Finly November 2018 by FINLY

FINLY| NOVEMBER 2018 | Finstreet | SIMSR

From the Editor’s Desk

Dear Readers, We at Finstreet are proud to unveil the November edition of our monthly magazine FINLY for the academic year 2018-19. Our Cover Story helps us understand the recent loan defaults by IL&FS and its impact on various associated industries. Next in line, is the Eco Section, which explains in detail about the Interest Rate hikes by the US Federal Reserve and its impact on emerging economies and global trade. In the Sector Analysis, the authors inspect the Oil and Gas Industry, with an in-depth analysis of the latest disruptions in the industry. This month's Fintech Funda is about the Supreme Court of India's verdict on the constitutional validity of the Aadhaar card and what it means to the way KYC procedures will now be implemented. We are fortunate to have Mr. Shantanu Mukhopadhyay, the outgoing student of PGDM-Finance and former convener, Consultancy @ SIMSR, to pen down his experiences during MBA in the Alumni Section. Aadi Gala, a current student of PG-International Business and Convener, Finstreet, has penned the experiences of his summer internship at BD Shah Securities Ltd., which I am sure will definitely be useful for juniors to get a feel of the type of companies that come to campus and the stay of their internship at any company in the future. In the end, we have introduced a new section called “Know Your Finance”, which contains information, breaking down some useful concepts in Finance, which would help any aspiring finance student to take baby steps in building the concepts as well as confidence in the subject. I am thankful to Prof. (Dr.) Pankaj Trivedi (Course Coordinator, PGDM Core, and Faculty Coordinator, Finstreet) for providing the essential mentoring, support and backing to the Finly team. I would also like to thank our New Sponsors, White Knight Ventures, for an enriching collaboration. We hope to continue the partnership for a very long time. We have received an overwhelming response for this month's call for article competition, with some high-quality content from some of the best management colleges of the country and I thank each and every participant for their sincere efforts and participation. This month's winner's and runner-up articles are a recommended read. I thank all our readers and faculty members for their constant love and support. Your reviews and feedback are much appreciated. Team FINLY has always been a strong set of focused individuals who put in a lot of efforts and dedication to stitch together this magazine and I can't thank them enough for their constant support and initiative. HAPPY READING!!! R Prasanth, PGDM-FINANCE, 2017-2019, K.J. SIMSR

Faculty Incharge

Editor-in-Chief

Team Finly November 2018 Dr.(Prof) Pankaj Trivedi

R Prasanth

-Conceptualization & DesignIsha Koolwal

Aachman Vijayvargia

Shubham Patel

Indresh Naithani

-Content TeamShreya Baderia

Adyasha Pratihari

Radhika Goyal

Siddharth Shah Shree Vignesh Pratik Sharma

Prateek Tripathi

FINLY| JULY 2018 | Finstreet | SIMSR

INDEX

Editorial Team Finly

Cover Story

Article of the Month-Winner

Article of the Month-Runner Up

Eco Section

Fintech Funda Alumni Section Sector Analysis Internship Diaries

Know your ď&#x20AC; nance

The never ending saga of

IL&FS Defaults

Cover Story

We can see many instances in history where one company can disrupt the entire market sentiment. The Great Depression of 1930, the Russian Debt Default of 1998, followed by the Lehman Brothers crisis in 2008 comes to mind. One thing that is common in them is that all of them happened due to negligence by the company and the authorities at large which is exactly the case in India right now. We have our own Lehman Brothers in the form of a defaulter in Mumbai-based Infrastructure Leasing & Financial Services (IL&FS) company. Indian markets are tumbling uncontrollably due to the fiasco surrounding Infrastructure Leasing & Financial Services (IL&FS). Investors and shareholders are under a frenzy considering the domino effect that might take place. Being compared to

the Lehman collapse, it is believed to create a financial crisis for the nation similar to the former one created globally. Though it is claimed that IL&FS won't collapse and the matter will be handled keeping things well within control, as it is too big to fail. But this is a wakeup call for the government to identify similar threats vigilantly in the future. BACKGROUND OF IL&FS The company started its operations in the year 1983, by a collaboration of three institutes namely, Central Bank of India, Housing Development Finance Corporation and Unit Trust of India as an â&#x20AC;&#x153; R B I re g i ste re d C o re I nve st m e n t Companyâ&#x20AC;?. Currently, it functions along with 250+ subsidiaries and has shareholders such as Life Insurance Corporation of India (LIC), ORIX, MITSUBISHI, Abu Dhabi Investment

FINLY| NOVEMBER 2018 | Finstreet | SIMSR

Cover Story

authority, etc. It has handled major infrastructure projects such as The Sports Hub in Trivandrum, Gujrat International Finance Tec-City (GIFT), Tripura Power Project, Chennai Nashri Tunnel etc. Through its numerous subsidiaries, it has acquired major projects. It functions as a lending and execution company both. It is a private company but enjoys a special status as it is part of major government projects and has shareholders such as the LIC, SBI Bank and HDFC Bank.

Source- TheRoughPaper

It has 23 direct subsidiaries and 141 indirect subsidiaries, 6 joint ventures, and 4 associate companies. This is a complex structure as each entity is subdivided into legal entities, crossownership, and government investments.

crore. Due to the cascading effect of the IL&FS default, the Sensex has tanked by 2000 points in September 2018. IL&FS has been defaulting on loans since September this year. If recent figures are to be believed it has unpaid debt amounting to â&#x201A;š1 lakh crore. Also, it has repayments of $500 million lined up for the second half of the financial year but has an available corpus of only $27 million. The complexity of the issue arises because IL&FS functions through its numerous subsidiaries. Government regulation demands that every concession-based infrastructure project have a separate entity due to the reason that loans are taken specifically against the entity and the project. With 250+ subsidiaries and numerous projects in association with the government, many creditors had the presumption that risks were underwritten by the government. Major assets of the company are infrastructure entities such as roads, bridges, canals, etc., which cannot be auctioned or sold to recover the amount.

Its projects span across different sectors such as healthcare, area development, transportation, finance, water, urban infrastructure, environment, education, and tourism. Source- Livemint

WHAT IS THE CRISIS ABOUT? The current crisis has taken everyone by a storm. The crashing stock market has seen a wipe-out of around â&#x201A;š8.48 lakh

REASONS FOR THE DEFAULT Financing infrastructure requires a huge amount of capital for a long period of

Cover Story

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time. This required IL&FS to borrow for short durations but lend for longer periods. Since banks are already laden with a pile of bad debt, they withdrew from financing most of the projects. The only option left with IL&FS was to borrow from the money market. But every infrastructure project in India has to deal with political and legal hurdles, which result in unanticipated delays and even in some cases termination of the project. The reason why IL&FS defaulted can be mainly attributed to the following factors: Ÿ PPP model by the government- In

many infrastructure projects in India the government resorts to a PPP (Public-private partnership) model where it pays the infrastructure company only upon the completion of the project Ÿ Rising cost of land Ÿ E n f o r c e m e n t o f R i g h t t o Fa i r

Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Bill - People whose lands were acquired previously for various infrastructural projects were seeking compensation under the new act stalling the projects or creating further delays and leading IL & FS to incur more costs. The enforcement of the right to fair compensation has made several projects unviable and illegal because of which IL & FS has not undertaken any new projects post 2013

completion of several projects A large chunk of the money was held in government claims, seeking environmental clearances. Il &FS also had to bear the cost of delays caused by the concession authorities in handing over the right-of-way (a right to make a way over a piece of land, usually to and from another piece of land) in several projects. We can conclude that the major reason behind the financial crisis of IL&FS is incomplete projects due to escalating co st s o f l a n d , d e l ay i n s e c u r i n g environmental clearances, pending government claims and the imposition of the land acquisition act which made many of its projects unviable. So these projects were not generating any cash flow. Around ₹16000 crores are stuck in claims. IL&FS has ended up financing too many projects which got tangled in some issues or the other and these incomplete projects were not generating enough cash flow. A LOST OPPORTUNITY There was a possibility of a merger between the Piramal group and IL&FS in 2014. This would have led to a combined net worth of ₹16000 crores, and a debt of ₹62000 crores. However, LIC played spoilsport in the deal and the deal never got underway. LIC asked for a price of ₹1100 per share, whereas the board had consented to ₹750 a share. Hence, the deal did not materialize.

Ÿ Environmental clearances-

Environmental clearances delayed the

This could have solved the liquidity

Cover Story

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problem of IL&FS but the deal fell apart. Now 4 years later, IL&FS is suffering from a severe liquidity crunch. This mammoth pile of debt has been accumulated over the years. IL&FS Engineering and Construction Co., IL&FS Transportation Networks and IL&FS Financial Services; these listed entities had their own equity capital, but the parent company IL&FS would raise debt for its activities. This debt would then be infused as debt in each subsidiary, which in turn would use this equity (which was actually debt) to raise debt. So this vicious cycle of debt being used to raise more debt led to the mammoth problem in which IL&FS is today. Had the vicious cycle been avoided, IL&FS could have averted this debt trap. IMPLICATIONS ON THE ECONOMY In the current scenario infusion of equity and selling of assets is the only way to clear its debt obligations. IMPACT OF A POSSIBLE BAILOUT THROUGH EQUITY INFUSION However, selling its assets could reduce its debt of ₹91000 crores by just ₹30000 crore. Infusion of equity is the last resort. SBI, one of the primary shareholders in IL&FS, has been asked to bail out the beleaguered company. Banks, given with its already rising pile of bad debt will worsen the situation if a bailout is to happen. Hard earned tax payer's money would go into this. They would try to recover this amount by charging higher interest rates on retail as well as corporate loans given which

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would result in a slowdown of the economy. If a bank's debt were to keep on piling like this it would reduce the creditworthiness of the banks and ultimately the common man would be affected. EXPOSURE OF BANKS Out of a cumulated debt of ₹91000 crore, it owes ₹57000 crore to banks. 70% of this debt is held by public sector banks, less than 10% by private banks and the rest by LIC and other foreign banks. Punjab National Bank, Bank of Baroda and Union Bank have the maximum exposure to this debt. Non-payment of this debt will only add to the already existing NPA problem of public sector banks. Around 5% of the banking loans are provided to finance companies. So a drop in the credit ratings of finance companies will adversely affect banks. EXPOSURE OF MUTUAL FUNDS IL&FS defaults will have a huge impact on the debt market as bonds accounted for 3 0 - 3 5 % o f i t s t o ta l b o r ro w i n g s . Outstanding debentures and commercial papers accounted for 1 percent and 2 percent, respectively, of India's domestic corporate debt market. A large number of mutual funds, around 32, had invested in the CPs and NCDs issued by the IL&FS group. 12 mutual fund schemes had invested in the debt papers of IL&FS and the rest 20 in the IL & FS financial services. As a result of a default by IL&FS on payment of debt obligations, the funds could be locked leading to a shortage of liquidity amounting to ₹1 lakh crore.

IMSR

FINLY| NOVEMBER 2018 | Finstreet | SIMSR

Cover Story

FURTHER IMPACT ON NBFCs A default by IL&FS will have rippling effects on NBFCS, as can be seen by the increasing interest rates on bonds and subsequently the bond yields. This will lead to an increase in borrowing costs by NBFCs. NBFCs had emerged as the preferred financing options amidst the presence of debt-riddled banks. They could easily raise debt in the money market. Around 60% of the commercial paper issued by NBFCs are owned by various mutual funds. As an aftermath of the IL&FS default, mutual funds will start selling debt market products of various NBFCs which they have invested in, leading to a decrease in the bond prices and the yields shooting up. Lenders will want a higher rate of return to compensate for the risk involved in lending to NBFCs. NBFCs mostly lend to SMEs and MSMEs. If the cost of borrowing of NBFCs increase they will pass on the rise in borrowing rate to the SMEs which in turn will have an adverse impact on their growth and development. ROLE OF CREDIT RATING AGENCIES Due to the complicated structure of the organization because of all the subsidiaries and numerous projects in line, credit rating agencies were unable to predict this turn of events. Credit rating agencies had flagged a warning earlier but the impact was not very clearly expressed until the situation started to unfold. Recently credit rating agencies such as

ICRA and CARE have downgraded the rating (to as low as 'D') which will have implications on the bond price of a company. IL&FS's rating was based on the strong investments present in the parent company. Also, the debt of the subsidiary companies was not realised correctly. The SEBI chief has mentioned about rationalizing of the framework for rating agencies. Higher access to accounts should be provided to rating agencies for better analysis of the financial condition of the companies. Prompt detection of worrisome situations from part of credit agencies is called for.

According to the rating agencies, the debt of IL&FS was rated investment grade, but people inside the board knew that the paper was worthless. “(For) years it was in the knowledge of everyone including independent directors, executive directors, and shareholder directors that the company had a serious asset-liability mismatch and it was quite clear there would be a default,” said RC Bhargava, former director, IL&FS, and chairman, Maruti Suzuki, in an interview to Forbes India. “(For) years it was in the knowledge of everyone that the company had a serious asset-liability mismatch.” - RC Bhargava, former director, IL&FS, and chairman, Maruti Suzuki

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THE ROAD AHEAD The government has dissolved the existing board and has formed a new board to form a resolution plan and show the road ahead. The new board includes industry stalwarts like Mr. Uday Kotak, vice chairman, Kotak Mahindra Bank, Vineet Nayyar, former vice-chairman of Tech Mahindra and GN Bajpai, former chairman of Securities and Exchange Board of India. When the new board meets, they have a huge task in hand. There cannot be just one solution to this mess created. To sell the individual assets, each asset has to be looked at separately and issues within them have to be resolved before selling them off. The company has identified 25 projects for sale which could fetch ₹30000 crores but the problem is that these assets will take time to sell. Also, Interest payments have to be brought on track. Coming to the assets, one example is that of Noida Toll Bridge Company, where IL&FS has a majority stake. The company has been involved in a legal battle with the Noida Residents Welfare Association and thus there has been no toll collection since November 2016 and it is unlikely that its sale will find any suitors. Similarly, IL&FS Solar Power and IL&FS Energy will find it hard to have any buyers as the renewable energy sector in India is as it is going through some turbulence. The debt mutual funds who have exposure to the IL&FS default, have already written down 3-5 percent of their value. They believe that the commercial paper will start paying interest at some

point. However if the paper is redeemed lower than the par value, which is likely to be, the losses could be worse. As of now, the commercial papers have no buyers. In terms of numbers, the group has to repay ₹ 25,798 crores by the end of March 31, 2019, out of the total ₹ 91091 crores of debt. The company basically needs long-term finance to meet its obligations. The government also has to help it by releasing funds from stuck projects and give quicker approval for the projects. The new board also has to make a thorough investigation to identify what went wrong and take appropriate steps to punish the guilty. The existing model of IL&FS being a financer as well as a developer of the projects can be restructured and should be separated into two legal entities. As a result, the investor's risk will be reduced and it will be easier to find investors who specialize in each. It would not be difficult for the new board to find new investors and infuse fresh equity which could be available at reasonable valuations. For people looking to invest in the IL&FS equity shares, a word of caution is in o rd e r b e ca u s e a ny t y p e o f d e bt restructuring of this sort hurts the retail equity investors the most. The case of Electrosteel Steels can be sighted here where equity investors lost 98 percent of their holdings after the restructuring approved by the court and new investors Vedanta taking over the company.

Article of the Month - Winner

HOW CAN INDIA ACHIEVE FINANCIAL INCLUSION?

Rohit Dudi IIM Lucknow 2017-19

As per the Committee on Financial Inclusion, chaired by Dr. C. Rangarajan, Financial inclusion is defined as a process to ensure access to financial services and to provide timely and adequate credit as and when needed by most vulnerable groups such as the low-income sections and the weaker groups of the society at an affordable cost. Not only does it include just banking products but also includes other financial services like equity products and insurance.

financial wealth in exigent circumstances 3. It reduces the chances of exploitation of the vulnerable sections by the dishonest money lenders by providing easy access to formal credit

1. It develops a great culture of savings among a very large segment of the rural population

As per NSSO 59th Round Survey results, 52% of farmers in rural households are financially excluded from the formal banking sector. Of the total farmers in rural households, only 30% have access to formal sources of credit. More than 75% of farmer households have no or limited access to formal sources of credit. The problem of financial exclusion is more severe in Central, North-Eastern and Eastern regions of India.

2. It brings the population of low-income groups in the perimeters of the formal banking sector, thus protecting their

But the situation has improved in the last few years as shown in the infographic below:

BENEFITS:

Article of the Month - Winner

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3. Simplified Branch Authorization Policy is helping to address the serious issue of the uneven spread of bank branches. Domestic Scheduled Commercial Banks (SCBs) have been given permission to open branches in tier 2 and below cities freely

Because of the increase in formal banking avenues in rural areas, the situation has improved:

FINANCIAL INCLUSION INITIATIVES (PLANNED AND TAKEN UP) 1. All banks have been advised to open Basic Saving Bank Deposit (BSBD) accounts which come along with minimum common facilities which include, but not limited to, no minimum balance, facility of providing ATM card, receipt/credit of money through electronic payment channels, deposit, and withdrawal of cash at the bank branches and ATMs. 2. Simplified and relaxed KYC norms so as to facilitate the opening of bank accounts easily and with no minimum balance requirements. The condition of introduction by existing customers has also been given away. UIDAI Aadhar Card can now be used, both as an identity proof and as an address proof.

4. There has been a mandate of a compulsory requirement of the opening of branches in unbanked villages. Moreover, banks have been directed for allocation of at least 25% of the total number of branches in unbanked rural centers, which were to be opened during that year 5. The initiative of opening an intermediate brick and mortar structure, which will help in effective cash management, close supervision of BC operations, redressal of customer grievances and documentation 6. Public and private sector banks were asked to submit a three-year Financial Inclusion Plan (FIP) approved by the board. RBI monitors these plans on a monthly basis. These FIPs must be disaggregated and should be percolated down up to the individual branch level 7. Financial Literacy Centers (FLCs) have come up. They help in scaling up financial literacy efforts by conducting outdoor Financial Literacy Camps at least once a month. 800+ FLCs have been set up providing literacy to a total of 2.5 million people through seminars and lectures, awareness camps or Choupals 8. Innovative business models are aimed at further improving financial inclusion

Article of the Month - Winner

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plans and efforts are being put in to look closely into the processing of applications for banking licenses. FIP is now an important criterion for getting new bank licenses as suggested by Dr. D Subbarao 9. It is due to the honest and concerted efforts by RBI, since 2005, which has led to the increase in the number of branches of Scheduled Commercial Banks (which have increased manifold). As a comparison with rural areas, the number of bank branches in semi-urban areas has increased more rapidly

11. Issuing Kisan Credit Cards (KCC): Banks are issuing KCCs to small rural farmers so that they can meet their credit requirements. More than 40 million KCCs have been issued so far with an outstanding credit of ₹3000 billion

12. Issuing General Credit Cards (GCC): Banks have introduced General Credit Card facility for amounts up to ₹25000 at rural and semi-urban branches. Close to 4 million GCCs have been issued with the credit amount amounting to ₹80 billion

10. The total number of bank outlets, including the number of RRBs, have increased to a large extent

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Article of the Month - Winner

HOW DO THEY MAKE MONEY? 15. SHG (Self Help Groups) - Bank 13. Through BCs (Business Correspondents), ICT (Information and Communication Technology) based Accounts: To provide cost-effective and efficient banking services in the unbanked and remote corners of the country, RBI has directed all commercial banks to provide banking services based on ICT, through Bcs.

Linkage Growth: Helps in bringing many people under the umbrella of sustainable development in a very costeffective manner within a short period of time. As per NABARD and the “Status of Microfinance in India” report, 8.5 million saving linked SHGs are having a total aggregate savings of ₹80 billion 16. MFIs (Micro Financial Institutions) growing: RBI is following the bank-led model in order to achieve financial inclusion. Many NBFCs are supplementing efforts for financial inclusion at the ground level. Microcredit is recognized as a separate category under NBFCs named as NBFC-MFIs

14. ATM Network Expansion: Number of ATMs in the rural part of India has witnessed a CAGR of 35%. The number has increased from 5500 to 13000. Financial stability, financial inclusion, and financial education are three important elements of an integral strategy. Financial inclusion works from the supply side by providing access to different financial services; financial education works from the demand side for promoting awareness among the citizens about the benefits and needs of financial services which are offered by banks and other financial institutions.

17. Bank Credit to MSME sector: The sector has a large employment potential of 65 million people over 28 million organizations and is rightly considered as an engine for economic growth and for the promotion of financial inclusion in rural areas. Bank credit to the MSME sector has increased at a CAGR of 33%

18. Insurance Penetration in India: The total life and non-life insurance penetration in terms of the ratio of insurance premium as a percentage of total GDP have increased from 2.32 to 5.10 in the last one decade. There is a

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huge untapped potential when it comes to insurance penetration

mobile money, way less than many African and small Asian nations

19. Financial Inclusion Initiatives as taken up by Private Corporates: Projects such as E- Sagar/ E-Choupal (ITC), Project Shakti (HUL), Haryali Kisan Bazaar (DCM) etc. These are pioneering projects that have brought a huge improvement in the lives of the people who participate and prepare the base for economic development

23. Leveraging Payments Banks: Allowing the Payments Banks to process different government payments will break the monopoly of public sector banks and will be a boon for the customers

20. Ensuring that agents are â&#x20AC;&#x153;transaction-readyâ&#x20AC;? is very important. The success relies on the innovative model of usage of small corner stores, which can act as agents for banks where people can have the option to deposit and withdraw money directly from their accounts and do other transactions

24. Enabling Regulation: In June, RBI needs to ease the regulations so that even start-up banks and other small banks can come up to help in financial inclusion in India by providing banking services to unbanked areas

21. Building a trusted environment and an acceptance network is required: Every account holder will be getting their debit cards in their emails. Acceptance network for such cards is virtually non-existent. We can solve this problem to develop the network quickly and India can partner with global players to make that happen

25. Government's usage of new Payment Channels for subsidies: India is home to $ 70 billion worth of retail s u b s i d i e s a n d s o c i a l p ro g ra m s . Government is switching to targeted benefit payment from its older way of providing generalized subsidies, thus, shifting all payment flows from cash mode to digital channels. India is estimated to have $ 70 billion in international remittances. These flows can very well contribute to the economic viability of banking channels which are new and expanding

22. Emphasizing on the usage of mobile: Bigger efforts can be made to use mobile channels as catalysts for financial inclusion. India is way behind other nations when it comes to leveraging mobile channels to the fullest. The Intermedia Financial Inclusion Insight (FII) Survey suggests that only 0.3% of Indian adults use

26. Creating an infrastructure which can handle every aspect of banking service such a very large segment of the Indian population. The many solutions can include BBPS (Bharat Bill Payment System), NeSL (National e-Governance Services Ltd), BHIM (Bharat Interface for Money), and UPI (Unified Payments Interface)

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HOW DO THEY MAKE MONEY?

Article of the Month - Winner

A FINANCIALLY INCLUSIVE INDIA India's financial inclusion program has sparked an interest in other countries who seek to overcome similar kind of challenges. If India's program can go beyond the initial sprint towards meaningful financial inclusion, it can actually be a useful example for other nations to follow.

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Article of the Month - Runner Up

CURRENCY CRISIS

Prateek Sharma, TAPMI, 2017-19

The Indian currency is on a free fall for m a n y m o n t h s n o w. T h e R u p e e depreciated by more than 16% from January (2018) when it used to be at ₹62.6 vis-à-vis the Dollar. It is currently trading at ₹73.60 against the Dollar. Initial estimates suggested that it will stabilize around ₹68 but the Rupee breached all expectations of the veteran analysts and crossed the ₹70 level to reach ₹74, which felt like going back to the year 2013 again. This slide had many ra m i f i c a t i o n s o n t h e e c o n o my, especially in the capital and debt markets. The 10-year G-sec yield reached to 8.22% in the bond market. There are a whole lot of reasons behind this depreciation, some are international and some are domestic. WHAT EXACTLY IS AN EXCHANGE RATE? It is simply a value of a currency compared with other currencies of the world.

SO, WHAT DETERMINES THIS EXCHANGE RATE? The exchange rate is determined by the demand and supply of the currency in the world. The currency of any country depreciates when this demand and supply is disturbed. When the demand of a c u r re n c y i n c re a s e s o r i t s s u p p l y decreases, the currency appreciates which is happening with the Dollar these days. When the demand of any currency decreases relative to another currency, that currency depreciates, which is the case with many emerging market economies like that of Turkey, Venezuela, Russia, and India. The value of a currency is broadly determined either by trade or finance. Trade forms a micro-component of the exchange rate when compared to the finance part, involving FPI and FII outflows from the capital (both equity and debt) and forex markets. This is the major

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reason behind the current currency depreciation of the emerging economies including India. Largely, it is the forex market that determines the fo r e i g n e xc h a n g e ra t e s . R u p e e depreciation will occur when the Rupee is sold to buy Dollars. According to Bank for International Settlements, trading in foreign exchange markets averaged $5.09 trillion per day in April 2016 which is a little less than twice of India's GDP. This is where the forex trading occurs and Rupee is sold for other currencies. Now the obvious question is, why the demand for Dollar is more today? The US Federal Reserve is tightening the monetary policy by increasing the benchmark interest rates which is slowing down the money supply and growth in the US and increasing the demand for Dollar. The increased interest rates are lucrative for foreign investors and thus they are driving their money back to the US. Also, there is a huge political and economic turmoil after the trade war ignited by US President Donald Trump, which is having a significant effect on the larger scheme of things. Some countries are facing the condition of hyperinflation and some are on the brink of bankruptcy, and thus foreign investors became bearish about the future prospects of these markets. And here in India, what we witnessed is a capital outflow of $75 billion from Indian markets in the past 8 months, which certainly is not in the central bank's control and thus the Rupee depreciated significantly.

There are other microeconomic factors as well in this picture which involves the trade part which are evident reasons for the currency's free fall. This started with the Turkish Lira depreciating to an abysmal low of â&#x201A;ş7 against the Dollar after the US imposed trade tariffs on Turkey, wherein the financial contagion effect worked and devalued the Rupee further. Financial contagion refers to the spread of market disturbances mostly on the downside from one country to the other. Concerns regarding the Lira had not only affected India but also currencies of other emerging economies like Russian Rubble, South African Rand, and Mexican Peso. This didn't stop here and exacerbated when crude oil prices shot up after the US imposed sanctions on Iran and the supply of crude dropped (as Iran supplies crude oil to the tune of 1 million barrel/day). Also, there are other reasons for this drop - a decrease in production in Venezuela due to a political and economic turmoil over there, Russia's output has also declined in past few years, Iran has cut its supplies, Libya and Saudi Arabia also witnessed a decrease in the production levels. Due to a reduced supply and the everincreasing demand, crude oil prices are skyrocketing. reaching $85 a barrel from $30 a barrel in mid-2016. India particularly faced the brunt of it since we

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import more than 80% of our for crude oil needs. Increased crude oil prices translated to higher import bills and which helped in a widening of the current account deficit which touched 2.4% of the GDP from 1.9% in FY2018. THE ROAD AHEAD Going by the estimates of Nomura Holdings and Merrill Lynch-Bank of America, the current account deficit may touch 2.8% of the GDP on account of huge Dollar outflow. Current Account Deficit can be simplified as a condition wherein imports are higher than exports. Now with increased prices, our import will be costlier and we will have to shell out more Dollars to pay for our trade. This widens our current account deficit as India imports much more than what it exports. A repercussion to that is, India's so-called huge stockpile of forex reserves plunged by $5.1 billion to $394.4 billion from $426.3 billion in less than three months. Much of it was due to the RBI's intervention in selling Dollars to control Rupee depreciation as a piecemeal approach and the rest was spent towards import bills, where gold imports increased by 4% to $17.63 billion in the first half of 2018-19, inflating the country's trade deficit. RBI sold over $40 billion of forex reserves to stabilize the Rupee.

Source: Bloomberg

This data feed from Bloomberg terminal shows the movement of Rupee vis-Ă -vis Dollar when plotted against the Brent Crude prices for the past six months. It is evident that how the Rupee is chasing the crude prices and the depreciation in Rupee's value is maximum when there was a huge FPI outflow in the April-June period. which justifies the point that forex and capital markets largely determine the exchange rate. In August the Rupee was almost stagnant as foreign investors pumped â&#x201A;š5,189 Crores in India, which increased the demand for Rupee.

ANALYSIS OF US FEDERAL RESERVE INTEREST RATE HIKE

ECO Section

INTRODUCTION US Federal Reserve decided to hike federal funds rate after a meeting in September 2018. It is the third increase in this year and eighth since 2015. Fed Chairman Jerome Powell said in a statement, “the US central bank has a long way to go before interest rates hit neutral” suggesting that there can be more hikes in future. Interest rates a f fe c t t h e w a y c o n s u m e r s a n d businesses plan their finances. It has ripple effects across the entire economy. This article explores various significant aspects like the need for interest rate hike, impact on consumer and business spending, the effect on the securities market and implications for the global economy.

US MONETARY POLICY AND THE NEED FOR INTEREST RATE HIKE US Federal Reserve is responsible for setting the monetary policy in the US. By controlling the monetary policy, the Federal Reserve tries to achieve the following two goals: Ÿ Promote maximum sustainable growth

and employment Ÿ Keep inflation in check Using monetary policy, Federal Reserve controls the money supply in the economy. If the money supply is increased, interest rates decrease and it encourages economic growth and employment. This is referred to as “expansionary policy.” Similarly, if the money supply is reduced, interest rates increase and it helps to keep inflation in

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check. This is called â&#x20AC;&#x153;contractionary policy.â&#x20AC;? To accomplish these goals Federal Reserve uses the following three tools of monetary policy.

Federal Reserve uses these tools to control reserve balances of commercial banks. This, in turn, influences the federal funds rate. It is the rate at which commercial banks lend excess reserves to other banks. The Federal Open Market Committee (FOMC) projects (Source: RBI) desired federal fund rates and uses monetary policy tools for manipulating market rates to align with desired target rates. Example of open market operation is when Federal Reserve buys bonds from commercial banks. This increases the reserve supply and in turn, reduces the federal fund rates. When the discount rate is increased, commercial banks tend to borrow less. This decreases the reserve supply and leads to a rise in federal funds rates. When reserve requirements are reduced, banks have enough balances to run their operations. This lowers the demand for reserves and federal fund rates fall. The following graph shows that the inflation rate is rising in the US from 2015 at a constant rate. The inflation rate is a measure of the change in the

price index, in this case, the consumer price index.

Above graph shows that the US u n e m p l o y m e nt rate i s fa l l i n g . I n September 2018, the unemployment rate dropped to 3.7% which is the lowest in the last 49 years. A l s o, re c e n t l y, A m a zo n m a d e a n announcement to increase the minimum wage to $15/hour. Other major firms are also likely to follow the suit. This further creates an upward pressure on inflation. This is the reason why US Federal Reserve is increasing interest rates to keep inflation from spiralling out of hand. THE RIPPLE EFFECTS The rise in federal funds rate has ripple effects on various segments of the economy. It has caused an increase in prime lending rates. These are the rates that banks charge when lending money to their most credit-worthy borrowers. Interest rates charged to other companies

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and consumers are over and above prime rates based on their risk profile. Thus, the increase in prime rates makes other interest rates go up as well. For example, credit card rates, home mortgages etc. Hike in interest rates also increases national debt as the money and time required to pay off the debt go up.

expenses, otherwise higher interest rates eat away their profits. Also, increased borrowing costs stop the companies from investing in new assets and in turn result in slowing down the growth. If a firm is not able to meet the debt obligations, its survival can be threatened. EFFECT ON THE SECURITIES MARKET

Interest rates also affect the profitability of businesses. The Banking sector usually makes profits, whereas, the profitability of other businesses goes down as the cost of capital increases. Home sales also decline on the back of higher interest rates. Consumer spending also sees a downturn due to the increased cost of borrowing and higher saving rates on bank deposits.

There is an inverse relationship between interest rates and bond prices. As interest rates increase, the demand for lower yield bonds goes down because investors tend to sell such bonds and reinvest that amount in more lucrative options. Similarly, higher yield bond prices go up when interest rates fall. Fluctuation in longer maturity bonds is more in relation with interest rate changes.

I M PA C T O N C O N S U M E R A N D BUSINESS SPENDING Availability of credit allows consumers to make instant purchases without having to wait for saving and accumulating money. Lower the interest rates more willing are the consumers to borrow money for making major purchases like house or car. One person's spending is another person's income. This fact combined with the availability of credit increases consumer spending by many folds through the economy. As opposed to this, higher interest rates discourage consumers to borrow. This has a negative impact on consumer spending.Firms need credit to run their operations. Higher interest rates increase the cost of capital for the businesses. Thus, companies have to improve their productivity to compensate for increased interest

Interest rates also affect stock prices. When interest rates are high, consumer spending goes down. This causes business revenues to fall and stock prices to drop. Similarly, when interest rates are low, consumer spending grows. This makes revenues and stock prices to go up. Stocks are affected by changing business cycles. They provide better returns during the period of expansionary policy and fewer returns during a period of the contractionary policy. Cyclical stocks are

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more susceptible to business cycles as compared to defensive stocks. Also, small-cap companies have higher sensitivity to changes in monetary p o l i c y a s o p p o s e d to l a rge - ca p companies. US monetary policy has a significant impact on global markets.

Interest rates play a crucial role in valuing stocks. US treasury bonds are considered as a risk-free investment because returns are guaranteed by full faith and credit of t h e U S gove r n m e nt . S to c ks a re comparatively risky. Thus, investors need a risk premium over and above the risk-free rate to invest in stocks. The total required rate of return is the sum of risk-free rate and risk premium. A share's fair value is future cash flows of the firm discounted to present using investor's required rate of return as the discount rate. When interest rates increase, the required rate of return increases. As a result, the stock price falls because the stock price needs to be lower to provide the desired rate of return. Thus, there is an inverse relationship between interest rates and stock prices. IMPLICATIONS FOR THE GLOBAL ECONOMY

After the 2008 financial crisis, the US Federal Reserve cut down interest rates to encourage economic growth. During this period of low interest rates, businesses in emerging markets have benefited by borrowing in US dollars. Now with rising US interest rates, it will become difficult for emerging market businesses to service the debt as the amount is denominated in dollar. These increased debt expenses can potentially cause a series of corporate defaults. Just like businesses, emerging market governments have also borrowed money in US dollars at lower interest rates to drive growth. But this can bring difficulties with rising interest rates. If they are not able to meet the debt obligations, it can lead to lower credit rating and higher borrowing costs.

Following the 2008 financial crisis, investors turned to emerging markets as the US and European bond yields hit a record low. Ever since the emerging markets have enjoyed significant foreign direct investment. But with rising interest rates in the US, investors are turning away from higher-yield but riskier investments. It can lead to an outflow of capital from Asian and other emerging markets into dollardenominated bonds and instruments. This will have an impact on fragile five

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economies â&#x20AC;&#x201C; South Africa, India, on financial instruments. However, it Indonesia, Brazil, and Turkey â&#x20AC;&#x201C; which are takes few months for things to change. Federal Reserve keeps adjusting the vulnerable to this kind of change. federal funds rate to maintain the balance Hike in interest rates tends to appreciate in the economy over the long term. We dollar value as the demand for dollar- can expect to see several such changes in denominated investments increases. the near future and should be prepared With rising dollar value countries for the implications that will follow. exporting to US markets benefit and importing countries suffer due to a strong Fed has increased interest rates but still dollar. Also, many economies rely on has remained accommodative in their exports of commodities like crude oil, stance because of the risk of slackening natural gas, copper etc. in international demand due to US-China trade war, markets. This trade takes place in dollars. decrease in oil prices due to improved So, when the dollar grows stronger capacity utilization by Saudi Arabia compared to other currencies, the increasing the global oil supply. Fed is respective countries suffer as they receive aiming at 2 % inflation target with a stable employment scenario and growth rate. less value for the commodities. So, the rate hike is just to keep in check the UNWINDING THE FED'S BALANCE SHEET overheating of the economy which will stabilize over a period of time. Federal Reserve's balance sheet became complex after the 2008 financial crisis as they purchased a large amount of U.S. Treasury and mortgage-backed securities to provide liquidity and encourage recovery from recession. The Fed's balance sheet grew in size - from about $870 billion in August 2007 to $4.5 trillion in September 2017. These steps were taken along with maintaining interest rates near zero for almost a decade to a s s i s t e c o n o m i c re c o v e r y. T h e s e measures are no longer needed for today's economy, so monetary policy normalization is underway. As a result, US Federal Reserve is on the path of raising interest rate targets and unwinding the balance sheet. CONCLUSION Interest rates affect the economy by

Fintech Funda

INTRODUCTION

The validity and application of Aadhaar Card came into question when there was a petition filed in the Apex Court of the country, seeking the constitutional validity and the necessity of a 12 digit identification number for various services and its link with the privacy pact of a Citizen. In July 2017, it started with the Supreme Court accepting the petition and then, in September 2018, a five-judge bench including the Chief Justice of India gave a majority decision of upholding the constitutional validity of Aadhaar card. The court abolished Section 57 of the Aadhaar Act, as a consequence of which private companies and entities can no longer ask their customers about their Aadhaar details. The decision also removes the necessity of Aadhaar card for issuing a SIM card or availing a telephone service o f a ny k i n d a n d a l s o f r o m t h e p rereq u is ite list o f ed u cat io n a l

subsidies. On the other hand, the Apex Court decided to keep the linkage of PAN and Aadhaar mandatory. For a country like India and its industries which was following the path of Aadhaar verification and related information for services, felt a big jolt as the process and methods are going to change in a big way, requiring a lot of cleanup work to restore order.

Source: www.trak.in

WHY WAS IT MADE COMPULSORY? India being a country with such a huge population and spread across a diverse

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geographical area, makes it very difficult for building and maintaining a proper identification system, especially working with any flat or physical filebased process like that of a Voter Identity card. The concept of a Unique Identification Number came into existence to make the process hasslefree, utilizing a digital platform, which was an emerging technological shift at that point in time. It was mainly on the lines of the Social Security Number (SSN) of the United States, which is given to their citizens to track their income and determine their benefits. In order to increase the identification accuracy and reduce the leakages in the policies of government schemes public sector organizations and scheme distribution channels decided to make the available UID compulsory for most of the schemes and related public sector entries. It was made compulsory in most of the important channels, which are now scrapped, as follows: 1. Bank Account 2 . E m p l o y m e nt P ro v i d e nt F u n d s Account 3. Mobile Phone Number 4. Scholarships 5. Passport 6. Concession on Railway Tickets 7. Mid-day Meal 8. PDS benefits After this, even private sector entities started relying on it. It was a sure sign that Aadhaar is here to stay and become your most important identity proof. Employers started to use Aadhaar to verify their potential employees, a move that could see the erstwhile week-

long verification process reducing to less than 15 minutes, and hiring costs falling drastically. It also helped make the process paperless â&#x20AC;&#x201D; now there was no need to provide documents that show, say, for example, the proof of residence. This helped the private firms and fintech companies in a great way as the operational cost of verification and its related processes decreased significantly and in a way became hassle free for both the company and the customer, thus creating a system of instant registration and service. This also allured various firms in creating Fintech businesses as the ease of doing business increased in this process and they became more relevant with respect to the customer's needs. DISHA Digital Information Security in Healthcare Act (DISHA) is an act to regulate, generate, collect and own the confidential data of patients. It works in collaboration with the National Digital Health Authority and Health Information Exchanges. It explicitly mentions that the patient's data can be shared with his/her consent and will be used only for treating him/her. Since 2016, the government has been planning to link Aadhaar with the national health records. On July 6, 2018, Niti Aayog proposed to create a National Health Stack to store and maintain the records of the personal health of every citizen. This idea could have changed the way the health data of Indians are stored and shared. The health record of an individual would co m p r i s e o f t h e m e d i ca l h i sto r y, medication being followed, allergies,

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different reports or scans, personal details, statistics etc. The foundation of data is based on a strong identity, such as the beneficiary's Aadhaar number. Earlier numerous discussions were held and questions had been raised about India Stack allowing private companies to use the information on its system, much of which is based on Aadhaar, to create their technology services. This database was subject to who will own it, who can access it and who will be having rights to modify or control the data. But now the decision of upholding the constitutional validity of Aadhaar Card may rectify the issues faced. (India Stack is a set of API's that helps the Indian government, businesses, startups and developers to use digital infrastructure to solve country's problems towards presence-less, paperless and cashless service delivery.) There was one incident reported in November 2017, wherein some HIV positive patients undergoing antiretroviral therapy under the NACO programme dropped out of the programme for fear of being identified by their families once they submitted their Aadhaar details. Similarly, there were a number of instances of people who were denied medical services because they didn't own an Aadhaar Card. Post the SC verdict, the identity proof will no longer be required. The Supreme Court's decision will ensure that the most deserving and economically deprived get their due, and made sure that the transparency in government schemes and services is up to the mark.

GDPR General Data Protection Regulation is a regulation in EU law on data protection and privacy for all individuals within the European Union (EU) and the European Economic Area (EEA). It is seen as quintessential by the privacy activists. On the other hand, Aadhaar is at the other end of the spectrum which is often looked upon as the greatest villain of the privacy breach in India. India, as a country, lags behind the world leaders when it comes to data protection. India is currently in a unique position as it embarks on a digital transformation journey of unprecedented magnitude through the citizen biometric data platform of Aadhaar. Aadhaar was meant to foster efficient processes in different sectors, but multiple cases of data leak are the major areas of concern. India might sketch on an over-arching data protection administration by constructing on GDPR. Although, data protection cannot be in the hands of the government alone. Companies in India can additionally seize cognizance and hold in forceful data protection measures akin to GDPR that will merely enable their development in the long run. The Indian government could learn from the GDPR and leapfrog the curve as it has done in the past, with technology deployments in sectors like banking, telecom etc. HOW DOES IT AFFECT THE FINTECH FIRMS? Harshil Mathur, chief executive and cofounder of Razorpay, giving his views on

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the verdict, hinted that the e-KYC verification and onboarding which cost around Rs 15, would shot up to Rs 100 now. While many things are still uncertain, there is a high possibility that the mandatory Aadhaar authentication policy will return, but now with the backing of strong laws.

look for other forms of identification and they might even have to delete the consumers Aadhaar data as favored by Justice Chandrachud.

REMEDIES: WHAT NEXT?

While the verdict came as a relief for those who have still not linked their bank accounts with Aadhaar card, it is still mandatory to link it with the PAN card. Since a PAN card is mandatory to open any bank account, so indirectly, Aadhaar card will still be linked with the bank account, which surprisingly is not part of the observations of the Apex Court and policymakers and analysts have turned a blind eye to this. Supreme Court also reduced the duration for which Aadhaar data could be stored from five years to six months which means it will affect the financial institutions which used Aadhaar card to decide on the creditworthiness of the borrower. Apart from financial institutions, telecom companies that offered services only on the submission of Aadhaar will have to

While there is panic among fintech firms, telecom companies and startups who rely heavily on a cheap e-KYC, there are still six different forms of documents that can be submitted online for authentication of identity. The e-KYC authentication using Aadhaar card has not been banned at large as the companies can still use it as a voluntary submission by the customers. According to Kotak Mahindra Bank CEO, this verdict hasn't yet affected the increase in the number of new savings account holders and it won't affect it in the future too. Customers who choose to authenticate their account using Aadhaar card will have to follow a simple procedure wherein the number of documents submitted by the customer will be less and at the same time hassle-free for them. While if they choose

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not to submit their Aadhaar, they'll have to go through a lengthy process and wait for the account to get activated for some time which usually gets activated within two hours of e-KYC using Aadhaar. So, even though the Supreme Court has struck off section 57, there is a high chance that customers will still go for Aadhaar verification, for availing services in a jiffy.

Alumni Section

learning, and countless instances of legpulling among a set of close-knit friends. Generally, it is seen that a small group is usually created by a set of like-minded people with similar interests and hence those walks become more special. The campus is indeed powerful as we possess an immense bargaining power, together, to make positive changes within ourselves and then in the society - in those 2 years. It's a recursive relationship - the output of which depends on you and no one else.

Shantanu Mukhopadhyay PGDM â&#x20AC;&#x201C; Finance | 2016-2018 Former Convener, Consultancy @ SIMSR I used to walk around the campus in my leisure time and those would remain as the best walks of my life. Those are etched in my memory as it would always consist of some sort of a healthy discussion on any topic, on-the-walk

Learning is bound to happen in those 2 years; that's how the course is designed, but to make the learning exponential and to maximize your benefits, we must make conscious efforts - adopting good practices and cultivating them is the key. Ĺ¸ WHAT IS THE OBJECTIVE OF JOINING

SIMSR? No, it is not getting a decent job. That will eventually unfold if you set exponential learning as the objective. Learning from the campus, peers, classroom, events and elsewhere is what your main objective should look like. Landing an on-campus

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job is easy; which can be realized only when you hit the market and face offcampus interviews. Prepare yourself for that. Develop skills which are required in the market. Ĺ¸ ARE WE REALLY A TIER 2

INSTITUTION? This is a keyword which you will hear from everyone around you - your roommates, placement members, classmates and that too at a time when labeled as a tier 2 college affects us. If we, ourselves, lower our collective level, why would our counter parties (the companies, other B schools, ranking agencies etc.) consider us as tier 1? Having worked with IIM graduates, I can safely say that peer learning is one of the most distinctive attributes in categorizing tiers. To quote an example, the number of finance students attempting exams of the likes of CFA/FRM is significantly higher than our batch. It should not be misconstrued as benchmark exams, but the preparation process would certainly enhance your knowledge. In some institutes, the fee is much lower as the college sponsors/have a tie-up with the concerned authority for bulk enrollment. We have historically made SIMSR as a tier 2 institute and only a change in the attitude, primarily to be led by the students can change the mindset and enhance the real brand value. The point being made here is that the fees paid by you and the time invested in this entire journey is only for your

personal and professional learning & growth. We tend to forget this and over the years, many students have developed this tendency to skip classes, do not enjoy additional classes, never approach any faculty, who are having a rich industry experience, for personalized help on any subject or something generic, skip quality industry interaction sessions, do not utilize the library and do not engage in healthy discussions with classmates on current topics/subject matter. Ĺ¸ WHAT SHOULD BE THE STRATEGY TO

EFFECTIVELY UTILIZE THESE 2 YEARS? UTILIZATION OF CAMPUS RESOURCES: The best thing about SIMSR is the campus - everyone would accept hands down as one of the best campus experiences you can get in the heart of the city like Mumbai, but how many of us explore the same is the question. Have you ever spent time on those benches with a book in hand? Have you ever interacted with the old people who come for an evening walk? Have you ever attended any event arranged by non-MBA departments like a session on R, VBA or an opportunity to learn a foreign language? Having able to do so, I am confident about the learning and the enriching experience it offers. The conglomerate structure of Vidyavihar is itself an avenue to learn. UTILIZATION OF SIMSR RESOURCES: I have seen a handful of people spending day & night in the library and there were friends who rarely visited the library. With such a huge and varied collection of books to offer, one who is interested in learning would happily sit there for hours. Reading a newspaper daily should be another

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motive to visit the library. All this is easier said than done. Hence regularizing your 24 hrs. and adopting good practices would certainly enable you to utilize the resources. And that would make you positively unique as not many will be able to replicate it. Many B-Schools have already integrated Bloomberg terminals as part of their infrastructure and students have been practicing on it since quite a few years n o w. B l o o m b e r g Te r m i n a l i s a command-driven utility and a serious market demand. Thus, the newly installed facility for the same should be availed in the right earnest and students should make a point to practice it to be at par with its competitors. So many student-driven committees and each offer something different and useful are present in SIMSR. Use these platforms to your maximum advantage to hone your interpersonal skills, social skills, and people skills. Know your area of interest, go deep into that and committee events are good trigger points in that aspect. Keep interacting with faculty members; they want to help you and their experience is worth listening to. Do live projects as client interaction makes you more matured; faculty can be of great help in providing live project leads. Do not hesitate to ask questions in the class if that does not hinder the flow of the session and thus you will learn to ask the right questions. Participating in B school events conducted by colleges outside of SIMSR, if that interests you, is another offering of SIMSR. Look out for

learning opportunities which SIMSR's resources offer. While you are on the campus you are really powerful - utilize this power wisely. PEER TO PEER LEARNING: Do you know of someone in your batch of 480 students who are extremely good with MS Excel and MS PowerPoint? If no, then it is most likely that you haven't interacted with much of your batchmates. If yes, do practice and learn from his/her approach to deal with MS office tools. Knowing your peers' matter; knowing their career story; their struggle; their skillset and interest area. You can have your own small group based on the area of interest or comfort zone but do not let this space separate you from other talented individuals. The relationship you build with peers in the 2 years will last long. The direct advantage you get is the opportunity to land a job via t h e refe r ra l p ro g ra m m e i n o t h e r organizations. Great minds discuss ideas (and not people) and knowing others' perspectives is always enriching. BUILD YOUR BRAND: When anyone from your batch hears your name, what image do they form in their mind is your brand image. Hence put a conscious effort to project positive qualities of yours. This exercise will help you in the corporate world in the long term after 2 years. GET INVOLVED IN CAMPUS ACTIVITIES: MBA is 50% theory and 50% practice. Hence get involved in whatever activities are going on which you feel will fetch learning. No task is small or menial. Even

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approaching the admin office for room booking teaches you a very important skill set - negotiation skills.

own choice and that is completely justified. There is not much that I want to add here.

Ÿ DOES GPA MATTER?

Placement preparation should not start just a couple of days before companies come on campus. Preparation is a c o nt i n u o u s p ro c e s s a n d to ga i n competitive advantage, you need to start it early. Cultivate current affairs, revise subject fundamentals, go in depth about the company's work and prepare accordingly.

My take on this is fairly crude - if it doesn't really matter, why not try to score personal best. You'll hear stories such as “A student securing only 7 (pointer) got a better placement opportunity than a 9 (pointer)” and conclude that GPA is irrelevant. But the former grabbed a better opportunity owing to his clinical performance in the interview. Despite having a low GPA, he/she has subject knowledge clarity and that's what matters in the end. Only the scheme of things in the longterm matters. Therefore, focus on your subject knowledge and strengthen your concepts as that will enhance your chances of realizing the ideal combination of a good GPA and an excellent placement. Do not forget that no effort will go waste and you will be surprised to realize how your efforts and hard work now, will pay off at your workplace in some way or the other in the future, howsoever significant!

The energy with which Friday night parties are enjoyed, learning @ SIMSR should be equally energetic and fun. Focus on the process of learning each day and good results will follow. All the very best to all the current students of SIMSR!

Ÿ WHAT ABOUT PLACEMENTS?

Profile-Organization-Package/Stipend are 3 dimensions to consider for placements if the location is not a constraint. Try to get a summer placement which offers immense learning. Hence look out for profile and invest 2 months' effort on the work. For the finals, everyone will have their

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OIL AND NATURAL GAS

Sector Analysis

Shreya Baderia | PGDM FS | 2018-2020 Prateek Tripathi | PGDM FS | 2018-2020

INTRODUCTION The journey of India's Oil and Gas Industry started with the discovery of oil deposits in Digboi, Assam in 1889. Being one of the major sectors in India, the industry plays a crucial role in the development of the Economy. As of May 2018, India is the second largest oil refiner in Asia. The demand for energy is ever growing and to satisfy it, the government imports around 83% of its oil requirements. Currently, the 3rd largest consumer of energy in the world, India's oil Imports for 2017-18 was $87.7 billion USD. The oil and gas industry has been segregated based on three major activities â&#x20AC;&#x201C; Upstream, Mid-Stream and Downstream.

Upstream activities are the operations that are related to exploration and production, which is why the sector is also commonly known as the Exploration & Production (E&P) Sector. It involves searching for potential underground or underwater crude oil and natural gas fields, drilling of exploratory wells and bringing crude oil and raw natural gas to the surface. Some of the companies into the upstream business are IOCL (Indian Oil Corporation Limited), ONGC (Oil and Natural Gas Corporation) and OIL (Oil India Limited). Mid-stream activities are the ones that act as a link between the upstream and the downstream activities. These activities comprise transportation and storage of war crude oil, natural gas and finished petroleum products.

Sector Analysis

FOOD PROCESSING FINLY|INDUSTRY NOVEMBER 2018 | Finstreet | SIMSR Downstream activities are the activities which include refining and marketing. The operations involved in downstream activities include converting the raw crude oil and natural gas into finished usable items such as gasoline and other petroleum-based products. Companies like IOCL, BPCL (Bharat Petroleum Corporation Limited), HPCL (Hindustan Petroleum Corporation Limited), GAIL India Limited which are commonly called OMCs (Oil Marketing Companies) fall under this category. MARKET OVERVIEW When it comes to consumption of energy, India ranks 3rd in the world in terms of oil consumption as of October 2018 and 15th in the world in terms of gas consumption. According to a report published by Economic Times, in the year 2017, India's energy consumption is set to grow by 4.2% a year by 2035, faster than the other leading economies around the world.

energies by 2030. E S T I M AT E D C H A N G E ( % ) I N CONSUMPTION (2015-2035)

Source: Economic Times

As the consumption is rising, demand for oil and gas is witnessing drastic growth. To supplement the ever-increasing demand, the government is continuously trying to increase domestic production, but it is not sufficient to meet the rising consumption needs. Hence, India is a country that is heavily dependent on imports to supplement its rising demand for oil. Top 3 countries from where India imports its oils are Saudi Arabia, Iraq, and Iran.

Source: IBEF (**MBPD â&#x20AC;&#x201C; Million Barrels Per Day)

Source: The Statista Portal

( **BBL- barrels/day)

It is expected that India will be the largest market for the consumption of fossil fuels by 2035 and will overtake China as the largest growth market for

Natural Gas is a vital input for generating power and to manufacture several kinds of products in the country. At a time when the country is heavily dependent on imports to supplement its oil needs, FY 18 has witnessed a growth in domestic production of natural gas. This can be primarily due to production from onshore b l o c k s , o f fs e tt i n g t h e d e c l i n e i n production from offshore blocks. India also relies on imports to some extent to meet its natural gas demands. India imports much of the natural gas from Qatar.

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Sector Analysis

cooking, especially the rural population. Hence, the government is targeting to bridge this energy divide with LPG, which opens up doors of opportunities for the sector. The pie chart below shows that over 65% of the households use biomass as their cooking fuel.

2) Rapid technological advancements: There have been amazing technological advancements in the oil and gas space, which have led to the increased use of advanced machinery and drilling and exploration techniques. Such advancements are expected to be on a rise in future which will propel the growth of the industry.

The opportunities in the sector are what will become the potential growth drivers of this sector.

3) The Growth of Auto Sector: Currently two-thirds of the freight transport in the country takes place through roadways. Also, passenger vehicle ownership in India is much lower as compared to the world average. With the increase in urbanization and level of disposable income of the country's population, the demand for vehicles is only going to increase.

1) Energy Access (Clean cooking): Even till today, a large portion of our population is dependent on biomass for

4) Geopolitical factors: The global scenario or geopolitical uncertainties play a key role in the growth of the Indian oil

GROWTH DRIVERS

Sector Analysis

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and gas industry as our country is an import-dependent economy. The recent US sanctions on Iran have further added uncertainty and volatility to the global markets. Hence, the conditions at the global level must remain calm and stable to instill growth in the oil and gas sector. 5) Robust Demand: When compared to all other major economies, the energy demand in India is ready to grow faster on the back of a strong economic growth. The crude oil consumption is forecasted to be at 500MT in FY40 compared to 221.76MT in FY17. At the same time, the demand for natural gas is expected to grow till 143MT in FY40 from the current 54MT in FY17. The chart below shows the petroleum product demand forecast in the near future.

6) Government Support: The government has also allowed 100% FDI through the automatic route in many segments of the petroleum sector across the hydrocarbon value chain, which is expected to boost the production in the sector. MICHEAL PORTER'S 5 FORCES ANALYSIS

The competition in the industry is analyzed using Porter's five forces to check the profitability and attractiveness for the oil and gas industry. 1. THREAT OF NEW ENTRY - (LOW) Since a large amount of investment is required, the threat of a new entrant is quite low. Economies of scale and sufficient cash are other factors which explain the low threat. Government intervention to support PSUs over the private sector in the downstream sector has kept competition away. This also explains the strength of barriers to entry and exit. 2 . T H R E AT O F S U B S T I T U T E S (MEDIUM) The major substitutes to oil and gas are other forms of energy like coal, solar power, wind power etc. Presently, however, these resources are not capable of substituting oil and gas on a large scale. Also, the government is considering the use of biodiesel as an alternative to oil owing to the sky-high prices. Here, the threat of substitutes which is low at present is likely to increase in the future. 3. BUYER POWER - (VERY LOW) In this industry, with prices being more or less the same and fixed by the government and with no real alternatives, the buyer is left with no choice or any bargaining power. Customers have no part in price determination.

Sector Analysis

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4. SUPPLIER POWER - (HIGH) Since the number of players in the market is quite low, the bargaining power of suppliers in the industry is high. Also, India meets a majority of its oil needs by importing from Saudi Arabia, Iraq, and Iran. However, with sanctions from the US on Iran into play, India has to depend upon Saudi Arabia and Iraq in case of any shortfall. 5. INDUSTRY RIVALRY - (VERY LOW) The competition is largely between PSU's across all the streams, with an exception of one or two private players. Therefore, the competitive rivalry is very low in the industry. FACTORS AFFECTING PRICE OF CRUDE OIL IN THE GLOBAL CONTEXT WORLD OIL DEMAND AND SUPPLY A simple but one of the most important concepts that govern the price of oil in the international market is the demand and supply of the commodity. More the demand for oil, higher the price. The demand for crude oil has been rising across the world, whereas an article published by worldstopexports.com states that there are only 15 countries that supply nearly 80% of the total crude oil in the world market. There are a number of factors that affect the demand and supply of oil. Some of them are as follows: MARKET SENTIMENTS

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to a plethora of factors may result in a drastic increase in oil demand in the present and of course the opposite holds true as well i.e. a mere belief that the oil prices may fall in the near future reduces the demand for oil in the present. POLITICAL FACTORS 1. Decisions of major oil producer groups such as the Organisation of Petroleum Exporting Countries (OPEC) act as key influencers in determining oil prices. They account for a significant share of oil supply around the globe, which means that an oil trader always needs to be updated about the changes in policies and decisions by these nations. The Middle East constitutes some of the world's major oilproducing nations such as the UAE, Saudi Arabia, and Iran. The instability in these regions can affect oil prices significantly. 2. According to a recent article published in economic times, a war in the Middle East could drive up the prices of crude oil to as high as $80-$90 per barrel. 3. In addition, US president Mr. Donald Trump's decision to deregulate the US oil industry has boosted the domestic oil production, reducing its dependence on import. The country has been the world's biggest oil consumer for a long time and the measures taken are in the right direction.

Market sentiments are a huge driver of oil prices. The mere belief that the oil price may rise in the near future owing

Sector Analysis

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MARKET PERFORMANCE According to a recent report by equitymaster.com, the S&P BSE Oil and Gas Index was at 13248. The index is down 10.7% over the last 30 days and over the last one year it has lost 16.2%. Also, according to an article published by National Herald, ONGC, one of the Navratna companies, is on the brink of bankruptcy due to the financial crises it is facing within the organization. The situation is so bad that the company is paying off salaries to its employees by availing loan from outside. This is definitely going to have an adverse effect on its share value.

The performance of BPCL on the charts have been similar to the other OMCs like HPCL and IOCL owing to the constant turmoil in the Indian and global oil and gas sector. The stock has eroded by almost 44% in the past 1 year and by 27% in the last 3 months. The stock was trading at the highs of 550 in October '17 and is currently trading around the levels of 285.

GOVERNMENT INITIATIVES

The stock of IOC is also struggling amidst the volatile global scenario. Over the past 1 year, the stock has deteriorated by 36%, while over the last 3 months the stock has fallen by almost 19% and is currently trading at 132 odd levels. The stock was pretty range bound in the month of September, but we saw a heavy fall in the stock recently when the government announced significant price cuts in diesel and petrol prices.

1. According to a recent article published by Times of India, the government has recently approved a bunch of fiscal incentives to boost oil and gas production in the country. This initiative is expected to induce production of hydrocarbons (chief components of petroleum and natural gas) worth Rs.50 lakh crores. Under this initiative, the government is planning to charge half the amount of the cess levied on oil produced per tonne from nominated fields of state-owned ONGC (i.e. half of Rs.4500), whereas for gas, a discount of 75% would be offered in royalty 2. The government has reduced the basic customs duty on Liquid Natural Gas (LNG) from 5% to 2.5% in the budget session of 2017-18 to enhance

Sector Analysis

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the demand for LNG in the market, especially in sectors like power, petrochemical, and fertilizers.

3. The government has taken an initiative to provide marketing and pricing freedom for gas produced from Coal Bed Methane fields to enhance gas production from CBM in the country. FUTURE PROSPECTS Natural gas consumption is expected to increase at a CAGR of 4.31% by 2040. In order to supplement the demand, the government has introduced a number of policies, some of which has been discussed above.

develop alternative fuels and sources of energy. The introduction of electric battery vehicles and announcement of hybridelectric commuter aircraft by Boeing and Jet-Blue Airways (by 2022) suggests that the oil sector is going to face a tough competition by the emerging alternative sources of energy. In an article published by Economic Times in the year 2017, a futurist and a clean energy expert, Tony Seba has even predicted that electric vehicles would destroy the global oil industry after a decade. Only time will tell if his predictions come closer to reality.

The Government is more inclined towards making India a gas based economy. It has planned to increase the share of gas in its energy mix to 15% by the year 2022 (subject to extension). An increase in the share of gas in the energy mix suggests a significantly increasing growth in consumption of gas within the country, which would require adequate investment in pipelines, enhancement of city gas distribution network and LNG import terminals. The demand for oil has also been experiencing a surge since quite some time and is expected to do so in the future as well. However, we cannot ignore the fact that the world is moving towards a more tech-savvy environment and looking for ways to conserve the very precious and limited fossil fuels and at the same time, to

Internship Diaries

THE COMPANY OVERVIEW Founded in 1980 as a sub-broking and in the jobbing segments, BD Shah soon transformed into a full-fledged company offering a whole range of financial services and it has come a long way. Originated as a proprietary concern in 1985 and transformed into a corporate firm as â&#x20AC;&#x153;B D SHAH Securities Ltd.â&#x20AC;? in 1997. They are a 100% retail focused stockbroking firm with a membership of NSE | BSE | MCX | CDSL Depository Services and the likes. AADI GALA PGDM - International Business 2017-2019 Convener, Finstreet

It has a long list of clientele, many of them loyal to them since 1980, due to the trust it has generated and focuses on the everchanging client needs over this period of time. The maximisation of client wealth over this period has helped them grow in the past and continue to do so in future.

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Internship Diaries

THE PROCESS BD Shah believes in testing the logic and financial acumen of students which will help them critically analyse and choose one of the growing sectors in the economy. The questions were mainly related to the basics of equity markets with a few questions on economics and current affairs. Post this aptitude test, one round of personal interview was scheduled for shortlisted students. The panel consisted of the Director of the firm and the Research Head, under whom students would be doing their internship. The interview revolved around testing of the thoroughness of the points mentioned in the CV. Q u e st i o n s p e r ta i n i n g to re c e nt happenings in stock markets, types of valuation techniques and its suitability, along with formulas and significance of the CAPM model, GG (Gordon Growth) model, and the Terminal Value were asked as well. THE EXPERIENCE On the ver y first day, we were introduced to the values of the organisation and the ethical standards requisite in our research work. Every intern was allocated one sector to do a qualitative research and update the mentor with a presentation on the same, encompassing parameters like current trends, budgetary support, regulations around the same and a major emphasis on future growth drivers that will help the sector clock a growth rate higher than that of GDP.

This exercise required interns to use databases and government websites extensively and find correlations to support their arguments logically. This was followed by a quantitative analysis of the sector, where the financial data was extracted from Capitaline on all the companies present in a comparable format. The Y-o-Y growth, with focus on ROE, ROA and other inflection points, was used to filter out and arrive at some companies which can be researched into. Small-cap and mid-cap companies were chosen over large caps as they are thinly researched and offer immense return potential if analysed with the right set of assumptions. 5 listed companies were narrowed down from a total consideration set of 80 companies with the help of a mentor on the basis of operating performances and corporate governance policies. A historical analysis was conducted with a preparation of the past trends of 5 years and common size statements were prepared. Revenue drivers and cost assumptions were carried out for each of them and percentage of sales approach was used to classify important heads in the income statement and balance sheet to estimate the fundamentals for the next 5 years. With all the quantitative data insight, valuation through DCF, P/E and EV/EBITDA multiples were used to arrive at a fair price of each share, based on which recommendations for the same was given. These recommendations were then presented in the form of a report which was presented to various portfolio

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Internship Diaries

managers for their feedback and usage.

MY 2 CENTS Overall, BD Shah Securities, made me understand the multiple facets involved in the process of equity valuation and how challenging the role of a Research Analyst is. The entire time and learning obtained have helped me win many Equity Research Competitions and also the CFA Research Challenge. For anyone wishing to pursue his/her career as a Research Analyst, I would advise them to start reading newspapers, tracking markets and build their own small portfolio and invest based on your own findings and research. The real lesson of managing and recommending the investments of clients in any scrip will be achieved by experimenting your acumen on your own portfolio.

Know your Finance 43

INTRODUCTION In the last edition of FINLY, we had covered the different types of orders one could make when trading or investing in the stock market. We also covered the different types of markets available to invest in, and we also saw how to calculate the real rate of return of these investments and calculated the returns of fixed deposits and short-term debt funds. In this edition, we will be introducing the concepts of Technical Analysis of Stocks, the Time Value of Money and Working Capital Management to better understand what people and companies should expect from their investments.

PERSONAL FINANCE

Time value of money is an idea. An idea that due to its potential to earn, money that is available today is worth more than the same amount available in the future. Since money available today can earn interest, it will become a bigger amount in the future. PRESENT VALUE The present value, quite obviously, is the value of the sum of money as it is today. But it is also the amount of money we need to invest today, to arrive at a known sum, in the future. So, take for example a car purchased for Rs. 10 Lakh which will have to payed in the future. We know the final value of our payments will be 10 lakhs at a known point of time in the future. So, the amount of money you need to invest today is the present value.

TIME VALUE OF MONEY It is a very widely used concept to assess

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current requirements to meet a future obligation. The process by which we arrive at the present value from the future value, the rate of return, and time-period is called discounting, as we strip the future value of its earnings, or we discount it, to arrive at the present value.

But in cases where the rate of return is non-uniform and varies with time, the overall future value has to be calculated by summing all the different profits from different time periods, based on different rates of return which will be compared to the future value of the other investment opportunities, which will be calculated in a similar manner, to help us make a decision on where to invest our hard-earned money.

INTERNAL FACTORS COMPANY SIZE AND GROWTH RATES If company size is high then working capital needs are significantly high, else they are low and can be managed easily. ORGANIZATIONAL STRUCTURE In a centralized organization, working capital needs are lower as compared to a highly decentralized structure where every department is having its own separate working capital needs. THE SOPHISTICATION OF WORKING CAPITAL MANAGEMENT If working capital management of a company is sophisticated then its working capital needs are relatively lower. BORROWING AND INVESTING POSITIONS AND CAPACITIES A company with efficient borrowing and investing mechanisms will have relatively lower working capital needs.

GENERAL AWARENESS EXTERNAL FACTORS WORKING CAPITAL MANAGEMENT BANKING SERVICES Well-developed banking services lead to lower working capital needs as it is easier for companies to borrow short-term funds.

Working Capital is a measure of a company's operational efficiency, liquidity, and overall health. It is given as current assets minus current liabilities. Working Capital Management involves managing a company's working capital so that its short-term financial needs and operating expenses are met conveniently.

INTEREST RATES If interest rates are high then the company maintains a high working capital to avoid buying at higher interest rates.

There are certain internal and external factors impacting the working capital needs:

NEW TECHNOLOGIES AND NEW PRODUCTS New technologies and new products

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make it easier to manage working capital due to which working capital needs are lower. ECONOMY Impact of the economy is specific to an industry. For example, if the economy is not doing well then companies may cut down inventory and maintain higher cash balances to maintain liquidity. COMPETITORS In highly competitive industries working capital needs are relatively high. LIQUIDITY MANAGEMENT Managing liquidity is an important part of a company's working capital management as it is a measure of creditworthiness (the ability of the borrower to pay what is owed in a timely manner). This can be done by maintaining the liquidity ratios given below:

company. For a better Cash Conversion Cycle, the No. of days of receivable and No. of days of inventory should ideally be low whereas No. of days of payables should be high. RECEIVABLES MANAGEMENT No. of days of receivable is one of the ways for receivables management. A high value means the company is selling most of the products to its customers on credit and taking a long time to collect money, whereas a low value means the company takes less time to collect its account receivables. This measure does not, however, consider the age distribution within the outstanding balance. This limitation can be overcome by preparing an Aging report that considers the age distribution within the outstanding balance. The table shown below considers the duration for which the amount is outstanding for the given months:

Cash Conversion Cycle = No. of days of receivable + No. of days of inventory No. of days of payables Cash Conversion Cycle helps us in working capital management. It tells us how quickly a firm is able to convert its accounts receivables, inventory and accounts payable into cash. The lower this value the better it is for the

Above table (Expressed as a percentage of the total amount outstanding for that month)

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discount while paying to suppliers. Late payments can lead to loss of creditworthiness of a company and will reduce its credit rating. Accounts Payable management can be done using Payables Turnover Ratio and No. of days of payables. No. of days of payables measures the time taken by a firm to pay its creditors or suppliers. Now consider the month of January

Weighted Average Collection Period = 46.5 (Sum of Days X Weight) INVENTORY MANAGEMENT Inventory turnover ratio and No. of days of inventory are the ways for inventory management. It tells us how long the company takes to sell its inventory. It is important to keep an adequate amount of inventory level. If inventory levels are too low, it will result in loss of sales due to stock-outs and if inventory level is high, it means a lot of firm's capital is tied up in its inventory. The company can calculate an effective reorder point (point of inventory in hand at which replenishment of inventory should be done) to manage its inventory. PAYABLES MANAGEMENT Accounts Payable represents an important source of funds and should be managed well. Paying too early can mean the firm isn't using its credit duration, unless paying early leads to a

STOCK MARKET TECHNICAL ANALYSIS Technical analysis is the study of collective market sentiment, as expressed in buying and selling of assets. The market price of an asset equates the supply and demand at any point in time. There is one underlying assumption; that market prices reflect both rational and irrational investor behavior. This means that the efficient market hypothesis does not hold true and price & volume reflect the collective behavior of the market. Technical analysis can be considered opposite to that of fundamental a n a l ys i s . F u n d a m e nta l a n a l ys i s considers the company's financial statements and the overall market scenario and other useful information to determine the intrinsic value of a firm. On the other hand, technical analysis uses only the firm's share price and volume data and finds trends and patterns that tend to repeat and can be used for forecasting prices. The major advantage of using technical analysis is that price and volume are observable data. Also, it can be applied to assets that do not generate future

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cash flows, like various commodities. Technical analysis is also useful when frauds related to financial statements occur. Price and volume reflect the true value even before the fraud occurs. Disadvantages of technical analysis are that it is less predictable in the illiquid market and in market scenarios which are subject to outside manipulations like currency market intervention by central banks. For stocks of bankrupt companies, covering the shorts might indicate a BUY signal although the reality may be completely opposite. Technical analysis primarily uses charts of price and volume to analyze trends. The x-axis of the chart is generally the time interval. A technical analyst generally looks at the long-term horizon, for example monthly and weekly charts and only then looks at the daily or intraday charts to get a clearer picture.

DIFFERENT TECHNICAL ANALYSIS CHARTS

BAR CHARTS include the high and low prices for each period, where each period is displayed as a vertical line. The opening price is indicated by a dash on the left side and the closing price is indicated by a dash on the right side of that vertical line.

Source: in.tradingview.com

CANDLESTICK CHARTS depict the same data as that of a bar chart but in a box format, bounded by the opening and the closing prices. The box is clear if the closing price is higher than the opening price or filled, if the closing price is lower than the opening price. Candlestick charts are widely used as the patterns are easier to analyze.

LINE CHARTS show the closing prices for each period in a continuous line.

Source: in.tradingview.com

The volume prices required for further technical analysis are shown below the price charts.

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Relative strength analysis indicates the asset's performance in relation to a certain benchmark value, a stock index or a particular asset. An increasing trend indicates that the asset is outperforming the benchmark and a decreasing trend shows that the asset is underperforming the benchmark. Relative strength ratios help in intermarket analysis. TREND, SUPPORT AND RESISTANCE LINES UPTREND: Prices are constantly discovering higher highs and retracing to higher lows. This indicates higher demand.

T R E N D L I N E : Tre n d l i n e s h e l p to d e c i p h e r w h e t h e r t h e t re n d i s continuing or reversing. In an uptrend, a trendline connects the increasing lows in prices. In a downtrend, the trendline connects the decreasing highs in prices. When the price crosses the trendline, there's a breakout from downtrend or a breakdown from an uptrend, both of which mean a condition of a trend reversal. SUPPORT: Support levels are buying levels where buying is expected to emerge to prevent a further price drop. RESISTANCE: Resistance levels are selling levels where selling is expected to emerge that prevents the prices from increasing further.

Source: in.tradingview.com

DOWNTREND: prices are constantly falling to lower lows and retracing to lower highs. This indicates a higher supply.

Source: in.tradingview.com

CHANGE IN POLARITY: resistance level once breached can act as a support level. This is known as change in polarity.

Source: allstarcharts.com/principle-polarity-supply-demand-101

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We welcome your valuable feedback Finstreet, The Finance Committee of K.J. S.I.M.S.R.

Email Us At : finstreet@somaiya.edu