A FICTION: NOT FAR AWAY FROM RECENT FUTURE REALITY

In late evening, when I had just pressed the shut down button of my workstation, a colleague of mine entered the office chamber (Officially allotted to me to work).Hello, was the first word uttered out by her and before I could ask the purpose, she herself expressed that she planned to have my company while walking back to home, at least the part of distance that was common to we both. I welcomed the idea and also thanked her for the same. Thus the journey homewards started. While on walk the momentary silence was done away by my colleague, when she requested the permission to ask question that was coming to her mind. I agreed to help her to the limited capacity of mine.

 Probably it was the prices of yellow metal that were troubling her and my colleague wanted to know, where the prices are expected to move in future and why. This I am inferring from the talks that continued.

She started the conversation by posing her curiosity as ahead: “Where do you see the price of gold going in the days to come?”

Since, at that moment, I was not exactly focusing on ‘investment advisory’, so I responded by saying that “on a broad level, the price are supposed to continue their northward journey.”

It seems that my response confused her a bit, as she soon came up with another question that “what I mean, when I say a broad level.”

I got the point and then explained to her that “the prices of any commodity do not move in a straight line. When I say on a broad level, it means that the prices will keep moving northwards, but in between they may drop as well, but they will pick up again, and thus will continue to scale up.”

It seems, that she was not ready to buy anything that I said, therefore, she questioned that what lay behind my confidence, which she visualized while I was answering her first curiosity.

Suddenly I realized that majority of investors; rarely scan the external and vital economic variables that are often of political nature. This made me aware that now I need to go bit detailed and also in a manner that she could easily comprehend.

“Well, I was just reading through some material and I realized that there is another solid reason for gold prices to go up,” I told her.

“Is it something other than all the money printing that is happening and is likely to happen in the days to come, all around the world?” she asked.

“Yes”, I answered.

“So what is this new reason?” she was now more curious.

Now I started by posing a question as ahead “Ever heard of Hugo Chavez?” Pat came the reply, “nope” with a supplementary question that now who’s he?

“He is the President of Venezuela, a country in South America.”                                

Probably she got a bit more confused and said that she knew that, but expressed her surprise on the issue that what “Venezuela” has got to do with the price of gold.

This made me aware that now my job was to explain history, international polity, and international trade, cost of transaction and accounting to her, and all this in very limited time of few minutes. I knew that I may be bombarded with whorls of questions.

 I started with letting her know that Venezuela has the 15th largest gold reserves in the world amounting to 401.1 tonnes. A lot of this gold is lying abroad in banks in New York, London and Zurich.

“But why will a country keep its gold overseas?” she interrupted.

 I started to introduce her with history. I said that “a part of the reason comes from history. Till August 15, 1971, the world was on a gold standard. Paper currencies were ultimately convertible into gold. This meant that countries had to settle their deficits in gold.” I followed this by giving an instance from international trade. I asked her to assume that England and Germany are exporting and importing goods from each other. At the end if France exports more to England than England to France, there is a deficit.” This means that England had to pay France. This payment was to be made in gold. A look at her face made me feel that she has now started picking up what I was attempting to explain. I carried on by adding that “now this meant that gold had to be physically moved from England to France, which of course was a pain. Movement meant cost of insurance as well as security.”

She was prompt in asking that “what was the way out?”

 I added for these reasons “a lot of this gold is simply stored overseas at the Federal Reserve Bank of New York (a part of the Federal Reserve of the United States, the Central Bank of the US).”

“How do you think this is going to help?”

It’s simple; I added and just narrated what Peter Bernstein writes in his book “The Power of Gold”. For example, if England lost gold to France, a guard at the Federal Reserve had merely to bring a dolly to England’s closet, trundle the gold to the French closet, and note the change in the bookkeeping records.’

She got the point, and allowed my request to take her back to Hugo Chavez.

The deliberations continued further, certainly with some statistical inferences. Estimates suggest that nearly 211 tonnes of the 400-odd tonnes of gold that Venezuela has are with banks abroad. Chavez has asked this gold to repatriated back to Venezuela.”

Now this brings a twist in the story, and the discussion to follow will also attempt to answer possible reason for Hugo Chavez’s such an act.

 ”Chavez has had an anti-US stance for years and may feel that because of that Venezuela runs the risk of its gold being seized.”

“Gold Seized? Why would such happen and does the possibility of such an act exist?” was the latest in series of questions.

“It sure is. I explained the same by making her aware of the ongoing Libyan foreign exchange reserves crisis, which happens to be an outcome of its foreign reserves being seized by allied nations with declaration of war earlier this year.”

 “But what has all this got to do with the price of gold? To me it’s as simple as me wanting to have gold in my own locker rather than the bank locker.”

I agreed to her statement, while continuing to explain by adding that all is not that straightforward as concluded by her, though to some extent she was correct. The straight forward part of transaction would be limited to 99 tonnes of total 211 tonnes lying abroad, as this 99 tonnes are deposited with the Bank of England in London. Repatriating that back to Venezuela would be a straightforward process.”

 Now comes the not so straight forward part, which happens to be of the tune of 112 tonnes of the gold and same is lying abroad with what are known as bullion banks. J P Morgan is one of them. Estimates suggest that Venezuelan gold worth $807 million (or around 450,000 ounces of gold) is lying with it.”

 She was instant, and argued that this should also be as straight forward as it is in the case of Bank of England, London, while simultaneously her facial expressions conveyed me that she wanted to know, if I dare to differ from her opinion. Certainly, I had to differ, and added that things are not always as simple as they seem to be. The statistics again came handy in quoting that “estimates suggest that the total amount of physical gold with J P Morgan currently stands at around 338,303 ounces (1 troy ounce equals 31.1 grams).”

Now, it seemed that she was out of reasons, as she expressed her ignorance about having to come across any news in media regarding, such a huge bank robbery in which approximately 1,11,697 ounce or 3473.8 kilo grams worth gold was looted.  I had to instantly chip in by saying that, this is not a case of bank lifting, but a way of functioning of financial system in general and banking sector in particular. Let me add an example to illustrate it? I sought her permission. The phenomenon goes as explained ahead [the attempt was to explain the process by making it as easy as possible, so that even a novice can understand].

“Central banks around the world had a huge amount of gold lying in their vaults, not earning any return. The end of 2007 witnessed the stock of gold with central banks around the world rising to 32,000 tonnes of gold.”

 I requested her to be more attentive to whatever I was going to add now. Out of the 32,000 tonnes gold held, the Central Bank lent approximately 14,000 tonnes to Bullion Banks like J P Morgan. James Turk and John Rubino in their coauthored book The Collapse of the Dollar, have argued that “lending, for instance, involves the central bank transferring gold to a major private bank, known as bullion bank, which pays the central bank a small-but-positive interest rate, then sells the gold in the open market.”

In this manner “central banks convert the gold into cash and then deploy this cash, somewhere to earn some positive rate of return. This based on a very fundamental assumption that idle assets provide no return, and there is fair possibility that such assets may ultimately add up some cost to the holder.” These costs may range from cost of storage to cost of security. As per meaning conveyed by the operative word “lending”, since the gold has been lent, therefore, the central banks have all the rights to, and can demand it back, whenever they want.

She chipped in by adding that probably “this is what Venezuela is doing right now”; and thus conveyed me a feeling that she was sincerely following the every single word uttered by me. 

 I nodded in agreement and continued further by adding that, since, the bullion banks have promised to return the borrowed gold to the central banks so they will have to return the same. In prevailing situations these bullion banks are not having the volume of gold that was lent to them by Central Bank. In financial and monetary world, this position is conveyed by the term ‘short’, and this means that these bullion banks are ‘short’ gold.

Now comes a significant turn in events, that may work as catalyst to force the prices of gold to break the roof. As the situation deliberated above suggests that, in case, sometime in future, these bullion banks are asked to deposit the volume of  gold lent to them by central bank, they will be left with no choice and would be obligated to buy gold in order to repay the central banks’.”

“So, as I can get, it goes like, that in such a scenario the bullion banks like J P Morgan will now have to buy back gold from the market in order to repay the Venezuelan government, given the situation that Venezuela has around 450,000 ounces of gold deposited with J P Morgan, whereas J P Morgan at present has only 338,303 ounces of gold in its accounts/ record books,” she added.

Exactly, I said in agreement, and carried the deliberations forward by adding, that this buying will lead to the price of gold rising further. I knew that now she has got answer to her question, but then too, I continued it by saying that this is only one part of the story.

Much like a child, who is curious to know about everything, she was now eager to learn that what the remaining part of story was now. She requested me to unfold the other part of the story.

I continued by giving her a reference of a report titled “Thing That Make You Go Hmmm” , and told that this report points out, ‘Chavez’s move could set in motion a chain of events whereby Central banks who store the bulk of their gold overseas in ‘safe’ locations scramble to repossess their country’s true ‘wealth’. If that happens, the most high-stakes game of musical chairs the world has ever seen will have begun’,” I said.

“This sounds very scary”, she added.

“Yes, you are very much correct while mentioning that the report further states that ‘any delay in repatriating Venezuela’s gold could potentially start a frantic scramble by central banks to claim their physical. God save the scenario, but if it actually happens, rest assured that gold price will be on fire. A scenario will take place, which has neither been seen in past, nor even imagined.

It will give birth to an economic tsunami of magnitude, which will turn the great economic recession witnessed by world or even the jasmine revolution and contribution of social media to same to seem dwarf.

Don’t be surprised if I that there is enough in media to believe U S Govt. Manufactured Fake Gold

Perhaps, there are only few who can imagine the magnitude of risk, specifically if they are not linked to foreign trade. Let me illustrate it. It’s one thing to counterfeit a twenty or hundred dollar bill. The amount of financial damage is usually limited to a specific region and only affects dozens of people and thousands of dollars. Secret Service agents quickly notify the banks on how to recognize these phony bills and retail outlets usually have procedures in place (such as special pens to test the paper) to stop their proliferation.

This is the most sacred of all commodities because it is thought to be the most trusted reliable and valuable means of saving wealth.

A recent discovery — in October of 2009 – has been suppressed by the main stream media but has been circulating among the “big money” brokers and financial kingpins and is just now being revealed to the public. It involves the gold in Fort Knox — the US Treasury gold — that is the equity of our national wealth. In short, millions (with an “m”) of gold bars are fake!.Who did this? None, but the United States Government, as claimed by Chinese Authorities.

Background
In October of 2009 the Chinese received a shipment of gold bars. Gold is regularly exchanges between countries to pay debts and to settle the so-called balance of trade. Most gold is exchanged and stored in vaults under the supervision of a special organization based in London, the London Bullion Market Association (or LBMA). When the shipment was received, the Chinese government asked that special tests be performed to guarantee the purity and weight of the gold bars. In this test, four small holed are drilled into the gold bars and the metal is then analyzed.

Officials were shocked to learn that the bars were fake. They contained cores of tungsten with only a outer coating of real gold. What’s more, these gold bars, containing serial numbers for tracking, originated in the US and had been stored in Fort Knox for years. There were reportedly between, 5600 to 5700 bars, weighing 400 oz. each, in the shipment!

At first many gold experts assumed the fake gold originated in China, the world’s best knock-off producers. The Chinese were quick to investigate and issued a statement that implicated the US in the scheme.

 

What the Chinese Uncovered

Roughly 15 years ago — during the Clinton Administration [think Robert Rubin, Sir Alan Greenspan and Lawrence Summers] — between 1.3 and 1.5 million 400 oz tungsten blanks were allegedly manufactured by a very high-end, sophisticated refiner in the USA [more than 16 Thousand metric tonnes]. Subsequently, 640,000 of these tungsten blanks received their gold plating and WERE shipped to Ft. Knox and remain there to this day.

According to the Chinese investigation, the balance of this 1.3 million to 1.5 million 400 oz tungsten cache was also gold plated and then allegedly “sold” into the international market. Apparently, the global market is literally “stuffed full of 400 oz salted bars”. Perhaps, its worth is as much as, 600-billion U S dollars.

Always Yours — As Usual — Saurabh Singh

 RELATED LINKS FOR READERS WHO WANT TO GO IN MORE DETAILS TO BEFORE COMMENTING ON STORY

1. http://etfdailynews.com/2011/08/17/venezuelan-president-hugo-chavez-sends-precious-metal-etfs-a-wakeup-call-gld-iau-slv-gdx-agq/
2. http://philosophers-stone.co.uk/wordpress/2011/08/hugo-chavez-gold-runs-bank-runs-and-bank-holidays/
3. http://profit.ndtv.com/news/show/chavez-officially-nationalizes-venezuela-s-gold-industry-174207
4. http://notime4bull.com/aggregator/sources/13
5. http://mikepiro.com/blog/as-chavez-pulls-venezuelas-gold-from-jp-morgan-is-the-great-scramble-for-physical-starting/
6. http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/traders-brace-for-venezuela-gold-transfer/article2134031/print/
7. http://www.bighaber.com/haber/chavez-to-nationalize-venezuelan-gold-industry-1072000.html
8. http://www.advisorperspectives.com/commentaries/global_082611.php
9. http://americasfinancialmeltdown.blogspot.com/2010/11/below-is-antiwar_4391.html
10. http://mikepiro.com/blog/ron-paul-audit-federal-reserve-gold-stores/
11. http://www.freedomsphoenix.com/News/061976-2009-11-26-us-govt-manufactured-fake-gold.htm
12. http://www.the-boondocks.org/forum/index.php?t=msg&&goto=157202#msg_157202s
    

FEELING HEAT ON US DEBT : EARNINGS AND INDEX POISED TO EXHIBIT UNWANTED OSCILLATIONS

Wrangling over the US debt ceiling and questions marks over corporate earnings mean markets are unlikely to get a break any time soon.

Wall Street is set to close its worst three months in a year as July draws to a close next week after a roller coaster ride for markets. Whacked out fund managers hitting the beach in August may find themselves fiddling with their BlackBerrys more than the little umbrella in their cocktails.

“I need a vacation, man. After all the stuff that’s happened in the last three months I’m pretty much shot, I’m getting weird,” said one New Jersey-based fund manager, who was packing his bags for a destination in the Caribbean as temperatures topped 100 degrees Fahrenheit in New York City.

With euro zone leaders having reached a deal for yet another bailout for debt-laden Greece, investors will be free to chew over the rancor in Washington with even more attention.

Negotiations between President Barack Obama and the top Republican in the House of Representatives, John Boehner, still looked far from a deal to avert a looming US default, lawmakers said on Friday, raising the likelihood of more volatility next week if no solution is reached over the weekend.

“It’s likely an agreement in any form will cause a relief rally for equities,” said global head of sales trading at Dahlman Rose in New York.

“Coming on the heels of overall pretty good earnings numbers and some sort of resolution in Greece and that could make for a rally in the market,” he said.

But on the other side of the coin, the prolonged and partisan dispute over solving the country’s debt crisis means there is still a big downside risk.

“Who knows where that is going to go,” as per an analyst at MF Global in Chicago. “We’re vulnerable to a buyers’ strike if we don’t get any news.”

In addition, the corporate earnings season suggests other risks could dog the market. Despite generally good results so far, there have been some worrisome signs. The S&P 500 rallied 6% in the run-up to reporting season, but earnings misses from big industrial names like Rockwell Collins and Caterpillar Inc weighed on the Dow and S&P 500 on Friday.

Earlier in the week several big consumer names such as Whirlpool and Pepsi warned about sluggishness in developed markets, sending their shares sharply lower.

“The market still has a high degree of skepticism in it,” said the analyst, summing up the earnings season so far.

As per him, he will be closely following earnings from sector and economic bellwethers next week. Those include the package delivery company UPS, chipmaker Texas Instruments, and online retailer Amazon.

Around 30 percent of the S&P 500′s USD 12.3 trillion market caps have reported earnings so far. They have outpaced consensus estimates by 3.8%, and only 7% have missed estimates, according to data from Morgan Stanley.

But share prices of those that have fallen short of estimates have taken a severe beating. Given the fragile sentiment a few more prominent misses could derail the market.

“The market is punishing these misses more than it is rewarding beats, an asymmetry we have been calling for and we forecast will continue,” wrote Morgan Stanley’s US equity strategist in a note to clients.

“Our view remains that first half of the year numbers are achievable but the second half of the year looks challenged,” he said.

Next week is also a big week for economic data. Fears of a slowdown in the economy have been a large driver of market volatility over the last few months, and the coming releases will be parsed very closely.

They include early regional manufacturing data from Chicago and New York, a reading of consumer sentiment, and a first reading of US growth for the second quarter, expected to show the economy grew just 1.9% in the period.

Bob Doll, chief equity strategist at Blackrock, one of the world’s largest fund managers with around USD 1.6 trillion of equities under management, said this week that the US economy is at a critical juncture.

Doll points out that since 1960 every time year-on-year growth has fallen under 2% the US economy has gone into recession.

“Our bottom line view is that investors should maintain a reasonably constructive bias toward risk assets, but should also be prepared to scale back exposure if evidence of economic growth acceleration does not materialize.”

Always Yours — As Usual —- Saurabh Singh

Note: Compiled from published News and Views

OIL POLITICS, SPECULATION, CHAIN REACTION AND MANAGEMENT

It requires quantum of intelligence, to infer from what is happening in the markets, or politico-socio-economic across the globe, to why it is happening. Things are never as simple as they seem to be. This would become comprehendible and evident as soon as one reads, relates and analyses the instances mentioned hereunder:

“Crude oil prices peaked to US $ 100 – 115 a barrel in April and May 2011 and moved downwards after that to touch a rate of US $ 90 – 92 per barrel in June 2011. In such a scenario, price increase by the Union Government should have been announced in April – May 2011, but the same did not occur. The Government found June 2011 to be the auspicious time for announcing price hike when the prices had nearly normalized. What could have been the motive for doing so? Simple answer is that April – May 2011 was the time when five states were going to elect the assembly members. The states being, West Bengal, Tamil Nadu, Assam, Kerala and Puducherry. ”

“If one goes by what the campaign managers of Congress had to say on the Rahul Gandhi’s much publicized kisan padyatra-(which as claimed was undertaken to champion the cause of the farmers of the region) -  was conceived to detract the public attention from the issue of hike in petroleum products and their possible spiraling effect on inflation. This yatra detracted the lot of electronic media attention from the campaign that opposition forces such as BJP and Left were seeking to build up on the oil price hike related issues. ”

“Since the Oil shock of 1973, USA strategically took measures to control the oil market by keeping continued focus on West Asian Region. In 1980, Jimmy Carter, the then President of USA declared Persian Gulf an exclusive zone of American influence and created a rapid deployment of forces, which latter turned into what is known as US Central Command or CENTCOM.  ”

“As is being believed by majority that skirmish in Libya is behind recent spurt in prices, should correct their facts. Libya produces less than 3 per cent of global petroleum output. Where as Saudi Arabia has already made up for the current shortfall and its excess stocks are more than that of Libya and Algeria put together. In fact in present situation too oil production at many of Libyan facilities continues even in civil war there. ”

“The argument being forwarded by few is that rising demand from China and India has forced an upward trend in oil prices is also unjustified. Though these two countries do account for growing share of global demand, but then same is counterbalanced by slower demand from USA and Europe.”

“There is still a wide spread perception that cartel of Oil Exporting Countries can manipulate and influence the prices by changing the level of their supplies. Reality today is much different. The OPEC has turned from being a cartel to being a minor player today. Non OPEC countries now account for increasingly significant proportion of global supply. Russia has already snatched the title of being largest supplier of crude oil from Saudi Arabia since 2009.  ”

Many more such instances may be quoted. It’s not being quoted in anticipation that the variety of above instances is good enough to comprehend that nearly none of the factors assumed or arguments forwarded are capable of forcing any kind of hike in prices of the crude oil.

 

Then what is it, which is responsible for hike in crude oil price?

 

…….any guesses, if not, then storm your grey matter and keep visiting this place in hope of getting answer to this simple question.

 

Always Yours — As Usual —- Saurabh Singh

 

 

FY 2012 – 13 AND FCCB – IS IT GOING TO BE A SPEED BREAKER FOR INDIA’S GROWTH STORY

Global hedge funds and offshore investors are closely tracking the response of Corporate India, the judiciary and financial market regulators as 16,000 crore of convertible bonds sold by local top 500 companies come up for repayment by March 2012. With some Indian firms trying to wriggle out of their commitments, overseas bondholders are beginning to question the creditworthiness of India Inc. They are also anxious to figure out whether Indian courts will uphold creditors’ rights.

The Reserve Bank of India had raised concerns about high overseas borrowings in its recent Financial Stability Report. Shares of many companies are trading at a fraction of the price at which Foreign Currency Convertible Bonds (FCCBs) are to be converted into shares. If prices recover, investors can convert the bonds into equity shares. That looks unlikely. If prices don’t recover, the companies can redeem the bonds by paying off investors. That appears impossible given the stretched balance sheets of many companies. Then, companies will have to issue fresh bonds in lieu of the old ones, negotiating a new set of conditions — revised conversion price, extended tenure and reset interest rates.

Most companies worth their salt will try to work out some solution either by raising fresh money to redeem the FCCBs along with redemption premium or by restructuring the bonds. This is because they know a default or legal tussle would blacklist them in the foreign market. It will also downgrade their credit rating. That’s why the companies, whose stocks are trading at a discount to the conversion price, are already in talks with investors, says Ashutosh Maheshwari, head of investment banking at Motilal Oswal.

Assam Company and Suzlon are two such examples. “We are looking at restructuring our outstanding FCCBs,” says Sanjay Sharma, finance head of Assam Company, whose FCCBs worth $32 million will mature in November. Offshore Investors Watching Closely .The stock of the Kolkata-based tea company has been hovering at around15, a good 48% discount to the conversion price of 28.75 that the company had fixed when it issued bonds in 2006.
The Suzlon spokesperson says the company does not foresee any problems with FCCBs. Suzlon’s $300 million worth FCCBs will mature in June and October next year. The Suzlon stock is quoting at 50% discount to the conversion price. Reliance Communications has the largest chunk of outstanding FCCBs worth $925 million (about 4,150 crore).

These bonds are unlikely to be converted into equity shares when they mature in March, as the stock is trading at 86% discount to the conversion price of . 661. RCOM will try to raise bank loans to repay bondholders, says a person close to the company. That will add to the company’s ballooning debt burden of 35,000 crore. RCOM did not comment on the issue. “Offshore investors are watching how India Inc behaves. If pragmatism prevails over greed, then invariably restructuring will work,” says H Jayesh, founder-partner of law firm Juris Corp. At the same time, there is a lingering fear that this could easily turn into a minefield of disputes. “We fear some Indian promoters will neither agree to convert at a lower price — as it will dilute their stake, nor repay the money,” says a bondholder, who had subscribed to FCCBs of a handful of companies in 2007.

Akil Hirani, managing partner of legal firm Majmudar & Company, expects some bondholders to have disagreements with the promoters on revision of the conversion price, leaving them with no option but to take legal recourse against the companies. If the companies want investors to give heavy discounts, the matter is likely to go to courts, according to Huzefa Nasikwala, managing partner, Nasikwala Law Office. “Agree to a conversion at a realistic price and most investors will effectively extend the maturity period by a few years, if not more,” is what Juris Corp’s Jayesh advises companies.

A month ago, a Singapore-based hedge fund, 3 Degrees Asset Management, moved the RBI against Karur KCP Packagings, a Tamil Nadubased cement bag maker. Karur KCP had raised $10 million in April 2006 through FCCBs bearing a 2% interest rate and conversion price at  75. The bonds were due to expire on April 27, 2011. Backed by majority of the bondholders, the tenure of the security was extended by another 10 years and coupon was cut to zero. The hedge fund has alleged fraud and manipulations in the company’s exemption scheme. The foreign fund is planning to initiate legal proceedings against the issuer.

Two years ago, US-based hedge funds DE Shaw and Citadel Investment Group had filed a winding-up petition against Chandigarh-based Venus Remedies after the company defaulted on an FCCB issue. However, the matter was resolved last year. Beginning 2006, FCCBs captured the imagination of promoters of Indian companies who exploited it as the cheapest source of finance. It was a simple bet: the stock market will continue to rise and issuers will not be driven to a point where they will have to pay back the money; once the stock of the issuing company touches a pre-agreed price (conversion rate), the bonds will be converted into shares. The bet backfired as the stock market dipped — the bellwether Sensex has fallen 15% this year — and the stocks are struggling at a fraction of the conversion price. Some small and mid-caps are now trying different ploys to hold back payment. A few have entered into messy court feuds, one of the firms has allegedly falsified accounts to overstate losses and moved the BIFR while another has taken refuge in complaints by local investors. Bonds worth 31,500 crore are due for redemption by March 2013, according to a Crisil Research study of S&P CNX 500 and BSE 500 companies. Of this, Rs 16,000 crore of bonds will mature by March 2012.

Market participants say the numbers could double if all mid and small-cap companies are taken into consideration. Among the top 500 companies, it looks like 70% of outstanding bonds may not be converted, says Crisil’s Koparkar. Of this, the “real worry” is bonds worth 2,000 crore, he adds. But the figure is at least  5,000 crore if all small and mid-cap stocks are taken into account, says a bondholder, not wanting to be named. Three years ago, some companies defaulted in paying FCCB investors. The bondholders, in turn, took them to courts. The list included Wockhardt. Its bondholders had filed a winding up petition against the company.

Always Yours — As Usual — Saurabh Singh

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IFRS ——- What is IFRS ?

IFRS for SMEs  — What is IFRSs and IFRSs for SME Scope of IFRS All International Accounting Standards (IASs) and Interpretations issued by the former IASC (International Accounting Standard Committee) and SIC (Standard Interpretation Committee) continue to be applicable unless and until they are amended or withdrawn. IFRS sets out recognition, measurement, presentation and disclosure requirements of transaction and events in general purpose financial statements. IFRSs apply to the general-purpose financial statements and other financial reporting by profit-oriented entities i.e. those engaged in commercial, industrial, financial, and similar activities, regardless of their legal form. Entities other than profit-oriented business entities may also use IFRSs with certain changes in terminologies. General purpose financial statements are intended to meet the common needs of shareholders, creditors, employees, suppliers, government and the public at large for information about an entity’s financial position, performance, and cash flows. IFRS apply to consolidated as well as separate financial statements. If an IFRS allows both a ‘benchmark’ and an ‘allowed alternative’ treatment none of them is preferred treatment. However, in developing Standards, IASB intends not to permit choices in accounting treatment. Further, IASB intends to reconsider the choices in existing IASs. IFRS presents fundamental principles in bold face type and other guidance in non-bold type (the ‘black-letter’/'grey-letter’ distinction). Paragraphs of both types have equal authority. IFRS does not prescribe as who should apply IFRS. It left upon the national standard setters to decide which entities would be bound to comply with IFRS. The focus of international standard setting is on profit-oriented reporting entities, including non-corporate entities such as mutual funds. Despite concentrating on profit-type entities, the IASB envisages that non-profit entities in the private and public sectors may nevertheless find its Standards an appropriate basis for financial reporting. The specific needs of the public sector have been acknowledged by the International Federation of Accountants (IFAC), whose Public Sector Committee has on its agenda the preparation of standards based on IFRS, for use by public sector entities. However, a non-profit entity that states compliance with IFRS should comply with IFRS in full. A profit-oriented reporting entity is one that reports to users, who rely on the financial statements as a major source of financial information about the entity. Financial Statements are directed to the information needs of users such as investors and potential investors, employees, lenders, suppliers, creditors, customers, governments and the public at large. The term financial statements refer to statements that display different aspects of the entity’s financial performance and position. Financial position is reflected in the statement of financial position and a statement of changes in shareholders’ equity (excluding transactions with shareholders). Financial performance is reported in the income statement and liquidity position in the cash flow statement. These statements are supplemented by a series of detailed notes. Some Standards permit different treatments for certain types of transactions or events. One treatment is designated as the benchmark treatment, and the other the allowed alternative. Neither is designated as the IASB’s preferred approach. The Board intends to develop future Standards that require similar transactions and events to be accounted for in the same way. The IASB intends to reconsider the choices given in current IFRS with a view to reducing and potentially eliminating them. Structure of IASB The IASB is organised under an independent Foundation named the International Accounting Standards Committee Foundation (IASCF). That Foundation is a not-for-profit corporation created under the laws of the State of Delaware, United States of America, on 8 March 2001. Components of the new structure of IASB are as follows: 1. International Accounting Standards Board (IASB) – has sole responsibility for establishing International Financial Reporting Standards (IFRSs). 2. IASC Foundation – oversees the work of the IASB, the structure, and strategy, and has fundraising responsibility. 3. International Financial Reporting Interpretations Committee (IFRIC) – develops interpretations for approval by the IASB. 4. Standards Advisory Council (SAC) – advises the IASB and the IASCF. 5. Working Groups – expert task forces for individual agenda projects. 6. Monitoring Board of Public Authorities- effective 01.02.2009 Accounting Standards in India are issued by Accounting Standard Board (ASB) of Institute of Chartered Accountants of India and are largely based on IFRS. However, India has not been able to keep pace with the amendment and additions made in IFRS from time to time. This is largely because of its sensitivity to local conditions including the conflicting legal and economic environment. However, with the opening of Indian economy in near past, the convergence to IFRS has become unavoidable. Keeping this in view, ASB decided to form an IFRS task force in August 2006. Based on the recommendation of this task force, the Council of ICAI, in its 269th meeting decided to fully converge with IFRS from the accounting periods commencing on or after 1st April 2011. At initial stage, this convergence will be mandatory for listed and other public interest entities like banks, insurance companies, NBFCs, and large sized organizations with high turnover or annual income. Why this convergence? Converging with IFRS will have multiple benefits for Indian entities especially those who aspire to go global. Some of the benefits of convergence with IFRS are explained below: a) Accessibility to foreign capital markets The force of globalization has enabled the concept of ‘open economy’ and increasing numbers of countries has opened doors for foreign investment and foreign capital. Many Indian entities expanding and making their presence felt in international arena. Huge amount of capital commitment are required in this process for which entities have to list their shares in various stock exchanges around the world. Majority of stock exchanged either require or permit IFRS complaint accounts. Adaptation of IFRS will enable Indian entities to have access to international capital markets. b) Reduced Cost At present when Indian entities list their securities abroad they have to make another set of accounts which are acceptable in that country. Convergence with IFRS will eliminate this need for preparation of dual financial statements and thereby reduce the cost of raising capital from foreign markets. c) Enhance Comparability If the Financial statements of Indian entities are made in lines of IFRS, they will have greater comparability and will enable foreign companies to have broader and deeper understanding of the entities relative standing. This will also facilitate mergers, amalgamation and acquisition decisions. d) Boon for multinational group entities Entities in India may have a holding, subsidiary or associate company in some other nation. Compliance with IFRS for all group entities will enable the company management to have all the financial statements of the group in one reporting platform and hence will facilitate the consolidation process. e) New Opportunities for the professionals Migration to IFRS will not only be beneficial for Indian corporate, it will also be a boon to Indian accounting and other associated fields. India is a country with immense human resource. With knowledge of IFRS Indian professional can immerge as leading accounting service provider around the globe. This convergence will also open the flood gate of opportunities for valuers and actuaries as IFRS is fair value based accounting standard. What is IFRSs?   International Financial Reporting Standards comprise: – IFRSs – standards issued after 2001 – IASs- standards issued before 2001 – Interpretations originated from the International Financial Reporting Interpretations Committee (IFRIC) – issued after 2001 – Interpretations of Standing Interpretations Committee (SIC) – issued before 2001 Effective IFRSs as on date • No of standards issued – effective 29 (total 41) IASs , 8 IFRSs • No of interpretations – effective 15 (total 18) IFRIC Interpretations, effective 11(total 33)SIC Interpretations • No of Financial Reporting Standards in force as on date – 63  Grouping of IFRSs into eleven parts:  1. Preface and framework  Preface a. Objectives of the IASB b. Scope and authority of IFRSs c. Due process d. Timing of application of IFRSs e. Language Framework a. Introduction b. Qualitative characteristics of financial statements c. The elements of financial statements d. Recognition of the elements of financial statements e. Measurement of the elements of financial statements f. Concepts of capital and capital maintenance 2. Other literature  a. IASC Foundation Constitution b. Due process Handbook of IASB c. Due process Handbook of IFRIC d. Glossary 3. Presentation of Financial Statements  Standard Number Standard Name IAS 1 Presentation of Financial Statements IAS 7 Statement of Cash Flows IAS 33 Earnings Per Share IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors IAS 10 Events after the Reporting period IAS 21 The effects of changes in foreign exchange rates IAS 29 Financial Reporting in Hyperinflationary economies SIC 7 Introduction of the EURO IFRIC 7 Applying the restatement approach under IAS 29 Financial Reporting in Hyper inflationary Economies 4. IFRSs on Interim Financial Statements IAS 34 – Interim Financial Reporting  5. IFRSs on Group Reporting Standard  Number Standard Name IFRS 3 Business Combinations IAS 27 Consolidated and separate financial statements IAS 28 Investment in Associates IAS 31 Interest in joint ventures  6. IFRSs on Assets  Standard Number Standard Name IAS 2 Inventories IAS 16 Property, Plant & Equipment IAS 40 Investment Property IAS 38 Intangible Assets IAS 32, IAS 39, IFRS 7 Financial Assets / Financial Instruments IAS 41 Biological assets IFRS 5 Non-Current Assets held for sale & Discontinued operations IAS 17 Leases IFRS 6 Exploration and Evaluation of Mineral Assets  7. IFRSs on Expenses and Liabilities  i. IAS 19 – Employee Benefits ii. IFRIC 14- IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction iii. IAS 37 – Provisions, Contingent Liabilities and Contingent Assets iv. IFRIC 1 -Changes in Existing Decommissioning, Restoration and Similar Liabilities v. IFRIC 5- Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds vi. IFRIC 6- Liabilities Arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment vii. IAS 12- Income Taxes viii. SIC 21 – Income Taxes – Recovery of Revalued Non-Depreciable Assets ix. SIC 25- Income Taxes – Changes in the Tax Status of an Enterprise or its Shareholders x. IFRS 2- Share-based Payment xi. Financial liabilities / Financial Instruments a. IAS 32 Financial Instruments: Presentation b. IAS 39 Financial Instruments: Recognition and Measurement c. IFRS 7 Financial Instruments: Disclosure  8. IFRSs on Income  i. Construction contracts (IAS 11) ii. Revenue (IAS 18) iii. Agriculture income (IAS 41) iv. Service concession arrangements – IFRIC 12 & SIC 29 v. Customer loyalty programmes – Customer reward credit or points IFRIC 13  9. IFRs on Disclosure  A.  IAS 24 Related Party Disclosures B. IFRS 8 Operating Segments  10. IFRSs on Industry  i. IFRS 4 Insurance Contracts ii. IAS 26 Accounting and Reporting by Retirement Benefit Plans  11. IFRSs on First time adoption – IFRS 1  IFRSs for SME  History  In Sept 2003: World Standard Setters survey n June 2004: Discussion Paper (117 comments) n April 2005: Questionnaire on recognition and measurement (94 responses) n Oct 2005: Roundtables on recognition and measurement (43 groups) n Feb 2007: Exposure Draft (162 comments) n Nov 2007: Field tests (116 real SMEs) n Mar – Apr 2008: Board education sessions n May 2008 – Apr 2009: Redeliberations n May 2009: Near-final draft posted on IASB website n 1 June 2009: Ballot draft sent to the Board n 9 July 2009: Final IFRS for SMEs issued Why IFRSs for SME A. Topics not relevant to SMEs are omitted. B. Where full IFRSs allow accounting policy choices, the IFRS for SMEs allows only the easier option. C. Many of the principles for recognizing and measuring assets, liabilities, income and expenses in full IFRSs are simplified. D Significantly fewer disclosures are required. E the standard has been written in clear, easily translatable language.  What is SME as per IFRSs  SME Small and medium-sized entities are entities that:  Do not have public accountability, and o Publish general purpose financial statements for external users. Examples of external users include owners who are not involved in managing the business, existing and potential creditors, and credit rating agencies. General purpose financial statements are those that present fairly financial position, operating results, and cash flows for external capital providers and others. An entity has public accountability if: o Its debt or equity instruments are traded in a public market or it is in the process of issuing such instruments for trading in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets), or o It holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. This is typically the case for banks, credit unions, insurance companies, securities brokers/dealers, mutual funds and investment banks.  Contents of IFRSs for SME – divided into 35 sections  1. Small and Medium-sized Entities 2. Concepts and Pervasive Principles 3. Financial Statement Presentation 4. Statement of Financial Position 5. Statement of Comprehensive Income and Income Statement 6. Statement of Changes in Equity and Statement of Comprehensive Income and Retained Earnings 7. Statement of Cash Flows 8. Notes to the Financial Statements 9. Consolidated and Separate Financial Statements 10. Accounting Policies, Estimates and Errors 11. Basic Financial Instruments 12. Additional Financial Instruments Issues 13. Inventories 14. Investments in Associates 15. Investments in Joint Ventures 16. Investment Property 17. Property, Plant and Equipment 18. Intangible Assets other than Goodwill 19. Business Combinations and Goodwill 20. Leases 21. Provisions and Contingencies 22. Liabilities and Equity 23. Revenue 24. Government Grants 25. Borrowing Costs 26. Share-based Payment 27. Impairment of Assets 28. Employee Benefits 29. Income Tax 30. Foreign Currency Translation 31. Hyperinflation 32. Events after the End of the Reporting Period 33. Related Party Disclosures 34. Specialised Activities 35. Transition to the IFRS for SMEs Glossary Derivation Table Basis for Conclusions – published in a separate booklet Illustrative Financial Statements and Presentation and Disclosure Checklist – published in a separate booklet  Omitted topics in IFRSs for SME The IFRS for SMEs does not address the following topics that are covered in full IFRSs: n Earnings per share n Interim financial reporting n Segment reporting n Special accounting for assets held for sale  Examples of options in full IFRSs NOT included in the IFRS for SMEs n Financial instrument options, including available-for-sale, held-to-maturity and fair value options n The revaluation model for property, plant and equipment, and for intangible assets n Proportionate consolidation for investments in jointly-controlled entities n For investment property, measurement is driven by circumstances rather than allowing an accounting policy choice between the cost and fair value models n Various options for government grants.  Conclusion  To conclude IASB put lot of efforts in coming out IFRSs for SME. IASB has received 162 comments on Exposure Draft for IFRSs for SME. IASB follows transparent approach for formulation of standards.

Always Yours —- As Usual — Saurabh Singh

SAHARA INDIA COMMERCIAL CORPORATION — A MYSTRY — AN ENIGMA — OR– A LOOT

2.6 m Shareholders, but Sahara Co Still Unlisted

Sahara India Commercial Not on Bourses Despite  3,000-cr Issue

In October 2009, Sahara India Commercial Corporation (SICCL), part of Sahara Group of Companies, decided to issue shares to a bunch of investors. While the size of the share issue— 3,000 crore—was substantial, what was really startling was not the amount, but the number of shareholders who were allotted shares: 2.6 million. Even if this were the only share issue by the company, it would make it the third-largest company in the country today in terms of number of shareholders—behind Reliance Power (4.9 million shareholders as of December 2010), and Reliance Industries (3.5 million). That share issue by SICCL placed it far ahead of other stellar names of India Inc such as Tata Steel and NTPC, in terms of the shareholder base.

But here’s the real surprise. Despite the share issue, SICCL is not listed on any stock exchange. According to filings by the company with the registrar of companies, West Bengal, the company issued 30 crore shares with a face value of 1, at a premium of 99, on October 29, 2009. The number of allottees were 26,89,935. The company has also uploaded, on the RoC site, a long list of the share allottees. The shares have not been listed on any exchange. “The companies act and SEBI regulations are clear,” says Tejesh Chitlangi, a senior associate with Finsec Law Advisors: “Section 67 of The Companies Act construes an offering of shares or debentures to 50 or more persons as an offer or invitation to the public, for which norms listed out in SEBI Regulations would need to be followed. These include issuing of prospectus, compliance with the procedures and other disclosure norms.”

In response to a questionnaire sent by ET, Sahara spokesperson, Abhijit Sarkar said: “SICCL is an unlisted public limited company and does not intend to list its shares at any of the stock exchanges as decided by the board of directors of the company. Compliances with the SEBI Regulations are applicable for the listed companies as well the company who intend to get their shares listed on the stock exchanges.”

He said necessary board and shareholder approvals were taken. Further, the fact that the return of allotment was duly approved by RoC West Bengal was evidence that “required compliances for allotment of equity shares by the company are fully complied with”. According to Sahara, an approval from the RoC was given in September 2010.

Staying Away from the Street Sahara arm not listed on any stock exchange
The company: Sahara India Commercial Corporation

Business: Real Estate and infrastructure

No. of shareholders: 2.6 million Funds raised: Rs 3,000 crore

Type of company: Public, but unlisted

•Third-largest company in India today in terms of number of shareholders—behind Reliance Power and Reliance Industries

• As of March 2009, SICCL posted a loss before tax of Rs 449 cr, on revenues of Rs 1,600 cr
• Its balance-sheet size, as of March 2009, was Rs 8,591 cr. Over 80% of this, Rs 6,922 cr, was raised through OFCDs Two Share Allotments

Says Jayant Thakur, a chartered accountant specialising in securities law: “When a company raises funds from more than 50 people, it does not remain a private placement, but is a public issue. For this, listing requirements, as well as other SEBI norms must be followed.” SICCL, according to other filings with the RoC, is primarily a real estate and infrastructure developer. Documents filed by the company describe it as ‘perhaps one of the largest infrastructure and housing development company in India.” As of March 2009, the company posted a loss before tax of . 449 crore, on revenues of . 1,600 crore. SICCL’s balance-sheet size, as of March 2009, was . 8,591 crore. Of this, . 6,922 crore (over 80%) was raised through the issue of optionally fully convertible debentures, or OFCDs. OFCDs are bonds, which on maturity, and at the option of the investor, can be converted into equity shares.
Between March 2009 and June 2010, SICCL completed two share allotments—one for . 3,000 crore to 2.6 million investors, and the other of . 2,000 crore, done on June 30, 2010, to five private limited companies. Thus the total amount of shares issued by the company, as a result of these two allotments, was . 5,000 crore. It could not be ascertained whether the two share allotments arose as a result of the conversion of OFCDs, issued earlier by the company, into shares or whether these were standalone issues of shares to investors. Sahara Group did not give details about the circumstances under which the shares were issued.

According to SICCL’s debenture prospectus, shareholder approvals for OFCDs were given at seven different meetings held between 1998 and 2005 and were to be on private placement basis to “friends, associates, group companies, workers/employees and individuals having their association with group companies”. The OFCD issue opened on July 6, 1998, and closed on June 30, 2008. According to the debenture prospectus, the total size of the issue, spread over five types of bonds, and 10 years, was . 17,250 crore. The funds raised were to be used to finance a number of projects, including the development of the Aamby Valley project.

Late last year, the Securities and Exchange Board of India (SEBI) had banned two other Sahara Group companies—Sahara India real estate corporation (SIRECL), and Sahara Housing Investment Corporation(SHICL)—from raising funds from the public through the issue of OFCDs, without going through the necessary approvals and procedures required. The two companies claimed that they had not made a ‘public offer’ (defined as an offer to more than 50 investors), as claimed by SEBI, but had placed the debentures privately and among a few friends, associates and others close to the group. Therefore, the companies claimed, SEBI had no jurisdiction. The market regulator, disagreeing with the claim of a ‘private placement’, had imposed the ban.

The SEBI ban on the other two Sahara companies was stayed by the Allahabad High Court but the stay order was lifted earlier this month. SEBI has filed a caveat in the Supreme Court against the issuance of any ex-parte orders in the case (which are issued without one of the parties being present). Sahara is reported to have filed a special leave petition in the Supreme Court as well, though this could not be confirmed.

Always Yours — As Usual — Saurabh Singh

My Journey on Path of E-Commerce: A Recollection

The effort here is not to deliberate on the History of Computers and or Internet, but since it turns out to be a brief but vital component of total deliberations if any is being made on providing or seeking or exchanging any product, service, information etc. using Internet as a medium.  Instead of starting the sentence “long long ago….”, like in many other field, here story starts with the set words “In very recent past….” .

The deregulation of Internet and it’s use for Commerce is recent as just four decades. Today it would not be wrong if one makes an inference that it happens to be largest market place. It has also succeeded in turning itself near to indispensable and a good number of people can not imagine their daily life in its absence. As a tool of exchanging information and thought, it has even left behind the devices like telephone, fax, mobile telephony etc. by miles. Even we have the examples, though of very recent nature, that few less popular national government, when faced by some kind of event which was called by media as uprising, made internet their first target to breakdown the communication flow taking place in citizens. The case of “EGYPT” and “LIBYA” are a burning and recent example of this.

Initially there was some sense of fear amongst the people who were stakeholders in business. These stakeholder can never alone be the Business Men, they also included the beside established business houses, the Entrepreneurs,  students of business, the academic and scholarly community dealing with issues related to the domain of business, the customers around whom business revolves, and certainly a few more individuals who comprise those who thought it to be fad and expected it to die an immature death.

Here, the stage is ripe for sharing few anecdotes especially Indian to give a practical understanding of how these developments moved from nearly nowhere to everywhere. Prior to starting on it, Helpman and Trajtenberg (1998) were of the opinion that “In any given era there typically exist a handful of technologies that play a far reaching role in widely fostering technical change and thereby bringing about sustained and pervasive productivity gains.” On the similar lines Norman (1999) said that “The goal is to move from current situation of complexity and frustration to one where technology serves human needs invisibly, unobtrusively: the human centered and customer centered way.”

Now coming to Anecdotes:

1. It was perhaps Year 2000 or 2001, when I happened to give entrance examination for pursuing Ph. D. Program at Indian Institute of Information Technology & Management, Gwalior, when it was still functioning in old building. Till then I was not aware that I would be lucky enough to make my career in academics, scholarly and research work, and also in transfer of technology to masses, though I wanted to do it.

They used to conduct a written test followed by interview for admitting research scholars. Luckily or otherwise, I cleared the written test to qualify for next stage, that was personal interview. There I was interested in pursuing my research in E- Commerce. That was also a time when an e-Commerce initiative with the help of internet initiated by Shoppers’ Stop had met a debacle. All through the interview while I was trying my best to convince them that e-Commerce was the very near future, the interview board was interested in making me believe that penetration of computer required for that would never happen in India and they topped their argument by quoting the example of debacle of Shoppers’ Stop. Besides it the board also wanted to convince me on importance of bandwidth and its importance for e-Commerce, suggesting me to work on it, as it was a must for success of the concept I was arguing, but then I was least interested as it was a work for a Technical Degree Holder and not my cup of tea with MBA preceded by ZBC. Ultimately we could not land on a common platform and it could be said that they rejected me or I myself worked to get rejected.

Nearly the same got repeated at NITIE Pawai Mumbai same year. I would elaborate on it next time when I get chance to further elaborate on it. Its late night and I plan to close writing at this moment. hope spelling mistakes if any would be pardoned.

Always Yours — As Usual —- Saurabh Singh