FROM THE EDITORS
The Financial Bulletin Money Matters Club IBS, Hyderabad Est..—2005
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Dear Readers, It gives us immense pleasure to come up with the August, 2018 issue successfully.
Faculty Coordinator: Dr. G.P Girish
In this issue, we bring to you the much talked about TCS Buyback and The Vodafone-Idea Merger
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TCS Buyback What is a buyback? A buyback is a process by which a company repurchases a portion of its shares already issued in the market. It is a very standard mechanism which is followed to increase the Earning per share (EPS) of a company. [EPS=Profit after tax/ Number of Equity shares issued]. So, via buyback the denominator i.e. Number of shares gets reduced and the overall ratio gets higher.
Another popular reason for the buyback is losing the interest of the shareholders in the company. For example, if an investor finds in the financial statements that the cash in hand is very high, it implies that the company has idle cash and not many investment opportunities available with it. In such a case, an investor decides to get back the amount invested in that company and look for other investment avenues. Tata Consultancy Services (TCS) on 6th August 2018 set 18th August 2018 as the record date (the date on which the shareholders listed in the company’s records are eligible to participate in the buyback process). Features of the Buyback: •
The total buyback amount is Rs.16000 crores whereby 7.61 crore shares (representing 1.99% of the paid-up share capital) will be bought back.
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The buyback price is set at Rs.2100 per share.
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The share buyback will be via tender route whereby shares will be bought back in proportion to the shares held by the shareholders.
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In conformity with the legal requirements framed by Securities Exchange Board of India (SEBI), TCS has to reserve 15% of the buyback amount for small shareholders (who hold less than Rs.2,00,000 investment in shares).
Reasons for the Buyback: The decision is in tandem with the intention of the management of TCS to distribute 80 to 100% of the free cash flows to its investors. Free cash flow is the amount of cash which a company can generate after providing for all the capital expenditures. This remaining amount can be either used for expansion plans or dividend payment to the investors.
Not to forget that the current IT Industry is facing severe challenges in the market and the TCS Buyback can be a symbol of losing confidence in the potential of this biggest and oldest IT Company. Impact of the Buyback: • The buyback amount will be in addition to the final dividend amount of Rs.29/share for May 2018. Hence, a total of Rs.27,100 crores will be distributed to the shareholders. • The return on equity (ROE) is likely to improve by 5% for the FY 2019 and the EPS is expected to increase by 2% to Rs.77 for the same financial year. • The market saw a good boost on the announcement day as witnessed by the BSE Price which rose to Rs.1849 (3.16% rise in price) showing good positive intent by the shareholders. • Apart from this, the TCS valuation rose to Rs.7,05,012.80 crores. However, analysts at Motilal Oswal believe that the proposed move will reduce the other incomes of TCS which provide a yield of roughly 8% on the cash asset. The investors are viewing the move as a growth sign and are expecting it to be double digits as experienced over the past two quarters.
By: Bhavesh Gandhi
Italy’s Debt Turmoil There has been a lot of rise and fall in the Italian government bonds that has ultimately made the country's banks queasy. Banks constant struggle with bad loans and debts had made Italy's public debt equivalent to 131.80% of the country's GDP in the year 2017. It is said to be the 3rd largest sovereign debt market in the world with about $2.5 trillion of debts outstanding. Italy’s biggest problem is having too much of government debts.
Many Italian borrowers have been a part of arrear on bank loan repayment, 2/3rd of the bad debts were from real estate and construction sectors which led to increase in unemployment and decrease in economic growth stagnating the demand for new buildings. Also, the country's troubled banking system has led to decrease in Government budget by 2.30% in terms of GDP. At the same time, Italy government found that it was more expensive to fund the country as those who were in debts had riskier investments which were less profitable.
France owns the highest proportion of Italy’s debt worth $311billion, which is almost 12% of France’s GDP. This has made France more vulnerable with regard to the crisis. There have been new reforms, especially in the banking sector to set aside funds to recapitalize week lenders. European Union states are required to submit their annual budgetary plan at the end of the fiscal year. Also the political parties, the Star and League have introduced cuts in taxes and spending plan which will initiate the basic income guaranteed to the underprivileged.
The populist coalition of Lega and Five Star Movement have promised to implement lower taxes, higher public spending and pension reforms. To prevent Italy from losing the value of Euro, President Sergio Mattarella rejected the populist proposed government. It is also being predicted that the fiscal proposal made by the upcoming political parties are expected to blow out Italy’s debt to GDP ratio to 150% compared to the current GDP which is 132% over the next 5 years.
The Italian Treasury is set to sell up to 6 billion euros ($6.94 billion) of bonds across the five-year, seven-year and 10-year maturity.
Effects of Italy’s debt on European Union:
Due to the large pile of Italy’s debt, the European Union has a growing concern between conceptions of local autonomy, national sovereignty, and supernatural authority. It is also being expected that if Europe’s cyclical upturn does not convert to sustainable growth, then the quadruple threats of Italy’s bank, debts, immigration integration backlash, and economic malaise will test the resilience of single currency and of European integration. Europe’s problems tend to reinforce one another. Anemic growth makes it harder to sort out banks’ nonperforming loans, which in turn further impedes growth, fueling public discontent. The country’s debt crisis is so severe that European union had to bail out the borrowing as it became overly expensive.
By: Arushi Vij
The Disorder of the Orderly In the age where a person struggles to earn a crore, banks are reporting losses worth ₨.50,000 Crore during a single quarter. Recovering from the Kingfisher blow of ₨.7000 Crore, an overwhelming ascend towards a ₨.11,000 crore fraud uncovered. Amidst these headlines is there a silver lining? Other than a huge pile of cases in the court and chaos among the nation, these losses could affect the way we bank. Surely there are experiences of rising discomfort when you approach a bank for a loan as extra precautionary measures have been deployed, maybe this stage was just learning the hard way. Banks could also be merged, so tomorrow your banker could be a part of a bigger, better and a much efficient conglomerate which just means upgrading the way you operate and a better sense of security. The government can come to your rescue, well it did with the recapitalization of public banks. But just the way one gets perks and becomes irresponsible the reporting of the losses hasn’t stopped. What would your reaction be when you wake up and read your bank has gone insolvent? Your net worth with that bank has come down to just a lakh. Yes, your hard-earned deposits are just insured towards one lakh no matter what your balance is, that is the price you pay for their mistakes. Sounds quite daunting for an organization whose primary function is to just accept deposits and lend loans. Well, which bank are you going to trust, a private bank?. Headlines such as ‘Chanda Kocchar granted a loan worth ₨.3250 crore to Videocon for her own ulterior motives, Axis bank reports loss in the 4th quarter worth ₨.2189 crore first time since its inception’ don’t give a comforting hug. Then a public bank maybe? ‘IN GOVERNMENT WE TRUST! Don’t we?’ . Think again, according to Moody’s Investor services, India’s public sector banks will need five times more capital than what is budgeted. Here’s the gloomy picture of ₨.3606 crore loss reported by Indian Overseas Bank in its 4th quarter, take a
more known public bank like Canara which is a step ahead with 4th quarter losses worth ₨.4860 crore. Astonishingly the first bank of our great nation The State Bank of India too is reporting losses almost equal to the other two banks combined that is worth Rs 7,718 Crores. Too many figures discussed until now, sounds like a child’s play when you don’t add the 7 zeros following them. The real question is “when will these inefficiencies turn around?”.
The banks which provided an order, a system, and which are the backbone of the entire nation just sound crippled. Hope this dreadful disorder is brought back to order.
By: Aditya J Bhatt
The Effect of ASEAN Trade Pact on India’s Trade Deficit “Regional
Comprehensive Economic Partnership” (RCEP) is a major trade-pact which is being negotiated amongst 10 countries of “Association of South East Asian Nations” (ASEAN) group and 6 other FTA partners South Korea, India, Australia, China, Japan and New Zealand. As per Commerce Ministry of India, country’s trade deficit with seven countries (China, Japan, South Korea, Australia, New Zealand, Indonesia, and Thailand) of RCEP has increased in 2017-18 as compared to its previous year. The trade gap with the remaining three nations, i.e. Malaysia, Lao, and Brunei dipped in 201718. India’s trade deficit of $157 billion in 2017-18 was the highest since 2012-13. Reasons for this are short-term issues caused by the implementation of GST, to longer-term problems like losing the competitive edge in textiles and agricultural exports. The rise in jewelry and gems imports have also led to an increasing trade deficit. The increase in imports was nearly twice as high as export growth in 2017-18, which led to the trade deficit widening by 44 percent, this pushed the current account deficit of 2018-19 to close to 1.9 percent of the GDP. Prime Minister’s big plan to boost ‘Make in India’ through higher import duties has encountered disturbance, with cheap products from overseas being sent into the country by misusing the Free Trade Agreement (FTA) with ASEAN. The idea of ‘Make in India’ was to discourage imports. However, some exporters started using ASEAN countries to send their exports to India to evade higher duties. What has rung alarm bells in the government is the entry of products (mobiles) from China via an ASEAN member country without any substantial value-added tax, in violation of rules of origin. The FTA between India and ASEAN allows import of goods at zero or concessional customs duty from a member-country if reasonable value addition has been carried out there. The rule requires a 35% value-added tax, without which India can deny tax benefits. This is not the first time that misuse of the rule of origin has come to the front. The DRI (Directorate of Revenue Intelligence) has investigated abuse under India-Thailand, India-South Korea, and India-ASEAN Free Trade Agreements.
Therefore, before inking any trade pact further, the government should mull about the widened deficit and take measures to curb it. FTAs should be made in such a way that the imports decline and deficit narrows down.
By: Manognya Patibandla
Growth of Microfinance: Grameen lending to Commercial Business The father of Microfinance, Mohammed Yunus wouldn't have thought about the journey of microfinance since he first introduced this concept of microfinance in villages of Bangladesh. There have been three distinct waves of MFI (Micro Finance Institution) growth and commercialization: • The first wave was when the Grameen Bank lending process mastered the development of the methodology of reaching loans to the poor groups. • The second wave was when MFIs reached economies of scale and sought out methods to morph into commercial organizations. • The third wave was when institutions like L&T finance and Equitas took to microfinance business. Most MFIs have adopted and improvised upon the Grameen Bank methodology which has given them high growth. Most of the early MFIs in India were dependent upon donor and philanthropic funds. Not-for-profit organizations were given these funds from a motive to cater to certain social issues. However as the activities scaled up, these institutions adopted a more commercial approach. Implications of these transformation processes and its effects on the personal enrichment of the promoters of MFIs as well as the governance implications have surfaced now. Also, there was a discussion on the moral and ethical fabric on which some of the large microfinance institutions are built. Key Takeaways: • The rate of interest that MFIs charge are mostly aligned to cater both business profit orientation and social accountability towards poor or microentrepreneurs and deliver efficient services. • Proper governance and regulatory mechanism are put in place and the regulators ensure that unfair MFIs are put to task. • Small loan amount does not threaten the vested interests of local moneylenders as it might not affect the basic fabric of the local economy. • The MBTs (Mutual Benefit Trusts) have two advantages, firstly, the NBFCs could deal with blocks of shareholders (MBTs) instead of individuals. And secondly, the trust deed would ensure that an employee of the NBFC would
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chair the MBTs and participate in the general body of the NBFC as a representative, thereby ensuring complete control over community investment in the NBFC. The founders of MFIs never invested risk capital and borrowed the ideas and models from elsewhere. This is not a strong moral fabric to build a business on when the goal is that of eradicating poverty. If there is a crisis in the microfinance sector it will not affect the poor in a big way. They would lose out on an assured source of lending but will get access to newer and innovative institutions in due time. One category of institutions that are definitely going to suffer if the microfinance market falls are the banks who have aggressively lent to the MFIs and allowed them to leverage public funds (in the form of loans) for generating private profits. There is a tremendous potential for somebody investing in these MFI organizations if they continue to get the valuations that they are getting as of now. In the case of MFIs, it is possible to trace the profits to the poor. If we look at all the large business houses, we find that the promoters are usually there for the long haul and over a period of time even consolidate their holdings by buying back stock from the market. But in the case of microfinance, promoter-managers are keen to get as much out of the business.
By: Shally Bhateja
The Vodafone-Idea Merger On 20th March 2017, Idea and Vodafone announced their merger to create the biggest telecom company in India. The Aditya Birla Group is one of India’s most respected and the largest conglomerate with over 150 years of history. The Vodafone Group is a leader in enterprise mobility internationally and is a global leader in IoT (Internet of Things). Post-merger, the promoters of Idea and Vodafone Group will be the joint promoters of the combined entity. Together they will have a customer base of 400 million, customer market shares of 35% and revenue market share of 41%. Vodafone will be owning 45.1% in the merged entity after giving 4.9% stake to the Aditya Birla Group for Rs. 3874 crores. The Idea Birla Group will be owning 26% of the combined entity and has the right to acquire up to 9.5% additional shareholding from Vodafone Group. If perhaps their shareholdings in the combined company are uneven after four years, Vodafone will sell the stocks in the combined company to equalize its control to that of the Aditya Birla Group over the following five years. Prior to concluding the transaction, Vodafone and Idea have planned to market their standalone assets and Idea's 11.15% share in Indus Towers. Vodafone will also explore tactical options, including the sales due to its 42% stake in Indus Towers. The Parties have agreed upon a standstill period for the first three years after closing, during which neither Party can buy any shares from or sell any shares to a third party. The Aditya Birla Group has the right to purchase shares from Vodafone at Rs. 130 each which represents a premium of 80% to Idea’s undisturbed share price of Rs.72.5 during these 3 years. The Department of Telecommunications has given the final indication to the merger of Vodafone and Idea. The two have consented to pay Rs. 7268 crores. Kumar Mangalam Birla would be the non-executive chairman and Balesh Sharma will lead as the new CEO of the merged enterprise. The merger of Kumar Mangalam Birla-owned Idea Cellular with Vodafone India will not only form a telecom goliath, but also have snowballing implications on the business, benefits, staff, and end users. The merger will push more merger moves in the telecom sector. Bharti Airtel has just purchased Indian resources of
Telenor and Reliance Communication, Aircel, Tata Teleservices and MTS are in talks for the merger. Furthermore, the merger between India’s No. 2 and No. 3 carriers, Vodafone India and Idea Cellular, will lead in an early stabilization of the sector turning the combined entity into the No. 1 player in the Indian Telecom Sector, pushing the present No. 1 Bharti Airtel to No. 2. The consolidated endorser check of the combined element would be about 39 crores, considerably higher than Airtel's 27 crores and Jio's present number of 7.2 crores. It would have an income piece of the pie of almost 40 for every penny contrasted and Airtel's close to 32 for every penny. It would have the most grounded retail impression in the business and also vigorous range possessions.
By: Anish Shroff
The Sashakt Scheme With the banking sector's bad loan problems spiralling to epic proportions, public and private sector bank officials formulated a new framework to deal with this crisis. RBI, on 12th February 2018, issued a circular stating that it would now be mandatory for banks to start the resolution process under IBC for all large accounts that are overdue even by a single day, from September 1, 2018. Project Sashakt, led by Sunil Mehta, chairman of the Punjab National Bank was announced. It is a five-way strategy to deal with non-performing assets (NPAs) through a market-led approach which could stabilize balance sheets in the medium term. An Inter-Creditor Agreement (ICA) has been signed by several banks as part of the Sashakt scheme in relation to loans above Rs 50 crore. The ICA permits the lead lender to formulate the resolution plan. All decisions are to be guided by majority lenders, i.e. those with a 66% share in the aggregate exposure. If any disagreement occurs from a lender, the lead lender has the right but not the obligation to buy-out dissenting lender at a value equal to 85% of the lower liquidation value or resolution value. Parking of stressed assets in an Asset Management Company (AMC) is another important aspect of Sashakt. New AMC (or use of existing asset reconstruction companies like the Asset Reconstruction Company India Ltd) with alternative investment funds (AIFs) are required to be set up by the lenders. An AIF can raise funds from institutional investors, as well as banks, which will be used as an investment in stressed assets acquired by AMCs, and AMCs will use these funds to issue security receipts to banks against bad loans that are to be recovered within 60 days. This will be a market-driven process. Bid for these assets shall be offered by other AMCs/AIFs as well and will have to match the national AMC/ARCIL’s price (treated as floor price). Under Sashakt, NPAs onto the books of the AMC will be immediately transferred by the lenders, and ARCs will have the opportunity to revive the relevant asset.
Details of the plan are as below: • For loans under Rs 50 crores, a resolution plan is to be formulated within 90 days of detection of stress by individual banks. • For assets between Rs 50-500 crores, the lead lender should devise a resolution plan within 180 days. • An AMC structure will be created for assets whose worth is over Rs 500 crore. • Multiple AMCs are likely to be created. • AMCs will appoint industry experts and turn around specialists to help resolve the stressed asset. • ARCs will also be allowed to bid for assets through a transparent auction process. • ARCs could also tie up with AMCs to operate and turn around the asset. • Banks may also push for the creation of a platform for trading assets. On March 31, 2018, bad loans across listed banks stood at over Rs 10 lakh crores. This figure is expected to rise over the coming quarters as cautioned by the Reserve Bank of India in its Financial Stability Report. The RBI also reported that gross NPA ratio of scheduled commercial banks could rise to 12.2 percent by March 2019 from 11.6 percent in March 2018.
By : Priti Goyal
A Way Out of the Current Banking Turmoil The banking system of a country directly impacts the Economy of a country at a large, and if we look at the current banking situation in India we can find that it is in great turmoil.
The Reserve Bank of India (RBI) continuously tries to keep the system up to the mark through its monetary policy and various other regulations. Since past two years both Public sector banks and Private sector banks are facing “N” number of frauds which has ultimately resulted into Rs. 8.41 lakh crore of NPA’s (NON PERFORMING ASSETS).
People might think that NPA’s are only a problem for Public sector banks but in reality, it is not. Both Public Sector Banks & Private Sector Banks are facing these issues. RBI and Government both are working very hard in this direction by taking various steps like amending “BANKING REGULATIONS ACT”, scrapping of loan restructuring schemes, keeping repo rate stagnant, etc. But will it be beneficial in a long run?
People are also talking about Privatization and Mergers of Banks. But again Private sector banks are also facing the same problem and merging two or more banks may solve the problem in short term but in long run it will not.
So, it is not about rules & regulations or mergers or privatization. What our banking system needs is a more transparent and comparatively less regulated environment.
There are lots of banks all over the World who have started using Artificial intelligence, Blockchains and such technologies for greater transparency, efficiency and providing customer-oriented services.
If we look at the current Banks in India then chat bots have already taken their important place in Indian banking system. Thus the only solution for coming out of such issues is to have a more technologically advanced system that would continuously keep a watch on wrong doings. It might not totally remove human factor from the system but may make it more effective and efficient. Banks are forced to fight frauds all the time, if not fought effectively, they can derail the entire system. What we need is a revolution in the Banking System by means of fintech and various technological weapons to reduce the human intervention. And the battle can be won by waging a war using technology to combat losses.
By: Supriya Panse
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