The IBS Times- September 2014

BY RIPU UNDERSTANDING STIMULUS PACAKGES AND QUANTITATIVE EASING TANDON

THE IBS TIMES September 2014, Issue No. 171

INDIA’S MOST DEBT LADEN COMPANIES

BY AISHWARYA KOLISETTY

PROFILES OF TOP VENTURE CAPITAL FIRMS

BY SACHI KHESKANI

BIGGEST IPO EVER

BY NAVJOTH SAHU

INTERNET.ORG FACEBOOK’S INTERNET FOR ALL DREAM

BY PRIYANKA MALIK

FinStreet, IBS Hyderabad

171

ISSUE NO.

SEPTEMBER 2014

CONTENTS 3

Super-Hit IPO: Alibaba

6

E- Commerce Attracting Billions

12

10 Pradhan Mantri Jan Dhan Yojana 12 Cover Story: The Facebook Dream 14 Raghuram Rajan- The Year Gone By 17 Market Watch 19 Cartelization in India

22

22 Venturing All the Way !

25 Industry Analysis- Textile 31

3

28 Kingfisher Airlines- Castle in the Air 31 Companies Drowning in Debt 33 Quarterly Results: Banks 36 Stimulus Packages & Quantitative Easing 40 Event Synopsis (MD): Coalgate 42 Company in Focus: Karur Vysya Bank

INTELLIGENCE BEYOND SUCCESS

“Someone can't hide behind a trust in the Bahamas. A Swiss bank will have to find the information on who is behind the account and provide income, interest income, dividend and all other financial income in addition to the bank account information,”- a source at G20 Summit 2014, Australia

Letter from the Editor

THE IBS TIMES Faculty Mentor Dr. Ravi Kumar Jain On the Cover: Facebook by Joel Saget

Dear Readers, Greetings from Team FinStreet !

With due regards to your feedbacks and support to The IBS Times, our team keeps getting motivated and with every issue, our thirst to write more and better keeps on multiplying.

Team IBS Times Chaahat Khattar (Editor-in-Chief) Akshay Gupta Atharva Solanki Manisha Mohapatra Nikhil Acharya Nishtha Behl Shivam Tandon Vanika Sharma Alisha Singh Apoorva Anusha

This issue of The IBS Times continues to follow the path of in-depth research and analysis and presenting the same to our readers in simplistic yet interesting format.

We all know Facebook as the largest social networking site but the cover story of this issue talks about the Facebook‘s plan to go social and provide free internet to one and all. The magazine also discusses the much in news IPO of Alibaba and how e-Commerce in India is attracting billions. This edition also unravels the Jan Dhan Yojana and the mysteries of Stimulus Packages and Quantitative Easing.

The magazine covers update on the sage of Kingfisher Airlines and the recently declared Quarterly Results of Top Banks of the nation. Our regular sectionMarket Watch shares insights on the performance of markets in the past couple of weeks. This edition covers and exhaustive research on the profile of Top Venture Capital Firms of the world and the Top Debt Ridden Companies of the nation.

The magazine sheds light on the performance of Raghuram Rajan as RBI Governor in the year gone by and the growing Cartelization in the Nation.

Avik Chakrabarty Kaushik Chandell Koisetty Sai Aishwarya Manjari Navjoth Sahu Priyanka Malik

The magazine also covers industry analysis on the Textile Industry. This edition has synopsis on the successfully organized Management Discussion on Coal Embezzlement by Events team. The magazine includes an exhaustive report from investment point of view on Karur Vysya Bank by Team Vriddhi Research.

Hope you have an enriching experience reading The IBS Times. Your feedbacks and opinions will help us make it better !

Rahul Mishra Ripu Daman Tandon

Chaahat Khattar

Sachi Kheskani Sameena Usman Srishti Karmakar Vikas Sharma

" It's not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”- Robert Kiyosaki

Superhit IPO

Alibaba- King of IPOs

- Navjoth Sahu

As Chinese e-commerce powerhouse giant Alibaba hit

• Some 271 million shares changed hands, more than

trading in the market on Friday, 19 September on

double the turnover on Twitter Inc's first day last year,

the New York Stock Exchange under the name BABA,

although still short of volume for the General Motors

it is quietly hinting at plans to expand into the U.S.

Co and Facebook Inc IPOs.

The company controls nearly 80 percent of all e-

What is Alibaba:

commerce in China, and founder and chairman Jack Ma has ambitions that go beyond the country‟s borders.

Alibaba Group was established in 1999 by a group of 18 people led by Jack Ma, a former English teacher from Hangzhou, China. From the outset, the

Some of the major key points after the first day of AliBaba on the NYSE trade floor are:

company‘s founders shared a belief that the Internet would level the playing field by enabling small

• Company priced its initial public offering of stock at

enterprises to leverage innovation and technology to

$68 per share which quickly jumped to $98 once

grow and compete more effectively in the domestic

trading finally launched and finally closed at $93.89.

and global economies. Since launching its first

• It was so popular, the stock price had to be revised

website

up eight times, with the traders chasing the Sellers of

manufacturers

the Shares

internationally, Alibaba Group has grown into a

• Alibaba started day valued at $167.62bn, bigger than Amazon and eBay like e-commerce companies

helping

small

and

Chinese

entrepreneurs

exporters, to

sell

global leader in online and mobile commerce. Today the company and its related companies operate leading wholesale and retail online market places as

• After the first day it is now worth $230bn, which is

well as Internet-based businesses offering advertising

more than Facebook and Twitter

and marketing services, electronic payment, cloud-

• Founder Jack Ma expected to net $14bn on US

based computing and network services and mobile

market but reached $22bn

solutions, among others.

• More than 127 million stocks were traded in the first

While we should all celebrate the impressive

15 minutes of the day

achievements

• Sells anything from celebrity fat suits to animals, plans to open in Europe

of

entrepreneurs

like

Jack

Ma,

Alibaba‘s founder, we must not lose sight of another startling reality: for all the worries in the U.S. about the geo-political and economic threat posed by China,

• There is now talk of an Amazon merger, Ma

American financial and consumer markets remain

'interested' in talks with the firm

widely open to China while the opposite is hardly true.

3|SEPTEMBER 2014

The Biggest U.S. IPO:

the company likes to highlight, is the total sum of

Alibaba‘s massive offering at the IPO would put it at

goods and services transacted on all its sites.

the top of the biggest-ever U.S. IPO list, beating out

Threats to U.S.:

Visa (V 0.42%) , which currently holds the 6 year long record of after it raised $17.9 billion in 2008, according

to

Bloomberg

data.

Standout

tech

companies such as Google ( GOOG 0.77%) and Amazon (AMZN 0.31%) which don‘t even make in the list. And if the bankers choose to execute an option to sell more shares, Alibaba‘s IPO sum could jump to $24.3 billion, beating out Agricultural Bank of China to become the biggest IPO worldwide.

Market Capitalization: At the high end of its IPO price range of $66-$68, Alibaba will be bringing in enough money to give it a market capitalization of $162.7 billion. That would make it much larger than Amazon, but less than half the size of Google‘s massive market value.

But this is not all just think about one fact. One hundred six Chinese companies are listed on the New York Stock Exchange and the NASDAQ. They include state-owned giants such as Petro-China and China Mobile, and private firms like Baidu (the search giant) and JD.com (Alibaba‘s competitor). The number of American companies listed in China? Zero.

Of course, this may not be a fair comparison. Because China

maintains

capital

controls

and

has

a

nonconvertible currency, it makes little sense for foreign companies to list in China. However, even if there were no capital controls, it is doubtful that an American company could have listed in China with the same kind of ease and welcome experienced by Alibaba. Chinese listing requirements are notorious for their arbitrariness and complexity.

Revenue: Alibaba‘s historical stats sound huge in its prospectus: its 279 million shoppers bought $248 billion in gross merchandise volume sold. Its mobile sales expanded 100% last year. Those are impressive figures. Much further down, on page 94 on its prospectus, Alibaba

This unequal relationship of trade is also reflected in U.S.-China trade. The openness of the U.S. has allowed Chinese-made goods unimpeded access to its vast consumer markets. Between 2000 and the end of July 2014, China‘s cumulative trade surplus with the U.S. was $3.13 trillion.

records its most recent annual revenue: $8.5 billion.

That beats out only Facebook FB 0.75% . Amazon brought in almost 9 times that much in its most recent fiscal year. The comparison is not exactly apples-toapples. Alibaba‘s business model is similar to that of Ebay, in that it is a middleman coordinating sellers and buyers. Alibaba doesn‘t house and manage any products itself. Gross merchandise volume, the metric

Meanwhile, American companies that have been doing

business

in

China

have

periodically

encountered harassment and protectionism. Most interestingly, while Alibaba is getting ready for its IPO on the NYSE, Chinese authorities are carrying out tough anti-monopoly enforcement actions against well-known U.S. companies. Microsoft is one which is facing an ultimatum. Qualcomm is being threatened with a $1 billion fine. Chrysler was just slapped with

4|SEPTEMBER 2014

a $5 million fine for ―operating a price monopoly‖—

Sadly, Chinese businesses with huge stakes in a

even though Chrysler‘s market share in China is less

healthy Sino-U.S. relationship have been doing

than half a percentage point.

absolutely nothing to champion America‘s image in

Behind this tactful imbalanced relationship is an even more panicking political asymmetry. The openness of the U.S. markets to Chinese companies and goods is ensured by the enormous political support from the shocking American business community, which has worked relentlessly to prevent the U.S.-China geopolitical rivalry from spoiling their commercial ties. Since normalization of diplomatic relations between Washington and Beijing in 1979, leading American companies, such as Boeing, GE, Goldman Sachs, and many others have given generously to causes dedicated to improving U.S.-China relations.

When China was trying to enter the World Trade Organization, Corporate America launched an all-out

China. Even if we try to exclude state-owned companies because they are essentially owned by the Communist Party, private Chinese firms, including those with listings in the U.S. and those that sell most of their products to the U.S., have been disengaged from political, intellectual, or cultural activities in China that may serve to advance Sino-American ties or act as a voice of moderation and reason. For example, not a single Chinese firm has publicly expressed disagreement with Beijing‘s harassment of American firms in the ongoing anti-monopoly crackdown. No well-known business leaders have been on record in repudiating the anti-American hysteria in the Chinese media.

campaign on Capitol Hill to ensure that Congress

We can blame this political asymmetry on China‘s

would not block Beijing‘s entry. Even in China,

one-party

American businesses have funded scholarships and

entrepreneurs a political space or voice. But Chinese

cultural programs aimed at advancing Chinese

entrepreneurs should not wait for a green light from

understanding of the United States.

the Communist Party, which sees the U.S. as a threat

Of course, one could argue that America has engaged in these activities out of self-interest. This is undeniably true. But the case of American business leaders is that they have a more forward-looking mindset. They understand—more deeply than most cynics—that

a

stable

commercial

relationship

between a democracy and a dictatorship cannot be taken for granted. They must do everything possible to prevent politics from poisoning business. Luckily, America‘s democratic institutions provide them with the means and access to be China‘s most powerful lobby in Washington.

5|SEPTEMBER 2014

rule,

which

denies

Chinese

private

to its survival. They must do their part to help stabilize the Sino-U.S. relationship because it is in their long-term self-interest. So, when Jack Ma returns to China in triumph, with billions of dollars in the bank, he might want to devote a portion of his entrepreneurial talent to another worthy cause: selling America to China.

E- Commerce

E-Commerce Attracing Billions

- Avik Chakrabarty

Investors see India as the world's next big thing in e-

Such big potential for online retail is made possible in

commerce.

part by India‘s continued restrictions on big box

Although online shopping is still in its infancy in India at $2.3 billion of an overall $421 billion retail market in 2013, according to research firm Crisil. But

retailers that have Indians starved for choice. Still, India‘s e-commerce businesses face several other challenges.

it is growing fast and the potential of reaching a

Fewer than 12 per cent of Indians have credit or debit

mostly untapped market of 1.2 billion people has

cards, meaning that to expand, Amazon, Flipkart and

sparked a funding-and-expansion arms race. India's

Snapdeal have had to accommodate cumbersome cash

rapidly growing e-commerce market is turning out to

payments. Cash-on-delivery is very important. It‘s a

be a three-horse race between Amazon, Flipkart and

very Indian concept. But that is inefficient and

Snapdeal.

expensive for companies. The companies must also

The battle is playing out on TV and in newspapers: Amazon.com India is running front-page spreads touting its next-day delivery service and easy return policy. Snapdeal has a television ad with a put-upon housemaid unpacking all the purchases a happy middle class family has made online and complaining

develop logistics and distribution systems in India.

The biggest challenge, though, will likely be price wars in the fierce fight for market share. From a consumer perspective, it means better days to come.

The bargains consumers will be able to get online will only get better.

that with all the money they are saving, she should get

Flipkart-Amazon Battle Pits Murthy Against

a raise.

Premji:

India‘s e-commerce revenue has grown explosively

India's tech titans and fierce cross-town rivals,

over the past three years despite only 11 per cent of

Wipro's Azim Premji and Infosys' N R Narayana

Indians having access to the Internet, according to a

Murthy, are squaring off in the burgeoning $3-billion

report by KPMG and the Internet & Mobile

e-commerce market space. Premji has gone with the

Association of India. Online sales are growing at

domestic players; he has investments in Myntra

more than 50 per cent annually and are on track to

(recently acquired by Flipkart) and Snapdeal while

reach $8.3 billion by 2016, Crisil estimates. KPMG

Murthy has placed his bets on global e-tailing giant

estimates that e-commerce could contribute 4 per cent

Amazon.

of India‘s GDP by 2020, compared to a projected 10 per cent for the country‘s IT and call-center outsourcing industry.

Earlier this year, the Wipro chairman through his investment arm, Premji Invest, and a clutch of other investors, pumped in about $50 million in fashion etailer Myntra. Snapdeal, another e-commerce player,

6|SEPTEMBER 2014

got $100 million in funding from five investors

Higher disposable incomes and internet connectivity

including Premji Invest.

are pushing the Indian middle class to shop online.

More recently, Amazon and Murthy's family office, Catamaran Ventures, floated a JV to help small and medium businesses join the online bandwagon.

The two IT czars are fighting it out in an e-commerce market that's expected to touch $32 billion by the end of this decade.

Catamaran holds a majority 51% in the JV—Taurus

Ratan Tata to Invest in Snapdeal to Join E-

Business and Trade Services.

commerce Boom? at

After India‘s IT czars Azim Premji and Narayana

Bangalore-based Allegro Capital Advisors, said

Murthy showed interest in the country‘s sunrise

comparisons between Premji and Murthy's venture is

sector, it is the turn of business leaders such as Ratan

not like-to-like. "Having said that, it's easier to be a

Tata to join the $3.5 billion e-commerce sector.

financial investor. But in the case of Catamaran, they

The 76-year-old ex-chairman of India‘s largest

Deepak

Srinath,

director—digital

practice

are setting up full-scale operations and would be managing business operations. It's not easy to stick your neck out in this fashion which is a high-risk game in itself."

conglomerate Tata Sons, is reported to be investing in leading online market-place Snapdeal. Tata, who transformed

India's

largest

private

sector

conglomerate with a string of marquee global

Murthy's embraced a safe game plan with assured

acquisitions, is expected to be a minority investor in

returns, while Premji's is a higher risk affair many

his personal capacity in the e-tailer. Ratan Tata, who

analysts doesn‘t support this they believe they both

is now Chairman Emeritus of Tata Sons, is known to

are bullish about the sector but have different

be buying some minority stake from an existing

investment strategies. While one is taking a portfolio

investor, which means there would be no fresh

investment approach, the other has made a more

infusion of funds in Snapdeal.

strategic move.

While his holding is unlikely to be high, its real

With Flipkart raising $1 billion in fresh funds and

significance would lie in the buzz it would create for

Amazon pouring $2 billion into the India market,

the four-year-old firm. Tata has always had an interest

many existing players could fall off the investors'

in technology; even so, the deal, if it goes through,

radar paving the way for a two- or a three-way race

would mark the ultimate coming together of the old

between Amazon, Flipkart and Snapdeal in India. So

and new guard. Tata could be boarding Snapdeal just

far, Flipkart has raised close to about $1.7 billion

when the online marketplace, which has crossed $1

from a clutch of investors as it fights Amazon and

billion in gross merchandise sale by value--second

Snapdeal in a fast-growing e-commerce market.

only to Flipkart — is busy fending off a challenge from online retail juggernaut Amazon for No. 2 position in the domestic e-commerce market.

7|SEPTEMBER 2014

India's galloping internet user base is now estimated at over 240 million, raising the possibility of it emerging as the world's largest digital commerce market along with China. Snapdeal has already raised two rounds of funds so far this year, taking total capital raised to about $350 million, at a valuation of a billion dollars.

Its existing investors include San Jose-based eBay Inc, Singapore's Temasek, Black Rock, Premji Invest, It's inflection point for Indian startups:

Intel, Nexus Venture Partners, NEA-IndoUS Venture

The investments would be testimony to the growing

Partners and Bessemer Venture Partners.

interest of established business houses in India's

S ‗Kris‘ Gopalakrishnan, a co-founder and non-

burgeoning internet commerce, which is poised to hit

executive vice-chairman of Infosys, the information

$9 billion over the next two years, according to US

technology giant, has plans to invest in start-ups after

venture capital fund Accel Partners. The potential

his retirement in October. He‘d possible look at those

investment by Tata, who stepped down from his day-

in areas such as e-retailing and digital marketing.

to-day

―Obviously, what I know well is technology, and

responsibilities

at

the

$100

billion

conglomerate about two years ago, would be a huge, timely shot in the arm for Snapdeal, with both Flipkart and Amazon declaring open war for dominance of India's fast-growing e-commerce market which has attracted top dollars from financial investors.

within technology, the whole areas of digital marketing and e-retailing seem very hot. E-retailing has to change as we learn more about it. This is something very nascent. Initially, our reaction was to copy what we do in the physical world but as we

Bangalore-based Flipkart, the country's leading etailer

understand more about the technology, we will

with gross sales nearing $3 billion, last week raised $1

change the way we do things.‖

billion in funding mostly from existing investors led

by Tiger Global, Naspers and Accel Partners.

While Gopalakrishnan does not hold investments in any start-ups as of now, he has invested in a business

The Jeff Bezos-led Amazon responded a day later by

incubator called Start-up Village in Kerala; he‘s also

announcing a $2 billion investment in what is

chief mentor there. His investment plans would be

becoming a hotly contested three legged race.

limited to Bangalore and Kerala, as of now.

Other big Indian business houses with interests in

When he was asked if he would look at investing in

offline retail like Mukesh Ambani's Reliance Retail

the US, like some of his colleagues within the

and the Aditya Birla Group have now begun

founding team of Infosys, he said, ―I am keen to do

unfolding their e-commerce plans as an increasing

things in India; I am not going anywhere else.‖

number of Indians shop online, driven in large part by rising smartphone penetration.

8|SEPTEMBER 2014

ARE BUSINESS LEADER ONLY INVESTING? Myntra and Snapdeal needed money and expertise from successful Indian entrepreneurs. From an investment perspective, Premji's investments are a more classic VC style investment that fosters local entrepreneurship with a very high risk-reward ratio.

However, Amazon transaction is a contractor one.

the nation. Allowing foreign investors to partner with local manufacturers to source products will bring down prices, increase choices and make it convenient for consumers to shop online, like never before. Also, this move will eventually get rid of middlemen, leading to lower transactions, overhead, inventory and labour costs for companies. This economic reform will increase the contribution of e-commerce to the

It seems to as a low-risk, financial return-focused

country's economy by about 4% by 2020.

yield investment that has risen out of an opportunity Indian market had been operating quite differently till

driven by regulations in India.

now. The government had hitherto banned foreign The fact that these iconic business leaders are trying to align themselves in the ecommerce sector shows that there is some substance in the sector. However, these leaders are just acting as investors.

operators unless they set up a platform for Indian suppliers to sell their wares. So while these foreign players - like Amazon or eBay - handle the logistics, the Indian e-retailers are those who are actually doing

Wipro Chairman Azim Premji‘s investment in

business. This marketplace environment helped ease

erstwhile retail chain Subhiksha, Mehta said that

out a lot of worries for small and medium-sized

Premji just acted as an investor but did not involve

businesses. The relaxing of these rules may witness

himself in the business, which later turned into one of

large players entering the fray. Apart from the

the biggest debacles in the Indian retail sector.

government implementing a calibrated approach in

Ratan

strategic

this regard, the way out would be to figure out niche

investment where there may see some closer

markets, customized products, innovative marketing

relationship between Croma and Snapdeal given that

etc.

Tata‘s

investment

may

be

a

Snapdeal‘s top selling products are in electronics category. Experts wonder whether Tata‘s role will grow beyond being just an investor in the company.

Finance Minister Arun Jaitley mentioned liberalizing e-commerce in his Budget speech, but so far the government has not taken any steps to change the foreign investment restrictions.

Government needs to allow more Foreign Direct Investment (FDI) in e-commerce. This is going to benefit the market and make it more dynamic. There is going to be a lot of economic flow that will benefit 9|SEPTEMBER 2014

Unravelling

Pradhan Mantri Jan Dhan Yojana

- Manjari Sharma

The Pradhan Mantri Jan Dhan Yojana was launched on 28 August, 2014 across the nation simultaneously.

The Prime Minister, Mr. Narendra Modi, declared the new start for ending the financial untouchability in India, as 1.5 crore bank accounts were opened on the 1st day of its launch across the country, is an exercise unprecedented on scale in economic history.

With the rapid growth of our country in the knowledge era with all the facilities of modern banking and financial systems, it is unacceptable that a large majority of Indian population is deprived of basic banking facilities. It seems with all these ―Sab Ka Sath Sab Ka Vikas‖ is the development philosophy of our current PM Mr. Narendra Bhai Modi.

economic growth and India rising the poor in our country are still trapped in a perpetual cycle of exclusion and deprivation. For this prevalent issue Jan

In his Independence Day speech he had announced

Dhan Yojana is the first step in the direction of

the PRADHAN MANTRI JAN DHAN YOJANA as a

providing financial freedom to one and all. With a

National Mission on Financial Inclusion with an

bank account, every

ambitious objective of covering all households in the country with banking facilities and having a bank account for each household. This is important for including people left out into the mainstream of the financial banking system. The PMJDY is the core essence of the development philosophy. As Mr. Modi said, ―Banks were nationalized in 1969 after weaving a lot of dreams before the country. We were told that this would benefit the poor. But I regret to say that in reality, even after 68 years of independence, not even 68 per cent of the population is covered by the banking

system.

This

is

also

untouchability.‖ (Source: The Hindu).

a

form

of

household gains access to banking facilities. This will enable the poor and downtrodden to come out of the grip of moneylenders. Right now, most Indian households rely on usurious money-lenders for credit and on the Saradhas and Saharas for their savings needs. Bank accounts for all may solve this problem.

As a first step, the RuPay debit card is given to the beneficiaries who will have an inbuilt accident insurance cover of R1 lakh and an overdraft facility up to R5,000. It was announced that those who open an account by Republic Day next year will also get a life insurance cover of R30,000. The PM said PMJDY was also aimed at eliminating corruption as it would facilitate routing of subsidies directly into the

10 | S E P T E M B E R 2 0 1 4

accounts

of

intended

beneficiaries,

instead

of

open accounts in different banks using different

dispensing them through the vast, leaky network of

identity documents like PAN card, Aadhar among

government agencies. It also offers an opportunity for

others in the lure of getting insurance cover of Rs 1

local banks to grow their businesses in the current

lakh from all the banks. The banks should have a

uncertain economic environment. The benefit of

single information sharing system by which this

Pradhan Mantri Jan Dhan Yojana can be extended to

possible misuse could be stopped. Another possible

existing account holders without opening a new

threat was ‗smurfing‘, the RBI official said. (Source:

account. For a glimpse of how banks embraced the

The Hindu).

scheme, the country‘s largest bank, State Bank of India opened 20 lakh new savings accounts on 18th September 2014, Thursday through 10,000 camps held across the country. Bank of Baroda said it surpassed the mandate to open 10 lakh accounts while Union Bank of India opened 5 lakh accounts. IDBI Bank said it opened over 3.62 lakh basic savings accounts under PMJDY against the 2 lakh target, and held camps at more than 6,800 locations. Bharatiya Mahila Bank, India‘s first women‘s bank, said it organized 43 camps. (Source: IndianExpress.com).

Right now, one account is being opened for one adult of each household and by 2018; the aim is to make it two per household and one should be a woman of the house.

Executing the scheme in a right manner so that it does not lead to duplication of accounts is the main concern for the banks. Till now, 40 million bank accounts have been opened under the Pradhan Mantri Jan Dhan Yojana and that banks have mobilized Rs 3,700 crore so far. Easy access to the banking system (and freedom from scam-artists and moneylenders) can materially lift India‘s economic prosperity. Direct subsidy transfers can save money which are now lost in the loopholes or the leakages. But that‘s the backended long-term story. The costs of the Jan Dhan Yojana are front-ended. If the Government is ready to bear all the costs, this will be another welfare project to be funded by the tax payer. The bottom-line is as counting on sheer numbers; the scheme has started off

There is good and bad to all great ideas, execution at

with a bang. But the question is whether these

such a mass level is always a challenge. The Reserve

accounts will actually generate the promised ‗Dhan‘

Bank on Friday warned the banks to be more careful

for all those who have signed up for it.

while opening accounts under the Jan-Dhan Yojana, saying that a single individual could open multiple accounts in the lure of Rs 1 lakh insurance cover. ―There are some caveats when the banks are implementing the financial inclusion scheme under the recently launched Jan-Dhan programme,‖ RBI Executive Director P Vijay Bhaskar said at a CII seminar in Kolkata on Friday. He said people could

11 | S E P T E M B E R 2 0 1 4

Cover Story

The Facebook Dream- Internet for All

- Priyanka Malik

“By giving people the power to share, we are making

Facebook has come up with an app- ‗Internet.org‘.

the world more transparent.”- Mark Zuckerberg

Other firms that have joined hands in the initiative are

FACEBOOK, the largest social networking platform today, was founded by Mark Zukerberg in 2004 with a vision of connecting people. In its initial years

Nokia, Samsung and Ericson. The app primarily targets the Zambians in South Africa because only 15% of the population had an access to internet.

Facebook users were limited to Harvard itself. But,

The app aims at connecting 4.25 billion people by

with a mission of Global sharing, Connections and

bridging the gap of affordability and awareness. Since

openness Facebook could expand its user base to

the major chunk of the targeted 5 billion lack internet

other universities, high schools, MNCs and finally to

connection because of un-affordable data plans.

the entire world for everyone who claims to be 13 or

Therefore, the app designed provides free data in

above. It had a user base of 1.11 billion in March,

association with Airtel to all the customers who desire

2013. Facebook is a utility that allows people to share

the connectivity but lack the finances. It will help the

their

recent

Zambians to gain an access to a specific set of

happening in their lives in a manner, which is

applications inclusive of social media, search engine,

negligent of the physical distance and allows them to

local health, employment, weather and women right

stay connected with their loved ones.

sources.

The world has shrunken because of the same.

According to Techcrunch, Facebook along with 6

Although, Facebook provides connectivity to almost

other telecom companies is also working towards the

half of the world‘s internet connected population still

drones and satellites to enhance the infrastructure in-

some of the remaining gap was bridged by $19 billion

order to deliver net connections in the remotely

acquisition of ‗Watsapp Inc.‘, a messaging app for

situated places with no cellular towers in range.

mobile phones. With a mission of making it a global

As informed by the product manager ‗Guy Rosen‘

messaging app and providing connectivity to over 1

Facebook or internet.org don‘t pay for the free data

thoughts,

photographs

and

every

billion people it actually connects 600 million as of

access but Airtel does and the free access plan acts as

now.

an on-ramp to the Airtel‘s data plans. If the consumer

After surpassing 1 billion users its prime aim is to

clicks on the service or app not covered by the

hike the user base to 5 billion by making internet

internet.org the app will alert the consumer about the

more accessible and connecting people from the

fact that their data plan needs to be expanded.

developing nations world-wide, to improve their lives.

Internet if becomes accessible on such a large scale could improve people‘s health, job opportunities and boost economies. To turn this dream to a reality 12 | S E P T E M B E R 2 0 1 4

The services set includes Facebook; Messenger; Google

Search;

Wikipedia;

AccuWeather;

eZeLibrary; Facts for life (by UNICEF); Go Zambia Jobs; Kokoliko; MAMA (Mobile Alliance for

earlier partnership with ‗Globe Telecom‘ where-in

it

provided

free

access

to

Philippines. The other trails in Paraguay and Tanzania along with the earlier helped Facebook to provide connectivity to around 3 million people.

Now that Facebook is on a roll to launch the new app it has entered into role expansion by being bigger than just a social networking site. Further, the successful trial of the app in Zambia would set a long term goal to reach out to other countries of Africa, Asia and South America.

Although, the mission is benevolent to provide world-wide internet connectivity but, Maternal Action); WRAPP (Women‘s Rights App); Zambia uReport (by UNICEF- to find out about HIV and AIDS health information).

many are apprehensive of the fact that it might be just a masquerade of altruism and the final goal of the company is just profit-driven and ‗internet.org‘ is a growth tactic on a massive scale to imprint

To promote the app there will be awareness campaigns in Zambia. Call-outs in the Facebook app and notifications to subscribers of Airtel will favor the same. Further, the residents would be allowed to visit internet.org for free entry points or they may download the 800 KB app from the android app market by paying for a little data. The app was overhauled as a team of engineers was sent to South Africa, to gauge the performance. As a result of the improvisations which were done it was able to reduce the start time by more than 50%, data usage by 50%, reports of failed or slow image loads by 90% and the overall size of the app by 65%.

It isn‘t for the first time that Facebook has come up with an initiative like this. It has tasted success in its

13 | S E P T E M B E R 2 0 1 4

Facebook as a facilitator of internet.

Report Card

Raghuram Rajan- The Year Gone By

- Kaushik Chandell

“One way to do things is to say let us think in theory,

Born in a Tamil family on February 3rd, 1963, at

develop the best plan possible and then implement in

Bhopal, Madhya Pradesh, Raghuram Govinda Rajan

one go. I call this the Brahminical way. But this may

had this Bureaucratic blood from the very beginning.

not work as at the implementation stage you will

His father was a Senior Bureaucrat in Indian

realize that some aspects were not considered. The

Government. Looking at his educational background

alternative is, roll up the sleeves, don‟t minimize the

we can conclude that Mr. Rajan has never

thinking phase, but do it quickly. I am trying to do

compromised with the second best. He did schooling

that. There‟s this Chinese phrase, „Cross the river by

from Delhi Public School, RK Puram, Bachelors from

feeling the stones‟. It‟s basically step-by-step, but take

IIT Delhi and further acquired a post graduate

that step, don‟t theorize about how you‟re going to

diploma from IIM Ahmedabad. He was a Gold

cross the entire river, not knowing where the steps

medalist from IIT as well as from IIM. He received

are... Take the first step and feel your way through the

his Ph.D. from MIT Sloan School of management in

next step, be more practical about it.”- Raghuram

1991 for his thesis on ―ESSAYS ON BANKING‖.

Rajan

He became the Chief Economist at the International

On September 4, 2013, when the former IMF chief

Monetary Fund (IMF) from October 2003 to

economist Mr. Raghuram Rajan took over as the 23rd

December 2006, the President of the American

governor of Reserve Bank of India, a mountain of

Finance Association in 2011. In 2008, Former Prime

expectations surrounded him as India had longed-for a

Minister Dr. Manmohan Singh appointed Rajan as an

saviour of economy for quite some time now. Rupee

economic adviser. That very year, a high-level

was at its lifetime lows where as inflation on the other

committee on financial reforms, headed by Rajan,

hand was giving nightmares to the policymakers.

submitted its final report to the Planning Commission.

“I don’t have a magic wand to solve the ills of the

He replaced Kaushik Basu as Chief Economic

economy.”

Adviser to the Government of India on 10 August

This was the statement given by Rajan himself but everyone believed otherwise. He had a certain degree of confidence in his speeches from the very first day in office.

2012. On August 6, 2013 it was announced that Rajan would take over as the next RBI Governor. He was appointed RBI Governor for a term of 3 years succeeding D Subbarao whose term ended on 4 September 2013.

14 | S E P T E M B E R 2 0 1 4

In August 2013, Rupee was plunging at an increasing

• Rupee has stabilized

rate and had reached to its all-time low of 68.85 per

• Banking structure has improved

dollar. Under the new leadership of Rajan, RBI offered banks concessional swaps to raise foreign

• Share market bounced back

currency deposits which brought in 34 billion dollar

Rajan is not shy of raising policy rates to fight

and a special dollar window for oil marketing

inflation and most importantly he has no pressure to

companies, which eased demand in the currency

cut interest rates to boost the growth. He follows the

markets. This not only resulted in stabilization but

principle that economy can‘t be strengthened just by

also in recovery where it has now reached the value of

taking one large step but by taking hundreds of small

60.95 per dollar. Although Rajan raised the key policy

steps.

rate to 8% in phases, inflation has still remained an

THE ROAD AHEAD

issue. High interest rates has attracted foreign funds into bond with flows crossing a sum of 17 billion dollar in 2014 so far.

The man who famously predicted the global economic crisis of 2008 has a lot to fight with as we move ahead. Some of these could be the following:

One year down the line, Rajan indeed has worked to resolve the cracks in the economy. Few of his visible works are as follows: • Capital flow has resumed

Inflation RBI governor has reportedly refused the demand of politicians and industrialists for a rate cut. ―It is too early to lower the guard against the high inflation,

• Current account deficit has narrowed 15 | S E P T E M B E R 2 0 1 4

which is taking away the fruits of economic growth

from the poor in the far-flung areas of the country‖

much

says Rajan. Inflation has indeed fallen and indeed the

dispensation, Government is very much determined to

average inflation has come down to 6.93% in 2014 as

go ahead with the plan. Being the guardian of the

compared to 10.92% in 2013 but isn‘t fully under

banks it‘ll be interesting to see how Rajan tackles

control yet. Rajan has set a target of less than 6% for

government‘s micromanagement in state run banks.

himself.

Bad Loans

eager

to

give

any

special

regulatory

Changes from within: RBI is being revamping the monetary policies and

RBI has begun efforts to resolve the bad loan issue in

framework under the reign of Raghuram Rajan. Part

the banking system that threatens the very stability of

of this plan has been to appoint a Chief Operating

the economy. A detailed approach is being followed

Officer (COO) and a fifth deputy governor at RBI and

to identify the bad assets. About 2.5 lakh crores of

regrouping the departments to improve the efficiency

non-performing assets are piled up in the banking

of RBI.

statement. Connections between bankers and middle men who facilitates corporate loans are also one of the major reasons for bad loans which requires special

However, government is not so keen in following these policies as appointment of new COO has already been ruled out.

attention by Raghuram Rajan.

SHORT TERM PAIN & LONG TERM GAIN Populism Recently proposed waiver by Andhra Pradesh and Telangana state government known as Jan Dhan Yojana which ensures opening of crores of bank accounts at zero balance with embedded benefits

Rajan‘s battle with economy will not be pain-free.

Inflation policies will pressurize the economy immensely. Growth is still slow and interest rates are still high which indicates that recovery will still remain muted for some time.

within a short time. Narendra Modi‘s flagship financial inclusion programme, Jan Dhan Yojana, which was launched on 28 August, could prove to be yet another acid test for the banking regulator. The programme requires banks, mostly state-run, to open 7.5 crore bank accounts in a period of five months.

Banks have already been pushed to open over 2 crore bank accounts in the first two days of the programme.

However, if we are able to survive this pain throughout the battle, the economy will benefit in a long term. Inflation will go down and as a result savings will increase ultimately leading to the larger pool of funds which can reduce the need for foreign financing. On a whole, we can say that Rajan is sacrificing short term growth for long term stability.

Even though Rajan claims that he has no magic wand,

With these populist measures taken up by central and state government, RBI realizes that such measures can have serious implications on India‘s banking system.

Even though Rajan has made it clear that he is not 16 | S E P T E M B E R 2 0 1 4

it looks like he does have one. But whether this wand can improve the living conditions for us or not, only time will tell.

Capital Markets

Market Watch

- Rahul Mishra

The S&P BSE sensex has done well towards the end

selling by exporters and a strong rally in local shares.

of the week to record sixth straight week of rise.

This gain further helped rupee to trade strong.

Among the sector space, Pharma & Healthcare,

GOLD PRICES

Banking & Finance and technology fund witnessed gain, while FMCG funds lost under market pressure.

Gold prices fell eight month low this week and might fall further due to stronger US dollar and rising real

Both Sensex and Nifty registered marginal gains for the week ended September 19. The S&P BSE sensex closed 0.1 per cent higher, while Nifty ended 0.2 per cent up. The Midcap index closed 1.4 per cent higher

interest rates. The time is not good for metals as equities are doing exceptionally good and drawing major capital so until that stops gold will be under pressure.

while the BSE small-cap index ended 0.2 per cent up.

The US Federal Reserve at the end of a two-day

EFFECT ON INDIA

policy meeting on Wednesday, 17 September 2014,

With gold price falling almost by 3 percent for the

maintained a commitment to keep US interest rates

week, its biggest weekly drop since May 30 has

near zero for a considerable time which helped

resulted in lowering of prices of other precious

boosting government's benchmark 10-year bond

metals, with silver falling to a 14-month low. This

hitting its highest level in more than 11 months on

decline can help India in shifting its economically

Friday, this week.

inefficient share of physical savings to financial

The outlook for the Indian markets during the week remains volatile, although buyers are expected to emerge on corrections and traders might roll over positions in the futures & options (F&O) segment in coming days.

The foreign flows have bought shares worth $ 14.19 billion till now so it remains the key factor for shares.NSE index is 0.72 percent away from a record high so, domestically a lot depends on RBI policy review on September 30.

US dollar vs. Indian rupee September 18, 2014 Indian rupee ended eight paise higher at 60.84 against US dollar following late dollar

17 | S E P T E M B E R 2 0 1 4

savings through deposits in bank, insurance and mutual funds.

NIFTY Gainers

RBI Reference Rates

18 | S E P T E M B E R 2 0 1 4

NIFTY Loser

Oligopoly

Cartelization in India

- Apoorva Anusha

CEMENT

This is a group of sellers and buyers who come

Cement is an essential commodity under the essential

together in collusion to eliminate competition.

Commodities Act and the industry has been under

According to economic theory there are two forms of

price and distribution control from February 1942. In

collusion –express and tactic.

the year 1982 government introduced dual pricing

The Indian cement industry was growing during

system that means partial decontrol was introduced.

1924-1941. At that time there was serious competition

Cartel is set up in hope of gaining a monopoly.

among

A ―hard core‖ cartel means an anticompetitive

profitability. Associated cement company (ACC) was

agreement or anticompetitive concerted practice by

formed and several other cement companies were

competitors.

formed to make the first move towards combining

“People of the same trade seldom meet together,

these into an integral whole act.

even

the

In 1982 when Indian government decided to partially

conversation ends in a conspiracy against the public

decontrol the sector so that there can be growth, they

or in some contrivance to raise prices”.

realized that this method is working out well. And

for

merriment

and

diversion,

but

These are the words of ADAM SMITH, the father of modern economics. The most common type of cartel agreements among sellers is price-fixing agreements, bid-rigging

arrangements,

customer

allocation

agreement and output restriction agreements.

the

producers,

depressing

prices

and

then in lure of modernization and expansion government decided to completely decontrol the cement sector in 1989.

Since then the demand for cement is ever increasing because it is directly related to the economic activity, infrastructural investment and construction activity. India is the second largest producer of cement in the world after china. These are 125 large plant owned by 54 companies.

In the instant case, it is precise that

the

cement

manufacturer‘s association is an apex association of cement manufacturers and the other respondents manufacturing 19 | S E P T E M B E R 2 0 1 4

were

cement-

companies.

The respondents sell their manufacture through a

Cartelization or anti competitive behavior in telecom

network of distributors like railways and trucks. The

sector can be categorized into three parts (1) anti-

price per bag differed from location to location. The

competitive agreements (2) abuse of dominance and

prices also fluctuate due to the cost of the railway

(3) mergers and acquisitions. They are very helpful in

freight and transport charges.

analyzing different situations that may occur.

The prices are also determined in different states on

Nothing stirs up public indignation as much as the

the basis of present market conditions by the local

existence of cartels. The idea of competitors entering

management of the manufacturers and the stockiest

into an agreement to divide up the market in some

are also given information about the intimation of

may raises the hackles of public authority. As there

prices, which are fixed from time to time.

are so many operators in the tele-communications

Earlier the cement manufacturers used to recover their cost of production with only a reasonable margin of

market then there must be some amount of cooperation, otherwise there would be disarray.

profit. But later on, area wise committee was formed

In 2013, on 22 may there was news in the Hindu

to promote the interest of its members in relation to

regarding the disagreement on comptroller and

commerce as well as industries associated with

Auditor General (CAG) of India of allegations in

cement.

telecom operators forming cartel. In reply to this

The committee also collected and disseminated statistical and technical information in respect of

Vodafone said that if all the players in the industry did not participate it cannot be termed as cartelization.

cement trade and industry. This helped to increase

Marten Pieters, MD and CEO of Vodafone India said,

cooperation

―I have never heard about the cartel of 12 operators.

and

unanimity

amongst

cement

producers.

TELECOM SECTOR

Cartel is typically one or two or three guys sitting in a room somewhere. So I do not know where that idea came from.‖

Communications are universally recognized as one of the key area of our society. They are a goal in themselves as they represent an activity of established and growing importance with economic and societal consequences.

It is linked with the idea of access, which does not permit extrication that is an act of releasing from a tangled condition. Access in this context refers both to customers and competitors. So the regulation of market is important.

A Raja, the prime accuse in 2G case says that he is in trouble because he stood in the way of a telecom cartel.

An essential agreement that existed that time was of interconnection were different operators were allowed to terminate on their competitors network. A BSNL customer was allowed to call a friend who owns an Airtel phone. But the question was at what price this exchange should occur. Unfortunately there was no easy answer.

20 | S E P T E M B E R 2 0 1 4

So, it was decided to allow the parties to arrive at an

consumer on the basis of its choice or preference.

agreement by themselves. It could be beneficial to

They are purchased on the advice of the medical

both parties to agree to a high interconnection charge

professionals. Hence there is no escape when drug

to maintain their own markets. And so the calls made

companies build a market for their drugs through their

on an operator‘s own network was made cheaper as

extensive marketing network that target medical

compared to call on other network, leading to an

professionals and chemists with a variety of

inherent tension between competition and co-

marketing techniques.

operation in telecommunications.

PHARAMACEUTICAL SECTOR The Indian Pharmaceutical sector has come a long way, from being a small player in 1970, to becoming a prominent provider of health products. It serves 95 percent of the country‘s pharmaceutical needs today.

The

main

pharmaceutical

anti-competitive sector

are

issues centered

in on

the anti-

competitive agreements and collusive practices along the supply and distribution chains. Almost 64.25% of all pharmacists are members of All India Organization of Chemists and Druggists (AIOCD). The AIOCD is known to launch boycotts against drug companies in

There are some doubts in some quarters if further growth and internationalization of the industry, in the changed scenario of a new deregulated environment.

For this the government introduced the National Pharmaceuticals Pricing Policy, 2011.

order to grab higher profit margins. In fact price decontrol has led to greater trade margins for the pharmacists in fact this actually beats the purpose of decontrol of prices i.e. to allow the manufacturers to be able to spend more on R&D. The suffering lies

In India, the pharmaceutical sector is affected by a

with the consumers ultimately. Some of these

complex variety of laws and policy Instruments. Not

unethical practices were pertaining to irrational drug

all of these regulations, however, form part of the

prescriptions by doctors motivated by kickbacks

National Drug Policies (NDPs) that have been

received from pharmaceutical companies.

promulgated from time to time by the Ministry of Petroleum and Chemicals. In addition to the national drug policies, the Drug Price Control Orders (DPCOs), the National Industrial Polices, the Foreign Exchange Regulation Act (FERA), and the Indian Patents Act (IPA) also have an impact on the pharmaceutical industry.

The usual assumption that market mechanisms stabilize prices does not hold entirely true for the Pharmaceutical industry. This is because unlike consumer goods, drugs are not purchased by the

21 | S E P T E M B E R 2 0 1 4

Behind the Scenes

Venturing All the Way !

- Sachi Kheskani

The concept of Venture capital is archaic and has its

The core principle underlying venture capital, is to

roots right back in the Fifteenth century, where

invest in high-risk projects with the anticipation of

Christopher Columbus travelled westwards instead of

high returns. These funds are then invested in several

eastwards from Europe, in search of Indian soil; he

nascent enterprises, which require funding, but are

sought help from King of Portugal, who refused to

unable to access it through the conventional sources

finance him and was not very impressed by his far-

such as banks and financial institutions. Venture

fetched idea of exploration of lands. Finally, Queen

capital funding may be by way of investment in the

Isabella of Spain, in good faith decided to fund him

equity of the new enterprise or a combination of debt

and the rest is as they say is "History". Post world war

and equity, though equity stands the most preferred

II, the modern venture capital industry began

route in recent times. It is important to have a global

extending its roots. It is often said that people decide

picture of Venture Capitals and then streamline it on

to become entrepreneurs because they see role models

India.

in other people who have become successful entrepreneurs. Well, there lies the essence of venture capital!

US economy accounts for 68%

of the Venture

Capital activity, which is a very strong sign for growth. There is a noteworthy rebound in Europe,

Venture capital is nothing but, money provided by

since it saw a 19% increase in capital invested and 6%

professionals who invest alongside management in

change in deals, but still it does not have an impact

young, swiftly growing companies that have the

when it comes to global activity of Venture capital

potential to develop into major economic contributors.

funds. India, fourth in the global VC rankings, saw an

Venture capital is an important source of equity for

increase of 13% in capital invested reflecting strong

start-up companies. Venture capitalists generally:

interests in consumer services sector, although the

• Finance new and rapidly growing companies

number of rounds fell back slightly.

• Purchase equity securities

The year 2013, has given many reasons to venture

• Assist in the development of new products or services • Add value to the company through active

capitals for investing in India, thanks to the relaxation of FDI limits and technological revolution brought about by e-commerce.

1. Blume Ventures - 19 deals

participation • Take higher risks with the expectation of higher rewards • Have a long-term orientation.

Blume Ventures has been the most aggressive early stage investor since 2011, leading the charts consistently. Founded in 2010 with a corpus of Rs 100 crore for the maiden fund, its investments are relatively smaller as compared to other funds on the

22 | S E P T E M B E R 2 0 1 4

list but it has been consistently closing new deals.

Accel during the year include Portea Medical, a

Some of the companies it invested this year include

provider of in-home healthcare services promoted by

research platform Infollion, colour theme-focused e-

serial

commerce website Paletly, mobile consumer analytics

company Theramyt Novobiologics; social media

provider Voxapp and location-based mobile services

content aggregator tool Eventifier and ScaleArc Inc,

player NowFloats. Other investments include event

which is engaged in designing and development of

ticketing and discovery platform Explara and online

database infrastructure software.

personal

care

and

beauty

products

platform

entrepreneur

K

Ganesh;

biotechnology

4. Kalaari Capital - 11 deals

Purplle.com.

Kalaari Capital, earlier known as Indo US Venture 2. Nexus Venture Partners - 12 deals

Partners, is a new entrant to the top VC firms‘ list this

2013 has been an exciting year for Nexus Venture

year. The firm raised a new $150 million fund last

Partners, with many of its portfolio companies seeing

year and has been busy deploying that corpus. It

large follow-on rounds from other investors. Of the

invested in The Label Corp Pvt. Ltd, which owns and

dozen deals closed during the year, more than half

operates online portal apparel and accessories

were follow on rounds of funding in which Nexus

thelabelcorp.com;

Venture Partners also participated. It invested in

Technologies and bakery chain Ovenfresh among

Gurgaon-based logistics company SSN Logistics Pvt

others.

Ltd, which runs the web platform Delhivery.com; realty portal Housing.co.in, started by a group of IIT Bombay students and California-based cloud startup Armor Inc, among others. Some of Nexus‘ existing portfolio companies - Snapdeal, Eka Software and Druva Software - also raised large follow on rounds of funding. Web giant Yahoo Inc acquired Astrid, a task and to-do list mobile app backed by Nexus Venture Partners.

3. Accel Partners - 11 deals Even as the valuation of its portfolio company Flipkart.com continues to surge (in latest deal $1.6 billion), Accel maintained its faith in other existing ecommerce portfolio companies besides betting on other sectors. Some of the new companies backed by

23 | S E P T E M B E R 2 0 1 4

software

company

Robosoft

As of 2014, SEBI-registered venture capital funds (VCFs), alternative investment funds and foreign venture capital investors (FVCIs) have invested in a large number of Indian companies at different stages of evolution. Average investments have been about Rs 9,000 crore per year. All VCF's have got a pass through status. A pass-through status means the income generated will be taxed in the hands of the investor, and not the fund. This move will surely boost venturing in India!

Sr.N o

Name of Venture Capital

Founder

Headquarte rs

No. of Deal s

Biggest Investment

Latest Investmen t

Indian Investments

82

Sum Investe d in Million dollars 667.44

1.

Andreess en Horowitz

Marc Andreess en & Ben Horowitz

Menlo Park, California

Skype (software)

Tanium and Buzzfeed (2014)

Mountain View, San Francisco, New york city, Cambridge.

73

562.05

Uber (Mobile Taxi hailing services)

Arthur Patterson & Jim Swartz

Palo Alto, California, U.S.

33

488

Facebook (social networking site)

Airseed (consumer intelligenc e developer platform) & Namo media (advertisin g content for mobile application s) Pond5, Packlink, Netskope etc

Plivo (seed capital for mobile application) and Fab.com (E-commerce) Appurify (Mobile testing application)

2.

Google Ventures

Bill Marris

3.

Accel Partners

4.

Sequio Capital

Don Valentine

Menlo Park, California, U.S.

25

279.17

Whatsapp

Octro (Games maker)

5.

Khosla Ventures

Vinod Khosla

Menlo Park, California, U.S.

36

318.52

Peek.com (Ecommerce) & Ayasdi (data managemen t)

Avogy, Strut etc

24 | S E P T E M B E R 2 0 1 4

BookMyShow , Power2SME, Flipkart, Universal Collectibillia, etc Octro (Games maker),JustDi al, Bank Bazaar & Sirion Labs etc.

Khosla Labs (Mobile solutions)

Industry Analysis

Textile Sector

- Sameena Usman

Textile Sector, the most happening industrial sector in

thrust to the Indian textile industry, which has now

India, is one of the few vintage or classic age old

successfully become one of the largest in the world.

industries that India is proud of and till date, the textile industry still has a daunting presence in the economy of our country, so much so that it contributes to one-third of the nation‘s gross export income and also shares a pie of 14 per cent of the country‘s

manufacturing

value

addition

i.e.

This industry largely depends upon the textile manufacturing and export. India earns about 27% of its total foreign exchange through textile exports.

Further, the textile industry contributes around 3% to the GDP of the country.

a

considerable share in the industrial production too.Coming to providing opportunities & utilizing human resources, lets speak about -employment generation.It is a hub of employment opportunities. It not only generates jobs in its own industry, but also opens up scopes for the other ancillary sectors. The

Our textile sector also contributes significantly to the world production of fibres and yarns including jute. In the world textile scenario, ours is the largest producer of jute, second largest producer of silk, third largest producer of cotton and cellulosic fibre and fifth largest producer of synthetic fibre\yarn.

fact that it is the second largest employment

There were also a few downs that the industry had

generator, next only to agriculture, totally validates it.

leapt into. For example, during the year 08-09, the

The industry currently generates employment to more

industry had to face adverse agro-climatic conditions,

than 45 million people.

despite which, it produced 289 lakh bales of cotton

The Textile Industry, apart from encompassing prosperity into the economy, is also striving to provide improved quality of living by fulfilling the basic needs of our masses and simultaneously catering to the fashion needs of our classes. It is a giant, selfreliant industry, right from the production of raw materials to the delivery of finished products, with substantial value-addition at each stage of processing; it has positioned itself to glory as one of the leading textile industries in the world. Going back in timeline, it was predominantly an unorganized industry, but the scenario

started

changing

after

the

economic

liberalization of Indian economy in 1991. The opening up of the economy gave the much-needed

25 | S E P T E M B E R 2 0 1 4

compared to the 314 lakh bales in 07, and yet managed to retain its position as world's second highest cotton producer.

Current positive trends of the Indian textile industry: Indian textile industry has an edge in low cost cotton sourcing compared to other countries.

also rich in resources of fibres like polyester, silk, viscose etc.

Sophisticated and highly trained manpower. The

Average wage rates in India are 50-60 per cent lower than that in developed countries, which impliesthat India is to benefit from global outsourcing trends in labour intensive businesses such as garments

&

textiles.

country has a huge advantage due to lower wage rates.

Because of low labour rates the manufacturing cost in textile automatically comes down to very reasonable rates.

Highly efficient spinning sector and has presence in

Design and fashion capabilities are key strengths that

almost all processes of the value chain.

will enable Indian players to strengthen their

Diversity in size, manufacturing facility, type of

relationships with global retailers and score over their

apparel produced, quantity and quality of output, cost,

Chinese competitors.

and requirement for fabric etc. It comprises suppliers

Production facilities are available across the textile value

chain,

manufacturing.

from The

spinning industry

is

to

garments

investing

in

technology and increasing its capacities which should prove a major asset in the years to come.

of ready-made garments for both, domestic or exports markets.

Weaknesses Industry still plagued with some historical regulations such as knitted garments still remaining as a SSI

Large Indian players such as:

(small scale industry) domain, and the low bargaining

Arvind Mills, Welspun India, Alok Industries and

power in a customer-ruled market further hinders it.

Raymonds, have established themselves as 'quality

Knitted garments manufacturing has remained as an

producers ' in the global market. This recognition will

extremely fragmented industry. Global players would

further enable India to leverage its position among

prefer to source their entire requirement from two or

global retailers.

three vendors and the Indian garment units find it

Accumulated experience in terms of deals with global brands and this should benefit Indian vendors.

INDIAN

TEXTILE

INDUSTRY

–

difficult to meet the capacity requirements.

Labour force giving low productivity as compared to

SWOT

ANALYSIS Strengths

other competing countries.

India seriously lacks in trade pact memberships, which leads to restricted access to the other major markets.

Largest area under cotton cultivation in the world.

Technology obsolescence despite certain measures Abundance of rich raw materials resources . It is one of the largest producers of cotton in the world and is 26 | S E P T E M B E R 2 0 1 4

being taken.

Standards and policies such as SA-8000 WARP have resulted in increased pressure on companies for strictly standardized working practices.

Government Initiatives With a view to raise India's share in the global textiles trade to 10 per cent by 2015, the Ministry of Textiles proposes 50 new textile parks. Out of the 50, 30 have been already sanctioned by the government (with a cost of US$ 710 million). Set up under the Scheme for Integrated Textile Parks (SITP), this initiative will not Indian labour laws are relatively unfavourable to the trades and there is an urgent need for labour reforms

only make the industry cost competitive, but will also enhance manufacturing capacity in the sector.

in India.

Predictions

Opportunities

With the substantial increase in export demand, our

The domestic consumption is significantly low, which has been surveyed through percapita consumption, of textile indicating significant potential growth.

Volatility: The domestic market is extremely sensitive to fashion fads and this has resulted in the development of a responsive garment industry.

There is a lot of scope for product differentiation and innovative product development and focus should be emphasised on them.

textile industry is in for a reasonable scale of improvement!

Previously, the slightly lower demand from prominent western markets including the states and European countries, which were reeling under recessionary conditions, was the major reason for the fall in exports during financial year ‗13. In dollar terms the total value of textile products exported from India touched 32 billion$ in the last year. And this is expected to rise in the forthcoming years.Especially the recovering

Increased use of CAD to develop designing

demand from the US market is expected to aid in

capabilities and for developing greater options.

higher export realisation in rupee terms. And the

Threats Not just export competition, but the industry also faces insider competition due to cheaper imports of goods of higher quality at lower costs.

rupee value might as well go up against the US dollar.

Thus, the Textile Industry of our country proves to be pivotal across many points, apart from aiding in economic prosperity, it also effectively dictates our countries efficiency in terms of resources, labour and capability.

27 | S E P T E M B E R 2 0 1 4

Broken Dreams

Kingfisher: Castle in the Air We all are well aware of the adage that states ―all good things must come to an end, so be it in the case of Kingfisher Airlines (K.F.A) which hit the headlines all across the world for its tragic downfall.

- Alisha Singh

REASONS FOR DECLINE There have been umpteen numbers of reasons for the tragic downfall of the K.F.A, many market analysts opined that the flaws in the business plans and style of

Established in the year 2003, it was owned by the

functioning lie at the root of Kingfisher airlines' woes

Bengaluru based United Breweries Group headed by

.According

the flamboyant Mr Vijay Mallya. The airline started

analysts point out that Mr Mallya should have never

commercial operations in 9 May 2005 with a fleet of

got into the airline business. ―We believe that the ill-

four new Airbus A320-200s operating a flight from

conceived foray into the airline business has already

Mumbai to Delhi along with a promising tag line ―Fly

cost UB shareholders dearly and that their ownership

the good times‖. Kingfisher's headquarters was

of India's premier liquor and beer assets has been

located in The Qube in Andheri (East), Mumbai under

sacrificed at the altar of egoistic ambitions‖.

its registered office located in UB City, Bangalore. In

Moreover, Kingfisher also fell prey to its business

2008 Kingfisher commenced with international

model which focused only on the upper-end fliers.

flights, with its maiden flight from Bangalore to

The slowdown of 2008-2009 decimated the high-end

London Heathrow, Kingfisher was at its high peak

market. There has been clear evidence that price

with plans to spread its wings across the globe, as the

matters most to the Indian consumer, despite the fact

Indian market had huge benefits of the increase of the

Mr Mallya stuck on to his proprietary model. The

liberalisation of the market. Moreover, as the saying

closure of Kingfisher Red (earlier known as Air

goes the quickest way to become a millionaire is for a

Deccan), the low-cost arm which emerged after his

billionaire to invest in the airline sector.

takeover of Air Deccan in 2007-08 also added on to

Although K.F.A took off its journey with great spirits bagging the award for its outstanding service and also the only Indian airline to have a five-star rating from UK-based aviation consulting firm Skytrax, but to its dismay the airlines had not seen a single year of profit since it got listed in 2006. Today, accumulated losses stand at about Rs 8,200 crore with its operations ceased once and for all.

VERITAS

Investment

Research

its downfall. Moreover, K.F.A could not survive the fierce competition in the low cost domestic airlines where Spice jet, Indigo, Jetkonnect outperformed leaving K.F.A far behind in the race. Kingfisher's debts added to its already high costs-interest expense to net sales ratio in July-September was 21 per cent.

The airline needed a big revenue boost to offset costs.

In a nutshell it all bottled down to improper business model.

28 | S E P T E M B E R 2 0 1 4

to

WILFUL DEFAULT OF K.F.A According to Reserve Bank of India (RBI) norms, a 'wilful default' is said to have occurred when an entity defaults in its payment obligations to lenders even if it has the capacity to pay and doesn't use the funds for which the loan was availed, or diverts such funds.

to finance ministry data. Mr Vijay Mallya had earned a lot of criticism on grounds of leading a flamboyant lifestyle even as the airline was unable to pay salaries.

Moreover, he went on to acquire Whyte & Mackay, a Scottish bulk liquor maker amidst drama and glamour, bought newspapers (Asian Age was one such), fashion and movie magazines, bought and sold a TV

The K.F.A which had ceased its operations since October 2012 was declared as a‘ wilful‘ defaulter along with its chairman Mr Vijay Mallya by the United Bank of India (U.B.I) making it the first bank to do so. U.B.I was one of the many lenders to Kingfisher Airlines with an exposure of about Rs 400 crore to the embattled airline. Kingfisher Airlines was one of the leading companies in a list of defaulters

company and added football teams to his ever expanding empire, he even added a cricket team to his list of acquisitions and called it Royal Challengers.

The acquisitions wouldn't just stop there. He went on to own a racing team (Force India) which regularly competes in Formula One racing events, launched a calendar named after his brand, Kingfisher, in which the best of the models were featured.

compiled by the finance ministry. Subsequently, other banks such as State Bank of India, IDBI Bank and Punjab National Bank also initiated the process of

REASONS

WHY

K.F.A

HAS

NOT

BEEN

DECLARED BANKRUPT

declaring KFA and its directors as wilful defaulters.

Whether the gigantic airline should be declared

State Bank of India led a consortium of 17 banks that

bankrupt or not? Is the question that has caught the

had a total exposure of Rs 6,500 crore to the airline.

attention of many? There have been innumerable

After banks started their recovery process last year,

discussions and debates over the financial status of

the total dues are now about Rs 4,000 crore, according

K.F.A where people have contributed their distinct

29 | S E P T E M B E R 2 0 1 4

views but here are some reasons as to why its title of

of the debt, with enough to help it revive itself. This is

getting bankruptcy is withheld.

how many US airlines have come back from what seemed like certain death.

CONCLUSION Despite the trepidation, allegations, accusations, criticism, anger hurled against the gigantic airlines it was unable to recover from the massive losses it had incurred during the business creating a hole in the Indian economy and also rendering its employees jobless. ―Fly the good times‖ hit rock bottom even though the journey took off on a positive note. Hence, it isn't always that you can pull off every business venture in your life time. Scotch on the rocks works. Kingfisher on the rocks doesn't.

First, the concept of separate legal entity comes into picture where the company is treated as a separate body from its owners where in that any individual shareholder has no liability for debts that the company has. Promoters own just 36% of shares, almost all of which are pledged against loans taken. This is strange phenomenon - taking promoter shares as collateral for loans given to the company.

Secondly, there is a lack of bankruptcy protection law in India unlike in the U.S.A. A company can't just cease to operate. If it owns a factory license and has lived for five years, it can apply to the Board of Industrial and Financial Reconstruction (BIFR). Or, any company can apply to get their debt restructured, a method that Kingfisher took in 2010 (when lenders converted some of their debt to shares at nearly 64 rupees per share). But a company can't demand protection from creditors. A better alternative is to partially liquidate, and free the company from the rest 30 | S E P T E M B E R 2 0 1 4

Troubled Balance Sheets

Companies Drowning in Debt

- Aishwarya Kolisetty

The face of the financial segment of our country is

Bank of India witnessed a drop of 34% in its earning

definitely its top billionaire companies. But behind the

last year mostly because of the non-payment of

glorifying exterior hides the anguish these companies

interest on the loans and increase in borrowing by the

bear. The top Indian companies today struggle hard to

corporates.

keep their positions intact as they fight to get themselves out of the pool of debt they are surrounded in.

Major companies like Reliance ADA group,

Jaypee group, Adani enterprise, GVK Group, Lanco Infratech ect are the victims of this situation today.

Entering into an industry expansion friendly era with Modi into picture, the companies have turned hopeful for a recovery. Thus several private players have planned to pay off these debts by the means of share sales that would raise upto an estimate of $5 billion.

The past few years the Indian economy and its

The major company‘s performance today in context to

performance boosted up the temptations of these

the financial leverage are:

companies to approach the banks for a handsome



loan. The faith in the same economic status declined

its international loan of around rs.3100 crores

last year when the country witnessed a substantial

($500 million on schedule) raising its shares by

downfall in the rupee. The rupee losing its strength put these companies under a pressure to survive the

2%. 

debt they entered into. The borrowings have already

Business Today gathers that it is reasonable to

placing their profit levels at stake. Even though

expect that the promoter holding could reduce by

having several projects and investments lined up,

around 25 per cent, which could mean an IPO

these companies are facing a crisis situation and are

between Rs. 1,200 crores to Rs. 1,500 crores. 

13% in context to the dollar, the companies worse hit

1.5 billion overseas in the year 2014. 

Associates, Reliance communications.

Lanco Infrastructure company stated that the longterm debt has gone up by 16 per cent to Rs.

The increases in the debt of the major companies have led to a decline in the earnings of the banking sector

Adani Enterprise on the other hand is still on the path of increasing its debt and is planning to raise

were the companies with a huge forex borrowing. The worst hit among them are Adani enterprise, Jaiprakash

GVK Company accounts for a bulk of the debt – Rs. 2,500 crores - at the holding company level.

surpassed the investments of these companies thus

struggling to get out of it. The rupee depreciating by

Reliance communications has managed to repay

30,120 crores (Rs. 26,004 crores). 

Jaiprakash AssociationsLtd. Are looking towards

as well. Deterioration in the asset quality of the Indian

sale of assets worth 10000 crore on 2014-15 after

banks has been noticed in the past few years

a successful disinvestment of around Rs. 15000

questioning the performance of the banking sector.

crore to cover up their debt

The best managed bank of India which is the State

31 | S E P T E M B E R 2 0 1 4

Each of the companies have tried to find out a favorable mode to minimize their debt in 2014 and not prolonging it to the forthcoming years. The improvement recorded in the economy is being used by these companies to its fullest to recover its debts causing a burden on the economy itself. Definitely the Modi wave has proven to be favorable, but the whole eradication of these huge debts is definitely a long term process. The latter half of the year is expecting to witness the best period for equity offering as the total estimate of raising capital via equity is around $6 billion.

Chance to Raise Funds: Although the recovery of the debt id a long process, the current year has been really exciting for these companies and they have managed to exploit the

Inferences: the wide spread of the debt among the Indian corporates

has

definitely

some

alarming

and

underlying aspects that should be taken care of. The banking process of our country should immediately be checked upon and cautioned. They transactions and activities carried on y the bank must be much more transparent and communicated. Care should be taken that all the policies and the regulations must be followed by the bank before lending money. RBI must be a strict watchdog and keep a constant look on the lending mechanism of the banks. Secondly, the political pressure on the states owned banks must be avoided as much as possible. The norms of repaying loans and their interest must be tightened. The defaulters must be severely penalized.

situation to the maximum. The past two years really

A company is ever ready to borrow money from the

slowed down the economic pace of the country

banks in order to raise its investments and a bank is

discouraging the country to invest and earn thus

definitely willing to lend to such a company. The

making it very difficult for the companies to raise

catch here is that a company must be cautious about

money from the public to cover up its debt. The

the debt it is piling up and has to certainly maintain its

downward trend of the rupee compared to dollar

debt-equity ratio. It does not take long for a private

increased the debt burden on many companies. Thus

debt to turn into a public debt thus inviting a crisis.

the revival in the economy this year has turned into a

The top indebted companies are certainly trying hard

blessing for them. The average revenue of 24

to recover and although the sales have been increasing

companies in the infrastructure sub-index, which

positively for quite some time, the profit levels find it

includes highly indebted firms including Reliance

difficult to rise as yet. Thus the companies still have a

Communications and Jaiprakash, should rise 10.3

hard journey to undergo until they arrive at their

percent in this fiscal year to March from 8 percent last

destinations.

year, according to Thomson Reuters data The companies now view at changing the conditions of their balance sheet before looking for a new borrowing.

32 | S E P T E M B E R 2 0 1 4

Banking

Quarterly Results

- Srishti Karmakar

With the change in the political scenario and the new

2013 there has been a large decrease which is a good

promises, the performance of banks may get

sign. Capital Adequacy Ratio has decreased to 12.85

impacted. But the question is will this effect be

from 12.96 in the last quarter.

positive or negative. Some of it lies in the hands of

ICICI Bank has shown a good increase in their

RBI. On Sept 16 2014 Reserve Bank of India governor Raghuram Rajan gave the clearest possible

Quarters

signal that he'll keep interest rates unchanged at the

Revenue

month-end monetary policy announcement as the WPI

Net Profit

inflation came down in August. The general picture

Gross NPA

can be seen by seeing the top banks namely State

% of Gross NPA

Bank of India, ICICI Bank, Punjab National Bank and HDFC Bank.

IC IC I Bank Quarterly Report (in Rs.C r) J un-14 Mar-14 Dec-13 S ep-13

J un-13

14616.71 14465.34 14255.96 12979.75 12904.97 2655.3 2652.01 2532.21 2352.05

2274.21

10843.3 10505.84 10399.13 10028.45 10009.41 3.05

3.03

3.05

3.08

3.23

C AR

17.39

17.7

17.81

17.63

18.35

C AS A

43%

42.90%

43.30%

43.30%

43.20%

Starting with State Bank of India, the No.1 and the most trusted bank of India had revenue of Rs.

revenue but not much in their net profit compared to

40,789.21 crores and net profit of Rs.3,349.08 crores

the last quarter. The increase in the income is

in the first quarter of 2014. Compared to fourth

cancelled out by the much larger increase in the

quarter of 2013 there is a fall in the revenue but a rise

expense. CASA ratio has increased from 42.9% to

in the net profit. This shows that that the income has

43% which means the bank is getting money at a

gone also with the decrease in the expenses. Looking

lower cost now. There is a marginal increase of 0.02

into the Current Account Saving Account ratio which

in NPA compared to the last quarter but it has

is 44.67% of the total deposit we see increase in it

decreased compared to June 2013.CAR has increased

compared to the last quarter but a decrease compared

to 17.39 from 17.7 in the last quarter. But in June

to the June 2013. Coming to the critical part, the Non

2013 the CAR was 18.35 which not a good sign.

S tate B ank of India Quarterly R eport (in R s .C r) Quarters R evenue Net Profit Gros s NPA % of Gros s NPA C AR C AS A R atio

J un-14

Mar-14

Dec-13

S ep-13

For HDFC Bank we see a decrease in the net profit J un-13

even if there is increase in the revenue when we

40739.21 42443.27 46358.43 37199.92 36192.62 3349.08 3040.74 2234.34 2375.01

3241.08

60434.24 61605.35 67799.33 64206.3 60891.46

Quarters R evenue

HDFC B ank Quarterly R eport (in R s .C r) J un-14 Mar-14 Dec-13 S ep-13 J un-13 13070.65 12789.98 11937.69 11937.69 11588.56

4.9

4.95

5.73

5.64

5.56

Net Profit

2233.04 2326.52

12.85

12.96

11.88

11.96

12.12

Gros s NPA

3356.22 2989.28 3017.84 2941.71 2719.03

44.67%

44.43%

43.89%

43.58%

46.10%

Performing Asset has shown a marginal decrease of 0.05 standing at 4.9. But in comparison to the June 33 | S E P T E M B E R 2 0 1 4

% of Gros s NPA

2325.7 1982.32 1843.86

1.1

1

1

1.1

1

C AR

15.5

16.1

14.7

14.6

15.5

C AS A R atio

43%

44.80%

43.70%

45%

44.70%

compare it with the last quarter. This simply shows

US subprime lending crisis, to some extent, was

that the expenses are more than the income. When we

triggered also because of this reason.

look at the gross NPA in terms of numbers it is increasing but the percentage is more or less constant.

The CASA ratio has fallen from 44.8% to 43% so has the CAR from 16.1 to 15.5 when compared to the last quarter.

Public Sector banks provide around 80% of the credit to industries and it is this part of the credit distribution that forms a great chunk of NPA. Last year, when kingfisher was marred in financial crisis, SBI provided it huge amount of loan which it is not able to

Punjab National Bank has consistently increased it

recover from it. If Indian industry is in crisis, it is

revenue as well as net profit by a good margin

bound to hit the banking sector and their NPA will

Punjab National Bank Quarterly Report (in Rs.C r)

rise. Only PSBs can‘t be blamed for the situation. The

Quarters

J un-14

Revenue

12825.13 12498.23 11922.29 11632.84 11746.59

Net Profit % of Gross NPA C AR

Dec-13

S ep-13

J un-13

economic policy of the government and also politician-corporate nexus is behind the current state

505.49 1275.32

of banking industry. . If the NPAs keep rising in the

19602.84 18880.06 16595.84 16526.26 15090.63

current state like that of Kotak Mahindra or Union

1405.12

Gross NPA

Mar-14 806.35

755.41

5.48

5.25

4.96

5.14

4.84

12.35

12.28

11.62

12.32

12.44

Bank, it will lead to shutting down of bank and it can also create a very serious economic crisis in the nation. One of the main reasons of rising NPA is the

standing at Rs. 1405.12 Crore The NPA has increased

relaxed lending norms especially for corporate

from 5.25 to 5.48 compared to the last quarter and

honchos when their financial status and credit rating is

CAR from !2.28 to 12.35. The increase in the NPA

not analyzed properly. Also, to face competition

can be harmful for the bank in long term if not

banks are hugely selling unsecured loans which

checked now.

attributes to the level of NPAs. Global economy can effect the banking sector but to a very small extent. It

Rising NPA

is the policies of RBI and govt. that can improve the The performance of banks is hampered due to the rising numbers of bad loans especially for public sector banks. For a few weeks the rising NPA (non performing assets) or bad loans have been in news and for all wrong reasons. The rising bad debts of Indian bank have become a cause of worry for the RBI and govt. recently Union Bank of India saw a steep rise in its NPA and that resulted in its CMD Archana

Bhargava‘s

resignation.

Rising

NPA

signifies that bank has given loan to firms or individuals and is not able to recover the same. The 34 | S E P T E M B E R 2 0 1 4

situation. If the status of NPAs in banks is not controlled, banks can become bankrupt. The entire credit distribution structure of the economy can be destructed and the country could be in a major financial turmoil. When US hit the subprime crisis, it was because of the lenient lending norms and baks had huge number of loan defaulters. The big banks filed for bankruptcy and US economy went jittery. So, NPA problem is to be taken seriously.

Rising CAR As of the 2014, CAR of Indian banks has dwindled to 13.0% from 13.9% in the previous fiscal. After the reverberations of the U.S. subprime mortgage crisis on the Indian economy, there was some improvement

such issues pose a long-term systemic risk to the Indian banking sector. You see, the public sector banks account for nearly 70% of total banking activity in the country and their performance can affect the economy as a whole. Therefore, measures to improve corporate governance at banks should be taken.

in CAR for couple of years (i.e. until fiscal year 2010), but since then CAR of Indian banks has been on a decline.

The public sector banks are worst hit. Their average CAR has fallen to 11.2% as of 2014 and in the present fiscal year as well for the quarter ended June 2014 it has fallen further to 10.7%.

Over the last few years quality of assets of banks in India has come under tremendous pressure by the way of rise in Non-Performing Assets (NPAs). And public sector banks have suffered more than their private sector counter parts. The gross NPA of the PSBs has increased to 4.1% of the end of March 2014 from 3.6% a year ago. Their net NPAs (as a proportion of their net advances) too have mounted to 2.2% compared to 1.7% during the same period a year ago.

It is noteworthy that a bank can have a robust CAR only when it follows prudent lending practices through a vigilant due diligence process. The Government should take cognisance of this, because 35 | S E P T E M B E R 2 0 1 4

Demystifying

Stimulas Packages and Quantitative Easing Considering

the

economic

2008 with the passage of the Emergency Economic

conditions globally, every government looks up to

Stabilization Act., the Dodd-Frank Act later reduced

prevent its economy from any sort of financial crisis,

the authorization to $475 billion. A $787 billion

specifically

economic stimulus package was approved by the U.S.

by

macro

providing

and

micro

- Ripu Tandon

different

stimulating

packages through tax rebates & different incentives

government in February, 2009.

and to boost spending in the economy. This leads to

measures taken by the U.S. government and were

the factor, as spending increases demand, it would

designed in a manner to jump start the economic

increase the employment rate, in turn increasing

growth & save around 900,000 to 2.3 million jobs.

income and thus boosts spending. Especially during

The spending done in three categories as per the

recession, this cycle continues till the time the

―American Recovery and Reinvestment Act‖ (ARRA)

economy has recovered from the recession period.

were:

One of such stimulus packages were used by U.S. in



2008, the time of global recession & it was aimed at

$224

billion

for

extending

These were the

unemployment

benefits, education benefits & health care benefits.

increasing the employment levels and hence the



$288 billion in tax cuts

recovery of the U.S. economy. It was also a time



$275 billion for the creation of jobs using federal

when India used its first stimulus package in order to ensure the safety of the bank deposits and the stability of the financial system in India.

One of the key

factors that was considered by the Indian Government was to infuse liquidity into the banking system and was a time when Reserve Bank of India (RBI) reduced the cash reserve ratio (CRR), repo rate and the reverse repo rate. These important measures were taken by the government to counter the impact of the global recession & stimulating the Indian Economy.

contracts, grants & loans.

ARRA was better known as the ―Obama Stimulus Plan‖ and was designed to help the economy from 2008 financial crisis & the subsequent recession.

Unlike Troubled Asset Relief Program, ARRA was designed to put more money into the hands of small businesses and families.

Though the package was

designed to be spent over a span of 10 years, its maximum impact of 91.5% of the budget or $720 billion was the budget for the first three fiscal years.

In the U.S. a group of programs run by the U.S. Treasury in order to stabilize the financial system of the country and restoring the economic growth. The Troubled Asset Relief Program (TARP), initially the treasury with the purchasing power of $700 billion to

ARRA did better than it was actually planned. The Congressional Budgeted Office projected ARRA would increase the GDP by 1.4 – 3.8% by 2009.

As

of October 30, 2009 with the help of ARRA, the government was able to save 640,329 jobs.

buy the illiquid mortgage-backed by securities & other assets to restore the liquidity to the money markets. Though the fund was created on October 3, 36 | S E P T E M B E R 2 0 1 4

The main purpose of the plan was to instil the confidence needed to restore the economic growth.

The biggest challenged that was faced by the U.S.

recession was yet to be unfold‖. Till this time the

government was to create enough of the stimulus

government had announced two stimulus packages

required to soften the recession, but at the same time

and the third package in the three months.

maintaining the stance of not creating further doubts about the ballooning U.S. debt. However, the overall plan was blamed for adding further debt and failing to reduce unemployment below 9%.

In the recent times when the Indian stock markets surged to new heights primarily with the help of the Foreign Institutional Investors (FII), there were fears that the inflow would dry up due to the stimulus

In India, the first of the stimulus packages were

rollback announcement by the U.S. Federal Reserves.

announced in December, 2008 during the global

The Stimulus package may also have an indirect

recession. The package was to contain the impact of

affect on the stock markets of an economy.

the global financial crisis on the Indian Economy.

Quantitative Easing

Few of the measures taken by the Indian Government as per the first stimulus package were: 

the Fiscal Policy, the Quantitative Easing is an Planned and non-plan expenditure of Rs. 300,000 in four months.



Incentives for loans on housing from Rs. 500,000 and up to Rs. 20 lacs.



Additional allocations of incentive schemes.



Full refund of the service tax by exporters to foreign agents.



Export duty on iron-ore fines were eliminated.



Norms for government departments to replace vehicles relaxed.



Apart from the Stimulus package which are related to

An across the board 4% cut in CENVAT (Central Value Added Tax) on non-petroleum products bringing down prices of cars, cement, textiles and other goods.

occasionally used monetary policy adopted by a government to increase money supply in the economy.

These

measures

are

unconventional

monetary policies where the Central Bank purchases government securities or other different kinds of securities from the market in order to lower the interest rates and to increase the lending by commercial banks and spending by the consumers. In India, RBI infuses a pre-determined quantity of money into the economy by buying financial assets from commercial banks and private entities. leads to the increase in bank reserves.

This Using

quantitative easing, methods are aimed at maintaining price levels or inflation levels in the economy, but

During the time when the stimulus package was

these policies can backfire leading to high levels of

announced by the Obama administration in U.S., Mr.

inflation. Also, it may lead to an unbalance in the

Pranab Mukharjee, then Finance Minister of India

money market.

announced the third of the stimulus package for the Indian Economy by way of a 2% cut in the excise duty & service tax. It was a time when the Finance Minister mentioned, ―full impact of the global 37 | S E P T E M B E R 2 0 1 4

As per the monetarist, during an economic slowdown the Central Bank lowers down the interest rates which would stimulate lending & economic activity in the economy as these measures encourages people to

spend more rather than saving. Central Bank may

Europe falling to a five year low to 0.3%, well below

employ a variety of policies in order to improve

the target of ECB of 2%.

growth. It is important to ba lance the short term improvements

with

the

long

term

market

expectations. At times the Central Bank can adapt activities that are primarily aimed at adjusting the

When Federal Reserves in the U.S. decides to taper the quantitative easing, it immediately seems to hit the news in India. Quantitative Easing has become an important tool for the Federal Reserves since 2007 to

discount rates or reserve requirements or more

help stimulate the

unconventional ones considered

markets.

as

Quantitative Easing

―Quantitative

tapering can have a

Tapering‖.

domino effect to the

One of the examples

markets of different

in

Quantitative

economies as well.

Tampering was seen

Before tapering was

in the reaction of

announced by the

financial

Federal

2007

crisis when

in the

Reserves,

India enjoyed the

Federal Reserve began purchasing assets with long

benefits of excess US dollar circulation. Since the

term maturities to lower the long term interest rates.

interest rates were near ―0‖, the FII‘s weren‘t hesitant

The activity was mainly taken in place to entice the

to invest in India and hence taking the advantage of

financial institutions to lend money. Being open with

higher interest rates. Markets have been jittery since

the investors in regards to the future banking activity

the time Federal Reserve‘s chairman announced about

helps to set the market expectations. Hence, it is the

the cut on the pace of bond purchases. The Federal

typical reason why the central banks employ a gradual

Reserve has more than tripled its balance sheet to

taper rather than abrupt halt to loosen up monetary

around $3.3 trillion with the help of its bond buying.

policies.

The quantitative easing measures taken, has helped to

Recently, Mario Draghi, President of the European

drive up the prices in risk assets across the globe.

Central Bank (ECB), announced that the bank is

It has been believed that the quantitative easing

planning to be engaged in a form of quantitative

tapering to have an effect on the Indian Market. An

easing through the purchase of private sector credit,

impact was seen in the markets of a possible

including to the asset-backed securities and covered

unwinding of quantitative easing by the Federal

bonds. These would be taken in addition to the new

Reserves in the India, such as:

cut in interest rates.



These decisions were taken

considering the factors of annual inflation rate in 38 | S E P T E M B E R 2 0 1 4

The Sensex crashed by 388 points on March 23, 2014 after the Fed‘s comments on tapering. That





was because FII‘s who invest $ 14 billion in the

a fiscal policy of stimulus package such as; it may

current year and $ 22.2 billion last year turned as

lead to higher government borrowing or there are

sellers, fearing the expected reversal in the Fed‘s

chances that the policy may not be effective as people

strategy.

might start saving instead of spending. Making any

India has witnessed a net capital inflow of $88

changes in the policies plays an important role in

billion in 2012 and was largely due to the

deciding whichever policy needs to be amended or

quantitative easing measures by the Fed‘s. A

implemented. However, the core factor that makes

reversal in the capital inflows would wreck havoc

the Central Bank in making such changes or decisions

on Rupee, mainly the current account deficit

is to prevent an economy from any financial crisis and

would be difficult.

recovering the economy from recession.

The asset price volatility and a slowdown in the investments would definitely hurt investments.



All these actions would lead to a delay in the overall GDP growth.

However, a positive side of this affect was seen as excess liquidity is withdrawn, the commodity prices would come down and negate the inflationary measures which was a result of a weak Rupee.

Whichever policy the Central Bank decides, whether a stimulus package (Fiscal Policy) or quantitative easing (monetary policy), it is highly important to understand and balance the effects of it in the short run and the long run. For instance it may cause higher inflation if the amount of easing required is overestimated and too much creation of money is being done by the purchase of liquid assets & it may fail to be effective if the banks remain reluctant in lending money to businesses and households.

Also,

increasing the money supply tends to depreciate the exchange rate versus the other currencies and a devaluation of a currency majorly harms the import businesses as the cost of importing goods is inflated.

At the same time there are risks involved in choosing

39 | S E P T E M B E R 2 0 1 4

On Campus Event

Management Discussion: Coal Embezzlement

- Rashmeet Gujral

On 18 September 2014, FinStreet held a Management

Judgement of the Supreme Court:

Discussion on the topic Coal Embezzlement-A glitch.



Allocations are arbitrary and illegal since 1993.

We saw a decent turnout and a good response for the



Inconsistency of screening committee and lack of

event.

fair and transparent procedure.

Most of the Indian coal reserves were in private hands



post independence. During 1st five year development plan, government felt needs of more coal. To deal

No objective criteria for evaluation of comparative merits.



with shortage of coal, government came up with a

The

Attorney

General

pleaded

against

deallocation.

piece of legislation in 1973 which is known as coal



46 out of 218 blocks.

mines nationalization act 1973. With coal mines



Cancellation is already done for 80 companies

nationalization act, all the coal reserves were declared



Final decision awaited

national assets. This act also defines guidelines for mining and labors working in mining‘s. In July 1992,

Sectors affected to coal block deallocation: power sector, steel, banking and cement.

Ministry of Coal, issued the instructions for Screening where composition of Committee was formed and 143 coal blocks were prepared which were placed on the website of the MoC. Companies could apply for an allocation from among these blocks. Reimbursement for expenses while preparing the geological report. In 1996 Amendment was passed for the captive mining for cement companies. In year 2000, again one amendment was done with the bill, which removes the

Finstreet perspective: The actions of the judiciary were well-justified as they would ensure efficient allocation of scarce resources and establish a level playing field for all companies. The imports will increase temporarily till the entire conflict is resolved due to the inaccessibility of producers to the domestic supply leading to increased CAD. However, the effect should be minimal in the long term.

restriction of captive mining from coal mining. That

There have been some dips in the stock prices of

means any company in the country can mine their

certain companies from allied industries due to Indian

own consumption, sale or for any other purpose

capital markets are driven by events to a great extent.

accordance with the license. In 2005 the Expert

However, the market fundamentals are strong and in

Committee on Coal Sector Reforms provided

the long term, the markets should normalize provided

recommendations

the government and judiciary consider the companies‘

process.

In

on

2010

improving the

Mines

the

allocation

and

Minerals

interests in its future decisions and actions.

(Development and Regulation) Act, 1957 Amendment

Suggestion for further action in companies‘ interest:

Bill was enacted, providing for coal blocks to be sold

The government will have to inform the Court, give a

through a system of competitive bidding.

chart and say that which are the companies which are

40 | S E P T E M B E R 2 0 1 4

actually implementing the projects and how were they given the coal blocks. Establishing a single window clearance process for coal mines with transparency and

strict

adherence

will

prevent

future

mismanagement.

Currently, commercial sale of coal is allowed for government companies only. To meet the growing coal demand, it is prudent to consider commercial sales of coal by Private Developers though suitable framework may need to be developed for coal pricing, balance profits to private developers etc. Also they will bring efficiency with advanced technology and management processes.

41 | S E P T E M B E R 2 0 1 4

Vriddhi Research’s Corner

Company in Focus: Karur Vysya Bank

Economic Overview India is currently one of the world's most attractive investment destinations. With the opening up of foreign direct investment (FDI) in several sectors, the country is an eye-catching destination for overseas investors. The relaxation of norms by the government has also created a vast opportunity for foreign players,

- Gaurav Bhowmick

inflow of US$ 2.3 billion in May 2014, taking the total to US$ 7.8 billion so far in 2014.

Also, India could become the world's seventh biggest nation in terms of private wealth, with a 150 per cent increase in total, from US$ 2 trillion in 2013 to US$ 5 trillion by 2018, as per a recent study by the Boston Consulting Group (BCG).

who are competing for a greater role in the Indian market. Sectors projected to do well in the coming

Industry Overview

years include Banking, automotive, technology, life

India is considered among the top economies in the

sciences and consumer products.

world, with tremendous potential for its banking

The HSBC's Services Purchasing Managers' Index

sector to flourish. The last decade witnessed a

(PMI) touched a 17 month high at 54.4 points in June

significant upsurge in transactions through ATMs, as

2014 as compared to 50.2 points in May 2014, which

well as internet and mobile banking.

is a positive sign for the services sector in India.

The country's banking industry looks set for greater

Also, India made its entry into the club of the top 15

transformation. With the Indian Parliament passing

ultra-high-net-worth households (more than US$ 100

the Banking Laws (Amendment) Bill in 2012, the

million in private financial wealth) in 2013 obtaining

landscape of the sector has duly changed. The bill

the 13th rank with 284 such households.

allows the Reserve Bank of India (RBI) to make final guidelines on issuing new licenses, which could lead

India holds a 6.4 percent share of global gross domestic product (GDP) on purchasing power parity (PPP) basis and presently is the third biggest economy in the world in terms of PPP, according to a World

to a greater number of banks in the country. The style of operation is also slowly evolving with the integration of modern technology into the banking industry.

Bank report.

In the next 5-10 years, the sector is expected to create According to an HSBC report, Indian equities markets have seen foreign institutional investors (FII) net

42 | S E P T E M B E R 2 0 1 4

up to two million new jobs driven by the efforts of the

RBI and the Government of India to expand financial

FY 06–13; in FY 13 total deposits stood at US$

services into rural areas.

1,274.3 billion.

Two new banks have already received licences from the government, and the RBI's new norms will offer incentives to banks to spot bad loans and take

Company Overview Karur Vysya Bank provides corporate, retail and business banking products and services in India.

necessary recourse to curb the practices of rogue borrowers.

The Karur Vysya Bank Limited, popularly known as KVB, one such endeavor, was set up in 1916 by two

The size of banking assets in India totalled US$ 1.8 trillion in FY 13 and is expected to touch US$ 28.5 trillion in FY 25.Bank deposits have grown at a compound annual growth rate (CAGR) of 21.2 per cent over FY 06-13. In FY 13, total deposits were US$ 1,274.3 billion.

The revenue of Indian banks increased from US$ 11.8

great visionaries and illustrious sons of Karur, the Late Shri M A Venkatarama Chettiar and the Late Shri Athi Krishna Chettiar to inculcate the habit of savings and provide financial assistance to traders and small agriculturists in and around Karur, a textile town in Tamil Nadu.

The bank has recognized

billion to US$ 46.9 billion over the period 2001-2010.

Profit after tax also reached US$ 12 billion from US$

i) Treasury;

1.4 billion in the period.

ii) Corporate & wholesale banking;

Credit to housing sector grew at a CAGR of 11.1 per

iii) Retail banking; and iv) Other banking operations

cent during the period FY 08-13. Total banking sector

as primary reporting segments.

credit is anticipated to grow at a CAGR of 18.1 per

KVB has consistently maintained strong fundamentals

cent (in terms of INR) to reach US$ 2.4 trillion by

with a higher percentage of Capital Adequacy Ratio

2017.

than mandated by the RBI. KVB has also been

The RBI has announced a few measures in its bi-

generating profits and rewarding its stakeholders with

monthly monetary policy on June 3, 2014 which

handsome dividends since inception.

includes an increase in the foreign exchange remittance limit to US$ 125,000 from the previous limit of US$ 75,000.

India‘s banking sector has the potential to become the fifth largest banking sector globally by 2020 and the third largest by 2025. The industry has witnessed discernible development, with deposits growing at a CAGR of 21.2 per cent (in terms of INR) in the period

43 | S E P T E M B E R 2 0 1 4

Rationale Karur Vysya bank has an even favorable AssetsLiabilities-Management with higher share of deposits

Favorable Assets-Liabilities-Management likely to support margins in the dampening interest rate environment

in the (less than) 1 Yr and 1Yr – (between) 3 Yr

I believe ALM will likely support margins in the

maturity periods also advances in the same maturity

dampening interest rate environment and macros as

period which is likely to support margins in the

the larger amount of deposits in comparison to the

dampening interest rate environment.

advances would come for re-pricing at lower probably interest rates.

Even though benefits gathered from recapitalization done during Q4FY14 tapering period, cost of funds is not likely to rise as ~47% of deposits would be repriced at lower interest rate while only ~17% of advances is likely to be re-priced at lower yields.

Retail banking segment has been key drivers of its growth strategy Karur Vysya bank has built a robust liability franchise and segmental strategy, displayed in its CASA mobilization displayed Y-O-Y. Its CASA mix (34-41% during FY06-14 (Unaudited)) has been

Diversified income based lending and superior liabilities (CASA mix) are key strengths of the bank.

It has consistently delivered steady NIM during previous several quarters largely on back of lower cost of funds which has been underpinned by strong CASA mobilization franchise.

Headline NPLs have been holding well contrary to economic and street expectations, high exposure to non-operational income portfolio remains a potential risk.

Nonetheless, incremental stress build-up (slippages + restructuring) during FY14 (Unaudited) came at Rs.23.9 bn, well within the management's expected

one of the highest in the industry on back of its threepronged strategy: •

Strategy

of

expanding

its

network,

where

competition is relatively lower than the rest of the segments.

• Better customer segmentation strategy, which helps in developing customized and perfectly suited products.

• Focus on transactional banking which help in getting higher floats as compared to other existing segments from the customers along with generating consistent fee-based income.

guidance range (Rs.48 bn). At CMP, stock trades at

Despite rapid expansion, it has managed its operating

reasonable valuation (1.86x FY16E ABV).

performance relatively well. Its cost / Income ratio improved from 38.9% in FY05 to 29.8% in FY14

44 | S E P T E M B E R 2 0 1 4

(Unaudited). KVB has emphasized more on business re-engineering to reduce transaction costs besides gaining smoothness in operations and enhancing its business productivity. The moderate rise in Operation Expense was largely due to growth in bank's network and other infrastructures while salary paid to employees fell 1.7% YoY in FY14 (Unaudited).

Valuation The F-CF-F valuation of Karur Vysya Bank stands at Rs. 633.34 The Price to Free Cash flow model valuation indicates Price-to-Free-Cash-Flow Ratio of 8.98 which is better than the Industry mean of 7.991.

Analyst’s Recommendation: At CMP, stock trades reasonable at 14.38x and 1.9x its FY16E ABV. I expect earnings to grow by 12.1% CAGR during FY14-16E along with healthy return ratios (RoE: ~ 21.4%, RoA: 1.6%).

I am setting TP to Rs.621 (2.48x FY16E ABV) on improving macro and micro economic situations and give BUY rating on the stock given a time frame of 20-24 weeks.

The Fundamentals of Karur Vysya Bank indicates a potentially strong investment opportunity given a 24 months‘ time frame.

45 | S E P T E M B E R 2 0 1 4

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46 | S E P T E M B E R 2 0 1 4