The Financial Bulletin MONEY MATTERS CLUB IBS HYDERABAD
From the Editor Dear Readers,
Established-2005 Editorial Enquiries Money Matters Contact Club Contact No +919948564613, +917842772646 Advisor Dr.S Vijayalaxmi
It gives us the immense pleasure to come up with September Issue of 2013 successfully. We are happy to announce the winner of the “Article of the month” award, Sudip Kumar Kar and Gaurav Mukherjee from TAPMI for their outstanding write-up on “QE TaperingConsequences for Emerging Markets”.
Faculty Co-ordinator Dr..Amlan Ghosh Student Co-ordinator Kanchan Kumar Roy
This issue highlights the flagship event of Money Matters Club,
Editor Saurav K Singh +918187896530
out to be a big platform of fun with finance based games. The theme of
“REDUX 8.0”, which was conducted on 28th August 2013 which turned
the game was “where the crux is to manage your bucks” on Time Value Advertising Contacts Sahil Kakwani +918187896351
HELP DESK
of Money concept. A wide range of articles casing from the Impact of
rupee depreciation
on power sector to Microsoft-Nokia deal. And the Parliament approving For further queries, subscription and advertisement email us: mmcnewsletter1@gmail.com You can login to http:moneymattersclub.weebly.c om/
the Food Security Bill with amendments. This issue also talks about the Land acquisition Bill, that establishes regulations for land acquisition as a part of India’s massive industrialization drive driven by public-private partnership. We have discussed about the most recent fiasco of the National Spot Exchange.
All rights reserved. Money Matters Club, The official Finance Club of IBS Hyderabad. Visit us at for further information.
A
deep
analysis
on
“THE
NSEL
FIASCO:
DEJARGONING THE CRISIS” that gives you the detailed insight of the NSEL and its crisis. As the basic knowledge of finance always comes in handy. The last section deals with such knowledge enhancement. So “Let’s Find.” Happy Reading!
Saurav Kumar Singh 2
Contents Sl. No. 1
Particulars
Page No.
QE Tapering– Consequences for Emerging Market
03
- Gaurav Mukherjee and Sudip Kar, TAPMI
2
Land Acquisition– What can be feasible and pragmatic solution?
06
- Mainak Guha, IIM Kozhikode
3
Impact of Rupee Depreciation on Power Sector
09
- Ajit Singh,, SIBM
4
Football Field– Now in Valuation
5
The NSEL fiasco: Dejargoning the crisis
6
The battle for Food: National Food Security Act 2013
12
- Lokeshwar Sinha, IFMR
16
- Komal Jain, IBS Hyderabad
20
- Shweta, IBS Hyderabad
7
Get-Together : Microsoft-Nokia Deal
8
Making Rational Financial Decisions: Money Matters !!
23
- Praneeth Katta, IBS Hyderabad
25
- Saurav Kumar Singh, IBS Hyderabad
9
REDUX 8.0 : The flagship event of Money Matters Club
27
- Partha Pratim Roy, IBS Hyderabad
10
Let’s Find
29
3
QE Tapering- Consequences for Emerging Markets With the economic slowdown after the financial The question is in which manner it will do so. It will crisis in 2008 a sharp decline in spending was stop buying bonds and as the existing bonds mature witnessed. The Federal Reserve cut the bank rate it will need to roll over the cash.
The Federal
substantially to reduce the risk of inflation falling Reserve should try to release some of its reserves well below target. In other words Central Bank and securities in a gradual manner either by having intervened as a crisis management bank and injected an asymmetric means of releasing excess reserve liquidity in the economy by purchasing Government and sale of securities or it will incrementally buy securities and bonds. As a result the balance sheet of less and less government securities so that bank the bank got impacted. However the Central Bank is reserves gradually fall and as economy grows committed to low and stable inflation and will resort deposit rate grows but incremental deposit will not to tightening if it feels that economy has revived and come as it will be directed to buying of these inflation will go up the desired level. Then it will securities. So either both sides of Central bank’s resort to tapering of bond buying. As the situation balance sheet will be handled simultaneously or only gets normal the Central bank will try to reduce its one side will be handled other being left open to abnormally high existing balance sheet of $3 trillion market. to $ 1-1.5 trillion.
The impact of the QE tapering can be analyzed in two scenarios: Scenario 1: The tapering is done within one year, i.e., the balance sheet of US Federal which has gone up from $ 800 billion to $ 3 trillion over the last 3-4 yrs, rightly so, to handle the crisis so as to move out of a negative GDP growth and reduce unemployment rate, will come down to 1-1.3 trillion by 2014. In this drastic measure with the tapering of bond buying by Federal Reserve the bond price will fall
Source: Federal Reserve
(yield will go up) and hence entice the investors to invest in its own country. Hence they will repatriate 4
their funds through FII withdrawal route. The
easing was always going to happen; only its timing
massive outflow of dollar will cause the domestic
has hit the emerging markets when the economic
currency of emerging markets to depreciate causing
growth is down. Such drastic measures within a
lot of speculations. This will hit badly a country
short term will pull down the recovery and growth
with a substantial current account deficit like India
plans of the emerging markets.
and Turkey. For funding CAD foreign money is
Scenario 2:
required and its outflow will only aggravate the
It is most likely that Federal Reserve will gradually
balance of payment crisis. Nevertheless if the ROE
bring the balance sheet down in a 3-4 yrs time frame
of projects are far better than cost of funds then
only when its GDP has reached a moderate growth
there won’t be massive drain out of foreign
level and unemployment rate has been minimized.
currency. Developing markets where the market is
subdued and the demand growth is muted with The US congress has asked Federal Reserve to projects yielding lower IRR, foreign investors might reduce its monthly bond purchase of $85 billion US. not find any incentive to stop repatriation. If there is If it happens that US Fed buys bonds worth of
$30
demand side constraint of fund rather than cost of -40 billion now (as the Chairman of FED has stated fund then FII’s will withdraw considerable amounts. that he wants to keep bond buying intact) and This will depreciate the domestic currency further releases the money from maturing bonds then it will giving rise to panic. Over the last one and half create an asymmetry in liquidity absorption and months the rupee has gone down by 13 percent from injection. Thereby unwinding will happen in a Rs 53.8 to 61. India’s current account deficit is $ 9 gradual basis. US Fed. Reserve has more than billion a month. Emerging countries can leverage 1
trillion of its securities as mortgage securities
the currency depreciation to bolster its export which it can liquidate if it wishes to do so for QE growth but unfortunately that has not happened in tapering. Yet it has not done so. India because of sluggish industrial growth. The debilitating growth prospects of manufacturing sector has led to loss in confidence of foreign institutional investors who have shifted their sights to countries that offer higher returns such as Japan. The highly volatility in domestic currency witnessed a pull out of $5.6 billion from the debt market in June 2013. Around $1.8 billion also flowed out of equity segment which can be largely attributed to
Source: Federal Reserve
repatriation of FIIs. The unwinding of Quantitative 5
From table below we can infer that it has not reduced its securities in the past 3 months or so and hence is in a go slow mood. If such is the case then by the time it does the QE unwinding and the emerging economies move up the growth ladder will have no impact. The depreciated currency in these countries over the short term will stabilize as growth takes off in the emerging markets.
Though the high currency volatility is a major concern for the Central banks of developing countries in the short run but as the QE unwinding is completed gradually over a period it is expected that foreign funds will flow in given proper investment friendly policies are in place. If the Federal Reserve goes on reducing its balance sheet
GAURAV MUKHERJEE
to normal levels by trimming $2 trillion of bank reserves then this can be lent across the globe in
SUDIP KAR
T.A.PAI MANAGEMENT INSTITUTE
various emerging markets.
6
Land Acquisition: What can be feasible and pragmatic solution “Land acquisition Bill in present form will not evolved over the years: help.” -Naina Lal Kidwai, FICCI President, July 18 2013 . Since time immemorial, India has been a country dominated by agriculture. Even in the today’s era of industrialization, of the total 3,287,240 sq km of land, more than 60% is meant for cultivation. But things changed as the Indian economy opened up in 1990-91. With fast developments, came the needs of requisite infrastructures, educational institutions, industries and SEZs etc. All these prompted land
But the current legislation, implemented in
acquisition that was previously under the garb of
2011,has its share of pros and cons as well. A
cultivation. While on one hand, forcible acquisition
critical analysis of the same has been done in table
of agricultural land robs farmers of their livelihood,
1 (at the end).
taking away forest land disturbs the balance of ecology. Therefore, the question arises “How are we
Let’s now have a look at the main features of the
supposed
LARR, 2011:
to
effectively
industrialization,
allocate
agricultural
land
purposes,
for and
•
infrastructure and for a sustainable and inclusive
purposes for which land can be taken.
growth”. The current ‘Land Acquisition Act of
•
India’ is in no way agreement with India’s policy
compensation for both.
past like Singur, Nandigram, POSCO are still afresh
•
in the memories of people. The research paper tries
market value) and urban areas (at least 2
analysis of the propositions made by some of the for
an
effective
The Bill provides a floor price on acquired land in rural (at least 4 times the
to address this incumbent problem by providing an
researchers
The Bill gives definition for ‘land-owner’ and ‘livelihood loser’ and mandates
and vision of inclusive growth. The incidents in the
eminent
The Bill provides a definition of public
times the market value).
land
•
Acquisition Bill.
The
Bill
also
mandates
additional
entitlements for the landowners and livelihood-losers in terms of additional
Let us now see how the Land Acquisition Acts have 7
•
•
While
subsistence allowance, compensation,
price of the land is to be determined through an
entitlement of job to a family member etc.
auction process and not left to the discretion of the
Land acquisition cannot exceed 5% and
government. Being an auction process by willing
10% respectively of the total multi-cropped
land sellers, it also eliminates the possibility of
and single-cropped area in any district.
forceful usurpation of land. The model also suggests
The Bill demands at least 80% consent for
compensation not only in terms of cash but also
acquisition for private projects (70% for
similar quality and quantity of land for those who
PPP Projects).
are heavily reliant on land. Similarly, economists
this
is
a
step
towards
pragmatic Sebastian
Morris
and
Ajay
Pandey
propose
land-acquisition, researchers have pointed out awarding coupons authorizing rights to land-losers several drawbacks as well. While the Bill is too to any development on that land. But the model also much biased towards land-owners, it bypasses the calls for reduced transaction costs and removal of true
needs
for
housing,
development
and regulatory hassles.
infrastructure. The Bill arbitrarily marks-up the
While having a perfect land acquisition policy is a
floor price without true valuation of land and
utopian concept, several amendments can be
attaches entitlements to potentially huge number of
introduced in the existing Bill. A large section of
claimants and places no cap on the total
economists are still proponents of the view that
compensation or number of claimants. While the
safeguarding the rights and interest of the farmers is
Bill does not limit forceful usurpation of land, it
more important than industrial development, given
does heavily restrict free market transaction of land
the view of the food-security and that agriculture
between willing buyers and sellers. Also, the
still provides employment to over 60% of the
definition of public purpose as provided is too broad
population.
and is still at the mercy of bureaucracy.
While
the
whole
land-acquisition
procedure can be supervised by a representative
However, researchers have suggested alternatives committee comprising public-figures and socialand amendments to the above Bill. Researcher reformers, the role of Gram Sabhas has to be made Sujata Marjit suggests that the land-losers may have broader. Their role has to be lifted from consultation a claim on the future value of the land lost. Hence, to being a part of the decision-makers. Most of the the government, acting as a legal tax-authority, may land valuation is made according to what was done charge a portion of the increased market price and decades ago. The land price has to be fixed as per distribute the same among the legal land-losers in the current market price and in addition to the the form of annual payments. Economists Maitreesh entitlements to the land-losers, a scheme of pension Ghatak and Parikshit Ghosh have, alternatively, for land-losers may help them restore themselves. provided an auction based model where the transfer 8
Land acquisition should not be permitted in tribal areas to preserve their culture, language and life of community. And finally, as proposed earlier, diversity in compensation offered may be brought in (cash versus non-cash settlement). It can well be reiterated, acquisition of land for large projects may not be feasible if the Bill stays in the current form and gets enacted into law. TABLE:
MAINAK GUHA IIM KOZHIKODE
9
IMPACT OF RUPEE DEPRICIATION ON POWER SECTOR
•
In the last 3 months, rupee has depreciated by
Most of the power equipment is imported from China and South Korea
approximately 14.3% against the USD. This depreciation was unexpected and took the market
3. Higher cost of imported raw materials:
participants by surprise. This depreciation of the rupee will impact Indian industry in several ways. In
•
Coal prices- Around 20 per cent of the
this article, I will analyze the impact of rupee
demand of coal required for power plants are
depreciation on the power sector.
met through imports.
Growth in Indian economy is impossible without •
growth in the power sector. The twelfth five year
Thermal plants may face the crunch of higher
plan (April 2012- March 2017) has plans to add an
import cost of ferrous metals and petroleum
additional generation capacity of 76000 MW. To put
products.
it in perspective, India currently has an installed
Now that we know the basic impact of rupee
capacity of 193000 MW. Thus, huge growth is
depreciation on the sector, let us take a look at some
expected in the sector in coming years. Now, let us
companies in the sector. We will try to analyze the
look at the impact of rupee depreciation on the
impact on the companies and take a look at their
sector and how it might hamper government’s
stock returns vis-à-vis USD-INR to see how the
targets. First, we look at the power sector as a whole
market reacted.
and then we will look into specific companies in the 1.
sector.
NTPC:
Due to rupee depreciation, Indian power sector will The company has a foreign currency debt of $3 be impacted in three main ways:billion. It is approximately 30% of company’s total debt. The company has never hedged any of its
1. Higher interest outgo due to ECBs:
foreign currency positions. In a recent interview to •
•
2.
Due to lower interest rates abroad, several
ET, they told that they have no plans to hedge in the
loans were taken in foreign currency
future as well. They are hedging just a small loan to test what hedging is all about. The company has an
Most of the loans were not hedged properly.
advantage that it can pass the higher costs to consumers. The Central Electricity Regulatory
Higher cost of imported equipment:
Commission (CERC) allows NTPC to fully recover
10
Reliance Power had bagged this project in 2007 in a
any increase in cost. Also, the company plans to
global tender quoting the lowest 'levelised' tariff of
import 16 million tonnes of coal in FY 2013-14 and
Rs 1.19 per unit for 25 years. They are currently in
source 145 million tonnes of domestic coal. There-
talks with the regulator, CERC to reconsider the
fore, its total share of imported coal is 10% only.
price of the bid in lieu of the recent depreciation of rupee. As far as coal is concerned, almost all the coal requirements for Reliance Power are to be met through domestic coal only. One UMPP- Krishnapatnam, will be using imported coal. But, the company has bought coal mines in Indonesia to meet that need.
As seen in the graph above, NTPC was affected by rupee depreciation. In the last three months, rupee has depreciated by 14.3% and the stock price of NTPC has come down by 13.52%. It clearly indicates that the market believes that NTPC will be adversely affected.
2. Reliance Power: The company has one of the highest foreign currency exposures. The company has secured It is evident from the graph above that Reliance
loans of Rs 14255 Crores in foreign currency out of
Power didn’t come down much w.r.t. rupee
a total loan of Rs 23926 Crores i.e. around 60%
depreciation. In the last 3 months, the price of the
(As of 31st March 2013, Source: Data from annual
stock has come down by only 2.11% w.r.t. a
report). But, the company has hedged most of its
depreciation of 14.3% in rupee. Therefore, it is clear
foreign currency risk with only a small proportion
that the market believes that the company will be
being non-hedged. The management has been
able to tide over the depreciation of rupee. In short,
prudent enough to hedge the risk unlike NTPC.
the management has done their job of hedging the But, they are facing some issues in Sasan UMPP.
risk properly.
11
Tata Power stock has fallen by almost 17%
3. Tata Power:
vis-Ă -vis a fall of 14.3% in INR vs USD. This Although, they hedge their foreign exchange
implies that the market believes that Tata Power
exposure, they have not hedged their positions fully.
has exposure to rupee depreciation as concluded in
They have huge exposure that is not hedged. They
our qualitative analysis given above.
have around Rs 6900 crores of unhedged exposure (As of 31st March 2013, Source: Annual Report of Tata Power). In my opinion, it is not a good strategy to hedge partial exposures and investors usually prefer companies which hedge either complete exposure or don’t hedge at all. Apart from this, their Mundra UMPP is also facing severe problems due to rupee depreciation. It has a foreign currency loan of $1.7 billion and it is possible that a huge chunk of it is unhedged. It is
AJIT SINGH SIBM PUNE
importing coal from Indonesia for its project. With the depreciation of rupee, cost of coal will increase. According to Deepak Parekh committee, with the depreciation of Rupee, the project is unviable. Indian banks have stopped disbursal of loans due to perceived unviability of the project. This is a huge deterrent to the company.
12
FOOTBALL FIELD: NOW IN VALUATION “If business schools could offer just one course, it In general, a football field will show that the would not be on stock trading, the efficient market valuation range from comparable company analysis hypothesis or modern portfolio theory. Rather, is lower than that of comparable transaction analysis B-schools should be encouraging students to learn because a control premium is including the the boring, but critically important, discipline of comparable transaction analysis. However, this is not always the case especially when there has not
business valuation.”-Warren Buffett.
been any M&A activity in the industry for a long
Introduction
time. A DCF analysis normally creates a valuation
A company can be valued according to different range that is similar to the range for a comparable methodologies like Discounted Cash Flow (DCF) company analysis. Typically, a company’s current model,
Enterprise
value
Multiples
(e.g. acquisition value falls above the overlapping ranges
EV/EBITDA), 52 weeks high/low stock price levels given by the comparable company analysis and the of the company etc. Once various valuation analyses DCF analysis. This is because an acquirer should have been performed, it is important to evaluate the pay a control premium, which is not included in valuation ranges derived from various methods and either of the above valuation methods. A Leveraged use that information to triangulate a valuation range Buyout (LBO) analysis generally provides a floor for
the
company.
Investment
bankers
often value for a company, as it represents a price that a
summarize the result by creating a page called financial buyer would be willing to pay, based on “football field” to graphically depict the valuation their required internal rate of return (IRR). Generranges derived using different methods of valuation. ally, strategic buyers pay more than the financial A “football field”, so named for its resemblance to a buyers, since they can take the advantage of synerU.S football playing field, is a summary which gies with their own company. But, if the market enables bankers to establish a valuation range for a allows high leverage (as was the case from 2006 company that is the subject of a merger and acquisi- tomid-2007), which results into higher IRRs, or if tion (M&A) transaction. For public companies, the there are specific operating strategies that a financial football field also includes the target’s 52-week buyer brings to the transaction, then it is possible for trading range in line with the precedent transactions financial buyers to surpass strategic buyers, despite in the specified sector (e.g. 30-40%).
the lack of synergy benefits. If there are multiple lines of businesses within a company, then a
Getting into a Football Field
break-up analysis can be included in the football 13
field. Depending on the industry and the company,
LBO valuation was completed, which shows a
other valuation methodologies can also be included
valuation range of $39 to $45, based on an assumed
in the summary.
20% IRR requirement. A break-up analysis was completed, because there are several different
Understanding with an Example -
business lines run by the company, and the An example of football field can be found below –
valuation range based on this analysis is $41 to $51, which is the widest range due to uncertainty regarding different business line values. Based on this football field, investment bankers might determine that the appropriate triangulated value for the target company is $50 (which might be expressed as a range of $48 to $52. Analysis &Interpretations The comparable company analysis range is generally in line with the DCF analysis range, which means that, currently, investors are properly
In the above figure, the current stock price of $40
valuing the company in the public markets relative
is within the comparable company analysis range
to its intrinsic value. The breakup analysis range in
of $36 to $44. The comparable company analysis
Figure 1.1 is wider than some of the other methods.
range is less than the comparable transaction
This is not uncommon because there is less
analysis range of $42 to $51. This is generally
certainty in the values of several component pieces
expected since comparable transaction multiples
compared to a single company because there is
include a control premium whereas trading
execution risk involved with each of the individuals
comparable (from comparable company analysis)
sale transactions and also because there may be
do not. A DCF analysis might show a valuation
uncertainty as to the range of values for some of the
range of $38 to $45, unless synergies are added,
component pieces.
where the range might increase to $43 to $50, assuming cost synergies of $5.In this football field,
If the company in Figure above were for sale and a
it is inferred that financial buyers might be inter-
buyer were to offer $50 per share, the offer is likely
ested in the target company based on the its strong
to be considered “fair” from a financial point of
cash flow, low leverage, and small capital
view as –
expenditure requirements, and so an LBO
1. $50 represents a $10 per share or 25% premium 14
to the current share price of $40. 2. $50 is on the high end of the comparable transaction analysis range of $42 to $51. 3. $50 is greater by $5 per share than the high end of the DCF analysis or “intrinsic” value range of $38 to $45.
This means that, assuming markets were to properly value this company based on a DCF valuation, the highest value a public investor should be willing to pay for a non-controlling interest is $45 per share. If the financial buyer were Applications
to offer $50 per share, the offer price would exceed the standalone intrinsic value of the company. The
•
only reason a potential buyer should be willing to
It helps to graphically depict the valuation ranges
pay $50 per share for a company that is, at most
derived
using
different
valuation
methods.
worth $45 on a standalone basis is because the
•
potential buyer can create more than $5 per share
This approach also helps in using one method to “sanitize” the other!
of synergy value.
•
A football field summarizes the various metrics
If, in this example, the DCF analysis range were
and assumptions used to determine the valuation
$46 to $53, as shown in Figure below, as opposed
of a company.
to $38 to $45 as shown in Figure above, the target company might not want to accept an offer of $50 Conclusion
per share. If the company believes in the integrity of its strategic plan and its projections, it might not
Companies
want to try and realize its strategic plan and then
are
generally
valued
using
a
combination of multiples and future cash flows,
allow time for the market to reward it with a higher
and each of which can be taken in a best, worst and
stock price. Assuming, the market ultimately does
median case scenario. For example with DCF, it
recognize the intrinsic value of the company; it is
can be assumed that the company will have
possible that this company could be worth more in
a terminal growth rate of x%, x+1% or x-1% which
the public markets than the $50 per share offered
would give three different final values. Thus, the
by the buyer.
DCF method will give a range of values for the 15
company being valued. This applies to all valuation methods. The football field graph shows the different mean valuations and multiples for the different methodologies and allows the person conducting the valuation to decide which method to use primarily to achieve the best possible valuation. Straight away an investment banker can see the share price given by the average of all of the valuation methods and argue its range of valuation. The valuation range is finally tested and analysed within the context of merger consequence analysis in order to determine the ultimate bid price.
Lokeshwar Sinha IFMR, Chennai, PGDM – Financial Engineering, Batch 2012-14.
16
THE NSEL FIASCO: DEJARGONING THE CRISIS Mr. Ramesh Abhishek, Chairman of Forward Are there any other spot exchange existing in Markets Commission pointed out that “There is a
India?
regulatory vacuum with respect of spot exchanges.
Yes, in June 2007, the Government of India
Three spot exchanges were exempted by the
granted three entities - NSEL, NCDEX Spot and
government under Section 27 of FCRA to conduct
R-Next approval to set-up spot exchanges.
forward trading in one day contracts. This was done
Who regulates the Spot Exchange market in
to boost volumes so that their economic viability
India?
improved. However there were many conditions also
The Department of Consumers Affairs (DCA)
like they cannot do short selling etc and we were
appointed Forward Markets Commission (FMC) as
seeking information about their trades and as
the designated regulator of Spot Exchanges in India
required we are advising the government.”
in February 2012.
What has happened with NSEL has taken away the
lifetime savings of around 13,000 investors along What
is
the
role
of
Forward
Markets
with two PSUs banks and 175 brokers who are still Commission? running pillar to post to recover their hard earned FMC keeps an eye on the trading and speculation money, but much to their dismay, they are still market under its parent agency, the Ministry of Finance.
unsure whether they will ever recover it or not.
The
present
chairman
of
FMC
is
NSEL was managed by a group which operates nine Mr. Ramesh Abhishek since 24th September 2012. exchanges across the world and ironically, the word As per the provisions of FCRA, all the spot contracts “Exchange” connotes trust and confidence, in the should
be ready contracts
which
mean
the
mind of investors. This exchange was recognised by transactions should be settled within 11 days, which is also known as T+10 contracts in trade parlance.
the Ministry of Consumer Affairs. However, let us understand what had happened in
What led to the Crisis?
NSEL from the very beginning.
NSEL had several contracts which exceeded 11
First of all, what are spot exchanges?
days and some even worked for T+25 and T+35 day
They are the electronic version of the Mandis, which
settlement cycle which as per the FMC is not
existed earlier, where buyers and sellers would meet
permitted.
to exchange goods with money.
FMC also found that NSEL was engaged in short-
17
selling, i.e., where contracts were sold without What happens to the underlying commodity in actually owning the underlying the commodity.
the contract? The underlying commodity is needed to be
Hence, the regulator, FMC, sent the notice to the
physically delivered but NSEL facilitated the use of
stock exchange asking them to immediately reduce
electronic warehouse receipts so as to enable the
the settlement period and convert all its existing
arbitrage opportunity to the investors without taking
contracts to “trade-for-trade� basis which means
the physical possession of goods.
that every trade has to be settled the same day and
could not be extended. The exchange immediately Did NSEL try to stop the above transactions? followed the orders of FMC.
No, in fact NSEL encouraged this type of transaction, for instance, one of the contract
But the news triggered panic amongst investors,
specifications said that “Storage charges would be
traders and hence many of them wanted to close
waived off for those members and their constituents
down their positions immediately and hence
who sell on JEERANJ25 out of the delivery position
exchange had to defer all the settlements.
again the purchase option of JEERANJ5.
Hence, the panic resulted in a payment crisis which
This meant that the contracts would be rolled over
amounted to Rs. 5600 crore.
and refinanced and as an incentive to this, the Pictorial Representation of the Crisis
storage charges of trader would be waived off. What did the government do? On 1 August 2013 National Spot Exchange (NSEL) suspended trading of all contracts, other than e-Series. Later on 5 August 2013 National Spot Exchange (NSEL) suspended the trading of E-series contracts also leading to the complete shutdown of the exchange. What were the implications of the decision to suspend all the contracts? Since the government was noticing what was happening and with the fact that the speculation that was taking place in the NSEL would merely harm the economy, asked NSEL to stop launching new contracts. 18
NSEL respecting the decision stopped launching
But many of the above parties are also exposed to
new positions and also asked its members to settle
some other market segments there may emerge the
all the future contracts within 11 days and to deal in
chances of Ripple Effect. Also the big investors of
trade-to-trade basis.
stock market have also invested their money in
Hence, as a result people who were earning by mere
NSEL, hence there is a speculation that the crisis in
speculating lost their interest in spot trading and
NSEL may also spread to stock market.
demanded settlement of their positions from the
Even the stocks of the Multi Commodity
traders, which they failed to honour, and hence,
Exchange (MCX) fall. Are the traders on this
there was a payment crisis.
exchange also vulnerable to the risks? Since MCX also operates in commodities trading,
Why was there a need a sudden suspension?
The directive was to close the contracts and settle this event could lead to tighter security and scrutiny them on July 31st but NSEL cited “Grave later. However, there is no direct connection Emergency” and market disequilibrium deferring the between MCX and NSEL but that they share settlement period by 15 days. Later the repayment Financial Technologies as their promoter. period was extended to 20 weeks, where they would
What about the future of the NSEL crisis and
repay their traders at the rate of 5% per week of the
also what is the way forward for these
total amount for 20 weeks.
exchanges? It is said that government is coming up with new
What is the reason behind the delay in
regulation to govern these spot exchanges and to
repayment?
plug their loopholes.
It is feared that the underlying asset of the contract is
Till they don’t come with a better regulation, NSEL
insufficient to cover the extent of the liabilities,
may not be allowed to launch any further contracts.
though the exchange claims to have stocks worth Rs. 6,200 crore, but an independent analysis shows
Also the structure of the now suspended contracts
there are strong chances of shortfalls.
may change depending on the new regulation.
Media persons from the one of the India’s leading
Meanwhile, the brokers exposed to NSEL are being
journal Business Standard visited the godowns of
asked about the details to the contracts they are
NSEL giving unsatisfactory results.
exposed to. Now to stop such further crisis, SEBI has to take a
Who are parties affected?
leadership position as the FMC are not authorised of
All the parties exposed to the exchange like brokers,
such powers yet.
high net worth individuals and also the companies.
However, a panel, headed by Arwind Mayaram, the “Mayaram Committee” has taken up the matter and 19
has pointed out certain minor functioning error at the exchange based on the findings of the two working groups-Reserve Bank and Enforcement Directorate.
KOMAL JAIN Batch of 2014 IBS HYDERABAD
20
THE BATTLE FOR FOOD: NATIONAL FOOD SECURITY ACT 2013 After facing a number of hurdles for over two years, is entitled to free meals during pregnancy and six the Food security bill finally gets the Presidential months
after
child
birth,
through
the
local
assent and becomes an Act. Food security bill comes anganwadi, apart from maternity benefit of not less in with objective of providing cheap food grain to than Rs.6,000 in
installments. Government plans
almost 67% of Indian population and eradicate to execute this by setting up starvation and poverty from the society. Subsidies Distribution System (TPDS) for
Targeted Public priority sector
have always accounted for a major part of the households. Will this move really help eradicate government expenditure in India and food subsidy is hunger is what is to be seen in the near future. no exception. The present food security bill is
According to the recent report of United Nations
nothing new but an extension of already existing
Development Programme (UNDP) India’s HDI
food subsidies.
(Human
development index) is at 0.554, and
For the very reason that this bill targets at 67% of ranks India at 136 of the 186 countries considered. India’s population i.e.
approximately 1.24 bil- It states that almost half the children under the age
lion people this bill has become the talk of the town. of 5 are mal nourished and more than thirds of The 67% will
include 75% rural and 50% urban people in the age bracket of 15 to 50 years are
population .The bill claims to provide total of five undernourished. India has a long way to go in kilograms of
subsidized rice, wheat and coarse improving its HDI ranking and moving on the path
grains a month at a price much cheaper than the of real
development and the first step towards it is
market price to the poor section of the society and providing nourishment, education and
infrastruc-
households covered under “Antyodaya Anna Yo- ture. Looking at it from an economic point of view, jana” are
entitled to thirty five kilograms of food NFSB will act as a boost to the sluggish economy.
grains. Every pregnant woman and lactating mother
21
The disposable income of people will increase as NFSB also lacks focus on the remedies to the root they would be spending less on food grains (the cause of malnutrition i.e. access to clean water, present expenditure on food grains is higher in both sanitation facilities and health education. rural and urban areas). This saved income would
The coverage of NFSB varies with region and is
bring in an increase in the demand of other products thereby
going to be higher in more populous states that have
increasing the aggregate demand and
higher poverty rates too. There are many states
production level will increase.
which presently have well functioning PDS and have
Therefore the economy will face better participation
either quasi universal or universal coverage when it
rate in terms of workers, which will push the
comes to providing food to its people. These include
economy towards the path of growth, employment
Tamil Nadu, Andhra Pradesh, West Bengal, Kerala,
and improve the living standard of people too. With
Himachal Pradesh, and the likes. Over centralization
the increase in the amount of food grains to be
of PDS under the bill will hamper the status of these
supplied, the warehouse storage cost would decrease
states. Further urbanized states would also be at a
as the grains would be distributed rather than rot in
loss as the bill covers 50% of the urban population.
the warehouse. But the other side of the coin depicts an
According to a report out of the current population
entirely
covered under the TPDS , 46% will be strictly better
different picture. Firstly this move of the govern-
off, 14% will be equally better off and 40% will be
ment is being criticized as more of a political budge
strictly worse off.
rather than a step towards poverty and hunger elimination as the government has announced it ahead of the federal polls of 2014. government, the expenditure
According to the incurred on NFSB
will be around 1,25,000 crore , 1% of GDP. As a percentage of major subsidies, food subsidy accounts for 40.73 percent (2013-14) which higher than the previous years but still lower than that of 2007-08 (47.01%). The present fiscal deficit is put at 4.8% which is higher than the sustainable level of 3%, NFSB will further worsen the deficit of the country. Moreover though the prices of the food grains would be low for the poor, there would be a drastic rise in the free market price impacting the lower and middle-middle class population. The 22
Adding to this, the identification of the target population would be a major cause of concern. As the central government deems it fit that the states/UTs should select the eligible households by framing their own criteria. With the existing level of corruption in the distribution system and the country on a large, creating fake identities and leakages from the warehouses are unavoidable. Under such state of affairs people other than the target population would SHWETA
also be benefitted giving a false increase in the number of target mouths fed.
Batch of 2014 IBS HYDERABAD
A critical study of the National Food Security Act leaves us with the thought, “The battle for the right to food is far from over- Jean Dreze�
23
GET-TOGETHER: MICROSOFT AND NOKIA A time in history where two giants in their own to introduce Smartphone’s with Symbian series 60 domain come together may be for a better tomorrow, devices to the customers in 2002, but failed to one dominated the mobile technology and the other capitalize and maintain the leadership position in the software and Personal Computers arena.
industry.
Nokia – Over 150 years it has evolved from being Everything changed in 2007, when apple launched just a paper mill to global telecommunication leader, its first ‘Apple i-Phone’ with touch screen facility adapting themselves to the changing times and and app based operating system, which redefined the technologies with consistent innovation and agility. way Smartphone ought to be. The Finnish magic machine put the Finns on a Nokia dint upgrade, but continued with the age old global platform for decades and played a major role Symbian OS system. As time passed, new versions to bring them out of the slump in 1990. It has of iOS and invention of Android devices (Samsung become the identity of Finns.
Galaxy Series) captured the market share of Nokia.
Microsoft – (Start): A corporation we would all be In emerging economies like India and China, other thankful for. It changed the way we perceive the manufacturers like HTC, Huawei and ZTE attacked world, changing and bringing the paradigm shifts in Nokia in the lower end. a way we conduct our operations, activities and
One of major drawback of Nokia is timing, it did not
businesses. Though Microsoft has begun small, it
act in accordance with time and was left behind in
had a huge vision, reminding us not to despise the
the industry in which it was leading.
small beginnings. For more than 30 years it has been continuously
delivering
the
innovation
Finally fighting to survive in the manufacturing
and
business of the mobiles and striving for market share
technology at our doorstep and upgrading our
and profits.
Windows to view larger and a better world.
Better Late than Never:
Change:
Finally Nokia left the Symbian OS for Windows 8
One thing is inevitable, i.e. change, some say it is
and launched the Lumia Series to compete with
good, to others it may be bitter. Well to Nokia things
Samsung
changed from better to bitter.
and
Apple
Phone
makers
in
the
Smartphone industry space.
Though being a pioneer in the mobile handset
Being a leader in Operating system and dominating
industry it failed to adapt itself to the changing
the PC arena, Microsoft had not been able to
trends of the industry. Nokia was the first company 24
leverage its position to grab the market in the mobile
patents” in the wireless industry. In a law suit
handset space. Being a leader in Operating system
filed against Apple on account of violation of 46
and dominating the PC arena, Microsoft had not
Nokia’s patents, Apple pays $600 million every
been able to leverage its position to grab the market
year in patent related revenue.
in the mobile handset space.
•
Let’s play together to get pay:
Microsoft has not bought these patents, but it has licensed them for 10 years giving it a space to
Nokia got better off by selling its mobile handset
reign that other phone rivals don’t have.
business to Microsoft and entering into a patent agreement deal worth $7.2 bn. Looking at the
•
Nokia’s declining state, the deal was an attempt to
Nokia spent lavishly on R&D, last year alone it has spent $5 bn. Microsoft can use the R&D
scale up the business and gain the market share.
resource and employees to innovate and compete
On the other hand, Microsoft has less than 4% of the
with its rivals.
market share in the global Smartphone market; it has potentially more to gain than to lose. The deal could make both Nokia and Microsoft •
Microsoft can leverage Skype, its own dominant better by innovating and providing the world better voice-over-Internet service provider by pushing platforms to use and change the way the business it across its devices by integrating it with and day to day operations are done. windows8 OS, through which it can compete with conventional cellular carriers on voice and text
services which has huge potential for
growth. This provides an edge to Microsoft as Skype is
dominantly used compared to
Google hangouts and other Service providers. •
As Microsoft dominates the PC space and through the deal it has mobile handset division, it can integrate both of them and provide a seamless experience to the customers by using PRANEETH KATTA
Skype and other app-based services.
Batch of 2015 •
Nokia has retained some of its most of its
IBS HYDERABAD
fundamental and important patents called “utility 25
MAKING RATIONAL FINANCIAL DECISIONS: Money Matters !! Growing our wealth involves changing the way we aspirations. Do you still want to buy brands? deal with money. It means accepting that we could be the victim of inefficient money management due Keep only one credit card and that too with a to emotions and preconceived notions, and being lower limit: prepared to address these flaws.
Having a credit card constantly offers the temptation
Here are some money management rules that will to spend due to ‘easy availability’ of money. But, in help to take control of our finances:
present times, a credit card is a must because of the convenience and safety features. One way to reduce spending through credit card is to have a low spend-
Handling “Surprise” Money sensibly:
When you receive ‘surprise’ money such as an ing limit. Set the limit based on your budget. inheritance or a tax refund or a bonus from your employer, don’t spend it right away. Instead, place it Bargain: in a cash/liquid fund or bank deposit. Tell yourself Keep a look out for discounts offers, sales etc. These that this money will be available to you in couple of are announced in daily publications. While planning months. By the time this happens, you would a purchase, check out the current prices. If the consider this money as a saving not to be spent purchase can wait and a festival is round the corner, carelessly. Another way to avoid spending is by wait for festive discounts/offers when you can but at asking, “ How long would it take me to earn this the lowest price. money?” You will immediately assign a higher value to the money.
Diversify: You should spread your investments across different investment options within an investment category
Brand does not mean better:
Do you know that brands like Nike don’t and across investment categories. This way, the manufacture their own shoes? They get their chances of facing loss in overall investment portfolio products manufactured from small companies on comes down. Korea, China etc. All they do is brand the products as ‘Nike’. You can buy the same pair of shoes Account for Inflation: without the Nike brand name for about 1/10th of the Inflation has two effects on your money. It eats into price. Most brands follow this, that is they don’t
Your investing earnings and it increases your cost
manufacture. All brands do is encash one’s 26
of living. While you cannot do much about your
markets closed for a year or two.” Research has
cost of living moving up, you do have control over
validated that those investors who don’t follow the
your investment returns.
market too closely, fare much better with their investments.
Don’t fall in love with your investments: Your investments are simply investments. Don’t attach emotions to them. Treat them objectively. If you have to sell, sell. There is no love lost– only money gained. Always analyze the situation of the industry, the investment is part of, even if your grandfather was holding the same and passed on to you.
SAURAV KUMAR SINGH
Don’t be overconfident:
Batch of 2015
People tend to believe that they have superior
IBS HYDERABAD
knowledge and investment skills. This results in making bad investment decisions. Unfortunately, when a mistake is committed, people tend to get over that very quickly by explaining the loss to circumstances beyond their control, and continue to exercise their ‘superior’ knowledge and investment skills. Its always better to add risk to the expected return. If the risk is commensurate with the discounted loss and gain scenarios and it still make sense, then go ahead with the investment.
Don’t watch the market too closely: Warren Buffet made a statement, “ After we buy a stock, consequently, we would not be disturbed if
27
REDUX 8.0 The Money Matters club organized its flagship event
On
for this year ‘Redux 8.0’ on 28th August 2013 in the
registration started at 6:30pm and was closed by
seminar hall of IBS, Hyderabad campus. The event
6:45pm. The game started with clubbing 3 people
was conducted by the newly recruited members of
in a team. In the process 13 teams were formed.
st
the scheduled date, i.e. 28th August’2013, the
1 year. Our club believes in learning finance in a
After team formation a brief introduction about the
fun way and so was our event Redux 8.0. The theme
game and different rounds was communicated to
of the event was ‘Where the crux is to manage your
the participants. The game began with its first
bucks’. It was basically a finance game based on
round which was named ‘GET SET GO!!!’ in
Time Value of Money concepts where one ability to
which some puzzles, based on concepts of finance,
manage his money through the course of his life was
were kept in the form of coloured balls on a table at
tested. The marketing for the event started a week
the centre of the hall, answering these puzzles the
before the scheduled date of Redux 8.0. The
teams could earn some amount of virtual cash. The
marketing team created poster, banners and videos
puzzles were arranged in three zones based on their
for promotion on social media and classrooms. They
difficulty
also prepared eye catching artistic models, one of
corresponded to virtual cash linked to the puzzles,
them was a money generating clock depicting the
i.e.
time value of money theme. The efforts of marketing
Cash-Rs7000/-), Yellow Zone (Difficulty-Medium,
team were appreciated a lot and they achieved their
Virtual Cash-Rs.3000) and Green Zone (Difficulty-
goal as well i.e. to draw a lot of attention and as a
Low, Virtual Cash-Rs.3000). Participants could
result a large number of participants came to play
pick up puzzles from any zone, answer it and earn
the event.
virtual cash. This was only a warm-up round so
-
level.
Red
The
Zone
difficulty
level
(Difficulty-High,
also
Virtual
there were no eliminations but if any team could earn more than Rs.15000 they would get an advantage in the 2nd round of the game. The 2nd round was named “RUN FOR MONEY”; it was treasure-hunt game based upon the concept of time value of money. In this round all the teams were handed over a set of 5 questions which were to be answered in 10 minutes, in addition to that the time
28
advantage earned in the 1st round i.e.-{(Total virtual cash earned-15000)/1000}minutes. But none of the teams could earn above Rs. 15000 and hence all were on the same level. In this round each of the five questions were attached to an asset whose initial price was mentioned in front of the respective question and the price of the asset was appreciating @1% in every 10seconds as soon as the round started. As this was an elimination round all teams gave in their best. Only 5 teams qualified for the 3rd round. The last round was called “THE JOURNEY OF LIFE” which was related to how an individual throughout his course of life can invest his money in the best options available to get the maximum benefit. The Round featured a story about a person, Chatur Singh, who wanted to do MBA and takes a loan from one of the three banks given which had different rates of interest and payback periods. In the next level each team had to invest the money given by Chatur’s father into any of the given options, i.e. - commodities market, land investment, fixed deposits, and earns the maximum benefit after a course of 4 years. This being the final round, team members had to choose out of the best available options so that they had maximum liquefied cash at the end of the round. The team with the maximum liquefied amount of cash was declared as the winner. PARTHA PRATIM ROY IBS HYDERABAD
29
Let’s Find ! 1. Which company’s ticker symbol on the NYSE is “C”? 2. On March 18, 1852, in New York City, two persons and others signed articles of association for a joint stock company to do a banking and express business in distant California. Rushing for gold and silver in the West, overland by pony and stagecoach, coming through for miners, merchants, farmers and ranchers, building on the frontier, offering “Ocean-to-Ocean” service by 1888, X. grew with the nation and is part of American History. Identify x. 3. Economic historians usually attribute the start of the Great Depression to the sudden collapse of US stock market prices on October 29, 1929. This day is known as……..
devastating
4. Name the first Indian woman CEO of a Foreign Bank. 5. Who is known as the “orcale of omaha”? And his famous quote is "Rule No.1: Never loss money, Rule No.2: Never forget the Rule No.1". 6. In India where is the Paper for the currency manufactured? 7. Which is the only country having paper currency and have no coins and it introduced cheque only in 1997? 8. This international organization of central banks fosters international monetary and financial cooperation and serves as a bank for central banks. It is responsible for framing the famous BASEL norms. 9. Parent company of Standard & poors? 10. It traces its history to the 1850s, when four Gujarati and one Parsi stockbroker would gather under banyan trees in front of Mumbai's Town Hall. The location of these meetings changed many times, as the number of brokers constantly increased. The group eventually moved to its current place in 1874 and in 1875 became an official organization known as 'The Native Share & Stock Brokers Association'. What?
Answers will be available in October issue. Kindly write us your answers on our email-id. August Issue : Quiz Answers 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
CASHFLOW DEPRECIATION BASEL ARBITRAGE CALLABLE HYPOTHECTAION INDENTURE LIQUIDITY ROLLOVER CYCLICAL 30