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1st Sept.

2008
Volume 2, Issue 11

Wealth Incorporation - A CCIM Finance Club Initiative Presents

CHAANAKYA
..Tracking the Economy

Issue Attractions
National Headlines International Headline Corporate Interview Students Article
Investors Check/Quiz

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I have a problem with too much money. I can't reinvest it fast enough, and because I reinvest it, more money comes in. Yes, the rich do get richer. - Robert Kiyosaki

National Headlines

Company Review/Buzz Words


Investors Check

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Inflation12.40 % , IIP 5.2%

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Sensex

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On Aug 29th NSE launched currency futures for the first time in India. Interest rate derivatives may also come in India by Jan. end IDFC MF has launched of IDFC Strategic Sector (50-50) Equity Fund, an open ended equity fund that will invest up to 50 per cent of the assets in a chosen sector that is positioned for high returns. Fidelity Asset Management Company on Monday launched its first fixed maturity plan, the Fidelity Fixed Maturity, Series 1 - Plan A with duration of 370 days from the date of allotment of units. Fund managers expect a rebound in equities by the second quarter of calendar 2009, and are accordingly framing strategies to manage portfolios while delaying new launches. Standard Chartered Bank is scaling down its personal loans business and has decided to henceforth focus on cross selling to existing customers. Almost all commercial banks, including State Bank of India (SBI) and Punjab National Bank (PNB), have decided not to increase interest rates on education loans. Borrowers finding it difficult to service their loans owing to increasing interest rates and inflation, banks and financial institutions are anticipating a grim scenario of ballooning defaults. According to industry sources, of late, bad debts have risen from 5-7% to 14-19% for some banks.

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International Headlines
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Lehman sought to sell up to a 50 percent stake to Chinas biggest brokerage, CITIC Securities, or Korea Development Bank. Microsoft Corp. is buying a Munich, Germany-based Web comparison shopping site and its parent company for about $486 million in cash. Canadas Precision Drilling will buy Grey Wolf in a cash and stock deal worth more than $2 billion,, apparently ending an extended fight for control the Houston gas driller. Japan is drawing up an economic stimulus package worth $73 billion, or eight trillion yen, to help businesses and consumers cope with soaring fuel and commodity prices. Federal regulators say Merrill Lynch & Co. will buy back up to $7 billion in auction-rate securities over its role in selling the risky bonds to retail investors. Fed Hints It Will Raise Benchmark Interest Rate: policy makers expect to eventually raise their benchmark interest rate in an effort to slow inflation.

You know you are on the road to success if you would do your job, and not be paid for it. - Oprah Winfrey, American, Talk Show Host

Interview with Mr. Sandeep Kumar P.


Position Held : Analyst, ICICI Prudential. Q1. Sir, Can you tell us about your job profile?

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Ans. I'm working with ICICI Prudential as an Analyst, my work profile includes testing the product effectiveness and innovation in products. My job is to use primary market data about the performance and the effectiveness of a certain product. Moreover, I make effective use of various mathematical models in bringing out new features to the existing products or propose a new product and conduct the pilot phase testing. Q2. The markets lately have been extremely volatile and during this phase how have the customers reacted to the newly introduced products? Ans. There have not been many additions/alterations to the existing products, although there have been many changes in the way they have been marketed and percepted, the external factors are something that the products have been made to face, i.e., when we suggest ways and means to enhance the product or a particular feature, we keep in mind the macroeconomic conditions & the necessary drifts of the economic indicators and only then do we move forward. Being in a junior position, we work on this individually by segregating the findings necessary and in addition to it, we pick up the study or the suggestion that we find most suitable for an existing product in the existing environment and than we test it against it's sustainability in the future or we implement the findings on the products that will be available in the market later. Q3. Sir, any suggestions or words of inspiration for the Finance Club students of Christ University Institute of Management? Ans. Education is the single most valuable asset which always has an increasing value through time. It is important that one goes beyond books to identify their interests and strengths and work on them. Thank You.

We go to school to learn to work hard for money. I write books and create products that teach people how to have money work hard for them. - Robert Kiyosaki, American Author & Investor

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Corporate Bond

By : Kavitha

Did you Know?


1. T h e r e w e r e n o commercial banks in colonial America. Borrowing was done largely from merchants who borrowed in turn from Merchant banks in England or from friends and family acquaintances. The first US chartered bank was the Bank of North America in 1781. 2. In 1997, currency speculators panicked, and started selling Thai baht. This triggered an overall panic in Asia, leading to the collapse of the economies, leading to the 1997 Asian Currency Crisis. This explains why Asian countries keep high foreign reserves as a hedge against further runs.
Stock Ratnas
INDIAN HOTELS BSE- 500850, NSE INDHOTEL CMP Rs. 76.40 TARGET PRICE: Rs.85 TATA MOTORS BSE 500570 NSE TATAMOTORS CMP- Rs. 433.50 TARGET PRICE: Rs. 454 Infosys Tech BSE 500209 NSE INFOSYSTCH CMP- Rs. 1679.60 TARGET PRICE: Rs. 1703
(CMP Current Market Price)

A Corporate Bond is a bond issued by a corporation. The term is usually applied to longerterm debt instruments, generally with a maturity date falling at least a year after their issue date. Corporate bonds play an important role in the growth of an economy. In India Government bonds currently dominate the domestic bond market. They account for two-thirds of the total outstanding debt and 97 per cent of secondary trade. Currently, the FII limit in corporate debt stands at $1.5 billion. A well developed bond market could supplement the banking system in meeting the requirements of the corporate sector for long term capital investment and asset creation. It could provide a stable source of finance; especially when the equity market is volatile and resource requirements of the corporate entities are large. In the case of India, development of a corporate bond market has become even more crucial especially, in view of the need for raising large amount of resources for infrastructure development in the country during the next couple of years. Countries like Malaysia and South Korea have made reasonable progress in the development of corporate bond market followed by Thailand in regard to the developing Asia. Yet going by the US or European standards the progress has been tardy; rather insignificant considering the actual requirements of the region, as of now. Both China and India have lagged behind in developing corporate bond markets.

Some of the problems with the Indian Corporate bond market are: 1. Bank financing versus bond financing - Corporates took resort to their growing internal resources, raised resources through low cost equity taking advantage of the equity boom. Further, the bond financing, in the absence of hedging avenues, turned out be more risky and less flexible in comparison to bank financing 2. Risk management - The derivatives markets are not well developed do enable both issuers and investors to efficiently transfer the risks arising out of interest rate movements. Though markets exist for interest rate swaps and interest rate futures, the number of participants is limited and the market is not broad and deep. 3. Stamp Duty - Stamp duty has been a source of revenue for the State governments. Duty is levied on financial instruments both either at the time of issue or on transfer or on both depending upon the nature of the instrument, issuer etc. These duties are perceived to be very high and act as a deterrent to the development of the bond markets. 4. Narrow Investor base - In India, provident and pension funds have been traditionally investing in Government securities for safety. Retail investors participation in tradable fixed income securities is very negligible. 5. Repo in Corporate Bonds - Repos are currently allowed only in Government securities though there was a move to extend the same to corporate bonds by the RBI. Repos certainly create liquidity to the corporate bond market.
The recent developments: The Securities & Exchange Board of India (SEBI) is preparing a slew of major initiatives to kick start the moribund corporate bond market. SEBI and the Reserve Bank of India (RBI) are also on the verge of an agreement on starting repos in corporate bonds as Repos would allow investors to recycle illiquid corporate bonds and then borrow, which in turn would improve liquidity. The introduction of repos in corporate bonds would improve liquidity. The move will improve liquidity in the market. Major changes are also proposed in the corporate bond market to ensure robust trading and settlement. Apart from simplifying the procedure for corporate bond issuances by listed firms, SEBI is also planning to insist on them appointing debenture trustees. It will also mandate a transparent clearing & settlement system for such trading. Implicit in the SEBI moves is the fact that it wants over-thecounter trading to eventually move to the exchange platform. There is a move to exempt tax deducted at the source for bonds traded on the exchange platform to push for an exchange-traded corporate bond market

The herd instinct among forecasters makes sheep look like independent thinkers., Edgar R. Fiedler, American Business Economist

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INVESTORS CHECK

By: Diwakar Grover

Why hedge funds may be good for Indian markets? An illustrative view
Mention below is benefits of introducing hedge funds in the Indian market. It shows how hedge funds could improve asset price efficiency. Besides, such funds, by virtue of their diverse investment styles, could provide investors an opportunity to enhance their risk-adjusted portfolio returns. Of different genre Suppose a long-only (mutual fund) manager and a hedge fund manager both have a negative view on SBI, a positive view on HDFC Bank and a neutral view on ITC. Long-only active managers will buy ITC in the same weight as their benchmark index, may overweight HDFC Bank and may not take any exposure in SBI. There is a reason for such a strategy. Active managers strive to beat their benchmark index. But they do not take too many active bets, lest their bets go wrong. Often, active funds tail the benchmark index with few active bets. Importantly, such managers cannot short-sell to take advantage of their negative view on a stock. Hedge fund managers do not suffer from such constraint. In the above example, the hedge fund manager may overweight HDFC Bank, short-sell SBI and not take any exposure in ITC. Better still, to neutralize any market risk, the hedge fund manager may buy HDFC Bank and short-sell SBI in such a way that the market risk in HDFC Bank is offset by short-selling SBI. Often, neutralizing market risk on a portfolio would mean short-selling Nifty futures. Exploiting price inefficiency Hedge funds identify mispriced assets and exploit any price inefficiency. One way to do this is to employ statistical arbitrage. Suppose a hedge fund manager finds that combination of one share of HDFC Bank and two short shares of SBI (1HDFC 2SBI) has a stable statistical distribution. If the spread wanders far away from its mean, a hedge fund manager would set-up this strategy with a view that the spread will tighten. Such relative-value strategies can help arbitrate away asset price inefficiencies in a normal market. Besides, hedge funds employ strategies to arbitrage price differentials between the derivatives and the spot market. Suppose a stock is trading at Rs 1,480 in the spot market. Assume that the hedge fund manager, based on her proprietary model, believes that the futures price should be only Rs 1,470 against its current market price of Rs. 1,510. Contd. On Page No. 6.

Quiz:
Q.1. Type of tax-deferred trust account created by the U.S. government to assist families in funding educational expenses for beneficiaries 18 years or younger. Q.2. The process of consolidating swap agreements between two parties into a single agreement. As a result, instead of each swap agreement leading to a stream of individual payments by either party, all of the swaps are netted together so that only one net payment is being made to one party based on the flows of the combined swaps. Q.3. A type of monopoly that exists as a result of the high fixed or start-up costs of operating a business in a particular industry. Because it is economically sensible to have certain natural monopolies, governments often regulate those in operation, ensuring that consumers get a fair deal.

Time is our most precious asset, we should invest it wisely. Michael Levy, American Self Help Author and Poet

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Company Review

By : Sukrutha

Motilal Oswal Financial Services Ltd. (MOFSL) is a well-diversified, financial services company focused on wealth creation for all its customers, such as institutional and corporate clients, HNI and retail customers. Their services and product offerings include equity broking, commodity broking, distribution of third party products, investment banking and venture capital management
Overview
Motilal Oswal Securities Ltd. was founded in 1987 as a small sub-broking unit, with just two people running the show. Focus on customer-first-attitude, ethical and transparent business practices, respect for professionalism, research-based value investing and implementation of cutting-edge technology enabled them to blossom into a 2000 member team. Today they are a well diversified financial services firm offering a range of financial products and services such as: > Wealth Management > Broking Distribution > Commodity Broking > Portfolio Management Services > Institutional Equities > Private Equity > Investment Banking Services > Principal Strategies They have a diversified client base that includes retail customers (including High Net worth Individuals), mutual funds, foreign institutional investors, financial institutions and corporate clients. They are headquartered in Mumbai and as of June 30, 2008, they had a network spread over 450 cities and towns comprising 1,496 Business Locations operated in collaboration with Business Partners.

Careers at Motilal Oswal


Motilal Oswal is expanding rapidly. They are thus seeking an increasing number of new associates in all fields of operations ranging from research, sales and marketing to back office operations. They aim to select the right person for the job and create a distinctive environment for people to learn, experiment, and grow. They have a unique program supported by 4 pillars to a successful career. The four pillars are: 1. Growth Path: For Professional and Personal growth supported by a dynamic growth environment. 2. Meritocracy: the most important parameter for professional growth. 3. Leadership development: There is a huge amount of investment in terms of money, training, effort and time to groom deserving associates to assume higher level positions. 4. Empowerment and Entrepreneurship: Motilal Oswal believes in empowerment of it associates and encourages entrepreneurship talent. Many of their Business associates, who started as a single outlet, are multi location today and have expanded their business many folds.

So at Motilal Oswal, one can look forward to a very successful and rewarding career.

Buzz Word

Book Quotes:

Horizontal spread :The buying and selling of two options at the same price but with different maturity dates. Hard landing : A change in economic strategy to counteract inflation which has serious results for the population. Forfaiting : Providing finance for exporters, where an agent accepts a bill of exchange from an overseas customer, he buys the bill at a discount and collects the payments from the customer in due course. Risk arbitrage : The business of buying shares in companies which are likely to be taken over and so rise in price.

Never again clutter your days or nights with so many menial and unimportant things that you have no time to accept a real challenge when it comes along - Og Mandino Keep in mind that the true measure of an individual is how he treats a person who can do him absolutely no good. - Ann Landers

Money won is twice as sweet as money earned., Paul Newman, American, Actor and Philanthropist

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INVESTORS CHECK
Contd. From Page No. 4
The fund manager will short the futures contract and simultaneously buy the stock in the spot market. The trade will be profitable as long as difference between the spot price and the futures price is less than Rs 40. As more hedge funds exploit such price differentials, disconnect between the spot and derivative markets could gradually reduce. And that could attract long-term hedgers to the market. Higher risk-adjusted returns Hedge funds create value for investors through their diverse investment styles. Here are some examples.

Quiz Answers
1. Coverdell Education Savings Account - ESA 2. Bilateral Netting 3. Natural Monopoly

Did you Know?


The Stock Exchange in Amsterdam, the Netherlands, was founded in 1602 for dealings in printed shares of the United East India Company of the Netherlands. Its the worlds oldest stock exchange. The worlds largest commercial or utility employer is the Indian railway system, with over 1.6 million regular employees on its payroll. The first Morgan Bank on Wall Street was built in 1871 on the former site of a grocery store. Naina Lal Kidwai, one of the head honchos of HSBC's investment banking business in India, was instrumental in the New York Stock Exchange listing of Wipro; in facilitating nationwide cellular phone service t hrough a deal involving the Tata and Birla families and AT&T; and in a n u m b e r o f privatisation deals.

Relative-value strategies such as fixed-income arbitrage and market-neutral style strive to back-out beta exposure and provide alpha returns. Such strategies typically carry lower volatility than government bonds but generate higher returns. They, hence, act as returns-enhancers when combined with a bond portfolio. The long-short investment style (such as 130 per cent long position and 30 per cent short position in equity) is a high-risk high-return strategy. The volatility of this strategy is lower than that of the traditional equity strategy. This strategy, hence, acts as return-enhancers when combined with equity portfolios.

The managed-futures investment style primarily takes exposure in commodity futures. This style acts as a risk-diversifier for an equity portfolio. Of course, there are risks with such investments. Hedge funds typically employ high leverage. This causes a systemic risk in the event a fund folds because of high drawdowns. Besides, monitoring such managers is important because many of them may charge alpha fees for beta exposure. It is not surprising that the committee has recommended that hedge fund investments be offered only to those who can invest Rs 1 and above. A similar such rule exists in the US. Conclusion It is important to understand that arbitraging price inefficiencies does not mean that hedge funds will prevent formation of market crashes or asset price bubbles. Hedge fund managers can be as irrational as the professional long-only managers and investors. Yet, the introduction of hedge funds will be a welcome move to the Indian markets for two reasons such funds can provide higher risk-adjusted returns for investors and can facilitate better asset price efficiency.

Please mail your valuable feedbacks, reviews at chaanakya.ccim@gmail.com

Contributions made by :
Editing/Compiling News Company Review, Did you know, Quotes Stock Ratnas, Quiz Graphs Investors Check Interview Book Quotes, Buzz Word Students Article Coordination Arihant Patawari Fouzia Taranum B. Anoop Rajan & Ashish Poddar Sukrutha Laavanya Gnana Devi Diwakar Grover Vamsi Kanagovi Nikhil Mehta Kavitha Manish Sinha