August 17, 2014 Volume 8
FinNiche
FinXpress
FinXpress Volume 8 Aug 17, 2014
From The Editorial FinGyaan Session
CONTENTS
From The Editorial In Focus: Impact of Argentina’s sovereign debt default Opinion: Indian EconomyThen and Now Term of the Week: ESOP Market This Week News Fun Corner
With the first encounter nearing between the Intellectual Professors and the Mighty young Managers, it is time to pull your socks and gear up with the weapons of knowledge and wisdom to conquer the battle. To sharpen the weapons, FinNiche– The Finance Club of IMT-G brings its most awaited session-FINGYAAN on Aug 19,2014. This week, the In Focus section talks about the most recent default which occurred two weeks back, when Argentina failed to make a payment on bonds issued as partial compensation to victims of its default in 2001. The Opinion talks as “Indian Economy-Then and Now” speaks about the growth of Indian Economy over the past 68 years and pushes us to enhance it further. The term of the week describes “ESOP” which stands for Employee Stock Options and the various incentives it provides for employees. The fact would benefit IMTians to earn the way Flipkart employees earned through the same. Club FinNiche welcomes any comments, suggestions or criticism regarding the magazine. Please do write to us and share your ideas. Happy Reading! Regards The Editorial Team Club FinNiche
Disclaimer: FinXpress takes no responsibility for the opinions expressed in the magazine. August 2014
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FinNiche
FINANCIAL KNOWLEDGE
Impact of Argentina’s sovereign debt default ------ By J.Sindhuja
Large financial events often have consequences that are not immediately appreciated. One such event was Argentina’s eighth time unlucky default which had huge impact on U.S taxpayers and investors worldwide.
London conference Secondly, global economic and political shocks can make it impossible for a government to service its debt. Obvious examples are the debt defaults by Latin American governments during the 1930s (due to a sharp fall in primary product prices) and the 1940s (collapse of international trade due to war).Third, the one which is being played out now in the euro zone, is public sector nationalization of private debts.
In December 2001, the government of Argentina initiated the largest sovereign debt default on record. It has suspended interest payments and principal repayments on 152 bond issues whose face value was more than $81 billion. After three Composition of Argentina’s debts years in 2005, it announced its plan to restructure these defaulted debts under unusually harsh terms, offering new bonds of net present value equaling to just 27 percent of those they had replaced, disowned all past due interest, and vowed to unilaterally cancel its obligations to any lenders rejecting these terms. When only three quarters of the lenders accepted the restructuring offer, the government formally repudiated the liabilities held by the holdouts. The most recent default occurred two Argentina debt held by foreign weeks back, when Argentina failed to make domestic a payment on bonds issued as partial compensation to victims of its default in 2001.
and
Why do countries default? This Argentine move demonstrates a general principle. Most sovereign debt defaults are not the result of mismanagement or wild spending by sitting governments. Two centuries of debt “refunding” shows that there would be at least three major motivations for defaulting on sovereign bonds, unrelated to excessive public spending. First, we find many scenarios where debts were repudiated because they were accumulated in dubious circumstances under previous governments. Argentina is an obvious example. One of the extreme examples is the cancelling of the external debt of the Federal Republic of Germany (holdover from the Nazi regime)at the 1953
August 2014
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FINANCIAL KNOWLEDGE
FinNiche
Impact of Argentina’s default:
modernization in the developing world, ultimately imposing considerably high costs The Argentine government’s actions had for many millions of people. enormous costs for everyone. Lenders in U.S, Europe and Latin America incurred The Argentine default and restructuring direct financial losses of almost $84 billion strategy discourages the financial and ($74 billion net of tax benefits). Moreover, technological transfers that drive this the default also impacted ordinary modernization process, and the U.S. taxpayers by generating indirect costs and government has a global responsibility to private shareholders that never held ensure that the Argentine approach does Argentine debt, and which exceeded the not become a new international standard. direct costs to the lenders. The American government also has a national responsibility to protect U.S. Figures show that holders of defaulted taxpayers and investors from losses created bonds in US incurred direct costs by the arbitrary actions of other amounting to $9 billion, including their governments both the multi-billion dollar defaulted interest payments, capital losses losses imposed by Argentina’s default and foregone investment returns. Those program and those which could follow if direct costs also lowered the taxes they other countries adopt Argentina’s strategy. ultimately paid to the U.S. and state governments, creating an indirect cost for Conclusion American taxpayers of some $2.6 billion. The imposition of enormous and Argentine default and restructuring unnecessary costs on investors, impacted its worldwide lenders by costing shareholders and taxpayers in the United them $74 billion and also generated States, Europe and Latin America was led additional indirect costs for taxpayers and by actions taken by the Argentine shareholders around the world of more government in late 2001 and early 2005 . If than $63 billion. The default and its Argentina’s leaders had heeded the aftermath also triggered three substantial International Monetary Fund and applied bailout packages from the International more discipline to their domestic fiscal and Monetary Fund (IMF), financed by monetary policies, the IMF would not have taxpayers in the member countries that suspended its emergency loans – and the contribute to the IMF’s funding. These default might have been avoided entirely, or payments put at risk another $4.0 billion at least it could have been considerably in funds contributed by U.S. taxpayers smaller. The direct costs for those lenders and $23.2 billion in funds provided by the and the indirect costs imposed would have taxpayers of all IMF contributing been much smaller, if the Argentine members. government had offered a restructuring The terms of the Argentine default plan that respected the norms of produced other, more subtle costs across international finance and provided an the global economy. It had adverse effects exchange that would have satisfied all of its on its economy. It reduced exports to lenders. Argentina, and its struggles over the terms of restructuring have claimed considerably high costs. Argentina‘s apparently successful harsh, take-it-or-leave-it approach to its lenders threatens to change the terms of international lending and ultimately reduce financial and technology transfers to developing nations. This could result in Argentina’s debt policies retarding
August 2014
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FinNiche
OPINION
Indian Economy: Then and Now —— By Abhinav Agarwal
This week on 15th August we celebrated our 68th Independence Day which was the fruit of relentless struggles of our forefathers for more than a century. Many brave men laid down their lives so that we could get an opportunity to live in an Independent India, an India with unending opportunities, an India with infinite possibilities and most importantly an India with people who dream.
economic history. Indian economy was finally liberalized from government control and opened itself for business from other countries to come and invest. Post liberalization period marked the end of license raj, reduction in interest rates and end of many public monopolies. Various big multinationals like Unilever, Proctor and Gamble, Citi Bank, etc. entered India, bringing brought along with them professional expertise. Growth rate exploded from 2003 to 2011, making India the preferred destination of various big businesses from other countries. Analysis:
The growth of our economy in the last 67 years can be gauged by the fact that Indian When the British left India, we were among GDP has grown to Rs. 57 lakh crore from a the poorest of nations the world over, but mere Rs. 2.7 Lakh crore. we have come a long way to being one of the “emerging superpowers” of the world. In an independent economy we started with socialist principles, but we are increasingly moving towards a free economy with some characters of a welfare state. The architects of our constitution relied on a five year agenda model, thus five year plans were made with focus on the most pressing need of the time. The focus of the first five year plan was on agriculture and the next one on industry, which led to the set up of One of the most important factor behind industries like Steel Authority of India Ltd this is the economic liberalization in 1991, and many more of national importance. which led to a huge influx of money into This was followed by the nationalization of India, and as can be seen from the above Indian Banks in 1969, when 14 top banks graph the exponential rise in the income of India including State Bank of India, were actually happened after the 1990’s. nationalized. But the following period of Emergency and political uncertainty in India led to a loss of confidence in the economy and thus money was hard to come by. This led to a crisis of payments situation, where India was not able to pay back the loans taken from world bank, prompting Dr. Manmohan Singh, the then finance minister to bring reforms, which are considered to be the turning point in Indian Brief History:
August 2014
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OPINION
FinNiche
In 1950, our economy was very stagnant India’s current account deficit has always and grew at very dismal rates of close to been a problem as India has traditionally zero percent. Almost 47% of our population imported more then it has exported. But lived under the poverty line, only 2% of the people were employed in manufacturing related activities and the biggest contributor to the GDP was agriculture. Now services is the biggest with 64.8% share in GDP and agriculture having 13.7% share. Considering, the food grain production in India, it has more than doubled from 1947
the growth of imports has been far higher then the growth of exports, widening the current account deficit to a record 4.8% of the GDP in 2014. Thus, as can be seen from the analysis, Indian economy has come a long way but there is still a lot to be done to call it a developed one. Various new reforms need to
to 2014 to a record 264 million ton. India’s foreign exchange reserve has also increased manifold to an astonishing $300
be undertaken and most importantly corruption needs to be eradicated so that these can have a long term impact. The recent general elections were fought on the plank of ‘Development’, which for an emerging economy like India is a great sign.
Billion from a mere $2 Billion after independence. This has given us a bigger cushion against external shocks such as the Dot Com crisis of 1998-99, US recession of 2007-08.
August 2014
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FinNiche
FINANCIAL KNOWLEDGE
ESOP: Employee Stock Option Employee Stock Options commonly known as ESOPs are a form of equity compensations granted by a company to its employees and executives as a part of their incentive or remuneration package.
Non-qualified stock options are the stock options for broad-based plans as they do not qualify for special treatment given to Incentive stock options. Generally, an employee owes no tax except the ordinary income tax when these options are granted to them. Ordinary Income tax is paid on the difference between the grant price and stock’s market value when he/she purchases the shares. And the company gets to deduct this difference as compensation expense. NSOs can be granted at a discount to the stock’s market value and are transferable to children and charities provided the company allows it.
ESOP gives an employee a right to buy certain number of shares in the company at a fixed price for a limited time duration as spelled out in the options agreement. The price at which options are offered to the employees is known as “grant” price, which is usually the market price of the stock at that time. Employees who have been granted stock options hope that share prices will go up and they will be able to capitalize on this market situation by Incentive stock options also known as selling those shares. “qualified” stock options as they qualify to receive special tax treatment. For an employee no Income tax is due at grant or exercise of the ISO. Rather, tax is deferred till one sells the stock. The entire option gain is taxed at long-term capital gain rates, provided one sells the stock at least two year after the option is granted and at least one year after he/she has purchased. A Company doesn’t get any tax benefit from granting ISOs. So, they are generally reserved as perks for top management employees who tend to benefit the company more than the employees in lower income brackets from gain tax treatment of ISOs. Unlike NSOs, ISOs cannot be granted at a discount to stock’s market value and are Companies can offer different types of plans non-transferable. to its employees depending upon what they want to get out of the offering. These plans In this world of business competition ESOP differ in their tax advantages and has become one of the ways to motivate and disadvantages offered to both the company retain your productive and loyal employees. issuing options and to the employees ESOP in Recent News: receiving them. Recently, About 400 of Flipkart employees, In general most of the ESOPs fall in one of who were granted Employee Stock Options the two categories: Non-qualified stock two years ago, have become crorepatis options (abbreviated as NSO or NQSO) or because of the valuation jump of the eIncentive stock options (abbreviated as tailer. ISO).
August 2014
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FinNiche
FINANCIAL KNOWLEDGE
Market This Week Markets got off to a positive start on Monday, recovering a portion of the losses in the last week. The trend followed and market again recovered on Tuesday. The market grew drastically on Wednesday when Mr. Dilip Shanghvi, founder and MD of Sun Pharmaceutical Industries announced his net worth of 17.2 billion. He tops the global rich list of individuals whose fortunes are based on the healthcare business. After this news, the price of stocks of healthcare business grew drastically which grew a boost to SENSEX. On Thursday, Indian conglomerate Adani Mining won state approval to build a 300 km rail line for $15 billion. As market is driven by sentiments, there was again rise in SENSEX.
BSE SENSEX
SENSEX Simple Moving Averages Thirty Days Fi y Days Hundred Days Two Hundred Days
26,271.85 26,271.85 26,271.85 26,271.85
CNX Nifty
August 2014
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FinNiche
FINANCIAL KNOWLEDGE Nifty Simple Moving Averages Thirty Days
7,830.60
Fi y Days
7,830.60
Hundred Days Two Hundred Days
7,830.60 7,830.60
Commodities Commodity
Unit
Rs / Unit
% Change
Gold
10 grams
28,278.00
‐2.69%
Silver
1 Kg
43,263.00
‐0.12%
Crude Oil
1 bbl
5,829
‐2.03%
Lending / Deposit Rates Base Rate
10.00% ‐ 10.25%
Savings Deposit Rate
4.00%
Term Deposit Rate
8.00% ‐ 9.05%
Key Policy Rates and Reserve Ratios Bank Rate Repo Rate
9.0% 8.0%
Reverse Repo Rate
7.0%
Cash Reserve Ra o Statutory Liquidity Ra o
4% 22%
Exchange Rates
August 2014
INR / 1 USD
61.05
INR / 1 Euro
81.55
INR / 100 Jap. YEN
59.55
INR / 1 Pound Sterling
101.83
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FinNiche
FINANCIAL KNOWLEDGE
News of The Week SpiceJet flies into Rs 124 crore quarterly Adani Power buys Lanco loss Udupi thermal power plant
Infratech’s
SpiceJet on Thursday reported a net loss of Rs 124.10 crore for the three months ended June, mainly bogged down by higher expenses. In the first quarter of current fiscal, the airline saw its total income from operations slide to Rs 1,691.04 crore from Rs 1,701.54 crore recorded in the same period a year ago. Besides, the company's expenses climbed to Rs 1,782.95 crore in the latest June quarter. In the comparable period, the same stood at Rs 1,641.93 crore.
Adani Power has acquired Lanco Infratech's 1,200 mw Udupi thermal power plant in a Rs 6,000-crore transaction, marking the second mega deal in two and-a-half weeks for the sector that is seeing a spurt of fundraising and M&A activity after being down in the dumps for years. Lanco Infratech, which has a market capitalisation of Rs 2,054 crore, said it will receive Rs 2,000 crore in cash and transfer debt of about Rs 4,000 crore to Adani.
Automated Teller Machines (ATMs) from the present five to three a month. It has also allowed banks to charge customers if they use their own bank ATM more than five times a month. New charges will apply for transactions done at ATMs located in six metro centres, namely, Mumbai, New Delhi, Chennai, Kolkata, Bengaluru and Hyderabad. The new norms will come into effect from November 1, 2014.
The stock price of Warren Buffett's Berkshire Hathaway topped $200,000 for the first time Thursday. Class A shares of Berkshire jumped past the milestone to an all-time trading high of $201,740 Thursday morning.
Adani pipped other bidders including Mumbai-based Sajjan Jindal in the RBI caps free usage of cross-bank ATMs acquisition of the Udupi plant, which runs to 3 a month on imported coal and sells 90% of the Reserve Bank of India has cut the number power to Karnataka and 10% to Punjab. of free transactions that savings bank customers can avail from other bank's Berkshire Hathaway stock tops $200,000
The shares have long been the mostexpensive U.S. stock. Buffett has never split Berkshire's A shares, although he did create more affordable Class B shares in Supreme Court grants jailed tycoon 1996 that now sell for just over $134. Earlier this month, the Omaha-based Subrata Roy more time to sell hotels company reported second-quarter profits of Jailed business tycoon Subrata Roy, $6.4 billion, or $3,889 per Class A share. negotiating sale of his luxury hotels from a makeshift office in prison, was granted a 15 India's forex reserves falls: RBI day extension from the Supreme Court to India's foreign exchange reserves fell to seal a deal and pay $1.6 billion to secure $319.35 billion as of August 8, compared bail. with $319.99 billion the week earlier. Roy, head of the Sahara conglomerate, was Changes in foreign currency assets, initially given 10 working days to Aug. 19 to expressed in dollar terms, include the effect talk to potential bidders for his three luxury of appreciation or depreciation of other hotels, including the Grosvenor House in currencies held in its reserves, the RBI said London and the New York Plaza. in its weekly statistical supplement.
August 2014
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FinNiche
FINANCIAL KNOWLEDGE
News of The Week Zensar buys solutions firm
e-commerce alarm throughout the 18-nation region, which is already bracing for the impact of sanctions imposed on and by Russia over Zensar Technologies Inc of the U.S., part of Ukraine. RPG Group’s Zensar Technologies, has entered into a definitive agreement with Germany, Europe's largest economy, Professional Access Inc of the U.S. to contracted by 0.2 percent in the quarter, acquire the latter for an unspecified undercutting Bundesbank forecasts that amount. Under the terms of the agreement, gross domestic product would be New York-based Professional Access will unchanged. Foreign trade and investment now be a wholly-owned subsidiary of were notable weak spots, the German Zensar Technologies Inc. The deal will be Statistics Office said on Thursday. financed by a combination of internal France fared little better; its GDP failed to accruals and debt, Zensar Technologies grow for the second quarter in a row. Italy, said. the euro zone's third-largest economy, slid back into recession for the third time since Professional Access’ founders Babu 2008 in the second quarter, shrinking by Venkatesh and Ashu Chahal will continue 0.2 percent. to manage the company. Their management team and all their associates based in Cisco to lay off 6,000 people Bangalore, Mumbai and Delhi-NCR will become a part of Zensar’s global delivery Networking solutions giant Cisco will lay off up to 6,000 employees globally, including organisation. India, after it reported a marginal decline in Jet Airways, Etihad Partner to Offer profits and revenues for the fourth quarter. Fliers Discounted Fares The reduction, which is about eight per cent of US-based firm's global workforce, Jet Airways and its strategic investment follows a similar move by the company last partner Etihad have offered discounts year when it announced plans to slash ranging from 20 per cent to 68 per cent to 4,000 jobs. fliers on regular fares over the combined network of the two airlines. People in the know of the development said that India would also be impacted by the This special offer would be available for sale lay-offs, as Cisco had a sizable workforce in from August 15 to August 19 for travel the region. Cisco, however did not comment between September 15 and September 30, on the impact on Indian operations. Jet Airways said in a release on Thursday. Attractive fares to all domestic and SEBI to re-examine MCX plea on MCX-SX international destinations of the carriers divestment have been rolled out on the eve of India's Capital markets regulator SEBI will take a 67th Independence Day, it said. relook at a fresh plea by Multi Commodity Euro-Zone GDP Fails to Grow in Second Exchange that it be exempted from Quarter divesting its holding in MCX-SX, sources have said. SEBI has asked MCX and FTIL, Euro zone economic growth ground to a to sell their holdings in the exchange. In halt in the second quarter as Germany's July, SEBI had rejected a similar request by economy shrank and France's stagnated. MCX. The zero growth reported by statistics agency Eurostat on Thursday was cause for
August 2014
U.S.-based
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FinNiche
FUN CORNER
FUN CORNER Last Week’s Answers
FinQuiz 1.
What is known as the cost of living index which represents the goods and services purchased by consumers?
2.
Parent company of Standard and poors ?
3.
FD in a commercial bank can be done for a maximum period of ?
4.
When you’re looking at a stock’s MA, what are you looking at?
5.
The most important and common form of dividend is?
1) Arbitrage 2)Monte Dei Pashi Di Siena 3) 1 4) Shareholder rights plan 5) Futures
CARTOONS
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Volume 8 Publisher: Indradeep Sen
August 2014
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