Himanshu - Happy.....

The Third Stimulus

2009-01-26T16:30:00.000-08:00

Although I had to write about Ketan Parekh in this post, but I got this interesting thing in my mind which I thought of sharing with you people.

In the current scenario when various governments around the world are coming up with stimulus packages, Our government has also introduced 2 packages already worth around some Rs. 50,000 crores. It may take time for this money to flow into system but we will surely see another stimulus package in few months which will make the money available in the system as early as 4-5 months. The size of this package will be around 1/3rd of already announced packages or 75% of the size of first package. The best thing or should I say the most amazing quality of this package is the implementation part which is at its best. I am talking about the General Elections in our country.

Elections are serious business now. The cost of conducting last general elections in our country was Rs. 1300 crores. This was the expense from election commission only. It does not include expenditure of any political party or candidate.

Rs 11 crore (Rs 110 million)	1971
Rs 23 crore (Rs 230 million)	1977
Rs 54 crore (Rs 540 million)	1980
Rs 81 crore (Rs 810 million)	1984
Rs 154 crore (Rs 1.54 billion)	1989
Rs 359 crore (Rs 3.59 billion)	1991
Rs 597 crore (Rs 5.97 billion)	1995
Rs 666 crore (Rs 6.66 billion)	1998
Rs 880 crore (Rs 8.80 billion)	1999
Rs 1300 crore (Rs 13.00 billion)	2004
X Crores	2009

Going by the figures, we can simply say that the cost on public purse will be around Rs. 1700-2000 crores this time. This is roughly 10% of the first stimulus package introduced by Government of India.

Now Coming on to Political Parties and candidates. The expenditure starts with parties becoming top clients of marketing firm with contract size of more than 100 crores. As mentioned in some newspapers congress has given contract worth Rs. 150 crores to 2 agencies. BJP has given Rs. 120 crores to other 2. The total cost on marketing through organized media will cross atleast Rs. 500 crores.

There are more than 950 political partis registered in India. The total campaigning cost of all political parties was around Rs. 10,000 crores in 2004 elections.( this is unofficial figure). The official figure of Rs. 3000 crores includes Rs. 1300 crores spent by EC as well. The unofficial figure is expected to rise to Rs. 12000 crores - Rs. 16000 crores for this years election.

According to rules of Election Commission: In General elections, Candidates in bigger constituencies can spend can spend upto Rs. 25 Lakh. In other constituencies it varies between Rs. 10 Lakh and 25 Lakh.

In assembly elections, Candidates can spend just Rs. 12 lakh on their campaign. Out of this Rs. 4 lakh should be kept aside for main party leaders to campaign. But the remaining eight lakh "is just the cost of hiring a chopper for a day"

If we take a common scenario in which elections held for 540 seats and there are on a average 4 serious contestants per seat and they spend approved amount only that averages to about 20 lakhs.

That is : 540 * 4 * 20,00,000 = 432 crores.

But actual expenditure is about 23 times more than allowed expenses. It is said that a candidate generally spends or is willing to spend more than 10 times the prescribed ceiling. It is not out to philanthropy, but of trust in Indian Political System that he/she can earn atleast 10 times of what he spends once he gets power.

Assembly elections are not about the small change either. In the Karnataka assembly elections in May 2008, hard cash, liquor and goodies worth Rs 45.57 crore were seized during the campaign.

Former Prime Minister VP Singh tried to legislate to force election spending through cheques only, but as expected he failed.

If we take average cases of 1850 crores to be expenditure of EC and 14000 crores from political parties. It comes our to be around kewl 16000 crores (approx.) which is more than 75% of first stimulus package of Indian Government.

Where this money is spent: It is mostly spent on liquor, cash to voters, arranging rallies, freebies, advertisements through organized media and expenditure by party workers like mobile phones, food, vehicles, posters and party after elections. Most of the money is going directly into hands of people thus it is increasing the supply of money in market.

Elections will put more money in market in next 6 months in comparison to all the stimulus packages by Indian government put together. The amazing thing is that the money is actually spent in this scenario. We know about the implementation of government projects and how much time it takes but election expenditure needs to be on time so money will be out by June middle. Can't it be regarded as the stimulus package by government or political parties who will be forming the government.

Writing few lines about US Scenario:

Barack Obama has spent whopping $1.5 billion (Rs. 7500 crores) for elections on his way to become the president of US. But Obama used the Internet to lobby ordinary voters to sign small cheques. In India, it is unaccounted money that makes for deep party coffers. It even costed $170 million for the parties organized in first week for Obama. This money also came from donations with maximum limit set to $ 50,000.

Money cant buy you love but what to say about elections.

Thinkin. .,.,……….........

Top Scams - Harshad Mehta

2009-01-08T11:02:00.000-08:00

Satyam - a 7000 crore scam - sounds big.

As said by Mr. Damodran former Sebi chairman : The case of Satyam Computer is neither the first nor the last corporate fraud to have hit India. I was just thinking about the scams which have in the past have raised our eyes.

5 Scams which I remember or should I say 5 hit scams in Indian Market in recent past were:

Harshad Mehta Scam
Ketan Parekh Scam
IPO Scam (Benaami Account)
Telgi Stamp Paper Scam
UTI Scam

Harshad Mehta, once known to be the first start broker of Indian Capital Market or to put in other words he changed the way people use to look at broking(stock-broking ;) ) business. He was the one who made every middle class Indian imagine that he can be rich by getting into stock market. He will always be known as the first BIG BULL and the main architect of the securities scam of 1992. The scam which led the market go down by 40% in less than couple of months. He died in judicial custody just before year 2001 was coming to an end.

There were two markets running parallelly. One was the formal money market in which banks lend to each other by taking government securities as mortgages. Second was the informal money market in which money lending is done for investing in stocks. Interest rate in the second was twice as much as interest rate in the first. There is a artificial wall between the two markets due to gap in interest rates and there was this person who used this artificial wall to make enormous profits. This was the scam explained in 5 lines.

BSE sensex rose to about 4.5 times in around 20 months. It touched 1000 mark for the first time on July 25th 1990 and in March 1992 it touched 4000 for the first time. This rise in stock market lead to the requirement of huge funds for brokers. The margin imposed by BSE were quite high. The money from the informal market was costing too much for brokers. There were some brokers who were operating in informal and formal money markets. At the same time, Indian Government has adopted the LPG policy, so Public Sector Banks were under pressure to improve there bottom line. At this time, the broker used what is called as Ready Forward(RF) deals to take out money from the formal market into the informal market.

The banks needs to maintain certain amount of money(SLR) in the form of government securities and certain approved securities. The RF was a secured short term loan between banks. Typically it was for 15 day period. It was kind of agreement between two banks in which borrowing bank actually sells the securities to the lending bank with a promise to buy it back at the end of the period at a slightly higher price. It helps both the banks in a way that the bank who is in temporary surge of government securities gets them and at the same time the other bank earns some income and securities remains with them. RF is legally not a loan so it does not constitute a part of its liability. In the beginning the banks use to deal directly with each other but it use show which banks needs the money and which use to increase the cost of borrowing. So brokers came into the deal. Now, the banks were not aware which bank is lending and which bank is borrowing, the broker use to earn the commission for this transaction. The broker use to take securities from one bank and cheque from other bank. It use to give the both the things after interchanging. As the securities use to change hands for short term, so banks usually use to give Bank receipts(BR). BR's use to act like the receipt of securities.

Mehta after coming into this business, got the idea of breaking the artificial wall of two markets. For this purpose he used 2 small and little known banks - Bank of Karad(BOK) and Metropolitan Bank(MCB). These banks were willing to issue BR's for a fee. These fake BR's were used to get money from other banks. The collected money was then invested in sock market and was used to drive up the prices of selected stocks. When time period use to end, the stocks were sold and money returned to the bank after making a profit. The game kept on going till the time stock prices were going up. But when the market fell, the game came in front. Because the banks who have lended the money have got fake bank receipts which was just worth scrap.

This scam affected many banks including PSB's. It even affected National Housing Bank which was a branch of RBI.

The CBI conducted an enquiry. HE died in the judicial custody. His death also remains a mystery. The money which he earned was still untraceable to a large extent though there are many possibilities expressed by renowned persons. One such claim was the money use to send out through Hawala and it use to reenter through India Development Bonds.

This scam broke the Indian financial System. The immediate result was the market going down from 4500 odd levels to 2500. Market lost about Rs. 100,000 crores worth of market capitalization. After this market reached the milestone of 5000 in year 1999.

Harshad Mehta after getting out of the jail tried to reenter the market almost every year. He made a comeback in 1997 as stock market guru. He was amongst the first in India to launch a website for giving tips to share holders.

He was man with flashiness attached to him. He use to drive Toyota Lexus in 1992 which was not that easy to see for middle class Indian at that time. He feed bears with peanuts in mumbai zoo symbolizing his victory over bear cartel in the market. His few famous quotes: "I thought I'd be like Pied Piper." and Asset Creation is not a crime, that if you wanted to be Harshad Mehta come to the stock market, etc."

I feel bad when I think that if that person can rise from being a small town boy to a role model(till scam came in front) in such a small time. What he could have done by his eternal optimism and amazing brain if it would have been channeled to more productive use.

(Next will be an article on Ketan Parekh)

Mutual Funds

2009-01-06T12:04:00.000-08:00

A Mutual fund is a fund raised from public that invests in a diversified portfolio of securities. People who give money for investment are its owners or unitholders. It earns money in 2 ways - first is if the value of the security increases and secondly securities can pay dividend. A fund may lose money if the value of the security drops.

In other words, it can be said that Mutual fund is collection of money with a promise that money will be invested by professional managers who are expected to grow the money in better way than normal people. Individuals generally lack time and skills to invest there money. The basic principle in Mutual funds state that hire a professional for collective funds and pay management fees in return.

In India, Mutual Fund are governed by AMFI and Sebi. The organization that manages the investment is the Asset Management Company(AMC). Employees of the AMC who perform this role of managing the money are known as fund managers.

Investors are very particular about there investment. Risk quotient plays an important role in there decision. Investor thus chooses through Portfolio Management Schemes (PMS).It is possible to balance the time and cost required to manage investments by grouping investors together based on their preferences.

Mutual fund business needs to be highly regulated to protect investors from Mutual fund frauds and big players in the market. Regulations vary from one country to another though they can be broadly classified under the following headings:

Pre-Qualification to start a Mutual funds.
Permissible schemes and investments
Control over marketing process
Level of operational flexibility to the professional investors
and, Valuation of securities

There are 5 parties involved in Mutual Funds. Investors, Trustees, AMC, Registrar and Custodian/ Depositor.

Investor as we people know the persons who invest money.

Trustees are responsible for ensuring that investors interests in a scheme are properly taken care of. They are paid the fees for the same.

AMC manage the investment portfolio for which it charges a fees. It is the one which bears all the costs that are related to its activity, such as office space, interiors, machinery, software development and other costs.

Registrar This post is for tracking the scheme. Sometimes AMC's keep this post in house. The registrar maintains an account of the investor's investments in and disinvestments from the schemes. Requests to invest more money into a scheme, or to redeem money against existing investments in a scheme are processed by the R&T.

Custodian/Depositor It maintains custody of the securities in which the schemes invests-as distinct from the registrar who tracks the investment by investors in the scheme. This ensures an ongoing independent record of the investments of the scheme.

Types of Mutual Funds:

Open End Fund

Close End Fund

Open end-Fund - These are mutual funds which continually create new units or redeem issued units on demand. They are also called unit trusts. Units can be bought or sold in the market at prevailing NAV.

Close end-Fund - It can be floated under a company structure or a trust structure. There is a lock-in period for investments in this kind of fund. Typically ELSS can be considered as an important example of the fund.

NAV-Net Asset Value - It is the market value of its underlying assets minus its liabilities divided by the number of units outstanding.

Mutual Fund Categories

Equity Funds - These funds invest mainly in the stocks of various types of companies. The types of companies in which the fund will invest will depend on the investment objectives, strategies and policies of the fund.

Income Funds - The objective of these funds is to provide a regular stream of income to the investor. Mostly there investment are in medium to long term secured investments.

Balanced Funds - There objective is to have optimal portfolio or risk and consistentenancy. They typically invest around 60-65% in equities and remaining in debt.

Index Funds - These funds invest only in the stocks which are in the particular index. These funds are good to track the flow of the market indices.

Sector Funds - The investment from these funds are basically into the stocks of particular sector companies. Sector funds typically target in one specific market segment, for example: Power, Energy, Real Estate, Finance, Oil and Natural Gas, etc. They are typically high risk high return funds.

Islamic Funds (Not in India) - These funds follow the Islamic Shairah rules. There is the purification process as the idle money earns interest which is not desirable in Islamic investments.

Main sources of Income for the Mutual Funds:

Sources of income depends on the investment objective and thus the investments.

Profit from Government securities.
Returns from deposits.
Return from term finance certificate or corporate paper.
Profit from Money market transactions.
Profit from PLS accounts with banks.
Dividends from equity investments.
Capital gains from sale of equity securities.
Any appreciation in the value of the investment, but not realized, is not taken into account, while calculating the income but it is taken into account while calculating the NAV.

These are basics of Mutual Funds. In next few articles we will try to understand about Mutual Fund industry in India.

Safe Investments

2008-12-29T09:39:00.000-08:00

Till few years back, most of the people use to invest in small saving schemes. Though many investors have started investing in equities now but still there are many investors in small towns who invest in post office saving schemes, bank deposits, government securities and rbi bonds. For any portfolio to be considered balanced, fixed income investments are a must.

Here are the most popular small savings schemes you can include in your investment portfolio:

Kisan Vikas Patra(KVP) The KVP was launched after seeing a large potential of rural area. Investment in KVP double every 8 years and 7 months. The rate of interest is 8.41% p.a. approximately.

Certificates are available in denominations of Rs. 100, Rs. 500, Rs. 1000, Rs. 5000, Rs. 10000 and Rs. 50000.
You can purchase the certificates at any post office.
There is no maximum limit on the purchase of number of certificates purchased.
An identity slip will be issued to you on request.
On maturity, certificates can be encashed at the issuing post office.
They can also be encashed at any other post office, once the officer-in-charge verifies your identity.
Someone else can also be nominated to receive the money.

Post Office Monthly Income Scheme This scheme is good for people who want to receive monthly income.

Account can be opened at any post office.
Account may be opened single or jointly.
Interest rate is 8% p.a. payable monthly.
Minimum investment is Rs. 1500 and Rs. 4,50,000 for single accounts and Rs. 9,00,000 for joint account.
Maturity period of the scheme is six years.
You can transfer your account from one post office to another across India, without any cost.

National Savings Certificates (NSC)(VIII Issue) This scheme was basically designed for minors.

Account can be opened at any post office.
Account may be opened jointly by 2 adults, a minor and an adult, aminor and a trust as well.
Certificates are available in denominations of Rs. 100, Rs. 500, Rs. 1,000, Rs. 5,000, Rs. 10,000.
Interest rate is 8%.
Maturity period of the scheme is 6 years.
Besides cash, local cheques, pay order or Demand Draft(DD) drawn in favour of the post master are also accepted.
Certificates can be encashed at the post office where they are registered or at any other post office once the officer incharge verifies the registration.

Post Office Time Deposits This scheme let the people invest small amount in regular intervals.

Account can be open singly, jointly. Even a minor of 10 yrs. and above can open an account directly.
The duration and rate of interest is:
Interest rate and Duration: 1 year - 6.25% 2 years - 6.50% 3 years - 7.25% 5 years - 7.50%
Different accounts of different maturity period can be opened in one name.
Ifmoney is withdrawn between 6 months and 1 year - no interest, after 1 yr. prematurely - interest will be paid at 2% less than the rate of interest specified.

Reserve Bank of India's Savings Bond This is safest investment as issued by RBI.

No maximum limit for investment in this bond.
Both half-yearly and cumulative interest options are available.
Interest rate is 8% p.a.
Maturity period is of 5 years.

These investment options may not make a big part of any portfolio but are necessary to be there. There are some other option like PPF, Bank FD's etc. which I will explain in some other post.

Hope this information helps. For any query, you can get in touch with me at chopra.himanshu@gmail.com or +91-9910306652.

IT - It will rock again for INDIA.

2008-12-27T10:40:00.000-08:00

IT stocks are down. Infosys from the 52 week high of 2046 is trading at around 1110. TCS from 1100 to 470 odd levels. Rest all companies are also on same lines.

In this scenario, When People think It companies may lose there sheen over a period of time. I am here to try and give you people a reason to think the opposite.

These recommendations are purely for mid and large sized organizations.

We see lots of bankruptcies these days. As a common saying in colleges these days goes. Half the companies are bankrupt and rest half are sold. But if we see in a bit of detail, this is the time when Indian It firms are going to come with flying colours to compete with the best in world.

Some of the reaons for the same are:

Need for Outsourcing

Cost control will the word, once we reach bottom of this downturn. All the survivors of this downturn will try to cut as much costs as possible.

IT outsourcing typically helps in achieving 30% - 40% savings. Whenever a company thinks about outsourcing, It gets 2 options. First is biggies like IBM, Accenture and second is Indian IT firms. Lately Indian IT firms have started getting deals almost equivalent to size of global IT giants. ABN-AMRO or Citigroup can be taken as an example. This downturn will actually male outsourcing a necessity for big players.

As a result of the shift, India is becoming hub for R&D and IT outsourcing.

Attrition Rate

Investment in workforce is looked as one of the most important and heavy cost in IT industry. Indian IT companies spend heavily on employees. Infosys training campus's are famous worldwide for the same.

Attrition rate for Indian IT firms are around 15%. Biggies like TCS maintain it @ around 11% with Infosys closely behind @ 13%. These are much less than global biggies like Accenture which maintain a global rate of around 20%.

Attrition rate is expected to fall to lower levels in this downturn. This low turnover will actually be constructive for the companies.

Homesickness

Highly skilled people can work in India in the same domain as they are working elsewhere in the world and still can live with their family. This feeling is getting many senior people back to India and Indian IT companies hire them to get sufficient experienced personnel for work. These people give companies a chance to expand services in new areas. Current Layoff @ Us is also helping in the cause. The benefit is mutual in these kinds of cases.

Employee Cost Factor

Employee cost was rising at a steep rate in Indian IT industry till last year. Yearly increase of around 25 % was not sustainable in the long run. This downturn has given companies sufficient room to slow down on salary increases. This makes them able t hire skilled persons at right cost.

Quality Education

Education is the base for the technology industry. Between 2004 and 2011, the number of engineers passing out every year will double.Leading corporate groups are coming into the field of providing quality education. Reliance, Jaypee, Mahindra are the few names which come across my mind right now. Tata nd Birla have already setup great institutions that are recognized globally for education.

IIT's, IIM's and ISB are giving the best to students in India and making them comparable to anyone in this world.

Amity, Symbiosis, ICFAI are helping in making the education erach ti maximum people by increasing intakes in their institutes.

These can be the reasons for the sucess of IT firms in future. These companies will be big time recruiters and money makers in times to come.