Niveshak June17

FROM EDITOR’S DESK Niveshak Volume X ISSUE VI JUNE 2017 Faculty Chairman

Prof. P. Saravanan

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

All images, design and artwork are copyright of IIM Shillong Finance Club Finance Club Indian Institute of Management Shillong www.iims-niveshak.com

Dear Niveshaks, This month has been quite an eventful one with the Prime Minister visiting and signing pacts with countries like the US and Israel which has both defense-related, bilateral trade benefits as well as economic impacts. The ongoing tussle with China and the renewed talk of make in India should boost consumption of domestically produces goods. The divestment approval for Air India serving a debt of over Rs 50,000 crore, is surviving on a taxpayer bailout. The Indian markets have been bullish, to say the least, and look all set to breach the highest tally ever. Amongst all of this, GST made the biggest impact in the month of June. The GST also addressed as the Good and Simple Tax by Mr. Modi was launched on the 31st of June and created maximum buzz by featuring the maximum number of times in the news portals, morning papers and the discussions of all and sundry. That said, this month, we bring to you in our cover story another initiative that the present Government is likely to implement, ‘Will India make the shift to a new Financial Year.’ The article deals with a lot of potent questions and thoughts on the shift if it takes place, talks about the background of the current financial year and accounts for the pros and cons of the shift to the new financial year. The magazine team gives their opinions and suggestions on the shift while analyzing the move already implemented by the state of Madhya Pradesh in the conclusion section. The Article of the Month raises a pertinent question, one that every Indian and Chinese resident ponders about with juxtaposed thoughts on the issue; ‘Can India replace China as a new superpower?’ A must read for the finance enthusiasts with comparisons drawn between the two countries on various topics including the GDP, population, and other macroeconomic factors. The FinSight and FinGyaan sections deal with ‘Capitalism, Inequality and Sustainable Development’ and ‘Indian Pharma – An Ambivalent Aura.’ The articles talk about inequality as a result of the widening gap between the rich and poor as a result of capitalism and how it affects the sustainable growth of the world. The FinGyaan section deals with the Indian pharma sector; its impact on the Indian economy, GST’s influence on the pharma industry, the importance of US markets for Indian pharma division and the technological innovations in the industry. In the FinaFame section, you get to read about Sanford I. Weill - The Man Who Invented Financial Supermarket (an institution or a company which offers a full range of financial services under one roof ) that includes insurance, underwriting, stock brokerage services apart from a gamut of banking services. The Classroom section shall further your knowledge on ‘triple witching,’ an event that occurs when the contracts for stock index futures, stock index options, and stock options expire on the same day. Have a fun time going through the various sections of the magazine. We hope you enjoy reading and give us your valuable feedback on what you expect to read in the upcoming volumes. Thank you. Stay Invested! 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 Niveshak Times

04 The Month That Was

Cover Story

Article of the month

10 Can India Replace China As The New Super Power?

14 Will India Make the Shift to a New Financial Year?

FinGyaan 18

Capitalism, Inequality & Sustainable Development

FinFame

22 Sanford I Weill

FinSight

25 Indian Pharma: An Ambivalent Aura

FinView

Prof. P Saravanan, Assistant Professor of Finance & Accounting, IIM Shillong

29 Triple Witching

Classroom

The Month That Was

NIVESHAK

www.iims-niveshak.com

The Niveshak Times Embracing Humanoid Robots to Serve Customers Using technology to service customers in banks has been the talk of the town for quite some time now, we have seen many new finTech companies emerge in the last few years, the trend of using humanoid robots to answer customer queries is catching up off late. Canara Bank is running a pilot test of using the humanoid robot – Mitra in its head office at Bangalore to answer close to 500 frequently asked questions. Mitra can listen to customers queries and offer guidance depending upon the question posed to it. This guidance is a huge welcome as the bank has 15 departments and customers are usually clueless about which counter to approach when they walk in the first time. Many banks like City Union Bank, HDFC Bank are experimenting with robots as customer assistants. These robots provide basic information such as bank’s history, account details, lending rates, updating passbooks, etc. The robots are designed to interact not just in English but also in select local languages. The most exciting thing about these robots is they will soon be equipped to carry out financial transactions, ordering cheque books etc. It could take time before customers could adopt using robots for their bank transactions, but it will definitely happen in the coming years. While there is excitement about the scope of usage of these robots, the toughest challenge will be to integrate the robots with core banking systems along with working on securing them from any external threats. PM Modi Visits USA, Portugal and Netherlands Prime Minister Narendra Modi visits three nations this month to strengthen bilateral relations and discuss issues of global importance like counter terrorism and climate change. This was the first visit of Modi to USA after President Trump has taken over the reign.

The US visit was aimed at strengthening the US-India strategic partnership, which Trump very much views as a critical partnership in promoting stability and security in the Asia Pacific region and globally. PM Modi met top American CEOs of global giants including Apple, Microsoft and Google on issues ranging from visas, investment and job creation. The leaders of both the countries called on Pakistan to ensure that its territory is not used to launch terrorist attacks on other countries. They also stressed that terrorism was a global scourge that must be fought and terrorist safe heavens rooted out in every part of the world. Along with the above, a range of other issues were discussed to strengthen the defense relationships between the countries. However the Climate issue was left in the same state as Trump is firm on his decision of staying out of Paris agreement. As a matter of fact Trump also suggested that India too sign out of it and increase its coal production by 2020. India braces up for GST Implementation The landmark implementation of GST will change the fate of many businesses and lives of many customers following the biggest tax overhaul in history. GST will bring a uniform indirect system subsuming various central, state and local indirect taxes and levies. GST is part of a One Nation, One Tax vision of the Modi-led government. The present structure of the tax prevents cascading effect, gives ease of compliance, uniform tax rates and structure, and lowers extra tax burden on customers (GST is essentially a destination tax). A big concern is the Indian GST’s sheer complexity—with rates of 5%, 12%, 18% and 28%, and myriad exceptions, it contrasts with simpler, flatter and broader sales taxes in other countries. The official schedule of GST rates runs into 213 pages and has undergone repeated last-minute changes. “Rubber goods are taxed at 12%;

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NIVESHAK

sporting goods at 18%. I make rubber sporting goods—so what tax am I supposed to pay?” asks Anurag Agarwal, the local IIA secretary. This is the smallest of confusions a SME owner presently has. One particular concern is how a new feature of the GST, the input tax credit, will work. This allows a company to claim refunds on its inputs and means it should only pay tax on the value it adds. The structure will encourage companies to buy from suppliers that are GST-compliant, so that tax credits can flow down a supply chain. AU Small Finance Bank goes for an IPO AU Small Finance Bank is an addition to the list of several players entering the primary market to raise fresh funds. The small finance bank’s initial public offering (IPO) opened for subscription on 28th June 2017, with a price band of Rs 355-358 per share. It is an offer for sale by promoters and investors. Brokerage houses place their bets on this financial institution’s presence in underserved segments. Over the years AU SFB has established itself as a preferred lender to the underserved segment in areas of vehicle, SME and MSME finance present, the brokerage house said in the report. Many brokerages are positive about the bank and its IPO. Confidence on this bank arises due to its strong finances, diversified portfolio of loans and untapped market potential. The banks vehicle loan percentage has come down from 79% to 50% in FY1617. The bank has a robust and comprehensive credit assessment and risk management framework to identify, monitor and manage risk inherent in operations. The bank is said to have a robust AUM growth of 39% over FY15-17, healthy asset quality (1.61 percent gross NPA) and high return ratios. However certain issues have been flagged saying there could be a risk in transitioning from NBFC to an SFB as there could be an impact on business and finan-

financial condition of the bank. Government gives approval for disinvestment of Air India The government has given an in-principle approval for the disinvestment of staterun carrier Air India, Finance Minister Arun Jaitley announced on 28th June 2017. He further announced that a body will be setup to finalize modalities and details for disinvesting of Air India. Currently, Air India has a debt of over Rs 50,000 crore and is surviving on a taxpayer bailout. Indigo airlines has come forward to strike a deal with Air India, but nothing has been discussed yet, Indigo will benefit out of the International Operations share Air India presently holds (44%). 7th Pay Commission recommendations on allowance approved The Union Cabinet on 28th June 2017 approved the recommendations of the 7th Pay Commissions for higher allowances, including house rent allowance (HRA). The move will benefit more than 50 lakh serving and retired central government employees. Notable, the Cabinet decision comes more than a year after the pay of central government employees was increased.

The Month That Was

The Niveshak Times

www.iims-niveshak.com

31400.00

1,000

BSE

DII

FII

800

31300.00

600 31200.00

400 200

BSE

31100.00

0 31000.00

-200 -400

30900.00

-600 30800.00

-800

27/06/2017

23/06/2017

22/06/2017

21/06/2017

20/06/2017

19/06/2017

16/06/2017

15/06/2017

14/06/2017

13/06/2017

12/06/2017

09/06/2017

08/06/2017

07/06/2017

06/06/2017

05/06/2017

02/06/2017

01/06/2017

30700.00

FII, DII Net turnover (in Rs. Crores)

Market Snapshot

-1,000

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

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

1,25,96,812 Source: www.bseindia.com

CURRENCY RATES INR / 1 USD INR / 1 Euro INR / 100 Jap. YEN INR / 1 Pound Sterling INR/ SGD 2.00% 1.50% 1.00%

INR/1 USD

Euro/1 USD

GBP/1 USD

64.62 73.74 57.51 83.97

LENDING / DEPOSIT RATES Base rate Deposit rate

9.10% - 9.60% 6.25% - 6.90%

RESERVE RATIOS CRR SLR

4.00% 20.00%

46.94 JPY/1 USD

SGD/1 USD

POLICY RATES Bank Rate Repo rate Reverse Repo rate

6.50% 6.25% 5.75%

0.50% 0.00% -0.50% -1.00% -1.50% -2.00%

Source: www.bseindia.com Date as on June 30th

www.iims-niveshak.com

BSE Open

% change

Sensex MIDCAP Smallcap AUTO BANKEX CD CG

31145.8 14625.29 15080.21 24161.95 26547.35 15400.15 17596.08

30921.61 14644.48 15410.52 23408.17 26277.96 16012.71 17075.94

-0.72% 0.13% 2.19% -3.12% -1.01% 3.98% -2.96%

FMCG Healthcare IT METAL OIL&GAS POWER PSU REALTY TECK

10106.15 13563.8 10229.52 11247.61 14247.08 2220.59 8677.14 1931.11 5710.69

10428.17 14190.58 9833.46 11374.12 13202.65 2225.54 8112.61 2043.23 5523.75

3.19% 4.62% -3.87% 1.12% -7.33% 0.22% -6.51% 5.81% -3.27%

Index

% CHANGE

% Change TECK, -3.27% Smallcap, 2.19% REALTY, 5.81% PSU, -6.51% POWER, 0.22% OIL&GAS, -7.33%

IT, -3.87%

Capital Goods, 2.96% BANKEX, -1.01% AUTO, -3.12% Sensex, -0.72%

MIDCAP, 0.13% METAL, 1.12% Healthcare, 4.62% FMCG, 3.19% Consumer Durables, 3.98%

Market CoverSnapshot Story

Market Snapshot

Niveshak Investment Fund

Done on 30/6/14

Information Technology(9.72%) HCL Tech.

Infosys

TCS

Wg: 3.70% Gain : 12.23%

Wg: 2.72% Gain: 17.38%

Wg: 3.30% Gain : -4.63%

FMCG(23.58%) Colgate HUL

Britannia

Wg: 5.83% Gain : 44.68%

Wg: 7.22% Gain: 271.12%

Wg: 4.83% Gain: 55.16%

Amara Raja Wg: 3.51% Gain: 18.50%

Godrej Consm. Wg: 8.62% Gain: 11.40%

Lupin Wg: 3.85% Gain : -5.67%

Midcap Stocks (15.92%) Bharat Forge Wg: 4.27% Gain: 21.27%

Kalpataru Power Wg: 4.62% Gain: 29.50%

ITC

Wg: 5.69% Gain: 46.33%

Titan Company Wg: 5.11% Gain: 42.09%

Chemicals (8.01%)

Pharmaceuticals (6.84%) Dr Reddyâ&#x20AC;&#x2122;s Labs Wg: 2.99% Gain: --8.03%

HDFC Bank Wg: 8.30% Gain: 80.07%

Misc. (13.74%)

Auto (7.37%) Tata Motors Wg: 3.86% Gain: -2.50%

Bank (8.30%)

Natco Pharma Wg: 7.04% Gain: 96.85%

Asian Paints Wg: 8.01% Gain: 80.49%

Textile (6.52%) Page Indus. Wg: 6.52% Gain : 66.85%

Performance Evaluation

As on 30th June 2017

June Month's Performance of NIF

195

104

185

103

175 165

102

155

101

145

100

135

125 115

98 97 01-Jun-17

Performance of Niveshak Investment Fund Since Inception

105 08-Jun-17

15-Jun-17

Scaled Sensex

22-Jun-17

29-Jun-17

Scaled NIF

95 30-01-2014

18/12/2014

27-10-2015

Sensex Scaled values

06-09-2016

29-Jun-17

Portfolio Scaled Values Value Scaled to 100

Total Investment Value : 10,00,000 Current Portfolio Value : 18,49,823 Change in Portfolio Value : 84.98% Change in Sensex : 51.94%

Risk Measures: Standard Deviation : 20.51 (Sensex 10.65) Sharpe Ratio : 3.95 (Sensex : 4.40) Cash Remaining: 58,400

Comments on NIF’s Performance & Way Ahead: NDA government’s ambitious

move to roll out GST from July 1st resulted in anxiety among investors and hence, first monthly decline in Indian Equity stocks this year. The benchmark index S&P BSE SENSEX zoomed to all time high figure of 31,311 in the middle of the month, yet lost track and momentum to close down 0.26% at 30,922 at the end of the month. However, benchmark index closed up by 4.91% for the quarter. Forecast of normal monsoon, lower than expected inflation and central bank’s bi-month policy announcement to keep lending rate unchanged helped in fixed income indices to move up. Small cap stock indices continued to outperform. Where almost all the strategy indices lost their shine at the end of month, S&P BSE IPO marked an exception by gaining 5.67% in the month of June and 14.67 for the quarter. Further, announcement of normal monsoon by IMD moved up S&P BSE FMCG index by 4.08%. at the end of month. Riding on the robust performance of FMCG sector NIF managed to beat the benchmark index. However, subdued performance of IT and Pharma sector resulted in marginal positive return. With confirmation of GST roll out, NIF portfolio is due for major overhaul.

Article of the Month Cover Story

NIVESHAK

Can India Replace China as a new superpower? OmDuseja SIMSREE “When the wind of change blows, some build walls while others build windmills.” In terms of economic scenario, it is China that has shown a very strong economic growth since 1990’s by exporting a lot of commodities especially manufactured goods. China has been a major exporter to the US which is helping the US and the world to grow at a decent growth rate. But after the financial crisis in the US in 2008, the world is feeling the impacts of the crisis, especially those economies which have a large dependency on the export-led growth like China, Japan, and others. Hence after 2008, the US was not

JUNE 2017

able to consume the way it used to before the financial crisis, and hence China has adopted infrastructure led growth by taking more and more amount of debt. As per Ruchir Sharma, Investment head at Morgan Stanley, China used to take 1$ of debt to increase GDP by 1$ before the crisis, but in the year 2016 China had taken almost 4.5$ of debt to grow their GDP by 1$. With China sitting on such a huge pile of debt there are concerns among the analysts whether China will be able to grow at the same rate and help the global economy. Meanwhile, there are voices which say India can replace China as a new Superpower or Growth engine for the global economy. As can

NIVESHAK

seen,

China

has taken over India in terms of GDP after 1990 and since then China is having the tag of the fastest growing economy, but in recent times India replaced China and got the tag of the fastest growing economy. As far as growth rate is concerned China has shown double-digit growth rate for a longer period whereas India is still to achieve the sustainable double-digit growth rate. One should compare the macroeconomic fundamentals for an economy to get an idea regarding the future growth rate. If we see China is able to maintain the Inflation rate close to 5-6% in the past decade whereas in India inflation was in double digits in the past decade but it has come down sharply in the past 2-3 years due to good monsoon and the measures taken by the government to control the food inflation and the low oil prices has also helped in achieving the lower inflation target. The other major factor is the infrastructure which always acts as a major fundamental factor for the growth of an emerging economy. China’s per capita consumption of cement is 660kg whereas India’s per capita cement consumption is 190kg which shows a major area where India has to work to build a strong platform for sustainable growth. Infrastructure also has a

Article of the Month Cover Story

multiplier effect by giving the rural population an opportunity to develop and allowing the urban population to access the untouched rural market giving a further push to GDP. Even the confidence of doing business in India has increased in the last two years as compared to China mainly because of the reforms taken by the RBI and the Government of India by providing finance at cheaper interest rates and by implementing other structural reforms. Recently in the Budget 2017, the finance minister announced a reduction in the corporate tax to 25% for MSME’s having revenue under ₹ 50 Crores which can again attract more entrepreneurs to select India as the destination for their businesses. India ranks 130 in the ease of doing business whereas China ranks 78 which again suggests the need of more business-friendly reforms. With the GST finally being implemented by the Government of India from 1st July 2017 the trade in the country among the states will improve which will further enhance the business-friendly environment. Now as said the debt levels of the Chinese economy is at an alarming level and because of that the rating agency Moody has downgraded China from Aa3 to A1 whereas the debt levels of the India are at the comfortable levels. As far as productivity goes the productivity of Chinese economy is 60% higher than that of India

Article of the Month Cover Story

NIVESHAK

because of better quality infrastructure and better production techniques. The other major concern for the Chinese economy is the aging population which shows the weak signal for the further growth whereas on the other end India has more than 50% of its population below the age of 25 and more than 65% below the age of 35. As Indiaâ&#x20AC;&#x2122;s GDP is approximately 1/5th of the Chinaâ&#x20AC;&#x2122;s GDP, therefore even if India started growing at the double-digit rate the magnitude of the GDP added will be relatively very small. Hence India first needs to achieve the sustainable double-digit growth rate for almost a decade to act a Global growth engine. One of the major advantages for India at this stage will be its domestic consumption-led growth model rather than export-led growth in this weak global demand scenario. Reforms like new bankruptcy code allowing banks to deal with the bad loans at a faster pace will definitely help the banking sector of India. India currently is struggling with more than â&#x201A;š 10 lakh crore of NPAs because of which the banks are not able to provide credit to the business in an efficient way. In India, more than 70% of the market share in the banking sector is owned by the

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priority sector lending these banks are under stress which is not the case with other major economies. With the solution to the above problem, the private spending will also start to pick up which is muted so far and has even reduced even after demonetization which in turn will help the Government of India to reduce its fiscal deficit. Proper education always acts as a major reform to fight against the income inequality and also allow giving poor the source from which they can earn and hence reduce the inequality. India has a literacy rate of 72.1% whereas China has a literacy rate of 96.4%. With India taking a firm step towards building 20 world class educational institutions which will be termed as Institutions of Eminence will hopefully improve the literacy rate and quality of education in India. The other indicator of strong economic growth in the coming years is the stock market in the Indian economy. The SENSEX has rallied more than 200% from 10000 to 30000 in the last decade whereas the SHANGHAI has moved just over 50% from 2000 to 3192. The stronger markets suggest strong FII inflows in the economy, strong DII inflows and a positive sentiment about the economy.

NIVESHAK

ÂŠ FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

Article of the Month Cover Story

Final Call The comparison discussed between the two economies above suggests that if India wants to replace China, it should put the fundamentals required for a strong, sustainable growth in place. But it may take a long time for India to add the magnitude of GDP that China is currently adding to the global GDP. With the current moves from the Government, hopefully the Indian economy will be able to show the growth shown by China but in a more sustainable way.

Cover Story

NIVESHAK

Will India Make the Shift to a new financial year? FinanceClub IIM Shillong In May 2017, Madhya Pradesh became the first state to break the 150 year old tradition of having Apr-Mar as the financial year â&#x20AC;&#x201C; which was introduced to our country by the British - by switching to the JanuaryDecember Financial year calendar. The announcement came after Prime Minister Narendra Modi urged the states to take initiative in this regard in the Civil Services day 2017 function which was held in April this year. The Prime Minister asked the states to consider advancing their financial year to January-December, mentioning that in a country where agricultural income

JUNE 2017

is exceedingly important, budget should be prepared immediately after its receipt for the year. However, this sudden decision to change the fiscal year might have its own pros and cons. History About one year ago, the Indian Government led by Narendra Modi started pondering over this 3 decades-old question: Should India change its financial year calendar to January-December from April-March? In July 2016, the Government formed a committee headed by former Chief Economic Adviser Mr. Shanker Acharya to

NIVESHAK

season i.e. during July-September, the early allocations will help the agro economy and farmers. It would give the government the time and space to make reasonably more informed budgetary allocations.

• Advantages from the changeover were too minimal

Arguments against

• It could upset collection of data from the markets and would take a long time before normal rhythm of the budget cycle is restored • The change would give rise to issues such as extensive amendments to tax laws and systems There have been complaints about the April-March financial year and it has been a matter of huge discussions right from the post-independence era. An informative discussion note by Niti Aayog’s Bibek Debroy and Kishore Desai pointed that there has never been a consensus on the best choice for a new financial year. Therefore, the calls for a switch have been rejected for decades. Major Advantages Proponents of the switch say that the move would help the Government in better budgeting since the Budget would come out during November. If the country faces a drought situation during monsoon

Apart from that, the change will make it easy for Indian companies that have associated entities and subsidiaries in overseas jurisdictions to consolidate the financial statements as most of them follow the Gregorian calendar year. The Industry federations have also voiced their support for changing the financial year at different point of time. Also, comparison of the macro data with other countries will also be much simpler. The multi-lateral agencies like IMF and World Bank give their projections in calendar year form. The Centre is yet to give any decision on changing the calendar year, and states adopting the change of financial year before Centre can lead to confusion. Pronab Sen said that the states will have no idea about the resource flow and transfers from the Centre. The change would require huge amendments to various statues and tax laws, thus resulting in a lot of paperwork for the states and the central Government. The transition cost for a huge country like India would be astronomical. The other reason for the idea of aligning it with monsoon season being unpersuasive is that, while agriculture is indeed important and contributes to 17% of the GDP, the Indian economy is becoming less reliant upon agriculture. The tremendous growth in other sectors like services might lead to the agriculture sector becoming lesser and lesser important and its contribution to the GDP may also come down to single digit figures in a few years. Therefore, bearing all the costs involved with so much

Cover Story

examine the “desirability and feasibility” of having a new financial year. The Committee recommended that India can shift to a January to December financial year instead of following April-March cycle. The reasoning given by the panel was that the change will align the fiscal year with the monsoon cycle and the country’s agricultural harvests. This suggestion is in line with the recommendation of the LK Jha Committee formed in 1984, which suggested that changing the financial year to start from January would provide a cushion to the budget from the impact of southwest monsoon. However, the then Congress Government decided against this recommendation on the following arguments:

Cover Story

NIVESHAK

of paperwork in making this move only for this particular reason will nullify the positive effect created. The Niti Aayogâ&#x20AC;&#x2122;s note too suggested that changing financial year just on the reasoning of better budget allocation depending on how good the monsoon season is not a convincing enough reason. While the southwest monsoon is indeed critical, the production pattern of food grains shows that winter sowing season (rabi) is as important as the preceding kharif season. To understand how much the Government expenditure has changed due to the bad monsoons in terms of schemes, an analysis of Grants to various sectors in 2014-15 month wise is shown in the graph below: The analysis of month-wise expenditure for the year 2014-15 under major schemes

indicates that while there are variations in expenditure for various months, there is no clear evidence of major seasonal disruptions in the overall development works. Thus, it is very hard to conclude that the bad monsoons will lead to a better budgetary allocation. Conclusion Although the percentage share of agriculture sector to GDP is decreasing year on year, there is still a socio-economic

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impact that can be created by allocating the right spending on the basis of monsoon rains. In terms of workforce employment, agriculture sector still accounts for about 50% of the entire workforce in the country with the rural workforce majorly employed in this sector. Growth in agriculture has inter-linkages with that of the overall economic growth of the country in general and industrial growth in particular. An investment in this sector thereby, impacts other sectors of the economy as well. On the other hand, it will help industries by aligning India with the prevailing practice of developed countries. This will be a progressive move and provide a convenient transition for the Indian economy as it gets increasingly integrated to the global economy and with more companies from across our borders engaging in business

activities in India. For MNC firms in India, which currently have to deal with two types of financial years â&#x20AC;&#x201C; one for India and one for their parent country - a uniform structure will be a relief as it would facilitate the management of their financial accounts. However, it is too soon to conclude that the implementation of the new financial calendar year is a winning move for the Madhya Pradesh Government, as we have to wait and watch the impact it creates

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Cover Story

on the development of the state. Also, it would be very interesting to see whether other state governments will follow suit, and implement a Jan-Dec Financial Year as done by the Madhya Pradesh Government.

FinGyaan Cover Story

NIVESHAK

Capitalism, Inequality and Sustainable Development AnilShankar T A PAI MANAGEMENT INSTITUTE

As a major in Finance, I believe that we must be critical of our domain and see what are the pros and cons of the same. And so, I felt a need to pen down my thoughts on â&#x20AC;&#x153;Capitalism ad Inequalityâ&#x20AC;?. Now I am no communist! I do not believe in the very ideals set forth by Karl Marx. But nevertheless, I felt the need to walk through the lanes trodden by the great Adam Smith; the capitalistic path which the world now swears by and follows. The world has been so engrossed with the exponential growth that has been achieved over the past couple of years that very few really talk about the widening gap between the rich and the poor! During the

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World Economic Forum, held at Davos in 2011, the then special advisor to the IMF, Zhu Min, stated that an increase in inequality is one of the biggest challenges for the world (1). Richard Freeman, a professor at Harvard, had a similar view. He explained that though capitalism has reduced the inequality amongst the countries, the inequality within the country has widened. That capitalism and globalization has led to the concentration of wealth amongst a few individuals was a fact. Fig (1) shows that majority of the population are in the low-income category. These are those who fall between $2 to $9/ day income bracket. Overall, from the above graph, it can be

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FinGyaan Cover Story

inferred that the wealth of the population has increased over a span of 10 years. But Fig (2) below shows the actual cause of concern. We can clearly see that 45% of the wealth of the world is concentrated amongst an astonishingly 0.7% of the world population! Forbes had released the list of richest individuals in 2017. Adding the wealth of these top 10 individuals results to a total of 500 Billion dollars. This sum is greater than the GDP of some of the countries of the world! There are several other statistics to show how skewed the riches of the world are in the hands of a few individuals. And the numbers are disturbing. Now when we see the above numbers, a natural question arises; how does it matter? Over the years, the United Nations has been validating the growing body of evidence of the adverse effects of inequality on the world. Some of them are given below: 1) Wealth inequality results in high rates of violence and disputes related to property. Studies have shown that such a society witnesses

Studies have shown that such a society witnesses increasing social divisions. 2) It has been noticed that in the countries/ societies where income/wealth inequality is high, the life expectancy of the poor, and sometimes even the rich, is quite low. Cases of HIV, obesity etc, are quite pronounced in these countries. 3) Education is another prominent factor which is affected by income inequality. The percentage of school dropouts are higher is such countries. The number of child marriage cases are more pronounced in such societies/countries. The above conclusions have been widely researched by Richard Wilkinson and Kate Pickett and their findings have been documented in their book “The Spirit Level”. They found out that inequality and factors like drug usage, child marriage, violence were positively correlated while factors like health, education were negatively correlated with inequality. When inequality reduces, the percentage of low income population reduces and the middle-income population rises. Research has shown that this can have a major impact on the levels of ic

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this can have a major impact on the levels of consumption patterns and that it can boost the economy over the coming years. The rise of middle income leads to more savings. This can have a positive impact on the banks as they tend to have larger capital. The government too can implement its social welfare schemes in a better manner. This leads to the country becoming more business friendly leading to larger foreign investments. Research has also shown that the quality of political institutions is dependent on the income and education levels of its population. Hence a fall in the income inequality leads to improvement in the quality of political institutions. (4) Perhaps the most neglected effect of income inequality is its effect on the environmental quality. Constatini and Martini (2010) has stated that the per-capita national income affects the environmental quality. The Environmental Kuznets Curve (EKC) describes the relationship between the economic growth and the level of environmental damage as an inverted U-shape curve as shown in Fig (3). Based on the EK-curve, there is a threshold per-capita income until which point the degradation of the environment keeps increasing. But once this threshold is crossed, the society takes necessary steps to curb/reduce the damage caused by the economic activities undertaken by the country/society. The effects of income inequality have been widely researched and documented (Baland et al, 2007; Andrich et al., 2010) and the results obtained resonate the same message: higher the income inequality, worse is the impact on the environment. And this understanding is important as sustainable development is the key to a better future.

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Another factor which can impact the dynamics of our world is the population growth rate. Population growth rate is a play of exponential mathematics according to the Malthusian Theory of Population. (5) According to this theory, while population growth is an exponential function, the food output growth is an arithmetic one. Hence at one point in future, according to Thomas Malthus, humans would have no resources to survive. But it is the run up to the last leg where the ideals of capitalism can wreck havoc. If such a situation arises wherein the resources remain scarce and the population grows, the income inequality can rise to levels greater than those of the current day. And that can happen as there is a definite possibility of high levels of automation stealing away millions of jobs. If that does happen, inequality can lead to the destruction of the very social fabric which binds humanity. Democratic institutions may fail and the whole economic structure would fall. But of course, this is a theory and like all theories, it has its own flaws. Conclusion As we can observe, the current form of capitalism that the world follows is not sustainable. The United Nations understood this and has since been trying to find a solution as to how this problem can be tackled. It met 12th August 2015 and drafted the Sustainable development goals, which are 17 in total. (8) As seen in the fig (4), countries with least income inequalities fared better than its counterparts. Of all, the countries in the Nordic region were the ones who had the least income inequalities and were touted to achieve the sustainable development goals set by the UN.

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But are these goals enough to ensure that inequality reduces? For example, the first goal in the list of 17 is to “end poverty in all its forms everywhere”. (8) But can setting a goal help achieve one? Capitalism nurtures economic inequality if it exists in the present form; that is if income inequality persists. And if economic inequality persists, then it can lead to catastrophic effects. So can we improve the current world economic structure? Is there a way to reform the current system to ensure that inequality reduces? Or do we require an entirely new system to ensure equality in all forms? This I feel is one of the most challenging issues that the world currently faces. Unless a solution is arrived at very soon, the world faces a big risk of another crisis.

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Sanford I. Weil: The Man Who Invented Financial Supermarket GIRRAJ GOYAL Introduction: Wall Street acknowledges Mr. Sanford I. Weill as the most courageous dealmaker and aggregator of companies on the landscape of financial businesses. Sanford Weill engineered many deals in his legendary 45 years of careerincluding the 1998 epic merger of Travelers and Citibank to formulate the international conglomerate. His life story reveals how he revolutionized and transformed the banking world through mergers-acquisitions and takeovers. Throughout his professional life, Mr. Sanford Weill was well-known for creating successful business products coming out of unworkable, smaller pieces and for filling product vacuums in the financial market that no one else even realised. His fearless business deal making

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tactics were very much evident during his tenure as Chairman and CEO of Citigroup. He actively lobbied US Congress to deregulate the financial service industry and was instrumental in creating an umbrella of financial services formerly known as â&#x20AC;&#x153;Financial Supermarketâ&#x20AC;?. What is Financial Supermarket? The financial supermarket is an institution or a company which offers a full range of financial services under one roof. Apart from a gamut of banking services it also includes insurance, underwriting, stock brokerage services. The rationale lying behind the financial supermarket is to offer efficiency and convenience to customers and there by generating higher fees per client and fostering customer loyalty to the clients.

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firewall between the two financial services were torn down. Further, a grace period of 2 to 5 years was allowed to Citigroup by federal law to operate its business in merged form. Otherwise, it would have had required spinoff to continue its insurance business. The wall street regarded him as “Shatterer of Glass Steagall”. Glass Steagall- Aftermath of repeal The successful drive to repeal the Glass-Steagall Federal law is what made the formation of Citigroup possible. It resulted in an acquisition spree, which instantly led to the consolidation deals of more than 30 financial firms in 1998, to just four financial behemoth companies by 2008. It unquestionably raised the size and scale of operations as well as complexity involved in financial transactions. Further, repealing of Glass Steagall paved the way for banks to create shadow banks in the system. It supercharged growth rate and dominance in financial landscape of the most perilous tooenormous to-fizzle banks and nonbanks. The size of expansion was so enormous that assets of top 6 banks grew from about 20% of GDP to 60% from the year 1998 to 2008. Assets of Citigroup alone got virtually tripled in such short span of time. Like every coin has two sides, repealing of Glass Steagall had another side too. Owing to the consolidation drive, there were fundamental conflicts of interest among organisations. It also changed the culture of commercial banking as higher risk culture of investment banking came at the shore. In competition drive, megabanks became greedy, started

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Business Career and Powerplays After completing graduation from Cornell University, Sander Weill got his first job in Bear Stearns as a runner in Wall Street. However, instead of soliciting and enticing clients, he was more focused on analysing financial statements of corporates and disclosures made to Securities and Exchange Commission (SEC) and thereby coming out with unique products which may cater client’s attention automatically. After serving five years in Bear Stearns, he founded and partnered with a brokerage firm which eventually became country’s second largest brokerage firm within a span of 20 years. In these 20 years, Sandy Weill completed over 15 mergers and acquisitions. With a capital aggregating more than $250 million, his firm trailed only Merrill Lynch as the industry’s largest security brokerage firm. He also founded “National Academy Foundation” in collaboration with the Academy of Finance to educate students graduating from high schools in the realm of finance. services because this deal was not in full confirmation with Federal Laws i.e.“Glass Steagall Act” in particular. In the US, since 1933 through Glass Steagall Act banking and insurance business have been kept separate. Banks were not allowed to underwrite stock insurance. Hence there remained a huge possibility that merger would run into problems and eventually a flop show at Wall Street. But very soon clouds of doubt hanging over the merger disappeared as Both Weill and Jhon Reed (CEO of Citi Group) lobbied to both Democrats and Republicans for repealing the Glass Steagall Act. Their strategies were so sound and effective that within a year

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taking on the high risk to mint even higher profits. Repealing of the act also allowed former investment banks to use low-cost FDIC insured deposit from the commercial bank as part of an internal arrangement in spite of the fact the investment banks were carrying high-risk exposure in the market. These developments in banking system reposed threat to the stability of the financial system as a failure at any corner of it had the potential to trigger instability and financial crisis in the economy. Shattering of Glass Steagall raised discussion among economists that revoking of Glass Steagall was at the centre of 2008 financial crisis as this Act prevented banks from operating as both investment and commercial banks. Those who were against repealing of the Glass Steagall argued that allowing banks to continue in both investment and commercial landscape was the main reason for the creation of all mortgage-backed derivative products that eventually hold worth less than the paper on which it was written. Another set who favoured repealing of the act argued that 2008 financial crash and economic slowdown was mainly due to fuelling of shadow banking system, subprime mortgage meltdown and complete failure of securitization process of assets. Hence, to them repealing of Glass Steagall Act was irrelevant to 2008 financial crisis as it would not have affected commercial lenders and investment banks that were distressed in 2008. Glass Steagall- Current Dilemma In the year 2012, in an interview given to CNBC, Sanford I. Weill advocated for breaking up of big banks. It was an odd statement as the man who himself created financial supermarket now advocated for breaking of big banks. “What we should probably do is go and split up investment banking from banking. Have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that’s not going to risk the taxpayer dollars, that’s not too big to fail.” said former Citigroup Chairman & CEO Sandy Weill. He argued that though post-2008 measures increased the stability of the financial system, there is still scope for improvements in transparency and accountability. He further argued that banks should be allowed to operate with a leverage ratio 12 to 15 times

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where investment banks should be marked to market on a daily basis on the basis of the quality of asset owned by them. Glass Steagall act also became a major point of discussion in US presidential election as “Berny Sanders” (Democratic candidate), and several activists of party highlighted the need for “breaking up of big bank” for the restoration of safety in the economy. But, Hilary Clinton out rightly refused to pledge to reinstate GlassStegall had she become the president as she believed that criticism over repealing of law is unfounded and baseless. Conclusion- Sanford I. Will life Lessons The renowned financial writer “Amey Stone” & “Mike Brewster” described Sanford I. Will as the “King of Capital” in their biography “King of Capital: Sanford Will and making of Citigroup”. His life story reveals how a feared, admired, envied, and determined man traces the path of success and gets to top. It also gives valuable insights into various business tactics, powerplays, and strategies. He had the ability to develop cordial relations with the workforce with all love, loyalty and battles heartbreaks at the same time. His laser-like focus and the incredible belief in his conviction distinguished him from the run of mill business executives. The deals and professional work of Wall Street icon will continue to have long lasting impact on global finance and economy.

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Indian Pharma: An Ambivalent Aura Alamelu Somasundaram

Loyola Institute of Business Administration Introduction: Pharmaceutical sector is booming in India with increasing its share towards the global generics exports volume. It is one of the largest provider of generics drugs to the USA. Since 2005, the revenue of the pharma sector in India has grown at a CAGR of 17.5%. India has a competitive advantage over other countries because of its costefficient production. The major portion of the earnings of this sector comes from exports. The top five export destinations are USA, UK, Germany, Russia and China. Also, pharma segment is expected to generate revenue of $ 55 billion by 2020. Meanwhile, we see that the profit margins

of these Indian firms are under pressure. Many firms are fighting hard to get FDA approvals for their drugs. We also foresee certain disruptors that will revamp the operation of this industry. Technological Disruptors: Evolving technology are the disruptors of any industry. Even in the history, there had been many instances where technology has completely changed the way of functioning of an industry. Banking is one such industry where computers replaced numerous workers. Four key technological factors that would change the way of operation of the pharma industry â&#x20AC;&#x201C; 3D printing is a revolutionizing technology.

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Use of it in the production of tablets poses a threat to the sector. US FDA had approved the first 3D tablet in 2015. Secondly, virtual reality and augmented reality would be the future of Pharma marketing. There is a survey stating that people spent almost 71% of their time with their mobile phones. This urges the need for mobile marketing. Augmented reality and virtual reality are the future dichotomy of mobile marketing. The companies need to set aside a fraction of their earnings for the expenses for this new transformation. Next, the nanotechnology is widely used in treating Cancer. The future solution of cancer treatment is going to be with nanoparticles and nanobots. Further, it is evident that nanotechnology is capital intensive. The Indian pharma companies should make provisions for this foreseen tech-drive. Finally, though it may seem to be a vanilla phenomenon, itâ&#x20AC;&#x2122;s the bitter truth. The outperforming Research and Development sector is trying to find out vaccines for every disease. This means that the disease is prevented from occurring i.e., drugs for treating the diseases will no longer be needed as they are prevented in their inception stage itself. Hence, vaccination will erode the treatment drugs. The above technological disruptors would call for the redesign of the business model of the Indian Pharmaceutical companies.

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R&D Spending â&#x20AC;&#x201C; Global Picture R&D activities are vital for any pharma company. It is pivotal to the success of the company. More the R&D spending, higher is the likelihood of the company to come out with new drugs. Geographic Visualization: USA is the topranking country that spends heavily on R&D. With respect to Pharma sector, as per the Winter 2016 report of Industrial Research Institute, the leading R&D spending countries are USA, Germany, and UK. 56% of the total R&D spending in Pharma is done by USA followed by Germany with 16%, and UK with 7%. When assessed as a percentage of GDP, Israel surpasses other countries with a R&D spending of 4.25% of its GDP. On the other hand, India ranks 6th with $ 71 billion in R&D spending in 2015. The number of R&D centers for Pharma in India is 25 (in 2016). Firm-wise View: The top seven pharma companies of India spent $ 1.3 billion in FY16 for their research and development activities. Cipla is one of the pharma giants with high R&D spending in 2016. It is then followed by Lupin; whose number of patents rose four times from 600 in FY08 to 2525 in FY16. Globally, in Pharma industry, Roche, a swiss based biopharmaceutical company, is the top firm that spends highly in research. In 2013, it had spent $10 billion. It is also the 5th largest R&D spending companies in the world. Novartis, again a swiss based pharma firm, globally stands at 6th position in R&D spending with $ 9.9 billion in 2013. Finally, Merck, a New-Jersey based pharma company had spent $ 7.5 billion in R&D, and it is at 10th position globally. Thus, out of the top 10 high R&D spending companies, 3 are pharma firms (33.3%). Also, though USA spends highly on Pharma R&D, when viewed from companiesâ&#x20AC;&#x2122; perspective, it is the Swiss companies that spend more on Pharma. It is apparent that the R&D spending by the top seven Indian Pharmaceuticals is just 13% of what Roche spends for a year. This emphasizes the need for higher R&D spending by Indian pharma giants.

the end customers. However, this price hike can be done only on the new products and the existing drugs must be sold at the same price (as it was before GST). So, the companies are striving to selloff their old stocks as early as possible before GST gets implemented (July 1st). PostGST, if the companies need to sell their old stocks, they must do it at a lower profit margin. For instance, if the price of a nonscheduled drug is Rs 10, and its cost of sales is Rs 7, then Pre-GST tax would be Rs 0.9 and profit margin would be Rs 2.1. Post-GST the tax would be 1.2, and the profit margin would be Rs 1.8. The profit margin for the drug would go down by 14.3%. This is reason for which the companies are trying to sell their stock before GST. As of 21st June, according to the report of AIOCD (All India Organization of Chemists and Druggists), these firms are holding only 22 days of inventories (3 weeks). Next comes the input tax credit scheme under the GST climate. It allows the pharma firms to get refund of the taxes that they paid for their inputs. Pre-GST, it was 100%. Now, 100% refund will be available only for drugs whose receipts are available; otherwise, it’s going to be 40%. This means that the refund can be claimed only if the supplier pays GST. It further demands the firms to have proper documentation, and verification before ordering the goods. The disposal of Inverted duty structure is the biggest advantage of GST for the Pharma firms. Inverted duty structure is a condition where the duty of importing the raw material is higher than the duty of importing the finished goods. The disposal of this structure or the refund of the accrued credit would result in fostering the domestic manufacturing of the products. Though GST may seem to be unfriendly for the pharma in the short term with its modified input tax credit, and higher tax slab, it would be conducive in the longer run.

market. Americans generally pay 300 bucks more for the drugs than an average Canadian or Germans do. The new president, Trump wants to bring down the prices of drugs in America. Next, the Indian firms are suffering from data integrity and thus, getting approvals from US FDA for their new plants and products is becoming increasingly laborious. Past decade has seen, quite a high number of warning letters and alerts for the Indian Pharmaceutical industry. FDA vets the compliance of the drug manufacturers with the CGMP (Current Good Manufacturing Practices) regulations. Any deviations will make the companies lose their trust component. Henceforth, there is no key regulatory disruptor for the sector as GST poses a good omen. But, there are technology and foreign pressures on the industry. The companies must equip themselves on the technological front with little more expenses on research and development. They should also ensure that their honesty and loyalty doesn’t gets spoiled due to their non-compliance to the regulatory framework in USA. The legal and regulatory specifications are the external forces whereas the technology and organization’s process regulations are internal to the firm. With respect to the pharma sector, the external forces to the business seems to be favorable. Only the internal changes are required over which the firms have control. Hence, Indian firms must reorganize their framework to have sustainable road ahead.

Trump and US FDA: Indian pharmaceuticals are highly reliant on the USA market. A huge fraction of the revenues comes from exports. So, this makes us to study about the USA Pharma © FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

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PROF. PALANISAMY SARAVANAN ASSOCIATE PROFESSOR OF FINANCE & ACCOUNTING, IIM SHILLONG ARTICLE CREDITS: FINANCIAL EXPRESS

As the stock market indices touch new highs every day, those investors who have missed the rally are entering the market which further boost the indices. But, in order to realise profit one should sell the shares at the right point of time, which is an important part of investment science. So, when you should book profit? Is it when the valuation of your shares is high; market is volatile, prices have reached lifetime highs and lost steam or should you wait until your targeted rate of return is achieved or should you hold the shares for the long term? Reduction of risk As stock markets are more volatile compared to the past, it is essential to book profits at regular intervals. Some investors stay put in certain specific shares without any fear as they think that market volatility is only short term and it may not affect their holding, which may be true to some extent. On the contrary, smart investors make use of the opportunity to book profits and maximise their gains. For instance, Mr A bought shares in ABC company at an average price of Rs 840 and sold at Rs 905 and thus booked a profit of Rs 65 per share. Again, he bought back the same company’s shares at Rs 846 with a target price of Rs 905. If he had considered himself as a longterm investor and would not have booked profits, then opportunity lost was Rs 59 (905846) per share. If you book profits at regular intervals then you can hedge the risk. No love and affection for shares Often, investors fall in love with their shares so that they don’t want to sell. The appreciation of shares, if the investor does not book profits at appropriate time, is like the appreciation of investment in immovable assets like real

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right price. Lifetime high price When indices are touching lifetime highs with some share prices hitting the roof and still climbing up each day, you should stop chasing the market and wait for the correction. Avoid booking profits because you may get the feeling of being left out. Don’t invest further but sit tight on good shares and wait for the correction. Increase your cash balance to utilise a market correction in the future. Enhancing your cash balance can act as a hedge to take advantage of the movement of the market in either side. If the market goes up, you are staying invested and if there is a correction, you have the cash to buy shares at cheap rate. Practice of average out One of the most common strategies adopted by investors is to average out when the share price drops. It may not be a good strategy as it is difficult to identify what is the bottom price of the share that you are averaging out. In such a scenario, one should trigger stop loss to book profits or protect profits. One should go for average out only when the stock price is increasing or the stock retreating from its bottom. It is always better to book profits when the stock is in bearish mode.

CLASSROOM FinFunda of the Month

Dear Maâ&#x20AC;&#x2122;am, what is the concept of triple witching? How does it impact the market? Triple witching occurs when the contracts for stock index futures, stock index options and stock options expire on the same day. Triple witching days happen four times a year on the third Friday of March, June, September and December. Triple witching days, particularly the final hour of trading preceding the closing bell, can result in escalated trading activity and volatility as traders close, roll out or offset their expiring positions. The phenomena includes index futures as well as options. Why does it not include single stock futures then? Since 2002, triple witching days have also included the expiration of single stock futures, meaning there are actually four types expiring contracts, but the term quadruple witching has never caught on. Triple witching days generate trading activity and volatility because contracts that are allowed to expire may necessitate the purchase or sale of the underlying security. While some derivative contracts are opened with the intention of buying or selling the underlying security, traders seeking derivative exposure only must close, roll out or offset their open positions prior to the close of trading on triple witching days. Can you explain how the expiration process unfolds in real terms and what is the impact on the stock market? Futures and options contracts, unlike a stock, have an expiration date. Large bets have been placed in the futures markets,

Triple Witching Finance Club IIM Shillong

and triple witching is when those traders will have to decide if they will roll their futures contracts over (maintain a position in a non-expired contract) or close their futures position (which could be buying or selling, depending on the direction of their original trade). Options traders also find out if their options expire in or out of the money. On such days, traders with large positions in these contracts may be financially incentivized to try to temporary push the underlying market in a certain direction to affect the value of their contracts. The expiration forces traders to act by a certain day, causing trading volume in affected markets to rise. Because of the increased volume, the chance of some abnormal price moves, and a statistical bias which may cause some day trading strategies not to work (which work during non-triple witching weeks/ days), some day traders recommend caution, and others recommend not trading at all. Any final words or recommendations on trading during the triple witching weeks? How an individual day trader chooses to handle triple witching will depend upon their trading style, their trading strategies and primarily their level of trading experience. If a day trader opts to trade during these weeks measures should be taken to make ensure the strategy being used works in such an environment, or a new strategy can be constructed specifically for this week (based on tendencies and statistical biases typically noted during these weeks). Swing traders and investors are unlikely to be significantly affected by the event, but swing traders may wish to take note of any statistical biases present during the week of triple witching. As a last word, short-term traders should adapt their strategies to these conditions, or avoid trading (or reduce position size) if they notice their performance deteriorates during this time.

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