Niveshak June15 Flip Version

Niveshak THE INVESTOR

VOLUME 8 ISSUE 6

June 2015

FROM EDITOR’S DESK Niveshak Volume VIII ISSUE VI June 2015 Faculty Chairman

Prof. P. Saravanan

THE TEAM Abhishek Bansal Bhawana Saraf Maha Singh Gulati Palash jain Prakhar Nagori Ramesh Jaiswal Rahul Bajaj Sandeep Sharma Vishal Khare

All images, design and artwork are copyright of IIM Shillong Finance Club

CONTENTS

Dear Niveshaks, The month of June started with the RBI in its second bi-monthly policy reducing the policy repo rate by 25 basis points from 7.5% to 7.25% while keeping the CRR unchanged. The government has decided to give interest-free loans for cash-strapped sugar mills to help them pay nearly 30% of the record Rs 21,000 crore they owe to cane farmers, many of whom are struggling with huge debts as the first country-wide drought in six years looms. The current account deficit (CAD) narrowed sharply to $ 1.3 billion or 0.2% of GDP in the fourth quarter of the last financial year on a sequential basis mainly on account of a lower trade gap. With the government taking steps to improve ease of doing business and attracting investments, FDI inflows into the services sector (which includes banking, insurance, outsourcing, R&D, courier and technology testing) grew by over 46% to $3.25 billion in 2014-15. China hosted the signing ceremony of Asian Infrastructure Investment Bank (AIIB), a new international financial institution set to rival the World Bank and Asia Development Bank, which will fund Asian energy, transport and infrastructure projects. To help investors and companies in IPOs, SEBI has reduced the listing time from 12 days to 6 days from the date of the public offer and also allowed a larger number of firms to tap the “fasttrack” route for raising funds. On the magazine front, the cover story for the month includes the impact of the sequential rate cut on the economy as a whole as well as share markets reaction to the same The Article of the Month (AOM) discusses about IP policies in India . The article talks about how the current IP policies are affecting the pharmaceutical industry globally. FinSight discusses the pros and cons of new social security schemes.FinGyaan article on ‘Credit Cards’ talks about how the popularity of credit cards affecting the buying behavior of consumers. FinView has the excerpts from the discussions with an IIM professor about the impact of RBI’s recent monetary policy on Indian economy. Classroom section shares knowledge on Circus Swap. To end this brief note, it’s important that we thank you, our readers, for your constant support and appreciation. Please continue to motivate us so that we can come out with more insightful reads in the issues to come. Keep pouring in.

Cover Story Niveshak Times

04 The Month That Was

Article of the month

Sequential RBI Rate Cuts 10 The Health of Wealth & The Whatís happening around..?? Wealth of Health

FinGyaan 18 Credit Cards : Simplified

Finsight

New Schemes

Social

FinLife

Stay invested! Team Niveshak

©Finance Club Indian Institute of Management Shillong

22 Valuation of an IPO: Are you 29 worth it?

FINVIEW

Interview With Dr. Maram Srikanth Professor, IIM Shillong

www.iims-niveshak.com

CLASSROOM

31 Circus Swap

Disclaimer: The views presented are the opinion/work of the individual author and The Finance Club of IIM Shillong bears no responsibility whatsoever.

Security

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The Niveshak Times

Team NIVESHAK

IIM Shillong Delhi Assembly Passes Budget For 2015-16 The Delhi Assembly passed the Rs 41,129 crore budget for 2015-16 -- the first by the AAP government -- with a major focus on education, health and transport sectors. The budget was presented on June 25 by Deputy Chief Minister Manish Sisodia and it was passed by voice vote by the House after lengthy discussion. The budget was seen to be aimed at AAP’s core constituencies of middle class and poor as the government did not announce any hike in Value Added Tax (VAT) but raised the luxury and entertainment tax which will pinch those going to to gym, club, spa and restaurants. Watching movies in multiplexes has also become dearer due to hike in entertainment tax. A monthly entertainment tax of Rs 40 was levied on cable TV/ DTH services. Sectors like education, healthcare, transport, water, power saw major jump in allocation while Rs 50 crore has been set aside for providing free wifi facility in colleges and villages, which was a major election promise of AAP. Steps like installation of CCTV cameras in DTC buses and every classroom in government-run schools were also announced in the budget. In the budget, Rs 19,000 crore was set aside for plan expenditure while the non-plan expenditure was estimated at Rs 22,129 crore. The government allocated Rs 9,836 crore for the education sector of which Rs 4570 crore was given under the plan outlay, an increase of around 106 per cent over the last budget. Bank Credit Growth Slows To 9.8%: RBI Growth rate of credit by scheduled commercial banks slowed to 9.8 per cent at Rs 66,33,417 crore for the fortnight ended May 29, data from the Reserve Bank of India showed. Banks’ advances had stood at Rs 60,41,520 crore in the same fortnight last year. In the previous fortnight ended May 15, credit growth was 10.16 per cent. Deposits of the banks increased by 11.48 per cent

MAY 2015

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to Rs 87,89,273 crore in the reporting period as compared to Rs 78,83,586 crore in the year-ago period, the data showed. The fortnight ended May 15 saw bank deposits growing at 11.85 per cent. In fiscal year 2014-15, banks’ credit grew at 12.6 per cent while deposits grew at 12.8 per cent. Demand deposits of the banks rose 9.14 per cent to Rs 8,18,648 crore as against Rs 7,50,050 crore in the year-ago period. Time deposits increased 11.73 per cent to Rs 79,70,625 crore as compared to Rs 71,33,536 crore a year ago. Government To Infuse Additional Rs 11,500 Cr In PSU Banks In FY16 The government is likely to infuse additional $1.8 billion (about Rs 11,500 crore) in public sector banks this fiscal year over and above $1.2 billion earmarked in the Budget, Finance Secretary Rajiv Mehrishi said on Friday. “Will put additional $1.8 billion in PSU banks apart from $1.2 billion budgeted this year,” he told reporters here. The government has earmarked Rs 7,940 crore in the Budget for recapitalisation of PSU banks for the current fiscal year. Earlier this month, Mr Mehrishi said the government intends to provide $9 billion (about Rs 57,000 crore) to public sector banks towards recapitalisation over the next two fiscal years to meet global capital adequacy norms and for growth. Finance Minister Arun Jaitley had recently promised more capital infusion into public sector banks, saying there’s “merit” in their demand for more funds over and above what was provided in the Budget. The government has already started assessment of capital requirement of public sector banks. It has already received presentation of 14 public sector banks. Speaking at an event here earlier on Friday, Reserve Bank Deputy Governor R Gandhi said state-owned banks are “adequately” capitalised at present but would need additional money to comply with global capital adequacy norms in the future. According to an estimate, public sector banks would need an additional capital of Rs 2.40 lakh crore by

2018 to meet the Basel III capital adequacy norms. Keeping the huge capital requirements in mind, the Cabinet in December 2014 had allowed public sector banks to raise up to Rs 1.60 lakh crore from markets by diluting government holding to 52 per cent in phases. India Is The Second Biggest Partner In New Asian Bank Representatives of 57 countries are set to finalize their membership to the newly formed Asian Infrastructure Investment Bank in Beijing on Monday. India is expected to hold the second largest share in the new bank after China. Members of the multilateral institution, seen as a rival to the Western-dominated World Bank and Asian Development Bank, will sign agreements to formalize the shareholding structure and chart out the future course of action at a meeting at the Great Hall of the People on Monday. India will be allocated 9-10% of the shares and will be expected to contribute $1.6 billion over a period of five years. China will hold 25-30% of the shares being the bank’s promoter and largest stakeholder. One reason why India will get a high share allocation is the absence of Japan. If Tokyo decides to change its mind, it might take India’s place as the second biggest shareholder because it has a bigger size of gross domestic product. Government To Borrow Rs 1.96 Lakh Crore In Q2 Of FY16 Government on 29th June said it will borrow Rs 1.96 lakh crore from markets in the July-September quarter of the current financial year, 2015-16. “After reviewing the cash position of the Government, in consultation with the Reserve Bank of India (RBI), the Government of India has decided to notify the amounts for the issuance of Treasury Bills for the quarter ending September,” said an official release. The borrowing “calendar will be subject to changes, if circumstances so warrant, including for the reasons, such as, intervening holidays”, it said. Of the Rs 1.96 lakh crore, Rs 1.19 lakh crore would be raised through the auction of 91 days Treasury Bills. While, Rs 39,000 crore and Rs 38,000 crore are expected to be raised by way of auctioning 182 days and 364 days Treasury Bills, as per the borrowing calender.

The government, as per the budget papers, plans to borrow Rs 6 lakh crore from the market in the current fiscal, up from Rs 5.92 lakh crore in 2014-15. However, the net borrowings in 2015-16 would be Rs 4.56 lakh crore, after considering repayments of past loans and interest, as per budget documents. Beating its own financial target, the government was able to contain the fiscal deficit at 3.99 per cent of GDP in 2014-15 at Rs 5.01 lakh crore. First Set Of Small, Payment Bank Licences In 2 Months: RBI Reserve Bank is all set to issue first set of licences for small and payment banks in the next two months, a move aimed at promoting financial inclusion. The RBI had received 72 applications for small finance bank licences and 41 applications for payment bank licences.The applicants include Department of Post, Tech Mahindra, Videocon Group and stock exchange NSE, besides big corporates like Ambanis and Birlas. The objective of licensing small banks is to promote financial inclusion by offering saving vehicles and credit to small business units and other unorganised sector entities. “I hope (we would) be able to announce a new set of bank licences, at least one set of bank licences by August-end. We are undertaking a review of all regulations governing markets to see where there is scope for further liberalisation once macroeconomic uncertainty diminishes,” RBI Governor Raghuram Rajan had said after the monetary policy review last week. Small finance banks will primarily undertake basic banking activities of acceptance of deposits and lending to unserved and under-served sections including small business units, small and marginal farmers, micro and small industries and unorganised sector entities.

The Month That Was

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Market Snapshot

NIVESHAK

Market Snapshot

Article Market of Snapshot the Month Cover Story

BSE Index 28500

2,000

BSE

28000

DII

FII

1,500 1,000

27500

500

27000

26500

BSE

FII, DII Net turnover (in Rs. Crores)

Article ofSnapshot the Month Market Cover Story

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-‐500

29/06/15

26/06/15

25/06/15

24/06/15

23/06/15

22/06/15

19/06/15

18/06/15

17/06/15

16/06/15

15/06/15

12/06/15

11/06/15

10/06/15

09/06/15

08/06/15

05/06/15

04/06/15

-‐1,500

03/06/15

25500

02/06/15

-‐1,000 01/06/15

26000

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

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

LENDING / DEPOSIT RATES

1,00,59,359

Base rate Deposit rate

Source: www.bseindia.com

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

63.92 70.41 52.17 100.40 47.33

CRR SLR

0.00% -‐0.50%

INR/1 USD

Euro/1 USD

GBP/1 USD

JPY/1 USD

% change

27828.44 10716.00 11280.57 19079.79 21511.65 10666.11 16802.00 7847.38 16900.00 10910.00 9728.35 9643.21 2069.81 7815.80 1537.68 6122.23

27664.94 10652.70 11055.45 18607.35 20914.73 10545.46 17476.93 7634.74 16221.78 10537.26 9176.79 9839.31 2015.63 7586.13 1408.00 5940.33

-0.59% -0.59% -2.00% -2.48% -2.77% -1.13% 4.02% -2.71% -4.01% -3.42% -5.67% 2.03% -2.62% -2.94% -8.43% -2.97%

% Change TECK, -‐2.97% Smallcap, -‐2.00%

4.00% 21.50%

REALTY, -‐8.43% PSU, -‐2.94% POWER, -‐2.62% OIL&GAS, 2.03% MIDCAP, -‐0.59% METAL, -‐5.67%

POLICY RATES SGD/1 USD

Bank Rate Repo rate Reverse Repo rate

8.25% 7.25% 6.25%

-‐1.00% -‐1.50% -‐2.00%

% CHANGE

RESERVE RATIOS

CURRENCY MOVEMENTS 0.50%

9.70%-10.00% 8.00% - 8.50%

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

Open

Source: www.bseindia.com 29th May 2015 to 29th June 2015

IT, -‐3.42% Healthcare, -‐4.01% FMCG, -‐2.71% CD, -‐1.13%

CG, 4.02% BANKEX, -‐2.77% AUTO, -‐2.48% Sensex, -‐0.59%

-‐2.50%

Data as on 29th June 2015 -‐3.00%

JUNE 2015

Niveshak Investment Fund

Performance Evaluation

Done on 30/6/14

CONS NON DURABLE (6.37%)

Informa(on Technology (12.02%)

Infosys

Wg: 3.29% Gain : 21.28%

HCL Tech.

Wg: 4.63% Gain : 22.92%

TCS

Wg: 4.10% Gain : 3.52%

Colgate

HUL

Auto (8.36%)

ITC

Dr Reddy’s Labs Wg:4.58% Gain:23.26%

Lupin Wg:7.89% Gain : 63.07%

145 100

135

125

115

105

HDFC Bank

NIF

Values Scaled to 100

Asian Paints Wg:6.32% Gain:20.17%

MISC. (4.12%)

MANUFACTURING

Titan Company Wg:4.12% Gain:-‐2.3%

Page Industries Wg:6.81% Gain:43.99%

(6.81%)

Sensex

Wg: 6.18% Opening Por+olio Value : 10,00,000 Gain : 15.76% Current Por+olio Value : 15,52,180

Chemicals (6.32%)

Amara Raja BaT Wg:4.26% Gain :22.29%

(12.47%)

155 102

Sensex

Wg:6.37% Wg:6.17% Wg:4.72% Wg:4.26% Gain:174% Gain:33.32% Gain:30.17% Gain :-‐8.2%

Pharmaceu(cals

165

Performance of Niveshak Investment Fund since IncepCon

104

BANKING (6.18%)

Britannia

June Performance of Niveshak Investment Fund

GODREJ CONSUMER Wg:6.37% Gain:41.46%

FMCG (21.52%)

Tata Motors Wg:4.10% Gain : -‐3.19%

As on 29th June 2015

Change in Por+olio Value : 50.52% Sensex : 0 8.03% Change in

NIF

Values Scaled to 100

Risk Measures: Standard DeviaCon : 14.59(Sensex 19.45) Sharpe RaCo : 2.71(Sensex : 2.27) Cash Remaining:271897

Comments on NIF’s Performance & Way Ahead : Throughout June 2015, Sensex was seen under pressure, Reserve bank of India through its Goldilocks policy has cut 25 basis point, third in a sequence since January in the repo rates, however concerns remains on monsoon and its impact on the prices. On domesCc front India's annual infrastructure growth fell to 0.4 percent in April, its second straight contracCon, dragged down by lower producCon of electricity, crude oil and cement data showed. The growth in our por+olio was witnessed in terms of value in Pharma, manufacturing, FMCG , Consumer Durables stocks . The wholesale prices fell at a slower-‐ than-‐expected annual rate of 2.36 percent in May, their seventh straight fall, mainly on the back of plunging oil and manufacturing goods prices. On global front Greece’s intensifying tension has now( As on 29th June) been shi]ed on the mandate from referendum. U.S. economic growth is showing further signs of weakening while a recovery is gaining tracCon in euro zone countries such as France and Italy, the OrganisaCon for Economic Co-‐operaCon and Development The por+olio did not witness any re shuﬄe during this month, however we are watchful of the current fall and correcCons in the prices of overvalued stocks and therefore reshuﬄes in the next month would depend upon the momentum of the market.

NIVESHAK

Article of the Month Cover Story

NIVESHAK

the world today has medicines for stress and depression too.

The Health of Wealth & The Wealth of Health Trisha De Niyogi

SIIB Pune

“Health is Wealth” That is what we have heard from our childhood. Loss of health leads to loss of happiness and the biggest wealth of the human life is happiness. But, when we enter the pharmaceutical industry, which is primarily US dominated, we receive a ‘culture’ shock; “for health is wealth”, which means that to have good health you need money. Today, in many countries, less than 10% of women who want to prevent pregnancy actually have access to contraceptive methods. 61.2% deaths, in Africa, were caused by communicable diseases, maternal, neo-natal diseases and

JUNE 2015

nutritional deficiencies that could be treated successfully with pharmaceutical agents. With a stroke of genius, Albert Einstein, the scientist who disapproved war & loved mankind, said, “Everything that can be counted does not necessarily count; everything that counts necessarily be counted.” The number crunching by WHO to study the performance of the global health, found appalling figures even today. Whether it is accepted or not, but human life counts. Men die of war. Men die of disease. But, do men die of guilt/sorrow? Maybe not, because

Drugs and medicines are one of the easiest and the most effective ways of reducing the mortality rate of the world. People still die of malaria, small pox in the less developed country, whereas many countries have already eradicated them completely. Such inequality must be removed and not just reduced in order to make this earth a safer and a healthier place. The ‘Patent cliff’ unlike the “Berlin Wall” or “The great wall of China”, is the beginning of a longawaited event in the history of pharmaceutical industry. In theory, it should act like a messiah or a harbinger of a new world order, whereas it is like a standing coin. We never know which side it may fall. As the patents of several important prescription

drugs continued to expire one after the other, the power seemed to be transferred from the handful of companies to smaller manufacturers in countries like India. Patents are intended to help the companies spending huge amount of time and capital to discover and develop new drugs, to recover the costs and make some profit out of it by providing for injunctive relief against infringers. It is after all a costly affair. A study showed that today it takes around $2.6 billion as against $802 million in 2001 to develop a novel drug. Given the expense of drug research and development, it is quite understandable that the pharmaceutical companies would also attempt to

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Property Rights (TRIPS) Agreement and interpreted the flexibilities which included compulsory l i c e n s i n g (enabling generic drug production prior to patent expiration) as well as nationally defined criteria for granting patents, which was supporting the promotion of ‘access of medicines to all’.

recoup the costs of taking the medicine to the pharmacy shelves as well. However, we cannot ignore the fact that profit-making is the main objective of businesses, while achieving social equity is the domain of the government. But, the greed for abnormal profits has become the new source of motivation of holding patents longer. But, as Mahatma Gandhi said, there is enough for everyone’s needs but not for everyone’s greed. From the numbers which may not count much for the purpose of world enhancement, we estimate that the cost of developing a new drug increased at an annual rate of 12.5%, more than the inflation rate of US and UK put together. Economists feel such a rapid run-up in costs is was expected from this industry which was protected from competition by the government. It has been seen that government-granted patent monopolies give companies very little incentive to control costs and reduce wastage and as a result, prices (which used the costplus methodology) rises above and output falls below the competitive level. (Posner, 1974). But, the bloated costs were perhaps the least of the problems stemming out of the system of drug research. Even after attaching a high price to the drug, the patent monopolies do not back down in paying for drugs that would be much

JUNE 2015

cheaper in a free market. And we are not even considering the generic variants at this point of time. A very good example would be the struggle of the state governments and the insurers to pay back $84,000 that Gilead Sciences charges for Sovaldi, a new Hepatitus C drug. Infact, the drug companies, use the excess money for lobbying and campaign donations to prolong their monopoly and the benefits coming along with it. These companies have tried many other ways to do keep their strong hold on their monopoly. Patenting existing drugs after slight modifications was another very smart technique. However, this provision came under international attention when the Indian Supreme Court denied Novartis, the Swiss drug company, to patent for their lucrative anti-leukaemia drug ‘Glivec’. Now, as the world awakened to the cries in the disadvantaged economies dying of all kinds of diseases- small or grave, the world government as well as private philanthropists came ahead for their aid. On one hand, organizations like Bill & Melinda Gates foundation have gone all out focusing on diseases like malaria, measles, tuberculosis and even AIDs. On the other, the Doha Convention (2001) clarified the scope of the Trade-Related Aspects of Intellectual

This is where India comes into the picture. India’s Patent Act (1970) ensured a robust self-sufficient and self-reliant domestic pharmaceutical industry. India may very well be called as the ‘Pharmacy of the World’. Local generic production came under threat after the implementation of TRIPS, but India managed to adapt. India now could produce generic forms of the medication at a fraction of the original price and thus bring about a change in wasteful and corrupt system. Moreover, as economists debate whether ‘foreign aid is a boon or bane’, the governments are coming together to facilitate circulation if not manufacturing within.

Guest for the last Republic Day Parade was! Yes, none other than Mr Barack Obama. The world knows, if India tightens its intellectual property (IP) policies, it will devastate the US p h ar m ac e u t i c al industry. Hence, the renewed ‘friendship’ with the Modi Government! India has an upper hand and India knows it! It must leverage its strategic position of time, space and capabilities to be the true leader – a nation which has always upheld the ‘wealth of health’ over the ‘health of wealth’.

The ’inexpensiveness’ of the Indian generics could not only solve the global shortage of circulation of drugs due to shooting prices, but also could devastate the ‘MONOPOLY’ of the pharmaceutical companies in India. Yes, not an oligopoly but a monopoly. Till 2008, the top 15 pharmaceutical companies were responsible for at least half of the total industry revenue. But, the patent cliff i.e. a series of patent expiration of the prescription drugs, has given an opportunity to India to market the generic variants of these medicines to the world. Atleast a list of 10 drugs including Glivec, Singulair and Diovan represent to a loss of more than $32 billion in global sales, which is bad news for the United States. And I am sure you all remember who the Chief

Article of the Month Cover Story

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Sequential RBI Rate Cuts What’s happening around..??

Prakhar Nagori & Sandeep Sharma

IIM Shillong Reserve Bank Of India Lowers The Repo Rate To 7.25%, A Reduction By 25 Basis Points….!!! As this news flashed in the TV channels, it was evident that this rate cut, which apparently is the third in this year, is backed up by strong reasoning of lower inflation levels and with a motto to give the Indian Economy the required boost. Rajan, with this rate cut has made a strong indication that he is aiming for higher growth potential in the industry which, till date looking at corporate results, is a bit on disappointment side. Investment boost is the industry’s need and by this rate cut RBI will ensure the same is being passed on by the banks to its customers.

JUNE 2015

While projecting GDP growth in FY16 at a lower 7.6%, with a downward bias, he clearly described RBI’s action as a “Goldilocks policy”. Goldilocks principle states that something must fall within certain margins, as opposed to reaching extremes thus neither being too conservative nor being too aggressive. Something About Inflation We have seen the retail inflation measured by CPI (consumer price index) decelerate in these recent months with a softening of food inflation but yet the impact of unseasonal rains yet to show up- Vegetables inflation continued to ease, along with that of other sub-groups such as cereals, oil, sugar and spices. On the other hand, protein items, especially milk and

pulses, continued to impart upward inflationary pressures. Fuel Inflation is rising successively driven by prices of electricity and firewood. Inflation excluding food and fuel rose marginally. House rent, education, medical and transport expenses were among the major drivers of inflation in this category. Whereas the WPI (Wholesale Price Index) based inflation remained in the negative territory for the seventh consecutive month. What’s Going On Worldwide? The US economy shrank in Q1 due to harsh weather conditions, strengthening US dollar affecting exports and decline in non-residential fixed investment. In the Euro-Zone financial conditions have eased due to the European Central Bank’s (ECB) quantitative easing and a depreciating euro whereas in Japan, surprisingly there was an upside growth in Q1 majorly backed by private demand as spending by the businesses has led to an increase in personal consumption. The RBI reduction came just weeks after China made its third interest rate reduction in six months, but growth in India’s giant neighbor has been slowing down on the outset of hints from Federal Reserve pondering to hike its interest rates. This indicates a strong need for Government and RBI to work together to ensure that macroeconomic position remains strong while investment and growth are accelerated towards their potential. Indian Economy There has been a consistency in moderate phase of domestic economy which is very well represented in Q1, Agricultural activity was

adversely affected by unseasonal rains and hailstorms in north India during March 2015, affecting an estimated 94 lakh hectares of area sown under the rabi crop which might lead to contraction in food grains production by more than 5 per cent with respect to the preceding year’s level. Also there has been confirmation of the onset of El Nino by the Australian Bureau of Meteorology which also forewarns India to make ample measures in relation to contingency plans for food management - storage of adequate quantity of seeds and fertilizers for timely supply, crop insurance schemes, credit facilities, timely release of food stocks and the repair of disruptions in food supply chains through imports and dehoarding so that all this can manage the impact of low production on Inflation. Talking about the Industrial production which has been reviving but still we can see weakness of consumption spending. Things could have been worse if the input cost would not had declined. Service Sector is giving a mixed signal as we see a pick-up in service tax collections, sales of trucks, railway freight, domestic air passenger and air freight traffic whereas on the other hand, the slowdown in tourist arrivals, railway traffic and international air passenger and freight traffic could affect hotels & restaurants On A Positive Note As per Deutsche Boerse’s MNI India Business Sentiment Indicator, a gauge of current sentiment among BSE-listed companies, rose by 7.7 per cent to 67.1 in June from 62.3 in May indicating an improvement in India’s Business Sentiment. This is also backed up by firms

Cover Story

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reporting significant improvement in production levels, domestic as well as export orders this month. Relation Between Interest Rate And Stock Market Every time when the rate changes are announced, the market has a tendency to react sharply to the news. A change in repo rate will lead to a change in the cost of capital for business. For e.g. If the RBI cuts rates, the Banks can borrow money at lower rates from the RBI which they will further lend to corporates at a lower rate which leaves corporate with a good amount of free cash to reinvest or take more loans to grow their business. Even if the banks do not agree to pass on the lower interest rates to corporates, they will be able to borrow more money at a lower interest rate which they can pump into the system to help in growing businesses by increasing their credit-deposit ratio. Growing businesses or even the perception of future growth leads to people buying up stocks in anticipation of future gains. This was one of the important reason behind BSE Sensex jump of 728.72 pts on 15th January, 2015, when RBI had cut the repo rate by 25 basis points, first rate cut in the last 18 months. The realty index was the top sectoral gainer, up 7.99%, followed by the Bankex and capital goods, which were up 3.29% and 2.40%, respectively. Sector Wise Impact Of Change In Interest Rate Now we can better understand the relation between interest rates and stock markets. They are inversely related, so as the interest rates increase, stock market activities tend to come

JUNE 2015

NIVESHAK

down and vice versa. However, some industries are more sensitive to the change in interest rates in comparison to other as shown below:• Industries which are capital intensive like Real Estate, Automobiles are affected most by high interest rates but when the interest rates are lower they have a great chance to gain the most. When the interest rates are decreasing, it is a good bet to invest in these sector companies • Sectors like IT & Pharma are less affected by the change in the interest rates. Factors such as currency rate fluctuations, visa restrictions, competition from the large global players and margin pressures affect the IT sector in a good way. Therefore, IT sector is not so much interest rate-sensitive. Certainly, Pharma is considered as the defensive sector and is the preferred choice of investors during uncertain and volatile market conditions • During the time of rising interest rate, companies with zero or near zero debts in their balance sheets would be a good choice. FMCG or fast moving consumer goods is one sector that comes under this category due to its low debt nature and considered as a defensive sector • One other important sector that is affected most by change in the interest rates is Banking sector. It is one of the immediate beneficiaries of repo rate cuts due to increase in the demand of loan. However, the Net Interest Margins (Difference between the interest banks earn on the money they lend and the interest they pay to the depositors) for banks is likely to decrease post rate cuts as mere 25-bp base rate cut would not revive loan demand – particularly by the corporate sector, which is availing of funds from commercial papers where rates are hovering around 9%

Change In Stock Market Position Between Three Repo Rate Cuts While RBI has cut the repo rate thrice in this year, Sensex has not been very responsive and right now it is moving near to its value on 1st January, 2015 i.e. 27,485.77. The important thing to note here is that while market reacted sharply to repo rate news on the date of announcements, real impact on the market came only over a period of time. A rate cut of only 25 basis points may not have too much significant bearing on the market for the long term and can’t alone drive the market up for a period of time. The rate must fall below the threshold limit, may be around 6 percent which may give comfort to the market in terms of stable future growth. Also the resultant Sensex movement is the outcome of various domestic and global factors not only the rate changes declared by the RBI. Future Scenario Of Rate Cut And Market The recent rate cut was a majority decision by central bank’s Technical Advisory Committee (TAC) where all seven members were in favour of rate cut but on the same side central bank’s policy cited three major concerns with respect to prices; Firstly some forecasters, notably the IMD ( India Meteorological Department), predict a below-normal southwest monsoon. Astute food management is needed to mitigate possible inflationary effects. Second, crude prices have been firming amidst considerable volatility, and geopolitical risks are ever present. Third, volatility in the external environment could impact inflation. Thus, there is a mixed feeling in the markets whether further rate cuts will be followed soon or not as many of the analyst believe this could be the last rate cut for this year unless and until something dramatic happens in the Indian Economy.

Looking forward, the future data on growth and inflation will drive the decisions of the Central bank of India on its monetary policy ahead. RBI has raised its inflation forecast a bit, owing to worries on the bad monsoon and the bounce bank in the prices of crude oil. However, market experts are believing that much of the oil price bounce back is done and now the country is seeing above normal rainfall in the June month that will keep a check on the future inflation data. Looking into all this, the industry is expecting that RBI can go for at least one more cut in the current year. As RBI governor is known for his conservative strategy, nothing can be said with certainty about the future rate cut. Any future rate cut possibility by the RBI will drive the market up as it gives positive signal about the Indian economy. However, it is expected that market movement in the next 2-3 months will mainly depend on the global factors like Fed’s monetary policy as FIIs will be a net seller if Fed announces quick rise in interest rate. Also the possibility of “Grexit” would be on line if Greece is not able to fix a deal with its international creditor which would be perceived negatively in the global markets.

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Credit Cards : Simplified

A credit card is one of the simplest and convenient modes of payment. Borrowing from the definition of Wikipedia, ‘It allows the cardholder to pay for goods and services based on the holder’s promise to pay for them. The issuer of the card creates a revolving account and grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user.’ Credit cards are examples of how power can be vested in as small a thing as an 85.60 × 53.98 mm plastic card with a magnetic strip embedded in it. Major credit card providers are Visa and MasterCard. Nowadays, all banks provide their customers with the credit card options. Let us look at how the credit card has grown important in our daily lives and the processes related to it. History of credit cards- Credit cards can be

JUNE 2015

Nishant Ray

IIM Shillong

traced back to the late Nineteenth century where the word ‘credit card’ had been used eleven times in the novel ‘Looking Backwards’ by Edward Bellamy. The concept was similar to the present day credit cards except that, the users in the novel used the citizen’s dividends from the Government similar to the Social Security numbers concept in the United States. Western Union issued charge cards to its regular customers in 1921. Since then many companies have started issuing such cards. With the advent of time, companies started accepting each other’s cards. By 1950, most oil companies sold fuels through cards that can be assumed to be the predecessors of the modern day credit cards. In 1966, Barclaycard in UK was the first to issue credit cards outside the US. The use of credit cards became popular in the US, Canada and the UK by the mid-twentieth century. However,

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the acceptance remained low in cash-oriented economies like France and Germany. In fact, France was faster in developing and adopting chip-based credit cards that were seen as antifraud credit devices. Today, in most countries, including India, online banking and debit cards are more popular than credit cards. Transaction Steps Authorization- The cardholder gives the card for payment. The merchant submits the transaction to the concerned bank. The bank verifies the card details and the amount after which an approval code is generated. Batching- Authorised transactions are kept in ‘batches’ which are sent to the acquirer at a fixed period of time usually once in a day. Clearing and Settlement-The batch transactions are sent by the acquirer through the credit card association that debits the issuers for payment and credits the acquirer. Funding- The acquirer in return pays the merchant for which he gets the processing fee. Chargebacks- Sometimes, the money in the merchant account is held due to a transactional dispute mostly initiated by the cardholder. In the event of a chargeback, the issuer returns the transaction to the acquirer for resolution. The acquirer then forwards the chargeback to the merchant, who must either accept the chargeback or contest it.

Benefits to users- The main benefit of a credit card is convenience. In short, credit card allows you short term loans without calculating your remaining balance that is not possible with a debit or an ATM card. Imagine an emergency, where you do not have sufficient balance to meet the needs, in such cases, credit cards can prove to be lifesavers. Also, most credit cards come with rewards and benefit packages. Generally, with every purchase you get points that can be redeemed for cash. Benefits to merchants- Cash payments are clumsier to manage. With the advent of credit cards, it has become easier for merchants to accept payments. Also, the risk of theft or fraud by the employees is lessened. Earlier, a merchant used to give credit to a customer based on the credit history. Now, he doesn’t need to worry so much because the bank promises to pay the merchant even if the customer defaults. Benefits to banks – Most of the benefits from a credit card comes from the interest that the bank charges. Other benefits include providing customer convenience and urging them to do a greater number of transactions so that more benefits are reaped by the bank. The bank also bears cost for providing and letting the customers use credit cards. They can be categorised as: Interest Costs: Generally the banks borrow

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money at a lower interest rate to pay for the money that the customer uses his credit card. Suppose the bank has borrowed the money @ 5% interest rate while it charges 15% for the debt created by the usage of credit card. If the debt remains for a year, then the bank is actually earning the difference between the rates, 10% in this case. Operating Costs: It is the cost of running the credit card portfolio, including everything ranging from paying the executives who run the company, printing the plastics, managing the statements and running the applications that keep track of every cardholder’s balance, answering the phone calls which cardholders place to their issuer, protecting the customers from fraud rings. Charge-offs: Sometimes, the bills of the customers become uncollectable. Often, people are not able to cover the credit card expenses, in which case the amount is written off as uncollectable. Rewards: To attract the customers to use their credit cards most banks run loyalty programmes where they reward customers with credit points on every purchase. Also, they provide cash back offers. The banks do all this due to the competitive environment. Frauds: The card issuers also bear the cost of any fraud that happens due to the making of duplicate cards or an unauthorised use of such cards. In the UK, the cost of one such fraud was £500 million in 2004. Fraud monitoring emphasises minimizing frauds so that such losses are minimal. Fraud monitoring has

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become an important activity in all credit card banking services. Overspending With Credit Cards Credit cards make spending effortless. We tend to buy more than we can actually afford. The thought of how to pay for it gets deferred and this is why most of us find a huge credit bill and the subsequent problems of arranging to pay for it. We would often come across people who initially took a credit card, over-spent and then abstained from using it in future. We can learn from others’ mistakes and try to control our expenditure even when we have a credit card. Everyone is using a credit card, so why shall I not use it? Sometimes, even peer pressure forces you to use cards when we actually don’t require it. We may find not using a credit card socially unacceptable but imagine a large debt on you after using it. There has to be a balance between the two. Imagine yourself using a credit card to buy an item with discounts since you don’t have cash. You promise to pay as soon as the bill comes. If you don’t have money when the bill comes, you keep paying interest on the amount. Instead of earning the discount, you end up paying more. Relying on credit cards for making your monthly purchases can hamper your other financial plans. You will end up saving less. You are actually chasing your money rather than having control over it. Credit card security relies on the physical security of the plastic card as well as the privacy of the credit card number. Therefore, when a person other than the card owner has access

to the card or its number, security is potentially compromised. Once, merchants would often accept credit card numbers without additional verification for mail order purchases. It’s now common practice to only ship to confirmed addresses as a security measure to minimise fraudulent purchases. Some merchants will accept a credit card number for in-store purchases, whereupon access to the number allows easy fraud, but many require the card itself to be present, and require a signature. A lost or stolen card can be cancelled, and if this is done quickly, will greatly limit the fraud that can take place this way. The concept of credit cards has found a variety of uses. Nowadays, their application and usability have become diversified. We will see two types of credit cards that have an extensive use in the Indian context: Student Credit Cards With the passage of time and the development of the financial sector, credit cards are easier to avail. Initially meant just for financially strong individuals, credit cards are now finding newer users including students. They require fewer formalities and are tweaked to satisfy the student’s needs. We can take the example of SBI’s credit card for student (education loan customers) against fixed deposits. It hardly requires any documents except the usual identity and address proof. There are no initial charges if it is made against a fixed deposit account. However, the amount to be spent is lesser than 90% of the fixed deposits. It is a good option for the students since this way they will have a control on the amount they spend. Moreover, there are no annual charges if an individual spends more than Rs 35000 in the year before. The student can use it to convert purchases into EMI’s. However, there is a counter-view to that. Credit cards do nothing but inculcate a habit of useless spending into people, and now into students as well. It starts with a shiny plastic card and the promise of the world at your feet and ends with innumerable cases of depression and suicides when you can’t end up paying what you owe. Learn to cut your coat according to your cloth, not the other way around. Kisan Credit Cards Credit cards are not just for big businessmen. We are evolving into a society where every individual will have the comfort of taking credits

for his work. Launched as early as 1998 by The Government of India and NABARD, the Kisan Credit cards are one of the best ways to promote the agricultural sector. It allows the farmers to take affordable credits without getting into the usual procedures that would have been very difficult for a common farmer. The benefit associated with it is that a farmer can postpone the repayments in case of a crop failure. Also, withdrawals can be made in a relatively simple way so that the farmer finds it an easy to use service. Even banks like IDBI provide Kisan credit cards. Credit cards are becoming popular. However, better modes of payment are coming into use. Advancement in technology can even wipe out credit cards from our financial systems. For example, the Google Wallet is intended to replace the credit cards in our wallets by becoming an advanced mode of payment. In future, we may find applications that would just require our biometrics for transfers or payments. This would not only increase convenience but also reduce the risks associated with the theft and misuse of credit cards.

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Valuation of an IPO: Are you worth it?

Maha Singh Gulati

IIM Shillong Let us start by understanding what an IPO is. What Is An IPO? An initial public offering (IPO) — is the procedure by which organizations go from private to public and sell shares of their firm. Once a company is public, it is owned by the shareholders who purchase the company’s stock when it is put on the market. Initial public offerings doesn’t occur without any forethought and requires a lot of effort. An IPO generally takes three to four months from the earliest starting point to the first day’s trading on the exchange. Before we move further, let us understand that why does a company go public? Why does a company go public? It’s essentially a cash making move. The thought is to raise support and have more liquidity or cash on hand by selling shares publicly. This cash can be utilized as a part of different courses, for example, reinvesting into company’s current infrastructure or expanding the business. An included benefit from issuing shares is that they can be utilized to draw in top administration attention through the offer of advantages like investment opportunity plans. Another advantage of going public is that stocks can

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be used in merger and acquisition deals as a part of the payment. Some companies also like to go public just to get listed on major stock exchanges. What Are The Steps Involved In IPO? A company needs an investment prospectus before it can determine its IPO price. An investment prospectus is essentially a road map for investors, showing them where the company is now and where it plans to be in future. The prospectus shows the business plan for the company and relevant information about its growth. Any information that demonstrates the sustainability of the company is included in its investment prospectus. When the investment prospectus is ready, the company hires an investment bank for further valuation. Organizations need investment banks to relegate a worth to the business and handle financial specialist relations. To allocate a worth to a company, an investment bank has two alternatives: Use a genuine illustration of an IPO for a comparable company or compute the net present quality (NPV) of the company. In the event that an investment bank utilizes a true illustration, the company whereupon it bases its IPO valuation must be comparative in size and have comparable income streams. In the event

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that the investment bank ascertains the NPV of a company for IPO valuation, it investigates the company’s advantages, liabilities, money inflows and development potential. Components Of IPO Valuation: Like any deals exertion, an effective deal relies on the interest for the item you are offering - a solid interest in the company will prompt a higher IPO price. Solid interest does not mean the company is more important - rather, the company will have a higher valuation. In practice, this refinement is essential. Two indistinguishable organizations may have altogether different IPO valuations just due to the timing of the IPO as contrasted with business request. A great sample is the huge valuations of IPO’s at the top of the tech contrasted with comparative tech IPO’s since that time. The organizations that experienced IPO’s at the crest got much higher valuations and subsequently significantly more investment capital - just in light of the fact that they sold when interest was high. (Figure out how organizations can spare or help their public offering price with these alternatives. An alternate part of IPO valuation is industry comparables. In the event that the IPO hopeful is in a field that as of now has equivalent publicly exchanged organizations, the IPO valuation may be interfaced to the valuation products being relegated to contenders. The justification is that financial specialists will be ready to pay a comparable sum for another company in the business as they are right now paying for existing organizations. Notwithstanding review comparables, an IPO valuation depends vigorously on the company’s future development projections. Development is a huge piece of quality creation and the essential rationale behind an IPO is to raise more capital to reserve further development.

The fruitful offer of an IPO regularly relies upon the company’s arrangements and projections for forceful future development. A percentage of the elements that assume a huge part in an IPO valuation are not focused around numbers or budgetary projections. Qualitative components that make up a company’s story can be as compelling - or much all the more effective - as the income projections and financials. A company may have another item or administration that will change the way we do things, or it might be on the forefront of an entire new plan of action. Organizations that advanced new and energizing advances were given multi-billion-dollar valuations, in spite of having practically no income. Also, organizations experiencing an IPO can beef up their story by adding industry veterans and specialists to their payroll, giving the presence of a becoming business with accomplished administration. Now let us look at a few examples of the most prominent IPO’s that have happened. ALIBABA Nobody intrigued by business could get away from the buzz encompassing Alibaba’s first sale of stock. The organization’s shares were evaluated at $68 for the IPO, which would have made it bigger than those of Twitter or Facebook, in the first moment of being a traded on an open market organization. When exchanging started at twelve, Alibaba stock was at 92.70. Examiners and the media have examined the limbs of Alibaba’s mammoth association, ruminating about its potential quality and focused stance. The Alibaba IPO approves the Chinese tech industry as a worthy spot for western speculation. That could mean more Chinese tech firms seeking the given pool of investment cash. Aspiring youthful ambitious people will

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size up developing business rivalry with more noteworthy appreciation as they look for financial specialists. They might never again have the capacity to make global development a low need. Alibaba’s open offering reminds us that Chinese organizations will likewise contend with U.S. ones for the same rare information researchers, programming designers, architects, storytellers, and other people who can help organizations make items and settle on business choices. China ought to never again be seen as a simply an alluring wellspring of minimal effort ability. That will make MBAs a more sizzling product, with conceivably more suitors. That could drive effectively swelled Silicon Valley wages significantly higher, expanding the locale’s current compensation bubble. Facebook Facebook had a striking journey subsequent to its commencement, and all the more so following its IPO in 2012. The greatest accomplishment of the organization as such, other than associating in excess of 1.2 billion clients, has been splitting the code of adapting a versatile stage. This is something that drove its stock cost from $18 to where it is today at around $80 for every offer. An agreeable indication that can be drawn from Facebook’s prosperity is that in the event that you have a sufficiently huge client base and the right model of engagement, you can accomplish the uncommon and make apparently unrealistic

headways. Definitely this is the impulse that drives new companies to concentrate on picking up clients over gains. Facebook’s normal income for every client has climbed essentially in late quarters and we anticipate that the pattern will proceed. Facebook reports development in its normal commercial estimating and the quantity of advertisement impressions, however not their genuine qualities. Nonetheless, we evaluate that the organization’s normal ad pricing remained at generally $1 for every 1000 impressions in Q2 2014 and the aggregate number of commercial impressions was some place around 2,266 billion amid the same period. (See the supplement beneath to see how we make these estimations.) An increment of 10% in ad pricing evaluation can bring about commercial incomes going up by 10%, expecting that the quantity of advertisement impressions doesn’t change. Considering that promotion incomes represent marginally in excess of 90% of Facebook’s incomes, the general effect on incomes would be near 9.1%. This interprets into EPS increments of approximately 9.3% and 9.2% for 2014 and 2015 respectively. Hence, if the normal advertisement estimating for 2014 were to bounce 10% over what we as of now expect, it would bring about our assessments for non-GAAP weakened EPS for 2014 and 2015 set up to $1.89 and $2.62 separately. Our current assessments stand at $1.73 and $2.40 for 2014 and 2015, separately

Figure 1: Alibaba’s worth

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(versus agreement evaluations of $1.69 and 2.04). At the point when Facebook dispatched its IPO in 2012, we were worried that the valuing of the arrangement couldn’t be legitimized by the organization’s plan of action. Our worries were justified as the shares smashed from the IPO cost of $38, tumbling to as low to as low as $17.55 amid that year. Much of this was determined by financial specialists’ questions around Facebook’s capacity to adapt its constantly becoming versatile base. By then, we expected that Facebook’s income for every 1000 online visits would keep on declining because of the becoming blend of worldwide clients and the progressing movement to versatile clients. Moreover, we accepted that Facebook required to empower e-business development by expanding offering of virtual products to restore its valuation and enhance financial specialist estimation. We established our desires on the way that was social gaming grabbing quickly, as well as e-business was seeing worldwide selection and Facebook’s stage appeared perfect for advancing online transactions. Notwithstanding the promptness of these patterns, the circumstances stayed repressed for Facebook all through 2012 and just began to enhance gently towards the end of the year, when the organization began trying endeavours to make a feasible versatile adaptation model. At that moment, we accepted that if Facebook could split the portable publicizing confound, its stock could without much of a stretch ricochet back and it could be worth a great deal more than it was around then. Be that as it may, we didn’t believe that its versatile procedure would get to be as fruitful as it is today. We imagined that, considering the absence of space on cell phones for showcase promotions, Facebook would keep on struggling as far as income development. We can now say that we were – in a statement negated. Facebook kept on believing that advertisements are the best approach. It evaluated the formula for cell phones and took off food based advertisements, which basically tackled the issue of absence of accessibility of land on portable screens for putting flags and content promotions. By then, it was tricky to envision that obstructing Facebook’s customary food

with supported posts and promotions won’t break down client experience. Notwithstanding, the organization was cautious and focused by leveraging client produced information. These notices turned into a common part of Facebook’s sustains and pulled in a considerable measure of sponsors because of their profoundly focused on nature and great navigate rates. A few studies and assessments propose that navigate rate for Facebook’s channel based promotions could be increased from 2% to 6%. Taking a normal figure of 3% will infer that Facebook’s channel based advertisements encounter 3 clicks for every 100 impressions. This is the reason Facebook’s advertisement income accelerated in 2013 as the extent of versatility in general commercial incomes developed. The IPO market in 2015 has been relatively thin as compared to the previous year. The year 2014 was seen as one of the best for IPO market in the recent history with companies coming at a pace that was hard to keep up. However there are some much awaited IPOs coming up in this year with companies like AirBnB, Dropbox, Ferrari, Uber and PayPal coming out with new issues. In India also IPOs like Indigo, HAL, RINL and Prabhat Dairy will grab many eyeballs making the IPO market an attractive one which will keep on growing.

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Article of the Month Finsight Cover Story

Gaurav Maheshwari

Pushkar Ralegankar

According to Directive Principles of State Policy, Article 41 of Indian Constitution states ‘The State shall, within the limits of its economic capacity and development, make effective provision for securing the right to work, to education and to public assistance in cases of unemployment, old age, sickness and disablement, and in other cases of undeserved want’. On 9th May’2015, Prime Minister Narendra Modi announced three new social security schemes to better manifest the provisions said in the Article 41. Even though there already exist several social protection schemes announced by different governments of the past which have provided social coverage to some extent, there is a lot of hullabaloo around these new schemes due to high expectations from the new government. The initial response to these schemes has been overwhelming – but registering for such schemes is the easier part, since trouble really begins when claimants seek the benefits promised. But a few questions remain – for instance, the big question of designing these schemes so as to maximise reach to 1.25 billion people, or whether the claim settlement process will succeed in being transparent. Many other such questions persist – the answers to which only time can reveal.

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Why Social Security? Asian Development Bank describes social protection as enabling “vulnerable groups -both poor and non-poor to prevent, reduce or cope with risks”. In terms of the just workforce in India, totalling 459 million, 94% is employed in unorganised sectors*. Statistics on poverty in India are well known, which is 29.5%, i.e. the percentage of BPL population, according to the report of Rangarajan Committee. It can be argued therefore that providing social protection to the needy and poor dependent population is the responsibility of the government. But India’s expenditure on social security is lacklustre – going up to only 1.7% of GDP, which is lower than similar low level income countries like Nepal (2.1%), Sri Lanka (3.2%) and a few others. There are a few pension schemes for the unorganized sector (not to mention state-level exceptions of meagre compensation), but insofar as concerns universal social security, Indian unorganized sectors do not enjoy coverage under accidental and other insurance schemes, which organized sectors do. Three New Schemes The latest social security schemes launched are the Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY), the Pradhan Mantri Suraksha Bima

Yojana (PMSBY) and the Atal Pension Yojana (APY). The basis of all these schemes is the JAM (Jan Dhan Yojana, Aadhaar and Mobile) Trinity, which has the potential to streamline the transfer benefits in a leakage-proof manner. At the time of writing this article, the number of registrations has crossed 10 crores, which is praiseworthy considering it has been only a month since the announcement. A couple of moves that have facilitated the high volume of registrations are the auto-debit facility and the availability of application and claim form in nine languages. The length of all application forms is just one page and even the claim forms require only basic details, doing away with unnecessary clutter. PMJJBY is a life insurance scheme available to nominees of members in the event of their death. Individuals in the age group of 18 to 50 can register for this scheme and the required premium is Rs 330 which has to be paid in one instalment annually. Risk coverage provided under this scheme is Rs 2 lakhs and the causes extend to death for any reason and can be availed if the age of the member at the time of his/her death is below 55. PMSBY is an accident insurance scheme offering accidental death cover and disability cover for death or disability on account of an accident. As of now, this scheme has been most widely accepted. Currently, PMSBY accounts for 75% **

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New Social Security Schemes

of members relative to the two other schemes. It is available for all the individuals in the age group of 18 to 70 years and with a premium of only Rs 12 per annum, guaranteed risk coverage is Rs 2 lakhs. Only in the case of partial disability, it is Rs 1 lakh. Partial disability has been described as the total and irrevocable loss of sight of one eye or loss of use of one hand or foot. A unique aspect of both PMJJBY and PMSBY is that instead of a separate medical check-up, a self-declared certificate of good health has to be submitted – a move that definitely stands to increase the adoption rate of these schemes. APY is a motive under the National Pension Scheme (pension is a regular payment to a person that is intended to allow them to subsist without working) to provide old age income security to the working poor and to address risks faced by workers in unorganised sector when they are no longer earning. The age of joining for this scheme can range from 18 to 40 years, but the contribution is required till the member attains the age of 60. The pension begins once the member turns 60 and in case of the member him/herself passing away, the respective spouse gets the benefits. Under this scheme, for members who join by December 2015, the government will assist in contributing to their account for a period of 5 years. Contribution by individuals has to be done monthly, depending upon the age of subscriber and the amount of pension he/she requires, which may vary from Rs 1000 to 5000. Shortfalls And Probable Causes Of Failure Except for accidental insurance scheme i.e. PMSBY, other two schemes PMJJBY and APY could have been formulated in a better way so that they could have the more feasible impact. The primary problem with PMJJBY is the termination of assurance at 55 yrs. Consider the case of a couple where the member of this scheme is the only breadwinner. If the member dies after 55, then there is no compensation. Ideally this would be the time when one requires it the most. Another question would be that of the bold move of self-declaration of health. This decision could come back to haunt the government during the claims settlement. Not everyone reads the forms carefully enough and will declare themselves fit on the paper. In the event that conflicting medical history is found during the settlement of claims, then there can be a plethora of problems in granting compensation. In one of these schemes, the premium amount is INR 330 which has to be paid in lump sum. Not many

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thorough investigative processes will be waived off. There is awareness of suicides that happen just to gain benefit from such schemes. The government must therefore continuously keep a check on such tendencies. The calculations of internal rate of return don’t reflect any higher number. Considering the government is investing 5% of EPFO funds in equity market, the corpus collected from these insurance schemes can also be invested in an efficient manner so as to guarantee better returns. Returns from investment in Infrastructure projects are expected to be quite high, hence assurance of higher rate of return is possible. There is an existing insurance plan by State Bank of India, called as SBI Saral Shield. A unique feature available in this plan is that the benefits from the scheme can be linked to repayment of existing loans. This model can be tried on a pilot basis in any one of the social security scheme. India cannot afford any further failures in planning and monitoring social benefits and all the new insurance plans should address the causes which lead to failure of schemes like Swavalamban Yojana and many others. Concluding Remarks India has a higher percentage of younger population and as this population retires, the need for insurance schemes will tend to increase. In his speech during latest Union Budget, Indian Finance Minister said ‘I propose to work towards creating a universal social security system for all Indians that will ensure that no Indian citizen has to worry about illness, accidents or penury in old age’. Not only Finance Minister, all the concerned executives should work diligently and transparently towards Universal Social Security Mission and then only India can see a better tomorrow.

Interview With Dr.Maram Srikanth Professor, IIM Shillong

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among the poor population are likely to keep this amount in their bank account and even if the balance is available, auto-debit of this much amount will send an instant negative sentiment. Zero balance accounts under Jan Dhan Yojana are evidence of this. In Atal Pension Yojana, the biggest negative is the continuous investment for a minimum of 240 months. It requires patience and a non-zero account balance for a long period. Considering the high percentage of the temporary workforce in India, recurring investment is one of the main hurdles. Otherwise we would have had a huge subscriber base in currently existing schemes. What makes it worse is the penalty in the event of non-contribution by the subscriber that may also lead to the account being frozen. There are four slabs in APY, benefits wherein range from Rs 1000-5000. A simple calculation demonstrates that Rs 5000 of today will be equivalent to Rs 1559 after 20 years, assuming an inflation of 6%. Even omitting from consideration the slab of 1k-4k, if the highest possible benefit amount values to such a meagre amount, then one must ask oneself as to whether there will be any significant value added to the state of living of the poor. According to the World Bank, average life expectancy in India is around 67 years and pension begins from 60. So will the subscribing members receive any significant benefit or is it just the opposite, that the government will earn cash for its projects? Flaws in PMJJBY and APY are revealed from the fact that out of 10 crore subscribers to the new scheme, only 2.5 crores** have registered for both of these together. The low premium and better ROI on PMSBY makes it the winner among the three. What Can Or Could Have Been Done First of all, there should be some contribution from the government in all schemes. Not every individual can contribute to schemes that provide old age security and so, pension schemes could be designed on 3 pillar basis. They are a) Basic pension b) Mandatory contribution to the earnings-related scheme c) Voluntary savings. A basic pension should be given to all. In addition, proportionate benefits can be given to people who are contributing to any of the pension scheme and the amount they are saving in their bank accounts. This will ensure a basic cover for all. It is being said that for deaths occurring in the first year of registering for the insurance,

What Is The Impact Of RBI’s Recent Monetary Policy On The Indian Economy? Indian economy achieved less than satisfactory growth during the last financial year. For instance, agriculture sector grew only 0.2%, manufacturing clocked 6.1% and services recorded 10.2% during the FY 2014-15. Besides, there was lacklustre growth in non-food credit disbursement (just 12.6%, the lowest in the last 18 years) of Indian banks during the FY 201415. As per the estimates of RBI, while inflation is expected to be at 6% and growth in GDP is expected to be at 7.6% during the FY 2015-16. RBI reduced its Policy interest rate i.e., ‘Repo rate’, the rate at which banks in India can borrow funds from the central bank, from 7.50% to 7.25% p.a. in its recent monetary policy announced on June 2, 2015. Certainly, this augurs well for the Indian economy since monsoon is expected to be deficient and less than its LPA (Long Period Average – any forecast of less than 90% of LPA is considered as drought) of 88% during the FY 2015-16. As per the OBICUS (Order Books, Inventories and Capacity Utilisation Survey) conducted by RBI, India Inc. has been witnessing lower capacity utilisation and piling up of inventories for quite some time. Low demand (flat sales), decline in bottom lines and over capacity are haunting the Indian corporate sector. Capital expenditures (Capex) are not taking place. Oil prices have been firming up. There is muted growth in external demand. In view of the above background, I personally feel that RBI has taken a conscious decision to reduce Repo rate to boost demand, and to encourage investment climate thereby reviving growth prospects in the Indian economy.

Apart From The Measures In Monetary Policy, Are There Any Ways And Means To Ensure Higher Capacity Utilization As Well As Revival Of Overall Investment Climate In The Economy? According to a research conducted by Business Standard, there are three sectors which are sunrise industries in India viz., Renewable Energy, Defence Production and E-Commerce. As renewable energy offers alternative energy solutions, Indian entrepreneurs can encash the opportunity by investing in wind power, solar power, hydel power and bio-mass energy projects. Further, this would address power deficit situation in the country in the long run. Manufacturing of defence related products has an estimated capex opportunity of USD 245 billion during the next decade. As India is one of the top importers of arms and ammunition, the Government proposed to reduce its reliance on foreign suppliers through its ‘Make in India’ programme and thus increased Foreign Direct Investment (FDI) limit from 26 per cent to 49 per cent in the defence sector. E-Commerce is expected to hit USD 100 billion as India’s internet users’ population would be around 470 million by 2020. Apart from the above, Government of India is very keen to revive stalled infrastructure projects in order to kickstart the economy. In the infrastructure segment, as many as 248 projects have been stalled (worth Rs. 15,600 crore). The Government has been contemplating issue of single window clearances, resolution of land acquisition issues, assignment of special asset class status to infrastructure, restructuring the loans to the infrastructure sector, etc. Narendra

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Modi’s pet punchline ‘Minimum Government – Maximum Governance’ may work wonders, if implemented in toto, for the country Do You Feel That Indian Economy Has The Potential To Record Double Digit Growth In The Next 10 Years Like China Did In The Past? Yes. India has the potential to record double digit growth if it addresses structural issues like building up of world-class infrastructure facilities, opting for alternative energy security models (like green energy, without depending on fossil fuels), simplification of tax regime (like Goods & Services Tax), enabling investment climate through affordable banking and financial services, cutting down red-tapism, etc. You can see that how young entrepreneurs are foraying into their dream projects against all odds in the recent periods. Though some of them are able to mobilise funds through informal channels, Government should support Micro Small and Medium Enterprises (MSMEs) since they contribute to GDP through exports, create employment and overall positive investment climate. Setting up of MUDRA (Micro Unit Development and Refinance Agency) Bank by the Union Government is a right initiative in this context The Economies Of US, Europe And Japan Are In Recovery Mode. Even China Is Not Growing. As Such, External Demand Is On The Low Ebb. In View Of The Above, What Strategy Indian Corporates, Mainly Exporters, Should Adopt? Look, India is the second most populous country after China, having 1.3 billion people in the world. As such, India is modelled on ‘consumption led economic growth’. Indian exporters can think of domestic market through innovative marketing techniques. However, share of exports in India’s GDP has been increasing, of late. For this, we need to explore alternative overseas markets since the advanced economies are on recovery path. This is an opportunity for the Indian exporters to test other overseas markets wherein they might face certain issue such as low margins, trade restrictions, sovereign risks, etc. Government of India should also encourage Indian exporters through lower duty regime,

JUNE 2015

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interest subvention, extension of lines of credit to countries wherein sovereign risk persists, etc. Indian Banks Have Issues Viz., Asset Quality, Capital Adequacy And Human Resources, Etc. Now, RBI Gave Bank Licenses To Bandhan Financial Services And IDFC, Which Will Intensify The Competition Further. What Would Be Future Scenario Of Indian Banking Industry? Indian banking industry is at inflection point. As per the Basel III norms, banks in India have to infuse additional capital of around Rs. 5 lakh crore by March 31, 2019. On one side, corporate bond market in India is in nascent stage; capital market is shaky on the other hand due to various factors. Government of India is the owner of Public Sector Banks (PSBs) holding above 51% stake. Since Indian banks, especially PSBs, recorded negative growth in their bottom lines primarily due to stressed assets [Gross Non-Performing Assets (GNPAs) and Restructured Standard Assets (RSAs) of around 11-12%] as of March 31, 2015, it will be a formidable task for them to meet the capital adequacy norms as envisaged. PSBs enjoy market share 77% in the Indian banking industry. As most of the bankers are getting retired in PSBs, the present decade (2010-2020) is treated as ‘retirement decade’ in the Indian banking sector. Since banking in general, credit in particular, is a function of experience, time only will tell how the banks will manage their human resource issues in the near future. Government of India is seriously contemplating of attracting the talent from the private sector (for the PSBs) by giving market driven remuneration packages. Further, Indian banks are in the process of consolidating their technology platform to strengthen their risk management systems. Though competition in the Indian banking industry will intensify with the entry of two more banks viz., Bandhan Financial Services and IDFC, they will complement the efforts of financial inclusion drive till the last mile. As competition enhances efficiency, I welcome these two new banks which are endowed with specific expertise in domains viz., micro-finance and infrastructure finance.

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CIRCUS SWAP NIDHI GARG IIM Shillong

Sir yesterday while returning from college to home I heard one corporate person suggesting other to go for circus swap. I found the term new and interesting. Could you please throw some light on it? Sure, the Circus Swap is the most common form of forex transactions where “CIRCUS” is an acronym for Combined Interest Rate and Currency Swap as it is a combination of both interest rate swap and currency swap. Circus swaps are also called cross-currency swaps or currency coupon swaps Sir, what are these interest rate swaps and currency swaps? Interest rate swap is an agreement between two parties for exchange of their rates i.e. fixed interest rate and floating interest rate. The floating interest rates are mostly based on LIBOR (London Interbank Offered Rate). Parties uses this swap to manage exposure to fluctuating interest rates or to obtain lower interest rate. Currency swap involves exchange of principal and interest from one currency into another. This is used by companies to hedge against exchange rate fluctuations. So, Circus Swaps are basically described as swap wherein one party exchanges a fixed rate amount in one currency to a floating rate amount in another currency. But sir, what is the use of this? Can you please explain with the help of a real life example? Ok, suppose a company is based in India so its reporting currency is Rupee. The company imports from US through some of its suppliers on credit. This means that

the cash coming in the company in the form of assets is in Rupees while its outstanding liabilities to its creditors are in dollar. Assume that the interest rates in US are rising while the interest rates in India are falling. The dollar is strengthening against the rupees. This means our company will start losing as its receipts are decreasing in value while its payments are increasing in value and are getting costlier. In such a situation the company can enter into a circus swap. The company can transfer some of its US dollar liabilities into Rupee liabilities by reducing its Rupee assets but at the same time this will reduce its currency fluctuation exposure. This example cleared how this Circus Swap works. But what are the benefits of entering into these swaps? Circus swaps allows firms to switch their loans from one currency to another. They also allows firms to choose whether they want to have fixed or floating-rate interest based on current market situations and needs of the firm. The swap benefits the firm as it can borrow in the currency which will give it the best terms. Swaps offer many advantages but what are the risks associated with entering into a swap? Some risks associated with swaps are: 1.Credit risk: This risk is associated with default by the counterparty. If the other party defaults in between then the swap will be left in an open position and the problem of mismatch may arise if we are not able to find other party with required interests. 2.Market risk: The market risk is associated with volatility of interest rates and exchange rates for unhedged positions Thank you Sir. This explanation makes things very clear.

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