Niveshak Nov16

FROM EDITOR’S DESK Niveshak Volume IX ISSUE XI November 2016 Faculty Chairman

Prof. P. Saravanan

THE TEAM Aaron Keith Rego Abhishek Jaiswal Aditya Kumar Jain Akshay Kaushal Anand Mittal Anisha Khurana Ankit Singhal Ankur Kumar Anoop Prakash Arjun Bhargava Devansh Sheth Dhruvika Chawalla Girraj Goyal Pratibha Sapra Sankeerth Bondugula Saurabh Gupta Shreyans Jain Vinay Gundecha All images, design and artwork are copyright of IIM Shillong Finance Club ©Finance Club Indian Institute of Management Shillong

The month of November saw one of the major events of 2016, that is, the Prime Minister Narendra Modi’s ‘surgical strike’ on counterfeit notes and black money, which suddenly rendered 86% of the value of notes in circulation invalid. For the second time in last four decades, India was subjected to shock treatment of overnight demonetization of high value currency notes. Bank notes of Rs. 500 and Rs. 1000 denominations stopped being legal tender as a part of government’s bold move to combat black money. The move was followed by long, frustrating and anxious wait by people outside ATMs and banks across the country, to exchange the illicit currency notes. The cash crunch faced by the people in the last month is certain to have an adverse impact on their consumption spending, especially in rural areas, with the ensuing effect on the economy in the third quarter. Another event which was in the headlines was the victory of Republican candidate Donald Trump in the US presidential elections, defeating the formidable challenger, Hillary Clinton. The month also saw some other interesting news like the disbursement of Rs.21000 crores by NABARD to farmers to assist them in the Rabi harvest, the increase in NPAs of the state run public sector banks, and the proposed income disclosure scheme under the Income Tax Act.

On the magazine front, we have covered Airtel for our Equity Research report. Our cover story talks about the historic move by the Indian government to remove the higher denomination notes from circulation and explains the implications of the move on the Indian economy. The article of the month talks about Regtech and how it is going to be the next big thing in the financial industry. The author has thrown light on the concept, while also trying to understand the impact of the technology on the banking industry in general, and Indian banking in particular. For FinGyaan, the author talks about Artificial Intelligence and how it is transforming the Financial Services Industry in today’s world. In the FinSight section, the author has studied the upheavals going on in Indian Banking Sector and the underlying factors for them. In the newly introduced FinaFame section, we have looked at Laurence D. Fink, the founder, chairman and chief executive officer of the BlackRock. The Classroom section explains the concept of Leverage Buyout, which essentially means the acquisition of another company using borrowed capital. For FinView, we have brought the interview of Mr. Ashish Nanda, Business Head of Banking Channel at the Kotak Mahindra Group. Mr. Nanda gives his views on demonetization and how it is going to impact the Indian banking sector and what strategy should banks adopt in the current scenario. He also touched upon various other topics like rising NPAs, strengthening of dollar against rupee, as well as role of technology in today’s world.

Finally, we would like to thank our readers for their immense support and encouragement. You remain our prime motivating factor that keeps our spirits high and gives us the vigor and vitality to keep working hard. We hope you had a great month and wish you the best for the new one. Stay Invested!

Team Niveshak

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

CONTENTS Niveshak Times

04 The Month That Was

Cover Story

Equity Research

10 Bharti Airtel Ltd.

Article of the month

12 Regtech – The Next Big Thing

15 Demonetization – Demon to the Black Wizards

FinGyaan

FinView

28 Mr. Ashish Nanda - Kotak MaArtificial Intelligence - Trans- hindra Group forming the Financial Services Industry Classroom

FinaFame

23 Laurence D. Fink: CEO of the Decade!

FinSight

25 The Upheaval in Indian Banking Sector

30 Leveraged Buyout

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The Niveshak Times Team NIVESHAK

IIM Shillong Donald Trump to be the 45th President of the United States

Changes in Income Tax Act might give Black Money holders another chance to come clean:

Finally, the wait was over, when the results for the most expensive and most watched US Presidential Elections were announced on November 8, 2016. Against all the odds, projections, and opinion polls, Donald Trump became victorious in the Presidential elections. The result was unexpected for the Republican Candidate, as he did not only beat GOP (Grand Old Party i.e. Republican Party) candidates but also the formidable challenger Hillary Clinton, who was consistently in the lead in all the opinion polls. Not to mention that he was bogged down by scandals and gaffes throughout his election journey. Despite all that, he managed to position himself as an unorthodox candidate. He was successful in selling his propositions to the Americans, be it the issue of Southern Border Wall or proposing a temporary ban on Muslim immigrants.

The government has proposed yet another income disclosure scheme, which apart from bringing black money under the ambit of taxation, is also aimed at channelizing funds for the welfare of the poor. Under the proposed scheme, the declarant can declare his or her undisclosed income which would be taxed at 30% and also be subject to a penalty of 10% & a surcharge called ‘Pradhan Mantri Garib Kalyan Cess’ of 33% on the tax, all of which would total up to be roughly around 50% of the total income declared.

The elections have also restored consumer confidence in the US economy. According to The University of Michigan, the index of sentiment ascended to 93.8 from 87.2 in October. Hence, the American citizens are anticipating more investments, jobs, and growth in the near future. Interest rates may come down by 1% in the coming months In a statement coming from KV Kamath, Chief of New Development Bank (NDB), he anticipates that with a good monsoon, decrease in inflation, and the after effects of demonetization, we can expect the interest rates to further decrease by as much as 1% in the coming 3 to 6 months. Though the cash illiquidity has increased manifold in the system in the recent days, it is being cited as shortterm in nature, and the experts feel that demonetization will have salutary effects on the system in the coming months. Also with the Pradhan Mantri Garib Kalyan Yojna (PMGKY) 2016 coming out into the picture, as the unaccounted wealth is removed from the system, the rate of inflation is expected to come down further. Hence, with the combined impact of all these factors, it is expected that the rate of interest will come down by at least one percentage point in the near future.

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In addition to this, 25% of the undisclosed income would have a four-year lock-in period wherein the declarant would have to deposit the aforementioned margin of the amount under a zero-interest deposit scheme which will be called Pradhan Mantri Garib Kalyan Deposit Scheme, 2016. This part of the money deposited would be used for developmental activities such as investment in infrastructure, primary education and primary health. The bill has been tabled as a money bill, which means that it does not need the approval of the Rajya Sabha where the government is in a minority and hence, it is likely to be passed without much hindrances. The scheme is expected to be in effect till Dec 30, although there has been no formal communication yet regarding the duration.

cash crunch caused by the recent demonetization.

two successive years of scanty rainfall in the past.

The Bank plans on expanding and having a network of 1 Lakh shops across the state of Rajasthan by the end of this year itself, which perhaps seems a bit too optimistic. All of these outlets would accept digital payments via Airtel Bank, and the payments would be effected through mobile phones without charging any processing fee. Opening an account is easy, and would require only e-KYC through Aadhar Cards post which you can deposit & withdraw cash. However, borrowing would not be possible as a Payments Bank is not authorized to provide loans.

The Rs. 21,000 crore sanction would help in meeting the crop loan requirements of the farmers which would further help in the smooth flow of credit for farmers to enable them to undertake the Rabi requirements.

“Payment banks are feeders, no threat, to big banks”. - Raghuram Rajan

According to the minister of State for Finance, Santosh Kumar Gangwar, “the government has taken sector-specific measures (infrastructure, power, road textiles, steel etc.) where incidence of NPA is high,” listing the passing of legislations like the Insolvency and Bankruptcy Code (IBC), amendment of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) and the Recovery of Debt due to Banks and Financial Institutions (RDDBFI) Act aimed at improving resolution or recovery of bank loans. The minister further added that “Six new Debt Recovery Tribunals have been established for improving recovery,”. The Reserve Bank of India (RBI) has also introduced several relevant measures such as the Corporate Debt Restructuring, the Strategic Debt Restructuring scheme, the formation of the Joint Lenders Forum and Sustainable Structuring of Stressed Asset to address the issue of rising NPA’s.

NABARD disburses Rs.21000 Crore to Farmers With the upcoming winter season, the Government has allowed NABARD to disburse Rs.21000 to the farmers to assist them with the growing of Rabi crops for a prosperous harvest. The farmers faced the crisis of purchasing seeds and fertilizers with the limited amount of cash with them post demonetization. The government thereby ensured that the sweeping away off the 86% of currency did not affect the farmers adversely. The demonetization policy by the government hit the farmers badly by leaving them cash dry ahead of the sowing season. This step would have been hazardous for the growth of crops considering

State-run banks’ bad loans rise further The Gross Non-Performing Assets (NPAs) of the public-sector banks, often referred to as bad loans further rose to Rs. 6,30,323 crore as against Rs. 5,50,346 crore, in the previous quarter.

Airtel Payments Bank receives huge response amidst cash crunch: The Airtel Payments Bank - the first payments bank in India - finally went live this month, with over 10,000 customers opening up their savings account with the bank within the first two days. Surprisingly, most of these accounts have been opened up in semi-urban and rural areas. The Bank is a subsidiary of the telecom giant Bharti Airtel, and is currently offering an annual interest rate of a staggering 7.25% with an insurance of Rs.1 Lakh per account. As of now the pilot services have been rolled out only in Rajasthan across 10,000 retail Airtel outlets facilitating cashless purchases through mobile phones, adding impetus to the digital payments ecosystem in India amidst the

TheCover Month Story That Was

The MonthStory That Was Cover

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Market CoverSnapshot Story

Market Snapshot BSE

28500

3,000

DII

FII

28000

2,000

27500 1,000

BSE

27000 26500

26000

-1,000

25500 -2,000

25000

30/11/2016

29/11/2016

28/11/2016

25/11/2016

24/11/2016

23/11/2016

22/11/2016

21/11/2016

18/11/2016

17/11/2016

16/11/2016

15/11/2016

11/11/2016

10/11/2016

09/11/2016

08/11/2016

07/11/2016

04/11/2016

03/11/2016

02/11/2016

01/11/2016

24500

FII, DII Net turnover (in Rs. Crores)

BSE

-3,000

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

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

1,07,88,708 Source: www.bseindia.com

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

8.00%

INR/1 USD

Euro/1 USD

6.00%

4.00%

GBP/1 USD

68.50 72.66 60.95 85.24 48.03 JPY/1 USD

SGD/1 USD

LENDING / DEPOSIT RATES Base rate Deposit rate

9.30%-9.65% 6.50% - 7.30%

RESERVE RATIOS CRR SLR

TECK, -2.06% Smallcap, -9.23%

4.00% 20.75%

REALTY, -17.63% PSU, -0.71% POWER, 1.13% OIL&GAS, -2.86% MIDCAP, -7.23%

POLICY RATES Bank Rate Repo rate Reverse Repo rate

6.75% 6.25% 5.75%

2.00%

0.00%

% Change

Source: www.bseindia.com

-2.00%

IT, -1.81% Healthcare, -4.48% FMCG, -5.17%

METAL, 3.38%

CD, -12.75% CG, -5.87% BANKEX, -4.70% AUTO, -9.20% Sensex, -4.57%

Date as on October 31st -4.00%

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Market CoverSnapshot Story

Market Snapshot

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Equity CoverResearch Story

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Â© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

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Article of the Month Cover Story

RegTech – The Next Big Thing VaishnaviAdapa IIM Kozhikode What is Regtech?

of noncompliance have increased the risk of the banks, both large and small to be alert in these isRegtech is a new concept primarily signifying the sues. technology applied to resolve issues regarding regulation within the financial industry. It helps banks and other financial services firms to better manage Is this a problem? and understand their legal risks as well to easily adThe larger banks who maintain assets larger than here to their regulatory obligations. the economies of many countries of the world have started increasing their compliance staff by at least twice. However, there is no syndicated service ofWhy is this important? fering to get the practices of the industry under Given the crisis situations a lot of big and small fi- one tree. There is an expected need for man power nancial firms faced in the recent past either due to with high talent. JPMorgan alone has 8000 employglobal slow down or through aggression, the regu- ees working for anti-money laundering purposes lators started being more conscious with the com- alone. pliance, governance and risks. The regulators have not only taken a ‘take no prisoners’ approach, but To counter the increasing expenses because of the also increased the number and variety of regula- compliance charges, the banks started decreasing tions. There is an estimation that there are 175,000 their focus on few of their banking activities like edpages of regulations that the organizations have to ucational loans, mortgage activities and some core comply to. Taking out redundancies or the obso- banking activities. lete ones, another study estimated 120,000 pages of regulation a bank has to comply by 2020. The How will Regtech solve these issues? recent example of large banks paying billions of Though most of the banks have a separate wing dollars as fine, compulsory public announcements

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for Governance, Regulation and Compliance (GRC), they are not very effective. The main reason is that these divisions and their activities are not connected to the customer facing divisions of the bank, even when customer experience aspects significantly impact the compliance risks today. For example in a customer onboarding process, KYC regulations have to be triggered. This takes a lot of time for the legacy systems of the banks. This lag might become a reason for the money laundering and many other problems the banks are facing right now. Regtech companies come into picture by automating and simplifying the process by pursuing straight through processing. This will not only help them decrease the costs but also pace up the process. Since they act as syndicate data collectors from third parties and also the other banks in the industry, economies of scale help them in achieving their lower costs.

capital adequacy ratios and the projections of the future based on machine learning and big data analytics. Almost all the important central banks and important financial regulators in the world like FED, Australian investments and securities commission, Office of Comptroller of currency of the US, central banks of Canada, England have already started taking the help of Regtech firms in their activities.

What is the role of technology? Technology is going to play a major role here. The Regtech companies are going to use cloud for the banks to access only the data they want. They also create standardized interfaces with remote login facilities, create advanced algorithms to understand the patterns in data, both structured and unstructured so as to create reliable signs for any threats beforehand.

The figure1 broadly shows the typical features How is this going to effect the banka Regtech can offer. Though there is a low probing industry landscape in the near ability that a single firm offers all the solutions, all the firms and the ecosystem together would offer future? these services to the banks from outside the banks. Regtech is going to help the entire banking sector in the best possible way. Data can be the most important contribution of Regtech. Data can be exHelping out another set i.e., regulaplained for two different ways. One is getting imtors portant data for the banks and the other is using Few Regtech companies have grown into the field the existing data to create innovative solutions to of just helping the regulators alone in monitor- the banks. Few examples can be using artificial ining the financial service firms if they are meeting telligence and intelligent algorithms to understand the regulatory requirements. They also use the the behavior of a customer on social media sites technology to help the regulators create prede- like Facebook, twitter and quantify the probabiltermined responses by analyzing various banks’ ity of money laundering, default of loans via this © FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

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Article of the Month Cover Story

account or it might also be using or creating new third party databases which would be highly useful for any bank to follow the comply to the regulations. The Regtech companies also become an important liaison between the regulators and the financial institutions creating spaces for the banks or other financial service firms to create spaces where the firms can test their new products without regulatory requirements. Then the regulators can verify the feasibility of such products, analyze the pros and cons of such products on the banks’ health and the economy as a whole. For the end customers, this shift can affect the price of the products as these firms would not only decrease their direct costs of compliance by decreasing in time and using technology but also their indirect costs by decreasing the probability of getting fined by the regulators.

Not a rosy path all the way Like all other disruptions, these Regtechs though they bring in a lot of ease for the banks to function, there is an enough reason for the banks to be cautious. This is because the dependency on the Regtech would highly increase. The companies also would be under intense scrutiny from now on

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as they have to share some information to create a syndicate network and this information would be accessible to the regulators. Apart from that there is an issue of reliability and privacy. The Regtechs would be accessing sensitive information and also be holding higher stakes. Given that most of these firms are tech based startup firms, the reliability of making a Regtech company a partner is a big challenge and is certainly a risk involving high return.

Demonetization – Demon to the Black Wizards FinanceClub IIM Shillong

For the Indian banking I strongly believe that the Indian banks and the Indian economy has not reached such a stage that the banks need Regtech firms as a necessity now. RBI as of now has done a good job in being conservative from the beginning. The encouragement for the Regtech cannot be expected in the near future form RBI. Regtechs have somehow emerged from Fintech which is currently in its nascent stages in India through payment banks, small finance banks and the like. So, it takes time for this industry to mature and then develop a market for Regtech firms. Another reason I believe that Indian banks do not require Regtechs now is that the Indian economy is not yet prepared to use that kind of advanced technology in decision making processes as 70% of the banking is with the public sector banks which have different mottos than just running a profit making organization contrary to their foreign counterparts.

Introduction Financial Inclusion, Weeding out Unaccounted Wealth and Ending Corruption are like the holy trinity for the health and prosperity of a developing nation. In this respect Government of India is proactively taking all possible measures, starting with Financial Inclusion and now weeding out Unaccounted Wealth from the economy. Long since has the stage been set, beginning with the Jan-Dhan Yojana to bring over 255 million individuals under the banking system, the Gold Monetization Scheme as an alternative to hold physical gold, the Income Declaration Scheme meant to provide a single window for people to declare their unaccounted wealth and now, the masterstroke of demonetization. With these measures, the government aims to fight the evil of black money, combat corruption and bridge the financial gap prevalent in the country. As the saying goes, “short term pain - for the long term gain”, the government defended its move saying, for the greater good in the long term, the country and its

citizens have to bear the brunt of demonetization for a short while. Naturally there has been a lot of appreciation and criticism for the move, appreciation for taking one of the boldest move to usurp unaccounted wealth, and criticism for not consulting many experts before taking this move and for the way it has been implemented in the country. On the government’s part, it is understood that secrecy is paramount when taking such a move but it could have managed it better when it comes to disbursing the new cash across the country.

History of Demonetization and its Comparison with the Current Scenario The first question is whether the positive effect of demonetization will last? All things considered, demonetization is not another or unique thought. A few nations have attempted it before; India too demonetized twice in the past – in 1946 and in 1978. Worldwide experience has been that demonetization remained a one-time measure, and

NIVESHAK the dark economy began developing all once again once the administration disappoints its monitor. Countries in the past that have tried to regulate their currencies mostly failed. Soviet Union, Nigeria, Ghana and Myanmar are some examples of demonetization. This has been India’s experience too with the 1978 scene when the 10,000, 5,000 and 1,000 rupee notes were demonetized. Nevertheless, this time can be diverse for a few reasons. In 1978, the estimation of money demonetized was under 2 percent of what was available for use when contrasted with almost 85 percent this time round. Second, the huge advances in innovation during the most recent 40 years will encourage more compelling review trail of money, making it troublesome for hoarders to face a government. Third, the robust

taxation regime, one of whose central qualities is self-policing, ought to lessen the degree for the dark economy. At last, it will be up to the Government to keep up the vigil, place fear into individuals transgressing the law through merciless arraignment and wounding punishments and con corruption with a draconian hand.

NIVESHAK ably going to require significant investment. This could have been kept away from in arrangement ahead of time. Currently, the ATMs are giving just Rs.100 and Rs.2000 notes. If this entire exchange is done in Rs.2000 notes, then storing money will be even simpler. And this will help corruption and black money to go up. Hence if the government is willing to curb black money, then the total amount of Rs.100 notes in circulation must increase. But logistics cost for Rs.100 notes will be around 20 times more than Rs.2000 notes. The government must compromise on either of the fronts. Also, old currency exchange must be faster to limit the impact on consumption. Current motive should be to restore liquidity in the market. The motive behind demonetization can be addressed by lower value

note circulation in future. Also, impact on economy and GDP can be limited by faster and phased manner execution.

Future Economic Outlook

Analysts estimate a slowdown in the growth rate of the economy because of demonetization Implementation of process step. HDFC Bank expects India’s GDP to grow at 7.3% versus the earlier estimate of 7.8%. CARE Banks were not prepared for this by any stretch of Ratings slashed its projection for gross value addthe imagination. We can contend that the general ed (GVA) to 7.1-7.3% from 7.6%. This is a decline purpose of “surgical strike” on the black economy from the earlier estimation of 8% growth rate. Alcould have turned out badly if the choice was though many are in the wait and watch mode, it is made open. Yet, at any rate, some level of arrange- certain that demonetization will hurt the GDP at ment could have been made considering the way least in short run. that the lawful tenders being banned contribute near 86% of value. Small banks in India came up One of the interesting after-effects of demonetishort on money inside the first couple of hours. zation is that there is a huge increase in liquidity New Rs.2000 notes are good for exchange but in the banking system, but not enough demand in not for daily tender. There are 2.5 lakh ATMs in the short run, this would lead to a fall of interest the nation and adjusting them to give new ten- rates in the near future, which will make the sourcders of Rs.500 and Rs.2000 notes is unquestion- es of funds cheaper in the economy thereby pro-

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pelling investments within the country. As a result of demonetization is estimated that, out of the 14 lakh crore worth of 500 and 1000 notes, roughly 3 lakh crore of rupees are unlikely to be exchanged against the new notes, which means a reduction of the money supply by the same amount. This can be written off from the Central Banks balance sheet as a liability and will in turn help the government to pay off its foreign debt thereby reducing the country risk premium which international investors demand.

Re Genesis for the Banking Sector

is heavily cash driven is also expected to be badly affected. On the other hand, the move has turned out to be a reason to rejoice for the payment banks such as PayTm, Citrus and Mobikwik etc. A large number of users have already migrated to digital wallets, which offer the convenience of making cashless payments. Kirana Stores, Vegetable vendors and other small vendors also have started using Paytm to accept payments in the light of this move.

Effect on the Stock Market

A temporary setback for the financial services sector was observed because a significant percentage of the money is deemed unusable and the number of transactions across the broking houses has reduced. Investments in sectors like real estate, cement, steel, etc. have fallen due to a decrease in prices of the products. The purchasing power across all the sectors will only return when the This increased liquidity with the banks, coupled wealth is earned back again. Till then this decline with possible rate cuts from the RBI to boost the in purchasing power will negatively impact the weakening short term demand due to currency prices of various goods and services. The decline crunch might mean cheaper credits for the com- would be felt more for long term investment and mon people if banks decide to transfer these ben- consumption. efits to the end consumer. The lower credit rates Effect on the Infrastructure Sector might also mean that the rates offered by the banks on such deposits might go down, which in The Infrastructure and real estate sector will be turn would be detrimental to people who are pri- one of the hard-hit sectors due to the demonetization exercise since it entails high involvement marily dependent on interest income. of cash transactions and black money. However, The unexpected move by the government has also most of these practices are prevalent in the secresulted in a slowdown in businesses across inondary sales market, and thus the resale properdustries and scales. SMEs and small business, who ties market will take a bigger hit. Another segment were mainly dependent on hard cash for most of which largely sees cash payments is the luxury and their business transactions have been hit, resulthigh-end real estate. Traditionally, the legal financing in a slowdown in their business operations. ing and banking channels have only accounted for Even the sales of big FMCG players have taken a a very small part of transactions in this space. As dive, as retailers across the country are finding it sellers struggle to offload properties in this seghard to sell the products that are already on the ment to generate liquidity, the prices of luxury shelves. Companies have had to reduce their proproperties are likely to drop as much as 25-30%. duction levels, at least for the short term, which has further had negative ripple effects on various Talking about the primary market – the market for stockholders. A significant chunk of these organi- projects undertaken by reputed and credible dezations – small and big businesses alike – depend velopers – it will largely remain unaffected since on the credits extended by the bank for their the financing channels used by buyers to buy propshort-term as well as long-term financial needs. erty in this segment are legal channels like home With their operations taking a hit, their ability to loans. service the loans that they have taken might suffer, and since it is expected that things might take The Indian real estate sector, as a whole, has seen more than two quarters to get back in order, the quite a few positive changes in the last one year. risk of a rise in NPAs also hovers over the banks. The passing of RERA (Real Estate Regulation and Apart from this, the micro-finance industry, which Development Act, 2016) and the Benami Transactions Act, along with the demonetization exercise, Over 8 Lakh Crore have been deposited in the banks from 8th Nov till the end of this month. This led the RBI to increase the CRR to 100% for all the deposits made between September 16 and November 11 fortnights. This is expected to suck out 3.24 Lakh Crore of excess liquidity from the system.

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NIVESHAK will make the sector lose much of its traditional taint and move towards transparency. However, short-term agony is inevitable while looking for a long-term cure for the disease. In the long run, the Indian real estate sector will emerge stronger and healthier.

tics, FMCG have been negatively impacted. The non-durables and luxury goods markets might also get adversely affected. However, the market value of bonds is showing positive sentiment in anticipation of the fall in interest rates in the near future. Further, stock of public sector banks are moving up as they are expected to have higher deposits Data Analytics to disburse money due to their larger penetration in the rural areas, Data Analytics could be used to disburse money whereas on contrary, the stocks of the private to villages and towns whose rabi farming cycle has banks are showing reverse trends. started or is about to start. Due to the perishable nature of the seeds and crop harvested in Kharif However, all these impacts seem to be short-term season, the farmers who are ready to sell their in nature. The long term outlook of the move will harvested crops are in a hurry to sell their harvest, turn out to be positive as it is a big step in makwhich has been halted due to the non-availability ing India a cashless economy. The removal of the of cash. Money should be disbursed to those vil- parallel economy from the system may force peolages in order to facilitate the sale of those crops. ple to transact through banks, which will lead to channelizing of the unrecorded transaction into the mainstream economy and hence has potential What’s in store for the country? to boost the size of white economy figuratively. All The turn of events from 8th November, demoneti- in all, in our opinion, though the implementation zation has shown us a mixed bag of reactions from could have been better, it is a right move at a right a common man to big honchos. The stock market time considering the positive impacts outweigh has been volatile, Indian currency is depreciat- the negative impacts significantly in the long run. ing, and the sectors like automotive, steel, logis-

Artificial Intelligence - Transforming the Financial Services Industry NandanBanerjee IIM Indore (Mumbai Campus) Artificial Intelligence: Transforming the Financial Services Industry Very recently, a team at google has developed a system to demonstrate how Artificial Intelligence can build its own encryption which consequently will fuel research on encryption that becomes stronger as hackers try to crack it. AlphaGo, an AI system developed by DeepMind technologies, defeated Go’s (a Chinese board game) European Champion Fan Hui 5-0 last year which startled the entire Go community. LendingClub, a peerto-peer lending platform is using its AI algorithm to offer the risk rating and the credit worthiness on the spot. These are some very recent disruptions that’s happening across areas with Artificial Intelligence assuming the centre-stage of these futuristic developments. Recently, AI has witnessed renewed interest from both the academics and the industry. It is touted to bring a sea change across industries ranging from military and defence to humanitarian technologies. In 2015 alone, the giants of AI – Google, Microsoft and Facebook spent $8.5 billion in acquisition and research. Though conservatives claim that it would take 100 years for computers with AI to outsmart human brain but Google’s director

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of engineering Ray Kurzweil believes it could take place as early as 2029. In spite of these, the financial institutions have been slow to adopt and exploit AI as done by other technology companies. It may lead to extinction of some big institutions and at the same time provides ample opportunity for start-ups to disrupt the existing business models and build next generation of institutions. Developments in the AI domain have gathered tremendous momentum recently although AI as a field of research was developed back in 1956. The key driver behind this is the rapid expansion in the availability and the amount of data. Be it data created in various social websites, financial transactions or mobile app, it can be conveniently collected and processed. Again, there has been an exponential increase in the computer’s data processing ability (Moore’s Law) enabled by cloud computing, refinement of techniques like deep learning and other optimized learning techniques. Barriers to AI experimenting are rapidly reducing as a larger number of non-specialists have started developing AI programs. Although AI experimenting is becoming easier gradually, the greatest advantage lies with the financial services sector as it is a sector with ample specialist

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NIVESHAK skills in mathematics, data science and statistics. This is the reason AI is drastically changing models in financial services industry, be it by automating the process, by crunching numbers through big data or by interacting to humans through voice. Artificial Intelligence is affecting several areas of Financial Services with varying impact and disruptive capability. As per a global survey executed by Euromoney along with the law firm Baker & McKenzie to identify the areas of financial services can be deployed in the coming 3 years, 49% of the respondents chose Risk Assessment as the most popular application. This entails, solving internal management questions such as, whether or not to open a new branch in a new location or whether or not to give the client a new loan. The AI algorithm can easily process huge data and quantify the various risks to arrive at an analytical decision. The 2nd most popular area was Financial Research with 45% respondents endorsing it. The AI algorithms can now read the annual reports, company filings, management news interviews etc. and process them quantitatively. The key here is AI’s ability to process contextual information which was previously assumed to be human specific capability. Next in importance identified were portfolio management and trading with 37% and 33% respondents voting for it. The argument here is that it is very difficult for a human brain to figure out how the stock market is moving. Also, due to its direct correlation with the income, the managers are optimistic to use AI in this area. Although, till date, on 1.0 generation

of Robo-advisers are introduced which are amateur and less reliable, the next generation are believed to be significantly superior in giving refined solutions. At the tail end was AI systems use at sales and customer service which was agreed by only 14% respondents. This area includes customized offerings to customers as per their requirement. For example, someone with healthy lifestyle (doing regular exercises) would be charged lesser

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life insurance premiums compared with someone who does not, and to verify, the actual data can be easily tracked using various devices. AI is actively pursued by plenty of start-ups and other companies to provide superior services to the stakeholders. In the payments space, DBS bank in India launched its app “Digibank” which contains AI and natural language recognition driving its virtual assistant application. In the insurance sector, services like MyDrive & Metromile are coming up with “pay per use” options which will be backed by its IoT and Big Data & Analytics, bringing new insight into insurance risk. In the deposit and lending sector, firms like Kreditech offers credit score for applicants with no/very low credit history through data collected from its applicant’s smart phone. In the capital raising sector as well firms like Seedrs and Crowdcube are using AI to identify needs and understand the content and thereby serve the customers. In the Investment management field, start-ups like Frontier Solutions is trying to spot good investment opportunities in undervalued stocks through its AI system scanning through company’s financial statements. AI is thus becoming more and more relevant in the banking area and other financial services. Also, the big shots in this sector are unable to invest meaningfully due to their legacy systems leaving them the option of scouting the booming start-ups.

respond compared to the small and medium scale industry which can operate from lean infrastructure and thrive on the big corporations willing to outsource their activities.

to this, there has been more focus towards multidisciplinary teams. The last major obstacle is lack of senior management/Board Buy-in. The same is a result of low returns emanating from past investments into this

The major obstacles being faced in implementing AI systems has also been captured by the survey done by Euromoney along with the law firm Baker & McKenzie. The biggest of them being the cost, which is significantly high due to the reason that the human capital requirement consists of skill from both technology and industry. The requirement of huge data volumes and processing ability also compounds the cost. Another significant obstacle is the specialist skill to maintain and operate the technology. Even though companies are willing to recruit the talent pool, it is rare. It is very difficult to get the requisite hybrid knowledge. Due

field. Rather than actively pursuing AI, the companies are following a wait and watch strategy of poaching start-ups excelling in the field.

The disruptions that these start-ups bring are not only changing the internal structure of the financial institu-

As a result of AI systems there are some major concerns, with mass unemployment being the primary one. With more and more services going digital, there is lesser need to operate labor intensive physical branches to cater to the customers. In some conventional services, the reductions have been 90%-100% as they can be easily automated with high reliability along with producing significant cost reductions for the company. So,

tions, but the structure of the entire industry. A survey conducted by Euromoney Thought Leadership found that 56% of the executives believe that AI will bring in the table more small and medium sized participants. Whereas only 8% of the experts were of the opinion that the same industry structure will sustain itself. Clearly, the reason behind such an opinion is that big corporations with legacy IT systems will be slow to

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NIVESHAK

NIVESHAK the jobs with critical decision making requirements will become dearer whereas middle and low level employees catering to daily routine activities would be replaced by intelligent solutions. Another major concern is that most of the AI coders are male. As pointed out by Melinda gates “There is no way a “sea of dudes” will know how to appeal to female consumers in coding no matter how long they work at it. It’s appropriate to have diversity in artificial intelligence.” Another issue arises when increasing computation speed and power combines with erroneous utility or objective function. The system can make errors at tremendously high speeds and thus result in irrecuperable losses. The same happened with Knight Capital losing $440 million while trading due to a programming error (4). These cases will give rise to very high corporate liability risks. The data being fed to the AI system can also have the coder’s biases which makes the system learn biases and give incorrect decisions. Not to ignore the cyber terror and crime which could thrive through these systems. For example, a politician taking his daily medication through the automated medicine dispenser can be tampered to change the content and be exterminated remotely. There is very low partnership with the regulators and the jurists while preparing these AI systems. This is due to the perception that they are under-resourced in talent and capital compared to the financial institutions. But, to have a constructive ecosystem with proper checks against rogue elements, any anticipatory

regulations must be dealt away with. Instead, the regulators themselves should make investments to be up to date with the technology and be able to bring sound regulations. Elon Musk himself spoke about reservations about AI as he believes that erroneous programs may result in futuristic AI equipped machines taking control of human race in the coming days. But most of the researchers and industrialists claim that the good outweighs the bad. Be it reducing the number of road accidents through driverless cars or be it intelligent post operation mobility and smart autonomous home medication management, there is a lot that can be made convenient and reliable by this. In the financial services industry, there have been some instances of operational errors in the past resulting in losses but there can be learning out of these mistakes to build better checks in future programs. The convenience AI brings to a consumer who can now open a bank account sitting at the home through interactive KYC check or the transparency it brings to the banking industry by objective analysis of data and coming out with credit worthiness of the client promises much more compared to the sporadic red flags raised in some areas. With better multidisciplinary teams with the right mix of technology person, industry expert, jurist and regulator personnel, there will surely be creation of systems that will be a boon to humanity and ignite the next sea change in way things are done by human being.

Laurence D. Fink: CEO of the Decade! ArjunBhargava IIM Shillong

NOVEMBER 2016

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Introduction

Initial Days of Larry Fink

The Founder, Chairman and Chief Executive Officer of the BlackRock, Laurence D. Fink also heads the company’s Global Executive Committee. It so happened that Larry Fink and seven other partners founded the BlackRock in 1988 and it is due to his leadership skills that the company has elevated into becoming the leader in investment banking, risk management and advisory services across the globe. The BlackRock today manages more money than any other investment firm anywhere around the world. This can be credited to the financial acumen, unflagging spirit, tenacious hard-work and the effective leadership of Mr. Fink and his employees at the BlackRock. It is for reasons such as this that Mr. Larry Fink was named as one of the “World’s Most Respected Leaders” in the business world by the Fortune Magazine in the year 2016. He was also named as the “CEO of the Decade” by the Financial News in 2011 and the “World’s Best CEO” by Barron’s for 10 consecutive years.

Mr. Laurence D. Fink grew up in a Jewish family in California. Mr. Finks’ mother was an English Professor and his father owned a shoe store. Mr. Fink pursued a degree in BA in political science from the University of California, Los Angeles, in 1974. He earned his MBA degree from the UCLA Anderson Graduate school of Management in 1976.

Career – Stepping into and Dominating the World of Finance Mr. Fink started his career in an Investment Bank based out of New York, known as the Boston First in 1976. Assuming charge of the bond department of First Boston, Larry Fink’s contribution was instrumental in the creation and development of the mortgage-backed security market in the United States. Member of the management committee at First Boston, Fink was also a Managing Director and Co-Head of the taxable fixed income division. This department had the responsibility of trading and the distribution of all the Government, Mortgage and Corporate Securities. He was

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NIVESHAK the sole authority in starting the Financial Futures tory of the BlackRock organization. Laurence and Options Department while also heading the D. Fink ushered the merger with Merrill Lynch Mortgage and the Real Estate Products Group. Investment Managers which saw a great appreciation in the BlackRock’s asset manageOwing to all these activities Mr. Fink was an as- ment portfolio. BlackRock also made a historiset to the Boston First company and the addi- cal deal of purchasing Stuyvesant Town–Peter tion provided by him to the bottom line of First Cooper Village, a Manhattan housing complex, Boston was as much as 1 Billion Dollars. His glo- for 5.4 Billion Dollars in the same year. This deal rious stint at the bank was unblemished until became the largest deal in the residential-real1986 wherein he wrongly predicted the course estate sector in the history of the United States. of the interest rates in the coming future which led to a loss of a 100 million dollars to the com- The crisis of 2008 happened and Governpany. This proved to be a turning moment in his ment of the United States entrusted Blackcareer since it was because of this experience Rock to help with the cleaning up of the finanthat Mr. Fink thought of starting a company that cial meltdown. The BlackRock was considered would be investing the money of the clients but to be the best company in order to lead the involving a comprehensive analysis of Risk man- clean-up job post the financial crisis of 2008. agement as well in order to minimize the risk of leading the investment into a bad investment. In 2009, BlackRock became the largest money management firm on the planet, 22 years post its inception. The history was scripted with the purchase of the Barclays Global Investors. Larry Fink maintains a quiet and a calm demeanor and is not known for exerting or exercising influence despite having a great deal of it within the Industry.

“ One of the key elements of human behavior is, humans have a greater fear of loss than enjoyment of success. All the academic studies will show you that the fear of loss of capital is far greater than the enjoyment of gains. “

Larry Fink was paid 23.6 million dollars by the BlackRock foundation in 2010. By 2016, BlackRock comprised of 12000 employees across 27 countries and had 5 trillion dollars under its management.

“Presently, Mr. Fink holds the position of the member of the Board of Trustees of the New York University and the Co-Chairman of the NYU Langone Medical Center Board of Trustees. He also serves on the Boards of the Museum of Modern Art (MoMA), the Council on Foreign Relations Thus, BlackRock was founded in 1988 under the and Robin Hood, the poverty-fighting charitable BlackStone Group. Laurence D. Fink became the Di- organization. He is also an Executive Commitrector and CEO of BlackRock. Through the split from tee member of The Partnership for New York the BlackStone group and gaining even more inde- City, the economic development organization. pendence till 1998, Mr. Fink maintained his position of the Chairman and the CEO of the BlackRock. Also, recently, Mr. Fink had sent a letter to the He held a plethora of positions within the company CEO’s of the companies featuring on the S&P 500 such as the Chairman of the Executive and Lead- and the large corporations in the Europe as well. ership Committees, Co-Chair of the Global Client The letter concentrates on the short term investCommittee and the Chair of the Corporate Council. ments both in the US and the Europe and also talks about the short termism with respect to politics Fink was gaining publicity in the corporate struc- as well. It asks the Corporates from both the geoture, media and government alike. BlackRock graphical destinations to plan well for the future. decided and went public in 1999. Owing to his reputation, Mr. Fink helped in the negotiation Apart from being a member on the various boards and thereby the resignation of the CEO of the of trustees and doing for the community, Larry Fink New York Stock Exchange, Richard Grasso in also founded the Lori and Laurence Fink Centre for 2003, as he was receiving a lot of flak with re- Finance and Investment at UCLA Anderson in 2009 spect to the remuneration being drawn by him. and currently serves as the Chairman of the Board. The year 2006 was a marquee period in the his-

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The Upheaval in Indian Banking Sector SaurabhGoyal IIM RAIPUR fessional banking culture; and Second, technological and structural changes in the econOccasionally some particular sectors of economy omy. And though present health of banks is see a cyclical downturn; Steel sector presently in In- beset with risks, steps taken by RBI and Govdia, for instance. Economy can take these sectorial ernment give reasons for cautious optimism. downturns into its strides. But when banking sector collapses, it takes down whole economy with itself. A Present rooted in Past Global financial crisis of 2008, which originated Broadly there are three momentous cusps in IBS. from US Banks, is a prime example. So if you were First, in 1970s, we nationalized banks to pursue to gauge the health of an economy, just look at the the socialist economic agenda set by the then financial health of its banking sector. It is against Indira Gandhi government. Second, as part of this critical backdrop that we have to evaluate up1991 economic reforms, we acted on Narasimheavals going on in Indian Banking sector (IBS). ham committee report on banking sector. We For analytical convenience, the essay is further deregulated the sector through new licenses, divided into three parts. First, it traces the larger lowering of SLR and CRR and grant of autonomy policy trends and fit them into public-policy his- to Public sector Banks (PSBs). And finally, there tory of Indian Banking. Secondly, it discusses is the present moment. It is consistent with the upheavals caused by challenges and risks our liberalization policy followed since 1991. looming over Indian Banking. And finally, it disRecently, RBI has granted 23 new licenses - 2 unicusses the policy and regulatory steps taken versal, 11 payments and 10 licenses for small fiby the government to reform banking in India. nance banks. The niche banks - small finance and The key argument of the essay is that the pres- payments banks -are to pursue the objective of ent upheavals in IBS are due to two things. First, deepening financial inclusion. Similarly RBI and larger slowdown in economy and an unpro- government have come up with innovative poliIntroduction:

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Like most reforms in India, these banking reforms too are product not of choice but of necessity. We patted ourselves on backs that our banks withstood the global financial crisis when most global banks were going bust. However, as it turns out, our banks were simply on a lending spree which had little professional rationale. The risks and challenges mounted. And then came the moment of reckoning. The Day of reckoning RBI, under the leadership of Dr. Raghuram Rajan, has been fixated on fixing IBS. This unrelenting focus (much to chagrin of corporate sector) has

in oil prices, their margins are shrinking and the business is nor more as profitable as it was. So the companies who made investment are suffering. Second, Indian PSBs have not adopted competitive and professional managerial principles. Political meddling in appointments and lending decisions lead to inefficiency. And that reflects in poor financial results. If not for the recapitalization by government many of our PSBs would be financially unviable by now. Finally, a range of challenges lie ahead. Basel-3 norm compliance by March 2019 is going to be a huge task. Given the stressed books of banks the strict capital adequacy norms seem too high to mount. Dealing with competition from new age

Under this a newly constituted Bank Board Bureau (BBB), under the chairmanship of Mr. Vinod Rai, is mandated for appointment to top Banking jobs in PSBs. Similarly constitution of Monetary Policy Committee ushers in a broad-based and institutional way of monetary policy making. This institutional innovation will make the RBI-Finance ministry relationship on monetary policy less fractious. And the defined inflation range of 2% to 4% will give a clear purpose to MPC. It will also infuse predictability in Indian money markets. And that bodes well for long term investments. Two, SBI and its 5 sister banks are going to be consolidated to create a large bank comparable to global banks. Three, RBI has launched many schemes to enable banks to deal with NPAs. Corporate Debt Restructuring, Join Lender Forum, 5/25 scheme, and Scheme for Sustainable Restructuring of Stressed Assets are few examples. Add to this mix the newly passed Bankruptcy law, and we get a credible recovery policy tools for banks. Four, launch of the unified payment interface (UPI) by the National Payments Corporation of India is a momentous step towards a cashless economy. And cashless economy is inherently more efficient. E-transaction leaves a

trail which is easier to track than physical transfers. That will make taxation more efficient and black money hoarding much more difficult. Fifth, more than 20 Crore bank accounts opened under PM Jan Dhan Yojna are potentially single biggest opportunity for our Banks. Once subsidies and payments are routed through these accounts, it will create banking on the scale hitherto unknown in India. And Indian Post Banks will take formal banking to the last mile in India. And finally, many traditional banks are taking brave steps to keep up with the times. For example, Yes Bank, has partnered with FreeCharge and MasterCard to launch FreeCharge Go, a virtual card that allows users to pay for both online and offline goods and services. Conclusion Upheavals can be caused by both positive and negative trends. Presently we are witnessing both in Indian Banking. On one hand, sins of past are haunting our PSBs. On the other, new opportunities await them. A Brave New World beckons. We hope our banks will rise up to the occasion.

As % of Total oytstanding assets of PSBs Fintech start-ups is a future-defining challenge for Banks. Crypto-currencies like Bitcoin have They say that the day of reckoning can be the potential to turn entire banking landscape postponed but not avoided. Same happened up-side down. And finally, spill-over effects of a with Indian Banks. A range of challenges presently fragile global economy pose risks going and risks have surfaced in recent few years. forward. One instance of this is how significantly First and foremost is the rising NPAs of PSBs. Fed’s monetary policy impacts Indian economy. Foreign Institutional Investors (FIIs) leave the IBS is crippled due to ‘Double- Balance Sheet country at the drop of hat. And that exposes stress’ Problem. That is, stress from companies banks to a volatile situation as many of the projin sectors in downturn (Power, Steel, Textile for ects that they finance are also co-financed by FIIs. instance) gets transferred to balance sheet of banks which lend them. Many of these compa- Building a Brave New Banking Sector nies made investment on the assumptions that Indian Government and RBI have collectively takturned out to be wrong. And now their cash flows en a range of steps for risk-mitigation and capacare not in tune with their expectations. For ex- ity building in IBS. One, Government has launched ample, take oil exploration domain. Due to fall ‘Mission Indradhanush’ to professionalize PSBs. caused huge, long overdue, upheavals in PSBs.

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FinSight

cies to enable banks to deal with stressed assets. The essay will discuss them in detail in third part.

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Mr. AshishNanda

BUSINESS HEAD, BANKING CHANNEL, KOTAK MAHINDRA GROUP Mr. Ashish Nanda is the Executive Vice President and Business Head for PCG and Alternative Channels at Kotak Securities.Previously he has served as Assistant Finance Manager at Anand Group. Mr. Nanda provides highly strategic and tactical leadership within areas of plannng, product design, new business, sales and marketing and P&L performance function. He is a qualified Chartered Accountant, graduated from Delhi University with BCom Honors and Post graduated from Indian Institute of Management Ahemdabad.

What is your take on demonetization? Given the problems people are facing do you, since you have been working on the retail end of banking, think government could have executed it in a better fashion?

etc. The volume of transactions has gone up significantly. Overall, a cashless economy is a much better thing to have. Of course, digitization will change the dynamics in the next 3 to 5 years. Traditional banks has to get their game plan right due to a serious threat from payment banks. Airtel Talking of people’s perspec- launched its payment bank in Rajasthan recently In a candid tive, I would divide the clien- which is going to be a paperless bank; this is gointerview with tele into two parts-retail and ing to change the way banking sector functions. Team NiveHNI. On both these sides it is considered a great move. What do you think should be the strategy adshak, Mr NanDue to improper execution opted by traditional banks? What role do you see da shares his and no cash in hand small payment banks playing in this, and do the legacy views about businessmen are facing is- banks stand a chance of losing their customers to sues since the past 25 days. them completely? Should they tie up with a paythe on-going My view is once the gap be- ment bank or launch their own new platform? Demonetizatween the 2000 rupee notes tion and its and 100 rupee notes gets Very difficult to tell how things will function ten repercussions. bridged economy will start years from now and which strategy will work. Stratpicking up. Yes, it could have egy of PayTM seems to be doing fine and Airtel He also presbeen executed slightly bet- coming up with its bank looks like a good prospecents his views ter. There was not enough tive strategy as well. However, I think banking will about the fucurrency supplied when they be based on segmentation. It will be divided into went public; they could have banks that cater to top end spread out clients, the ture of Indian had a larger stock of curren- masses, retail and the lower sections. One strateconomy cy in hand. They could have egy will not fit all. Personally, tying up with paypaid more attention to the ment banks will not work for most of the banks. smaller intricacies of the com- They need to form a strategy based on the usage mon man. For example, they allowed hospitals of technology, the kind of clients that they have, and chemists to use the old notes and later al- etc. Coming up with IT based solutions for their lowed payment of utility bills with the same. They clients can be a good strategy. Kotak footfalls into could have implemented and executed more such the banks are significantly lower these days. Most plans from the very beginning. However, most of of the transactions happen on mobile phones and the clients at Kotak are happy with the move and on the digital space. Payment banks will become in the long run it is going to benefit the people. large and setup their own banks. Tying up with payment banks may reduce their “market share”. While the penetration of debit and credit cards is still very low in India, there is a hard push Due to the twin balance sheet problems, the isfor digital banking, do you think it has come sue of rising NPAs continues to haunt the banking at right time? Is it a threat to the large banks? sector in India, and RBI is working tooth and nail to fight it from its roots. What measures from the This move has come as a big positive for non- banks do you think will put an end to this issue? cash transactions for payment banks, credit cards, Demonetization has helped banks increased

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footfalls while it is digitization that has led to increase in NPAs. On the retail side, though the last 20 days have been a bit tough. The 500 and 1000 rupee notes need to come out in large numbers that will stabilize the economy and not aggravate these twin balance sheet problems. This quarter and the last quarter of the financial year is going to be a bit of a lag; 2018 will be better. Huge gain for economy in the market and hopefully, this issue of NPAs will reduce to a negligible extent. Sir the dollar is strengthening against the rupee with a record low of 68.86 with Donald Trump coming up with challenging policies. However people still think that the rupee is overvalued against a basket of currencies? How bad is it for the rupee and how good is it for the economy?

tion story, which can be a positive driver and due to its population and hard-working middle class section it is well placed to get over this compared to the other economies, just like how it did in 2008. Government will bring the economic push and after the budget next year, the economy will do significantly well. Globally, Indian currency has been the strongest and the correction was due for some time. Difficult to predict the exact number and RBI has set a strong base in the past one year which will strengthen it further You have started your career as a CA and came this far to head the banking channel of the Kotak Mahindra group, please throw some light on how your career path has been?

With technology taking centre stage and rise India is a part of the global economy and world in the digital space keep up to date on techover economic changes affect the Indian economy nology and knowledge. Think out of the box as well. Donald trump is a businessman and will and bring changes with innovation and creativnot come up with policies that affect business in ity. Keep working hard and the world will be a major manner. India has a very large consump- yours. That will be my small piece of advice.

He Speaketh Fin View Cover Story

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Classroom Cover Story

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CLASSROOM FinFunda of the Month

Leveraged Buyout

WINNER

Saurabh Gupta IIM Shillong

Artical of the Month Prize - INR 1500/Vaishnavi Adapa IIMK

Sir, in recent years the term Leverage buyout or LBO has become a buzz word in financial industry. All I know, the leverage in financial term is that it is used for borrowed capital for an investment that magnifies profits or losses. What is the Leverage Buyout? A Leverage buyout is an acquisition of firm with the help of a large amount of debt, which is often collateralized with the assets of the company being acquired. A financial buyer, say a Private Equity funds invests a small amount of equity as compared to total purchase price and uses debt to fund the rest of the company. LBOs involve institutional investors and financial sponsors who make large acquisitions, without committing all the capital required for the acquisition. A special case of leveraged buyout is Management buyout (MBO), where the company’s management team converts

the return to the private equity investors and 2) The benefit of tax shield can result in higher valuations Sir, does leveraged buyout happens in India? If yes, can you give some examples? Yes, leveraged buyout happened in past. Some of the successful LBO by Indian companies are: Tetley acquired by Tata Tea, Whyte and Mackay by UB Group, Corus by Tata Steel, and Hansen Transmissions by Suzlon Energy. Sir, this means it is a very popular way of acquiring companies in India. No. There have been many stringent laws and regulations implemented by various organizations such as RBI, Ministry of Finance etc., such as Reserve Bank’s restriction on lending, Restriction on Exit through Public listing, LBO is not seen as a

the company to a privately held company by using heavy borrowing to purchase the outstanding shares. The basic LBO process is described in diagram Sir, what are the advantages of LBO? The LBO has majorly 2 advantages: 1) Increase use of leverage increases

feasible option for investors. Also underdeveloped Debt market is a big constraint in India.

NOVEMBER 2016

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 15th December, 2016 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 fig »» ured on our Blog in the ‘Specials’ section

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