Arbitrage By- Kammra Shushmendra Kumar
Arbitrage in simple terms can be defined as
from
Buy at low and sell at high. It takes advantage
acquisitions. Especially in case of hostile
of price differences in different markets by the
takeovers, when companies attempting to
simultaneous purchase and sale of an asset
initiate the takeover will pay high price for
such as gold, foreign exchanges, financial
the target company’s stock than market price.
securities or commodities. There is no chance
Risk arbitrageurs who expects the stock price
of arbitrage exists in perfect market scenario,
will increase buy target company’s stock
but it exists in real world due to market
before merger and want to sell it after merger
inefficiencies. It is a necessary activity in
to make profit. But it won’t result always in
economic
profit as mergers might end in fail.
theory to
reduce
the
price
large
number
of
mergers
and
disparities in various market and to increase the market’s liquidity.
Arbitrage is used in various financial sectors like bond market, stock market, commodity
Arbitrage can be classified as risk and
market, derivatives market and currency or
riskless. Arbitrage is riskless when it requires
forex market. Foreign exchange arbitrage
no investment of capital and there is no
involves the exchange generally in more than
chance of losing money. But it is not so
two countries. It takes advantage of the
straight forward as it majorly relied on trader
exchange rate variation between different
advantage of opportunities on the available
countries. Interest rate arbitrage occurs when
information and make a profit and the
there is difference in money rates among
opportunities are highly speculative. Risk
countries. In Simple terms, you borrow at
arbitrages came into prominence in 1980’s
lower interest rate and reinvest it at higher
when many inventors began to take advantage
interest rate. Financial securities and gold
3
arbitrage work alike commodity arbitrage in
high expenses in high tax regions. It also
the domestic market, but the former ones are
occurs when investor purchases stock before
highly relied on exchange rates than latter.
the ex-dividend rate and sell later.
Index arbitrage will occur when one takes
Arbitrage opportunities are measured using
advantage of the price difference in stocks
certain
versus future contracts of a company.
Evaluation Techniques�. These methods are
techniques
called
“Efficiency
used to quantify the arbitrage opportunities International arbitrage is the one when one company is listed in multiple countries. For example, if a foreign company issues ordinary shares in their stocks and it can issue American depository receipts or global depository receipts to allow investors in other countries. This will lead to spread or differential pricing from time to time. Convertible debentures are the one when company issues debt that can be converted into shares in the future. So, it will pay lower interest rate than on non-convertible or
that are present. The techniques can be categorized into four main categories: i) Parametric deterministic (Aigner-Chu model) ii) Parametric stochastic (stochastic frontier estimation or SFE) iii) Non-parametric deterministic (data envelopment analysis or DEA)
iv)
Non-parametric
stochastic
techniques (stochastic DEA or SDEA). DEA is most commonly used technique followed by SPE. DEA models studies the efficiency of input-output
units to
produce different
outputs.
"straight" debt that comprises of a straight debt instrument plus an embedded call option.
When it comes to financial arbitrage there are
Convertible arbitrage takes advantage of price
different types such as: Arbitrage betting,
differences associated with embedded option
covered interest arbitrage, fixed income
in the convertible debenture. Usually, it takes
arbitrage, political arbitrage, remarketing
place
arbitrage,
when
investor
purchasing
the
statistical arbitrage,
triangular
convertible security and then selling a series
arbitrage etc. To have a successful arbitrage,
of hedges.
the
Regulatory arbitrage is the practice where
relationships with suppliers so they know to
companies took advantage of loopholes in
call the person when they have the product.
regulatory systems. It is difficult to prevent
The person needs to make sure the drivers and
but can manage it by limiting the prominent
common carriers are carded everywhere the
loop holes thereby increasing the costs
person pull an arbitrage. The arbitrage should
associated with the regulations. Tax arbitrage
stay relatable with the person key carriers by
is the practice where one can profit from the
maintaining consistent business relationships.
difference in tax treatments for different
There are certain situations where the person
purposes. Business take advantage of it by
should avoid arbitrages, such as the savings
incurring high revenues in low tax region than
aren’t ideal, facing a customer run-out
person
needs
to
maintain
trusted
4
situation, a lengthy delay at the rack, logistics
Even if it is highly risk and may prompts to
costs outweigh the savings etc. When going
illegal activities like insider trading, it is legal
for an arbitrage, you need to make quick
in many countries like United States as it
decisions or you risk missing out. Arbitrages
highly serves to the market efficiency and
are complex and they require seamless
increases market liquidity. In countries like
communication between supply and logistics
India, it is not legal as it would not allow buy
teams. It is important to have goals, rewards
from BSE and Sell at NSE at the same time
ahead of time to ensure that you can act
and vice versa. Common arbitrage in Indian
quickly when the opportunity arises.
equity market is cash-futures arbitrage or cash
Arbitrage opportunity can come from any sources, such as making the best buy at a single rack, racks in different places, PADDs or Origin Points, Indexes and Market Timing etc.
and carry arbitrage where it takes advantage of the price discrepancy in stock and future contract. Currency arbitrage or futures-futures arbitrage occurs between different exchanges like INR bought in NSE at low price and sold in MCX at high price.
If you don’t have strong relationships with your suppliers, then you have options of all suppliers and you can compare prices then you can have arbitrage opportunity, this is making the best buy at a single rack. If you keep close contacts with suppliers in different areas and observe prices, then you may observe arbitrage opportunity, this is racks in different places.
5
Banking Sector in India – Challenges By- Deepanshu Panjwani (IMS DAVV INDORE)
India is moving ahead towards a journey
day operations, risk management, fraud
of noteworthy changes like the ease of
prevention and etc. Hence, these issues
doing
are pertaining to a varied section of
business,
insurance,
universal
financial
health
inclusion,
banking
operations
but
are
digitization, infrastructure development
interconnected with each other in vital
along
aspects.
with
the
growth
of
the
manufacturing and service sector.
Challenges faced by banking sector in
Globalization of the Indian Economy has
India are:
led to new boulevard and challenges for
Financial Inclusion
Indian banks. It has also been a reason for
It means making useful and affordable
the restructuring of the banking sector
financial
services
accessible
and
through a sequence of mergers and
available,
to
businesses
and
amalgamations.
individuals irrespective of their status.
In the last two decades, the Indian
Banks by connecting and updating its
banking system has been through a
customers with the ongoing services and
transformational phase in accordance
delivering them in a responsible and
with the forward movement by the real
sustainable way are holding an important
economy. This period is an evidence of
role in making this an enormous success.
adaptation of the bank’s innovative
However, for a population count like that
approach from brick and mortar branch
of India, it becomes a great challenge to
system to implementation of pioneering
make the services known to all. Various
delivery channels like internet banking,
schemes that are brought in the frame, to
ATMs, call centers, automated kiosks,
ease the lives of poor people and needful
chatbots and other automation with the
are completely unaware about them.
assistance of artificial intelligence.
Lack of financial literacy also acts as a
In respect to the banking sector, the
great
business is bound to face the issues
achieving a high rate of financial
which are
and constantly
inclusion. Rural and Semi rural markets
evolving, both internally and externally.
are the least touched in terms of financial
It comprises of third- party management,
literacy.
familiar
workforce management, banking day to
hurdle
all
for
policymakers
in
6
1. Capital Adequacy and Infusion
increasingly
audacious
Banks initiate provisions, to be protected
organized gangs with or without backing
against bad loans. This money cannot be
by state players have come to light,” the
used for any other purpose even lending.
RBI said.
Capital adequacy ratio or Capital to Risk
3. b. Fraud Risk
Assets ratio measure the funds/capital
Banking regulators are also concerned
bank has. Decrease/Fall in this ratio is a
with the increased number of fraudulent
worrisome sign as it leads to using
transactions in banks. And banks are
depositors’ money for lending. This
often seen unwilling to report these
money is, however, riskier than their
cases. All corporate loan-related fraud
own. There is a standard minimum
cases get seasoned for two to three years
percentage a bank needs to maintain as
as NPAs before they are reported as
CAR as per the Basel III norms, failing
fraud,” the RBI said in the report. In the
to do that results in severe issues. To
last five years, the volume of bank fraud
fulfill the minimum capital requirement
has increased by 19.6% to 5,064 cases.
in order to keep the banks in race
4. NPA
government infuses capital. Infusion of
It stands for non-performing assets. The
capital has multipurpose; it is majorly
assets (loans) which stop generating
introduced to NPA drowned banks so
income for the bank as the repayment of
that they can swim through it. The capital
principle
infused further can be used for major
doubtful which are classified as Non-
investing activities, to generate revenue.
performing assets. The mounting NPA
2. a. Cyber Security
and Stressed asset are day by day
With the rise of digitization in India,
becoming major concern. Aggregate
there has been trending upsurge in
gross
penetrations of computers, laptops, and
Commercial Banks) have gone from Rs
smartphones which facilitates the access
3, 23,464 cr, as on March 31, 2015, to Rs
of the Internet to Indians for opting the
10, 35,528 cr, as on March 31, 2018.
digital channels in order to perform their
There are 2 groups of defaulters who
banking transaction. The RBI classifies
have majorly contributed to this. The first
fraud as a transaction involving any
group is big companies and corporate
cheating, negligence, misappropriation
houses. Public Banks, possibly under
of funds, or forged documents. “Not only
political and economic pressure gave
simple attacks using phishing, vishing
loans to a lot of companies who
and social engineering, but also
defaulted. The 2nd group is that of
or/and
NPAs
of
attacks
interest
SCBS
by
becomes
(Schedule
7
farmers. Loan waivers just before the
task for the Indian banks to meet the
elections being the root cause, additional
service
to it the uncertainty of weather conditions
international standards.
also affect the overall productivity return
As there have been lower entry barriers by
from agriculture. One major hurdle in
the authorities, many players like private
recovering these loans is Indian law, as it
Banks, foreign banks and non-banking
treats an individual and his company as
finance companies etc. entered the banking
two different entities. So if a company
sector. The foreign banks and new private
has borrowed loan and defaults, at best
sector
bank can seize properties of the
technology revolution.
company, but cannot seize the property
7. Technology Management
of an individual. There are many
We
companies which have defaulted but
technological change and the emergence
their promoters have properties worth
of
billions of dollars. This allows the
acknowledging
individuals to corner fund irrespective of
implementing several technologies like
the loss his/her company bears.
risk
5. Payment banks
system, Information management and
There has been a significant rise in the
analytics, unique payment gateways and
number of the launching of the payment
internet banking. All these points to a
and small finance banks. A specific
flourishing
industry
segment is being targeted by these banks
technology
management.
and is determined to increase their share
while there has been significant action,
in the near future. As per the current
there are a lot of challenges and problems
scenario, these banks aren’t making
which are yet to be taken care of. Some
enough profits and doesn’t meet the
of them are that most banks do not yet
shareholder expectations in parlance with
predict
return on equity or return on investment.
transactions of their customers, in fact,
and
banking
banks
live
new
have
in
operation of
started the
times
of
paradigms.
and
this
the
real-time
constant
Banks change
compliance
high
are and
management
focused
on
However,
risks
and
they even do not have a multi6. Rigorous Competition
dimensional
The globalization has the outcome in
platform, cyber threats, heavy back- end
fierce competition for the domestic
workflows, frauds, lack of operational
banks. With the opening for foreign
efficiency, information security, lack of
banks in India, it has become a herculean
transparency, risk management, etc.
-
real-time
analysis
8
Budget 2019: Populism meets Financial Prudence By- Gaurav Badve (KJSMIR) On 1st February 2019, the interim Budget
the unorganized sector and low- income
was presented by the Indian Finance
salaried citizens. It lists down the macro-
Minister for the financial year 2019-20. The
economic plans for boosting the GDP
Budget was presented in the backdrop of
growth. These plans include expending
the national elections which are slated to
capital towards building next generation
take place in the months of April and May
physical infrastructure, a strong health
this year.
system, focusing on rural industrialization, farm production, and the creation of a
The Budget focussed its attention on the
Digital India, amongst others.
domestic rural and agricultural economy, Table 1: Receipts
2017-
2018-
2018-
2019-
2019-
2018
2019
2019
2020
2020
Budget
Revised
Budget
Estimate
Actual
Estimat
Estimat
Estimat
d
s
es
es
es
Growth
Receipts
1.
143523
Revenue
3
Receipts 2.
2018-
2019-
2019 (as 2020 (as %
of %
of
GDP)
GDP)
Revised
Budget
Estimat
Estimat
es
es
1725738
1729682
1977693
14.34%
9.27%
9.55%
1480649
1484406
1705046
14.86%
7.96%
8.23%
245089
245276
272647
11.16%
1.31%
1.32%
Tax
Revenue (Net
124248 to 8
Centre) 3.
Non
Tax
192745
Revenue
9
4. Capital Receipts
706742
716475
727553
806507
10.85%
3.90%
3.90%
15633
12199
13155
12508
-4.92%
0.07%
0.06%
100045
80000
80000
90000
12.50%
0.43%
0.43%
624276
634398
703999
10.97%
3.40%
3.40%
2442213
2457235
2784200
13.31%
13.17%
13.45%
5. Recovery of Loans 6.
Other
Receipts 7. Borrowin gs
and 591064
Other Liabilities 8.
Total
Receipts (1+4)
214197 5
All figures are in (In â‚š crore) Table 1 provides the different sources of receipts for the government and their Budget estimates (forecasting the likely receipts based upon pre-budget presentation trends), Revised estimates(a mid-year estimate based on six months actual trends and likely forecast of receipts for the remaining six months). Once the budget year is over, the Actuals show the actual details of receipts.
10
Table 2: Expenditures
2017-
2018-
2018-
2019-
2018
2019
2019
2020
Budget
Revised
Budget
Expenditures
Actuals
Estimates Estimates Estimates
2018-
2019-
2019-2020 2019 (as 2020 (as % Estimated GDP)
of %
of
GDP)
Growth Revised
Budget
Estimates Estimates 9.
Total
Expenditure
2141975 2442213
2457235
2784200
13.31%
11.87%
14.92%
1878835 2141772
2140612
2447907
14.36%
11.47%
13.12%
528952
575795
587570
665061
13.19%
3.15%
3.56%
191034
195345
200300
200740
0.22%
1.07%
1.08%
263140
300441
316623
336293
6.21%
1.70%
1.80%
(10+13) 10.
On
Revenue Account
of
which 11. Interest Payments 12. Grants in
Aid
for
creation
of
capital assets 13. Capital
On
Account All figures are in (In â‚š crore)
11
Table 3: Deficit
2017-
2018-
2018-
2019-
2018
2019
2019
2020
2019-2020
Deficit Budget Actuals
Revised
Estimated
Budget
Estimates Estimates Estimates
Growth
2018-2019
2019-2020
(as % of (as % of GDP)
GDP)
Revised
Budget
Estimates
Estimates
3.40%
3.40%
14. Fiscal
591064
624276
634398
703999
10.97%
Deficit
Table 4: GDP
GDP
Nominal GDP(Approximate)
2018-2019
2019-2020
2019-2020
Revised
Budget
Estimated
Estimates
Estimates
Growth
1,86,58,765
2,07,05,853
10.97%
Table 5: Debt
Debt
As on 31st March As on 31st March Estimated 2019
2020
Growth
87,97,766.30
95,29,549.00
8%
External debt
2,58,959.18
2,68,269.18
4%
Total
90,56,725.48
97,97,818.18
8%
Internal debt and other liabilities
All figures are in (In â‚š crore)
12
Debt Position
leakages of cash that occur in case of
Internal Debt consists of loans raised in the
subsidies or loan waivers. It will be
open market, from compensation and other
interesting to see how the government
bonds, etc. External Debt is a loan in
manages this without deviating from its
foreign currency and is very low and not a
fiscal deficit target.
cause of concern for the government. Similarly, the budgetary allocation has Total Debt of 97 lakh crore is only central
been made towards social security benefits
government debt and doesn’t contain state
in the form of pension schemes for workers
government liabilities.
in the unorganized sector.
It is a very small percentage of GDP and
Pradhan Mantri Shram-Yogi Maandhan
should not be a cause of concern.
one of the world’s largest pension schemes plans to provide workers in the unorganized sector with monthly income up to ₹15000
Major Schemes
an assured monthly pension of ₹3000from the age of 60 years on a monthly
Reforms have been proposed with the aim
contribution of a small affordable amount
of increasing disposable income of farmers
during their working age. For example, an
and the Indian middle class.
unorganized sector worker joining pension Yojana at the age of 29 years will have to
Pradhan Mantri Kisan SAmman Nidhi PM - KISAN has been introduced which proposes to provide minimum guaranteed
contribute only ₹100 per month till the age of 60 years however a worker joining at the age of 18 years will have to contribute as
income to small and vulnerable farmers. It
little as ₹55 per month. This will be
is a Direct Benefit Transfer under which
followed by deposit of an equal matching
farmer families holding cultivable land up
share by the government in their pension
to 2 hectares (86% of farmers in India come in this bracket) will receive income support of ₹6000 in three equal instalments of ₹2000 being directly transferred to the bank
account every month. This scheme costing an estimated ₹500 crore is likely to benefit at least 10 crore workers in the unorganised sector in the next 5 years.
accounts of beneficiary farmers. For providing relief to small taxpayers, the It is expected to benefit 12 crore small and marginal farmers directly without the
Budget offers a full tax rebate for individuals whose taxable annual income is
13
below ₹5, 00,000. No changes are however
to be processed digitally within 24 hours
proposed in the income tax slab rates for
under this project. It would be interesting to
individuals or corporates, and persons
see how these proposals are implemented
earning income over ₹ 5, 00,000 remain to
and whether they can minimize challenges
be taxed in the same manner.
of
unreasonable
and
high-pitched
assessments by the tax authorities. Tax deduction has been raised from ₹40,000 to ₹50,000 for salaried persons this
The Budget also provides an impetus to the
is estimated to provide a tax benefit to 3
real estate sector. Proposals include:
crore salary earners and pensioners. •
Tax exemption on notional rent
Another benefit of this scheme is that as
earned by a person on two self-
more people start getting the tax benefit it
occupied houses; •
will encourage them to enter the tax base
Non-taxability of notional rental
which will ultimately drive the tax base to
income on unsold inventories for
increase.
two years; and •
An encouragement is also given to
up to ₹ 2 crores from investment in
technological development, creation of digital
infrastructure
and
two residential houses.
digitized
•
governance. The Budget proposes to create
year which is further likely to
assessment platform, where anonymous
accelerate construction and provide
scrutiny is proposed to be carried out and in
a boost to affordable housing.
a speedier manner. Tax returns are expected
(A)
Core
of
the
Core
Schemes
Mahatma National
2018 Actual
Gandhi Rural
55166
Tax exemptions for development of housing projects are extended by a
a taxpayer friendly, technology-driven, tax
2017-
Benefits of rollover of capital gains
2018-
2018-
2019-
2019
2019
2020
Expected
Budget
Revised
Budget
Growth
Estimates Estimates Estimates 55000
61084
60000
-1.77%
14
Employment Guarantee Program(MNREGA) Umbrella Scheme for Development
of 5061
5183
7609
5395
-29.10%
2287
1550
1227
-20.83%
Scheduled Castes Umbrella for
Programme
Development
Other
of
Vulnerable
1574
Groups All figures are in (In â‚š crore) The decline in the allocation of funds to
It is however surprising that the Budget
MNREGA in the Budget Estimates could
estimates for Income Support and Direct
push down wages even further when annual
Benefit have grown significantly, but those
revisions happen in April.
for Aircraft and Aeroengines have reduced with respect to the revised estimates. This
There has also been a decline in the
has been done to achieve a more populist
allocation of funds towards Umbrella
balance in light of the upcoming elections.
Scheme for Development of Scheduled Castes and Other Vulnerable Groups by more than 20%.
(B)
Major Central Sector Schemes
Interest
20172018 Actual
Subsidy
2018-
2018-
2019-
2019
2019
2020
Expected
Budget
Revised
Budget
Growth
Estimates Estimates Estimates
for
Short Term Credit to 13046
15000
14987
18000
20.10%
Farmers
15
Income
Support
Scheme Aircrafts
and
75000
275%
1778
1813
2369
2115
-10.68%
13097
16478
16478
29500
79.02%
of 23892
29663
37321
36691
-1.68%
Aeroengines
Direct Benefit Transfer
National
20000
Highways
Authority India(NHAI)
All figures are in (In â‚š crore)
The reason for this is it was estimated that
Impact on Debt and Equity Markets
the income support schemes would increase Equity market
or the share
market
disposable income and increase spending
experienced a slight boost as Sensex ended
and will lead to an inflationary play as a
212 points up after Budget announcements.
result.
Stocks of automotive industry such as Maruti
Suzuki
and
Heromotocorp
experienced huge gains in the Sensex, ending up to 7% higher. Agriculture stocks got
a
boost
due
to
favourable
announcements made for the farmers. Defence
stocks
rose
following
Conclusion The Government targets a fiscal deficit of 3.4% of the total GDP and current account deficit of 2.5% of the GDP for FY 2019-20. While this is a prudent target, in order to
the
implement the above reforms, further
announcement that the Defence Budget for
reforms may be required to maintain these
FY20 has been increased to Rs 3 lakh
ratios. These targets are based on the
crore.Debt market experienced an increase
expectations to achieve a nominal GDP
in 10-year bond yield on the budget day
growth rate of 11.5% in FY 2019-20, along
however before the budget it had declined.
with higher tax collections, due to the GST.
16
One does get the feeling however that the government might have overestimated
References: https://www.indiabudget.gov.in
incomes and underestimated Fiscal Deficit. https://www.indiabudget.gov.in/ub2019Whether India is able to achieve its estimates also depends on the emerging global trade tensions. All-in-all, the Finance Ministry had to present a populist Budget keeping the elections in mind this summer
20/rec/annex9.pdf https://www.financialexpress.com/budget/ 2019-indian-union-budget-day-sharemarket-live-updates-sensex-nifty
but it also tried not to deviate from financial
https://www.ndtv.com/business/union-
prudence.
budget-2019-defence-budget-increased-by6-87-to-rs-3-18-lakh-crore-1987049
17
IRRATIONAL BEHAVIOUR OF PEOPLE WHEN INVESTING IN STOCK MARKET By- Rohit Garg (IIM- Shillong) Most of the people in the world want to be rich and live a lavish lifestyle. But lavish style requires money, so we become greedy and want to earn more money without working hard and having a proper rationale as to how to do the same. People flock to the lottery, some people do illegal business, and some think to invest in stocks as a shortcut to become rich. But the question is whether the investment in the stock market makes us so wealthy that we can live a lavish lifestyle? Sometimes the path which seems rosy has a lot of thorns in it, and we tend to forget that. The shine of gold influences us without actually inspecting the materials.
Indians make their investment decision? An owner of the medical shop bought shares of XYZ company because his neighbor told him that stock will reap profits and that there is insider information on the stock that its price will rise. The owner's children were growing up, and in 2 to 3 years he wanted to get her daughter married and wanted to gift her a car in the marriage. The neighbor had a good reputation and had earned money in the market; this influenced the person to listen to his neighbor. Other people are those who invest in the same stocks as recommended by the analyst in the news channel. People believe whatever they see in the news is true because they have this notion that an analyst cannot be wrong, but they must understand that if all
In India, a large portion of the population is
the analysts were always right then why
in the middle-class bracket who are bored
they are giving their analysis on television
of their mundane job and want fame and
when they could have invested in the stock
money for themselves and their family
and have earned a lot of money from it.
members. I mean who doesn’t want to be
Why would I like to share my wealth with
rich. The primary motive in the lives of
others if I think that I possess exclusive
people is to earn money.
information about something? I am here to
Stocks market in India is pretty small as
do business and not to do the charity.
compared to the US and China. Most of the
Management pays money to the news
people are not literate and do not have
channel to publicize their stocks so that the
sound financial knowledge; other people
stock price can rise and they could
influence them. So how do most of the
18
manipulate the market and make money out
Another bias which affects the investor is
of it.
the disposition effect that is they "hold on
The investors get affected by various types of behavioral bias as well. Only 0.01% of the investors earn huge money. There are money biases which stop the people from making more money in the stock market. Most of the people don't accept their mistakes, and when they win, they give credit to themselves, and when they fail, they put the blame on others. This is known as self-attribution bias. An investor should understand that they can not be right 100 percent of the time. Even the most prominent investors of the world like Waren Buffet do not have a hundred percent success rate. People should accept this fact and try not to blame others for their own mistakes.
to the sellers and sell the winners soon." This implies that an investor will sell assets that have increased in value while keeping assets that have dropped in value. The investor should always have a stop loss for his/her decision and strictly adhere to it. One should not hope while trading that a stock will reach its previous trading value. Suzlon was one of the most famous stock which many people had faith in, and many people kept it on hold even when there was a lot of erosion of shareholder's wealth just on the belief that share price will return. One of the recent stories which I will share with you is about the latest happenings. After the government had implemented long term capital gains tax, I told my father to sell stocks of Deepak Fertilizers as I found it overpriced, but he did not sell the
19
shares because at that time it was trading at
But the research conducted so far has found
Rs.460 and had made a high of Rs.500
out that very few people can beat the market
some 10 - 15 days earlier. This is another
in the long run and most of the people
bias which we find in people as they do not
should try to overcome their biases and
want to sell when there is a right time and
have a clear objective while making an
want to wait until the share reaches its
investment decision. So it is better for
previous high price.
investors to invest in the market portfolio
Most people are overconfident that they can beat the market in the long run and from here the concept of active trading comes into the picture.
after their analysis. They should not be dependent on another person to do the same. There is nothing wrong in failing but not accepting the failure is a crime for investors.
20
Peer-to-Peer Lending – Are we ready for it? By-Rohit Khanna, Shivam Mehra, IMI New Delhi
Peer-to-peer lending, also abbreviated as P2P lending, is the practice of lending Borrowers
P2P management team assess the lender capacity
Investor pumps the money to P2P
Investor pumps the money to P2P
Borrowers Borrowers
Investor decides the borrower and P2P management just provides platform
Borrower(s)
money to individuals or businesses through
Lending Market is projected to grow at a
online services that match lenders with
CAGR of 51.5% from 2016 to 2022, to
borrowers.
reach value of $460,312 million.
The
social
network
of
individuals can be utilized to enhance the confidence and examine the risk in a better manner by studying the social behavior of individuals. The online platform matches peer lenders with borrowers in order to
There can be two fundamental operating methods for lending procedure on P2P platform. In first method, the lender puts money in a pool of funds. The P2P lending company dispatches the money to different
provide unsecured loans. It is a blessing in
borrowers. In this pattern, a lender doesn’t
disguise for borrowers as it provides hassle-
know the borrower’s information. The
free borrowing experience at competitive interest rates and boom for lenders who wish to invest their money in a completely
investor pours in the money and goes away, and is not part of the operational end of the lending.
new asset class with higher returns. P2P
21
Another method is the lender chooses a
multiple investors. All the investors for a
borrower on the platform, and provides the
particular loan will enjoy the same interest
money to him/her. In this case, the lender
rate to avoid any speculation and should
assesses the borrower’s capacity or takes
lead to the fair discovery of market-based
further business motive into consideration
assessment of borrower's risk profile.
if any. The borrower starts bidding in terms of his requirements and capacity to reach out to investors. The borrower needs to add Guarantor
who
takes
guarantee
of
borrower requesting the loan. The lender and borrower are allowed to negotiate the terms of the loans i.e. interest rate, tenure
Once the terms of loan are finalized and requisite documents have been collected, agreed loan terms are embedded in smart contract. A smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract. Smart contracts
etc.
The platform doesn’t guarantee fixed or
allow
minimum rate of returns to any lender nor
transactions without third parties. These
guarantee the principal amount to lenders.
transactions are traceable and irreversible.
The major job of platform is to ease the
After that, investors are obligated to
decision making process by providing
transfer the money to the Nodal Escrow
relevant information about the borrowers
Account
and lenders to each other. To mitigate
disbursal. Money from Nodal Escrow
the
performance
(non-interest
of
credible
bearing)
for
investment risks, a loan can be funded by
22
account is transferred to the borrower’s
here to fulfill his/her dreams. There was no
bank account on priority basis.
cap on total investment per lender or on total amount that can be borrowed. When
Provision of Fees
government woke up for licensing, the Fees are generally paid to the platform by
industry had already grown to 1.3 trillion
both the lender as well as the borrower.
yuan (US$191 billion). The regulations
Borrowers pay an origination fee as a
were enforced suddenly which led to
percentage of the loan amount raised --
winding up of companies as most of them
according to their risk category. The lenders
operated in unregulated manner.
pay administration and additional fees if they choose to use any additional service for example, legal advice, recovery support etc. which the platform may provide. Failure of P2P platforms in China However, in the recent times Peer-to-peer lending platforms in China are shutting down at a rapid pace. According to
Many players like Ezubao were indulged in
Bloomberg report, 4500 P2P lending
Ponzi schemes which took money from
platforms in China have closed in last five
new investors to pay money due to earlier
years. The P2P lending industry in China
investors. These platforms also issued
has 50 million registered users and $192
wealth management–type products that had
billion of outstanding loans, according to
maturity mismatches, putting them at the
the Bloomberg report. There is a need to
risk of a run if investors pull out their
study the failure of these global start ups
investments. Initially, when P2P industry
and plan it in a better way for India.
was in growth stage, no regulator wanted to
According to a 2015 study by the Associate
take responsibility of the same. Hence rules
of
Accountants
were laid down without much responsibility
(ACCA), only 9.6% of Chinese people are
and enforcement was left to local or
able to get proper bank loans. This led to
provisional
government.
sudden rise of P2P industry in China,
platforms
registered
however in quite unregulated manner. The
governments and funds collected from
exaggerated
tempted
investors were diverted for government
ordinary citizens to invest large amount
projects that banks would not fund. It is
Chartered
Certified
return
figures
These with
P2P local
23
interesting
to
note
that
municipal
compared to its operations. When these will
government was overseeing the platforms
turn to P2P companies in India, there would
which were funding across the country!
exist high risk of default. According to
Road ahead for India
financial services firm Morgan Stanley, US-based CircleBack lending reported
For India, such issues are not expected to
losses of more than $126 Mn in 2015 due to
arise as RBI has already declared norms for
defaults. This is where AI and analytics
P2P companies. However it is necessary for
come into play. Till now, statistical models
regulatory body to keep check on extremely
have been employed to check for any risk
high interest rates offered to lenders as
of default. However, these models assume
people might end up investing huge savings
formal relationships between variables in
amount. Also, the Rs 10 lakh limit on lender
the form of mathematical equations, while
side should be relooked as it disinterests
machine learning methods can learn from
high net-worth individuals (HNIs) and
data without requiring any rules-based
premium customers. The Rs 10 lakh cap for
programming. Machine learning helps to
P2P lending may be a hurdle in the long run
study
as SMEs and MSMEs use this platform
monotonic behavior of variables in the data.
complex
non-linear
and
non-
extensively. The limit needs to be revised in the next two -three years. The current issue of high operations cost and low margins can be overcome if high volumes are allowed. The RBI guidelines asked all P2P operators to appoint a bank promoted trustee to monitor the flow of funds between escrow accounts of borrowers and lenders. This needs modification as currently IDBI trusteeship is the only one offering such services to P2P lenders enjoying monopoly and high price.
The process of P2P lending requires lot of online document verification like identity cards, bank account statements, income tax returns etc for decision making process. However, fake documents are on rise in the country. Artificial Intelligence can help us to detect fake documents uploaded by any of the parties. Techniques comprise of looking for places where parts of an image appear to be duplicated, such as if a number were copied from one place to another on a form, and looking for inconsistencies in
How Analytics & AI can come into play
coloring and fonts that could stipulate
In India, banks are reluctant to provide
tampering. More technical aspects of
loans to SME’s and traders where the
images, like levels of JPEG compression
company has relatively few capital assets
across a file or metadata that indicates
24
certain tools were used to edit the files, can also be used.
References ▪
(n.d.).
Retrieved
from
Anything that assists to bridge borrowers
https://www.rbi.org.in/Scripts/Notifi
and lenders is a useful contribution to the
cationUser.aspx?Id=11137
financial system. connection perpetual
However any such
requires difficulties
conquering
the
of
and
costs
▪
dramatic rise and fall of online P2P lending in China. Retrieved from https://techcrunch.com/2018/08/01/
information. At this stage, P2P advantages
the-dramatic-rise-and-fall-of-online-
might not be explicit that would make them a significant part of the financial system in
Liu, J. (2018, August 02). The
p2p-lending-in-china/
▪
Mittal, A. (2018, December 03). RBI
long term, but experimentation is a good
Directive: P2P Lending Platforms -
thing and we shall witness how the efficient
Peer to Peer Lending in India.
and coherent P2P platforms develop.
Retrieved
from
https://www.paisabazaar.com/blog/ rbi-directive-p2p-lending-platforms/
25
Study on Economic slowdown in Emerging Economies By- Sayyed Shahil (NITTE) Introduction
Therefore, economic slowdown may lead to
Economic slowdown is defined as the
multiple systemic
decrease in the economic growth over a
financial crisis (Sassower, 2019).
period of time (Ben-David & Papell, 1998).The commonly used measure of economic growth of a country is Gross Domestic
Product
(GDP).
Therefore,
economic slowdown is a situation when the GDP of the country slows significantly but not decline. For instance,a country’s GDP has continues grow at the rate of 3 percent, 4 percent and 5 percent in three years respectively.
Subsequently,
the
GDP
failure and global
In objectives of this article are in two folds. First, we assess if there is an economic slowdown in the emerging markets and are all the emerging markets slowing down. Second,
we analyse causes
for the
slowdown. We collect the relevant data of the countries which are categorised as emerging markets by Morgan Stanley Capital International. The list of countries is presented in the Table 1.
growth decreases to 4.5 percent, 4.6 percent Table 1: List of Emerging Markets
and 4.7 percent. This situation is called as economic
slowdown.
The
economic
Region Country
recession (DePillis & Isidore, 2018).
Brazil
India Pakistan
Therefore, it is very important for the policy
Americ
Colombi
makers or the investors watch out for the
a
a
early signals and avoid slowdown turning
Chile
into a full blown recession.
Peru Mexico
The emerging markets is said to be the
Czech
the 21st Century (ECB, 2016). The
the global trade integration. Further, $225
Europe
Asia
Indonesia South-
Malaysia
Republic Greece
Thailand
Hungary
Philippine s
billion dollar denominated debt of the emerging markets is maturing in 2019.
China
Korea
major drivers of global economic growth in
affect the developed economies too due to
Country
n
slowdown may even lead the economy to
slowdown in the emerging economies may
Regio
Poland
Taiwan
26
Russia
no economic slowdown in emerging
Egypt
markets in general. Africa
Middle
Qatar
-East
Turkey
South Africa
UAE
Further, we analyse the growth in emerging markets region-wise i.e. America, Europe, Africa, Middle-East and Asia. The region-
The relevant data for the article is collected
wise Real GDP growth is presented in Figure 2.
from Bloomberg. Is there a Slow Down in Emerging
Figure 2: Real GDP Growth in Emerging Markets - Region-wise
Markets?
AMERICA
The Figure 1 presents the average of Real Peru
GDP growth of all the emerging markets
Brazil
Chile
Colombia
Mexico
8.00
(listed above) from 2011 to 2018 and two
6.00
years Bloomberg estimate of the GDP
4.00
growth.
2.00
0.00
Figure 1: Real GDP Growth in Emerging
2011
2012
2013
2014
2015
2016
2017
2018 2019E 2020E
-2.00
Markets -4.00
6.00 4.00 2.00 0.00
-6.00
EUROPE
Czech Republic
Greece
Hungary
Poland
Russia
8.00
Source: Bloomberg Above figure indicates that there was an
6.00 4.00 2.00
economic slowdown in the emerging
0.00
markets from 2011 to 2016. However, there
-2.00
2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7 2 0 1 8 2 0 1 9 E2 0 2 0 E
was a sign of recovery in the year 2017 and
-4.00 -6.00
2018. The Bloomberg estimates for the year 2019 and 2020 looks stable. We may note
-8.00 -10.00
that the economic outlook of the rating agency Moody’s is also ‘broadly stable’ for emerging markets for the year 2019 (Lee, 2018). Therefore, we conclude that there is
27
employment, production and export of the
ASIA India
Korea
Thailand
Malaysia
Taiwan
Philippines
Pakistan
China
country as UK is the major trade partner. This is main reason for the decrease in the expected GDP of Poland.
10.00 8.00
Korea unemployment rate is increasing and
6.00
it is the highest since 2010. Unemployment
4.00 2.00
being the leading indicator, we may expect
0.00 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7 2 0 1 82 0 1 9 E2 0 2 0 E
Source: Bloomberg From the Figure 2 it can be observed that Peru, Chile, Poland, Korea, Taiwan,
Korea will experience the slowdown. The Figure 3 presents the unemployment rate in Korea from 2009 to 2018. Figure 3: Unemployment Rate in Korea
China, Turkey, and South Africa are the slowing markets. Causes and Effects of slowdown Peruis one of the emerging countries that earned lower score of -0.13 in the World Bank’s
assessment
of
government
effectiveness because of the weak political stability. This is leading to decrease in YoY GDP growth rate. Chileunemployment rate has been raising
Source: Bloomberg
since 2014. The foreign reserves of the country which provide a defensive against short-term dislocations from sudden shifts in
funding
is
below the thresholds
recommended by the IMF. This is reason GDP
of
the
country
is
decreasing
significantly. Poland economy is expected to decline in
Taiwan is facing downward trend in export orders since 2009 it has not recovered from then. By the end of 2018 YoY export growth was -2.10. This is purely because decrease in the demand for smart devices around the globe. This lead to the decrease in countries GDP.
coming years, because of trade relationship with United Kingdom which is said to be exiting the European Union. This will affect
28
Figure 4: Real GDP (yoy%) vs Export
Figure 5: Turkey Consumer confidence
orders (yoy%) of Taiwan
index
Source: Bloomberg Source: Bloomberg South Africa jobless rate stood at 27.5 China
be
percent in 3rdquarter which is the 15 year
attributed to the rising quality and quantity
highest. Unemployment rate being the
of work force, efficient capital allocation
leading indicator we can expect the
and end of demographic dividend (Hedrick-
slowdown to continue (Mark, 2018). South
2018). As a result,
China’s
Africa stands 3rd place in most vulnerable
manufacturing purchase manager index
country in Emerging-Market vulnerability
(PMI) continued to fall, in January 2018 it
scorecard. It indicates that country is liked
was 51.3 and in December 2018 it
to get effected by any panic in the African
decreased to 49.4.International Monetary
region.
Fund also stated that china holds reserve
Probability of recession, African economy
below the thresholds recommended by
recession probability is 22.5 percent.
Wong,
economic
slowdown
can
According
to
Bloomberg
IMF. These reserves will help china to bulwark against short-term dislocation from sudden shifts in funding. Turkey is experiencing high inflationary pressure which iscurrently at 20.30 percent, highest in the last five years. Turkey has outstanding debt of $45.98 billion maturing in
2019-20.
The
Chief
Middle-East
Economist for Bloomberg has predicted a recession in Turkey for the year 2019. This is because there is plunge in the consumer confidence index.
Source: Bloomberg The higher interest rates in South Africa’s is also posing challenge for its banking Industry. Further, we see the consumer confidence index declining from 2016. In 2016 it was 95.25 percentwhich declined to 84.57 percent in 2018. All these leading
29
indicators show that the slowdown in South
DePillis, L., & Isidore, C. (2018). Five
Africa may continue.
ways to tell if a slowdown will turn into a recession.
Conclusion
Retrieved
from
https://edition.cnn.com/2019/01/02/econo The data presented in the article shows that
my/slowdown-recession-warning-
there is no economic slowdown in
signs/index.html
emerging markets in general. However, we observe the economic slowdown in some regions. The slowdown in China because of high tariffs
imposed
by USA.
The
slowdown in European region is due to the
ECB. (2016). The slowdown in emerging market economies and its implications for the global economy. ECB Economic Bulletin, 2(3), 1–15.
Brexit of United Kingdom from European
Hedrick-Wong, Y. (2018). The Reality Of
Union. In the Asian region, we see
China’s Economic Slowdown. Retrieved
slowdown in, Korea and Taiwan.
from https://www.forbes.com/sites/yuwahedrick
References
wong/2018/08/23/the-reality-of-chinasBen-David, D., & Papell, D. H. (1998). Slowdowns
and
Meltdowns:
economic-slowdown/5a875ad94d86
Postwar
Growth Evidence From 74 Countries. The Review of Economics and Statistics, 80(4), 561–571.
Johnson, S., & Orlik, T. (2018). Who Loses If
Panic
Returns?
Retrieved
from
Bloomberg Global Insight
https://doi.org/10.1162/003465398557834
30
How do elections impact the macros of the Indian Economy? By- Shipra Agarwal (XIME Bangalore) Actions driven by perception, the need for
create a mirage of a great rule that people
prosperity and the integrating world are the
can reflect upon while casting their vote.
reasons for the commotion around the
Due to this reason right before the election
globe. A slight increase in the momentum
government spending goes up but the
in any of these factors spurs a chain reaction
question that is overlooked is how does this
disrupting the balance that we are trying to
expenditure really impact the economy?
maintain. Disruption can be associated with the economies of the world which have time and again created chaos given their inherent sensitivity towards the exogenous and indigenous events taking place on a realtime basis.
The past records show that during the elections government's actual expenditure exceeds the budgeted estimates which lead to an increase in the fiscal deficit. Government embarks upon the journey of populism and spends heavily on social
Moving on to the Indian economy, every
security schemes, farm loan waivers,
five years it goes through the process of
salaries of public servants, etc.
disruption with the change in the ruling government. In this world driven by network connectivity and data, different political parties have identified their own set of stakeholders whom they try to manipulate using social media. Every party has
chosen
different
religion
Politicians stress upon the need of the hour for the farm and non- farm sector to justify their actions. But the glaring reality is that this kind of expenditure increases the stress of the economy and does little to relieve the farmers of their burden.
and
communities as their stakeholder to win the
In truth, the majority of the small and
favor of majority and this is the main reason
marginal
for the persistent culture divide in the
unorganized sector to borrow money. Farm
country.
loan waivers increase the state debt and
farmers
simultaneously Foundation of elections is laid upon the promises made by the politicians to the public and the despairing fact is that an initiative is taken towards the fulfillment of
still
increase
approach
their
the
interest
payment obligation. Also, NPAs of the banks providing agricultural loan shoot up which makes them wary of the risk exposure in the districts with a high
these promises close to the next elections to
31
probability of loan waivers. On the other
manipulated and it is difficult to point
hand, another reality is that in India big
fingers when corruption is prevalent at all
farmers are able to get the loans easily
levels of the system. For the next elections
because of bureaucracy and corruption
Finance Minister Arun Jaitley came up with
prevalent in the country. Waivers create a
electoral bonds to make the funding process
moral hazard which is the reason behind big
transparent, but how successful it will be
farmers deliberately not repaying the loans.
when the identity of the donors is kept
Elections are a costly affair and the
secret, is yet to be seen.
economy does not gain anything from this
Oil prices are another sensitive issue in
non-productive
Political
India and most of the political parties claim
parties spend large sums of money on
to bring them down while campaigning for
advertising,
voter
elections. For this reason, oil marketing
mobilization, propaganda and campaign
companies increase the oil prices in the fear
material printing.
of
expenditure.
transportation,
A fact that we all know but needs to be pointed out is that previously mentioned expenditures made are all explicit but the major portion of the spending goes on swaying the voters to their side. Now, where does this money comes from? The major sources of funding are corporates and big business houses which transfer their
government
intervention
during
elections to keep the prices in check. This affects the stock prices of the oil marketing companies and they are exposed to the risk of both oil price trajectory and government policy during the election. Currently, OMCs are also facing the possibility of dilution of stake by the government in these companies.
black money to the parties to do their
In business parlance, investors expect a
bidding in return. This directly attacks the
return for the efforts made but in India, we
competitive environment and affects the
are witnessing a cycle of change of
growth rate.
governments with low significant growth.
In 2008, the government took the first step towards
making
political
funding
transparent with the Right to Information act which allowed disclosure of income tax returns of political parties. But this step has shown little to no effects as reports can be
In the midst of opportunistic politics, the greater good of the public is overlooked. The opportunity cost of the elections is the development of infrastructure and longterm benefits to the economy. We are still struggling for the survival of the majority of
32
the population when the world is moving
Even with a hazy vision of a foggy future,
ahead with artificial intelligence.
we still hope for a better government, a
A dream is what we chase, the reality is what we face, a fusion of the two is the hope
better economy and a better tomorrow. "Acche Din Aayenge�
that we keep in our fragile hearts with the slight trepidation that one day this all will fade.
33
The Nudge Theory By- Shalini Balakrishna (KJSIMR) Have we ever pondered about a technique
without
to prevent someone from doing something
significantly manipulating their economic
that is detrimental to his or her well-being,
incentives. Since nudges are not meant to
without actually harping about the folly?
penalize people, they are considered to be
Or, a technique that will make someone
more effective and certainly less prone to
behave or act in a manner that we want?
resistance
The Nudge Theory throws light upon
instructions and forbiddance. In this article,
exactly this facet. Popularized in 2008 by
we will be looking at various domains
Nobel Memorial Prize awardee, Richard
where the Nudge Theory is applied, the
Thaler and Cass Sunstein in their book
benefits associated with it, along with some
“Nudge:
contradictory views, and latest trends.
Improving
Decisions
About
Health, Wealth, and Happiness�, this concept remained an enigma until the mid2000s. Falling under the purview of not just Behavioral Economics, the Nudge Theory
forbidding
as
any
compared
choices
to
and
outright
A very famous technique adopted as a sub-conscious nudge in order to render a cost effective solution is the image of a fly that is baked in the ceramic of urinals at
has garnered application across various
Amsterdam’s
domains, particularly involving citizenry
seemed to be a ridiculous proposition,
and
nudge
proved out to be beneficial when, Jos van
essentially refers to coaxing or providing
Bedoff, during his military service in the
positive reinforcement of a set of human
1960s, observed that an army urinal bearing
behaviors, with the help of hints and
a small dot was much cleaner as compared
suggestions, that can either consciously or
to all other urinals. This idea was later
sub-consciously facilitate, motivate, and
implemented in 1980s in the urinals at
alter human actions in a predictable way,
Schiphol airport and there was a remarkable
consumer
behavior.
A
Schiphol
airport.
What
34
reduction in the after installation, spillage
Nudge in Banking – The banking sector
and
by
can use the Nudge concept to benefit
approximately 80%, following the sub-
customers. Real time analytics are used to
conscious targeting of the fly by the urinal
facilitate transactions, save time and effort.
users.
Alerts pertaining to spending patterns are
subsequent
cleaning
costs,
Application Areas of the Nudge Theory
provided to the customers such that they plan expenses appropriately.
Analytics Marketing Nudge and Analytics are seen to be intertwined.
Behavioral
science
understanding of human behavior are significant
tools
for
any
analytics
professional.
Nudge is a real driver which influence consumers. It involves learnings from behavioural
economics.
To
better
understand human behaviour and it’s both rational and irrational dimensions, it
Nudge in Telecom Analytics – Leveraging
becomes more efficient to take actions and
data-driven technologies such as image
to modify the behaviour as we wish. To
recognition,
analytics,
avoid marketing campaigns which are not
Telecom
efficient. It is an advanced process of
operators use data science and machine
decision-making process. Benefits involve-
behavioral
predictive clustering,
etc.
learning to extend the applications of Nudge theory.
•
Remarkable power through costeffective actions.
35
Example- For increasing significantly low
design thinking, consultancy. Now, let us
pension saving rates across private sector
see how nudge theory works:
employees, the UK Government mandated employers to establish an “automatic enrolment” scheme in 2012. This scheme would make savings as a default feature of the employment for the employees, thus incentivizing them to do whatever they
Anchoring - If someone asks us the following question, “Population of Chicago less or more than 5million” or “Population of Chicago less or more than 500”, people are more likely to respond a higher number to 5miilion.
want and stimulate savings. With this scheme, the active membership of private
Loss Aversion - People tend to avoid loss
sector pension schemes increased from 2.7
than making gain. Making use of this
million to 7.7 million in 2016.
consumer buying behaviour, companies
•
tend to have a policy of one free samples Low
cost,
simple,
effective
technique to the new behaviours Obama government uses Nudge to bring the ideas that informed Nudge to bear on White House decisions on everything from shaming companies so they pollute less to getting people to make use of their tax-free pension plans. •
Improve
ROI
from
marketing
decision. Social Pressure - We like to think that we are individuals but we also love to jump on a bandwagon. We have a pull towards conformity. See the milligram experiments.
proof that out of 7 people in a room, with one person that can change the single
Campbell uses Nudge theory to understand a decision you make about the way choices that are presented. What is the order in which we list options? What is the description given to each option? What is the typical length of the form that is asked to be filled by the respondent? Can it easily comprehend? In Vivo BVA has also introduced a predictive real life thinking involves
when they have to make a purchasing
In psychological experiments it is been a
strategies
which
etc. so that consumers won’t want to lose it
creativity
techniques,
person’s opinion on something which is scientifically correct. But how can theory of nudge be used to pursue people to do good things like blood donation, helping other etc. We need to set up our own feedback systems. How can people know things are going wrong better still how can they know things are about to go wrong? Fitness trackers tell us how many steps were taken and how many calories burnt today
36
expecting errors. It helps us by knowing
with regard to the benefits of programmes
what can go wrong. We can build in
such as Swachh Bharat, Jan Dhan Yojana,
measures to prevent this from happening.
Digital India and Skill Development. The
Tourist destinations like London have
modus operandi used was social messaging
unavoidable look right slogans on the side
and new advertisement campaigns, that
of the pavements. In cafeteria, healthy food
helped in widening the scope and reach of
is kept in the shelf which is on the view of
such flagship programs.
the buyers and the junk food is kept on the upper and lower side, away from the direct sight of buyers. This determines the individual’s behaviour. These are some methods used by the government that help to shift the society. The Nudge Theory in recent times In September 2016, it was announced that the government think tank NITI Aayog was going to set up a “Nudge Unit”. The Nudge Unit was an important topic of conversation in 2010 when former British Prime Minister David Cameron established a Behavioural Insights Team (BIT) to work upon a wide range of projects.
If the nudge unit has only been an idea on paper till now, then the time is opportune for the Government to now invest in and begin using behavioral insights. Some public policy outcomes can be drastically improved by targeting a change in the behavior of people. Take for instance, Swachh Bharat Mission (SBM). While the Prime Minister himself said that SBM requires behavioral change on a large scale, the efforts of the mission have been directed mostly towards construction of toilets. Stepping-up the compliance of tax is the other area of discussion. India could take a clue from UK’s experiment with using insights from behavioral economics
NITI Aayog had tied up with the Bill &
to get more people to pay their taxes on
Melinda Gates Foundation (BMGF) to
time. Similarly, if financial inclusion is to
work on the changing behaviors of people
be brought about in true spirit, mere
which would prove to be an impetus to
opening of accounts, through the Jan Dhan
make programs and policies of the
Yojana, is not going to be enough. It is
government more effective. The project
necessary to have a framework which is
was established when the think-tank was
propelled towards the upliftment and
riddled with complaints from various state
empowerment of the poor by dealing with
governments on policy implementations.
the psychology of the poor.Unless policy
The aim of the unit was to sensitize people
interventions are designed to change
37
behaviors, problems stemming from deep-
“authentication”
rooted cultural and social norms will not be
voluntary identification platform intended
rooted out from our society. This does not
for welfare services, demonetization and
necessarily mean that policies designed
the insistence on cashless payment, as well
using behavioral insights will solve all
as the Goods and Services Tax. All of these
problems or will even be effective in the
have a common feature: war on cash.
Indian context. The crux of the Nudge
Though
theory would comprise the identification of
demonetization
opportunities and the implementation of
problematic for Thaler, his nudge theory is
changes in the purview of India.
completely in sync with the shaping of the
Though India is a young country with great potential, it suffers from extreme wealth inequality. Some studies claim one in five Indians as being poor. A host of social issues is faced by a poor population with multiple regional and societal differences, as
female
infanticide,
deep
superstitions, drug abuse among youth (in certain states), child marriage, dowry, littering,
the
from
implementation might
have
a
of been
cash-is-bad global narrative.
The Road Ahead
such
programme
non-payment
of
taxes
and
corruption, etc. Thus there is a large gap where subtle nudging measures could create a tremendous impact. The ruling Bharatiya Janata Party has championed Richard Thaler as a certificate for Narendra
The ‘Nudge Theory’ finds its potential applications in varied fields such as healthcare,
public
policy,
influencing
citizen behavior, investment planning and personal finance. For example, tax breaks under Section 80C are a nudge to encourage people to invest in financial instruments such as equity-linked savings schemes and the Public Provident Fund instead of gold or
property.
The
‘nudge’
of
lower
premiums on life covers are used by insurers to encourage customers to stay away from smoking. Similarly, mutual fund SIPs, are also a nudge to investors to allay fears and panic during market falls, by
Modi’s demonetization. This constitutes
making regular investing the default option.
the first step towards going cashless and a
Lack of knowledge, poor incentives or
good beginning to reduce corruption. A
inertia often causes us to select sub-optimal
number of major policies shaped the Modi
choices. If a nudge helps us choose an
government’s narrative since his election in
option which is also socially desirable, it
May 2014. These include transformation of
could result in better social harmony, civic
Aadhaar into a mandatory, universal digital
sense and public healthcare.
38
Pledging of shares- Indication of India’s own subprime? BY-TRIPTI LAL (SRCC) the lender can sell the shares in the market so as to maintain the margin.
What exactly is pledging of shares? Pledging of shares is a tool used by a company’s
promoter
or
even
retail
Now, when promoters borrow against their
investors to secure loans by keeping their
shareholdings, they usually do to meet their
shareholding as collateral to any bank,
working capital needs or just keep the firm
NBFC or any other financial institution. A
afloat, which makes pledging a very risky
promoter of a company pledges his shares
proposition. Also, high leverage may shake
as collateral to raise money with the
investor confidence which might lead to
valuation of prices lesser than the market
selling of shares, leading to a fall in share
value.
price. As share prices fall, the margin value
The difference is known as the margin which acts as a cushion or a security to the lender. If the margin falls below the predetermined level ( level ascertained by both
increases and fall in the value of collateral leading to promoters selling more shares which further pulls down the share prices. This increased volatility can create a debt trap for the promoters and reduce the firm’s
valuation. lender and borrower in consultation), the
Current scenario
promoter must pay in cash or pledge more
Recently, Anil Ambani’s RCom pledged Rs
shares as collateral or sell shares in market and pay the raised money to the lender. If the promoter fails to maintain the margin,
8.15 crore shares or 2.95% stake to Axis Trustee in addition to already pledged Rs17.25 crore or 6% stake at Axis Trustee.
39
It was a measure to arrest the slide in the
ledging shares fuelling greater risk and
prices of its stocks as L&T finance and
volatility in the market.
Edelweiss Group sold some already pledged shares of RCom.
The pledging spree began in 2014 after the rise of NBFCs and as they resorted to
Not only RCom, but firms like Subhash
aggressive lending, promoters could easily
Chandra headed Zee group too pledged
raise funds from NBFCs by pledging their
some of its shares to secure loans to meet its
shares. The shares pledged were the mid
working capital needs and other expansion
cap and small cap ones, which created more
projects.
Indian
volatility in the market as sentiments started
Corporations, the new trend is where their
correcting the market in around 2015,
promoters are pledging shares to secure
leaving promoters reel under debt.
For
most
of
the
loans and keep their corporations afloat. Adani Group, for instance has already pledged shares worth Rs 35,226, a mind boggling figure, and its subsidiaries have pledged close to 50% of shares to various financial institutions. Tata Group, Jindal Steel, Future Group, GMR Group all are walking down the lane of pledging promoter –held shares.
Also, there has been a direct link, direct correlation
established
between
how
promoters of companies in stressed sectors resort to massive pledging of shares to, again, keep their firms afloat. Textiles, Power, Construction and Steel sector firms are already facing insolvency and one of the reasons could be attributed to extensive shareholding pledging. Since these sector
The following data explicitly depicts that
shave long gestation period for the new
how big organisations are resorting to
Greenfield projects, securing loans through pledging shares is seen a much easier and
40
hassle free route, without realising the fact
SEBI (Issue of Capital and Disclosure
that it erodes the shareholder’s wealth and
requirements)
finally a company’s market value.
mandates that at least 20% of the public
The data above depicts that over the time the number of companies that have its promoters pledging its shares has increased and the nominal value of these shares has also increased substantially. What does the Companies Act, 2013 says? The Companies Act, 2013 doesn’t place nay restriction on the quantum or manner in which the promoters might pledge their shares. Also, it doesn’t prescribe the minimum percentage to be held by the promoters. They are free to pledge any percentage although Regulation 36 of The
Regulations
2009
does
issue must be held by the promoters for a minimum lock-in- period of 3 years. Post three years, the promoters are free to sell their shares. Is it an indication of India’s own subprime? When the ‘wealth effect’ over scores the ‘income effect’, it signals an inflating bubble, which soon might burst, paving way for an impending recession or crisis. The ‘pledging bubble’ too is a signal for the same. The ‘promoter funding bubble’ is quite enormous, and its enormity can be judged by the fact that promoters’ loan
41
against shares may be at least Rs 1.2 lakh
environment of high risk and volatility and
crores based on disclosure of Rs 2.4 lakh
tighter liquidity, higher leverage is making
crores worth pledges( total pledged shares
investors lose confidence, and difficult to
are Rs2.4 lakh, out of which 50% are
maintain margin and collateral values again
promoter-held shares, the rest are retail
leading to a fall in the market value of a
shares).
company.
The situation is worse, since it is leading to
SEBI is keeping a close watch since recent
a double whammy or ‘double leverage’
decline in prices of RCom shares on the
since promoters like Subhash Chandra of
allegations by one of its lenders, Edelweiss,
Zee group are pledging their shares,
has led to plummeting of share prices and
borrowing funds and investing in Special
thus fall in the value of collateral and SEBI
Purpose
fears this suit might be followed for other
Vehicles,
which
are
like
repackaging smaller loans to diversify risk.
companies’
shares,
where
This is known as Asset securitisation, the
borrowing is skyrocketing.
promoter
main cause of the 2007 subprime crisis. Pledging of shares is also a signal of corporate governance lapses since in an
42
References:
untouchable/articleshow/67970682.
1) Economic
Times,
“Indian
Inc
forced to pledge shares” [online]. Available
at
:
https://economictimes.indiatimes.c
pledge-India’s crisis”
own
sub-prime
[online].
Available
.com/markets/stocks/news/promote
promoters-forced-to-draw-loans-
r-share-pledge-indias-own-
by-pledging-theirholdings/articleshow/68034070.cm
subprime/articleshow/68105880.c ms
s 2) Economic Times, “Promoter 2942
Available
3) Economic Times, “Promoter-share
at:https://economictimes.indiatimes
om/markets/stocks/news/ind-inc-
stocks
cms
untouchable”
[online]. at:
https://economictimes.indiatimes.c om/markets/stocks/news/promoter-
4) CS
Vikas
pledging [online].
Gupta,
“All
about
shares”,
Tax
Guru
Available
at:
https://taxguru.in/sebi/pledgingshares.html
share-pledges-are-all-these-2942stocks-
43
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