Niveshak Dec13

Niveshak THE INVESTOR

VOLUME 6 ISSUE 12

December 2013

OUTLOOK

2014

Launching ‘Niveshak Investment Fund’

FROM EDITOR’S DESK Dear Niveshaks,

Niveshak Volume VI ISSUE XII December 2013 Faculty Chairman

Prof. P. Saravanan

THE TEAM Akanksha Gupta Anchal Khaneja Anushri Bansal Apoorva Sharma Gaurav Bhardwaj Gourav Sachdeva Himanshu Arora Ishaan Mohan Jatin Sethi Kaushal Kumar Ghai Kocherlakota Tarun Kritika Nema Mohit Gupta Mohnish Khiani Neha Misra Nirmit Mohan Priyadarshi Agarwal S C Chakravarthi V All images, design and artwork are copyright of IIM Shillong Finance Club ©Finance Club Indian Institute of Management Shillong

With this issue of Niveshak, we bid farewell to an eventful year of 2013. The year is marked with the historic debut run of the Aam Aadmi Party in Delhi assembly elections and the beginning of a new wave in the Indian politics. AAP has won 28 out of 70 seats and emerged as the second largest party after BJP with the ruling Congress ending up in a humiliating defeat. The main reason behind this is sighted as the growing distrust on Congress among the people of the country in the wake of numerous scams and growing food prices. The assembly elections which were seen as semi-finals before the upcoming 2014 general elections has shown the signs of uprising Modi-wave in the country with the BJP emerging victorious in almost all the states in which the elections were held. Now, the AAP is all set to establish a new government in Delhi with outside support from Congress. The main agenda of the party will be to first prove their majority on the floor and then to pass the Jan Lokpal bill as early as possible. The year has also seen an uproar in the benchmark stock indices of Sensex and Nifty after they scaled new heights despite slowing economic growth and high inflation, in hopes of wider reforms after the 2014 Lok Sabha elections. The strong show by the BJP in assembly elections contributed to boost investor sentiments and stock indices breaking their previous all-time highs. The Federal Reserve’s announcement of a $10 billion stimulus cut, finally after a long wait, has also helped the markets stabilize. After fluctuating in a tight range for a major part of the year, the Sensex recorded a new intra-day high of 21,483.74 on December 9. The index has risen by 8.5% in 2013 from 2012 as compared to 26% in 2012. The article of the month, ‘Telecom Vendor Market undergoing a paradigm shift’ gives a note on the changing telecom landscape and its possible ramifications for the cost-sensitive market like India. Our cover story ‘Outlook 2014’ brings forward a detailed analysis of the prevailing global and domestic economic factors, their impact on various sectors and give their standpoint for the year 2014. Our next presentation, ‘Japanese Economy – How it feels to sit on a Time Bomb’ tells us how the ‘Abenomics’ has affected Japan’s economy and what they must do to come out of a likely abyss. The article on “Facebook IPO” from FinPact critically analyzes what went wrong with the biggest ever IPO. FinSight article “Mc Aloo Pvt Ltd” relates the strategies adopted by a hypothetical Pani Puri Vendor to that of the banks. The Government Securities (in short G-secs) are considered to be of lowrisk since they are backed by the taxing power of the government and are issued by it or its agencies. The classroom section of this issue takes you through how government uses these instruments to raise money and where to obtain them. To end this brief note, it’s important that we thank you, our readers, for your constant support and appreciation. It is your endless encouragement and enthusiasm that keeps us going. Kindly keep pouring in your suggestions and feedback to niveshak.iims@gmail.com and as always, Stay invested !

Team Niveshak

www.iims-niveshak.com 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 Niveshak Times

04 The Year That Was

Article of the month

Outlook 2014

10 Telecom Vendor Market undergoing a Paradigm Shift

FinGyaan 18 Japanese Economy: How it feels to sit on a Time Bomb?

26 Mc Aloo Pvt Ltd

Finsight

FinPact 22 Facebook IPO: What really happened in the biggest IPO flop ever!!

CLASSROOM

29 G-Secs

The Year That Was

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The Niveshak Times Team NIVESHAK

IIM Shillong Detroit Finally Ruled Eligible For Bankruptcy On July 18, 2013, Detroit became the largest public sector bankruptcy. Before the motor city filed, just over 60 cities, counties, towns and villages had filed for bankruptcy under Chapter 9, the procedure used by municipalities in courts since the mid-1950s. Detroit’s bankruptcy filing came with the approval of Michigan Governor Rick Snyder. The bankruptcy was filed by Emergency Manager Kevyn Orr whose job it is to find a way to resolve Detroit’s financial situation, which includes an estimated $18 million in total outstanding liabilities. Orr was appointed emergency financial manager by Gov. Snyder, an appointment opposed by Detroit residents in a November 2012 referendum. Part of Orr’s plan, to reorganize the city and cut the debt down to $2 billion, would mean that retirees, bond holders and investors would receive only 17% of what they are owed. In fact, the bankruptcy situation in Detroit presented a unique opportunity for the city to reinvent itself. However, a few days back Detroit became the largest American city ever to qualify for bankruptcy protection. Pope Benedict XVI Resigns On February 11, 2013, Pope Benedict XVI announced that he would resign—the first time a pope had done so since Gregory XII in 1415. He cited his “advanced age,” along with the physical and mental demands of the papacy, as the reason for his resignation. Naturally, a large number of conspiracy theories emerged in the wake of this controversial move. On February 22, 2013, some organizations alleged that Pope Benedict was given a 300-page dossier by a group of cardinals the day before he resigned that reveal a massive conspiracy. On March 13, 2013, it was announced that Jorge Mario Bergoglio would become the 266th Pope of the Catholic Church. After the decision, Bergoglio picked the papal name of Francis in honour of Saint Francis of Assisi. He has quickly gained a reputation for kindness and humility.

to housing market volatility in response to a rise in mortgage interest rates. Sales improved to 25.4 per cent to a seasonally adjusted annual rate of 444,000 units, according to Commerce Department in US, surpassing expectations of 425,000. Last year during October, new home sales were up 21.6 per cent. The surge in inventory due to US shutdown mid-October, allowed the median home price to slide to its lowest levels, enabling buyers to go ahead with their home purchase in October. Hence led to a peaked demand in October. India Blasts Off For Mars India’s first interplanetary probe and the centerpiece of the country’s burgeoning space program, has been met with a burst of patriotic pride. The unmanned vessel blast off from a small island in the Indian Ocean off the coast of Chennai, on a 300-day journey to reach the orbit of the Red Planet. In the history of space exploration, 40 missions to Mars have been launched, but only 16 have been successful. India’s Mars Orbiter Mission will cost about $77 million, about a fifth of other nations’ missions. Mangalyan is scheduled to enter Mars’ orbit in September next year. It will carry scientific payloads to investigate whether Mars ever had an environment in which life could have evolved. The Indian government has been forced to defend its prioritization of a mission to Mars, while vast social inequity and a laggard economy blight the nation. Prime Minister Manmohan Singh has said: ‘’A nation’s state of development is finally a product of its technological prowess’’.

Home Sales In US Peaked Since Last 33 Years During October

Arundhati Bhattacharya Became The New Chief Of SBI Arundhati Bhattacharya became the new chairperson of State Bank of India on 7th October 2013. She became the first woman chief of India’s biggest lender bank. During her tenure of 36 years in SBI, she has held a number of important positions including those of deputy managing director and corporate development officer, chief general manager (Bangalore Circle) and chief general manager (New Businesses).

US new home sales recorded their largest monthly increase in more than 33 years in October, pointing

She also headed SBI Capital Markets Ltd., a subsidiary of State Bank of India and had a stint in the

DECEMBER 2013

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Bank’s New York office where she was in charge of monitoring branch performance, overseeing external audit and correspondent relations. Her appointment comes at a time when the government is all set to open the country’s first bank dedicated for women, Bhartiya Mahila Bank and she has a number of challenges awaiting her which relate to asset quality, capital, merger of associate banks, etc. Raghuram Rajan Appointed As Next RBI Governor For Three Years The government has appointed Raghuram Rajan as the next governor of the Reserve Bank of India, raising hopes that the former IMF chief economist, who in 2005 famously predicted the financial crisis that hit the developed world three years later, will bring a fresh and perhaps more innovative approach to pull the economy out of the current crisis of slowing growth and a weakening currency. Rajan, 50, who was previously the chief economic advisor, took over from D Subbarao on September 4. He is the youngest governor of India’s central bank since Sir CD Deshmukh, the first Indian governor whose tenure ran from August 1943 to June 1949. He is the 23rd governor of RBI, succeeding Subbarao, whose tenure was marked by visible tension between North Block, the abode of the finance ministry, and Mint Street, as RBI is often referred to. Overseas investors had pumped in over Rs 11,000 crore (USD 1.7 billion) in the Indian stock market the month following new RBI Governor Raghuram Rajan’s announcing measures to boost the weakening rupee and revive economic growth. An alumni of IIM-Ahmedabad and IIT-Delhi, Rajan earned his doctorate from the Massachusetts Institute of Technology. He was professor at the University of Chicago’s Booth School of Business before taking over as chief economic advisor last August. Master Blaster Sachin Tendulkar Retires Finally the most dreaded day for an Indian cricket fan arrived in the year 2013 when the cricketing maestro retired from all forms of international cricket. After carrying the burden of the sport for 23 years and creating innumerous batting records, finally Sachin Tendulkar was given an immemorial farewell at his homeground i.e the Wankhede stadium. After conquering the peak of a century of

centuries and amassing more than 30000 runs at the international level, the master left the field forever after an emotional speech thanking everyone who has helped him in his career. Second only to the great Sir Don Bradman, Sachin scored 72 in his last outing. Immediately after retiring the Government bestowed him with the highest Indian civilian award, the Bharat Ratna. With this he also became the first sportsperson to receive this honour. The Rise Of Bitcoin Created in 2009, bitcoin has grown into the world’s largest virtual currency, which is traded on exchanges around the world. The validity of the transactions by bitcoin is backed up by codebreaking work done by a network of miners who are paid for solving system’s cryptographic challenges issued by bitcoin. Bitcoin raises questions about the relationship between the governments and money in an increasingly digital world. Although bitcoin users don’t trust fiat currency and want to avoid inflation, they are vulnerable to hacking. The value of bitcoin soared early in 2013 amid a huge media coverage. In July 2013, the Winklevoss twins of Facebook fame announced that they had bought 1% of the Bitcoin in existence and filed to offer Bitcoin ETF. In the November of 2013, there was a sudden spike in demand from Chinese buyers, which had tripled the value of bitcoin currency in less than a month from $213 to as high as $675. On 27th November, the value of bitcoin currency touched the 1000 dollars mark which can be partially attributed to the open-mindedness shown by the lawmakers of congressional panel. Soon after reaching a lofty highs of $1200, the People’s Bank of China issued an official statement about bitcoin that banks and payment companies were prohibited from dealing with bitcoin, but that the country’s citizens are free to buy and sell it and this announcement has seen its effect in the form of decline in the value of bitcoin to $800. So, even if private crypto-currencies would feature more in the near future, it does not necessarily mean that it will dislodge the existing fiat currencies. This can be supported by the fact that no single private currency can be relied on to have necessary unique features to become a useful source of value.

The Year That Was

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Article ofSnapshot the Month Market Cover Story

Market Snapshot

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

MARKET CAP (IN RS. CR) BSE Mkt. Cap

69,76,392.43 Source: www.bseindia.com

CURRENCY RATES INR / 1 USD INR / 1 Euro INR / 100 Jap. YEN INR / 1 Pound Sterling INR/ 1 SGD

61.8668 84.651 59.37 101.1027 48.79

CURRENCY MOVEMENTS

LENDING / DEPOSIT RATES Base rate Deposit rate

9.80%-10.25% 8.00% - 9.05%

RESERVE RATIOS CRR SLR

4.00% 23%

POLICY RATES Bank Rate Repo rate Reverse Repo rate

8.75% 7.75% 6.75%

Source: www.bseindia.com 25th November to 24th December 2013 Data as on 25th December 2013

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BSE Index Sensex MIDCAP Smallcap AUTO BANKEX CD CG FMCG Healthcare IT METAL OIL&GAS POWER PSU REALTY TECK

Open

% change

3.97% 7.42% 7.38% 3.25% 5.85% 2.98% 14.36% 1.47% 5.28% 6.99% 7.54% 5.34% 6.77% 4.37% 10.05% 5.60%

20229.05 6162.01 5991.2 11986.6 12222.07 5585.62 8957.88 6404.51 9452.12 8376.97 9131 8361.57 1569.24 5589.91 1319.3 4724.71

21032.71 6619.19 6433.61 12375.58 12937.6 5751.87 10244.24 6498.48 9950.93 8962.53 9819.76 8807.98 1675.48 5834.28 1451.88 4989.32

% CHANGE

Article Market of Snapshot the Month Cover Story

Market Snapshot

Finance Club, launches its first

Fund Objective

‘Niveshak I

Niveshak Investment Fund is a diversified equity portfo diversified portfolio strategy. The investment portfolio w large and midcap companies. Investment Philosophy

• This fund aims to optimize the risk-adjusted return by building a portfolio of large and mid-cap stocks across sectors, selected as per “Sector Choice Methodology” developed by finance club of IIM Shillong • It will follow a blend of top-down macro research to identify growth sectors and bottom-up fundamental research to cherry pick stocks • It is an equity fund focused on investing in carefully selected stocks offering best possible risk-adjusted return across identified sectors with potential growth opportunities • It aims to give an edge by capturing the best sectoral opportunities in the market • A smaller allocation to other sectors will be done purely for defensive considerations

, IIM Shillong Investment fund

Investment Fund’

olio that aims for growth from a focused and optimally would comprise of about 25 - 30 stocks belonging to the Key Features

• Initially, a virtual amount of Rs. 10,00,000 would be used for formation of the first portfolio • Each change in investment portfolio would be notified on Niveshak’s facebook page and website for transparency (https://www.facebook.com/Niveshak.IIMS) • Quarterly report would be published by Finance Club of IIM Shillong reviewing the performance of the investment portfolio and reasons for the outcome of the performance • Methodology for choice of the sector and the stock is strictly confidential and would only be disclosed to investors investing Rs. 50,000 or more • Our fund would stand in comparison with NSE Nifty for its performance measurement

Article of the Month Cover Story

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Telecom Vendor Market undergoing a paradigm shift

Soumya Chattopadhyay

IIM Kozhikode China, most often discussed in the world economy for its immense potential for labour arbitrage and being dubbed as the manufacturer of the world was in the news for something entirely different not so long ago. It may have been pushed aside to the periphery as more exciting news have hogged the limelight, let us take a closer look at it. Chinese telecom company Huawei Technologies reported close to 5% rise in its sales to 102.7 billion Yuan (US$16.1 billion) for the first-half of 2012, ending on June

30th, which surpassed Ericsson’s 106.3 billion kronor (US$15.25 billion) over the same period. Erstwhile the world’s second-largest equipment manufacturer, Huawei’s latest income became for the first time more than the Swedish player, exclaimed Chinese media. “[Huawei] continues to maintain robust growth momentum, although the global economic situation and telecom equipment market remains a significant challenge,” said the company. Now the question is what’s so special about a

Fig 1: Mobile Infrastructure Global Market Share

DECEMBER 2013

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and hence are least likely to be the significant contributor to the vendor organizations’ bottom line. From the era of 90’s it became evident that emerging markets are going to dominate the telecom sphere world wide as there was the growth potential. Interestingly, it is during the same time frame Chinese government promoted Huawei and ZTE. Back then, nobody would have imagined that in a short span of 20 years, they will not only compete with the western biggies, they will be almost ousting most of them. Motorola is no longer in the game, the joint venture of Alcatel-Lucent is almost a fringe player, NSN is bleeding for years and was perhaps the worst affected by the rise of Huawei in some part of

Fig 2: Net Profit/Loss of Huawei Tech. & ZTE Corp.

Speaking about Ericsson where I have the experience of working for close to three years, it has always been a technology leader with its strong R&D facilities. With a history of over 130 years, it has always sustained in the market place by making superior ‘boxes’. In telecom, box typically means equipment from the vendor side which is being sold to the telecom operators. Interestingly, It’s not only Ericsson, companies like Motorola, Alcatel-Lucent, NSN; all had the core competence of making quality products. In markets where previously they have competed, namely Japan, US, Canada and Europe; point of differentiation between them has always been technological supremacy. This industry has not still faced the tremendous cost implications and hence low cost leadership positioning was not a lucrative idea for any of the incumbent market players. However juicy may those markets be, they reached their point of stagnation roughly some 20 years before today. Those markets lack the scope of further telecom penetration

the world. The only behemoth left in the ring is the Swedish multinational, Ericsson and we got the news in 2012 about it being replaced by Huawei as the market leader. Perhaps, now if we look back at the financial report mentioned earlier in the article, we will be able to have a broader picture. This market world-wide is going through a huge paradigm shift where entrenched market players of yesteryears are falling by the road side as new Chinese players, bankrolled by almost interest free government debt and by dint of unforeseen reverse engineering skills going ahead at an alarming speed. Now it would be interesting to take a look at the possible ramifications of this change in the telecom vendor market with respect to India. India having a population of more than 1 billion consisting of a burgeoning middle class is an attractive market place and an indispensable one in terms of finalising strategy of any organisation because of the sheer volume of business it would generate.

Article of the Month Cover Story

single financial result declaration which may well just be a single event, a transient one off thing that probably has no long term ramifications. After all, we are not talking about a time tested trend and one result hardly justifies making a conclusive stand about anything. But as we shall look beyond just this result, a different picture will come to the fore. How telecom, communication; in short the ICT industry is going through a paradigm shift. Increasingly, European telecom vendor behemoths like Nokia, Siemens (they eventually forged a joint entity NSN which is again going to be dissolved as Nokia is all set to acquire Siemens’ share in the Joint venture), Ericsson are being displaced by Chinese companies like Huawei and ZTE.

Article of the Month Cover Story

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Huawei, a privately held firm is today India’s dominant telecom equipment provider, much to the annoyance of the Indian government. The company which is stationed in India for more than a decade now is one of the first Chinese companies to cross the mighty Himalaya’s and look for opportunities beyond the Chinese domestic market. Predicting the possible future extent of the nascent market of that time, Huawei stuck on. Even after several instances of Indian government almost throwing it out of the country, accusing it of espionage, under-cutting the equipment market and even sabotaging chances for domestic players, Huawei went on to invest heavily in their South-Asian neighbour, consequently setting-up an R&D facility and an equipment testing facility. Eventually such efforts mitigated some of the apprehensions and with instances of increasing localization within the company they warmed Indian hearts. However, Huawei still doesn’t have the kind of trust and confidence bestowed on Ericsson or NSN. But when it is about cost saving to the tune of 40%, a quick set-up time and efficiency in a bitterly fought cost sensitive market, many Indian telecom companies, both public and private have been forced to opt for Huawei. For an emerging economy like India, the crying need is of quick and low cost equipment and Chinese companies connect the dots better than their European competitors. If it is not about quality and high end latest technology, then the competitive advantage of technological supremacy of European companies goes for a toss. This trend is evident in major parts of BRIC and Central Asian markets. Starting from telecom base stations, to mobile handsets, the Chinese manufacturers have managed to penetrate this potentially huge yet difficult to sustain market place and slowly yet surely make profits. ZTE, another noteworthy Chinese entity, a competitor of Huawei in many ways followed suit a few years after the latter’s foray into global markets. Though it is still a juvenile entity in terms of revenue, it follows precisely the same Huawei model of being a fast follower and cost leadership. It may not be long when it

DECEMBER 2013

learns the trick of the game as well. From the Indian market perspective, Ericsson has taken major blows in recent time with its revenue stream being severely constrained while Huawei stands in a commanding position. More so after North India’s recent power blackout, when Indian government authorities had to grudgingly wake up to the fact that India’s infrastructure needs to be built up quickly yet with severe cost constraints and perhaps China can deliver better than anybody with these two factors in mind. New Delhi currently has little choice than to submit tenders to Chinese equipment and infrastructure companies as practicalities of the domestic market has left it in a tight spot. However, granting Chinese companies a majority of the contracts by most of the Indian Telecom operators will end up posing other challenges to New Delhi as it will increase Chinese imports Vs exports, tilting the already skewed traded basket of goods even further in China’s favour. Close to US$40 billion trade deficit with China is good enough reason to cause sleepless nights to our finance ministry. India is worried, and quite rightly so that the already sharp rise in trade deficit will further worsen conditions – increasing inflation, depreciating the rupee which is going through a lot of turmoil anyway and putting extreme strain on the country’s capacity to lure foreign direct investment. Only way to get out of it is Indian telecom companies need to start moving up the value chain and start exploring possibilities of backward integration. Initiating country wide bulk managed services deals with European companies at a cheaper rate by giving them sufficient volume can also be an option to think about. There is another entirely different aspect of this story is also related with India. To begin with, we need to understand h o w

Ericsson in its desperate bid to reinvent its competitive advantage of technology leadership is moving towards a “Outside In”

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competitive telecom vendor market. However, question remains how effectively Chinese vendors can go forward from this crucial strategic junction where they are no longer playing the second fiddle to the Western companies. As they plan to march ahead, they can no longer position themselves as just an aggregator or fast follower. The onus of the technology leadership and taking forward the innovation bandwagon will fall firmly on their shoulders as they can only grow further if they can offer something new. Huawei has recently declared its firm commitment to spend the highest amount of money for its R&D wing. However, it still needs to travel some distance to convince critics about its ability to be the torch bearer of further innovation in the telecom domain. With European companies bleeding

Fig 3: Spending on Research and Development by Telecom Vendors

the daunting task of rapidly repositioning itself going out of its own 130 years of comfort zone and core skill sets is a complex and different question altogether. But the fact remains, what Ericsson did is mere replication of the same cheap, back office outsourcing model that has already been implemented by the likes of IBM, Cognizant etc. But it is for the very first time this model has been tried by a global telecom player and it would be interesting to see whether other European biggies like Nokia-Siemens and Alcatel-Lucent follow the similar path in their desperate bid to carve out spaces in the overtly

heavily and consequently not being able to spend resources behind further research, it is of extreme importance that Chinese players live up to it. Otherwise, telecom domain may have to brace for a period of technological stagnation and muted innovation in the near future.

Huawei continues to maintain robust growth momentum, although the global economic situation and telecom equipment market remains

ÂŠ FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

Article of the Month Cover Story

approach which is essentially about offering customers end to end technological solutions in the entire ICT domain. In the past two years or so, Ericsson is quickly shifting its positioning from just being an equipment provider to a technology solution provider. For being able to make this huge strategic shift, it has selected India as the destination. The Swedish company went on a hiring spree at a frantic pace employing more than 10000 software employees mostly by dint of poaching them from the other entrenched, incumbent market players in the software industry, operating out of India. It has rather an audacious objective of setting up a fully functional and delivering software and consulting wing in near future exclusively catering to the global telecom industry. Whether they will be able to pull off

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Cover Story

Outlook

2014

Team Niveshak

IIM Shillong Introduction 2013 was a tumultuous year for the global economy. It has seen both the ups and downs in terms of business cycles that threatened the financial stability of the world. Early in the year, Cyprus’ debt crisis led to the downgrade of its sovereign rating to junk status and brought back the fears of the resurgence of the Euro Crisis. The debt ceiling debate between the Republicans and the Democrats that happened in the US during October had an adverse impact on the global economy and reached a point where the US Government could have faced a debt payment default. The world this year also saw the rise of the virtual currency Bitcoin, from being less than $20 a unit at the beginning of the year and finally touching $1000 level for a Bitcoin. Yet another major event that happened in September this year and would go down the corporate history books is Nokia’s acquisition by Microsoft. This might further intensify the competition in the mobile communication market. Along with the rest of the world, India has witnessed a few exciting events in 2013. Some of the major events include the free fall of the Indian currency and a speedy recovery to the current levels after a series of corrective measures taken by Mr. Raghuram Rajan, the newly appointed Governor of the Reserve Bank of India and the rise in FDI limits in sectors such as Telecom, Multi-Brand Retail, defense etc. The Indian Government, though accused of being in a logjam, took a few important policy decisions regarding the introduction of the Land Acquisition Bill, the Pension Bill and the controversial Food Security Bill. Lastly, the world this year has also witnessed the sun set on the illustrious career of the cricketing maestro Sachin Tendulkar. Let us have a look at what the future beholds in 2014 for the economy of India and the world. Global Outlook Quantitative-easing, which was designed to stimulate the U.S. economy, has been tapered

DECEMBER 2013

from $85 billion a month to $75 billion. Due to the unpredictability of the timing of the tapering, substantial turmoil in the global financial markets was observed during the middle of 2013.The fact that the Fed Reserve is pondering over the issue of QE tapering implies that the US economy is moving in the right direction signifying the symptoms of higher growth rates in the medium to long term. The higher growth symptoms of US have a huge impact on the global economy, especially on the developing countries because of rise in their exports to the U.S. The recent Fed taper announcement didn’t have any impact on the Indian financial markets as the markets were well prepared and also due to the improved economic fundamentals in the past 3 to 6 months. The very successful FCNR scheme implemented by RBI shifted the positions of FIIs from the stock markets into this scheme, because of which there is very little hot money to go out right now. So, it can be inferred that even if there is any short-term volatility, the markets would not show any erratic variations due to the reduction in the gush of liquidity being provided by U.S. Fed through FIIs. The QEtapering would result in an increase in interest rates in the U.S. at the longer end of the yield curve. This can affect the US economy in two ways: the rise in interest rates would lead to an increase in mortgage rates and this would slow down the housing market in the U.S. The second effect is that the tapering may lead to higher burden (borrowing costs) to the U.S. government which is already constrained by the debt-ceiling limit. A major impact of increase in interest rates in the U.S. on the emerging markets is that of the fund outflow from these economies because of the increase in yield rates of the U.S. government bonds. Euro zone’s GDP expanded by 0.3% in the second quarter of 2013, signaling an exit from recession. The European Commission is expecting to have a GDP growth of 1.1% in 2014 against the previous

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Cover Story

Impact on Sensex (from June to September) of QE tapering announcement in May 2013

No Impact on Sensex of QE tapering announcement in December 2013

Fig 1: Impact of QE Tapering Announcement on Sensex

forecast of 1.2%. The inflation rate is expected to be at lower levels, below the European Central Bank’s target of just below 2 percent. On the unemployment front, it is expected to stay at 12.2% and may ease off only in 2015. With a global share of around 25% in terms of GDP, the anticipated deflationary scenario in the European Union threatens the global economic recovery from 2008 recession. The slump in the domestic demand in European Union further hampers the trade with India and thus has an impact on the exports from India. This could further aggravate the situation of slow GDP growth and also the CAD deficit situation of India. After witnessing a peak GDP growth rate of 7.8% in the third quarter of 2013, China is expected to have a GDP growth rate of 6.9% in 2014 according to Nomura. This sluggish economic forecast is

Fig 2: Euro Area GDP Growth Rate

due to the tight economic policies adopted by China in expectation of systemic financial risks. These risks include the signs of rapid build-up of financial leverage, elevated property prices and worsening of asset quality because of over dependence of the economy on social lending. With the majority of China’s population reaching the retirement age, a structural reform that

could be undertaken to increase the work-force population could be the relaxation of the one child policy. This will have a huge impact on the domestic demand right from the hospitals to the baby care products. For Japan, IMF has predicted a growth rate of 1.2% in 2014, but much of this would depend on the successful implementation and outcome of the recent structural reforms (mainly constituted sales tax hike) being undertaken under Abenomics. India Outlook Reflecting the macro-economic challenges, Moody’s has predicted India’s GDP growth rate to remain weak and remain around 5.5% for the fiscal year ending in March 2015 as the elections in the mid of the year are expected to delay the reforms. So, even if a new government is formed at the Center, it would take considerable amount of time for the new government to consolidate the existing initiatives and to implement any new initiatives, which would further take more time to get reflected in the numbers. Hence, considering the practical difficulties in the implementation of policies and removal of bottle-necks, there may not be any sudden spikes in the economy although there may be a boom in the stock markets due to the euphoria of the formation of an industry friendly government, if it so happens. On the currency front, it is expected that the rupee would stabilize at around ₹60 per dollar. Considering the fact that quarterly CAD fell to $5.2 billion in July-September quarter in which the major contribution was that of a sharp fall in gold imports, an annual target of $70 billion of CAD i.e. 3.9% of GDP in 2014 looks quite reachable. On the other hand, the government would not be able to meet its fiscal deficit target of 4.8% of GDP due to higher budgeted spending of 10000 crores during 2014 general elections. The only way it could fund its higher expenditure and yet stay within the

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stipulated limits, is by monetizing its stake in a likes of Tesco and IKEA stores. Owing to these few PSUs or by receiving higher dividends from unsatisfactory responses from the global retail them or by receiving higher proceeds from the giants, a mixed performance of the Indian retail upcoming spectrum auctions. It is expected that sector in 2014 can be anticipated. The key here the decrease in CAD will outweigh the increase is the result of the general elections to be held in fiscal deficit. With the expectation that an next year. BJP president Rajnath Singh indicated industry friendly government will be formed, that there would be a reversal of policies related foreign capital inflows are expected to pick up in to FDI if BJP is voted to power. With a majority the second half of the year. Hence, a fall in CAD of people interested in the outcome of 2014 and an increase in foreign capital inflows are general elections, a good amount of investment some of the strong factors which support our inflow can be seen in the second half of 2014. prediction of rupee value to be at 60 per dollar. IT Sector With the interest rates hovering around 9-10%, growth not picking up drastically and consumer Better than expected US growth, higher spending showing a downward trend, it is a rare discretionary spends on IT from global companies case that inflation could rise from current levels. and higher growth forecasts by NASCOM, suggest At the same time, the CPI index would not fall a better outlook for domestic IT sector in India drastically due to the supply side issues which is on the horizon. Considering the fact that the would take longer time to be addressed. On the Indiaâ&#x20AC;&#x2122;s top software companies like TCS, Infosys, Stock Markets front, it is anticipated that the Wipro, HCL Technologies etc. posted stellar main triggers would be Modi factor playing out results in the previous quarter and the expected until elections and the quantum of QE tapering hiring is to increase by 33% in the 1st quarter of and these points would overshadow the benign 2014, a favorable scenario for IT sector in India is expected, provided there are no external expected earnings growth of 8-10% in FY15. hiccups. Another key factor that can contribute Industry Outlook as a growth driver for IT sector is the increase in Retail Sector spending in online retail, cloud computing and India, the home to one of the top 5 retail markets e-commerce. With companies such as Flipkart in the world, offers an immense potential for raising $360 million in its fifth round of funding, the growth and opportunities in this sector. As Myntra raising $25 million there could be a huge of now, 90% of the retail market is controlled by domestic demand potential for IT services in the unorganized segment. With the consumers 2014. But one should not get carried away by gradually shifting from unorganized sector to this huge potential for IT sector. The Immigration organized retailing, a huge growth in this sector bill, which is being pushed by US senators and is awaited in the near long term. Against the is expected to become a law in the early 2014, negative outlook for retail sector in 2013, the which will double the visa application fee for the Indian software organized retail sector firms and will has fared well in also force which the companies them to reduce such as Reliance professionals Fresh, Aditya Birla with H1B work More and Tataâ&#x20AC;&#x2122;s Star permit. With Bazaar were able to more than half shrink their combined of the revenues losses by about half. coming from On the flipside, the North America, break-up of Bhartithis move would Walmart has raised disrupt the further questions on existing business FDI rules in India. The models of the controversial issues Indian IT firms. relating to the FDI So, much of the in multi-brand retail success of Indian such as the sourcing IT firms depends of at least 30% of the on the policies Fig 3: Incremental Revenues and Net Profit of IT Companies products from small adopted by the industries, 50% of the total investment in backend infrastructure U.S. government. etc. caused not only the split up of Bharti and Telecom Sector Walmart, but also delayed the opening of the Telecom sector has witnessed a comeback in

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FY14 after 3-4 years of underperformance when for the industry stood at 13.37%, credit growth compared to the broader index. This happened was at 18.7% in Q2 FY14 shows positive signs even though the quarterly results of the main for the sector. From an investment perspective, players suggest otherwise, with revenues, ARPUs, an investor cannot ignore this sector because and profits still not out of the woods. Analysts of its higher weightage in Sensex. That is why mainly attribute this to two main reasons: for FY15, well managed large private banks that easing regulatory framework and decreased have built up a good retail franchise in the recent competitive intensity. But the balance sheets of years and have tighter lending norms can be these companies suggest otherwise with higher preferred. PSUs are expected to underperform loans taken by them and the interest costs with respect to their private counterparts due to continuing to weigh down their profits. Even additional capital infusion requirements, losing though the competitive intensity has eased, market share to private players, higher NPA pricing power has not returned to this sector levels and governance issues cropping up during which is evident the change from the fact that in their top these companies management; are still not this even after able to charge having a huge their 3G services valuation gap at premium between the two prices. Another baskets. Another indicator of the major event in direction of the this sector would industry would be the awarding be the upcoming of new banking s p e c t r u m licenses to big auctions which corporate houses would indicate like Aditya Birla the bullishness Group and L&T of the players. Finance among FY15 could be others, which the year of a would increase Fig 5: Banking Sector Performance tectonic shift in the competition the industry as it is anticipated that there could in this sector. be consolidation in this sector after the recent Conclusion issuance of the M&A guidelines by EGOM. All in all, 2014 promises to be an eventful year Banking Sector with a lot depending on the way the economic Banking has been one sector that has variables respond to the moves of the U.S. Fed. underperformed the Sensex by almost 11% in Europe’s faster recovery from sovereign debt the past year even after having a 28% weightage crisis could be a booster to the global economy. Any change in the one child policy rule in China would have a positive impact on the outlook for China’s economy. The central election outcome would be the most awaited event in India and would decide the future direction of the financial markets of the country. An improvement in the macroeconomic variables in the past few months gives an optimistic view for 2014. Export oriented sectors could continue to report better returns not due to the rupee depreciation as seen in the last year, but due to Fig 4: Telecom Industry Debt 2008-13 improving global economy, thus creating newer in it. This underperformance can be greatly opportunities for these businesses to grow. attributed to the rising Non Performing Assets Domestically dependent sectors, which were (NPA) levels not only in PSU banks but also in the recent outperformers in the markets, would private sector banks with 3.7% gross NPA levels perform in-line with the market in the coming for the whole sector. Besides NPA levels, factors year. One can expect a bumpy ride through the such as rupee volatility, persistent inflation and year 2013 which promises a lot for the economy low economic growth added to the woes of this that has performed way below its true potential. sector in the past year. Though the deposit growth

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FinGyaan

Japanese Economy How It feels To Sit On A Time Bomb!

Chaahat Khattar

IBS, Hyderabad Mathematics is always fun and it is even funnier if you explore something new in it. Japan recently did. Japan’s economy has been ballooning so much (catch the sarcasm in it) that it took Bloomberg not much time to introduce a term we did not hear of before- Quadrillion. In August 2013, Japan’s public debt crossed 15 zeroes mark

DECEMBER 2013

which looks like 1,000,000,000,000,000 Yen. To make things sound a bit sophisticated (possibly not as much embarrassing), Bloomberg went on to term this number as a 100 Trillion which is definitely not as much fun to sound. As per Organisation for Economic Co-operation and Development (“OECD”), The economy of Japan is the third largest in the world by nominal Gross Domestic Product (close to USD 6 Trillion), the fourth largest by Purchasing Power Parity and is the world’s second largest developed economy. This little nation (only by virtue of its size) is world’s 3rd largest automobile manufacturing country (Toyota, a Japanese automobile major is world’s biggest automobile company), has the largest electronics goods industry (Sony Electronics is a market leader in several segments such as television, gaming consoles, commercial appliances, cameras etc.), and is often ranked among the world’s most innovative countries leading several measures of global patent filings. Japan is the world’s largest creditor nation, generally running an annual

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trade surplus and having a considerable net international investment surplus. As a matter of fact, United States of America owes Japan around USD 1.1 Trillion making Japan the second largest lender to USA, just couple of billions short of People’s Republic of China. Japanese economy after facing a short-term recession as an aftermath of disastrous earthquake and tsunami in 2011 bounced back and The Tokyo stock market has surged about 65 percent since last fall. In the second quarter, the economy expanded by 3.8 percent, which is faster than other developed economies and the moderate inflation which is necessary for an economy to grow is back. With all these rosy numbers and accolades around, it is so hard to believe that such a nation is struggling and is just blowing off recession and financial meltdown every other day. Japan’s public debt is ever increasing. It is 233% of the Gross Domestic Product (“GDP”) which is worse than US’s 80% and even worrying than Greece’s 155% . There are several reasons for this position of Japan. The most important being the stimulus

packages Japan’s government has been announcing in the recent past. Almost after every quarter the government has been announcing multi billion dollar stimulus packages and then the Bank of Japan (Central Bank of Japan) announces separate stimulus packages like the USD 117 Billion one which it announced in the beginning of 2013. This is too much for monetary easing and can lead to financial institutions becoming depended upon the public money. Economic recessions have impacted Japanese economy severely. Exports have fallen down and country has moved from trade surplus to trade deficit. Going back to the point of stimulus packages, the investors lose interest in such an economy which has pushed down the value of government bonds in Japan hammering the value of Japanese Yen (“JPY”) and as JPY gets badly affected, the oil import bill for Japan has increased the net import bill. The demographic situation is also a reason to be blamed on for Japan’s economic catastrophe. This is more of a natural factor leading to unwanted consequences. The young population in Japan is low, birthrate is low, death rate is

Economic recessions have impacted Japanese economy severely. Exports have fallen down and country has moved from trade surplus to trade deficit © FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

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high (Japan is losing close to a million people every year), immigration is low but number of Japanese people over the retirement age is very high (The average Japanese farmer is 66 years old, his farm is less than five acres in size, and he is the beneficiary of his share of about $50 billion of annual government subsidies ) which puts pressure on the social security system of the nation. Now Japan has been caught up in the vicious circle of debt. As much as the government has raised, it is required to pay more as interest payments, as a result of tsunami, the spending on public works have increased leading to more borrowing and also as more money is being spent on social security, government needs more funds again leading to higher interest payments on increased borrowing . Someone might wonder that if the situation is so bad in Japan then why we are not forecasting a US or European crisis like situation for Japan? The answer is very simple. Most of Japan’s debt is internal unlike US or European nations. In numbers, Japan owes USD 3 Trillion to external sources which is less than its GDP. So a breather for Japan is that the money is flowing internally only and the government ends up paying interest to its own banks and it does not have to go through the real test of bonds markets for raising funds from external sources. In order to bring the atrocious budgetary deficit under control, Japan under the leadership of Prime Minister Shinzo Abe have taken three primary steps so far which journalists refer to us “Three Arrows ” or “Abenomics”. One we have already discussed about giving financial stimulus and infusing capital into the businesses. The other one deals with monetary easing. With due help from Bank of Japan, knowingly or unknowingly Japan has been printing more currency (increasing money supply in the economy) in the recent past in order to increase inflation. By doing so Japan has planned to increase consumption thereby brining GDP on track. The third arrow talks about structural reforms in the economy. To help unlock that

money, Abe has aimed his third arrow of economic policy at growth-inducing reforms from trade liberalization to steps elevating the participation of women in the workforce. So far, the Abenomics has been influential but definitely not revolutionary. The growth rate is positive and so is inflation but that could be short term and the three arrows might not be sustainable in the long run. Japan for the first time since 1997 has also increased sales tax from 5% to 8% which was expected to generate close to USD 8 Trillion in revenues for the government but at the same time to cushion it up, Abe announced a USD 5 Trillion stimulus so the net realizable benefit of USD 3 Trillion to the government seems like peanuts and questionable. Also, Japanese firms might just hit back with lower profits to pay lower taxes that can lead to worst-case scenario. Will Japanese exports really increase over the coming months and years? In a theoretical, static world, maybe. But in the real, dynamic world, not a chance, at least not in a sustained way. Why? Two main reasons: First, strong yen during much of the time period before 2013 caused traditional Japanese exporters to move production facilities overseas to much cheaper areas. As a result, many “Japanese” goods now are actually Chinese or Korean or Filipino or Vietnamese. Therefore, the lower yen does not increase shipments of these products from Japan. In fact, many of these goods now are imported by Japanese retailers at increased prices, reflecting the yen’s decline. Other nations will retaliate against a lower yen. They will monetize their own debts, increasing the supply of their own fiat currencies, driving down those currencies’ values . If Japan opts for cuts such as cut on its spending or social welfare, it will not help much as that will reduce demand in the system and it will be like a situation where a struggling firm multiplies its revenue by sacking thousands of employees or by introducing austerity measures which provides a cushion for short run but in the long run such firms end up being acquired or filing for bankruptcy.

Most of Japan’s debt is internal unlike US or European nations. In numbers, Japan owes USD 3 Trillion to external sources which is less than its GDP

DECEMBER 2013

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NOVEMBER 2013 1. Herbalife Now the point of discussion is that what Japan should do? It seems like it is into an abyss. The real thing is that yes it is true Japan is in real mess but what it can do is that try not to dig the hole deeper and instead try to refill the same and Japan itself will come to a better position. Growth will be the key to Japanâ&#x20AC;&#x2122;s rebound. Japan will need to focus more on multiplying its GDP growth, ensuring inflation in the economy and controlling upon the stimulus packages it has been giving. Japan enjoys the fact that it can control the interest rate it has been paying on debt as most of it is internal so it can take up the risk of engineering a higher inflation oriented economy. This will further help Japan in reducing Debt-GDP ratio which will make Japanese Government Bonds more lucrative to buy thereby generating more of external money supply in the economy. Government should promote tourism, immigration and bring back the industries it has lost when JPY was becoming stronger. In a nutshell, Japan has an interesting time ahead. In 2020, Tokyo will be playing host to Summer Olympics and for that Japan needs to have a sustainable and extremely stable economy. No wonder the government is using all its arsenal in order to bring the economy back on track but more than that it must know that Japan is a developed nation and the industries it has must be sustainable enough to create cushions for themselves and letting people have more income enabling them to go for shopping and boost the economy.

2. C K Prahlad 3. Bitcoin 4. Vietnam 5. Stephan R Pratt 6. Tarini Vaidya of KBC Bank 7. Investopedia 8. Jeff Bezos 9. Circuit Breakers

Japan will need to focus more on improving its GDP growth, ensuring inflation in the economy and controlling upon the stimulus packages it has been giving

ÂŠ FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

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Facebook IPO: What really happened in the biggest IPO flop ever!!

Mohit Gupta

IIM Shillong The Facebook IPO was the most anticipated and the most hyped IPO of the decade. It was one of the biggest IPO in technology and internet history. But the IPO which was being hailed as the “cultural touchstone” turned out to be a big disaster. The stock faltered as soon as it opened. The shares plummeted more than 50% over the next few months. It became a disastrous stock floatation. The IPO buyers of Facebook who expected first day “pop” like LinkedIn and

investors came to know about the negative information of Facebook’s performance but the small investors did not get any information. • The article emphasizes just how big information advantage big sophisticated institutional investors have over small investors. • This article also rejects the hypothesis that investing is “a level playing field.” But first the complete story of how the small

Share Price at market close $45.00 $40.00 $35.00 $30.00 $25.00 $20.00 $15.00 $10.00 $5.00 $0.00

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Share Price at market close

Fig 1: Graph of share price at market close at various dates

were hoping to get richer in the upcoming days got demolished. Facebook’s reputation got a dive. Lawsuits and recriminations commenced. The fault with the IPO lies with Facebook, Facebook’s bankers and some IPO information disclosure rules. One problem with the IPO was also that investors paid way too much for the stock. During the roadshow of Facebook before the IPO the big institutional

DECEMBER 2013

investors were demolished in Facebook IPO. In the beginning of an IPO process, company managers meet with the research analysts to teach them about the company business and sometimes they also share the financial information of the company. In case of Facebook Mark Zuckerberg could not come in the meeting. Facebook’s CFO David Ebersman met with the analysts and gave them the forecast

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But trouble started soon. Facebook’s financial performance had deteriorated. Ebersman Underwriter Morgan Stanley JP Morgan Goldman Sachs

realized that it might be difficult for Facebook to attain the growth gates that he had verbally provided to the analysts. Though the change in the growth rate was small, in IPO showbiz statistics runs on basis of momentum, and nothing kills momentum like a poorly timed downward revision. Ebersman then reached out to Michael Grimes who was the head investment banker at IPO underwriter Morgan Stanley. He told the issues to Grimes. Michael Grimes is one among the most respected investment bankers in Silicon Valley. Grimes took a overview of the complete situation from Ebersman so that he could come up with a plan. He called others at Morgan Stanley to warn them about the deterioration of Facebook’s performance. Then Grimes told Ebersman to tell the underwriter analysts about the deterioration of Facebook’s performance but the critical issue was will Facebook tell them that. Meanwhile, Cipora Herman, Facebook’s Treasurer requested for the financial models that the analysts had submitted a couple of weeks earlier to see exactly what their estimates were. Facebook finance team saw that the estimates were very similar to the guidance given by them. Now the issue was how to get the analysts quietly reduce the estimates without spooking the IPO buyers. By then, this had become a sensitive issue that the lawyers got involved. The lawyer’s recommended Facebook to update the vague language it had given in S-1 and to include a clear warning to the investors about the possible impact of growth of Facebook’s mobile users on

2012 Revenue Estimates $1.175 $1.182 $1.207 Number in Billions

Revised 2012 Revenue Estimates $1.111 $1.096 $1.125

Table 1: Estimated revenues and revised estimated revenues

Underwriter

Morgan Stanley JP Morgan Goldman Sachs

2012 Revenue guidance proAnalysts revised 2012 Revenue % Change vided to analysts on April 16 Estimates after call from Treasurer 2012 on May 9 2012 $5.000 $4.854 -3.01% $5.000 $4.839 -3.33% $5.000 $4.852 -3.05% Number In Billions Table 2: Revenue guidance and revised revenue guidance provided to analysts

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of Facebook’s performance. But this forecast was never shared with the small investors. Based on the forecast given by Facebook the analysts prepared their estimates for Facebook’s performance. This was then sent to Facebook for review purpose. The point to be noted is that these estimates were not derived independently. They were derived and estimated on basis of the company guidance which was clearly visible by looking at the estimates of the three lead IPO underwriters. All their estimates are very near to the company forecasts. None of the small public market investors got any information about the estimates or Facebook’s guidance. All they got was vague language in the prospectus S-1 about risk factors. But very crucial information was hidden in that vague language i.e. r the risk factor that discussed the growth of Facebook’s mobile usage and Facebook’s inability to make money through ads in mobile compared to that growth rate and how this might affect revenue. Meanwhile, the analysts verbally gave presentations about their estimates to the bank’s salespeople. These estimates were also given verbally to the big institutional investors but none of the small investors ever got them. Facebook kicked off its institutional roadshow on 7th May 2012 for face to face meeting with big institutional investors. Though roadshows before IPO are somber events, Facebook’s roadshow was more like a Hollywood style party.

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Facebook’s revenue. Ebersman told the board of Facebook about the problem which was going on. After that Facebook filed its Amendment No. 6 to Form S-1 to disclose the problem it was facing to serve ads to mobile users. The changes were done on three pages of the 170page document. On page 14 and 17, Facebook told about the problem of mobile users growing faster than the rate at which it can serve ads per page on mobile platform. On page 57, the company said that the mobile trend which it had discussed somewhere had also affected its second quarter due to Facebook users shifting to mobile phones from computers. But ironically even after these amendments no data pointed out to the deterioration in the financial condition of Facebook. It was very difficult for anyone to find out the implicitly mentioned warnings in the prospectus and understand its implications. After that it was time to tell about the Facebook’s deteriorating performance to the research analysts and through them to the big institutional investors. After the company’s surprising last moment amendment, the difficult task was to reveal and to explain the financial deterioration of the company to Cipora Herman who was Facebook’s vice president of finance. As this was very important Cipora Herman and Michael Greaves did a rehearsal session in a hotel in Philadelphia. The part of an analyst was played by Greaves, while Cipora Herman played herself. At 5:03pm the amended S-1 was officially made public on the SEC website. As law bans investment bankers from influencing the analysts by any means, Grimes left the room before Herman’s first call to Scott Devitt at Morgan Stanley to avoid the appearance of breaking the law. But Herman had a script in Grimes’ handwriting detailing Facebook’s new second-quarter revenue estimates which called for Treasurer Herman to explicitly tell the analysts that Facebook’s performance would be at the “lower end” of its guidance range. Herman’s made the first three calls to the research desks of Morgan Stanley, JPMorgan and Goldman Sachs to make the revelation, and after their conversations, they cut their estimates for Facebook’s second quarter, which wasn’t going well. All three banks also cut their estimates of Facebook’s annual revenue by between 3.01% and 3.33% - which was perfectly aligned with Herman’s notes. Herman called 7

analysts that evening making calls every 15 minutes. In the following morning she called the other 8 underwriter analysts. Investment banker Michael Grimes stayed with her for the first two calls. The news spread from research analysts to their preferred clients that Facebook was slashing revenue estimates in the middle of the much hyped roadshow. All the three major banks had effectively sounded alarm bells on Wall Street. The situation converged to such a point that even the analysts who had not yet made a single call about Facebook’s new figures were being inundated with questions. The public didn’t find out about them until after the IPO had priced. Even though after so many debacles, a week later, due to the intense demand for shares, Facebook raised its IPO price and also the number of shares to be issued. Then, on May 18th, Facebook went public. And after that the inevitable happened, because the business was deteriorating, the stock quickly crashed. The net negative change from the offering price became more than 50% over the following three months. So, this is the string of events that happened during the IPO of Facebook. Facebook’s financial performance deteriorated during the marketing of the IPO. Only big institutional investors were informed about that verbally. Small investors did not come to know anything. At the end of these strings of events Facebook and Morgan Significant Price Moves Trading Date Share Days after Price at IPO Market Close Offering Price

18-May-12

$38.00

Net Change From Offering Price N/A

First Day 1 2

18-May-12 21-May-12 22-May-12

$38.23 $34.03 $31.00

0.60% -10% -18%

6 8 9 19 68 83

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$28.84 $29.60 $27.72 $30.01 $20.01 $18.06

-24% -22% -27% -21% -47% -52%

Table 3: Chart showing significant price moves

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Fig 2: Variation of stock prices of Facebook on the opening day

Stanley believe that they had followed the IPO rules in place at the time and they may well have. Morgan Stanley was fined by Massachusetts but didn’t say what the firm did wrong. But one thing clearly comes out of all these events that some IPO disclosure rules are absurd. These rules make a mockery of the idea that investing is a level playing field .They turn small investors into mere muppets. Aftermath

The IPO had serious implications in its aftermath. Other technology companies faced the consequences. The spirit was dampened in the major exchanges. According to Bloomberg estimates retail investors lost approximately $630 million on Facebook stock since IPO. UBS alone may have lost as much as $350 million. The investment firms which were plagued by technical glitches were compensated by $40 million by the Nasdaq stock exchange. The IPO had impact both on Facebook and on its investors. It was said to be beneficial and provided rewards to venture capitalists who finally saw the fruits of their labor. In contrast it negatively affected the individual investors including Facebook employees. The IPO lowered the interest in the stock by investors which made it more difficult for the company to accumulate cash reserves for large future expenditures such as acquisitions. Other firms also faced the implications of the IPO fiasco. The IPO could jeopardize profits for underwriters who face investors skeptical of the technology industry. The troubled process made it harder for the next social media company that wants to go public. More than 40 lawsuits were filed in the month following the Facebook IPO. Some have filed lawsuits, alleging that an underwriter for Morgan Stanley selectively revealed adjusted earnings estimates to preferred clients. The remaining underwriters and Facebook’s CEO and board are also facing litigation. After the

fallout of the botched offering the reputation of both Morgan Stanley, the primary IPO underwriter, and NASDAQ were damaged. Twitter Drawing On Lessons Drawn On Facebook IPO

Twitter IPO was the most hotly anticipated initial public stock offering since Facebook. But Twitter did all it can to distance itself from the Facebook fiasco which has become a case study on how not to take your company public. Twitter had lot of opportunities to analyze the Facebook IPO and draw whatever insights and lessons they can from it. Twitter filed their IPO with an original range of $17-$20 per share. It raised the offering to $23 to $25, and then priced the initial public offering at $26. Twitter priced its shares more modestly so that it has room to grow once it goes public and offered a smaller percentage of the company than Facebook did to goose demand. Twitter’s has drawn good lessons from Facebook episode and it is visible from the fact that it announced via a surprise tweet that it had confidentially submitted paperwork to begin selling stock to the public as compared to Facebook splashy announcement in February 2012, which gave investors an early and revealing glimpse into every aspect of its financial performance. After that Facebook’s every public filing was intensely scrutinized, especially the one that raised worrisome questions about Facebook’s lack of mobile advertising revenue. In May 2012 Facebook sold $16 billion in stock to investors and after that its share price skid in the following months amid doubts about its ability to make money from its 1 billion users. After the Facebook fiasco mobile advertisement revenue growth has picked up significantly and is accelerating at a very fast pace. As a result the investors have warmed up to social media stocks and Twitter seized on this opportune moment to sell stock to the public.

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Mc Aloo Pvt Ltd Somya Sharma

SIBM, Pune “The country is in economic crisis, you must be facing a lot of troubles too, right?” I asked. “ma’am, I don’t know about the country but we are always in trouble, but we still have to keep up.” “Ab jeena to hai hi na!” And well he does know how to keep up. And prosper. Well, I was not talking to some dalal street stock broker or a grocery store owner. Neither was he a fancy sales manager or a retired Govt. employee. Well, he happens to be our local Pani Puri vendor! For the purpose of this article let’s call him Raghav. A lot has been and is still being written about how the country is going through an unprecedented economic turmoil and stasis of growth, and ways which can revive it. There are suggestions ranging from liberalization to greater FDI to cutting subsidies. Surely the experts know what they are doing and some these measures could, if implemented dexterously, could help replenish the slowdown. But, to be very blunt, these measures have to navigate a complex web of long term impact analysis, political bickering, foreign policy, inherent socio economic disparities and many more and that will take time. Wal-Mart is not going to be here just tomorrow! So, for once, let’s take a different angle. A different set of suggestions. In the words of Anton von Leeuwenhoek, the biggest problems can be answered by the simplest of solutions. Well he should know, he invented the microscope. Let’s explore how an average Indian sustains the growth. Let’s see how Raghav does it. Raghav is your average migrant worker who came to Punjab when he was 12yrs old. After 15 years of various odd jobs, he finally saved enough money to start his own venture, his own Pani Puri cart. In a country where govt. has almost no financial protection for the unorganized labour force, this venture was his only promise of a better future for him for his family. The business was good (we all

DECEMBER 2013

know Punjabis love their food) and growing. Then the slowdown struck. It came slowly but steadily. Raghav doesn’t have an MBA degree and doesn’t really watch any news, but still he knew something was wrong.Oblivious to the tall promises of reviving growth made by the esteemed ministers and policies suggested by business experts, Raghav took his own measures. Similar conditions are faced by Banks, operating in a challenging environment of rapid economic change, more technologysavvy customers, thinner margins and increasing regulations. The article recommends strategies banks can implement that will drive profitability and increase customer satisfaction. It includes testing of several innovative banking concepts that address alternatives within the branch model and new strategies for virtual models. For a clearer interpretation let’s take his steps vis a vis the steps the industry can consider. 1. Raghav started with his strengths and improvised on it. Instead of parking his cart at his usual market place he started making rounds to the different colonies and residential enclaves around the area during early evenings and returned to his usual spot in the late evening when the market is full. His door to door services were a hit owing to his good quality preparations and convenience to the people. He was soon a part of their daily routine, the new extracurricular. The day he took an off, something was amiss. What’s in it for Us ICICI Bank’s hassle-free and convenient Doorstep Banking is an example of this strategy. With ICICI Bank’s Doorstep Banking at your service, allows you to focus all your time and energies towards the growth of your business. Reliable agents appointed by ICICI Bank, pick up and deliver cash and trade documents and pick up cheques. This service also reduces risk of carrying large sum of cash to or from the branch. Cash-inTransit agents (CIT) pick up and deliver cash

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of them. There was something for everybody. What’s in it for Us With good product and services, comes the word of mouth, the strongest brand builder. It doesn’t need new million dollar ad campaigns. It’s steady, stable and more permanent. Increase in the customer portfolio requires catering to different customer profiles. People like choices; “One size fits all” is no longer in demand. Customization is an inherent human need. A wider product line up can be evolved with just a few basic changes. Bank should identify the following new business segments as a step toward becoming Multi Specialist Bank. • Wholesale (Large & Mid Corporates) • Urban Retail • Small & Medium Enterprises • Rural/Agri Business 3. Raghav knows winters are approaching. He also knows that many people don’t like to eat pani puri then. He has seen it. Well, this time it’s different. He has learnt to make tikkis, the yummy potato snack. With his past experiences at various food corners and help from a friend, he has perfected this street delicacy because he knows that they sell, especially in winters, like hot potatoes, literally! And all this with almost no extra cost to him What’s in it for Us Know your market. Know your customers. Understand the dynamics at play. Use feedback, market surveys, polls and social media to know the general mood, aspirations and future trends. Evidence based design helps you bring out market oriented products and services with minimum expending of resources. For example, leverage customers’ information to target specific customers. For banks, one key use of customer information is to help identify when customers are experiencing a major life event such as such as approaching retirement age or getting married. Such major events often lead to important changes in financial needs as individuals save more, change their investment portfolio allocation or try to finance major purchases. The Bank of Nova Scotia (Scotiabank)

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in armoured vehicles and are secured by a comprehensive insurance cover. Private lender HDFC Bank is planning to launch 500 mini branches, handled by one to three people, across India by the end of FY14. The bank has added about 219 mini branches pan-India since 2012. The basic motive behind such an initiative by the bank is to take the formal banking experience to people in unbanked and under-banked areas. A mini branch, manned by one, two or three persons, offers the entire range of products and services including savings and current accounts, fixed deposits, recurring deposits, credit card, instant debit card and also ATM facility. Not only this, a bank can also implement an open architecture. How does an open architecture help customers? Let us first look at the various distribution channels of insurance products we have today. Currently, an insurance policy can be bought in three ways: through an agent; from a bank where one holds an account; or directly from the insurance company. The open architecture enables an insurance company to offer its products at any branch of any bank across the country through multiple tie-ups. This will enlarge the range of options available to potential insurance buyers by increasing insurance penetration into geographies left untapped so far. The open architecture aims at increasing insurance penetration through optimal utilization of banks’ infrastructure and experienced workforce. This will promote healthy competition and allow the banks to offer a choice to their customers. Above all, quality should never be diluted, no matter what. It’s the single biggest trait that ensures a sustainable and progressive outlook in times of crisis. Good quality has to be backed up by innovative approaches in service delivery. It could range from a simple door to door operation to large scale IT based solutions. Good quality coupled with customer friendly services is a deadly combo. 2. The word spread and so did his customer base. Raghav now carried the water with seven different flavors. Some people stuck to the traditional ones, others made new favorites while many found it best to have all

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regularly monitors customer activity and contacts individual customers with large transactions that may indicate important life events. For example, a large deposit may be due to the fact that a customer has received an inheritance, is about to be married, or has experienced some other major life event. In these cases, a bank representative will contact the customer to confirm that an important event has occurred and understand its nature. Where appropriate, the bank representative will act quickly to recommend products that would be useful to meet their new financial situation. These targeted contacts are one of the reasons that Scotiabank is rated highly for customer service. Banks can also use customer knowledge to identify and align with customer segments and preferences. Customers in different stages of life or with different preferences have distinctive needs, and banks might design products, or bundles of products, that provide more value to specific customer groups. Different product offerings can be income replacement for baby boomers nearing retirement, college savings plans for new parents, and high yield savings accounts for individuals just beginning their careers. 4. Raghav used to be, let’s say, somewhat, snobbish, rude, not anymore though he smiles, speaks politely and even makes small talk with regulars. He also has improved a lot on his Punjabi speaking skills. He is now also catering for small parties and functions. What’s in it for Us: Soft skills are often underestimated. They should not better be. You might be an IT giant or a small cloth store, acquiring new soft skills is the best thing you can do for yourself and eventually your enterprise. It could be learning simple etiquettes to learning new languages. As the old adage says, “customer is god” remember it. A study was conducted which indicated that consumers, globally rejected the idea of highly automated branches with limited personal attention and expertise, with 26% consumers saying they would leave their current bank if personal attention and advice were eliminated from their bank branch. Despite the popularity of virtual banking, global consumers still value bank branches

DECEMBER 2013

for personal attention. Customers prefer online channels for simple transactions, but they also demand highquality, personal service for more complex transactions and advice. 5. With the work growing, Raghav found himself unable to manage everything on his own. He never really was a guy who would hire an assistant. But now he works with two young boys Yes, he was initially not happy. But he also realizes now that it’s necessary for sustaining and growing, even if that means paying two salaries it has paid off well. The boys are doing good. One of them stays back at the market place while the other accompanies Raghav to his daily rounds. They will soon be adding more carts and products, thanks to the skillful boys. What’s for Us Crisis usually sets the layoff bells ringing. People are stripped off their jobs. It is imperative for many enterprises to do so, but it’s also necessary to realize that a successful operation cannot be run without a cohesive, motivated and dedicated team. Right talents must be scouted and groomed. Bottlenecks and stagnant positions identified and remolded. Hiring should not stop. “Men might not be machines, but machines always need men”. Raghav gives us a perspective on what small but effective changes we can bring. Agreed, the problems in the economy are quite diverse and a multi-pronged strategy is needed. But Raghav shows us how subtle changes can bring about widespread changes. He underlines the power of small. He is not a PR magician or a financial wiz. He might not become as big as McDonalds or Pizza hut, but he certainly tells us what the average Indian, with no big savings and technical know how about business, has done and still does whenever faced with dire circumstances. He tells you what a bank can do. And I must say it’s worth looking into. And yeah, for the record, most of the kids coming to Raghavs’ tikki stall innocently and lovingly demand, “Bhaiya! Do McAloo tikki dena!!”

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Sir, recently I read a news article about lifting the cap on FII holdings in G-Secs. Can you explain what exactly are G-Secs? G-Sec stands for government security, which is a tradable instrument issued by the Central Government or the State Governments, acknowledging the debt obligation of the government. Such securities are short term (generally called treasury bills, with original maturity of less than one year) or long term (generally called Government bonds or dated securities with original maturity of one year or more). Sir, if someone wants to buy or sell G-Secs then where he/she should go and what is the procedure of obtaining them? There is an active secondary market in G-Secs and they can be bought or sold in the secondary market through: (i) Over the Counter (OTC), in which a participant may contact a bank, a financial institution or a primary dealer either directly or indirectly through a broker registered with SEBI and carry on the negotiation over the phone, or (ii) Negotiated Dealing System (NDS), which is electronic dealing and reporting of transactions in G-Secs. It enables the members to submit electronically through bids or applications for primary issuance of G-Secs when auctions take place. Negotiated Dealing System-Order Matching (NDS-OM) is also introduced where trading is done anonymously by placing orders on the system or accepting the orders already placed by other participants, or (iii) Stock Exchanges, where G-Secs are available for trading to cater needs of retail investors. Sir, why should one invest in Government securities? Investing in Government securities has the following advantages: • Government securities offer maximum safety as they carry the Sovereign’s commitment for payment of interest and repayment of principal

G-Secs Jatin sethi IIM Shillong • They can be held in book entry (i.e. dematerialized), thus, obviating the need for safekeeping • They can be easily traded in the secondary market to meet cash requirements • They can also be used as collateral to borrow funds in the repo market • Their prices are readily available due to a liquid and active secondary market, and a transparent price distribution mechanism Sir, can you tell me why does the price of Government securities change? Like other financial instruments, the price of Government securities keeps varying in the secondary market. In general, this is governed by the demand and supply situation. More specifically, the fluctuations in interest rate influence their prices. When interest rates fall, investments in G-Secs see appreciation in value because price and interest rate are inversely proportionate. People prefer to invest in securities rather than keeping money in banks where they are getting less return. So, high demand raises the price of securities. Also, for retail investors there is capital appreciation. However, with increase in interest rate the reverse happens and the securities drop in prices. Several other macro-economic factors also influence the price of government securities, such as, expected rate of inflation, liquidity in the market, etc. The prices are also affected by developments in money markets, capital, forex, credit as well as international bond markets (specifically the US Treasuries). One more thing sir, there have been instances when RBI itself buys G-Secs. What is the rationale behind it? The apex bank sometimes purchases government securities from money markets as part of its efforts to infuse liquidity into the system. It does this through Open Market Operations which here implies the buying of government securities in the open market in order to expand the amount of money in the banking system and stimulate growth. This is also known as buyback of Government securities. This clears a lot of questions that I had. Thank you Sir for the explanation.

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FIN-Q 1. It is a long-standing common-law rule that requires a trustee who is investing for another to behave in the same way as a judicious individual of reasonable discretion and intelligence who is seeking a reasonable income and preservation of capital. What is this rule called? 2. X led to the formation of two very important organisations of the world, Y and Z. X took place at New Hampshire at the conclusion of World War II where 44 nations participated. Y lent currencies to countries with trade deficit and Z provided underdeveloped nations with monetary assistance. Guess what are X, Y and Z. 3. Economic historians usually attribute the start of the Great Depression to the sudden devastating collapse of US stock market prices on October 29, 1929. This day is known as…….. 4. Which country has been recently removed from the exclusive club which has AAA ratings from all the three rating agencies S & P, Moody’s and Fitch ? It has been downgraded by S & P. 5. Which site is the number 1 in terms of number of photos being uploaded daily ? 6. This company (A) is owned by a software giant (parent company). A toss of coin decided the moniker order on the logo of the parent company. The company A is recently in news for its substantial sales growth in August-October quarter. The company A is a Bangalore based IT services firm. Identify the company A. 7. Question (Connect the dots)

8. Question (Connect the dots)

9. Give the terminology by connecting the images below.

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