FINLY February 2021

FINLY

FEBRUARY 2021 | Issue No. 98

Vodafone and Cairn Arbitration Case Intriguing Indeed

Sector Analysis

Eco Section

Vaccine Diplomacy

Agrochemical

European UnionChina Trade Deal

CONTENTS 01

02

EDI TO R I AL

TEAM F INL Y

03

08

C O VER ST O R Y

EC O SEC TIO N

Vodafone & Cairn Abitration Case

European UnionChina Trade Deal

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16

SEC TO R ANALY SIS

C O MPAN Y AN ALYSIS

Agrochemical Sector

Coromandel International

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24

INTR IGU ING IN DEED

G R EEN F I NANC E

Litigation Financing

Water Futures-Betting on the most essential commodity on Earth

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26

C ALL F O R AR T IC LES WI NN ER

Sudipta P Kashyap Christ University

C ALL F O R AR TIC LES R UN NER UP

Akshay Pai SCMHRD | 19-21

ISSUE NO. 98, FEBRUARY 2021

Dear Readers,

Editor's Note

At the end of the tunnel is light, and standing at the cusp of 2021, the future sure looks optimistic. The year certainly started on a positive note with India beginning its Covid vaccination drive on January 16 with priority given to an estimated three crore healthcare workers and the frontline workers. The benchmark BSE Sensex also achieved a remarkable milestone on January 21 by breaching the 50,000-mark for the first time ever. Across India, the new US President Joe Biden took office on January 20, 2021. The Joe Biden administration brings hope to democracies across the world, including India.

“Optimism is essential to achievement and it is also the foundation of courage and true progress”- Nicholas M. Butler. Taking inspiration from this profound quote, we at Finstreet are proud to unveil the 98th edition of our monthly magazine “Finly” for the academic year 2020-21.

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 we can’t thank them enough for their constant support and initiative.

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. We thank all the participants for their sincere efforts. This month’s winner and runner-up articles are a recommended read.

We are thankful to Prof. (Dr.) Pankaj Trivedi (Course 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!!!

Akshitaa Bahl |Editor-in-Chief| PGDM FS

Nilomee Savla |Editor-Finly| PGDM FS

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ISSUE NO. 98, FEBRUARY 2021

TEAM FINLY Faculty in-charge

Editor-in-chief

Editor - FINLY

Dr. (Prof) Pankaj Trivedi

Akshitaa Bahl

Nilomee Savla

Team Coordinator

Saheel Sirvoicar

Conceptualization & Design

Krisha Sanghvi

Srishti

Vaishnavi Badaya

Content Team

Akash Pawar

Anant Maske

Himanshu Sharma

Karishma Lalwani

Mohit Kansal

Nishi Kumari

Prakhar Gupta

Praneet Sisodiya

Rahul Devaram

Riya Shah

Sahil Mankotia

Saurabh Dubey

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| COVER STORY

VODAFONE AND CAIRN ARBITRATION CASE INTRODUCTION After Vodafone, India lost its case against Cairn also and suffered a double whammy at the Permanent Court of Arbitration at The Hague. The court ruled that the Indian government’s retrospective tax demand against the global oil and gas major was “inconsistent” with the UK-India bilateral treaty. Much like Vodafone, Cairn also challenged the government of India’s claim of tax demand based on the law’s government changed retrospectively. In both the cases, it was an embarrassment for the Government of India, so much so that the panel member nominated by India also ruled against India’s claims. Now, let’s dig a little deep to understand things comprehensively!

VODAFONE INTERNATION HOLDINGS VS. UNION OF INDIA Last year in September, the Indian government lost the high-profile international tax arbitration case against

Karishma Lalwani | MBA | 2020-22 Rahul Devaram | MBA | 2020-22 Vodafone. The international arbitration court ruled that the Government of India claiming ₹22,100 crores in taxes from telecom giant Vodafone using retrospective legislation, was in "breach of the guarantee of fair and equitable treatment" asserted under the bilateral investment protection pact between India and the Netherlands.

The tax dispute involving ₹12,000 crores in interest and ₹7,900 crores in penalties started with Vodafone's acquisition of Indian mobile assets from Hutchison Whampoa in 2007. Later, Indian government insisted that Vodafone should pay taxes on the $11B acquisition, which was challenged

by Vodafone at the Bombay High Court, which ruled in favour of the Income Tax Department of India. Interestingly this was overruled by the Supreme Court which asserted that Vodafone need not pay any taxes and asked the Income Tax Department to pay back ₹833 crores in taxes to Vodafone Idea.

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| COVER STORY The convoluted tussle took another turn in 2012. To prevent abuse and plug the loophole of such indirect transfer of Indian assets, the Government of India in 2012 amended the law which empowers the Income Tax Department to tax such deals retrospectively, making them effective from 1962. This put the onus of paying taxes back on Vodafone which the telecom giant contested at International arbitration court, Hague. It was a unanimous decision at the court and India lost the case against Vodafone. However, India may decide to challenge this decision at Singapore appellate tribunal. The matter has been discussed with Prime Minister Narendra Modi and there are high chances that the government may proceed with it.

leaving no stone unturned to realize the dream of making India a major supply chain and manufacturing hub.

So, the centre’s response is based on two points as it prepares to walk a tightrope. One view is, from a section of economic policy experts that the centre should not challenge the verdict and dig deep into the pit it already is in. They warn about possible wrong messages that would be going around the “Indian archaic tax regime” to the investors.

The other view is that the government should challenge this to reaffirm India’s right to tax.

Experts in favour of the challenge argue that it will set a precedent for similar cases in the future. Solicitor General Mr Tushar Mehta has already supported the move to appeal against the verdict.

CAIRY ENERGY PLC VS. UNION OF INDIA

The government thinks that a new challenge against the Arbitration court’s judgement in the Vodafone case should be a well chalked out plan. The key concern for the Narendra Modi led government is that these repeated challenges might send a wrong signal to the investors. The government does not want this to happen particularly when it is trying to woo the foreign investments into the country aggressively. Especially after the pandemic, which the government thinks has created an opportunity to attract foreign investments into the country; the Government of India is

Introduction: Nearly two months after the final verdict of Vodafone International Holdings vs. Union of India was passed by The Permanent Court of Arbitration at The Hague, the Government of India saw another setback when it lost to Cairn PLC in the arbitration case between the two on 24th December 2020 in the same court.

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| COVER STORY The case was on similar lines with the Vodafone arbitration case. The major reason behind the two arbitration cases was the Retrospective taxation imposed by the Indian government after they lost the case against Vodafone in the Supreme Court of India.

CASE DETAILS Facts of the case: The dispute took place between Income Tax Authorities of India and Cairn PLC.

In order to better understand the details of the case, the concept of this RetrospectiveTaxation needs to be understood first. Retrospective Taxation allows a country to pass a rule on taxing certain products, items or services and deals and charge companies from time behind the date on which the law is passed. This route is used by countries to correct any irregularities in their taxation policies that have, in the past, provided the companies with an opportunity to take advantage of such loopholes.

The subject matter of the case was a transaction between the Cairn UK Holdings Limited and Cairn India Limited regarding the transfer of shares of Cairn India Holdings from the former to the latter as a part of internal reorganization in 2006-07.

The Government of India (Ministry of Finance) amended Section 9 of Income-tax Act, 1961 vide Finance Act 2012 and imposed it retrospectively from 1962. The amendment says: “Shares or interest in any foreign company/entity shall be deemed to be situated in India if such shares or interest derives its substantial value from assets located in India. Any capital gain from the transfer of such shares or interest in a foreign company deriving its substantial value from assets located in India was brought under tax levy.”

The transaction took place in 2006-07 but the tax was imposed in 2012 as a result of retrospective taxation imposed by Government of India in Finance Act, 2012, post losing the Vodafone case in Supreme Court.

This amendment marked the beginning of the case Cairn Energy Public Limited Company (CPLC) Vs. Union of India.

ITAT announced the verdict in the verdict in favour of Income Tax Authorities and regarding the Delhi High Court, the case is still pending.

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The Income Tax Authorities of India considered it a transaction involving capital gains and imposed a tax of around ₹24,500 crores on Cairn UK Holdings Limited.

In addition to the tax amount, an interest amount was also levied upon Cairn UK Holdings Limited.

Aggrieved by such an order, Cairn group approached the Income Tax Appellate Tribunal (ITAT) and Delhi High Court.

| COVER STORY Subsequently, years later, the case reached in The Permanent Court of Arbitration at The Hague with the argument that the case was more of a tax-related investment dispute than a mere tax dispute.

a result of divesting, approx. 30% of its stake in the Subsidiaries and part of IPO proceeds, CUHL received approx. ₹6,101 crores.

Matter of the case: Internal Reorganisation of the Cairn Group Prior to August 2006, the Indian operations of the Cairn Group were handled by Cairn India Holdings Limited (CIHL).

CIHL was incorporated in Jersey in 2006 and was a wholly-owned subsidiary of Cairn UK Holdings Limited (CUHL). Cairn Group also has 9 subsidiaries in India which were wholly-owned subsidiaries of CIHL. As a part of their internal reorganization, CUHL transferred the whole issued capital of CIHL to a new company Cairn India Limited (CIL) which they incorporated in August 2006 in India. The consideration for this transaction was to be paid partly in cash and partly in shares of CIL.

Arguments Advanced by Cairn PLC: The retrospective taxation imposed by the Government of India was against the Right to Equality mentioned in the Indian Constitution. This unfair treatment is also a violation of the UK-India Bilateral Investment Treaty.

The transaction of transferring shares was a part of internal reorganization and did not involve any third party or the effect of the transfer of controlling interest. The transaction did not result in any wealth creation for the group.

The retrospective taxation was introduced in the Finance Act, 2012. Hence, the amount of interest demanded from the date of the transaction in 2006 to 2012 was invalid.

Arguments advanced Authorities:

CIL then divested 30.5% of its shareholding by way of an Initial Public Offering (“IPO”). As

by

Income

Tax

The amendment in the Finance Act, 2012

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| COVER STORY regarding the retrospective taxation was to clear the scope of the taxable transaction in case of capital gains tax and the transaction under dispute was always and is taxable in India.

Here, CUHL is a non-resident company and the transaction involved the transfer of shares of CIHL by CUHL. The shares of CIHL derive their substantial value from assets in India, so they will be considered to be belonging to India. Hence, the transfer of these shares is taxable by the Income Tax Authorities of India.

The Income Tax Authorities of India also distinguished this case from the Vodafone case by stating that the latter case involves the transfer of foreign shares between the two non-resident companies while the former case has taken place between a non-resident and a resident company. Hence, the two cases are not similar.

Ruling: On 24th December, 2020, The Permanent Court of Arbitration announced the verdict in favour of Cairn group stating that the Government of India has violated the clause of fair treatment of companies which they had agreed upon in the UK-India Bilateral Investment Treaty. The Government of India not only lost the case but also was imposed upon compensation of roughly ₹8,000 crores for the damages suffered by the Cairn group during the tenure of the entire dispute.

The Court also ordered the Government of India to remove the freeze that it had imposed on the shares and dividends of CIL at the time when they were being transferred to Vedanta Group barring the 9.8% stake of Cairn PLC. LESSONS FOR INDIA FROM THE SETBACKS India’s Parliament, executive and the judiciary should internalize India’s Bilateral Investment Treaties (BIT) and other International law obligations in their foreign investment doctrine.

They should be well versed with such laws so that when they exercise their public power in a manner that is consistent with International Tax laws.

This helps avoid such pitfalls.

For an emerging economy like India, the confidence of foreign investors is paramount and should frame laws and act accordingly.

India unilaterally terminated almost all of its BITs after foreign investors started suing India for allegedly breaching the terms of BITs. Obviously, this received mixed reactions from both domestic and international communities. But the matter of fact is that this Vodafone case, Cairn case and several other cases are simply a result of bad state regulation or lack of awareness of the bodies involved, which could have been avoided.

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| ECO SECTION

EUROPEAN UNION - CHINA TRADE DEAL INTRODUCTION

Praneet Sisodiya | MBA - A | 2020-22 Prakhar Gupta | MBA - A | 2020-22

When Jose Manuel Barroso, former president of the European Commission, and Herman Van Rompuy, former European Council president, visited Beijing in November 2013, hopes were high that an investment treaty with China could be reached within 30 months. Little did Barroso and Van Rompuy know, both of whom stepped down a year later, that it would take seven years and 35 rounds of negotiations to finalize a deal. The EU concluded its Comprehensive Agreement on Investment (CAI) with China on 31st December 2020. The European Union and China investment deal will ameliorate the level playing field for European investors, while Chinese companies will benefit from new openings in Europe. The EU has sealed its top priority in its trade relations with China. Brussels insists that the investment pact, which comes into force in early 2022, will settle enduring hurdles faced by European companies.

and China amounts to $1 billion a day, with China being the EU’s largest import source.

The EU is China’s second-largest trading partner after the US. The investment deal takes care of several of the EU’s grievances.

The EU’s companies are being forced to divulge important technological knowledge in exchange for being allowed to compete in the Chinese market. China has been inequitable in favoring the state-owned companies and the process of state subsidies is veiled to outside countries. European investors struggled to make foreign direct investments (FDI) in certain Chinese industries. Over the last 20 years, FDI from the EU to China reached a cumulative €140 billion, with Chinese FDI into the EU reaching €120 billion.

The level of bilateral FDI remains small, the EU claims, given the two massive markets' size and financial might. The deal is likely to improve these numbers. Disputes under the agreement will be solved in a state-to-state dispute settlement mechanism, which will be accompanied by a monitoring mechanism for pre-litigation phase issue solving at the political level.

IMPLICATIONS FOR THE EUROPEAN UNION The trade between the European Union (EU)

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| ECO SECTION The deal will allow EU companies to be more competitive without resorting to sharing technology and following other distortive practices. With China accounting for 30 percent of the current global growth, the EU companies believe that expanded access into that market will ensure a better EU economic performance. Some other additives for the EU include better access to markets, expunging barriers such as necessities for companies to enter into partnerships with local firms and quashing caps on the level of investment, Intellectual Property (IP) protection, and access to legal remedies in China. The bloc’s companies will get augmented access to manufacturing, the automotive industry, financial services, health, R&D of biological resources, telecommunications, computer services, international maritime transport, airtransport related services, business services, environmental services, and construction services.

In the sectors pertinent to the agreement, European businesses will enjoy more legal certainty and predictability. Equal access to standard-setting bodies will be granted for EU companies and they will be more robust and transparent on rules for regulatory purposes.

However, access to China’s energy sector has been left untouched in the agreement. The deal also puts the EU on the same pedestal as the US when it comes to operating in the Chinese financial services market.

Valdis Dombrovskis, the EU’s trade commissioner, admonished that the deal is not an elixir for all the issues that ail the

trade between the two. The trade deal is far narrower than comprehensive free trade agreements that the EU has signed with Japan, Canada, and the UK. Some issues that were not ironed out were overcapacity in steel production, unequal access to public procurement contracts, and trade in counterfeit goods. EU was also looking to settle broader impediments like China’s use of industrial subsidies, through reform of the World Trade Organization. EU insists that the deal can help other countries in being more assertive in trade with Beijing as the deal establishes a new reference point in how to seek assurances from China.

IMPLICATIONS FOR CHINA For China the deal is good diplomacy as the new US administration under President Biden has made it crystal clear that it would bring together all democracies to put pressure on Beijing over its human rights record and discriminatory trade practices. With China being cornered alone in the world due to it being the origin of Covid-19, the deal provides a little respite for President Xi Jinping. The deal locks in existing rights for Chinese companies in the EU market at a time when the EU is looking to expand its legal arsenal against unfair foreign competition. It also offers China new entry into the manufacturing sector and the rapidly growing renewable energy sector in Europe.

CRITICISM OF THE DEAL The agreement is likely to be controversial

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| ECO SECTION with human rights advocates, given allegations of abuses in China. It could also create friction with the incoming US administration of Joe Biden, who has made clear that he wants an alliance with the EU to bring joint pressure on Beijing over its aggressive trade practices. Over the past year, China has crushed the freedom of Hong Kong, intensified oppression in Xinjiang, killed Indian troops, threatened Taiwan, and sanctioned Australia. EU claims that its ubiquitous and inseparable human rights are the cornerstone of its relations with other countries. But the deal raises pressing concerns about China’s human rights record in dealing with Uighur Muslims in the western region of Xinjiang. It is estimated that more than a million Uighur Muslims are imprisoned in camps in Xinjiang, while those outside are subjected to forced labor, intense surveillance, religious restrictions, forced sterilizations, and changing the demography of the region. But the Chinese deny this by saying that the camps are mere vocational training centers. The bloc has said it has got unprecedented commitments from Beijing, including that China shall make continued and sustained efforts to ratify two International Labour Organization conventions against forced labor, but human rights advocates contend that this is not sufficient. What makes matters worst is that the French junior minister for trade said that the EU will not wait for Beijing to adopt a ban on forced labor before ratifying its investment agreement with China. Beijing’s commitments will be ratified, but not at the time of signing of the deal. These friction points will continue to linger till the deal is signed by the European Parliament.

IMPLICATIONS FOR INDIA The EU is India’s largest trading partner and in recent times India has been showing a proclivity of entering into a preferential trade agreement with the EU if not a free trade agreement. The signing of the investment deal would mean India will have to compete more with China and think about reassessing its relations with the EU. India will need to woo the EU more proactively and make its economy more prepossessing for the Europeans. Until New Delhi agrees to sign a comprehensive trade agreement with the EU, Europe’s primary focal point will be on the RCEP- integrated China, while India will languish behind. The deal will also make China more audacious in the Indian Ocean region with repeated forays of its navy where India is the current net security provider and thus impinging on India’s regional geopolitical clout.

CONCLUSION The EU-China investment deal underscores the prioritization of the EU’s short-term economic opportunities over any long-term

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| ECO SECTION strategy vis-à -vis a rising global power that is intent on challenging the tenets of the global order, which the EU is keen to preserve. So, human rights and liberal values are being ignored, and they are not being allowed to cloud the economic relations with China. The EU has demonstrated that it is nowhere close to emerging as a serious geopolitical player on the world stage. With Brussels’ innate lack of ability to think strategically, it should instead increase engagement with India.It can also be said that Beijing has emerged as the bigger winner as the deal is the most consequential agreement, geo-economically, geopolitically since the signing of its World Trade Organization Accession Protocol in 2001. The deal has given China a morale booster in challenging times for the CCP and reinforced their belief that democracies have no stomach for a long- term fight and the moment of economic weakness is too good an opportunity to leave. The deal also puts China in an invulnerable position and helps muffle the impact of America’s efforts to exclude it from global trade and investment.

In purely economic terms, European Union has emerged as the winner from the deal but geopolitically it is China who has taken the pole position and this will reinvigorate its belief to continue with its hegemonic tendencies in the Indo-Pacific region and globally.

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| SECTOR ANALYSIS

AGROCHEMICAL SECTOR OVERVIEW Agrochemicals are recognized as an important input for increasing agricultural production and preventing crop loss before and after harvesting. Indian agrochemical industry has contributed significantly towards increased agricultural output, improved public health, and plays an important role in achieving national food security. It is the onset of the agrochemicals era that transformed Indian agriculture from a food deficient to a food surplus country.

MARKET DEMOGRAPHICS

Sahil Mankhotia | MBA D | 2020 - 22 Akash Pawar | MBA IB | 2020 - 22 Agrochemicals is the largest sub-segment of the Indian specialty chemicals market. At USD 9.2 billion, it is the fourth largest agrochemical production market globally.

The segment has historically grown at 10.0% between 2014 and 2019. About 45% of India's agrochemical production is exported. While many large MNCs such as Bayer, BASF, and Syngenta operate in the Indian market, the market is dominated by Indian majors. 6 out of the top 10 companies in India are domestic players, and domestic companies account for 80% of the total agrochemical market in India.

In India, pests and diseases on average consume about 20-25% of the total food produced. According to the Department of Agriculture, India loses an agricultural product that costs â‚š1.48 lakh crores annually due to damage from pests, weeds, and plant diseases.

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| SECTOR ANALYSIS Agrochemicals are broadly classified as insecticides, herbicides, fungicides, rodenticides, bio-pesticides, and nematicides depending on the type of pest they control. Insecticides dominate the Indian plant protection market accounting for about 60 % of the market share. It is followed by herbicides (16 %), fungicides (18 %), and others (6 %). The Indian Agrochemical Industry has approximately 125 technical grade manufacturers, 800 registered formulas, more than 1,45,000 distributors, and 60 technical pesticides.

About 80% of the common and uncommon pesticides are made by large Indian production companies and international companies.

Paddy estimates the highest share (26% -28%) of pesticide use followed by cotton (18% -20%). Andhra Pradesh is a leading consumer of agrochemicals with a share of 24%. Eight states including Andhra Pradesh, Maharashtra, Punjab, Madhya Pradesh, Chhattisgarh, Gujarat, Tamil Nadu, and Haryana account for the use of more than 70% of agrochemicals in India.

SUPPLY AND DEMAND SCENARIO The current use of agrochemicals in the Indian market is very low and is 0.27 kg per hectare, which is far less as compared to developed countries like The United States where it is 4.58 kg per hectare. Low consumption of agrochemicals is a common cause of low yields per hectare of agricultural production in India.Production of agrochemicals has grown at CAGR 3.8% from FY15 to FY19. Despite the sizable growth of the industry, low-capacity utilization, high inventory (owing to seasonal & irregular demand on account of monsoons) and long credit periods to farmers remain key concerns, making operations ‘working capital’ intensive.

KEY MARKET TRENDS Make-in-India and import substitution: Indian agrochemical companies rely heavily on imports to meet their raw material and intermediate needs, with China accounting for about 50% of these imports. Indian companies are now looking to reduce their dependence on China and import imports

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| SECTOR ANALYSIS by producing important links in the region.

Leading agrochemical players in India, such as PI Industries and Rallis among others have announced greenfield production projects for manufacturing the intermediaries.

pesticides due to (a) rising farm labor costs, which have made the manual removal of weeds uneconomical, and (b) strong growth in horticulture cultivation activities, which involve higher adoption of herbicides and fungicides.

Domestic Use: The domestic use of pesticides is likely to increase due to increased farmers' awareness and government support. China's environmental degradation will reduce the number of local chemical enterprises from 6884 to no more than 2000 by 2020 and continue to reduce to only 1000 by 2022.

This indicates that China's chemical capacity will decline significantly.

Hence, agrochemical companies in India are expected to effectively increase capacity utilization in India.

GROWTH DRIVERS:

Increased focus on CRAMS: The new R&D molecule has become more complex and costly, enabling global developers to oversee research releases and strategic partnerships. India's low-cost manufacturing capabilities established track record in process chemistry and strong IPR protection policies have made India a preferred destination for global innovators looking to outsource their manufacturing operations.

Changing product mix: Unlike the rest of the world, the Indian agrochemical market has historically been dominated by pesticides. However, the growth of herbicides and fungicides is estimated to outweigh the growth of

The need to improve farm production to achieve food security: While India is home to 18% of the world's population, it has only 11% of the world's arable land. At the same time, Indian farm production continues to be very low as it shows an average yield of 0.6 kg/hectare in 2016 vis-Ă -vis 7.0 kg/hectare in the USA and 13.0 kg/hectare in China. With the growth of the population, the agricultural land for each Indian has declined in recent years, emphasizing the need to improve farm productivity. Agrochemicals play a very important role in improving farm productivity by preventing crop losses from weeds, insects, fungi, etc.

Increased farmer awareness and rising farm income: Efforts by the government and the private sector to address farmers' education and digital integration have made farmers aware of advanced crop management solutions.

Besides, the improvement in farmers' income combined with increased creditworthiness may lead to increased investment in agricultural products to improve farm productivity.

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| SECTOR ANALYSIS Export outlook: The ability of Indian manufacturers to supply low-cost products while meeting international quality requirements is likely to stimulate export growth in the agrochemicals sector. This coupled with a strong pipeline of agrochemicals worth USD 8 billion going offpatent, between 2020-2025, is likely to create a huge growth opportunity for the Indian agrochemicals industry.

KEY PLAYERS IN AGROCHEMICALS SECTOR The Indian agrochemical market is highly fragmented in nature with over 800 formulators. The competition is fierce with a large number of organized sector players and a significant share of spurious pesticides. The market has been witnessing mergers and acquisitions with large players buying out small manufacturers.

The agrochemical industry in India has a large number of domestic players. Most players have products in different price ranges, which caters to the demand of all segments, resulting in a large amount of revenue formation. There are a few players who are more focused on technical products and especially those who cater to export markets. Global giants such as Bayer, Syngenta, BASF, Dow DuPont, FMC are also well established in the domestic market. The top ten companies control almost 80% of the market share.

The market share of large players depends primarily on the product portfolio and the introduction of new molecules. Strategic alliances with competitors are common to reduce risks and serve a wider customer base.

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| COMPANY ANALYSIS

COROMANDEL INTERNATIONAL BACKGROUND Coromandel International Limited is an agrochemical manufacturer founded in 1961 and headquartered at Secunderabad, Telangana. The company is a part of the Murugappa Group founded by A. M. M Murugappa Chettiar in 1900. The company has a strong footprint across 81 countries for its crop protection chemical segment.

Additionally, the company has 16 integrated manufacturing facilities and 7 R&D laboratories in India. Coromandel is India’s second-largest phosphatic fertilizer producer and has a fertilizer manufacturing capacity of around 4.5 million tons. The company produces specialty nutrients, organic fertilizers, phosphatic fertilizers, crop protection chemicals, Biologicals, and is also involved in the retail business. The crop protection chemicals include insecticides, pesticides, fungicides, and herbicides. The company’s retail business is spread across Andhra Pradesh, Karnataka, Telangana, and Maharashtra with 750 rural retail outlets.

Anant Maske | MBA - IB | 2020-22 Himanshu Sharma | MBA - IB | 2020-22

CORPORATE GOVERNANCE The company puts in systematic efforts to eliminate the asymmetry of information between Executive and Non-Executive Directors. Transparency, Internal controls, risk management, internal and external communication, and product & service quality are some major elements of corporate governance.

There are 10 Directors on the board of which the Managing Director is the Executive Director. Of the 9 Non-Executive Directors, 5 are independent (one woman), and 4 are

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| COMPANY ANALYSIS

Non-independent.

All the material information is circulated to the directors, including the minimum information which must be made available legally. There are various committees, including the Risk Management Committee and CSR Committee, which take decisions according to their responsibilities. The Board of Directors ensures the Code of Conduct laid down by them is followed strictly. During the last 3 years, there have been no penalties imposed on the company by either the Stock Exchange or SEBI. Although in the year 2017-18, a penalty of Rs 2 lakhs was levied on Urvarak Limited, a merged company, to delay in making a disclosure under SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011. The penalty amount was paid in full.

SHAREHOLDING PATTERN

FINANCIAL ANALYSIS

RATIO ANALYSIS (CONSOLIDATED)

The Total Consolidated revenue of the company decreased slightly, around 0.64%, in the FY2020 as compared to FY2019. This was mainly due to a decrease in sales of the company in current financial year, which fell from 10,052.69 crores in FY19 to 9,839.77 crores in FY20. Other operating revenue also decreased around 30%, from 65.46 crores to 45.73 crores.Even though revenue decreased, the company increased PBT by 26% in FY20 as compared to FY19. This happened as the company decreased its operating expenses by nearly 3%, from 12,146 crores in FY 19 to 11,799 crores in FY20. Consolidated profit for the year for the company increased from 720 crores to 1065 crores in the FY20, approximately 48% increase.

Current Ratio The Current ratio (consolidated) of the company has increased to 1.45:1, for the FY20, from 1.24:1 last year. This was attained due to a sharp decrease in the current liabilities from 7,078 crores last year to 5,366 crore in FY20.

While the current assets only decreased

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| COMPANY ANALYSIS around 11%, from 8,753 crores to 7,794 crores. As the ideal ratio is 2:1, the company will be looking into bettering the ratio in the future.

Debt/Equity Ratio The company has a very low Debt to Equity ratio, which further decreased from 0.88 to 0.38. This shows that the company continues to be long-term debt-free and can finance its growth without taking large borrowings, which puts the company in a strong position financially.

Interest Coverage Ratio Here again, the company boasts of high multiples. The ICR for FY20 has increased to 6.86 from 5.45 in FY19. This increase in ICR implies that the company can pay its interest payments 6.86 times the operating profit. This is simply because the company is mainly debt-free and is also growing year-on-year in terms of revenue and profit.

Net Profit Margin The company’s Net Profit Margin grew to 8.1% in FY20, from 5.44% in FY19.

Although the revenue for FY20 remained relatively flat compared to the previous year, control of the operating expenses meant that the company was able to increase the profit for this year, which increased Net Profit Margin by 260 basis points compared to the previous year.

6.86 from 5.45 in FY19. This increase in ICR implies that the company can pay its interest payments 6.86 times the operating profit. This is because the company is mainly debt-free and is also growing yearon-year in terms of revenue and profit.

Net Profit Margin The company’s Net Profit Margin grew to 8.1% in FY20, from 5.44% in FY19. The revenue for FY20 remained relatively flat compared to the previous year, control of the operating expenses meant that the company was able to increase the profit for this year, which increased Net Profit Margin by 260 basis points compared to the previous year.

EPS The company’s EPS has increased consistently over the years, indicating its profitability over time. Along with this, there is an increase in the price of the stock, which is currently 4 times what it was on 1st April 2016.

Interest Coverage Ratio Here again, the company boasts of high multiples. The ICR for FY20 has increased to

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| COMPANY ANALYSIS IMPACT OF COVID-19 The Covid-19 pandemic has significantly impacted the business of the agrochemical industry in India. India’s government had declared agriculture and its affiliated industries under the essential commodities to maintain the supply of food and support the livelihood of farmers as well as other people in rural India. Additionally, the Ministry of Home Affairs had issued guidelines to exempt agrochemicals and fertilizer production and transport.

However, the companies involved in the manufacturing of agrochemicals and fertilizers faced many challenges in the initial period when the lockdown was imposed throughout the country. The labor shortage, transportation service for employees, and strict administrative checks had a negative impact on the efficiency of the company.

Post covid-19 pandemic, as the economies are getting back on track, the agrochemical industry is also expected to gain traction as the state and central governments support the companies to increase production capacities. China’s increasing focus on strengthening environmental laws for its chemical manufacturers and the Covid-19 pandemic has also shifted the world’s attention towards Indian players as an alternative to the Chinese chemicals and fertilizers.

FUTURE OUTLOOK The covid-19 pandemic has changed various things not only from the manufacturer’s point of view but also from the consumer’s point of view as well. Agri technology and digital penetration have increased significantly in rural India during the pandemic.

Additionally, India’s government is taking initiatives such as providing nutrient recommendations to the farmers by linking their soil health data to their farm records. Such initiatives will enable farmers to make wise and informed decisions about the purchase of nutrients or fertilizers. The Atmanirbhar Bharat initiative is also likely to boost the growth of the company’s business across India.

With the penetration of Jan Dhan, Aadhar, and Mobile, the agriculture sector is expected to shift towards smart agriculture.

The focus of the company on constant innovation and development of new products such as Groplus, and Grosmart is expected to aid the company in increasing its footprint in local as well as foreign markets in coming years. The inaugural of the Kaleshwaram lift irrigation project on the Godavari River in 2019, is expected to accelerate the agriculture activities in the northern part of Telangana. Owing to this, the company’s sales are expected to grow in the Telangana state in the coming years.

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| INTRIGUING INDEED

LITIGATION LITIGATIONFINANCING FINANCING INTRODUCTION: We want to live in a world where peace, equality, and justice prevails. But, these come with a price which is not affordable for all. Martin Luther King Junior has rightly said that “Injustice anywhere is a threat to justice everywhere�. Today, the global population has access to justice irrespective of the region or area. However, the availability of sufficient funds to gain access to that justice is still a significant barrier for a considerable percentage of the global population. To address this money problem, litigation financing or third-party financing came into existence. Litigation financing is based on a non-recourse type of funding wherein; the funding entity provides funds to the litigation party. In return, it expects a monetary reward if the litigation is successful. Litigation financing covers costs of the litigations in courts, commercial contracts, personal injury claims, international commercial arbitrage, insolvency proceedings, and antitrust proceedings, among others.

Mohit Kansal| MBA - FS | 2020-22 Nishi Kumari| MBA- FS | 2020-22

THE PROCESS OF LITIGATION FINANCING The process of litigation financing is very simple and clear to understand. The thirdparty financers include hedge funds, insurance companies, pension funds, and investment banks, among others. If the litigation is successful, the third-party financer recovers his/her costs incurred during the litigation and charges some additional money as its fee. If the claimant fails to win the litigation, the third-party financer walks with no reward, and this is the risk the financer has to take in the litigation financing. Return on investments in litigation financing can be around 4-5 times and even more in some cases.

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| INTRIGUING INDEED Additionally, returns on these investments are not significantly affected by external factors like fluctuations in stock markets or other economic factors. Among the key litigation, pf financers include the IMF Bentham, Burford Capital LLC, Vannin Capital, and Longford Capital Management.

EVOLUTION OF LITIGATION FINANCING: Since its early days, litigation financing has been used to fund the claim holders and gain monetary rewards out of the litigation.

However, like any other market, the litigation financing market is also expanding its range to expand its global footprint. Apart from the non-recourse funding and single case finance, litigation financiers are also involved in cases such as portfolio financing, defence side funding, and monetization of claims, among others.

financing is another segment where the litigation financers have their eyes on. In this type of funding, the fund providers invest in a set of claims which are litigated by a law firm or some individual. There is a lower risk involved in portfolio financing than a single claim financing as in portfolio financing; the risk is distributed amongst a set of claims that is not possible in the single claim with just two outputs.

Monetization of claims is another evolving type of litigation financing applicable in time-consuming cases where the financer provides funds to the claim holder to cover the claim holder's servicing debt, operating expense, and R&D among others. So, for the claim holder who has scarce resources to run the business, this type of funding will help keep the operations of its business running until the settlement is done.

INDIAN SCENARIO FINANCING:

The defence side financing involves financing the defendant where the defendant is sued for breach of contracts or agreement, disputes pertaining to ownership of companies, real estate, or other liquid assets.

The recovery of the money for the financers in such cases comes from the profits that the defendant earns from the assets for which the defendant was sued initially. Portfolio

FOR

LITIGATION

As rightly said by the honourable President of India, Shri. Ram Nath Kovind “India has acquired a reputation of an expensive legal system. In part, this is because of delays, but there is also a question of affordability of fees.” According to a 2015-16 survey, it was found that litigants spend on legal costs in lower courts alone was up to ₹ 30,000 crores.

Studies conducted by DAKSH, a civil society organization, revealed that the average cost (other than fees of lawyers) incurred by a litigant is ₹1,039 per case per day and the average cost incurred per day due to loss of pay/business is ₹1,746 per case. In such a situation, what options lay before people who cannot afford the triune expense of

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| INTRIGUING INDEED advocate fees, daily costs, loss of pay, and a possible additional pay-out in the event they lose their case? This upward graph of recent years' economic activities has led India to become one of the upcoming hubs for commercial arbitrations. India eventually would need a progressive and comprehensive legal framework that would support convenient dispute-resolution with minimal intervention and provide for maximum judicial support for arbitration.

In 1876, in Privy Council in Ram Coomar Coondoo v. Chando Canto Mookerjee (187677) 4 IA 23, Litigation Financing was permitted on the grounds of promoting access to justice. Though, it had been in India from way back in the 18th century and has always been allowed. As per Bloomberg reports, in a recent gathering of Indian legal professionals, more than 70% of the audience believed that litigation finance is prohibited under Indian Law, at a time when, its popularity has skyrocketed globally to the extent that litigation finance, as an asset class, has outperformed private equity, real estate, credit, and hedge funds, which is an alarming number and depicting the lack of development in this area of finance, litigation risk management, and class action suits in India.

CHALLENGES FOR LITIGATION FINANCING IN INDIA: A quick return on investment is what every investor seeks before investing in any product or asset. Looking at the Indian

litigation system, resolving litigation is a very time-consuming process. Other proceedings such as arbitration, which are usually completed in a short duration, are also stretched. The claimant has to approach courts and face bureaucratic red tapes before the execution. The investors also prefer lawyers to have a stake in the rewards from the claim to make more efforts to win the case. However, acting on a contingency basis is prohibited for lawyers in India, it restricts them from working for monetary rewards. Owing to this, there is a blurry image of the future of litigation financing in India.

FUTURE OF LITIGATION FINANCING: Litigation finance has witnessed appreciable growth in the recent past, but a significant number of entities possess the knowledge and awareness related to litigation funding and have not utilized it yet. Among the various factors expected to drive litigation financing in the coming years, one factor is huge capital entering markets which will ultimately provide more opportunities for fund providers to invest in litigation portfolios and complex cases. Countries like Hong Kong and Singapore have also opened their doors for funders to expand their litigation financing operations. In developed countries like the U.S, court decisions and regulations are now alleviating the concerns and fears related to ethics of causes of litigation financing which is a positive sign for the players involved in the litigation financing market. Additionally, the Covid-19 pandemic has affected various economies

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| INTRIGUING INDEED severely. Owing to this, the growth of many economies across the globe has slowed down. And as the economies slow down, the sources of capital in the country get affected significantly, which is expected to fuel the growth of litigation financing in the coming years.

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| GREEN FINANCE

WATER FUTURES : BETTING ON THE MOST ESSENTIAL COMMODITY ON EARTH INTRODUCTION:

Saurabh Kumar Dubey|MBA FS | 2020 - 22 Riya Shah | MBA B| 2020 - 22

On December 7th 2020, the Chicago Mercantile Exchange initiated trading water, similar to how it trades commodities such as gold, silver or oil. As reported by Bloomberg News, water futures tied to the Nasdaq Veles California Water Index, which measures the volumeweighted average price of water, began trading on the Chicago Mercantile Exchange with $1.1 billion in contracts in California.

areas under extreme water stress. According to the Food and Agriculture Organization (FAO), the annual amount of available freshwater resources per person had declined by more than 20 percent in the last twenty years. Two years ago, Nasdaq Veles California Water Index started measuring the volume-weighted average price of water and received two trades of January 2021 water contracts that went live on 7th December 2020.

WHAT PROMPTED THIS SCHEME?

HOW DOES IT WORK?

Climate change, drought, wildfire, pollution, population growth are some of the major reasons why this scheme saw the daylight. According to the United Nation, Global Water Institute, WWF over 2 billion people across the world face a high-water crisis while around 700 million fear of being displaced by intense water scarcity by 2030. Come 2040, over 600 million people will be forced to live in

Water futures allow buyers to fix a price on water resources they would use on a future date. In California, these prices are determined by betting among farmers, investors, and municipalities, through transparent pricing regulations in different regions. The contract safeguards the buyers who are commonly manufacturing industries, oil companies, and farming corporations, from financial risk arising out of higher water prices.

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| GREEN FINANCE option as it allows buyers to continue with their normal water usage without increasing any operating costs even as water becomes scarce.

HOW DOES THE MARKET WORK?

Buyers then purchase a contract at a price that reflects their expectations. This contract lets them purchase water at the contract price even in an event of a drought or water shortage. This is attractive as these water futures function as fixed-price water insurance contracts.

HOW IS IT DIFFERENT TRADABLE ITEMS?

FROM

OTHER

The index sets a week-by-week benchmark spot price of water rights in California, supported by the volume-weighted average of the exchange costs in the state's five biggest exchange markets. The prospects are monetarily settled, instead of requiring the actual conveyance. Agreements incorporate quarterly ones through 2022, with each speaking to 10 acres of water, equivalent to generally 3.26 million gallons.

HOW DOES THIS SCHEME HELP?

They are quite similar to other commodity futures such as gold futures or oil futures except in one significant way. Unlike other future contracts, water isn't delivered at the future date. Instead, the buyer is compensated with an amount that is equivalent to the current spot price of water.

WHY WAS THE DIFFERENCE NECESSARY? This alteration is made as the standard, set by the Chicago Exchange for each future contract represents 10-acre feet of water, which is enough to submerge an acre of land one foot high. Additionally, the cost of transportation involved in the actual delivery of water may outdo the amount saved by entering into the futures contract.

This makes financial settlement the best bet

Farmers all around the world face one common issue – Water shortage and unpredictable monsoons. In the present situation, if a farmer wants to know what water will cost in the upcoming six months, it's kind of his best guess. The future will allow him to know what is everybody's best guess, as stated by Patrick Wolf, Senior Manager and Head of Product Development at Nasdaq. The farmer will plant his proceedings accordingly.

WHO WILL BE BENEFITTED? The market will allow farmers, hedge funds, and local bodies (municipalities) to hedge bets on the future price of water and its availability in western America. Not to forget, California is recovering from an

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| GREEN FINANCE eight-year drought. According to the U.S. Drought Monitor in July 2014, a whopping 58% of California's land came under "exceptional drought" leading to crop failure and making the life of people and water's stakeholders more painful.

WATER FUTURES AND INDIA: When water futures were first announced, the California exchange market rose by 131%. This makes it fair to say water futures hold high economic prospects. In a waterscarce world, while countries with unregulated water futures market will pose as attractive, developing countries such as India characterized by a dense population will face immense pressure to sell the access of this ever-shrinking resource to its thirsty citizens on a priority basis.

In India, each state government has the legislative right over water resources in their territories. However, at present, there are numerous water-based government projects with private participation in India.

These projects range from construction to supplying contracts. While the legal framework prevents profit-driven privatization of water resources, the longterm contracts entered by the state government with private parties create vulnerability, which may lead to informal

control over water by the private sector. The Supreme Court of India on multiple occasions clarified on how the state government must justify the benefit to the general public by private involvement which acts as a form of protection. Moreover, contracts sustained via betting, as water futures are prohibited in India.

This does not rule out the possibility of developing water futures in India, especially taking into consideration the nation's recent movements such as the Environmental Impact Assessment amendment. However, it could prove to be dangerous in an event of improper implementation and poor regulations.

CRITICISMS: The new scheme as mentioned will not solve the problem of water scarcity but will surely help the stakeholders know the prices and make trading more transparent. The scheme is also being countered by experts stating that water, being a basic need for humanity, should not fall in the hands of financial institutions as a tradable commodity. Pedro Arrojo-Agudo, a UN expert on water and human rights said that one can’t put a value on the water as one does with other traded commodities as water belongs to all and the risk of trading water is that the large agricultural and industrial players and large-scale utilities are the ones who can buy, marginalizing and impacting the vulnerable sector of the economy such as small-scale farmers.

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| CALL FOR ARTICLES -WINNER

REVISITING THE CHILEAN CRISIS: A FAILURE OF THE BANKING SECTOR BACKGROUND

Sudipta P Kashyap | Christ (Deemed to be) University Bangalore

Chile which was considered as one of the countries with a better economic shape when compared to its other Latin American neighbours experienced an economic crisis during the year 1982. The military took over the government in the year 1973. The Chilean economy was still losing strength in the months that followed the coup. As the military itself was not skilled in bringing about a remedy for the persistent economic difficulties, the government appointed a group of Chilean economists educated in the United States at the University of Chicago and were named as the Chicago boys. They advocated laissez-faire, free-market, neoliberal, and fiscally conservative policies.

Chile was drastically transformed from an economy isolated from the remainder of the planet with zero external trade and with strong government intervention, into a liberalized, world-integrated economy, where the market forces were left free to guide most of the economic decisions.

First, we need to go back to the times on how it all began. The principle explanation behind the drop in savings from about 16 percent of GDP to 12.4% and a significant drop in the level of investment was the decision taken by the Chicago boys to remove the credit controls that had to been enforced to address the capital to production rather than pure consumption. This kind of freedom increased consumption in Chile’s middle class which was coupled with a large increase in the imports. The debtors did not realise the losses they would suffer due to the high interest rates on their borrowed money and the alternate to face their debts was to borrow more money. As the over lending increased, the debtors realised that they were facing an economic crisis but as there was also a nationwide crisis that was expected, the incentive to solve their economic problems was very low. The debtors assumed that there would be a typical Chilean inflation that would result in a negative real rate of interest.

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| CALL FOR ARTICLES -WINNER Here, it is also important to understand the relationship that existed between the debtors and creditors. In any normal financial system there is always transparency where both of them are reasonably well informed. The Chilean financial sector had two defects, firstly, under Pinochet’s rule, the authorities wished to conceal information and secondly, the lenders were to a large degree foreign bankers, with no sense of the non-transparent Chilean financial sector.

Therefore, all these factors led to a collapse of the country’s financial sector. Even during the crisis, most of the foreign credits were unaware that the people they were lending to were not creditworthy. The major effect was in 1981 when CRAV one of the largest privately owned banks was declared bankrupt. Soon by the end of 1981 financial institutions had a debt of 2.5 million dollars which was more than twice of the total amount they all possessed.

RECOVERY FROM THE CRISIS After the initial shock of the crisis had passed, Chile was able to go back and understand its economic situation. During the years after the crisis, Chile's government took up quick actions to implement major policy reforms and to restructure institutions through various government policies and programmes. This was in a very large part aided by huge amounts of lending from the World Bank which was in turn used to formulate and implement the policies and programmes. The World Bank granted loans to Chile to fund four targeted projects aimed

at rebuilding the nearly ruined Chilean financial system. These projects were essentially allocations of money to the different sectors of Chile's economy that could most benefitted by them. The World Bank's loans to Chile were designed to accomplish three similar aims and objectives, against which their success or failure could be measured, that is, in order to understand their impact.

First and foremost, of these objectives was to simply aid the Chilean government in dealing with a steadily worsening recession that was taking a serious toll on the financial wellbeing of the country therefore precisely it was to slowdown the recession.

Secondly, the Bank had observed Chile's recent struggles with failure in medium and long term financing and was hoping to improve the situation through intervention by the government itself. The World Bank further looked to provide the means for structural adjustments.

Through analysis of the four projects, it can be seen how difficult it is to structure and initiate an effective plan of recovery in the midst of a crisis, when the benefits of experience and hindsight are non-existent.

However, with each project important lessons were learnt as to the proper design of such undertakings, and as a result successive attempts were increasingly more successful.

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| CALL FOR ARTICLES -WINNER CONCLUSION In only one decade, Chile's banking system, and in fact its entire financial sector, was turned around from near bankruptcy into the success story of one the countries of Latin America. In fact, Chile has emerged as one of the most attractive capital markets to investors in the region and around the world.

The Chile of the 1990s has been a symbol of renewed economic hope and prosperity.

Chile has been consistently ahead of its neighbours with respect to GDP growth, according to statistics presented by Hans Rudolf, International Finances Coordinator in Chile, during an interview with the author.

Statistics show that this domestic saving is also leading to increased domestic investment-constructive investment in new facilities, which is creating more than enough capacity for Chile to grow in the future. The Chile of today is far more stable financial environment and promising outlook on the future than during the dark days of its debt crisis.

Investors worldwide recognize the opportunities that Chile can provide and have far more confidence in sending their funds to the once-troubled Latin American nation. Chile has moved beyond the repair and recovery phase and is poised to move onward and upward in the global marketplace.

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MODIGLIANI AND MILLER PROPOSITIONS: THE IRRELEVANCE IT TAKES TO MAKE FINANCIAL DECISIONS IRRELEVANT INTRODUCTION

Akshay Pai |2019-21| SCHMRD

It was in 1958 that professors Franco Modigliani of MIT and Merton Miller of University of Chicago published their paradigm-shifting paper in the June issue of the American Economic Review. Innocently titled “The Cost of Capital, Corporate Finance, and the Theory of Investment” the paper went about knocking down prevalent financial wisdom for decades after publication. Like an explosive revelation, the theory singed decades of conventionally accepted practices with its ‘irrelevance propositions’. In the succinct 30-page article detailing their work, the two professors elaborated transformational new ways of reforming the conventional corporate finance approach that earned them a well-deserved Nobel prize in Economics. Though the Nobel Prize is never disputed, the theory has had its fair share of critics, with most of the criticisms being centred around the lack of practical applications of the theory, which requires far too many assumptions to be grounded in appreciable reality.

This arcane (for most management graduates) theory which is a mystery shrouded in an enigma wrapped in a puzzle for finance novices can be brought down from its lofty perch in economics to the practicalities of Dalal Street and everyday life by concentrating on what the theory is, why it matters and how knowing about it can impact you.

WHAT IS M&M THEORY? The revolutionary theory peddles the astounding supposition that under the right assumptions - financing decisions are irrelevant, cash management is unimportant, capital structuring is unheeded by the market, dividend policy is immaterial, financial risk management is peripheral at best, shareholding patterns don’t hold any importance and last but not the least, diversification is not a business necessity.

The theory achieves this impact through two

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| CALL FOR ARTICLES -RUNNER UP enigmatic propositions which are deceptively simple at first glance.

Proposition I: Under the right assumptions, the firm's total market value is independent of its capital structure that is to say - the market value is independent of the percentage of debt or equity in its capital structure. The proposition stresses that the value of the firm is determined only by the left half of the balance sheet (composition of assets) rather than the right half of the balance sheet (composition of equity and debt).

Proposition II: Under the right assumptions, the firm’s cost of equity increases in proportion to its debt-equity ratio. Greater the presence of debt in the capital structure, greater would be the expected rate of return expected and demanded by the equity holders.

WHAT REAL WORLD APPLICATIONS DOES THE THEORY HAVE? The reason why these propositions were so revolutionary is that they went against the core tenets of Wall-Street in the 1960s, which was maximising returns. Firms used (and still use) leverage to maximise shareholder returns by adjusting debt levels providing financial and operating flexibilities. M&M propositions proposed that in an idealised world (the real world for economists!) leveraging debt will not work miracles, the ideal capital structure would be one which best bolsters the operational parameters of the enterprise, and not the one which would supposedly provide best return to investors.

The theory proposes total market value for levered and unlevered companies remain the same given a level of risk and operations and firmly puts the onus of value creation on the company’s operations and not on its finances.

The theory is controversial because like most economic theories out there it is based on a multitude of assumptions, most of which involve conditions difficult to create or maintain in actual financial markets. The assumptions involved in the theory are – information is symmetric, markets are frictionless and efficient, investors are rational, cashflow remains unimpacted by financial policies (no bankruptcy), there is no taxation (corrected in a later version of the theory).

These assumptions led to ageneration of scholars investigating the theory, some tried to improve it by bringing it down from the ivory tower and lofty ideals of economics to the metric-driven world of Wall Street.

Critics have chosen the following three avenues of attack to negate the theory’s importance – the tax shield effect, the agency and bankruptcy cost debates, and the fact that information by its very nature is asymmetrical. Modigliani and Miller accepted the tax shield deficiency in their original work and modified the theory to account for corporate taxation. The other two critical points while not directly addressed in the theory, only exist as sore issues because the financial markets don’t function the way they are supposed to function, the blame for market and regulation inefficiencies can hardly be passed on to Modigliani and Miller.

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| CALL FOR ARTICLES -RUNNER UP WHY DO MBA GRADS AND FUTURE CXOs NEED TO KNOW ABOUT M&M THEORY? Modigliani and Miller’s theory brings the balance sheet from out of the boardroom and onto the production floor, by positing the company’s value creation to be a function of its operations rather than its financial structuring.

In professor Modigliani’s own words, the best thing the theory did was teach future generations of CXOs that the prevalent concept of management existing to maximize profit or shareholder returns could be wrong, instead they could aim to maximize the market value of the firm by running it better, which is after all what the market likes. M&M Theory has had a second coming with the rise of ESG considerations in funding and financing that has taken place in the last decade. The assumptions involved in the two propositions lead critics to question the base practicality of the theory, however the theory that proves pretty much everything else irrelevant, holds its relevance even after half a century of scrutiny and scepticism.

The M&M theory also offers another parallel to Andrew Sheng’s famous quote regarding financial engineering and real engineering in the cult classic ‘The Inside Job’ – “Why should a Financial Engineer be paid 4 to 100 times as much as a Real Engineer, the Real Engineer builds bridges while the Financial Engineer builds dreams… and when those dreams turn out to he a nightmares, other people will pay for it.”

The M&M Theory helps put to bed the ageold question - Is it Financial Management that creates value to the firm, or is it the Engineering line and staff that create value, which is then maximised by the Management’s decisions.

The starry-eyed MBA students of today (like the author) will be joining the workforce in the post Covid pandemic era, with markets all over the world facing the most desolate and darkest of all depressions in history. This will inevitably lead to a tightening of purses and credit may well be made available on the basis of salt of the earth numbers like operational returns and asset valuations rather than glossy figures on the right half of the balance sheet and easy to manipulate financial metrics.

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