Islamic Banks vs Conventional Banks

(Reproducing the article which i had sent to IIM Shillong for their Finance Magazine "Niveshak", though this was never published:P)

Industry forecast suggest that Islamic Banking assets with commercial banks globally, will reach $1.1 trillion in 2012 (2010: $826 bn). If we consider only the Middle East and North African Countries(MENA), which constitute a major share of Islamic Banking industry, Islamic banking assets increased to $416bn in 2010, representing a five year CAGR of 20% compared to less than 9% for leading conventional banks. But Islamic Banking Industry is still fragmented with most Islamic banks holding less than $13bn assets – yet to achieve scale, facing pressure on profitability.

If we compare the performances of IBs with CBs then Islamic Banking industry’s ROE now appears to be stabilizing around 10% down from 23% in 2006. Inspite of having higher financing income, higher provisions and operating costs have contributed to the steep decline in profitability of Islamic banks.

Also if we compare Staff cost/operating expenses(2010), it is 60% in Islamic Banks compared to 54% in conventional banks and the ratio of Staff Cost and Deposits(2010) is 3% and 0.8% respectively. Higher Staff Costs should translate to better performance but Islamic Banks lag behind their conventional peers which again indicates a lack of operational efficiency. A study done by Ernst & Young (‘A Brave New World of Sustainable Growth’ ) suggests that Operational efficiency can improve the Profitability of Islamic Banks by 25%

Comparing IBs and CBs during the Financial Crisis

To assess the impact of the crisis, there was a study carried out by IMF and it used bank-level data covering 2007−10 for about 120 IBs and CBs in eight countries—Bahrain (including offshore), Jordan, Kuwait, Malaysia, Qatar, Saudi Arabia, Turkey, and the UAE and the evidence showed that in 2008, IBs fared better in all countries, except Qatar, the UAE, and Malaysia. In Saudi Arabia, Bahrain offshore, Jordan, and Turkey, the change in profitability was significantly more favorable for IBs. The picture was reversed in 2009, with IBs faring clearly worse in three countries. In Bahrain (including offshore), and the UAE, the profitability of IBs declined significantly more than that of CBs, while in Qatar the increase in IB‘s profitability was significantly lower than that of CBs

Factors related to IBs‘ business model helped contain the adverse impact on profitability in 2008, while weaknesses in risk management practices in some IBs led to larger decline in profitability compared to CBs in 2009. In particular, adherence to Shariah principles precluded IBs from financing or investing in the kind of instruments that have adversely affected their conventional competitors and triggered the global financial crisis. The weak performance in some countries was associated with sectoral concentration and, in some cases, was facilitated by exemptions from concentration limits, highlighting the importance of a neutral regulatory framework for IBs and CBs and strengthening risk management in some banks.

Despite higher profitability during the pre-global crisis period (2005–07), IBs‘ average

profitability for 2008–09 was similar to that of CBs, indicating better cumulative (pre- and post-crisis) profitability and suggesting that higher pre-crisis profitability was not driven by a strategy of greater risk taking. Large IBs have fared better than small ones. Better diversification, economies of scale, and stronger reputation might have contributed to this better performance. This suggests that developing the industry and increasing competition should be achieved through establishing large and well managed IBs that can compete with existing banks. Also IBs‘ credit and asset growth were at least twice higher than that of CBs during the crisis, suggesting a growing market share going forward and larger supervisory responsibility.

While the global crisis gave IBs an opportunity to prove their resilience, it also highlighted the need to address important challenges. The crisis has led to greater recognition of the importance of liquidity risks, and the need for efficient bank resolution framework. Hence, building a well-functioning liquidity management infrastructure is a key priority.

Moreover, regulators and standard-setters for IBs should ensure that the supervisory and legal infrastructure, including for bank resolution, remain relevant to the rapidly changing Islamic financial landscape and global developments. Reform efforts in this regard should interface with the global reform agenda. Greater convergence and harmonization of regulations and products and offering a greater variety of Products consistent with Shariah principles is needed to facilitate an efficient and sustainable growth of the industry.

Commonly used Islamic Banking Financial Products(instruments)

Murabahah

Murabahah (accurate transliteration murābaḥa) is defined as a cost-plus sale, where the seller expressly mentions the cost he has incurred on the commodities to be sold and sells it to another person by adding some profit or mark-up thereon which is known to the buyer. As the requirement includes an 'honest declaration of cost', murabaha is one of three types of bayu-al-amanah ('fiduciary' sale). Other two types of bayu-al-amanah are Tawliyah (sale at cost) and Wadiah (sale at specified loss)].

Istisna’a

Literally the word istisna’ derived from the root word sana’ or to manufacture or to construct something. Istisna’ is an order or request to manufacture something, whereby the requestor invited, induced or caused another to make or manufacture some goods for him. Technically, it is a contract to purchase for a definite price (agreed by both parties) something that may be manufactured later on according to agreed specifications between the parties. In other words, it is a contract of sale of specified items to be manufactured or constructed with an obligation on the part of the manufacturer or contractor to deliver them to the customer upon completion. The contract of Istisna’ creates a moral obligation on the manufacturer to manufacture the goods, but before he starts the work, any one of the parties may cancel the contract after giving a notice to the other. However, after the manufacturer has started the work, the contract cannot be cancelled unilaterally.

Ijarah

An agreement whereby the Bank (lessor) purchases or constructs an asset for lease according to the customer’s request (lessee), based on his promise to lease the asset for a specific period and against certain rent installments. Ijarah could end by transferring the ownership of the asset to the lessee and there must be usufruct. Usufruct is a legal term describing a situation wherein a person or company has a temporary right to use and derive income from someone else's property (provided that it isn't damaged).

Musharakah

An agreement between the Bank and a customer to contribute to a certain investment enterprise, whether existing new, or the ownership of a certain property either permanently or according to a diminishing arrangement ending with the acquisition by the customer of the full ownership. The profit is shared as per the agreement set between parties while the loss is shared in proportion to their shares of capital in the enterprise.

Mudarabah
An agreement between the Bank and a third party whereby one party would provide a certain amount of funds which the other party (Mudarib) would invest in a specific enterprise or activity against a specific share in the profit. The Mudarib would bear the loss in case of default, negligence or violation of any of the terms and conditions of the Mudarabah.

Wakalah
An agreement between the Bank and an agent whereby the agent invests it according to specific conditions in return for a certain fee (a lump sum of money or a percentage of the amount invested). The agent is obliged to return the invested amount in case of default, negligence or violation of any of the terms and conditions of the Wakalah.

Sukuk

Sukuk is the Arabic name for a financial certificate but can be seen as an Islamic equivalent of bond. However, fixed-income, interest-bearing bonds are not permissible in Islam. Hence, Sukuk are securities that comply with the Islamic law (Shari’ah) and its investment principles, which prohibit the charging or paying of interest. Financial assets that comply with the Islamic law can be classified in accordance with their tradability and non-tradability in the secondary markets.

Bai’ al-inah (sale and buy-back agreement)
The financier sells an asset to the customer on a deferred-payment basis, and then the asset is repurchased by the financier for cash at a discount. The buying back agreement allows the bank to assume ownership over the asset in order to protect against default without explicitly charging interest in the event of late payments or insolvency. Some scholars believe that this is not compliant with Shari’ah principles but this principle is still being practice by some Muslim countries, particularly Malaysia.

Bai’ bithaman ajil (deferred payment sale)
This concept refers to the sale of goods on a deferred payment basis at a price, which includes a profit margin agreed to by both parties. This is similar to Murabahah, except Bai’ bithaman ajil is normally offered for long-term deferred payment sale while Murabahah, is normally for short term deferred payment sale e.g. up to 1 year.

Bai muajjal (credit sale)
Literally bai muajjal means a credit sale. Technically, it is a financing technique adopted by Islamic banks that takes the form of murabahah muajjal. It is a contract in which the bank earns a profit margin on the purchase price and allows the buyer to pay the price of the commodity at a future date in a lump sum or in installments. It has to expressly mention cost of the commodity and the margin of profit is mutually agreed. The price fixed for the commodity in such a transaction can be the same as the spot price or higher or lower than the spot price.

Musawamah
Musawamah is the negotiation of a selling price between two parties without reference by the seller to either costs or asking price. While the seller may or may not have full knowledge of the cost of the item being negotiated, they are under no obligation to reveal these costs as part of the negotiation process. This difference in obligation by the seller is the key distinction between Murabahah and Musawamah with all other rules as described in Murabahah remaining the same. Musawamah is the most common type of trading negotiation seen in Islamic commerce.

Bai salam
Bai salam means a contract in which advance payment is made for goods to be delivered later on. The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute. The objects of this sale are goods and cannot be gold, silver or currencies (these are “ribawi” items) based on these metals. Barring this, Bai Salam covers almost everything that is capable of being definitely described as to quantity, quality, and workmanship.

Understanding Mudarabah

One of the Islamic principles is that there should be no reward without risk-bearing. This principle is applicable to both labour and capital. As no payment is allowed to labour unless it is applied to work, so no reward for capital should be allowed unless it is exposed to business risks.

Consider two persons, one of whom has capital but no special skills in business, while the other has managerial skills but possesses no capital. They can co-operate in either of two ways:

1. Debt-financing (the western loan system). The businessman borrows the capital from the capital-owner and invests it in his trade. The capital-owner is to get back his principal and an additional amount on the basis of a fixed rate, called the interest rate, as his compensation for parting with liquidity for a fixed period. The claim of the lender for repayment of the principal plus the payment of the interest becomes viable only after the expiry of this period. This payment is due irrespective of whether the businessman has made a profit using the borrowed money. In the event of a loss, the borrower has to repay the principal amount of the loan, as well as the accrued interest, from his own resources, while the capital-owner loses nothing. Islam views this as an unjust transaction.
   
   
2. Mudarabah (the Islamic way, or PLS - Profit Loss Sharing). The two persons co-operate with each other on the basis of partnership, where the capital-owner provides the capital and the other party puts his management skills into the business. The capital-owner is not involved in the actual day-to-day operation of the business, but is free to stipulate certain conditions that he may deem necessary to ensure the best use of his funds. After the expiry of the period, which may be the termination of the contract or such time that returns are obtained from the business, the capital-owner gets back his principal amount together with a pre-agreed share of the profit.
   
   
   
   
   
   
   

The ratio in which the total profits of the enterprise are distributed between the capital-owner and the manager of the enterprise is determined and mutually agreed at the time of entering the contract, before the beginning of the project. In the event of loss, the capital-owner bears all the loss and the principal is reduced by the amount of the loss. It is the risk of loss that entitles the capital-owner to a share in the profits. The manager bears no financial loss, because he has lost his time and his work has been wasted. This is, in essence, the principle of mudarabah.

There are at least three reasons for considering the mudarabah relationship to be more just than the creditor-debtor relationship:

(i)  Both parties agree on the ratio in which profits will be shared between them.

(ii) The treatment of both parties is uniform in the event of loss, since if the provider of the capital suffers a reduction of his principal, the manager is deprived of a reward for his labour, time and effort.

(iii) Both parties are treated equally if there is any violation of the agreement. If the manager violates anyone of the stipulated conditions, or if he does not work, or is instrumental in causing loss to the business by negligence or bad management, he will have to bear the responsibility for the safe return of the whole amount in question. If, on the other hand, the provider of the capital violates any of the stipulated conditions, for example, by withdrawing his funds before the stipulated time, or by not providing part or full funds at the promised time, etc., he will have to pay the manager a reward equivalent to what he would have earned in similar work.

Mudarabah is the basis of modern Islamic banking on a two-tier basis.

1st tier: The depositors put their money into the bank's investment account and agree to share profits with it. In this case, the depositors are the providers of the capital and the bank functions as the manager of funds.

2nd tier: Entrepreneurs seek finance from the bank for their businesses on the condition that profits accruing from their business will be shared between them and the bank in a mutually agreed proportion, but that any loss will be borne by the bank only. In this case, the bank functions as the provider of capital and the entrepreneur functions as the manager.

Thus, under an Islamic banking system, the cost of capital is not analogous to a zero interest rate, as some people wrongly assume it to be. The only difference between Islamic banking and interest-based banking in this respect is that the cost of capital in interest-based banking is a predetermined fixed rate, while in Islamic banking, it is expressed as a ratio of profit.

Intro to Islamic Banking

Islamic banking refers to a system of banking or banking activity that is consistent with the principles of the Shari'ah (Islamic rulings) . 

While elimination of "Riba" or interest in all its forms is an important feature of the Islamic financial system, Islamic banking is much more. In essence, it aims to eliminate exploitation and to establish a just society by the application of the Shari'ah or Islamic rulings to the operations of banks and other financial institutions. To ensure compliance to the Shari'ah, Islamic banks use the services of religious boards comprised of Shari'ah scholars.

Islamic finance may be viewed as a form of ethical investing, or ethical lending, except that no loans are possible unless they are interest-free. Among the ethical restrictions is the prohibition on alcohol and gambling and the consumption of pork. Islamic funds would never knowingly invest in companies involved in gambling, alcoholic beverages, or porcine food products

Its practitioners and clients need not be Muslim, but they must accept the ethical restrictions underscored by Islamic values.

Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shari’ah, known as Fiqh al-Muamalat(Islamic rules on transactions).The principle source of the Shari’ah is The Qur’an followed by the recorded sayings and actions of Prophet Muhammad (pbuh) – the Hadith. Where solutions to problems cannot be found in these two sources, rulings are made based on the consensus of a community leaned scholars, independent reasoning of an Islamic scholar and custom, so long as such rulings do not deviate from the fundamental teachings in The Qur’an.

Page 221 of my 300 page auto biography...

I wrote this article for one of my interviews ...sharing it here....

"everyone burst into laughter. Hahahaha…..What a nice hairstyle I had….

As she was flipping through the pages of the album, a rush of nostalgia hit me that took me back in time. There were Posed class pictures that never quite came out the way they should have been. Pictures of the party that we had on the day when we started a new club in our college, pictures of the football match played with the Differently abled children of Deepalaya school, Pictures of Yasmeen, Pictures of me receiving an award from my first team lead, Pictures of the day when I was given the ‘best innovator’ award, Pictures when I felt satisfied donating money for education, Pictures of my first promotion, Pictures of the achievements on work.

Ooh!!! What a life it has been at various junctures. At 23, it was about getting placed. At 30, it was about playing with my little daughter who was growing up. At 36, it was about appreciating the progressive social context that India was encapsulated in.

At 45 today, it holds a very different meaning for me. Today, happiness means feeling worthy, responsible for having a job done, and done well at that, for having achieved more than I had aimed, for having made a difference to the lives of people around me. Despite all this, there is something missing. A gap I need to fill in. Having changed the fortunes of the companies I worked with, I guess I need to do something for the people now. A big day ahead. Tomorrow’s visit to  "

ended it abruptly because it's just one page and one page ends abruptly most of the times...:P

East Africa food crisis

Its been a long time since the last post....
.......
Anywayz....Read this new post on food crisis and i hope you will find it helpful in some or the other way....

East Africa Food Crisis :_

Read analysis of East Africa food crisis here 
....

Thank You and have a nice day...:)..

Connecting the dots between Taliban, Russia, USA , Afghanistan, Pakistan and Mujahideen......

Because of its strategic location, Afghanistan is seen as a springboard to the huge resources of oil and gas in Central Asia. 1973 military coup led by Soviet-backed Communists in the Afghan army ousted the last scion of the Durrani dynasty. The Soviet Red Army marched into Kabul in December 1978.

Soon after the invasion, the U.S., wary of Soviet expansionist designs, sold the ‘Islam-is-in-danger’ story to the Islamic World, especially Saudi Arabia and Pakistan. To further its goal of ousting the Communists from Afghanistan, the U.S. engaged the Saudi royal house and the Pakistani political and military establishment to wage a proxy war against the Soviet Red Army.

Pakistan ensured that America’s Central Intelligence Agency (CIA) channeled all weapons, purchased with Saudi money, through the Inter-Services Intelligence (ISI), which trained the Mujahidden from various countries. It was thus that during the Cold War, Afghanistan became a battle-ground for a ‘hot war’ between the world’s two superpowers, though the U.S. sought to fight its war making the Islamic Mujahidden its proxy.

Stirred, shaken, and finally, sapped by the zeal of the Mujahidden, the Soviet Red Army retreated from Afghanistan in 1989. The defeat of a superpower emboldened the Islamists to think in an entirely new way: with limited numbers and limited resources, a holy war could defeat the other superpower also.

As the war ended, the CIA abandoned Pakistan and Afghanistan without taking back the weapons in the hands of the Mujahidden

Birth of Taliban...

During the Soviet occupation of Afghanistan (1979-89), the civil war between the Red Army and the Islamists saw a constant tussle for control of Kabul. The warlords levied and collected taxes from road users passing through their “area”.

 In the summer of 1994, these road bandits stopped a convoy, just north of Kandahar. The convoy belonged to a wealthy and influential Pakistani who demanded that the Pakistani government intervene and secure the release of the captured convoy

The Pakistani government, which did not want to intervene directly, instead directed the ISI to seek the help of the radical Jamiat-e-Ulema Islam (JUI). The JUI ran everal madrassas (Islamic seminaries) where a large number of Afghan students (refugees who fled their homeland during the 1979-89 war) were enrolled. The JUI used these students to organise a local militia against the warlords, which had held the convoy to ransom.

About 2000 volunteers of the JUI, who called themselves ‘Taliban’, meaning ‘students’, freed the convoy after decimating the forces of the warlords. Flush with success, they pressed on and successfully captured Kandahar. The Taliban were given a rousing reception by the locals, who hated the local warlord for the misery he had inflicted on them. The Taliban’s impeccable behavior helped them gain a reputation for being honest and religious. At this time, the Taliban did not impose any of the harsh measures (like the imposition of a strict and ultra-orthodox Islamic code of conduct) for which it later gained international notoriety.

By the end of 1996, the Taliban had captured nearly 90 per cent of the country’s territory including Kabul.

The ousted warlords, mostly non-Pashtuns (unlike the Pashtun-dominated Taliban), joined hands to take on the Taliban. However, as they were left with control of only 10 per cent of the country’s territory, they set up base in the country’s north and hence the anti-Taliban grouping came to be called the Northern Alliance.

The Northern Alliance was lent support –military, diplomatic, and logistical – by Central Asian republics, which feared that the Taliban might sweep into their countries. India, mindful of an anti-India and pro-Pakistan government (read Taliban) in Kabul, also provided the Northern Alliance with the required ‘assistance’.

From then onwards, there is a constant war going on between Taliban and anti-Taliban Forces which all of us are aware of….

MDI Gdpi experience...

Gd topic :- Human activists : Do they work for the society or for their own benefit...
All the 10 members in the group gave some decent points..

Interview :-
M1(madam 1) : tell me about urself..
me :same old story ...


M2 stopped my story in between when i said i am a member of BAKG(business analysis knowledge group) and CSR groups in my company and said ..oh! that was the reason you were speaking that much in the gd....

everyone laughs...eheheh
(but they dont know that i have just enrolled myself formally for BAKG group ...did not attend any meet or any activity or anything :P)

M1:continue
me: blah blah blah...

M1:smthing about ur company and the work u do
me:blah blah blah...

M2:ur hobbies?
me: playing computer games..

M2:what do you get playing computer games..
me: (wasn't prepared for this question..)said about imagination involved in characters, artificial intelligence,explained how gaming is a complex thing from inside...

M2: No, tell us why do you play..what do you get..leave those technical and other stuff...
me: (???????????thought for a while...couldn't get any answer and then i said) it is like eating a chocolate

M2:(everyone confused) eating a chocolate?
me: yes..eating a chocolate energizes you so is playing the game...

everyone started laughing ...

M2:so do you think eating a chocolate energizes you ..it adds some excitement really
me: yes and explained something

then discussion on chocolate and what does it do....:)

end of the discussion ...

M2 : you can go

verdict : Selected.............:)

Stocks and Sensex Series- Article 2

After understanding what are stocks, now it is the time to understand Why do the companies issue stocks and Why do the stock prices move up and down…

Firstly let us understand Why do the companies issue stocks:-

The reason is that at some point every company needs to "raise money". To do this, companies can either borrow it from somebody or raise it by selling part of the company, which is known as issuing stock.

A company can borrow by taking a loan from a bank or by issuing bonds. Both methods come under "debt financing". On the other hand, issuing stock is called “equity financing”.

Issuing stock is advantageous for the company because it does not require the company to pay back the money or make interest payments along the way.

All that the shareholders get in return for their money is the hope that the shares will someday be worth more than what they paid for them. The first sale of a stock, which is issued by the private company itself, is called the initial public offering (IPO).

It is important to understand the distinction between a company financing through debt and financing through equity. When you buy a debt investment such as a bond, you are guaranteed the return of your money (the principal) along with promised interest payments.

This isn't the case with an equity investment. By becoming an owner, you assume the risk of the company not being successful - just as a small business owner isn't guaranteed a return, neither is a shareholder. Shareholders earn a lot if a company is successful, but they also stand to lose their entire investment if the company isn't successful.

There are no guarantees when it comes to individual stocks. Some companies pay out dividends, but many others do not. And there is no obligation to pay out dividends. Without dividends, an investor can make money on a stock only through its appreciation of the stock price in the open market.

On the downside, any stock may go bankrupt, in which case your investment is worth nothing. 

Why do the stock prices move up and down:-

Stock prices change because of “supply and demand”. If more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, if more people want to sell a stock than buy it, there would be greater supply than demand, and the price would fall.

Understanding supply and demand is easy. What is difficult to understand is what makes people like a particular stock and dislike another stock. If you understand this, you will know what people are buying and what people are selling.

To figure out the likes and dislikes of people, you have to figure out what news is positive for a company and what news is negative and how any news about a company will be interpreted by the people.

The most important factor that affects the value of a company is its earnings. Earnings are the profit a company makes, and in the long run no company can survive without them. It makes sense when you think about it. If a company never makes money, it isn't going to stay in business. Public companies are required to report their earnings four times a year (once each quarter).

If a company's results are better than expected, the price jumps up. If a company's results disappoint  and are worse than expected, then the price will fall.

Of course, it's not just earnings that can change the feeling people have about a stock. During the “dotcom bubble”, for example, the stock price of dozens of internet companies rose without ever making even the smallest profit. As we all know, these high stock prices did not hold, and most internet companies saw their values shrink to a fraction of their highs. Still, this fact demonstrates that there are factors other than current earnings that influence stocks.

So, what are "all the factors" that affect the stocks price? The best answer is that nobody really knows for sure. Some believe that it isn't possible to predict how stock prices will change, while others think that by drawing charts and looking at past price movements, you can determine when to buy and sell. The only thing we do know is that stocks are volatile and can change in price very very rapidly.

At the most fundamental level, supply and demand in the market determines stock price.There are many types of techniques and methods that investors use to figure out whether a stock price will go up or down. 

IMI gdpi experience..

Date : 25th march 2011
venue :Hyderabad

The first step was to write an essay then gd then pi..

essay topic: International trade barriers work (this is how it was ..same wording..)
 wrote against the topic ...saying it creates work..and supporting arguments from diff. scenarios....was ok..

Gd : one of us (group) was asked to come there and pickup a chit...on which topic would be writte...if we are not comfortable with the first topic then we can pickup another chit...for another topic..

We all agreed with the first topic...

Topic as heard by me : Judiciary system in India
we were given 5 mins to think...and a paper to note down our points...

I started the gd...was speaking continuosly...spoke for about 3-4 mins..was loosing on points...no one was interrupting me... then after 3-4 mins , one guy said "what u are speaking is correct but we are here to discuss about education system in India."

phew!!!!!!!!!!!!!!!!!!!!!

was shocked totally...ppl were shocked and so they were not interrupting me!!!!wow!!!

was totally blank...then that guy spoke for 2-3 mins on the education system...

as soon as he finished ...i took over again and this time i spoke on "education system " :) ...
From then onwards spoke around 5-6 times .....since i had a little research on education system.....

PI:-

dont remember the exact sequence of questions ....

i was asked on "tell me about urself", ur college,why mba(was grilled on this..for about 15-20 mins atleast)...about my performance in GD(??????) ...then asked me to go to Tiss or SPJAIN or other colleges which offer social entrepreneurship, then about my friend in IMI, how should IMI promote itself, what should it do....how much time do i spend online daily, what stuff do i read, what is going on in libya, what is no-fly zone, what will happen if someone imposes no-fly zone and if the other country doesn't follow, what do you think of US taking control of libya in the name of protecting its civilians, what if all the members of UNSC decide against manmohan singh and india and decide to attack...thats it..


Final Results Out on April 17th 2011(today)
Result : Converted

Series of articles about Stocks, Shares, Sensex....

First Article in this series:

Basics of Stocks:

A “stock” is a share in the ownership of a company. A stock represents a claim on the company's assets and earnings. As you acquire more stocks, your ownership stake in the company becomes greater. 

Holding a company's stock means that you are one of the many owners (shareholders) of a company and, as such, you have a claim to everything the company owns. This means that technically you own a tiny little piece of all the furniture, every trademark, and every contract of the company. As an owner, you are entitled to your share of the company's earnings as well. These earnings will be given to you. These earnings are called “dividends” and are given to the shareholders from time to time. 

A stock is represented by a "stock certificate". This is a piece of paper that is proof of your ownership. However, now-a-days you could also have a “demat” account. This means that there will be no “stock certificates”. Everything will be done though the computer electronically. Selling and buying stocks can be done just by a few clicks.    

Being a shareholder of a public company does not mean you have a say in the day-to-day running of the business. Instead, “one vote per share” to elect the board of directors of the company at annual meetings is all you can do. For instance, being a Microsoft shareholder doesn't mean you can call up Bill Gates and tell him how you think the company should be run.

The management of the company is supposed to increase the value of the firm for shareholders. If this doesn't happen, the shareholders can vote to have the management removed. In reality, individual investors like you and I don't own enough shares to have a material influence on the company. It's really the big boys like large institutional investors and billionaire entrepreneurs who make the decisions.

For ordinary shareholders, not being able to manage the company isn't such a big deal. After all, the idea is that you don't want to have to work to make money, right? The importance of being a shareholder is that you are entitled to a portion of the company’s profits and have a claim on assets. 

Profits are sometimes paid out in the form of dividends as mentioned earlier. The more shares you own, the larger the portion of the profits you get. Your claim on assets is only relevant if a company goes bankrupt. In case of liquidation, you'll receive what's left after all the creditors have been paid.

Another extremely important feature of stock is "limited liability", which means that, as an owner of a stock, you are "not personally liable" if the company is not able to pay its debts. In other legal structures such as partnerships, if the partnership firm goes bankrupt the creditors can come after the partners “personally” and sell off their house, car, furniture, etc.

Owning stock means that, no matter what happens to the company, the maximum value you can lose is the value of your stocks. Even if a company of which you are a shareholder goes bankrupt, you can never lose your personal assets. 

                                                     Series to be continued...:)

Policy Rates and Reserve Ratios

At first let us consider two similar rates – bank rate and repo rate. Bank rate is the rate of interest that commercial banks and other financial intermediaries have to pay on the loan that they take from country’s central or federal bank. Repo rate is similar to bank rate except that it is applicable to short term loans while bank rate is applicable to long term loans. In India Reserve Bank of India (RBI) is central bank. Suppose that bank rate in India is 5% which means that if a commercial bank takes a loan of 1 million rupees from central bank then it has pay 5% of 1 million i.e. Rs. 50,000 as the interest. Reverse repo rate is the counterpart of repo rate. It is the rate of interest commercial banks and other financial intermediaries receive on excess funds they deposit with the central bank. Now suppose the commercial bank deposits 1 million rupees in central bank with reverse repo rate being 5% then the commercial bank will receive Rs. 50, 00 as interest on their deposit. The three above mentioned rates are also referred to as policy rates.


Cash reserve ratio(CRR) and statutory liquidity ratio(SLR) are reserve ratios which put a limit on the minimum amount of reserve that commercial banks and other financial intermediaries are required to keep in central bank. CRR is the percentage of their total deposits that the commercial banks have to keep in central bank in form of cash. SLR is similar to CRR except that apart from cash other liquid assets like precious metals such as gold and approved short term securities like treasury bills may be used to meet the reserve requirements. A better understanding of reserve ratio will be possible after going through the example provided below. Assume that the CRR and SLR are 6% and 20% respectively and a commercial bank has a total deposit of 10 million rupees with itself. Now the bank has to keep 0.6 million rupees in cash as a deposit with central bank and make a net deposit of 2 million rupees in form of liquid assets with the central bank.

The RBI reviews these rates and ratios on a monthly basis with intent to keep a check on money supply and inflation rate in economy. In order to increase the supply of money in economy RBI may decrease its policy rates and reserve ratios. The decrease will have the combined effect of increasing the deposits available with the commercial banks which may be offered as loans to general public thereby pumping money into the economy. The current value of these ratios and rates can be found at http://www.rbi.org.in/home.aspx

Lokpal Bill and Anna Hazare...

• What is Lokpal and what is the controversy surrounding it?

Lokpal is an independent body to enquire into the lapses and complaints against legislators, including members of Parliament.

The global Corruption Perception Index has put India at the 87th place out of 178 countries, showing the country slipping from the 84th position in 2009. The result is that India has 100,000 billionaires and 8.7 crore families (a minimum of 40 crore people) living below the poverty line.

The Central Government has at last proposed the Lokpal Bill 2010, but unfortunately it fails even to be a cosmetic exercise to fight corruption.

The Lokpal is a three-member body consisting of the chairperson, who is a former Chief Justice or a judge of the Supreme Court and two members who are have been judges of the Supreme Court or High Court Chief Justices. 

The jurisdiction of the Lokpal under Section 10 apparently covers the Prime Minister, ministers and members of Parliament. But hypocrisy is exposed when at the same time it nullifies the same by providing that the Lokpal shall not enquire into any allegations of corruption against any member of either House of Parliamentunless the recommendation of Speaker or the Chairman of the Council of States, as the case may be, is received by it. 

Not only that, but insultingly after the enquiry and even when the Lokpal finds that any of the charges have been proved against members of Parliament, all he can do is to send a report of his finding to the Speaker and Chairman of the Council of States, and they alone will determine what action is to be taken — obviously it may include rejecting the report of the Lokpal.

The government is treating the members of Parliament like sacred idols in a temple who cannot be touched by the Lokpal, but only by the Brahmanical priesthood of co-legislators, who will decide finally. This reduces the authority of the Lokpal to worse than a lower-level magistrate whose order has to be complied with by even the highest in the land, including the President.

The Lokpal under Section 11 is forbidden to enquire into any memo of complaint if it is made after the expiry of five years from the date when the offence is alleged to have been committed.

Also, has the UPA government considered that if a five-year period were to be provided, then by the same logic, would they not be barred from holding an enquiry into the 2G spectrum scam of 2001-02 during the BJP-led government (which, by all standards, should be held along with the enquiry into the 2G scam against former minister A. Raja) ? 

Read the Full article here

• Who is Anna Hazare and what is he demanding?

Anna Hazare , is an Indian social activist who is especially recognized for his contribution to the development of Ralegan Siddhi, a village in Parner taluka of Ahmednagar district, Maharashtra, India and his efforts for establishing it as a model village, for which he was awarded the Padma Bhushan by the Government of India in 1992.


On 5 April 2011, Hazare started a 'fast unto death' to exert pressure on the Government of India to enact a strong anti-corruption act as envisaged in the Jan Lokpal Bill, a law that will establish a Lokpal (ombudsman) that will have the power to deal with corruption in public offices. The fast led to nation wide protests in support of Hazare. The fast ended on 9 April 2011. All of his demands of the movement are agreed by the Government of India and Government issued a gazette notification on formation of a joint committee headed by senior minister Pranab Mukherjee to draft an effective Lokpal Bill


Source : Wikipedia

Creation of New States :-

Background(w.r.t. Telangana)

When India became independent, Telugu-speaking people were distributed in about 22 districts, 9 of them in the former Nizam's dominions of the princely state of Hyderabad, 12 in the Madras Presidency (Andhra region), and one in French-controlled Yanam. In December 1953, the States Reorganization Commission was appointed to prepare for the creation of states on linguistic lines. 


The States Reorganisation Commission (SRC) was not in favour of an immediate merger of Telangana region with Andhra state, despite their common language. SRC said “opinion in Andhra is overwhelmingly in favour of the larger unit; public opinion in Telangana has still to crystallize itself”. The people of Telangana had several concerns. The region had a less-developed economy than Andhra, but with a larger revenue base (mostly because it taxed rather than prohibited alcoholic beverages), which people of Telangana feared might be diverted for use in Andhra.  It was feared that the people of Andhra, who had access to higher standards of education under the British rule, would have an unfair advantage in seeking government and educational jobs.

Prime minister Jawaharlal Nehru initially was skeptical of merging Telangana with Andhra State, fearing a "tint of expansionist imperialism" in it. He compared the merger to a matrimonial alliance having "provisions for divorce" if the partners in the alliance cannot get on well.

Following the Gentlemen's agreement, the central government established a unified Andhra Pradesh on November 1, 1956.In the years after the formation of Andhra Pradesh state, the people of Telangana expressed dissatisfaction over how the agreements and guarantees were implemented. Discontent intensified in January 1969, when the some of the guarantees that had been agreed on were supposed to lapse. Student agitation for the proper implementation of the agreement began at Osmania University in Hyderabad and spread to other parts of the region

Due to agitation in the Seema-Andra region in 1973 protesting the protections for Telangana, the central government diluted the protections in Gentlemen's agreement by initiating the Six point formula.,which was an agreement to avoid such agitations in future.

IN 2000, New states Chattisgarh, Jharkhand and Uttaranchal were created and Telangana was not created (bcoz of the stiff opposition from the then ruling party In Andhra Pradesh(TDP) and as a result TRS party was formed.

And after the death of the CM YS Rajashekhara Reddy and protest unto death of TRS leader Chandrasekhar Rao ,the protests have been started again and continuing still.

 

Why do the people demand for creation of new States

1)Identity Crisis:- They feel they are do not have their separate identity and are not getting the proper recognition.

2)In case of larger states. Govts concentrate on core market areas and many of the other regions in the state are not competitively developed compared to some cities

3)Employment oppurtunities:-

When ppl feel that people from other regions are getting the jobs what they deserve

Ex:-Telangana

4)To Assume Political leadership:-

---->Why shouldn’t there be any more new states:-

1)Growth of Naxalism and Maoism

Ex: Condition of Naxalism and Maoism because of underdevelopment in Chattisgarh and Jharkhand created in 2000

2) Unnecessary duplication of Resources available. There has to be creation of separate assemblies, allocation of funds to the new states etc etc

3) Splitting of the powers of center. Loss of national integrity

4) Ex president KR Narayanan in his book “dimensions of federal nation building” argues that strngest democratic country is the one with the strongest centre. So, splitting the centre would decrease strengths of central government

5) There are many conflicts between the already existing states. Ex : Conflicts between the Ap and Karnataka, Ap-tamilnadu over Cauvery water and almatti dam . Creation of new states would further increase the conflicts

6)Meghalaya was created on ethnic basis but still there are conflicts between khasi and ghairo tribes

7)76% revenue of Andhra Pradesh comes from Telangana . so Telangana is not an underdeveloped region

8)sri Krishna committee report solutions and comments are also not in favour of Separate State

Read all the solutions suggested by the report here :

http://www.indianexpress.com/news/telangana-report-srikrishnas-6-options-and-comments/734150/0

9) Giving a separate Telangana would increase the demands for creation of some more states

Nuclear "Leaks" in INDIA ....

Mishaps At Nuclear Plants in INDIA

• 1987 Kalpakkam, Tamil Nadu Refuelling problem in fast breeder test reactor damages the reactor’s core. Plant shut down for two years.
• 1989 Tarapur, Maharashtra Radioactive leak from reactor. Repairs take over a year.
• 1992 Tarapur, Maharashtra A malfunctioning tube causes a leak of 12 curies of radioactivity
• 1992 Kota, Rajasthan Fire in 4 pumps threatens cooling system
• 1993 Bulandshahar, UP Fire in steam turbine at the Narora Power station damages the heavy water reactor
• 1994 Kaiga, Karnataka Dome collapses while under construction
• 1999 Kalpakkam, Tamil Nadu Four tonnes of heavy water leaks, exposing workers to radioactivity
• 1999 Tarapur, Maharashtra Tube failures result in de-rating of the reactor
• 2001 Kota, Rajasthan Turbine blade failures, cracks in end shields, leaks in the moderator heat exchanger.
• 2009 Kaiga, Karnataka 50 workers fall ill after drinking water contaminated by tritium, a radioactive isotope of hydrogen.

Case Against N-Power

• Critics say nuclear power is the most dangerous. The risk of an accident cannot be ruled out.
• Storing and treating nuclear waste is tricky
• Radioactive material from plants can be used for weapons
• N-power plants run on uranium, supplies of which may be limited

And For It...

• It is a viable "green"alternative to fossil fuels. It’s also environment-friendly.
• With limited energy resources the world needs nuclear energy
• Strict safety norms can ensure there are no accidents at plants

Prime Minister Manmohan Singh has ordered an immediate technical review of safety systems at India’s nuclear plants, while mandarins and scientists from the Indian nuclear establishment have scrambled to dispel worries among the public of any likelihood of an emergency. But concerns had been gaining solidity after deals to set up mega N-power plants were finalised with the Americans, the French and the Russians recently. With international collaboration, India aims to boost its present production capacity of nuclear energy from 4,780 megawatts to 63,000 in about two decades. However, many are apprehensive since some of these new individual plants have combined generation capacities of 10,000 MW, compared to the few-hundred-MW ones presently in operation. Worse, the sites chosen for setting them up are often in zones officially designated as earthquake-prone and potentially vulnerable to tsunamis.

There haven’t been major accidents so far, but several small mishaps repeatedly put claims of safety at Indian nuclear plants under scrutiny. In August 2003, leakage at a nuclear reprocessing plant at Kalpakkam exposed six workers to harmful radiation. Likewise, in November 2009, around 50 employees at the Kaiga power plant in Karnataka were exposed to radiation when they drank water from a contaminated cooler. And last May, in a major accident, one scrap dealer died when radioactive material (Cobalt-60) from a Delhi University lab ended up in Mayapuri, a Delhi market for metal scrap. It was a violation of the law that says all radioactive material ought to be disposed of safely under supervision from the Atomic Energy Regulatory Board.

Among the nuclear power plants on the anvil is the one at Jaitapur, coastal Maharashtra. It will house reactors from the French firm Areva and shall have a combined capacity of 10,000 MW. But in 20 years, as many as 92 quakes have been recorded here, with the severest of them  in 1993 measuring 6.2 on the Richter scale. The region is officially seismically marked as Zone III—Zone V being the worst category

Even people who have earlier been with the nuclear establishment are raising concerns. P.K. Iyengar, former chairman of the Atomic Energy Commission of India, says Indian nuclear scientists have indeed successfully built and operated pressurised heavy water reactors under the size of 400 MW, but that the new imported ones involve “untested” technologies and are of much larger scales at 1,600 MW. “My advice to the government would be to not jump into 1,600 MW reactors from just 400 MW and place six of these together in one spot that is exposed to possible earthquakes and tsunamis. This raises several safety infrastructure requirements that have to be properly evaluated,” he says.

Recent events in Japan have indeed shaken the faith of many who pray at the altar of nuclear energy. In an article for a business daily, even Shyam Saran, who was India’s top negotiator for the Indo-US nuclear deal, has said the “nuclear renaissance” could be dead if effective corrective measures are not taken up jointly by countries like India, China and Japan, where growth in nuclear energy generation is supposed to be among the highest. “The three countries should take the lead to follow up on their initiatives (promised at a Washington meet in 2010) and establish a collaborative effort to ensure the safe and less risky development of nuclear power in the 21st century.” The fate of nuclear renaissance, as Saran argued, may well now depend upon the success of their efforts.

Source :- Outlook India Magazine

Numbers in Budget-Analysis...

Projected improvement in the fiscal deficit -- 4.6% of gross domestic product (GDP)

What Does Fiscal Deficit Mean?

When a government's total expenditures exceed the revenue that it generates (excluding money from borrowings). Deficit differs from debt, which is an accumulation of yearly deficits.

Now, consider these facts to show how unrealistic this is....

Growth in total expenditure is projected at 3.4% for 2011-12, compared with 18.7% growth in 2010-11. Since the budget assumes that nominal GDP will increase by 14% in 2011-12, growth in government expenditure is far below the increase in nominal GDP. Given the government’s track record, curbing expenditure to such an extent is extremely unlikely.

The finance minister says that subsidies in 2011-12 will be lower by Rs. 20,583 crore than the amount spent on subsidies in the current fiscal. Though oil prices are high, the petroleum subsidy is lower by almost Rs. 15,000 crore. Although the government plans to introduce a right to food Bill, it has kept the food subsidy figure flat. Even the fertilizer subsidy is budgeted at a lower level. Apart from subsidies, guess how much this government for the ‘aam aadmi’ is spending under the head “social security and welfare”? Budgeted expenditure is Rs. 3,401 crore in 2011-12, while they spent Rs. 18,427 crore this fiscal. Either the ‘aam aadmi’ tag is hot air, or the numbers are bound to go up.

What about capital expenditure? The outlay for total capital expenditure in 2011-12 is lower than in 2010-11, but the finance minister says that part of the revenue expenditure is for the creation of capital assets. Taking that into account and after adjusting for capital expenditure on defence, the rate of growth in capital expenditure works out to 23.5%, which is good. Unfortunately, the budget does not give the amount of grants for creation of capital assets in 2009-10, so we do not know what the growth rate has been this fiscal and whether the projected growth rate is achievable. Interestingly, the increase in total capital expenditure, without taking the grants for creation of capital assets into consideration, was a huge 44.6% in 2010-11. By that reckoning, although the 23.5% growth looks impressive, it’s actually quite a deceleration from government capital expenditure in the current fiscal.

Consider also that, in spite of such a huge growth in government capital expenditure in the current fiscal, the trend on gross fixed capital formation this year hasn’t been encouraging. According to the third quarter GDP numbers, growth in gross fixed capital formation has been decelerating steadily—it was 25.7% in the first quarter, 17.8% in the second and a mere 6% in the third quarter.

On the receipts front, the projection of growth in tax revenue for 2011-12 is 17.9%, well below this fiscal year’s growth of 23.5%. With a nominal GDP growth of 14%, that should be achievable.
The rally in the markets on Monday was, therefore, a relief rally, relief that the finance minister has, at least, done no harm. As the heroic assumptions behind the budget projections for 2011-12 sink in, even the relief may fade away.

Why it's too soon to give Brazil and India permanent seats on the U.N. Security Council.

BRIC countries, Brazil, Russia, India, and China, have grown more and more influential in the world economy, their administrators and myriad pundits have inevitably concluded that they and other rising powers should also become more important actors in global politics. The insistence by Brazil and India for permanent seats on the United Nations Security Council, a similar push by China and Brazil for a greater say on climate change talks and on IMF and World Bank voting shares, and a greater voice for South Africa in all of these arenas are just a few examples of the BRICs' growing boldness.

But the emerging powers are not ready for prime time. And never has this been clearer than now, with revolution sweeping the Middle East. It is the traditional powers in the West that will determine the international response to this crisis -- not because they are favored by global institutions, but because their word is backed by military and diplomatic weight. In contrast, the world's rising economies lack the ability -- and the values -- to project their power on the world stage.

Let's back up a bit. By now, the growing economic clout of the new regional powers is indisputable. Their political strength, however, is less obvious. And more importantly, their entry into the halls of world governance would not necessarily strengthen the developing international legal regime. These new powers lack the same commitment as the older ones to supranational institutions and universal values such as human rights, the collective defense of democracy, a robust climate change framework, nuclear nonproliferation, and so forth.

But in recent discussions about what should be done in Libya -- as well as in other potential trouble spots in the Arab world -- yet another weakness is laid bare. In addition to generally not wanting to intervene on humanitarian grounds or in defense of democracy or human rights, the "new powers" lack … power. Despite China's and Brazil's military and naval buildup, and India's and Pakistan's possession of nuclear weapons, they still lack the ability to project power the way that countries such as France and Britain can when NATO or the U.N. Security Council so decide. One can agree with such interventions or oppose them, but at this juncture only countries such as these and the United States have the wherewithal to actually do something in crises such as Libya.

The real issue remains that only the United States, France, and Britain really count in the Arab world crisis. Only the U.S. military was able to nudge the Egyptian Army into edging Hosni Mubarak out of power (obviously thanks to the popular movement in the street, but Qaddafi has shown that jasmines and chants are not sufficient). Only the French government, after much hesitation and several false starts, was finally able to convince Tunisian ruler Zine el-Abidine Ben Ali to leave, and largely because the military abandoned him. And if a no-fly zone is imposed or a humanitarian intervention does take place in Libya, only the United States and NATO will be able to enforce it.

All of which brings us back to square one. The emerging economies may catch up with the older, more developed ones sooner than expected. And they are certainly insistent on conquering the political equivalent of their economic surge. But for the moment, they lack the necessary commitments to the liberal order as well as the ability to project their rising power. Are the new powers willing to fully accept and contribute to the evolving international legal regime on issues such as human rights, collective defense of democracy, trade, climate change, or nonproliferation? Are they committed -- even if Washington is not -- to the International Criminal Court, the Doha round of trade talks, the U.N. Human Rights Council, the International Atomic Energy Agency, and new, more enlightened stances by the IMF and World Bank? Can they eventually begin to assume their responsibilities in U.N. peacekeeping operations (Brazil and India have; South Africa and China are beginning)?

Given the progress that has been made in recent months, scant as it may be, it would seem that a virtuous, non-Faustian pact may be struck with the emerging powers: a seat at the table in exchange for a full-fledged commitment to the agreements, covenants, and deals cut before they arrived, regardless of recurrent noncompliance with all of these structures by the countries that originally created them. The more China, India, Brazil, South Africa, Mexico, Pakistan, and others meet these standards, the more welcome they should be to the inner councils of world governance. Next year, Mexico will chair the G-20 for six months: This will be a fine opportunity to see whether the emerging powers are finally coming of age.

source :- foreignpolicy.com