Niveshak Sept16

Niveshak

THE INVESTOR

VOLUME IX ISSUE IX

September2016

The Telecom War in India

How Jio will affect the market

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

Prof. P. Saravanan

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

Dear Niveshak The month of September saw the benchmark Sensex falling 557 points or 1.96% from the start of the month. The month did not see any major economic events or policy announcements by the government. The most talked about topic this month was the new RBI governor who would replace Dr. Raghuram Rajan.

This month also the news came that the country’s GDP grew by 7.1% in the first quarter of this fiscal year. This reaffirmed the India’s position as the fastest growing major-economy in the world. Also on the governance front, there was some good news. Our Babu-led bureaucracy has finally energised themselves and has started competing among themselves to get the status best performing states. Many states have also hired big consulting firms to help them understand the process of evaluation and find ways to improve their rankings. On policy-front the government is taking its initiative further and is giving major boost to the Unified Payment Interface (UPI). There was also one initiative that could be the first of the million steps needed to revive the financially-drain Indian Railways (IR). The IR has started the dynamic surge-pricing for ticket booking for some of its premium trains.

On magazine front, this month we have covered HUL for our Equity Research Report. HUL being a behemoth FMCG company provides a wide view of the Indian rural sector economy also. Article of the month talks about talks about the Unified Payment Interface (UPI). The author talks about why how the UPI is different from Payment Wallet system and who it is another step to make a cashless society. Our cover story talks about the Telecom battle which has started with the launch of Jio at rock-bottom price. On the FinGyaan, the author gives views on the GST and how it could help in removing the parallel economy running in the country. FinRewind section talks about the WorldCom Scandal in the year 2002. While for FinSight we have a topic on the robust BRICS economy. The author illustrates how these five nations could be the engine of growth for the world economy. On Classroom this time we are explain the concept on Margin Trading.

For FinView, this time we have brought the interview of Mr. Tapan Singhel, MD & CEO of Bajaj Allianz. He gives his views on investment philosophy, how we can convert the insurance industry into a pull-based selling model and how IoT can add value to the Insurance industry.

Finally, 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 vigour and vitality to keep working hard. We hope you had a great financial year and wish you the best for the new one.

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 Equity Research Report

10 HUL

Article of the month

16 Telecom Data War

12 Unified Payment Interface and Its Impact on Payment

FinGyaan 20

GST Impetus for Indian Economy

Finsight

28 BRICS - The Fuel to the World’s growth Engine

FinRewind

24 WorldCom Scandal, 2002

FINVIEW

30 Mr. Tapan Singhel, MD & CEO

of Bajaj Allianz

CLASSROOM

33 Margin Trading

The Month That Was

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The Niveshak Times Team NIVESHAK

IIM Shillong GDP grew by 7.1% in Q1 Indian economy grew by 7.1% in the first quarter of this fiscal. Though this reaffirms the India’s positions as the fastest major economies in the world, the growth is below expectations. This also diminishes the hope of achieving 8% growth for the whole year. Also this growth is also slow than the 7.9% growth achieved in the Q4 of FY16.

These ranking are updated continually. As soon any reform or initiative has been verified by the concerned department, the same is fed into the dashboard. This is done on a real time basis.

To understand the process and to improve their rankings, states have hired top-notch consultants.

The consulting firms would also help these states on how they could improve their ranking.

Indian economy needs to grew by 8% consistently if it needs to create job, reduce poverty and uplift the life of people. This slow growth might also put some pressure on the central bank to cut interest rate in the monetary policy meeting on October 4th. But that hope is also tied to the inflationary pressure in the economy.

There have been some disagreements about the method. While some states have questioned the process of evaluation, DIPP has also raised question about the reforms initiated by some states contemplating whether these reforms should qualify for consideration in the evaluation process or not.

The April – July fiscal deficit was registered at 73.7% of the whole year’s budget which is slightly above than the last year’s figure of 69.3%.

Moves to Revive Construction Sector

Sony to Acquire Ten Sports Sony Pictures Network Limited (SPN) will buy Ten Sports for INR 2600 crore from Zee Entertainment Enterprise (ZEE). This would add muscle to the already large portfolio of SPN. SPN currently owns channels like Sony Six, Sony Six HD, Sony ESPN and Sony ESPN HD. By acquiring Ten Sports it will add channels like Ten 1, Ten 2, ten 3 etc.

ZEE had also acquired Ten Sports from Dubaibased Abdul Rahman Bukhatir’s Taj Group for INR 500 crore.

Adding Ten Sports channels to its portfolio to its already diversified channels will make SPN’s portfolio quite strong. Also SPN holds broadcasting right to the Indian Premier League (IPL). The biggest advantage would come from channels like WWE (World Wrestling Entertainment).

States Competing to Get the Best Ranking Competition would even get the babu-culture moving was little unexpected. But that has actually happened among the states.

Indian states are competing among themselves to get the best ranking among themselves.

MAY 2016

In a major step to boost the economy and take it to the path of growth trajectory, government has taken slew of measures that will boost the construction sector. As this sector is linked to the heavy-metals industries, revival in construction sector would have direct effect on the improvement in other sectors.

Specifically, the government has taken steps to improve the process of release of funds stuck in the arbitration process. As per the data release government agencies, pending claims from government bodies are the major reason for the burgeoning debt in the construction sector. These pending claims account for about 150% of the total debt.

The government has also given approval to the 100% FDI in the food sector.

Under the steps taken by the government, the government would pay around 75% of the claim amount to an escrow account. For faster settlement the disputes would also be transferred to a new arbitration process.

Push for Financial Inclusion: UPI to Get Major Boost In a major push for the financial inclusion that would help sort the last mile connectivity problem, the government has given major push to the

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NIVESHAK

Unified Payments Interface (UPI). UPI could rope in as many as 1015 ecommerce players.

The concept of UPI is almost same as that of the mobile wallet system Paytm. But there is a slight difference. While payment apps like Paytm does not require one to have bank accounts, UPI system would work with bank account. However the other functionalities and workings are almost same.

This would act both as advantage as well disadvantage. While advantage would be in the form of people would be opening bank accounts and thus financial inclusion while this same advantage couls be its biggest stumbling block since a large section of people still do not have proper documents to open bank accounts.

1.5 times the base price. This would be done only on the base fare. Other charges like reservation charges, IRCTC charges etc. would be levied in addition to the above hiked charges.

Railways officials said that this would help Indian Railways mop up around INR 500 crore for this fiscal. Also they contended that when other modes of transportation have dynamic price mechanism then why not Railways should have.

Employees Could Hold Large Share in a Company’s IPO: SEBI In order to increase retail participation in the companies market regulator Security Exchange Board of India has increased the participation of employees in the company in which they work.

As per the earlier guidelines, employees could bid up to INR 2 lakh for their company’s IPO. But with the revised guidelines, the employees would be able to invest unto INR 5 lakh in their company.

This has been done to improve the participation and increase the retail base in the company’s IPO. In 2010, SEBI had hiked the employee participation up to INR 2 lakh. But from then there has been devaluation in rupee. So to offset that effect of rising inflation SEBI has taken decision to increase the limit.

Dynamic Surge Pricing in Railways Railways has taken a step that would help it mop up little more cash. It has introduced surge pricing mechanism for premium trains like Rajdhani, Satabdi and Duronto.

Under the proposed mechanism, the railways price would increase with the increase in the number of the reserved berth. With every 10% reservation in the birth, the price would increase by 10% of the base price. Also the maximum price has been capped to 1.5 times the base price. This means around 50% of the total seats would be sold at

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

The Month That Was

The Niveshak Times

5

6

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NIVESHAK

29200

BSE

29000

DII

4,000

FII

3,000

28800 28600

2,000

BSE

28400 28200

1,000

28000

0

27800 27600

-1,000

27400 29-09-2016

28-09-2016

27-09-2016

26-09-2016

23-09-2016

22-09-2016

21-09-2016

20-09-2016

19-09-2016

16-09-2016

15-09-2016

14-09-2016

12-09-2016

09-09-2016

08-09-2016

07-09-2016

06-09-2016

02-09-2016

01-09-2016

27200

-2,000

FII, DII Net turnover (in Rs. Crores)

Article ofSnapshot the Month Market Cover Story

Market Snapshot

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

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

1,10,73,648 Source: www.bseindia.com

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

1.50%

INR/1 USD

Euro/1 USD

1.00% 0.50%

GBP/1 USD

66.66 74.75 66.05 86.42 48.84

JPY/1 USD

SGD/1 USD

LENDING / DEPOSIT RATES Base rate Deposit rate

9.30%-9.70% 7.00% - 7.30%

RESERVE RATIOS CRR SLR

4.00% 21.00%

POLICY RATES Bank Rate Repo rate Reverse Repo rate

7.00% 6.50% 6.00%

0.00% -0.50% -1.00%

Source: www.bseindia.com

-1.50% -2.00% -2.50%

SEPTEMBER 2016

Date as on September 30th

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NIVESHAK

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

Open

Close

% change

28459.09 13236 12665 22043 22683 12488 15195 8828 16144 10457 9943 11080 2103 7511 1542 5764

27865.96 13167 12781 22232 22046 12549 14582 8461 16181 10229 9764 11378 1990 7462 1512 5631

-2.08 -0.52 0.91 0.85 -2.81 0.48 -4.04 -4.61 0.23 -2.18 -1.80 2.68 -5.40 -0.65 -1.93 -2.32

% CHANGE

% Change TECK, -2.32% REALTY, -1.93% POWER, -5.40%

Smallcap, 0.91% PSU, -0.65%

MIDCAP, -0.52% METAL, -1.80% 1 IT, -2.18% FMCG, -4.16% CG, -4.04% BANKEX, -2.81% Sensex, -2.08%

OIL&GAS, 2.68%

Healthcare, 0.23% CD, 0.48%

AUTO, 0.85%

© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

Article Market of Snapshot the Month Cover Story

Market Snapshot

7

Niveshak Investment Fund

Done on 30/6/14

Information Technology(10.91%) TCS

HCL Tech.

Infosys

Wg: 3.74% Gain : -3.91%

Wg: 3.84% Gain : 7.79%

Wg: 3.33% Gain: 24.76%

FMCG(21.84%) Colgate HUL

Britannia

Wg: 5.62% Gain : 26.70%

Wg: 7.26% Gain: 236.36%

Wg: 4.28% Gain: 24.57%

Amara Raja Wg: 4.67% Gain: 45.84%

Godrej Consm.

Wg: 7.81% Gain: 86.44%

Pharmaceuticals (9.78%) Dr Reddy’s Labs Wg: 3.83% Gain: 5.77%

Lupin Wg: 5.95% Gain : 29.94%

Midcap Stocks (12.55%) Bharat Forge Wg: 3.93% Gain: 3.74%

Kalpataru Power Wg: 4.01% Gain: --2.53%

HDFC Bank Wg: 7.05% Gain: 38.92%

ITC

Wg: 4.69% Gain: 4.30%

Misc. (12.07%)

Auto (9.94%) Tata Motors Wg: 5.27% Gain: 26.15%

Bank (7.05%)

Natco Pharma Wg: 4.61% Gain: 17.67%

Titan Company Wg: 4.26% Gain: 5.39%

Chemicals (9.31%) Asian Paints Wg: 9.31% Gain: 88.38%

Textile (6.56%) Page Indus.

Wg: 6.56% Gain : 46.54%

Performance Evaluation

As on 30th Sep 2016

Sep Performance of Nivehshak Investment Fund 103

185

102

175 165

101

Scaled Sensex Scaled NIF

155

100

145

99

135

98

125

97

115

96 95

Performance of Niveshak Investment Fund since Inception

105 1/9

4/9

7/9

10/9 13/9 16/9 19/9 22/9 25/9 28/9 Scaled Sensex

Scaled NIF

Opening Portfolio Value : 10,00,000 Current Portfolio Value : 1681889 Change in Portfolio Value : 68.18% Change in Sensex : 35.94%

95 30-01-2014 18-08-2014 27-02-2015 03-09-2015 16-03-2016

27-Sep-16

Value Scaled to 100

Risk Measures: Standard Deviation : 19.21 (Sensex 9.93) Sharpe Ratio : 3.34 (Sensex : 3.22) Cash Remaining: 58,000

Comments on NIF’s Performance & Way Ahead: The month of September saw the markets remaining relatively tepid with not much movement in the markets.

The markets saw a bit of volatility due to the Fed meeting initially and later on the tensions between India and Pakistan saw the market take a nosedive The coming month will see the focus shift towards the company quarterly results and the Reserve Bank of India monetary policy meet whose decision on key interest rates could cause turmoil across the Indian markets.

The top performers during the month in the NIF were Natco Pharma and ITC which saw a gain of 12% and 8% respectively whereas the laggards were Bharat Forge and Amara Raja Batteries which fell by nearly 6% and 4% respectively.

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Equity Research Report Cover Story

HUL ER Report

EQUITY RESEARCH REPORT – Hindustan Unilever Limited

Date: 30th September

Rating Matrix

Growth Drivers

Corporate Governance

Business Description

Company Background

Rating Target Current Market price Target Period Potential Upside (Annualized)

Buy Rs. 1114 Rs. 868 6-7 months 28% (53%)

Basic Information Ticker (BSE)

500696

Ticker (NSE)

HINDUNILVR

Sector

FMCG

M- Cap

₹ 191257 Cr.

Hindustan Unilever Limited (HUL) is an Indian consumer goods company based in Mumbai, Maharashtra. HUL is a subsidiary of Unilever, one of the world’s leading suppliers of fast moving consumer goods with strong local roots in more than 100 countries across the globe with annual sales of €48.4 billion in 2014. It is owned by Anglo-Dutch Company-Unilever which owns a 67% controlling share in HUL. HUL's products include foods, beverages,cleaning agents, personal care products, and water purifiers.

HUL’s business falls primarily under 5 segments: Soaps, Detergents and Household Care, Personal Products, Beverages and Packaged foods. The primary sources of revenue for HUL are Cosmetics (48.87%), Tea (25.92%) and soaps (16.19%). They have several brands such as Lux (Soap), Surf Excel (Detergent), Clinic Plus (Hair Care), Lifebuoy (Soap), etc. of which the first 3 brands rank in the top 10 of ACNielsen Brand Equity list. A total of 16 brands of HUL feature in the list. The company has 35 brands spanning 20 categories of the FMCG business & over 16,000 employees. Innovation has always been HUL’s key strengths.

The company has 5 independent directors out of total 9 members in board of directors. It follows a differential remuneration policy for Non-Executive Directors, with the maximum limit of remuneration payable to them is Rs 150 lakhs, for the period from 1st April 2013 to 31st March 2018. The Company has adopted the policies in line with new governance requirements including the Policy on Related Party Transactions, Policy on Material Subsidiaries, CSR Policy and Whistle Blower Policy.

Shareholding Pattern (As per BSE) Promoter Public Others

Total

Jun- 16’ 67.20 32.80 0.00

Mar – 16’ 67.21 32.79 0.00

Dec – 15’ 67.21 32.79 0.00

100.00

100.00

100.00

• Organised sector growth is expected to grow as the share of unorganised market in the FMCG sector fall with increased level of brand consciousness • Growth in modern retail will augment the growth of organised FMCG sector • Availability of products has become way more easier as internet and different channels of sales has made the accessibility of desired product to customers more convenient at required time and place • Rural consumption has increased, led by a combination of increasing incomes and higher aspiration levels, there is an increased demand for branded products in rural India • Investment in this sector attracts investors as the FMCG products have demand throughout the year.

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

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We have calculated the stock’s intrinsic value based on a weighted average of DCF, ResidualIncome and Relative multiples based valuation. Starting FY17, growth in revenues have been estimated at a gradually declining rate averaging 15% for the first 5-yr and 3% for the next. Due to the non-cyclical natureofbusiness,the sensitivityofHUL stockis below1,indicatingadefensivenaturewitha WACC of 6.9%. Thefundamentalvaluestands atRs. 963 andgivena CMP ofRs.868 as on 30th Sep,’16,the stockis undervalued.

Rating Definition

The near term profitability might be impacted by entry of competitors in the market however HUL continues toenjoyamarketleaderpositionin manysegments oftheFMCGmarketandwil continue toearnasizeable margin despitestiffcompetiton.

BUY: If stock is expected to deliver more than 10% annualized returns over holding period NEUTRAL: If stock is expected to deliver (-)10% -10% annualized returns over holding period SELL: If stock is expected to deliver less than (-)10% annualized returns over holding period

Technical Analysis

Comparable Valuation

Usingtechnicalanalysis wecan estimate ashortterm target of 910 whichis nearly a 5% upsidefrom current levels as the 50% retracement levels of the downtrend is around that level. The RSI and MACD also indicates an oversold position and the likelihood of a bounce back is on the cards. In the long termthe stock mayfindresistanceat the 950 levelwhich is its 52 weekhigh andapproximately nearourexpectedtargetprice.

Industry Competition

Industry Figure

The consumer durables market is expected to reach US$ 12.5 bil ion in 2015 and US$ 20.6 bil ion by 2020. Urban markets account for the major share (65 per cent) of total revenues in the consumer durables sector in India. There is a lot of scope for growth from rural markets with consumption expected to grow in these areas as penetration of brands increases. Also demand for durables like refrigerators as well as consumer electronic goods are likely to witness growing demand in the Equity Research report coming years in the rural markets as the government plans to invest significantly in rural electrification.

The FMCG sector has grown at an annual average of about 11 per cent over the last decade. The overall FMCG market is expected to increase at (CAGR) of 14.7 per cent to touch US$ 110.4 bil ion during 2012-2020,with the rural FMCG marketanticipatedto increase ata CAGR of 17.7 percent to reachUS$ 100 bil ionduring 2012-2025.Food products is the leading segment,accountingfor 43 per cent of the overall market. Personal care (22 per cent) and fabric care (12 per cent) come next in termsofmarketshare.

Date: 30th September Threat of New Entry –Medium Industry Rivalry The industry is highly cluttered and there • Substantial investments are necessary to achieve growth and economies of scale are lots of companies competing for the same market Buyer power –High • Consumers are generally wil ing to experiment & brand loyalty is low

Threat of Substitutes –High • Consumer needs are continuously shifting • Newer products are being rapidly launched by competitors

Supplier Power –Low • Large number of suppliers are locally available • Raw material can be sourced locally

Valuation Summary Method DiscountedCash Flows Relative Valuation Residual Income Valuation

Value/Share Weight Fair Value 1067.13 0.33 779.41 0.33 963.07 1042.66 0.33

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

Equity Research Report Cover Story

EQUITY RESEARCH REPORT –Hindustan Unilever Limited

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Article of the Month Cover Story

NIVESHAK

Unified Payment Interface and Its Impact on Payment SiddarthBhargava&KaranVerma IIM Udaipur

Introduction As soon as the Unified payment interface was launched by Reserve bank of India, the speculations have been rife that this shall mark the end of payment wallets in India. The objective of this article is to understand Unified Payment Interface or UPI and its different features along with understanding the impact of UPI on payment wallets.

Unified Payment Interface (UPI) With the motto “Power to Empower�, Digital India campaign was launched. National Payments Corporation of India (NPCI) brought this innovative idea of Unified Payment Interface (UPI) to further digitize India and make it a cashless society. The digital systems help in removing opacity of cash while

SEPTEMBER 2016

maintaining the history of financial transaction.

It will further integrate financial inclusion of Indian society.

UPI is a type of payment system within standard set of Application Programming Interfaces (APIs) to facilitate online immediate payment systems, which leverages on increasing smartphones demand and Internet penetration. Unlike NEFT/RTGS/IMPS, the system is far more structured and standardized across other banks. This system will surely compete against the mobile wallets with much lesser transaction details to be inserted. The architecture of UPI is built on IMPS. How does it Works?

The system is hassle free and it efficiently

NIVESHAK NIVESHAK

repository) will route out payment instructions based on the details. The ABPS (Aadhaar Payment Bridge System) will share this mapper for NACH (National Automated Clearing House) and impart subsidies or direct benefits to the individual.

The process is robust enough to complete transaction on inserting virtual number itself.

The authentication by providing MPIN (Mobile Personal Identification Number) and not OTP (One Time Password) further removes the inconvenience of waiting for the password to flash out. Successful transaction message will prompt up to complete the process. At back end, NPCI will maintain a database of customer’s mobile number, Aadhaar number and bank details. This central mapper (central

Simplicity – Receiving and paying payment as smooth as swiping phonebook or making call is the primary motive. An account holder can pay the identifier with the “payment address” (Aadhaar Number, Virtual Payment Address, Mobile Number etc.) and not by filling account/ bank details every time. The solution can be initiated from either side, which further eases down the process.

Key Drivers of UPI NPCI ideated of implementing UPI in order to simplify and bring down everything on a single payment interface. The key drivers are: -

Adoption – Given the projection of Mobile and

© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

Article of the Month Cover Story

removes the hectic steps of entering account number, account type, bank name and IFSC code. Once the UPI enabled banks connects the individual to the system, the transaction can be initiated by inserting either of Aadhaar Number, mobile phone number or virtual payment address. The addresses are of two types – global and local. Global address includes Aadhaar, bank account number and mobile number. Local address is a virtual address, which is being provided by banks and resembles similar to email ID (xxx@icicibank).

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Internet penetration in the upcoming year, the model is scalable. Pilot operations should allow gradual adoption of smartphones and feature phones. The consumer who is not yet using mobile application should also be getting benefited. Interoperability with different identifiers should not crash down the solution.

Innovation – The model allows innovations to be done on both side i.e. payee and payer side. Apart from it, the application providers should have advantage of enhancing mobile devices, providing integrated payments across different platforms, newer authenticating process which is hassle free etc.

Security – With the increasing cases of phishing, risk scoring etc. in this technological world, an individual always has concern about security of their data. The solution should provide endto-end robust security and data protection.

As per note specified by NPCI, 1-click 2-factor authentication has been offered in the solution that can be further improvised.

Cost – In a cost-conscious country like India, the costly product doesn’t long last. As mobile phones are being used for credential capture, virtual payment addresses and third party authentication schemes like Aadhaar, the cost is likely to be driven down for both the acquiring and issuing side.

Differentiating features Although we had payment wallets in the existing market, the solution offers some of the contrasting features to scale it at large.

“Pay by Date” feature is added in the interface, which makes collective request to individual or group for payment on due date. Additionally snoozing option has been provided to pay the request before expiry date to escape from services being blocked.

Multiple recurring payment options with higher credit limit. Unlike payment wallets, the solution provides transaction for higher monetary value i.e. up to one lakh.

NPCI has indicated a charge of 0.50 INR per transaction, which will appear in bank statement as IMPS transaction. AP Hota, CEO & MD NPCI said, “Already a few banks (Yes Bank) out of 29 banks have gone live with UPI to serve their customers. A few other banks are

SEPTEMBER 2016

also likely to incorporate this game changing experience for their customers.”

Impact of UPI on Payment wallet Ever since the launch of UPI by RBI, speculations have been rife that UPI will mark the end of payment wallets in this country. Since none of the banks have actually rolled out or integrated the platform to their existing apps, it’s very early and uninformed speculation to declare sudden deaths of wallets. Even today the number of wallet users in India is much more than the users base of any of the mobile banking app. Although the new interface seems to provide promising results in the future, but the impact on payment wallets is yet to be assessed properly.

As more and more banks integrate their existing apps with UPI, more and more customers are expected to use these apps for cash transfers.

Majority of the people opting for these services are expected to be people who frequently transact with. As we understood that the main benefits of payment wallets are limited liability exposure and ease of transactions, the wallets to be impacted the most are the ones with just these value propositions. Wallets will have to evolve themselves to come up with better value propositions to make them more attractive.

Wallets have become main stream today with Paytm alone having more than 122 million users. The main hurdle for the UPI to overcome is cash which due to its iniquitousness, is the most famous medium for transactions.

The ticket size of payments through UPI is expected to be not very high and equivalent to that of wallets.

With the growing internet and smartphone penetration, the number of wallet users have increased manifold due to the ease of usage and convenience. With the UPI integration in banking apps, the bank apps will add convenience of wallets but with added advantages of a bank account. The acceptability and ease of usage of banking apps will play a crucial role in defining the future course of UPI and its impact on payment wallets.

NIVESHAK

UPI is essentially just an architecture for payments and rather than a competition, may as well act as enhancer of increasing acceptance for payment wallets. Currently most of the wallets either add money via Debit card, internet banking or cashbacks. The first two modes of loading the money into wallets require a customer to have internet banking or debit card. With the introduction of UPI, this will no longer hold. People with a bank account, using a mobile banking app can transfer funds seamlessly to their wallets.

Since these wallets allow customers to pay to many merchants, the acceptance of bank apps and consequently UPI by the customers is important for the success of UPI architecture.

Although the process of transferring money doesn’t require either of the recipient to share his/her account details and hence has a better chance to gain trust of the customers.

The major hindrance for the wallets is the fact that the commission structure is very huge and makes their model difficult to operate, in wafer thin margins. Payments of wallets through net banking or cards include transaction fees of two percent that is usually split between bank and wallet. The wallet gets a share of 0.4-0.5% which makes their business difficult to operate in. Huge transaction charges is another why many merchants, especially the smaller ones haven’t yet moved to online modes of payment.

This is where RBI is working with introduction of UPI. With more than 50 million small registered business, and two million of them paying service tax, wallets have been able to partner with only a fraction of them (30,000). There are still a lot of low hanging fruits in the market up for grab. The acceptance of UPI by these small merchants can go a long way in digitizing the economy and reducing physical cash.

As the economy moves more towards digitization, and with increased acceptance of online modes of payments, and if the wallets decide to evolve themselves into more than just a cash alternate, the UPI can be a game changer for the economy.

The most critical factor for the success of UPI is the seamless integration of it with banking apps and ease of use to increase the usage among the consumers. The technological framework seems to be the only challenge that the banks will have to overcome in order to make UPI a success.

To conclude, it’s too early to declare the death of payment wallets via UPI architecture. Although UPI does provide a plethora of opportunities in the digitization of money transfer in India With the introduction of UPI, the adoption is highly dependent upon the customer touch point that is the banking apps. The banking apps will have to evolve to be as user friendly and convenient as the payment wallets and their apps are. Although the new customer base will be the one that comes from untapped market or cannibalized from wallet users is yet to be seen.

For wallets this is a technological breakthrough that will disrupt the payment wallets market.

The UPI architecture can also provide the wallets an opportunity to tap the untapped market and bring more users to its platform, and at the same time they will have to evolve from just a digital wallet and provide more services to consumers like doorstep pickup of cash, micro-credit, hyper local transactions etc. to make the space more competitive.

But the real winner of the whole new evolved system will be RBI, which will be one step closer to creating a cashless society. At the same time Indian consumers will have the real ease and convenience of carrying any amount of money without the actual cash risk.

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But implementation and integration of UPI isn’t that simple with current banking apps.

Training staff, upgradation of technology and changing perceptions of the people will include huge investments. Building trust among the consumers may also be a challenge for the banks for using UPIs.

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Telecom Data War AnkitSinghal Mukesh Ambani at the Reliance Industries’ 42nd annual general meeting on 1 September’, 2016 made an announcement on Jio, RIL’s telecom venture, including its data tariff plans and the free voice call services across India.

The 45 minutes speech resulted in 9800 crores and 2450 crore market capitalization loss for the two telecom giants Airtel and Idea Cellular respectively. The underlying business model of increasing the ‘willingness to pay’ for the customers so that they happily pay little more to get attractive services has triggered the price war with existing telecom operators.

Importance of 4G Of 1 billion mobile users, only 34% have access to the internet, and only 10% of mobile users use 3G or above. Telecom companies have realised that there is not going to be movement in a voice now as 80% of the Indian

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population have access to mobile phones. Next big challenge is the internet. Hence, Reliance Jio has invested Rs.15000 crores in laying down the optical fibre network all across India.

Charging for SMS and voice will be redundant as many apps provide these facilities for free.

Hence, telecom companies see potential customer base in the internet segment.

Reliance JIO Business Model To target the India’s $50 billion telecommunication industry Reliance Jio has come up with various plans. The underlying rationale behind the business model of Reliance Jio is the more data you use, the cheaper it will be for you. Reliance Jio is promising to provide 1 GB data for as low as 50 rupees and subscription to all reliance Jio apps for free for one year. Another big feature of Reliance Jio plan is the free voice calling. In the

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network providers, free data at night, access to JIO apps they are tempting users to pay more.

The target of Reliance Jio is to get Rs 300 from

and roaming for free. By keeping the lowest monthly plan of 149, they have made sure to

each customer by the year 2017.

earn at least the current average revenue from each customer. Their other monthly plans for the data users and with attractive facilities like 4G, more data compare to other telecom

Retaliation from other Telecom Carriers As of now Reliance Jio has not been commercially rolled out. It will be available from Jan 2017, and then the number portability

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year 1995, per call charges was INR 32 per minute but surprisingly after 21 years customer will get “free calls.” Also, they are providing unlimited data at night for 3 hours to attract the customer and eliminating the concept of roaming and SMS charges. Providing unlimited data won’t cost much as they have already laid down the optical fibres, ranging over 2.5 lakh kilometres so that it won’t cost them much.

The average monthly revenue per user (ARPU) in India is Rs 150, and they have kept the lowest monthly plan of Rs 149 with all the facilities like SMS, voice calls

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option will also be available. So, other telecom operators have three months to make sure that they maintain their customer base or attract new customers with their pricing strategies.

Reliance Jio customers are reporting a huge

Airtel: Reliance Jio accused Airtel of ‘anticompetitive behaviour.’ Airtel, in turn, accused reliance Jio of not cooperating to cover up technical issues from Reliance Jio’s side.

number of call drops, and big traffic of call volumes is between Reliance Jio and Airtel.

Reliance Jio released the live data on call drops its users are experiencing due to Airtel, Vodafone, and Idea not providing enough connectivity.

Reliance Jio is providing free data, voice calls, and text services for the year 2016. To counterattack this scheme, Airtel has come up with 90 days of 4G service for Airtel 4g customers which is priced at 1495 starting from October 1, 2016.

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Vodafone: Vodafone and BSNL signed a 2G intra-circle roaming agreement to use each other’s assets and network strength across the country. This strategic partnering will help BSNL in expanding its reach in urban areas and will help Vodafone in expanding its reach in the rural areas.

Benefits for the customer Whenever tariff war has unleashed it has always benefited the customer, and the same will happen this time around too. The healthier the competition, better it would be for the customers. Customer will receive better service quality, 4G internet services at affordable prices. Current telecom war will ensure that internet speed will be faster than what has been previously provided by various telecom providers. The charges for roaming, SMS, voice calling won’t be taken from the customer. In the coming months, telecom operators may come up with even better plans to increase or retain the customer base. In the end, the quality of service provided by the telecom operators will decide the winner of this telecom war.

Vodafone has launched a scheme of offering 10 GB 4G data at the cost of 1 GB for three months for the new handset (handset which has not used Vodafone sim in last six months).

Vodafone Group has pumped in Rs 47,700 crores of overseas investment into its Indian operation, to reduce the unit’s debt and to prepare for the upcoming auction. The move signals Vodafone’s aggressive intent in the spectrum auction for 4G waves.

Impact on upcoming Spectrum Auction The aggressive price wars will have an impact on October’s spectrum auction. The mountains of debt along with the aggressive price war may result in $74 billion loss for the government in October’s auction. Some operators have decided to sit out of the auction, and some have decided not to go for certain wavelengths. India was planning its biggest sale of spectrum that can buffering on videos and can speed up download speed for 1 billion plus users in world’s 2nd largest smartphone market. Government generated $18 billion revenue from last year’s auction and $9.8 billion from the auction held in 2014 and this year they were planning to raise $83 billion from the auction. But, companies will spend a fraction of what they have spent in the previous auction to fend off the new market model of Reliance Jio and aggressive price tactics employed by other telecom carriers.

But, Vodafone is looking to spend big in this year’s auction and may spend up to Rs.16300 crores to boost 4G services

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BSNL: BSNL came up with the plan of providing unlimited data for Rs 249 at a download speed of 2 Mbps. Consumers can download 300 GB of data and per Gb price will be less than Rs 1 which is very cheap for the Indian market.

But unlike Jio’s offer that is available for 4G customers, BSNL plan will be open for 2G and 3G customers.

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GST Impetus for Indian Economy Vipin Sirohi

GST is the biggest reform in the indirect tax structure of India since the economy began to be opened up 25 years ago. The Constitution Amendment Bill for Goods and Services Tax (GST) passed in the Rajya Sabha on 3 August 2016 will rework the taxation powers of the Centre and states, set up a GST council and roll out the new tax regime from April 2017. With the roll out of GST, a common Indian market will be developed and the cascading effect of tax on the cost of goods and services will be reduced. GST will impact the Tax Structure, Tax Computation, Tax Payment, Compliance

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and Credit Utilization leading to a complete overhaul of the current indirect tax system. GST will have a strong impact on almost all aspects of business operations, for instance, pricing of products and services, optimization of supply chain, IT, accounting and tax compliance systems. This comprehensive tax will cover all stages right from production to the sale and will be levied only on the value added at each stage of the process.

GST has been commonly accepted around the world having acknowledgement of more than

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140 countries and the tax rate is between 15%20% in most of the countries.

Taxation under GST GST shall be levied concurrently by the Centre (CGST) and the States (SGST). Both CGST and SGST will be levied on the basis of the

Reform Measure • Economic Union of India: Goods can be easily moved across the country with diffused state boundaries which will encourage businesses to focus on pan-India operations.

• Simpler Tax Structure: By merging all

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destination principle. Thus, exports would be exempted from domestic taxation, and tax on imports would be levied in the same manner as domestic goods and services. Inter-State supplies within the country would attract an Integrated GST (aggregate of CGST and the SGST of the destination State). All the things useful for the poor are expected to be kept out of the tax bracket.

levies on goods and services, GST acquires a very simple and transparent character with less paperwork and reduction in accounting complexities. A simpler tax regime will make the manufacturing sector more competitive and save both money and time.

• Reduced Tax Burden: Under the present tax structure of India, a company has to pay multiple taxes to the centre and state governments, which results in the tax costs for a business going up by many folds. However,

Achievements Expected of GST as a Policy

under GST, the cascading impact of these multiple taxes will be eliminated.

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• Uniform Tax Regime: To attract industries and drive the economy of the state, many states offer complete or partial exemptions from the taxes. However, with only one or two

everyone expects India to better its Ease of Doing Business ranking quickly. The reduced tax on the manufacturing and procurements will help reduce the price for exports and support

tax rates across the supply chain, state specific advantages/disadvantages will be gone, thus offering a level playing field for all stakeholders.

• Greater Tax Revenues: A simpler taxation regime will bring greater compliance thus leading to increase in the number of tax payers and in turn tax revenues for the government.

• Competitive Pricing: The total tax component of any product manufactured in India is about 25-30% of the cost of the product. After implementation of GST, the tax paid by the final consumer will come down in most of the cases and it will help in boosting consumption, which is further beneficial to companies.

• Push to Exports: India is expected to climb up the Ease of Doing Business ladder quickly with a uniformed tax structured. The competitiveness of Indian goods in international market will increase with the fall in production cost in domestic market. This bodes well for exporters, who compete with global manufacturers that operate on very different cost structures.

• Prepares for Ease of Doing Business: With a uniformed tax structure under GST,

make in India campaign by making Indian goods competitive in the global market. It will help reduce compliance cost and make the time taken for refunds shorter. This will thus, have an overall favourable impact for the exporters in terms of working capital funds and compliance, this would indirectly help in boosting exports.

Also, uniformity in tax rates and procedures will give the much needed confidence to foreign firms that are looking at investing in India.

Impact on GDP and Inflation • A study by the National Council of Applied Economic Research shows that GST will boost India’s GDP growth by 0.9% to 1.7%.

• Global examples like that of Malaysia and Canada show that in spite of careful planning, there has been a spurt in prices following the introduction of GST. In a research note, Goldman Sachs, found that Asian countries, which brought in GST between 1977 and 2015, reported an average increase of 1.1% in inflation during the year of its implementation.

Sachs, based on cross-country evidence and the evidence from state VAT implementation, also estimated that if the GST rate was 20% in India,

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months, led by rising prices of both food and non-food articles. However, the Government, through the FRMB act, is determined to balance the revenue and deficit of states. For the first time, by law, the inflation target will be fixed at 4% (+/- 2%).

Roadmap • A GST Council will be formed within 60 days of the enactment of the Bill consisting of representatives from the Centre as well as State.

The Council will make recommendations to the Union and the States on model Goods & Service tax laws, Place of Supply rules rates including floor rates with bands of goods & service tax and any other matter relating to GST as the Council may decide.

• Detailed outline of Joint Committee constituted by Empowered Committee of the State Finance Ministers on return and registration refund, business processes of payment under GST have been formulated and put in the public domain for suggestions.

• The draft GST Law was formulated and put in public domain for suggestions in June 2016.

• GST Network, an IT support of GST,

which will facilitate tax payment, online registration and return filing, will be launched.

• States will draft their respective GST Legislations to enable them to implement GST, which will be in line with the Central GST Legislation.

Conclusion

In terms of growth, price and current account, the macroeconomic impact of introduction of GST will be significant. Although there will be a short-term narrow price impact on the larger economy. However, a larger impact is expected on the administrative compliance cost of GST which is expected to increase the tax revenue from “parallel” or “black” economy. With a flourishing services sector and a high economic growth trajectory of India, a shift in incomebased tax to consumption-based tax is going to provide substantial stimulus to source of revenue.

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retail inflation could rise 0.9% points. Retail food inflation has already built up over the years and in such scenario, any further increase in inflation is likely to be a burden on the populace.

• In July, retail inflation touched a 23-month high of 6.07%; wholesale price inflation accelerated to 3.55% , the fastest in 23

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WorldCom Scandal, 2002 AdityaJain It was the June of 2002 when WorldCom, the second largest company in the long-distance telecommunications, admitted to overstating its earnings by more than 3.8 billion USD in 2001 and the first quarter of 2002. Not only that, later in the year it also announced about manipulating its reserve accounts to the tune of another 3.8 billion USD. WorldCom began as Long Distance Discount Services Inc. in 1983, in Mississippi. By 1989, the shares of the company were being publicly traded and it had become a public limited corporation as an outcome of being merged with Advantage Companies Inc. In 1985, its name was changed to LDDS WorldCom and the head office was shifted to Clinton, Mississippi.

The company witnessed rapid growth in the 1990s by making a series of acquisitions that boosted its reported revenues, rising from 154

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million USD in the year 1990 to 39.2 billion USD in 2001. This rapid growth resulted in the company being ranked 42 in Fortune 500 list of companies.

The company’s name was changed to MCI WorldCom with the takeover of MCI in 1998, making it the second largest long-distance carrier in the United States. Later in 2000, the company’s name was changed to WorldCom. Along with WorldCom, there were other telecommunications companies as well which were in financial trouble, Qwest Communications, Global Crossing, Lucent Technologies, Enron, and Adelphia to name a few. The basic problem with all of these companies lied in the overly optimistic predictions of the market in the 1990s, driven by the internet growth and the dotcom bubble. As a result of this, when these

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with the reserve accounts with the purpose of changing its reported earnings. In August of the same year, WorldCom further admitted to using its reserves in improper ways. They had reduced the reserve accounts to provide credits against the line costs.

The motive of top management behind committing this fraud was pretty clear. After the dot-com bubble had ended, the economy was down in recession and all the telecommunications witnessed a reduction in the demand, including

WorldCom. Revenues were at an all-time low, far below the expectations of the investors; and to top all of this, WorldCom had taken a lot of debt to expand its operations. The market value of WorldCom had plunged and therefore, the management had a powerful motive to conceal bad news by engaging in false accounting practices.

So who discovered the fraud? Cynthia Cooper, the then WorldCom’s internal auditor, found that line costs were being treated as capital expenditure in the May of 2002. This matter was discussed between the auditor, the chief financial officer of WorldCom, Scott D. Sullivan, and the company’s controller, David F. Myers.

The internal auditing team often worked secretly at night to reveal the fraud.

The head of the audit committee of WorldCom’s Board of Directors, Max Bobbitt, was also informed about the matter by Ms Cooper on or about June 12th. Max Bobbitt sought the intervention of the company’s external auditor, KPMG into the matter (KPMG replaced Arthur Anderson as the external auditor of WorldCom in May 2002).

Soon after the fraud was exposed, the CFO was dismissed from the job, the controller resigned himself, and the company’s previous auditor, Arthur Anderson, immediately withdrew its audit opinion for 2001, stating that it was not notified about line costs being treated as capital expenditure. The Securities and Exchange Commission of the United States began investigating the matter on June 26, 2002.

In July 2002, Tauzin, chairman of the House Energy and Commerce Committee, announced that the internal documents of the company and the mails exchanged between the executives clearly indicated that the executives knew about the fraud from as early as the summer of 2000.

WorldCom filed for bankruptcy protection under the Chapter 11 on July 21, 2002, making it the largest such filing in the history of United States at the time. The company paid 750 million USD to the SEC in the form of cash and stock by the bankruptcy reorganization agreement.

In the deal concluded between SEC and WorldCom, it was agreed that WorldCom would pay a civil penalty of 2.25 billion USD. Former SEC chairman, Richard C. Breeden, was appointed by Jed Rakoff, the then federal judge, to oversee WorldCom’s compliance with

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companies faced reduced demand as compared to the expectations of everyone, after the end of the dot-com bubble, their investors suffered major losses.

The market value of WorldCom fell from 150 billion USD in 2000 to 150 million USD in 2002, and the company filed for bankruptcy, admitting to overstating its earnings by classifying revenue expenditure as capital expenditure.

WorldCom paid other companies for using their communication networks (these costs are called line costs), and it classified these payments as capital expenditure instead of revenue expenditure, reducing its expenses and thereby increasing profits, falsely overstating its earnings.

Line costs consist of access fee and transport charges for WorldCom customers’ messages. As reported, around 3.055 billion USD in 2001 and 797 million USD in 2002 Q1 was classified under capital expenditure. By doing so, the company was able to spread its current expenses evenly in the coming years, increasing both its net income and assets in 2002.

In July 2002, WorldCom said that there might be a possibility of irregularities existing in its reserve accounts and that it was investigating the same.

Reserve accounts are meant to provide a security for predictable events, like future tax liabilities, and the management is not supposed to tamper

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the agreement between them and the SEC. Breeden prepared a report, “Restoring Trust” for Rakoff. He suggested a lot of corporate governance reforms as part of an effort to “cast the new MCI into what he hoped would become a model of how shareholders should be protected and how companies should be run”.

Some of the Consequences Even before the announcement in June 2002, the share of WorldCom had fallen from 64.50 USD in 1999 to less than 2 USD per share which further declined to below 1 USD a share after the announcement and then it went down the

drain to a few pennies per share after the news that there were further irregularities in the accounting practices followed by WorldCom. Many employees of WorldCom who held stock in the company also suffered huge losses.

About 32% or 642.3 million USD of WorldCom retirement funds were in company stock at the end of 2000. By 2002, this had fallen to less than 18.7 million USD or 4% of the funds.

The company cut 17,000 employees off from its workforce of 85,000 in 2002.

In the August of 2002, a group was formed by the name of exWorldCom 5100. It consisted of 5100 former employees (who were dismissed on June 28, 2002 before the bankruptcy petition by WorldCom) of the company with the objective of receiving full payment of

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severance pay and benefits according to the WorldCom Severance Plan.

Post-Bankruptcy By the end of 2003, according to the estimates, the value of total assets that had been inflated by the company stood at about 11 billion USD. This resulted in the WorldCom scandal being the largest accounting fraud in the history of America until 2008.

In 2004, with close to 5.7 billion USD in debt and 6 billion USD in cash, WorldCom emerged from the bankruptcy under Chapter 11. Half of the cash was meant to pay the claims

and settlements that were due. Previous bondholders were paid 35.7 cents for every dollar due, that too in the form of bonds and stocks of the newly formed company, MCI Inc. All of the stock of previous shareholders was cancelled, making it completely useless for them.

There were creditors waiting for 2 years for payment, they were yet to be paid; these also included some of the employees who were dismissed during 2002.

In February 2005, Verizon Communications acquired MCI for 7.6 billion USD. Bernard Ebbers, who was the CEO of WorldCom at the time when the scandal happened, was found guilty of every charge against him and was convicted of fraud, conspiracy, and filing false documents with regulators, on March

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Australia, France, India, Japan, Israel, Italy, and Turkey.

There has been opposition to the Act as well.

Opponents argue that the bill has reduced the international competitive edge of America against foreign financial service providers by introducing an overly complex regulatory environment in the financial markets of America.

On the contrary, the proponents consider the bill to be a godsend. They believe that it has improved the confidence that one can display in the trustworthiness of corporate financial statements.

WorldCom scandal was one of the biggest scandals in history and was among those which resulted in the inception of SarbanesOxley Act which made laws more stringent and made it difficult for the companies to commit such frauds as in the case of WorldCom.

Sarbanes-Oxley Act (SOX) As a reaction to a slew of corporate scandals, including that of WorldCom, Sarbanes-Oxley Act was passed which is the most sweeping set of new business regulations since the 1930s.

According to the Act, the accuracy of financial information must be individually certified by the top management. Additionally, penalties have been made more severe for any fraudulent financial practice committed. Also, the independence of statutory auditors has been increased.

The Act contains 11 sections which range from telling about the duty of the Board of Directors to the criminal penalty that can be awarded to a person being involved in a fraud. It also requires the SEC to implement rulings on requirements for complying with the law.

The Act was approved by the House by a vote of 423 favouring, 3 opposing, and 8 abstaining, and it was approved by the Senate with a vote of 99 favouring and 1 abstaining. The law was signed into by President George W. Bush who stated that it includes “the most far-reaching reforms of American business practices since the time of Franklin D. Roosevelt. The era of low standards and the false profits is over; no boardroom in America is above or beyond the law”.

There was a perception that there is a need for stricter financial governance. This resulted in SOX-type regulations being subsequently enacted in Germany, Canada, South Africa, © FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

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15, 2005. All of this was related to the 11 billion USD accounting scandal. He received a sentence of imprisonment for 25 years. At that time, Ebbers’s age was 63 years. He surrendered himself in September of 2006 to the Federal Bureau of Prisons prison at Oakdale, Louisiana to serve his sentence.

In March 2005, 16 out of 17 former underwriters of WorldCom reached settlements with the investors. Citigroup had settled for an amount of 2.65 billion USD. In December 2005, an announcement was made by Microsoft that MCI will be joining it by providing “Voice over Internet Protocol” (VoIP) service to Windows Live Messenger users for making telephone calls. This was called MCI Web Calling and it was MCI’s last new product.

After the merger with Verizon, this service was renamed as Verizon Web Calling.

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BRICS - The Fuel to the World’s Growth Engine KeerthanaRaghavan TA Pai Management Institute, Manipal Introduction BRICS refers to an acronym given by the Chief Economist, Mr O’Neill, of Goldman Sachs in 2001. It refers to a bunch of emerging economies -Brazil, Russia, India, China and South Africa. According to him these economies held a lot of potential to become the next superpower because these countries were developing at a rapid pace.

These economies also looked attractive to investors because of their expanding middle class and massive development in terms of infrastructure. Added to this these countries also encompass 25% of the world’s land coverage and 40% of the world’s population. Each country was unique in itself it had its own capabilities and strengths. For example- Brazil is blessed with immense natural resources,

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agricultural products to be specific. Russia has huge deposits of oil, natural gas and coal.

India’s strength lies in its natural resources as well as its labour force which is skilled and its IT sector. China is a manufacturing hub and is a export driven economy. It has a huge potential for hydropower as well.

From BRIC to BRICS: South Africa was not a part of BRIC it was added only in 2010. The economists felt that there should be a representation from the African nations because Africa was second largest and most populous continent after Asia. Even though South Africa was smaller than Nigeria it became a part of BRICS because it had abundant natural resources, developed infrastructure and was a business hub. China was the one

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that pushed for South Africa’s entry into BRICS because China has a huge stake in South Africa across diverse sectors such as banking, infrastructure, transport and renewable energy. China and South Africa are good trading partners and it is expected in future that China will diversify its investment in South Africa by investing in sectors ranging from biotechnology to IT. South Africa adds strategic value by being a part of BRIC because of its mineral wealth and offers highly specialised mineralrelated professional services.

Expectations when BRICS was created: The idea was BRICS was that the countries would help each other in facilitating trade and cooperate with each other in trade, investment opportunities and other such areas. Basically it was meant to improve the bond between the emerging counties which was initially weak. The objective was met by holding high profile meetings once in a year to discuss important issues and to improve trade relations. The move was somewhat successful because when Russia was about to be excluded from G20 the BRICS criticised the West for its attempts.

It saved Russia from being isolated both economically and politically. Thus, in

this way BRICS grouping has played an important role in international affairs.

One of the initiatives taken by the BRICS member countries was to establish NDB (National Development Bank) for infrastructure funding of the emerging economies. The news of establishment came as a major shock for World Bank and IMF (International Monetary Fund) because they felt that their control over emerging economies was eroding gradually because the now these countries would be selfsufficient. NDB was created because of the discriminatory attitude of the West towards countries like India and China. But the initiatives came with a cost. It was feared that China would try to exert its influence and hence take up more resources than required for funding its needs.

Current scenario/reality of BRICS The intentions behind grouping a couple of emerging economies was pretty noble but it did not operationalize because each country was too different, they did not have the synergy. Each one of them is facing a unique problem right from economic slowdown to steep fall in commodity prices. Ever since the Federal Reserve said that the American economy is doing well,

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the investors are pulling out money from emerging economies and shifting it to the developed economies. The other smaller countries like Mexico, Indonesia etc. are expected to do well. The situation is bad in China because it could not sustain its

policies have worked well and it is the favourite destination for the investments in the current scenario. Japan and China have also invested in India especially in infrastructure.

growth rate of previous decade.

Russia on the other hand is facing its own set of troubles because of its high dependency in its oil and gas sector because exporting oil and gas is its major source of revenue.

Hence, steep fall in commodity prices has had a huge negative impact on Russia.

The Ukraine Crisis added to its woes and Russia was isolated both politically and economically. When trade relations with other countries are impacted, the growth of the country gets impacted. The Russian central Bank also raised its Interest rates so as to save its falling currency (Ruble).

Brazil is undergoing a political turmoil with the President Dilma Roussef stepping down and there has been a recent scandal linked to state oil and gas firm Petrobas.

Economically there is a huge fiscal deficit and the economic growth has been at a turtle’s pace. The fiscal deficit has arisen due to non-repayment of loans that the government had borrowed from the government banks. The Central Bank of Brazil has not been very efficient in curbing the non-discretionary spending. It is clearly a case wherein a fiscal crisis has led to economic crisis. Another reason is slowdown in China and Brazil being the largest exporter was hit the largest. The unemployment levels are high, inflation around 9% and Zika virus that became famous which could potentially have an impact on sales of tickets.

India looks pretty decent compared to others because its economic conditions have improved. Various fiscal and monetary

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The Road Ahead for BRIC Nations: The greatest lesson from the emergence of the BRICs is that no rise is complete without the triumph of the middle class. The record across these four countries is exceptional, but there is still considerable room for growth. The US should cooperate and work to improve the NDB that was established.

The BRICS can be successful if they grow, provide investment opportunities for outside investors, and interact smoothly with International Financial Institutions (IFIs). The BRICS bank can work and cooperate with Asian Development Bank and World Bank. The BRICS face the challenge of containing China’s drive to control institutions that were supposed to give each partner an equal voice during critical decisions. The BRICS will hold a minimum stake of 55 percent in the bank but some analysts say China could increase its hold by bringing in new member countries from its sphere of influence hence end up getting more say and decision making power. Other than BRICS there are N-11 countries as well that are poised to transform the world economy. US being the world superpower can become a thing of past if the emerging economies (BRICS) work together in a collaborative manner and strive to be the best by working on their major weakness which is corruption and capitalism.

Mr. Tapan Singhel MD & CEO Bajaj Allianz How does Bajaj Allianz go about planning its investment? What is their security selection philosophy?

Investment managers make their decisions based primarily on fundamental research.

One of the things which investment managers often overlook is the emotional aspect of the markets. Emotions play a big role in deciding the stock movements and the overall behaviour of the market. Most of the time, we do calculations on how the industry is performing, where do the valuation ratios stand. These are important factors which contribute to 70-80% of the performance but it’s the human aspect of the market which often provides the alpha. However, in the long run, it is extremely difficult to beat the market.

I once had the privilege to interact with Mr. Warren Buffet and his points of advice were: • Put your money in which you think is long term. Invest primarily in non-cyclical companies which are say recession-proof • Gauge the sentiments, the strengths and the management of a company before investing

condition is moving up. When one has surplus funds, which is left behind once the disposable income has satiated all utility buckets, then one starts thinking about health, life and other assets, that brings the pull automatically.

The insurance industry has to make it very convenient for the consumers. Whenever the need arises, the industry should be at its tip. Today, the Uber’s and Ola’s are providing nothing but convenience. They are not investing in physical assets. The shift for the insurance industry too, has to be towards providing convenience to the consumers. The tipping will happen on its own.

Insurance business is based on relationship management. We have changed our tagline to say “Relationship beyond insurance”. In the industry, claims are not very frequent. The maximum is in the car segment which is onethird. For homes, it is one in hundred. For health, it is one-tenth, which means that 90% people do not experience insurance benefits. Hence, they lose charm in insuring. But, we have seen historically that the year when people remove In the Indian Insurance industry, currently lot of the cover, is the year they end up needing it. In transactions happen via push selling initiated such situations, all their assets get wiped-off. by the insurance company correspondents.

Many people view insurance products as Hence, the relationship aspect of the insurance investment tools and not as vehicles to hedge industry is very important. We need to provide against risk. How can we convert the market to convenience, accessibility and go beyond a pull-based selling model? claims. For example, in a health product, we are adding benefits like pharmacy discounts, gym This would come naturally. When a country’s discounts, spa discounts, wellness tips – these economic condition improves, the insurance are the services you usually pay for. So, even penetration goes up. In India, the economic if you don’t have claims, throughout the year something is benefitting you. In car insurance, © FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

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support in new projects and beneficiaries we have added benefits like replacement of punctured tyres, batteries etc. and other forms of road-side assistance.

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We have gone much beyond claims as that is a small segment of the population. The experience should be beyond claims and that is how the industry will evolve. The focus should be on solution-orientation rather than selling products as such because when you are pushing something, nobody wants to buy.

With the advent of technology, can Internet of Things (IoT) add value to the insurance industry?

IoT has a big role to play in the insurance industry. If you look at telematics, though the manufacturers have put it in the car for analysing the engine damages and issuing pre-warnings to the customer, the insurance industry in developed countries has started making big use of it. Selected insurance providers can now fit this clever device into your car that measures how well you drive.

By having the device installed in your car, it’s possible for you to prove that you drive safely.

Your premiums are then based on how safe and conscientious a driver you are instead of paying for insurance based on the average driver.

Look at the wearable devices for health monitoring. The devices track your physical training, your fitness levels and guide you on the same. So, IoT and insurance are going to be heavily integrated. The only challenge is customer data privacy as the customers have to give access to their data. This would help us analyse their trends and customise our offerings. Now, even this challenge has softened a bit as the customers are opening up and the issue of data privacy is being taken care of due to their habit of going online for most of their needs. They know that the Google’s and the Amazon’s of the world already have a lot of their data. So, the future looks very promising in terms of IoT.

SEPTEMBER 2016

Talking about the market, what are the kind of events that create volatility and how can the market players safeguard against it?

Perception has a big role to play in market volatility. What exactly is recession – people unwilling to buy because they are unsure about their future earnings. When people are in a positive mood about the economy, the car sales pick up. So, volatility is caused mostly by human emotions. A good fund manager needs to observe the sentiments of the masses through all possible news vehicles – social media in particular as it captures the reactions well. The days of the fund manager reading only reports and balance sheets are gone.

Today, there are so many online tools available to analyse the trends of the consumers. It is important to combine fundamental and technical research with customer sentiment analysis in today’s dynamic conditions.

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FinFunda of the Month

Sir, what is margin trading?

Margin trading allows an investor to buy more stock and shares than one would normally be able to with their own money. Effectively, trading on margin is like borrowing money from a broker to purchase stock. Usually, trading on margin is carried out through a separate account called a margin account.

Sir, is there a cost associated with borrowing?

Yes, it is in essence, a loan from the broker which carries a fixed rate of interest.

Therefore, an investor would enter into margin trading only if he sees gains which beats the interest costs.

Further, the securities purchased with the borrowed sum will act as collateral.

But what if the anticipated increase in price does not take place? Who bears the loss?

The investor is the risk taker, acting beyond his normal capacity with a view to enjoy substantial gains, but at the possible cost of substantial losses. It is like trading with leverage. Thus, should there be a decline in price, the effect on the investor is increased due to borrowing additional capital.

Sir, and if the loss is beyond the capacity of the investor to cover, how does the broker ensure his interests are covered?

This is where a margin requirement comes into play. The investor does not use only borrowed money for trading. Before approaching the broker for additional money, the investor is required to deposit an initial investment (set as a percentage or a minimum amount or a combination of both) which serves as a capital lock-in. Thus, if the price

Margin Trading Anoop Prakash IIM Shillong of the security falls, the initial investment serves as a cushion for the lender to ensure that his money is secure.

With computerization, the margin requirements is constantly updated at the terminal of the broker.

As stock prices decline, the margin requirements is updated and if the value of the stock goes below a predetermined threshold, a margin call is made and an amount is to be deposited by the investor (borrower) to make good any unrealized loss. This amount is called the maintenance margin. If the additional amount is not deposited, the broker has the right to sell a part of the stock to cover the requirement.

Are brokerage charges any different under margin trading?

No, brokerage and DP charges are the same and equivalent for normal delivery. Further, margin trading is not allowed on derivatives.

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WINNERS Article of the Month Prize - INR 1500/-

Siddarth Bhargava & Karan Verma IIM Udaipur

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