New FII norms will lead to reduced volatility

• SEBI has proposed to allow FIIs to use AAA-rated foreign government securities in lieu of cash for payment of margins against positions in derivatives.

• Margin payment is a headache in this business.. for all sorts of investors in futures and options.. They being FII s whose volume of transactions is huge its going to be a problem..

• Currently its a time for musings by various experts about the repurcussions of this policy move. In one such view - According to Professor Amit K. Barua, IIM Ahmedabad, in a debate in ET - this is what i can understand and present to you as per my existing knowledge base..

• its An appropriate beginning.

• This measure would allow FIIs to use their holdings in, sovereign Debts of foreign countries, eg. US government securities for investing in the Indian equity derivatives market.

• The 1st benefit will acrue from the outcome that FIIs will be able to change F and O positions without changing or shifting their cash market investment. So if a margin call comes from the exchange they can use their AAA grade US govt. securities as a margin without selling their cash market exposure to pay out the margins.

• Thus the volatility in the cash market of BSE and NSE that is caused by sudden withdrawal and infusion of funds by FIIs will decrease considerably.

• Result: This will make the entire process to happen in a phased manner. The reduced volatility in turn will make F and O prices cheap and make investment in to Equity options attractive plus hedging through options will also be attractive.

• The 2nd benefit will be seen in FOREX market. The exchange rate fluctuations due to the frequent entry and exit of FIIs' from the Indian equity markets will reduce.

• Result: The additional volatility in the market determination of exchange rates will die down as changes in FII exposure will not be drastic. The Forex Options will be cheaper AND will make hedging for "Exporters, IT Companies et all " cheaper against their risk of rupee apreciation against dollar etc.. and will be beneficial to whole indian economy.

• Currently there is a cap on the total value of the margin accounted for by foreign securities.

• This cap should be raised in a phased manner and can be removed also to reap the benefits in its entirety out of the current changes.

• If suddenly rupee apreciates then it will be difficult to realize the full margin value as foreign soveriegn assets are denominated in US dollar now so this adjustment should be accounted for in the margin requirement in advance.

• So, let us wait and watch how these new norms behave and how we digest their effects and hope for the best results for the Indian economy.

our sincere thanks to ET and the expert to enlighten us on this very important topic...

Indian IT companies - are they in doldrums due to Strong Rupee ? Results Watch

The current quarter result snapshot of the top Indian IT companies is as under:
Q 1 - FY 08

• INFOSYS

Net profit : Rs 1079 crore (including tax write back) down 5.68%

consolidated net sales has gone slightly up at Rs 3,773 crore from Rs 3,772 crore

The reported net profit and sales of the company is below its given guidance on the back of weak rupee. (The quarter Q1 revenue guidance of was at around Rs 3,896-3,913 crore and the net profit at Rs 1,005.37 crore).
Operating profit margin has declined to 28.7% compared to 31.7% in the previous quarter.

• WIPRO:

net profit of Rs 726 crore, down 15.2% against Rs 856 crore in the previous quarter.

net revenue was down 3% at Rs 4203 crore versus Rs 4333 QoQ.

its margin dropped by 250 bps sequentially.

• SATYAM COMPUTER SERVICES:

consolidated net profit at 378.3 crore as against Rs 393.6 crore in previous quarter, decline of 3.89%.

net sales stood at Rs 1,830.2 crore versus Rs 1,779 crore up by 2.9%.

Net profit margin slipped to 20.67% from 22.15% QoQ.

• TCS:

consolidated net profit of Rs 1202.9 crore versus Rs 1195.2 crore on QoQ basis as per Indian GAAP.

consolidated revenue was up at Rs 5202.9 crore versus Rs 5162.1 crore on QoQ basis.

Its forex hedge was at $ 2.5 bn.

OUR VIEW VIS-A-VIS OTHERS:

• Seeing all this analysts seem to suggest that the IT dream run may be over atleast in the short term.
• This they say on premise of Rupee getting stronger and making IT exports incompetitive.

But

• The IT industry is on an acquisition spree if rumors are to be believed IT bellweather Infosys Technologies is trying to acquire Capgemini, a consulting company & a IT behemoth.
• The Indian companies are trying to innovate in the business delivery model to decrease their operating costs. Read the new value chain enhancement initiatives which are currently kept under wraps.

The business environment is throwing some unique challenges but also glance through the past & present strength.

Indian Software Brand Message During .com boom & till now in 2006 is:

• A safe destination to do business
• Hassle-free procedural and regulatory environment
• Long-term sustainable competitive advantage in people and infrastructure
• Preeminent destination for cross-border IT services
• Leading global ITES hub for high-value activities
• Strategic product development and R&D base

Now these things also have been added:

• Acquiring higher places in value chain through targeting Consulting Business
• Working on scale economies.
• A greater focus on innovations during these challenging times.
• Fighting rupee appreciation by various sources like hegding etc.

Thus though the future may look gloomy through certain analysts's forecasts there is not much to worry about the long term story.

Still it is the only sector in Indian capital Markets which doubles its returns in around 3 years (Read Infosys). Also they only have performed & given consistent returns in the past.

Though currently they may have their stock prices under pressure they still are the sound bets. Even my personal advice being it is the Right Time to Invest in to them when the prices go down!!! They will surely give better returns in the 1 to 1.5 year horizon. (Reco. by Rishi Kothari)

IN right essence this is a challenge to the it companies to perform better which will take them to newer heights!

Basel II norms and preparedness of Indian banks

This article seeks to explore various dimensions of issues and problems that banking system might encounter after implementation of Basel II norms. To determine these issues and problems we will delve into various aspects of current banking system like role of central bank in implementing policy changes, complexity of the banking system in terms of assortment of banks of various sizes, importance in economy, geographical spread etc and current state of preparation to implement policy changes.

· Basel II – Modification of Basel I
Basel II is a modification of Basel I accord. The present accord has been criticized as being inflexible due to its focus on primarily credit risk and treating all types of borrowers under one risk category regardless of credit worthiness. The major criticism against the existing accord stems from its
• Broad brush approach – irrespective of quality of counter party or credit
• Encouraging regulatory arbitrage by cherry picking
• Lack of incentives for credit risk mitigation techniques
• Not covering operational risk
Therefore Basel committee proposed new norms which provide solutions of aforesaid problems. The newly proposed norms called as Basel II comprise of three important aspects which are termed as three pillars of Basel II. These are basically
1. Minimum Capital Requirements
2. Supervisory Review Process
3. Enhanced Disclosure


· Approach of RBI to the Basel II accord
RBI has designed a detailed road map for convergence of the banks to Basel II norms .This road map has been designed after due consultation with the banks .Banks were asked to decide upon the best alternative available to them for implementing Basel II norms and after considering this guidelines are prepared. These guidelines give due weight age to size of banks, complexity of operation, and availability of resources for implementation of these norms. Hence RBI has to formulate different guidelines for these banks which are at different stages of implementation of Basel II guidelines. For this RBI has formed a steering committee to suggest migration methodology to Basel II. Based on recommendation of steering committee RBI has proposed the “Draft guidelines for implementing new capital adequacy framework” covering the capital adequacy guidelines of the Basel II accord. These guidelines are with different level of stringency in terms of capital adequacy requirement.



· Indian banks and Basel II – Analysis of preparedness

I. General state of prepared ness: majority of the banks are confident of meeting deadline. MIS remain a major concern of majority of the banks.

II. Capital requirement: 54% of the banks are technologically equipped for Basel II norms implementation and have placed core banking solutions. 87 percent of respondent banks have already estimated the incremental capital required for this purpose in their organization. 27 per cent banks expect their capital requirements to increase by 1-2 % while 20 per cent banks expect their capital requirements to increase by more than 3 % during the implementation stage of Basel. Banks also predict that their capital requirement will increase after implementation of Basel II norms.


III. Impact on credit: 87percent of the respondent banks quoted that increased capital requirements imposed by the Basel accord will not make their banks more risk averse towards credit dispensation. Merely 13% felt that implementation of Basel II could have an
adverse impact on banks lending to commercial sector. Small and Medium enterprises and Farm and rural sectors are likely to be the most affected sectors.



· Issues and challenges for Indian banks: The issues and challenges that Indian banks might face after implementation of Basel II norms can be classified as Capital adequacy related, supervision related and disclosure related. All the issues under these heads are discussed in details in following part of the research paper.

· Conclusion: Implementation of Basel II has been described as a long journey rather than a destination by itself. Undoubtedly, it would require commitment of substantial capital and human resources on the part of both banks and the supervisors. RBI has decided to follow a consultative process while implementing Basel II norms and move in a gradual, sequential and co-coordinated manner. For this purpose, dialogue has already been initiated with the stakeholders. A steering committee comprising representatives of banks and different supervisory and regulatory departments is taking stock of all issues relating to its implementation. As envisaged by the Basel Committee, the accounting profession too, will make a positive contribution in this respect to make Indian banking system stronger.