Silver remains very undervalued on a historical basis and is undervalued even against gold. While gold has begun to receive some interest from a small minority of retail investors, silver remains the preserve of relatively few contrarian investors and the media and financial press rarely, if ever, covers silver. And yet silver is quite likely in the intermediate stage of a bull market that will rival or surpass that of the 1970s.

Silver is currently worth less than $17.00 per ounce. It rose to a recent nominal high $20.88/oz in March 2008. After an 18 month period of correction and consolidation, silver looks set to challenge that high in the coming months. We continue to be bullish on gold and particularly silver and believe that silver will likely surpass its non inflation adjusted high of $48.70 per ounce and its inflation adjusted high of some $130 per ounce in the coming years.

Why Silver is in a Bull Market and How High Could it Go?
Precious metals has been the best performing asset classes in recent years with gold and silver outperforming equities, property and most asset classes over a 3, 5 and 10 year period. This outperformance looks set to continue in the coming months due to the very bullish fundamentals. The primary reason for our bullish outlook on silver is due to the continuing and increasing global macroeconomic, currency and geopolitical risks; silver’s historic role as money and a store of value; the declining and very small supply of silver; significant industrial demand and perhaps most importantly significant and increasing investment demand.

Gold, oil and nearly every major commodity, stock indices and property market surpassed their record highs in recent years. Favourable supply and demand factors, continuing global macroeconomic and geopolitical risk and concerns regarding the emergence of inflation and stagflation as the massive global monetary and fiscal reflation affects the value of fiat currencies all point to higher silver prices in the long term.

In the 1970s silver rose from under $1.50/oz in 1970 to nearly $50/oz in 1980. Thus, silver rose by more than 25 times or by more than 2,400%. Were silver to replicate its performance in the 1970s, it would have to rise by more than 25 times again. The average price of silver in 2001 was $4.37/oz and 25 fold increase would result in silver rising to over $110/oz. While this price target may seem outlandish to some, it is worth remembering that silver’s record high in 1980 adjusted for inflation (according to US government inflation figures) was some $130/oz.

Admittedly, the final phase of the silver blow off was a speculative bubble as the billionaire Hunt brothers attempted to corner the silver market. Unlike in 1979, today there are hundreds of billionaires, some multi billionaires, thousands of millionaires, hedge funds and many sovereign wealth funds. Small allocations by any of these will see sharp moves up in the price. Indeed, the silver market is so small that it could very easily be cornered again (as appears to be happened in the tin market in recent weeks). > Is Silver About Returns or a Hedge Against Inflation & Systemic Risk?

Silver is a hedge against macroeconomic, systemic and inflationary risk with the attractive added potential for significant capital gains. Real asset allocation and prudent diversification would be an important reason to have an allocation to silver. Silver is highly correlated to the safe haven of gold and is in effect a leveraged sister of the precious yellow metal. Thus, informed investors use gold more for wealth preservation purposes and silver in order to make a return.

Silver: Declining Supply
In 1900 there were 12 billion ounces of silver in the world. By 1990, the internationally respected commodities research firm CPM Group say that figure had been reduced to around 2.2 billion ounces of silver. Today, that figure has fallen to less than 1 billion ounces in above ground refined silver. It is estimated that more than 90% of all the silver that has ever been mined has been consumed by the global photography, technology, medical, defence and electronics industries.

On current supply/demand trends, the amount of above ground refined silver is projected to shrink to even lower levels in the coming years. Industrial demand has been outstripping mining supply for most of the last 20 years, driving above ground supply to historically low levels. Few in the investment world are aware of this important fact.

Silver production has been flat in recent years while demand has been increasing. This hasn’t resulted in significantly higher prices yet because the world has been able to fill the gap from inventories and official government stockpiles.

However, today the U.S. government’s stockpile is all but gone, and sales from other official sources, such as China, Russia and India, are declining, too. The decline in refined silver stocks, from around 2.2 billion ounces in 1990 to around 300 million ounces today means that silver stocks are near an all time low.

Very importantly, silver is very unusual as its supply is inelastic.

This means that silver production will not ramp up significantly if the silver price goes up. Supply didn’t increase significantly in the 1970s when silver rose more than 35 fold in price – from $1.40/oz in 1971 to a high of nearly $50/oz in 1980. Importantly, silver is a byproduct metal and some 80% of mined silver is a byproduct of base metals. Higher prices for silver will not cause copper, nickel, zinc, lead or other base metal miners to increase their production. In the event of a global stagflationary or deflationary slowdown, demand for base metals would likely fall thus further decreasing the supply of mined silver.

There are only a handful of pure silver mines remaining – many with depleting reserves. This inflexible supply means that we cannot expect significant mine supply to depress the price after silver rises in price. It is extremely rare to find a good, service, commodity or investment that is price inelastic in both supply and demand. This is another powerfully bullish aspect unique to silver.

SOURCE:  Commodity Online

The Supreme Court on Friday asked the Income-Tax department not to impose penalties on Vodafone until an order is passed in this case after hearings in July. The court also allowed the tax office to continue with the case. The apex court bench directed the telecom major to appear before the Income-Tax department to explain its position on the department’s notice seeking imposition of penalty for its alleged failure to deduct tax at source on its stake purchase in Hutchison-Essar. “No steps would be taken to enforce a penalty if imposed on the petitioner (Vodafone),” court ruled. It, however, asked the company to explain its position to the department as only show-cause notice was issued.

Source : http://economictimes.indiatimes.com/news/news-by-industry/telecom/dont-penalise-vodafone-till-verdict-sc-tells-i-t/articleshow/7996556.cms

Three years ago,Vishal Retail commanded a market valuation of about 2,200 crore.Today,the nationwide retail chain has sold its retail and wholesale business lock,stock and barrel at just 3% of its peak valuation.The debt-laden retailer has sold its retail business to Chennai-based Shriram Group and wholesale business to PE firm TPG for 70 crore,it said in a filing to Bombay Stock Exchange on Monday.The deal makes Vishal,built by RC Agarwal out of a shop he founded in Kolkata 24 years ago,the first listed Indian retailer to sell out in the wake of the economic meltdown in 2008. It completes the corporate debt restructuring (CDR) process started last year after Vishal Retail failed to pay its dues.The retailer ran up debt of around 730 crore as on September 30,2010,as it tried to fund an ambitious expansion plan.The transaction on a slump sale basis includes all the assets,rights,interests,inventories,cash flows,store leases and liabilities of the company.Slump sale is a mode of selling a business where one or more undertakings are transferred for a lump sum,without fixing values for individual assets and liabilities.Of the 500-crore debt the company owes to lenders who have participated in the CDR process,about 75 crore has been retained as debt at Vishal Retail,to be repaid through asset sales. The remainder was converted partially into long-term TPG Wholesale debt securities and compulsory convertible security.These will be converted into equity at the time of the eventual public issue.The repayment amount is broadly equal to the value of the equity then converted,he said.The lenders that are part of the CDR include State Bank of India,HDFC Bank,ING Vysya,UCO and Bank of India.Lenders who did not participate in the CDR include Barclays,Deutsche Bank and LIC Mutual Fund.The non-CDR lenders were offered an option of either accepting the same terms that were given to the CDR lenders or a one-time settlement of roughly 25 cents to the dollar plus a small amount of equity.

Source: Economic Times

• • The Union cabinet is expected to take up the Constitutional Amendment Bill on the Goods and Services Tax (GST) in its meeting next week, although doubts persist that the comprehensive reform of India’s indirect tax regime will keep its roll out timeline of April 1, 2012.
  • In his Budget speech, finance minister Pranab Mukherjee had said that the government would introduce the GST Bill in the ongoing session of Parliament.
  • The government has been trying to introduce the legislation for the past four years but has been unsuccessful so far as many states, particularly those governed by the main opposition Bharatiya Janata Party, have opposed it. These states fear a dent in their financial autonomy if GST is implemented. The centre has already made several concessions, including dropping union finance minsiter’s veto, to get states to agree to the proposal.
  • The centre was keen to roll out both Direct Taxes Code and GST together from April 1, 2012 but the long process involved may make the task difficult.
  • The introduction of GST needs an amendment to the constitution to empower the centre to tax retail trade, give states governments the power to tax services and for setting up a council for resolving disputes.
  • At present, the centre can tax services and goods only at the factory gate. States can tax goods only at the retail level and do not have the power to tax services.
  • The bill, once introduced, will be referred to the parliament’s standing committee, which is expected to give its report only by the winter session.
  • The government can present the bill for voting in Parliament earliest in the next Budget Session after which it would have to be ratified by at least 50% of state legislatures. After ratification of the constitutional amendment bill, the centre and state assemblies also have to pass the GST legislation and notify rules.

Compiled by Manali Chaturvedi..

Court: Bombay High Court

Brief: In this judgment, after hearing the matter, vide its order dated 8 September, 2010 running into 196 pages, the HC has dismissed the writ petition filed by VIH, holding that the proceedings initiated by the Revenue Authorities (“RA”) under section 201 of the Act cannot be held to lack jurisdiction of the RA, it was not inclined to stay the operation of the proceedings under section 201 of the Act. However, the HC has directed the RA that no final orders can be passed for a period of eight weeks.

Citation: Writ petition No. 1325 of 2010 decided by the Bombay High Court

Judgment:

Facts in Brief

• Vodafone International Holdings B.V (“Vodafone”) was issued a notice by the Indian tax authorities in the context of non-compliance of Indian withholding tax obligations (vis-à-vis the acquisition of shares of a non-resident Hutchison Group entity (“HG) outside India).

• The primary allegation of the Indian tax authorities was that though the shares transferred belonged to a non-resident entity and the share transfer had taken place outside India (from one non-resident to another), what effectively exchanged hands pursuant to the transaction was the “controlling interest” in Hutchison Essar Limited (“HEL”) , which was held indirectly by HG. HEL was the flagship company which held the telecom business of the Hutchison Group in India.

• Vodafone filed a writ petition before the Bombay High Court against the said notice. The Bombay High Court rejected the writ petition and made a prima facie observation that the transaction under consideration may be liable to tax in India since the underlying intent of the transaction was to transfer “controlling interest” in HEL from HG to Vodafone.

• Aggrieved by the above, Vodafone filed a special leave petition before the Supreme Court. The Supreme Court dismissed the special leave petition and directed the Indian tax Authorities to examine the limited question as to whether they have sufficient territorial jurisdiction to levy tax on the transaction under consideration.

• Further, the Supreme Court also provided relief to Vodafone by directing that in case the order passed by the Indian tax authorities is against Vodafone, it could directly approach the Bombay High Court for quick adjudication (i.e. it would not be required to go through the elaborate procedure of first approaching the appellate commissioner and income tax appellate tribunal before appealing to the Bombay High Court).

• In response to the Supreme Court’s direction and post completion of a detailed scrutiny, the Indian tax authorities passed a voluminous order adjudicating that they had territorial jurisdiction to tax the transaction under consideration. Further, they also held that the transaction was taxable in India and Vodafone was an “assessee in default” for not having complied with its withholding tax obligations.

• Based on the relief granted by the Supreme Court, Vodafone directly approached the Bombay High Court against the said order of the Indian tax authorities.

• A brief summary of the key contentions put forth by Vodafone and the Indian tax authorities and the resultant verdict of the Bombay High Court is as follows.

Key contentions by Vodafone

• Since the transfer is of a capital asset situated outside India, the gains arising there from should not be liable to tax in India in the hands of the non-resident seller entity.

• The Income Tax Act, 1961 (“ITA”) does not have any “look through” provisions. The same cannot be enforced through judicial interpretation.

• The observation of the Indian tax authorities that pursuant to the transaction under consideration, the benefit of the telecom license stood transferred to Vodafone is grossly misconceived. Under the Telecom policy of India, a telecom license can only be held an Indian company and there was no transfer, direct or indirect, of any such license.

• The Foreign Investment Promotion Board (“FIPB”) Approval was a routine process required to be complied with pursuant to Press Note 1. This mundane requirement does not shift the situs of the shares to India.

• The Indian withholding tax provisions under section 195 of the ITA do not apply to offshore payments. Further, section 195 of the ITA could be triggered only if it can be established that the payment under consideration is of “a sum chargeable under the ITA”.

• In a case such as the present, where the payment has no element which could be made liable to tax in India and the payer does not withhold any tax and the Indian tax authorities thereafter make a demand of tax which allegedly should have been withheld under Section 195 of the ITA, it is open to the payer to contend that its action was justified on the ground that there was no sum chargeable to tax under the provisions of the ITA. Such an issue if raised has to be decided and not only on a prima facie basis.

Key contentions of the Indian Tax authorities

• The transaction constituted a transfer of composite and bundle of rights held by HG in HEL (Vodafone had simply stepped into shoes of HG). The subject matter of transfer was not the shares of the Cayman Islands Company but assets situated in India.

• HG had necessarily to adopt several steps to consummate the transaction of transferring all its rights in HEL in India, which were independent of the transfer of the share of the Cayman Islands Company.

• HG received income from the disinvestment of its rights and interest in HEL. This was brought out in its appropriation of income as a “transaction special dividend” to its shareholders.

• “Controlling interest” in a company can be obtained by independent agreements de hors shareholding.

• Several valuable rights (which are property rights and capital assets) were relinquished in favour of Vodafone. These rights would constitute an asset of a capital nature which is situated in India.

• The provisions under the ITA are of wide amplitude and a comparison with the OECD system of taxation may not be appropriate.

• “Capital asset” is widely defined to mean property of any kind held by the assessee. This would include rights and interests which are capable of being owned and transferred.

• Though an acquisition of an interest in a joint venture would not amount to an acquisition of an asset, the acquisition of a bundle of rights amounted to acquisition of “property”. HG could transfer its “controlling interest” in HEL only on extinguishing it rights in HEL.

• A disinvestment of its right, title or interest preceded disinvestment of “controlling interest”. It would be too simplistic to assume that what was transferred was only a share and that all other rights were incidental to the transfer. Further the particular mode of transfer would not be determinative of the nature of the asset and would not  alter or determine the situs, nature or character of the asset. Accordingly, HG relinquished it asset, namely its interest in HEL, so as to fall in the ambit of “transfer” as defined under section 2(47) of the ITA.

• The “accrual” or “arising” of any income indicates some origin of income and this has to be determined on a cumulative basis depending on the facts of the case. The entire income which HG derived had its “source” in India and hence “accrued” or “arose” in India.

• In respect of the liability to deduct tax, the expression “person” as provided in section 195 of the ITA could be applied to a non-resident. Further the provisions would apply to all payments which wholly or partly represent “a sum chargeable to tax” and once the income is chargeable, the nexus will exist both with regard to payee and the payer. Since the transaction under consideration had a substantial nexus, it would result in an obligation being cast on Vodafone to deduct tax at source under section 195 of the ITA.

Ruling of the Bombay High Court

• From the Hutchison Group’s perspective, it had carried on “Indian mobile telecommunications operations” which was being discontinued as a result of the transaction.

• A review of various relevant term sheets, sale purchase agreement, tax deed covenant, brand license agreement, loan assignment agreements, due diligence report, etc. clearly established that it would be simplistic to assume that the entire transaction between HG Group and Vodafone was fulfilled merely upon the transfer of a single share of a Cayman Islands company.

• The true nature of the transaction as it emerges from the transactional documents is that the transfer of a solitary share of Cayman Islands Company reflected only a part of the arrangement put into place by the parties towards achieving the object of transferring “control” of HEL to Vodafone.

• The transactional documents are not merely incidental or consequential to the transfer of the share of Cayman Islands Company but recognize independently the rights and entitlements of HG in relation to the Indian business which were being transferred to Vodafone.

• The transfer of the share of the Cayman Islands Company was not adequate in itself to achieve the object of consummating the transaction between HG and Vodafone. Intrinsic to the transaction was a transfer of other rights and entitlements. These rights and entitlements constitute in themselves “capital assets” within the meaning of Section 2(14) of the ITA (which expression is defined to mean “property of any kind held by the assessee.”)

• The transfer of the share of the Cayman Islands Company was not adequate in itself to achieve the object of consummating the transaction between HG and Vodafone. Intrinsic to the transaction was a transfer of other rights and entitlements constitute in themselves “capital assets” within the meaning of section 2(14) of the ITA (which expression is defined to mean “property of any kind held by the assessee”).

• Vodafone’s disclosure to the FIPB is indicative of the fact that the consideration that was paid to HG in the amount of US $ 11.01 billion was for the acquisition of panoply of entitlements including a control premium, use and rights to the Hutch brand in India, a non-compete agreement with the Hutch group, the value of non-voting non-convertible preference shares, various loan obligations and the entitlement to acquire a further 15% indirect interest in HEL.

• The Bombay High Court has however refrained from adjudicating on the methodology pursuant to which the total consideration should be apportioned towards each of the above.

• In assessing the true nature and the character of a transaction, the label which the parties may ascribe to the transaction is not determinative of its character. The nature of the transaction has to be ascertained from the covenants of the contract and from the surrounding circumstances.

• From the perspective of income tax law, what is relevant is the place from which or the source from income accrued arose and was derived as a consequence of divestment of HG’s interest in India. If there was no divestment or relinquishment of such interest in India, there was no occasion for the income to arise. The real taxable event is the divestment of HG’s interest (which comprises of various facets or components including the transfer of interests in different group entities).

• Once the territorial nexus is established, the provisions of section 195 of the ITA would operate. Even though the revenue laws of the country may not be enforceable in another country that does not imply that the courts of a country shall not enforce the law against the residents of another country within their own territories.

• “Chargeability” and “enforceability” are distinct legal conceptions. A mere difficulty in compliance or in enforcement is not a ground to avoid observance. In the present case, the transaction in question had a significant nexus with India. The essence of the transaction was a change in the “controlling interest” in HEL which constituted a “source of income” in India. The transaction between the parties covered within its sweep, diverse rights and entitlements. Vodafone, by the diverse agreements that it entered into, has a nexus with Indian jurisdiction. In these circumstances, the proceedings which have been initiated by the Indian tax authorities cannot be held to lack jurisdiction.

• The constitutional validity of the amendment to section 201 of the ITA was not adjudicated upon since it was not applied by the Indian tax authorities while invoking the territorial jurisdiction.

• Further, the Bombay High Court has held that it is open to Vodafone to agitate before the Indian tax authorities that it had reasonable cause and a genuine belief to the effect that it was not liable to deduct tax at source and accordingly, no penal liability could be fastened upon.

By one estimate, between 1948 and 2008, $462 billion of unaccounted wealth has been sneaked out of India and into tax havens. As political and institutional pressure mounts on the government to bring it back, John Samuel Raja D maps out the money-laundering trail.

What is black money?
Income on which tax is evaded is black money. For example, when a seller of property receives part of the sale proceeds in cash, and doesn’t show it in its tax accounts. Or, when a company shows fictitious expenses to pay less taxes. All this is illegal, unaccounted wealth.
How is it created?
There are ways and ways. Two are mentioned above. Here are two common tax and accounting tricks employed by businesses — the most prolific creators of black money.
UNDER-INVOICING OF SALES:
Company X sells Rs 100 worth of goods to Dealer Y. Company X invoices Rs 80 to the dealer, the remaining Rs 20 it takes in cash and siphons it off. Dealer Y sells goods to a customer for Rs 120 in cash; shows Rs 100 in his books, but conceals Rs 20.
FICTITIOUS VENDORS:
Promoter of Company X floats Vendor Y. Except Vendor Y exists only on paper. Company X shows it is paying the vendor for goods supplied. Money goes to promoter via vendor.
How much of it is there and where is it?

The corporate affairs ministry is mulling expanding the scope of private limited companies to raise funds through private placements. At the same time, it is also planning new regulations to make fund raising by these companies more transparent. The move would involve amending the Companies Act, 1956, allowing the private limited companies to retain their status while raising the shareholders’ threshold from the current 50 to 99.

Source : http://www.financialexpress.com/news/private-placement-route-to-get-wider-more-transparent/749667/

What is Foreign Direct Investment (FDI)

1. FDI or foreign investment refers to long term participation by country A into country B. It usually involves participation in management, joint venture, transfer of technology and expertise.
2. There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative) and “stock of foreign direct investment”, which is the cumulative number for a given period.
3. Direct investment excludes investment through purchase of shares.

Importance of retail sector in India

1. Retail sector is one of the largest contributors to Indian GDP. It provides 15% of employment through world’s largest retail network with 12 million outlets which makes it second largest employment provider in India after agriculture.
2. The organized retail sector is growing at a rapid pace of 28% p.a. Hence India is sometimes referred to as “Nation of shopkeepers”.

FDI and Retail sector – Current scenario

1. Government has permitted FDI in single brand retail upto 51% in joint venture for the retail of branded products. Brands like Adidas, Nokia; Amway, Samsung, Sony etc are the examples of single brand products which are an outcome of FDI.
2. Though 100 per cent FDI is permitted in cold chain through the automatic route in the absence of FDI in retail, the flow of such funds to the sector has been insignificant. The present FDI regime allows 51 per cent foreign investment in single brand retail and 100 per cent in wholesale cash and carry.

   The Ministry of Consumer Affairs and Public Distribution initially suggested a cap of 49 per cent FDI in multi-brand retail, while the Micro, Small and Medium Enterprises Ministry’s recommendation is for 18 per cent FDI. But the recent skyrocketing of food prices — especially those of onions — and the declining inflow of FDI have opened a door for the Government to take a more ambitious decision on the prickly issue.

3. But it has its meaning confined to single brand because multi brand retail sector is one of the few sectors where FDI is not allowed. It is because there have been protests by trading associations and other stakeholders against allowing FDI in multi brand retail.
4. A crucial argument against allowing foreign investment in retail is the belief that small retailers will suffer because of penetration of foreign players in the market. But government is showing some positive signs and planning to allow upto 51% in multi brand retail sector. It has already issued a concept paper in this regard.

Retail sector as an emerging market for FDI

After liberalization, Privatization and Globalization (LPG), India has radically emerged in retail sector. The rapid growing GDP rate, strategic location and geography, versatile demographics have attracted foreign investors and India has been portrayed as an important investment destination for global players.

According to A.T Kearney, a well known international management consultant- “India is second most attractive retail destination globally amongst 30 emergent markets”. Even world renowned retailing organizations like Wal Mart has decided to enter India via joint venture with Bharti and a French retailer Carrefour is also planning to enter into supermarket retail through Dubai based Landmark group.

Arguments in favour of FDI

1. FDI will bring the latest technology and management practices to build modern supply chains in India connecting small producers with national and even global markets.
2. Modernization of the creaky old distribution system.
3. Better customer services, lower prices and product quality because of competition between domestic and international players in retail market.
4. Breakdown of domestic monopoly and capital constraints.

Arguments against FDI

1. Present retail scenario in India will not be able to survive competition from global markets. It is because lending rates in India are quite high and hence high cost of borrowing will force domestic players to charge higher prices.
2. FDI can upset import balance.
3. Domestic retail players have a threat of being unemployed.

According to The Hindu newspaper dated 18/01/2011 – “With the recent uproar on rising food and vegetables prices providing a handy trigger, the Manmohan Singh Government is all set to give its approval to 51 per cent Foreign Direct Investment (FDI) in the multi-brand retail sector with the Commerce and Industry Ministry likely to move a Cabinet note next week.”

Rise and Demise of Small Businesses

There are small ones and there are large ones, some come into existence and survive while others perish in a matter of small time, some are taken over by the bigger fish in the pond and some swim alone facing the tides of competition. The handling of commerce in the macro milieu is proving to be a tough ask not only for the small businesses but the big brothers too. The question that ejaculates in the psyche is that on a globe where the corporate biggies are finding it Herculean to sustain profitability and growth, at the same time being a perfect acrobat to satisfy the customer, what is the in the store for the smaller corporations. Are hey all set to face red by being eaten as cherries or is it that they are equipped with the ammo to come out all guns firing. We are on the Planet Earth which has celebrated as many birthdays as there are people living on it. The velocity of change that it is witnessing is far more rapid in present years as they were in the past. With breeze of change propelling harder than ever its time to analyse the appetite of the younger brothers of corporate honchos. Here I present two scenarios to explain what future may be olding for us.

Scenario 1:

Small is Beautiful Horrible

Imagine yourself walking past a shopping complex on an upstreet market lane. Suddenly you feel a craving to go for a chatpati chaat followed by two three rounds of gol-gappas (panipuri / waterballs) and you look out for a hawker who could quench your innate desire. After rolling your eyeballs in 359°, you notice a beautiful Quadracycle at the last 1° bearing the name, hold your breath, McDonald’s Chaat Bhandar”- Registered trade mark. Don’t pinch yourself and please believe your eyes because for your kind information it belongs to our very own “I am loving it-McDonald’s” stable. This might very well be the case wherein the business jumbos, after finding the opportunities to grow limiting in numbers, would go out on a hunt to acquire small businesses and to try their hands at Lilliputians. Most of the bigger corporate houses first go for acquisition of the companies in the same business then, in an anticipation of diversification, they go for ones that are alien to their own line of business. What’s left after that? In a race to gain critical mass, enjoy economies of scale and long-run competitiveness big companies go haywire for getting into more businesses. Small businesses on the other hand face the problems of adequate finance to expand their scales, technology to provide better products. Even if they succeed to expand their scales they fail to achieve the break even and hence enter in aggressive mode, trying to intrude territory of competitors. It ultimately becomes a game of mutual loss where all the players try to pull each other down. In such a state of affairs what may happen is that the giants, who are already finding opportunities confined, may come forward to gobble these Lilliputians to make some more moolah from them. The recent show of acquisitions by King of Good Times “Vijay Mallya” of UB group must be clear in everybody’s mind which is nothing but the idea that I have discussed here. Another spate of acquisitions started by “Laxmi Niwas Mittal” of Mittal Steels also boasts s the same story.

To understand lets take the example of your neighborhood chaat shop. Due to increasing competition from other roadside shops, the hawker may offer you – better ambience, spicier chaat, good seating arrangement, clean eatables at an acceptable price- definitely not his core competencies because they can be copied by his competitors. The moment this gets imitated by the other players, he may again find it difficult to entice his customers. His limited capital cannot allow him to expand his operations. The weapons in his artillery are not many to make more experiments. Thus his business will more or less depend on the force of an invisible hand. Now think of McDonald’s which is in the same line of business- food and hospitality. With excess cash brimming in the treasury McDonald’s may well think of purchasing not only this shop but some more shops in the nearby localities.

This would be for 3 reasons:

1. Attaining critical mass- Expansion.

2. Reducing Cheap/Generic Competition.

3. Utilizing excess financial resources.

It may take some time to come to this extremely basic scenario but this view cannot be ignored.

Scenario 2:

Big Daddies Beware, Smaller players here

Let’s take the same story forward. Suppose after satiating your taste buds your kids start pulling your pants, asking for a new music system with advanced features. You move into a King-size showroom to try out the new ones. In the large range full of known brands like Samsung, LG and SONY you find a music system boasting of a new brand name, don’t feel woozy, “Videocon – a product of Chintoo Electricals”. And to make you believe your senses you find a mannequin of the King of Bollywood Shahrukh khan endorsing the product.

This is the alternative climax for the story told above. More and more small businesses are fearing the muscle of corporate powerhouses that are eating there share of cake due to technological supremacy, economies of scale and scope, farther reach and specialist functionality, chain of core competencies and heer size. By constantly reducing their prices to fit in local consumer’s expenditure bracket these large companies are giving the customer run for their money. This results in local players watching their citadel of loyal consumers getting eroded. To stop the intrusion into their fortress small companies do not have many options at their disposal. They can fight a ruthless battle by trying to decrease their prices too but eventually what happens is an intense bruise which may further lead to its ultimate murder. To decrease or even abolish the possibility of them being assassinated by the Business He-men what should be done? The answer lies in the ability to form a conglomerate of all the small layers in the market and then take the biggies head-on. The trepidation of being acquired by big company is also due to the fact that in the process of such a swallow the bargaining power of the one being absorbed is far lesser than in the case of a merger with players of equal strength. This is why we may well be headed towards a system in which the all the Lilliputians in a territory may combine to form a goliath which may then pose obvious threats to the larger players in the market. Just the opposite of what happened in the scenario 1. In such a case we will see all the smaller brands with desi names like Chintoo Electricals, Bunty Music, and Mannu Sound systems along with other counterparts forming one large corporation and creating menace for Samsung electronics and LG. Smaller companies are often run on promoter’s capital and hence depend less on the outside capital. When these form unison they do not have to care about the cost of capital associated with the money being used in the business. They an be relieved of paying heavy dividends or payments in form of interest on loans because no outsider’s capital is involved.

Another issue that challenges the psyche is how would these miniatures manage the size of a new, bigger, enhanced organisation. For this purpose these businesses require to have the expertise of managing large scales or it may result into a brutal disaster. The idea of big businesses merging and becoming uccessful makes sense if we also take into account that these so called smaller players have a better understanding of the regional and local needs of the customers which their bigger counterparts may not have in sufficiency. The advantage of being closer to the customer would definitely place these conglomerates a cut above the rest.

• Hedging is basically a position acquired by one to offset the exposure to price fluctuation and thus, reduce the risk involved. Futures contracts are the most commonly used instruments for hedging.

• Futures are standardized contracts between two parties for the future delivery of a specified asset (specified quality and quantity) at a price which is agreed upon at a current date. When one buys a future contract:

1. The price is fixed today.
2. The full payment is not made until a later date.
3. The buyer is required to put up a margin account whereby the futures contract is marked to market every day. (Thus, the profit or loss on futures is calculated on a daily basis. The loss, if any, is paid to the exchange and the profit, if any, made is earned.

Now futures (positions) are of two types, LONG & SHORT – Lets understand them one by one.

• A long future position is whereby one agrees to buy a specified asset at a price agreed upon today and
• A short future position is whereby one agrees to sell a specified asset at a price agreed upon today.

Reducing the risk of the Hedger: What & How?

Hedging can be done using these future contracts and thus reduces risk for the hedger:-

• A long futures hedge is appropriate when you know you will purchase an asset in the future & want to lock in the price today. For example: A company is aware that it needs to make a purchase of a certain commodity, say oil, at a future date. However, is worried of the future price increases. Thus, enters into a long futures contract to buy the asset at a future date at a price specifies today. Thus, it has minimised its risk against the future price increase.

• A short futures hedge is appropriate when you know you will sell an asset in the future & want to lock in the price today. For example: A company owns a product, say oil, and wishes to make sale of the same. However, it is worried of the future price decrease. Thus, enters into a short futures contract for the product so as to fix the price today.

Future contracts, thus, help in reducing the risk for a company and limiting its exposure. It removes the uncertainity of future price movement of a commodity. Hence, the ambuguity of expected profit and loss is eliminated. But just like futures limit the loss for a company, they also limit the profits.

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