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Capital Edge: July-Aug 2010
Capital Edge: July-Aug 2010
CAPITAL EDGE
Finance Newsletter
September 2010
July-Aug 2010
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From the Editor’s Desk
Greetings to every reader/non reader/skimmer/scanner. We at FINesse , The Finance Club
of SIIB are proud to present your fortnightly newsletter- CAPITAL EDGE.
Capital Edge is your update on the latest financial news and views. We intend to appeal to
those who are well versed in Finance and those who wish to learn more of Finance.
This volume consists of a glimpse into the proposal of Basel III norms, a look into Fraud
Examination and Value Investing.
We have incorporated Heard on the Street, the analysis of the stock market for this week.
Win with Fin our regular quiz is back this week with mind boggling questions. The person
who responds first with the correct entries will get their name published on the notice
board as well as in the next issue of the newsletter.
We ourselves are undergoing a trial by fire with Finance, any mistake, error and faux pas in
the newsletter is deeply regretted. We would like you to provide us with your suggestions
and comments by mailing us at siib-finance-club-2010-12@googlegroups.com .
Rahul Dey
This issue of Capital Edge is brought to you by FINesse-The Finance Club of SIIB
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Fraud Examination
After some big-wig bankruptcies in U.S. the need of forensic Accountants were realized
in States .In India too After the economic liberalization of the 90’s the number of
financial scams surfacing have grown considerably be it the Harshad Mehta’s scam,
Ketan Parekh’s Scam, Telagi’s stamp scam or be it the recent Satyam Scam this have
paved the way for forensic Accountants in India also. The Job of the forensic
Accountant is to examine various entities for possible Frauds
1. Fraud detection
2. Fraud Investigation
3. Fraud Prevention
There is a very thin line between fraud detection and fraud investigation, basically
fraud detection process is carried out by the auditor, fraud investigation is the task of
law enforcement agencies like police department in India and the prevention is the
work of management.
Forensic Accounting: If you are concerned about financial frauds and discrepancies u
need more than just an accountant, Forensic accounting is a combination of the
accounting, auditing and investigation skills. Forensic Accounting area is a specialty
practice area of accounting that describes engagements, which result from real or
anticipated litigation. These engagements mainly fall into one of these 3 categories:
economic damages, frauds in accounts or inventory or business evaluation. Forensic
Accounting is a very broad area, while fraud examination is merely a small subset of it.
A fraud examination is an area which is considered to be the monopoly of Chartered
Accountants because of the nature of expertise it needs in accounting it is considered
to be some challenging job among the CA’s however very few organization has fraud
examination as separate practice. However some of the national CA companies do
provide these services but mainly the area is dominated by big Consultancy firm like
Deloitte, KPMG, PriceWaterHouseCoopers and Ernst & Young.
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There are 3 or 4 Government agencies also which are dedicated to combating the
fraud
SFIO : Serious fraud Investigation Office is the dedicated division of the department of
Company Affairs, which looks into the frauds that involves violation of multiple laws
such as Income Tax and RBI act.
CBI: Central Beauro of Investigations has its specialized wing to take on financial
frauds and is being called economic offenses wing.
CVC: Central Vigilance Commission is the body which handles crucial part of the
occupational frauds i.e. corruption. it also helps in resolving banking frauds.
Nature of frauds is changing worldwide and everybody is worried about the crimes
committed with the help of Technology because with the rise in technology for frauds
the challenges for the fraud examiners are bound to grow by leaps and bounds.
By Vinay Prabhakar
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Basle III Norms
After a 6 year hiatus, the Bank of International Settlements (BIS) will be making its
presence felt once again in the banking world. After Basel I and Basel II accords, BIS
has decided to bring out an update which will make banking less volatile to crisis, this
will be in the form of Basel III norms. The draft has already been proposed and the
Basel III norms will be further discussed and ratified at the G-20 summit in November
at Seoul, South Korea.
These norms are being deliberated due to the recent Global Financial Meltdown when
banks did not have enough capital to cover the risk. The G-20 wants to set aside capital
with higher proportion in common stock or retained earnings. This is being done
simply to avoid another financial catastrophe. The BIS has thus proposed stricter and
more prudent rules to govern banks.
1. Increasing Tier 1 and Tier 2 Capital,and eliminating Tier 3 Capital. Banks must hold
4.5 % by January 2015 (proposed) and a further 2.5 % totalling 7%.
2. Strengthen risk coverage of capital
3. Introduction of a leverage ratio to safeguard against overleverage.
4. The suggestion to build up buffer capital in harmonious times which can be used to
fund activities and cover losses during times of financial crisis.
5. Protecting the banking sector from periods of excess credit growth
6. The Basel Committee is further introducing a 30 day liquidity coverage ratio for all
banks which are active globally.
The Basel III proposal has polarised banks and the BIS on two opposing sides. The BIS
wants prudency while the banks believe that such rules will only hamper economic
growth. The Basel Committee is using Basel III as a launchpad to bring back financial
health to the bank sector, its aim is to get banks to wean themselves off short term
funding. The surprising aspect is that banks themselves should not have much to
complain of regarding capital as most European and American banks have raised their
minimum capital after the crisis. BIS wants to keep in check those banks which are
below the average on standards of capital. The BIS will have to concede on 2 points- 1.
Banks will be advised to cut their reliance on short term funding and 2. Banks to
implement Basel III norms by 2012, which seems an unrealistic target.
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How will this impact Indian Banks ?
Indian banks have not been exposed to financial risk as much as their American and
European counterparts. The Indian economy has been strict and does not allow high
risk ventures, such as Hedge Funds. The Indian Banking sector is thus protected yet the
potential for growth is very high if some rules were relaxed.
RBI Governer D. Subbarao stated that at the end of June 30, 2010, the aggregate
capital to risk-weighted assets ratio in the Indian banking sector was at 13.4%, of which
Tier-I capital constituted 9.3%. He believes that Indian banks will not be overly
stretched to maintain a higher capital level. The only hindrance to growth could be the
fact that some deductions would be shifted from Tier I and Tier II Capital to common
stock.
I request the readers to mail in their opinions, findings and suggestions regarding Basel
III norms to me - rahuldey1@gmail.com.
By Rahul Dey
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VALUE INVESTING
“Investment is most intelligent when it is most business-like”
When Benjamin Graham told this basic principle to a class of Columbia Business
School, nobody has thought that his new investment strategy would become biggest
wealth-churner investment strategy of all times. And nobody has thought that many of
his students would become billionaires using this strategy; with one of them becoming
the 2nd richest man in the world.
What Benjamin Graham introduced to his class in the summer of 1928 is the
cornerstone of wealth generation, that is, Value investing. It is an investment strategy
which is based on getting “Margin of safety” and using it to your advantage. Margin of
safety is the difference between the intrinsic value of a share and its price in the
market. Again intrinsic value is the “real value” of the stock determined by
fundamental analysis of the company.
Value investing thus involves buying a share whose market price is lower than the
intrinsic value of the stock with a sure-shot gain whenever the market “discovers” the
stock and price the stock at its real value or intrinsic value. Intrinsic value provides a
safety in the investment because a stock cannot fall drastically in the market from its
intrinsic value.(As the adage goes “you can’t fall of a ditch”).
So there is only one way and, that is, the price of stock will go up. Therefore, there is a
great deal of certainty in this strategy.
Sooner or later market does place the stock to its real value and whenever this
happens a value investor makes a profit owing to the low buying price of the stock.
Intrinsic or fundamental value of a stock is determined by looking at the fundamentals
of the company i.e. whether the stock trades at discounts to book value, have high
dividend yields, have low price-to-earnings ratio or low price-to-book ratio etc.
Returns from Value investing has surpassed even the growth investing in last decade
and it is said to be one of the safest investment strategy in the world.
BY Sumant Bhatnagar
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Fin Headlines
Hike in interest rates by RBI put economy in comfort zone
In a bid to continue to its fight against inflation, the Reserve Bank of India (RBI) has increased the
interest rates. It raised the repo rate by 25 basis points to 6% and the reverse repo rate has been
raised by 50 basis points to 5%.This hike in interest rates will result in a rise in cost of funds for the
banks and eventually makes loans expensive, which will reduce consumption.
The telecom network in India has reached a landmark by becoming the second largest network in the
world. The total subscriber base in India is over 670 million as of July 2010. This took the overall tele-
density in the country to 58 %.
Gold prices retreat from record; silver may break 30-yr record
Gold retreated from record highs, as a firmer dollar tempered the momentum, although concerns about
further quantitative easing in the United States cushioned prices.
Andrew Ross Sorkin on Lehman, the Crisis and How Pride Led
to the Fall
In the two years since crisis gripped the financial world, surprisingly little has changed. In those
perilous days in September, 2008, Lehman, Merrill Lynch and AIG fell like dominoes, and it seemed
Goldman Sachs (GS) and JPMorgan Chase (JPM) might be next. Any American family with money in
the bank or investments in a 401(k) had to wonder if their financial security was imperiled.
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RBI to review its policy today, to hike 25 basis points
For the first time, RBI is conducting a mid-quarter review of the monetary policy
and everyone, right from the bankers to the market are expecting the central
bank to raise the main policy rates by 25 basis points. The interest rates are
expected to hike for the fifth time and it is seen as a move to control inflation.A
25 basis points hike would take its repo rate to 6 per cent and the reverse repo
rate to 4.75 per cent
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Heard On The Street
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Win with Fin
1. Which company dragged P&G to court over shampoo ad issue?
2. Which bank approched finance ministry for raising 20K crore?
3. How many Indian companies are listed in the 50 biggest Asia-Pacific
companies?
4. Recently Carin Energy Plc asserted that it has no differences with
Government of India and they mentiioned one more company. Name the
other company name they mentioned?
5. Blackberry announced thar it won’t intercept one of their services as asked
by government of India for their services in the country. Which service is
that?
6. Which company (investment bank) has been sued over gender bias?
7. USA moved WTO against which country?
8. How much money did US Senate passed for small business credit measure?
9. Which organisation suspended green nod to Vedanta’s bauxite mining
company?
10.Which company CEO gets more than Microsoft’s Steve Ballmer?
By Manish Sonowal
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FINesse
Our team consists of :
1. Rahul Dey
2. Vinay Prabhakar
3. Adarsh Kumar
4. Manish Sonowal
5. Sumant Bhatnagar
6. Mohit Jindal
7. Tushar Agarwal
8. Ankur Rastogi
9. Priyam Narayan
10. Lam Zoulian
11. Shshank Jain
12. Kunal Ohre
Email us at siib-finance-club-2010-12@googlegroups.com
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