“Rescue packages are like a contagious disease”

Abhishek Goenka, CEO of India Forex Advisors, a foreign exchange consulting company, speaks to Moneylife’s Sanket Dhanorkar about his assessment of the euro bailout package, the impact on the rupee and the growth in the currency futures market

Moneylife (ML): How do you see the current scenario in the global currency markets? Given the euro’s difficulties, how would it impact global currencies?
Abhishek Goenka (AG):
Because of the problems in the eurozone, we have seen around a 10%-15 % fall in the euro. This has impacted other countries like the UK also. Despite this fact, in the case of dollar-rupee, we have not seen significant corrections in the inflows into India. However, this seems to be on the cards, which could show us (some) weakness in the near-term. Foreign investors are likely to pull out money from the emerging markets due to the liquidity crunch overseas. This will have a weakening effect on the rupee. The process of weakening has also started in other Asian currencies. The yen has remained largely range-bound. Also, expectations of an appreciation in the Chinese yuan have dipped as their exports will get hit in the current scenario. We believe the euro will weaken further to around 1.20 levels and below. Overall, Asian currencies will continue to be weak.

ML: What products are being sold by banks currently? Have exotic instruments disappeared or still existing in some other form?
Most of the structured products, which were being offered by the banks, have kind of stopped. Largely because most of these corporates had burnt their fingers in 2008-09 and also because there have been cases of default and erosion of net-worth in some cases.  Moreover, people don’t want to make fresh calls in the market currently due to global imbalances. Banks also want the management to first understand the product and then sell these products. There are very limited products being offered now—like plain vanilla range forward products or a zero-cost option where there is not much leverage. Only very large corporates are entering into structured products. Smaller companies are not entering into such deals.

The Reserve Bank of India (RBI) is considering barring such small companies from entering into exotic derivatives contracts. They will put certain stipulations in terms of net-worth and overall exposures. So now, only the bigger corporates will be allowed to enter into exotic instruments where the level of understanding and risk appetite is there. Banks are also not very aggressive in selling these kinds of products for mid-sized companies. It will take some time for interest to come back from both banks and corporates. So I think this is a good move by the RBI because totally stopping the entire derivatives products is no solution. Financial markets are all about evolution. Companies that are making money or reducing costs from such instruments have a team that understands these structures completely and the purpose is generally hedging. But the case with some SMEs and smaller companies is that they do not have experts to manage their treasury. They normally move according to the herd. If others are parking money in some instruments, they will also enter the product without understanding the risk. So it is makes sense to allow only those companies into such structures that understand the risk, have proper risk management practices and whose valuation allows them to take a slight hit without impacting their net-worth.

ML: What is required in terms of regulations and transparency for the currency derivatives segment?
There could be a compulsion to have risk management policies for every company that has foreign exchange exposures and want to take even a simple forward contract. This will ensure that everybody knows what they are doing and understand the maximum downside risk. The government could also think of designing a comprehensive test structure where only a qualified treasury team would be authorised to transact with the bank. The RBI could also stress on documentation i.e., if you are entering into a forward contract, they could check if you have the supporting documents to back your transactions. They could also have stronger audits in place for banks selling such products. In this way, the RBI can be updated on mark-to-market losses in the client’s books and any improper contracts can be controlled and tracked.

ML: What are the current trends in the currency markets segment?
The currency futures market has picked up tremendously in the past year or so. In fact, in the years to come it might cross the overall over-the-counter (OTC) derivatives market in India. It has already crossed around Rs35,000 crore-Rs40,000 crore  in terms of volumes. So many of our clients are showing interest in currency markets both for hedging and trading purposes. There are also cases of arbitrage at times between the currency futures and OTC forwards market, which has increased the overall interest. Currency has always been a bigger market than equities and commodities. We have seen a significant increase in currency exposure in India. In fact, pretty soon we will see total volumes in the currency market exceeding that of the equity markets in India.

ML: RBI has allowed options trading in the currency futures market. What is your opinion on this move?
Going by the past history I don’t think options trading will take much time to catch up. What is definitely required though is that the tenure of the contract should be increased from three months to six or eight months. Because, if suppose in the OTC market, you have an exposure in December, you can book a contract there. You cannot take similar exposures in the currency futures market. Training needs to be imparted and certification courses should cover the subject in details.{break}

ML: What is your advice for retail investors wanting to participate in currency markets?
Whether it is sponsoring education abroad, medical expenses or travelling abroad, retail participants have a great opportunity in this market in terms of hedging as well as for trading purposes. The more participation we see in the currency market, the liquidity improves and we have better price discovery. Earlier the arbitrage between the currency futures and OTC forward markets used to be as high as 20 paisa. Now it has come down to just 3-4 paisa. The best part is that the market is totally transparent.

My advice to retail participants is, one should read before investing instead of pumping all your money into the markets. You could probably set aside 10%-20% of your portfolio for currency exposure. Start with a small kitty; otherwise the confidence will get broken with the first loss. Track the movements very closely as also the political and economic factors affecting the movement. You should read the research reports published on various sources to get an understanding. Slowly, over a period of 3-6 months, you will be well-equipped to deal with the currency market. Education should be a continuous process. If you are really passionate and treat it like a business, there is no reason why you should not make money.

ML: What would be the ramifications if more institutions like Goldman Sachs are found out?
If anything as big as this happens, which involves a 100-150 year old bank or institution; there will be a definite risk aversion in the markets. Liquidity will get sucked out as the confidence goes down. Bond spreads will go drastically higher and yields will go up. The dollar will get very strong. There will be a bout of risk aversion, which will cause commodities to go down. The currencies will take a hit—which includes the emerging markets also. What will go up is only gold and the dollar. I will not be shocked if in the coming 2-3 months we see such kind of news with some (other) big institution coming up again. I don’t think the entire story has come out yet. There is a possibility that things might get out of control. At that time the ramifications will be huge. If the problems in Europe intensify, a lot of Ponzi schemes like Bernard Madoff’s will go bust. The overall sentiment would be hurt very badly. The timing of Goldman Sachs’ problem was not as bad as it is today. If such a thing were to happen in today’s scenario, the markets would have reacted very badly as sentiments are very poor. At that time, sentiments were neutral.

ML: What is your sense regarding the impact of the bailout package?
We have to get into the details of the rescue package—the size and scope of bond purchases by the European Central Bank (ECB). It has to be approved 100% in-principle by all the countries, which has not yet happened. The implementation process should also be fast and Greece should accept all the terms. The problem may worsen till the time it is implemented. That’s the reason why after the announcement we saw these currencies moving up but (they) ultimately fell with a bang. The rescue package has not given that much confidence to the market.

ML: Is it wise to introduce such huge bailout packages or should countries be allowed to take a hit?
Earlier, we have seen that rescue packages have only delayed the problem, they have never ended it. It is like a contagious disease. If you let everybody get afflicted by it, you will have a global reaction. So a rescue package should be designed in a way that the country can be bailed out over a period of time with penal interest. The norms of the bailout should not be very relaxed; otherwise it might become a habit. For instance, if in India, you keep bailing out farmers, they will never repay loans. Ultimately, it is the taxpayers’ money. Why should the taxpayer suffer for it? While creating the eurozone, the terms stated that the fiscal deficit should be limited to 3% of the gross domestic product (GDP). Everybody has flouted the norms, including Germany and Italy. So when you have such norms, you should stick to them. Countries that cannot do so should take a hit and be penalised.

ML: How do you think the competition among stock exchanges in this segment is playing out?
We have witnessed an enormous increase in volumes in the past year or so. Any exchange, which is able to get the maximum share, will benefit a lot. That is why there is such intense competition. When NSE came to prominence, BSE took a step back. Now, the MCX and NSE are trying to fight each other for the pie. It has a lot to do with the first-mover advantage. The more popular an exchange, the more liquid it is and more members will get attracted to it. It is also a game of valuation. The exchanges have to show a good valuation if they are to attract investments from abroad.

ML: What are your expectations regarding the short-term and medium-term movements in the dollar-rupee rate?
In the short-term (2-3 weeks), the rupee will move to about 46 levels. In the medium-term (2-4 months), I still feel the rupee will remain weak. I would expect it touch around 47 levels because if it maintains about 45.50, then it will enter into a temporary bearish phase. This is a level, which is a long-term downward trend line. Such trend lines don’t break so easily. The Elliott wave analysis shows that a medium-term bottom has been made at around 44.10 A-B-C correction of the rise from Rs39-Rs52. Please also note 44.10 is the 61.8% retracement of the rally from Rs39 to Rs52. So, one should not book exports for long-term. One should not be taking a call of more than three months. The downside in the rupee is clearly open till Rs47.20. We might see decent corrections in stock markets also, which would weaken the rupee further.


Savings bonds don’t carry nomination option for joint holders

Entitled legal heirs to these financial instruments will have to face a lot of time-consuming paperwork and legal hassles if these bonds are transmitted to them

According to the government of India’s 2003 notification, savings bonds do not carry a nomination option for joint holders. With no nomination facility available, any entitled legal heir will have to face a lot of paperwork and legal hassles for inheriting the funds accrued in such bonds.

“I thought nomination is mandatory for all financial assets as well as physical assets. Didn't all co-operative societies make it compulsory for members to have a nomination some years ago? I just discovered this when I received a bond certificate (for the Govt of India 8% savings bonds) with the section 'Nomination Registered at Sr No' struck off,” said Dr Nita Mukherjee, a well-known researcher.

According to the 2003 notification, the sole holder or a sole surviving joint holder of bonds can nominate one or more persons who shall be entitled to the bonds and the payment in the event of his or her death. This means that only the surviving member of a joint bond account can nominate someone. ”The government presumes that both holders of a joint bond account won’t expire at the same time,” said Bhavesh Gagiwala, a certified financial planner (CFP) at Falguni Investment.

Mr Gagiwala added that joint holding allows three applicants—and the government didn’t think that nominees were a necessary option. “Some of our rules are so weird and you can’t complain or take it up to someone, as this is a government scheme,” said Yogin Sabnis, a CFP from VSK Financial Consultancy Services.

But nomination is the simplest way for transfer of funds to legal heirs during the time of death. Without such nominations, heirs have to do a lot of paperwork and spend a lot of money and time to get the assets. “If there are no slots for nomination, which is your inherent right, then that is a tremendous issue,” said Vivek Rege, MD, VR Wealth Advisors Pvt Ltd.

A legal heir entitled to these assets would have to do a lot of paperwork, which include signatures from various relatives and the filling up of a nomination or succession form. These signatures would be proof for the issuing authority of these financial instruments in order to release the assets.

Added to that, heirs who have not been expressly nominated would also have to issue advertisements informing the public that they are the legal heirs and should receive no objection from their relatives. The entire scenario becomes very time-consuming and the heirs have to shell out a lot of money for legal fees.

On 20th April, the Bombay High Court had ruled that in case of transmission of shares, all ownership rights will vest with the nominee rather than the legal heirs.

Mr Sabnis said that the rule may have been implemented in order to reduce conflict. This is a major lacuna in whole process and leaves a lot of unanswered questions for customers.

However, certain banks provide you with a separate nomination form when you want to open a savings account. However, it is not compulsory for banks to have a separate nomination column.


SEBI plays double standards on Standard Chartered IDR issue

While the big multinational Standard Chartered Bank was allowed to blank out disclosure of litigation, then why were Indian banks such as Lakshmi Vilas Bank and United Bank of India not allowed this favour?

Even as the first-ever Indian Depository Receipt (IDR) issue of Standard Chartered Plc is set to open in the Indian capital markets on 25 May 2010, questions about its non-disclosure of numerous litigations still remain open. The bank’s name was involved in the 1992 Harshad Mehta securities scam, which rocked the Indian capital market. However, the Securities and Exchange Board of India (SEBI) has turned a blind eye over all its pending litigations and has quietly passed the red herring prospectus (RHP), while Lakshmi Vilas Bank Ltd and United Bank of India have had to disclose all their pending litigations.

Standard Chartered has been taking the stand that the litigation is not ‘material’. The question then remains, why did SEBI seek a disclosure from these two Indian banks?

Lakshmi Vilas Bank Ltd, in which the Harshad Mehta Group held 2,700 shares in connection with the 1992 securities scam, disclosed the case in its draft red herring prospectus which reads: “The Bank has 14 cases as on date involving title suits relating to shares between various parties wherein the Bank is a proforma party and awaiting decision of the said courts. Noteworthy to mention is a case filed in the Sub Court under Special Court (TORTS) Act, 1992 by the Custodian in 1996 for shares held by (the) Harshad Mehta Group totalling 2,700 shares held by various parties and the matter is still pending.”

Similarly, United Bank of India, which hit the market earlier this year, disclosed all its cases against its chairman and directors, civil proceedings, labour and employment cases and other cases related to the bank. There was no mention of the bank’s involvement in the scam. The RHP had one case filed by SEBI against the bank, 18 civil cases, approximately 162 cases pertaining to labour and employment issues (as on 1 March 2010) and three other cases.

“As of the date of this Draft Red Herring Prospectus, neither the Company, any member of the Group, any Director, or any material associate of the Company (emphasis ours) are involved in any material governmental, legal or arbitration proceedings or litigation and the Company is not aware of any pending or threatened material governmental, legal or arbitration proceedings or litigation relating to the Company, any member of the Group, any Director or any material associate which, in either case, may have a significant effect on the performance of the Group, and there are no liabilities or defaults (including arrears and potential liabilities) in relation to such material proceedings or litigation which would be required to be disclosed under the SEBI Regulations,” states page 419 of Standard Chartered’s red herring prospectus.

However there are at least half-a-dozen cases filed against the bank by the Enforcement Directorate in 2002.

Earlier, Arijit De, head of external communications of Standard Chartered India replied to an email query by Moneylife: “The IDRs represent the shares of Standard Chartered (SC) plc, UK, the ultimate parent company of Standard Chartered Bank, India. In accordance with the disclosure requirements under SEBI Regulations, IDR Rules, other applicable laws and international practice, SC plc has made appropriate disclosures of all material issues in the draft offer document filed with SEBI. We have nothing further to add beyond what is disclosed in the DRHP.”

Moneylife had previously reported about this issue and had raised the matter with SEBI but we have still not received any response.
(Read here: http://www.moneylife.in/article/8/4778.html).



bodla mohan

7 years ago

would u please quote nav of stanadard chartred Mutual fund schemd G207 sceef-growth


7 years ago

I can’t understand the rationale for why Standard Chartered is doing an IDR.”The issue will also increase our market visibility and brand profile, apart from giving Indian investors an opportunity to participate in our growth,” said Peter Sands, group chief executive.I can’t understand the logic of the above statement.If its a PR exercise why not buy some ad slots?


7 years ago

In the same scam Air India's money was involved - if I recollect properly - to which mention was made by JPC Comittee, now again in a recent loan matter with Air India, this bank is involved. I think other banks have
made some complaint to RBI recently
there was a news item.


7 years ago

We Indians dont want to hurt the sentiments of Foreign cos/people.
What ever they do is good for us.
Please keep quiet dont disturb/hurt the sentiments.
What ever they disclose it is okay,even if they dont disclose it is okay.
Why Money Life wants to bring out all these small things i can't understand?

parackal thomas

7 years ago

It is still not late to take up the matter with higher authorities including THE MINISTER OF FINANCE-what affects an Indian subsidiary affects the Parent Uk company as well being fully owned by them now. Money life needs to be PRO ACTIVE and seek answers.

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