october newsletter edition

8/8/2019 October Newsletter Edition

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62 e-FINANCIALNEWSLETTEROCTOBER 2010 EDITION

This Issue

Islamic Banking At A Glance IFRS Convergence: A Financial Reform For India Ignorance Is Bliss? Not Anymore! 10 year government bond yield differential of USD/ INR Full Capital Account Convertibility- Should India go this Route? Sudoku Tickle Your Brain!!!


2/18

ABOUT PROMETHEUS..

Prometheus is a name synonymous with all of you. Yes, it the one that represents an urge to acquire knowled

in all of us. But besides that, there is another story that unfolds.

Prometheus was a champion of human-kind known for his intelligence, which stole fire from Zeus and gave it

the mortals. Zeus, in turn punished him for his crime. They bound him to a rock while a great eagle ate his liv

every day. Thus, Prometheus is blamed and credited with the creation of Human Beings.

Prometheus belonged to a group of Giants named Titans, who ruled the earth until the Greek God Olymp

overthrew them. When all giants rebelled against the Gods, Prometheus won their favour. The Goddess Athe

admired his actions and in turn taught him astronomy, navigation, mathematics etc., which he spread to othe

around him. That is why since that time he became famous as the one disseminating knowledge. Moreover, ma

literary works use his name instead of the word Forethought. Owing to the skills and knowledge he bestow

over the people, he is widely known in the world.

Another contribution that he made for the welfare of Humankind was that he brought to them Fire, which pav

way for brightness in their lives.

It is with this zeal that all classical works that followed Prometheus conveyed the never depleting thirst to kno

more, to explore further and share among all.

We, the Finance Club, with the same thirst present you the October-2010 edition of Prometheus. We hope

make it a knowledge sharing platform for all of us. Enjoy the brightness and thirst..No rules bound,

boundaries rule!
http://en.wikipedia.org/wiki/File:Prometheus_at_Rockefeller_Center_by_David_Shankbone.jpg


3/18

From The Editors Desk

With great pleasure Prometheus presents you a new edition of e-

newsletter. I also congratulate you for being a part of ALLIANCE University,

the 428th University in the country.

The main motive of the newsletter is to enhance the learning of its readersand add on to their knowledge. Through this edition of the newsletter,

Prometheus has tried working towards this goal.

I sincerely express my gratitude to Prof. Edwin Castelino, Prof. Mohan

Gopinath, Prof. Mihir Dash and Prof. Anirban Dutta for helping with the

creation of this issue of the newsletter in various capacities. I also thank all

the students who contributed towards the newsletter.

Alliance has a new enthusiastic batch of students and the Finance Club

looks forward to their contributions to the newsletter in the coming

months. Prometheus wishes to make this e- newsletter a platform for all of

you to learn and gain knowledge in the process of moulding yourselves to

be the future successful corporate managers.

I wish you all the very best for your future endeavours.

Sukriti Gupta


4/18

Islamic Banking at a Glance

By: Dnyanesh Palekar

WHAT IS ISLAMIC BANKING?

Islamic Banking is not a new but somewhat an overlooked phenomenon. Its principles have been around since

early days of Islam. As a genre of financial services, Islamic banking shuns the very idea of interest rates, and re

on profit-sharing principles. The banking principles are purely based on the Shariah law which upholds the be

that the wealth is generated through actual trade and investment and one cannot make money out of money.

HOW DO ISLAMIC BANKS OPERATE?

Unlike conventional banking which operates on the principle of interest, an Islamic bank shares the profits with

client by investing in his venture, while depositors share banks profits for investing their money in the bank

deposit. While giving home finance or consumer loan, what Islamic bank does is it purchases the asset the cli

wants to possess and resells it to him or leases it to him on agreed rent till the bank recovers its full investm

with some time value of money. Now its again an issue of debate for many Muslim scholars as they consider ti

value of money as an indirect form of interest. Also, banks take into consideration the profile of the sector befo

investing in any venture. Banks cant invest in any interest-based ventures or Islamically unethical ventures

tobacco, alcohol or any other sort of intoxicants, fashion, gambling, vulgar entertainment, etc.

CURRENT REACH OF ISLAMIC BANKING:

Though not as much widely spread as the conventional banks, today the sector is enjoying a boom, due to mo

and more people adhering to Islamic values and applying their religion to economics. Islamic finance sector off

to the retail consumers, to the corporate banking clients and even to the governments a whole choice

competitive as well as Shariah-compliant products ranging from the equivalent of sovereign bonds (Suku

insurance (Takaful), current accounts, home finance, consumer finance, etc. With market presence in more th

75 countries, this industry deals with the global assets which are about to cross the mark of $1 trillion (nearly 6

assets coming from the Middle East countries) and is expected to increase at a rate of around 20-25% year on y

and this being the reason why the commercial banking giants like Deutsche Bank, Royal Bank of Scotland, U

Bank, ABN Amro Bank, Standard Chartered Bank, HSBC Bank, etc. have also entered into this industry to share

pie of profits with the pure Islamic banks.


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CHALLENGES FOR ISLAMIC BANKING INDUSTRY:

This high pace of growth itself is causing some problems to the industry. Each time a Shariah-compliant financ

product is created, it requires three different types of people to be involved: bankers lawyers and Shariah schola

who are very few in the world. Thus, creating Islamic financial products is a complex issue and is itself creat

some challenges for the industry as a whole. Added to this, Islamic financial products based within Islamic finan

framework like an Islamic Window in an International Bank is leading to skepticism from Muslim investors a

challenges to the industry. Also, the capability of offering side of this market is restricted as no internation

investment bank has been involved in the market until now. So, the main challenges to the industry are related

the structuring aspects of the financial products and types of players active in the market. Such challenges ha

not stopped international banks from trying to cash in on this growing sector.

ISLAMIC BANKING IN INDIA:

The Islamic finance companies are considered as Non-Banking Financial Companies (NBFCs) in India as the prese

Banking Regulation Act doesnt consider any financial institute as a bank unless its based on interest. Howev

Islamic Banking in India is possible through a separate legislation, says D. Subbarao, the Governor of Reserve Ba

of India (RBI). Though an RBI study group had earlier rejected the concept of Islamic Banking, it got the backing

the Raghuram Rajan Committee on Banking Reforms. As a result, the first Islamic bank in the country with act

involvement of the Kerala Government is likely to start operations in Kochi soon. India has vast scope for t

Islamic banking with present sound economic base and many citizens and companies complying with Shariah la

in business. Also for a section of Indian Muslim community which considers share trading as against t

fundamental of Islam, the formation of an Islamic bank will be relief to them. This industry has a large opportun

if it gets proper support of the required legislation changes and a positive political will. With its success, it will h

bring a huge untapped money market into action and will also be a healthy contributor to the employment a

economic growth of the country.


6/18

IFRS Convergence: A Financial reform for India

By: Dinesh Chandra Gupta

The development, India has achieved post 1991 economic reform, after which the world started looking it a

future superpower, needs another round of changes, this time as a financial reform

In Europe the Euro allowed for comparison without currency distortions among the member nations of Euro zo

Later on they successfully removed the further distortions in the form of accounting standards, with the adopti

of International Financial Reporting Standards (IFRS) across the Europe. After this, rest of the world start

adopting this standard and currently over 100 countries have either converged to IFRS or have declared the date

adoption.

In line with the global trend, the Institute of Chartered Accountants of India (ICAI) has proposed a roadmap f

convergence with IFRS for certain defined entities (listed entities, banks and insurance entities and certain oth

large-sized entities) with effect from accounting periods commencing on or after April 1, 2011. As IFRS impa

differently on different sectors, India has decided to implement this standard in a phased manner so as not to ha

adverse effect.

Adoption of this standard will give Indian companies access to the rest of world like never before and ev

potential investors can compare the foreign companies with domestic companies in much easier way as the

would be uniform accounting policies. Some important benefits from the convergence to IFRS can be illustrated

follows:

IFRS will considerably improve the comparability of entities: IFRS will enhance more comparability amo

sectors, countries and companies due to the uniform accounting standard. This can give Indian compan

an advantage to initiate new relationships with investors, customers and suppliers across the globe.


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IFRS will help Indian companies to reduce the cost of capital: Currently if an Indian company wants to ra

capital and list securities in the US capital market or other markets may be required to comply with cert

time taking procedures to meet their regulatory requirements. With convergence to IFRS, these hurdles w

be removed and companies will have better access to global capital markets.

IFRS can also help in increasing global footprints of Indian companies: This new standard will provide

transparent and comparable financial information and thus will enable the partnership with fore

entities. This will also reduce post acquisition financial integration costs.

Standalone vs. Consolidated financial statements: Most Indian companies produce their finan

statements in parent/standalone basis which does not give a true picture to investors about t

performance of the company. Though Indian Accounting Standard 21 gives guidelines for the consolida

financial statements, it does not mandate for the companies to do so. On the other hand, IFRS mandat

companies to produce only consolidated financial statements.

Fair value vs. Historical value: Historical values will be substituted by fair values for several balance sh

items, through which a company would be able to project its true worth.

While these are the key benefits which can provide Indian corporate a much needed fillip to compete and ex

with their counterparts in the rest of the world, to implement the IFRS will also require proper planning and

strong determination.

After the reform of 1991, which is popularly known as Liberalization, Privatization and Globalization (LPG), In

has achieved a lot of milestones in these two decades. There is still an urgent need for some policy changes

financial regulations, to improve coordination among the various regulators. The Government of India has alrea

proposed several changes such as the Goods & Service Tax (GST) and the Direct Tax Code (DTC), and with these t

convergence to IFRS can initiate a financial reform which can help India in achieving its dream to become a glo

superpower.


8/18

Ignorance is Bliss? Not anymore!

By: Anand Kumar Toshniwal

Anand was a happy man after helping his NRI friend John, who wanted money to start a new venture abroad,

purchasing his ancestral property. Not only did Anand help a friend in need (as the popular saying goes), he a

got a decent property at what he thought was a very good price. However, his happiness was short lived becauwhat he never realized was that his small ignorance could well turn out to be the biggest mistake of his life.

What was his ignorance? He forgot to withhold tax on the payment he made to John. Now is it such a big mistak

Youll see. However lets start from the start. What actually is the concept of TDS and why TDS?

As the very name suggests, the word "TDS" stands for Tax Deducted at Source. In India, TDS is deducted fro

various sources like salaries, interest on securities, etc. The responsibility for deducting tax at source rests with t

person who is making the payment.

Assessees pay tax in the assessment year on income earned in previous year. Due to this rule the tax collection

delayed till the completion of the previous year. Even sometimes people conceal their income and the tax is npaid at all. In order to overcome these problems, government started to deduct some amount of tax from t

amount which is receivable by the assessee. The amount of tax so deducted is called as "Tax Deducted at Sourc

or TDS in India.

Let us assume that the value of property purchased by Anand was of the amount of ` 1 crore. Thus [assuming Jo

doesnt have a PAN card] Anand should have made a deduction of about 20% or the tax rate applicable to Joh

whichever is higher1). That would amount to about ` 31 lacs [30% + 3% education cess]. Now the law holds Ana

accountable for making the payment.

So Anand has to make this payment from his own pocket1. Moreover law also imposes a penalty of 100% of t

amount of tax on Anand in case he doesnt make payment in time. It doesnt end there either. The Law aimposes a simple interest of 1%of the amount of tax for every month or part of it 1 [Within one week from the e

of month in which the payment was made or within two months from the end of month in which credit w

made]. Now let us assume the transaction takes place on 31st

of March, 2009. [Thus the period from 1st

April, 20

to 31st

march 2010 is 12 months]. So, the interest for the year would be about ` 12 lacs. To summarise, at the e

of the year Anand has a tax liability of ` 74 lacs. [31+31+12]

To worsen the situation, imagine if he doesnt get to know of the concept of TDS for one more year, then t

liability on the part of Anand at the end of 2nd year i.e.[31st March,2011] would be 86 lacs. [74+12]

So, for a transaction of amount 1crore Anand would now be paying a tax of ` 86 lacs from his pocket which

wouldnt have to pay if he had made the TDS. Oops! This did turn out to be a great folly. The misery doesnt ehere. He could also be liable for rigorous imprisonment for a term which shall not be less than 3 months, but m

extend up to 7years.

However this story too has a happy ending albeit with a clause. His friend John (Remember him! The NRI w

actually put Anand in this soup) could now become the Hero and save him from the fiasco if he makes the payme

of tax in his tax assessment. In such a situation Anand need not pay any more tax on the transaction.

So whats the moral of the story?

No, its not to deny help to NRI friends but to be careful of the concept of withholding taxes.


9/18

H

10 year government bond yield differential of USD/ INR

By: Sahil Kapoor

The purpose of this study is to analyze the factors affecting interest rates of central banks. The benchmark inter

rates set by central bank play an important role in moving the prices of currencies in foreign exchange market a

influence the bond prices, which in turn affect the bond yields of government bonds. The benchmark interest rat

directly affect other short term interest rates such as deposits, bank loan, credit card interest rates and adjustab

rate mortgages. Interest rates control the flow of money in the economy. High interest rates curb inflation, b

also slow down the economy. Low interest rates stimulate the economy but also lead to inflation. Interest rat

dictate the flow of investment. Since currencies are the representations of countrys economy, differences

interest rates affect the relative worth of currencies. Correlations form an integral part of foreign exchan

market. Based on 1 month, 3 month, 6 month and 1 year correlations among different variables, economists a

analyst try to predict future currency trends. In this study, we have established correlations between interest ra

differentials and yield differentials of currency pairs. Theoretically, when interest rates move up, bond yields al

move up, which means that the currency having a higher rate of interest among the two in the currency pair w

be more rewarding as the other rates of interest affected by this single rate also tend to rise, making it a high

yielding currency. The differential in the interest rates decide, whether the inflows of foreign investment in t

country would rise or fall.

The US economy was in a slow down mode, as the country entered a new decade. The Fed began to ease t

interest rates, a step it took to stem the U.S economys slowdown. The year 2001 saw 11 cuts in interest rat

from 6.5% in beginning of the year to 1.75% towards the end. The Fed made all possible efforts to induce mon

into the economy with lower interest rates, to induce more spending and help in faster revival of the econom

Since, RBI is dependent on U.S for majority of its exports; RBI too cut its rates. This means that Interest Ra

Differential( IRD) increased though negatively, because magnitudes of cuts in India was less proportionate than

the U.S. with a decrease in the interest rates, the 10 year bond yields were also affected. Though the yields on

year bonds fell in both the countries, the fall was greater for India, because it was considered safe haven f

investment and with increase in demand, prices rose and yields fell more sharply as against in U.S, where t

people were reluctant to invest money because their state of economy was in a critical stage.


10/18

For the next three years, the rates fluctuated in U.S around 1-2%. Moreover, deflation posed a bigger threa

economy, which was trying to get up on its feet again. It was only towards late 2004, that the rates started to p

signalling that the U.S economy was on track. This was also the time when yield differential peaked at -.41.

From 2004 onwards, the Fed started increasing the rates, to curb inflationary pressures mounting on the econo

On account of increased interest rates, the 10 year treasury notes yield increased and the IRD decreased and he

affected the yield differential even though the Indian bond yields hovered around the same level.

When recession struck the world, the worst impact was on U.S economy. The bond yields were able to main

their levels due to stimulus packages by Fed. The impact of US recession was felt in India too though not m

because of the norms in place here pertaining to the inflow coming from foreign countries. The RBI cuts inte

rates to foster the growth in the economy, thereby increasing the yields of the existing bonds in the G-Sec mar

This goes against the rule of decreasing yields with cut in interest rates, due to the effects of many other fact

affecting Indian economy and the G-Sec market.


11/18

Full Capital Account Convertibility- Should India Go This Route?

By: Kunal Bhushan

Today everybody is talking about the issue of FCAC, and people have varied opinion about it. Countries wh

cannot fuel their growth on their own due to lack of funds for investments can get funds in this way. Some supp

the argument saying this will open whole lot of opportunity for investments; this will remove the bottleneck in t

system. FCAC will allow India to see high level of investments in sectors which have competitive advantage. T

other argument is labor arbitraging which says as the capital and commodities movement is free in the world, t

country can use the immense potential that it has by offering cheap labor.

But the situation on ground is not at all favorable for FCAC. The country has very poor infrastructure and this h

lead to development in patches. There are places which have grown immensely while there are areas which a

extremely backward. The country has almost half of its population managing its livelihood with extreme difficulty

Presently in our country certain sectors have developed competitive advantage, and the FDI investment

concentrated in these sectors. If FCAC is allowed, these sectors will see immense investments and will lead

creation of sector specific jobs. There will be people who will have too many opportunities and there will be tho

with absolutely no opportunity. An imbalance may result into social unrest.

The way forward is to invest in infrastructure sector as it is blood vessel for development. The infrastructure sec

includes all form of transport from rail, road, air & sea. Once there is a good infrastructure, it will make way

overall development.

The government should provide more incentives for investment in infrastructure and other lagging sectors

should design policies in order to promote more private- public partnership. The government should come up w

new manufacturing policy as there are sticky issues and the policy doesnt promote investment. Manufacturing

one sector where we have all the necessary factors of production present and we can be an alternative to Chin

All these are core issues which the government has to see before going ahead and allowing FCAC. As investo

have profit motive but state has to find a balance between growth & social welfare.


12/18

SUDOKU

Each Sudoku has a unique solution that can be reached logically without guessing. Enter digits from 1 to 9 into t

blank spaces. Every row must contain one of each digit. So must every column, as must every 3x3 square.

Try out your skills with numbers!!!!

RULES

Every row of 9 numbers must include all digits 1 through 9 in any order. Every column of 9 numbers must include all digits 1 through 9 in any order.

Every 3 by 3 subsection of the 9 by 9 square must include all digits 1 through 9.


13/18


14/18

4. Analyse the following statements regarding the launch of Rupee symbol?

I. The symbol has been taken from the devanagari script meaning a coin on goldII. The 2 parallel lines in the symbol with space in between make an allusion to tricolor

a. I is correct, II is Incorrectb. I is correct, II is Correctc. I is Incorrect, II is Correctd. I is Incorrect, II is Incorrect

5. What is BONDPAR?a. A system to analyze the performance of Bond Portfolio.b. A Bond type in Middle East issued at discount and redeemed at par.c. An acronym for Bond on Notional Delivery Particularly after Retirement.d. None of the Above.

6. The Book namedAlchemy of Finance has been written by the great investor:a. Benjamin Graham.b. Warren Buffet.c. George Soros.d. David Dodd.

7. Which of the following form a part of set of assumption (s), of IFRS, to be implemented by April, 2011?I Accrual Basis

II Going Concern

III Stable Measuring Unit

a. I and II.b. II and III.c. I and III.d. All of the above.


15/18

8. Which of the following have been the most lucrative merger/ acquisition deal of the decade (2000-2009

a. AOL- Time Warnerb. GlaxoWellcome- Smithkline Beechamc. Royal Dutch- Shell Transportd. AT&T- Bell South Corp

9. Winners Curse in context of Auctions refer to:

a. Seller receiving less than expectedb. Buyer Paying more than expectedc. Seller Receiving fixed and floating incomed. Buyer creating a provision

10.A theory that nominal interest rates in two or more countries should be equal to the required real ratereturn to investors plus compensation for the expected amount of inflation in each country.

a. Newton Effect.b. Peter Effect.c. Fisher Effect.d. Walter Effect.


16/18

CONTRIBUTORS TO THE NEWSLETTER OCTOBER 2010, EDITION

DNYANESH PALEKAR ANAND TOSHNIWAL DINESH CHANDRA GUPTA

KUNAL BHUSHAN SAHIL KAPOOR


17/18

COORDINATORS OF PROMETHEUS 2010

ISH NIROLA ARCHANAA KUMAR KARTHICK.A.S

RISHI PURWAR SUKRITI GUPTA VISHAL AGGARWAL

S. SHAILESH


18/18

Time is the friend of the wonderful company, the enemy of the mediocre."

time is the friend of the wonderfu

company, the enemy of the mediocre.

- Warren Buffett

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