December 29, 2013 Volume 23
Mar 22, 2016
EXAM FEVER
It had been a grueling week for IMT both because term end exams and a cold wave sweeping the campus. Though both were as tough as anticipated, nothing deters IMT and buzz is still on for new year eve. Ever heard about Green Shoe Option or do you think NASDAQ should compensate for its technical glitch or want to know about the new normal of the Indian Economy, well that’s what we bring you with this week’s term of week, opinion section and in focus. On the market front we had seen the wall street hitting a bull run while our own Sensex remained largely bullish on account of strong FII buying. Amid concerns that India’s fiscal deficit may cross 5% and GDP estimates of more then 7% from planning commission. We bring you a gist of market indices and detailed news analysis through our news and market of week. We hope you enjoy the articles in this edition of FinXpress. We look forward to your comments, acknowledgements and criticism regarding our magazine. Happy Reading!!!
Regards,
The Editorial Team
FinNiche Club
From The Editorial FinXpress
Volume 23
Dec 29,2013
FinXpress
Disclaimer: FinXpress takes no responsibility for the opinions expressed in the magazine.
FinNiche
December 2013 Page 1
CONTENTS
From The Editorial
In focus: The New Normal of
Indian Economy
Opinion: NASDAQ
Compensation
Term of the Week: Green
Shoe Option
Market This Week
News
Fun Corner
Page 2
IN FOCUS
The big poser after the results of the second-quarter GDP results was whether it had marked a bottoming out of the economy or was it the new normal? If the second is true, then even if the growth figures improve in subsequent quarters, to touch 5-5.5% levels, we would have to forget the magic years of awe-inspiring figures. Now we would have to content with moderate figures. That’s not going to be easy. where should we try to bounce back to: an unsustainable GDP growth of 9% or a more sustainable 6-7%? Back in the heydays of close to 9% GDP growth, well respected economic commentators used to argue that “9% growth and 7% inflation is better than 6% growth and 4% inflation”. Reality has proved otherwise. Today there is no doubt we would have been better off had we grown at a consistent 6-7 % with 4% inflation for a few years before trying to raise our growth trajectory. In hindsight, we erred in thinking we could wring out growth through ever looser fiscal and monetary policies, without engaging in deeper structural reform, ignoring crucial issues like reforms in markets like land and labour. Growth has virtually halved in two years to 5% in 2012-13 — the lowest level in a decade — and is not expected to be any better this year. But, it is not catastrophic if it creates the base for a sustainable, long term non-inflationary growth period. Faced with a choice between a sustainable, but lower, growth with low inflation, and brief spurts of high growth and high inflation, what should the Indian Government do? If advanced countries continue to reflate their economies, India might benefit from a brief upside. But unless investment picks up and supply bottlenecks ease, it will once again run up against inflation.
Consumption-led growth of the early 21st century, courtesy exceptionally-docile global conditions and fiscal and monetary stimulus doled out in the aftermath of the financial crisis, has its limits. A supply-constrained economy like ours needs investment-led growth. Otherwise, it is only a matter of time before India hits a roadblock that forces a growth slowdown. And worse, give rise to tensions that could threaten the social fabric of a society stretched taut at the best of times. The potential growth rate of an economy is not constant but dynamic. It is a function of its level of capital formation, social and physical infrastructure, quality of governance and, now increasingly, a function of the global environment. However, any attempt to push ahead of this number, without creating the investments needed, will only lead to overheating and render growth unsustainable. Unfortunately, in our obsession with the GDP growth rate, we are unwilling to accept that growth is not a discrete process. It is like running a marathon. One cannot run a marathon like a sprint. Each government builds on the structure created, not only by its immediate predecessor but by all previous governments. Where would we be without the steel frame of the public sector created during the Nehruvian years or the reforms initiated by the Narasimha Rao government? Likewise, where would we be without the massive national highway development project and reform measures like opening up insurance and, more importantly, fiscal consolidation, under the NDA? The biggest problem with India remains that instead of attempting heavy lifting, we keep trying quick fixes. This leads us back to the question which was first asked—Is this the new normal?
FinNiche
The New Normal of Indian Economy
—- By Aditya Vikram Agrawal
December 2013
Page 3
Opinion
Nasdaq OMX Group Inc. has finally consented to compensate the firms on December 31 in relation to the claims of the botched technical glitch during the Facebook Inc.’s May 2012 initial public offering (IPO). It previously said it would pay up to $41.6 million in claims to the various market participants that had lost money when the glitch in the Nasdaq's system during the I P O p r e v e n t e d t i m e l y o r d e r confirmations for many traders, leaving them unsure about their exposure for hours and, in some cases, it extended to few days also which was a major issue. The exchange operator in a note to traders on Friday said a total of $41.6 million in claims qualified for compensation, even though market makers estimated they lost $500 million collectively.
Firms that qualified for compensation had to agree till December 23 not to sue Nasdaq exchange over the IPO in order to be eligible for a one-time voluntary payout. Nasdaq was fined $10 million by the US Securities and Exchange Commission (SEC), the largest fine ever for an exchange, the case was just one of a raft of high-profile technology glitches that have plagued exchanges in recent years. In August, a software bug paralyzed thousands of Nasdaq-listed stocks marketwide for three hours. This happened just few days after a technical problem at Goldman Sachs sent a flood of erroneous orders to the US equity options markets.
After the Nasdaq outage, as the need of the hour permitted the US Securities and Exchange Commission called the head of all of the exchanges to Washington to discuss the ways to strengthen critical market infrastructure and improve its resilience when technology fails. Other major glitches include BATS Global Markets' botching of its own market debut, which it had to abandon, just months before Facebook's IPO. And on August 6, the exchange operator faced an outage on one of its markets of nearly an hour. CBOE Holdings Inc experienced a glitch in April that shut down the Chicago Board Options Exchange, the No. 1 US stock-options market, for half a day, preventing trading in options on two of the US market's most closely watched indexes. At Intercontinental Exchange Group's NYSE Euronext unit, a bug in new software being rolled out in September briefly led to a trading halt across US options markets. A handful of trades are busted due to these minor glitches at the exchanges. A single 10 min hault can create a havoc as and specifics around the trades as well as the traders losses could not be determined. They disturb the overall financial peace of the various countries. During peak hours, stock traders use complex algorithms to generate millions of messages per second about what they’re buying, selling or canceling. But a spate of high-profile technology glitches has proved that these algorithms don’t always interact without a hitch, and regulators should force market players to test their technologies before unleashing them on the world. Until recently, the issue was moot. The historical view was that the government did not need to intervene but now the stock exchange authorities have proposed that the exchanges should abide by certain minimum testing standards for their technology, and coordinate their testing with trading firms.
FinNiche
NASDAQ COMPENSATION —- By Jagriti Kalra
December 2013
Page 4
FINANCIAL KNOWLEDGE
Green shoe option is the provision provided
in the underwriting agreement wherein the
underwriter can issue more shares than
initially planned. Also referred as Over-
allotment option, this option was named
after Green Shoe Company for which this
was first used in 1960. The Green Shoe
option is a clause in the underwriting
agreement of an IPO, which allows to sell
additional shares, usually 15%, to the
public if the demand exceeds expectations
and the stock trades above its offering
price.
How Green-Shoe Option Works ?
As already mentioned above, green shoe
option works on the concept of over-
allotment of shares. Let us understand it
with the help of an example. Say, for
instance, a company is planning to issue
100,000 shares but due to high demand it
actually issues 115000 shares. Point to be
noted is that company did not actually
issue extra 15000 shares.
The 15000 shares that are used for over-
allotment are the ones that are borrowed
from the company’s promoters with whom
the stabilising agent enters into a separate
contract. For the subscriber of the public
issue, it makes no difference whether the
company is allotting the shares from the
100000 freshly allotted shares or from the
one that are borrowed from the promoter.
To an investor, a share is just another
share.
Though for the company the situation is
completely different. The money received
the company from over-allotment of the
shares has to be kept in a separate account
known as GSO bank account.
The task of the stabilising agent starts only
after the shares are allotted and their
trading starts on stock exchange. While
trading, two possibilities could arise for the
price of the share:
In case the shares are trading at a
price lower than the offer price, the
stabilizing agent would start buying
the shares from the money that is
lying in the bank account. Hence by
buying the shares from the market
while others are selling kind of negate
the falling prices and stabilizes share
prices. The share so bought are given
to the promoters from whom the
shares were bought for over-allotment.
Other case could be that the price of
the shares starts to rise. In such a
case, the stabilizing agent won’t buy
the shares from the market. Instead
the company can exercise their green
shoe agreement and issue new shares
to the stabilizing agent who will return
these shares to the promoters.
Since these options protect both company
as well as shareholders against falling
price, hence it is quite commonly used as a
hedging mechanism by the companies
issuing fresh equity. One famous example
where Green-Shoe Options were used was
during Facebook IPO release.
Pros and Cons of Green-Shoe Options
The flexibility to respond quickly to rising or
falling demand for the shares is a huge
positive of the green shoes. For the issuer
and the accompanying banks there is the
possibility to place a maximum number of
shares that may be extended at the same
time acting as a risk buffer. Thus, in the
case of low demand the exercise of the
green shoes is simply waived and can still
be a successful.
If the green shoe is connected with the
issuance of new shares, there is an
appropriate exercise of its dilutive effect on
other shareholders, which is often seen
negatively.
FinNiche
Green Shoe Option —- By Bhanu Chokhani
December 2013
Page 5
FINANCIAL KNOWLEDGE FinNiche
Market This Week
Indian shares are expected to remain firm as Wall Street hits record highs while foreign
investors look set to end the year as strong net buyers. Foreign Institutional Investors
(FIIs) have bought around $2.5 billion in shares as of Thursday in December, bringing
their net purchases for the year so far to around $19.9 billion. The gains could allow
indexes to post a second consecutive yearly advance, with the NSE index up 6.9 per-
cent so far this year, compared with a 27.7 percent gain in 2012.
SENSEX Simple Moving Averages
BSE SENSEX
CNX Nifty
December 2013
Thirty Days 20,803.82
Fifty Days 20,796.17
Hundred fifty Days 19,881.23
Two Hundred Days 19,731.28
Page 6
FINANCIAL KNOWLEDGE FinNiche
Bank Rate 8.75%
Repo Rate 7.75%
Reverse Repo Rate 6.75%
Cash Reserve Ratio 4%
Statutory Liquidity Ratio 23%
INR / 1 USD 61.85
INR / 1 Euro 85.00
INR / 100 Jap. YEN 58.82
INR / 1 Pound Sterling 101.96
Commodity Unit Rs / Unit % Change
Gold 10 grams 28564 -0.04
Silver 1 Kg 45154 0.84
Crude Oil 1 bbl 6261 1.00
Base Rate 10.00%-10.25%
Savings Deposit Rate 4.0%
Term Deposit Rate 8.0%-9.05%
Nifty Simple Moving Averages
Commodities
Lending / Deposit Rates
Thirty Days 6188.49
Fifty Days 6183.30
Hundred fifty Days 5926.63
Two Hundred Days 5905.47
Key Policy Rates and Reserve Ratios
Exchange Rates
December 2013
Page 7
Financial Knowledge
India's GDP growth rate likely to hit 7.5-8 per cent in 2014: Montek Planning Commission Deputy Chairman Montek Singh Ahluwalia has said India's economic growth rate is expected to be at 7.5-8 per cent next year. "We have become globally integrated and we can't do for India independently. The problem consists of one third from domestic factors and two-third from global factors," he said. Mr Ahluwalia said India's growth rate shot up in 1960-70s and picked up in 1990s. He was speaking at the ninth V Narayanan Memorial lecture at Sastra University Srinivasa Ramanujan Centre in Kumbakonam, Tamil Nadu on Friday. The reforms are to be carried gradually in large diverisifed highly democratic country and to bring changes it takes time, he said. In a five-year period during 2000s, it went up to 9 per cent. In 2008, the financial crisis crept in and the growth rate came to 6 per cent, it went to 9 per cent in 2009, and then to 9.3 per cent. In 2011, the rate again went down to 6.2 per cent and in 2012-13 to 5 per cent. The global economy is turning around and will be better in 2014. India's growth rate will be 7.5-8 per cent post-election, irrespective of who is in power, Mr Ahluwalia concluded. Top Bitcoin operator halts trade after RBI warning India's biggest Bitcoin trading platform said on its website Friday it had suspended operations after the central bank warned against the risks of using virtual money. BuySellBitCo.in closed its platform, citing an advisory by the Reserve Bank of India issued on Christmas Eve highlighting the risks of t rad ing in d ig i ta l currenc ies . BuySellBitCo.in said on its website that the move was "to protect the interest of our customers". The central bank's warning comes after Bitcoin, which can be stored either virtually or on a user's hard drive and offers a largely anonymous payment system, had begun
gaining popularity in India. The emergence of Bitcoin and other virtual currencies in India has come despite a traditional preference for assets backed by property and other tangible goods. "There is no underlying or backing of any asset for virtual currencies and as such their value seems to be a matter of speculation," the central bank said in its December 24 advisory. The "huge volatility in the value of virtual currencies has been noticed", it added. A t t h e l a s t r a t e po s t e d by BuySellBitCo.in, which was conducting about Rs. 1.2 crore worth of Bitcoin transactions monthly, according to Indian media, one Bitcoin was selling for Rs. 48,039 ($776). The dollar worth of a Bitcoin has rocketed from just cents in 2010 to a $1,200 peak in early December, but has since fallen back. India's fiscal deficit to touch 5.2 per cent in FY14: Crisil Rating agency Crisil on Monday said the Indian government will overshoot its fiscal deficit target of 4.8 per cent by 0.40 per cent this fiscal year (FY14) and suggested state-run companies should dip into their cash reserves to narrow the gap by paying extra dividends. Given the current scenario, wherein the front loading of expenditure has resulted in 84.4 per cent of the budgeted fiscal deficit target being hit by November, Crisil said it expects the fiscal deficit to touch 5.2 per cent. "The Centre can reduce its fiscal deficit by as much as Rs. 20,000 crore this fiscal by using cash reserves of public sector units," Crisil's research wing said in the note. It said the top 20 public sector undertakings will have a cash reserve of Rs. 1,60,000 crore by March 2014 and are "comfortably placed" to pay a special dividend. "We estimate these companies are well placed to distribute 40 per cent of the corpus (Rs. 64,000 crore) as dividend without impacting growth plans," it said. This amount will be Rs. 27,000 crore more than the dividend paid by the companies in last year and
FinNiche
NEWS
December 2013
Page 8
Financial Knowledge
after calculating the stake of the government in the companies, will result in excess revenue of Rs. 20,000 crore. "The Rs. 20,000 crore additional income would approximate 20 basis points of the fiscal deficit, which can help the government reach closer to its stated fiscal deficit target of 4.8 per cent," it said. CCI to clear projects worth Rs. 10 lakh crore, growth to revive: Cabinet Secretary Exuding confidence that India's growth will bounce back, the government on Friday said it has approved 287 stalled projects worth Rs. 5.5 lakh crore and 250 such projects worth Rs. 10 lakh crore would be cleared shortly. "So far there has been resolution at some level or the other of about almost 300 projects with the total investment of Rs. 5.55 lakh crore...this process is an ongoing one and we have about another 250 projects with an investment of over Rs. 10 lakh crore," Cabinet Secretary Ajit Kumar Seth said in Delhi. The government has been trying to ease the regulatory burden and simplify procedures to boost infrastructure projects, he said. "Guidelines on mergers and acquisitions (for the telecom sector) are also being worked out and we are confident that by the end of January, the next round of auctions (spectrum) will begin...the sector will definitely find itself on the path of further growth," he said. "Lot has been done in the power sector. We have approved the guidelines for pricing and pass-through of higher cost of imported coal and the issue of signing fuel supply agreements (FSAs) has also been resolved and 157 FSAs have been signed this year," he added. Mr Seth asked the industry to invest more in research and development as "this is an area where we need to catch up fast".
Cyprus tax row: India set to start income tax office in island nation, says report As part of its strategy to combat black money, India will soon operationalise its first-ever income tax office in Cyprus to tackle funds flowing from the island nation even as it mulls rolling back suspension of tax benefits on investments made from that country. Final approvals from the Prime Minister's Office (PMO) have been obtained to post an IRS officer as First Secretary in the country, one of the main sources of foreign direct investment (FDI) into India, and also at seven other foreign locations including France, Germany, Netherlands, Japan, UAE, UK and USA where operations will begin next month. The government had decided to set up the Income Tax Overseas Units (ITOUs) in these eight countries as part of its multi-pronged strategy to combat blackmoney and streamline flow of investments from these nations into India. Two such ITOUs are already operational in Mauritius and Singapore. But in November this year, India classified the island nation as a notified jurisdictional area and suspended the tax benefits. Following the notification by the Finance Ministry, all payments made to Cyprus attracted a 30 per cent withholding tax and Indian entities receiving money from there were required to disclose the source of funds. India took the decision to withdraw tax benefits on grounds that Cyprus was not providing information requested by tax authorities under the taxation treaty. After this decision Cyprus had said the Indian government has agreed to withdraw a notification that suspended tax benefits for investments from the island nation but this is subject to the foreign nation adopting the global convention on exchange of tax information.
FinNiche
NEWS
December 2013
FinNiche
Fun Corner
FinQuiz
1. He is the pioneer in mutual fund industry and often referred as the Father of
Index Fund investing. He created the first S&P 500 Index fund. Identify this fa-
mous person?
2. Name the first Indian woman CEO of a Foreign Bank?
3. Name the term used for depreciating a company's intangible assets?
4. Which bank is promoted by 20th Century Finance Corporation and Keppel Tat-
lee Bank of Singapore in India?
5. In the world of trade and commerce what is special about the commissioning of
Monte dei Paschi si Siena in Italy in 1742?
CARTOONS
FUN CORNER
Page 9
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Volume Publisher: Rajat Kochar
December 2013
Last Week Answers
1. Interest Coverage ratio
2. 8.0%
3. Opportunity
4. Economic
5. 3