Promises

1
FINANCIAL SECTOR: TRANSFORMING TOMORROW

Promises to make
The market regulator: Sebi
India’s capital market is today amongst the largest in market capitalisation. As investors pumped money
into the Indian bourses, the regulator’s job only got tougher. But Meleveetil Damodaran, chief of
Securities and Exchange Board of India (Sebi), the market regulator, had already put in place a well-oiled
machinery to take up these challenges. “Ten thousand brokers, 30,000 sub-brokers and every kind of
intermediaries, and this number is growing,” says the Sebi boss. .
Regulation succeeds market; else it would kill the market. If you grow a market in size, one individual
will not have a disproportionate influence in the market. There is an element of investor protection in this.
We have given more products and the response has been remarkable. We are talking to companies to
bring more stocks into the market. We do not see ourselves as mere cops although we have such an image
in media. We see ourselves as much in development as much in regulation.
1. FINANCIAL ADVISORS:
Find a mentor: Have a role model who has had a profound influence in your life and learn to imbibe their
ways in order to help guide you to achieve your goals and strive towards perfection.
1.1 The Investment Advisors: Sebi
When many countries talk about having regulated investment advisors, they are taking about asset
managers. We are trying to initially deal with those who are professionals in this area. We are providing
training for aspiring advisers under the National Institute of Securities Market to create a body of
professional investment advisors. Today, we have product pushers who sell products depending on the
margins they would get. We want to have advisers who will tell you what share of your investment should
go into which instrument depending on your peculiar investment and liquidity requirements.
One of Sebi’s recent proposals is for investment advisors to compulsorily declare to an investor, how
much will earn from a particular transaction. Every investment adviser shall disclose to a prospective
client all material information about itself, its business, its disciplinary history, the terms and conditions
on which it offers advisory services and such other information as is necessary for him to take an
informed decision on whether to avail himself its services,” Sebi draft paper said. As and when this
suggestion becomes a regulation, there will be greater transparency in the investment process for all
investors and investors can hope for a pricing structure, based on the amount of advice given.
1.2 NYU B-school ready for Sebi link
New York’s Stern School of Business is set to join hands with the National Institute of Securities Market
(NISM), the market education arm of Securities Exchange Board of India (Sebi), to collaborate in
research and tailor executive education programmes. The joint venture between the two entities is
expected to reach a conclusive stage soon. New York University Leonard N Stern School of Business
dean Thomas F Cooley said: “The three-fold gains would emerge for the two entities through this pact.
Apart from access to the Indian economy and tracking the evolution of business in emerging markets, the
tie-up would help to understand the ‘incredible’ Indian stock market and provide an opportunity to
influence the thought process and evolution of financial markets.”
FINANCIAL MARKET… 2
2. WEALTH MANAGERS
Take calculated risk: Never let an opportunity pass you by. Do your research and if it is worthwhile have
the courage and self-confidence to take that risk to make your goals a reality.
2.1 Pension fund should tap Street: Sebi
It’s the best time ever for pension funds in the country to invest in the capital market, notwithstanding
persisting fears that stock markets were still too risky to invest these funds in. “That fear is completely
unsubstantiated. Pension funds should invest in the stock market. Ours is among the world’s most mature
stock markets and pension funds will obviously not be doing day trading. They will be long-term
investments that will add to the maturity of the stock market here. They will bring in their credibility and
stability and will, in turn, inspire further confidence for other long term investments.”
In some cases, in fact, even the most advanced capital markets have acknowledged that our paper work is
the most thorough. Some of the world’s biggest pension funds, thanks to the credibility of the stock
markets here, have invested in Indian stock market. All that, though, has still failed to inspire sufficient
confidence of Indian Employees Provident Fund Organisations in the stock markets here. While the Rs 20
billion ($ 503 million)-odd NPF (for about 300,000 employees who joined service after January 2004) has
had official sanction for 10% of its funds to be invested in the stock markets since 2004, the EPF is also
allowed to invest up to 5% in the capital markets.
Reference was made to Chile’s pension fund operations, which is often cited by capital market enthusiasts
as among the most professionally managed pension funds which simultaneously bring in stable returns to
the subscribers – the capital market regulator pointed out that Chile’s capital market were far less mature
than the Indian stock market. Sebi officials point to the fact that not a penny has been tapped from the
Contributory compensation Guarantee Fund – running into several hundred crores of rupees – over the
last several years. In fact, the last time the Fund was tapped, was in 2001.
2.2 The sovereign wealth fund: Sebi
It is state money that is coming in. Sovereign wealth funds have been around for a long time. In this case,
you know where the money is coming from. They are investing in a large number of companies. The
issue is whether the national economic policy will be comfortable with a large shareholding in a big
company going to another country? That is a larger policy issue which needs to be addressed. With SWFs
that is a big question. They are not coming with a minuscule investment. Policymakers are looking at
whether SWFs would cause problems in industries where there are no sectorial caps. These are clearly big
boys. The surpluses of government are clearly huge that would impact the market. There will be countries
where the growth stories cannot be within the countries. For example, Singapore’s Temasek and GIC
have to go out and buy abroad in order to keep the Singapore economy growing.
Sovereign funds now cherry-pick in India

Sovereign wealth funds, which have come under scrutiny in the US and Europe for buying stakes in
distressed financial majors such as Citigroup and Merrill Lynch, have been quite active in India. If the
data for all private equity (PE) and venture capital (VC) deals announced in 2007 is analysed, sovereign
wealth funds account for as much as one-fifth of the total deal value. In terms of actual numbers, though,
these funds were involved in just 3% of the over 400 deals announced by PE & VC funds last year.
Temasek, a sovereign wealth fund based in Singapore, was the largest PE investor in India last year.
3. FINANCIAL PLANNERS
Vision: From a clear idea of where and what you want to be in five years’ time. Draw up a mission plan
to achieve your goals and make sure you follow through to get there.
3.1 QIP, preferential share routes open for PSBs
The government has given public sector banks (PSBs) permission to raise money through qualified
institutional placements (QIPs) and preferential allotment of shares. The amendment to the Banking
Companies Act in September 2005 allowed all nationalised banks to raise equity shares through private
placement. A notification to implement the same has now been issued. The Centre has asked all PSU
banks to move a resolution to effect such fund-raising options in their respective boards. Till date, banks
have raised equity capital only by issuing shares to the public. Bank of India will be the first PSU bank to
raise capital through the QIP route; the government has already okayed the proposal. Bank of India plans
to dilute 5% of government stake. Similarly, an unlisted PSU bank like Punjab & Sind Bank is also
considering a proposal to divest 20% of government holding through a private placement route.
The government decision to allow public sector banks (PSB) to raise money through qualified
institutional placements (QIP) and preferential placement of shares is bound to come as a big relief to
PSBs strapped for capital. PSBs, where the government’s shareholding is already previously close to 51%
and where further dilution will not be possible in the existing political climate, are likely to be especially
happy. Presently they cannot approach the market but at the same time the pressures on them to raise
more capital are immense for two reasons.
One, to meet the higher capital requirements of Basle II, wherein in addition to credit risk banks also need
to set aside capital to meet operational risk – the risk of, say, a sudden change in interest rates that could
result in a depreciation of their investment portfolio.
And two, to acquire the financial muscle to face increased competition as and when the RBI reviews its
roadmap for foreign direct investment in banking sector in 2009. Since Basle II norms kick in from April
2008 for banks with overseas presence are likely to feel the pinch sooner than others. However, it is only
a year before all banks will have to comply with these norms. It is therefore, good that the government has
finally opened new avenues to raise funds.
Both QIPs and preferential allotments have the added advantage of being much more cost-effective than a
public issue. They are also much quicker. Given the volatility in the initial public offering market, banks
will doubtless prefer the certainty of the QIPs and the preferential allotment route rather than go through
the ‘ignominy’ of either having less-than-full subscription or lowering their price band, as has happened
with some IPOs in the recent past. However, all these ploys can at best buy time. As long as the economy
continues to record robust growth (and there is no reason to believe it will not), banks will always need
more capital. There is a limit to how many new categories we can create. Ideally, government must be
prepared to allow its shareholding fall to 33% as was mooted by former finance minister Yashwant Sinha
under the NDA government but, needless to say, did not find acceptance even then.
3.2 Private placement
The private placement market in India has witnessed a very rapid growth in the recent past with
companies increasingly adopting the private route for funds mobilisation choosing to make private
offerings to sophisticated and qualified institutional investors rather than issuing securities publicly.
This is borne out by the fact that in the financial year 2006-07 alone around 1,300 companies raised Rs
126,790 crore through private placements (debt only). The accelerated growth of private placements in
spite of the presence of a well-developed public stock market warrants an investigation into the possible
effects it could have on the performance of companies concerned.
Some analysts state that private placements can be effective in resolving several agency issues while
spurring a firm to higher performance by increasing the efficiency in the operations and management
system through direct and concentrated control. Another school of thought argues that private-placement
investors’ interest in a firm is limited to the short haul with the sole aim of maximising their returns for a
limited period of time. This gives them an incentive to under-invest to the detriment of the long-term
growth capacity and sustainability of firms.
There are generally three types of investors, viz, financial investors, strategic investors and promoters:
o Financial investors are organisations like mutual funds, etc, which invest in companies with the main
objective of earning high returns on their free cash and generally do not have a strategic advantage or
expertise with respect the core competency of the firms they invest in.
o Strategic investors, on the other hand, are in the same or related areas of business as the firm and
invest perhaps, to gain from synergies and use of their expertise in the same area as the firm whose
shares they purchase.
o Besides, some of the private equity placements are also purchases by the promoters of the same firm
looking to increase their share in the ownership and control of the firm.
Announcement effect
The post-announcement increase in market value of equity can be attributed to a positive signalling effect.
The purchase of a company’s stake by well informed and qualified financial investors suggests the
potential of the company to offer higher financial returns in the future. Strategic investors hint at a
hitherto unrealised core potential in the firm and investments by promoters strongly signal their optimism
about the firm’s future return to shareholders.
The retail investors invest in firms that have announced private issue of equity to institutions and
promoters. These investments, if made immediately following such announcements or in anticipation of
them, may capitalise on the announcement effect but there is no extraordinary return on longer-term
holding.
4. INCLUSIVE CEOs
Ambition: Write down a high stretching target for year and try your best to achieve it. Learn to have faith
in your dreams and aim for the impossible as it has often been achieved.
Managing Bourses
When India Inc and investors were busy minting money on the bourses through 2007, it was also keeping
the market authorities busy scanning all price moving rumours and pulling up concerned companies
which included big names like Reliance, Tata and even a host of state-run firms.
The country’s two leading stock exchanges – the BSE and NSE – issued over 250 notices to more than
100-listed entities over published media reports that had the potential to affect the share prices, but
bourses were not informed in advance. Baring a few, these reports led to a sharp surge in the share prices
of the concerned companies, even though on most occasions, the companies downplayed the reports in
their replies to the notices issued by the bourses.
However, the stock exchanges continued doing their duty religiously in the interest of investors, while
asking for clarifications whenever needed and also advising investors to keep away from rumours and
focus on fundamentals before investing in stocks.
Even on the last day of the year, the BSE continued this drill by issuing investor-interest alerts on the
front page of a leading daily, asking the investors: “Do a thorough evaluation before investing in any
security; Be careful about stocks that show a sudden spurt in price or trading activity without a change in
the fundamentals of the company; Do not get misled by recommendation in the newspapers, electronic
media, and websites; Do not get swayed by promises of high returns.” Both BSE and NSE continued to
issue such alerts. But the market continued to soar new heights, as if undeterred by such alerts.
While the total invested wealth on the bourses soared by close to Rs 35,00,000 crore to an all-time high of
more than Rs 70,00,000 crore at the end of the year ’07, the companies against whom such notices were
issued accounted for almost Rs 10,00,000 crore of the total market cap gain during the year.
Just about 10 such companies, including three IT firms – TCS, Wipro, and Tech Mahindra – saw their
market value declining in 2007. However, the rest saw their fortunes soaring on the bourses, with surge of
more than five times in some cases. The year 2007 started with a notice issued to state-run IFCI on reports
that the company might induct a foreign bank or a local bank as a strategic investor.
In the reply on January 2, ’07 IFCI said, “In this connection we have to state that our board of directors
are contemplating various options for the future of IFCI. However, currently there is no specific proposal
under consideration of IFCI’s board.” However, as the year progressed, it saw a hectic bidding war
emerging for 26% of IFCI, but it rejected all the bids in the last month of the year and now again the
reports are surfacing about IFCI restarting the stake-sale process. During the year, IFCI saw its market
value soaring from just Rs 775 crore to well above Rs 5,000 crore. Another first such notice of the year
was to Mercator Lines on the reports that it was mulling a Singapore listing. The reply said that Mercator
Lines did not issue any official release on the matter and ‘nothing has been firmed up and the news item
appears to be based on rumours’. Again as the year progressed, Mercator Lines got listed in Singapore
and its market valued rose Rs 657 crore to more than Rs 3,500 crore. The bourses issued at least three
notices to IFCI and two to Mercator Lines.
5. RISK MANAGEMENT CONSULTANTS

Be positive: Adopt the best mental attitude and concentrate on the potential of positive thinking. As the
book The Secret by Rhonda Byrne rightfully says “Every thought of yours is a real thing – a force.”
5.1 The concept of self regulatory organisations: Sebi
The real story about India is not the growth, but the kind of players in the market and regulatory
landscape. There is a lot of emphasis on self-regulation in the US, the easiest market to compare our
market with. The US Securities and Exchange Commission (SEC), does not regulate a lot of entities that
we do. The regulatory load is higher on Sebi since the element of self-regulation is absent except for what
stock exchanges are doing.
A large number of brokers are not corporatised, which adds to the regulatory burden. The SEC does not
regulate brokers as the concept of self-regulatory organisations (SROs) is very much there. We are in the
process of persuading people to set up SROs here too. We wrote the SRO regulations some years ago. We
are rewriting this and all our other regulations. In terms of the number of players in the market, we are as
large as any other market. Process simplification can address a lot of issue.
Every intermediary, for example, is required to renew its registration in three years. We have now told
them to file for permanent registration and pay annual fee. They should also file a self-certification on
whether they have breached any regulation in the last 12 months. We will cross-check the declaration. If
they get to hear from us, then it is a bad news. Otherwise, it is taken that the registration is on. This way,
we can reduce a lot of workload.
5.2 Preventing insider trading
In a bid to curb the abuse of privileged corporate information, Sebi has proposed that company insiders
will have to return any profits made from the purchase and sale of company stock to the company; if both
transactions occur within a six-month period. Sebi seems to have taken a leaf out of the US stock market
regulator rule book that requires 10% owners, directors and officers of the company to give up “any profit
realised… from any purchase and sale, or any sale and purchase, of any equity security” of the company
within a six month period. Sebi proposal to put in place regulation to compel company insiders to
surrender short-term (short-swing) profits made from trading in the shares of their company is a welcome
corporate governance reform. Mooting the concept of a ‘designated insider’, Sebi has proposed that all
key management personnel, directors and beneficial owners, directly or indirectly, of 10% or more of any
class of equity securities are designated insiders for these regulations.
The regulator has also clarified that this liability will be imposed without any necessity for guilty or
wrongfulness. The idea of these regulations is not to punish such activity, which is covered by other
regulations. International experience indicates that conviction for insider trading is hard, though not
impossible, to obtain. Disgorgement without admitting guilt is a common tool in international markets,
allowing both the regulator and the regulated to avoid lengthy legal proceedings. However, the definition
of ‘designated insider’ should be made comprehensive to include all those in the know of price-sensitive
information, irrespective of their relationship with the company. Apart from identifying obvious insiders,
as corporate governance measure Sebi must make it mandatory for listed companies to go beyond the
regulations and communicate internally and externally a comprehensive list of insiders covered by this
profit disgorgement rule. And these checks may not drive insider trading underground, carried out
through third parties. Sebi would do well to simultaneously beef up investigation and secure some
conviction, to discourage any insider trading.
6. MICROFINANCE PROFESSIONALS
Be punctual: It is disrespectful to keep someone waiting. Plan effectively beforehand so that you get there
10 minutes before time.
6.1 Simultaneous listing
Domestic companies planning to raise funds through American Depository receipts (ADR) or global
depository receipts (GDR) without listing on the domestic stock exchanges will have to wait. The
government is unlikely to allow it for now. This follows a recommendation by the high-level committee
appointed by finance ministry to look into all issues regarding ADRs and GDRs. The committee was set
up in May ‘07and had senior officials from RBI, Sebi as its representatives. The committee headed by
leading economist Saumitra Chaudhury that has submitted its report to the ministry is understood to have
recommended a status quo.
At present, companies have to go in for a simultaneous listing, both on the foreign markets as well as
domestic markets. Domestic companies could raise funds through ADRs and GDRs before 2005 when the
government put a blanket ban on unlisted companies from doing so. Unlisted companies which had issued
ADRs and GDRs were asked to list within three years. Expert feel the idea behind such a restriction is to
promote home capital market which is now considered as one of the best in terms of returns. Experts say
the government is treading on future opening up cautiously.
6.2 Uniform minimum 25% public stake
The finance ministry’s suggestion that companies maintain a uniform minimum 25% public stake to
remain listed is a welcome reform. It would help increase free float and thereby reduce volatility,
discourage manipulation and ensure better price discovery. The minimum public holding requirement has
dropped from a high of 60% to 40% to the current level of 25%. Though the general limit now stands at
25%, it has been rendered meaningless by various exemptions. While IT companies were allowed listing
with a mere 10% dilution during the dotcom boom, Sebi subsequently allowed book-built public issue of
over Rs 100 crore with 60% allotment to QIBs to list with only 10% dilution. It is now possible for
companies to list with as little as 20 lakh shares if they can meet other conditions. The small dilution
allows companies to charge a higher price, which also helps them reach the Rs 100 crore limit. The
obvious implications are that investors are denied participation in wealth creation. Also, the small number
of outstanding shares means that a few big players can get together and corner these shares and
manipulate prices.
6.3 Streamline the IPO process
Reliance Power sought permission from Sebi to make faster allotment to qualified institutional bidders
(QIBs) in its public offer, presumably to free up funds fast. This would amount to preferential treatment to
large investors and should not be allowed unless it is extended to other investor categories. But the larger
point is that there is a case for speeding up the IPO process, which can take up to 20 days from
application to refund. There is an opportunity cost of capital, as many investors would have discovered at
market crash when blue chips were available at bargain prices. Reliance Power is in a position to make a
faster allotment and refund to QIBs clearly suggests that it is primarily the load on the system created by a
large number of retail applications, mostly in hard form that is responsible for the IPO process taking as
long as it does. Better process management can shave off a few days at the most, but certainly not
compress it to seven days that Sebi is reported to be targeting. For that to happen retail applications, at
least a substantial portion, would have to shift to the electronic mode.
This sounds a big task, but is doable because a good part of the information such as address and bank
account details going into the physical IPO application is already available with depositories. Suitable
software can import all that information on to an online form through the investor’s unique depository
number or PAN. All that the investor would then need to mention is the bid amount and submit the
cheque. This would require greater number of application centres, but post issue closing work would be
cut down substantially. In fact, in such a situation even banks and post offices could also collect
applications for a fee. The regulator could also think of incentivising online application and electronic
funds transfer for IPOs. Some of the IPOs have already allowed discounts to retail investors. Similarly, a
small discount could be provided to those retail investors who apply online.
6.4 Simplifying corporate bond issues
Sebi has proposed new regulations for corporate bonds, which, if implemented, will make issuances
simpler for companies and make corporate bond issues more transparent. Sebi has also proposed to put in
place a mechanism, which would enable e-issuances of debt securities to the public. This will lead to
faster capital raising by companies besides making the exercise more cost-effective for issuers. After
discussions, the capital markets regulator, Sebi will now seek the approval of its board to unveil norms
aimed at simplifying the issuance and listing of corporate bonds. The firms which are already listed in the
equity segment will now need to provide only incremental information when they file for a bond offering
and listing. This is based on the rationale that information relating to the company is in the public domain.
By easing the procedure part more firms would be encouraged to tap the bond market through the public
route. Even for unlisted firms, the process will be simplified.
The regulators would also try to address the issue of attracting retail investors to the bond offerings.
Along with these norms, the government is expected to push for other measures such as keeping
transactions in corporate bonds out of the purview of tax deducted at source (TDS) and also uniform
stamp duty. However, all states have to be on the board before an uniform stamp duty waiver is allowed.
Besides, the department of corporate affairs would also need to carry out enabling changes in the
Companies Act to enable easier listing norms.
India’s corporate debt market has been the subject of much attention over the last few years. Reforms had
bypassed this segment of the market for a long time while the equities segment has witnessed a sea
change. But the winds of the change are slowly blowing across bond-street as Indian policymakers seek to
correct infirmities which have hindered the development of the market.
India’s securities market regulator Sebi has already set in motion changes which include a far more
simplified issuance structure, signalling of electronic issuance of debt securities while the Central bank is
expected to complement this by allowing repo in corporate debt. It could be the government’s turn next to
act in the form of easing of procedures such as doing away with tax deducted at source and granting
incentives like an uniform stamp duty.
The growth in demand for credit to fund industrial investment and infrastructure has led to overemphasis
on the equity markets, and a concentration of corporate risk on bank’s balance sheet. The true corporate
debt market is even smaller than it appears to be, because most what is classified as corporate debt is
either raised by public sector or financial institutions to lend on to the corporates. A well-developed
corporate debt market in the country will provide larger firms with an access to new source of capital. It
will also allow access to capital for smaller firms, though they will be lower rated. Simultaneously, a
competitor source of alternative funding to the banking sector will be created. This will increase pressure
on the banks to innovate and provide new methods of finance.
7. CREDIT COUNSELORS
Accept criticism: Do not allow constructive criticism to damage your self-esteem. Learn to use it in a
more effective manner by growing from it.
7.1 No load mutual fund
A new chapter was just turned in the history of mutual fund investments in the country. No load mutual
funds are now a reality here too. In a recent circular, the Sebi said investors will not be charged an entry
load, if they apply directly with a mutual fund house. This means that the 2.25% that an investor would
have been paid to the distributor, will now also go into the stock markets as a part of his investments,
helping him enhance his return.
What does it mean? If an investor puts Rs 1,000 in a scheme and the entry load is 2.25%, he would
receive units worth Rs 977.50 only, impacting his investment’s net asset value (NAV). The market
regulator felt that the current structure denied investors the entire benefits of the investment. Now, you
can log on to the website of all fund houses in the country, fill in a form, and the fund house will arrange
for a person to come to your place, take your signature, PAN card and do the other formalities. There are
billboards across the cities that give out numbers to SMS, through which you can get in touch with fund
houses directly.
Why is it important? As a number, 2.25% may look very meagre. But when the power of compounding
gets into action, it can work miracles to this figure. Year after year, the extra money that you invest (since
it was not used as commission to the distributor) will grow. When you reinvest those earnings, they help
generate additional earnings; those additional earnings help generate more earnings, and so on. This is
called compounding, and it can work wonders to your portfolio. But there’s a flip side. Direct investments
are only advisable if you know what funds to invest and whether they are suitable for your portfolio. If
you are not well-versed with stock markets, it would make sense to read up a lot about investments before
committing your hard-earned money. And if one is still not confident about the financial decisions one is
taking, it’s best to search a mentor.
7.2 Amortisation in close-ended funds
Amortisation of initial issue expenses is an accounting procedure that allows funds to spend the amount
collected as fees when the new fund offer is on (currently above 6% for a three-year fund) in stages and
not at one go. Typically about 3% is paid to broker as commissions while the rest is used to pay for the
billboards, television spots and other marketing expenses.
Capital market regulator Sebi is planning to scrap the regulation that allows mutual funds launching close-
ended funds to amortise initial issue expenses. And since close-ended funds are not allowed to charge
‘entry-load’, fund houses will now have to pay for the fund marketing expenses and distributor
commissions through the asset management fees they collect. If the new regulation is announced, big-
budget promotional campaigns for new schemes by mutual fund houses could soon be a thing of the past.
More specifically, AMCs can still go for extravagant ad campaigns, but they can’t be billed to investors.
Two years back, Sebi had abolished this regulation for open-ended schemes. Following the Sebi move to
scrap the amortisation benefit for open-ended schemes, there was a sudden spurt in close-ended scheme
launches. Of the 34 new fund offers in 2007, as many as 24 were close ended. Also the launch of a slew
of close-ended funds in the past couple of months is being viewed by industry sources as a pre-emptive
move on the part of AMCs.
8. TECH SAVVY PROFESSIONALS

Welcome competition: Choose the best adversary you can and make them the one to beat. However, play
fair and keep the aggression under control. A little bit of healthy competition only make you strive harder
to achieve your goals. So welcome it!
8.1 The integrated market surveillance system: Sebi
We have a sophisticated tool called ‘integrated market surveillance system’. Many regulators in the world
do not have this as exchanges use this. But we decided to have one of our own. This tool throws up a
large number of alerts on the screen every day indicating areas that need questioning. This could be large-
scale orders on stocks that remained dormant for a long time. Those at the terminals pass on the
information to the surveillance division. They in turn prioritise the investigation by doing patch analysis.
If somebody has bought a stock suddenly in huge quantities, then we probe into the conduct of that person
in relation to that stock before and after the transaction. The idea is to find if somebody has manipulated
the market. There could be a case of insider trading. One interesting case where we could swiftly prevent
fraud is of Nissan Copper Ltd. The stock price went up like anything without an explanation on the day of
its listing. As soon as we saw that, we checked who all, were the players in the market. Within 24 hours,
we could get 23 names and addresses and send notices to them across the country seeking an explanation
on the nature of transaction. Before the proceeds of those transactions were moved into those bank
accounts, we could identify and freeze them. That then gets into a formal inquiry and adjudication.
8.2 Specialised arm to track manipulations: Sebi
Capital market regulator Sebi is toying with the idea of floating a specialised arm to track complex market
manipulations. The regulator is planning to set up a sophisticated investigating agency that will have
professionals from diverse specialisations to probe securities frauds and help in prosecuting white-collar
offenders. The proposed agency will be manned by professionals from sectors like finance, tax
accounting, law and forensic sciences who would work on specific investigations for a fixed term. No
other capital market regulator in the world has such an agency.
Administratively, the multidisciplinary investigations wings would be distinct from the statutory
regulator, which would enable Sebi to pay remuneration at par with industry standards. The regulator
cannot have two wage structures within the same framework. The idea is also to have a dedicated team
with cutting-edge skill sets who will not be burdened with routine regulatory business. Having a separate
strategic business unit will enable Sebi to hire professionals who claim a premium for their service in a
dynamic and booming economy. Besides, hiring someone for a particular service to be delivered within a
time frame is more cost-effective than recruiting somebody for a lifetime.
8.3 The extended business reporting language: Sebi
Sebi is planning to adopt a system of collecting and dealing with information and responding to it quickly.
SEC is now developing this system called the ‘extended business reporting language (XBRL)’. The
important development is the new corporate filing mechanism that we have introduced. Until recently, a
company listed on the Bombay and national stock exchanges had to file time sensitive information with
two of these exchanges in addition to Sebi’s electronic data filing system. Now, we have asked companies
to file at only one corporate filing platform and three of us will access this.
9. ONE-STOP-SHOPS
Stress control: Set aside quiet a time for yourself to de-stress and do things you enjoy. Meditate, dance or
take up a sport or a hobby. Anything that lets you unwind from the daily hustle and bustle and helps you
to find inner peace and tranquility to take on yet another hectic day in your life.
Real Estate Investment Trust (REIT)
Sebi’s proposal for opening investment opportunities in the real estate sector through real estate
investment trusts (REITs) involves certain legal issues, which will have to be addressed by Sebi before
making it effective:
The first and the foremost issue pertain to the legislative competence of Sebi in framing the regulations for
REITs considering the provisions contained in the Sebi Act.
The Sebi Act mandates the market regulator to protect the interest of investors in securities by such
measures as it thinks fit. The measures may provide for registering and regulating the working of stock
brokers, depositories, DPs, collective investment schemes, mutual funds and certain other intermediaries
specified in Section 11 & 12 of the Sebi Act.
The new category of proposed intermediaries, namely, real estate investment trust and real estate
investment management company (REIMC) are not expressly covered by provisions of the said sections.
This may, therefore, require appropriate amendments to the Sebi Act.
Justice Kania Committee, while considering the market regulator’s proposal to register and regulate Asset
Management Company, Research Analyst, Stock Lender, STP service provider, etc, as intermediaries
under Section 11 & 12 of the Sebi Act, had opined and recommended that the Act may be amended for
this purpose. The proposal for amendments to the Sebi Act based on recommendations of Justice Kania
Committee is pending with the Centre. Perhaps, the proposal to treat REIT and REIMC as intermediaries
may be clubbed with that proposal.
As per the proposed regulations, the real estate investment scheme means a close-ended scheme
constituted as a trust that invests in real estate with the aim to provide returns to unit holders mainly from
the rental income or capital gains of the real estate. Further, the draft regulations envisage the public offer
of ‘real estate investment instruments’ or units’ by REITs and listing thereof on stock exchanges.
The public offer and listing of the said instruments or units, however, would not be legally possible as the
instruments or units within the definition of ‘securities’ under Section 2(H) of the Securities Contracts
(Regulation) Act, 1956 (SCRA).
The fact, that REIT would invest directly in real estate. In other words, REIT will not be dealing in
securities either while collecting investments by issue of units or instruments to the investors. Hence, this
would require amendment to SCRA.
The proposed regulations have also borrowed several provisions from existing Sebi regulations governing
the collective investment schemes but there is no clear distinction made between the collective investment
scheme and the proposed real estate investment scheme.
Going by the experience of collective investment schemes, under which millions of investors were duped
and the Sebi Act had to be amended to empower the market watchdog for regulating such schemes
(though Sebi at the time was reluctant to do so), one will have to move forward with the present proposal
very cautiously in a volatile real estate market.
Tax structure
REITs are seen as low volatile investment options offering steady income through all market conditions,
given that they invest largely in income-generating real estate. This is based on the rationale that REITs
have to distribute at least 90% of their net income after tax as dividend to investors. Globally too, this is
the norm. This being the case, the product would not take off without fiscal incentives.
Sebi’s draft guidelines allow REITs to buy stake in real estate projects. They are, however, barred from
buying vacant land. Further, REITs cannot own more than 15% of a single real estate development and
25% of a single developer’s portfolio. Globally, many jurisdictions exempt income that is distributed as
dividends from corporate tax and this encourages REITs to distribute up to 100% of their net taxable
income as dividend to avoid paying taxes.
The government is vetting Sebi proposal to provide tax waiver on the dividend income of real estate
investment trusts (REITs). Sebi has made a case to the government to consider giving tax benefits to
REITs on the lines of mutual funds to encourage bigger investor participation.
The government may spell out tax treatment, but what may delay the process is the fact that Sebi is yet to
firm up the REIT structure. REITs are investment vehicles registered under the Indian Trust Act and have
to be approved by Sebi. They are managed by professional real estate investment management companies
and can invest in properties including apartments and malls. An investor can buy units in a REIT just as
he does in mutual fund. He will earn dividend income on the unit or shares of an REIT.
The income-tax law now provides for pass-through status for mutual funds and all income the fund earns is
tax-free. But any income distributed by the mutual fund attracts a dividend-distribution tax of up to 25%,
depending on the fund’s nature. But unitholders do not have to pay tax on their dividend income.
Sebi has recommended extending a similar tax treatment to REITs. This would mean giving them a pass-
through status and exempting all income earned by REITs from tax. Investors holding REIT units should
also be spared from paying tax on dividends. But income distributed by the REIT would attract dividend-
distribution tax.
Sebi in its draft guidelines has suggested that REITs should distribute not less 90% of their net income
after tax as dividends to unitholders. “To encourage investments in REITs, the capital gains on transfer of
units of REITs should be given the same tax treatment as capital gains on transfer of units of equity-
oriented mutual funds. In other words, it means that the unitholder should be exempt from long-term
capital gains tax.
FINANCIAL MARKET…13
10. CONTINUING LEARNING CENTRES

Be aware of your appearance: Enhance your appearance by leading a healthy lifestyle. Ensure you get
adequate rest, regular exercise and a balanced diet. Flip through the latest magazine to help you follow
current trends and styles to help guide you. Of course, do keep in mind that what is most important is that
it should suit your body type and flatter you, not render you a fashion victim! Sport a new haircut.
Stock markets’ architecture
Stock exchanges occupy a prime and elitist position amongst the varied institutions of capitalism. They
are at the centre of modern capital markets. Many of them are global landmarks: often the whole city
shining in their hallowed company. Of late, they are on a roll through mega mergers, vaulting valuations
and high ambitions. Then, it is ironic that their very raison d’etre is under threat, that too, in this age of
high finance when market infrastructure is looked upon with a reverence rarely seen in the past. For the
past few years stock exchanges have been in the process of shedding their old skins to look young and to
remain vibrant. Organisational innovations (Corporatisation and demutualisation), institutional
innovations (emergence of regulators and self regulatory organisations – SROs, clearing corporations),
market innovations (alternate trading systems – ATSs), outsourcing and technological changes have been
making the stock exchange horizon too narrow prompting questions on their very relevance. Interestingly,
some of these have been autonomous changes, willingly adapted and adopted by the stock exchanges.
Market innovations: Electronic communication networks (that facilitates trading of securities among its
subscribers), crossing networks (that matches orders for execution without first routing to a stock
exchange), negotiated dealing system (which matches orders in government securities) are market
innovations that challenge the core functions of the stock exchange. Similarly, there are electronic
systems which display buy-sell quotes of counter-parties to enable the buyers and the sellers in the
corporate bond market to strike deals either at the stock exchange or bilaterally. These ATSs, some of
which are called ‘dabba-trading’ in Indian context, are diverting traders from stock exchanges.
Technology has completely changed the architecture of securities transactions. Apart from ‘creating’ new
ATSs, it has made the trading platform accessible to clients through the internet and mobile devices. It
would continue to play a much bigger role in the days to come in the execution of trades and monitoring
of positions in the market.
Institutional innovations: The unbundling bandwagon has made heavy inroads into stock exchange
operations. Many specialised service providers have taken up core functions of the stock exchange.
Specialised securities settlement systems have come up the world over to handle post-trading activities.
The laws in some jurisdictions require clearing and settlement functions to be discharged by a clearing
corporation. National Securities Clearing Corporation Ltd and Clearing Corporation of India Ltd provide
counter-party guarantee and clear and settle trades in corporate and government securities respectively in
India.
Organisational innovations: Organisational innovations have resulted in the stock exchanges losing part of
their self-regulatory status. This is both because of the perceived conflict of interest between commercial
aspirations and regulatory tasks as well as the search for new turfs by the greatly empowered statutory
regulators. Statutory regulators have taken over substantial part of regulation of markets as well as
regulation of listed companies and brokers. Rules of trading, obligations of listed companies, and service
standards of brokers, etc which used to be traditionally handled by stock exchanges, have been
substantially taken over by the regulators.
Freer markets and more rules: There are even attempts to transfer listing and supervision of listed
companies to agencies outside stock exchanges. In fact, regulators world wide have been following the
dictum of ‘freer markets and more rules’ in imposing new rules on every traditional activity of a stock
exchange. In addition, Brokers’ Associations and other interest groups are trying to adorn the angle’s role
of SROs, often with the blessing of the regulators.
Thus trading, clearing settlement, market regulation, listing and broking are no more the exclusive
prerogative of stock exchanges. There is no function which is core or exclusive to a stock exchange.
While core functions of a stock exchange are being taken over by/transferred in other agencies, the
definition of ‘stock exchange’ in the Securities Contracts (Regulation) Act (SCRA) in India hardly
protects the turfs of the exchange. The stock exchange under the law is a body corporate, incorporated
under the Companies Act, for the purpose of assisting, regulating or controlling businesses of buying,
selling or dealing in securities. Thus, all corporate intermediaries in securities market, all of whom assist
in dealing in securities, are Stock Exchanges while the negotiated dealing system which provides trading
platform for government securities is not.
Stock Exchange has full statutory backing in all jurisdictions: Are the Stock Exchanges only to implement
the regulations made by statutory regulators? That too, when they have limited enforcement powers and
they operate in competition with less regulated new world of ATSs? Or else, do the ‘traditional stock
exchanges still perform an essential function in capitalism? Yes, they do. Stock Exchanges are legal
entities having full statutory backing in all jurisdictions, while ATSs are far from achieving such an
overarching statutory backing even in the jurisdictions they are permitted. Besides, the cost of regulation
of a market with no exchange like central facilitator and with overcrowded, thinly legalised multiple
commercial entities, will be too high and impractical.
Stock Exchange is in a position to embrace best technology: Stock Exchanges, with their substantial wealth
are in a better position to embrace the best technology available for a globalised market. Though initially
reluctant, due to organisational inertia or legacy constraints, all major stock exchanges in the world have
moved on to the electronic platform and restricted the unbridled growth of just electronic platforms like
ECNs. The Stock Exchanges are better equipped not only to pluck the low hanging fruits but the high
hanging ones as well!
Stock Exchange is still an organic whole: While unbundling follows more a piece-meal approach,
exchange is still an organic whole, providing convergence and thereby a meaning to the very process of
unbundling. Above all, stock exchanges are probably, the first example of a public-private-partnership
model of carrying the policy objective of market development and regulation to fruition which only
institutions are expected to perform. This embedded institutional ethos is the hallmark that distinguishes
the stock exchanges from other market functionaries, particularly the pure commercial entities. Innovation
in exchange architecture should be backed by this cardinal principle not only for preserving their
legitimacy but also for warding off questions on their relevance, though emanating from the sidelines.
This probably calls for judicial unbundling.
11. GLOBAL OUTLOOK

We prefer to call ourselves world citizens
11.1 International financial architecture
The international financial system has been changing as well as improving, first after the breakdown of
the Bretton Woods system in the 1970s. A greater level of coordination, data sharing and transparency
among countries, their central banks and the regulators has marked it.
The gears were visibly shifted after the 1997 Asian Crisis (which first broke out in Thailand and soon
engulfed Malaysia, Indonesia, Korea and the Philippines), the 1998 Russian default, followed soon by the
insolvency of hedge fund (Long Term Capital Fund).
Following the Asian Crisis, finance ministers and central bankers from 22 “systematically significant”
countries (including India) met in Washington DC in April 1998 to examine the functioning of the
international financial system. In fact, this grouping has over time evolved into an important international
forum. However, in its 1998 meetings, this group felt that the global capital markets and financial systems
could be further strengthened through action in five broad areas:
• Enhancing transparency and accountability;
• Developing and assessing internationally accepted standards;
• Strengthening domestic financial systems;
• Involving the private sector; and
• Modifying IMF’s financial facilities as well as other systemic issues for coordinated management of
international financial crisis.
This five-cornered edifice clearly needs a new design. However, the bursting of the technology bubble in
2000 and the September 11 World Trade Center attacks in 2001 further accentuated the felt need for an
orchestrated global response to international financial crisis, yet again. The subprime messes in the United
States, and its cross-border ripples, have necessitated a relook at the design and structure of the existing
web of global financial linkage, including the regulatory mechanism, early warning signals systems and
reporting requirements that were put in place after 1997 Asian Crisis and strengthened over time.
The reasons are well known. One, this is the second time after the LTCM calamity that high jinks in the
US domestic financial market has upset the fine balance of the international financial system. And, in
both the cases, US regulators have been walking the thin line of moral hazard, feeding the system an
ever-increasing supply of dollars to cover up not only past misdemeanours but also propping up the
domestic financial system with artificial oxygen supplies.
It is almost ironic that the US financial regulatory system (quite octopus-like actually, with a multiplicity
of authorities) which has in the past hectored and preached emerging markets and other countries for their
lax regulatory system, failed to see either the cracks in the system or the imminent catastrophe looming on
the horizon. The problems, therefore, seems to be two-fold:
One, while the international financial architecture ensures that domestic financial systems in the rest of
the world are monitored constantly, US seems to be exempt from the process. In addition, there’s another
larger issue: once the problem is revealed, should central banks then pour additional money to cover up
the past misdemeanours of banks?
This time around too, the Fed has been flooding the market with liquidity to provide intemperate banks
with not only additional capital at the year-end but to also keep the inter-bank loan market afloat. Even
the European Central Bank is guilty of pushing additional liquidity into the system over the past few
weeks. For example, on December 18 ’07 alone, the ECB pumped out half a trillion of dollars to hydrate
the European inter-bank market. That is not to say that the mechanisms do not currently exist. They do,
but seem to be designed purely for the emerging or developing economies.
One interesting development seems to have already happened. The G8 grouping recently launched the
Heiligendamm process, under which the industrialised countries will have a continuous dialogue with the
five largest emerging economies – India, China, Brazil, Mexico and South Africa – in recognition of their
enlarged role.
The second development is still a demand but needs to be implemented fast. This is increased voting
power and quotas in the IMF and World Bank for the developing and low-income countries. This crucial
bit of reform might be necessary to take the five-star financial architecture to its logical end – to provide
IMF with the political impetus to access vulnerabilities in the developed economies’ financial systems,
and take pre-emptive action before they drag the world economy down with them.
11.2 Tax Havens: Sebi
A tax haven by itself is not a bad thing. We only look at its implications for the Indian market and
economy. The Indian regulatory ecosystem in general is concerned about whether tax evaded money is
finding its way back from such jurisdiction (round tripping). We do not have a finite list of tax havens.
The International Organisation of Securities Commissions (IOSCO) has a finite list of non-cooperative
jurisdictions. We will not register a foreign investor domiciled in such a jurisdiction. We have an
international obligation to discriminate against them. They are in any case few and far between. IOSCO’s
taskforce on dealing with these jurisdictions constantly persuades them to come on board. A few have
complied in recent months and the list is becoming shorter.
11.3 Terror financing: Sebi
The National Security Adviser identified 11 possible means of terror financing in South Asia. Capital
market was just one of them. I must emphasise that these were not specific to India, but to South Asia in
general. He, however, did not say that there is a lot of evidence to prove that terrorist money is being
deployed in our markets or profits made out of capital markets are used in sponsor terror. There is
absolutely no evidence of terrorist money being deployed in the capital market. The second possibility of
using profits from the market to fund terror is outside our purview as we do not track the end use of funds.
The ministry of corporate affairs and Sebi had put in place a mechanism long ago to book those who go
underground after raising money from the market.
12. ISSUES OF THE PRESENT

Freedom to get & fail in the system of free enterprise
12.1 FII registered in non-IOSCO jurisdiction
Marker regulator Sebi is all set to notify the new guidelines for their registration by which all entities
registered in non-IOSCO compliant jurisdiction may not be able to register as FII here. The International
Organisation of Securities Commission (IOSCO) has a finite list of non-co-operative jurisdiction. Sebi
will not register a foreign investor domiciled in such a jurisdiction. IOSCO which is head-quartered in
Spain is the international standard-setting body for securities markets with its norms applicable in more
than 90% of world’s securities markets.
12.2 The private equities: Sebi
The private equity investment is coming in large measure to listed as well as unlisted entities. Nobody is
worried about the origin of these investments whereas people are worried about the money coming in to
markets. It is only recently that the International Organisation of Securities Commissions came up with a
taskforce on whether we need to regulate private equity. If so, what is the kind of regulation needed?
IPO convertibles
Private equity (PE) deals struck ahead of initial public offerings (IPO) have come under regulatory glare.
The capital market regulator Sebi has taken a serious view on such pre-IPO deals, where companies have
raised debt through issue of ‘IPO convertibles’ – a hybrid instrument that is debt in the grab of equity.
Market sources said many pre-IPO deals struck last year had a now-familiar instrument called IPO
convertibles. “It is nothing but debt, since the companies do not freeze the pricing at the time of deal. And
allow investors the freedom to buy equity at the IPO price at a later date, when the company goes public.”
Sebi is believed to have now asked unlisted companies that are going for IPOs to “freeze their pre-IPO
pricing” and “to fix their IPO pricing independently”. Sources said the regulator is likely to announce
measures to check pre-IPO deals involving IPO convertibles.
In 2007, PEs had emerged as the most preferred investors for corporates, enabling them to raise a record $
17 billion during the year, according to Grant Thornton. The capital mobilised through PE deals last year
was higher than the funds collected through IPOs, follow-on offerings and qualified institutional
placements (QIPs). Analysts said half of the PE deals struck in 2007, especially in certain sectors like real
estate, involved IPO convertibles. Any check introduced on IPO convertibles will bring in transparency in
the primary market.
2
SECURITY MARKET
Promise to sustain
1. Fastest growing IPO market
It will be raining initial public offers (IPOs) in India during the first half of 2008. As many as 34 issues
will hit the capital market raising an estimated $ 14,171.7 million, an increase of nearly 300% over the
corresponding period last year. This would make India the fastest growing IPO market in the first half of
2008 in the Asia, Pacific region. Indian IPOs have reached a record year in 2007, where US $ 8.3 billion
from 90 issues were launched, almost an increase of 75%.
As per the research undertaken by Thomson Financial, an arm of the Thomson Corporation, one of the
world’s leading information companies, “Year 2008 will also see some mega IPOs getting listed on the
Indian exchange such as Reliance Power, and Emaar-MGF. Overall, it is estimated that there will be 143
initial offers in the first six months in the Asia-Pacific region. According to the report, India will capture
around 26% market share to stand on the second pedestal after China (47% market share) in Asia-Pacific
region market in the first half of 2008.
China Metallurgical Construction Group will be the biggest IPO to hit the Asia-Pacific region during the
period worth $ 3,000 million. In fact amongst the 10 biggest IPOs to line up in the Asia-Pacific region
during this period, China has six, while India has two, and Singapore and South Korea one each. Other
prominent IPOs expected to hit the capital market in India include those of Air India, DLF Assets, Coal
India and GSPC. By the first half of 2008, Thomson Financial estimates Indian power companies to be
the second most active after financials in the IPO market.
The IPO burst is expected to propel India ahead of economies such as those of South Korea, Australia and
Hong Kong. Currently, India ranks ninth in the IPO market all across the globe, capturing 2.7% market
share – up from just 1.8% global market share in the same period last year, even a bigger IPO market than
Australia, Japan and Italy. In terms of sheer numbers, Reliance Power ($ 2,500 million) and Emaar MGF
($ 1500 million) will be the second and fifth biggest IPOs in the Asia-Pacific region. Reliance Power, on
January 16, will be India’s largest IPO on record shattering DLF’s IPO record worth US $ 2,300 million
launched in April 2007.
Experts believe that so many public offers hitting the Indian market clearly indicates that India Inc
requires growth capital and the investors also share the faith in their plans. Earlier companies used to raise
capital overseas where there are more regulatory issues and the cost of compliance high. But now they
can raise a considerable sum in the Indian market. More IPOs are also good for retail investors, as they’ve
more options to choose rather than picking from the same basket. This time, most of IPOs are from
companies which are making a foray in the infrastructure, which requires large capital.
However, experts also show a more skeptical view. They believe that the string of IPOs may hit the
secondary market. People will be taking out money for investing in new issues and the liquidity will be
sapped out. This can derail the markets. For instance, there is an unusual frenzy to gather enough money
to take exposure in the forthcoming IPO of Reliance Power. Thousands of people have inquired and quite
a large number of them have opened up new demat accounts to invest in Reliance Power. Everyone wants
to participate in the upcoming IPOs. It may trigger huge selling in the secondary market. FIIs and Mutual
Funds are also likely to pull out huge money from the secondary market to invest in these issues.
SECURITY MARKET… 19
2. India’s PEG strongest among BRIC markets
Talks of recession are increasingly being heard across the world as the US economy shows signs of
slowing down. If the world’s biggest economy indeed stumbles, stock markets across the world are likely
to come under risk. But how bad it will be for each country depends on the relative valuation of its
benchmark indices. Indian crash from the mid of January ‘08, although sparked by international factors,
has nevertheless bought some sanity among investors. In the aftermath, it is opportune to determine the
potential value of Indian markets against other leading markets in the world by using the PEG ratio.
The PEG ratio is a widely used measure to gauge the potential value of a financial instrument. It is a
valuation measure for determining the trade-off between the price of the stock, the earnings generated per
share and the expected future growth. A PEG of 3 for instance indicates that for every 1% growth in
earnings, an investor has to pay 3 units. Hence, a lower ratio is preferred over a higher one. A negative
PEG however indicate expected drop in future earnings, and cannot be attractive.
Decoupling or not, India still is an attractive destination for global investors. A relative comparison of
PEG ratios of 10 leading global indices throws up some interesting numbers for India vis-à-vis other
countries. India, trailing behind Korea, has the second lowest PEG compared to other countries like US,
UK, France, Germany, and others. Although KOSPI precedes Sensex, its earning growth at 10% is lower
than Sensex’s earning growth at 15%. In terms of earning growth, we are in step with China at 15%.
India emerges as the most attractive among all BRIC countries when compared on the PEG parameter.
Against 1.7 for Sensex, China’s Shanghai stock exchange composite at 2.9, Brazil’s Bovespa at 2 and
Russia’s RTS at 3.9 definitely look expensive for funds looking at investing in leading emerging markets.
3. US economy still strong & open: Rice
US secretary of state Condoleezza Rice sought to soothe investor fears about the US economy, saying it
was resilient and sound and that Washington remained open to trade and investment. In the keynote
address at the World Economic Forum in Davos delivered against a backdrop of financial turmoil, Rice
made a rare foray into world economics and urged her audience of business leaders to have confidence in
the US economy. “The US economy is resilient. Its structure is sound and its long-term economic
fundamentals are healthy. The US continues to welcome foreign investment and free trade.” US president
George W Bush had announced an outline of a “meaningful” fiscal growth package that boosted
consumer spending and would support business investment this year.”
4. Bush reassures to banish the imminent recession
US President George W Bush said, US would banish the spectre of an imminent recession, provided the
Congress acts quickly on the $ 150-billion economic stimulus package. To build a prosperous future, we
must trust people with their own money and empower them to grow economy. In the long run, Americans
can be confident about our economic growth. But in the short run, we can all see that growth is slowing.
SECURITY MARKET… 20
5. US economy is stronger than what it is given credit for
Even as the Bush administration rushed the fiscal stimulus package through the US Congress, the US
ambassador to India said the economic fallout of the subprime crisis is not known yet, and that the
slowdown of the US economy will have an impact on other countries as well. US ambassador to India
David C Mulford said the subprime issue is not linked just to mortgages, and that it involved the
structured product of financial markets. In his assessment, the exact extent of the economic fallout from
the subprime crisis is yet to be known. “We have to see how serious the economic fallout is”, he said, and
called the subprime crisis a complicated issue.
The effects of the subprime crisis were keenly felt in India and had worried the government to the extent
that Prime Minister Manmohan Singh hoped that US authorities would take “appropriate and credible
measures” to contain the damage caused by subprime crisis. The Bush administration had rushed through
an economic stimulus package to counter the crisis. Mr Mulford, who has served as chairman of the
International Credit Suisse First Boston in London and as assistant secretary of the US Treasury for
international affairs, indicated that probably more stringent measures needed to be taken. The key was to
bring in more transparency into the system. He however, said the US market has a “unique ability” to
adjust itself, and that the US economy is stronger than what it is given credit for. He acknowledged that
there is a slowdown in the US economy, but not to a point where it could be called a recession.
Even as the government here sought to reassure investors by saying that India and China could not offset
the impact of the slowdown of the US economy and that India is protected, Mr Mulford’s assessment is
that no country can remain immune to the effect of the slowdown.
Besides, due to dollar depreciation, the US has been able to cut the trade deficit with India in the last 12
months. According to figure released by the US embassy, in 2003, US exports to India was $ 3.4 billion,
but now it stands at $ 50 billion because US exports to India have gone up by 75%. And India’s exports
have gone up by 40-42%. In fact, high tech exports from the US stood at $ 1 billion, more than doubling
in the last year. And FDI stood $ 2 billion in 2007.
6. The real economy of India in good shape: FM
Finance Minister P Chidambaram suggested that investors panicking at the turbulence in the financial
markets need to draw confidence from the strength of India’s robust real economy. And the government
would take special fiscal measures to shore up any weak spots in that growth story. Specifically, fiscal
measures would boost consumption in the economy if the current slowdown in the production of
consumer goods persists. We will wait to see if the negative growth in consumer goods production is just
a blip. If the trend persists, we will take fiscal measures to deal with it.
India need not get affected that much by the turmoil in the global markets as the Indian economy was
driven by its own robust investment and consumption. Ours is a long term growth story based on real
investments and consumption. He also sought to separate the behaviour of the real economy from that of
the financial economy. The risk emanating from the United State has more to do with liquidity flows.
These risks would apply perhaps to our exchange rate management or the management of capital flows.
These are external risks which we will manage. The real economy in India is in good shape.
3
INDIA
Promise to grow
It’s the time to build micro-economic policies
At the Davos 08 Summit, the general opinion was that slowdowns points to the end of one economic
cycle with Tokyo University professor Ito stating said the cycle have to come to its logical conclusion and
cannot be stopped midway. However, at Davos, the US situation was upmost in the minds of the speakers
as they debated whether market corrections delivers a healthier economy in the long run, and when should
policy makers fight an eventual correction.
Finance minister P Chidambaram said a slowdown is a pointer to the end of one economy cycle, but that
the US slowdown is worrying. We have to tolerate slowdown. Recession is a negative growth rate.
According to Mr Chidambaram the US is not in recession, and it will bounce back. It is a knowledge-
based society. It is just a hunch that it is going through a slowdown. It is not going through negative
growth and can bounce back after 2-3 quarters.
In our profession, we manage to build micro-economic policies. Control the ups and down by policy, but
do not overdo it. US crisis is due to lack of regulation; if regulators had done their job the subprime crisis
might not have happened. It is a clear case of failure of regulators.
Mr Chidambaram said the salaried and job holders will be able to tide a slowdown better than the poor.
With appropriate policies in place they will be able to hold their job. They will have the possibility to
borrow from banks. However, it is the poor that will be the most hit. The policy stimuli should be so
carefully calibrated that the pain is not on the poor, with a tax break system in place.
It’s a trade between Inflation & growth
As a politician he would be in trouble if his country’s inflation went to 6-7%. Therefore everything has to
be kept on target. Inflation must be kept low if a high rate of growth has to be aimed for. Mr
Chidambaram said keeping inflation rate low, not high growth, was a priority for the government. “At the
moment, we are comfortable with inflation below 4% and growth above 8%. “Between inflation and
growth, what hurts the poor most is the inflation. That is why we must keep inflation low and this means
reasonably high rate of growth.”
It’s a domestic consumption and investment story
Mr Chidambaram pointed to statistics provided by Stephen Roach that the US consumption is $ 9.5
trillion, whereas the consumption of India and China is $ 1.75 trillion. Therefore India and China cannot
be expected to replace the US consumption gap. But it also depends on the extent that India and China are
growing. However, the growth in India and China cannot be decoupled from that of the US. Though,
India is not as affected as China, which depends on exports, while India’s growth is driven mainly by its
domestic consumption and investments. If the US slowdown spreads to other countries and affects the
EU, India’s exports would suffer.
INDIA… 22
It’s the highest growth in 18 years
Buoyed by revision in growth estimates for 2006-07, finance minister exuded confidence that the country
would grow close to 9% in 2007-08 on the back of an investment boom. The country grew faster in 2006-
07 than previously estimated and clocked 9.6%, highest in 18 years.
Earlier estimates had pegged the growth rate in 2006-07 at 9.4%. The improved growth in the GDP during
2006-07 has been achieved due to all-round improvement in mining, manufacturing and services sectors,
which helped to offset the slower growth in agriculture sector. While agriculture sector grew by 3.8%,
down from 6.1%, manufacturing sector recorded 12% growth, which is substantially higher than 9.0%
growth recorded in the previous year. The economy expended by 9.3% in the first quarter and 8.9% in the
second quarter in fiscal 2007-08. Mr Chidambaram emphasised that the government could make rapid
policy adjustments to sustain the high growth in the wake of heightened global uncertainties.
It was a matter of considerable satisfaction that despite turbulence and heightened global uncertainties,
our economy grew by 9.6% in 2006-07 and is estimated to grow close to 9% this year. It is difficult to say
which side of 9% it would be. He added that economic think-tank NCAER had forecast a GDP growth
rate of 9.1% for 2007-08. The new revision put India’s average growth over the past three years at 8.8%.
This shows that since the United Progressive Alliance (UPA) came to power there has been an investment
boom, people are investing and they have confidence in the future. Despite turbulence and heightened
uncertainty, our economy is growing at 9.4% (2005-06), 9.6% (2006-07) and is estimated to grow at close
to 9% (2007-08). We are not making policies and we are not taking administrative steps in vacuum. We
are confident that if we keep firm hands on the wheel, the Indian economy will sail through turbulent
waters. We are maintaining a balance between growth and inflation. The inflation is still below 4% and
growth is well above 8%.
It’s the time to increase per capita income
The per capita income of Indians has gone up as much as 14.2% in 2006-07, enabling them spend more
on manufactured products like mobiles and health care services, while increasing their savings. The per
capita income at current prices is estimated at Rs 29,642 in 2006-07 as against Rs 25,956 for the previous
year, depicting a growth of 14.2%, according to the figures released by the Central and Statistical Office
(CSO), if adjusted against inflation, the per capita income at current prices rose by 8.1% at Rs 22,553 as
against Rs 20,858 for the previous year.
It’s the time to redouble efforts to maintain domestic drivers of growth
Prime Minister Manmohan Singh has cautioned that the US slowdown may hit the Indian economy,
which could impact exports as well as capital inflows. Since the economy is now increasingly integrated
with global economy – with the external sector accounting for almost 40% of GDP – the country cannot
be fully immune to international developments.
There are some clouds over global financial markets following the subprime crisis in the US. There are
worries that the growth of the US and other leading economies may slow down and some may even go
into recession. This may impact both our exports as well as capital inflows. He, however, expressed the
need to redouble our efforts to maintain the domestic drivers of growth and ensure the policy measure to
facilitate even faster growth.
INDIA… 23
Mr Singh said the prospects are encouraging for the 11th Plan with regard to economic growth. Growth
has averaged close to 9% per annum in the last three years of the 10th Plan, thus more than making up for
a slow start in the first two years. Such a good growth performance is unprecedented and leads us to
wonder whether we have actually scaled another invisible barrier and placed our economy on a high-
growth path. It is possible that with the correct set of policies and dedicated effort by both the Centre and
state governments, we will not only be able to maintain this momentum of high growth in the near future
but may be able to raise it to 10% p.a. This is what the 11th Plan attempts to do over the next five years.
Mr Singh said the high growth rate has been achieved because of the historically high savings and
investment rates. Our savings rate, after stagnating for almost two decades, has touched 34% of GDP and
the investment rate has crossed 35% of GDP. These high rates, which are based on improvements in both
private and public savings, are likely to go up in future because of our young population profile. This will
be adequate to support a growth rate of 9-10%.
It’s the time to cut Indirect taxes on consumer durables.
The Prime Minister Economic Advisory Council has advised the government to moderate indirect taxes
on consumer goods to boost consumption and sustain the growth in the economy. The moderation in tax
rates would also augur well for the manufacturing sector which has shown signs of a slowdown. Latest
IIP figures show a sharp decline in the manufacturing growth rates. “Our own view is that the economy
will grow at about 8.5% next year. But there are some areas of concern where there are weaknesses. They
are known, like manufacturing,” Council Chairman C Rangarajan told reporters after pre-budget meeting
with the finance minister.
4.1
INDIA INC
Promise to unlock value
1. Tata Chemicals buys US soda ash maker

A YEAR ON: DEAL ON CORUS ANNIVERSARY
On the first anniversary of the Corus deal, Tatas on Thrusday, 31st of January, ’08 acquired a soda ash
manufacturing company in the US for a little over $ 1 billion. The US-based, debt-free, profit-making
General Chemical Industrial Products (GCIP) recorded a turnover of $ 400 million last year and has 100
years of extractable trona reserves.
Exactly on the same day a year ago, the Tata Group had acquired Anglo-Dutch steel maker Tata Steel for
$ 12.5 billion, making Tata Steel the world’s sixth largest steel company. Homi R Khusrokhan MD, Tata
Chemicals said, “This particular acquisition (GCIP) is certainly going to change the future of Tata
Chemicals. It is a very good acquisition and will be very good for the company.”
Currently manufacturing around 2.5 million tonnes of natural soda ash, which finds application mainly for
glass, chemicals and soaps and detergent making, GCIP has mining and manufacturing facilities at Green
River Basin in Wyoming, which has the largest deposit of trona in the world. This acquisition would
enable the Tata Group Company to have access to low-cost soda ash sourcing and acquire global
customers, among others. The acquisition will provide Tata Chemicals Ltd access to markets in North
America, Latin America and Far East, which compliment its existing business. Tata Chemicals Ltd,
currently generates 40% of its revenue from overseas.
2. India Inc’s Intangible assets

INTENGIBLES: 74% OF TOTAL ENTERPRISE VALUE
India Inc holds far more within its fold than what meets the eye. In the knowledge-driven global
marketplace, where intangible assets such as intellectual property, brand, customer relationship and talent
hold much more value than tangible ‘visible’ assets such as capital, land, building, factories et al, India
emerges at the top of podium, head and shoulders above all developed countries and blocs, barring US
and Switzerland. India ranked number three economies in world with the highest intangible component as
a percentage of the total enterprise value.
Total Enterprise Value (TEV) is a value of disclosed and undisclosed tangible and investible assets. With
an estimated intangible assets component of 74% (as proportion of TEV) - India just behind the US (75%)
and Switzerland (74%) - according to Global Intangible Tracker 2007 (GIT), the most extensive global
study ever on intangibles assets by the London-based Brand Finance Institute. Global intangible to TEV
average is around 65%.
Global Intangible Tracker (GIT) 2007 covered over 5,000 companies in 32 countries. For India, GIT
considered the top 50 companies (by market cap) on the Bombay Stock Exchange. This partly reflects the
dominance of the software sector in the Indian stock market. And with rapid growth in healthcare,
personal care, pharma and biotechnology, the country’s intellectual capital is poised for a big leap. It also
sets the stage for Indian brands and companies to attain critical mass and pursue global trajectories.
INDIA INC… 25
Today, India’s TEV of $ 365-billion (2006) accounts for a measly 0.8% of the global figure ($ 47.7-
trillion), and tangible assets make up a small $ 96-billion of that. The rest, constitute a massive wealth of
$ 269-billion of disclosed and undisclosed intangible assets ($ 3-billion and $ 266-billion, respectively).
And if the estimates for the first half of the current year (HY 2007) are anything to go by, Indian economy
with as high an intangible assets of $ 320.3-billion (up from $ 269-billion in 2006) could actually topple
the top two economies on the tangible to TEV proportion parameter.
At the top of the heap amongst Asian economies, India leads China by far, with the letter’s TEV showing
58% of intangible asset component. UAE comes third in Asia with 55% proportion of tangible assets in
the economy. Other most intangible Asian economies include Japan (44%), Singapore (45%), and Taiwan
(45%). Malaysia (43%) and South Korea (25%) remains at the bottom of the intangible heap. As Indian
economy grows, it is likely to increase the lead.
Interestingly, India Inc has in fact seen the proportion of its intangible assets soar since the beginning of
this decade (2001) when it stood at just 56% of $ 75.1-billion TEV. The GIT study assumes significance
in the wake of changes in the accounting practices, which means that the valuation of intangibles assets is
now a boardroom issue and cannot be ignored.
3. Incubation business is set to hit growth highway

BUSINESS INCUBATION: PROMOTING IDEAS
Business incubation in the country is poised for a strong growth with both government and private sectors
seeing good prospects in promoting ideas that have robust commercial potential. Earlier, it was the
ministry of science and technology that was funding business incubation, but now other ministries too
have begun the practice of supporting commercially-viable ideas, the incubation business is set for a
significant growth. The technical competence of a country virtually hinged on its ability to bridge the time
gap for an idea to be taken from the laboratory to commercial utilisation, adding that the conversion of
ideas into workable products had been considerably enhanced in India with incubation centres providing
management, funding and other inputs to entrepreneurs.
Indian STEPS (Science and Business Technology Entrepreneurs’ parks) and Business Incubation
Association (ISBA) is the apex professional body supporting business incubators across the country, has
about 100 incubation centres, and the number are expected to double within the next two years. However,
these numbers did not match up to global levels, considering that the US had about 1,500 incubation
centres, China had about 800 and even South Korea had about 400 such centers.
4.2
AUTOMOBILE INDUSTRY
A promise is a promise
A Dream machine: Nano second to none
Ratan Tata has delivered what his rivals didn’t dare to dream: World’s cheapest car at a little over Rs 1
lakh on road. Nano is second to none: A dream machine with 624 CC, 33 HP petrol engine meets latest
emission and crash norms. On Thursday, 10th of January, 2008, even as the world saluted his sprit of
innovation, the irony may not have been entirely lost on the man who had dreamt of the concept – an
affordable and safe car for the Indian family. After all, the road to the Tata people’s car has been as
bumpy – and lonely – as it could get for its creator. Unbelievably as it may now sound, there were simply
no takers for the idea.
About four years ago, Mr Tata mooted the idea of building an Asian people’s car at a meeting of the
Automotive Component Manufacturers Association (ACMA). He felt that a four wheel car could be built
from scooter parts. “Malaysia, Indonesia and India could come together to jointly produce this really low
cost car. We could produce one part, they could produce another part and then each one would exchange
and have the rights,” said Mr Tata. A studied silence greeted his proposal. Except, for the industry
stalwart Brijmohan Munjal, who gave some initial encouragement. At a much later stage, Carlos Ghosn,
one of the most respected CEOs in the auto industry, and head of Renault- Nissan, too said that such a car,
if possible, could only be produced in India. Almost everyone else said it was a pipedream.
None of this was unusual for Mr Tata. Last time around, at a similar ACMA meeting, Mr Tata had first
spelt out his dream of a car designed in India – later known as the Indica – to challenge the hegemony of
the Japanese designed Maruti 800. “That time I was actually criticised,” reveals Mr Tata. Even his friends
from the global automobile industry warned him about a project whose time had not come. My friend
here said when the Indica was under production that you would produce a lemon. They would beg me to
distance myself from the Indica project. Later when the Indica managed to carve out a niche, suddenly Mr
Tata found his friends were back in circulation.
The small car project too had its share of critics. “There was a fair amount of ridicule when the project
started that it is a pipe dream and in honestly that would have extended into the company also in certain
quarters. That it can’t be done and that I was caught in the Web.” He said.
It’s shaking the foundations of the world automobile industry
It’s the car, which, just days after its launch, is shaking the foundations of the world automobile industry.
The reverberations from the launch of the Tata Nano at the Delhi Auto Expo continue to be felt world-
wide. Auto majors are rethinking strategy and trying to figure put ways to break into the newly created
ultra low cost car segment.
According to sources in the auto industry, Volkswagen, Nissan and General Motors have sent out to
feelers to Indian vendors to work on their version of a $ 3000-4000 car. This in addition to the Bajaj-
Renault project; where feasibility study is already on. Experts feel the cost benefit of the ultra low cost
car has triggered interest from top names in the global auto business. And given the Tata and Bajaj
project, India is being seen as a hub for this segment.
WORLD AUTOMOBLE INDUSTRIES… 27
It would open new business opportunities
Let’s look the markets that Nano has opened or is likely to uncover. It would bring in a new segment of
customers on board and, hence, lead to new business opportunities to cater to them. A taxi driver in
Mumbai when asked why not changing his car has been replied by saying that he was waiting for the
Nano. That’s not all. Like Maruti 800 in the ‘80s, Tata Nano is expected to spawn a new range of auto
repairs shops and accessories. There is no doubt that the car would fuel the growth of car accessories
market. It would also challenge accessory-makers to offer cost-effective and innovative solutions for the
car. Most auto-analysts do believe that there could be a dedicated set of cost-effective accessories that are
likely to be launched once the car is launched around Dewali.
But apart from markets it is at the individual level that the Indian imagination works attentively. Tata’s
new automotive wonder may not truly be a tall boy but it surely is stirring some tall tales. Walk out on to
the main street and you would see several ingenuous, sinuous minds at work doodling out ways and
means to adapt the new Nano to suit their needs. The local milkman has already started thinking of
holders on the side of the car for his milkcans. The laundryman is thinking of collecting dirty linen using
the Nano. Business in the daytime, leisure with family in the evenings; from a small car the Nano is likely
to be converted into a Multi-Utility Vehicle.
Making India the small car hub, a Neno step
The Auto Policy 2002 and the Automotive Mission Plan 2006-2016 state the government’s intention and
outline the action required to make India an automotive hub. A key element of this vision is the small car.
Industry has committed and is currently in the process of investing over Rs 70,000 crore in India. Of this
nearly 65% of the investments in the passenger vehicle sector is stated to be directed towards producing
small cars. There are four essential prerequisites for being called a small car hub:
1) The total production of small car in India should rank amongst the top two in the world.
2) Small cars should have a high share of the domestic market.
3) Exports of small cars should account for a significant share of the global market.
4) India should be home to the development and use of new technologies and manufacturing
processes that would sustain this leadership over time.
India is the third producer of small cars after Japan and Brazil. Given the current projections for the Nano,
India could easily become the second largest market for small cars in the world and in time perhaps
become the preferred location. Small cars also account for over 71% of the domestic market. India would
continue to be predominantly small car market.
The development in small car space in India would enable, to command a respectable share in the global
market in time. A number of patentable technologies and processes have been used in the development of
Nano. The Nano is also an environmentally-friendly and safe car. Clearly the Nano has revitalised the
potential to make India a small car hub.
4.3
INFORMATION TECHNOLOGY
Promise to shine
IS IT DEAD? And is the stock market about to write the obituary of information technology (IT) sector?
Or, has it already done it? The sector, which appeared almost invincible not so long ago, is now under
siege from investors and analysts alike. Its future prospects have also come under a cloud on fears that the
US economy is hurtling towards a recession which, in turn, will trigger off a global economic slowdown.
IT stocks were laggards in ’07, even as the broader market continued to witness a bull run. The 30
companies of the ET Infotech index lost over 5% during the year, while the BSE Sensex gained 45.5%. IT
scrips could not escape the bear hug as well started mid-way from January ’08. Here again, the drop in ET
Infotech was sharper than the fall in sensex. The market turmoil has also caused these scrips to trade at
historically low price-to-earnings multiples.
The steep appreciation of the rupee in the short span of time has retarded the growth of IT exporters.
However, this is evident from the fact that while growth in rupee revenue has come down, growth in
dollar terms has remained strong. Also, growth in the banking, financial services and insurance (BFSI)
space was decent, despite the subprime woes in global financial markets. This sounds assuring enough,
since the banking and financial segment is the major revenue stream for Indian IT companies.
Moreover, IT companies have been able to curtail the impact of a stronger rupee on their profitability. On
an average, a rise of 100 basis points (bps) in the rupee against the dollar pulls operating margin down by
30-45 bps in case of top companies. Hence, an overall increase of 11% in the rupee should have reduced
the profitability of IT companies by 300-450 bps. However, in reality, the impact was lesser – 100-300
bps – due to better operational efficiency and effective hedging practices by the companies. Experts feel
that IT companies are equipped to handle a moderate appreciation of 2-3% in the rupee annually. As long
as the rupee’s value doesn’t rise more than this, its effect may not be noticeable.
Another point worth noting for investors is the kind of cash some of these companies have in their
balance sheet. Another factor that deserves attention is the growth strategies of the IT sector. IT
companies made some key global acquisitions in ’07. Apart from the big companies, medium and smaller
IT companies were also seen to be on a global hunt for acquisition. It seems domestic IT companies are
no longer shy of taking the inorganic route to expand their reach and portfolio of deliverables. This makes
a strong case for future growth prospects of the sector.
1. Forrester lower outlook for IT growth in US
The darkening cloud of a possible slowdown in the US economy and its negative impact on IT sector has
got strengthened with Forrester expecting a lower IT market growth in 2008. Though, outlook on IT
outsourcing remains stable. In a report “US IT market outlook”, Forrester has said that it has lowered its
outlook for growth in US IT investment, purchase and spending in 2008.
INFORMATION TECHNOLOGY… 29
US IT investment
The biggest change is expected to be in the area of IT investment which includes hardware,
communication equipment and software with 4.8% growth. We have downgraded our forecast for 2008
IT investment from 7.8% to 4.8% because of likely cutbacks in capital purchases in this gloomy
environment. The Forrester forecast for 2008 on investment has moved from mildly positive to moderate.
Forrester said that comparing the revised 2008 IT investment growth rates with those for 2007 and 2006
shows a pattern of steadily slowing growth in tech markets. For IT investment, 2008 growth of 4.8% will
be half a percentage point less than 2007 growth of 5.3% and more than a percentage point below the
2006 growth of 6.1%. Looking ahead to 2009, Forrester is expecting a significant pick up in IT
investment as companies invest in new technologies that can deliver improved business results.
US IT spending
Our 2008 forecast for IT spending (reflecting businesses and government IT operational budgets) has
been lowered from 6.4% to 5.2%. It said that IT outsourcing will record at 6% growth in 2008 as at the
same level in 2007. However, IT services will record 3% growth in 2008 as against 5% in 2007. While
comparing the revised 2008 IT spending growth rates with those for 2007 and 2006, it growth of 5.2%
will be down fractionally from the 2007 growth of 5.7% and the 2006 growth rate of 5.4%. Looking
ahead to 2009, Forrester is expecting a significant pick up in IT spending as companies invest in new
technologies that can deliver improved business results. However it expects spending on IT consulting
and integration services to remain sluggish with just 3% growth.
2. Gartner report: India leader in offshoring
India remains the undisputed leader in offshore services, but countries like China, Russia and Brazil are
biting at its heels, according to a report by research firm Gartner. The report, which analysed 30 countries
on the suitability for offshore locations, assessed them on 10 criteria including language, government
support, labour pool, infrastructure, cost, political and economic environment, cultural compatibility, and
data and intellectual property security and privacy.
3. Equa Terra study: India favourite outsourcing destination for UK firm
India emerged as the favourite outsourcing destination for businesses in UK, as organisations rated India-
based outsourcing firms highest in terms of satisfaction, placing them above ‘traditional’ global providers
in a survey of UK’s public and private firms. According to the ‘Outsourcing Service Performance Study
2007, conducted by sourcing advisory firm Equa Terra, all UK businesses currently offshoring all or parts
of their IT functions use India as one of their locations, and plan to continue with the strategy.
4. TCS: 20% QoQ profit growth
The country’s biggest software services exporter Tata Consultancy Services (TCS) said its third-quarter
net profit jumped by more than 20% from a year earlier as it hiked fees and won more deals in a tough
business climate. Net profit for TCS in the three months ended December rose to Rs 1,331 crore. Revenue
increased 23% to Rs 6,041 crore.
TCS chief executive officer S Ramadorai said; “Our robust business model, with a focus on the emerging
markets, has helped us despite tough external circumstances. We are cautiously optimistic about the
future.” Software companies suffered a difficult quarter as the US-triggered global credit crunch hit the
banking and financial sectors and the rupee’s rise against the dollar hit company margins.
The US is the biggest market for Indian software and service exports. TCS and other Indian software
makers were hurt last year by a more than 12% appreciation in the value of the rupee against the dollar –
the currency in which the industry earns two-thirds of revenue – and rising wages. The rupee’s climb
reduces the local equivalent of every dollar earned by the $ 50-billion IT industry, with every percentage
point rise in the local currency shaving about 50 basis points off its operating margin.
TCS traditionally gives no earnings guidance. But “the deal pipeline is very strong. We are chasing at
least 45 deals which are in the $ 50-100 million range”. A shift in focus towards the emerging markets
aided growth. The company’s biggest deal during the quarter was with New York-based global
information and media company Nielsen and worth $ 1.2 billion. Its second largest was a $ 200 million
contract with Mexico-based Social Security Institute of Mexico.
5. Infosys: 12% QoQ profit growth
Infosys registered consolidated revenue of Rs 4,271 crore for the third quarter ended December 31, 2007,
showing a quarter-on-quarter (QoQ) growth of 4%. Its net profit touched Rs 1,231 crore, recording QoQ
growth of 12%. Infosys CEO Kris Gopalakrishnan said the environment has not changed. There has been
no project cancellation and no signs of slowdown. There has, in fact, been a pricing increase.
Infosys’ dependence on the US market is quite substantial as it generated 62.3% of its revenue from North
America for the third quarter of FY08. The IT spending environment will be favourable to large offshore
players, even though the macro environment is challenging. Indian outsourcers that offer Western firms
technology and back-office services are expending into Europe and Asia-Pacific to cut their dependence
on an uncertain US market that generates more than half their revenue.
6. Wipro: 12% QoQ profit growth
The country’s third-largest software maker Wipro reported a 12% rise in net profit for the third quarter
ended December ’07 at Rs 854 crore, mitigating the impact of rising rupee on profitability. The Bangalore
- based firm posted a 33% year-on-year growth in revenue for the quarter at Rs 5,303 crore. The New
York Stock Exchange listed company said organic global IT margins remained flat despite an
appreciating rupee and impact of wage hikes.
Wipro chairman Azim Premji told: For the December quarter, global IT service and products business
added 39 new clients. The company expects good momentum in all its businesses. Looking ahead, for the
quarter ending March 2008, we expect our revenue from global IT services business to be approximately
$ 955 million. On business environment, Premji said the US economy in general and the financial
services sector worldwide in particular are facing challenges.
However, we have not seen any impact on our business so far. We are not seeing any sign of slowdown.
We continue to see good demand for our services and believe that the value that (our) global delivery
model offers is enduring. Premji said Wipro’s dependence on the US market has come down from 64% of
its total revenues a year ago to 62% now. It will keep coming down. Premji said, adding he expected the
figure to fall by 2% annually going forward.
7. IT still shining
The country’s top information technology companies have once again displayed that they have what it
takes to thrive in a difficult environment. The falling dollar, the subprime crisis and slowing US economy
were significant worries and were expected to hurt earnings, yet the overall impact of these factors have
been minor. The big four of the software industry and others managed to add clients, grow their topline on
the strength of increased volume of business, get a foothold in new markets and, most importantly,
renegotiate billing rates with existing clients to partly offset the impact of the rising rupee. Control on
costs, and particularly salary expenses even as they recruited several thousands more, helped companies
improve their margins. On the whole, the industry performed in line with street expectations and
improved its guidance for full-year earnings.
Indeed, it’s an illustrative example of how the corporate sector can continue to grow its business in tough
environments. Topline for most companies, other than Infosys and NIIT, grew by more than 22% - 45%
(year-on-year) during the Q3 of FY08. Net earnings, although healthy, did not keep pace with topline
growth. Larger companies reported more robust profit growth than the smaller ones.
The economic environment could get tougher in the next few quarters. The extent of the US subprime
crisis is yet not known fully. Also to be seen is the impact of the crisis on IT companies’ earnings from
the important ‘banking, financial services and insurance’ segment. Fears of recession in the US are more
real now, and the recently announced fiscal stimulus package and the 0.75 percentage point cut in interest
rates by the US Federal Reserve only confirms these apprehensions.
The industry, therefore, needs to intensify its efforts to expand to new and growing markets, and
simultaneously seek out more value-added higher margin work to sustain earnings growth. It should also
continue to look for acquisitions overseas of companies that would enable it to break into unexplored
territories. On the positive, continued emphasis on cost cutting by global and domestic companies will
lead to greater outsourcing of processes. That should protect IT companies’ earnings.
8. Time to chant Homeward Bound
For the $ 40 billion IT services and ITeS industry, it could well be time to chant Homeward Bound.
Dogged by rising rupee, increasing wages and dipping margins in the IT exports business, the home
market is now far too attractive to ignore. Demand for IT products and services from India Inc is growing
at a fast clip, margins are attractive and there are no rupee-dollar worries. And most interestingly the deal
size has gone up significantly with a large number of $ 50-100 million IT contracts up for grabs. This is
similar to what Indian players chase in the global markets.
Companies with domestic market arms like TCS, HCL, and Wipro and multinationals like IBM,
Accenture, and HP have seen the business grow significantly. Even Infosys Technologies is setting up an
India Business Unit to tap the local market. While for the small and mid-tier IT companies the local
market provides an opportunity to stay afloat in these tough times. According to Rajdeep Sahrawat, vice
president, Nasscom, today the domestic market is far cry from what it was earlier. “There are mega deals
up for grabs both in the private and public sector. For instance the railways ERP project, the BSNL
systems integration, networking projects, IT work from ministry of finance and private telecom
companies, banks and others are offering multi-year contracts that are over $ 100 million.”
9. Time to take hard decisions
Tough business environment necessitates hard decisions by companies to survive and thrive in difficult
times. Thus, Tata Consultancy Services’ (TCS) decision to effect a marginal cut in employee
compensation illustrates corporate India’s capacity to take difficult decisions. Reports suggest that the pay
out would reduce an employee’s earnings by 1.5%. But the impact on the company’s wage cost and
operating profit would be significant.
The company estimated its employee cost at Rs 8,000 crore (consolidated statement) for 2006-07 and Rs
5,865 crore for the nine months to December 2007 (against Rs 5,810 crore for the comparable period of
the previous year). Although, it is hard for any employee to take a pay cut, it is a small sacrifice to make
to secure the overall health of the company, especially when threats to the IT sector are numerous. IT
companies in general cannot really afford bigger employee cost and therefore wage moderation becomes
necessary. TCS is not alone. Global companies such as IBM have cut wages to survive a difficult
economic environment. Temporary pain is better than risking the health of the sector.
10. Indian banking products
The depressed sentiments on technology spend for 2008, especially in the US, is unlikely to have any
bearing on at least one segment of the Indian IT industry – banking products. India is already home to
some of leading banking products largely used in Asia Pacific, Africa and Latin America and these areas
are very much on the curve of increasing their technology spend.
There are no exact estimates on the global banking products market but runs into multi-billion dollars.
The primary investment in the area of core banking solution (CBS), but significant portion of these spends
are in the surround services involved in adopting CBS solution like – systems integration, change
management, program management, customisation and implementation.
11. Insurers’ annual IT bill to triple to $ 9 b by 2012
After having relied on traditional ways of doing business for ling, insurance companies are now
embracing IT in a big way and their IT expenses are expected to rise three fold to over $ 9 billion by
2012. According to a new report by global consultancy firm Celent, the Indian insurance companies
would spend close to $ 3 billion on IT in 2008, with life insurers alone accounting for nearly $ 2.4 billion.
Matching the rate of growth in premium collection, the IT expenses would also grow to $ 9.4 billion in
the next five years.
5.1
INDIAN
Promise to ball rolling
1. Sunil Mittal wants to set India’s football rolling
Sunil Mittal’s Bharti Group have a new ‘goal’, it is not business of another kind. He wants India to
qualify for the 2018 football World Cup. “Whatever it takes, our ambition is to see India qualify for the
2018 World Cup.” Bharti will invest a couple of hundred crores and enter into collaboration with the All
India Footwall Federation (AIFF) in a public-private partnership to build Indian football.
Mr Mittal also said Bharti would make significant investments towards establishing a world-class football
academy and talent development programme. The Bharti Enterprises chairman also signed a
memorandum of understanding with Ranjan Dasmunsi, Information and Broadcasting minister and AIFF
chief. The MoU envisages that both parties jointly set up a comprehensive national football development
programme, including a world-class academy.
Indian corporates have been associated with football since quite some time now. Mahindra United,
Dempo, Salgaocar and JCT are all clubs owned by corporate houses while Vijay Mallya’s Kingfisher
sponsors the two Kolkata clubs, East Bengal and Mohan Bagan. But this is the first time that a corporate
house is investing so in Indian football largely and nationally.
India had qualified for the football World Cup once, way back in 1950. The country made it to World Cup
in Brazil by default due to the withdrawal of several countries, but could not take up their place in the
competition because FIFA insisted that all players at the World Cup finals wear footwall boots. Despite
boasting of some of the oldest football clubs and the third-oldest tournament in the world (Durand Cup),
India is ranked 143rd in the world. While Indian cricketers enjoy iconic status, its footwall players suffer
in anonymity.
Unveiling plans to ‘electrify football in the country’ which Mr Mittal described as languishing because of
the popularity enjoyed by cricket, he said: “Footwall is the world’s most popular sport. It unites the
World. Our vision is to develop a rich footwall culture in India. To achieve this vision, we will look at
partnering with leading international football clubs and institutions like Manchester United and IMG. We
had enough dose of cricket and I think it is the time to start a programme to make India a footwall-nation.
In 10 years we want India to be on the world stage.”
2. Indians want to set India’s cricket rolling
Indians paid millions of dollars to buy the eight franchises of BCCI’s Twenty20 Indian Premier League
(IPL). Eleven companies – some a consortium of individuals – were in the race to own teams from a
choice of 12 cities where the franchises would be based. The base price for owing a team for 10 years was
set at $ 50 million. The companies will pay 10% of the bid to the board every year. The board announced
after bids for franchises were opened.
Reliance Industries Mumbai team $ 111.9 million

United Breweries Bangalore $ 111.6 million
INDIAN… 34
Actor Shahrukh Khan consortium Kolkata $ 75.09 million

Infrastructure Company GMR Holdings Delhi $ 84 million
Preity Zinta consortium Mohali $ 76 million
Media group Deccan Chronicle Hyderabad $ 107.1 million
India Cement Chennai $ 91 million
UK-based company Emerging India Jaipur $ 67 million
To date we (the Indian Premier League) have made $ 1.749 billion, board vice-president Lalit Modi told a
news conference. “We are looking to build on it going forward.” The inaugural event will be held in
April. The league, expected to feature many of the game’s top players, is an effort to counter an unofficial
Indian Twenty20 league that began late last year. The 44-days IPL starts on April 18 will feature eight
franchises with 16-man squads in its inaugural season. Teams will play home away games leading up to a
grand final. The first year will feature 59 matches played in late afternoon for prime-time television.
India, where cricketers are feted like pop stars, has the largest global cricket audience and multi-million-
dollar sponsorship deals. IPL has the patronage of the International Cricket Council (ICC), the sport’s
governing body, and is intended to be part of the soccer-style Champions League, involving teams from
several countries.
IPL title bids go global
The Indian Premier League (IPL) story just got bigger, and global. IPL Chairman and BCCI V-P Lalit
Modi said, “We don’t want to limit the sponsorship to companies already operating in India, considering
the interest level the tournament has generated and the profile of our franchisee and broadcasting partners.
We want to reach out to even those companies which want to enter the Indian market.”
It is for the purpose of attracting global title sponsors that interested bidders are not required to buy the
tender document unlike tenders for the franchisee sponsorships which needed to be purchased. The tender
document for title sponsorship has been posted on the IPL website and can be downloaded by interested a
bidder – which simplifies the bidding procedure even for companies not yet operating in India.
PepsiCo, Bharti Airtel, R-ADAG, Vodafone, Emaar MGF, LG Electronics and DLF are among potential
Indian bidders but they will have to compete with global sponsors to win the title rights. Further, even
franchisee rights owners have been allowed to bid for title sponsorship. UB Group, for example, can bid
for title sponsorship, even though it is the franchisee owner of the Bangalore team.
Detailing plans for hard-selling the Twenty20 league, Mr Modi said: “We are going all out to promote the
IPL with an ad blitz of Rs 100 crore. It will involve promoting the league through various platforms
which will reflect the magnitude of the tournament.” The five-year title sponsorship rights will give the
winner category exclusivity on various platforms. Other than having naming rights to the league, the logo
of the winning bidder will be integrated along with the logo of IPL. Other branding opportunities with the
right holder will include branding on stumps, shared branding on sightscreens, and inclusion in television
graphics, branding on the IPL website and in-stadia rights to promote products or services. In addition, the
winner will hold the first option to negotiate renewal rights after the five-year term expires.
5.2
FINANCIAL PROFESSIONALS
Promises to true and fair
1. Freedom brings responsibility
It’s a New Year gift to financial professionals. In response to the long-pending plea from chartered
accountants, company secretaries and cost and works accountants the government has finally allowed
them to advertise their services. What is clear is that as business deals get more and more complex, skilled
finance professionals will be needed to structure these deals to best advantage. In such a scenario, the ban
on advertisement puts our locally qualified finance professionals at a huge disadvantage vis-à-vis their
overseas counterparts.
While practicing company secretaries will be allowed to solicit business right away, professionals in other
areas will have to wait for formal clearance by their apex bodies before they follow suit. However, that is
only a formality. For all practical purposes, therefore, finance professionals will no longer have to rely on
word of mouth for attracting business but can boldly proclaim their expertise as well as track record.
However, greater freedom always comes with greater responsibilities. CAs for instance, attest the
reliability of financial statements that a number of others rely on; government (for tax), investors (for
putting in their hard earned money), banks (for lending), potential employees (for making career choices)
and so on. Thus, they have a huge responsibility to uphold professional ethics at all times and ensure that
corporate scandals like Enron and WorldCom that bought discredit to the profession do not recur.
2. Need for regulatory revamp as professions go global
Professionals that deal closely with companies like CAs, corporate lawyers, insolvency practitioners and
company secretaries need to constantly harness their knowledge and skills to be of real use to Corporate
India which is now more globalised than ever and is scaling up the size of its overseas acquisitions. In
recent months, some of the institute that govern these professions have revised their curriculum, in
response to the challenge that globalisation of Indian companies have brought about.
The Institute of Chartered Accountants of India (ICAI) has already reported that the student community
has accepted the new course, which is in consonance with the new requirements of globalisation,
wholeheartedly, with a definite increase in enrolment numbers and success rates. ICAI had initiated
efforts to enter into mutual recognition agreements (MRAs) with the US, Australia and Singapore.
ICSI, the body that sets the standards for company secretaries, is now on a major curriculum revamp
exercise, since the changing paradigm would require company secretaries to master competencies in new
areas like mergers and acquisitions, competition economies, corporate valuation, insolvency, treasury
management, overseas listing, labour laws etc. The idea is to enable the company secretaries to advise the
businesses to create higher standards of openness, trustfulness, clarity and accuracy. The new trends in
business environment, emerging regulatory regimes and developments on the WTO front have been the
driving force to give contemporariness to new curriculum for the company Secretary-ship course.
FINANCIAL PROFESSIONALS… 36
Of course, acquisition of newer skills is imperative for these professions to fulfil their dreams of
becoming true global players themselves. Under the WTO, talks are on to liberalise movement of
professionals across national borders for the seamless commingling of professions such as CAs, company
secretaries and lawyers. India has accorded top priority to recognition of Indian degrees by foreign
countries during multilateral and bilateral negotiations on trade in services. Concurrently, domestic laws
are being amended to allow such multi-disciplinary partnerships to flourish.
One area that is left behind, however, is the legal profession. While scores of individual lawyers as well as
law firms are struggling to keep themselves abreast of the global developments in corporate laws, the Bar
Council of India, it is alleged, is yet to play a patronising role in this regard. Resistance from BCI is also
thwarting the opening up of legal profession for foreign law firms, even though a sizeable number of
young lawyers support liberalisation. Even in the domain of judiciary, a big knowledge gap is
increasingly being felt when it comes to legal wrangles involving questions of corporate and business
practices and technological advances. There in indeed going to be a larger role for professionals in the
insolvency process, such as liquidators, administrators, valuers, turnaround advice and other supervisory
roles. At a-time corporate governance, business ethics and sustainability have assumed the centrestage in
boardroom discussion and corporate policies, holding back the reforms in regulations on these professions
is fatuous.
3. ICAI to crack down on bogus CAs
The Institute of Chartered Accountants of India (ICAI) will deal unregistered chartered accountants and
forgery of audit firms’ signatures, seals and letterheads with an iron hand. The institute is in the process of
adopting modern tools to prevent malpractices in the name of CA professionals. Sources close to the
developments revealed that ICAI has received feedback from the financial institutions and different tax
authorities about fake signatures, seals and letterheads of accounting and auditing firms.
The institute has noticed that, just like bogus medical practitioners, some unqualified accountants and
auditors are pretending to be CA professionals. Such people are using false registration numbers and
issuing fake certificates. They are taking a toll on the financial health of the nation and our image. The
institute has appointed a team to look into the matter and to come up with appropriate solutions. It is
learnt that the institute would shortly introduce monogram, unique digital identification numbers and
special certificates to prevent the misdemeanors that might affect the image of ICAI.
ICAI president Sunil Talati said that ICAI receives at least a dozen complaints a year and is taking the
matter seriously. The institute, with 1.40 lakh-registered members, has issued an open note to its members
directing them to initiate necessary action if they come across a case of fake certification. The institute
has requested its members to file an immediate complaint with the competent authority in case of alleged
offences related audit reports, balance sheets and certificates by anyone.
Unqualified persons signing documents on behalf of a member or his firm will be levied a minimum fine
of Rs 5,000 and maximum Rs 100,000 under the Chartered Accountants Act, 1949. Cases of alleged
violation of Section 24 and 26 are directly against the institute for which the institute initiates necessary
criminal actions. Meanwhile, ICAI has also decided to address issues related to unregistered qualified CA
professionals. It has issued a warning to CAs not registered with the institute. “It is advisable for the CA
to be member of the institute. It helps one to remain abreast of the changes in the profession and legal
framework. The industry should also ensure that its CA employees are members of ICAI to ensure that
the institute can initiate necessary actions in case of any misdeed.
6.1
MUTUAL FUND
Promise to realise financial goals
Global volatility may dampen India’s emergence
A significant development over the last couple of years has been the renewed optimism about India as an
investment destination among global investors. This is reflected in the strong foreign portfolio inflows ($
51.2 bn between 2003-07). In addition, India-dedicated country funds across the world manage over $ 42
billion in assets. Given its size and expected growth over the next few decades, an ‘India-strategy’ has
become a must for companies across the world with global aspirations. At the same time, inflows from
domestic investors through mutual funds, insurance (ULIPs) and direct investment have moved up
sharply. All these factors pushed the major Indian indices to historical highs.
Hence, the recent fall (Jan‘08) needs to be seen in the context of the sharp run up witnessed in the last
quarter of 2007 and increasing volatility in the global markets amidst concerns about future economic
growth. Apart from India, other markets in the region have also moved down sharply. In recent times,
investors have been ignoring fundamentals and focusing on momentum stocks, which was overdone.
The declines in India can also be attributed to technical factors such as unwinding of positions by
speculators and the triggering of margin calls, leading to a cascading effect, especially on stocks with low
liquidity. While markets have bounced back after correction, it is too early to rule out further volatility.
Volatility is an inherent part of stock market investing and investors need to keep in mind that market
gyrations tend to be more pronounced over the short term. Increased volatility over the near term could
be due to a plethora of factors – liquidity, earnings expectations, speculation… etc. However, over the
long term, equity markets tend to reflect the economic and corporate fundamentals, which continue to
remain healthy for India relative to most emerging markets.
The flip side of the strong FII inflows is that unlike in the past, Indian markets are now more integrated
with global trends and will be impacted by any contagion, at least over the near term. We expect
momentum stocks to lose ground and fundamentally sound companies will attract flows.
Net exports account for a minimal portion of the economy and domestic drivers (investment &
consumption) account for a majority of GDP growth. Hence, India is well positioned to withstand any
sharp slowdown in the global economy, compared to other Asian and emerging market countries.
Keeping in mind the expected earnings growth for the coming years, valuations at these levels appear to
be attractive. Further volatility over the near term can’t be ruled out given the global situation, but the
broad direction remains positive over the years to come.
MUTUAL FUND… 38
What should one do?
Typically, in volatile periods such as these, often-repeated questions are – Where should I invest? Should
I book profits? Should I shift my investments? While the answers vary from individual to individual, our
advice continues to be – there is no ‘right time’ to invest and it is the time you give to your investments
that matters.
Draw up a clear asset allocation plan based on your financial situation, attitudes to risk and goals in life.
Once the plan is put in place, stick to it and do not get perturbed by temporary market movements.
The focus should be on products providing exposure to quality companies with strong fundamentals.
Markets go through cycles over time and a well-crafted financial plan helps you to weather this volatility
over the long term. Research has shown that the probability of attaining financial goals is much higher by
following this approach, rather than by trying to juggle around with investments, and time market cycles.
Successful investing depends as much on the quality of the investment as on the discipline one exhibits.
After all, we invest to achieve peace of mind through realisation of our financial goals and we should not
allow the investments themselves to disturb that!
7
REAL ESTATE
Promise to mature
India is on the verge of becoming a developed country within a span of 10-15 years. This would result in
rapid urbanisation, which would lead to a demand of over 56 million new homes in urban India. Figures
released by the Union Housing Ministry suggest that there is likely to be a shortfall of close to 27 million
houses. According to a study commissioned by Asipac, this translates into a total shortage of 12.42 billion
square feet. That there needs to be a radical policy overhaul is evident from the fact that real estate prices
have been rising faster than real income. For without that it would virtually be impossible for the average
Indian to buy his/her dream house. The time has come now, when policy change is required for housing
developments, especially in view of the fact that real market lies in low cost housing, which has a share of
89% of total housing units required.
1. A bumpy ride ahead
Real estate companies mopped up the most amounts through initial public offers on stock exchanges
during 2007. Despite high interest rates, the real estate sector remained buoyant during 2007 primarily
because of the strong underlying demand, aggressive marketing, entry of new players and upsurge in
retail and multiplexes. The highest share occupied by the sector in IPO market during the year reflects
this. The property developer mobilised as much as 42.7% of the total funds through IPOs.
The year 2007 saw good times roll out for the real estate sectors. Real estate industry is changing with
large projects, and customers are now looking for product differentiation and quality. Looking ahead,
what’s in store for the property market? Will the going continue to be as good or is there a bumpy ride
ahead? Experts feel that there will be definitely be a fresh infusion of transparency in the coming year.
Major names adhering to best industry practices will be taking the lead and setting the required
benchmarks. Construction is moving up the value chain as corporates are taking up real estate business.
Investors will see realistic real estate investment options at all levels soon.
The basic real estate mantra dictates that new destinations need to come into limelight once other
locations reach their peak potential, thus offering little scope for growth. The major expansion drives in
tier II and tier III and even tier IV cities will contribute to the boom in the sector.
National regulators
Measures such as SEBI formulating the draft guidelines for Real Estate Investment Trusts (REIT) and
scraping of the Urban Land Ceiling and Regulation Act (ULCRA), were definitely some of the high
points of 2007 which are sure to reap benefits this year. A national housing regulator that regulate home
finance and promote affordable housing will in all likelihood be seen this year to bring in the much
needed professionalism, transparency and maturity in Indian real estate. It would help if the special
federal body could spell out and execute policy for the real estate industry.
General economy return
Experts share some interesting insights that the returns for players will lower down, thereby bringing the
present day ‘abnormal returns’ of 70-75% to the general economy return rates of around 20-25%. The big
bang will boil down and stabilise which will be good for the industry also in the long run.
REAL ESTATE… 40
The investor-driven market will become more consumer-driven with end users as the prime focus, mainly
due to the current paucity of 22 million households in the country. The focus of the industry will start
shifting from high-end housing to middle-income and low-income housing.
Tier III cities lead the way
Practices such as innovative financing schemes, value-for-money products, environment-friendly projects

and newer development formats will rule realty in the year ahead. Integrated townships as a self-
sufficient, work-live-play model will continue to witness major demand and development. Tier III cities
are expected to lead the way in 2008. With Tier-I and even Tier-II increasingly out of the reach of the
common man’s budget, one can still participate in emerging party zones of 2008 – the Tier-III cities!
Bottlenecks haunt the industry
But while there are quite a few positive changes that one can look forward to in the New Year, certain
challenges still remain. Experts cite the example of metros and some of the previously popular Tier II
towns that are saturating at an incredible pace. Property prices here skyrocket beyond the reach of middle-
income homebuyers. There is little scope for new market drivers such as malls to find a place in many
saturated locations – meanwhile, prices remain high. This is obviously not the best of scenarios from an
investment point of view, since optimal investment requires low-entry levels and appreciable growth
within a realistic time-frame. Clearly, supply of land will continue to pose a major challenge for the
sector. Absence of title insurance against defective titles, overheated land prices and inflated land
valuations and delivery delays are some bottlenecks that will still haunt the industry. However, with the
increased efforts to bring in transparency, these issues are sure to be resolved in the near future.
Experts feel that there is no shortage of land if initiatives were executed in a planned manner. While
housing is indeed expensive the construction cost in India is amongst the lowest in the world. The need of
the hour is to construct more houses while taking less time for construction. The industry needed to
harness technology, which is vital for mass housing development, better. Construction should be made
faster through use of appropriate technology, to reduce the inflationary impact during the gestation period.
The sector needs to make investment in the sector first.
Experts pointed out towards prefabricated housing, an advanced technology which can produce 50 houses
a day. The technology is already in use in Thailand and widely successful. India must consider such
alternatives. Besides, there be a public private partnership to meet the challenge of low-cost housing in
India. This would only be possible if both the state and the centre were supportive and engaged in policy
making, which would be conductive for industry. Even simple things like reducing the project sanction
time, which currently takes up to 33 months would help tremendously.
Making housing affordable
The government’s decision to set up a task force to identify ways of providing affordable housing is very
timely. Country-wide appreciation in real estate prices, together with high interest rates severely eroded
affordability for a greater section of the population. The shortage of nearly 25 million dwelling units is
primarily for the weaker and low income categories. This section had found housing difficult even when
real estate prices were down. At current elevated prices many in the middle class would have given up
hope of owning a house.
REAL ESTATE… 41
But even before we deliberate the policy response, it is important to define affordability. Does it mean
providing housing to the economically weaker sections in the heart of the city? Also, does it mean
outright ownership or rented accommodation? The idea should be to provide people affordable housing at
a reasonable distance from their work place. This is where public transport comes in. But the abysmal
failure of public transport systems in most Indian cities has meant that people are forced to live close to
their work place, which has created unwarranted demand pressure and high prices. The archaic land laws
that make conversion difficult and discourage land pooling have further accentuated the problem.
Therefore, what is required is an integrated land-use and transport policy.
The Jawaharlal Nehru National Urban Renewal Mission (JNNURM) has provided an incentive structure
for states to put in place relevant reforms. We need to build on that. And public transport needs to become
central to any planning. A stronger incentive for redevelopment of land is also required to motivate the
market to come up with solutions. We also need to look overseas to countries such as Singapore that have
managed to provide affordable housing to the working class by building high-rises.
8
TAX EVASION
Promise to collect taxes
Evading tax evasion
Tax evasion is a very popular crime worldwide, wherein unscrupulous entities seek to profit, by not
paying taxes to the government. It is a universal crime, with only the extent thereof varying from country
to country, depending primarily upon the efficiency of the enforcement of the tax laws therein. If tax is
the price of civilisation, its evasion is anti-civilisation, which breeds further offences. Tax evasion is not
restricted to any section of the society or business. It is a mindset prevailing amongst the large corporates,
who sit on the top of the pyramid, as well as millions of entities who lie at the bottom. The bigger ones
engineer sophisticated and gigantic evasions, while the smaller ones avoid taxes, through ingenious and
often popular modes. Such a conduct gives rise to the classic cat and mouse situation, where the
determined taxman continuously stalks and nabs the tax evader and the determined evader, like a
magician; keep conjuring newer and newer schemes to defraud the revenue.
Tax evasion is a global scourge. The “black” economy has, by some estimates, reached 10% of GDP in
advanced countries and can top 70% in developing countries. And it is getting worse. As tax evasion
becomes more pervasive, whole network to help hide incomes have appeared, making it far less likely
that those who break the law are punished. Moreover, because more people are evading taxes, tax
administrations are under increasing pressure to become more lenient or to accept bribes.
Value-added tax
One strategy for weakening ties among potential evaders is to introduce various conflicts of interests. For
example, value-added tax is designed to encourage firms to procure invoices for their inputs in order to
reduce their own tax outlays. But the results often fall short of the potential benefits, because VAT has
helped inspire tax evaders to create even stronger networks that can hide an entire chain of transactions.
VAT refund system for consumers
Another way to reward consumers for combating tax evasion is to offer subsidies. Some developing
countries have introduced a far-reaching VAT refund system for consumers who collect official receipts.
Northern Cyprus, like Turkey offers a 2.5 percentage point refund on VAT, compared to the standard
VAT rate of 13%. But such systems are burdened by large administration and compliance costs. The
process of collecting and verifying claims is time-consuming and the net-benefit for tax-payers is low.
Moreover, the methods is vulnerable to illicit practices, such as collecting receipts issued to foreigners
and students, who cannot claim their own refunds.
Monetary subsidies to consumption
Monetary subsidies to consumption are often granted in developed countries for a variety of purposes.
One such subsidy is permitting deduction of a fixed percentage of certain expenses from income tax. In
Italy, expenditures for home improvements have been partly deductible for the past ten years, mainly to
improve tax compliance by firms in the housing sector. Those who claim the home improvement
deduction must supply an invoice from the building contractor, which must specify the cost of labour.
TAX EVASION… 43
In terms of reducing tax evasion, the results have been mixed. Raw data show an increase in reported
income and the number of firms and official workers. However, taxable income in the sector is still
growing at a slower rate than gross income as measured by national accounts.
Receipt that doubles as a lottery ticket
The Chinese have devised a novel solution. To encourage customers to request official receipts as proof
of payment, some local tax authorities issue a type of receipt that doubles as a lottery ticket. The receipts
can be used as scratch cards to win small amounts of cash, but they also serve as lottery tickets for
winning large amounts. Of course, there is a risk that lotteries may diminish the moral motivation of the
citizens to obey tax laws, because compliance becomes conditional on some form of compensation. But if
lotteries fail to control tax evasion, the Chinese have another method: the death penalty.
9
ECONOMIC DIPLOMACY IN ACTION

Promise to catch-up
Indo-US relationship
The single most critical aspect of the Indo-US relationship is that the entire process has been driven by the
private sector initiatives. Both New Delhi and Washington have, in fact, been playing catch-up with the
business-led growth seen in the past two decades. This is a case where economics has overtaken
diplomatic and political considerations. Since 1991, trade between the US and India has grown six-fold
reaching $ 32 billion in 2006. US companies are engaged in India more intensely than they are elsewhere.
1. US companies in India
General Electric crossed $ 1 billion business three years ago. The company houses the second largest
research centre in Bangalore, employs 22,000 in India. India is Reebok’s fastest growing market in the
Asia Pacific. It is the third largest market for Motorola. Both Ford and GM have been jostling for space in
the fast growing Indian market. US automotive systems company Viseton is the largest exporter of
alternators out of India.
Monsanto introduced BT cotton in 2003, by 2005, nearly half of million-cotton farmers, benefited from
its use. Du Pont has its R&D centre for seed research in India. Coca-Cola exports from India tea, coffee,
PET resins, closures, crowns and labels to its global operators.
Intel has its e-biz application and networking software development centre in India. Microsoft’s
Hyderabad facility is its largest such enterprise outside of Redmond, Washington. Its tie-up with ADAG
in IPTV illustrates how fat the US brands are keen to participate in the India growth story. Among the top
20 Indian IT firms, nine are from the US and account for 37% of the turnover of the top 20 firms.
J P Morgan & Chase Co, the third largest US bank has set up $ 2 billion fund focusing on infrastructure
investment in India. Blackstone group and also Citibank group had set up $ 5 billion worth fund for India.
Even for start-ups, US venture funds have shown keen interest in India. Bessemer Venture Partners, for
instance, has set aside $ 350 million for deploying in India. Oak Investment Partners has a corpus of $ 200
million for India.
Portfolio investment from the US is no less significant. Out of 1,030 FIIs from 42 different countries, as
many as 388 FIIs are from the US. Till mid-2004, 40% of the total FII investment came from the US. In
fact, the US has been consistently providing more than 30% of the total portfolio investment in India.
2. US Brands managed to weather the diplomatic turmoil
When the brands, which define the US economic might, are euphoric, the government-to-government
relationship had to turn cordial. Thus, Indo-US relationship has managed to weather the diplomatic
turmoil of Pokharan-II with ease. And the change of governments in both the democracies did not slow
down the fast developing economic relation.
ECONOMC DISPLOMACY… 45
Since 1992 Washington has moved from Republicans to Democrats and then back to the Republicans
while India has seen all political combinations ruling in New Delhi. Despite this, the private-private
relationship matured further, into the recent closer strategic relation initiatives, including the joint-military
exercises, and the Indo-US civil nuclear deal now on offer.
3. No historical suspicion & political compulsions
The critical point is the fast emergence of the BRIC economies as the locomotives for the future global
growth. Among these fours, US ties with China and Russia have always been driven by political
considerations. Despite it being a unipolar world today their relationships continues to remain clouded by
the historic suspicion of each other. US relations with Brazil, in fact with the entire Latin America, also
remain guided largely by Washington’s domestic political compulsions.
4. Private initiatives thawed the cold ties into a warm partnership
With India, Washington never attempted to build a strong geo-strategic partnership, busy as it had been
wooing Pakistan. Curiously, the private initiatives in both the democracies thawed the cold ties into a
warm partnership. The bureaucratic and political skeptics either in Washington or in New Delhi could not
influence or impede the creation of this emerging global story.
5. Visible shift in economic balance
If the political opinion in the US has consented to offer nuclear technology to India the reason lies in the
visible shift in economic balance. The global economic powerhouse is anchoring its base away from the
Atlantic to the Indian Ocean belt – to India and China in particular. Given the deep rooted democratic
value, freedom for free enterprise and personal liberties, India is indeed a culture resembling the basic
principles of the American Constitution. The nuclear deal, thus, illustrates Washington’s keenness to
make good the lost opportunity and time.
6. Consensus to take the nation on an even faster track of growth
That the Indian government, too, has warmed up to the prospect shaking off the baggage of the past is
encouraging. What the civil society now expects from the political leadership is a consensus to take the
nation on an even faster track of growth. With the sealing and delivery of the Indo-US civil nuclear deal,
Indian leaders of varied hues will clearly demonstrate their unflinching commitment towards the
betterment of the nation’s economy. This will remain a showcase in the annals of human history – a
people to people relationship overcoming diplomatic and political humps and maturing into a deep-rooted
relation between the two global democracies.
Deal or not, US to expand ties with India: Washington would very much like to see nuclear agreement
move forward. We hope it will. We respect the needs and rights of their political leaders. But we’re ready
and able to move forward whenever they would like us to. We continue to believe it’s something that’s in
the best interests of the United States, of India, and of the broader international community in efforts to
inhibit the proliferation of nuclear technology and nuclear weapons.

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1

FINANCIAL SECTOR: TRANSFORMING TOMORROW

The market regulator: Sebi

1.1 The Investment Advisors: Sebi

1.2 NYU B-school ready for Sebi link

2.1 Pension fund should tap Street: Sebi

2.2 The sovereign wealth fund: Sebi

Sovereign funds now cherry-pick in India

3.1 QIP, preferential share routes open for PSBs

3.2 Private placement

5. RISK MANAGEMENT CONSULTANTS

5.1 The concept of self regulatory organisations: Sebi

5.2 Preventing insider trading

6.1 Simultaneous listing

6.2 Uniform minimum 25% public stake

6.3 Streamline the IPO process

6.4 Simplifying corporate bond issues

7.1 No load mutual fund

7.2 Amortisation in close-ended funds

8. TECH SAVVY PROFESSIONALS

8.1 The integrated market surveillance system: Sebi

8.2 Specialised arm to track manipulations: Sebi

8.3 The extended business reporting language: Sebi

Real Estate Investment Trust (REIT)

10. CONTINUING LEARNING CENTRES

Stock markets’ architecture

11. GLOBAL OUTLOOK

11.1 International financial architecture

• Enhancing transparency and accountability;

• Developing and assessing internationally accepted standards;

• Strengthening domestic financial systems;

• Involving the private sector; and

11.2 Tax Havens: Sebi

11.3 Terror financing: Sebi

12. ISSUES OF THE PRESENT

12.1 FII registered in non-IOSCO jurisdiction

12.2 The private equities: Sebi

1. Fastest growing IPO market

2. India’s PEG strongest among BRIC markets

3. US economy still strong & open: Rice

4. Bush reassures to banish the imminent recession

5. US economy is stronger than what it is given credit for

6. The real economy of India in good shape: FM

It’s the time to build micro-economic policies

It’s a trade between Inflation & growth

It’s a domestic consumption and investment story

It’s the highest growth in 18 years

It’s the time to increase per capita income

It’s the time to redouble efforts to maintain domestic drivers of growth

It’s the time to cut Indirect taxes on consumer durables.

1. Tata Chemicals buys US soda ash maker

2. India Inc’s Intangible assets

3. Incubation business is set to hit growth highway

A Dream machine: Nano second to none

It’s shaking the foundations of the world automobile industry

It would open new business opportunities

Making India the small car hub, a Neno step

2) Small cars should have a high share of the domestic market.

1. Forrester lower outlook for IT growth in US

2. Gartner report: India leader in offshoring

3. Equa Terra study: India favourite outsourcing destination for UK firm

4. TCS: 20% QoQ profit growth

5. Infosys: 12% QoQ profit growth

6. Wipro: 12% QoQ profit growth