March 17th, 2017
The Bonus Stripping NPAs and large corporates
Enigma of Technology Adoption in MSME
The Big Elections 2017 CPEC and India
Glimpses of ICICI ‘Derivatives Specialist’ Workshop
EDITION XVI . 16
A FinNiche Initiative
EDITORIAL
- HRISHIKESH GULKOTWAR
“If you’re brave enough to say goodbye, life will reward you with a new hello.” – Paulo Coelho Last few days have been nothing short of breath-taking. From BJP sweeping away the victory in both Uttar Pradesh & Uttarakhand, TATA launching its out kit car TaMo RaceMO, Radio City IPO, to the senior FinNiche committee being formally announced. Life @ IMT is abuzz with the first year students busy prepping up for their project presentations, the IMT admin team busy with preparations for the convocation of 201517 batch. Club FinNiche wishes them best luck for their future and dearly awaits the new batch of fresh young minds ready to conquer the world. With this edition of FinXpress we have started accepting articles written by our colleagues and the best among them make it to the magazine. With this we leave you with our last edition of FinXpress and hope you have enjoyed reading our publications. We will be back in June post our summer internships and hand over the baton to the Junior FinNiche committee. We welcome any comment, suggestions or criticisms regarding the magazine, for the same do write to us at finniche.imt@gmail.com.
Happy reading! The Editorial Team Club FinNiche @ IMT Ghaziabad Facebook: https://www.facebook.com/FinIche/?fref=ts
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CONTENTS The Big Elections 2017
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Core Problem of NPAs is Large Corporates Sectors 4 CPEC and India
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Enigma of Technology Adoption in MSME 8 Being Taxed on Long Term Capital Gains, Try Bonus Stripping 12 Fin-Humour
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Market
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FinApp
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Did You Know
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The Team FinNiche
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Our FinXpress
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NATIONAL
THE BIG ELECTIONS 2017
- NIDHI KUMAR
Modi wave in Uttar Pradesh and Uttarakhand —— Congress in power in Punjab after 10 years —— AAP completely swept by the Saffron wave
BJP emerged victorious in Uttar Pradesh by a very huge margin - call it the 'Modi wave' or the 'saffron wave’. The BJP along with its alliances won 324 seats out of 403 in the state assembly, the biggest majority for any party in Uttar Pradesh since 1980. Even the Manipur results have been termed as historic as the party advanced from having no seats to a possibility of forming a government. Voters handed the Bharatiya Janata Party a three-fourths majority in India’s most populous state, Uttar Pradesh, and the neighboring state of Uttarakhand. In Punjab, however, the Congress to power after a gap of 10 years, with 77 of the 117 seats. In Goa and Manipur, Congress fell short of the halfway mark in both States. In Manipur, the Congress won 28 of the 60 seats, three short of a majority. BJP managed only 21 seats. The results were a virtual repeat of the BJP’s 2014 Lok Sabha performance, where the party had
won as many as 71 seats. The Aam Aadmi Party, which fancied its chances in Punjab, swept nothing – it was itself swept aside in the saffron wave. Soon after the U.P. results became known, Bahujan Samaj Party president Mayavati lashed out at what she claimed was the manipulation of Electronic Voting Machines. Ms. Mayawati demanded for an inquiry into EVM use and received support from outgoing U.P. Chief Minister and Samajwadi Party president Akhilesh Yadav. BJP's big win in state polls have in a way, revealed people’s endorsement of demonetization.
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Likely Effects of the Poll Results •
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The BJP has now emerged as the leading political party in India. BJP and allies have governments in at least 12 states. About 54% of the population in India is under saffron rule. Moreover, 63.6% of the country is under BJP and its allies. The assembly polls are likely to help in the swift and smooth rollout of the Goods and Services Tax which is the biggest tax reform in the history of Independent India and give a big boost to other such economic reforms.
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BJP's huge victory is likely to whet the appetite of investors and stock markets. The latter may see a bull run, at least in the near term. BJP and its allies are set to have a majority by mid-2018 in the Rajya Sabha. A majority in the Rajya Sabha will give the government confidence to go ahead with some contentious economic reforms, like in labor laws. The composition of the newly elected 5 assemblies will also impact the Presidential poll in a big way.
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NATIONAL
Core Problem of NPAs is Large Corporates Sectors
- KRISHANT KAUL
Challenging task for banks to deal with —— NPAs in the resolution of large debts and Steel Industry —— Performance of ARCs —— Special Purpose Vehicle Committee
According to Finance Minister Arun Jaitley, the rate of rise in bank’s non-performing assets has slowed down in the March quarter and the steel sector has started showing signs of improvement. The core problem of NPAs is with very large corporates, though few in numbers, which are predominantly in the steel, power, infrastructure and textile sectors. To deal with the NPAs of the banks is a challenging task even though the NPAs have shown a declining trend in the last quarter of the current financial year. Jaitley said some corporates have expanded their capacity during the boom period from 2003-2008, but could not face the onslaught of global financial crisis and consequent slow down thereafter. The government is taking sectoral specific measures to deal with the problem of NPAs specifically in the resolution of large debts, Steel Sector is on its path of recovery while many decisions have been taken in the infrastructure, power and textile Sectors to resolve their problems. The gross NPAs of public sector banks have risen from Rs 5.02 lakh crore at the end of March 2016 to Rs 6.06 lakh crore in December 2016. The members of Consultative Committee too gave various suggestions in order to deal with the NPAs of PSBs. Some Parliamentarians suggested that apart from recovery proceedings, criminal action must be taken against the big willful defaulters and their photographs may also be published. A member also
suggested that under the SARFAESI Act, the focus should be on catching big willful defaulters. Jaitley said the RBI has set up an Oversight Committee to look into process of the cases referred to it by the different banks. Seeing the response and its performance, the Government is considering multiplication of such committees. On the issue of setting-up a ‘bad bank’, Jaitley said that several possible alternatives exist and the issue is being debated on public platforms. The Finance Minister further said the Insolvency and Bankruptcy Board of India (IBBI) has already been set up under the Insolvency and Bankruptcy Code, 2016. During the meeting, members of Parliament was apprised of the various measures undertaken by the government and Reserve Bank to deal with the problem of NPAs. During the meeting, one member suggested that state governments may be allowed to take part in the auction of stressed assets. Some members also said that since Asset Reconstruction Companies (ARCs) are in private sector and their performance is not up to the mark in many cases, therefore, close monitoring of their operations be done through stringent regulations especially in the wake of decision to allow 100 per cent FDI in the ARCs through automatic route. Another member suggested that to improve the confidence of bank officials, the Gross NPA norm may be fixed in the range of 9-10 per cent as well as not counting the asset as NPA if it has been restructured.
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Some members suggested that the government must go ahead to establish Public Sector Asset Rehabilitation Agency (PARA) and it should only consider those NPAs where sector specific reforms do not work. Other suggestions given by the members included that a Special Bank may be created where NPAs of all the Public-Sector Banks be transferred. Young entrepreneurs who have taken soft loans from the banks but suffered due to slow down may be supported by the banks in order to revive their businesses.
It was also suggested by some members that there is a need to restore the confidence of the officers of the banks which have been off later adversely affected due to increasing NPAs. The MPs recommended measures be taken to comfort these officials and to enable them to take commercially viable and rational decisions. They suggested creating a Special Performance Vehicle (SPV) Committee outside the banking system to guide commercial decisions.
GLIMPSES OF ICICI DIRECT AND FINNICHE PRESENTING ‘DERIVATIVES SPECIALIST’ WORKSHOP
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INTERNATIONAL
CPEC and India
- RISHI SAXENA
Source: http://foreignpolicynews.org/2016/08/14/china-6-magical-economic-corridor/
CPEC and the benefits for China —— Pakistan running for its power shortage issue —— India’s apprehension towards CPEC
CHINA PAKISTAN ECONOMIC CORRIDOR (CPEC) is an under construction economic corridor between Pakistan and China. On 20 April 2015, Pakistan and China signed an agreement to commence work on the $46 billion agreement, which is roughly 20% of Pakistan's annual GDP, with approximately $28 billion worth of fast-tracked projects to be developed by the end of 2018. It aims to connect Gwadar port (Southwest Pakistan) to Xinjiang (Western China). Currently valued at 54 billion dollar, it is a collection of energy project, SEZs creation and various infrastructure projects. It became partly operational in November’ 2016 when a Chinese
cargo was shipped to Africa and West Asia from Gwadar Port in Pakistan. Benefits for China The major benefit for China is the reduction in distance to reach Africa and West Asia. Chinese officials describe the corridor as “One Belt, One Road”, which seeks to physically connect China to its markets in Asia, Europe and beyond. The second most important factor for China is the monitoring of Indian and American activities in Indian Ocean. China can deploy naval ships on Gwadar on the pretext of protecting its port and trade activities. Thirdly the western areas of China
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INTERNATIONAL
are yet to get benefit of development as compared to its coastal areas, hence it can be seen as a developmental factor for far off western areas of China. Fourthly the corridor will pass through PoK as will give China a chance to engulf India. Some 8,000 security personnel have already been set out to protect over 8,100 Chinese personnel working on 210 projects across Pakistan. Benefits to Pakistan Pakistan government views CPEC as a major game changer for themselves. The corridor will generate employment for 7 lakh people by 2030. The huge investment of around 34 billion dollar to power projects promises to produce 10,000 MW of electricity for Pakistan by year end. Currently Pakistan faces acute power shortage and this investment will bring major boost for electricity in Pakistan. Pakistan has proposed around 29 SEZs around corridor to promote export business inside Pakistan. The major reason for Pakistan is also getting a stronghold in the PoK region after China’s intervention as in case of border tensions with India, Pakistan can get military support from China easily.
via CPEC. Moreover CPEC passes through disputed region of PoK. In case of any crisis , the Chinese can easily enter PoK region. India and China are major competitors in West Asia and Africa region, so after CPEC India can lose a significant of market share to China. What can India do now? India has already hinted at reworking the Indus water treaty. Moreover India has signed a strategic pact with Iran for development of Chabahar port. Chabahar port is located in Southeastern Iran in the Gulf of Oman and has direct access to ocean. In a joint venture between the Jawaharlal Nehru Port Trust and the Kandla port, India will invest $85 million in developing 2 container berths with a length of 640 mts and 3 multi-cargo berths at Chabahar port. The port will make way for India to bypass Pakistan in transporting goods to Afghanistan using a sea-land route. At present, Pakistan does not allow India to transport through its territory to Afghanistan. It has, however, recently allowed some Afghan shipments to come to India. It can be used to station security vessels for merchant ships off the African coast apart from giving the country a foothold in the western Arabian Sea, which is important as many of its energy imports pass through the route.
India’s apprehension towards CPEC Pakistan has given most of the rights to use its Gwadar Port to China, by this way China will encircle India from three sides and in case of any crisis with India , China can easily send its troop Page 7
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ENIGMA OF TECHNOLOGY ADOPTION IN MSME
- DEVESH JAIN Sec E, PGDM-I
- AAKASH SINGHAL Sec E, PGDM-I
Micro, small and medium enterprises (MSMEs), defined by Ministry of MSMEs based on their investment in plant and machinery (for manufacturing firms) and investment in equipment for firms providing or rendering services, (Table 1), form the backbone of the Indian economy. They contribute a staggering 38% to the Indian GDP ($796 bn) by employing nearly 40% of the Indian work force, contributing 45% to the manufacturing output of the country and 40% to the exports from the country. This multi-million job generating industry is the growth engine of our economy and technology is the backbone of the modern business. Table 1: Classification of MSMEs*
Interestingly, 90% of MSMEs in India have no access to internet. There are only 42% such MSMEs in Arab States. In Europe & China numbers drop significantly to 26% & 22%, respectively, and the same drops to meagre 5% in USA. Thus, we can see that there is a significant gap that we need to bridge if we want our country to prosper .
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Furthermore, they are always cash strapped and have other priorities where they need to deploy their limited cash. This discourages them to explore or invest in technology. From MSME’s point of view, being able to take business decisions backed by technology, that is what the driver of technology for an MSME should be. It is important MSMEs understand that adoption of technology is very cost effective and efficient. At the same time, major challenge for the vendors is to provide a simple and user friendly, yet effective technological platform. "An all-in-one solution, like a dashboard which tells me about the overall health of my company comprising profits, defect rate, operational efficiency, inventory etc., is what I want" said a MSME entrepreneur from Rajnandgaon, Chattisgarh. A MSME entrepreneur doesn’t want a mere alert on his phone about the status of the day, rather he wants to adopt a technology which is helpful in providing him answer to questions like: What is my cost of production? Am I able to see my production at the end of the day not through SMS but through a tool? Am I able to see my profits for the day or on incremental basis? This is the high time for MSMEs to understand that spending on technology is not an expense, rather an investment which will help them in the long run. Equally important is the fact that they need a lot of hand holding because they don’t have the knowledge/skillset, in-house, to completely adopt change in technology. The major expense is not in acquiring the technology but in training employees about these new technologies, getting after-sales support from the vendor and the high attrition cost associated with a trained employee. That’s where these enterprises don’t estimate and don’t budget these in their cash flows, and regard any such expense as wastage of company funds. Also, myopic view rather than long term and sustainable approach, lack of working capital, lack of awareness about government initiatives, being cash strapped, all sum up as reasons for delay and hesitation in technology adoption by MSMEs. Although, there are many schemes & initiatives which have been started by Government of India and inculcated in the annual budget like: Performance & Credit Rating Scheme, Marketing Assistance Scheme, International Cooperation (IC) Scheme, MSME Talent/ Job Melas. But their awareness is very minimal or negligible in areas other than Tier I cities. Also, the government weighs all of the micro, small and medium enterprises in same scale. But different policies should be in place as a micro sized enterprise is quite different from a medium sized enterprise. Trade Receivables Discounting System (TReDS), which will help MSMEs raise capital quickly by transfer of their financial obligation to the market, is also one important area where the government needs to speed up the process of actual implementation. Presently, demonetization has also played its part for these enterprises. With sudden drop in the supply of cash, their supply chains have felt the tremors. The aggregate demand having plummeted after demonetization has even affected the players operating in white sphere of money because their buyers don’t have enough cash to pay for the product/ services. This has created a sudden compulsion for them to rethink their strategy in order to survive. They must now become the part of the banking system, digitize and fully declare their financials, if they want to survive in the long term.
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Moreover, the transition for the organized MSMEs (around 7% of total MSMEs) will be much sooner and smoother as compared to their unorganized counterpart (around 93% of total MSMEs). The unorganized portion of this crucial sector may feel more hiccups but digitization will benefit them in the long run. With digitization, they will be able to keep track of unaccounted transactions and streamline their processes and accounting. This will reduce their expenses, improve their credit appraisal and provide them access to a bigger credit market. Also, the recent reduction in MCLR (Marginal Cost Lending Rate) by banks will benefit them to avail credit at lower interest rates. This will also enable the financial inclusion of the labor community and hence, will lead to betterment of the society as a whole. But the current stringent labor laws prohibit any such inclusion where the small entrepreneurs are forced to get work done under tight conditions. Relaxation of these laws to certain extent is required to ensure proper compliance and hence, the inclusion of the labor community. Additionally, government schemes like Credit Linked Capital Subsidy Scheme (CLCSS) and Credit Guarantee Scheme (CGS) aim to provide the MSMEs with the fund needed for their technology upgradation. They focus on two fronts namely, Energy efficiency and Product Quality Certification. Moreover, the strengthening dollar might have its affects in the global market, but it certainly provides an opportunity for them to reap long term benefits in this global market. Upgradation of technology to achieve international standard and development of a sustainable business model is necessary if they want to take advantage of export opportunities. Important to realize is the fact that the Union Budget of 2017 will be quintessential for these MSMEs. The government should pay special heed to the following in the budget: 1.
Using technology for credit extension & lending rate: Currently under MSME Credit rating scheme parameters like Operational, Financial, Business and Management risks are considered whereas Technology Adoption by MSMEs is ignored. On the other end access to cheap Finance is perhaps one of the biggest pain points for MSMEs in India. Instead of providing MSMEs with loan at subsidized rates, the focus should be on credit rating based loans. This will also help to stop the ongoing practice of subsidized finance as for any economy too much subsidy is regarded as a bottleneck in growth. Inclusion of Technology Adoption as a factor in Credit Ratings
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Higher the Credit Rating Lower the Rate of Interest
Acts as an incentive for MSME to adopt and upgrade existing technology
Providing support in technology adoption: Due to financial constraints, generally, MSMEs neither have a technologically sound workforce nor can they afford any consultants who can advise them on technology adoption. Also, the technology vendors try to maximize their profits and impose whatever technology they have on MSMEs. Thus, it is an imperative for the government to facilitate technology adoption right from the beginning i.e. from buying to implementation. Singapore’s Technology Adoption Programme (TAP), which supports collaboration amongst public sector Page 10
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research institutes, private sector technology providers, Institutes of Higher learning, Trade Association and Chambers (TACs), and private sector system integrators, to identify and translate new technologies into Ready-to-Go (RTG) solutions, can be used as a guiding book. TACs can identify sectoral challenges and aggregate common technology needs amongst members and work with research partners to translate technologies into RTG solutions for SME adoption 3.
Ensuring a robust and safe platform for MSMEs: Cloud computing is a major advancement in the history of computing. It enables the organizations to deploy, operate and consume technology with greater agility and at a low cost. Cloud is flexible and the pay-as-you-go cost model which is scalable, affordable, and customizable. With superior technology comes the great responsibility to handle them carefully. According to CERT, about 32,323 websites were hacked in 2014 alone and number of reported cases of cyber-crimes increased by 350% from 2010 to 2016. Internet of Things (IoT) and Artificial Intelligence (AI) are responsible for the digital transformation of the modern SMEs, but in current scenario no significant steps are taken by Government as far as curbing cyber-crimes and strengthening cyber security is concerned. Expectations from Government in this budget would be to strengthen the current Information security structure and to educate the MSMEs about the same.
All things considered, this industry needs special attention from the government, hand holding by big private players and a change in their rigid thought process. The short-term pain and the long-term gain slogan reverberates nicely in their case.
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GUEST ARTICLE
Being Taxed on Long Term Capital Gains, Try Bonus Stripping - KASHISH THUKRAL SEC E, PGDM - I
We are all born ignorant, but one must work hard to remain stupid, is one the quotes by Benjamin Franklin. It stresses the importance of acquiring new information and making the most of opportunities. One such opportunity is to safeguard our financial interests. Protecting one’s investment is as difficult as earning it. Be it safeguarding from externalities such as theft or reducing the amount you need to give away as tax, there is no easy answer. Let us look at one of the ways to tackle the latter. Suppose you bought a property in year 2000-01 for a sum of INR 5, 00,000 and sold it 2015-16 for a sum of INR 1 Cr after paying brokerage and other charges amounting to be 10%. After taking the benefit of indexation, you are now sitting on a long term capital gain of INR 90,00,000 according to the government and need to pay a tax @ 20% i.e. INR 18,00,000. Who in their right mind would like to depart with their hard earned 18, 00,000 rupees? The most helpful thing might be to have a notional loss to reduce this tax burden. Suppose a Company, X, trading @100 Rs per share announces a bonus issues of 1:1. You buy 20000 shares at this price. You will receive an equal amount of shares. It will reduce the price of shares to 50 but your investment amount remains intact. The cost of acquiring bonus shares is zero. (See Table 1) Table 1 No of shares Price Buy 20000 Bonus 20000 Total 40000
Amount 100 2000000 0 0 50 2000000
So, now you sell the original 20,000 shares bought. The Income Tax recognizes FIFO method. This makes your cost of acquisition @100 per share. But since now the price has reduced to 50, you sell it half its value. Thereby incurring notional loss of INR 10, 00,000 (See Table 2). Page 12
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Legally you have incurred a profit of 90, 00,000 and your government a total of 8, 00,000 with respect to these two sets of transactions. Your tax burden is reduced. Then after waiting for a year you can sell the remaining shares @ 50 per share. There is still a problem, the price of the share might fluctuate. For this reason, it is advisable to hedge your investment in the derivative market. Table 2 No of shares Price Sell Original Shares 20000 Cost 20000 Notional loss
Amount 50 1000000 100 -2000000 -1000000
One might think about the cost of brokerage and premium to be paid on derivative. But even If you factor in all the costs, the tax savings you’ve earned is larger than what you will incur. This is known as bonus stripping. A note of caution, it is illegal for insiders to do it. Also, it comes under purview of section 94 of Income Tax Act, if one transacts in Mutual fund units. Sale and purchase of shares, does not come under the purview of section 94(8) of the Income Tax Act. If you are required to pay tax on long term capital gain, just a piece of advice, GAIL is to issue bonus shares sometime this month.
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FINHUMOUR - AFROZ I. HUSAIN
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MARKET - SAMARTH AGARWAL
The BJP’s landslide victory in the assembly elections cheered the domestic equity market with the Nifty50 index of NSE hitting an all-time high of 9,123 and the Sensex soaring over 600 points in morning trade on Tuesday amid firm capital inflows. However, market experts are having mixed reactions to the market rally, with some of them suggesting that the indices have begun to look expensive at current valuations with no trigger for earnings upgrade present. The election results have led to greater likelihood of the BJP returning to power in 2019. This can ensure the continuation of the current economic policies, but the fact is they have not led to a big positive impact on corporate earnings. The 30-share BSE Sensex was trading 482.25 points, or 1.67 per cent, higher at 29,428 around 12.10 pm (IST), whereas the 50-share NSE Nifty index was up 146 points, or 1.64 per cent, at 9,080.
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FINAPP - SRIKANT SINGH
FinMantra- Financial services & Payments • Platform- Android (2.2 & up) • Offered By- Fino Paytech Ltd. • Rating- 4 on Google play store • Downloads- 100 Mn customers worldwide • Download link- click here • The key features of this app are: • Money Transfer – Conduct Money Transfers for your customers through FINO Money wallet, NEFT and IMPS • Mobile TopUp — Conduct recharges for any network mobile number for your customers • Bill Payments — Pay Electricity, Water, Landline etc bills • Insurance - Pay Insurance Premium • Transactions — lets you see all your transactions at one place. About Company: Fino Paytech is a business and banking technology platform combined with extensive services delivery channel. Profitable since 2010, Fino PayTech crossed revenue of Rs 300 crore in FY16. It does around 80 to 85 million transactions and handles around Rs 8,000 crore in cash through its platform every year. It has enrolled over 50 million people with banks of which 28 million are active . The company has over 20,000 business correspondent points and 10,000 retail agents. Fino is no startup, it does not use fancy terms like cashbacks, weekend special offers or online marketplaces. It has 400 points for remittances and bill payments named Fino Mart across the nation which will be converted into bank branches. It also has 8,000 agents under Jan Dhan doing enrolments and already handles Rs 7,000-8,000 crore in cash annually. Fino has been in the business of rural payments for 10 years. Fino has done it all — starting with electronic benefit transfer in Andhra Pradesh in 2007-08 to issuing smart cards to beneficiaries under the Swasthya Bima Yojana, doing remittances for Union Bank for migrants in Mumbai from Uttar Pradesh. This company has grown through a feet-on-street model right from its inception. •
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DID YOU KNOW
- ADYA JHA
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India is the 19th largest exporter and the 10th largest importer in the world
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According to the Pew Research Centre, the median income of middle class American households has decreased from 2000 to 2016
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India is the second largest producer of farm output and the largest producer of milk, pulses and jute
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While more than 80% of all men in the U.S had jobs in 1950, only 65% of all men have jobs today
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The GDP of China is 19,758 times greater than the GDP of the island of Dominica , though the GDP per capita is roughly the same for the two nations
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India has the third largest road network in the world which covers more than 4.3 million kilometers in length
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Almost a quarter of the foreign-owned businesses in the United Kingdom are owned from or within the United States of America
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Indian Railways is the fourth largest railway network in the world with a track length of 114,500 km
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According to an estimate. About a half of American households spend more than they earn every month
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The total amount of student loan in the U.S has more than doubled over the past decade
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THE TEAM FINNICHE
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