Highest Bank Fixed Deposit rates for different time periods

The interest rates are peaking across different maturities and here is quick review of the highest interest rates across different time frames offered by various banks. 

Time Period Bank(s) Interest rate

15 - 29 days Barclays Bank  6.75%

30 - 45 days Barclays Bank, 

DBS Bank 7.25%

46-60 days Oriental Bank of 

Commerce 8.25%

61 - 90 days  Oriental Bank of

Commerce 8.25%

91 - 179 days ING Vysya Bank 10.00%

180 - 364 days State Bank of 

Hyderabad 10.25%

1 yr - 2 yrs DBS Bank 11.25%

2 yrs - 3 yrs CUB, KVB, LVB 11.00%

3 yrs - 5 yrs  Karnataka Bank 11.00%

In addition to the above, there are "Special Deposit Rates" offered by banks which are as follows:

Bank Rate Term (Days)

ICICI Bank 10.50% 890

City Union Bank 11.30% 1000

Federal Bank 10.00% 365

Standard Chartered 10.00% 401

ING Vysya Bank 10.50% 365

Tamilnad Mercantile

Bank 11.00% 1095

Please note that these special deposit rates are applicable only if you choose the specified term mentioned above. 

Make best use of this opportunity to lock in your fixed deposits componenet of your asset allocation. 

Real Estate gets little relief in Andhra Pradesh

The Andhra Pradesh Government has recently announced the following concessions to prop up the ailing real estate industry in the state:

The concessions offered are:

* Stamp duty on new houses of area up to 1200 sq.ft would be exempt from January 1, 2009 to December 31, 2010.

* Building approval and permit fee has also been exempted.

* City level infrastructure is also allowed to be paid in four-six monthly instanlements during th period of construction. 

We believe this would start the process of exempting stamp duty and offering other benefits to real estate developers in various other states as well.  The concessions should be time bound and withdrawn once the overall market recovers in the next 2-3 years.  Else, this would become a matter of right for the consumers and it would lead to large scale protests when these concessions are withdrawn.  The Government would be forced to keep extending the benefit just like what is happening with STPI benefits for IT/ITES companies.  

Coupled with the recent reduction in loan interest rates on housing and the proposed exemption of stamp duty, the buyers gets real bargains while buying the house.  

Time to lock into Fixed Deposits - Part III

After completing the first two parts on the attractive fixed deposit interest rates currently prevalent in the banking sector, we have been contacted by various people if they could committ into fixed deposits for 3 years for the entire corpus/savings they have.

We have also come across advertisements from banks over the last week or so where the interest have still gone up from the 10.50 - 11.00% bracket to above 11%. This is particularly very evident in the case of private sector banks and makes it all the more enticing.

The rates looks very tempting for lay investors. But at the same time, it is very important to note that the time-frame of the deposit should be decided by the funds requirements of the individuals. Just because a bank offers higher interest rates, the deposits should not be contracted for a longer time-frame. It should be aligned with the individual's funds requirement before the tenure of the fixed deposit is committed. In case you have surplus money which you may not require for a longer tenure, then it makes sense to lock into deposits at higher rates, but at the same time maintain your assset allocation matrix.

One should also remember that Fixed Deposits are only a portion of your investment portfolio and higher interest rates alone should not influence you to have a very high proportion of your investments in fixed deposits. When we take into account the inflation rate of around 8%, and the deposit rate of 11%, technically it means that you are able to get a real effective interest rate of only 3% or so pre-tax. Post-tax, the return would be much lower. Therefore, in order to grow your investments and build the corpus for meeting your future financial goals or retirement, you need to ensure that investments are also channeled to other investment avenues like equity, gold etc.,

The other point to remember is to spread your deposits across different banks with a maximum limit of Rs100,000/- to take advantage of the Deposit Insurance scheme. Though it involves more running between the banks, it may be prudent to do so.

Just for information purposes, few attractive interest rate options which has come up from private sector banks are:

1. City Union Bank is offering 11.30% on 1000 day deposit. Karur Vysya Bank is offering 11% on a 3 year deposit.
2. Standard Chartered Bank is offering 11.00% on 90 days short term deposit.
3. In Chennai, REPCO Bank Ltd., is offering 11.50% on 40 months deposit. But please note that REPCO Bank deposits doesnt come under Deposit Insurance Guarantee scheme.

Time to lock into fixed deposits? - Part II

India also started feeling the heat of global slow-down. Inflation ruling well above 12% has now slipped into single digits and it has been reported below 9% for the last week. The rupee continues to trade volatile against the USD and again slipping below the Rs49 mark yesterday. The Prime Minister is making statements to the effect that more pain is in the offing for India. Exports have gone down to a great extent both in manufacturing and service sector (IT) resulting in lesser inflow of foreign currency. FII sales in the stock markets are continuing and the demand for the greenback remains constant.

Coming back to the main question of interest rates in the econcomy, the auto manufacturers and real-estate developers are crying hoarse about the high interest rates which is affecting the demand for their products. Of course, the interest rates alone cant prop up an industry, but it is a definitely a critical factor. With the increasing cost of money, Indian industries have started delaying or jettisoning capacity expansion plans. Many projects could not achieve financial closure due to lack of funds in the market. Now the Government started stepping in through RBI by giving out signals of low interest rate regime. Now there is no threat of demand led inflation, Government is keen on reducing the interest rates in the economy. RBI, under a new head, D Subbarao, started using the monetary tools to bring down the rates to banks and financial institutions. It has aggressively cut the CRR rates by 3.5% over the last 2 months. It has reduced the reverse repo rates and opened up the window for lending to banks and mutual funds.

With the signals becoming clear that Government favouring a lower interest rate regime, the banks has started reducing the lending rates. Of course, the PSU Banks have taken the lead in this instance as they are more amenable to the Government's intervention in the interest rates. The measures taken by the RBI is expected to pump in more than 200,000 crores of Rupees into the system and it should relieve the current pressure on the credit. The interest rates may also start coming down over the next couple of months. Though term deposits are not as tax efficient as FMP's, it is still better to have a good percentage of your fixed income investments in the form of term deposits, as it gives the needed liquidity and the redemption terms are much more easier compared to FMP's. Therefore, I think it is one of the best times to committ funds to Fixed Deposits with banks to take advantage of the high interest rates offered by them.

State Bank of India offers 10.50% for 1000 days deposit and other private banks like Karur Vysya Bank, City Union Bank, Lakshmi Vilas Bank are offering 11.00% on term deposits for 400 days or more. State Bank's deposit scheme was very popular that it garnered more than Rs1000 crores on a daily basis during the first few days of this campaign. Remember, the deposits in the name of Senior Citizens fetches 0.50% more than the normal rates.

Enjoy this small window of high interest rates and commit your term deposits at attractive rates. Make hay while the sun shines!!!

Time to lock into fixed deposits? - Part I

Fixed deposits or time deposits were a long last financial instrument hardly used over the last 3-4 years thanks to continuous bull run in the stock markets. Persons who wants to keep money in Fixed deposits were looked down upon as risk-averse, conservative and naive investors. Low interest regime and inefficient tax structure also added to the woes of the investors in fixed deposits. Fixed deposits, as the preferred asset class, vanished from the investors radar.

Coupled with the recent turmoil in the global financial markets and erosion in value of stocks across the board and the high fixed deposit interest rates, fixed or term deposits have slowly gaining prominence again. Currently banks are offering attractive interest rates of 10.50% to 11.50% (for senior citizens) on retail fixed deposits.

If you analyse the reasons behind the high interest rates, you will understand that it is due to the tightening of the domestic money supply by RBI through various monetary policy measures like hiking the CRR rates and repo rates making it costly for banks to borrow and lend. RBI followed the dear money policy till couple of months ago due to the run-away demand led inflation. Suddenly in September, the global financial markets went through a very bad patch where many of the global investment banks disappeared from the scene and it led to sudden realisation of counter-party default risk among the financial community. Banks started hoarding cash instead of lending to customers and financial institutions thereby creating scarcity of deposits.

In that scenario, Indian banks and financial institutions which have lent money to various sectors like real-estate and others started facing defaults or delayed payments. The stock markets worldwide tumbled as the FII's started selling across the board and more particularly in emerging markets. FII's selling the stocks and taking the money out of the country resulted in heavy demand for the US Dollar. The Indian rupee depreciated sharply against the dollar breaching the Rs50 mark against the dollar before recovering to Rs48 against the dollar. The industrial production, exports and consumer demand started to slow-down across the world. Today many countries have seen negative growth in their economy. US, Japan and Europe have slipped into recession. What a change compared what was 6-9 months back. The reaction were swift and painful for most of the market particpants.

Part II of the article would be published tomorrow.

It's an interesting article by Yogesh Chhabria.

LATELY, I have been thinking a lot about the Lehman crisis. Spending money that they didn't have and going beyond their means is one of the main reasons for their situation today. In fact that is the cause for the current economic crisis in the US.

When I see all this happening, I can only remember the good old days. Then, karz was bad. People looked down upon those who took loans. Parents would not give their daughter's hand in marriage to a man with loans.

But of course, the times have changed now. Everyone I know has a loan. The buzz word is EMI (equated monthly installment). Today, you can buy everything on EMI - a house, a television, even an i-Pod. In fact I know of someone who just bought a fancy BMW 3 series on EMI, instead of buying a cheaper car outright with cash. I mostly prefer to take public transport, but then I am an old man with old thoughts!

Anyway, coming back to what caused the crisis.

Imagine having Rs 2 lakh in your bank account, no regular income, yet buying a house worth Rs 65 lakh, in the hope of selling it for a higher price. Even if the price of the house fell by just 5 per cent (that is Rs 3 lakh), you will go bankrupt. This is what Lehman Brothers did; with around USD 20 billion they went and bought assets worth over USD 600 billion. Isn't it suicidal and simply foolish?

I am sure things would have been different, had I been the head of Lehman brothers. But who wants an old conservative man like me to head a complex financial institution.

But there are a few lessons that we can learn:

1.Live a balanced life and avoid overspending.
2. Don't buy things we don't need.
3. Don't buy Branded goods.
4. Don't buy excess Food, Cloths, Cosmetics, Footwear, electronics and Fashion accuracies. Just think before you buy.
Tip: World still has a lot of growth ahead and the future holds immense opportunities for us. Let us make the most of it and save and invest it wisely instead of wasting our precious little on things we don't need.
5. Try to balance life with work (No one is happy to work in their professions).
6. Don't stress out your self, after work try to do some extra activities like swimming, yoga, walking, running where you can divert your mind from stress.
A thumb rule: Health is more important than money.
7. Try to understand each other (Wife and Husband) in financial matters and help each other.
Tip: As soon as you get your monthly salary, set aside a fixed amount, usually 35 per cent, for insurance, savings and investments. You can then spend the rest.
8. Not all loans are bad. Loans that are 'need based' (home loans, education loans) can always find a place in your finances against those that are largely 'want based' (Credit cards, personal loans, car loans).
9. Borrow only if repayment is financially comfortable.
A thumb rule: Keep EMIs within 35 to 45 per cent of your monthly income.


In that respect, there is one American who I really respect - Warren Buffet. He has lived in the same ordinary house for over three decades, drives his own medium sized car and leads an extremely regular 'middle class' life. If that's all it takes for the richest person on earth to be happy, why do all of us need to take extra stress just so that we can get things which aren't even essential?



Source: World Wide Web

How deposit insurance works in India?

When rumours about the financial health of a private bank began to circulate last week, people queued up at the bank's ATMs in the wee hours to withdraw money. One of my friends who had large sums parked in fixed deposits with the bank called to enquire about the rumour.

When I asked him whether he had similar deposits across a range of banks, he replied that his entire surplus cash of Rs 8 lakh was parked with the same bank, as he did not have an account with any other bank! Shocked, I took the opportunity to explain to him how deposit insurance works in India. Here is what my friend, and others like him, need to know.

How much is covered?
All deposits of up to to Rs 1 lakh in a commercial or cooperative bank in India are insured by the Deposit Insurance and Credit Guarantee Corporation of India (DICGC) (a wholly owned subsidiary of RBI).The insurance coverage to the banks is extended by collecting premium from the banks, at half-yearly intervals at the rate of 10 paise per annum per hundred rupees. The insurance protection is made available to the depositors free of cost. The cover of Rs 1 lakh is applicable for your principal and interest dues taken together. Deposits in different banks are separately insured, with each deposit eligible for Rs 1 lakh cover.

What kinds of deposits are covered?
Insurance cover is available across savings accounts, current accounts, recurring and fixed deposits.

Which banks are covered?
All commercial banks including branches of foreign banks functioning in India, local area banks and regional rural banks are covered. At present, all co-operative banks other than those from the States of Meghalaya and the Union Territories of Chandigarh, Lakshadweep and Nagar Haveli are covered under the deposit insurance system. Primary cooperative societies are not currently covered by the scheme.

What are the ways to increase the cover for my bank deposits?
Spreading your surplus across many banks is the most direct way to increase the deposit cover.
You can even make sure that your deposits in a single bank are insured, by having multiple joint accounts with different "first holders". Insurance tends to be offered in the first holder's name.

What happens to deposits in a joint account?
If more than one deposit account (whether savings, current, recurring or fixed deposit) is jointly held by individuals in one or more branches of a bank, then all the accounts in which their names appear in the same order will be aggregated for the Rs 1 lakh cover. However, if deposits are held under different first holders, then every such account will be eligible for insurance cover of Rs 1 lakh.

Is it possible to increase the insurance cover for my deposit by paying a higher premium?
No. It is not possible to pay premium and increase the cover. However, such provisions may come into being in future. Recently, with the financial turmoil in the US, as part of the bailout package, the US Government has increased the cover from $1,00,000 to $2,50,000. So it's possible in India that the cover may be enhanced in future.

How are the settlement claims awarded?
In the event of the winding up or liquidation of bank, every depositor of the bank is entitled to payment of an amount equal to the deposits held by him at all the branches of that bank put together, standing as on the date of cancellation of registration of the bank. So, all my friend has to do to avoid sleepless nights at the ATM is to spread his deposits over several banks, to increase his overall insurance cover!

Source HBL

Global Financial Crisis keeps rolling - latest to be rescued is Fortis! Who is next?

Fortis, the largest Belgian financial-services firm, received an 11.2 billion-euro ($16.3 billion) rescue from Belgium, the Netherlands and Luxembourg after investor confidence in the bank evaporated last week.

Belgium will buy 49 percent of Fortis's Belgian banking unit for 4.7 billion euros, while the Netherlands will pay 4 billion euros for a similar stake in the Dutch banking business, the governments said in a statement late yesterday. Luxembourg will provide a 2.5 billion-euro loan convertible into 49 percent of Fortis's banking division in that country.

Fortis is the largest European firm so far caught up in the global financial crisis that drove Lehman Brothers Holdings Inc. into bankruptcy two weeks ago and prompted U.S. President George W. Bush to seek a $700 billion bank rescue package. Fortis dropped 35 percent last week in Brussels trading on concern the company would struggle to replenish capital depleted by the 24.2 billion-euro takeover of ABN Amro Holding NV units and credit writedowns.

``Confidence in Fortis needs to be restored,'' said Corne van Zeijl, a senior portfolio manager at SNS Asset Management in Den Bosch, the Netherlands, who oversees about $1.1 billion and owns Fortis shares.

Fortis plans to sell its stake in ABN Amro's consumer banking unit, though a buyer wasn't identified. Fortis joined with Royal Bank of Scotland Group Plc and Spain's Banco Santander SA last year to buy Amsterdam-based ABN Amro for 72 billion euros, just as the U.S. subprime mortgage market collapsed.

Lippens Resigns
Fortis Chairman Maurice Lippens stepped down and will be replaced by someone from outside the company, Fortis said. The firm picked company insider Filip Dierckx to succeed Herman Verwilst as chief executive officer on Sept. 26, just three months after former CEO Jean-Paul Votron was pushed out.

Fortis, formed in the 1990 merger of the Dutch insurance company NV Amev, Belgian insurer AG Group and the Dutch bank VSB, angered investors on June 26 by scrapping the interim dividend and announcing plans to sell shares to help strengthen its finances.

``We're buying power in the bank, getting more influence on the decisions that will be made, that's what savers need in these times,'' Dutch Finance Minister Wouter Bos told Dutch public television NOS. Bos said he couldn't comment on who'll buy the ABN Amro business.

The collapse of New York-based Lehman and the U.S. rescue of American International Group Inc. heightened concern about the global financial system and made it costlier for banks to raise funds. Seattle-based Washington Mutual Inc. was seized by regulators last week in the biggest U.S. bank failure in history.


Fortis tried three days ago to assuage investor concerns by stating that its financial position was ``solid,'' and that it had identified banking and insurance businesses to sell worth as much as 10 billion euros. Fortis said it wouldn't sell assets at fire-sale prices, and didn't have an urgent need for funds.

`Over-Leveraged'
The remarks, presented in an impromptu press conference by Verwilst and Dierckx, failed to stem the selling. The stock ended the day down 20 percent.

``Markets thought that they were over-leveraged,'' European Central Bank Governing Council member Nout Wellink said. ``What's happening in the U.S. is having an impact on the rest of the world. At the end of the day Fortis is a good bank,'' said Wellink, who also heads the Dutch central bank.

Fortis has fallen 71 percent this year in Brussels, the second-worst performance among the 69 companies on the Bloomberg Europe Banks and Financial Services Index, cutting the lender's market capitalization to 12.2 billion euros.

The company has about 3 billion euros of bonds maturing this year and needs to refinance an additional 7 billion euros next year, said Ivan Lathouders, an analyst at Banque Degroof SA in Brussels, in a report last week.

Short-Selling Restricted
Fortis reported a 49 percent decline in second-quarter profit on credit-related writedowns on Aug. 4. The banking business's core Tier I capital ratio, an indicator of a bank's ability to absorb losses, was 7.4 percent at the end of June, compared with Fortis's own target of 6 percent.
The company's structured credit portfolio, which includes collateralized debt obligations and U.S. mortgage-backed securities, amounted to 41.7 billion euros at the end of June. Fortis said Aug. 4 the pretax impact of the credit market turmoil on its earnings was 918 million euros in the first half.

Belgian and Dutch regulators restricted short-selling in the shares and derivatives of financial companies for three months last week to curtail a market rout. The rules require investors betting on a decline in stock prices to arrange to borrow the shares before selling them. The Belgian and Dutch regulators also requested investors to refrain from lending the securities.

Source: Bloomberg.com

U.S. government seizes Washington Mutual

The U.S. government on Thursday made the largest bank seizure in American history, taking over Washington Mutual, the severely troubled savings and loan, and selling pieces of it to JPMorgan Chase in an emergency deal intended to avoid sticking the taxpayer with a bill for another bank, according to people briefed on the plan.

For weeks, the Federal Reserve and the Treasury Department had been nervous about the fate of WaMu, among the worst-hit by the housing crisis, and had pressed hard for the bank to sell itself. As panic gripped financial markets last week after the collapse of the investment bank Lehman Brothers, U.S. regulators stepped up their efforts, working behind the scenes, and at times going behind WaMu's back to work privately with potential bidders.

Indeed, the seizure and the deal with JPMorgan came as a shock to Washington Mutual's board, which was kept completely in the dark: the company's new chief executive, Alan Fishman, was flying from New York to Seattle at the time the deal was brokered, according to these people.
The shot-gun acquisition marks the second time since the housing crisis began that the government has pushed a troubled bank into the arms of JPMorgan Chase. In March, JPMorgan rescued Bear Stearns as it teetered into bankruptcy protection.

The deal will give JPMorgan branches in California and other markets where it does not have a footprint. But JPMorgan will also inherit a big loan portfolio of troubled mortgages and commercial real estate.

U.S. regulators had been trying to broker a deal for Washington Mutual because a takeover by the Federal Deposit Insurance Corp. would have dealt a crushing blow to the deposit insurance fund. The fund, which stood at $45.2 billion at the end of June, had been severely depleted after suffering a debilitating loss from the sudden collapse of IndyMac Bank. Analysts say that a failure of Washington Mutual would have cost the fund upwards of $20 billion to $30 billion.
The takeover of Washington Mutual is yet another black-eye for its primary federal regulator, the Office of Thrift Supervision. It also oversaw IndyMac Bank, another big lender that suddenly collapsed in mid-July, and several other deeply troubled savings banks. Washington Mutual was the largest institution under its watch.

Washington Mutual long insisted that it could remain independent, but the giant thrift had quietly hired Goldman Sachs early last week to identify potential bidders. Among the banks that expressed interest were Citigroup, JPMorgan Chase, HSBC, Banco Santander, TD Bancorp and Wells Fargo. Each had different reasons for making an offer, but nobody could make the numbers work. Several deadlines past without anyone submitting bid.

Washington Mutual had struggled to find a partner earlier this year willing to inject fresh funds in its ailing business. This spring, it balked at an offer from JPMorgan to buy the entire company. Instead, TPG, the big private equity firm, led a group of investors that made a $5 billion capital injection in April.

Optimising your tax benefits on your life insurance premium

Life Insurance is a must for any income generating individual. The nature and the quantum of risk cover required varies from person to person. The Government also provides you with excellent tax benefits for the amount of life insurance premium you pay under sec 80 C of the Income Tax Act.

The insurance premium paid on our life insurance policies is deducted from your total income under Sec 80 C. The practical story is that most of you would have already exhausted the available limit of Rs100,000 under Sec 80 C by way of housing loan principal repayment.

But there is a possibility of utilising a portion of the life insurance premium paid by availing the benefit under Sec 80 D of the Income Tax Act. Sec 80 D of the Income Tax Act provides for deduction of premium paid towards Health Insurance from your total income. If the insurance policy covers "critical illness", then the premium portion attributable to the critical illness cover can be deducted u/s 80 D of the IT Act instead of claiming it under Sec 80 C. Normally we deduct the total premium on life insurance policies under sec 80 C but it is possible that we get few extra thousands deduction from taxable income if you have a policy with critical illness rider.

You have to contact your Life Insurance company and ask for the premium break-up details between the mortality charges for the life cover and the critical illness cover. Few of the insurance policies you have taken already has a "critical illness" rider attached to it. Going forward, when you opt for a life insurance cover you have to do a cost benefit analysis of having a critical illness rider considering the additional deduction possible under Sec 80 D of the IT Act.

Get a premium certificate from the life insurance company stating clearly the amount of premium charged for critical illness cover and claim it under sec 80 D and avail extra tax deductions.

Warren Buffett to invest $10bn in Goldman Sachs!!

Warren Buffett, one of the richest men in the world, is to invest up to $10bn (£5.4bn) in Goldman Sachs as the investment bank attempts to bolster its financial position amid continued fallout on Wall Street as a result of the sustained credit crisis.

Mr Buffett, known as the "Sage of Omaha" for his legendary investment skills, will buy an initial $5bn holding through his Berkshire Hathaway investment vehicle, and will receive warrants to buy up to another $5bn at a later date.

Goldman is also raising a further $2.5bn through a public offering of its shares, which soared by 8.4pc to $135.56 in extended after-hours trading.

The investment is a major vote of confidence in the bank, which has largely avoided the worst of the sub-prime crisis, but also highlights just how precarious the market has become that an institution such as Goldman feels the need to raise money in the first place.

The news should act as a fillip for the wider stock market, given that Mr Buffett is perceived by many as a shrewd investor to whom timing is crucial. It is the first time Mr Buffett has bought a stake in an investment bank since purchasing a holding in Salomon Brothers in 1987.

His investment comes just a day after Goldman changed its legal status to allow it to become a federal holding bank. "Buffett did this after Goldman converted to a bank holding company," said Pat Dorsey, director of equity research at Morningstar,"Buffett is saying that, with less leverage and more stable sources of funding, this is an institution worth investing in. From Buffett's perspective you have a world-class firm in a less-competitive landscape, with a hopefully less-risky business model."

As a result of its initial investment, Berkshire will own the equivalent of a 10pc stake in Goldman, based on last night's closing market capitalisation, in return for buying $5bn of perpetual preferred shares which will pay a 10pc dividend and which the bank can buy back at any time for a 10pc premium. Berkshire will also receive warrants to purchase $5bn of ordinary shares at a strike price of $115 a share at any point over the next five years.

Mr Buffett said last night "Goldman Sachs is an exceptional institution" with "the intellectual and financial capital to continue its track record of out-performance".

Japanese bank Sumitomo Mitsui Financial Group is also reported to be considering investing $2.5bn in Goldman Sachs.

Goldman Sachs and Morgan Stanley to become banks

The Wall Street that shaped the financial world for two decades ended last night, when Goldman Sachs Group Inc. and Morgan Stanley concluded there is no future in remaining investment banks now that investors have determined the model is broken.

The Federal Reserve's approval of their bid to become banks ends the ascendancy of the securities firms, 75 years after Congress separated them from deposit-taking lenders, and caps weeks of chaos that sent Lehman Brothers Holdings Inc. into bankruptcy and led to the rushed sale of Merrill Lynch & Co. to Bank of America Corp.

``The decision marks the end of Wall Street as we have known it,'' said William Isaac, a former chairman of the Federal Deposit Insurance Corp. ``It's too bad.''

Goldman, whose alumni include Henry Paulson, the Treasury Secretary presiding over a $700 billion bank bailout, and Morgan Stanley, a product of the 1933 Glass-Steagall Act that cleaved investment and commercial banks, insisted they didn't need to change course, even as their shares plunged and their borrowing costs soared last week.

By then, it was too late. As financial markets gyrated --the Dow Jones Industrial Average whipsawed 1,000 points in the week's last two days -- and clients defected, executives at the two firms concluded they had no choice. The Federal Reserve Board met at 9 p.m. yesterday and considered applications delivered that day, said Michelle Smith, a spokeswoman for the central bank. The decision was unanimous, she said.

`Blood in Water'
``There's blood in the water in the industry and the sharks are circling,'' Peter Kovalski, who helps oversee about $10 billion at Alpine Woods Capital Investors LLC, said at the end of last week. ``It all comes down to perception and the current trust within the community.''
Morgan Stanley rose 4.1 percent to $28.33 by 11:16 a.m. in German trading, after jumping 21 percent in New York on Sept. 19. Goldman declined 1.2 percent to $128.28 in Germany, after surging 20 percent three days ago in New York.

Wall Street hasn't had such a shakeup since the 1980s, when firms including Morgan Stanley and Bear Stearns Cos. went public and London's financial markets were altered forever with the so- called Big Bang reforms implemented in 1986. Bear Stearns disappeared in March, when it was bought by JPMorgan Chase & Co.

The announcement paves the way for the two New York-based firms, both of which will now be regulated by the Fed, to build their deposit base, potentially through acquisitions. That will allow them to rely more heavily on deposits from retail customers instead of using borrowed money -- the leverage that led to the undoing of Bear Stearns and Lehman.

Depositors Rule
Morgan Stanley has taken $15.7 billion of writedowns and losses on mortgage-related securities and other types of loans since the credit crunch started last year. Goldman's tally stands at about $4.9 billion. While both companies have remained profitable and avoided money-losing quarters suffered by Lehman and Merrill Lynch, their revenue from sales and trading and investment banking has been declining this year.

``Deposit-banking is king right now,'' said David Hendler, an analyst at CreditSights Inc. in New York. ``It's the only meaningful critical-mass way to make money.''
Morgan Stanley may feel it has more time to contemplate alternatives to the deal that it began to shape last week with Wachovia Corp., said Tony Plath, a finance professor at the University of North Carolina at Charlotte.

`Certainty'
``This means Morgan Stanley is reassessing its plan for a merger with Wachovia,'' Plath said. ``Morgan Stanley is going to try to go it alone, and I expect it will try to buy a bank with a market-to-book ratio that is next to nothing. It means they are walking away from Wachovia.''
Morgan Stanley, the second-biggest securities firm until this week, had $36 billion of deposits and three million retail accounts at the end of August. The company plans to convert its Utah-based industrial bank into a national bank.

``This new bank holding structure will ensure that Morgan Stanley is in the strongest possible position,'' Chairman and Chief Executive Officer John Mack, 63, said in a statement last night. ``It also offers the marketplace certainty about the strength of our financial position and our access to funding.''

Goldman, the largest and most profitable of the U.S. securities firms, will become the fourth-largest bank holding company. The firm already has more than $20 billion in customer deposits in two subsidiaries and is creating a new one, GS Bank USA, that will have more than $150 billion of assets, making it one of the 10 largest banks in the U.S., the firm said in a statement last night. The firm will increase its deposit base ``through acquisitions and organically,'' Goldman said.


``Goldman Sachs, under Federal Reserve supervision, will be regarded as an even more secure institution with an exceptionally clean balance sheet and a greater diversity of funding sources,'' Lloyd Blankfein, 54, Goldman's chairman and CEO, said in the statement.

The Washington-based Fed is the primary regulator of bank- holding companies, which are firms that own or control banks. Citigroup Inc., Bank of America Corp. and JPMorgan are bank- holding companies regulated by the Fed.

Securities firms, by contrast, had been regulated by the Securities and Exchange Commission. The SEC's future becomes dimmer with the change in Goldman and Morgan Stanley's structures.

Less Risky
``You can't kiss goodbye to the last two important investment banks without noting that the house is empty,'' said David Becker, a former SEC general counsel who is now a partner at Cleary Gottlieb Steen & Hamilton in Washington. ``It's a downward spiral where the less significant the population you regulate, the less your available resources.''

The change is also likely to lead to less risk-taking by the companies and possibly lower pay for their employees. Both Goldman and Morgan Stanley held more than $20 of assets for every $1 of shareholder equity, making them dependent on market funding to operate.

Goldman, in particular, has been remarkable for the high bonuses it pays to its employees. Goldman's CEO and two co- presidents were each paid more than $67 million last year. `They're going to have to protect their deposit bases by law, and the days of high leverage are gone,'' said Charles Geisst, a finance professor at Manhattan College in Riverdale, New York, who wrote ``Wall Street: A History.'' ``The days of the big bonuses are gone.''

Source: Bloomberg.com

Fallout from the bankruptcy of Lehman Brothers

WHEN Warren Buffett said that derivatives were "financial weapons of mass destruction", this was just the kind of crisis the investment seer had in mind. Part of the reason investors are so nervous about the health of financial companies is that they do not know how exposed they are to the derivatives market. It is doubly troubling that the collapse of Lehman Brothers and the near-collapse of American International Group (AIG) came before such useful reforms as a central clearing house for derivatives were in place.

A bankruptcy the size of Lehman's has three potential impacts on the $62 trillion credit-default swaps (CDS) market, where investors buy insurance against corporate default. All of them would have been multiplied many times had AIG failed too. The insurer has $441 billion in exposure to credit derivatives. A lot of this was provided to banks, which would have taken a hit to their capital had AIG failed. Small wonder the Federal Reserve had to intervene.

The first impact concerns contracts on the debt of Lehman itself. As a "credit event", the bankruptcy will trigger settlement of contracts, under rules drawn up by the International Swaps and Derivatives Association (ISDA). Those who sold insurance against Lehman going bust will lose a lot. But Lehman had looked risky for some time, so investors should have had the chance to limit their exposure.

The second effect relates to deals where Lehman was a counterparty, ie, a buyer or seller of a swaps contract. For example, an investor or bank may have bought a swap as insurance against an AIG default, with Lehman on the other side of the deal. That protection could conceivably be worthless if Lehman fails to pay up. Until the Friday before its bankruptcy, Lehman would have posted collateral, which the counterparty can claim. After that day, the buyer will have been exposed to price movements before it could unwind the contract.

The third effect will be on the collateralised-debt obligation (CDO) market, which caused so many problems last year. So-called synthetic CDOs comprise a bunch of credit-default swaps; a Lehman default may cause big losses for holders of the riskier tranches.

Insiders say the biggest exposure may be in the interest-rate swaps market, which is many times larger than those for credit derivatives. In a typical interest-rate swap, one party agrees to exchange a fixed-rate obligation with another that has a floating, or variable, rate exposure. Depending on whether floating rates rise or fall, one will end up owing money to the other. Again, those banks that dealt with Lehman should have been fine until Friday, when the bank was still posting collateral. But not afterwards.

Although there are ISDA rules to cover such events, the sheer size of Lehman in the market (its gross derivatives positions will be hundreds of billions of dollars) makes this default a severe test. There will inevitably be legal disputes as well. The good news is that the swaps markets did not utterly seize up after it went bust on September 15th. But the reaction may be a delayed one. Mr Buffett's WMD could leave behind a cloud of toxicity.

Source:Economist.com

Dividend stocks - Do they matter?

Interesting in dividend stocks seems to have gone out of fashion over
the last few years.

We came across this interesting article recently on India Infoline (http://www.indiainfoline.com/news/innernews.asp?storyId=76882&lmn=1&cat= 26). They analyze the top 25 dividend yielding stocks and conclude that most of them are
'Value Traps' - these stocks may give strong dividends, but may suffer from price erosion.

This is because of earnings pressures going forward. The analysis has selected the top dividend yielding companies from groups of different market capitalization. Due to capital erosion, these stocks may not yield good results even in a bear market.

This raises a fundamental question - do dividend stocks merit a place in your portfolio?. We feel they do for the following reasons:

Earnings visibility - While companies giving high dividend yields also face earnings pressures, that is applicable in general to the entire market. In fact, these stocks tend to have relatively stable earnings streams as compared to the rest of the market

Low beta - Dividend stocks tend to trade in a narrow band and are less prone to a fall even in volatile market. In calendar year 2008 stocks like TNPL, Ador Fontech, Varun Shipping have had lesser fall as compared to other stocks

Stable cash flows - they have stable cash flows and do not have a heavy interest burden. This ensures adequate interest coverage in times of rising interest rates.

Tax efficient - Dividends are tax free for the investor. Even after considering the dividend distribution tax paid by the company, it Is still efficient for the investor from an annual earnings viewpoint

Dividend history - Stocks with a dividend track record have proven
their ability to pay dividends through business cycles. For e.g. companies from the Shriram group have paid dividends over the past twenty years.

In the current market we feel that defensive stocks like TNPL and Ador Welding have a role to play in Investor's portfolio. They cap your downside and provide assured income as well. That is more than can be said for several large cap 'growth' stocks.

Falling liquidity in small cap and mid cap stocks

2008 has been an extremely volatile year for the equity markets. Along with market fluctuations, there has been a fall in the liquidity for individual scripts. This is more pronounced in the case of mid cap and small cap companies.

The Bombay Stock Exchange (BSE) has seen a fall in the turnover in both cash and equity segments. This has hit small investors hard as often small companies are listed only on the BSE and not on the National Stock Exchange (NSE). For several companies the turnover is below thousand shares a day, making it difficult to buy/sell even small quantities.

This hits small investors the hardest. Large investors like mutual funds, insurance companies, FII’s tend to stick to the large companies anyways. Small investors typically seek value in smaller companies and here they are facing a liquidity crunch.

While purchasing shares of a company, the liquidity has always been a criterion. In the current market scenario, it gains more importance, and small investors are advised to keep away from shares with very low liquidity. Typically, shares in the A group have more liquidity and they could form the first sub set from which companies are picked out.

While picking stocks outside the A group, the following guideline could be typically used – An investor should be able to buy/sell shares worth at least Rs 25,000 in that company without difficulties in the day. It is important to have a benchmark in terms of value as the market price of the share might vary from Rs 2 to Rs 10,000.

In a nutshell, ideally consider shares which are traded both on the NSE and BSE and have atleast a minimal level of liquidity, so that we can buy/sell them without having to pay a liquidity premium.

Mortgage conditions 'set to worsen'

Home owners are being warned that they will find it even more difficult to get a mortgage in the next few months. The warning was issued by the Council of Mortgage Lenders as it released figures showing mortgage lending had dropped almost 30 per cent to the lowest July figure since 2002.

The latest decline stands out because July is typically one of the busy months for mortgage lending. The CML blamed the shortage of mortgage funding and slower demand among home owners for the worsening conditions. Bob Pannell, CML head of research, said: "In the absence of fresh interventions from the authorities, mortgage lending activity is set to worsen in the second half of 2008."

He explained there is a "dampening of consumer demand due to tightened lending criteria, declining house prices and pressures on household finances from higher food and energy costs". While gross mortgage lending is down 27 per cent from July last year, it actually increased by 5 per cent the previous month to £24.8 billion in July. But Mr Pannell added: "While there was a small month-on-month increase in activity, it represented a notable decline from a year ago.
This continues the weaker picture seen in June and points towards the more subdued levels of lending we are likely to see in the second half of 2008."

His comments come just a day after Kenneth Rogoff, chief economist to the International Monetary Fund between 2001 and 2004, told an audience in Singapore that "the financial crisis is at the halfway point, perhaps."

Now an economics professor at Harvard University, Mr Rogoff said. "We're not just going to see mid-sized banks go under in the next few months, we're going to see a whopper, we're going to see a big one, one of the big investment banks or big banks."

The CML said its mortgage lending figures - based on completions - are expected to get worse because the Bank of England said last month that mortgage approvals had plummeted by more than two-thirds in a year.

Mortgage approvals were down from 41,000 in May to just 36,000 in June - the lowest level since records began in 1993, the bank said.

Dis-investment of PSU enterprises

With the success in the trust vote in Parliamant by UPA without the support of the Left, has opened up various avenues for the Government to raise the budgetary shortfall through divestment of stake in loss making PSU enterprises. The Governmnet was very open in commenting that it would take forward the almost stalled economic reforms process and made bold statements on banking de-regulation few days back.

With the agri loan waiver scheme alone has taken close to Rs60,000 crores from the Government's kitty, it would be an appropriate time for the Government to look at alternatives like divestment to raise the required revenue.

The market has taken scent of that and today all possible candidates of divestment like ITI, HOCL, RCF, HMT were locked in the upper circuit. Even other profit making and well run PSU's like Engineers India and STC were up by more than 15% in today's trading.

The time is right for the Government to proceed ahead with divestment without the hassles of a constantly pestering Left, but it all depends how they manage the process of divestment. They bungled in the case of IFCI when they tried to rope in a strategic partner.

We believe that the Government may not go for a big-bang divestment process at this stage because the Left and their new found partners would take the issue to the streets and may lead to large scale public protests. Already the macro-economic scenario in the country looks gloomy with rising inflation, high interest rates and economic slowdown. This may turn very negative for the Government who has to face the public in another 9 months time (at the maximum).

Economic Times reporting on TCI Fund buying of PSU shares

Exactly 3 months after we spotted that The Children Investment (TCI) Fund is buying aggressively in PSU Bank counters, The Economic Times has carried an front page article on this. The earlier write ups in this blog on TCI buying can be read here and here.

TCI Fund has acquired more than 9% stakes in 3 PSU banks, Punjab National Bank, Vijaya Bank and Indian Overseas Bank. The maximum threshold limit for FII to buy in the PSU Bank stocks is 10% and they are close to achieving that. In addition to these 3 banks, they have also bought more than 4% stake in Bank of Baroda and Union Bank of India.

After the trust vote, which UPA won recently, the Finance Minister has gone on record saying that during the Monsoon session of the Parliament, Government would introduce the Banking Regulation Amendment Bill which allows voting rights according to the shareholding pattern. As of now, the voting rights in PSU Banks are not in proportion to the shareholding pattern and the Government still retains the so called "golden share".

Things are hotting up on the Banking space, particularly the PSU Banking space with the BR Amendment. Thanks to Communists for withdrawing support to the Government, otherwise, this would have been unthinkable. We have to wait and watch how things span out in the months to come with regard to further reforms in the financial services space by the Government.

Click here to read the Economic Times article on TCI Fund's purchase of PSU Bank shares.

Insurance companies increasing their Indian equity markets exposure

We have earlier written here about the fact that Insurance companies in India are increasing their exposure to the Indian stock markets. The first quarter of this fical 2008-09 data has come out and it goes on to prove that Insurance companies are the biggest buyers in the market.

As per the statistics disclosed by Business Line, Insurance companies in India has bought shares worth Rs15,000 crores in the first 3 months, April to June 2008. Life Insurance Corporation (LIC) has alone bought shares worth Rs12,000 crores. LIC's investment has increased by 60% in the Qtr 1, 2008-09 compared to Qtr 1 in 2007-08. The increase in the Insurance companies investment in stock markets is due to the increased inflow seen in the ULIP products sold by them. Though the volumes have come down due to market uncertainities over the last 3 months or so, ULIP's are still preferred medium to invest in Indian equities for the average Indian.

Ironically, during the same quarter, Mutual Funds have bought less than what they bought in Qtr 1 2007-08. MF's have bought shares worth Rs3,131 crores compared to Rs4319 crores the previous year.

Fund Investing in Volatile Markets

In 2008, the equity markets have seen a high amount of volatility. After reaching a high in early January, the markets have been on a downward trend. A variety of global and local events including oil prices, sub prime crisis, inflation etc has influenced the markets.

A common question we have is whether to continue investing in the markets now. Even those who invest through SIP plans in equity mutual funds face this dilemma. There is no shortage of advice either.

We question the logic behind the most common ones:


· Continue investment in the markets as they are for the long -term:
Every analyst worth his salt is downgrading earnings, reducing P/E multiples and predicting ever lower Sensex predictions. If the analysts are so sure that the markets are going down, then why should retail investors continue to invest now? Why cant they wait for the 10k Sensex levels predicted with such confidence by the same analysts to whom they hand over their money? While picking the bottom of a market is different, if there is an overall gloomy scenario and a strong downward trend, then why should invest put up their money now?


· Invest in mutual funds and do not pick stocks directly as one should leave it to the professionals in such tough times:
As of today (15th July 2008), as per Value Research, the diversified equity mutual funds have delivered a 1 year return of – 16%. Add 2.5% administrative expenses and 2.25% entry load, the total return in a year stands at – 21%. Against this the Nifty has a – 10% return over one year. That is a huge difference of 10 % over a year. Why should I hand over my funds to a professional who doubles my loss, when I can stick to an Index ETF with better returns?


· Invest in five star funds recommended by the fund distributors/Value Research:
Currently ICICIDirect wants investors to switch to Sundaram Select Focus and HSBC Equity based on one year performances. Out of curiosity I checked their fund recommendations in 2007. Of course neither fund figured there.

One more curious fact – I have never seen any distributor/MF rating firm put a Sell on any fund. And all these switching of fund portfolios will earn them fresh entry loads. Coupled with the fact that they keep changing their preferred funds every few months, it is difficult to build a long term portfolio using this information.


Summary
So what we need to do in this market – Do not follow any general advice – there is no free lunch!!

In this market it is best for each investor to carry out his own analysis, determine his/her risk apetite, holding period before you decide on MF investments. Remember, asset allocation is the key. When we buy/sell a fund we need to consider the impact on our portfolio.

Today a multitude of options are available (In this blog we have spoken about arbitrage funds, international funds, liquid plus funds etc.)

Building a long term mutual fund portfolio which provides superior returns requires clear understanding of the expected returns and the risks in such portfolios, and it does not help with frequent churning of the funds.

Treatment of TVS Electronics Shareholders

The TVS group is one of the oldest and most respected business families in India. TVS Electronics is one of their listed companies. Unfortunately the shareholders have been taken for a ride recently.

In 1999, TVS Electronics, a listed company paid Rs 10 crores to ICL foundries to acquire 6 acres of commercial land in Nandambakkam, which is close to Guindy. This property is shown as an asset of Sravanaa Properties, which was earlier a 100% owned subsidiary of TVS E.

As per reports in the Economic Times, the group has been trying to sell this land since Sept 2007. The upset price is Rs 225 crores, and they are close to clinching a deal with Ascendas, which is a renowned Singapore realty firm. Sounds great news for TVS E shareholders. But there is a sting in the tail.

Through a board resolution on 13 August 2007, the stake in Sravanaa Properties has been divested by TVS Electronics in favour of TVS Investments for a consideration for Rs45.50 crores to meet the long term fund requirements of TVS Electronics. The group had an upset price of Rs 225 crores, but they were happy to sell the stake to an unlisted group entity for Rs 45 crores !!

It is worthwhile to understand some corporate developments which took place in the case of TVS Electronics during the August 13, 2007 meeting. (http://www.bseindia.com/qresann/newsh.asp?newsid={5171DFA9-AB41-4B4A-85A8-BB70A99D1D8A}&param1=1). The firm transferred the assets in Sravanaa Properties and TVS Finance to TVS Investments Ltd for a total consideration of 60 crores.

Subsequently in Nov 07 the firm issued a statement that TVS E does not own the land in Chennai (http://www.bseindia.com/qresann/newsh.asp?newsid={2075BE77-829E-4361-80D0-ED5C76EF43A8}&param1=1)

Several questions could be raised about these transactions:

1. If the TVS Group had any intention of selling this property in the near future, why did they divest their stake in the company, Sravanaa properties. Instead of subscribing for the preferential allotment, TVS Investments has taken over the prime assets of TVS electronics at almost one-fourths of current market price. The irony is that the current market price is much lower than what it would have been 9 months ago when the real estate prices were ruling high.

2. If the TVS Electronics is dire need of funds, it should have borrowed from the market or taken a loan from any TVS Group company. Instead they sold their family silver to run the business?

3. Regarding the sale of TVS Finance and Services Ltd's shares, four months down the line, TVS Investments makes an open offer for the same shares of TVS Finance and Services Ltd., at Rs26/- per share, again at agreat dis-advantage to TVS electronics shareholders.

The way in which the TVS Group has treated TVS Electronics shareholders is very disappointing. They used TVS Electronics funds of Rs10 crores to buy the land from ICL Foundries in 1999, and finally when they were about to hit a goldmine, TVS Group has silently transferred the property to an unlisted group company. Probably, all these transactions would be within the rules of the law but not definitely in the right spirit!!

Post your comments.

Time to look at Top-ups on your Pension and Children Plans

We have been seeing a very volatile stock markets with a negative bias over the last 3 months. The NIFTY has corrected from 6000 levels to sub-4000 levels and the index PE has fallen from 17 to less than 14. This has been caused by the global factors like continuously raising crude oil prices, commodity prices, threat of inflation and stagflation (raising inflation with negative economic growth) across continents and top it all the liquidity crisis and the lack of confidence on the stocks. So taking into account all the above factors, the markets has discounted heavily leading to a 35% correction on NIFTY in 2008.

We also acknowledge that all these factors are true and bound to have an effect on the stock market performance over the short to medium term, but the moot question is, from the long term perspective does this provide an opportunity to buy/increase your exposure to Indian equity. We believe that it is definitely a good opportunity to start buying Indian equities slowly but steadly. Nobody can predict the tops and bottoms of the stock markets exactly, but as investors we should make good use of the huge market corrections for increasing our exposure in the long term investment options. Since many of us don't directly invest in stock markets but we invest through our Mutual Funds units, Unit linked Plans for Pension, it is a good time to look at making top-up premiums to our existing plans.


The advantage of top-up premiums are :

1. It allocates the maximum amount towards investment content rate (ICR). In many cases, almost 99% of the top-up premium goes towards investment allocation.
2. As the market has come down significantly and the NAV's of various funds have corrected by huge margin, the unit holders would get higher number of units.
3. Top-up premiums should be used for effectively increasing your pension or other LONG TERM investment plans corpus only. By long term, we mean where we allow the investments to remain for more than 5 years or so.

Gwalior Chemical Industries - bulk purchase by Goldman Sachs

Gwalior Chemical Industries is a small cap stock which has garnered lot of market attention over the last couple of weeks. The stock has shot into prominence with one of the funds of Goldman Sachs Mauritius turning aggressive buyer in the counter over the last week. Goldman Sachs fund has acquired close to 1.6 million shares from the open market during the last week (almost on all trading days) at an average price of close to Rs95. This bulk deal has been reported in various business newspapers in the bulk deals section.

There is also a rumour that this company is going to be acquired by Bayer Life Sciences at the rate of Rs190/- per share but it has not been confirmed.

When we look at their financials, the topline has grown by 43.50% this year and the net profit has grown by 33.32%. The EPS per share works out to Rs9.85 compared to Rs9.43 for the last year. It means that there is a big equity dilution on the way. The share has today closed around Rs94 resulting in a PE of close to 10. Though it is not very cheap, the large accumulation by FII's may warrant some closer examination of the company, future business prospects.

Keep a close watch on Gwalior Chemical Industries!

Mysore Cements - Investment Idea

Mysore Cements is a SK Birla promoted company with a cement production capacity of 2.1 million tonnes across 3 production facilities in Karnataka, UP and MP. The SK Birla group has recently off-loaded its entire stake of 54.38% to Hiedelberg Cement Group of Germany. Now, Mysore Cements is a subsidary of Hiedelberg Group. The company is expanding its capacity to 5.9 million tonnes per annum subject to approvals from regulatory authorities. The Board of the company has been re-cast with the nominees from Hiedelberg group taking over the Birla held board positions. The company is merging Indorama cement and Hiedelberg Cement India P Ltd with itself w.e.f 01 April 2008.
The company follows Jan-Dec accounting year and for the y.e 31 Dec 2007, the total production of Cement and Clinker stood at 2.201 Million tonnes companred to 1.610 million tonnes for the y.e. 31 Dec 2006, implying a production increase of 36%. The net realisation per tonne of cement during 2007 stood at Rs3271 compared to Rs2954, again showing an upward bias in price realisation.

Positives:
1. The company revenue and profits have been raising continuously over the last 4 quarters. Of course, the cement cycle is doing good being the primary reason, the company's association with Hiedelberg may be a positive in the long run. The net profit of the company has increased to Rs97.65 crores for the y.e 31-12-07 compared to the loss of 2.19 Rs34.31 crores in y.e. 31-12-06. For the quarter ended 31-03-08, the company has reported an EPS of Rs 2.59.
2. The company holds cash to the extent of Rs180.73 crores in the Balance sheet as at 31-12-07. This works to per share value of Rs11.43. The total market capitalisation of Mysore Cements at the current rate of Rs32 works out to Rs506 crores.
3. The company has generated cash of more than Rs.80 crores for the year ended 31.12.07.
4. The company holds 12 lakh shares of Cimmco Birla Ltd., in its books valued at Rs12 lakhs. The market price of Cimmco Birla is Rs25 per share and there is already a proposal of takeover by Titagarh Wagons. Since Cimmco Birla is under BIFR purview, the promoter company can not sell the stake now.
5. In addition to this, the company holds investments in listed entities which are valued clost to Rs2.50 crores. (As per the last balance sheet it was valued at Rs5.45 crores. Considering the erosion in value of securities over the last few months, I have reduced the market value of investments by more than 50% to Rs2.50 crores)
6. The company has accumulated losses of Rs269.83 crores in the books which will help the company to reduce the tax burden over the next couple of years.
7. The company is quoting at an attractive valuation of less than USD65 Economic Value per tonne compared to the industry average of USD105 per tonne.
8. The company has an expanding operating margin over the last 3-4 quarters.

Negatives:
1. Cement being a highly cyclical industry, the fortunes may swing wildly. The per tonne realisation may not be sustained, there can also be a drop in the demand for cement due to economy slowdown. The company may also face difficulty in managing rising input costs, in-adequate limestone mining facilities, coal availability and increasing railway freight charges.
2. The company being located in the hinterland, the exports may not be an viable option at all.
3. The accumulated losses to the extent of Rs269 crores will stop any dividend pay-out for the next couple of years atleast.
4. Increasing cement capacity across the industry leading to fall in price.

Our take on this company:
The company looks interesting to us at this price of Rs32 considering its parentage. We are being very conservative in estimating the full year EPS to be around Rs7.50 (instead of Rs10 thats what you will get if you just annualise the first quarter ending 31 March'08). It is quoting at 4 PE but since it is a turn-around story and zero-debt company (very important in a rising interest rate scenario) it is destined to do better.
We would ideally look at a price of Rs45 over the next one year at the minimum for this scrip, which presents a possible upside of around 50% from the current price levels.

Ranbaxy promoters does an unthinkable act!!

The promoters of Ranbaxy Labs have done an unthinkable act in the history of Corporate India by selling out their 34.8% stake in Ranbaxy at a price of Rs737/- per share to Daiichi Sankyo, a Japanese pharma company. for Rs10,000 crores. In order to further increase its stake to 50.1%, Daiichi Sankyo would be issued equity shares and convertible warrants on a preferential basis and also make an open offer to the existing public shareholders of Ranbaxy for an additional 20% stake at a price of Rs737 per share. At the price of Rs737/- per share, Ranbaxy is valued at USD8.5 billions.

The Japanese company, after acquiring the stake from Ranbaxy promoters would further make an open offer to the share holders for acquiring additional 20% of the share capital. The combined entity of Daiichi Sankyo and Ranbaxy would be the world's 15th largest Pharmaceutical company.

Mr Malvinder Singh will continue to lead the company as its CEO and Managing Director while additionally assuming the position of Chairman of the Board, upon closure.

Sharekhan in its research report yesterday as written that " The open offer price of Rs737 per share represents a premium of 31.4% to Ranbaxy's closing stock price on June 10, 2008, a 53.5% premium to Ranbaxy's average daily closing price for the three months ending on June 10, 2008 and an 18% premium to Ranbaxy's fair price of Rs625 per share. The open offer price is attractively priced and presents an attractive exit option for investors. However, the acceptance ratio in the open offer works out to just ~34% taking into account the free float of 58.9% (on the expanded equity base), which could limit the upside in the short term. Moreover, the complete exit of promoters has come as a surprise and could possibly act as a drag on the stock sentimentally.

For investors with a long-term investment horizon, at the current levels the effective purchase price would amount to ~Rs469 per share considering the possibility of tendering ~34% of the shares in the open offer at a price of Rs737 per share. This price would be at 26.2x CY2008 fully diluted earnings and at 14.7x CY2009 fully diluted earnings".


What would Ranbaxy promoters do with the money?

Malvinder Singh in his interview to Economic Times has stated that he along with his brother Shivinder and Sunil Godhwani of Religare Securities would decide on the future course of action for the Ranbaxy group.

We think that the focus would shift to Fortis Healthcare and Religare, Ranbaxy group listed companies. There can be more buy-outs in the health-care space. Already few months back, Fortis Healthcare bought out the promoters stake in Malar Hospitals, Chennai.

Religare is already on a roll. It has already got a license to float a mutual fund company in association with Aegon. Senior level recruitments have already started in this company. They want build the Religare brand and have a presence in the entire spectrum of financial services. With the banking sector opening up in 2009, Ranbaxy promoters would have possibly felt that more can be done on the financial services industry and for that matter they have already created a war-chest of Rs10,000 crores.


It is very rare to see promoters selling off their entire stake in a profitably running Indian company with global operations. It sounds like the promoters want to get out of the business when the going is good.

Due dates for filing income tax returns and the relevant forms

The due date for filing income tax returns is fast approaching for various kinds of assessess. The following are the various types of Income Tax Return Forms which needs to be used by assessees for filing their return of income for the Assessment Year 2008-09 (Financial year ending 31 March 2008).

ITR 1 - For Individuals having Income from Salary/ Pension/ family pension & Interest
ITR 2 - For Individuals and HUFs not having Income from Business or Profession
ITR 3 - For Individuals/HUFs being partners in firms and not carrying out business or profession under any proprietorship
ITR 4 - For individuals & HUFs having income from a proprietary business or profession
ITR 5 - For firms, AOPs and BOIs


The due dates for filing return of income is as givine below:

I Where the assessee is a Company - 31st October of the Assessment year.

II Where the assessee is a person other than a company :-

a) where accounts of the assessee are to be Audited or 2.a working partner of a firm whose accounts are required to be audited under the Income Tax Act or any other law - 31st October of the Assessment Year.

b) Where the return has to be filed under the one-by-six criteria - 31st October of the Assessment Year.

c) Any other assessee - 31st July of the Assessment Year

For the salaried employees the due date for filing return of income is 31 July 2008.

How difficult is it to buy a term insurance plan?

We all know that term insurance is the cheapest and the easiest form of insurance. But look at the travails of Business Standard reporter when he tried to buy a term insurance product from various life insurance agents in Mumbai.

Click here to read the story.

This is not an isolated case. We have also had instances of meeting the Insurance Advisors who go on talking about the various ULIP's and other products but never talk about the simple of insurance. We have seen rampant mis-selling of ULIP's by the advisors where the long duration products are sold to people who are in the age bracket of 55 and above.

We once had an opportunity to meet the Sales Development Manager of one of the India's largest private insurance company and the talk went towards what kind of products being sold pre-dominantly. He said he pushes only Unit linked products and when we quizzed him about the term policies he was not even clear about the products and it premium rates. That is the kind of environment we are in.

There is some good news from the biggest of the lot, Life Insurance Corproation (LIC). LIC has indicated that it would sell more of traditional products in the Financial Year 2008-09 and hopes to bring down the percentage of ULIP's to 70% of the total new policies sold.

It is a market where the buyers are to be aware. Caveat Emptor!!

Review of existing Insurance policies

We all own life insurance policies that have been acquired over the last several years due to reasons, which are not really towards, risk mitigation. We would have bought life insurance policies because the "agent" is our relative or a person who is known to us. We start servicing the policy acquired without ever realizing if these policies are cost-effective, matches our risk profile and provides adequate security. Therefore, it becomes imperative that we do a review of our existing life insurance policies and do a cost benefit analysis with regard to the premiums paid and the risk cover provided.

We came across a person of 32 years with the following insurance covers.

1. An Endowment policy for Rs100, 000 with double death benefit and a annual premium of Rs4100/-. The policy was taken 8 years ago for a term of 25 years.

2. A term policy for Rs300, 000 with return of premium after the policy term of 25 years. Annual premium is Rs3085/-.

Now considering his present financial position and his age, it becomes important that he has a higher life cover than the coverage of Rs500, 000 (from both the policies). For the premium of Rs7185/- per annum, it is possible that he could get a cover of close to Rs20, 00,000 for a term of 25 years. Therefore, it makes sense to discontinue the existing policies and go for pure term insurance policies with a much higher life cover. We need to keep remembering that Insurance is for meeting any exigency and never be construed as an investment.

Now the other important question that comes up is what we would do with the existing policy and how to salvage the premium amounts already paid. Here you don't have many options but to accept the surrender value of the policy. There will be definitely loss of premiums paid when you pre-close a policy, but you should also understand that there is still 17 more years left in the policy. Will it make sense to discontinue now or to go on for another 17 years with low risk cover?

Normally for policies, which have completed 5 years of service, the Insurance Company allows the policy to continue for 6 to 12 months from the due date of premium without allowing the policy to lapse. Therefore, it is prudent in this case to stop paying the premium for 2008 onwards and look out for alternative life covers. You will be able to enjoy the life cover for another 6 months from the due date and then approach the insurance company to surrender the policy and recover the surrender value.

To summarize:

1. Review the existing life insurance policies held by you periodically to find out if it is providing you with optimum cover.

2. If you are planning to re-engineer your existing life insurance policies, it makes sense to do it as early as possible. Preferably, it should be done before somebody attains 35 years of age to take advantage of the lower premiums till 35 years.

3. Go for pure term policies and not for term policies with return of premium unless you for some strange reason want the premium you have paid back at the end of the policy term. It does not make economic sense.

4. Make best use of the policy terms to ensure that the policy continues to be in force until you choose the new policy.

5. Surrender value in respect of policies can be used to plan your cash flows, as at times it is sizeable. In the above example, for the first policy the surrender value is close to Rs28, 000/-.

6. Last but not the least; Insurance should never be looked at from an investment perspective.

Arbitrage funds – a good place to park money for short term

Arbitrage funds are the funds floated by Mutual Funds with an aim to take advantage of arbitrage opportunities that exist between the cash and the futures market to generate a steady income for the investors. The arbitrage funds take advantage of the mis-pricing between the cash and derivatives market.

How arbitrage funds work?

For example, an arbitrage fund may buy Infosys shares @ Rs1800/share in cash market on 01 April. At the same time, it will sell Infosys shares in the futures market, which would be quoting at about Rs1815. This existing difference is called "cost of carry" in financial parlance.
Let’s say the price of Infosys on the expiry date of the futures contract (last Thursday of every month) is Rs1900. Thus, the fund will make a profit of Rs100 per share in the cash market (Rs1900- Rs1800) and loss of Rs85 in the futures market. (Rs1815 – Rs1900). Here, the important assumption is the cash and futures price remains the same on the date of expiry. The net gain per share is Rs15 after setting off the loss on the futures market.

In case the price of Infosys share drops to Rs1700 on the settlement day. The fund will make a loss of Rs100 per share in the cash market and profit of Rs115 in the futures market. Again, the net gain will be Rs15 per share. This way, the arbitrage funds makes money in all the situations.


Tax Implications for Arbitrage funds:
For tax purposes, arbitrage funds are treated like equity funds. There is no dividend distribution tax, no long term capital gains tax and the short term capital gains tax is at 11.33% compared to the applicable slab rate for debt funds.
Dividend distribution tax – NIL
Long Term Capital Gains tax – NIL
Short Term Capital Gains Tax – 11.33%
Securities Transaction Tax – 0.25%

Return expectations:
The arbitrage funds have given a return of around 9.25% p.a. in the last 6-12 months compared to 7.5% returns for floating rate funds and 7.9% for liquid plus funds. The tax treatment is also favourable compared to the debt funds. The Arbitrage funds are the only equity related funds which have given positive returns over the last 3 months or so.

Risks associated with these funds:
Of course, there is couple of them. First, it is possible that the arbitrage opportunity may not be available for the fund to take advantage off. In those cases, we understand it would act like a liquid fund. The second one is that the logic of the cash and futures price of a stock matches on the contract expiry date may not materialize. In addition there is always a possibility of fund manager not capitalizing on the opportunity and the lack of liquidity to execute arbitrage contracts.

Popular Arbitrage funds in the market:
The following are some of the popular arbitrage funds in the market:
JM Arbitrage Advantage fund, SBI Arbitrage Opportunities funds, Kotak Equity Arbitrage Fund, Standard Chartered Arbitrage Fund Plan B. Each of these funds has given a return of above 9% in the last 12 months.

Suitability of the product:
The Arbitrage funds are suitable for people who want to park funds for a short term of 12 -18 months with reasonable degree of safety and return.

Financial Planning for Major Events – Part II

This article looks at financial "smartness" during a function. The actual event often happens at such speed that smart decision making is difficult. While enjoying the function, from a financial viewpoint the two main factors are liquidity and safety.

Liquidity – Compute before hand the cash payments, which will need to be made during the function. If necessary, negotiate the payment mode with the vendors beforehand to make sure that you do not have to carry large amounts of cash. Do maintain a buffer for emergency expenses.
Event Insurance – Today event insurance is available from several Insurance companies. This ensures that in case the event does not happen, then insurance is available to cover the fixed expenses which have already been incurred. The amounts involved are nominal and is worth the peace of mind. Do consider the riders for theft, natural calamities etc. Typically Insurance for Rs 10 lakhs comes to around Rs 6000. Approach any general insurer for the necessary cover.

Locate the nearest ATM – Try to find out the ATM nearest to the venue where the event is being held. This is helpful, if sudden cash is required.

Find a custodian – Try to delegate the cash management to a reliable person who is not an active participant in the function. They can manage the cash without getting distracted by the events of the function.

Managing cash receipts – Giving gifts is a standard practice in our functions. Often this is in the form of cash. Decide before hand on who would manage the cash for you. Apart from keeping the gifts safely, it is also essential to maintain a record of who has made each gift. This is often difficult for cash gifts. Hence, smart and speedy record keeping is vital J Of course the physical gifts also need to be collected and stored safely.

Gifts from friends/close relations – One of the joys of receiving a gift are the surprise element. At times close friends/relations prefer to ask you what you would prefer as a gift. So do keep a list of a few handy things you would want (at different budgets). Nowadays gift cards are also in vogue. If there are no preferences then remember Cash is always king!!

Safety – Functions are a time to display the jewels, designer clothing, silver vessels and other valuable items. Make sure that individual people have responsibility for specific items. Of course at the end of the day, we would need to keep a personal eye on major items.

Recordkeeping – As always, record keeping is vital. Several big ticket expenses/receipts happen during the function and one should keep a note of the same. It will help us analyze the expenses and also compare the actual expenses against the estimates, made before hand.

Further to our post on April 17 on the bulk purchases of PSU Bank shares by TCI Cyprus Holdings, we have got more information on the quantum of stake taken by TCI in various PSU Banks. Business India has reported in its latest issue, has carried a mention about the stake accumulated by TCI. TCI now holds 7.66% in Indian Overseas Bank and 9.62 % in Vijaya Bank. TCI has become the single largest shareholder after Government of India in IOB and the largest FII in Vijaya Bank. Business India has also carried some spicy information like a "big industrial group with interests in Financial Services" have also mopped up shares in Vijaya Bank in April. Incidentally, LIC has increased its stake in Vijaya Bank to 5.11% in April 2008. Lot of action in Vijaya Bank counter.

Vijaya Bank has come out with a decent set of numbers showing a growth of 9.03% in Net Profits for the year ending March 2008. This growth in profits is after providing for dimunition in value of investments to the extent of Rs272 crores in Q4, 2008. The Q4 provision for dimuntion in value of investments is due to temporary rising of bond yields during the last month of the financial year as the liquidity dried up in the market. The analysts think that the value of investments written down during Q4, 2008 would regain value as the bond yields stabilizes in the coming weeks.

Watch out for action in PSU bank and in particular Vijaya Bank!!

Financial Planning for Major Events – Part I

We cherish memories of key events in our life like weddings, house warming ceremonies & birthdays. Large amounts of money are spent for the same. Proper budgeting and prudent spending can go a long way in ensuring optimal spending. In this post we address the different aspects to take into account in the lead-up to the function.

Record-keeping - The first thing is to purchase a sturdy notebook (the physical one not electronic!!)This will serve as long-term record of the event.
Budget - It is essential to prepare a budget for the event. The number of guests at a function typically determines the food and venue budgets. Hence, preparing detailed lists of likely guests is essential.
Money management – Once the budget has been finalized, decide on the best method for financing for the same. Try to have a tie-up with friends/relations to arrange for money at short notice if required. This will prevent running around at the last minute to make arrangements for money (borrowing at short notice is often very expensive)
Section Estimates - Estimates need to be made for key areas including food, travel, venue, religious expenses. Leave a generous amount (typically 20%) for miscellaneous items, price escalations. Decide on the upper limits for the key areas, keeping in mind the overall budget. It is surprising how often we go overboard, for a specific item (e.g. clothing) and find ourselves short for the remaining items.
Negotiate key expenses – As a buyer, we have the negotiating power/choice for several items like clothing, wedding contractors etc. It is worthwhile negotiating rates for these key expenses. Often, a token advance helps us secure contracts in advance for major expenses. Doing this earlier also helps us look around for different options, as we have enough time.
Bulk purchases – Purchasing items like clothing, in bulk definitely gives cost savings.
Techno-savvy – The Internet has relevant information in most areas. One can obtain information about the costs of different items; communicate with our distant friends, relations in a cost-effective manner. For e.g. maintaining online wedding albums has become a trend now. For smaller functions, consider usage of personal digital cameras, instead of hiring professional photographers.
Accounting – Note down all relevant expenses, as they occur in the build-up to the occasion. It is surprising, how often expense items get missed out/or they are not considered to be a part of wedding expenses.
Payment Options– Avoid paying cash, unless there are significant cost advantages/no other options. Also do not pay out the entire amount for any vendor. Hold back some amount till the function is completed.
Liquidity management – One needs to have sufficient cash to meet sudden, emergency expenses which come up at the last minute. Apart from that, proper planning will ensure that we do not have to make large cash payments to all vendors at the same time.

Conducting a function is a very personal event, where we decide, how we want to celebrate the event. Hence, the suggestions given above might not be applicable to everyone. Some of us would want to celebrate the event in as grand a manner as possible. Some amount of planning at the early stages saves a lot of pain during the function.

Bulk purchases in PSU Bank stocks by TCI Hedge Fund

Over the last couple of months, one particular hedge fund, The Childrent Investment (TCI) Fund is accumulating shares of Public Sector Bank in huge quantities. TCI has been buying aggressively in the counters of Punjab National Bank, Indian Overseas Bank and Vijaya Bank . It is believed that they have invested more than Rs5000 crores in these bank stocks put together accumulating stakes ranging from 2% to 5% in each of the banks.

What is so interesting is the fact that TCI is considered to be one of the most active investor funds. They have instrumental in various corporate shake-ups over the last couple of years across the world. TCI was responsible for stopping the Deutsche Bourse's bid for London Stock Exchange resulting in the Chairman and CEO of Deutsche Bourse resigning over a period of time. Click here to read about this.

TCI has also been responsible for the sale of ABN AMRO Bank in 2007. It was one of the first funds which sent out a letter to the Managing Board of ABN Amro Bank to find out avenues to increase share holders returns by splitting the company or selling of the assets. This eventually resulted in the sale of ABN Amro Bank to Royal Bank of Scotland led consortium. Click here to read about this.

TCI is also involved in a debate with Japanese Government in trying to raise its stake to 20% from the present holding of 9% in Japan's Power Utility major, JPower. TCI wanted the dividends to shareholders to be increased by JPower but opposed by the management. Then TCI approached the Japanese government requesting for approval to raise its stake to 20% in JPower so that it can influence major board decisions. Two days back Japanese government has rejected the TCI request citing the reason that TCI looks for short term profits ahead of the common good to the public. Click here to read the story.

Now with a very noticeable history of active investing across industries and countries, TCI is upping their stake in various public sector banks in India. We guess TCI sees a possibility of using its stake in PSU banks to push forward the agenda of mergers in the Indian Banking sphere. Interesting space to watch out for!!

The story of Orchid Chemicals & Pharmaceuticals

Shareholders in Orchid chemicals have had a roller coaster ride since the beginning of March. March started on a positive note for Orchid Chemicals with LIC picking up an additional stake of 2.3% in the company, which took the overall holding of LIC to 8%. Citibank had also come out with a positive buy report on the company. Even during the crash between Jan to March earlier in the year, Orchid had withstood the crash better than several other companies.

Then the "Bear" struck. Due to internal problems, Bear Stearns liquidated their positions in several companies in the Indian market through their unit BSMA. While they had disposed their stake in Orchid at Rs 190 level, this lead to a dramatic slide in the company prices. In a single day the price crashed from Rs 220 to Rs 130, partly due to the sale of Bear Stearn’s stake and also due to the fire sale of stock held by financiers, India Bulls Securities and Religare.

The promoter Mr.Raghavendra Rao had pledged his personal and family’s existing stake (17%) to raise funds and purchase an additional stake of 7% in the company. As the price came down, the financiers (India Bulls Securities and Religare) of Mr Raghavendra Rao & family sold the shares in the market to safeguard their investments.

Subsequently the price languished between Rs 110-140 in the later half of March. At that time, the scrip was offering tremendous value to the shareholders and was available at a forward FY09 PE of 4 times. With a gradual recovery in the market, the script price also recovered. This week, the Ranbaxy group company, Solrex Pharmaceuticals has taken a 13% stake in the company through open market purchase. There was a 40% rise in the value of the firm in two days and the price reached Rs 247 today. Initially there were talks of a hostile takeover by Ranbaxy group but with the financial institutions taking a neutral stand, the threat of hostile takeover is not there for Orchid’s Raghavendra Rao, atleast for the time being.

What are the lessons for retail investors in such a scenario?

• Such rapid price fluctuations offer profit-making opportunities. If the company’s fundamentals have not changed, then abnormal fall in prices represent excellent buying opportunities. Value investors wait for these opportunities to pounce on it to grab equity at very attractive valuations.

• In bear markets, the volatility levels of fundamentally strong companies with low promoter holdings may be high as the company becomes susceptible to takeover threats from competitors.

• Financial Institutions will play a significant role in ensuring management stability. LIC and United India Insurance (which holds 2.8%) have refused to enter into the discussion on which group they would support in case of a hostile takeover.

Typically when an external company challenges the incumbent management for control, the price volatility will increase with a typical upwards trend. Again it is, good news for small investors.