January 2013 A Financial Newsletter Volume 4 Issue 32

CHRIST UNIVERSITY INSTITUTE OF MANAGEMENT , KENGERI CAMPUS

In this Issue

03FinancialRegulation

04RBIColumn

08MarketRoundUp

08EconomicRollers

09StockAnalysis

10FinanceBuzz

11CampusPoll

12PhotoFind

13FinanceQuiz

14Crossword

15Answers

05DoesIndiarequireauniquecorporate governance code

06DoweneedasuperregulatorforIndia

07FinancialSectorLegislativeReforms Commission androleoftheregulator

CORPORATE

GOVERNANCE

FINANCIAL REGULATION

An IntroductionFinancial regulation deals with directing the financial institutions like banks, insurance companies, mortgage loan companies, etc. to fulfil certain requirements, imposing certain restrictions and setting out guidelines so as to keep up the integrity of the entire financial system. These regulations are set by both the government and non government bodies.

The various regulatory bodies in the country are listed below:

Reserve Bank of India - It is the central banking regulatory that governs the monetary policy of the Indian Rupee.

Securities and Exchange Board of India - This is a statutory body that governs the securities market of India.

Forward Markets Commission - It regulates the commodity derivative markets and brokers.

Insurance Regulatory and Development Authority - This is an agency of the Indian Government which supervises the insurance sector.

Pension Fund Regulatory and Development Authority - This is an agency which promotes old age income security by regulating and developing pension funds.

Ministry of Finance - The ministry is concerned with taxation, union budgets, capital markets and finances for the centre and state.

High Level Coordination Committee: It maintains coordinat ion between the regulators.

Stumble BlocksRegulatory ArbitrageRegulation of district co-operative banks is a sensitive issue. Such banks are monitored both by the RBI and Registrar of companies in the specific state. While RBI has expertise but does not have jurisdiction ROC holds the regulatory authority but lacks expertise.

Conflict of InterestRBI is not just the regulatory body but also an investment advisory body for the government and monetary policy maker for the country. Now the role of investment broker to government may act as an impediment to the role of a banking regulator because many banks tend to buy government securities.

Problem of CoordinationIndia's financial system suffers from lack of proper coordination. To mitigate financial risk, coordination among regulatory bodies is very crucial. If Financial Stability and Development Council (FSDC) does not play an active role then an inter-agency conflict may arise.

ANINDITANATH1MBAADEVANGKATARIA1MBAA

3

R B I C O L U M N

India's Foreign Trade: 2012-13 (Apri l-September)

The impact of adverse trade spillovers from weakness in the advanced as well as major emerging economies and slowdown in domestic economic activity was clearly evident on India's trade performance. Lower imports largely reflected slowdown in domestic economic activities, relatively lower international oil prices and decline in demand for gold imports. Major highlights of India's trade performance are set out below:

Exports stood at US$ 141.8 billion and showed a decline of 8.1 per cent as against an increase of 40.5 per cent during H1 of 2011-12. Decline in exports became more pronounced in Q2 of 2012-13 as global economic and trade environment remained unsupportive.

During H1 of 2012-13, imports declined by 3.6 per cent over the corresponding period of 2011-12 and stood at US$ 234.8 billion. Lower imports during H1 of 2012-13 mainly reflect the contraction in import of gold and silver, slow domestic economic activity, and a moderate growth in the quantum of imports of petroleum, oil and lubricants (POL).

Imports of gold and silver at US$ 21.3 billion during H1 of 2012-13 were 32.6 per cent lower than that in H1 of 2011-12.

The average price of Indian basket of crude oil during H1 of 2012-13 stood at US$ 107.4 per barrel, nearly 3.5 per cent lower than US$ 111.3 per barrel during H1 of 2011-12.

As decline in exports has been higher than that of imports, trade deficit at US$ 93.0 billion during H1 of 2012-13 was higher as compared with US$ 89.2 billion during H1 of 2011-12. Non-oil non gold trade deficit also stood higher at US$ 20.6 billion in Q1 of 2012-13 as compared with US$ 17.3 billion in Q1 of 2011-12.

Commodity-wise data on merchandise exports show that engineering goods, petroleum products, chemicals, gems & jeweller and agricultural products contributed more than around 83 per cent of India's exports during Q1 of 2012-13.

F inances of Fore ign Direct Investment Companies: 2010-11The financial performance of 745 FDI companies for the year 2010-11 presented in this article is based on the audited annual accounts closed during April 2010 to March 2011. The select 745 companies consists of 493 public limited companies and 252 private limited companies, which were included in the regular studies on finances of non-government non-financial public/ private limited companies for the year 2010-11. The select companies are classified into 8 major countries and 9 major industries. A company is classified into a country depending upon the country of origin of the largest FDI share holding in the company. The industry of the company is determined on the basis of the industry from which the company has reported more than 50 per cent earning of its total income.

As observed 'Computer and related activities (81)', 'Chemicals and chemical products (78)' and 'Machinery and machine tools (66)' were the most preferred industries for FDI. Similarly, Mauritius is the origin of investment in the highest number of companies (179), followed by USA (114), UK (66) and Germany (61).

The select 745 FDI companies under study, as a sample have some limitations that the sample companies had a share of only 4.8 per cent of total FDI inflow to India (from August 1991 to March 2011).

The sales of the select 745 FDI companies registered a higher growth (16.0 per cent) in 2010-11. However manu fac tu r i ng expenses and emp loyees ' remuneration grew at higher rates leading to lower growth in EBITDA and a decline in EBT.

Sales growth in 2010-11 was higher than that in the previous year for all major industries except in 'Motor vehicles and other transport equipment' and 'Computer and related activities' industries. Net profits witnessed a lower growth across manufacturing industries and recorded a decline for the services sector industries.

As per the countries of origin, FDI companies from UK recorded higher growth in net profits (22.0 per cent) in 2010-11, while those from Japan, USA, Switzerland and Mauritius recorded substantial decline.

BHARGAVAMANIKANTASONTI1MBAA

4Source www.rbi.org

FINANCIAL REGULATION

“Governanceandleadershiparetheyinandyangofa successfulorganization.

Ifyouhaveleadershipwithoutgovernanceyourisktyranny,fraudandpersonal�iefdoms.

Ifyouhavegovernancewithoutleadershipyouriskatrophy,bureaucracy

andindifference.”-MarkGoyder(DirectorofTomorrow'sCompany)

Corporate Governance is a system by which the companies are controlled and directed. It includes regulatory and market mechanisms, the roles and relationships between a company's management, its board, its shareholders and other stakeholders, and the ultimate goals for which the corporation is governed.

There are many different models of corporate governance across the world and it differs based on the level of capitalism embedded in it. The Indian corporate governance code is derived from the Anglo-Saxon model, where the institutional investors have a great deal of control and equity financing is of great importance. Recent ly, the news of convergence of the various models has been doing rounds. Whether or not these convergences will result in a change in the corporate governance practices across the world is still a question.

Let us take the case of India. There has been lots of criticism against the Anglo- Saxon derived system of governance in India. The first and the foremost issue is the concentrated ownership. Business groups, business families and the government dominate the corporate sector in India unlike the western world where the shares are held by geographically dispersed investors. Secondly, the cultural differences in India, make it difficult for the Anglo Saxon model to survive in the long run.

Essentially, separation of management from government, transparency, accountability, strategic risk management, corporate responsibility to contribute towards the sustenance of the natural environment and corporate responsibility towards stakeholders make up the fundamentals of a corporate governance model. So if India needs to adopt this model it should comply with these principles.

India has adopted a market model post liberalization, with liberalized foreign investment in Indian companies as well as rules and regulations favouring the development of capital market. This has resulted in increased public investment in the equity capital of companies. There arose the need for protecting the interests of non controlling share holders which could be achieved with the implementation of corporate governance. As such the initial goal of the corporate governance model was to protect the non- controlling shareholders; but with time the goal has changed with the focus being given to protecting the rights of monetary shareholders, enterprise performance and corporate responsibility. So, the Anglo Saxon model will work in India irrespective of the ownership structure.

Concentrated ownership has both positive and negative influences on corporate governance. Tunneling is one such bad effect which can happen in companies with a pyramid structure, which will allow the parent company at the apex to control the company at the bottom with low voting rights. This can be avoided only through the abolition of py ram id s t ruc tu re s and s t reng then ing organisations like Serious Fraud Investigation Office (SFIO). As always, implementation of rules and regulation in India is still a big problem. On the whole, it's better to continue with the existing Anglo Saxon derived model of corporate governance.

CORPORATE

GOVERNANCE

Source:http://www.ecgi.org/codes/documents/hampel23.pdf

5

SOUMYABALAKRISHNAN1MBAB

DOES INDIA NEED TO ADOPT ACORPORATEGOVERNANCEMODELT H A T I S S I G N I F I C A N T LYDIFFERENT FROM THE ANGLOSAXONMODEL?THISISTHEREALD E B AT E T H AT H A S T O B EADDRESSEDNOW.

FINANCIAL REGULATION

6

ASHAJOSE1MBAB

“Anoverall�inancialregulatorforthecountry hasthepotentialtoeasetheridefortheaverageinvestor”

A big question that is being furiously debated upon is as to who should keep an eye on the money that you invest in Unit Linked Insurance Policies (ULIPs)? The mutual fund industry feels it should be the Securities and Exchange Board of India (SEBI) as ULIPs are basically investment products. But ULIPs are essentially sold by insurance firms under the costume of protecting the consumer. So the insurance sector feels that in keeping with international norms, the Insurance Regulatory and Development Authority (IRDA) must regulate it.

So the existential crisis remains - who should regulate companies that fall between two sectors or fall under two or more sectors?

The ProblemThis is not the only sector which faces a regulatory dilemma. For example when gold exchange traded funds were being launched in the country, there was confusion whether such products should fall directly under the Reserve Bank of India (RBI) regulation or the forward market commission which is the regulatory body for commodities. Similarly, when currency trading started in the country, many felt that it should come under RBI but it is now being regulated by SEBI.

The SolutionThe question then arises – Is a super regulator the solution to all these problems?If we look at examples from the world at large, UK has a super regulator - the Financial Services Authority - which many feel was not effective at the time of the financial crisis. So, the model has failed. Others say that multi regulatory models have not worked either. The US had multiple regulators, yet the crisis originated in that country.

A popular opinion in our country is that a unified approach is better than to have many regulators. It might not guarantee that all the problems will be resolved but at least the confusion can be avoided by having one single regulator. Another school of thought which is not quite in tune with the populist opinion thinks that having a super regulator in India will lead to greater bureaucratic hurdles.

Our TakeA super regulator is suited for the Indian market because by creating many regulators we are only creating more hindrances for the average investor and entrepreneur. If a single company can operate in multiple financial products then it is also better for it to deal with a single regulator. By doing this a robust financial sector can be built where all the engines of growth will be linked together.

Source: http://forbesindia.com/article/resolution/wanted-a-financial-regulator-for-india/11142/1#ixzz2E8GprBeb

FINANCIAL REGULATION

7

ANUSHREE1MBAD

Regulations on financial services have restricted the growth while half of the population still does not have access to finance. Policy change in respect of the financial regulation is the need of the hour.

The current financial laws are outdated and require changes that cannot be made under the existing laws. Financial Sector Legislative Reforms Commission (FSLRC) has its responsibility of reviewing, simplifying and modernizing the legislations affecting the financial markets. FSLRC has issued an approach paper which discusses its strategies and philosophy. It mainly talks about India's financial regulatory architecture.

Finance Sector Legislative Reforms Commission (FSLRC) has endorsed a transition to a more scientific regulatory architecture recommended by government reports such as Raghuram Rajan committee report and Percy Mistry committee report. The lesson learnt from the global economic downturn pressed FSLRC to propose a new regulatory framework.

The Three elements in FSLRC approach are:-1. Modes of independence2. Accountability3. Rule making process of regulators.

Financial regulation allow may allow greater innovation, if its primary objective is to protect customers, which instills the industry to design financial products based on the same objectives. In order to protect the consumers it is important to cease unfair practices and sale of unsuitable products. This can be done by establishing a framework or a system which is able to detect such malpractices instantly. This brings in the importance of a regulator. Basically, the main objective of the regulator is not only to protect the consumers from fraudulent practices but also the companies such as insurance companies from taking too much risk, in order to avoid the possibility of becoming bankrupt.

The regulatory objectives should be clearly defined. Also the regulator should be empowered with respective instruments that do not prevent innovation. At times the regulator might have to choose between innovation and reducing risk, but in this scenario eliminating risk altogether is not a good option as it will restrict finance from reaching out to new customers, products and markets, thus restricting the power of the regulator.

With a vision to protect public interest FSLRC emphasizes on governance of regulation. Regulators will be independent but should be accountable. It discourages the idea of bringing too many innovations in the financial system and echoes to keep it simple but powerful.

ATTIMESTHEREGULATORMIGHTHAVETOCHOOSEBETWEENINNOVATION

ANDREDUCINGRISK

MARKET ROUND UP

8

ANKITMEHROTRA1MBAD

· Oil Imports up by 16.77% in November 2012 to $ 14.5 billion.· Delta buys 49% of Virgin Atlantic from Singapore Airlines.· HSBC set to pay $ 1.92 billion in the US to settle money-launderingprobe.· Gross direct tax collection grows by 7.14% during April to November.· Direct-to-Home (DTH) companies queue up to raise funds for expansion.· FDI in telecom sector falls to $ 43 million in April-September.· Price of Aakash tablet to fall to $ 35 soon: Sibal· Kingfisher Airlines HQ 'detained' by service tax department for 3 monthsnow.· IIP number raises doubts as sugar output doubles in October.· Asian Development Bank cuts India's GDP growth to 5.4%· EGoM cuts 2G spectrum auction base price by 30%· Reebok sticks to Rs 870 crore in fraud case.· ICICI Bank opens 101 rural branches across 6 states.· Banks lost Rs 4,448 crore in FY12 to fraud: Finance Minister· Deutsche Bank increases India's capital base to Rs 7000 crore.· IndiGo makes Rs 88 crore operating loss.· Reliance Group and China's Wanda to form Realty Joint Venture.· Q2 GDP growth close to three year low at 5.3%· HSBC scraps its plan to buy RBS Indian assets.

Repo Rate: 8.00% Reverse Repo Rate: 7.00% CRR: 4.25% SLR: 23% CBLO (as on 22nd Dec 2012):7.93 bps Inflation as on Nov 2012: WPI: 7.24 % Food inflation: 8.50% Forex Reserve (as on 21st Dec 2012): $296.6316 billion IIP (for October 2012): 8.20 % 91 Days T bills (as on 24th Sep 2012): 8.14% 10 year G- Sec Yield (as on 28th September 2012): 8.15 % Exports during August 2012: $22.3 billion Imports during August 2012: $38 billion

Source: Finance Ministry, Office of Economic Advisory, HDFC Securities Reports, Ministry of Commerce

ECONOMIC ROLLERS ANUBHA1MBAB

STOCK ANALYSIS

9

AJOJOSEPH1MBAA

Metal stocks rose for the fourth straight day after data on 14 December 2012 showed that a preliminary version of China manufacturing Purchasing Managers' Index hit a 14-month high in December 2012. Auto stocks advanced on hopes of strong earnings due to higher sales in the festive season that topped with Diwali in November, with Bajaj Auto hitting record high. ITC (cigarette maker) shed 1.55% to Rs 289 due to a bulk deal of 9.74 lakh shares executed in the counter at Rs 290.95 per share. Reliance Industries (RIL) scaled up with the share buy back program opened on 1 February 2012 and closing on 19 January 2013, with a reserve fund of Rs 10440 crore. Mahindra & Mahindra scaled 0.21% to Rs 966.30 as it intends to purchase Navistar Group's stake in Mahindra Navistar Automotives and Mahindra Navistar Engines for a total sum of about Rs 175 crore. Following the purchase of Navistar Group's stake in Mahindra Navistar Automotives (MNAL) and Mahindra Navistar Engines (MNEPL), both MNAL and MNEPL would become wholly-owned subsidiaries of Mahindra & Mahindra (M&M). M&M would take complete ownership of operations and continue to sell MNEPL and MNAL products.

Key indices reported gains for second straight session of trade to settle at a highest closing level in almost two weeks as world stocks rose following a credit-rating upgrade for Greece, rise in US home-builder confidence and progress in negotiations to avert the US fiscal cliff of tax hikes and spending cuts.

The BSE Sensex, was up by 111.25 points or 0.57% to 19,476. A positive sentiment was noticed by data showing that foreign funds remained net buyers of Indian stocks on 18 December 2012. From a 52-week low of 15,358.02 on 2 January 2012, the Sensex has risen to 4,117.98 points or 26.81%. The Sensex is off 136.18 points or 0.69% from a 52-week high of 19,612.18 hit on 11 December 2012.

Sourcehttp://www.hsbcinvestdirect.co.in

THE BSE SENSEX, WAS UP BY 111.25 POINTS OR 0.57% TO 19,476. FROM A 52-WEEK LOW OF

15,358.02 ON 2 JANUARY 2012, THE SENSEX HAS RISEN TO 4,117.98 POINTS OR 26.81%. THE SENSEX IS OFF 136.18 POINTS OR 0.69% FROM A 52-WEEK HIGH OF 19,612.18 HIT ON 11 DECEMBER

2012.

FINANCE BUZZ

10

FCDFinancial Conglomerates Directive (FCD) is the directive which makes provision for group-wide supervision of companies which have subsidiaries operating in more than one financial sector.

IAISInternational Association of Insurance Supervisors (IAIS) represents insurance regulators and supervisors worldwide; the IAIS issues global insurance principles and standards.

Macro prudential regulationMacro prudential regulation is a regulatory policy aimed at maintaining the stability of the financial system as a whole.

ChillSpecial restrictions that can be placed on a given security by the Depository Trust Company (DTC). Chill restrictions are intended to limit the potential for problems within the financial marketplace and can be placed on a security for various reasons.

WildcattingA policy instituted by the Securities and Exchange Commission (SEC) that calls for the review of an entire industry whenever critical problems (such as accounting fraud) are found within one or two companies in the industry. The origins of this term are derived from the oil industry, where companies drill for oil in unexplored or wild areas.

SterilizationDenotes the process whereby the monetary impact of the liquidity generated by accretion to the foreign exchange assets of RBI is neutralized through the use of open market operation or liquidity adjustment facility or cash reserve ratio.

MonetarismA school of thought, which holds that money is the major determinant of short-run movement in nominal gross domestic product (GDP) and long-run movements in prices. While monetarists give prime importance to money supply in determining aggregate demand, others argue that a wide variety of variants like fiscal policy and net exports of goods and services including money, affect the way the economy functions.

NAVEENKUMARM1MBAD

11

Question

PMEAC Chairman C Rangarajan said, "India does not need a super regulator for financial sector markets but needs better co-ordination among existing regulators" Do you think India should have a single regulator for financial markets like Financial Services Authority (FSA) in United Kingdom?

ResponsesTotal Responses: 59

RESPONSES NO. OF RESPONSES

YES 30

NO 28

CAN’T SAY 1

Best Comments1. A single regulator would be good, as the system is working well but there is nocoordination in hard times of recession. India cruised well just because we are fundamentally strong. The markets also look very attractive to get some huge foreign reserves but lack of coordination and delay in decisions due to this is a subject we need to ponder over.-Raghav Arora 1221425

2. If we have FSA like UK then it will dominate the entire financial market and therewould be less of regulation, more of domination leading to enforcement of rules and regulations which in some cases might not even be justifiable. So I think one regulatory authority wouldn't be such a good idea looking at India's current financial status with the number of increasing corruption and more over a single regulatory authority controlled by the government would finally end becoming a big corruption unit.-Rishi Chakravorty 1120320

CAMPUS POLL ANKUSH KUMAR SINGH 1 MBA B

PHOTO FIND

12

TKIRUTHIKKADEVI1MBAARVISHNUVARTHANA1MBAD

FINANCE QUIZ

13

1. Name the financial regulator of India which is overseen by theMinistry of Consumer Affairs, Food and Public Distribution.

2. Who is the present chairman of the US Federal Reserve?

3. Name the program conducted by the US Federal Reserve (“theFed”) in late 2011 and 2012 to help stimulate the economy by buying longer-term treasuries.

4. Name the markets under regulation in India.

5. Expand FDIC.

6. Financial Services Authority (FSA) is the financial regulator ofwhich country?

7. Name the regulator for pension sector in India.

8. Who is the present chairman of the SEBI?

9. Name the authority responsible for regulating securities industryin USA.

10. Which country has “The Hellenic Republic Capital MarketCommission” as one of the two regulatory bodies for the financial industry?

VINAYPAHUJA1MBACAMOGHAVARSHAP1MBAC

CROSSWORD

14

Across

5.Is the chief regulator of forwards and futuresmarkets in India, established under the Forwards Contract Act, 1952

6.Is the only licensing-cum-regulating body offinancial audit and accountancy profession in India.

7.Is a method of placement by which cash isbroken into smaller deposits of money, used to defeat suspicion of money laundering.

9.India's central banking institution, whichcontrols the monetary policy of the Indian rupee.

10.Know your customer

Down

1.Is a non-standardized contract between twoparties to buy or sell an asset at a specified future time at a price agreed upon today.

2.The process in which money is deposited in acontrolled foreign corporation offshore, preferably in a Tax haven where minimal records are kept, and then shipped back as a Foreign Direct Investment, exempt from taxation.

3.The process of concealing the source of moneyobtained by illicit means

4.PFRDA is the regulating authority for ________in India

7.It is the regulator for the securities market inIndia; it was established on 12 April 1992.

8.It serves as an Authority to protect the interestsof holders of insurance policies, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith.

ABHISEKSAHU1MBAC

ANSWERS

15

PHOTO FIND

1.Mr Ashish Chauhan, CEO of Bombay Stock Exchange

2.Logo of Insurance Regulatory and Development Authority,India

3.Ramesh Abhishek, Chairman of Forward Market Commission,India

4.SEBI Bhawan, Mumbai

5.Logo of Pension Fund Regulatory and Development Authority,India

6.Mr Anand Sinha, Deputy Governor of Reserve Bank of India

Across

5.FMC—is the chief regulator of forwards and futuresmarkets in India, established under Forwards Contract Act, 1952

6.ICAI—is the only licensing cum regulating body offinancial audit and accountancy profession in India

7.STRUCTURING—is a method of placement by whichcash is broken into smaller deposits of money, used to defeat suspicion of money laundering

9.RBI—India's central banking institution, whichcontrols the monetary policy of the Indian rupee

10.KYC—know your customer

Down

1.FORWARD CONTRACT—is a non-standardizedcontract between two parties to buy or sell an asset at a specified future time at a price agreed upon today

2.ROUND TRIPPING—the process in which money isdeposited in a controlled foreign corporation offshore, preferably in a Tax haven where minimal records are kept, and then shipped back as a Foreign Direct Investment, exempt from taxation

3.MONEY LAUNDERING—the process of concealingthe source of money obtained by illicit means

4.PENSION—PFRDA is the regulating authority inIndia

7.SEBI—is the regulator for the securities market inIndia; it was established on 12 April 1992.

8.IRDA—it serves as an Authority to protect theinterests of holders of insurance policies, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith.

FINANCE QUIZ

1.Forward Markets Commission (India)

2.Ben Bernanke

3.Operation Twist

4.Commodities, equity, debt, foreign exchange

5.Federal Deposit Insurance Corporation

6.United Kingdom

7.PFRDA (The Pension Fund Regulatory andDevelopment Authority)

8.Upendra Kumar Sinha

9.Securities and Exchange Commission.

10.Greece

�����������

Please mail your valuable feedback , reviews at nishka@mba.christuniversity.in

CHRISTUNIVERSITYINSTITUTEOFMANAGEMENT,KENGERI

FORPRIVATECIRCULATIONONLY