VENTURE CAPITAL

WE ARE LISTENING THESE NEWS NOW-A DAYS IN THE MARKET.

"Infosys Technologies' co-founder and chief mentor N R Narayana Murthy sold shares worth Rs 180 crore to start a venture capital firm".

"Indian firms see $77 mn VC funding in July-Sept(2009)".

"Sudha Murthy sold 20 lakh company shares owned by her for over Rs 430 crore in the open market for Narayan Murthy VC Firm".


WHAT IS THIS VENTURE CAPITAL FIRM?


Venture capital (also known as VC or Venture) is a type of private equity capital typically provided for early-stage, high-potential, growth companies in the interest of generating a return through an eventual realization event such as an IPO or trade sale of the company. Venture capital investments are generally made as cash in exchange for shares in the invested company. It is typical for venture capital investors to identify and back companies in high technology industries such as biotechnology and ICT (information and communication technology).

Venture capital typically comes from institutional investors and high net worth individuals and is pooled together by dedicated investment firms.

Venture capital firms typically comprise small teams with technology backgrounds (scientists, researchers) or those with business training or deep industry experience. VC has a reputation of being a particularly impenetrable career path, employing only those who bring expert value.

A core skill within VC is the ability to identify novel technologies that have the potential to generate high commercial returns at an early stage. By definition, VCs also take a role in managing entrepreneurial companies at an early stage, thus adding skills as well as capital (thereby differentiating VC from buy out private equity which typically invest in companies with proven revenue), and thereby potentially realizing much higher rates of returns.

A venture capitalist (also known as a VC) is a person or investment firm that makes venture investments, and these venture capitalists are expected to bring managerial and technical expertise as well as capital to their investments. A venture capital fund refers to a pooled investment vehicle (often an LP or LLC) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans.

Venture capital is also associated with job creation, the knowledge economy and used as a proxy measure of innovation within an economic sector or geography.

Venture capital is most attractive for new companies with limited operating history that are too small to raise capital in the public markets and are too immature to secure a bank loan or complete a debt offering. In exchange for the high risk that venture capitalists assume by investing in smaller and less mature companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the company's ownership (and consequently value).

Young companies wishing to raise venture capital require a combination of extremely rare yet sought after qualities, such as innovative technology, potential for rapid growth, a well-developed business model, and an impressive management team. VCs typically reject 98% of opportunities presented to them, reflecting the rarity of this combination.

FOR MORE INFORMATION ABOUT THIS TOPIC VISIT THE FOLLOWING LINK:-
http://en.wikipedia.org/wiki/Venture_capital



Venture Capital Organization in INDIA


Venture Capital (VC) financing started in India in 1988 with the formation of Technology Development and Information Company of India Ltd. (TDICI) - promoted by ICICI and UTI. The first private VC fund was sponsored by Credit Capital Finance Corporation (CFC) and promoted by Bank of India, Asian Development Bank and the Commonwealth Development Corporation viz. Credit Capital Venture Fund. At the same time Gujarat Venture Finance Ltd. and APIDC Venture Capital Ltd. were started by state level financial institutions.

Venture capitalists take higher risks by investing in an early-stage company with little or no history, and they expect a higher return for their high-risk equity investment. Internationally, VCs look at an Internal Rate of Return (IRR) of 40% plus . However, in India the ideal benchmark is in the region of an Internal Rate of Return (IRR) of 25% for general funds and more than 30% for IT-specific funds. Most firms require large portions of equity in exchange for start-up financing

VC financing differs from the conventional bank financing in the following ways:

VC financing invests in equity of the company while conventional financing generally extends term loans
Conventional financing looks to current income i.e. dividend and interest, while in VC financing returns are by way of capital appreciation
Assessment in conventional financing is conservative i.e. lower the risk, higher the chances of getting loan. But, VC financing is a risk taking finance where potential returns outweigh risk factors.
VCs are in for long run and rarely exit before 3 years while a bank will fund a project as long as it is sure that enough cash flow will be generated to repay the loans.
In addition, Venture Capitalists lend management support and provide entrepreneurs with many other facilities. They even participate in the management process. VC generally invests in unlisted companies and make profit only after the company obtains listing. VC extends need based support in a number of stages of investments unlike single round financing by conventional financiers.

VCs carry out very detailed due diligence and make 2-7 year investments. The VCs also hand-hold and nurture the companies they invest in besides helping them reach IPO stage when valuations are favourable. VCFs help entrepreneurs at four stages viz., idea generation, start-up, ramp-up and finally in the exit.

Generally a Venture Capitalist looks at the following aspects before investing in any venture.

i) A strong management team - each member of the team must have adequate level of skills, commitment and motivation that creates a balance between members in areas such as marketing, finance, and operations, research & development, general management, personnel management, and legal and tax issues.

ii) A viable idea - establish the market for the product or service, why customers will purchase the product, who the ultimate users are , who the competition is, and the projected growth of the industry.

iii) Business plan: the plan should concisely describe the nature of the business, the qualifications of the members of the management team, how well the business has performed, and business projections and forecasts.

So while approaching a venture fund one needs to be fully prepared and keep the above requirements in mind while submitting the business plan.

ICICI Venture Funds Management Company Limited

ICICI Venture (formerly TDICI Limited) was founded in 1988 as a joint venture with the Unit Trust of India. Subsequently, ICICI bought out UTI's stake in 1998 and ICICI Venture became a fully owned subsidiary of ICICI. ICICI Venture also has an affiliation with the Trust Company of the West (TCW), which provides it a platform for networking Indian companies with global markets and technology. Strong parentage and affiliates for ICICI Venture also translates into access to a broad spectrum of financial and analytical resources thus enabling a keen understanding of the Indian financial markets and entrepreneurial ethos.

For more details please visit : www.iciciventure.com/

IFCI VENTURE CAPITAL FUNDS LTD. (IVCF)

IFCI Venture Capital Funds Ltd. (IVCF) was originally set up by IFCI as a Society by the name of Risk Capital Foundation (RCF) in 1975 to provide institutional support to first generation professionals and technocrats setting up their own ventures in the medium scale sector, under the Risk Capital Scheme. In 1988, RCF was converted into a company, Risk Capital and Technology Finance Corporation Ltd. (RCTC), when it also introduced the Technology Finance and Development Scheme for financing development and commercialisation of indigenous technology. To reflect the shift in the company's activities, the name of RCTC was changed to IFCI Venture Capital Funds Ltd (IVCF) in February 2000.

For more details please visit : www.ifciltd.com/SubsidiariesAssociates/IFCIVentureCapitalFundsLtd/tabid/93/Default.aspx

SIDBI Venture Capital Limited (SVCL)

SIDBI Venture Capital Limited (SVCL) is a wholly owned subsidiary of SIDBI, incorporated in July 1999 to act as an umbrella organisation to oversee the Venture Capital operation of SIDBI. SVCL mission is to catalyse entrepreneurship by providing capital and other strategic inputs for building businesses around growth opportunities and maximize returns on investment. SVCL will manage the various Venture Capital Funds launched/ being launched by SIDBI.

For more details please visit : www.sidbiventure.co.in

IL & FS Group Businesses

IL&FS Investment Managers Limited (IIML), a subsidiary of Infrastructure Leasing & Financial Services Limited (IL&FS), is one of the oldest and largest private equity fund managers in India, with over $ 1.7 bn under management.

Established in 1989, IIML has been an early and in many instances, the first investor across various sectors such as Telecom, City Gas Distribution, Shipyards, Retail, and Media. Funds managed by IIML now span General Purpose Private Equity, Real Estate and Infrastructure.

For more details please visit : www.ilfsinvestmentmanagers.com/

Gujraj Venture Finance Limited (GVFL)

Started in July 1990, at the initiative of the World Bank, GVFL Ltd. is regarded as a pioneer of Venture Capital in India. Over the past ten years, GVFL Ltd. has provided financial and managerial support to over 57 companies with a high growth potential.

GVFL Ltd invests all over India and across industries. It has created a niche for itself in small and medium scale companies. Investment and monitoring such companies require considerable effort and involvement as compared to large projects. Over the last ten years GVFL Ltd. has been developing an edge, dealing in such investments.

For more details please visit : www.gvfl.com

How to form a Company in India?

Before we could analyse the procedures for incorporating a company in India, let us have a quick view of some of the basic particulars.

WHAT IS A COMPANY?

1. A Company can be termed as a voluntary association of person incorporated for the purpose of carrying out some business.

2. In the eyes of law, a company is considered as a juristic person.

3. The company can sue and it can be sued.

4. It has its own name and a separate legal entity, distinct from its members who constitute it.

5. A company has its own property; the members (shareholders) can not claim the property of the company as their own property.

6. Though a company is treated as a legal person, it is not considered as a citizen; hence, it doesn't hold any citizenship in this country.

7. The liability of the members (shareholders) of the company is limited to the amount of shares they hold in the company.

8. Shares of a company are easily transferable to any person. It means the business can be transferred from one hand to another.

AUTHORISED SHARE CAPITAL:

The Companies act, 1956 limits the powers of board to issue share within the limit of Authorised Share Captial. It can be increased at any time after complying with certain formalities prescribed under the Act.

The minimum authorised share capital for incorporating a Private Limited company is INR 100,000.

The minimum authorised share capital for incorporating a Public Limited company is INR 500,000.

PAID UP SHARE CAPITAL

Paid-up Share Capital is that portion of Authorised Share Capital for which shares have been issued by the company and shareholders had paid for those shares.

PROMOTERS:

As the name indicates, Promoters are the persons who promote / float / incorporate a company. They stand as the primary persons to take through a company. Promoters are normally been appointed as directors of the company.

Number of Promoters

For incorporating a Private Limited Company a minimum of two promoters are required.

For incorporating a Public Limited Company a minimum of seven promoters are required

NUMBER OF DIRECTORS

For incorporating a Private Limited Company a minimum of two directors are required.

For incorporating a Public Limited Company a minimum of three directors are required.

FORMATION OF COMPANIES UNDER THE COMPANIES ACT, 1956

1. As per the Company law, the name of each company should be unique. As such, the proposed name of the company has to be approved by the Registrar of Companies and blocked till registration. The following is the process to get availability of name

a. Promoters / Directors have to file an application in Form 1A giving the following particulars:

b. Names and addresses of promoters

c. Proposed name of the company

d. Two Alternative names of the proposed company is required if the proposed name is not available

e. Type of company - Private or Public

f. Brief objectives of the company

g. Proposed Directors and their addresses

h. Proposed address of the company

i. Authorised Share Capital

j. Details of Group companies, if any

k. Details of fees paid for name availability

l. Note about significance of the proposed name. This is because regulations have some criteria based on which names are to be allowed

m. Director Identification Number:It is a unique Identification Number allotted to an individual who intends to be appointed as director of a company pursuant to section 266A & 266B of the Companies Act, 1956. DIN is mandatory for all directors

2. Digital Signature Certificate:
The Information Technology Act, 2000 provides for use of Digital Signatures on the documents submitted in electronic form in order to ensure the security and authenticity of the documents filed
electronically. This is the only secure and authentic way that a document can be submitted electronically. As such, all filings done by the companies under MCA21 e-Governance programme are required to be filed with the use of Digital Signatures by the person authorised to sign the documents.

Application for the availability of name: Apply to the jurisdictional Registrar of Companies to ascertain the availability of name in Form- 1A along with fee of Rs. 500/-. Registrar of Companies normally informs the status of the application within 4 days. If the name proposed is not available, apply again for a fresh name. On approval of name, the Registrar will issue a name allotment letter and will block the name.
3. Memorandum and Articles of Association:

I. Arrange for drafting of the Memorandum and Articles of Association, vetting of the same by the Registrar of the Companies and printing of the same.

II. Arrange for stamping of the Memorandum and Articles of Association as per instructions of Registrar of Companies

III. Get the Memorandum and Articles of Association (MoA & AoA) signed by Directors, and each shall also write in his own hand his name, father's name, occupation and address and number of shares subscribed for, and duly witnessed by at least one person who shall also write in his own hand his name, father's name, occupation and address.

IV. In case the Memorandum and Articles is to be signed by any of the promoters out side India, then the signing should be done in the presence of Consul of India at the Indian Consulate. The MoA & AoA should be dated on a date after the date of stamping

4. Fee Structure: Fee required to be paid to the ROC for incorporation of the company.

5 The following forms are to be filled and signed:

I. Statutory declaration by Company - Form No.1.

II. Notice of situation of Registered Office of the Company - Form No. 18.

III. Particulars of Directors, Manager or Secretary - Form No. 32.

IV. Consent to act as Directors - Form No. 29.

6 File the following documents with the Registrar of Companies:

I. Stamped and signed copy of Memorandum and Articles of Association.

II. Form No. 1, 18, 32, and 29 in duplicate.

III. Certified true copy of the Registrar of Companies letter intimating availability of name.

IV. Power of attorney in favour of any person for making corrections on their behalf in the documents and papers filed for registration.

7 Certificate of Incorporation:

I. Once all these procedures are through, Registrar of Companies will issue a Certificate of Incorporation

II. In case of Private Limited Companies, they can commence business immediately on receipt of the certificates of incorporation from the Registrar of Companies.

III. In case of Public Limited Companies, following additional steps are to be completed.

8. Arrange for payment of application and allotment money in cash by the Directors on the shares taken or agreed to be taken by them

9. File the statement in lieu of prospectus with the Registrar of Companies in accordance with Schedule IV of the Companies Act, 1956

10. File a declaration in Form No.20 with the Registrar of Companies to the effect that the application and allotment monies have been paid/will be paid in respect of shares taken up/agreed to be taken up by the Directors

11. After these formalities are over, the Registrar of Companies will issue Certificate of Commencement of Business




WRITTEN BY:-Bala Murgan

An I for an I

It is not often that you meet a head of state, rarer still to meet a head of state who is an elder statesman with wisdom and special insights. So it was a rare privilege this week to meet Shimon Peres, the Israeli president, along with a CII team that was in Tel Aviv and Jerusalem to continue a CEOs' dialogue. Peres' mind ranged far and wide. Agriculture is technology-intensive, he said, which is why 100,000 cows in Israel produce as much milk as 4 million cows in Ethiopia. "We have increased milk yield 30-40 times," he explained. Slipping smoothly to another field, he said "making spare parts for the human body" is the science of the future. He meant stem cell research, of course, and added that Israel is trying to be a leader in the field, having recently replaced a damaged heart muscle by using cells taken from the skin.

Switching subjects again, he got more adventurous. "Why not make the army into a university?" All young Israelis have to serve their time in the army, but Peres said only one in seven soldiers is a fighting man, the rest are in what he called services. "We give them housing, a salary, other facilities—so why not educate them while they are in uniform? Normally, it takes 1,300 hours of study to get a degree. If you do it properly, it can be done in 650 hours." And, of course, he touched on oil and energy, pointing out that the sun was a more reliable, long-term source of energy than hydrocarbons, and that Israel was investing a lot of money in solar energy research.

The sub-text to these and many other stimulating thoughts was that Israel seeks to become an R&D-intensive country, with cutting-edge technology in a variety of fields. "We are only 8 million people, you are more than a billion. We can't possibly produce to feed your market…how many shoes can we make, and how many people to make those shoes? Better for us to do the research and create the technologies that you can use in your production system." Peres was echoing what the CEOs had already discussed, that Israeli technology and Indian production were a perfect match. At dinner the previous night, a former Israeli chief of staff who now heads a water company talked of his company desalinating water at a cost of no more than 3 paise per litre. Then there was the recycling of urban sewage—which his company "bought" and then recycled. Once all the plants under construction come on stream, a third of Israel's total water consumption will be recycled, and the country will actually be recharging its aquifers. It is easy to see the application of these and other technologies (as in drip irrigation and solar energy) in India.

It is not widely known outside Israel as to just how much the country has become a research-intensive and technology-oriented country—and not just in defence technology (the country is now the second-most important source of defence supplies for India). A single Technion university has 15,000 tech students, perhaps more than all our IITs put together.

Doing business for Israel and India (I to I) is easy because there is enormous goodwill for India in the country, not least because India has no history of anti-Semitism—one reason why tens of thousands of Israelis come holidaying to India every year. The Slumdog Millionaire book, for instance, has sold over 100,000 copies in its Hebrew translation, perhaps more than it has sold in India! All of Amitav Ghosh's books, Arundhati Roy's masterpiece, Adiga's White Tiger, all have a ready and large market. Israelis have discovered India. It is time Indians discovered Israel.

by T N NINAN(chief editor Business Standard)

how rain is affecting industrial growth!

All the indusries are directly dependent on the agriculture sector. Because of delay in monsoon agriculture sector is surviving a lot. This inturn affecting all the indstries connected to it. Prices of grains, vegetables & fruits going high day-by-day. because of this people are not spending on other things which again leads to defficiency in demand and lowers the IIP.

but in opposite of this we can see a growth in cement and coal industry by 10.6% & 9.7% respectively. This could be attributed to the weak monsoon which resulted in a delay in maintenance shutdowns.

So we can conclude that during weak monsoon investors can get good returns by investing in coal and cement companies.

NSE launches interest rate futures, trades Rs 267 cr on day 1

The National Stock Exchange (NSE) which launched interest rate futures (IRF) on Monday, registered a trade volume of Rs 267.31 crore on Day 1, the NSE said in a statement in Mumbai.

Trading in interest rate futures was earlier inaugurated by Finance Secretary Ashok Chawla, in the presence of SEBI Chairman C B Bhave and RBI Deputy Governor, Shyamala Gopinath.

Interest rate futures on NSE are based on a notional ten year GOI bond, bearing a notional 7 per cent interest rate coupon payable half-yearly. The tradable lot size is Rs 2 lakh.

Market participants responded enthusiastically to the product launch on the first day. In around five hours of trading time available after inauguration, 1,475 trades were recorded resulting in 14,559 contracts being traded at a total value of Rs 267.31 crore, the NSE said.

Out of the two quarterly contracts available for trading, December 2009 was the most active with 13,789 contracts being traded. The bid-ask spread was observed to be around one tick i.e. quarter paisa most of the time, it said.

Nearly 638 members have registered for this new products out of which 21 are banks. The contribution by banks in the total gross volume was 32.48 per cent. Amongst banks, Union Bank of India was most active bank.

State Bank of India was the first PSU bank to trade, while Central Bank of India has executed the single largest trade.

In the domestic private bank category, HDFC Bank executed the first trade. Bank of America, IDBI Bank and Axis Bank also actively participated, the NSE said.

"After launching currency futures last year and interest rate futures today, we want to see how to introduce more and more products on the exchange traded platform and settled through central clearing entity which gives settlement gurantee," Securities and Exchange Board of India (SEBI) Chiarman, C B Bhave, said after the launch of interest rate futures in Mumbai.

Finance Secretary, Ashok Chawla, said that volumes were not the only thing. The manner in which the market develops is very important, he said.

Banks and FIIs can also participate in interest rate futures within the regulatory framework, Chawla said, adding that this is expected to give a push to this product.

Interest rate futures will be useful to those who have a view on the future interest rates and would like to benefit from interest rate movements. It is also expected to help those who have large a portfolio of GoI securities and would like to hedge against losses from interest rate movements, the NSE said.

Banks, primary dealers, mutual funds, insurance companies, corporate houses, financial institutions and member-brokers will be eligible to participate in IRF trading on the exchange.

The members registered with SEBI for trading in currency/equity derivatives segments are eligible to trade in interest rate derivatives, subject to the trading/clearing member having a net worth of Rs 1 crore and Rs 10 crore, respectively.

Interest rate futures are the most widely-traded derivatives instrument in the world and it also has a huge opportunity in India. Interest rate risk is the uncertainty in the movement of interest rates which have never been constant in the past and presumably not remain constant in the future as well.

The volatility of interest rates has increased manifold in the last couple of years. The annualised volatility of yield of 10-year benchmark Government of India Securities for the calender year 2008 has been 17.40 per cent compared to 8.51 per cent in 2007.

How Does Age Enter into Financial Planning?

Here are some guidelines to use, depending on your present age:

Ages 20 to 40.When you are young, growth of financial resources should be a primary goal; a relatively high degree of risk is tolerable.

Suggestion: Invest in a diversified portfolio of common stocks or in a mutual fund managed for growth of assets, not income. Speculation (real estate, coins, metals, etc.) is acceptable.

Ages 40 to 50. This is the period of time when the 20/20 rule goes into effect, working now for about 20 years and having 20 years more to go before retirement. Stocks are still an attractive choice, but now you need a more balanced approach. Begin to invest in fixed-rate instruments

(bonds), and look into ones that are tax free (municipals) only if your present or near-future income is high enough to warrant it.

Ages 50 to 60. At this point, growth is less important and risk less acceptable. Move a portion of your investments out of stocks and into bonds in order to minimize risk and increase your current flow of income.

Age 60 and Over. By now, the majority of your funds should be in incomeproducing investments to provide safety and maximum current interest.

Jaimini Bhagwati: Whither economics and finance? Policymakers need to broaden the scope of financial application

It would have been inconceivable just a year ago that the US government would need to support Fannie Mae and Freddie Mac and become a de-facto majority shareholder in General Motors, AIG, Citibank and Bank of America, and the UK government would hold controlling shares in the Royal Bank of Scotland. The Financial Times was concerned enough to run a series on the “Future of Capitalism”. Maybe the underlying concern was more about the future of capitalists, particularly those engaged in asset management and investment banking activities. However, public memory is notoriously short and we again have fawning comments about Goldman Sachs and the $3.4 billion profits posted by it in the April-June, 2009 quarter. These profits were driven by trading in fixed-income securities. In recent times, the bid-ask spreads on US government bonds have been wide since competition has been less with fewer market-makers. The Fed has deliberately stayed on the sidelines allowing banks to improve their financial health. It is surprising that such profits are being ascribed to financial acumen.

Goldman has returned $10 billion of TARP funding but it had also issued medium-term bonds worth several billion dollars which were guaranteed by the US Federal Deposit Insurance Corporation (FDIC). Goldman also benefited from the US government-funded bailout of AIG since it received $12.5 billion from AIG. Further, the somewhat discredited Value-at-Risk measure for Goldman is reported to have doubled over the last quarter. Steep bonuses seem to be back and there have been no consequences for most senior personnel in financial sector firms for decisions which resulted in their too-big-to-fail institutions receiving taxpayer-funded support.

At the same time, leading economists, central bankers and policymakers in finance ministries around the world have expressed sharply contrasting and even diametrically opposed views on the fundamentals of economics and finance. The following is illustrative of the issues on which there are clashing views. Namely, whether:

• asset-price bubbles can be recognised well in time and should central banks be made accountable for monitoring and preventing systemic risk from ballooning;
• inflation targeting delivers low inflation, steady growth, low levels of unemployment and financial sector stability or whether these three objectives were achieved in the last ten years due to a combination of global factors which were inherently unsustainable;
• it is possible to prevent financial firms from becoming too big to fail;
• the financial sector, including banking should be made “boring”, that is made to focus on core lending functions by raising capital requirements for trading activities;
• there should be ceilings on compensation in financial institutions since this could reduce greedy risk-taking;
• taxpayers are adequately compensated for government-funded support for private sector firms;
• the Efficient Markets Hypothesis (EMH) holds.

Paul Krugman has suggested that “much of the past 30 years of macroeconomics was spectacularly useless at best and positively harmful at worst.” According to other commentators, many policymakers and central bankers bought into the myth that economics is more than a social science. Taking a step back in time, Alfred Nobel conceived of five prizes, one each for Physics, Chemistry, Physiology or Medicine, Literature and Peace, for work which “conferred the greatest benefit on mankind.” The first prizes were awarded in 1901. And, it is only in 1968 that the Swedish central bank decided to fund a Nobel Prize for Economics. This was probably based on a consensus that innovative thinking in economics is more relevant for social welfare than, for example, history or sociology. Robert Skidelsky has suggested that economics should go back to its roots since its predictive power is similar to that of other social sciences and it should give up its excessive reliance on mathematical models.

Bertie Wooster, the central character in P G Wodehouse novels, would have remarked that his “mind boggles” if he had encountered the current uncertainties about established tenets of economics and finance. More seriously, and in fairness to these two inter-related disciplines, all these issues have been debated often in the past and there can be no categorical answers which apply uniformly over time and across countries. Unfortunately, however, now that there are signs that the major economies are recovering it may soon be back to business as usual.

In the late 1990s, an important insight of the then President of the World Bank was that economists needed to understand finance. To that end he insisted that all senior managers, which included many PhDs in economics, undergo basic finance training and learn how to read a balance sheet. The recent economic meltdown was triggered by a breakdown in investment banking and international capital markets. It is conceivable that central bankers and other regulators may have acted earlier if they were better informed about capital markets in general, and derivatives markets in particular. Consequently, in the Indian context, it would be useful to have a Chief Financial Adviser (CFA) in the ministry of finance in addition to a Chief Economic Adviser. The CFA could complement the work of the CEA to give the finance ministry a more in-depth picture of the health of financial markets and provide inputs on the state of accounting and corporate governance. A CFA could also highlight the need to move faster on deregulation of interest rates on small savings, making the government yield curve arbitrage free etc.

More generally, the mutually inconsistent opinions of Nobel Prize-winning economists are symptomatic of the multi-disciplinary and ever-changing confluence of factors, which drive economic outcomes even within the same country. India’s systemic shortcomings in eg providing assured irrigation, basic infrastructure, pricing of power, fertiliser and petroleum products and corporate governance (Satyam) or the problems of companies such as General Motors in the US, banks in Europe stem from a variety of factors. Clearly, purely formulaic remedies such as inflation targeting, liberalising exchange rate policies, introduction of exchange-traded forex derivatives, developing corporate bond markets, raising/lowering of interest rates and safeguarding the independence of RBI may not be sufficient or even appropriate. India-based economists and finance specialists have been relatively quiet about the applicability of recommendations based essentially on available data and static models. Further, we also need to reflect a bit more about the continuing capture of economic and financial sector policies by special interests in developed countries when thinking about solutions for comparable situations in India.

ECONOMIC GROWTH V/S DEVELOPMENT

Economic development is the development of economic wealth of countries or regions for the well-being of their inhabitants. This is the short definition of Economic Development.

Economic Growth & development are two different terms used in economics.

Generally speaking economic development refers to the problems of underdeveloped countries and economic growth to those of developed countries.

By Economic Growth we simply mean increase in per capita income or increase in GNP. In recent literature, the term economic growth refers to sustained increase in a country’s output of goods and services, or more precisely product per capita. Output is generally measured in terms of GNP.

The term economic development is far more comprehensive. It implies progressive changes in the socio-economic structure of a country.
Viewed in this way economic development Involves a steady decline in agricultural shares in GNP and continuous increase in shares of industries, trade banking construction and services.
Further whereas economic growth merely refers to rise in output; development implies change in technological and institutional organization of production as well as in distributive pattern of income.

Hence, compared to the objective of development, economic growth is easy realize. By a larger mobilization of resources and raising their productivity, output level can be raised. The process of development is far more extensive. Apart from a rise in output, it involves changes in composition of output, shift in the allocation of productive resources, and elimination or reduction of poverty, inequalities and unemployment.

In the words of Amartya Sen “Development requires the removal of major sources of unfreedom poverty as well as tyranny, poor economic opportunities as well as systematic social deprivation neglect of public facilities as well as intolerance or over activity of repressive states….”

Economic development is not possible without growth but growth is possible without development because growth is just increase in GNP It does not have any other parameters to it.
Development can be conceived as Multi-Dimensional process or phenomena. If there is increase in GNP more than the increase in per capita Income then we can say that Development is possible.
When given conditions of population improves then we can say that this is also an indicator of economic Development.

Is rising prices of food due to biofuels?

Fear of a spike in food prices has been palpable in India ever since rains have played truant in the country this year. We are well into August and monsoons have already been 29% below normal with almost 50% of the total districts in India reeling under a drought. The government has assured that it would use its reserves to put a cap on rising food prices and also increase ration supplies, especially in the case of wheat, rice and sugar which have been badly hit by the drought. Thus, the government will have to do all in its power to ensure that there is a smooth operation of the food distribution system and the national markets in the country.

Globally, the International Food Policy Research Institute has warned that even if global reserves are relied upon to curb hunger and price rises, rebuilding stocks from the low levels will be difficult. Food prices had spiked internationally in 2008 as high fuel prices and the subsequent interest in biofuels impacted production of other crops. Therefore, a lot of issues will need to be addressed if a food crisis in the future has to be prevented

Basics of Financial Markets

What is Investment?

The money you earn is partly spent and the rest saved for meeting future expenses. Instead of keeping the savings idle you may like to use savings in order to get return on it in the future. This is called Investment.

Why should one invest?

One needs to invest to:

- earn return on your idle resources

- generate a specifi ed sum of money for a specific goal in life

- make a provision for an uncertain future

- One of the important reasons why one needs to invest wisely is to meet the cost of Inflation. Inflation is the rate at which the cost of living increases. The cost of living is simply what it costs to buy the goods and services you need to live. Inflation causes money to lose value because it will not buy the same amount of a good or a service in the future as it does now or did in the past. For example, if there was a 6% inflation rate for the next 20 years, a Rs. 100 purchase today would cost Rs.321 in 20 years. This is why it is important to consider inflation as a factor in any

long-term investment strategy. Remember to look at an investment’s ‘real’ rate of return, which is the return after inflation. The aim of investments should be to provide a return above the inflation rate to ensure that the investment does not decrease in value. For example, if the annual inflation rate is 6%, then the investment will need to earn more than 6% to ensure it increases in value. If the after-tax return on your investment is less than the inflation rate, then your assets have actually decreased in value; that is, they won’t buy as much today as they did

last year.

When to start Investing?

The sooner one starts investing the better. By investing early you allow your investments more time to grow, whereby the concept of compounding (as we shall see later) increases your income, by a cumulating the principal and the interest or dividend earned on it, year after year. The three golden rules for all investors are:

- Invest early

- Invest regularly

- Invest for long term and not short term

What care should one take while investing?

Before making any investment, one must ensure to:

1. obtain written documents explaining the investment

2. read and understand such documents

3. verify the legitimacy of the investment

4. find out the costs and benefits associated with the investment

5. assess the risk-return profile of the investment

6. know the liquidity and safety aspects of the investment

7. ascertain if it is appropriate for your specific goals

8. compare these details with other investment opportunities available

9. examine if it fits in with other investments you are considering or you have already made

10. deal only through an authorised intermediary

11. seek all clarifications about the intermediary and the investment

12. explore the options available to you if something were to go wrong, and then, if satisfied, make the investment.

These are called the Twelve Important Steps to Investing.

What is meant by Interest?

When we borrow money, we are expected to pay for using it – this is known as Interest. Interest is an amount charged to the borrower for the privilege of using the lender’s money. Interest is usually calculated as a percentage of the principal balance (the amount of money borrowed). The percentage rate may be fixed for the life of the loan, or it may be variable, depending on the terms of the loan.

What factors determine interest rates?

When we talk of interest rates, there are different types of interest rates - rates that banks offer to their depositors, rates that they lend to their borrowers, the rate at which the Government borrows in the Bond/Government Securities market, rates offered to investors in small savings schemes like NSC, PPF, rates at which companies issue fixed deposits etc. The factors which govern these interest rates are mostly economy related and are commonly referred to as macroeconomic factors.

Some of these factors are:

- Demand for money

- Level of Government borrowings

- Supply of money

- Inflation rate

- The Reserve Bank of India and the Government policies which determine some of the variables mentioned above.

What are various options available for investment?

One may invest in:

- Physical assets like real estate, gold/jewellery, commodities etc.

and/or

- Financial assets such as fixed deposits with banks, small saving instruments with postoffices, insurance/provident/pension fund etc. or securities market related instruments like shares, bonds, debentures etc.

What are various Short-term financial options available for investment?

Broadly speaking, savings bank account, money market/liquid funds and fi xed deposits with banks may be considered as short-term financial investment options: Savings Bank Account is often the first banking product people use, which offers low interest (4%-5% p.a.), making them only marginally better than fi xed deposits. Money Market or Liquid Funds are a specialized form of mutual funds that invest in extremely short-term fixed income instruments and thereby provide easy liquidity. Unlike most mutual funds, money market funds are primarily oriented towards protecting your capital and then, aim to maximise returns. Money market funds usually yield better returns than savings accounts, but lower than bank fixed deposits. Fixed Deposits with Banks are also referred to as term deposits and minimum investment period for bank FDs is 30 days. Fixed Deposits with banks are for investors with low risk appetite, and may be considered for 6-12 months investment period as normally interest on less than 6 months bank FDs is likely to be lower than money market fund returns.

What are various Long-term financial options available for investment?

Post Office Savings Schemes, Public Provident Fund, Company Fixed Deposits, Bonds and Debentures, Mutual Funds etc.

Post Office Savings: Post Offi ce Monthly Income Scheme is a low risk saving instrument, which can be availed through any post offi ce. It provides an interest rate of 8% per annum, which is paid monthly. Minimum amount, which can be invested, is Rs.1,000/- and additional investment in multiples of 1,000/-. Maximum amount is Rs.3,00,000/- (if Single) or Rs. 6,00,000/- (if held Jointly) during a year. It has a maturity period of 6 years. A bonus of 10% is paid at the time of maturity. Premature withdrawal is permitted if deposit is more than one year old. A deduction of 5% is levied from the principal amount if withdrawn prematurely; the 10% bonus is also denied.

Public Provident Fund: A long term savings instrument with a maturity of 15 years and interest payable at 8% per annum compounded annually. A PPF account can be opened through a nationalized bank at anytime during the year and is open all through the year for depositing money. Tax benefits can be availed for the amount invested and interest accrued is tax-free. A withdrawal is permissible every year from the seventh financial year of the date of opening of the account and the amount of withdrawal will be limited to 50% of the balance at credit at the end of the 4th year immediately preceding the year in which the amount is withdrawn or at the end of the preceding year whichever is lower the amount of loan if any.

Company Fixed Deposits: These are short-term (six months) to medium-term (three to five years) borrowings by companies at a fixed rate of interest which is payable monthly, quarterly, semi10 annually or annually. They can also be cumulative fixed deposits where the entire principal alongwith the interest is paid at the end of the loan period. The rate of interest varies between 6-9% per annum for company FDs. The interest received is after deduction of taxes.

Bonds: It is a fixed income (debt) instrument issued for a period of more than one year with the purpose of raising capital. The central or state government, corporations and similar institutions sell bonds. A bond is generally a promise to repay the principal along with a fixed rate of interest on a specified date, called the Maturity Date.

Mutual Funds: These are funds operated by an investment company which raises money from

the public and invests in a group of assets (shares, debentures etc.), in accordance with a stated set of objectives. It is a substitute for those who are unable to invest directly in equities or debt because of resource, time or knowledge constraints. Benefits include professional money management, buying in small amounts and diversifi cation. Mutual fund units are issued and redeemed by the Fund Management Company based on the fund’s net asset value (NAV), which is determined at the end of each trading session. NAV is calculated as the value of all the shares held by the fund, minus expenses, divided by the number of units issued. Mutual Funds are usually long term investment vehicle though there some categories of mutual funds, such as money market mutual funds which are short term instruments.

What is meant by a Stock Exchange?

The Securities Contract (Regulation) Act, 1956 [SCRA] defines ‘Stock Exchange’ as any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities. Stock exchange could be a regional stock exchange whose area of operation/jurisdiction is specified at the time of its recognition or national exchanges, which are permitted to have nationwide trading since inception.

What is an ‘Equity’/Share?

Total equity capital of a company is divided into equal units of small denominations, each called a share. For example, in a company the total equity capital of Rs 2,00,00,000 is divided into 20,00,000 units of Rs 10 each. Each such unit of Rs 10 is called a Share. Thus, the company then is 11 said to have 20,00,000 equity shares of Rs 10 each. The holders of such shares are members of the company and have voting rights.

What is a ‘Debt Instrument’?

Debt instrument represents a contract whereby one party lends money to another on pre-determined terms with regards to rate and periodicity of interest, repayment of principal

amount by the borrower to the lender. In the Indian securities markets, the term ‘bond’ is used for debt instruments issued by the Central and State governments and public sector organizations and the term ‘debenture’ is used for instruments issued by private corporate sector.

What is a Derivative?

Derivative is a product whose value is derived from the value of one or more basic variables, called underlying. The underlying asset can be equity, index, foreign exchange (forex), commodity or any other asset. Derivative products initially emerged as hedging devices against fluctuations in commodity prices and commodity-linked derivatives remained the sole form of such products for almost three hundred years. The financial derivatives came into spotlight in post-1970 period due to growing instability in the financial markets. However, since their emergence, these products have become very popular and by 1990s, they accounted for about twothirds of total transactions in derivative products.

What is a Mutual Fund?

A Mutual Fund is a body corporate registered with SEBI (Securities Exchange Board of India) that pools money from individuals/corporate investors and invests the same in a variety of different financial instruments or securities such as equity shares, Government securities, Bonds, debentures etc. Mutual funds can thus be considered as financial intermediaries in the investment business that collect funds from the public and invest on behalf of the investors. Mutual funds issue units to the investors. The appreciation of the portfolio or securities in which the mutual fund has invested the money leads to an appreciation in the value of the units held by investors. The investment objectives outlined by a Mutual Fund in its prospectus are binding on the Mutual Fund scheme. The investment objectives specify the class of securities a Mutual Fund can invest in. Mutual Funds invest in various asset classes like equity, bonds, debentures, commercial paper and government securities. The schemes offered by mutual funds vary from fund to fund. Some are pure equity schemes; others are a mix of equity

and bonds. Investors are also given the option of getting dividends, which are declared periodically by the mutual fund, or to participate only in the capital appreciation of the scheme.

What is an Index ?

An Index shows how a specified portfolio of share prices are moving in order to give an indication of market trends. It is a basket of securities and the average price movement of the basket of securities indicates the index movement, whether upwards or downwards.

What is a Depository?

A depository is like a bank wherein the deposits are securities (viz. shares, debentures, bonds, government securities, units etc.) in electronic form.

What is Dematerialization ?

Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited to the investor’s account with his Depository Participant (DP).

What is the function of Securities Market?

Securities Markets is a place where buyers and sellers of securities can enter into transactions to purchase and sell shares, bonds, debentures etc. Further, it performs an important role of enabling corporates, entrepreneurs to raise resources for their companies and business ventures through public issues. Transfer of resources from those having idle resources (investors) to others who have a need for them (corporates) is most efficiently achieved through the securities market. Stated formally, securities markets provide channels for reallocation of savings to investments and entrepreneurship. Savings are linked to investments by a variety of intermediaries, through a range of financial products, called ‘Securities’.

Which are the securities one can invest in?

- Shares

- Government Securities

- Derivative products

- Units of Mutual Funds etc.,

are some of the securities investors in the securities market can invest in.

What is the role of the ‘Primary Market’?

The primary market provides the channel for sale of new securities. Primary market provides opportunity to issuers of securities; Government as well as corporates, to raise resources to meet their requirements of investment and/or discharge some obligation. They may issue the securities at face value, or at a discount/premium and these securities may take a variety of forms such as equity, debt etc. They may issue the securities in domestic market and/or international market.

Why do companies need to issue shares to the public?

Most companies are usually started privately by their promoter(s). However, the promoters’ capital and the borrowings from banks and financial institutions may not be sufficient for setting up or running the business over a long term. So companies invite the public to contribute towards the equity and issue shares to individual investors. The way to invite share capital from the public is through a ‘Public Issue’. Simply stated, a public issue is an offer to the public to subscribe to the share capital of a company. Once this is done, the company allots shares to the applicants as per the prescribed rules and regulations laid down by SEBI.

What is meant by Market Capitalisation?

The market value of a quoted company, which is calculated by multiplying its current share price (market price) by the number of shares in issue is called as market capitalization. E.g. Company A has 120 million shares in issue. The current market price is Rs. 100. The market capitalisation of company A is Rs. 12000 million.

What is an Initial Public Offer (IPO)?

An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. It is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuer’s securities. The sale of securities can be either through book building or through normal public issue.

What is a Prospectus ?

A large number of new companies oat public issues. While a large number of these companies are genuine, quite a few may want to exploit the investors. Therefore, it is very important that an investor before applying for any issue identifies future potential of a company. A part of the guidelines issued by SEBI (Securities and Exchange Board of India) is the disclosure of 23 information to the public. This disclosure includes information like the reason for raising the money, the way money is proposed to be spent, the return expected on the money etc. This information is in the form of ‘Prospectus’ which also includes information regarding the size of the issue, the current status of the company, its equity capital, its current and past performance, the promoters, the project, cost of the project, means of financing, product and capacity etc. It also contains lot of mandatory information regarding underwriting and statutory compliances. This helps investors to evaluate short term and long term prospects of the company.

What is meant by Secondary market?

Secondary market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets.

What is a Contract Note?

Contract Note is a confirmation of trades done on a particular day on behalf of the client by a trading member. It imposes a legally enforceable relationship between the client and the trading member with respect to purchase/sale and settlement of trades. It also helps to settle disputes/claims between the investor and the trading member. It is a prerequisite for filing a complaint or arbitration proceeding against the trading member in case of a dispute. A valid contract note should be in the prescribed form, contain the details of trades, stamped with requisite value and duly signed by the authorized signatory. Contract notes are kept in duplicate, the trading member and the client should keep one copy each. After verifying the details contained therein, the client keeps one copy and returns the second copy to the trading member duly acknowledged by him.

What precautions must one take before investing in the stock markets?

Here are some useful pointers to bear in mind before you invest in the markets:

-Make sure your broker is registered with SEBI and the exchanges and do not deal with unregistered intermediaries.

-Ensure that you receive contract notes for all your transactions from your broker within one working day of execution of the trades.

-All investments carry risk of some kind. Investors should always know the risk that they are taking and invest in a manner that matches their risk tolerance.

-Do not be misled by market rumours, luring advertisement or ‘hot tips’ of the day.

-Take informed decisions by studying the fundamentals of the company. Find out the business the company is into, its future prospects, quality of management, past track record etc Sources of knowing about a company are through annual reports, economic magazines, databases available with vendors or your financial advisor. If your financial advisor or broker advises you to invest in a company you have never heard of, be cautious. Spend some time checking out about the company before investing.

-Do not be attracted by announcements of fantastic results/news reports, about a company. Do your own research before investing in any stock.

-Do not be attracted to stocks based on what an internet website promotes, unless you have done adequate study of the company.

-Investing in very low priced stocks or what are known as penny stocks does not guarantee high returns.

-Be cautious about stocks which show a sudden spurt in price or trading activity.

-Any advise or tip that claims that there are huge returns expected,especially for acting quickly, may be risky and may to lead to losing some, most, or all of your money.

Economic Conditions Snapshot, August 2009: McKinsey Global Survey Results

Executives’ optimism about their nations’ economies and their companies’ prospects continued to grow over the past six weeks, and many companies are focusing more on growth. Yet full recovery, executives say, remains far off.

Executives’ optimism about the economy has continued to grow over the past month and a half, according to the results of a McKinsey Quarterly survey in the field during the week that US stock markets hit their highest point so far in 2009.¹ More companies are pursuing a range of growth initiatives than were doing so six weeks ago, and the proportion expecting increased profits this year has risen to 40 percent, from 33 percent. Similarly, the share of those saying that their nations’ economies have improved since September 2008 has risen, though only to 26 percent, from 20 percent.

More executives—42 percent—pick the description “battered but resilient” for the global economy than any other. Yet their other responses indicate that they see the economy as battered enough to prevent a large-scale economic recovery from arriving anytime soon. The share expecting an upturn to begin in 2009, for example, has fallen to 20 percent, from 28 percent, over the past six weeks, and the percentage of respondents who think that their national economies will be better at the end of the year—37 percent—equals the percentage who think their national economies will be worse.