Demonetization - RBI - Government of India v/s Dalal Street

Novemeber 8, 2016 was the historic day when the Prime Minister of India – Mr. Narendra Modi announced a 50-day drive towards demonetization of the already printed old Rs. 500 and Rs. 1000 currency notes effective from midnight of that date. The demonetization drive was basically put in action to end the fake currency circulation of the high denomination notes in the Indian economy and as a strict measure against the parallel or black economy. Since the announcement of the demonetization, people holding a huge chunk of black money have been finding innovative ways to safeguard their wealth. Some seem to have found out ways to safeguard a substantial part, while others chose to declare their wealth and bear the fines.

On December 31, 2016, the Indian Prime Minister had addressed the nation as the 50-day Demonetization drive initiated by the government was completed. Mr. Modi laid out several major incentives mainly for the poor, the farmers, women, pensioners and small scale business people.

Soon after the PM announced bank related incentives for these segments, several banks had cut their Marginal Cost of Funds Lending Rate (MCLR) with SBI leading the pack by cutting MCLR by 0.9% Other PSUs like Punjab National bank and Union Bank of India have announced a cut in the lending rates. India's largest private bank ICICI too cut its lending rates by 70 bps or 0.7%

Narendra Modi had earlier indicated that the budget shall be presented 1 month in advance. On January 4, 2017, the government declared that the Union Budget 2017-18 will be presented on February 1, 2017.

So now the question troubling investors and traders is, with these developments in place, will the stock market see a huge bullish run before the budget is presented by the Finance Minister? Traders would be hungry for an opportunity to book quick profits, while investors may be seeking that golden moment to enter the market for long term.

Writer’s Analysis on this Scenario

Expectations in the Indian economy

• 1   More than 85% of the market participants including majority of the economists were expecting a cut in the repo rate of 25 bps. during the Reserve Bank of India’s bi monthly policy meet on December 7, 2016. About 23% of those participants showed over-optimism and even expected a cut of 50 bps. because the CPI numbers that were released few days before the policy meet were well within the central bank’s target. The main reason of the CPI figure remaining in limit was that food inflation was low and within the expected range as a result of a good normal monsoon. The OPEC members had still (i.e. before the December policy meet) not reached a consensus to put a cap on the oil output sighting uncertainty from Iran’s and Russia’s stance. This kept oil prices well below $50 per barrel, which was in turn good for Indian economy as low import prices mean lower import bill for the Indian government (oil prices make up about 80% of the government’s import bill). Thus, two main components – food and fuel, which have more than 50% weightage in the CPI basket of goods seemed well under control. Also in its policy meet in October 2016, RBI governor Dr. Urjit Patel had stated that the neutral real interest rate in India is now 1.5 – 2.0%. This may also have raised expectations of the market for a probable rate cut during the December policy meet. However, RBI did not cut the rates and that had probably led to a dissatisfaction amongst the market players.
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• 2    Soon as the demonetization drive was initiated by the government, the economy was seeing a tough situation with liquid cash getting dried up in the country as the currency notes of 500 and 1000 denominations, which made up 86% of the total cash notes circulated in the economy were no longer valid. The industries directly and indirectly related with the consumer markets – mainly the FMCG industry, were facing tough time as potential consumers queued up in front of ATMs and banks to either exchange or deposit their old notes. Consumer goods market saw a substantial hit because of the demonetization drive – So much that analysts and domestic as well as international investment firms now revised India’s expected FY 2017 GDP growth down to 7.0 – 7.2% from the previously expected 7.6%. This was the second reason for the market players to expect that RBI may go for a rate cut so as to stimulate the state of economy and to support growth at pre-determined levels.

What may have kept RBI from cutting the interest rates on December 7, 2016

Ø  There were mixed expectations of people from the Demonetization drive. Many saw it as a bold and a good decision by the Indian government against the parallel economy (black economy), while many claimed it to be a step only to get an advantage in the upcoming Uttar Pradesh state elections (Uttar Pradesh state elections are considered to be very important for the government in power at the center i.e. the BJP government, as a majority win in the same can get them a good number of seats in the Upper House of the Parliament, where currently they have very few seats as opposed to the Lower House of the Parliament where they have more than two-thirds of the majority). The government had however claimed it as a step towards eradicating the parallel economy. The results of the same could be analyzed only after the entire drive got completed and government could actually measure the success of their initiative only after that. The RBI had raised the CRR from 4% to 100% after the demonetization drive was initiated (This was   however rolled back during the December 7 policy meet).

Ø  As of December 7, 2016, it was only a month since Donald Trump was elected as the President of The United States of America and the world was still confused on how the global economy would move ahead with this development. This was because there was Hilary Clinton’s win was what majority of the global market players were expecting but it turned out to be the other way round. However, in spite of Trump’s win the US markets went on to post one of the best performances since the 2008 Global Financial Crisis. Thus, there was still confusion prevailing in the markets. Over and above that, world’s highest growing emerging economy – India, was facing a tough time because of a tentatively slowing growth as cash started getting dried up in the economy following the demonetization drive.

Ø  Russia, being one of the largest non-OPEC oil producer, had shown a positive indication to put a cap on oil output – much what the OPEC member countries were looking for to take a decision on controlling the oil output so as to support prices. This had given a positive indication for the upward movement in the oil prices, which had remained at sub $50 per barrel levels for quite a long time. This move, which was a cheer for oil producing countries, was seen as a potential point of worry for the oil importing countries like India. Movement of oil prices from those levels to about $55 a barrel (which the OPEC member countries were expecting) could add up substantially to India’s import bill, which would pass on and add up to the domestic oil prices, which would in turn start reflecting in the prices of goods produced in the country as they move up. This again would create a rebalance in the import-export scenario in Indian economy and would also lead to a potential inflation upwards.

Ø  The artificial disinflation (which was assumed to potentially occur because of the already evident low spending and low economic activity) in India following the demonetization drive would start recovering once the new currency notes would fully replace the old notes and as India would come out of the temporary liquidity crisis. Thus, once a sudden jump in inflation would raise questions and create panic in the fastest growing emerging economy in case RBI would cut the rates on December 7 policy meet. The U.S. Fed had not increased their interest rates as was being promised before the presidential elections happened.

With all these factors in place, it would be very hazy environment for the RBI to put one more rate cut in place. Also, now as the decisions for rate cut and other monetary policy forming decisions are jointly being taken by 3 members from the RBI team and 3 government appointed representatives after the formation of Monetary Policy Committee (MPC), the political and economic environments simultaneously brainstorm in the process. Thus, in such an environment, it was quite evident that RBI would not be cutting interest rates in the December 7 policy meet as such decisions should maintain as consistency in the performance of the economy. It was quite surprising that about 85% of the market players were expecting a rate cut during that meet.

Writer’s Comments

Taking into consideration all the factors, it seems that in this less-than-one-month period before the Budget, economic activity will start getting back to normal with the new currency notes accelerating back into the economy as they replace the old notes.

As per the recent developments, the U.S. shale production will be increasing in the coming months though the OPEC members have agreed to put a cap. This may pose a threat to the commitment of OPEC and there is a possibility that the leading oil producers like Saudi Arabia and Iran will refrain from limiting their oil output in order to retain their market share, which will lead to Russia becoming active in the oil market again to retain its own market share. This may drive the oil prices back to sub $50 a barrel levels which is a possible big cheer for an oil importing country like India.

On December 31, 2016 when Mr. Narendra Modi addressed the nation to thank the citizens of India, he specially thanked the bankers for taking due pain during that period and also announced several bank related incentives as stated earlier. With this, he gave several indications towards the possible incentives in the 2017-18 Union Budget that is scheduled to be presented on February 1, 2017.

The leading public and private banks in India had recently passed on the rate cuts to common people by slashing their MCLR substantially.

But in the next RBI policy meet scheduled on February 8, 2017, I expect the RBI shall maintain the policy rates at the current levels, reason being that RBI may monitor the activity in the economy after demonetization for quite some time and until the results of demonetization are measured, it would be difficult to take major decisions. Also, the recent benefits of rate cuts that have been passed by the banks shall be monitored for some time. In case RBI cuts rate in the February meet, there shall be an oversupply of stimulus in the economy because of back to back events happening, which can be a potential driver of inflation, which is again bad for the economy in a long run. We should never forget the case of the U.S. Housing Bubble that happened as the U.S. Fed provided an oversupply of monetary stimuli by aggressively reducing the rates following the Dot com bubble and the 2001 World Trade Centre attacks, which ultimately led to the 2008 Global Financial Crisis.

In this scenario, I expect the market to remain range-bound at the current levels with a few upward and downward fluctuations or move slightly upwards by about 2% from the current levels till February 1, 2017.         

The writer can be reached at pgpb05.34@misbbocconi.com

- Harsh Pathak

Student and Core-Committee Member of Finance Club, MISB Bocconi - Bocconi India

Dabba Trading Comes to a Halt

As an aftermath of the Demonetization of old Rs. 500 and 1000 notes from the Indian Economy, expected results of curbing the Black Economy to a major scale seem to be positive at least from the stock market point of view. The recent news have shown that the illegal “Dabba Trading” has completely come to a standstill as traders face liquidity crunch with the highest denomination of Indian currency notes been demonetized and no longer considered a legal tender in the fastest growing economy in the world presently.

What is Dabba Trading?

Dabba Trading is an Indian Terminology, which is an illegal form of trading and is considered equivalent to Black Economy in the stock markets.

In dabba trading, a client buys and sells shares or index futures, with a broker who offers the outlawed service. The only difference here is that the trades are based on official (market) rates, but are not entered in any trading terminal and no securities ever change hands; they happen outside the purview of stock exchanges and regulators. The broker with whom the trade has been placed is the counterparty, just like a cricket or horse racing bookie. If the client makes money on the trade, the broker loses an equivalent amount, and if the client loses money, the broker gains by an equivalent account.

Everything is settled in cash. The 'brokerage' is higher than that for a regular transaction, and is usually in the form of a spread; the client will have to pay slightly above the market price in a buy trade and will get slightly below the market rate in a sell trade. Still the savings on margins that have to be maintained with stock exchanges for regular trades and savings on income tax (in case of profitable trades) more than make up for the higher brokerage.

How is Dabba Trading linked to Black Money?

There are brokers who specialize in what can be called ‘unofficial official’ trades for high networth traders who want to avoid the taxman’s glare. The trades are perfectly legal and routed through the broker’s terminal, but the profits and losses are settled in cash. Also, there are no records of the clients who transact with these brokers.

This is contravention of the SEBI rule that insists on all dealings between the broker and client being done through cheques. The 'cash broker' will enter all his clients' orders in his own proprietary book. If the client makes money, the broker pays him in cash, and if the client loses money, the broker collects in cash from him. The benefits for the clients are that they do not have to put up margins, and do not have to pay taxes on the profits earned. The broker charges a higher commission on these trades in return for the ‘facilities’ he is providing.

For this business to be profitable for the broker, there should not be a huge profit on his books at the end of the year. Else, he will end up paying tax on that money, since all the trades are shown in his name. Also, having a good client base is important. It is the cash collected from the losing clients that is paid out to the winners..

Many of the high-volume traders on Dalal Street, and even some of the so-called investment gurus, are known to route a sizeable chunk of their trades through brokers who settle in cash, to avoid tax. And while the brokers manage to balance their accounts at the end of year, the Income Tax department is only too aware of the cash transactions in the stock market and of the tricks resorted to conceal them. Still, with help from skilled chartered accountants and some accommodative assessing officers, the game has been going on for a while.

Effect of Demonetization

The Rs. 500 and 1000 notes, which made up 86% of the cash in the Indian economy, have been scrapped as a legal tender in the country since November 8, 2016. With this, the black market cash economy, which is considered to be consisting money in these denominations, has taken a big hit. Some of the dabba brokers who accept big trades, hedge their bets by taking an opposite position in the official market. This adds to the liquidity in the market.

Black money holders who indulged in Dabba Trading are facing a severe liquidity crunch and the trades of this kind have come almost to a halt and are in turn putting pressure on the stock prices.

So… Finally there are some positive results showing up for the bold step of demonetization that the present Indian Government has taken to curb the Black Economy. A Great News indeed!! The present effects of this may seem to be negative (in terms of Stock Market Reactions), but however, its long term implications seem to be much more positive and are expected to outweigh the present negative impacts.

- Harsh Pathak

Student and Core-Committee Member of Finance Club, MISB Bocconi - Bocconi India

Where is Oil Heading

Major Oil Indexes

Western Texas Intermediate (WTI) – WTI refers to oil extracted from the wells in the U.S. and sent via pirpeline to Cushing, Oklahoma and crude supplies are land-locked. The product is very light and very sweet, making it ideal for gasoline refining, in particular. WTI is the main benchmark for the oil consumed in the U.S.

Brent Blend – Roughly two-thirds of all crude contracts around the world reference Brent Blend, making it the most widely used marker of all. These days, “Brent” actually refers to oil from four different fields in the North Sea: Brent, Forties, Oseberg and Ekofisk. Crude from this region is light and sweet, making them ideal for the refining of diesel fuel, gasoline and other high-demand products. And because the supply is water-borne, it’s easy to transport to distant locations.

Brent is the reference for about two-thirds of the oil traded around the world, with WTI the dominant benchmark in the U.S. and Dubai/Oman influential in the Asian market.

Source: Intercontinental Exchange (ICE)

The preference for Brent crude today stems from the fact that it may be a better indicator of global oil prices. It's also still considered a sweet crude, despite having a higher sulfur content than WTI.

Although most Brent is destined for European markets, it's already used as a price benchmark for other grades.

As per Bloomberg, “Brent represents the Northwest Europe sweet market, but since it's used as the benchmarks for all West African and Mediterranean crude, and now for some Southeast Asia crudes, it's directly linked to a larger market."

Oil Market Outlook

Oil rose more than 1 percent today (November 7, 2016), boosted by a commitment from OPEC to stick to a deal to cut output.

Brent crude $ 46.20 per barrel at 17:30 IST, up 62 cents, or 1.36 percent, from the previous close. At the same time, U.S. West Texas Intermediate (WTI) crude was up 75 cents, or 1.7 percent, at $44.82 a barrel.

Mohammed Barkindo, Secretary-General of the Organization of the Petroleum Exporting Countries said at a conference in Abu Dhabi that the group (OPEC) was committed to an output-cutting deal made in Algiers in September.

Oil futures posted their biggest weekly percentage decline since January last week with Brent falling as low as $45.08, its weakest since Aug. 11, and WTI hitting $43.57, its lowest since Sept. 20. (Source: Reuters). There are also risks that the oil glut, which has dogged markets for over two years, could continue as OPEC's de-facto leader Saudi Arabia threatened to increase production. Even if Saudi Arabia does not follow through on that threat, its exports could rise.

"Saudi local oil demand is falling, and just maintaining current output could imply higher exports," Barclays bank said in an interview to Reuters.

What Major Oil Companies Expect…

In a recent report by Financial Times, Royal Dutch Shell and BP recently warned investors not to expect a strong rebound in oil prices next year as they set out plans for further cuts in spending to contain rising debts. The UK-listed oil majors both said they were planning for prices per barrel in the low $50s in 2017 — only a little above current levels — in a sign of the industry adapting to “lower-for-longer” market conditions.

Oil prices have stabilised in recent months after the sharp falls from $100-per-barrel crude two years ago but Shell and BP made clear they were not counting on a return to previous peaks.

“We see some firming in prices next year but nothing significantly north of what we see now,” said Brian Gilvary, BP’s chief financial officer, after announcing a 48 per cent drop in the group’s third-quarter earnings. Shares in BP closed down 4.5 per cent at £4.62 after publication of its results, which were dented by lower refining margins at the group’s downstream business as well as losses in upstream exploration and production.

Shell  reported an 18 per cent increase in profits which reflected heavy cost cuts after the group’s £35bn takeover of BG Group, completed in February.  However, Ben van Beurden, Shell’s chief executive, said: “Lower oil prices continue to be a significant challenge across the business, and the outlook remains uncertain.”

The more positive investor response to Shell’s results, meanwhile, reflected relief at its improvement from the prior quarter, when profits fell by 70 per cent (Source: Financial Times)

The continued squeeze on prices was reflected in the latest spending cuts outlined by BP and Shell.

Mr. Gilvary said BP’s capital investment would fall to about $16bn this year, down from an earlier forecast of $17bn to $19bn, and would remain broadly stable at $15bn to $17bn in 2017.

Shell said its capital spending would be about $29bn in 2016. This is almost 40 per cent less than the combined investment of Shell and BG Group two years ago. Spending would fall again in 2017 to about $25bn – the bottom end of Shell’s previous guidance of $25bn to $30bn – in an indication that oil majors intend to keep low spending.

Iain Reid, analyst at Macquarie, said: “They are making sure they do not crash and burn next year. They have cut capex down to almost the lowest possible level.”

In an interview with Bloomberg in Abu Dhabi, Bob Dudley, BP’s CEO said that he expected oil to touch $55 a barrel in 2017. He said, “Oil supply and demand is “generally” in balance, it’s just waiting until the stocks drain out.”

Eni SpA, an Italian multinational oil and gas company headquartered in Rome which posted a greater-than-expected third-quarter loss, is reducing capital expenditure at least through next year, its CEO Claudio Descalzi said in an interview with Bloomberg. As per Bloomberg reports, Eni is among major oil producers that are under pressure since crude prices plunged to less than half their 2014 peak levels. The company pumps crude in Iraq and is developing offshore natural gas fields in Egypt and Mozambique. Descalzi said oil prices would be high enough over the next three years for his company to maintain investment spending and its dividend. “Our number that’s good to cover our investment, and our operating cash flow is $50.” Prices could trade as high as $65 in the next three years, he said.

Exxon Mobil Corp. CEO Rex Tillerson, said:  “Capital spending will be “highly variable” from one producer to the next. There’s still a significant supply overhang and inventory overhang that needs to be worked through.

Energy investment will be 44 percent lower than expected from 2015 to 2020, compared with expectations before crude prices collapsed about two years ago, author and energy consultant Daniel Yergin said in an interview in Abu Dhabi. “‘When you look at all the postponements and cancellations, that will add up later in this decade,” he said.

Oil Outlook Ahead

According to a report by McKinsey & Company published in November 2016 – “Energy 2050: Insights from the ground up”, Fossil Fuels will dominate energy use through 2050. This is because of the massive investments that have already been made and because of the superior energy intensity and reliability of fossil fuels. The mix, however, will change. Gas will continue to grow quickly, but the global demand for coal will likely peak around 2025. Growth in the use of oil, which is predominantly used for transport, will slow down as vehicles get more efficient and more electric; here, peak demand could come as soon as 2030. By 2050, the research estimates that coal will be down to just 16 percent of global power generation (from 41 percent now) and fossil fuels to 38 percent (from 66 percent now). Overall, though, coal, oil, and, gas will continue to be 74 percent of primary energy demand, down from 82 percent now. After that, the rate of decline is likely to accelerate.

As per the Monthly Oil Market Report by OPEC released in October,

• ·         World Oil Demand

World oil demand in 2016 is seen to average 94.40 mb/d. In 2017, world oil demand is anticipated to rise by 1.15 mb/d, unchanged to average 95.56 mb/d. (Demand for OPEC crude in 2016 is estimated to stand at 31.8 mb/d, an increase of 1.8 mb/d over last year. In 2017, demand for OPEC crude is forecast at 32.6 mb/d, a rise of 0.8 mb/d over the current year).

• ·         World Oil Supply

     Non-OPEC oil supply in 2016 is expected to contract by 0.68 mb/d to average 56.30 mb/d. In 2017, non-OPEC supply is anticipated to show growth of 0.24 mb/d to average 56.54 mb/d, mainly due to new projects coming on stream in Russia. OPEC NGLs are expected to average 6.43 mb/d in 2017, an increase of 0.15 mb/d over the current year.

• ·         Demand for OPEC crude in 2016 is estimated to stand at 31.8 mb/d, an increase of 1.8 mb/d

     over last year. In 2017, demand for OPEC crude is forecast at 32.6 mb/d, a rise of 0.8 mb/d overthe current year.

According to Bloomberg data, “Oil producers in the North Sea are poised to ship the most crude in more than four years. This expected surge is in line with the expectations that OPEC will try to contain a global surplus with coordinated output cuts. Shipments of North Sea grades will increase 10 percent month-on-month to about 2.16 million barrels a day in December.”  The surge poses yet another challenge to the Organization of Petroleum Exporting Countries as it seeks to curb production to steady markets in a world with plenty of oil. OPEC ministers will meet in Vienna on Nov. 30 to decide how to trim output to a range of 32.5 million to 33 million barrels a day. Libya, Nigeria and Iran are claiming exemption from cuts because of their own circumstances, and Iraq has contested how its output has been measured.

While supplies from some nations outside of OPEC are indeed falling, non-members boosting their crude output include Kazakhstan, Brazil and Russia, which last month pumped oil at a post-Soviet era high (Source: Bloomberg). OPEC itself increased production to a record 34.02 million barrels a day in October, according to a Bloomberg survey of analysts, oil companies and ship-tracking data. In addition, the U.S. is now freely shipping its oil across the globe, following the removal of export restrictions last year.

On November 7, 2016, Mohammed Barkindo told reporters in Abu Dhabi that, Russia – the world’s biggest energy producer – is “on board” with an OPEC agreement to limit crude oil production to help re-balance the market. “OPEC producers remain committed to an agreement reached last month in Algiers to trim output, and cooperation from non-OPEC producers will help bring the oil market back into balance” he said. Russia is due to join OPEC for talks later this month in Vienna, where OPEC will convene for its bi-annual meeting.

The Organization of Petroleum Exporting Countries, which pumps about 40 percent of the world’s oil, is trying to persuade producers from outside the group, such as Russia, to join the cuts. OPEC wants to put the changes into effect when it meets in Vienna on Nov. 30. The group has held talks over the past weeks with producer nations Russia, Azerbaijan, Brazil, Kazakhstan and Mexico.

According to Bloomberg report, Russia, the world’s largest energy producer, pumped at a post-Soviet record of 11.2 million barrels a day last month. With new fields ramping up production and more due to start producing before year-end, its output may climb further. Energy Minister Alexander Novak indicated that Russia was willing to freeze production for six months or more, rather than cut, and only if OPEC reached an agreement first. Bottom of Form The Algiers accord helped push oil prices to a 15-month high above $50 a barrel, but crude has subsequently fallen as several OPEC states disputed production estimates that would determine the size of cuts by individual members of the group. Without a deal, OPEC will return to the policy of pumping without limits to secure sales.

Author and energy consultant Daniel Yergin said in an interview, “OPEC members Iraq and Iran represent a “sticking point” that needs a resolution if there is to be agreement to limit production. If there isn’t an agreement, it’s back to battle for market share.”

As per the World Economic Outlook report published in October 2016 by International Monetary Fund (IMF), by the end of FY17, Brent Crude is expected to see the levels of $51 a barrel sighting the fact that demand in Developed Economies will be stagnant and major of the growth in demand that previously came from them will be balanced by the growth in demand from Major Emerging economies like India and China.

From here, oil is seen to meet the levels of $53-55 a barrel. In the mean time, let us watch what happens in the U.S. presidential elections!! 

- Harsh Pathak 
Student and Core-Committee Member of Finance Club, MISB Bocconi

Insider Trading

In this post, we bring to you the concept of Insider Trading. Yes! The same thing which got Rajat Gupta, MD of McKinsey at that time and a co-founder of one of the leading international business schools in India, a 2 year jail in the U.S. federal prison.

The Birth..

Insider trading is something that has been around ever since the first stock markets opened up in the Netherlands in the 1600’s but its effects on investors and economies were not fully understood till the 20^th century

What Insider Trading means…

Insider trading refers to the trading of a company’s stock or other public securities by an individual who has access to non-public information (i.e. classified or privileged information) about the company or an upcoming event that could impact the markets

Punsishable?  Yes indeed!

Insider trading is considered wrong and illegal as it gives the people who posses privileged information and unfair advantage over the average investor and they could make much larger profits than an average investor, which makes it very unfair to the general investing community.

Notable Cases of Insider Trading

1.       Albert H. Wiggins
The Roaring 20’s : 1920’s America was gave birth to one of the most bullish markets ever seen by man, it was a market with almost no regulation which enabled a select few to put easily put up smokescreens and market operations to reap profits. One of the most famous of these was the Wiggins case in which the head of the Chase National Bank at the time, Alfred Wiggins shorted over 40,000 shares of his own company and made millions in the markets. The funny part was that there was no law against this at the time and it prompted the creation of a Securities Law termed as the “Wiggins Acts”.

2.        The Great Bilzerian
We are all aware of the flamboyant Instagram playboy Dan Bilzerian but few of us know how his father Paul Bilzerian made the millions of dollars he would later bestow upon his sons. In the late 80’s Pauls Bilzerian was involved in several cases of stock parking and greenmailing in which he used takeover information he has to get companies to buyback their own shares from him at higher prices. He was sentenced to 4 years in prison and a fine of 1.5 million dollars, but he still had enough money to leave his sons 100 million dollar trust funds.

3.       The Greedy Journalist
The Foster Winans case is unique not because of the volume of damages caused but rather due to the curious way in which it was carried out. Forster Winnans was a coloumist for the wall street journal who wrote a weekly stock profile column. Winnans had such an impact on the market that the stocks he wrote about often went up or down according to the contents of his article. Eventually Winnans began to leak information about his upcoming articles to traders who began using this information to make insider trades from which they gave Winnans a cut of the earnings.

4.       The Christmas Debacle
In Dec 2011 two HSBC traders were involved in a currency front running scam (stocking up currency in anticipation of a future transaction) in a deal handled by HSBC on behalf of Cairn Energy which involved a merger-acquisition in which the Pound Sterling for the transaction was to be sourced by HSBC. The traders took advantage of this situation and bought the currency in advance, resulting in extra and illegal profits for themselves and the bank. They were recently apprehended by the department of justice and a sensational audio clip was recovered with one of the accused describing the deal as,” ohhh, f*****g Christmas”.

Who is the Police?

1  United States : Insider trading is dealt with very differently in different countries. States like the US have very stringent regulations about insider trading as they have a long history with it and we all can learn from them. In the US most of the regulation and legislation is handled by the SEC and the enforcement and prosecution is carried out by the department of justice.

2   European Union : In 2014 the European standardized the legislation for insider trading in its member nations through the Criminal Sanction for Market Abuse Act in which all EU member states agreed to introduced prison sentences of 2-4 years for Insider trading.

3  India : In India most of the regulatory and legislative duties are performed by SEBI, which was empowered in the wake of the Harshad Mehta Scam in 1992. In India securities market legislation and enforcement is carried out by SEBI which acts as a watchdog for most sectors of the financial sectors and protection of Investor Interests.

And…… What is the IMPACT of Insider Trading?

In a broader perspective the entire market is considered a victim of insider trading as directly or indirectly the entire market is affected by the price fluctuations and misappropriations caused by the misuse of information by privileged parties. However even though the traditional opinion is that loss of confidence in the markets caused by insider trading harm the average investor and in extension the economy might be misplaced.

Several prominent economists including the Great Milton Friedman have argued that insider trading is one of the closest things to a victimless crime that exists in modern society. The basic theory is, insider trading a way to correct information asymmetry. The fact that information can be distributed to the entire market by the actions of a few privileged information holders should be treated as boon and the buying or selling pressure for a stock will automatically become a source of information for an investor.

The argument to legalize insider trading makes several arguments from the perspectives of free speech, and the fact that insider trading on negative information might actually save a lot of investors a lot of money. In reality however we are far away from ever legalizing insider trading as the act of giving and unfair advantage to certain investors over others seems to be enough of a deterrent to stop and talk of the legalization of insider trading. Only time will tell if this level of liberalization will ever be accepted in the financial markets of the world.

Here is the turning point but..

Insider Trading is legal!! Wait wait before having any thoughts…please read the Terms & Conditions ahead……

The legal version is when corporate insiders—officers, directors, and employees—buy and sell stock in their own companies. When corporate insiders trade in their own securities, they must report their trades to the Regulatory Body of the Securities Market.

- Arko Biswas

Student and Core Committee Member of Finance Club, MISB Bocconi

Relaince Jio - A Masterstroke or An Upcoming Nightmare for Indian Consumer?

The SCENE

Probably it happened for the first time ever that “Idea” came in after action!! Are you amazed the same way like I was with this news? Ok, let me come to the center story without beating around the bush. Bharti Airtel slashed its 4G data offering rates by 80% and soon after, Idea cut its 3G/4G rates by up to 67%. Coming up next is Vodafone that is expected to cut data offering rates soon. And guess who is the devil behind this master game… Yes!! You you’re right!! Reliance Jio it is!!!

The Mukesh Ambani-led Reliance Group, with its revolutionary product – Reliance Jio, is giving sleepless nights to major service providers in the telecom sector. Even before its commercial launch, Reliance Jio claimed to have 15 lakh subscribers of its 4G network. The SIM card of Reliance Jio comes bundled with LYF smartphones priced as low as Rs 2,999. Jio is offering 90 days of free unlimited 4G mobile Internet and voice calling in the SIM cards. And now, this offer has been extended to OEMs like Gionee, Karbonn, Lava and Xolo. A pricing masterstroke it seems!!

But the real question here is whether this entire scenario of data rate cuts, driven by Reliance Jio, is really beneficiating Indian consumers!!

Government’s Expectations v/s Expected Reality

The Government of India is expecting to raise $83 Billion from the mega sale of mobile frequencies, the biggest ever auction, starting from October 1, 2016. There have been, however, building doubts on the success of spectrum auction raised by industry experts who say that the base pricing of the base airwaves is quite high.

There is still another big underlying story that is expected to affect the sale of this spectrum.

Aggressive price war to retain the market share has already led the highly debt-laden carrier companies to lower their tariff rates by a highly substantial amount which is expected to give a blow to the revenues of the carriers. (On August 30, 2016 i.e. a day after Bharti Airtel declared a slash in 4G rates by about 80%, its stock fell by about 3%).

(Source: Bloomberg)

Adding to the headache of these companies is the gloomy outlook on the telecom sector. As per a report published by Fortune, between 2012 and 2018, the Indian telecom sector is set to lose $386 Billion due to the increasing usage of services like Skype, WhatsApp, Lync etc. with data tariffs falling continuously as a result of the service providers getting in a fierce price war to retain their market share.

(Source: Bloomberg)

As per Bloomberg’s latest report, India’s 12 wireless companies carry more than $61 Billion in debt. A credit ratings agency – ICRA (A Moody’s Investors Service Company) had recently estimated that in the scenario of high debt already on the books of carrier companies, falling revenues from voice calls and now the aggressive data tariff cuts by the service providers, the carriers may spend just $9.7 Billion in the upcoming auction.

What the Industry has to say…

When asked about their strategy of future business in India due to shift of consumers’ attention from voice calling to VoIP, Vodafone’s Head of Organizational Effectiveness said that, “At the moment we realize that the telecom is increasingly becoming a cut-throat market, our present strategy lies in making Vodafone a leading market player in India.”

On Reliance Jio’s product rollout, Idea’s chairman Kumar Mangalam Birla said in an interview with ET Now that Idea is going to bid very sensibly in the spectrum auction. “We have got a larger player like Jio entering the market with a large presence on the ground, in terms of huge asset base, a player with very deep pockets and it is bound to be disruptive. So, I think for all of us incumbents, it is going to be a tough two years but it will be exciting to see how it plays out” said Mr. Birla in the interview on July 27, 2016.

Worrying on the level of return that the auction shall give, Telenor ASA has said that it won’t be bidding in the auction as the return are not up to an acceptable level.

As per the estimates of International Data Corp., the Indian smartphone base will reach to 600 million by 2020. This requires improving the coverage would hence be crucial for the service providers. While Bharti Airtel has not commented their stance on the upcoming auction, Sunil Sood (Managing Director, Vodafone) has said that Vodafone will bid for the spectrum. It is further expected that Vodafone shall turn out to be the largest bidder in the $83 Billion spectrum auction starting from October 1, 2016.

Government in a deep soup?

While it is expected that the carriers will bid for just $9.7 Billion in the auction, it directly implies that the government will be facing a blow of $73 Billion (a huge amount!!!) leading to failure (87% expected shortfall) of the biggest spectrum auction that has ever happened in India (a major event!!). This in turn will raise doubts on the capability of government to meet/fulfill its projected economic activities. (Doubts on the capabilities of one of the most capable governments?? Definitely not a good news!!)

Blogger’s Comments

Over and above this, recent reports of the least exploration of oil this fiscal year since 1947 has put speculation among market analysts who are taking caveats at meeting the future oil demands. This substantial fall in exploration (least in the past 70 years) will soon lead to a shortfall in the oil supplies. A global spending on exploration has been already cut to $40 Billion this year from about $100 Billion in 2014, and this is in turn mounting more doubts on the future outlook of oil markets. Global benchmark Brent stood at $49.59 a barrel on August 30, 2016. With expected drop in oil supply and growing demand, if oil prices go up by a notable amount, it would further add to the import bill (oil imports make up 80% of India’s import bill), doing nothing but increasing headache of Indian government in addition to its reputation getting hampered as a result of the expected 87% shortfall in bidding participation ($73 Billion blow) in the spectrum auction.

Higher Import Bill & fair exports (in the face of stagnant global demand) => Higher CAD => Impact on Forex Rates => Higher Inflation => Lower Real Interest rates => Lower deposit in banks => worrying bank outlook => lower loan growth => New RBI governor Dr. Urjit Patel will find it difficult to cut repo rates => Market will raise doubts on Dr. Patel as a good governor => Doubtful outlook on Indian Economy => Investments in the economy affected => Dr. Raghuram Rajan’s work goes in vain (No, we don’t want this to happen!!!)

From one scenario, where consumers are seemingly getting an advantage of the gigantic data rate cuts by the carriers, looking at the expected broader macro-economic data, does the consumer actually seem to be getting the advantage? Is Reliance Jio actually benefitting Indian consumer?

Amidst our speculations, let’s wait and watch what actually happens on October 1, 2016. Stay tuned!!   

- Harsh Pathak

  Student and Core Committee Member of Finance Club at MISB Bocconi - Bocconi India