InFINeeti | Annual Issue | August 2014
InFINeeti | Annual Issue | August 2014
InFINeeti | Annual Issue | August 2014
FROM THE EDITOR’S DESK
3
Dear Friends, Greetings from Team InFINeeti… A lot has changed since the last time we interacted. A new government has been formed, the Union budget has been presented, the Sensex has touched a new high of 25000 and many more events. Before the elections, a slogan from BJP’s national campaign had become famous, “ Ache Din Aane Wale Hai”. The masses have voted for the party and after three decades, a single party has won a majority in the Parliament. There were high expectations from the new government. The first test of the new government was to present a balanced budget which clearly lays down the roadmap for economic growth in India in both- short and long term. So, our theme for the magazine this time is based on the slogan of BJP: “Union Budget: Has budget met the expectations of Ache Din ?“ Technology, nowadays, is touching every sphere of business. Banking is no exception. We have tried to analyse the role of technology in shaping the banking industry. Also, we are hearing about GST for long enough. One of our articles analyses the future of GST in India. Many people believe that the one of the reasons for the fall of the last government can be attributed to populist schemes by the centre and corruption emanating from those schemes. We have tried to analyse whether populism or rational economic policies work in the longer term. Financial sector is in dire need of reforms. Most of the laws are archaic and date back to the Stone Age. In this backdrop, FSLRC committee was formed which tabled its recommendations. One of our articles analyses the recommendations made by the committee. In our constant tryst to innovate, we have tried to amalgamate two unrelated events into one. One is the recently concluded FIFA World Cup and the other one is M&A. How football and M&A can be related? We have an interesting article on it. The magazine also contains the analysis of dividend distribution tax and FDI in Insurance, and a discussion on whether they are good or not. This is the time of the year when B-school students have returned from their summer internship. So, we have captured the experience of one of our colleague regarding how summer internships are important to understand the nuances of business in a MBA student’s life. We then have tried to get an insight into the Indian Agriculture sector and Rural Finances by conducting an interview with a dignitary from NABARD. We have also included an article on implementation of IFRS in India. Besides the insightful articles, the edition also features regular columns like FIN Trivia, FIN-lingos and News Chronicles. We have also added a new regular column on equity research. We hope readers will find it useful. From the next time onwards, the readers will be greeted by our new team and we, the current team, have a sense of pleasure, pride and at the same time are poignant as it was an excellent opportunity given to us to handle this esteemed magazine. We hope that we have done a good job. Till then we hope that you will enjoy reading this annual budget edition. Do write to us regarding any suggestions, feedbacks or recommendations. Goodbye & Happy Reading !!!
InFINeeti | Annual Issue | August 2014 2 4
CONTENTS
>>> Page 26
5
>>> Page 36
9 12
24 26
Budget plus 3.0: Highlights of post budget analysis at IIFT
Future of gst: Advantages & disadvantages of implementing GST
Top events of 2014: Review of important events of 2014
Role of technology in banking: Analysis of role of technology in changing the past, present & future of banking industry
32
40
Football & M&A: A comprehensive analysis of M&As using football as an analogy
Dividend tion tax:
>>> Page 56
How FSLRC recommendations can bring much needed reforms in financial sector
18 COVER
45
STORY ANALYSIS OF THE UNION BUDGET
Ifrs implementation in india: Benefits of adopting IFRS
53
Faculty’s corner: FDI in Insurance
56
“Does the budget meet the expectations of Ache Din“
Populism: A necessary evil? Ill-effects measures
60
of
populist
Summer internship experience: Shubham Agarwal shares his RBI experience
distribu-
How taxing dividends is useful to government. Are they really beneficial?
Fslrc recommendations:
Regulars 16 36 49 61 63
FIN LINGOS EQUITY RESEACRH PRECURSOR EXPERT SPEAKS NEWS CHRONICLE FIN TRIVIA
InFINeeti | Annual Issue | August 2014 5
FOOTBALL PLAYER TRADE VIS-Ă€-VIS CORPORATE M&A
BY-BRAJESH M & NITESH SINGH, IIFT
INTRODUCTION
(sponsorship and merchandise). As per a 2013 report,
Football has often been used as a powerful image
Real Madrid earned revenue of $675 million during
representing hope, as a vehicle that binds people and
the last year and has a team value of $3 billion as of
encourages them to function as one, giving them a
May 2014, of which $1.12 billion (32.6%) is to be
sense of purpose and direction. There is even an ad-
earned through commercial sources, another $1.12
vertisement that shows kids playing football with a
billion from Broadcasting, $710 million (20.6%)
rag ball in a poverty stricken locality in Africa, a strong
through Match Day revenue and the remaining $484
testament to the overwhelming sentimental appeal
million through brand value.
and sway that football holds over the masses. Club football has cashed in on this popularity and has transformed itself into elaborate money making machine that is on par with the leading corporate giants of present day, in terms of revenue streams and marketing campaigns. SOURCES OF REVENUE How do soccer clubs make money? It is a very simple question that many fans of the game often wonder and postulate but seldom fully understand. Most first answers to this question would be match-day sales,
It is important to understand the growing similarity
but there are those with a deeper understanding of
between corporates of the financial world and foot-
the industry that know that this is not quite the full
balling clubs. For the latter, assets are-players, broad-
story. Deloitte’s Football Money League reports the
cast rights, kit sponsorship deals and franchise deals,
revenue of top football clubs by broadly classifying
and these are used by the club to make money, not
the revenue into 3 main segments: Match-day Reve-
so markedly different from the way corporates make
nue (gate receipts), Broadcasting Revenue (domestic
money. Another curious similarity that can be struck
and international), and Commercial Revenue
is the concept of mergers and acquisitions (M&A).
InFINeeti | Annual Issue | August 2014 6
The idea of M & A, though in circulation for a long
Broadband (so it could offer more comprehensive tel-
time, has started gaining purchase over the past few
ecommunications services) and Walt Disney’s 2006
months, with several big ticket deals being an-
acquisition of Pixar (to extend its animation capabili-
nounced; Whatsapp- Facebook, Shire-Abbvie, Myntra-
ties and add new films it could market to its estab-
Flipkart, to name a few.
lished audience) come under this bracket. Premier
FOOTBALL TRANSFERS AND CORPORATE M&A The footballing world is no stranger to the idea of M&A, though in an entirely different context. It is not possible for football clubs to buy each other, so acquisitions are limited to people: the manager, the players and the marketing and support staff. In fact, the transfer market, which facilitates the acquisition of players, is the most talked about topic when transfer windows open, and is fuelled by incessant speculation and hectic negotiations. Before we further develop this analogy, let’s take a step back and try and understand why companies in the financial world go in for M&A. Though the reasons for such activities would
League clubs have spent more than £4.4bn on players since the transfer window was introduced 12 years ago with this summer's spending set to cross £500m.
vary from case to case, they can be broadly grouped
Post 2008, when Abu-Dhabi-based oil magnate Sheikh
under a few categories, like capability enhancement,
Mansour bin Zayed Al-Nahyan bought Manchester
expansion into other markets, reduction in competi-
City FC, the club’s total cash outlay was £930.4m, of
tion, financial survival etc. A close examination of
which only £365.3m was generated from their own
transfer deals in football reveals striking similarities
operations. Chelsea’s acquisition of Diego Costa is a
with these points.
clear indication of Mourinho’s intention to adding
CAPABILITY EXPANSION
some firepower to his long depleted strike force, and providing support to Fernando Torres who often cuts
Capability expansion refers to a company’s efforts in
a lone figure up front. Luke Shaw’s move to Manches-
shoring up its resources and improving resistance to
ter United to plug deficiencies in left back can also be
possible weaknesses. One of the major reasons be-
viewed similarly. Other familiar names among big
hind acquisition is to appropriate some capability that
spenders are Barcelona and Real Madrid, who are
the target company has and that the acquirer wanted
constantly on the lookout for promising new talent, to
or needed. Comcast’s 2002 acquisition of AT&T
InFINeeti | Annual Issue | August 2014 7
maintain their reputation of being football power-
mobile networks for access to free content. All of their
houses. Roman Abramovich's billions have made Chel-
promotional advertisements feature Shinji Kagawa,
sea the Premier League's biggest spenders over the
their Japanese midfielder, in an attempt to connect
past decade with £681m going on transfer fees.
with their fans in Japan. Another instance of clubs try-
EXPANSION
ing to build their image in new markets is the establishment of soccer training camps and youth leagues,
Another main motivation behind M&A is to expand
as entry points to an expansion in the future.
into a new geographic location. Examples include the acquisition of Lucent (U.S.) by Alcatel (France) in 2006, Bharti’s deal with Zain to buy the Kuwaiti firm's mobile operations in 15 African countries in 2010 and South African Breweries’ purchases of Miller (U.S.) in 2002 and Bavaria Brewery (Colombia) in 2005. Extrapolating this argument to the world of football, a club’s monetary fortunes are linked to the following that it enjoys across the world.
Source: www.thesportsbank.com
Many a times, the rationale behind M&A is to expand your market share by buying out competition. Acquisition of Thums up by Coca Cola in 1993 falls under this category. Thums Up had an 85% market share when sold, and it made sense for Coca Cola to swoop in and bring Thums Up under its wings. There are endless examples for this when it comes to football. A case in Source:www.wowtechy.com
point is Borussia Dortmund’s midfielder Mario Gotze’s move to rivals Bayern Munich last summer, followed
The more popular a club is throughout the world, the
by striker Robert Lewandowski’s exit to the same club.
more point of sale opportunities it will have for fans to
Juan Mata‘s move to Manchester United constitutes a
purchase merchandise, thereby filling the coffers of
rather curious move by Chelsea to purportedly make
the football club. It would be pertinent to talk about
life difficult for its contenders Arsenal, Liverpool and
Manchester United’s efforts in building up a fan base
Manchester City.
in Asia, ranging from official websites in local languages (manutd.cn, manutd.jp) to tie ups with local
InFINeeti | Annual Issue | August 2014 8
have in key midfielder Arturo Vidal. Chelsea veteran Frank Lampard being offloaded to rivals Manchester City, is akin to companies getting rid of streams that are no longer considered core to their business.
Source: www.iamwire.com
CONCLUSION Having talked of M&A in companies and their similarities with transfers in Football, it is important to sound a word of caution; the path to a successful deal is laden with numerous obstacles in all shapes and sizes. Source:www.etoro.com/www.manutd24.com
Instances of failed deals and failed transfers are many LEVERAGED DEALS Many M&A deals take shape of a leverage deal in which the whole, or a part of a struggling business entity is taken over by an acquirer, often one aligned with its field of work, so as to open up the possibility of collaboration with the acquired business. Microsoft’s acquisition of Nokia, Sun Pharmaceuticals’ taking over of struggling Ranbaxy are examples for the same.
in number; America Online (AOL) and Time Warner in 2007, Sprint and Nextel Communications in 2005, Motorola and Google (2012); the list is depressingly long. A Forbes article states that the probability of success of an M&A deal is about 50%, a coin toss. The football world is also replete with instances of failed transfers; Marouane Fellaini to Manchester United, Fernando Torres to Chelsea, Andriy Shevchenko to Chelsea, Mario Balotelli to Manchester City. It is therefore imperative to understand to the last detail,
A lot of football clubs resort to this measure so as to
the implications of a possible merger, or a player ac-
avert the risk of financial crisis. Cash strapped Ju-
quisition, for a deal once signed cannot be undone so
ventus, for instance, is trying to make some money
easily.
out of the significant interest that the other clubs
InFINeeti | Annual Issue | August 2014 9
OVERVIEW The third edition of the annual budget analysis session, Budget Plus 3.0, was organized at Indian Institute of Foreign Trade, Kolkata. The esteemed discussion panel included Dr. K. Rangarajan, Head, Kolkata
the Budget affects everyone from a housewife to a business tycoon and how everyone has diverse views on it. He added that IIFT has invited academicians, faculty and industry experts to have a discussion on the budget and what it holds for every one of us.
Center, Dr. Ranajoy Bhattacharyya, Professor of Eco-
The Student Body gave an enlightening presentation
nomics, IIFT, Dr.Saikat Sinha Roy, professor of eco-
on the highlights of the budget. It was a succinct over-
nomics, Jadavpur University, Mr.Pankaj Agarwal and
view, throwing light on the various schemes and initi-
Mr.Akash Mansinka from Ernst and Young. The discus-
atives taken by the Government.
sion was moderated by Dr. Bibek Ray Chaudhuri, Pro-
Chaudhuri threw light on the “developmental per-
fessor, IIFT.
spectives” and spoke on how he looked forward to
Dr. K Rangarajan welcomed everyone and said that
Dr. Bibek Ray
the economy getting back on track with “higher growth, stable inflation and prudent policy system”,
InFINeeti | Annual Issue | August 2014 10
although the Consumer Price Index, being double- tures of the budget different from the earlier ones is digit, was still a major issue of concern. The Budget that most of the changes are for more than two lays out the roadmap to achieve a growth rate of 7- years and no timeline has been specified. Moreover 8%. According to him, “The Government is targeting tax benefits have been given to the industries that small savings".
have their own power units. Dividend distribution tax, the tax paid by a company on its dividends paid, “needs to be grossed up".
Students listen as experts dissect every aspect of the budget
Mr. Pankaj Agarwal spoke on the indirect taxes which comprises the customs, excise and service tax. He enlightened the gathering on how Service Tax, though Dr.Saikat Sinha Roy analyzing the budget
introduced only in 1994, garners the highest tax revenues for the Government.
Dr.Saikat Sinha Roy spoke as to how, for the last two years, the economy has not been performing well. He also pointed out the initiatives taken to incentivize The trust of the investors in the Economy needs to the use of renewable energy resources. The decision be restored. According to him, the budget “is a docu- of the Government to levy taxes on the services proment of intent”. The current government manifesto duced by the educational institutes will add to the included the need for an overhaul of infrastructure revenues of the Government. by which the Government will get revenue. He said Dr. Ranajoy Bhattacharya took a different stance from that subsidies should be phased out “for the Indian the other panelists and remarked that he was economy to compete with the other economies”. “disappointed by the budget”. He said that the GovAlthough the current government is perceived to be ernment had missed a huge opportunity. Having been “industry friendly, yet retrospective taxes have not elected with an “overwhelming mandate”, it been taken off”. According to him, one of the fea-
InFINeeti | Annual Issue | August 2014 11
was time to take some hard measures. According to The audience, comprising of students from IIFT, were him, the budget was a “pure eyewash”. He questioned very participative and had various questions ranging the transparency of the Government and its attempt to from the duration of the long term capital gains to “surreptitiously
reduce
expenditure
behind
the increasing FDI in defense.
scenes”, referring to the reduction in the expenditure The panel concluded that though the budget was “welcoming”, yet more was expected of it. They called in for “simpler tax administration” that would lead to larger tax compliance. All in all, the session was quite enriching and informative as students, both from the first year as well as from the second year got to understand the nuances on Agriculture, Rural Development and Social sector. He remarked that “Agriculture is the main bottleneck in India” and enlightened us on the fact that Agriculture employs 55 percent of the population yet accounts for only 14 percent of the GDP. This structural flaw needs to be addressed.
of the budget and also understood how to dissect the nitty-gritty of the budget. So, from next time onwards they would know what to look for in the budget and would be in a better position to analyze it.
-By Mohd Zeeshan - IIFT
InFINeeti | Annual Issue | August 2014 12
GST– IS THERE ANY FUTURE? BY- SNEHA SHRIVASTAVA, IIM-RAIPUR
INTRODUCTION The most awaited Goods and Services Tax (GST), a major reform in the Indian taxation system with respect to indirect tax, has been announced in the Union Budget of 2014. Every industry is looking forward to this transformation with the positive hopes. There
cascading effect has been reduced to a certain extent. Moreover, the bulk of the tax revenue goes to the central government. So in order to compensate the state government it levy multiple indirect taxes on the revenue generated from goods, for example inter-state sales tax, octroi etc.
are questions in the minds of people from every sec-
The proposed GST is aimed at replacing multiple indi-
tor of economy regarding the impact of the changes
rect taxes like central excise, VAT, service tax with the
that would be brought by GST. The manufacturers,
common taxation system. And this can have major
wholesalers, retailers and the consumers are waiting
implications on the Indian economic growth. GST
to know their stake associated with the reform.
would bring in higher revenue for the government by
BACKGROUND
broadening the tax base and minimizing exemptions. This would also redistribute the tax burden equitably
The current tax system is inefficient and complicated due to the tussle between the central and the state governments to generate maximum revenue for
between the manufacturing and the service industry. THE PROPOSAL OF DUAL GST
them. Central government levies tax on the manufac-
The current proposal of dual goods and service tax
ture of goods through CENVAT, on services through
will not distinguish between goods and services. And
Finance Act and on the sale of goods through Central
the central and the state GST would be levied on the
Sales Tax Act (CST). States again levy taxes on the
taxable value of the transaction. Except few assump-
sales of good that is independent of the tax levied by
tions, all the goods and services would be covered
the Centre. This multi-layered tax system leads to the
under this scheme.
cascading effect on the indirect taxation system. However, after the introduction of VAT in 2005, the
Currently the indirect taxes on goods is around 20% and services are taxed at around 10%. But once the
InFINeeti | Annual Issue | August 2014 13
The cascading effect of multistage taxation in the supply chain GST is implemented, the final rate for GST is expected
goods. This leads to the operational inefficiency. Fur-
to be around 14-16%. Further, the proposal has been
ther, the impact of the increase in the number of
put for the dual tax structure which will impose single
warehouses is borne by the end consumer in terms of
tax rate for services and multiple tax rates for the
cost or they have to sacrifice on quality.
goods. WHAT WILL EXACTLY HAPPEN? The implementation of the goods and services tax would impose a single tax on the goods and services. At the end the amount of tax the consumer has to pay will remain almost same in the short run. But the distribution of taxes would be equal on both the manufacturing and services sector. This will reduce the extra burden that the manufacturing sector is carrying. Moreover, it will broaden the tax base by minimizing exemptions and scope of corruption by making the taxation system more transparent. The cascading effect of the taxes imposed by the centre and the state would disappear. IMPACT ON THE SUPPLY CHAIN AND LOGISTICS:
But the GST will bring a common and centralized market for the sales of goods and services across the country. This will increase the operational efficiency of the supply chain and the benefit will reach to the end consumer as well. IMPACT ON GDP: Due to the transfer of major share of indirect tax collected to the centre, state levies multiple indirect taxes on the goods and services. To avoid this the taxpayers play with the loopholes in the tax structure and try to avoid paying the tax, leading to larger number of exemptions. This leads to losses for the government. But, the implementation of GST would bring in transparency and reduce complexity. It will broaden the tax base and would redistribute the burden between the
Currently due to the complex tax structure the inven-
manufacture and service sector. Further, under GST all
tory and the distribution decisions are taken so as to
the goods and services would be covered and the num-
avoid as much tax as possible. The manufacturers
ber of exemptions would be reduced. And this will gen-
maintain warehouses in different states to save on
erate more revenue for the government.
central sales tax imposed on inter-state movement of
InFINeeti | Annual Issue | August 2014 14
The current proposal for the implementation of dual GST The center and state will have their fixed share and IMPACT ON THE SYSTEM: there would not be scope of either unnecessary tax imposition or tax avoidance. This will bring more investment, generate more employment and would promote exports. All this together would add to the GDP of our country. IMPACT ON THE MANUFACTURING SECTOR:
The reform will increase the efficiency of the system by bringing in transparency. The different sectors would be treated equally and the consumers would have to pay the fair price for the goods and services. The transparency will bring compliance to the government norms and would reduce corruption.
As discussed above the manufacturing sector has For example, in case of the goods manufactured, supbeen pressed with the extra burden of tax as it pro- pose the consumer pays the GST of 6% while buying vides the scope for multi-stage taxation. This has the product. Here the tax amount paid by the consummade this sector less attractive for investment. But the GST would release the ailing manufacturing sector from the heavy tax burden. This would make
er would be shared by the manufacturers, wholesalers and retailers equitably based on their cost of manufacturing or services.
this sector as a profitable option which would spur its ANALYSIS- FOR THE FUTURE OF GST growth. As a result, cost of production will decrease and export will increase. IMPACT ON THE PRICE OF GOODS:
With respect to the prior experience - Implementation of VAT in 2005-2008: The implementation of value added tax (VAT) in 2005
In the long run, the price of goods would decrease as had increased the income tax revenue for the governthe profit earned in the upper end of the supply chain ment of India to 5.9% of GDP in 2008 when compared would be transferred to the consumers as well.
to the 3.7% of GDP in 2004. Working on the
InFINeeti | Annual Issue | August 2014 15
similar lines of VAT, GST could also reduce the com- reduce the complexity and would bring in more transplexities in the tax structure which gives the scope of parency. It would reduce the scope of red tape and corruption. It will bring transparency which will in- tax avoidance or exemptions, which is otherwise poscrease the revenue generated from the income tax.
sible in the existing taxation system.
WITH REFERENCE TO OTHER COUNTRIES:
CONCLUSION
According to the report published by the National To summarize, the implementation of GST would not Council of Applied Economic Research, implementa- have direct impact on the consumers in the short run, tion of GST would increase GDP by 0.9%-1.7%. Canada as they have to pay almost same tax for the consumpexperienced 1-2% increase in GDP after the imple- tion of goods and services. However, in the long run mentation of GST. On the similar lines, when GST was the benefits earned by the manufacturers, wholesalers introduced in New Zealand in 1987, it increased the and the retailers would be passed on to the consumers revenue generated from tax by 45%. Currently, there are 160 countries in the world who have adopted GST. WITH RESPECT TO THE BJP’S ELECTION MANIFESTO: BJP government is strongly in the favor of bringing transparency in the tax system and the growth and development of all the sectors of economy. The evidence collected from the implementation of VAT in
and they have to pay lesser on the purchase of goods. Moreover, the burden on the manufacturing sector will get reduced as there will be equitable distribution of tax between the manufacturing and services. This will encourage investments in the manufacturing sector, which is currently lagging behind in our country. The boost in the manufacturing sector will create the collateral benefits like increase in employment, exports, investments opportunities, FDI etc.
India in 2005 and the implementation of GST or VAT in All these factors would together add to the revenue other countries shows the brighter picture. It reveals generated from the indirect tax and would accelerate that the centralization of the taxation system and the the growth of the country. single tax rate for both the goods and services would
InFINeeti | Annual Issue | August 2014 16
Fin Lingo CHINESE WALL
ratings to corporate, municipal or sovereign bonds.
It is the communication barrier
These ratings correspond to the risk involved in buy-
that should exist between
ing these bonds.
different departments of a fi-
CLUB DEAL
nancial institution to avoid any possible conflict of interest. For example, if a firm offers both brokering and corporate advisory services, the client should be able to trust that the sensitive information which it is sharing with the advisory department would not be used by the brokering department to make undue financial gains.
It is a private equity buyout in which the controlling interest in a company rests with several different private equity firms. This group pools its assets together and collectively makes the acquisition. PE firms do this in order to acquire expensive companies which they would not have been able to
INVESTMENT GRADE
acquire going alone. Also, it is an effective risk man-
It is a rating system that indicates the risk of default
agement strategy since the risk is now distributed.
for a bond issued by a company or a sovereign.
CONDITIONS PRECEDENT
There are bond rating agencies such as Standard & Poor’s, Moody’s and Fitch among others that assign
The set of conditions that a borrower must meet before he can request that credit facilities be made available to him. These conditions are a part of the lending agreement that the borrower might have with a bank or financial institution.
InFINeeti | Annual Issue | August 2014 17
Fin Lingo FALLEN ANGEL
receive a pre-determined fixed interest rate. Swap-
It is a security which was once in-
tion is short for call swap option. It is a hedging tool a
vestment-grade but has since been
buyer might use if he believes the interest rates are
downgraded to junk status. Not all
likely to go down.
fallen angels are securities of com-
PITCHBOOK
panies headed towards bankruptcy. For example, a company with strong fundamentals may temporarily lose investor confidence due to extraneous factors. This may result in a downgrade of credit rating.
A book of graphs, charts and market data along with recommendations
for
the
market presented to prospective clients by bankers and financial institutions. The ob-
EXCHANGE TRADED FUND
jective is to land a mandate to
An investment fund that holds stocks, bonds or com-
handle the client’s funds.
modities and is traded on an ex-
MATERIAL ADVERSE CHANGE (MAC)
change like a regular stock. An ETF tracks an index and tries to replicate the return provided by it. For example, when one buys into an ETF tracking the Sensex, they are buying into a portfolio of stocks being traded there. The objective here is not to outdo the performance of the Sensex but to match it.
Material Adverse Change (MAC) is a condition that is usually included in loan agreements, providing
protection
to
lenders
against changes that may have a significant effect on the business, financial condition and assets of the borrower. After the occurrence of a MAC event prior to closing of a deal, lenders usually
CALL SWAPTION
reserve the right to modify the interest rate or other
Call Swaption is a category of op-
terms of the agreement. For already closed deals,
tion which gives the owner a right
lenders may refuse any further drawing of cash and
but not the obligation to exercise
demand immediate debt repayment.
a swap. If exercised the buyer would have the right to
InFINeeti | Annual Issue | August 2014
COVER STORY
14
InFINeeti | Annual Issue | August 2014 19
COVER STORY BUDGET ANALYSIS : KYA ACHE DIN AANE WALE HAI? BY– SURYANARAYAN PANDA -IIFT INTRODUCTION
ing industry the future wheel that will drive the econ-
Election 2014 was a very high voltage affair where
omy. Steps such as extending excise duty cuts on vari-
many promises were made by our politicians to bring
ous products like auto and consumer durables can
the economy back on track. The current government
help in raising the private consumption and spruce up
carries the expectations of a billion plus population to
capacity utilisation.
salvage the economy from the deep economic mess it
Source: Ministry of Statistics and Programme Imple-
is currently in. With this backdrop the Union budget
mentation
2014 was tabled on 10th July in Parliament by our Finance Minister Mr. Arun Jaitley. The Finance Minister had limited time at his disposal to come up with any big bang reforms. Nevertheless he was successful in making some good decisions in the Union Budget. The Finance minister announced a slew of measures for correcting the economy in fields of manufacturing, job creation, education, banking and infrastructure. So, although the budget measures may not be the big ticket reforms that people were expecting but these same measures have the potential to cause transient but critical changes in the system. Some of the key measures that the government took could have a very
Infrastructure push in the form of better road connec-
positive effect on the economy.
tivity could push the demand of automobiles in our
MANUFACTURING BOOST
country thus giving a boost to the industry that has been in stagnation for the last couple of years. The
The Budget has specified a number of measures to rectify the manufacturing sector and bring it back onto the growth track. The budget has announced steps to raise private consumption and make manufactur-
biggest advantage of the growth of manufacturing sector is that the effects are more prominently visible in the rural areas than the urban areas.
InFINeeti | Annual Issue | August 2014 20
COVER STORY
So, manufacturing is the best tool to reduce the Urban
Infrastructural push of the government thus improv-
-rural income divide.
ing the standard of life of average Indians.
INFRASTRUCTURE PUSH
INCREASE OF TAX EXEMPTION
A greater thrust on the infrastructure was unmistake-
The Finance Minister increased the basic tax exemp-
able in the Union budget. The overall spending for in-
tion rate from the current ₹2 Lac to ₹2.5 Lac for all
frastructure is budgeted to increase by 24% to
individuals. For women and senior citizens between
₹210000 crores. The government has allocated ₹7060
the age group of 60 to 80 years the basic exemption
crores to setup 100 smart cities. This will not only
rate is increased from ₹2.5 Lac to ₹3.0 Lac. The invest-
boost the infrastructure sector but will also provide
ment related deduction under section 80C has also
low cost housing options to the millions of poor peo-
been increased from ₹1.0 Lac to ₹1.5 Lac. These in-
ple who cannot afford proper housing.
creased tax exemption rates may cause a revenue loss
Source: Ministry of Finance
of ₹22000 crores to the government. However, the increased tax exemptions will ensure greater money with the consumers, thus increasing the disposal income with the general public. This will increase consumption and this will get reflected as higher economic activities. The indirect beneficiaries of the raising of tax exemption could be FMCG, consumer durables, two wheelers companies as well as the housing industry in the form of increased consumption. EASE OF DOING BUSINESS
The Budget has also focussed on ways to fund the In-
Investor sentiment is very important for the accrual
frastructure push by setting up of 3P India entity and
of required investments to fund our economic growth.
Infrastructure bonds. This could create a massive push
Hence, the ease of doing business is a very important
for better infrastructure and the direct beneficiaries
factor that any country should keep in mind. Sadly,
would be the Engineering, Procurement and Construc-
India ranks at 134 out of 189 countries in the Interna-
tion (EPC) companies. The government has identified
tional Finance Corporation’s ‘Ease of Doing Business’
that 40% of Indians do not have basic sanitation facili-
index. The Finance Minister has taken a few steps in
ties and the government has not provided its share of
this regard to give a fillip to the overall operating envi-
facilities. The basic infrastructural issues like sewage
ronment for an investor. These steps should incentiv--
drain and access to roads could be addressed in the
InFINeeti | Annual Issue | August 2014
COVER STORY
21
-ise value addition, generate income and create more
domestic market and advantage of operating out of
jobs for an average Indian thus improving the overall
India this new policy could give an impetus to domes-
environment for doing business. Moreover it could
tic manufacturing of defence equipments by domes-
also make the Indian investment story attractive for
tic companies. It could also attract those foreign com-
foreign companies and could attract highly needed
panies that were looking to invest in Indian defence
foreign funds.
manufacturing as part of the earlier Defence Offset
Source: Ministry of Finance
Policy. PUSH TO EMPLOYMENT CREATION
INCREASE IN FDI IN DEFENCE The Union budget presented a 12.43% hike in defence budget to 229000 crores of rupees. The Finance Minister, who also holds the portfolio of the Defence ministry talked about the important task of indigenous production of defense equipments. To boost
The budget has allocated ₹ 330 crores to set up 6
home production, the Finance minister hiked the FDI
mega clusters around the country to boost the em-
in the defence sector to 49% from the earlier 26%.
ployment opportunities in the country. The budget
The government has taken a sound decision by de-
has also reduced the excise duty in labour intensive
linking FDI up to 49% for transfer of state of the art
sectors like footwear from 12% to 6% for footwear
technology. The primary focus of the government is
priced between ₹500 to ₹1000 and few specific foods
to reduce the dependency of the security of the na-
packaging industries from 10% to 6%.
tion on supplies by other countries. Given the large
InFINeeti | Annual Issue | August 2014 22
COVER STORY
The small and medium enterprises (SME) sector em-
front.
ploys 8% of all the employees in our country. Giving a
In our country where the working population consti-
boost to the SMEs of our country, the finance minis-
tutes 64% of the entire population, tourism and man-
ter announced a ₹10000 crores fund to back early
ufacturing are two spheres that could create enough
stage companies. This is a huge respite for start-ups
jobs. Moreover, due to requirement of less invest-
in need of money and this will boost their ability to
ment in tourism sector, our country can afford to in-
survive.
vest and develop this sector. The skill requirements
Another employee intensive industry that received
for an employee working in a manufacturing firm are
good government attention is Tourism. The budget
far less than the skill requirements of an employee
has proposed to create five tourist circuits at a cost of
working in the service sector. Hence, boosting the
₹500 crores and proposed to launch the E-Visa facili-
manufacturing industry could be a pragmatic way to
ty. Such small incremental steps like E-Visa facility for
create low skilled or middle skilled jobs so that peo-
foreign tourists can create a vast change in the num-
ple could move away from agriculture related low
ber of foreign tourists’ arrivals especially when the
paying jobs to better paying manufacturing jobs.
number of foreign tourists’ arrival proportionate to population of our country is one of the lowest in the world and there is a huge upside to achieve on this
InFINeeti | Annual Issue | August 2014 23
COVER STORY
TAME INFLATION
ACHE DIN AANE WALE HAI
The government has encouraged states to allow
The measures undertaken by the government in the
setting up of private agriculture market in order to
Union budget shows the serious efforts put in by the
keep a check on the state sponsored APMCs. This will
government. The measures may be small and incre-
increase efficiency in terms of timely delivery of pro-
mental but such small measures will go a long way in
duce as well as will reduce the food wastage. Key
transforming our economy locked in low growth and
measures like price stabilisation fund and higher
high inflation. I believe that the government has put its
budgetary allocation for rural infrastructure and
sincerest efforts in making the budget a pragmatic
warehousing were announced in the budget that will
budget that touches the life of every Indian in a posi-
improve the supply chain of agriculture products as
tive way and hence I believe that the election promises
well as will ensure the timely arrival of essential sea-
of ‘Ache Din Aane Wale Hai’ that was made by our poli-
sonal crops like onions etc.
ticians seem quite plausible.
InFINeeti | Annual Issue | August 2014 24
TOP FINANCIAL EVENTS OF 2014 MR. ARUN JAITLEY BECAME THE FINANCE MINISTER
man software company SAP, will take over as manag-
Mr. Arun Jaitley took over the office of the Finance ing director and chief executive. minister under the current NDA rule in the 16th Lok Sabha. Mr Jaitley, who holds a Law degree from the University of Delhi, got the plum post along with the Defence portfolio. AIRASIA ENTERS INDIA Asia's biggest
FLIPKART
ACQUIRES
MYNTRA Flipkart India Pvt Ltd, the country’s
largest
e-
commerce
firm,
ac-
quired rival Myntra.com in the largest-ever deal in the country’s e-commerce market. Though the two Bangalore-based companies
low-cost
did not disclose the merger amount, analysts’ esti-
carrier, the Kuala Lumpur-
mates suggest the cash-and-stock deal is likely to val-
based AirAsia, floated a
ue online fashion retailer Myntra at more than $330
joint venture with Tata
million.
Sons, the holding company of India's largest conglomerate, and Telestra Tradeplace, an investment vehicle of the Bhatia family, to launch a new airline in India called as Air Asia India. AirAsia will have 49% stake, Tatas 30% and Bhatia will hold 21% in the company, which will be headquartered in Chennai. VISHAL SIKKA TO BE THE NEW CEO OF INFOSYS
$100B BRICS FUND TO TURN CONCRETE IN RIO The BRICS nations formally announced the setting up of a $100-billion fund, which will help member countries tide over a current account deficit crisis, at their fifth summit in Brazil. China will be the largest donor to this fund and is
Infosys appointed its first out-
expected to contribute around $41 billion. India, Rus-
sider to head the company, hop-
sia and Brazil will contribute $18 billion each with
ing new blood will help in its
South Africa bringing in the remaining $5 billion.
struggle to stay competitive, as it tries to evolve from a low-cost outsourcing company into a global technology brand. India's second-largest software exporter said Vishal Sikka, a veteran of Ger
SUBRATA ROY IN TIHAR JAIL Subrata Roy, the flamboyant chairman of the financial services group Sahara India Pariwar and owner
InFINeeti | Annual Issue | August 2014 25
of properties such as New
ative to peers is the key factor that has kept the
York’s Plaza Hotel and a
stock buzzing. In addition, a special dividend of ₹40
stake in India’s only For-
declared last week has attracted investors.
mula One racing team, surrendered
to
police
after the nation’s top court issued a warrant in a probe into whether he failed to refund US$3.9 billion to his depositors.
INDIA BLOCKS WTO DEAL ON TFA India scuttled the Trade Facilitation Agreement (TFA) which is part of the Bali package at the WTO because it was not satisfied
FLIPKART VALUED AT $7 BILLION
with the progress on
India’s biggest online retailer has
finding a permanent solu-
received as much as $1 billion in
tion to the issue of allow-
fresh capital from its existing inves-
ing it higher public stockholding of food grains. Last
tors including Tiger Global, Naspers and Singapore's
ditch attempts to meet the 31 July deadline to
sovereign wealth fund GIC. Singapore's GIC became make the TFA a WTO rule failed as India did not supthe latest investor to put its faith in India's largest port the move. At the heart of the problem is a rule online retailer. The fund raising, the largest-ever by that caps subsidies to farmers in developing countries an Indian start-up and among the largest-ever by any at 10% of the total value of agricultural production, Internet start-up globally, values Flipkart at over $7 based on 1986-88 prices. Developing countries complain that the base year is out-dated and that they Billion. need to be provide food security TCS AT RS 5 TRILLION
to the poor.
TCS, India’s most valuable company based on market cap, crossed Rs. 5 lakh crores in market value, a big MICROMAX BEATS SAMSUNG achievement considering the tough business environ- Home-grown domestic phone ment it has been operating in. It has also found itself vendor Micromax has unseated Samsung in India as a berth among the global top five business software the top handset seller in the 2nd quarter of 2014. A companies. The market value of TCS is more than study conducted by technology market research firm that of the next four Indian IT companies combined, Counterpoint Research says that with a 16.6 percent and exceeds that of the other
share of the mobile market, Micromax is followed by
Tata Group firms put together as
Samsung with a 14.4 percent market share. However,
well. Sustained growth momen-
in the Smartphone segment, Micromax is still placed
tum over the past four years rel-
second with Samsung holding nearly 25 % market.
InFINeeti | Annual Issue | August 2014 26
ROLE OF TECHNOLOGY IN CHANGING THE BANKING INDUSTRY
BY– AVIRAL VERMA & SANJEEV RANJAN -IIFT
INTRODUCTION
then operated in restricted mode. With the arrival of
Shabby interiors, grilled counters, disinterested offi-
foreign tech savvy banks, the public sector banks
cials, ceiling touching files, never ending queues to
were forced to restructure the banking operations to
spick-and-span offices, open counters and data hun-
have a competitive edge.
gry computers, this has been challenging journey for banking industry. Ever since the inception of banking system in India from the early establishment of Bank of Hindustan in 1770 to its current state; banking system has constantly been evolving. Nationalization of major private banks in 1969 was one of the leading milestones in the history of banking in India that made bank accessible to unbanked population of India. But the most significant change was the opening of Indian economy towards the global economy that brought the paradigm shift in the banking system in India. Liberalization broke the shackles of the sector which till
InFINeeti | Annual Issue | August 2014 27
EVOLUTION OF BANKING STRUCTURE Technology has power to transform the fundamental economics of any industry and banking is no different. The banking industry has taken enormous strides with the use of technology. Most of the banking transactions can now be conducted over the internet. Along with it, technology has reduced the barriers and changed the economics of delivery. KEY MILESTONES IN BANKING INDUSTRY
banking sector and provided the individuals hassle free transactions. Visa, which is a global payment technology company, processes 47,000 transactions per second reliably, conveniently and securely. Presence in 200 countries with $2.2 billion Visa cards and 2.1 million ATM (as of December 31, 2013) it accounts for a total of 91.6 billion transactions worth $4.5 trillion on 31 March 2014. NEFT: National Electronic Funds Transfer facilitates electronically transfer of funds from any branch to
ATM: Addition of facilities such as fund transfer, bill
any individual or firm. NEFT has an upper ceiling of
payment and account maintenance has reduced the
50,000 per transaction.
footfall at the bank branch which has brought down the operational costs. Branches are now able to cater more customer base from a single branch. As per forecasts, ATMs per million populations will increase from 85 to 170.
RTGS: Real time gross settlement system means continuous settlement of funds by an individual or by an order within a span of 30 minutes. No upper ceiling in transaction makes it the most favorable online transfer mode of payment in case of larger transaction. Plastic Money- Credit and Debit Cards: The biggest game changer in the banking industry was the introduction of plastic money. Debit and Credit card payments through payment gateway revolutionized the
Mobile banking: Over the years it was felt to have a technology which goes beyond ATM. In context of India which boast of a mammoth subscriber base of 900 million mobile users this was even more necessary.
InFINeeti | Annual Issue | August 2014 28
Mobile banking initially provided SMS alert facility but
Cheque Truncation System: CTS introduced cheque
later added services such as account enquiries, bill
clearance using MICR. It helped in reducing the turna-
payment, and fund transfer and loan requests. This
round time in clearing of cheques and curbing cheque
helped in enhancing customer experience and con-
frauds. ECS Electronic Clearing Service enabled repetitive and periodic transaction such as interest payment, salary and pension payment towards electricity, phone and water payments. DATA ANALYTICS IN BANKING Data analytics is the buzz word today. The highly competitive market requires banks to convert vast amount of data into meaningful information which could help them in generating sales and differentiated customer experiences. Banks utilize data analytics to
venience.
improve customer retention, cross selling, optimizing
CORE BANKING SOLUTIONS With the arrival of computer and internet, manual ways found their way out. IT revolution equipped the banking sector with CORE (centralized online realtime electronic) banking solutions. It helped in reduction of operational cost as printing and backup became centralized. CORE banking reduced the manpower requirement and increased efficiency by reducing the transaction cycle time. It provided to customer the much required freedom to transact anywhere. It facilitated accurate and quick implementation of
price structure, gain customer insights and implement real time event management.
banking policies. All this helped in increasing business
Most private banks utilize their business analytics to
opportunities which led to reduction in legal expense
fine tune their campaign and marketing efforts. These
and penalties.
analytics provides insight and help to identify new customers and reduces marketing spend per customers.
InFINeeti | Annual Issue | August 2014 29
2013 revenue of 423 billion rupees. Although European banks are struggling when it comes to IT spending as compared to others because of the little growth of European economy. Still banking IT spending will rise by .4% in 2013 to $59.5 billion, with spending expected to stay flat through 2015.
CHALLENGES Based out of a survey, the graph above shows the rea- Two banks in the Persian Gulf lost $45 million in a few sons why banks implement business intelligence and hours. A British company reported that it lost $1.3 bilanalytics. IT SPENDING IN BANKING SECTOR The upsurge in spending on IT products by banks is encouraging and indicative of the emphasis being placed on technology. Total IT spending in banking sector across North America, Europe, and Asia-Pacific will grow to US$188.0 billion in 2014, making an increase of approximately 4.4% over 2013. Indian banking and securities companies have forecasted to spend 477 billion rupees on IT products and services in 2014, which amounts to an increase of 12.7 percent over
lion from a single attack. Brazilian banks say their customers lose millions annually to cyber fraud. While banks’ customers have turned tech-savvy and have started using online banking services and products, evidence indicate that fraudsters are devising new ways of frauds by exploiting the loopholes in systems and processes. Customers are being exposed to Phishing, Watering hole, Pharming and Credit Card Redirection and different malware based-attacks.
InFINeeti | Annual Issue | August 2014 30
lations. Also, the software behind it is still under beta phase and a major portion is under development.
Rupay: RBI launched India’s first ever domestic card scheme RuPay on March 2012 with an entry level acceptance at ATM’s. Its long term aim is to evolve as an alternative to MasterCard and Visa, but before FUTURE JOURNEY AHEAD Bitcoin has emerged strongly as an alternative to con-
that it still has to cover a lot of ground. CONCLUSION
ventional internet banking. Marketed as an open
The pre and post liberalization era has witnessed
source and decentralized technology, it is finding its
huge changes in the banking sector and the advent of
user base at an exponential rate. The inclination to-
technology in this sector has spread new colors. Now
wards Bitcoin comes due to the fact that it poses no
technology has become the integral part of the bank-
restriction on the transaction amount and is free from
ing sector right from driving the basic banking ser-
bank charges. This is why it has been witnessing in-
vices to the introduction of several new products and
creasing acceptance around the globe. It is currently
services. It is quite evident that what we see today
values at 584 US Dollar/ per Bitcoin
won’t stay the same in coming years. Banking indus-
The financial bodies have time and again raised concerns over the use of Bitcoin as a full-fledged tool for transactions. Currently the user base is quite small, which limits its use as a normal currency. It is highly volatile and as a result its value experience high oscil-
try will keep chasing the fast paced technology for its betterment.
InFINeeti | Annual Issue | August 2014
NATIONAL IT CONCLAVE 2014 Theme: THE NEXT BIG THING IN INDIAN IT Date: 30th August, 2014 Venue: Swissotel, Kolkata SESSIONS INAUGURAL SESSION - 09:30 to 11:00 am SESSION 1 – 11:15 am to 12:45 pm Recharging e-Governance SESSION 2 – 02:00 to 03.30 pm SMAC in the Indian context SESSION 3 – 03:45 to 05:15 pm Saturation vs Satisfaction
FEW SPEAKERS AT THE CONCLAVE
InFINeeti | Annual Issue | August 2014 32
REFORMS IN DIVIDEND DISTRIBUTION TAX : IS THE STEP BY GOVERNMENT TAKEN IN THE RIGHT DIRECTION?
BY– MOHNISH KHAINI - IIM, SHILLONG
INTRODUCTION
idend at a prescribed rate.
Decisions about the Dividend pay-out by far have
This new system also ensured that the administration
been a subject of great curiosity and interest for the
of tax on dividend would be more efficient and effec-
analysts, researchers and academicians for a long
tive. The DDT aimed to improve economic growth
time now. The objective of the Dividend Pay-out is to
and flexibility by eliminating the tax bias against equi-
determine the extent to which the company is distrib-
ty-financed investments thereby promoting saving
uting the ‘dividends’ to its shareholders out of the
and investment. It also aimed at reducing the tax bias
earnings of the company.
against capital gains in the earlier tax system encour-
Both the investors and the corporate houses were expecting the abolition of the double taxation on divi-
aging investment and enhancing the long term growth potential of the economy.
dend income ever since the Government of India had
DIVIDEND DISTRIBUTION TAX (DDT) & DOUBLE
initiated financial reforms in 1991. In the budget of
TAXATION:
1997, the Finance Minister announced the abolition
There is a common notion that the dividends are
of tax on dividend income in the hands of the share-
often taxed twice. There is a school of thought that
holders. However, the budget also proposed a new
argues for tax exemption for dividend income. The
tax on the companies when they declared, distribut-
basis of their argument is that the taxation of divi-
ed or paid dividend. This new corporate dividend tax
dend income amounts to double taxation. The expla-
was also called as Dividend Distribution Tax (DDT).
nation behind this concept is that the corporate
The main objective of this was to discourage compa-
profits are subject to corporate tax. Since dividends
nies from increasing the dividend outflow significantly
are paid out of the profit earned which is already
leading to lower capital formation. Even though this
taxed, if the dividends are taxed again, it amounts to
system exempted investors from paying any direct
double taxation.
tax, it required them to pay an indirect tax on the div-
InFINeeti | Annual Issue | August 2014 33
This logic can be challenged on two grounds: There is a legal distinction between the corporation
REFORMS IN DIVIDEND DISTRIBUTION TAX IN THE UNION BUDGET 2014 – 15
as an entity and the individual shareholders who own The reforms brought in by the newly elected governthe company.
ment with respect to the direct tax will definitely be a
Tax rates currently in place were set with the shot in the arm for corporate. However, the only knowledge that there was taxation at the corporate dampener would be the amendment made in the diviand individual level. This means that if there is a mor- dend distribution tax. The amendment made was with al objection to ‘double taxation’, then, the remedial respect to section-115O of income tax. action would also require an increase in the corporate tax rate. IS IT UNFAIR TO RETAIL INVESTORS?
This section was introduced in income tax act in 1997 which made corporates liable to pay DDT while distributing profit to the shareholders. The recent amend-
It’s been over a decade that investors have been argu- ment in the act will increase the effective dividend dising that taxing dividend is unfair and it leads to double tribution tax as the basis for calculation of tax will be taxation. The argument is well grounded in a sense gross distributable surplus rather than net distributathat dividend is a source of income for the sharehold- ble surplus. ers and it is distributed after the corporate tax is levied from the gross earning of the firm. Hence, imposition of tax on distribution is injustice to them. However, is it really an injustice to shareholders?
The difference can be explained by the following example: Let’s assume, in 2013, Infosys made Rs.200 Crore profit and it distributed the entire profit to its shareholders.
In my opinion, it does not lead to double taxation. Why? As per our legal system, a company and its owner both are separate entities. Various benefits are ac-
In this case, the DDT that Infosys is subjected to pay would have been as follows:
crued to the owners because of this. For example, Dividend distribution amount: Rs.200 Crore/1.16995 = when a company faces in a crisis, its owners are not liable to pay any debt from their pockets. Considering that, when the gross earnings of a firm are taxed it is
Rs.170.95 Crore (The effective rate of 16.995% includes Education cess and surcharge as well)
deemed as an income tax paid by the firm and not by its owners. Moreover, when dividends are taxed, earnings of owners are taxed. Hence, the argument of double taxation is definitely fallacious.
Tax Paid: Rs.170.95*16.995% = Rs.29.05 Crore
InFINeeti | Annual Issue | August 2014 34
In contrast, Post amendment, suppose the profit fig- the earning and invest it in high NPV project as it ultiures are considered to be same for Infosys as per the mately affects the share price of the company in secexample above, the tax that Infosys has to pay in 2014 ondary market. would be,
Furthermore, if shareholders demand any dividends,
Tax paid: Rs.200 Crore*16.995% = Rs.33.99 Crore Dividend Distribution Amount: Rs.200 – Rs.33.99 = Rs. 166.01 Crore Thus this example shows that a minor tweak in the calculation of DDT can result in high income that the government is going to earn from it.
firms can distribute stock dividends in lieu of cash dividends. Stock dividends provide many benefits to both shareholder and a firm. It doesn’t enforce tax liabilities on shareholders. Firms don’t have to share its earnings and can invest in new projects to expand quickly. Stock dividends provide more liquidity to the stock in the secondary market.
IMPLICATIONS OF CHANGES IN THE DIVIDEND DISTRI- Hence, this proposed change will hardly be a cause of BUTION TAX
concern for the shareholders.
1 - Impact on corporates:
3 - Clientele effect:
There is an inverse relation between dividend distribu- Clientele hypothesis claims that certain type of investion tax and company’s dividend pay-out ratio. When tors prefer cash dividends since their marginal tax on dividend distribution tax is higher, companies prefer to dividend is less than their income from other sources. retain most of their earnings for future spending. Re- It is more prevalent in India as compared to the develtained earnings can be used to invest in high growth oped economies. project which will help in following manner: For
example:
In
Need for external financing will be less which will
2013, the maximum
reduce the cost of capital for the firms.
salary that Reliance
High growth projects will give an opportunity to firms can give to Mukesh to earn more profits which will be reflected in their Ambani, as agreed share price in the secondary markets. 2 - Impact on shareholders: Plethora of research has been done on what do small shareholders prefer: capital gain or cash dividends? Majority of them claim that shareholders are more satisfied with capital appreciation than cash dividends. They do not raise any objection if company retains all
by shareholders, is Rs. 38 crore. But Mukesh
Ambani
withdrew only 15 crore as a salary. However, the amount he received from cash dividend is massive Rs. 1,240.7 crore. The rationale behind this is that his salary is taxed at 30% while the earnings through dividends are taxed only at 15%.
InFINeeti | Annual Issue | August 2014 35
Promoter
Company
FY11 (Rs. Cr)
Azim H Premji
Wipro
1345.1
Mukesh Ambani
RIL
1240.7
Rahul Bajaj
Bajaj
917.4
Anil Agarwal
Vedanta
790.2
Keshub Mahindra
M&M
312.2
The above table shows the dividend earnings of busi- cies of taxes, the new government, during its maiden ness persons in the financial year 2011. This clearly shows the presence of clientele effect. Top managers, who have a final say in dividend policy of the company, have personal advantage in cash dividends which might lead them to incline towards cash dividends. The proposed change will not limit the gap completely, but will surely reduce the gap. CONCLUSION: Tax is one of the main sources of revenues for the Government. Decisions regarding taxes are always given paramount importance during the budget since these decisions set the stage for the economy’s growth during the course of the year. Well aware of these intrica-
Union Budget has brought in small but effective changes in key policies which would assist in streamlining the cash flows of its treasury. small tweak in the calculation of the Dividend Distribution Tax can generate huge revenues to the government. At the first instance, this change gives an impression that it is going to play a spoil sport for the corporates and investors but dwelling deep into this matter, the changes also present an opportunity for the corporates to look out for better growth oriented projects and thereby providing shareholders better returns on their investment by way of capital appreciation. Hence it can be said that in spite of having negative aspects, the positive aspects of the proposed change outweighs the shortcomings of the same.
InFINeeti | Annual Issue | August 2014 36
EQUITY RESEARCH : A PRECURSOR WHAT IS EQUITY RESEARCH?
WHAT’S N IT FOR YOU?
The purpose of investment research is to help inves-
InFINeeti from now on launches a new section, called
tors decide which asset class – cash and cash equiva-
EQUITY RESEARCH, to this magazine which will solely
lents, fixed interest securities, real estate, commodi-
be dedicated to publishing an equity research report
ties, currencies and derivatives amongst others-
on one of the happening stocks of the quarter every
would make a good investment. In Equity Research, a
edition. We, acting as a sell-side analyst, through our
sub-set of investment research, the universe of assets
reports will give you our recommendations on wheth-
is limited to stocks. There are two types of profes-
er to BUY, HOLD or SELL the stock.
sionals in this field, namely- Sell-side analyst who
BUT HOW IS EQUITY RESEARCH DONE?
work at brokerages and independent equity research firms, and Buy-side analyst who work for money management firms and present stock pitches to portfolio managers.
Before you start investing, it is best that you know how Equity Research reports are made. Hence, in this edition, we put forward “A Prelude to EQUITY RESEARCH” so as to get you an understanding of it before you actually dive into investing. HOW TO MAKE EQUITY RESEARCH REPORTS? While doing an Equity Research for a particular share or stock, the work in itself requires one to split it into research and then future projections or estimations. For doing so, the basic framework involves one to understand the business model of the company, read its financial statements, use ratio analysis techniques to compare its financial performance with those of its
Source: Moneycontrol
closest comparable peers, value it using both intrinsic (absolute) and relative valuation approaches, and
InFINeeti | Annual Issue | August 2014 37
finally, prepare a complete equity research report derstanding on the fundamentals of the company and with a recommendation to BUY, SELL or HOLD the can qualitatively give a rating to the company. If funstock at its current price.
damentals of the company are strong, even if the
Equity Research starts with carrying out the Fundamental analysis of the company followed by the ratio analysis and then finally valuation is done. FUNDAMENTAL ANALYSIS: Equity Research and analysis begins with an attempt to understand the business and financial characteristics of the given company. This implies the analysis of the industry and the company. To start with, doing
market goes wrong, the company will come back to its position.
the Fundamental analysis of the company becomes A simple framework for understanding the Business extremely crucial. When analysing an investment, Profile of the company: Fundamentals of a company are the actual numbers
FINANCIAL/RATIO ANALYSIS:
that cause movements in its stock price. In this case, the analyst is interested in analysing firm specific data Once an overview of the business profile is done, the to have an understanding of the big picture, rather financial health of the company is to be looked into. than looking at the technical aspects of an invest- While analysing the financial profile, one has to critically look into the aspects of Size, Profitability, Growth ment’s market chart. One of the two approaches goes into the doing of Fundamental analysis namely Bottom-Up approach or Top-Down approach. Bottom-Up approach focuses primarily on the individual stocks rather than on the external factors impacting the economy. The TopDown approach, on the other hand, is a step wise process starting with the analysis of the external environment using PEST analysis, then examining the industry of the company using models like Porter’s 5 forces or Porter’s Diamond depending upon the underlying factors involved and eventually analysing the company using the popular SWOT analysis. After doing the above analysis, the analyst or the investor gets an un-
profile, Return on Investment and the Credit profile of the company. Ratio analysis helps in evaluating various aspects of a company’s financial performance such as its efficiency, liquidity, profitability and solvency. This requires the analysis of the financial statements, namely the Balance Sheet, Profit & Loss Statement, and Cash Flows Statement of the company. But the numbers in the company’s financial statements carry little meaning in themselves as it doesn’t tell us how good the business is at converting resources to earnings and this is where the ratios come into help as they provide meaningful relationships between individual line items in the financial statements. Another important aspect of ratio analysis is that the ratios can be
InFINeeti | Annual Issue | August 2014 38
compared across different companies within the same
Operating
EBITDA
Return on
Return
sector or sub-sector to get an overview of the perfor-
Perfor-
Margin
Assets
Equity
mance of the company against its competitors or the industry as a whole. In the coming editions of our
mance Activity
Asset
Inventory
Operating
magazine, we intend to restrict our use of ratio analy-
Levels
Turnover
Turnover
working capital Turnover Cash Ratio
sis to the finding of ratios that will help us evaluate Year 2011
NTPC
Face Value
Power
Reliance
Grid
Power
10
10
10
Profitability Ratios Operating Profit Margin (%) Net Profit
27.09
83.85
24.66
Liquidity
Current
Quick Ratio
Position Leverage
Ratio Debt/
Net Debt/ Net
Equity Stock Val- P/E
Equity P/S
on
Debt/
Capital EV/EBITDA
uation Multiples
15.57
28.81
55.59
VALUATION:
Margin (%) Having done the two analyses, one moves to the last
Liquidity And Solvency Ratios Current Ratio Quick Ratio Debt Equity
2.48 2.23 0.76
1.05 1.02 2.05
1.94 2.26 0.44
Ratio five aspects of the company namely its operating performance, activity levels, liquidity position, leverage and valuation multiples.
and the most important aspect of Equity Research which is Valuation. The final stage in the research of the target company is finding out what is the company’s total worth. As the name goes, valuation is the process of determining the current worth of the equity, asset or company. Valuation is the estimation of an asset’s value based either on variables perceived to
Example of important ratios used for Power Industry:
be related to future investment returns (usually cash
From the above table one can easily do a comparative flows) or on comparisons with similar assets. It is analysis of the companies against the important ratios needed in not just doing Equity Research but also in a and approximate an average ratio for the industry. number of other things like Mergers and Acquisitions, From this, one can find out how the company is per- investment analysis, capital budgeting and many forming in tandem to the industry in general. The list of important ratios used: Source: - www.moneycontrol.com (for the year 2011)
more. The valuation models are used in making investment decisions as to which assets are undervalued
InFINeeti | Annual Issue | August 2014 39
or overvalued. It is through Valuation one can quanti- range of practical problems like judging whether the tatively rate the company. Approaches to Valuation as put forth by Aswath Damodaran, professor at NYU Stern:
securities are fairly valued or under/overvalued, inferring market expectations, evaluating corporate like events mergers and acquisitions, divestitures, spinoffs, management buy-outs (MBOs), leveraged recapi-
Intrinsic Valuation: The value of an asset is estimated talizations etc. based upon its cash flows, growth potential and risk. The most widely used valuation model here are: Discounted Cash Flow (DCF)
Summary of the steps of Equity Research:
do the company and industry analysis
Dividend Discount Model (DDM) In a DCF model, the forecasted future cash flows are
Understand the company’s business profile and
Forecast company’s performance
discounted to get to the present value. The other valu-
Select the appropriate Valuation model
ation method in usage is Dividend Discount Model (DDM). But this can be used only when the company
Make investment decision based on the funda-
pays out dividends. Once the intrinsic value or the fair value of equity is obtained, it is compared with the Current Market Price of the share and based on this the analyst comes to a conclusion whether the stock is overvalued or undervalued. Current Market Price: Rs. 250
mentals and valuation.
While making an investment decision, both the Fundamentals and Valuation of the company matters. Finally on the basis of the ratings of these two parameters, investment is made. This above mentioned framework for doing Fundamental analysis, Ratio Analysis and finally Valuation is an essential starting point but is by no means exhaustive. There are many other factors like the price movements (Technical Analysis) which
Intrinsic Price: Rs. 262
are taken into account before making an investment in the equity.
Relative Valuation: Estimates the value of an asset by Now that an overview is given, InFINeeti Team inaugulooking at the pricing of ‘comparable’ assets relative rates the section on EQUITY RESEARCH. Please do look to a common variable like The above picture indicates forward to the next edition so as to start investing… that the Intrinsic price of the equity is more than that of the Current Market Price which tells us that the stock is currently undervalued and has potential, -BY GAYATHRI BHUVANGIRI, IIFT hence should be a BUY. The tools of equity valuation is used to address a
InFINeeti | Annual Issue | August 2014 40
FSLRC: A GAME-CHANGER FOR THE INDIAN FINANCIAL SECTOR & ITS STAKEHOLDERS BY– AMARDEEP KUMAR, IIFT
INTRODUCTION The total number of acts and regulations governing the financial sector in India today stands at more than 60. Most of them are archaic and date back all the way to the Stone Age. For example- Indian monetary policy’s pillars rest on the Reserve bank of India
FSLRC committee chairman: - B.N. Krishna
Act, 1934. Similarly, the Insurance Act of 1938 governs the Insurance sector in India . Act/Law
Year 1st
Public Debt Act Securities Contract
incorporated 1944 1956
(Regulation) Act Indian Coinage Act FERA/FEMA Banking Regulation Act
The FSLRC submitted its report in October 2012 and recommended a complete overhaul of the regulations governing the Indian Financial sector. The Commission recommends a draft “Indian Financial Code” which eliminates more than 20 of the current 60+ laws governing financial markets in India and merges
1906 1973/1999 1949
some of the most powerful Indian Financial Regulatory bodies into one “Unified Financial Authority” (See
Table 1: Showing India’s vintage financial laws
table 2 in the next page).
Yes, there have been amendments over the years but
The powers of the RBI have been curtailed compre-
those changes have been piecemeal and more stop-
hensively in the report while most other regulators
gap than not. The results include regulatory overlaps,
have been replaced by a single “super regulator” and
regulatory arbitrage and inconsistencies. It was in this
the onus of consumer-protection has been changed
backdrop that the Government of India constituted
from “caveat emptor” to “caveat vendor”. The report
the Financial Sector Legislative Reforms Commission
raises the bar for consumer protection and places the
(FSLRC) in March 2011 to comprehensively review
responsibility of avoiding frauds, or the sale of inap-
and recast the legal and institutional structure of the
propriate products to the consumers, with the ser-
financial sector in India.
vice provider.
InFINeeti | Annual Issue | August 2014 42
Present Regulator RBI SEBI
To be replaced by ( as per the recommendations of the FSLRC) RBI ( though with reduced powers)
FMC
United Financial Agency (UFA)
IRDA Securities Appellate Tribunal Deposit Insurance and Credit
Financial Sector Appellate Tribunal (FSAT) Resolution Corporation (RC)
Guarantee Corporation (DICGC) Financial Stability Development
It remains as it is.
Council (FSDC) New entity New entity
Debt Management Agency (DMA) Financial Redressal Agency (FRA) Table 2: Present and proposed Indian Financial Regulatory Structure
KEY RECOMMENDATIONS & THEIR IMPACTS
It will regulate and control all activities of the finan-
Let us discuss the key recommendations of the Com-
cial market other than what is to be regulated by the
mission and their impact on the Indian Financial fir-
RBI. The proposed agency will be carrying out all the
mament.
responsibilities of all the existing regulators (other
UNIFIED FINANCIAL AUTHORITY (UFA): - One of the loudest amendments proposed by the Commission is the formation of a “Unified Financial Authority” replacing SEBI, IRDA, PFRDA and FMC (the Forward Markets Commission). According to the FSLRC, the
than the RBI) like SEBI, FMC, IRDA, PFRDA etc. The UFA will also be the first consumer interest protection regulator in the financial sector with the exception of banking and payment systems which will be under the ambit of the RBI.
incumbent financial regime with multiple sectorial
ROLE OF RBI: - The RBI gets to keep most of its pow-
regulators creates conflicts of interest and leads to
ers and continues to guide the nation’s monetary pol-
overlaps and gaps in regulation at the same time. For
icy and regulation of its banking industry. It also per-
example- while Ponzi schemes are not regulated by
forms the function of regulation and enforcement of
any agency as of now, Securities market is regulated
the payment systems and enforcement of the pro-
by SEBI and RBI both. It makes economic sense and
posed consumer protection law. However, it loses its
creates synergy to merge regulatory bodies into one
power of managing public debt. Also, its monopoly
and remove the problems of inter-regulatory turf-
over monetary policy formulation is in danger as the
wars. The FSLRC establishes a new seven agency
commission proposes that the central government, in
model to regulate and control the financial sector in India.
InFINeeti | Annual Issue | August 2014 28
consultation with the RBI Governor, set a monetary policy target and hold the Central Bank accountable in case of its failure to achieve these objectives. The icing on the cake, at least for the Government, is the fact that the Commission wants the Central bank to deliver on the monetary policy front by adopting a Monetary Policy Committee having the Governor as its Chairman and six other members.
ation of the Financial Redressal Agency (FRA) to
Only one of these members will come from RBI. Of
attend to consumer complaints in the financial sector
course the Central Bank can advise the Government
(except the banking sector) across the nation. The
on the appointment of two other members while the
FRA will replace all sector-specific Ombudsmen pre-
remaining three members will be appointed by the
sent now. All financial service providers are required
Government. Thus, the Committee effectively dilutes
to set up internal mechanisms for consumer griev-
the Central Bank’s autonomy on monetary policy
ance-redressal and to educate the consumer of their
matters of the country. It rather places its faith in a
right to seek redressal. If the consumer is unsatisfied
government which is prone to reducing rates in an
with the appropriate handling of their issues by the
election year and is, otherwise too, gullible to being
firm, they can approach the FRA.
populist at the expense of the economy.
FINANCIAL SECTOR APPELLATE TRIBUNAL (FSAT): -
Additionally, it places the RBI, and all regulators for
Financial Sector Appellate Tribunal (FSAT) is the all-
that matter, under judicial review, a step unprece-
important pillar proposed by the Committee, for ap-
dented in the history of India. Dr. Raghuram Rajan
peals against the actions of the RBI, the FRA and the
has correctly warned that this provision will result
UFA. The existing Securities Appellate Tribunal will be
into constant questioning of regulatory decisions thus
merged into FSAT, to which the consumer can appeal
creating paralysis of analysis as regulators will go slow
against all financial sector regulators. FSAT will have
on decision making. There is also the danger of
powers of jurisdictional oversight on the actions of
shrewd participants in the financial system exploiting
the regulators. This places regulators in a tight spot,
the loop-holes to their own advantage by going for
for their decisions are not always based on the surety
excessive litigation.
of events but more on their likeliness to happen since they cannot wait for a tragedy to strike before acting
FINANCIAL REDRESSAL AGENCY: - Consumer interest protection is one of the key concerns of the Committee. To this effect, the FSLRC recommends the cre
on it and defanging it.
InFINeeti | Annual Issue | August 2014 43
Source: - Livemint
Corporation has also been proposed to handle the
FINANCIAL STABILITY AND DEVELOPMENT COUNCIL
resolution of financial firms.
(FSDC): - The Financial Stability and Development
ANALYSIS & CONCLUSION
Council (FSDC) is the only existing regulator, apart from the RBI of course, that stays on. It will oversee the various systemic risks and will suggest ways to bring them down. The Committee wants to establish a financial data cell whose primary job will be to look for the systemic risk in the financial sector and report the same to its parent body, the FSDC. The FSDC, being a statutory body, will then measure and manage the risks in the system. The FSDC will be empowered to undertake all required interventions for reducing the systemic risks.
FSLRC has produced one the most far-reaching reports based on its recommendations and possible outcomes. Its stress on having a clear framework for monetary policy-making was what prompted the GoI to form the “Urijit Patel Committee”. The Commission’s rap to the service-providers and the regulators for unfair and not-so-consumer friendly practices may begin a new era of consumer protectionism in the Indian financial sector and may force the authorities to revisit their approach to the consumer and consider mending their ways. In proposing to create a Draft
PUBLIC DEBT MANAGEMENT AUTHORITY: - The Pub-
Financial Code for India, the committee has tried to
lic Debt Management Authority to manage public
bring in some fresh air to the laws governing the fi-
debt is an altogether new institution to manage gov-
nancial sector of this country.
ernment’s debt in the proposed regime. A Resolution
InFINeeti | Annual Issue | August 2014 44
In trying to amalgamate various regulators into one
monetary and fiscal policies and has made the govern-
body, it has tried creating the much-needed synergy in
ment further answerable to the people of India. In the
regulation. By proposing to make RBI and other regu-
words of Dr. Raghuram Rajan, though he himself is
lators responsible to the parliament, it has tried to
one of the biggest critic of the committee’s recom-
make them answerable to the people of this country.
mendations, “FSLRC report is one of the most im-
In increasing the weight of the government in formu-
portant, well researched as well as well-publicized re-
lating India’s monetary policy, it has tried to bridge
ports in Indian Financial History. The report’s influ-
the gap between the country’s
ence will be felt for many years to come”. Enough said.
InFINeeti | Annual Issue | August 2014 45
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) BY- DHAWAL LACHHWANI - IIFT
INTRODUCTION International Financial Reporting Standards (IFRS), previously known as International Accounting Standards (IAS), is a set of standards, framework and explanations adopted for preparation and presentation of financial statements.
importance of IFRS. Many countries have already moved towards convergence of their respective accounting principles with IFRS, while others are still passive with their approach. IFRS IN INDIA In India, Accounting standards are formulated by Insti-
In present scenario of globalization and liberalization,
tute of Chartered Accountants of India (ICAI), through
the world has become a small place. Many corporates
its Accounting Boards Standard. Thereafter these ac-
in emerging economies are looking to enhance their
counting standards are considered by National Advi-
access to the global markets to fulfil their need of cap-
sory Committee on Accounting Standards (NACAS)
ital funding. Thus, it is of paramount importance that
which then recommends it to the Central govern-
there exists a system or a set of guidelines which is
ment. At present, 28 Accounting Standards, with cer-
consistent all across the globe, and here in lies the
tain differences, have been notified under the Compa-
InFINeeti | Annual Issue | August 2014 46
the Companies Act, 1956.
TIMELINE FOR IMPLEMENTING IFRS
ICAI, in 2007, commenced the process of development of accounting principles which converged with IFRS. They were to be known as Indian Accounting Standards (Ind-AS). The move to converge its accounting standards with IFRS, rather than adopting it outright, is because there exists a wide fundamental gap between the Indian GAAP and the IFRS. NEED FOR IFRS IN INDIA Globalization of Economies - Globalization of Economies has created the need for a standardized practice for reporting of important financial documents to bring more uniformity across the globe. For Raising Capital from Overseas - Indian Companies raising capital overseas is a common practice nowadays. This requires the financial documents to be transparent and in a format which is recognized all over the world To help MNCs prepare consolidated financial statements- The MNCs, which are operating across various countries, will find it easier to prepare consolidated
India joined the IFRS bandwagon a little late, with close to 130 countries already aligned to IFRS and many more in the process. IFRS will be implemented in India in three phases Phase One- Phase One involves companies having revenue of more than Rs.1,000 crores. A deadline of April 1, 2015 has been set for them. Phase Two- Phase two will begin from April 1, 2016 and will consist of companies with a turnover of more than Rs.500cr and less than Rs.1000 crores.
balance sheet once IFRS has been implemented glob-
Phase Three- Phase three will be applicable for the
ally
remaining companies (companies having revenue of
Better Quality of Information- IFRS mandates extensive disclosures and hence is considered a better tool for accounting. It is a pro impact accounting system, which requires all outcomes that have an impact on company’s finances to be recorded accordingly. It also has very stringent Income recognition rules.
less than Rs.500cr). No deadline has been set for it as of now. ISSUES AND CHALLENGES In spite of its visible benefits, implementation of IFRS in India remains a challenging prospect and is bound to face certain issues such as:
InFINeeti | Annual Issue | August 2014 47
DIFFERENCES BETWEEN IFRS AND INDIAN ACCOUNTING STANDARDS BASIS Principle v/s Rule based standards
Standards v/s Local Laws
IFRS AS Principle based. The underly- Generally rule based. Compaing economic substance is the nies act determine and guide as prime evaluation factor
ed Accounting Local regulations take prece-
International
Standards take precedence Presentation of financial statements
Depreciation of fixed assets
to how a transaction is record-
dence while preparing financial
statements No prescribed format. Assets Companies Act and other Inand Liabilities need to be clas-
dustry regulations have defined
sified as current and Non- prescribed formats current Depreciation is an annual Useful lives already prescribed change. Based on the estimat- in Schedule II of the Company’s Cash flow statement
ed life of the assets Mandatory
Act Mandatory for some. Direct method for insurance companies and indirect for other
Valuations
listed companies Provides guidance on how to The guidelines under IAS are measure value of mergers, debatable as of now acquisitions, take overs and amalgamations etc.
AWARENESS ABOUT INTERNATIONAL PRACTICES IFRS adoption implies that the entire reporting of financial statements needs to undergo numerous changes as mentioned above. A lot of work needs to be done to bring about an awareness regarding the impact of IFRS among the users and the various stakeholders.
NEED FOR TRAINING Professional accountants’ proficiency with IFRS is absolutely essential for its implementation. The biggest hurdle would be the lack of courses and professional institutions that impart knowledge about IFRS. As its full time implementation draws near (2015), acute shortage of trained IFRS staff is being observed.
InFINeeti | Annual Issue | August 2014 48
AMENDMENTS TO THE EXISTING LAWS
TRAINING & SKILL DEVELOPMENT CHALLENGES
There is a huge gap between IFRS and existing laws
Training and skill development are the critical issues
such as SEBI regulations, banking laws and regula-
the government will have to address for successful
tions and even the New Companies Act (2013).
IFRS integration. All the stakeholders including inves-
TAXATION
tors, accountants, rating agencies, actuaries and valuation experts would need to develop an understand-
IFRS convergence would result in a change in most of
ing of IFRS and its provisions. Educational institutions
the elements present in financial statements, conse-
will have a big role to play, and academic institutions
quently ushering a change in tax liability. The taxation
must include IFRS in their curriculum and students
laws should address the treatment of tax liabilities
must focus on acquiring a strong & deeper under-
that arise on convergence of Indian GAAP and IFRS.
standing. The proposed move to Ind-AS is definitely a
FAIR VALUE
step in the right direction and it will positively result in significant improvements to financial reporting and
IFRS is a principle based accounting system, which
corporate governance practices.
uses fair value as a parameter for recording most of the items in financial statements. The use of fair value will bring a lot of volatility and subjectivity into the picture. Additionally, a lot of groundwork has to be done to arrive at a fair value that is agreeable to all. Furthermore, whether fair value gains and losses should be computed in calculation of distributable profits is another debate altogether.
CONCLUSION Ind-AS (converged with IFRS), despite the issues and challenges, is clearly a must for India, if it is to move forward and open the economy in true sense to international investors. The Government of India needs to become proactive in taking steps to smoothen out the phasing from Indian GAAP to IFRS.
InFINeeti | Annual Issue | August 2014 49
EXPERT SPEAKS
MR. P. SATISH CHIEF GENERAL MANAGER, NABARD
TEAM INFINEETI: What percentage of people, of
their own bank account.
those targeted, has actually benefited by schemes for
By ’98-‘99 we aimed that at least 1 million groups be
microfinance designed by NABARD? Are the benefits
formed and linked to the bank, but the achievement
sustainable even after the scheme is over?
was that we exceeded in formation of more than 2
MR. SATISH: NABARD is an apex organization which
million groups, especially with the support of various
does actual field level financing. In 1990 what NAB-
state governments. Today, if we take the data of
ARD had realised that existing banking structure was
March 2014 nearly 8 million groups, of which 80-90%
not sufficient to meet a large number of people who
are women, are linked with outstanding credit to all
are outside the existing banking structure and existing
these groups must be 50k crores. But there are issues
financial products. Hence NABARD formulated a pilot
about the benefits that are sustained at the end of
project called Self Help Group Bank Linkage Program,
the period, and we have mixed reports from the field.
where NGOs and other organization formed a group
Nurturing and hand holding support is not continued
of 4 people especially women, after which they start-
after the groups get the first dose of credit and then
ed savings till they reach a level of maturity and then
sometimes the groups defunct or the group disinte-
linked to bank branch to give some finance- which
grates, but what we get from the report on field is
was in small amount and a period which was suitable
that sustenance of 45-55% of the group after the
to the Self Help Group. So that basically is micro-
credit is over and problem is in the rest of the groups.
finance that was started in India in 91’-92’ in the form
This is what we are concerned and currently dealing
of NABARD project. We just aimed at 500 groups but
with.
it progressed well and it caught imagination of bankers and the government. In ‘ 96 govt. made it a regular financial activity for all banks, after that time there was no looking back and the govt supported it. The RBI also supported unregistered group who can open
TEAM INFINEETI: How has been the recovery/ repayment and collection of the debtors who have been provided by microcredit schemes?
InFINeeti | Annual Issue | August 2014 50
MR. SATISH: I was mentioning about the SHG con-
activities such as micro financing/microcredit? Does
cept where for recovery and repayment there is no
govt. give a lump sum or does NABARD ask for spe-
collateral, but there is a lot of influence of peer
cific funds?
group. However our philosophy & practice has been
MR. SATISH: Most of the work which NABARD does in
that wherever there have been group forming and
this microfinance is of refinancing, which primarily
nurturing, there has to be a necessarily 100% recov-
comes from our own funds. Earlier we had Micro Fi-
ery which have been our experience in 97-98% of
nance Development and Equity Fund (MFDEF), for
the cases, remaining 2-3% where there has been un-
which the government, RBI and other banks had con-
foreseen circumstances and recovery cannot be
tributed some nominal value. A lot of amount we
done fully.
were ploughing back into the MFDEF. The fund does
But what happened in ‘98-’99, government had
not exist now, instead a financial inclusion fund exists-
come up with the scheme of SGSY (Swarnajayanti
which is also created within NABARD with initial nomi-
Gram Swarozgar Yojana) in order to help the SHGs.
nal contribution from government, but more from in-
This scheme saw a lot of bank support but it saw a
terest differential we had from other schemes. So
lot of deviation from the original principle of forming
technically speaking neither government provides any
and nurturing of the groups and recovery percentage
huge funds nor do we ask for specific funds, which we
was very poor- in the range of 30-40%.Whereas the
are generating from our internal activities.
groups covered under non-government program supported good recovery. This happened due to the dilution of the principles that were previously mentioned. You must have heard the crisis in Andhra Pra-
TEAM INFINEETI: How does NABARD interact or collaborate with NGO’s? How do you select the NGOs to work with, and how do you blacklist them?
desh in ‘09-’10 in the microfinance movement, that
MR. SATISH: Basically, we look at any organization at
have also added to the problems of recovery. So the
a grass root level and we go through its previous work
segments in which you normally expect to have
at the district level- for which we have our district de-
100% recovery, is now facing problems with regards
velopment managers. They know the NGOs in the dis-
to recovery percentage. The only silver lining is that
trict and their track record very well. After which we
the SGSY is being replaced by National Rural Liveli-
invite the NGOs to participate in our programs. But
hood Mission, negativity associated with the govern-
whenever there is a case of financial sanction, grant or
ment will go away and we will be able to bring the
a support, we normally look at the financial reports
movement back into track.
and statements for the past 3 years, its working, its
TEAM INFINEETI: What is the government policy for
governance, structure, and housekeeping along with
the disbursement of funds for NABARD to carry out
its track record in carrying out developmental activities.
InFINeeti | Annual Issue | August 2014 51
What we can say is that we are quite liberal and open
NABARD. In other ways we have a lot of promotional
to NGOs who are ready to work in the field in an hon-
schemes, wherein we transfer technology to farmer to
est and dedicated manner. For the smaller NGOs who
produce export quality fruits, vegetables and crops.
have smaller track record of say less than 5 years, we
These include training the farmers, supplying them
give them smaller programs.
with new variety of seed and planting material, plus
As far as the blacklisting is considered especially when
enabling them in usage of practices that are accepta-
it comes to serious financial irregularities in sanc-
ble in international standards and certifications re-
tioned grants or loans which they have not used up
quired to fulfil the phyto-sanitary needs. We believe
properly, and not returned money or even in some
that only when markets are open for agriculture and
cases, absconding NGO office bearers such NGOs, we
there is free trade then only farmer is benefitted.
discuss with the local administration and other agencies and then only initiate the process of blacklisting
TEAM INFINEETI: With a new government having a lot
them and inform the government about the same.
of expectations from a development standpoint, what do you thing the new government must do to bring
TEAM INFINEETI: For a perspective into foreign trade-
back India’s growth story back on track and how can
what incentives does NABARD have for increasing the
NABARD contribute towards the same
export/foreign trade? Does it have special trade relat-
MR. SATISH: We have to realise it that no government
ed schemes?
can neglect agriculture as a sector. Though the contri-
MR. SATISH: One aspect is about Agri Export Zones
bution to the GDP of the nation is only 14% still, 60%
and for banks which are financing in Agri Export Zones
employment is engaged in Agri-related activities. But
in short term or long term finance. There is a special
as far as present govt. is concerned, what we expect is
refinance scheme which refinances their credits to the
to have a lot of market related reforms in prices and
banks in the Agri Export Zone. NABARD also support
movements. The movement between states should be
banks for refinance, and support export promotion for
enabled to move products in and out quickly. Now
agriculture, in terms of grading and processing of
you see the price rise in some commodities- a large
fruits and vegetables & packaging, and credits for ex-
part of this is because of restriction of free movement.
port related documentation. One big area where NAB-
Even basic cereal prices are regulated. If the markets
ARD supports is cold storage and other facilities re-
are freed and there is free entry and exit for suppliers
quired for export, including providing freezer vans,
and buyers in the agricultural markets, and we have
freezing facility etc. All of the schemes are partly sub-
acts such as Agriculture Produce Market
sidised from Ministry of Agriculture and Food Processing and partially through loan routed through
InFINeeti | Annual Issue | August 2014 52
Committee Act etc., for which for the last 10 years
years there is a decrease in agriculture capital for-
there has been no discussion on reforms on the field
mation which is necessary for farm mechanization,
level, things can improve quite a lot. To add on we
irrigation, horticulture etc.
have the system of fixing the minimum support price on certain crops and restriction of export on various
Second thing is the policy on the Joint Liability Group
goods. So, unless there is a free market as far as agri-
of landless farmers, of which Rs.5 Lacs will be spon-
culture produce is concerned- sector will not grow in
sored by the government. Third is the Rs.2000cr fund
this way. The government must bring in reforms so
(within NABARD) for Agro Processing Unit which has
that everyone benefits- the farmers and the consum-
an important relation with Agro Export that we previ-
ers are not taxed with too much price at its doorstep.
ously discussed. This is import from an export point of view as a lot of it goes to Middle East, Europe etc.
TEAM INFINEETI: What, according to you, is the high-
Fourthly, climate change adaptation fund has been
light of the budget and what are the budget’s implica-
created, which NABARD had initially proposed. NAB-
tions in the long run?
ARD had implemented a climate change project in
MR. SATISH: Let me restrict to agriculture related is-
Ahmednagar, Maharashtra to help farmers adapt and
sues of the budget. One thing is that there has been a
mitigate the impact of climate change. Such initia-
creation of 5000cr fund for NABARD; in the last 10-15
tives have to be taken by the government so that for the next 5-10 years, climatic changes-be it rise in temperature or rainfall, it is taken care of.
InFINeeti | Annual Issue | August 2014 53
FACULTY’S CORNER WOULD INCREASE IN FDI LIMIT HELP HEALTH INSURANCE SECTOR IN INDIA? -BY BIBEK ROY CHAUDHARI PROFESSOR, IIFT INTRODUCTION Decision to increase FDI limit in the Insurance Sector from 26% to 49% by the Government of India is being hotly debated. The private companies have naturally welcomed the move seen as giving them a levelplaying field in a sector heavily dominated by stateinvested entities.
optimists that new products, more coverage, higher penetration especially in rural areas are the likely benefits of this policy change. Question which comes to one’s mind is whether lack of capital was the only problem which was plaguing this sector? Is it the panacea of all evils? In this article we are going to concentrate on health insurance to understand the present scenario and the implications of the new policy for this particular sector. Compared to Life Insurance which has been traditionally positioned as a tax planning tool, health insurance took a long time to emerge in our country. Especially, after 1990s when the economy was liberalized and new ideas came from across the border the sector took off. And once the sector was opened up for
Fact is, only 3% of GDP is accounted for by this sector
private participation and the per capita income of the
out of which general insurance accounts for less than
people increased simultaneously it experienced con-
one percent of GDP. This implies huge potential for
siderable growth. Between the years 2007 and 2011
future growth in this sector. It has also been pointed
the health insurance membership increased to 300
out that this move would bring the much needed long
million and is expected to touch 600 million by 2015.
-term capital in this sector. Benefits to existing com-
Even after such growth the out-of-pocket expenses
panies which are constrained by lack of funds and re-
dominate the health care spending estimated at 72%
duced profitability are thus understood. Implications
of total expenses. India’s per capita health care
for the other important stakeholders like the
spending is only $109 compared to the global average
‘consumers’ are not that obvious. It is being stated by
of $863. Hence a lot of potential growth is
InFINeeti | Annual Issue | August 2014 54
foreseen given the incidence of diseases in our coun-
Lack of doctors and health care infrastructure has se-
try. What are the likely factors that have impeded the verely limited the access to such services especially in growth of this sector?
the rural areas. Most of the people in such areas depend on public health care with serious quality issues. Whereas the little bit of private care which does exist is not affordable for most of the people. Multi-layer care-delivery system creates a problem for the insured as movement across multiple points are re-
Source: www.maculahealthcare.com
ANALYSIS OF INSURANCE SECTOR
quired during each visit. On the other hand due to lax medical procedures adverse drug related problems are quite high. In terms of product offerings most of
Like any other financial services the insurance sector is also impacted by the problem of asymmetric information. It becomes difficult for the insurer to detect less risky individuals as there is an incentive to hide details to pay lesser premium on the part of the insured. The problem is more acute in rural areas. The moral hazard problem also may be high due to the unholy nexus between the hospital/doctor and the customer which may give rise to false claims. Given the state of legal institutions in India the probability of such events are quite high. On the other hand the third party agents entrusted with claim settlements often create problems even in case of genuine cases. Thus profitability of companies has come down drastically due to such reasons and higher competition from new entrants. On the other hand the consumers
the insurance providers offer indemnity based products covering critical procedures involving lump sum payments. This bypasses the other needs of health care seekers like regular check-ups (preventive health care), one day procedures, maternity related care etc. Can FDI solve these problems? Increase in FDI limit may interest new entrants with new models of delivery and products. This is required given the supplydemand mismatch observed in this sector. Moreover, this would create jobs being a labor-intensive process. Intensified competition among players would increase efficiency of services and directly benefit the consumers. Knowledge spillovers from international best practices would enable the service providers to reach out to more customers.
have faced the music in times of need which has led FACTORS AFFECTING THIS SECTOR to lesser demand for such products. Information re- First, major point emphasized in the literature which garding this kind of incidents spread quickly through deals in FDI in health care is whether the sector is alword-of-mouth. Both these reasons limit the growth ready commercialized. This is because liberalization of of membership among the people aware of the ser- this sector leads to commercialization and if it vices.
InFINeeti | Annual Issue | August 2014 55
is not already exposed to such phenomenon the en- be necessary but not sufficient condition for larger try of foreign money may create ripples for which the FDI flows. market may not be ready. Since in India we have al- Thirdly, commensurate investment in health care inready allowed 26% foreign participation with a num- frastructure. Lack of proper health care facilities ber of private players there seems to be room for fur- across locations impacts demand for health insurance ther commercialization and it would be less of a services. A shock to the system. The greatest impact on health consumer care financing, distribution of facilities, access to ser- would
be
vices, etc., is thus the degree to which health care is inclined commercial, not whether it is foreign. Nonetheless buy an inFDI may help surance in
reducing product only when commensurate health facilities are
financing con- available within their reach. Public-private partnership straints
and may be the way forward especially in semi-urban and
increase
rural areas. Tremendous scope of medical tourism also
health care access in a country like India. Second,
existing
regulatory
environment,
may induce more investments in health care facilities and
‘resilience’, will significantly determine the economic and health impact of FDI, the effectiveness of safeguard measures and the stability of commitments. Important issue in this case is establishing the likely balance of ‘power’ between the national regulatory system and potential investors. Not only might regulations determine the level of FDI, but opening up, or extending, the commercial sector will require standards in care to be established and maintained. Thus we need to determine whether the regulatory regime will be able to handle (greater) FDI, and if not what measures need to be enacted to do so. Thus the current regulatory regime must be made more effective in order to attract more FDI. Increasing the limit may
in countries like ours. Fourthly, the model for health insurance delivery is also equally important. Various forms of insurance, mandatory, voluntary and community health insurance cover approximately one-fourth of India’s population. Whether insurance is offered through employment, purchased voluntarily or sponsored by the government for select populations, all potentially contribute towards the health systems goal of providing financial risk protection and reducing the financial barriers to quality health care. Innovative models based on mobile devices are being suggested for greater outreach. All in all, it can be said that FDI in insurance has the capability to transform this sector.
InFINeeti | Annual Issue | August 2014 56
POPULISM HAS BROKEN THE BACK OF INDIAN ECONOMY. WHAT’S WRONG WITH AVOIDING IT? -BY ASHISH KASHYAP & SUMIT BHANSALI SJMSOM, IIT-BOMBAY
INTRODUCTION Populism has acquired a pejorative connotation in recent times. It has become an adjective of choice to describe any politician who wants to take the easy route to popularity via appeasement. However, isn’t
cluded the total value of the loans to be waived for 30 million small and marginal farmers (estimated at 500 billion rupees) and a One Time Settlement scheme (OTS) for another 10 million farmers (estimated at 100 billion rupees).
that the point of a democracy? The will of the people is supposed to be paramount. The problem lies in the fact that short-term and long-term interests of the society are often antithetical to each other and one cannot rely on the masses to provide a logical vision for the future. Populism has evolved over the last century as a response to the inequalities inherent in
Although the sentiment behind the measure was
liberal capitalism. It believes in an expansionary fiscal
laudable – freeing up small agriculturists from the
policy of the government which increases public em-
cycle of debt – the design of this scheme was flawed.
ployment, mobilizes the masses and blurs the distinc-
An important feature of the program which has been
tions between leaders and institutions.
heavily criticized is that it covers only formal sources of credit and excludes any kind of informal loan. So
Over the years, Indian polity has thrown up many instances of populist decisions taken without much thought to economic prudence and rationality. On 29 February 2008, P. Chidambaram, the Finance Minister of India at that time, announced a debt relief package for farmers which included the complete waiver of loans given to small and marginal farmers. It was called the Agricultural Debt Waiver and Debt Relief Scheme and the 600 billion rupee package in-
one side it benefitted wealthy and large-scale farmers who had access to institutional credit (about 23% of the total farmers), small and marginal farmers, who borrow the majority of their funds from private moneylenders, did not benefited from the scheme. Thus the scheme just ended up straining our public finances while the most deprived farmers remained unaffected. This was a classic populist scheme.
InFINeeti | Annual Issue | August 2014 57
ELECTIONS ARE THE TARGET Similarly, just before the 2014 elections, the Government of India was considering tweaking the rules for MGNREGA program wherein the benefits to the workers would be linked to the inflation rate in order to better target the rural poor. At the end of November 2013, the Ministry of Rural Development constituted a new committee to determine a suitable index for the MGNREGA wages on the basis of which new baseline wages will be fixed for 2014. Currently the MGNREGA wages are pegged to the consumer price index (agricultural laborers), or CPI
Electoral politics has become a mechanism to achieve some sort of redistribution of income every five years, placating all the special interest groups that dot the political landscape of India. Over the years, a pattern seems to have emerged where territorial groups demand special packages (for example, Bundelkhand) or statehood (for example, Telangana). Most of the Social groups are known to make community-specific demands, such as reservations (the recent inclusion of Jats in the Central OBC list), special status (as in case of minority status to Jains), or subsidies. Various state governments have also indulged in offering exclusive benefits to certain specific communities, like unemployment allowance, free TV sets, gold ornaments, free computers, etc. After the DMK announced a string of freebies in its election manifesto, bête noire AIADMK came out with its own edition of the sop opera. If the DMK's manifesto reads like a book about freebies, the AIADMK is also following the course. In fact, AIADMK’s
(AL), which has a large food and beverages compo-
J. Jayalalithaa has tried to beat her bête noire M.
nent.
Karunanidhi at his own game by taking the mad race
The committee would assess the merits of using an
to a new level. Ms. Jayalalithaa has in fact promised
alternative measure, such as the consumer price in-
to give half a sovereign gold to women awaiting
dex (rural areas), or CPI (R), where the food and bev-
marriage apart from a cash assistance of Rs.25, 000.
erages category is accorded a lower weighting, and
The Maharashtra government, as a final shot before
was due to release its report in three months' time,
facing the assembly election, announced a new res-
before the national elections to be held by May
ervation quota -- 16 percent for Marathas and 5 per-
2014. Why this logical step could not have been tak-
cent for Muslims. Before this announcement Maha-
en in the years before eludes comprehension?
rashtra had 52 percent reservations, which crossed the limit set at 50 percent by the Supreme Court.
EXAMPLES OF POPULIST SCHEMES
With these fresh set of reservations the total
InFINeeti | Annual Issue | August 2014 58
reservations in the state has gone up to 73 percent. Although the decision has been challenged in the judiciary, it is a symptom of a larger problem afflicting our entire political landscape. These are direct acts of economic populism which are easy to diagnose. We must however not ignore the broader and subtler definition of populism and the far-reaching implications that it has for the polity of the country. Populist moves are not just direct economic ones all the time; they also entail concessions to the majority or some special minority, ideologically suspect measures, appeasement etc. It needs a very keen analysis to discern these subtle threats to a more rational governance model. Let’s look a few contemporary issues which will elucidate our point. The new Narendra Modi Government has promised us a lot of initiatives which reek of populism and dubitable logic
tion of floods will call for a massive diversion of flood waters which may not be feasible at all, or if technically feasible, it may have serious impacts on the river regime downstream of the diversion point, on the diversion route and in the recipient areas. On the other hand, if only small fractions of the flood flows are to be diverted (as seems to be the intention), there will be hardly any flood moderation. For instance, the flow in the Ganga during a high flood can exceed two million cusecs, whereas the link canals envisaged will divert only 1,500 cusecs. It is primarily in the context of drought that the project might ap-
Interlinking of Rivers: Rivers have a religious, cultur- pear to be needed. However the proposed river links al and sentimental value to India and its population. (reportedly mainly by gravity, with a few modest lifts) They are also the lifeblood of the economy. Hence are no answer to drought-prone areas. Linking a river interlinking of rivers is a highly visible, popular move. to another will merely provide additional water to However it is fraught with the possibility of potential areas already served by rivers. disaster. It is an attempt to change the geography of the country. When comparisons are made to a national water grid on the analogy of a “power grid”, it is extremely misleading. A river is not a human creation, they are integral components of ecological systems and inextricable parts of the cultural, social and spiritual lives of the communities concerned. It is not quite clear how the linking of rivers will contribute to the objective of flood control. A significant modera-
New IITs, IIMs and AIIMs in every state: While IITs and IIMs have a very prominent brand value and significance to a large section of the population as an aspirational goal, this move is extremely illogical. The current new IITs and newer IIMs already face a resource crisis, they have yet to acquire proper campuses, enough faculty and are struggling. Instead of investing more in making sure that they get to
InFINeeti | Annual Issue | August 2014 59
A
similar levels of competency as the older institutes, more fruitful investment in the network and frequenthis decision aimed at appeasing popular demands is cy of trains in critically overloaded sections would be probably going to add to the woes of our educational much more useful. However Bullet Trains is again a system. The need of the hour is more quality institu- very visible and populist move, aimed at invoking sentions , rather than more institutions.
timents of chauvinism and national pride. CONCLUSIONS It is very clear that the ideology of democracy and popular will has been immeasurably damaged by the machinations of unscrupulous politicians. Populist moves are aimed at exploiting the myopia which the average citizen exhibits when it comes to long-term
Bullet Trains: There is no evidence of any urgent need for bullet trains in India. Since the entire technology will be imported and limited to a few sections of the railways, we are also not sure about the benefits of the technology transfer. Meanwhile, we continue to have train accidents, poor sanitation and cleanliness in our trains and railway stations and perpetually delayed trains.
issues. Popular democracy and Populism are not inseparable. A more aware electorate is the need of the hour.
InFINeeti | Annual Issue | August 2014 60
SUMMER INTERNSHIP EXPERIENCE ( RESERVE BANK OF INDIA) -BY SHUBHAM AGARWAL, IIFT
Summer Internship is an integral part of an individu- lot in gaining an insight about the general functioning al’s B-School life which equips one with the tools to of RBI and specifically in my project. be used later in the professional life. It is an enabling platform where one can learn the nuances and intricacies of one’s desired field. One can get a feel of how corporate life is going to be after an MBA. Moreover it gives one an opportunity to asses one’s own capability and relative performance with best of the students in the country in a dynamic environment.
The atmosphere in RBI was very vibrant where everyone from junior level to senior executives were very enthusiastic about their work , about imparting knowledge and aiding the interns in their work. I would say that my learning curve was exponential in RBI where I learnt various facets of managing risk, got a rare opportunity to have hands on experience in au-
From the first trimester itself I was very passionate diting the banks based out of Kolkata on CAMELS –i.e. about finance and always was ready to walk an extra Capital Asset Market Earnings Legal and Systems mile to learn the intricacies associated with it. Thus, I framework. The investment analysis of my project always had the desire to pursue an internship in the was an uphill task where I had to understand the anfinance domain. Finally, I had the privilege of doing nual reports of various public and private sector banks my internship with Reserve Bank of India in their Kol- and then draw a comparison. kata regional office.
I learnt a lot from my internship where I had to work
The project which I got to work on was “Role of on short deadlines, work in different groups and talk Treasury in Liquidity Risk Management”. The ap- and interact with Chief Financial officers of various proach to my project was two-fold. First I had to Public sector banks. During the course of my internstudy and understand the nuances of Treasury and ship I also appeared for CFA Level 2 exam and the help RBI guidelines which govern the policies of banks in and guidance that I got from my mentors and peers in our country. Secondly, I had to analyse the treasury RBI was hugely beneficial to me. Overall I would say investments of private sector banks and public sector that it was an internship which involved diligence coubanks and then give my suggestions. I feel that fi- pled with equal amount of fun and a lot of learning. nance subjects in my first year of MBA helped me a
InFINeeti | Annual Issue | August 2014 61
RBI CUTS SLR RATE BY 50 BASIS POINT According
to
Mr.
FLIPKART SIGNED MoU TO PROVIDE TRAINING IN RURAL AREAS
Raghuram Rajan, foreign
The Retail giant from
reserves come at a cost.
India,
Though he accepts that
based
higher foreign reserve is
come forward to ex-
better than lower foreign
tend help by providing training to rural and semi-
reserve, but at the same
urban people. Flipkart has signed a Memorandum of
time, he also makes it clear that only having foreign
Understanding (MoU) for the initiative. They are going
reserve will never buy the immunity for the Indian
to start the training centres in Agra, Meerut, Varanasi,
economy.
Aurangabad, Pochamalli, Salem, Guwahati and Shil-
He opines that if something can provide immunity to the Indian economy, then that is nothing but credible monetary policy. If we have low fiscal deficit, moder-
Bangalore Flipkart,
has
long. After the training Flipkart may well absorb them as their employee. COLD WAR BETWEEN RUSSIA & AUSTRALIA
ate current account deficit and low inflation people will want to invest here. To achieve immunity we must get the status of a developed country. According to him, it can happen only when the Rupee will go more international and debt market will become more vibrant. That is why RBI gives emphasis on reducing and controlling inflation so much The Reserve Bank of India has recently slashed SLR rate by 50 basis points to 22% while CRR (4%) and repo rate (8%) are kept unchanged.
A cold war has been started between Russia and Austarlia which started over the issue of Russia’s support
to
the
separatist
movement for Crimea in Ukraine. On one hand Australia openly criticised Russia’s stand on the issue, US along with other G8 countries have been imposing ban on Russian organizations and individuals since middle of March 2014. As a consequence Russia has introduced an embargo on various agricultural
InFINeeti | Annual Issue | August 2014 62
products like beef, pork, fruit, vegetable, poultry, fish,
INFIBEAM PLANNING FOR AN IPO
milk and number of dairy products from Australia, EU,
Ahmedabad based Infibeam Inc, the organisation be-
US, Canada and others.
hind the consumer e-commerce venture called In-
JAPAN FOREIGN RESERVES FALLS BY $7.89 BN
fibeam.com and B2B e-
Japan’s foreign exchange reserve fell to the lowest for
commerce
the past 4 months. At the end of
namely Build A Bazaar,
July Japan’s total foreign exchange
is going to raise Rs 500-
reserve is tallying at $1.28 trillion
1,000 crore ($83-166
which is reduced by $7.89 billion in
million) through an Initial Public Offering (IPO) in India
the last month. According to finance ministry of Ja-
within the next couple of quarters as mentioned by
pan, this happened due to drop in value of foreign se-
its founder and CEO Vishal Mehta.
curities held by the government because of a slump in
UNIVERSAL
US Treasury bond prices.
TRADING OPERATIONS ON 16TH JULY 2014
SCAM IN BHUSHAN STEEL
Universal Commodity Ex-
CBI has arrested Neeraj Singal, Vice
change (UCX): India’s 6th
chairman and Managing Director of
commodity
Bhushan steel. The allegation is
which started functioning
that he is involved in a scam of Rs.
on 19th April 2013 has sus-
50 Lakh which also involves Syndicate Bank. On 2nd
pended all the trading operations on 16th July 2014. It
August, the CBI has arrested 6 accused, together with
was promoted by Commex Technology in joint ven-
the Chairman-cum-Managing Director of Syndicate
tures with IDBI Bank, IFFCO, NABARD and REC. Signs
Bank S K Jain, for allegedly taking bribe of Rs 50 lakh
of fraudulent trade practices have been observed in
to increase credit limit of some companies violating
the aforementioned exchange by Forward Market
the banking rules. As a result share price of Bhushan
Commission in March. Similar issues were also found
steel has taken a plunge of 10% in BSE.
with MCX when a special audit took place under purview of PwC.
platform
COMMODITY
EXCHANGE
STOPPED
exchange
InFINeeti | Annual Issue | August 2014 63
KNOW ABOUT YOUR COIN! The latest Indian one rupee coin which has the highest circulation is made up of Ferritic Stainless Steel (FSS), having a diameter of 25mm. It weighs 4.85 gm. The value of the coin, when melted is estimated to be 70 paisa. The remaining 30 paisa goes to the government as seigniorage.
Indians. But only one, Azim Premji, figures in the list of
105
billionaires
who have pledged to give away at least 50% of their wealth for
greater
social
The
Azim
good.
Premji Foundation is now ramping up from a staff of 800 to about 5,000 in the next five years. It is checking out B-schools to hire fresh MBAs for leadership
NUMBER OF PEOPLE LIVING BELOW THE POVERTY
roles. Premji will build the foundation with the same
LINE
vision and rigour with which he scaled up Wipro in
A study by BBC shows
the early years.
that only eight of the
SWEDEN HAS THE HIGHEST TAX RATE IN THE
Indian states constitute
WORLD
poor population of 421 million which is greater than the poor population of 26 poorest countries from Africa, which is 410 million. According to World Bank, over 450 million people living below the international poverty line of $1.25 a day.
Sweden has the highest rate of Income Tax in the world. A Swedish has to pay 56.6% of his salary as the income tax.
PREMJI PROMISES TO PAY 50% OF HIS WEALTH FOR
Sweden is followed by Denmark (55.4%), The Nether-
SOCIAL CAUSE
lands (52%) and Austria (50%). Though they charge a
Ten out of the world’s top 150-odd billionaires are
high rate of tax, still all these taxes are duly utilised to provide every aspect of social security to the citizens.
InFINeeti | Annual Issue | August 2014 64
COIN MINTING IN INDIA Government of India has 4 mints each with a long and distinguished history. Alipore (Calcutta) mint and Mumbai (Bombay) mints were established in 1829 by British Government. Hyderabad mint was established in 1903 under patronage of Nizam, later taken over by GoI in 1950. Noida mint is the latest one established in 1986. Each mint has special identification mark on the coin it releases. Mumbai (Bombay) mint issued coins has a diamond mint mark under the year of the coin. Hyderabad mint issued coins has a star mark below the year mark. NOIDA mint issued coins has a thick dot just below the date. Alipore mint leaves no mark in coins. WEIRD TAXES ACROSS THE WORLD:
Google tax in France: Online tech companies need to pay to the government for online advertisements. Used to support artists and online cultural information centre.
Jock Tax in California: Exclusively sports superheroes have to pay from match fees.
Window Tax in Scotland, England and Great Britain in 18th and 19th century.
Cow flatulence Tax: In Ireland Denmark and other EU nations, cattle owners need to pay as the cattle produce methane causing global warming.
Beard Tax in Russia: Initiated by Peter the great, one of the most notorious Czars.
Tax deduction on Bribe: In Germany, bribery was legal under few circumstances till 2002.
InFINeeti | Annual Issue | August 2014
CREDITS
MEET THE TEAM
65
OUTGOING TEAM
ANKIT TIWARI is a software engineer and comes with
Ankit Tiwari
a prior work experience in Infosys Limited . He intends to specialize in Finance & Marketing. He wants to pursue his career in IT & Banking industry. Additionally, he is an avid reader, likes writing in his spare time , loves reading newspaper and also loves playing and watching Cricket .
Ashutosh Deshpande Sanket Tandon Sobhit Agarwal
SPECIAL THANKS TO:
Apurva Kulkarni
ASHUTOSH DESHPANDE has completed his graduation
Kartik Puri
in Computer Engineering from Mumbai University, post which he has worked with Mahindra Holidays. He has inclinations towards Finance and Strategy. Also, he is an avid writer, has written for various blogs, football sites and magazines on topics ranging from Politics, Current Affairs to European Football.
Shubham Agarwal
INCOMING TEAM
Adhiraj Bandhopadhyay Gayathri Bhuvangiri Mehul Gehrana Suryanarayan Panda
is a software engineer and has prior work experience with Infosys Limited. He intends to specialize in Finance and wants to pursue his career in the same domain. He is an ardent Manchester United fan. Apart from following football he likes to read and travel in his spare time SANKET TANDON
FEEDBACK/QUERIES infineeti@iift.ac.in infineeti@gmail.com
Published by students of Indian Institute of Foreign Trade New Delhi | Kolkata
ALL RIGHTS RESERVED
SOBHIT AGARWAL has completed his B.tech in Elec-
tronics and Communication engineering from NIT Surat in year 2012. Before joining IIFT ,he worked as Marketing Manager at Endeavor Careers Pvt. Ltd. for 12 months. Moreover , he has a keen interest in finance and wants to pursue a career in the same domain.
InFINeeti | Annual Issue | August 2014
Contact Team InFINeeti: infineeti@iift.ac.in | infineeti@gmail.com Published by Indian Institute of Foreign Trade, New Delhi and Kolkata All Rights Reserved