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The silver lining

The silver lining

Many investors are convinced that after the Sensex plunged 41% in six months, the key indices can fall no further. It looks like they could be right. Can things really improve?

Within a few months, talking heads will be waxing eloquent about the year that was and the year that lies ahead. However, now seems to be a better time to take stock of where the markets are headed. Many investors are convinced that after the Sensex plunged 41% in six months, the key indices can fall no further. It looks like they could be right. This, despite the general reluctance that retail investors are showing, a fall in trade value and volume indicators, rising inflation, falling industrial production numbers and political instability. Can things really improve?

The answer to that question is an unqualified, yes. The upswing will be aided by the foreign institutional investors (FIIs). The biggest movers in the Indian market, FIIs reduced their holdings in BSE 500 companies from 19.86% in June 2007 to 18.18% in June 2008, leading to a fall in stock prices and Rs 60,000 crore moving out of the markets. While much of this has been attributed to the global liquidity crunch and the crisis in the US markets, domestic laws have also played an important role. Specifically, the Securities and Exchange Board of India’s (Sebi) new regulations on FII registration and re-registration after the participatory notes controversy in late 2007.

But here’s the silver lining. Over 1,000 FIIs have registered with Sebi in recent months. Add to it the sovereign fund registrations and the growing faith in the Indian markets is clear. “FII registrations are a good sign for retail investors, as it shows the faith reposed in the markets,” says Bhavesh Shah, vice-president (research), Asit C. Mehta Investment Intermediates.

That’s just one bright spot. The second quarter results are expected to be better than predicted in light of the companies accounting for derivative exposures when the rupee was strong at Rs 40, compared with now when it is close to 45. “This will mean the frontline companies will be in a better position, with low debt and better margins fuelling growth in numbers,” says Deven Choksey, MD, K.R. Choksey Share and Securities.

Another factor is the Bihar floods. It might seem inappropriate to refer to the calamity in this context, but it’s a fact that large-scale rehabilitation efforts will follow soon. This will result in increased spending on infrastructure and development. Other policy decisions include pension and insurance sector reforms. The opening up of the pension sector is on the cards and a rise in foreign stakes in insurance firms from the current 26% to 49% will mean more capital inflow and revival of the IPO market. “We plan to go in for an IPO irrespective of the government move in 2009,” says Deepak Parekh, chairman, HDFC. Finally, the arrears payout from the sixth Pay Commission is expected to create liquidity, which could increase consumption and provide a fillip to the market. All these should attract the long-term investor back to buying.

—Narayan Krishnamurthy

WORD’S WORTH

C.B Bhave
“Investors have to take real interest in the growth of stock exchanges.At the same time, we can’t allow one entity to dominate the exchange.”

—C.B Bhave, Sebi chief, on the proposal to increase institutional stake in stock exchanges

“Entrusting responsibilities to separate bodies can have the developer and regulator trying to outscore each other.”
—Sanjay Hegde, executive director, PwC, on the proposal that RBI, Sebi should have fewer responsibilities

“Reverse mortgage is a market-driven product, but we need banks to be sensitive to the needs of the elderly.”
—S. Sridhar, Chief MD, National Housing Bank, on the tepid response to the loan scheme for the elderly

“Retail investors have shown maturity and have remained invested in mutual funds instead of pulling out like the foreign players.”
—Gopal Agarwal, equity head, Mirae AMC

Source: The Economic Times, The Asian Age, HT Media

 

FMP or FD?

If you’ve been wondering where to park your money in the current market uncertainty, consider fixed maturity plans (FMPs), which invest in debt instruments of exact maturity periods. This means that regardless of the ups and downs in the market value of investments, the final earnings are predictable. So the indicative returns provided by FMPs reflect the reality. But with banks advertising FD rates of 10-11% a year, should one invest in FMPs?

The answer is, yes. As R. Swaminathan, vice-president, IDBI Capital, says, “FMPs score over FDs and other debt instruments because the interest rate risk is commensurately mitigated and the tax implications are favourable.” In an FD, the interest is added to your income and taxed at normal rates. In FMPs of tenures longer than a year, if you take all your gains as capital appreciation, the taxation is a flat 10% or 20% with indexation. That’s a lot of saving compared with the tax on the interest earned from an FD. For investments of less than a year, there’s advantage if you receive the gains as dividends, as they will be taxed at 12.5%.

However, like all good things, FMPs are facing a problem of plenty— the debt paper they are investing in is not of the highest quality. Also, like all mutual funds, FMPs have downside risks, even though for all practical purposes they have been predictable and safe.

The rise and rise of FMPs

• Since January this year, over 300 FMPs have been launched.
• FMPs have raised over Rs 70,000 crore since the beginning of 2008.
• For FMPs ranging from 6-months to 13-months, the yield is 10.6-11.5%.

— Tanvi Varma

 

Power of the Masses

DAVID VS GOLIATH
Largest settlements in the United States since 1995

Company

Liggett Group

Enron

WorldCom

Cedant

Tyco

AOL

Nortel

Toshiba

Microsoft

Royal Ahold

Mckesson

Lucent

Settlement

$145 billion

$7.2 billion

$6.1 billion

$3.5 billion

$2.97 billion

$2.65 billion

$2.4 billion

$2.1 billion

$1.1 billion

$1.1 billion

$960 million

$600 million

Did you know that in the aftermath of the Bhopal gas tragedy, the Indian government filed a suit against the Union Carbide in the US courts? The reason cited was that our legal system was ill-equipped to tackle such a case in the absence of any provisions for class action lawsuits. But, eventually, the case was tried in India’s Supreme Court and the firm agreed to a $470 million lump-sum settlement, which translated to Rs 1 lakh each for the kin of deceased and Rs 25,000 for illness. Compare this with the billion-dollar settlements reached as a result of class action suits against MNCs in America (see table). Over two decades later, India is waking up to the power of representative lawsuits. The new Companies Bill, expected to be tabled during the October session, proposes to introduce class action suits by shareholder associations and other groups against firms.

What is class action? It is a lawsuit filed by one or more plaintiffs on behalf of others who have a similar legal claim. Remember Julia Roberts as Erin Brockovich in the eponymous Hollywood hit? She fought a class action suit that resulted in the Pacific Gas and Electric Company paying $333 million to settle 650 claims.

The advantages of a class action suit are obvious. The cost of litigation is divided among all the plaintiffs, which can be a huge amount for any individual. Also, with a single judge presiding, there would be no risk of different judgements for similar cases, and no repetition of exhibits, which is a waste of time and money. Says H. Rajan Sharma, an attorney specialising in international and class action litigation in New York: “This device is an effective deterrent to certain types of corporate misconduct such as consumer fraud and product liability.”

While Indian law allows shareholders to take a failing company to court, the average time of litigation is 25 years, so very few cases are fought. On the other hand, America saw over 200 such suits in 2007 alone, with the average settlement from 2002-2007 being $24.4 million.

If India had the same provisions for mass litigation as the US, instead of individually hearing over 5 lakh petitions against the Union Carbide, one or more victims could have taken the matter to court. Once the judge would have defined the “class” of victims, notices would have been sent on the Internet or mailed to victims and advertised in newspapers. After the settlement, all the plaintiffs would have taken home a proportionate share on the basis of submitted claims. It’s still not too late to introduce the provision in India—at least it will be a beginning towards achieving accountability and justice.

—Sushmita Choudhury

TELLING FIGURES
 

Numbers speak louder than words. Here are some of the biggest settlements in class action suits across the globe, except in America.

$4 billion

Bernard won the suit for nearly 80,000 survivors
Bernard won the suit for nearly 80,000 survivors
This was the total payout in the largest class action suit in Canada, and it took a woman, Nora Bernard, to win it.After being victimised at the Shubenacadie Indian Residential School, she fought against abusive treatment meted out to the students at native Indian residential schools. In 2007, she won her battle.

$140 million
Aristocrat Leisure shelled out the sum in Australia’s biggest class action settlement in August 2008.The second largest gaming machine manufacturer in the world was penalised for issuing an inflated profit forecast.

$450 million
Royal Dutch Shell paid the sum to over 50 European investors for overstating its oil and gas reserves.Won in April 2007, it’s the first pan-European class settlement of a securities fraud claim.

 

 New development

Finance Minister P. Chidambaram sprung a surprise when he announced that the New Pension Scheme (NPS) would be thrown open to individuals across the nation. The five-year-old NPS, currently open only to government employees, boasts a Rs 4,000 crore corpus, but is riddled with problems because the Pension Fund Regulatory and Development Authority (PFRDA) legislation has not been cleared by the government. Now, in a proactive move, PFRDA is planning to invite private fund managers to handle the NPS corpus. Says D. Swarup, chairman, PFRDA: “We will appoint intermediaries to collect contributions from subscribers. These regulated entities will primarily be banks with a national reach and electronic connectivity to enable swift transfer of collected funds to the Central Recordkeeping Agency.” Not surprisingly, post offices, with their vast network, are likely to be the first in a large chain of proposed intermediaries. The plan is to offer five schemes to both government employees and individuals with an option to take an exposure of up to 25% or 30% in equities. Considering the process is expected to kick off in the next six months, the PFRDA has a lot on its plate.

Pension scheme: What’s in the offing

• The scheme will be open to all individuals.
• Subscribers will have the option to take 25-30% in equities.
• Young NPS subscribers can opt for up to 50% in equities.
• Subscribers can change fund managers once a year.
• Private fund managers will also handle corpus after it is open to all.

—Narayan Krishnamurthy

YOUR VERDICT

Do you think there should be a cap on credit card interest rates?

91.4% Yes5.7% No2.9% Can’t say

An overwhelming majority of respondents prefers a cap on credit card interest rates. The rates have shot up from 30-35% to almost 50% in the absence of an RBI ceiling.

Conducted between Sep 4 and Sep 11. Total responses: 140

 

Two-in-one card

Given the rising credit card interest rates, chances are that many of you have recently acquired a debit card—even as you hold on to a couple of credit cards. To tackle the irritant of lugging around so many cards in your wallet, Standard Chartered Bank has come up with a simple solution. It has recently launched ‘1 money’, which packs the power of debit and credit in one card. Says Sai Narain CDK, who heads consumer transaction banking: “The card aims to give our customers the unique experience of using multiple cards while holding just one piece of plastic.” Here is how it works: a cardholder chooses a default option (debit or credit) for making the payment. But every time the card is swiped, the customer receives an SMS from the bank, asking if he wants to switch his default option. He has 24 hours to make up his mind. However, if he fails to reply to the SMS, the transaction is done in accordance with the default option. Currently available only in metros, the card can also be used for cash withdrawal of up to Rs 2 lakh per day. To avail of the benefits of this card, one has to pay an annual fee of Rs 6,000. Some might find it a small price to pay for freeing up the wallet space.

—Priya Kapoor

Health plan for diabetics

Sugary deal

Age (years)

25

35

45

Premium (Rs)

7,236

9,804

14,109

Ask a diabetic about the lifestyle changes and you are likely to be subjected to a monologue on the care and precautions required. Indeed, if diabetes is not managed well, it can lead to serious complications, from heart disease and kidney failure to blindness and foot amputations. Now, a unique long-term health insurance plan has been developed exclusively for Type II diabetics and pre-diabetics. Says Bhargav Dasgupta, executive director, ICICI Prudential Life: “The new Diabetes Care Active plan offers a customised wellness programme, among other features.”

The plan includes regular medical testing and doctor consultation as per the policy details, which means frequent blood sugar check-up and stringent annual health monitoring. A special diabetes coach is assigned to each policyholder to assist in managing diabetes through education, goal-setting, and diet and fitness guidelines for achieving the goals. What’s more, those who demonstrate a good control over the illness will be charged a reduced premium.

The policy has various payout options on detection of any of the following seven critical illnesses—angioplasty, cancer, coronary artery bypass or graft surgery, end-stage renal failure, heart attack, stroke and any major organ transplant. Available across three fixed sum assured benefits of Rs 3 lakh, Rs 5 lakh and Rs 10 lakh, the policy is offered to anyone between 25 and 60 years. Given the lifestyle wellness component that it comes bundled with, this is a policy that should accompany your medical kit.

—Narayan Krishnamurthy

Prepaid Bonanza

More for less


• You get the benefit of tariff reductions automatically.

• Lifetime customers don’t have to recharge more than once in six months.

• There will be no change in cell number if you change tariff plans.

• Blackout days (when concessional calls/free SMSes are not available) have been limited to 5 a year.

Did you know that you will be able to enjoy 30-40% more talk time when you next top up your mobile phone prepaid cards? The Telecom Regulatory Authority of India has directed the operators to do away with their processing fee—typically around Rs 130 for prepaid vouchers of Rs 300-345.

They can only charge an administrative fee, which cannot exceed Rs 2, plus taxes. This means that you shall get talk time worth almost the full value of the recharge coupon. Moreover, the users who have a lifetime prepaid plan can now migrate to new tariff plans without paying any fee.