Niveshak Apr17

F r o m E d i t o r ’ s De s k Dear Niveshaks,

Niveshak Volume X ISSUE IV APRIL 2017 Faculty Chairman

Prof. P. Saravanan

The Team Akshay Kaushal Anand Mittal Arjun Bhargava Dhruvika Chawalla Girraj Goyal Pratibha Sapra Sankeerth Bondugula Saurabh Gupta Vinay Gundecha

This month, we want to start with a thank you to all our magazine readers and content contributors for your relentless support and encouragement. The quality and number of articles we have been receiving is steadily growing and it has become a painstakingly difficult task for us to select the best of those articles. Indeed we are also happy to know that a lot of companies and their employees also follow our Magazine. The last month had been quite an eventful one for the Indian stock markets, it has seen its all-time high and the momentum still continues as I write this editorial. It’s a pleasing sight for the traders and short term investors to see the prices of a vast majority of stocks rise to such heights. It goes without saying, a low tides follows the high, Investors have to be cautious and doubly careful in case they are planning to take any fresh long positions in the current market scenario. The rise was mainly driven by the strong earnings reports from major banks like ICICI, Yes Bank, Indian Bank and the likes. Policy measures also fueled the euphoria in markets. We also witnessed merger talks of two large e-commerce players in the country – Flipkart and Snapdeal, this merger could be a turning point in the e-commerce battlefield pitting Flipkart against the Global player Amazon, as stronger competitor than before. We have the French elections due on 7th May, has been covered in the Article of the Month. The battle is between two major contenders, Le Pen – A Protectionist leader of France’s far right political wing and Emmanuel Marcon – A former Investment banker, leading ‘En Marche!’ It will be interesting to see, if people of France will surprise the world just like people from USA did or will they choose the more liberal and well supported Investment Banker. In this version we also publish RERA: The Real Estate Sector Finally gets a Watchdog, which touches upon the salient features of the act along with discussing what changes we can expect in the real estate sector due to this landmark act, which has been long overdue. In the FinFame you are about read about the most Successful Value Investor in the last century – Warren Buffet. His life, his principles, his investing style continue to inspire anyone who wishes to venture into the stock markets. In the Classroom we make an attempt to explain the Modern Portfolio theory for those who are not aware of it, and to those who are already aware of it, it would be a revision. We hope you enjoy reading our magazine and give us your valuable feedback on what you expect to read in the upcoming volumes. . Thank you. Stay Invested! Team Niveshak

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.

Niveshak Times

04 The Month That Was

C O N T E N TS

Cover Story

Article of the month

10 Hereâ&#x20AC;&#x2122;s Looking at You, Future France

RERA: The Real Estate Sector Finally gets a Watchdog

FinGyaan 23

The FinTech Revolution - The Uprising Finance Sector

FinaFame

20 Warren Buffett

FinSight

16 Demonetization & US presiden-

tial elections: A double whammy for the Indian stock & gold Market

26 Dr. P. Saravanan

FinView Classroom

27 Modern Portfolio Theory

The Month That Was

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The Niveshak Times Team NIVESHAK

IIM Shillong Flipkart-Snapdeal merger underway

RERA Act deadline closing soon

The Flipkart-Snapdeal merger talks are in their final stages and a confirmation may come as soon as May-end. Apart from SoftBank, which owns 30 percent of Snapdeal’s stake, other investors in the e-tailer include names like Kalaari Capital and Nexus venture, which own 8 and 11 percent respectively, and have given the green signal for the proposed merger between the two homegrown rivals.

The deadline for establishing a real estate regulator is almost over. According to the Real Estate (Regulation and Development) Act, 2016, which was enacted on 1 May 2016, a regulator under the Act should come in to existence by 1 May 2017. The Ministry of Housing and Urban Poverty Alleviation (MUHPA) had notified 69 sections of the Act on 30 April last year and the remaining 32 sections of the Act were notified on 19 April this year.

Flipkart’s management and Board is largely in favour of the deal. The Bengaluru-based e-commerce marketplace has reportedly appointed Goldman Sachs as an adviser for the proposed acquisition of rival Snapdeal. The deal has been held back by opposition of the Snapdeal investors to the buyout terms given so far. The founders, who according to sources have accepted this offer, only want assurance that the 2,500 employees of Snapdeal stay on after the merger. Sensex reaches record high, breaches 30,000 The Sensex and Nifty rose to record highs on Wednesday, buoyed by solid company earnings reports and global market gains, while the rupee hit a 20-month high against the dollar. The benchmark Sensex rose 0.6 percent to a high of 30,134.69 points, surpassing its last record in March 2015, while the broader Nifty saw similar gains, hitting an all-time high for the second straight session. Back home, overall optimism on March- quarter corporate earnings also contributed to the gains. Rupee also gained past 64/$ for the first time since April 2015. The currency gained 6.4% in last 3 month becoming the best performing currency in Asia. The rupee has received a further boost as the central bank has refrained from any meaningful intervention to curb its sharp gains, as it often has in the past.

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According to experts, implementation of RERA is likely to bring in transparency in the sector. RERA will protect the interest of the homebuyer and ensure timely delivery of projects. Under the Act, builders have to deposit 70 per cent of the collected amount in an escrow account to ensure that money is not diverted from one project to another. There will be fines and penalties if the developer does not adhere to delivery guidelines. Also, regulatory bodies and appellate tribunals have to be set up in each state to solve builderbuyer disputes within 120 days. Moreover, promoters will not be able to change a project’s design without buyers’ consent, and carpet area will carry a uniform definition, thus reducing the builder-buyer disputes. All states expected to approve state GST law by May-end Jharkhand Assembly today passed the Jharkhand Goods and Services Taxes Bill, 2017 to pave the way for roll out of GST from July 1. Bihar, Telengana and Rajasthan assemblies have already passed the SGST law. According to revenue secretary Hasmukh Adhia, fourteen state legislatures will approve their respective State Goods and Services Tax (SGST) law by mid-May. Mr Adhia said the new regime would not have any inflationary impact on the economy since the country would be shifting from multiplelevel taxes that had a cascading effect to the GST that would do away with such a scenario and aid in easing inflation.

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Tamil Nadu and Himachal Pradesh promised to take steps for early passage of GST bills, while Odisha expressed concerns over calculation of compensation to the states for loss of revenue. While the GST Council has decided on a four-tier rate structure of 5, 12, 18 and 28 per cent, its Fitment Committee will devise a formula for tax rate to be levied on different products and services under the Goods and Services Tax (GST) regime from July.

French elections and the impact on EU The French elections are underway, and the polls show that Le Pen, Melenchon, centrist Emmanuel Macron and conservative FranĂ§ois Fillon all have around 20% of support, making the ballot too

close to call for most economists. Despite the tight race, investors have taken the uncertainty in stride. Analysts have noted that markets are not priced for the worst-case scenarios in which either Melenchon or Le Pen wins. If Le Pen claims victory in the French election, she will seek to bring France out of the single currency and the European Union altogether, plunging it into uncertainty. She has campaigned vigorously for promoting the ban on religious symbols in public, and her recent interview with Anderson Cooper highlighted her disdain for minorities and their culture, particularly Sikhs and Muslims. Though the two candidates ran neck and neck in the first round of 11 candidates, Macron is expected to trounce Le Pen by some 20 percentage points in the May 7 vote.

ÂŠ FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

The Month That Was

The Niveshak Times

NIVESHAK

30200.00

2,000

BSE

DII

FII 1,500

29800.00

1,000

29600.00

500

29400.00

29200.00

-500

29000.00

-1,000

28800.00

-1,500

BSE

30000.00

FII, DII Net turnover (in Rs. Crores)

Market CoverSnapshot Story

Market Snapshot

28,04,17

27,04,17

26,04,17

25,04,17

24,04,17

21,04,17

20,04,17

19,04,17

18,04,17

17,04,17

13,04,17

12,04,17

11,04,17

10,04,17

07,04,17

06,04,17

05,04,17

03,04,17

Source: www.bseindia.com www.nseindia.com

Market Cap (in Rs. Cr) BSE Mkt. Cap

1,24,84,974 Source: www.bseindia.com

Currency rates INR / 1 USD INR / 1 Euro INR / 100 Jap. YEN INR / 1 Pound Sterling INR / 1 SGD

0.00%

INR/1 USD

-0.50% -1.00% -1.50%

64.26 70.02 57.62 83.21 46.20

Euro/1 USD GBP/1 USD JPY/1 USD SGD/1 USD

Lending / Deposit rates Base rate Deposit rate

9.10%-9.60% 6.50% - 7.00%

Reserve ratios CRR SLR

4.00% 20.50%

Policy Rates Bank Rate Repo rate Reverse Repo rate

6.50% 6.25% 6.00%

-2.00% -2.50% -3.00% -3.50% -4.00%

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Source: www.bseindia.com

Date as on April 30th

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BSE Index % change Open Close Sensex 1.01% 29621 29918 AUTO 3.50% 22013 22782 BANKEX 3.70% 24421 25325 Capital Goods 8.63% 16446 17866 Consumer Durables 1.42% 15257 15475 FMCG 1.53% 9270 9412 Healthcare -1.91% 15312 15019 IT -7.20% 10366 9619 METAL -4.24% 11804 11303 OIL&GAS 6.57% 13564 14455 POWER 2.43% 2274 2330 REALTY 20.25% 1600 1924 TECK -5.57% 5771 5450 Smallcap 6.50% 14434 15373 MIDCAP 4.98% 14097 14798 PSU 4.92% 8597 9020 % Change

TECK, -5.57% Sma llcap, 6.50% REALTY, 20.25% PSU, 4.92% POWER, 2.43% OIL&GAS, 6.57% MIDCAP, 4.98% METAL, -4.24% IT, -7.20%

Hea lthcare, -1.91% FMCG, 1.53% Cons umer Dura bles, 1.42%

Ca pi tal Goods, 8.63%

BANKEX, 3.70% AUTO, 3.50% Sensex, 1.01%

Â© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

Market CoverSnapshot Story

Market Snapshot

Article of the Month Cover Story

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Here’s looking at you, future France GauravJain& RitvikAnand IIMK & EThames Degree College A mere 3-4 years back, the possibility of a populist riding on an anti-immigrant rhetoric, throwing pot-shots at elites, despite having an affluent lineage and inherited wealth, could have easily been dismissed with a ‘meh’. But not today. Just so we are clear, we are not talking about Trump here. This is about the possible triumph on 7th May 2017 of either someone who hasn’t held an electoral office before or someone who can potentially destabilize the world economy. And these disruptions are not for good. Emmanuel Macron, a former investment banker, leading ‘En Marche!’ and Marine Le Pen of France’s far right political wing, National Front, will face-off for the French presidency on 7th of this May. Both have upended the socialists and the republicans for the first time

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since the fifth republic was set up by Charles de Gaulle in 1958. If opinion polls, estimates and political scientists are to be consulted, a majority of them vouch that Macron is set to be the next president but polls can be deceptive with reference to Trump’s case as there is a sort of a bias concerning the extreme right wing votes as people are humiliated publicly to claim such kind of votes. Still, given a 77% voter turnout in the first round of elections and Le Pen’s close finish for the second position, nothing can be said to be set in stone. With a majority of unemployed and blue collared voters (see, g.1) rallying behind her and the support for her from rural areas – read less populated areas with higher concentration of people with only vocational

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Trade, Trade Go Away; Le Pen Doesn’t Want You to Enter the Fray While Macron endorses socially liberal policies and wants to ‘double down’ on free trade, Marine may possibly trigger a ‘Frexit’. She wills to replace the euro with ‘noveau Franc’ of a lower value. She believes that this will make French exports more competitive. Additionally, she wants to put French companies on priority for public contracts. All this raises two basic questions: (1) If you ill-afford free trade and don’t believe in the concept of imports, what benefit would other economies get by accepting your exports? Reciprocity be damned, right? (2) Would the national debt converted in the new currency be acceptable to all? Even if it is, her idea of asking France’s central bank to print more money to pay off the debt flies right in the face of Economics 101. Rationalisation of corporate taxes are important and increasing welfare benefits for all are called-for, but from where would France finance that, if taxes – including the ones for households – are to be lowered further. Here one shouldn’t forget the lost trade that would result from Le Pen’s ‘intelligent protectionism’. With this one can only hope that the French cheese with the wine from Bordeaux

still remains accessible to its connoisseurs. High on Xenophobia To an outsider reading Marine’s manifesto, she might sound like an adamant 5-year old who wants Coldplay to pull a Gangnam style. It’s a possibility, but not only would that be inappropriate, it surely will leave Chris Martin with hoots which he never wants to hear. So, Le Pen aims to reduce legal immigration from 1,40,000 people to 10,000 people annually by abolishing policies that attract immigrants. Though, it’s agreeable that excess of immigration puts pressure on local infrastructure and increases the number of candidates per job but one cannot forget the influence it has on bridging the skill gap and the marginal increment in job it brings with it. According to OECD, overall, immigration is good for any economy. Such policies can negatively impact FDI inflows and would give countries with more liberal policies an edge over France. Moreover, xenophobia will also not bode well for the French tourism industry. Her manifesto also wills to fine the firms with an additional tax for hiring foreign nationals in an attempt to increase national preference. Did Someone Hear, ‘Frexit’? France shipped US$ 488.8 Billion worth of exports in the year 2016 and 65.1% of its exports were with the European countries. Keep this in mind and think about the sequential outcome of a Le Pen mandate: 1. Being Marine means renegotiating terms with the EU within first 6 months of her into power. Renegotiations would be based on restoring national borders, abandoning Euro as a currency and seeking freedom from the Schengen zone. Courtesy: NF’s manifesto. 2. The negotiations are bound to fail, for it would defeat the very idea of

Article of the Month Cover Story

degrees – many fear, that this could well be US 2.0. And what if the intellectuals supporting Macron don’t even turn out to vote for him? All this makes pertinent to discuss what France will be under Le Pen’s protectionist leadership.

Article of the Month Cover Story

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having an EU 3. Being Marine also means launching a referendum and hoping to triggering Article 50 of the Lisbon treaty. And if history is any indication, recently, nations have only swiped right the wrong person. The possible solutions for France would be then to expand trade with Asia, which is abysmally low at 17% of the total exports today. It will also have to reconsider its ties with Russia. So, sanctions now can go down the drain. In fact, only a possibility of Frexit can bring Euronext Paris on its knees. The currency will depreciate and inflation with increase in the short run. The odd thing here tough is that Britain is more inclined towards a Le Pen victory for this very reason. According to The Economist, the British parliament fears that the endorsement of liberal policies and open condemnation of Brexit by Macron, will further weaken London’s ties with other nations in terms of trade opportunities. And France being one of the key stakeholders will have a major say in how Brexit negotiations shall take place. Not Exactly Trump In Marine’s own words, “Climate change is not a religion, it is useful for there to be a debate about what is harming the climate.” In fact, this is the right step going forward. There is a need for more firm commitments on climate change. The COP21 needs to be respected by all its

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signatories. There’s one more difference: They also differ on abortion rights – the US equivalent of India’s cow vigilantism in terms of the primetime debates conducted. While Marine stands for freely available contraception and the right to abortion, Trump wants to stop government organisations like

funding for non-profit Planned Parenthood. Regarding tackling terrorism, one never is sure about the alignment of these superpowers. While Le Pen believes in Bashar-al-Assad’s army, Trump firmly sides with the rebels. But again, when the leader of the oldest democracy bases his decisions on the basis of them foxy evening news, who knows! Anyway, we cannot predict what the future will bring. We will have to look into the matter and then get back to you. One can only hope that Marine stays away from jingoism and takes rational policy decisions, if she wins. ‘If’ being the operative word here. Though her move to exempt MSMEs from severe regulations and to cap the maximum work hours is a positive step towards labour reforms, what needs to be seen is how inclusive can she be in that. The liberals are hoping that Macron wins. But, a large chunk of France wants Le Pen to take control of Paris. The odds, as of now, are in Macron’s favour. But, this is not rocket science. It’s much more complicated. It’s the political science that has befuddled both the economists and the political analysts alike. Who wins only time can tell, but with Brexit and Trumpera one needs to know what lies ahead and that better be easy and cheap access to French wine and all good things French.

NIVESHAK

Cover Story

RERA: The Real Estate Sector Finally gets a Watchdog AnandMittal& GirrajGoyal

IIM Shillong

ment for conceptualizing the idea of RERA, and the support it received from the NDA government for The Real Estate sector – which is perhaps one of the passing the bill from both the houses must be acmost significant sectors for a developing economy knowledged and appreciated. Though RERA is a like India - was struggling with lack of demand post Central Act, constitutionally “land” happens to be a the demonetisation move taken by the government state-subject, and considering this fact, the states last year. The falling consumer sentiments needed a have rightfully been empowered to implement the robust step to support the sluggish sector. The Real operational rules under RERA. Estate (Regulation and Development) Act, 2016, or RERA which became effective from 1st may, 2017 So, how would RERA change the game for the Incan be construed as a much needed and a big step dian Real Estate sector and the housing-sector in particular? Let us discuss in detail, the provisions of in this direction. RERA act and their possible impacts: A country, where the financial markets have a plethora of regulations to curb the malpractices undertaken by corporates & investors alike, was lacking Compulsory registration of every project out a regulator to protect the interests of the common 1. public who invest their life-long earnings to buy a for sale with RERA: home. The bold efforts taken by the UPA govern“No promoter shall advertise, market, book, sell or

Cover Story

NIVESHAK offer for sale, or invite persons to purchase in any manner any plot, apartment or building, as the case may be, in any real estate project or part of it, in any planning area, without registering the real estate project with the Real Estate Regulatory Authority established under this Act.” This provision would ensure that all the relevant and correct information is provided to the prospective investor so that complete transparency and accountability can be maintained. This can be instrumental in boosting investor confidence in the builders again. Not only the new projects, but the currently on-going projects are also required to register with RERA and for this, the promoters have been given a timeline of 3 months (till 31st July 2017). 2. The most disputed matter in any Real Estate Project, is delay in transferring of possession. To tackle this, RERA provides for 5 important provisions: • Sacrosanct timeline: The Promoter would have to provide a declaration in form of a written affidavit stating the date or time-period for completion of the project. • Title deed of land: The Promoter would also need to provide a written declaration regarding legal title of the land on which the project is proposed, stating that he/she is the undisputed and absolute owner of the property; and the property is free from any charge and encumbrances. This would ensure that at any point in the future, there is no dispute regarding transferring the ownership of the land. • Maintenance of a separate ESCROW Account: Earlier, the builders used to utilize the amount received on application or the advances received for booking of a flat for another projects they might be working on. RERA mandates that post-booking, or receipt of any such amount, the builders would have to transfer that to a separate escrow account with a scheduled bank.

layed projects: In case the builders default on the proposed timeline of the project, the investors would be entitled to claim a refund of the amount paid so far, along with interest. Further, if any investor does not wish to claim a refund, he/ she shall be entitled for an interest on the amount paid for every month of delay, till the handing over of the possession. However, this Act takes into account the interests of the Promoters as well, as if a buyer defaults in paying instalments on agreed dates, the builder shall also be entitled to receive interest at the same interest rate mentioned in the agreement for sale. 3.

Cap on booking amount:

Post May 1. 2017, which is the effective date for applicability of RERA, a promoter cannot accept more than 10% of total cost as advance payment without signing an registered agreement for sale. 4.

Online Information:

Since every project shall be required to be registered under RERA, all the requisite details shall be available online for the users to maintain full transparency and accountability. 5.

Covers brokers in its ambit:

The RERA act is also applicable to the property brokers and real estate agents. With RERA, homebuyers who use the services of real estate agents and agencies will also be protected and would have access to a quick & seamless legal redressal in case of faulty business practices.

However, there are some negative aspects to the applicability of RERA as well, some of which are-

• The builders and promoters have historically been financially and politically resourceful, and arguably have had the power and influence to lobby the State Governments. Some States are manipulating provisions under the Act to suit the interests of the builders; for instance, the Haryana • Violations could be a non-compoundable State Government has changed the provisions reoffence: In case the builders do not comply with lating to escrow account. In cases like these, the the provisions of the act, they may even lose reg- positive effects of the Act would not come out istration of the project; and in case of continuous and everything would go for a toss. offence, imprisonment for a term up to 3 years • So far, only 2 states have established Real with or without fine can be pronounced. Estate Appellate Tribunals, hence the effective en• Hefty compensation to customers for de- forcement of the Act is still under question.

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NIVESHAK and the promoters would have to make sure that all the compliances are met with. The larger players in this industry may have to keep a separate legal arm to take care of all these compliances, which would further increase their expenses. This Considering the importance of the Real Estate again, might result in an increase in the Real Essector in our country, and the magnitude of fitate prices. nances that flow into this sector, RERA would naturally have a significant Financial Impact on the sector, and the economy as a whole. Some of the In our opinion, this move falls In line with the ampossible impacts can be: bitious “housing for all by 2022” scheme of the • Real Estate Prices can be expected to rise Modi government. on account of a possible surge in the construction costs, as the builders will have less liquidity available to them since their funds may be stuck in escrow accounts.

• The transition process ensuring compliance of existing projects as per the regulations under RERA may take some time, which again might create short-term shortage of supply which may further potentially boost the prices.

Further, this Act would also enable better utilisation of discounts in housing interest rates which were proposed in Budget 2017. Hence, it would indeed streamline the flow of credit for housingrealty sector.

While effective applicability of this Act remains under question for now, it is still a move in the right direction and should be applauded. A good deal of accountability would now lie on the shoulders of the State Governments, and the success or failure of this Act would depend on their co• Now, due to the presence of a legal frame- operation to a great extent. work, new project launches may get delayed as they would have to be first registered under RERA

Cover Story

• The Builders, in the initial agreement itself, may quote unreasonably far completion dates to avoid hefty penalty and interest payment. This might create a demand and supply imbalance.

FinSight

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Demonetization & US presidential elections: A double whammy for the Indian stock & gold Market ShrutiDhumal&RyanRego S.I.E.S College Of Management Studies In the second week of November 2016, the prime minister of India, Narendra Modi, made an announcement banning all ₹500 and ₹1000 notes with effect from midnight of the same day. This resulted in a huge frenzy of people clamouring to understand as to what are the implications of such a decision. People started using their soon to be illegal notes to buy goods in order get rid of those notes. Most used them to buy gold which, after the announcement, was selling for a premium of about 40%-60%. People were allowed to deposit and exchange the old notes, at banks and post offices, for the new ₹500 and ₹2000 notes. Around this same timeframe, Trump emerged victorious as the 45th president of the united states of America. This gave a shock to markets

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across the globe. There were predictions of Hillary winning the elections and investors made their investing decisions accordingly but uncertainty loomed when there were indications of Trump surpassing Hillary in the ongoing polls while the vote count was being done. For an investor, Trump’s win in the election meant uncertainty and no investor likes uncertainty. Hence, pharma companies and IT companies having US exposure were affected.

After demonetization, the Indian stock market got a huge blow. Indian equity markets saw a declining trend since the government demonetized ₹500 & ₹1000 currency notes after midnight on 8th November, 2016. The two popular benchmark indices – Sensex

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to Bloomberg, foreign investors sold Indian equities worth $1.4 billion from November 9th to November 17th. After demonetization gold was one of seriously affected assets. The jewellery industry was happy with the government’s decision to ban the larger denomination notes, saying gold demand will rise as people will have increased confidence in gold rather than traditional paper money. Several people who had old currency in abundance invested it in gold. Also, several jewellers kept their shops open on 8th November till mid-night. According to Surendra Mehta, secretary of Indian Bullion and Jeweler’s Association (IBJA), they estimated a sale of gold worth Rs.5000 crore was sold between 8pm on 8th November and 2-3am the following day. Rs.5000 crore worth of gold is noteworthy because under normal circumstances, it turns out to be 20% of the gold sales for the month. IBJA also claimed that 1000 out of the 6 lakh jewelers across the country accepted the 500 and 1000 rupees notes as payment for sale of gold on the night of 8th November. Another aspect to be noted was that jewelers were charging premiums

FinSight

and Nifty fell continuously after the day of demonetization. There was noticeable impact on the stock market as investors withdraw the capital from the market. Some withdrew because they were out of funds and others because they expected a crash in the markets and then later they can buy back them at the lower prices. Stocks of the real estate sector fell considerably following the government’s initiative to tackle India’s black money problem. November 2016 has not been a great month for the Indian markets. the S&P BSE Sensex and CNX Nifty was down 4.39% and 4.66% respectively in this month. Indian equity market managed to recover slightly in the trading sessions of November end. Despite that, they emerged as one of the worst performers in emerging Asian equity markets for November, Apart from demonetization, there was also US presidential election, wherein Mr. Donald Trump won the election. Due to the concerns about his restrictive trade policy philosophy, foreign investors pulled out their investments from Indian equities. Also, there was subsequent rise in the US bond yields and the dollar was further strengthened. This further led to the downfall in the market. According

FinSight

NIVESHAK to customers who were buying gold with the recently demonetized notes. Experts say that premiums as high as 50% were being paid for 10 grams of gold. There was rise in gold prices due to the sudden rise in the demand. But, this was a short-term cause and effect. Soon due to the fear of income tax raid, people stopped investing in gold. Hence its prices also decreased eventually. Tax notices were sent by central excise unit of Bhopal to 650 jewellers, asking them to disclose their gold quantities sold between 7th November, 2016 and 11th November, 2016. Gold prices also decreased due to the fall of global gold prices because of the strengthening of the US dollar during this period. Due to this double whammy, there was a decrease in the GDP for the third quarter i.e. from October to December. Following table gives the information about the changes in the values of Sensex, Nifty and gold.

The Sensex and Nifty fell after demonetization but gold prices saw a sudden surge for a short period which later witnessed a steady decline. The ratio of Sensex to Nifty for the whole of third quarter remained constant i.e. approximately 3.2. Further, for analysis we chose correlation as a statistical tool to study the relation between Sensex, Nifty and Gold and following are the findings:

Following is the graphical representation of the comparison between Sensex and Nifty.

It was found that Sensex and Nifty are highly positively correlated. This means that they both increase or decrease in unison. Comparatively, gold is lesser correlated to Sensex and Nifty.

Following graphical representation shows the variations in the Gold prices in the last quarter and the effects of the double whammy.

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World Gold council (a global market development organisation for the gold industry) follows a conservative estimation that Indian consumers will purchase between 650 to 750 tonnes of gold in the year 2017. The demand for gold in 2016 was at a 7-year low (514 tonnes) Goods and Services Tax(GST) is expected to improve transparency in the gold markets and there is an expectation of economic growth thus potentially increasing Indiaâ&#x20AC;&#x2122;s gold demand to 850-950 tonnes by the year 2020. be recovered through existing cash flows.

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FinSight

Unsustainable loan is converted into equity or related instruments thereby reducing debt burden of the borrower as well as equity stake of the promoters. According to RBI, the sustainable loan should be at least 50% of the unsustainable loan. In a period where the Non-Performing Assets are on the rise and threaten the stability of lenders, the 3 R approach can be an effective measure to put a check on these stressed assets. RBI has aggressively implemented these schemes to deal with the rising NPAs problem. Only time will tell whether these efforts are fruitful or not. As one of the world’s fastest emerging economies we should pray that it’s the former. Amen.

FinaFame

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Warren Buffett Anshul Mishra IIM Shillong Introduction JWarren Buffet is one of the most prominent and influential personalities in the field of Finance and Investment. He is an American Business magnate, investor and philanthropist. He is also revered as the “Sage” or “Oracle” of Omaha. Moreover, Warren Buffett is also viewed as the Greatest and one of the most successful investors in world history. He has the feat of amassing billions of dollars through investing under his belt. Background – Early Life and Education Buffett was born on the 30th of August 1930 in the city of Omaha in Nebraska to Howard and Leila Buffett. Buffett showed a remarkable liking and interest in Stocks right from his childhood days where he would scribble them of the blackboard. Being a child growing up during the great depression and his city being adversely affected by the same, Warren grew

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up as a frugal, spendthrift and learnt to respect the value of money. Warren spent his adolescence in Washington D.C. where he graduated from Woodrow Wilson High school. He then went on to pursue his Bachelors and upon rejection from Harvard Masters of Science – economics from University of Nebraska and Columbia University respectively in the years 1950 and 1951. Ever since his childhood days he showed proclivity in the business ventures which he pursued through distributing newspapers, selling stamps and Coca-Cola bottles as well as coming up with pinball machine leasing business. At the age of 15, he bought a 40-acre farm from his lifetime savings & earnings of $2000 which he used to pay his way through college.

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The Dawn of a new era: Berkshire-Hathaway The need to work independently prompted Buffett to return to Omaha once again and start up another business venture which was in the form of a family investment partnership at the age of 25. Buffett worked for the firm from 19561969.However, A series of events caused the partnership to dissolve with each shareholder taking home a three-fold gain. It was during this time that Buffett acquired the breakeven firm of Berkshire Hathaway Textile Corp. in Massachusetts in 1965. Little did he know that this would be his first yet most famous and influential deal but he does still regard it as his biggest investment mistake of all time. He effected the successful turnaround of this company by remodelling the firm’s financial framework. He also decided to use the firm based on its native premise of remaining a textilerelated business but also decided to further its use by utilising it as a holding company for ulterior motives and investments. During the market collapse in 1973-74, Berkshire got the opportunity to purchase firms at bargain prices and seized this opportunity to embark on a buying spree which also included the likes of an investment in The Washington Post. The rest is history and Berkshire Hathaway now has $552.25 billion worth of assets under management as well yearly sales figures of $211 billion (2015). Current Scenario Warren is a jack of all trades when it comes to value investing. Warren used the holding nature to purchase his first insurance company

– National Indemnity Company and used its substantial cash flow to fund future acquisitions. He has many subsidiaries such as GEICO, Dairy Queen, Net Jets, Benjamin Moore & Co. etc. His company interests include American Express, GE, Walmart, Coca-Cola, IBM, P & G & Wells-Fargo. Some of his feats include: • Loan to Mars resulting in a $580 million profit • Wells Fargo is up 6.5 times of its 2009 valuation • American Express is up 5 times since Warren’s investment in the firm • Bank of America gives Warren $300 million in proceeds per year and also provides them the option of purchasing shares at $7 • Goldman Sachs paid out dividends worth $500 million a year and redemption bonuses worth $500 million when Warren repurchased shares • Kraft foods and Heinz Merger to create 5th largest Food related business entity boasting revenues of over $28 billion Net worth & Current Influence Warren Buffett has an astounding net worth of $65 billion at 86 years of age. Most of his net worth is attributed to his shareholding in the International Conglomerate of Berkshire Hathaway of which he owns roughly a third. Warren has been mainly influenced in his career by two people: • Father of Value Investing – Benjamin Graham • Charlie Munger – Lawyer turned investor Investment Style Value Investing involves “seeking stocks that were selling at an extraordinary discount to the value of the underlying assets also called as intrinsic value” as told by Graham. Warren Buffett’s investing philosophy is termed as value investing because it looks at the underlying value of the firm rather than at movements of its share prices in the stock market. He believes an investor should only invest in stocks that they want to hold forever. His investing virtues of patience, discipline

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Initial Investments & entrepreneurial ventures During his Masters course he had the opportunity of studying under the legendary value investor - Benjamin Graham who is the author of “The Intelligent Investor”. Post his education, he returned to Omaha, studied public speaking and setup his own firm Buffett-Falk & Co. where he worked as an investment salesman from 1951-54. Following this and due to his close relationship with his mentor Benjamin, he eventually landed a job at the latter’s New York based investment firm Graham-Newman Corp. where he functioned as a security analyst from 1954-56. These couple of years formed the foundation and groundwork for what would become Buffett’s successful approach to Investing in stocks.

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NIVESHAK and value have outperformed the market for decades. The key criteria include: • Low debt with good return on capital invested • Easy to understand • Cash flow are their prime profits • Strong franchises and freedom to price • Can be run by an average joe • Predictable earnings and revenues • Owner focussed nature of management This disciplined methodology is broken when Buffett looks not only for returns in dividend income but also in share price growth. Pragmatism and thorough caution are integral components of Buffett’s strategy. Buffett had many examples based on the above principle such as his refusal to invest in the stocks of technology companies, he managed to stick to his methodology and managed to double his profits when the dotcom bubble burst. Recent Activity and Philanthropy Warren Buffett is still frugal, he continues to reside in his 5-bedroom house that he purchased in 1958, he continues to dine at local restaurants and diners and drink Coca-Cola. Buffett in June 2006, announced that he would donate a vast majoritarian stake of wealth to the Bill & Melinda Gates foundation, US libraries and Global schools. Buffett has agreed to donate most of his wealth posthumously and also in line with some of the qualities that he is associated with such as – Rational, decisive, maverick and blazing a path all his own. A great many books have been written about Buffett and his investing methodology but none of them were his own. Buffett has also been politically active wherein he launched the website Drive2Vote to encourage Nebraska

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residents to vote. Moreover, he expressed his support for Hilary Clinton publicly and also called out Donald Trump. Recent Activity and Philanthropy Warren Buffett has continued to rank 2nd overall according to Forbes for 15 consecutive years. He recently broke his investing methodology when he invested $1 billion in Apple – a tech stock. He is also ranked as one of the most influential people according to Time magazine. Buffett has plans to re-enter the Indian after exiting the same 3 years ago. There are talking going on about Buffett’s retirement as CEO, Chief investment officer and Chairman. He made an announcement regarding his retirement in January and also named probable successors. He plans to publicly broadcast the annual meeting of Berkshire Hathaway which is the world’s 6th largest company in terms of market cap. The company also has a huge amount of cash - $72 billion in its balance sheet. As of this date, Buffett has given away more than a quarter of his shares to charity and continues to donate 4% of his shares annually. While Buffett continues to manage the firm, his retirement woes have been starting to affect the company’s growth prospects drastically. Till the time Buffett continues to spearhead BerkshireHathaway, the company will continue to provide everyone with stable, sustainable and reliable growth in the long term as well provide autonomy to its workers and heads of business. Warren will continue to work like the company would go on forever and that he would be its owner. He would also continue with his annual letters to his investors and being transparent. Price is what you pay. Value is what you get. Warren Buffett

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FinGyaan Cover Story

SumeetJangir IIM Udaipur The evolution of the internet and the revolution of startups have led to new avenues of growth and innovation in almost every industry. Every day a great number of deals are being executed, a lot number of startups come into the picture, and plenty of mergers and acquisition take place in the market across the globe. This technological tsunami has led various traditional businesses out of the market because of disruptive ideas and more convenient services. This advancement has narrowed down the global market into a village. Now there are a lot many sellers and lot many buyers transacts every day without any limitations. In this fast growing technological disruptive arena, all the sectors are coming with new potentials and ways of doing business. Fintech sector is also no different with this revolution. As per the current trends, this area has emerged as one of the fastest growing segments and disruptive one. The number of startups is

putting their feet in this river of opportunities. Before proceeding further, let’s understand what constitute ‘Fintech.’ The word ‘Fintech’ became with the combination of words, ‘Finance’ and ‘Technology’ or in other words, Fintech is providing financial services with the help of technology. Fintech includes various service areas based on the technology. The major service areas under Fintech are as follows1. Payments: This particular service area has grown very fast post demonetization. This segment includes the tools which work as gateways, PoS payment processors, processors, cards. Or in other words, this kind of startups help in the processing of the payment, mainly online. Paytm, MMoneyOnMobile, PayMate, PayU Money are among. 2. Mobile Payments: These type of startups are none other but payment services based on

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mobile phones such as PoS based on mobile, wallets, and payment aggregators. The major players in this particular segment are Paytm, MobiKwik and Freecharge. 3. Investment Tech: These startups are providing private and public market investing based services such as wealth management, trading platforms. This includes virtual trading platforms. FundsIndia, Myuniverse are among. 4. Insurance Tech: This kind of startups help insurance companies in doing better business by providing risk management tools, distribution platforms, etc. 5. Banking Tech: This particular sector in Fintech is mainly to enable basic banking services with the help of technology to the users, like tech solutions, distribution platforms, backend solution providers. 6. Lending and consumer finance: This kind of platforms are meant to help financial institutions in managing credit scoring and lead generation. These platforms include peer to peer financing tools, loan comparison platforms, personal finance, expense splitting, tax filing, etc. These startups have leveraged the cloud network in providing financial services. 7. Enterprise finance: This kind of platforms are designed to perform basic accounting, compliance and taxation functions for the enterprises. These platforms are easy to use and readily available to function with. 8. Cryptocurrency: These are the virtual currency created on the blockchain, the encryption technology is being used in fund transfer, etc. 9. Crowdfunding: These platforms help in raising money through donations, rewards, and

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equity from the public at large. And other than these, lot many other sub-sectors are also there in the Fintech sector. From the figure 1 above, it is clearly evident that the number of startups established year after year since 2010 are increasing at a rapid pace. The year 2015, was the golden year for startups in India because of various reasons like the global boom in the startups, government regulations, policies and the campaigns. Since the number of new startups came into the picture, the investors also became more active toward this segment. Startups in this particular sector are striving hard to get the funding. Many of the startups got the funding from various investors including seed funding, Series A, Series B and more further. Investors also positively responded to this particular sector. Investors showed their faith in the startups founded in this particular sector. In the various funding rounds and many equities and debt, investors participated. As per the report, the year 2015 registered a total funding of around $ 1.4 billion in comparison to $ 0.2 billion in the year 2014. The year 2016 was also positive in terms of a number of funding rounds and the amount of funding. Here is the glimpse of total funding and number of funding rounds took place in Fintech India segment. The number of funding rounds and total funding amount has increased significantly in last two years. Many new investors entered the market and invested heavily in these startups, the number of seed funding rounds has also increased drastically because of increase in the number of micro-financing venture capitalists.

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FinGyaan Cover Story

The lending sector was a most favorite sector for the investors in the Fintech. The startups in this particular sector got the maximum rounds of funding and amount too. Major investors in the Fintech sector so far are Sequoia Capital, Accel Partners, Blume Ventures and Intel Capital. Saif Partners and Metrix Partners were among others. M&As in the Fintech Sector: Mergers and acquisitions are also not new in this particular sectors. In the past couple of years, many mergers and acquisitions took place in the Fintech. There were deals of one startup buying another startup. In September 2016, PayU Money bought Citrus Pay, a Mumbai-based startup founded in the year 2011 for a deal size of $ 130 million, just before the demonetization. Many other M&A deals took place in the year 2015 and 2016 by keeping this market moving and active. The demonetization boon:

November 8, 2016, our prime minister announced the demonetization, after this, a short-term cash crunch spread in the market. During that period, mobile wallet business, a part of FinTech spread with a faster pace and boomed to high because of the new user base and increased online transactions. Businesses like Paytm spread itself to every single marginal seller and presented extensive reach. This has led to the bumper growth of this industry. Conclusion: By concluding this discussion here, it can be said that Fintech sector has immersed as a fasted growing sector in this arena of startups. This sector has shown a great potential in terms of future developments through new and disruptive ideas. That day wonâ&#x20AC;&#x2122;t be far away when this particular segment would become the most attractive and most popular sector for both, the investors and the entrepreneurs.

ÂŠ FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

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FinView Cover Story

Dr. P. Saravanan

Asso. Prof. of Corporate Finance and Financial Planning Indian Institute of Management, Shillong RECENTLY MANY COMPANIES across sectors such as information technology, pharma,cem ent,sugar,textiles,engineering made buyback offers to their shareholders and this trend is expected to continue.Let us understand what are buyback offers, why companies go for buyback and how should a shareholder evaluate the same. Why buyback? Companies tend to go for buyback offers when they have significant amount of surplus cash and no lucrative projects to invest, lower growth prospects,no plan for acquisition, e x p a n s i o n , d i ve r s i f i c a t i o n , e t c. Fu r t h e r, companies also felt that the current share price is cheaper to buy. A buyback announcement sends out a positive signal for the share. Companies offervarious reasons forbuyback such as to attain optimum capital structure, to improve earnings per share, to prevent unwanted takeover bids, to service the equity more efficiently, etc. Tax implications Since July 2015, buyback offers are taking place through the stock exchanges and security transaction taxes are being paid on such transactions. Owing to this, long-term capital gains made are tax-free and shortterm gains are subject to a tax of 15%. Further, large shareholders (who earn above `10 lakh through dividends) are being taxed at 10% tax, thus buybacks are more tax-efficient way than that of dividend not only for large shareholders but also promoters who holds a controlling stake in their company. For buyback offer, Securities and Exchange Board of India (Sebi) has also mandated 15% reservation for retail investors holding shares whose market

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value as on record date is up to `2 lakh. Look at the outstanding debt Sometime, companies may go for buyback inspite of having significant amount of debt in its balance sheet. In such a scenario, investors should evaluate why the company is announcing buyback instead of paying back its debt. Open market or tender offer How the buybacks are offeredâ&#x20AC;&#x201D;whether through open market or tender offerâ&#x20AC;&#x201D;is an important point to consider.Promoters are not permitted to participate in the open market method whereas the tender offer method is open to them. If promoters are participating in buyback, it is likely to be positive for shareholders in the long run. Look at the offer price Before selling your shares under buyback, consider carefully the offer price being made. As a shareholder,you are going to gain only if buyback offer price is significantly higher than the current market price and the quantum of the buyback amount is substantial. Another relevant point is how the buyback is being financed: is it through internal resources or through external debt? If the company takes an external debt and goes for buyback one needs to re-look at the capital structure of the company and other relevant points. It is difficult to take a decision on whether to sell shares in a buyback offer. It is a function of your expected rate of return and your holding period. If you are really a long-term investor with an investment horizon of 10 to 15 years, ignore the buyback offers so that your share can be a multi-bagger.

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Arjun Bhargava IIM Shillong Sir, talking about investment and portfolio selection, is there any method by which we can select portfolios for maximum returns? Sam, I see that recently you have started taking an active interest in portfolio building owing to your curiosity of investing in the stocks. There are many theories to select portfolios for a given amount of risk and the return desired out of the investment. I would take you through the Modern Portfolio Theory which forms a solid foundation for most other theories to build a certain portfolio. The theory was propounded and published for the first time in a paper known as “Portfolio Selection” by Henry Markowitz in 1952. The Modern portfolio theory (MPT) emphasizes on constructing portfolios for risk-averse stockholders to enhance or optimize their expected returns based on a certain level of risk in the market prevalent to the portfolio. What role does the risk play in constructing a portfolio and how is risk and return related for a given portfolio? As is clear from the definition of MPT, the risk is an integral part of investing in stock or a portfolio of stocks. An investor can create an efficient frontier (a tool that demonstrates the returns on investment for a given amount of risk undertaken) of a variety of portfolios offering highest returns for a certain amount of risk accepted by the investor (who may be risk-averse or a risk-taker, irrespective). The MPT states that the portfolio should comprise of such assets that maximize the gains of an investor for a given amount of risk. Thus, risk and return should not be viewed as two distinct entities. Similarly, for a given return desired by an investor, the portfolio can be built to minimize the risk of the investment.

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Modern Portfolio Theory

Sir, can you please elaborate more about the efficient frontier? The “Efficient Frontier” is a tool of the MPT which demonstrates to the investors the highest return expected from a portfolio, given the amount of risk that they agree to take. All possible arrangements of assets that occur are plot on the graph. The X-axis of the graph plots the portfolio’s risk percentage (measured as the standard deviation) and the Y-axis plots the expected return percentage. The different points plot as shown in the figure reveal the most coveted portfolios. For example, if Portfolio A yield an expected return of 8% and carries a risk of 8%, and the Portfolio B has a standard deviation of 10% yielding an expected return of 8%, the Portfolio A is considered more “efficient”, because, for a lower risk, it offers the same expected return. The graph connecting all these plotted points gives an upward sloping hyperbole, and this is known as the ‘Efficient Frontier Curve.’ The points that lie on this curve are the most suitable plots for investing in a portfolio.

The Efficient Frontier Graph

A N N O U N C E M E N TS ALL ARE INVITED Team Niveshak invites articles from B-Schools all across India. We are looking for original articles related to finance & economics. Students can also contribute puzzles and jokes related to finance & economics. References should be cited wherever necessary. The best article will be featured as the “Article of the Month” and would be awarded cash prize of Rs.1500/- along with a certificate. Instructions »» Please send your articles before 20th June , 2017 to niveshak.iims@gmail. com »» The subject line of the mail must be “Article for Niveshak_<Article Title>” »» Do mention your name, institute name and batch with your article »» Please ensure that the entire document has a wordcount between 800- 1000 »» Format: Microsoft WORD File, Font: - Times New Roman, Size: - 12, Line spacing: 1.5 »» Please do NOT send PDF files and kindly stick to the format »» Number of authors is limited to 2 at maximum »» Mention your e-mail id/ blog if you want the readers to contact you for further discussion »» Also certain entries which could not make the cut to the Niveshak will get figured on our Blog in the ‘Specials’ section

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