volUME

4.09

ISSUE
71

July 31th, 2010

 contents

02 - News 10 - Did you know

about us
National & International events in All you wanted to know about

the world of finance. Noise Trader.

CHAANAKYA is the official 03 - Monetary Policy Review 12 - Indian Currency

Finance Newsletter, released For the First quarter of 2010-11. The unique Indian currency provides a

fortnightly. Its objective is to 05 - RIL Investors’ Check new brand image for INDIA.

keep each & everyone abreast RIL net rises 32% but still recom- 14 - Alumni Speak
with the activities & events in mended “Neutral” from “Buy”. A peek into the corporate world

the world of finance. 07 - GST in India through our Alumni’s experience.

Gain from GST to propel India’s 18 - Quiz

economy to $2 trillion. Check your Financial Quotient.

Student’s cartoon

By Sachin, MBA - M

CHAANAKYA VOL 4_09

 Rates

Repo 5.75 %
Reverse Repo 4.50 %
Call rate 3.30-5.30%
Inflation (as on 14 July) 10.55 %
Forex Reserve (as on 30th July) $ 282.938 billion
91day T-Bill 5.7364 %
IIP (as on 11th July) 11.5 %
6.90 GS 2019 8.0907%

GRAPHS
Rs/$ Oil ( $ per bbl)
QUOTES 47.6
80
Oil(per bbl)

Rs/$

78
47.2

76
46.8

46.4 74

46 72
15-Jul 18-Jul 21-Jul 24-Jul 27-Jul 30-Jul 15-Jul 18-Jul 21-Jul 24-Jul 27-Jul 30-Jul

“A liberal is a man who Gold(per 10 gram)

is willing to spend somebody

Gold(per 10 gram)
18300

else’s money”
18100

17900

17700

~ Carter Glass 17500

15-Jul 18-Jul 21-Jul 24-Jul 27-Jul 30-Jul

5600

“If you think nobody

35000000

5500
28000000

cares if you’re alive, try missing 5400

21000000

a couple of car payments.” 5300

14000000

5200 7000000
15-Jul 18-Jul 21-Jul 24-Jul 27-Jul 30-Jul

~Earl Wilson future rates

open interest

18,300 5600

“Money is like manure. 18,100 5500

You have to spread it around 17,900 5400 sensex

or it smells. “
nifty

17,700 5300

17,500 5200

~J. Paul Getty

15-Jul 18-Jul 21-Jul 24-Jul 27-Jul 30-Jul

1 CHAANAKYA VOL 4_09

 international news
By Elisabeth Merin Mathew, MBA-L
• The Basel committee on banking supervision softened some of its proposed capital and
liquidity rules while introducing new restriction on how much lenders can borrow as part
of an effort to rein in their risk taking.
• The IMF and EU suspended a review of Hungary’s funding programme,set up in 2008
to save the country from financial meltdown, saying it must take tough action to meet
targets for cutting its budget deficit.
• Nokia Siemens Networks (NCN) the world’s second largest maker of wireless phone
systems will pay $1.2 billion for wireless network assets from Motorola Inc to expand in
North America and Japan.
• General Motors will buy Auto Finance company AmeriCredit Corp for $3.5 billion in a
cash deal to boost sales and remove investor concern ahead of a planned stock list-
ing.

national news

• The Reserve Bank of India (RBI) raised repo rate by 25 basis points from 5.5 % to
5.75% and reverse repo rate has been hiked by 50 basis point to 4.50 per cent. The
cash reserve ratio or CRR and bank rate have been kept unchanged at 6 per cent. RBI
will review monetary policy every six weeks.
• RBI raised economic growth forecast to 8.5 per cent for 2010-11 fiscal from earlier 8 per
cent.
• Inflation is expected to come down at six percent by the end of this year. “The present
high rate of inflation is mainly due to food price inflation. The government has taken a
number of steps to curb inflation”.
• The government approved the symbol of the Indian currency ( ` ) which will differentiate
it from currencies used in countries such as Pakistan, Nepal, Sri-lanka and Mauritius.
Two parallel lines crossing ‘Ra’ in Devanagiri script or ‘R’in Roman denote the symbol
“is equal to” one Indian Rupee.

2 CHAANAKYA VOL 4_09

 MONETARY POLICY REVIEW-FIRST QUARTER 2010-11
By Venita Sequeira, MBA-N

Policy Stance of the RBI:

• To contain inflation and be prepared to any further build up in inflationary pressures.
• To maintain an interest rate regime consistent with price, output and financial
stability.
• To actively manage liquidity and to ensure that excess liquidity does not harm the
effectiveness of policy rate actions.

Change in Key rates and policies:

RATES AND POLICIES CURRENT PREVIOUS

Repo 5.75% (up 25 bps) 5.5%
Reverse Repo 4.5% (up 50 bps) 4%
Cash Reserve Ratio 6% 6%
Bank Rate 6% 6%
Policy Review Every 6 weeks Once in a quarter

Why a rise by 50bps in the Reverse Repo rate?

The RBI raised the Reverse Repo by a higher than expected 50 bps to narrow the LAF
(Liquidity Adjustment Facility) corridor from 150 bps to 125 bps. It is narrowed down to
reduce instability and volatility in markets.

Why didn’t the RBI touch the CRR?

An increase in CRR would reduce the lendable funds to various sectors and thus curb
growth. The RBI is constantly aiming at domestic growth which would be hindered with an
increase in CRR.

Projections as of year end:

GDP 8.5%
Inflation 6%
Money supply 17%
Deposits 18%
Non food credit 20%

3 CHAANAKYA VOL 4_09

Outlook on inflation will be shaped by 3 factors:

The monsoon at home;

The policy rests all its expectations on the monsoon, as it can increase the food output and
thus bring about a check on the inflating food prices.

Trends in global energy and commodity prices;

Global energy prices are showing a decline and if they continue to decline further, it would
definitely reduce the inflationary impact of the fuel price hike. Commodity prices will also
decline if the idle global capacity is utilized for imports and to ease the pressure on domestic
prices.

Domestic demand side pressures;

It is clearly evident that the demand side pressures are building up because of the constant
strengthening of the key domestic growth drivers.

Factors contributing to the rise in inflation:

Non food items contribute 70% to the WPI;

The Non-food items inflation which was near to 0 in November 2009 rose sharply to 10.6
% in June 2010 indicating that inflation is now very much generalized, unlike earlier.

Rise in prices of fuel products, iron ore and electricity ;

The partial deregulation of fuel prices will definitely have an inflationary impact in the short
run.

Impact:

• The Indian currency appreciated by 0.8%, the most since June, to 46.665 per
dollar.
• The Indian benchmark 10-year bond yield was at 7.67 percent, steady at Monday’s
close after easing briefly to 7.66 percent.
• The bank index of the Bombay Stock Exchange fell by 0.08 per cent ahead of the
Reserve Bank’s quarterly review of the monetary policy.

Conclusion:

• By narrowing the gap in the ‘LAF’ corridor, the RBI hopes to stabilize overnight rates
across liquidity conditions, stabilize overnight rate expectations and result in finer pricing
for the term structure.
• As the demand for credit increases and the liquidity tightens, both the deposit and
lending rates are expected to go up. For ex, a number of banks like HDFC, Central Bank of
India and Lakshmi Vilas Bank have already increased their interest rates on fixed deposits,
following the policy review.
• The policy has confidence in growth while at the same time focusing on price
stability.

4 CHAANAKYA VOL 4_09

 RIL investors check

RIL net rises 32% to Rs. 4851 crore but still recommended “NEUTRAL” from
“BUY”

INTRODUCTION

Higher gas volumes from its Krishnan Godavari fields on the eastern coast have led Muke-
sh Ambani’s Reliance Industries (RIL) to one of its best quarterly performances till date.

Beating market expectations, it showed a 32 percent increase in net profit at Rs. 4851
crore for the quarter ending June. The company had recorded a net profit of Rs. 3666 crore
in the corresponding quarter last year.

FACTORS FOR SUCCESS

The company had yet another record quarter due

to high operating rates and improving margins
across all their business. Reliance embarked on
two major initiatives to create incremental value.
They entered into a joint venture in shale gas
to internationalize and diversify the upstream
portfolio. Reliance has also committed itself to
participate in high growth and exciting area of
broadband wireless. Both these initiatives are
in line with the strategy to indentify and invest in
new, value-creating businesses.

RIL earned $7.3 (Rs. 341) on turning every

barrel of crude oil into fuel during the quarter,
against $6.8 (Rs. 318) per barrel during the cor-
responding previous quarter. The refining mar-
gins have moved up and the petrochemical cycle has improved. This is one of the RIL’s
best quarterly results in the recent past.

The refining margins have been in the range expected. The only positive surprise came in
the result in the petrochemical volumes that have improved.

RIL is producing about 60 million standard cubic metres of gas per day (mscmd) from the
KG-D6 fields. The company began gas production at the fields last April. During the quarter
ended June 30, production from KG-D6 was 304,349 tonnes of crude oil and 5,376 mscmd
of natural gas with a growth of 207 percent and 210 percent, respectively, as the oil and
gas production was under ramp-up during the corresponding period of the previous year.

The quarter saw the company’s total income increase 84.8 percent to Rs. 58,950 crore
from Rs. 31,896 crore in the April–June quarter of 2009-10. The increase in volumes ac-

5 CHAANAKYA VOL 4_09

counted for 48.4 percent of the growth in revenue exports where higher by 103.5 percent
at Rs. 32,849 crore as against 16,145 crore in the corresponding previous quarter.

During the quarter, revenue for the petrochemical segment increased by 18.8 percent from
Rs. 11,707 crore to Rs. 13,903 crore. Increase in volumes accounted for about 60 percent
of this rise and higher prices for the rest.

RIL’s international operations during the quarter included farming out 30 percent of its par-
ticipating interest in Oman Block 18 and 25 percent Oman Block 41 to Oman Oil Company
Exploration and Production. The company also farmed out 20 percent of its participating
interest in Colombia Borjo North and Borjo South to Ecopetrol.

Through its subsidiary, Reliance Marcellus LLC, it entered into a joint venture with US
based Atlas Energy and acquired a 40 percent interest in Atlas ‘core Marcellus Shale acre-
age position. In a similar deal through its subsidiary Reliance Eagleford Upstream Hold-
ing LP, it took a 45 percent stake in US based pioneer natural resources companies core
Eagleford Shale acreage position.

For the quarter ended June 30, RIL had cash and cash equivalents of Rs. 26,407 crore.
RIL’s scrip gained 0.14 percent to close Rs. 1,053.50 on the Bombay Stock Exchange.

Conclusion:

Motilal Oswal Cuts RIL from buy to neutral:

Indian brokerage Motilal Oswal cut Reliance Industries to “neutral” from “buy”, as the en-
ergy giant’s gas production from KG-D6 block was unlikely to be ramped up for next 6-12
months.

As against the earlier expectation of KG-D6 gas production reaching 80 mscmd (million
standard cubic meters of gas a day), RIL indicated that the production is unlikely to in-
crease for the next 6-12 months.

Reliance’s chief financial officer, Alok Agarwal, told reporters on Tuesday that Reliance
would not increase output at its KG D6 block off the east coast of India until a full review
of the reservoir is completed. Thus inspite of RIL doing well, brokerage firms downgraded
and rated neutral for the scrips as the EPS estimates being downgraded by 3/9%.

All riches have their origin in mind. Wealth is in ideas - not money.”
Robert Collier

“Before borrowing money from a friend it’s best to decide which you need most.”
Joe Moore

“Being rich is having money; being wealthy is having time.”

Margaret Bonnano

6 CHAANAKYA VOL 4_09

 Goods and services tax in india
By Pottim Sahiti Reddy, MBA-K

On 21st July, Finance minister Pranab Mukherjee unveiled a three-year plan for moving to
a single rate - Goods and Services tax regime of 16% for the centre as well as states by
2014 starting with 20% in year one.

“Gain from GST to propel India’s economy to $2 trillion.”

Pranab Mukherjee

Why GST?

The shortcoming in the present VAT structure is that it does not include the central taxes
such as customs duty, surcharges and at the state level also it does not include luxury tax
and entertainment tax. This is keeping the taxpayers away from the benefits of compre-
hensive input tax and service tax set-off.

The proposed GST will give more relief to industry, trade, agriculture and consumers
through a more comprehensive and wider coverage of input tax set-off and service tax set-
off by inclusion of several taxes.

Structure of GST:

Many countries are following a single GST

model. But for country like India dual model
is supported. Dual GST means the proposed
model will have two components-
CGST - Central goods and service tax levied
by the central government
SGST - State goods and service tax levied by
the state government.
The centre and state will be currently looking
at three categories of GST after the exemption
of 99 commodities-
1. A lower rate for basic goods.
2. Standard rate for all the other goods.
3. Rate for services.

First year: The standard GST will be 20 percent with both centre and state levying 10 per-
cent each on goods. For products which will attract lower rate, the total GST burden will be
12 percent if centre and state agree to levy 6 percent each on these products.

Second year: The plan is to reduce standard rate for goods to 9 percent for both centre
and state so that GST comes to 18 percent.

Final year: If there is not much burden on the government for compensation, all rates for
goods and services could converge at 8 percent resulting in 16 percent GST.

7 CHAANAKYA VOL 4_09

Rate for services is 16 percent right from the year one with centre and state levying 8 per-
cent each.

Benefits of GST:

1. GST provides a comprehensive and wider coverage of input credit setoff; service tax
credit can be used for the payment of tax on sale of goods etc.
2. CST will be removed. At present there is no input tax credit available for CST.
3. Instead of all the Centre and State indirect taxes, only a common GST needs to be
paid.
4. Uniformity of tax rates across all the states.
5. Ensures better compliance due to reduction in the aggregate tax rate.
6. By reducing the tax burden, the competitiveness of Indian products in the international
market is expected to increase.
7.Prices of goods are expected to reduce in the long run as the benefits of less tax burden
would be passed on to the consumer.
8. Overall tax compliance cost will reduce for the government and can concentrate on
GST.

Does GST design require changes?

The three-way classification would induce

scope for classification and valuation dis-
putes between the Centre and state and
may substantially increase the compliance
cost for tax payers. It is also providing a
stimulus to lobbying lower rates by states.
Given a time line reducing the rates, it’s not
clear why both centre and state need to
maintain this distinction in the rates.

Suppose one level of government decides

to divide the tax base into three categories,
the overall rates will get differentiated. Even
if the centre were to opt for two rates by merging the rate for services with standard rate
for goods, the differential between the categories would have been reduced.

\It would be useful to reconsider the advantages of fewer rates before finalizing the rate
structure for GST in India.

The states losing autonomy in tax powers, especially in determining rates is another is-
sue. The proposed draft of the constitutional amendment suggests that subsequent to the
introduction of GST, any changes in the design of the tax would require the consent of
two-thirds of the members of the Council of Ministers, as well as the assent of the Union
finance minister. Most of the states are not happy with this approach.

8 CHAANAKYA VOL 4_09

As financial services and local sales of computers are difficult to tax and if these two sec-
tors are excluded from the base, number of states requiring standard rates higher than 15
percent will come to nine. Even if tax net is expanded to include these services, atleast four
states would require standard rates higher than 15 percent for revenue neutrality. Some of
the states are losing more from Central Service Tax than they could gain from inclusion of
services in the base. This is a structural issue and most of the states may find it difficult to
accept compensation.

Conclusion: The goal of GST is to bring India together into a common market. GST is
meant to be tax on final consumption. It is structured as a destination-based tax and so
rates need not be the same across all states. It would be important to provide a floor rate
on both the standard rate and lower rate of tax to further prevent wars. Uniformity in forms
and procedures such as one registration and one return will also contribute to reduction in
compliance costs.

Buzzwords
Drill-Bit Stock

A term used to describe shares that trade for prices less than one dollar. The fractional
prices are comparable to the diameter measures of drill-bits found in a hardware store.

Dog And Pony Show

A slang term referring to a financial seminar that presents new products or issues of securi-
ties to potential buyers.

Fast Tape

A type of futures market that occurs when a single traded price is unavailable because of
the rapid and large number of transactions occurring in the pit or ring.

Fallen Angel

1. A bond that was once investment grade but has since been reduced to junk bond sta-
tus.
2. A stock that has fallen substantially from its all time highs.

Dividend Clawback

An arrangement under which those financing a project agree to contribute, as equity, any
prior dividends received from the project to cover any cash shortages.

Double Barreled

Bonds secured by the pledge of two or more sources of repayment.

9 CHAANAKYA VOL 4_09

 DID YOU KNOW ?
By Amar G M, MBA-M

Noise Trader- What is It???

In simple terms, Noise Trading can be

considered to be the opposite of trading
based on News (Facts, Figures, etc). Rational
traders trade based on information while the
Noise traders do not. Black (1986) defines
Noise trading as trading on noise as if it
were information. In addition, he notes the
importance of noise trading in capital markets:
“Noise makes financial markets possible but
also makes them imperfect.” That is, in a world
without Noise traders, all trading is motivated
by informational advantages. Recognizing they
will be trading against another informed investor, traders will be reluctant to transact. Noise
traders provide the necessary liquidity to financial markets. In providing liquidity, however,
they also provide noise.

Why Do Noise Traders Trade?

Noise trading arises due to many reasons. Some investors may simply enjoy trading or
erroneously believe they have unique information or insights. In addition, some traders
may trade on “sentiments”. Evidence from social psychology, sociology, and marketing
suggests that individual investor’s decisions are likely to be influenced by “fads” or “fashion.”
Alternatively, institutional investors may be more inclined to trading on sentiments due to
the close-knit nature of the investment community, the importance of performance relative
to other institutional investors and the asymmetry of the incentives. Investors may trade
on the same signal, but the signal need not be related to fundamental value (e.g. technical
analysis). Trueman (1988) suggested that institutional investors may engage in noise
trading because it provides an imperfect signal to clients that the manager is informed. In
a nut shell, noise trading may result from perceived information advantages, sentiments,
trading appearing in the utility function or agency problems.

The Impact of Noise Trading on Prices

Noise trading can explain excess volatility in security prices (i.e. prices will be more volatile
than value), temporal patterns in stock prices (e.g. momentum) and the use of technical
analysis and positive feedback trading. The magnitude of Noise traders’ impact on security
prices will depend on both the degree of Noise trading in the market and the systematic
nature of Noise trading. Greater the degree of Noise trading greater will be the deviation
between price and value. As the deviation between price and value increases, rational
arbitrageurs should work to push prices toward fundamental value. In real markets, however,
arbitrage is costly (e.g. short sale proceeds are not available for investment). Moreover, in
a world with noise traders and finite horizons, arbitrage can be risky. For example, rational

10 CHAANAKYA VOL 4_09

arbitrageurs with limited horizons may be forced to unwind their positions in a period when
Noise traders have pushed prices even further away from fundamental values. If Noise
trading is cross-sectionally independent, then the impact of noise traders on a security’s
price is likely to be small relative to a world in which noise trading is cross-sectionally
correlated. That is, if orders from noise traders are equally likely to buy or sell initiated at
a point in time, then many noise traders’ orders will cancel out and the impact on price
should be relatively small. Alternatively, if the noise traders’ orders generally come from
the same direction (i.e. primarily buy initiated or primarily sell initiated), their impact on
a security’s price is likely to be large. A similar argument holds for the expected impact
of noise traders on the market. If noise traders’ orders are cross-sectionally correlated
across securities, then they are likely to impact market averages. That is, if noise traders
systematically enter (or exit) financial markets, market averages may be affected.

Can Noise Traders Survive?

Historically, the impact of Noise trades has been assumed to be minimal since Noise traders
should lose wealth (and therefore eventually become unimportant) when trading against
rational “smart-money” arbitrageurs. However, there is little reason to suspect that rational
smart money speculators dominate financial markets develop formal models that allow
for the survival of Noise traders. Noise traders systematically underestimate variances of
risky assets and therefore invest a greater fraction of their wealth in the risky asset than
would an otherwise equally risk-averse rational investor. Their excessive risk-taking may
not only allow Noise traders to survive but they may also come to dominate the market.
Alternatively, the actions of Noise traders are cross-sectionally correlated (systematic) and
influence asset prices. Like any other systematic risk, the risk impounded by the random
sentiments of noise traders should be priced. Thus, Noise traders may be compensated
for a risk that they create.

Moreover, even though the model predicts that Noise traders will lose (on average) when
trading against rational arbitrageurs, Noise traders may garner higher rates of returns than
sophisticated investors if they concentrate their holdings in assets that have a greater
sensitivity to innovations in noise trader sentiment. The issue of whether investors are
compensated for bearing noise trader risk. Specifically, assets with greater sensitivity to
noise-trader risk will tend to sell below fundamental values (reflecting the pricing of noise
trader risk). They suggest that such a scenario can explain the fact that most close-ended
funds sell at a discount to their underlying assets (assuming individual investors are noise
traders). Specifically, the discount from fundamental values reflects the additional risk
from the ownership structure: close-ended fund shares are held primarily by Noise traders
(individual investors), but Noise traders play a less important role in the underlying assets
of the funds.

Thus, under these conditions, passive close-ended fund shareholders should garner
larger returns than passive investors of the underlying assets as compensation for bearing
noise trader risk. Despite selling at discounts, (passive) closed-end fund shareholders
do not garner larger returns than the holders of the underlying assets. In fact, discounts
are just large enough to cover the expenses incurred by the funds. In addition, holding
capitalization constant, NYSE stocks with greater exposure to individual investors (and
presumably greater exposure to noise trader risk) earn lower returns than stocks with
greater exposure to institutional investors.

11 CHAANAKYA VOL 4_09

 unique symbol for indian currency
By Emili Mathew, MBA-N
Sanjeeb Saha, MBA-K

The Indian rupee is going to have a unique symbol soon. The new symbol is designed by
Bombay IIT post-graduate D Udaya Kumar and has been approved by the cabinet headed
by Prime Minister Manmohan Singh on 15th July 2010. The jury, which had sent the five
short-listed entries for the cabinet’s approval, was headed by a Reserve Bank Deputy
Governor. This will make Indian currency to be only the fifth one to have a distinct identity.
The others are US Dollar, Euro, British Pound and Japanese Yen.

This is a reflection of the fact that the Indian currency, backed by over a trillion dollar econ-
omy, is making its presence felt on the international scene with its increasingly highlighted
strength and global representation.

The decision to have a symbol for the Indian rupee was taken by the government last year.
The finance ministry wanted the symbol to represent the historical and cultural ethos of the
country and called for entries from the public. Udaya Kumar’s entry was chosen from 3,000
designs competing for the currency symbol.

The design is based on the Tricolour, with two lines at the top and white space in between.
It represents the Indian flag and is a blend of Indian and Roman letters; a capital ‘R’ and
Devanagari ‘ra’, which stands for rupiya. The symbol will help to distinguish the currency
from the rupee or rupiah of other countries like Pakistan, Nepal, Sri Lanka and Indonesia.
Kumar will get an award of Rs 2.5 lakhs for his effort.

The symbol will not be printed or embossed on currency notes or coins. Among currencies
with distinctive identities, only the pound sterling has its symbol printed on the notes. To
start with, the symbol will be included in the ‘Unicode Standard’ and major scripts of the
world to ensure that it is easily displayed and printed in the electronic and print media. Uni-
code is an international standard that allows text data to be interchanged globally without
conflict. After incorporation in the global and Indian codes, it would be used by all individu-
als and entities within and outside the country. The symbol is likely to be adopted in a span
of six months in the country, and within 18 to 24 months globally.

The symbol has been created to recognize the increasing linkages between India and the
world. It would further highlight the strength and robustness of the Indian economy as a fa-
voured destination for global investments and standardize the expression of Indian rupee
in different languages.

Having a distinct symbol for Indian currency can be seen as a branding effort which reflects
India’s craving to be recognized as one of the most robust and stable economies that has
successfully sailed through the recent world wide recession and emerged as a fascinating
growth story in the global scenario. It is likely to receive a huge response in India as it is
attached to a lot of public pride and sentiments.

12 CHAANAKYA VOL 4_09

 Govt not to extend sugar futures ban beyond september

By Hardik Karia, MBA-M

In the past decade we have seen that Forward Markets Commission (FMC) has imposed
bans over various commodities like wheat, rice, urad and tur. These regulations are made
from time to time, in order to control and keep a grip over the movement of derivatives. The
forces of Demand and Supply in the market sometimes make it essential for the authorities
to take such decisions.

Why is it done?
The Centre had banned futures trading in wheat, rice, urad and tur two years ago due
to increasing prices. Similarly last year, it banned futures trading in rubber, soybean oil,
potato and chickpea (chana) because the prices were shooting up. Each time, the Centre
was concerned with the rising prices as they thought the forward trading was promot-
ing speculation. Thus, the above examples prove that the Centre is concerned about the
speculations done in the market, which affects the market efficiency. But this does not ap-
ply to sugar.

Case with Sugar

Prices of sugar in the year 2009 were not over-valued, neither any speculations were
buffering. Then the question arises, what were the bars for? Sugar prices have been rul-
ing higher due to high production during the year 2008-09 and gained over 20 per cent
since the beginning of the year. Reports says, “Sugar production in the season (2009-10)
is expected to be less than 160 lakh tons against 263 lakh tones last season”. In view of
the lower production, the Centre has allowed duty-free imports of raw and white sugar,
besides curbing its exports and banning the sugar futures on exchange.

Revoking sugar trade ban

In May 2009, the market regulators had barred the launch of new sugar futures contracts.
As the crop avereage is higher this year with a better production estimate, the ban won’t be
extended beyond September 31, 2010. Initially, nine contracts of the commodity may be
launched. Officials expect sugar production to top 24 million tons in the sugar year begin-
ning in October 2010, higher than the domestic demand of about 23 million tons.

Political Approach
The annual rate of food inflation has moved up to 12.92 percent for the week ended June
19, 2010 due to high prices of essential items. The poor and the ’not so poor’ are hit the
most. Sugar is the most politically sensitive of all commodities and also has the highest
weightage in the wholesale price index (WPI) which is why it was put on the banned list.

There is general belief among the masses that futures trading of food articles, especially
sugar, on the commodity exchanges leads to price rise and inflation. Inflation crossing
double digits has added oil to the fire. Political parties are raising their voice against trading
while business lobby FMC says there is no need to extend ban on Sugar Futures after the
deadline of September 2010.

13
CHAANAKYA VOL 4_09
 Alumni Speak
By SMITHA JOSEPH
CLIFFORD CARDOZA
MOHIL KAPOOR

In this edition, we have with us Mr. Venkat Raju V.

Mr. Venkat Raju V

Director
Bagalur Cross Vinayaka
Education Society
Batch: 2004 – ‘06

CONTACT DETAILS
Mobile no: +91-9880422455
Email id: venkyraj@rediff.com

The following are excerpts from an interview with Mr. Venkat Raju V, a finance alumnus
who passed out in the year 2006. He is currently the Director for Bagalur Cross Vinayaka
Education Society. He has been the director for this organization for the past one and a
half year.

Chaanakya: What does your present job involve?

Mr. Venkat Raju V: This job involves interacting with parents, co-ordinating with the school
principals, keeping tab on day to day activities happening in school, strategic planning,
formulating short term and long term goals, managing human resource. The present job
involves all the functions of a company at its own capacity.

Chaanakya: What kind of challenges does your job bring up?

Mr. Venkat Raju V: Schooling is as a very competitive field in the city outskirts, with ‘n’
number of schools competing to mark their presence and with a minimum of 2 or 3 new
schools starting every year offering free admissions as an introductory offer. Scarcity of
Good Teaching staff, matching with the parents and student’s expectations, providing best
facilities at low cost of fee structure are some of the grave challenges that come up. To
sustain and grow in these kinds of markets is a real challenge.

Chaanakya: How did you prepare yourself for your present job?

Mr. Venkat Raju V: My previous job was as a senior finance executive working on project
costing, analysing orders for profits/loss with respect to consumables, manpower, time,

14 CHAANAKYA VOL 4_09

machines availability and so on. My job was well defined to choose, prioritise and execute
orders with respect to profitability and my job was confined to very similar parameters day
in and day out.

My present job offers to handle wide functionalities in its own capacity and wide perspective
and challenges of managing a company all by myself.

Chaanakya: What kind of expectations does your organization have of you?

Mr. Venkat Raju V: My organization expects overall development of child through quality
education at any cost and sustainable growth year on year.

Chaanakya: What qualities do you think a fresher must possess to perform efficiently
in the field you are into?

Mr. Venkat Raju V: Since I have an experience of both Employee as well as an employer,
I personally feel one should always try to understand merits, demerits, challenges of the
industry or the company with respect to one’s own interests before getting into the industry
he/she chooses. I personally feel one should always think and act in investor’s point of view
to be a successful employee in any chosen field.

Chaanakya: Finally, any message for the students............

Mr. Venkat Raju V: My Message to students… in the market out here, employer wants you
students very badly; they are very desperate to have a right candidate at any cost… so it is
up to you to matchup their expectations…

All the Very Best for your future.

Thanks!

15 CHAANAKYA VOL 4_09

 Structure of pension funds

By Prateek Singla, MBA K

An economy, apart from everything else, is a highly fluid transmission mechanism. Its
beauty lies in how the smallest of changes have the most complex trickle-down effects.

A reform in the pension system tackles the primary problem of the financial sector in a
dual manner. Introduction of private pension fund managers will ensure the large-scale
mobilisation of savings. This would increase the rate of savings, which would lead to a
higher rate of capital accumulation, crucial for a developing country like India. It has been
proved statistically that private managers are in a position to earn greater returns from their
sources. So in effect privatising the pension system would place a large pool of fund in the
hands of efficient managers, specialising in this form of activity.

Current Systems in India

The EPF programme,

established in 1952, is a
contributory provident fund
providing benefits upon
retirement, resignation or death
based on the accumulated
contributions plus interest, from
employers and employees.
Subscribers to the EPF have
the option to make partial
withdrawals for specified
purposes such as house
construction, higher education
for children, marriage, and
medical expenses associated
with illness.

In India the EPF, has been used more as medium of tax evasion by the salaried classes as
the entire amount deposited in EPF is deductible for income-tax estimation purposes.

There is an urgent need to:

• Reduce government burden: In India the number of elderly (persons aged 60 and
above) is expected to increase by 107%, to 113.0 million by 2016.

• Involve unorganised sector: Barely 34 million (or less than 11%) of the estimated
working population in India is eligible to participate in formal provisions meant to provide old
age income security. Therefore, almost 90% of India’s workforce is not eligible to participate
in any scheme that enables them to save for economic security during their old age.

• At present the pension Social Security system is based on employer and employee
contributions, which largely excludes the unorganised sector.

16 CHAANAKYA VOL 4_09

Changes recommended
• Private management of accretions through Pension Fund Managers: It is
recommended the establishment of 6 Pension Fund Managers (PFMs) so as to simplify
choice for individuals. But this objection is misplaced, as, even if individuals themselves do
not possess the knowledge of financial instruments, the market forces would enable them
to decide to employ a PFM who would make these choices on their behalf. Hence, this
number should be determined by the free interplay of market forces.

• Role of government guarantees: To reassure the people to switch to the new system,
government guarantees play a vital role

• Administrative authority: The Indian Pensions Authority (IPA) would oversee the
entire working of the system and handle the administration. CII, in a recent press release
suggested that the insurance regulator could also supervise the pensions sector.

• Removal of subsidies: The present contribution of 1.16% of wages by the Government

to the Employees’ Pension Scheme should discontinue. Instead, this contribution should
be channelled into the National Senior Citizen’s Fund as initial corpus for the first 3 years of
incorporation of this Fund. Thereafter, this contribution should be discontinued. In addition,
25% of the premature and lump sum withdrawal tax on provident funds under the new IRA
system should be transferred to this Fund annually.

• Role of the insurance sector: The reform in the pension sector is also closely connected
with the insurance sector. Hence a reform carried out in one of them will necessarily have
a positive external effect on the other and as such both share a symbiotic relationship.

• Early withdrawals: The suggestion is to abolition the tax on earnings of over 12 per
cent in Provident Fund and levy of tax, at least of a 10 per cent, on early withdrawal from
Provident Funds.

• Financing the transition cost: The transition cost for a new pension system may be
three-fold:
1. Cost of paying the workers who chose to remain within the old system.
2. Cost of reimbursing those who chose the new system.
3. Cost of the ‘safety net’ provided by the government.

• Inflation indexing: It would be a better alternative to enable the old to maintain their
current consumption bundle by indexing pensions to prices. Using price rather than wage
indexation would also help dampen the contribution rate increase and the wage increases
may be put to use for other purposes.

CONCLUSION

The key word for pension reform is flexibility. This implies that maximum room needs to
be provided for local experiments. Rules need to be laid down clearly, but their number
and level of stringency should not be overwhelming. In the long run, there needs to be a
commitment to phase out most of the detailed rules, leaving only a broad framework to act
upon.

17 CHAANAKYA VOL 4_09

 Crossword
Across

3. An increase in price and trading volume in a

particular sector of the economy that occurs as a
result of a recent takeover, which initiates a change
in sentiment towards the sector.

5. The behaviour of a company that chooses to

focus only on high-end ,high-margin products even
if customers show an inclination towards value-ori-
ented products.

6. The bank which has joined the United Stock

Exhange shareholder base by acquiring a 1.33 per-
cent stake.

Down

1. The state leading in the implementation of projects related to the Delhi-Mumbai In-
dustrial Corridor.
2. Goods that are perceived to be exclusive as long as prices remain high or in-
crease.
4. A bond denominated in Canadian dollars that is sold in Canada by foreign financial
institutions and companies.

Quiz

1. Who was the chairman of Union Carbide when Bhopal tragedy occurred on 3 De-
cember 1984?
2. If we consider that BSE Index has increased from 17000 to 17170 today, it would
mean that __________
3. Revenue-neutral rate (RNR) is a component of ___________ taxes in India?
4. What is the free look period given to the consumers to bring in more transparency,
discourage mis-selling of Ulips & other insurance policies and help investors take informed
decisions?
5. Who is the current Chief Economic Adviser to the Government of India?

18 CHAANAKYA VOL 4_09

Answers

Crossword

Quiz

1. Warren Anderson
2. Total value of the securities which constitute
the index has increased 1%
3. Goods and Services Tax (GST)
4. 15 Days
5. Kaushik Basu

19 CHAANAKYA VOL 4_09

 team

Manesh Paul Mani Editor-in-chief

Sachin Cartoon
Amutha Priya D News
Nivedita Tiwary Investors check
Sonal Sankhla Student Article
Nithya Prakash Scam
Mookambigai Commodities Market
Niveditha S Debate
Clifford Cardoza
Smitha Joseph &
Mohil Kapoor Alumni Speak
Dorin Jane Quiz & Did You Know
Mantri Ankit Atul Quotes & Buzz Words
Pottim Sahiti Reddy Crosswords
Vipul Jain Graph, Rates
Dhanya Anna Kurian
Resmy Sebastian Review Committee
Bhargav K Creative Head & Design
Pradeep Thangavel Compiling and Editing

20 CHAANAKYA VOL 4_09

Please mail your valuable feedbacks, reviews at chaanakya@mba.christuniversity.in