VOLUME 4.21ISSUE 83

February 1, 2011

The whole of the global economy is based on supplying the cravings of two per cent of the world’s population

-Bill Bryson

Rates 01

Graphs 02

News 03National & International events in the world of financeDebate 04Direct Tax Code (DTC)Contemporary ArticlesThird Quarter Review of Monetary policy 07 Black money stashed in Swiss banks 09Contrasting View on 2G scam 12

Stock Watch 14Suzlon Energy

Commodity Article 15Power sector may face losses after shift to IFRSInvestors Check 16iGate-Patni Deal

Alumni Speak 18A peek into the corporate world through our Alumni’s experience

Investor’s Focus 20Technical and fundamental analysis of Finolex Cables

Buzz Words 21Fincopedia

Quiz & Crosswords 22Check your Financial Quotient

RepoReverse RepoCall rateInflation (as on 28th Jan.)Forex Reserve(as on 21st Jan. 2011)91 day T-BillIIP (for November 2010)6.90 GS 2019

6.50 %5.50 %5.60 % - 6.75 % +8.43% $ 299.395 billion

7.2274 %+9.2% 8.0907-8.0907%

Rates

01

By- Md. Zafar Iqbal, I MBA M

student’s caRtoon

44

44.5

45

45.5

46

17-Jan 20-Jan 23-Jan 26-Jan 29-Jan

Rs/$

GRaPHs

02

18200

18400

18600

18800

19000

19200

17-Jan 20-Jan 23-Jan 26-Jan 29-Jan

Gold(per 10 gram)

1500000

6500000

11500000

16500000

21500000

5400

5600

5800

6000

17-Jan 20-Jan 23-Jan 26-Jan 29-Jan

future rates open interest

5400

5600

5800

6000

18,200.00

18,400.00

18,600.00

18,800.00

19,000.00

19,200.00

17-Jan 20-Jan 23-Jan 26-Jan 29-Jan

sensex nifty

95

96

97

98

99

17-Jan 20-Jan 23-Jan 26-Jan 29-Jan

Oil(per bbl)

inteRnational news

• Ford earned its biggest profit in more than a decade in 2010 as robust car and truck sales

and years of cost cuts paid off for the company. The results disappointed Wall Street,

however, and Ford’s stock price fell 6% to $17.73.

• Foreign direct investment in China hit a record $105.7 billion last year, highlighting

growing confidence in the economy even as Beijing seeks to rein in growth. Investment

by overseas companies rose 17.4 percent year-on-year, with more than a fifth of the

money flowing into the red-hot property sector.

• Google Inc, fresh off announcing a management shake-up, and will give a $100 million

equity award to outgoing chief executive Eric Schmidt, who in April will be succeeded

by company cofounder Larry Page.

• New York-based bank is lifting Vikram Pandit’s base salary to USD 1.75 million from

just USD 1 a year effective immediately, according to a filing with the Securities and

Exchange Commission.

• The government had to pay higher interest rates on its long-term borrowings in the three

months to December because of the monetary tightening by the Reserve Bank of India

and tighter liquidity conditions.

• Public sector Indian Overseas Bank planned to raise USD 500 million through Mid-

Term Notes (MTN) as part of expanding its overseas presence.

• Banks have sought capital subsidy and other incentives from the Uttarakhand govern-

ment to complete the financial inclusion process in the hill state where most of the vil-

lages are situated in remote areas.

• The 30-share BSE index shed 0.4 percent leading to a 10.6 percent fall in the month, its

lowest since October 2008.

• The RBI has raised the repo and reverse repo rates by 25 basis points each. It had raised

the policy rates six times in 2010 by 25 basis points each. As was expected, the RBI has

taken further measures to rein in the inflation rate. The repo rate, the one at which the

RBI lends to banks will now be 6.50 percent. The reverse repo rate, the rate banks get

for depositing funds with the central bank will be 5.50 percent.

national news

By- Rajat Sikri, I MBA L

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debate By- Richa M Jain, I MBA L

Will Direct Tax Code (DTC) actually bring about the needed change in the country’s Taxation System?

AGAINST:

Earlier, as per Income Tax Act 1961, most of the investments came under EEE (Exempt-Exempt-Exempt) Category. What it meant was that, tax exemption was enjoyed at all the Three Stages – Investment, Accumulation and Withdrawal. All this is going to change, once DTC regime comes in place. As per DTC proposals, most of these investments (ex-cept few mentioned in the second paragraph) will now be considered under EET (Exempt-Exempt-Tax) Category. What this means is that one will have to pay taxes on any money being withdrawn from these funds. This discourages investments in ELSS (equity linked saving schemes) or mutual funds.

The personal income tax slab is as fol-lows: • ` 2 lacs – ` 5 lacs will attract 10% tax• ` 5 lacs – ` 10 lacs will attract 20% tax• ` 10 lacs and above will attract 30%

tax

This tax slab does not live up to the prom-ise by the government made in the draft bill of 10% income tax for up to ` 10 lacs income. Further in contrast, those with in-come of ` 10 lacs and above will see a decline in their tax liability.

The new regime also provides high-income earners with greater avenues of tax-exempt savings and investment options by tripling annual investment limit to ̀ 3 lacs. People in the low-income category will also be hit by the proposal as it abolishes the exemption on HRA benefits and home loan interest for self-occupied property. However, if the same house or second house is given on rent, the person will get tax benefits on interest payout and that too, unlimited interest payment. Obviously the government seeks to favor landlords over tenants.

The new regime also seeks to discourage savings in general and is thus pro-consumption. India has a saving rate of almost 35% while most of the developed countries have the sav-ing rate (ratio of gross national savings to GDP) around 14-20%. Taxing capital gains may discourage saving. Removal of distinction between the long term and short term capital gains and taxing them at respective slab rates of individuals is another shocker. Those al-ready in highest tax bracket may be negatively impacted while those in lower tax rate slabs

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FOR:

An ideal direct tax regime should be simple to understand and administer, equitable and progressive, and reward economic activity and above all it should provide buoyancy to the government’s revenue. Does the proposed tax code stand these tests?

Consider the first aspect. The new tax code is indeed simple to understand and will go a long way in reducing the ambivalence and discretion which plagues the existing Income Tax Act, 1961. The new tax code seeks to leave little scope for multiple interpretations and will thus curb disputes and litigation, something very common with the existing Act.

The new code is in fact a completely new tax law aiming to simplify the direct tax regime in India and has tried to capture the best international practices. This new code also at-tempts to make direct taxes equitable by introducing moderate levels of taxation and ex-panding the overall tax base. The DTC attempts to simplify the legalities to enable better understanding so as to ensure a higher degree of compliance.

For instance, the new directive has done away with different heads of income. The two broad heads of income would now be income from ordinary source and income from spe-cial source. The first head would include income from employment; house property and business while the second head would include capital gains on equity and equity oriented funds and income of any other nature.

Faster economic growth needs higher savings and investments while efficiency requires squeezing more out of the existing assets or capital. By reducing the effective tax burden for those with the higher propensity to save and invest (individuals with income of ̀ 10 lacs and more), the new tax code may improve the chances of economic growth.

may be positively impacted. Also all dividends will attract 5% tax. There is no tax benefit for leave travel allowance.

As per the existing laws, an NRI (Non Resident Indians) is liable to pay taxes on his or her global income, if he or she stays in India for a period more than 182 days in a financial year. But DTC is going to shorten this duration to just 60 days.

The tax system is being changed to make it a lot simpler but it will have more sections than the IT ACT 1961. The government is trying to bring in transparency in the taxation system and also reduce the gap between its expenditure and revenue through taxes, but considering that DTC seems more favorable to pro-high income earners and anti-low income earners, the common man might bear the brunt of such change and unless the government increase its tax base the gap cannot really be covered as the high income earners might have their tax liability reduced.

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By reducing corporate tax rate, the new regime also seeks to incentivize India Inc to grow their revenues and profitability. By linking minimum alternate tax (MAT) to gross assets rather than profits, the new regime seeks to encourage companies to make most of their existing assets rather than go on an asset creation binge which is quite common right now. This is a step in the right direction and investor friendly.

At present, India has a low tax-to-GDP ratio of around 10% and there is enough scope for improvement. For developed countries this ratio varies in the range of 30-40%. Will the new regime provide the government with ammunition to plug the rising gap between gov-ernment expenses and the tax revenues? There are two ways to achieve this. Induce existing payers to pay more tax or bring more people under the tax net i.e. expand the tax base.

The new regime will make taxpayers pay more which may raise revenues. But those in higher income bracket may now play less tax so the net effect is difficult to gauze. The greatest source of buoyancy may however come from the capital gains tax, which will now become universal. Government may get tax windfall from the migration to EET method from EEE method in case of long-term savings such as insurance products, new pension scheme and provident funds among others.

From a technical point of view some of the benefits are:1. On top of existing ` 1 lac tax benefit, an extra ` 50,000 has been added for “Pure Life

Insurance“ (Sum insured is at least 20 times the premium paid), health insurance, med claims policies and tuition fees of children.

2. Maximum limit for medical reimbursements has been increased to ` 50,000 per year from current ` 15,000 limit.

3. Tax Exemption for interest-payment on housing loan for self-occupied property will remain the same i.e., ` 1.5lacs per year.

4. For income/losses from housing property, deductions for Maintenance and Property Tax would be reduced from 30% to 20% of the Gross Rent. Also all interest paid on house loan for a rented house is deductible from tax.

5. Tax exemption on Education Loan Payments to continue.6. Surcharge and Education cess are abolished.7. Corporate taxes to be reduced from present 34% to 30 % including education cess and

surcharge.8. The text of the act is made a lot friendlier.

Overall the DTC seems to be a good initiative from the government’s side and its effective implementation will help the country’s tax system get more transparent and more revenue generating. The cons of the system need to be ignored as its pros out number them. Every method does have some loop holes and it is now up to our government to see how it plugs in these loopholes to the benefit of our country after its implementation in 2012.

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tHiRd QuaRteR Review of MonetaRy Policy

By- Vinutha V Jois, I MBA K

The Reserve Bank released its Third Quarter Review of Monetary Policy for 2010-11 on 25th of Jan. 2011. The RBI has in-creased the repo and reverse repo rates by 25 basis points (bps) each, under the liquidity adjustment facility (LAF), similar to the Second Quarter of 2010-11, thus the Repo rate now stands at 6.5% compared to previous quarter’s 6.25% and Reverse repo at 5.5% com-pared to previous quarter which stood at 5.25%.

• The cash reserve ratio (CRR) of scheduled banks has been retained at 6.0 per cent of their net demand and time liabilities (NDTL) for both the Second and third quarter.

• The Bank Rate has been 6.0 per cent for the second and third quarter.

• The repo rate and reverse repo has been increased in order to increase the cost of bor-rowing and lending for banks which will in turn lead to decrease in demand and reduce the inflation.

Inflation rate/Month, 2010 Sept. Nov. Dec. Factors(for increase from Nov. to Dec.)

WPI Inflation 8.62 7.5 8.4 Driven by food and fuel inflation.

Food Inflation 16.44 9.4 13.5

Due to severe supply constraints in respect of some food items. Vegetable prices increased by 22.9 per cent in December 2010 over the previ-

ous month’s level.

Fuel Inflation 12.7 10.3 11.2Rise in non-administered domestic fuel prices, reflecting the sharp increase in international

prices.

Liquidity

• Tight liquidity conditions persisted throughout the third quarter of 2010-11.

• The average daily net injection of liquidity through the liquidity adjustment facility (LAF) increased from around 62,000 crore in October to 1,20,000 crore in December.

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• To mitigate the liquidity deficit, the statutory liquidity ratio (SLR) of SCBs was reduced from 25 per cent of their NDTL to 24 per cent with effect from December 18, 2010.

• The additional liquidity support to scheduled commercial banks under the LAF to the

extent of up to one per cent of their net demand and time liabilities (NDTL), currently set to expire on January 28, 2011, is now extended up to April 8, 2011.

• The second LAF (SLAF) will be conducted on a daily basis up to April 8, 2011.

Money SupplyMoney supply (M3) growth moderated during the year, reflecting slower deposit growth and faster currency expansion which reduced the money multiplier. Several banks raised their deposit rates after the Second Quarter Review of 2010-11 which contributed to a larg-er deposit mobilization in December. Consequently, M3 growth increased to 16.5 per cent by end-December 2010, close to the indicative projection of 17 per cent for 2010-11. How-ever, year-on-year non¬food credit growth has been above the Reserve Bank’s indicative projection of 20 per cent since early October 2010, rising to 24 per cent by end-December 2010.

Widening gap between credit and deposit ratio has become the major concern:• The incremental non-food credit deposit ratio is increased to 102 percent due to the gap.

• Banks have been asked to increase the deposit growth and restrain the credit growth to align the Credit and Deposit growth.

• RBI would prevail upon banks with an abnormal incremental credit deposit ration to ensure a balance.

Projections• Current account deficit (CAD), for the year (2010) is expected to be close to 3.5 per

cent of GDP.

• Inflation target for the end of March, 2011 has been revised from 5.5 to 7%.

• The GDP rate projection is retained at 8.5%.

5 CHAANAKYA VOL 4_13 09

When we hear about Swiss banks, what comes into our mind is a bank which keeps money of millionaires, government officials or criminals which have been obtained through il-legal measures, or celebrities protecting their wealth from their spouses. Apart from them, Swiss banks are available to anyone and lots of average people have account with Swiss banks. People who live in countries with unstable government and banks turn to Swiss banks for security.

Advantages of Banking with Swiss Banks

PrivacyYour relationship with your Swiss bank can be compared with your rela-tionship with your doctor or attorney. Swiss law prohibits its bankers from disclosing the existence of your ac-count or any account related informa-tion without your consent (Except for some circumstances). In Switzerland, if a banker reveals information about a bank account without permission, im-mediate prosecution will begin by Swiss attorney. Bankers face up to six months in prison and a fine of up to 50,000 Swiss Francs. And, you have the option to sue the bank for dam-ages. Needless to say, Swiss banks are over concerned about the privacy of your account.

Low riskSwitzerland has had an extremely stable economy and infrastructure for many years has not been in war with any nation since 1505. Swiss bankers are also well trained and know how to grow your money. Depositor protection in Switzerland in governed by the Swiss Bankers Association’s (SBA) self-regulatory Depositor Protection Agreement. Depositor Protection Agreement guarantees that, in the event of bank failure, depositors will rapidly receive their legally privileged claims. As an additional measure, Swiss law demands high capital adequacy. Swiss banks therefore, counted as the best in the world.

In fact, the Swiss franc is considered one of the world’s premier currencies with virtually zero inflation and has been historically backed by at least 40 percent gold reserves. Swiss banks are also known to have very sophisticated investment services and Internet banking.

Why India is concerned about money stashed in Swiss Banks?It is not a secret that trillions are stashed away in Swiss Bank accounts by many Indians. In the first direct confirmation of Indian black money in Swiss Banks, John Christiansen, the director of tax justice network, the tax evasion watchdog-says India can do a lot more

By- Jobin Jose, I MBA M

blacK Money stasHed in swiss banKs

if it wants to get back Indian money in Swiss Banks. Swiss finance ministry has promised to help India with details of particular accounts if the government provides proof that tax evasion has taken place.

Indians believe that the money stashed in Swiss Banks have been looted from India by its most corrupt politicians. Apart from politicians, private parties also have put their money in Swiss Banks. There are several methods or reasons for a private party having stashed money in Swiss Banks. It can be under invoicing of exports and over invoicing imports and getting the balance stored abroad; It can be not bringing the earning abroad; Transactions done abroad and not reported here; Hawala funds; Funds earned by artists/entertainment industry/sports people and stashed abroad. Money earned through illegal methods includ-ing corruption, tax evasion and smuggling is put in Swiss Banks as a safe place to keep with.

Swiss A/c holders take shelter of trustsThree individuals who were ordered to pay tax against money lying in Liechtenstein’s LGT bank have told the tax department that their names figure as beneficiaries of a trust that has an account with the bank. The persons said that they were not aware of the trust and have not received any money in the name of the trust. Many Indians stashed money in boutique Swiss Banks may have parked money in the names of discretionary trusts. In discretionary trusts, the proportion of the money to be shared among the beneficiaries is left to the discretion of the trustees. NRIs who have opened accounts in the names of such trusts cannot be touched by Indian government.

The money is re-directed to India as FDIs?Many of the account holders are believed to be moving the funds from Swiss Banks to Dubai. Once the money is with UAE banks it can be directly invested in even FDI-compli-ant projects in India. So the black money looted from India is coming back India through legal means. This is a typical example of money laundering.

According to the report of Swiss Bank Association, Indians have invested $1891 billion in Swiss Banks till 2008. A current study of Global Financial Integrity had estimated the present value of black money flowing out from the country is $462 billion. It is about 1/3rd of India’s GDP.

The recent actions of government to bring back black money Under intense pressure from opposition parties and Supreme Court, the centre government started its movements towards black money deposited in foreign banks. India has recently amended its DTAA (Double Taxation Avoidance Agreement) with Switzerland to obtain banking related information from Swiss banks in case of Indians against whom there are tax evasion related charges. The changes to the DTAA are yet to come into force as the Swiss Parliament has to give its nod for the revised pact.

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The Supreme Court had recently come down heavily for its reluctance to dis-close the names of those Indians who had stashed money in LGT Bank of Liechten-stein. The Prime Minister, Dr. Manmohan Singh, had recently said that there was “no instant solution” to bring back the black money stashed in foreign banks and that information with the government cannot made public due to treaty obligations. The Finance Minister Mr. Pranab Mukher-jee had pointed out that the government had received information about the black money accounts in foreign banks.

The Finance Minister, on 25th Jan. 2011 said the government has formed a multi-disciplin-ary committee to get studies conducted to estimate the amount illicit money generated by Indian citizens. He also said about a five-point strategy that government was adopting to address the issue of black money. The Swiss Bankers Association have previously said that any information exchange would be according to the conditions set out by the Organization for Economic Cooperation and Development (OECD), the grouping of mostly developed nations, and the information be-ing sought should be specific in nature. As per the revised treaty, Switzerland would now provide administrative assistance in tax evasion cases also, in addition to the tax fraud cases applicable earlier.

ConclusionIf Indian government manages to bring this amount back, it will be a major boost for coun-try’s economy as far as foreign currency is concerned. But it will be a mammoth task for the Central government to bring back the money. It will be interesting to see what action will be taken by the Indian government in this regard. However, it will also raise the infla-tion if such a huge amount comes to India. So, government should invest this black money in the share market and other development projects. Ironically, in a country like India where several people die of poverty and starvation every year, such a huge amount is being transferred to Swiss Bank. Government should put pressure on Swiss Bank Association for details of the depositors, so culprits should be brought to justice.

The 2G spectrum scam involved officials in the government of India illegally undercharging mobile telephony companies for frequency allocation licenses, which they would use to create 2G subscriptions for cell phones. 2G licenses were issued to private telecom players at throwaway prices in 2008.

Comptroller and Auditor General (CAG) report: • Spectrum scam has cost the exchequer `1.7 lakh cr.• Entry fee for spectrum licenses in 2008 pegged at 2001

prices.• Mobile subscriber base had shot up to 350 million in 2008 from 4 million in 2001.• Raja ignored advice of TRAI, Law Ministry, and Finance Ministry.• Favoritism, corporate encash premium.• No proper auction process followed, no bids invited.

A month after submission of report, PM received the resignation of A. Raja, ex-Minister for telecom. But all was not closed; rather it opened into a new folding. ‘Blame games’ started by both ruling and opposition parties.

Mr. Sibal v/s CAG The new telecom Minister Kapil Sibal took both the Opposition and CAG head on in the battle over alleged corruption in 2G telephony, saying there was no policy flaw and CAG’s es-timates of revenue losses from under pricing of spectrum were grossly overvalued. The UPA only followed NDA policies in awarding 2G licenses in 2008. Only procedural mistakes in implementa-tion of policy were being investigated by his min-istry, including the CBI’s anti-corruption probe into the matter (which in turn is being monitored by Supreme Court) but the policy itself was nei-ther a UPA brainchild nor was it flawed. “It is a fact that as a consequence of this telecom policy, India is today the world’s largest telecom market.”

The issue of criminal culpability in implementation is being investigated. All that is being said is that facts on policy must be placed before the people. Prime Minister Manmohan Singh too had agreed on continuing with the old policy on 2G pricing while going in for auction of 3G spectrum. He said the telecoms regulator had also repeatedly recommended that 2G spectrum not be auctioned.

contRastinG view on tHe 2G sPectRuM scaM

By- Vijay Kumar S, I MBA L

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Montek v/s CAGThe Planning Commission Deputy Chairman, Montek Singh Ahluwalia too says CAG was wrong. He thought ` 1.7 lakh Cr is a way out, unrealistic number. CAG’s estimate of loss in 2G scam was utterly erroneous.

Status of the ScamThe Supreme Court on 21 Jan. 2011, directed CBI to carry out investigation into 2G spec-trum scam without being influenced by telecom minister Kapil Sibal’s views. The SC said that the minister must behave with some responsibility. His statement will have no bearing on CBI investigations. The Court directed the CBI to go ahead with the probe into the scam without getting influenced by any body’s statement. The SC also issues notice to all 11 telecom firms who got spectrum during A Raja’s tenure on Subramanian Swamy’s petition seeking cancellation of all irregular mobile licenses.

The court observed that Sibal has grossly undermined the CAG report and that a minister should have behaved with some sense of responsibility.

Conclusion:The country’s mobile phone market is the world’s fastest-growing and its nearly 700 mil-lion users trail only China, making it a must-invest market for any major global operator. But regulatory uncertainties have been a concern for some and could make foreign compa-nies start to look more carefully where to invest. If the government imposes heavy fines on new licensees singled out in the auditor’s report, it would weaken them further. The newer operators are yet to make profit as they offer heavy discounts to grab subscribers, and any financial penalty would be a blow to them, forcing some to leave the market.

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About the company:Suzlon Energy is the third largest wind turbine manufacturer of the world. The market share of the company is about 9.8%. The company has the capacity to set up Wind Turbine Generators (WTG) ranging in capacity from 600 KW to 2.1 MW. The company has its presence in 25 countries with R&D capabilities in Belgium, Denmark, Germany, India and The Netherlands. The company has its production plants in India, China and United States. The company has a larger order book with majority of the orders coming from Australia.

Fundamental View :

• Suzlon Energy has signed an agreement with Hindustan Zinc, a Vedanta Group com-pany to set up, operate and maintain 150 MW of wind power projects in Karnataka, Maharashtra, Rajasthan and Tamil Nadu. The project entails a total investment of ap-proximately ` 865 crore.

• REpower Systems AG in which Suzlon Energy is a majority shareholder with over 90% holding has concluded a contract for the delivery of 25 wind turbines with EverPower Wind Holdings, Inc with an option to purchase an additional 85 units.

• Suzlon Energy signed an order worth about $1.28 billion for 1,000 Megawatts of wind power projects with Caparo Energy India. Caparo Energy India is a wholly owned sub-sidiary of AIM listed Caparo Energy.

About the Stock:The Stock has been moving within a tight range for a few months. The stock has fallen down significantly in the last year. It has made a bottom reversal on its 52 week low of 43.There seems to be an uptrend for the stock at this point. The stock can see significant upside after it crosses the level of 60 which will be hard to cross.

Recommendation:The outlook for the stock is positive. Hence the stock can be bought at this level.

stocK watcH: suZlon eneRGy

By- Gaurav Jain, I MBA M

RECOMMENDATION: BUY

STOPLOSS: `46 CMP: `49.8

TARGET: `60 DURATION: 60 DAYS

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Power has always been a scarce commodity in India. We all suffer from power cuts on a daily basis and even industries suffer a lot from such power cuts. Above all, what is more important is that the demand for power is always on the rise. With expectations of India growing at 8 to 9%, there will only be an increase in the demand. This scenario suggests that large corporate should invest in power generation business. For investors, to invest and earn long term profits from investment in one of the promising commodity: Power. But before going into such kind of investment it is important to look in to the present conditions. The most important aspect is the introduction of IFRS in our country. The Institute of Chartered Accountants of India (ICAI) has announced that IFRS will be mandatory in India for financial statements for the periods beginning on or after 1 April 2011. This will be done by revising existing accounting standards to make them compatible with IFRS. Reserve Bank of India has stated that financial statements of banks need to be IFRS-compliant for periods beginning on or after 1 April 2011. The ICAI has also stated that IFRS will be applied to companies above `1000 crore from April 2011. Thus what will happen to the electricity board of our country is a big question. Various reports and analysts suggest that electricity board may face losses after shift to IFRS. India’s GAAP allows for later adjustments against tariff and fuel prices, foreign currency fluctuations, among other things. But under IFRS, these components are charged to the profit and loss (P&L) account.

India’s state electricity boards with so-called regulatory assets will face massive cumulative losses once Indian accounting standards converge with international financial reporting standards (IFRS) in April due to a crucial accounting difference. These losses, as calculated by the utilities, could be as high as ̀ 17,457 crore for Tamil Nadu Electricity Board (TNEB), `3,257 crore for Maharashtra State Electricity Distribution Co. Ltd and `1,445 crore for Uttar and Dakshin Haryana Bijli Vitran Nigam Ltd. Experts said the loss could be averted if the International Accounting Standards Board (IASB) agrees to change IFRS to bring it in line with generally accepted accounting principles (GAAP) used in India and some other countries. Regulatory assets or liabilities are components of electricity prices set by the regulator for future adjustments. India’s GAAP has a facility for later adjustments while IFRS does not permit so. There are serious anomalies relating to regulatory assets in India’s power sector, the Association of Power Producers--whose members include Tata Power Co. Ltd, Adani Power Ltd and Reliance Power Ltd --has already informed government about that. The letter adds the Haryana board has recognized regulatory assets of `1,445 crore and potential regulatory assets of `3,716 crore, aggregating to `5,161 crore; while the regulatory assets of the Maharashtra board amount to `3,257 crore. And all of these regulatory assets of electricity boards will be converted into losses under IFRS. Typically, regulatory assets add up because the power sector regulator does not allow distribution companies to raise tariff in public interest. It, instead, offers them sops such as reducing depreciation rates and writing off losses due to foreign exchange fluctuations, and

PoweR sectoR May face losses afteR sHift to ifRs

INTRODUCTIONAfter efforts for over two years the promoters of Patni and private equity firm General Atlantic have managed to sell their stakes of 63% of Patni, valued at INR 503.50 per share, to iGate. The deal is valued at $1.22 billion, including the open offer of 20% for the shareholders according to the norms of the Securities and Exchange Board of India (SEBI).

CONTENTThe deal is the largest acquisition of an Indian software exporter by another Indian firm. The three Patni brothers, Ashok, Gajendra and Narendra Patni, hold 46% in the company while private equity firm General Atlantic holds another 17%, a deal for their combined stake of 63%. The promoters have been trying to sell the stakes for a quite a long time. There were a total of three players in the race to acquire Patni, Japanese players Fujitsu and NTT DOCOMO, a consortium of two private equity funds Carlyle and Advent International and iGate. The promoter family came close to selling stakes in May 2010 to NTT DOCOMO but the deal did not materialize due to difference on price expectations.

PRIVATE equity firms led by Carlyle had made a bid of `600 per share. The bid was conditional upon several terms, including a non-compete clause that restricted the promoters, the three Patni brothers, from engaging in the same business and a clause providing for a

By- Rohit Dhannawat, I MBA L

iGate – Patni deal

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allows them to defer the adjustment of these costs to the future.However, experts working with the power sector on IFRS convergence said there could be a way out for distribution companies. In 2009, the International Accounting Standards Board, IASB, issued a proposal, known as exposure draft (ED), to consider regulatory assets and liabilities under the IFRS framework, as happens in the Indian GAPP. But the body is yet to decide. If IASB is successful in implementing ED then it will become a standard and eventually, regulatory assets will be treated as revenue/assets within IFRS framework. This will solve the problem.

Though, the solution is proposed but still there is a wait-and-watch situation for Indian power firms. Thus, one has to be cautious before planning any kind of investment in one of the most promise looking commodity: electricity.

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lower bid price in case of any liabilities discovered at a later stage. iGate Corporation’s bid backed by London-headquartered buyout fund Apex, had initially made a bid around ` 550 per share without any non-compete clause. Patni faces the prospect of losing many clients to competition. Even if one or two major clients either part away or dilute the work then it would substantially impact the company.

Clients feel that the deal with the iGate would result in a stretched acquisition and integration process as both firms are listed, and several issues such as higher staff attrition, loss of several management members, and changes in the strategy. It is predicted that the loss could be at least 25% revenue loss. iGate has shortlisted Deloitte Haskins & Sells and HR firm Mercer to help with integration and restructuring. Phaneesh Murthy the owner of iGate is set to be the CEO of the iGate-Patni. iGate is being backed by UK-based private equity firm, Apax Partners, which is funding it to the extent of nearly $400 million. Apax has put a few conditions attached to it such as performance guarantees that include delivering a minimum 15% business growth for the joint entity, which could be called Patni-iGate Corp. If it fails to deliver to the performance benchmarks then Apax’s shareholding could go up. If the performance clause is breached, iGate can end up becoming an Apax company. iGate is about a third of Patni’s size with annual revenues of $252 million, giving the combined entity close to a billion dollars in revenues. Under the terms of the deal with iGate, the promoters have an 18-month non-compete clause during which they will not be able to start a similar business. The non-compete clause will not be applicable to the second generation of the promoter family and to existing businesses. Both Patni and iGate brands will exist for the time being. The merger will be completed by mid-year. The transaction may be completed in the first half of 2011 and the combined entity expected to become cash accretive by next year. iGate is taking a $700 million debt from the Royal Bank of Canada and Jefferies & Company to finance the transaction and also issuing equity of $270 million to Apax Partners.

CONCLUSIONPatni has been lagging behind the last 1-2 years because of internal disputes, which made them more internally focused. The new entity will be able to focus on the market and building capabilities. One of iGate’s first tasks will be to reassure employees and reach out to clients. And of the two, the employee attrition may be the more worrying factor.

On the other hand, in the recently announced results of iGate the net profit grew by 71% to 207.5 crore. After the completion of the integration process, Patni will get a better exposure to fast-growing banking and financial services vertical, while iGate will get an advantage of Patni’s scale and size of operations.

18

aluMni sPeaK

In this edition, we have Mr. Deepak Mantri, to give us insights on “Importance of live projects and SIP ”

Name- Deepak Mantri Batch- 2006-2008Educational Qualification- MBA in finance and B.Com Delhi University.Company- GMRDesignation- Associate Manager IBD SPGLocation- BangaloreEmail- deepak.mantri@gmrgroup.in

Chaanakya- What does your job involve as a associate manager with GMR group?Mr. Mantri- Strategic planning / budgeting / forecasting, Support Business Develop-ment Team, Project feasibility studies and Cost & Financial Analysis, Review of Finan-cial Models. Shareholding Price Analysis on weekly basis, Analysis of Macro Economic Indicators and impact on the Group / projects in particular mainly.

Chaanakya- What is the importance of certification with respect to the corporate world?Mr. Mantri- In certain fields certification does play an important role. For example, if you work with a bank or a trading company, certification has its significance but not much in other fields.

Chaanakya - Importance of live project. Your take...Mr. Mantri - It gives you a good and practical experience, builds up networking skills, enhances writing report writing abilities, etc. It also helps to understand different expecta-tions from different people in the corporate world.

Taking up projects in any stream is helpful as it gives a insight into the other fields than your owns. Chaanakya - Corporate world or financial institutions?Mr. Mantri - Well both of them have different working conditions and environment. Cor-porate World gives out more of ‘Learning’ than their counterparts in the Financial World, where ‘Growth’ prospects are higher. Financial markets are more of target chasing.

Chaanakya - What you think about the SIP and what role does it play during placements?Mr. Mantri - It plays an important role in knowledge building, learning and knowing cor-porate world better. During placements it plays a crucial role with respect to the learning’s from it. Knowledge and confidence building should be the aim while undergoing a SIP. Chaanakya - Working with GMR, which is a Diversified Company with its operations

By- Geetika Gupta, I MBA N

18 19

in different sectors, what is your understanding about the infrastructure future and the PPP model which is growing in India?Mr. Mantri - Infrastructure has a huge market for itself. GMR is into energy power plant, water management and infrastructure. As seen PPP is really working well in India and it’s better to have more such models in the future. Since the service charges are too high for the general public to bear after the completion of PPP projects, the government must put more money and finance the private players, providing them with incentives.

Chaanakya - Does MBA really prepare one for the corporate world? Corporate prefer a jack of all trade or a specialist?Mr. Mantri - Its right that MBA makes one a jack of all trades but, corporate prefer spe-cialists. Have knowledge about everything but be a specialist in something.

An MBA gives edge over others in the corporate world. You have to work with different people. Some of them are CA’s, engineers etc, MBA makes you compatible with all and prepares you to work with different people. The course helps you to adjust in corporate world and build your confidence.

Chaanakya - What matters big brand or big salary?Mr. Mantri - Well in my view, all that matters is ‘learning’. Salary should be secondary. Try to learn more about business, all that you can. You can get any opportunity in your career. Exposure matters most, how, what you did and from where is all secondary.

Chaanakya - Message for our Christites..Mr. Mantri - Keep yourself updated with current affairs always. It’s not just for getting a placement; even while working in the Corporate, keep yourself updated with current af-fairs. You should always keep yourself updated with your dream company.

Have the habit of asking ‘WHY’ for every information you come across, I remember and follow till now what TSR sir taught me in his mentoring during my days in Christ, i.e. to keep ‘why’ with you always.

Remember, market is very big and till 2020 we have very good time so use it to your best. Carry a distinctive attitude, take those risks in interviews, after all you are the future man-agers and you must know the art of taking risks...

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investoR focus By- Madhukar Das, I MBA G

Finolex Cables Markets under heavy selling pressure as FIIs again start selling causing a 4% drop in benchmark indices in last 3 days and bringing them down a to 5 month low. Selling in large cap has effected a sell off in mid and smallcap space causing the stock prices to spiral down 2-14%.

Fundamentally Speaking Finolex cables is India’s largest and leading manufacturer of electrical and telecommunica-tion cables and is the flagship company of Finolex group. The company is rated as a Su-perBrand. With Government and corporate spending on infrastructure and power projects in the country, sales for electrical and telecommunication cables is bound to rise and Fi-nolex being the largest player in this space is most likely to benefit from it. They have ramped up production in their Roorkie plant and further increased its capacity by 50% with proximity to north Indian market this plant will be able to cater to the growing demand by infrastructure projects in that region. The company also produces a range of electrical items such as electrical switches, CFLs etc. The company is going in for a JV with a Japanese company to produce high tension cables of upto five hundred kilowatts. The JV is expected to be operational in next 3-6 months. The ratios look very attractive for the company. Gross margin and net profit margin are about two times the industry average. RoE is 9% whereas industry weighted average is 4%. P/B ratio is 1.16 which is very low for industry leader in a segment. Price to sales is 0.46 which means revenue per share is more than twice the price of each share. P/E ratio is 7.1 whereas weighted average for industry is 21. Sales have been growing over past 3 years with a CAGR of 16.1%. Current enterprise value per share is `66.7. The current market cap for the company is `750 crores. The company has got investments in equities and cash of close to `500 crore. Therefore the investments and cash comprise of 66% of the market cap which makes the company fundamentally sound and very lucrative investment at current

The candlestick chart sug-gests it has found support at the 40 bar (short term) sup-port level. Any improve-ment in broad market dy-namics will propel this stock up from the current levels.

MACD charts signals a re-versal in short term trend.

The stochastic oscillator suggests that the scrip has been in the oversold region and bears will soon wane out.

Williams %R on weekly chart suggests that the scrip has been under selling pres-sure but is showing signs of recovery.

Commodity channel index chart shows sudden fall in scrip on weekly charts owing to heavy sell off by FIIs and domestic institutions in the broader market and recovery will effected by fundamen-tally sound scripts when the bears fade out.

Special points of in-terest: Since we are looking at a trading horizon of 15-30 days, we shall give more weightage to technical analysis and price trend of the stock. We shall also study the fundamental as-pects of a company to avoid getting into loss making trade posi-tions in case of movement of market in direction opposite to that of my predic-tion.

Technically Speaking

Recommendation : BUY CMP : `48.85 Target Price : `54 Stop loss : `46

BUY : HCL Infosystems CMP—`103 Target—`110 Stop Loss—`99

Sell : Essar Oil CMP—`125.30 Target—`113 Stop Loss—`128

Mastek CMP—`168 Target—`160 Stop Loss—`172

Other Picks

21

Chinese wallIn business, a Chinese wall or firewall is an information barrier implemented within a firm to separate and isolate persons who make investment decisions from persons who are privy to undisclosed material information which may influence those deci-sions. This is a way of avoiding conflict of interest problems.

Gray ListIt is a list of stocks that are ineligible for trade by an investment bank’s risk arbitrage division. The gray list is composed of firms working with the investment bank, often in matters of mergers and acquisitions.

RingfencingIt is done when a regulated public utility business financially separates itself from a parent company that engages in non-regulated business. This is done mainly to pro-tect consumers of essential services such as power, water and basic telecommunica-tions from financial instability or bankruptcy in the parent company resulting from losses in their open market activities. Ringfencing also keeps customer information within the public utility business private from the for-profit efforts of the parent company’s other business.

Enronomics It is a fraudulent accounting technique that involves a parent company making arti-ficial paper-only transactions with its subsidiaries to hide losses the parent company has incurred through business activities. By transferring losses to off-book entities or wholly-owned subsidiaries, the now-bankrupt energy corporation Enron created one of the largest accounting scandals and securities frauds in history.

AUTEXAUTEX is an electronic platform from Thomson Financial that allows potential buyers or sellers of a large block of shares to identify other large traders on the bid and ask side of a particular stock. By showing “trade advertisements” in a stock is-sue, the interface presents indicators of interest among traders who wish to get a feel for the market liquidity before executing a large trade.

Expunge It is an action that destroys any record of an AUTEX indication. Expunging an in-dication will permanently remove an trace of a trader’s advertisement for a block order.

buZZ woRds

22

fin-o-HuMouR

1. Who is replacing Ashok Chawala as Finance Secretary?a. Shushama Nath b. Pranab Mukherjee c. R Gopalan d. D Subbarao

2. Aditya Birla Group has agreed to buy U.S.-based Columbian Chemicals for a. $875 mn b. $750 mn c. $900 mn d. $800 mn

3. Life Insurance Corporation has crossed the landmark of many policies in the current year as of January 29. ? a. 50 lacs b. 1 crore c. 1.5 crores d. 2.5 crores

4. Air India has signed a seven-year information technology (IT) deal worth a little more than $50 million with a. IBM b. Oracle c. Microsoft d. Google

5. In what amount does I-gate has announced the acquisition of Patni computer system?a. 1 bn b. 1.2 bn c. 2 bn d. 2.2 bn

6. What is the current repo rate?a. 5 b. 5.5 c. 6 d. 6.5

By- Abhijeet Singh, I MBA G

Hello Readers,We at Chaanakya, are always aiming towards a value addition and knowledge gain. In our constant attempts, we are awarding our read-ers with cash prizes and gifts.

So get ready for a thrilling experience and answer our quiz and cross-words and win amazing prices and gifts*. Quiz `200/- Cash and complimentary gifts*. Crossword `100/- Cash and complimentary gifts*.

Send us your entries at: chaanakya@mba.christuniversity.in within 7 days with subject line: Fin-o-humour.

QuiZ

Across

3. The rate at which banks has to maintain security in the form of bonds

4. The present telecom minister

5. The deficit one that is expected to be close to 3.5% of GDP

Down

1. The person who has been re-ported as having the Indians account information of swiss bank

2. Which is the one that is being added as EEE in DTC of petroleum to consumers?

By- Naveen Kulkarni, I MBA N

cRosswoRds

23

answeRs to PRevious issue

Quiz Answers:

1. a 2. c3. b4. d5. a6. c7. c

Crosswords

Winners for Quiz1. Syed Azhar A. (Cash Prize)2. Harsh Upadhyay (Complimentry gift)Winners for CrosswordsNo Correct Entry Received.

teaM cHaanaKya 2010-2012

Team photo is incomplete without:Akshat Malik, Apurva Gupta & Pragathi P.

*Rules and regulations of Fin-o-humour1. The contest is open to all the readers, other than members of Chaanakya team and Wealth incor-

poration fianace club co-ordinators.2. Participants entries should reach us within 7 days only.3. Names of winners would be published in next issue.4. Team Chaanakya reserves the right to withdraw the contest at any time without prior notice.5. Incase of ties team Chaanakya would decide the winner.6. Decision of team Chaanakya would be last and final.7. Team Chaanakya is not bound to disclose its measures of selection of winners.8. Team Chaanakya has a right to award the participants, in cash or in kind.9. To claim you prize contact: chaanakya@mba.christuniversity.in

DisclaimerChaanakya is a fortnightly newsletter of Wealth Incorporation Finance Club of Christ University Institute of Management, Bangalore (CUIM). Chaanakya is a newsletter circulated by the students of CUIM. Opinions and contribution towards this newsletter is made by the students of CUIM. Christ University Institute of Management, Bangalore nor Team Chaanakya is responsible for any undue circumstances which might occur at any point of time.

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