Niveshak June 2016

FROM EDITOR’S DESK Niveshak Volume IX ISSUE VI June 2016 Faculty Chairman

Prof. P. Saravanan

THE TEAM Aaron Keith Rego Abhishek Jaiswal Aditya Kumar Jain Anisha Khurana Ankit Singhal Ankur Kumar Anoop Prakash Devansh Sheth Shreyans Jain All images, design and artwork are copyright of IIM Shillong Finance Club ©Finance Club Indian Institute of Management Shillong www.iims-niveshak.com

Dear Niveshak The month of June saw two major events, the first one being domestic and other being a global one, both of which will have a far-reaching effect in the coming quarters. While the benchmark Sensex index ended the month at approximately the same level at which it started, there was huge volatility mainly on account of these events. The first big surprise to shake the market took place when the RBI Governor, Raghuram Rajan wrote an open letter to the employees of the RBI about his plan to exit when his term ends. The main cause of the concern was the timing of the change in governorship when the global economy is facing strong headwinds. Another event with global repercussion was the Brexit. The ‘Leave’ camp having won the vote meant that the UK would have to leave the European Union. The stock markets plummeted across the globe with Sensex opening around 1000 points down the next day. Since India has strong economic ties with the United Kingdom and many companies earn in the Euro, the market tumbled. The month also saw some other interesting news like Railways making its front line staff more customer friendly and e-commerce company Flipkart reducing its return day policy from 30 days to 10 days for most of the products it sales. On magazine front this time, the article of the month talks about the GST since the bill has been passed by the Lok Sabha and awaits its approval from the Rajya Sabha. The article provides a holistic view of the bill. Our cover story talks about the historic vote of Brexit and explains what the implications are and what led to such a situation. For FinGyaan, the author talks about how financial system can be integrated with the sustainable development. It brings in different perspectives which can help us reach this goal. Our FinRewind section talks about the Dot-com bubble burst. The author analyses the event and charts out the lesson that can be learnt from this. And the FinSight section explains Islamic Development Bank. The author explains its financing instruments and the key features of the bank and its implication for India. This time we have brought the expert interview of Mr. Rakesh Kumar Verma, Chief Financial Officer of JNU, IAAS. He gives a detailed explanation on the expenditure of the government on the education sector and how it is ensured that the money is used for the intended purpose. He also talks about how the funds are allocated to the educational institutions. Finally, we would like to thank our readers for their immense support and encouragement. You remain the prime motivation factor that keeps our spirits high and gives us the vigour and vitality to keep working hard. We hope you had a great month and wish you the best for the new one. Team Niveshak

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 Month That Was

Article of the month

10 GST: Better Late Than Never

FinGyaan 18 Sustainability and Finance: Winds of Change

FinRewind

22 The Commotion of Dot-Com

14 To Be or Not to Be: The BREXIT Conundrum

Finsight

26 Islamic Development Bank FINVIEW

30 Rakesh Kumar Verma

Chief Financial Officer, JNU, IAAS

CLASSROOM

32 7th Pay Commission

The Month That Was

NIVESHAK

www.iims-niveshak.com

The Niveshak Times Team NIVESHAK

IIM Shillong RBI Governor Raghuram Rajan to Step Down In an open letter to all the RBI employees, Mr. Raghuram Rajan said that he will step down as the RBI Governor and return to academia when his term ends in September. In his letter to the employees, Rajan listed down the work done under his supervision and what needs to be done. Shifting to the inflation targeting, stabilizing Rupee and taking up the task of cleaning up the books of the banks were some of the accomplishments that Mr. Rajan mentioned in his letter. “While I was open to seeing these developments through, on due reflection and after consultation with the government, I want to share with you that I will be returning to academia when my term as governor ends on September 4, 2016,” Rajan said. “I will, of course, always be available to serve my country when needed.” The move came as a surprise for the market. The former International Monetary Fund chief economist strongly supported the creation of a monetary committee and strongly stick to his target of lowering down inflation. At a time when the world economy is again showing sign of slowdown, with the Brexit happening, stepping down of an internationally acclaimed technocrats does not bode well for the economy. However the government has also shown proactiveness on its part and has said that the next governor would also be an economist. Britain Voted to Come Out from the European Union Little did anyone know that it would finally happen and the UK would vote to come out of the politicaleconomic union of 28 nations. But finally the UK has decided to leave the EU. In a historic referendum which will have longdrawn effect all over the world, both financially as well as politically, the ‘Leave’ side won marginally with 51.9% vote and the ‘Remain’ side getting remaining 48.1%. While it contours of how will the process evolve is not clear, the analysts are saying it might have

JUNE 2016

contagion effect with other nations in the European Nations planning to leave the bloc. IT and Steel are the two major sectors of Indian economy which got affected majorly. Patanjali Under Scanner for its Allegations in the Advertisement The INR5000 crore FMCG company has come under the scanner of Indian food regulators for its allegations in an advertisement about other brand. It claims that the company uses ‘Kacchi Ghani’ process to make the edible oil, while many other brands use neurotoxin hexagon solvent extraction method which is harmful for the health. The Solvent Extractors’ Association of India (SEAI) filed a complaint against Patanjali. It said that the claim made in the advertisement is misleading and would dilute their brand unnecessarily. In response to this issue, Food Safety and Standards Authority of India (FSSAI) has directed its Central Licensing Authority to issue a show-cause notice to Patanjali. Manufacturing Sector Picks Up in May Data released by Nikkei India Manufacturing Purchasing Managers Index rose to 50.7. The index was at 50.5 level in April. Any mark above the 50mark level shows expansion while the level below 50 shows contraction. The data showed that the demand was mainly from the domestic country. Demand was falling from the export market as the new export orders fell for the first time in the last 32 months. The data also showed that the intermediate goods sector performed well as compared to other consumer goods sector. The decline was much steeper in the investment goods firms. There was expansion in the workforce size. The data also showed that the manufacturing grew by 9.3% in FY16. Flipkart Reduces 30 Day Return Policy to 10 Day for Most Products Coming to the terms of handling the nightmare of the logistics, ecommerce giant, Flipkart has

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reduced the time period the customers are allowed to return their goods from 30 days to the 10 days for most of its top-selling products. Also the company has increased the commission it charges from the sellers. While its rival Amazon cashed in on the opportunity by slashing down the commission it charges from the sellers. Flipkart is also discontinuing with its Zero+ Commission Policy which it had introduced earlier. Under the scheme the sellers were allowed to sell their products on its platform without having to pay for anything. Instead they were asked to advertise on the company’s website for a fee. All India Vendor’s Association (AIVA), a group of 1000 sellers on online platform, said that it will increase the cost. Also frequent changes in the policy is also a cause of concern for the sellers as they need to realign their processes. Finance Ministry Takes Measures to Boost Spending and Cut Expenditure In its bid to boost the private sector investment in the country, the Finance Ministry is developing a stringent expenditure monitoring system to monitor the expenses made by the key departments of the government. It has also asked some of the departments to expeditiously start implementing their projects.

customer-friendly companies in the world like Starbucks, Amazon and Toyota. The QCI suggested to divide the staff of the railways into zonal teams and ensure a healthy competition exists among them. These teams should compete with each other in two to three month basis on clearly defined parameters. Government is Mulling Policy Changes to Bring Start Ups in Medium Industry To support the recently launched initiative, Startup India, the government is planning some changes in the policies to include some startups in the Medium Industry category. This is being done because central ministries’ departments have to procure at least 20% of their purchases from the small and the medium enterprises. These purchases come with some preferential treatment which could help a new business thrive. In order to impove the participation in the campaign, revamping the initiative is being considered as an alternative where certain regulations which prove a detterant to the business activities would be eased so as to promote the initiative. DIPP has already proposed an upgraded action plan to ensure the same. If all goes as planned, the government expects to see not only a better participation for the initiative but also healthy results coming their way

The Ministry clarified that the monitoring process will ensure that the quality of the expenditure is maintained and the money is spent in a right full manner. For example, in case of drought the Ministry will be able to direct the expenditure of rural development ministry in a better manner. Railways to Become More Customer Friendly While the top-most priority of the Railway Minister Mr. Suresh Prabhu is to ensure cleaner railways, another major concern that has haunted the ministry is how to make it more customer friendly. But now the change has started. Quality Council of India (QCI), which is a collaboration between the government and the industry, has advised Railways to make its frontline, customer-facing staff more friendly and reward them on a continuous basis. The council suggested to follow the model of some of the most

The Month That Was

The Niveshak Times

www.iims-niveshak.com

NIVESHAK

27100

BSE

27000

DII

2,000

FII

1,500

26900 26800

1,000

BSE

26700 26600

500

26500 26400

26300 26200

-500

26100 29-06-2016

28-06-2016

27-06-2016

24-06-2016

23-06-2016

22-06-2016

21-06-2016

20-06-2016

17-06-2016

16-06-2016

15-06-2016

14-06-2016

13-06-2016

10-06-2016

09-06-2016

08-06-2016

07-06-2016

06-06-2016

03-06-2016

02-06-2016

01-06-2016

26000

-1,000

FII, DII Net turnover (in Rs. Crores)

Article ofSnapshot the Month Market Cover Story

Market Snapshot

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

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

1,02,85,017 Source: www.bseindia.com

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

12.00%

INR/1 USD

10.00% 8.00% 6.00%

Euro/1 USD

GBP/1 USD

67.62 74.96 65.73 90.70 50.12

JPY/1 USD

SGD/1 USD

LENDING / DEPOSIT RATES Base rate Deposit rate

9.30%-9.70% 7.00% - 7.50%

RESERVE RATIOS CRR SLR

4.00% 21.25%

POLICY RATES Bank Rate Repo rate Reverse Repo rate

7.00% 6.50% 6.00%

4.00% 2.00% 0.00% -2.00% -4.00%

Source: www.bseindia.com

-6.00% -8.00% -10.00%

JUNE 2016

Date as on June 30th

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NIVESHAK

BSE Index

% change

Open

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

1.18% 1.92% 1.80% 3.18% 1.30% 4.87% 1.15% -2.96% 6.80% 3.66% 6.48% 7.84% -2.35% 5.75% 2.88% 6.87%

26684 19372 20168 14417 11820 8060 15316 11541 7977 9378 1875 1421 6215 11159 11389 6285

27000 19745 20531 14875 11973 8453 15493 11200 8520 9721 1996 1533 6069 11801 11717 6717

% Change TECK, -2.35%

IT, -2.96%

Smallcap, 5.75% REALTY, 7.84% PSU, 6.87% POWER, 6.48% OIL&GAS, 3.66% MIDCAP, 2.88% METAL, 6.80%

Healthcare, 1.15% FMCG, 4.87% CD, 1.30% CG, 3.18% BANKEX, 1.80% AUTO, 1.92% Sensex, 1.18% © FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

Article Market of Snapshot the Month Cover Story

Market Snapshot

Niveshak Investment Fund

Done on 30/6/14

Information Technology(11.78%)

Bank (6.86%)

HCL Tech.

HDFC Bank Wg: 6.86% Gain: 27.62%

Infosys

TCS

Wg: 3.69% Gain : -2.38%

Wg: 3.95% Gain: 44.26%

Wg: 4.13% Gain : 3.61%

FMCG(21.53%) Colgate HUL

Britannia

Wg: 5.60% Gain : 20.07%

Wg: 6.26% Gain: 174.02%

Wg: 4.66% Gain: 27.59%

Amara Raja Wg: 4.24% Gain: 20.89%

Godrej Consm. Wg: 8.31% Gain: 83.38%

Lupin Wg: 6.48% Gain : 33.37%

Midcap Stocks (12.26%) Bharat Forge Wg: 3.44% Gain: -17.54%

Kalpataru Power Wg: 4.14% Gain: -2.03%

Titan Company Wg: 4.59% Gain: 8.30%

Chemicals (8.46%)

Pharmaceuticals (10.87%) Dr Reddy’s Labs Wg: 4.39% Gain: 17.11%

Wg: 5.01% Gain: 7.20%

Misc. (12.90%)

Auto (9.00%) Tata Motors Wg: 4.76% Gain: 2.41%

ITC

Natco Pharma Wg: 4.68% Gain: 12.92%

Asian Paints Wg: 8.46% Gain: 59.55%

Textile (6.35%) Page Indus.

Wg: 6.35% Gain : 33.53%

Performance Evaluation

As on 30th June 2016

June Performance of Nivehshak Investment Fund 175

104 103 102

165

Scaled Sensex

155

Scaled NIF

145

101

135

100

125

115

95 1/6

4/6

7/6

10/6 13/6 16/6 19/6 22/6 25/6 28/6 Scaled Sensex

Scaled NIF

Opening Portfolio Value : 10,00,000 Current Portfolio Value : 16,00,905 Change in Portfolio Value : 60.09% Change in Sensex : 31.72%

30-Jan-14 07-Mar-14 15-Apr-14 26-May-14 03-Jul-14 08/08/2014 16/09/2014 23/10/2014 12/02/2014 07/01/2015 12/02/2015 20/03/2015 29/04/2015 04/06/2015 09/07/2015 13/08/2015 18/09/2015 28/10/2015 04-Dec-15 11-Jan-16 16-Feb-16 23-Mar-16 04-May-16 08-Jun-16

105

97 96

Performance of Niveshak Investment Fund since Inception

Value Scaled to 100

Risk Measures: Standard Deviation : 18.41 (Sensex 9.92) Sharpe Ratio : 3.05 (Sensex : 2.79) Cash Remaining: 58,000

Comments on NIF’s Performance & Way Ahead: The month of June saw multiple events rock the market, with Raghuram Rajan announcing his exit from the helm of the RBI to Britain announcing its exits from the European Union. The Sensex which on 23rd of June tanked nearly 1000 points was seen slowly picking itself up towards the end of the month. The coming month will see the focus shift towards the company quarterly results and the monsoon session of parliament in which the GST bill may be brought up for discussion. The top performers during the month in the NIF were Natco Pharma and Titan which saw a gain of 21% and 13% respectively whereas the laggards were Infosys and Asian Paints which fell by nearly 7% and 2 % respectively.

Article of the Month Cover Story

NIVESHAK

GST: Better Late Than Never PrasadParth SIIB The country is watching the upcoming Rajya Sabha elections with bated breath as it will decide the future of India’s most significant tax reform- the GST. Already cleared by the Lok Sabha, it is waiting for approval from Rajya Sabha where the current ruling dispensation does not have the majority. Hailed as a ‘gamechanger’, it is going to be the next leg of a long journey towards an ideal goal. It has been billed by the incumbent Finance Minister as ‘the single biggest tax reform since 1947’. The objective of the article is to provide a holistic view of the GST and its various aspects along with the claimed implications on the growth of the economy. Income from tax receipts is classified into those of direct taxes and indirect taxes which

JUNE 2016

form an important component of the fiscal policy for any country. As such there exists no a priori universally accepted proportion of these two categories. However in the case of India, it has been observed that indirect taxes form a higher proportion of the total tax revenue than direct taxes. This has been primarily due to a limited scope for raising additional revenue from direct taxes. But in the case of indirect taxes, extending their coverage and enhancing rates is much easier. All successive governments have tried to increase tax revenue by way of increasing indirect tax rates and also introducing new taxes regularly. This has resulted in a haphazard evolution of an inefficient tax regime which at times triggers inter-state wars, feeds inflationary forces, and

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1977, found that there was an abundance of unnecessary diversity in rates, coverage and procedures etc. Its biggest defect was found out to be its cost-cascading effect along with its subsequent ill-effects such as reducing efficiency, hindering exports by making them uncompetitive and reducing its effectiveness as a policy tool. The VAT system was introduced in 1985 based on the very recommendations of the Jha Committee. It was further enlarged and made more comprehensive in 1991 on the recommendations of the Chelliah Committee. The VAT system of taxation was opposed tooth and nail by the states primarily due the fear of an adverse impact on their revenue receipts. They also feared the loss of control over a significant policy tool with which

policy with regards to our domestic industry and agriculture are now being phased out due to our commitment to the WTO. Even the central sales tax is being phased out and the states are going to be soon reimbursed with the losses. In spite of such measures on the part of the government, the regime is still considered unsatisfactory one by the critics due to absence of a consistent long-term policy governing these taxes. Multiple committees have been set up to look into the issues related to indirect taxes and the growing disillusionment with them. The LK Jha Committee was one such committee entrusted with broad terms of reference to review the existing structure. The Committee which submitted its report in

to attract business investments. Even the response of industry and business circles was much ambivalent since it involved selfpolicing and self-assessment and made tax evasion quite difficult. Yet it is considered as a significant achievement as it has relieved us from the cost and price cascading effects and has rationalized the regime to quite an extent. Now even the states have adopted the VAT system in terms of their sales taxes after being reassured of compensation on the part of the central government. However, this is considered as only a stepping stone towards a higher objective of an eventual comprehensive tax on goods and services i.e. the GST. Even after such comprehensive reforms, still the regime is plagued by multiple deficiencies.

Article of the Month Cover Story

worsens income distribution. The present indirect taxes regime consists of myriad taxes in the form of service tax, excise duties, customs duties, sales tax (which is being phased out slowly) etc. The service tax was introduced quite recently through a constitutional amendment and is justified on the grounds of a growing share of services in GDP. The structure of excise duties was reformed and a VAT format was introduced thereby shifting them to an ad valorem basis. The Budget for 2000-01 was a watershed one from where we shifted to a single, modvatable rate of Central value Added tax of 16% with an objective of imparting a long-term stability and to remove uncertainties. The customs duties which were in lieu of a protectionist

Article of the Month Cover Story

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The Cenvat does not cover the chain of value addition below the stage of production and also does not cover other indirect taxes such as additional excise duties, surcharges etc. At the state level, the VAT does not cover luxury tax, entry tax etc which still results in a cost cascading effect. Also the VAT on goods has not been integrated with tax on services at the state level. So it can be inferred that we still have to go a long way in terms of reforming our tax regime. The GST comes as a ‘face-saver’ and is a big step in the right direction although

manner taking on board all the concerns of states which are important stakeholders in a federal polity like India. The proposed Bill takes into account some of the concerns of the states and promises compensation for five years in a tapering manner. It includes two parallel and independent components i.e. the central GST and the state GST. The state entry taxes will be subsumed under this system while petroleum, oil products along with alcohol have been kept of the purview of the tax. The

it is bound to throw up several problems of its own. It is considered to be near optimum and close to being called as an ideal tax. The GST meets the criteria which are associated with an ideal tax regime. It is a rich and buoyant source of tax receipts and allows for a free working of the market mechanism. It also has a neutral impact on resource allocation, size of business units and their location as well as supply costs and prices. It also facilitates the creation of India as an integrated and hurdle free market and also allows room for retaining international competitiveness. It will also bring closure to preposterous debates on ideal and optimum taxes. However the caveat here is the federal structure of the country and it is essential that it is implemented in a phased

Finance Minister has also promised for rational and low rates within reasonable range of 1826%. To the extent possible, all indirect taxes will be subsumed into the respective CGST or SGST and exemptions or concessions will be applicable only to those items which deserve special treatment such as exports and items produced in SEZs. Both CGST and SGST will be imposed on imports and the liability will be based on final destination where they are consumed . There is also a provision for a GST council which will comprise of central and state finance ministers. The council will make recommendations on taxes, cess and surcharge and the items that are to be kept out of the purview of GST. It gives 1/3rd vote share to the centre and 2/3rd to states with a 3/4th

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NIVESHAK

Article of the Month Cover Story

majority needed to make any amendments. It will also provide for dispute settlement though there have been demands to have a separate body for this. Once such an integrated system is achieved, several benefits are expected to be accrued. Along with the development of an integrated market, it also holds the promise of reducing tax evasion and ensuring better tax compliance and disclosures. It will be like ‘creating internal trade liberalization’ in the words of the incumbent Finance minister. It will make manufacturing and exports more competitive by reducing costs and enabling our exports to compete at the global level. It is expected to do away with the distortions and duplications of the current regime and be a pioneer in stimulating economic growth. It is expected that the adoption of the GST will result in benefits to the tune of 1-2% of our GDP! No doubt that it is one of the most important innovations in the history of taxation. For now, how the government intends to go ahead with the bill remains to be seen. Considering that the GST impacts the federal polity, 50% of the states have to agree to the bill before it becomes a law. If the Government manages to get through all the hurdles, it will end all the piecemeal and a patchwork of taxes and bring about a uniform regime which is in the best interests of all the stakeholders viz the

states, the centre, the industry and the most significant of them all – the consumers. It will be a watershed event of sorts considering the assurance of a better future it depicts

Cover Story

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To Be or Not to Be: The BREXIT Conundrum AaronRego

A Brief Introduction In the past few weeks, one of the major events that has dominated the headlines across the globe is the possibility of a Brexit, i.e., A British Exit from the European Union. On the 23rd of June, the people of UK voted in a referendum with a majority of 51.9% to leave the European Union. The impact of the referendum was immediate, with markets across the globe witnessing a widespread selloff. However, in order to better understand how the question of a Brexit first arose, we first need to understand what the Eurozone is. European Union – a brief background The European Union is a political and economic union of 28 member states that are located primarily in the continent of Europe. It essentially operates through a hybrid system of supranational and intergovernmental decision making, essentially meaning that the

JUNE 2016

IIM Shillong

union consists of a decision-making body that supersedes the local governments while also harmonising the cooperation between the governments. The premise of the European Union first took form after the 1957 Treaty of Rome which Belgium, France, Italy, Luxembourg, Netherlands and West Germany signed to form the European Economic Community (EEC). By 1992, 12 countries were part of the EEC. In 1992 however, with the signing of the Maastricht Treaty, the European Union as we know it today came into existence, and an additional 16 countries joined the Union, taking the total up to 28. The formation of the European Union created a single political entity which made the movement of goods and services with Europe hassle free. Additionally, countries within the European Union were allowed free movement

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Cover Story

of Labour, Capital and Services in and out of their territory. EU member states were also required to maintain common policies on trade, agriculture, fisheries and regional development. The political union was further strengthened in 2002 by a monetary union, with 19 out of the 28 countries adopting Euro as a common currency. Reasons for UK’s discontent within the EU The seeds of discontent began emerging immediately after the UK joined the EU as it opened up its borders to anyone in the EU. Before 1993, immigration into the UK wasn’t a huge problem as the net migration was less the 100,000 annually. However, between 1993 and 2014 the number of migrants more than doubled from 3.8 million to 8.3 million. During the same period, the number of foreign citizens increased from nearly 2 million to 5 million. Additionally, the UK contributed nearly GBP13Bn to the EU budget and received about GBP4.5Bn in the form of rebates from the EU making the net contribution around GBP8.5Bn. This contribution did not go down well with many of the Britons, who saw this as wasteful spending. The United Kingdom Independence Party (UKIP) which won the last European elections along with a few conservative MPs campaigned aggressively for Britain’s exit from the EU. The reasons that were sighted by the parties in favour of the Brexit was the fact that billions of Pounds would be saved, which in turn could be used for social security purposes. Also, the increasing xenophobia within the British population and the fear of losing out jobs to immigrants resulted in an increasing number

of people demanding a referendum on the future of UK in the European Union. The British referendum After an intense debate on what the benefits and repercussions of leaving the EU would be; the UK on 23rd June 2016, carried out a referendum in order to determine whether the United Kingdom would continue to be a part of the EU. After a day of voting, with a 71.8% turnout (incidentally the highest turnout for a vote since 1992 in the UK) the outcome of the referendum was declared, leaving the world is shock and the EU in dismay, with 51.9% of the voter opting to leave the EU. The result of the referendum sent shockwaves across the globe with markets witnessing a meltdown and the British Pound tumbling to record lows. With the outcome of the vote, it is more or less certain that the UK would be leaving the European Union. However, what is still unclear is the repercussions of such an unprecedented move. What next for the UK and EU? Given the outcome of the vote, the process for UK’s withdrawal begins with it having to invoke article 50 of the Lisbon Treaty. This will set in motion the legal process of withdrawing from the EU and will give the UK about 2 years to negotiate its exit from the EU. The article, however, has only been in force since 2009, and would be used for the first time in history, meaning no one really knows how the entire Brexit process is going to pan out. That being said EU laws would continue to apply in the UK so long as it continues to be a part of the EU. Also, the UK would have to abide by all the EU treaties but would no longer be

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part of the decision-making process. Additionally, the UK is headed for political turmoil with the incumbent PM David Cameron announcing that he would be stepping down from the post in October. The upcoming election will further exacerbate the uncertainty surrounding the UK. He has also categorically stated that he would not be the one to invoke article 50 of the Lisbon treaty; leaving that task to his successor. Repercussions of the Brexit While the impact of the Brexit would be seen across the UK and the world; a lot would depend on how the negotiations proceed in the next 2 years. Immigration, which was among the most pressing issue that was in favour of the vote isn’t going to reduce immediately. However, the most likely outcome once the

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exit has been completed would be that EU citizens would have to obtain a work permit similar to the ones that are issued to non-EU citizens in order to continue working in the UK. Conversely, even British citizens working in the EU would have to obtain a visa in order to work in the EU. This would most likely depend on the kind of deal that UK chalks out with the EU concerning the movement of labour. Also, the territories within the UK such as Scotland, Northern Ireland and London which voted in favour of staying in the EU have now begun demanding their own independence from the UK. Not too long ago in 2014, Scotland had carried out a similar referendum on whether to stay in the UK. At that time the Scottish voted to stay in the UK. However, with the UK having decided to leave the EU,

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Cover Story

demands for a second referendum on Scottish Independence has gained ground. What can be the most damaging for the UK, both politically and financially is the fact that an increasing number of people in London have begun demanding independence from the UK. If this were to happen Great Britain would crumble from within; since London represents the financial backbone of the United Kingdom. Impact on Trade The EU accounts for nearly half of all the British goods export; this number increases substantially to 63% if the countries with which the EU has a free trade agreement are included. While ideally, it would be favourable for both sides to reach an agreement on free trade. However, in the worst case scenario, Britain would face trade tariffs on their exports. While this might not be a major trade barrier, it certainly would reduce the economic benefits of the exit. The sector which may bear the brunt of Britain’s exit is the financial services industry as most of it depends on the EU remaining a single market. Even in the best case scenario where free movement of people was preserved; the UK would still lose out on a significant amount of clout in this sector. How will it affect India? Given that the Brexit concerns primarily the UK and EU, it is essential to understand what its impact will be on India. Given that we live in a globalised world; what impacts one county or region will tend to impact the rest of the globe. In the Indian context, the Brexit saw a mass exodus of funds from the stock markets, with many FIIs opting to pull out their investments. The stock markets wiped out nearly ₹4 lakh crore in investors wealth in a single day of trading. Also, companies such as TATA Motors

which have their operations located in the UK would have to bear the brunt of the exit, this was reflected in the stock performance of such companies. However, with the Pound hitting record lows, companies which had borrowed in that currency will benefit significantly. The Pound which fell by nearly 10% will help ease the debt burden by lowering the interest and principal repayment costs. All said and done, India is fundamentally strong enough to withstand the impact of the Brexit and any adverse effect would only be temporary. Editors take on the issue To sum it up, there were rational and logical reasons for people to have warned against a Brexit. However, the prevailing xenophobia and scaremongering meant that people might have been duped into taking a decision that is not in the long term interest of the UK or the EU. That being said, all the warnings are only theoretical at the moment and only time will tell if they hold true or not. However, one can be assured of the fact that Germany and other EU nations will try and make an example out of the UK in order to ensure that such demands of independence do not resurface in other parts of Europe.

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Sustainability and Finance: Winds of Change ANKITGOEL XLRI, Jamshedpur Introduction Neo-classical view is that there are two arms of a state – Financial arm and Social arm. The Financial arm consists of financial institutions and agents whose main function is to create wealth and maximize profit of the shareholders. The other arm which is the social arm are the government, civil servants, activists whose main aim is to distribute the wealth in such a way that it leads to more equity and sustainability. This idea is based on division of labour that if a certain set of people

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specializes in one kind of work and other set in other kind of work, it would lead to increase in efficiency and an overall reduction in the cost and hence welfare of the economy as a whole.( UNEP Enquiry Paper, September, 2015) But this classical view is being increasingly challenged as it has failed to address the sustainability issues like poverty and climate change. The question is whether the present state of the system can give us sustainable society apart from economically efficient? The answer is clearly ‘NO’ and as we see financial

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on every country to take responsibility in curbing activities that endanger our natural resources. The laws and regulatory framework is getting more stringent and any attempt of not complying with them invites severe punishment. Any negligence on the part of banks or investors to overlook this risk can result in huge monetary loss in the future. Credibility Risk: This type of risk can bring down the value of a company in no time. As we have recently seen with Volkswagen whose share price plunged to 50% when it was found that they were not complying with the emission standards and resorted to unscrupulous means to hide the truth. Therefore the onus is on the financial institution to have check and balances before they make their investment in any company. Opportunities and Challenges According to World Economic Forum it would require around US$5.7trillion annual investments by 2020 to build infrastructure which is environment friendly and can lead to sustainable development. It also projects a shift from usual investments to green investment of about US$5.7 trillion annually. It definitely is a huge amount and investors may not be ready to do so if they don’t get proper returns. But According to McKinsey report there is huge potential gain of about US$2.8 trillion by 2030. This opens up a huge opportunity for investors and financial institutions to put their money and earn returns for their shareholders and at the same time support sustainable development (Bond, D.,Platz,D. and Magnusson, M. (2012). There are number of practices and strategies that a financial Institution can adopt: Innovative Financial Instruments The financial firms, investors and banks can come up with innovative financial products which can mitigate the risks associated with environment, social and governance (ESG) issues. • Green Bonds: They are called green bonds because the revenues from them are used to finance green projects. It is one of the most prominent instrument that is being used by most institutional investors today to meet their environmental impact commitments. The market share of green bond stood at $US66bn in June 2015 according to Climate bond initiative and is expected to reach $US1tn by

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institutions has to take up more responsibility in developing a part of sustainable future. Risks Involved for Financial Institutions The banks and other lenders who finance projects are being exposed to risks which were not traditionally considered while making any investment decision. The Natural Capital has become very important for financial institutions as the risks associated with them are hidden in company’s supply chain. Hence it is imperative for a finance firm to take into account the following risks which are associated with sustainability of a company or a project:(Mulder, I; Mitchell ,2013) Default Risk: Default or credit risk for investor results from operational risk of a company. The world has become more conservative regarding the natural resources for sustainable development and access to them is not that easy as it used to be. For example for a clothing manufacturing company, water scarcity can lead to shortage of cotton which in turn would lead to increase in prices because of which demand may reduce and company might incur losses. Therefore if a financial institution chose to invest in this company, it may not able to recover its investments. Legal Risk: According to UNEP FI report a firm can measure financial risks which are associated with ESG (Environment, Social and Governance) issues in a project. It is incumbent on the firm to enquire about the considerations that their client have made regarding sustainable development in their projects. If they fail to do so then they could be taken to courts for negligence of their duty. Market/Investment Risk: It is being increasingly observed that the bond rating and stock of a company which follow sustainable development model finds resonance among people and they make efforts to communicate their initiatives to their customers. The S&P which is a major rating agency also take into account this factor while giving rating to country’s investment grade. So financial institution should take cognisance of this fact while making investment in the government bonds of a country otherwise they risk of facing the market downturn. Regulatory Risk: Climate change and natural resources depletion is posing a great threat to mankind and hence there is pressure

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2020 (UNEP Sep, 2015 Climate Bond Initiative). But for that to happen government especially of developing countries needs to join hands with financial institutions to develop robust market for the same. They need to provide tax incentives, cheaper liquidity and standardization of loans for green assets. • Investment Tools: UNEP in association with NCD (Natural Capital Declaration) has developed many innovative tools which help Investors to incorporate risks such as water scarcity, deforestation in the bonds. It helps them to measure the amount of exposure of the project to these risks. 1) Incorporating Water Scarcity Risk: There are techniques (Tool developed by GIZ/ NCD) which incorporates water stress into corporate bonds (Michael Ridley and David Boland July, 2015). Shadow water pricing helps in calculating the opportunity cost of water available which could have been used for other purposes. It is calculated using Total Economic value (TEV) Framework. Doing this introduces water risk in the financial model of the company under review through its operating expenditures. It also calculates various credit ratios which help the investor take informed investment decision in the project or the company as he gets to know the level to which company is exposed to water scarcity/stress risk. 2) Incorporating Deforestation Risk: Similar to water stress framework, another framework

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is developed to assess the deforestation risk associated with soft commodities like beef, soy, and palm oil. It is even more significant for financial institutions which are exposed to forest eco-system risk. It has an impact both on the lending side as well as on the investments into the companies which are associated with upstream production of soft commodities or their downstream consumption. NCD has developed Soft Commodity Forest Risk Assessment (SCFA) tool which assists the investors in measuring the degradation of forests risk which its prospective clients are exposed to (United Nations Environment Programme, 2015). Mandatory Lending Directed lending also known as Priority sector lending is one area which financial institutions can explore. Countries have quotas for banks to mandatorily provide loans to SMEs and agriculture sector for example India has about 40% quota but it has put pressure on bank’s budget resources and Non-Performing Assets (NPA) have increased over the period of time. Now India is introducing a new financial instrument called Priority Sector Lending Certificates (PSLC). A kind of trading system would be introduced in which a Qualified Investor (QI) lends to priority sector and earn PSLC and this PSLC can be traded with the investor who wants to fulfil his quota of PSL loans (UNEP Enquiry Paper October, 2015). In this way they assume low risk as loans would

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environmental risks and scarcities of ecological resources (UNEP, October 2012). Environmental taxes can help in curbing the non-sustainable activities by penalizing the corporates for polluting the environment. The extra revenues that government earns from these ecotaxes can be used either as an investment in green technology or they can be used for the upliftment for low income people. Similarly carbon taxes can help in shifting demand from coal generated power to renewable sources of energy. Other than taxes, government can subsidize projects which are environmental friendly, reduces ecological footprints and improves human well-being (Güler Aras David Crowther, 2008). Now it is for the government to decide which approach they want to take. Whether they want to penalize bad behaviours by imposing taxes or reward good behaviour by subsidizing the investments in green projects. Road Ahead A lot has been done but lot needs to be done to integrate financial system with the sustainable development and create a shared value for all the stakeholders. We need to enhance market practice and upgrade governance architecture just like china’s green finance. Central banks have a key role to play to integrate eco-system with financial institutions and Basel norms III (CISL & UNEP FI, 2014) should have provisions for environmental risks. Insurance sector in India has still not opened up to sustainable development but it has to play bigger role in the future. Code for investor duties should be clearly laid down and steps should be taken to reduce short termism. Greening of capital markets which includes both equity and bonds have a huge potential and it would also encourage to fund long term green infrastructure projects. As it is said what gets measured, gets managed. Therefore investors should use tools to incorporate water scarcity risk, deforestation risk etc. into the financial models which would help them correctly value the projects. Winds of change have started to blow but we have to make them strong enough to sustain our environment along with economic growth. And we have seen financial system of the world will have to play a big role in achieving it.

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remain with the QIs. Also the proposal is on the cards for making differentiated reserve ratios for green projects so that it encourages financial institutions to disperse loans to clean energy projects and still be positive on the bottom line. Central Bank of Lebanon have already implemented this from 2014. Even RBI came with new guidelines and finance renewable energy projects in April, 2015. Incentives After 2007-08 financial system collapse, regulatory authorities of different countries have become very stringent because of which investors resort to short termism (Dallas,Lynne, 2011) i.e. to make short term profits and ignoring long term investments. It leads to less investments in green projects which have long term prospective. Hence it is imperative for the government to compensate by providing credit lines for long term green projects and come out with policy framework which address short termism. Some of the solutions that have been in the fray are having an escrow account which would lock the profits in the short run and they would be released only after a cycle or round of economic activity finishes. A ceiling on excessive bonus provided by fund managers is another measure to address this issue. But this has to be supplemented by financial incentives like tax breaks, loan guarantee and cash grants. This would encourage banks and investors to invest in ESOC (Energy Service Companies). Voluntary Lending It is quite different from directed lending. Directed lending was more of obligation whereas voluntary or direct lending involves investments made voluntarily with the motive of profit. But the problem is many investors don’t see monetary gains from public projects which are related to environment. Hence many National Development banks (NDB) have been developed and according to DESA, NDBs of G20 countries are worth US$3trillion. These funds if properly harnessed can be utilized to fund long term green and clean energy projects. Role of Government: Fiscal Policy Government can be a significant actor in building a green economy through fiscal interventions. According to UNEP, a country’s economy is a Green economy if it helps in improving human welfare and creating social equity but at the same time reduces

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The commotion of Dot-Com AnishaKhurana IIM Shillong The financial markets have been exposed to scams and threats and one of the major crisis affecting the financial markets, Dotcom bubble, a historic speculative bubble, happened during 1997-2000 predominantly due to Internet boom. A brief background The Dot-Com bubble burst in March 2000 when NASDAQ was trading at a peak price of 5,048.62. The bubble started with the IPO of Netscape in 1995 when the initial stock was setup at a price of $28 from the earlier setup price of $12 and $14. It resulted in a skyrocketed capitalization of $1 billion and on the first trading day itself, the stock price rose to $71. In the succeeding years, internet users were growing exponentially in number. This increase

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resulted in a largely untapped market were terms like internet, networking, information technology, web experience, online retailing became buzzwords. New businesses were flooding in with various promises relating to conducting business online. After that, there were big IPOs and venture capital finances of Internet companies predominantly in the US market. Stock prices shot up as every investor started looking for the next big thing. Interestingly, stock prices were soaring high even for the companies that had never made profits or did not even had a fixed revenue stream. Moreover, these companies had a market capitalization of more than a billion dollars and getting share prices doubled up on the second of listing itself on the hope that they would serve a large customer base in the coming years. These companies had one common feature which led to them being

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During 1995-2000, the value of NASDAQ grew to almost five times. With the boom, the valuations of the companies were shooting through the roof. Following these events, happened one of the highest valued deals in the American business history where AOL and Time Warner merged on January 10, 2000. At the time of the merger, the resulting company AOL-Time was valued at $350 billion. AOL referred to as a dominant player in the market and Time Warner with an intention to establish a presence in the online market came together as Time Warner. The idea was to leverage upon the broad customer base of AOL and AOL, in turn, would benefit from Warner’s cable network. After the bubble burst, share prices fell to 80 pounce after trading at a peak of 511 pounce. In the year 1992, AOL had to write off losses worth $99 billion after the market crash. Following that, there were countless job losses. Today the combined value of these companies is one-fifth of the value on the day of the merger. AOL is currently valued at 3.6 billion dollars and Time Warner at 68.9 billion dollars. Also, in the year 1999, there was a total of 457 IPOs, primarily of the tech companies. Out of them, 117 companies were trading at double the worth on the first day of trading. Leverage ratios tended to be at very low level. Reasons The business model “Get Big Fast” on which start-ups were working upon did not consider the shortcomings. The focus was on grabbing market share even though it came at initial losses. Also, low-interest rates in the economy during the period 1998-99 increased the capital fund available for start-ups and increased of venture capital funding. Economists believe that these events were the result of limited information concentrating in the hands of few educated individuals and herd mentality explained the rest. This emphasis on a few people fuelled the “Network Effect”, wherein one consumer affected the other users of the same or related good or service. This resulted in people, who did not have any prior knowledge of the stock market, trading heavily. Investment banks raised almost $77 billion

during the period 1999-2000. These banks used to charge a brokerage fee of 6 percent fee from the companies for making them public. Banks failed to follow the guidelines, required for a company to go public. In actual, banks demanded to invest in the companies before going for IPOs, which ultimately helped in the valuation of these companies and provided more revenue streams to the banks. As per the guidelines, a company should have a constant revenue stream and profitability for past three consecutive years and should have been in business for more than five years. Another reason was that Federal Reserve started pumping money into the capital market. Free trade across the globe made the workers in the USA vulnerable as the factories of the businesses were being moved to cheaper places like India. Due to this, companies were laying off workers although stock prices were soaring sky high. High-Risk companies, mostly technology and IT-enabled services, have a higher beta level due to which they share a potential risk of higher volatility during the time of crisis. Also, the startups have a higher beta level due to less certainty regarding future cash flows. Companies ignored the aspect of establishing the certainty factor and more importantly the timing of the cash flows. Some of the companies like Amazon, eBay, and Google have survived the bubble due to early mover advantage in the dot-com business. Amazon spent a lot to alert the market about its existence and expand its customer base. Post-bubble burst After the crash, some reforms were introduced to stabilize the market. Like, a person needs to have a minimum amount in his/her bank account to make sure that the individual is in a solvent state. Increased responsibilities for CEOs and CFOs were laid out since most of the companies were not honest in their dealings making it one of the reasons for bursting of the bubble. This was made to ensure that the frauds and loopholes could be easily found out. Companies were required to make proper disclosure in the books of accounts and make transparent balance sheets i.e. to disclose all the relevant information, which will help investors gain a better and clear picture of the company’s financial health and avoid investing

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called “dot-com” companies; they often carried “. com” suffix in their URL.

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considered at the current level of 5,000 is not similar to the earlier level of 5,000 fifteen years ago, as the inflation levels have increased to over 20% as compared to the year 1995. The economy has also grown multifold during this period. Another point to be taken into Effects of the bubble on the Indian economy consideration is the P/E level at which the The impact of the bubble was seen companies are trading currently. Apple and predominantly in the US market. Although, Microsoft are trading at 17 times while in the stock prices of Indian technology companies year 1995, the same was 70 times. fell as well. However, the Indian companies were able to recover faster as they were working on a sound business model and Facebook is currently valued at $84 billion and within tight regulations by SEBI and other is likely to touch 100 billion dollar mark when it goes public. However, if the revenue stream government agencies. and other factors are taken into consideration, the worth of the company does not seem Current Scenario that high. Also, the acquisition of WhatsApp Currently, NASDAQ, which is trading at 5,104, by Facebook for $22bn raises concerns over is at the same level at which it was trading 15 the correct approach to valuation of the tech years ago. Can we expect the next bubble to companies. burst? “Unicorns,” companies having a market capitalization of more than 1 billion dollars, Groupon’s profitability is falling although the at present approximate to 150 in number. company is very successful in its business “Decacorns,” companies trading at market model. There are concerns over the longcapitalization worth ten billion dollars are also term prospects of the business as a significant increasing in number. The level of the current chunk of the merchants operating with them funding is similar to that was seen during the are dissatisfied with the business arrangement. late 1990s. in non-profitable ventures. It was done to prevent the situation wherein stakeholders were given a false image that the companies were making huge profits.

Uber and Twitter are cash-negative. LinkedIn There is a mixed opinion regarding this. operates at a narrow profit margin. Amazon However, few of the things, which should be in India is currently spending at a pace akin to

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hype created. The same was seen during Super Bowls, 2000 when 17 companies paid $44 million for advertising spots. One year i.e. the year 2001, only three companies ran advertisements.

Points to keep in mind while investing for an investor Popular alternatives are not always the profitable ones. IT or tech stocks do well in the short term but when it comes to long-term perspective, these stocks are not a preferred source of investment as these companies’ stocks tend to be speculative. An investor should look for companies following a sound business model and should look for consistency in revenue and profitability. One should also factor in the basic things such as overall debt to equity, P/E ratios, and stable and healthy profit margins. Also, the company should also be compared at an industry level keeping the beta and other factors in mind. Lessons learned from the crisis What were the reasons for such a huge fall in the stock markets and why did all these aspirations regarding valuations and profit generation fell flat. The reason is simple. Everything is Cyclical, and the market of the fools will eventually run out. These fluctuations will always remain in the stock exchange. The lesson from the same is how to understand this and not get lured by the false promises. Fundamentals of trading in the market would remain same. If at any point, these are forgotten, there would be another bubble burst. If a person wants to invest money for the long term, he/she should look for stocks which are not overvalued. Educated investors get to know about the state of the market and see the warning signs coming. The same happened with Joseph Kennedy in the year 1929 when he received advice for investing in the stock market by a shoe shining boy. Changes in the valuation of the companies with soaring stock prices do not happen overnight or even in months. This is a longdrawn process. Most of the companies trading in the late 1990s did not have a sound business plan and were just floating with the Internet

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the period when the bubble burst. Dropbox’s worth is falling. In India, the startup bubble is getting vulnerable as most of the startups - Zomato, Tiny Owl, Housing.com - are laying off workers. Zomato, a Unicorn, has laid off 3,000 workers across the globe. Housing. com fired 600 employees. Valuations of these companies have reached a point where it is not sustainable.

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Islamic Development Bank NinadPurkar K. J. Somaiya Institute, Mumbai Introduction: The Islamic Developed Bank’s

(IDB) motto is “Providing resources, fighting poverty, restoring dignity”. In accordance with its motto the bank channels funds into productive projects in Muslim world and into social & educational development initiatives. IDB was formally opened in October, 1975 in Jeddah, Kingdom of Saudi Arabia. It has 4 regional offices in Morocco, Malaysia, Kazakhstan, and Senegal. It also has gateway offices and field representatives in various Muslim countries. It is interesting to note that, IDB is an observer in the United Nations General Assembly. IDB was founded by members of Organization of Islamic Co-operation (OIC) and each member country has to contribute to the capital of the bank as per the guidelines. IDB currently has 56 member countries, and Saudi Arabia contributes almost quarter of the paid-up capital and is the biggest contributor. Currently the paid-up capital of IDB is around $150 Billion. Operations: IDB works for the betterment of Muslim society economically, educationally and socially. In its pursuit of the goals, it sponsors

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various infrastructure projects, educational and social initiatives in member Muslim countries. It also supports Muslim population in various non-Muslim countries. IDB is a Sharia (Islamic Law) compliant finance institution. It strictly does not involve in projects or activities related to Pork or Alcohol. It also does not charge any interest on loans and hence often zero-interest rate banking is referred to Islamic Banking. It employs a unique Profit-loss sharing tool instead of traditional fixed (or even floating) interest rate charges. It is often argued that IDB charges interest but has relabeled it with different Islamic jargons. As per a noted author Mohammad Salim, “What the Koran prohibits is usury, and not interests itself and Islamic banks do not practice what they preach; they all charge interest, but disguised in Islamic garb.”

IDB Financing Instruments: 1. Loan: Loans are extended to public institutions or governments for a longer period. 2. Grant (Technical Assistance): It is

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Picture 1: IDB Member countries provided for institutional capacity building programs, feasibility studies and project preparation and design, mainly in the form of grants. 3. Istisna’a: This is a form of sale agreement, applicable to assets that are not available or existing at the time of concluding the agreement. E.g. Roads 4. Leasing: The Bank purchases the asset (e.g. machinery or equipment) and leases it to the beneficiary for a specific period of time, up to 20 years. The Bank remains the owner of the asset and lease installments are not considered as debt. At the end of the rental period, the Bank transfers the ownership of the asset to the lessee as a gift. 5. Installment Sale: This consists of the Bank purchasing the asset (e.g. machinery or equipment) needed for a project and then reselling the asset to the buyer at a higher price, which is mutually agreed between the Bank and the buyer. The ownership of the asset is transferred to the buyer upon delivery (which allows the buyer to use the asset to secure financing for operational purposes). 6. Profit Share: Projects with an expected high financial rate of return are often financed by profit sharing. This instrument implies investing in a certain project together with another partner

and both obtaining a percentage of the profit that corresponds to their respective investments. 7. Equity: Equity can only be extended to activities in the “real sector” that have economic value. Islamic financial institutions are not allowed to undertake businesses which involve speculation. Concept of Profit Sharing Tool: Sharia in Islamic Banking, does not allow interest but it does not restrict bankers to use resources (funds) efficiently. Using resources efficiently means utilizing capital, labor and other fixed assets efficiently so as to make funds available to public for business activities. The profit earned through business activities is shared with bank as it becomes an essential stake-holder in the business. The profits earned in business should also be justifiable, as in premium charged over cost to sustain the business, welfare of businessman, and other general welfare. The customer should not be duped with inferior products or services. For example, if a customer is charged amount “X+a+b” for a product or service, whose basic cost is “X”, profit of amount “b” will be retained by him and rest will be transferred to the bank that is amount “a” along with initial money X.

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The profit in Quran is counter-value (iwad); a profit created from a trade and commerce must contain an equivalent counter-value. In practical terms, profit creation must embrace risk-taking (ghurum). Work and effort must be evident in trading as a trader is expected to exert his skills and know-how (ikhtiyar) in fulfilling his business obligations. In the case of Traditional Banking, the interest is charged even if the business does not earn any legitimate profit or premium. So the risk of business totally lies with the borrower. Profits derived from fixed income instruments are created without iwad, since loans are collateralized and contractual interest earned implies that banks hold no obligation to compensate losses of borrowing party. In addition, banks add no value to the financial contract. They are prudent in debt collections and charge customers on all overhead expenses. These charges constitute a component of the interest on all loans. When a bank is worried about interest or currency risks, it uses derivatives for hedging purposes, the cost of which is borne by customers. The neglect of risk-taking and adding value to the financial contract, has removed morality from the banking business, since the bank gets most from the loan deal. For this reason, Islam has forbidden taking and receipt of interest as riba.

Features of IDB: 1. Resilience: As per the IMF study, rapid growth of Islamic banking in developing countries is accompanied with claims about its relative resilience to financial crises as

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compared to conventional banking. Results show that Islamic bank branches are less prone to deposit withdrawals during financial panics, both unconditionally and after controlling for bank characteristics. The Islamic branches of banks that have both Islamic and conventional operations tend to attract (rather than lose) deposits during panics, which suggests a role for religious branding. It is also found that Islamic bank branches grant more loans during financial panics and that their lending decisions are less sensitive to changes in deposits. The findings also suggest that greater financial inclusion of faith-based groups may enhance the stability of the banking system. 2. Backed by Petro-dollars: IDB’s founding members have huge reserves of petro-dollars and that translates into huge funds with IDB. 3. Strong Growth: As of 2014, Sharia compliant financial institutions operated around 1% of world’s total assets. According to Ernst & Young, Islamic banking has been growing faster than banking assets as a whole, growing at an annual rate of 17.6% between 2009 and 2013, and is projected to grow by an average of 19.7% a year to 2018. 4. High ROA: As per the IMF and an independent study submitted to International Journal of Social Economics, “Islamic Banks have recorded higher ROA (Return on Assets) as they are able to utilize existing overloads carried by mainstream banks. The lower overhead expenses, does not imply efficiency. It is also inconsistent with their relatively low asset utilization and investment margin ratios.”

5. Funding large projects: IDB has also offered to fund AIIB (Asian Infrastructure Investment Bank) projects and has aggressively pushed for financing $1-1.5 trillion worth of projects in Asian developing economies in the sectors Power, Infrastructure, and Water. Entry into India: IDB would set up its shop in Gujarat and will be headed by Zafar Sareshwala, former owner of Parsoli Motors. Gujarat has a thriving Muslim business community of around 17 million and IDB will have good acceptance in that area. As a goodwill gesture IDB has offered around 200 ambulances, 30 of which have already been commissioned in Gujarat.

Initial Role of IDB in India: 1. Promote growth by making interest free funding available to Muslims 2. Develop properties held by Waqf board as the trustees do not hold the financial means to do so 3. Felicitate $100 million line of credit by EXIM Bank to IDB countries in order to promote exports 4. Execute $55 million pact with the Rashtriya Institute of Skill and Education to provide medical care to the rural poor specifically in tribal areas Indian Muslim Diaspora: It is interesting to note the back-drop of entry of IDB into India. Although India is not an Islamic country, its huge 180 million strong Muslim populations have attracted IDB the most. The diaspora possesses certain unique features such as high growth rate, low education and income levels and lower social presence. The current appalling condition of Muslim diaspora in India needs to change and providing Sharia compliant finance is a next step towards it. Financial Inclusion of Indian Muslims: As per the Sachar Committee report presented in 2006, “The access of Muslims to bank credit, including priority sector advances, is low and inadequate. The average size of credit is also meager and low compared with other socio-

religious communities both in public sector and private sector banks. The position is similar with respect to finances from specialized institutions like the SIDBI and NABARD. Census 2001 data show that the percentage of households availing themselves of banking facilities is much lower in villages where the share of Muslim population is high. The financial exclusion of Muslims has farreaching implications for their socio-economic and educational uplift.” Also as per the noted economist Saif Ahmed, “Indian Muslims stay out of the conventional banking system not because of unawareness or poverty but because of religious sensitivities associated with banking”. Another point in support of Islamic Finance is that Muslims tend not to save in the conventional banking system; they will have an additional incentive to do so if Islamic Finance banks come up. It is estimated that the amount of money that stays out of the banking system is around Rs. 40,000 crores. RBI committee on Medium term path for Financial Inclusion advises that the conventional banks start Islamic Finance divisions and this is a practice in many South-East Asian countries. Given the circumstances, Islamic Finance seems to be a good option for financial inclusion of Indian Muslims. Conclusion: Indian Muslim diaspora has been given certain unique privileges such as Muslim Personal Law Board, Madarassa Education, Waqf Board and separate Muslim universities. Although this has not helped the community at large to progress, a separate financial institution may prove to be a game changer. In order to sustain in the long run, IDB needs to focus on other sectors and diaspora as well; farmers and SMEs may be a good target segment. Interest free financing is vital for rural India and the market is still in nascent stage; IDB stands to gain from its global presence and first mover advantage. Much is yet to be unfolded, but this is surely going to be a move worth watching for.

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How does government incur expenditure and what is the mechanism to ensure that the money is utilised for the intended purpose? In the government ‘single treasury account’ is followed as in the case of countries like the United States of America. The Constitution mandates that there shall be a single fund called the Consolidated Fund of India in which all receipts of the Government would be paid and all loans or funds raised by the Government would be credited. No money can be withdrawn from the Consolidated Fund of India except with the previous approval of the Parliament and assent of the President of India. This procedure is called introduction of Appropriation Bill which is in the nature of a Money Bill, which, after being passed by the Parliament and assented by the President of India, becomes an Appropriation Act. In the system of parliamentary democracy that we follow in India, Legislature places funds at the disposal of the Executive for being spent on the purposes approved by the Legislature and within the timeline prescribed. The financial year in India runs from Ist April to 31st March. Any money which cannot be spent by 31st March would lapse and would require a fresh re-appropriation in the next financial year. There are several oversight agencies which include Parliamentary Committees whose duty is to see that the money given by the Parliament is spent for the purpose for which it has been given, in accordance with the rules prescribed and within the time limit laid down. The foremost of these is the Comptroller and Auditor General of India (CAG) who is a constitutional authority. The CAG, whose service conditions are like a Supreme Court Judge and who cannot be removed from his

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office except by the process of impeachment in both the Houses of Parliament, conducts several kinds of audit to ensure the accountability of the Executive to the Legislature, which is the cornerstone of the parliamentary democracy. These audits include Regulatory Audit and Compliance Audit which focus on compliance with the existing rules and regulations and assess whether the expenditure conforms to the authority which governs it. Financial Attest Audit is conducted by the CAG with a view to express opinion whether the financial statements and annual accounts prepared and presented to the Legislature present a true and fair picture and are free from material misstatements. CAG also conducts Performance Audit which is increasingly gaining currency worldwide. The Performance Audit which is also known as Value for Money audit, focuses on the aspects of efficiency, economy and effectiveness. In order words, the CAG sees whether the objective for which the money has been spent, has been achieved or not and whether the existing resources have been optimally utilized i.e., whether the same results were possible with deployment of lesser resources. A distinction is also made between the output and the outcome. For example, organising a workshop on gender sensitisation may be the output and the attitudinal change that it aims to bring about may be the outcome. Admittedly, it would be far more difficult to measure outcome in quantifiable terms. The Audit Reports of the CAG are submitted to the President of India and Governors of States for being laid before the Parliament and the State Legislatures. These reports are then

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RAKESH KUMAR VERMA CHIEF FINANCIAL OFFICER, JNU, IAAS

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What is the criteria for allocating funds for subsidy given to the educational institutions? The element of subsidy in the case of educational institutions is not distinctly shown in budget. The subsidy exists in hidden form and can be broadly called the gap between the amount of money that the services offered by the educational institutions would fetch in the open market and the amount of the money that the educational institutions charge from the users i.e. the students and research scholars. The Government assesses the need of the educational institutions in accordance with the education policy and its broad objective of spreading literacy, increasing gross enrolment ratio, reducing drop outs and focusing on technical and higher education and research. The financial needs are worked out by the Government Department or the University Grants Commission in accordance with the norms prescribed for various kinds of expenditure which include both plan and non-plan and capital and revenue. These educational institutions are mandated to follow the policies of the Government of India which aim to promote social equity and justice like reservation for students belonging to SC/ ST/OBC and other categories like persons with disabilities. If the element of subsidy is to be worked out in the case of government funded institutions and shown distinctly, it would be a huge amount. For example, in the case of premier universities, the fees collected from the students may be only 2-3 crore rupees in a year but the expenditure on the university may be in the range of 400-500 crore rupees a year, not taking into account free use of resources like land. In conclusion, the subsidy to educational institutions is an instrument of the State Policy with the objective of making the people of India educated and self-reliant and contributing to the efforts of the country

to achieve its goals in the field of higher education and scientific research. What are the career opportunities available for MBA students in the field of finance in government organisations? The opportunities to the MBA students are diverse and varied. A career with the government presents a challenging opportunity and can be highly satisfying. Equipped with technical knowledge and expertise in the field of management, the students can contribute significantly in ensuring that the benefits of the various government schemes actually reach the intended beneficiaries and the Government is made accountable to the various stake holders. The MBA students would find a career in public sector organisations particularly rewarding because these are more or less business entities and are run on commercial principles. Several of these are also listed on the stock exchange and the norms of the corporate governance have to conform to the globally accepted standards. Do employees get to work on process optimization project using techniques like six sigma? Techniques like six sigma are normally not used in Government departments but are used in public sector organisations in the manufacturing sectors. Techniques like PERT (Programme Evaluation and Review Technique) and CPM (Critical Path Method) are commonly used in the Government with a view to ensuring that the projects are completed within the prescribed time limit and resources are utilized optimally.

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examined by the Public Accounts Committees which in turns submit their report to the Parliament/State Legislature

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I was reading in the newspaper that the cabinet has recently approved 7th Pay Commission. What is this Pay Commission? The government of India has set up Pay Commission which acts as an administrative body to suggesting revision of salary structure of Government employees from time to time. Since independence to till date, seven pay commissions have been set up including the latest one. The first pay commission was appointed in May, 1946 and from then onwards a new commission is appointed approximately every ten years. Sir, as you mentioned that a new commission is set up approximately every ten year, how much time does a commission take to submit its report? There is no such fix period for all the commissions till now. But it takes anywhere around one year to three year for a commission to submit its report. The first commission submitted its report exactly in one year while other commissions have taken more time, like the Fifth Pay Commission took close to three years and the Fourth Commission submitted three reports taking in total of four years. It must be a long drawn exercise. What are the recommendations of all the past commissions? If you could tell me the key highlights of each commission I would be able to understand its work in a better manner? . I may not be able to explain the recommendations of all commissions constituted till now, but I would try to cover the main highlights of each commission’s recommendation. This should help you in getting a broad understanding of the commissions.

JUNE 2016

7th Pay Commission Ankur Kumar IIM Shillong

First Commission (May, 1946): It was set up under chairmanship of Shree Srinivasa Varadachariar. The commission gave its recommendation on the idea of “living wages”. The minimum and maximum salary was fixed as INR55 and INR2000. Second Commission (August, 1957): Justice Jagannadha Das chaired the Second Pay Commission. The commission reduced the pay scales and recommended that the working environment should be designed in such a way that increases the efficiency of the government by accepting employees with minimum qualifications. Third Commission (April, 1970): Justice Raghubir Dayal chaired the Third commission which added three concepts of inclusiveness, comprehensibility and adequacy for pay structure. Fourth Commission (June, 1983): Mr. PN Singhal was the chairman of this commission. The commission recommended a permanent body to review the salary of the employees. This recommended was never implemented. Fifth Commission (April, 1994): The commission was set up under the Justice S. Ratnavel Pandian. Two important recommendations of the commission were to increase the minimum starting salary from INR750 to INR2250 and to cut the government workforce by 30%. Sixth Commission (October, 2006): The commission was set up under the chairmanship of Justice B.N.Srikrishna. The commission recommended to reduce the number of pay scales to remove ambiguity and brought the idea of pay bands. These are the major highlights of all the previous commissions set up by the government. This should help you in understanding the evolution of the pay structure in the country.

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