RISK A MOST IMPORTANT GAME CHANGER

Risk is the universal truth in the investment and business world, birth of risk takes place in the arena of uncertainty which is stored in the future .In other way risk is the integral part of the growth so, if one has to grow they have to take calculated risk and here comes risk management.

Risk associated with Investment

Organizations can't plan for their finance without understanding investment risk. Many people when they hear about 'risk' think automatically about the chance of being defrauded or not getting all their money back. This 'capital' risk is important but isn't the only type.

Other types of risk involve uncertainty and unpredictability. When you make an investment, it can be difficult to say with any certainty what you'll get back when you finally cash it in.

Share prices fluctuate, interest rates vary, and inflation is a risk too. Just concentrating on capital risk and ignoring these other risks can mean you take too cautious an approach.

Understanding risk means identifying your own attitude to risk and identifying the different types of risk. Then you can pick up tips for minimizing the chances of things going wrong.

Different types of risk:

Capital risk

Theoretically speaking, every investment carries at least some risk that you won't get back all the capital you invested. This is known as capital risk. However in practice several products are so safe that it's virtually certain you'll get what you were promised. For example, National Savings Certificates, Post office deposits and government bonds (gilts) are backed by the government.

But other asset class like equity corporate deposits other debt investments, Real states investments holds significant capital risk.

Inflation risk

Inflation risk is the danger of rising prices eroding the buying power of your money. This risk is greatest if you invest in savings accounts and bank fixed deposits.

Sometime many savings accounts don't pay interest equal to the rate of inflation after tax, so even if one doesn't spend any of the interest, the 'real' value of your savings falls. If you spend the interest, the problem is even greater.

Shortfall risk

Shortfall risk means failing to reach your investment goal because the return on your investments is too low. For example, say you want to save Rs20,000 and can get a return of 3.4% after tax from a savings account. This means you'd have to save Rs140 a month to reach your target. If you can only save Rs100 a month, you'd need a return of 6.9%.

To reduce shortfall risk, you need to invest at least some of your money for a higher return but this may involve taking some capital risk.

Share-based risk

Specific risk

This is the risk that the company one have invested in performs badly. Some companies will fluctuate more than others. First time investors should be especially concerned to keep this type of risk to a minimum.

This could be done by building up less risky assets first - so if you buy share-based investments they'll have less effect on your overall portfolio. You can also reduce your specific risk by investing across a range of shares. This way, if one of them goes bust, or falls heavily, the overall effect on your portfolio is less.

The best and cheapest way to spread your risk is to invest in pooled investments like Mutual fund, investment trusts. They are called pooled investments because you pool your money with other savers to buy a wide range of shares.

Market risk

This is the risk of a fall in the particular country's stock market where your money is invested. When a market falls you will usually find that most shares are dragged down with it. Some fall by more than the average, some by less, but few will buck the overall trend.

A good way of avoiding market risk is to invest your money gradually, for example through a monthly investment scheme as this will smooth out big variations in the price.

You can reduce market risk by investing in many stock markets around the world. This works because not all stock markets will rise and fall together by the same amount, so if one crashes, you should be able to limit your losses because the others won't have fallen as much.

Currency risk

If your money is invested in stock markets outside the country, then one will face currency risk. Wherever money is invested, it will have to be converted into currency of host nation, when one want it back. As a result, movements in the exchange rate will affect the value of your investment - this can work in your favor or against the investor. When FII were pumping the money in Indian market that time rupee were quoting at 39 but when they were selling from the country the rupee close to 52 look the risk involve with the currency.

one can limit currency risk by diversifying, for example through an international fund that spreads its investments around the globe. Alternatively, one can avoid currency risk by sticking to the one nation but this increases your market risk.

Fund Manager risk

There is a huge variation in the investment performance of individual fund managers of unit and investment trusts. It would be great if we could pick the winners in advance, but over the long-term bet very few managers manage to beat the stock market.

Investing through an index-tracking fund should remove the risk of picking a bad manager. Index trackers just try to follow their chosen index, such as the NIFTY All Share or the BSE 100. Index , MIDCAP Index trackers tend to have lower charges than funds where managers try to beat the market

Measuring and Managing Investment Risk:

We tend to think of "risk" in principally negative terms, as something to be avoided or a threat that we hope won't materialize. In the investment world, however, risk is inseparable from recital and, rather than being desirable or undesirable, is simply necessary. Understanding risk is one of the most important parts of a financial learning.

Risk - fine, dire and essential:

A general explanation for investment risk is deviation from an expected outcome. We can express this in absolute terms or relative to something else like a market benchmark. That deviation can be positive or negative, and relates to the idea of "no pain, no gain" - to achieve higher returns in the long run you have to accept more short-term volatility. How much volatility depends on risk tolerance of the individual - an expression of the capacity to assume volatility based on specific financial circumstance and the inclination to do so, taking into account your psychological comfort with uncertainty and the possibility of incurring large short-term losses.

Absolute Measures of Risk:

One of the most commonly used absolute risk metrics is standard deviation, a statistical measure of dispersion around a central tendency. I am taking the example of most stable and mature equity index of the globe for the explanation , during a 15-year period from August 1, 1992, to July 31, 2007, the average annualized total return of the S&P 500 Stock Index was 10.7%. This number tells you what happened for the whole period, but it doesn't say what happened along the way.

The average standard deviation of the S&P 500 for that same period was 13.5%. Statistical theory tells us that in normal distributions (the familiar bell-shaped curve) any given outcome should fall within one standard deviation of the mean about 67% of the time and within two standard deviations about 95% of the time. Thus, an S&P 500 investor could expect the return at any given point during this time to be 10.7% +/- 13.5% just under 70% of the time and +/- 27.0% 95% of the time. The Indian market has shown same trend since July 1990 till latest quotes in 2009.

Risk and Psychology

While that outcome may be helpful, it does not fully address an investor's risk concerns. The field of behavioral finance has contributed an important element to the risk equation, demonstrating asymmetry between how people view gains and losses. In the language of prospect theory, an area of behavioral finance introduced by Amos Tversky and Daniel Kahneman in 1979, investors exhibit loss aversion - they put more weight on the pain associated with a loss than the good feeling associated with a gain.

Thus, what investors really want to know is not just how much an asset deviates from its expected outcome, but how bad things look way down on the left-hand tail of the distribution curve. Value at risk (VAR)attempts to provide an answer to this question. The idea behind VAR is to quantify how bad a loss on an investment could be with a given level of confidence over a defined period of time. For example, the following statement would be an example of VAR: "With about a 95% level of confidence, the most you stand to lose on this $1,000 investment over a two-year time horizon is $200." The confidence level is a probability statement based on the statistical characteristics of the investment and the shape of its distribution curve.

Of course, even a measure like VAR doesn't guarantee that things won't be worse. Spectacular debacles like hedge fund Long Term Capital Management in 1998 remind us that so-called "outlier events" may occur. After all, 95% confidence allows that 5% of the time results may be much worse than what VAR calculates. In the case of LTCM, the outlier event was the Russian government's default on its outstanding sovereign debt obligations, an event that caused the hedge fund's performance to be much worse than its expected value at risk.

Another risk measure tilting to behavioral tendencies is drawdown, which refers to any period during which an asset's return is negative relative to a previous high mark. In measuring drawdown, we attempt to address three things: the magnitude of each negative period (how bad), the duration of each (how long) and the frequency (how many times).

Risk: The Passive and the Active

In addition to wanting to know, for example, whether a mutual fund beat the NIFTY and other indexes we also want to know how comparatively risky it was. One measure for this is beta, based on the statistical property of covariance and also called "market risk", "systematic risk", or "non-diversifiable risk". A beta greater than 1 indicates more risk than the market and vice versa.

Beta helps us to understand the concepts of passive and active risk. The graph below shows a time series of returns (each data point labeled "+") for a particular portfolio R(p) versus the market return R(m). The returns are cash-adjusted, so the point at which the x and y axes intersect is the cash-equivalent return. Drawing a line of best fit through the data points allows us to quantify the passive, or beta, risk and the active risk, which we refer to as alpha.

The gradient of the line is its beta. For example, a gradient of 1.0 indicates that for every unit increase of market return, the portfolio return also increases by one unit. A manager employing a passive management strategy can attempt to increase the portfolio return by taking on more market risk (i.e. a beta greater than 1) or alternatively decrease portfolio risk (and return) by reducing the portfolio beta below

1. Influence of Other Factors

If the level of market or systematic risk were the only influencing factor, then a portfolio's return would always be equal to the beta-adjusted market return. Of course, this is not the case - returns vary as a result of a number of factors unrelated to market risk. Investment managers who follow an active strategy take on other risks to achieve excess returns over the market's performance. Active strategies include stock, sector or country selection, fundamental analysis and charting.

Fund managers are on the hunt for alpha - the measure of excess return. In our diagram example above, alpha is the amount of portfolio return not explained by beta, represented as the distance between the intersection of the x and y axes and the y axis intercept, which can be positive or negative. In their quest for excess returns, active managers expose investors to alpha risk - the risk that their bets will prove negative rather than positive. For example, a manager may think that the energy sector will outperform the S&P 500 and increase her portfolio's weighting in this sector. If unexpected economic developments cause energy stocks to sharply decline, the manager will likely underperform the benchmark - an example of alpha risk.

A note of caution is in order when analyzing the significance of alpha and beta. There must be some evidence of a linear pattern between the portfolio returns and those of the market, or a reasonably inclusive line of best fit. If the data points are randomly dispersed, then the line of best fit will have little predictive ability and the results for alpha and beta will be statistically insignificant. A general rule is that an r-squared of 0.70 or higher (1.0 being perfect correlation) between the portfolio and the market reasonably validates the significance of alpha, beta and other relative measures.

The Price of Risk

There is economic cost to the decision between passive and active risk. In general, the more active the investment strategy (the more alpha a fund manager seeks to generate) the more an investor will need to pay for exposure to that strategy. It helps to think in terms of a spectrum from a purely passive approach. For example, a buy and hold investment into a proxy for the C&X NIFTY or NIFTYJr - all the way to a highly active approach such as a hedge fund employing complex trading strategies involving high capital commitments and transaction costs. For a purely passive vehicle like an index fund or an exchange trade fund ETF) you might pay 15-20basis points in annual management fees, while for a high-octane hedge fund you would need to shell out 200 basis points in annual fees plus give 20% of the profits back to the manager. In between these two confines lie alternative approaches combining active and passive risk management.

The discrepancy in pricing between passive and active strategies (or beta risk and alpha risk respectively) encourages many investors to try and separate these risks: i.e. to pay lower fees for the beta risk assumed and concentrates their more expensive exposures to specifically defined alpha opportunities. This is popularly known as portable alpha, the idea that the alpha component of a total return is separate from the beta component.

For example a fund manager may claim to have an active sector rotation strategy for beating the S&P 500 and show as evidence a track record of beating the index by 1.5% on an average annualized basis. To the investor, that 1.5% of excess return is the manager's value - the alpha - and the investor is willing to pay higher fees to obtain it. The rest of the total return, what the S&P 500 itself earned, arguably has nothing to do with the manager's unique ability, so why pay the same fee? Portable alpha strategies use derivatives and other tools to refine the means by which they obtain and pay for the alpha and beta components of their exposure.

Conclusions

Risk is integral part of return. Every investment involves some amount of risk, which can be very close to zero in the case of a Government security or very high for something such as concentrated exposure to African equities or real estate in Argentina the spatiotemporal variation plays important role in risk. Risk is quantifiable both in absolute and in relative terms. A solid understanding of risk in its different forms can help investors to better understand the opportunities, trade-offs and costs involved with different investment approaches.

Commodity Market in India

Organized commodity derivatives in India has their old history, it was started in 1875, barely about ten year after they started in Chicago. However, many feared that derivatives fuelled superfluous speculation and were detrimental to the healthy functioning of the markets for the underlying commodities. As a result, after independence, commodity options trading and cash settlement of commodity futures were banned in 1952. A further gust came in 1960s when, following several years of severe draughts that forced many farmers to default on forward contracts and even many committed suicides, forward trading was banned in many commodities considered primary or essential. Consequently, the commodities derivative markets dismantled and remained dormant for about four decades until the new millennium when the Government, in a complete change in policy, started actively encouraging the commodity derivatives market. Since 2002, the commodities futures market in India has experienced an unprecedented boom in terms of the number of modern exchanges, number of commodities allowed for derivatives trading as well as the value of futures trading in commodities.

Revolution in commodity trading:

After the Indian economy embarked upon the process of liberalization and globalization in 1990, the Government formed a Committee headed by Prof. K.N. Kabra in 1993 to examine the role of futures trading. The Committee recommended allowing futures trading in17commodity groups. It also recommended strengthening of the Forward Markets Commission, and certain amendments to Forward Contracts (Regulation) Act 1952, particularly allowing options trading in goods and registration of brokers with Forward Markets Commission. The Government accepted most of these recommendations and futures trading were permitted in all recommended commodities.

Commodity futures trading in India remained in a state of hibernation for nearly four decades, essentially due to suspicions about the benefits of derivatives. Lastly a realization that derivatives do perform a role in risk management led the government to change its stance. The policy changes favoring commodity derivatives were also facilitated by the enhanced role assigned to free market forces under the new liberalization policy of the Government. Indeed, it was a timely decision too, since internationally the commodity cycle is on the upswing and the next decade is being touted as the decade of commodities.

SCOPE OF COMMODITY FUTURE IN INDIA:

India is amongst the top-5 producers of most of the commodities, in addition to being a major consumer due to their consumption storey. Agriculture contributes about 22% to the GDP of the Indian economy. It employees around 57% of the labor force on a total of 163 million hectares of land. Agriculture sector is an important factor in achieving a GDP growth of 8-10%. All this indicates that India can be promoted as a major center for trading of commodity derivatives. It is unfortunate that the policies of FMC during the most of 1950s to 1980s suppressed the very markets it was supposed to encourage and nurture to grow with times. It was a mistake other emerging economies of the world would want to avoid. However, it is not in India alone that derivatives were suspected of creating too much speculation that would be to the detriment of the healthy growth of the markets and the farmers. Such suspicions might normally arise due to a misunderstanding of the characteristics and role of derivative product.

It is important to understand why commodity derivatives are required and the role they can play in risk management. It is common knowledge that prices of commodities, metals, shares and currencies fluctuate over time. The possibility of adverse price changes in future creates risk for businesses. Derivatives are used to reduce or eliminate price risk arising from unforeseen price changes. A derivative is a financial contract whose price depends on, or is derived from, the price of another asset.

Two important derivatives are futures and options.

(i) Commodity Futures Contracts: A futures contract is an agreement for buying or selling a commodity for a predetermined delivery price at a specific future time. Futures are standardized contracts that are traded on organized futures exchanges that ensure performance of the contracts and thus remove the default risk. The commodity futures have existed since the Chicago Board of Trade (CBOT, www.cbot.com) was established in 1848 to bring farmers and merchants together. The major function of futures markets is to transfer price risk from hedgers to speculators. For example, suppose a farmer is expecting his crop of wheat to be ready in two months time, but is worried that the price of wheat may decline in this period. In order to minimize his risk, he can enter into a futures contract to sell his crop in two months' time at a price determined now. This way he is able to hedge his risk arising from a possible adverse change in the price of his commodity.

(ii) Commodity Options contracts: Like futures, options are also financial instruments used for hedging and speculation. The commodity option holder has the right, but not the obligation, to buy (or sell) a specific quantity of a commodity at a specified price on or before a specified date. Option contracts involve two parties - the seller of the option writes the option in favor of the buyer (holder) who pays a certain premium to the seller as a price for the option. There are two types of commodity options: a 'call' option gives the holder a right to buy a commodity at an agreed price, while a 'put' option gives the holder a right to sell a commodity at an agreed price on or before a specified date (called expiry date). The option holder will exercise the option only if it is beneficial to him; otherwise he will let the option lapse. For example, suppose a farmer buys a put option to sell 100 Quintals of wheat at a price of $25 per quintal and pays a 'premium' of $0.5 per quintal (or a total of $50). If the price of wheat declines to say $20 before expiry, the farmer will exercise his option and sell his wheat at the agreed price of $25 per quintal. However, if the market price of wheat increases to say $30 per quintal, it would be advantageous for the farmer to sell it directly in the open market at the spot price, rather than exercise his option to sell at $25 per quintal.

Futures and options trading therefore helps in hedging the price risk and also provide investment opportunity to speculators who are willing to assume risk for a possible return. Further, futures trading and the ensuing discovery of price can help farmers in deciding which crops to grow. They can also help in building a competitive edge and enable businesses to smoothen their earnings because none hedging of the risk would increase the volatility of their quarterly earnings. Thus futures and options markets perform important functions that cannot be ignored in modern business environment. At the same time, it is true that too much speculative activity in essential commodities would destabilize the markets and therefore, these markets are normally regulated as per the laws of the country.

STRUCTUE OF COMODITY MARKET IN INDIA :

Forward Market Commission (FMC)

FMC is the apex organization to take care and act as the watchdog for the commodity markets in India. It was set up in 1953 under the Forward Contracts (Regulation) Act, 1952 and Managed by Ministry of Consumer Affairs and Public Distribution, Govt. of India.. Currently Shri B.C.Khatua, is the Chairman of FMC

Multi Commodity Exchange (MCX)

Promoted by Financial Technologies (India) Ltd. And various PSU Banks It commenced its operations on 10th November 2003 Headquartered in Mumbai, MCX is led by an expert management team 62 commodities; volumes 5893 crores per day Over 3000 clients trading through more than 500 brokers daily Expected turnover-50000 crores a day by 2012 Gold, Silver, Crude & Mentha oil contributing to turnover

National Commodity Exchange (NCDX)

Promoters - ICICI Bank, LIC, NABARD, NSE Punjab National Bank (PNB), CRISIL Ltd, Indian Farmers Fertilizer Cooperative Limited (IFFCO) and Canara Bank It commenced its operations on December 15, 2003.NCDEX is located in Mumbai and offers facilities through more than 390 centers in India.55 commodities; volumes 3296 crores per day Chana, Urad, Guar & Silver contributing to turnover

NMCE, Ahmadabad

National Board of Trade, Indore (NBOT) :

It incorporated on July 30,1999 to offer integrated, state-of-the-art commodity futures exchange. It was incorporated to offer transparent and efficient trading platform to various market intermediaries in the commodity futures trade. Today NBOT is one of the fastest growing commodity exchanges recognized by the Government of India under the aegis of the Forward Markets Commission. Within a short span of seven years, NBOT has carved out a niche for itself in the commodities market. With a humble beginning of trading in February 2000 its average daily volume has reached a staggering 60,000 MTs (approx.) in terms of Soya oil.

National Multi-Commodity Exchange(NMCE):

National Multi Commodity Exchange of India Ltd. (NMCE) was promoted by commodity-relevant public institutions, viz., Central Warehousing Corporation (CWC), National Agricultural Cooperative Marketing Federation of India (NAFED), Gujarat Agro-Industries Corporation Limited (GAICL), Gujarat State Agricultural Marketing Board (GSAMB), National Institute of Agricultural Marketing (NIAM), and Neptune Overseas Limited (NOL). While various integral aspects of commodity economy, viz., warehousing, cooperatives, private and public sector marketing of agricultural commodities, research and training were adequately addressed in structuring the Exchange, finance was still a vital missing link. Punjab National Bank (PNB) took equity of the Exchange to establish that linkage. Even today, NMCE is the only Exchange in India to have such investment and technical support from the commodity relevant institutions

Except the above installation there are 22 other exchanges operates in India who provides trading of commodities however more than 90% trade executes in above mentioned exchange.

Conclusion:

Commodity trading in India was started with the objective to safeguard the farmers and provide the hedge to the industry and to discover the price of the commodity however due to lack of awareness and inadequate infrastructure the light of its benefit are miles away from the farmers and so it has became the traders and speculators paradise .Indian farmers and small traders are not so capable to understand the mathematics of commodity trading and the operational complexity involved in trading .The use of modern communication devise make them more difficult to handle .The commodity market requires more reform and more participation from the farmer and trader to get its real goal.

Pankaj Kumar

Pharma Update

PHARMA UPDATE

Sanofi-Aventis Scans India for Acquisitions"; "Glaxo Eyes Piramal, Dr. Reddy's Labs"; "MNCs Eye Indian Pharma": If these and other recent headlines are any indication, India's pharmaceutical companies are in play for multinational suitors. According to some industry observers, more acquisitions are almost certain once valuations improve -- whether for diversification, exposure to emerging markets or other purposes.

Pharmaceutical, health care and biotechnology was one of the busiest sectors on India's Deal Street in 2008. At US$5.57 billion, it was second in terms of total value, marginally below telecommunications, which had total transactions worth US$5.78 billion. The pharma sector had 57 deals, second only to the 102 deals in the IT and IT services sector.

In June 2008, the acquisition of Ranbaxy Laboratories -- India's biggest drugmaker at the time -- by Japanese firm Daiichi Sankyo set the ball rolling. At US$4.6 billion, it was the largest of India's deals for the year. Since then, the Dabur Group, which operates in the wellness space, sold a 73% stake in its Dabur Pharma prescription business to Singapore-based Fresenius Kabi for US$200 million. Perrigo, an over-the-counter firm based in the U.S., picked up an 85% stake in Mumbai-based Vedants Drugs & Fine Chemicals for US$12 million. Wockhardt, based in Mumbai, hawked its nutritional supplement brands Farex, Protinex and Dexolac to U.S.-based Abbott Laboratories for US$130 million and its animal health division to Vetoquinol of France for US$40 million. And Sanofi-Aventis of France acquired Hyderabad-based vaccine major Shantha Biotechnics for nearly US$800 million.

The Sanofi-Aventis strategy in India in the past has been around a smaller number of products. The company's management in India is now focusing more on the base business and has accelerated their growth rate from about 7% per year to around 15% to 16%. Vaccine is clearly an area where they were in deficit -- pretty much everybody is. And that is why Shantha was so important. The company is still on the takeover trail. There will be more shopping on the horizon. The objective is to build the company's vaccine, biotechnology and non-prescription-medicine businesses, as well as expand in emerging markets.

A team from Sanofi, which had US$42 billion in revenues last year, visited India recently and held talks with Mumbai-based Piramal Healthcare and the privately held, Bangalore-based Micro Labs. GlaxoSmithKline (GSK), which had US$45 billion in revenues, is widely reported to be looking to acquire a 5% stake in Dr. Reddy's Laboratories; it already has a marketing deal in place. Pfizer, meanwhile, has struck alliances with Aurobindo Pharma and Claris Lifesciences. A lot of other proposals of the same kind are floating around, some of which involve second-tier companies, including Torrent Pharmaceuticals, Unichem Laboratories, Shasun Chemicals and Orchid Chemicals & Pharmaceuticals. The promoter families of quite a few Indian drug companies are open to the idea of selling to a multinational company but are waiting for valuations to improve. Some of the big deals being spoken about haven't gone through because of valuations.

Four Important Trends

Why has Indian pharma come under the takeover lens? Four important global trends are driving MNCs' strategies:

First is cost optimization, for which you need to create a flexible business model.

The second is getting into businesses that are different -- vaccines, for instance.

The third is the pursuit of profitable growth, for which you need to focus on emerging markets, which give you good margins.

Finally there is the move into generics, for which many companies have to look at inorganic growth."With growth expected to taper off in the U.S. and other developed countries, emerging economies like India are expected to drive future expansion. The Indian pharmaceutical market had estimated revenues of US$17 billion in fiscal 2008. The domestic formulation business, which was US$8 billion, is estimated to grow at over 12% annually to reach US$14 billion by fiscal 2013.

The key growth drivers in the domestic market, are increasing per-capita income, growing insurance penetration, better health awareness, higher government expenditure, adherence to IPR (intellectual property rights) norms, and shifts in disease profiles. Also, the country has established itself as a leading player in generics manufacturing as well as contract research and manufacturing. This is of interest to MNCs, which are currently facing a relatively low pipeline of new innovator drugs. Increased pressure from governments in several developed countries to reduce health care costs has also forced large pharma companies to look at enhancing their generics portfolio.

Getting access to India's domestic market and adding generics to portfolios are two primary drivers behind the increasing number of takeovers by MNCs in the pharma sector. Until recently, India was not an important market for big pharma companies because it accounted for only a very small percentage of their global revenues. But over the next 10 years, India is expected to become a multibillion-dollar market, among the top 10 markets globally. Indeed, Consumer spending on health care in India increased from 4% of gross domestic product in 1995 to 7% in 2007, and is expected to rise to 13% by 2015. However, tapping the Indian market will require a tailored approach. Cost efficiencies are important, price points are important. There are lots of poor people and different disease profiles.

On the generic front, earlier, generics used to be the lower end of the game, the bottom of the barrel. But those days have changed. Now there is a big drive for generic substitution wherever possible, because the prices collapse by 90%. All the big pharma players want to take a bigger role in generics. They realize that having generics in their portfolio gives them an extra arrow in the quiver while dealing with policymakers globally. One way is to acquire Indian drug-makers that have proven skills in manufacturing can keep their operations lean and have cost-effective generic development methods.

Expansion by global pharma companies into emerging markets like India becomes imperative as about US$103 billion worth of patented drugs will go off patent in the next few years. This will further hit the already sagging fortunes of such companies. Thus they are trying to augment their revenues by acquiring or aligning with companies in the generics business. The acquisition of Ranbaxy is an apt example in this context.

The industry itself isn't necessarily looking to sell out. The Indian Pharmaceutical Alliance, a lobby of 12 top home-grown drug-makers, was seeking the government's help to prevent acquisitions by foreign companies, through funding to protect and promote the industry and through tackling such issues as patents and price controls.

A Fragmented, Vulnerable Market

The Indian market is vulnerable because it is fragmented. At the end of 2008, according to pharma research firm ORG IMS, the top five companies had a combined market share of only 22%. Cipla Ltd. had the largest, having ousted Ranbaxy from the top spot, yet its share was only 5.3%. The top 20 companies had a total market share of about 57%. Globally, the 10 largest companies account for about 40% of sales.

According to Espicom Business Intelligence, India is the world's fourth-largest producer of pharmaceuticals by volume, accounting for around 8% of global production. In value terms, India's production accounts for around 1.5% of the world total, ranking India thirteenth. While there are around 270 large R&D-based pharmaceutical companies in India, including multinationals, government-owned and private companies, there are also around 5,600 smaller licensed generics manufacturers, although in reality only around 3,000 companies are involved in pharmaceutical production. Most small firms do not have their own production facilities, but operate using the spare capacity of other drug manufacturers. That is the fragmented market of pharmaceuticals in India.

The intense competition in a highly fragmented market is posing a great challenge. The stage is set for the next phase of growth accompanied by consolidation. India is one of the most competitive markets in the world, primarily because it is very fragmented. No one enjoys dominance and that is unlikely to change in the near future.

Cost considerations are also driving MNCs' interest. India offers the benefits of low-cost R&D, a domain in which it is estimated to capture a 10% to 20% share of the world's business by 2020 from less than 1% currently. Globally, pharmaceutical companies are shifting their outsourcing activities to Asian markets, with India emerging as one of the most attractive destinations, according to an August 2009 report by the Organization of Pharmaceutical Producers of India (OPPI) and Ernst & Young (E&Y). India is a fast-growing custom manufacturing outsourcing destination with a growth rate of 43% that is three times the global market rate. This is driven by its ability to create a differentiating cost value proposition powered by its lower manufacturing costs, skilled manpower and strong technical capabilities.

The report rated India highest in terms of cost-efficiency attractiveness among six destinations including China, Eastern Europe, Puerto Rico, Singapore and Ireland. India's cost efficiency is driven by its low manufacturing cost, which is only 35% to 40% of the cost of manufacturing in the United States, supported by its low installation and manpower cost. In drug discovery and development services, India is emerging as a hot spot, growing at around 65%. India offers significant cost arbitrage in end-to-end R&D with potential savings of 61% as compared to the United States.

Another E&Y study, developed with the Federation of Indian Chambers of Commerce and Industry (FICCI), says India enjoys significant cost arbitrage in the conduct of clinical trials, which includes infrastructure, patient recruitment, manpower, data management and processing costs. "The cost of these activities in India is typically 40% to 60% lower than in developed countries and around 10% to 20% lower than in other emerging economies," says the study. At least eight of the top 10 pharma companies internationally are tapping such allied services in India. The sector is growing by 21% annually in India, compared with 7.5% globally.

A Growing Affluent Market

MNCs have another reason to eye India. The FICCI-E&Y study says that high-value drugs from MNCs could produce up to US$8 billion in sales by 2015. The population in India's highest income class is expected to grow to 25 million in 2015 from 10 million today, so more people will be able to afford high-value patented drugs. MNCs are increasingly restructuring their operations with global parents increasing their equity stakes in their Indian affiliates. Companies such as Bristol-Myers Squibb and Merck that had exited the Indian market have staged a reentry. Lifestyle disorders will make people more vulnerable to ailments such as cardiovascular diseases and diabetes. Secondly, medicines will become more affordable to a larger number of people as the size of India's 300 million middle class is rapidly increasing and income levels are also going up.

But the entry of MNCs does not necessarily mean more expensive medicines. It could lead to the introduction of patented drugs for lifestyle diseases. But India will continue to need affordable medicines, particularly for acute ailments. These are typically served by generic medicines which are affordable and, in certain cases, their prices are regulated by the government. While we can expect patented medicines to be launched in India, particularly due to growing confidence in Indian IPR laws, affordable generic medicines will continue to comprise a very significant section of the market.

Pharma takeovers elicit so much attention because health care is of key importance everywhere. Health care and pharmaceuticals will continue to be of strategic interest for the country. The pharmaceutical industry will continue to be watched and followed keenly by the media as well as the government, unlike several other sectors. That is why industries such as advertising and market research have become almost 100% foreign-owned without a murmur, while pharma takeovers have a host of critics.

The criticisms notwithstanding, MNCs obviously are attracted to India. From the Indian point of view, it makes sense to join hands or sell out. Intense competition is one reason. A patent regime established in 2005 that limits the industry's ability to introduce new generic drugs is another. With the increasing need for capital to sustain momentum, a number of Indian pharmaceutical companies will find it difficult to pursue the growth path on their own. Such companies will be ideal candidates to join hands with strong multinational companies.

Indian companies face other problems, too. Exports, mainly of generics, have become an increasingly important business component. But some Western countries are setting up what are perceived as non-tariff barriers. For example, the U.S. Food & Drug Administration has taken action against several companies; early this year, it banned 28 of Ranbaxy's drugs, saying the company had falsified data and test results in approved and pending drug applications. Also, several shipments of generic drugs destined for Latin American countries have been seized in European ports. A Dr. Reddy's consignment of losartan, used to lower blood pressure, was seized in transit to Brazil by Dutch customs officials. The U.S. multinational DuPont holds the patent for losartan in the Netherlands. Several such seizures have occurred that the Indian industry considers illegal because the drugs were in transit and not meant for sale in any European market.

Indian Pharma 'At a Crossroads'

Indian companies are at a crossroads. Because of the increasing competition, winning in commodity generics in developed markets will be difficult. Today, valuations are fantastic. So divest. If you do not divest, you have to invest. But for that you need resources. Ranbaxy and Shantha got very rich valuations, some three to five times sales.

The "rich" valuations raise a different issue: Are MNCs paying too much? Consider what happened to Daiichi after the Ranbaxy purchase. At the time of the acquisition, a leading business magazine wrote in its headline "Japan's Daiichi Sankyo makes Ranbaxy Laboratories an offer it can't refuse." The Singh brothers, Malvinder and Shivinder, sold their 34% stake to the Japanese major for US$2 billion. Daiichi paid a similar sum in an open offer to ordinary shareholders; it now owns 63.9% of the company. At the end of the year, the Japanese company was licking its wounds. It had to write down US$3.84 billion after Ranbaxy shares plunged 66% on the Bombay bourses, in line with the rest of the market. Four years of Daiichi's profits were wiped out. That doesn't seem to have fazed others. Japan's largest and oldest pharma giant, Takeda Pharmaceutical, is keenly eyeing Ahmedabad-based Torrent Pharmaceuticals as a possible acquisition.

Takeda and Daiichi are looking to the future. When the Indian pharma industry itself looks to the future, what does it see? Just a few years ago, Indian companies seemed to be on the takeover trail. The roles have now reversed in the Indian pharma M&A space. In the growth years of 2005 to 2008, companies like Wockhardt, Dr. Reddy's and Ranbaxy were busy shopping abroad to expand their global footprint. In 2007-08 alone, Indian drug companies made 14 acquisitions abroad at a cost of US$1.3 billion. Some deals have gone wrong. Wockhardt is selling off because it borrowed too much to fund acquisitions and ended up with financial problems. Sun Pharma is still fighting a legal battle over its bid for Taro of Israel. The experiences of some others -- Dr. Reddy's with Betapharm of Germany for one -- have not turned out well: The Company has had to write off around US$300 million on account of this German subsidiary.

Is it the end of the Indian pharma MNC? Indian generic MNCs will come up. Sun Pharma is trying. So is Dr. Reddy's. They could become generic MNCs. Companies that have ambitions are not going to give up. This is just a pause.

Pharma Update

PHARMA UPDATE

Sanofi-Aventis Scans India for Acquisitions"; "Glaxo Eyes Piramal, Dr. Reddy's Labs"; "MNCs Eye Indian Pharma": If these and other recent headlines are any indication, India's pharmaceutical companies are in play for multinational suitors. According to some industry observers, more acquisitions are almost certain once valuations improve -- whether for diversification, exposure to emerging markets or other purposes.

Pharmaceutical, health care and biotechnology was one of the busiest sectors on India's Deal Street in 2008. At US$5.57 billion, it was second in terms of total value, marginally below telecommunications, which had total transactions worth US$5.78 billion. The pharma sector had 57 deals, second only to the 102 deals in the IT and IT services sector.

In June 2008, the acquisition of Ranbaxy Laboratories -- India's biggest drugmaker at the time -- by Japanese firm Daiichi Sankyo set the ball rolling. At US$4.6 billion, it was the largest of India's deals for the year. Since then, the Dabur Group, which operates in the wellness space, sold a 73% stake in its Dabur Pharma prescription business to Singapore-based Fresenius Kabi for US$200 million. Perrigo, an over-the-counter firm based in the U.S., picked up an 85% stake in Mumbai-based Vedants Drugs & Fine Chemicals for US$12 million. Wockhardt, based in Mumbai, hawked its nutritional supplement brands Farex, Protinex and Dexolac to U.S.-based Abbott Laboratories for US$130 million and its animal health division to Vetoquinol of France for US$40 million. And Sanofi-Aventis of France acquired Hyderabad-based vaccine major Shantha Biotechnics for nearly US$800 million.

The Sanofi-Aventis strategy in India in the past has been around a smaller number of products. The company's management in India is now focusing more on the base business and has accelerated their growth rate from about 7% per year to around 15% to 16%. Vaccine is clearly an area where they were in deficit -- pretty much everybody is. And that is why Shantha was so important. The company is still on the takeover trail. There will be more shopping on the horizon. The objective is to build the company's vaccine, biotechnology and non-prescription-medicine businesses, as well as expand in emerging markets.

A team from Sanofi, which had US$42 billion in revenues last year, visited India recently and held talks with Mumbai-based Piramal Healthcare and the privately held, Bangalore-based Micro Labs. GlaxoSmithKline (GSK), which had US$45 billion in revenues, is widely reported to be looking to acquire a 5% stake in Dr. Reddy's Laboratories; it already has a marketing deal in place. Pfizer, meanwhile, has struck alliances with Aurobindo Pharma and Claris Lifesciences. A lot of other proposals of the same kind are floating around, some of which involve second-tier companies, including Torrent Pharmaceuticals, Unichem Laboratories, Shasun Chemicals and Orchid Chemicals & Pharmaceuticals. The promoter families of quite a few Indian drug companies are open to the idea of selling to a multinational company but are waiting for valuations to improve. Some of the big deals being spoken about haven't gone through because of valuations.

Four Important Trends

Why has Indian pharma come under the takeover lens? Four important global trends are driving MNCs' strategies:

First is cost optimization, for which you need to create a flexible business model.

The second is getting into businesses that are different -- vaccines, for instance.

The third is the pursuit of profitable growth, for which you need to focus on emerging markets, which give you good margins.

Finally there is the move into generics, for which many companies have to look at inorganic growth."With growth expected to taper off in the U.S. and other developed countries, emerging economies like India are expected to drive future expansion. The Indian pharmaceutical market had estimated revenues of US$17 billion in fiscal 2008. The domestic formulation business, which was US$8 billion, is estimated to grow at over 12% annually to reach US$14 billion by fiscal 2013.

The key growth drivers in the domestic market, are increasing per-capita income, growing insurance penetration, better health awareness, higher government expenditure, adherence to IPR (intellectual property rights) norms, and shifts in disease profiles. Also, the country has established itself as a leading player in generics manufacturing as well as contract research and manufacturing. This is of interest to MNCs, which are currently facing a relatively low pipeline of new innovator drugs. Increased pressure from governments in several developed countries to reduce health care costs has also forced large pharma companies to look at enhancing their generics portfolio.

Getting access to India's domestic market and adding generics to portfolios are two primary drivers behind the increasing number of takeovers by MNCs in the pharma sector. Until recently, India was not an important market for big pharma companies because it accounted for only a very small percentage of their global revenues. But over the next 10 years, India is expected to become a multibillion-dollar market, among the top 10 markets globally. Indeed, Consumer spending on health care in India increased from 4% of gross domestic product in 1995 to 7% in 2007, and is expected to rise to 13% by 2015. However, tapping the Indian market will require a tailored approach. Cost efficiencies are important, price points are important. There are lots of poor people and different disease profiles.

On the generic front, earlier, generics used to be the lower end of the game, the bottom of the barrel. But those days have changed. Now there is a big drive for generic substitution wherever possible, because the prices collapse by 90%. All the big pharma players want to take a bigger role in generics. They realize that having generics in their portfolio gives them an extra arrow in the quiver while dealing with policymakers globally. One way is to acquire Indian drug-makers that have proven skills in manufacturing can keep their operations lean and have cost-effective generic development methods.

Expansion by global pharma companies into emerging markets like India becomes imperative as about US$103 billion worth of patented drugs will go off patent in the next few years. This will further hit the already sagging fortunes of such companies. Thus they are trying to augment their revenues by acquiring or aligning with companies in the generics business. The acquisition of Ranbaxy is an apt example in this context.

The industry itself isn't necessarily looking to sell out. The Indian Pharmaceutical Alliance, a lobby of 12 top home-grown drug-makers, was seeking the government's help to prevent acquisitions by foreign companies, through funding to protect and promote the industry and through tackling such issues as patents and price controls.

A Fragmented, Vulnerable Market

The Indian market is vulnerable because it is fragmented. At the end of 2008, according to pharma research firm ORG IMS, the top five companies had a combined market share of only 22%. Cipla Ltd. had the largest, having ousted Ranbaxy from the top spot, yet its share was only 5.3%. The top 20 companies had a total market share of about 57%. Globally, the 10 largest companies account for about 40% of sales.

According to Espicom Business Intelligence, India is the world's fourth-largest producer of pharmaceuticals by volume, accounting for around 8% of global production. In value terms, India's production accounts for around 1.5% of the world total, ranking India thirteenth. While there are around 270 large R&D-based pharmaceutical companies in India, including multinationals, government-owned and private companies, there are also around 5,600 smaller licensed generics manufacturers, although in reality only around 3,000 companies are involved in pharmaceutical production. Most small firms do not have their own production facilities, but operate using the spare capacity of other drug manufacturers. That is the fragmented market of pharmaceuticals in India.

The intense competition in a highly fragmented market is posing a great challenge. The stage is set for the next phase of growth accompanied by consolidation. India is one of the most competitive markets in the world, primarily because it is very fragmented. No one enjoys dominance and that is unlikely to change in the near future.

Cost considerations are also driving MNCs' interest. India offers the benefits of low-cost R&D, a domain in which it is estimated to capture a 10% to 20% share of the world's business by 2020 from less than 1% currently. Globally, pharmaceutical companies are shifting their outsourcing activities to Asian markets, with India emerging as one of the most attractive destinations, according to an August 2009 report by the Organization of Pharmaceutical Producers of India (OPPI) and Ernst & Young (E&Y). India is a fast-growing custom manufacturing outsourcing destination with a growth rate of 43% that is three times the global market rate. This is driven by its ability to create a differentiating cost value proposition powered by its lower manufacturing costs, skilled manpower and strong technical capabilities.

The report rated India highest in terms of cost-efficiency attractiveness among six destinations including China, Eastern Europe, Puerto Rico, Singapore and Ireland. India's cost efficiency is driven by its low manufacturing cost, which is only 35% to 40% of the cost of manufacturing in the United States, supported by its low installation and manpower cost. In drug discovery and development services, India is emerging as a hot spot, growing at around 65%. India offers significant cost arbitrage in end-to-end R&D with potential savings of 61% as compared to the United States.

Another E&Y study, developed with the Federation of Indian Chambers of Commerce and Industry (FICCI), says India enjoys significant cost arbitrage in the conduct of clinical trials, which includes infrastructure, patient recruitment, manpower, data management and processing costs. "The cost of these activities in India is typically 40% to 60% lower than in developed countries and around 10% to 20% lower than in other emerging economies," says the study. At least eight of the top 10 pharma companies internationally are tapping such allied services in India. The sector is growing by 21% annually in India, compared with 7.5% globally.

A Growing Affluent Market

MNCs have another reason to eye India. The FICCI-E&Y study says that high-value drugs from MNCs could produce up to US$8 billion in sales by 2015. The population in India's highest income class is expected to grow to 25 million in 2015 from 10 million today, so more people will be able to afford high-value patented drugs. MNCs are increasingly restructuring their operations with global parents increasing their equity stakes in their Indian affiliates. Companies such as Bristol-Myers Squibb and Merck that had exited the Indian market have staged a reentry. Lifestyle disorders will make people more vulnerable to ailments such as cardiovascular diseases and diabetes. Secondly, medicines will become more affordable to a larger number of people as the size of India's 300 million middle class is rapidly increasing and income levels are also going up.

But the entry of MNCs does not necessarily mean more expensive medicines. It could lead to the introduction of patented drugs for lifestyle diseases. But India will continue to need affordable medicines, particularly for acute ailments. These are typically served by generic medicines which are affordable and, in certain cases, their prices are regulated by the government. While we can expect patented medicines to be launched in India, particularly due to growing confidence in Indian IPR laws, affordable generic medicines will continue to comprise a very significant section of the market.

Pharma takeovers elicit so much attention because health care is of key importance everywhere. Health care and pharmaceuticals will continue to be of strategic interest for the country. The pharmaceutical industry will continue to be watched and followed keenly by the media as well as the government, unlike several other sectors. That is why industries such as advertising and market research have become almost 100% foreign-owned without a murmur, while pharma takeovers have a host of critics.

The criticisms notwithstanding, MNCs obviously are attracted to India. From the Indian point of view, it makes sense to join hands or sell out. Intense competition is one reason. A patent regime established in 2005 that limits the industry's ability to introduce new generic drugs is another. With the increasing need for capital to sustain momentum, a number of Indian pharmaceutical companies will find it difficult to pursue the growth path on their own. Such companies will be ideal candidates to join hands with strong multinational companies.

Indian companies face other problems, too. Exports, mainly of generics, have become an increasingly important business component. But some Western countries are setting up what are perceived as non-tariff barriers. For example, the U.S. Food & Drug Administration has taken action against several companies; early this year, it banned 28 of Ranbaxy's drugs, saying the company had falsified data and test results in approved and pending drug applications. Also, several shipments of generic drugs destined for Latin American countries have been seized in European ports. A Dr. Reddy's consignment of losartan, used to lower blood pressure, was seized in transit to Brazil by Dutch customs officials. The U.S. multinational DuPont holds the patent for losartan in the Netherlands. Several such seizures have occurred that the Indian industry considers illegal because the drugs were in transit and not meant for sale in any European market.

Indian Pharma 'At a Crossroads'

Indian companies are at a crossroads. Because of the increasing competition, winning in commodity generics in developed markets will be difficult. Today, valuations are fantastic. So divest. If you do not divest, you have to invest. But for that you need resources. Ranbaxy and Shantha got very rich valuations, some three to five times sales.

The "rich" valuations raise a different issue: Are MNCs paying too much? Consider what happened to Daiichi after the Ranbaxy purchase. At the time of the acquisition, a leading business magazine wrote in its headline "Japan's Daiichi Sankyo makes Ranbaxy Laboratories an offer it can't refuse." The Singh brothers, Malvinder and Shivinder, sold their 34% stake to the Japanese major for US$2 billion. Daiichi paid a similar sum in an open offer to ordinary shareholders; it now owns 63.9% of the company. At the end of the year, the Japanese company was licking its wounds. It had to write down US$3.84 billion after Ranbaxy shares plunged 66% on the Bombay bourses, in line with the rest of the market. Four years of Daiichi's profits were wiped out. That doesn't seem to have fazed others. Japan's largest and oldest pharma giant, Takeda Pharmaceutical, is keenly eyeing Ahmedabad-based Torrent Pharmaceuticals as a possible acquisition.

Takeda and Daiichi are looking to the future. When the Indian pharma industry itself looks to the future, what does it see? Just a few years ago, Indian companies seemed to be on the takeover trail. The roles have now reversed in the Indian pharma M&A space. In the growth years of 2005 to 2008, companies like Wockhardt, Dr. Reddy's and Ranbaxy were busy shopping abroad to expand their global footprint. In 2007-08 alone, Indian drug companies made 14 acquisitions abroad at a cost of US$1.3 billion. Some deals have gone wrong. Wockhardt is selling off because it borrowed too much to fund acquisitions and ended up with financial problems. Sun Pharma is still fighting a legal battle over its bid for Taro of Israel. The experiences of some others -- Dr. Reddy's with Betapharm of Germany for one -- have not turned out well: The Company has had to write off around US$300 million on account of this German subsidiary.

Is it the end of the Indian pharma MNC? Indian generic MNCs will come up. Sun Pharma is trying. So is Dr. Reddy's. They could become generic MNCs. Companies that have ambitions are not going to give up. This is just a pause.

Types of Mutual Fund.

Open-Ended Funds, Close-Ended Funds and Interval Funds

Open-ended funds:

are open for investors to enter or exit at any time, even after the NFO. When existing investors buy additional units or new investors buy units of the open ended scheme, it is called a sale transaction. It happens at a sale price, which is equal to the NAV. When investors choose to return any of their units to the scheme and get back their equivalent value, it is called a re-purchase transaction. This happens at a re purchase price that is linked to the NAV. Although some unit-holders may exit from the scheme, wholly or partly, the scheme continues operations with the remaining investors. The scheme does not have any kind of time frame in which it is to be closed. The ongoing entry and exit of investors implies that the unit capital in an open-ended fund would keep changing on a regular basis.

Close-ended funds

have a fixed maturity. Investors can buy units of a close-ended scheme, from the fund, only during its NFO. The fund makes arrangements for the units to be traded, post-NFO in a stock exchange. This is done through a listing of the scheme in a stock exchange. Such listing is compulsory for close-ended schemes. Therefore, after the NFO, investors who want to buy Units will have to find a seller for those units in the stock exchange. Similarly, investors who want to sell Units will have to find a buyer for those units in the stock exchange. Since post- NFO, sale and purchase of units happen to or from a counter-party in the stock exchange – and not to or from the mutual fund – the unit capital of the scheme remains stable.

Interval funds

combine features of both open-ended and closeended schemes. They are largely close-ended, but become openended at pre-specified intervals. For instance, an interval scheme might become open-ended between January 1 to 15, and July 1 to 15, each year. The benefit for investors is that, unlike in a purely close-ended scheme, they are not completely dependent on the stock exchange to be able to buy or sell units of the interval fund.

Actively Managed Funds and Passive Funds

Actively managed funds :

The funds where the fund manager has the flexibility to choose the investment portfolio, within the broad parameters of the investment objective of the scheme. Since this increases the role of the fund manager, the expenses for running the fund turn out to be higher. Investors expect actively managed funds to perform better than the market.

Passive funds:

The invest on the basis of a specified index, whose performance it seeks to track. Thus, a passive fund tracking the BSE Sensex would buy only the shares that are part of the composition of the BSE Sensex. The proportion of each share in the scheme’s portfolio would also be the same as the weightage assigned to the share in the computation of the BSE Sensex. Thus, the performance of these funds tends to mirror the concerned index. They are not designed to perform better than the market. Such schemes are also called index schemes. Since the portfolio is determined by the index itself, the fund manager has no role in deciding on investments. Therefore, these schemes have low running costs.

Debt, Equity and Hybrid Funds

A scheme might have an investment objective to invest largely in equity shares and equity-related investments like convertible debentures. Such schemes are called equity schemes. Schemes with an investment objective that limits them to investments in debt securities like Treasury Bills, Government Securities, Bonds and Debentures are called debt funds.

Hybrid funds :

It has an investment charter that provides for a reasonable level of investment in both debt and equity