Finly September 2021

FINLY

SEPTEMBER 2021 | Issue No. 103

e-Rupi and the road ahead for digital currency in India Intriguing Indeed

Sector Analysis

IPO Frenzy

Airline Industry

Eco Section Scrapping Retro tax and its implications

CONTENTS 01

02

ED ITO R IAL

TEAM F INL Y

04

09

C O VER ST O R Y

EC O SEC TIO N

e-Rupi and Road ahead for Digital Currency in India

Scrapping Retro tax and its implications

12

18

SEC T O R ANAL YSIS

C O MPAN Y AN AL YSIS

Airline

Interglobe Aviation

22

27

INTR I GU ING IND EED

EN TR EP R ENEUR SHIP INNO VATIO N

IPO Frenzy

Cred

31

34

PER SO N IN F O C U S

C ALL F O R AR TIC L ES WINN ER

Mr Bill Ackman

37

Nitesh Goyal

ALUMNI INSIGHTS

Pratik Tirodkar PGDM FS | Finstreet | 2015 - 2017

ISSUE NO. 103, SEPTEMBER 2021

Editor's Note Dear Readers, “Historically, pandemics have forced humans to break with the past and imagine their world anew. This one is no different. It is a portal, a gateway between one world and the next. We can choose to walk through it, dragging the carcasses of our prejudice and hatred, our avarice, our data banks and dead ideas, our dead rivers and smoky skies behind us. Or we can walk through lightly, with little luggage, ready to imagine another world. And ready to fight for it.” - Arundhati Roy This pandemic is an opportunity to expand our knowledge by finding new ways to circumvent the circumstances, invest in the most intuitive ideas that come to our mind and surpass this havoc. As Ben Franklin rightly said, “An investment in knowledge always pays the best interest,” we at Finstreet are back with the next edition of our monthly magazine “Finly” for the academic year 2021-22.

Team FINLY has always been a dedicated group of people who put in a lot of time and effort to put this magazine together, and we can't thank them enough for their unwavering support and initiative.

The September edition’s cover story tries to understand e-Rupi and the road ahead for digital currency in India. The intriguing indeed article goes through the interesting topic of IPO Frenzy.

We are thankful to Prof. (Dr.) Pankaj Trivedi (Course Coordinator, PGDM Core and Faculty Coordinator, Finstreet) for providing the much-required mentoring, support and backing to the Finly team.

We thank all our readers and faculty members for their valuable reviews and feedback.

HAPPY READING!!!

STAY HOME STAY SAFE!!!

Anusha Nair

Riya Agarwal

|Editor-in-Chief|

|Editor-Finly|

MBA FS

MBA FS

1

ISSUE NO. 103, SEPTEMBER 2021

TEAM FINLY Faculty in-charge

Dr. (Prof) Pankaj Trivedi

Editing Team Editor-in-Chief

Editor - FINLY

Anusha Nair

Riya Agarwal

Team Coordinator

Aakanksha Agarwal

Conceptualization & Design

Devansh Mehta

Anusha Nair

Anuja Singhal

Saurabh Dubey

2

Content Team

Mehul Parwal

Sahil Mehdiratta

Kaushal Daga

Shivam Mahendru

Himanshu Sharma

Shubhangi Thapliyal

Tanya Nayyar

Rohan Bhakkad

Jitesh Patil

Riya Agarwal

Nishi Kumari

Shrishti Gupta

Saurabh Dubey

3

| COVER STORY

E-RUPI AND THE ROAD AHEAD FOR DIGITAL CURRENCY IN INDIA Mehul Parwal | MBA-FS | 2020-22 Kaushal Daga | MBA-FS | 2020-22 INTRODUCTION The government of India launched e- Rupi, a digital payment system, on August 2. eRupi is a cashless and contactless digital payment solution that can play a significant role in the Direct Benefit Transfer (DBT) scheme more effectively and prevent problems of leakage and last-mile delivery of welfare payment. The DBT scheme would be benefitted from e-Rupi based on the ease and the simplicity of UPI. WHAT IS E-RUPI? e-RUPI is essentially a prepaid voucher and has been electronically generated to eliminate the contact factor. e-RUPI will connect the sponsors of the services with the beneficiaries and service providers in a digital manner but does not permit direct cash-out or peer-to-peer transfer.

Any government agency or corporation can generate e-Rupi vouchers via their partnered bank.

WHAT IS E-RUPI AND HOW WILL THEY BE USED? e-Rupi uses two methodologies – QR code or SMS strings to deliver it to the beneficiary’s mobile. If a person has a basic feature smartphone, they will be able to use this facility mainly due to its dual nature of SMS strings and a QR code which is crucial since smartphone penetration has been on the rise in the country Estimates suggest that close to 400 million feature phone users in India would ordinarily be kept out of any tech-heavy cashless digital payment solution since these require an Internet-enabled smartphone. It will be redeemable at specific accepting centers without and debit or credit card, UPI, net banking, or any application. It has been developed by the National

4

| COVER STORY Payments Corporation of India (NPCI) with the help of the department of financial services, the ministry of health, and the National Health Authority.

Source: Wikipedia These vouchers are person and purposespecific, meaning if the voucher is generated for the vaccination purpose from the government, they can be redeemed for that only.

NPCI has onboarded State Bank of India, HDFC Bank, Axis Bank, Punjab National Bank, Bank of Baroda, Canara Bank, IndusInd Bank, and ICICI Bank that will become the issuing entities. A corporate or government agency can approach these entities and submit the details of those specific persons and the purpose of issuing e-RUPI. The banks will then generate the SMS strings and send them to the mobile number registered for that person.

BENEFITS OF E-RUPI The most important feature of e-RUPI compared to other digital payments is that end beneficiaries need not be banked. This results in more significant adoption in the rural area and among an economically backward section of society. It will foster financial inclusion in the country as there are still 190 million unbanked citizens. It will ensure that government welfare schemes reach the end beneficiary without any leakage of benefits/funds and in the most transparent manner. e-RUPI has significant potential to support small businesses by providing direct benefits from government schemes specifically designed for them. The government can go one step further in its digital payment infrastructure based on e-RUPI experience, which will help develop a Central backed Digital Currency (CBCD) and ensure its success. e-RUPI is easy to use, safe, and secure to keep the details of beneficiaries completely confidential.

LIMITATION The area of concern in the system is that the beneficiaries do not require to disclose their identity. If the merchant doesn’t check someone’s identity, anyone can claim these benefits, violating the very purpose of e-RUPI. APPLICATION OF E-RUPI e-RUPI can be a breakthrough event for the PDS programme in India. The incompetence

5

| COVER STORY of the programme is rooted in high overhead costs, leakages, exclusion, and inefficiencies. An e-RUPI food-specific voucher can allow the beneficiary to buy the ration from his preferred outlet instead of some specific one. The value addition beyond the One Nation, One Ration Card will come from removing price distortion and the redemption of the voucher at market price by merchants within and outside the PDS network. The USA, South Korea, and several other nations have used a similar evoucher based incentive for welfare services. e-RUPI could also be used in the fertilizer subsidy to the farmer, which constitutes a significant share in the subsidy programme by the government. e-RUPI would allow farmers to buy fertilizer at a nominal rate from the dealer and direct credit of subsidy to the account of the respective dealer. In 2011, a special task force headed by Nandan Nilekani had suggested a blueprint for the direct transfer of subsidies on kerosene, LPG, and fertilizer in a phased manner.

Whereas LPG subsidy recommendation got successfully implemented with desired results. The recommendation of fertilizer subsidy has not been implemented yet. The e-RUPI will allay apprehensions about creating an IT infrastructure, managing nearly 3,00,000 fertiliser sale points, the collapse of dealer network due to liquidity squeeze in the event of subsidy payments getting delayed, and a complex system of timely credit of subsidy into an estimated 129 million Aadhaar-linked bank accounts of farm households.

e-RUPI is best suited for the school voucher programmes. The efficacy of these programmes is well tested in many countries around the globe. Student gets a voucher to pay the fees and expenses enlisted schools of their choice, public or private, which compete to get full-paying students. This eventually results in many options for students, and competition benefits students and schools while better transparency and accountability. “Few states in the US have implemented a digital voucher-based system for educational institutions to create targeted delivery structures. But no country has implemented an e-voucher system on a massive scale in the past,” said Hitesh Malviya, founder of itsblockchain.com, India’s first and oldest blockchain and cryptocurrency publication platform. e- Rupi can be a game-changing factor for the Ayushman Bharat healthcare initiative.

Beneficiaries will receive e-RUPI vouchers of designated value, which give them the power to get the healthcare along with portability and facility choice. The hospitals and clinics will benefit from the immediate payment without any delay from the government that can play a major role in creating a robust healthcare system in India.

Corporate application of e-RUPI includes disbursement and easy compliance of giving employee benefits with tax implications such as meals, education, travel, and health.

This also eases the transfer of bonuses in kind without any hassle.

6

| COVER STORY HOW IS E-RUPI DIFFERENT FROM DIGITAL CURRENCIES? The introduction of e-RUPI is a stepping stone towards having a digital currency in India. It is, however, not a digital currency but a welfare service voucher system to ensure the reach of benefits to particular beneficiaries who genuinely need it without any leakage and delay.

This is totally different from cryptocurrencies that let you buy goods and services or trade them for gain. However, it’s governmentregulated, while crypto is privately owned.

Initially, the prepaid voucher issued by the government will primarily be utilized for the government welfare schemes.

However, regarding the introduction of digital currency in India, the Reserve Bank of India (RBI) in January announced that it is exploring the option of central bank digital currency in tandem with other countries plans of introducing a country-specific digital currency in their respective countries.

Hitesh Malviya says, “The purpose of cryptocurrencies and e-rupee is the same — to reach the unbanked population, but the approach is different here, cryptocurrencies are distributed and decentralised medium of exchanges. On the other hand, e-RUPI is centralised but one of its kind digital payment protocol”.

ROAD AHEAD FOR DIGITAL CURRENCY e-Rupi will be the stepping stone towards digital currency, and the success of the same will help the government understand what should be the next step. RBI has noted some crucial reasons as to why digital currency can be a success in India. One of them is the digital payment penetration which has increased after demonetization and is now stressed upon during the covid pandemic. India also has a high currency to GDP ratio, which will benefit the aforementioned CBDCs.

India is not a front-runner in CBDC, unlike China, Europe, and some other countries.

Still, the rise of cryptocurrencies such as Facebook’s Diem is a major encouraging factor to the authorities to push for the pilot project in the near future. e-RUPI is based on the UPI system, while cryptocurrency is based on blockchain and distributed ledger. e-RUPI is very much similar to the gift we get online, but the government backs this.

There are some advantages to the usage of digital currency, especially in the taxation part. A major reason why tax evasion works is that cash is almost impossible to trace.

7

| COVER STORY Supposedly, a digital currency is brought in; every transaction will be recorded. However, RBI is also concerned over the disintermediation of the banking system, i.e., people converting their cash into digital currency and moving it out of the bank and into high-yielding instruments. This might lead to the collapse of the banking system, which might subsequently lead to the tumbling of the economy.

With financial literacy still being induced in the population, the RBI and the government need to cover all their bases before deciding.

It might take time, but the infusion of digital currency might be another step towards taking advantage of the latest technology.

8

| ECO SECTION

SCRAPPING RETRO TAX AND ITS IMPLICATIONS

WHAT IS RETROSPECTIVE TAXATION? As the name suggests, retrospective taxation allows India to impose retrospective capital gains tax on transactions involving the transfer of shares in a foreign company located in India after 1962. In simple words, it allows India to impose tax on transactions that happened before the law was passed. It was introduced in a 2012 Amendment to the Finance Act by Late Pranab Mukherjee during his tenure as the finance minister. Countries make use of this tax to correct any abnormality in their taxation policies that have let companies take advantage of such loopholes, in the past.

Nishi Kumari | MBA - FS | 2020-22 Shubhangi Thapliyal | MBA - A | 2020-22 This tax ends up hurting firms that had knowingly or unknowingly interpreted the taxation rules differently. Countries like the US, the UK, the Netherlands, Canada, Australia and Italy have imposed retrospective taxes on companies that have taken advantage of loopholes in the taxation policies.

The current Modi government has introduced The Taxation Laws (Amendment) Bill, 2021 in the Lower House, which seeks to withdraw tax demands made using retrospective tax law. Many investors have extended their support too as it looks after the interest of foreign investors. This amendment seeks to withdraw the tax demands on companies like Vodafone and Cairn.

CASE OF VODAFONE AND CAIRN The Indian government levied a capital gain tax of Rs. 22,100 crores on a deal by Vodafone where it bought a Cayman

Source - Live Mint

9

| ECO SECTION Islands-based firm that controlled the Hutchison telecommunications network, functioning in India. Vodafone argues that India had no right to tax a transaction between two foreign-based companies, even if their assets were in India.

In 2012, the Supreme Court ruled that Vodafone does not have to pay the taxes to the Indian Tax Department. But the Congress Government was not ready to back out and introduced Retrospective tax law and the onus to pay the taxes fell back on Vodafone. The government received a lot of international criticism that’s why it tried to settle the matter benevolently. But it didn’t work. In 2014, Vodafone appealed in the Court of Arbitration under Article 9 of the Bilateral Investment Treaty (BIT) between India and the Netherlands. BIT ensures that companies in both countries shall be treated fairly and enjoy full security. And Article 9 says that any dispute between companies of the two countries shall be settled through negotiations. Vodafone invoked it as its Dutch Unit, which made the mentioned transaction between an Indian firm and a Dutch company.

This was the major reason for the Court to rule in favour of Vodafone. The tax demand of Rs. 24,500 crores from Cairn Energy is based on the transaction where Cairn UK transferred shares of Cairn India Holdings to Cairn India, the Indian tax authorities challenged that Cairn UK made capital gains.

Cairn Energy approached the Permanent Court of Arbitration (PCA), and the Court ruled in its favour stating that the tax demand was inconsistent with the UK India Bilateral Treaty.

The Judgement has asked to pay compensation to Cairn of about $1.2 billion (about Rs.10000 crore).

Cairn Energy sued Air India in New York to seize its assets to enforce the $1.2 billion arbitration award that it won against the Indian government in a retrospective tax dispute.

NEW LEGISLATION PROPOSALS The new Taxation Laws (Amendment) Bill, 2021 was introduced by the Finance Ministry in Lok Sabha to do away with the contentious retrospective tax demand provisions. As per the amendment, tax raised for the indirect transfer of Indian assets before May, 2021 would be nullified on fulfillment of specified conditions such as: Withdrawal of pending litigation Undertaking that no damages claims would be filed According to the new bill, tax claims made on offshore transactions executed before 28 May 2012, when the amendment to the Income Tax Act brought out by the previous United Progressive Alliance government took effect, will be nullified, subject to riders. However, offshore transactions involving Indian assets executed after 28 May 2012 are still taxable as there is no retrospective application of the law.

Additionally, the amendment also proposes

10

| ECO SECTION to refund the amount paid by companies facing trial in these cases without interest thereon.

been enough to signal India’s intentions to keep the economy open, transparent and rules-based.

There are an estimated as many as 17 entities that stand to benefit from the proposed tax amendment as per the government.

Approximately Rs. 1.10 lakh crore in back taxes were said to be sought from these 17 entities that were levied taxes using 2012 legislation. Major recoveries are said to be made only from Cairn. The central government has said that it will refund about Rs. 8,100 crores collected to enforce such levies. Of this, Rs. 7,900 crore is from Cairn Energy alone.

Now it will take a lot more work. Some of it might be done by the judiciary, like the Indian Supreme Court’s decision Friday to allow enforcement of a Singapore arbitration order in India, giving major relief to Amazon.com Inc.. The emergency arbitrator had, on Amazon’s plea, halted the $3.4 billion sale of cash-strapped Indian retailer Future Retail Ltd. to Ambani’s Reliance Industries Ltd.

The bill also proposed to provide that the demand raised for the indirect transfer of Indian assets made before May 28, 2012 shall be nullified on fulfillment of specified conditions like withdrawal or furnishing of undertaking for withdrawal of pending litigation and furnishing of an undertaking to the effect that no claim for cost, damages, interest etc. shall be filed.

Thus, the overall message from the new legislation is loud and clear – India is ready for course correction if needed. By scrapping this law, the Centre expects greater foreign investment in the country.

The industry has welcomed the government’s move to scrap the retrospective tax with open arms. They say that it will reignite the choice of India as a favorable investment destination along with low tax rates.

India is bound to become a favored destination by foreign players as the tax rates are also quite attractive. Critics, on the other hand, argue that had the Modi government scrapped retrospective taxation after taking power in 2014, it would have

11

| SECTOR ANALYSIS

AIRLINE INDUSTRY Sahil Mehdiratta | MBA - A | 2020 - 22 Shivam Mahendru | MBA-IB | 2020 - 22 INTRODUCTION The history of the Indian Aviation Industry started in December 1912 with its first domestic air route between Karachi and Delhi. Since then, the industry has come a long way to becoming the third biggest Airline industry in the world.

Prior to the pandemic, the Indian aviation industry was growing at the fastest pace in the world at around 18% CAGR with over 486 airports, airstrips, flying schools, and military bases available in the country out of which 17 airports are international airports.

However, Aviation is perhaps one of the most severely hit sector as strict lockdown norms imposed by the government ensured that the entire sector came to a complete halt. Domestic passenger and international passenger traffic declined at a CAGR of -9.02% and -28.64%, respectively, from FY16 to FY21, owing to

the slowdown in the economy and the COVID-19 related restrictions on flights in FY21.

Due to the high cost of entry into the industry as well as a high level of brand loyalty, the top 4 Commercial airline companies command over 85% of the entire market share of the commercial airline industry.

Source - Directorate General of civil Aviation

12

| SECTOR ANALYSIS PORTER'S 5 FORCES ANALYSIS

1. Power of suppliers - High The industry identifies airport operators, aircraft manufacturers and leasers, airline maintenance providers, airline service providers, and fuel companies as the key suppliers for airlines.

Aircraft manufacturing is highly capital intensive and as such there are very few players in the market for both large and small jet aircraft. Boeing and Airbus, both of which are huge corporations, create a duopoly. Other Global manufacturers include Embraer, Bombardier, and United Aircraft Corporation.

Many airlines have their fleet dependent upon certain manufacturers which restricts their switching costs, moreover, because of the oligopoly structure the manufacturers are not heavily dependent on any particular airline for their business

Switching of airports is not feasible as an airline operating in a key market area would incur a substantial loss of revenue and additional costs to switch airports. Although some airports do have a dependence on some airlines to push for key components of their business, including shops, parking, and hotels.

Some suppliers of goods to airlines such as maintenance, staffing, and food providers could be substituted but these often are tied to specific airports or routes. i.e. each airport will have a sole catering supplier and a sole maintenance supplier, these are sometimes owned by an airport company or the airline itself.

Jet fuel comprises a high percentage of operating expenses for the airline (Typically around or more than 30%).

Aircraft fuel is sold by major oil companies and airlines will usually enter into long-term agreements with them.

2. Buying power - Moderate to High Buyers are generally consumers, business account holders, and travel agencies with agreements with individual airlines. These individuals with low financial muscle represent a very small amount of a given airline's business.

13

| SECTOR ANALYSIS Customers have a fairly high propensity to switch airlines if a similar route is offered lower prices. Many airlines have "frequent flier" schemes to encourage repeat customers.

Products are highly undifferentiated.

The only point of difference is that airlines are having a low-cost model versus a full-service model.

Many airlines highlight service quality as well as punctuality in their marketing.

However, consumers are mainly driven by price, and air travel is rarely bought for its own sake, rather as a way of getting from A to B most conveniently.

3. New entrants -Moderate Economies of scale are key to the success of an airline. Profit margins are often thin, and it can be hard for any airline to turn a profit, especially those reliant on a single market. Thus, it is extremely difficult for new players to enter, considering the amount of Fixed capital required and the low level of profitability Airlines are a highly regulated industry; governments regulate safety, security, staff training, and aircraft procedures.

Certain globally agreed standards are upheld because of the industry's international nature, and airlines can live or die on their safety records. Green taxes also apply, referring to the emissions of aircraft.

Airports and governments strictly control landing slots and routes; a new player requires a large investment to establish profitable routes. The opening of new routes may be easier but can be risky compared to competing on established routes.

4. The threat of substitutes – Moderate The availability of a substitute to flying depends on the route in question and varies according to the cost and the benefit of the alternative Switching costs for consumers are low, the only cost being foregoing frequent flier miles; some short-haul routes can be substituted for rail or car travel Especially in emerging economies such as India, rail usage as means of transport dominates with extensive rail networks present. However, rail can be time-consuming, especially over long distances.

5. The threat of Rivalry -High Some low-cost carriers have also entered the international flights (longhaul) market. In this way, competition among airlines is expected to intensify as legacy carriers are more dependent on the long-haul flight operating segment, on which they enjoyed greater profit margins so far.

Price wars are prevalent because of

14

| SECTOR ANALYSIS largely undifferentiated offerings and price-sensitive customers, and if oil prices rise, this could impact the profitability of the industry even further Some airlines have diversified into offering other associated travel services but most only focus on air travel; diversification into freight can be another revenue stream; most major airlines already do this. Moreover, many airlines tend to bundle their services by offering hotel bookings and car rentals, gathering commission fees added to ancillary revenues, the importance of which is increasing for the industry.

KEY STRATEGIES AND INVESTMENTS OVER THE YEARS The Civil Aviation industry has ushered in a new era of expansion, driven by factors such as modern airports, Foreign Direct Investment (FDI) in domestic airlines, low-cost carriers (LCCs), advanced information technology (IT) interventions, and growing emphasis on regional connectivity.

The Government has allowed 100% FDI under the automatic route in scheduled air transport, regional, and domestic scheduled passenger airlines. However, FDI over 49% would require government approval.

The Government is planning to start 14 water aerodromes across the country.

Expansion of six international airports completed under PPP. The sector is expected to witness investments worth US$ 25 billion by 2027.

Indian airports are emulating the SEZaerotropolis model to enhance revenues; focus on revenues from retail, advertising, vehicle parking, etc. to increase non-aeronautical revenue RECENT GOVERNMENT INITIATIVES On May 08, 2021, AAI commenced commercial operations at Rupsi airport —Northeast India's 15th and Assam's 7th airports.

The Airport Authority of India plans to abolish royalty and offer steep discounts in lease rent to encourage MRO units to set up facilities at its airports.

Under Union Budget 2021-22, the Government lowered the custom duty from 2.5% to 0% on components or parts, including engines, for manufacturing aircraft by public sector units of the Ministry of Defence.

In February 2019, the Government of India sanctioned developing a new

Rising business activity leading to higher

greenfield airport in Hirasar, Gujarat,

demand for non-scheduled airlines. As

with an estimated investment of Rs.

of January 2021, there were 101 operators

1,405 crore (US$ 194.73 million).

(NSOP).

15

| SECTOR ANALYSIS PASSENGER AIRPORTS

AIR

TRAFFIC

AT

MAJOR

zones with 0% GST, and import restrictions.

2.Policy support and demand unlocking large investment pool

growth

The success of PPP will raise investment in existing and greenfield airports. Private sector participation in six existing airports operated by AAI is likely to increase investment opportunities for the airport sector.

OPPORTUNITIES AND GROWTH 1. Huge potential to develop India as an MRO hub India's MRO industry is expected to grow from US$ 800 million in 2018 to more than US$ 2.4 billion by 2028.

Indian airline companies will spend over 12-15% of their revenues on maintenance, the second-highest cost component after fuel.

The Government has envisaged making India a global MRO hub, handling nearly 90% of the MRO needs of Indian operators and obtaining around 20% of the MRO revenue from foreignregistered aircraft.

To achieve this, the Government has

The Government of India has launched NABH-Nirman Scheme, which is aimed at increasing India's airports' capacity.

According to various estimates, India will require investments worth Rs. 3 - 4 lakh crore (US - 62.06 million) to achieve a billion trips per year capacity.

3. Leverage on non-aeronautical revenues, improved technology Airport developers can now draw on wider revenue opportunities such as retail, advertising, and vehicle parking.

Future operators will benefit from greater operational efficiency due to satellite-based navigation systems like 'Project Gagan', which is in the development phase.

OUTLOOK

proposed various key steps, including setting up a high-power task force to

Indian airlines are scrambling to survive,

promote MRO, declaration of MRO and

with SpiceJet restructuring its fixed lease

component warehouses as free trade

costs and IndiGo laying off 10% of its

16

| SECTOR ANALYSIS workforce. Most airlines have sufficient short-term liquidity, but the long-term picture raises concerns. They will need to secure additional funding to survive the crisis and ramp up operations when demand increases. Support from the Government, monetary or otherwise, would also have a stabilizing effect on Indian carriers, as demonstrated in other countries.

Indian aviation will emerge out of this pandemic, but it is a long road ahead that could shake up every aspect of flying as we know it.

17

| COMPANY ANALYSIS

INTERGLOBE AVIATION LTD.

InterGlobe Enterprises, a prominent Indian corporation, has been bridging gaps between people and markets since 1989. Their unwavering dedication to this goal has helped them gain a strong foothold in businesses like civil aviation, hospitality, travel commerce, airline management, aircraft maintenance engineering, and advanced pilot training.

BUSINESS OVERVIEW InterGlobe Aviation is India's largest passenger airline operator, with a market share of 54% as of June 2021. The company operates its flights under the IndiGo brand.

IndiGo is a provider of low-cost airlines transportation services. It provides both passenger and cargo transportation. IndiGo is headquartered in Gurgaon, India, and operates its business in both domestic and foreign markets.

IndiGo connects people worldwide to a network of over 91 destinations with a fleet of 275 aircraft and increasing. It is one of the most dependable airlines globally, with a

Tanya Nayyar | MBA - D | 2020-22 Jitesh Patil | MBA - D | 2020-22 uniform fleet for each type of operation, high operational reliability, and awardwinning service.

IndiGo was named India's safest airline by the Safe Travel Barometer in FY 2021. It has taken all necessary precautions as mandated by the government and going above and beyond to ensure the safety of its passengers.

VALUES & PRINCIPLES IndiGo offers a simple, unbundled product to consumers, delivering on its single brand promise of providing air connectivity and affordable fares across Indian and international destinations, fostering trade, tourism, and mobility. Its mission is to build the world's best transportation system.

IndiGo

operates

under

a

set

of

fundamental values and guiding principles that include being on time, offering low

18

| COMPANY ANALYSIS fares, and being courteous and hassle-free.

These values are the bedrock of the company's vision, and IndiGo's steadfast dedication to them has resulted in a distinct "IndiGo" experience that sets them apart from the competition. They've become synonymous with affordability, punctuality, and reliability.

Being On-Time: Before IndiGo, airlines were mired in tardy and unpredictable schedules, causing great inconvenience to travelers. IndiGo took this as a priority challenge and made being on time a key service value. They emerged as the leading domestic airline in terms of “ontime performance” (OTP) and have been ranked No. 1, with an average OTP of 95.4%1 in FY 2021.

Lower Fares: IndiGo’s low-cost operating structure enables it to charge lower fares over other airlines. Their passionate cost-conscious approach to business means that every penny saved ultimately gives them greater ability to charge lower fares, ahus stimulating higher demand and saving travelers money.

Hassle-Free and Courteous Service: IndiGo has been instrumental in transforming the air travel experience in the domestic market – right from the experience of ticket booking to arrival at a destination. They are uncompromising in treating their customers with respect, honesty, and gratitude. IndiGo has also invested in cutting-edge technologies to make it easier for customers to book on

their mobile platforms.

BUSINESS SEGMENTS IndiGo provides both passenger and cargo transportation. The company also offers inflight catering services. It also provides preflight and post-flight ground handling services for both passenger and cargo transport. IndiGo offers various value-added services, including information and support for baggage, airport lounge, travel insurance, group bookings, online booking with special offers and discounts. It provides holiday packages to various destinations. The company also offers special assistance, including medical facilities, infant services, and help to disabled customers.

IndiGo began operations with a single aircraft in August 2006 and has grown to 285 aircraft as of March 31, 2021, comprising 123 A320 CEOs, 100 A320 NEOs, 25 ATRs, and 14 A321 NEOs. In FY2020, it flew to 86 destinations, including 62 domestic and 24 foreign, up from 68 destinations in FY2019.

CORPORATE GOVERNANCE At InterGlobe Aviation Limited, they focus on integrity, transparency, accountability, and ethics as the pillars of good corporate governance. They believe that all these are critical in successfully running your Company and reinforcing relationships with its stakeholders. Their corporate governance framework also ensures that they make timely disclosures and share accurate information about their financial and

19

| COMPANY ANALYSIS

operational performance with all the stakeholders. IndiGo has established systems and procedures to ensure that its Board is well informed and well equipped to fulfill its responsibilities.

The company’s Code of Conduct for Directors and Senior Management and the Code of Conduct for all employees extend their core values and reflect their commitment to ensure a good corporate governance framework and ensure ethical business practices across their operations.

IndiGo has a multi-tiered corporate governance structure, which includes the Board at the apex decision-making level to provide leadership and guidance and oversee the Company’s overall functioning and strategic supervision on behalf of all stakeholders. The Board guides the senior management, evaluates the Company’s strategic direction, management policies, and effectiveness, and ensures that the long-term interests of all stakeholders are being served.

Mutual Funds have decreased holdings from 3.35% to 2.6% on a Q-o-Q basis.

Mutual fund holdings have steadily declined from the inflection point of March 2020, where they had 7.91% of total shares.

21 MFs bought and 22 MFs sold InterGlobe Aviation Ltd. in Jul 2021 for a net change of 318,600 stocks. ICICI Prudential Flexicap Fund Regular Growth was the highest buyer of 438,320 shares in Jul 2021, constituting 0.11% of the company's paid-up equity.

Kotak Equity Arbitrage Fund Growth was the highest seller of 83,500 shares in Jul 2021, comprising 0.02% of the company's paid-up equity.

The Company’s Board has a combination of Executive, Non-Executive, and Independent Directors and represents an optimal mix of knowledge and experience to provide effective leadership for the business.

Source - Annual Report, Trendlyne

SHAREHOLDING PATTERN

FINANCIAL ANALYSIS

As of June 2021 Qtr, Promoters holding

The company's total revenue has reduced

remains unchanged at 74.84%. FII/FPI have

from 6361.8 INR cr to 3170.3 INR cr in June

increased holdings from 18.34% to 19.17% as

2021 qtr on a Q-o-Q basis. The company's operating profit has decreased from 551.5

20

| COMPANY ANALYSIS

INR cr to -1464.8 INR cr on June 2021 Q-o-Q basis. Operating profit negative indicates that even though the company's operating expenses have been reduced, the company has not been able to generate enough revenue to cover the reduced operating expenses.

Since

operating

profit

is

negative, no tax obligation is being levied on the company.

Source - Quarterly Report, Trendlyne RATIO ANALYSIS

Source - Annual Report, Trendlyne ROCE has reduced from 6.31 % in March 2020 to -15.23% in March 2021; this is because the company's net income is negative. EBIT margin has also reduced from 4.53 % in March 2020 to -25.10% in March 2021. The company's current ratio, which is current assets divided by current liabilities, has remained constant and

short-term borrowing or liabilities. The price to book value per share has skyrocketed from 7 in March 2020 to 599.5 in March 2021, mainly due to losses that have caused shareholders equity to reduce, but the effects have not been reflected in the market.

FUTURE OUTLOOK Daily cash burn rates remain elevated for Indigo due to losses and the inability to earn revenue that could cover expenses in a very competitive and commoditized market.

The risk of increased fuel prices remains a constant threat to Indigo and the whole aviation industry. Since covid restrictions have reduced considerably, the footfall at airports has increased, as travel trends do not have headwinds as substantial as they were in the previous year. One main reason for losses for Indigo has been the forex losses that are poised to increase in the foreseeable future by the current stage of the economy.

Indigo might turn around the situation by leveraging its strength of being a market leader in the Indian aviation industry, holding approximately a market share of 55%, which gives it a fair advantage to play on pricing and provide exceptional business-class services. Analysts remain positive on the stock in the long term, given the expansion of capacities, penetration into Tier 2-3 cities, focus on route optimization, and likely market share gains post-Covid era.

above its ideal value of 1, confirming that the firm has enough liquidity to cover its

21

| INTRIGUING INDEED

IPO FRENZY LITIGATION FINANCING INTRODUCTION

Shrishti Gupta | MBA -FS | 2020-22 Himanshu Sharma | MBA - IB | 2020-22

The sudden surge in the number of prospectus filings with SEBI to list and raise funds from the equity market comes on the back of strengthening benchmark indices, which are trading at an all-time high level and are likely to grow further following a declining trend in coronavirus cases and an uptick in economic activity going forward. An IPO is a big step for a company as it provides the company with access to raise a lot of money. This gives the company a greater ability to grow and expand. The increased transparency and share listing credibility can also be a factor in helping it obtain better terms when seeking borrowed funds as well.

Merchant bankers look to capitalize on the excess liquidity in the market, the rise in indices, and good investor sentiment. A bull market offers a high probability of listing gains, which is not only a big draw for many IPO investors but also leads to companies launching their issues.

The new economy is taking over fast. It will play a significant part in the growth of the economy over the next decade or so while the relevance of the old economy will fade out. Recent listings are crucial in that regard as they will help the market to take cognizance of emerging growth engines going ahead.

This isn't the first time that low-cost money is resulting in expensive equity valuations. In the past, bull markets, too, liquidity tailwinds have always been a big catalyst to boost equity returns. In the past bull markets, India has witnessed a peak of over 80 public issues, and the number drops when the sentiment mellows down.

A strong market means that a good company can command a higher valuation for its shares than in a subdued market environment. At the same time, even the not-so-good companies can see their issues sail through in a buoyant market.

HISTORY

22

| INTRIGUING INDEED The current rush of IPOs, FPOs, and OFS in the primary market is nothing but history repeating itself in tune with the current bull market rally.

Capitalism inevitably creates speculative bubbles in some asset class or another, and it creates a significant impact on society once it bursts. Economic history is replete with such examples: from the Tulip mania in the 17th century to the South Sea bubble a few decades later, the Great Depression in the 1930s, the Japanese real estate bubble in the late 1980s, the Asian financial crisis of 1997, the dot com bust in 2001 and the Global Financial crisis in 2008. One of the tricky things about bubbles, though, is that they become evident only in hindsight after they burst.

The historical understanding of the five stages of a bubble whilst it is being created should be looked into. First, a displacement is created in the market. This has been led by technology or interest rates in the past.

Second, the boom phase is typically led by the FOMO (Fear of missing out) syndrome, attracting new classes of investors, talking up markets by word of mouth, teleprinters, radio, and TV. Third, asset prices tend to skyrocket with new theories advanced for justifying dizzying valuations. In 1989 the Japanese real estate bubble saw Tokyo properties selling at $ 139k per sq ft and P/E ratios of 80 which were justified by pundits, analysts, and TV anchors of that era. Just 20 years ago, the internet- dot com bubble in 1999-2000 saw esoteric valuations at P/E of 200 in the US, a frenzy of IPOs by a

multitude of companies (457 at the peak in 1999 ) which went bankrupt by 2002. eToys, pets.com, webfan.com, globe.com are some examples of the $ 1.8 Trillion rout in 6 months from March 2000 when the bubble burst. Fourth, profit-booking by smart investors like BNP Paribas did in Aug 2007 - one full year before the housing mortgage crisis blew up in 2008. Finally, the panic stage arrives, where some events cause the bubbles to be pricked, followed by margin calls, stampedes to exit, and a collapse of asset prices. Generally, these events are the withdrawal of liquidity through raising the interest rate or change in sentiment due to macroeconomic events such as recession or defaults.

RECENT TRENDS Indian retail investors, too, have shown their excitement by subscribing to the IPOs for listing gains, making FY21's first-day gains the highest in at least three years. As much as 78% of total listings in FY21 have seen first-day gains, and this surreal shift towards primary issues has definitely been due to it being a bull market. It should, however, be noted that in times of such high spirits, even lower-grade issues tend to see higher subscriptions. The following table shows the listing gains/losses of IPOs recently listed in 2021:

23

| INTRIGUING INDEED and moving investment.

towards

direct

equity

REASONS As central banks remain accommodating with their monetary policy, high global liquidity across the world is one of the key factors driving this excitement around the IPOs. Due to this liquidity, the greater risk tolerance has ensured that even the lossmaking firms are getting a considerable number of bids from investors.

Another major factor is the rise of retail investors in the equity market. In India, investors with a shareholding of up to Rs. 2 lakhs in a publicly listed company are retail investors. Retail investors' exposure to NSE-listed companies reached an alltime high of 7.28% in June 2021, as per data compiled by Prime Database. It shows the willingness of individual investors to invest directly into the equity market rather than going through the mutual fund route.

While flows to direct equities have been rising, there was an M-o-M decline of Rs 495 crore in gross SIP contributions in February as per the Amfi data. This tepid response to SIPs and more inclination towards direct equities suggest a behavioural shift among retail investors, who are looking for higher returns by directly investing in cyclical stocks, commoditized bets, and real estate stocks. Surprisingly, contrary to the past bull markets,

retail

investors

are

slowly

redeeming from low return-generating funds

24

| INTRIGUING INDEED

The tech companies looking to go public have also got the eyes of the investors due to the heightened FOMO (fear of missing out) factor. Indian investors are looking for their own Google and Facebook in these new tech companies and wish to be a part of these by holding a stake in them. The Chinese government's action on the tech companies has also brought the worried global tech-investors into countries like India and Indonesia, leading to liquidity flowing into the Indian capital markets.

GLOBAL TRENDS This IPO frenzy is not limited to India but has taken over the markets across the world. As per an EY report, the global IPO volumes in Q1 and Q2 2021 rose 85% and 150%, respectively. At the same time, the proceeds rose 271% and 215% year-on-year in Q1 and Q2 2021, respectively. The first half of 2021 saw 1,070 IPOs globally with total proceeds of $222 billion.

Loose monetary policy and government stimulus, along with the vaccine rollout, have aided the US IPO markets. Despite resurgent waves of the pandemic, IPO activity in Asia-Pacific (1H 2021) remained stable as compared to last year, while the proceeds reached a 20-year high. At the same time, there is a solid year-on-year increase in IPO activity on European exchanges, as Europe accounted for ~21% of global IPOs in the first half of 2021.

In the US, the volume of IPOs in 2020 more than doubled from 2019 to 494, aggregating approximately $174 billion. While in the first half of 2021, in total, 218 IPOs raised $84.2 billion in proceeds. Forty-one unicorn companies went public during the first two quarters of 2021, compared to 27 unicorn listings in 2020.

Five of the top 10 global IPOs in 1H 2021 were launched in Greater Chinese exchanges, indicating rising business confidence, mainly due to improved corporate profitability, in China. Japan and South Korea also saw mega IPOs and increased IPO activity year on year.

As of now, a steady pipeline of more than $1 billion IPOs is expected for the second half of 2021. This includes SPACs, tech companies, and companies in attractive sectors like renewables, healthcare, and ecommerce. .

25

| INTRIGUING INDEED CONCLUSION IPO pipelines continue to grow across all major markets as investor confidence remains high for sectors that have prospered from the lockdowns. However, cross-border IPO traffic from China to the US market is expected to slow down due to regulatory issues on anti-trust and data security concerns.

Going forward, there are many factors that might impact the investor sentiments for IPOs. These include inflation and interest rates, liquidity, geopolitical developments, and regulatory changes. Investors need to be aware of all of these factors and must monitor them to see any change in sentiment.

26

| ENTREPRENEURSHIP INNOVATION

CRED INTRODUCTION Cred, the brainchild of serial Entrepreneur Kunal Shah is a three-year-old startup that was founded in 2018, and now it has entered the Unicorn Club of Startups with a market cap of more than $2.2 billion. Shah took two years to push the valuation of a credit card bill payments company to $800 million. The startup today has a workforce of 373 employees and is headquartered in Bangalore. This application-based startup enables the customers to pay their credit card bills using various payment methods such as net banking, UPI, online wallets, and debit cards. The customers also get reward points and various coupons with the payments done, which they can redeem at various other places.

BUSINESS MODEL CRED runs an application that rewards customers for paying their credit card bills on time and gives them access to a variety of additional services such as credit and a

Riya Agarwal | MBA - FS | 2020 - 22 Rohan Bhakkad | MBA - FS | 2020 - 22 premium list of products from high-end brands. By setting such a high bar, the startup says it guarantees that people are motivated to improve their financial behavior. CRED today serves more than 6 million customers, or about 22% of all credit card holders and 35% of all premium credit cardholders, in the world’s second-largest internet market.

Very few startups like CRED are focusing on the high-end base and have taken a platform-based approach to acquire customers now and look for monetization later. A credit card in India remains a desirable product. The under penetration would likely confirm continued strong growth in the near future. Over time, the form-factor may evolve, that is, move from plastic card to virtual card, but the inherent demand for credit is expected to grow.

27

| ENTREPRENEURSHIP INNOVATION “India has 57 million credit cards (versus 830 million debit cards) that largely serves the high-end market. . The credit card industry is mainly concentrated, with the top 4 banks (HDFC, SBI, ICICI, and Axis) capturing around 70% of the entire market. This space is extremely profitable for these banks as evident from the SBI Cards IPO,” according to the analysts at Bank of America. With the increase in the Credit card business and an ever-increasing number of credit cards being issued, this market is on the verge of being the next industry to watch out for

REWARDS AND ADVANTAGES A world of selective access: Every time people pay off their credit card dues using CRED, they receive CRED coins, which can be used to get exclusive access to rewards and experiences.

Through CRED Protect, they receive a category-based analysis of all their transactions. They can see if there are any hidden charges and also keep track of their credit limit.

Unique products and experiences: People also can content their refined taste with the CRED Store with an exclusive selection of products, brands, and experiences meant to refresh after a long day of work.

Rewarding and safe: Security always takes precedence at CRED. All data and transactions are encrypted.

Pay rent and enjoy longer credit: People can pay their rent with CRED RentPay to enjoy up to 45 days of the credit-free period. They can also use their CRED coins to receive cashback on the rent paid each month.

FUNDING AND INVESTORS

Never miss a due date: People can also set payment reminders so that due dates are not missed, and with instant settlements, one never has to wait for their payments to go through.

Take control: With a provision like CRED, people are in total control of their payments and their credit card.

The following are names of the investors that have invested in the idea of CRED:

28

| ENTREPRENEURSHIP INNOVATION Sequoia Capital, DST Global, General Catalyst, Coatue Management, Dragoneer Investment Group, Tiger Global Management, Ribbit Capital, Sofina, Tiger Global, Hillhouse Capital Group, Greenoaks Capital, Falcon Edge Capital, Sriram Krishnan, ru-Net, Jitendra Gupta, Haresh Chawla, Mukesh Bansal,Amit Mital, Akshay Kothari, Sequoia Capital India, Amrish Rau, RTP Global, Insight Partners, Sriharsha Majety, Rainmatter Capital, Nithin Kamath, Nami Zarringhalam, Gemini Investments, Alan Mamedi

edition, and as their official sponsors, CRED had a lot to offer.

Cashback: During the power-play overs of any Vivo IPL 2021 match, people could clear their credit card bills and have a chance to earn a 100% cashback. What was also fun was that they could also get featured in a live match telecast.

Jackpots: From 27th April to 3rd May 2021, CRED encouraged members to stay at home and be rewarded by participating in mega jackpots where they could win unmatched rewards from bitcoin to gold, Harley Davidson Fat Boys, TATA Safari car, complete home makeover, brand-new iPhones for a decade, free flights for five years.

MARKETING Marketing being one of the most important growth drivers for online application-based startups, CRED has a unique style of marketing, with the target audience being millennials. It has unconventional ways like promoting their application creating advertisements on the theme 'not everyone gets it' by hiring celebrities like Kumar Sanu, Alka Yagnik, Usha Uthup, Bappi Lahiri, which became a unique and identified idea in 2020. CRED was also the official partner for the Indian Premier League for the 2021

THE ULTIMATE CASH COW Lending is the best approach to make money, and Cred has begun testing that, too. Cred has channeled Cred Cash in collaboration with IDFC First Bank, where consumers receive a credit line, and the

29

| ENTREPRENEURSHIP INNOVATION interest rates offered are one-third of that of the credit cards. While that might sound low, credit card interest rates are enormous, and in terms of consumer loans, Cred offers credit at interest rates that are almost at par with the industry standard.

But what is essential is that while Cred has customers who have a solid credit score, the platform also has been tracking their bill payment pattern. It can boast of a decent set of borrowers whose chances of default are low. This can be a great growth prospect in terms of business revenue for Cred.

and experiences, along with focusing on safety and convenience. Also, CRED has become a part of the talks in India, partially because of the pace at which it has raised money recently, its growing valuation, and the fact that it only serves a set of the target audience.

Cred has a huge challenge to keep coming out with exciting products and features.

While its e-commerce scheme might have worked, Cred will need to partner with additional brands to provide attractive bargains to consumers. Moreover, it has to keep the brands satisfied with sales and

While this is a beginning for the credit business, the prospects continue to be great. Recently, Razor pay, which entered the unicorn club with a $100-million funding round, is understood to have driven investor interest with its neo-banking platform and not its core payment gateway business.

From Cred investors' point of view, they are looking at the future, and lending might emerge as a strong game there.

promotions, so they remain interested in the platform.

INTO THE FUTURE Data being the new oil of the 21st Century, Cred is a startup that is data-driven and based on the data collection and utilization with modern tools like Artificial intelligence and Machine Learning is going to be one of the prime beneficiaries of schemes like Digital India and will grow more and more as people start making credit card payments using the CRED app. Bill payment is a chore.

But an application like CRED is adding greater value to it with a bunch of rewards

30

| PERSON IN FOCUS

BILL ACKMAN PERSONAL LIFE William Albert Ackman was born on 11th May 1966 and raised in Ashkenazi Jewish descent in Chappaqua, New York, USA. He completed his graduation with a Bachelor of Arts magna cum laude in Social Studies from Harvard College. His thesis was “Scaling the Ivy Wall: The Jewish and Asian American Experience in Harvard Admissions”. Later, he completed his MBA from Harvard Business School in 1992. He is an American investor and hedge fund manager. He is the founder and CEO of Pershing Square Capital Management, a hedge fund management company. His investment approach makes him an activist investor.

PROFESSIONAL CAREER In 1992, Bill founded Gotham Partners, an investment firm with David P. Berkowitz, another Harvard graduate. The firm, though, made small investments in public limited companies.

Saurabh Kumar Dubey | MBA FS | 2020-22

A failure to bid for Rockefeller Center and Leucadia National, an insurance and real estate firm, created a buzz among the investors. Three years later, Gotham Partners could have USD 500 million in Assets Under Management (AUM).

In 2004, Mr. Ackman started Pershing Square Capital Management with USD 54 million investments, and in 2005, he bought a considerable value of shares in Wendy's International, a fast-food chain. He also put pressure on the people of the company to sell to Tim Hortons doughnut chain. The stock prices later collapsed as Bill sold his shares for a profit. His other investments include a 10 percent stake in Target Corporation and 38 percent in the Borders group.

In 2012, Pershing Square Holdings, a closedend fund, was launched by Pershing Square Capital. It was able to raise USD 3 billion in the stock markets. Mr. Ackman then bought

31

| PERSON IN FOCUS shares in the J.C. Penny, but after arguments with some board members, he left the position. In August 2013, Pershing Square Capital announced that they had hired Citigroup to liquidate 39.1 million shares. As of January 2015, LCH Investment declared Mr. Ackman as among the world's top 20 hedge fund managers. This accolade resulted from the gains made to the investors by Pershing Square Capital, which are around USD 4.5 billion.

INVESTMENTS STYLE A research published at the University of Oxford states that Mr. Ackman's investing style is paradigmatic of "engaged activism," a long-term strategy in correlation with the benefits of the real economy. The ace investor himself had said that his most successful investments are always controversial. And his first rule of activist investing is to "make a bold call that nobody believes in." His style of investment is both praised and criticized by the U.S govt. Officials, hedge fund managers, retail investors, and the general public.

his time, and hunkering down in the office to do research. As a result of these changes, his firm Pershing Square returned 58.1% in 2019, which Reuters says qualified as "one of the world's best-performing hedge funds" for 2019.

COVID-19 When the economies around the globe were suffering from the pandemic's havoc, Mr. Bill Ackman made fortunes out of it. He made USD 2.6 billion windfalls from a USD 27 million bet. He made fortunes through credit protections on investment-grade and high-yield bond indexes.

Source - Reuters Some of the notable mentions are his proxy fights with the Canadian Pacific Railways, shorting the MBIA's bonds during the financial crisis of 2007-08.

"Betting on Zero" is a documentary film that reported the efforts of Mr. Bill Ackman.

After a weak performance in 2015–2018, Ackman told investors in January 2018 that he would go back to basics by cutting staff, ending investor visits that were eating into

NET WORTH AND PHILANTHROPY As of 2021, the reported net worth of Mr. Bill Ackman is USD 1.6 billion, as per Forbes. His income comes directly from investing in the stock markets. The other side of this investor shows his empathy towards the needy ones. He contributed around USD 6.8 million to the Center for Jewish History. Another USD 1.1 million was

32

| PERSON IN FOCUS donated towards the Innocence Project by Mr. Ackman. Further, USD 1.1 million was donated to Centurion Ministries. He has also decided to donate 50 percent of his wealth towards charity.

LAST WORD Though not an active social media enthusiast, people who want to connect with Mr. Bill Ackman can reach out to him on Twitter. His Twitter handle is @BillAckman. He is not on Instagram or Facebook, as cleared by the investor himself.

33

| CALL FOR ARTICLES -WINNER

BAD BANK: A SOLUTION TO INDIA'S NPA PROBLEM OR A PREPOSTEROUS IDEA? Nitesh Goyal | Shri

Ram

College

INTRODUCTION

University of Delhi

Banks are considered to be one of the greatest drivers for boosting our economy, for they act as a catalyst in the economic activities and financial markets and perform the function of a linchpin between the surplus units, say, investors, by accepting their deposits and deficit units, say, borrowers by lending them. As long as they can maintain this see-saw appropriately, there is not an issue, but the problem arises when they are not able to recover the amount that they have lent, which in the banking parlance is termed as 'NonPerforming Asset.' It is responsible for huge losses for the bank and denigrates the very existence of the banking sector, insinuating an ominous burden on the balance sheets of the banks.

trend

The figures of NPAs in the Indian context have witnessed a surge in the last few years.

The given chart here explicitly shows the

of

rising

of

NPAs;

Commerce,

though

India

witnessed a modest decline in March 2019, some experts cite it due to the increased write-off of NPAs from the balance sheets.

And then comes the most minacious year of the century - 2020 bringing with itself a storm of violence for everyone, thus serving as a perfect blow for all the sectors concomitant

to

the

involvement

of

mankind, and the financial sector was at the forefront of all. The Reserve Bank of India, in its Financial Stability report published in the first quarter of this year, gauged the non-performing asset ratio to be 13.5% by September from 7.5% a year ago, for the Scheduled Commercial Banks and it may also soar up to 14.8% in the worst scenario. The statistics here are enough to corroborate the looming crisis in the banking sector of our country and the exigency to iron it out in a time-bound manner.

34

| CALL FOR ARTICLES -WINNER

Source: Times of India BAD BANK- A SILVER LINING In layman's words, a 'bad bank' can be defined as a bank that buys the bad (unrealizable) loans of the lenders and the financial institutions and ultimately realizes these bad assets over a period of time, thus helping the banks to clear their balance sheets. If we go about the positives of bad banks in resolving the NPA crisis in India, then it can be expected that bad banks can assist in making the banks free from the bad loans, thus cleaning their balance sheets. On transferring the stressed assets to bad banks, it will be generating 15% in cash and 85% in Sovereign Guarantee Security Receipts. As the recovery of bad loans demands commitment in terms of money and time, banks could then be focusing themselves on their core function and work. Moreover, the amount freed after selling the bad loans can be utilized to grant new loans, thus encouraging the banks to expand their lending activities.

OTHERS' EXPERIENCE The success of other countries in establishing

resolving the $1.4 billion bad loans of Mellon Bank, the successful feasibility of solution proposed by McKinsey to establish two bad banks to cope up with the Swedish Banking Crisis of 1992, the way out of the Finnish Banking Crisis of the 1990s, the establishment of Indonesian Bank Restructuring Agency( IBRA) to emerge out of the Asian Financial Crisis in 1997 and 1998, the implementation of the Crisis Asset Relief Program in the US after the financial crisis of 2008 proving it favorable in aiding its economy to get out of the crisis- all these instances are enough for India to not discouraging the bad banks as a viable solution to deal with the surging NPA crisis.

PROPOSAL In Budget 2021, the proposal to structure an Asset Reconstruction Company, which would collect the debt, and an Asset Management Company (AMC), which would act as a resolution manager, was put forward. Recently, India has stepped towards this direction by the coming up of National Asset Reconstruction Co. Ltd. or the so-called bad bank with a paid-up capital of Rs. 74,6 crores, according to filings with the Registrar of Companies (RoC). In fact, many experts are of the opinion that bad banks can help in releasing over 5 lakh crore NPA capital in the pandemic crisis, which is financially endangered due to bad loans.

the bad banks provides a positive impetus to our envisagement. Grant Street's success in

35

| CALL FOR ARTICLES -WINNER CHALLENGES AND THE CONCERNS But as simple and viable it sounds, the issue of Bad Bank is not immune to the various concerns and challenges it could pose. In the words of Raghuram Rajan, former RBI Governor, "I just saw this (bad bank idea) as shifting loans from one government pocket (the public sector banks) to another (the bad bank) and did not see how it would improve matters. Indeed, if the bad bank were in the public sector, the reluctance to act would merely be shifted to the bad bank", Rajan wrote in his book I Do What I Do. He also pointed out the threat of immorality risk where banks would be lending recklessly due to an escapist route available, thereby accentuating the already existing grave problem. Another concern is regarding the accumulation of capital for raising the bad bank in an already financially devastated economy due to the pandemic-induced circumstances. There is also an absence of a clear procedure to determine the value of the bad loan and the criterion and the parameters to consider for the classification of a bad loan which may create political challenges for the government.

As we know, it is the politicians and bureaucrats who are the vanguards of public sector banks, so there remains a larger issue of lack of professionalism in solving the problems by them.

Thus, we can conclude that the idea of Bad bank is good. Hence the broader reforms are required to deal with the challenges that are deeply embedded in our banking secretary, thus making them better. If we are able to overcome the challenges and the negatives as opined by the experts, in fact, Bad Bank can prove to be an optimum solution to the problem of the rising NPAs in our country.

THE WAY FORWARD Though the concerns posed by the various concerned experts cannot be side-lined, they have their own significance, but in this financially distressed environment, Bad Banks seem to be a prudent alternative. Keeping the bad banks as the last priority can be a wise decision. Efforts should be made to draw specific area-wise solutions at the first point.

36

| ALUMNI INSIGHTS

LIFE JOURNEY AT K J SOMAIYA Pratik Tirodkar | PGDM FS | FINSTREET Batch 2015 - 2017 Finstreet always brings back a lot of fond memories that I shared with my fellow team members. It has been 4 years since I passed out of SIMSR but the association with Finstreet is the one that is really for the keeps.

Being a student of the Financial Services batch, when the briefs for the committees were presented, I was quite sure I wanted to get into finstreet because of the range of exposure you got into the world of finance.

Be that by interacting with like-minded group members, participating in various events like SIFICO, Lock, Stock, and Trade, etc., or being a part of this enlightening publication called Finly.

Finstreet offered multiple avenues not just restricted to finance but also to develop other

facets

like

inter-personal

skills,

personality development among others. In my personal experience, all this gives you that incremental edge during the final

placements and I distinctly remember that everyone from our batch in finstreet ended up with good placements.

I would like to share a bit about my professional experience post my graduation from SIMSR. I have been working in an Investor relations consulting firm for the last 3.5 years and I am sure many would not be aware of the scope of work in an IR capacity. Let me walk you through the same.

In the past few years, IR has grown rapidly, and it is difficult to believe that it is not a significant function of corporations listed on the stock exchange. It provides substantial support for a company’s financing and is therefore directly involved in value creation.

As a 3rd party IR advisor, we cater to small and midcap companies listed on the stock exchange. Our primary responsibilities are although not restricted to

37

| ALUMNI INSIGHTS

·Fulfilling the regulatory demand to provide information based on the SEBI guidelines

This has provided me a great insight into the sharpest minds in the business and cultivate my own decision-making process.

Preparing and presenting the quarterly result documents like Investor Presentations, Press Release, Earnings Speech

I hope I have provided a brief insight into the IR field which is relatively niche as of now but with the advent of a higher degree of regulatory disclosure and information-hungry retail investors, the scope of work for IR looks to increase exponentially in the coming few years.

Tracking of industry-specific news updates, Peer results, providing business intelligence Communication with potential stakeholders

current

and

Arranging calls/meetings with existing majority shareholders Pitching the company to potential shareholders and Research analysts

Last but not least I would forever be thankful to our seniors from Finstreet like Lokesh, Tamoghna, and Mr. Pankaj Trivedi Sir, who were really passionate about the committee and were excellent references for us not only restricted to the committee but also during our curriculum and placement season.

Best of luck to the current finstreet team

Coordinating annual meetings

and you guys are doing a great job of carrying the legacy forward.

Marketing and Financial advisory Other integrated activities shareholding analysis etc

like

This current role has made me communicate directly with the CFO and management of the company to get their message across in our results material which is then published to the stock exchange. I have been witness to many discussions, wherein many veteran investors

and

analysts

question

the

management before deciding whether the company is worthy of investment or not.

38

ISSUE NO. 103, SEPTEMBER 2021

About Finstreet Finstreet, the finance committee of K J Somaiya Institute of Management aims at bridging the gap between industry and academic curriculum through effective delivery of knowledge-oriented sessions and events through a network of highly motivated members and renowned industry experts. Through the FINLY magazine, we focus on covering crucial topics for each month and giving our members a platform to express their views.

OUR UPCOMING EVENT

39