Niveshak Mar14

Niveshak THE INVESTOR

VOLUME 7 ISSUE 3

March 2014

IPO SCRUTINY: A BIGGER EYE!!

FROM EDITOR’S DESK Dear Niveshaks,

Niveshak Volume VII ISSUE III March 2014 Faculty Chairman

Prof. P. Saravanan

THE TEAM Akanksha Gupta Apoorva Sharma Gaurav Bhardwaj Jatin Sethi Kocherlakota Tarun Mohit Gupta Mohnish Khiani Priyadarshi Agarwal S C Chakravarthi V All images, design and artwork are copyright of IIM Shillong Finance Club ©Finance Club Indian Institute of Management Shillong www.iims-niveshak.com

We hope that the month of March had brought with it lots of joys and colors with the festival of Holi. From acquiring WhatsApp for a whooping $19 billion, now Facebook has again finalized acquisition of Oculus VR, a virtual reality company for $2 billion in stock and cash. Mark Zuckerberg stated this aquisition to be part of the strategy directed towards providing new kinds of experiences in virtual reality to the Facebook users, gaming being the first feather in their caps. Apart from the rallying Indian stock market, said to be experiencing the pre-poll effect before the country goes for central elections in a few months, the month also brought in with it mystery in the form of disappearance of the Malaysian Airlines Flight MH 370. Even after 21 days since it went missing and a numerous contingency theories, joint search by the international communities using the latest of the technologies there is still no clue to the location of the plane or its 239 people onboard. Moving to the current happening in the field of information technology, Microsoft launched free Office application for iPad on Apple’s online App Store. It was greeted with a great response and was seen as Satya Nadella’s move to let Microsoft sidestep paying Apple the 30 percent cut it gets of the price of applications for its popular devices as well as in-app purchases and generate an opportunity to enhance Microsoft’s revenues. This month was also marked by the historical event of reclaiming of Crimea as part of Russia. Although Russia might face an international condemnation for many years to come, this did not stop Mr. Putin from speeding the process of redrawing the international borders of Russia. In the March edition of Niveshak, our editors have covered the story about the requirement of an internal agency to monitor the funds raised through the IPO process as proposed by SEBI. The Article of the Month this time is ‘Emerging market equities or Developed market equities- Which equity market deserves a higher premium?’ which discusses about the real potential of emerging markets compared with the developed markets. FinGyan section covers Dividends for gains at stock market- Is it the right choice which analyzes whether a company giving good dividends regularly are worth investing. FinSight article this month covers Push or Pull- Inflation and Policy Rates. The FinPact section this month discusses about the $19 Billion acquisition of Whatsapp by Facebook and argued if the price for the acquisition is justified? FinView this time covers an Interview with Ms. Surbhi Arora on New exploration policy by Indian Government. And Lastly Classroom section this time is a lesson on new finance enthusiasts about Corporate Debt Restructuring. Also, Team Niveshak would like to extend its gratitude towards the senior team for their continuous guidance and support in taking the Finance Club of IIM Shillong to new heights and thereby increasing its reach. They have been a part of some new initiatives such as FinDrishti, Celebratio, ICICI Direct and Niveshak Investment Fund (NIF). The senior Finance club comprises: Anchal Khaneja, Anushri Bansal, Gourav Sachdeva, Himanshu Arora, Ishaan Mohan, Kaushal Kumar Ghai, Kritika Nema, Neha Misra and Nirmit Mohan. We hope to continue this relationship and strive to take Finance club to newer heights with your continuous support. We would like to thank our readers for their immense support and encourage-ment. You remain our prime motivation factor that keeps our spirits high and gives us the vigor and vitality to keep working hard. 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 Cover Story Niveshak Times

04 The Month That Was

Article of the month

Emerging Market Equities 16 Internal Monitoring Agency: or Developed Market Equities- Is it enough to ensure ethical Which Equity Market deserves usage of funds raised through a Higher Premium?’ IPO?

FinGyaan 20 Dividend for Gains @ Stock Market–is it the right choice?

Finsight

28 Push or Pull - Inflation and, Policy Rates prediction

FinPact

24 $ 19 Billion Acquisition: The Story Behind

FINVIEW

31 Ms. Surbhi Arora:

Assoc. Prof., Global School of Business & Global School of Accounting and Commerce

CLASSROOM

Corporate Debt Restructuring

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The Month That Was

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The Niveshak Times Team NIVESHAK

IIM Shillong Indian Government Raise $10 Billion from the Sale of 2G Telecom Spectrum India raised almost $10 billion from an auction of wireless spectrum that saw Reliance Jio Infocomm Ltd. emerge as a potential competitor to Vodafone Group Plc(VOD) and Bharti Airtel Ltd.(BHARTI). The government got 375.7 billion rupees ($6 billion) of bids for the 1,800 megahertz band in 22 regional zones by selling almost 80% of the more than 400 units of airwaves in this band and 235.9 billion rupees for 900 MHz in Mumbai, New Delhi and Kolkata by selling all of the 46MHz of 900MHz. Telecom companies will pay 25% and 33% of the bid amount upfront in the 900MHz band and 1,800MHz band, respectively, and the rest in 10 annual installments after a two-year moratorium. The spectrum auction not only raised the much-needed funds for the government, but also set the stage for a redrawing of the competitive landscape in India’s telecom industry. Reliance Jio joins Vodafone, the biggest spender in the auction, and billionaire Sunil Mittal’s Bharti in seeking to tap the world’s biggest wireless market by users after China. A key reason for the success of this auction was the impending expiry of 900MHz spectrum rights for incumbent operators such as Bharti Airtel and Vodafone in key metros, in November, forcing them to renew their licences for the next 20 years. Costlier permit renewals will also ensure that smaller operators choose to exit the sector, hastening the pace of consolidation in favor of the bigger Telcos with stronger balance sheets. Alibaba’s IPO Soon Alibaba Group Holding Ltd., China’s biggest e-commerce company, will begin the process of filing for an initial public offering (IPO) in the US that may be the biggest since Facebook Inc.. The company is open to listing in China should circumstances permit in the future, the company said in an emailed statement. Investment banks have valued Alibaba, founded by former English teacher Jack, at as much as $200 billion, which would make it the secondbiggest Internet company behind Google Inc. based on market capitalization. A US share sale by Alibaba would be a blow to Hong Kong, which hasn’t hosted an IPO of more than $4 billion since October 2010. The IPO is codenamed Avatar, two people familiar with the matter have said.

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Alibaba, posted its fourth straight quarterly profit on surging sales. Net income attributable to ordinary shareholders was $792 million in the three months ended September, a 12% increase from the June quarter, according to a January presentation from Yahoo! Inc., which owns a 24% stake. Revenue rose 51% to $1.78 billion. Google has a market capitalization of $400 billion; Amazon $171 billion; and Facebook, owner of the world’s largest social network, $175 billion, according to data compiled by Bloomberg. Maruti Suzuki‘S Brawl with Minorities Continues Soon after announcing its quarterly results, Maruti Suzuki announced that its proposed Gujrat manufacturing facility would now be owned by its parent company Suzuki Motor Corporation and that the cars would be sold to Maruti on a cost plus markup basis. Even though the results were good, the stock tanked after this announcement as it created a lot of uncertainty regarding the amount of mark-up the parent would charge and this agreement would also change the contours of the Maruti from a car manufacturer to a car sales and marketing firm. This agreement would have impacted the profit margins of Maruti Suzuki, which are already under pressure due to the appreciation of the yen against the rupee for its royalty payments to Suzuki. During the last financial year royalty payments stood at 2.5% of net sales and in the current year stood at 5.7% of sales. This number is so huge that royalty payments from Maruti amounted to 102% of Suzuki’s net profits. All this led to a lot of opposition from DIIs and FIIs and finally Maruti agreed to modify this agreement. As of now, the new facility would remain with Suzuki, but the cars would be sold to Maruti on a cost basis and the cost of manufacturing the cars would remain the same, has Maruti itself manufactured the cars. Also the facility would be transferred to Maruti after 15 year at book value rather than at fair value and all these decision would now be taken up for minority shareholder approval through a voting procedure. Indian Government Plans To Launch CPSE ETF The Government will now have another route to divest its holdings in 10 public sector enterprises with the launch of the CPSE ETF (Central Public Sector

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Enterprises Exchange Traded Fund). In May last year, the Government had approved the setting up of a CPSE ETF comprising equity shares of CPSEs, to be launched as a CPSE ETF mutual fund scheme. The Department of Disinvestment appointed Goldman Sachs Asset Management (India) to launch and manage the scheme. Out of the proceeds of the new fund offer, Goldman Sachs would purchase CPSE shares forming part of the CPSE Index. It would be bought in proportion to the composition and weightages on CPSE Index. The ten companies include ONGC, Gail, Coal India, Indian Oil, Oil India, Power Finance Corporation, Rural Electrification Corporation, Container Corp, Bharat Electronics and Engineers India Ltd. The Government plans to raise up to Rs 3,000 crore from this scheme which will help in meeting the shortfalls arising out of disinvestments. NSE holds Fourth ‘Investothon’ in Mumbai The National Stock Exchange (NSE) on the 30th of March organized ‘Investothon,’ in the financial capital, to create awareness among investors and market intermediaries about the importance of investing safely. NSE takes a number of initiatives to reach out to investors in different parts of the country. The investor run is aimed at strengthening NSE’s efforts to grow the investor base, by joining hands with members and market participants, to sensitize investors about safe investing and opportunities available in the markets. NSE, the country’s leading stock exchange, has been organising Investothon across cities such as Bangalore, Pune, Bhubaneshwar, Kochi, Ahmedabad, Rajkot. Growing Sense Of Optimism In Stock Markets The month of March has seen Indian stock markets touching their all-time highs session after session. The benchmark index BSE has breached the limit of 22000 and the same is the case with NIFTY, which has crossed the figure of 6500. Banks and PSUs led the gains on optimism about a recovery in the domestic economy. A firming trend in other Asian markets also buoyed the trading sentiments here. The Indian rupee also edged higher tracking gains in equity markets. The currency rose to its fresh eight month high and breached important resistance of 60 per dollar. There has been a steady inflows by foreign institutional investors of around $2.5 billion. Also, the growing sense of optimism in regards to the formation of new government is one of the main

reasons for the stock markets to see all-time highs. There is a lot of excitement around and everyone is expecting a lower interest rates to improve the earnings growth. The expectation is that Sensex may touch 24000 provided a business friendly government is formed after the election. RBI Sends Bank Licence Applicant List to EC; IDFC, L&T Finance, LIC Housing Top Contenders Infrastructure Development Finance Co, L&T Finance Holdings and LIC Housing Finance could be in the running for new banking licences along with Reliance Capital, JM Financial and even India Post. That’s according to a list of applicants’ names that qualify for licences which has been sent to the Election Commission by the Reserve Bank of India. One of the aims of the exercise is financial inclusion or widening access to the banking system, especially in rural areas. Amid the heat generated by the election campaign, the award of new banking licences has taken on an intriguingly political colour. Not surprisingly, Reserve Bank of India governor Rajan wants everything done by the book, that is, make sure that any action taken is in accordance with the model code of conduct currently in place. Hence the referral of the issue to the Election Commission. This may mean that the process gets delayed until after the polls. The central bank has written to the commission asking whether the issue of new bank licences will violate the code of conduct ahead of the April-May election. Media reports suggest that the Election Commission could ask RBI to wait until the election process is complete. The RBI governor has clarified that he has not received any communication from the poll panel so far. The process for awarding new bank licences began in February 2011 when the then finance minister Pranab Mukherjee announced it in his budget for FY11. It was speeded up last July when 26 companies applied for licences. The Tata Group withdrew from the race, implying that the central bank’s conditions were restrictive and conforming to them would affect its other businesses besides having to ensure that more than 1,000 group units were compliant with requirements. The finance arm of another big industrial group, Mahindra & Mahindra, dropped its plans to apply for a licence even before the application deadline.

The Month That Was

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Article ofSnapshot the Month Market Cover Story

Market Snapshot

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

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

73,72,264.39 Source: www.bseindia.com

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

LENDING / DEPOSIT RATES Base rate Deposit rate

10.00%-10.25% 8.00% - 9.25%

RESERVE RATIOS 60.0998 82.5765 58.83 99.8498 47.52

CURRENCY MOVEMENTS

CRR SLR

4.00% 23%

POLICY RATES Bank Rate Repo rate Reverse Repo rate

9.00% 8.00% 7.00%

Source: www.bseindia.com 25th February 2014 to 28th March 2014 Data as on 28th March 2014

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

Open

% change

20986.99 6469.03 6436.27 12427.9 12250.53 5991.44 10254.45 6505.67 10599.49 9653.2 8575.85 8427.72 1527.62 5466.22 1203.24 5191.86

22339.97 7010.29 6999.06 13142.84 14585.16 6359.59 12068.53 7015.94 10072.73 8774.41 9684.27 9455.85 1743.99 6363.83 1427.96 4897.52

6.45% 8.37% 8.74% 5.75% 19.06% 6.14% 17.69% 7.84% -4.97% -9.10% 12.92% 12.20% 14.16% 16.42% 18.68% -5.67%

% CHANGE

Article Market of Snapshot the Month Cover Story

Market Snapshot

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Article of the Month Cover Story

Emerging Market Developed Market OR Equities Equities

Which equity market deserves a higher premium? Siddhartha Banerjee

Introduction For more than a decade, emerging markets economies have grown at a higher rate than developed markets. Simultaneously, emerging markets equities have outperformed developed markets counterparts as investors have been hunting for better growth opportunities. Despite this relative outperformance, emerging markets stocks have been consistently valued below par compared to the developed markets stocks. This article seeks to analyze the underlying factors of valuation of these two asset classes

Fig 1: MSCI EM Returns Versus DM Index Returns

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IFMR, Chennai

and tries to emphasize on the fact that emerging markets stocks deserve to be valued higher than how they are valued in general. To arrive at this conclusion, performance of the two asset classes over the years has been analyzed along with the underlying drivers governing their performance. These driving factors are discussed briefly in this analysis. Performance Overview: Emerging versus Developed Market Equities From the analysis of emerging market equity returns in the period between 1990-2012, it can

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Fig 2: Emerging Markets Growth has Soared

set to decline to 47% in 2015. It is estimated by IMF that in the period 2013-17, emerging markets will grow at 6%p.a whereas the developed markets will grow at 2.3% p.a. ii) Dynamic Demographic Trends: Positive demographic trend is another important component of the emerging market growth potential and this provides a major investment rationale for allocating wealth to these markets. Strong population growth, increasing number of

Fig 3: Emerging Marketâ&#x20AC;&#x2122;s Working Age Population Explosion

Fig 4: Emerging Market (Yellow) & US Consumption (blue) as a % of Global Consumption

people in working age and rapid urbanization has boosted the domestic consumer base and in turn the emerging market economies. This is in contrast to the developed market where population is aging faster and consumption trend as a percentage of global consumption is declining. [See Fig-3 & Fig-4] iii) Investment Spending Trends: Currently the investment spending as a percentage of global GDP is higher in the emerging markets than in the developed markets and this trend is likely to continue in future. As the emerging economies go through the process of transforming themselves to developed economies fixed asset investment will shoot up and this is likely to remain a trend in the long term. [Fig 5] But the problem with this view is that stock markets generally have a loose relationship

ÂŠ FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

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be seen that an investment in MSCI Emerging Markets Index hedged into USD have obtained positive returns in 74% of the calendar years. It is also worth noting that the annualized return on investment at 20.1% is four times more than that of investing in the global developed market index which is only 5.2%. Even on an un-hedged basis, wherein full currency exposure is assumed there is an advantage to the emerging markets. In this case an annualized return on investment of 8.4% is higher than that of the global developed market index which is 5.2%. In the period 20002012 the un-hedged annualized returns of the emerging markets index was 12.6%, which is much superior compared to only 0.7% of the developed markets index. But since 2011 the MSCI emerging market index has underperformed compared to many developed markets. Emerging markets equities have lagged behind Eurozone and US equities by 25% and 29% respectively since 2011. Here the aim is to analyze the underlying reasons for the prolonged outperformance of the emerging markets equities relative to the developed markets counterparts and the reasons behind their sudden loss of momentum. Drivers of Emerging Markets Equity Returns Prospective investors in emerging markets equities are often reminded of the following widely commercialized arguments as to why they should increase their allocations to the emerging markets equities. These are as follows: i) Higher Growth Rate: Emerging economies have been consistently growing at a faster rate than developed economies for over a decade. Increasing urbanization and a growing middle class have given rise to a new generation consumers with strong demand for consumer products and infrastructure developments to support their changing lifestyle. According to the estimate made by IMF, developed marketâ&#x20AC;&#x2122;s share of world output which was 64% in 1992 is

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Fig 5:Investment Spending as a % of Global GDP

Fig 8: Comparison of Index Earnings and Dividend Growth

with the economies that they represent. Another related issue is that the economic growth may not get reflected in the corporate profitability. So valuation i.e. the price paid for the earnings growth is a more important driver than economic growth.

market companies have outperformed those in developed markets, in either of emerging and developed market segment. Earnings and Dividend Growth: In the period 2003-2013, earnings growth and dividends growth of emerging markets companies have

Fig 6: Valuation Formulas

Companyâ&#x20AC;&#x2122;s head- Overall growth Growth in home Growth in Growth in quarters market emerging markets developed markets Emerging Markets 23.8% 17.9% 30.7% 22.4% Developed 10.7% 7.5% 12.6% 11.7% Markets Fig 7: Revenue Growth Rate (CAGR) Segmented According to Geographies

Valuation of Equities: Emerging Versus Developed Markets Although many analysts and academicians argue that country risk is diversifiable to global investors and hence it should not be priced into stocks; that argument has been weakened by the strong correlation across different stock markets. Using the basic discounted cash flow model it can be illustrated that stocks which are perceived â&#x20AC;&#x153;riskierâ&#x20AC;? should sell for a lower price. The valuation of equity can be computed using the following relations: i) Comparison of Valuation Parameters: Emerging Markets Versus Developed Markets Stocks Revenue Growth: Companies headquartered in the emerging markets have seen much higher CAGR in revenues than their developed market counterparts in the last decade. The emerging

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outpaced developed markets companies. High profitability has led to higher earnings and dividend growth. EPS of MSCI EM Index has grown 3.87 times in these 10 years whereas EPS of S&P 500 has increased by only 2.16 times. Simultaneously, the emerging markets dividends have grown at a CAGR of 14% over the last decade, at a much faster rate than developed markets. The number of companies offering to pay dividends to the shareholders has also increased significantly. The proportion of companies paying dividends in emerging markets has increased from 74.6% in 2003 to 90.3% in 2013. This has broadened the opportunity set of income oriented investors. Comparison of Dividend Pay-Out Ratio: Generally speaking firms that pay-out high dividends are considered to be profitable, matured and

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Fig 9: Emerging Markets Dividen Payout Ratio

ii) Comparison of Valuation Multiples (P/E & P/ BV Ratios): Developed Versus Emerging Markets In the above figures, year wise median P/E and P/BV ratios of all the developed and emerging market companies have been compared. Before 2006 emerging market P/E ratios were about 30-35% lower than the developed market counterpart. But it has gradually converged

Return on Equity (ROE) ratio of the companies. The median returns on equity of developed market and emerging market companies have been compared in the figures below. It can be noted that emerging market companies had higher ROE than developed market companies in every year taken in the analysis. But in the recent years the developed market companies have almost caught up with emerging market companies. Once at more than 13% in 2007, emerging markets companies’ ROE now languishes at approximately 9%, almost at par with the ROE of developed markets companies. This suggests that it is not profitability that has led to the P/E or PBV multiple convergences. b) Cost of Capital: An explanation for the convergence of the multiples can be the declining equity risk premium and thereby reducing the cost of equity. This can be explained by the following relation. Hence, if the cost of financing decreases it pushes the overall multiple up. Over the last decade there were widespread structural reforms in the emerging markets. This along with reforms in the financial sector, leading to improvements in the investor’s access to information has led to the narrowing of the cost of capital relative to the developed markets. From the figure we can see that there has been a sharp fall in the emerging

Fig 10: P/E and P/B Ratio trends: Developed versus Emerging markets

with the developed market multiples over the course of time. Reasons for Such Convergence: An effort has been made to identify the reasons for such convergence. Possible reasons are illustrated as follows. a) Profitability of the Developed Market Companies Relative to Emerging Markets: The profitability of the companies in developed and emerging markets can be estimated by using the Fig 11: ROE: EM relative to DM

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stable. It has been observed that at present the Emerging markets equities’ dividend payout ratios are comparable with US equities, with 38.1% and 35.4% of the earnings respectively. Thus the Emerging markets equities seem attractive from both perspectives-capital appreciation as well as income from dividends.

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market cost of financing in the period 2008-10 and this can be a contributor to the convergence between the developed and emerging market equity multiples. Implications for the investors: Investors in general get attracted towards emerging markets because of its potential of earning higher returns although accompanied by higher risks. But the

question: are the risk-adjusted returns of the emerging markets equities less than the developed markets counterparts? To answer this question Sharpe Ratios of the two asset classes are compared. Returns and volatility are calculated for both the asset classes over a time frame since 1991. It has been found that the Shape Ratio of the MSCI EM index is

Fig 12: Emerging Markets Cost of Financing

equity valuations in the last few years imply that emerging markets equities are no longer as risky as they were, relative to the developed market equities and they are also not priced at a significant discount relative to the developed market counterparts. Comparison of Risk-Adjusted Returns: Emerging versus Developed Markets In spite of historically generating higher returns than the developed markets equities, emerging markets equities have been trading at a small discount relative to the developed market equities. This leaves us with the obvious

1.0 compared to 0.7 of S&P 500 Index, when the period of estimate is from 1991 to 2010, which indicates a better risk adjusted returns from the emerging markets. However, over the three year period from September 2010 to September 2013 emerging markets have clearly underperformed with an excess return of -7% whereas the developed markets equities have generated an excess return of 11.5%. Emerging Markets Recent Underperformance What are the reasons behind such underperformance? It seems that a confluence

Fig 13: Sharpe Ratios of EM versus DM (1991-2010)

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of certain events occurring simultaneously has led to this underperformance. The main factors can be summarized as follows: Rebalancing of Chinese Economy: Slowdown in China as a result of economic rebalancing from the investment driven economy to the consumption driven economy has affected the emerging market equities adversely. The biggest risk to the market is the possibility of a policy error as China makes this adjustment. This along with concerns about weak commodity prices have negatively impacted many commodity linked emerging market stocks. This fear is mainly based out of the premise that a hard landing of Chinese economy will put pressure on commodity prices. But most of the fear seems exaggerated and it is expected that Chinese economy will have healthy growth once businesses get comfortable with policies of the new political landscape. Change in Investor’s Expectations: Emerging markets equities have been hurt by a series of negative surprises related to the growth in the recent years. Investors’ expectation of growth in debt laden developed markets was extremely low whereas it was high from the emerging markets. Although the growth rates of emerging markets have outpaced the growth rate of developed markets, it was less than the investor’s expectations. This acted as a catalyst for the recent equity sell –off in the emerging markets. However, despite this slowdown the emerging markets are forecasted to contribute $0.83 of every dollar of global growth in 2013. Loose monetary policies in the developed world: Global equity markets have been overly impacted by the unprecedented levels of liquidity pushed into the system by the Central banks of developed nations. The sheer

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Fig 14: Risk adjusted returns (2010-2013)

scale of Quantitative Easing along with interest rates at historically lowest levels have certainly contributed to more flow of capital to developed equity markets rather than emerging markets in times of fear, thus increasing volatility and reducing investor confidence. Apart from that, currency weakness of Japanese Yen caused due to quantitative easing has led to its export growth and has reduced the competitiveness of many emerging markets exporting companies especially in South Korea. Although long term impacts of such monetary policies on stock prices are hard to predict, their short term impacts are significant. Conclusion Although the above mentioned factors have affected the performance of the emerging markets equities recently, their long term prospects cannot be denied. The key findings in this analysis point to better growth prospects of the emerging markets supported by favorable demographics and consumption pattern, which will likely trigger the revenues of the emerging markets companies. This higher revenue is expected to generate better corporate earnings and this coupled with favorable dividend payment culture of the emerging markets companies implies a better return on investment from the emerging markets equities. In addition to that, various structural reforms in the emerging markets, as we have seen over the years, will enable the risks to decrease further. So in my opinion, keeping the long term picture in mind, emerging markets equities deserve a higher valuation because of their potential to generate better risk adjusted returns.

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Internal Monitoring Agency

Is it enough to ensure ethical usage of funds raised through IPO? Gaurav Bhardwaj

IIM Shillong Disinvestment SEBI recently proposed establishment of a monitoring agency that would overview the usage of funds raised by companies through IPO route. Till now companies raising money more than 500 crore are required to have such monitoring agency but now SEBI in its proposal have said that all the companies raising money through IPO would need to have an internal audit agency that would report companyâ&#x20AC;&#x2122;s usage of funds every quarter. In this report all the information related to deviation in usage of money from the stated objectives in companyâ&#x20AC;&#x2122;s prospectus would be made public through stock exchange with the comments from CEO and managing director of the company on the same. This step has been proposed by SEBI considering the unethical utilization of public fund raised through IPO for personal purposes by promoters. This article in an attempt to observe the situation from a third party perspective and analyze if such a proposal should be implemented or not. Current System Under current system of governance various regulators/parties have shared responsibilities to govern the usage of funds by the companies

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raised through the IPO route. Various parties that play a significant role in the governance of decisions made by the company to use the public funds includes stock exchanges which gets quarterly updates on the use of IPO funds, but they never get into the detailed analysis of how and where these funds are getting used. Secondly the market regulator SEBI that is ought to play a significant role in monitoring the funds, but they only investigates abnormal stock price movements and misstatements in the offer document. Thirdly the Ministry of Corporate Affairs who hold the right to investigate the use of IPO funds but the updates on this are filed by companies only once in 12-18 months, making absence of strict measures very visible in regard to usage of public funds. Merchant bankers can also play a role in taking care of the public money by checking the prospectus with due diligence but they often rely on report by auditors, solicitors and valuers. The only authority internal to the company that is meant to protect investors interest i.e. the Independent directors of the company

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as a matter of course, but may act if it comes across information that warrants an investigation. But the information to the registrar is generally reported after 12-18 months and the action by registrar due to this lag gets delayed. Also due to the vagueness of SEBI’s format for the quarterly disclosure is convenient for unscrupulous promoters. It does not require details of the company’s investments in mutual funds or securities, nor of interest on such investments. It also does not require details of inter-corporate deposits (ICDs) and money lent to friends and relatives. Promoters can park money in highrisk ICDs or siphon it off by lending to shell companies in the disguise of rupee investment in high-interest liquid instruments. In this regard taking the case of Bedmutha Industries, an iron and steel company in Nashik, Maharashtra. More than Rs 60 crore of the Rs 92 crore it raised through an IPO are in cash credit, Inter-Corporate deposits and advances to unspecified parties for purchase of assets. In their limited review, the auditors of the company gave no break-up of the advances or ICDs. In addition to changing objectives to utilize money raised through IPO or investing money in highly risky inter-corporate deposits, there have been various instances wherein company after raising funds through market completely disappeared from the scene. There are 238 companies in the ministry of corporate affairs’ list of ‘vanishing companies’ and out of that, 87 remained untraceable till March 2012. In Companies Act 2013, to protect small investors interest a new clause has been introduced which enables the investors to withdraw their money from the company in case it chooses to change its objectives for which they made a public offering. To ensure that information related to such a change reaches to investors at large, now it has become mandatory to pass a special resolution i.e. agreement from 75% of shareholders of the company to make the proposed change effective, earlier the objective could be changed through an ordinary resolution only.

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must make necessary evaluation of the decisions made by the company in regard with their various investment decisions but in reality they do not raise tough questions and may even be complicit in misuse of funds. You may come across various instances wherein independent directors left the company before a fraud took place in that company. I n a d e q u a c y in Current Regulations Due to the existing regulatory gaps in the current system of monitoring IPO proceeds, promoter gets a free hand in using funds raised though that route as there is no proper reporting system in place for binding promoters to ensure that the proceeds are being used to fulfill the right objectives. For example, after the IPO, a company is not required to update SEBI on how proceeds are being used, it only needs to file a quarterly status report with the stock exchange where it is listed. Taking an old example, four years back Pradip Overseas, which had raised Rs 116 crore from the public in March 2010 to set up a textile special economic zone (SEZ) in Gujarat and a factory in it after two years, had used just Rs 5.15 crore of some Rs 100 crore earmarked for the project. The independent director of the company in a document quoted that they have dropped the plan of establishing factory in the SEZ. The document also said the company had yet to order some Rs 57 crore worth of plant and machinery, although production was to start in January 2011. In 2012, the company blamed finance ministry for introducing the minimum alternative tax on the SEZ’s. But the lack of disclosure of material information to investors was a major concern. This is one of the many examples wherein, money raised through IPO was not being used for the stated objectives, but it had been used after a change in company objectives took place by passing the the proposal through majority shareholders which were majorly the promoters themselves. In this case Pradip Overseas changed the IPO object clause to use the proceeds as margin money for working capital after the IPO. The registrar does not monitor companies

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After considering the above mentioned examples we can clearly observe that there is a huge requirement of a monitory agency that should be established just to monitor the utilization of funds raised through public offering and report the same to investors at large at the regular interval. Now the question is would it be cost effective for companies raising money less than 500 crore to hire another set o f people to monitor utilization of funds. And how reliable this internal team would be in reporting correct information. Or what other alternatives can be adopted in order to solve this problem Suggested Corrective Actions Now to discuss what can be done in order to bring rationality in the processes to ensure that funds are being utilized for the purposes they were meant for, we can move forward with various suggestions. Firstly considering the improvements that can be made in the current system. The Finance Ministry must make it mandatory to report the use of funds by the company every quarter and the information to be disseminated by the stock exchange to all the investors at large so that they can take informed decisions regarding their investment in that company in the future. More importantly, in addition to reporting time period, SEBI must use a more stringent reporting format to ensure that promoters cannot easily play with investor’s money. Current format as mentioned above is inadequate to ensure that correct reporting about the use of public funds by the company is made to investors as it does not considers

MARCH 2014

money parked in IDR’s or mutual funds and the risk associated with those investments. An escrow account can also be used to ensure that money generated through public offering is being used for right reasons. Scope for misuse of initial public offer proceeds by the company promoters would drastically reduce if the money is kept in an escrow account and monitored by the fund utilization by a committee to be put in place as per SEBI’s proposal. Book Running L e a d Managers i.e. Merchant B a n k e r s may also be made responsible for reporting on a quarterly basis for 2 years after the IPO is made about the usage of funds by the company and in case of detection of any fraudulent reporting regarding the activities undertaken by the company, the license of the merchant banker would be directly cancelled. Independent directors can also play a significant role wherein they would be directly held responsible for approving company’s decision regarding investment of raised funds in mutual funds or IDR’s or other investment alternatives and reporting the same to investors through the sub-committee SEBI is proposing for reporting the deviation in use of funds raised through public by the company. Now talking about whether such an additional cost would be feasible for a company raising less than 500 crore or such activities can be outsourced to banks which can perform this audit job at a lower cost while serving greater number of customers. We can say that if this audit is done and reported by an internal committee then the transparency in audit process might be lower and also in long run these committees acting like independent directors may become ineffective. But if such activity is to be mandatorily undertaken by a bank then it would lead to reduced cost at the same time much more effective reporting as the banks would be a third party to reporting and their fee structure might be pre-

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decided by SEBI or finance ministry in order to ensure that no extra money or services is

companies going for an IPO with prefixed remuneration set by the government would be very cost effective for conducting the entire process both for the company and the finance ministry and it would greatly improve the investor protection system. In addition to making the banks responsible for reporting the fund usage report on a quarterly basis to investors through stock exchanges, an internal committee set up in SEBI might also review bank work through a process of surprise checks to ensure that banks are functioning with utmost care to undertake ethical reporting regarding the usage of funds. Strict monetary penalties can be levied on banks in case they are found reporting false information about the utilization of money by the companies. Hence we conclude by stating that such a monitoring system for all the IPO’s in India must be made mandatory by the regulators and the existing processes of review system must also be improved in addition to making the new reporting system mandatory for all IPO’s in India.

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given to these bankers for doing incorrect or biased reporting. SEBI like SEC in USA can also themselves take up the job of having quarterly audits in the companies raising money though IPO route. But it would be very difficult as more than 100 companies raise money through IPO annually, hence more feasible idea is to make company responsible for such reporting themselves either through a sub-committee reporting system or outsourcing the same to the banks. All these measures if taken with due diligence and taking into consideration the nitty-gritty of the process would surely improve the reporting system and would help in protection of the rights of small investors. Conclusion According to the current regulations, IPO issue above Rs.500 crores are required to report the usage of funds to the investor through stock exchange. But since 2003-04, only 45 companies have made public issues above Rs. 500 crore, the number of smaller issues is 309. The total amount raised by these 354 issues was Rs. 142,137 crore. Also considering the number of fraudulent activities taking place without a proper fund utilization reporting system in place, now the need of such a sub-committee or monitoring system that would report quarterly review of the deviation in usage of public issue proceeds with respect to the stated objectives in the prospectus is evident. Broadly mapping the end use of funds raised via IPOs may not stem the rot. The key would be the willingness to minutely study the details. For instance, if a company stated that one of the purposes to raise money was towards land and building, money could actually be used to create personal assets like buying a farmhouse/ villa, and this would still come rightfully under the header, land and buildings, and the misuse would not be noticeable. And after analyzing the current situation and

possible loopholes in the system, a new system with banks playing a pivotal role can be adopted for reviewing and reporting utilization of public offering proceeds. We can conclude that making banks responsible for the audit of

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Dividend for gains

@stock market–is it the right FinGyaan

FinGyaan

choice? Priyo Ranjan

XISS

Against the popular belief of most investors prevailing in this country with respect to the dividend policy paid by the companies, the facts and reality lies distant. While the tale of the town supports the “More the dividend, more the efficient/better is the company for investment”, the grim reality lays very different altogether. Under such cloudy shades of misconception, we need to break the barriers and understand what actually the truth is? Well, looking at the scenario let me break the fact that some of the best companies in the world do without paying dividend or rather paying very low dividends. In order to understand this phenomenon let us understand as to what the reasons behind such a dividend policy could be. Well, the dividend policy largely depends on the broad and well laid out objectives with respect to the mission and vision of the company. The path chosen by the company may vary. However, companies aim at roughly achieving the same

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end results- maximization of shareholder’s wealth. When we analyse with respect to this objective, the company’s position should stand clear. Another fact to this point of view is the company’s requirement to grow and expand. This expansion would further require capital which would be acquired by:1. Issue of fresh shares in case of which the ownership of shareholders gets diluted 2. Bank loans which require huge interests to be paid 3. A cut from the profits accumulated from the share of dividends that has been paid. This lies as the safest option as the money of the owners grows at the maximum rate under such investment circumstances. Now, the next big question lies as to how and why would the investors invest in such a company of which they don’t get dividends? How would they know that their money is growing?

Well like the saying goes “Patience shimmers while haste quivers”. The very simple fact that would convince investors that they need to look at long term prospects rather than the short term small gains. The companies would offer a much better return and be at a better position to offer them over a considerable period of time. Your money invested in business would work out/suit much better than it being invested elsewhere over a period of time as a company always has much higher scope of growing than the money being invested elsewhere. Capital gains is the term that would satisfy investors to the core of their hearts and keep the market value of the company’s shares high, a significant factor to be observed from the company’s viewpoint. The company can utilize money more efficiently than the money being invested elsewhere. These shackles of wrongly developed notions need to be broken off and people be made aware of the long term benefits of their investments in the form of capital gains over the long run. The dividend policy is not merely a tool and necessity of the companies to maintain their stand rather the companies need to clear out to their investors their long term objectives and how are they safeguarding their stockholder’s interest over the long term. To put up a practical scenario and as an eye opener let us know some of the companies which have maintained the difference: Warren Buffet’s Berksire- Hathaway is a perfect example- an active acquirer of businesses Name of Comapany Google Berkshire Hathaway Amazon.com Gilead Services E-Bay American International Yahoo Adobe Cognizant Technology

Trading As GOOG BRKB AMZN GILD EBAY AIG YHOO ADBE CTSH

that retaining cash flow is a key ingredient of success. This tells us that-“Don’t just focus on companies that don’t yet have dividends. Some companies that have the potential for robust dividend growth like the FORD (NYSE) could triple its current 40% a share dividend over the next few years without making a dent in the balance sheet.” While the day traders would eye upon that little profit that they could make out of the day’s trading, it i s to be understood that the capital market is a game of both the dividends and capital gain- the difference being that one falls right under your nose while the other needs time to grow into a gold reserve you someday discover. “Patience and dedication is the key”. The shareholder is like a long term guardian with personal interest who becomes family to the happiness or distress, the growth or ruins, the please and the pains, the turmoil and the walk-away of the firm invested in. What needs to be understood is that a good investment climate is reflected sharply by the share markets? Also, another feature is the market sentiment. Speculation is good for any market. However, too much of speculation can be worrisome and can raise doubts of stability and sustainability of the market which none of the governments or regulatory or parental bodies would want to exist. A safe market keeps the money rotating and while it is a game of the stars for many it’s a disciplined science for others. This excess Market Value (Billions) 291.9 187.3 126.1 80.7 66.8 66.9 29.3 22.1 201

Table 1: Companies That Do Not Pay Dividends

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Fig 1: Current Dividend Yields of Major Markets

speculation has also praised the dividend policies those failed and criticised some of the most successful ones at the time of their inception. Amongst all dividend policy theories proposed upon, there is none that has proved to be absolute and this reflects with the volatility of shares existing in the market. However, while the giant companies have withstood the test

Fig 2: Excess Cash Allocation Decision Tree

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of time as against their interesting dividend policies many have failed trying to follow their footsteps. Indeed it is rather difficult to predict the market reaction towards any changes in the dividend policy as itâ&#x20AC;&#x2122;s more of a short jerk and levelling out thing or it can even lead to drastic changes â&#x20AC;&#x201C;sometimes to catastrophic levels for a company. If a company which has been paying dividends suddenly resorts to change and reduces it the investors might interpret in many ways. Again the market sentiments as well as the speculations may create chaos. This in turn would thereby make the price of the shares to fall even if the company wanted to save for improving upon its business and aiming at long term benefits. In the other case round if a company paying little dividends starts paying dividends initially there would be a tear of happiness on the benefits offered and huge buy outs would occur moving the stock prices up but after some time the prices would again slowly go down. But there are chances in for a surprise in such cases too. So think and think hard before putting your bets in the stock markets as a sound peek into the nature of benefit you are looking for and the time frame you consider to achieve

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more gain” statement is nonetheless true. So, speculate and decide but do not be deceived by short term gains and miss out on the broader benefits of the capital gains over short term dividends.

FIN-Q Solutions MARCH 2014 1. .8079/.8083 2. Merrill Lynch 3. A: MCX (Multi Commodity Exchange of India Ltd.) B: Financial Technologies (India) Ltd. (FTIL) 4. a joint venture worth $825 million announced between anil ambani and steven spielberg :relaince dreams work partnership 5. Microsoft acquiring Nokia 6. Distribute prasada at Tirupati 7. Rakesh Jhunjhunwala 8. Financial Services Act 9.New York City headquarters of Lehman Brothers; Sep 15, 2008 is the date on which Lehman Brothers filed for Chapter 11 Bankruptcy Protection 10. Rahul Gandhi 11. Proposed Egypt import ban on two and three wheelers that pushed Bajaj Auto stock down 12. Arvind Kejriwal 13. Elvis Presley 14. Kaushik Basu 15.B 16. Rajya Wardhan Ghei 17. C 18. 10 March 2014

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it in, you may have to link yourself strongly to the dividend policy of the company being considered. The other factors always existing, for nothing has been able to predict these markets accurately till date. The “More risk

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Article of the Month FinPact Cover Story

$ 19 Billion Acquisition: The Story Behind Saket Hawelia & Swati Pamnani

IIM Shillong

“Our mission is to make the world more open and connected”. With the intention of “working hard” over the next few years and to “connect the whole world”, Mark Zuckerberg, the CEO of the global social networking giant Facebook announced the decision of the company to purchase Whatsapp, probably not knowing the speculation that would engulf the whole world for the next couple of days about the much astonishing $19 billion deal. While some financial experts exclaimed that it was a “stunning sum” for a company that was merely five years old, others lauded the personal victory of the

Whatsapp founders Jan Koum and Brian Action, the former employees of Yahoo! who had been turned away by both Twitter and Facebook in the past. Others still wondered, what had made Facebook take such a decision or what financial opportunities Facebook saw which the common man had completely failed to fathom. This article is an attempt to sit into the shoes of the CEO of Facebook and look at the otherwise unseen.

Fig 1: Timeline of Growth of Various Internet Based Companies

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app on a continuous basis, that too assuming that there would be no operational costs at all for the company to incur. • The second scenario may be that the app continues to be a hit among the users and as such the company may afford to retain the existing customer base while increasing the charge over above a dollar a year. At the existing user base of about 450 million, the company could possibly increase it to about $6 ($2.72 billion/450 million) a year. This scenario too is based on the premise that there would be no operational costs for Facebook. Revenues from advertisements on Whatsapp would undoubtedly provide some relief to the aforesaid figures, but the fact that the app has always followed the statement “We don’t sell ads”, it is unlikely that Facebook would take it back and start sending text ads. A quick snapshot of the financials of various internet based companies has been shown below:

Company Market Enterprise Cap ($) Value($)

EBITDA($)

Net In- No. Of EV/ EV/Revcome($) Users(Mn) User($) enue

EV/EBITDA

Facebook 173,540 160090 Twitter 20,130 18790

3930 -542

1490 -645

1230 243

130.15 77.33

20.34 28.26

40.74 NA

Netflix Yelp Zynga LinkedIn

277 2.4 74 182

112 -10 -37 27

44 120 27 277

576.82 48.25 108.52 72.13

5.81 24.85 3.36 13.06

91.62 2412.5 39.59 109.78

25,900 6,200 4,200 23,530

25380 5790 2930 19980

Table 1: Financials of Various Internet Based Companies

Market Cap

Enterprise Value

EBITDA

Net Income

Market Cap

Enterprise Value

0.9998

EBITDA

0.9709

0.9701

Net Income

0.8978

0.8971

0.9716

No. of Users (Millions)

0.9812

0.9789

0.9354

0.8453

No. of Users (Millions)

Table 2: Correlation Between Market’s Assessment of Corporate Values And a Few Significant Measures

billion users to discount the fact of users deleting the app or reinstalling the same) users using the

Furthermore, the correlation between market’s assessment of corporate values and a few

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Assuming a conservative required return on equity to be 10% and a tax rate of 30%, the required earnings to justify the deal for Facebook would be $1.9 billion (0.1 * $19 billion); the corresponding Earnings before Tax being $2.72 billion ($1.9 billion / (1-0.3)) per annum. Now, what is even more important to note here is that the figures of $2.72 billion per annum depict an incomplete picture of the financial viability of the business model for if the “break even” is to be considered, the break even number would snowball, depending on time taken to “arrive at the steady earning state” and the degree of risk that is involved in the business model. There are a number of points to consider in this regard: • If Facebook continues the existing business model of Whatsapp, i.e., allowing the users to use the app completely free of cost in the first year, and charging a dollar henceforth; the company would still need about 3 billion (a little over 2.72

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significant measure has been shown above. The various inferences that can be drawn using the correlation matrix have been enlisted below: • The number of users is one of the most important determinants of the financial health of the company as this parameter helps to explain the differences in value across the companies. This is further evident from the fact that when on 14th February, 2014, Zillow reported its earnings the stock shot up by as much as 12%, primarily backed by the news of more than expected number of new users being added on the company’s portfolio. Similarly, the stock price of Twitter took a nose dive as the news of a decreased user base surfaced. • In the online business, user engagement is crucial; in fact the value per user increases with an increase in user engagement. It goes without saying that the social media companies having users who stay on their websites for a greater duration are worth more than the otherwise “dormant” companies whose users spend lesser time. However, the comparisons across the companies on this parameter becomes difficult owing to the different degrees of engagement, the fact of the matter is that these figures do matter to the marketer. • The marketer tends to value those companies who have business models of predictable rather than diffused revenues. Many of the companies mentioned above on the list derive their revenue from advertising alone, some from both advertising and subscriptions while others still

have subscription as their source of revenue. Many are online retailers like Zynga and Netflix. In spite of the fact that the sample taken above is not large enough to draw reliable conclusions, the value per user of $576.82 associated with Netflix is sufficient to suggest that the market gives more value to predictable subscription revenues rather than uncertain advertising revenue. Taking the fundamental analysis of the “Great Deal”, Facebook seems to have acknowledged and accepted the fact that today the market will reward you only if you have a greater base of “involved users”. This forms the basis of Facebook’s acquisition of Whatsapp. Facebook is today valued as a $170 billion company with an enviable user base of 1.25 billion. This takes the valuation figures to be around $130 per user. Now, let us assume that the acquisition of Whatsapp would increase the user base of Facebook by just 160 million (considering the users who use both Facebook and Whatsapp) and the market continues to value each user at $130, there would be an increase in the value of Facebook by $20.8 billion which certainly justifies the price of $19 billion paid to acquire Whatsapp! Now, looking at the flip side, there are a number of caveats associated with this great deal. Now, that the positives have been examined, it become important to analyse each of “these dangers”. At the very onset, it may be possible that the market is very optimistic about the value of users

Fig 2: Downloads of WhatsApp Messenger vs. Facebook Messenger

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Fig 3: M&A History of Facebook

at social media companies to the extent that the value of the users are being over estimated. This implies that the entire valuation in the above case of $130 per user loses ground. However, to some extent this point has been refuted in the analysis in this case as a bulk of the acquisition price was paid by Facebook in the form of its own shares. This implies that if the argument of over valuation is true for the social media companies and a couple of years down the line, the shares of such companies experience a correction, then the fact that a significant amount of the purchase price was paid to Whatsapp in the shares, suggests that even the shares given were overpriced, counterbalancing the entire argument. Secondly, with the passage of a few more years and with the social media companies moving up the life cycle, the measure of valuation shall shift from number of users to the amount of revenues, earnings and the cash flows. With this, there would be a complete re-pricing of the social media industry with the leaders being those who have been successful in converting the users into profits. This in fact is in line with what was experienced in the case of the dot com companies; where the parameters of valuation changed from those that were having the most number of website users to those who ensured a larger stay on the respective websites to finally being the ones to generate maximum earnings from the users. The challenge for the companies today is that such transitions usually happen without the companies even realizing it. The challenge for Facebook therefore would be to start by first attracting the Whatsapp users to the

Facebook ecosystem and then proceed with the hope that the transition of the variables is not around the corner. Facebook could then use time to monetize the users, tapping advertising as an important source of revenue besides developing other models for the generation of earnings. To conclude, it would be myopic to scorn at the deal and chid Mark Zuckerberg as being overly aggressive as there is ample evidence of investors who have massively gained from their investments in social media. However, this may just be a small part of the entire story as price movements in the short term are shaped more by mood and momentum. The success mantra is believing that “the dice of the Zeus ultimately falls on those who stick to the fundamentals with patience”. The business of social media, the investment into a company of this type, the acquisitions and mergers of such companies seem to challenge the traditional rationale of the entire domain of finance. As an investor, it has become really difficult to interpret the “signals” provided by the actions of these companies. The signalling theory in finance seems to take a back seat in front of the magnanimous numbers involved; the traditional metrics of revenue, earnings before income and tax (EBIT) and risk are no more reliable measures for ascertaining and explaining the price movements. The rule of the thumb is that one should not rely on his rational instincts to determine the price movements of such companies!

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Push or Pull - Inflation and, Policy Rates prediction Jayakrishna Akurathi

IIM Ranchi

Few years ago, most of the common people might not be aware of how the policy rates are going to influence their daily purchasing power or the real value of the interest that the banks are paying to their bank balances. For that matter, most of us might not be aware of these policy rates, leave aside to state the awareness of who sets and why the policy rates are adjusted regularly. Over time, people have started showing interest in these policy decisions taken by the central bank, for which the credit goes to the media because of its relentless efforts in spreading the awareness about the policy decisions among public. Yes, I have been implicitly talking about the Monetary Policy reviews carried out by the Reserve Bank of India, twice in a quarter. It would be better to start with the objectives of the Monetary Policy at this point. The fundamental objective of the Monetary Policy framework of any country is to establish the price stability without lowering the economic growth drastically. Of course, this seems to be a contradictory statement both in practice and theory, but this is the expectation of the authorities. Policy rates will be adjusted as per the inflation prevailing in the economy at the point of time. Let us fix the scope of our discussion to India for now. The reserve bank of India increases or decreases the policy rates in case of high inflation and low inflation respectively. When we say the policy rates, we are specifically referring the repurchase rate, shortly repo rate. Repo

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rate is the rate at which the banks borrow from the RBI to meet their daily reserve requirements. In this backdrop, it is highly curious for any individual to know the basis or the factors on which the Reserve Bank of India, determines the policy rates. The primary factor to be considered is the inflation prevailing in the economy at the given point of time. Here again, the matter is not ended because there is not one inflation index, but there are two inflation indices which are Wholesale price index and the Consumer price index. WPI measures the inflation at the producer end where as CPI measures the inflation at the consumer end. Both of them have their own merits and demerits. Between these complicated alternatives, RBI has been using WPI as its basis until Urjit Patel committee has released its report recently stating that CPI should be the basis of deciding policy rates instead of WPI. In fact, most of the developed countries and to that matter, the Federal Bank of U.S.A uses the CPI in deciding its policy rates. Some advanced countries use weighted average of the CPI and WPI for arriving at a figure of inflation index. If we delve about how inflation is caused in an economy, there are broadly two reasons. One is the inflation that arises due to the increase in the input prices. These include, increase in the cost of raw materials due to resource scarcity or the seasonal effect, rise of wage rates of the labour due to the

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CPI WPI IIP Repo GDP

Apr 13 9.39 4.77 2.0 7.5 4.4

May 13 Jun 13 9.31 9.87 4.58 5.16 -1.6 -2.2 7.25 7.25

Jul 13 9.64 5.85 2.6 7.25 4.8

jumped upwards by 104 basis points which is quite worrying instance for the Reserve Bank. IIP data available at that point in time was of the month of July, which saw a growth of +2.6%. IIP growth indicates that the industrial activity has shown an increase in the July which is a positive indication that the aggregate demand may rise. However, it is not certain that aggregate demand will rise because of the sentiments and expectations of the markets. Seasonal factors are also effective in this regard. Considering that the Reserve Bank has optimistically gauged that this is a signal of pick up in the sentiments and thereby the future aggregate demand, which has been substantiated by the significant rise in the WPI data, we expect that the Reserve Bank should raise the repo rate, though not certain about by how many points. Now, consider the second hike in the policy rates from 7.5% to 7.75% which was raised on the second quarter review of monetary policy held on Oct 29. The WPI and CPI figures for the month of September were released by then and are at 7.05 and 9.84 respectively. This time, both CPI and WPI have shown an upward trend by 32 and 6 basis points respectively, where as IIP data of August which was latest then has shown a growth of +0.6%. Compared to the situation of the earlier case, now, IIP and WPI have shown a dip in their growth whereas CPI showed positive growth. Since, both the inflations have shown an uptick, it is quite natural for any Central Bank to revise the policy rates upwards. Hence, this outcome also falls on the rationale stated earlier. Now, let us consider the third and final hike in the policy rates from 7.75% to 8% which was raised on the Q3 monetary policy review held on Jan 28. The WPI and CPI figures for the month of December were released by then and, are at 6.16 and 9.87 respectively. This time, both WPI and CPI showed a downward movement of 136 and 129 basis points which appears to be a relief moment

Aug 13 9.52 6.99 0.6 7.25

Sep 13 9.84 7.05 2.0 7.5

Oct 13 10.17 7.24 -1.8 7.75 4.7

Nov 13 11.16 7.52 -2.1 7.75

Table 1: Factoring Explained

ÂŠ FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

Dec 13 9.87 6.16 -0.6 7.75

Jan 14 8.79 5.05 NA 8 NA

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less supply of the labour et al. This type of inflation arises due to supply side constraints and is termed as Cost push inflation. On the other hand, we have another source of inflation which is caused due to the increase in the aggregate demand in the economy. The rise of aggregate demand is what the government intends at all times because it leads to higher GDP growth. On the other hand, when purchasing power of consumer increases, the demand for goods & services grow at a higher rate than the production of goods & services to which inflation is incidental. This type of inflation arises from demand side and is termed as Demand Pull inflation. Based on this discussion, now let us look into the current situation in the Indian context and examine which inflation is predominant for the past few months. Let us look into the figures of the inflation, both WPI and CPI, for the months in this fiscal till January since the Ministry of Statistics and Ministry of Commerce has not released the figures for February and later months while writing this report. The following table below shows the list of CPI and WPI data. If we analyse the data presented in the above table, we see that the repo rate has been changed thrice since September quarter from 7.25% to 8% in the recent monetary policy review on Jan 28th. This is termed as contractionary monetary policy which tightens the money supply in the economy. Every decision of policy rate hike of RBI is usually driven by the inflation figures provided by the government of India. Let us verify the first hike in the policy rate, from 7.25% to 7.5% which was raised on the mid-quarter review of the monetary policy corresponding to Q2 held on Sep 20. The WPI and CPI figures for the month of August were released by then and are at 6.99% and 9.52% respectively. Though the CPI was moderated marginally by 12 basis points compared to the previous monthâ&#x20AC;&#x2122;s figure, WPI has

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for all of us, especially RBI. IIP data released for the month of November 2013 recorded a growth of -2.1%. A look at these three figures shows that the higher interest rates set by the RBI earlier have started showing positive results in terms of inflation because the money supply in the economy has come down and the industrial activity has slowed down as the private investment slashed due to high cost of borrowing. General expectations at this moment would be a marginal reduction in the policy rates or at least maintain the status quo in the worst possible case by RBI. However, Reserve bank has increased the policy rate by 25 basis points citing the priority of sustainable long term price stability and economic growth over the short term growth. Nonetheless, the reason sounds very convincing, as also the comfort levels of the inflation for RBI is 5-6 percent. Besides these three monetary policy reviews, Q3 mid-quarter review was held on Dec 18 during which the RBI maintained the status quo by keeping the policy rates unchanged at 7.75%. CPI, WPI and IIP were at 11.16%, 7.52% and -1.8% respectively where CPI increased by 99 basis points and WPI increased by 28 basis points. Contrary to the normal expectations of increase in the policy rates, RBI maintained the status quo. This gives us a signal that there are few more factors, in view of long term stability and growth, that our central bank considers beyond the inflation figures. This behaviour also shows a balanced approach taken by the Reserve bank. It is normal tendency for the people to expect for a rate cut during high inflation because it would lead to an increase in the aggregate demand and thereby hyperinflation if rates are not cut. Intuitively, this sounds reasonable because, increase in the aggregate demand is a consequence of the increase in the spending of the public and private groups which drives up the inflation further in the economy if the policy rates are not cut. But, one important factor that has to be considered at any decision point is to accurately identify the source of inflation, whether it is due to the raise in either input prices i.e., supply side or in the aggregate demand in order to address the root cause accurately. Increase in the aggregate demand is also one of the causes of the increase

MARCH 2014

in the input prices and thereby hike in the price of the final good/service. On the other hand, dip in the supply of the raw materials that are required in the production of final goods due to unfavourable weather conditions is another cause. Even in this case, what if the RBI does not act upon the policy rates thinking that the inflation is purely due to supply side constraints? One of the possibilities is that the interest rates remain constant and the private investment may go up so as the public spending on the credit payment purchases. This aggravates the aggregate demand in the economy and hence inflation rises further. So, it can be argued very convincingly that adjusting the interest rates with the inflation is the only and supreme tool in the hands of the central bank. Alongside, the data released for the CPI figures in the month of December 2013 showed a drastic increase in the prices of vegetables by about 61.60% which can be primarily attributed to the supply side issues and, the change in the food patterns of the population in the urban areas and the rising consumption patterns in the rural areas. However, the same figure for January 2014 came down to 21.91%. This shows that there will be huge fluctuations and variations in some of the components of the CPI. Hence, it is reasonably arguable to take only core inflation into consideration instead of headline inflation while deciding upon the policy rates. Core inflation eliminates the temporary price shocks caused by food and energy components in the CPI. Going forward, the next monetary policy review will be on April 1, 2014. The data for CPI, WPI for the month of February and IIP for the month of January 2014 are going to be deciding factors for the RBI to act on the policy rates. With the discussion made in this report on the past outcomes and the decisions of the RBI on policy rates, I expect those who read this article would be in a position to predict the outcome of the monetary policy review. The figures for the parameters which we have used in the analysis will be out by 15th of March. Rest assured, let us wait and watch whether the next move of the RBI is as per our prediction or not.

MS. SURBHI ARORA Associate Prof., Global School of Business & Global School of Accounting and Commerce

India cabinet has agreed to double the natural gas prices for retail and industrial consumers to help foreign investments in exploration and to change the situation of declining growth in the sector. So what would be the impact of this decision on India as a whole? Gas prices are based on the prices of international crude for LNG and other natural gases. Generally the oil and natural gas companies enter into long term contracts from whom they are importing the gas with some escalations, so if the government suddenly decides to increase the price then it would have adverse impact on the economy. Gradual increase in the prices can be absorbed by these people but a sudden increase would adversely impact the consumers who would be at the receiving end and would be the ultimate victims of this increase in prices. Obviously, it will lead to inflation in the economy. Indian energy companies would be happy as it will increase investment and would help them in attracting money in this sector. There have been allegations against RIL for reducing their gas production from KG-D6 basin to force the government to increase the gas prices. So what are your views on this? And how would this impact the oil and gas firms? Since the very beginning, this company has been under this allegation and the company overstated their reserves but the actual production was lesser. Therefore, in my personal opinion, reliance has actually manipulated their statements about their production and reserves. Last December, a parliamentary panel report hinted that RIL deliberately reduced gas production to arm-twist the government into conceding a higher gas price. In 1999, when RIL got the field under NELP, initial estimates suggested that gas production would reach about 40 MMSCMD but later it was revised to

80 MMSCMD. In March 2010, the production reached 69.4 MMSCMD and thus, these estimates seemed reasonable. But in 2010-11, the average production was 55.9 MMSCMD accounting for 35% of Indiaâ&#x20AC;&#x2122;s total consumption and 44% of the domestic output. In 2011-12, production declined to 42.7 MMSCMD and further to 26 MMSCMD in 2012-13. In last December, came down to 10 MMSCMD. The explanation given by RIL was that water and sand had entered their wells. The government wanted RIL to increase output by drilling more wells but it refused to do so and a penalty of over $1 billion disallowing cost was imposed on it. RIL sought arbitration in this regard. The parliamentary panel report on petroleum and natural gas in December 2013 stated that the committee would urge the ministry to convince the nation that the fall in production of natural gas in KG D6 block is not due to commercial consideration or price at which gas is to be sold. It also warned of the consequences of this drastic output fall as gas based power plants of around 8,000 MW were at the various stages of completion. These had not been allocated gas due to the falling production of KG D6, resulting in stranded capacity, with an investment of Rs 40,000 crore at the risk of becoming NPAs. This January, it announced it had started production of about one to two million MMSCMD from a new well in the basin. New exploration licensing policy (NELP) was conceptualized by GOI during 199798 to provide equal platform to both public and private sectors companies in exploration and production of hydrocarbons. There was a considerable amount of underbidding in NELP 9. What do you think are the reasons for this underbidding and how would the scenario change for oil and natural gas industry after introduction of NELP 10. Initially, when NELP was instituted there were a lot of foreign players coming to India through

ÂŠ FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

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Joint Ventures. But the size of the holdings was not enough to continue for very long as they were uneconomical. Another problem was that the process made ONGC responsible for sorting problems out during 1999. Other private players did not have confidence in ONGC as it was a public sector unit. So if the production did not start at the stipulated time there were huge penalties attached for non-compliance. Since the government was involved with PSU’s therefore they easily got extension in time for starting the production. This was seen as one of the major reasons that the sector was not attractive for private companies and the oil and gas sector was majorly dominated by public players. It was only after NELP 4 and NELP 5, we had the data related to the availability of oil and gas resources. NELP-X a total of 46 blocks is being offered. Of the 46 blocks on offer, 14 are in deep water, 15 in shallow water and 17 are on land. On offer are also areas that the government had reclaimed from RIL and Cairn India. The 10th round has the second highest blocks on offer and contrary to the PSCs or production sharing contracts model followed till date, the government could be following a revenue sharing model based on the Rangarajan Panel recommendations. It is likely that this will be the last round of NELP as India could move towards the Open Acreage regime (OALP), where bids can be submitted for blocks at any time following requisite procedures. A doubling of gas prices announced could recover bidder sentiment and unlock potential interest in several other reserves that were considered uneconomical at current prices. NELP X offers an integrated approach to exploration. Now, the operator will be allowed to go ahead irrespective of the fuel found – CBM, Shale gas, conventional gas or oil. Currently, companies can explore the fuel specifically mentioned in their contracts. However, the fiscal regimes are yet to be decided upon. In a major policy decision, the petroleum ministry has notified the new gas pricing formula for domestic gas, which has paved the way for the current auction of blocks. This links the price of gas at four international hubs.

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Many large corporations stated that due to profit sharing agreements, many companies were backing out. Other reason that came into the foray was high capital expenditure for companies backing out of the contract. Do you really think these reasons were valid?

MARCH 2014

Majorly companies used to follow production sharing contracts, sharing the production of the fields between the government and the company. But as per the last review of rules, government is introducing a revenue sharing system on the requests put by the exploration companies. Now once the government has agreed to revenue sharing system, companies are again requesting for a production sharing system as that system helped in bringing down the costs. The change from current profit sharing mechanism or the cost recovery model to revenue sharing contacts was suggested by a committee headed by the Prime Minister’s Economic Advisory Council Chairman, C. Rangarajan. The revenue sharing contact would not be linked to the cost incurred by the operator. This is particularly of importance in the light of the controversy involving RIL. But in a revenue sharing contract, which does not factor in the cost by the operator, is not likely to go down well with the public sector. Therefore, the cabinet ministers want to continue with the existing cost recovery model. Fluctuation in global crude prices impact Indian economy heavily. Is there any way which Indian government can adopt in order to eliminate or minimize these outside effects by stabilizing internal production? India does not have adequate oil reserves to produce oil in a volume as per demanded by consumers in India. Bombay high, which is producing crude oil have been mostly utilized, and now the crude levels are very low and it is not of high quality, so the cost of extracting the same is very high. But to sustain itself ONGC is continuing the production otherwise it would be very difficult for them to sustain. The surge in oil prices are not only due to the disequilibrium in demand in supply but speculation in commodity markets, unregulated over-the-counter (OTC) transactions and trading in paper barrels are also responsible for it. Goldman Sachs had stated in Asia Economics Analyst that a VAR (value-at-risk) analysis suggests that a $ 10 increase in oil would reduce GDP growth by 0.2 percentage point and would also affect the country’s current account deficit. But Cairn India and GAIL is performing really well in terms of extraction. They have doubled their production and have found new reserves in Rajasthan.

We have very limited internal production, thus, in future we cannot sustain lower oil and gas prices for long. Still this import would be very high unless we switch to some alternative sources like shale gas. India is rich in shale gas and if companies do not shift to using shale gas then lower prices cannot be sustained for long. India has high shale gas reserves, but due to political reasons India has not been able to fully exploit its potential in Shale gas. Some advancements have been made by Cairn in association with ONGC in Rajasthan for exploiting Shale gas resources. The shale gas policy came in November and only after that we are looking for exploiting the potential of Shale gas. Schlumberger, had carried out a comprehensive shale gas pilot project for ONGC in the Damodar Valley basin, and had made an initial gas-inplace estimate of 300-2,100 trillion cubic feet (tcf) in Indian shale gas basins. In comparison, Reliance’s KG D6 field has proven reserves of just 7-8 tcf. India, the second fastest-growing major economy in the world, now needs increased gas output to feed its new power plants. The country also expects more fertiliser plants to use gas instead of naphtha in order to reduce fertiliser subsidy. Recovering shale gas from such massive reserves may not be that easy though as land acquisition may be a major problem. How does the process of valuation of oil wells start and what financial implications it has for MNC’s involved in the project? Companies have an idea about presence of reserves at a particular place. And they generally have a target to dig at least one well per year but there are legal restrictions on the same. Also, this digging of wells involves a huge cost to be borne by the company. The value of wells is generally determined by the companies by a process of valuation and they bid for the crude rich areas as per their valuations on the same based on cash flows, discounted cash flows, NPV and IRR calculations in the detailed project report. The reporting for inflation and contingency is also taken care of in this detailed project. MNCs have to be very cautious in evaluating these oil wells. While the rise of unconventional shale gas production will increase the sense of energy security in India. Concerns about high volumes of water being used

and toxic being used for the extraction and its post-production impact on the environment, fails to classify shale gas extraction as a sustainable alternative. So what are your views on the same? India has spent recent years investing in renewable options such as wind and solar power. The country has also made considerable efforts in the past years to bring gas through pipelines from various countries such as Turkmenistan, Iran, Qatar, Bangladesh and Myanmar. However, these efforts have been undermined by persistent security and cost issues such as was the case with the much-debated Iran-Pakistan-India gas pipeline. Despite these initiatives, India has yet to give due attention to the vast shale gas resources in the country as an energy source. There are huge shale deposits in the Gangetic Plains, Assam, Gujarat, Rajasthan and many coastal areas, and with the development of new technology like horizontal drilling and sand cracking, the extraction of shale gas has become more economical than ever. Private businesses in India have realized the bright prospects of shale gas faster than the government. Reliance Industries was the first to grasp the new opportunity. ONGC in a major breakthrough, struck natural gas in its maiden well drilled to tap shale gas in West Bengal. This was the first time gas was been discovered in sedimentary shale rocks outside the US and Canada. ONGC created an exploration landmark when gas flowed out from the Barren Measure shale at a depth of around 1700 meters, in its first R&D well RNSG – 1 near Durgapur at Icchapur, West Bengal. Experts are calling the discovery of shale gas in the last decade and the new drilling techniques that come with it, a ‘natural gas revolution’. A decade ago, shale gas was considered too difficult to extract. Shale development has come very far and the extent of how much power and fuel it can provide seems out of this world. Shale gas development is proving to be the low-cost option, lower than gas from conventional resources. The downward price effects of increased North American shale gas production are already being felt in Western European spot gas markets via rising LNG trade in the Atlantic LNG. If India can produce more gas, then it can reduce its coal imports which are environmentally unfriendly, its gasoline consumption through the use of compressed natural gas, and its demand

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for LPG through piped natural gas to meet residential cooking and heating requirements, etc. Natural gas is a versatile fuel and more environmental friendly. Chinaâ&#x20AC;&#x2122;s most promising shale-bearing basins lie in Sichuan province but the shale there is nearly 6 kilometres below the ground. There are few land-based rigs that can drill that deep and that equipment does not exist in China. Fracking has been linked to small earthquakes in Canada, the US and the UK. That may present a risk in Sichuan, which was devastated by a quake in 2008. In my opinion, the water problem has been too much hyped. US has been very successful in using shale gas. Problem takes place because of the chemically treated water being used for manufacturing of shale gas but with changes in technology, we can see an improvement in future. There are also a lot of other environmental concerns which were not given any notice. One of the biggest problem is land acquisition. Due to this reason we are not able to fully exploit our shale gas resources. At a time when gas prices are low, government budgets are constrained, and yet awareness of environmental issues is rising, perhaps the shale gas revolution will start of as little more than gentle breeze!

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What should be OPEC strategy? Shall it lower down the prices that will compromise its survival or shall it keep its prices high on the apprehension that higher prices might lead to reduction in demand which would be exploited by non-OPEC producer. OPEC keeps the prices high because it is their strategy and not because of their cost of production. These companies set prices because of political reasons and itâ&#x20AC;&#x2122;s not related to the cost of production. OPEC countries have problems among themselves in deciding the oil prices. Since last three years, 2011, 2012 and 2013, there has been stability in the prices of OPEC basket averaging to $ 106 a barrel despite of all the challenges. And this price is considered fair by all standards by all countries. This oil price stability actually led to the gradual global economic recovery. However, some skeptics want OPEC to raise their oil production by 2 million barrels per day which would reduce the prices below $70 a barrel. They argue that this price will remove the shale oil from the world oil production map as it will be less

MARCH 2014

than the average cost of shale gas and this will not have a negative impact on the income of the producing countries in OPEC since the volume of sales will be high. They however ignore the fact that the pressure that this removal can induce to OPEC major countries, particularly the Gulf States. To make up this shortage if shale oil is removed, GCC countries have to invest billions of dollars to develop new fields and to increase the depletion rate of their existing fields. According to Dr. Sami Alnuaim, a Saudi writer, OPEC is however committed towards oil market stability required to protect the global economic recovery and secure the oil supplies. It also continues to implement its current strategy towards the shale oil evolution by monitoring the development of this high cost oil to further assess its potential threat in the long term. Currently shale oil is being looked at complementing the conventional oil. In the worst scenario, OPEC countries in the long run will either find new markets for its oil if the need arises or further use this spared quantity in expanding its oil integrated industry This will definitely help these countries to diversify their sources of income, improve their economies and reduce unemployment.

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FinFunda of the Month

Corporate Debt restructuring Ajita v. ranade JBIMS Mumbai Who can trigger the CDR mechanism?

Professor, I read that an engineering and construction company has undergone corporate debt restructuring (CDR) recently. What is a CDR exercise? Corporate debt restructuring, or CDR is a process in which a company’s outstanding obligations are reorganized. This process raises the company’s ability to meet these obligations. Typically, reorganization may be done in the following ways – Converting debt into equity, Increasing tenure of the loan, Reducing the rate of interest, Indexing interest to earnings. A company undergoes a CDR when it has trouble in servicing its debt or the interest installment, which may be due to reasons beyond the control of the company. Why would a lender be interested in helping a company with CDR as they may suffer losses in the process? A CDR exercise gives the lenders an opportunity to avoid being burdened with NPAs and convert them into performing assets. The lenders can liquidate the company’s assets to recover their outstanding, but the process maybe long and cumbersome and yields low returns. What are the objectives of CDR? The most important objective of CDR is to revive viable corporates and ensure safety of funds lent by banks, other financial institutions and foreign institutional investors. This promotes equitability and fair repayment to the creditors. Professor, can you name some companies which have undergone CDR? Sure. Wockhardt, Gammon India, Kingfisher airlines, Suzlon, Koutons Retail and GTL Infrastructure Ltd. are some companies that have undergone CDR. Recently in January, IVRCL, an infrastructure firm has also initiated the CDR process.

CDR Mechanism may be triggered by: • One or more of the creditors having minimum 20% share in either working capital or term finance • The concerned corporate, if supported by a bank or a financial institution having a minimum of 20% share Sir, can you describe the structure of a CDR system in India? The CDR system has a three tier structure consisting of CDR Standing Forum, CDR Empowered Group and CDR Cell : 1. CDR Standing Forum It is a representative general body of all Financial Institutions and Banks participating in CDR system comprising of Chief Executives of All-India Financial institutions and Scheduled Banks, but it excludes Regional Rural Banks, co-operative banks, and NBFCs. It is a selfempowered body that lays down policies and guidelines to be followed by the CDR Empowered Group and CDR Cell for debt restructuring. It ensures their smooth functioning and adherence to the prescribed time schedules. 2. CDR Empowered Group (EG) It comprises of ED level representatives of certain banks along with ED level representatives of the lenders. It considers the preliminary report of all cases of requests of restructuring, submitted to it by the CDR Cell and decide whether or not to approve restructuring. It also approves the final restructuring. 3. CDR Cell The CDR cell is mandated to assist the CDR Standing Forum and the EG in all their functions. All references for corporate debt restructuring are proposed to the CDR Cell. It is the responsibility of the lead institution/major stakeholder to the corporate to work out a preliminary restructuring plan in consultation with other stakeholders and submit it to the CDR Cell. This clears a lot of questions that I had. Thank you Sir for the explanation.

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CLASSROOM

Anchal Khaneja

At the outset, I would like to thank the Finance Club of 2011-13 batch for having given me a wonderful opportunity to work with such an amazing team. The journey was filled with moments that will be cherished for a long time to come. I will take back with me a lot of knowledge as well as experience that will help me thrive in today’s competitive world. Each and every individual of the team has been a source of learning for me and I would like to thank each one of them for that. Niveshak had become an inherent part of my routine at IIM Shillong and I thoroughly enjoyed my experience contributing for the magazine. The junior team is a fantastic bunch of bright minds and I am sure they will take Niveshak and the Finance club to unsurmountable heights. I wish them the very best in all their endeavours.

Anushri Bansal

My mind still holds afresh the memory of the day the results for Finance Club inductions were announced. It was indeed one of the most joyous moments for me in IIM Shillong. Being a part of the Club has given me an opportunity to work with the best minds on campus. The challenges that we came across as a team in handling the responsibility of publishing a magazine every month and brainstorming for new initiatives and competitions were a great learning experience. I’m proud to have been a part of the team which could carry forward the legacy started by our seniors. I would like to wish Finance Club 2013-15 all the best in all their future endeavors and hope to see Finance Club reaching new heights in near future. And for our readers – Stay Invested!

Gourav Sachdeva

It is customary to write this message as we move out of this wonderful experience into the real world. Having thanked each other profusely enough and knowing that we’ll be in touch from wherever we will be, I thank all our readers, participants in numerous events and our critics for they are the one who made us grow. And grown we have from pillar to post, developing new ideas and beating new challenges! My IIM Shillong experience sans the Finance Club would be anything but complete. The awe-inspiring zeal and co-ordination with which we worked will serve as a benchmark for my future assignments. I can only hope that our readers got a glimpse of it through the 28 pages (Niveshak) that we churned out every month. To my juniors whom I have tortured enough so that ours patrons out there continue to love us – Best of luck in everything you do and remember, though you are extremely talented, motivated and capable, you do have your lineage of alumni to look up to for all the support and guidance you may require at any point in this illuminating journey.

Himanshu Arora

It has been an honour to be associated with the Finance Club of IIM Shillong and share the stage with such intellectual and devoted people. Frequent meetings, never ending discussions and numerous disagreements, but with the common denomination of taking the club to greater heights, have formed a substantial part of my learning in the 2 years at IIM Shillong. The opportunities provided by the club whether it be writing for a now well-established magazine Niveshak, organizing events, interacting with many successful personalities and participating in various competitions have helped me become a more learned and experienced person. I would like to thank the Finance Club members for making my journey more fulfilling and beyond the realm of professionalism being such great friends. The junior Finance Club team, you are a group of highly talented and scintillating people and I wish you success in all your endeavours. Also, this message would never be complete without thanking our readers who have inspired us to work harder and bring out the best within us day after day.

Ishaan Mohan

Passion for finance had encouraged me to pursue MBA and Finance Club made me live this passion here at IIM Shillong. I would like to thank the Finance Club of PGP -11 which gave me an opportunity to work in such a dynamic and competitive team. The best part of it was our team meetings which on numerous occasions stretched pretty late in the night. These meetings were never quite; as most of us would surely agree but the kind of ideas and solutions out of these brainstorming sessions helped me in learning a lot from each and every one. Finance Club is one of the sweetest memories which I would be carrying along with myself from Shillong and will surely miss it. I would like to congratulate the Finance Club of PGP-13 for the wonderful work they have been doing and I hope you guys will take this club to greater heights in the future. Last but not the least, I pay my regards to all the readers of Niveshak (Brain Child of Finance Club since inception) and the participants for making the events such as FinDrishti and many more a great success. And as always Stay Invested!

Kaushal Kumar Ghai

Ever since I joined IIM Shillong I followed Niveshak and slowly grew the desire in me to be a part of the Finance Club. Being part of the Finance Club has not just helped me keep abreast of the latest happenings in the financial world but has also given me the opportunity of working with some of the best minds on campus. The long meeting hours, the discussions, the arguments and the brainstorming sessions we had taught me lessons which no book of Finance will ever teach me. Some of the new initiatives that we took, be it FinDrishti, Vishleshan, Niveshak Investment Fund (NIF) etc. were a great learning experience. I would like to wish Finance Club 2013-15 all the best in all their future endeavors and hope to see Niveshak reaching new heights in near future.

Kritika Nema

An investment in knowledge pays the best interestâ&#x20AC;&#x2122;- being a part of the Finance Club of IIM Shillong stands testimony to this quote by Benjamin Franklin. Even though I was inducted as a designer into the club, I was extremely privileged to be an integral part of a dynamic self-motivated team that focused not just on the magazine Niveshak, but committed itself to taking up several new initiatives like Celebratio, Findrishti, ICICI Direct, NIF and so on. Our regular team meetings--which I fondly term as The Merry Mayhem-- used to be relentless night long fun-filled brainstorming sessions and were nothing short of actual WarRoom discussions in the corporate world. Whether it was designing the magazine, writing & reviewing articles, conducting quizzes & case study competitions, stock picking for NIF, or interviewing the distinguished minds from the world of finance- every day has taught me something new. I wish that the junior team makes the most of this wonderful opportunity and takes the Finance Club of IIM Shillong to greater heights. As always, Stay Invested!

Neha Misra

With this I can now truly say that life has come a full circle. Words will never be enough to sum up my experiences as member of the Finance Club of IIM Shillong. Whether it has been working month after month to come out with Niveshak that was better than the previous one or performing as a team to come up with events that engage and interest finance enthusiasts across B-schools, every moment has been a great learning experience. I would like to thank each and every member of the Finance Club of PGP 2012-14 who has worked together through every situation and ensured that Finance Club is now on strong foundations. It is also a proud moment as we pass on the baton to an extremely able team of juniors forming the Finance Club of PGP 2013-15. Endeavors such as the Niveshak Investment Fund have just re-instated my faith in this team and I really wish and hope that they continue to succeed in each every venture of theirs and continue taking the Finance Club of IIM Shillong to greater heights.

Nirmit Mohan

Working for the Finance Club has been an immense learning experience. Its membership is something which I have cherished and will to do so for rest of my life. The prestigious magazine gave me the opportunity to share my thoughts on finance vertical with others and appreciate othersâ&#x20AC;&#x2122; viewpoint on the same. I would also like to thank the readers for constant feedback and criticism. The team provided enormous brain storming occasions to learn. I will never forget the intense meetings we all used to have conceptualising new activities or refurbishing the old ones. Adding new activities like Vishleshan, Celebratio, Niveshak Investment Fund (NIF), Findrishti and Academic Workshops into the Fin-Club kitty was a phenomenal experience in itself. I hope that in future also, I find the same pool of talent to work with that I got here. My best wishes to our talented juniors to continue to work with the same energy and enthusiasm that they have displayed till now.

WINNERS Article of the Month Prize - INR 1500/Siddhartha Banerjee IFMR, Chennai

FIN-Q First Prize - INR 1000/Vineet Jain TAPMI Second Prize - INR 500/Saket Hawelia IIM Shillong

ANNOUNCEMENTS ALL ARE INVITED Team Niveshak invites articles from B-Schools all across India. We are looking for original articles related to finance & economics. Students can also contribute puzzles and jokes related to finance & economics. References should be cited wherever necessary. The best article will be featured as the “Article of the Month” and would be awarded cash prize of Rs.1500/- along with a certificate. Instructions »» Please send your articles before 5th April, 2014 to niveshak.iims@gmail.com »» The subject line of the mail must be “Article for Niveshak_<Article Title>” »» Do mention your name, institute name and batch with your article »» Please ensure that the entire document has a wordcount between 1500-2000 »» Format: Microsoft WORD File, Font: - Times New Roman, Size: - 12, Line spacing: 1.5 »» Please do NOT send PDF files and kindly stick to the format »» Number of authors is limited to 2 at maximum »» Mention your e-mail id/ blog if you want the readers to contact you for further discussion »» Also certain entries which could not make the cut to the Niveshak will get figured on our Blog in the ‘Specials’ section

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