August 3, 2014 Volume 6
FII Conflict in WTO
Amazon vs Flipkart
FinNiche
FinXpress
FinXpress Volume 6 Aug 03, 2014
From The Editorial Time for Survivor 6.0
CONTENTS
From The Editorial In Focus: Crisis in Geneva Opinion: Flipkart Vs Amazon Term of the Week: FII Market This Week
With the first term approaching towards its end and the new batch finally getting imbibed to the IMT culture, with sleepless nights and all the quizzes and presentations lined up, we bring to you yet another illuminating edition of FinXpress. This week, the In Focus section talks about the WTO crisis in Geneva and why the countries could not reach on a consensus on the subsidies issue. The Opinion makes a critical analysis of the ongoing rivalry between Amazon and Flipkart and the resultant benefit that the consumers will enjoy because of it.
News Fun Corner
The term of the week describes "FII", a term most common in using foreign financing. Do have a look at the Market and News section to bring yourself up to speed with market volatility and the reasons behind it. Stay tuned for our ice-breaker event, Survivor 6.0 which is just round the corner, on 3rd and 4th of August, 2014. 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. AUG 2014
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FinNiche
FINANCIAL KNOWLEDGE
Crisis in Geneva ------ By Arijit Samaddar
Currently power corridors around the globe are talking about India. In justconcluded WTO meeting in Geneva India’s firm stand blocked the implementation of global trade facilitation deal. Is it a watershed moment for India? To find answer to this question we have to delve into different aspects of the story. Need of Global Trade facilitation deal: Though we often talk about ‘Global Village’, cross-border trade is still a prime issue of concern. Pundits around the world agree on the point that greater liberalisation of trade by minimizing tariffs and easing flow of goods and services among nations is the need of the hour. Instead of creating gamut of bilateral or regional trade pacts (RTAs) this deal could have provided a uniform platform for all countries. Analysts figured out that by this liberalization procedure $ 1 tn could have been pumped into the global economy which would have created astounding 21 million jobs around the world. WTO members have been striving to hammer out the agreement since 2001. But the process once again stumbled.
WTO—Tough ride: Since the formation of WTO just-ended Geneva summit was the only opportunity to strike a deal for grand global trade reform. In Doha Summit this thought was initiated. Last year’s Bali meet faced a great hindrance from India. After attaching peace clause that India can continue with AUG 2014
its food subsidy program the summit ended on the point that in next meet at Geneva execution of Trade Facilitating Agreement (TFA) will be finalized. Points of Conflict:
In Geneva meet India was at cynosure. India did not budge from its stand that along with Trade facilitation agreement permanent deal needs to be ensured regarding subsidised food stockpiling. Presently WTO norms limit the value of food subsidies at 10 percent of total value of food grain production. The point of contention is the valuation of food grain as WTO uses two decades old price range. Last year India launched vast food security programme according to which two third of its citizens are entitled to receive subsidised food grains. As per existing WTO norm the food security scheme is at a serious threat. India wants to restructure food valuation that means changing the base year. Aftermath of India’s stand: India’s such rigidity drew harsh flak from various countries led by US and EU. Many economists termed India’s move as ‘hostage-taking’ and ‘suicidal’. Though India faced stiff opposition from most of the member countries some nations like Cuba, Venezuela and Bolivia extended their support. There has been a talk of going ahead excluding India. But India’s presence in economic scenario is not at all ignorable and that fact is accepted by PAGE 2
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FINANCIAL KNOWLEDGE Pundits across the globe. Therefore the meeting ended with no consensus raising questions about relevance of WTO.
point of continuing its food security programme. This scheme ensures that no one in India has to starve anymore. But due to present norms
Analyzing India’s stand: At first let us look why rest of the world termed India’s move a ‘suicidal’ one. India always articulated that World bodies like WTO needs urgent reform. But India itself caused blockage of deal of such magnitude. In absence of global trade pact more and more regional trade agreements (RTA) will be created. In world-stage pro-business image of the new government of India takes a hit. In this Geneva round India faced isolation as countries like Russia, China, Brazil and Pakistan posed stiff opposition.
In such a scenario it is obvious to blame India for creating such grand crisis. But before passing judgement we need to look into other side of the coin.
Assertive India: India’s rigid stand signalled a strong message to the world that it will no longer buckle under any pressure. For benefit of its own people India is ready to take on any global player. Despite change of guard at the centre India remained unmoved about the
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of WTO India could be penalised for continuing subsidised food security programme. Therefore it was the high time for India to raise its voice to ensure food for all. There are some pundits who believe global trade agreement will need huge funding which will become troublesome for developing countries. To ensure free trade across the border and to minimize red-tapism countries like India has to speed up its domestic reform process and finance multiple projects to match international standards.
Therefore, the scenario is not at all ‘black and white’. Analyzing multiple facets it can be obviously said India was truly in a position to bargain. Compromising on welfare of its own people India cannot afford to join the party. The stand is crystal clear-‘India First’. In this constantly-changing economic scenario one needs to see how global power centres deal with the situation, how India is treated by other major powers.
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OPINION
Flipkart vs Amazon: Who Will Sit Easy? —— By Bharti Alwani
Flipkart, the Bangalore based e-commerce company announced investments worth $1 billion a couple of days back. As soon as the news broke out, Amazon stole Flipkart’s thunder by announcing their plan of investing $2 billion in India. After the sequence of such big investment news, the big question in everyone’s mind is who will be the winner - the homebred Flipkart or global e-commerce giant Amazon ? The perhaps obvious answer is INDIAN CONSUMERS. These announcements clearly depicts that the war of prices has just begun and both the companies will bleed money in order to built or sustain the customer base, which in turn will give choices to the consumers and hence lead to overall customer satisfaction. However, it may be possible that in the short run, these companies may earn meager profits in order to survive competition.
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Motives That Drive Amazon & Flipkart Amazon’s investment announcement came on the heels of its performance in last quarter which shows that the company has made a net loss of $126M because of which its stock price dropped by nearly 10%. After the fall in price, Wall Street has pressurized Amazon to lower its spending and focus on the margins. However, it’s decision of investing in India, according to Amit Agarwal, Amazon’s India head & country manager, was not made in a single day. This explanation of his can be justified by the fact that 40% of Amazon’s sales come from international markets. In order to attain higher international growth, the only lucrative market for Amazon is India. Flipkart, on the other hand has been guided by different objectiveas. To say, their founders, Sachin and Binny Bansal, were too a greater extend not only inspired but also tried to imitate Amazon built an ePAGE 4
OPINION
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commerce business model in India on the lines of Amazon revenue model. But there lies the challenge in itself.The battle was daunting challenge for them. The investors of Flipkart such as Accel and Tiger Global have been well versed with the fact that the real e-commerce battle in India was not between Flipkart or Snapdeal but AMAZON. Recently, Flipkart has acquired many other ecommerce players including Myntra and LetsBuy (which is not a surprise that Accel and Tiger Global were investors in both these firms).
in the ecommerce battle in India. The raise of $1B raise was the exact hit that the flipkart did to deal with a huge cashrich and growth-hungry Amazon. The sole strength and advantage of Flipkart's lies in the experience it has with the Indian consumers and local partners for years now. Where does this leave the other ecommerce players? This leaves many other retail ecommerce players in trouble as now they have to compete with the huge ecommerce giant players who have the capacity to absorb more than hundred million dollars as its annual losses. Snapdeal might be the other company that could sustain and raise enough comparable cash to stay in this race. Retail e-commerce in India is a long-term play. It cannot bring returns in short term as it requires patience .Big players having the capability to absorb losses over several years and the stamina to stay in this long fight will survive. It's possible that both Amazon.in and Flipkart are going to survive in the long run. But the only So Flipkart has prepared itself for the player in this market who will sit easy new upcoming and the biggest challenge during the upcoming frenzy will be the that Amazon was thought to be for years Indian consumer.
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FINANCIAL KNOWLEDGE
FinNiche
Foreign Institutional Investors Foreign Institutional Investors are These are the players who drive a particular institutions who monitor their money flow sector in bullish or bearish nature by and money in the assets of an organization large. which is a not based in the country of Monthly FII Net Investments (Calendar Year existence of FII. The money flow so made by 2014) FII could be an inflow or outflow i.e. either INR crores the FII could invest in their capital in the Month Equity Debt Total buying of assets of a company or they could withdraw their capital by selling off the assets of the organisation. The buy and sell January-14 714 12,609 13,323 sentiment of an FII depends largely on the trust that the foreign investor has in the February-14 1,404 11,337 12,741 organisation’s growth and development policies and their Corporate Actions to be March-14 20,077 11,586 31,663 executed in the near future. As per Section 15 (1) (a) of the SEBI FII April-14 9,602 (9,185) 418 Regulations, 1995, Foreign Institutional Investor has the liberty to invest in Total - 2014 31,798 26,347 58,145 securities in the primary as well as in the secondary markets which includes shares, SEBI has the over 1450 institutional debentures and warrants of listed, unlisted investors registered with it in India. or to be listed companies on recognised Examples of FIIs in banks, insurance stock exchange of India. companies, venture capital groups , hedge The FIIs can invest/trade in the desired funds and mutual funds, retirement or streams of markets by various approaches, pension funds, angel investor groups, such as: venture capital groups, private investment clubs. 1) Through registered brokers in recognised stock exchanges. 2)
Through a sub account which is Present Trend maintained in the name of an This year the FIIs were in hyped trend in individual outside India. the markets because of their record high 3) FIIs can issue ODIs i.e. Off-shore investments into the Indian Markets and derivative instruments to the persons this nature is existing till date. In the recognised as appropriate foreign Financial Year, according to SEBI FIIs have regulatory authority. shown an investment of about Rs.80000 Other places where FIIs can trade in are crores i.e. US$13.31 billion which reveals domestic mutual funds, collective the fact that how India is treated as an investment schemes, dated government equity market. The trend was also observed securities, Indian Depository Receipts etc. due to the fact that the government had The so called market movers of a market as increased the credit limit for the foreign designated majorly comprise of these FIIs. investors from $2 Million to $25 Million.
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FinNiche
FINANCIAL KNOWLEDGE
Market This Week Both the BSE and NSE recorded a fall in the last week except for Thursday where it rose because of automobile sector results being declared where players like Maruti Udhyog performed reasonably well. The whole week events like withdrawing capital by FII’s resulted in plummeting of the market. A variation of 2.96% was seen from last Friday to the current one. Sensex recorded a high of 26286.50 and a lowest of 25480.84 where as Nifty achieved 7716.35 as the highest figure and a lowest of 7602.60. BSE SENSEX
SENSEX Simple Moving Averages Thirty Days Fifty Days Hundred Days Two Hundred Days
25806.43 25,823.56 25,806.70 25,768.58
CNX Nifty
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FINANCIAL KNOWLEDGE Nifty Simple Moving Averages Thirty Days
7615.43
Fifty Days
7628.97
Hundred Days Two Hundred Days
7651.47 7682,05
Commodities Commodity
Unit
Rs / Unit
% Change
Gold
10 grams
28054
0.84
Silver
1 Kg
44427
0.06
Crude Oil
1 bbl
5974
0.54
Lending / Deposit Rates Base Rate
10.00%-10.25%
Savings Deposit Rate
4.0%
Term Deposit Rate
8.00%-9.05%
Key Policy Rates and Reserve Ratios Bank Rate Repo Rate
9.00% 8.00%
Reverse Repo Rate
7.00%
Cash Reserve Ratio Statutory Liquidity Ratio
4% 22.5%
Exchange Rates
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INR / 1 USD
60.85
INR / 1 Euro
81.46
INR / 100 Jap. YEN
69.11
INR / 1 Pound Sterling
102.68
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FinNiche
FINANCIAL KNOWLEDGE
NEWS OF THE WEEK IndiGo readying itself for an IPO protection to the head of a landless family. InterGlobe Aviation limited or IndiGo h a s s t a r t e d r e s t r u c t u r i n g i t s China gathers pace, Europe falters shareholding ,giving increasing signals and US steady that it will be going for an IPO in the near future. Rakesh Gangwal ,who owns 47.833% in IndiGo will convert Reports coming out of China suggest his shareholding, which presently is that Manufacturing activity gathered held through a foreign company, pace. Measured by manufacturing Caelum Investment Llc into NRI purchasing managers Indices (PMIs), the shareholding. This conversion of shares efforts of the government were bearing from a foreign company to NRI will fruit in China as the manufacturing allow the company to bring in FIIs. The airline has also decided to appoint BoB PMI rose to 57.1 percent in July , up chairman M.D.Malya to its board. from 51 in June. RIL may not be allowed to charge But for Eurozone the PMI stood at 51.8, new Gas prices same as June. While growth in Germany Reliance Industries limited may not be picked up, it was balanced by a allowed to charge new gas prices from downturn in French, Greece , Spain its two producing fields off the Andhra and Italy. Ukraine crisis also played a coast, until it makes up for deficit in big role especially in the British shortage. In a high lever meeting of the economy where manufacturing grew at top bureaucrats of the oil ministry, it its slowest pace in a year. The was decided that a penalty must be slapped for not complying with the manufacturing PMI fell to 55.4 from contract. Also in the pipeline is a 57.2 in June. complete rework of the gas pricing formula worked out by the previous US manufacturing PMI slipped to 55.8 UPA government. from 57.3 in June, which was the Service delivery platform of three highest in the last four years. Although the pace of growth of manufacturing welfare schemes to be merged output slowed in July, it remained close The service delivery platforms of to Junes four year high. New orders rse Rashtriya Swasthya Bima Yojana, Aam to 63.4 from 58.9, Gross domestic Aadmi Bima Yojana and the Indira product likely grew at a 3.0 percent Gnadhi pension scheme are set to be annual rate. Business investment likely merged together to streamline the rebounded as did spending on home processes and increase efficiency. The merger will bring life and disability building. cover, health benefits and old age pension under one service, which will help in improving the quality of life of unorganized sector workers. While the Rashtriya Swasthya Bima Yojana provides cashless hospitalization for the poor, the Aam Aadmi Bima Yojanaprovides life and disability
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In Latin American countries, Brazil manufacturing activity continued to disappoint as the manufacturing PMI fell for fourth month straight. In Argentina the markets crashed after the country defaulted for the second time
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FinNiche
FINANCIAL KNOWLEDGE
NEWS OF THE WEEK in last 12 years. The default came after Argentina could not strike a deal with lead holdout investors. The default results from Argentina's failure to comply with a court order that holdout bondholders be paid at the same time as a $539 million coupon payment to those who accepted reduced payments in two prior restructurings. Rating agency Standard and Poor, downgraded Argentina’s long and short term foreign currency credit rating to “selective default”. Manufacturing activity expands at its fastest rate in 17 months in July India’s manufacturing activity measured by manufacturing PMI rose to 53.0 in July, fastest in 17 months. It was 51.5 in June. This can be attributed to the fact that firms increased production to meet a flood f new orders from both internal and external sources. However this was accompanied by a sharp rise in input prices, indicating that Inflation may remain high in the near future. This has led some to believe that RBI may not favor cutting interest rates in near term thus borrowing cost may remain high, which can be an impediment to growth. NSE to launch new 10-year bond futures National Stock Exchange said it would launch one, two and three-month interest rate futures (IRF) contracts based on the new 10-year 2024 bond. Rival BSE is also expected to launch a similar bond. Interest Rates Futures contracts based on 8.40% central government security maturing on July 28, 2024 will be made available for
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trading with effect from August 4, 2014. Piramal and Dutch APG to invest one billion dollars in Infra. Piramal Enterprises Limited and APG Asset Management, tied up to invest $1 bn in various Indian infrastructure companies over the next three years through rupee-denominated mezzanine instruments. This move could help the cash starved infrastructure companies who have struggled to maintain cash flow. Many Indian infrastructure companies borrowed heavily in the past few years when the economy was one of the fastest growing in the world, but were squeezed by a slowdown in growth last year and a slide in the rupee to record lows. Piramal and APG have each initially committed $375 million for investments under the alliance. Japan urges business
Brazil
to
do
more
Japan Prime minister Shinjo Abe on his visit to Brazil has said that, his economic policies commonly known as ‘Abenomics” are bearing fruit. He said that it was time for the two nations to expand their trade and investment partnership. Japanese banks extended $700 million in loans to boost Brazilian soy and corn exports to Japan and help finance oil platform construction for Brazil's growing offshore oil industry. Brazil's state development bank BNDES agreed to join forces with Japan's bank for international cooperation, JBIC, to look for areas to promote investment by small and medium-sized Japanese companies in Brazil.
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FUN CORNER
FUN CORNER Last Week’s Answers
FinQuiz? 1.
A fund that buys securities in distressed investments is called _______.
2. 3. 4.
_______ factor is the most important factor in calcu-
1) Mutual Fund 2) Italy
lating one’s FICO score.
3) 25 and 10 respectively
_______ will acquire all the equity shares of Satyam
4) Mayaram Panel
Cineplexes Ltd.
5) WPI
Few months back RBI postponed the launch of Indian digital currency. What was its name?
5.
What is a colloquial name for a non-trading day on stock exchange or other commercial market.
CARTOONS
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Volume 6 Publisher: Arihant Jain
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