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THE INVESTOR VOLUME 5 ISSUE 1 January 2012

Will the yen dream run come to an end?>>Pg. 08

is gold an investors paradise?pg. 20

AUDITORS

WATCH DOGS or BLOOD HOUNDS


2/26Disclaimer: The views presented are the opinion/work of the individual author and The Finance Club of IIM Shillong bearsno responsibility whatsoever.

F R O M E D I T O R S D E S K

NiveshakVolume V

ISSUE I January 2012

Faculty MentorProf. N. Sivasankaran

Editorial Team Akanksha Behl Akhil Tandon

Chandan GuptaHarshali Damle

Kailash V. MadanNilkesh Patra

Rakesh Agarwal

Creative Team Anuroop Bhanu

Venkata Abhiram M.

All images, design and artworkare copyright of

IIM Shillong Finance Club

Finance ClubIndian Institute of Management

Shillong

www.iims-niveshak.com

THE TEAM

Dear Niveshaks,

has not been ver pleasant for the business world, as majorit oboth the developed and the developing nations have failed to ex erience ra g owth. Come 2012, we are again heading for a bumpy economy, and the - gers of g owth seem to be miles away.

The Euro Zone occupied the center-stage in the geo politics arena for the entire year. The repercussions of the debt of these count ies have beeneconomies all across the globe. While the depth and duration of the slowdothe European union being di cult to be quanti able, a continued credit crsovereig -debt problems, lack of competitiveness, and scal austerit impserious problems. The United States, which was on the brink of another maslowdown in 2011, has of late shown sig s of recover , both in ter s of ou

employ ent.

The outlook for the developing economies doesnt seem to be ver en-ing. The South East Asian giants- India and china have been revising its gobjective om time to time, and g owth in china has been cur ailed to a s g re level. India has been ba ling with a low Indust ial production and in the la er half of the year, and the depreciation of the home cur ency has major concer .

However, with a spur in NRI deposits, owing to dereg lation of NRI drates, and the he selling of dollars by the reser e bank, the r pee has beis emergingrevise this sentence. The Indust ial production data for the mof November has provided a ray of hope, and all the e or s of the gover mcombating in ation are nally bearing it. Amidst such a sit ation, the WBank has slashed the world GDP g owth forecast for 2012 to a palt 2.5 3.40% for 2013. Given the uncer aint prevailing, and impor ance of eurinter ational business, the f t re of euro will play be a major role in deterhow the world economy will shape up in this year. Thus, the coming year wagain test the me le of our economists, nancial analysts and business t c

This issue brings to you an exclusive view on the credibilit of accouin the contemporar world. This issue also feat res an exclusive inter iewMr. Swapnil Dakshindas, a Senior Manager at one of the Big Four Audit The ar icle of the month throws light on the appreciation of yen, and this ialso feat res other ar icles on Gold as a lucrative invest ent, commodit and the viabilit of Real Estate Invest ent Tr sts as an invest ent avenuclassroom section ex lains the concept of Insider Trading.

We would like to thank all the readers for their valuable ar icles, crosent ies and appreciation e-mails. It is only because of readers constant suand encouragement that Niveshak has been such a g eat success. On thesethoughts, I on behalf of the entire team of Niveshak would like to wish youhappy and unforge able 2012.

Please send in your suggestions and feedback at niveshak.iims@g ail

and as always, stay invested.

Team Niveshak


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C O N T E N T

Niveshak Times04 The Month That Was

Article of the month08 Will the Yen dream runcome to an end?

Cover Story

11 Auditors - Watchdogs orBloodhounds?

Perspective

18 Commodity market: Proveyour metal

Finsight

20 Is Gold an Investorsparadise?

Fingyaan16 Assessing Real EstateInvestment Trusts (REITs) as

an investment

CLASSROOM23 Insider Trading

He speaketh14 Mr. Swapnil Dakshindas


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FDI up by 56% and Indirect taxes collec-tion rises by 16.1%FDI in country went up to $2.53 billion in No-vember 2011 showing an impressive growth ofaround 56%. The cumulative flows for the April-November period reached $22.83 billion up by62.81 per cent from $14.02 billion a year ago. TheFDI for the current financial year is expected tocross the mark of $30 billion, far ahead of the$19.43 billion of FDI inflow for the last fiscal year.Services, housing and real estate, constructionactivities, computers and hardware, power andtelecom are some of the sectors that see themaximum inflow of funds during this period.Another good news came for the struggling In-dian Economy when the Chairman of CentralBoard of Excise and Customs ( CBEC) S K Goel an-nounced an impressive 16.1% growth in Indirecttax collection to Rs 2,85,787 crore during April-

December against the collection of Rs 2,46,168crore in the same period last year. The indi-rect tax collection in three quarters of 2011-12 isabout 72.7 per cent of the Budget Estimates ofRs 3,92,908 crore, showing CBEC is well on trackto meet the budget estimates this financial year.Government modi es import duty struc -ture of gold and silver

As per notification by Government of India theimport duty structure of gold and silver hasbeen changed from specific to ad valorem witheffect from 17th January,2012. The import dutyon gold has been pegged at 2% on the valueof gold as against the existing charge of Rs 300

per 10 grams while the same on silver has beenchanged to 6% of the value from the prevailingRs 1500 a kg. The move is likely to curb exorbi-tant import of precious metals which has result-ed in huge outflow of dollar outside India. The

change is expected to rake in an additional Rs600 crore for the exchequer during the remainingmonths of the fiscal as per Finance Ministry es-timates. The old rates were fixed 4-5 years ago.In the last few years, prices have increased sub-stantially so the change has been made to bringduties in line with market prices, said CentralBoard of Excise and Customs (CBEC) ChairmanS K Goel. The decision is expected to fuel theprices of gold and silver in the market. The dia-monds also will now attract an import duty of2% on the value.Reliance Communications gets into $1.18billion re nance deal with Chinese banksRelianceCommu-nicationssaid on17-jan-2012 that it has secured loans from a host

of Chinese banks including Industrial and Com-mercial Bank of China , China Development BankCorp, Export Import Bank of China and otherbanks to refinance $1.18 billion worth of out-standing foreign currency convertible bonds ofRs 654 conversion price due for redemption onMarch 1. The maturity period of loan would be ofseven years at interest cost of about 5 percent.The news has come as a relief to the RelianceCommunications that has reported falling prof-its for eight straight quarters. The company is

also in talks with various international giants tostrike a deal for its tower business so as to repayits huge debt of around $ 6.5 billion.Chinas economy down to single digitgrowth

Chinas economy has registered a single digitgrowth rate of 9.2 % as compared with the 10.4%growth in 2010. However it beats the govern-ment target of 8% growth rate. According to offi-cial projections the growth of economy is furtherexpected to come down to around 8.5 per cent in2012. Ma Jiantang, Chief of China National Bureauof Statistics (NBS), told the media that as per thepreliminary statistics, Chinas GDP reached 47.16trillion yuan ($ 7.26 trillion) in 2011.

The Niveshak Times


IIM, Shillong

Team NIVESHAK

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Aviation Ministry to initiate the processof allowing foreign airlines to invest inthe local aviation industry Aviation Ministry said in a statement that itwould soon initiate the process of opening upthe Indian aviation sector for investment by theforeign airlines up to a stake of 49%.The foreigninvestors are allowed to invest up to 49% in thedomestic airlines but foreign airlines are barredfrom the same. A meeting between Finance Min-ister Pranab Mukherjee and Civil Aviation Min-ister Ajit Singh in this regard also decided torelease Rs 150 crore for payment of portion ofpending salaries and allowances of Air India em-ployees, including pilots. The decision brings arelief to the cash strapping Indian airlines whichare already under a huge debt and are expectedto lose up to $3 billion in the fiscal year thatends in March.Citigroups pro ts up by 6% from the pre -vious year

Citigroup posted aprofit of $11.3 billionin 2011, 6% more thanthe previous year. TheCEO of the company,Mr. Vikram Pandit, isvery happy with the

solid performance of the company in 2011 andstated that the company has reached its keybenchmarks in the consumer business segment.However, there was a sharp fall of 33% in therevenues of Citis asset management and bro-kerage business to $6.4 billion. The firm alsoreported fourth quarter earnings, which fell to$1.16 billion, down from $1.2 billion in the sameperiod in 2010.France Downgraded by S&P, Gold tostrengthen there afterFrance, the second-biggest economy of the Euro-zone, can no longer boast about the AAA creditrating like Germany, which still retains it. S&Pdowngraded Frances credit rating by one notchto AA+. It stated that Frances unemploymentrate was high, around 9%, due to its high gov-ernment debt and a rigid labor market. Thereis a possibility of another downgrade this year

or next if efforts at budget consolidation policyand organizational restructurings falter. France istrying to reduce around 1.7 trillion euros of debt.However, this downgrade would raise its borrow-ing costs at sucha time. Highercosts could makethe EFSF, which i smeant to prevent t h ecredit contagion, less effective in stemming theeuro crisis. However, there is a possibility thatthis downgrade of France may make people rushto the yellow metal again which could lead tohigher prices of Gold. Financial planners haverecommend investors hold 5-10% of their portfo-lio in gold as part of their asset allocation.Investment proposals in India plunged45%Investment proposals in India plunged 45 percent to a five-year low in 2011 as companiesceased projects citing administrative disturbanc-

es, a move which could deteriorate the growthin 2012. In 2011, the new investment proposalsin the country stood at 10.46 trillion rupees ascompared to 18.88 trillion rupees in 2010. Ac-cording to Prime Minister Manmohan Singh, In-dias economy is likely to grow at about 7 percent this fiscal year, lower than the 7.5 per centgrowth the government forecasted last month.3rd consecutive week for negative foodin ation

Food inflation in India stood at 0.42 per cent forthe week ended January 7, 2012, remaining neg-ative for the third consecutive week. This wasmainly due to fall in prices of onion and veg-etables. Onion prices fell by 75.42 per cent whilepotato prices were down by 23.48 per cent. Over-all vegetables prices went down by 45.81 percent compare to the same period last year. How-ever, other food products became more expen-sive. Price of pulses went up by 14.27 per centwhile for milk it grew by 11.48 per cent. Fruits

and cereals also became more expensive on anannual basis. According to experts, the declinein food inflation will be a major incentive for theRBI to resort to the option of cutting key interestrates in the future.

The Niveshak Times

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T h eM on t h T h a t W a s

FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG


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MARKET CAP (IN RS. CR)BSE Mkt. Cap 58,91,508Index Full Mkt. Cap 28,31,879Index Free Float Mkt. Cap 13,86,220

CURRENCY RATESINR / 1 USD 50.39INR / 1 Euro 65.31INR / 100 Jap. YEN 65.27INR / 1 Pound Sterling 77.97

POLICY RATESBank Rate 6%Repo rate 8.50%Reverse Repo rate 7.50%

Market Snapshot


RESERVE RATIOSCRR 6%SLR 24%

LENDING / DEPOSIT RATESBase rate 10%-10.75%Deposit rate 8.5% - 9.25%

Source: www.bseindia.comwww.nseindia.com

Source: www.bseindia.com

Source: www.bseindia.com22nd December 2011 to 20th January 2012

Data as on 20 th January 2012

M a r k e t

S n a p s h o t

CURRENCY MOVEMENTS


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M ar k e t S n a p s h o t

BSEIndex Open Close % ChangeSensex 15,546 16,739 7.67%

MIDCAP 5,141 5,680 10.48%Smallcap 5,517 6,277 13.78%AUTO 8,019 8,819 9.98%BANKEX 9,353 10,912 16.67%CD 5,293 5,801 9.60%CG 7,974 9,807 22.99%FMCG 4,056 4,035 -0.52%Healthcare 5,822 6,169 5.96%IT 5,652 5,500 -2.69%METAL 9,457 11,198 18.41%OIL&GAS 7,879 8,325 5.66%POWER 1,776 2,078 17.00%PSU 6,345 7,227 13.90%REALTY 1,375 1,708 24.22%TECK 3,328 3,293 -1.05%


Market Snapshot

% CHANGE


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Will the Japanese Yen dream run come to anend?

Here we talk of the most developed and the thirdlargest economy of the world - Japan. There are vari-ous factors that govern the valuation of a currencyranging from the economic outlook, macroeconomicconditions and trade relations to political stability.The Japanese Yen has enjoyed a dream run from theperiod between mid 2007 to where the currency ap-preciated in general despite volatility in the process.Even though the economic indicators in were not inits favor ,from a low of around 120 , Yen has stabi-lized to about 78 at present(Fig. 1). Since the past 6

months, there has been speculation in the marketthat the Yen has reached its peak and owing to thegrim economic conditions, the currency is bound todepreciate.Japan is basically an export driven economy andhence due to the global financial crisis (2008), therewas an overall drop in demand for the Japanesegoods and the appreciated Yen made the exportstoo dear for the consumers abroad. This led to a

steep fall in the growth rate which went down to alow of -5% in the year 2010, indicating that the gross

domestic output was shrinking (Fig. 2) .The fall inthe growth rate led to a decrease in inflation (Fig. 3)which should have been a positive sign for a grow-ing economy but not so in the case of Japan as thecurrency deflated by 2-3 % in the 2009-10 and theeconomy contracted.Till now, Japan had enjoyed a positive balance oftrade but the appreciated Yen ensured that the Japa-nese exports plummeted as compared to the im-ports leading to an overall negative balance of tradeof -684 Billion Yen ($8.7 billion) in 2011.

The overall contraction is also aided by the fact thatthe local manufacturers are setting up productionplants outside for cheaper labor and lower costs ofproduction. The industrial output was predicted tobe 13% for the previous quarter and it was actually-7 %. The outwardly movement of the productionhouses aided the problem of high unemploymentand low exports.

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W elingkar institute of M anageMent ,MuMbaiAkanksha Kumar & Jaideep Singh Gaur

Will the

en dream run come to an end ?

Fig. 1: Relationship between yen and dollar (Jan 2007 to present)



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The natural rate of unemployment in Japan is 2.6%but it never went below 4 % in the previous years.To add to its woes, Japan has one of the worlds old-est populations and the working population of thecountry is predicted to decline over the next few de-

cades. A continuously increasing population in the

age bracket of 55-64 is all set to enjoy pension andmedical benefits leaving a huge void in the workforce that cannot be sustained by the younger workforce. Such a scenario also leads to a decrease inthe domestic consumption and an increase in thegovernment expenditure.In such a grim economic outlook it was quite strange

that the appreciation of Yen in the Forex marketscontinued unabated .A major reason could be thataround the same time, the dollar was weakening

which could be attributed to the fact that US econ-omy suffered a severe recession post 2007 when itssub-prime crisis went to an unsustainable level. Onthe other hand, the Japanese Yen was perceived asa stable currency and became a safe haven for in-

vestors, triggering its rise .The further appreciation

of the currency led to more investment in Yen byinvestors and speculators as it continued to yieldpositive results. Hence the appreciation of the Yenwas more due to financial and speculative reasonsthan the countrys own economic outlook leading tothe formation of a bubble around it.Time seems to be literally running out for Japan as

the debt to GDP ratio stands at 492%. Out of this,the sovereign debt contributes approximately 213%which is the highest in the world. The tax revenues

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Fig. 2: GDP growth rate of Japan from 1970 to present

Fig. 3: The decreasing in ation rate from July 2008 onwards

Fig. 4: Relationship between trade balance and current account Fig. 5: Ratios of overseas production


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generated by the government have been decliningconstantly in relation to the ever-increasing budgetdeficit .The reduction in revenue generation can beattributed to the rise of unemployment which iscoupled by a variety of factors and the increase in

the budget deficit is largely due to an increase inthe government spending. The Tsunami on March11, 2011 hit a massive blow to the already cripplingeconomy, adding huge expenses for the governmentfor the redevelopment work. The Japanese govern-ment also borrowed close to $2.87 billion from theEurozone for the same.Japan is already sitting on a pile of huge debts andthe maturity amount for none of them is less than40000 billion Yen ($512 billion) for the next 4 yearstill 2015.The biggest chunk of debts have to be paid

in the year of 2011 amounting to 120000 yen ($1538billion). Considering the huge foreign reserves of Ja-pan ($1.3 trillion) the repayment of the debt shouldnot be a problem but at this stage the economy issliding and the government is not able to generatemore revenues due to factors ranging from unem-ployment, reduction in workforce, contracting ex-ports to increasing expenses and so on. If the similarsituation continues and the gap between the budgetdeficit and revenues increases, the economy willkeep becoming shakier. High debt is good for posi-tive economic times but when the economy takesa downturn the same is bound to turn into a majorsore point.

The Japanese government has tried to intervene inthe Forex markets to help the Yen depreciate but theeffects were short lived. Hence the Bank of Japan re-cently announced an expanded asset purchase pro-gram (aka quantitative easing) that could raise the

eyebrows of even the most liberal proponents of QE.The expanded program includes purchase of real es-tate investment trusts, exchange-traded funds andlower quality corporate bonds in order to facilitatesome depreciation.Thus, we see that the Japanese Yen has enjoyed anappreciated value for quite some time due to marketand speculator sentiments in a volatile global situa-tion. Since the appreciation was not due to the highgrowth of the economy it was unnatural for the cur-rency to appreciate so strongly. All the above data

strongly indicates that Japan is touted to face sometough economic times ahead and it really needssome real out of the box solutions in order to getout of this quagmire. The stabilization of the Yenshows that it has reached its peak and the specula-tors do not see any reason for further investment asthey do not see the gains any further. Moreover, thestrengthening of the dollar can accelerate Yens fallas the speculators would like to once again moveto a safe haven. The depreciation of Yen would be ablessing for Japan as it is the only way it can expandits economy.

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Fig. 6: Unemployment rate in Japan

Fig. 7: Japan debt maturity timeline



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External AuditorsExternal Audit enables an auditor to express anopinion about the financial statements of the or-ganizationThey report to the Shareholders of the organiza -

tionThey are independent from the management ofthe organizationNeed for an auditAudit helps the shareholders to understand iftheir investment is in safe hands. Not all inves-tors are financially literate and they need helpto have a check on the financial performance ofthe company and hence arises the need for anaudit. All companies are statutorily required toprepare and maintain accounts which are thenscrutinized by the auditor who certifies them.The purpose of an audit is to enhance the degreeof confidence of intended users in the financialstatements. This is achieved by the expression ofan opinion by the auditor on whether the finan-cial statements are prepared, in all material re-spects, in accordance with an applicable financialreporting framework. In the case of most generalpurpose frameworks, that opinion is based onwhether the financial statements are presentedfairly, in all material respects, or give a true andfair view in accordance with the framework.The Audit report includes a paragraph mentioningthe management responsibilities. The standard

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t eaM n iveshak Rakesh Agarwal & Harshali Damle

Auditing is an important tool that the sharehold-ers use to evaluate the operations and ensurethe safety of their investment in a particularcompany. However, in the recent past, the effec-tiveness of this tool has been highly questioned.There is a need to understand the importanceand limitations of auditing to better appreciateits requirement in the current scenario.Auditing is the independent examination of fi-nancial information of any entity, whether profitoriented or not, and irrespective of its size or le-gal form, when such an examination is conductedwith a view to expressing an opinion thereon.Audit can be of various kinds. Some of them are1)Internal Audit2)External Audit3)Tax AuditThere is a significant difference between Internaland External Audit. Internal AuditorsInternal Audit is conducted to add value and im -prove the organizations operationsInternal Auditors report to the Audit Committeeformed by the Board of Directors or the manage-ment

They are usually the employees of the organiza -tion, though the internal audit function can beoutsourced too. There are limitations on the in-dependence of the internal auditors

AUDITORS:

WATCHDOGS

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Some examples of these limitations can be: Useof sampling techniques by the auditor, controlsbeing circumvented by collusion or inappropriatemanagement override. Also auditors cannot com-ment on the propriety of the decisions taken bythe management.Duties of an auditorAn auditor is appointed by the shareholders of thecompany. Hence the auditor is liable to report tothem in the form of an audit report. For this, it isthe duty of the auditor to exercise adequate skillsand competence and ensure independence duringthe process.An auditor is required to obtain reasonable assur-ance about whether the financial statements as awhole are free from material misstatement, wheth-er due to fraud or error.

However, currently, the function and need of anaudit is being questioned by investors. This is dueto a rise in high profile scams in various compa-nies.The Indian EnronThe Satyam scam perpetrated by B. Ramalinga Rajuand his affiliates in January 2009 is considered thebiggest Indian corporate scandal till date. It hasrecently come into the lime-light after the newowners of Satyam Computer Services, the Mahin-

dras, have decided to file a suit against its formerboard of directors, employees and also the auditarm of PricewaterhouseCoopers in a Hyderabadcourt seeking damages for perpetrating the fraud.This brings into question the fiduciary responsi-bilities, obligations and responsibilities in per-formance of duties of the auditors. Both Satyamand PricewaterhouseCoopers are globally reputedfirms. The auditors cannot hide under the standardclause auditors can be watchdogs and not blood-hounds especially when cash and bank balances

have been overstated in such a large company.A company is considered an entity distinct fromits promoters. So, there is no reason why it cannotsue its promoter for perpetrating a fraud and let-ting the company bleed. The same holds true forthe management team or even auditors who eithercollude with promoters, breach their fiduciary re-sponsibility or are negligent in their duties. The

content of an audit is: Management is responsiblefor the preparation of these financial statementsthat give a true and fair view of the financial posi-tion, financial performance and cash flows of theCompany. This responsibility includes the design,implementation and maintenance of internal con-trol relevant to the preparation and presentation

of the financial statements that give a true andfair view and are free from material misstatement,whether due to fraud or error. Auditors responsi-bility is to express an opinion on these financialstatements based on their audit.The key points to be noted here are:1)Auditors give an opinion and no guarantee on thefinancial soundness of the company. The auditor isnot an advisor to the company or to the sharehold-ers of the company.2)Materiality is an important consideration in theopinion. This means that the auditors can chooseto ignore immaterial facts. Materiality will be de-fined as something that will have an impact onthe decision making of the users of the financialstatements.3)The opinion is on the true and fair view. This canbe clearly differentiated from the correctness ele-ment.4)Reasonable assurance is not an absolute level ofassurance, because there are inherent limitations

of an audit which result in most of the audit evi-dence on which the auditor draws conclusions andbases the auditors opinion being persuasive ratherthan conclusive.Inherent Limitations of an AuditThe auditor is not expected to, and cannot, reduceaudit risk to zero and cannot therefore obtain ab-solute assurance that the financial statements arefree from material misstatement due to fraud orerror. This is because there are inherent limitationsof an audit. Most of the audit evidence which theauditor draws conclusions and bases the auditorsopinion on is persuasive rather than conclusive.The inherent limitations of an audit arise from The nature of financial reporting The nature of audit procedures and The need for the audit to be conducted within

a reasonable period of time and at a reason-able cost.

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of not conducting proper due diligence while Tal-luri Srinivas, former partner of PricewaterhouseC-oopers (PwC), then statutory auditors of Satyamhas been held guilty for not complying with profes-sional standards. The role of Satyam internal audi-tor Prabhakar Gupta and S Gopalakrishnan, formerpartner of PwC, is still under scrutiny while twochartered accountants of Lovelock & Lewes havebeen charged with a Rs 5 lakh penalty each forgross negligence in carrying out the statutory auditof Satyam and have been barred permanently fromthe register of members.RolesFor a publicly listed firm, the shareholders of acompany place very high reliance on the auditorsreport, which apparently shows the true andfair view of the accounts of a company. Hence,

it is of utmost importance that the auditors per-form their duties with care and vigilance to ensurethat there are no illegal or improper transactions;and any wrong-doing is transparently reported tothe people at large who have invested their hardearned money to become a part of the company.ConclusionIn scams like this, all the parties involved invari-ably suffer incredible loss in terms of losses incustomers as well as significant reputational loss.Hence, it becomes the responsibility of both theauditors and the company management to ensurethat the audit protocols and guidance lines are fol-lowed diligently without fail. The role of the ICAIand other regulatory bodies should not be confinedto just punishing auditors in case they fail to dis-charge their duty, but they should also re-examinethe present system to strengthen and intensify theinternal audit system. There is a need to maintainhigh standards of integrity to ensure safeguardingthe interests of the investors. Also it is the need of

the hour to strengthen the regulatory framework ofthe operations of the companies.

culpability of the audit firm, as opposed to thatof the partner in charge of the audit, is far lessobvious. Despite this, the image of Satyams statu-tory auditors, PricewaterhouseCoopers has beentarnished, as voices are being raised at the pos-sibility that the auditors were complicit with theconspirators in the multi-crore scam.On the other hand, the auditors feel that the casefiled by Mahindra Satyam is merely an attempt toshift the responsibility of the fraud that was delib-erately concealed under the direction of Satyamsown management to the auditors. So, Price Wa-terhouse has also filed a case against MahindraSatyam, countering the latters charges. Agreed, ithas the right to seek legal remedy and has severalprecedents in the West. An example is Arthur An-dersen that agreed, without accepting any wrong-doing on its part, to pay damages to Enron Corpcreditors to settle charges that the accounting firmwas negligent in auditing and advising the energytrader that became bankrupt in 2001.Speci c PenaltiesUS regulators actionsA joint penalty of USD 17.5 billion was imposedby US regulator Securities Exchange Commission inApril, 2011 on Satyam Computers, PriceWaterhouseIndia and affiliated auditors for manipulating ac-counts for several years. Satyam agreed to pay afine of USD 10 million towards settlement of charg-es while PriceWaterhouse India settled its chargesof conducting deficient audits of the companysfinancial statements and enabling a massive ac-counting fraud to go undetected for several yearsby paying USD 6 million. For violations of PCAOBrules and standards in relation to the Satyam auditengagement, Lovelock & Lewes and Price Water-house Bangalore agreed to pay the Public Com-pany Accounting Oversight Board (PCAOB) a USD

1.5 million penalty in settlement of the charges.Indian regulators actionsIt took nearly three years for the Institute of Char-tered Accountants of India (ICAI) to finally comeout with its findings on those guilty of perpetratingthe Satyam scam. According to the findings of ICAI,Vadlamani Srinivas, erstwhile chief financial officer(CFO) of Satyam Computers has been found guilty

The role of the ICAI and other regulatory bodies should not be con ned to just punishing auditors in case they fail to discharge their duty, but they should also re-examine the present system to strengthen and intensify the internal audit system


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Mr. SwapnilDakshindas, Char-tered Accountant,in a candid discus-

sion with TeamNiveshak talks

about the regula-tory framework,

current audit pro-cedures, impactof IFRS and the

changes required

Niveshak : a s aN auditor with aN ex -perieNce iN auditiNg for 10 years , do you thiNk the curreNt regulatioNs are sufficieNt with regards the safeguard -iNg the iNterests of the iNvestors ?

M r . D akshinDas : Regulations will only beeffective if they are implemented inthe letter and spirit. If we see the his-tory of frauds / scams, we can notethat it was not insufficient regulations

which were solely responsible. Regu-lations on its own cannot ensure fairreporting from corporates, fraudstersfind a way around the regulationsand would continue to do so. To safe-guard the interests of investors anorchestrated effort is required fromthe management and the auditors.Changes to legislations would contin-ue to be made as they are an effortto improve the legislation and incor-porate the changing environment. Inmy opinion, the current regulationsare sufficient to safeguard the inter-ests of the investors if followed in theright spirit.

Niveshak : w hat are your suggestioNs for improviNg the regulatory frame -work to iNcrease the efficieNcy aNd effectiveNess of audits ?

M r . D akshinDas : I feel that one of themost important improvement oppor-tunity is that the regulations shouldensure that the auditors are acting

independently and without any pres-sure in performing their duties effec-tively. The current Companies Bill pro-poses rotation of Auditors after certainperiod of time. I feel that this changeis a good move towards increasing theefficiency and effectiveness of audits.Also regulations have to keep pacewith the changing business environ-ment. Legislators have to play an ac-tive role in understanding the way inwhich corporates operate. In order toimprove efficiency and effectiveness ofaudits, the auditors too are required tokeep up with the changes in businessby adopting more robust audit pro-cedures. Auditors have to gear them-selves up with the necessary tools inorder to perform an effective audit.

Niveshak : w hat will be your advice to iNvestors iNvestiNg based oN the audi -tors opiNioN of the compaNy ?M r . D akshinDas : In todays era, investorshave to look further than only the fi-nancial statements. There is no denialthat the financial statements reflecton the position of the company, butinvestors are impacted by the futureperformance of the company whichis based on an array of factors. Butit does not mean that the investorsshy away from the auditors reportand the financial statements. One badapple should not deter us from havingapples at all!

Mr. Swapnil Dakshindassenior M anager in one of the b ig 4 a udit f irMs

Mr. Swapnil Dakshindas is a Senior Manager at one of thein the Audit and Assurance Department. He is a Chartered

years of work experience in the field of auditing. He has w public and private companies across various sectors.



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agemeNt of a compaNy ?

M r . D akshinDas : Manipulation is possible wherethere is a judgment involved. Hence, ManagementEstimates is one of the financial statement areaswhich is most prone to manipulation.

Niveshak : w hat are the iNdicators that oNe must look out for to ideNtify such poteNtial maNipula -tioNs ?

M r . D akshinDas : Indicators can be: excessive pres-sures on management from sources outside orinside the entity to achieve an expected andperhaps unrealistic earnings target or financialoutcome- particularly when the consequences tomanagement for failing to meet these goals can

be significant, history of the management, unusu-al changes to such estimates, aggressive use ofestimates, etc.

Niveshak : h ow will the implemeNtatioN of ifrsimpact fiNaNcial statemeNts ? w ould the profit figures aNd other fiNaNcial statemeNt elemeNts be

affected very sigNificaNtly from it ?

M r . D akshinDas : The implementation of IFRS will in-volve a new way of thinking about accounting and

financial reporting. This new way of thinking plac-es greater emphasis on interpretation and appli-cation of principles- with a particular focus on thesubstance and underlying economics of a transac-tion, and on transparency of financial information.Adopting IFRS is not simply a policy change; it isa business change.

These standards bring about many new accountingconcepts and requirements that will significantlyaffect the way entities account for and report their

results. For e.g. Financial instruments which werereported as off Balance Sheet items will now haveto be fair valued at each reporting date and ac-counted for based on their classification.

Niveshak : d o you thiNk high level maNagemeNt frauds caN be detected usiNg the Normal audit pro -cedures ?

M r . D akshinDas : Statutory audits were not designedin a manner to detect frauds. Auditors were al-ways considered as a watch dog and not a blood-hound. But this perception is fast changing nowand the investors expect a lot more from the audi-tors. An auditor is expected to perform assess-ment of existence of frauds based on a varietyof factors. In case, the auditor comes across in-dicators of frauds, the audit procedures are thendesigned to cover these fraud risks. In order todetect high level management frauds, the audi-tors are expected to exercise a high level of pro-fessional skepticism. Performing normal auditprocedure help in identifying indicators of fraud,but do not detect fraud in itself.

Niveshak : h ow do you rate the effectiveNess of iNterNal audits iN compaNies ?

M r . D akshinDas : Internal Audit is an independentagency that can be engaged by the management/Board of Directors to ensure safeguarding of as-sets, improve efficiency/effectiveness of opera-tions and ensure compliance for the applicablestatutes/policies developed by the company. In-ternal auditors do a more focused audit on theoperations and processes of a company. But inIndia, Internal audits reap little results, as the In-ternal Auditor reports to the management only.So, if the management does not take appropriateaction on matters highlighted by internal auditor,then it loses its effectiveness. So again, internalaudit in itself cannot said to be effective or inef-fective. It is the joint effort of the internal auditor

and the management which results in an efficientand effective audit.

Niveshak : d o you thiNk aN iNcrease iN the scope of the audit will iNcrease its effectiveNess ? (eg . c om -meNt oN propriety of maNagemeNt decisioNs , etc .)

M r . D akshinDas : Increasing scope is not the answerto increasing effectiveness of audits. The currentscope of audits are robust enough to ensure ef-ficient audit. The only need is to get equippedadequately and follow the required proceduresdiligently.

Niveshak : w hat are the fiNaNcial statemeNt areas that are most proNe to maNipulatioN by the maN -


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the perception that REITs could serve as a hedge inthe event of either an economic crisis or inflationmakes REIT an excellent opportunity to invest.Overall, the market can be classified by offering fourdifferent types of REITs:1)Equity trusts where the assets are invested in own-erships claims to various types of properties like, e.g.residential, commercial or industrial property2)Mortgage trusts where the assets are invested in

claims where interest is the main source of incomelike for example mortgages3)Hybrid trusts that invest in both equity and mort-gages, offering the advantage of offsetting interestincome against depreciation of the property4)Specialized trusts that invest for example in devel-opment and construction or are involved in sale andlease-back arrangementsPast studies have presented mixed evidence on therelationship between stock returns and REIT returns.

Studying the magnitudes simultaneously would en-able us to draw inferences for both private and publicpolicy purposes. For instance, private portfolio man-agers would be interested in learning how sensitiveREIT returns are to stock market movements in orderto improve the risk management of their real estateportfolios and/or also see whether mixing real estateassets with a general market portfolio would offerbetter risk/return opportunities. Also, official policy-makers (i.e. monetary authorities) would be inter-ested in seeing how changes in interest rates affect

REIT performance.Over the last few years the real estate sec-

tor has had an excellent performance. Fuelled by in-creasing prices, higher rents and government spend-ing more on infrastructure projects the real estateindustry has been delivering very high returns, out-performing global equity markets most of the time.In 2008-2009, the sub-prime crisis had a significantimpact on REITs but as soon as global market re-covered, REITs again yielded significant returns overequity and other investment options. In addition, RE-ITs are an attractive option for both institutional andprivate investors. REITs not only provide access to thereal estate market, but are also a liquid investmentalternative.

Alpha is a measure of an assets risk relative to theoverall market. It reflects the difference betweenan assets actual performance and the performanceexpected based on risk level taken by the fundsmanager. A fund that produced the expected returnfor the level of risk assumed has an Alpha of zero.A positive Alpha shows that the manager produceda return greater than expected for the risk taken.A negative Alpha indicates that the manager hasproduced a return smaller than expected relative tothe risk taken.In the last decade, the market for real estate invest-ment trusts (REITS) has shown substantial growthrates. REITS were originally a tax design for cor-porations investing in real estate assets in orderto reduce or eliminate the corporate income tax.Overall, the REIT structure was designed to providea somehow similar vehicle for investments in realestate markets as mutual funds provide for invest-ments in stocks. For instance, Australian real estateinvestment trusts (AREITS) are a unitized portfolioof property assets, listed on the Australian stock ex-change, which allow investors to purchase a sharein a diversified and professionally managed portfo-lio of real estate.According to 2011 Australian REIT Survey conductedby (BDO Corporate Finance) the top 40 REITs in Aus-tralia had assets of $148 billion as of June 30, 2011.It excluded entities with a market capitalisation lessthan $10 million.In the US, REITs gained 28.0% on a total-return basis

during 2010 much higher than the S&P 500 (+14.8%).Fundamentals are clearly improving across thespace, and REIT displayed high positive alpha. Also,

ASSESSING REAL ESTATE INVESTMENTTRUSTS (REITs) AS AN INVESTMENT

sChMrd P uneAbishek Sharma & Amit Sharma

Fig. 1: REITs, S&P 500, NASDAQ future predictions



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Risks Related to REITS

Double-Dip Recession:If in future the economy slows down rapidly andGDP growth turns negative again, the capital mar-kets could become more volatile, and valuationscould fall. In particular, a double-dip recessiondriven by weakness in the housing market (par-ticularly in the US) could raise questions againabout the financial system and shut off capitalavailability for the REIT sector, resulting in a sell-off.Tail Risks: There are currently a number of tailrisksoutcomes that rarely can happen but thatmay have strong negative effects were they to oc-curfacing the capital markets as we look out into2011. Generally macro in nature, these could stillend up impacting the REIT space via fund flows,

macro-economic changes, or monetary policy.Methodology and data S&P 500 Index is a ba-rometer to measure the US stock market healthand growth. Also, the REIT index gives us dataon returns through investment in real estate. Wehave compared percentage changes of respectiveindices with each other by forming a regressionmodel based on recent data. Data for both theindices has been collected for the last year on adaily basis. The regression model provides us withmathematical evidence proving that REIT retains a

positive alpha against stock indices. A similar ap-proach has been applied for the Australian REIT.Data and preliminary statistical resultsThe data sample contains daily observations thatcombine the following variables. For the four cat-egories of REITs namely equity, mortgage, hybridand composite we obtained the total index re-turn. The samples period is from December 2010to December 2011 and the main source is Bloom-berg. The other variables are the S&P 500 continu-ously compounded returns and the growth rate ofindustrial production. Industrial production is aproxy for real economic activity.

As there are different REIT structures in differenteconomies, we have performed regression on lastone year data of both Australia and the US.To validate our research that REIT seeks positivealpha against the S&P500 index, we collected datafor REIT index and S&P500 for the past year on adaily basis. Thereafter, daily percentage changefor each of the two indices was calculated. Then,regression was performed on the collected datausing Excel 2007.Results showed that the two indices share a goodcorrelation. The regression model explains 99% ofthe deviation in the data. Further, regression mod-el shows that returns on REIT are over and aboveS&P500 index (positive Alpha) which implies that

gains over and above natural returns on REIT arehigher as compared to S&P500. Herein is a greatinvestment opportunity. However in this case, Al-pha is considerably too small as we are focussingon return on daily basis. If on such a short termREIT can give a positive Alpha over and accessof returns, it gives investors better portfolio op-tion if they invest on REITs. Further if we find outAlpha for long term, it is significant enough toattract the investors over equity market. With thecalculations and empirical data, we have reached

to calculation that REIT can yield much higher re-turns in this economic scenario where nations arespending hugely on their infrastructure.Hence, we conclude that REITs all over the worldhave performed well even in the face economicadversity which makes it a high gain propositionfor investors.

Table 1: Results for regression analysis - REIT (Australia) &S&P500 stock index. (daily percentage change)

Regression statisticsMultiple R 0.745

R square 0.559

Adjusted R square 0.557

Standard Error 0.789

Observations 251

Y=0.0213+.73X

coefficients

Intercept 0.021X Variable 1 0.727

Regression statisticsMultiple R 0.905

R square 0.820

Adjusted R square 0.820

Standard Error 0.795

Observations 255

Y=0.034+1.17Xcoefficients

Intercept 0.034X Variable 1 1.17

Table 2: Results for regression analysis - REIT index (US) &S&P500 stock index. (daily percentage change)


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Trading in commodities has been an attractiveinvesting medium for many people in recentpast. Commodities on MCX, NCDEX and othertrading platform have seen a tremendous in-crease in trading volume. The items that are be-ing traded in commodity market varies from oilseeds to food grains to metals and Iron & steel.We have concentrated on metals as it seems tobe more promising and lucrative in commoditymarket.The metal section in commodities especially hasoutperformed the market. The metal index valuecan be compared through following table.Current ScenarioIt is evident from the table below that the futureprice of MCXMETAL index raised very sharply ev-ery year from 2008 till date. The future priceincrease shows that the there has been a trend

of more trading in metals in commodity marketin particular.As the volume traded increased every year sodid the spot price of the metal index. This trendclearly indicates a sign of higher interest of trad-ers in commodity market and that too in metals.The return has been huge on the investmentsmade in metal section in commodity market.This trend also indicates that the demand ofmetals has increased significantly in recent pastand is likely to continue in future.The four most traded metals on MCX are Cop-per, Zinc, Lead, and Aluminium. The table belowshows the volume traded from March 2008 toMarch 2011. The CAGR shown is the compound-ed annual growth in volume traded. Copper hasa CAGR of 32.67%. Aluminium is 16.99% andLead is 57.46%

Year(As on 1st June) Future price(Rs.)(MCX-METAL)

2008-09 2185.3

2009-10 32602010-11 4266

2011-12 4733

The increase in traded volume shows that thegeneral demand for these metals has increased.These metals have a growth because its utilityas a product has increased. For example therehas been a high demand in industries like bat-teries and infrastructure. These industries de-pend on the general demand and availability ofthese metals. So as these industries prosper sodoes the metals.Comparison of price movement of few metalsvis-a-vis Sensex:

As graph shows Sensex is fairly negatively cor-related with Lead and Zinc. It offers option todiversify the portfolio besides bullion.Future ProspectsAs we have seen that these metals have attract-ed a lot of investors to bet on them. The Metalindex has risen up to the historical high. There

is lot more to come for the metals in particularfor the commodity market which will lure moreinvestors to invest in commodity market as theliquidity of commodity market has increased.The higher liquidity resembles higher opportu-nity to make money in market.The commodity market will bring about a newchange in investors thinking. Government playsa major role in this market. As some of the gov-ernment policies and regulations bring about awhole new prospect to the industry, so does it

affects the commodity market.Few regulations and projects such as NationalHighway Authority of India have lead to an im-mense rise in the metal demands. When such

sibM b angaloreAshish Kumar & Tejas Ghargec

Commodity market:

Table 1:Metal index value table (Future price)

Prove your metal



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projects are undertaken, there is rise in demandof metals which leads to rise in the prices ofmetals as such. Such type of scenarios will at-tract investors because they know that the fluc-tuations of the spot prices of these metals willbe high. The liquidity will also increase whichagain will give a positive vibe to the investorsto make money by investing in commodity mar-ket. The rural electrification corporation limitedhas shown an increase in the demand of coppertubes for electrification purposes and which willgrow as the day passes.There are certain areas where government hastaken steps to improve the existing conditions,few of them being infrastructure, electricity,automobiles etc. As an investor one needs tounderstand that as long as India grows, so willthe need for infrastructure and automobiles.The future demand for the metals will obviouslyincrease which will give a boost in trading of

metals in commodity market.Analysis of important metals:Zinc:About 47 % of Zinc produced worldwide is con-sumed by Galvanizing industry. Galvanizing in-dustry is located mainly in China. Since Chinahas the largest manufacturing sector in world.Galvanizing is complementing industry to man-ufacturing. Due to low demand worldwide, Zincprices have declined from $2500/ton to $1900/ton.The International Lead and Zinc Study Group(ILZSG) reported that Zinc markets were in a308000 tonne surplus in the first eight monthsof 2011, primarily due to increased mine pro-duction. Since supply exceeding demand Zincprices are likely to remain weak in 2012.Aluminum: Total Aluminum Industrial consumption datashows that Transport, Packaging and construc-tion industry account for 26%, 22% and 22% oftotal consumption respectively.

Transport contributes nearly to 6% of IndiasGDP. India is sixth largest vehicle manufacturerof world. The industry grows at 16-18 %. With 7million units, it is projected to overtake Japan,

Germany and Korea by 2017. Construction in-dustry contributes nearly about 8 % of GDP. Thisindustry is growing at the CAGR of 20% for thelast 5 years. Indian packaging industry is grow-ing 15 % year on year.Copper: Copper is mainly used in electrical/electronicsindustry (42%) followed by construction (28%)and transportation (12%). Worldwide electric-

ity is not penetrated in developing and underdeveloped nations. There is large scale electri-fication programmes carried out by nations in-cluding India. India wants to increase electricitycapacity addition by 100 GW from 2012 to 2017which is half of the present electricity capacityof nation. Thus copper and Aluminium priceswill be rising in coming years.Lead: Batteries are the main driver of lead worldwidedemand. About 71% of lead produced is con-sumed by battery production. Lead acid bat-tery is used in automobiles, inverters and UPS.Therefore the lead demand depends heavily onAutomobile, computer and domestic inverterindustry. Demand in automobile, inverter andUPS is dwindling due to global slowdown. Leadseems to show decline in prices for short term,but it has boom for long term.ConclusionAccording to recent analysis and reports, share-

holders in equity market have eroded theirwealth by more than 20% in last one year. Asthe Indian market for equities has taken a majorhit due to European woes and unstable US econ-omies, people are reluctant to invest in equities.The much safer and profitable investment aheadlies in commodity market because of the ease ofmonetary policies in some major economies likeChina and regulations by Indian government.Moreover being a developing and emerging mar-ket in infrastructure, FIIs see India as a lucrative

market. Their investment will surge the demandfor metals which in turn will lead to better liquid-ity and better ROI for investors. Hence, its time forIndian investors to be metalistic !!.

Volume traded 2008-09(30th march)2009-10

(30th march)2010-11

(30th march)2011-12

(30th march) CAGR

Copper 1007753 2175657 2706875 3122346 32.67%

Aluminium 13706 12510 16547 25678 16.99%Zinc 323656 208772 257899 273429 -4.12%

Lead 110436 130344 578649 678937 57.46%

Table 2:Metal index value table (Volume traded & CAGR)


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Gold has emerged asone of the most reliableand stable Investmentavenue for most of theinvestors who otherwiseare finding it difficult tosave themselves fromhuge losses because ofthe falling stock mar-kets, rising unemploy-ment and falling GDPs,Low correlation withother asset classes likeequity and debt makesit less volatile than oth-er commodity pricesand thus a good assetto diversify the overallportfolio. However inves-tors must be very care-

ful while parking theirfunds in Gold becauseas the world economyturns stable, gold priceslanguish, as happened inthe 1980s to 1990s.

with other asset classes like equityand debt thereby a good asset to di-versify the overall portfolio. If had in-vested $10,000 in January 2001, your37.81 ounces of the precious metalwould have been worth more than$69,000 by September 1, 2011.As per the current status (January 18,2012) the price of gold is Rs 27584/10g.The centre has raised import and ex-cise duties on gold and silver hopingto mop up Rs 600 Cr more and con-

tain current account deficit. Raisingimport duty on gold to 2% of valuefrom Rs 300 per 10 grams to Rs 540per 10 grams as per the current price.It could slow imports thus reducingdollar demand and strengthening therupee.As it is clearly visible from the chart,there has been a considerable in-crease in the prices of gold over the

Hats off to the little yellow metalwhich has managed to outshine themillions of other investment optionsavailable today. With global economydownsizing and inflation rising, un-employment reaching the maximumlevel, and stock markets putting alltheir efforts to terrorize the investors,gold appears to be the The SilverLining to the millions of investorsaround the world, be it in the formof bullion, gold certificates, mining-shares, derivatives, ETFs or even jew-ellery.Gold has emerged as one of the mostliquid and stable assets for invest-ment purposes. During last two years,when all the asset classes have failedto perform, gold is the only invest-ible asset that has remained upbeat.Gold is a hedge against the dollar andinflation. It has a very low correlation

iift, n eW d elhiHarsh Bhatia

Is Gold an Investors paradise?

Fig. 1: Gold vs. Stocks since 1998



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last 15 years (from 1996-2011). Last 2 years haveshown an increase of more than 100%! Suchtrends fuel more demand for gold, which, com-bined with limited production and supply, driveprices even higher in a kind of cycle.E-gold on the Financial Technologies-promotedNational Spot Exchange (NSEL) outperformedother gold investment avenues in 2010, dueto the least transaction, brokerage and deliv-

ery costs compared to other options. Spot goldgave slightly higher returns, but given the riskinvolved in holding physical gold, many inves-tors preferred to invest in e-gold. E-gold has of-fered 23.64 per cent return since its launch inMarch last year. Other options, including MCXGold Futures, have offered comparatively less,with Gold BeES and Reliance Gold ETF posting17.98 per cent and 17.82 per cent returns, re-spectively. E-gold was launched in April 2010 forinvestment by small investors who could not

buy in bulk.It also helps in diversifying an investors port-folio as it usually tends to progress oppositethe stock market. Traditional options, such asbonds, property and hedge funds often fail tohandle the market panic, and may sell off withequities in times of uncertainty. Gold is subjectto market risk, but many of the downside risksassociated with its price is different to the risksassociated with other assets. This enhancesgolds attractiveness as a portfolio diversifier.The more volatile an asset, usually the riskier itis. The gold price is typically less volatile thanother commodity prices. Portfolios consisting ofgold may leverage this uncertainty and would

be able to with-stand catastrophic economicsituations.Gold also enjoys a tax-free life in countries suchas UK, where gold coins like Sovereigns and Bri-tannias are viewed as currency and so are ex-empted from VAT.Plus, since the increase in value of gold has notbeen derived by work, it is not an income, thusthere is no income tax either. Silver & other pre-

cious metals do not enjoy the same luxury.Gold enjoys psychological appeal. 4000 yearsafter its discovery, it is still perceived as oneof the most precious metals. This means thateven during times of crisis, market failures andgovernment defaults, gold is likely to retainits value unlike other investment options. Thismakes gold one of the safest collaterals for thefinancers to count upon, enabling them to lendmoney without much hesitation. Also it is nottied to any issuers liability unlike bonds, but isentirely the investors asset.Gold is perceived as The Worlds FrightenedBunny. Whenever the economy signals signsof depression and downturn, the demand forgold has increased. During crisis, people fearthat their investment options would be nega-tively influenced and would not provide themwith necessary funds hence they see gold as anasset which will always buy bread. When Lehm-an Brothers declared bankruptcy in September

2008, the prices of Gold rose by 27% from $728per ounce to $922 in a matter of three days.Gold is also used to protect the economy fromrising inflation by controlling the countrys cur-

Table. 1: 10 gms of GOLD PRICE History for the last 86 years


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rency against fluctuating dollar. It is inverselyrelated with dollar, i.e. when the dollar weak-ens, the price of gold will rise. Many currencytraders treat gold as the 4th global currency, af-ter Dollar, Yen and Euro. The European demandfor gold comes mainly from German and Swissinvestors because of concerns over public debtin the Euro zone and the potential inflation-ary impact of the European Central Banks an-nouncement of the $1 trillion rescue package topurchase Euro zone government bonds to ad-dress the Greek debt crisis.Although gold is a great hedge in this risky time,the problem is that it is just a hedge and sowhen times are good for the economy, invest-ments in gold can take a downhill path. Goldis today viewed as a safety-net against politi-

cal and economic uncertainties, and its demandis high today only in such circumstances. Butwhen world economy turns stable, gold priceslanguish, as it happened in the 1980s to 1990s.This is why it has been suggested that inves-tors should hold no more than 15% of their as-sets in gold, and they should buy only whenthe price dips because the price of the metal ishistorically high.Gold has the advantage of being the most eas-ily comprehensible investment to the averageinvestor, considering that its value is set on anopen market. As Market watch noted, Goldis what a real bull market looks like. Gold isunder-valued, under-owned and under-appreci-ated. The supply/demand balance in gold is be-coming increasingly tight. And although interimvolatility cannot be ruled out, gold prices arelikely to trade higher. It is most assuredly notwell understood by most investors. At the be-ginning of the 1970s when gold was about to

undertake its historic move from $35 to $800per ounce in the succeeding ten years, the sameobservations would have been valid. The onlydifference this time is that the fundamentalsfor gold are actually better. Under such circum-stances, the future of gold seems quite goldenindeed. Thus, holding Gold in your portfolio isntadvisable...its a must!!!Long live the king of all investments!

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tFIN-Q Solutions

December 2011

1. Operation Twist

2. 159th meeting of OPEC

3. Cuba

4. UTI

5. Pranab Mukharjee,Subbarao

6. Cost per click

7. Dual Aspect Concept

8. Parimal D. Nath- wani

9. Sage PeachtreeComplete Accounting

10. Round trip trading


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Sir, is insider trading a serious offencefor which Rajat Gupta, the 1st Indian bornglobal CEO of an MNC, is charged by Securi-ties Exchange Commission (SEC)?

Yes, because he used information tomake money that should have been keptconfidential, i.e insider trading.

Sir, Can you tell me more about in-sider trading?

Insider trading is trading in stocks,bonds or securities of a corporation by an

individual who has non-public informationabout the corporation. The insider here isan individual who can be companys direc-

tor, officer, large shareholder, etc. In USA and Germany,it is required that these insiders report their trading tothe regulator or disclose it publicly, within a few daysof business trading cycle.

So, how can it be illegal?

It can be illegal, if the insider usesthe material information that is still not dis-closed to the public. If he shares this infor-mation with anybody, who can use this toan advantage over other investors and thus

makes profits, or saves himself from losses, then itsillegal.

Sir, can you give an example?

When Rajat Gupta gave information to

Raj Rajaratnam, the founder of Galleon funds,about Berkshire Hathaways investment of $5billion in Goldman Sachs, just after attend-

ing the board meeting of Goldman Sachs(which wasa day before it was made public), it was illegal. From

this information Galleon group and Gupta benefitted,which was a loss for other investors.

I got it, but can insider trading belegal?

It is legal, if insiders will trade afterthe material information is public or asper SEC in USA. If insiders have a legalcontract that allows them to trade in fu-

ture, than its not illegal and is called affirmativedefence. In this scenario, the insider has no directadvantage over other investors. Still regulatory bod-ies want such insider trading to be reported.

Then, we should always invest ortrade following the trading patterns ofinsiders.

Yes, to some extent we may, as in-

siders know about their companys posi-tion better than what has been disclosedto public. For example, a Chief Financial

Officer knows the financial health of his companybetter that what is being reported to public. So tofollow the CFOs footsteps will be wiser. But, if insid-ers are using it as a strategy to trap investors, eventhough they know company in future will not do asexpected, then you are in a problem because youstand a chance of losing your investment.

Oh I see. Just one last question sir.In India if I adopt such unethical ways tocreate money, can I be traced?

Definitely yes. SEBI is a vigilantwatchdog. It compares the financial re-ports of corporates with that of auditorslike PwC, E&Y, etc. and in case of collusion

of reports strict action is initiated.

Thank you, Sir. Now, I have someidea about insider trading.

CLASSROOM

FinFunda of the Month

INSIDER TRADING

NIVESHAK 23

Cl a s s r o om

IIM Shillong Rameswar Misra


24/26J anuary 2012

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F I N - Q1. Pachmarhi, located in X District of Madhya Pradesh is the only hill station in

the state. X is very important with regards to the Indian Financial System. IdentifyXs claim to fame.

2. This term is used extensively in newspaper reports today. It shot into promi-nence after X (newspaper) published it after the Watergate scandal in 1973. Identifythe term and X.

3. X is a non-tradable, non interest paying financial instrument which protectsemployers against fraudulent actions of their employees. Identify X.

4. Company X founded by Y got its fourth round of funding recently from Gen-eral Atlantic and Sequoia Capital. This funding is one of the biggest in pure-playanalytics. Identify X and Y.

5. . X was set up with the help of Y and presently has 2 stocks listed in it witha total market capitalization of $0.7bn. Identify X and Y.6. DSP Merill Lynch has a very important first to its name in the Indian Context.

Name it.7. Some of the tactics used in XY, also known as Z are closed-door meetings

with bank directors, increased severity of inspections, appeals to community spirit,or vague threats. It is usually done by an authority like the Federal Reserve. IdentifyX, Y and Z.

8. Connect. (Hint: International trade term)

9. X publicly listed its shares in 2005 through an IPO and immediately spun offX Capital Markets and X Alternative Investments. X is presently one of the advisorsof Y, which recently filed for bankruptcy protection. Identify X and Y.

10. Some of the stocks in this investors portfolio include Aptech, Lupin, Nagar-juna Construction and Karur Vysya Bank. He recently exited Pantaloon Retail com-pletely. He is sometimes referred to as Indias Warren Buffett. Identify him.

All entries should be mailed at [email protected] by 6h February, 2012 23:59 hrs One lucky winner will receive cash prize of Rs. 500/-


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