NCDs vs Fixed Deposits :: Business Line

With equity markets remaining turbulent and NCD issues making a comeback, investors have yet another option to choose from, on the fixed income side. But, with fixed deposits offering attractive rates, should you take the plunge? To help you make a choice, let us delve into the attributes of these two instruments:

Investment News that Matter :: Business Line

Pensions get a regulator

The passage of the Pension Bill has granted the Pension Fund Regulatory and Development Authority (PFRDA) official status as the regulator of pensions for the country. That is good news for new government employees whose pension proceeds have been invested in the new pension scheme in recent years. It is also good news for private sector employees who have put faith in the New Pension Scheme. The PFRDA now has the requisite authority to issue rules and guidelines to regulate the fund managers who manage this money. With the passage of this Bill, fund managers can now offer an additional minimum assured returns scheme to their subscribers. Withdrawals will be permitted from the individual pension account subject to the conditions, such as purpose, frequency and limits, as may be specified by the regulations.

Households to benefit

In his introductory speech, the Governor announced slew of initiatives such as facilitating withdrawals from balances in prepaid cards, electronic and mobile bill payment facilities and setting up of mini ATMs by non-bank entities among others.

Allowing customers to withdraw money from the outstanding balances in their prepaid cards will help people living in remote areas meet their cash needs. The RBI will conduct a pilot enabling cash payments on such prepaid cards using Aadhaar for certification.

Under the electronic bill payment system, households can use bank accounts to pay school fees, utilities bills, medical bills and money transfers. This will enable public make payments anytime anywhere. Given the rising mobile phone penetration in India, the RBI is keen on getting banks and mobile service providers to roll out mobile based payment facilities. It intends to set up a technical committee to explore the feasibility of developing an application for encrypted SMS based payments that will run on any mobile handset.

New inflation hedge

To provide retail investors a real hedge against inflation, the RBI has proposed issue of inflation indexed certificates, linked to the CPI (consumer price index). The RBI, earlier in June, had issued inflation indexed bonds, linking returns to the WPI (wholesale price) index. However the gap between WPI and CPI continued to widen. This rendered WPI linked bonds unattractive for investors. This has now been addressed with the new CPI linked certificates. The first issue is expected to open by end November 2013.

Earnings downgrades continue

Even as markets recovered by over 3 per cent, foreign brokerages have downgraded expected earnings for companies making up the country’s bellwether index - Sensex. Weak rupee, lull in economic activity and high interest rates are expected to reduce growth over the next two years.

Morgan Stanley has reduced its Sensex profit growth estimates for the fiscal year 2014 and 2015 by over 6 percentage points. Their revised twelve-month target for the Sensex stands at 18,200, implying a 5.5 per cent fall from its current levels.

Bank of America Merrill Lynch also said that it expected Sensex earnings to remain at Rs 1260 in FY14, 4 per cent lower than their earlier estimate of Rs 1315. It also added that with five stocks – ONGC, HDFC Bank, ICICI Bank, SBI and Tata Steel, accounting for nearly half the profit growth, the concentration risk has increased now. Earlier in the month Goldman Sachs slashed its index targets for March 2014 citing growth challenges across sectors and upward pressure on interest rates.

A bit on the virtual currency :: Business Line

The first time I heard of a currency issued by an institution, apart from the Government or the Central Bank of a nation, was way back in 2002. A relative, devotee of Maharishi Mahesh Yogi, told us about “Raam”. Raam is a currency in circulation in Holland and parts of United States, issued by the Stichting Maharishi Global Financing Research (SMDFR), a charitable foundation based in Holland. Two questions came to my mind: First, who guarantees the payment to the bearer? Second, if many more institutions start to issue currencies, wouldn't it lead to a lot of chaos?

Similar, and more, questions were raised in our minds when we heard of Bitcoin for the first time.

In 2008 Satoshi Nakamoto (a pseudonym for the person or group of people who designed the original Bitcoin protocol) posted a paper describing a cryptocurrency protocol. He created an open source client and issued the first Bitcoins in 2009 that are encrypted so that it cannot be misused or reused. This is just like a wallet (free to create) on your desktop and you can use a currency that does not belong to any country or any region or any organisation, for transactions. Instead of a central bank mining the currency, the mining of Bitcoin is done by users all across the network. There are inbuilt checks in the open source algorithm which prevents any conflicting transactions or prevents people from paying the same bitcoin to two different people.

Bitcoin can also be bought using regular currencies such as dollars, or pounds or euros. Currently, one bitcoin can be bought for approximately $107. One can payout in bits (as in computers). Free email, free calls (skype/viber), now free transfer of money! It’s an absolutely logical evolution. However, my original questions remain. Is the currency backed by some organisation/bank /or government? No. It has value because there is demand for it. If tomorrow there is no demand, its value will be worthless. Is there a possibility of that happening? Yes and No. Regulators are seriously concerned in the US and other countries and they are watching the currency and allied activities closely. They may take extreme steps and ban the use of Bitcoin. Thailand recently banned trading in Bitcoin.

On the other hand, there is a growing community of users who are in favour of digital currency.

Will it lead to chaos? The value of the currency is definitely very volatile. It is first of its kind. There may be more digital currencies which would crop up in the future. It may lead to chaos, even network security breaches. Adopting good practices by users may be the key.

“All over the world people are trading hundreds of thousands of dollars worth of Bitcoin every day with no middle man and no credit card companies. It’s a startup currency which has never happened before” says weusecoins.com. Organizations like Amazon, Barnes & Noble, iTunes and many more accept bitcoins for transactions. The virtual currency is also very popular in China, as popular as in US and the UK, reported Rob Minto in Beyondbrics, Financial Times (July 9, 2013).

All this sounds cool but how big is it? It has definitely made some headlines recently. Cameron and Tyler Winklevoss, twins known for battling Mark Zuckerberg over ownership of Facebook Inc, have filed for an initial public offering of a Bitcoin ETF designed to allow investors to track the performance of the digital currency bitcoin. It will be just like an index that represents the bitcoins. The response to the proposal is, however, lukewarm at best.

The fear of criminal activity, money laundering, high volatility, no regulation, bubble, are all rife. So are the whole generation of users who swear by the currency and consider it an economic revolution. We are not clear about the implications of virtual currency yet. Though it is definitely challenges the way we conceive money. The question to ask is whether money as we know it is undergoing a tremendous change.

(Nupur Pavan Bang is Senior Researcher, Indian School of Business, Hyderabad and Khemchand H Sakaldeepi is Researcher, Centre for Investment, Indian School of Business, Hyderabad. The views are personal)

Five years after the biggest bankruptcy in US history, no case against Lehman top executives By New York Times

At a closed-door meeting in early 2011, Wall Street regulators were close to throwing in the towel on their biggest case. The US Securities and Exchange Commission's eight-member Lehman Brothers team, having hit one dead end after another over the previous two years, concluded that suing the bank's executives would be legally unjustified. The group, noting that prosecutors and FBI agents had already walked away from a parallel criminal case, reached agreement to close its most prominent investigation stemming from the financial crisis, according to officials who attended the meeting, which has not been reported previously.

But Mary L Schapiro, SEC chairwoman, disagreed. She pushed George S Canellos, who supervised the Lehman investigation as head of the SEC's New York office, to explain how executives who presided over the biggest bankruptcy in US history could escape without a single civil charge. "I don't get it," she said during a tense exchange with Canellos, according to sources. "Why is there no case?" she continued, staring at Canellos, instructing him to continue investigating whether Lehman misled investors. "The world won't understand."

Run Out of Leads?

She was right. Five years after Lehman's collapse hastened a worldwide economic panic, the government faces lingering questions about the decision to spare executives like Richard S Fuld Jr, who ran Lehman for 14 years until its demise. Not a single senior executive from any Wall Street bank faced criminal charges from the crisis, either. And the government's deadline for filing most charges will expire this month, the anniversary of Lehman's collapse, providing a reminder of the case and its unpopular outcome.

Federal prosecutors and the SEC have never officially announced its decision to close the Lehman investigation. But a New York Times examination of the case, based on interviews with more than a dozen lawyers and officials involved in the inquiry and a review of bankruptcy court documents, pulls back a curtain on private deliberations and clashing philosophies surrounding the decision not to bring charges.

The SEC quietly reached the decision in 2012 after officials sparred for months over whether Lehman omitted "material" information in disclosures to investors, an important legal standard. Canellos argued that the omissions were not material. Those who questioned that reasoning — like Schapiro — acquiesced to Canellos' team, which was closest to the evidence.

The SEC also debated the culpability of top Lehman executives. But Canellos' team argued that Fuld did not know that Lehman was using questionable accounting practices despite testimony from another Lehman executive that suggested otherwise. Schapiro did not override his judgment after SEC officials cautioned her that it could be unethical to do so. The agency's enforcement unit has struck an even harder line in recent months under its new chairwoman, Mary Jo White. Yet the continued absence of parallel criminal cases against top executives reflects the challenge of white-collar investigations in which prosecutors struggle to pinpoint where risky dealings cross the line into illegality.

When the evidence is murky, prosecutors sometimes hesitate to charge top executives, who have the money to fight rather than settle. The Lehman case once seemed like the exception. But by early 2011, Canellos' team had run out of leads. It ruled out suing Lehman itself, because the firm was in bankruptcy.

The team also decided not to sue Fuld for failing to supervise the firm's risk-taking, believing that the SEC did not have the authority to do so.

Rupee recovering fast & will stabilise stronger as trade imbalance corrects:: ET

The rupee has staged a strong recovery after hitting the skids over the last few months. The sudden turnaround has caught some by surprise, but it shouldn't have. The rupee crashing below 60 to a dollar was a capitulation trade that was clearly overdone. Given market data and the likely trajectory of the global economy, the Indian currency could actually exceed expectations here on, regardless of the US Federal Reserve's tapering programme.

India is among the five largest economies on the basis of purchasing power parity, and is among the most open with international trade now nearly 50 per cent of GDP. Clearly, it can no longer be insulated from global market and risk developments.

Sure, economic growth hit a record low of 5 per cent in the financial year ended March 2013 and slowed to 4.4 per cent in the first quarter. But apart from China, India still has the highest growth rate among all economies with a GDP of around $2 trillion or more. Yet, it has had the worst-performing currency in its peer group since May, when talk started about the Federal Reserve tapering its bond-buying programme.

It would appear that sentiment got the better of objective analysis. India's net equity inflows amount to $12 billion since the beginning of the calendar year, while there's been a much smaller outflow from debt investors. But we perceive a crisis of confidence among foreign institutional investors (FIIs).

The allocations for the purchase of debt securities among FIIs were fully sold a few weeks ago. This is despite India seeing more foreign direct investment this year from consumer and pharmaceutical companies, airlines and so on than ever before, with the exception of the BP-RIL deal in 2011.

Apart from this, Moody's reiterated the country's investment-grade rating a few days ago.

RBI Governor Joke !!

A journalist, was fed up with the Indian Economy, decided to ask views of RBI Governor on sports instead of Indian economy.

He asked “Dear RBI Governor, which game do you like”.

RBI Governor replied “Cricket when played in India”.

Journalist further asked, which part of Cricket do you like, I mean batting or bowling?

Our great economist RBI Governor replied “No, No, I LIKE THE TOSS AT THE BEGINNING OF THE MATCH IN INDIA".

Journalist was amused and asked “Why, only toss Sir”.

RBI Governor smiled for the first time and told "BECAUSE IT IS THE ONLY TIME WHEN I SEE OUR RUPEE GOING UP AT LEAST FOR A SHORTWHILE"

Global Markets Update

US Mkts on TUE

Dow: 15191 +127 +0.85%
Nasdaq: 3729 +22 +0.62%
S&P500:1683 +12 +0.73%
Nikkei: 14503 +80 +0.56%
Infy: +3.89%, Wit: -2.49%
Ttm: +5.93%, Rdy: -0.46%
Hdb: +2.47%, Ibn: +2.06%
SBID:+0.48%, RIGD +4.56%
Us/Inr $63.63, Eu/Us 1.33
Dix: 81.81, Us/JPY 100.29
Gold: $1364,Silver: $23.07
Oil: $107.14 Brent: $111.33
SGX Nifty last night : 5938.00 +27.00

The reduced geopolitical tension and healthy economic data also sparked gains in Asian and European markets.
Politicians in Washington continue to debate the pros and cons of a strike on Syria. In addition, Secretary of State John Kerry raised the possibility Monday of avoiding an attack if Syria were to give up its chemical weapons.

Markets were encouraged by more evidence that the Chinese economy has stabilized. Industrial output rose a robust 10.4% in August, the strongest in over a year. Retail sales and fixed asset investments last month also rose more than expected.

Apple revealed two new iPhones: the iPhone 5S and less expensive "iPhone 5C. Apple closed more than 2% lower, but the stock has run up nearly 20% in the past two months in anticipation of the announcement.

Nike, Goldman Sachs and Visa were in focus, as the three will be the newest members of the Dow, replacing Alcoa, Hewlett-Packard and Bank of America. Goldman, Nike and Visa all rose on the news. Alcoa and HP fell slightly while BofA was up more than 1%.

From the worst to the best performer: Rupee to touch 60 as Raghuram Rajan reverses sentiment :: ET

The currency tide has turned in spectacular fashion. Asia's worst performer until last week, the rupee has become the world's best performer in the past five days as investor confidence has surged following a series of steps to boost inflows and the receding likelihood of a US strike on Syria.

The local currency had its best four-day rally in four decades after Reserve Bank of India Governor Raghuram Rajan moved to reverse sentiment on policymaking, introducing several measures soon after taking over last Wednesday. Liberal fund-raising rules for banks and exchange risk cover for NRI deposits are estimated to draw about $20 billion in the next few weeks.

The rupee's slump below 60 to the dollar was a "capitulation trade which clearly was overdone", according to Alok Agarwal, CFO at Reliance Industries. "The rupee's reversal should take the same path — a move up to 63 against the dollar, with relief and confidence coming back and then a slower appreciation to 60 as the emerging markets steady themselves after the Fed's plans on tapering are known at next week's Federal Open Market Committee meeting."

The rupee gained 2.2 per cent from Friday's level to 63.84 to the dollar. It's the best performer in the past five days among the 189 currencies listed on the Bloomberg table. The rupee strengthened past 64 for the first time since August 26 to as high as 63.76, Bloomberg data shows. The currency touched an all-time low of 68.84 on August 28.

Raghuram Rajan's measures reverse sentiment, rupee headed to touch 60

SGX Nifty 5,905.00 -6.00

SGX Nifty 5,905.00 -6.00
Singapore Exchange
8:00AM India time
11th Sept

How to choose tax-free bonds :: Business Line

Buy a bond with a maturity closest to your investment horizon.

The current bond offering from Rural Electrification Corporation (REC) has prompted us to revisit the subject of tax-free bonds. Rather than look at whether REC bonds are attractive, our objective here is to show you how to choose tax-free bonds to align your investments with your life goals. We will use the features of the REC bonds to discuss the factors that you need to consider when you invest in tax-free bonds.

WHY TAX-FREE BONDS?

Your investment portfolio should necessarily have bonds. Retail bond products have fixed cash flows and finite maturity. This means you will know at the time of investment how much interest you will receive every year and when you will get back your initial capital. You should, for instance, invest in a 10-year bond if you need to fund your child’s college tuition fees 10 years hence. And if expected bond returns are lower than your required return, you should invest a proportion of your capital in equity.

In other words, you have to always invest in bonds. The issue is that interest income is taxed at your marginal tax rate. So, if you receive 9 per cent interest on your fixed deposits, your actual post-tax return at 30 per cent tax rate is 6.3 per cent. And this return will only get lower if the government increases the marginal tax rate for high-income earners!

So, what should you do? Your objective is to ensure that most, if not all, of your bond investments earn tax-free interest. This leaves you with two choices at present. You either have to invest in securities that can fetch you exemption under Section 80 of Income-tax Act for Rs 1 lakh every year. Or you have to buy tax-free bonds. And since Section 80 has an upper investment limit, you have to consider tax-free bonds for your bond portfolio.

The question is: Are you investing excess money at your disposal (discretionary wealth) or are you investing to achieve an objective? If it is the latter, you should buy a bond with maturity closest to your investment horizon. Suppose your daughter is scheduled to enter college 11 years hence, you should buy the 10-year tax-free bond, even if the 15-year bond is attractive!

But what if your investment horizon is 20 years or you are investing your discretionary wealth? You should use the break-even rule. That is, to make a meaningful comparison between, say, the 15-year and the 20-year bond, you will have to assume that all cash flows from the 15-year bond will be reinvested for additional 5 years. The rule is : Invest in the 15-year bond if the break-even rate appears lower than the expected 5-year deposit rate 15 years from now; break-even rate is the rate which makes you indifferent between investing in the 20-year bond, and buying the 15-year bond and reinvesting the proceeds in a 5-year bond.

BREAK-EVEN RULE

Based on the break-even rule, the 15-year REC tax-free bond appears attractive compared to the 20-year bond, if you expect the 5-year rate 15 years from now to be more than 5.9 per cent post-tax or 8.5 per cent pre-tax (at 30 per cent marginal tax rate). But the 20-year bond becomes attractive if you expect the tax rate to increase!

You do not have to forecast interest rates to apply the break-even rule. You have to intuitively sense whether the rate in the future will be higher or lower based on the current rate levels. The break-even rule helps you to choose bonds systematically. Importantly, the rule forces you to consider reinvestment risk instead of simply buying a bond that offers you higher interest rate today. You can use the break-even rule for your investments in bank fixed deposits as well.