Cabinet clears new bill on mining regulations

The Union Cabinet cleared a new bill on regulating and developing mining on Friday which will mandate coal companies to provide 26% of post-tax profit for the welfare of affected people, a move intended to benefit mostly tribals.

The Mines & Minerals (Regulation and Development) Bill, 2011, which seeks to replace a 1957 act, also provides for setting up of National Mining Regulatory Authority and Tribunal and formation of District Mineral Foundations in 60 mineral-rich districts across the country.

The states will also be advised to set up authorities and tribunals on these lines. The Bill, which advocates "sustainable and scientific" mining, also suggests non-coal miners like bauxite and iron ore firms to share an amount equal to that of royalty with local residents instead of just sharing profits.

A 10-member ministerial panel set up in June last year, has finalised the methodology ensuring that people in mineral-rich districts of Andhra Pradesh, Orissa, Chhattisgarh, Goa, Jharkhand, Karnataka, Madhya Pradesh, Maharashtra, Rajasthan, Uttar Pradesh and West Bengal get monetary benefits from the mining.

An estimated amount of Rs 10,000 crore will be generated per year from the miners and an average amount of Rs 180 to 200 crore will be distributed among District Mining Foundations of 60 mineral rich districts that include 25 districts affected by Left Wing Extremism.

Calling it "a revolutionary step", a Government official said the UPA dispensation was committed towards the welfare of the villagers and families, particularly tribals affected by mining activities.

The bill is expected to be introduced in the Winter Session of Parliament, the official said.

Europe Crisis Drives up Cost of Foreign Funds

Indian companies may now be forced to borrow from the local market at higher rates as borrowing overseas has become a lot more costly

Indian corporates, who borrowed liberally from overseas loan markets last fiscal, are finding the going tough now as the ongoing sovereign debt crisis in Europe is driving up prices of overseas loans, which may force them to look at raising money at higher rates from local lenders.

Although the government and the Reserve Bank of India recently eased some of the rules relating to foreign borrowings to ensure greater access to fundraising abroad, the crisis in the euro zone, marked by fears of a potential default by Greece, has led to overseas lenders seeking higher spreads on loans. A senior official of a bank, which arranges and syndicates foreign loans, said spreads have widened for even a AAA or a top-rated corporate with the spreads being as high as 450 basis points over the London Inter Bank Offered Rate, or Libor the benchmark for lending. The six-month Libor is now 0.55%.

Such a high spread being quoted now will mean that even top companies will not be able to raise such loans as they breach the cost or price ceiling set by the government and RBI. The rules on the cost of such loans restrict pricing to 300 basis points over the Libor for loans of a maturity of 3-5 years,200 basis points over the Libor for loans of a maturity of up to one year and 500 basis points over the Libor for loans with a tenor of over five years.

According to bankers, the borrowing cost for corporates has risen by 250 basis points (1 basis point is 0.01%) over the past two months. Prior to July, top corporates were able to access foreign loans at 250 basis points over the Libor. This has shot up to 450 basis points, which is about 4.5% above Libor. Coupled with this, the prevailing Mumbai Interbank forwards rate, or Mifor, a benchmark for hedging costs,is now close to 5.2% for five years, which will raise the all-in cost of such loans to close to 9.5-10 %.This contrasts with a pricing of 10.5-11 % for a loan of a similar maturity in local currency from a Indian bank. Banks such as the Indian bank and Union Bank of India have postponed their foreign bond issuances, which come under the ECB guidelines, due to unfavourable market conditions.

The spreads on credit default swap papers, which offer protection against a possible default on Indian paper have also widened, reflecting the heightened risk aversion. The CDS spread on SBI the countrys largest bank has widened to 358.40 basis points,up from 202 basis points in June.

In line with the weakness in global financial markets, the credit spreads for borrowers may increase, which may further reduce the arbitrage between the foreign currency debt and rupee debt, says Nishikant Das, director of debt capital markets, Standard Chartered Bank. There is risk aversion at this point of time in the market, which has resulted in preference for stronger credit and higher pricing, he added.

Recently, RBI eased the norms for borrowing through the automatic route to $750 million for real, industrial and infrastructure sector. Indian companies have raised $21 billion in the seven months to July this year. Among the top borrowers was Reliance Industries, or RIL, which raised $1.09 billion in July. The central bank is now considering easing the norms on pricing to allow for firms to borrow at higher interest rates.

However, analysts are not very optimistic about the impact of these initiatives, due to the global market conditions. Interest rate arbitrage has come down considerably compared to what it was six months ago, owing to dollar shortage in the market on account of crises in the euro zone, said NS Venkatesh, head of treasury, IDBI bank. The demand for dollars will continue to be there globally and because of that,the interest rate differential is likely to shrink further. There is a high possibility that this might continue to be the scenario for the coming 6-7 months, said Anil Bhansali, vice-president - risk management, Mecklai Financial.

Price No Bar for Gold as Wedding Season Kicks in

Thanks to a slight correction, jewellers bet on high demand

RAM SAHGAL MUMBAI

Jewellers who have seen sales slip during the third quarter are hoping demand will perk up with the onset of the festive season which will be followed by the marriage season in October.

Tanishq, the countrys largest jeweller with 126 stores across 76 towns,has recorded a single-digit fall in plain gold jewellery sales which account for 70% of its revenues,this September from a year ago. Sales of plain gold jewellery for the quarter are likely to be pulled down by lower business this month, said Sandeep Kulhalli, vice president (retail),Tanishq.We expect a double-digit growth in sales of studded jewellery to offset this slowdown and sales to improve with the festive and marriage seasons getting under way, he said,adding studded gold jewellery accounted for 30% of the companys sales.

Shrenuj, a leading manufacturer of studded gold jewellery, which counts Tanishq, Reliance Jewels, joyalukkas and GRT Jewelers’ as its clients, recorded fewer bookings during the third quarter as retail jewellers witnessed fewer footfalls at their stores. However, a leading company official said things were likely to look up with prices having corrected recently.

“Business has been down during July-September. My estimate is it could be down by half from a year ago”, said Umesh Shah, VP (domestic jewellery division),Shrenuj. I feel we could see better times ahead. Some of our clients who refrained from taking delivery of jewellery orders placed over the past 15-20 days are now lifting them.I think footfalls at our clients end will pick up due to the festive season and because gold and diamond prices have corrected somewhat.

Ananthapadmanabhan, MD,Chennai-based GRT Jewellers, said demand would pick up with the marriage season getting under way. People have seen a steady appreciation in gold and if buying is mandatory during the festive and marriage seasons, they will buy irrespective of prices. This is what we have seen at our stores in Tamil Nadu, Andhra and Karnataka, he said.

Joy Alukkas, chairman, joyalukkas group, said he expected demand to remain steady at his stores. We have not seen a fall in grammage at our stores and I expect the trend to continue as Hindus, Muslims and Christians marriage calendar is spread throughout the year.

Gold MFs a Big Hit, Outshine Equity

Gold MFs have earned 34% against a 16% fall logged by diversified schemes since Jan 11

Record-level gold prices may have dampened the demand for jewellery, but it has hardly dented investors’ appetite for products based on the yellow metal. Gold schemes with the facility to make periodic purchases, floated by Reliance Mutual Fund, Kotak Mutual Fund and SBI Mutual Fund, have seen sizeable inflows, prompting other asset management companies to plan similar product launches. ICICI Prudential’s opened its gold fund-of-fund NFO for subscription last week.

Birla Mutual Fund and Baroda Pioneer Mutual Fund have filed drafts with market regulator Sebi to launch such schemes and many others are expected to follow suit. Fund houses are looking to cash in on the frenzy for gold products among investors, who are fleeing stocks because of the uncertainty over the debt crisis in Europe and worries about a recession in the US.SBI Mutual Fund, which recently wound up its gold fund-of-fund NFO, raised almost.500 crore with 70,000 SIP folios from 1.3 lakh applications. Reliance MF, which was also raised about.500 crore in its NFO in February, is claiming to have received commitments worth.350 crore every year for the next ten years.

Kotak Mutual Fund, which gathered a rather modest.80 crore in its NFO in August, has seen sizeable inflows since launch, a top official said. The heightening rush for gold products is not without a reason: Gold mutual funds have returned almost 34% since January this year, while the value of equity diversified schemes have eroded 16% in the period. Most fixed income products return 10-12 % annualised. But, fewer investors could benefit from the gold rally till early this year, partly because they could only bet on gold through exchange traded funds (ETFs) or futures contracts. For that, they needed to open demat accounts with brokers, as ETFs are traded on stock exchanges like shares and most of them do not offer systematic investment plans (SIPs).ETFs were not fully exploiting the possible investor demand for gold because of the lack of awareness, but with the fund-of-fund structure,there is scope for wider investor participation, said Lakhshmi Iyer, head-fixed income and products, Kotak Mahindra Asset Management.

SIP GOLD, DON'T GULP

The consensus among investors and analysts is that gold is overbought at these levels and could correct significantly from these levels. The recent rally in gold is certainly overdone and certainly not conducive for lump sum investments, said Harish Galipalli, research head of JRG Wealth Management. We expect a correction and consolidation over the next four to five quarters, he said. He does not rule out a jump in gold to.36,000 next year. Indian gold prices, currently at about.26,300,could correct as much as 25% this year, analysts said. But, the market is divided on the probability of a sharp rebound after the expected decline.

Rupee cost averaging (SIPs) is a good strategy to bet on gold because there could be a bounceback after the correction if concerns in developed markets persist, said Alex Mathews, head-technical research, Geojit BNP Paribas. A section of the market feels there is very little steam left for gold to run up as central banks in developed economies are refraining from printing money. Gold and other commodities gained from the billions of dollars that the US Fed pumped into the market by way of quantitative easing programmes. There is no real money to push up gold prices further. It will remain in a range, at the most, said a fund manager, who manages a mutual fund scheme, which invests in equities, bonds and gold.

Blue Chips now Going at Huge Discount

At least 17 stocks in BSE A group trade at lower PEs than what they were at in post-Lehman trough

If one believes in India’s long-term growth story, it may just be time to take the plunge as many of the blue chips such as Maruti Suzuki, Tata Power and Dr Reddys trade at a valuation lower than the post Lehman Brothers trough in March 2009.The global selloff in equities that wiped out more than $3 trillion in wealth has been indiscriminate with even companies having more than 30% earnings growth bearing the brunt despite their fundamentals turning stronger.

Rising cost of funds and input prices may slow revenue growth and squeeze their profitability, but a possible slide in commodity prices may turn out to be a blessing in disguise. Even if macro fundamentals deteriorate, efficient companies could outperform. The common perception is that earnings growth is highly levered to the economic growth, said a recent note from Morgan Stanley. Operating leverage has been falling and is at an 8-year low.

The sensitivity of earnings to macro growth is likely to be lower than history. Earnings seem relatively better protected compared to a growth slowdown in 2008-09. At least 17 companies in the BSEs A group list currently trade at a lower price-earnings ratio compared to that in March 2009,when the benchmark Sensex had fallen to its 30-month low,a study by ET Intelligence Group shows.

Some of the most frequently-traded companies with sound fundamentals are at lower valuations than in March 9,2009,when the Sensex had crashed to as low as 8,160.The absolute index numbers may be misleading too as earnings have risen substantially in the three years between the Lehman collapse and an impending Euro zone crisis. The P/E ratio for the Sensex is also lower at 15 times, compared with 23 times in March 2009,when it fell to multi-year lows.

Unhedged forex debt spells trouble for firms like Bharti Airtel, Tata Motors, Tata Steel and Reliance Communications

Canara Robecos Jain says Q2 may spring negative surprises

MUMBAI: Bharti Airtel, Tata Motors, Tata Steel andReliance Communications, which have piled up foreign currency debt in their acquisition spree of the past few years, may be the unwanted stocks for investors as the Indian currency is whipsawed by foreign funds pulling out and a strong import demand, experts said.

The fact that these companies have not hedged a good portion of their debt amid fears of a double-dip recession could well become a thorn in their balance sheets as international markets turn hostile to lending to emerging market companies.

"Several Indian companies have taken huge working capital loans in foreign currency; these are largely unhedged borrowings," said Ritesh Jain, investment head at Canara Robeco Mutual Fund. "Companies with unhedged foreign exchange exposure on the liability side expose themselves to huge currency losses. We expect negative surprises in the September quarter."

The rupee has fallen nearly 13% since August this year. Currently, trading close to 50 a dollar, the rupee has fallen to a 28-month low on September 22, as the global macroeconomic situation worsened even further. Even though a weakening rupee is beneficial to IT companies, the dollar's strength against other billing currencies, like euro and British pound sterling, will neutralise their 'export receivable earnings'.

Corporate earnings may slow in the next three quarters, said Jain who owns stocks of dairy products and chocolate maker Nestle, soaps and shampoo maker Hindustan Unilever, and cement producer ACC, a unit of Switzerland's Holcim. Apart from a drop in operating margins, Indian companies will also have to wrestle with a general decline in demand. According to analyst reports, consensus earnings for FY12 have fallen 7% over the past six months and are currently hovering at 15% levels. "Our mid-term outlook for economy is slowing growth along with a stubborn inflation," Jain said.

"The concern is as much local as it is global. Domestic consumption refuses to slow down even after a series of rate hikes. Global uncertainty and regulatory environment are now allowing capital formation needed for broadbased growth of economy and to dampen inflationary pressures," he said.

Despite a 20% correction in the market since January, Jain is not lured by attractive valuations as their performance will be the worst hit during tough times while top companies sail through.

"Blue-chip companies and niche businesses will continue to command rich valuations while mid-, and small-cap stocks, with not much corporate performance, will remain cheap on valuation front," Jain said, adding, "We'll prefer to stay in good companies, even if it means paying a higher premium for investing in them."

The fund house has sold some shares such as Infosys Technologies and TCS that may face a slowdown in order flows from the West. Some infrastructure-related stocks such as Coal India, Power Grid, L&T and NTPC have also been reduced in the portfolio.

According to him, investors should invest in companies which can navigate through different business cycles and can adapt to a changing business environment.

They should look at companies which have free cash flows, he said. "It is companies and not markets that create wealth," Jain said. Jain is also bullish on gold for the next three to four years and he believes that investors should have at least 10-20% of assets in it.

Weekly Sector Outlook

Bank Stock Outlook:-

1. Bank shares are likely to remain under pressure in the forthcoming week, taking cues from the week global scenario that has impacted sentiment adversely in the broader equity market, analysts said.
2. “The only hope is that with September expiry on Thursday, if the high level of shorts that have been built up in Bank Nifty are covered, then it could actually lead to a relief rally in broad markets,” said an analysts with a large domestic brokerage.

Auto Stock Outlook:-

1. Automobile stocks are seen moving in range next week, even as the broad market is expected to be volatile on global cues, dealers said.
2. “There might be a pull-back initially next week, but the markets are again expected to fall,” a dealer with a local brokerage said.

Pharma Stock Outlook:-

1. Shares of pharmaceutical companies will continues to gain over the next five sessions, even though no major events are expected in the sector, because of defensive buying amid volatility in the broad market, analyst said.
2. According to analysts, pharma stocks are safe bets during times of decline. “I am positive on the pharma shares because in any market turmoil, they look relatively promising,” the analyst said.

Telecom Stock Outlook:-

1. Telecom stocks are seen in range with a weak bias in the next five trading sessions taking cues from the broad market, dealers said.
2. While the broad market will take cues from overseas development s next week, trade could also be choppy due to the expiry of September derivatives’ contracts, dealers said. This could also impact telecom stocks, dealers said.

Capital Goods Stock Outlook:-

1. Shares of capital goods and engineering companies may fall further next week on concern s that looming recession in global economy may continue to moderate growth, dealers and analysts said.
2. August core sector data, likely to detailed next week, may influence the capital goods stock movements.

Cement Stock Outlook:-

1. Sentiment for the cement sector is likely to remain positive next week. However, the stocks will track broad market for direction, analysts and dealers said.
2. Despite weakness in the broad market this week, shares of most cement companies ended higher.

Steel Stock Outlook:-

1. Shares of steel majors appear weak in the next five sessions on concern demand is not likely to pick up either locally or globally in the near term, dealers and analysts said.
2. The rupee depreciation is also likely to benefit the steel prices going forward. The Indian rupee has depreciated 8% in past two months.

IT Stock Outlook:-

1. Shares of major information technology companies are seen down next week on profit booking and continued economic concerns in US and the Eurozone, which are the major market for Indian software exporters, dealers and analysts said.
2. Nearly 80% of Indian IT companies’ revenue comes from US & Europe. This week, IT shares remained volatile, gaining in the first half of the week as rupee depreciation to record levels.

Oil Stock Outlook:-

1. The shares of oil marketing companies are likely to track the movement in rupee against the dollar next week, even as the easing price of crude is likely to provide support to these counters at current levels, dealers said.
2. Moreover, the outlook for rupees was not very optimistic, while the market was not expecting a mare significant correction in the crude prices.

FMCG Stock Outlook:-

1. The Shares of fast moving consumer goods companies are seen range bound in the week ahead, analysts said.
2. FMCG shares will, however, continue to outperform the broader market as they are unlikely to fall sharply in the week ahead, an analyst with a domestic brokerage said.

Fed Twister,China Chill Rattle Global Markets

Sensex slumps over 700 points to 26-month low;rupee a tad below 50

The world seemed to be at its wits end on Thursday. Policymakers either ran out of ideas, or used tools that markets feared were too little, too late. Hints of hope were shadowed by a spate of bad news: Feds twist operation to bring down long-term interest rates followed its gloomy assessment of the US economy; new data showed that Chinese factories have slowed for a third month; and three big US lenders -- Bank of America, Citigroup and Wells Fargo were downgraded. Institutions have sensed that quantitative easing by central banks, in whatever form, can only help to buy a little time. So lets get on our knees and pray. That we do get fooled again, said an internal note of one of the worlds largest insurance groups.

Europe and Asias markets dived on Thursday, mirroring the decline in US markets the previous night, with India’s benchmark indices posting the biggest percentage losses in a day since July 2009.The US market was trading nearly 4% down at the time of going to the press. Operation Twist is supposed to push bond yields closer to zero, which should reduce mortgage rates and revive housing activity.QE1 was supposed to do the same thing. But it didn’t work, said Ed Yardeni, president & chief investment strategist of US-based Yardeni Research, in an emailed note. Governments and central banks in the US,UK and Eurozone have printed, spent, lent or guaranteed $17 trillion since 2008,over 50% of the combined GDP of the three. They do not want the money to go waste, and will try out everything to avert a recession a process that could cause brief rallies and sudden plunges. There can be two scenarios a global sluggishness and a potential crisis, said Uday Kotak, executive VC, Kotak group. Sensex fell 704 points or 4.1% to end at 16,361.Nifty dropped 209.60 points or 4.08% to close at 4,923.65,with FIIs selling shares worth.1,305 crore.

IT DRIVES INNOVATION IN THE BANKING SECTOR

As India moves towards financial inclusion in the banking sector,technology will play a key role in achieving this goal

In a country of 1200 million Indians,which has only 400 million bank users,there is an urgent need to ensure financial inclusion and greater transparency,and banking technology will play a crucial role in driving this change.

On Thursday,September 8,2011,key players of the banking industry converged at the ITC Grand Central in Mumbai to discuss the issues involved in this transformation,at the fifth edition of The Economic Times Banking Technology Conclave 11.

The conclave, Indian Banking 2015: Towards Technology Enabled Transformation had speakers discussing a wide range of issues impacting the sector the importance of technology investments, partnerships with the Information Technology sector, customer-centricity for higher profitability and the emerging frontiers for cooperative banks, among other things.

Information technology in banking is fast evolving, said a KPMG White Paper, released on the occasion. From enabling banking services to driving transformation in the industry, information Technology holds a promise to change the face of banking in the next few years. New entrants are looking to leverage their existing strengths in the Indian banking arena. The opportunity available to these entrants through leveraging their understanding of technologies and markets they operate in promises innovative business models with a focus on delivering customer value. The need to provide personalised, speedy and cost-effective services is pushing banks to further reorient and innovate the business model of banking and enabling technology, the paper adds.
Mr M.V.Nair, Conference Chairman & Chairman and Managing Director, Union Bank of India, highlighted four emerging trends in banking technology. Mr Nair referred to an integrated multi-channel delivery system; financial inclusion; customer relationship management and IT governance. He also spoke of the importance of green IT initiatives for business competitiveness and cost efficiency, pointing out that modern IT systems were complex and sophisticated, but they were also energy guzzlers.

According to statistics, every watt required for computer power creates the need for another watt for cooling, Mr Nair said.It becomes one of the integral parts of Green IT to develop a strategy for implementation of less paper offices to paperless offices. Initiatives like the solar-powered ATMs with which we are experimenting at Union Bank of India may go a long way towards green technology in banking.

The challenges involved in reaching out to last-mile customers formed an integral part of the discussions. Sunny Banerjea, Partner and Head, Management Consulting, KPMG India, pointed out that thanks to mobile phones and other devices, todays consumer had far more computing power in his hand than it had taken to get man to the moon in the 1960s.However,as most bankers would agree, customers could not be looked at as a homogenous group, and strategies for rural and urban customers would necessarily have to be different.

Shikha Sharma, Managing Director and CEO, Axis Bank Ltd, pointed out that while the market was a large one,there were differences in the way the older generation, and the younger one, perceived their banking needs. She also raised issues of changing mindsets and workforce training for the new era of computerisation.

There is no doubt that the complex world of Indian banking has already seen tremendous change. With many transactions taking place through the Internet,mobile banking and Automated Teller Machines, customers no longer need to wait in long queues during working hours to get their passbooks updated, or to withdraw money. Even cooperative banks, which have largely operated through traditional models,have begun to see the need for technology-enabled transactions; The Greater Bombay Co-operative Bank Ltd. or instance, has seen value in opening innovative E-lobby Banking branches, and streamlining their systems by achieving ISO 9001:2008 certification. In just 150 sq ft space, we have seven machines which allow you, among other things,to deposit cash, pay electricity bills and get your passbook printed, said Narendrakumar A Baldota, Chairman of the Bank. Banking is available 24x7 and customers come in even at 1.00 a.m.or 2.00 a.m. And the cost is hardly Rs 12 lakh for these seven machines.

In June 2010,Reserve Bank of India had asked all banks to present a three-year financial inclusion plan by incorporating the government's goal of making banking facilities available in all villages with 2000 population by March 31,2012.

The Government is also planning to leverage the Unique Identification Authority of India (UIDAI) project to further achieve financial inclusion, a fact that most bankers at the conclave agreed would make a huge difference.For emerging markets to move ahead in the global arena, however, there are primarily four issues that need attention. In achieving these goals, banking technology will certainly make a vital difference, simplifying the banking process, offering speed and convenience to the customer in an increasingly competitive era, and also playing a holistic role in financial inclusion. As speakers at the Conclave agreed, while there are many challenges to be met, the process is certainly gaining momentum.

FIs may Get to Use Idle Stocks to Raise Funds

Sebi may let FIs issue tradable third-party warrants in lieu of idle stocks held by them

Financial institutions, like insurance firms, banks and corporate holding companies, may soon be able to use their idle stock investments to generate liquidity by offering a new financial instrument to investors. Market regulator Sebi is exploring the possibility of allowing institutions to issue third-party warrants that can be traded on the stock exchange, said persons familiar with the development. Such warrants would be equity derivatives against underlying stocks that financial institutions have invested in. Sebi is working on the feasibility of third-party warrants. The matter has been discussed between officials of finance ministry, Sebi and exchanges. The idea is to attract more investors in the market and make it more liquid, said a person who was present at the meeting held early September. The possible features of such warrants will be discussed in the next meeting, said the person. The proposed product could increase liquidity in scrips with low floating stock. For instance,there may be takers for warrants against stocks like Coal India,SAIL, NTPC where promoter holding is over 85%.Besides,earnings from sale of warrants will lower investment cost for institutions.

Current norms allow only companies to issue warrants linked to their stocks. Say, Tata Steel offers one lakh warrants to raise funds. But if an MF holding shares of Tata Steel sells warrants against those shares, such instruments are called third-party warrants. Popular in some of the overseas markets, these warrants work as long-term call options. Here, the seller of the warrant writes a covered call, which means that it will not sell the underlying stock before the warrant expires. The premium received by the FI, or the seller of the warrant, is its earnings from the warrant while Tata Steel has no links to the issuance. If launched with market-friendly micro-structure, it will help large institutions generate returns on their long-term holdings which are lying idle, said Devesh Kumar, managing director-head equities, RBS global banking and markets. He felt that there would be good response for such products in India.

Internationally, some of the largest issuers of exchange-traded third party structured products are Citibank, Goldman, UBS and BNP, among others. Countries, like Australia, Germany, Hong Kong, Italy, Japan and Singapore, have vibrant markets for such products. In Hong Kong Stock Exchange, they account for over 10% of the total turnover. How will retail investors benefit While the product is meant for institutional investors, experts say it will also benefit retail investors. Since large institutions, like insurance and MFs, will be able to generate income, this will result in higher NAVs of their investments. Many institutional investors are holding large shareholding in blue chip companies. But it is essential that such products are launched with keeping in mind the Indian market requirements. Such products have their own gestation period, said Rakesh Puri, MD (Global head of operations & compliance) at Elara Capital, a UK-based investment bank. For instance, LIC holds around 19% stake in L&T worth around.18,000 crore. Similarly, it holds 12% and 9% stake in SBI and ICICI Bank worth around.14,500 and.9,000 crore, respectively. HDFC MF holds around 1% in Infosys worth around.1,500 crore and 4% in Crompton Greaves worth around.450 crore.SBI holds 1.5% stake in IDFC worth around.250 crore. The returns from these holdings are restricted to dividend and capital appreciation. The issuance of third party warrant was first proposed by Sebi in 2002 as part of its efforts to introduce new instruments, but the regulator had felt that the market was ready for such a product.

We now almost have a decade of experience in the derivatives market. Its time we should start innovating products that create liquidity in the system. Institutions always look for instrument that are liquid and provides them the structure they are comfortable with. Since the product has taken off well in some countries, there is no reason for it to be not well accepted, said Kumar. In 2008,a committee headed by Prof Rammohan Rao to review developments in the Indian derivatives market recommended that new products like third-party warrants should be made available to investors without compromising risk management. Last month, t he subject was discussed among Sebi and finance ministry officials. In another meeting held in the first week of September, the ministry officials had asked Sebi for an update. A finance ministry official confirmed the development. Third-party warrants can widen the choice for investors in terms of issue price, maturity, strike price and types of options. The product is flexible and tailored as per the appetite of the investor. Otherwise, the market is full of homogenous product.While a lot depends on the final guidelines, the product should not be too complicated, said Deena Mehta, MD, Asit C Mehta Investment Intermediates. Mehta was part of the 2008 committee. But exchange officials think that several issues have to be sorted out before it can be launched. It needs to be standardised to some extent if it has to trade on exchanges; otherwise, it will be like an OTC product traded on an exchange. But why warrants when options are available for trading Brokers think that unlike futures and options, which are standardised products, many investors could be attracted to warrants as these can be structured as per their requirements. While investors can take exposure through options, the scope is limited as the view cannot be for more than three months and strike price is fixed and determined by the exchanges. But in case of third party warrants,, said Puri.

New Equity Fund Issues must Raise at least.10 cr

Regulator also sets.20-crore lower limit for non-equity fund schemes

Stock market regulator Sebi has ordered mutual funds to raise the minimum amount they hope to raise through new equity fund schemes as part of a crackdown on what it calls are casual fund launches. Sebi has asked mutual fund houses to increase the minimum target amount (MTA) mentioned in the fund prospectus to.10 crore in case of equity schemes and.20 crore in other fund categories, up from nominal amounts of between.10 lakh and.1 crore now. Changes in MTA will prevent casual fund launches. Fund houses should launch schemes only if they are really serious about it. They should not launch a fund if they are not confident about collecting at least.10 crore, a senior Sebi official said.

The regulator has also asked fund houses that are awaiting approval to launch new fund offers to revise the targeted amount figures and re-file their prospectus, people familiar with the matter said. Fund houses that fail to collect the minimum amount specified in the prospectus would have to refund the money collected to investors. Refunds will need to be made within six weeks failing which fund houses will have to return the money along with 15% interest. Asset management companies that are not able to mobilise money at the NFO phase raise MTA by accepting money from promoter companies (banks in the case of bank-promoted fund houses and corporates for corporate-promoted fund houses) or wealth trustees, said the CEO of a private fund house. Money collected from promoters or trustees moves out the moment the scheme crosses the MTA threshold. Sebi sees this as a method to trap small retail investors.

By raising MTAs, Sebi is trying to make it difficult for funds to bridge the shortfall using their own resources, the CEO said. Fund houses have mobilised about.850 crore by launching 15 equity funds since January this year. As per Value Research data, smaller fund houses such as Mirae Asset Investment and Religare Mutual Fund have declared less than a crore of rupees as first declared AUM. Only three funds, namely HSBC Brazil Fund, Union KBC Equity Fund and Sundaram Equity Plus (which collected.188 crore,.166 crore and.136 crore, respectively ) have managed to mobilise more than.100 crore in the NFO phase. According to AMFIs April-June quarter update,145 new schemes were launched in the quarter and a sum of.19,059 crore was mobilised .18,331 crore under income schemes,.301 crore under equity schemes,.1 crore under liquid and money market schemes,.57 crore under gilt schemes,.51 crore under Gold ETF,.5 crore under other ETFs and.313 crore under fund-of-funds investing overseas. With assets over.1.20 lakh crore, fixed maturity plans remain one of largest investment pools in the industry. Raising MTA is a move in the right direction... Fund houses should not act casual while launching funds, said Dhirendra Kumar, managing director of Delhi-based fund tracker Value Research. Moreover, it is not worth the while for fund houses to manage small sums of money... In fact, Sebi should come out with (fund) category-specific ticket sizes or MTA, he said. shailesh.

India to Topple Japan as Worlds 3rd-Largest Economy

In terms of purchasing power parity, Japan economy likely to shrink post tsunami as India may grow at 7-8 %

India might become the world’s third largest economy in 2011 by overtaking Japan in terms of GDP measured according to the domestic purchasing power of the rupee, otherwise called purchasing power parity. India is now the fourth-largest economy behind the US, China and Japan.

Numbers from 2010 show that the Japanese economy was worth $4.31 trillion, with India snapping at its heels at $4.06 trillion. But after March’s devastating tsunami and earthquakes, Japans economy is widely expected to contract, while India’s economy will grow between 7% and 8% this fiscal. India should overtake Japan in 2011 to become the third-largest economy in the world at PPP, said Sunil Sinha, head of research and senior economist at Crisil.IMF forecasts show India and Japan neck-to-neck in 2011,but the disaster in Japan has brought the event forward. Were it not for the earthquake and tsunami,India would have overtaken Japan in around 2013-14, said Sinha.

The purchasing power parity (PPP) method measures the size of an economy by levelling price differences between countries that occur in the process of conversion to a single currency. Under this method, a dollar should be able to buy the same amount of goods anywhere in the world and exchange rates should adjust accordingly.

The Economists Big Mac index which takes the price of a Big Mac burger across 120 countries to calculate the real price of its currency is a crude way to measure PPP. India was included in the index recently. t showed that the rupee was undervalued by 53% against the dollar in August. arlier, a report by consultant PwC suggested that the Indian economy would surpass the Japanese economy in 2012.The IMF expects the Japanese economy to contract 0.7% this year, while India is expected to grow 8.2%.A bigger economy could also give the government additional clout and bargaining power overseas.

Gold Up Again; Solid Losses Expected In Europe, US Opening

Gold futures jumped near $1830 levels boosted by losses in Asian equities and also as European stock market futures were indicating heavy losses for markets due to open shortly on Monday.

Also, the U.S. stock market futures were sharply lower in pre-open European trading on Monday as worries over euro zone debt problems were expected to weigh on investor sentiment. European Union finance ministers meeting in Poland over the weekend made little progress, while Greece's government reportedly held a cabinet meeting on Sunday to discuss how to plug a budget shortfall and avoid default. Futures on the Dow Jones Industrial Average fell 154 points to 11,292. Futures for the FTSE 100 index were pointing to a 1.5% opening loss, while those for the French CAC 40 index were being called down 2.4% and those for the German DAX 40 index were pointing to a 2.1% loss.

An ounce of Gold on the COMEX division of the New York Mercantile Exchange traded at $ 1825 up $10. On Friday, it settled at $1,811.65 a troy ounce, retreating 2.58% over the week, the second consecutive weekly decline. The sell off came in the yellow metal also as the traders booked profits in the gold when it hit the fresh highs of $1923.7 per ounce on 6th September to cover their losses in the equity markets and other risky assets. This twist always comes in the markets when gold has rallied for a long time and equities have also been tumbling at the same time and then finally to cover the losses in risky asset classes investors have to sell off the safe haven metal.

MCX benchmark gold futures are trading at Rs 28181 up by more than Rs 400 per 10 grams or 1.64%. The gains in the domestic gold were much stronger than the international futures. In percentage terms the COMEX gold futures were up just 0.5%. The domestic traders may buy the metal with target of Rs 28250 and Rs 28320 with stop loss near Rs 28130 levels.

The week ahead includes the two-day Federal Open Market Committee meeting, which ends Wednesday and could include quantitative easing, or other steps by the Federal Reserve, such as replacing shorter dated securities with longer-maturity bonds.

Elsewhere, the economics calendar includes plenty of housing data. On Monday the National Association of Home Builders housing market index, which gauges builder sentiment, is due and it's expected to hold steady at its current low level of 15. Housing starts and permits are due on Tuesday and both numbers are expected to have declined in August. Existing homes sales for August are due Wednesday.

The top the regional agenda in the Asia-Pacific region in the week ahead will be the Japanese and Chinese economic data along with minutes from the latest Australian Central Bank meeting.

In India,Equity Funds are Better Placed to Outperform Markets

Expert Take

By and large, equity mutual funds outperform the stock markets. Surprisingly, this is a controversial statement. That’s because some people firmly believe, based on imported studies, that mutual funds don’t actually do so. However, in India, this has always been true. On the face of it, there can be two possible reasons for this. Either the Indian fund managers are very good, or the Indian markets are very easy to beat. The truth, as always, is probably a mix of the two. First ,the numbers. Value Research has just done a study of the historical outperformance of the Indian equity funds, compared to the stock markets. By stock markets, I mean the large-cap indices like the Nifty and the Sensex. Of course, each fund has its own index and, technically, the fund managers job is to beat that particular index.

However, from a consumer perspective, its beating the big indices that matter. We ignored funds that were either limited to particular sectors or themes, and we also ignored funds that were focused on mid-cap or small-cap companies. Only funds that were dominantly large-cap were included in the study. Here are some of the interesting findings. One of the things we looked at was the five-year returns of such funds for all the five-year periods ending every year since 2002.In each of the five-year period,71% of the funds, on an average, outperformed the Sensex. Interestingly, for 2002-2007,the average was 81% and for 2008-2011,it was 55%.It was in only one of the five-year periods,2004-2009,that only a minority of the funds (46%) could beat the Sensex. However, when we dug in to see the story behind this decline,we found something very interesting.

We looked at the annual numbers instead of the five-year ones. There are nine years of huge outperformance and one of severe underperformance. In calendar year 2008,a mere 7% of the funds outperformed the Sensex. In the other nine years, the average was 89% and the minimum was 76%.That the story is so clear and the conclusions in data so sharply delineated are themselves the real conclusions. The thing about funds outperformance of the markets in India is that you don’t have to dig very deep to find a rich lode. The issue is not the trend but what it means for investors. In a rapidly evolving economy (and stock market) like Indias, there is a lot more churn of businesses than there is in the developed markets.

Simultaneously, despite the sound and fury of a hyperactive market, here just don’t appear to be enough investors who will quickly latch on to trends and smother them with a large volume of buying and selling. There’s so much happening all the time in terms of businesses changing, evolving, growing and simply participating in the enormous pockets of growth, that there’s plenty of room to identify and exploit opportunities. Basically, there’s a lot of money lying on the table. Well, may be not actually lying on the table but at least visible to a reasonably smart investment manager. And that’s something thats been in reasonably good supply. However, there’s another side to this story which some people believe in, that maybe the Indian indices are easy to beat.

At the end of the day, neither the Sensex nor the Nifty are designed as investment portfolios. Both the indices are based on a number of parameters. The Sensex apparently bends towards being representative while the Nifty has a more numerically driven criteria that is focused on liquidity, measured by low impact cost of trading. While the day may yet come when things change so much that index funds and ETFs become the logical choice, it probably wont be any time soon.

Weekly Sector Outlook

Bank Stock Outlook

1. Bank shares are likely to move up in the forthcoming week on short covering and taking cues from the expected increase in the broader market, analysts said.

2. Bank stocks are likely to continue the trend of taking support from the overall increase in broad market.

Auto Stock Outlook

1. Automobile stocks are seen in demand next week as expectations of a reversal in the interest rate cycle is likely to trigger buying in the rate-sensitive stocks.

2. Shares of automobiles, capital goods and power companies gained after the announcement of Reserve Bank of India’s review of monetary policy.

Pharma Stock Outlook

1. Shares of pharmaceutical companies are likely to remain in range next week taking cue from the broad market in the absence of any specific action in the sector, dealers said.

2. The broad market is seen tailing the overseas indices next week, which will eye developments of the two-day meet of the European Union finance ministers.

Capital Goods Stock Outlook

1. Shares of engineering and capital goods companies may continue to remain subdued next week on concerns high borrowing costs may slow down the investment cycle and weigh on margins.

Telecom Stock Outlook

1. Telecom stocks are seen trading in a narrow range with mixed performances by individual stocks largely taking cues from the broader market, dealers said today.

2. “Telecom (stocks) are not seen outperforming the market… There is nothing (specific) to affect the telecom sector next week” said an analyst with a brokerage firm.

Cement Stock Outlook

1. Shares of major cement companies are seen firm next week, as sentiment for the sector remains upbeat ahead of the approaching peak season, and in line with the broad market, and analyst and dealers said.

2. A positive outlook on cement prices is seen adding to the positive sentiment for the sector.

Steel Stock Outlook

1. Shares of steel majors appear mixed in the next five sessions due to a combination of good and bad news.

2. While the unlikelihood of any improvement in demand for the alloy will weigh on steel counters, they will benefit from rupee’s weakness that will allow companies to raise prices, dealers said.

IT Stock Outlook

1. Information technology shares are likely to continue to perform strong next week, as sentiment for the sector remains upbeat in view of the depreciation of the Indian rupee against the dollar, dealers and analysts said, the rise could be capped by some profit booking.

Oil Stock Outlook

1. Oil & Natural Gas Corp Ltd counter will be in focus next week, as the government has decided to defer the 427.77-mln-share follow-on public offering of the company on expectations of getting better prices for its stake.

2. In the near term, ONGC shares will trade in a positive zone, until the government announces a new date for offering.

FMGC Stock Outlook

1. Shares of fast-moving consumer goods companies are seen range bound in the next week ahead, and may even decline slightly, as analysts see these stocks as being expensive. Some profit booking is also likely in the stocks, they said.