capitalizing on opportunities - Nirmal Bang

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Jan 15, 2016 - The main advantage of this move is ...... bonds will still have limitations, ..... As per software lobby
RNI No. MAHENG/2009/28962 | Volume 8 Issue 01 | 01st - 15th Jan ’16 M umbai | Pages 48 | For Pr ivate Circulation

E-retailers and direct sellers are cashing in on growth opportunities in these sectors in the coming years

CAPITALIZING ON OPPORTUNITIES

DB Corner – Page 5

Volume 8

Issue: 01, 01st - 15th Jan ’16

Editor-in-Chief & Publisher: Rakesh Bhandari Editor: Tushita Nigam Senior Sub-Editor: Kiran V Uchil Art Director: Sachin Kamble Junior Designer: Harshad Pawar Operations: Namrata Sabbani Research Team: Sunil Jain, Vikas Salunkhe, Swati Hotkar, Nirav Chheda

Printed and published by Mr Rakesh Bhandari on behalf of Nirmal Bang Financial Services Pvt Ltd, printed at Uchitha Graphic Printers Pvt Ltd 65, Ideal Ind. Estate, Senapati Bapat Marg, Lower Parel, Mumbai – 400013 and published at Nirmal Bang Financial Services Pvt Ltd, 19, Sonawala Building, 25 Bank Street, Fort, Mumbai-400001. Editor: Tushita Nigam

Rise Of The Renminbi The inclusion of Chinese renminbi will result in greater use of this currency in trade and finance, securing its position as a global economic power – Page 6 A Fiscal Challenge Only time will tell if the Seventh Pay Commission’s recommendation to hike pay will boost consumption or pose risk to fiscal consolidation – Page 8 Fairly Optimistic Domestic consumption and capital investment by the government are likely to be key drivers of growth – Page 12 A Much-needed Regulation A robust insolvency resolution mechanism is on the cards and will soon help creditors recover a large part of their investment so that they can re-invest this money is other businesses – Page 15 Bond Bulls In spite of heavy debt burden, bond issuances by Indian corporates in 2016 are poised to crossed the record `5 lakh crore mark achieved in 2015 – Page 18 More For Less The government aims to achieve financial inclusion and economic empowerment of the poor through the recently-launched social security schemes – Page 21 Capitalizing On Opportunities E-retailers and direct sellers are cashing in on growth opportunities in these sectors in the coming years – Page 24 Pitfalls To Avoid Avoid these five mistakes to improve your finances in 2016 – Page 28 On Guard Follow certain guidelines to avoid being tricked into buying an insurance policy that may not work best for you – Page 30 Unsung Underdogs Smaller AMCs should not be dismissed as oddballs by investors as these have given consistently better returns than their bigger counterparts – Page 32 Technical Outlook For The Fortnight Gone By – Page 35

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Value Trap The price to book value could be misleading at times, and must, therefore, be used judiciously by investors – Page 36 Mental Miscues Fallacies and illusions are aplenty in the stock markets and must, therefore, be borne in mind while making stock decisions – Page 40 It’s simplified...

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E-commerce: A Big Deal

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igital revolution in India is paving the way for e-commerce companies to thrive and flourish. Furthermore, increasing Internet and mobile penetration, growing acceptability of online payments and favourable demographics has provided the e-commerce sector in India a unique opportunity to connect with their customers, according to a study by an industry body. The direct selling market too has evolved in tandem with e-retail in the country. Our cover story in this issue explains the future prospects of e-commerce and direct selling markets in India. The other articles covered in this issue are the inclusion of the Chinese currency in the International Monetary Fund’s Special Drawing Rights (SDR) basket and what it means for the Chinese economy, the current state of the Indian economy and its growth prospects in the near future, the Seventh Pay Commission’s recommendation on pay hike and whether or not it will boost consumption or pose a risk to fiscal consolidation, the need for a strong insolvency resolution mechanism in India, the bond market in country, the recently launched social security schemes as well as the aim behind the introduction of these schemes to the masses and the mistakes an individual should avoid while planning his/her finances for the next financial year. The Beyond Basics section covers two interesting articles. While one article talks about the guidelines that individuals should follow to avoid being dragged into buying an insurance policy that may not suit their needs, the other article is on how smaller fund houses in the country are giving their bigger counterparts a run for their money. Do not miss the two articles in the Beyond Learning section. One of them explains the need to use the price to book value ratio rather judiciously, while the other one urges you to not let fallacies and illusions become the sole reason while picking stocks. And finally, the Beyond Market team wishes all its readers a very Happy and a Prosperous New YeaR!

Tushita Nigam Editor

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In the coming fortnight, market participants are advised to avoid fresh buying as the Indian stock markets look weak.

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fter holding its benchmark federal-funds rate near zero for seven years, the US Federal Reserve increased rates a quarter-percentage point, in the previous fortnight. It set a new target range for the federal funds rate at 0.25% to 0.5%, up from 0 to 0.25%.

Market participants can look forward to the quarterly results of India Inc, which the Street expects to be a mixed bag. Also, expectations for policy announcements in the Union Budget will start building up from the coming fortnight and must be watched at closelY.

Commodities continue to remain weak. In fact, Brent crude prices fell to an 11-year low recently as fresh concerns over China’s economy added to huge storage overhangs, near-record production and slowing demand, which have adversely affected prices of crude oil. The People’s Bank of China devalued its currency to a five-year low recently in an attempt to prop up its weak economy and boost exports. China has been experiencing an economic slowdown since quite some time. In the coming fortnight, market participants are advised to avoid fresh buying as the Indian stock markets look weak. They can sell around the 7,720 level on the Nifty. However, if it crosses the 7,770 level, the markets look good from a trading and investment perspective.

Sensex: 24,851.83 Nifty: 7,568.30 (As on 7th Jan’16)

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Disclaimer It is safe to assume that my clients and I may have an investment interest in the stocks/sectors discussed. Investors are required to take an independent decision before investing. Investment in equity is subject to market risk. Our research should not be considered as an advertisement or advice, professional or otherwise. The investor is requested to take into consideration all the risk factors including their financial condition, suitability to risk return profile and the like and take professional advice before investing.

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he International Monetary Fund (IMF) recently announced that the Chinese yuan or renminbi (RMB) met all the existing criteria and will be included in the Special Drawing Right (SDR) basket as the fifth currency alongside the existing currencies - the US dollar, the euro, the Japanese yen and the British pound. The new basket including the Chinese renminbi will take effect on 1st Oct ’16. The value of the SDR will be based 6

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on a weighted average of the values of the basket of currencies comprising the US dollar, euro, the Chinese renminbi, Japanese yen, and British pound. The inclusion of the RMB will enhance the attractiveness of the SDR by diversifying the basket and making it more representative of the world’s major currencies. SDR, which was created in 1969 by IMF, is the name for foreign exchange reserve assets maintained by the IMF. The value of these reserves or assets is based on the basket of few

international currencies, which it reviews every five years. The main advantage of this move is that the importance of the Chinese currency in world trade will grow. Besides, a part of world currency reserves will start to shift in the Chinese currency, which is today predominantly held in major currencies like the US dollar, euro, British pound and Japanese yen. According to the IMF, the global foreign exchange reserves rose to It’s simplified...

USD 11.46 trillion in the second quarter of 2015, from 11.44 trillion dollars in the first quarter and the total SDR allocation is 204 billion. The value of the SDR is around USD 1.4 per unit. Total SDR assets thus account for 2.4% of global reserves. The inclusion of Chinese renminbi will stabilize the currency and generate additional demand. While global central banks do not strictly follow SDR weightages in their reserves, even a part of it is estimated to generate an additional demand of 2-3 trillion for the Chinese currency over the next 10 years. Chinese yuan accounts for about 1.1% of total global foreign reserves. Its currency will become stronger like euro and yen, thus attracting more capital from global investors, which is crucial for its economic growth. This will further free up its external account, leading to an increase in confidence of the international community as well as investors. This is a good move particularly at a time when investors are looking at the Chinese economy rather apprehensively following the recent correction in commodity prices, weakening of its manufacturing sector and dependence on the external sector for economic growth. Also, China is trying to rebalance its economy. It is moving to a consumption-driven economy from an investment-driven one and is looking for higher growth for its domestic sectors. The result of this

shift in the short term is bound to be on growth as it will slow down its growth in the coming months. In fact, China devalued the renminbi recently to retain its competitiveness and keep the pace of exports. The inclusion of its currency in SDR will ease worries of global investors who are expecting further reforms and careful handling of its economy by its policymakers, owing to the growing role of the Chinese economy globally. There is also fear that sudden and abrupt changes in the value of the Chinese currency could lead to a currency war as other countries might look at this development negatively or that it may weaken their competitiveness in world trade, hurting exports and economic growth. While this move seems symbolic, its real impact will be visible over time. Because of the inclusion, China has undergone several financial reforms, making the currency more liberal, which was one of the preconditions for its inclusion in the SDR. In the past other members were apprehensive about including China in SDR. However, following reforms, their stance on the issue has softened. Also, people feel that the dominance of the US dollar will ease. Post the global financial crisis of 2008, the safety of the dollar was questioned. Also, both the Eurozone and Japan have been facing economic slowdown and their situation has worsened owing to lower interest

rates and high debt ceiling. The US, the EU, Japan and the UK account for close to 50% of the global economy. Now, following the addition of the Chinese economy, it represents over 60% of the global economy. The Chinese currency has a 10.92% weight in the basket compared to 41.73% in case of the US dollar and 30.9% in case of euro. Importantly it will have higher weight compared to the other two currencies - Japanese yen at 8.33% and British pound at 8.09%. During the previous review of SDR in 2010, the IMF said renminbi did not meet the key criteria of being a freely usable currency and was, therefore, not included in the SDR basket at that time. Renminbi only fulfilled one of the two conditions, which was its dominance in the global trade for export of goods and services. The recent inclusion shows that renminbi has improved considerably in terms of liquidity. This also marks the importance of IMF in stabilizing and supporting the global economy, particularly in view of its falling reputation. Emerging economies had been asking for reforms in the IMF and seeking greater stake in managing the global economy. The International Monetary Fund was considered to be in favour of large economies, particularly the US and Europe. This will accommodate the rising power of the Chinese economy and the global economic order and global affairS.

Blocked Currency A blocked currency, also known as a nonconvertible currency, is a currency that is not freely traded on the forex market, but mainly used in domestic transactions. Such a currency is very difficult or impossible to convert into a free trade. The restrictions are usually set by the government, and in some cases it is illegal to convert it. Blocked currencies are created by governments that wish to control its exchange and trade, without the involvement of any foreign creditor. Beyond Market 01st - 15th Jan ’16

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ill the government miss the fiscal deficit target of 3.5% of the gross domestic product (GDP) for the next financial year - 2017? Some section of the market does believe so. This is because of the overhang in the form of the seventh pay commission report that has recommended a 23.55% payment hike to 47 lakh central government employees and 52 lakh pensioners. While the government is yet to accept 8

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the suggestions of the pay commission, history has it that such recommendations are always followed by the government, albeit with minor changes. The wage hikes, that are done every 10 years, will be applicable from January ’16. If the implementation of the pay panel suggestions is delayed, hikes are paid in the form of arrears. To recall, the seventh pay commission report was submitted to the government in November. It has estimated that the wage increase is

likely to cost the government `1.02 lakh crore in 2016-2017: `73,650 crore on central budget and `28,450 crore on railway budget. The additional burden of seventh pay commission is 0.65% of the GDP. What’s more, pay hikes at the centre are often followed by pay hikes at the state levels with a lag of one or two years. Clearly the implementation of the pay commission will increase the fiscal burden of the government, both at centre and state levels. So, from where would the It’s simplified...

Financial Implications (` in crore) Pay Allowances HRA* TPTA** Other Allowances Pension TOTAL

2016-17 (Without VII CPC) 244300 12400 9900 24300 142600 433500

Source: Seventh Pay Commission Report

2016-17 (With VII CPC) Financial Impact 283400 39100 29600 17200 9900 0 36400 12100 176300 33700 535600 102100

Percentage Increase 16 138.71 0 49.79 23.63 23.55

*HRA: House Rent Allowance **TPTA: Transport Allowance

government mobilize more revenues? Will the fiscal deficit, which is the difference between what the government earns and what it spends, shoot up? Before we answer those questions, it is important to acknowledge what the other section of the market thinks of the seventh pay commission report. They view this as a fiscal stimulus by the government that will give a major consumption boost and revive the Indian economy. The article tries to explain both sides of the story. Fiscal Deficit Arithmetic The chances of breach of the 3.5% fiscal deficit target for FY17 are high. According to the fiscal consolidation plan of the government, the fiscal deficit has to be reduced from 3.9% in FY16 to 3.5% in FY17. For FY18 the target is 3%.

Therefore, in addition to the 50 basis points cut in fiscal deficit from FY16 to FY17, the government also has to absorb the 65 basis points impact due to the recommendations of the seventh pay commission. Thus, the government will have to create an additional fiscal space of 115 basis points to implement the pay panel’s recommendations, without diverting from the fiscal consolidation path. If the government delays the implementation, it will have to bear the brunt of higher interest rate and pay arrears beginning January ’16. For There are quite a few factors that might work in favour of the government to be fiscally prudent and meet the deficit target. One, the government will have to continue to cut back subsidies, as they have done in FY16. This will give them additional fiscal space.

Two, as consumption increases, growth will pick up helping government’s tax collection - direct tax (from corporate) and indirect tax (from sale of goods and services). Three, a likely goods and services tax (GST) rollout in the year 2016 will help the government to garner more tax revenue. Four, the government is on its course to abolish various tax holidays given to corporates. This will help the government mobilize more revenue. Against There are quite a few factors that might work against the government thereby making the fiscal deficit target daunting. One, with crude prices already low, there is limited benefit from crude oil drop as compared to FY16. This is the reason why the government will have to stop passing

Key Recommendations Of The Seventh Pay Commission Total increase of 23.55% recommended in pay, allowances & pensions (PAP) The minimum pay is recommended at `18,000 per month and the maximum pay at `2,25,000 per month for apex scale and `2,50,000 per month for Cabinet Secretary and others at the same level The rate of annual increment has been retained at 3% Commission recommends abolishing 52 allowances while another 36 are to be subsumed in existing allowances or in newly proposed allowances Status quo has been recommended on the retirement age of central government employees at 60 years Seventh CPC report is proposed to be implemented from 1st Jan ’16

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PAY COMMISSIONS: A BRIEF HISTORY 1st Appointment: May 1946 Filing Of Report: May 1947 Implementation: January 1946 Financial Impact (` cr): NA

2nd Appointment: August 1957 Filing Of Report: August 1959 Implementation: July 1959 Financial Impact (` cr): 39.62

3rd Appointment: April 1970 Filing Of Report: March 1973 Implementation: January 1973 Financial Impact (` cr): 144.6

4th Appointment: June 1983 Filing Of Report:3 Reports - June & December, 1986, & May 1987 Implementation: January 1986 Financial Impact (` cr): 1,282

5th Appointment: April 1994 Filing Of Report: January 1997 Implementation: January 1996 Financial Impact (` cr): 17,000

6th Appointment: July 2006 Filing Of Report: March 2008 Implementation: January 2006 Financial Impact (` cr): 22,000

7th Chairman: A K MATHUR Appointment: February 2014 Filing Of Report: November 2015 Implementation: January 2016 Financial Impact (` cr): 1,02,100

any benefit to the consumer. Instead, it will have to hike excise on petrol and diesel to fill their coffers. Two, the corporate tax, as promised by the government will have to be lowered step wise from 30% now to 25% over the next four years. This means lower tax revenue. Three, the government will have to disinvest aggressively to boost revenue, which is a challenging task. While some accounting jugglery like pushing back subsidy payments to later years cannot be wished away, it is important for the government to not cut capital expenditure to meet its deficit. Lesser investment by the government will have a negative impact on growth. 10

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Spillover On Consumption One notable impact of the seventh pay commission would be increase in consumption. Discretionary spending on auto, fast moving consumer goods, houses, white goods like ACs, washing machines, etc, will increase. This will help revive growth. It can be recalled that consumption growth, which has been the cornerstone of the Indian economy, has been erratic in the past few years due to weak monsoon, low rural wage growth and higher interest rates. Thus the pay panel recommendations, if accepted, can turn out to be a boon for the Indian economy. It helps to mention here that boost to

consumption is unlikely to be very high. This is because, unlike earlier pay commission recommendations, this time around the arrear payment is likely to be small: 3 months as against 2 years due to delayed 6th pay commission recommendations. Spending bulk money after the 6th pay commission report led to huge consumption boost, and inflation. Inflation More money chasing lesser goods leads to inflation. This is what happened in the aftermath of 5th and 6th pay panel recommendations. However, it is unlikely to be the case this time around. This is because: one, currently there is huge underutilization in the system. It’s simplified...

As consumption increases, the system has the ability to produce more, without leading to higher inflation. Two, the government is playing a key role in kick-starting investments. Higher supply will keep inflation under check. Three, lower global commodity prices will offset inflationary pressure. Fourth, interest rate in the system is higher as compared to

earlier periods, thereby consumption spending.

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In A Nutshell Not all money in the hands of the government employee and pensioner gets spent. Instead, even the savings increase. It is up to the government to meaningfully use those savings for capital formation in the economy. While past experience shows that pay

revisions boost consumption, increase fiscal burden and stoke inflation, this time around the environment seems conducive for adoption of pay commission recommendations. As things stand today, both fiscal consolidation and higher capacity expansion is the need of the hour for the Indian economy. Now, it is up to the government to adopt the recommendations of the seventh pay commission as it deems fiT.

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n 12th Dec ‘15, India’s President Pranab Mukherjee struck an optimistic note when he said that India is on its way to achieving an 8% growth in GDP (Gross Domestic Product).

The President said, “Various countries today consider India an 12

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attractive investment destination because of political stability and government’s new initiatives like Swachh Bharat, Make in India, Digital India, Skill India, etc,” while inaugurating the 185th Anniversary celebrations of the Calcutta Chamber of Commerce. The President is not alone in his It’s simplified...

optimism. A recent report by the United Nations (UN) says that India’s GDP will grow by a record 7.3% in 2016 and 7.5% in 2017. The United Nations World Economic Situation and Prospects (WESP) 2016 report says that India will be the fastest growing economy in the world in 2016 and 2017 though the global economic outlook continues to be rather bleak. If this happens India will outrun its closest rival in South Asia - China. The UN report predicts that the Chinese economy will grow by 6.4% in 2016 down from the 6.8% growth it had achieved in 2015. In 2017, the Chinese economy is expected to grow by 6.5%, a tad bit slower than India. To put things in context, the world economy is estimated to grow by 2.9% in 2016 and 3.2% in 2017. The report identified several global economic concerns such as low commodity prices, diminished trade flows, rising volatility in exchange rates and stagnant investment and productivity growth. Even amongst the BRICS nations, India is the fastest-growing economy. While China’s economy is expected to slow down, countries like Russia and Brazil are already in the middle of an economic slowdown. The UN report goes so far as to say that the ‘pivot’ of global economic growth is shifting back towards developed economies. The report says growth in developed economies will cross the 2% mark in 2016 for the first time since 2010. Goldman Sachs has gone a step ahead of the UN in its bullishness about India. A recent report by Sachs says that India’s GDP will grow by 7.9% in 2016. Goldman Sachs believes that Beyond Market 01st - 15th Jan ’16

domestic consumption and capital investment by the government will be key drivers of growth. Goldman Sachs India chief economist Tushar Poddar has said that they expect investment demand in India to improve in part due to increased government spending on infrastructure, especially on railways and highways, lower interest rates, rising FDI inflows and improvement in ease of doing business. “Higher productivity growth from improvements in technology, education and the ease of doing business can boost potential growth to 8% from FY16-17 through FY19-20,” said Poddar. Economist and UK MP Lord Meghnad Desai believes that India can indeed grow at 8% rate if it gets its policies right. “I think a growth rate of 7% to 7.5% is a default rate but the real challenge is to get 9% to 10%, which India is capable of but requires hard work. With right policies, it can easily grow at 8%,” Desai told a leading wire service. The government of India is certainly positive about achieving this growth. Recent data released by the Ministry of Finance lends credence to the government’s view. During the period between April-November ’15, indirect tax collections increased by 24% and the reason this number is important is because indirect tax collections reflect the health of a country’s economy. Foreign direct investment inflows, another indicator of economic growth, have also increased substantially by 24% to $60 billion since May, 2014. So is it time to cheer or should we be exercising caution? Opinion of experts is divided on this. There are

those who would like to err on the side of caution. A section of experts have pointed out that indicators of economic health such as an increase in indirect tax collection are mostly because of an increase in excise duty on petroleum products and service tax rate. They opine that an increase in indirect tax collections, therefore, cannot be considered as a measure of economic health. There are other numbers that paint a grim picture of the economy as well. India’s merchandise exports have declined by 17.53% over 11 consecutive months. Exports have declined by 17.53% to $21.35 billion in October ’15 from $25.89 billion in October ’14, according to data released by India’s commerce ministry. A fall in exports is never good news. Other worrying indicators are fall in passenger vehicles sales, motorcycle sales and tractor sales. Passenger vehicle sales have increased by only 3.85% between September ’14 and September ’15. Motorcycle sales are down by 4.06% during April-September ’15 when compared to the same period last year. Tractor sales have fallen by 20% between April ’15 and September ’15 when compared to the same period last year. India’s real estate sector is in the midst of a slowdown with rising inventory levels and a slowdown in new project launches. Bad debt continues to haunt banks. According to credit rating firm CARE, the non-performing assets of banks as of September ’15 are `3,36,685 crore, showing an increase of `71,000 crore. Corporate profitability is down as well and there is a reluctance on the part of Indian It’s simplified...

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entrepreneurs to invest in the country. Economists and other experts have pointed out time and again that reforms are a must if India is to sustain these growth levels. Until and unless reforms are set in motion, India’s economic growth will be on shaky grounds. Reforms in the food logistics system, labour laws and bankruptcy laws are much needed. For instance a reform in labour laws will give a push to India’s manufacturing sector, something that even the President of India has emphasized on. President Pranab Mukherjee has said that renewed focus on the manufacturing sector is needed to improve economic growth of India. A revival of India’s manufacturing sector is essential for job creation. Unfortunately, India’s job creation is

down by 43,000 as of 30th Jun ’15 from the previous quarter, according to the 26th quarterly employment survey conducted by labour ministry. This isn’t expected to change any time soon. India’s Minister of State for Finance Jayant Sinha said recently that the country would have to grow at 8% for decades for job creation to pick up. “What we are trying to do is build India’s production capacity so we can sustain high growth over long periods of time,” Sinha said at industry lobbying body PHD Chamber’s 110th annual general meeting. “This building of production capacity involves developing hard assets such as roads, ports, rail connectivity and soft assets such as skills and an innovation eco system,” Sinha said. Reforms have been stalled because

the ruling party is in minority in the upper house. If reforms continue to be stalled, it could become a hindrance to private sector investment. International ratings agency Moody’s Investors Service said in a report that reforms are needed to turn India’s “cyclical upswing in growth into a structural one.” The ruling party has failed to enact legislation on important reforms such as a unified goods and services tax and the Land Acquisition Bill. Moody’s believes these reforms are crucial to increase India’s economic growth rate. Until reforms get a boost, it is perhaps wiser to view India’s growth with caution. Though India is well placed, reforms are the much needed glue that can strengthen the growth fundamentals in IndiA.

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hen investors and creditors want to recover invested capital from an unsuccessful or failed company, chances are they will get back peanuts on their investments in the current environment. Resolutions to failed companies are slow and take several years. By then, existing capital and assets could be long gone disappearing into litigations, processes and further mis-allocation. Investors and creditors under these circumstances cannot recover, and reallocate capital to the producing

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engines of the economy. One of the keys central to a thriving capital market is its inherent ability to allocate capital efficiently to the sectors and companies that need it the most. Capital well-allocated can go a long way in improving the efficiency of companies, sectors and economy as a whole. Capital misallocation can cause losses, delays and inordinate wastage in a capital-starved nation like India. In India, a tremendous amount of capital stuck in businesses that have

closed down and ceased to function due to the absence of speedy resolution to pre-closure issues such as who gets paid and how to dispose off assets and who can claim the intellectual property. Hundreds of man hours are wasted in simply trying to dispose of assets and paying the creditors. By some estimates, over 60,000 cases are pending and in various stages of settlement for winding up companies or settling its creditors. Winding up an enterprise that has

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gone belly up can take years to settle. In the interim period, creditors and bankers often find that they can barely recover about 25% to 30% of their dues due to inordinate delays in processing the closure of firms. On the contrary, creditors in the west such as the US, can recover their dues rather quickly, which can be as much as 80% of the outstandings, thanks to the solid framework of the Bankruptcy Law. Needless to say, the freed up capital often goes towards other more productive areas, which require critical capital for innovation and growth. The lack of bankruptcy law in India deters many new entrepreneurs and financiers from funding newer ventures. Lack of new businesses stifles worker productivity, creativity and innovation, and skill development, affecting their growth in the bargain. How do banks tide over misallocation of capital? The route to avoid classifying bad loans into non-performing assets is to roll over these debts and extend their repayment periods keeping them good in the books. This sweeps the dust under the carpet because there is no quick and easy mechanism that deals with all stakeholder issues under one law. As a result, banks are straddled with more bad loans.

Under present conditions, often creditors even those secured against assets of a company, end up taking a big haircut on their investments. Sometimes more good money is put into these failing projects to revive them. But when these projects are not revived, more good money turns bad, resulting in tremendous misallocation of capital. The Problem There are many laws that deal with corporate insolvency at various stages and levels. In India, the Companies Act, 2013, Board for Industrial and Financial Reconstruction, and the Debt Recovery Tribunals are often involved in unwinding cases of companies. Most of these overlap in their jurisdiction due to which speedy resolution seems difficult for unwinding companies. Here’s where a uniform bankruptcy law steps in. In his budget speech of 2015, finance minister Arun Jaitley recognized the need for a bankruptcy law that encapsulates all aspects of unwinding a company that has gone sour, and announced a comprehensive Bankruptcy Code, in accordance with global standards. As a means to resolve issues that come with bankruptcy, this law will make it easier and quicker for investors and creditors to recover

their capital, and re-allocate the same to companies that need it. The new Bankruptcy Code proposes to replace existing corporate insolvency issues at a fundamental level involving all stakeholders. It empowers all creditors (whether secured, unsecured, domestic, international, financial or operational) to trigger resolution processes; it enables the resolution process to start at the first sign of financial distress. What’s key is that it provides for a single forum to oversee all insolvency and liquidation proceedings and enables a silent period where new proceedings do not derail existing ones. It can also replace managements during insolvency thereby maintaining the enterprise as a going concern. And it offers a time limit in which debtor’s viability can be assessed. It also lays out a roadmap for liquidation of assets. The process can get a lot easier with speedy closure and resolution of disputes under one window. Assets can be sold off quickly, debts recovered and capital deployed back into the business. In many cases, the assets sold off or disposed and older plant and machinery can be used to start new ventures. The Bankruptcy Code’s objective is to reduce the time spent on resolving

BANKRUPTCY LAWS ACROSS THE WORLD The US has a Bankruptcy Code that quickly liquidates through a popular bankruptcy law known as Chapter 7. In Chapter 11, reorganization cases are dealt with and Chapter 15 deals with cross-border insolvencies. Individual bankruptcies are dealt with separately. In the UK, after bankruptcy proceedings, there is a discharge after 12 months with part of the assets being used to pay off debts. Court-appointed administrators handle cases where companies can be turned around.

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disputes, which often takes years, and it also improves recovery of the money lent. There are various estimates which suggest that it could take 5-15 years for lenders and investors to recover their money in case of default. Bankers are delighted that such a law will speed up the process of recovery, especially in cases where banks are stuck for a number of years. Governor Raghuram Rajan has also lauded the Code saying that it will hold borrowers accountable to the banks for their loan contracts. Besides, it can go a long way in helping banks to take over botched up

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businesses, and start the unwinding process on a war footing. Rajan also said that often in the case of banks lending to corporates, it was a win-win situation for the latter and a lose-lose situation for the bank in case of failed enterprises. The draft bill sets a timeline of 180 days, extendable by another 90 days, to resolve cases of insolvency or bankruptcy. The bill envisages setting up of a bench at the National Company Law Tribunal to adjudicate bankruptcy cases. The key principles also provide for professionals outside managers in the

interim; while it also says that 75% of creditors must agree to any restructuring plan before outright liquidation. These recommendations can provide a boost to special situation funds that acquire distressed assets, besides helping financial services companies to recover dues. For Indian banks, the Bankruptcy Law will be a blessing as it will help them recover dues sooner than before. Thousands of man hours and money are spent on just dealing with issues of bad loans. A good bankruptcy law in place will pave the way for a better and healthier banking system and will eventually turn out to be a win-win for all stakeholders concerneD.

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W

hen Amtek Auto shares tanked 50% in August, after two JP Morgan Mutual Fund’s debt schemes, which had an auto component maker’s debt papers, took a hit on their portfolios, it spooked the bond market.

and equity market opportunities have turned lacklustre.

Yield premium on bonds rated below AAA spiked to an 11-week high of 54 basis points in September from as low as 31 basis points the previous month as investors asked for more for their investment in the Indian corporate debt market.

Now, credit quality issues, especially after the Amtek saga, are coming back to haunt India Inc. Also, the damp business and investment sentiment in India are not helping matters either, said experts.

While Amtek Auto has somewhat managed to wriggle out of its troubles by selling its assets, its woes mirror India Inc’s debt situation across the spectrum: Huge debt taken in an investment and capacity-building binge in the last few years are now caught in economic slowdown. Despite such hiccups, the bond market has turned into an important fund-raising avenue for corporates after funding from banks, which are sitting on a huge pile-up of non-performing assets, has dried up, 18

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Indian corporates saw the fastest increase in debt in Asia between 2012 and mid-2014, with the ones with weakest interest coverage ratio taking 20% more debt.

This is leading to rise in sales and borrowing costs of Indian corporate bonds rated below AA.

with maturities of five and six years at coupons higher than 10% in October while Adani Power paid 10.5% on such notes maturing in April ’19. Meanwhile, with the bank funding drying up - the growth pace is at a 20-year low - funds required by India Inc are huge. Indian infrastructure companies alone need to raise `47 lakh crore till March ’19, according an estimate by a ratings agency. Of this, `8.8 lakh crore has to come from corporate bonds, it estimates. In comparison, only $19 billion corporate bonds were sold by infra firms in 2014.

The yield on five-year A notes rose 30 basis points in October to 10.06% as against a decline of 22 basis points for similar-maturity AAA debt to 8.22%.

Credit rating profile is also hurting small and mid-level corporates. Many a corporate such as GVK Power, which has `23,500 crore of outstanding debt, hasn’t raised any funds through bonds as it does not have top debt ratings like Larsen & Toubro. Indian rules do not allow insurers and pension funds to invest in below AAA corporate bonds, shrinking the number of investors.

Future Retail sold bonds rated AA-

Also, most issuances are privately

The issuance of bonds rated A+ and below fell for third consecutive month in October to seven deals worth `110 crore, a fall of 97% from `3,670 crore in 45 deals in March ’15.

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placed with banks, which hold them till maturity, and little interest from individual investors has also meant little trading and price discovery THE SILVER LINING Despite the hurdles, the Indian bond market saw record issuances of over `5 lakh crore in 2015. Indian companies, for whom domestic bonds are already a key source of funding for Indian companies, issued `3.6 lakh crore of domestic bonds this year, in line with the `3.7 lakh crore a year ago. Experts see the momentum continuing in the New Year too. Trading volume has almost doubled to a monthly average of `88,600 crore this year as against `45,300 crore in 2011, according to the Securities and Exchange Board of India. That compares with about $40 billion in the US. So, how is the state of different bond market avenues available for corporate India? FOREIGN CONVERTIBLE (FCCBS)

CURRENCY BONDS

Indian issuers of FCCBs defaulted on $140 million of notes in 2015, which are about 42% of the total redemptions due. This comes on top of $105 million in default in 2014. Investors in bonds of an auto parts maker had claimed the company’s share price was inflated to trigger conditions for conversion of foreign currency debt into equity. Only one company managed to issue FCCBs in 2015 as outstanding FCCBs of Indian corporates returned 4.7% through November, compared with 12.2% for Hong Kong and 5.7% for the Asia-Pacific region. Beyond Market 01st - 15th Jan ’16

Experts said FCCB sales could pick up next year if pricing restrictions are relaxed. According to the Reserve Bank of India rules, issuers can’t sell three-to five-year debt at more than 300 basis points over the London interbank offered rate and 450 basis points for notes with tenors of more than five years. Creditors in India recover about 25.7 cents on the dollar in the 4.3 years that it takes to resolve insolvency, compared with 80.4 cents in the US after less than half that time, according to World Bank data. RATE-CUT BETS Sales of floating-rate bonds in India have almost quadrupled in 2015 as issuers feel the RBI isn’t done cutting interest rates. About `5,870 crore worth bonds linked to money-market and lending rates were sold in 2015, up from `1,580 crore in 2014. US RATE HIKE The US Federal Reserve raised rate by 25 bps, which has also dampened sentiment for investors in Indian bonds. Foreign holdings of rupee-denominated sovereign and corporate debt fell by `4,690 crore in November, the most since May. OFFSHORE BONDS Sales of Indian offshore bonds are likely to rise next year to more than $10 billion from the five year low of $9 billion in 2015 on mergers and acquisitions and refinance needs of India Inc, according to three of the top four arrangers for Indian overseas bonds in 2015. Foreign bond sales had touched a record $19.2 billion in the year 2014. With $8.5 billion of Indian overseas bonds set to mature in 2016, refinance would be one of the top reasons for

such issuances. Issuances by financial firms was the biggest in 2015 with $3.75 billion, or 41.8% of total sales, followed by energy companies at $2.67 billion (29.8%), telecom $1.3 billion (14.5%), conglomerates $650 million (7.2%), infrastructure $289 million (3.2%), real estate $200 million (2.2%), auto ancillaries $113 million (1.3%). Reliance Industries was the largest issuer of overseas bonds in 2015, raising a total of $2.18 billion, followed by Bharti Airtel at $1 billion. However such funding doesn’t come without risk. Bharti gets 68% of revenues from India, and according to S&P, rising foreigncurrency debt exposure leaves it exposed to sudden depreciation of the Indian rupee. MASALA BONDS Indian companies could raise up to $5 billion over the next three years through the issuance of offshore rupee or masala bonds, but success of the new instrument will depend on competitive pricing and attractive returns, according to ratings agency Standard & Poor’s. Masala bond is used to refer to an instrument through which Indian companies can raise overseas funds in rupees, and not foreign currency. It said masala bond issuers will seek competitive pricing and funding diversification, while investors will pursue adequate returns that factor in their estimates of currency risk. “Uncertainty about liquidity, availability of the existing option to invest in onshore rupee bonds, and currency risk could subdue investor demand. Masala bond issuances have the potential to reach $5 billion over the next two to three years if they overcome these challenges,” the ratings agency said. It’s simplified...

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Barclays Plc is more optimistic as it sees $50 billion being raised through such bonds in the next three years. India Infrastructure Finance Co and Indian Railway Finance Corp are seeking arrangers for a sale. HDFC is also planning to issue notes, while NTPC has mandated banks for an offshore bond. Issuers of such bonds will still have limitations, experts said. Yields on rupee offshore bonds are likely to be lower than rupee onshore counterparts, they said. Also, such bonds will be capped at $750 million a year per seller with a minimum maturity of five years. DIVERSE BASKET It’s not just dollars that Indian corporates are raising debt overseas. Bharti Airtel in November announced India’s first sterling bond sale since

the global financial crisis. The company is looking to raise 500 million pounds. It has already raised $6.3 billion since 2013 in notes issued in dollars, euros and Swiss francs. ICICI Bank was the last Indian borrower to issue British bonds, raising 460 million pounds in 2007. Issuers, including Housing Development Finance Corp, are planning to sell 1 billion pounds of rupee bonds to investors in London, according to the UK Treasury. Issuance across multiple currencies has helped to diversify companies’ investor base and borrow for long. JUNK BONDS Yields of dollar bonds of sub-investment grade Indian firms have spiked up to 100 basis points in over-the-counter trading in December following huge sell off in the global

junk bond markets. Mostly Indian companies whose earnings are closely linked to commodity prices were hit the most. The commodity-related debt papers of firms related to energy, metals and mining suffered. India has a sovereign credit rating of BBB-, the lowest investment grade, based on the rating issued by the top three global rating agencies - S&P, Fitch and Moody’s. The outlook on India’s rating is stable. Companies generally do not have a rating above the sovereign rating. Reliance Industries, which is rated BBB, is the only exception. Volatility in global junk bond markets could also reduce the capability of lower-rated companies to borrow overseas. Junk bond issuances by Indian firms have nearly halved in 2015, totalling about $800 million, compared with $1.5 billion in 2014.

The most intelligent strategy in Chess is to be ready with the next move. Similarly, currency trading involves moves that are a combination of knowledge and skill, backed by years of experience. Currency Derivatives Trading with us keeps you a few steps ahead, always.

EQUITIES | DERIVATIVES | COMMODITIES* | CURRENC Y | MUTUAL FUNDS# | IPOs# | INSURANCE# | DP Contac t: 022-39269600 | e -mail: [email protected] | w w w.nirmalbang.com 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400001. Tel: 3926 8600 / 01; Fax: 3926 8610 Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme related document carefully before investing. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. Through Nirmal Bang Securities Pvt. Ltd. *Through Nirmal Bang Commodities Pvt. Ltd. #Distributors investment in securities is subject to market risk. investment in securities is subject to market risk

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ear 2015 would be considered as a significant one for the Indian insurance sector.

On one hand growth crawled back on the back of positive environment, while on the other hand, the Parliament cleared the long pending Insurance Laws (Amendment) Act, 2015 (Amendment Act). The amended bill raised the ceiling for foreign investment in the insurance sector to 49% from 26% earlier. However, the announcement of various insurance schemes by the government like Pradhan Mantri Beyond Market 01st - 15th Jan ’16

Suraksha Bima Yojana (PMSBY), Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) and Atal Pension Yojana (APY) completely changed the perspective of the Indian insurance sector. In the past few years and especially FY14 and FY13, slowdown in growth, persistently high inflation and interest rates, and volatile equity markets have adversely impacted the life insurance industry. There has been a reduction in household savings as a percentage of GDP from 25.2% in FY10 to 21.9% in FY13. Financial savings have

fallen from 12% in FY10 to 7.1% of GDP in FY13. Within financial savings there has been a shift towards term deposits and a fall in the share of insurance products. The penetration of insurance is lower in India compared to other developed and developing economies. Hence, there is a significant potential for the insurance industry to grow further in the coming years. Also, the fact that India has a very low Sum Assured to GDP ratio would work in favour of the sector. India, with a ratio of 39% in 2013, significantly lags behind many It’s simplified...

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economies, for instance the US at 263% or Japan at 256%.

PRADHAN MANTRI SURAKSHA BIMA YOJANA (PMSBY)

But now things are changing for the better as several insurance players in India feel that the government’s decision to push insurance schemes across the length and breadth of the country has came as a big relief to the ailing sector.

As said earlier, PMSBY is a personal accident insurance policy that not only protects the investor’s family in the event of an accidental death but also protects him/her against loss of income due to any disability.

Once again hordes of people are opting for insurance products that offer life and health cover. Also, many are considering pension schemes. Minimal premium on these products is one of the many reasons for the interest in insurance. Pradhan Mantri Suraksha Bima Yojana is a one-year personal accident insurance scheme, renewable every year. It offers protection against death or disability due to accident. The sum assured on this scheme is `2 lakh on a premium of `12 per year. Pradhan Mantri Jeevan Jyoti Bima Yojana on the other hand is a term life insurance scheme, which is renewable every year. It offers life insurance cover for death due to any reason for a cover of `2 lakh on a premium of `330 per annum. Atal Pension Yojana is a pension scheme, which provides a monthly income when individuals no longer earn after their retirement. According to government data, around 12.32 crore people have enrolled themselves for the three schemes with 9.2 crore people in PMSBY, 2.9 crore in PMJJBY and the remaining in APY. This article attempts to explain these schemes, their benefits to investors and how they are likely to set the direction for growth in the insurance industry in the coming year. 22

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According to government guidelines, any individual between the age of 18 and 70 years and having a bank account can buy this policy from a bank. Not only public sector banks, but also private sector banks have started aggressively selling this policy in the past few months. An important feature of this scheme is that the policy pays a claim of `2 lakh if a person dies in an accident or suffers from permanent disability due to accident. The cover runs up to the age of 70. The policy is valid for one year (from 1st Jun ’15 to 31st May ’16) after which investors need to pay the premium to continue the existing policy. This scheme can be very useful for people who don’t have any accident policy from their employer or are working in an unorganized sector such as labourers who work at construction sites or drivers. Permanent disability covers loss of sight in both eyes, hands or feet. It also covers partial disability comprising loss of sight in one eye or loss of one hand or one foot. The policy does not cover temporary disabilities. The PMSBY offers a cover of `2 lakh at `12 per year. While there are several similar policies offered by other insurance players with same benefits at a premium of `150 and above, PMSBY is far ahead of the competition due to its attractive pricing. However, on account of partial disability the cover

is for an amount of `1 lakh only. PRADHAN MANTRI JEEVAN JYOTI BIMA YOJANA (PMJJBY) Pradhan Mantri Jeevan Jyoti Bima Yojana is a term life insurance scheme, which covers death due to any reason. For a sum assured of `2 lakh, the premium payable is `330 per annum by any subscriber of the policy. In the event of the death of the insurer, the sum will be paid to his/her family members. PMJJBY can be taken only through banks. Therefore, an individual desirous of availing this insurance scheme needs a savings bank account to join PMJJBY. Investors can buy PMJJYB in addition to the existing insurance as a top-up to strengthen their financial portfolios. It is a good insurance scheme for a non-earning member of the family, say a youngster who has not yet started earning. It will be administered by LIC or any other life insurance company, which is willing to offer such a product in partnership with a bank(s). It will be the responsibility of the participating bank to recover the appropriate annual premium in one installment, as per the option, from the accountholder on or before the due date through ‘auto-debit’ process and transfer the amount due to the insurance company. However, the flip side of this scheme is that the sum assured of `2 lakh is fixed and low and is insufficient for middle class individuals as they can neither increase nor decrease the sum assured. The policy is renewed every year and one has to remain cautious of the date of renewal. There is a possibility that the premium amount may change in the future. It’s simplified...

Whatever the investor’s decision, he/she has to make sure that all possible permutations and combinations are evaluated before investing in these schemes. Besides, individuals should assess their current and future family requirements, especially if they happen to be the sole bread earner for their families. ATAL PENSION YOJANA (APY) Atal Pension Yojana would provide a fixed minimum pension `1,000 to `5,000 per month starting from the age of 60. The amount of pension will depend on the monthly contribution by the employee and the age at which the employee subscribes the insurance. The government provides a grid based on current age. For example, a 25-year-old needs to pay `376 a month for a pension of `5,000.

In any case the individual will have to subscribe under Atal Pension Yojana for a minimum of 20 years. The most significant part of this yojana is co-contribution by government of `1,000 per annum or 50% of the total contribution whichever is lower, for the first 5 years if one has enrolled for the scheme before 31st Dec ’15 and are not income-tax payers. The scheme is available to all bank account holders between 18 and 40 years of age. People who are covered under statutory social security schemes, such as Employees’ Provident Fund are also not eligible for government contribution. APY will be focused on all citizens in the unorganized sector, who join the National Pension System (NPS) administered by the Pension Fund

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Regulatory and Development Authority (PFRDA) and who are not members of any statutory social security scheme. Investors need to regularly pay as discontinuation of payments will lead to freezing of their account after six months, deactivation after 12 months, and closure of the scheme after 24 months. Upon completion of 60 years, the subscribers will have to submit the request to the associated bank for drawing the guaranteed monthly pension. Exit before 60 years of age is not permitted. However, it is permitted only in exceptional circumstances, i.e., in the event of the death of beneficiary or a terminal disease. This scheme best suits investors who wish to get guaranteed pension after they retirE.

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Disclaimer: Insurance is a subject matter of solicitation. Mutual Fund investments are subject to market risk. Please read the scheme-related document carefully before investing. Security is subject to market risk. Please read the Do’s and Don’ts prescribed by Commodity Exchange before trading. The PMS Service is not offering for commodity segment. *Through Nirmal Bang Commodities Pvt. Ltd. #Distributors

Registered Office: 38-B, Khatau Building, 2nd Floor, Alkesh Dinesh Mody Marg, Fort, Mumbai - 400 001. Tel: 39268600 / 8601; Fax: 39268610, Corporate Office: B-2, 301/302, 3rd Floor, Marathon Innova, Off Ganpatrao Kadam Marg, Lower Parel (W), Mumbai - 400 013. Tel.: 39268000 / 8001 Fax: 39268010 BSE SEBI REGN No. INB011072759, INF011072759 & INE011072759, NSE SEBI REGN No. INB230939139, INF230939139 & INE230939139 DP SEBI REGN. No NSDL: IN-DP-NSDL-136-2000, CDS(I)l: IN-DP-CDSL-37-99, AMFI REGN. No. arn-49454 NCDEX REGN. NO. 00362, FMC Code-0075, MCX REGN. No. 16590, FMC Code-MCX/TCM/CORP/0490, MCX SX-INE260939139, PMS-INP000002981

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CAPITALIZING ON OPPORTUNITIES

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-commerce market is likely to grow ten-fold in the next five years to reach $100 billion on the back of increasing penetration of Internet, smartphones and the spread of digital network in rural areas, says a study. This boom will happen as broadband would take over and digital network will spread into rural areas. Mukesh Ambani recently launched Reliance Jio, the telecom arm of Reliance Industries that has got pan India 4G license. But the services are in beta phase and can be accessed by RIL employees at 1,000 locations. During the launch, Mukesh Ambani said, “India is ranked around 150 in the Internet and mobile broadband penetration out of 230 countries, Jio is conceived to change this...I have no doubt that with the launch of Jio, India’s rank will go up from around 150 to among the top ten in the next few years for Internet and mobile broadband penetration.” Currently, Bharti Airtel, Vodafone and Idea have launched their 4G services in the country. Other operators with 4G licenses are expected to join the league soon. Rising mobile Internet penetration in India clubbed with the availability of a wide variety of brands and products at the touch of a mobile screen have truly made 2015 the year of e-commerce in India.

A latest survey by e-commerce giant Flipkart revealed a comprehensive and in-depth view into what trends dominate the online retail space today. As per the survey, electronics and mobiles have emerged as the top performing categories on Flipkart’s marketplace followed by lifestyle accessories, women’s and men’s clothing. The survey was conducted across 50 million Indian shoppers and Beyond Market 01st - 15th Jan ’16

analyzed buying preferences between 1st January and 14th Dec ’15. Electronic items and mobiles were also the highest selling and searched categories in October-November for e-commerce players, as per a report by Associated Chambers of Commerce and Industry of India. The country’s e-commerce sector, which is around $10 billion (`65,000 crore) at present, can even touch $250 billion in the next ten years as digital network would spread in rural areas. “By end of the decade, by 2020, e-commerce would be $100 billion industry... Presently China has a $450 billion e-commerce (market) and India is just $10 billion. India in next 10 years, would be close to $250 billion of e-commerce,” Department of Industrial Policy and Promotion (DIPP) – Government of India, secretary, Amitabh Kant said, while releasing a report on direct selling by industry body FICCI and consultancy firm KPMG. According to Kant, the e-commerce market would be driven by the local languages and broadband Internet penetration in rural India. By 2017, India will have 350 million smartphones and it will create demand, the report said. As per software lobby Nasscom, the e-commerce industry will be a $100 billion industry by 2020. According to Rajiv Vaishnav, vice president, Nasscom e-retailing, online travel, advertisement and financial services along with mobile and Internet services would be the key drivers. He further stated the growth areas that were identified over the last 20 years were IT services, business process outsourcing and engineering services. Internet as a business model has no geographical restriction and is the only business, which can service both

domestic and international markets. Meanwhile, e-retailing and various other formats of retail such as direct selling could co-exist and grow as there are several models growing in retail across the world. “We would see several trends growing, while e-commerce has mushroomed in India recently... by 2017, we would have 500 million Indians connected to Internet and it would create huge consumer opportunity,” Kant said. India will also witness rapid urbanization and create an economy driven by the middle class. “By 2030, we would have 350 million people moving from rural to urban areas and by 2050, 700 million people would move to urban areas... by 2025, India’s middle class would drive India’s 50% economy,” said Kant. The state governments should follow the drafted guidelines on direct selling to bring clarity in the sector, Kant added. As per the report, direct selling in India has grown at a CAGR of 16% over the past five years and is presently at `7,500 crore. However, “the market grew at a lower rate of 4% in 2013-14 due to slowdown in the industry”, the report said. Currently, India is ranked around 150 in the Internet and mobile broadband penetration out of 230 countries. Direct selling, one of the oldest and traditional forms of selling, is today a successful industry operating in over 100 countries, with a market size of $180 billion. In India, the market was estimated at `75 billion (2013-14), and forms around 0.4% of the total retail sales in the country. In the last five years, the industry has recorded strong growth rates especially in the states of Assam, Delhi, Punjab and West Bengal. North India has emerged as the largest region by market size and accounted It’s simplified...

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for `22 billion in the last fiscal year. South India, which holds the second highest share of the direct selling market, was pegged at `19 billion in terms of revenue in the last fiscal. While the north east is currently the smallest market, it has recorded the highest growth rate of 14% in India with revenue of `9 billion. The growth has primarily been driven by rising income levels, high rate of urbanization and growing consumerism in the Indian states. Direct selling is a dynamic and rapidly expanding channel of distribution for the marketing of products and services. While there is no universal definition of direct selling, different countries and individuals have defined it differently. It can be broadly understood as ‘selling of goods and services to the consumers away from a fixed retail outlet, generally in their homes, workplace, etc, through explanation and demonstration of the product by the direct sellers’. Direct sales generally benefit from the explanation and demonstration of products made by an independent direct sales person to the consumer. Being a specialized channel of distribution, which is neither wholesale nor retail, it covers both business-to-business and business-toconsumers aspects. Despite its differences, in many ways, direct selling is similar to traditional consumer goods retail. In both cases, the distributors or direct sellers, can earn a commission, when the sale of the product takes place. Earning of sales commission may be based on one’s own sales as well as on the cumulative sales of the group built by the seller, similar to commissions in traditional sales environments. The direct selling industry has 26

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significantly contributed to women empowerment, skill development, technology percolation and the growth of the SMEs sector in states, besides contributing to the state exchequer. Total indirect tax contribution by direct selling industry to the government last year alone is estimated at `740 to `790 million. In addition, the industry also provides a viable means of alternative income, which promotes self-employment. Going ahead, the industry is expected to be driven by factors such as growth in consumer markets and increase in penetration to globally comparable levels, the KPMG report said. With a high rate of economic development, the consumer goods market is well developed in a majority of states. The trend of consumerism has seen growth in recent years and demand for FMCGs has grown rapidly. With plenty of opportunities for growth many direct selling companies have taken up initiatives across states in the country. Organized retail is a fast-growing sector with the development of many malls in the state. With rising demand for FMCG, the country should witness potential growth of the direct selling industry, going forward. Maharashtra has the strongest FMCG market in India. Mumbai, the financial capital of the country along with other key cities like Pune, Nashik and Nagpur, contributes substantially towards the economic growth of the state. It is one of the most industrially developed states in the country and home to most of the corporate offices of major companies. The direct selling market in Maharashtra has grown at a CAGR of 9% over the last 4 years and is approximately `7.6 billion to `7.8 billion market at

present and is dominated by Amway, Avon, Herbalife, Oriflame, etc. The direct selling industry spans across a diverse range of products. However, specialized products requiring one to one interaction and demonstration with the customers health and wellness products, cosmetics, personal care products dominate the direct selling market. Increasing coverage is an important trend. Companies are driving their retailer coverage through aggressive outlet addition. Outlet addition has evolved from an ad-hoc to a structured process. Leading players are marrying internal data with external information from a diverse range of sources to improve identification of gaps in their coverage. Companies are adding different outlet types to serve varied consumption and shopping needs. Some are adopting alternative ways to market mechanisms to serve lowthroughput or specialized channels. With the success of the industry, which relies on individuals to accomplish sales, a number of fraudulent businesses have also tried to emulate the form, but with malicious intentions and outcomes. This has impacted the industry even at the state level. The regulatory challenge is considered to be the biggest deterrent for the growth of direct selling industry in all the states. There is a need to revisit existing laws in states and bring about regulatory clarity to build an environment of trust in order to reap some of the benefits that the industry has to offer. The need of the hour is to sensitize the consumers and the stakeholders and engage in continuous discussion with various state government entities to propose appropriate legislation and represent the interests of the direct selling industrY. It’s simplified...

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t seems that year 2015 just flew past us and we are all set to enter into another year that looks at us with a lot of promise. The beginning of the year is a time to set new goals as well as look back at things that happened to us personally and professionally. Maybe there are certain lessons that 2015 has taught you and you have vowed to imbibe them and move on. Just as you embark upon a new year, we are here to give you some tips that will help you avoid financial pitfalls that will cover your back not only in 28

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the near future, but will improve the condition of your overall financial health. Here are some mistakes that you should necessarily avoid making if you intend to improve your finances in 2016.

their credit cards for just about everything. While there is no disputing its convenience, it must be borne in mind at all times that reckless use of your credit card can land you in trouble like no other.

LETTING YOUR CREDIT CARD DEBT GO OUT OF HAND

There is no harm in using a credit card provided you make small purchases and repay the outstanding amount within the billing cycle.

Plastic money, by way of credit cards, has nearly become an extension of our lives, just like our cellphones. Be it shopping at a mall or an e-commerce portal, the new generation does not hesitate to swipe

The moment you exceed your limit, you have let yourself out of control. It may seem a little over the top the first time, but soon you find that you have It’s simplified...

a huge outstanding balance that you will take a long time to repay. Besides, you will also have messed up your credit score with a large outstanding balance. If you are heading that way, let this serve as a word of caution and if you already have a large outstanding balance on your credit card, use your resources to repay your credit card debt as soon as you can in the new year. NOT PUTTING AWAY MONEY FOR RETIREMENT You are a young and happening professional firing from all barrels. You are doing pretty well for yourself and you think to yourself that you have a lot of time to think about old school things such as retirement and pension plans. But hold on! Unlike the previous generation you have a private sector job and are only too aware of the fact that your current employer or future employer will not pay you a pension! Who then will pay you in your old age? You yourself of course! That is the reason why you must invest in retirement funds right away, at the beginning of your career. Retirement plans too can be tailor-made to your needs. So, carry out the necessary research and invest in one as soon as you can, if you haven’t done so already. NO EMERGENCY FUND This is the fundamental mistake

people make with regards to a financial plan. You may have invested in various financial instruments throughout the year in 2015, but ask yourself honestly whether you have beefed up your emergency fund adequately. An emergency fund should be able to take care of your finances including all your loans and expenses for a period of at least three to six months of time. If you have ignored this kitty, make it a point to step up your savings game there. BEEN SLACK WITH PAYMENTS Whether it is the repayment of the various forms of credit you service or the payment on your bills, do not underestimate the value of timely payments. Use technology on your smart devices to set up reminders about EMI payments, premiums and even utility bills. Late payments of the credit you have availed of can be seriously detrimental to your CIBIL score. Today credit bureaus such as CIBIL take into consideration only the credit records, but the time may not be far off where they will take into account payments on other facilities such as insurance premiums and utility bills as well. So it is financially wise to step up your game as soon as you can, and never miss a single payment. NOT CHECKING YOUR CREDIT SCORE AND REPORT This is another cardinal mistake you may have made in the year gone by. It

is imperative to check your own CIBIL report and CIBIL score at least once or twice a year. Either you are confident that you have not done anything to mess up your score or you know that things are bad and thus have avoided looking at your CIBIL score and report. In either case you have been wrong. Even if you have been prudent with your finances, it is very important to take a look at your CIBIL score and CIBIL report at least once or twice a year to ensure that there are no discrepancies in your report. On the other hand if you are painfully aware of the fact that your CIBIL score may be low on account of some bad financial moves, take a look at your report to spot the exact reason of your diminished score, and work hard to do what it takes to rectify it. Knowing the exact reason and the space you have gone wrong in will help you in restoring your CIBIL score to at least the level of 750 (out of 900). A high CIBIL score today is a must in order to access timely credit at competitive rates. By following these tips and avoiding these cardinal mistakes with regards to your finances you can alter your financial health significantly. Following these tips will definitely bring in more peace of mind and spur your level of confidence. So here’s to happy and financially healthy 2016! Have a great year ahead!

Logrolling The exchange of political favours, especially among legislators who agree to support each others’ initiatives is known as logrolling. Informal agreement between legislators to vote for each others’ priorities. Logrolling occurs frequently when lawmakers, unencumbered by pressure from party leaders, push through a bill that benefits their constituencies, but is financed by all taxpayers. Popular logrolling projects include, dams, bridges, highways, housing projects and hospitals. The term originates from the early days of neighbours helping each other clear land to build homes. Beyond Market 01st - 15th Jan ’16

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nsurance is the most important financial instrument that secures the financial future of your family. Buying an insurance policy, therefore, requires careful consideration and thought, and should never be done in a hurry. As a consumer willing to buy insurance, you should ask a set of pertinent questions before you decide upon the policy that is right for you. The idea is to know about the features and benefits of the policy and make an informed choice. Here are some questions that you must necessarily ask of the agent or the advisor selling the insurance policy to you before you decide to go ahead with the purchase. Does The Agent Or The Advisor Have The Right Credentials To Suggest A Policy That Is Best Suited To Your Needs? The agent or the advisor who has approached you to sell an insurance policy must be qualified to do so in the first place. You, therefore, have every right to ask him to provide his license number as an agent and ask other details as to when it was issued and when it is set to expire. Ask him if he is a full-time or a part time agent of the insurance company that he is representing and note the details of his reporting manager of the office or the branch he reports to. Do not hesitate to ask these questions as they are not invasive or insulting to the advisor, but are necessary for you to arrive at a confident purchase decision. By assessing the credentials of your agent or advisor, you are also eliminating the risk of mis-selling or being sold an insurance product that has little relevance to your life. What Are Your Financial Needs At Present And In The Future? Beyond Market 01st - 15th Jan ’16

Buying insurance must be a need-based decision and there is no “one-size-fits-all” policy. You should, therefore, ensure that the insurance advisor has a problem-solving attitude and is asking you pertinent questions about your age, income, needs and goals for the future. If you have not given enough thought to these factors, your agent should definitely take them into account and carry out a proper analysis of your needs before suggesting a policy or policies that are best suited to meet your financial goals and take care of the financial ambitions that you harbour for your family. According to your needs in the present and in the future, the advisor must be able to come up with a policy recommendation that is best suited to your needs. What Are The Product Details And What Are The Benefits It Has To Offer? Once a need-based analysis has been carried out by your advisor and he comes up with a suitable life insurance product, here are the questions you must ask him.

you need to pay? the sum assured and benefits you will receive at the end of your policy? exclusions of the policy and what are the riders that you can opt for to make the policy more customized to your needs? These questions should be clearly answered by your advisor and spelt out in writing for your benefit. Additionally, you can also ask questions pertaining to premium payment flexibility and the facility to withdraw cash from your policy (if it is applicable).

What Are The Differentiators?

Product

The advisor who has approached you is obviously representing one particular insurer and will try and tell you that the product he is recommending to you is the best in the industry. Even if he sounds convincing to you, do ensure that he offers you a comparison with other similar products that are available from other insurance companies. A good advisor should have thorough knowledge not just about the insurance products that he is authorized to sell, but he should also have a clear idea about competition and should be able to tell you exactly what differentiates the policy he has recommended from other products in the same category from his competition. The recommendations he makes for you should be meaningful and unbiased, irrespective of competition. If you ask these questions to your advisor before buying the policy, there is a slim chance of you going grossly wrong. But if you feel that the product that you have opted for is not really apt for you, and you have been mis-sold a particular insurance policy, you can take advantage of the 15 day free-look period that every policyholder is granted. In this time frame, if you are not satisfied with the product entirely, you can return the policy to the insurance company and you will get a refund of the premium amount you have already paid, after the minimum applicable charges have been deducted. Purchase of your insurance policy is of utmost importance. Therefore, make sure you take out the time and make the effort to choose the right plan(s) that are suitable for yoU. It’s simplified...

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lobally, investors are convinced that bigger the corpus of the funds, better the returns. Unfortunately, this wisdom also holds

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true for Indian investors investing in mutual funds. When it comes to financial investing, size does matter as investors flock to fund houses that give historic superlative returns and

have thousands of crores in assets. Meanwhile, there exist some best-performing funds that continue to remain beyond the eye of investors It’s simplified...

and yet, are dark horses in an industry where success is measured in terms of assets under management (AUM) held by a fund house. Dozens of such mutual funds, usually smaller in size, are unable to match the flagrant advertising campaigns and mammoth sales forces of the ‘big brothers’ from the industry. Usually, big funds that have the backing of a solid parent company, market themselves as those that offer better infrastructure, including risk management, ably supported by superlative technology and compliance capabilities as compared to smaller funds. Such is the hold of big fund houses in the country that views of small fund managers are not even heard amidst the noise of immaterial news that is often splashed across news channels and newspapers. While established fund houses like Reliance, HDFC, ICICI Prudential, DSP BlackRock, SBI and Franklin Templeton, among others rule the roost by giving consistently good returns, there are relatively new players and funds such as Motilal Oswal, Quantum, Edelweiss and Parag Parikh Financial Advisory Services Pvt Ltd (PPFAS) that are flag bearers of small schemes with good performance in the Indian mutual fund industry. However, investors should always remember that if any scheme has managed to beat benchmark and category-beating performance over the long term, they shouldn’t ignore it simply because they have a small corpus. This is because savers who are channeled towards top-selling, blockbuster mutual funds often miss out on some of the highestperforming funds that the mutual fund industry has to offer. Beyond Market 01st - 15th Jan ’16

Should Investors Stop Buying The Biggest And Expensive Funds Reports and studies by eminent professionals show that large funds can be their own worst enemy. Many of them have become so big and burdensome that their enormity has started impacting the returns.

During volatile times if too many investors tried exiting a large fund at the same time, it could put undue pressure on the financial markets. Therefore, this is one real risk that merits closer attention. Big Gets Bigger - But Where Are The Returns?

It is a fact that mutual funds with high corpus are generally difficult to run. They are likely to trail behind their more nimble peers when the market is on the rise.

In the last one year big funds with large cap, high corpus, have given returns in the range of 2% to 3% while several others have given negative returns.

To cite an example, there are numerous funds such as Reliance Equity Opportunities Fund, HDFC Equity Fund, HDFC Top 200 and ICICI Prudential Focused Bluechip Equity fund, among others that have seen their returns falling and assets soaring. But they have over the long term given positive returns.

At the same time, a small fund like Religare Invesco Dynamic Equity Fund has given a return of 6.31% in the last one year and 18.42% in the last three years. This is not an isolated case as several other schemes from multi-cap to small-cap and mid-cap have given above average returns in the last few years.

However, if we look at some small funds, we find that they have managed to give strong returns in the last one and three years, respectively.

Indian investors also need to be a little more bold and brave while investing in mutual funds. As we all know, past performance does not determine the future performance of funds. So, investors should look at funds that despite a short history have managed to beat markets on a consistent basis. They must look at young funds, and invest in managers when they are creating their track record, rather than living off it.

Typically, large funds find it difficult to quickly change positions in their portfolios, which could have an impact their returns. There are some investment strategies that suit large funds. One of the strategies includes the “buy and hold” approach to investing in deep, liquid markets such as blue-chip shares or large sales forces and gilts. However, we do need to do a better job as an industry of bringing to the notice of investors funds that are performing effectively.

Mirae Asset is a prime example of this kind. When Mirae Asset fund was launched in 2008, investors were still under the fear of global recession. But the management team backed its fund managers and over a period of time, the fund has evolved as an alternative to big players.

Even fund managers managing large funds cannot have large exposure to a single stock as a slight correction might have a negative reaction on the fund’s performance.

Mirae Asset India Opportunities Fund, a multi-cap fund and Mirae Asset Emerging Bluechip Fund, a mid-cap fund have delivered returns of 13.63% and 23.43%, respectively It’s simplified...

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in the last five years. Investors should look beyond these blockbuster funds and consider a few undiscovered smaller gems that are generating attractive returns. These managers often invest their own capital into these new funds and, are interestingly, limiting the amount of money they are prepared to manage. Take the example of PPFAS. They have launched only one equity scheme by putting their own money into the scheme and sticking to their approach of value investing, sidelining market movements. Small Means Solid Performance? There’s a perception among Indian investors that if it is small, it cannot be good. But if we dig a little bit into the performance of smaller fund houses, investors would be in for a surprise. As mentioned earlier, various schemes (across equity, debt and hybrid) from each fund house, have beaten their respective benchmarks over a 3- and 5-year period. Many small AMCs fared surprisingly well. In volatile market conditions, fund houses such as BNP Paribas, Taurus, Quantum, Canara Robeco, Principal and Mirae Asset, among others have beaten their respective benchmarks over the rough debt and equity markets in the last five years. If we take stock of three year and five year performance of funds, we see that quite a few schemes offered by smaller AMCs figure among the top five or ten funds across equity and debt fund categories. For instance, BNP Paribas Equity Fund or BNP Paribas Long Term Equity Fund is the top ranker in the three year and five year tenure in their respective categories. Religare 34

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Invesco’s Mid Cap and Small Cap Fund and its Mid-cap Fund both figure among the top 10 funds in the mid- and small-cap categories over five years. CanRobeco Emerging Equities and PPFAS have also delivered returns of 10% in the last one year. Smaller mutual funds could have also had arrangements that limited the impact of redemption on performance during times of crises as compared to big fund houses that can impact the net asset value (NAV) of the scheme. Furthermore, it is likely that smaller hedge funds have less beta, or market risk, within their portfolios. It Is Not Fearful However, despite their positive performance, they have not been able to garner assets. But investors must be wondering if good returns automatically lead to inflows from investors. Well, if that is your worry, then let it be known that flows don’t always follow performance. The biggest fear in the mind of investors is trust. Investors think small asset management companies (AMC) would become victims of consolidation or ownership change as was visible when in the past several foreign as well as domestic players exited the Indian markets for a number of reasons. Despite delivering good returns, some AMCs can lose out in the AUM race either because they do not actively woo distributors or most large distributors don’t consider schemes below a certain size. In spite of being around since 2006-07 and delivering good returns across schemes, Quantum AMC, which uses an all-direct model, manages under `1,000 crore of assets under management (AUM) across all

its schemes. But retail investors should not lose out on the chance to own a good scheme that tops its category just because it comes from a small AMC. Investors should also remember that players that have sold off their business in India were not small players (Fidelity, Standard Chartered, Morgan Stanley and AIG) but they had a fairly decent market share in spite of cut-throat competition of gathering assets. Therefore, ownership change is as much of a risk with a larger AMC as it is with a smaller one. As such changes in any case cannot be predicted, and investors do get an exit option when fund ownership changes, it would be best not to worry too much about this factor when selecting your funds. Rather, you as an investor must base your investment decision only on the performance of a mutual fund scheme under consideration. In A Nutshell Mutual fund houses that were launched only a decade back like Quantum, Mirae, Motilal Oswal and the one recently, Parag Parikh Mutual Fund, have opted for niche business models that focus on a single category of funds. They have resisted rolling out an unending stream of new fund offers (NFOs) and have focused instead on delivering good performance on the handful of schemes that they do manage. PPFAS looks at value investing as does Motilal Oswal AMC. For bigger fund houses at any point in time, it will have a few schemes performing well enough to be showcased to investors. But for a smaller AMC with just a few schemes, stakes are much higher. Smaller AMCs have to perform and deliver or say goodbye to their businesseS. It’s simplified...

TECHNICAL OUTLOOK FOR THE FORTNIGHT

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echnically, the Nifty is trading below the 50-day moving average (DMA), i.e. below the 7,873 level, which indicates a cautious view. An interesting observation on the weekly chart is that the Nifty is trading in the downward channel, indicating a short-term bearish view. Also, the Nifty is taking a strong support of 50% Fibonacci Retracement i.e. 7,550 level. It has been noticed that the Nifty had almost made the double bottom near the same level and bounced back to rally towards 7,950-7,980 levels. Yet, it somehow failed to give the breakout of the 8,000 psychological mark. Taking into consideration the above technical formation, we believe that the Nifty may not give a smooth rally in the northward direction unless and until it doesn’t achieve a breakout of the 8,000-mark. On a smaller degree, the daily chart clearly indicates that the Nifty is on the verge of making the Right Shoulder of the Inverse Head and Shoulder Pattern. The Left Shoulder bottom was formed near 7,700 level, which indicates that the Nifty may also form the Right Shoulder Bottom in the range of 7,700-7,720 levels and may bounce back towards 7,960-7,980 levels, supported by the Neckline of Inverse Head and Shoulder pattern.

slightly turned cautious. But the overall media trend remains positive. Looking at the chart formation, we believe that the Nifty may continue its range-bound trading session with an immediate support of 7,700. Any move below this level, may drag the Nifty towards 7,600-7,550, whereas resistance is at 7,980. Any move above the same, may take the Nifty towards the 8,100 mark. The Bank Nifty is trading in lower top-lower bottom formation, indicating a potential downside. The Bank Nifty has immediate resistance around the 17,100 level on the upside. There is an important support at 16,620-16,400 levels. The Bank Nifty faces immediate resistance around the 17,100 level on the upside and on a decisive close above, market participants can expect it to rally to 17,570/17,900 levels. On the Nifty Options front for the January series, the highest OI build up is witnessed near 7500 Put strike, whereas on the Call side, it is observed at the 8,200 level. We believe the market will remain range-bound in the month as well with strong resistance at 8,000 and 8,200 levels. We expect the market to take support at the 7,500 level. India VIX, which measures the immediate

30-day volatility in the market, remained in the range of 13-17 levels. Going forward, we believe VIX will remain range-bound with most major events priced in. The Put Call Ratio-Open Interest (PCR-OI) for Nifty Options has been in the range of 0.75-0.90 in the month of December and continues to remain below 1 level, implying a negative undertone in the market. OPTIONS STRATEGY NIFTY LONG STRADDLE It can be initiated by ‘Buying 1 lot 7800 CE (`119) and buying 1 lot 7800 PE (`120) of the January series’. The net combined premium outflow comes around `239, which will also be the maximum loss for the strategy. The strategy will break even above 8,039 or below the 7,561 level. The maximum profit for the strategy will be unlimited. We expect the Nifty to test its support as well as resistance in this month. So, if the Nifty moves towards 7,500 or above 8,000, the strategy would give gains. One can book profits if the total premium comes in the range of `310 `330 points. One should keep a stop loss of 50 points premium or when the total premium reduces to 190.

Nifty Daily Chart

On the flip side, if the Nifty fails to hold the 7,700 mark, then the Inverse Head and Shoulder pattern will not form and the Nifty may drag towards 7,600-7,550 levels. In the coming days 7,700 will act as a crucial support level, which is likely to be the make-or-break level. The overall short-term trend has Beyond Market 01st - 15th Jan ’16

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f late high expectations are moderating as recovery in earnings cycle is getting delayed. Also, hopes that the new government will change the face of India are looking

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distant, coupled with limited room for the government to speed up spending. In addition to this, global slowdown, lower commodity prices and exports growth have led to moderations, which is showing in the share prices.

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From the highs of February ’15, stocks are down across the board, particularly in the small-cap and mid-cap space. Due to the correction, certain stocks are far more attractive than they were in the past. While there It’s simplified...

are stocks available at bargain prices and some of the traditional valuation matrixes such as price to earnings ratio and price to book value can be helpful, investors need to be cautious in the current environment. It is a proven strategy that if you invest in some of the stocks that are trading below their book value, then the chances of making higher returns are high. Price to book value is an old valuations technique, which most of the investors are well aware of. While one might know its advantages, today let us discuss why and when the price to book value does not work, how investors can avoid falling into the trap of low price to book value and thus make the best use of this ratio, which is not just about a number but much beyond. WHEN AND WHY DOES A BOOK VALUE NOT WORK Case 1: When The Company Has A Huge Contingent Liability Today, most companies have contingent liabilities in their books. Contingent liabilities are liabilities outside the book and not recognized as liability. Things like corporate guarantee, possible future damages, bank guarantee, lawsuits and others may be huge in terms of the amount. Yet, they may be sitting outside the books of the company. Particularly in the current environment where related party transactions and business activities are high, these liabilities need to be looked at differently. A contingent liability may not actually become real. But a high component of contingent liability in the books is certainly a cause of worry. A contingent liability, like a bank guarantee given for a distressed company, can be revoked by the bank, Beyond Market 01st - 15th Jan ’16

in which case the burden of the same could come into the books of the guarantor thus hitting its balance sheet and the book value. The actual impact of such liabilities can lower the book value, which may be looking good without accounting for such liabilities. Case 2: Is The Company Sitting On Huge Intangibles? A book value, which is well supported by hard assets compared to a book value, which is supported by intangible assets such as goodwill, trademark, patents, needs to be looked at differently. In bad times, things like brand name and goodwill have no real value. Many companies have seen their prices falling below the book value. And this is one reason that has been common in some of these companies. At times like this, markets do not put much value on intangibles, in which case the prices can go below the book value. In case of hard assets such as plant and machinery or a road project, it is hard to believe that these assets can become zero overnight. Even today despite huge stress in many of the sectors, companies which have hard assets are able to survive. Many companies have put their road projects, wind projects, cement plants and additional land bank on sale to reduce their debt. On the other hand we have companies, which have burnt cash in their businesses and left with no assets, finding it difficult to survive. If a large component of the book value is attributed to hard assets or the assets that can realize value like investments and cash in the books, it will be able to protect book value to that extent.

Case 3: When A Large Part Of The Liability Is Shifted To The Future Companies often shift their immediate liabilities to the future to shore up their accounts or profitability. For instance many companies in the infrastructure and power sector resort to capitalizing interest costs, which is actually shown as debt in the balance sheet instead of deducting it from the profit and loss account. It is possible that had the company charged the interest cost to profit and loss account it might have reported losses, which would have reduced the book value. Banks are shifting some of their provisioning requirements to the future while restructuring or resorting to some accounting or business practices that allow them to show a healthy book value. In case of some of the listed banks, the value of their stressed accounts is greater than their net worth, which means that if the banks write them off today, they will have no net worth or book value. A number of banking stocks, particularly in the public sector space, are trading below their book value. While a section of the market will say that they are attractive, a look at the real impact of the future provision requirements will actually show an inflated book value. In cases like this, one needs to recompute the historical book value with future liabilities. Case 4: When Companies Are Going To Make Losses In The Coming Years It is quite obvious that companies will expect losses in the current environment. Companies which are under stress because of external or internal factors are expected to report losses. A profit-making company, It’s simplified...

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which suddenly reports losses, could give a big surprise to the market. Losses will reduce the book value. On the one side, the reported book value will look very attractive, but on the other side if this book value is adjusted for the impending losses, the story could be different. Reported profits after adjustments or the remaining profit after distribution of dividend area added back to reserves also known as retained earnings, increases the book value. However in the event of losses, these same reserves, which belong to shareholders, get reduced or reduce the book value of the company to that extent. In fact many listed Indian companies owing to the losses incurred in the past are currently having a negative net worth, which essentially means that the company has a negative book value. In such cases, the book value of the company loses its relevance. Not just historical, even while looking at the current book value of the company, investors should adjust these book values in line with possibilities of losses which can be a result of many other things, especially assets write off and losses in subsidiaries, among others. Case 5: Is There A Huge Risk Of Dilution? Equity dilution is another risk to the book value. If there are 100 outstanding shares in a company and supposing the company has to issue more shares during the year, let us assume another 50 shares, then the ownership of the existing shareholders will get diluted to that extent. And thus, the share of earnings for each of the shareholders will reduce. Also, it is quite possible that the book value might fall if additional shares issued are at cheaper 38

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valuations. In certain cases, companies issue future equity warrants, which might get due for conversion into equity at the time of the due date. In such cases, the book value of the company will reduce because of additional shares that are being issued. In the current environment, there are many stressed companies, which are looking to raise equity and ready to dilute equity at substantially lower valuations. In fact the prices are so low that even a small equity fund-raising will meet with huge equity dilution. Effectively investors need to take care of possible dilutions, which might cause a lower book value. So while, the reported book value will look higher, the actual book value could be different or lower. Case 6: Are Assets Shown In The Business Overstated? There are cases when assets are overstated in the books, which is when the market price of the assets are not truly reflected in the books. Inventory for instance in the case of companies in the commodities segment could see a huge reduction in value and at the same time look more in the books of the companies which is when we are looking at the historical value of book value. For instance in the commodities space for metals, oil & gas, it is possible that the book value of FY15 is higher because of the value of inventory that is shown in the books. In real estate for instance, the value of inventory that is land and others might depreciate, which may or may not get reflected in its historical book value. Huge depreciation in assets, particularly inventory, can lower the

book value. Case 7: When A Company Has A Huge Debt Debt in general is risky. In good times it can boost profitability and earnings of the company but in bad times it can hit even the strongest. Very few companies and industries have the ability to service debt in bad times. In fact in the current environment all major Indian business groups are facing huge financial challenges because of debt. While debt does not hit equity, it erodes equity at times if the company is not able to service its debt. Things like frequent dilution, capitalization of interest cost and frequent increase in debt lead to erosion of equity. A number of companies in infrastructure, real estate, power and steel have seen the impact of high debt. Today, equity of these companies has fallen so drastically that the book value has no meaning. Because of the increasing burden of debt in the books of these companies, the value of equity has dropped and thus the book value has eroded to a great extent. Typically in a capital-intensive industry, companies need debt to fund these projects. While this is an advantage, excessive debt funding has crippled equity investors because the value of equity in these projects has been totally wiped out as a result of increasing burden of debt. Today, in some of these cases, if these assets are sold in the market, the money that will be realized from these assets, will be enough only to repay debt. In fact the conditions are so severe that there could be a shortfall of funds to repay debT. It’s simplified...

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Fallacies and illusions are aplenty in the stock markets and must, therefore, be borne in mind while making stock decisions

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allacy and illusion are two sides of the same coin. It refers to things that are false or not real, but seem real nonetheless. It could be a wrong belief or a mistaken idea or just a wrong perception of a fact. We all have fallen prey to such fallacies and illusions in our day-to-day lives, either knowingly or unknowingly.

Also known as the Monte Carlo simulation or the fallacy of the maturity of chances, gambler’s fallacy is a false belief that if a random event has occurred more frequently than normal during a given period, it will occur less frequently in the future.

Being a cauldron of human emotions, the stock market is fraught with numerous such fallacies and illusions. Today, we will learn about a few of these so that we can self-analyze if we are falling prey to such harmful human behaviours.

For example, if a dice throws number 4 during five consecutive rolls, you may be inclined to believe that the likelihood of the next roll being a 4 is very slim. This line of thinking is wrong as in a random event, past events do not change the probability

Beyond Market 01st - 15th Jan ’16

Gambler’s Fallacy

of that event occurring again in the future. Similarly in the stock markets, quite often we feel that if a stock has fallen for 5 to 6 days in a row, the chances of it going down in the future are very low. Hence, we initiate a buy position on the stock. In reality however, the probability of the stock falling the next trading day is the same, that is, 50:50. Remember In a random market like the stock market, past events have no bearing on future events. One should base their buy/sell decisions on It’s simplified...

fundamentals and technicals rather than such fallacies.

Focusing illusion is an illusion where an investor gets stuck or hung up on a piece of data and makes all further decisions based on this focus point. In other words, we usually focus or place too much importance on only one aspect of an event while ignoring all other aspects. For example, many investors place too much importance on technicals alone or a 52-week high or low number, or even a recent high or low that the stock has made. This becomes a focus point for them. Now even if all other indicators point in the opposite direction of your focus point, you conveniently ignore them and rely merely on your focus point. Remember Stock markets are very dynamic. Stock levels and situations constantly change from time to time. Focusing on a single event or factor can seriously hamper your chances of success. You should be well informed of all pertinent data points and only then should you act accordingly.

This is exactly the reverse of Gambler’s Fallacy. A player may believe that if a random event has occurred more frequently than normal during a given period, then the likelihood of that event continuing in the future is high. In other words a series of consecutive results is likely to be sustained. For example, in the earlier example, if the roll of dice yields number 4 on five continuous occasions, then it is falsely believed that the next roll of dice will also give number 4. Beyond Market 01st - 15th Jan ’16

Similarly in the stock market, we often feel that if a stock has fallen 5 or 6 trading sessions in a row, then it is a trend and the chances of it going down during the next trading day are very high, and we take a short position on the stock. Remember The probability of the stock falling the next day is always 50:50. In fact the chances of a bounce back in the stock are more as in the short term there may be profit-booking or a relief or pullback rally.

It is an illusion where a person who has learnt something new or has noticed something unique, starts noticing it everywhere. If you have learned a new raga in your music class, you start looking for it or hearing it in most songs. Similarly, if you have learned a new technical indicator or a trading pattern, you start seeing that pattern in almost all charts you come across. Remember Human beings are fond of novelty and any new information or knowledge seems to linger on in their memory. We unknowingly start searching and looking for it. Hence, we erroneously start believing that the phenomenon occurs more frequently. The best way to avoid this illusion is to gather more and more knowledge about the topic so as to weed out unnecessary noise from the real deal.

This is a false belief that if you have made a bad investing decision and lost money, the only way to recover that money is by investing more money in the same investment. This is a classic case of throwing good

money after bad money. When most investors see their stock price fall by 50% to 60%, they feel that the stock has fallen more than warranted and, hence, invest more money in the stock thinking that averaging their stock will bring down their purchase price and when the stock will eventually go up, they will not only recover their losses but also make a profit. Remember A stock which has fallen so much may have dropped simply because its fundamentals may have been wrong, which you may not have been aware of and the stock may fall much further from these levels too. You would do well to sell those shares, book your losses and invest that money in a potentially stronger company with stronger fundamentals and a greater potential of going up, subsequently, giving you a much better chance at recovering your lost money faster.

A turkey that sees a farmer coming towards it, only thinks of one thing: that the farmer will bring it food. Never does it dawn upon the turkey that today being Thanksgiving the farmer may not be coming towards it with food but would be making the turkey his food. Similarly, a stock trader who has been rewarded consistently by a particular stock or an event such as earnings or results, monetary policy, or a specific trading strategy, always views that stock or situation as a profit-making opportunity in the market.

Every situation and time is different. You never know which opportunity It’s simplified...

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comes disguised as a wolf in sheep’s clothing. Treat every trade based on its merit and not on past laurels.

A base rate fallacy occurs when a person misjudges the likelihood of an event because he fails to take into consideration the base rate information. Base rate is the probability percentage of an event happening irrespective of the conditions of the situation. For example: Shyam always buys stock options. He never sells them. Shyam owns a Mercedes. Shyam owns a 3 BHK flat. Which of these below-mentioned statements appears to be correct? 1. Shyam makes a profit by buying Options 2. Shyam makes a loss by buying Options. Most of us would be inclined to think that since Shyam owns a Mercedes, a big House, he must be making huge profits from buying Options. One automatically infers that Options buying is a profitable proposition. Here, the base rate information that “90% of the time sellers of options make money and only 10% of the time, buyers of Options make money,” is completely ignored. No thought is given to the idea that Shyam may be making money from other businesses and his Options trades may in fact be the only-loss making entity.

Always consider the base rate or the historic probability of an event before making any decision.

Clustering illusion is seeing a pattern 42

Beyond Market 01st - 15th Jan ’16

in what is actually a random sequence of events. For example, a person studying technical charts would wrongly interpret 3 consecutive green upside candles as a legitimate positive trend and then initiate a buy position. This becomes similar to flipping a coin 10 times. Obviously there is going to be a streak where there are 3 or 4 consecutive heads or tails. One cannot interpret this streak as a trend since the probability of the next coin toss is independent of the previous streak.

Not all streaks are a pattern. If you feel there is in fact a trend in the pattern, confirm the same with the help of other indicators and oscillators before making a trade.

This fallacy believes that if a person is on a winning spree, luck is on his side and that he will continue winning more in the future also. This fallacy is one of the main reason why profits turn to losses in the stock markets as well as casinos. If a person has a string of profitable trades, he becomes overconfident and complacent. He starts taking bigger risks, trades without any research, trades without keeping stop losses and does not book his profits in the hope of greater profits. Alternatively, if he sees somebody else who is on a winning spree, he abandons his strategy and tries to imitate that other person in the false hope that that person’s luck will rub on him too.

Every winning spree ends and luck runs out sooner or later and when it does, you might lose much more than you have earned. If you are sitting on

profit, it makes sense to book it and leave while luck is still on your side.

It is an illusion where a person overestimates his control of the outcome of an event, which is unpredictable. Simply put, the person has no demonstrable influence over the event. For example, a cricket fan may spend hours sitting in a particular chair in an uncomfortable position because he feels that changing his chair or his sitting position will cause his team to lose, even though he knows that the players cannot see him or that the outcome is not governed by him. Similarly, a stock trader has many such illusions such as trading in a particular share only, entering only a fixed number of shares for trades, performing fixed routines such as trading only at a fixed time and chanting a special mantra before every trade, among others.

You hardly have any influence over what the opposite person thinks about you. How then can you possibly expect to influence the entire stock market, that too from the confines of your trading room itself? Just think about it. Stop spending time and effort in useless beliefs and trust your knowledge and analysis.

It is also known as cherry-picking. The term is derived from the process of cherry-picking. The cherry picker is expected to pick only the best and the ripest of cherries and discard any rotten cherries. This gives a wrong impression that all cherries in the farm are of a superior quality and fit for consumption. It’s simplified...

Similarly, supposing you have picked a stock, you only tend to focus on data which supports your belief and all the data that is contrary to your views is conveniently ignored. This is also known as choice supportive bias. In the end you convince yourself that there is only positive news flow about the stock and your decision to buy the stock was indeed correct. Remember When you tend to look at only one side of the coin, you miss the complete picture and that may be detrimental to your financial health. Analyze all information - both positive and negative - without any discrimination whatsoever.

This is an illusion where you overestimate your abilities and qualities relative to others. Say you have made a couple of trades, which were contrary to what others had advised you and made profits or earned better returns than your peers, friends, relatives or even some experts or analysts. In such a scenario, you get carried away and start thinking that you are superior to them. You start ignoring prudent and sound advice and place

too much confidence in your own stock-picking and trading abilities. Remember It is a good thing to have self belief and confidence. But if it turns into overconfidence and a complete disregard for others’ views and analysis, you are, without a doubt, headed for choppy waters. A good trader is one who listens to everyone, checks whether the advice or information holds any water, and only then takes an informed decision.

Reduction fallacy is also known as the fallacy of single cause. Many times it is concluded that there is a single simple cause of an outcome when in reality the outcome may have occurred due to a number of causes. Many times when markets or a stock price crashes we tend to blame a single cause such as bad result, global crises, inflation numbers, etc. So, whenever that single event occurs again in the future, you expect the same market reaction to follow. Remember Even though a single event may be a catalyst in triggering a price crash or rise, it is usually a combination of factors such as overbought/oversold

conditions, profit-booking, liquidity crunch, FII offloading, etc, which may have triggered the fall. Don’t expect the same reaction for future occurrences of that same cause. Also, stop blaming the cause as the reason for your failures. Accept that you made a mistake, learn from it and be careful in the future.

Most of us are lazy and like to rely on external help to make our decisions. We often are under an illusion that a particular friend, or relative or an expert is better equipped at predicting the market behaviour than us and, hence, start relying on his or her advice about stock trading. We may even empower someone to trade on our behalf in return for some fees or commission for that matter. Remember Others may be more knowledgeable than us at times, but it is highly improbable that they are more successful in getting market predictions right all the time. As is rightly put, for every seer there is a sucker. Don’t fall prey to such predators who are ready to lure you into their trap by spreading wrong information about their successful endeavors and cheat yoU.

Swap Positioning Swap positioning is a practice whereby an intermediary enters into one side of the swap transaction, such as fixed rate payer (or floating rate payer) to a client who wishes to be a floating rate payer (or a fixed rate payer). Then the intermediary waits for a matching counterparty and offloads the swap thereto. In other words, swap positioning involves holding a portfolio of swaps usually by a swap dealer without seeking to offset each swap with an identical mirror swap. In this sense, the swap dealer becomes a counterparty to every swap held in its portfolio. The dealer earns, for its services as a dealer, a pay-receive spread (bid-ask spread), which is equal to the difference between the swap coupon the dealer pays and swap coupon the dealer receives. Swap positioning is also known as swap warehousing or booking a swap. Beyond Market 01st - 15th Jan ’16

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IMPORTANT JARGON FOR THE FORTNIGHT US FED HIKES RATE: INDIA WELL PLACED

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s expected, the US Federal Reserve (Fed) obliged markets by hiking interest rate by 25 basis points in its Federal Open Market Committee (FOMC) meet on 16th December. This is a big deal as interest rates in the US were near zero levels for the last seven years. In fact, the Fed has hiked rates for the first time in the last 10 years. Rate hike by the Fed ends the era of ultra cheap interest rates in the US, signaling that interest rate trajectory is on the up. What Are US Fed And FOMC? Like India’s Reserve Bank of India (RBI), the Federal Reserve is the central bank of the United States of America. As an independent agency, the Fed’s mandate is to promote sustainable growth, promote high levels of employment, stabilize inflation and moderate long-term interest rates by setting monetary policy. Federal Open Market Committee (FOMC) is the monetary policymaking arm of the US Federal Reserve.

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logic being: lower interest rates would boost consumption, and help GDP growth as well as lower unemployment. After a loose monetary policy for years post the financial crisis of 2008, the US wanted to normalize its policy. Why Were Markets Apprehensive Of The US Fed? A loose monetary policy in the US had created huge money-chasing asset classes across the globe. Now, higher interest rates in the US would mean, fund managers pulling out money from asset classes for better and comparatively safer returns from the US. Emerging markets were much more apprehensive of the US Fed’s move ever since the US Fed first hinted that they will taper its bond-buying program in May ’13. Then, emerging markets with large current account deficits (CAD) like India were worse off as currencies tumbled against the US dollar. The possibility of the US Fed hiking rates was a major overhang on world markets. So, Now What Did The US Fed Signify?

Why Was The FOMC Meet Of 16th-17th December Important?

The US Fed has done a great job of striking a balance by hiking rates as well as pacifying the markets by communicating that the process of policy normalization will be gradual and without disruptions.

FOMC holds eight scheduled meetings in a year. Before the December meet, Fed had indicated that it would raise interest rates as data regarding the US economy was improving. While the eventuality of the event was certain, the timing of the event was uncertain.

The US Fed has cited considerable improvement in labour market conditions, and reasonable confidence of achieving the medium-term inflation target of 2%. The statement also showed optimism about the prospects of the US economy. Currently, the US GDP is growing at 2.2%.

Why Is Interest Rates In The US Such A Big Deal?

What Was The Guidance Shared By The US Fed?

For starters, interest rates were slashed to zero levels by the US Fed alongside a loose monetary stance to help the economy revive post the economic crisis of 2008. The

The US Fed sounded dovish in its outlook. It said that future moves will depend on how the US economy evolves. The FOMC stressed that the actual path of

Beyond Market 01st - 15th Jan ’16

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inflation will be important for any future hikes. Remember the target for inflation is 2%, which is currently hovering at around 0.5%. Therefore, it is unclear, especially given the background of uncertain global economy that whether the US Fed will hike rates in 2016 or not. The next Federal Open Market Committee meeting is scheduled on 27th of this month. How Is India Placed? Foreign investors have been selling Indian equities in anticipation of Fed rate hike. But given strong fundamentals, India is well-placed to counter reverse the flow of capital. For one, most key macroeconomic parameters have significantly improved in the past two years since May ’13. It is in a position to offer tough competition in attracting foreign capital. Second, interest rate differential between the US and India is still historically high, leaving sufficient room for the RBI to cut interest rates even if the US Fed were to raise rates in the future. Lower domestic rates will boost GDP. Third, the RBI has accumulated enough reserve to withstand any volatility in the currency markets, thereby rendering INR stable against the US dollar.

MID-YEAR ECONOMIC REVIEW: GROWTH TARGET SLASHED

GDP

The government presented its mid-year economic review to the parliament on 18th December last year. It is a practice to submit a mid-year economic analysis by the government in the parliament and is prepared by the chief economic advisor to the government and his team. The review this time around drew a mixed picture about the Indian economy. Here are few key takeaways from the economic review with key focus on growth, inflation and fiscal deficit. What Does The Review Say About GDP Growth? The government sees the economy reviving, but it slashed its GDP growth target for FY16 from an estimated 8.1% to 8.5% made in the Budget to 7% to 7.5%. Weak monsoons and lower exports have forced them to lower their targets. Is It Not Negative News? Yes it is. But experts consider the targets to be more pragmatic than negative. Even with 7% to 7.5% growth rate, India still remains the fastest growing economy in the Beyond Market 01st - 15th Jan ’16

world. The Reserve Bank of India (RBI) has a target of 7.4% for FY16. What Is The Outlook? The government sees the outlook challenging for FY17. While it expects exports to recover in FY17, it expects lower consumption demand and weak private investment taking a toll on growth. Further, the review says that it is unlikely that there will be a significant boost in demand if the government sticks to its fiscal consolidation plan. What Does The Review Say About Fiscal Deficit? The government is confident of meeting its fiscal deficit target of 3.9% of the GDP in FY16 on the back of higher indirect tax revenue. But, it has said that the task of fiscal consolidation is challenging, with lower-than-projected growth rate and lower disinvestment receipts. How Should One Read This Comment? This formal acknowledgment by the government that the fiscal deficit target is not likely to be achieved is the single biggest takeaway from the mid-year review. One, the government is clearly making a case of some fiscal slippages for higher growth. While we might see government sticking to 3.9% fiscal deficit target for FY16, the government might delay its fiscal consolidation plan of 3.5% for FY17 and 3% for FY18. Second, the government will face additional fiscal burden on account of the pay hike recommended by the seventh pay commission and the one-rank-one-pension scheme of the government in future years. What Does The Review Say About Inflation? The government expects inflation measured by Consumer Price Index (CPI inflation) to remain within the RBI’s target of about 6%. It expects reforms and low inflation to maintain a “benign” interest rate regime. This implies that lower interest rate regime will help boost consumption, thereby helping growth. What Is The Bottom Line Of The Review? The government believes both fiscal and monetary policy should be accommodative. It believes that public policy should not only focus on reforms that boost the supply-side of the economy, but also focus on boosting demand. Some fiscal slippage is okay if extra money goes into building assets for the economY. It’s simplified...

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INTERNATIONAL STOCK EXCHANGE HOLIDAYS FOR 2016 Date 01 January 2016 11 January 2016 18 January 2016 26 January 2016 08 February 2016 09 February 2016 10 February 2016 11 February 2016 12 February 2016 15 February 2016 07 March 2016 21 March 2016 24 March 2016 25 March 2016 28 March 2016 04 April 2016 14 April 2016 15 April 2016 19 April 2016 29 April 2016 02 May 2016 03 May 2016 04 May 2016 05 May 2016 30 May 2016 09 June 2016 10 June 2016 01 July 2016 04 July 2016 06 July 2016 18 July 2016 09 August 2016 11 August 2016 15 August 2016 29 August 2016 05 September 2016 12 September 2016 13 September 2016 15 September 2016 16 September 2016 19 September 2016 22 September 2016 03 October 2016 04 October 2016 05 October 2016 06 October 2016 07 October 2016 10 October 2016 11 October 2016 12 October 2016 31 October 2016 03 November 2016 14 November 2016 23 November 2016 24 November 2016 23 December 2016 26 December 2016 27 December 2016

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