“Next Marking” Management Education
12th September, 2017
In this issue...
1. DeMon deflated? Not really… 2. Investing biases to Overcome 3. Companies in ‘SHELL’ 4. Unravelling the Infosys Drama 5. Internet of things – An Introduction
From Editors Desk By Neha Sardar & Akhil Jacob
T
his edition of Sofia times is like a time line – we have in store for you a little from the past, present and the future.
We believe that in the world of finance better decisions for today can only be taken in the wake of what happened yesterday and what is going to happen tomorrow. This edition also tries to give you the necessary skills and tips to be the Intelligent investor you always wanted to be. We have an assessment of the aftermath of Demonetization - was it a good decision?? Recently the ex-governor of RBI Mr. Raghuram Rajan stated that he would not have supported the demonetization - this edition explores our take on this issue. Want to be the next big investor – we have what you may need to be one – check out our space on what biases you need to avoid to be an informed investor. Shell companies - is this a new way to bypass tax laws is this legal, what exactly are Shell Companies– we bring to you the basics of what you need to know about this. The drama in Infosys is known to all of us, in this edition of Sofia times we have decided to take you on a ride from past to the present with a time line of events that culminated to what is happening in Infosys today.
Finally taking a sprint to the future we have what is known as the IOT – Internet of things being explored here at Sofia times – we have laid out a basic understanding of the same to lay groundwork for future articles to explore the use if IOT in the world of finance and banking, we would like you to explore the same with us and let us know through your contributions as to what you think is the best use of IOT in finance. We hope that you will find this edition useful and please let us know of there are any specific areas you want us to cover in the future. Happy Reading!!!!
DeMon deflated? Not really… By: Mahalakshmi Subramanian
T
he Reserve Bank of India on August 30 made a revelation that was surprising but not entirely unexpected. We got to know that 98.96% of the Rs1000 and Rs500 notes (in value terms) that got demonetized on November 8, had been returned. While some are quick to term the note ban as a complete failure, others believe that it is a reform in progress. While a definitive judgement seems difficult, a few of the results expected by the government seemed to have materialized. o Eradication of black money o A windfall gain of Rs 3-4 trillion (in the form of invalid notes that would perish outside the system, thereby reducing the RBI’s liability and translating into a gain for the government) o A rise in digital payment mechanisms that would transform India into a cashless society Let us consider the first two. The RBI’s numbers have dashed any likelihood of discovering a huge cache of black money stashed away in the homes of the rich. The government withdrew Rs.15.44 Did you know ??? lakh crore from the system. Of this, almost Rs 15.28 lakh crore has come back into banks, thereby disproving any Rs 1,000 and higher denomination claims of black money being discovered notes were first demonetized in January 1946 and again in 1978. in bundles. Secondly, any hopes that the The highest denomination notes ever government had in landing a gain (as printed by the Reserve Bank of India explained above) were also trashed. was the Rs 10,000 note in 1938 and What one can glean from the above again in 1954. numbers is that the government will Higher denomination banknotes of have to chase black money in other asset Rs 1,000, Rs 5,000 and Rs 10,000 were reintroduced in 1954 and all of classes such as gold and real estate. them were demonetized in January Demonetization spurred use of digital 1978 payments systems, thus fueling hopes of India’s future as a cashless economy.
However, cynics would (rightly) reiterate that we have a long way to go. After having risen to as much as 957 million transactions in December 2016, the volume of digital transactions plunged to 862 million in July 2017. This could be attributed to the return of cash to the economy and the RBI’s efforts to introduce newer denominations of notes to reduce the gap between high-value and low value notes. India also has to work hard in terms of strengthening the infrastructural machinery to support a massive and sustainable adoption of digital payments. A billion mobile phones and Aadhaar cards may make ‘click-n-pay’ easier, but that is not enough. What India needs is a change in mindset, accompanied by incentives for individuals/institutions promoting the use of digital payment systems. And no, this does not mean those cash rewards doled out by the government in the initial months after demonetization. Some measures in this regard would be contemplating low-interest rate loans or a tax deduction for digital Samaritans. While the note ban certainly added untold woes to the already suffering common man’s life, it may hold out certain Did you know??? positives in the long term. Reports reveal that post demonetization usage of The Rs 1,000 note made a comeback in cash reduced by 25%, while tax collections rose 45%, thus filling up the November 2000. government’s coffers. Also, the fact that huge money has returned to the banking Rs 500 note came into circulation in system should make tracking easier, enabling the government and tax October 1987. authorities to punish tax evaders. One hopes that the government follows up on efforts to track huge deposits and bring black money holders to the book rather than giving up demonetization as a failed strategy.
Investing biases to Overcome By: Angad Katdare
8 behavioral biases every Investor must be overcome to become a better investor enjamin Graham, also known as the father of value investing, introduced the concept of Mr. Market in his 1949 book “The Intelligent Investor”. In the book, Mr. Market is an imaginary investor who is
driven
exuberance
by fear, and
‘his’
greed
and
investing
decisions are driven by emotions rather than company’s fundamentals. When the market falls, Mr. Market sells the stock and when the market rises, ‘he’ buys the stock. Sounds familiar? Majority of the ‘investors’ can relate to this hypothetical Mr. Market. So, why does this happen? Even after the BSE Sensex has given a CAGR return of 16% since its inception and multiple stocks have given profound returns, why does an average investor lose money or make paltry returns on his portfolio? The answer lies in knowing the behavioral biases. What is behavioral finance? Investopedia describes it as “a field of finance that proposes psychology-based theories to explain stock market anomalies such as severe rises or falls in stock price.” The key word here is ‘psychology’. Sanjoy Bhattacharya says, value investing is 85% psychology. If you conquer the psychology aspect of investing, it will help you immensely in getting better returns.
Here are 8 such behavioral biases (psychology aspect) which an investor must know about if he wishes to earn better returns. I will try to explain them in simple terms. 1. Loss Aversion – It’s the tendency of investors to avoid losses. The pain of losing Rs.10 is more than gaining Rs.10. 2. Anchoring Bias – It’s the tendency to attach to an anchor (E.g.: stock price or a thought) while deciding. If you buy a stock at Rs.100 and the stock doubles to Rs.200 over the next 12 months. Your analysis says that the stock is undervalued even at Rs.200 and it’s still a buy. But, the investor suffering from anchoring bias won’t buy the stock at Rs.200 because he has an ‘anchor price’ of Rs.100 i.e. his first buy price and he’ll wait for the price to fall and come near his original buy price. This will lead to losing a potential profit opportunity by not buying the stock at Rs.200. 3. Confirmation Bias – This is a powerful bias to overcome. An investor will search for information which supports his existing opinion about the stock. If there is a news contradicting his existing opinion, he’ll choose not to read it. If an investor has decided to buy a stock, he’ll only read news supporting his buy analysis and filter out all the news which will challenge his analysis (even if the news is true.) 4. Recency Bias – If a company announces a great quarterly result, the investors tend to buy the stock on that recent news i.e. the quarterly results. The investors overlook any old negative news which may adversely affect the business in the long run and the stock may go down. 5. Buyer’s Remorse – People become risk averse or take more
risk.
Suppose
an
investor buys a stock and after a month it falls by 25%.
Food for thought Someone once asked Warren Buffett how to become a better investor. He pointed to a stack of annual reports. “Read 500 pages like this every day,” he said. “That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.”
So, the investor will sell the stock. In the future, the investor will become risk averse and doubt his own analysis before buying a stock. 6. Overconfidence Bias – James Montier in his 2006 study titled “Behaving Badly” found out that 74% of the 300 professional fund managers ‘believed’ that they have outperformed the market. Only 50% of the investors can outperform the market. An investor must be humble in his approach. Having confidence in one’s ability is a profound thing but there is a thin line between overconfidence and confidence. Always be humble, patient and accept that you don’t know everything. Market is a cruel place. It doesn’t discriminate between investors. It will annihilate an investor’s portfolio overnight in a day. 7. Sunk Cost Trap –Never try to catch a falling knife as it will hurt you. If a stock falls from Rs.100 to Rs.80 and an investor buys the stock at Rs.80. The stock falls further to Rs.50. The investor instead of selling the stock and covering his losses buys more of the stock to average his price. (E.g. Reliance Power in 2008) 8. Bandwagon Effect – Investor tends to buy a stock because of its popularity or because many big investors have bought it. Even though the stock has gone up since it has become popular and it may not be a good buy but still people fall prey to this bias. Ignore the crowd or a big name and always do your own thorough analysis before buying or selling a stock.
Food for thought Billionaire investor Ray Dalio once said, “The more you think you know, the more closed-minded you’ll be.” Repeat this line to yourself the next time you’re certain of something
How to overcome these biases? You can’t! Be aware of them and try to minimize their impact as much as possible. In the age of internet, everyone has access to
instant news. Edge in knowing behavioral finance (biases) will be a major differentiator between a good investor and a great investor.
Companies in ‘SHELL’ By: Chanchal Singh
he Securities and Exchange Board of India (SEBI) took a decision on 7th August to initiate action against 331 suspect Shell Companies in India and band them from trading. It is said that around 7000 crores of investors’ money is stuck in these 331 companies. Last month, the authorities ordered around 2 lac shell companies to shut down. After a hearing, the accused companies have been placed in the Graded Surveillance Measure (GSM) in stage VI. In this case, trading of the security is allowed only once a month only when the “surveillance deposit” which is three times the trade value is deposited with SEBI. What is a Shell Company? There is no proper definition of this term in the Companies Act 2013, however, for understanding, Shell Companies are companies without any business operations or significant assets or investment. Companies create the
shell
companies
for
some
illegitimate purpose like avoiding tax burden by hiding the ownership from Law. These companies provide ease of converting black money into white on papers. US defines shell companies in Securities Act and has laws governing the creation and operation of such companies.
Current Action The Finance Minister discussed the probable action that the government would take against these companies. Since there isn’t any law defining these companies, the actions would be under the Benami Laws and Income Tax laws prevailing in India. Some companies out of these banned companies appealed to Securities Appellate Tribunal (SAT) against SEBI’s order. Securities Appellate Tribunal (SAT) cancelled the restriction imposed by SEBI on two companies namely Parsvnath Developers and SQS India BFSI Ltd. Other two companies are Signet Industries Ltd and Pincon Spirit Ltd. However, there will be a price band of 10% on Parsvnath Developers and 20% on the other three companies. Shell companies help the promoters and owners of well established companies to hide their revenue and operations from the law which makes easy for them to continue fraudulent activities and tax evasion. With the demonetization of currency by the Government, the banks were flooded with the deposits from these companies. This shows how the Indian market is filled with Black Money lockers ‘Shell Companies’. Our law doesn’t have any definition of ‘Shell Company’ in its books, hence now when the cases are rising we are dealing with the Benami Law and Income Tax Act without any direct applicable provisions. This gives the opportunity of loopholes for evasion. After the ban of 2 days, which resulted in huge loss for the whole market, SEBI revoked the ban on few companies and justified the action by that the list was provided by the Central Ministry. This puts a question on the autonomy of SEBI as an independent board of people. It is said that the around 160 of the banned companies were active in trading with 2.7 million public shareholders. When few companies moved to the SAT (Securities Appellate Tribunal) against SEBI’s action, the verdict given by the tribunal was, “Natural justice should have
been followed before action was taken�. These questions the action taking procedure of SEBI as such a dignified authority. Any new law brings its own compliance cost, which would in return increase the overall cost of performance of operation. But if there isn’t a law which properly defines the possible fraudulent activities and the governing rules, firms would keep on finding the loopholes and exploit them for their benefits.
Unravelling the Infosys Drama By: Neha Sardar
nfosys, the second largest IT Company in India has found itself amidst high level disagreement and dispute and it just does not seem to die down. It started off with the exponential increase in the severance package of CEO Vishal Sikka to as of now his resignation. The company's co-founder and former chairman N.R. Narayana Murthy expressed transparency
great
concerns and
over
corporate
governance. Let us look at the major events that took place via this timeline: August 2014: Vishal Sikka, a former SAP AG executive board member, takes over from S.D. Shibulal as Infosys chief executive to revive the fortunes of the company which was losing market share. December 2014: Some of Infosys’s founders - N.R. Narayana Murthy, Nandan Nilekani, S.D. Shibulal and K. Dinesh - sell shares worth $1.1 billion in the company, cashing in on a more than 20 percent gain in the stock since Sikka’s appointment. February 2016: Board decides to extend Sikka’s tenure by two years to 2021. $20-billion target by 2020, set by Sikka. February 2016: Sikka was rewarded with a 55% rise in compensation, to $11 million. This was a major decision taken by Infosys board to reward Sikka.
April 2016: Sikka was appointed CEO in 2014 for a term of five years. However, only 3.57% of promoter votes were cast in favour of a resolution reappointing Vishal Sikka as CEO. May 2016: Rs 23.02 crore severance pay, salary and other benefits were paid to Rajiv Bansal in 2015. This raised controversy as he was outgoing executive and proxy advisors and analysts interpreted this as unfairly high compensation. Bansal had joined Infosys in October 1999 and resigned on 12 October 2015. He left the company to join as head of finance at Ola, run by ANI Technologies Pvt.
Did you know ???
Ltd. September 2016: Some of the company’s founders expressed
their
disagreement over the high
It is known to all that Narayan Murthy along with six other colleagues founded Infosys in 1980. However, the employee number 1 for Infosys was N S Raghavan. Murthy was heading Patni Computers at that time and he promised Ashok Patni for completion of two projects. However, that took him almost 11 months and he joined Infosys as Employee number 4.
compensation and hence Infosys had to stop the remaining installation of severance payment of Rs 17.38 crore to Bansal. October 2016: D. N. Prahlad was appointed as an independent director on the company’s board. This did not go down well with many since he happened to be a relative of Murthy. December 2016: Founders including N.R. Narayana Murthy, S.D. Shibulal and Kris Gopalakrishnan went on to hold a meeting V. Seshasayee, chairman of the board, and Vishal Sikka, CEO. In the meeting the founders expressed their unhappiness with Seshasayee on the issues of corporate governance. February 2017: Infosys says had already addressed concerns about executive pay after media reported that its founders had complained about decisions including a pay hike for Sikka.
Company reassures investors and analysts it was not being distracted by a dispute with founders. The company’s third largest institutional investor, Oppenheimer Funds extended support to CEO Sikka. February 2017: Even though there was clear indication of trouble in heaven, Infosys chairman R. Seshasayee went on to deny the tussle saying that there was no conflict of interest between the firm’s founders and the board of directors. Vishal Sikka declared that the media reports on conflict between founders on corporate government were distracting and that his relation with everyone including Chairman Murthy was good. Independent director Kiran Mazumdar-Shaw assured that the severance pay issue will be solved sooner and it would bring the dispute between Murthy and Sikka to an end. On the same day Murthy went on to call off the fight about corporate government, making it official that there will be a media conference and the company will deal with the issues inside rather than making it public. April 2017: Founder Murthy criticizes salary hike given to Chief Operating Officer Pravin Rao. Company announces $2 billion cash return to shareholders and appoints independent director Ravi Venkatesan as cochairman of board, moves seen aimed at placating some founders and former executives who were critical about the management. August 2017: Sikka resigns as CEO, citing a stream of distractions and disruptions. "I cannot carry out my job as CEO and continue to create value, while also constantly defending
against
unrelenting,
baseless/malicious
and
increasingly personal attacks," Sikka said in a blog post. U.B. Pravin Rao, Infosys' chief operating officer, was named interim managing director and CEO. Rao will report to Sikka, who will take on the executive vice chairman role until a permanent CEO takes charge, which should be no later than end-March 2018 as per the company officials. Nandan Nilekani returns as its new non-executive chairman.
Internet of things – An Introduction By: Akhil John Jacob
R
ecently we have been hearing a lot of assumptions and propositions made on how the world will be after a few years. – Taking only the job market into consideration, the future does not look bright for the good old manual labor, we hear mostly that robots will take over, artificial intelligence will substitute most of the work done today by normal people like you and me, lot of jobs are at stake etc. In this context, another common term that is thrown around these days is IOT – Internet of things. This article will explore the meaning of IOT and subsequently future articles in the forthcoming editions of the same magazine we will see how this new world finding will impact the financial and banking sector. The Internet of Things (IoT) is, without a doubt, one of the biggest technological transformations on the horizon, with many already claiming that we are entering the second major digital revolution. The Internet of Things (IoT) is a system of interrelated computing devices, mechanical and digital machines, objects, animals or people that are provided with unique identifiers and the ability to transfer data over a network without requiring human-to-human or human-tocomputer interaction. A thing, in the Internet of Things, can be a person with a heart monitor implant, a farm animal with a biochip transponder, an automobile that has built-in sensors to alert the driver when tire pressure is low -- or any other natural or man-made object that can be assigned an IP address and provided with the ability to transfer data over a network. Simply put, this is the concept of basically connecting any device with an on and off switch to the Internet (and/or to each other). This includes everything from mobile phones, cars, washing machines, headphones, home lighting, wearable devices and almost anything else you can think of. This also applies
to components of machines, for example taking the financial sector – An ATM machine, CCTv cameras that can not only record and retain videos but also give data to the installer about every person that walks into his premises. If we have to think of a day to day example of internet of things – have you considered the Apple Home kit app – An app that can detect your presence and control the security and lighting solutions of your home from the tip of your finger – gone are the days where we have to switch on and off the lights, today apps detect your presence and decide what light suits your preferences at what time of the day. Have you thought what will be the possibilities if such predictive and self-reasoning solutions were to be proposed in the banking and the financial sector. Predictions are that there will be 25 billion smartphones, smartwatches, wearables, connected cars and other connected devices by 2020. An amazing forecast, that strongly indicates the influence that machine-to-machine (M2M) connectivity is going to have on our society, culture and business. In a very short space of time, we are all going to be surrounded by intuitive connected devices, from our smartphones and wearable tech, through to millions of sensors in our homes, on our roads and in our workplaces. For consumers, the real promise of the ubiquitous connectivity of the IoT era is to help us save time, work smarter, drive safer and live a healthier and more active lifestyle. For business, there are multiple opportunities to benefit from IoT, with $2 trillion of economic benefit predicted on a global level. The new rule for the future is going to be, "Anything that can be connected, will be connected." But why on earth would you want so many connected devices talking to each other? There are many examples for what this might look like or what the potential value might be. Say for example you are on your way to a meeting; your car could have access to your calendar and already know the best route to take. If the traffic is heavy your car might send a text to the other party notifying them that you will be late. What if your alarm clock wakes up you at 6 a.m. and then notifies your coffee maker to start brewing coffee for you? What if your office equipment knew when it was running low on supplies and
automatically re-ordered more? – Doesn’t all this sound familiar to Jarvis in Iron man – who wouldn’t want a lifestyle like Tony Stark right. The question is finally will the finance sector benefit from this – can the banks get data of your spending habits and predict that you might need a loan before you even know you need one. Can this type of highly personalized information help the banks, insurance and financial institutions to come up with tailor made products for individual customers. What if your neighborhood ATM detects your presence as you walk in and there is no more need of using a card or PIN – what if you are a small business man and as you walk into the bank and the bank is already ready with the overdraft you were in the bank for in the first place, simply because the bank knows your spending habit and finance needs from your ATM, Net and Phone banking uses. Well these are just crude examples, but the possibilities are endless. The bigger question being are all these safe??? – IOT maybe accepted in all the other sectors but in finance – is it viable and safe to have all this data stored and processed in a place – can there be security breaches. Now that we have an idea of what is IOT and its potential uses. The possibilities and threats of IOT in finance and banking sector will be discussed in detail in the future editions of the same magazine so please stay tuned to this space. To be contd…..
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neha.sardar17@gim.ac.in akhil.jacob17@gim.ac.in yamini.sharma17@gim.ac.in sarvesh.nigayle17@gim.ac.in akash.dammani17@gim.ac.in mahalakshmi.subramaniam17@gim.ac.in