volUME4.09

ISSUE 71

July 31th, 2010

about us02 - News

National & International events in

the world of finance.

03 - Monetary Policy Review

For the First quarter of 2010-11.

05 - RIL Investors’ Check

RIL net rises 32% but still recom-

mended “Neutral” from “Buy”.

07 - GST in India

Gain from GST to propel India’s

economy to $2 trillion.

10 - Did you know

all you wanted to know about

Noise Trader.

12 - Indian Currency

The unique Indian currency provides a

new brand image for INDIA.

14 - Alumni Speak

A peek into the corporate world

through our Alumni’s experience.

18 - Quiz

Check your Financial Quotient.

contents

CHAANAKYA is the official

Finance Newsletter, released

fortnightly. Its objective is to

keep each & everyone abreast

with the activities & events in

the world of finance.

CHAANAKYA VOL 4_09

student’s cartoon

By Sachin, MBA - M

RepoReverse RepoCall rateInflation (as on 14 July)Forex Reserve (as on 30th July)91day T-BillIIP (as on 11th July)6.90 GS 2019

5.75 %4.50 %3.30-5.30%10.55 % $ 282.938 billion 5.7364 %11.5 %8.0907%

1

QUOTES

rates

GraPHs

“A liberal is a man who is willing to spend somebody else’s money”

~ Carter Glass

“Money is like manure. You have to spread it around or it smells. “

~J. Paul Getty

CHAANAKYA VOL 4_09

46

46.4

46.8

47.2

47.6

15-Jul 18-Jul 21-Jul 24-Jul 27-Jul 30-Jul

Rs/$

Rs/$

72

74

76

78

80

15-Jul 18-Jul 21-Jul 24-Jul 27-Jul 30-Jul

Oil ( $ per bbl)Oil(per bbl)

17500

17700

17900

18100

18300

15-Jul 18-Jul 21-Jul 24-Jul 27-Jul 30-Jul

Gold(per 10 gram)Gold(per 10 gram)

7000000

14000000

21000000

28000000

35000000

5200

5300

5400

5500

5600

15-Jul 18-Jul 21-Jul 24-Jul 27-Jul 30-Jul

future ratesopen interest

5200

5300

5400

5500

5600

17,500

17,700

17,900

18,100

18,300

15-Jul 18-Jul 21-Jul 24-Jul 27-Jul 30-Jul

sensex

nifty

“If you think nobody cares if you’re alive, try missing

a couple of car payments.”

~Earl Wilson

international news

The Basel committee on banking supervision softened some of its proposed capital and •

liquidity rules while introducing new restriction on how much lenders can borrow as part

of an effort to rein in their risk taking.

The IMF and EU suspended a review of Hungary’s funding programme,set up in 2008 •

tosavethecountryfromfinancialmeltdown,sayingitmusttaketoughactiontomeet

targetsforcuttingitsbudgetdeficit.

Nokia Siemens Networks (NCN) the world’s second largest maker of wireless phone •

systems will pay $1.2 billion for wireless network assets from Motorola Inc to expand in

North America and Japan.

General Motors will buy Auto Finance company AmeriCredit Corp for $3.5 billion in a •

cash deal to boost sales and remove investor concern ahead of a planned stock list-

ing.

The Reserve Bank of India (RBI) raised repo rate by 25 basis points from 5.5 % to •

5.75% and reverse repo rate has been hiked by 50 basis point to 4.50 per cent. The

cash reserve ratio or CRR and bank rate have been kept unchanged at 6 per cent. RBI

will review monetary policy every six weeks.

RBIraisedeconomicgrowthforecastto8.5percentfor2010-11fiscalfromearlier8per•

cent.

Inflationisexpectedtocomedownatsixpercentbytheendofthisyear.“Thepresent•

highrateofinflationismainlyduetofoodpriceinflation.Thegovernmenthastakena

numberofstepstocurbinflation”.

The government approved the symbol of the Indian currency ( • ` ) which will differentiate

it from currencies used in countries such as Pakistan, Nepal, Sri-lanka and Mauritius.

Two parallel lines crossing ‘Ra’ in Devanagiri script or ‘R’in Roman denote the symbol

“isequalto”oneIndianRupee.

2

national news

CHAANAKYA VOL 4_09

By Elisabeth Merin Mathew, MBA-L

Policy Stance of the RBI:• Tocontaininflationandbepreparedtoanyfurtherbuildupininflationarypressures.• To maintain an interest rate regime consistent with price, output and financialstability.• Toactivelymanageliquidityandtoensurethatexcessliquiditydoesnotharmtheeffectiveness of policy rate actions.

Change in Key rates and policies:

RATES AND POLICIES CURRENT PREVIOUSRepo 5.75% (up 25 bps) 5.5%Reverse Repo 4.5% (up 50 bps) 4%Cash Reserve Ratio 6% 6%Bank Rate 6% 6%Policy Review Every 6 weeks Once in a quarter

Why a rise by 50bps in the Reverse Repo rate?

The RBI raised the Reverse Repo by a higher than expected 50 bps to narrow the LAF (Liquidity Adjustment Facility) corridor from 150 bps to 125 bps. It is narrowed down to reduce instability and volatility in markets.

Why didn’t the RBI touch the CRR?

An increase in CRR would reduce the lendable funds to various sectors and thus curb growth. The RBI is constantly aiming at domestic growth which would be hindered with an increase in CRR.

Projections as of year end:

GDP 8.5%Inflation 6%Money supply 17%Deposits 18%Non food credit 20%

3

By Venita Sequeira, MBA-N

MonetarY PolicY reView-First Quarter 2010-11

CHAANAKYA VOL 4_09

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Outlook on inflation will be shaped by 3 factors:

The monsoon at home;The policy rests all its expectations on the monsoon, as it can increase the food output and thusbringaboutacheckontheinflatingfoodprices.

Trends in global energy and commodity prices;Global energy prices are showing a decline and if they continue to decline further, it would definitelyreducetheinflationaryimpactofthefuelpricehike.Commoditypriceswillalsodecline if the idle global capacity is utilized for imports and to ease the pressure on domestic prices.

Domestic demand side pressures;It is clearly evident that the demand side pressures are building up because of the constant strengthening of the key domestic growth drivers.

Factors contributing to the rise in inflation:

Non food items contribute 70% to the WPI;TheNon-fooditemsinflationwhichwasnearto0inNovember2009rosesharplyto10.6%inJune2010indicatingthatinflationisnowverymuchgeneralized,unlikeearlier.

Rise in prices of fuel products, iron ore and electricity ;Thepartialderegulationoffuelpriceswilldefinitelyhaveaninflationaryimpactintheshortrun.

Impact:

• The Indian currency appreciated by 0.8%, the most since June, to 46.665 perdollar.• TheIndianbenchmark10-yearbondyieldwasat7.67percent,steadyatMonday’scloseaftereasingbrieflyto7.66percent.• ThebankindexoftheBombayStockExchangefellby0.08percentaheadoftheReserve Bank’s quarterly review of the monetary policy.

Conclusion:

• Bynarrowingthegapinthe‘LAF’corridor,theRBIhopestostabilizeovernightratesacrossliquidityconditions,stabilizeovernightrateexpectationsandresultinfinerpricingfor the term structure.• Asthedemandforcreditincreasesandtheliquiditytightens,boththedepositandlending rates are expected to go up. For ex, a number of banks like HDFC, Central Bank of IndiaandLakshmiVilasBankhavealreadyincreasedtheirinterestratesonfixeddeposits,following the policy review.• The policy has confidence in growth while at the same time focusing on pricestability.

CHAANAKYA VOL 4_09

5 CHAANAKYA VOL 4_09

ril inVestors cHeck

RIL net rises 32% to Rs. 4851 crore but still recommended “NEUTRAL” from “BUY”

INTRODUCTION

HighergasvolumesfromitsKrishnanGodavarifieldsontheeasterncoasthaveledMuke-sh Ambani’s Reliance Industries (RIL) to one of its best quarterly performances till date.

Beatingmarketexpectations, itshoweda32percent increase innetprofitatRs.4851croreforthequarterendingJune.ThecompanyhadrecordedanetprofitofRs.3666crorein the corresponding quarter last year.

FACTORS FOR SUCCESS

The company had yet another record quarter due to high operating rates and improving margins across all their business. Reliance embarked on two major initiatives to create incremental value. They entered into a joint venture in shale gas to internationalize and diversify the upstream portfolio. Reliance has also committed itself to participate in high growth and exciting area of broadband wireless. Both these initiatives are in line with the strategy to indentify and invest in new, value-creating businesses.

RIL earned $7.3 (Rs. 341) on turning every barrel of crude oil into fuel during the quarter, against $6.8 (Rs. 318) per barrel during the cor-respondingpreviousquarter.Therefiningmar-gins have moved up and the petrochemical cycle has improved. This is one of the RIL’s best quarterly results in the recent past.

Therefiningmarginshavebeenintherangeexpected.Theonlypositivesurprisecameinthe result in the petrochemical volumes that have improved.

RIL is producing about 60 million standard cubic metres of gas per day (mscmd) from the KG-D6fields.ThecompanybegangasproductionatthefieldslastApril.DuringthequarterendedJune30,productionfromKG-D6was304,349tonnesofcrudeoiland5,376mscmdof natural gas with a growth of 207 percent and 210 percent, respectively, as the oil and gas production was under ramp-up during the corresponding period of the previous year.

Thequartersawthecompany’stotal incomeincrease84.8percenttoRs.58,950crorefromRs.31,896croreintheApril–Junequarterof2009-10.Theincreaseinvolumesac-

counted for 48.4 percent of the growth in revenue exports where higher by 103.5 percent atRs.32,849croreasagainst16,145croreinthecorrespondingpreviousquarter.

During the quarter, revenue for the petrochemical segment increased by 18.8 percent from Rs.11,707croretoRs.13,903crore.Increaseinvolumesaccountedforabout60percentof this rise and higher prices for the rest.

RIL’s international operations during the quarter included farming out 30 percent of its par-ticipating interest in Oman Block 18 and 25 percent Oman Block 41 to Oman Oil Company Exploration and Production. The company also farmed out 20 percent of its participating interest in Colombia Borjo North and Borjo South to Ecopetrol.

Through its subsidiary, Reliance Marcellus LLC, it entered into a joint venture with US based Atlas Energy and acquired a 40 percent interest in Atlas ‘core Marcellus Shale acre-age position. In a similar deal through its subsidiary Reliance Eagleford Upstream Hold-ing LP, it took a 45 percent stake in US based pioneer natural resources companies core Eagleford Shale acreage position.

For the quarter ended June 30, RIL had cash and cash equivalents of Rs. 26,407 crore. RIL’s scrip gained 0.14 percent to close Rs. 1,053.50 on the Bombay Stock Exchange.

Conclusion:

Motilal Oswal Cuts RIL from buy to neutral:

IndianbrokerageMotilalOswalcutRelianceIndustriesto“neutral”from“buy”,astheen-ergy giant’s gas production from KG-D6 block was unlikely to be ramped up for next 6-12 months.

As against the earlier expectation of KG-D6 gas production reaching 80 mscmd (million standard cubic meters of gas a day), RIL indicated that the production is unlikely to in-crease for the next 6-12 months.

Reliance’schieffinancialofficer,AlokAgarwal, told reportersonTuesday thatReliancewould not increase output at its KG D6 block off the east coast of India until a full review ofthereservoiriscompleted.ThusinspiteofRILdoingwell,brokeragefirmsdowngradedandratedneutralforthescripsastheEPSestimatesbeingdowngradedby3/9%.

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All riches have their origin in mind. Wealth is in ideas - not money.” Robert Collier

“Before borrowing money from a friend it’s best to decide which you need most.” Joe Moore

“Being rich is having money; being wealthy is having time.” Margaret Bonnano

Goods and serVices tax in india

7

On 21st July, Finance minister Pranab Mukherjee unveiled a three-year plan for moving to a single rate - Goods and Services tax regime of 16% for the centre as well as states by 2014 starting with 20% in year one.

“GainfromGSTtopropelIndia’seconomyto$2trillion.” Pranab Mukherjee

Why GST?

The shortcoming in the present VAT structure is that it does not include the central taxes such as customs duty, surcharges and at the state level also it does not include luxury tax andentertainmenttax.Thisiskeepingthetaxpayersawayfromthebenefitsofcompre-hensive input tax and service tax set-off.

The proposed GST will give more relief to industry, trade, agriculture and consumers through a more comprehensive and wider coverage of input tax set-off and service tax set-off by inclusion of several taxes.

Structure of GST:

Many countries are following a single GST model. But for country like India dual model is supported. Dual GST means the proposed model will have two components-CGST - Central goods and service tax levied by the central governmentSGST - State goods and service tax levied by the state government.The centre and state will be currently looking at three categories of GST after the exemption of99commodities-1. A lower rate for basic goods.2. Standard rate for all the other goods.3. Rate for services.

First year: The standard GST will be 20 percent with both centre and state levying 10 per-cent each on goods. For products which will attract lower rate, the total GST burden will be 12 percent if centre and state agree to levy 6 percent each on these products.

Second year: Theplanistoreducestandardrateforgoodsto9percentforbothcentreand state so that GST comes to 18 percent.

Final year: If there is not much burden on the government for compensation, all rates for goods and services could converge at 8 percent resulting in 16 percent GST.

By Pottim Sahiti Reddy, MBA-K

CHAANAKYA VOL 4_09

8

Rate for services is 16 percent right from the year one with centre and state levying 8 per-cent each.

Benefits of GST:

1. GST provides a comprehensive and wider coverage of input credit setoff; service tax credit can be used for the payment of tax on sale of goods etc.2. CST will be removed. At present there is no input tax credit available for CST.3. Instead of all the Centre and State indirect taxes, only a common GST needs to be paid.4. Uniformity of tax rates across all the states.5. Ensures better compliance due to reduction in the aggregate tax rate.6. By reducing the tax burden, the competitiveness of Indian products in the international market is expected to increase.7.Pricesofgoodsareexpectedtoreduceinthelongrunasthebenefitsoflesstaxburdenwould be passed on to the consumer.8. Overall tax compliance cost will reduce for the government and can concentrate on GST.

Does GST design require changes?

The three-wayclassificationwould inducescope for classification and valuation dis-putes between the Centre and state and may substantially increase the compliance cost for tax payers. It is also providing a stimulus to lobbying lower rates by states. Given a time line reducing the rates, it’s not clear why both centre and state need to maintain this distinction in the rates.

Suppose one level of government decides to divide the tax base into three categories, the overall rates will get differentiated. Even if the centre were to opt for two rates by merging the rate for services with standard rate for goods, the differential between the categories would have been reduced.

\Itwouldbeusefultoreconsidertheadvantagesoffewerratesbeforefinalizingtheratestructure for GST in India.

The states losing autonomy in tax powers, especially in determining rates is another is-sue. The proposed draft of the constitutional amendment suggests that subsequent to the introduction of GST, any changes in the design of the tax would require the consent of two-thirds of the members of the Council of Ministers, as well as the assent of the Union financeminister.Mostofthestatesarenothappywiththisapproach.

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9

Asfinancialservicesandlocalsalesofcomputersaredifficulttotaxandifthesetwosec-tors are excluded from the base, number of states requiring standard rates higher than 15 percent will come to nine. Even if tax net is expanded to include these services, atleast four states would require standard rates higher than 15 percent for revenue neutrality. Some of the states are losing more from Central Service Tax than they could gain from inclusion of servicesinthebase.Thisisastructuralissueandmostofthestatesmayfinditdifficulttoaccept compensation.

Conclusion: The goal of GST is to bring India together into a common market. GST is meanttobetaxonfinalconsumption.Itisstructuredasadestination-basedtaxandsoratesneednotbethesameacrossallstates.Itwouldbeimportanttoprovideafloorrateon both the standard rate and lower rate of tax to further prevent wars. Uniformity in forms and procedures such as one registration and one return will also contribute to reduction in compliance costs.

CHAANAKYA VOL 4_09

Buzzwords

Drill-Bit Stock

A term used to describe shares that trade for prices less than one dollar. The fractional prices are comparable to the diameter measures of drill-bits found in a hardware store.

Dog And Pony Show

Aslangtermreferringtoafinancialseminarthatpresentsnewproductsorissuesofsecuri-ties to potential buyers.

Fast Tape

A type of futures market that occurs when a single traded price is unavailable because of the rapid and large number of transactions occurring in the pit or ring.

Fallen Angel

1. A bond that was once investment grade but has since been reduced to junk bond sta-tus. 2. A stock that has fallen substantially from its all time highs.

Dividend Clawback

Anarrangementunderwhichthosefinancingaprojectagreetocontribute,asequity,anyprior dividends received from the project to cover any cash shortages.

Double Barreled

Bonds secured by the pledge of two or more sources of repayment.

Noise Trader- What is It???

In simple terms, Noise Trading can be considered to be the opposite of trading based on News (Facts, Figures, etc). Rational traders trade based on information while the Noise traders do not. Black (1986) definesNoise trading as trading on noise as if it were information. In addition, he notes the importance of noise trading in capital markets: “Noise makes financial markets possible butalsomakesthemimperfect.”Thatis,inaworldwithout Noise traders, all trading is motivated by informational advantages. Recognizing they will be trading against another informed investor, traders will be reluctant to transact. Noise tradersprovidethenecessaryliquiditytofinancialmarkets.Inprovidingliquidity,however,they also provide noise.

Why Do Noise Traders Trade?

Noise trading arises due to many reasons. Some investors may simply enjoy trading or erroneously believe they have unique information or insights. In addition, some traders may trade on “sentiments”. Evidence from social psychology, sociology, andmarketingsuggeststhatindividualinvestor’sdecisionsarelikelytobeinfluencedby“fads”or“fashion.”Alternatively, institutional investors may be more inclined to trading on sentiments due to the close-knit nature of the investment community, the importance of performance relative to other institutional investors and the asymmetry of the incentives. Investors may trade on the same signal, but the signal need not be related to fundamental value (e.g. technical analysis). Trueman (1988) suggested that institutional investors may engage in noisetrading because it provides an imperfect signal to clients that the manager is informed. In a nut shell, noise trading may result from perceived information advantages, sentiments, trading appearing in the utility function or agency problems.

The Impact of Noise Trading on Prices

Noise trading can explain excess volatility in security prices (i.e. prices will be more volatile than value), temporal patterns in stock prices (e.g. momentum) and the use of technical analysis and positive feedback trading. The magnitude of Noise traders’ impact on security prices will depend on both the degree of Noise trading in the market and the systematic nature of Noise trading. Greater the degree of Noise trading greater will be the deviation between price and value. As the deviation between price and value increases, rational arbitrageurs should work to push prices toward fundamental value. In real markets, however, arbitrage is costly (e.g. short sale proceeds are not available for investment). Moreover, in aworldwithnoisetradersandfinitehorizons,arbitragecanberisky.Forexample,rational

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By Amar G M, MBA-M

did You know ?

CHAANAKYA VOL 4_09

11 CHAANAKYA VOL 4_09

arbitrageurs with limited horizons may be forced to unwind their positions in a period when Noise traders have pushed prices even further away from fundamental values. If Noise trading is cross-sectionally independent, then the impact of noise traders on a security’s price is likely to be small relative to a world in which noise trading is cross-sectionally correlated. That is, if orders from noise traders are equally likely to buy or sell initiated at a point in time, then many noise traders’ orders will cancel out and the impact on price should be relatively small. Alternatively, if the noise traders’ orders generally come from the same direction (i.e. primarily buy initiated or primarily sell initiated), their impact on a security’s price is likely to be large. A similar argument holds for the expected impact of noise traders on the market. If noise traders’ orders are cross-sectionally correlated across securities, then they are likely to impact market averages. That is, if noise traders systematicallyenter(orexit)financialmarkets,marketaveragesmaybeaffected.

Can Noise Traders Survive?

Historically, the impact of Noise trades has been assumed to be minimal since Noise traders should lose wealth (and therefore eventually become unimportant) when trading against rational“smart-money”arbitrageurs.However,thereislittlereasontosuspectthatrationalsmartmoneyspeculatorsdominatefinancialmarketsdevelop formalmodels thatallowfor the survival of Noise traders. Noise traders systematically underestimate variances of risky assets and therefore invest a greater fraction of their wealth in the risky asset than would an otherwise equally risk-averse rational investor. Their excessive risk-taking may not only allow Noise traders to survive but they may also come to dominate the market. Alternatively, the actions of Noise traders are cross-sectionally correlated (systematic) and influenceassetprices.Likeanyothersystematicrisk,theriskimpoundedbytherandomsentiments of noise traders should be priced. Thus, Noise traders may be compensated for a risk that they create.

Moreover, even though the model predicts that Noise traders will lose (on average) when trading against rational arbitrageurs, Noise traders may garner higher rates of returns than sophisticated investors if they concentrate their holdings in assets that have a greater sensitivity to innovations in noise trader sentiment. The issue of whether investors are compensatedforbearingnoisetraderrisk.Specifically,assetswithgreatersensitivitytonoise-traderriskwilltendtosellbelowfundamentalvalues(reflectingthepricingofnoisetrader risk). They suggest that such a scenario can explain the fact that most close-ended funds sell at a discount to their underlying assets (assuming individual investors are noise traders). Specifically, the discount from fundamental values reflects the additional riskfrom the ownership structure: close-ended fund shares are held primarily by Noise traders (individual investors), but Noise traders play a less important role in the underlying assets of the funds.

Thus, under these conditions, passive close-ended fund shareholders should garner larger returns than passive investors of the underlying assets as compensation for bearing noise trader risk. Despite selling at discounts, (passive) closed-end fund shareholders do not garner larger returns than the holders of the underlying assets. In fact, discounts are just large enough to cover the expenses incurred by the funds. In addition, holding capitalization constant, NYSE stocks with greater exposure to individual investors (and presumably greater exposure to noise trader risk) earn lower returns than stocks with greater exposure to institutional investors.

uniQue sYMBol For indian currencY

By Emili Mathew, MBA-N Sanjeeb Saha, MBA-K

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The Indian rupee is going to have a unique symbol soon. The new symbol is designed by Bombay IIT post-graduate D Udaya Kumar and has been approved by the cabinet headed byPrimeMinisterManmohanSinghon15thJuly2010.Thejury,whichhadsentthefiveshort-listed entries for the cabinet’s approval, was headed by a Reserve Bank Deputy Governor.ThiswillmakeIndiancurrencytobeonlythefifthonetohaveadistinctidentity.The others are US Dollar, Euro, British Pound and Japanese Yen.

ThisisareflectionofthefactthattheIndiancurrency,backedbyoveratrilliondollarecon-omy, is making its presence felt on the international scene with its increasingly highlighted strength and global representation.

The decision to have a symbol for the Indian rupee was taken by the government last year. Thefinanceministrywantedthesymboltorepresentthehistoricalandculturalethosofthecountry and called for entries from the public. Udaya Kumar’s entry was chosen from 3,000 designs competing for the currency symbol.

The design is based on the Tricolour, with two lines at the top and white space in between. ItrepresentstheIndianflagandisablendofIndianandRomanletters;acapital‘R’andDevanagari ‘ra’, which stands for rupiya. The symbol will help to distinguish the currency from the rupee or rupiah of other countries like Pakistan, Nepal, Sri Lanka and Indonesia. Kumar will get an award of Rs 2.5 lakhs for his effort.

The symbol will not be printed or embossed on currency notes or coins. Among currencies with distinctive identities, only the pound sterling has its symbol printed on the notes. To start with, the symbol will be included in the ‘Unicode Standard’ and major scripts of the world to ensure that it is easily displayed and printed in the electronic and print media. Uni-code is an international standard that allows text data to be interchanged globally without conflict.AfterincorporationintheglobalandIndiancodes,itwouldbeusedbyallindividu-als and entities within and outside the country. The symbol is likely to be adopted in a span of six months in the country, and within 18 to 24 months globally.

The symbol has been created to recognize the increasing linkages between India and the world. It would further highlight the strength and robustness of the Indian economy as a fa-voured destination for global investments and standardize the expression of Indian rupee in different languages.

HavingadistinctsymbolforIndiancurrencycanbeseenasabrandingeffortwhichreflectsIndia’s craving to be recognized as one of the most robust and stable economies that has successfully sailed through the recent world wide recession and emerged as a fascinating growth story in the global scenario. It is likely to receive a huge response in India as it is attached to a lot of public pride and sentiments.

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GoVt not to extend suGar Futures Ban BeYond sePteMBer

By Hardik Karia, MBA-M

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In the past decade we have seen that Forward Markets Commission (FMC) has imposed bans over various commodities like wheat, rice, urad and tur. These regulations are made from time to time, in order to control and keep a grip over the movement of derivatives. The forces of Demand and Supply in the market sometimes make it essential for the authorities to take such decisions.

Why is it done?The Centre had banned futures trading in wheat, rice, urad and tur two years ago due to increasing prices. Similarly last year, it banned futures trading in rubber, soybean oil, potato and chickpea (chana) because the prices were shooting up. Each time, the Centre was concerned with the rising prices as they thought the forward trading was promot-ing speculation. Thus, the above examples prove that the Centre is concerned about the speculationsdoneinthemarket,whichaffectsthemarketefficiency.Butthisdoesnotap-ply to sugar.

Case with SugarPrices of sugar in the year 2009were not over-valued, neither any speculationswerebuffering. Then the question arises, what were the bars for? Sugar prices have been rul-inghigherduetohighproductionduringtheyear2008-09andgainedover20percentsincethebeginningoftheyear.Reportssays,“Sugarproductionintheseason(2009-10)isexpectedtobelessthan160lakhtonsagainst263lakhtoneslastseason”.Inviewofthe lower production, the Centre has allowed duty-free imports of raw and white sugar, besides curbing its exports and banning the sugar futures on exchange.

Revoking sugar trade banInMay2009,themarketregulatorshadbarredthelaunchofnewsugarfuturescontracts.As the crop avereage is higher this year with a better production estimate, the ban won’t be extended beyond September 31, 2010. Initially, nine contracts of the commodity may be launched.Officialsexpectsugarproductiontotop24milliontonsinthesugaryearbegin-ning in October 2010, higher than the domestic demand of about 23 million tons.

Political ApproachTheannualrateoffoodinflationhasmovedupto12.92percentfortheweekendedJune19,2010duetohighpricesofessentialitems.Thepoorandthe’notsopoor’arehitthemost. Sugar is the most politically sensitive of all commodities and also has the highest weightage in the wholesale price index (WPI) which is why it was put on the banned list.

There is general belief among the masses that futures trading of food articles, especially sugar,on thecommodityexchanges leads toprice riseand inflation. Inflationcrossingdoubledigitshasaddedoiltothefire.Politicalpartiesareraisingtheirvoiceagainsttradingwhile business lobby FMC says there is no need to extend ban on Sugar Futures after the deadline of September 2010.

By SMITHA JOSEPH CLIFFORD CARDOZA MOHIL KAPOOR

aluMni sPeak

In this edition, we have with us Mr. Venkat Raju V.

ThefollowingareexcerptsfromaninterviewwithMr.VenkatRajuV,afinancealumnuswho passed out in the year 2006. He is currently the Director for Bagalur Cross Vinayaka Education Society. He has been the director for this organization for the past one and a half year.

Chaanakya: What does your present job involve?

Mr. Venkat Raju V: This job involves interacting with parents, co-ordinating with the school principals, keeping tab on day to day activities happening in school, strategic planning, formulating short term and long term goals, managing human resource. The present job involves all the functions of a company at its own capacity.

Chaanakya: What kind of challenges does your job bring up?

Mr. Venkat Raju V:Schooling isasaverycompetitivefield inthecityoutskirts,with ‘n’number of schools competing to mark their presence and with a minimum of 2 or 3 new schools starting every year offering free admissions as an introductory offer. Scarcity of Good Teaching staff, matching with the parents and student’s expectations, providing best facilities at low cost of fee structure are some of the grave challenges that come up. To sustain and grow in these kinds of markets is a real challenge.

Chaanakya: How did you prepare yourself for your present job?

Mr. Venkat Raju V:Mypreviousjobwasasaseniorfinanceexecutiveworkingonprojectcosting,analysingorders forprofits/losswith respect toconsumables,manpower, time,

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Mr. Venkat Raju VDirector

Bagalur Cross Vinayaka Education Society Batch: 2004 – ‘06

CONTACT DETAILSMobile no: +91-9880422455

Email id: venkyraj@rediff.com

machinesavailabilityandsoon.Myjobwaswelldefinedtochoose,prioritiseandexecuteorderswithrespecttoprofitabilityandmyjobwasconfinedtoverysimilarparametersdayin and day out.

My present job offers to handle wide functionalities in its own capacity and wide perspective and challenges of managing a company all by myself.

Chaanakya: What kind of expectations does your organization have of you?

Mr. Venkat Raju V: My organization expects overall development of child through quality education at any cost and sustainable growth year on year.

Chaanakya: What qualities do you think a fresher must possess to perform efficiently in the field you are into?

Mr. Venkat Raju V: Since I have an experience of both Employee as well as an employer, I personally feel one should always try to understand merits, demerits, challenges of the industry or the company with respect to one’s own interests before getting into the industry he/she chooses. I personally feel one should always think and act in investor’s point of view tobeasuccessfulemployeeinanychosenfield.

Chaanakya: Finally, any message for the students............

Mr. Venkat Raju V: My Message to students… in the market out here, employer wants you students very badly; they are very desperate to have a right candidate at any cost… so it is up to you to matchup their expectations…

All the Very Best for your future.

Thanks!

15 CHAANAKYA VOL 4_09

structure oF Pension Funds

An economy, apart from everything else, is a highly fluid transmissionmechanism. Itsbeauty lies in how the smallest of changes have the most complex trickle-down effects.

Areform in thepensionsystem tackles theprimaryproblemof thefinancialsector inadual manner. Introduction of private pension fund managers will ensure the large-scale mobilisation of savings. This would increase the rate of savings, which would lead to a higher rate of capital accumulation, crucial for a developing country like India. It has been proved statistically that private managers are in a position to earn greater returns from their sources. So in effect privatising the pension system would place a large pool of fund in the handsofefficientmanagers,specialisinginthisformofactivity.

Current Systems in India

The EPF programme, established in 1952, is acontributory provident fund providing benefits uponretirement, resignation or death based on the accumulated contributions plus interest, from employers and employees. Subscribers to the EPF have the option to make partial withdrawals for specifiedpurposes such as house construction, higher education for children, marriage, and medical expenses associated with illness.

In India the EPF, has been used more as medium of tax evasion by the salaried classes as the entire amount deposited in EPF is deductible for income-tax estimation purposes.

There is an urgent need to:• Reducegovernmentburden:InIndiathenumberofelderly(personsaged60andabove) is expected to increase by 107%, to 113.0 million by 2016.

• Involveunorganisedsector:Barely34million (or less than11%)of theestimatedworking population in India is eligible to participate in formal provisions meant to provide old ageincomesecurity.Therefore,almost90%ofIndia’sworkforceisnoteligibletoparticipatein any scheme that enables them to save for economic security during their old age.

• AtpresentthepensionSocialSecuritysystemisbasedonemployerandemployeecontributions, which largely excludes the unorganised sector.

By Prateek Singla, MBA K

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Changes recommended• Private management of accretions through Pension Fund Managers: It isrecommended the establishment of 6 Pension Fund Managers (PFMs) so as to simplify choice for individuals. But this objection is misplaced, as, even if individuals themselves do notpossesstheknowledgeoffinancialinstruments,themarketforceswouldenablethemto decide to employ a PFM who would make these choices on their behalf. Hence, this number should be determined by the free interplay of market forces.

• Roleofgovernmentguarantees:Toreassurethepeopletoswitchtothenewsystem,government guarantees play a vital role

• Administrative authority:The IndianPensionsAuthority (IPA)would oversee theentire working of the system and handle the administration. CII, in a recent press release suggested that the insurance regulator could also supervise the pensions sector.

• Removalofsubsidies:Thepresentcontributionof1.16%ofwagesbytheGovernmentto the Employees’ Pension Scheme should discontinue. Instead, this contribution should bechannelledintotheNationalSeniorCitizen’sFundasinitialcorpusforthefirst3yearsofincorporation of this Fund. Thereafter, this contribution should be discontinued. In addition, 25% of the premature and lump sum withdrawal tax on provident funds under the new IRA system should be transferred to this Fund annually.

• Roleoftheinsurancesector:Thereforminthepensionsectorisalsocloselyconnectedwith the insurance sector. Hence a reform carried out in one of them will necessarily have a positive external effect on the other and as such both share a symbiotic relationship.

• Earlywithdrawals:Thesuggestionistoabolitionthetaxonearningsofover12percent in Provident Fund and levy of tax, at least of a 10 per cent, on early withdrawal from Provident Funds.

• Financingthetransitioncost:Thetransitioncostforanewpensionsystemmaybethree-fold:1. Cost of paying the workers who chose to remain within the old system.2. Cost of reimbursing those who chose the new system.3. Cost of the ‘safety net’ provided by the government.

• Inflationindexing:Itwouldbeabetteralternativetoenabletheoldtomaintaintheircurrent consumption bundle by indexing pensions to prices. Using price rather than wage indexation would also help dampen the contribution rate increase and the wage increases may be put to use for other purposes.

CONCLUSION

Thekeywordforpensionreformisflexibility.This impliesthatmaximumroomneedstobe provided for local experiments. Rules need to be laid down clearly, but their number and level of stringency should not be overwhelming. In the long run, there needs to be a commitment to phase out most of the detailed rules, leaving only a broad framework to act upon.

17 CHAANAKYA VOL 4_09

Across

3. An increase in price and trading volume in a particular sector of the economy that occurs as a result of a recent takeover, which initiates a change in sentiment towards the sector.

5. The behaviour of a company that chooses to focus only on high-end ,high-margin products even if customers show an inclination towards value-ori-ented products.

6. The bank which has joined the United Stock Exhange shareholder base by acquiring a 1.33 per-cent stake.

18 CHAANAKYA VOL 4_09

crossword

Down

1. The state leading in the implementation of projects related to the Delhi-Mumbai In-dustrial Corridor.2. Goods that are perceived to be exclusive as long as prices remain high or in-crease.4. AbonddenominatedinCanadiandollarsthatissoldinCanadabyforeignfinancialinstitutions and companies.

1. Who was the chairman of Union Carbide when Bhopal tragedy occurred on 3 De-

cember1984?

2. If we consider that BSE Index has increased from 17000 to 17170 today, it would

mean that __________

3. Revenue-neutral rate (RNR) is a component of ___________ taxes in India?

4. What is the free look period given to the consumers to bring in more transparency,

discourage mis-selling of Ulips & other insurance policies and help investors take informed

decisions?

5. Who is the current Chief Economic Adviser to the Government of India?

Quiz

answers

Quiz

19 CHAANAKYA VOL 4_09

crossword

1. Warren Anderson

2. Total value of the securities which constitute

the index has increased 1%

3. Goods and Services Tax (GST)

4. 15 Days

5. Kaushik Basu

20 CHAANAKYA VOL 4_09

Manesh Paul Mani Editor-in-chief

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Sonal Sankhla Student Article

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Clifford Cardoza

Smitha Joseph &

Mohil Kapoor Alumni Speak

Dorin Jane Quiz & Did You Know

Mantri Ankit Atul Quotes & Buzz Words

Pottim Sahiti Reddy Crosswords

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Dhanya Anna Kurian

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teaM

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