, the effec-tiveness of this tool has been highly questioned. There is a need to understand the importance and limitations of auditing to better appreciate its requirement in the current scenario.

Auditing is the independent examination of fi-nancial information of any entity, whether profit oriented or not, and irrespective of its size or le-gal form, when such an examination is conducted with a view to expressing an opinion thereon.

Audit can be of various kinds. Some of them are

1)Internal Audit

2)External Audit

3)Tax Audit

There is a significant difference between Internal and External Audit.

Internal Auditors

•Internal Audit is conducted to add value and im-prove the organization’s operations

•Internal Auditors report to the Audit Committee formed by the Board of Directors or the manage-ment

•They are usually the employees of the organiza-tion, though the internal audit function can be outsourced too. There are limitations on the in-dependence of the internal auditors

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Some examples of these limitations can be: Use of sampling techniques by the auditor, controls being circumvented by collusion or inappropriate management override. Also auditors cannot com-ment on the propriety of the decisions taken by the management.

Duties of an auditorAn auditor is appointed by the shareholders of the company. Hence the auditor is liable to report to them in the form of an audit report. For this, it is the duty of the auditor to exercise adequate skills and competence and ensure independence during the process.

An auditor is required to obtain reasonable assur-ance about whether the financial statements as a whole are free from material misstatement, wheth-er due to fraud or error.

However, currently, the function and need of an audit is being questioned by investors. This is due to a rise in high profile scams in various compa-nies.

The Indian EnronThe Satyam scam perpetrated by B. Ramalinga Raju and his affiliates in January 2009 is considered the biggest Indian corporate scandal till date. It has recently come into the lime-light after the new owners of Satyam Computer Services, the Mahin-dra’s, have decided to file a suit against its former board of directors, employees and also the audit arm of PricewaterhouseCoopers in a Hyderabad court seeking damages for perpetrating the fraud. This brings into question the fiduciary responsi-bilities, obligations and responsibilities in per-formance of duties of the auditors. Both Satyam and PricewaterhouseCoopers are globally reputed firms. The auditors cannot hide under the standard clause “auditors can be watchdogs and not blood-hounds” especially when cash and bank balances have been overstated in such a large company.

A company is considered an entity distinct from its promoters. So, there is no reason why it cannot sue its promoter for perpetrating a fraud and let-ting the company bleed. The same holds true for the management team or even auditors who either collude with promoters, breach their fiduciary re-sponsibility or are negligent in their duties. The

content of an audit is: “Management is responsible for the preparation of these financial statements that give a true and fair view of the financial posi-tion, financial performance and cash flows of the Company”. This responsibility includes the design, implementation and maintenance of internal con-trol relevant to the preparation and presentation of the financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error. Auditors’ responsi-bility is to express an opinion on these financial statements based on their audit.

The key points to be noted here are:

1)Auditors give an opinion and no guarantee on the financial soundness of the company. The auditor is not an advisor to the company or to the sharehold-ers of the company.

2)Materiality is an important consideration in the opinion. This means that the auditors can choose to ignore immaterial facts. Materiality will be de-fined as something that will have an impact on the decision making of the users of the financial statements.

3)The opinion is on the true and fair view. This can be clearly differentiated from the correctness ele-ment.

4)Reasonable assurance is not an absolute level of assurance, because there are inherent limitations of an audit which result in most of the audit evi-dence on which the auditor draws conclusions and bases the auditor’s opinion being persuasive rather than conclusive.

Inherent Limitations of an AuditThe auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain ab-solute assurance that the financial statements are free from material misstatement due to fraud or error. This is because there are inherent limitations of an audit. Most of the audit evidence which the auditor draws conclusions and bases the auditor’s opinion on is persuasive rather than conclusive. The inherent limitations of an audit arise from

• The nature of financial reporting

• The nature of audit procedures and

• The need for the audit to be conducted within a reasonable period of time and at a reason-able cost.

It took nearly three years for the Institute of Chartered Accountants of India (ICAI) to finally come out with its findings on those guilty of perpetrating the Satyam scam


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of not conducting proper due diligence while Tal-luri Srinivas, former partner of PricewaterhouseC-oopers (PwC), then statutory auditors of Satyam has been held guilty for not complying with profes-sional standards. The role of Satyam internal audi-tor Prabhakar Gupta and S Gopalakrishnan, former partner of PwC, is still under scrutiny while two chartered accountants of Lovelock & Lewes have been charged with a Rs 5 lakh penalty each for gross negligence in carrying out the statutory audit of Satyam and have been barred permanently from the register of members.

RolesFor a publicly listed firm, the shareholders of a company place very high reliance on the auditor’s report, which apparently shows the true and fair view of the accounts of a company. Hence, it is of utmost importance that the auditors per-form their duties with care and vigilance to ensure that there are no illegal or improper transactions; and any wrong-doing is transparently reported to the people at large who have invested their hard earned money to become a part of the company.

ConclusionIn scams like this, all the parties involved invari-ably suffer incredible loss in terms of losses in customers as well as significant reputational loss. Hence, it becomes the responsibility of both the auditors and the company management to ensure that the audit protocols and guidance lines are fol-lowed diligently without fail. The role of the ICAI and other regulatory bodies should not be confined to just punishing auditors in case they fail to dis-charge their duty, but they should also re-examine the present system to strengthen and intensify the internal audit system. There is a need to maintain high standards of integrity to ensure safeguarding the interests of the investors. Also it is the need of the hour to strengthen the regulatory framework of the operations of the companies.

culpability of the audit firm, as opposed to that of the partner in charge of the audit, is far less obvious. Despite this, the image of Satyam’s statu-tory auditors, PricewaterhouseCoopers has been tarnished, as voices are being raised at the pos-sibility that the auditors were complicit with the conspirators in the multi-crore scam.

On the other hand, the auditors feel that the case filed by Mahindra Satyam is merely an attempt to shift the responsibility of the fraud that was delib-erately concealed under the direction of Satyam’s own management to the auditors. So, Price Wa-terhouse has also filed a case against Mahindra Satyam, countering the latter’s charges. Agreed, it has the right to seek legal remedy and has several precedents in the West. An example is Arthur An-dersen that agreed, without accepting any wrong-doing on its part, to pay damages to Enron Corp creditors to settle charges that the accounting firm was negligent in auditing and advising the energy trader that became bankrupt in 2001.

Specific PenaltiesUS regulators actionsA joint penalty of USD 17.5 billion was imposed by US regulator Securities Exchange Commission in April, 2011 on Satyam Computers, PriceWaterhouse India and affiliated auditors for manipulating ac-counts for several years. Satyam agreed to pay a fine of USD 10 million towards settlement of charg-es while PriceWaterhouse India settled its charges of conducting “deficient audits of the company’s financial statements and enabling a massive ac-counting fraud to go undetected for several years” by paying USD 6 million. For violations of PCAOB rules and standards in relation to the Satyam audit engagement, Lovelock & Lewes and Price Water-house Bangalore agreed to pay the Public Com-pany Accounting Oversight Board (PCAOB) a USD 1.5 million penalty in settlement of the charges.

Indian regulators actions

It took nearly three years for the Institute of Char-tered Accountants of India (ICAI) to finally come out with its findings on those guilty of perpetrating the Satyam scam. According to the findings of ICAI, Vadlamani Srinivas, erstwhile chief financial officer (CFO) of Satyam Computers has been found guilty

The role of the ICAI and other regulatory bodies should not be confined to just punishing auditors in case they fail to discharge their duty, but they should also re-examine the present system to strengthen and

intensify the internal audit system

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Mr. Swapnil Dakshindas, Char-tered Accountant, in a candid discus-

sion with Team Niveshak talks

about the regula-tory framework,

current audit pro-cedures, impact of IFRS and the

changes required

Niveshak: as aN auditor with aN ex-perieNce iN auditiNg for 10 years, do you thiNk the curreNt regulatioNs are sufficieNt with regards the safeguard-iNg the iNterests of the iNvestors?

Mr. DakshinDas: Regulations will only be effective if they are implemented in the letter and spirit. If we see the his-tory of frauds / scams, we can note that it was not insufficient regulations which were solely responsible. Regu-lations on its own cannot ensure fair reporting from corporates, fraudsters find a way around the regulations and would continue to do so. To safe-guard the interests of investors an orchestrated effort is required from the management and the auditors. Changes to legislations would contin-ue to be made as they are an effort to improve the legislation and incor-porate the changing environment. In my opinion, the current regulations are sufficient to safeguard the inter-ests of the investors if followed in the right spirit.

Niveshak: what are your suggestioNs for improviNg the regulatory frame-work to iNcrease the efficieNcy aNd effectiveNess of audits?

Mr. DakshinDas: I feel that one of the most important improvement oppor-tunity is that the regulations should ensure that the auditors are acting

independently and without any pres-sure in performing their duties effec-tively. The current Companies Bill pro-poses rotation of Auditors after certain period of time. I feel that this change is a good move towards increasing the efficiency and effectiveness of audits. Also regulations have to keep pace with the changing business environ-ment. Legislators have to play an ac-tive role in understanding the way in which corporates operate. In order to improve efficiency and effectiveness of audits, the auditors too are required to keep up with the changes in business by adopting more robust audit pro-cedures. Auditors have to gear them-selves up with the necessary tools in order to perform an effective audit.

Niveshak: what will be your advice to iNvestors iNvestiNg based oN the audi-tors opiNioN of the compaNy?

Mr. DakshinDas: In today’s era, investors have to look further than only the fi-nancial statements. There is no denial that the financial statements reflect on the position of the company, but investors are impacted by the future performance of the company which is based on an array of factors. But it does not mean that the investors shy away from the auditor’s report and the financial statements. One bad apple should not deter us from having apples at all!

Mr. Swapnil Dakshindassenior Manager in one of the big 4 audit firMs

Mr. Swapnil Dakshindas is a Senior Manager at one of the Big Four Audit firms in the Audit and Assurance Department. He is a Chartered Accountant with over 10 years of work experience in the field of auditing. He has worked as an auditor of both public and private companies across various sectors.


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agemeNt of a compaNy?

Mr. DakshinDas: Manipulation is possible where there is a judgment involved. Hence, Management Estimates is one of the financial statement areas which is most prone to manipulation.

Niveshak: what are the iNdicators that oNe must look out for to ideNtify such poteNtial maNipula-tioNs?

Mr. DakshinDas: Indicators can be: excessive pres-sures on management from sources outside or inside the entity to achieve an expected and perhaps unrealistic earnings target or financial outcome- particularly when the consequences to management for failing to meet these goals can be significant, history of the management, unusu-al changes to such estimates, aggressive use of estimates, etc.

Niveshak: how will the implemeNtatioN of ifrs impact fiNaNcial statemeNts? would the profit figures aNd other fiNaNcial statemeNt elemeNts be affected very sigNificaNtly from it?

Mr. DakshinDas: The implementation of IFRS will in-volve a new way of thinking about accounting and financial reporting. This new way of thinking plac-es greater emphasis on interpretation and appli-cation of principles- with a particular focus on the substance and underlying economics of a transac-tion, and on transparency of financial information. Adopting IFRS is not simply a policy change; it is a business change.

These standards bring about many new accounting concepts and requirements that will significantly affect the way entities account for and report their results. For e.g. Financial instruments which were reported as off Balance Sheet items will now have to be fair valued at each reporting date and ac-counted for based on their classification.

Niveshak: do you thiNk high level maNagemeNt frauds caN be detected usiNg the Normal audit pro-cedures?

Mr. DakshinDas: Statutory audits were not designed in a manner to detect frauds. Auditors were al-ways considered as a watch dog and not a blood-hound. But this perception is fast changing now and the investors expect a lot more from the audi-tors. An auditor is expected to perform assess-ment of existence of frauds based on a variety of factors. In case, the auditor comes across in-dicators of frauds, the audit procedures are then designed to cover these fraud risks. In order to detect high level management frauds, the audi-tors are expected to exercise a high level of pro-fessional skepticism. Performing normal audit procedure help in identifying indicators of fraud, but do not detect fraud in itself.

Niveshak: how do you rate the effectiveNess of iNterNal audits iN compaNies?

Mr. DakshinDas: Internal Audit is an independent agency that can be engaged by the management /Board of Directors to ensure safeguarding of as-sets, improve efficiency/effectiveness of opera-tions and ensure compliance for the applicable statutes/policies developed by the company. In-ternal auditors do a more focused audit on the operations and processes of a company. But in India, Internal audits reap little results, as the In-ternal Auditor reports to the management only. So, if the management does not take appropriate action on matters highlighted by internal auditor, then it loses its effectiveness. So again, internal audit in itself cannot said to be effective or inef-fective. It is the joint effort of the internal auditor and the management which results in an efficient and effective audit.

Niveshak: do you thiNk aN iNcrease iN the scope of the audit will iNcrease its effectiveNess? (eg. com-meNt oN propriety of maNagemeNt decisioNs, etc.)

Mr. DakshinDas: Increasing scope is not the answer to increasing effectiveness of audits. The current scope of audits are robust enough to ensure ef-ficient audit. The only need is to get equipped adequately and follow the required procedures diligently.

Niveshak: what are the fiNaNcial statemeNt areas that are most proNe to maNipulatioN by the maN-

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the perception that REITs could serve as a hedge in the event of either an economic crisis or inflation makes REIT an excellent opportunity to invest.

Overall, the market can be classified by offering four different types of REITs:

1)Equity trusts where the assets are invested in own-erships claims to various types of properties like, e.g. residential, commercial or industrial property

2)Mortgage trusts where the assets are invested in claims where interest is the main source of income like for example mortgages

3)Hybrid trusts that invest in both equity and mort-gages, offering the advantage of offsetting interest income against depreciation of the property

4)Specialized trusts that invest for example in devel-opment and construction or are involved in sale and lease-back arrangements

Past studies have presented mixed evidence on the relationship between stock returns and REIT returns. Studying the magnitudes simultaneously would en-able us to draw inferences for both private and public policy purposes. For instance, private portfolio man-agers would be interested in learning how sensitive REIT returns are to stock market movements in order to improve the risk management of their real estate portfolios and/or also see whether mixing real estate assets with a general market portfolio would offer better risk/return opportunities. Also, official policy-makers (i.e. monetary authorities) would be inter-ested in seeing how changes in interest rates affect REIT performance.

Over the last few years the real estate sec-tor has had an excellent performance. Fuelled by in-creasing prices, higher rents and government spend-ing more on infrastructure projects the real estate industry has been delivering very high returns, out-performing global equity markets most of the time. In 2008-2009, the sub-prime crisis had a significant impact on REITs but as soon as global market re-covered, REITs again yielded significant returns over equity and other investment options. In addition, RE-ITs are an attractive option for both institutional and private investors. REITs not only provide access to the real estate market, but are also a liquid investment alternative.

Alpha is a measure of an assets risk relative to the overall market. It reflects the difference between an assets actual performance and the performance expected based on risk level taken by the fund’s manager. A fund that produced the expected return for the level of risk assumed has an Alpha of zero. A positive Alpha shows that the manager produced a return greater than expected for the risk taken. A negative Alpha indicates that the manager has produced a return smaller than expected relative to the risk taken.

In the last decade, the market for real estate invest-ment trusts (REITS) has shown substantial growth rates. REITS were originally a tax design for cor-porations investing in real estate assets in order to reduce or eliminate the corporate income tax. Overall, the REIT structure was designed to provide a somehow similar vehicle for investments in real estate markets as mutual funds provide for invest-ments in stocks. For instance, Australian real estate investment trusts (AREITS) are a unitized portfolio of property assets, listed on the Australian stock ex-change, which allow investors to purchase a share in a diversified and professionally managed portfo-lio of real estate.

According to 2011 Australian REIT Survey conducted by (BDO Corporate Finance) the top 40 REITs in Aus-tralia had assets of $148 billion as of June 30, 2011. It excluded entities with a market capitalisation less than $10 million.

In the US, REITs gained 28.0% on a total-return basis during 2010 much higher than the S&P 500 (+14.8%). Fundamentals are clearly improving across the space, and REIT displayed high positive alpha. Also,

ASSESSING REAL ESTATE INVESTMENT TRUSTS (REITs) AS AN INVESTMENT

sChMrd PuneAbishek Sharma & Amit Sharma

Fig. 1: REITs, S&P 500, NASDAQ future predictions


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Double-Dip Recession:If in future the economy slows down rapidly and GDP growth turns negative again, the capital mar-kets could become more volatile, and valuations could fall. In particular, a double-dip recession driven by weakness in the housing market (par-ticularly in the US) could raise questions again about the financial system and shut off capital availability for the REIT sector, resulting in a sell-off.

Tail Risks: There are currently a number of tail risks—outcomes that rarely can happen but that may have strong negative effects were they to oc-cur—facing the capital markets as we look out into 2011. Generally macro in nature, these could still end up impacting the REIT space via fund flows, macro-economic changes, or monetary policy.

Methodology and data S&P 500 Index is a ba-rometer to measure the US stock market health and growth. Also, the REIT index gives us data on returns through investment in real estate. We have compared percentage changes of respective indices with each other by forming a regression model based on recent data. Data for both the indices has been collected for the last year on a daily basis. The regression model provides us with mathematical evidence proving that REIT retains a positive alpha against stock indices. A similar ap-proach has been applied for the Australian REIT.

Data and preliminary statistical resultsThe data sample contains daily observations that combine the following variables. For the four cat-egories of REITs namely equity, mortgage, hybrid and composite we obtained the total index re-turn. The sample’s period is from December 2010 to December 2011 and the main source is Bloom-berg. The other variables are the S&P 500 continu-ously compounded returns and the growth rate of industrial production. Industrial production is a proxy for real economic activity.

As there are different REIT structures in different economies, we have performed regression on last one year data of both Australia and the US.

To validate our research that REIT seeks positive alpha against the S&P500 index, we collected data for REIT index and S&P500 for the past year on a daily basis. Thereafter, daily percentage change for each of the two indices was calculated. Then, regression was performed on the collected data using Excel 2007.

Results showed that the two indices share a good correlation. The regression model explains 99% of the deviation in the data. Further, regression mod-el shows that returns on REIT are over and above S&P500 index (positive Alpha) which implies that gains over and above natural returns on REIT are higher as compared to S&P500. Herein is a great investment opportunity. However in this case, Al-pha is considerably too small as we are focussing on return on daily basis. If on such a short term REIT can give a positive Alpha over and access of returns, it gives investors better portfolio op-tion if they invest on REITs. Further if we find out Alpha for long term, it is significant enough to attract the investors over equity market. With the calculations and empirical data, we have reached to calculation that REIT can yield much higher re-turns in this economic scenario where nations are spending hugely on their infrastructure.

Hence, we conclude that REIT’s all over the world have performed well even in the face economic adversity which makes it a high gain proposition for investors.

Table 1: Results for regression analysis - REIT (Australia) & S&P500 stock index. (daily percentage change)

Regression statistics

Multiple R 0.745

R square 0.559

Adjusted R square 0.557

Standard Error 0.789

Observations 251

Y=0.0213+.73X

coefficients

Intercept 0.021

X Variable 1 0.727

Regression statistics

Multiple R 0.905

R square 0.820

Adjusted R square 0.820

Standard Error 0.795

Observations 255

Y=0.034+1.17X

coefficients

Intercept 0.034

X Variable 1 1.17

Table 2: Results for regression analysis - REIT index (US) & S&P500 stock index. (daily percentage change)

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Trading in commodities has been an attractive investing medium for many people in recent past. Commodities on MCX, NCDEX and other trading platform have seen a tremendous in-crease in trading volume. The items that are be-ing traded in commodity market varies from oil seeds to food grains to metals and Iron & steel. We have concentrated on metals as it seems to be more promising and lucrative in commodity market.The metal section in commodities especially has outperformed the market. The metal index value can be compared through following table.Current ScenarioIt is evident from the table below that the future price of MCXMETAL index raised very sharply ev-ery year from 2008 till date. The future price increase shows that the there has been a trend of more trading in metals in commodity market in particular.As the volume traded increased every year so did the spot price of the metal index. This trend clearly indicates a sign of higher interest of trad-ers in commodity market and that too in metals.The return has been huge on the investments made in metal section in commodity market.This trend also indicates that the demand of metals has increased significantly in recent past and is likely to continue in future.The four most traded metals on MCX are Cop-per, Zinc, Lead, and Aluminium. The table below shows the volume traded from March 2008 to March 2011. The CAGR shown is the compound-ed annual growth in volume traded. Copper has a CAGR of 32.67%. Aluminium is 16.99% and Lead is 57.46%

Year(As on 1st June) Future price(Rs.)(MCX-METAL)

2008-09 2185.3

2009-10 3260

2010-11 4266

2011-12 4733

The increase in traded volume shows that the general demand for these metals has increased. These metals have a growth because its utility as a product has increased. For example there has been a high demand in industries like bat-teries and infrastructure. These industries de-pend on the general demand and availability of these metals. So as these industries prosper so does the metals.Comparison of price movement of few metals vis-a-vis Sensex:

As graph shows Sensex is fairly negatively cor-related with Lead and Zinc. It offers option to diversify the portfolio besides bullion.Future ProspectsAs we have seen that these metals have attract-ed a lot of investors to bet on them. The Metal index has risen up to the historical high. There is lot more to come for the metals in particular for the commodity market which will lure more investors to invest in commodity market as the liquidity of commodity market has increased. The higher liquidity resembles higher opportu-nity to make money in market.The commodity market will bring about a new change in investors thinking. Government plays a major role in this market. As some of the gov-ernment policies and regulations bring about a whole new prospect to the industry, so does it affects the commodity market.Few regulations and projects such as National Highway Authority of India have lead to an im-mense rise in the metal demands. When such

sibM bangaloreAshish Kumar & Tejas Ghargec

Commodity market:

Table 1:Metal index value table (Future price)

Prove your ‘metal’


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projects are undertaken, there is rise in demand of metals which leads to rise in the prices of metals as such. Such type of scenarios will at-tract investors because they know that the fluc-tuations of the spot prices of these metals will be high. The liquidity will also increase which again will give a positive vibe to the investors to make money by investing in commodity mar-ket. The rural electrification corporation limited has shown an increase in the demand of copper tubes for electrification purposes and which will grow as the day passes. There are certain areas where government has taken steps to improve the existing conditions, few of them being infrastructure, electricity, automobiles etc. As an investor one needs to understand that as long as India grows, so will the need for infrastructure and automobiles. The future demand for the metals will obviously increase which will give a boost in trading of metals in commodity market.Analysis of important metals:Zinc:About 47 % of Zinc produced worldwide is con-sumed by Galvanizing industry. Galvanizing in-dustry is located mainly in China. Since China has the largest manufacturing sector in world. Galvanizing is complementing industry to man-ufacturing. Due to low demand worldwide, Zinc prices have declined from $2500/ton to $1900/ton.

The International Lead and Zinc Study Group (ILZSG) reported that Zinc markets were in a 308000 tonne surplus in the first eight months of 2011, primarily due to increased mine pro-duction. Since supply exceeding demand Zinc prices are likely to remain weak in 2012.Aluminum: Total Aluminum Industrial consumption data shows that Transport, Packaging and construc-tion industry account for 26%, 22% and 22% of total consumption respectively.Transport contributes nearly to 6% of India’s GDP. India is sixth largest vehicle manufacturer of world. The industry grows at 16-18 %. With 7 million units, it is projected to overtake Japan,

Germany and Korea by 2017. Construction in-dustry contributes nearly about 8 % of GDP. This industry is growing at the CAGR of 20% for the last 5 years. Indian packaging industry is grow-ing 15 % year on year. Copper: Copper is mainly used in electrical/electronics industry (42%) followed by construction (28%) and transportation (12%). Worldwide electric-ity is not penetrated in developing and under developed nations. There is large scale electri-fication programmes carried out by nations in-cluding India. India wants to increase electricity capacity addition by 100 GW from 2012 to 2017 which is half of the present electricity capacity of nation. Thus copper and Aluminium prices will be rising in coming years.Lead: Batteries are the main driver of lead worldwide demand. About 71% of lead produced is con-sumed by battery production. Lead acid bat-tery is used in automobiles, inverters and UPS. Therefore the lead demand depends heavily on Automobile, computer and domestic inverter industry. Demand in automobile, inverter and UPS is dwindling due to global slowdown. Lead seems to show decline in prices for short term, but it has boom for long term.ConclusionAccording to recent analysis and reports, share-holders in equity market have eroded their wealth by more than 20% in last one year. As the Indian market for equities has taken a major hit due to European woes and unstable US econ-omies, people are reluctant to invest in equities. The much safer and profitable investment ahead lies in commodity market because of the ease of monetary policies in some major economies like China and regulations by Indian government. Moreover being a developing and emerging mar-ket in infrastructure, FIIs see India as a lucrative market. Their investment will surge the demand for metals which in turn will lead to better liquid-ity and better ROI for investors. Hence, it’s time for Indian investors to be metalistic !!.

Volume traded2008-09

(30th march)2009-10

(30th march)2010-11

(30th march)2011-12

(30th march)CAGR

Copper 1007753 2175657 2706875 3122346 32.67%

Aluminium 13706 12510 16547 25678 16.99%

Zinc 323656 208772 257899 273429 -4.12%

Lead 110436 130344 578649 678937 57.46%

Table 2:Metal index value table (Volume traded & CAGR)

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Gold has emerged as one of the most reliable and stable Investment avenue for most of the investors who otherwise are finding it difficult to save themselves from huge losses because of the falling stock mar-kets, rising unemploy-ment and falling GDP’s, Low correlation with other asset classes like equity and debt makes it less volatile than oth-er commodity prices and thus a good asset to diversify the overall portfolio. However inves-tors must be very care-ful while parking their funds in Gold because as the world economy turns stable, gold prices languish, as happened in the 1980s to 1990s.

with other asset classes like equity and debt thereby a good asset to di-versify the overall portfolio. If had in-vested $10,000 in January 2001, your 37.81 ounces of the precious metal would have been worth more than $69,000 by September 1, 2011.

As per the current status (January 18, 2012) the price of gold is Rs 27584/10g. The centre has raised import and ex-cise duties on gold and silver hoping to mop up Rs 600 Cr more and con-tain current account deficit. Raising import duty on gold to 2% of value from Rs 300 per 10 grams to Rs 540 per 10 grams as per the current price. It could slow imports thus reducing dollar demand and strengthening the rupee.As it is clearly visible from the chart, there has been a considerable in-crease in the prices of gold over the

Hats off to the little yellow metal which has managed to outshine the millions of other investment options available today. With global economy downsizing and inflation rising, un-employment reaching the maximum level, and stock markets putting all their efforts to terrorize the investors, gold appears to be the “The Silver Lining” to the millions of investors around the world, be it in the form of bullion, gold certificates, mining-shares, derivatives, ETFs or even jew-ellery.

Gold has emerged as one of the most liquid and stable assets for invest-ment purposes. During last two years, when all the asset classes have failed to perform, gold is the only invest-ible asset that has remained upbeat. Gold is a hedge against the dollar and inflation. It has a very low correlation

iift, neW delhi

Harsh Bhatia

Is Gold an Investor’s paradise?

Fig. 1: Gold vs. Stocks since 1998


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last 15 years (from 1996-2011). Last 2 years have shown an increase of more than 100%! Such trends fuel more demand for gold, which, com-bined with limited production and supply, drive prices even higher in a kind of cycle.

E-gold on the Financial Technologies-promoted National Spot Exchange (NSEL) outperformed other gold investment avenues in 2010, due to the least transaction, brokerage and deliv-ery costs compared to other options. Spot gold gave slightly higher returns, but given the risk involved in holding physical gold, many inves-tors preferred to invest in e-gold. E-gold has of-fered 23.64 per cent return since its launch in March last year. Other options, including MCX Gold Futures, have offered comparatively less, with Gold BeES and Reliance Gold ETF posting 17.98 per cent and 17.82 per cent returns, re-spectively. E-gold was launched in April 2010 for investment by small investors who could not buy in bulk.

It also helps in diversifying an investor’s port-folio as it usually tends to progress opposite the stock market. Traditional options, such as bonds, property and hedge funds often fail to handle the market panic, and may sell off with equities in times of uncertainty. Gold is subject to market risk, but many of the downside risks associated with its price is different to the risks associated with other assets. This enhances gold’s attractiveness as a portfolio diversifier. The more volatile an asset, usually the riskier it is. The gold price is typically less volatile than other commodity prices. Portfolios consisting of gold may leverage this uncertainty and would

be able to with-stand catastrophic economic situations.

Gold also enjoys a tax-free life in countries such as UK, where gold coins like Sovereigns and Bri-tannia’s are viewed as currency and so are ex-empted from VAT.

Plus, since the increase in value of gold has not been derived by work, it is not an income, thus there is no income tax either. Silver & other pre-cious metals do not enjoy the same luxury.

Gold enjoys psychological appeal. 4000 years after its discovery, it is still perceived as one of the most precious metals. This means that even during times of crisis, market failures and government defaults, gold is likely to retain its value unlike other investment options. This makes gold one of the safest collaterals for the financers to count upon, enabling them to lend money without much hesitation. Also it is not tied to any issuer’s liability unlike bonds, but is entirely the investor’s asset.

Gold is perceived as “The World’s Frightened Bunny”. Whenever the economy signals signs of depression and downturn, the demand for gold has increased. During crisis, people fear that their investment options would be nega-tively influenced and would not provide them with necessary funds hence they see gold as an asset which will always buy bread. When Lehm-an Brothers declared bankruptcy in September 2008, the prices of Gold rose by 27% from $728 per ounce to $922 in a matter of three days.

Gold is also used to protect the economy from rising inflation by controlling the country’s cur-

Table. 1: 10 gms of GOLD PRICE History for the last 86 years

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rency against fluctuating dollar. It is inversely related with dollar, i.e. when the dollar weak-ens, the price of gold will rise. Many currency traders treat gold as the 4th global currency, af-ter Dollar, Yen and Euro. The European demand for gold comes mainly from German and Swiss investors because of concerns over public debt in the Euro zone and the potential inflation-ary impact of the European Central Bank’s an-nouncement of the $1 trillion rescue package to purchase Euro zone government bonds to ad-dress the Greek debt crisis.

Although gold is a great hedge in this risky time, the problem is that it is just – a hedge – and so when times are good for the economy, invest-ments in gold can take a downhill path. Gold is today viewed as a safety-net against politi-cal and economic uncertainties, and its demand is high today only in such circumstances. But when world economy turns stable, gold prices languish, as it happened in the 1980s to 1990s. This is why it has been suggested that “inves-tors should hold no more than 15% of their as-sets in gold, and they should buy only when the price dips because the price of the metal is historically high.”

Gold has the advantage of being the most eas-ily comprehensible investment to the average investor, considering that its value is set on an open market. As Market watch noted, “Gold is what a real bull market looks like”. Gold is under-valued, under-owned and under-appreci-ated. The supply/demand balance in gold is be-coming increasingly tight. And although interim volatility cannot be ruled out, gold prices are likely to trade higher. It is most assuredly not well understood by most investors. At the be-ginning of the 1970’s when gold was about to undertake its historic move from $35 to $800 per ounce in the succeeding ten years, the same observations would have been valid. The only difference this time is that the fundamentals for gold are actually better. Under such circum-stances, the future of gold seems quite ‘golden’ indeed. Thus, holding Gold in your portfolio isn’t advisable...it’s a must!!!

Long live the king of all investments!

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FIN-Q SolutionsDecember 2011

1. Operation Twist

2. 159th meeting of OPEC

3. Cuba

4. UTI

5. Pranab Mukharjee, Subbarao

6. Cost per click

7. Dual Aspect Concept

8. Parimal D. Nath-wani

9. Sage Peachtree Complete Accounting

10. Round trip trading


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Sir, is insider trading a serious offence for which Rajat Gupta, the 1st Indian born global CEO of an MNC, is charged by Securi-ties Exchange Commission (SEC)?

Yes, because he used information to make money that should have been kept confidential, i.e insider trading.

Sir, Can you tell me more about in-sider trading?

Insider trading is trading in stocks, bonds or securities of a corporation by an individual who has non-public information about the corporation. The insider here is an individual who can be company’s direc-

tor, officer, large shareholder, etc. In USA and Germany, it is required that these insiders report their trading to the regulator or disclose it publicly, within a few days of business trading cycle.

So, how can it be illegal?

It can be illegal, if the insider uses the material information that is still not dis-closed to the public. If he shares this infor-mation with anybody, who can use this to an advantage over other investors and thus

makes profits, or saves himself from losses, then it’s illegal.

Sir, can you give an example?

When Rajat Gupta gave information to Raj Rajaratnam, the founder of Galleon funds, about Berkshire Hathaway’s investment of $5 billion in Goldman Sachs, just after attend-

ing the board meeting of Goldman Sachs(which was a day before it was made public), it was illegal. From

this information Galleon group and Gupta benefitted, which was a loss for other investors.

I got it, but can insider trading be legal?

It is legal, if insiders will trade after the material information is public or as per SEC in USA. If insiders have a legal contract that allows them to trade in fu-

ture, than it’s not illegal and is called affirmative defence. In this scenario, the insider has no direct advantage over other investors. Still regulatory bod-ies want such insider trading to be reported.

Then, we should always invest or trade following the trading patterns of insiders.

Yes, to some extent we may, as in-siders know about their company’s posi-tion better than what has been disclosed to public. For example, a Chief Financial

Officer knows the financial health of his company better that what is being reported to public. So to follow the CFO’s footsteps will be wiser. But, if insid-ers are using it as a strategy to trap investors, even though they know company in future will not do as expected, then you are in a problem because you stand a chance of losing your investment.

Oh I see. Just one last question sir. In India if I adopt such unethical ways to create money, can I be traced?

Definitely yes. SEBI is a vigilant watchdog. It compares the financial re-ports of corporates with that of auditors like PwC, E&Y, etc. and in case of collusion

of reports strict action is initiated.

Thank you, Sir. Now, I have some idea about insider trading.

CLASSROOMFinFunda

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INSIDER TRADING

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lassroomIIM Shillong Rameswar Misra

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F I N - Q1. Pachmarhi, located in X District of Madhya Pradesh is the only hill station in

the state. X is very important with regards to the Indian Financial System. Identify X’s claim to fame.

2. This term is used extensively in newspaper reports today. It shot into promi-nence after X (newspaper) published it after the Watergate scandal in 1973. Identify the term and X.

3. X is a non-tradable, non interest paying financial instrument which protects employers against fraudulent actions of their employees. Identify X.

4. Company X founded by Y got its fourth round of funding recently from Gen-eral Atlantic and Sequoia Capital. This funding is one of the biggest in pure-play analytics. Identify X and Y.

5. . X was set up with the help of Y and presently has 2 stocks listed in it with a total market capitalization of $0.7bn. Identify X and Y.

6. DSP Merill Lynch has a very important first to its name in the Indian Context. Name it.

7. Some of the tactics used in XY, also known as Z are closed-door meetings with bank directors, increased severity of inspections, appeals to community spirit, or vague threats. It is usually done by an authority like the Federal Reserve. Identify X, Y and Z.

8. Connect. (Hint: International trade term)

9. X publicly listed its shares in 2005 through an IPO and immediately spun off X Capital Markets and X Alternative Investments. X is presently one of the advisors of Y, which recently filed for bankruptcy protection. Identify X and Y.

10. Some of the stocks in this investor’s portfolio include Aptech, Lupin, Nagar-juna Construction and Karur Vysya Bank. He recently exited Pantaloon Retail com-pletely. He is sometimes referred to as India’s Warren Buffett. Identify him.

All entries should be mailed at [email protected] by 6h February, 2012 23:59 hrs One lucky winner will receive cash prize of Rs. 500/-

Article of the MonthPrize - INR 1000/-

Akanksha Kumar & Jaideep Singh Gaur Welingkar institute of Management, Mumbai

W I N N E R S

A N N O U N C E M E N T SALL ARE INVITED

Team Niveshak invite articles from B-Schools all across India. We are looking for original articles related to finance & economics. Students can also contribute puz-zles and jokes related to finance & economics. References should be cited wherever necessary. The best article will be featured as the “Article of the Month” and would be awarded cash prize of Rs.1000/-

Instructions » Please email your article with the file name and the subject as <Title of the

Article>_<Institute Name>_<Author’s name/Group’s name> by 6 February 2012. » Article must be sent in Microsoft Word Document (doc/docx), Font: Times New

Roman, Font Size: 12, Line spacing: 1.5 » Please ensure that the entire document has a wordcount between 1200 - 1500 » The cover page of the article should only contain the Title of the Article, the Au-

thor’s Name and the Institute’s Name » Mention your e-mail id/ blog if you want the readers to contact you for further

discussion » Also certain entries which could not make the cut to the Niveshak will get figured

on our Blog in the ‘Specials’ section

SUBSCRIBE!!Get your OWN COPY delivered to inbox

Drop a mail at [email protected]

ThanksTeam Niveshakwww.iims-niveshak.com

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FIN - QPrize - INR 500/-Prashanta Khaitan

Jamnalal Bajaj Institute of Management Studies , Mumbai

COMMENTS/FEEDBACK MAIL TO [email protected]://iims-niveshak.comALL RIGHTS RESERVED

Finance ClubIndian Institute of Management, Shillong

Mayurbhanj Complex,NongthymmaiShillong- 793014

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