July 13, 2014 Volume 3
FinNiche
FinXpress
FinXpress Volume 3 July 13, 2014
From The Editorial Moving on with the legacy
CONTENTS In Focus: CRR and SLR Exemption: A much needed fillip in the infra sector Opinion: Union Budget 2014-15 Term of The Week: Leveraged Buyout Market This Week News Fun Corner
Club FinNiche would like to take the opportunity to welcome all the juniors to the clubs and committees in IMT Ghaziabad. It is exciting to see the flare with which the juniors are taking the new leadership roles and carrying forward the IMT legacy. With the academic year going at full speed, seniors have their presentations lined for the weekend whereas the juniors are studying hard to excel well in their quizzes and mid term. This week we bring to you opinion about the much talked Union Budget 2014-15 and have a critical view of the same. The magazine highlights the need for SLR and CRR Exemption in the Infra sector, whether such regulatory norms are required or not? To enhance the financial knowledge, we bring to you LBO (Leveraged Buyout) as the term of the week. We hope you enjoy reading the articles in this edition of FinXpress. Looking forward to your acknowledgements and suggestions for improvements. Happy Reading!!
Regards
Team FinNiche
Disclaimer: FinXpress takes no responsibility for the opinions expressed in the magazine.
July 2014
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In Focus
FinNiche
CRR & SLR Exemption : A Much Needed Fillip For The Infra Sector —- By Arunav Chakraverty
The newly elected NDA government has often emphasized that reviving infrastructure is one of its priorities. The budget presented by Mr. Jaitley on the 10th of July was a step in the right direction. In a move described by HDFC Chairman, Deepak Parekh, as revolutionary, the finance minister has proposed that banks be allowed to raise funds to finance infrastructure loans without having to maintain cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements for such funds.
infra lending will be reduced as a result of CRR and SLR exemption, which will compensate the banks for any premium that they would have to pay for such bonds due to their long tenor. However, the euphoria among banks over this proposal may not last long. RBI is already planning to come up with strict standards to regulate the implementation of the proposal. It is planning to allow this leeway to banks only as long as the loan remains healthy. If such a loan becomes an NPA, the bank will have to set aside the SLR and CRR requirements for the entire exposure. The central bank is also planning to set strict project appraisal standards for banks wanting to avail of this facility, so that such fund raising is only allowed for viable projects.
CRR requirement pertains to the proportion of deposits (currently set at 4%) that banks have to keep with RBI and on which they get no interest whereas the SLR requirement pertains to the proportion of deposits (currently set at 22.5%) that banks must invest in government securities. These steps are being taken by the RBI because many within the central bank believe that banks are already overexposed to the infra sector and any more exposure might lead to an increase in credit risk. Infrastructure is among the five sectors (the others being textiles, iron and steel, aviation and mining) that the RBI has identified as stressed. Also, the RBI is apprehensive about losing a certain amount of control on monetary This proposal, when implemented, will policy as it controls the money supply in also have the added effect of freeing such the economy by adjusting the CRR. After funds, raised through long term bonds, the implementation of this exemption, the from priority sector lending requirements RBI won’t have the authority to tinker as infrastructure is a component of the with such funds. priority sector. The main benefit that will accrue from this proposal is better Whichever side of the debate one chooses management of a s s e t — l i a b i l i t y to take, what cannot be denied is the fact mismatches in banks which had become that a strong infra sector is urgently a major problem for some public sector required for sustained growth and at banks. This is because the cost of funds least the government has set the ball for banks issuing long term bonds for rolling in the right direction.
July 2014
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FinNiche
Opinion
Union Budget 2014 —- By V V Raviteja
The much awaited Modi’s Union budget 2014 is out to address the impending fiscal consolidation and the infrastructure bottleneck challenges faced by the Indian economy. Let us have glance over its major highlights and their possible impact.
towards debt mutual funds (as mentioned above) will enable banks to attract more funds from customers. However the proposed capital infusion of INR 112 billion in the PSB’s, which is less than previous 4 year average, is not an encouraging sign particularly when they are grappling with The fiscal deficit target for FY15 is pegged increased NPL ratios. at 4.1%, which the Government looks to achieve by bolstering its revenues by increasing its tax ambit (in particular indirect taxes) and with an increase in disinvestment proceeds. The measures like introduction of long term capital gains tax on debt mutual funds and further increase of customs and excise duties on imported electronics and tobacco products are all intended in achieving the same. Capital expenditure is budgeted at 18.8% with a significant increase towards power, ports and shipping, which are critical for fuelling a sustained growth in the economy. However not just awarding these projects but also the implementation of these projects by addressing the ground issues like environmental clearances and land acquisitions will be crucial.
The proposal of setting up an INR 100 billion venture capital fund, lowering of investment allowance (to INR 250 million) and designing a new legal framework for exit are all expected to boost the flagging small and medium enterprises segment. The construction sector has also witnessed an increased allocation in this year’s The proposed 10 year tax holiday for the budget which is expected to boost the power sector will benefit almost 18-20GW country’s employment levels, as this sector (~10% of total generation capacity of India) is one of the largest employers in India. projects which are currently in various phases of construction. However, the However, all these steps of increasing the current budgeted allocation for the consumer expenditure and boosting renewable and excise duty cut on its manufacturing sector could yet be undone imports is only expected to have a minimal by poor monsoon and consequential poorer impact. agriculture output. Along with this, its possible spill over effects on the industry Banks are also allowed to raise long term and service sector would only worsen the funds for the infrastructure lending which woes of already stagnating economy. This will address their issue of asset-liability is really a big challenge for the new mismatch. Providing autonomy to the Government for achieving its promised PSB’s and reducing the attractiveness “Ache Din aane wale hain” motive.
July 2014
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FinNiche
FINANCIAL KNOWLEDGE
Leveraged Buyout (LBO) LBO stands for Leveraged Buyout which means acquiring another company with the help of leverage. The term is widely used in Mergers and Acquisitions when one company uses some form of leverage like issuing debt, bonds and other instruments and uses the proceeds to obtain or acquire a company or any real asset. Generally, the assets purchased are used as collateral in order to obtain the leverage to the debt holders.
be divided into several tranches and sold off according to the requirements of an investor. The senior most tranche gets a lower margin whereas lower tranches are compensated for the risk in the form of higher margins. The first LBO can be dated back to 1955 when McLean Industries purchased PanAtlantic Steamship Company. McLean during this transaction borrowed US$ 42 million and issued preferred stock worth US$ 7 million. These days you will see several transactions involving LBO. The latest deal which came into picture involving LBO was the Dell’s buyout. Motivations behind LBO: Lower cost of funding Enhanced returns from the buyout Some of the risk transferred to the debt holders
The entities which use this form of takeover strategy are not restricted to corporations. In fact, funds like private equities and hedge funds also use this form of strategy to enhance their returns. Financial sponsors are firms supply equity to fund houses who then will combine it with leverage to carry out the transaction thereby enhancing the return. Leverage in the form of debt is a cheap source of financing and therefore increases the return that can be attributed to the shareholders. However, using too much leverage increases the debt-to-equity ratio which adds to the risk profile of the firm. So there is a trade-off between the riskiness of a deal and the cost of funding. LBO’s are a win-win situation for both the financial sponsor and the banks as the sponsors get the means to carry out the deal and the banks are able to earn a better margin on their services than a normal corporate lending. The debt issued can also
July 2014
Risks involved in a LBO: Risk profile of the acquiring company increases due to increase of leverage If too much leverage is used sometimes cost of funding increases when the optimal capital structure is breached Legal risk sometimes increases if the debt holders are not treated properly and fairly A specific form of leveraged buyout is Management Buyout or MBO where the management of the company acquires the company from the shareholders using leverage provided by the owners itself. MBOs are generally supported by owners when they want to retire or liquidate their equity position. MBO’s also create a conflict of interest when the management is looking for a lower price for the purchase and are employed by the owners who would prefer a higher price.
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FinNiche
FINANCIAL KNOWLEDGE
Market This Week Equity benchmarks plunged over 3.5% during previous week amid heavy profit booking post the Railway Budget and the Union Budget. Both benchmarks touched new all-time highs (26190/7808) on Tuesday’s session before succumbing to selling pressure. A strong wave of selling pressure swept the index off its feet leading to its biggest percentage fall in 15 months. The broader markets bore deeper cuts as the BSE midcap and small cap indices remained under the profit booking spell and ended down 7.00% and 7.80% respectively. The 30 share S&P BSE Sensex closed down by 937 points or 3.61% at 25024, while the NSE Nifty settled at 7459, down by 292 points or 3.77%. Internationally major European markets ended the week losing 3-4%. The Asian markets traded mixed but maintained a negative bias taking cues from the weak US and Europe markets. BSE SENSEX
SENSEX Simple Moving Averages Thirty Days Fifty Days Hundred Fifty Days Two Hundred Days
25347.68 24733.81 22486.98 21986.50
CNX Nifty
July 2014
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FINANCIAL KNOWLEDGE
FinNiche
Nifty Simple Moving Averages Thirty Days
7574.96
Fifty Days
7386.00
Hundred Days Two Hundred Days
6705.74 6549.41
Commodities Commodity
Unit 10 grams
Rs / Unit 28315
% Change 2.65%
Gold Silver
1 Kg
46068
2.25%
Crude Oil
1 bbl
6070
-2.52%
Lending / Deposit Rates Base Rate
10.00%-10.25%
Savings Deposit Rate
4.0%
Term Deposit Rate
8.0%-9.05%
Key Policy Rates and Reserve Ratios Bank Rate Repo Rate
9% 8%
Reverse Repo Rate
7%
Cash Reserve Ratio Statutory Liquidity Ratio
4% 22.5%
Exchange Rates
July 2014
INR / 1 USD
59.92
INR / 1 Euro
81.68
INR / 100 Jap. YEN
59.25
INR / 1 Pound Sterling
102.74
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FINANCIAL KNOWLEDGE
FinNiche
NEWS India’s Forex reserves up by $614 500 slid 0.9 percent and the Nasdaq million tumbled 1.6 percent. A sharp drop in oil prices slammed energy shares, with U.S. India's foreign exchange reserves rose by crude futures settling down more than $2 $614.6 million to $316.39 billion for the a barrel. Shares of Exxon Mobil were week ended July 4, Reserve Bank of India down 0.8 percent at $101.74 and were (RBI) data showed. The reserves had the biggest drag on the S&P 500. increased by $856.6 million to $315.77 billion for the week ended June 27, led by German business lauds India’s budget, a sharp jump in overseas currency assets. ready to invest in country According to the RBI's weekly statistical supplement, foreign currency assets, the biggest component of the forex reserves, jumped by $760.6 million to $286.57 billion. The foreign currency assets had grown by $850.9 million to $288.81 billion for the week ended June 27.
German companies are ready to invest in India at the first signs of growth recovery, while Finance Minister Arun Jaitley's maiden budget shows the NDA government is taking the right direction, German business leaders said here Friday. Germany is India's biggest trading partner in Europe and ranks among the Wall St edges up; indexes post losses top 10 countries by origin of foreign direct for week investment (FDI) into India. U.S. stocks managed to score modest gains on Friday, but the S&P 500 posted its biggest weekly drop since April as investors showed only mild enthusiasm after getting their first glimpses of earnings. Shares of Wells Fargo & Co., which fell 0.6 percent to $51.49, were in the spotlight as the biggest U.S. mortgage lender was the first major U.S. bank to report earnings. Wells Fargo's results will be followed next week by earnings from Citigroup, Goldman Sachs, JPMorgan Chase and Bank of America. Internet names ranked among the day's biggest gainers, with shares of Amazon.com Inc up 5.6 percent at $346.20, and eBay Inc up 2.3 percent at $51.50. The Dow Jones industrial average rose 28.74 points or 0.17 percent, to end at 16,943.81. The S&P 500 gained 2.89 points or 0.15 percent, to 1,967.57. The Nasdaq Composite added 19.29 points or 0.44 percent, to 4,415.49. For the week, the Dow ended down 0.7 percent, the S&P
July 2014
What has impressed the German industry heads is that the government intends to facilitate private business and foreign investment. The union budget for 201415 has raised the FDI cap in defence and insurance upto 49 percent, with majority control of ventures being retained in Indian hands. Apple holds November
iWatch
release
till
Apple iWatch is not likely to enter the market until November. Earlier, it was rumored that the much-awaited gadget would probably see an early launch but a report said that the launch date has been deferred owing to both hardware and software related complications. According to the Mashable, KGI analyst Ming-Chi Kuo has confirmed the delay and said that the estimated time of iWatch mass production has been extended from late September to the middle or end of November.
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FinNiche
FINANCIAL KNOWLEDGE
NEWS Aerospace jamboree on tenterhooks rules require banks to set up separate over F-35 fighter, Airbus jet revamp departments for risk management, accounting and statistical analysis for Suspense over the appearance of wealth management services, and give America’s newest combat jet, a diplomatic details for each wealth management chill between the West and Russia and product individually. the re-launch of an Airbus jet with a surprise tweak in its name could make Stock indices flat as Portugal fears the Farnborough Airshow one of the least ease; oil down sharply predictable for years. Major global equities markets steadied While the world’s largest aerospace event and the yen stabilized against the U.S. is traditionally a cauldron for new dollar on Friday as worries about technology and dazzling flying displays, Portugal's biggest bank ebbed, while oil technical problems forced the F-35 Joint prices dropped on easing concern about Strike Fighter to withdraw from a warm- supply losses in the Middle East. MSCI's up event and Farnborough's aircraft list is All-World Index, however, was still down already crossed through with several high 1.6 percent for the week, while the profile no-shows. The July 14-20 Standard & Poor's 500 index was on track gathering will go ahead without the brand for its worst week since April. new Bombardier (BBDb.TO) C-Series or popular Russian fighter displays. Qatar Early U.S. earnings reports sparked some Airways has withdrawn its Airbus A380 caution for U.S. stock investors, with Well superjumbo, saying the still undelivered Fargo's shares down 1.2 percent after the plane is not yet ready. bank for the first time since 2009 did not increase its earnings-per-share from the China demands wall around wealth preceding quarter. management sector to cut risk US sets duties on South Korean steel Chinese banks must create a firewall pipe in about-face around increasingly popular wealth management services, the country's The U.S. Commerce Department on banking regulator urged, in order to avoid Friday set duties on South Korean steel any contagion from higher risk products pipe used in the oil and natural gas spreading to normal bank loans. Banks industry, reversing itself in one of the must establish a separate department to most contentious trade disputes in years carry out wealth management business after hefty lobbying from U.S. producers by the end of September, the China and lawmakers. The turnaround cheered Banking Regulatory Commission (CBRC) domestic steel companies battling a surge said on its website on Friday. in imports from foreign rivals looking to cash in on surging demand for the Thirsting for higher returns, China's specialist pipes due to a boom in U.S. wealth management sector has exploded shale drilling. in recent years, hitting around 12.8 trillion yuan ($2.06 trillion) by the end of Duties will lift pipe prices and tighten May. But the opaque nature of the sector supplies, helping companies like United has fed concerns about its health. New States Steel Corp.
July 2014
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FinNiche
FUN CORNER
Fun Corner FinQuiz 1. 2. 3. 4. 5.
A —— loan is a short term loan availed until a longer term financing is obtained? A certificate of debt is called ———-? The measure of continuous rise in the worth of an asset is called ———-? The value of an asset based on its original cost of purchase excluding the depreciation and other devaluing costs is called ———? ———- is funds available for borrowing?
Last Week’s Answers 1. 2. 3. 4. 5.
Linkers Baldev Singh The Taj palace and tower Spicejet Tata Indica
Last Week’s Quiz Winners Kushal Kapoor
Ravi K
Sarthak Awasthi
Mili Handa
CARTOONS
Rush in your entries to : finniche.imt@gmail.com The right entries will get their name featured in the next issue of FinXpress. So hit the quiz fast & get yourself visible among 1000 odd in the campus.
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July 2014
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