Infineeti annual by Zigu MBA

Th e M ont h ly Fina nce m a g a z ine fro m IIFT

An n ua l Issue

Changing PHaSe of indiaâ&#x20AC;&#x2122;s financial system Cover Story >>> page 26

microfinance

A fairy tale into nightmare >>> page 20

currency risk management

Embarking on new growth paths >>> page 30

US Debt ceiling crisis

How it all started and its effects >>> page 45

Honest answers Joy Bhattacharjya page 52

Special feature Infineeti Research

INFINEETI | A n n u a l I s s u e 2 0 1 1

ME SSAGE FROM EDITOR - i n - c h i e f

changing PHaSe of india’s financIAL system

I n t h e cove r s to r y, o ur e d i to r i a l te a m p re s e nt s t h e cha nging fa ce of

I n d i a n f i n a n c i a l s ce n a r i o. Th i s i s s ue cove r s myr i a d d oma ins of I nd ia n f i n a n c i a l s ce n a r i o. S ME d e b t s a n d m i c ro f i n a n ce i n d u str y is in focu s.

h e wo r l d i s a d i f fe re nt

the countr y has redefined the

focussed on some of such core

place post 2008. The

wo rd “s t ub b o r n”. Th e R e s e r ve

issues affec ting our economy.

developed par t of the

Bank of India has raised the

Ar t i c l e s from cor porate s, a ca -

g l o b e i s s t i l l s t r u g g l i n g. T h e

interest rates 11 times since

demia and students present

Eu ro Zo n e i s c u r re nt l y t r y i n g

March 2010. This has largely

the situation of the corpo-

ver y hard to avoid another

b e e n h e l d re s p o n s i b l e fo r t h e

rate bond market, reasons and

f i n a n c i a l f i a s co. O n t h e o t h e r

slowing growth rate but inter-

e f fe c t s o f U S d e b t c r i s i s a n d

hand, the USA has its kitty

e s t i n g l y, r e a l i n t e r e s t r a t e s

S ME f i n a n c e i n I n d i a a l o n g

full with Congress approv-

were negative for the same

with other pressing topics.

i n g t h e b i l l to ra i s e t h e d e b t

time period. It is said that

H a p py re a d ing !

ceiling at the last moment.

the benefits of Shining India

A m i d s t a l l t h i s u n c e r t a i n t y,

are not reaching the areas

Arjit jain is specialising in

emerging

are

that most desire and need

Finance. He interned with

finding it increasingly dif-

t h e m . Th e re fo re, t h e g ove r n -

Mahindra

ficult to sustain the growth

m e nt o f I n d i a h a s p ro c l a i m e d

and has worked in Reliance

s to r y. I n d i a i s f a c i n g t h e h e at

financial inclusion to be the

Industres Limited. An avid

of all this global macroeco-

f l a g b e a re r o f f u t u re grow t h .

reader, he is learning the build-

nomic turbulence. I nflation in

I n t h i s An n ua l I s s ue, we h ave

ing blocks of economics at IIFT.

economies

and

Mahindra

INFINEETI RESEARCH R e s e a rc h s e c t i o n o f INFINEETI s h o wc a s e s t h e winning entr y of National Research Paper C o m p e t i t i o n b y s t u d e n t s o f NITIE . E q u i t y R e s e a r c h C e l l o f IIFT c o m e s u p w i t h t h e research report on Rolta India Limited.

Avai lable along wi th the Annual issu e

INFINEETI | A n n u a l i s s u e 2 0 1 1

INFO

INFINEETI | A n n u a l I s s u e 2 0 1 1

MEET TH E TEAM

CONTENTS

A r c h i e g a n g r a d e is an av id l e a r n e r EDITOR - IN - C H IEF

and has k een interes t in Finan ce. S h e

Ar ji t J ai n

h a s c o m p l e t e d CFA L e v e l 1 . S h e h a s interned with Tata Consultancy Services

E d i to r i a l b o a r d

in Co r po rate Finance and has wo r k e d

Arc hi e G angrade

in Computer Sciences Corporation.

N i s htha Anan d Shi vaji Ya d av Sunand an Sr idh aran

n i sh t h a a n a n d i s s p e c i a l i s i n g i n

Vi ne e t Baks h i

Finance. She has interned with Deloitte

»» p.6

Co n t r i b u t i o n s f r o m

Operations prac tice. She plans to join

TRends Make Money

Ak as h S

the field of M anagement consultanc y.

Sudarshan Suk hani

India Pvt Ltd in their Strategy &

Apoor v J ayavant Kunal Pati l

india’s evolving m&a landscape

Sunil Shirole

sh i va j i ya d av i s a C h e m i c a l e n g i -

Pr i ya Si ngh

n e e r, w h o t a k e s k e e n i n t e r e s t i n

R ohi t K hattar

Finance and Trade. He has co mp l e te d

S oumya S e n

CFA L e v e l 1 . H i s i n t e r e s t s l i e i n f o l -

Su m an Ti war i

lowing commodities and he aspires

VC and PE Investments IN INDIA

to be a trader in the near future.

Snehal D esai

Sunandan sridharan is specialfeedback/queries

izing in Finance. He has interned

i n fi ne e ti @i i f t. ac. in

w i t h Ta t a C a p i t a l t h i s s u m m e r a n d

i n fi ne e ti @gmail. co m

looks for ward to work in the challenging

Banking

and

Financial

S e r v i c e s I n d u s t r y, p o s t g r a d u a t i o n .

v i n e e t b a k sh i i s a C i v i l E n g i n e e r with diverse interests. He has interned w i t h TATA S t e e l . A h i g h l y e n e r -

R antej Singh

FAIRY TALE INTO NIGHTMARE

M S Shr iram

paschimbanga

Dr. R anajoy Bhattachar y ya

42 SO you thought

WONDERLAND TWo Words of finance

20 MICROFINANCE

Honest Answers Joy Bhattacharjya

39 Keynes and

14 ALICE IN

Tea m I nFIN e et i

ALL RIG H TS RESER VED

ning in SME’s

»» p.45

R euben R ay

Pr i ya J u ne ja

Published monthly by students of Indian I nstitute of Foreign Tr a d e , N e w D e l h i a n d Kolk ata

36 Resource plan-

Pallav i S a xe n a

design

»» p.20

the US would default

M r itunjay Kumar

US Debt ceiling crisis: how it all started and its effec ts

Tir thak r it M uk herjee

indian corporate debt market need of the hour

Regulars 55 Campus to

corporate: Tata capital

56 summer

internship: Tata capital

58 fun with fin: Crossword

30 Currency risk

getic and motivated professional, he has interests in various fields.

management Embarking on new grow th paths

Prof. Har k irat Singh

Cover story 26 Changing PHaSe of india’s financial system

INFINEETI | A n n u a l i s s u e 2 0 1 1

INFINEETI | A n n u a l I s s u e 2 0 1 1

TECH NICAL ANALYS I S

Trends Make Money

b u y i n g. T h i s g ro u p a re t re n d

We a l w a y s a s s u m e t h a t t h e

downtrends. Here also, money

following investors. The group

o n g o i n g t re n d w i l l co n t i n u e.

is made with the principle

that makes the most money

After a sustained up move,

“buy low, sell high’ except that

a re t re n d fo l l ow i n g i nve s to r s.

many traders believe prices have risen so much that a

we first sell high and then, The problem with anticipat-

retracement, or even a com-

i n g a c h a n g e i n t re n d i s t h at

plete reversal, of trend is

Short sellers make money

sooner or later the investor

l i k e l y. B a s e d o n t h i s b e l i e f,

when there is a downtrend.

b e g i n s t o “ p l a y G o d ”. W h o

traders go and sell the market.

k n o w s t h e f u t u re ? T h e c o u n -

Selling at what is currently the

Tr e n d s m a k e m o n e y i n t h e

te r- t re n d i nve s to r c l a i m s t h at

top of the market is an exhila-

l a t e r, b u y a t a l o w e r p r i c e .

E xcer pted f ro m th e bo o k , TRADING TH E MARKETS WITH S UDAR S HAN S UKH ANI. Publ is h ed by Vis io n B o o k s (w w w. visio nbo o k sindia .co m ). M r S uk h a n i w r ites a bl o g c alled Tra ding Step s at w w w.s uda r s h a n o n l in e.co m

Th e s a m e p r i n c i p l e s a p p l y to

neha buys a share at

The ideas that “trends make

Figure

make

market. When prices move

he does. He is buying even

rat i n g expe r ie nce. The tra d e r

40 and sells it at 50.

m o n e y ” a n d “ b u y l o w, s e l l

m o n e y. T h e c h a r t s h o w s a n

from low to high, we have

before the trend has changed.

feels like a king, announc-

She makes money on

high” appear contradic tor y. I n

u p t r e n d i n PN B a s t h e p r i c e

a n u p t re n d. Wh e n t h e y m ove

He is saying that there will

i n g t h e e n d o f a t r e n d . We

the investment. Why? She

a n u p t re n d, p r i c e s a re g o i n g

goes up from Rs. 350- 1,050

f r o m h i g h t o l o w, w e h a v e

b e a t re n d c h a n g e a n d p r i ce s

all love to catch the high or

makes money because the

up. I f t h ey are g o ing u p, then

a d o w n t r e n d . E i t h e r w a y, a

will go up. How can he be sure

low of a move. I t makes for

s h a r e ’s p r i c e m o v e d h i g h e r

h ow can yo u “ bu y l ow ”?S o we

Therefore,

say

t re n d i s n e ce s s a r y i n o rd e r to

about that? What happens

good stor y telling. But, in

thus giving a profit. Could

ask , wh at is the l ow ? I f S neha

“buy

low” we

refer-

m a k e m o n e y. Th e i m p o r t a n ce

if prices do not go up?

re a l i t y, tre nd s a re pe rsiste nt.

she make money if the price

can sell her s hare fo r 50 then

ring

low.

o f t re n d m us t b e un d e r s to o d.

fell to 30? No, she would have

h e r p u rc h a s e p r i ce o f 4 0 i s a

lost money because the law

low. After all, the purpose is to

o f mathe m ati c s says t h at t h e

1 . 1 : Tre n d s

when

are

relative

Once a move starts, it can

W h e n s h a re p r i ce s f a l l, t h e re

The trend following inves-

c o n t i n u e fo r l o n g e r t h a n w e

S o m etim e in 19 89 , R e l i a n ce’s

is a downtrend. Many inves-

to r, o n t h e o t h e r h a n d, wa i t s

i m a gi ne. Whe n a ma r ke t is in

sell h ig her. I f s he antic ipates

share price hit a low below 50.

tors will buy shares in a down-

patiently for prices to actu-

a trend, you should assume

only way to make money in

t h a t t h e p r i c e w i l l r i s e, t h e n

At t h e t i m e o f t h i s w r i t i n g i t

t r e n d b e c a u s e t h e y fe e l t h a t

a l l y b e g i n m o v i n g u p b e fo r e

t h a t t h e t re n d w i l l c o n t i n u e.

the market is to follow the

the current price is a low since

w a s t r a d i n g a t ` 1 , 0 0 0 ( t h e re

p r i c e s h ave b e c o m e t o o l o w.

he takes a buying position.

Tr e n d s m a k e t h e b i g m o n e y.

rule: Buy low and sell high.

she may be able to sell higher.

were bo nu s is s u es al s o i n t h e

What they really mean is that,

inter im bu t we w il l l eave t h at

soon enough, pr ices will star t

Figure 1.2: No trend, no money.

for now). Does the “buy at low ”

r i s i n g. Th e re fo re, t h e y a nt i c i -

This chart of Hind Unilever

r u l e req u ire u s to wai t fo r 5 0

pate a change in trend from

shows the absence of any trend

Author presents his v i e w s i n CN B C T V - 1 8 . H e i s a f u l l t i m e t r a d e r.

in R el iance? I ho pe no t, s i n ce

d o w n t o u p. I n o t h e r w o r d s ,

this pr ice may not be seen for

s u c h i nve s t o r s a r e a n t i c i p a t -

Assume That the Ongoing

a l o ng tim e. A l ow, th e re fo re,

ing a trend reversal before

Tre n d Wi l l Co nt i n ue.

is a price from where we antic-

the reversal ac tually happens.

ipate higher prices. If prices

These investors are coun-

move up from our buying level,

t e r - t r e n d i nv e s t o r s . T h e y a r e

we have fulfilled the golden

taking a position which is

a x i o m “ b u y l o w, S e l l H i g h”,

against the current trend.

and, we have made a profit. Meanwhile,

other

inves-

The m ove f ro m 4 0 to 5 0 i s a n

t o r s w i l l n o t b u y. T h e y w a i t

u ptrend. B u yer s m ak e m o n e y

p a t i e n t l y fo r p r i c e s t o b e g i n

w h e n p r i c e s g o u p. I n o t h e r

r i s i n g b e f o r e t h e y b u y. T h i s

words, buyers make money

gro up i s wa i t i n g fo r t h e t re n d

when there is an uptrend.

to actually reverse before

INFINEETI | A n n u a l i s s u e 2 0 1 1

INFINEETI | A n n u a l I s s u e 2 0 1 1

M& A

India’s Evolving M&A Landscape

the participation of private

$ 1 2 .9 b i l l i o n i n Ja n ua r y 2 0 0 7 t ra n s a c t i o n s i n I n d i a to d ate.

players, and earmark ing about

is a case in point. Also notable

U S D 1 Tr i l l i o n t o s p e n d o n

i s t h e a cq u i s i t i o n o f N ove l l i s F u n d a m e n t a l s o f i n b o u n d t h e s e c t o r i n c o m i n g y e a r s . by H indalco Industries for M&A remain intact as over-

M o r e o v e r, v a l u a t i o n m u l t i -

$ 6 b i l l i o n i n M ay 2 0 0 7 . Wh i l e s e a s a c q u i r e r s c o n t i n u e t o p l e s i n t h i s s p a c e l o o k m o r e

S u nil S hiro l e, M an a gin g Direc to r & CEO, Yen Ca pita l Adv is o r s

m i l l i o n t o n n e s a y e a r, f o r l a r g e s t f o r e i g n i n v e s t m e n t

foreign

acquisi-

I n d i a n co r p o rate s a re a g gre s - view I ndia as strategic market

attractive with sector valua-

s i v e l y e x p a n d i n g t h e i r h o r i - fo r t h e i r g l o b a l grow t h p l a n s,

tions below those of the wider

z o n s , t h e i r c o u n t e r p a r t s o f f - a l t h o ug h p re m i um va l uat i o n s

I n d i a n m a r k e t . T h e c o u n t r y ’s

shore are similarly targeting make Indian businesses look

f i n a n c i a l s e c t o r, w h i c h h a s

a n d a c q u i r i n g o r s e t t i n g u p un at t ra c t i ve at f a ce va l ue.

seen a wave of M&A deals and

o p e rat i o n s w i t h i n I n d i a .

IPO s, cou ld expa nd fu r the r a s

n the last 3 years, India Inc.

b e s t exe m p l i f i e d by t h e h i g h

Lastly,

has acquired foreign assets

profile takeover of Jaguar

t i o n s w i t h t h e a i m o f a cq u i r-

wor th $27.25 Billion (Rs.

L a n d R o v e r ( J LR ) b y Ta t a

ing knowledge and technol-

1226 thousand Crores). The

M o to rs. Fo ll ow in g t h is t h e

ogy have also contributed

depreciation of major world

co mpany im m ediatel y m oved

to the growth of outbound

c u r renc i e s, the weak inter n a-

to b egin pro du c tio n in I ndia,

M & A s . B PO s , IT e n t e r p r i s e s

tional economy and subse -

allowing it to tak e advantag e

a n d p h a r m a s s e e k to a cq u i re

quent lack luster international

of India’s labour and cost arbi-

patents, trademarks and copy-

d e m a n d h ave a l l co nt r i b u te d

trage and apply its k nowledge

rights to strengthen their

Corporate reorganization and

to ma k i ng fore i gn co mpan ies

o f t h e l o c al m ar k et.

k now l edg e bas e.

consolidation within “frag-

Inbound M&A: India top target among BRICs af ter Chi na

The interest of foreign compa-

a n t i c i p a t e d b a n k i n g r e fo r m s

nies in I ndian entities is likely

may open the sector for

to continue trending upwards

gre ate r fore ign pa r ticipation.

a s co m p a n i e s f ro m K o re a a n d

Consolidation Drivers for D o m e st ic M &A

attractive to Indian buyers.

mented” sectors act as cat-

Bu t more i m por t ant h as b een

S e co n d l y, s e ve ra l I n d i a n co r-

The availability and access

alysts for domestic M&A.

India Inc ’s growing confidence

po rate ( as wel l as the g over n-

to c apital, co u pl ed w i t h h i g h

Companies

i n i t s e l f o n t h e b a c k o f ra p i d

ment) invest abroad as they

valuation of Indian compa-

looking at consolidation as

growth and unshack ling of the

seek to secure energy and

nies, is a significant driver

a m e a n s to rat i o n a l i s e co s t s.

li ce n s e R aj.

raw material/mineral sup-

fuelling

M&A.

This has given rise to a new

plies to ac hieve their grow th

De-leveraging of balance

generation of transactions

The motivation for acquisi-

objectives.

The acquisition

sheets, robust capital markets

that are built on the basis

tions abroad are manifold, pri-

o f G re a t e r N i l e i n S u d a n a n d

a n d e m e r g e n c e o f l e ve r a g e d

of a short-term need to be

marily acquiring market share,

R u s s i a’s S a k h a l i n b y ONGC ,

finance has helped compa-

a b l e to cu t costs, consolid ate

IP, b ra nds a nd an est ablish ed

and General Chemicals by Tata

nies to increasingly look for

a n d b r i n g l a r g e r re ve n u e o n

k nowledge and resource base.

Chemicals are examples of

outbound M&A. Also what is

the table, not on the basis

such takeovers. Latin Amer ica

n o t a b l e i s t h e grow i n g t re n d

W h i l e I n d i a n c o r p o r a t e s a r e R u s s i a a re e x p e c t e d t o e n t e r

o f l o n g - te r m strate gic ne e d s.

and Africa are emerging as

among Indian corporates

a g gre s s i ve l y e x p a n d i n g t h e i r I n d i a , a l o n g w i t h c o u n t e r -

With strong balance sheets

M & A t a r g e t s fo r I n d i a n c o m -

of acquiring companies far

h o r i z o n s , t h e i r c o u n t e r p a r t s par ts from the US, Europe and

and willing local lenders,

Fi r s t l y, I n d i a n co m p a n i e s

panies because of rich natural

l arg er than them s el ve s i n o f f -

o f fs h o re a re s i m i l a r l y t a rg e t - Japan. Two keys areas of inter-

Indian companies are well

look to acquire established

resources including oil, gas,

shore jurisdic tions. The acqui-

i n g a n d a c q u i r i n g o r s e t t i n g e s t re m a i n t h e i n f ra s t r uc t ure

p o s i t i o ne d to pu rsu e consoli-

b ra n d name s, as well as mar-

iron ore and coal. Resource

sition of Corus, a company

u p o p e r a t i o n s w i t h i n I n d i a . a n d f i n a n c i a l s e c to r s.

d at i o n a nd expa nsion.

keting, sales and distribu-

motivations accounted for

with a capacit y of 18.3 million

V o d a f o n e ’s l o n g - d r a w n - o u t

t i o n c h a n n e l s i n h i g h l y co m -

20% of all foreign acquisitions

t o n n e s a y e a r, b y Ta t a S t e e l ,

a c q u i s i t i o n o f a 6 7 p e r c e n t The oppor tunity is substantial

petitive markets like the US,

bet wee n 2 00 0 and 2 00 7.

w ho s e c apac it y at the t i m e o f

s t a k e i n H u t c h i s o n E s s a r a t i n t h e f o r m e r, w i t h t h e g o v -

acquisition was a mere 5.93

$11.1 billion was one of the ernment looking to fur ther

Why O u t b ound M & As?

E u r o p e a n d t h e UK . T h i s i s

outbound

are

actively

Acq ui s it io n Fin an c in g The

environment

for

INFINEETI | A n n u a l i s s u e 2 0 1 1

INFINEETI | A n n u a l I s s u e 2 0 1 1

acquisition finance has sig-

an offshore company by an

o u t co nver s io ns ; and ca n a l s o

right deal and the right credit

acquisitions as they are famil- i nte gration issu e s.

nificantly improved, allow-

I n d i a n c o m p a ny, i s a l s o p e r-

aver t public offer risks related

s t r uc t ure.

i a r w i t h l o c a l l aws a n d re g u -

i n g I nd i an cor po rates to t ap

mitted. Back-up financing

to indirec t acquisition of sub -

m u lti ple s ource s o f f un din g.

instruments such as guar-

stantial shares or voting rights

The

and

antees, stand-by letters of

in the l is ted targ et com p a ny.

funding options for Indian

credit, k eep -wel l agreem ents

corporates, in general, and

etc are usually used either

for M&A have expanded.

where the financier is a group

liquidity

pool

lations, have better under- Against a backdrop of eco-

Pr i vate Eq ui t y Fund i ng

s t a n d i n g o f t h e c u l t u r e & nomic uncertainty in certain work ethics in the country European regions, as well

I ndia has witnessed increased

of the target and are likely as moderating growth and

The benign debt m ar ke t e nvi -

usage of innovative finan-

to h ave l o c a l co nt a c t s, i n f l u - d e m a n d , i n c r e a s i n g i n t e r -

ronment, especially from

c i a l i n s t r um e nt s to f un d s uc h

e n ce w h i c h co ul d h e l p i n t h e e s t r a t e s , i n f l a t i o n i s s u e s

acquisitions, some of which

co n d uc t o f b us i n e s s.

v i s i o n s b e i n g n o ti f i e d by t h e

are attributable to exposure to private equity players.

and the merger control pro-

O utlook

Competition Commission of

Private equity players have

I n d i a , M& A a c tiv it y in I nd ia in

b e e n t h e m o s t a c t i ve p l aye r s

L o o k i n g f o r w a r d , t h e r e i s the first half of 2011 has resil-

with 2.03 billion $ wor th deals

ever y reason to believe that iently kept pace with 2010

in the year of 2005 rising to

M & A v o l u m e s c a n b e s u s - l e ve l s.

2 3 b i l l i o n $ i n t h e ye a r 2 0 1 0 .

t a i n e d. Co r p o rate co n f i d e n ce

Ve nt u re c a p i t a l f u n d s a n d

h a s r e b o u n d e d s t r o n g l y a n d ABOUT THE AUTHOR

foreign institutional investors

Indian CEOs are willing to con-

a re a l s o s i gn i f i c a nt p l aye r s i n

s i d e r t ra n s fo r m a t i o n a l d e a l s. A Cor porate Finance special-

a cq ui s i t i o n f i n a n ce m a r k e t s.

However, successful M&A per- i s t , S u n i l S h i r o l e h a s m o r e formance by India Inc is largely t h a n 2 4 y e a r s e x p e r i e n c e i n

Indian equity markets have

company or a multinational

the second half of 2010, has

Private Equity players are

d e p e n d e nt o n t h e re g ul ato r y the field of Bank ing & Finance

per formed well, providing

bank catering to the group

h e l p e d s e ve r a l c o r p o r a t e s t o

adding

multi-

l a n d s c a p e. S ucce s s f ul a cco m - holding senior positions with

various fund raising oppor-

or where the actual interest

refinance the debt or raise

ple aspects as partners in

plishment of the complex M&A Citibank , Standard Char tered

t u n i t i e s, i n c l u d i n g t h e i s s u -

o f t h e f inanc ier is in a paral -

l o ng -ter m f u nds at at t ra c t i ve

the

process.

process in today â&#x20AC;&#x2122;s times needs

ance of innovative hybrid

lel t ran sac tio n.

costs. The rupee bond market,

Co m p a n i e s a re a b l e to l e ve r-

e n a b l i n g s te p s f ro m t h e g ov-

while still at a relatively

a g e o n t h e ex p e r i e n ce o f t h e

ernment and regulators, as

securities. The decline in

value

acquisition

b o r rowi ng cos ts h as allowed

New financing structures have

nas cent s tag e, has dee p e n e d.

PE p l a y e r s i n M & A P r o c e s s ,

well as the strategies followed

I nd i an com pa ni es to replace

also been explored whereby

In January 2009, Citi helped

n e g o t i at i o n s a n d e s t a b l i s h e d

b y c o n s o l i d a t i n g c o r p o r a t e s.

debt with cheaper financ-

s p e c i a l p u r p o s e ve h i c l e s a re

ONGC V i d e s h r a i s e o v e r $ 1

c r e d i b i l i t y. D u r i n g t h e b i d

While government needs to

ing, putting them in position

s e t u p o u t s i d e I n d i a to r a i s e

billion in the domestic com-

p ro ce s s a n d p o s t a cq ui s i t i o n ,

bring in facilitative provi-

now to be more aggressive

funds offshore for making

m erc ial paper m ar k et to f un d

PE f i r m c a n i n f u s e c a p i t a l o n

s i o n s t h ro ug h c h a n g e s i n t h e

o n acq u i s i ti ons.

acquisit io ns in I ndia. Fu r ther,

its acquisition of I mperial plc.

a short notice depending on

Companies Bill, Combinations

this has led to increased usage

I ndian banks have stepped up

the need and the objective.

R e g u l a t i o n s , Ta k e o v e r C o d e

acquisi-

o f hyb r id f inanc ing pro du c ts,

their l ending ac tiv it y a s we l l.

PE p l aye r s a l s o h ave t h e f l ex-

and Foreign Investment Polic y,

tion financing by banks in

such as fu l l y / par tl y co nver t-

I n J anu ar y 20 10 , S B I p rovi d e d

ibility in structuring the trans-

co r p o rate s a re fo c us i n g t h e i r

India, banks are permit-

ible instruments, warrants,

a l o an o f m o re than $ 1 b i l l i o n

action. They can Investment

strategy based on imminent

ted to finance the acquisi-

etc. Such instruments are

to GTL I n f ra s t r u c t u re to h e l p

at t h e p a re nt l e ve l a s we l l a s

changes due to proposed

tion of companies that are

also co m m o n in c as e o f l is ted

f u n d i t s a c q u i s i t i o n o f A i rc e l

I nve s t at t h e S P V l e ve l i . e. i n co nve rg e n ce w i t h IFR S , ava i l -

e n g a ge d i n i m plement in g o r

co mpan ies s ince by v ir tu e o f

To w e r s ( w h i c h w a s s t r u c -

the overseas entit y acquir- ability of acquisition financ-

operating an infrastructure

t h ese, t h e f inanc ier c an avail

tured as an asset purchase).

ing the target. Their experi- ing and long-term par tner-

p ro j e c t . Fi n a n c i n g by b a n k s

of benefits of a fluctuating

Moreover, leveraged loans are

e n c e s a l s o c o m e h a n d y w i t h s h i p p o te nt i a l w h i l e co n c l ud -

of acquisition of shares of

capital market by phasing

available especially for the

re s p e c t to re s t r uc t ur i n g p o s t ing the deal think ing through

relation

and Deutsche Bank. He was involved with several landmark M&A transactions such as t h e B h a ra t Fo rg e a cq u i s i t i o n of CDP Germany and Unilever a cq u i s i t i o n o f R o s s e l Te a . H e has raised more than US$ 500 Million in the International bonds markets.He is the F o u n d e r o f Ye n C a p i t a l Ad v i s o r s a n d co n ce p t u a l i ze d t h e I n d i a Pr i v a t e E q u i t y Fa i r â&#x20AC;&#x201C; I n d i aâ&#x20AC;&#x2122;s f i r s t B 2 B p l a t f o r m i n Pr i vate Eq u i t y. H e h o l d s a B A ( E co ) f ro m t h e Fe rg u s s o n College, Pune and an MBA f ro m t h e Sy m b i o s i s I n s t i t u te of Business Management.

INFINEETI | A n n u a l i s s u e 2 0 1 1

INFINEETI | A n n u a l I s s u e 2 0 1 1

android activations every

g o o d a s t h e ex i s t i n g o n e s b ut

the promoters understand

d a y. A p p l e , f r o m J u l y 2 0 0 8

far superior in terms of fea-

the business from scratch

VC and PE investments in India

till March 2011, has witnessed

t ure s a n d co s t. I t i s a l l a b o ut

and have absolute cost and

33 million app downloads per

c re at i n g a f ut ure m a r k rat h e r

quality control which make

d ay. I f o n e s e e s t h e re ve n ue s

than following the industr y

them globally competitive.

from these apps, it is huge and

benchmark. India is best at

The same get supported

sustainable and that is what

t h i s w h e n i t co m e s to l i fe - s c i -

with their ability to get into

V C s a re e ye i n g. I n d i a i s h e n ce

ences, software or biotech.

unchar ted territor y and estab -

ALTERNATE INVESTMENTS

S neha l D esa i, D eput y GM Ada n i Gro up

lished businesses. For Example

being viewed as a potential Application developer market.

I n p r i v a t e e q u i t y i nve s t m e n t

We l s p u n to d ay i s t h e wo r l d ’s

I n d i a n c o m p a n i e s h ave d o n e

b i g g e s t p i p e l i n e c o m p a n y.

ince the world debate on

Th e cur rent V C inves tm ent in qualified bits) which have got

far better as compared to

the 2008 recessio n was

I n dia is s til l predo m inantl y in V C f u nding. As u niq ue i d e a s

a t t r a c t i n g V C i nve s t m e n t s. I t

T h e PE s p r e f e r a r i s i n g a n d

a b o u t t h e” V s h a p e” o r

t h e s o f t w a re s e c to r fo l l owe d become scarce VC investments

Wh i l e m a ny V C s a re fo c u s i n g

i s n a t u ra l b e c a u s e PE i nve s t -

a macro tailwind sector and

the “ W shape”, venture capital-

b y b i o t e c h n o l o g y a n d l i f e are more driven towards R & D

o n e s t a b l i s h e d i n d us t r i e s a n d

ments do not necessarily

w i t h i n th e s e c to r t he y p re fe r

i s t s and pr i vate equit y inves-

sciences. Clean technology companies (But a VC invest-

emerging sectors like apps

come in with new or unique

market leaders with pricing

tors across the globe and also

companies are also attract- ment never gets classified

a n d c l o u d t e c h n o l o g y, t h e

ideas. Indian entrepreneurs

power or cost power. Naturally

in India are busy searching for

ing the interest of VCs, but a s a n R & D i nve s t m e nt ) .

c l a s s i c a l V C s a re s t i l l s e a rc h -

have shown the hunger and

there is no substitute for great

good entrepreneurs and low

as easy money has not been

ing

competence to build large and

management. Major PE invest-

va l u e d d e a l s. I t h a s n o r m a l l y

available due to the dear th of

g re a t b u s i n e s s e s. E m e rg e n c e

m e nt s have ha ppe ne d in re a l

been observed that the VC

unique ideas, investment is

Wh i l e m a ny V C s a re fo c u s i n g

o f I n d i a n MNC s a n d a t a g o f

e s t a t e . E n e r g y, p a r t i c u l a r l y

and private equity investment

taking place in the ver ticals

o n e s t a b l i s h e d i n d us t r i e s a n d

an emerging economy have

power generation compa-

cycles star t during recession or

o f est abl is hed indu s tr ies. Fo r

emerging sectors like apps

made India a preferred des-

nies such as domestic feed

stagnation and get completed

ex amp l e, co m panies invo l ved

a n d c l o u d t e c h n o l o g y, t h e

t i n a t i o n f o r PE i n v e s t o r s .

b a s e d compa nie s a re g e tting

during the growth phase of

in t h e m anu f ac tu r ing o f s o l ar

c l a s s i c a l V C s a re s t i l l s e a rc h -

the economy as it is crucial for

photovoltaic (PV ) cells have

i n g fo r b re a k t h ro ug h i n n ova -

Acco rd i n g to a KPMG s ur ve y,

foreign feed linkage based

eq u i t y i nve s tor s to enter into

attracted VC investments as

tion

companies.

star ting from a meager five

companies. Pharmaceutical,

a deal during the bad phase

India is still ranked among the The area w hic h has s u r p r i s e d

Internet has given birth to

d e a l s a n d a t o t a l i nve s t m e n t

s o f t w a r e & ITE S , E d u c a t i o n

of the investment. Both t ypes

t o p 1 0 m a n u f a c t u r i n g c o u n - V C s is the w ho l e new h o r i zo n

many “M e too” ideas and com-

o f U S D 2 0 m i l l i o n i n 1 9 9 6 ,U S D

a n d As s e t b a c k e d b u s i n e s s e s

of equit y investors follow cre -

tries (although it is not a high o f Apps. With the em e rg e n ce

panies. But breakthrough

17.13

been

are preferred investment

ative destruction concepts

value a dditio n pro ces s in the o f IPAD, IP H ONE a n d s i m i l a r

i d e a s c h a n g e t h e i n d u s t r y.

i nv e s t e d a c r o s s 3 3 9 d e a l s i n

c o m p a n i e s f o r PE i n v e s t o r s .

k n o w i n g l y o r u n k n o w i n g l y.

industr y). But PV cells have p ro d u c t s, a n e w s e g m e n t

They have a vast impact on

2007, making India one of

huge applications in solar for Apps has evolved. The

business models and on

t h e t o p s e ve n PE i nve s t m e n t

O verseas investors are excited

The venture capital industr y

b ased ir r ig atio n pu m ps, s o l ar nu m ber s o f dow nl o ade d a p p s

s o c i e t y. T h e o n l y r i s k s w i t h

destinations in the world.

about investments in India

i n I n d i a h a s a l re a d y m a t u re d

e n e rg y c a p t i ve p owe r a n d i n a r e h u g e a n d s h o c k i n g . T h e

t h e s e k i n d s o f co m p a n i e s a re

and there has been a lot of

b a c k u p p owe r fo r ce l l p h o n e r e a s o n f o r t h e a p p s h a v i n g

either you are there or you are

The past year has witnessed

higher valuation that Indian

foreign investment in the

towers apar t from solar energy a h u g e m a r k e t i s g l o b a l i z a -

n o t t h e re. S o r i s k re t ur n i s at

PE i n v e s t o r s m o s t l y i n v e s t -

entrepreneurs are demand-

c o u n t r y. T h e i n d u s t r y w h i c h

usage.

A n o t h e r e x a m p l e o f tio n. I r res pec tive o f w h e t h e r

its best. For example, funding

ing in family run organiza-

ing. The other challenge

was initially in a nascent stage

ve r t i c a l i nve s t m e n t i s - co m - you are an Indian or a Brazilin,

t h e wo r l d ’s f a s te s t a n d s m a l l -

t i o n s t h a t h ave b e e n i n e x i s -

t h a t t h e i nve s t o r s a re f a c i n g

promoted by multilateral

p a n i e s w o r k i n g i n c u s t o m - i n UK , U S A o r i n C h i n a , y o u

e s t ( b ut us a b l e ) co m p ute r s o r

te n ce fo r m o re t h a n 1 0 ye a r s

is the Indian entrepreneurs’

agencies and the state gov-

ized dr i l l bits (des igning bits c a n b e a n A p p d e v e l o p e r o r

the fastest and the best rocket

handling the same business.

p s y c h e o f t r e a t i n g PE a s p r e

e r n m e nt s i s n ow o b s e r v i n g a

based on the strata of geogra- a u s e r. G o o g l e c l a i m e d t h a t

companies. Here the idea is to

Th e re a s o n fo r c h o o s i n g s uc h

IPO t ra n s a c t i o n s to e s t a b l i s h

m u l t i t u d e o f p r i v a t e p l aye r s.

phy rather than using globally i t w a s h a n d l i n g 5 5 0 0 0 0 n e w

introduce new products as

organizations is obvious:

IPO v a l u a t i o n b e n c h m a r k s .

for

breakthrough

based

a b e t ter pr ice a s compa re d to

billion

has

but the challenge is the

INFINEETI | A n n u a l i s s u e 2 0 1 1

INFINEETI | A n n u a l I s s u e 2 0 1 1

finance

Pro j e c t Fina nce

v a n i l l a b a n k c re d i t p ro d u c t s,

needed to carry out trade

Alice in Wonderland - The two worlds of Finance

treasur y management prod-

w i t h t h e i r d i s t a nt co l o n i e s i n

ucts,

structured corporate

the Americas and Asia. This

Similarly project finance, at

finance, project finance etc

led to emergence of modern

least in its sane form, takes

… t h e ra n g e i s e n d l e s s. Al l o f

day international banks which

a holistic view of a proj-

t h e s e a re d i ve r s e i n s t r um e nt s

enabled traders to export

e c t ’s l i f e c y c l e a n d s t r u c -

R antej Singh

and each one has immense

g o o d s s a fe i n t h e k n ow l e d g e

t ure s t h e payme nt a nd re pay-

breadth and depth within

that the bank at the distant

ment cycles such that while

itself – but the common thread

shores would meet its com-

t h e p ro j e c t m a n a g e m e n t h a s

h e re a re t wo wo r l d s

exposure on the underlying

prov ide c redit to their c l i e nt s

bet ween them is that they are

m i t m e nt to p ay a s l o n g a s t h e

e n o ug h mone y at a ll time s to

of Finance – one that

a s s e t , t h e m o re co m p l ex a n d

and keep cash reser ves for

a l l ve r y c l o s e l y l i n k e d t o t h e

expor ting par ty met the terms

meet its financial needs for

co-exists with the

risk prone the business eco

meeting contractual obliga-

re a l wo r l d b us i n e s s e s.

and conditions of the underly-

project execution, it is also

real world, and the other

system becomes. Such com-

tio ns. An entrepreneu r o r t h e

ing trade contrac t. Soon there

kept on its toes to meet the

t hat c re ate s i ts own vir t ual

plexit y of ten ser ves the inter -

co m pany do es n’t al ways h ave

were more specialized trade

project milestones on time.

re a l i t y. T h e fo r m e r p ro -

ests of the ‘insiders’ at the

ample cash in its pockets to

finance products covering a

The clauses inbuilt into a

vi d es cons tr uc ti ve in p ut to

co st o f t he res t o f the m ar k et.

pay for these business require -

Le t us l o o k at s o m e ex a m p l e s

w h o l e g a m ut o f i nte r n at i o n a l

good project finance struc-

the larger economy while

Look ing at the entire financial

ments. This is where the world

of such ‘real world’ finance

trade operations; today we

ture ensure financial pru-

the latter exists primar-

in dust r y as a ho m o g eneo u s l y

of finance steps in – it pro -

p r o d u c t s . Tr a d e F i n a n c e i s

even have some trade finance

denc y of the project execution

ily to ser ve its own inter-

malevolent force doesn’t lead

vides these entrepreneurs /

the mother of modern com-

focused investment funds that

team, failing which the under-

est. The former co-exists

to productive solutions. At

companies with the funding

m e rc i a l b a n k i n g - i t p ro b a b l y

venture into the non-tradi-

l y i n g a s s e t – i . e. t h e p r o j e c t

closely with the main-street

t h e same tim e, expec ting the

to fill in the gap from the time

originated thousands of years

tional trade finance trans-

itself can be taken over by

b u s i n e s s a n d h a s i t s i nte r-

f in an cial indu s tr y to exerc is e

when money is required by

ago when civilization gradu-

actions that conventional

t h e f i na ncing a ge nc y. Proje c t

ests aligned with the sta-

rational self control is unlikely

the bu s ines s til l the ti m e t h e

ated from barter system of

banks - with all their inher-

financing allows construc tion

bility and long term growth

to wo r k s i n ce t h e i n d u s t r y i s

business is able to pay it back

t ra d e to m o n e y b a s e d s ys te m

e nt p ro ce s s r i gi d i t y, f i n d d i f -

o f m a s sive re fine r ie s, big fa c -

o f t h e e co n o my, t h e l a t te r

structured to be incentiv-

by selling their goods and ser-

o f t ra d e. I n i t s s i m p l e s t fo r m ,

f i c u l t t o s t r u c t u r e . H o w e v e r,

tories and high investment

fo c u s e s p r i m a r i l y o n s h o r t

ized based on ever increas-

v ices to their c l ients.

a trader buys goods at point A

no matter how complex the

l o n g g e s t at i o n i n f ra s t r u c t u re

term gains which are some -

ing quar ter on quar ter growth

fo r a l ow p r i ce a n d s e l l s t h e m

trade finance instrument, it

projects like roads, airpor ts,

times at odds with the

irrespective of external eco -

at point B at a higher price,

ser ves the inherent purpose of

sea-por ts etc. All of these con-

welfare of larger market.

n o mic c yc l es.

thus mak ing a profit. However,

financing the underlying busi-

t r i b ute to ove ra ll growth a nd

the trader needs money to

ness transaction in the real

development of the real br ick

purchase goods in the first

wo r l d. Th e f i n a n c i n g e nt i t y i s

and mor tar world. Again, in

The financing entity in this

p l a c e . T h a t ’s w h e r e a t r a d e

usually unambiguous about

m o s t c a s e s, a p ro j e c t f i n a n c -

Differentiating between these two worlds of finance helps

developing

The ‘real world’ finance

Tra d e Fi n a n ce

better understanding of the

Th e wo r l d o f f inance that co -

case charges a rate of inter-

financer enters the equation

t h e n a t u re o f t h e u n d e r l y i n g

ing agency is a hands-on

i nte rac ti on be t ween f in an -

exists with the real world is the

e s t p ro p o r t i o n a t e t o t h e r i s k

by providing the trader credit

real world transaction and

entity which usually has a

ci a l i ndus tr y a nd t h e larger

one that provides money as an

profile of the borrower for

to buy the goods and cover his

the associated risks before

clear grip on the risks and

b u s i n e s s e co - s ystem. M o re

essential input in the lifec ycle

providing the credit. The

expenses till the goods can be

putting its money on the

rewards associated with the

o f ten tha n not, th e greater

o f a b u s i n e s s. A l l b u s i n e s s e s

f inanc ing in s u c h c as es co ul d

s o l d at a p ro f i t. O ve r t h e a g e s

t a b l e. Th i s e n s ure s t h at w h i l e

underlying real world trans-

the distance between the

t h a t p ro d u c e g o o d s a n d s e r-

come from a wide array of

trade finance has evolved

the money oils the wheels of

a c t i o n – i.e. the proje c t be ing

real world assets which

v i ce s, w h i c h c re ate t h e b a s i c

e n t i t i e s – c o m m e rc i a l b a n k s,

w i t h t i m e to re f l e c t t h e wo r l d

global trade, a realistic risk to

f i n a n ced.

are to be financed and

elements of our civilization,

N B FC s , p r i v a t e i n v e s t o r s e t c

around it. With the emergence

return equation is maintained

the entity that ends up

n eed to bu y raw m ater ial, pay

and co u l d be in the s h a p e o f

o f co l o n i a l e ra , b us i n e s s e s i n

which discourages irresponsi-

taking the ownership/risk

salaries to their employees,

various instruments – plain

parent countries of Europe

b l e r i s k t a k i n g.

‘Al i ce i n wond e r la nd ’

INFINEETI | A n n u a l i s s u e 2 0 1 1

The picture gets hazier

INFINEETI | A n n u a l I s s u e 2 0 1 1

CDO, CDO-square and the crash

and crazier as the dis-

of repayment. They call them

covered Iceland, which had

prominence. These are the been understandable had

Collateralized Debt Obligations

i nve s te d i n s o m e d e r i vat i ve o f

s a m e f i r m s t h at a re b l a m e d fo r t h e s y s t e m n o t b e e n c o m -

t a n c e b e t we e n t h e u n d e r -

Take the example of home mor t-

(CDO s ) a n d s e l l t h e m t o o t h e r

M r. J o e’s A m e r i c a n s u b u r b a n

instigating one of the great- promised by inherent con-

l y i n g re a l wo r l d a s s e t a n d

gages. M r. J o e bu ys a ho m e in

investment banks or hedge

m o r tg a g e, we nt b a n k r up t a n d

e s t f i n a n c i a l c r i s e s o f l a s t 1 0 0 f l i c t s of inte re st. The ju d ge s

the entity financing it

a subur b o f s o m e m id wes ter n

f u nds, w hil e k eeping a n e at c ut

wa s l e f t w i t h n o m o n e y to p ay

y e a r s . T h e y f r e e l y g a v e AAA ( rat i n g a ge ncie s) cha rg e the

increases. Multiple layers

town in the US and gets a home

o f pro f it fo r their ef fo r t i n c re -

the salaries of its public school

r a t i n g s t o u l t i m a t e l y w o r t h - j ud g e d (the compa ny whose

o f i nte r m e di ati on bet ween

loan from his neighborhood

ating thes e ‘innovative’ f i n a n ce

te a c h e r s.

less

the risk originators and

b a n k . Th e n e i g h b o r h o o d b a n k

ins tr u m ents. Thes e new ow n e r s

the risk owners create an

needs liquidity to provide loans

t h e n f u r t h e r s l i c e a n d r e p a c k-

Cre d i t R at i n g Ag e n c i e s, j uro r s

i n p e r s p e c t i v e , AAA r a t i n g i s A s a r e s u l t , t h e m o r e t h e

impossibly intricate maze

to more people so it sells down

a g e v a r i o u s CDO s i n t o n e w

o f t h e wo r l d

m a ny n o tc h e s h i g h e r t h a n t h e AAA ratings that these agen-

which even veteran insid-

M r. Jo e’s m o r tg ag e to a big g er

t r a n c h e s – CDO s q u a r e s , a n d

e r s a re unable to un ravel.

ban k , an d in the pro ces s k eeps

sell them down the line. This

This process of selling finan-

c i e s t o s ove re i g n g ove r n m e n t b l e f ina ncia l prod u c ts, more

a small p ro f it m argin fo r its el f.

pro ces s co ntinu es ad-in f i n i t um

c i a l i n s t r u m e nt d ow n t h e l i n e

b o n d s o f s o m e o f t h e f a s t e s t t h e bu sine ss the y g ot … a nd

till in the end no one k nows who

is facilitated by credit rating

g ro w i n g e m e r g i n g m a r k e t s o f h e n c e h i g h e r t h e b o n u s e s

ow ns w hat! S o o n the de b t o r i g -

agencies that give risk rating to

the world like India. So how taken home by their ana-

inating banks/ entities at the

a l m o s t a nyt h i n g o n t h e p l a n e t

d o t h e s e a g e n c i e s i m p a c t t h e l ys t s a n d m a n a g e r s ! D e s p i te

b o t to m o f t h e m o r tg a g e c h a i n

– from mor tgages to sovereign

r e a l w o r l d ? Pu t s i m p l y, a b a d t h e s u b s e q u e n t m a y h e m i n

realized that no matter how

governments to private com-

credit rating by these agen- the markets, not much has

bad the quality of the mort-

p a n i e s to a ny t yp e o f t ra d a b l e

cies feeds into the risk adjusted c h a n g e d – n o t m a n y h a v e

gage, there would always be

instruments. Credit Rating

re t ur n s d e b t m o d e l s t h at p us h learnt the lesson that depen-

someone willing to buy the

Agencies are themselves a

u p t h e i n t e r e s t r a t e a t w h i c h d e n ce on the r isk rating pro -

s a m e b e c a u s e i n t h i s ‘a l i c e i n

prime example of a system

a l e n d e r w i l l l e n d m o n e y t o vi d e d by a n ex te r na l a ge nc y

wo n d e r l a n d ’ wo r l d, m at h e m at -

i n w h i c h t h e m o d e l d o e s n’ t

t h e b o r r o w e r. T h i s c r e a t e s a is no alter native to thorough

i c a l m o d e l s p rov i d e d by c re d i t

reflect the reality but rather

v i c i o u s c i r c l e f o r t h o s e g i v e n self assessment of the under-

rating agencies and mortgage

creates the reality it desires

a l o we r r a t i n g b y t h e s e a g e n - l yi n g r isk .

structured

m o r t g a g e i n s t r u me nts a re to be rate d )

p ro d uc t s. Jus t to k e e p m at te r s f o r j u d g i n g ( r a t i n g ) t h e m .

ratings given by these agencies doled out to inscruta-

M at h e mati c a l mo dels h ave

The

aggre-

insurance companies could

c i e s. Th e s ove re i gn b o n d s o f a

been created as an attempt

gated many such loans from

as s o c iate a reas o nabl e p r i ce to

d e ve l o p i n g co unt r y o r co r p o - H FT, spe cu lation on ste roid s

to measure risks associated

various small banks and sells

any kind of mor tgage instru-

rate b o n d s o f a m e d i um s i ze d

with these scenarios, but as

them to an investment bank,

m e nt. Co n s e q u e nt l y, h o m e

company get a lower rating Another example of mathe -

repeated market bubbles

again keeping a small margin

loans were given to people

t h u s i n c r e a s i n g t h e i r c o s t o f matical models creating their

and busts over the last

o f p r o f i t f o r i t s e l f. S o f a r s o

w ith N o I nco m e N o J o b ( NIN JA

raising capital, putting them own self ser ving realit y is

cent ur y have s h own , t h ese

good... the process of selling

l o ans ) to bu y s eco nd an d t h i rd

at a perennial competitive dis- t h e f i e l d o f H i g h Fr e q u e n c y

m o d e l s a re wo e f u l l y i n a d -

d ow n t h e m o r tg a g e h e l p s t h e

homes and everyone danced

– c l a s s i c c a s e o f ‘ t a i l wa g gi n g

a d va nt a g e co m p a re d to t h o s e Tr a d i n g ( H FT ) i n e q u i t i e s .

equate in capturing the

banks to extend their ser-

their way to the hypermarket

t h e d o g’ rat h e r t h a n t h e o t h e r

w h o g e t a h i g h e r r a t i n g. Th u s Buying and selling of equities

complexity of real world

vices to more home buyers.

to bu y s u per-s ized g o od s ! As a

w ay a ro u n d. Th e c re d i t r a t i n g

the rating model creates its is supposed to be based on

a nd de pi c ti ng them in t h e

Th e i nve s t m e n t b a n k s a re n o t

result home prices kept going

agencies – essentially the three

o w n re a l i t y. T h e d e ve l o p e d calculating fair value of the

form of few numeric values.

in the habit of keeping such

up and the party lasted till it

m a j o r p l a y e r s – S & P, M o o d y ’s

w e s t e r n m a r k e t s a r e f a c i n g stock depending on the com-

O ver de pe nde nce o n t h ese

asset s o n their bo o k s fo r l o ng,

lasted. But when it crashed it

a n d Fi tc h R at i n g s, a re t h e j ur y

t h i s p a i n f o r t h e f i r s t t i m e i n p a n y ’s p r e s e n t a n d f u t u r e

m o de ls ha s cos tly imp lica-

so they bunch together various

pulled the entire world down

t h at j ud g e s t h e wo r l d.

living memor y, while the devel- earning potential, thus result-

tions for the larger busi-

mor tgages and cut & slice them

w ith it. When M r. J o e de f a ul te d

ne ss e co s ys te m.

in tranches based on perceived

on his home loan installment,

Ye t t h e r e i s a n o v e r w h e l m -

t h e p a i n f u l e n d o f t h i s s t i c k capital. I n theor y, companies

risk of default and priority

a re m o te m u n i c i p a l i t y i n s n ow

ing irony in their continued

fo r e ve r. T h i s wo u l d s t i l l h ave with better market strategies

bigger

bank

o p i n g e co n o m i e s h ave b e e n at i n g i n e fficie nt a llocation of

INFINEETI | A n n u a l i s s u e 2 0 1 1

INFINEETI | A n n u a l I s s u e 2 0 1 1

should find it easier to raise

simply seeing and acting on

the M&A bankers, it would be

shor t term, leaving bystand-

growth capital. This would

market prices sooner than com-

ver y difficult, if not impos-

ers to pay for the same in

involve thorough quantita-

petitors thus they are better at

s i b l e, fo r o r i g i n a l o w n e r s t o

long term. Hence this dif-

tive and qualitative analysis to

speculating than others. There

f i n d w i l l i n g b u y e r s fo r t h e i r

ferentiation and isolation

re a ch a broad ran ge o f equit y

is nothing new about specula-

businesses thus vastly reduc -

b e t we e n t h e d i s p a r a t e e l e -

valuations – it is in equal mea-

t i o n s c re a t i n g b i z a r re m a r k e t

ing the incentive for entre -

m e nt s of the ind u str y ne e d s

sures a science and an art.

scenarios. E.g. in 1637, the

preneu r s to c reate n e w b us i -

t o b e fo r c e d t h r o u g h i n d e -

High Frequenc y Trading makes

contrac t prices for Tulip flower

nesses. M&A bankers also

pendent ex ternal agencies –

no s u c h c lai ms – it uses b rute

buds reached an ex traordinar y

make it possible for well

a n d t h a t i s w h e r e e f fe c t i v e

computing power and complex

pr ice of ten tim es the averag e

m anag ed co m panies to grow

f i n a n c i a l re g u l at i o n p l ays a

algorithms to automatically

annual income of a skilled

i n o rg a n i c a l l y. I n o rd e r to d o

critical part in maintaining

evaluate mar ket data and take

D utch c raf ts m en at that tim e,

so, the M&A banks employ

c a l c u l a t i n g t h e ‘ f a i r v a l u e’

b u y and s e ll d e cisio n s in f rac -

before crashing spec tacular ly.

a r m i e s o f e a g e r - b e ave r a n a -

o f a co m p a ny. R e s e a rc h

t i o ns of a s e cond. S o me o f t h e

HFT, h owever, pu ts the s pec u -

lysts who put in 100 hour

black box HFT systems conduct

lat io n mar k ets o n s u per – s te -

trades in 250 micro seconds,

S um m a r y

s ys te mic fina ncia l sta bilit y.

p ro ve s t h a t m o re t h a n t wo

I t is impor tant to differentiate

A B OUT T H E AUT H OR

weeks slouched over their

thirds of M&As destroy value

b e t we e n t h e e l e m e nt s o f t h e

roids. So when the markets

l apto ps wo r k ing o n co m p l ex

fo r t h e a cq u i r i n g co m p a ny.

financial industry that con-

i.e. four thousand times in a

begin to turn southwards,

valuation models.

Anyone

So why do companies still

structively engage with the

s e cond.

HFTs read the mar ket infor ma-

w ho k nows this exerc i s e w i l l

c a r r y o ut t h e s e ove r- p r i ce d

‘re a l wo r l d ’ a n d t h e e l e m e nt s

t io n b efo re o ther s and rapidl y

vouch for the fact that you

M & A s a n d p a y h i g h fe e s i n

t h a t c re a t e t h e i r o w n v i r t u a l

H FT s y s t e m s a c t u p o n t h e

m a g n i f y t h e d o w nw a rd t re n d

can put your finger on any

t h e p ro c e s s ? T h e a n s we r i s

re a l i t y i n o rd e r to s e r ve t h e i r

wider market sentiment and

t h u s c r e a t i n g ‘ f l a s h c r a s h e s ’.

desired end-result within

rat h e r s i m p l e – a l l t h e d e c i -

self interest. Whenever the

movement of numbers; fair

The biggest losers in such sce -

a broad valuation range

s i o n m a k e r s i nvo l ve d i n t h e

g a p b e t we e n t h e ‘re a l wo r l d ’

valuation or nature of underly-

narios are individual inves-

and then justify that figure

p ro ce s s - t h e M & A b a n k e r s,

and the ‘virtual reality ’ of

i n g a s s e t ( i n thi s case, equit y)

tors and pension funds that

using appropriate assump-

consultants, lawyers and

f i n a n c i a l m o d e l s b e co m e to o

d o e s n’ t m a t t e r – t h e s e a l g o -

can n e ver m atc h the des tr u c -

tions. There are just too many

senior management teams

b i g to i gn o re, a m a r k e t c ra s h

rithms might as well be

tive power of HFTs during such

as s u m ptio ns in the p ro ce s s –

of acquiring and acquired

o cc u r s. Lo o k i n g at t h e e nt i re

t r a d i n g c h i c k e n s . H FTs d o

downtrends. Seen in this light,

assumptions around future

companies end up making

f i n a n c i a l i n d us t r y a s a h o m o -

not hold any position for

the HFTs don’t seem so distant

costs, revenues, cash flows

l o t s o f m o n e y. Th e re a l

geneously malevolent force

long, typically squaring off

and cut off from the real world

and to to p them al l, a s s um p -

l o s e r s a re t h e s h a re h o l d e r s

d o e s n’ t l e a d t o p r o d u c t i v e

t h e i r p o s i t i o n s by e n d o f d ay

– the ripples from their impac t

tions around the appropr iate

o f t h e a c q u i r i n g c o m p a n y.

solutions. At the same time,

e ve r y d ay. Today HFTs co nt ro l

hit the common man on the

discount fac tor to be used for

So while the M&A industry

expec ting the financial indus-

about 70% of global trade in

st reet.

calculating the net present

provides a valuable transac -

t r y t o e xe r c i s e s r a t i o n a l s e l f

value. The complex valuation

tional service to the wider

control is unlikely to work

e q u i t i e s . P r o p o n e n t s o f H FT a rg ue that i t e nhan ces liquid-

M&A and the myth of ‘fair

m o d e l s a re m o re o f t e n t h a n

markets, it also creates an

since the industry is struc-

ity in the market thus bene-

valuat i o n’

not a reason used by M&A

eco-system in which the

tured to be incentivized based

banks to justify a hefty fee

insiders make extra-ordi-

on ever increasing quarter

fi t i n g the ma r ket o n a wh o le. Others are not so enthused

Fin ally l et ’s have a q u ic k l o o k

fo r t h e i r s e r v i c e s. I n re a l i t y,

nary profits at the cost

on quar ter growth irrespec-

by t h i s argume nt. I t is argued

a t t h e M & A i n d u s t r y. M & A

i n a m a j o r i t y o f t h e c a s e s, a

of outsiders. Subsequent

tive of external economic

t h a t H FTs c a u s e a n ‘a d v e r s e

b a n k e r s p l ay a c r u c i a l ro l e i n

free to download simple excel

b a l a n ce s h e e t w r i te - d ow n s

cycles. This leads to a sce -

se l ec ti on’ problem. I n stead o f

the market by bringing the

sheet based application is

by the acquiring company

n a r i o i n w h i c h re c k l e s s d e c i -

b e i n g b e t t e r i n fo r m e d a b o u t

b u ye r s a n d s e l l e r s o f c o m p a -

just as accurate (or inaccu-

are the proof of this oft –

s i o n m a k e r s w i t h i n t h e i n d us -

a c o m p a n y, H FT o u t f i t s a r e

nies on the same table. Without

rate) in

re p e ate d p h e n o m e n o n .

t r y m a k e l a rg e b o n us e s i n t h e

Rantej Singh is Head Strategy for R euters M ar ket Light, Thomson Reuters. R antej is also a co -author of ‘Prac titioners Book on Trade Finance’“ Any views expressed in this article are the personal v i e ws o f t h e a u t h o r a n d d o not in any way represent the views of Thomson R euters.

INFINEETI | A n n u a l i s s u e 2 0 1 1

INFINEETI | A n n u a l I s s u e 2 0 1 1

space is organised and who

moved beyond being an inde -

constraints that the fellow

t h e d i f fe re nt o f p l aye r s i n t h e

pendent obser ver. I n this case

S H G m e m b e r s f a ce d. I t m a d e

market are. At this point of

the State is in a peculiar posi -

members think about their

Microfinance: A Fairy tale turns into nightmare

time there are three signifi-

t i o n o f b e i n g a p l aye r a s we l l

financial services needs of

c a nt i nte r ve nt i o n s i n t h e p ro -

a s a n a r b i te r o f m i c ro f i n a n ce

their households, and also

vision of universal access to

p ra c t i ce s.

those of their neighbours who

M S S r ira m

microfinance

It was inevitable that the

commercial model of microfinance in India, with its minimalist and standardised model of lending, would grow into a bubble and run i nto t ro u b l e. M a ny mi cro f i nance commercial organisations have entered the m a r k e t i n s e arch o f pro f i ts a nd are co m p eti n g to l en d to t h e p o o r. I n th e pro cess t h e y h a v e p u t t h e “u n d e r s t a n d i n g” o f t h e n e e d s o f the poor aside and have star ted chasing targets and n um b e rs. Fo r t h ese i n sti tu tions, the poor are not seen as human beings having individual identities and needs. Instead they are seen a s d at a p o int s th at a dd u p in their profit statements. The anxiety for growth is dictated by the fact that the investors in the marketbased models are impatient a nd l o o k fo r h i gh retu r n s – a nd t h e n ex i t !

we re m e m b e r s o f t h e c o l l e c -

f i n a n c i a l s e r vi ce s. ( 3 ) T h e m a r k e t fo r c e s , w h i c h

tive. This helped the members

( 1 ) T h e p e o p l e ’s m o v e m e n t

l o o k at t h e p o o r a s a m a r k e t,

think responsibly because

which has existed outside

have found a mechanism to

t h e y we re d e a l i n g w i t h t h e i r

of the government schemes,

deliver credit through an

own money or the money of

h ere is a new intens it y

opposition par ties, has pro -

banks and other inter ventions

efficient delivery model.

the members of the collective.

in the discussion on

mulgated an ordinance in

b y e n t re p re n e u r s. T h i s i s l e d

This approach is more than

This methodology ensured

microfinance – about

o rd e r to “re i n i n” MFI s. Th e re

by n o n - g ove r n m e n t a l o rg a n -

a decade old and has made

that people were together

multiple lending, interest

is indeed a sense of déjà vu to

i s a t i o n s ( NGO s ) t h a t h a v e

rapid growth. This growth

t o n a r r a t e a g r o w t h s t o r y, a

rates and on whether a bubble

the entire episode – of a crisis

re m a i n e d t r ue to t h e co m m u-

h a s e n co ura g e d us to l o o k at

s to r y of the ir confid e nce a nd

is b ein g bu il t aro u nd l ending

fo l l ow i n g h e a d y s u cce s s. Th e

nity-based model and have

the business through a dif-

h ow t h e y we re ta k ing cha rge

to t h e po o r. There is a heated

success had culminated in the

emerged by organising people

ferent lens. Each of these

o f t h e i r own live s. This move -

debate about the interest rates

oversubscription of the SKS

to sor t out their financial mis-

inter ventions has a differ-

ment is very time -consum-

of microfinance institutions

Microfinance initial public

matches without the inter ven-

e n t a p p ro a c h a n d u s e s a d i f -

i n g. T h e c o l l e c t i ve h a s t o g o

(MFIs) and whether they could

o f fe r i n g, a l l o t m e n t o f s h a re s

tion of the external world, and

fe re nt m e t h o d o l o g y to re a c h

t h r o u g h t h e m a ny p h a s e s o f

be termed usurious. There has

at the u pper end o f th e i n d i c -

if there is an inter vention it

o ut to t h e p o o r. Th e s e m e t h -

forming, storming, norming

also b een a bo ardro o m f rac as

ative price band, listing of the

is a conscious choice collec-

o d o l o gi e s h ave a n i m p o r t a nt

and per forming. Even if the

at SKS Microfinance – an event

scrip at a premium, and its

tively exercised by the people.

bearing on the process and

p r o c e s s i s s l o w, t h e e d i f i c e

unrelated to the larger one

co ntinu o u s r is e therea f te r. As

packaging of financial ser-

will be strong and lasting. This

about the delicate relation-

this was sinking into the minds

(2) The inter vention by the

vices. The SHG model was

e d i f i ce ca n continu e to se r ve

s h i p b e t we e n MFI s a n d t h e i r

o f the pl ayer s in the m i c ro f i -

government pre -existed the

promoted as an alter native to

the poor and the marginalised

client s, bu t it is never thel es s

n a n ce m a r k e t – a n d w i t h t h e

p e o p l e’s m o v e m e n t a n d w a s

the available options of finan-

o n a n au to - pilot ba sis once it

hogging equal headline space

next rung of institutions ready

e x p re s s e d i n t h e fo r m o f t h e

c i a l i nte r m e d i at i o n . I t wa s at

stabilises. Once this happens,

i n t h e p re s s. Th e co m m e rc i a l

to har ves t the g o l d r u s h – t h e

s e l f - h e l p gro u p s ( S H G s ) . Th i s

o n e l e ve l ro o te d i n t h e co m -

it shows that the poor can

section of the industry has

same SKS Microfinance was

has usually been supply-

munity and at another level

not only take control of

reacted with the industry

in the news fo r al l the w ro n g

driven, addressing the insti-

was integrated with the larger

t h e i r re s o u rc e s, b u t a s t h e s e

association – the Microfinance

reas o ns.

tutional and physical infra-

b a n k i n g s ys te m . Th e d e a l i n g s

re s o urce s grow the y ca n hire

structure needs and offer-

we re o n t h e b a s i s o f m u t u a l -

p ro fe s s i o n a l h e l p t o m a n a g e

ing standardised supply-

i t y, t h us p rovi d i n g t h e p owe r

their resources. This trans-

s i d e s o l u t i o n s o r “s c h e m e s ”.

o f a co l l e c t i ve. Th e a p p ro a c h ,

formation does not happen

I n s t i t u t i o n s N e t w o r k ( MFIN ) – coming out with a code of

Th re e m o d e l s

conduct. The State has indicated its displeasure about

This ar ticle looks at the growth

I n A n d h r a Pr a d e s h t h e S t a t e

by d e f i n i t i o n , wa s a s l ow o n e

over night, but through a long

the level of interest rates

i n m i c ro f i n a n ce, k e e p i n g t h e

h a s a l m o s t us ur p e d t h e co m -

because there had to be a

process of community inter-

and it has sent an advisory

c u r rent devel o pm ents i n p e r-

munity model through the

good understanding on how

ve nt i o n. Unfor tu nate ly, the re

to the commercial banks.

s p e c t i v e . B u t b e fo r e l o o k i n g

I n d i r a K r a n t i Pa t h a m s c h e m e

a collec tive based on the prin-

i s i m p atie nce, a nd the n the re

The Government of Andhra

at the current episode, it is

( e a r l i e r k n ow n a s Ve l u g u ) .

c i p l e s o f m ut ua l i t y wo r k e d. I t

is the State. If the groups

Pradesh, facing a lot of flak

im po r tant to have a p e r s p e c -

Clearly the role of the govern-

required patience, tolerance

succeed, there is an urge to

f ro m t h e l o c a l p r e s s a n d t h e

tive o n how the m ic rof i n a n ce

m e n t i n A n d h r a Pr a d e s h h a s

and an appreciation of the

replicate the model quickly

INFINEETI | A n n u a l i s s u e 2 0 1 1

INFINEETI | A n n u a l I s s u e 2 0 1 1

across the countr y. The success

wo u l d e ve n t u a l l y g e t a g o o d

l ittl e dif ference bet we e n o n e

Fa d e s , w h i c h u s e d t o f o c u s

re s p o n s i ve n e s s a n d p re ve n t s

a contemporary Indian com-

o f communi t y- cent red micro -

deal.Unfor tunately there have

MFI a n d t h e o t h e r w r i t i n g

on lending for community

customisation and once it

m e n t a r y. A l l t h e e l e m e n t s

finance has attrac ted the gov-

been numerous instances

abo u t MFI s in B o l iv ia h a s s a i d

infrastructure projects, and

reaches stability it expects

– client poaching, competi-

er nment. The State deals with

where our belief in the market

that the institutions tend to

P r o M u j e r, w h i c h s p e c i a l i z e d

t o g ro w a t a s c o rc h i n g p a c e.

tion, reck less lending, over-

large numbers and its anxiet y

h a s b e e n b e l i e d a n d m i c ro f i -

converge operationally to the

i n e m p owe r m e nt t ra i n i n g ; a l l

When something – particu-

indebtedness of the client –

to deliver development at a

n an ce adds to the s ceptic is m

d o m i n a nt m i c ro f i n a n ce p a ra -

dropped most of the opera-

larly in financial services –

t h at e ve ntu a lly ca u se d cra cks

pace that can do justice to

about the school that believes

digm. The paradigm of com-

t i o n a l p ra c t i ce s t h at d i f fe re n -

grows at an unnatural pace, it

in the efficient credit deliver y

the incumbent combination

only in markets. During the

mercial microfinance is that

tiated them from the domi-

is going to build into a bubble

mechanisms were present in

i s u n d e r s t a n d a b l e. T h e S t a t e

initial phases of the inter-

of minimalism. That credit

n a nt p a ra d i gm .

sooner or later. Such a process

B o l i vi a.

learnt quickly from the SHG

vent io n by the m ar k et m o del

should be provided efficiently

movement and decided to

o f mFIs, m o s t o f u s l o o k ed at

and quickly and a sharpen-

This “convergence” is happen-

n a n ce s e c to r m ay b e h a p p e n -

adopt it as one of its “schemes”.

the growth of these organi-

ing o f f inanc ial v iabil i t y h ave

i n g i n I n d i a a s we l l. Th e m i n i -

i n g n o w. T h e h o p e t h a t t h e

Th e ba nk li nk a g e p ro gramme

z a t i o n s w i t h a s e n s e o f a w e.

i n f l u e n ce d i n s t i t u t i o n s o p e r -

m a l i s t m o d e l d i s b ur s e s c re d i t

demonstration of one mar-

One of the visible indicators

h a s b e e n g o i n g o n fo r ye a r s,

Th e s e o rg a n i z a t i o n s b ro u g h t

ating in this s pace.

in as efficient a manner as

ket-based experiment will

o f t h e s t a n d a rd i ze d m o d e l i s

and each year the government

selling soaps and shampoos. It

attrac t more players has come

its religious belief in zero tol-

increases the targets to the

has its merits. For instance, in a

true. Many more organisations

e ra n ce of d e fa u lt. The orga ni-

banks for linkage and por ts

largely agrarian society where

h ave e nte re d t h e m a r k e t a n d

z a t i o n s fo l l ow i n g t h e m a r k e t

several other welfare schemes

l a rg e c a s h i n f l ows t a k e p l a ce

a re co m p e t i n g to l e n d to t h e

model have possibly seen

o n to the grou ps.

only during the har vest season

poor. I n the process they have

too much of indiscipline in

a n d t h e l o c a l e co n o my o p e r -

put the “understanding” of the

the deliver y of credit to the

ates on peaking of financial

needs of the poor aside and

poor and have realized that

ac tivit y in this season, forcing

h a ve s t a r t e d c h a s i n g t a r g e t s

this is one variable that has

The last type of player in

a week ly repayment is by def-

a n d n um b e r s. Fo r t h e s e i n s t i -

to be controlled at all cost.

the inclusion market is a

inition defying the logic of

tutions, the poor are not seen

The story of organizations

product of market forces. In

a gra r i a n c a s h f l ows. H owe ve r,

as human beings having an

h av i n g a n e a r 1 0 0 % re cove r y

the last decade there have

b y fo r c i n g t h i s w e e k l y d i s c i -

i n d i v i d u a l i d e n t i t y, c h a r a c -

rate fo r ye a r s i s a f a b l e d i f f i -

b e e n s e ve r a l p e o p l e w h o fo r

p l i n e t h e s e i n s t i t u t i o n s h ave

teristic and need. Instead they

c ul t to be lie ve, give n that no

yea r s wor ke d i n t h e develo p -

possibly expanded the market

are seen as data points that

household or economy can be

for credit – persuading people

add up to their profit state -

i n s ul a r to shocks a ll the time.

to t h i n k a b o ut a c t i vi t i e s t h at

ments. This anxiety for growth

Ye s , t h e c o m m e r c i a l m o d e l s

M a r k et for I nc lus i o n

B o l i v i an E x p e r i e n ce

i n t h e m a r k e t - b a s e d m i c ro f i -

Effec t s of R api d Growth

ment sector with communi-

efficiency to their opera-

ties and became impatient for

t i o n s. B u t g a i n s i n e f f i c i e n c y

growth. They embraced a mar-

are usually a func tion of stan -

I n m i c r o f i n a n c e i t s e l f, t h e r e

g i ve a we e k l y c a s h f l o w t h a t

is dic tated by the fac t that the

have been able to control one

k e t- b a s e d m o d e l o f i n c l u s i ve

dardisation. Standardisation

were significant lessons to

can service their loan. This

i nve s to r s i n t h e m a r k e t b a s e d

c a us e of d e fa u lt – inte nt. Bu t

f i n a n c e. T h e i d e a w a s t h a t i f

wo r ked at t wo l evel s :

b e l e a r n t f r o m B o l i v i a . Fo r

could thereby have made

models are impatient and look

i t i s we l l k n o w n t h a t d e f a u l t

instance, Rhyne indicates

m o re c a s h m ove t h ro u g h t h e

for returns (and then exit!). The

also happens when the abilit y

we are able to make this ac tivi t y of i nc lu s i ve fin an ce in h er-

(a) The organisations them-

that the number of institu-

h a n d s o f p e o p l e a n d re d uce d

evidence from Bolivia is avail -

to re p ay is impa ire d. The ne w

ently profitable, then more

selves offered standardised

tio ns that had a s u bs id y d ra s -

t h e i r v u l n e r a b i l i t y. H o w e v e r,

a b l e b e fo r e u s. M i c r o f i n a n c e

g e n e r a t i o n o f MFI s h a s p o s -

and more people (who work

products, that allowed them

tically fell in about four years,

the downside of a standard-

in that countr y went through a

sibly not learnt to deal with

for profits) will see merit in

to reduce o perating co s ts.

and each of these institutions

ized model is that unless

phase of intense competition,

t h i s a s p e c t . Fo r a l o n g t i m e,

l o s t i t s c o r e i d e n t i t y. FIE , a n

the cultural and economic

l e a d i n g to ove r- i n d e b te d n e s s

w h i l e t h e MFI s we re grow i n g

o p e rati ng i n thi s mar ket. An d with a good number of players,

( b) Th e i n d i v i d u a l i d e nt i t y o f

MFI k nown for technical assis-

n u a n ce s o f e a c h l o c at i o n a re

and even the collapse of a few

at a n u nnatu ra l pa ce throu gh

the market will not only

each organisation and what

tance to a s ing l e co mm un i t y-

u n d e r s t o o d, 4 t h e re c o u l d b e

i n s t i t ut i o n s. A re a d i n g o f t h e

geographic diversification,

ex p a nd, but be cause o f co m-

it stood for vanished. In the

bas ed enter pr is e,

c ra c k s. A s t a n d a rd i s e d m o d e l

microfinance movement of

the borrowers were proba-

petition the poor customers

f ield o ne co u l d therefo re s ee

closes innovation, reduces

B o l i vi a i n t h e 1 9 9 0 s l o o k s l i k e

b l y growing at a nor ma l pa ce.

INFINEETI | A n n u a l i s s u e 2 0 1 1

INFINEETI | A n n u a l I s s u e 2 0 1 1

State R esponse

on the entire market. Given

have serious governance

that the State itself is a domi-

issues that are not being

Wi t h c o m p e t i t i o n s e t t i n g i n ,

is not the same as servicing

by o ther f ac to r s s u c h a s p re s -

m o re a nd m ore MFIs co n cen -

o n e such l o an. And s ince the

sure for repayment of dues by

trated on the same geogra-

MFIs have not provided them-

o t h e r MFI s t h a t l e n t m o n e y

investigated. The institutional

p h i e s. Wi th the client get t in g

selves with a mechanism of

to the s am e bo r rower s” ( M i nt,

representatives on the boards

multiple choices and the

coping with default, the pres-

1 5 O c to ber 20 10 ). The co l l e c -

o f t h e s e MFI s h a ve n o t e xe r -

a n x i e t y of the c l ient to get as

sure on the borrower turns out

tive response of the micro-

cised their independence. The

m u ch

to b e i n te n s e. A n d t h i s p re s -

finance institutions has also

p ro m o t e r s h a ve g o t t e n a w a y

b e e n fo u n d wa nt i n g. Al l t h at

with significant instances of

they have o f fered is a co d e o f

skimming and there seems

conduc t, which is obser ved in

to be no dissent voiced on

v io l atio n! A m eta l eve l c re d i t

the greedy executive com-

bureau makes a mocker y of

p e n s at ions a nd shor t- sig hte d

w hat is c l ear l y ac k now l e d g e d

b e h avi or of the ma na g e me nt

o n the f iel d. Yo u do n o t n e e d

of the top MFIs. S o on the one

a database of clients and

h a n d, w h i l e t h e l a rg e r d i re c -

l o ans. The c l ients them s e l ve s

Th e re s p o n s e o f t h e St ate h a s

nant player in this market, this

tional of the movement of the

are openly talk ing of multiple

also not been in the desir-

heavy-handedness creates

State/ RBI in terms of financial

bo r row ing s.

a b l e d i re c t i o n . O bv i o u s l y, a l l

an undesirable competitive

i n c l us i on se e ms to be g ood –

t h e a c t i o n i s c e n t re d a ro u n d

barrier to an alternative model

directing payments through

Andhra Pradesh which has

o f c re d i t d e l i ve r y. I n s t e a d

banks, calling for financial

t h e h i g h e s t co n ce n t r a t i o n o f

of harping on caps on inter-

inclusion plans, opening up

U n f o r t u n a t e l y, t h e c e l e b r a -

MFIs and the largest exposure

est rates and threatening to

branch licencing, removing

tion of the market endorse-

through the SHG-Bank link age

remove microfinance from the

the cap on end use interest

G ove r n an ce I ssu e s

of finance as possible from

sure could potentially lead

ment of this business at the

model. The government has

priority sector list, it is nec-

rate s and so on – its re sponse

m u lti ple i ns ti tut io n s an d t h is

t o s u i c i d e s . We d o n o t k n o w

“bottom of the pyramid” could

re s p o n d e d w i t h a h e av y h a n d

essar y for the State/Reser ve

to t h e ra pid growth of micro -

co u ple d wi th the over zealo us

w h e t h e r t h e c u r re nt s p ate o f

not have been more ill-timed.

by p a s s i n g a n o rd i n a n ce t h at

B a n k o f I n d i a to l o o k a t s p e -

finance has been somewhat

suppliers of credit meant that

suicides in Andhra Prades h is

At the ground level, the stress

has shifted the discourse

cific instances and pull up the

a l a r m i s t . H o p e f u l l y t h e S t a te

the client herself was trying

a result o f the MFI l o ans and

was showing. Clients (for

from the basic problem to

delinquent organisations. The

a n d t h e RBI wou ld d o what is

to grow at an un n at ural pace,

the intense repayment pres-

w hatever reas o ns ) we re co m -

a legal frame. This almost

R B I h a s s e t up a co m m i t te e to

we l l w i t h i n t h e i r m a n d a t e i n

or that the client had begun

sure o n the c l ients. Thes e are

m itting s u ic ides. At th e i n s t i -

a p p e a r s l i k e t h e g ove r n m e n t

look into the issues pertain-

s p e c i f i c c a s e s. Th i s wo u l d b e

to re s or t to adverse usage o f

claims made by the state gov-

tutional level, it appeared

taking revenge on the com-

i n g to MFI s a n d h a s a s k e d t h e

a superior approach compared

credit. Unfor tunately the stan-

ernment. Vik ram Akula, the

that the boardroom battles

petition with its monopolis-

co m m i t te e to s ub m i t a re p o r t

to the polic y-level clampdown

d a rdi s e d m ode ls do n o t h ave

chair man of SKS M icrofinance

were al l abo u t s to c k o p t i o n s,

t i c r e g u l a t o r y p o w e r. W h i l e

within three months. But what

that they have been talking

the patience to engage with

a c k n ow l e d g e d t h at 1 7 o f t h e

cashing in, cashing out and

t h e re a re n ua n ce s i n w h e t h e r

i s n o t c l e a r i s w hy t h e R B I i s

a b o ut.

the client. It is one thing to

30 suici de c as es were rel ated

severance packages, when

the Government of Andhra

not carrying out a routine

ju s t i fy the hi gh co st o f credit

to borrowers of SKS (Indian

each of the boards should have

Pradesh has the ability and

inspection of the por tfolio

at lower levels, but we also

Express, 15 October 2010).

been discussing whether their

the inclination to digest the

o f s o m e MFI s t h a t a r e u n d e r

have to re a li s e th at at h igh er

However he is

not helping

b u s i n e s s m o d e l wa s s h ow i n g

administrative implications

i t s p ur vi e w i n o rd e r to un d e r-

le ve l s of i nd e btedn ess, inter-

t h e c a u s e o f t h e MFI s b y

cracks. I nstead of being intro -

o f t h e o rd i n a n ce, i t h a s o n ce

stand the issues of ghost

est rates become onerous from

stating that “the deceased

s pec tive, the res po ns e o f t h e

again shown its inability to

c l i e n t s a n d m u l t i p l e b o r ro w -

t he poi nt of v i e w o f t h e po o r

borrowers were not default-

MFI s h a s b e e n s t u b b o r n a n d

target the errant microfi-

i n g s a n d t a k e a c t i o n to d i s c i -

households. Ser vicing five MFI

ers of SKS and they would

defens ive.

nance institutions, and has

pline the erring organisations.

loans of Rs 10,000 each at 28%

h ave b e e n d r i ve n to s u i c i d e s

instead come down heavily

Some of these organisations

ABOUT THE AUTHOR M S Sriram (mssriram@ gmail.com) is an independent researcher and consultant based in Bangalore. He is a n a d j u n c t p r o fe s s o r a t IIM Ahmedabad and IIM I ndore.

INFINEETI | A n n u a l i s s u e 2 0 1 1

INFINEETI | A n n u a l I s s u e 2 0 1 1

sectors leading to inclusive

COVER STORY

a cce s s i s ve r y i m p o r t a nt.

o f t h e Fina ncia l Tu r moil.

growth – Agriculture and

Changing Phase of India’s Financial System - Embarking on new growth paths

Infrastructure, is the first

All these areas require a lot of

major step taken in this

participatory work by the

regard. There is a huge

c o m m u n i t y. A n d i n a v i b r a n t

problem of productivity gap

democracy such as ours it is

in these sectors even at the

important that the affluent

ex i s t i n g l e ve l s o f te c h n o l o g y.

sections of society realize

I n s i m p l e wo rd s i f we c a n g e t

their

Arc h i e G an gra d e, Pr iya J u nej a, Pr iya S in gh

f a r m e r s to a d o p t b e t te r c ul t i -

re s p o n s i b i l i t y.

v a t i o n p r a c t i c e s, m o re r a t i o -

wider

social

drinking water etc, and that

nal use of inputs and so on,

As the PM said in his recent CII

recession in sight

governments at different

we can get a yield increase.

a d d r e s s , “ Fo r I n d i a t o b e a

and the worst of

I n c l u s i v e G r o w t h : A U t o p i a n levels have to ensure the pro -

However, it is not as effor tless

g l o b a l p l aye r i t i s e s s e nt i a l to

v i s i o n o f t h e s e s e r v i ce s”. Th e

as it seems. I t majorly involves

un d e r s t a n d t h e n e e d to m a k e

The Indian Central Bank is

C e n t u r y, w e h a v e s e e n t h e

thrust of the government is

the issues of k nowledge trans-

our growth process more

vested with powers to issue

resilience and robustness of

“ To w a r d s f a s t e r a n d m o r e t h a t t h e e c o n o m i c b e n e f i t s

mission and system per for-

inclusive; to save more and

g ui d e l ine s on a ny issu e re lat-

t h e I n d i a n Fi n a n c i a l S y s t e m .

inclusive growth “– the theme acc r u ed as a res u l t o f g l o b a l -

m a n ce, a b s e n ce o f a ny o n e o f

w a s t e l e s s ; t o c a r e fo r t h o s e

ing to the functioning of

Po l i c y m ake r s are t h in k in g o f

o f t h e E l eventh Five Year Pl an i z a t i o n s h o u l d b e i n c l u s i v e

them would not give us the

who are less privileged and

banks. Various prudent guide -

reforms day and night and

c l e a r l y d e p i c t s t h e w i l l a n d and that the issues of employ-

desired result. One can tell

less well off ; to be role models

lines of RBI include liquidity

many of these are getting

i n t e n t i o n o f t h e g o ve r n m e n t m e n t g e n e r a t i o n , p o v e r t y

the farmers to move to an

o f p r o b i t y, m o d e r a t i o n a n d

maintenance, capital ade-

implemented to change the

to f in d a s u s tainabl e bal ance r e d u c t i o n a n d h u m a n d e v e l -

o p t i m a l w a y o f s e e d i n g, b u t

c h a r i t y. T h i s r e a l i z a t i o n h a s

q u a c y, i n c o m e r e c o g n i t i o n ,

face of India. Though India has

between growth and inclu- opment must be addressed.

there must be trusted cer ti-

made us wiser today of the

asset classification and provi-

gracefully steered clear of the

sio n . Th e par l iam entar y el ec - T h e q u e s t i o n t o b e a s k e d i s ,

fied seeds available. On the

consequences of our actions

sioning, connected lending

global slowdown, the task

tion campaign of 2004, with “Is it possible to include the

o t h e r h a n d, k n ow l e d g e t ra n s -

and thus collec tive movement

and prudential norms on large

a h ea d i s not s i mple. I n dia h as

i t s ‘ I n d i a S h i n i n g ’ v s . ‘A a m m o s t d i s a d v a n t a g e d i n t h e

m i s s i o n i s a l s o a c r i t i c a l i s s ue

towa rd s t h i s ‘s e e m i n g uto p i a’

exposures.

to keep wor k ing for maintain-

Aadmi’ confrontation, high- production and distribution

with the farmers being rigid

i s w e l l u n d e r w a y. A n d a s a

Regulation Act vests powers

i n g t h e grow t h rate o f 9 % o r

lighted an apparently wide- of produc ts and ser vices?”

and

n a t i o n s t i l l i n t h e p ro c e s s o f

in the RBI to ensure compli-

even taking it to double digits.

s p r e a d p e r c e p t i o n t h a t t h e And the ans wer to this i s t h at

a p p ro a c h .

d e ve l o p i n g i t s e l f, i t wo u l d

a n ce w ith its prov isions. And

per haps be ver y premature to

t h us a ll the se gu id e line s a nd

ith

double

dip

the first decade of the 21st

Glo b al Financ ial Sys tem .

dream or a real it y ?

orthodox

their

b e n e f i t s o f e co n o m i c grow t h it is indeed possible, and that

The

Banking

I n an effor t to achieve all this,

were simply passing too many innovatio n is the way. At t h e

I n addition to agr iculture and

l e t g o o f t h e d re a m o f i n c l u -

the Banking Regulation Act

l et u s re v i s i t the ef fec t o f t h e

people by. Inclusive growth by bo tto m o f the py ram id a cce s s

i n f r a s t r u c t u re, t h e t wo o t h e r

sive growth but with some

together have resulted in a

I nclusive Growth Polic y of the

it s ve r y definition im plies an to real oppor tunities to create

critical areas we need to focus

h a rd re a l i t i e s t h row n i n to o.”

robust Banking Sector in

gover nment and the proposal

equitable

o f wealth has the potential to

on are education and health

of the Reser ve Bank of India

resources with benefits accru- transform lives in an inclusive

care. The other important

Banking in India undergoing

to come up with new banks.

ing to ever y section of society. w a y. S e c t o r s s u c h a s h e a l t h -

aspec t of inclusiveness is that

metamorphosis

And that is not all; India is

care, energy, clean water, edu-

when the growth process

changing the pattern of global

T h e r e fo r e, a k e y e l e m e n t o f c a t i o n , a n d h o u s i n g, p re s e n t

t a k e s o f f, t h e d i s p e r s i o n o f

India was relatively unaf-

increase penetration of formal

i nv e s t m e n t s i n t h e w o r l d . I n

t h e s t r a t e g y f o r i n c l u s i v e o p p o r t u n i t i e s w h i c h a re r i p e

s k i l l s a c ro s s t h e p o p ul at i o n i s

fe c t e d b y t h e f i n a n c i a l c r i s i s

bank ing ser vices in unbanked

t he d ar k ne s s of t h e Fin an cial

g r o w t h m u s t b e “ t o p r o v i d e fo r innovatio n.

n o t un i fo r m . Th at i s w hy i t i s

t h a n k s to t h e R e s e r ve B a n k o f

r u r a l a r e a s. A s p e r s t a t i s t i c s,

Crisis, let us revisit the reforms

the majority of our people

e s s e nt i a l to re va m p t h e e d u -

India (RBI)! The stringent rules

a m o n g I n d i a’s p o p u l a t i o n o f

and policies which are chang-

access to bas ic f ac il ities s u c h The ac k now l edg em ent by t h e

cational system and doing

l a i d d ow n by t h e R B I b ro ug ht

1 .2 b i l l ion, 50% a re ye t to be

ing the face of India under the

a s h e a l t h , e d u c a t i o n , c l e a n g over nm ent o f the t wo m a j o r

t h at i n a way w h i c h i m p rove s

u s s a fe l y o nto t h e o t h e r s i d e

covered under formal banking.

allocation

India. Th e n e e d o f t h e h o u r fo r t h e Indian Banking sector is to

INFINEETI | A n n u a l i s s u e 2 0 1 1

INFINEETI | A n n u a l I s s u e 2 0 1 1

Th i s ju s ti fi e s the requirement

apply

banking

regulations. Regulations on

and with the possible conver -

In the pre-reform period,

would lead to improvement in

to step up the opening of

licenses. The track record of

N B FC s are no t s o f t eit h e r. N o

s i o n o f N B FC s t o b a n k s , t h e

Foreign Direc t I nvestment

supply and the operational

b r a n c h e s i n r u ra l a re a s s o a s

t h e p ro m o ter s w il l be as cer t-

N B FC c a n c a r r y o u t i t s b u s i -

R e s e r ve B a n k o f I n d i a i s we l l

( FDI ) a cco unte d fo r o n l y 0 .3 %

side, thus fur ther strengthen-

to meet the objectives of

tained from other banks,

nes s w itho u t o btainin g a ce r-

on track in making the banking

o f GDP, w h i l e a s o f 2 0 0 8 - 0 9 i t

i n g t h e re ta il se c tor by bu ild -

increasing banking penetra-

supervisory/regulatory

tificate of registration from

industr y more dynamic and to

s t o o d a t 3 . 5 5 % o f GDP . T h e

ing a strong backend infra-

tion and financial inclusion

depar tments as well as from

the R B I . Al s o, m ainten a n ce o f

increase the reach of financial

c o m p o s i t i o n o f FDI h a s a l s o

s t r uc t u re. The ba ck wa rd inte -

ra p i d l y a n d m e e t t h e t a rg e t s

SEBI, the Capital Market

liquid assets at a specified

s e r vi ce s.

undergone a tremendous shift

grat i o n by mu lti bra nd wou ld

s e t o u t for prov idin g ban k in g

R e g u l ato r. Fi n a n c i a l s t re n g t h

percentage of public deposits

f ro m FDI i n p r i m a r y a n d m a n -

l e a d t o b e t t e r p r i c e s fo r t h e

s e r v ice s i n v i lla g es wit h p o p -

of the promoters and long-

i s c o m p u l s o r y. B u t i n a g g r e -

C h a n g i n g p a t t e r n s o f i nve s t -

ufacturing sectors to that in

far mers, and their technology

u l a t i o n o v e r 2 , 0 0 0 . Fo r t h i s

t e r m v i a b i l i t y a re t h e i m p o r-

gate these regulations are less

ments – Domestic and Foreign

the

s e c t o r. T h e

w o u l d h e l p u s e n h a n c e fo o d

p u r pos e Banks are advised to

t a nt f a c to r s w h ic h wi l l af fec t

strict than those for banks and

p a t t e r n o f FDI w i t h i n t h e s e

securit y by reducing wastage.

prepare their Annual Branch

the decision of the RBI.ined

thus it makes arbitrage oppor-

The economic crisis of 1991

sectors has also changed dras-

Expansion Plan where they

from other banks, supervi-

tunities possible. Another way

l e d to t h e o p e n i n g u p o f t h e

tically. For example, there has

Fro m t h e patte r ns a nd tre nd s

should allocate at least 25

s o r y / re g u l a to r y d e p a r t m e n t s

we c an appro ac h this co nve r-

Indian economy and the

b e e n a s h i f t f r o m FDI i n

i n FDI inflows of I nd ia , it ca n

percent of the total number of

as well as from SEBI, the

sion is that only standalone

be seen that while the reforms

branches proposed to be

C a p i t a l M a r k e t R e g u l a t o r.

NBFCs are considered for con-

of 1991 have led to impressive

opened during the year in the

Fin an cial s treng th o f the pro -

ver s io n to bank s and n o t t h e

grow t h , t h e y ’re s t i l l m i n o r i n

unbanked rural areas. This will

m o te r s a n d l o n g - te r m v i a b i l -

ones which are associated

c o m p a r i s o n t o t h e c o u n t r y ’s

benefit a huge number of rural

i t y a re t h e i m p o r t a n t f a c t o r s

with any corporate. In the real

potential. In fact, looking at

for

new

services

populations if appropriately

the graph of the Indian growth

a p p li e d but more such in it ia-

s t o r y, i t i s e v i d e n t l y v i s i b l e

t i ve s are ne e de d.

that the economy needs to be opened up even more for

Ac c o r d i n g t o t h e Wa l l S t r e e t

increasing the growth rate.

Journal, Reser ve bank of I ndia

Even though the projected

is likely to issue four new

impact it created is very

C h e m i c a l I n d u s t r y t o FDI i n

g r o w t h r a t e fo r 2 0 1 1 - 1 2 w a s

banking licenses in order to

visible from the fac t that India

FMCG , e v e n t h o u g h a l l t h e

9%, the first quar ter showed a

include a large chunk of the

grew from a small $132 million

areas

poor

c o u n t r y ’s p o p u l a t i o n i n t h e

economy in 1991-92 to $5.3

nominal terms. There has been

Fur ther more, it is highly

formal bank ing system. One of

b i l l i o n i n 1 9 9 5 - 9 6 . H o w e v e r,

i n c re a s i n g ex p o r t o r i e nt at i o n

unlikely that the projected

the main reasons for rapid

t h e M ex i c a n Cr i s i s ( 1 9 9 6 ) a n d

o f FDI e ve r s i n ce 1 9 9 1 w h i c h

growth rate would be achieved

have

improved

growth

7.8%.

transformation of banking

wh ich w il l af fec t the dec is io n

w o r l d h o w e v e r, N B FC s w i t h

S o ut h E a s t As i a n Cr i s i s ( 1 9 9 8 )

can be pr imar ily attr ibuted to

d ue to othe r pe r tine nt stru c -

s e c t o r i s Fi n a n c i a l I n c l u s i o n .

of the RBI.

corporate

were so intense that the

t h e IT s e r v i c e s a n d g e n e r a l

tural and circumstantial issues

Siemens Financial Ser vices

respective economies were

i n c re a s e i n s h a re o f ex p o r t s.

p re va l ent in I nd ia n Economy.

Authors are students of Indian I n s t i t u t e o f Fo r e i g n Tr a d e , D elhi and Kolk ata.

Ad vent of ne w players in t h e

backing

market will foster competition

In addition to this, Non-

Private Limited, Mahindra and

pushed back by twenty five

and thereby reduce cost while

B an k in g Financ ial Co m panies

M a h i n d r a Fi n a n c i a l S e r v i c e s

years, which reiterated the

S i m i l a r l y, a f t e r t h e e n t r y o f

i m p ro v i n g s e r v i c e q u a l i t y.

a re a l s o i n t a l k s w i t h t h e R B I

L im ited have s tro ng f i n a n c i a l

fact that too much depen-

Foreign Institutional Investors

Acco rd i n g to t h e re g u l at i o n s

for their conversion into

b a c k i n g o f t h e i r p a re nt co m -

dence on foreign capital could

( FII s ) t h e m a r k e t d e p t h h a s

s e t by I n d i a’s Ce nt ra l B a n k i t

banks. I f NBFCs are allowed to

panies for conversion to

be harmful. At that time, I ndia

increased

wo u l d be pla nnin g to impo se

be co nver ted to bank s then it

bank s.

a d o p te d a c a ut i o us a p p ro a c h

P r e s e n t l y, a l o t o f d e b a t e i s

a co nd i ti on whi ch will en sure

would eliminate the arbitrage

by not allowing foreign invest-

going on about whether or

only those corporates with

opportunities available to

With new branches in the rural

m e nt s i n va r i o us s e c to r s.

n o t t o o p e n u p FDI i n m u l t i

sound financial backing can

them

sector, new licenses in banking

due

lighter

tremendously.

b r a n d r e t a i l . FDI i n r e t a i l

INFINEETI | A n n u a l i s s u e 2 0 1 1

INFINEETI | A n n u a l I s s u e 2 0 1 1

l o a n s i n a significa nt ma nne r.

D u r i n g 2 0 0 7 - 2 0 0 8 w h e n INR

we re cove re d w i t h o ut p ayi n g

was appreciating against USD,

attention to their duration

Currency Risk Management: An India Inc Perspective

Indian companies entered

and long-term unmatched

As per industry estimates,

i nto fo re i gn exc h a n g e d e r i va -

hedging

overall

t i ve co nt ra c t s, s o m e o f w h i c h

used. Majority of such deals

foreign currency loans for

turned sour, resulting in a mark

were conducted during the

Indian companies due to

to m a r k e t l o s s o f 3 ,1 7 ,1 9 0 M n

period

such depreciation, were to

Pro f. H a r k irat Sin gh

in 2008. As per the Times of

ap preci ated an d fo rex d er iva -

the

India, as on 31.12.2008, Indian

t i ve s we re i n co r re c t l y s o l d by

R s 5 0 , 0 0 0 m n p e r q u a r t e r.

firms had a total of $2.4 Trillion

p r i vate, fo re i gn a n d n at i o n a l -

a s d e r i vat i ve p o s i t i o n s, m o re

i ze d b a n k s to I n d i a I n c, i t wa s

These losses were primarily

t h a n 2 t i m e s t h e I n d i a n GDP.

further used without under-

due to imprudent currency

standing the risk elements

hedging strategies to cover

o r i m p a c t o n p r o f i t a b i l i t y.

the huge foreign currency loan

CURRENCY

mere glance through

touched the all time high of Rs.

Te c h n o l o g y, P h a r m a c e u t i c a l

the For tun e 500 co m-

5 2 a g a i n s t U S D. T h i s c h a n g e

& A u t o i n d u s t r y. T h e r a t i o -

pani e s i s suf f icient to

was not unidirec tional; erratic

nale behind choosing these

F l u c t u a t i o n i n t h e INR r a t e s

convince that, to be a great

appreciation and deprecia-

s e c t o r s i s t h e i r r a p i d g ro w t h

resulted in several corpo-

co m pany, one has to vent ure

t i o n w a s s e e n p e r i o d i c a l l y.

and inc reas ing inter nat i o n a l -

r a t e s s u f fe r i n g h e a v y l o s s e s ,

ization. The main currencies at

as a result of which many com-

pl ay are U S D, G B P, EUR & JPY.

abroad. And it takes no rocket science to conclude that going

Such large movements in

abroad entails operating in

exchange rates adversely

several currencies. Hence,

af fec ted the pro f itabil it y and

Corporate India adopted a slew of h e d gi n g s t r a te gi e s by u s i n g d i f fe re n t types of struc tured produc ts, but in the majority of the cases, it resulted in a negative effect on the financial per formance.

the

Rupee

forex

tune of

losses

Rs 40,000 to

exposures and restatement of foreign currency loans.

panies took their bankers to

During the period of Rupee

The driving factor for these

co ur t. Th e co m p a n i e s a l l e g e d

appreciation, the interest

transactions was low inter-

that the banks had struc-

rates for foreign currenc y bor-

e s t rate s o f d o l l a r a n d s t ro n -

aggressive cur renc y r isk man-

tured

that

rowings were significantly

ger trend of USD against

agement and used complex

aimed for trading profits

low; this induced a large

Swiss,

derivative

instruments.

r a t h e r t h a n fo r h e d g i n g. T h e

number of Indian companies

Bharti Airtel achieved 27%

H o w e v e r, t h e r i s k f e a t u r e s

cour t ordered a CBI enquir y

to borrow abroad to meet

increase in quarterly profit

of these instruments were

into the alleged irregulari-

t h e i r f i n a n c i n g n e e d s. D o l l a r

on account of record addi-

i g n o re d b y, b o t h t h e c o r-

ties in derivative deals that

â&#x20AC;&#x201C; R up e e c h a n g e s a f fe c te d t h e

tion of new connections.

porates, and their bankers.

brought many companies

l i a b i l i t y a n d s e r vi c i n g o f s uc h

Pharma

sector

displayed

the

products

c u r re n c y r i s k m a n a g e m e nt i s

competitiveness of Indian

Auto

a n u n avo i d a b l e d e v i l fo r a ny

enterprises operating inter-

n a te d by a my r i a d o f fo re i gn

It is worthy to note here

growing company conduct-

n a t i o n a l l y. C o r p o r a t e I n d i a

players, such as the Japanese,

that the majority of the

ing international business.

adopted a slew of hedging

Europeans, Americans and

Indian companies do not

s t r a t e g i e s b y u s i n g d i f fe r e n t

K o r e a n s . T h e MNC s a v o i d e d

h a ve a we l l d e f i n e d h e d g i n g

FLUCTUATIONS IN INR RATES &

t yp es of s tr u c tu red pro du c ts,

the u s e o f exo tic o ptio n s a n d

p o l i c y, gi v i n g l a t i t u d e to

CORPORATE INDIA

but in the majority of the cases,

re s t r i c t e d t h e m s e l ve s t o t r a -

the treasur y department to

it resulted in a negative effec t

ditional means of hedging.

conduct speculative foreign

on the financial per for mance.

They also used operational

exchange

sector

was

domi-

transactions.

hedging to meet their long

inter national trade (2008-09),

when

were

FOREIGN CURRENCY LOAN S

t o t h e b r i n k o f b a n k r u p t c y.

According to the RBI repor t on

structures

term, uncommitted exposures.

Tr e a s u r y o f c o m p a n i e s u s e d

85% of the international trade

Let us consider the cur-

h a p p e n s i n U S D, a n d fo r t h e

rency management tech-

f i r s t t i m e i n h i s t o r y, INR s aw

niques and their effective -

FORE X RI S K AND CORPORATE

committed,

u nfore s e e n flu c t uat io n s vis-Ă

ness for the three major

INDIA

and

- v i s all m ajor c ur ren cies an d

industries i.e. Information

zero cost options to hedge uncommitted

forecasted

currency

exposures. These exposures

Franc

and

Ye n .

INFINEETI | A n n u a l i s s u e 2 0 1 1

INFINEETI | A n n u a l I s s u e 2 0 1 1

CURRENCY

i t wa s p a r t i c ul a r l y d e p re c i at-

rate in I ndia. I ndustr y felt the

foreign currency Options

i n g a g a i n s t t h e Euro p e a n c ur-

n e e d fo r o t h e r e f fe c t i v e a n d

derivatives. The forex losses

r e n c i e s . To m a k e m a x i m u m

efficient hedging approach

over-shadowed higher oper-

the

the future value of Rupee

c u r r e n c y e x p o s u r e s i n U S D,

out of this, IT industr y star ted

to m e e t c h a l l e n g e s o f ove ra l l

at i n g m a rgi n s o f 2 0 % fo r t h e

enhanced business turnover

and selec ted forex derivatives

C H F a n d Ye n e t c .

diversifying

appreciation

Rupee

M a r c h q u a r t e r. Fo r e x d e r i v a -

was dragged down by forex

based on their convic tions. I n

the companies used stepped

against all major currencies.

tives created huge cash losses

l o s s i n t h e s a m e q u a r t e r.

majority of such cases, predic-

t h e y c a n c h a n g e t h e i r i nvo i ce

t io n o f s tro ng o r weak I ndian

c u r r e n c i e s t o G B P a n d EUR .

But

the

profit

from

We a k e n i n g t r e n d s o f fo r e i g n

Rupee, proved wrong and

currency affected the prof-

co m p a n i e s l i k e Wo c k h a rd t,

itability on account of the

R anbax y,

increasing liability of USD

S a t y a m , B h a r t i , Ta t a S t e e l ,

loans and payment of inter-

Suzlon etc. incurred heavy

est

forex losses in some quar ters.

service

foreign

charges

currency

Infosys,

Wipro,

loans.

B h a r t i , Ta t a S t e e l , R a n b a x y,

Some of

I t can b e o bs er ved that I ndia

S er vice etc. made forex losses

Inc. did not have the adequate

on their foreign currency

understanding of hedging

funding operations to the

strategies or of the opera-

tune of

Rs3450

tions of the forex markets.

Rs2850

I t w a s fo r t h e f i r s t t i m e t h a t

forward and rollover con-

Rs 261 0 M io resp ec -

INR s a w l a n d s l i d e d e p r e c i a -

tracts to cover long term

tively due to deprecation

t i o n f ro m R s 3 9 to t h e d o l l a r

exposures instead of swaps.

against the loan currency of

to Rs 52; hence, they failed

USD. Similar ly, Suzlon energy,

to take adequate measures

t h e c o u n t r y â&#x20AC;&#x2122;s b i g g e s t m a k e r

to pro te c t their interes ts. The

of Wind turbines repor ted

RBI obser ved that the advi-

losses

approximately

s o r y s e r v i c e p ro v i d e d by t h e

Information

Rs. 1300 Mio due to restat-

I n dian bank s was ver y u npro -

I ndu s tr y

ing of its foreign currency

fessional and lacked foresight.

M i o,

R s 3 1 1 0 M i o,

M i o a nd

European countries, so that

Companies tried to predict the future value of Rupee and selected forex derivatives based on their conv ic tio n s. I n m a jor i t y of such cases, pre d i c t i o n o f s t ro n g o r weak Indian Rupee, proved wrong.

Tata Motors, Tata Consultanc y

Rs5860 Mio,

business

for another major Indian To co unte r t h i s, t h e IT i n d us -

Ph a r m a compa ny, Wock ha rd t

tr y star ted factoring exchange

Ltd. due to numerous, complex

rate fluctuations in their

h e d gi ng strate gie s. Compa ny

sale contracts. Such adjust-

co n d u c te d fo re x d e a l s i n t h e

ments had a provision of

absence of clear forex hedging

neutral zone for exchange

policy and faced huge esti-

rate changes and with pass

mated

or share the exchange rate

losses around $ 300 million

c h a n g e to co n ce r n e d p a r t i e s.

mark

derivative

market

contracts.

Such cur renc y rate protec tion in sales contract, touched 60%

Company also allowed its

o f t h e to t a l l o n g te r m ex p o r t

foreign subsidiaries, under

contracts

executed

its guarantees, to indulge

b y t h e I n d i a n IT i n d u s t r y .

in carry trade and deriva-

duly

t i ve t r a n s a c t i o n s i n ove r s e a s Ph a r m a ce ut i c a l i n d us t r y

markets. It used structured zero cost options with various

But soon Rupee appreciated

R a n b a x y, o n e o f t h e l a r g e s t

I n d i a n b a n k s to cove r ex p o r t

6.5% against GBP moving from

I n d i a n p h a r m a ce ut i c a l m a j o r,

b i l l re ce iva ble s. I t u se d stru c -

EFFECT OF U S P H ARMA AND

R s 8 6 .2 3 to R s 8 1 .2 3 . Ag a i n s t

had extensive exposures to

t u re d z e ro c o s t o p t i o n s w i t h

AUTO INDU S TRY

E u r o, i t a p p r e c i a t e d f r o m R s

U S D. T h e y m a i n l y u s e d z e r o

va r i o us I nd ia n ba nks to cove r

58.55 to

Rs 55, a rise of

co s t o p t i o n s to p ro te c t t h e m -

ex p o r t bill re ce iva ble s. Those

6 .1 % . M a x i m um a p p re c i at i o n

selves from forex losses.

structures star ted giving extra

o f 8 .6 % wa s a g a i n s t U S D f ro m

I n i t i a l l y, t h e y m a d e s i g n i f i -

profits because of favorable

Rs 44.24 to Rs 40.42. Rupee

c a n t t r a d i n g p ro f i t s, b u t d u e

movement of Rupee against

Rupee appreciation against

a p p re c i ate d a g a i n s t a l l m a j o r

to lack of timely reversal of

U S D i n I n d i a n Fo r e x M a r k e t

Exchange rate fluctuations

USD adversely affected the

c u r re n c i e s i . e. EUR , G B P, U S D

positions, they faced losses

a n d U S D a ga inst CHF a nd Ye n

FOREX DERIVATIVES SELECTION

created extra profits and

pro f its o f the co m pan i e s t h at

& J PY. I t w a s o b s e r v e d t h a t

to the tune of Rs 7610 mn.

in international forex markets.

- INDIA INC

huge losses in the different

were dependent heavily on

for every 1% appreciation

quarters, depending upon

t h e U S m a r k e t . I n p a r t i c u l a r,

in Rupee, there was 0.40%

Foreign exchange fluc tua-

This increased their greed,

The selection of derivative

the nature of exposures and

it affected those companies

â&#x20AC;&#x201C; 0.45% reduction in the

t i o n s c a us e d 5 2 % d ro p i n t h e

and the

products was driven, not by

movement of major curren-

w hic h u s ed U S D as its i nvo i ce

n e t m a r g i n s o f IT i n d u s t r y.

t o t a l p r o f i t o f t h e c o m p a n y.

into leveraged derivative

the objective to hedge, but

c i e s a g a i n s t INR . Co m p a n i e s

c u r r e n c y. D u r i n g t h e p e r i o d

Thereafter, Rupee appreciated

R a n b a x y i n c ur re d

R s 1 1 5 8 .0

structured contracts with a

by the greed of the treasur y

used for wards, swaps and zero

2007-2010, the rupee move -

ove r a l l t h e m a j o r c u r re n c i e s

million losses on its foreign

n um b e r of I nd ia n a nd fore ign

te a ms to e a r n tradin g p ro f it s.

co s t a n d l e ve ra g e s t r u c t u re d

ment was not uniform with

d ue to f l ow o f fo re i gn i nve s t-

c u r re n c y b o r row i n g s b e s i d e s

banks

Companies tried to predict

options etc. to hedge their

respect to all major currencies;

m e n t s a n d h i g h GDP g r o w t h

Rs 23360 mn forex loss on

create money from non-core

c o nve r t i b l e b o n d l i a b i l i t y.

Te c h n o l o g y

company entered

with

objective

INFINEETI | A n n u a l i s s u e 2 0 1 1

INFINEETI | A n n u a l I s s u e 2 0 1 1

Japanese car manufacturing

competitiveness in the I ndian

analyzed the strategies of

co m p a n i e s i n I n d i a a l s o f a ce d

m a r k e t a g a i n s t Euro p e a n a n d

their competitors in the Indian

unique situation in the area

American car manufacturing

m a r k e t. To re d u ce the cost of

and

o f c ur re n c y r i s k m a n a g e m e nt

un i t s. Th e s e co m p e t i n g co m -

Japanese imported compo-

CURRENCY Japanese,

b u si n e s s a c ti v i t ies. Cur ren c y

European

predictions were made by

Wock hardt had mobilized

American car manufactures

with Yen appreciating against

panies were using high per-

n e nt s t he y a lso shif te d to the

the company and strate -

s u b s t a n t i a l fo re i g n d e b t s ( t o

have a significant presence

U S D a n d R u p e e d e p re c i a t i n g

ce nt a g e o f I n d i a n m a d e co m -

l o c a l vend ors for I nd ia n com-

gi es d e ve lope d o n such fo re -

t h e t une o f U S D 45 0 m il l io n),

i n t h e l o c a l a u t o i n d u s t r y.

against USD. As a result, com-

ponents for their manufac tur-

ponents instead of using forex

casting convictions proved

which were raised to reduce

These companies were also

ponent impor t from Japan for

ing activities and making them

derivatives to hedge Yen Rupee

t o v e r y c o s t l y t o Wo c k h a r d t .

the cost of funds.

expo s ed to c hang e in

va l ue

their manufacturing activ-

immune to Rupee deprecia-

exchange rate fluctuations.

depreciation against USD

against major currencies in

ities in India became very

tion against home cur rencies.

Subsequently, Rupee, CHF, Yen

phase, the maturity of some

forex markets. European &

costly and decreased their

Japanese auto companies

moved against the hedging

o f t h e fo re i g n c u r re n c y d e b t

American car manufactur-

The picture presented is a news

strategies of the company

required immediate cash

ing companies in India used

p a p e r clipping that wa s pu b -

a n d ove r i ndulgen ce in st ruc -

assistance from its banks.

local supply of components

l i s h e d in the e conomic time s

t u re d d e r i v a t i ve i n s t r u m e n t s

C o m p a ny h a d s o u g h t c o r p o -

fo r the pro du c tio n o f c a r s, a s

o n t h e 1 9 t h J a n u a r y 2 0 1 1 , at

cre ate d huge losses. Fur t h er,

rate debt restructuring from

a hedging strategy against

the author â&#x20AC;&#x2122;s request; InFineeti

u n d er pre s s u re f ro m overseas

banks to deal with servic-

Rupee depreciation. This

is publishing this ar ticle for

b a n k , fo re i g n s u b s i d i a r i e s o f

in g an d repay m ent o f fo reign

helped by reducing the cost

the benefit of the readers.

Wo c k h a r d t L t d . h a d t o c l o s e

debts. Hence, they incurred

of impor ted components from

derivative deals with offshore

a h e av y co s t d u e to e f f i c i e n t

the parent companies which

banks.

currency risk management.

fur ther reduced the cost of

M o r e o v e r, c a n c e l l a -

During

impor ts for their car manu-

tion and mark to market of der ivatives resulted in a huge c a s h c r u n c h i n t h e co m p a ny.

Automobile

Industry

facturing business in India.

Disclaimer : This is a summar ized version of the case prepared by t h e a u t h o r, a f t e r e x t e n s i v e research. Readers may get in touch with Prof .Hark irat Singh at hark irat@iift.ac.in for fur ther discussion / details. All opinions expressed are the a u t h o r â&#x20AC;&#x2122;s p e r s o n a l o p i n i o n s .

ABOUT THE AUTHOR P r o f. H a r k i r a t S i n g h i s a p r o f e s s o r a n d c o n s u l t a n t a t IIFT, D e l h i , h e i s a l s o t h e v i s i t i n g Fa c u l t y t o a n u m b e r o f p r e m i e r m a n a g e m e n t i n s t i t u t e s i n I n d i a a n d a b r o a d , h e i s a c o n s u l t a n t t o a n u m b e r o f c o m p a n i e s i n t h e a r e a o f I n t e r n a t i o n a l Fi n a n c i a l & C u r r e n c y R i s k Management. He has over 25 years of experience in I nternational Bank ing, forex dealing a n d h a s a l s o b e e n i n c h a rg e o f E x p o r t , I m p o r t , R e m i t t a n c e s, I nve s t m e n t a n d Co r re s p o n d e n t B a n k i n g . H e h a s b e e n t h e C h a i r m a n o f Fo r e x C l u b o f I n d i a , D e l h i C h a p t e r f o r t w o t e r m s .

INFINEETI | A n n u a l i s s u e 2 0 1 1

INFINEETI | A n n u a l I s s u e 2 0 1 1

SME FINANCE

Resource Planning in SME s – Is less very little? R eu ben R ay ; Hea d - Wh o l es a l eLen din g at I ntel l ec ash

w a s t e d ; t h e p ro o f l i e s i n t h e

a n d t h e f i n a n c i a l s up p o r t to

re s o urce me tr ics that ne e d to

hugely underutilized capaci-

create them thereon. I am yet

be fine-tuned and balanced

ties idling across the length

to come across a sanction

fo r t h e e ntit y not be ing stu ck

and breadth of the countr y

l e t te r w h i c h s t ate s a f ur t h e r

i n a s i ngle or bit of sca le, bu t

with no regulatory ques-

line of ‘x ’ towards capacity

soar higher and higher up the

tions or suppor t framework.

b ui l d i n g o n ce t h e e nt i t y h a s

economic scale of contribu-

achieved cer tain scale and

tion to the nation’s GDP. This is

Cre di t R i s k : N e e d l e s s to s ay,

mass through an on-going

the need of the hour to tack le

a well capitalized entity will

l e n d i n g p ro gra m . Cre d i t r i s k

s up p l y sid e inflation that ha s

grow faster. I t will need lesser

practitioners believe they

b e e n t he bu zz word of late in

c re d i t g o i n g fo r wa rd a n d w i l l

can well handle the entity by

this par t of the sub - continent.

hy do Banks often

model that does not spend

ever y middle -income salar ied

bring about faster acceptance

covenants and limited scope

shy

from

optimally based on long-ter m

class believes that the orga-

of its products and ser vices

o f f i n a n c i a l f l e x i b i l i t y, b u t

M a r ke t s to d i s t r i b ute r i s k :

early-

strategy (both the banker and

nization can be done better

not only within the nation,

that stifles the ver y basics

Risks in Banks are largely

s t a g e S ME s i s a q u e s t i o n

the investor seeking profit-

and ever y s m al l vendo r k e e p s

but also globally. Big firms are

o f a ny e nte r p r i s e t h at k e e p s

retained in the portfolios

t h a t o f t e n b o t h e r s m e ; m o re

able returns within the first

brew ing s ec ret w is hes o f o ut-

h i g h l y i nve s te d i n re s o u rce s,

wishing to challenge its own

that manage them. Hence

so at this particular hour of

stage of operations without

do ing its pr inc ipal s om e d ay.

and have not focused in

limits and grow beyond what

it becomes difficult to look

h i g h i nflati on an d n o to o ls to

caring for resource -invest-

N ow w h i l e t h at s o u n d s q u i te

turning the tide in a year or

e ve n t h e fo un d e r d re a mt o f.

b e yo n d t h e c u r re nt o p p o r t u -

tame it. I have been obser v-

i n g ) . A d d i t i o n a l l y, n o r d o e s

enter pr ising and needs ac tive

two but rather ensure they

i n g S ME s a n d t h e i r w a y s o f

t h e reg u l ato r req u ire f ir m s to

encouragement, the reason

are ready to take on when the

Rather than reduce the

issues that may cripple the

raising funds along with their

have basic facilities in place

why we have not been able

mar ket tsunami of their offer-

e nt i t y to a r i s k- a b i d i n g b o r-

organization going for ward.

measures to control spending,

to explore the enterprising

to c reate to o m any in d us t r i a l

i n g s h i t s t h e m w i t h d e m a n d.

r o w e r, c r e d i t r i s k c a n b e

M o s t me d iu m size compa nie s

w h i c h i n tur n i s leadin g to an

spir it in the f ir s t pl ace. Whil e

biggies since independence

What we see in a nationally

better covered by allowing

h ave mu ltiple ba nke rs sitting

asymmetric pattern of lending

i t m ay s o u n d h i g h l y n a i ve to

is per haps the f ac t that e ve r y

big-scale player is years of

the enterprise to scale up by

i n i t s b o o k s, w h o a re t ra i n e d

and growth for these entities.

suggest having all in place

small enterprise has tried

sustained investment coupled

supporting it whole -heart-

to t a k e f i n a n c i a l r i s k s o n t h e

before taking the plunge,

to take the shortest route

with a chunky initial invest-

edly through additional lines

e n t i t y t h e y l e n d . H o w e v e r,

M a n y S ME s w i t h t r u e p r o m -

i s n’t t h i s t h e l e s s o n we h ave

to success without invest-

m e n t . H o w e v e r, n o t a l l S ME s

w i t h o u t h i g h s e c u r i t y cove r

while they are more than

ises and life changing solu-

learnt while tak ing our annual

ing completely in resources

n e e d to b e co m e t h e m ul t i n a -

and collaterals, by helping

adequately covered through

tions to modern day prob-

vacat ions, co o k ing u p a m eal

to scale up and capture the

tionals that we see around, nor

i t grow a n d s e e d e b t c a p i t a l

primary and collateral secu-

lems are faced with a single

o r fo r t h a t m a t t e r, p re p a r i n g

e nte r p r i s e’s t r u e we a l t h . An d

d o a l l a s p i r e. H o w e v e r, c o m -

return in higher measures.

r i t y, a c t u a l r i s k - b e a r i n g

agenda - how do I offer my

for exams? S ome of the issues

this is largely due to the regu-

p a r e d t o o n e s u c c e s s s t o r y,

R at h e r t h a n wo r r yi n g a b o ut

beyond a security cover is

services that are relevant,

related to SME financing which

lator for the sec tor only inter-

there are probably a dozen

credit risk , the lender should

what needs to shine for th.

can hold the imagination of

need to be examined are:

ested in framing policies with

stor ies which have failed, due

worry

well-

E l s e, g ove r nme nt mone y col-

re g a rd t o o w n e r s h i p, re p o r t-

par tially to the financial advi-

equipped is the entity to take

l e c t e d t h o u g h t h ro u g h t a xe s

away

financing

an Indian mindset that does

nities and address the for ward

about

how

not willingly explore fresh

R egu l ator y Framewor k : Th e

ing standards and customer

sors in the forms of Banks, FI’s

the next step; sadly we do

should be lent free of inter-

solutions but largely imi-

regulator while being too busy

ethic s. What abo u t th e s co p e

a n d N B FC s n o t a d vi s i n g t h e m

not measure nex t-step capa-

est to help enterprises grow

tates practices elsewhere,

i n re g u l a t i n g h a s t o p e r h a p s

of growth of the enterprise,

o n re s o urce - i nve s t i n g. Wi t h a

bilities through resource

and flourish by aiding their

and how do I raise enough

now look deeper in retrospec-

importance of its service in

clear focus to get their money

mapping to growth. Also

s c a l i n g u p jou r ne y. This issu e

f u n d s t o s t a r t a n e n t e r p r i s e.

tion as to why there is so much

o u r e c o n o my a n d t h e n e c e s -

back, bankers fail to probe

add to the fact that single

of higher risk appetite can

Realities hit these enterpris-

noise about financing them;

sity to first invest clearly in

deeper with questions about

p a ra m e te r s o f c re d i t r i s k a re

also be addressed by creating

i ng entre pre ne urs h ard wh en

perhaps the fact that ever y

its resources before tak ing the

t h e m o d e l, t h e s co p e to s c a l e

applied across industries,

a s e p a rate ma r ke t to play the

they realize how they have cut

other young student carries

big plunge? Else, resources

up and hence a detailed inves-

failing to recognize the finer

r i s k a nd re wa rd ga me s ba se d

corners to build a business

that vision in their heads,

will be used up and highly

tigation on resources required

nuances of industry-based

o n p e r fo r m a n c e, r a t h e r t h a n

INFINEETI | A n n u a l i s s u e 2 0 1 1

INFINEETI | A n n u a l I s s u e 2 0 1 1

measurement of risk by financial

optimum per formance given

u til izatio n s to r y i n o ur b a c k-

e x p o s u r e . To d a y w e h a v e i n d i -

added resources that could

y a rd s i s o n e o f t h e a n s we r s.

viduals and bodies who can con-

rais e the per fo r m ance f u r ther?

fidently and accurately check on

How can our produc ts not only

Al s o u nner v ing a re t h e re a l i -

the resources of the company

meet, but exceed the quality

ties o f how S ME s a re e n co ur-

to measure deliverables and

standards more often than

aged to produce with limited

scaling for optimum utiliza-

not? I ndian mindset of measur-

resources, limited power and

t i o n o f r e s o u r c e s t o d e l i ve r i t s

ing against projected per for-

fuel source, and no knowl-

product till its own last mile. The

m a n ce i s a p p l a u d e d fo r b e i n g

edge bank, relying heavily

ECONOMY

Keynes & Paschimbanga Dr. R anajoy B hattachar y ya

idea is to create a market around

on their own experi-

i t, w h i c h h e l p s cove r t h e i n f ra -

ence and vision of the

s t r u c t u re b u i l d i n g r i s k i n S ME s

industr y they ser ve. If

John Maynard Keynes has

By recognizing the validity of

its popularity and hurtled

a n d e nte r p r i s e s t h at a re b r i n g -

banks are willing to look

always

for

his policies anytime and any-

towards disaster apparently

i ng good name an d value to t h e

beyond lending only for

coming up with effective

w h e re p ro v i d e d t h e re i s i nvo l -

fo r d oing the r ight thing, v iz,

co u nt r y w h i l e a i d i n g e co n o m i c

the proposed capex or

routes of escape when an

untary unemployment possi-

b r i nging We st B e nga l ba ck to

growth. The gover nment can do

work ing capital, the reg-

economy finds itself at the

bly demand constrained, we

t h e path of ind u str ia l glor y.

i t s pa r t by bu i ldin g ro ads, p o r t s

ulator needs to step in

wrong end of the business

can apply it to multitude of

and bridges; all these are meant

by creating a window to

cycle. The main argument in

situations including that of

Th i s b r i n g s u s to t h e s e co n d

been

revered

to aid our businesses but not

conser vative - perhaps we hate

dis tr ibu te their r i s k s b e yo n d

K e y n e s’s f r a m e w o r k w a s t h a t

We s t B e n g a l ( n ow re c h r i s te n e d

issue necessary to piece

much can be done when they

being pushed to the limits

t h e s e c u r i t i z a t i o n ro u t e a n d

the government can step in

Pa c h i m b a n g a ) . To b r i n g We s t

to ge the r ou r a rgu me nt. What

fi n d the ms e lve s cr ipp led due to

with regards to per formance

allow for a study coupled

successfully when recession-

B e n g a l i nto t h e p i c t ure we f i r s t

are the probable causes

lack of resources which were not

a n d q u a l i t y a l i k e . Pe r h a p s a l l

w ith bro ad ar m s to we l co m e

ary markets make a mess of

need to look into a couple of

f o r t h e L e f t Fr o n t d e b a c l e ?

planned in a phased manner and

t h i s h a s t o d o w i t h n o t c re a t -

l arg er inves tm ent i nto t h e s e

gi vi n g e m p l oym e nt to a l l w h o

i s s u e s . T h e f i r s t i s f a c t u a l . Fo r

H un d re d s of hou rs have be e n

not being advised by the lenders

in g a m ar k et to em power them

a re a s w i t h s co p e fo r n at i o n -

are willing to work. Though

the majority of the years that

devoted on this especially

and regulators alike. Does an

wit h eno u g h f u nds, hav ing no

building, before regulating

this is the exact context in

the Left Front ruled West Bengal,

in local language television

entity need to spend adequately

regu l ato r y f ram ewo r k to ins is t

trade. Else regulators will

which he wrote his magnum

the corporate lobby abhorred it.

news channels. Scores of

on marketing of its goods? Or

lending based on an additional

regulate, not procreate or co -

opus, the General Theor y of

I n d us t r i e s m i grate d a n d i n d us -

reasons from the arrogance

d o we pat the m o n t h e back fo r

parameter of scope to optimize

c reate, l ender s w i l l l e n d b ut

Employment, Interest and

trialists across the spectrum

o f t he Le f t Front gove r nme nt

good word-of-mouth market-

and scale the use of rapidly

not risk and India will keep its

Money there is nothing in

and their protégés sometimes

to the failure to devise a com-

ing and hence nil budgets for

redu cing elem ents li ke m iner -

s tatu s q u o o f ‘s a b c h a l t a h a i ’.

the policies that make them

used pretty strong language.

pensation package for the

m a r k e t i n g ! Lo o k a t yo u r fe l l ow

a l s, c o a l a n d w a t e r, t o e n s u r e

exclusive to that situation.

By speaking out against these

land losers were debated and

counterpar ts across the Atlantic

t h e y have neces s ar y res o u rces

Fo r i n s t a n ce, t h e re a re a l ways

‘d e s t r o y e r s o f i n d u s t r i e s ’ t h e

contested. One issue however

o r e ve n i n the S o ut h -East Asian

to go beyo nd the o rdinar y and

people who are willing to work

corporate spokespersons must

re m a i n e d u n a d d re s s e d – t h e

e co n omy who s ell mo re in I n dia

place its footprint globally

a n d a re un a b l e to f i n d j o b s i n

have thought that they were

i s s u e o f We s t B e n g a l ’s r a p i d

than in their own countr y. How?

that proudly spells its Indian

un d e rd e ve l o p e d co unt r i e s. I n

m a k i n g a s t ro n g c a s e i n f avo ur

growth rate since the mid

Why are Indian brands yet to

o r igins. The c r is is w ith l ender s

these countries policies like

o f t h e p e o p l e o f We s t B e n g a l

1 9 90s. A fa st pa ce of growth

cre ate a global hype an d inter-

lies with no scope to distrib -

t h e o n e s p ro p o s e d by K e yn e s

w h o s e l i ve l i h o o d s we re c l e a r l y

brings with it a new set of

e s t a c r o s s s e c t o r s ? We a r e t h e

ute the risk accumulated in

can be used by the govern-

at s t a k e a n d w h o t h e y t h o ug ht

challenges

l o we s t c o s t p ro d u c e r s o f m a ny

their asset books. Creating

ment at any point of time,

we re s h a m e l e s s l y b e i n g b ul l i e d

a s s o c i ate d w i t h t h e p re s s u re

commodities, yet not many

an alternative market where

i r re s p e c t i ve o f t h e e co n o my ’s

to vo te fo r t h e m . Th e s a m e s e t

cooker type situation that

beyond our shores ack nowledge

f un d ho u s es hel p to dis tr ibu te

exac t location on the business

o f p e o p l e m us t h ave b e e n co m -

results from an overheat-

their presence in global markets.

r isk and rais e f u r ther f u nds to

c yc l e.

pletely intrigued when the

i n g o f t h e s t a t e e c o n o my. I f

What are the tools to measure

aid the capacity building and

Left Front government lost

w e l o o k b a c k u p o n I n d i a ’s

ABOUT THE AUTHOR M r. R e u b e n R a y w a s c l u s t e r h e a d a t Ta t a C a p i t a l b e fo r e taking up the opportunity of heading the wholesale lending division at Intellecash. Ar ticle reflects personal views of the author

–

challenges

INFINEETI | A n n u a l i s s u e 2 0 1 1

INFINEETI | A n n u a l I s s u e 2 0 1 1

ECONOMY

p e r fo r m a n c e s i n c e t h e m i d

Now to the last issue in our

realization that a gover nment

its pursuit of industrializa-

1990s and its sudden growth

chain of reason: The role of

can create a space for policies

tion if and when they take

acceleration scenario from

expectations in shaping eco-

t h at a re re l at i ve l y u n p o p u l a r

up the challenge. And unlike

the ‘H indu rate’ of 3.5 or

n o m i c a n d p o l i t i c a l o u tco m e s.

to the co m m o n m an by m a n -

their predecessors they

thereabouts in the pre 1990s

To appreciate this we must first

a g i n g p e o p l e’s e x p e c t a t i o n s

should always keep a copy

period to around 8 % in

appreciate that Keynesian fiscal

thro u g h a paral l el s et o f p o l i -

of The General Theor y at a

re ce n t ye a r s we c a n v i s u a l -

policies, like building a road

cies tailor-made for obtaining

p l a ce whe re it ca n e a sily be

ize some of these challenges

w i t h g o v e r n m e n t m o n e y, a r e

his co nf idence.

fo un d.

– a perceived rise in inequal-

as much symbolic as they are

ity and especially discontent

effective in putting money in

Since the mid 2000s, the

ABOUT THE AUTHOR

a m o n g t h e p o o re r s e c t i o n s

t h e h an ds o f tho s e wo r k ing in

central government began a

o f t h e s o c i e t y. T h i s d i s c o n -

t h e p ro j e c t . O f t e n j u s t a ‘g o v -

s e r i e s o f p o l i c i e s t h a t ra l l i e d

tent was effectively used

e r n m e n t i s b e h i n d m e’ s i g n a l

pu bl ic o pinio n in the g ove r n -

by the Maoists to pursue

m a y wo r k wo n d e r s i f t h e y a r e

m e n t ’s f a v o u r w i t h o u t s a c -

their own anti-democracy

p ro per ly t im ed and adver tis ed

rificing the momentum of

agenda. In fact the discon-

in t h e media. There are nu m er-

growth. These policies like,

te nt h a d re a c h e d a n ex te nt

ous examples in histor y – indeed

fo r ins tance, the R aj iv G a n d h i

t h e p ro -vi o l e n ce l o b by o f t h e

the centre had taken and for

where some of the left

branches of economic policy

G r a m S a r a k Yo j o n a a n d t h e

U l t ra Le f t. Th o ug h h i tc h e s l i k e

similar confidence building

minded people started to

research – w here j u s t a fo r m al

National Rural Employment

t h e f a r m e r ’s re vo l t i n We s te r n

exercises. These policies would

ca l l t h e growth ‘predato r y ’.

declaration from a gover nment

Guarantee Ac t effec tively dis-

UP s t i l l r e m a i n , f r o m w h a t

have acted like safety valves

turns the tide in favour of a par-

armed the critics of growth

appeared to be a seething

channeling out the excess

For West Bengal the contrast

ticular individual or a company

and hushed them into silence.

c a ul d ro n i n t h e m i d 2 0 0 0 s t h e

s te a m at a t i m e w h e n t h e s t ate

in growth rate happened

by giving it a decisive strate -

With clear signals of a pro-

situation improved enough to

wa s g e t t i n g ove r h e ate d f ro m a

more abruptly. After a lacuna

gic advant a g e. A s im pl e ex ten-

poor government, the secu-

a l l ow t h e g ove r n m e nt to co n -

s ud d e n b ur s t o f e n e rg y o n t h e

of about three decades from

s i o n o f t h i s l o gi c to t h e re a l m

rity agencies were better

tinue with relatively high rates

par t of government that was in

1 9 7 0 s to e nd of 199 0s wh en

of public life takes us to the

pl aced to identif y and t a rg e t

o f grow t h .

a s t a t e o f s t u p o r fo r t h e p a s t t h re e d e c a d e s.

the growth rate was just about 4%, the growth rate

Th e Le f t Fro nt g ove r n m e nt i n

suddenly zoomed to more

We s t B e n g a l m i s s e d t h i s p o i nt

B y fo rc i n g t h e p e o p l e o f We s t

tha n 7 % i n the la s t decade.

co m p l e te l y. R at h e r t h a n i n s t i -

Bengal to remove them from

C h a l l e n g e s we re i n e v i t a b l e

tuting such Keynesian-style

p o we r a t a p o i n t w h e n i n d u s -

especially from the set of

macro management policies

tries were just beginning to

p eo p le to whom th e ben ef it

with government funds they

r e a p p e a r i n We s t B e n g a l , t h e

d i d n o t acc r ue i mmediately,

a t t e m p t e d t o u s e b r u t e fo rc e

Buddhadev Bhattachar y ya gov-

o r w h o t u r n e d o u t to b e a t

in bulldozing their way into an

e r n m e nt d i d a h ug e d i s s e r vi ce

the receiving end at least for

industrial nir vana. Tak ing a leaf

to t h e s t ate. Th e m o m e nt um i s

the fi r s t pa r t of th e growt h

out of the central government ’s

n ow l o s t a n d i t w i l l t a k e a h e r-

p ro ces s – promi ne nt amo n g

policies the Lef t Front gover n-

c u l e a n e f f o r t t o r e v i v e i t . Le t

whom were the farmers who

ment should have pursued a

u s h o p e t h at t h e n e w g ove r n -

were to lose their land to

s e r i e s o f s te p s s i m i l a r to w h at

m e n t w i l l b e m o re s e n s i b l e i n

m a k e way for i nd u st r ies.

Author is a Professor at Indian I n s t i t u t e o f Fo r e i g n Tr a d e , K o l k a t a C e n t e r. H e i s t h e R e c i p i e n t o f t h e Fu l b r i g h t Scholar in R esidence award in 2007 – 08 and the Asia Fe l l ow s aw a rd i n 2 0 0 2 - 0 3 . He has also been the Advisor (Research) for Joint Study Group on Indo-Russian Trade (2006 – 2007) under Ministr y o f Co m m e rc e, G o ve r n m e n t of I ndia

INFINEETI | A n n u a l i s s u e 2 0 1 1

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debt crisis

So You Thought the US would Default: Layman’s Finance M r itu nj ay Ku m a r

The way to dust y death. Out, out, brief candle! Life’s but a walk ing shadow, a poor player That struts and frets his hour upon the stage And then is heard no more. I t is a tale Told by an idiot, full of sound and fur y, Signifying nothing. -M acbeth (Ac t V, S cene V )

be generous and leave you

be over-awed by the term

what? No growth would imply

a l l h a l e a n d h e a r t y. S & P d i d

Tr e a s u r y s e c u r i t i e s . T h e y a r e

no jobs are created. The unem-

downgrade the US. Yes We Can

just pieces of paper which the

p l oy m e nt rate wo u l d r i s e. S o

Obama settled for $2.4 trillion

U S g o ve r n m e n t u s e s t o f u n d

t h e re cove r y g e ts prolong e d.

c ut s ove r a p e r i o d o f 1 0 ye a r s

its umpteen programmes. A

and Republicans settled for

s o p h i s t i c a t e d i n s t r u m e n t fo r

S o w h at d o the cu ts me a n for

$ 2 . 1 t r i l l i o n i n c re a s e i n d e b t

r a i s i n g d e b t . Fo r a n a v e r a g e

the hoi polloi? No it will not

ceiling. S&P wanted double

Joe, loans do the same trick as

have any impact on defense

o f t h o s e c ut s a n d l e s s b i c k e r-

t h e t re a s ur y s e c ur i t y d o e s fo r

b u d g e t s . N o, b o d y b a g s w i l l

ing. Bickering, I understand

t h e g ove r n m e nt.) Th at wo ul d

not stop coming from Iraq and

helps no one. In fac t our polit-

m e a n t h at t h e c a r w h i c h yo u

A f g h a n i s t a n . N o, t h e B u f f e t s

ical class should see the ill

wa nte d to gi f t to yo ur d a d o r

will not have to shell out extra

e f fe c t s o f i n t e r n e c i n e p o l i t i -

your girlfriend, or the vaca-

as taxes. I t will hit those at the

cal battles. But the cuts? Af ter

tion that you were planning

lowest rung of the develop-

h u s r a n g M a c b e t h ’s

debt default by US. What a

end even w hen the c a s t i n g i s

lament in my aural

poor piece of showmanship

still playing on. After being

region (par ticularly the

it was. The usual ingredi-

full of sound and fury signi-

much bravado, Captain Obama

fo r yo ur f a m i l y ( t h a n k s to t h e

mental ladder. Social security,

last two stanzas) seeing the

ents of a C-grade Bollywood

f y ing no thing w hat c a m e o ut

went down with the Reps

banks) would become cost-

h o u s i n g, i n f r a s t r u c t u re, e d u -

hoopla around the impending

thriller where you know the

at the end was a meow. So you

holding a gun to his head. The

l i e r fo r yo u. H ow ? S i m p l e. Th e

cation, health and commu-

really thought that the poster

Reps must have been embold-

mor tgages and other loans are

nity services must bear the

boy of free markets and global

e n e d by Ye s We Ca n O b a m a’s

p e g g e d to t h e Tre a s ur y s e c u-

b r unt. Bu t shou ld it matte r to

capitalism was to be con-

capitulation. Let us wait

rity rates, so as the treasur y

f i n a n c e c a p i t a l. S o yo u t h i n k

s u m ed by the ver y fo rce s t h at

for November Thanksgiving

interest rates rise so would

their hearts would melt at

it had reared with so much

Day when more of action is

y o u r EMI s . I n f a c t t h e c o r -

the plight of people. After

o f a f fe c t i o n . S o y o u t h o u g h t

ex p e c te d a g a i n .

n e r s to n e o f m o d e r n f i n a n c i a l

a l l a re hu ma n be ing s not ju st

m o d e l i n g c a l l e d a s t h e CAPM

r e s o u r c e s l i k e a n y o t h e r. S o

that those vultures would bite the same hands which

So how should a layman not

m o d e l u s e s Tr e a s u r y s e c u -

what if the glor ified jargon of

had fed them j u s t a co up l e o f

wanting to gorge on reams

rity rate as a risk free rate.

business and finance capital

y e a r s a g o. ( I a m a l l u d i n g t o

of newsprint and macro-

Th e i n c re a s i n g b urd e n wo ul d

chooses to call them human

t h e 2 0 0 7 - 0 8 re c e s s i o n w h e re

economics stuff make sense

s e ve re l y h ur t Ja n e’s a n d Jo e’s

re s o urce ?

finance capital eagerly took

o f a l l t h i s d r a m a ? Fo r s u c h

s e nt i m e nt s. Th at wo ul d m a k e

the bail o u t pac k ag es ) .

s o ul s I w i l l t r y to m a k e t h i n g s

t h e ove ra l l d e m a n d g o d ow n .

Common sense is not so

f a i r l y s i m p l e. Th e d ow n gra d e

Pe o p l e w i l l n o t w a n t t o b u y

common after all. The economy

But the finance capital did

would mean that the inter-

saying, “Oh! The atmosphere is

is tottering with Q1 growth

have its pound of flesh. So

e s t r a t e o n Tr e a s u r y s e c u r i -

so gloomy.” And so the growth

at 0.3% and Q2 at 1.3%. And

you thought Shylock would

t i e s s h o ul d r i s e. ( N ow d o n o t

rate would plummet. Now

you tr y to force cuts down the

INFINEETI | A n n u a l i s s u e 2 0 1 1

INFINEETI | A n n u a l I s s u e 2 0 1 1

throat of a hapless popula-

holds its position at the top

there I have taken the cue.)

tion still rebuilding their lives

and no one in sight to chal-

By a strange set of circum-

af ter the Great Recession. Will

lenge its supremacy (I Yuan has

stances, the guy meets the

there be some sor t of magic

g o t m u c h d i s t a n ce to cove r ) .

beautiful damsel and love

to rejuve nate the eco n o my if

Tr e a s u r y s e c u r i t i e s a r e s t i l l

f l o w s b e t w e e n t h e t w o. T h e

the demand does not pick up?

co n sidered a s afe ins tr u m ent.

damsel plants a soft kiss on

Pe o ple wou ld need to lo o sen

During the 2007 blood bath

his c heek . And as the h i p p i e s

their purse strings and not

in t h e m ar k ets, inves to r s f l ed

exhor ted during the swinging

keep it in their cupboards.

to take refuge in dollar and

sixties I urge finance capital

Am e r i c a ne e ds to get b ack to

t reasur y s ec u r ities. Strang el y

to make love and not war with

work and for that it needs more

the blood bath triggered by

Macroeconomics. The result

funds even if it runs up excess

the recent downgrade saw

i s a s o o t h i n g at m o s p h e re fo r

deficit in the shor t ter m. Euro

investors scurr ying for trea-

entrepreneu r s hip and grow t h

zone is in ser ious mess due to

sur y security as a cover. I must

fo r t h e wo r l d. B u t a l a s i t i s a

t h e n on- ava i lab ilit y o f mo n e -

concede, “Strange are the

dream . Al as !

t a r y poli c y i ns trument. Th ere

w a y s o f f i n a n c e. S t r a n g e a r e

also the messiahs have forced

t h e ways o f f inance”.

debt crisis

US Debt ceiling crisis: How it all started and its effects Ti r thak r i t M uk herjee

w r i te

this

f ro m t h e p ub l i c to f un d t h e

fe d e ra l g ove r nme nt a g e ncie s.

9th

g ove r n m e nt

Th i s d ebt compr ise s of t wo

article

Aug us t, 2 0 1 1 t h e

Th e

ex p e n d i t ure s.

G ove r n m e nt

spends

co m p o ne nts – d e bt he ld by

to t a l p ub l i c d e b t o f U S A

i t s m o n e y o n e nt i t l e m e nt s

g ove r nme nt

I am an optimist though. An

s t a n d s at $ 1 4 , 5 9 0 , 2 5 3 ,

l i k e M e d i c a re, M e d i c a i d a n d

t h e d e bt he ld by the pu blic.

inveterate o ptim is t.

2 2 5 , 0 6 6 2 a cco rd i n g to U S

o t h e r s o c i a l s e c ur i t y b e n e f i t s.

Th e l arg e st fore ign owne rs

d e b t c l o c k , i n c l ud i n g t h e

We l l, t h i s i n c l ud e s t h e co s t l y

o f t h e US pu blic d e bt a re

$ 2 3 8 b i l l i o n by w h i c h t h e

wa r s

Afg h a n i s t a n

t h e ce ntra l ba nks of China ,

The process is such that when

U S d e b t s h o t up a s s o o n

a n d b a i l i n g t h e g uys w h o

Ja p a n , the Unite d K ing d om

yo u n e e d the fun ds t h e mo st,

a s t h e d e b t ce i l i n g wa s

we re

a n d B razil.

the process has been made so

ra i s e d j us t b e fo re Aug us t

G l o b a l Fi n a n c i a l Cr i s i s i n t h e

m u c h d i f f i c u l t . S o w hy m a k e

2 n d a n d at t h e c ur re nt rate

f i r s t p l a ce. Th i s m a k e s up

t h e i nte re s t rate h igh er wh en

i t i s a l l s e t to grow to $ 1 5

a l m o s t h a l f o f t h e b ud g e t.

we need it most. Why shut the

t r i l l i o n by t h e t i m e 2 0 1 1

B ut, t h e o n l y m a j o r s o urce s

The debt ceiling is an ar tificial

t a p w h e n we n e e d w a te r t h e

e n d s. U S d e b t i s a l re a d y

o f re ve n ue a re i n co m e a n d

spending limit which is set by

most. I remember a scene from

h ove r i n g n e a r to 1 0 0 % o f

s o c i a l i n s ura n ce t a xe s w h i c h

t h e Co n gre ss a nd the a mou nt

the recent rib-tickler Delhi

i t s GDP. An d f i n a l l y, w i t h

a cco unt

the

is decided and agreed upon

B e l l y. The re i s no water in t h e

t h e c ur re nt U S p o p ul at i o n

re ve n ue a m o unt i n g to o n l y

through a successful vote in

t o i l e t s o t h e m o re e x p e n s i ve

at 3 0 8 m i l l i o n , t h e gro s s

$ 2 .6 t r i l l i o n e ve r y ye a r. Th e

Co n gress a nd the su bse qu e nt

option needs to be used (read

ex te r n a l d e b t p e r c a p i t a

tax season is the only one

signing into law by the US

juice). The available juices are

Af te r

o r t wo p o s i t i ve m o nt h s i n a

president. In simpler words,

and

ye a r fo r t h e g ove r n m e nt. Th e

i t ’s h o w m u c h m o n e y t h e U S

re ce s s i o n , t h e g ove r n m e nt

g ove r n m e nt

p ays

Government can borrow to

spending

s o a re d

m o re t h a n $ 1 b i l l i o n a d ay

p ay i t s a nnu a l bills. Whe n the

at a f a s t rate w h i l e t a x

i n i nte re s t o n i t s d e b t s - a n d

debt ceiling is reached, US

re ve n ue s

s p e n d s $ 1 0 b i l l i o n a d ay o n

cannot incur any more debt

the

d o i n g ‘g ove r n m e nt s t uf f ’. Th e

a n d t h e US Tre a su r y will ne e d

d e f i c i t.

fe d e ra l g ove r n m e nt o f t h e

to prioritize which debts to

g ove r n m e nt

U n i te d St ate s b o r rows m o n e y

pay and which not, and that

t h ro ug h t h e i s s ue o f s e c ur i t i e s

is cer tainly not a situation the

Tre a s ur y b o r rows m o n e y

by t h e Tre a s ur y a n d o t h e r

government would want to be

cu t s down the th ro at s o f pro testing populations, but the

Fin an ce c apital needs to have

results have not been desired.

a hear t after all. I k now money

rat he r a ve r y cost ly o pt io n in

n e ve r s l e e p s. B u t t r y i m a gi n -

t h i s c a s e.

i n g t h i s . Fi n a n c e c a p i t a l i s a ruthless guy with no hear t and

Well before I close shop, I must

M icroeconomics is a beautiful

say all is not lost. There are

d a m s e l w i t h a h e a r t o f g o l d.

a n u m b e r o f c ave at s w i t h o u t

(No offence meant towards

which the earlier scenario

any sex. Wall Street, the mecca

may not play out. The dollar

o f f in an ce is a g eneral l y co n-

though an emasculated cur-

s i d e r e d a p l a c e fo r h i g h t e s -

rency to some extent still

to sterone l evel m en and f ro m

A B OUT

THE

AUT H OR

Mritunjay is an assistant manager with State Tra d i n g Co r p o ra t i o n o f I n d i a Limited. He works in the Bullion division and has completed his MBA from Indian I n s t i t u t e o f F o r e i g n Tr a d e . For quer ies and comments please wr ite to him on: (mr itunjay_ogs@yahoo.com)

a b o ut

the

t h us

$ 4 7 ,0 0 0 .

financial

crisis

has h ave

s uf fe re d

i n c re a s i n g

g ove r n m e nt ’s Th e

p a r t i c ul a r l y

the

I ra q,

re s p o n s i b l e

fo r

90%

fo r

a c t ua l l y

the

a ccou nts

a nd

What is D e b t Ce ilin g ?

INFINEETI | A n n u a l i s s u e 2 0 1 1

INFINEETI | A n n u a l I s s u e 2 0 1 1

in. USA is one of the few coun-

pledging to repay the m o ney

have meant cutting govern-

under way, more must be done

tries in the wor ld where there

once Congress has approved a

m e n t s p e n d i n g d r a m a t i c a l l y,

to pay down the debt. Both

b ud g e t co m m i t te e to f i n d a d d i - i n f l a t i o n . N e g a t i v e n o m i n a l 47 t i o n a l d e f i c i t r e d u c t i o n o f a t i n t e re s t r a t e s o n s h o r t t e r m

i s a ce i l i n g o n t h e s p e n d i n g.

h igh er debt ceil ing and no ti-

coming up with $738 billion

sides accept that the deficit

l e a s t $ 1 .5 t r i l l i o n .

However, according to Warren

f ied Congres s that he w il l be

in new tax revenue (which

needs to be brought under

 I f t h e co m m i t te e f a i l s by l ate i n v e s t o r s a r e s o c o n f i d e n t

Buffet, the debt ceiling is a

out of options after August

is needed to get through

control, but have different

November to find additional about the solvency of the

w a s te o f t i m e a n d s h o u l d b e

2 n d . I f t h e C o n g r e s s d i d n’ t

the fiscal year that ends on

i d e a s a b o ut h ow to g o a b o ut

w ays t o re d u c e t h e d e f i c i t , t h e U.S. Treasur y that they are lit-

eliminated. The first debt

raise t he debt ceil ing by that

September 30th) increasing

it. The main sticking points

f a i l ure wo ul d t r i g g e r a uto m at i c e r a l l y w i l l i n g t o p a y m o n e y

l i m i t was s e t i n 1917 at $11. 5

t i m e , Tr e a s u r y w o u l d n o t

by 66% the $1.1 trillion the

have been the Republicans’

c u t s a c r o s s t h e g o v e r n m e n t t o fo r t h e U. S . Tre a s u r y t o s a fe

b i l l i on and i t has been raised

h ave autho r it y to bo r row any

government is expected to

resistance to tax rises and

take effec t in 2013. Among them keep their money. The down-

74 times since March 1962

m o re m o n e y. A p a r t f r o m t h e

co l l ec t in taxes in the s e co n d

calls for bigger spending cuts

wo u l d b e t h e f i r s t re d u c t i o n i n gra d e will have a shor t te r m

with a maximum of 18 times

failure to pay essential obli-

h a l f o f t h e f i s c a l y e a r. I f t h e

than have been backed by the

D e f e n s e D e p a r t m e n t s p e n d i n g bearish impac t on the market

u nd e r R ona ld R eagan .

g at i o n s l i k e a c t i ve d u t y m i l i -

investors are convinced the

Democrats. The Democrats

i n d e c a d e s.

t ar y, federal wo r k er s, taxpay-

U S w il l no t be abl e to p ay i t s

also want to shield healthcare

 Th e d e a l d o e s n o t i n c l ud e t h e D J IA i n l a s t 1 3 d a y s d o e s n’t

W H AT I S T H E DE B T CEILING

ers due ref u nds af ter s atis f y -

d e b t s , t h e y ’ l l s e l l Tr e a s u r y ’s

p ro gra m s fo r t h e e l d e r l y a n d

R e p ub l i c a n s’ g o a l o f re q ui r i n g a m e a n t h e w o r l d i s f a c i n g a

CRI S IS ALL ABOUT ?

ing existing interest payments

to avoid the risk that the

p o o r f ro m t h e c ut s. Fi n a l l y o n

balanced-budget amendment. I t d o u b l e d i p a l r e a d y ( n o t y e t

to bondholders, Medicare

g o ve r n m e n t m i g h t n o t m a k e

Aug us t 1 s t, t h e U.S . H o us e o f

a l s o l e a ve s o u t t h e D e m o c r a t s’ at l e a st) bu t it is growing at

payments, Social Security pay-

good on them. That would

R e p re s e nt at i ve s p a s s e d a b i l l

plan to end some tax cuts for the a slow pace and investors are

d r i v e Tr e a s u r y p r i c e s d o w n

t o r a i s e t h e c o u n t r y ’s d e b t

we a l t hy.

and push interest rates up,

ceiling in exchange for cuts

raising the borrowing costs on

i n g ove r n m e nt s p e n d i n g.

O n 1 6 t h M ay, 2 0 1 1 U n c l e

ever ything from mor tgages to cars. H igher rates would likely

T- B i l l s d e m o n s t r a t e t h a t

ce r t a i nly , bu t the 15% fa ll in

shifting to safer assets like g o l d.

The United States lost its topt i e r AAA c r e d i t r a t i n g f r o m ABOUT THE AUTHOR

US DEBT DEAL FACTS

Standard & Poor ’s on 6th August Tir thakrit is student at Indian

s l ower the eco no my w h i c h i s

a f t e r t h e p o l i t i c a l b a t t l e t h a t I nstitute of Foreign Trade. He

already recovering at a less

t o o k t h e c o u n t r y t o t h e b r i n k tracks different commodities

than expected slow pace

o f a d e f a ul t. S & P l owe re d l o n g - and uses his sk ills of analys-

even after two back to back

te r m s ove re i gn c re d i t rat i n g o n i n g s to c k s e f fe c t i ve l y i n t h e

Q u antitative E as ing.

t h e U n i te d St ate s to ‘AA+’ f ro m mar ket.

Barrack Obama cannot raise

‘AAA’ a n d a f f i r m e d t h e ‘A - 1 ’

the debt limit on his own

shor t-term rating. In my opinion,

S a m’s c re d i t c a rd r a n o u t o f

m e n t s, u n e m p l o y m e n t i n s u r -

because the under the US con-

t h e hyp e a b o ut S & P d ow n gra d -

control and it was maxed

an ce and defens e co ntrac to r s

stitution, all gover nment bor-

ing US is not impor tant at all.

out. The $14.3 trillion limit

, it would also mean affect-

rowing has to be approved by

We a l l k n o w t h e c r e d i b i l i t y o f

on federal borrowing was

i n g t h e g o v e r n m e n t ’s a b i l i t y

Congress, and this has led to a

 It allows the debt ceiling

t h e rat i n g s a f te r t h e f ate o f t h e

reached, which left the

to bo r row q u ic k l y o r at l ower

protrac ted stalemate between

to rise by up to $2.4 trillion

AAA rated assets in 2008, by top

Congress 11 weeks to raise

cost, due to a perception

Republicans and Democrats.

- e n o ug h to k e e p t h e co unt r y

notch rating companies of the

t h e d e b t ce i l i n g o r f a ce t h e

of increased risk in loaning

The R epu bl ic ans, w ho co nt ro l

b o r row i n g m o n e y unt i l 2 0 1 3 .

world. S&P downgraded Japan

w rat h o f f i n a n c i a l c r i s i s 2 . 0 .

money to the US gover nment.

the House of Representatives,

 It includes spending cuts

i n 2 0 0 2 a n d n o t h i n g h a p p e n e d,

Tr e a s u r y S e c r e t a r y T i m o t h y

The economic impact could

insisted that the govern-

t h at co ul d re a c h $ 2 .5 t r i l l i o n ,

not even their rates changed.

Geithner managed to keep

be large due to the US gov-

ment must cut the deficit

to e xce e d t h e a m o u n t o f t h e

The historically low and nominal

America afloat by taking

e r n m e n t ’s v e r y l a r g e r o l e i n

first before any agreement

d e b t ce i l i n g i n c re a s e.

r e a l y i e l d s o n U. S . Tr e a s u r y

“ex traordi nar y measures” by

glo bal m ar k ets. The Co ngres s

o n ra i s i n g t h e d e b t l i m i t c a n

 I t i n i t i a l l y c ut s s p e n d i n g by

securities are signaling loud

suspending payments into

being unable to raise the debt

be reached. The republicans

at least $900 billion over 10

a n d c l e a r t h at i nve s to r s ex p e c t

two federal pension funds,

ce i l i n g by Au g u s t 2 n d wo u l d

feel that with the recover y

years, and creates a bipar tisan

neither default nor significant

INFINEETI | A n n u a l i s s u e 2 0 1 1

INFINEETI | A n n u a l I s s u e 2 0 1 1

CORPORATE DEBT

The Indian Corporate Debt Market- Need of the Hour Varun K h an n a , Pr iya nk a Pa d m a na bh a a n d Pratik Agrawa l

rat i o n i n g c re d i t. Th i s wa s t h e

several

case during the 2008 finan-

t i o n s s uc h a s m a x i m um p o s i -

Debt Market in India.

cial crisis when banks had a

tion exposure, sector expo -

m a i n i s s u e s a m o n g t h e m a re

liquidity problem, where we

s u re e t c w h i c h p l ay a ro l e i n

a s fo l l ows:

s a w a n u n p re c e d e n t e d q u a r -

the lending decisions. Debt

te r- o n - q ua r te r grow t h o f 1 3 0

m a r k e t a l l ows t h e co r p o rate s

1) The demand for corpo-

p e r ce nt i n p r i m a r y d e b t i s s u-

to raise funds directly from

rate bonds is restricted to

a n c e s i n t h e t h i rd q u a r t e r o f

the public bypassing the

only highly rated issues and

2 0 0 8 - 0 9 . Th e e co n o m i c c r i s i s

i nte r m e d i a r i e s.

generally the investors are

India has aggressive targets

thus ser ved to highlight the

f o r GDP g r o w t h r a t e a t 8

impor tance of a robust and

percent to 10 percent per

resilient debt mar ket in I ndia.

annum and would require USD 1 trillion to fund infrastruc-

H ug e I n f ra s t r uc t ure Fun d i n g -

t u re re q u i re m e nt s dur in g t h e

lending

restric-

development of Corporate The

pension funds, commercial M o p p i n g Pub l i c S avi n g s -

banks and insurance compan i e s. The proble m with this is

Co r p o rate d e b t co ul d a l s o b e

that Banks & Insurance com-

an attractive investment alter-

p a n i e s a re limite d by re str ic -

n at i ve fo r i nve s to r s a s i t p ro -

tions on the amount of money

Twe l f th Fi ve Ye ar Plan p er io d.

A developed bond market

vides them with higher returns

t h e y c a n i nv e s t i n Co r p o r a t e

In order to achieve this target,

can be an appropriate route

as compared to time deposits;

Pa p e r.

it requires a massive capital

of channelizing the savings

t h i s wo u l d h e l p i n a cce l e r a t-

for which debt market can

2) Investing in bond gener-

Source: BIS repor t - The internatinal bank ing market 2010

a l l y c a r r ie s t wo k ind s of r isks,

market sector which is con-

m e e t i n g t h e re q u i re m e n t s o f

Credit risk and I nterest risk . I n

Al t h o u g h t h e co r p o rate d e b t

t r ibut in g o nl y aro u nd 1 4% o f

the co r po rate s ec to r fo r l o n g

case of government bonds only

market is an alternative source

the total debt market, a figure

term capital investment and

interest risk exists, however

of funding, it is still at its

ver y less when compared to

as s et c reatio n.

without a well developed sec-

nascent stage in India. The

o t h er co u ntr ies.

co nt r i bu te s i gnif icant ly.

corporate debt market in India i s m e r e l y 6 . 5 % o f t h e GDP whereas the government debt sector is nearly 40% of the GDP. Thi s fi gu re is ver y in sig-

N e e d fo r a w e l l d e v e l oped debt market funding the Indian G row th Sto r y-

nificant when compared to

o n d a r y m a r k e t fo r c o r p o r a t e Spare Tire Theor y- A much

bonds, both Credit risk and

cited simile coined by Alan

Interest risk are present (An

Greenspan (2000) is that

efficiently functioning sec-

bond markets can act like a

o n d a r y ma r ke t syste m, whe re

â&#x20AC;&#x153;s p a r e t i r eâ&#x20AC;?, s u b s t i t u t i n g f o r

t ra d e s a re s e t t l e d a n d w h e re

bank lending as a source of

the clearing system ensures protection from default by

that of in US, South Korea,

A re a s o n a b l y we l l d e ve l o p e d

corporate funding at times

B r a z i l. Th e t a b l e b e l ow gi ve s

bond market could supple-

when banksâ&#x20AC;&#x2122; balance sheets

o f t h e co u nt r y i n c a p i t a l fo r-

i n g t h e m o b i l i s at i o n o f f un d s

individual market partici-

the government and corpo-

ment the banking system in

are weak and banks are

mation. A constraint in bank

to savings which again can be

p a nt s, e ra se s the cre d it r isk).

r a t e d e b t a s a p e rc e n t a g e o f

funding of infrastruc ture proj-

used in the investment by the

GDP for di ffe re nt co unt r ies.

ec ts is the long term nature of

co m p a n i e s co n ce r n e d.

o f l i q u i d m a r k e t f o r CD S

the infrastructure funds which The table gives the corpo-

cause an asset liability mis-

r a t e d e b t a s a p e rc e n t a g e o f

m atc h fo r b a n k s.

the total debt. It is evident fro m the fi gu re s t h at I n dia is tries in the corporate debt

Reasons for failure of Cor porate D ebt M ar ket i n I nd i a

The banking industry faces

(Credit Default Swap) and other interest rate options have prevented investors from g e t t i n g i nto t h e d e b t m a r k e t

B a n k Fun d i n g R e g ul at i o n s -

lagging far behind other coun-

3) Risk Management: Absence

There are number of issues

as a whole. These inter-

which have prevented the

est rate instruments help in

INFINEETI | A n n u a l i s s u e 2 0 1 1

INFINEETI | A n n u a l I s s u e 2 0 1 1

l owe r gra d e bond s a s we ll.

he d gi ng s ome o f t h e r isk an d

from issuing bonds to retail

& FCC B ’s . T h e p r o b l e m w i t h

b o n d s h a d to b e rate d by t wo

2 5 % h a i rc ut to co nt a i n l e ve r-

a re s ought af te r gen erally by

investors (either directly or

a n i l l i q u i d m a r k e t i s t h at t h e

c re d i t a g e n c i e s. Th e s e n o r m s

a g e ) . T h i s m o ve wo u l d a g a i n

investors purchasing corpo-

through mutual funds), and

investor cannot get his money

we re re l a xe d by S E B I i n 2 0 0 7 ,

increase liquidity which is

A n e f f i c i e n t d o m e s t i c co r p o -

rate d e bt.

to long-term investors like

bac k and is expo s ed to i nte r-

thereby allowing more cor po -

much needed in the corporate

rate bond market needs to

insurance companies, provi-

es t rate r is k if he ho l d s o n t i l l

rate to raise money through

b o n d m a r k e t.

h a v e g r e a t e r t r a n s p a r e n c y,

dent and pens io n f u nds.

the m atu r it y. Al s o the re i s n o

d e b t a n d l owe r t h e co s t o f a l l

pro per pr ice dis cover y a n d i t

co r p o rate d e b t i s s ua n ce s.

4 ) Ta x D e d u c t e d a t S o u r c e ( T. D . S . ) h a s b e e n a n o t h e r

pr i ce d iscover y, credib le 4) Risk of corporate debt

rating agencies, wide range of

can be managed by hedging

corporate debt securities, effi-

2) SEBI recently simplified doc-

their credit or default risk.

cient disclosure norms for cor-

umentation and disclosures

Introduction

hedging

p o rate s a nd a wid e r ra nge of

8) One of the most impor-

for companies which are listed

Instruments such as Plain

investors with varied risk pro -

tant m is s ing l ink s is a M a r k e t

o n a n I n d i a n exc h a n g e. Th e s e

Va n i l l a C r e d i t D e f a u l t S w a p s

files. This would not only help

Maker who offers two way

listed companies now have

(CD S ) i s b e i n g co n s i d e re d by

create an impor tant alterna-

quotes for trading in corpo -

minimal additional disclo-

the RBI.

tive funding source in times

rate bo nds, j u s t as it i s b e i n g

s ure s re q ui re m e nt s fo r p ub l i c

do ne in c as e o f G -s ecs w h i c h

i s s ue o r p r i vate p l a ce m e nt o f

i ss u e whi c h ha s h in dered t h e

6) The corporate bond market

leads to improper valuation of

growth of d e bt mar k et. Af ter

is quite fragmented as the

the bo nds.

recommendation by the RBI

bonds are issued as and when

t o GOI , i t w a s a b o l i s h e d f o r

money is required .The compa-

of disruptions in sources of 5 ) To i n c re a s e l i q ui d i t y i n t h e

ex te r n a l fina ncing, bu t wou ld

have increased their liquid-

also reduce the cost of capital

i t y. M a r k e t m a k e r wo u l d a l s o

fo r c o r p o r a t e s. I t w o u l d a l s o

help in greater price discov-

diversify sources of debt

e r y, l i q u i d i t y a n d i n s u r a n c e

funding for corporates and

ag ains t def au l t.

enable greater transparency i n p r i c i n g o f c r e d i t r i s k . Fo r

9 ) T h e d e m a n d fo r i s s u a n c e s

c re at i n g a v i b ra nt a n d t ra n s -

o f co r po rate bo nds is l i m i te d

parent corporate debt market,

f r o m t h e b a n k i n g s e c t o r, a s

i t i s i mpor ta nt that a ppropr i-

b a n k s p r e fe r g i v i n g l o a n s t o

a t e p o l i c y r e fo r m s a r e i n t r o -

buying bonds as bonds are

d u ce d to p u t i n p l a ce n e ce s -

G o ve r n m e n t b o n d s, h o we ve r

nies prefer private placements

marked-to -market, which may

sar y market infrastructure that

i t s t i l l c o n t i n u e s t o e x i s t fo r

route rather than public issue

lead to negative impact on

would facilitate the growth of

corporate bonds, but insur-

wh ich res u l ts into c reatio n o f

the balance sheets of banks

an ac tive primar y and second-

ance

companies/pension

large number of small debt

(erosion of capital) due to

a r y co r porate bond ma r ke t.

fu nds have be e n sp ared. Th is

issues. This m ak es the m ar k et

n e g a t i ve m ove m e n t o f i n t e r -

par tial treatment makes it dif-

illiquid.

es t rates.

f i c u l t to i n t ro d u ce a u n i fo r m computerized trading system.

7) Th e l iq u idit y o f the co r po rate bond markets has been an

5) Stamp duty has been one

i s s u e a n d t h e re i s a p re s s i n g

o f t h e m a j o r d e t e r re n t s a s i t

need for a robust exchange

is levied both at the time of

traded secondary market.

i s s u e a n d t r a n s f e r. A l s o t h e

Th e l a rg e r a n d c re d i t wo r t hy

s t a m p dut y a ppl icab le dif fers

Ste p s t a k e n to a d d re s s some of the issues, rev ive th e bo n d mar ket a n d th e ro a d a h ead

corporate debt. These posi-

s e c o n d a r y m a r k e t fo r c o r p o -

tive initiatives have lowered

rate debt, Current Primar y

the cost of issuances and have

Dealers who act as Market

m a d e t h e d e b t m a r k e t at t ra c -

m a k e r s fo r g ove r n m e nt s e c u-

t i ve fo r co r p o rate.

rities could be utilized for m a r k e t m a k i n g o f h i g h r a te d

3) Recently the corporate

bonds as a pilot test. If the

1) Before 2007 only bonds

b o n d s h avi n g a rat i n g o f “AA”

experiment leads to increase in

co r p o rate s f i n d i t c h e a p e r to

having

or above have been allowed

s e co n d a r y t ra d i n g by at t ra c t-

according to the class of inves-

raise bonds in the interna-

Investment Grade or above

to be used in the Repo market

i n g t h e i n t e re s t o f i nve s t o r s,

to r s d i s co u ra gi n g co r p o ra te s

t i o n a l m a r k e t t h r o u g h EC B ’s

could be issued. Moreover

a s co l l ate ra l ( w i t h a m i n i m um

t h e i d e a c a n b e re p l i c ate d fo r

credit

rating

ABOUT THE AUTHORS Authors are students of Indian I n s t i t u t e o f F o r e i g n Tr a d e - Kolk ata.

INFINEETI | A n n u a l i s s u e 2 0 1 1

INFINEETI | A n n u a l I s s u e 2 0 1 1

Interview

Honest Answers Tea m I nf ineet i t a l k s to Joy Bh atta c h a r j ya , CEO o f Kolk ata K nig ht R ider s a bo ut r un n in g th e s po r ts bus in es s a nd hi s a sso c iatio n w it h quizzin g

our marketing ability; just

Premier League. Any club

Q. A s t h e o w n e r o f t h e t e a m

that Shah Ruk h is a mar keting

h a s l i k e 2 0 c o m p e t i t o r s . Yo u

i s t h e re a conflic t of inte re st?

a n d a d ve r t i s i n g g e n i us.

might watch all the Chelsea

Fo r ex a mple, Arse na l ha s not

m a tc h e s i f yo u a re a C h e l s e a

won the league in the last few

Q. W h e n i t c o m e s t o a d v e r t -

supporter and three-four

years but still they are mak ing

i n g a n d m a r k e t i n g, KKR i s t h e

o t h e r b i g g a m e s . S i m i l a r l y,

m o n e y.

t e a m t h a t i s m o s t p ro m o t e d.

ove r t h e ye a r s, we ex p e c t t h e

Te l l u s s o m e t h i n g a b o u t t h e

KKR s u p p o r t e r s w i l l w a t c h

A. The beauty of the IPL teams

p ro m o t i o n m e c h a n i s m .

a l l t h e KKR g a m e s a n d f e w

is that ever yone has $9 million

other games on the week-

t o s p e n d. Yo u h a ve t o s p e n d

A. Mohun Bagan and East

ends. Therefore, viewership

your $9 million. No franchi-

Archie and Arjit from our team

i t s e e m e d t o s u i t b o t h o f u s.

A l s o t h e r e i s a s h e e r e xc i t e -

B e n g a l h a ve b e e n i n K o l k a t a

will come down. But once

see can spend $5millionn

got the opportunity to talk

S o n o w, I h a v e b e e n t h e r e

ment. When I joined television

for so long. So, the people

it comes down, it will stabi-

and keep $4million because

wi t h M r. J oy Bhat t ach arjya o n

f ro m pa s t 4 year s.

in 1995-96, most televisions

here understand the meaning

l i ze. Wh e re we g e t n ow h e re i s

their fans by and large will be

were just starting in India.

o f s u p p o r t i n g a c l u b . KKR

merchandising and even tele -

a g a i n s t it a nd a sk why d id n’t

the way to INQUIZITION where he was the q u i z master. Here

Q. So how do you like work ing

Similarly here, right now, pro -

is the only real big sport-

vision deals. There are huge

they spend it. The problem

is the conversation for our

wit h t h e team ?

fessional club spor ts is just

i n g u n i t i n t h e c i t y. S o m a ny

o p p o r t u n i t i e s i n m a ny o t h e r

arises when I am making 1

s t a r t i n g. S o e x p e r i e n ce w i s e,

people who were born and

sectors. Manchester United

rupee and spending 3 rupees.

you can compare it to star t-

brought up here, have left.

makes 35-36% of their revenue

T h a t w i l l n o t b e s u s t a i n a b l e.

i n g M a n c h e s te r U n i te d w h e n

The entire diaspora is inclined

f r o m t i c k e t s a l e . Tr y b u y i n g

The small teams of the English

it s tar ted. I t is im po r t a nt g e t

t o w a r d s s o m e t h i n g l i k e KKR

a Manchester United season

League cannot spend the k ind

your basics right. You may win

b e c a us e i t t h e i r b i g g e s t h o l d

ticket – it is close to impos-

of money that Chelsea spends.

a few and yo u m ay l o s e a fe w

o n to We s t B e n g a l. Wh e n yo u

s i b l e. Th e b us i n e s s m o d e l s o f

H o w e v e r, w h e n t h e s e b i g

but if you create a create a

h a ve p l a ye r s l i k e S h a k i b a n d

a l l IPL te a m s m us t e vo l ve l i k e

s p e n d e r s a re g o n e, s u d d e n l y

c u l t u r e, i t w i l l s t a y t h e r e fo r

Shah Rukh, you have a huge

t h at.

yo u w i l l olla pse. M od e ls have

the next for ty years. That is

s u p p o r t e ve n i n B a n g l a d e s h .

m o re im po r tant.

Th at i s w hy - i t i s a ve r y i nte r-

Q. S o, t h e b u s i n e s s m o d e l o f

yo u a n o t h e r b e t t e r e x a m p l e.

esting point – a team from

IPL t e a m s w o u l d b e l i k e t h e

The Indian Football Federation

re a de r s.

I n a countr y like I ndia, spor ts comes only af ter the basic needs have been met. The tragedy lies in the fac t that despite the bad state of I ndian spor ts bodies, spor tspersons have excelled in their respec tive fields.

t o b e s u s t a i n a b l e. I w i l l g i ve

Q. Sir, tell us about your asso -

A. It is an amazing team.

Q. K o l k a t a K n i g h t R i d e r s a r e

Punjab calls itself the King’s XI

b u s i n e s s m o d e l s o f t h e EPL

star ted the I-league. Three

ciation with Kolkata Knight

Let me tell you something.

a p p r e c i a t e d f o r t h e i r b r e a k-

Pun j a b. Th e y d o n’t c a l l t h e m -

te a m s ?

years back Priya Ranjan Das

R i d e r s ( KKR ) a n d t h e j o u r n e y

If India loses, you definitely

even. Your comments on that.

selves Chandigarh because

s o far.

feel bad about it but you

Munshi was the head of the

Chandigarh is a very small

A . Th e y c a n n o t ex a c t l y b e t h e

AIFF a n d t h e O i l M i n i s t e r.

have to put your spirit up.

A. The sponsors were not

p a r t o f Pu n j a b. Th e y w a n t t o

s a m e. EPL t e a m s a r e p l a y i n g

ONGC p a i d s i x c ro re s fo r t h e

A. I have been in sports

When you are working with

buying K olk ata K night R iders,

a p p e a l to t h e e nt i re d i a s p o ra

l i k e 9 - 1 0 m o nt h s a ye a r w h i l e

sponsorship. Once M r. Munshi

for a ver y long time. I have

a team yo u g o thro u g h m u c h

they were bu y ing S ha h R uk h .

o f Pun j a b, w h i c h i s h ug e a n d

IPL t e a m s d o n’ t . R o u g h l y a

f e l l i l l , ONGC s a i d t h e y a r e

wo r ke d i n ESPN fo r 7-8 years.

h igh er hig hs and m u c h l ower

Shah Rukh alone brought

s p re a d a l l ove r t h e wo r l d.

sports franchise makes its

not interested in football.

KKR c a m e t o m e l o o k i n g

l ows. I f yo u t h i n k a b o u t i t, i t

c r o r e s . We u s e d t o t h i n k w e

m o n e y f ro m t i c k e t s a l e s, m e r-

Only profitable systems are

for someone to understand

is tough when you lose by 2

w e r e f a n t a s t i c i n m a r k e t i n g,

Q. H ow d o yo u s e e t h e o p e r-

c h a n d i s i n g, t e l e v i s i o n r i g h t s

s us t a i n a ble.

the opportunity and how to

r u n s . H o w e v e r, y o u c a n n o t

but the truth is that Shah

ations of the team evolving

and sponsorships. I n our case,

put things for the franchise

show it (your emotions) – if

R u k h is s u c h a big nam e t h at

ove r t h e ye a r s ?

we have to pay a franchi-

Q . KKR p l a y s o n a l o t o n

f o r w a r d . We m e t t w i c e , b u t

the management star ts or the

so many adver tisers wanted to

see fee; we have to pay our

Shahrukh

n o t h i n g w a s s p e l l e d o u t . We

coach star ts showing it then

be a par t o f it. That is w hy we

A. There are two interesting

players and the administrative

what is the expenditure on

s t a r te d wor k i ng to get h er an d

the team feels bad about it.

b ro k e e ve n . I t wa s n o t a b o u t

things. Look at the English

a n d l o gi s t i c co s t s.

a d ve r t i se me nt?

Khan,

hence

INFINEETI | A n n u a l i s s u e 2 0 1 1

INFINEETI | A n n u a l I s s u e 2 0 1 1

INTER V IEW

campus to corporate

A . We do not s pen d o n adver-

kids the opportunities they

well as Twitter, this year publi-

tisements unlike some teams.

were de pr ived o f.

cizing the pre and post match

My Journey with TATA Capital

events. I t is impor tant to note

B u t we do adver t ise t h ro ugh s o c i a l m e d i a a s i t ’s c h e a p .

Q. W h a t d o y o u t h i n k a b o u t

that S o c ial m edia is a p a r t o f

Also for media interaction

Sports Management as a

ever y bo dy ’s l ife now a n d a l s o

we h ave o u r m e d i a p a r t n e r s.

sub jec t o r a c areer ?

ever ybody feels he/she is a

M ehak G and hi , M anagement Trai nee, Tat a Cap it al Ltd.

par t o f s o c ial m edia.

IPL b y i t s e l f i s a b i g e n t i t y t h a t i t d o e s n’t re q u i re m u c h

A. It has already been intro-

o f a dve r ti s i ng as it at t rac t s a

duced in the system. Although

Q. We g o t a n o p p o r t u n i t y

l o t of publi c i t y. M any a t imes

i t ’s a l u c r a t i v e i n d u s t r y, t h e

to participate in a quiz con-

it happens that we need to

response hasn’t been as

ducted by you. What is your

control those outcomes due

go o d. I t is l ik e an adver tis ing

t a k e o n t h e Q u i z z i n g c u l t u re

to this publicity rather than

Industr y 25 years ago when

in I ndia w ith u s.

a i r i n g ou r prod uc t s.

there was no specialization for

hen I landed in

w a s s o i n s p i re d by t h e g l o r i - r a n g i n g f r o m R o a d w o r k t o a

M u m b a i o n a r a i ny

o us h i s to r y o f t h e gro up t h at Te l e c o m To w e r Pr o j e c t t o a n

Sunday evening,

I w e n t a h e a d a n d r e a d t h e Air po r t to a S olar Powe r Plant

l i t t l e d i d I k n o w t h a t my l i fe

much-acclaimed books by Shri t o s e t - u p o f a n e w c e m e n t

would be transformed the

R.M. Lala, an esteemed author f a c to r y. I n f ra s t r u c t u re i s o n e

n ex t d ay, w h e n my j o ur n e y at

on the resplendent Tata Stor y. o f t h e k e y s e c t o r s i n I n d i a

it and the industr y was scepti-

A. My first interaction with

Tata Capital would begin with

today and there is an ocean of

Harsha ki Khoj was your

cal ab o u t s u c h s pec ial izatio n.

serious Quizzing happened

the induction programme.

At Ta t a Ca p i t a l, M a n a g e m e n t o p p o r t u nitie s we a re ta pping

brainchild. How was the expe -

Th ere a re eno u g h o ppo r tu ni-

when I reached 1988 India

D u r i n g t h e we e k- l o n g i n d u c -

Tr a i n e e s u n d e r g o a u n i q u e i n t o . E v e n a s a n e w c o m e r,

r i e n ce ? What i s t h e p o tent ial

t ies to b e devel o ped.

finals. Regarding quizzes, I

tion, we interacted with

Tr a i n i n g P r o g r a m m e o f f o u r I h a v e b e e n e n t r u s t e d w i t h

s et my ow n Q u izzes. I n a ye a r

the top management at the

q u a r t e r l y ro t a t i o n s s p a n n i n g h a n d s - o n w o r k t h a t e n a b l e s

Q Fan s are the co ns u m er s fo r

I nor mally set 6-7 quizzes and

co m p a ny w h i c h co m p r i s e s o f

a year that exposes them to m e t o m a k e a d i f fe r e n c e .

c l u b s. As IPL s e a s o n i s s h o r t,

also choose my own institu-

some of the best brains in the

d i f f e r e n t f u n c t i o n s i n t h e Fr o m d e t a i l e d r e s e a r c h o n a

A . H ar s ha k i k hoj was st ar ted

h o w d o y o u e n s u r e t h a t KKR

tio ns. Tal k ing abo u t q ui z z i n g

financial industr y. The senior-

o r g a n i z a t i o n . To m a i n t a i n H yd ro - Powe r Pla nt to a na lyz-

i n 2 004.I t was a h uge success

is connected with their fans

culture in India, it was more

m o s t m a n a g e r s o f t h e va r i o us

t h e c o n t i n u i t y o f l e a r n i n g , i n g b a l a n ce s h e e t s o f p o te n -

b u t E S PN d i d n’ t d o m u c h t o

t h ro ugh o u t the year ?

p r e v a l e n t a t o u r t i m e s. N o w,

departments

including

t h e f i r s t t h r e e r o t a t i o n s a r e tial clients to attending a day-

with induction of KBC, it has

Commercial & Infrastructure

in the same division, which long conference by Ministr y

for such talent hunt initiat i ves i n futu re ?

c a p i t a l i s e o n i t. I t gi ve s u s a

–

possibility for ever ybody to

A. We have been adver tising on

beco m e m o re s pec ial ize d a n d

Fi n a n ce, I nve s t m e nt B a n k i n g,

is Corporate Finance in my of New & Renewable Energy

be a part of sports industry

social media as well as normal

incentive specific. Also people

Private Equity, Tata Securities,

c a s e . T h i s e n s u r e s t h a t w e to p re pa r ing Cre d it Appra isa l

from outside the field.

media. Normal media is a one

t e n d t o fo r g e t t h a t Q u i z z i n g

Co n s um e r Fi n a n ce & Ad vi s o r y

g e t to ex p e r i e n ce t h e va r i o us M emorandums to brainstorm-

India is in a better situation

way produc t and Social media

i s n o t o n l y a b o u t K n ow l e d g e

S e r v i c e s a n d Ta t a C a r d s &

p ro f i l e f a ce t s – S a l e s, Cre d i t , i n g w i t h m y t e a m o v e r n e w

n o w, s h o w s l i k e t h i s w i l l b e

is all about k nowledge. S ocial

but also about Intelligent

Fo re x S e r v i c e s – s h a re d w i t h

O p e r a t i o n s , R e s e a r c h a n d s o ideas to grow, the var iet y and

se en more i n the n ear f ut ure.

Media is the one which fans

G u es s ing.

us not only the finer aspects

o n i n o r d e r t o u n d e r s t a n d depth in the wor k is a motiva-

I t i s ve r y i m por t ant to un der-

us e to vent ou t their fr u stra -

o f t h e i r p ro d uc t p o r t fo l i o b ut

t h r o u g h r e a l - l i f e e x p e r i e n c e tion in itself. Today, I can con-

stand that in a country like

t i o n . T h e c h a l l e n g e f o r KKR

t h e i r s t rate gi c i nte nt a s we l l.

w h e re o ur p a s s i o n l i e s. I c ur- f i d e nt l y say that I u nd e rsta nd

I ndia, spor ts comes only af ter

an d o t her team s is to rem ain

The induction also included

r e n t l y w o r k w i t h t h e Pr o j e c t the end process of financing a

their basic needs have been

i n t h e e ye s o f t h e p e o p l e fo r

a d ay- t r i p to t h e re ve re d Tat a

Fi n a n c e t e a m a t N e w D e l h i , large projec t – right from lead

m e t . T h e re a l t r a g e d y l i e s i n

the rest of 9 months which

M a n a g e m e n t Tr a i n e e C e n t r e

where we provide long term generation to client interac-

t h e f ac t that d esp ite t h e b ad

can be easily done through

( TMTC ) a t P u n e w h e r e w e

f i n a n c e fo r e s t a b l i s h i n g n e w t i o n t o e v e r y s t e p o f d o c u -

st ate of I ndi a n sp o r t s b o dies,

s o c i a l m e d i a . A l s o, t h e c o s t

reconnected with the rich

i n d u s t r i a l a n d i n f r a s t r u c t u r e m e nt at ion to cre d it a ppra isa l

s p o r t s p e r s o n s h a ve e xc e l l e d

fac tor plays an impor tant par t

va l ue s o f t h e Tat a G ro up a n d

p ro j e c t s a s we l l a s fo r ex p a n - to the final disbursal of funds.

in their respective fields. Now,

i n d e c i s i o n m a k i n g. KKR h a s

got an insight into the lives

sion, diversification and mod- This k ind of learning has been

people are tr ying to give their

b e e n a c t i v e o n Fa c e b o o k a s

of our legendar y leaders. I

ernization of existing projects, p o s s i b l e o n l y b e c a u s e o f t h e

We t h a n k M r. J o y f o r t a k i n g time off for us. Hope our readers enjoyed the candid chat.

INFINEETI | A n n u a l i s s u e 2 0 1 1

INFINEETI | A n n u a l I s s u e 2 0 1 1

m o n t h s. D e s p i t e t h e i r h e c t i c

a n d M r. A m o l D a l v i , D e p u t y

schedule, they were more than

Vice President, Controllership

Internship with TATA Capital

h a p py to t a k e m e un d e r t h e i r

depar tment for having guided

w i n g a n d m a k e my i n i t i a t i o n

me throughout my tenure.

S un a n da n S r idh a ra n

b r i lli a nt, e ncou ragin g super i-

summer internship

ors and talented teammates I a m pr i v i le ge d to wo r k wit h . At Tat a Ca p i t a l, we fo c u s n o t o n l y o n w h at we d o b u t h ow we do it. The journey is as i m p or tant a s the dest in at io n . That is where the discern-

smooth and hassle free. As the we e k p ro gre s s e d, I e n gro s s e d

Along with the knowledge

mys e l f i n my p ro j e c t , h o p i n g

that I gained from working

to produce quality work

with industry experts, my

which would reflect well

learning in terms of under-

on me and my institute.

standing corporate culture

o pro fes s k now l edg e is

apprec iated fo r it, is a n exc i t-

one thing, bu t to pu t it

ing one indeed. Moreover, it is

in to practice is another

a pr iceless oppor tunit y to get

M y p ro j e c t p r i m a r i l y i nvo l ve d

m o r e s o. M y f r e q u e n t i n t e r -

we do, we ensure that we set a

e n t i re l y. At a B - S c h o o l, a

s o m e exper ience u nd e r o n e’s

preparing presentations to be

actions with my mentor and

benchmark for trust and integ-

st udent is expo s ed to nu m er-

belt. It was these and more

p re s e n t e d b y t h e CFO t o t h e

te a m m e m b e r a n d t h e i r va l u-

rity in a world where profits

ous concepts, theories and

tho u g hts r u nning in my m i n d

board on The Annual Audit

able inputs have helped in

often dominate principles and

techniques and while one

that I approached my first day

and Consolidated Results. I

b ro a d e n i n g my h o r i z o n s a n d

where grand financial insti-

can duly imbibe them over

at Tata Capital. My mentor had

wa s a l s o a s s i gn e d t h e t a s k to

helped me discover avenues

t u t i o n s h a ve c r u m b l e d w h e n

t h e co ur s e o f the c u r r ic u l u m ,

been kind enough to talk to me

va l ue a f i n a n c i a l a s s e t i nve s t-

that I never knew existed.

i n g v a l u e s o f t h e Ta t a G ro u p g u i d e o u r p a t h . We n o t o n l y s t r i ve fo r e xc e l l e n c e i n w h a t

is equally important, if not

they diverted from ethical

m e n t b y Ta t a C a p i t a l f o r

d e v e l o p m e n t . To s a y t h a t

purpose of ascertaining the

To w a r d s t h e e n d o f m y t w o

Ta t a C a p i t a l i s a n e m p l o ye e -

i m p a i r m e n t f i g u re s fo r p re p -

m o n t h s a t Ta t a C a p i t a l , I

friendly company would be an

aration of financial state-

was required to make a pre -

understatement. I can say it

m e nt s. I t wa s t h e f i r s t t i m e, I

sentation of my work to my

t h ro u g h p e r s o n a l e x p e r i e n ce

they must be applied in the

p r i o r to my j o i n i n g h i s te a m ,

got to use valuation models

mentor and the HR team. I

t h at the H R te a m go es o ut o f

re a l wo r l d to b e t r u l y a p p re -

w h i c h h a d g i ve n m e a v a g u e

and apply my classroom learn-

wa s p l e a s e d to n o te t h at t h e

t h e way to e n s u re t h at e ve r y

ciated. The summer intern-

i d e a o f w h at wa s i n s to re fo r

ing. It was at this moment

management showed keen

employee is listened to and

sh ip ac t s as a prec u r s o r, bo th

me. Never theless, I was still

that the importance of what

interest in the presenta-

genuinely valued. Even within

for the students as well as the

apprehens ive and ner vo us a s

is taught to us dawned on me.

tion. In conclusion, my time

only 4 years of the Tata Group

i n d u s t r y. Fo r u s , i t i s a t a s t e

I walked up to repor t to my

Af te r my i n i t i a l we e k l y p ro g -

w i t h Ta t a C a p i t a l h e l p e d m e

foraying into the financial ser-

o f t h i n g s to co m e, a g l i m p s e

m ento r. I t was c l ear f ro m t h e

ress reports were appreci-

augment my k nowledge and

v i ces dom ai n wit h t h is NB FC,

o f t h e f u t u r e. Fo r t h e i n d u s -

ver y first moment that he had

a t e d b y my m e n t o r, I g a i n e d

opened new paradigms of

t he re s ults a re th ere fo r all to

t r y, i t i s a c h a n c e t o a s s e s s

a defined roles and respon-

confidence in my ability to

thought. I am proud that I was

see. I feel ver y for tunate to

the next crop of managers

sibilities assigned for me. I

make a meaningful contri-

a b l e t o m a k e a p o s i t i ve c o n -

b e a p a r t o f t h i s c o m p a n y ’s

wh o wil l be indu c ted into the

was bo th pro u d and te r r i f i e d

bution during my tenure.

tr ibution dur ing my time with

growth in its initial years. The

corporate world in about a

to find out that the project

current oppor tunities here,

year. Fo r a f res her l ik e m e, fo r

assigned to me was among

During the latter stage of

believe that this two month

along with the learning and

whom the internship is his/

the key deliverables of the

my project I was asked to

e x p e r i e n ce w i l l p rove i n s t r u -

exposure, are unmatchable.

her first brush with the cor-

Controllership Department.

exe c ute a fe w m o re t a s k s t h at

m e n t a l i n t h e ye a r s to co m e.

M y j o u r n e y s o f a r w i t h Ta t a

po rate wo r l d, the pro po s itio n

Capital has been a truly enrich-

can be quite daunting and

I wa s l ate r i nt ro d u ce d to t h e

the organizations require-

ing experience and I know

challenging. But, the pros-

other members of my team, my

ment. I would particularly

t h i s i s o n l y t h e b e g i n n i n g…

pec t o f m ak ing o ne’s m ar k o n

c o l l e a g u e s w h o m I wo u l d b e

l i k e t o t h a n k M r. R a k e s h

one’s organization, and being

wor k ing with for the nex t t wo

Bhatia, Financial Controller

the organization and firmly

aligned my interests with

INFINEETI | A n n u a l i s s u e 2 0 1 1

CRO SSWORD

ACROS S

DOWN

1 : R o g e r a l o n e i s n o t w h at t h i s p l a ce i s

2: I ndian watc hdo g (4)

fa m ou s for ( 5)

3: B er nank e’s f am o u s s tu dent (7)

3 : J ohn M ay na rd ________ (6)

4: Ag enc y q u ic k er than S & P to c u t U S to

5 : M i s le adi ng s cent in f in an ce? (3, 7)

s ize. (4 , 5 )

7 : GNP le s s d e preciat io n (3)

6: Co s t o f inac tio n (11 )

1 0 : Flowe r name less o n e let ter(4)

8: Vir tu al s to rag e (5 )

1 1 : R e a lm of the “K in g o f Wall St reet ” (7 )

9: Lo ndo n bas ed v ital benc hm ar k (5)

12: $70bn is what this company raised in

11 : L au reate m ade by hedg e f u nd f ail u re ( 7 )

i t s 2010 IPO ( 9)

13 : S hareho l der s’ prero g ative (5 )

1 5 : M ar r i a ge of equals, so to speak (6)

14 : N ovel s u bs c r iptio n m etho d (4 )

16: Lightning in Dalal Street? (Hint: Think co m pu te r s ) ( 4)

B y : R a h ul Jaya s a n k a ra n

1 7 : D e fu nc t woods (7)

R ahu l is a s tu dent o f IIFT K o l k ata