January, 2009

January, 2009 A Fin-Niche Publication

FROM THE EDITORS DESK

The Financial reporters have had a more than busy routine for the past few months. With
hiccoughs in the global economy, many firms crossing over hands, the world gripped in
fervour of mergers and acquisitions, the mega investments of SWFs, the Freddies and
Fannies being nationalized, inflation breaking roof-tops, many a minds have been boggled.

While the world was mesmerized by the Beijing Olympics, Fin-Niche managed to carve a
niche of its own with Bluff-Master. Fin-Niche rode on over the crests of the wave created
by Bluff-Master to organize Descendants of Kuber, The Fiscal Crusade & The
Solomons Mines, events which resonate the impounding success of the club.

Ever since our last edition India has been a witness to many changes. From the precipices of
the sensex, the sky soaring inflation rates, the boiling world crude oil prices, the loans
becoming leaner, the SEBI opening futures in forex trading, India has undergone huge
transformations.

What else lies in store?

The extremities of finance, the psyche behind investments, the emergence of the sovereign
funds and the Private Equity, the world crude oil prices, inflation and the insurance sector are
the major issues addressed in this issue.

For the analytical and inquisitive minds, we have the Fin-Teaser section which has a quiz and
a cross-word.

Till our next edition, Happy Reading!!!

TEAM FINNICHE

Editors Designer
PSK Kartheek Karan Aggarwal

Mehul Sangoi

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January, 2009 A Fin-Niche Publication

Contents
1. World Crude Oil Prices..4

2. Lessons to be learnt from Inflation... 6

3. Extreme Finance....9

4. Behavioural Finance.11

5. Sovereign Wealth Funds...15

6. Private Equitys Power Play.21

7. Way Ahead For Insurance Sector In India...23

8. Fin-Teaser Quiz26

9. Fin-Teaser Crossword..28

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WORLD CRUDE OIL PRICES

Aniket Deb Roy (PGDM-FIN) 2008-10

Up, up and up. Crude oil prices were aiming for the sky until recently. They had touched
$147 per barrel as recently as 15th July, 2008. The rise was sharp, considering it was around
$100 per barrel on 20th February, 2008. $200 per barrel seemed imminent. In fact, many firms
like Goldman Sachs predicted it wouldnt be long before one fine day we would open our
newspapers and see $200 per barrel written in bold on the front page. Thankfully though, the
prices are showing a downward trend now. This article aims to look at the reasons behind this
sudden sharp rise in crude, and the reasons for its fall recently. It also investigates the impact
that the rising crude prices have had on the world or may have in the future, in case the prices
decide to take a U-turn once more. Finally, it attempts to predict what we can expect in the
future in terms of crude prices.

So why did the prices rise so dramatically? The main factor is undoubtedly, demand. Most of
the emerging economies (like China, India etc) are heavily dependent on oil for their growth,
especially in the transportation sector. The problem has been compounded by lack of
foresight or plain ignorance on the part of the world. Everybody knows oil to be a non
renewable source of energy. It is known that one day there would be a shortfall in supply, and
ultimately the reserves would come to an end. But it happens so many times that we dont act
until we are pushed into a tight corner as we have been pushed into now. No efforts were put
in to develop alternate, renewable sources of energy on a large scale to ease demand. Now,
finally, when the world finds itself in a tight spot, we are getting to hear of battery powered
cars, solar devices and nuclear energy. None of these renewable sources have been brought at
par with oil for our energy needs hence the crisis. But at least some effort is being made in
such alternative directions, which is cause for relief. So in a way, because of the increase in
prices, people have realized that oil is not forever and hence they have been forced to look at
renewable sources, many of which like solar power and wind energy are environment
friendly. With global warming on the rampage these days, its good that this realization has
come sooner than later. Other factors have also played their part in the rise of the crude oil
prices. One factor has been the depreciation of the dollar. Since oil is traded in dollars, this
automatically shoots up prices. Political factors like tensions between the US and Iran, and
terrorist destruction of pipelines have also contributed to the rise. Also many economies
including India tend to absorb the price rise through subsidies for votes, so that the price

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increases are not passed on to the consumers. Therefore there is no fall in demand, as the
prices rise. In fact, demand continues to rise as before, triggering further price rise.

There are mixed opinions on another major factor that is believed to be behind the oil price
rise Speculation. Now what is that and how does it drive oil prices? Speculation of prices
happens when people buy oil futures. A future is a contract whereby you agree to pay the
money for some quantity of oil. You do not actually buy the oil, but the contract with oil as
its underlying value. So how do you make money? Let me explain it with an example
Suppose you buy a futures contract of 2 barrels of oil at current rates of $100/barrel (say). So
you pay $200. The next day the price rises by $2/barrel. So you gain $4 (for 2 barrels). The
day after that oil price falls by $3. $6 will now be debited from your account. This process
continues until the expiry date of the future contract comes when you get whatever money is
there in your account. Speculation is pure guesswork on oil prices much like speculation in
stocks which drives the Sensex up or down. Of course, the other factors that have been
mentioned are the ones responsible for the speculation in case of oil. Investors, based on
current conditions speculated that demand will be greater than supply in the future and so
price of oil will increase. As a result more futures were in demand which led to an increase in
their price. This led to an increase in the price of oil. So many people feel the rise in oil prices
was not due to actual demand supply conditions that have happened but due to speculations
of the future. There are others who believe that speculation is not a reason for the rise.
Buying futures contracts does not reduce the supply of oil in the market, they say. So how
can the price of the commodity, oil, increase? Some economists believe though that
speculation leads to hoarding by some, leading to a shortfall of supply. Whether hoarding did
indeed take place is a matter of debate.

In general, all these factors together contributed to the sharp rise that we witnessed recently.

The recent fall in prices to around $122 per barrel is a consequence of a fall in demand.
Increase in supply by OPEC (Oil Producing and Exporting countries), especially Saudi
Arabia has also contributed to the fall. In India the UPA governments steep price increase
recently, as a result of its inability to subsidize for oil any further, has led to a decrease in
demand. All over the world, as people fail to cope with the rising prices, they are reducing
their consumption of oil.

Oil prices affect transportation costs, and therefore affect the costs of almost every item that
is transported from the factories/warehouses to the markets or vice versa such as foodstuffs,
or raw materials like steel. This therefore affects the inflation rates such as the WPI

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(Wholesale Price Index) and the CPI (Consumer Price Index). In fact, the recent spurt in
inflation in India was the effect of the rise in World crude prices to a large extent.

If oil prices are allowed to go through the roof, then there will be a drop in demand as has
happened now, which will lead to a fall in GDP growth rates, both for the developing
countries as well as for the OPEC.

Although there has been a slight fall in prices, the present prices are very high, and there is
every possibility of the prices increasing in the near future, until alternative sources of energy
are fully developed. Automobiles, the largest users of oil energy, show no signs of declining,
and with the launch of cheaper cars like the Tata Nano, more and more cars will be on the
roads, leading to increased demand. So even though prices have gone down, everything
indicates to this being only a temporary phase.

The need of the hour therefore is to minimize the consumption of oil as much as possible, and
to pursue the development of alternative sources vigorously and on a large scale. But how
many people are still willing to make the effort?

References:

1) Economic Times Front page July article on the recent fluctuations of crude oil.
2) Goldman Sachs report 6th May 2008

Online source:

http://www.nationmaster.com/encyclopedia/Oil-price-increases-since-2003

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LESSONS TO BE LEARNT FROM THIS INFLATION

Pal Gautam Deepak Ranjan (PGDM-FIN) 2008-10

The inflation woe that we all are confronting today is a result of the mismatch between
supply and demand for the products. The demand for the products has risen due to increasing
proportion of the population getting access to money. This increasing access to money may
be due to many factors: (i) Reserve Bank of India in its effort to finance government
operations prints more money in the system (ii) There is more of supply of money than
demand. This increase of access to money leads to greater demand as purchasing power of
the masses increases and the supply of goods is unable to match the increasing demand.

However, in the case of our country, the inflation that we face has more to do with the fall of
the rupee in the wake of falling economic condition since January this year. The reason I am
attaching inflation to the depreciating rupee is only because we are facing a current account
deficit mainly due to high global Crude oil prices. Crude oil is a major component in every
economy, as there are many other inter-related services that depend on the availability and
price of Crude oil. India depends on imports of Crude oil to the extent of 70% for meeting its
domestic needs. As a result the increase in the prices of Crude oil is creating a huge current
deficit. In normal times when the economy of our country is stable and not hit by inflation,
the RBI plays a major role in keeping the rupee down to boost the export sector. It does so by
buying the dollars that comes to India through exports and inward remittances from non-
resident Indians (NRIs), dollars resulting from portfolio investments, from companies that
borrow abroad, foreign direct investments and corporate borrowings done through external
commercial borrowing route. All the above channels bring foreign currency in our country
boosting our balance of payment. While buying the dollars it needs to pay them back in
rupees, which it does through printing rupees or selling the rupee denominated securities. But
this way of buying dollars, results in greater money penetration due to the former and results
in inflation as explained above.

I am of the view that rupee appreciation should not be prevented by the RBI for the following
reasons:

a) First of all, rupee depreciation is done mainly to protect the interests of the exporters. But,
even after keeping the money to low levels we have lost the garment export business to
them due to their mass production and use of technology. So, a low value of rupee hasnt
helped us in that particular segment. Also, we cant keep the interest of the exporters

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intact sacrificing the wellness of the whole population who are affected due to hikes in
the prices of daily goods. Moreover, in the ongoing talks at the WTO meet the developed
nations are bargaining for lesser tariffs which will surely induce competition and the
export sector will have to take help of its own rather than depend on weaker rupee.
The argument that Software Industries will be eroded is not true, because the exports of
Software sector will not see a drop in spite of rupee has appreciated since it is paid in
dollar terms (It can see a drop in demand if the other buying markets are facing recession).
So in order to keep the same profit margins in rupee terms it will have to snatch more
projects which it is capable of doing because of its competitive resources proven by the
outsourcing boom.

In present economic situation since October 2008, where the rupee has significantly
weakened against the dollar, the headache of Indian IT companies has not eased because
of demand slowdown of IT services in US. Hence IT companies are on a scout for new
market search. All this proves that money depreciation is not going to be the sole factor for
good health of Indian IT companies; rather they should penetrate into new markets. Also,
low cost markets for which India gets majority of the outsourcing work in IT, is being
challenged by countries like Mexico and Philippines where the same low cost situation
persist. Hence diversification and appealing to clients through quality product will be the
winning factor for Indian IT companies in the future.

The argument that exporters bring the valuable foreign currency can be challenged from
the fact that India at its growing stage attracts valuable foreign currency from FIIs in
stocks, PE firms and FDIs through their investments in already existing firms and in
upcoming projects. So, if the economy is robust it will warrant investment by the
prospective investors anyhow.

b) Rupee appreciation means imports of goods become cheaper and the country will be able
to provide them for cheaper values. Our country is not self-sufficient in Crude oil, non-
ferrous minerals, metals, fertilizers, edible oils and pulses. This can help the government
import these goods at lower prices and reduce its fiscal deficit and inflationary problems.
c) Appreciation of rupee will help the manufacturing industry, particularly those industries,
whose end products depend on the raw materials imported, by keeping the price lower.
d) Rupee appreciation helps in garnering more foreign currency from the exports of those
products which other countries is badly in need of like food products as for obtaining
the same quantity they will have to shell out more from their currencies.

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For e.g. for obtaining a 45 Rs. item when dollars and rupees were exchanged for 1:45,
USA had to spent 1$. Now if the dollar and rupee is exchanged for 1:40, USA would
have to spend 1.125$ for the same quantity.

e) Appreciation of the rupee helps in easing the pressure related to foreign debt servicing
(interest payments on debt raised in foreign currency) on India and Indian companies as
India and Indian companies have to pay less in rupee terms. It boosts the Indian
companies to raise money from external commercial borrowings route.
f) Appreciation of money will reduce the prospects of government subsidies to protect the
loss making petroleum industries. In todays scenario, the Indian government supports the
loss making oil producing industries by raising money through oil bonds and as a result
suffers from huge fiscal deficit, for which Fitch, a global rating agency, recently
downgraded Indias long-term local currency issuer default rating. This could have been
prevented if the rupee would have remained stronger.

From the inflation we are witnessing today, it is evident that if we keep the rupee high it will
reduce the inflationary pressures, preventing the RBI from taking drastic steps such as CRR
hike and creating liquidity crunch (which propels recession due to lesser investments). Also,
the export segment should try to match the competitors head-on through competency shown
in output and trend rather than depending on a weak rupee to shore them safely. Hence from
my perspective, appreciation of money should be given a serious thought to for all the above
mentioned reasons.

References:
http://www.thehindubusinessline.com/2007/04/09/stories
http://www.rediff.com/money/2002/apr/25tut.htm

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EXTREME FINANCE
Nitin Purwar (PGDM-IB) 2008-10

Financial Bloodshed

This story occurred in a small country in south-eastern Europe called Albania. This is the
story of the sad demise of more than 2000 people due to a major investment malpractice.

Albania was one of the poorest, isolated and backward countries in Europe. The transition of
the country from central planning to a market driven economy began in 1991. This was the
time when a large part of the population was unfamiliar with financial institutions and
practices. The three state banks of the country held 90 percent of the deposits, offered loans at
positive interest rates but had a growing portfolio of bad loans.

The Bank of Albania had put tight credit ceilings on them. Thus an informal lending market
ran parallel to satisfy the private sector demands. This was the start of the debacle- the
Pyramid schemes. Under such schemes, the companies promised high returns on investment
and these returns were paid to the first investors by the money received from those who
invested later. But these companies soon turned out to be insolvent as their liabilities
exceeded their assets. And the options left were running away- or declaring bankruptcy.

In Albania many schemes like Xhaferi and Popolli came up offering interest rates as high as
30 percent per month and they attracted nearly 2 million people in a country of 3.5 million.
Albanians sold away their houses and farms in order to invest in these schemes.

In January 1997 two such schemes Suede and Gjallica declared bankruptcy and failed
payments, triggering riots. People lost all faith. In March 1997, the government lost all
control, with many on army and police deserting their jobs. 1 million arms were looted. Some
2000 people were killed in the violence that followed the collapse of these pyramid schemes.

Death Bonds

Today the volatility in the financial markets of the world troubles even the best of investing
brains. The sharp rise and fall in the markets have given sleepless nights to many. But the
ultimate solution to this volatility comes in the form of Death Bonds. Whether the
government survives or falls, world is at peace or war, rain or drought, people just keep
dying. This is the biggest attraction of a death bond.

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Death bonds are life insurance policies brought by brokers from those wishing to cash their
policies early. The brokers bet on the early death and pay until the recipient expires;
thereafter they take the proceeds.

Big firms like Bear Stearns, Lehman Brothers, etc. are beginning to eye the profit potential in
this field. Thus policies will be bought, bundled and sold to big investors. So dont forget to
get yourself insured and be ready to die?

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Behavioural Finance

Santosh Anil Patil (PGDM-IB) 2008-10

"Wall Street fell sharply for a second straight session Tuesday after a hefty jump in wholesale
inflation and a drop in new home construction gave investors more reason to believe an
economic recovery is far off. The Dow Jones industrial average dropped by more than 150
points" reported MSNBC on 19th August 2008.

Introduction

The notion that individuals act rationally and consider all available information before taking
decisions forms the basis of many finance and economic theories. But then this might be the
case only on few occasions since people arriving at decisions commit repeated patterns of
irrationality, inconsistency and incompetence when faced with adversity. The news, making
stock market headlines, is directly or indirectly related with the behaviour of investors.

"Behavioural Finance is an integration of classical economics and finance with psychology

and decision making sciences".

Behavioral Finance is a study of investor market behavior that derives from psychological
principles of decision making, to explain why people buy or sell the stocks. It is the
connection between behavioral cognitive psychology and financial market economics leading
to decision making process.

Behavioral Finance focuses upon how investors interpret and act on information to make
informed investment decisions. Investors do not always behave in a rational, predictable and
an unbiased manner indicated by the quantitative models. Behavioral finance places the
emphasis on investor behavior leading to various market anomalies.

Behavioral Finance promises to make economic models better at explaining systematic non-
idiosyncratic investor decisions, taking into consideration their emotions and cognitive errors
and how these influence decision making. This article discusses certain key behavioral
Finance issues as follows.

Irrational investor behaviour

Human beings typically consider the loss of Rs.100 twice as painful as the pleasure received
from the same amount. People are willing to take more risks to avoid losses than to realize

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gains. Faced with sure gain, most investors are risk averse but faced with sure loss, investors
become risk takers.

When it comes to stock portfolio, monitoring the investments takes a back seat amongst
major percentage. When a company acquires other company and the investors are holding
stocks in the acquired company, then their response post acquisition is varied.

Logically people tend to sell off their part, but then most of the investors are inertial rather
than logical. People passively accept the shares offered in such cases. Such passive behaviour
significantly effects the companies making strategic financing decisions. Unlike Computers,
Investors behaviour in financial models is different laying emphasis on cognitive and
emotional biases. This results in inefficiencies in financial markets which can be avoided or
exploited. Once the irrational behaviour is established with its effect on stock prices, its
implications on corporate finance determines the capital structure, dividend policy, market
securities or communication with shareholders.

Herd Behaviour

Herd behaviour can be mainly attributed to two reasons:

Man is a social being and has a natural desire to be accepted by a group, rather than
being branded as an outcast. Hence following a group is an ideal way of becoming a
member.
Common rational: It is unlikely that such a large group can go wrong.

Herd behaviour has a great deal to do with the wild swings of panic and exuberance that can
seize markets in the wake of surprising economic news. The Financial transactions and
investments and their activities are in one way or other influenced by other people.
An Investor's thoughts, feelings and actions can be influenced by other individuals, their
words, their actions and consequence of their actions. For example, when Warren Buffet buys
a stock or commodity it becomes news and affects its price.

The irrational investor errors result in market misevaluation of assets. Nevertheless, this
behaviour can arise naturally in fully rational settings including,

Frequent convergence by individuals or firms upon mistaken actions based on little

justifying information.
Tendency for social outcomes to be fragile with respect to seemingly smaller shocks.

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Delay decisions for extended period of time.

Herd behaviour was clearly seen when venture capitalists and private investors started
investing frantically towards internet related companies, unaware of the working business
models of those companies. The overpricing of US technology stocks in the late 1990s or the
under pricing of Indian IT stocks during early 2000s was a clear implication of herd
behaviour.

Fear of regret

People tend to feel sorrow and grief after having made an error in judgement. Investors
deciding whether to sell a security are typically emotionally affected by whether the security
was bought for more or less than the current price. One theory is that investors avoid selling
stocks that have gone down in order to avoid the pain and regret of having made a bad
investment. The embarrassment of having to report the loss to the IRS, accountants, and
others may also contribute to the tendency not to sell losing investments. Investors follow the
crowd and conventional wisdom to avoid the possibility of feeling regret in the event that
their decisions prove to be incorrect. Many investors find it easier to buy a popular stock and
rationalize it going down since everyone else owned it and thought so highly of it. Buying a
stock with a bad image is harder to rationalize if it goes down. Additionally, many believe
that money managers and advisors favour well known and popular companies because they
are less likely to be fired if they underperform.

Over Reaction

People tend to overreact to bad news and under-react to good news. This can be mainly
attributed to short term behaviour of investors known as "Investor's myopia". Thus if the
short term earnings report is not good then investors response is an ill considered
overreaction with its inevitable effect on stock prices. The process involves three steps:

1. Under-reaction: Whenever there is news or events signalling change of prospects for a

given stock, for the whole market, investors tend to hesitate and delay their buying or
selling decisions. Sometimes investors do not react at all resulting in a period with no
price changes. This period of inertia is stated as under reaction of investors.
2. Adjustments: Later on, investors slowly start picking up the signals and the
information diffuses inside the investors mind and a gradual price adjustment takes
place. This might drive the value of stock towards its fundamental value.

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3. Over-Reaction: In the end, once the cascade of news and market reactions fully
confirm the change, investors over react by excess buying or excess selling of stocks
affecting stock prices.

Over-reaction comes into picture when there is a comparison between the "Favourite" stocks
and "Out of Favour" (OF) stocks. The "Out of Favour" stocks are not bad performing stocks
but the ones which are not attractive. However over a period of time, the OF stocks become
"Favourites" and vice versa. Because of increased buying, the effect is reversed and the
process repeats in a cyclical manner. The Markets overreact to IPOs while the under-react to
earnings announcements and dividends announcements. Reliance Power Ltd IPO is a recent
example for market overreaction.

Conclusion

Behavioural finance provides many useful insights for the investment professionals providing
them with a framework for evaluating active investment managers. By challenging the
"Efficient Market Hypothesis" it has resulted in the flow of new ideas into financial
economics and ultimately into economics.

The growing interest in stock markets, growing number of investors and the growing
emergence of new theories have resulted in better application of Behavioural Finance theories
which are extending their branches into various financial products. In the last decade, the
financial literature has amassed a substantial number of insights into market anomalies
suggesting that the rational behaviour underlying efficient market hypothesis are subject to
variations depending on models of human behaviour. Hence it is the time to apply knowledge
in investing and prime time to take corrective actions. The analysis can result in more rational
and lucrative financial decisions.

References:

1. Bob Lutgen, Economic Analysis of Asset Prices.

2. Bailey, R.E. (2005) The Economics of Financial Markets, Cambridge University
Press.
3. Nofsinger, J.R. (2002) The Psychology of Investing, Prentice-Hall.
4. Martin Sewell, Introduction to Behavioural finance.
5. BANERJEE, Abhijit V., 1992. A simple model of herd behavior. The Quarterly
Journal of Economics, 107(3), 797817.
6. Hirshleifer, David and Teoh, Siew Hong Fisher College of Business, The Ohio State
University, Herd Behavior and Cascading in Capital Markets: A Review and Synthesis.
7. Robert J. Shiller, Human Behavior and the Efficiency of the Financial System."""

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SOVEREIGN WEALTH FUNDS

Priti Shrivastav (PGDM-FIN) 2007-09

Peeping into the future - The Centre of Economic Gravity is shifting and is doing that at a
rate faster than what you can contemplate!

1. Introduction
In the simplest language, a Sovereign Wealth Fund (SWF) is a fund owned by the State
Governments of country. It is a pool of money, typically, created out of the accumulated
forex reserves of this country, to earn higher long-term returns, by investing them world-
wide. To put it more conveniently, SWFs are next in line to succeed Hedge Funds, Private
Equity and the PetroDollars. Nevertheless, SWFs have arrived in a much bigger way and
have the potential to change the global dynamics entirely, in a matter of just a couple of
decades. SWFs summed up to $500 billion in the 1990s, currently, they constitute about $2.5
to $3 trillion, which is already greater than the size of all the hedge funds and as per a study
published by Morgan Stanley in May 2007, SWFs will constitute a huge $12 billion by 2015.
Today over 20 countries have their SWFs and each is worth more than $10 billion. Some of
the SWFs are as follows: (Source: IMF)

The Kuwait Investment Authority (KIA) it is the earliest SWF to be floated, way
back in 1953. Its assets are worth $250 billion.
Abu Dhabi Investment Authority or ADIA, $1300 billion is the largest SWF, created
in 1976.
The Government Pension Fund of Norway, GPF, worth $350 billion, created in 1981.
Chinese Investment Corporation, very recently floated by China, worth $200 billion.
Temasek holdings, $159.2 and GIC, $330 billion, both owned by Singapore, created
in 1974 and 1981 respectively.
Qatar Investment Authority, QIA, $50 billion, founded in 2000.
Stabilization Fund of the Russian Federation, $158 billion, created in 2004.
Kazanah Nasional, KN, $18.3 billion, created by Malaysia in 1993.

Many more, with some in the pipeline.

Because they are owned by the State Government, SWFs are supposed to come from
extremely reliable sources. However, there is a catch over here. Most sovereign funds are
secretive, just the way hedge funds are. Although the IMF (International Monetary Fund) and

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the BIS (Bank for International Settlements) are working on developing some common
guidelines for SWF disclosure policies, at the maximum, only the fund financials can be
revealed. But, is this game restricted only to the economic operations and benefits, or is there
strategic move and motive lurking from behind? Singapore is the only country which
publishes its balance-sheets and the details of its assets-under-management. But even in its
case, if one takes a glance at the activities of Temasek and GIC in the immediate
neighbourhood of Singapore, in the South-East Asia, it will be no rocket-science to surmise
that it is the broader strategic goals that are also being rigorously fuelled.
Moreover, the SWFs can get deadlier than hedge funds as they have access to a much larger
and faster capital and do not have any higher obligations, being run by the State Government
itself. In fact, it will not be out rightly wrong to say that SWFs could be putting their money
into hedge funds.

2. Zoomed-in Picture
In this section, I will first discuss the Indian scenario on the SWF front, then present a picture
of the worldwide activity of the SWFs and then, present a specific picture, keeping in frame,
the United States of America.

2.1 India Yet to wake up.

Indias forex reserves stand over $260 billion. As per the latest 2007 reports of BIS, India
recorded the fastest rise in the forex market turnover growth. India, parks its forex reserves in
low-risk, low-yield, treasury bills of the USA. It takes pride in being the biggest investor in
the US securities, among all the BRIC nations and is only increasing the opportunity cost by
holding accumulated reserves, with the increase in liquidity management costs and the
constant weakening of the US Dollar.
One could argue that the escalating forex reserves is the result of a transient macro-economic
phase and hence doing away with these reserves to invest them more aggressively would be
foolishness. But before such a concern is raised, we will have to be clear on two things
First, nobody is asking to shift the entire reserve into an Indian Sovereign Wealth Fund. Even
10% of it will suffice. It is not so huge a risk to divert this portion from less than 5% yield-
earning securities to investments giving at least 3 times more than that. Second, what is the
benchmark of measuring aggressiveness? Is taking any investment out of a low-risk security
to a relatively higher risk security equivalent to being aggressive in the sense of the term
commonly used?
No. It is not. 5 is greater than 2 and 20 is also greater than 2 and this does not make 5 and 20
equal.
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Countries with smaller forex reserves than India, whose economies are not oil-driven, are
already into the market and are here since a long time. In fact with the strategic alignments
happening, the longer the delay in entering the game, huger will be the opportunity costs.
And it is not just about the missed opportunities. Something more that is missing is the
surprising absence of a regulatory code to check the funds pumped in by other SWFs into
India, through covert complex channels.
Although Temasek being allowed to double its stake in ICICI was a visible SWF activity, one
cannot forget the 18th October Crash of the
Sensex, when measures were taken to curb the PNs. Can anyone confidently aver that the
SWF of no foreign country was taking the PN route to the Indian market? And if it was doing
so, the enormity of the issue is not beyond comprehension.
As per the November 2007 news of the realty sector, the project development company
controlled by the government of Ras Al Khaimah, part of the UAE federation, made clear
that it had linked up with Indias Trimex Group to build township projects across India.
Indian major DLF and Dubais Nakheel have announced a joint venture with plans to invest
more than $10bn to build two townships on 40,000 acres. Emaar Properties, a Dubai-based
developer and the largest Arab real estate company, has a 40 per cent stake in a joint venture
with Indias MGF. UAE has the biggest SWF in the world. What will be the situation in case,
ADIA, the SWF of UAE, takes over these Dubai-based developers?
So, when will India wake up, float its own SWF, make regulations to monitor the sprawling
footprints of the SWFs, which are not sparing any opportunity in the pursuit of a strategic
supremacy.
With the weakening dollar, what better time than now?

2.2 Intense Activity on the Global Scene:

If there is still any doubt to believe that the Sovereign Wealth Funds have arrived, let us take
a quick look at some of the major activities that took place on the SWF front in 2007,
globally:

Borse Dubai, the government-controlled exchange, bought a 19.9% stake in the

Nasdaq and also, bought the 28% stake of Nasdaq in the London Stock Exchange.
Morgan Stanley, in a major recapitalization move, sold off a whopping 10% stake to
the Chinese state.
GIC, Singapore bought 12.5% stake of UBS.
GIC bought 4% stake in the CitiGroup.
ADIA, SWF of UAE, bought 5% stake in the CitiGroup.
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The Kuwait Investment Authority (KIA), along with a Korean Investment Group and
a Japanese Bank, bought stake worth $6.6 billion of Merrill Lynch.
Mubadala Development Company, an investment arm of the ADIA group, acquired
an 8 percent stake in AMD. Also acquired a 7.5 percent stake in the Carlyle Group.
The Chinese government took a $3 billion stake in the Blackstone Group, ahead of the
buyout shops I.P.O.

There are many more major examples, be it that of Barclays Plc or Bear Stearns and so on
and so forth. Chinas $200 billion is enough to buy majority stake in some of the top
companies of the world. The current international investment laws have no provision to
prevent this, at least in the markets where it matters the most, because SWFs are corporate,
legally.
German Chancellor Angela Merkel, in an interview earlier this January, warned that her own
nation was at risk two years ago when Russian government-controlled firms began buying
major oil and gas pipelines in Europe. The first lady of Germany questioned, "How do we
actually deal with funds in state hands? This is a phenomenon which until now has not
existed on such a scale."
Looking at all this, it is not hard to guess, that in the future if, the Almighty forbids, wars
were to be fought, the battleground would be the financial markets.

2.3 The United States of America Being Circled and Cornered

There is a joke which says, A survey was conducted by the U.N. worldwide. The only
question asked was:
"Would you please give your most honest opinion about solutions to the food shortage in the
rest of the world?"
The survey was a huge failure. In Africa, they did not know what "food" meant. In Western
Europe, they did not know what "shortage" meant. In Eastern Europe, they did not know
what "opinion" meant. In the Middle East, they did not know what "solution" meant. In South
America, they did not know what "please" meant. In Asia, they did not know what "honest"
meant. And in the USA, they did not know what "THE REST OF THE WORLD" meant.
Keeping this joke aside only for a short while, times have surely changed. The mention of the
economy of the USA now rings a tinkle in our minds Recession. But the tragedy is, the
woes of the US economy are not limited to that. The Centre of Economic Gravity is shifting
and is doing that at a rate faster than what we can contemplate. Assuming a hypothetical

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situation of the countries heavily invested in the US government securities, taking out their
dollar money out of these securities and dumping the same on the financial markets in the
form of SWFs - it would probably sound the ultimate death knell.
Worse, what if there is the MAD effect? MAD stands for Mutually Assured Destruction and
is used to explain what the impact on the entire world be like if only 2 or more nuclear-
capable nations used their nuclear ammo, the WMDs against even each other alone. So, if a
nation flush with US dollars, tries this out on the US, it will have a huge bearing on other
countries as well.
Even if such a harsh way to slaughter the US economy is not adopted, there are always more
polite ways of pinching the US here and there.
Venezuela has also decided to nationalize the countrys oil industry and is fast bringing
together the South American forces. Oil prices are already spiraling,
Russia has come up with its own SWF. Already, the mighty SWFs of the Middle-East and
China have made a boisterous entry into the US financial markets, thanks to the sub-prime
crisis. So, if others continue to not know the meaning of solution, honesty, et al, how long
will it be before the US understood the meaning of The Rest of the World?
One does wonder, why doesnt the US come up with an SWF of its own? There indeed was a
debate and almost a political consensus over having one, under Clinton. The dot-com bubble
blast and the subsequent terrorist attack were enough to kick the US economy to a state into
which it has degenerated now and to, at that time, compel the US to push this plan under
wraps. And right now, it is not at all easy for the US to think of floating a separate pool of
money.
So, will the free birds wings be completely clipped?

3. The Road Ahead

Now there is little doubt, if the burgeoning might of the SWFs is not kept under scrutiny or
control, we will very soon be in an entirely different world. Of course, the world has to
change and that the penetration of the SWFs is already deep enough to prevent this change
but by having regulations in place, at least, considering the benefit of India, this change can
be postponed, by two-three decades or so.
What specifically the Indian policy makers can do until they do not wake up on the issue of
creating a SWF of our own, is, put in place adequate regulations to at least put sectoral caps
on the investment of SWFs. The existing KYC policies will also have to be made more
stringent.

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Globally, as already mentioned, the IMF and the BIS are already working on ways to keep
SWFs in control. The fact that the IMF has acknowledged SWFs to be an issue, itself speaks
volumes. An action is keenly awaited. (Of course, more by the US)
Making things a little less pessimistic - indeed, the strategic minds cannot be restrained but
one can surely find some respite in the Norwegian model of SWF. GPF, the Norwegian SWF,
keeps its investments highly diversified and more importantly, the investments typically do
not exceed a single percent of the ownership. But again, is it possible to impose such a
model on powers like the Oil-rich Middle-East and the invincible China?
Does the IMF enjoy this level of clout?
Will a time come and will it come soon, when both - to protect their key (or the remainder)
assets and to attack and grab the key (or the remainder) assets of their strategic enemies,
countries will see the reverse phenomena of privatization?
Is this what globalization is effectively about?

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Private Equitys Power play

Sri Harsha M P (PGDM-IB) 2008-10

In the age of buoyant capital markets, every company is in a mad rush to get listed. However,
the markets are slaves to investor sentiment which may swing quite wildly, causing a lot of
volatility. Moreover, little-known entrepreneurs face a lot of difficulty in raising money from
the public to set their firms up and expand their operations. In such a scenario the most
prudent step an entrepreneur can take is to turn to Private Equity.

Private Equity, popularly known as PE, refers to equity that is not traded on the public
markets. PE is not restricted to seed capital or venture capital alone. It can be used for
funding expansions as well. However, recent trends in the market suggest that PE firms are
concentrating more on leveraged buyouts.

PE firms in recent years have generated returns that have outstripped the public markets.
They have become the favourable investment vehicles for many high Net-Worth Individuals,
Mutual Funds, Institutional Investors and other PE firms as well. Even countries with
substantial Forex reserves are investing in PE firms and funds in order to generate maximum
returns, as illustrated by the investment by the Chinese Government in the PE giant
Blackstone. PE firms today are undoubtedly the financial powerhouses of the world.

So how exactly did PE firms acquire this power and how are they making use of it? PE
industry initially invested in start-ups which received little investment from other sources, but
had tremendous potential. The first PE firm American Research and Development
Corporations investment of $70000 in the year 1957 in Digital Equipment Corporation
(DEC) yielded $355 million after DECs IPO in 1968 - an ROI of 500 times which eventually
led to huge PE investments in potentially lucrative start-ups, a trend which continues to this
day.

PE firms slowly moved toward another investment trend - Leveraged Buyouts. PE firms
started looking for companies which had strong fundamentals, but were distressed due to
prevailing market conditions. Having acquired a majority stake in such companies, PE firms
played an active role in restructuring the management of these companies eventually leading
them out of their slump. Once these temporarily sick units turned profitable again, PE firms
got them listed or found another potential buyer, to exit with huge returns on their
investments.

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These incredible results attracted may individuals and institutions towards PE, and eventually
they started investing in PE firms on a large scale. According to data available for the year
2006, $365 billion was invested in PE, an indicator of the kind of power that PE firms wield.

PE firms are a boon for budding entrepreneurs. These firms, which have a knack for
identifying entrepreneurial talent, encourage people to turn their dream projects into reality.
Also, unlike other investors PE firms do not just sit back and watch their investments. They
actively take part in the decision-making process of their investee companies and nurture
their investments. PE firms also play a prominent role in improving the levels of corporate
governance. They ensure that the companies they have invested in comply with the
established norms of the industry and the society. There have been instances where PE firms,
overcome by greed, veered away from the path of responsible corporate governance.
However, such aberrations have reduced in number and PE firms are looked upon as
responsible investors.

India too has been an important hotspot on the PE radar. The number of deals, and the money
invested in these deals by both domestic and foreign PE firms has increased substantially in
recent years.PE firms have invested in many Indian start-ups as well as emerging companies,
and made huge profits.PE firm Warburg Pincus had invested in todays blue-chip company
Bharti Tele-ventures, at a time when it was making no real profits; later it made a whopping
$1.3 billion profit on its stake sale. PE investments in India for the first three months of 2008
stood at an amazing $4 billion. PE firms are no longer interested in acquiring just minority
stakes in Indian companies. Firms such as Barings PE partners (India), Actis and IVF
advisors have acquired a majority stake in a handful of Indian companies in recent times. PE
firms are looking to control the companies they invest in and do what they have done over the
years in companies worldwide - turning them around and making huge profits. Indian
companies can definitely expect similar results from these Private Equity firms and it is time
India braced itself to witness Private Equitys power play.

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Way Ahead for Insurance Sector in India

Sucharit Narang (PGDM-FT) 2007-09

Insurance is basically an instrument for making the benefit of making good the financial
loss towards the insured entity. Needing insurance is often compared with needing a
parachute. If that parachute or the insurance does not exist for the very first time, then
chances are that you wont need it ever again. There exist lots of potential in various
insurance segments of Indian market. Since India is exposed to natural calamities, insurance
as an industry to mitigate the negative financial consequences is undeveloped. Major changes
in the economic policies, rising household wealth and improvements in regulatory framework
existing in the industry are the governing factors that determine the segments further growth.
Earlier, insurance sector was regulated tightly and was concentrated in the hands of a few
public sector insurers. Now with the Insurance Regulatory and Development Authority Act
(IRDA) in the year 1999, the country has abandoned the public sector exclusivity in favour of
market driven competition. This change led to entry of international insurers, proliferation of
newer innovative products and thus helped raise standards. Earlier, LIC dominated the
insurance market with the help of its sales force and margins were reasonably high. But the
coming of private companies has lead to a lot of innovations in this sector.

Some of them are:

a) Introduction of unit-linked insurance plans (ULIPs) has been, possibly, the single-largest
innovation in the field of life insurance in India. The design of the product addresses and
overcomes several concerns that customers have had in the past like liquidity, flexibility and
transparency.
b) One of the most significant outcomes of the enhanced competition has been the reduction
in the rates for pure protection plans. Over the last seven years, the rates have been revised
downwards, and are significantly lower than those prevailing prior to opening up of the
sector.
c) Life insurance companies have also been quick to recognize the huge need for structured
retirement plans and have leveraged their abilities for long-term fund management towards
building this segment.
d) The growth in group insurance business has also been impressive. The superannuation and
gratuity business has grown on the strength of professional fund management and a host of
value-added services.

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e) They have also changed the style of insurance intermediation i.e. the mode of distribution
of insurance products. Concepts like Bancassurance (selling insurance through banks),
Mallassurance (selling insurance through malls), selling by corporate brokers and e-
marketing are complementing the efforts of individual agents.
f) In todays world, focus is on selling more products to existing customers through various
touch points be it event based marketing or tracking. Customer Relationship Management
helps in acquiring new customers. Also granular details about the customers help companies
design better products, improve service level and reduce operational cost. Lastly Business
Intelligence tools help the firm to monitor customer behaviour

Another distinct feature of the sector is that the industry is prone to easy replication and
hence the products lose their exclusivity no sooner than they are introduced in the market.
In a market where a new product can be very easily replicated, what would be a
differentiating factor?

The need for brand differentiation and the need for life insurers to reach out to consumers has
led to huge investments by life insurance companies on promotions, advertisements etc. For
an industry where the perception is that a product can only be sold, never bought, these
efforts are creating a pull factor for the first time in Life Insurance in India.

India's insurance sector, like many other sectors, is set to boom given the unprecedented
growth of the economy. Indians seek insurance products in the absence of social security and
because of tax benefits due to such investments; it is ranked favourably compared to any
other investment. The huge potential for the business lies in the growing and aging Indian
population. Also education is another segment where Indians like to invest a lot of their
money. Thus, products which seek to lay emphasis on a childs future are popular.

For the female child, the focus lies on higher education as well marriage expenditures.
According to census of 2001, rural sector comprises 72% of population and generates 26% of
GDP. Hence rural sector forms a vital part both economically and politically. However rural
sector products have certain specific needs that need to be taken into picture before entering
into the segment. Income pattern in rural sector is different in urban sector, in the sense that
income follows crop cycles. There are mainly two crops in a year. Incorporating this would
lead to a semi annual payment of premium in rural India. Therefore policies have to region
specific. Another stark feature of rural sector is that buying pattern is lower in rural sector.
Take the example of FMCG products, which have been successful in rural markets by

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lowering unit sizes. Taking cue from this sector, insurance products need to be sold with a
lower face value. Also, the level of education in rural area is lower as compared the urban
areas. Thus, simplified products would be preferred by most customers. Lastly, verification
would be cumbersome in such areas. Thus using wide age groups for policies would simplify
the procedure. Despite penetration efforts by government, rural insurance remains a small
part of the market. Companies see rural business as an obligation rather than opportunity.

Need for spreading insurance throughout the country is a necessity. Growing purchasing
power parity of the rural population must be targeted. There is a need to understand the
psyche of rural population, since they have a strong habit of saving.

India is among the most promising emerging insurance markets in the world. To unleash this
huge potential, insurance companies need to have a long term commitment in to the sector
and should design products keeping in mind the above said factors and utilise the distribution
mechanisms.

India needs to liberalise further in order to maintain a proper balance between

insurance solvency and investment flexibility.

References

1) Goldman Sachs Global Economics Paper No: 99 Dreaming with BRICs: The Path to
2050.
2) Malhotra Committee Report, Finance Ministry, Government of India, January 1994.
3) Sinha, Tapen An Analysis of the Evolution of Insurance in India.
4) Sinha, Tapen Insurance Sector in India: Towards the 2020 Vision.
5) Sinha Tapen The Indian insurance industry: challenges and prospects.
6) VijyaKumar, A Globalization of Indian insurance sector - issues and challenges.

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FIN-TEASER QUIZ
Akshay Somalwar (PGDM-FIN) 2008-10

1. What is the ISO Code of the Indian Currency in the forex markets?
a. INR 342
b. INR 654
c. INR 213
d. INR 356
e. INR 201

2. The branch of the world bank that offers guarantee against the political risk to
investors in developing countries

3. Finance minister of India during the emergency?

4.
It is a municipal badge.
Trident is the residential symbol of Bologna.
Identify the logo.

5.

Identify the personality in the photograph

6. A brass plate bank is the one which

a. Offers loans less than the prime lending rate
b. Has no offices
c. Is authorized to provide insurance
d. Offers brokerage services
e. Has head offices in the rural regions

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7. The Wall Street got its name because,

a. It was a part of the Abner Walls farm.
b. Derived from the Dutch name Vall Street.
c. Originated besides a wall
d. It was influenced by the strength of the great Berlin Wall.
e. It symbolized the wall between the optimists (bulls) and pessimists (bears).

8. Who was the governor of RBI before YV Reddy ?

9. Who is the Managing Director of IMF?

10. What is the Tag line of Bank of Baroda?

Answers:
1: ISO Code: INR-356 2: Multilateral investment guarantee agency (MIGA)

3: C. Subhramanyam 4: Maserati Car Logo

5: JP Morgan 6: b.

7: c 8: Mr. Bimal Jalan

9: Dominique Strauss-Kahn 10: Indias International Bank

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Fin-teaser- crossword

ACROSS:
2. The price above the face value DOWN:
5. Bottom price 1. Expand
7. Sell off (stocks) 3. New Bulletin
8. Mystery 4. Limit
10. Currency of mexico Before 6. Type of interest rate
15. Raise money through sale of debt or 9. Divide the market into
equity 11. Rate charged by banks
18. In debt 12. Securities traded outside the exchange
20. Amount left 13. Trading Members of the exchange
22. South Korean Benchmark Index 14. Exchange Regulator
24. The price at which last transaction 16. Tokyo stock exchange index
occured (abbr.) 17. Overall software integration for all the
25. Net Worth of a business company's processes
26. Make currency coins 19. The maximum loss not exceeded with a
28. Stock market indicator given probability defined as the
29. Insider revelation confidence level, over a given period of
time.
20. Type of option
23. Minimum or maximum amount for a stock
buy or sell
25. Competed with TATA Steel for Corus
Bidding
27. Minimum stock price movement

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Solution

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January, 2009 A Fin-Niche Publication

A fin-niche publication

Institute of management technology

Ghaziabad

Website: www.imt.edu

Webmail: finniche@imt.edu

Blog: finniche.blogspot.com

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