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CAPITAL EDGEFinance Newsletter

September 2010

Symbiosis Institute of International Business

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CONTENTS

From the Editorial Desk Pg 2

Fraud Examination Pg 3

Basel III Norms Pg 5

Value Investing Pg 7

Headlines Pg 8

Heard on the Street Pg 10

Win With Fin Pg 11

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From the Editors DeskGreetings to every reader/non reader/skimmer/scanner. We at FINesse , The Finance Club

of SIIB are proud to present your fortnightly newsletter- CAPITAL EDGE.

Capital Edge is your update on the latest financial news and views. We intend to appeal to

those who are well versed in Finance and those who wish to learn more of Finance.

This volume consists of a glimpse into the proposal of Basel III norms, a look into Fraud

Examination and Value Investing.

We have incorporated Heard on the Street, the analysis of the stock market for this week.

Win with Fin our regular quiz is back this week with mind boggling questions. The person

who responds first with the correct entries will get their name published on the notice

board as well as in the next issue of the newsletter.

We ourselves are undergoing a trial by fire with Finance, any mistake, error and faux pas in

the newsletter is deeply regretted. We would like you to provide us with your suggestions

and comments by mailing us [email protected].

May you get an edge in Finance with Capital Edge

Rahul Dey

This issue of Capital Edge is brought to you by FINesse-The Finance Club of SIIB
mailto:[email protected]:[email protected]:[email protected]:[email protected]

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Fraud Examination

After some big-wig bankruptcies in U.S. the need of forensic Accountants were realized

in States .In India too After the economic liberalization of the 90s the number of

financial scams surfacing have grown considerably be it the Harshad Mehtas scam,

Ketan Parekhs Scam, Telagis stamp scam or be it the recent Satyam Scam this have

paved the way for forensic Accountants in India also. The Job of the forensic

Accountant is to examine various entities for possible Frauds

Fraud Examination is divided into 3 basic aspects:

1. Fraud detection

2. Fraud Investigation

3. Fraud Prevention

There is a very thin line between fraud detection and fraud investigation, basically

fraud detection process is carried out by the auditor, fraud investigation is the task of

law enforcement agencies like police department in India and the prevention is the

work of management.

Forensic Accounting: If you are concerned about financial frauds and discrepancies u

need more than just an accountant, Forensic accounting is a combination of the

accounting, auditing and investigation skills. Forensic Accounting area is a specialty

practice area of accounting that describes engagements, which result from real or

anticipated litigation. These engagements mainly fall into one of these 3 categories:

economic damages, frauds in accounts or inventory or business evaluation. ForensicAccounting is a very broad area, while fraud examination is merely a small subset of it.

A fraud examination is an area which is considered to be the monopoly of Chartered

Accountants because of the nature of expertise it needs in accounting it is considered

to be some challenging job among the CAs however very few organization has fraud

examination as separate practice. However some of the national CA companies do

provide these services but mainly the area is dominated by big Consultancy firm like

Deloitte, KPMG, PriceWaterHouseCoopers and Ernst & Young.

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There are 3 or 4 Government agencies also which are dedicated to combating the

fraud

SFIO : Serious fraud Investigation Office is the dedicated division of the department of

Company Affairs, which looks into the frauds that involves violation of multiple laws

such as Income Tax and RBI act.

CBI: Central Beauro of Investigations has its specialized wing to take on financial

frauds and is being called economic offenses wing.

CVC: Central Vigilance Commission is the body which handles crucial part of the

occupational frauds i.e. corruption. it also helps in resolving banking frauds.

Nature of frauds is changing worldwide and everybody is worried about the crimes

committed with the help of Technology because with the rise in technology for frauds

the challenges for the fraud examiners are bound to grow by leaps and bounds.

By Vinay Prabhakar

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Basle III Norms

After a 6 year hiatus, the Bank of International Settlements (BIS) will be making its

presence felt once again in the banking world. After Basel I and Basel II accords, BIS

has decided to bring out an update which will make banking less volatile to crisis, this

will be in the form of Basel III norms. The draft has already been proposed and the

Basel III norms will be further discussed and ratified at the G-20 summit in November

at Seoul, South Korea.

These norms are being deliberated due to the recent Global Financial Meltdown when

banks did not have enough capital to cover the risk. The G-20 wants to set aside capital

with higher proportion in common stock or retained earnings. This is being done

simply to avoid another financial catastrophe. The BIS has thus proposed stricter and

more prudent rules to govern banks.

What does the Basel III draft contain ?

1. Increasing Tier 1 and Tier 2 Capital,and eliminating Tier 3 Capital. Banks must hold

4.5 % by January 2015 (proposed) and a further 2.5 % totalling 7%.

2. Strengthen risk coverage of capital

3. Introduction of a leverage ratio to safeguard against overleverage.

4. The suggestion to build up buffer capital in harmonious times which can be used tofund activities and cover losses during times of financial crisis.

5. Protecting the banking sector from periods of excess credit growth

6. The Basel Committee is further introducing a 30 day liquidity coverage ratio for all

banks which are active globally.

The Basel III proposal has polarised banks and the BIS on two opposing sides. The BIS

wants prudency while the banks believe that such rules will only hamper economic

growth. The Basel Committee is using Basel III as a launchpad to bring back financial

health to the bank sector, its aim is to get banks to wean themselves off short term

funding. The surprising aspect is that banks themselves should not have much to

complain of regarding capital as most European and American banks have raised their

minimum capital after the crisis. BIS wants to keep in check those banks which are

below the average on standards of capital. The BIS will have to concede on 2 points- 1.

Banks will be advised to cut their reliance on short term funding and 2. Banks to

implement Basel III norms by 2012, which seems an unrealistic target.

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How will this impact Indian Banks ?

Indian banks have not been exposed to financial risk as much as their American and

European counterparts. The Indian economy has been strict and does not allow high

risk ventures, such as Hedge Funds. The Indian Banking sector is thus protected yet the

potential for growth is very high if some rules were relaxed.

RBI Governer D. Subbarao stated that at the end of June 30, 2010, the aggregate

capital to risk-weighted assets ratio in the Indian banking sector was at 13.4%, of which

Tier-I capital constituted 9.3%. He believes that Indian banks will not be overly

stretched to maintain a higher capital level. The only hindrance to growth could be the

fact that some deductions would be shifted from Tier I and Tier II Capital to common

stock.

I request the readers to mail in their opinions, findings and suggestions regarding Basel

III norms to me [email protected].

By Rahul Dey

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VALUE INVESTING

Investment is most intelligent when it is most business-like

When Benjamin Graham told this basic principle to a class of Columbia Business

School, nobody has thought that his new investment strategy would become biggestwealth-churner investment strategy of all times. And nobody has thought that many of

his students would become billionaires using this strategy; with one of them becoming

the 2nd

richest man in the world.

What Benjamin Graham introduced to his class in the summer of 1928 is the

cornerstone of wealth generation, that is, Value investing. It is an investment strategy

which is based on getting Margin of safety and using it to your advantage. Margin of

safety is the difference between the intrinsic value of a share and its price in the

market. Again intrinsic value is the real value of the stock determined by

fundamental analysis of the company.

Value investing thus involves buying a share whose market price is lower than the

intrinsic value of the stock with a sure-shot gain whenever the market discovers the

stock and price the stock at its real value or intrinsic value. Intrinsic value provides a

safety in the investment because a stock cannot fall drastically in the market from its

intrinsic value.(As the adage goes you cant fall of a ditch).

So there is only one way and, that is, the price of stock will go up. Therefore, there is a

great deal of certainty in this strategy.

Sooner or later market does place the stock to its real value and whenever this

happens a value investor makes a profit owing to the low buying price of the stock.

Intrinsic or fundamental value of a stock is determined by looking at the fundamentals

of the company i.e. whether the stock trades at discounts to book value, have high

dividend yields, have low price-to-earnings ratio or low price-to-book ratio etc.

Returns from Value investing has surpassed even the growth investing in last decade

and it is said to be one of the safest investment strategy in the world.

Major value investors: Warren Buffet (Berkshire Hathaway Chairman), William.J

Ruane, Irving Kahn and Charles Brandes (all of whom were students of Benjamin

Graham at Columbia business school).

BY Sumant Bhatnagar

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Fin Headlines

Hike in interest rates by RBI put economy in comfort zone

In a bid to continue to its fight against inflation, the Reserve Bank of India (RBI) has increased the

interest rates. It raised the repo rate by 25 basis points to 6% and the reverse repo rate has been

raised by 50 basis points to 5%.This hike in interest rates will result in a rise in cost of funds for the

banks and eventually makes loans expensive, which will reduce consumption.

Indian telecom network is 2nd largest in the world

The telecom network in India has reached a landmark by becoming the second largest network in the

world. The total subscriber base in India is over 670 million as of July 2010. This took the overall tele-

density in the country to 58 %.

Gold prices retreat from record; silver may break 30-yr record

Gold retreated from record highs, as a firmer dollar tempered the momentum, although concerns about

further quantitative easing in the United States cushioned prices.

Andrew Ross Sorkin on Lehman, the Crisis and How Pride Ledto the Fall

In the two years since crisis gripped the financial world, surprisingly little has changed. In those

perilous days in September, 2008, Lehman, Merrill Lynch and AIG fell like dominoes, and it seemed

Goldman Sachs (GS) and JPMorgan Chase (JPM) might be next. Any American family with money in

the bank or investments in a 401(k) had to wonder if their financial security was imperiled.

Sensex ends above 19500; RIL, ACC, RCom, Bhartigain

BSE, a benchmark index for Indian equities closed 177 points higher on Friday.Both funds and retail investors actively took long positions across the board.The30-scrip sensitive index (Sensex) of the Bombay Stock Exchange (BSE), whichopened at 19,555.05 points, ended at 19,594.75 points, 177.26 points or 0.91percent up from its previous close at 19593.84 points.
http://www.yrth.net/financial-consulting-articles/andrew-ross-sorkin-on-lehman-the-crisis-and-how-pride-led-to-the-fallhttp://www.yrth.net/financial-consulting-articles/andrew-ross-sorkin-on-lehman-the-crisis-and-how-pride-led-to-the-fallhttp://www.yrth.net/financial-consulting-articles/andrew-ross-sorkin-on-lehman-the-crisis-and-how-pride-led-to-the-fallhttp://www.yrth.net/financial-consulting-articles/andrew-ross-sorkin-on-lehman-the-crisis-and-how-pride-led-to-the-fall

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RBI to review its policy today, to hike 25 basis points

For the first time, RBI is conducting a mid-quarter review of the monetary policyand everyone, right from the bankers to the market are expecting the centralbank to raise the main policy rates by 25 basis points. The interest rates areexpected to hike for the fifth time and it is seen as a move to control inflation.A

25 basis points hike would take its repo rate to 6 per cent and the reverse reporate to 4.75 per cent

NSE to use free-float M-Cap method for sectoral indices

The National Stock Exchange (NSE) is going to use free float marketcapitalization computation (M-Cap) method from October 11 for all its sectoralindices.

IRDA to finalize IPO norms for non-life insurance cos

Insurance Regulatory and Development Authority (IRDA) is all set to finalize theIPO guidelines for non-life insurance companies by the end of this month. Thenew guidelines will allow non-life insurance companies to raise funds from thecapital market.

Citi to Sell Its Student Loan Unit

Citigroup said that it will sell its big student loan business to Sallie Mae and Discover Financial

Services for $600 million.

Chinas BYD in Strategic Move for Tibet Miner

BYD Company, the Chinese battery and car maker that counts Warren E. Buffett as an investor, said

Friday it has agreed to buy an 18 percent stake in a Tibetan-based lithium and boron miner, moving

to secure a strategically vital asset for its future growth, The Associated Press reported.

By Tushar Agrawal and Shshank Jain

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Heard On The Street

Top Gainers of the Week

Top Losers of the Week

Company Name Last Price Prv Close Change % Loss

Kotak Mahindra Bank 473.55 861.8 -388.25 -45.05

Gujarat State Petronet 109.05 115.6 -6.55 -5.67

Koutons Retail India 298.1 315.95 -17.85 -5.65

PTC India 120.15 126.7 -6.55 -5.17

By Kunal Ohrie and Mohit Jindal

Company Name Last Price Prv Close Change % Loss

Godrej Consumer Product 459.35 398.75 60.6 15.2

Bhushan Steel Ltd. 2,114.80 1,869.00 245.8 13.15

LIC Housing Finance 1,317.95 1,176.35 141.6 12.04

Corporation Bank 709.1 635.4 73.7 11.6

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Win with Fin

1. Which company dragged P&G to court over shampoo ad issue?

2. Which bank approched finance ministry for raising 20K crore?

3. How many Indian companies are listed in the 50 biggest Asia-Pacific

companies?

4. Recently Carin Energy Plc asserted that it has no differences with

Government of India and they mentiioned one more company. Name the

other company name they mentioned?

5. Blackberry announced thar it wont intercept one of their services as asked

by government of India for their services in the country. Which service is

that?

6. Which company (investment bank) has been sued over gender bias?7. USA moved WTO against which country?

8. How much money did US Senate passed for small business credit measure?

9. Which organisation suspended green nod to Vedantas bauxite mining

company?

10.Which company CEO gets more than Microsofts Steve Ballmer?

By Manish Sonowal

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FINesse

Our team consists of :

1. Rahul Dey2. Vinay Prabhakar3. Adarsh Kumar4. Manish Sonowal5. Sumant Bhatnagar6. Mohit Jindal7. Tushar Agarwal8. Ankur Rastogi9. Priyam Narayan10.Lam Zoulian11.Shshank Jain12.Kunal Ohre

Email us [email protected]

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