The IBS Times; 183rd Issue; August 2015

The IBS times August 2015, Issue No. 183 Volume II

1|AUGUST2015

FinStreet, IBS Hyderabad

ISSUE NO. 183, August 2015, Volume II

What’s Inside

2|AUGUST2015

0INTELLIGENCE BEYOND SUCCESS

LETTER FROM THE EDITOR TEAM IBS TIMES KAUSHIK CHANDELL (EDITOR-IN-CHIEF) AVIK CHAKRABARTY (MANAGING EDITOR) ALISHA SINGH APOORVA ANUSHA

KOLISETTY AISHWARYA MANJARI SHARMA NAVJOTH SAHU PRIYANKA MALIK RAHUL MISHRA RIPU TANDON SACHI KHESKANI SAMEENA USMAN

Dear Readers, Greetings from Team FinStreet.

The buzz of Economic Collapse is going round the corner. David Levy’s grandfather predicted the Great Depression of 1929. Following the footsteps of his grandfather, Mr. Levy has currently predicted the Recession of 2015 which will last for a considerable time. With an intention to deliver the best to our readers our next issue won’t only be covering the current situation of the global crisis but will also provide you with the safety measures to survive it.

For the time being, please enjoy reading the 183rd issue of The IBS Times and we promise to deliver our findings with the 184th edition as soon as possible.

Our team, in this edition brings to you the recent happenings on Fall of China with a guest article on Rise before the Fall of China. Also, we have shed some light on What Payment Banks are and how it’ll help the Indian Economy along with articles Airfare Capping, Neuromarketing & GST. From the global market, Times brings to you Canadian Crisis. For your better understanding about the market scenario we have for you, our famous Market Watch titled All in the Same Boat? From the Industrial point of view we have shared our insights on Infrastructure Development. This issue from the investment point of view also brings to you an exhaustive report on GATI published by Team Vriddhi Research.

SRISHTI KARMAKAR ABHINAV BANERJEE

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

ANUPAMA KUMARSWAMI CHESTHA KUMAR EYAMINI N

Kaushik Chandell Team FinStreet

HEMLATA HAJONG ISHAN GUPTA JATIN SHARMA JHARNA SONI PRATEEK PANDEY RANU SARUPRIA RAVI RANJAN PANDIT ROHIT TILLU SAKSHI ISSAR SANDHYA ADHAVAN

-CONFUCIUS

SUPRIYA GAUR SWARUPA ROY 3|AUGUST2015

Cover Page Source: http://nicholsoncartoons.com.au/

AVIATION CONTROVERSIES

AIRFARE CAPPING?

-Ravi Ranjan Pandit

Capping for Airfare violates competition norms as it

gone down by 50% since October - November 2014.

stifles the movement of market forces. Market forces

Even lower fare has failed to create demand. Because

should be allowed to operate as the sector is

of high domestic fares, the cost of foreign travel

deregulated. When something is deregulated and the

especially to Far East was cheaper than travelling in

market forces are supposed to determine it, the capping

India. This led to huge gap between Outbound

of pricing is not in sync with the philosophy of

(Indians travelling abroad) and Inbound (Foreign

deregulation. The Competition Commission of India is

tourist coming to India) travelers. India witnessed the

probing whether there is cartelization among carriers in

steepest hike in outbound airfares last year. The

fixing price of air tickets. Competition commission of

airfares were increased by 18%. Following the

India (CCI) - the watchdog had looked into the matter

reduction in airfares, domestic tourism should get a

on three previous occasions as well but did not find any

major boost. Domestic tourism was up by 10% to

evidence of fair trade norm violations. Competition law

300 mn travelers against 273 mn travelers previous

in India aims at preventing practices having adverse

year. Fares during winter months are set to remain

effect on competition, promoting and sustaining

low, as airlines in India have sought to fly 12% more

competition in markets, protecting the interest of

flights during winter. Airlines have sought to operate

consumers and ensuring freedom of trade carried on by

13,951 flights a week compared to 12,533 flights a

other participants in market. CCI is the youngest

week during summer.

regulators in the country and is mandated to ensure fair

In a move to that will reduce airfares and airlines cost

competition and is mandated to ensure fair competition

of Operations, the Civil Aviation Ministry has asked

across the sectors and keep a check on cartelization and

the airport regulators to follow a Normative

abuse of market dominance among other violations by

Approach to decide airport charges and do away with

way of mergers and acquisitions.

current Cost plus method.

In May 2015, group of Parliamentarians led by BJP

charges will substantially get lower and stabilized

leader Kirit Somaiya met Mr. Chawla and lodged a

under. Any reduction in airport charges will bring

complaint against carrier on airfares. Stakeholders,

down airfares and will surely give a boost to

including parliamentarians, have been demanding curbs

passengers flying. The Government focus is to

on highly fluctuating domestic airfares, especially for

improve regional connectivity in the country and a

travel at short notice. Jet airways said that current

collection from 1% on tickets will be utilized in

airfares offered by various airlines are not sustainable.

funding the losses of Operations on loss making

Jet airways is in loss. It has leased out its 9 wide-bodied

smaller routes. The Civil aviation ministry should

jets including B777 to contain losses. The airfare has

have a fund like the telecom's Universal Service

gone down by 50% since October - November 2014.

Obligation (USO) fund and use that fund to improve

Even lower fare has failed to create demand. Because

connectivity between smaller cities and towns.

4|AUGUST2015

Doing so the airport

Obligation (USO) fund and use that fund to improve

growth forecast to seven % from an 7.5 % earlier,

connectivity between smaller cities and towns. The

lead economic indicators sector are showing early

abolition of 5/20 rule, 5 years of Operation and fleet

signs of a pickup. Sales of passenger and commercial

size of 20 has been proposed. The Domestic Flying

vehicles, too, are growing. But lower ticket prices,

Credit formula has been junked.

driven by lower fuel costs, are a major factor driving

Generous deals in Domestic airfares are back this time because of capacity addition by Vistara and AirAsia India and fall in Oil prices. According to Yatra.com -

traffic growth. Growth as measured in revenue passenger kilometers, an airline industry unit that is an indication of passenger demand or growth

2nd largest travel portal, the average domestic fare has

In many of the sectors, differential between a flight

come down by about 19% from a year ago. The decline

ticket and an AC train ticket is only a few hundred

in prices could be on the back of capacity addition, as

rupees. This differential accounts for less than one %

airlines in India have not reduced fuel surcharge. The

of the monthly income of most individuals and is

two new carriers AirAsia, Vistara along with IndiGo are

seen as negligible vis-a-vis the convenience, comfort

adding capacity in the market. Aviation fuel accounts

and time savings of an air journey. CRISIL Research

for nearly half of Indian Airlines Operational cost.

expects domestic air passenger traffic to record 15-

Domestic air traffic is on the upswing with passenger growth rates and seat occupancy hitting a five- year high. Discretionary travel has spiked over the past six months, as fares declined 15-20%. Inbound traffic tourist arrivals grew 4.8% between January and July, Which is spurring passenger growth in the domestic market. In fact, air traffic has grown 19.4 % between January and June, which is the highest amongst topseven domestic airline markets in the world, outstripping China that grew 12.3 % in the same period.

According to the Directorate General of Civil Aviation data, domestic airlines flew 45 million passengers between January and July this year, compared with 37.6 million in the corresponding period last year, a growth of 21 %. Aviation sector analyst see it as a sign of revival in the economy. While rating agency Moody's has cut the country's domestic growth forecast to seven % from an 7.5 % earlier, lead economic indicators sector 5are early | Ashowing UGUST2 0 1 5signs of a pickup. Sales of passenger and commercial vehicles, too, are growing.

17 % year-on-year growth in 2015-16 driven by economic growth, largely flat fares and enhanced connectivity to smaller towns made possible by the entry of new airlines. Intense competition and lower fuel prices are expected to keep a check on fares during the year. We expect domestic growth in FY16 at about 15 per cen. We are seeing a combination of economic recovery and lower fares due to falling fuel prices. Lower fares are stimulating growth to higher than expected levels and will continue in the near term especially in the September quarter, but impact on yields is visible, said Kapil Kaul of Centre for Asia Pacific Aviation. The growth is largely being led by increase in leisure travel and visiting friends and relatives’ traffic, said Manoj Chacko, Chief executive of Kuoni Business Travel. Foreign tourist arrivals during January-July were up 4.8 % at 4.47 million on a year-on-year basis. Average load factor in the first half of 2015 was 83.6 %, against mid-70 % loads seen in 2010-14, JP Morgan Asia Pacific

Travel. Foreign tourist arrivals during January-July

emergency travelers can be addressed by bringing in

were up 4.8 % at 4.47 million on a year-on-year basis.

an emergency quota of seats. It is not possible to ask

Average load factor in the first half of 2015 was 83.6

the airlines to reserve some seats for emergency

%, against mid-70 % loads seen in 2010-14, JP Morgan

travelers and release the seats last minute for people

Asia Pacific Equity Research stated. The revival in

travelling due to an emergency. Instead of collating

passenger volumes is being seen after a period of slow

high/low fares, the DGCA check for average fares

growth between 2012 and 2014. In 2014, domestic

from airlines, as the airline operates on the basis of

carriers flew 67.3 million passengers, a growth of 9.7 %

yield management. Airlines sell large number of

over 2013. In 2013, domestic air traffic had grown at a

tickets last minute at higher prices and hence

modest 4.4 % over 2012, while 2012 had seen

increase their yield. So, the fare range may not have

passenger numbers decline over 2011. In a clear signal

increased but the number of tickets at higher prices

on capping airfares, the Civil Aviation Ministry said

has surely increased. Airlines are also increasing

mechanisms would be put in place to curb predatory

cancellation charges.

pricing ways of airlines. Urging Directorate General of

Conclusion

Civil Aviation (DGCA), to put in place some mechanism to check steep variations in the price of air

Amid tussle between Government and airline

tickets could also be one of the options. Predatory

companies on airfare, we believe flying in air should

pricing by the airlines is a big issue. A large section of

be affordable. We should not forget that airlines are

the public and even parliamentarians have raised the

commercial entities. They need to make money so

issue that airlines charge between Rs.30000 - Rs.40000

there has got to be a balance in the whole thing. The

for a ticket when a passenger has to travel in some

Government has put pressure on domestic airlines to

emergency.

lower the airfare. But the price of airfare should be left with the market forces. We are unlikely to see a

The civil aviation ministry has decided not to regulate airfares. It’s analysis since January to March on 6 key routes showed fares have lowered or marginally increased. Analysis have shown that fares have not gone up to the extent costs for airlines have. All airlines declare their minimum and maximum fare every month and that is a transparent enough mechanism to check fares. Few methods discussed by ministry included limiting the highest fare at Rs.20000 fixing a lower and higher fare band and allowing airlines to go by 33% higher or lower from that fixed band. Concerns for emergency travellers can be addressed by bringing in 6|AUGUST2015

an emergency quota of seats.

stable industry emerge unless pricing and capacity is stabilized. Capacity will be moderate in 2015-16, but from the next, expect domestic capacity to open up significantly and that could impact pricing. Strong air passenger traffic growth, capacity discipline approach and lower fuel prices benefited the airlines to post a turnaround at the operating level in 201415. However airlines need to sort out the capital structures to reduce interest costs and losses at net level.

SHOPPERS STOP COLLABARTES WITH SNAPDEAL

SNAP A DEAL: A STRATERGIC ALLIANCE

-Abhinav Banerjee

cities

According to the alliance, the Shoppers Stop’s online

while Snapdeal reaches thousands of pin-codes with an

site will continue to run along with their digital store

extremely large consumer base,"

on Snapdeal. A wide range of high end brands and

"Our

reach

is

limited

to

over

30

-Govind Shrikhande Managing Director, Shoppers Stop. th

categories such as clothes, footwear and accessories will be made available to buyers. The retail store will use the online marketplace’s platform optimally by

On Thursday August 6 , retail major Shoppers Stop and

observing the consumer behavior and accordingly

the online market bond Snapdeal formed a strategic

design product promotions and launch campaigns.

alliance. As a result of which Shoppers Stop will launch its own store on online market place of Snapdeal. The retailer, which also sells merchandise through its website, is keen on tapping the potential of online marketplaces

which

are

gaining

favor

among

consumers. As a result the stocks of Shoppers Stop rose by7 % to rs.420.25. At 12:45 pm (on Thursday) the Shoppers Stop stock was trading 2.45 % at Rs 426.70, outperforming the broader Nifty and the Sensex, which were in the red. This was due to a greater expectation in the market after the alliance that the retail store’s unmatched

brand

collection

along

with

the

marketplace’s nationwide reach will give birth to a superior shopping experience for customers.

A distinctive feature of this joint venture is that buyers will also be able to pick up products from the nearest Shoppers Stop store or get it delivered. To start with, this facility will be soon launched in 17 stores in northern India by Diwali first, and will gradually expand to all other regions. There are chances of initial hiccups such as repetition of products that Shoppers Stop sells and are also listed on Snapdeal separately, perhaps with different price tags. The online market today, is maturing really fast and there have been a couple of mergers and alliances recently in Indian market. One of the most talked about mergers was between Flipkart and Snapdeal. The seven year old Bangalore based

The Co-Founder & CEO of Snapdeal, Kunal Bahl is

domestic e-retailer acquired the online fashion portal

very excited about this arrangement, and says;

for an undisclosed amount in May 2014. Industry

This partnership marks a strong beginning of the bright

analysts and insiders believe it was a $300 million or

future for online and offline retail collaboration in

Rs 2,000 crore deal. Shopper’s stop and Snapdeal is

India. By bringing the best of online and offline

not a merger though. It’s a corporate alliance

shopping experience to consumers we are confident of

wherein one party, Shopper’s Stop, is getting in

delivering great value to consumers across the country

contract with another party, Snapdeal, to sell its

while offering them a world class shopping experience.

products on the latter’s online portal. The Shoppers Stop store on Snapdeal will be designed keeping in

7|AUGUST2015

mind the finer nuances of the retailer's brand.Further, consumers will also be able to exchange or return the

Stop store on Snapdeal will be designed keeping in mind the Z finer nuances of the retailer's brand. Further, consumers will also be able to exchange or return the products bought on the retailer's brand store on Snapdeal at any of the 74 retailer's stores across 35 cities.

"We will have discussions with brands on how pricing and merchandising overlap can be managed," said

(A sudden hike in the stock rates of shoppers stop, as a result of the tie up, on 6th of august)

Shrikhande (Managing Director of Shoppers Stop). deal was signed after the failed attempts to join with Shoppers Stop currently sells its private-label brands on Amazon, Flipkart and some other e-commerce companies. This partnership is in line with Shopper Stop’s so-called Omni-channel retail strategy and its objective of increasing its online sales to 10% from 1% now. Shoppers Stop had indicated that it would be

Flipkart. Amazon and Future Group joined hands in a similar manner wherein Future group would sell its products online exclusively. The alliance is a further evidence that E-commerce market is developing real fast and also gaining the support of the retail giants rather than being resisted by them as predicted.

investing around Rs.60 crore over the next three years on its Omni-channel business. Though, Snapdeal came

Snapdeal, which is known to compete very

into picture four years after Flipkart, it has focused on a

aggressively with its competitors such as Flipkart or

marketplace model right from the start, helping it attract

Amazon and establish itself with deserving

more exclusive stores. A Bank of America Merrill

importance in the market. It would be really

Lynch report said this helped it have a first mover

interesting to see what great heights would it achieve

advantage. Snapdeal is also tapping TV commerce to

with this alliance and leave a mark in the nascent e-

address non-internet users. "Unlike other e-commerce

commerce industry of India.

platforms in India, Snapdeal started as a pure marketplace model and currently we estimate has highest GMV (gross merchandise volume) on the marketplace when compared to Flipkart and Amazon.

Snapdeal also has the widest variety of products listed and broadest variety of merchants when compared to its peers," the report said.

One of the competitors, Future Group too had entered a similar deal last year by tying up with Amazon. This deal was signed after the failed attempts to join with 8|AUGUST2015 Flipkart.

Amazon and Future Group joined hands in a

similar manner wherein Future group would sell its

MARKET WATCH

ALL IN THE SAME BOAT?

-Ranu Sarupria

Not surprisingly, the performance of the global market

$1.1474. The dollar USDJPY, +1.28% climbed

in the last week was quite predictable but volatile too.

1.2% to 120.16 yen. The Japanese currency had

As in the last month assumptions were made that stock

benefited Monday from haven demand as stocks

market is going to bounce strongly, but it happened all

plunged world-wide. After the Black Monday, a

the other way round. China shocked the financial

different sort of thrill-ride seems to be ahead for this

market by devaluating their currency. China’s market

market, after yesterday’s brief 1,000-point drop for

downfall has been dramatic and painful for the investors

the Dow industrials and a move into correction

involved. This action has seriously affected the global

territory for the S&P 500 and Nasdaq Composite. It

market. The Indian rupee value is continuously dipping

was an extremely turbulent day for U.S. stocks

and there by affecting the Indian stock market too. A

driven by deep fears about China's economic

sudden fall of 1100 points in SENSEX shocked the

slowdown. Stocks staged a comeback that nearly

investors.

brought the Dow back into positive territory but that ultimately failed. The 588-point decline was the

INTERNATIONAL MARKET US Market The dollar advanced against the Euro and Yen, recovering somewhat after getting beaten up by the most by rival currencies a day earlier. But after the Monday hectic session, the dollar surrendered its gains against emerging-markets currencies as well as the socalled commodity dollars — the currencies of Australia, New Zealand and Canada. The ICE U.S. Dollar index DXY, +0.65% a measure of the greenback’s strength against a basket of six currencies, was up 0.7% to 93.9990 in recent action after slumping 1.7% on Monday. It is still down 0.8% for the week, but up 4.2% for the year so far. The buck was already up for the day in early trading, but it then added to its gains after China’s Central Bank cut its benchmark interest rates. The euro EURUSD, -1.2479% was down 1% to $1.1474. The dollar USDJPY, +1.28% climbed 1.2% to 120.16 yen. The Japanese currency had benefited 9|AUGUST2015

Monday from haven demand as stocks plunged world-

worst for the Dow since August 2011. The wave of selling knocked the S&P 500 into correction mode for the first time since 2011 and the Dow to its lowest close in a year and a half. Within minutes after the opening bell, the Dow plummeted 1,089 points. That is the largest point loss ever during a trading day, surpassing the Flash Crash of 2010.

China’s Downfall Continuing with the fall in China’s yuan from the last week, gave a terrible shock on Monday, august 25.

This day turned out to be nightmare for the global markets and was named as ‘Black Monday’. The proximate cause for all this is a chain of events that began with the surprise devaluation of the yuan on August 11th. More than $5 trillion has been wiped off on global stock prices A weakening outlook for Chinese growth, and a slip in China's currency, have combined to put pressure on other emerging economies—and especially those whose growth model depends on Chinese demand for industrial and

Sensex closing price

Nifty Closing price

24/Aug/15

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14/Aug/15

8600.00 8400.00 8200.00 8000.00 7800.00 7600.00 7400.00

13/Aug/15

28500.00 28000.00 27500.00 27000.00 26500.00 26000.00 25500.00 25000.00 24500.00

NSE GAINERS

CLOSING

%CHANGE

LOOSERS

CLOSING

%CHANGE

YES BANK

680.70

8.10

TATA POWER

58.50

-6.02

TATA

328.85

6.68

AMBUJA

207.60

-2.14

MOTORS

CEMENT

BPCL

862.75

5.39

POWER GRID

128.60

-1.91

AXIS BANK

353.61

5.05

HDFC

1,145.50

-1.90

ICICI BANK

283.50

5.02

HCL TECH

914.05

-1.49

BSE GAINERS

CLOSING

% CHANGE

LOOSERS

CLOSING

% CHANGE

DLF

112.50

16.82%

VEDANTA

80

37

BHARTI

408.60

8.73%

HINDALCO

79

27

JSW ENERGY

65.80

6.65%

TATA STEEL

206

21

HDIL

62.90

7.25%

TATA MOTORS

310

20

GODREJ

353.90

6.37%

COAL INDIA

336

18

INFRATEL

10 | A U G U S T 2 0 1 5

have combined to put pressure on other emerging

South Korean authorities were suspected of selling

economies—and especially those whose growth model

dollars to arrest the won's fall but the bigger problem

depends on Chinese demand for industrial and other

is its contagious effect on other global markets. The

commodities. SHANGHAI COMPOSITES declined

symptoms are already visible, with global markets

by 8.5% wiping out all gains made this year. Even

now responding to developments in China rather

companies hit the maximum lower daily limit by 10%.

than in Greece. This affected Indian rupee and

China’s smaller SHENZHEN COMPOSITES LOST

weakened it as compared to US $. The Indian rupee

7.7%

will weaken to its lowest in several years over the

Effect on Indian Economy

next 12 months as the economy struggles to pick up momentum and on expectations that an impending

Several decades’ later foreign hand pushed the Indian

rise in U.S. interest rates will keep the dollar on a

markets off a cliff, sending the SENSEX to its worst

steadily strengthening path. The rupee INR=IN has

single day loss. Fears of meltdown in China sink global

largely held its The poll of about 30 foreign

market. SENSEX crushes 1,625 points (6%) its biggest

exchange

single day loss from close to close. FII net sales touch a

rupee INR=IN will trade at 64.00 per dollar by end-

record of Rs 5,275 crores on Monday, domestic funds

June, 64.50 in six months and weaken to 65.00 in a

buy stocks nearly of Rs 4,100 cr. All 30 SENSEX and

year. It was trading around 63.93 against the dollar

50 NIFTY stocks are in red. Indian investors lose

on Friday. After the biggest crash on Monday, Asian

$100bn. Even rupee weakened by 82paise to close at 2-

currencies were all trading lower than US dollar.

year low of 66.65/$.

China’s yuan ended 6.4against per dollar. ₹ weakens

Currency Market

82 paise to close at 2year low of 66.65/$.

analysts

week

showed

the

JAN

AUG

%

1

25

CHANGE

INDIAN RUPEE

63.36

66.65

-5.2

Chinese dragon seems to have run out of fire, with

CHINESE YUAN

6.21

6.4

-3.1

nearly 40% of its market wealth wiped out in less than

BRITISH POUND

1.56

1.58

-1.3

JAPANESE YEN

119.74 117.42 1.9

EURO

121

117

3.3

SWISS FRANC

0.99

0.93

6.1

AUSTRALIAN $

0.82

0.72

12.2

The currency market in the last week seemed to be quite

CURRENCY/USD

this

dicey. With the intense devaluation of Yuan the china’s currency, which dragged all other currencies and had affected various other countries economy too. The

a month. In a surprise move, China devalued the yuan on Tuesday. The devaluation in the yuan has impacted most emerging market currencies and stoked fears about a currency war. South Africa's rand struggled at 14-year lows, the Turkish lira languished near a record low, while the Malaysian ringgit hit a 17-year low.

South Korean authorities were suspected of selling 11 | A U G U S T 2 0 1 5

dollars to arrest the won's fall but the bigger problem is

Commodity Market

Conclusion

A free fall engulfed commodity markets globally with

After the biggest stock market crash, it seems Indian

prices falling to their lowest levels. Chinese economy

economy as a magnet for the global funds and

hit Indian metals, mining and resources firms hard. The

transfer of wealth. This is resumed till the China

Bloomberg Commodity Index of 22 raw material from

currency devaluation settles down. Compared to

oil to metal lost as much as 2.2% to 85.8 points, Crude

other economies, India seems to be in a better

oil, aluminium, iron ore, copper, zinc, coal looked at

position with strengthening growth, low current

about due to weaker demand from China, largest

account deficit, narrow fiscal deficit and moderating

consumer of raw materials. BRENT declined as much

inflation. India seems to be as a destination choice

as 5% to $43.28 a barrel. COPPER, an indicator of

once the volatility settles down. The turmoil may

global economic activity lost around 4% to $4,855. The

continue but India is best among the emerging

fall in the prices of Crude oil is like blessing for the

market. The deflation in International commodity

Indian economy, as it would reduce account deficit and

has been sharper than the Indian rupee devaluation.

helps to save foreign exchange reserves. GOLD

Price fall in crude oil has been much more than the

continued to glitter on Monday, hovering near its

fall in price of Indian currency. Our economy has an

highest level in almost seven weeks as worries over a

advantage to get big benefits out of commodities

slowing Chinese economy pushed investors away from

turmoil and majority crude. This is one of the best

risky assets and into those deemed as safe. Gold prices

opportunities to get back into equity for those who

increased by Rs150 per 10gms and were trading at

are patient and has long term money, on the same

Rs27,450 in Mumbai market on Monday.

hand investors need to be careful and be prepared for

COMMODITY

Last

Today’s price

(As of August

price/contract

change

24, 2015)

(USD)

the further risk. It is advisable to investors to keep away from

stocks

that

have

-1.98, -4.36%

ETHANOL

1.432

-0.015, -1.04%

NATURAL

1.4169

-0.0455, -3.11%

HEATING OIL

2.667

-0.009, -0.34%

RBOB

1.4780

-0.0669, -4.33%

CRUDE OIL

GAS

GASOLINE 12 | A U G U S T 2 0 1 5

Foreign

Institutional Investors. It’s better to invest in large caps rather than in mid-caps stocks.

43.48

BRENT

high

GOODS AND SERVICES TAX (GST)

AFFLICTION OR BENEFACTION?

-Supriya Gaur

What has been haunting the common man since long

Differentiating goods from services is a tedious task

time is the system of taxation. The day an individual

due to the bundled products of today's economy and

begins to earn, he starts thinking about various

hence GST, acting as an umbrella for the combined

investment options by which a part of the tax he is

taxation structure will make the procedure a lot

supposed to pay can be laid off. These taxes, be it a

easier by involving various central indirect taxes

direct tax (directly imposed and paid to the government

including the Central Excise Duty, Service Tax etc.

on the income or profit) such as an income tax and a

It will also incorporate the State Value Added Tax

corporate tax or an indirect tax (levied on goods and

(VAT), octroi and entry tax (levied when a product

services) such as service tax and a sales tax, appear no

enters the state octroi is applicable in Maharashtra

more than a burden even though these taxes are used to

and Gujarat) and luxury tax etc. GST, officially

finance government expenditure. To rescue people

known as The Constitution (122nd amendment) Bill,

from this nightmare, Goods and Services Tax (GST)

2014, came into wings of discussion right away from

came into picture. Now the whole discussion shifts to

2000 and was introduced in Lok Sabha on December

the point of understanding what exactly GST is and is it

19, 2014 and passed in that house on May 6, 2015. It

in anyway helpful to the common man.

was referred to Select Committee of Rajya Sabha on May 14, 2015 and is targeted to be implemented

GST meaning

from April, 2016.

Goods and Services Tax (GST) is an exhaustive tax charged on manufacture, sale and consumption of

Need and structure of GST

goods and services at a national level. Goods are

The current indirect tax structure of India has been

tangible products that have to be manufactured, stored,

diversified into various centre and state levied taxes

transported, marketed and sold. Services on the other

wherein the rate of tax imposed by state varies.

hand are intangible individualistic or collective output.

PRESENT TAX STRUCTURE

Excise Duty

Service Tax

Sales Tax/ VAT/ CST

Customs Duty

Entry Tax/ Entertainment

Manufacture

Provision of Service

Sale

Import and Export

Entertainment and Goods Entry

13 | A U G U S T 2 0 1 5

Earlier the excise duty was charged both on inputs used and outputs produced i.e. the tax was imposed on each intermediate good in the manufacturing process. This led to cascading effect where a tax was levied on another

tax

amount.

The

same

scenario

was

encountered with the sales tax which had a cascading effect through the distribution channel. To overcome this “tax on tax� situation, Value Added Tax (VAT)

Intra State Taxable Supply

Excise and Service Tax will be known as CGST

Local VAT and Other Taxes will be known as SGST

Inter State Taxable Supply

CST will be known as Integrated GST (IGST)

Approx. Sum Total of CGST and SGST

Import from Outside India

Custom Duty

In place of CVD and SAD, IGST will be charged

came into action which was implemented on all kinds of goods. According to VAT scheme, the amount of tax

Highlights of GST

already paid on the inputs was deducted from that of the

The main feature of GST is the collaboration of all

output. This handled the cascading effect partially but

indirect taxes on goods and services under a single

the problem still persisted because several central and

taxation structure. Although a few items such as

state taxes and sectors such as oil and gas production

alcoholic liquor for human consumption have been

were excluded from VAT. Moreover the goods and

exempted from being charged according to the GST

services were taxed differently. Keeping in mind these

structure. Other items excluded from its list are

hurdles, GST came to the rescue which subsumes most

petroleum crude, high speed diesel, motor spirit

of the indirect taxes into a single tax. Under this regime,

(petrol), natural gas and aviation turbine fuel. The

all goods and services bear the same tax and the

GST Council which comprises of the Union Finance

discrepancy in the tax amount due to change in state

Minister as Chairman, the Union Minister of state in

boundaries is removed. Moreover it will lead to higher

charge of Revenue or Finance and the Minister in

output and more employment opportunities. Countries

charge of Finance or Taxation will decide when to

like Australia and Japan already have a GST in action

levy tax according to GST on these excluded items.

which has helped these economies to earn higher revenues and increase national income.

In addition to this, tax of up to 1% will be levied by centre on interstate supply of goods and services for

The proposed tax structure will consist of Central

trade and commerce which will directly go to the

Goods and Services Tax (CGST) and State Goods and

state from which the supply originated. The duration

Service Tax (SGST) which will impose tax on every

of this tax would be two years or can be longer as

taxable value of every transaction of supply of goods

decided by the GST council and the basis for

and services. GST also incorporates Integrated Goods

deciding the originator state of supply will be

and Service Tax (IGST) which is levied on the interstate

governed by the law of Parliament.

trade of goods and services.

14 | A U G U S T 2 0 1 5

GST will act as a stimulus to pay tax because only then the producer will get a balance between what they pay on input and what they receive. This will in turn widen the tax base. Further it gives a sigh of relief in term of export which will be zero rated under GST and will be relinquished of all embedded tax at the state and central level.

payers in terms of this important commodity.

Several analysts are in view that the GST bill is just a framework for taxation and does not give any detailed information. According to Dr. M. Govinda Rao, Director, National Institute of Public Finance and Policy, New Delhi, “GST is a minimalist bill�.

Further they put forward that all the details have to

Issues of Conflict The idea of GST emerged way back in 2000 but it has not been implemented till date. In fact the expected time for its application is assumed to be a year later i.e. April, 2016. There must be some loopholes that have instigated the opposition parties to raise points of conflict. The prime issue that stepped up was the 1% tax applied on interstate supply of goods and services which would eventually go to the account of the originating state. Before the amendment, 2% tax was levied on the interstate sale so the amount of tax was to be collected only after the sale. But according to GST, if for example a good moved from one state to another 1% tax is charged, again if the same good moved to another state 1% tax is again charged and the process continues until the good reaches its destination. As a result the cumulative amount of all of these 1% tax charged at every point would go to the original supplier state. This would benefit only the producing states such as Gujarat, Maharashtra and Tamil Nadu.

GST has kept certain items out of its purview and petroleum is one of them. Since petroleum accounts for almost 30-35% of revenues of a state so the cascading effect which arises because of the present tax structure will still prevail thus reaping no benefits to the tax payers in terms of this important commodity.

15 | A U G U S T 2 0 1 5

Several analysts are in view that the GST bill is just a

be worked on by the GST Council. Various other issues need to be settled before the bill is actually implemented. First of all the changes in the bill must allow the centre to impose tax after manufacturing and authorize states to levy tax on services as well.

Next point of conflict is the threshold. States on one hand have low turnover threshold of up to Rs. 50 lacs while the centre has a turnover threshold of Rs. 1.5 crore. Thus the centre would want the threshold to be low in order to expand the tax base.

The Final Word In my opinion it is not only the political upfront that has delayed the implementation of GST but along with this several reforms are required to make the bill a flawless one and get a better version. The most disturbing factor in the current GST is 1% interstate tax on supply which according to me must be changed to 1% tax on interstate sale rather than supply. This would benefit both the producing state as well as the selling state.

Whether GST will act as a game changer or a reform depends on its articulation and level of acceptance by the common man who has unbound expectations from the Goods and Services Tax Bill.

CANADIAN CRISIS

BOOM TO RECESSION

Definition of Recession

-Sakshi Issar a classic cup and handles formation. The country that hadn’t seen two consecutive years of negative GDP

A significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a

growth is now forced to slash its interest twice since 2014. Canada’s central bank now expects GDP growth to be 1.1% Y/Y this year, down from its 1.9% forecast in April.

recession is two consecutive quarters of negative economic growth as measured by a country's gross

Various reasons have been cited for this economic

domestic product (GDP).

slump. Stephen Poloz. Governor, Bank of Canada blamed the falling oil prices for affecting the local economy What triggered the crisis?

Oil prices have dropped and it has hit the Canadian economy hard. Schlumberger and Alberta, main oil producers of the country have been cutting jobs lately. Unemployment rate has jumped from 5.5% to 5.8% in this sector alone.

“Canada is on the brink of a ‘very unusual recession’, Canada is on the verge of a recession.”

Chinese crash showed the world that no economy is immune to a slowdown. Moreover, the repercussions

These were some of the headlines floated around by

of this crash could be directly seen in commodities

CNN and BBC across their channels. The market was

market and resource producing countries like Canada

able to track the decline in GDP for straight five months

which were observed to be on the receiving end.

which now stands shrunk by more than 0.2%.

Manufacturing output stands contracted at 1.7%.

Mining and oil and gas extraction has also gone downhill. It’s no surprise as per these factors that Canada is in a rough shape. The Canadian Dollar (CAD) is now the second-worst performing G-10 currency this year, only New Zealand Dollars have been weaker. And the chart CAD against USD has developed a classic cup and handles formation. The country that hadn’t 16 seen two |AU G Uconsecutive S T 2 0 1 5 years of negative GDP growth is now forced to slash its interest twice since

While China tried to minimize the impact of the crash, much damage was already done. Copper, which is gauged as a measure of global economic health dropped to a 6% low. Apart from Chinese crash giving Canada a tough time, more reasons emerged to give sleepless nights to Canadian policymakers. Bank of Canada confirmed that the country entered recession by noting that “real GDP is now projected to have contracted modestly in the first half of the year.”

is now projected to have contracted modestly in the first half of the year.”

Present Scenario In Fort McMurray, Alta., once hailed as the epicenter

Overheated real estate (housing) market in Canada has

of Canada’s economic engine, evidence of the oil

also been cited as a reason the economic slump as high

bust is everywhere. The unemployment rate has

cost leads to more household debt.

more than doubled to 8.6 % as dozens of massive oil sands projects are shelved by operators. The latest

Pre-Crisis Canada

setback involved Teck Resources, the country’s

Looking at the present housing crisis along with the

largest metals and mining company, which has

currency crisis because of various factors mentioned

delayed the planned start of its 260,000-barrel-per-

above, economists have started comparing Canada with

day Frontier bitumen mine by five years to 2026. As

the pre-crisis position of USA. However, it’s unwise to

the price of oil drops further, economists at ATB

compare the Canadian housing market of today to the

Financial slashed their growth forecasts for the

U.S. market before it crashed as unlike the situation

province to a barely-there 0.4 % for 2015. As

stateside, there isn’t anywhere near the same degree of

recently as December 2013, the Bank of Canada was

overbuilding

household

still touting rapid Chinese economic growth as a

formation. In fact, the ratio of housing starts to

reason why oil prices would continue to rise and

household formation is not far from its long-run average

benefit the Canadian economy. Poloz and bank

of 1.03. Also until a few years ago, Canadian citizens

officials may have assumed China would keep on

were buying houses in posh areas in condominium

doing what it had done for more than a decade.

format. However, that practice is also witnessing a

Eighteen months later, house prices continue to rise

slump among the Canadian citizens.

across the country, now driven mainly by the

Canada used to be known as a nation of savers: In 1982,

hyperactive markets of Toronto and Vancouver.

it stockpiled 20 % of its annual income. But by 2014

However, there isn’t a strong resource sector in place

that rate was down to 3.6 % – and at the end of last year

to support the mortgages taken.

Canada’s combined debt was $1.82-trillion, greater

“Canadian culture has shifted to a point where

than the total value of what Canada produced in goods

debt is much more acceptable”

in

Canada

relative

to

and services. It was also found out that the Canadian economists and policymakers weren’t judging the gravity of the then upcoming crisis correctly. Canadian forecasters consistently underestimated the impact of the sharp decline of oil prices on the economy,” wrote Randall Bartlett, a senior economist at TD Economics, in a recent report.

Canadians have witnessed a paradigm shift across the country where taking loans used to be a stressful situation. More and more people are now opting for loans to build houses and for various other facilities.

However, personal loans have decreased by 16% which is a positive trend as money is being used for building necessities and not indulging in luxury.

17 | A U G U S T 2 0 1 5

The currency is down 8.7% so far this year against the

Important Facts about Canada

greenback, currently trading at US86¢. That is the worst

 Prime Minister: Stephen Harper  Governor of Bank of Canada: Stephen Poloz  Debt to GDP (2014) : 86.51  Ruling Party : Conservative Party  Opposition Party: New Democratic Party

annual decline since its 18% plunge in 2008.

This situation is resulting in break ups between some of the old alliances. Recent split up between Leela and Kempinski can be a good example. It has been observed that the overall occupancy rate has decreased from 61% - 57% in 2013-14 and revenue per available room has

meagre economic growth all weigh on the currency.

reduced from INR 6,100 to 5700.

How to pull Canada out of the slump?

Aftermath Service industry could be a bright spot for Canada.

Manufacturers who weren’t forced out of business by the Lonnie’s rise above par took steps to insulate themselves from currency fluctuations—either by diversifying their customer base or relocating some production south of the border. That means they’re less likely to benefit when the dollar drops. Major attention is now being directed towards the manufacturing sector.

Benchmark interest rates are not expected to rise back to previous values very soon. The fact that the Canadians have now shifted from being savers to borrowers is here to stay. Banks are considering Quantitative Easing (QE) or forward guidance as some of the techniques to pull Canada out of the crisis.

However, it is claimed that it would have been better had the Canadian government paid attention to this

Bright spot

sector before the advent of the crisis. When the global

The present government has been in power since

price of oil was above US$100 a barrel, Ottawa was

2006. Post 2006, a bout of recession was felt across

bent on looking for better technology to cater to the

the world. However, the ruling government was able

international

like

to bring situation under control and the Canadian

TransCanada’s Keystone XL pipeline. All the while,

economy had recovered by 2010. Canadian residents

Canadian manufacturers continued to suffer from low

are expecting the same around this time as well.

productivity and weak demand for their products. The

However, the opposition party in Canada, The New

only companies making profits were those whose

Democratic Party has released a statement saying

operations were in sync with the oil and gas industry as

that 2010 was a different era and the world needs

they understood how to take advantage of growth in the

advanced economic policies now. The mid-October

sector. Economists say that they expect the loonie will

elections are touted to be game changing for both the

continue to decline until at least the third quarter of

ruling government and Canadian economy.

market,

pushing

projects

2015, as a dovish central bank, low oil prices and meagre 18 | A U G U S T 2 0 1 5

M-COMMERCE CORNER

INDIA’S NEW ATM: PAYTM

-Jatin Sharma

Paytm, an online mobile and DTH recharge company

against segment leaders Flipkart and Snapdeal,

with its headquarter in Noida, India, made a very

recently bought by Alibaba. Paytm has invested ₹100

humble beginning in 2010. One97, the parent company

crores to set up a strong cloud network via local

of Paytm has grown abnormally fast under the

regional courier companies, as well as joined hands

leadership of Vijay Shekhar Sharma, Chairman and

with India Post, to establish strong last mile

Managing Director of Paytm. The main appeal of online

connectivity. Paytm currently serves 30,000 pin

recharge business is convenience and attractive deals

codes and is increasing its reach to another 39,000

which come as a result of affiliations with a number of

pin codes to cater to tier 1 and tier 2 cities and deliver

merchants. In 2014 Paytm launched its Paytm wallet

to remote corners of north-east and southern states of

after securing licence from RBI to start a semi-closed

India.

wallet that is the money cannot be withdrawn from it.

Paytm has a neutral model on the lines of Alibaba

The wallet is particularly attractive as Paytm has

where it directly enable vendors to deliver to

liaisons with major ecommerce companies and it can be

customers without keeping inventory in warehouses

used to pay for other ecommerce websites like

unlike amazon and Flipkart. Most of the transactions

Makemytrip and Bookmyshow. Wallet users currently

of Paytm are done through Paytm wallet and only 5%

are 10 million and expected to increase to 25 million.

of the transactions are cash-on-delivery whereas this

Recently Paytm brought another innovative feature to

number in case of other major players is 60%. In

its wallet by making it possible for wallet holders to

January this year Paytm announced that it will raise

transfer money amongst each other. Ecommerce is

$575 million from Ant financial and Temasek

witnessing tremendous growth and Paytm is one of the

holdings, part of Alibaba affiliate group. Till now

companies spearheading the growth. It has become the

$200 million has been injected and the remaining

second most valued online company with a valuation of

Infusion of $375 million is subjected to evaluation of

$2 billion after Flipkart, valued at $11 billion.

company’s performance. With this investment the

Diversification of Paytm

stake of Alibaba affiliate goes up to 41% and would

Paytm, an acronym for pay through mobile is company’s core philosophy and is manifested in all its

open wider doors for Chinese firms to enter into India.

products. The company has formed strategic alliances

Expansions plans of Paytm are not just limited within

with a number of partners and is pumping in

the boundaries of the country, the company is

brobdingnagian sums of money. Paytm recently

expanding to South-east Asian countries like

forayed into online retail space and is directly pitted

Malaysia, Thailand and Indonesia under renowned

against segment leaders Flipkart and snapdeal, recently

entrepreneur Sourabh Sharma, founder of crowd

A U G U S Paytm T 2 0 1 5has invested ₹100 crores to bought19 by| Alibaba.

funding website Milaap. The company has also

set up a strong cloud network via local regional courier

started brand building campaign and it has acquired

entrepreneur Sourabh Sharma, founder of crowd

undertake any banking business.�Paytm is also

funding website Milaap. The company has also started

entering travel industry with a bus booking platform

brand building campaign and it has acquired the title

it is soon going to launch.

sponsorship rights of Indian domestic and international matches at home till 2019 for â‚š203.28 crores. Domestic Ranji trophy will be renamed after the company as Paytm Ranji Trophy. The Tata Sons chairman emeritus has come behind Paytm. The 76-year-old veteran has made an undisclosed investment in the mobile payments and commerce platform and will take up an advisory role, marking his fifth stake purchase in the local e-commerce sector. Paytm has an annual transaction value of $750 million, earning 1-1.5 % of payments as transaction fee. In the mobile-commerce business it earns transaction fees of up to five %.

The way ahead for Paytm Paytm is also set to enter into online grocery under a new vertical which will have its headquarter in Bangalore. Flipkart another ecommerce biggie is about to enter online grocery as well, a segment currently dominated by small and medium sized firms Bigbasket, Zopnow and Local Buniya. Last week with the announcement of a payment bank licence to Paytm, the company is all set to enter the financial services sector and harness its technological potential to reach untapped cohorts of the society. The in-principle license granted will be valid for 18 months, during which the applicants have to comply with the requirements under the Payment Banks Guidelines.

Following this, the RBI will consider granting a license for commencement of banking businesses “under Section 22(1) of the Banking Regulation Act, 1949.

Until a regular license is issued, the applicants cannot dsf

20 | A U G U S T 2 0 1 5

Constructive destruction is an inherent feature of economic systems. One system takes birth, grows, begins to dominate and gradually eliminates the previous system completely. Though the current share of online retail in total retail is miniscule but the growth rate might prove to be a sign of worry.

Online market is still severely underpenetrated due to the limited smartphones and internet usage. But these numbers are growing at a breakneck pace and hence online markets are attracting a lot of new players. Indian smartphone users grew at 54% in 2014, reaching 140 million in number and is expected to grow 4.7 fold to 651 million by 2019. At the same time the number of tablets grew 1.7 times and reached 2 million. The figure is expected to grow 9.2 times i.e. to 18.7 million by 2019. With these kind of numbers the ecommerce sector is going to give tough competition to brick and mortar retailers.

Payment business is one of the main business of Paytm which currently contributes 60% of the revenue while retail garners 40% of the sales. The lucrativeness of online payment business is attracting more players and Flipkart and Snapdeal both have announced that they will be launching their payment platforms soon. Even international players like Google and Apple have announced their entry into the online payment business and these giants can pose a serious threat to Paytm

WILL INDIA TRANSFORM?

MAKE IN INDIA: AN IMPENDING DREAM

-Jharna Soni

“She (India) has left indelible imprints on one fourth of

investors have imposed in the country's economy and

the human race in the course of a long succession of

the reforms initiated by the government towards ease

centuries. She has the right to reclaim ... her place

of doing business. There has also been an enormous

amongst

and

growth in foreign institutional investment (FII) by

symbolizing the spirit of humanity. From Persia to the

“717 %" to $40.92 billion during the previous fiscal

Chinese sea, from the icy regions of Siberia to Islands

year.

the

great

nations

summarizing

of Java and Borneo, India has propagated her beliefs,

Investments made in Startup Companies

her tales, and her civilization!"

– Sylvia Levi

600 500

Patym

The excerpt rightly puts forward how India has evolved

400

Snapdeal

and transformed itself over the centuries. If I were asked

300

Ola cabs

under what sky the human mind has most fully

200

Quikr

developed some of its exquisite gifts, has most deeply

100

Bigbasket

pondered on the greatest problems of life, and has found

0

Zomato Amount $ million

solutions, I shall point towards India. Prime Minister Narendra Modi undertook the Make in India campaign

Top most funded Startups

and found one such astounding solution to prominently

During the first quarter of 2015, Indian startups

put India, as the new face for global manufacturing.

raised $1.7 million from investors. These startups are

The ambitious scheme was launched on September 25

th

funded either through venture capital or through

last year with an aim to facilitate the inflow of new

private equity funds. According to the data that

technology and capital, while creating millions of jobs

YourStory compiled, on an average it has been

in the county.

reported that there has been at least two-startup

“In a sign that reflects investor confidence in the

funding between January and February 2015. The

Centre's 'Make in India' initiative, the foreign direct

graph below will indicate top startups that rose the

investment (FDI) into the country has witnessed a 48 %

highest funding.

jump in the seven-month period till April 2015”, the-

Foxconn endorsing Make in India

commerce and Industry Ministry said in a statement.

The world is facing a climate of contracting investments and yet the increased inflows of FDI in India, indicate the faith and utmost trust that foreign investors have imposed in the country's economy and the reforms 21 | A U G U S T 2 0 1 5

initiated by the government towards ease of doing

Foxconn known as the world’s largest electronics contract manufacturing giant, is a Taiwan-based company and a major endorser for the government’s “Make in India” campaign. The chairman of Foxconn, Terry Gou has signed a deal with Devendra Fadnavis, the Chief Minister of Maharashtra, to set

Devendra Fadnavis, the Chief Minister of Maharashtra,

has plans to invest $12 million to construct a steel

to set up its first facility in the state. Foxconn has

plant in Orissa but ran through rough weather with

decided to manufacture key components for Smart TV,

environmental clearance and land acquisition for its traded in US currency, an increase in value of dollar project. Apart from building its facility in Odisha, the accompanies a decrease in its price.

Korean Giant has made a deal with Uttam Galva The crisis in international market hasin also negatively Group to set up another steel plant Maharashtra.

smartphones

and

computers

by

assembling

components, starting automation and testing labs at its first center, near Pune. By the end of 2020 it has expressed to set up 10-12 such manufacturing units in India. Not only has Foxconn undertaken to set up manufacturing plants in India but has also become one of the most aggressive foreign investors into India. Here are some of the major investments made my Foxconn in various companies: 

Snapdeal- $500 million investment made along with China’s Alibaba group holding and Japan based Softbank Group Corp.



Ola cabs- $210 million investment along with Softbank.



Indian solar sector: Injects $20 million along with Softbank Group Corp and India based telecom company, Bharti.



Foxconn has also stated to form a joint venture with the flagship company of the Adnani group.

Make in India, Korean Style.

Korean companies were late bloomers in India, yet they somehow managed to woe the Indian market.

According to the estimates of Korean Exim Bank, more than 1000 Korean companies have invested around $3.9 million in India between 1990 and 2014. Among these Posco Steel Company decoded to make one of the largest investments in India, giving a boost to the Make in India campaign. Posco, the Korean based company Apart from building its facility in Odisha, the Korean Giant has 22 |made A U GaUdeal S T 2with 0 1 5 Uttam Galva Group to set up another steel plant in Maharashtra. The steel

affected price of gold.facility The downfall in the The steelthemanufacturing in Sindhudurg Chinese economy has ledwill to massive 30 district of Maharashtra cost $3selling billionof (Rs tonnes Shanghai Gold Exchange 19,000 gold crore).at There will be an 80:20 joint because venture people in market wanted to pay off the debts and between Uttam Galva Group and Posco Korea, liquidate possible investment of theyAssociation had done. accordingevery to the Memorandum As a result the price of gold dipped to itsThe lowest due (MoA) signed by both the companies.

Miglani to excessive thanpromoters demand and family, whosupply are the of forcing Uttam people Galva to sell atwill lower Iran’s nuclear deal with the Group, holdprices. majority of stake that is 80%.

Posco West has led reduction in conflicts in those regions will have theto option to increase its stake to 50% later which in turn indicated the gold prices to be lowered. on in future.

Further, Greece has been in the danger of being Can ‘Make in India’ really be effective? removed from Euro list. It has a huge amount of debt which it dealt with a last minute with There is a boom in by thesealing Indian economy withdeal all these its creditors thus imbibing less value gold. prime and crucial investments being of made in such a short span of time. The Make in India campaign is Moving to the factors internal to Indian economy, the definitely in its upswing and proving to be a huge government and Reserve Bank of India (RBI) have success. It won’t take long until we see India as the taken several measures to curb gold imports resulting biggest destination for global manufacturing. It has in lowering its prices and making it as an option for been justly said by Swami Vivekananda, that the way investment asset. This reduction has attracted to success is to take upon one idea, make that one consumers leading to healthy demand and high idea your life- think of it, dream of it and live on that consumerism. The unpredictable pattern of monsoon idea. Similarly the Make in India campaign has come is also a matter of concern. India is the second largest out with flying colors by the humongous efforts consumer of gold out of which rural population made by our government to turn this idea into reality. contributes to about 60% of overall buying of Now we can say that Make in India is not a distant products. With a good monsoon over the year the reality but an Impending Dream. demand for gold would increase especially during the festive season. On the other hand, lower levels of monsoon would negatively impact the demand for gold thus leading to an increase in its price.

According to the facts, India has been the world’s

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consumers decision making.

data analysis processes. According to Joe Wilkie, president of the new entity, named Nielsen

Acquisition of Innerscope Research Nielsen was the first large research company to take firm steps towards Neuromarketing when, in 2008, it bought a minority interest in Neurofocus. This was followed, in 2011, by an acquisition of the remaining shares, and an eventual re-branding of the neurodivision as Nielsen neuro. The new acquisition allowed Nielsen to offer a wide- range of services, integrating brain-wave measurements using Neuro-focus’ EEG technology with its traditional expertise in surveybased methods. More-recently, in May 2015, Nielsen extended its commitment to Neuromarketing when it announced its acquisition of Innerscope, one of the earliest and the most highly respected Neuromarketing companies, known for its solid scientific reputation and a

portfolio

of

research

methodologies

that

complemented Nielsen’s EEG approach. The global market

research

industry

is

going

through

a

diversification boom, both in the traditional service offerings and in the introduction of new methodologies and high- tech devices to study consumer choice and behaviour. Since the emergence of Neuromarketing as research field, some marketing vendors’ pon grade behaviour. Since the emergence of Neuromarketing as research

field,

some

marketing

vendors

have

proclaimed death of traditional research and presented their neuro-based tools as a panacea that solved all their customers’ problems. Traditional research companies, on the other hand, tended to 24 | A U G U S T 2 0 1 5

Consumer Neuroscience, the new unit will provide an

integrative,

science-oriented

and

globally

reachable approach which is going to be serviced by a team of over 1000 client-oriented staff and 18 Neuroscientists with over 250 peer-reviewed articles in the field. The scientists will be backed up by Nielsen’s existing infrastructure of 5 labs in the U.S and also multiple labs in the other high- potential countries around the world: U.K, Germany, Russia, Mexico, Columbia, Japan, China and India. Nielsen anticipates it will be able to deliver significant added value from the new services by combining the expertise of the two companies and offering a wider range of integrated capabilities, which the company believes will provide better predictive power and an ability to offer uniquely customized study designs.

Additional value is expected to come from the introduction of wearable measurements devices which will make it possible for research subjects to forget about being monitored and act in a natural manner. This is more a merger than an acquisition.

Nielsen’s acquisition of Innerscope, following its acquisition of Neurofocus, sends a strong signal to the industry that Nielsen sees neuromarketing techniques as both valid and necessary for a complete understanding of the consumer.

MONSOON’s IMPAT ON AGRICULTURE AND ELECTIONS

MONSOON BLUES

-Ishan Gupta

Every year the markets eagerly await the weather

production in India, while the crops contribute upto

department’s

These

26% of the total food grain and oilseed output. It is

predictions not only signal the investors about the

ironical that agriculture that feeds the entire nation,

market trends for the remaining year but also about the

supports more than half of our population and

robustness of the rural economy. Monsoon acts as a

contributes although small but a significant 15% to

double edged sword for the Indian economy. It not only

our GDP is in such a dismal state. We are still

decreases the cost of a large number of industrial

dependent on monsoon rains to grow our crops. We

products but also results in increased revenue for

have not been able to develop irrigation facilities that

companies as the rural population has more income to

will support our farmers and reduce our dependence

spend.

on this unreliable factor. Poor output of crops results

prediction

for

monsoon.

in food inflation and also increases the cost of raw 2014 was a disaster in terms of rain deficit. The four month long monsoon season (June to September) ended with 12% below average rainfall, making it the worst in five years. The situation has also been bleak for 2015.

The Indian Meteorological Department (IMD) had predicted a 12% monsoon deficiency in June 2015, 5% more from its earlier forecast of 7% in April.

Apparently there is no change for the remaining season (August to September) as well. The IMD estimates that the rainfall over the country is likely to be below normal and the monsoon deficit for this year will be above 10%. This is not a good signal to the investors. In light of the deteriorating monsoon conditions, Moody’s, the

materials for the industry. This inflation results in higher expenditure on the same number of items and high input cost affects the industries bottom-line. It also has a devastating effect on our farmers. They are already under heavy debts and poor farm output generates less income and increases the debt burden on them. Low income results in poor standards of living and results in them being trapped in the cycle of poverty. In the end the government has to come out with bailout packages to protect the farmers which in turn creates a pressure on its finances and limits its expenditure on other projects.

international rating agency, cut its forecast for India’s

Let us now look at the states that will be going to

economic growth to 7% for the current year from its

polls in 2015 and 2016. They are Bihar in 2015 and

earlier estimate of 7.5%. In a recent CRISIL report, four

Assam, Tamil Nadu, West Bengal, and Kerala in

states (Bihar, Karnataka, Maharashtra and Uttar

2016. Having earlier mentioned as to how monsoon

Pradesh) and five crops (Jowar, Soyabean, Tur, Maize

results in growth, here is a view on how this might

and Cotton) are expected to be badly hurt by deficient

affect election results. Monsoon in these states has

rains. These states contribute 34% to total food grain

been mixed this year.

production in India, while the crops contribute upto 26% of25the | A total U G Ufood S T 2 0grain 1 5 and oilseed output. It is ironical that agriculture that feeds the entire nation,

Monsoon in election states 32%

40% 20% 0% -20%

-8%

-3%

-8%

-18%

-40% Bihar

26 | A U G U S T 2 0 1 5

Assam

Tamil Nadu

West Bengal

Kerela

Bihar is the worst hit among the election bound states.

High share of

High

Low

It is the nearest to the deficient monsoon range (19%

agriculture

debt

irrigation

below normal as per IMD criteria). The central

households

government has already gone on a populist spree announcing various packages for the state. These include Rs 3,094 Cr. for farmer welfare and Rs 300 Cr.

States

Tamil

No

Yes

No

No

No

No

No

Yes

Yes

Nadu

package for increasing seed production. If Bihar is

West

nearing a rain deficit, West Bengal is on the opposite

Bengal

end. The state has been witnessing heavy rainfall due to

cover

Kerala

the effect of the cyclone ‘Komen’.

The table throws some light on the importance of Connecting monsoon (Used as a factor of growth) and

agriculture and monsoon in a few of these states

election is an interesting study titled ‘Growth and Election Outcomes in a Developing Country’ by Poonam Gupta and Arvind Panagariya. In this study

and alleviates the population from poverty. As per

they prove that growth helps incumbent heads of states

the study conducted a higher GDP should lead to re-

win elections. They have analysed growth and election

election of the incumbent. It is going to be an

data across a broad number of state and central elections

interesting election season. Bihar where agriculture

and statistically proven that states which witness a high

and monsoon plays an important role might be tricky

rate of GDP growth under a particular political party

one, with the monsoon going south and friends

tend to re-elect them. The central idea of this study is

turning foe (BJP and JD-U). Monsoon may not have

that higher the GDP grows larger portions of the

a direct bearing in the other states (West Bengal,

population is alleviated from poverty and they tend to

Tamil Nadu and Kerala) which have a lower share of

re-elect the incumbent heads of the state. In states where

agricultural households. Its effect on the economic

agriculture is an important source of income for the

growth of the state might just be the key factor that

population, monsoon becomes the important factor for

decides the fate of our political leaders.

electoral outcome.

So in simplicity monsoon has multiple effects on our economy. It is an important factor for farm output which takes care of the food security of our overgrowing population. The increased farm output also results in higher income for the rural population, low cost of inputs for the industry, higher revenue and higher profits. This in turn boosts the economy and alleviates the population 27 | A U G U S T 2 0 1 5

IPO MARKET READY WITH MORE THAN ₹ 30,000 CRORE OFFER

IS INVESTOR OPTIMISM JUSTIFIED?

-Swarupa Roy

Investment in the financial market has various options,

money; it does so by issuing debt or equity. The idea

and IPO is quoted to be one of the best profitable

and concept of IPO dates back to as much as four

investment vehicles in current times. Substantial

centuries ago with the first IPO being the Dutch East

amount is invested in IPOs each year in both national

India Company. Over the time several rules and

and international market (Wall Street). While the

regulations of IPOs have been developed and they

investors and the market are not new to the term IPO,

report to their respective country’s commission. In

let’s know what an IPO exactly is.

United States, IPOs are governed by the Securities

Before proceeding to IPO, let’s take a look at some basics. Companies are mainly categorized into two types, first is Private company and the other is Public company. A private business or company is unlisted and is either owned by non-governmental organizations or small number of shareholders who doesn’t offer or trade the company’s shares on the stock exchange market to the public. Mostly they are small businesses or firms. Plus, private firms do not have any regulatory accountability

towards

publicly

disclosing

its

accounting and financial details. While on the other

And Exchange Commission (SEC), while in India it is Securities Exchange Board of India (SEBI). In context to IPO, SEBI in July 2009 instituted the notion of ‘Anchor Investor’. An anchor investor in a public issue is a qualified institutional buyer who makes an application for a value of Rs 10 Crore or more through book building process. Considering the volatile nature of equity markets, private firms which are going for IPOs would gain from anchor investors as they can attract potential investors towards the public offering even before they actually hit the market.

hand a public company is always listed, and its shares and securities are traded by the public through stock

In recent times, the Indian market scenario has

exchange market. The shares are available for the

become quite active with several companies

general public to own and trade according to their own

becoming public and going for IPOs. According to

analysis and decision. A public company follows the

statistics, in 2014 there were around 47 potential

listing agreements and is obligated to publicly

IPOs out of which 45 have issued successfully. The

announce it accounting and financial information. Next,

number is estimated to increase by a considerable

coming to IPO abbreviated for Initial Public Offering,

margin in the current year. Since the beginning of

it is the transition of a private company or firm into

2015 to till now, ten companies have successfully

being a publicly listed company. In short, when a

launched IPOs and has together raised approximately

private company turns into IPO it makes the first stock

Rs 4,700 Crore. This figure is thrice in comparison

sale to the public. Generally a small private company

to the amount raised in 2014, i.e. Rs 1,528 Crore by

goes public when it needs to expand its capital and raise

six companies. According to the latest news in the

money;28it|does A U Gso U Sby T 2issuing 0 1 5 debt or equity. The idea

second half of 2015, recently more than 30

and concept of IPO dates back to as much as four

companies have queued up with public offers worth

second half of 2015, recently more than 30 companies have queued up with public offers worth Rs 30,000 Crore. While most of them are moderate size firms aiming anywhere between 300-2000 Crore, there also some famous businesses like IndiGo, Café Coffee Day (CCD), GVK and Matrix Cellular. Their aim is to raise cash to fund their respective business expansion plans along with paying off loans if any. The initial processes have begun with at least 20 companies already getting approval from SEBI to move ahead with their plans, and are in transition to IPOs. Café Coffee Day got the nod from SEBI to continue with its proposal of raising 1,150 Crore where it plans to utilize Rs 632 Crore to pay off its debts and the rest in opening nearly 215 CCD outlets.

Next, catering to the booming demand, indigo airlines went on to order a record 250 airbus. While it has not exactly

announced

its

official

IPO

valuation,

speculations are there in the market that it is anywhere near $4 billion. Conglomerate GVK has revealed its plans of expanding its airport business (GVK Airport Developers) and has put up an offer of raising approximately Rs 3,000 Crore. Matrix Cellular known for providing global telecommunication services to Indian citizens travelling in foreign countries, has put up a proposal of Rs 500 Crore to lift up its capital.

Others in the list includes RBL Bank, Biocon’s Syngene International, Amar Ujala Publications, catholic Syrian Bank and SH Kelkar & Company to name to a few.

withdrawing the restriction on the maximum of investors which is currently 25. Along with it, the concept of e-IPO is also on cards, where now the company will be able to issue capital through online stock exchange system. This move will reduce the normal time period of listing from 12 days to 6 days.

The guarantee of positive returns has also increased if the investors focus on proper investment through detailed study and analysis of the company history.

Overall it can be viewed as a positive sign for the Indian market. Bounded by rules and thorough inspection by SEBI, the new IPOs can be quoted to be safe for investments but not every investment will have desired or satisfactory return. So at the end of the day, it is the performance of the company and the

The recent news has created excitement in the IPO

decision of the investors that will decide which IPO

market amongst both investors and companies. And, in

to invest into and which to avoid.

midst of this, in order to positively encourage the IPO space, SEBI has relaxed certain norms, beginning with withdrawing the restriction on the maximum of 29 |which A U G UisS currently T 2 0 1 5 25. Along with it, the investors

concept of e-IPO is also on cards, where now the

INDUSTRY ANALYSIS

INFRASTRUCTURE DEVELOPMENT AS A PRIORITY

-Hemlata Hajong

Since the economic liberalization of the 1990s, infrastructure development has progressed rapidly, but the government failed to make any positive intervention to ease the infrastructure crunch faced by our country today. We have hardly seen any major changes in the past decade. Numerous projects were being processed but the outcomes are gloomy. It was in the year 19982004, which triggered infrastructural development.

Some of the achievements are as follows: 

January 2015 stood at US $24,028.19 million,

50% of the highways in its last 30 years in its

according to the Department of Industrial Policy and

five-year rule.

Promotion (DIPP). The Gross Capital Formation

Open skies policy and privatization and

(GCP)

modernization of airports.

infrastructure) grew from 5.6% of GDP in FY07 to



Envisioned the river-interlinking project.

6.5% of GDP in FY12. Overall share of investment



Golden quadrilateral of roads.

in infrastructure (as a share of GDP) over the



National Gram Sadak Yojana: A massive rural

eleventh plan period was 7.1% up from 5% in tenth

road project.

plan. The construction sector is responsible for



(as

an

indicator

of

investment

in

almost 7% of India’s GDP and is preceded by only Infrastructure industry is a huge industry. It includes

agriculture in this regard. This sector can be broken

buildings, roads, ports, airports, power supplies etc. It

up as such infrastructure development: 54%,

is the collection of physical and organizational

residential activities: 5%, industrial activities: 36%

structures and facilities. The present government is very

and commercial activities: 5%. Larsen and Toubro is

concerned about the infrastructural development. Huge

the leader among infrastructure companies in India.

investments have been bestowed upon various sectors.

It is one of the largest road developers in India and

The total earnings of the Indian Railways registered an

has projects for road construction of more than

increase of 12.57 percent from last year. Modi’s effort

Rs18,000 crore. They have taken projects to build

to make port development a major priority lead to the

metro trains in Hyderabad. Its building and factories

expansion of export and import containers by 7.34

business under L&T construction has secured orders

percent year-over-year from April to October 2014.

worth ₹2,521 crore in December 2014. The major

Foreign

players of this industry are as follows-

Direct

Investment

(FDI)

received

in

construction development sector from April 2000 to January 2015 stood at US $24,028.19 million, 30 | A U G U S T 2 0 1 5

according to the Department of Industrial Policy and

NAME

HEADQUARTER

MARKET CAPITALISATION (CRORE)

Larsen and Toubro

Mumbai

₹ 150,817.63

Reliance Infrastructure Limited

Mumbai

₹ 9,229.63

GMR Infrastructure Limited

Tamil Nadu

₹ 8,049

IRB Infrastructure developers

Mumbai

₹ 7,940

Jaiprakash Associates Limited

Uttar Pradesh

₹ 5,716

Nagarjuna Construction

Hyderabad

₹ 5,214

Mumbai

₹ 1,905

Telangana

₹ 1,252

Lanco Infratech Limited

Gurgaon

₹ 1,137

Punj Lloyd Infrastructure

Gurgaon

₹ 933

Limited

Company Limited Hindustan Construction Company GVK Power and Infrastructure Limited

Limited

31 | A U G U S T 2 0 1 5

Most of the companies are undertaking projects both

Beside these problems there are general challenges

small and big. Like Indostar Capital Finance Ltd and

faced by India. They can be clearance of land, lack

Reliance Capital Ltd have invested Rs200 crore in

of coordination between various organizational

Alliance group, a real estate company. Because the

bodies and government agencies, corruption, lack of

Reserve Bank of India has notified 100% foreign direct

proper dispute resolution, government policies, etc.

investment (FDI) in the construction sector it has

The Public Private Partnership (PPP) is also weak.

become easier for foreign companies to invest and

Government Initiatives-

enhance infrastructure.

Infrastructure development is a priority for the Risks and Challenges-

government. Prime Minister Narendra Modi, who

There are many challenges and risks faced by India in

completed one year in power this year, has vowed to

infrastructure development. Nearly 276 projects out of

raise public spending on infrastructure by $11 billion

586 projects as followed by Ministry of Statistics and

in the current fiscal year. It is even estimated that the

Program Implementation have been delayed. A large

total spending would reach US $19 billion during

pile of debts on the books of Indian infrastructure is

FY12-17. Funding from private as well as public

interfering with the government’s plan. The companies

sectors is set to increase sharply in the near term. In

that build big projects owe more than 3 trillion rupees.

the beginning of the current fiscal year, the

Banks are also being cautious in lending to

government allocated 32.89 billion rupees for

infrastructure sectors. Debts have risen and this could

railways, 58.3 billion rupees for roads and 175

limit

billion rupees for rural projects. Narendra Modi has

India’s

ability to

grow.

Thankfully the

government is focused on repaying their debts.

transformed his native state, Gujarat and built people oriented cities. His 10-year plan to improve infrastructure includes building smaller airports in towns, a high-speed train network, revamping trains and modernizing ports. He also has a grand vision for our country which includes-

32 | A U G U S T 2 0 1 5



To build 100 smart cities.



To create satellite cities around large cities.



Water grids



River interlinking.



Network of bullet trains.

Future GrowthThere is a large scope for development in this field especially the Indian port sector. By the end of 2017 port traffic will amount to 943.06 MT for India’s major ports and 815.20 MT for its minor ports.

Indian Aviation is expected to become the third largest across the globe by 2020. While sectors like power and road are expected to attract a large share

Infrastructure Output Forecast

of the proposed investments, new opportunities in

Four infrastructure ministers- civil aviation, railways,

the coming years. This will not only change the

road and shipping have been asked to work together

industry but also increase employment in various

under Narendra Modi’s office to keep regular tabs on

fields.

their progress through monthly meetings. According to surface

transport

minister

Nitin

Gadkari,

the

government has planned to turn around the road sector in two years by raising rupees one lakh crore in a year.

It will also use 200 billion rupees to establish a company called National Investment and Infrastructure Corp. This will allow the trust to raise debt and invest in equity of infrastructure finance companies such as the IRFC and NHB. India and US have signed a memorandum of understanding

(MoU)

in

order

to

establish

infrastructure collaboration platform. It will look into areas of urban development, water resources, river development,

communication

and

information

technology, railways, roadways, etc. Iran has also offered India to help build a rail link to connect Chabahar port with the North-South Transport Corridor.

33 | A U G U S T 2 0 1 5

A NEW INITIATIVE

START UP & STAND UP INDIA

-Prateek Pandey

The ‘man of action’ has provided the country with yet

year, government has maintained that India has

another vision which could serve as a stepping stone

already emerged as the fourth largest hub for start-

towards India Shining. Prime Minister Narendra Modi

ups. And, the survey has attributed the expansion of

is known for his fierce and hard- hitting speeches, it was

start-ups space to hyper-growth in technology and

‘Make in India’ announced last year. Whereas, this time

software products. From 3100 start-ups registered in

while addressing the country on 69th Independence Day

India as of 2014, the numbers are projected to go up

at New Delhi he coined the slogan of ‘Start-up India &

a whopping 11,500 by 2020 as per a study done by

Stand up India’ to promote people towards initiating

independent

new ventures that is, encouraging entrepreneurship,

market, consolidation in activities, availability of

especially those belonging to the weaker section in the

funding for bankable start-ups and evolving

society. Also, Prime Minister Modi told not to criticize

technology has been attributed as enough reason for

him for his increased expectations from well-

the spurt in growth of start-ups across sectors.

performing Indian banking sector and requested banks

Unlike previous government, this time talks are

to provide financial aid and offer incentives for the

transforming into action. Government has launched

Start-up India initiative.

two new investment and loan programs with a

An entrepreneur plays a vital role in the economic

combined allocation of ₹ 12000 crore. As per

growth and development of the country and thereby

Minister of State for Finance said while announcing

nurturing its economy. Prime Minister Modi’s motive

these programs “India is expected to surpass the

is to make the youth of the country a job creator instead

United Kingdom in terms of start-ups and will only

of job seeker. He also believes that India could Rank

be behind United States”. Finance Minister Arun

no-1 in start-ups across the globe. In his speech he said

Jaitley on 18-08-2015 launched the India Aspiration

each on India’s 1.25 lakh bank branches should

Fund (IAF) to setup as funds of funds under the

encourage at least one Dalit or Adivasi entrepreneur and

Small Industries Development Bank of India

a women entrepreneur. This would help creating a new

(SIDBI) in order to energize start-ups and thereby

paradigm in entrepreneurship and will thereby help in

creating job opportunities. In a statement, SIDBI

setting up a network of start-ups in the country. Labour

described the objective of IAF to “catalyze tens of

intensive sectors like leather, food processing and

thousands of crores of equity investment into start-

textiles are seen as areas where start-ups intertwined

ups and MSME’s (Micro and Small Enterprises).

with social inclusion drive mooted by Prime Minister

Creating employment to lakhs of people, mostly

Modi were possible. As per government’s pre-budget

educated youth, over a period of four to five years”.

economic survey presented in Parliament February this

An initial corpus of ₹ 400 crore has already been

year, government that India has already 34 | A U G Uhas S T maintained 2015 emerged as the fourth largest hub for start-ups. And, the

consultancy

KPMG.

Burgeoning

allocated to various venture funds under it. India’s largest insurance company LIC will be a co-investor

allocated to various venture funds under it. India’s

are located in urban India. Second, banks are

largest insurance company LIC will be a co-investor in

supposed to take deposits and lend money, not

the IAF.

provide risky capital, which is equity. Every startup

SMILE in association with SIDBI, Govt. has launched another innovative loan program for SMEs, named as SIDBI Make in India Loan for Small Enterprises (SMILE). A budget of ₹10,000 crore has been earmarked for SMILE. Focused on the 25 sectors under PM Modi’s Make in India vision, SMILE will offer

carries a very large probability of failure and, hence, must be funded by risk capital, provided by angel investors, venture funds and the likes. These diversify risk across many startups, and cut losses in failed ventures by cashing in on a few survivors. The RBI would blanch if banks started taking such risks. government’s

Nevertheless,

SMEs which will have less stringent rules and

flagship schemes like ‘Make in India’ and ‘Skill

regulations.

India’ are garnering a positive response from the

Together, these two Govt. initiated programs will help to create more than 20 lakh direct and indirect jobs in the country. Another Govt. scheme called Micro Units Development and Refinance Agency (MUDRA Bank) is already under process, wherein ₹ 20,000 crore has been earmarked for developing startups in India.

considering

that

quasi-equity and term based short term loans to Indian

Indian business sector and creating their own grounds and helping India to make a stand in the world’s most elite countries. We hope all these new initiatives together will definitely give the much needed boost to the employment and can play a crucial role in generating new avenues for the same.

India the “golden bird” of the ancient times is set to

Spreading a culture of startups to rural India could,

soar again provided it gets the right launch pad

theoretically, lift millions out of backwardness and

through government initiatives and implementation.

financial exclusion. The government's commitment to

There is immense opportunity given the favorable

the startup ecosystem and driving innovation from

internal and external factors that can back the

within India is commendable. There is tremendous

fundamentals of the Indian economy. However,

opportunity for young innovators to build localized

certain essential issues are dealt must be dealt with

solutions. Thus creating a few million entrepreneurs

to keep India flying high. While every individual,

across the country will not only create many more

every industry will have own opinions regarding this,

million jobs but also provide livelihood opportunities

it seems that 'Acche Din' are finally on the horizon

for the poor in remote corners of the country. But, much

for the startups.

like the two faces of the coin, there are several problems associated with Start-up & Stand up India campaign as well some of them are as follows. First, most of these bank branches which Prime Minister Modi talked about are located in urban India. Second, banks are supposed 35 | A U G U S T 2 0 1 5

to take deposits and lend money, not provide risky capital, which is equity. Every startup carries a very

CHINA’S CURRENCY CRISIS

THE GREAT FALL OF CHINA

-Rohit Tillu

China is the one of the world’s biggest economies not

Currency: Renminbi (Yuan)

only in terms of GDP (Gross Domestic Product), but also in terms of production, labour and capital. The country has been hit by stock market crash and change in value of US dollar, which has led to a currency crisis in the country. Before going forward with what exactly

Capital: Beijing

People's Republic of China

GDP: $10 Trillion

happened, let’s briefly understand what is meant by devaluation. Devaluation means the reduction in the value of a currency with respect to other currency. Let’s consider an example in this regard; suppose the price of 1$ is equal to 6 Chinese Yuan. So when we say that China has devalued its currency, it means that now the price of 1$ is equal to 6.5 Chinese Yuan. There is a decrease in the value of the Chinese Yuan in comparison with the US dollar. This decrease is known as devaluation.

Type of Economy: Centrally Planned

to lesser profits. Since China is an export-oriented economy, loss in the value of exports would cause significant loses. Another reason behind the currency crisis is the recent stock market crash, which was caused due to the shortfalls of margin calls for the borrowed money used by investors to earn profits.

The investors borrowed money from the banks along

China, being a centrally planned economy, where the

with their own money to buy the equity shares in the

government controls everything, does not follow the

stock markets. This borrowed money would be used

model of free play of market forces. It sets the value of

for speculation and earning returns on their

Renminbi (Yuan) in accordance with the closing value

investments. The condition of the borrowing said

of the US dollar at the end of every day. As the value of

that some money has to be put up by the investor for

the US dollar rose in the international market due to

buying the securities so that in the event of fall in

monetary policy of the United States Federal Reserve

price, the bank alone does not bear a loss. This

and the policy of US government, the value of Yuan

percentage of money put by the investor in the total

rose as it is directly connected to the price of US dollar.

value of equity stock purchased is termed as margin

When the value of Chinese Yuan increases, the Chinese

money. Due to rise in the value of the US dollar and

products automatically become costlier. Low cost was

in Yuan, which decreased their exports thus resulting

the competitive edge that the Chinese products had over

in lesser profits, also impacted the Chinese stock

the products from other countries. Increase in value of

market. The prices of securities declined. As a result,

Yuan means lesser exports for the exporters, which lead

the banks asked the investors to put up money for the

to lesser profits. Since China is an export-oriented

shortfall failing to which they would liquidate the

36 | loss A U Gin U Sthe T 2 0value 1 5 of exports would cause economy,

securities to recover the amount of their margin. This

significant loses. Another reason behind the currency

process is called as a margin call.. Let’s use a small

shortfall failing to which they would liquidate the

can be freely used for transaction across the globe.

securities to recover the amount of their margin. This

The IMF denied China’s appeal for induction in the

process is called as a margin call. Let’s use a small info

currency bucket, as they felt that the value of the

graphic example to understand the situation in a better

Chinese currency was not freely regulated. So, the

way:

international devaluation would be one measure towards the free regulation of the Yuan. Secondly, the rise in price of the Yuan had decreased their

Value of equity shares: $20,000 Margin 50%; Investor's contribution : $10,000 Bank's loan share: $10,000

exports throughout the globe. Devaluing the Yuan Decrease in the value of equity shares from $20,000 to $14,000 Bank's part: $10,000 Investor's part: $4,000

Since the margin is 50%, the bank will ask the investor to add either $3,000 more to make up for the margin or sell the shares in open market.

would boost up the exports as the Chinese products will be cheaper across globe and this would make China lucrative destination for the investors who wish to invest in the country by means of Foreign

This situation resulted in banks selling more shares in

Direct Investment (FDI)

the open market to recover the value of the margin

Let’s analyze how this currency devaluation affects

money. This also caused the investors to pull out of the

the global and the Indian economy.

market as the risk of losing the value of their securities  Impact on India as well as the bank recovering their margin was o Cheaper Electronics: When the Chinese devalue looming at large. This situation further added to the bad their currency in the market, countries will be economic performance as this lead to more losses on the flooded with cheap Chinese goods. As China is one part of companies who contributed a huge share in the of the biggest manufacturers of electronics, various country’s GDP. All this lead to a stock market crash in kinds of gadgets and appliances will also be cheaper. month of June which further aggravated China’s o Oil Prices: The nuclear deal between Iran, United currency slide.

States and the European Union has resulted in a The Chinese now needed an immediate solution to

decrease in the price of crude oil globally. The

tackle this currency crisis. The government thought that

Chinese slowdown will nudge the prices further

devaluation of the currency would help in calming this

down. Cheaper oil helps India in reducing its deficit

situation. They sought to achieve two objective using

and controlling inflation in the economy.

one tool, i.e. Currency devaluation. Their first objectiveo Competition in exports: Due to the devaluation of was to establish the Yuan in the basket of international

the Chinese currency, the Indian exporters will now

currencies used by the International Monetary Fund

face a competitive crunch as the Chinese goods will

(IMF). This basket of currencies contains currencies

be cheaper now. This may result in lower profit

such as the British Pound, US dollar and the Euro which

margins and slower export growth.

can be freely used for transaction across the globe. Theo Foreign Direct Investment (FDI): Decrease in the IMF denied China’s appeal for induction in the

value of Yuan now makes China a very attractive

currency bucket, as they felt that the value of the

location for investment in production. This might

37 | A U G U S T 2 0 1 5

o Foreign Direct Investment (FDI): Decrease in theo some export shocks for other countries exporting value of Yuan now makes China a very attractive

same kinds of goods.

location for investment in production. This might pullo Impact on Australia: Australia has recently away some investors who had decided to invest in India

experienced an economic boom by exporting natural

as a part of Prime Minister Modi’s Make in India

resources to the Chinese. The primary Australian

Initiative.

exports included the export of Iron ore and Coal.

o Gold Prices: China has overtaken India in the

These two alone accounted for 25% of Australia’s

consumption of gold. The gold prices are decreasing

total exports. Devaluation of the Yuan can affect

globally as a result of the Chinese slowdown and the

Australia’s economy as they may not get the same

Greece crisis. China’s gold import increased by 36%

revenues from the export of natural resources.

when compared on a year-on-year basis. This increaseo Cheaper Debt: Devaluation of the Yuan means is an indicator of the investors parking their money in

more Yuan for the same amount of US dollar. Thus,

safe havens. The global change in the demand and

there would be a decrease in the amount of interest

supply of gold may push its prices upwards.

payments for the foreign investors. This also means

o 

that more financial would be easily available and that Impact on Global Economy

too, for a lesser cost.

o Sale of US treasury bonds: China had been purchasing

Since China is biggest economy amongst all the

the US treasury bonds for the last decade. The US

developing countries, any impact on its financial

treasury bonds are a debt instrument issued by the

crisis will have repercussion on nearly all the

United States Federal Reserve. China owns roughly

economies throughout the world.

$1.78 trillion value of US debt. The Chinese have now

manufacturing economies may take a worse hit as

started offloading these bonds in the market. The sale

everything which is Chinese would now be cheaper.

of these bonds would increase the supply of US dollars

This will also impact the super powers such as the

in the markets and it may result in the decline in the

United States who is a debtor of the Chinese.

value of US dollar.

Certainly, China is a force to be reckoned with.

o Global Oil Prices: The nuclear deal between Iran, United States and the European Union has resulted in decrease in the crude oil prices. The devaluation of Yuan would further lower the prices now as the Chinese are looking forward to export more at a lesser price. o Cheaper goods worldwide: Devalued currency means that they can now export more at lesser prices. The goods exported thus will be cheaper and might cause some export shocks for other countries exporting same 38 | A U G U S T 2 0 1 5

kinds of goods.

o Impact on Australia: Australia has recently experienced

Export based,

GLOBAL TURMOIL

COMMODITIES SLUMP

-Sandhya Adhavan

"Gold gets dug out of the ground in Africa, or

Commodities can be split into two types: Hard

someplace. Then we melt it down, dig another hole,

Commodities - they typically consists of natural

bury it again and pay people to stand around guarding

resources that must be mined or extracted (gold,

it. It has no utility. Anyone watching from Mars would

rubber, oil, etc.) and Soft Commodities - they are

be scratching their head" says Warren Buffett, the

agricultural products or livestock (corn, wheat,

Oracle of Omaha and Chief Executive Officer of

coffee, sugar, soybeans, pork, etc.)

Berkshire Hathaway, is one of the most famous

Who can invest in Commodities and why?

investors of all time. The gold price has been hovering around $1200 for the past few weeks. This is not the only commodity in the market which is facing severe crash. Along with this the prices of Oil, Coal, Iron Ore, Cotton, Soybeans etc. has also been plummeting. For us to know what exactly is going on in the commodity markets, let us understand what is commodity market,

Commodity Market consists of Investors, Producers/ Farmers, Importers/Exporters, Hedgers, speculators, Arbitrageurs, Large scale consumers (e.g. refiners, jewelers, textile mills), Commodity financers, Agricultural credit providing agencies and Corporate having risk exposure in commodities.

who invests in them and why and how does it impact on

Trading in commodity futures (Futures is an

our economy.

agreement to buy or sell commodity at a predetermined price and date to avoid risk due to

Commodity Market

price fluctuations) is transparent and a process of fair It is a market which facilitates trading (buying and

price discovery is ensured through large scale

selling of raw or primary products) in various

participation. It provides a platform for producers to

commodities. It can be a spot or a derivatives market.

hedge their positions according to their exposure in

In spot market, commodities are bought and sold for

physical commodity. Besides, there are no company

immediate delivery, whereas in derivatives market,

specific risks as those seen in stock markets. It is a

various financial instruments based on commodities are

simple economics of demand and supply. Also,

traded. These financial instruments such as 'futures' are

Seasonal patterns quite often provide clue to both

traded in exchanges. Just as SEBI regulates the stock

short and long term players. Just like the exchanges

market,

(FMC)

in equity market, Commodity Futures market have

regulates commodity market. There are numerous ways

Clearing Houses, which guarantee that the terms of

to invest in commodities. The most direct way of

the contracts are fulfilled, thereby eliminating the

investing in commodities is by buying into a futures

counter party risk. Due to the online trading, growth

contract.

in the commodity market is now more evident.

Forward

Markets

39 | A U G U S T 2 0 1 5

Commission

Recent Performance of Commodities:

Recession Bell

Commodity prices have plunged 20% in the last six

The commodity prices has been decreasing for the

months. Growth in the global economy slowed to 2.7%

past few months. If this decrease means a surge in

year on year in the final quarter of 2014, down from

the production, then it is a good sign. But, this can

2.9% the previous quarter. Let us see how the global

also signal a global recession. Two worrying trends

surplus of output in many commodity markets and

have emerged on the global scene. One is a crash in

expectations of further slowdown in demand from china

commodity prices. The other is a sharp rise in global

continues to underpin current market weakness and

interest rates. In the past, crashing commodity prices

drive prices down in few major sectors.

and rising interest rates have often come together to

Agriculture The cotton market has been among the most

create a global recession.

Future to be unveiled

significantly affected. This is due to a policy initiated

Finance Minister Arun Jaitley in Budget for 2015-

by the Chinese Government of buying much of its

16, announced that FMC's (Forward Markets

domestic cotton output to put into reserve at a higher

Commission)

price than the prevailing world price, in order to support

Exchange Board of India) will help streamline

its own farmers. As a result, they had piled up stock

regulations

supplies. The china’s cotton supply exploded, so did its

commodities market, while facilitating growth of the

portion of global cotton stock, which was around 60%

market. The commodities market has been known to

of world’s cotton reserves. But last year china ended its

be more prone to speculative activities compared to

cotton reserve policy, thereby dumping all the stocks in

the stock market. But, the performance of the

the market, crushing prices.

commodity market in the recent past signifies that

Metals Due to a global market surplus of iron ore that coincided with china’s slowdown and also the imposition of import barriers, the price of iron ore fell by 47% in and Gold price fell to its lowest level in 6 years in three months to June. The world gold council reveal that Global demand fell by 12% to 915 tonnes in second quarter. This was mainly due to sharp currency devaluation in china.

40 | A U G U S T 2 0 1 5

merger

and

curb

with

wild

SEBI

(Securities

speculations

in

global recession is on its way. Let us wait and watch.

GAME CHANGER?

PAYMENT BANKS: A REVOLUTIONARY STORM Payment banks are those banks which can only receive deposits and provide remittances. It cannot carry out lending activities. It is a type of service niche bank.

They are new stripped-down type of banks, which are expected to reach customers mainly through their mobile phones rather than traditional bank branches.

The idea for payment banks was first proposed by the Nachiket Mor committee on financial inclusion (inclusive financing is delivery of financial services at affordable costs to sections of disadvantaged and low income groups). Finally on August 22th 2015 RBI granted ‘in-principal ‘approval (conditional approval) to 11 entities for setting up payment banks in India. A payment bank mainly aims at small businesses, low income households, migrant laborers, and unorganized

-Eyamini N

Regulations The minimum capital requirement is ₹100 crore. For the first five years, the stake of the promoter should be 40% minimum. A promoter/promoter group can have a joint venture with an existing scheduled commercial bank to set up a payments bank.

However, scheduled commercial bank can take equity stake in a payments bank to the extent permitted under Section 19 (2) of the Banking Regulation Act, 1949. Promoter/promoter groups should be ‘fit and proper’ with a sound track record of

professional

experience

or

running

their

businesses for at least a period of five years in order to be eligible to promote payments banks.

sector entities. In terms of network, payments banks are

The voting rights will be regulated by the Banking

expected to have access points particularly in remote

Regulation Act, 1949. The voting right of any

areas. For a payments bank, the access point can be its

shareholder is capped at 10%, which can be raised to

own branch, business correspondents (BCs) or other

26% by Reserve Bank of India (RBI). Any

network partners. Just as small banks, technological

acquisition of over than 5% will require approval of

solutions to lower costs will be the key for payments

the RBI. The majority of the bank's board of director

banks as well. Consumers would be free to open both

should consist of independent directors, appointed

savings bank account and current bank accounts with

according to RBI guidelines.

Payment Banks. As many as 40 entities/individuals had applied for payments banks licenses. . The Payments Bank will be registered as a public limited company under the Companies Act, 2013, and licensed under Section 22 of the Banking Regulation Act, 1949, with specific licensing conditions restricting its activities to acceptance of demand deposits and provision of payments and remittance services.

41 | A U G U S T 2 0 1 5

The bank should be fully networked from the beginning. The bank can accept utility bills. It cannot form

subsidiaries

to

undertake

non-banking

activities. Initially, the deposits will be capped at 1,00,000 per customer, but it may be raised by the RBI based on the performance of the bank. The bank cannot undertake lending activities. 25% of its branches must be in the unbanked rural area. The bank must use the term "payments bank" in it’s to differentiate it from other types of bank. The banks

branches must be in the unbanked rural area. The bank



through a mobile phone.

must use the term "payments bank" in it’s to differentiate it from other types of bank. The banks will be licensed as payments banks under Section 22 of



as

public

limited

company

Applicants

can

professionals,

be



prepaid

NBFC’S,

cheque less transactions through a phone.

under

the Companies Act, 2013. instrument

Telecom

They can offer services such as automatic payments of bills, and purchases in cashless,

the Banking Regulation Act, 1949 and will be registered

They can enable transfers and remittances

They can issue debit cards and ATM cards usable on ATM networks of all banks.

issuers,

companies,

supermarket chain, and corporates and so on. At present



accounts at nearly no cost being a part of the

there are 11 applicants approved by RBI at present

gateway that connects banks.

which includes 1. Aditya Birla Nuvo Limited



India.

3. Cholamandalam Distribution Services Limited

5. Fino PayTech Limited

They can provide forex cards to travelers, usable again as a debit or ATM card all over

2. Airtel M Commerce Services Limited

4. Department of Posts

They can transfer money directly to bank



They can offer forex services at charges lower than banks.

6. National Securities Depository Limited

Impact of Payment Banks on the Economy,

7. Reliance Industries Limited

Banking sector and individuals

8. Shri Dilip Shantilal Shanghvi

With increasing competition in the core banking

9. Shri Vijay Shekhar Sharma

services especially in semi urban and rural sectors, traditional banks have to keep up with superior

10. Tech Mahindra Limited

customer service and constant innovation in

11. Vodafone m-pesa Limited

introducing new schemes. With this increasing

Scope of Activities

competition among banks and banking services,



They can’t offer loans but can raise deposits of up to 1 lakh, and pay interest on these balances just like a savings bank account does.

customers are likely to benefit with quality, promptness and convenient financial services. The main aim is to ensure every individual in our economy can avail banking facilities as to make payments, transfer money and enhance his savings.

The banking facilities will reach the rural household



42 | A U G U S T 2 0 1 5

too. This will also lead to increased money supply in the economy.

branches must be in the unban too. This will also lead

approval for payments bank.

to increased money supply in the economy.

At present In Kenya, Vodafone’s M-Pesa is used by

As the government is working towards a direct

two in three of adults to store money, make

repayment of subsidy on various schemes to the bank

purchases and transfer funds to friends and relatives.

account of consumers, poor sections of society who not

Airtel is successfully operating these payment banks

having a bank account would gain with the introduction

in Africa but providing services to common people

of payment banks. They are mainly focusing on

so as to send and receive money through mobile

reducing the stake in public sector banks to 52% so that

phones and make payments. Thus payment banks

the capital adequacy ratio that the government has to

will bring millions of unbanked Indians into banking

maintain so that another 2008 banking collapse does not

folds especially the rural. It would be very helpful in

happen. But there were also oppositions from a leading

changing habits of Indians by facilitating the best

bank employee union as they felt that the entry of these

means for their savings and easy means for transfer

payment banks will hurt the interest of public sector

of money at lesser cost and time.

lenders. CASA deposits will also have an adverse effect in the due course. These CASA (Current Account and Savings Account) deposits which forms around 40 percent of public and private sector banks, payment banks introduction will lead to shift from CASA deposits to payment bank deposits thus the commercials banks will face a threat. Payment banks could also start offering competitive deposit rates of as high as 6-7% to enhance customers, compared with the average 4% savings deposit rates of traditional public sector banks.

Since most of laborers working away from home use post offices or third-party channels to initiate a funds transfer to their native places, payments banks once approved and introduced in the near future will change the face of rural India. By this the banking transactions will get easily accessible and less time consuming.

The Department of Posts, which sits over Rs 7 trillion of postal savings, has said it is also in talks with telecom companies which have already been given RBI's approval for payments bank. ked rural area. The bank U G Uterm S T 2 0"payments 15 must 43 use| Athe bank" in it’s to

differentiate it from other types of bank. The banks will

COVER STORY

SHOW ME THE MONEY

-Anupama Kumarswami

“Frugality includes all the other virtues” -Cicero Wealth maximization is every company’s motto. There can be nothing better than saving up on raising leverage by showing a hint of frugality. Restructuring of a company’s debt and equity combination with an aim of making that company’s capital structure more stable is called Recapitalization. Recapitalization involves the exchange of one form of financing for another. When a

directors modify the corporate charter to create the

corporation wants to reorganize its ownership structure,

different

a recapitalization plan is undertaken. It can also be

stockholder then exchanges existing shares for

described

a

shares of one or more of the new class of stock.

corporation’s capital structure. It also comprises of

While the second type of recapitalization plan

restructuring

sheet,

involves issuing a preferred stock dividend. The

accomplished by using the company’s existing

stockholders and directors declare a dividend of

operations, assets and cash flow to raise additional

several preferred shares for each share of common

capital. It is undertaken for a number of reasons, for

stock. This kind of recapitalization doesn’t involve

example, to defend against a hostile takeover,

any exchange of outstanding shares for new shares,

minimizing taxes or to implement an exit strategy for

but rather adding new shares to the old shares and

venture capitalists. In addition to that, a recapitalization

this dividend type of recapitalization is feasible only

plan can be used to amalgamate control by purchasing

if, before the recapitalization all the stock is owned

stock from the minority shareholders, to provide a

by one stockholder and the preferred stock dividend

medium for estate planning and also to provide a

can be declared proportionately. The third type of

mechanism to begin to reduce frequent involvement of

recapitalization plan includes creating a holding

certain shareholders.

company with two or more classes of stock and

as

reshuffling of

a

or

rearranging

company’s

balance

of

classes

of

corporate

stock.

Each

transferring the stock of an operating company to a Recapitalization occurs in three ways, each of which results in creating a different class of stock representing different combinations of rights and benefits. A traditional recapitalization plan involves internal corporate transactions in which the stockholders and directors modify the corporate charter to create the 44 | A U G U S T 2 0 1 5 different classes of corporate stock. Each stockholder

new holding company. This is same as the traditional recapitalization because the stockholders transfer their existing shares of one class of stock for the shares of multiple classes of stock.

ExteNet Systems Inc., a leading provider of distributed

been closed for almost whole July, have been kept on

networks enabling outdoor and indoor connectivity, had

lifeline by the European Central Bank and are

announced that Digital Bridge Holdings and Stonepeak

limiting cash withdrawals to a weekly 420 euros per

Infrastructure Partners have committed for $1 billion by

customer to prevent a run. With full recapitalization

undertaking a traditional recapitalization plan of the

of banks, there would be a major impact upon the

company in which the interests of existing investors

economy as there is around 40 billion euros in cash

will be acquired and additional capital will be provided

under huge disguise in the economy and that money

to support the long term growth of the business. This

would come back to the banks very quickly. Once

recapitalization enables ExteNet to continue pursuing

the recapitalization gets approved, new shares in the

strategic maneuver of outdoor and indoor distributed

banks will be held by the Hellenic Stability Fund

networks to meet the network densification and

(HFSF), not European authorities, which will allow

advanced wireless connectivity needs of its customers,

the banks to perform normal credit and capital

which also include wireless carriers and venue owners.

market operations with relatively few limitations.

With an excellent run of over ten years with their initial venture investor group and other significant investors, ExteNet expects to leverage extensive experience and proven success of their new partners in the communications infrastructure industry with this recapitalization.

The Recapitalization plan has its own set of benefits.

One of them is raising capital without taking on a debt. As the plan involves raising capital through sale of common stock, there is giving up of partial ownership of the company through the sale of stock, thus taking up no debt. Second benefit is that the

Recapitalization not only occurs on a corporate level

owners

retain

the

control

but also on a major national level. It has had a major

recapitalization, two classes of stock are created:

role in the Greek Crisis. The Greek banks involved in

preferred stock and common stock. Preferred stock

the crisis will have restricted access to bailout funds

typically has voting rights, dividend rights, and/or

until a fresh inflow of equity to recapitalize them

preferential liquidation rights, which are spelled out

several months from now if approved. An initial

in the articles of organization. The owner could keep

amount of $11.16 billion will be made available

the preferential stock, which allows him to continue

immediately to propel up the confidence within the

running the company and make the common stock

Greek banks, but this amount will be placed in a

available for purchase. The third advantage that

restricted account at least until a middle or end of

recapitalization holds is that it is a tax-free

October. There is no expectation of disbursement of

reorganization.

money right now, till the full 25 billion euros outlined

recognized under the Internal Revenue Code as tax-

in the rescue package agreed between Athens and its

free exchanges. To qualify as tax-free exchange, the

international lenders are available. Greek banks have

recapitalization must have a valid business purpose.

been closed for almost whole July, have been kept on

In general, as long as a corporate purpose for the

A U European GUST201 5 lifeline45 by| the Central Bank and are limiting

recapitalization is identified, the transaction should

cash withdrawals to a weekly 420 euros per customer to

qualify as a tax-free exchange. ExteNet is expecting

Most

of

business.

recapitalizations

In

are

In general, as long as a corporate purpose for the

Despite these disadvantages, recapitalization has

recapitalization is identified, the transaction should

become quite common in today’s market and is an

qualify as a tax-free exchange. ExteNet is expecting

attractive alternative for a business owner willing to

success out of its recapitalization because of the

convert some of the value in his business to cash

advantages mentioned.

without actually selling the company. One such

With a set of advantages, Recapitalization plan has disadvantages attached with it too. One such problem is that the preferred stock dividends may drain the company of needed cash. Large cumulative dividend has to be paid on the preferred stock to boost its value.

Dividends payable to the preferred shareholders are not deductible by the company. Therefore, the money used to pay the dividends will be taxed twice, once at the corporate level and then when the individual receives the dividend. Thus it doesn’t make any business sense to put the future health of the company at risk just to raise capital. The second shortcoming is that if a senior or mezzanine debt is raised, the result may be a more leveraged balance sheet. Third disadvantage can be that new equity is likely to involve shareholders who will desire participation at the board of director’s level.

These same shareholders will want to create a structure that ensures their ability to convert investment to cash at some future date. These new shareholders will cause dilution to existing shareholders. Finally, completing a recapitalization can be a time consuming process and an expensive one, since it normally involves retaining lawyers, accountants and investment bankers. These problems are visible in the case of Greek banks’ recapitalization

process.

The

government

will

ultimately dilute the existing shareholders so as to account for the bailout and thus ending a part of ownership by the banks.

46 | A U G U S T 2 0 1 5

recapitalization that took to the stands was of Connacher Oil and Gas Ltd., which operates a small oil sands project in northern Alberta. The restructuring lets Connacher convert roughly $1 billion of bonds into shares, to save about $80 million a year of interest. The plan also includes the issuance of $35 million of new convertible notes and a $30 million increase in its term loans for operations that have been squeezed by oil prices that have fallen by nearly half since June. Its existing shareholders will be left with 2% stake in the company but this plan improves its balance sheet, gets them aligned with new partners and positions them to become a stronger company. Nor there is right capital structure neither a perfect way of transferring ownership and control of the company in the most tax efficient manner. Recapitalization is just one way of structuring the company so that it facilitates growth in a way that it freezes the value of the company depending upon the business plan. It is eventually the company’s ability of how to garner stability and profits from the plan they introduce within the company. There are advantages and disadvantages in whatever plan the owner implements, so why not take up a less risky path and bring in the required changes. Recapitalization is an emerging kind of restructuring process from which the businesses can boom if they invest wisely.

GUEST ARTICLE

RISE BEFORE THE FALL: CHINA

-Gourab Nandi (IBS HYDERABAD)

For the last couple of months, China has been in the

instead of surrendering them to the collectives. They

headlines of the entire world’s newspapers, for taking a

can sell this surplus in open market. This greatly

sledge ride downhill. But here let’s first concentrate on

helped in increasing the efficiency. He was also the

the way uphill. The story on China is never complete

first leader to emphasize on opening trade with

without looking at the incredible path they took to reach

outside world. At that time, China was a large

the position, where they were, may be a year back from

poverty stricken country with a huge population. The

now. Talking of its assent, the most important time was

situation was perfect for setting China up for

during 1978. It was in this year that some major

becoming the world’s manufacturing hub. Its huge

economic reforms were undertaken by the then leader,

population can provide cheap labor for the

Deng Xiaoping, to change the country from an

companies setting up their manufacturing units in

economic underdog to the giant dragon of today.

China.

The Inception

The Gradual Changes

Since the World War II, China has always been a

In 1979, laws regarding Sino-Foreign Joint Ventures

staunch Communist nation with its close ties with

were passed, which literally marked the official

USSR. They have operated under a single political

welcoming of the foreign investor to do business in

party called The Communist Party of China (CPC).

China. In August of 1980, four Special Economic

Although there has been some other minor parties, but

Zones were setup at Zhuhai, Xiamen, Shenzhen and

they are not allowed to challenge the policies of the

Shantou to encourage Foreign Direct Investments. In

CPC. China had been under the rule of Mao Zedong

1982, the 6th Five year plan was drafted that

from 1949 till his death in 1976. With his ultra-leftist

emphasized on progress towards market economy

policies he was greatly successful in suppressing any

and sustained economic growth. Several laws were

capitalist idea that popped up. As expected, the

also passed, providing basic legal principles for the

economy could not thrive under such an authoritarian

operations of the market economy. In 1984, 14

conditions.

coastal cities and 3 other zones were setup up for increasing foreign trade. This zones enjoyed several

After the death of Mao Zedong, Den Xiaoping came into power. He had a more liberal ideology and was responsible for several economic reforms that helped shape the modern China. One of the early reforms was instituting the household responsibility system, by which farmers are allowed retain their surplus crops

economic benefits and tax evasion. The Communist Party of China has endorsed “socialist market economy” as the goal for economic reform. The year 1990 marked the reopening of the Shanghai Stock Exchange after 40 years, after it was closed by Mao Zedong.

instead of surrendering them to the collectives. They 47 | A U G U S T 2 0 1 5

can sell this surplus in open market. This greatly helped

By this time, the whole economy of China was dependent primarily on exports. Both the Chinese

By this time, the whole economy of China was

for more than a decade. It helped maintain a healthy

dependent primarily on exports. Both the Chinese

Trade Balance with its trade partners. Its trade

manufacturers and the FDI’s were manufacturing in

surplus swelled 10 folds from 2004 to 2009. In July

China using the cheap labor and exporting huge

2015, its trade surplus is 430 billion dollars. In 2005,

quantities of goods outside. By 1991, the total trade

due to the pressure from its major trading partners,

surplus of China stood at $7.9 billion. In order to

People’s Bank of China (PBOC) allowed the Yuan

manufacture these products in the developed countries,

to appreciate by 2.1% against USD. Over the next

the manufacturer has to face a much higher labor cost

three years, the Yuan was allowed to appreciate by

than that of China. Hence, the largest importers of

about 21% to a level of 6.83 to the USD. In July

“Made in China” products are US, EU, Australia and

2008, China halted the Yuan’s appreciation as

other developed nations. To make these exports more

worldwide demand for Chinese products slumped

attractive to the consumer countries, it was necessary

due to the global financial crisis. In June 2010, China

for China to have a low exchange rate. A cheaper Yuan

resumed its policy of gradually moving the Yuan up,

would ensure that these exporting products would be

and by December 2013, the currency had

much more attractive (due to lower price) in the

cumulatively appreciated by about 12% to 6.11. This

developed countries than their domestic made products.

helped the US industries compete against the low

The rate at which the trade surplus was increasing year

priced Chinese imports.

after year, there was a high chance that it would strengthen the Yuan to the level that it would make the exports costly to the importing nations. This can adversely affect the overall Chinese economy.

The Pegged Exchange Rate In pursuit of their goal, to maintain the attractiveness of their exports, they have actively controlled the exchange. For most of the developed economy the

Figure: Exchange rate, Yuan to USD

exchange rates are kept floating. Though the central

(Source: www.tradingeconomics.com)

banks of such countries do manipulate the exchange rates by small amounts, but that’s primarily to curb extreme volatility. In case of pegged exchange rate, the central banks actively control the rates to the extent of driving it in a particular direction or keep it fixed within a narrow range. The Yuan was pegged to USD at the exchange rate of 8.28 starting from 1994 and continued for more than a decade. It helped maintain a healthy 48 | A U G U S T 2 0 1 5 Trade Balance with its trade partners. Its trade surplus

In an effort to actively control the exchange rate, China has bought huge amount of US government securities, the value of which stands at $1.261 trillion at the end of March, 2015, which is highest by any nation (worth mentioning, Japan’s holding of US Treasury is $1.2269 trillion, as of March end, 2015).

The Forex Reserve Another aspect of Chinese economy is their huge gold reserve that they hold. The amount stood at 1054 tons in 2010. After 5 years of silence, on 21 July, 2015, they declared that the current level of gold reserve at 1658 tons, that’s roughly 60% rise from the 2010 levels.

However, the global market was expecting a much higher level, considering the fact that they were buying huge quantities of gold using dollar. This also increased the supply of dollars and hence helped strengthen Yuan against Dollar to a large extent. Moreover, China is the highest producer of gold in the world. The lower-thanexpected level of gold reserve declared may be also because of the fact that, it did not take into consideration the potential capacity of the gold mines that they have acquired within their country and offshore.

The Chinese government is also known for its high levels of corruption (ranked 100 of 175 in Corruption Perceptions Index, 2014). Its freedom of press is also among the lowest. The government also has too much interference in the markets. Because of all these problems, China has a low standard of living and, though being the world’s second largest economy, has a low GDP per capita (ranked 73rd).

Their economy being overly dependent on exports makes them susceptible to competitions from rest of the developing nations. Another major problem that the country is facing is its aging population. From the 1970’s China has implemented a one-child policy to control its huge population. But due to this policy there has been a large increase in the elderly population and less work force. All these problems have contributed to a major economic slowdown in the recent year. The economic growth has come

The Recent Issues

down to 7.4% in 2014.

Although The People’s Republic of China has become

Conclusion

the biggest economy in the world there has been several issue predominant in the country. The Chinese Government, although they still call themselves to be communist, their inner working has been a mystery. As stated earlier, China operates under a single political party, The Communist Party of China, and challenging or criticizing the CPC or the government policies is severely punishable. This makes China an authoritarian country. Also many government officials are elected for their technical expertise making China, in some ways, a Technocracy. With only one political party, there is more cohesive legislation that makes the government react quickly to any economic changes.

49 | A U G U S T 2 0 1 5

Despite

all

these

drawbacks,

the

Chinese

Government has been actively handling the economics scenario. The most recent example is an almost 2% devaluation of Yuan in a matter of a week (currently standing at 6.39 Yuan per USD). It’s evident that right now China need some drastic economic reforms in several sectors to come back to the growing path. They should address their problems from over dependence on exports and try to revive the economy from within. At the rate at which the economy was growing previously, it was expected to overtake US by 2026, to become the world’s largest economy.

VRIDDHI’s RESEARCH CORNER

COMPANY IN FOCUS: GATI

–Abhinav Baruah in recent times have driven the Indian logistics

Industry: Logistics

market,

Market Cap: Rs. 1593.81 Crores

infrastructure-related

CMP: 146.05

centric inefficiency.

BV: 70.18

simultaneously,

also

constraints

overcoming and

logistics-

Express Logistics: The Express logistics market in

Dividend Yield: 0.77%

India is about USD 3.5 BN and is growing at ~16%

PE:

CAGR. It is a fragmented industry with large number

Industry PE: 108.88

of players, estimated at about 2,500. However, there

Face Value: 2

has been considerable consolidation of the industry

Key Performance Indicators (FY 2014-15):

over the years and the large organized players,

Revenue: +14%

including government postal department, presently

EBITDA: + 29%

have about 72% share.

PBT: + 68%

E-Commerce Logistics: As more consumers

PAT: + 59%

continue to move up the socio-economic ladder,

EPS: +36%

online shopping is becoming a preferred means of shopping due to its convenience and wider options.

Online retail, while today representing a small

Industry Overview

fraction of the e-commerce space is one of the fastest The Indian logistics sector has typically been driven by the objective of reducing transportation costs that were (and often continue to be) inordinately high due to regional

concentration

of

manufacturing

and

growing segments. Online shopping of physical goods in India, will grow to $8.5Bn in 2016.

Numbers of online shoppers in India will more than double to 40M.

geographically diversified distribution activities as well as inefficiencies in infrastructure and accompanying technology. However, driven by strong fundamentals and consistent demand, the resilient Indian economy, in general and, the logistics sector in particular, are seemingly well-positioned to sail through turbulent global economic uncertainty. Rising investment, rapidly

evolving

regulatory

policies,

mega

infrastructure projects and several other developments in recent times have driven the Indian logistics market, 50 | A U G U S T 2 0 1 5

simultaneously, also overcoming infrastructure-related

About Gati Limited: Pioneering Express Distribution services in India, since 1989, Gati has transformed the logistic industry in India with many a path breaking revolutionary initiatives that paved the way to an organized logistic industry. With an annual turnover of Rs.15,273 Million, Gati today offers an integrated Express Distribution and customized Supply Chain Solutions to customers across diverse industry verticals.

Gati's advantage of seamless connectivity across air,

Distribution and customized Supply Chain Solutions to

more

customers

verticals.

streamlining paperwork for road transporters and

Gati's advantage of seamless connectivity across air,

bringing down logistics costs. Currently, each of

road and rail has resulted in a plethora of offerings to

India’s 29 states taxes goods that move across their

the customers, unmatched in the industry. Gati operates

borders at different rates. As a result, freight that

a fleet of more than 5000 vehicles on road, and over

moves across the country is taxed multiple times.

3100

India.

Worse, there are long delays at inter-state

A market leader in India, Gati has a strong market

checkpoints, as state authorities review and examine

presence in the Asia Pacific region and SAARC

freight and apply the relevant taxes and other levies.

countries. Today, Gati has offices in China, Singapore,

The planned GST system seeks to replace around 15

Hong Kong, Thailand, and Nepal and has plans to foray

state and federal taxes and tariffs for a single tax at

into other market

the

across

business

Gati’s Presence:

diverse

industry

partners

across

Gati has 16 Express distribution

centers, 64 Distribution centers and a dozen of

efficient

point

of

administration

cross-state

sale. is

Tax

often

transportation,

optimization

considered

over

and the

operational and logistics efficiency.

operating units across the country.

E-Commerce Boom in India: The ecommerce Others 10%

Share Holding Pattern

sector has seen unprecedented growth in 2014. The growth was driven by rapid technology adoption led by the increasing use of devices such as Smartphones

Retail 33%

Promoters 41% FIIs 10%

Corporate Bodies 6%

and tablets, and access to the internet through broadband, 3G, etc, which led to an increased online consumer

base.

Furthermore,

favoured

demographics and a growing internet user base helped aid this growth. In terms of highlights, the growth shown by home grown players such as

Rationale for Investment:

Flipkart and Snapdeal and the huge investor interest

Good and Service Tax (GST): The regulatory reforms

around these companies displayed the immense

proposed in the GST presents a golden opportunity to

potential of the market. E-commerce business of Gati

revisit, rationalize and re-engineer transportation and

contribute around 8 percent of Gati’s revenue and the

logistics networks, given the inherent inefficiencies

ecommerce business in India growing at CAGR of

with taxes based on the crossing of administrative

40-50 %, Gati’s business will surely benefit.

boundaries or border checkpoints. Taxation at a national level, rather than by each state, will result in more efficient cross-state transportation, streamlining paperwork and bringing down 51 | Afor U Groad U S T 2transporters 015 logistics costs. Currently, each of India’s 29 states taxes

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