InFINeeti Annual Issue | August 2013 by InFINeeti- The Business & Finance Magazine of IIFT

InFINee | Annual Issue | August 2013

FROM THE EDITOR’S DESK

ear Friends,

Greetings from Team InFINeeti…

Financial markets have been tumultuous as the economy continues to experience financial hiccups and upheavals. After a ray of hope for recovery, the ghost of the recent past has come back to haunt the markets. Besides Policy logjam, weak consumer & investor sentiment and stubborn inflation, the new pressure point that has emerged lately on the India's macroeconomic front is volatility in the rupee against the dollar. The highlight of the last quarter has been the downslide of rupee which has touched a new all-time low, this quarter. The rupee seems to be hitting new troughs every week, while inflation gallops, the imports are becoming dearer and the oil bill getting inflated further, the balance of payment position more unstable than ever before. RBI is taking the stock of the situation as does the central government to prevent these continual disorders before the new crises looms up. This does not bode well for the economy in general and industrial output in particular. Consequently, Gold is back in demand as falling rupee and melting equities leaving no place for investor to park their funds. Also, the better-than-expected US economic data has led to hardening of US treasury yields and has also triggered fears of early withdrawal of QE. Such a change in sentiment is adding further selling pressure on equities as an asset class thereby causing mayhem in debt and currency markets, as these are ultimately weighing on equities. Are emerging markets losing their luster? Will the rising level of NPAs severe threat to the banking sector in India? Is it the right time to deregulate the fuel prices? These are some of the questions that the authors have tried to answer in this edition of the magazine. Many economists are equating the current situation with that in 1991. Though it would be an amplification of the situation, with the rising external debt and falling reserves, the economy is heading in the similar direction thereby necessitating some urgent and far-reaching actions. Team InFINee had a candid talk with Mr. Prashant Joshi (Execu ve Director, UBS Wealth Management- USA) who expressed their views on the shi&ing trends & changing regula ons in the US Banking sector and the likely impact on the emerging markets. Besides, the edition features regular columns like “FIN Trivia”, FIN-lingos, News chronicles and Market Pulse. Besides the regular columns, this edition contains an in-depth analysis of the Jet-Etihad deal column containing some mind-boggling facts & figures. We also take extreme pride and pleasure in announcing that IIFT has completed its 50 years of excellence in leadership in International Business and this year marks a special mention. Happy Reading..!!

InFINee | Annual Issue | August 2013 2

CONTENTS

>>> Page 3

>>> Page 20

QE T

>>> Page 26

Consequences for the emerging markets

R : S S The true story behind the US mess

NPAâ&#x20AC;&#x201C; T Causes | Impact | Recommends

: T M Will the emerging economies be able to deliver

RedeďŹ ning the role of a regulator

E) Expert analysis of why banking sector will be the forerunner in next bull run

EMBATTLED

H Candid chat with Mr. Prashant Joshi (Execu ve

EXTERNAL DEBT

â&#x20AC;&#x153;Falling into a dark abyss!â&#x20AC;? 43

C Summer internship experience in investment bank

Is it the right me to fully deregulate the fuel prices

M P Sector-wise performance & Ni y movement analysis

STORY RUPEE & INDIAâ&#x20AC;&#x2122;S RISING

J -

An in-depth analysis of the proposed and the revised version of the stake sale by Jet airways

11 COVER

D A : E

Regulars 45

F T

InFINee | Annual Issue | August 2013 3

QE TAPERING CONSEQUENCES FOR EMERGING MARKETS - Sarah K All & Srimaitri Yalamarthi Symbiosis Institute of Business Management, Pune

uan ta ve Easing (QE), the unconven onal monetary policy that the Federal Reserve (Fed) adopted a er the sub-prime crisis to inject liquidity has reached the pping point and the Fed Chairman Ben Bernanke’s recent comments suggest slow withdrawal of QE by reducing the present 85 billion $ per month asset purchases- provided the US economy recovers sa sfactorily (unemployment 6.5% and inﬂa on 2%), and this according to him could be as early as mid- 2014. A policy meant for the welfare

of US ci zens, ironically has more implica ons for the world as a whole than the US alone, thanks to the huge size of the US economy as well as the enormous magnitude of the programme. The Fed announcement triggered sell-oﬀs in most markets across the world and its long term implica ons are not yet clear. Withdrawal of QE is inevitable considering the probability of asset bubbles being created, and ming is the crucial aspect- if the process is too sudden, it may aﬀect growth of not just US, but also other countries and leaders of the delicate emerging market economies in par cular should be aware of the dangers arising out of it.

INTRODUCTION

the rise in interest rates in the mid-90s, triggering the Southeast Asian crisis from 1997:

aising of interest rates a er periods of loose monetary policy by the Fed contributed majorly to the La n

American debt crisis in the 1980s as well as the Southeast Asian crisis in the 1990s. In both cases, higher interest rates in the US caused investors to quickly pull out funds which were earlier ﬂowing into these emerging countries and this caused sudden deprecia on of their local currencies- the shock was too much for these fragile economies which faced many problems including diﬃculty in repayment of debt and reduced growth because of lower liquidity. Rise of interest rates was more of a trigger than the cause of these crises

QE’s purpose was to ar ﬁcially increase the demand for low-risk US

and the actual cause points more towards the unsustainable debt

assets and thus bring down their yields, thus forcing investors into

levels these countries had, when investments came their way. In the

riskier assets that drive US growth. However a large amount of capi-

present scenario when the emerging economies and structurally

tal has ﬂown into emerging markets as well. Thus, when QE is with-

stronger, a crisis may not ensue; but careful monitoring of QE un-

drawn, the ar ﬁcial demand for low-risk assets is reduced and thus

winding will have to be done and ac ons taken on the monetary

their yields rise, promp ng investors across the world to invest in

front in par cular, to ensure that inﬂa on is in control and growth is

the safe US sovereign bonds in par cular and this results in capital

not aﬀected.

ou,lows par cularly those of FIIs from the rest of the world. This in

The following diagram illustrates the hike of interest rates star ng in

turn has several consequences that aﬀect exchange rates, capital

1979 which triggered the La n American crisis in the early 80s and

markets, inﬂa on etc. in these countries. Emerging economies, the

InFINee | Annual Issue | August 2013 4

largest of which are the BRICS and Mexico, Indonesia Turkey etc.

acute when high a high CAD economy has high external debt:

have done poorly since 2009 while the rest of world has recovered quicker. These countries are all capital thirsty and thus the withdrawal of capital may further aﬀect their growth ﬁgures.

The following chart shows the reduc on in emerging market GDP growth (at PPP) reducing, compared to the world:

The following diagram shows how the 10 year bond yields have risen a er the June 19 announcement and due to RBI steps taken a erwards. Similar pa;erns can be observed in almost all emerging economies.:

Source : Economist.com EFFECTS ON THE FINANCIAL SECTOR A er the May 22 and June 19 indica ons of QE withdrawal by the Fed, US bond yields spiked and thus capital flew from the riskier emerging economies to the safer US assets. This resulted in their currency deprecia on and speculators would expect the deprecia on in countries with high CAD to be more severe, sold them off at much larger amounts. The following diagram shows the worst affected currencies and as expected, all of them have current account deficits. Other factors such as external debt as well as support from the central banks also affect the deprecia on and hence the amount of deprecia on is not exactly propor onal to the current account deficits.

India in par cular faces the threat of inﬂa on as a depreciated rupee implies costlier oil imports (which have inelas c demand) which are either passed on to the customers- resul ng in cost inﬂa on, or

The following ﬁgure shows the gross external debt of emerging

subsidised by the government which fuels a higher ﬁscal deﬁcit

economies. High external debt indicates low repayment capacity if

which may be mone sed and hence cause inﬂa on. Apart from the

the currency depreciates and hence speculators tend to sell-oﬀ the-

usual nega ves, high inﬂa on causes a further deprecia on of the

se currencies resul ng in a self-fulﬁlling prophecy. The danger is

rupee and thus fuels a cycle of deprecia on. Separately, the worsened current account deﬁcit due to oil imports will also cause depre-

InFINee | Annual Issue | August 2013 5 cia on unless enough capital ﬂows in from abroad, since the RBI

▪

Deprecia on of currency

does not have enough reserves (around 300 billion $) to support the

▪

Higher interest rates

rupee. RBI has thus taken steps to increase interest rates to a;ract capital ﬂows, in spite of poor growth ﬁgures. It may be noted that

And the most aﬀected countries have:

inﬂa on due to oil imports has a me lag and the eﬀects are not evident yet, since most oil is purchased in the futures market usually

▪

High CAD

with 3-month contracts.

▪

High foreign debt

▪

High FII inﬂows during QE and low capital controls

▪

Low forex reserves

▪

Inelas c imports and exports

The following ﬂowchart illustrates the deprecia on cycle, applicable especially for India:

EFFECTS ON THE REAL SECTOR The impact of QE withdrawal on the real sector is of more concern to these countries and even short-term effects are important as Keynes once said- “In the long run, we are all dead”. However the effects cannot be no ced instantly and the impact is not as clear as that on the financial markets. The effects of the May and June announcements are also not clear as of now. However, qualita ve es mates of possible future effects can be made. There are several factors (from the corporate and government point of view) which determine the impact on the real sector and dependence on foreign capital is the most important factor. Countries Source : FT.com / Emerging Market Deficits diagram

which depend greatly on foreign capital- as FDI or as foreign debt, may ﬁnd raising capital more diﬃcult in the future and this may

Oil imports are inelas c and this is the reason the CAD worsens when oil prices go up, while IT exports have not shown a tendency to increase much. Thus having inelas c imports and exports worsens the situa on since it further deteriorates the CAD when there has been some deprecia on.

aﬀect their investments and thus their GDP. Another important factor is the sensi vity of the economy to interest rates. Highly interest-rate sensi ve sectors such as manufacturing are bound to suﬀer and thus economies dependent on manufacturing, retail etc. will face trouble. Fiscally strong economies may be able to over-

The stock markets have not been aﬀected to the same extent as the

come these diﬃcul es by being more spendthri and suppor ng

bond markets. This may be since the stocks are not me-bound

growth. Countries with ﬁscal deﬁcit may choose to borrow from the

investments and hence their pricing is not aﬀected as much as

central banks (instead of prin ng) and thus results in crowding out.

bonds, which may pay regular coupons and may have short maturity

Countries with high ﬁscal deﬁcit are thus more prone to a lower GDP

and thus a depreciated rupee aﬀects dollar returns of FIIs greatly.

growth.

There was vola lity however especially a er the May 22 announcement and also on June 19 when there was a steep fall, but there has since been a recovery.

Thus the main eﬀects of QE withdrawal are thus:

▪

Asset sell oﬀs

The most aﬀected countries thus have:

▪

High dependence on foreign capital

▪

Dependence on interest rate sensi ve sectors

▪

High ﬁscal deﬁcit

InFINee | Annual Issue | August 2013 6

CONCLUSION

19 may not repeat as QE withdrawal has been mostly factored in by

Emerging economies would do well to an cipate the eﬀects of QE

global investors.

withdrawal and the economies most prone to it should be alert. This will help reduce the impact to the short-term and not affect these economies’ growth. India for instance has taken several steps in June and July- it has tried to address the CAD by puBng restric ons on gold imports and the finance ministry has been trying to a;ract foreign investors to manage the rupee fall and avoid the deadly deprecia on cycle illustrated earlier. The RBI has taken steps to increase the interest rates (in par cular the overnight lending rates) indirectly by reducing inter-bank liquidity, to support the rupee and to control infla on. Another effec ve step by the RBI was the shortterm ban on proprietary trading by banks which caused specula ve investors to sell rupees. One important step that India can take to make the financial markets more robust is to make Indian ci zens more aware of investment and thus reduce the effect of Ins tu onal capital inflows and ou,lows. It must be kept in mind that the withdrawal of QE is not all bad news for these economies. Firstly, it is a signal that the US growth is finally back on track and a number of these countries depend on the US for exports as well as employment. Secondly, cheaper commodity prices can be expected if these countries manage to control their currency deprecia on, since dollar price of commodi es including oil will decrease. Thirdly, the currency and asset markets in these economies will be more stable a er QE- high vola lity was present during QE due to high liquidity. And finally, shocks like the one on June

InFINee | Annual Issue | August 2013 7

BREADWINNER & RISING PRICES STORY OF THE STATES - Prakarsh Jain S P Jain School of Global Management, Singapore

“

US is healing... if the Fed doesn't screw it up”, the buzz line

Our god says, inﬂa on in the United States needs to be higher. This

is in the news all over, and the ques on arises, is there any-

seems to be an event of purposely hur ng the middle class, which

thing le to screw up, that the media is s ll hoping them

has been the game since Globaliza on in 1980’s. The oﬃcial inﬂa on

not to screw it up. Absurd statement but that is the truth.

rate in the United States is siBng at about 1% and yes, if that is what actually exists, then what Bernanke insists that such a low rate of

Fed Chairman Ben Bernanke, God of the Modern World, one statement on an issue and markets all around the globe react. His stances in recent mes, which is challengeable and the same shall form the crux of this ar cle, being that ‘quan ta ve easing shall have to con nue un l some me now’. Obviously, a er making a withdrawal statement in June, the reasons for reversal had to be issued, and that was, the dual mandate needs to be met, unemployment and

infla on is not good for the economy certainly makes sense. However, what will never be admi;ed is that the official infla on rate is a counterfeit. The way infla on is calculated in America has changed more than 20 mes since 1980’s. If we calculate the way infla on was calculated back in 1980, it would be a stunning 8%. However, carefree people, who have many other things to worry about, do not happen to no ce and the claim that infla on is "too low" sustains.

infla on, was this not known before? Many of them know that infla on is out of control and that, they are Both the mandates men oned for con nuing easing for a probable be;er present but surely an unfit future are vague and in the air. Unemployment is not high, its skyrocket and infla on is not low, it is already over the roof so, what mandates are we talking of?

spending a lot more on things they buy on a regular basis than they used to. For example, when Obama entered the House, price of a gallon of gasoline was $1.84 and today the price has nearly doubled. This is the case with gasoline and therefore we can imagine the impact on other commodi es, as this carries a direct inﬂuence on almost everything that we buy.

InFINee | Annual Issue | August 2013 8

That might look like a one of example and therefore let us consider

Beer: 25%, Wine: 60%, Margarine: 143%, Turkey: 56%, Ground Beef:

some others. Electricity bills have risen faster than the rate of inﬂa-

61%

on claimed for ﬁve years in a row, and as USA Today men ons, water bills have tripled over the past decade.

LOW INFLATION, EXCUSE ME? Take another example, health insurance. In the era of post crisis, health insurance premiums have risen at an average of between 8 and 9%.

Where is this low inﬂa on found? Consider college tui on fees. Since the 1980’s, cost of tui on fees in the States has risen by 498%.

The above might sound some big- cket items and therefore let’s

Source : USA Today

consider the supermarket. Individuals who shop for groceries on a regular basis actually would know this.

Benny Johnson in The Blaze details out how the prices of many of the things that are bought on regular basis have soared between 2002 and 2012. Eggs: 73%, Coﬀee: 90%, Milk: 26%, White Bread: 39%, SpagheB: 44%, Orange Juice: 46%, Red Delicious Apples: 43%,

MOREOVER, WE ARE TALKING THAT INFLATION IS LOW Let’s now have a quick look at a graphical representa on of what has the policies led out by god of modern world done to the prices of commodi es:

InFINee | Annual Issue | August 2013 9 Considering the whole of inﬂa on, pay checks are not rising at the

conducted a hiring event, the same resulted in a million job applica-

pace that inﬂa on is, not even near to that rate. In fact, the house-

ons and only a small percentage were actually hired. An apparent

hold income in the States has fallen for four years in a row. There-

observa on in recent years has been an explosion in the number of

fore, the cost of living just keeps rising and in consequence, the

"temp workers”. To surprise, this phenomenon has also been ob-

middle class inﬂow has not shi ed or has shi ed downward.

served at large companies and sadly, those that work in the "temp industry" o en happen to work in deplorable condi ons for li;le pay. This is one of the elemental reasons, why the middle class is

The only and only big reason for this is the quality of jobs. Only 47%

shrinking.

of adults in US have a full- me job and 53% of the workers make less than $30,000 per annum. It is impossible to support a family on this job pay, but to no surprise, the economy is producing only of this instead of the high qualWhat is god thinking; is he planning to increase the pay checks of

ity full- me jobs.

workers, in order to make up for the "inﬂa on tax" that shall be and is being imposed? Some addi onal signs, which indicate that quality of jobs, are declivitous: Apparently, the number of individuals losing their jobs is star ng to move upward again and is geBng close to 400,000 mark. Since the

▪

Even though the economy has created nearly 200 thousand jobs in June, the number of full- me jobs has actually decreased.

▪

There are approximately 3 million “temp workers” a new all me high.

▪

1 out of 10 jobs are now ﬁlled through a temp agency.

▪

76% of the popula on is living on pay check to pay check.

▪

1 out of 4 workers, has a job that pays $10 or less an hour.

▪

America actually has a higher percentage of workers doing low wage work compared to any other industrialized na on.

▪

Currently only 24.6% of jobs available in the States qualify as "good jobs"

There was a me when just about any adult who was willing to work hard could go out and ﬁnd a good paying job and which would support a good middle class lifestyle. Nevertheless, those days seem to have gone forever. As the number of good jobs decrease, the numact of globaliza on, the American middle class is shrinking each

ber of people who can take care of family without government assis-

passing day and Ben seems clueless.

tance con nues to explode.

A;emp ng to ﬁnd a job today has been an incredibly frustra ng experience. Most of the jobs across pay very li;le, and the intense compe on for just about any job that is open kills the whole sense of availability. Things were surely not this in the past. For example, in current economic environment, when McDonalds

In addi on, thanks to the governments for crea ng the environment, which is incredibly, toxic for small businesses, and which could have acted as a breadwinner. In fact, today the percentage of self-employed workers is at an all- me record low.

InFINee | Annual Issue | August 2013 10

Taking all this into circumstance too, America unfortunately con n-

God of modern mes should enjoy his li;le period of euphoria le

ues to outsource thousands if not millions of good jobs overseas,

because when this bubble bursts and as all false ďŹ nancial bubbles

and government con nues to pursue laws, which is making the busi-

eventually do, the foolishness of Bernanke will be glaringly apparent

ness environment virulent.

to everyone.

The answer God would give us for every economic problem as always shall involve prin ng of money. Gratefully, the trillion dollars of money that has been squirrelled away at the Fed remains there un l today. Nevertheless, the day is not far when this money will be loosed up in the economy, and that will create stul fying inďŹ&#x201A;a on. Regre;ably, Ben does not seem to be concerned about the muckle of currency that is posi oned at Fed. The happy moments for him are that his reckless prin ng has helped the stock market to new highs.

Fixing of this system, which is so mingled, shall not be an easy task. US ship is in the middle of the ocean, and its motor system has been damaged. The next wave of collapse is rapidly approaching, and this one is going to be a lot more painful than ever.

Source : adamsviewimaging.blogspot.com (US Federal Reserve)

COVER STORY

- Avinash Kumar Indian Institute of Foreign Trade, Kolkata

COVER STORY

ping 350% rise. Our external debt has increased by $ 45 billions last year

upee collapsed from Rs 39 for a dollar on Jan’

▪

Persistent inﬂa on: Inﬂa on in India is hovering between

2008 to 61 for a dollar on Jul’ 2013. Since Jun’

7% to 8 % much above compared to that of developed na-

2013, it seems that Rupee is on downslide journey on every subse-

ons (<2%). Reserve Bank of India took several monetary

quent day touching its new low. Between May and July 2013, rupee

measures to contain it, but it couldn’t be brought down

depreciated by approximately 5 % from 55.6 for a dollar to 61 for a

below 7 %. Persistent inﬂa on reduces purchasing power of

dollar. Vola lity in currency is a sign of weak economy. It eroded the

a common man, reducing demand in the market

conﬁdence of Foreign Investors making them withdraw their money from the Indian market or hold their investment projects in India. In the past few weeks, foreign ins tu onal investors (FIIs) has sold their stakes in the Indian equity market and withdrawn billions of dollars, thereby compounding the rupee’s woes.

Fig.2 Deprecia on of Rupee against USD since Jan’ 2008 Source: rbi.org.in

▪

Slowing Economy: GDP growth rate has been reduced to 4.8 % in the last quarter. Growth and rupee’s value go together. A growing economy would export more, create posi ve

Fig. 1 Deprecia on of Rupee against USD in last 2 months

expecta on, a;ract foreign investor a;en on, draw in more FDI and FII and ﬁnally strengthen the rupee.

USA economy is slowly and steadily recovering from the recessions

▪

since Obama administra on took oﬃce. US Federal Reserve’s quan-

Rising Current Account Deﬁcit: Voicing concern over high Current Account Deﬁcit, Reserve Bank Governor D Subbarao

ta ve easing policy has also helped in the apprecia on of the US

today said: "Current Account Deﬁcit a year before last year

dollar. Thus the currencies of all the emerging markets like Indone-

was 4.2 per cent, last year it was 4.8 per cent. It is a ma;er

sia, Brazil, Thailand, India has depreciated. But the rate of deprecia-

of concern... We should be working towards reducing the

on for the Indian Rupee is spectacular.

Current Account Deﬁcit to sustainable levels to 2.5 percent”. Our current account deﬁcit needs to contain within a limit. We need to restrict our gold imports.

There are several reasons responsible for the downslide of rupee, some of them are:

▪

Uncontained Fiscal Deficit: Current Fiscal Deficit stood at 4.89% of GDP. Fiscal deficit leads to excessive government borrowing, rise in infla on, greater import leading to widen-

▪

India’s rising external debt: India’s external debt has risen to $ 390 billions in 2012 from $ 112 billions in 2004, a whop-

ing of Current Account Deﬁcit.

InFINee | Annual Issue | August 2013

COVER STORY ▪

Weakness in domes c equi es: The vola lity in the exchanges has triggered a panic leading to selloﬀ by foreign ins tu onal investors, causing further vola lity of rupee

By 2009 the short term borrowings was around 17.2 percent and by March 2013 the short term external debt rose to a whopping 33.1 percent of the Forex reserves. And Forex reserves have fallen to $ 292.65 billion. Fig. 3 Inﬂa on (WPI) Repayment of short term debts would cause large ou,low of dollars

Source: LOK SABHA SECRETARIAT

and put pressure on the currency intermi;ently. For example during May 22 and June 19 there was a net debt ou,low of $4.7 billion,

RISING EXTERNAL DEBT

oreign debt is a necessary evil that is needed by developing countries to sustain GDP growth rate, develop infrastructure etc. Usually such addi on of infra-

structure results in long term asset building that adds to improved produc vity of the na on. However in India's case the rise of external debt has been primarily to fund the current account deﬁcits catering largely to the working capital needs and funded through the short term loan at higher interest rates. This short term debt is also responsible to the vola lity of rupee.

At end March

External Debt ( $ billion)

External Debt to GDP

Foreign Exchange Reserves to Total External Debt

Short term to Foreign Exchange Reserves

2004-05

112.4

17.3

101.7

3.9

2005-06

139.1

16.8

109.0

12.9

14.0

2006-07

172.4

17.5

115.6

14.1

16.3

2007-08

224.4

18.0

138.0

14.8

20.4

2008-09

260.9

18.3

106.8

18.8

20.0

2009-10

305.9

17.8

99.6

21.3

21.2

2010-11

305.9

17.8

99.6

21.3

21.2

2011-12

345.8

20.0

85.1

26.6

22.6

2012-13

390.1

21.9

74.9

33.1

24.8

Fig.4 India’s rising external debt Source: Ministry of Finance

Short Term to Total External Debt 3.97

InFINee | Annual Issue | August 2013 14

NPA - THREAT TO BANKING SYSTEM CAUSES | IMPACTS | MEASURES - Deepak Bedi & Nimisha Jain Great Lakes Institute of Management , Chennai

T F

he lesson of history is that you do not get a sustained economic recovery as long as the financial system is in crisis

INTRODUCTION

-- Ben Bernanke In India, banks form 60% of the en re ﬁnancial sector. Other segments such as capital markets, bond markets are not developed unlike United States, United Kingdom. Therefore Indian economy is

or any country to prosper, to grow and being stabilized,

highly dependent on the performance and eﬃciency of banks in

needs to have a sound ﬁnancial system. Whenever a

par cular.

ﬁnancial system has crashed it has taken the economy to the deepest of crisis. US subprime crisis (2008) which started with the ﬁnancial system crash bringing down the major banks such as Lehman Brothers, Bear Stearns, Merrill Lynch, overall impac ng the US economy to an ex-

NON-PERFORMING ASSETS If we look at the present scenario, the core of ﬁnancial problems of the bank is formed by NPAs. Any loan or advance is considered as non-performing asset (NPA) if:

tent that the whole world is s ll struggling to come out of it. Financial system comprises of banks, insurance, Non-banking ﬁnancial companies, mutual funds, hedge funds, ins tu ons, markets etc.

▪

The interest or instalment of principal of a term loan remains overdue for a period of more than 90 days

InFINee | Annual Issue | August 2013 15

▪

In case of overdra /cash credit account, the account remains ‘out of order’ for more than 90 days

In India, 75% - 86% of total income of banks are interest income driven and remaining are fee based. Therefore Net Interest Margin (NIM) is higher which is good if we think from the earning point of

▪

In case the loan/advance is granted for agricultural purpose,

view but at the same me, banks are taking high chances when it

interest or principal payment is overdue for 2 harvest sea-

comes to risk and high probability of defaults by borrowers. Since it

sons or two and a half years whichever is lower

is in-build in our system therefore managing NPA is a cri cal aspect for banks. If the banks invest more in safer instruments and fetch lesser re-

In layman’s language, NPA represents the bad loans and advances where the borrowers were incapable of mee ng the repayment obliga ons .

turns, the chances of default decrease and at the same me the returns fetched in both the cases are nearly same as provisions and wri ng oﬀ bad debts in case of loans bringing down overall returns. According to the RBI, "Reduc on of NPAs in the Indian banking sec-

GROSS NPA

tor should be treated as a na onal priority item to make the system

Gross NPA is an advance which is considered irrecoverable, for bank

stronger, resilient and geared to meet the challenges of globaliza-

has made provisions, and which is s ll held in banks’ books of ac-

on."

counts.

NET NPA Net NPA is obtained by deduc ng items like interest due but not recovered, part payment received and kept in suspense account from Gross NPA.

CLASSIFICATION OF NPA ▪

Standard Assets: A standard asset is a performing asset. Such assets carry a normal risk and are not NPA in the real sense.

▪

Sub-Standard Assets: All those assets (loans and advances) which are considered as non-performing for a period of 12 months are called as Sub-Standard assets.

▪

Doub ul Assets: All those assets which are considered as non-performing for period of more than 12 months are called as Doub,ul Assets.

▪

Loss Assets: All those assets which cannot be recovered are called as Loss Assets.

A er this the assets are handed over to recovery agents for sale.

NPA - CRITICAL ASPECT OF INDIAN BANKING SYSTEM The level of NPA act as an indicator showing the bankers credit risks and eﬃciency of alloca on of resource Banking Sector Expanded—Handbook of Sta s cs

InFINee | Annual Issue | August 2013 16

CAUSES OF NPA

cial banks are required to lend 40% of their credit to ‘priority

Till 1991, Asset quality was not the prime concern for the Indian

sectors’.

Banking industry.

become sick and weak, it becomes diﬃcult to recover loans.

A er 1993, when RBI issued guidelines, NPA was started being looked as the Na onal Priority in the banking domain. Some of the

In case of ‘micro sector’ businesses, if some of their units

Money granted under poverty eleva on these schemes was

key reasons for the NPA can be a;ributed to:

not recovered due to poli cal manipula on, misuse of funds

and non-reliability of target audience of these sec ons.

Direct Loan System: Under this lending policy, the commer-

InFINee | Annual Issue | August 2013 17

Poor communica on to the borrowers regarding their repay-

IMPACT OF NPA

ment schedule and consequences.

Return on assets is the major criteria considered to know the wellbeing of a bank. Banks do not get interest generated from NPA but have to make provisions for the same from the current proďŹ ts.

Weak credit appraisal system.

Legal impediments that make the asset disposal process complex and me consuming.

If the level of NPA is not curtailed mely it may lead to: 1.

Rise in the cost of capital.

InFINee | Annual Issue | August 2013 18

Widening of the Asset-Liability mismatch.

Reduc on in the earning capacity and ROI.

Larger provision for the NPAs and lesser capital adequacy and proﬁtability.

Deteriora on of economic value added (EVA) because EVA=Net Opera ng Proﬁt – Cost of Capital

involved in the business – Can Lend otherwise Don’t. 3.

Team vs. Individual

▪ 4.

If the business is run by a team – Can Lend.

Technology used in the Business

▪

If customer is selling B to C, it must have online presence.

MEASURES ▪

Manufacturing companies should have energy eﬃcient measures.

Preven ve:

▪

Credit Assessment and Risk Management Mechanism: This should

Check if systems like ERP are in place.

Past Track Record

be in place to check the disbursement of loans, asset quality and

▪

poten al danger of addi on to the NPAs stock. Organiza onal restructuring: Improvement in the managerial eﬃ-

Should be posi ve.

Cri cal Dependence on Business

ciency, skill up grada on for proper assessment of credit worthiness

▪

and a change in the aBtude of the banks towards legal ac on, is necessary.

If the promoter’s only survival source is the exis ng business – Can Lend.

Reduced Dependence on Interest: Banks should aim at income from

Auditor

Fee based sources rather than Interest based. The banker can earn

▪

suﬃcient net margin by inves ng in safer securi es though not at

If the audi ng ﬁrm which carried out audi ng is well established ﬁrm then – Can Lend.

high rate of interest. 8.

Ra ng

▪

Criterion for Gran ng a Loan

Check if the company’s ra ng is good or bad.

Small Medium Enterprises 1.

Experience

▪

If out of these 8 points, a SME is valid in 4 points we can lend them

If a person is working and then wishes to start a

money to the tune of say 1-2crore.

business:

▪

If experience > 5 years, he is less likely to default – Can Lend.

ii.

Check for a stake holder in the business who was from the same line of business as the venture.

Cap corporates should be checked on addi onal points: 1.

HR System should be present in the organiza on

may be the case that he defaulted on creditors –

Check if the business is rela onship driven or eﬃciency driven. If later is the case – Can Lend.

Corporate governance should be strong/high.

Make young entrepreneurs aware of the CIBIL.

Succession Plan

▪

Apart from the above men oned 8 points as SME loan criterion, Mid

Person closing one business and opening another

Don’t Lend.

▪

Mid Corporate

Large Corporates Apart from the above men oned points for both SME and Mid Cor-

If the promoter is aged and has his son/daughter

porates, following criterion should be looked into:

InFINee | Annual Issue | August 2013 19 1.

Ins tu onal holding

holders through an orderly and coordinated restructuring

Market borrowing capacity

programme.

CONCLUSION: The problems of NPA can be resolved if banks prudently follow few measures such as credit assessment of the borrower before making an investment, Recovery performance is be;er with respect to individual small borrowers but it is slow in case of corpora ons and ins tu onal borrowers.

Cura ve: 1.

One Time Se$lement Schemes: As per the OTS scheme, for NPAs up to Rs. 10crores, the minimum amount that should be recovered should be 100% of the outstanding balance in the account.

Therefore banks can follow the criterion for deciding the credit worthiness of the loan taker. PSBs can reduce their NPAs by providing higher provisions for the NPA as well as being more systema c in the opera ons. 2.

Lok Adalats: It help banks to se;le disputes involving account in “doub,ul” and “loss” category, with outstanding

CDR- corporate debt restructuring as discussed in earlier paragraphs

balance of Rs. 5 lakh for compromise se;lement.

is in a nascent stage. It will change the scenario dras cally if properly implemented and executed.

Debt Recovery Tribunals (DRTs): These are the appellate authority for appeals ﬁled against the proceedings ini ated by secured creditors.

Corporate Debt Restructuring (CDR): This framework aims at minimizing the losses to the creditors and other stake-

InFINee | Annual Issue | August 2013 20

LOSING LUSTRE OF EMERGING MARKETS TRUTH OR MYTH ? - Abhishek Singh & Vipul Arun Indian Institute of Management, Rohtak

Source : Economist.com THE STORY SO FAR

oped economy yielding higher returns. They were also expected to grow richer on the back of apprecia ng currency which was sup-

“

When a champion sprinter falls short of his best speeds, it takes a while to determine whether he is temporarily on poor form or has permanently lost his edge.”

posed to be way below PPP rates. There was accelera on in growth during 2003–07 in emerging market, even as growth in advanced economies weakened. This s mulated a vigorous debate on whether emerging market and developing economies had decoupled from

The same is true with emerging markets, the world economy’s 21st-

the advanced economies. The debate was soon silenced by the glob-

century sprinters.

al meltdown that emanated from the US and Europe. This slum punished the developed na ons but the emerging markets were not isolated either. But they quickly bounced back, and during 2010–11

In 2003, Goldman Sachs report "Dreaming with BRIC's" predicted

many of them grew at or above pre-crisis rates.

that BRIC economies will account for over half the size of G6 countries by 2025 and will emerge as a major force in the world economy

Emerging-markets stocks, foreign exchange and credit returned

by 2050. The prime reason cited for such op mis c forecast was

19%, 6.8% and 11%, respec vely, from 2003 to 2010, compared

that the developing na ons have less capital per worker than devel-

with a 4.1% return for the Standard & Poor's 500-stock index, ac-

InFINee | Annual Issue | August 2013 21 cording to Goldman Sachs.

tained, meteoric growth in emerging markets.

Later as U.S market started to recover and talk of cuBng back Quan-

The growth drivers which were supposed to be aid to these markets

ta ve Easing, clubbed with weakness in commodity prices and

in the past few decades like the arbitrage of low-cost labour, op -

increased poli cal risks made emerging Na ons not so a;rac ve

mal popula on proﬁle, the advantages of supply chain globalisa on,

des na on as before. In fact these Emerging markets soon emerged

are no longer valid. The rise of automa on calls back for the cheap

to be the ugly ducklings of ﬁnancial world. Their currency plummet-

labour advantage these countries previously banked upon.

ed to historical lows as investors withdrew their money from their markets. Economies are now struggling with high inﬂa on, currency deprecia on, slowing GDP growth and increasing deﬁcits. Cynics

Strong US economy which acted as a centre for demand for these emerging markets can come forward as a compe tor for emerging markets posing further threat to the already shaking growth rate.

believed the problem in emerging economies is not only cyclical but more worrisome structural ones too.

The loosing lustre of emerging markets has more to do with high expecta ons than with high vola lity. Emerging markets equi es are one of the most vola le asset classes, but investors have been willing to afford the risk with an incen ve for higher returns. Their low correla on to US equi es, in the past made them a;rac ve choice for por,olio diversifica on. But with the emerging markets moving onto centre stage and their leading companies matching up with their counterparts in developed na ons, that configura on of risk, return and correla on may be changing structurally. More stability might push these markets back, down the risk fron er (i.e. becoming less risky), thus lowering the probability for outperformance. Un l emerging markets are able to convince ba;le-scarred investors that they can put together a broad-based long-term recovery, investors are likely to be dubious about their prospects.

FAIRYTALE FOR THE EMERGING MARKETS IS OVER For almost a decade, emerging markets were quite the flavour of the season, and held out the promise of higher growth and superior returns on investments. Slower economic growth in emergingmarket countries forms the backdrop to rising popular discontent. A handful of experts believed that although emerging markets profited from the favourable external environment in the early phase of their growth cycle but they failed to make the most of the window of opportunity afforded them. Structural reforms which were the

Source : Economist.com

need of the hour, if implemented, would have set the ladder for these economies on the path to higher growth but instead they

STORY IS NOT OVER YET: THE BOUNCE BACK

celebrated too soon to squander the advantage. On the other hand some economists believed that this me a broad This period cannot be called just a momentary growth slowdown as a graver problem lies ahead of them which might hinder the sus-

emerging-market bust looks unlikely. China, for instance is in the midst of a precarious shi from investment-led growth model to a

InFINee | Annual Issue | August 2013 22

more balanced, consump on-based model. Though its investment

covers through its restructuring, economies of closely linked coun-

surge has prompted plenty of bad debt, but the central government

tries like Brazil and Russia will be revitalized accordingly. Improve-

has the ﬁscal strength not only to absorb losses but to s mulate the

ments have already started to reﬂect in ﬁnancial reports, achieved

economy if necessary. That is a luxury emerging economies did not

through growth in earnings and reduc on in debt. The modernisa-

had in the past but the risk appe te has come a long way since then.

on of the regulatory environment with improved corporate gov-

It makes disaster much less likely. There

ernance and greater liquidity is also being experi-

seems to be low probability for the monetary

enced by these countries. The reasonable level of

condi ons to ghten suddenly. Even if they do

debts, controlled inﬂa on signals towards a be;er

so, the emerging markets have be;er defenc-

future for these economies. The current problems in

es than ever before, with ﬂexible exchange

emerging markets could be more of cyclical in na-

rates, substan al volume of foreign-exchange

ture and on the structural side. These emerging mar-

reserves and rela vely less debt. The stra ﬁca on of the growing

kets have grown with strong fundamentals which accounts for good

consumer classes in these markets are welcoming millions of new

mes in the past, such as strong demographics, opportunity for

middle class households which is supposed to grow each passing

rapid GDP growth and harnessing of untapped resources. Moreover

year. Poli cal risk is s ll a factor that lies in the deep roots of these

the QE (Quan ta ve Easing) tapering seems improbable in the near

countries. But it’s not as big a problem as it was in the days of the

future. As far as vola le currency in the emerging economies is con-

La n American debt crises of the early 1980s or Russia’s default on

cerned, they have always been viewed vola le by investors especial-

its sovereign debt in 1998 or Indian crisis in early 90’s which led to

ly in South East Asian countries. Investors have always hedged

liberalisa on of Indian economy. Also the companies in the emerg-

against prevailing currency risk in these economies so currency vola-

ing markets are less mature than in the developed world and with

lity should not be much of a concern.

more new enterprises surfacing up, there is a percep on among investors that there is signiﬁcant poten al for them to make proﬁts

CONCLUSION: ONLY TIME WILL TELL The present scenario indicates no doubt on the fundamental flaws which exist in emerging economies to varying degree. The emerging markets had it easy during the past decade to fuel their growths with easy money but with the change in the domes c and the global market, only the countries with strong fundamentals will be able to deliver on their promise. Countries whose growth is driven more by domes c consump on than exports will be less prone to global shocks and their growth model will be self sustainable and less dependent on others. Globally, inferior growth could focus leaders on amplified co-opera on and a new thrust for liberalisa on. However the affluent world is more vigilant about globalisa on than it was a decade back, and more concerned in retaining its export compe veness. The current propaga on of regional trade agreements

during the exponen al growth phase of these companies. The ever

could gesture a move towards frac onalisa on of the world econo-

increasing demand for commodi es is yet another reason emerging

my. Sluggish growth in the BRICs could lead to the sort of inner ten-

markets to perform well. This year will be the ﬁrst in which emerg-

sions that Na ons can relocate by picking external ﬁghts. Whether

ing markets will account for more than half of the world’s GDP on

or not the world can construct on a outstanding era of growth will

the basis of purchasing power as per IMF. Since much of the world's

rely in large part on whether the new giants tread a path towards

output of commodi es is in emerging markets, so the strong de-

superior global co-opera on—or trip, drop and, in the worst case,

mand will eventually leads to higher proﬁts. As Chinese market re-

clash.

InFINee | Annual Issue | August 2013 23

TAKING THE PLUNGE IS IT THE RIGHT TIME TO FULLY DEREGULATE FUEL PRICES - Saquib Hasnain & Shreyas Dwivedi Indian Institute of Foreign Trade, New Delhi DEREGULATION: A RETROSPECTION

WHAT IT ENTAILS

The basic mechanism for fuel to be sold in the company begins with NOCs, i.e. Na onal Oil Corpora ons. These include Oil India Limited ince independence, the Indian government, in view of the poor economic health of the country, has im-

posed a myriad of regula ons on various sectors in the industry. The one which has gained increasing prominence over the last few years is the regula on of fuel prices. This includes providing subsidies on petrol, diesel, LPG, kerosene, and natural gas.

and Oil and Natural Gas Corpora on. These NOCs extract oil from oil wells such as those in Bombay High, and reﬁne them using a variety of processes. During various stages in these processes, products such as petrol, diesel, kerosene, etc. are obtained. These are siphoned oﬀ and stored. These NOCs then sell them to Oil Marke ng Companies (OMCs) at the market price. These OMCs include HPCL, BPCL, IOC and Reliance. These OMCs

However, this subsidy has been gnawing at Indian ﬁnances for quite some me, ll the me it reached alarming propor on in 2010, with under recovery of petrol and diesel totalling to approximately 22000

then sell the fuel to retailers, which eventually reaches the consumers. Now, the price at which OMCs sell the fuel to retailers is much lower

crores, and overall

than the price they

under

recovery

purchased it for from

touching Rs 79,000

NOCs. This diﬀerence

crores. The prices

in prices is called Un-

were the lowest in

der recovery. A part of

the

East

this is borne by the

Asian region. The

government. This is

government called

essen ally

for par al deregu-

subsidy

la on

diesel

government gives so

prices and aligning

as to reduce the mon-

etary burden on the

South

petrol

prices

with the market. Since

then,

dis-

putes

over

the

fuel

which

the

ci zen.

AN ECONOMIC OUTLOOK

pricing mechanism have ensued. In

Currently the govern-

January 2013, the government gave approval for stepwise deregula on of diesel prices.

ment bears a fiscal deficit of 4.9% of the GDP, and the figure is growing every year. A huge por on of this burden is comprised of subsidies borne by the government, of which fuel forms a large part. The fiscal deficit, at this rate, is a looming sign of financial stress which

Topic Cartoon Source : Tooningin/Jayanto

InFINee | Annual Issue | August 2013 24

prices taken by the average voter. None of them can come up with concrete solu ons as to what should be done to stabilise fuel costs at a macro level, but then, poli cs has never been about ﬁnding solu ons.

scares oﬀ investors before they even begin to consider India. However, even the current par al deregula on of diesel impacts the prices of various consumer goods and thus further strains the common man, already reeling under accelerated inﬂa on.

A CORPORATE PERSPECTIVE The regula on in fuel prices has reduced our OMCs to toothless

THE COMMON CITIZEN- A MYOPIC VIEW?

gers. Their compe veness has taken severe hits, with most of

With inﬂa on sky-rocke ng to 9.31%, rising prices of various com-

them relying on government interven on to remain stable. In 2012,

modi es and services was already the biggest problem for the Indi-

the net losses of OMCs were es mated to be about Rs 1, 60,000

an Consumer. Thus, the deregula on (however par al), acted as a

crores. Out of this, approximately 80,000 crores was handled by

metaphorical ﬁnal nail in the coﬃn. And deregula on of diesel pric-

government subsidies, about 60,000 crores by upstream ﬁrms like

es would directly impact prices of almost every commodity which is

ONGC, and Rs 20,000 crores was s ll unaccounted for, and expected

transported using trucks, which is a huge basket.

to be carried forward into 2013. Another pressing issue is the ci zen’s spending on State Road Transport Corpora ons (SRTCs), which are the major users of diesel Regula on has also scared oﬀ poten al FDI in this sector, with glob-

(14%), and would thus be severely impacted. The fares would see a

al players unwilling to commence opera ons without the prices

substan al hike (about 18%), and passenger intake would be aﬀect-

being aligned with market movements. These corporates could

ed. This would thus impact state revenues from SRTCs. However,

bring signiﬁcant capital as well as technical exper se to the industry.

SRTCs were already struggling, with losses totalling to 0.08 % of the

Thus, India loses the opportunity to explore currently unreachable

GDP.

deposits as it s ll keeps out the latest technologies and techniques. One of the results of government regula ons on petrol and not die-

THE POLITICAL QUESTION Obviously deregula on is easier said than done, at least poli cally. Due to its impact on the common man, fuel and its price is one of the major instruments used to wield poli cal power, with the oppo-

sel ( ll Jan 2013) was the ﬂurry of favouri sm towards diesel cars in the automobile sector. This has resulted in almost 70% of the owned vehicles being diesel-run. Now, par al deregula on will have a signiﬁcant impact on the car industry based on diesel cars.

si on lining up to cri cize the government about being unable to manage costs and burdening the already stressed average Indian

A diesel-dependent product which will also face a crisis now is the

ci zen. Statements by Mamata Banerjee, M Karunanidhi, and mem-

portable electric generator, which became extremely popular due to

bers of the BJP all endeavour to cash in on the simplis c view of fuel

the government’s reluctance to deregulate diesel prices. These were

InFINee | Annual Issue | August 2013 25 purchased in bulk, and are s ll extensively used in both urban and

Thirdly, relying on basic economic principles, it seems to be logical

rural areas. However, now their cost-eﬀec veness will become

to align price levels with market forces, as government interven on

ques onable.

can only steer the ship so far.

Most worrying is the impact that diesel will have on the most proﬂigate variety of common man-the farmer. Tractors

and

Also, increased fuel prices would also mo vate the use of alterna ve energy sources and judicious use of fuel.

other

farm machines primar-

However, looking at the

ily run on diesel, and

current

the price hike will im-

(4.86%), as well as current

pact the Indian farmer,

inﬂa on

rate

prices and macroeconom-

who is already suﬀer-

ic context, the writers

ing losses and com-

strongly believe that full

miBng suicides. This is

deregula on at this point

also another ques on

of me, though making

from the poli cal angle

sense in the long-term

-is

the

government

economic outlook, would

the

put too much inﬂa onary

majority of its popula-

pressure on an already

worried

about

on, which is agro-based.

s ﬂed populace. Thereby, the writers recommend con nuing the stepwise rollout while taking into account current inﬂa on and adjus ng the amount of the fuel hike as per the needs of the hour.

However, a major part of the ci zen’s burden is due to the poor macroeconomic situa on of our country, and the ﬁscal deﬁcit is a huge contributor to that cause. More regula on and subsidies at this me would only ramp up the collec on of even greater debt for the coming years.

FULL DEREGULATION: AN OPINION Evalua ng the pros and cons of this no on, the writers were forced to consider a number of facets. Firstly, the prospect of significantly reducing our fiscal deficit to reach targeted levels of 4.8% of GDP seems to be an extremely alluring one. India as an economy, needs some s mulus to take it out of the current macroeconomic stalemate it is in with various MNCs and countries.

Secondly, the major OMCs in India are PSUs, and their compe ve health needs all the help we can give it. Deregula on would bring some much-needed capital to our PSUs.

InFINee | Annual Issue | August 2013 26

MAKING SENSE OF COLLECTIVE INVESMENTS PYRAMID SCHEMES - Dr. Bibek Ray Chaudhuri Assistant Professor, Indian Institute of Foreign Trade, Kolkata

channels etc.). The hallmark of such schemes is that they oﬀer highwo of the largest deposit taking companies in West

er than average returns while in some circumstances promised re-

Bengal has Rs. 4220 crores of outstanding amounts

turn may go up to as high as 500%. Such ridiculously high returns are

that they owe to millions of investors. Such an

made believable by convincing gullible investors about the unique-

amount can create social unrest and other undesirable consequenc-

ness of such schemes through personal interac on with the clients,

es if the projects in which these sums have been invested go wrong.

adver sing etc. The promoters of such schemes exploit their net-

Both the companies had been summoned by SEBI in recent mes

work in both banked and unbanked areas targe ng people with li;le

and ordered to stop the schemes which did not follow the guidelines

or no me to go to banks (like shopkeepers, vegetable vendors etc.)

laid down by the regulator. Taking advantage of the loopholes in the

or exploit their aversion to paper work or stringent formali es (like

present regula ons, lack of proper supervision, judicial delays and

KYC norms) excluding them from the ambit of formal ﬁnancial ins -

poli cal clout these companies have con nued with their opera ons

tu ons. In rural areas per capita savings being low among poorer

claiming no wrong doing on their

people along with almost negligible

part. Not only are the investors un-

inves ble opportuni es coupled

safe but the states like West Bengal

with low level of awareness is a

are suﬀering from much lesser small

fer le ground for prolifera on of

savings collec on in post oﬃces

such schemes. Agents are paid high

aﬀec ng the much needed funds to

commissions including foreign visits

ﬁnance their deﬁcits. In what follows

and gold bars for best performers

we discuss the nature of such

making the schemes more vulnera-

schemes in India and other countries

ble and risky.

and try to understand the causes behind their prolifera on and then discuss some of the possible remedies.

These schemes are akin to Ponzi schemes (named a er US scamster Charles Ponzi) where fresh investors and investments are required

Collec ve Investment Schemes (CIS) are regulated by a variety of

to grow exponen ally to pay high returns promised to earlier inves-

ins tu ons in India (SEBI, Coopera ve Socie es Act, Insurance Act,

tors. Millions of rupees are collected through small contribu ons

Companies Act etc.) depending on the kind of organiza ons ﬂoa ng

from large number of people. The smallness of the amount collect-

the scheme. Under such schemes agents regularly collect small

ed, to a large extent, reduces the inhibi ons against such schemes in

amounts from individuals, majorly lower middle class and lower

the mind of the investors. Instances of other investors who have

income group people (from both urban and rural areas). The money

been rewarded handsomely with high returns are o en cited as

so collected is then invested in businesses ranging from planta ons,

success stories to rope in new clients. Investors are also inﬂuenced

real estate, entertainment (including resorts and hotels, television

by innova ve projects (viz. planta ons or media) which have the

InFINee | Annual Issue | August 2013 27 poten al to earn higher returns. Most of the mes, local persons

The scam was busted when it was discovered that Ponzi had accu-

known to the investors are used as collec on agents. Prior rela on

mulated a huge debt due to payments made to investors whom a

or acquaintance is thus used to push the products. Investors are

high return was promised and subsequently his accounts were fro-

a;racted by higher returns and door-step service of such schemes.

zen. He was later on convicted and jailed for ďŹ nancial fraud. The

New companies, which may have diďŹ&#x192;cul es in obtaining loans from

case of Bernard MadoďŹ&#x20AC; whose crimes were detected in as late as

the banks or ďŹ nances from the capital markets, use these schemes

2008 is the biggest Ponzi scheme ever valued at $65 billion duping

to generate the ini al capital required to start their ventures. Many

thousands of investors. MadoďŹ&#x20AC; was a pioneer in computer-based

such schemes are actually not intended to dupe the investors but

trading and used his inďŹ&#x201A;uence with the moneyed to collect such

turns out to be so given the high promised returns and commissions

huge sum of money. Even though frauds have been detected in

to a;ract the savings, which a er certain point in me becomes

countries like the US, Ponzi

unsustainable. This said though, numerous instances are there, not only in India, where money laundering was the primary mo ve behind such schemes. In recent cases, local collec on agents have also joined the duped investors in agita ons against administrators of such schemes where the ďŹ rms vanished with the collected money (collected by these very agents using their local contacts). This shows that in many cases even the agents are not aware of intensions of the promoters. The plight of the investors can be easily

Schemes are more prevalent in countries with weaker regulatory structures. Instances like that of Albania in 1997 can be cited as a country badly aďŹ&#x20AC;ected by fraudulent schemes. Riots had resulted from such ďŹ nancial frauds leading to several deaths and toppling of governments. Jamaica lost almost 12.5% of its GDP due to such scams which also aďŹ&#x20AC;ected other countries in Caribbean jurisdic ons. Columbia was severely aďŹ&#x20AC;ected by one such scheme when loss amounted to as high as $1 billion and riots spread over 13 ci es.

imagined.

One such scheme in Lesotho caused loss of money for 1, 00,000 investors who were poor and vulnerable.

EXPERIENCE WORLD-WIDE One of the ďŹ rst such schemes was reported in as early as 1920s when Charles Ponzi an US scamster tried to exploit the diďŹ&#x20AC;erence in

MAJOR DRIVERS

prices of â&#x20AC;&#x2DC;interna onal reply couponsâ&#x20AC;&#x2122; across diďŹ&#x20AC;erent places. Buy-

Both demand and supply-side factors are the major drivers behind

ing from a place where the price was less and selling it where the

such schemes. As already men oned, an important supply-side fac-

price was higher.

even

Amount Invested /lost

tor would deďŹ -

Year of Collapse

U.S. Dollars

% of GDP1

nitely be the lack

2009

8 billion

n.a.2

eďŹ&#x20AC;ec ve supervi-

Recent Ponzi Schemes World wide Country

Name

bought a local bank with the

of regula on and

An gua and Barmoney collect- buda ed from inves- Grenada

Stanford Financial Group SGL Holdings

2008

30 million

5.0

India though in

tors

and

Jamaica

OLINT, Cash Plus etc.

2008

1 billion

12.5

pen and paper

caught

the

United States

MadoďŹ&#x20AC; Investment Securi es

2008

65 billion

0.5

the regula on of

Colombia

DRFE, DMG etc.

2008

1 billion

0.4

collec ve invest-

Lesotho

MKM Burial Society

2007

42 million

3.0

Albania

VEFA, Gjallica, Kamberi etc.

1997

1.7 billion

79.0

a;en on

the local regu-

sion. In case of

lators when an audit

his re-

schemes

(CIS) is opera onalized

accounts

ment

All references are with respect to home country GDP, although some schemes a racted non-resident investors

through

SEBI

vealed that he held

much

money

An guan investors were not permi ed to invest in this oďŹ&#x20AC;shore ins tu on

Reference: Monroe and Pa llo, Finance and Development, March 2010

than total value of the interna onal reply coupons in circula on.

(CIS) Regula ons 1999, in prac ce the

regulator

ďŹ nds it diďŹ&#x192;cult to monitor each and every scheme which are oďŹ&#x20AC;ered

InFINee | Annual Issue | August 2013 28

to investors. On top of it the district courts where the cases related

schemes harming the small investors. On the demand side, to facili-

to such schemes are tried takes a long me to give a verdict limi ng

tate investors to take informed decisions, ‘Investor Educa on Work-

SEBI’s ability to stop such schemes. It has also been found from ex-

shops’ may be organized by SEBI in conjunc on with the corre-

periences world-wide that such schemes proliferate due to macroe-

sponding departments in the states. Demand side analysis about

conomic factors like economic growth, an asset bubble, availability

client requirements needs to be taken up in order to design appro-

of higher number of investors and higher inves ble resources due to

priate subs tute products (some of them are discussed below).

easy availability of credit or higher savings. In case of India; high

Higher returns, at least par ally guarding against inﬂa on, easy

growth rate, huge popula on and savings rate provides a fer le

accessibility, secure and easily understandable instruments may go a

ground for such schemes. The vastness of

long way to generate demand for such prod-

the country with low penetra on of bank

ucts and can become viable alterna ves to

branches makes people suscep ble to

In case of India; huge popula-

fraudulent/risky pyramid schemes. Idea is

such schemes. Lack of enough trained

tion, high growth and savings

not to stop pyramid schemes (which would

manpower makes it diﬃcult for regula-

rate provide a fertile ground

be quite diﬃcult) but to ensure that the

tors to eﬀec vely monitor such schemes.

for such schemes.

schemes are ini ated by following proper

Demand side factors, like low-level of awareness

about

ﬁnancial

products

The vastness of the country

procedures and appropriate internal control mechanisms are at place. Timely detec on

among poten al clients makes the situa-

with low penetration of bank

of schemes which are not following the

on more diﬃcult. On top of that high

branches makes people suscep-

direc ves is absolutely essen al and hence

inﬂa on especially food prices have

tible to such schemes

SEBI must be strengthened (if separate regulator is not iden ﬁed) by induc ng proper-

aﬀected the economic condi ons of the people which may have induced them to

ly trained manpower in large numbers to

look for higher returns from the li;le money they had to insulate

tackle the menace of fraudulent schemes before it leads to major

them from future expected higher prices. Besides, cash injec on in

disasters observed in other countries. A delicate balancing act is

rural areas through schemes like MNREGA, Indira Awas Yojana,

required from the regulator, as ac ng too has ly may invite investor

might have also increased the supply of cash available to rural peo-

wrath because they may lose money because of such ac on. Moreo-

ple leading to higher demand for such schemes. Phenomenon like

ver, if ac on is taken, late investors may accuse the regulator of

‘herd behaviour’ is very o en observed among investors. Especially,

doing precious li;le.

in rural areas where community feelings are stronger, high ini al returns earned by some people can lead to huge number of people op ng for such schemes. The likelihood of such occurrences is higher in densely populated areas which may explain higher incidence of such schemes in states

On the supply side, crea ng viable subs tutes for such schemes should be a;empted. I would men on a few of the already exis ng ones with some suggested modiﬁca ons. The idea is to give the people more alterna ves when it comes to deploying their savings.

like West Bengal.

MICROFINANCE INSTITUTIONS (MFIS) POSSIBLE REMEDIES Surely,

the

Established (deﬁni on should be

investors

provided by RBI) MFIs may be al-

cannot be le in the

lowed to collect savings from the

lurch and allowed to be

general public. Currently regula on

duped

fraudulent

allows NBFCs and Coopera ves to

schemes. There should

collect deposits. Coopera ves can

be ways to reduce the

only collect deposits from its mem-

incidence

such

InFINee | Annual Issue | August 2013 29 bers. In case of NBFCs, only investment grade ins tu ons are al-

BANKING CORRESPONDENT (BC) AND BANKING FACILITA-

lowed to take deposits. Currently none of the NBFC-MFIs fall under

TOR (BF) MODEL

this category. Thus, no MFIs collect deposits. The network these ins tu ons have in remote areas would come in handy for such a

These two channels were mooted by RBI to tackle the problem of

scheme to work. It can solve a number of problems simultaneously

low penetra on of bank branches especially in rural areas. BC can

provided this scheme is properly designed. The rate the MFIs would

provide banking services like a one-man mobile branch by collec ng

oﬀer for the savings should be made ﬂexible so that they can com-

savings and giving loans with speciﬁed caps on value of transac ons.

pete with CIS operators and other schemes available. For MFIs this

BF model on the other hand uses exis ng informal channels in rural

can be a viable source of funds other than bank loans and donor

areas to increase banks’ customer base. BC model according to

capital. But, if CIS are so open ended and con nue even when SEBI

many studies have failed because per client revenue is lower than

had given orders to stop opera ons why can’t MFIs (established

per client cost. The problem with this model is that ini al cost of

ones) be given a chance at least to collect deposits as a pilot

loca ng a client by the channel partners is very high and needs to be

scheme?

heavily subsidized by the government. The poten al of lower per unit costs as the number of clients goes up is higher for such ac vi es. As an experiment mutual fund products may also be sold

NATIONAL RURAL LIVELIHOODS MISSION (NRLM) The exis ng SGSY scheme has been restructured by the Ministry of Rural Development into NRLM. Under this scheme among other things funds would be deployed in the rural areas to strengthen the forma on of Self Help Groups(SHGs) and to see to it that they are accorded highest priority when it comes to providing the necessary infrastructure, capacity development and distribu on of work by the local government machinery. One of the policies that is being implemented relates to encouraging the SHG members to save voluntarily and use the combined funds as a corpus to extend credit by the group thereby providing an addi onal avenue for the members to beneﬁt out of the returns generated from these ac vi es (touted as SHG-II). In SHG-I only the compulsory savings concept was introduced where the corpus formed by repeated savings by members was used to open an account in a bank. The bank in turn ( ll December 2011) gave a term loan to the group to be lent to its members. In SHG-II voluntary savings along with the compulsory one is being emphasized. The members can deposit the voluntary savings in the bank or use them to lend within the group genera ng a higher rate of return (as SHGs lend at 2% per month interest rate). This policy if properly implemented can viably compete with CIS since rates of return can be high.

through these channels giving the clientele in remote loca ons the opportunity to get higher returns. Investment opportuni es in standard instruments may effec vely compete with CIS related to non-standard investment opportuni es promising ridiculous returns. In many countries Ponzi schemes also thrive because of their promoters’ clout with the poli cal par es and generous dona ons they make for charitable purposes. Recent cases in the state of West Bengal have again pointed fingers at nexus between the ruling poli cal party and big companies floa ng CIS. It is not the ques on of who is patronizing such schemes; rather the concern is whether they are becoming too big to pose a danger to the social and economic wellbeing of the country as had happened in some countries. Thus the need of the hour is a joint effort by the government and the regulatory agencies to prevent such schemes from going out of propor on through proper investor educa on, protec on and preven on measures.

InFINee | Annual Issue | August 2013 30

DEAL ANALYSIS JET - ETIHAD - Raghav Kapila & Shubham Agarwal IIFT, Kolkata consisted of K.G Vishwanath, Raj Sivakumar, and Hameed Ali. The nego a ons were vola le with both par es staging walkouts. While E had walked out once, Jet Airways walked out at least thrice over diﬀerences on valua on

DIFFERENCES IN VALUATIONS E had ini ally valued Jet at a mere $500mn, leading to a walkout by Jet. They then raised the valua on to $800mn and ﬁnally raised it to $1.2bn while Jet pushed for a valua on of $1.6bn. The two airlines mutually agreed on several terms and the Jet team

ﬂew back to India with the deal almost sealed. Jet airways called a board mee ng in the second week of February to close the deal, and he Jet-E had deal, which came a er months of nego a-

commerce minister, Anand Sharma, was set to announce it in his

ons, is the ﬁrst investment by an overseas operator in

visit to Abu Dhabi on 18th February.

an Indian Airline since the government introduced FDI of 49% in the avia on sector. A er much turbulence in the deal, ﬁnally E had has agreed to acquire a 24% stake in Jet Airways for $379mn (~2058 Cr)

One day before the visit, Jet Airways received another shock. E had Airways chairman Sheikh Hamed bin Zayed al-Nahyan said that the airline needed to revise its deal to buy a stake in Jet Airways, and it was s ll me for the ﬁnal agreement to be struck.

THE DEAL MAKERS

Many said that the reason behind this was the lack of policy clarity

In August 2012, Jet Airways and E had airways teams met in Abu

in the SEBI guidelines.

Dhabi to carry out due diligence exercises. The team of E had included PWC, HSBC Holdings Plc., and its auditors – KPMG. On the other hand, Jet Airways engaged consul ng ﬁrm Ernst & Young to

POLICY CHANGES BY DGCA

conduct its own

To facilitate the Jet-E had deal, DGCA issued fresh guidelines as

due

diligence

on E had. The nego a ons gathered pace in

September

a er the policy

Started Opera ons Hub Des na ons Fleet Staﬀ Revenues

Jet May, 1993 Mumbai 20 Interna onal + 52 Indian 100 13,945 Rs 16,898 Cr (2011-12)

announcement by Indian Government .Jet airways nego a ng team

E had November, 2003 Abu Dhabi 84 66 8000 $4.8 Billion (2012)

approved

the

ministry of civil avia on. The changes, as pointed by moneylife, are as follows:

InFINee | Annual Issue | August 2013 31 - Clause 1.7

ment of the Indian carrier. These changes in guidelines are in total

states “A Sched-

contradic on to the policy, which mandates the eﬀec ve control in

uled Air Transport

the hands of an Indian shareholder. It is therefore obvious as to why

Service/Domes c

this clause has been diluted and the clause earlier referred to name-

Scheduled Passen-

ly, Clause 1.7 has been delegated—the reason to dilute the deﬁni-

ger Airline shall not

on of eﬀec ve control.

2008

have

agreements

such as shareholdagreements,

In order to facilitate Jet in receiving the considera on of $300 mil-

etc. with a foreign

lion through a so loan at 3% the guidelines were required to be

airline, containing

changed.

ers

provisions/

2008 - Clause 1.9 states “A Scheduled Air Transport Service/

arrangements empowering

such

foreign airlines or others on their behalf to have eﬀec ve control in the management

Domes c Scheduled Passenger Airline may enter into financial arrangements with a bank and/or other financial ins tu ons for the purpose of lease-finance, hire-purchase or other loan arrangements, but such a e-up shall not be permi;ed with a foreign airline”.

of the domes c airline”. 1 March 2013 - Clause 1.6 states “A Scheduled Air Transport SerClause 1.7 was deleted on 1 March 2013

vice/Domes c Scheduled Passenger Airline may enter into ﬁnancial arrangements with a bank and/or other ﬁnancial ins tu ons includ-

2008 - Clause 1.8 states “A Scheduled Air Transport Service/ Domes c Scheduled Passenger Airline shall not enter into an agree-

ing foreign airline for the purpose of lease-ﬁnance, higher purchase or other loan arrangements”.

ment with a foreign airline which may give such foreign airline the right to interfere in the management of the domes c operator.”

1 March 2013 - replaced by Clause 1.5 that states “A Scheduled Air Transport

Service/

MORE TURBULENCE IN THE DEAL

SEBI’s Concerns (As told to DEA)

Do-

▪

mes c Scheduled Passen-

Commercial pact should not be

entered into, as it gives E had the upper hand in opera onal ma;ers

ger Airline other than those who have FDI by

▪

foreign airlines shall not

E had, under the pact, gets rights

to source candidates for senior management posi ons

enter into an agreement with a foreign airline,

▪

which may give such for-

The airlines plan to shi network

and revenue management func ons to Abu Dhabi and consolidate sales oﬃce/ general sales agreement to support Jet’s sales in UAE

eign airline, the right to interfere in the management of the domes c

▪

operator”

Lead role in nego a ng with

suppliers, according to pact, will be E had’s The above clauses show that a foreign carrier, through its investment in a domes c operator, can now interfere with the manage-

▪

Corporate-governance code clauses should be amended for passage of board resolu ons by simple majority. Under current

InFINee | Annual Issue | August 2013 32

▪

arrangement, resolu ons are passed with three-fourths majority, giving E had the right to approve all decisions

▪

The nomina ons commi;ee should not have exclusive powers

▪ Others: 25%

to recommend appointment or removal of all independent directors and the CEO. These powers are against the provisions of the Companies Act

E had: 24%

SYNERGIES FROM THE DEAL Beneﬁts for Jet Airways

DIPP’s concerns on the revised shareholders’ agreement If the deal goes through the following beneﬁts would accrue:

▪

Eﬀec ve control and ownership lie with E had, and not Jet

▪

If Naresh Goyal’s stake is included, the 49% FDI limit is breached

▪

Under the FDI norms, rights for vo ng and nomina on should stay with Jet

▪ Jet Airways increase its interna onal reach and reduce some of its debt burden.

▪ The Indian carrier will get access to much-needed funds ▪ A global network, latest technology and best management prac ces

On July 24th, Foreign Investment Promo on Board (FIPB) gave its approval on the commercial agreement to Jet and E had, with

▪ Indian passengers will gain from increased compe on that is expected to lead to be;er oﬀerings, seamless travel through code-shares and cheaper airfares

few revisions which includes: Beneﬁts for E had Airways

1. It ensured that the control is not passed from Jet to E had 2. The rule of FDI in avia on were redeﬁned to clearly state that permission would be granted only if “substan al ownership and eﬀec ve control is vested in Indian na onals”.

▪ The global carrier will get access to traﬃc origina ng from India’s interiors

▪ E had an opportunity to tap into the fast growing Indian outbound market

3. Any changes in the SHA (Share Holders Agreement) with E had would require permission from GoI by Jet

4. The revised SHA also says that Indian laws would be used for trying the shareholder disputers over English laws which can s ll be used for other arbitra ons

5. The veto power lies with Naresh Goyal 6. E had would have two rather than three seats in the 12 member board as was planned earlier

7. Jet board can now take its call on the various boards being set up in Abu Dhabi which mostly implies for the opera onal and commercial decisions

The ﬁnal shareholding pa;ern a er the deal is:

▪

Naresh Goyal: 51% (even though being an NRI, this breaches the 49% FDI limit in avia on which is yet to be decided upon GoI)

▪ In addi on, it will mean that E had will not need to wait for the Indian Government to allow it to operate more ﬂights into India because of a cap on bilateral air service agreements with other countries

InFINee | Annual Issue | August 2013

“NIFTY in a real sense is not really at 5500+ levels” are what many analysts on street are saying these days. The carnage and vola lity that have been witnessed in the Indian Markets are at its peak. India’s Vola lity Index (VIX) have gained around 66% in past three months. Whether Sonianomics is to blame for rupee, Sensex crashes or are we facing the brunt of revival in US Economy, or both?? Whatever be the reason, we are fast losing the shine of a fast-growing emerging na on with a fear of possible downgrades by credit agencies.

InFINee | Annual Issue | August 2013 34

Asset/Index

1st May

31st July

%change

Gold(MCX)/10 grams

27,503

28,211

+2.6%

Sensex

19,504

19,345

-0.8%

Ni y

5,930

5,742

-3.1%

Rupee/$

53.8

60.81

-13.03%

NIFTY Chart (May-July 2013)

A-May 17 Ni y: 6187 Ni y reached 6187 following global cues with the US indices reaching all me highs, April inďŹ&#x201A;a on easing to a 41-month low and high liquidity exis ng in the markets. CNX Bank Ni y rallied over 500 points on hopes of rate cut by the RBI. Bank stocks like IndusInd Bank, Kotak Mahindra Bank and HDFC Bank reached 52-week highs. Other rate sensi ves such as auto and realty also rose to higher levels. Ni y could have gone on towards 6300 if a key resistance level formed in January 2011 was breached. Ni y could not break the resistance and moved lower therea er.

B- June 26 Ni y: 5588 From being at 6100 levels at May end Ni y had a bear run in June going below 5600 levels for the ďŹ rst me since April 16. Big names like BHEL, JSPL, DLF and Ranbaxy reached 52-week lows. Weakness in Rupee and the concerns over tapering down in the bond buying exercise of the US Federal Reserve also pushed Ni y lower. Overseas investors pulled out around $5 billion from the Indian debt and equity market in less than a month.

C- July 23 Ni y: 6077 RBI introduced a number of measures to squeeze liquidity in the markets to ďŹ ght the deprecia on of rupee. It raised the interest rate of Marginal Standing Facility (MSF) by 100 bps to 10.25 percent and also made some changes in the rules of CRR and LAF (Liquidity Adjustment Facility) to arrest the fall of rupee. Short covering was seen in stocks along with buying in beaten down sectors like banking and auto sectors. Stock-index futures gained amid signs the RBI wonâ&#x20AC;&#x2122;t ghten monetary policy at its meet.

D July 31 Ni y: 5742 July 24th saw Ni y tumbling as a result of proďŹ t booking in rate sensi ve and capital intensive sectors along with July series expiry. There were also concerns related to inďŹ&#x201A;a on with the fall in rupee. Borrowing costs for many companies have risen above 10 percent. Corporate bond sales plunged 96 % in July as yields surged a er RBIâ&#x20AC;&#x2122;s measures .The rupee crossed the 60 level showing no signs of a relief. Global fund houses sold $1.05 billion of Indian stocks in July a er Juneâ&#x20AC;&#x2122;s $1.8 billion sell-oďŹ&#x20AC;.

InFINee | Annual Issue | August 2013 35

The FMCG industry has been growing at a fast pace in the past few years backed by robust economic growth and rising rural income. Growth drivers such as premiumiza on, rapid urbaniza on, evolving consumer lifestyles and emergence of modern trade have shielded the industry from the slowdown un l ll recently.

Growth Posi on (%)

Shareholding Pa ern (%)

The Fast Moving Consumer goods (FMCG) sector is valued at Rs 1.8 trillion (Source: Nielsen). The industry is urban-centric with 66% share of the goods being consumed by urban India. Metropolitan ci es & small towns (popula on of 1-10 lakh) have been driving the FMCG consump on in urban India since 2002. In fact middle India, compris-

Market Performance (%)

Valua on (x)

domes c demand impac ng the companies stock prices. It has strong support at 16,724 levels. The top line growth has been sluggish for some me now with major FMCG companies like HUL, ITC, Dabur, ColPal, Britannia witnessing stress on their revenues. Though these companies have improved on their opera onal eﬃciency, revenue growth remains an issue

What aﬀects the industry :

• Demand : Favorable macroeconomic drivers such as GDP and popCNX FMCG Index (May– July 2013)

ula on growth, coupled with rising income levels and lifestyle changes are the main drivers for FMCG sector demand.

• Supply : India is a compe ve market in terms of product oﬀerings. In each category of FMCG product there are organized players as well as unorganized. However, lately with incomes rising consumers tend to move towards the more organized players who sell branded products.

• Expenses : The major expenses that impact this industry include raw materials and adver sing expenditure.

Peer Comparison

ing of the small towns and consuming 20% of overall FMCG sales, has been growing the fastest across rural and urban segments. As per Nielsen, USD 13 billion as of 2012. This sector is expected to grow to a USD 33 billion industry by 2015.. Rural India, where 70% of the popula on resides but only 34% consume FMCG goods, presents the biggest market poten al for the industry. Backed by low unit packs and aggressive distribu on reach, rural market size has expanded nearly four mes. Companies such as Hindustan Unilever and Dabur which derive nearly half their sales from rural India have been increasing their reach. CNX FMCG has a been sluggish from few weeks due to the decrease in

Data : FY 12-13 / Source : Bseindia.com

InFINee | Annual Issue | August 2013 36

Telecom has been one of fastest growing sectors of the Indian economy in the past few years. A er priva za on of the sector, companies like Bhar Airtel, Vodafone, Tata Telecom, and Idea have emerged as major players while state monopolies MTNL and BSNL have signiﬁcantly lagged behind.

Growth Posi on (%)

Shareholding Pa ern (%)

The Indian telecom sector has seen massive growth once the sector had been opened up to the private sector. The compe on in the sector has increased with local tariﬀ rates at close to 40 paise/minute

Market Market Performance Performance (%) (%)

Valua on Valua on (x) (x)

telecom even a er signiﬁcant penetra on is achieved.

•

Supply India is a compe ve market in terms of number of telecom players. Recently a er implementa on of Mobile Number Portability (MNP) the compe on in the sector has only gone up since operators have to lure and retain exis ng customers along with winning over new customers. With at least 4 to 5 large players in each of the 22 circles (service areas), the supply of services is very strong. However with the recent corrup on cases of some players, pricing power has returned to the incumbents.

•

Expenses The major expenses of retailers include network charges, staﬀ costs and interest on debt. Apart from these payments for addi onal spectrum, 3G licenses put strain on long term ﬁnances.

CNX BSE TecK Index (May– Juy 2013)

Peer Comparison

which is one of the lowest in the world. Mobile is now seen as a major driver of reach to the Indian consumer with the tele-density being so high at greater than 65% versus a low internet penetra on at 4% to 5%. Newer technologies are increasingly geBng integrated through the mobile phone, third genera on technology which enables greater integra on could make this a reality. What aﬀects the industry :

•

Demand : Favorable demographics and rising incomes of a country provide a spur to the telecom sector. Telecom is increasingly seen as a u lity now versus earlier years when it was seen as a more discre onary service. India being one of largest consumer countries could see con nued growth in

Data : FY 12-13 / Source : Bseindia.com

InFINee | Annual Issue | August 2013 37

The Banking Industry, one of the essen al pillars of the Indian Financial System, serves as a financial intermediary by accep ng capital surpluses as deposits and pools those funds to provide the par cipants that have capital deficit as credit. Because of the important role depository ins tu ons play in the financial system, the banking industry is highly regulated, with certain government restric ons on financial ac vi es by banks.

la on with the country's gross domes c product (GDP) and has a mul-

Shareholding Pa ern (%)

Growth Posi on (%)

Mainly banks are classiﬁed as either PSU or Private. Currently, in India 165 scheduled commercial banks exist including 26 public sector banks, 21 private banks and 32 foreign banks. They have a combined network of over 71,000 oﬃces and 9, 44,000 employees. Public sector

Market Performance (%)

Valua on (x)

plier effect of 2x to real GDP. Supply: Supply of liquidity is dependent upon several economic variables like RBI policies, economic growth and infla on. Higher the infla on, interest rates and slower economic growth less is the off take of credit in the market and vice versa Barriers to entry : Entry barriers are high in banking sector as one will require banking license from RBI which is allo;ed a er stringent due diligence and huge infrastructure for branch developments. Compe on : There is high compe on in the banking sector as there are private banks, public banks, co-opera ve banks, NBFC's and also private lenders. RBI is also looking at issuing new licenses which will further intensify compe on in the sector. S& P BSE Bankex has broken its major support of 11,000 decisively. The daily charts have formed an Evening Star candles ck pa;er which might signify more downside in the upcoming weeks.

Peer Comparison

banks hold over 77 % of total business of the banking industry, with the private and foreign banks holding of 18 % and 5% respec vely. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets rela ve to other banks in comparable economies in its region. Since Indian economy is witnessing strong growth the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong.

Data : FY 12-13 / Source : Bseindia.com

WHAT AFFECTS THE INDUSTRY: Demand The demand for credit is directly linked to the industrial and economical growth. The banking industry growth has a posi ve corre-

“Please refer to the page 42 for the impact of RBI measures on Banking Sector and an economy as a whole”

InFINee | Annual Issue | August 2013 38

WHEN THE SUN SHINES AGAIN FOR INDIAN ECONOMY - Mr. Rituraaj Juneja An IIFT Alumni & Founder of simpletrades.in

hat the global economy is going through some of the toughest mes is a no brainer. Indian economy including INR hiBng historic lows against USD has become a ‘Breaking News’ on daily basis. INR has already breached the 68 mark and seems headed to the psychological 70 mark.

Let me scien ﬁcally present the data for you. I have taken the Na onal Stock Exchange (NSE) NIFTY as basis for the analysis. The various sectoral indices have been pi;ed against this benchmark index and a view is thus formed based on their performance versus NIFTY. All this data is authen c to the best of my understanding and belief.

Chart-1: Bull-run from 23-Dec-11 to 20-May-13 (NIFTY Vs BANKNIFTY)

Fruits to vegetables to electricity to fuel, every item is geBng more and more expensive and some have gone up mul ple mes. Tough mes indeed! However, tough mes don’t last, tough people do! Sooner or later the mes will change. And if you are at the right place at the right me, you can see your career moving up and ahead in leaps and bounds! While the naysayers are having a field day, there are s ll certain pockets of economy that have stood out. As and when the economy has looked up, these Sectors have headed north with sheer tenacity. The idea of wri ng this ar cle is to iden fy such sectors/Industries. It is obvious that the stock markets are said to be the barometer of any economy’s health. Their direc on signifies if and whether the economy is doing well or otherwise. I shall a;empt to extract data from the Na onal Stock Exchange and analyze that for the benefit of the students who at their age are a worried lot. Would they or wouldn’t they get a job opportunity? Would the career offered be to their liking or otherwise? Is there any growth in the industry/organiza on of their employment? And these fears are not unfounded. There have been numerous reasons to be worried of late.

NIFTY recently enjoyed nearly 17-month bull-run from the low of 4531 made on 23-Dec-2011 to a high of 6229 made on 20-May-2013. This move of approx. 1700 points up move translates to about 30% (See Chart-1 above) : While many Sectors dras cally underperformed NIFTY which went up by 130%, the following could not even play the catch up game even during the good mes:

SECTOR NIFTY Infra Energy IT Commodi es Metals

GROWTH 130% 119% 112% 105% 93% 88%

Table-1: Bull-run from 23-Dec-11 to 20-May-13 (UNDERPERFORMING Sectors)

So, which Sectors were happier when NIFTY was happy?

Website URL : h&p://simpletrades.in/

InFINee | Annual Issue | August 2013 39

SECTOR

GROWTH

NIFTY

130%

▪

85,000+ PSU banks vacancies pan-India (2013-14)

FMCG

165%

▪

300,000 to be hired by PSU banks in the next 3years

Banks

159%

▪

10,000+ more jobs will get created through new Banks

Media

158%

▪

Banking sector is known to be compara vely more stable

Pharma

148%

▪

Banks invest to keep team agile & sharp to stay compe ve

Auto

139%

▪

Rounded careers & excellent growth opportuni es

▪

Work place closer to home (bank branches are everywhere, even in er-2 towns)

▪

Oﬀer far higher mobility in case of change of city/residence

Table-2: Bull-run from 23-Dec-11 to 20-May-13 (OUTPERFORMING Sectors)

Here are some more facts:

So, here are the secrets! These sectors would be the ones to focus on. Isn’t it obvious that the right organiza ons in these sectors that are growing even above the respec ve Sectoral average would not only oﬀer stable career opportuni es, but also a fast-track growth? They would also be hiring more than the others since growth shall also fuel manpower requirements. It actually does not end here. The performances would be rewarded with higher compensa on, increments and perks! To validate my ﬁndings, let me take you back and analyze the earlier mega bull-run when NIFTY moved from the lows of 2252 hit on 31-Oct -08 to the highs of 6338 on 05-Nov-10. This up move of almost 4100 points translates to about 218% (See Chart-2 below):

With more and more employees being recruited for Retail Banking, SME, Credit, Rural, Agri & FOREX management, Interna onal Financial Management & Interna onal Business are likely to remain the mainstream oﬀering excellent career op ons to the IIFTians. In the nutshell, FMCG, Banks, Media, Pharma & Auto are likely to see the thick of ac on when the Sun decides to shine again for the Indian economy. The big ques on is – would you be aligned to harness its poten al?

Chart-2: Bull-run from 31-Oct-08 to 05-Nov-10 (NIFTY Vs BANKNIFTY)

It is noted that even in this earlier mega up move, BANKS stood out with BANKNIFTY gaining by 293%. Placed in simpler words, BANKS are happier when the economy is happy! Simple. With the Banking reforms being announced and the applica ons for new bank licenses being ﬁled, this sector is very likely to outperform the benchmark index yet again! While excellent opportuni es would show up in the other sectors as well (see Table-2), Banks are making a strong case for considera on.

Mr. Rituraaj Juneja is an IIFTian with over 23 years of Interna onal Business Development experience in IT, Automobile, Electronics & Semiconductor industries and a simultaneous 12 years in Educa on & Training. A much sought-a er speaker & trainer across top Business Schools; he is an entrepreneur by heart and a mentor to many startups. He is a passionate Technical Analyst of Stock Markets and oﬀers market analysis through his website - www.SimpleTrades.in. His simple, eﬀec ve and impeccable analysis has won him many fans & admirers.

InFINee | Annual Issue | August 2013 40

A month has passed since the Reserve Bank of India (RBI) unleashed a barrage of liquidity- ghtening measures to rescue the rupee. Despite those measures, the local currency plunged to a historic low of 61.81 against the dollar on 6 August. The central bank’s ac ons primarily targeted currency speculators on mul ple fronts—by halving the amount Indian banks can borrow from RBI and simultaneously raising the borrowing cost for banks from the marginal standing facility (MSF) by 200 basis points. RBI also increased the daily balance requirement for banks to maintain the cash reserve ra o—the por on of deposits they must keep with the central bank— and launched a large-scale sale of short-term papers in the market at higher yields to drain every bit of loose cash ﬂoa ng around in the banking system.

Source : Livemint

InFINee | Annual Issue | August 2013 41

IN CONVERSATION WITH MR. PRASHANT JOSHI EXECUTIVE DIRECTOR - UBS WEALTH MANAGEMENT, USA

Team InFINeeti had a candid talk with Mr. Prashant Joshi (Executive Director - UBS Wealth Management, USA) who expressed his views on the shifting trends & changing regulations in the US Banking sector. Also, he spoke his heart out on the likely impact of the new Fed chief, expectations regarding Quantitative tapering and its likely impact on the emerging markets

Team InFINee : What do you think could be the impact of the new

large number of people who have stopped looking for work. Thus,

chairman of the Federal Reserve on the policy for US economy, the

the actual unemployment rate would be in two digits. Moreover,

emerging markets and India?

they have lost the skill-sets, which they have to regain in the new

Peasant Joshi: I don’t think we can expect drama c changes in the

economy; hence we cannot say if this is the true rate.

policy. The Chairman alone is not responsible, when it comes to a

I think it is a slow recovery because the US economy will grow slow-

policy change, it is a group of 12 people who decide, and the policy

ly. Hence 1.6% or 1.8% is the maximum rate at which they can grow.

will remain for the long term. It involves a group of twelve people

The ideal growth rate which is required to reduce unemployment is

who decide upon a policy and it remains for a long term. Coming to

3% or 4% which looks diﬃcult for US. Hence, it is a slow-slow recov-

narrowing down to the next two front runners, one of them has

ery. Moreover, the GDP es mate was based on last year data, which

been the President conﬁdant from the very beginning. He had

I don’t consider important at 1.1%. Also, Q2 is going to be one of the

helped him in his elec on campaigns as leader of his economic

bigger quarters as compared to others.

team. While the other being the current Fed Vice Chairman who represents a region. She is apoli cal but understands Bernanke very well. But, as it seems now, the new chairman will not bring about

TI: What do you think would be the eﬀect of changing regula ons

any drama c changes

in the US, especially in the light of the current happenings? PJ: It is having a big impact, especially on the ﬁnancial sector. The change of regula ons has made a lot of people on the defensive.

TI: US GDP growth rate for second quarter of this year have beaten the es mates of 1.1% to grow at 1.8%, at the same me the unemployment rate is at a three year low of 7.6%. Do you think this is just a short term implica on or the US economy can sustain it for a longer me? PJ: Firstly about Jobless rate. Even though on paper it is 7.6% which is at a 3 year low, but it is s ll higher than the pre-recession rate of 4.5% to 4.8%. What is not accounted in this rate calcula on is the

They are not ready to make the decisions, be it the changes or investments. Especially the Dodd-Frank Act, which represents the most comprehensive ﬁnancial regulatory reforms since great depression, with in-numerous sum component and interpreta ons, the way it is going to be viewed. Also about the Basel III recommenda ons on what needs to be implemented as far as the ﬁnancial ins tu ons hold, they do not know what the future is like. Another reason for it is that people are not

InFINee | Annual Issue | August 2013 42

inves ng, the trade market is ght and the unemployment rate is

geBng impacted in their day to day lives. Hence, the free money is

not going down as fast it is required to go and as I men oned earlier

being used for the beneﬁt of their own investments.

the GDP is also not growing at the pace it should grow. Overall, the cost of compliance with the regula ons, and decision making process involved in the regula on is also not helping the cause.

It is easier to get money from the markets; slowly it will change, treasury rates, the bond prices will change but it will not be an overnight change not a huge change unless & un l it reaches a threshold. As QE went up slowly, it will come down slowly; aﬀec ng the

TI: With the US poten ally coming out of QE, how will Asian economies be impacted by the Fed’s decision? Has the world changed since the 1980s and ‘90s?

people and the price of the assets, but it will not be a signiﬁcantly huge change. Nobody knows when the QE will end, since nothing of such massive sorts has been done before. Moreover, there is no 100% certainty that it will happen; the chances are always 30:70 or

PJ: The world has changed as far as the ﬁnancials work since 1980s

even 40:60

and ‘90s. Previously people had a blind trust for the US policies and would never doubt it. Now it has changed. Today it is not the case especially when we look at the big banks. One can never get the

TI: Extraordinary eﬀorts to s mulate economies with QE had

same kind of scope and access since the banks would be in constant

pushed gilt and government bond yields to 'unprecedented' lows,

pressure over regula on and scru ny for at least the next decade.

requiring income investors to move into higher yielding corporate

This is not going to change unless some behaviour changes, it will be

bonds and shares. Are Central banks forcing investors up the risk

the status quo.

spectrum? PJ: No, they are not but some are totally impacted. The common

TI: Should China fret over the US move on QE, as China's interests are aligned very strongly in the same direc on as the United States?

retail investors, the one who plan to invest in the stock market and re re peacefully are now forcing backwards, they are totally away from the markets. Investors in the ﬁxed income markets are badly impacted & investors in these markets are not those normal inves-

PJ: A very tricky ques on, China is an export oriented economy. In a way their currency is not fully conver ble. If they don’t open up the

tors but they are big professionals. Once they understand the market- they will understand when the asset price will go down and

market, they will not grow. As what I see, they need at least 7-8%

when bubbles will be formed. However the beneﬁt of QE on normal

growth. They need to have internal mechanism for internal growth.

investors is li;le lesser; when interest will go up & they will earn

As far as the US is concerned, it has always been concerned for the

some money- currently they are not making any money.

long term growth and there will be several measures in the Chinese markets which will help the US for this. TI: Reuters recently published the ar cle "How Much is Fed Aid to U.S. Corporate Proﬁts Worth?" which suggested that con nued TI: Quan ta ve Easing policy by the Federal Reserve is causing

low interest rates are ar ﬁcially boos ng corporate proﬁtability.

other assets to be mispriced and bubbles are being formed. For

What impact will tapering of quan ta ve easing have on stock

example, with interest rates ar ﬁcially low, investors are taking

prices if this is true?

greater risks in trying to obtain yield. Since Fed has already announced that it will begin to reduce its quan ta ve easing program, this would mean that the price of these assets will decline signiﬁcantly. What are the a<er-eﬀects of such an ac on?

PJ: Yes, it is true. The beneﬁt of QE is more of a corpora on- they are taking advantage of low interest rate. The ar cle is right in way that US companies are taking advantage as their proﬁtability looks good. A simple statement from the fed chairman, a month back,

PJ: The concern is there; however, impact is not seen. Nobody knows where it will end as the change is slow and not as required. A bigger concern which exists is that a lot of companies are showing proﬁt and the stock market is going up; but the people are not

which says that QE may be ending sooner than I expected made a lot of market turbulence. All the policies are made on what the Fed says and the guidelines set for the next 3-4 years.

InFINee | Annual Issue | August 2013 43

LIFE IN HSBC - Vartika Singh Indian Institute of Foreign Trade, Kolkata

Team InFINeeti talks to Vartika Singh (MBA (IB), 2012-14), Summer Intern at HSBC - Strategic Transactions Group, who gives her valuable insights on her summer internship experience - what she learnt, the challenges she faced and her advice to future aspirants who want to join HSBC.

Team InFINee : How would you describe a typical day for a sum-

ence, but one which I thoroughly enjoyed. I got to learn a lot from

mer intern at HSBC?

my seniors at HSBC, how well they managed their work and handled cri cal situa ons.

Var ka Singh: When we joined HSBC for internship, we had a small induc on and were given brief training on valua on, pitch books

TI: What were the expecta ons of the company from you?

etc. and of course the compliance which is a cri cal part of IB. However, the majority was on job training due to paucity of me in internship.

VS: From interns they do not expect much of prior knowledge, but the ability to learn. Quick grasping power is always acknowledged.

During internship typically my day started at 10 am. The ﬁrst thing I was required to do was check my mailbox for the review and feedback about the previous day deliverables and also to see if any work

But one basic expecta on was accuracy in work. The guiding principle would be to rather ask for an extra hour than to deliver any incorrect informa on.

has been assigned from outside India geographies where generally the communica on would ﬁrstly be through mail and then schedul-

Also in IB you do not get long meline projects, for any task you

ing further calls.

have to give the update or submit the deliverable in 3-4 hrs. So you are expected to keep the mentors in loop and inform the team

Work comprised of preparing pitch books, analysing various reports for valua on or sugges ng and substan a ng any strategy. Typically one can get 2 or 3 company proﬁles in a day, but apart from those, small tasks would be given with very short deadline, may be 2-3 hours. It required going through lots of reports and databases and

members immediately in case the situa on looks out of control because there is no scope to invest more than the es mated me on any task. Also it was expected to keep no work pending, so that the maximum me usage is possible, avoiding any cri cal situa on to occur.

used to consume most of the day. Interns were op mally allocated. In case I ﬁnish up the work by 8pm then I would be briefed about the next day work and before I leave for the day I used to have a

TI: What challenges did you encounter during your internship in

look at the work so that I can plan accordingly for the next day. So

the project(s) which you worked on? How did you tackle them?

on an average the day would end by 11 pm. But frequency of staying ll 1 am or 2 am was also very high. It was a very diﬀerent experi-

InFINee | Annual Issue | August 2013 44

VS: Main challenges occurred because of the diﬀerence in the na-

coopera ve and there are no communica on barriers. The interns

ture of work at IB. Unlike other industries, in one gets very short

are in fact employed like full me analysts and are involved in

deadlines, and it becomes more diﬃcult for interns since they are

mee ngs and discussions and were encouraged to share their view-

not very proﬁcient in using databases and excels. Delivering on me

points.

and maintaining the accuracy was a challenge in the beginning. Also in the ini al few days one gets totally bombarded with lots of new informa on and at the same me have some deliverable to

TI: Would you like to share any other informa on/experience/ advice with the future batches/readers of the magazine?

complete. Thus, according to me retaining those instruc ons and applying them wherever needed was a challenge in itself. Making notes of instruc ons helped in this. I also avoided seeking seniors’

VS: One general advice to those interested in doing internship in IB

advice for the same thing again and again. However, these diﬃcul-

is improve proﬁciency in excel and PowerPoint as these will be the

es persisted for ini al 1-2 weeks. Though once you become accus-

most used tools with a clear understanding of the basics of ﬁnancial

tomed to the work you can easily overcome all this.

concepts.

TI: What skills did you develop as an intern at HSBC? How do you

TI: How diﬃcult was the transi on from a typical MBA college life

think these skills will be useful in your future career?

to a typical corporate culture? How far were you able to apply the classroom learnings to the prac cal scenario?

VS: Being a so ware engineer, two months of internship in a ﬁnance company and that too in an investment bank role was a diﬀerent

VS: Before MBA I had worked with Infosys for more than a year. So

experience. It gave me a pla,orm to apply my knowledge at a much

actually I didn’t ﬁnd much diﬀerence as such in context of corporate

bigger pla,orm. Instead of being allocated to only one sector, I was

culture. In fact my work ex helped me geBng into the role easily, in

rather engaged with diﬀerent sectors on rota on basis which gave

understanding organiza on structure and in assimila ng well into

me hands-on in variety of sectors. Working on diﬀerent mergers &

the HSBC culture.

acquisi ons related tasks led to be;er understanding of inorganic growth of companies, analysis of various opportuni es and the interrela on of the deals taking place across the globe. I got to work on complex valua on models, made plenty of presenta ons which eventually made me proﬁcient in excel and power point.

Coming to the MBA classroom learning, it was definitely helpful. For a person like me without any financial background, classroom learning and compe ons in which I par cipated during MBA were of real help. Also the presenta ons, which are an integral part of MBA curriculum, case studies, financial accoun ng are few of the things which were of help during the internship.

TI: What did you learn about the company - your expecta ons v/s your experiences?

VS: I did not have any prior experience in IB, so basically I didn’t start with many expecta ons. In fact I did not expect much from short dura on of 2 months but I am thankful to HSBC which oﬀered me lot of opportuni es in such a small span of me. The extent of learning totally depended on the ability of an intern to complete tasks as fast as possible and to be assigned to more assignments. More work meant more learning. HSBC summer internship program is very well designed and is conducive to learning; teams are very

InFINee | Annual Issue | August 2013 45

India's gold consump on at 310 tonnes in Q2, highest in 10

Indian companies and individuals can invest, remit or spend over-

years

seas in an a;empt to curb dollar ou,lows from the country. Indian companies can now send out

India's consump on of gold rose to 310 tonnes in the second quarter ended June, highest in the last 10 years, despite government curbs to restrict imports to rein in burgeoning current account deﬁcit, a WGC report said on 15th August. Much of

only 100% of their net worth as overseas direct investment (ODI), way below the current cap of 400%, under the automa c route. The restric ons, however

spare

Navaratna

public sector en es ONGC and Oil India, the RBI said in a release.

the demand was met by stocks that had been built up to healthy levels following the April price drop. Imports more than doubled to 338 tonnes in April-June of this

NRI deposits fall 16% in Q1

calendar year, it said. Gold consump on stood at 181.1 tonnes in the same quarter last year.

Even as the government and RBI are trying to lure in more dollars into the country, ﬂows from nonresident Indians into bank deposits

Costlier onion, veggies push inﬂa on to 5-mth high of 5.79 %

has been falling. During April-June, NRIs put $5.50 billion into Indian

Rising prices of onions and other vegetables pushed infla on to a five-month high of 5.79 per cent in July even as the government and RBI ba;led to stabilise the rupee. Infla on based on the Wholesale Price Index (WPI) was at 4.86 per

banks' deposits, down 16.11% from a year ago. As on June end, NRIs held $71.07 billion in bank deposits, marginally lower than $71.69 billion in May. The sharp vola lity in the rupee may have prompted NRIs to refrain from puBng money into bank deposits. The rupee weakened 2.4% during June and has since then fallen to fresh all- me lows of 61.81/$.

cent in June. In July 2012, it was 7.52 per cent.

Index of Industrial Produc on: Output contracts 2.2%, dashRBI moves to limited capital controls to save Indian rupee With the rupee dri ing down to a life me low of 61.44 to the dollar, despite measures to ghten liquidity and push up interest rates, the Reserve Bank of India (RBI) on Wednesday changed tack, choosing to defend the currency by moving towards capital controls. The central bank put restric ons on the amount of foreign exchange

ing hopes of recovery Dashing hopes of a recovery, industrial produc on contracted 2.2 per cent in June, the second straight monthly drop, on account of a poor show by the manufacturing, mining and power sectors and a decline in produc on of capital goods. Factory output measured in terms of the Index of Industrial Produc-

InFINee | Annual Issue | August 2013 46

on (IIP) had contracted 2 per cent

Government plans to set up about 25 branches of the proposed

in June last year, as per the data

public sector Bhara ya Mahila Bank,

released by the Central Sta s cal

India's ﬁrst all women bank, by the

Organisa on.

end of this ﬁscal. "The Bhara ya Mahila Bank proposes to complete the ﬁrst six branches at Mumbai,

Germany poised to overtake US as world's No 2 exporter

Delhi, Kolkata, Chennai, Indore and

this year: DIHK

Guwaha by October 15 and take

Germany could overtake the United States to become the world's second-biggest exporter this year, but its share of global trade is

the total to 25 by March 31, 2014," an oﬃcial said. The government has already approved Rs 1,000 crores seed capital for the women focused public sector bank, announced by Finance Minister P Chid-

likely to dip as its ex-

ambaram in his budget speech.

ports lag global expansion, German chambers of commerce said on

Metropolis eyes acquisi ons in India, Africa for expansion

Thursday. Europe's biggest economy, currently

Diagnos cs chain Metropolis Healthcare is looking for acquisi ons in

the world's third-biggest

India and Africa as part of its expan-

exporter a er China and the United States, has seen its share of

sion plans. The Mumbai-based ﬁrm,

world trade fall to 7.5 percent by last year, from a post-German

which has earmarked Rs 100 crores

uniﬁca on peak of 11 percent in 1991-92, according to DIHK Cham-

to fund expansion and acquisi ons,

bers of Commerce.

said it is targe ng up to three domes c acquisi ons in the on-going ﬁscal apart from looking for similar

SingTel raises stake in Bhar Airtel to 32.34% for $302.2 Mn Singapore Telecommunica ons Ltd said on Thursday it will increase its eﬀec ve interest in India's Bhar Airtel Ltd to 32.34 per cent from 30.76 per cent, paying around S$383.6 million ($302.2 million).

SingTel,

opportuni es in West Africa in future. It also plans to open 14 new laboratories across the country in this ﬁscal as part of its expansion plans. "We are planning two to three acquisi ons in FY13-14 in the country. We are already in talks for these," Metropolis Healthcare MD & CEO Ameera Shah told PTI

Southeast

Asia's largest telecommunica-

UIDAI issues more than 40 crores Aadhaar numbers ll date

on operator, said it had agreed to buy 788,538 shares, or 3.62

Government today said the Unique Iden ﬁca on Authority of India

per cent, of Bhar Telecom

(UIDAI) has issued more than 40.29 crores Aadhaar numbers ll date

Ltd. Bhar Telecom holds approximately 43.57 per cent of Bhar

and the body will achieve the target 60 crores enrolments by 2014.

Airtel. "The acquisi on would allow SingTel to increase its eﬀec ve

"UIDAI has reiterated that the target of 60 crores Aadhaar enrol-

stake in BAL (Bhar Airtel), and is in line with SingTel's strategic fo-

ments will be achieved by 2014. More than 40 crores 29 lakh

cus on maximising the value of its exis ng businesses, which in-

Aadhaar numbers have been issued ll date and the process is con-

cludes reviewing opportuni es to increase shareholdings in exis ng

nuing at a healthy pace," Planning Commission said in a release.

associates," the Singapore ﬁrm said.

According to the release, only in the month of July, 2013, about two crores Aadhaar numbers have been generated.

India's ﬁrst all women bank to have 25 branches by end of the year

InFINee | Annual Issue | August 2013 47

mul ple mes in a trading session. Guerrilla trades typically have a

BITCOIN

shorter dura on than scalping

digital or virtual currency that uses peerto-peer technology to

facilitate instant payments. Bitcoin is a type of alterna ve currency known as a crypto-currency, which uses cryptography for security, making it diﬃcult to counterfeit.

or day trades and seldom last for more than a few minutes, at the most. Because of its high trading volume and limited return nature, low commissions and ght trading spreads are prerequisites for successful guerrilla trading. As it also demands considerable trading exper se, guerrilla trading is generally not recommended for novice traders.

Bitcoin issuance and transac ons are carried out collec vely by the network, with no central authority. The total number of Bitcoins that will be issued is capped at 21 million to ensure they are not

PRIME OF PRIME – POP

devalued by limitless supply.

RELATIVITY TRAP

brokerage that provides service to traders (especially Forex traders) who need micro-contract trades. Prime of Prime (PoP) brokerages also o en allow for trades of

greater leverage and, as a result, more risk. Many of the brokers

psychological or behavioural trap that leads people to make irra onal choices when making spending decisions.

using PoP brokerages are small regional banks with clients that need smaller currency trade op ons.

The

rela vity trap is frequently exploited by savvy mar-

CIRCUS SWAP

keters to coax consumers into making a spending decision that maximizes their profit. It arises because the human brain works in a rela ve way while making comparisons and finds it diffi-

A for

combina on of an interest rate swap and a currency swap in which a ﬁxed-rate loan in one currency is swapped

ﬂoa ng-rate

loan in another cur-

cult to compare across diﬀerent categories. Innumerable experi-

rency. A circus swap

ments on this subject ﬁnd that the rela vity trap is a potent issue

therefore

that aﬀects ﬁnancial decisions for a great number of people.

converts

not just the basis of the interest rate liability, but also the currency of this liability. The ﬂoa ng rate in a circus

GUERRILLA TRADING

swap is generally indexed to U.S. dollar LIBOR. The term is derived from the acronym CIRCUS, which stands for Combined Interest Rate

A very short-term trading technique that aims to generate small proﬁts while taking on very li;le risk per trade and repea ng this

and Currency Swap. Also known as a “cross-currency swap” or “currency coupon swap".

InFINee | Annual Issue | August 2013 48

LARGEST ROBBERY IN HISTORY!

▪

In Singapore, you can apply for an IPO at an ATM

oments before the US started bombing Baghdad; nearly $1

▪

In Romania, more than 80%

billion dollars was stolen from the Central bank of Iraq and consid-

of the populace don't have

ered the largest robbery in histo-

bank accounts. Ci has in-

ry. $650 million was later recov-

stalled ATMs that let people

ered in the walls of one of Sad-

pay their bills by deposi ng cash at the ATMs. Merchants pay a

dam’s palaces but the balance is

fee for the service

s ll missing.

WHEN IT WAS BUILT, CITICORPS CENTRE HAD A PERFECT CRISIS PREDICTOR!

HIGH CHANCE OF FALLING DOWN

obert Shiller, a professor at Yale University, predicted both

the .com and housing bub-

building was built it had

hen

Ci corp’s

bles. Nobody listened to him.

high chance of crumbling.

So, you might want to check

William J. LeMessurier was

when his next book will be com-

the structural engineer on

ing out before deciding to invest

the project. LeMessurier

your money somewhere!

decided to take responsibility, but secretly. He hatched a plan that involved workers to ﬁx all 200 joints of the

HOW US INVESTMENT MARKET WAS BORN?

building's structure and hired people to oversee the work carefully. He managed to do it without anyone knowing for twenty years!

n 1790, the federal government reﬁnanced all federal and state Revolu onary War debt, issuing $80 million in bonds. These bonds became the ﬁrst major issues of publicly traded securi es, marking the birth of the U.S. investment markets.

APPLE DECIDED TO STOP USING THE WORD ‘LAPTOP’ BECAUSE OF POTENTIAL INJURIES!

n 2006, Apple decided to

stop using the word 'laptop' because poten al injuries can

ATMS INTERESTING FACTS!

ensue if your laptop is le on your lap for extended periods

InFINee | Annual Issue | August 2013 49

JP MORGAN IN A ROLE OF FEDERAL RESERVE

n 1913, the Federal Reserve was es-

tablished to replace J.P. Morgan as lender of last resort. It is interes ng to see how one man was rich and powerful enough to bail out the whole economy in those days. JP Morgan Chase is one of

f Facebook were a country, it would be the third-largest country

in the world, a er China, India.

the four US “super-banks”.

WHAT WAS YAHOO WHAT’S THERE IN A NAME - A LOT!

ORIGINALLY CALLED?

he highest publicly reported amount of money

paid for a domain name is $7.5

ahoo was originally called Jery’s Guide to the World Wide Web a er founders Jerry Yang and David Filo.

UPS SAVING MORE THAN 10 MILLION

million! Paid for business.com

GALLONS OF GAS BY STOP MAKING LEFT TURNS!

HAPPY BIRTHDAY SONG IS NOT FOR FREE!

n 2004, UPS asked their

drivers to not to make a le

company,

Communica ons

Warner paid

turn unless it's absolutely

$28

necessary. This development

million for the copyright to

has led to UPS saving more

the song 'Happy Birthday'. Jennifer Nelson is a ﬁlmmaker with a mission: To make Hap-

than 10 million gallons of gas since 2004, and reducing carbon emissions by 100,000 metric tons, or the equivalent of 5,300 cars being oﬀ the road for a year.

py Birthday free for anyone to sing.

HOW

IKEA

GOT

ITS

NAME? The ini als of founder Ingvar kampard plus the ini als of the property and village he grew up in , Elmtaryd Agunnaryd.

MCDONALDS REJECTION RATE MORE THAN HARVARD!

cDonalds is a popular ﬁrst

job for many high school kids in the United States. However, as the economy struggled in the years surrounding 2011 Na onal Hiring Day, McDon-

IF FB WERE A COUNTRY…

alds only accepted 6.2% of people who applied. Compare that to Harvard, which accepts 7% of their applicants.

InFINee | Annual Issue | August 2013 50

Across 2 Federal income __ 6 Conﬁden ality agreement, for short 8 Used to be the standard for the dollar

Down 21 Investment made in order to reduce risk of adverse price movements in a security, by taking an oﬀse$ng posi on in a related security 22 Smith and Keynes

9 One kind of insurance

23 Net worth of a business

11 ___ ra o: A stock's price/earnings ra o divided by its year-over-year earnings growth rate

26 Wise adviser

14 Decide to opt out of an opportunity 15 Income a er deduc ng for opera ng expenses but before deduc ng for income taxes and interest (abbr.) 16 Raise money through sale of debt or equity

27 Land of the euro, for short 29 Cancel a stock order 31 Ended a stock posi on due to an execu on of a market order to buy or sell a security if a speciﬁc price is reached 32 Put money down.... hoped for a return 34 Combine, of two en es

1 Name of a char ng method in stock analysis 3 Vietnam currency symbol 4 Using money borrowed from a broker to purchase securi es 5 Condi onal expression 7 Rework the mortgage 8 The ___/fear oscillator (investor's emo onal swings ) 10 Accumulate 12 Making insurance policy eﬀec ve 13 Fail to connect 14 Equality 15 Index that tracks the ac vi es of experienced and inexperienced investors

17 Ownership papers

16 Bank's house takeover

19 Possible set of future events

18 Fund that tracks an index

20 Foreign exchange market 23 Dem and of an insurance policy 24 The of this has become a major concern for ﬁnancial ins tu ons 25 It was Black in 1869 28 Mutual or money market? 30 Who provides money-at certain price 33 The 'I' thing 35 Overall so ware integra on for all the company's processes (abbr.)

InFINee | Annual Issue | August 2013

CREDITS

EDITOR-IN-CHIEF Vaibhav Garg

EDITORIAL TEAM Aakanksha Hajela

MEET THE TEAM

AAKANKSHA HAJELA is an engineer and specializing in Finance & Marke ng. She comes with a prior work experience with IBM and has interned with ICICI Bank's Wholesale Banking Division involving oďŹ&#x201E;oading of a distressed por,olio to an MFI Client & the feasibility study for the same . She writes for business blogs and magazines. She plans to work in the ďŹ eld of Consul ng & Strategy

Bhushan Kanathe Kunal Maheshwari Mohmammad Umair Ansari

CONTRIBUTIONS FROM Ankit Tiwari Ashutosh Deshpande Raghav Kapila

BHUSHAN KANATHE is an engineer with a mo va on to specialize in Finance. He has cleared CFA Level 2. He regularly tracks the stock market and wants to pursue a career in investment banking. He has interned with Bajaj Allianz Life Insurance Co and was involved in strategy formula on for acquiring clients & development of micro-insurance products

Shubham Agarwal

C C Mohit Jethwa

KUNAL MAHESHWARI is a qualiďŹ ed Chartered Accountant with Ar cleship experience from KPMG and aims to make a career in the ďŹ eld of ďŹ nancial consultancy. He has interned with Mahindra & Mahindra Financial Services Ltd with their strategy team on building a roadmap for Mahindra Finance for expansion in rural India. He enjoys reading, listening to music and keeping himself updated with current aďŹ&#x20AC;airs

FEEDBACK/QUERIES infineeti@iift.ac.in infineeti@gmail.com

Published by students of Indian Ins tute of Foreign Trade

MOHMAMMAD UMAIR ANSARI is an engineer who aspires to build a career in Interna onal Business & Trade. He is an avid reader and a current aďŹ&#x20AC;airs buďŹ&#x20AC;. He has interned with Wipro Ltd at their corporate oďŹ&#x192;ce in Bangalore in their Strategic Client Acquisi on Group Telecom Ver cal. He was responsible for iden fying opportuni es for Wipro to target Telecom Service Providers in the CRM Space

New Delhi | Kolkata

VAIBHAV GARG is a qualiďŹ ed Chartered Accountant and graduate from DU. He aims to specialize in Finance & Trade. During his internship with Reserve Bank of India (RBI), he has done a project on 'Real Bo;lenecks in implementa on of Basel III capital norms' under Department of Banking Supervision He follows the stock and commodity markets and likes to update himself with the recent happenings in the ďŹ eld of ďŹ nance

InFINee | Annual Issue | August 2013

InFINee | Annual Issue | August 2013 1

FROM THE EDITOR’S DESK CONTENTS

Companies Gracing The Event

Indian Ins tute of Foreign Trade In associa on with

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Cognizant Business Consulting

Electronics & Computer So ware Export Promo on Council Presents

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WalMart

National IT Conclave 2013 ▪

Hewlett Packard

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Deloitte

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IBM

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Dassault Systemes

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Interglobe Tech

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PWC

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KPMG

On ‘The Paradigm Shift in Global IT Industry’ Indian Institute of Foreign Trade (IIFT) is organizing this conclave to provide a platform to share knowledge and ideas among intellectuals from leading Technology companies, corporate houses, international institutions, regulatory bodies, subject matter experts and B-school fraternity to deliberate upon some of the pressing issues present before the IT Industry. The event will be graced by the business leaders from all over the country, to deliberate upon the impact of Information Technology in the field of Consulting, Operations, Marketing & Human Resources. Date: 7th September, 2013

Venue: Taj Bengal, Kolkata

For Passes and Queries contact, Coordinators Systemix Club - IFT: Rohit Shukla | Samarth Shukla M - 9674042465 | M - 9163055599 Email: iift.systemix13@gmail.com

InFINee | Annual Issue | August 2013