This article was first published in the Free Press Journal on September 17th, 2012

Prime Minister, Dr. Manmohan Singh, the architect of India’s liberalization policies and the person credited with ending the license raj, had slipped into oblivion in the last few years. He has been often criticized of being a puppet at the hands of Mrs. Sonia Gandhi, the President of UPA. Increasingly so in the past year when the Indian Economy has experienced a slowdown and loss of investors’ confidence. Dr. Singh seems to have reincarnated himself in the light of the downgrade threats from Credit Rating Agencies (CRAs).

Empirical analysis of credit rating downgrades conclusively point towards a fall in benchmark indices across the world, by 0.3% to 1.2% on the day of the downgrade and the next day. Research also shows that the CRAs do provide new information to the market, and the information is especially significant in the case of downgrades.

However, the failure of CRAs to warn the investors of many a recent events (both at company as well as country levels), have raised questions on the worthiness of the CRAs itself. Marwan Elkhoury, Economist and Mathematician, writes in the Compendium on Debt Sustainability and Development (UN, 2009), “Ratings tend to be sticky, lagging markets, and then to over react when they do change. This over reaction may have aggravated financial crises in the recent past, contributing to financial instability and cross country contagion”.

But the point of interest to us in India is the next line written by him, “Moreover, the actions of countries which strive to maintain their rating grades through tight macroeconomic policies may be counterproductive for long term investment and growth”. To the credit of RBI, they have resisted any efforts of bowing out to the calls of a decrease in interest rates by the industry.

The UPA government though has bowed down to the fear of a credit rating downgrade, to junk status. They have announced a hike in Diesel prices and unleashed the reforms to bring in FDI in retail, aviation, power exchanges and broadcasting services.

The thing is, bowing down is not always bad. So the question is are these reforms really good for India? Are the reforms enough? Is it too little, too late? While a downgrade will have adverse impact on the stock market, FII inflows, credit and growth, the reforms announced will not have much of an impact if the entire ecosystem to do business is not made more favorable. Delays in projects due to multiple clearances required at the state and centre level and rampant corruption will only keep the investors at bay and push the exports, industrial output and GDP further down.

Dr. Singh, if you have really woken up from your slumber, go all out, leave no stones unturned. You do want to be remembered as the “Reformer” and not the “Underachiever”!

This article was originally published in Postnoon on September 14th, 2012

http://postnoon.com/2012/09/14/commitment-rewards/72810

I saw Abhi waiting for me again near my office. He had applied for a home loan about two weeks back. I had explained the process of applying for the home loan and also how the EMI’s work. I wondered what’s brought him back to me so soon. I didn’t have to wait long. He had his papers out, even before I could open the door to my office.

Abhi: Nicky, the bank has sent people over to my house to check if I actually live there. They even called and visited my office.

Nicky: That’s routine. Nothing to be worried about. They are just doing their job. Due diligence.

Abhi: Yeah, yeah. I understand. I am not here for that. Yesterday, my friend told me about a scheme that Axis Bank has come up with. He told me that if I take a loan for a period of 20 years and keep paying all my EMIs on time, without any defaults, the bank will waive off my last one year installments (that is last 12 months’ installments).

Nicky: Oh yes, I heard about that. You need to be locked with them for 15 years time to avail of that offer.

Abhi: How does that matter?

Nicky: Oh it does. Because it means that you cannot avail this benefit if you decide to prepay your loan before 15 years. It also means that you cannot avail this benefit if you transfer your balance to another bank, if they offer to charge a lower rate of return.

Abhi: Does this mean that the scheme is useless?

Nicky: Not at all. I’ll explain this with an example. A person taking Rs 50 lakhs as loan, for a period of 20 years, at 11%p.a. interest, will need to pay an EMI of Rs 51,609 per month. According to this scheme, he will be able to save Rs6,19,308 after 15 years, the equivalent of one year’s EMI.

Abhi: That’s quite a lot of money!

Nicky: Well. So it seems. But then, you see, the value of money 15 years down the line, is not the same as the value of money today. So its present value, after accounting for an average inflation of say 7%, is just Rs 2.24 lakhs. The value could be lower if you take a higher inflation or a higher opportunity cost.

Abhi: You are getting into a lot of jargons. Just tell me what should I do?

Nicky: Take an informed decision. All other terms being same, with no intentions to default, or switch your lender and if you are sure that you will keep the loan for at least 15 years, then this scheme is for you. The benefit in present value terms is not as big as you think. But it is definitely a benefit.

On the other hand, if you think you might want to repay earlier or might want to change the lending bank sometime in the future, then this scheme may not benefit you and this scheme should not be the deciding factor for choosing a home loan provider.

This article was originally published in Postnoon on September 9th, 2012

http://postnoon.com/2012/09/07/understanding-emis/71082

A week after our first set of discussions about home loans, Abhi came back to me for further assistance with understanding home loans. He told me that he had approached his bank and started the process of getting a loan sanctioned. He had already submitted self attested copies of four months pay slips, six months’ salary bank statements, past three years Form 16s, ID proof, address proof, PAN Card and the employee ID.

Abhi: Nicky, tell me, what are EMIs and how are they calculated?

Nicky: Equated Monthly Installment or EMI, as they are popularly known as, is a fixed amount of money that you return to the bank, on a specific date of each month. The EMI consists of part repayment of principal and the interest. It is calculated in such a way that over a period of time, if you pay all the EMIs on time, your loan will get completely repaid.

Abhi: Why don’t we just pay the interest every month and repay the principal after the term of the loan is over?

Nicky: Well, you could do that. But that would mean that you pay interest on the entire principal throughout the term. Also, when the term gets over, you may not have enough money to repay the principal. In EMIs, because you are also repaying a part of the principal every month, the interest component keeps decreasing every month. Every month, you pay interest on a lesser principal.

Another advantage is that the principal repayment is spread over many months, typically 240 or 120 months, relieving you of the burden of paying a very large amount at one time in the end. For example, if you were to take a loan of Rs10 lakhs at an interest of 11%, you will need to pay an EMI of Rs10,322 per month. This is equal to Rs1,23,864 per annum. If you look at the Table, you can clearly see that every year, your payment towards interest is coming down, as the interest is calculated only on the balance of the principal amount. If you keep paying Rs10,322 every month, for 20 years, you would have cleared your entire loan, along with all the interest.

Abhi: That’s very comforting.

Nicky: And that’s not all. You can also avail of tax benefits on both the principal as well as the interest paid.

Abhi: Hmmm…I just wish that my sanction letter comes soon and we are able to move into our new home as soon as possible!

This article was originally published in Postnoon on August 31st, 2012 http://postnoon.com/2012/08/31/paperwork-check-must/69584

My recently married cousin, Abhi, was contemplating buying a home. After putting all his savings together, he was still short of around Rs20 lakhs to buy the house that his wife and he liked. Being an engineer by education and by profession, he always found it difficult to handle financial matters. It is more a mental block than the capability to understand or deal with finances. He came to me to understand the home loan process.

Abhi: A lot of the banks advertise that the home loan will be processed, sanctioned and made available within a week or 10 days. Is it so simple?

Nicky: Abhi, that’s what they say. But you have to be realistic. It’s not so simple. You first need to get a whole lot of documents in place like your recent bank statements, salary slips and job offer letter, Form 16 issued by the company, passport sized photographs, Pan Card, Address Proof, Agreement of Sale etc. After you submit these to the bank’s sales team, they will then send it to their loan processing officer. Who will, rest assured, ask for more documents. You provide those, they will ask for something else.

Abhi: But why does this happen?

Nicky: That’s because of inadequate training to the sales team and their half hearted efforts. They do not give a complete list to begin with, to the customer. They do not check the documents properly and take it from the customer. If they did, they would know that the photo in the ID proof is not clear and hence the loan processing officer will not clear the file. Or, the amounts in the bank statements showing the down payment to the builder do not add up to at least 20% of the value of the property. Once they collect the cheque for the processing fees, their motivation to help you is lost. So they keep coming back to you and asking for more and more documents. And they will always justify by saying that the ‘regulations have changed’.

Abhi: This is de-motivating. If the process is so tiresome, why would anyone take a home loan?

Nicky: Do you have any other choice? Can you get a loan from somewhere else? Well, the answer is No. For most of us. So, whether we like it or not, we are stuck with this system. And then look at it this way, after you get the loan, you will be the owner of your dream house. So keep your cool. Patience is the key. You will get your loan.

Abhi: That’s true. How about the interest rates and the EMI?

Nicky: Ah that! Can we do it later? I have a class now…

This article was originally published in Postnoon on August 24th, 2012

http://postnoon.com/2012/08/24/algorithmic-trading/67942

From time to time, Algorithmic Trading (AT) or High Frequency Trading (HFT) hits the headlines, mainly due to regulatory concerns. The main concerns of the regulators being transparency, fairness and systemic stability.

A couple of days back, they were back in the news as the Delhi Highcourt issued notices to the regulator, Securities Exchange Board of India (SEBI), the exchanges: NSE and BSE, the Finance Ministry and the RBI. The notices were sent as a result of the plea of Intermediaries and Investor Welfare Association, which has alleged that AT “discriminates between rich and influential brokers and common investors/retail investors and creates inequality and finally casts a deceptive data to common investors and retail investors while trading in shares and securities on online trading platforms of BSE and NSE”.

Let’s look at what is AT in today’s article.

Definition

According to wikipedia, AT, also called automated trading, black-box trading, or algo trading, is the use of electronic platforms for entering trading orders with an algorithm deciding on aspects of the order such as the timing, price, or quantity of the order, or in many cases initiating the order without human intervention.

A special class of algorithmic trading is (HFT), in which computers make elaborate decisions to initiate orders based on information that is received electronically, before human traders are capable of processing the information they observe.

Characteristics

• Very high speed of trading due to the use of high speed computers
• Use of algorithms to process data feeds and take decisions to buy and sell automatically
• Use of co-location services

Concerns

The International Organization of Securities Commissions (IOSCO), reported in July 2011 that AT also contributed to the flash crash of May 6th, 2010 in the US when the benchmark index,  Dow Jones Industrial Average crashed and then quickly recovered.

In India too, in the last couple of years, there have been instances where the markets have lost a large amount of money in a very short span of time and then recovered quickly. Once such instance happened during the Muhurat Trading on Diwali day of 2011.

These events brought to light the highly correlated nature of trading strategies using AT. This means that the markets can quickly become one sided. AT also results in very high short term volatility which could be detrimental to retail, non algorithmic traders.

Pros

AT enhances the speed of information dissemination and its supporters claim that it helps in making the markets more efficient. Large and multiple trades can be processed and carried out quickly. Complicated strategies can be implemented through algorithms. 75% to 80% of total trades in US and UK can be attributed to AT.

These are also the very reasons why the Intermediaries and Investor Welfare Association has accused the regulators of being “silent spectators”. AT gives unfair advantages to institutions or brokers who have of co-location facilities and high speed computer prowess which are not available to the common man or ordinary retail investors.

SEBI, exchanges and the Ministry clearly need to put some thought into the advantages of speed over fairness to all.

This article was originally published in rediff.com on August 22, 2012

http://www.rediff.com/getahead/slide-show/slide-show-1-specials-we-object-mr-chetan-bhagat/20120822.htm

Do the young Indians really just want a job and a girlfriend? Which India is Mr. Chetan Bhagat talking about?

Chetan Bhagat became an instant hit with the Indian youth with his first book, “Five Point Someone”. The book took the youth through a journey of three engineering students at the prestigious Indian Institute of Technology, which every young Indian either related to or wanted to be able to relate to. It was easy to read and witty, but no literary masterpiece. His subsequent books, One night @ the call centre, The three mistakes of my life, and 2 States, too went on to become bestsellers but established Bhagat as a ‘dud’ in literary circles.

Bhagat’s latest book, ‘What young India wants’ is a non-fiction, unlike his previous books, and an attempt by Bhagat to establish himself as a serious, thinking, author. The book title indicates that Bhagat is trying to capitalize on his popularity with the Indian youth. The book may go on to become a bestseller, but he has clearly chewed more than he can bite this time.

There are essays in the book which have nothing to do with the youth or the young India. They are plain criticisms of politicians, policies and processes. And we are all on board there. Even though some of the observations are a bit over the top. For example, comparison of cricket with opium or suggesting that Indians are ‘suckers for power’!

However,  he has got the pulse of the youth wrong in many place in the essays which are related to the title of the book, “what young India wants”. And the biggest one in my opinion is that according to him Indians lack a good set of values and are a confused bunch of people.

Indians are definitely not confused and have solid set of values.

The young India I know wants to fulfill the aspirations of their parents. We want to bring home a boy or a girl whom our parents would approve of. We want to come home for Diwali, wherever in the world we might be. We want to take care of our parents in their old age and protect our children, always.

We believe in God. We know the right from the wrong. We know the difference between honesty and corruption. Sometimes we deviate from our values to survive. To survive the same processes and policies which Bhagat has so lucidly criticized in his book.

We are fighters who get to schools, colleges and offices, running behind buses, dangling through the door, because of inadequate frequencies and public transport. Would we ever reach the destination on time if we were to form a queue? Queue works when 10 or lower number of people board a bus with 10 empty seats. But if 20 people need to board a bus which is already full, it will not work. Have you seen Indians break queues in the developed countries?

The youth of the nation know that all service providers are bad. We stick to a service provider as long as we don’t decide to change, on a bad morning, in frustration. But the change is not in anticipation of better service. Same goes for their votes. Bhagat suggests that change can be brought around if everyone decides to vote for honest politicians. Isn’t that an oxymoron in India? There are no honest politicians to vote for. Whether it’s one party or the other, they are all corrupt.

We look up to our corporate czars because they survived and found their way through this corrupt system. Even if they inherited, as against innovated, they stayed afloat. And the suggestion that Indian youth does not look up to innovators or entrepreneurs is a bizarre one. Narayana Murthy (Infosys), Kiran Mazumdar Shaw (Biocon), Sunil Bharti Mittal (Airtel), and many more, are all first generation entrepreneurs, and we look up to them!

In spite of the education system, Indians think (unlike what Bhagat suggests)! We think, therefore a significant percentage of the scientists, doctors and academicians in the US are Indians. The fact that they go to the US and invent or innovate, and not in India, is a reflection on India’s processes and policies. Not on the quality of our brains.

And seriously, the comparison between opium and cricket, is inane by any stretch of imagination. Yes there was a controversy. The business part of it isn’t transparent. There are glamorous people involved. But what does that have to do with the game? Indian’s enjoy watching the game, the country has some world class players, they idolize some of them, how’s that different from basketball in the US or Football in Brazil? And trust me Mr. Bhagat, no child in India thinks about or sees “cricket as yet another example of India’s rich and powerful treating the country as their fiefdom”.

Truly, there is only one thing wrong with India. Its politics and the politicians. That is the root cause of our socio-economic troubles. And all we want, as youth of the nation, is a country free from these corrupt politicians. There is no confusion about that!

Author: Chetan Bhagat

Title: What young India wants

Publisher: Rupa Publications India Pvt. Ltd.

Pages: 181

This article was originally published in Postnoon on August 17th, 2012

http://postnoon.com/2012/08/17/plan-bond-purchases-well/66652

Srikanth was already waiting in the cafeteria when Prof. Nicky walked in for her morning cup of coffee.

Prof. Nicky: Good Morning Srikanth. What pulls you out of your bed at this time?

Srikanth: (Offended), well I am generally awake by this time. But today I am here to show you an sms and ask you about what it means.

Nicky: Alright, let me see the sms.

Srikanth: Here it is- “Shriram Transport Finance Corporation launches the first public issue of Non-Convertible Debentures (NCDs) this financial year from July 26th. The issue closes on August 10, 2012. The bonds offer an annual coupon rate of 10.25% and 10.50% for a period of 36 months and 60 months respectively”.

Prof. I know that a bond is an instrument which allows one to invest in a company (corporate bond) or with the government (government bond), for a fixed period of time and with a fixed return. In the case of this sms, a corporate bond is being offered for a fixed period of either 3 years or 5 years and will give a return of 10.25 and 10.5 percent respectively. But I have a few more questions.

First, What is coupon rate? Is it same as return?

Nicky: Let me make a correction in your previous statement, related to your question. 10.25% and 10.5% are not returns. They are coupon rates. Coupon rate is the interest that the bond issuer pays on the face value of a bond.

Srikanth: Face Value?

Nicky: Face Value of the bond is the amount which is returned to the investors by the issuer when the Bond matures. The price or the market value of the bond may be different depending on the attractiveness and demand for the bond.

Let me explain. If the prevailing price of a similar bond, with same coupon rates, in the market is say Rs97. Nobody will be willing to pay more than Rs97 for another bond. Hence the company will have to sell their bond at a discount of 3% on the face value. On the other hand, if the other similar bonds in the market are being sold at Rs105, the company will not be willing to sell their bond at the face value of Rs100. So, they will sell their bond at a premium of 5% on the face value.

Now, if the bond is bought at the face value, and held till maturity, it will give us a return which is equal to the coupon rate. But, if it is bought at a price less than or more than the face value, we will incur a capital loss or gain on maturity. This results in our return from bonds being different from the coupon rate. In finance parlance, the return on a bond is known as yield.

Srikanth: But why will a bond price be Rs97 or Rs105?

Nicky: That’s because, a bond need not be held till maturity. It can be traded in the market. Its transferrable. So a bond which is more in demand due to its higher coupon rate, its price increases. Whereas a bond which has a lower coupon rate, its price decreases.

Srikanth: Ah…Demand and Supply at work here too! Economics everywhere!

Nicky: Absolutely. No wonder it is known as the mother of all subjects!

This article was originally published in Postnoon on August 11th, 2012

http://postnoon.com/2012/08/11/better-safe-than-sorry/65297

Prof. Nicky had not been to Laxmiamma’s house since sometime and on her way to the campus, decided to stop by her house to relish her Irani chai and enquire about her well being. On her advice, Laxmiamma had opened a savings bank account and had also started saving through a recurring deposit. She was happy with this arrangement as it gave her peace of mind and assurance of safety for her money, as against the constant fear of theft when she kept it at home.

There was an agent at the bank who was advising her to invest her money in Systematic Investment Plans (SIP) rather than in a recurring deposit. So as soon as Prof. Nicky came in, after the pleasantries and having settled on the sofa with the chai, Laxmiamma asked him about SIPs.

Laxmiamma: This man at the bank says that SIPs give a much higher return when compared to the recurring deposit. What are SIPs? Is it true that they give more return? Why and how do they give more returns? Why did you ask me to put my money as deposits when SIPs give more return?

Prof. Nicky: Now, now…slow down amma! Let me answer your questions one by one.

What are SIPs

SIPs are instruments which allow you to invest in Mutual Funds on a periodic basis, as against a lump sum. SIPs are to mutual funds, what recurring deposits are to fixed deposits.

Performance of SIPs

When you put your money in a SIP, every month or every quarter, depending on your preference, the money is used to buy the units of mutual fund schemes. The units are bought at the price or the NAV of the fund on a specified date of that month/quarter. In this way, you get more units when the NAV is lower and lesser units when the NAV is higher. So it helps you average out the highs and the lows. This means that is helps reduce risk by spacing out your investments.

But, we cannot say that they will perform better than recurring deposits. Because the performance of the SIPs will depend on the performance of the fund in which you are putting your money. And the performance of the fund depends on where the fund put their money. If it is an equity fund, the performance of the fund will depend on the performance of the stocks in which the fund invested. So yes, they may give more returns than recurring deposits on some occasions and give lesser returns on the other.

Risk and risk taking ability

A person who can take the risk of either getting lesser returns or even losing a part of their principal, should invest in SIPs. They are less risky than investing directly in Mutual funds and even lesser risky that investing directly in the stock markets, yet, they are risky. On the other hand, recurring deposits are safe instruments, with practically no risk, unless the bank goes bankrupt.

Laxmiamma, you are too old to take risk. And you are not so rich that you can afford to lose your hard earned money. That’s the reason I asked you to invest in recurring deposit rather than SIPs.

Laxmiamma: Ah…next time that agent bugs me, I can now tell him that I do not have the risk taking ability to buy SIPs. I wonder if he will understand it though (winks)! More chai?

This article was originally published in Postnoon on August 4th, 2012

http://postnoon.com/2012/08/04/the-village-called-the-globe/63760

Pax Indica-India and the World of the 21st Century by Shashi Tharoor, hits the stores at a time when India is struggling with policy making at the domestic front. While our Prime Minister, Dr. Manmohan Singh is heard at International forums, he has been accused (and rightly so) of having lost his voice at home. In an environment which is mired with serious lapses in policy making at the home front, takers for a book on foreign policy may be few.

Having said that, there is no denying that if there is anyone more suited to write a book on India’s role in shaping the world’s ‘dreams’, it has to be the former UN Under-Secretary general and the former external affairs minister of state, Shashi Tharoor.

The premise of the book is vasudhaiva kutumbakam and focuses on the relationship of India with the members of the world family, past, present and suggestions for the future. Continuing with his obsession with Pandit Jawahar Lal Nehru, the book starts with a reference to the “tryst with destiny” speech and goes on to establish the role that India has been playing on the ‘global stage’ since the Harappan civilization.

It goes on to give a detailed account of India’s diplomatic relations with Pakistan, China, US and UN, but just offers a glimpse of the relations with the other regional and neighbouring countries, which might go a long way in shaping the policies of an India of tomorrow.

The book lacks the wit and spontaneity of his early books like The Great Indian Novel or Show Business. But it gives a good insight into the foreign policy making process in the country. Heavily advocating the use of social media, Tharoor emphasises on the need for change in the ‘intellectual and institutional infrastructure for foreign policy making in India’.

Name: Pax Indica-India and the World of the 21st Century

Author: Shashi Tharoor

Pages: 449

Publisher: Penguin Books India

This article was originally published in Postnoon on August 3rd, 2012

http://postnoon.com/2012/08/03/use-rti-superhighway/63511

The Right to Information Act (2005) became effective in October 2005 to empower every citizen to ask questions from the Government. This Act has given the Indian citizens the right to seek information and take copies of government documents on one hand and made the public officers accountable on the other.

The application may be submitted electronically or in a hard copy to the designated Public Information Officer (PIO). Every government department now has a PIO who is responsible to provide the information to any and every applicant.

The application should be accompanied with a payment of Rs10 towards processing charges for the Central Government Departments. The fees may vary from state to state for the departments at the state level. It can be paid in Cash, by a Demand Draft or by a Money Order. You must remember to take a receipt for the application fees paid.

Write or type the application in a clean, white sheet of paper. Frame the questions clearly with the intention for finding out reasons rather than accusing. For example, avoid using words like ‘Why did you” and “How could you”. Instead use words like “share the process followed” or “would like to know the manner in which…”. There is no limit to the number of questions that can be asked. However, it is advisable to keep your list of questions short and queries precise.

The application must contain the name of the person asking for information, his/her signature and application fee details like DD or Cheque Numbers. The reason for seeking information need not be stated as any Indian citizen has the Right to Information.

The application may be rejected if the department is exempt from disclosure or if the disclosure infringes upon the privacy or copyright of a person other than the government.

The upper limit for providing the information is 30 days. However, it is only 48 hours in cases involving life or liberty of a person. It is 35 days if the application is given to the Assistant PIO and 40 days if the information concerns a third party from whom the department might need to get the information before responding to the RTI application. If the information is not provided within these time frames, it is deemed as a refusal to provide information.

One of the reasons for the success of RTI is that if the information is not provided within 30 days of application, it directly penalizes the concerned officer by deducting Rs 250 per day of delay up to a maximum of Rs 25,000 per application, from the salary. If wrong information is provided, a penalty up to Rs 25,000 can be imposed on the officer.

RTI is the right step to make the governance of the country more credible and transparent.