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November - December 2012 Issue

OBAMA ImpacT Cover Story What the Democrats‘ victory means for the Indian IT Industry

Inside InFINee

Title Text

US—India—China: A perspec ve Roadmap for Fiscal DeďŹ cit Consolida on Sidebar Subtitle Text This is aofgood place to briey, but Overview Indian Banking Sector eec vely, describe your product or

Green Finance services.

FROM THE EDITOR’S DESK Welcome to the Nov-Dec edition of InFINeeti.

A lot has been happening in the world of finance ranging from the arrest of some prominent corporates in some crucial Insider trading cases to the acquiescence of the Indian Parliament on issue new banking license.

In this edition of InFINeeti we bring together some great articles as we head into an important year for the world economy specially with reference to the re-election of Obama as the US president. We have incorporated the trends in the booming ‘Green Finance’ industry, covering the events taking place in the Indian Banking Industry and the Fiscal Stimulation taking place across the world. Articles on Insider trading & a comparative analysis of the emerging gap in FDI in India & China should make a great read.

The Indian Markets have cheered the Fed’s decision to go forward with the third dose of Quantitative easing. Our Banking industry is going through a transformation as the government has given green signal to RBI to go forward to issue the new banking license. We have invited, Mr. Mukul Mitra from the industry to have his opinion on the health of the Indian Banks and the reasons for increasing NPAs in the banking industry.

The highlight of this edition focuses the re-election of Barack Obama as the US president and its anticipated impact on the Indian IT companies and consequently on the Indian Stock markets.

The issue features “Factopedia” & “FIN Trivia” columns containing some mind boggling facts & figures which will be the new regulars of InFINeeti. Besides, we continue to bring in the ‘Financial Lingos’ column which jots together some commonly used terms in the field of finance.

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!

CONTENTS November - December 2012 Issue

INDIA - US - CHINA Quantitative Easing - Not that Easy

4

Roadmap for Fiscal Deficit Consolidation

9

FDI: India vs. China

12

The Insider Job -The Dark Cloak of Insider Trading

16

Cover Story: Obama ImpacT

19

T

he US citizens have once again bestowed their faith in a Democrat candidate, entrusting him with the responsibility of reviving the slowing US economy out of its dark phase. Mr. Barack Obama needs to take tough measures, both in political and economic sense. But as these policies are implemented by the US Govt. it will certainly affect the global markets in a big way. The US Fiscal Cliff, Quantitative easing will affect the amount of outsourcing done by the US companies in developing countries. What would be the effects on job markets worldwide especially IT sector in India. Well, let’s wait and watch!

BANKING

T

he BFSI industry in India is under pressure owing to the increase in the number of NPA’s, and ailing core sectors is providing no respite to the growth of this sector. A brief analysis on the New Banking License, and excerpts from an Interview from the man who can provide a holistic view on the sector are the highlights of this section.

Indian Banking Industry An Update

24

Interview with Mr. Mukul Mitra

26

Securitisation of Financial Assets New Banking License - Will it help in Financial Inclusion ?

29

33

CONTENTS November - December 2012 Issue

“ GREEN FINANCE Carbon Credits: A perspective on the booming green investment market

37

Ground Zero: Africa

39

A

ll the fun stuff present in this section. Hear the story of how to make the transition from campus life to the corporate world - straight from the horse’s mouth. Get lost in the world of fin trivia, some fancy financial lingos, and update yourself with all the latest happenings in the financial world.

The winning entry of the equity research competition has also been published in this issue. And finally.. Meet the winners as well the team who has made this issue possible.

Are you environmentally conscious?” is the question put forth to the companies nowadays. The major economies of the world are encouraged to keep a tab on the Carbon Footprint, and as such the future of Carbon Credits as a Green Investment Market looks quite bright. We also take a tour into an unexplored territory which is rapidly becoming the preferred destination of the major economies eyeing rapid growth. Africa’s growth story is not only about its natural resources, but about reforms, including restructuring of regulatory frameworks, and policy amendments that have brought a fundamental change in the business environment, earning Africa a permanent place on every major investor’s map.

REGULARS Campus to Corporate

42

Financial Lingos

44

FINTrivia

47

News Chronicles

49

Equity Research

52

The Winners

56

Quantitative Easing Not that Easy..!!

W

Why QE?

ith growing inability of traditional

preferred weapon to fight out dry econo-

T

mies. However, whether pouring in billions

for lending purposes, prompting investments

of dollars into the market via indirect

and higher growth in production eventually.

monetary tools, QE has been a

he prime reason behind enforcing easing is to make banks have sufficient money

Drilling the concept down to its root, observe

measures spurs the economy in desired

that under QE, no new money is printed. Thus

direction in the long run‌ is indeed a bil-

easing is a means just to divert the flow of

lion dollar question! Is it sufficient just to

liquid money in the economy from one destina-

have more money into the system? Isn’t it

tion to the other. The concern is to decide/

also necessary for the central-banks to route

detect:

money so that it gets utilized for the intend-

i. Current base of liquid money from where

ed purposes specifically?

it needs to be hived off

The critique looks at scenarios, frequency,

ii. Where this money needs to be routed to

ways and the after-effects when QE has iii. How the diversion of this money shall be

been implemented in different economies.

done

4

Another rationale behind Quantitative Easing

Current Styles

A

might be the requirement to boost investment by miss on any of these tabs is capable to

ruin

the whole plot of digressing money to the right

front. For instance, if the idea is to divert the investment of money from risk-less assets (government/ treasury bonds) to risky assets (shares), then central bank credits the bond-holders’ account with equivalent money.

lowering the interest rates especially when credit channels are bunged. This, as the Federal Reserve was doing as a part of its earlier rounds of Quantitative Easing, comprised of purchasing mortgage-backed securities, demand for which had weakened sharply during the financial crisis. To meet the reduced demand with reduced

The investors who sell securi-

supply, increasing prices

ties to the central bank then

and lowering interest rates

take the proceeds and buy other

was a short-term technique,

assets,

prices.

which found no relevance

Lower bond yields encourage

in present times since the

borrowing; higher equity prices

credit channels have eased

raise consumption; both help

to quite an extent.

raising

their

investment and boost demand.

If the idea is to route the

Depending on the degree that

liquid money to productive

investors add foreign assets,

assets and long term in-

portfolio rebalancing weakens the domestic currency, fostering exports.

vestments, then an anticipated spoke in the wheel and a major challenge is the glittering

Unfortunately timing of this type of easing in India

yellow metal which has seen substantial increas-

has not been escorted with changes which could

es whenever QE has been launched. In the

make the most of the easing effect. For example,

course of the first round of quantitative easing in

given the fact that about 70% of Indian exports is un-

the US, which ran from November 2008 to

hedged, OMOs could be scheduled when seasonal

March 2010, gold prices rallied by a third. Dur-

exports are at peak. Finding a juncture of these two is

ing QE2, between November 2010 and March

not rare. This shall serve two purposes at the same

2011, they rose by another 17%. With a high

time - narrowing down the current account deficit

volatility in currency markets, investors are

(though temporarily), and the main purpose of divert-

likely to seek shelter in gold. This effect, if seen

ing money away from the risk-less securities. Even if

in India, shall be devastating for imports as

these consequences have a hideous negative; they

India, being the largest importer of gold, will

shall not impact economy in the long run since the

experience the worst of the implications related

laws of demand and supply shall take effect and bring

to rupee depreciation.

it back to its original state.

5

Two crucial questions

I

n light of this concern of ‘routing’ the money released to an appropriate base, it’s interesting to

see what US and India have been doing for the past few months at different deemed necessary levels.

T

he answer to these two questions lies in the third round of QE by the US. This

phase comprises of two parts. Under the first part, the government shall continue to purchase mortgage backed securities for $40 billion per month with no clear timeline when it will end.

First and foremost, in case of India where the WPI

As discussed, this shall most probably cause

(whole sale price index) is at 7.55%, CPI (consumer

prices to inflate. The current inflation rate in the

price index) at 10.36% and entrench spraying mone-

US is around 2%. Just as a higher inflation rate

tary gasoline on an incipient inflation fire. This is

indicates problems for an economy, a lower

because; the one-year forward inflation expectations

inflation rate can also be a sign of danger be-

are at 12.5%, OMOs or quantitative easing is akin to

cause if the inflation is primarily demand driven

additional money influx in the economy to quench

and not the one pushed by costs, an excessively

investment than

demand

fuelling

rather

consumer

spending. So, how does the

“

stumped inflation indicates a

This whole idea that you can do drought of demand; i.e. a central economic planning by ma- low purchasing power which

central bank ensure that the nipulating interest rates is a fallacy. We in turn means a narrowed water in the village is used in have depended on this for too long. We scope for growth. Why the farms and not for domestic house-hold usage?

believe the Federal Reserve, by creating

would not the Fed in US want this equation to invert?

credit and giving us artificially low

As it appears to me, this leg observation interest rates, is the road to great wealth. of the third round of QE worth noting is that in India, But it isn't. It's the road to a disaster.” corresponds to routing more during 2011-12, of the ₹ money towards consumption 127,000 crores bonds purdemand than it is right now. chased ₹ 102,000 crores were - Congressman Ron Paul Under the second part, faof 7-13 year maturity. In FY 2012-13, of the ₹ 55,000 Secondly,

an

crores bonds purchased, ₹ 42,000 crores are in the 7-

mously known as operation twist, is an initiative

13 year maturity.

of buying longer-term treasuries and simultane-

If the reason for buying these bonds is to create primary liquidity, the same could have been met through buying bonds of short maturity or conducting term repos of 3-6 month maturity with the market. Then why is it that the government is infusing liquidity only through long term securities?

ously selling some of the shorter-dated issues the central bank already holds in order to bring down long-term interest rates. The idea is that by purchasing longer-term bonds, the Fed can help drive prices up and yields down (since prices and yields move in opposite directions).

At the same time, selling shorter-term bonds should cause their yields to go up (since their

The answer

6

since inflation in India is high and secondly, is

prices would fall).

The program gets its name from the fact that in combination, these two actions “twist” the shape of the yield curve. A same phenomenon is apparent in the Indian case too. The fact that the government has been infusing liquidity only through long term securi-

mainly pushed by costs. So, at its own deemed necessary level, India plays the game only with the second leg of QE, i.e. a program on similar lines of operation twist, though not exactly same as that.

ties is evident from this figure of Yield curve.

Observe that in the figure, the 10 year bond yields have lowered by about 2%. The rationale behind doing this is that lower longer-term yields would goose the economy by making loans less expensive for those looking to:

♦

Buy homes

♦

Purchase cars

♦

Finance projects

The ‘billion-dollar’ question:

H

aving seen the different implications and various ways in which QE can be execut-

ed, the billion dollar question is that does pouring in billions of dollars into the market via these indirect measures really spur the economy in the desired direction in the long run? How long can we bank upon these ancillary measures? The need of the hour in both Indian and the American economies is to overcome the

This leg of QE3 in US is to route the money to satisfy

structural deficiencies impeding investments.

the investment demand of the economy. This two-

By easing credits, one can push investments

pronged strategy has been framed by the Fed to forti-

only when the fundamental platform for invest-

fy the flow of money to the pillar components of

ing is paved with a strong foundation. Bureau-

economy i.e. consumption and investment demands.

cratic hurdles in India, a dense spiral of corrup-

A point to be noted here is that India, on the other

tion and long sanctioning procedures are faced by an aspirant businessman before he/she raises money. So, however low the interest rates are, if a person is entangled in these steeplechases, how does it make investments easy? How does it create jobs? And how does it prompt growth?

So, the answer to the question, whether quantitative easing is a key step to an economy’s success is a bit difficult to be answered up-front.

Quantitative easing is surely a blessing, a boon when the structure in the economy is in place. It can create leverage effects where a gentle turn-

hand cannot go for the first part of the QE program

7

around of just a few purchases of bonds can

makeover the face of the economy. However, easing in isolation, not being complemented with appropriate channels to settle the money diverted, shall send the whole effort up in smoke.

Easing is not a means to create additional money, easing is not a means to absorb; easing is just a means to re-route the money from one base to the other, and

“In effect what the Fed is doing is guaranteeing that if you're a saver and desire safe assets you get no return. [Retirees] better have an awful lot of money if they want to live off of interest. So, it's forcing people, worldwide, to take risk, to take all kinds of risks that they're probably not all that comfortable taking and in effect it's a wealth transference from people who are natural creditors, people who have accumulated savings, to people who can use them, people who are natural borrowers�

- Michael Aronstein, President of Marketfield Asset Management so along with this re-routing, if the economy is architecturally and structurally incapable to create money and operationally incompetent to absorb money at the right time, easing alone cannot create wonders.

Vibhu Gangal (The author is a student of SCMHRD)

8

“An honest man is one who knows that he can’t consume more than he has produced — Ayn Rand

a five year roadmap for fiscal consolidation that promises to lower the fiscal deficit to 3% of GDP by FY2016-17.

W

hen a government’s total expenditure exceeds the revenue it generates, it is in fiscal deficit. The government finances the deficit by borrowing money or taking on debt. Sustained fiscal deficit can lead to unsustainable levels of public debt and can cause diverse forms of macroeconomic imbalances like inflation, lower sovereign credit rating and flight of foreign capital.

Chidambaram’s Roadmap The government expects that the fiscal consolidation will increase the investors’ confidence which will return the economy to the path of high investment, higher growth, lower inflation and long term sustainability. It has proposed a series of reforms and changes which are shown below.

In India, the fiscal deficit for FY2011-12 was 5.8% of GDP. The government took the target of reducing the fiscal deficit to 5.1% but due to muted tax revenue and higher spending on subsidies, it has revised its target to 5.3%. A committee mandated by the finance minister, headed by former finance secretary Vijay Kelkar, has presented a report introducing mid-term corrections in the current fiscal year 2012-13 as well as outlining a roadmap for fiscal consolidation. The committee urged the government to cut spending and portended that India was on the edge of a "fiscal precipice" and the economy was "flashing red lights" and without any consolidation, the fiscal deficit could shoot up to 6.1% in 2012-13. The government has accepted the committee’s recommendations and has unveiled

»Allowing more foreign

investment in sectors in-

cluding retail, aviation, pension, insurance, information and broadcasting sectors

»Selling stakes in several companies in the current fiscal year to raise 300 billion rupees ($5.5 billion).

The disinvestment department has already obtained cabinet approval for stake sale in 8 PSUs - HCL, NALCO, SAIL, RINL, BHEL, OIL, MMTC and NMDC

»To

provide cash subsides directly to consumers,

instead of paying companies such as refiners and 9

fertilizer producers to keep prices low.

Plugging of leakages by using UID: Aadhaar to distribute subsidies to the below poverty line population

millions of poor. Contracting manufacturing and exports in October has led to the worst on record trade deficit of nearly $21 billion. A second round of

ÂťIntroduction of the amended Direct Tax Code (DTC) bill which will replace the archaic Income Tax laws and Goods and Services Tax (GST) which will subsume various levies and streamline the indirect tax regime

ÂťIncrease in the price of diesel by over Rs 5/ltr ÂťGovernment officials are banned from holding conferences at five-star hotels, restricted travel and ordered a freeze on hiring to fill vacant posts

Aim too high, too hazy?

While the roadmap is a step in the right direction, it did not outline any specific measures and policies for meeting the 5.3% target as the efforts to keep a leash on rising government expenditure comes just four months ahead of the Union Budget for 2013-14 fiscal. The deficit reduction plan is short on specifics and stonewalls around fuel subsidies and expensive social welfare programmes for the country's

reforms aimed at liberalising the pension and insurance sectors has fallen victim to gridlock in parliament.

The government banked heavily on raising dollars by 2G spectrum auction but it raised less than a quarter of its 400 billion rupee target. Higher spending on fuel, food and fertiliser subsidies along with sluggish tax revenues has raised concerns that the fiscal deficit for the year to end-March 2013 could be as high as 6% of GDP. India's fiscal deficit is the widest among major 10

emerging economies due to huge spending on subsidies for items such as food, fuel and fertilizer. Spending on fuel and fertilizer subsidies is estimated to be 1.6 trillion rupees ($29.4 billion) this fiscal year, higher than the 1.04 trillion rupees ($19 billion) budgeted in March. This could force the government to borrow an extra 400 billion rupees ($7.35 billion) via bonds as early as December. Subdued tax revenues in a slowing economy have aggravated fiscal strains and both Standard and Poor's and Fitch have placed "negative" outlooks on India's current BBB-minus ratings.

of still unsold telecom spectrum before March by which it can garner 20,000 crore for the full fiscal year.

It can focus towards selling of state-run loss making companies that are gobbling up the cash and have led to Rs 96,710 crore of accumulated companies. Simplification and cutting of corpo-

The government had approved the minimum support price (MSP) of rice to be increased by 16% from Rs 1,250 per quintal to Rs 1,080 per quintal. With a significant increase in the MSP of rice the food subsidy is expected to cost the government around Rs 40,000 crore more than its current estimates. This number is likely to increase because after increasing the MSP of rice significantly, a similar price increase would have to be made for wheat during the coming months.

The monsoon this year has been 23% deficient.

This impacts the purchasing power of rural India and means lower sales of cars, bikes, white goods and fast moving consumer products, leading to a lower collection of indirect tax for the government. Lower taxes can drive up the fiscal deficit further. India’s fiscal deficit could miss the revised official target and swell to as much as 5.6% of GDP making it tougher for the government to avoid a credit rating downgrade..

Source : PSU Websites rate tax rate to effective tax rate for compliance improvement, building consensus and launching GST as well as building measures to cut tax disputes are some of the steps that can reform the tax regime to increase taxes.Selling of surplus land by Railways (1.1 lakh acres) and port authorities (50,000 acres) and selling of loss making PSUs present on prime industrial land will assist in keeping borrowings low.

Also, it has to keep the subsidies on food, fuel and fertilizer in check and most importantly come out with specific and concrete policies for meeting the fiscal deficit targets of 5.3% in FY2012-13 as well as 3% by FY2016-17 on the roadmap laid by the Finance Minister.

The Solution The Government can rationalize subsidies through better targeting of benefits to the needy. Direct cash transfer or using UID to provide subsidies is a step in this direction. It plans to have an auction

-(The author of the article– Pankaj Malhotra, is a first year student of IIFT (Kolkata Campus) ) 11

D

eveloping countries have increasingly received foreign direct investment (FDI) from developed countries starting from second part of the last century. The pace has anything but increased in the present century. This flow has been aided by opening up of the economy by the developing countries through appropriate policies. The multinational corporations (MNCs) have taken this opportunity to expand to such countries to take advantage of the low cost base, large internal markets, jump tariff walls, extract natural resources etc. The developing countries on the other hand have benefited from the fund flows through acquisition of new technology, generation of employment increases in productive capacity, increased competition leading to higher efficiency, replacing imports hence leading to forex savings etc. Debates regarding the beneficial effects of FDI especially the ones coming to the extractive in-

dustries in developing and less developed countries have pointed out to the absence of spill-over effects to the host economies.

According to AT Kearney's 2007 Global Services Location Index INDIA ranks second in the world in terms of financial attractiveness, people and skills availability and business environment. Until recently, country's financial stability in the current environment of financial turbulence and a possible unwinding of macro imbalances sent clear message to the prospective foreign investors about India's position as an expanding investment destination.

"India's external sector has displayed considerable strength and resilience since the reforms in 1991- despite several domestic as well as global political events and supply shocks in food and fuel........we partner with the global economy fully on the trade and current account while there is progressive liberalization of the capital account, consistent with the progress in reforms in the real, fiscal and financial sectors", observed Dr Y.V.Reddy, Governor of India's central banking authorities, Reserve Bank of India (RBI) at the World Leaders Forum in New York in April this year. "The strong macroeconomic fundamentals, growing size of the economy and 12

improving investment climate had attracted global corporation to invest in India. A major outcome of the economic reforms process aimed at opening up the economy and embracing globalization has led to tremendous increase in Foreign Direct Investment inflows into India�.

high priority industries. During this period the Foreign Investment Promotion Board (FIPB) was constituted to consider FDI under the government route. The third phase 2001 to present the FDI policy has been substantially liberalized with a negative list approach with all other activities permitted through the automatic route and substantial relaxation in terms of equity caps have also been made.

The Major benefits of Foreign Direct Investment (FDI) in case of India have been identified as filling the gap between investment funds required and domestic sources of funds. Technology transfer leading to knowledge diffusion and spillover effects on domestic firms. Transfer of superior organizational and management practices through

For most of the sectors foreign technological collaboration through automatic route has surpassed that through approval route. This shows the impact of FDI policy liberalization on tech-

links between the foreign investing company and the domestic firm.

nology collaborations. The number of investment proposals across states show that Chhattisgarh have received the maximum in terms of magnitude Rs. 10.45 lakh crores between 1991 to 2010 which is around 13.72% of that received by all the states. Almost 70% of the investments are in electricity and around 26% is in manufacturing.

These flows have been aided by enabling policy at the state-level and commensurate investment in infrastructure. Chhattisgarh is closely followed by Orissa and Gujarat. In Orissa the major invest-

FDI policy in India has become increasingly liberal over the past half a century. In the first phase between 1969 and 1991 MRTP and FERA Acts restricted the operation of foreign firms in terms of size, type of products, equity participation etc. In the second phase during 1991 to 2000 FDI policy was substantially liberalized by allowing 51% foreign participation through automatic route in 35 13

countries. This shows that tax policy plays a major role in determining FDI flows in these two countries.

ments have happened in coal, thermal power and cement. Gujarat on the other hand attracts most of the FDI in oil and gas, food processing, infrastructure and gems and jewelry among others. Thus most of the FDI in high inflows recipient states have exploited the natural resource bases available in those locations. Sector-wise bulk of the FDI proposals in the same period has come to electrical equipments and metallurgical industries.

Possible Reasons for Divergence in FDI flows In level terms China and India were almost at the same levels in terms of per capita income and exports in 1990 the gap has increased since then.

In 2010 the per capita income level of China was almost four times that of India and exports almost seven times that of India. Thus economic development and external engagements may be important determinants of the divergence in FDI flows in recent years. In terms of current a/c balance as a percentage of GDP China shows positive values whereas for India the value has been constantly negative. FDI inflows may be higher in a country with a positive balance since that shows comfortable foreign exchange position with lesser future risk. All other indicators ranging from literacy rate to internet users to crude steel output China is much ahead of India and differences have anything but increased over the years In terms of ease of doing business though both the countries have low rankings China is almost 40 ranks ahead of India in 2012. The major contributor to this difference is registering a property, resolving insolvency and enforcing contracts. China ranks much higher than India on all these three aspect. Whereas, when it comes to economic freedom measures India is ahead of China. It seems that FDI is more related to business related measures than quality of political institutions. China also has large natural resource endowments. In addition, China’s physical infrastructure is more competitive, particularly in the coastal areas. But, India may have an advantage in technical manpower, particularly in infor-

Comparison with China In terms of FDI inflows the two countries were at the same level till 1990s thereafter the gap widened till the year 2008 when the global financial Crisis happened. The gap came down during 2009 and continuously widened after that. Relative to market size (we have almost a similar scenario) the gap completely narrowed down during the Crisis and widening continuously thereafter. This is despite the fact that China (being more dependent on the external sector) was initially much more affected by the crisis than India. Thus it would be interesting to find out the reasons behind such divergence after the crisis. We would try to address this issue in this article.

Bulk of the FDI inflows in China is from Hong Kong whereas in case of India it is from Mauritius.

The Chinese Diaspora present in Hong Kong is the main force behind investments in China. Chinese money rotated through ‘round tripping’ (to take advantage of more favourable treatment of FDI) makes up for bulk of fund flows into the country.

In case of India the funds coming from Mauritius is from other countries routed through the latter due to Double Tax Avoidance Treaty (DTAA) between these two countries. The common cause is the tax law favoring foreign investors which results in the maximum amount of flows to these two 14

mation technology. China has a gigantic domestic market with a system of mass production. This reduces the cost of production considerably. Thus China is the first choice of multinationals for setting

up a wholly export-oriented unit. India too offers an equally attractive environment. There is no dearth of technically qualified manpower available cheaper than in the West. But India has yet to evolve a system of bulk production at the scale prevalent in China.

China has ‘‘more business-oriented’’ and more FDI -friendly policies than India. China’s FDI procedures are easier, and decisions can be taken rapidly.

China has more flexible labor laws, a better labor climate and better entry and exit procedures for business. Policies are geared towards more exports in china than in India. In terms of BITs (Bilateral Investment Treaties) China is much ahead of India.

The country has signed 128 such treaties compared to 83 by India.

In terms of the general determinants of FDI inflows it is seen that correlation between GDP, GDP per capita in purchasing power parity terms, goods exports, goods imports correlations are very high positive for both the countries but the coefficients are higher for China than India. Thus market size, economic development and trade may have caused the divergence in FDI observed in recent years.

For India correlation coefficients are higher for hitech exports to total exports, consumption expenditure, profit of FDI firms, openness and services 15

trade to total trade . In recent years on all this counts India is performing poorly. GDP growth has decelerated due to which components of GDP have also slowed down. Exports had slowed down due financial crisis affecting the demand from developed markets. This may have caused FDI to come down in India in recent times.

Apart from these reasons few other points merit a mention at this juncture. The debate surrounding policy towards FDI in multibrand retail in India shows that government is facing a considerable resistance against such flows in sensitive sectors (even though it has now been passed in both Houses of Parliament but by a narrow margin) the situation is much better in China. Moreover, the legal environment related to foreign firm operations in India was severely affected because of ruling of Supreme Court which cancelled all the 2G licenses granted on grounds of corruption. This caused resentment among the foreign investors who had considerable stake in the telecom sector. The exchange rate depreciation may have caused capital outflows. Finally, the policy changes in China towards enhancing domestic demand may have diverted FDI flows which are market seeking away from India.

(The author - Dr. Bibek Rai Chaudhari is a faculty at IIFT. )

I

An insider buys the stock (he might also already own it). He then releases price-sensitive information to a small group of people close to him, who buy the stock based on it, and spread the information further. This results in an increase in volumes and prices of the stock. The inside information has now become known to a larger group of people which further pushes up volumes and prices

ntroduction : According to the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992, "insider" is any person who, is or was connected with the company, and who is reasonably expected to have access to unpublished price-sensitive information about the stock of that particular company, or who has access to such unpublished price sensitive information.

Information that could be price sensitive includes periodical financial results of a company, intended declaration of dividend, issue or buyback of securities, any major expansion plans or execution of new projects, amalgamation, merger, takeovers, disposal of the whole or substantial part of the undertaking and any other significant changes in policies, plans or operations of the company.

However, insider trading isn't always illegal.

Trading by a company insider in its shares is not violation per se and is legal. What is illegal is the trading by an insider on the basis of unpublished price-sensitive information. Insider trading violations may also include 'tipping' such information and the person using it.

of the stock.

After a certain price has been reached, which the insider knows about, he exits, as do the ones close to him, and the stock's price falls. Those who had inside information are safe while the ordinary retail investor is stuck holding a white elephant as, in many cases, the 'tip' reaches him only when the stock is already on a boil.

The regular investor gets on the bandwagon rather late in the day as he is away from the buzz with no direct connection to the 'real' source. He buys the overvalued stock due to imbalance in the information flow.

While it's common knowledge that insider trading

Working of the Insider Trading

16

takes place, it is very difficult to prove. Insiders may not trade on their own account. Flow of information is another important factor, but difficult to track.

Regulations are in place to prevent this, but the stock price of a company invariably tends to move up or down at least a couple of weeks ahead of any pricesensitive announcement.

Market plague The impact on the small investor is negative both from the point of view of their financial interest and also their confidence in the markets. It is extremely detrimental to the growth of a healthy capital market where all participants, big and small, can step in with confidence of a fair play. In an efficient market, even one share traded on insider trading violates the integrity of the markets.

The efficient market hypothesis (EMH) asserts that financial markets are "informationally efficient". This means that the share price already reflects all known information and is unbiased. It reflects the collective beliefs of all investors about future prospects. In reality, however, there are those who are in the know, and those who get the news too late.

Effect on Company

It motivates insider managers differently than profit-maximizing managers. An insider manager may not work in the firm's best interest.

While the profit-maximizing manager constantly maximizes the difference between costs and returns, the insider trading manager is interested only in maximizing the profit in good periods, but may neglect costs in bad periods.

Opportunity costs will increase, because it is likely that managers will spend most of their time trying to profit from their own insider transactions. Separation of ownership and control allows managers to behave more opportunistically. Thus, a conflict of interests arises when managers work in their own interests and not in that of shareholders.

Business ethical issues Businesses exist to make money. But a few making money at the expense of many; raises moral, ethical and business issues. When investors don't have the money to invest, or they don't have confidence in the market, they don't invest.

Undermining that confidence can have severe financial repercussions, as well as affecting the market as a whole; in which case the advantage of a few comes at the cost of many-a cost that can continue for years.

Insider stock trading and the economy Before Black Tuesday and the Great Depression, insider stock trading laws didn't really exist.

Companies took advantage of this absence to inflate company stock values unfairly and make a ton of money on the market. Ultimately, corporate manipulation led to the stock market crash of Black Tuesday, which triggered the Great Depression. Insider stock trading laws were enacted after this crash to prevent companies from manipulating the stock market and

A light hearted cartoon from EMH 17

otherwise influence investing decisions; without which, another great market crash could easily occur.

Duty of trust or confidentiality Insider trading violates the duty of trust or confidentiality that one individual or business entity owes to another. Trust is implicit between a company and its investors. The corporation's officers are supposed to act in the best interest of the company's shareholders. Insider trading is a betrayal of that trust; by acting on information that shareholders aren't privy to for financial gain, officers of a

Source : Cartoonbank.com

corporation are acting purely in their own best interests. Sharing insider information that leads to investment decisions is a direct breach of confidentiality.

Moral ethical issues While moral ethical considerations of insider stock trading aren't the primary focus of ethical discussions, they still play a part in evaluating insider trading. Essentially, the moral ethical arguments all come down to one basic fact: It's wrong for investors to take advantage of other investors. In a level playing field where everyone

has the same information, investment success is based on skill.

In a market rife with insider trading, people can use secret information to take advantage of their opponents. This means that their gain comes at the cost of someone else's loss; not a loss based on skill, but a loss based on having information that someone else doesn't have. Abusing this information is morally wrong, as it violates the principals of fairness upon which the capital market is based.

Implications of insider trading It's hard enough to regain trust when officers of a single company trade illegally. When illegal insider trading encompasses several companies, as the scandal surrounding Enron, its auditors and the entire system of accounting checks and balances did, the broken trust can be far-reaching. It took direct Congressional involvement, in the form of the Sarbanes-Oxley Act of 2002, to restore public confidence. The act, which holds officers directly accountable for any errors, omissions or dishonesty in corporate reporting, is widely believed to have helped public confidence in the markets following the Enron scandal. Between July 31, 2002 and July 31, 2007, the New York Stock Exchange grew 67 percent, about $4.2 trillion.

When entire markets are widely perceived to be tainted by insider trading, average people who are also potential investors will avoid markets altogether. Thus there is a need for a stricter regulation to improve accountability and more rigorous sentence for the culprit, in order to curb the motivation for Insider Trading.

(The author– Kimi Gala is a first year student of SIMSREE 12-14)

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OBAMA ImpacT

As the dust settles and the president gets back to work, it is still to be seen what does Obama’s re-election holds for the Indian IT industry

T

rest at home, and they would not have wasted the energy to venture out to vote, I might have been rather writing about how good it would have been to have Obama rather than having Romney So if there would have been Mitt Romney in centre had it been more beneficial for Indian IT firms? In the short term yes but in long term Obama is a better bet after all American middle class may not be as smart as Indian but are much miser. Why am I saying so, that too when I started with bashing Obama for his IT policies? Due to the simple reason that though Mitt Romney had the experience of running a large business like Bain Capital as its owner, he had none in running a country where Obama had a clear advantage. In the short run Mitt Romney would have probably eased the Visa restrictions on IT firms as he himself was a firm believer of outsourcing, after all what kind of profit hungry (sane in business language) business head won’t be, though we can only assume that now. But the long term policies of Romney to fight recession were neither concrete nor clear and having a recession-less America would be beneficial for any firm in any sector not just IT industry.

raditionally Democrats have never been good for Indian Business environment. After Republican George W Bush fought tooth and nail in his own senate to pass the US-India Nuclear Deal, came the jolt from Democrat Obama who seemed to be hell bent on discouraging Indian IT firms to remain in US. So with the coming back of Democrats, are we doomed? Before we answer that question we have to ponder over some facts and figures.

Business of Business is to earn profit

I

n order to do so it has to reduce cost and thus comes the need for outsourcing. When the same job can be completed in same time at same efficiency but at a lower cost than the normal course of action for any business is to move the jobs to the low cost destination.

It’s just as simple as Tata Motor’s moving their plant to Singur, but is it really that simple?

Just when our IT firms started to enjoy their dominance in US and EU, Recession came knocking and thus started the chain of events which led to the current problem of just about every American hating the word outsourcing just as they hate vegans (pun intended) and more so during the election campaign of 2012 every American was preached that vegans are the reason behind the scarcity of meat since they eat all the vegetables which should be better utilized for feeding the livestock.

Only if American middle class voters were as smart as Indian middle class & understood the underlined reason behind a holiday on election day was not to encourage voting but to enjoy and

So what really happened?

D

uring recession the visa norms were tightened by US to encourage businesses to offer the jobs to Americans. Then why are Indian IT companies facing the heat of tightening in particular? There are various explanations for the same.

Predominant being that since IT firms have a significant international presence, they have been affected more than others. Other being that the Indian IT firms have been made a scapegoat by the

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politicians unable to tackle the high unemployrevision and spurt in opportunities till the economy ment figures last seen during great depression reaches into a more stable developed phase. Every (Politicians are same everywhere!). Most of the developed economy has been through this phase Indian IT firms have a very strong offshore work including America, Europe & South Korea though force but apart from that the companies are reJapan has been the only exception mostly due to quired to complete a good amount of jobs onsite the inherent nature of Japanese people of patriotwhich also helps the clients take advantage of tax ism and loyalty which has its roots in their centubreaks available to companies in America who ries old Samurai culture and the great defeat during keep a share World War II of jobs at What in particular is affecting our Indian IT firms & that too to So what is all home. This such an extent that even the always sleepy GOI has taken note the hoopla is where the and is preparing to escalate these so called visa laws in WTO? Visas come about? into picture as these jobs require the firms n 2010 Representative Zoe Lofgren of Califorto either engage local talent which is generally 4nia, the senior Democrat on the immigra5 times costlier than Indian workforce. So it tion subcommittee of the House Judiciary Commit-

I

tee, introduced a bill that would increase the wages employers would have to pay to the H-1B workers, in an effort to ensure they do not undercut Americans. The measure was specifically aimed at Indian outsourcing companies. In the same year Congress added an extra $2,000 to the fee for H-1B visas, in another move aimed at the Indian companies. This was bound to ruffle the Indian IT industry in whole. NASSCOM first came out protesting this clear discrimination and the government later took cue from this and lodged an official complaint with the US consulate. It also warned of escalating the matter in WTO. So later this year the US consulate tried to eyewash the government with new changes in process of visa applications to make them more clear and simple but without any clarification on increasing the number of H1-B visas, as expected.

The visas that are most sought after by Indian IT firms are H-1B, B-1 & L-1.The L-1 classification is for international transferees who have worked for a related organization abroad for at least one year in the past three years that will be coming to the United States to work in an executive or mana-

makes sense to bring Indian employees onshore for short durations to complete the job. This also adds as a carrot stick to lure highly skilled and in demand employees back home from leaving the company. There are people who say that attrition in Indian companies is very high and this can be attributed to our disloyal nature but the fact is every developing economy goes through this phase where the workforce sees a lot of wage

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gerial (L-1A) or specialized knowledge capacity (L-1B).

Not just the IT firms but also Obama is battling growing criticism from his own Silicon Valley firms on Immigration reforms. America’s entrepreneurs have disproportionately been immigrants, from Alexander Graham Bell to Sergei Brin of Google. 40% of fortune 500 companies were created by an immigrant or first generation American.

Still US is very hesitant in responding. Especially when compared to Australia and Canada.

The Indian IT firms understandable rely more on L-1B visa to channel the Indian talent to US shores. These visas are more in demand from US based IT firms like Accenture, IBM & cognizant as in order to make use of this Visa it is imperative that an employer has a very large employee pool already present on US soil.

Obama’s healthcare policy is one of the brightest for Indian IT firms. As Obama has pressed for

The H-1B classification is for professional-level jobs that require a minimum of a bachelor's degree in a specific academic field additionally through education and experience. The required wage for the position is the higher of the "actual wage" that is paid to other employees in this position or the "prevailing wage" which can be determined using nearly any source, including the employer's own wage survey.

Visa for skilled workers

Population

USA

140,000

311,591,917

Australia

126,000

22,620,600

7,618,000

70,000

34,482,779

9,985,000

Canada

Area in km 9,827,000

better healthcare access to the masses and every American being given a healthcare cover it is

*Source: US government As it is clearly visible in the graph the number of H1-B visa issued has gone down for India in 2010 but the figures for 2012 will be much gloomier.

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bringing business for Indian IT firms. Moreover, the Indian IT industry is witnessing a growth in another niche sector i.e. insurance. With the healthcare reforms by the US to bring a new dimension to the Indian IT industry, we expect to see a lot more innovation and growth in the coming year.

Though this space and my current wisdom is not enough to contest the measures and predict the

Obama for IT industry in America has some concrete plans in place. As per the Obama’s vision for IT industry the most important ones are as follows Cyber security, Modernized patent system, High speed infrastructure with a targeted investment of $7 billion, smarter power grid.

Though there are several other such proposed measures to be taken by President Obama but here are listed only the ones which will directly impact the increasing growth of Indian IT firms.

A smarter power grid will allow thermostats being controlled by smart phones and the increase in such innovative applications will help

exact outcome of Obama’s re-election on IT industry. But some of the current issues like Visa tightening are here to remain. With the new healthcare reforms in US and the Indian IT industries moving up the value chain through Analytics and Insurance services the opportunities are for grabs. It would be interesting to see how the IT sector develops and adapts to the changes in the economy world over.

It would be best to sum up with the story of Sultan of Ottoman Empire, Bayezid II. In 1492, Sultan of Ottoman Empire, Bayezid II made a controversial but a smart decision of ordering his navy to the Iberian Peninsula to evacuate Jews being forcibly converted to Catholicism by the Spanish inquisition; he not only gave refugees shelter in his province of Turkey but ordered his citizens to welcome them. It was this wise decision of Bayezid which contributed in his states rising power for years in science, technology and trade.

the Indian coders to utilize their skills and

Samarth Shukla (The author is a student of IIFT Kolkata)

take advantage. As of yet the Indian IT industry has been on a growth ladder as seen in the graph below.

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Indian Banking Industry -An Update Banks in India might be underestimating the Amendments in Banking regulations capital requirement for operational risks, like ear 2013 is likely to bring good news loss from frauds. The quantum of operational to banking business aspirants. The risk capital maintained is linked to its revenue Reserve Bank of India (RBI) will rather than being calibrated to the magnitude release the proposed bank license of operational losses norms. However, in order to be Repo Rate* 8.0% incurred by a firm. transparent, RBI might set up 7.0% Even under the an external committee to re- Reverse Repo Rate advanced approachview and finalize the applicaCash Reserve Ratio* 4.25% es, capital requiretions. It is expected to take over ments for operation23.0% an year to decide and allot the Statutory Liquidity Ratio al risk are likely to banking licenses. be underestimated, the RBI said.

Meanwhile, the shares of the expected frontrunners

Y

which applied for the license have risen considerably on the day the banking laws amendment was cleared by parliament.

Basel III Implementation The pressure on capital requirements for Basel –III is not yet to be felt by Indian banks. At least not until the end of this financial year. The Reserve Bank of India has rescheduled the start date for implementation of Basel III to April 1, 2013 from January 1, 2013 as planned earlier. The guidelines are to be implemented as on April 1, 2013 in a phased manner and would be fully implemented by March 31, 2018.

Rising Bank Frauds RBI in its financial stability report has raised concerns over the rise of banking frauds in India. There are formidable challenges in India in measuring the extent of operational risks due to lack of historical data on operational loss events.

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A few important minutes from the RBI’s Financial Stability Report: 1. Global risks remain elevated due to delays in resolution of issues like the European sovereign debt crisis and the imminent US fiscal cliff.

2. Risks to domestic growth arise from structural impediments such as fall in domestic savings, persistently high inflation, regulatory and environmental issues. These have caused a fall in investment demand and moderation in consumption spending leading to decline in growth.

3. External sector imbalances remain a worry.

Rising gold imports have worsened the current account deficit. Domestic savings have been falling. Moreover, a lower proportion of

household savings is channeled towards financial products.

4. Financial markets remained largely stable but exchange rate volatility was high relative to that of some peers and advanced economies. Financial sector dominated the corporate bond issuance, reducing effective disintermediation.

5. The recent deterioration in asset quality and regulatory changes requiring higher provisions may pose challenges for banks in India as they migrate to Basel III. 6. Financial Inclusion, Financial Literacy and Consumer Protection have been recognized as intertwining threads in pursuit of financial stability.

More Revenue for Banks from Direct Cash Transfers Government of India, in a phased manner, will use the cash transfer scheme to dole out its subsidies to the poor. While banks will act as agents on the Government’s behalf to disburse the cash, transaction costs will become an extra burden.

The Aadhaar enabled accounts are not expected to bring any considerable business to banks as they would be used by the holders only to withdraw direct cash transfer money. In a bid to incentivize banks for facilitating direct cash transfers to Aadhaar enabled accounts, the government is considering paying them a transaction fee. The Nandan Nilekani-led Task Force on Aadhaar-Enabled Unified Payment Infrastructure had suggested in a report that at the rate of 3.14 per cent, the total transaction fee could be Rs 5,000 crores when the scheme is fully implemented. The direct cash-transfer scheme have been proposed to be rolled out in 43 districts from January 1, but the

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business model for recouping transaction costs of banks is yet to be finalized.

Stock Market Performance As the Sensex is already hovering around the 20,000 mark, shares of the Banking sector are also on the rise.

A snapshot of the performance of Bankex on BSE vis-Ă -vis the Sensex: (absolute returns, as on 28/12/2012)

Index

Sensex

Bankex

1wk 1mth 3mth 6mth 1yr 2yr 3yr 5yr

1.1 1.4 3.6 14.4 23.6 -2.9 11.7 -3.8

1.3 4.2 9.1 24.5 54.0 10.0 43.2 25.9

Apparently, Bank stocks have outperformed the market in all the considered time periods.

With proactive regulation by the RBI, robust business fundamentals and overall positive outlook of the economy, the shares of major banks like SBI, HDFC Bank, ICICI Bank could continue to outperform the market in 2013.

* The CRR and Repo Rate has been revised downwards by 25 basis points wef 29 January 2013 The author, Gopi Krishna Venigalla, is a student of IIFT

Banking Talk with Mr. Mukul Mitra Team InFINeeti talks to Mr. Mukul Mitra on the increasing NPAs in the Indian banking industry and the need to bring PSBs growth rate and competence level at par with Private Sector Banks?

Q: Recently, Mr. Pratip chaudhary, the chief of SBI and Mr. R. Venkatachalam, Deputy Managing Director of State Bank of India have said that the worst is over for the SBI. Do you believe this is the case? .

To some extent, Yes. Now that NPAs have been identified correctly, the Bank can extend more focused attention to NPA management. However, in the present socio, political and economic environment, recovery of NPA may continue to be a serious challenge.

Q: The Increased level of NPAs has put a huge pressure on the balance sheet of the banks. On what factors would you attribute the current increase in NPAs? Several factors are contributing to current increase in NPA in banking sector. In view of the current slowdown of global as well as domestic economy, performance of different sectors is adversely affected. In my opinion, due to slow down of Government spending on infrastructure, cash flow of core sector. Industries are affected and it has cascading effect on other sectors as well. Sluggish growth in agriculture sector continues to be a cause of concern. In addition, some parts or other of the country are always affected by natural calamities which also contribute to increase in NPA in this large sector. Socio political climate, which again varies from state to state, is not always conducive for NPA recovery. Similarly, lack of Corporate Governance and transparency (of which Fund diversion is a common malady) on the part business

26

entities, contribute to increase in NPA. Inadequate appraisal skills and follow-up on the part of bank officials also result into the same. And lastly, increasing incidence of fraud is contributing to surge in NPA, particularly in Retail Banking Sector.

Q: If we compare the NPA figures, the PSB’s seem to be at a disadvantage in keeping the NPAs within Acceptable limits, what do you think is the reason for this disparity?

This is primarily because of the fact that in Corporate Loans, PSB’s share is around 70%.

When economy slows down and corporates are affected, PSBs are in more disadvantageous position. In Priority sector lending, PSBs are having more exposure in terms of quantum of loan and number of accounts which is why, in the backdrop of reasons mentioned in answer to question no. 2, PSBs experience more disadvantage.

Q: Many banks blame the rise in bad loans to a newly-introduced system where bad loans were flagged off in customized software, without any manual intervention as was done in the past. So, does it mean that the NPAs were being under-reported under the manual reporting system?

In classification of NPAs in the manual system, there was more scope for intentional as well as Inadvertent misclassification.

Therefore, there could be incidents of underreporting. However, banks are subject to a number of inspections and audits and in particular, in PSBs statutory auditors are compulsorily and periodically rotated. In the circumstances, chances of wide variance in reporting are unlikely.

Q: The bad assets (NPAs) with Indian banks have doubled in the three years from Rs 68,000 cr to Rs 1.37 trillion (approx), while restructured assets trebled during the period from Rs 75,000 cr to Rs 2.18 Trillion (approx). What is your take on the asset quality of the Indian banks?

Bad assets are a global phenomenon, not confined to Indian Banks alone. It is a fact that NPA is growing disproportionately with the growth of loans, advances and investments. Particularly, substantial increase in Corporate Debt Restructuring (CDR) is a cause of concern. The entire process of CDR requires an urgent review, and institutional machineries are required to be revamped for NPA management lest the growing NPA may lead the entire economy into a crisis.

Q: Indian banks have a total exposure of more than 2.5 lakh cr to the ailing aviation, real estate and telecom sectors which are facing turbulent times. Do you believe that these loans are hurting the balance sheet of the banks?

Yes. As discussed earlier slow down of global as well as domestic economy is affecting these sectors.

In view of this, corporates are asking for more liquidity and easing out of interest rate. On the other hand, RBI is concerned about the prevailing high inflation rate. Lowering of interest rate may fuel inflation and reduce the growth rate. Both the Government and the RBI are looking for a suitable way out.

Q: Even though the Securitization and Recon-

27

struction of Financial assets and enforcement of Securities interest (SARFAESI) Act has been passed in 2002, not much emphasis is being laid on promotion of Asset Reconstruction Companies (ARCs) and many banks are not going for securitization of their loans? What are your views on this?

Sometimes, banks are not finding terms of ARCs attractive. Let us take hypothetical example:- Say, outstanding amount in a loan account is Rs.100 crores against which a bank has tangible security worth Rs.50 crores. Now, if an ARC offers 15-20% of outstanding as settlement amount, bank may prefer to go to Debt Recovery Tribunal (DRT) instead of the ARC. Q: Indian banks are often criticized for their poor Credit Discipline and Inadequate Credit Risk Management which are the major contributing factors to the current NPA levels. Do you think that the Indian banks are well equipped, in terms of skills and expertise, to manage the diverse risks facing the banking industry?

In my opinion, banking is still treated, even by most of the bank employees, as a generalized subject. However, in today’s scenario, it requires specialized knowledge and skills, particularly in the areas of Credit, forex and treasury management. Though the banks have elaborate training system, wide skill gaps still exist in these areas both in Private as well as Public Sector Banks.

Q: Lastly, your inputs on overhauling the credit of PSB’s and what is needed to bring their growth rate and competence level at par

risk evaluation & management procedures

with Private Sector Banks?

About the interviewee:

For a comparison between growth rate and competence

Mr. Mukul Mitra (M.B.M., PhD, CAIIB, CPFA) The author has more than 25 years of work experience with SBI and is a visiting/guest faculty at BITS Pilani, XLRI, NIT Durgapur & IIFT among other reputed institutions.

level between PSBs and Private Sector Banks, we will have to take into account the fact that the environments in which they operate are not identical. A straight jacket approach in evaluation may not give accurate result.

Let us take an example:Business per employee in Private Sector Bank is much higher than PSBs. It is calculated by dividing total of deposits and advances by the number of employees.

But in doing so for PSBs, have we taken into account the services provided by the PSBs to large number pensioners of Government, schools, colleges and other organizations. Large numbers of PSBs are located in remote areas across the country where scope of business is also limited. For fulfilling Priority Sector Lending norms, PSBs are engaged in direct lending to agriculture and SMEs. Whereas Private Sector Banks, many a times, depend on indirect lending to this sector through other institutions like MFIs. Moreover, service conditions of employees of these banks are also different. Competent bank employees are abundant, both in PSBs and Private Sector Banks.

Nevertheless, the service conditions and the protective environment of PSBs breed complacency among employees which is required to be addressed.

In the changing scenario, in recruiting bank employees, more emphasis is required to given on professional knowledge in banking and finance. Even if persons are recruited from other fields of studies, acquiring professional qualification in banking and finance within a stipulated period should be made mandatory. Other HR issues are to be periodically reviewed.

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Securitization of Financial assets Many people still consider Securitisation to the primary cause of the 2008 crisis. In this article, the author has thrown some light on the securitisation process, need for securitisation and what the future holds

Background: It is quite common that any talk on finance does not end without reference to 2008 crisis. Frankly speaking, it is not entirely wrong to do so looking at the magnitude and the repercussions which it caused and turmoil markets faced. Even after more than four years, when the mayhem started with the sale of Bear Sterns to JP Morgan Chase, markets are far from full recoveries.

It is almost impossible to disassociate the crisis from securitization which has been cited as primary cause of the crisis the world is facing. The Financial Innovation pioneered by Lewis Ranieri (aka father of securitization) has played a major part in creating the mess in which we find ourselves today. But is it the sole cause or just a part of the big picture which

29

caused the crisis. This is the question which this article tries to attempt.

Securitization Process: Firstly I will attempt to explain to readers what asset securitization is and then try to analyze how safe this product of Financial Innovation is.

The process has been explained in the flow

Securitization refers to the pooling of the cash-flow producing assets and subsequent issuance of securities in capital markets which are backed by the assets themselves. These cash flows are distributed in a particular fashion to investors with varied risk-return appetite.

Financial Institutions (say, Banks) loan a certain amount to home buyers who agree to pay fixed Equated Monthly Installment and the asset (house) is kept as collateral to the deal. That EMI has both Principal and Interest component in it.

Now rather than keeping the loan for complete duration banks transfers the assets (Loan agreement) to an entity called Special Purpose Entity (SPV). SPV is a paper entity created by the originator of the loan (i.e.

Bank) and is, generally, in the form of a trust fund.

Trust Structure is preferred for SPV mainly because it offers following benefits over a company or partnership form: 1. Easy liquidation procedure: SPV has a finite life and can be easily liquidated if it is in trust form while a company has a longer and much tedious process for liquidation world over. Asset Securitization has a life which is equal to average life of the pool of the assets.

2. Lesser Regulations: Trusts are less regulated worldwide when compared to the companies. Thus for the sake of simplicity of the deal and process, trust form is preferred.

Forming an SPV, rather than Financial Institutions directly selling the bonds to investors, offers tangible benefits. Some of them are: A. SPV can claim higher credit rating than the firm which originally holds the mortgage portfolio. This is because of bankruptcy immunity which a SPV enjoys.

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Assets (Mortgage documents) are removed from the assets of the originator and shifted to SPV and SPV becomes legal owner of the assets B. Investors are also benefited due to bankruptcy immunization. In case the originator becomes bankrupt, creditors of the originator will have no right on the mortgage pool. This allows SPV to issue bonds at lower interest rates

Coming back to the process of securitization; The originator collects the cash flows from the obligator and transfers it to SPV. SPV issues the securities to the investors and passes the proceeds to the originator for the assets which are transferred to the SPV. A trustee is appointed which overlooks the process of collection and services. As far as the collection is concerned, Originators transfer the amount to the SPV After deducting a requisite fee from the proceeds (EMI) from obligators for debt servicing.

Investors vary in their risk return requirement and this calls for different investment avenues to suit their requirement. Thus securities of varying risk and return profiles are created, termed as tranches. Each tranche has varying rights over the cash flows. For the sake of simplicity let us assume there are only three tranches which have been created: 1.Tranche A or Senior tranche: It has the first right over the cash flows and is paid off first. This is the least risky bond and enjoys highest credit rating. This tranche is also called superior tranche owing to its nomenclature and the rights it provide over the cash flows.

2.Tranche B or Mezzanine tranche: This is paid off after Tranche A. Generally

diversification across different geographies to lower the risk.

this is an investment grade bond.

3. Tranche C or Equity tranche: This is the most risky tranche which is held by the Originator. It is paid off in the last and any loss (or default in the mortgage portfolio) is first absorbed in this tranche.

Tranche C or Equity tranche is a credit protection to the investor of class A and Class B tranches.

Any losses occurring due to default, first go to the account of Tranche C. If the losses exceed the value of tranche C then the mezzanine tranche takes up the losses. Thus, Tranche A is the most secured investment and gives lowest returns.

Apart from forming a SPV and Equity trenching, there are several methods by which we can increase the credit rating of the bonds issued: Third party guarantee: Many times a third party guarantee is provided either through a Credit Default Swap (CDS) or through bond insurance. This protects Investor interest but, at the same time, has added cost to it. It helps issuer to get the coveted AAA rating.

Over collateralization: Generally there is always an over collateralization of the pool of mortgage to protect the investors from default Geographical Diversification: For the sake of protection from housing prices crash in a particular area, pool of mortgages is made by

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Why the hell do we need this monster!!

After getting a brief understanding of how things work in a securitization process we now shift focus on the structural benefits which arises out of the securitization. Fundamentally it provides the flexibility in transforming cash flows and risk of the collateral pool into the securities issued on the pool.

The risks which originally the originator of a mortgage faced (Default, Prepayment, Extension etc) have now been transferred to the buyers of the Mortgage Backed Securities.

The total risk is not eliminated just the risk has now been transferred to a new title.

Securitization has proved to be a source of cheap capital by which firms can free up their balance sheets. Securitization can also improve balance sheet liquidity by converting long term and illiquid receivables into the funds that can be used for additional value generating investments. From an investor’s perspective, he gets a fixed income security which closely matches his risk return requirement and helps in further diversification.

What went wrong: If securitization is such a magic wand, then what went wrong and why do we ind ourselves in such a mess. To know that we have to understand how powerful this tool is.

The flip side is the amount of risk bank now owns. In case of the default rate increase, bank is liable to lose entire 100 billion as they own the most risky class in the pool of assets.

There were serious issues in the process which became evident during the period of crisis. Most glaring of which were: i) Task of risk management got disowned ii)Risk ultimately remained on banks balanced sheets There was a clear conflict of interest in which Mortgage Backed Securities having subprime mortgages as their collateral were given highest grade investment rating. There is fundamental conflict of interest in the way these rating agencies operated. The issue is still not addressed and there is an urgent need for a regulation in this sector.

What does future hold: An amateur driver puts his hands on cherry red Ferrari. Boom there he goes 150 MPH in a flash and then rams his cars into a wall. Who is at fault? Ferrari or the rookie. Probably a policeman was needed to check the kid.

Securitization has the same logic. It’s good when the underlying pool is good. It cannot work in the case of toxic debt funding. I certainly believe that there is a great scope for the tool but the process needs to be administered.

In India, RBI has come up with much detailed guidelines defining the scope of securitization and thereby fixing the responsibilities at various stages.

Lack of transparency in the structures of Asset Backed Securities(ABS) and Collateralized Debt obligation(CDO) are the main reasons of the skepticism regarding the instruments. There is an urgent

32

need to make these structural finance products simpler, so that the investor can fathom the risk involved. In India, though owing to less developed financial markets, these structures have been basic in nature. But asset quality remains a cause of concern as the legal framework in which we work is weak and default probability has been empirically high. Not just depending on LTV(Loan to Value) ratio ,which at times becomes redundant, and stricter KYC norms, are probably some of the measures which we can adopt.

We can find solace from the fact that in India loan is issued on a value which is generally less than the market value of the asset, especially in case of housing mortgages. This is done to avoid the capital gain tax from a seller’s perspective. In case of default this gives banks the ownership of the assets even when the actual loan is for around 50-60% of the market value of the asset. By this borrower is at serious disadvantage in case he defaults. The same might not be applicable in case of corporate funding as the structure is entirely different in those cases.

Post crisis securitization market has been weak but is expected to take off when the going gets good. There is an imminent need for regulatory requirements to control the malpractices of circumventing the regulatory and reporting regulations, as we have seen in the case of Enron and in many other B school case studies.

- Himanshu Kundoo Author is the student of IIFT & student coordinator of Cash-o-nova club.

(The Views presented in the article are author’s own and in no way represent the views of the club)

New Banking License–Will it help in Financial inclusion?

As MOF has given the green signal to RBI to go ahead with the issuance of New banking licenses, the question still remains-’Whether it will serve the intended purpose of financial inclusion’

Background: After a long tussle between the RBI and Finance ministry regarding the issuance of new banking licenses, Ministry of Finance(MOF) has finally come-up with an announcement allowing RBI to issue the banking license if the Private players or NBFCs’ meet the apex bank’s criteria.

While the finance ministry was pushing for the issuance of new banking licenses , the RBI maintained the stance that unless the Banking Regulation Act is amended providing the RBI legal powers to handle this situation it will not go ahead with it.

No new banks have been set up in the past eight years. In fact, no new Indian bank has been set up since the first flush of liberalization in 1993 when half-a-dozen banking licenses were given.

Excluding Regional rural banks, India has 96 scheduled commercial banks (SCBs)—27 public sector banks, 31 private banks and 38 foreign banks—having a combined network of over 53,000 branches. Accord-

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ing to ICRA report, public sector banks hold over 75% of the total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5%, respectively.

Indian Banking Sector: Penetration & its Health: While the ministry continues to harp upon the need to increase financial inclusion, data shows ample proof that just opening up new banks is not the solution. The number of Indian commercial banks in FY2012 is 173, with only 2.3% of them being nonscheduled commercial banks.

Looking at the extent of reach of the banks into rural and semiurban India, the data shows a very healthy growth. The total number of offices have shown a CAGR of 6.5% over the last five-year period. The increase in offices in semi -urban India is the fastest at 9.5% CAGR while rural India is the slowest at 4% CAGR. Although the some of the growth statistics are fairly satisfactory, there are many parameters which suggest the lack of financial inclusion compared to other developing and developed

a percentage of GDP is also a clear indicator of the low penetration and potential of the Indian banking inclusion.

in bank assets over the 5-yr period, this increasing proportion is a huge drawback and a pain-point for the Indian banking industry.

Also since nearly 70% of the banking assets in India lies with the public sector deterio-

Per capita credit and deposit is an extremely important indicator of not just the penetration but also the extent of maturity of the banking system in the country. Over a 5-year period, the per capita deposit growth has shown a 15.6% CAGR while the per capita credit growth is marginally faster at 17.1% CAGR. The greatest threat of the Indian banks (and

rating performance of the public sectors casts a gloom over the performance of the entire banking industry.

Government Rationale: At a time when most existing banks are burdened with constant increase in NPAs and debt restructurings one might wonder the rationale behind the increasing ixation

Bank Accounts Debit Cards

13%

Life Insurance

10%

Credit Cards

2%

Non-Life Insurance also some of the emerging economies) has been the rise of NPAs. Since 2007-08, the public sector banks have seen NPA growth from 2.33% to 3.17% of their total asset pool. Given the increase

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% of Population 57%

0.6%

of the Government towards the ushering of new banks. The most significant of the list of validations is, with nearly half the country

nations. The low value of consumer debt as

without admittance to the banking system, financial inclusion is indeed the need of the hour. The most significant of the list of validations is with nearly half the country without admittance to the banking system, financial inclusion is indeed the need of the hour. The Finance Minister P Chidambaram has asked the RBI to make efforts towards issuing the final guidelines for new banking licenses and receiving applications from interested parties.

Benefits would include 1.Increased Financial Inclusion 2.New banks can also bring new ideas to attract the customers in terms of more efficient products, a factor in which Indian banking is lagging even the developing markets 3.Create competition and also will aid in creating prospects in the dull market It has been seen by the Finance Minister as another method to end the credit downturn. Giving out new banking licenses quickly leads to new private lenders bringing in fresh capital and giving the jaded banking system an additional loss-absorbing cushion. By

infusing fresh capital into the banking system, the government is pursuing to counter the cyclical downturn by enticing cash rich stateowned firms to speed up investments.

RBI Perspective With stable growth and financial inclusion the outcome, the RBI do not have much contention about the intention of the Government, however it has taken to the unsavory hurry with which the Finance Ministry is trying to push for the outcome.

The major issue of disputation that the RBI have brought up is that RBI should be allocated more power to oversee that this mechanism doesn’t end up being ready made funds for the former. Under the current Banking Regulations Act, 1949, sec 45, RBI doesn’t have sufficient power to supersede a bank and its board’s actions although it still may through indirect means achieve a similar feat. Herein trying to regulate the licensing process till the last detail and the Government in

RBI Guideline Highlights (Source: RBI,2011) Eligible Promoters

Private sector groups with sound track record for 10yrs

Corporate Structure Corporate Governance

New banks will be setup through wholly-owned NOHC, registered as NBFC At least 50% of the directors should be independent

Foreign Shareholding

Aggregate shareholding should be 49% max for irst 5yrs

Min. Capital requirement

Minimum Capital requirement of Rs. 500 crores

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perhaps in its own interest to a certain extent, trying to reduce the red tape for once as a change.

The banking industry is different from all other industries in terms of its management of public money to a much greater extent and adequate safeguards must be in place to limit its exposure to the promoters’ other businesses and ensure any such dealings are subjected to approval by the boards. Thus depositors’ interest the most primary concern it points in the direction of vesting the RBI with overriding regulatory powers, including superseding the boards of banks. While RBI even with its existing powers has managed to supervise the banking industry in a fairly healthy manner, it still needs to be empowered befittingly afore licensing new banks, especially those promoted by large corporates who should not be allowed to view them as captive fund pools.

Conclusion Financial Inclusion is a critical aspect of an economy as it provides the banking sector with more funds to mobilize. Given India’s economic slump and poor infrastructure growth, an influx of funds in the banking sector would be a great boost to the sector. But financial inclusion is not going to come about by opening up new branches in the rural & semi-urban India. The challenge is to generate credit and deposit growth from those socio-economic sectors by improving the variety and customization of financial products which are more focused at the rural and semi-urban consumers. The role of technology at this stage is critical because not only will it incentivize the customers to utilize the banking sector by reducing cost of transaction and improving transparency but provide a growth platform for the not only the rural & semi-urban areas but also the Indian urban and metropolitan places.

Government must also understand that unless the

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RBI is given significant legal powers, it will be nearly impossible for RBI, the overall banking regulator, to achieve the economic growth objectives from the existing slump. Given the government’s previous massive governance failures and inability to close the fiscal deficit, this will act as an image boost towards investors and industries. Though RBI is in the process of drafting the guidelines for the issuance of new licenses, yet considering the existing economic situations and financial penetration, a very prudish approach in license issuance is the order.

-The Authors, Shovik Kar and Krishnendu Saha, are students of MDI, Gurgaon

Carbon credits are a tradable permit scheme. Carbon credits create a market for reducing greenhouse emissions by giving a monetary value to the cost of polluting the air. Carbon Credit is this new currency and each carbon credit represents one tonne of carbon dioxide either removed from the atmosphere or saved from being emitted. So, companies that are reducing these emissions by using renewable sources of energy or by planting trees can avail carbon credits and trade them in the market.

Carbon Credits A perspective on the booming green investment market

T

he concept of Carbon credits has come into prominence after Kyoto protocol signed in 1997. Countries and industrial groups were given credits when they emit below the threshold limit and these credits are allowed to be traded in the market. Carbon credits market has become one of the biggest markets in the world which was worth a staggering 92 billion euros in 2011, an increase of 10% from 2010. Carbon credits have been hugely traded with the volume of trade increasing by 22%. More than 75% of this growth is propelled by the European Union’s Emissions Trading scheme. The main function of this market was to encourage companies or groups which are emitting less than the limit and monetize this gap so that they can get advantage of their position in the carbon credits market. These (carbon credits) can not only provide financial gains but also improve the brand value of the company. It also helps in creating its image as that of a sustainable and efficient company. In 2010, Barclays Capital has bought over one million carbon credits from projects in different countries like India, China, Brazil, Thailand etc. Such kind of transactions

grab eyeballs and the ensuing media coverage gives out a competitive edge in the market for the company. With increasing emphasis on the reduction of greenhouse gases and awareness among companies as well as countries, this market is going to grow leaps and bounds. Though there is a tough battle going on between the developed and developing nations regarding the climate change and its consequences, it will be long before any new method comes out for finding out a way to control carbon emission by companies.

In Europe, with banks not willing to conduct trades for less than 10,000 or even 25,000 credits, commodities trading companies like CF Partners are carrying out these small and medium level transactions for aviation companies. This industry has also opened up several opportunities for many new businesses to flourish as companies are required to provide verified emission offsets, energy efficiency audits, greenhouse gas emission audits and to design carbon software. There have been companies which are providing software to check carbon footprints and reduction options for businesses,

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governments, and consultants.

was no extension to the Kyoto Protocol and there was no consensus among the nations about the way forward.

Carbon Credits Market in India As India is a developing nation, it has no emission targets to follow. But, India can leverage upon this point by making more investments in renewable energy sources and trying to reduce the emissions.

India needs to concentrate more on Clean Development Mechanism(CDM) projects and can become one of the leading players in the carbon credits market. It was estimated that the number of carbon credits issued would be around 246 million

by December 2012. India holds the second position in the global carbon credits market and MCX has become the first exchange in Asia to trade carbon credits. As MCX is a futures exchange, it relied on the customers’ intuitions about the future of carbon market and used this as the trading point. An example of how companies can make use of this mechanism is the Delhi metro rail corporation. It has become the first rail project to gain carbon credits because of the use of regenerative braking system in its rolling system which reduces energy consumption by nearly 30%.

Disadvantages of investing in this market The carbon credit market is in a very nascent stage right now and the rules governing it are not that clear. We have also heard about a recent scam in this market in India. Just like how the stock market needs strict regulations, this market also needs to identify itself with more regulations and checks. Also, there is the problem of identification of liquidity in the market. It is difficult to know the exact bid/ ask spreads in this market.

There is also a scarcity of clear exit strategy for the investors in this market.

The way forward for India Many investors are wary about investing in green field projects and are shying away from taking this part of the risk. But, most of the green projects in this area in India are driven by the state and the central government policies. So, it is up to the government how they want to take advantage of their unique position in this market.

As the concept of climate change and global warming is not going to die away in the near future, can India become the world leader in implementing innovative ideas to pave way for a cleaner and greener environment and become the envy of the world?

Effect of Recession on the market Before 2008 recession, there has been a tremendous response to the carbon credits. But, in the last few years, there has been a significant decrease in the average price of the carbon credit and also this year marks the end of the first commitment period for CDM. Europe, one of the major players in the market, has put a brake in the purchase of carbon credits, citing recession and the financial crisis that still engulfs the region.

There were only few Indian companies which held

-V. Nishanth Shouri & Deepak P (The authors are students of IIM Shillong)

on to the carbon credits market thinking that the market would rebound. But after the Durban talks in December 2011, the situation got worse. There

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“

Africa’s growth story is not only about its natural resources, but about reforms, including restructuring of regulatory frameworks, and policy amendments that have brought a fundamental change in the business environment, earning Africa a permanent place on every major investor’s map.”

Ground Zero: Africa Why the whole world is looking at the continent with eager eyes Africa - The New World Economy

A

frica is a resource rich continent which is going through an array of reforms over the troubled nations. The stagnated continent, is now showing signs of sharp growth given the fact that it is transforming itself in both the political as well as the economic front thereby attracting foreign investments. The GDP growth rate has increased from 2.3% in the 1990s to 5.2% and its collective GDP was at $ 1.7 trillion in 2010 and is expected to be $2.6 trillion by 2020. The estimat-

ed growth for Africa over the next five years is 8% and is double the estimated growth rate for other advanced economies which stands at 4% whereas the world’s estimated average is around 6%. Amongst the BRIC countries, Brazil has an average annual growth rate of 3.18% while India stands at 5.5%.

According to Ernst and Young, the foreign direct investment in the continent could reach $150 billion by 2015.

In the first decade of the 21st century, six of the African countries were amongst the top ten in the

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world’s fastest growing economies with Angola being the world’s fastest growing nation. Even in terms of annual average GDP growth the African countries have outpaced the Asian countries. By 2050, the number of emerging markets economies would have quintupled and 19 out of 30 biggest economies would belong to the emerging markets (including Africa).

The Drivers of Growth The African growth story is mainly driven by its banking, telecommunication and construction sectors.

Huge consumer demand, given the size of its population, is a major reason for Africa’s economic growth.

Around 70% of the capital that is invested in Africa is deployed for manufacturing and infrastructure sector. The low-carbon energy sector is being given due weightage and there is huge demand for investment in the health and education sectors. There is a huge potential in agri-technology. Almost half of the world’s arable land lies in the sub Saharan continent.

Barclays has recently launched an initiative to support the SME sector in Africa. The mining industry is also gauged to give huge benefits in the near future.

The mining potential of the African continent can be seen from the fact that the Democratic Republic of Congo has high reserves of copper, cobalt, gold and diamonds. Seeing this impressive opportunity, the IMF has approved a release of US$77 million to help the industry. Strong investments can be seen in the Western areas like Mali, Burkina Faso, Cote d’Ivoire,

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Senegal and Sierra Leone. The leading producers of gold, Ghana and Tanzania are also emerging as mining economies. Namibia has vast resource of uranium whereas Zambia is developing new mines for its copper industry and its output is expected to reach 2 million tonnes in the next five years.

However, we need to take a look at the factors that are stifling this industry’s growth. The rampant corruption in the awarding and transferring of ownership rights, the nationalization of the mining industries and the non abidance of laws. Moreover, the investors are wary of the deteriorating geopolitical environments and may be deterred from parking their money in Africa.

Paving the Way for Investments Thus, Africa provides great investment opportunities in both listed and private equities. There has been tremendous increase in investment in African funds in the recent past. Private equity investors did not have many opportunities save one country in Africa about a decade ago. But the situations have improved with at least twenty one countries emerging as the destination for high returns for private equity investors. Africa is home to 1 billion consumers. Tanzania, Ghana and Ethiopia are now being counted amongst

the world’s fastest growing economies.

According to Emerging Markets Private Equity Association, nearly 30% of the private equity investors are planning to expand their equity investments in Africa and 10% of the global investors are planning to start investing in Africa.

The local firms in South Africa manage more than $14 billion funds. The legislative changes are attracting the investors for local and foreign managed private equity funds. Some of the recent developments have been elimination of exchange controls that required approval of the Reserve Bank for private equity funds transactions outside South Africa, Namibia, Lesotho and Swaziland. Now approval is required only for foreign investment.

Moreover the recent economy crises had little impact on the private equity industry in South Africa due to less exposure. Ethiopia’s average GDP growth has not fallen below 8% in this millennium and it is presently the third largest growing economy in the world. It is a paradox since the internet penetration in Africa is around 0.7% but the economy is still growing at a good pace. Ghana’s economy has grown by 14% over last year because of oil coming on stream.

With the new HSBC GIF Frontier Markets Fund, private investors will be investing in only long equity funds in emerging economies and Nigeria and Vietnam are the first to be targeted for investment.

Africa offers private equity investors strong underly-

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ing economic growth, low competition for deals, low levels of financial risk, and the ability to have a real impact on the communities in which you invest It is often assumed that African Private Equity investments are extremely risky, commodity focused and pose problems at the time of exiting or divestment. According to the International Monetary Fund, the rising fuel and food prices are the biggest economic threats to the region. However there are high hopes on the region’s economy with many African entrepreneurs looking forward to foreign investments to raise funds for building and enhancing the infrastructure.

-Author of the article, Nitika Bansal, is a student of IIFT (Kolkata campus)

Campus to Corporate Team InFINeeti talks to our Alumni – Mr. Rajesh Beriwal (Co2012), Management Associate at Citibank India, who gives his valuable insights on his experience of transitioning from Campus to Corporate and his journey so far

Q: Your expectations of your job role before joining it.

expected them to be. The 12-day induction had

Joining one of the most global brands in your industry of aspiration is always an inspiring feeling. This feeling coupled with the butterflies of the first job made it quite an exciting affair for me. I had thought of it to be a very challenging experience. I expected people to be very hard-working and enterprising. At the same time, I was happily anticipating a very grand reception since I was joining as a Management Associate, which is the flagship programme of the bank and also considering the fact that our joining date coincided with the first day of the third millennium for Citi.

over and addressing us, some of them had

country-heads of different divisions coming joined the organization as an MA years ago, including the current Chief Country Officer, Pramit Jhaveri. The induction also included an innovation workshop, a business simulation workshop, group videos/presentations and a gala dinner with all honchos and previous batch of MA’s. All in all, it was a great reception for each one of us.

“My Advice to the coming batches would be to be prepared as the actual competition and struggle begins after the campus. Make your choices depending on what is important to you”

Q: Your description on the induction process if any of your organization, your experiences in it compared to your expectations.

It was a grand, grand affair. Luxurious hotels, lots and lots of high-profile interactions and a fun-filled outbound trip made the induction process quite worthwhile. What was also amazing was the quality of the people who were joining in with me. Some seriously talented people who were a lot more humble than I

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Q: Some description in general about your role, how your learning at IIFT helped/gave you an edge to get into your current role.

My present rotation is as an Officer-in-Charge of the Funds Transfer Unit, where I look into all non-trade related foreign remittances for corporate clients. The transactions being outbound, exchange rates play a part; also FEMA guidelines assume significant importance in my role. The role entails continuous interaction with customers , the coverage groups and the

regulatory teams who do the scrutiny of documents.

The learning at IIFT definitely helped since the transactions include derivative deals and a bit of FEMA knowledge comes in handy all the time.

Besides the curriculum, I feel the learning in the form of multi-tasking, taking up positions of responsibility etc., has also helped a lot in my current role.

Q: How corporate life is different from Campus (ESPECIALLY as an Management associate with Citibank)

It is a whole lot different from campus life, and I am sure most fresher would agree. It would help if you work in a young environment, helps to adjust faster.

The feeling of being a ‘student’ is no longer there, though you are still learning something every day.

Your family and your old school friends have a different set of questions to ask you. You are presumed to be more responsible and mature in whatever you do, which can be a good thing or bad, depending on how one takes it. So I would say, life becomes a lot more routine and boring, the extent of which depends on the kind of work one is doing.

Q: Any Miscellaneous area/experience/advice you would like to add.

Advice to the current batches would be to enjoy your present stay in the campus to the fullest since life’s going to change once you start working. Be optimistic with whatever you get. Everything under the sun has its pluses and minuses.

Q: Any general advice - something you wish you had received when you were still doing your MBA, which is needed for transition from 'Campus to Corporate'.

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I read this somewhere on the internet sometime back, “Get an MBA, Don’t Be an MBA”.

I think this holds true for all B-school candidates. The actual struggle and the competition begins after campus, so be prepared. Make your choices depending on what is more important for you – family, profile, money, job satisfaction etc. – the co-existence of all these is a bit difficult. Be ready to make that sacrifice. And on a final note, invest in relationships while you are in campus, will hold you in good stead every time in future.

Financial Lingos 1. DUTCH DISEASE It refers to the negative consequences arising from large increases in a country's income. The term "Dutch disease" originates from a crisis in the Netherlands in the 1960s that resulted from discoveries of vast natural gas deposits in the North Sea. The newfound wealth caused the Dutch guilder (currency) to rise, making exports of all non-oil products less competitive in the world market.

Similar economic condition occurred in Great Britain, when the price of oil quadrupled and it became economically viable to drill for North Sea Oil off the coast of Scotland. By the late 1970s, Britain had become a net exporter of oil; it had previously been a net importer. The pound soared in value, but the country fell into recession when British workers demanded higher wages and exports became uncompetitive.

2) MOMO PLAY It is basically a slang used for investors who are not interested in the fundamentals of the company but only in the short-term direction of the security’s price movement.

continue to rise higher.

He would exit his position as soon as the trends reverse. This is termed as “Momo Play”. It is similar to the Momentum Play. The investors interested in the ‘Momo Play’ are more concerned about the short term gains they can achieve.

3) YAWN – YOUNG AND WEALTHY (BUT) NORMAL The YAWN individuals are the ones that have made fortunes during their young age, but these individuals believe in living a relatively modest life. They contribute more to charity and other social causes, while spending much less on possessing luxurious items and living expensive lifestyles.

They redistribute a large portion of their wealth for social good, and hence they are of much benefit to the society.

For Instance, The news breaks out in the internet site (like money control) or television channel (CNBC Awaaz) that the stock outlook of Maruti Suzuki looks positive with a positive upward movement. One would know nothing about the Maruti’s fundamentals or results but would enter the stock with a hope that it would

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4) GRAVESTONE DOJI AND DRAGONFLY DOJI When the trend for the particular stock changes from being bullish to bearish, the reversal candlestick pattern it mainly occurs at the top of the uptrend is called as ‘Gravestone Doji’. The Gravestone Doji is created when the open, low, and close are the same or about the same price

6. SLEEPING BEAUTY A Sleeping beauty is a company which is considered prime for takeover, but has not yet been approached by any company. It may be having large cash reserves, undervalued real estate, undervalued share price, attractive assets, strong growth and earnings potential or anything in which the acquirer may be interested.

It is called ‘Gravestone’ because the trend for the future prospects of the stock is negative, and the term ‘Doji’ refers to the indecision happening in the market regarding the price of the stock or the index overall. Dragonfly Doji is the opposite of the Gravestone Doji when the trends change from Bearish to Bullish.

5. BLACK SWAN An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult to predict. This term was popularized by Nassim Nicholas Taleb, a finance professor and former Wall Street trader.

Black swan events are typically random and unexpected. This term is generally used in the corporate sector to mention an unexpected movement in the prices of the shares or to describe the losses in any particular year. Likewise, if a company making profits every year for several years incurs loss in any one year, then that can be referred to as Black Swan.

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A takeover, or acquisition, is typically characterized by the purchase of a smaller company by a larger firm. Practically, a large company having enough resources and looking for a sleeping beauty, hires an Investment bank which analyses the health of the company and submits a report to its management whether the target i.e. sleeping beauty) is suitable for acquisition or not.

7. BLACK KNIGHT A company that makes a hostile takeover offer for a target company is known as the Black knight. In mergers and acquisitions, a company may try to acquire the other company without the will of the management of the other company.

Black knight attempts to takeover the target company is deemed unwelcomed by the target company. When a company is facing a hostile takeover by a black knight, a white knight may appear to offer a way to avoid the hostile takeover with a friendly takeover.

8. WHITE KNIGHT

the company. As some of the shares in the company are held by the promoters and the financial institutions, both the black knight and squire knight focus on the shares held by the public.

A company that makes a friendly takeover offer to a target company that is being faced with a hostile takeover from a separate party. In this case, in order to save the target company from the hostile takeover, another company come to the rescue and makes a higher bid per share to the shareholder so that they do not sell their shares to the Black knight (i.e. the company making the hostile takeover).

10. PACMAN STRATEGY A form of defense used in a hostile takeover situation. The target firm turns around and tries to take over the company that has made the hostile bid.

There have been many cases in which a small firm takes over a large firm.

A White Knight purchases the majority interest in the company and in most of the cases; it asks the present management to continue with the operations of the company as the main objective behind the acquisition is not to take over control but to save the management of the company

An example of PACMAN Strategy being attempted hostile takeover of Martin Marietta by Bendix Corporation in 1982. In response, Martin Marietta started buying Bendix stock with the aim of assuming control over the company

.

9. SQUIRE KNIGHT A Squire Knight is similar to a "White knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in the target firm. Practically, a squire knight purchases as much shares from the market so that the black knight is not able to have the majority interest in

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How hard is it to spend a trillion dollars? If you spent one dollar every second, you would have spent a million dollars in 12 days. At that same rate, it would take you 32 years to spend a billion dollars. But it would take you more than 31,000 years to spend a trillion dollars.

A trillion $10 bills, if they were taped end to end, would wrap around the globe more than 380 times. That amount of money would still not be enough to pay off the U.S. national debt

The first stock exchange can be traced back to Antwerp, Belgium in 1460

United Arab Emirates tops the charts for mobile phone ownership – a whopping 176.5 phones for every 100 citizens.

The original name of Bank of America was Bank of Italy

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Hewlett-Packard was started in a garage in Palo Alto, CA in 1939. Bill Hewlett and Dave Packard flipped a coin to determine whether the firm would be called Hewlett-Packard or Packard-Hewlett. Packard won the coin toss but chose to go with Hewlett-Packard

China has 64 million vacant homes, including entire cities that are empty

Agricultural giant, Cargill, Inc., is the largest privately held company in the U.S, according to Forbes. If it went public, it would rank among the top 20 companies in the Fortune 500 in terms of revenue. It employs nearly 130,000 people and had revenues of nearly $110 billion.

American Airlines saved $40,000 in 1987 by eliminating one olive from each salad served in first-class

Bill Gates told his Harvard University professors that he would be a millionaire by age 30. He became a billionaire at age 31

The world's biggest mall is in China... but it has been 99% empty since 2005

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UN Slashed World Growth Forecast to 2.4 Percent for year 2013 United Nations on 18 December 2012 slashed its global growth predictions to 2.4 percent for 2013 and 3.2 percent for the following year and warned of a lasting employment crisis for western countries.

The UN's World Economic Situation and Prospects 2013 report warned that the Debt crises in Europe and the United States and a slowdown in China could all throw the world economy into recession.

FII Investment in the Indian stock market surpassed more than 24000 crores Rupees in December 2012 Foreign Institutional Investors (FIIs) in the month of December had pumped in more than 24000 crores rupees in the Indian stock market which is said to be the highest in 10 months timeline taking total FII inflow for the year 2012 to over 24 billion dollars. As per the SEBI Data, In December, 2012 Foreign Institutional Investors (FIIs) were gross buyers of shares worth Rs 71595 crores rupees while they sold equities amounting to 47412 crores rupees. This translates into a net inflow of 24183 crores rupees or around.4.42 billion dollar.

GAAR deferred by 2 years Giving certainty to foreign investors, the government has to put off the controversial general anti avoidance rules (GAAR) 1 April 2016. The decision, is the lynchpin of a series of measures to help revive investments from abroad in the economy, especially at a time when the government has little space for fiscal sops. The decision is in lines with what the Shome committee reviewing the rules had recommended to the government.

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US fiscal cliff resolution helps boost IT sentiment The US's last minute act to save itself from a fiscal cliff is expected to do some good for the technology industry in India. Som Mittal, president of IT industry body Nasscom, said, "With this, the economic uncertainties in the US are sort of behind us. It will help the Indian tech sector in terms of sentiments and growth.''

Economy could grow around 6% in 2013: Kaushik Basu India's economy could expand by around 6 per cent in 2013, World Bank Chief Economist Kaushik Basu said today, attributing the current slowdown to global factors.

CAD to be at 4.2 pc level in 2012-13: Rangarajan The current account deficit is likely to be around the last year's level of 4.2 per cent of the GDP for 2012-13 fiscal, Prime Minister's Economic Advisor Council Chairman C Rangarajan said on Wednesday. Current account deficit (CAD), which represents the difference between exports and imports after considering cash remittances and payment, widened to a record high of 5.4 per cent of GDP, or USD 22.3 billion, in July-September quarter.

Govt sets up 14th Finance Commission under former RBI Governor Y V Reddy The government today constituted the 14th Finance Commission under the Chairmanship of former RBI Governor Y V Reddy, which among other things, will suggest steps for pricing of public utilities like electricity and water in an independent manner.

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RBI may start new bank license process in 2013 as banking Bill gets Lok Sabha nod The Reserve Bank of India will likely start the process of issuing new bank licenses from 2013 after the Lok Sabha passed the much awaited Banking Amendment Bill that was seen as a crucial enabling condition for the central bank to pave the way for more players including corporate houses into the sector. The RBI had made it clear that it will not come out with the final guidelines on new bank license unless the Bill turns into a law, even as the finance ministry had been asking Punjab National Bank acquires 30% stake in MetLife, company to be re-branded Punjab National Bank (PNB) today said it has received all regulatory approvals for acquiring 30 per cent stake in MetLife India Insurance. Following this, the private sector life insurer would be re-branded as PNB MetLife India Ltd. In a filing on BSE, PNB said, the bank has received all regulatory approvals, including CCl's, for acquiring 30 per cent stake in MetLife India Insurance. Both PNB and MetLife India had approached the fair trade regulator Competition Commission of India (CCI) for approval on December 7, 2012. On closing of the transaction, the company will be re-branded, it said.

SEBI seeks to curb CEO pay The Securities and Exchange Board of India (Sebi) has sought to rein in the pay of top management in listed companies, comparing cases of excessive pay in the case of executives linked to the promoters to ‘abusive related party transaction. Sebi has proposed requiring the approval of disinterested or minority shareholders for managerial remuneration beyond a particular limit, as part of a consultative paper on corporate governance issued on Friday.

2% Hike in import duty on gold Gold import is a major constituent of India's rising Current Account Deficit (CAD). The CAD, which represents the difference between exports and imports after considering cash remittances and payment, widened to a record high of 5.4 percent of GDP, or 22.3 billion, in the July-September quarter. In order to curb the import of precious metals and check the CAD govt. has hiked the import duty on Gold & platinum from 4% to 6%.

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On HINDUSTAN MEDIA VENTURES LTD This was the winning entry by Vijay Bhadoria and Vartika Singh, MBA 1st yr students of IIFT K, as a part of the Equity Research Competition sharply affected by the economic slowdown which organized by Cashonova, the Finance Club of IIFT impacted businesses in the country and the consequent slowdown in the advertisement revenues.

Introduction – Industry Overview Growth of Indian M&E Industry

India is the 14th largest in Media & Entertainment(M&E) market in the world, with industry

Indian M&E is one of the fastest growing in the world and is expected to reach $37.6 billion by 2016, with a CAGR of about 17 % from 2012 to 2016. Driving Factors are steady macro-economic growth, rising spending power and positive demographic indicators.

revenue contributing to 1% of GDP. It comprises primarily of television, print, film, radio, music, animation, outdoor advertising and gaming.

Indian M&E industry has been one of fastest growing sectors of the economy. But it was

Future Outlook for Print Media

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Print Media Segment

‘Kadambini’, & internet portals of these publications.

HMVL belongs to the print segment of M&E

Key Financials

industry. India is the 2nd largest print market in

Revenue Segregation

the world with a readership base of over 350 HMVL is relentlessly pursuing the goal of sustainable value creation for its stakeholders. The twin values of ‘Trusteeship’ and ‘Accountability’ are the underlining principles of all HMVL initiatives.

and regional languages which garner 92% of the

As a responsible corporate citizen and media house, it is committed to promoting and practicing the principles of good ‘Corporate Governance’ and balanced care of all stakeholders

market.

Valuation

Print Media is expected to grow at a slower pace of 10% as compared to M&E Industry growth of 17%.

We have taken Discounted Cash flow model for the company’s valuation along with comparable. Technical analysis is also taken into consideration to provide a better stock pitch.

Million. Market is highly fragmented with over 62,000 newspapers and skewed towards Hindi

Company Overview & Performance

(Rs. Crore) Net Sales PBDIT Net Pro it EPS (Rs)

Discounted cash flow Analysis (DCF)

2012

‘11

‘10

‘09

‘08

598.2 519.7 163.5 17.6 16.8 114.5 96.8

27.0

0.56 0.61

65.4 8.90

14.8 2.58

0.08 0.05 0.11 0.14

53.6 7.30

The company got incorporated in 1918 under the name ‘The Behar Journals Limited’ and change its name to ‘Hindustan Media Ventures’ in 2008.

In 2009, HT Media acquired the Hindi business of the company, which comprises of Hindi daily news paper ‘Hindustan’2nd largest read daily of the country, magazines ‘Nandan’ and

Methodology and assumptions Growth: 3-stage model – high growth, moderation, stable at terminal value High growth period taken as a bit lesser than the CAGR – to account for increase in the overall costs & terminal growth pegged at the GDP growth rate Beta: Taken as per Thomson Reuters estimate. Levered beta calculated separately for each year Current D/E ratio use for converting to levered value

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beta calculated separately for each year Current D/E ratio use for converting to levered value WACC: Rf is the government 10-year bond rate: 8.50% , Rm is the overall market return since 2009 using CNX 500 index Average cost of debt over the years Capex, WC: Capex continued at the current levels,; expectation is that due to the company’s focus, cost is going to be well managed WC grows with revenue growth, as is the typical norm Comparable Based Valuation

PAT Margin:

Compared with peers – DB Corp, Deccan Holdings Private Limited, Jagran, and HT Media

Average rate of PAT over the last few years Discounted cash flow Analysis – Results

The CMP is Rs 160.09 which seems to be the lying in the range of the comparable

0.09 Growth rate taken for FY 13, as per the analyst estimates and average industry growth forecast

The low valuation on the basis of Price to Book Value is due to the poor performance of Deccan Holdings

High growth rate period a bit lesser than the FY12 value – to account for increase in the overall costs

Valuation Summary – Football Field Football field gives the summary of all the valuations

WACC is calculated from unlevered beta and D/ E ratio for each year The sum of the Free Cash Flow of equity calculated at present value. The estimated market price per share is calculated The share price for the firm at current market price was found to be undervalued

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Actual Return Volatility Hindustan Media Ventures Limited accepts 4.55% volatility on return distribution over the 30 days horizon. BSE assumes 0.61% volatility of returns over the 30 days investment horizon.

Investment Conclusion • Different valuation techniques show that the current stock is undervalued. Thus, good potential for growth • The grey box covers the maximum region, and hence gives the valuation range • The minimum price is around Rs 155 • The max. valuation comes to around Rs 198 • With the CMP at Rs 152, we see that the results obtained here signify that the share is currently undervalued in the market and is bound to go up Risk Analysis • Both the Comparable and DCF analysis suggest an appreciation in the Stock price as well as the Equity Value

Projected Return Density against Market Assuming 30 trading day’s horizon Hindustan Media Ventures Limited has beta of -2.37. This indicates as returns on its benchmark rise, returns on holding Hindustan Media Ventures Limited are expected to decrease by similarly larger amounts. On the other hand, during market turmoil’s, Hindustan is expected to outperform its benchmark. Additionally, Hindustan Media Ventures Limited has negative alpha implying that risk taken by holding this securing is not justified

• Also, the focus on quality, innovation and cost management is showing positive results for the company • Good growth over the last few years in terms of PAT • Stock volumes has been following up and down in recent times but strong fundamentals suggest will drive the future growth.

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Congratulations to the Winners!!

Name – Shovik Kar and Krishnendu Saha (MDI Gurgaon 11-13) Ar cle – New Banking License: Should RBI bite the bait?

Name – Deepak P and V.Nishanth Shouri (IIM-Shillong) Ar cle – Carbon Credits - A Perspec ve on the booming Green Investment Market

Name : Kimi Gala (SIMSREE 12-14) Ar cle – The Insider Job : The Dark Cloak of Insider Trading

Name – Ni ka Bansal (IIFT 12-14) Ar cle – Ground Zero : Africa as an a#rac ve investment

Name – Vibhu Gangal (SCMHRD 11 -13) Ar cle – Quan ta ve Easing

Name – Pankaj Malhotra (IIFT 1214) Ar cle – Roadmap for fiscal deficit

Contributions from IIFT Clubs

SAMARTH SHUKLA Coordinator, Systemix Club pens down his thoughts on the Obama Impact on the Indian IT

HIMANSHU KUNDOO Coordinator, Cashonova Club explains the concept of Se curitization of Financial As sets through his article.

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GOPI KRISHNA VENIGELLA Coordinator, Cashonova Club presents the updates of the Banking Industry

Credits

Meet The Team AAKANKSHA HAJELA is an Electronics Engineer with a keen interest in Finance and Strategy. She looks forward to work in the (ield of Consultancy. She has authored articles in business blogs

EDITOR-IN-CHIEF Vaibhav Garg

CONTRIBUTIONS FROM Gopi Krishna Venigella Himanshu Kundoo Samarth Shukla

BHUSHAN KANATHE is an Engineer with a motivation to specialize in Finance. He has cleared CFA Level 1 . He regularly tracks the stock market and wants to pursue a career in investment banking

SPECIAL THANKS New Logo Design Mohit Jethwa Nikhil Wagle

OutOut-going Team

KUNAL MAHESHWARI is a quali(ied Chartered Accountant and aims to make a career in the (ield of (inancial consultancy

Soumya Jyoti Sen Rohit Khattar Piyush Marwaha Ritesh Gupta Sourav Dutta

MOHMAMMAD UMAIR ANSARI is an electronics engineer. His hobbies include reading newspapers and following current affairs

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

Published by students of Indian Institute of Foreign Trade New Delhi | Kolkata

VAIBHAV GARG is a quali(ied Chartered Accountant and graduate from DU. He aims to specialize in Finance & Trade. He follows the stock and commodity markets and likes to update himself with the recent happenings in the (ield of (inance

ALL RIGHTS RESERVED

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CELEBRATING 50 YEARS

Contact Team InFINeeti: infineeti@iift.ac.in, infineeti@gmail.com Published by Indian Institute of Foreign Trade, New Delhi and Kolkata