29 July 2011

The Explainer: Stock Market - Part II

The first part of The Explainer on Stock Markets focused on a few basic aspects of the stock market, like meaning of share, types of markets, stock exchange, and demat account.

This article will focus on participants in the stock market, like brokers and investors

What is Speculation?

In the world of stock markets, Speculation relates to any activity that involves risk-taking. For example, a speculator may try to buy at a low price to sell later at a higher price, thus making a neat profit in the bargain. Now, you may wonder where is the risk here?

Any activity which is future-based involves risk. Look at it this way: the speculator buys at what he believes is a low price; he does this to sell at a higher price - something that may happen in the future. But there is no guarantee that the price will rise in the future. Thus he is taking a chance; in stock market jargon, this 'taking a chance' is called speculation.

In a simple way, let's say, even before the third test between India and England starts, you place a bet on its outcome - that India will win the match. Now what you are doing here is that you are speculating, with considerable risk involved - India may or may not win the match! 

Who is a Broker?
A broker is a middleman who brings a buyer and a seller together. He helps strike a deal; he charges brokerage or commission for his services. He does not buy or sell for himself; he does this to earn commission. In the stock market, there are both individual brokers as well as corporate brokers (like Motilal Oswal).

Types of Stock Brokers

There are two important types of brokers: Bear and Bull. Though brokers, they are called by these peculiar names after the kind of speculation they indulge in. 

Who is a Bear?

A bear is a broker and a speculator. He is a pessimist; he expects the price of shares to fall.  So what he tries to do is to sell at today's price, which he fears will fall in the future. He believes that by selling the shares at today's higher price, he can avoid making a loss in the future. If there is large-scale selling by a large number of bears, such a market sentiment is called bearish.

Who is a Bull?

A bull is a broker and a speculator. He is an optimist; he expects the price of shares to rise.  So what he tries to do is to buy at today's price, which he hopes will rise in the future. He believes that by buying the shares at today's lower price, he can make a big profit in the future after selling the shares at a higher price. If there is large-scale buying by a large number of bulls, such a market sentiment is called bullish.

After this simple take on stock brokers like bulls and bears, now let us look at two important types of investors: Chicken, Pig, and Stag.

Types of Investors
There are three important types of investors: Stag, Chicken, and Pig. I will not focus on the long term investor. 

Who is a Stag?
A Stag is an investor who buys shares through a famous company's Share Issue, i.e. on application when the company comes out with a share issue. He does this with a simple view: Buy at the face value (i.e. par value) and sell either before the company gets listed on the stock exchange (i.e. before trading starts on the stock exchange), or on the first day of the listing or in the first few days after the company gets listed on the stock exchange. 

The idea behind this is simple: buy at a low price (on application) and sell at a profit when the price goes up in the first few days of the company's listing. There is pretty little risk involved in this kind of trading. 

Who is a Chicken?
Ever heard the term - 'chicken-hearted'? If you called someone 'chicken-hearted', you meant to call that person a coward,  i.e. someone lacking courage. 

In the same way, a Chicken is an investor who does not have the courage to take risk. He is risk-averse, i.e. he avoids taking risk. He does not wish to lose money (and sleep!). So he does not speculate; he also avoid buying / selling anything for the short term. Typically he invests money in fixed deposits (mostly with nationalised banks; the guy would not trust private sector banks) and government bonds, like those issued by the RBI. On a rare occasion, he might invest in some blue chip stocks for the long term.

For your information, blue chip stocks relate to those companies that are financially secure, have a long track record of consistent growth, and sometimes, high dividend payout history.

Who is a Pig?
As an investor, a Pig is the antithesis of a Chicken; a Pig loves to take risk, to make that LARGE profit. Being impulsive and greedy by nature, he buys on the spur of the moment, without doing any background check on how the company is performing or whether the share price will rise. 

A Pig is the darling of a stock broker (bear / bull). Since he is a huge risk-taker, the stock brokers love him. The Pig may or may not make money but the stock broker does (by earning his commission).

I wanted to keep this article short; I hope this helps.

(Read The Explainer: Stock Market - Part I)

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Friday Reads: Horny Indians & Complete Guide to Google+

Starting today, I am resuming the Daily Reads thread. I hope you find this thread interesting and knowledge-enhancing.
  • Why are Indians so horny? (ToI)
  • The Best and Worst Ad Campaigns of All Time (The Atlantic)
  • Capitalism & The Pursuit of Profit Through a Cricketing Analogy. (Telegraph India)

  • It's not the U.S. only that could face a potential debt default, there are 21 more countries in the queue! (Rediff)

  • The Complete Guide to Google+. (Mashable)

Do you wish me to post articles / Web reads on specific issues? If yes, please post your comments.

28 July 2011

Tech Spawn: Most Successful Start-Ups

Technology companies often compete to hire the best talent to work for them. Some employees, after working for tech giants, go out to start their own enterprises. While ideas that bring in the moolah are important, what's equally important is the fact the start-ups require seed money.

It has been observed that it is comparatively easier to get venture capitalists to invest in your business venture if you had previously worked for a tech giant. Top Prospect has an interesting graph on the issue of which tech giants have spawned the most successful startups. 

If you wish to copy this infographic, then please acknowledge this blog; it helps in driving traffic to this blog!

Click on the picture for a larger view.

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27 July 2011

Infographic: Renewable Sources of Energy

Over the last decade, environmental issues, like climate change and global warming, have been a favourite of the GDPI panelists at India's top B-Schools; loads of essay and GD topics on these issues have been administered.

Global Warming and climate change have dominated media space for several years now. We are constantly reminded of the impeding doom that is waiting to visit us unless we stop pumping carbon dioxide and other poisonous fumes into the atmosphere.

Some say climate change is natural, i.e. part of the Earth's climate cycle. However, leading climatologists blame the rapidly changing global climate patterns on
 anthropogenic global warming, i.e. they attribute the rise in the earth's surface temperature to man's ruinous and exploitative activities. The chief culprit, among other reasons, is the use of fossil fuels, like oil and gas.

Let us not get into this never-ending debate; deniers and conformists have entrenched positions on this controversial issue.

However, there is one thing that environmentalists, climatologists, (most) governments, businesses (though reluctantly, of course) and the society at large agree on - use of alternate sources of energy, i.e. renewable sources of energy. 

There are a lot of renewable sources of energy, like solar, hydro, ocean, and geothermal. It is generally agreed that these so-called clean technologies are expensive and have notoriously large gestation plan (i.e. return on investment period) to yield tangible benefits for the users in the short run.

Find below an infographic that details the importance and benefits of the different types of renewable sources of energy. I found this here.

While most of the data here relate to the United States, I suggest that you look at the larger picture and extract valuable understanding of the issue under focus.

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25 July 2011

Infographic: The Hugeness of Data Today!

Today there is no dearth of data. You see it everywhere in facts and figures. Ever wondered how much data is available out there? I found the below posted infographic titled, How much data will humans create and store this year?, that answers this important  question.

Also found this note on the infographic on the same Web site
Sure, we can put a number on it, like 1.8 zettabytes being created and replicated (as in copied to DVDs and shared in the cloud) this year alone — a number that doubles every two years, according to a recent study by IDCand EMC. But how much is that, really? Not only is data itself ethereal and hard to visualize, but the numbers are so gargantuan that they quickly become too abstract to grasp.
One way to put it all into perspective is to hypothetically plug all that data into physical objects we all recognize. That 1.8 zettabytes of data, for example, would require 57.5 billion 32 GB iPads to store. How much is that? About $34.4 trillion worth. That’s equivalent to the GDP of the United States, Japan, China, Germany, France, the United Kingdom and Italy combined. And that’s how much data we’ll create and store just this year.

23 July 2011

Weekend Short Story: Twist in the Tale

As you know, I do not post any serious stuff on the weekends! This weekend, I have a short story, for a change.
About three years ago, Srinivasan Nagarajan, a dear friend and IAS officer (he topped the IAS in the country in 2005!), shared a short story with me. I was intrigued with the way the story ended, with a sudden twist - like those we find in the short stories of Jeffrey Archer.  Both of us do not know the actual source of the story.
Of one thing I am sure: you will enjoy this short story! 
In 1986, Mkele Mbembe was on holiday in Kenya after graduating from Northwestern University. On a hike through the bush, he came across a young bull elephant standing with one leg raised in the air.
The elephant seemed distressed, so Mbembe approached it very carefully. He got down on one knee and inspected the elephant’s foot, and found a large piece of wood deeply embedded in it. As carefully and as gently as he could, Mbembe worked the wood out with his hunting knife, after which the elephant gingerly put down its foot.
The elephant turned to face the man, and with a rather curious look on its face, stared at him for several tense moments. Mbembe stood frozen, thinking of nothing else but being trampled.
Eventually the elephant trumpeted loudly, turned, and walked away. Mbembe never forgot that elephant or the events of that day.
Twenty years later, Mbembe was walking through the Chicago Zoo with his teenaged son. As they approached the elephant enclosure, one of the creatures turned and walked over to near where Mbembe and his son Tapu were standing.
The large bull elephant stared at Mbembe, lifted its front foot off the ground, then put it down. The elephant did that several times then trumpeted loudly, all the while staring at the man.
Remembering the encounter in 1986, Mbembe couldn’t help wondering if this was the same elephant.
Mbembe summoned up his courage, climbed over the railing and made his way into the enclosure. He walked right up to the elephant and stared back in wonder.
The elephant trumpeted again, wrapped its trunk around one of Mbembe’s legs and slammed him against the railing, killing him instantly.
Probably it wasn’t the same elephant.
Stumped? I too was, as much as most of you are! Happy Weekend!

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22 July 2011

The Explainer: Inflation

Friends, this Friday's Explainer focuses on 'Inflation'. 
I have kept jargon out of this article; in fact, I have used a conversational mode of writing to explain this important issue. 

What is inflation?
Inflation relates to the sustained rise, over a period of time, in the general price level when there is a rise in demand (for goods) without an equal rise in supply.
In today’s interconnected world, a lack of stability in the prices of goods and services characterises all types of economies, be it in an emerging economy like India or in an advanced economy like the United States or underdeveloped economy like that of Senegal. But as we all know, any kind of uncertainty is not good for business; so is the case with price instability.

What causes inflation?
Generally, there is never a single cause behind the sustained rise in prices of a basket of goods and services, like wheat, rice, and cooking oil. However, some general reasons include:
(a) increase in money supply;
(b) rise in government spending;
(c) rise in purchasing power (a direct result of rising incomes);
(d) low supply across a range of goods, and
(e) infrastructure issues.
In India, inflation is seen as a result of a combination of all these factors. Let us elaborate on a few of them.

Explanation of causes

Since independence, the Government of India’s (GoI) expenditure has been shooting up steadily. Currently, the GoI’s spends lakhs of crores of rupees every year on welfare functions (like subsidies and insurance for the poor), development works (like building roads) and administrative expenses (like salary payments).
For your information, the current expenditure of the Government of India is more than Rs12,00,000 crore – yes, a staggering Rs12 lakh crore! To put this in perspective, the expenditure in 1980 was just a little over Rs23,000 crore.
When the government spends, it puts money into the hands of the common man, which increases her purchasing power. In short, higher spending would mean higher income, leading to higher purchasing capacity of the individual.
Higher purchasing power often raises the demand for goods and services; however, in the short run, the supply of such goods and services may not rise in equal proportion to meet the demand. This would lead to a rise in prices, a situation dubbed ‘inflation’.
Also, black-marketing, hoarding, speculation, and exploding population have all contributed to a rise in demand for goods and services.
It is also true that inflation might arise because of cost-push factors, like changes in production (as in the case of foodgrains), rise in prices of controlled-supply goods (like LPG and kerosene), and external factors like oil prices and global inflation. Yes, you could add increase in indirect tax too.

Cascading effect
By itself a rise in price of diesel won’t raise the overall inflation rate. It is just one commodity among a wide range of commodities consumed by us. However, when you look at the cascading impact of the rise in price of diesel, you will know that it straight way impacts you too!
It is like this: a rise in price of diesel will force the transporters to increase freight cost. Now vegetable / grain vendors use trucks to transport large quantities of their stocks to the market; this would mean that rising freight cost would add to the price they charge from the retailer / consumer. This means that we will have to pay more to buy the same old stuff!
Take another example, this time on indirect tax (a favourite tool of the government to increase its tax revenues). You must have heard of Service Tax (ST) and Value Added Tax (VAT), which the government imposes on a range of services, including on restaurants.
Let us say, you go down to your favourite restaurant to gorge on the delicious buffet spread. Now the bill arrives, and you notice that the final bill includes items like ST and VAT! (No, no, you didn’t order for these items but the government did!) All these taxes will add up to a substantial part of your food bill and that’s how indirect tax lead to inflationary situation.

How does inflation affect the common man?
Rapidly rising inflation leads to a fall in the purchasing power of money. In other words, the purchasing value of money comes down during an inflationary situation.
For example, let’s say you have Rs100 and a kilogram of mangoes cost Rs100. One month later, you visit the market, again, with Rs100. This time the mangoes are priced at 150 per kg. How much will you be able to buy with Rs100? About 2/3 kg or 670 grams. In short, the purchasing value of your money has fallen by 1/3.

What are WPI & CPI?
Dear Reader, to be honest, any note on these indexes will have to include jargon, which is, for most people, difficult to understand. So, I will reserve that stuff for some other day. Anyway, I will stick to some basic aspects of these indexes.

WPI stands for Wholesale Price Index while CPI stands for Consumer Price Index. The WPI is prepared by the Central Statistical Organisation (CSO). It includes all the important and price-sensitive goods, which are traded in wholesale markets across the country. The articles in the WPI consist of major foodstuffs, raw materials, semi-manufactured goods and manufactures. Hey, that’s too much technical stuff already!

What does it mean if today’s newspaper says that the current inflation rate is 10%?
If a newspaper story title screams that the inflation rate is 10%, then it means that the prices, on an average of a basket of commodities (like those in the WPI – oil, rice, wheat), have gone up by 10% over the prices that prevailed exactly on that date last year. (It’s actually calculated on a fortnight basis; however for simplicity’s sake, we took this approach.)

Confused? Let’s simplify. Let us say, on July 22 last year, you spent Rs100 to buy a basket of commodities. If the inflation rate today is 10%, it means that the price of that basket of commodities would have gone by 10%, to Rs110, today, i.e. on July 22 this year. It also means that the purchasing value of your Rs100 has gone down by 10%. 

Forget the Indian middle class; rising inflation has pushed more than one crore households, which would mean a minimum of 6 crore people, into poverty. It has the debilitating impact of depriving people of nourishment. Such deprivation affects the poor and the marginalised the most. It is no secret that more than 65% of all Indian children and 52% of all Indian women are malnourished; rising prices have only added to their woes. 

Kindly forgive me for any spelling / grammatical error; I write in one go! Thank you!

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20 July 2011

Infographic: Biggest Defence Forces on the Planet

I have always been fascinated by war, geopolitics, and military affairs. I read a lot on these issues, via a host of of sources.

The Economist Web site has an interesting infographic on the world's biggest defence forces. 

The infographic reinforces the superpower status of the United States. It has an almost equal proportion of personnel across the three wings of the services: army, air force, and the navy.

Demographics and till a few years back, lack of access to advanced military technology meant that while China could build the largest army, it still has a long way to match the naval and air force numbers of the world's lone superpower.

While India has the third largest armed forces in the world, we still have a marathon to run to match the defence technology standards set by some of the more advanced nations.

Check out another infographic on the world's largest military spenders.

19 July 2011

Infographic: History of Marketing Channels

As this blog is visited mostly by MBA aspirants, I have something very interesting for you: an infographic history of Marketing. I found this here.

If you wish to copy this, please acknowledge this blog! 

Click on the picture for a larger view.

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17 July 2011

Reflections on Friendship

Sometime in 1991, I bought a book titled, Treasury of Courage and Confidence, by Norman Vincent Peale. The book is a compilation of stories on human instincts and emotions. There is one particular story on friendship that caught my imagination and which I remember to this day.

I have put that story, with my own title, in the picture below; I shot this photograph at the ITR, a DRDO lab located at Chandipur-on-Sea. I hope you like this reflection on friendship.

15 July 2011

The Explainer: Stock Market - Part I

Last week, I started 'The Explainer' - a feature on explaining important political and economic issues. Initially I was skeptical of your response; however, your response to the first article on FDI was overwhelming and extremely positive. Thank you!
The Explainer this Friday will focus on 'Stock Markets'. In the space below, I have explained a lot of stock market terms, like dividend and demat accounts. I will try to explain these complicated terms in a layman's language.

What is the basic difference between a Private Company and Public Company?
In a private limited company, the minimum number of people required to start the business is two (2); in other words, you require a minimum of two people to contribute to the capital. In a public limited company, seven (7) people are required to start the business.
As for the maximum members who can contribute to the capital of a private company, it is 50. In the case of a public limited company, it is unlimited; in other words, a public company can have lakhs of people contributing to the capital base. For example, Reliance Industries, a public limited company, has more than two million shareholders.
In a very simple way, the people who start the company are called promoters.

What is a 'Share'?
The total capital of a company is divided into a large number of units. Each unit is given an equal value; such value is called par value (also called face value). Each such unit (with an equal value) is called a ‘share’. In short, a share is a unit of capital.
Let us say that you and six of your friends wish to start a public limited company, with Rs10,00,00,000 (Rs Ten Crore). Now you do not wish to invest a lot of your own money in the company because there is an inherent risk associated with it (like you may lose your entire investment if the company goes bankrupt!). So follow a simple principle of investment: use OPM – Other Peoples’ Money!
To make it easy for people to invest in small parts, you divide the total capital of Rs10 crore into 1 crore units, each with an equal value of Rs10. In this example, Rs10 crore is the total capital of the company, the total number of shares is 1 crore, and Rs10 is the par value (also called face value) of each share of the company.
The company now comes out with a prospectus, asking people to subscribe to the capital of the company. Let us say, I have bought 2000 shares of your company, at Rs10 each, for a total investment of Rs20,000. So now I have become a shareholder of your company; in other words, a co-owner of your company. 

What is Dividend?
There are different names for the returns gained on various kinds of investments. For example, when you invest money in a Fixed Deposit, the return is called ‘interest’. Similarly when you invest in shares, the return on such investment is called dividend. 
Let me open this up. A dividend is that part of the profit that is distributed among shareholders. Each share-holder will receive her share of the dividend in ‘proportion’ to her share holding (as a part of the total shares issued). In other words, dividend can be termed as distributed profit.
Recall that I had purchased 2000 shares. Now if the company declares a dividend of 20% on the face value of the share, then the dividend would be Rs2 per share. So, the total dividend I would receive would be Rs4000 (2000 shares x 2 per share).
What is a Stock Exchange?
A stock exchange is a marketplace where the shares of public limited companies are bought and sold. In India, the two main stock exchanges are the National Stock Exchange (NSE; India's largest) and the Bombay Stock Exchange (BSE; Asia's oldest, established 1875).

What comprises a Stock Market?
There are two major components in a stock market: primary market and secondary market.

What is a Primary Market?
The primary market can also be called capital market. It is a market in which newly issued shares are sold and purchased, via application. Hence, the primary market is also known as ‘new issues market’.
You must have seen ads of companies coming out with new issue of shares: in other words, these companies are raising fresh capital and are asking members of the public to buy shares (by subscribing to the capital) at the quoted par value and thus become shareholders.

What is a Secondary Market?
In this kind of a market, you deal in shares which already exist. In other words, it is a market in which previously issued shares are traded. Trading in such shares is done through a stock exchange.

Can you buy / sell shares on a stock exchange directly?
No. One needs membership of a stock exchange to be able to buy / sell shares on a stock exchange. The membership of a stock exchange comes with a very high price tag; hence it is difficult for common people like you and me to directly trade shares on a stock exchange.

So, how do you buy / sell shares?
We can buy / sell shares by approaching a stock broker, who is already a registered member of a stock exchange. There are a large number of stock brokers in the market (like Motilal Oswal and Anand Rathi) who can help us buy / sell shares.
Recall again that I had bought 2000 shares. Now if I wish to sell these shares, I need to have two things: (1) approach a stock broker to find a buyer and (2) own a demat account.
The easy part is that a stock broker can help me find a buyer on the stock market and help me dispose of my shares.

What is a demat account?
Demat stands for dematerialisation. In the past, when you purchased shares, you received hard / physical copies of certificates as proof of ownership of shares (just like a fee receipt or a fixed deposit receipt).
However, in order to avoid legal hassles like stealing of share certificates (and tax transparency) and administrative problems like crumpled share certificates, demat accounts were introduced.
A demat account can be opened with a bank or a stock broking house, for which the bank charges a fee. It works like a normal bank account or like your email account. In the most basic way, when you purchase shares, an electronic entry is entered in your demat account that mentions such a purchase. Similarly when you sell shares, another entry is made which reflects such a sale. In other words, a hard copy of your demat account will look like the passbook of your savings account.

Note: Whenever I write the next part of this article (if it is not on next Friday), I will focus on stock brokers, like bulls and bears and a few more stock market terms like wash sales.
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14 July 2011

Microsoft: An Infographic History

Microsoft is the largest software maker in the world. Check out this infographic capturing the history of the Redmond, Washington-based software giant.  

Click on the picture for larger view.

Since I do not remember the Web site where I collected this infographic (downloaded a few months back), the copyrights, if any, belong to its creator(s).

13 July 2011

Unsolved Mystery: Reactions to Post Disappear!

As you know, in the footer to each post, I have included Reactions to the Post via check boxes, like - Is this Post - Knowledge Add, Cool, Stupid. 

Till about 4 pm on July 12, the post titled The Explainer: Foreign Direct Investment had 62 Knowledge Add and 18 Cool reactions (with 0 Stupid). 

Currently, I find that there are only 50 Knowledge Add and 16 Cool; effectively, this means that reactions have disappeared! 

How can this happen? If you can throw some light on this, please post comment.

11 July 2011

U.S. cuts Pakistan's Pocket Money

The U.S. has announced that it has withheld U.S.$800 million in military aid to Pakistan. The amount is almost one-third of the total annual military aid from the U.S. to the Pakistani military. 

Since the launch of the War on Terror by the U.S. in the wake of the September 11 (2001) terror attacks, Pakistan has received over U.S.$10 billion in military aid from the U.S. for fighting terrorists.

However, this move does not affect the U.S. pledge of U.S.$1.5 billion in annual economic and development assistance to Pakistan through 2014.) 

In an interview with ABC News, Bill Daley, White House Chief of Staff, said this: “The truth of the matter is, our relationship with Pakistan is very complicated. Obviously, they’ve been an important ally in the fight on terrorism. They have been the victim of enormous amounts of terrorism. But right now they’ve taken some steps that have given us reason to pause on some of the aid which we’re giving to the military, and we’re trying to work through that. It’s a complicated relationship and a very difficult complicated part of the world. Obviously there's still a lot of pain that the political system in Pakistan is feeling by virtue of the raid that we did to get Osama bin Laden. Something that the president felt strongly about. We have no regrets over. But the Pakistani relationship is difficult, but it must be made to work over time. But until we get through these difficulties, we’ll hold back some of the money that the American taxpayers have committed to give." 

Among the major reasons behind the U.S. decision to pull the plug on military aid to Pakistan, here are a few: 

(a)  Pakistan's two-faced approach to fighting terror
: For several years now, Pakistan's military has fought against the Pakistani Taliban while turning a Nelson's Eye to the dangerous Afghan Taliban and the Haqqani terrorist network. 

While the Pakistani Taliban is fighting the Pakistani State, i.e. the political and military establishment (hence the Paki military action against the group), the
 main targets of the Afghan Taliban and the Haqqani network are the U.S.-led international forces. 

Both the Afghan Taliban and the Haqqani network are used by Pakistan to gain strategic depth in Afghanistan to install a pro-Pakistan 
(and an anti-India) government in Kabul after the American and other international forces withdraw from Afghanistan. 

(b)  The Raymond Davis Affair: 
Raymond Davis, a CIA contractor, was arrested by Pakistan security forces after he killed two Pakistani men who he alleged were trying to rob him. Though he was released after blood money (compensation money in exchange of withdrawal of criminal case) was paid to the families of the victims, the case whipped up a frenzy against the U.S. across Pakistan. 

The Pakistani government, u
nder tremendous public pressure and trying to show some spine, asked the U.S. to withdraw all CIA contractors and other special operations forces from Pakistani territory. This action, coupled with Pakistan's selective against terror groups, rattled the Americans. 

 OBL's Killing:
Osama bin Laden was found and killed by the U.S. special forces in a mansion, close to Pakistan's main military academy. The world, especially the U.S., was rattled by the fact that the world's most wanted terrorist was living 
securely in one of Pakistan's most garrisoned towns. Since then, there have been allegations of Pakistani complicity - especially of the ISI or the military - in harboring OBL.

Says Bruce Reidel, an expert on South Asian affairs: 
 "Not only is the U.S.-Pakistan relationship in a downward spiral, it doesn't look like there is any bottom in sight. It is hard to imagine things betting better and easy to imagine things getting worse. Foreign aid is never popular, and foreign aid for a country hiding enemy No. 1 is particularly unpopular."

Two days ago, Admiral Mike Mullen even alleged that Pakistan government was behind the  recent killing of journalist Saleem Shahzad, who had reported on terrorist sympathisers in the Pakistani navy. 

Now, Pakistan has hit back at the U.S. move to cut military aid. Putting on a brave face, a Pakistani military spokesman said that, "
Pakistan does not need foreign aid for anti-terror operations. We conducted Swat and Waziristan operations without any aid."

Brave words but Pakistan would need more than brave words to stay afloat. In the days to come, we will see many anti-U.S. Pakistanis parroting 'Look, the Americans have shown their true colours. They are betrayers and would dispose of us like a condom once the act is finished!"

As for the Americans, they do not know if their gamble will pay off. OBL is dead but anti-American terror groups are rampant and are in fact, thriving.

Let us see who blinks first: the U.S. or Pakistan.

(You can access the full transcript of the Bill Daley interview on ABC News here.) 

10 July 2011

Reflections on Life

For this weekend, no music videos; just these reflections on life. I found this here.

08 July 2011

The Explainer: Foreign Direct Investment

Starting today, every Friday, I will blog on 'explaining' crucial issues, including issues of economic and political nature. This feature will be titled 'The Explainer'. Most of these Explainers will be in the form of Question & Answer (Q&A), with minimal jargon.

I will start this series with 'Foreign Direct Investment', or FDI, as it is more popularly known. 

The language and interpretation are mine; the data have been taken from here.

What is FDI?
FDI refers to the capital invested by a foreign company in an existing or new domestic company. This way, by directly acquiring a 'stake' (by contributing to capital) in the domestic business, the foreign company becomes a shareholder.

(Please note that FDI does not relate to the funds invested by a foreign company in the share market; such investment is called Foreign Institutional Investment (FII).)

For example, if Prudential, a British company, invests in ICICI Prudential Life Insurance, by way of capital, such investment is termed FDI. 

In what way can a company bring in FDI?

FDI can be brought in through direct injection of funds into the capital of the company, subject to government rules.

What are the advantages of FDI?
A foreign partner (the one who brings in FDI) may come with better technology, technology transfer, expertise in executing large and complex projects (like airports), global reputation, financial leverage, access to markets elsewhere, etc.

How much FDI did India receive between April 2000 and March 2011? 
Between April 2000 and March 2011, India received a cumulative FDI of U.S.$194.81 billion.

How much FDI did India receive in the last financial year (2010-11)?
In 2010-11, India received U.S.$19.42 billion in FDI. This figure is 25 per cent less than the FDI inflow of U.S.$25.83 billion received in 2009-10.

Which sectors attracted the highest FDI in 2010-11?
The top three sectors (in order of highest) are: Services (21% of all FDI), Computer Hardware & Software (8%), and Telecom (8%).

Which were the top investing countries in India in 2010-11?
Mauritius (42% of all FDI came via this island country), Singapore (9%), and the U.S. (7%).

How is it that the tiny island nation of Mauritius is the biggest foreign investor in India?
India has a Double Taxation Avoidance Agreement (DTAA) with Mauritius. Without getting into complex tax jargon, if a company based in Mauritius is paying tax there, it will not be asked to pay tax in India. Since the tax rates are either nil or extremely low in Mauritius, companies prefer to route their investments into India through Mauritius.

    Let me bring to you a snapshot of FDI limits in some major sectors as laid down by the Government of India.

    % of FDI Cap / Equity
    Agriculture & related fields like Aquaculture
    Airports (Greenfield & Existing)
    Banking – Private Sector
    49 through automatic route 
    74 via Govt. approval
    Banking – Public Sector
    20 (both FDI & FII)
    In Broadcasting
        - Terrestrial FM
        - Cable Network
        - Direct-to-Home

    49 (incl FDI, FII, & NRI)
    49 (incl FDI, FII, & NRI)
    Commodity Exchange
    49 (includes 23% for FII)
    Petroleum & Gas Sector (exploring & refining)
       - by private sector companies
       - by public sector companies


    In Print Media
      - Current Affairs & News
      - Scientific & Technical journals
      - Facsimile edition of foreign newspapers



    49 through automatic route
    74 via Govt. approval
    Internet Service Providers
    49 through automatic route
    74 via Govt. approval
      - Wholesale Cash & Carry
      - Single Brand Retail


    An example: In telecom, the FDI limit is 74%. What it means is that in a telecom company like Uninor (a joint venture between Unitech, an Indian company, and Telenor, a company based in Norway), the maximum that Telenor can contribute to the capital base of the company is 74%. The rest of the capital (also called equity) should be held by an Indian company or a clutch of Indian investors.

    Jargon decoded:
    • Greenfield: Any project that is not constrained by prior or existing project. In short, a brand new project. For example, the building of the Hyderabad International Airport is a greenfield project. The developers were not constrained by existing infrastructure. Now contrast this with the Indira Gandhi International Airport in New Delhi. It was built in and around the existing old airport, and the developers were constrained by the existing infrastructure in developing it.

    • Automatic Route: Any FDI under the automatic route does not require prior approval either by the Government of India or the Reserve Bank of India (RBI).

    • Government ApprovalAny FDI that is NOT under the automatic route requires prior approval by the Government of India. 

    I have tried to keep it simple. This is meant for a reader who is not comfortable with economic jargon. I have deliberately skipped putting in some real tough terms, like capital gains tax, while explaining DTAA with Mauritius. 

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