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An Introduction to Indian Stock Market Index(s) —- SENSEX & NIFTY

The time I invested since my student days, to Private Corporate Sector, and presently working with a public sector autonomous body, I got opportunity to interact with good number of individuals who either were aspiring to get into a B-School so that they can land up smoothly and get absorbed in the vacant Human Resource Positions/ existing Manpower Requirements of Corporate (Private or Public) Sector.

I met one more category of individuals [relevant to this write up], who were pursuing their Post Graduate Program at some institution or Master’s Degree Program at some University to earn their PG Diploma in Business Management or Master of Business Administration Degree.

Since at this level they happen to be very new, it is not expected of them to be expert enough to understand the complexity of Industrial and Corporate Sector. Often, I noticed that at this stage, they thought that Business Administration as probably something very near to (if, not synonymous to) knowledge domains called as Economics or Commerce.

The other component that they look as business is Stock Market Index [Sensex or NIFTY], as they often see numerous articles discussing the business scenario or economic scenario and relating these to Stock Market Index in or the other context. Specially, since 2008 onwards there has been so much volatility and lack of stability in markets that now they often make headlines in Political News Papers too.

I found them, often very curious, to learn what Stock Market Index is, how it is created, why it is there, how is it a reflection of economic scenario and many more questions of the similar kind.

The problem is that majority of such individuals, even after having earned their degree or diploma sometimes, are not aware of it. There is no use deliberating on issue that why it is so, as that is not the subject of this deliberation. So coming directly to the topic, and that is to explain the heads mentioned below:

1. History of BSE                             

2. Calculation Methodology                     

3. Scrip Selection Criteria                              

4. Free Float Methodology     

5. Definition of Free Float                           

6. Major Advantages of Free Float

7. History of NIFTY                    

8. Calculation Methodology                      

9. Scrip Selection Criteria

The same follows here onwards:

HISTORY OF BSE SENSEX

SENSEX, first compiled in 1986, was calculated on a ‘Market Capitalization-Weighted’ methodology of 30 component stocks representing large, well-established and financially sound companies across key sectors. The base year of SENSEX was taken as 1978-79. SENSEX today is widely reported in both domestic and international markets through print as well as electronic media. It is scientifically designed and is based on globally accepted construction and review methodology. Since September 1, 2003, SENSEX is being calculated on a free-float market capitalization methodology. The ‘free-float market capitalization-weighted’ methodology is a widely followed index construction methodology on which majority of global equity indices are based; all major index providers like MSCI, FTSE, STOXX, S&P and Dow Jones use the free-float methodology.

The growth of the equity market in India has been phenomenal in the present decade. Right from early nineties, the stock market witnessed heightened activity in terms of various bull and bear runs. In the late nineties, the Indian market witnessed a huge frenzy in the ‘TMT’ sectors. More recently, real estate caught the fancy of the investors. SENSEX has captured all these happenings in the most judicious manner. One can identify the booms and busts of the Indian equity market through SENSEX. As the oldest index in the country, it provides the time series data over a fairly long period of time (from 1979 onwards). Small wonder, the SENSEX has become one of the most prominent brands in the country.

 

CALCULATION METHODOLOGY

SENSEX is calculated using the ‘Free-float Market Capitalization’ methodology, wherein, the level of index at any point of time reflects the free-float market value of 30 component stocks relative to a base period. The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company. This market capitalization is further multiplied by the free-float factor to determine the free-float market capitalization.

The base period of SENSEX is 1978-79 and the base value is 100 index points. This is often indicated by the notation 1978-79=100. The calculation of SENSEX involves dividing the free-float market capitalization of 30 companies in the Index by a number called the Index Divisor. The Divisor is the only link to the original base period value of the SENSEX. It keeps the Index comparable over time and is the adjustment point for all Index adjustments arising out of corporate actions, replacement of scrips etc. During market hours, prices of the index scrips, at which latest trades are executed, are used by the trading system to calculate SENSEX on a continuous basis.

 

SCRIP SELECTION CRITERIA

The general guidelines for selection of constituents in SENSEX are as follows:

  • Equities of companies listed on Bombay Stock Exchange Ltd. (excluding companies classified in Z group, listed mutual funds, scrip suspended on the last day of the month prior to review date, scrips objected by the Surveillance department of the Exchange and those that are traded under permitted category) shall be considered eligible.
  • Listing History: The scrip should have a listing history of at least three months at BSE. An exception may be granted to one month, if the average free-float market capitalization of a newly listed company ranks in the top 10 of all companies listed at BSE. In the event that a company is listed on account of a merger / demerger / amalgamation, a minimum listing history is not required.
  • The scrip should have been traded on each and every trading day in the last three months at BSE. Exceptions can be made for extreme reasons like scrip suspension etc.
  • Companies that have reported revenue in the latest four quarters from its core activity are considered eligible.
  • From the list of constituents selected through Steps 1-4, the top 75 companies based on free-float market capitalisation (avg. 3 months) are selected as well as any additional companies that are in the top 75 based on full market capitalization (avg. 3 months).
  • The filtered list of constituents selected through Step 5 (which can be greater than 75 companies) is then ranked on absolute turnover (avg. 3 months).
  • Any company in the filtered, sorted list created in Step 6 that has Cumulative Turnover of >98%, are excluded, so long as the remaining list has more than 30 scrips.
  • The filtered list calculated in Step 7 is then sorted by free float market capitalization. Any company having a weight within this filtered constituent list of <0.50% shall be excluded.
  • All remaining companies will be sorted on sector and sub-sorted in the descending order of rank on free-float market capitalization.
  • Industry/Sector Representation: Scrip selection will generally attempt to maintain index sectoral weights that are broadly in-line with the overall market.
  • Track Record: In the opinion of the BSE Index Committee, all companies included within the SENSEX should have an acceptable track record.

 

UNDERSTANDING FREE FLOAT METHODOLOGY

Free-float methodology refers to an index construction methodology that takes into consideration only the free-float market capitalization of a company for the purpose of index calculation and assigning weight to stocks in the index. Free-float market capitalization takes into consideration only those shares issued by the company that are readily available for trading in the market. It generally excludes promoters’ holding, government holding, strategic holding and other locked-in shares that will not come to the market for trading in the normal course. In other words, the market capitalization of each company in a free-float index is reduced to the extent of its readily available shares in the market.

Subsequently all BSE indices with the exception of BSE-PSU index have adopted the free-float methodology.

 

DEFINITION OF FREE FLOAT

Shareholding of investors that would not, in the normal course come into the open market for trading are treated as ‘Controlling/ Strategic Holdings’ and hence not included in free-float. Specifically, the following categories of holding are generally excluded from the definition of Free-float:

  • Shares held by founders/directors/ acquirers which has control element
  • Shares held by persons/ bodies with ‘Controlling Interest’
  • Shares held by Government as promoter/acquirer
  • Holdings through the FDI Route
  • Strategic stakes by private corporate bodies/ individuals
  • Equity held by associate/group companies (cross-holdings)
  • Equity held by Employee Welfare Trusts
  • Locked-in shares and shares which would not be sold in the open market in normal course.

 

MAJOR ADVANTAGES OF FREE FLOAT METHODOLOGY

  • A Free-float index reflects the market trends more rationally as it takes into consideration only those shares that are available for trading in the market.
  • Free-float Methodology makes the index more broad-based by reducing the concentration of top few companies in Index.
  • A Free-float index aids both active and passive investing styles. It aids active managers by enabling them to benchmark their fund returns vis-a -vis an investible index. This enables an apple-to-apple comparison thereby facilitating better evaluation of performance of active managers. Being a perfectly replicable portfolio of stocks, a Free-float adjusted index is best suited for the passive managers as it enables them to track the index with the least tracking error.
  • Free-float Methodology improves index flexibility in terms of including any stock from the universe of listed stocks. This improves market coverage and sector coverage of the index. For example, under a Full-market capitalization methodology, companies with large market capitalization and low free-float cannot generally be included in the Index because they tend to distort the index by having an undue influence on the index movement. However, under the Free-float Methodology, since only the free-float market capitalization of each company is considered for index calculation, it becomes possible to include such closely-held companies in the index while at the same time preventing their undue influence on the index movement.
  • Globally, the Free-float Methodology of index construction is considered to be an industry best practice and all major index providers like MSCI, FTSE, S&P and STOXX have adopted the same. MSCI, a leading global index provider, shifted all its indices to the Free-float Methodology in 2002. The MSCI India Standard Index, which is followed by Foreign Institutional Investors (FIIs) to track Indian equities, is also based on the Free-float Methodology. NASDAQ-100, the underlying index to the famous Exchange Traded Fund (ETF) – QQQ is based on the Free-float Methodology.

 

HISTORY OF NIFTY

S&P CNX Nifty is a well diversified 50 stock index accounting for 21 sectors of the economy. It is used for a variety of purposes such as benchmarking fund portfolios, index based derivatives and index funds.

S&P CNX Nifty is owned and managed by India Index Services and Products Ltd. (IISL), which is a joint venture between NSE and CRISIL. IISL is India’s first specialised company focused upon the index as a core product. IISL has a Marketing and Licensing Agreement with Standard & Poor’s (S&P), who are world leaders in index services.

  1. Traded value for the last six months of all Nifty stocks is approximately 44.89% of the traded value of all stocks on the NSE
  2. Nifty stocks represent about 58.64% of the total market capitalization as on March 31, 2008.
  3. Impact cost of the S&P CNX Nifty for a portfolio size of Rs.2 crore is 0.15%
  4.  S&P CNX Nifty is professionally maintained and is ideal for derivatives trading

CALCULATION METHODOLOGY

S&P CNX Nifty is computed using market capitalization weighted method, wherein the level of the index reflects the total market value of all the stocks in the index relative to a particular base period. The method also takes into account constituent changes in the index and importantly corporate actions such as stock splits, rights, etc without affecting the index value.

SCRIP SELECTION CRITERIA

The constituents and the criteria for the selection judge the effectiveness of the index. Selection of the index set is based on the following criteria:

Liquidity (Impact Cost)

For inclusion in the index, the security should have traded at an average impact cost of 0.50% or less during the last six months for 90% of the observations for a basket size of Rs. 2 Crores.

Impact cost is cost of executing a transaction in a security in proportion to the weightage of its market capitalisation as against the index market capitalisation at any point of time. This is the percentage mark up suffered while buying / selling the desired quantity of a security compared to its ideal price (best buy + best sell) / 2

Floating Stock

Companies eligible for inclusion in S&P CNX Nifty should have at least 10% floating stock. For this purpose, floating stock shall mean stocks which are not held by the promoters and associated entities (where identifiable) of such companies.

Others
a) A company which comes out with a IPO will be eligible for inclusion in the index, if it fulfills the normal eligibility criteria for the index like impact cost, market capitalisation and floating stock, for a 3 month period instead of a 6 month period.

b) Replacement of Stock from the Index:

A stock may be replaced from an index for the following reasons:

i. Compulsory changes like corporate actions, delisting etc. In such a scenario, the stock having largest market capitalization and satisfying other requirements related to liquidity, turnover and free float will be considered for inclusion.

ii. When a better candidate is available in the replacement pool, which can replace the index stock i.e. the stock with the highest market capitalization in the replacement pool has at least twice the market capitalization of the index stock with the lowest market capitalization.

With respect to (2) above, a maximum of 10% of the index size (number of stocks in the index) may be changed in a calendar year. Changes carried out for (2) above are irrespective of changes, if any, carried out for (1) above.

Always Yours — AS Usual — Saurabh Singh

 Source: Money Control Portal

PARTICIPATORY NOTES OR P-NOTES – A CHAOS; CONFUSION; TREACHERY OR SOME THING ELSE?…..A JOURNEY ….

P – NOTES – AN OVERVIEW

Perhaps, since Mr. Pranab Mukherjee, the present Finance Minister of UPA government (2009 – 2014) has presented his finance bill on March 16, 2012, the Term “P – Notes [Participatory Notes]” has transformed or metamorphosed in an instrument of mass massacre at Indian capital markets. Probably in current era we do not have Black Friday but probably a new kind of day, i.e., P – Note day, though the common term “Black Monday” is associated with these P – Notes. Even a rumor on the issue of GAAR and P – Note is good enough to create an epic blood bath in Indian Capital Markets these days.

The class of investors suffering maximum burnt are ‘the new breed of retail investors’, and I feel this to be the worst impact of the event, as this phenomenon may turn the retail investors chary and scary both. Consequently the flow of money to capital markets may decline significantly, rather it may get once again get diverted to safe heavens, i.e., to nationalized bank in India, out of which majority are in cash plus state. This mean the capital that was meant for capital markets will get locked into banks and simultaneously these banks will have to shell out more amount as interest on these deposits; without getting any returns on them (as there are no borrowers available in market, who may love to pick money from bank in the regime of sky rocketing interest rates).

Participatory notes can be found making it to news headlines every alternate day, but due to all bad reasons. They have been in the root of biggest fall witnessed at capital markets in current era. The apex regulatory bodies of Capital Market and Money Market,, i.e., SEBI and RBI are also making it to the headlines of pink paper these days, as they are found issuing notices and warnings to the parties using this instrument.

The financial analysts and experts dealing in or related to Capital Markets are neither concerned nor worried about this instrument, as Indian Investors do not and cannot use this instrument. At the same time they do not have a say in the issue, as it is the government which is supposed decide the fate of Participatory Notes. The P – Notes come into prominence when the deliberations are regarding or related to Foreign Institutional Investors [FIIs].

But what are Participatory Notes [P – Notes]

This as question is circulating in the conscious or sub-conscious part of mind of every individual or retail investor. They are a confused lot due to probably two reasons. First being that till a few months ago they had neither heard about any such instrument nor had they thought that something unknown may throw all their investments plans hay ware. Whereas, the second reason is their failure to comprehend that why it is they, who are paying the cost for something not known, and why the government and market regulators are working towards saving their interests.

An Attempt to Explain what P-Notes Are:

Just like any other derivative ‘Participatory Notes’ too are simply ‘derivative instruments’ that is used by investors not registered in India or Mauritius to trade in Indian markets

Numerous FIIs, which are neither registered nor they wish to get registered with SEBI, but are interested in getting exposure to Indian Securities, place their orders through brokerage houses that have Mauritius-based FII accounts.

These ‘P-Notes’ are generated as a consequence of the action of brokers who buy or sell securities on behalf of their clients on their proprietary account and as a result of the transaction, issue ‘notes’ in favor of such foreign investors. It is these notes which are called in profession of securities trading as “Participatory Notes”. The brokerage houses then repatriate the dividends and capital gains back to these entities, which are generated as a consequence of such trade. In this case, the broker acts like an exchange: it executes the trade and uses its internal accounts to settle the trade. They keep the investor’s name anonymous.

Somehow, anonymous investors are not liked by the regulators of Capital Markets. The recently out, Lahiri Committee Report, also lays emphasis on participatory notes, its role and functioning.

 Functioning of Participatory Notes Depicted Diagramatically

Exhibit – 1: Functioning of Participatory Notes

P-Notes, down the line exhibit properties of Hedge Funds. Although SEBI, as a regulator had issued KYC (Know Your Client) guidelines, which include that, FIIs must know all the requisites details about their client and be able to furnish the details of the same, as and when demanded or asked by the regulator, to which there should be strict compliance, failing which the regulator may sentence them to very harsh punishments or even capital punishments, as was done by SEBI in case of UBS Securities. SEBI barred UBS Securities from trading in Indian markets on this premise only as they could not succeed in furnish the information regarding their clients. Though, finally SAT reversed the SEBI’s order.

The Bigger Issue

The bigger question needs to address the debate on hedge funds and why regulators like SEBI and RBI are wary of them….. ? That will be another topic of discussion with some other headline. For the time being the deliberations stop here.

Photograph of Author or Compiler of this Post

Author

Always Yours — As Usual — Saurabh Singh

New World Order Imminent!- Anyone For A Game Of Ping Pong?

This vedio has been uploaded for my learned audiences, fans, students and scholars and rest others, who wish to understand issue of New World Order. I would top up the same by a commentry on Asian Environment Soon. Hope you find some value in it.Always Your—– As Usual — Saurabh Singh

Vodpod videos no longer available.

 

War amongst two Organs of same Body: Did Somebody Say Cannibalization: Is it Suicidal?

Market regulator SEBI has barred 14 private life insurance companies from selling unit-linked insurance plans without its approval, giving a fresh twist to the turf war between SEBI and insurance watchdog IRDA.

“We expect some companies to move the court” said the CEO of a life company. “It is unfortunate that this dispute has been allowed to reach this stage. It is time for the finance ministry to intervene” he added.

In an order signed by Prashant Sharn, wholetime director, SEBI, said, “I hereby direct the entities mentioned in this order not to issue any offer document, advertisement, brochure soliciting money from investors or raise money from investors by way of new and/or additional subscription for any product (including ULIPSs) having an investment component in the nature of mutual funds, till they obtain the requisite certificate of registration from SEBI.”

The 14 companies mentioned in this order include Aegon Religare, Aviva, Bajaj Allianz Life Insurance, Bharti AXA, Birla Sun Life, HDFC Standard Life, ICICI Prudential, ING Vyasa Life, Kotak Mahindra Old Mutual Life, Max New York Life, Metlife India, Reliance Life, SBI Life, TATA AIG Life.

A few months back, SEBI had questioned individual life companies why they were selling investment products without its approval. Companies had responded individually that insurance laws permit them to offer an investment component within a life insurance policy. They also said that they were regulated by SEBI who had cleared all these products. The life companies were supported by the market regulator, who reiterated the stand taken by life companies.

In its final order SEBI said, “I find that the entities by their own admission have stated that there are two components of ULIPSs – an insurance component where the risk on the life insurance portion vests with the insurer and the investment component where the risk lies with the investor. This establishes conclusively that ULIPSs are a combination product and the investment component need to be registered with and regulated by SEBI”

SEBI’s order has implications not only for the life insurance companies but also for their promoters who have sunk in over Rs 26,000 crore in the form paid up capital. According to analyst reports, a significant portion of the value of various companies including, ICICI Bank, Aditya Birla Nuvo, SBI Life and Bajaj Fin serve. Most of the business written by these companies is through ULIPSs. If these companies are barred from selling ULIPSs, their valuations are likely to be hit.

Atul Surana , Certified Financial Planner and MD of Catalyst Financial Planning, says, “Anybody will understand one clear partial stand of SEBI which has not included LIC’s name in the list of life insurance companies selling ULIPSs. Secondly, this sounds much like a war between IRDA and SEBI who are bent on proving their authorities. These two regulators could have sorted out the issue on regulatory process first and then issued the order!”

So far as the order’s negative implications are concerned, experts say that while they broadly agree with the concerns of the regulator, it is also important to look at some possible negative implications of this move.

For instance, this process of another regulatory approval might take away the sheen from these products. Insurance companies may not be inclined.  The Securities and Exchange Board of India’s latest order on ULIPSs is expected to have far-reaching implications for the concerned life insurance companies as well as investors. SEBI has issued a directive to all private life insurance companies not to issue any offer document or advertisement soliciting money from investors for a ULIPS or any product having an investment part in the nature of mutual funds, till they approve of the same.

This directive is the latest in a series of initiatives taken by the market regulator to put an end to all unfair market practices and make the process of investments simple, fair and cost efficient for an investor. While the immediate fallout will be negative for all the 14 private life insurance companies as ULIPSs form a major part of the new business written by these companies in the recent past, yet some financial experts feel that this is a welcome step as it puts an end to the unfair practice of pushing life insurance policies as investment products to gullible investors.

“In the current market practice investors end up paying very high charges for the investment part of these policies and are usually not aware of the expenses they are paying. This is because unlike a normal share or mutual fund investment there are usually a myriad of charges in a ULIPS product hidden behind numerous provisions and clauses which are sometimes not easy to comprehend even by insurance professionals,” says Ashish Kapur, CEO, Invest Shoppe India Ltd, adding, “hence common investors have very little chance of ever getting an accurate picture of the costs they are incurring on these insurance and investment combination products.”

Still all is not well with the SEBI order as it is believed to have some partiality besides having some negative implications to offer these products if the regulations are very tough and costly to comply with.

FRIENDLY FIRE: EXPECTED NUMBER OF CASUALTIES

SEBI’s order asking 14 insurance companies to stop selling unit-linked insurance plans has turned into full-fledged regulatory battle with the Insurance Regulatory and Development Authority issuing its own order directing the 14 companies to continue selling ULIPSs.

“After due consultation with the members of the consultative committee all the 14 insurance companies which are mentioned in the order of SEBI are directed to note that notwithstanding the said order of the SEBI, they shall continue to carry out insurance business as usual including offering, marketing and servicing ULIPSs in accordance with the Insurance Act 1938” IRDA said in a late evening order on Saturday signed by chairman J Harinarayan.

In the order IRDA observed that SEBI’s order would upset financial stability, jeorpardise policy holders interest and was prejudicial to the interest of insurers. The 14 companies mentioned in this order include; Aegon Religare, Aviva, Bajaj Allianz Life Insurance, Bharti AXA, Birla Sun Life, HDFC Standard Life, ICICI Prudential, ING Vyasa Life, Kotak Mahindra Old Mutual Life, Max New York Life, Metlife India, Reliance Life, SBI Life, TATA AIG Life.

“The IRDA Act `99 is specifically enacted to provide for an authority to protect the interests of holders of insurance policies, to regulate, promote and ensure the orderly growth of the insurance industry” IRDA said. The insurance industry was greatly relieved by IRDA’s order. “It is now between the regulators who have to settle this among themselves” said a senior industry official.

SEBI’s order has more far reaching implications than a press release or a circular. Since the order has been issued under Section 34(i) (a) and (b) of the insurance Act. IRDA has said that in the year `08-09 ULIPS policies involving a total premium of Rs 90,645 cr were in force. In fiscal `09-10 upto February 16.7 lakh policies have been sold with a premium of Rs 44,611crores. “It is also observed that the 14 insurance companies have an equity capital of Rs 16,281cr as on March 2009” IRDA said.

The insurance regulator said that observance of SEBI’s order would cause the stoppage of all renewals of insurance policies already invested by the insuring public may result in forced premature surrender of insurance policies causing substantial loss to the policyholders and to the insurers. “The effective stoppage of the sale of the products would cause a complete drying up of revenue flows to the insurance companies which could disrupt the payment of benefits on maturity, on death and on other admissible claims, putting the policyholder and the general public to irreparable financial loss. The financial position of the insurers will be seriously jeopardized thus destabilizing the market and upsetting financial stability” IRDA said.

IRDA IS FIRST TO BLOW CONCH – DIN’T YOU HEAR THE WAR CRY

SEBI’s order asking 14 insurance companies to stop selling unit-linked insurance plans has turned into full-fledged regulatory battle with the Insurance Regulatory and Development Authority issuing its own order directing the 14 companies to continue selling ULIPSs.

“After due consultation with the members of the consultative committee all the 14 insurance companies which are mentioned in the order of SEBI are directed to note that notwithstanding the said order of the SEBI, they shall continue to carry out insurance business as usual including offering, marketing and servicing ULIPSs in accordance with the Insurance Act 1938” IRDA said in a late evening order on Saturday signed by chairman J Harinarayan.

In the order IRDA observed that SEBI’s order would upset financial stability, jeorpardise policy holders interest and was prejudicial to the interest of insurers. The 14 companies mentioned in this order include; Aegon Religare, Aviva, Bajaj Allianz Life Insurance, Bharti AXA, Birla Sun Life, HDFC Standard Life, ICICI Prudential, ING Vyasa Life, Kotak Mahindra Old Mutual Life, Max New York Life, Metlife India, Reliance Life, SBI Life, TATA AIG Life.


“The IRDA Act `99 is specifically enacted to provide for an authority to protect the interests of holders of insurance policies, to regulate, promote and ensure the orderly growth of the insurance industry” IRDA said. The insurance industry was greatly relieved by IRDA’s order. “It is now between the regulators who have to settle this among themselves” said a senior industry official.

SEBI’s order has more far reaching implications than a press release or a circular. Since the order has been issued under Section 34(i) (a) and (b) of the insurance Act. IRDA has said that in the year `08-09 ULIPS policies involving a total premium of Rs 90,645 cr were in force. In fiscal `09-10 up to February 16.7 lakh policies have been sold with a premium of Rs 44,611crores. “It is also observed that the 14 insurance companies have an equity capital of Rs 16,281cr as on March 2009” IRDA said.

The insurance regulator said that observance of SEBI’s order would cause the stoppage of all renewals of insurance policies already invested by the insuring public may result in forced premature surrender of insurance policies causing substantial loss to the policyholders and to the insurers. “The effective stoppage of the sale of the products would cause a complete drying up of revenue flows to the insurance companies which could disrupt the payment of benefits on maturity, on death and on other admissible claims, putting the policyholder and the general public to irreparable financial loss. The financial position of the insurers will be seriously jeopardized thus destabilizing the market and upsetting financial stability” IRDA said.

POLICE DECIDES TO TURN SPECTOR

The finance ministry today kept a safe distance from the ongoing row between market regulator SEBI and insurance watchdog IRDA over ULIPs, saying the two regulators have to resolve the issue.

“It’s a matter between regulators; so they have to decide,” finance secretary Ashok Chawla told when sought his comments on yesterday’s SEBI decision to ban 14 life insurers from raising any more money from the unit-linked insurance plans (ULIPs) in which a portion of the premium amount is invested in stock markets, a move opposed by the insurance regulator.

The SEBI decision was taken after the market regulator had sent notices to these companies asking them as to explain why they did not take its permission to launch these schemes.

Insurance regulator IRDA is understood to have stated in its reply that regulation of ULIPs by IRDA is well-laid down and that it does not agree with SEBI contention that insurers need a certificate of registration from the market regulator for dealing in ULIPs.

The issue was also taken up at the meeting of the inter-regulatory body, the High Level Coordination Committee (HLCC). It was decided at the meeting that the two regulators should settle the issue between themselves.

Chawla said the SEBI and IRDA have not so far been able to come to any resolution. “So, SEBI has taken a legal process. He was going to be silent spectator to see the fire power of both Regulators.

 

Always Yours   — As Usual — Saurabh Singh, India

[Thanks are expressed for too many peple]

India’s Events that Covered Head Lines in 2009 Media

As Ever A Happening Year but with many Negative Shades still Promising A Bright Future Ahead

SLOWDOWN

It was a year of turbulence for India Inc and the economy. While many sectors like realty, textiles plunged into darkness on the back of a global recession, there was a ray of hope in some other sectors like the telecom. The year also saw India’s biggest corporate fraud, falling earnings, stock market crash, job losses and soaring food prices which hit the common man. However, towards the end of the year, the economy started showing signs of recovery.

The stimulus packages started giving results with the economy growing by 7.9 per cent in the second quarter of this fiscal, the highest growth in six quarters. The Indian economy is likely to grow between 7 per cent and 7.5 per cent during the current financial year despite poor performance of the agriculture sector due to drought and floods. India’s exports and industrial growth have also turned around raising hopes of a better year ahead.



Slowdown banner

Slowdown or Not

SATYAM SCAM

The year 2009 began on a shocking note with Satyam founder Ramalinga Raju admitting to siphoning off over Rs 7,000 crore (Rs 70 billion) from the company. It was the biggest corporate fraud in India. The Central Bureau of Investigation (CBI) has now pegged the Satyam fraud at Rs 14,000 crore (Rs 140 billion) instead of the Rs 7,800 crore (Rs 78 billion) that Raju had admitted to in January this year. Satyam Computer Services was founded by Raju in 1987. The crisis-hit company has been taken over by the Mahindra group and renamed Mahindra Satyam. Vineet Nayyar is the chairman of Mahindra Satyam.

Satyams ill famed directror Raju Ramlingam

Satyams ill famed Directror Raju Ramlingam

Raju, who turned 55 on September 15, has been in jail since January, 9. Raju is now being treated at the Nizam’s Institute of Medical Sciences (NIMS).  He was earlier diagnosed with Hepatitis C and heart ailments. Raju’s brother B Rama Raju, chief financial officer Vadlamani Srinivas, three other employees of Satyam and two auditors are also in jail. They have been charged with cheating, forgery and criminal conspiracy.

INFLATION SWINGS GOLD , FOOD PRICES

The food prices in India hit a 10-year high of 20 per cent for the year till December 5, due to demand-supply mismatch and worst monsoon in 37 years, which affected the kharif crop output. India’s annual rate of inflation, based on wholesale prices, rose sharply to 4.78 per cent in November from 1.34 per cent in the previous month, mainly on account of a 16.71 per cent jump in prices of food articles. Rising prices of food items, jet fuel and alcohol pushed up inflation to 5.64 per cent in January 2009.

In June, inflation in India turned negative 1.61 for the first time in 32 years but the prices of food items like fruit and vegetables, cereals and oil were still higher than last year.

A Grocery Shop Selling Pulses

A Grocery Shop Selling Pulses - Prices hit by Inflation

Meanwhile, the food inflation decreased to soften to 18.65 per cent for the week ended December 12, though essential items like potato and pulses continued to remain expensive.  Potato prices have zoomed by 136 per cent and pulses by over 40 per cent in the last one year.

MONTHLY INFLATION FIGURES

From now on, India will present inflation figures on a monthly basis instead of the existing weekly system. Analysts say since weekly data on wholesale price index-based inflation do not adequately capture the movement of prices of manufactured goods, government has to often revise the figures later.

GOLD PRICES ZOOM

Gold prices closed at all-time record of over Rs 18,000-per ten gram in November 2009 on the back of a strong marriage season demand, positive global cues and a weaker dollar. Gold touched a all-time high of Rs 18,550 per 10 gm. Gold prices rose by 13 per cent since the beginning of this November after the Reserve Bank of India announced it had bought 200 tonnes of bullion from the International Monetary Fund. Retail investment demand for gold has zoomed by 515.8 per cent to 109 tonnes in the second quarter (April-June) of 2009 from 17.7 tonnes in the first quarter. India consumes nearly 30 per cent of the world’s annual gold production. This is slated to increase by 36 per cent to 980 tonnes by 2010 according to the Indian Chamber of Commerce.

UNION BUDGET 2009 – 10

Stating that ‘aam aadmi’ is the focus of all the government programmes, Finance Minister Pranab Mukherjee proposed the following measures in Union Budget 2009-10

  • Personal income tax exemption limit for senior citizens raised by Rs 15,000.
  • The exemption limit for income tax for women raised by Rs 10,000 to Rs 190,000.
  • For all others, exemption limit raised by Rs 10,000 from Rs 150,000.
  • No change in corporate tax.
  • IT returns to be made simpler.
  • Fringe Benefit Tax abolished.
  • Minimum Alternate Tax on book profits increased to 15 per cent from 10 per cent.
  • Commodities Transaction Tax abolished.
  • 100 per cent tax deduction for donations for electoral funds to improve transparency in political funding.

One of the biggest taxation reforms in India — the Goods and Service Tax (GST) — is all set to integrate state economies and boost overall growth.

Union Minister for Finance during Budget Speech

Union Minister for Finance during Budget Speech

GST will create a single, unified Indian market to make the economy stronger. Pranab Mukherjee while presenting the Budget on July 6, 2009, said that GST would come into effect from April 2010.

DIVESTMENT – A GREAT MONEY SPINNER

Divestment is the government’s mantra to earn big bucks at a time when the country is feeling the ill-effects of the global financial crisis. Now that the Left parties are not a part of the United Progressive Alliance-II, the government has put divestment of public sector units on the fast track.

Money and its Game

Disinvestment -- A Money Spinner

The Centre is likely to prepare a blueprint for its divestment process for the next two years by the end of this financial year. At present, there are 61 unlisted profit-making public sector undertakings and 10 listed PSUs where the government could look to dilute its stake. It plans to raise over Rs 25,000 crore (Rs 250 billion) in 2009-10, which will help to cut down fiscal deficit and the expansion of public sector enterprises.

THE SPECTRUM SAGA

The much awaited auction of spectrum for 3G mobile services is likely to be delayed by more than a month and may commence from the first week of March next year. The schedule will be announced soon. The revised schedule is being worked out taking into account the outcome of last meeting of an Empowered Group of Ministers where defense ministry agreed to vacate spectrum.

Meanwhile, the spectrum row, termed as independent India’s largest financial scam, is centered on the allocation of scarce 2G spectrum at throwaway prices. Accusing Union Telecom Minister A Raja of orchestrating a Rs 60,000 crore (Rs 600 billion) scam, the opposition parties — Bharatiya Janata Party and Communist Party of India (Marxist) had asked the government to fire the minister and institute probe into the alleged irregularities.

Union Telecommunication Minister A. Raja

Union Telecommunication Minister A. Raja

The government had in 2007 recommended an ‘open license regime’. ‘Applications for telecom licenses were invited setting Oct 1, 2007, as the deadline. An artificial cut-off date, Sep 25, 2007, was created and applications received between Sep 25 and Oct 1 were summarily rejected. Rules of the game were changed after the game had begun,’ the BJP charged. The BJP alleged that ‘all friendly applicants, mostly real estate companies, had been advised to put in their applications before Sep 25’.

The licences and the spectrum allocation were then allotted to nine operators at a price of Rs 1,650 crore (Rs 16.50 billion) per operator. This price was not taken on the basis of the 2007 market value but on the basis of an auction held in 2001. The value of the licence and spectrum in 2007 could not be the same as in 2001 as the telecom market has grown phenomenally during this period. However, Prime Minister Manmohan Singh said allegations about the scam were incorrect. The prime minister had earlier expressed his reservations about inducting A Raja in the Cabinet.

MERGERS & ACQUISITION’S

Making strong inroads in the global acquisition arena, Indian companies continued to win big ticket deals and acquisitions.

BHARTI – MTN DEAL

This year Bharti Airtel was all set to take over South Africa’s MTN. It would have been India’s biggest-ever M&A deal but months later, the talks failed and the $23 billion deal was called off.

WIPRO BUYS YARDLEY’S ASIA BIZ

Wipro buys Yardley's Asia biz

Wipro buys Yardley's Asia biz

In a $45.5 million (Rs 215 crore) deal, Wipro took over 229-year-old British brand Yardley’s business in select markets including India from UK’s Lornamead Group to stretch its personal care portfolio to the premium range.

LUPIN BUYS PHILIPPINES DRUG FIRM

Drug maker Lupin acquired Multicare Pharmaceuticals Philippines Inc. for an undisclosed sum in March 2009. This is Lupin’s sixth acquisition in 18 months.

ONGC BUYS IMPERIAL ENERGY

The Oil and Natural Gas Corp took control of Imperial Energy Plc for $2.8 billion, in January 2009, after an overwhelming 96.8 per cent of London-listed firm’s total shareholders accepted its takeover offer.

MEGA INFRASTRUCTURE PROJECTS

Bandra-Worli_Sea-Bridge

Bandra-Worli_Sea-Bridge

BANDRA – WORLI SEA LINK

An engineering marvel and the first-ever open sea bridge of its kind, the Bandra-Worli Sea Link is one of the most complex and advanced construction projects ever to have been undertaken in India. The Rs 1,634-crore (Rs 16.34 billion) project of the Maharashtra State Road Development Corporation has been executed by the private engineering and construction major, Hindustan Construction Company.

DELHI METRO

Delhi Metro made further progress when a brand-new train chugged into the satellite city of Noida for the first time paving the way for thousands of commuters in east Delhi and adjoining areas to enjoy the new age transport system. The Noida corridor, built at a cost of Rs 630 crore (Rs 6.30 billion), is completely elevated and will be integrated with the existing 34.3 km Yamuna Bank-Dwarka Sector-9 segment, extending the total length of Line-3 to 47.4 km.

AIRPORTS

The state-of-the-art integrated terminal, called T3, of Indira Gandhi International Airport in New Delhi is poised to be the world’s second-largest, after Beijing in China, in terms of size. The terminal, built at a cost of Rs 8,996 crore (Rs 89.96 billion), has four boarding piers with 48 boarding gates and 78 aerobridges, which is the highest for a terminal of its size.

LONGEST FLYOVER

India’s longest flyover with a length of 11.66 km was opened in Hyderabad in October. The flyover was built over a period of about three years at a cost of Rs 600 crore (Rs 6 billion), using the latest technology of prefabricated segment and overhead grid launcher, causing minimal disruption to the traffic along the route.

INDIAN AUTO SECTOR BOOMS

It is raining cars in India. The passenger car sales in India soared 61 per cent in November on the back of improved consumer sentiment, easier finance and low sales base, according to the Society of Indian Automobile Manufacturers (Siam).

Auto companies sold 1,33,687 cars in November compared to 83,121 units in the same month last year. About 40 new car models were launched in the market over the past year. India has now become the second-largest maker of small cars, overtaking Brazil.

Nano Car from House of TATA

Nano Car from House of TATA

The world’s cheapest cars, the Tata Nano was launched in March this year. In two months, the Tatas received over 203,000 fully paid bookings amounting to nearly Rs 2,500 crore (Rs 25 billion).

BAJAJ BIDS FAREWELL TO SCOOTERS

Three months from now, Bajaj will bid farewell to scooters. From selling over a 100,000 units every month, the company now manufactures only 1,000 scooters. Bajaj Auto which revolutionized the nation’s scooter market said it will stop production of Kristal by end of the current fiscal.

AIRLINES HIT BY TURBULENCE


It was a year of losses and strikes for the airline industry. The combined losses of all airlines in 2008-09 were over Rs 8,000 crore (Rs 80 billion).  The operations of Jet Airways and Air India were hit for several days as their pilots went on strike in September to protests against a cut in performance-linked incentives.

Striking Air India Employees

Striking Air India Employees

A drop in traffic, revenues, high fuel costs further added to their woes. According to the International Air Transport Association (IATA), the Indian aviation industry, which accounts for two percent of air traffic worldwide, accounts for 11 percent of global losses.

Jet Airways, Air India, Kingfisher Airlines and low-cost carriers are now planning to hike air fares by up to 25 per cent in January.

THE RISE AND FALL OF MARKETS

The Sensex created history when it crossed the 21K-mark in January 2008, however,  a year later it crashed. In January 2009, the Sensex saw its biggest intra-day fall when it hit a low of 15,332, down 2,273 points. However, it recovered losses to some extent and closed at a loss of 875 points at 16,730 on Januray 22, 2009. On December 29, the Sensex rose by 0.24 per cent to its highest close at 17,401 in 19 months on December 29.

Sweden's Crown Princess Victoria poses with Bull

Sweden's Crown Princess Victoria poses with Bull -- Probably feeling Bullish on India

On May 18, 2009, the Sensex surged 2110.79 points from the previous closing of 12174.42 this leading to the suspension of trade for the whole day. The Sensex is expected to trade at a historical average P/E of 15 by the end of the financial 2010-11 as foreign and domestic equity analysts expect India Inc’s net profit to grow 25-30 per cent in 2010-11.

FAKE CURRENCY

The government has admitted that the problem of fake currency was ‘alarming and dangerous’ as some groups are trying to destabilize the Indian economy by injecting massive doses of counterfeit notes in the country. The secret template India uses to print currency notes has been ‘compromised’ and that is possibly why fake but real-looking Indian currency notes are being pumped in, the Central Bureau of Investigation said.

The CBI, the nodal agency for checking fake notes, has now formed a special team comprising its sleuths and officials from the Directorate of Revenue Intelligence, the Reserve Bank of India and the Central Forensic Science Laboratory to find out how and at what level the design got ‘compromised’. According to the CBI, the counterfeiters have deep knowledge about the kind of special ink, paper and other ingredients that go into the making of notes.

PLASTIC NOTES

The Reserve Bank of India is toying with the idea of replacing paper currency with polymer notes. As a pilot project, the central bank is said to have decided to introduce 100 crore (1 billion) pieces of Rs 10 polymer notes, for which the bank has floated a global tender. The bank has asked interested parties for 500 pieces of sample banknotes, before the actual global bids for the project go through.

Teller Machine Counting Currency Notes-- INR

Teller Machine Counting Currency Notes-- INR

THE COPENHAGEN SUMMIT

On December 7, officials from 192 countries attended the world’s biggest summit on climate in Copenhagen to tackle the challenges of climate change. However, the Copenhagen climate talks failed to deliver a legally binding agreement to tackle global warming. Countries like India, Brazil, China, and South Africa joined hands with President Obama to form the Copenhagen Accord.

The accord commits to cut greenhouse gas emission in each country but the Accord is not yet a legally binding treaty and failure to achieve emission reductions will not be penalized

“Climate change cannot be addressed by perpetuating the poverty of the developing countries,” Prime Minister Manmohan Singh had said. Environment Minister Jairam Ramesh told Parliament recently that the country would reduce its ‘carbon intensity’ — the amount of carbon dioxide emitted for each unit of gross domestic product — by up to 25 per cent from 2005 to 2020.

Climate change and environmental degradation will force as many as one billion people to migrate over the next four decades to Southeast Asia, central America and parts of west Africa.

Mumbai Traffic came to a Standstill following Heavy Rains

Mumbai Traffic came to a Standstill following Heavy Rains

GREAT YEAR FOR TELECOM

The telecom sector continued to ring louder in 2009. The economic slowdown did not hamper its growth. The telephone subscribers were a happy lot with a number of new mobile operators, like Tata DoCoMo, Unitech Wireless, MTS and STel, making a foray into the booming market. The intense competition led to a tariff war, with operators offering tariffs on per second basis. There was drop in roaming and STD tariffs as well. The mobile subscriber base grew from 346 million in December 2008 to 506 million by November 2009.  However, the much-awaited introduction of Mobile Number Portability and third generation (3G) mobile services has been delayed.

CRACKDOWN ON CELLPHONES WITHOUT IMEI CODE

The telecom ministry disconnected mobile phones without the IMEI (International Mobile Equipment Identity) code. Concerned over the threat to national security, the Department of Telecom had asked operators to crack down on illegal and China-made cheap handsets, which do not bear any IMEI code. It is estimated that there are about 25 million handsets without IMEI number. Delhi Police have seized over 3,500 mobile phones without unique identity numbers, mainly imported from China.

Telecom Sector Booms

Telcom Sector Boom

DUBAI CRISIS

The glittering Dubai image took a beating in 2009. The Dubai government’s announcement seeking a six-month reprieve on debt repayments sent shockwaves through the world markets, as it raised doubts over the Gulf emirate’s ability to meet its financial obligations. The Dubai government requested the creditors of Dubai World (one of three conglomerates that are backed by the emirate), to agree to a ‘standstill’ on repayments until May 30 2010.

The Dubai crisis is likely to hit exports, remittance, banking and real estate sector in India. Exports are going to be the most affected, as the UAE is now India’s largest export hotspot.

Bullion trading in Dubai is likely to be affected. The financial crisis in Dubai will not affect India but may prompt investors to take a relook at emerging markets, according to World Bank President Robert Zoellick. Indians who constituted 42.3 per cent of the UAE’s labour force in 2008 are also likely to be affected with several jobs being slashed.

Burj Tower, Dubai

Burj Tower, Dubai

NILEKANI, MURTHY IN NEW ROLE

Infosys co-founder Nandan Nilekani quit Infosys to head the government’s ambitious unique identification project (UID). Nilekani said he would start issuing the unique number by February 2011. Stating that it was a huge challenge to make sure that there is no duplication. Biometrics will be used to prevent duplication. The project estimated to cost around Rs 30,000 crore (Rs 300 billion) will offer identity card to all citizens.

Nandan Nilekani

Nandan Nilekani

MURTHY TURNS VENTURE CAPITALIST

N R Narayana Murthy now wants to help budding entrepreneurs. He has initiated the first step towards starting a venture capital fund focussed on India. The fund will encourage and support young entrepreneurs who have brilliant business ideas. The Infosys chairman offloaded 800,000 shares from his personal holding, to raise about Rs 177 crore (Rs 1.77 billion) a few days ago to start Catamaran Venture fund. The fund will primarily invest in India, though it might consider investing overseas on a ‘case-to-case basis’.

AMBANI WARS

The Ambani brothers continued to hog the limelight in 2009. Even four years after splitting the Reliance Empire, the Ambani brothers still seem to be washing dirty linen in public: the latest battle is over gas pricing. Mukesh and Anil Ambani are at loggerheads again over a gas-supply agreement that was made when the Dhirubhai Ambani-founded Reliance group was split in 2005.  The gas sale master agreement between Reliance Industries Ltd and Reliance Natural Resources Ltd states that the latter (RNRL) is entitled to be supplied 28 million cubic metres of gas a day from the Krishna-Godavari (KG) basin at a price of $2.34 per million British thermal unit (mBtu) for a period of 17 years.

Mukesh and Anil Ambani in Happier Times

Mukesh and Anil Ambani in Happier Times

Accusing RIL of using of delaying gas supply to the power projects of ADA Group and NTPC by a minimum of four years, RNRL said: “RIL is selling 40 million cubic meters of gas per day committed to NTPC and RNRL to third parties at $4.20 mmBtu and making super normal profit of over Rs 20,000 crore (Rs 200 billion), being the difference between $4.20 mmBtu and $ 2.34 mmBtu.

If you go by the NTPC draft agreement which the RNRL says is the template agreement for the supply of gas then there exists a clause that the price of the gas is subject to the government approval,” RIL’s counsel Harish Salve said.

Meanwhile, the government counsel said the issues involved were not between two parties. Gas from the Krishna-Godavari (K-G) basin was a natural resource belonging to the government. As the custodian of public interest, the government has asked the empowered group of ministers to fix an equitable price and it was doing so with the help of experts. The price of gas and other vital matters cannot be the subject of the fight between two persons.

—–Always Yours as Usual—-Saurabh

Note: The info has been posted for academic use only. This has no commercial value. Specially hosted for consumption of students so as to remain updated of major events and their Impact on markets. I acknowledge the portal Rediff.com and other media for source.

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