January 12, 2014 Volume 25
FinNiche
FinXpress
FinXpress Volume 25 Jan 12, 2014
From The Editorial A FRESH START
CONTENTS From The Editorial In Focus: Mor’s Proposal—A Step Towards Financial Inclusion Opinion: RELIANCE JIO pact with BHARTI AIRTEL Term of The Week: Management Buyout Market This Week News
A new year has begun and so has a new term. With lesser subject load on the juniors it is best time for all of us to brush up our finance knowledge base. Club FinNiche takes on the challenge to bring to the table all the latest happenings in the world of finance and economy and sensitize our readers for the same. We bring to you this week RBI’s central board member, Nachiket Mor, and his panel’s take on overhauling of existing financial system. The Opinion section sheds light on the comprehensive telecom infrastructure sharing pact announced by Reliance Jio and Bharti Airtel. Dissemination of knowledge of important financial terms has been one of our primary focus and so this edition of FinXpress brings to you some insights on ’Management buyout’ . We hope you enjoy reading the articles in this edition of FinXpress. We look forward to your acknowledgements and any suggestions for improvements are most welcome. Happy Reading!!
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Disclaimer: FinXpress takes no responsibility for the opinions expressed in the magazine .
January 2014
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FinNiche
In focus
Mor’s Proposal — A Step Towards Financial Inclusion —- By Bhanu Chokhani
Around 90 percent of small business does not have access to financial institutions and more than 60 percent of rural and urban population does not have a functional bank account. Financial inclusion has dominated public discourse for the last few years. The exclusion of this population from formal banking services is leading them to the unregulated, informal sector. In the backdrop of these harsh realities, Raghuram Rajan formed a panel headed by ex-ICICI Bank executive director Nachiket Mor to suggest steps for promoting financial inclusion. Recommending sweeping changes in banking stru ctu re , Mo r’s panel recommended setting up specialized bank specifically to cater to low income household of the nation. This proposition has been developed keeping in mind the
the Rs 50 crore that is one-tenth of the investment required to open a conventional full service bank. The report submitted by Mor’s panel also suggested the need for more than 10 types of specialized banks like wholesale banks and infrastructure banks to address the needs of specific sector and hence playing the growth driver for it. Mor Panel reiterated that there is a greater need to reevaluate the farm sector credit activities. It emphasize on the fact that the government should abolish interest subsidiary and loan waiver and the benefit should be directly transferred to the beneficiary’s account. At the same time it suggests that RBI should withdraw the permission to banks for pricing farm loans below base rate. Among the slew of changes on the regulatory front, it has made a case for gradual abolition of the statutory liquidity ratio (SLR), or the percentage of deposits invested in government bonds; raising the priority sector lending limit to 50 percent, from the current 40 percent, and allowing non-deposit taking NBFCs to work as business correspondents.
For the benefit of customers, the report has called for setting up a unified financial redress agency (FRA), to be created by the goal that by January 2016, each individual Finance Ministry, as a common agency for above 18 years of age should hold an customer grievance redress across all electronic bank account. At the same time financial products and services. banks should be setup at a distance of every 15 minutes to ensure ease All in all financial pandits, although accessibility. Members of the panel were of appreciating the recommendations, are the opinion that residents can be issued an keeping their fingers crossed and are account number by the bank at the same waiting for RBI to come up with the time when issuing Aadhar number. detailed guidelines. To ensure that payment services and deposit products be provided to small enterprises and low income individuals, the panel batted for the formation of “Payment Banks” with the upper cap on balance of Rs 50000 per customer. As per the suggestions these banks can be setup with
January 2014
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FinNiche
OPINION
RELIANCE JIO pact with BHARTI AIRTEL —- By V.V.Raviteja India Inc was caught by surprise with the announcement of an infrastructure sharing between the two conglomerates Bharti Airtel and Reliance Industries. The agreement is to share inter- and intra-city optic fibre networks, submarine cable networks, communications towers and internet broadband services. In a nut shell the deal will be giving Reliance, pan-India access to Airtel’s nationwide infrastructure while giving Airtel access to the optic fibre capacity created by Reliance in future. Now let us analyze this telecom infrastructure sharing agreements in perspective of either of companies.
BHARTI AIRTEL, India’s largest telecom operator by subscribers and revenues is now debt laden. In fact most of its assets including the towers and submarine cables are been underutilized. This deal offers it an opportunity of sustained cash flows in form of rentals and also enables it to roll out the 4G services early as compared to its competitors. Most importantly on the back of its African adventure, Airtel is now heavily debt laden and is looking for increased cash flows from domestic market. Strategically as well, Airtel is beginning to focus on high margin services like Data which would make it a winner once Reliance rolls out its optic fibre cable. By keeping apart monetary and strategic benefits, this deal once again underlines the fact that good sense prevails over other consideration in business. Little would have anyone forgot the disruptive innovation by Reliance in 2000’s by offering a mobile at Rs.500 and its rivalry with Airtel over the CDMA. To conclude, it would be a win-win situation for both the companies and most importantly to the customers as they would be able to enjoy cheaper 4G and also evade a possible price raise in their 2G or 3G services.
RELIANCE JIO, winner of Pan-India license for rolling out 4G services is the telecommunication subsidiary of India’s largest company Reliance Industries. It would be able to ride on 1.5 lakh towers of Airtel present pan-India, to launch its telecom services. Besides this it may also bank on the largely underutilized submarine cables of Airtel between India and Singapore. This capacity addition is in line with its strategy of providing ultra fast speed experience by meeting its bandwidth requirements by this route. Lastly it doesn’t require any capital investment for connectivity and will be able to roll out 4G services as per the deadline. Airtel have its presence in more than 50 countries which can be leveraged on global connectivity by Jio.
JaNUARY 2013
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FinNiche
FINANCIAL KNOWLEDGE
MANAGEMENT BUYOUT (MBO) A Management Buyout (MBO), in most aspects similar to an acquisition. The major difference between the two lie in the fact that the buying party in an MBO is the management of the company itself, rather than a third party of outside investors or another company. In process both MBO and acquisition are the same, differing only on the practical consequences. Such a condition may arise under three broad situations:  The owner of the company wants to retire and not keep possession of the company anymore  The business may no longer be considered as a core to the entire group  The company maybe facing a financial crisis and the owners may want to sell it off to improve their own cash flows The management at any point of time would have better knowledge of the company than the seller themselves, reducing the long drawn out process of due-diligence. The management would thus require lesser warranties about the state of the company, speeding up the entire process. The management in itself would like to go in for a buyout if it feels the need to get more involved directly and gain the possible financial rewards from the future developments of the organization. It may also go forward with it if there is an impending danger of the business being shut down by the ownership transfer to a third-party company. The biggest positive of an MBO lies in the fact that a public company is taken into a private one. This reduces several costs, which can be significant for smaller groups. It would also motivate the management to work harder and take decisions which would be in the long-term interest of the company.
The management of the company seeks out loans from banks, which they would provide if they are ready to undertake the associated risk with an MBO, which is considered to be high. It is typical for the banks to ask the managers to invest an amount that is significant to them personally, so as to lock them in to the success of the company. Private Equity Financing A popular method of funding, this is done by private equity investors, in return for a proportion of the shares or as a loan. The exact structure depends on the riskappetite of the investor. Private equity investors also usually get managers to invest a substantial amount of their personal wealth as an investment. The primary aim for the investors is profitability, thus leading them to put numerous terms on the working of the company, so as to be able to make an exit in a few years with a high profit. Seller Financing In some situations the management and the original owner of the company agree to a deal, wherein a small amount of the actual price is paid at the point of sale, and the remaining is paid out from the profits of the company in the following years. This serves as an advantage to the management because of having full control after the consideration is paid off.
Concerns with MBO The primary concern revolving around MBO relates to the unfair advantage possessed by the management over the current owners. It may lead to the agency problem, and also downward manipulation of the stock price via adverse information disclosures. This would lead to undervaluation of the company and a buyout at a Financing lower price, and a subsequent loss for the The managers are rarely wealthy enough to original owner. This has led to critics buy the company on their own, and thus questioning the validity of MBOs and require additional funds for the MBO to considering it as a form of insider trading. take place. There are three primary ways the financing takes place:
Debt Financing January 2014
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FinNiche
FINANCIAL KNOWLEDGE
NEWS OF THE WEEK India’s forex reserves down by $2.59 billion India’s foreign exchange reserved declined by $2.59 billion to $293.10 billion for the week ended January 3,Reserve Bank of India data showed. According to the RBI’s statistical supplement, foreign exchange assets, the biggest component of the forex reserves, fell by $1.68 billion to @266.95 billion. The foreign currency assets had risen by $164.3 million to $ 268.63 billion in the previous week. The value of special drawing rights decreased by $27.8 million to $4.43 billion week under the review. India’s po sition with the Intern ational Monetary Fund was down by $12.5 million to $1.99 billion. Reliance Industries welcomes gas price notification Reliance Industries today welcomed notification of new gas pricing formula that will almost double the fuel prices from April 1, and hoped the five year transition will eventually lead to market prices. The Ministry of Petroleum and Natural Gas had yesterday notified the ‘ D o me s ti c N a tu r al G a s P r i c i n g Guidelines,2014’ that will apply to all natural gas produced domestically , irrespective of the source, whether conventional, shale or coal –bed methane from April 1,2014. Accordingly gas from April will be priced at an average price of liquefied natural gas imports into India and benchmark global rates. This formula will be applicable for five years i.e. till March 31,2019.
percent at a record 9.7 million vehicles, raging from small city cars to heavy trucks. VV had pledged to surpass Toyota and General Motors as the world’s No. 1 car maker no later than 2018,aimimg to boost annual deliveries to at least 10 million cars. BSE to launch IRF Trading from January 20 Leading stock exchange BSE said live trading in new interest rate futures (IRF) , in long tenure 10 year Government bonds will begin on its platform on January 20. The exchange already received the approval of market regulator SEBI for launching IRF’s. Besides, NSE will begin live trading in the IRF on January 21,while MCX-SX said it will also go live this month without giving an exact date. An IRF is generally a contract between a buyer and a seller agreeing to the future delivery of any interest bearing asset such as Government bonds. It will provide participants a mechanism to hedge risks arising from fluctuations in interest rates which depend on various factors. PepsiCo’s first premium water to make appearance The world’s No.2 beverage company plans to gauge response to its first premium water bottled brand “Qua” at golden globe this weekend. Bottles will be passed out on the red carpet a way for the company to introduce it to the Hollywood types who appeal to its target audience. Apart from higher prices, product will come in stylish bottles.
Volkswagen embraces for market challenges as post 2013 record sales Europe’s largest automaker Volkswagen is bracing for challenging markets as it posted record 2013 sales with demand from China and North America more than offsetting declining deliveries in core European Markets. 2013 deliveries were up almost 5
January 2014
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FINANCIAL KNOWLEDGE
FinNiche
CNG prices hiked by a steep Rs 3.70 include a number of directorship a person can hold as an independent per kg director. The Securities and Exchange Taking CNG prices to an all time high Board of India (SEBI) in its next board IGL increased CNG by 8% in just 3 meeting will take up a proposal of new months of its last revision of prices. It corporate governance norms for cited steep rupee depreciation as the approval and after the board’s nod it reason for the price hike. will come out with detailed guidelines. The new corporate governance models Chill on street continues; Sensex deal with CEO salaries, succession slips 93 points, Infosys shines planning and whistle blower policy at The first full trading week of the new listed companies. year failed to bring any cheers to market which remained in grip of Crisil, others see India’s current selling and IT major Infosys’s better account deficit narrowing to 1.2 per than expected Q3 results was the only cent of GDP in Q3 bright spot. The Benchmark S&P BSE India’s current account deficit is likely Sensex extended its losses for the to decline to 1.1-1.2 per cent of its gross second consecutive week, dropping domestic product in the third quarter . another 93 points on persistent selling Current account deficit is the excess of pressure due to slowdown in foreign foreign outflows over inflows. The capital inflows coupled with strong US current account deficit to decline to 1.1 private sector employment report which per cent of GDP in Q3 FY2014 based may encourage Federal Reserve to taper on the trade account deficit of $10.1 its bond buying programme. The key billion in 2013. BSE barometer has lost 435.09 points or 2.05 per cent in the last two weeks. US job growth in December weakest En vironmen t M in istry rejects Vedanta’s bauxite mine request The environment ministry has rejected London-listed Vedanta Resource Ltd’s request to mine bauxite in the Niyamgiri hills of Odisha state after local residents opposed mining in the area they considered sacred. Vedanta Aluminum's 1 million tone a year alumina refinery in the eastern state has been struggling to source key raw material bauxite since its commissioning in August 2007.The company has been forced to import bauxite as a result. Vedanta forest clearance has been rejected. There will be no mining in the Niyamgiri hills.
in three years Us employees hired the fewest workers in almost three years in December, but the setback was likely to be temporary amid signs that cold weather conditions might have had an impact. Non farm payrolls rose only 74000 last month , the smallest increase since January 2011 and the unemployment rate fell 0.3 per cent point to 6.7 percent .It looks more of a weather issue –a big drop in construction and a 1000 drop in transportation.
SEBI to soon come out with norms on corporate governance model Market regulator SEBI today said it will soon some out with detail framework on corporate structure that could also
January 2014
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FinNiche
FINANCIAL KNOWLEDGE
Market This Week The week saw both the key indices closing in the green. Infosys ruled the market this week with higher than expected net profit of Rs 2,875 crore for quarter ended December 2013 against a net profit of Rs 2,407 crore in previous quarter. The rally was however overshadowed by banks like ICICI and SBI closing in the red. The export data came as a welcome news. December exports grew at $26.35 billion, up 7.1%, against $24.6 billion, a month ago. Brokers said a firming trend in global stock markets as traders awaited key jobs data due out of the US, helped the domestic markets to close in the green.
BSE SENSEX
SENSEX Simple Moving Averages Thirty Days Fifty Days Hundred and Fifty Days Two Hundred Days
20926.64 20814.58 19940.04 18526.48
CNX Nifty
January 2014
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FinNiche
FINANCIAL KNOWLEDGE Nifty Simple Moving Averages Thirty Days
6146.57
Fifty Days
5821.81
Hundred and Fifty Days Two Hundred Days
5869.87 5618.52
Commodities Commodity
Unit
Rs / Unit
% Change
Gold
10 grams
29033
+0.59
Silver
1 Kg
44824
+1.59
Crude Oil
1 bbl
5704
-0.02
Lending / Deposit Rates Base Rate
9.80%-10.25%
Savings Deposit Rate
4.0%
Term Deposit Rate
8.00%-9.05%
Key Policy Rates and Reserve Ratios Bank Rate Repo Rate
8.75% 7.75%
Reverse Repo Rate
6.75%
Cash Reserve Ratio Statutory Liquidity Ratio
4% 23%
Exchange Rates
January 2014
INR / 1 USD
61.94
INR / 1 Euro
84.31
INR / 100 Jap. YEN
59.01
INR / 1 Pound Sterling
102.06
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FinNiche
FUN CORNER
Fun Corner FinQuiz 1.
Up– bulls, Down– bears, No significant movement- ??
2.
First private sector corporate that launched the gold fund in India?
3.
Big Blue is IBM. Which corporate is referred as 'Big Black' ?
4.
Buying a company to sell its asset is called as?
5.
The term used for non– convertible paper money?
CARTOONS Last Week Answers 1 Merrill Lynch 2. Round Tripping 3. Vatican City 4. Currency Swap 5. Hedging
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Volume 25 Publisher: Divya Shree
January 2014
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