Investeurs ChronicleApril 2013, Volume: 69
CoverStoryFor many, it is a sense of deja vu. Fifteen years ago, the government and Indias financial regulators came under...
With rising financial clout and an army of depositors — many also doubling up as agents — under their fold, they acquired ...
Bank lending in India is only 50% of GDP and, of this, nearly a quarter is appropriated by the government. In any decent e...
STEEL OUTLOOK2012 was a challenging year for the steel industry with apparent steel use increasing at the slowest rate sin...
Emerging Country- TurkeyTurkey officially the Republic of Turkey is a transcontinental country, located mostly on Anatolia...
In FocusForexShould India Issue Sovereign Bonds?Sovereign Bond refers to a debt instrument bearing interest and issued by ...
About Investeurs Consulting Private LimitedFor a good business, finance is as crucial as vision, management andproduct. In...
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69 i chronicle


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Back in Limelight-“Saradha chit fund scam brings in focus deficiencies in Financial sector”
Steel Outlook
Moonsoon trend in India
Emerging Country-Turkey
Should India issue Sovergin Bonds

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69 i chronicle

  1. 1. Investeurs ChronicleApril 2013, Volume: 69
  2. 2. CoverStoryFor many, it is a sense of deja vu. Fifteen years ago, the government and Indias financial regulators came under fire after hundreds of crores were cleaned up bya few individuals and entities from gullible investors, who were promised fabulous returns from plantation schemes. In the uproar that followed, thegovernment mandated SEBI to monitor collective investment schemes, announce regulations and make legislative changes to ensure oversight of such schemes.Over a decade later, it appears that little has changed. Multi-level marketing or Ponzi schemes, which promise hefty returns to investors, have returned to hauntthem, the government, as well as the regulator as the blow up of the West Bengal-based Saradha Group of Companies shows. This is bound to snowball into amajor crisis in the state as thousands of investors have now started demanding their money back from companies involved in multi-marketing or Ponzischemes.The crisis in West Bengal could blow up into something bigger than what happened in Andhra Pradesh in 2010 when borrowers stopped repaying microfinancecompanies after the government issued an ordinance to regulate them, leading to a virtual collapse of the MFI.Chit funds/ Ponzi schemesThe chit fund, or the committee, is where a number of savers form a closed group to pool a stipulated amount over a finite number of months. Any member ofthe group can seek to borrow this pooled saving. She has to compete with other would-be borrowers in the group.Whoever has the most urgent need would offer to pay the highest rate of interest, implicit in the discount she is willing to bear to the nominal size of the corpusavailable for lending. The discount is shared among other members of the group.The man or woman who runs the chit or committee gets a handsome cut. If hedoes not run away with the money at his disposal, the chit fund is perfectly viable. In Kerala, the government itself runs chits through a state-owned enterprise.Ponzi scheme, a variant of chit fund is one that promises extraordinary returns by recycling depositors’ money, instead of investing in a productiveenterprise. In West Bengal, some of them promised to grow money by 34 times in 25 years by investing in plantations. Others offered doubling money in 15months by investing in fictitious potato trade or real estate. To entice more deposits, those operating these schemes promised to pay not just highreturns (18-20 per cent) but a hefty commission (Rs 30-35 on Rs 100 collected) on deposit money mobilised by the depositor/his recruits. SEBIbans collective investment schemes such as, say, buying a stake in a plantation, which is typically what Ponzi players offer to do.So, Ponzi players offer ‘time-shares’ on promise of return on surrender of membership. For instance, a depositor could be buying into comfortable hotelaccommodation for a few days in a year, somewhat like a club membership. These do not qualify as financial schemes.Back in Limelight“Saradha chit fund scam brings in focus deficiencies in Financial sector”
  3. 3. With rising financial clout and an army of depositors — many also doubling up as agents — under their fold, they acquired political influence, which lentlegitimacy to their methods. Initially, the rural poor were the target group. As the days went by, people from both rural as well as urban areas climbed on tothe Ponzi bandwagon.The rise, as in Saradha’s case, was meteoric. And, if Saradha is any indication, the fall of many other is inevitable.Reasons behind sprouting of Chit funds/ Ponzi schemesOf course, swindlers like the Saradha Groups SudiptaSen should be brought to book and their political backers exposed. We should also deplore peoplesgreed and ignorance that make them entrust their hard-earned savings to ludicrously lucrative schemes. But while condemning knavery and denouncinggreed, let us also point towards systemic deficiencies in the way the Indian financial sector is being regulated today.Even as the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI) and the Ministry of Corporate Affairs formulate elaborate rules forregistered mutual funds, banks and listed companies, there are many entities out there who are able to raise vast amounts of public money by operating in ano-man’s land, where these regulators are oblivious to the goings-on or, if aware, are wary of treading.Chit funds, in fact, fall into just this category. On paper, they are governed by a central Chit Funds Act 1982 as well as specific Chit Fund Acts enacted bydifferent states. As regulation of chit funds is a State subject, both RBI and SEBI exclude chit funds from the purview of their regulations for deposit-takingfinance companies or collective investment schemes. But these very exclusions allow chit funds to collect public money without any of the controls or checksimposed on regulated firms — capital adequacy norms, risk controls or even basic financial disclosures. But the increasing incidence of such scams and thequantum of public money involved in it, suggests that it may now be time for regulators to shed their reservations about treading on each other’s toes, andmake a collective effort to expand the regulatory net by pushing for legislative changes. If this results in some overlap of jurisdictions, so be it. After all, suchoverlaps exist even now with listed banks accountable to SEBI for their dealings with shareholders and to RBI, on depositor protection. The Saradha incidentalso provides ammunition for policymakers to lean on the State governments to tweak their chit fund laws, to grant SEBI or RBI powers to seek informationand inspect the books of chit funds. Financial institutions, as a class, are prone to the risk of ‘contagion’. Not only can the operational failure of an entity betransmitted to others, bad reputation too can fasten on just as well to other entities, to the detriment of the industry as a whole.But there is another aspect to this episode. Regulation undoubtedly is required, but, it will not nip the problem in its bud. The problem actually is the lack offormal banking channels for a vast majority of Indian population.The present government has made financial inclusion a major part of its agenda, stepping up financial connectivity to 2,11,224 villages, creating over 1.5lakh banking correspondents and over three crorekisan credit cards, and bringing up the number of bank accounts to 17 crore.But the bulk of these accounts are inactive, banks remain remote and intimidating, beyond access for most would-be depositors and borrowers.CoverStory
  4. 4. Bank lending in India is only 50% of GDP and, of this, nearly a quarter is appropriated by the government. In any decent economy, bank lending is wellabove 100% of GDP (200% for OECD and 340% for Japan). Since India has a long tradition of lending and borrowing money, credit requirement cannotbe lower than that for a normal economy.Which means informal lending is at least as large as formal credit, although finance professionals estimate the informal credit market to be only half thesize of the formal one.Informal credit is the lifeblood of not just poor villagers but also small and medium enterprises and the real estate sector, which the RBI urges banks tohandle only wearing surgical gloves coated with disinfectant.The net result is that large swathes of the economy are conditioned to accept segmented credit markets, exorbitant rates of interest, unregulatedoperations and reliance on trust rather than enforceable contracts. Making banks and NBFCs more accessible to them will certainly help wean themaway from such spurious operators of chits or other mutual benefit schemes.By being obtuse on the use of technology, by still dreaming that physical branches lay the path to financial inclusion, by refusing to recognise theecosystem that mobile phones represent is ideal for mass electronic banking. That the prepaid SIM is a portable electronic vault that can be remotelycredited and debited is less important than the network of authorized vendors of phone companies that can easily be molded into a network of thoseauthorized to sanction loans and collect repayment. The technology today available in the form of the mobile communications network and electronicpayment systems, has made it possible for banks to track the status of their borrowers and facilitate transactions at a fraction of the costs they used toincur earlier. It is time they used this reach to take banking services to the small customers’ doorstep.Passing the buckThe Left Front argues that it has proposed a new law ‘West Bengal Protection of Depositors Interests in Financial Institutions’ in 2003 to ensurepreventive action through district level vigilance. After carrying out due changes as proposed by the Centre, the Bill cleared by the State Assembly wassent for Presidential assent in 2009. That did not arrive until May 2011, after which the Left Front demitted office. Mamata Banerjee has reportedlydemanded a return of the Bill to enact an even “stronger” Act.But to lakhs of investors, all this makes little sense.We can choose to discard these lessons. But if we want to prevent the growth of scams that are beyond the normal oversight of regulators, we need tohelp the regulated sector grow faster - to keep pace with the demand for financial products and services that is growing at 1.5-2 times the growth inGDP and to implement financial inclusion in spirit!Till that time, we will witness repeat episodes of the Saradhalike event.CoverStory
  5. 5. STEEL OUTLOOK2012 was a challenging year for the steel industry with apparent steel use increasing at the slowest rate since 2009 when demand declined by 6.5%. This wasmainly due to the Eurozone crisis which persisted throughout 2012 and whose impact was felt further afield. On top of this, corrective macroeconomic measures inmajor emerging economies also contributed to a concerted slowdown globally.Steel demand from major end-using sectors will stay weak until 2015, and prices will soften further. Globally, the steel sector is oversupplied and the steelutilization rate is still below pre-crisis levels. Already, many steps have been taken in order to bring the market back into balance. In Europe, many mills haveimplemented cost-saving programmes, cut capacity in some cases and announced plant closures. Overcapacity in China is, however, the biggest problem. TheChinese steel sector has a few large mills and many small (inefficient) mills. From recent announcements, we see that China is planning to restructure its sectorsignificantly. However, the measure to bring 60% of total steel capacity under control of its top ten steel mills by 2015 is a very ambitious plan, and there is achance of resistance from local governments. But together with the stricter emissions caps, we think that consolidation will increase further in China, and in thelong term the sector should benefit.Overcapacity, glut in cheaper Chinese steel imports, economic conditions, shifts toward other substitutes significantly impact steel prices. Hence, for the next twoyears we expect prices to soften further.Steel prices improved in the first half of 2012, but declined in the back half due to a glut in imports, oversupply in the market from zealous steelmakers, weakdemand in Europe and tempering growth in Asia. Average price of Steel (HRC) in Q1-2013 was 607 USD/t and it is expected to reach 590 USD/t by the end of year2013 and 540 USD/t by the end of 2015.Structure Financial Messaging System (SFMS)It is a secure messaging standard developed to serve as a platformfor intra-bank and inter-bank applications. It is an Indian standarsimilar to SWIFT (Society for World-wide Interbank FinancialTelecommunications) which is the international messaging systemused for financial messaging globally.Monsoon Trend in IndiaStatsOutlook- SteelGloss
  6. 6. Emerging Country- TurkeyTurkey officially the Republic of Turkey is a transcontinental country, located mostly on Anatolia in Western Asia and onEast Thrace in Southeastern Europe. Turkey is bordered by eight countries. Turkey, a constitutionally secular state oftenviewed as a bridge between East and West, has developed into a successful multi-party democracy.Turkey is ranked 32nd out of 43 countries in the Europe region, and its overall score is higher than the world average.Turkey’s economic freedom score is 62.9, making its economy the 69th freest in the 2013 Index. Its score is 0.4 point betterthan last year, reflecting gains in the management of public spending, business freedom, and labor freedom.Turkeys largely free-market economy is increasingly driven by its industry and service sectors, although its traditionalagriculture sector still accounts for about 25% of employment. The automotive, construction, and electronics industries, arerising in importance and have surpassed textiles within Turkeys export mix. Oil began to flow through the Baku-Tbilisi-Ceyhan pipeline in May 2006, marking a major milestone that will bring up to 1 million barrels per day from the Caspian tomarket. Turkish Economy expanded by 2.2% in 2012- expected to grow by 3.5% in 2013. In 2012, the per capita incomewas $10,524 and unemployment was 9.8 percent, according to the World Bank. Official projections indicate GDP growthrising to 4% in 2013 and 5% the following year, which again compares well with the Eurozone where the most optimisticprojections foresee growth reaching only 1%. Projections for inflation are equally optimistic with official figuresanticipating a fall from 7.4% this year to 5.3% in 2013 and 5% the following year.Turkey recorded a trade deficit of 6958.49 USD Million in February of 2013. The contribution of exports to GDP rosesharply by 4.1% in 2012 from minus-1.1% the previous year, even as domestic private consumption contracted 0.8% in thefourth quarter of last year compared with a 3.3% increase in the same period of 2011.In Febuary 2013 compared to sameperiod of 2012 exports have increased by 5,8% and reached to the level of 12,4 billion dollar and imports have increased by9% up to the level of 19,4 billion dollar.Turkey ranks as the world’s 13th most attractive destination for Foreign Direct Investment. According to the UNCTAD thecountry received $12,4 billions of FDI in 2012. The majority of the FDI flowed into sectors including construction, realestate, transportation and energy.Diplomatic relations between India and Turkey was established in 1948. India is Turkey’s second largest trading partner inthe Asia-Pacific region. Turkey’s trade deficit with India amounted to USD 5.7 billion in 2011 and USD 2,8 billion in2010.Turkish merchandise exports to India in 2011 were USD 756 million and USD 606 million in 2010. India was Turkey’s9th largest supplier of merchandise imports in 2011 and the 2nd largest in the Asia-Pacific region.Turkish goods importsfrom India totaled 6.5 billion $ in 2011, up 91% from the 2010 level of USD 3.4 billion.Vital Economic Statistics of TurkeyEconomyParticulars DetailsGDP (nominal) $794.468 billion(2012 estimated)GDP growth rate 2.2% (2012)Currency Turkish LiraCredit Rating BB+ S&PFiscal Deficit 2.80% of GDP(2012)Current accountdeficit$48.8 billion (2012)
  7. 7. In FocusForexShould India Issue Sovereign Bonds?Sovereign Bond refers to a debt instrument bearing interest and issued by a country inForeign Currency that promises to pay a certain amount on a certain date, as well as periodinterest payments generally termed coupons. It often provides investors with considerablesecurity due to their payments being guaranteed by a country & is quite liquid as comparedto any other Paper.Recently IMF MD Christine Lagarde suggested that India can consider a sovereign bondissue .The topic has gained Momentum again in the finance ministry that have been arguingthat the time is ripe to directly sell bonds to foreign investors while the Reserve Bank ofIndia has been opposed to the idea fearing volatile yields on these could affect those of the10-year benchmark government bond in India.Looking at the advantages first, Issuing Sovereign Bonds would help the Country inaddressing the financing problems of the CAD and the infrastructure sector, lowering thecost of financing the budget deficit, enhancing its forex reserves, providing a benchmarkprice for Indian companies borrowing abroad and would also reduce the cost of borrowingin the domestic market,However, India has till now delayed venturing into Issuance of Sovereign Bonds because ofthe various challenges & issues involved in it .This time also, the Union government will notgo for a sovereign bond issue to get more dollars as the finance ministry feels the time isnot appropriate for issuing dollar-denominated sovereign bonds particularly when goldand crude oil prices have started heading down, which should reduce the CAD. Issuance ofSovereign Bonds has to be carefully planned with the end-use in mind and should come invarious maturities, to prevent a sudden outflow. Though interest rates are lower abroad,the government will have to offer a Libor-plus spread, depending on its sovereign rating.Since India has the lowest investment grade, making its bonds a risky proposition, it willhave to offer a higher rate of interest to attract investors. Although India had resorted toforeign-currency denominated sovereign bonds in a crisis; Quasi-sovereign debt bondsthrough State Bank of India in 1991, in 1998& in 2000, to shore up forex reserves, yet,which side will government tilt is a matter of conjecture at this stage, and will be governedby circumstances prevailing in next six months or so.Sensex Nifty18,357.8019,286.725568.405871.45Gold (10 gm) Silver (1 Kg)257052697044295 44656Crude Oil ($/barrel) Dollar/INR100.63103.1654.6354.29
  8. 8. About Investeurs Consulting Private LimitedFor a good business, finance is as crucial as vision, management andproduct. Intuitively then Business Finance plays a vital role in the businessprosperity. We, at Investeurs Consulting Pvt. Ltd understand andappreciate the vitality of this discipline and the responsibility that comeswith it.As Business Finance Consultants we realize that finance is an enabler thatcontributes significantly towards realizing your business goals. We bring tothe table 18 years of vast and vivid exposure to different businesses, aprofound understanding of business and financial dynamics and excellentrelationship with banks/ financial institutions.Domestic TradeFinance:Negotiation ofInland Letter ofCreditInternational TradeFinance:Buyers’ Credit andSuppliers’ CreditCapitalInvestment:Project Fundingand Term Loan. ***Working CapitalManagementFactoring Private EquityRating AssistanceTeam ChronicleAkanksha Srivastava akanksha@investeurs.comNidhi Gogia nidhi@investeurs.comShagun Khivsara shagun@investeurs.comHarpreet Kaur harpreet@investeurs.comDisclaimer: Investeurs Chronicles is prepared by Research & Analysis Team of Investeurs Consulting Private Limited to provide the recipient with relevant information pertaining to the world economy. Theinformation contained in the document is based on the releases made by various newspaper & publications; hence, we are not responsible for any inaccuracies in the information provided.Investeurs Consulting P. LimitedS-26, 27, 28, 3rdFloor, Veera Tower, Green Park Ext. New Delhi-110016,