Niveshak February 2021 Issue

Issue VI - Volume XIV

EDITOR'S NOTE Qui n’avance pas recule

Dear Niveshaks, We are delighted to bring to you the February 2021 edition of Niveshak. This is also the special edition dedicated to the Union Budget. With huge expectations from the budget, it can be said that this was a pathbreaking budget that did almost everything asked of it. On the COVID front, vaccination has progressed rapidly, but the concern of second wave is here as well. Indian markets have risen to record highs, with Sensex hitting 52k and Nifty hitting 15k milestones on the back of the Budget, giving a boost to assetcreating investment and going out of its way to bring back economic growth. What did this budget mean for the broader economy? What are the specifics that mattered for industries? These are the two questions that this edition’s “Cover Story” answers.

TEAM NIVESHAK Harichandana Aritro Datta Hulash Goyal Arushi Mathran Ishan Pandey Hardik Goyal Megha Rekhani Manish Kumar Mehak Nihar Mehta Shivangi Pratyush Kumar Siddhant Saha Rakesh M K Tushar Gera Sandhaan Goyal Vignaesh S Vasundhara Misra

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In the “FinView” section, we bring you the views of Gautam Trivedi (Cofounder & Managing Partner, Nepean Capital), Jayant Krishna (Group CEO, UKIBC) & Sanjay Tolia (Tax & Regulatory Leader, PwC India). Herein, we try to decode the budget on the positives & negatives of it and further reforms needed.

EDITOR'S NOTE

Finally, test your general knowledge about the world of finance in the “Quiz” section. Let us know how you did; we would love to hear from you! We would love to hear your thoughts, ideas, and feedback; please reach out to us to let us know what you think!

We hope you derive something Does an incorrect assumption about valuable from this edition and that the probability of an event open the you stay safe and excited in these door to profit? We explore more on exciting times. this question and answer it as part of the “Classroom.” In this edition’s Stay Invested, “Know Your Sector” section, we look TEAM NIVESHAK at the backbone of the Indian industry, the banking sector, which is known for efficiency & bad loans, and put critical factors that could help understand and analyze the sector. In the "On the Shoulders of Giants" section, we discuss the implications of monetary policy on the broader economy & the contributions of Robert Lucas. In the “Something Ventured, Something Started” section; we look at one of the most well-known VC firms, Sequoia Capital. It is looking to raise funds in the market for a new fund dedicated to only Indian startups.

All images, design and artwork are copyright of IIM Shillong Finance Club © Finance Club Indian Institute of Management, Shillong Disclaimer: The views presented are the opinion/work of the individual author and the Finance Club of IIM Shillong bears no responsibility whatsoever.

CONTENTS Cover Story

The Month That Was A look at the major events of the month in the world of Finance and Investment

NIF The performance report of the Niveshak Investment Fund

Decoding the Union Budget 2021; the impact, positives & negatives

Article Of The Month Too fast, too furious: quick evolution of SPAC in the street

FinView Union Budget 2021 analysis by Sanjay Tolia, Gautam Trivedi, Jayant Krishna

Something ventured, Something started

Know Your Sector

Classroom Dutch Book Theorem

Dynamics, benchmarks and metrics for evaluating the Banking Industry

On the Shoulders of Giants

Monetary Neutrality

A look at Sequoia Capital's New Seed Fund for India

Quiz A chance to test your Finance and Economics knowledge

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THE MONTH THAT WAS

THE MONTH THAT WAS 1. FM introduces Union Budget 2021 This year’s budget focused on the six pillars for reviving the economy health and well-being, physical and financial capital and infrastructure, inclusive development for aspirational India, reinvigorating human capital, innovation and R&D, and ‘minimum government and maximum governance’. Major announcements included hikes in custom duty to benefit Make in India, proposal to disinvest two more PSBs and a general insurance company, qualitative strengthening of schools, a new centrally sponsored healthcare scheme, etc. The fiscal deficit for 2021-22 is estimated to be around 6.8% of GDP. 2. Sensex crosses the 52K mark in a new record For the first time, Sensex crossed the 52k mark. The BSE Sensex rose 609.83 points to 52,154.13. The recovery in the corporate earnings ignited investors’ hopes for a faster than expected

recovery and boosted market sentiments. This consequently lifted stocks in the economically sensitive sectors like banking. 3. Monetary Policy committee keeps the rates unchanged

The country’s central bank, the Reserve Bank of India, has kept the policy rates unchanged. However, the bank has signaled normalization of some of the measures taken after the covid outbreak. The bank stated that it would gradually roll back a 100 basis points cut in the cash reserve ratio, extracting almost ₹1.5 trillion liquidity from the system. The Governor of the central bank, Mr. Shaktikanta Das, believes that a normalization of the scheme would create room for RBI to support the government’s massive borrowing programme announced in the recent union budget. 4. Bitcoin crosses the $50,000 mark for the first time For the first time, world’s largest

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cryptocurrency, Bitcoin, crossed the $50,000 mark. This latest rally took place even as the country prepared to ban private cryptocurrencies. The main reason stands to be a sustained interest from major global institutions. Furthermore, major companies like Tesla, Mastercard, Paypal, and Apple recently adopted cryptocurrency into their ecosystems. 5. Byju’s to acquire Toppr Edtech Unicorn, Byju’s is in advanced talks to acquire its competitor, Toppr for an amount of $150-160 million. In the month of August, Byju’s which is currently valued at around $12 billion, had acquired WhiteHat Jr for around $300 million. 6. India to grow at 10% in FY22: S&P As per the rating agency, Standard and Poors Global Ratings, India is expected to grow at the rate of 10% in FY22. Factors like sustained farm sector growth, COVID-19 vaccinations, stronger than expected market recovery, improved goods and services (GST) receipts stand to be responsible for this high growth rate. 7. Four banks shortlisted for Privatization The government has shortlisted

THE MONTH THAT WAS

four banks for privatization. This serves as an attempt to sell assets and boost government revenue. The four banks shortlisted for this purpose are Bank of Maharashtra, Bank of India, Indian Overseas Bank and the Central Bank of India. Two of these would be selected for sale in the 2021/22 financial year. 8. Stressed loans at NBFCs to climb to ₹1.5-1.8 trillion in FY21 As per the rating agency Crisil, the stressed assets of Indian non-banking financial corporations are expected to reach around ₹1.5 - 1.8 trillion, equivalent to 6-7.5% of their total assets under management, by the end of the financial year 2021. However, Crisil stated that the one-time covid restructuring window offered by RBI for micro, small and medium enterprises, will help in limiting the reported gross nonperforming assets.

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NIF PERFORMANCE EVALUATION

NIVESHAK INVESTMENT FUND PERFORMANCE EVALUATION

Return Measures Total Investment Value: ₹ 10,00,000 Current Portfolio Value: ₹ 21,51,820 Change in Portfolio Value: -0.39% Change in Sensex: 1.56%

Risk Measures Standard deviation NIF: 36.16% Standard deviation Sensex: 31.03% Sharpe Ratio: 3.69 (Sensex: 4.50) Cash Remaining: ₹1,84,140

Comments on Equity Market & NIF Performance The equity markets saw a bumpy ride in the month of February. The Union budget gave the markets enough reasons to cheer, and we witnessed a significant rally at the beginning of the month. However, in the second half of the month, the rising yields pulled the markets back, and we saw a decent correction on the last trading day of the month. The benchmark index posted a gain of 1.56% in February. Going forward, we will have to closely monitor the rising yields and their impact on the markets. NIF saw a portfolio change of -0.39% and stood at a net value of ₹ 21,51,820.

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NIF PERFORMANCE EVALUATION

Individual Stock Weight and Monthly Performance

Top Gainers of February 2021 35.02% - ADF Foods 15.32% - NOCIL 10.46% - Westlife Development

Top Losers of February 2021 -33.76% - Asian Granito -13.97% - Maruti Suzuki -12.90% - Dr Reddy's

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COVER STORY

DECODING THE BUDGET By Ashwin Ambala, Susmitha Devisetty, IIM Kozhikode

As India adapts to the new normal after the pandemic, this year's budget comes to us as the most required vaccine for the revival of the country. The finance minister portrayed a great deal of resilience and infused a ray of hope for the people and the economy. There were a series of housekeeping and rationalization measures that were adopted to ensure that the budget is business-friendly and breathes life into the otherwise dormant economy. It unleashed animal spirits among the corporate houses which further ignited the growth momentum of the country. Let's delve into some of the broad themes to corroborate the sentiments. Though there were six major themes for this year's budget, we are going to analyse the 3 most pressing themes which we felt are the game-changers. 1. Health and wellness: An increase in outlay by 137% to ₹2,23,846 crores is a testament to the government’s focus on 3 major pertinent health aspects which this

pandemic has enforced upon us that was due for quite long, they are a) Prevention b) Curation and c) Well-being of people The PM’s Atmanirbhar Swasth Bharat Yojana has an allocation of ₹ 64,180 crores planned for the establishment of research centres, last-mile delivery of medical services, integration of labs and hospitals, creation of more wellness centres, etc. This showcases the holistic thinking behind the formulation of this six - years long program. The universal coverage of water supply (Jal Jeevan Mission) which has an outlay of ₹2,87,000 crores over five years is also a flagship scheme. With the increasing water scarcity and receding water tables, this mission would allow the government to implement watershed management techniques at scale, rejuvenating our age-old water bodies.

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COVER STORY

The Vehicle scrappage policy is also expected to be a game-changer. In the near term, it will lead to increased production of new vehicles with BSVI norms, thereby increasing employment opportunities and aggregate demand. In the long term, it will have positive impacts on the environment as transportation contributes 11% of the total carbon emission in India. 2. Infrastructure & Financial capital:¬ It is one of the crucial sectors which brings the desired gunpowder in terms of capital for economic development and employment opportunities. Some of the individual policies interventions includes, a) Increased FDI in the insurance sector from 49% to 74%, b) Formulating single securities market code c) Establishing a state-of-the-art fintech hub at GIFT - IFSC d) Creating a Development Financial Institution with an outlay of ₹20,000 crores. All these decisions would bring the desired capital for financing growth in labour-intensive and capital-extensive industries.

Source: Reviving India’s Union Budget 2021–22, PwC:

growth,

Infrastructure: Roads and Highways: An outlay of ₹ 1,18,101 lakh crore to MRTH focusing on Bharatmala Pariyojana and enhanced Infrastructure spending will increase the disposable income in people's hands, thereby enhancing aggregate demand. Even the budget allocation of ₹2.25 lakh crores for economic corridors in four states and the flagship expressways will give sufficient push to the local economy and attract private investments.

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National Monetization Pipeline: A pool of ₹12,000 crores through InVITs of NHAI and PGCIL, monetization of assets by railways and of airports by AAI, would reduce the debt burden on these organizations and can have a snowball effect on the economy.

3. Agriculture Development

COVER STORY

and

Rural

Agriculture has been the only silver lining which showed some signs of positive growth during the covid times. A bumper monsoon provided good disposable income but the migrant labourers are left unemployed. Hence, special focus was necessitated in this domain as it contributes to more than 50% of overall employment for India. Some of the important steps taken by the government are: Agriculture: 1. Doubling the "Micro Irrigation fund" to ₹10,000 Crores 2. Extending Operation Green scheme to 22 perishable products 3. Integrating 1000 more mandis to eNAMs. This slew of measures will reduce costs for the farmers and provide better avenues for their products, thereby catering to both forward and backward

linkages. Apart from this, the promise of MSP being 1.5 times the imputed cost is bringing the policy more in tandem with the MS Swaminathan committee's recommendations. Fisheries: With a coastline of 7,500 km, India has a huge potential in the blue economy. Government has planned to develop modern fishing harbours and fish landing centres for better utilisation of our potential. Migrant workers: Migrants workers bore the maximum brunt of the pandemic. There was no food/ economic/ health security and as a welfare nation giving special attention to them was an obligation, and the state has tried its best to fulfil it. 'One nation one ration card' has showcased its' utility during covid times, and its countrywide implementation has been promised. Also, providing social security benefits to gig workers and bringing all workers under state insurance corporations and minimum wage schemes are steps in the right direction. Fiscal position: This budget which upheld the “less is more” principle also focused on improving the quality of spending rather than managing the fiscal deficit figures. Once in a century shock

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requires non-textbook treatment. A glide path has been mentioned with a target of bringing it under 4.5% of GDP by 2026. Amendments to the FRBM Act and the imposition of no new taxes and additional cesses will enhance spending sentiments among the middle class.

In conclusion, growth has been the buzz word for the 2022 Budget. The proactive steps from the Government’s side are the need for the hour to create a multiplier effect. The short term focus for the Government needs to be to bring confidence back in the Indian economy. India should not let go of this

COVER STORY

blessing in disguise and take all the necessary steps to emerge as a global power. This year's budget has again emphasized the need to focus on health and education. As it is rightly said, “Padega India tabhi to badega India”. However, adherence to fiscal prudence can’t be undermined in the long run, and there is a need for the Government to exercise caution while managing its fiscal policy.

Ashwin Ambala & Susmitha Devisetty, IIM Kozhikode

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ARTICLE OF THE MONTH

TOO FAST TOO FURIOUS: SPAC IN THE STREET By Akshay Pai, SCMHRD

Have SPACs become a mainstay on Wall Street, can the speed advantage they offer outweigh their risks in the long run, or is the SPAC bubble about to burst? ‘ExSPAC to Patronum’ How SPACs became the silver bullet spells for start-ups to go public on Wall Street: Like the silvery guardians summoned in the Harry Potter franchise to eliminate soul-sucking, depressioncausing Dementors’, financial instruments like Special Purpose Acquisition Companies (SPACs) have risen to combat the demons of COVID-19 led depression plaguing Wall Street in 2020. SPACs along with Bitcoin and $GME have been the most talked-about keyword among financial enthusiasts in 2020 for good and bad reasons alike. Like all revolutionary (but not perfect) financial instruments and innovations before it, SPACs have divided Wall Street exactly down the middle with an equal number of

backers and opponents. Most unicorn start-ups think of SPACs as a deliverer from their IPO woes and the best idea since sliced bread, but most analysts and value investors have panned them citing unfavorable returns and hidden costs (most target companies overprice shares to offset the 20% of total float which is issued to the SPAC as a part of the deal). A SPAC is in essence a shell company set up with a big-name investor or group of investors at the helm with the aim of raising money through IPOs to eventually acquire other companies. This makes a SPAC an evolved hybrid of IPOs and reverse mergers, that offers a faster (not necessarily more secure) route for a private entity to go public. A textbook example of a SPAC is the Diamond Eagle Acquisition Corp. which went public as a SPAC in December 2019 with no pre-set targets. In April 2020 it announced a reverse merger with DraftKings which then began trading as a public company.

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The main advantage of a SPAC for the target company is the acceleration of the process of going public, shaving off almost 4 crucial months that would be required in the conventional IPO method per a white paper on SPACs. For the SPAC retail investors, the advantage is bottom floor entry into unicorn start-ups that may take off exponentially once they receive the funding from going public. The SPAC owners gain about 20% of the shares of the merged entity as their reward. The SPAC exists for the sole purpose of acquisition and has no operational history or commercial operations – the capital raised from its IPO is locked in a trust account to be returned to investors with interest if no suitable acquisition is made within a set time limit – typically 2 years. This sped-up process is not without its risks. In finance trade-offs are the norm and not the exception – for every instrument that offers a higher return, the investors must also bear a higher degree of risk. The speed of the SPAC process comes with due diligence and propriety as casualties of the trade-off norm. The investors are also headed blindly into the investment since they have no knowledge of which company the SPAC will acquire and need to trust the promoter’s judgment. Transparency also takes a hit as the

ARTICLE OF THE MONTH

SPAC process is not as rigorous as traditional IPOs, this combined with the fact that SPAC managers are incentivized to find a target company to acquire within the time limit can limit their consideration for value accretive acquisitions. These factors can combine to provide a worst-case scenario where retail investors may be left holding the bag if an acquisition goes sour. SPAC to the future – The beginning of the end; can SPACs outlive the COVID pandemic era. The jury is still not out on whether the wave of SPACs in 2020 are a COVIDrelated ‘here today gone tomorrow’ exigency or a natural evolution of the IPO that is here to stay and will eventually replace the IPO. Experts are still divided over the sustainability and longevity of what is essentially a legitimate form of a blind check acquisition. There is a good reason why SPACs have increased exponentially over the last year – and that is the very reason why experts doubt the longevity of SPACs. The reason is the volatility and uncertainty caused by the COVID pandemic and its resulting economic downturn that caused several companies to pull back offerings that had been months and years in the making. Despite the pullbacks, there

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were 194 traditional IPO deals in 2020 with $67 billion in value raised, but SPACs were neck and neck with IPOs. From a decent start of 59 SPACs in 2019 to over 200 SPACs in 2020 raising $64 billion; SPACs seemed more than equal to the task of shouldering some of the fund-raising burdens from the lengthy IPO route in volatile markets. The statistics for 2021 are even more shocking – in just the first 6 weeks of the year, 145 SPACs have gone public raising over $46 billion with over 46 weeks to go. But doubts still remain whether SPACs can do the heavy lifting to make IPOs redundant. From an average market capitalization of $200-$400 million in the 1990s before the dot-com bubble, the IPO threshold is now more than $2 billion for well-managed enterprises with tier I investment banks. While there are SPACs that have breached this threshold – with air taxi inventor Joby Aviation announcing a $6.6 billion deal – the large majority of SPACs raised funding at values below the $1 billion thresholds. While this gives SPACs room to operate under the umbrella of IPOs, it also means that SPACs can replace IPOs only for the superstar start-ups with elite Csuites already in place, with business plans that rate the steep funding requirements. Doubters are also quick to point out in the absence of the

ARTICLE OF THE MONTH

pandemic driven volatility the main advantages of the SPAC – speed and low-cost won’t seem worth the risk for investors compared to a traditional IPO. In the end, the main determinants of the SPACs longevity will neither be the SPAC proponents or the target companies (both of whom are reaping disproportionate rewards) but the lowly investors. For now, the investors are happy to take part but the promote feature is already causing target companies to bloat the valuations, and there have been accusations of a trigger friendly ‘acquire anything’ mentality among SPAC promoters due to the 2 year ‘use it or lose it’ clause behind most SPAC IPOs. Unless SPAC managers come up with innovations such as performance-linked and delayed promotes or greater transparency in target selection the SPACs will bleed investors back to the regular old IPOs where investors get to choose where, how and how much to invest. In the end, SPACs may find long term acceptance by a mere act of repositioning themselves not as competitors for IPOs but by complementing IPOs by acting as funding outlets for fringe companies, cutting edge tech start-ups and other enterprises like 23andMe with no

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ARTICLE OF THE MONTH

comparable business models for traditional valuation. The best value SPACs may end up offering is to not meddle with the IPO process but by going one step down the funding chain to improve the VC process, by marrying funding from retail investors with the expertise of the VC and the idea and entrepreneurial drive of the target enterprise. It will be interesting to observe how IPOs, VC funding and SPACs adapt to the digital realities of the post COVID era to stay relevant and value additive.

Akshay Pai SCMHRD Pune

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FINVIEW

FINVIEW: UNION BUDGET 2021

MR. GAUTAM TRIVEDI

MR. JAYANT KRISHNA

MR. SANJAY TOLIA

Co-Founder & Managing Partner, Nepean Capital

Group CEO, UK India Business Council

Tax & Regulatory Leader, PwC India

Q1. With many expectations from the Union Budget 2021, how much did it indeed fulfill? Gautam Trivedi: The Union Budget this time around, and I was recently on one of the media channels as well, wherein I think there was positivity and I think one of the prime reasons behind that is that there was a lot of fear and concern with respect to new taxes that were potential to be announced. There was no COVID tax, no inheritance tax, no wealth tax, and no major tax increase, whether personal income tax level or corporate tax levels. As a result of which I think the equity markets have parried significantly. The Budget of course is

not only the markets but also is for the whole country and I think that itself was a huge positive. Another reason I think the Budget was positive was that the Govt of India for the first time seems to be comfortable in tolerating a higher fiscal deficit. What you've seen is the CAPEX for the next financial year is estimated now at ₹5.5 lakh crore up 34% from the current fiscal. They plan to spend around ₹3 lakh crore on the power sector, ₹2.2 lakh crore on healthcare, that's up a whopping 137% year on year, the highest ever budget outlay for the road and transport ministry, ₹1.18 lakh crore. The other startling number is an 18% increase in the railway sector. So all of this would effectively take the fiscal to 6.8% in the

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next fiscal year. It is only in 2025-26 is when the govt. is estimating that the fiscal deficit is going to come down, so we are looking at a higher fiscal deficit for the next four and a half years, higher than the past, and that says a lot, and is really a bold statement for the govt. come out and say this. Jayant Krishna: I agree with most of what Gautam said, for me, it is a business as usual kind of a budget, there have been a lot of apprehensions about covid, wealth taxes to be levied, none of that has happened. Even the core taxes, not much has been changed. So it does reflect some kind of stability in our taxation and more importantly in the public policy process, there is stability which is good, because if you look at a lot of investors, domestic and more so foreign investors look at regulatory stability. The Budget this time did not have anything of high drama. Nothing which was very spectacular and that itself the beauty of the Budget, that it was business as usual, that I fundamentally believe. There were a lot of signals for India to attract FDI but at the same time, it was not very promising from a trade perspective. India can expect some FDI in the insurance space. One thing which has worked, in the pandemic management portfolio, very few governments have looked at the pandemic as an opportunity to reform,

FINVIEW

labor laws if you look at, that's one big stumbling block, a lot of investors actually fear our labor law, so I think the forty-four federal laws have been bucketed in four law categories, a very good mechanism to support the industries by way of working capital, credit guarantees given to banks, NBFCs and largely, of course, big industries as well to support MSMEs which were suffering from the working capital crisis. These were very good reforms that happened during the pandemic and even PLI, definitely a major policy intervention that happened. Sanjay Tolia: I'll give you a different perspective, probably there were four areas which the govt. had to look out for. The major challenges were how do we build good quality assets, how do we create jobs, how do we take care of the well being of people and how do we increase consumption, and do all these, without increasing any tax, using borrowings, asset monetization as a source of the income. Yes, it has its own challenges with an increased fiscal deficit but if it is used in the right way it helps you in collecting taxes in the future, thus equalizing it in the future. If you look at asset creation, a huge amount of spend ₹5.5 lakh crore is devoted to infrastructure, whether it is our ports, national highways, urban infra or fright corridors. Now when

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you do these sorts of expenditures you actually create a multiplier effect. Imagine when you build a highway, it heads all the industries like steel, cement it just connects everything, and it goes to the last mile since you need laborers. So when the govt. spends on infrastructure, it helps create a large number of jobs, brings money into the hands of people, thus increasing consumption. I think the way the balancing act has been done, is quite well and clearly, there is a good focus on increasing the health expenditure. In my mind, it has been a holistic budget, with a clear focus on ease of doing business, whether around compliance or technology. Q2. With the underlying vision of “self-reliance”, how has the budget transformed this into real-action? Sanjay: The focus is on MSMEs, assetcreating investments with the idea of “Make in India, make for the World”. Exports form an integral part of this budget whether it be through different cash incentives or PLI schemes or compliance reforms. Besides, this is aligned with companies looking for alternate destinations to China whether it be in R&D or manufacturing and more. Essentially, the message is transforming India keeping in mind exports & selfsufficiency in everything.

FINVIEW

Gautam: For the first time in many years, the focus is clearly on manufacturing to make India ultracompetitive vis-à-vis Vietnam, Taiwan & more. Contract manufacturing has done really well despite lack of govt. support in the last two decades. Now with govt. firmly behind them with policy support, this sector will do even better. This performance is also visible in the stock market as well whether it be Dixon Technologies or Amber Enterprises or more. Jayant: For starters, the budget has clearly differentiated between Make in India & Self-reliant India initiatives. These are not rooted in higher protectionism & trade barriers but preparing India for the next step of economic growth keeping the two levers in mind, the exports & domestic consumption. This is visible in hightech manufacturing investments coming to India in sectors such as defense, electronics & pharma. Besides, capital- & labor-intensive sectors such as textiles, leather & infra getting a huge boost is also encouraging. So, the vision is being clearly transformed into action on the ground. Q3. Govt has gone full throttle to spending. Consequently, the fiscal deficit has risen & the long-term vision is to bring it to 4.5%. With the increased scale of disinvestment, what

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is the feasibility of getting there? Sanjay: According to recent forecasts by IMF & other institutions, India is expected to be back to pre-COVID growth levels in just two years. One of the factors to getting there is the investment boost given by this budget. Any changes in taxation policies would have hurt the possibility of higher growth. So, govt didn’t touch taxation. They preferred the route of borrowings, asset monetization & privatization (not blind disinvestment). So, because of higher tax buoyancy, tax mop-up will increase too. Jayant: 2020 being a watershed year, 9.5% fiscal deficit isn’t surprising. India’s trade-to-GDP ratio has come down in 2019-20 by 350bps to 40%. Almost a decade back it was at 56%. It isn’t always necessary that GDP is the sole creator of jobs. Higher international & domestic trade does that as well. The point here is that reduction of trade barriers such as import & customs duties is a must. International trade has been severely neglected in the last two decades. This has to be addressed soon. Gautam: The higher fiscal deficit is contingent upon the ability of the govt to raise money. India’s track record of privatization & disinvestment is pathetic. Timing is an issue. Even in the

FINVIEW

midst of such a fierce bull market in equities, govt hasn’t been able to achieve the targets set by itself. In terms of asset monetization, govt has shown the intent, but nothing concrete hasn’t happened. All of these are just vague statements. Q4. Government has said it’ll privatize 2 PSB’s. Which are the banks that could be privatized? Also, there’s a general notion among investors that PSUs are great assets but are not great investments. Why is that? Gautam: I’m not sure of the banks & I don’t think govt. is sure of it as well. The fact of the matter is these banks should have been privatized long back. The merging of banks will not solve problems or lead to new value creation. Reducing the absolute number of banks & recapitalization will not help. Govt. should also understand, the faster the privatization, the better it is for everyone. Also, considering the example of MTNL, it has great assets, but the stock price is down by almost 90% in the last decade. It was a blue-chip once. The company is sitting on billions of worth of assets whether it be the telecom infra or real estate. The value of most of these individual assets is more than the market capitalization of

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the whole company. That’s the issue with many PSUs. They are not using their assets efficiently to create value & which translates to investors staying away from these. Q5. Stock markets seem to be in a strong bull market after that strong bout of correction we had during the announcement of Lockdown 1.0. Where do you see the markets going from here? Will this rally sustain? Gautam: 75000 on Sensex in 3-4 years from now is a strong possibility. From a market perspective, liquidity & lowinterest rates in India & USFDA hinting at low-interest rates for at least a few quarters is what’s pushing up the market. Also, there’s the factor of missing out. With interest rates going down, alternatives to equity as an asset are really less. Real estate, fixed income securities & gold hasn’t done much in the last few years. There’s also the factor of better than expected earnings recovery & vaccine being available is helping as well. But despite these things, markets have run up really quickly & there’ll be a healthy correction, but by how much is an unknown. FPIs & FIIs have been pouring in a lot of money & even domestic fund inflow has also been really strong.

FINVIEW

Q6. FM has introduced a new cess called ‘Agri & infra development cess’. Will this impact consumer sentiment? There have also been changes in the indirect tax front such as few exemptions being given or extra levies on electronics items & more. How will it impact our trade with neighboring countries & what’s the next step to attracting more foreign capital? Sanjay: This extra cess is basically the reallocation of basic customs duty. It's not something extra or newly introduced additional cess on top of existing ones. On the customs front, there haven’t been any real changes. There’s been streamlining of notifications as well. The recent development is no notification will last more than two years. That’s a welcome move & the expiry of notifications will help in solving many confusions as well. One of the important areas of trade is the free trade policy. India didn’t become part of RCEP. India’s focus is today is more on US & UK dialogues which are important trade partners of India. With Brexit, bilateral trade between UK & India is expected to flourish. On

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FINVIEW

the outset, budget looks to have tinkered with custom duties on certain products but its more of a balancing act & nothing has actually changed on the ground.

MR. GAUTAM TRIVEDI Co-Founder & Managing Partner, Nepean Capital

MR. JAYANT KRISHNA Group CEO, UK India Business Council

MR. SANJAY TOLIA Tax & Regulatory Leader, PwC India

Mr. Trivedi has over 26 years of experience in the Indian and Asian Financial Industry. In his previous role, he was the CEO of Religare Capital Markets. Previously, he was a Managing Director and Head of Equity Distribution at Goldman Sachs India and served on the Board of the Indian Office. He also sits on the board of Raymond Apparels Limited. As Group CEO, he leads UKIBC in strengthening bilateral trade, investment, and economic ties between the UK and India. He has previously led initiatives of the PM's Skill India mission as CEO, Executive Director & COO of the National Skill Development Corporation. Prior to serving in govt., he was with the Tata Group for over two decades. Since joining the firm's tax practice in 1998 he has served in several leadership positions, including the India & Asia Pacific leader of Transfer Pricing. In his last role as the Markets Leader, Sanjay has nearly three decades of cross-sectoral experience and has worked with both national and international clients. He is also a lecturer at the IIM Ahmedabad.

NIVESHAK | FEB '21

CLASSROOM

CLASSROOM: DUTCH BOOK THEOREM Dutch Book Theorem is a form of probability theory that says that opportunities to profit will arise when probabilities are inconsistent. The assumed probabilities can be rooted in behavioral finance and is a result of human error in calculating the probability of an event.

The profit is a result of the difference between the premium charged for insurance and the costs which the company bears in settling insurance claims.

In the field of gambling, a Dutch Book is referred to as a set of odds that guarantees a profit, regardless of the In other words, when an incorrect outcome of the gamble. It is associated assumption is made about the with probabilities as determined by the likelihood of an event to occur, an odds not being reasonable. opportunity to profit will arise for an intermediary. In economics, the term refers to a sequence of trades that would leave For example, assume there is an one worse off and another better off. insurance company and a hundred The assumptions of the consumer people in a given insurance market. The choice theory rule out the chance that insurance company predicts that the anyone can be Dutch-Booked. probability that customers will need insurance is 10%, but all customers The main idea of the Dutch Book predict that the probability of requiring Theorem is to show that rational insurance is 20%, then the insurance people have subjective probabilities for company can charge more. The events that are random and that these insurance company knows that its probabilities must satisfy the standard customers will pay more for insurance. principles of probability.

NIVESHAK | FEB '21

KNOW YOUR SECTOR

KNOW YOUR SECTOR: BANKING The banking sector is always a unique sector when it comes to the analysis of its financial position, and in this Union Budget month's magazine, we try a hand at analyzing this sector.

Total Provisions /Gross NPAs highlight the bank's cushion to adjust for these losses. The higher the ratio better it is considered for the bank. In the recent past, with a perceived rise in NPAs, banks started creating high provisions showcasing a massive amount of losses all of sudden. Thus, higher losses in this situation are not considered a bad sign in general as the reason is not operational inefficiency but the creation of adequate security for the future.

The acronym ‘NPA’ has been haunting the banking sector for the last few years, so let's start our banking sector analysis with this. NPA, also known as NonPerforming Asset, is a loan or advance on which the principal or interest payment remains overdue for 90 days or more. Generally, two ratios help in evaluating them i.e. Then, we have CASA Ratio, which stands for Current and Savings Gross NPAs Ratio= Total Gross NPA / Account Ratio, which is calculated as Total Advances of the bank Deposits in Current and Savings Account / Total Deposits. A higher ratio is A higher ratio highlights the poor considered better as it indicates a lower quality of the bank's assets. However, the cost of funds as banks don't pay a highNet NPAs ratio is considered better interest rate on these accounts. Lower than Gross NPAs as it takes into account the ratio implies bank relies on other the provisioning done for the same. costlier sources of funding which can hurt its margins. Net NPAs Ratio= Gross NPAs - Provisions / Total Advances of the bank Then we have Capital Adequacy ratio = Tier 1 + Tier 2 Capital / Risk-weighted Similarly, Provision Coverage Ratio = Assets.

NIVESHAK | FEB'21

Here, Tier 1, tier 2 refers to the categorization of capital based on their nature, where there is a minimum threshold that each bank should maintain. You might need to refer to this concept in detail as it has some interesting concepts such as Capital Conservation Buffer, Basel Norms, the requisite percentages of each tier capital, what is included in which tier of capital, and so on. This ratio ensures that banks have adequate capital to protect the depositors' money. Coming to the Revenue aspect, since interest is the primary source of revenue for the banks, Net Interest Margin (NIM) helps in highlighting the true revenue picture.

KNOW YOUR SECTOR

income. Thus, other aspects need to be looked upon to get better insights into this ratio. Generally, many of these ratios are usually highlighted in the performance highlights section or, as it is mentioned in the annual report of the banks, saving time and effort to do calculations or look into other reports. Besides this, don't forget to consider other common ratios such as Return on Assets, Return on Capital, EPS, DPS, etc. Below mentioned are some of these ratios of two leading private sector banks to give you some insights on what is the value of these ratios:

Net Interest Margin= (Interest Income – Interest paid to depositors and lenders)/ Average total earning assets Then there is the Loans to Assets ratio, calculated as Loans provided to clients divided by total Assets. The higher ratio has two implications, i.e., the bank is at higher risk as the loans are less liquid than other financial assets, and if the default in loan payment is high, higher the chances of banks suffering losses. On the other hand, loans are generally the most profitable asset of the bank, and thus higher ratio indicates that the company might have a high net interest

Till the next time, try calculating (or we would say finding) these ratios from the annual reports of other banks to get a better holistic knowledge about the banking sector. After that, you're ready with comprehensive knowledge to showcase.

NIVESHAK | FEB '21

ON THE SHOULDERS OF GIANTS

ON THE SHOULDERS OF GIANTS: MONETARY NEUTRALITY Introduction Monetary policy is one of the critical economic policy in macro-economics. The central bank across countries uses monetary policy to influence economic variables such as inflation, employment etc. Robert Lucas was awarded the Nobel Prize in 1995 for his contribution to economics by his work on Monetary Neutrality. The theory aims to evaluate how monetary policy changes can influence inflation, employment, and production. Hume’s Theory The discussion on the subject was initiated by David Hume essays of 1752, Of Money and Of Interest. The doctrine of the quantity theory of money emphasized that the unitchange aspect of changes in the money stock and the irrelevance of such changes to the behaviour of rational people. According to him, money is the representation of labour and commodities. Ok, let us simplify it and remove the economic jargons!!!

“If we all the gold in England is annihilated at once, and one and twenty shillings substituted in the place of every guinea, would money be more plentiful or interest lower? No…. we would use silver instead of gold. So, Hume concluded his argument with the following two statements: - Changes in the number of units of money in circulation will have proportional effects on all prices that are stated in money terms. - And it does not have any effect at all on anything real, on how much people work or on the goods they produce or consume. Lucas’s Arguments There is always an interval before matters are adjusted to their new situation, and during this interval, the workman has not the same employment though he must pay the same level of expenses. Lucas raised the question that why an early recipient of the new money finds everything at the same price as formerly.

NIVESHAK | FEB'21

The study's main findings were that the anticipated changes in money growth have very different effects from the unanticipated changes. Even though anticipated changes induce an inflation premium on nominal interest rates, they have no impact on employment and production, as Hume pointed out. Unanticipated monetary expansions can stimulate production, and unanticipated contractions can induce depression. This distinction between anticipated and unanticipated monetary changes is key to understand the short-term trade-offs. This distinction is also important with the long-term evidence empirically tested by Lucas. Apart from this, the theory also established how general equilibrium reasoning could help evaluate the nature of the economic shocks and the economy's distributed lag response to these shocks.

ON THE SHOULDERS OF GIANTS

NIVESHAK | FEB '21

SOMETHING VENTURED, SOMETHING STARTED

SOMETHING VENTURED SOMETHING STARTED: SEQUOIA CAPITAL For this edition of "Something Ventured, Something Started," we'll take a different approach. Instead of covering a startup that has raised funding, we'll be covering a venture capital firm that's in the market right now to raise funds for a new fund. The firm in question is Sequoia Capital, the legendary Sand Hill Road behemoth, raising money for its second seed-stage India fund. Despite the pandemic and the infamous "Black Swan" memo that Sequoia released near the start of 2020 warning about impending doom, Sequoia Capital ended 2020 as one of the bestperforming venture capital firms, after exits from successful companies like Snowflake, Airbnb, Unity, and DoorDash. In India, Sequoia Capital ruffled some feathers too, by being the #1 VC firm in terms of deal count in 2020, with investments in companies like Byju's, Oyo, Ola, Zomato, Grofers, Freshworks, Cars24, Pine Labs, Unacademy and Cred.

Sequoia dominated the deal count numbers so much that it equals the deal count of the following two on the list combined (Accel and Tiger Global). As per filings with the SEC, Sequoia is raising money for Sequoia Capital India Seed Fund II less than two years after it floated the previous fund. The filings did not disclose the fund's size, but the last fund raised $200 million. The term of the fund was not disclosed in the filings either. The term of a fund determines the 'lifetime' of the fund over which the firm will invest in different businesses and exit them. Venture capital firms charge management fees (usually a fixed % of assets under management), and carried interest (calculated based on the excess of the fund's final IRR over the hurdle rate specified in their initial documents, to reward general partners good performance). Carried interest formula is also known as the waterfall mechanism. We can't wait to read more about the fund!

NIVESHAK | FEB'21

QUIZ

QUIZ 1) Which of the following banks has the greater market capitalization in India? A. State Bank of India B. ICICI Bank C. Kotak Mahindra Bank D. HDFC Bank 2) According to classification by IMF, the currency system in India falls under A. Managed floating B. Independently floating C. Crawling peg D. Pegged to a basket of currencies

A. Canara Bank B. ICICI Bank C. State Bank of India D. Punjab National Bank 5) Which of the following is not a highfrequency economic indicator tracked by the RBI? A. GDP growth rate B. Monthly equity investments by mutual funds C. Domestic passenger traffic D. Corporate bond issuance

3) Which of the following is NOT a Monetary Policy tool?

6) Which of the following investments would be relatively worse off in a falling interest rate environment

A. Repo and Reverse-Repo rates B. Open Market Operations C. SLR and CRR Rate D. GST Rate

A. REITs B. Cement companies C. Insurance companies D. Utilities

4) Which of the following bank launched the first mutual fund in India?

7) India is a part of all of the following free trade agreements except:

NIVESHAK | FEB'21

A. SAFTA B. AIFTA C. PTA with MERCOSUR D. RCEP

11) Which of the following companies is not a part of NIFTY50?

8) Which of the following is true: A. NSE is a listed company National Stock Exchange B. BSE is a listed company Bombay Stock Exchange C. NSE is a listed company Bombay Stock Exchange D. BSE is a listed company National Stock Exchange

QUIZ

on the on the on the on the

9) Which of the following is not a factor in the Fama and French’s original 3-factor model

A. HDFC Life Insurance Company B. Dabur India Limited C. Divis Laboratories D. Indusind Bank 12) Which of the following is not directly involved in the regulation of the futures market in India? A. Forwards Market Commission B. Reserve Bank of India C. SEBI D. Finance Ministry 13) Which of the following is not a debt zero company?

A. Market Risk B. Momentum C. Size D. Value

A. HUL B. ITC C. CDSL D. RIL

10) Which of the following statement is correct?

14) According to the Dow Theory, daily fluctuations in the stock market are used to identify the:

A. Every member country of the IMF automatically becomes the member of the World Bank B. The World Bank has 45 founder members C. India is not the founding member of the World Bank D. IMF is the part of World Bank group

A. short-term trend B. seasonal pattern C. primary trend D. intermediate trend

Answers 1) D 6) C 11) B

2) A 7) D 12) B

3) D 8) D 13) D

4) C 9) B 14) C

5) A 10) A

ANNOUNCEMENTS Team Niveshak invites articles from participants from all colleges across India. We are looking for original articles related to Finance and Economics. Participants can

also contribute

puzzles and jokes related to Finance and Economics. References should be cited wherever necessary. The best article will be featured as ”Article Of The Month” and would be awarded cash prize of ₹2500/- along with a certificate.

Instructions: •Send in your articles to niveshak.iims@gmail.com •The subject line of the mail must be ”Article For Niveshak_<Title>” •Do mention your name and institute name along with the article •Please ensure that the article has a word count between 1500— 2000 •Format: Microsoft Word; Font: Times New Roman; Size: 12; Line Spacing: 1.5 • Please DO NOT send PDF Files and stick to the format • Number of authors is limited to 2 for each article •Also certain entries which could not make the cut to the magazine will get featured on our website.