IIFT InFINeeti Annual Issue 2012 by Zigu MBA

THE F INA NCE MAGAZ I N E OF I I FT

S E P TE M BE R 2012

ANNUAL ISSUE SHOULD BANKS BE GIVEN MORE AUTONOMY? ENHANCING LIQUIDITY IN THE INDIAN DEBT MARKET - A PANACEA

MIST

BRICS

INDIAN TAX REFORMS

A n a l ys is - I m p a c t o f B a s e l 3 n o r m s

InFINeeti Annual Issue | September 2012

I NF O

M E E T TH E TE AM

E D I TO R - I N - C H I E F

SHILPI GHOSH is special-

S o u mya J yoti S en

izing the fields of marketing and finance. She has

E ditorial board

interned with Merck Sharp

R o hi t K hattar

& Dohme in the critical care

Pi y u sh M a r wa ha

division. She plans to work

R i te sh G upta S o u rav Datta R I T E S H G U P TA i s s p e c i a l i s A SSO C IAT E E DITORS

ing in field of finance. He

Ved i k a G a ne r i wala

has interned with Religare

S hi l p i G hos h

Enterprises Limited in the corporate

CO N TRIBUTIO N S FR OM

sion.

A a k anks ha H ajela

services plans

Banking

and

diviwork

finance

B h u sha n k anath e M d. Uma i r Ans ar i

P I Y U S H M A R WA H A i s a s o f t -

Va i bhav G arg

ware engineer with keen interest in finance. He has interned

design

in Trident Limited in forex divi-

Tea m I nFIN e e ti

sion. He regularly tracks stocks and commodities markets.

feedback / q ueries i nfi n e e ti @i i f t.ac. in i nfi n e e ti @gma i l. co m

S O U R AV D U T TA i s a g r a d uate of NIT Durgapur with diversified interests. He has

Pu b l i s h e d m o n t h l y b y s t u d e n t s o f I n d i a n I n s t i t u t e o f Fo r e i g n Tr a d e , New D elhi and Kolk ata

interned with L&T in the field of Risk Management.

A L L RIG H TS R E SER VED ROHIT KHAT TAR is specializing i n Fi n a n c e . H e h a s i n t e r n e d with Tata Consultanc y Ser vices in its Financial Solutions business unit. Post graduation, he intends to work in the Fi n a n c i a l S e r v i c e s i n d u s t r y.

InFINeeti Annual Issue | September 2012

MES SAG E F R OM T H E E DI TOR- IN - CH IE F

CO NTENTS

I n t h e c o v e r s t o r y, o u r

of discussion among bank ing industr y exper ts

editorial team presents

a b o u t t h e p re re q u i s i te s fo r t h e s m o o t h f u n c -

the new era of regulation

tio ning o f the s ec to r. S o m e has pu t s t re s s o n

i n b a n k i n g i n d u s t r y. Th e

severe regulations whereas some are in favour

issue talks about the pros

of automation as the need of the hour. To forge

and cons of monetary

ahead, indu s tr y l eader s s ay bank s mus t i n n o -

policy in India and the

vate w hil e appl y ing the l es s o ns o f t h e g l o b a l

ways to enhance liquid-

financial crisis. To do this, banks are encouraged

it y in the market. I t also takes a closer look on

t o e m p l o y “d i s c i p l i n e d i n n o v a t i o n ,” p u r s u i n g

t he t a x re for m s wit h a fo cus o n do llar as the

grow th thro u g h reas o nabl e r is k s. Th i s e d i t i o n

wo r l d ’s re s e r ve cur ren c y.

m a i n l y re vo l ve s a ro u n d t h i s i s s u e k e e p i n g i n

The banking industr y all over the world is

f a c e d i n t h e I n d i a n s c e n a r i o.

rency for nations but with

The ar ticle presents a detailed

the focus shifting to the

v i e w o n t h e n e e d fo r a l i q u i d

developing

debt market and the necessar y

Asia, has dollar lost its wor th

steps to enhance liquidity in

as the reserve currency?

Happy R eading ! !

With Warm regards, Team I nFINeeti

3 nor ms and their impac t on I ndian banks has b ee n a na ly ze d. As banks strive to emerge from the global fi n a n c i a l c r i s i s, t h ey are en co unter in g a new

I ndian mar kets.

Soumya Sen is specializing in f i n a n c e a n d t r a d e. H e h a s i n t e r n e d at ICF International and has deep interests in corporate and trade finance.Post his MBA,he wants to pursue a career in banking.

R EGUL A R S

Fo r y e a r s , t h e U S d o l l a r h a s

countries

40 FUN WITH FIN

29 GLOBAL economy

BRICS, one of the most promising group of coun-

the cor-

tries is losing its sheen.

Bank ing refor ms is one of the

porate culture and economic

Is this the rise of MIST?

most important issues being

scenario from Barclays Limited

raised in the global financial markets.

analyze

the

G ain insights about

3 7 M O N T H LY C H R O N I C L E S

20 corporate talk

9 Banking

parison of MIST vs BRIC, a detailed explanation

the regular columns, a closer look at the Basel

seved as the reserve cur-

a ll global i nve s to rs. Wit h a rat io n alist ic co m -

h a s b e e n c l e a r l y l a i d o u t . Fi n a l l y a l o n g w i t h

17 World economy

markets and the challenges

cific to investment communit y but relevant to

o f t he ne e d of regulat io n in b an k in g indu s tr y

5 DEBT MARKETS

»» p.17

bank ing indu s tr y in the recent pas t.

u nle as he d. Thi s issue t r ies to address a rang e of timely opportunities and challenges spe -

»» p.11

An analysis of the I ndian bond

the fast-moving economic changes and the host of new oppor tunities and r isks are being

»» p.3

m ind the s everal c hang es inco r po rate d i n t h e s e t t o c h a n g e fo r t h e b e t t e r. I t i s i m p o r t a n t t o e x p l o re t h e p o s s i b l e l o n g - te r m e f fe c t s o f

23 ECONOMY

prospects of banking sector

The indian growth story

being more regulated or more

has hit a major roadblock.

autonomous.

monetary

policy

the

real answer to controlling

13 taxation

inflation?

32 SUMMER

EXPERIENCE

Students from IIFT share their summer internship experience

34 Risk

management

era of bank ing. I t is one marked by continuing

The

regulator y uncer tainty and economic instabil-

struggled

i t y, whi c h i s hi n der in g b an ks’ ab ilit y to m ove

part of FY13. It has list its

With the introduction of

agement in banking seems

for ward.

The banking industry has been

attractiveness as a business

BASEL III nor ms, the bank ing

t o b e t t h e n e e d o f t h e h o u r.

facing lots of ups and downs over the past

destination. India is working

industr y across the globe is

How will it be effective

fe w ye a r s. Wi t h s c a n d a l s h a p p e n i n g a l l ove r

on two major tax reforms.

tr ying to analyze the impact of

in the present landscape?

the world like LIBOR rates being rigged, inves-

DTC (Direc t Tax Code) and GST

t h e n e w re fo r m s. We a n a l y ze

tors cannot trust even the world’ s most stable

(Goods and Ser v i ces Tax). The

the impact of the BASEL III

financial institutions. This has generated a lot

ar ticle presents a view on the

nor ms on the I ndian bamk ing

need of the tax refor ms

industr y.

indian

economy for

the

has most

27 BANKING NORMS

With the rising issues in wo r l d e c o n o my, r i s k m a n -

InFINeeti Annual Issue | September 2012

INDIAN E CO N O MY

IND IAN ECONOMY

Enhancing Liquidity in the Debt market : A panacea for India

i n c o r p o r a t e b o n d s, e s p e c i a l l y b o n d s i s s u e d

b a n k f i n a n ce, a b s e n ce of cre d it r isk mitig ation

by the infrastruc ture companies that entail tax

m e c h a n i s m s a n d a h o s t of othe r fa c tors, su ch

incentive. While investors are not shy of debts

as, absence of sound bankruptc y framework and

i s s ue d by t h e to p rate d f i r m s, t h e y a re re l uc -

l a c k o f a c t i ve i n t e re s t o f l o n g - t e r m i nve s t o r s

tant to subscribe to the lower rated instru-

like insurance companies. Corporates prefer

ments. This is an anomaly because lower rated

raising funds through private placements as

co m p a n i e s d o h ave a cce s s to b a n k f i n a n c i n g.

against public issuances because of operational

Credit enhancement by banks can perhaps

ease of issuance under private placements with

l ik e ins u rance co m panies, m u tu al f un d s e tc. i n

make such instruments attractive to inves-

minimum disclosures, low cost of issuance and

the

order to increase par ticipation and hence liquid-

to r s. B ut o n t h e f l i p s i d e, c re d i t e n h a n ce m e nt

the speed of raising funds. The issuance process

G over n ment an n o u nces

it y in the I ndian rupee cor porate debt mar kets.

e s s e nt i a l l y i nvo l ve s t ra n s fe r o f t h e c re d i t r i s k

is also impacted by costs, such as, stamp duties,

to banks and this will not only hamper the

transfer costs, etc. which needs rationaliza-

I ntro du c ti o n Whenever

i t s b o r row i n g c a l e n d a r, there is havoc in mar ket

Cur rent Prob lems

development of corporate bond market by

t i o n . Pre fe re n ce fo r p r i vate p l a ce m e nt i s a l s o

with Corporates being

I n d i a’s s o v e r e i g n b o n d m a r k e t s a t i s f i e s t h e

s t unt i n g t h e p r i ce d i s cove r y p ro ce s s b ut a l s o

d i c t a t e d b y t h e p r o f i l e o f i nv e s t o r s w h i c h i s

pushed out and inter-

immediacy and depth conditions only for

i n c re a s e t h e r i s k i n t h e b a n k i n g s y s t e m . T h e

m o s t l y i n s t i t ut i o n a l a n d a na r row ba se at that.

est rates rising thus

“o n-the -r u n” g over nm ent bo nds (i. e., t h e m o s t

fo c us m us t b e o n d e - r i s k i n g b a n k i n g s ys te m ,

m a k i ng pr i vate players lo o k fo r eit h er expen-

recentl y-is s u ed g over nm ent bo nd o f a s p e c i f i c

a n d a t t h e s a m e t i m e, b u i l d i n g / e n c o u r a g i n g

sive bank financing or dollar/euro/yen denom-

m a t u r i t y ) . O t h e r w i s e, t h e d o m e s t i c s ove re i gn

institutions that provide credit enhancement.

N e e d s fo r a n e f f i c i e n t l i q u i d d e b t m a r k e t i n I n di a :

The problem with an inefficient and illiquid

a) Ensuring financial system stability:

The debt ma r kets lack of liquidit y, which makes investor demand higher yields on these bonds. Thus mak ing these mar kets uncompetitive compared to foreign mar kets.

debt market is that it makes companies go o u t s i d e to b o r row t h u s i n c re a s i n g t h e ex te r-

A liquid cor porate bond mar ket can play a cr it-

nal debt of the countr y ; also it makes the debt

i c a l ro l e b e c a u s e i t s u p p l e m e nt s t h e b a n k i n g

m o re p ro n e to c h a n g e i n t h e exc h a n g e rate s.

s y s t e m t o m e e t t h e r e q u i r e m e n t s o f t h e c o r-

An e f f i c i e nt d e b t m a r k e t w i l l a l s o o p e n a n e w

porate sec tor for long-ter m capital investment

ave n u e fo r i nve s to r s w h e re t h e y wo u l d h ave

and asset creation. Banking systems cannot

a benefit of getting high yields without the

be the sole source of long-term investment

o b l i g a t i o n o f h o l d i n g t h e b o n d t o m a t u r i t y.

c a p i t a l w i t h o u t m a k i n g a n e c o n o my v u l n e r a -

inated ECBs (External Commercial Borrowings).

b o n d m a r k e t i s l a r g e l y i n e f f i c i e n t . E xc e p t fo r

Bu t ins pi te of s uch a h uge deman d fo r r u pee

a b o u t 8 - 1 0 s e c u r i t i e s at a t i m e fo r w h i c h t wo

denominated markets only ver y few companies

way q u o te s a re ava i l a b l e i n t h e m a r k e t, o t h e r

ra i s e mone y i n t h ese mar ket s. Th e p ro bl em is

par ts of the yield cur ve represent securities

the lack of liquidity which makes the investors

that are not actively traded. Activity is con-

Corporates in many developed markets –

rupt the flow of funds from savers to inves-

demand higher yields on these bonds, thus

centrated in a few s ec u r ities du e to t h e m a r k e t

predominantly in the US and increasingly

tors for a dangerously long period of time.

making these markets uncompetitive com-

co nf idence in them and the abil it y to l i q ui d ate

in other jurisdictions - have a marked pref-

pared to foreign markets even after tak ing care

po s itio ns q u ic k l y fo r thes e s pec if ic b o n d s at a

erence to tap the bond market rather than

Indeed, one of the lessons from the 1997

o f t he exc hange rate h edgin g co st. Th e need

f air val u e. I n the co r po rate debt m ar k e t, i nve s -

t o s e e k b a n k l o a n s f o r m e e t i n g t h e i r e x t e r-

Asian financial crisis has been the impor-

of the hour is to take steps to increase liquid-

tor base is mostly confined to banks, insur-

n a l f i n a n c e re q u i re m e n t s. I n I n d i a , h o we ve r,

tance of having non-bank funding chan-

ity in these markets by laying down proper

ance companies, provident funds, Primar y

companies continue to depend on the bank ing

nels open. In the aftermath of this crisis, a

re g u l at i o n s a n d a l s o p ro m o t i n g e nt r y o f b i g

D e a l e r s ( P D s ) a n d p e n s i o n f u n d s. O f l a t e, t h e

s ys te m fo r f u n d s b e c a u s e o f e a s e o f ava i l i n g

n u m b e r o f c o u n t r i e s i n t h e re g i o n , i n c l u d i n g

fo rei gn playe r s like FI I s an d D o mest ic Pl ayer s

retail investors have been showing interest

ble to external shocks. Historical and cross-

Market Structure in Developed Markets

s e c t i o n a l ex p e r i e n ce h a s shown that syste mic problems in the bank ing sector can inter-

InFINeeti Annual Issue | September 2012

I N DIA N ECO N O MY Korea, Malaysia, Singapore and Hong Kong,

debt m ar k ets need to grow m anifo l d to e n s ure

have made progress in building their own

that the f inanc ial s ec to r beco m es ad e q uate fo r

corporate debt markets. Spreading credit

an economy as large and as ambitious as Indiaâ&#x20AC;&#x2122;s.

r i s k f ro m b a n k s b a l a n ce s h e e t s m o re b ro a d l y through the financial system would lower

Reduced

currency

mismatches:

The development of local currency bond markets has been seen as a way to avoid

c) Creating new classes of investors:

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

crisis, not only by supplementing bank credit but also because these markets help reduce

ing reduces macroeconomic vulnerability

Commercial banks face asset-liabilit y mismatch

potential currency mismatches in the finan-

to shocks and systemic risk through diver-

issues in providing longer-maturity credit.

cial system. Currency mismatches can be

sification of credit and investment risk.

D e ve l o p m e n t o f a c o r p o r a t e d e b t m a r k e t w i l l

avoided by issuing local currency bonds.

enable par ticipation from institutions that have

b) Enabling meaningful coverage of real se c to r n e e d s :

the capacity as well as aptitude for longer matu-

Th u s, we l l - d e ve l o p e d a n d l i q u i d b o n d m a r k e t s

r it y exposures. Financial institutions like insur-

can help firms reduce their overall cost of

ance companies and provident funds have long-

capital by allowing them to tailor their asset

Th e fi nanc i a l s e c to r in I n dia is much to o s m al l

ter m l iabil ities and do no t have acce s s to a d e -

and liability profiles to reduce the risk of

to c a te r to t h e n e e d s o f t h e re a l e co n o my. A

quate high quality long-term assets to match

both maturity and currency mismatches.

comparison of the asset size of the top ten

them. Creation of a deep corporate bond market

Corporates and that of the top ten banks

can enable them to invest in long-term corporate

(as shown in Figure 1 below) reveals that

debt, thus ser ving the twin goals of diversifying

banks in India are unable to meet the scale

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

or sophistication of the needs of corporate

enabling these institutions to access high quality

The creation of long-term debt markets will

I nd i a. N e e dle s s to say, t h e f in an cial system is

long-term assets. Thus, access to long-term debt

also enable the generation of market interest

not big enough to meet the needs of small

o p e n s u p t h e m a r k e t t o n e w c l a s s e s o f i nve s -

rate s at t h e l o n g e n d o f t h e yi e l d c ur ve â&#x20AC;&#x201C; t h us

a n d m e d i u m - s i z e d e n t e r p r i s e s e i t h e r. W h i l e

tors with an appetite for longer matur it y assets

facilitating the development of a more com-

these are pointers to the fac t that the bank ing

and thereby helps prevent maturity mismatches.

p l e te te r m s t r uc t ure o f i nte re s t rate s. A d e e p e r,

e ) Te r m s t r u c t u r e a n d e f f e c t i v e transmission of monetary policy:

sector in India needs to be larger than its

m o re re s p o n s i ve i nte re s t rate m a r k e t wo u l d i n

current size, they are also clear indicators that

tur n provide the central bank with a mechanism fo r e f fe c t i ve t r a n s m i s s i o n o f m o n e t a r y p o l i c y.

Co n c l u s i o n The implementation of various measures for increasing the efficienc y and liquidity of the debt m a r k e t s w i l l h e l p to m a i nt a i n f i n a n c i a l s t a b i l i t y and provide a more optimal way for Corporates to raise and investors to invest money thereby bene f i t i n g t h e re a l s e c to r w h i l e a l s o i m p rovi n g t h e transmission of monetar y polic y in the economy.

R ahul Bakshi-The author is a student of IIM -I ndore

IND IAN ECONOMY

InFINeeti Annual Issue | September 2012

BAN KIN G

Should banks worldwide be given more autonomy or regulation- the need of the hour ?

BANKI NG

U n t i l e a r l y 1 9 7 0 ’s t h e B a n k i n g s y s t e m c o n -

s ys te m w h i c h p ro d uces mone y a s a n a sse t to

t ro l l e d t h e p r i ce s, q ua nt i t i e s o f b us i n e s s co n -

h o l d i n t i m e s o f p a r t i c u l a r u n c e r t a i n t y. T h e

d u c t e d a n d t h e m a r k e t a c c e s s. B u t s i n c e m i d

structure of the financial system has been

1 9 7 0 ’s t h e r e i s a s i g n i f i c a n t p r o c e s s o f r e g -

undergoing major change, which cer tainly

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

i nvo l ve s a m a j o r re t h i n k a bou t re gu lation.

towa rd s m o re m a r k e t- o r i e nte d fo r m s o f re g ul a t i o n - L i b e r a l i ze d I n t e re s t R a t e, I nve s t m e n t s,

B anking

Line - of-business, ownership link ages and entr y is among the

I nt rod uc t ion

of foreign financial institutions. Bank branching restrictions were phased out and in a number of

wo r l d ’s m o s t t i g ht l y re g u lated b usin esses. B u t m o s t

The recent ho u s ing bo o m , bu s t, the f i n a n c i a l

European countries by the early 1990s.Break ing

o f t h e eco n o mic probl em s

c r is is and s evere reces s io n that fo l l owe d, co n -

down the barriers imposed by the (1933) Glass-

in the past two hundred

t i n u e to a f fe c t u s. Th e s e e ve n t s h ave s h a p e d

Steagall Ac t, the Gramm-Leach-Bliley Financial

years were caused by banks

the economic recover y and transformed the

S e r v i ce M o d e r n i z at i o n Ac t o f 1 9 9 9 p e r m i t te d

a n d s p e c u l ato r s. Af te r t h e

reg u l atio n o f the f inanc ial s ys tem . Th e re ce nt

f i n a n c i a l h o l d i n g co m p a ny.

great depression, sound banking reforms

developments raise debates about the need for

ensured economic stabilit y and prosper it y for

improved regulation of bank ac tivit y for finan-

m a ny ye a r s. Po s t s u b - p r i m e c r i s i s, t h e B a n k s

c ial s tabil it y.

are reluctant to implement the regulator y reforms saying it inhibits innovation and raises b a r r i e r s t o e n t r y.

The recent histor y of regulator y re fo r m i n Bank i n g

Can we trust the

B e n e fi t s S o m e b e n e f i t s a re :

Fre e b a n ke r ’s c r t i q u e s

1.Freedom to adopt the most efficient practices

They say that the uncer tainty can be elimi-

& d e ve l o p n e w p ro d uc t s a n d s e r vi ce s.

nated and financial assets can be valued in

Banks to regulate

Th e d i m i n i s h -

themselves?The

ing effective -

2.Competition-forcing the exit or consolidation

re a s o n fo r b a n k s to b e re g u l ate d. I n s t a b i l i t y

recent

times

ness of tra-

o f re l at i ve l y i n e f f i c i e nt f i r m s.

is a result of unwise por tfolio decision. In

reveal many finan-

ditional con-

cial institutions

trols due to

3 . I m p r o v e m e n t s i n t h e q u a l i t y, v a r i e t y a n d

p l i n e b a n k s a d o p t i n g pru d e nt por tfolios.Fre e

failing.

financial inno-

a cce s s to n e w f i n a n c i a l i n s t r um e nt s & s e r vi ce s.

bankers argue that the r isk of contagion does

this

the same way as goods, so that there is no

t h e a b s e n ce o f re g u l at i o n , t h e m a r k e t d i s c i -

article we deal

vation

with the bene-

rapid techno-

4 .I m p rove d wo r l d a l l o c at i o n o f re s o urce s d ue

that deposits could simply be transferred from

fi t s and cos t as so -

l o g i c a l d e ve l -

to t h e re m ova l o f t h e b a r r i e r s to i nte r n at i o n a l

b a n k s w i t h u n s o u n d p o r t fo l i o to b a n k s w i t h

ciated with the

opment, the

c a p i t a l f l ows.

sounder por tfolios thereby having sound por t-

banking regula-

development

tion, how auton-

of regulator y

R e g ul ato r y re fo r m a n d co m p e t i t i o n ex p a n d e d

omy

can

help

avoidance,

t h e re a c h o f b a n k i n g to t h e u n d e r p r i v i l e g e d.

Co nt ra r y a rg um e nt : Asse t va lu e s ca n be pre -

the

banks

and

competition

Regulation is essential because the liquidity

dicted, but valuations are contingent on a

really

what ing

the

current

n o t j u s t i f y t h e n e e d fo r re g u l a t i o n . T h e y s a y

and

fo l i o m a n a g e m e nt.

needed

consider-

between international financial centers are

o f b a n k l i a b i l i t i e s i s a p ub l i c g o o d. Th e un ce r-

range of unknowns. It is difficult even for

financial

situation.

s o m e reas o ns w hy refo r m was neede d.

t a i nt y i s a n un q ua nt i f i a b l e r i s k- a l e a r n i n g g a p

ce nt ra l b a n k e r s to d e ter mine whe the r a ba nk

which can never be closed.Bank ing regulation &

has a liquidity/ solvenc y problem. If tactics like

super vision suppor ts the evolution of a bank ing

deposit insurance and lender-of-last-resor t

InFINeeti Annual Issue | September 2012

B A N KIN G facilities were applied successfully, banks could

• N o m e a s u re m e n t o f t h e d e g re e t o w h i c h t h e

be protected from failure in a free banking

t u r m o i l i n t h e f i n a n c i a l s ys te m c a n a f fe c t t h e

s yste m bu t that is a f ar cr y an d t h e f re e bank-

eco no my.

Why re g u l ate s ta bl e, di versi f i ed ba n ks?

re s t s o n e co n o m i c ro l e o f m o n e y a n d u n ce rt a i n t y. T h i s u n c e r t a i n t y i n t u r n r e n d e r s f r e e b a n k i n g unwo r k a b l e.R athe r tha n saying re g -

I n 1 9 7 0 ,t h e d e b t c r i s i s i l l us t rate d t h e n e e d fo r

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

• I n a d e q u a t e c o n c e n t r a t i o n o n t h e s a fe t y a n d

ce nt ra l b a n k i n g f un c t i o n s t h at n at ura l l y a r i s e

a te re s p o n s e i s to co n s i d e r h ow to i m p rove

soundness of individual depositor y institutions

in a deregulated environment.What most of us

the regulation. Good regulator y polic y should

in an ag e o f g l o bal interdependenc y.

d i d n’t k n ow b e fo re 2 0 0 7 wa s ex a c t l y h ow t h e y

take a broad view of the way rules affect

made profits. But the banks over-reached them-

e c o n o m y a n d s o c i e t y, w h i l e m a i n t a i n i n g a

er ’s argument ignores the potential for systemic i n st a bi li t y.

W h a t m a k e s u s re a l i s e t h e i m p o r t a n c e o f re g u l at i o n ?

BANKI NG

Au to n omy e nta i l s o perat io n al f reedo m. I t f ac il -

We e x p e r i e n c e d t h e c o l l a p s e o f b a n k i n g a n d

selves. They expanded too rapidly. I n 2007 and

s ui t a b l e d e gre e o f h umilit y a bou t the a bilit y

itates price and financial sector stability that

savings-and-loan industries, with huge costs to

2008, their schemes began to unravel. We learnt

to accurately quantify the relevant bene-

are impor tant for achieving sustainable growth.

t a x p aye r s a n d t h e e co n o my. Th e f a c t t h a t t h i s

a b o u t s u b - p r i m e m o r t g a g e s, l i a r s’ l o a n s, a n d

f i t s a n d c o s t s. Th e b a n k i n g i n d u s t r y s h o u l d

Monetar y policy is super essential for which

happened to heavily regulated industries makes

der ivatives where loans were repack aged, sold

have effective channels for voicing con-

t he ba nk s hou ld b e given so me AU TONOM OUS

us think whether regulation does more harm

a n d r e - s o l d s o t h a t a ny c o n n e c t i o n b e t w e e n

c e r n s a b o u t b u rd e n o r a b o u t l a c k o f c l a r i t y

p o w e r. A s o u n d a n d s t a b l e f i n a n c i a l s y s t e m

than g o o d?

b o r rowe r a n d t h e f i n a l l e n d e r wa s b ro k e n .

re g a rd i n g re g ul ato r y sta nd a rd s a nd su pe r v is o r y e x p e c t a t i o n s. A fo r w a r d - l o o k i n g m a c r o

including an efficient payment system is also i m p o r t a n t fo r a m a r k e t e co n o my to re a l i ze i t s

The reas o n fo r m o ral hazard is the a b s e n ce o f

Th e re c e n t a l l e g a t i o n s we re B a rc l ays - M a r k e t

p r ud e nt i a l a p p ro a c h mu st consid e r how the

full potential. Accountabilit y, transparenc y and

m ar k et dis c ipl ine bec au s e o f g over n m e nt re g -

interest rate manipulation, HSBC-Mexican drug

f i n a n c i a l s ys te m i s l i k ely to e volve ove r time.

g o o d gove r nance sh o uld be present.

u l ato r y p o l i c i e s. D e p o s i to r s a n d s h a re h o l d e r s

money laundering and Standard Char tered-

Fo r ex a m p l e, w h at s yste mic issu e s a re ra ise d

we re l u l l e d b y p re v i o u s a c t i o n s o f re g u l a t o r s

Iranian oil money laundering.The culture began

by n e w f i n a n c i a l p ro d u c t s, s u c h a s co m p l ex

Fitch R atings recently said that the capital

into believing that even if the institution failed

in 1986, when Margaret Thatcher ’s government

derivatives? We want a distinct regime for sys-

re q u i re me nts as per B ASEL I I I will in creas e the

they wo u l d s o m ehow be pro tec ted.

i n t r o d u c e d t h e “ B I G B A N G ” D E R E G U L AT I O N

te m i c a l l y i m p o r t a nt i n stitu tions.

t h at i nt ro d uce d t h e c ul t ure o f r i s k- t a k i n g, b i g

lending rate, impact the economic output thereby e x t e n d t h e c u r re n t re c e s s i o n . Fu r t h e r m o re, i n

Cost of b ank ing regulat ion

bonuses and a focus on shor t-term returns.The f i n a n c i a l i n s t r u m e nt s a re s o co m p l ex i t o f te n

Eu ro p e the gove r n ment bo n ds’ yield is i nc reas i n g, t h at i s, t h e b o n d s a re n o m o re at t ra c t i ve.

Bank ing regulation curbs the abilit y of bank ing

t a k e s m o nt h s to f i g ure o ut h ow m uc h wa s l o s t

Th i s i n tur n wi ll squeeze t h e mar ket t h at bank s

houses to move out of recession and re -boot the

a n d w h e re t h e m o n e y we nt.B a n k s us e d h i g h e r

c a n us e to me e t t h e n ew cap it al require m ents.

eco no my. An exam pl e o f res tr ic ting a n d co s t l y

l e ve r a g e t o m a x i m i ze p ro f i t s f ro m D e r i v a t i ve

b a n k i n g re g u l a t i o n i s O b a m a’s t re n c h a n t a n d

p ro d uc t s. O n e ex a m p l e i s t h e re ce nt co l l a p s e

res tr ic tive D o dd-Franc k ac t.

o f MF G l o b a l.

fa i l be c aus e, the y just h ave to mak e up the dif -

The ‘Quasi-nationalization’ of the bank ing sector

D odd-Frank has tr ied to reduce the costs asso -

ference when the loss exceeds the amount accu-

through a polic y that combines a high degree of

ciated with the regulation by focusing on insti-

m u late d through p remiums.

reg u l atio n and bail o u ts w il l dis r u pt l o n g - te r m

t ut i o n s w h o s e o p e rat i o n s b e a r m o s t c r i t i c a l l y

economic growth. Apar t from restr ic ting credit

on the stability of the financial system as a

through profit loss on regulator y compliance, it

whole.I t addressed the too -big-to -fail problem

m ay res u l t in the s hif t o f r is k to g en e ra l c re d i t

by allowing troubled systemically impor tant

t r a n s a c t i o n s. O n t h e b a c k o f t h e J. P. M o r g a n’s

f i n a n c i a l i n s t i t ut i o n s to b e s h ut te re d.

G over nm e nt and t ax payers are n o t at t he r is k fo r b ai li ng ou t the dep o sito rs if in sured bank s

Fl aw in t h e fi n a n ci a l regu l ati o n syste m S o m e ma c role ve l sh o r tco min gs were:

billion dollar losses, there is now a tempta•No attention to the stability of the financial

tio n in the E U to pas s a m eas u re s imi l a r to t h e

The banking sector has undergone major

s yste m a s a whol e.

Vo l c k er r u l e in the U. S D o dd ’s -Franck Ac t.

changes over the last few years. The regulation

S owr irajan S and R amanaidu D.S.TThe authors are students of I nstitue for Financial Management and R eseacr h,Chennai

InFINeeti Annual Issue | September 2012

GOV ER NM ENT AND TAXES

GOV E RN M E N T A N D TAX E S

Ta x R e fo r m s : An I n di a n Perspec ti ve I n o rder to mak e it s el f an attractive business destin at io n an d to in creas e tax receipts, India is working on t wo major tax refor ms. DTC ( D i re c t Ta x Co d e ) a n d G S T ( G o o d s a n d S e r v i c e s Ta x ) . L e t ’s

look

the

trend

combined

tax receipts for Union and the States.

I n co m e Ta x

Co r p o rate Ta x

Wh at p e rce nt a g e o f ove r 1 .2 1 b i l l i o n p o p u-

I n d i a h a s e n t e r e d i n t o D o u b l e Ta x a t i o n

l at i o n o f t h e co unt r y p ays i n co m e t a x ?

A v o i d a n c e A g r e e m e n t ( D TA A ) ; w i t h d i f f e r e nt co unt r i e s. S o m e m u ltinationa l compa nie s operating in I ndia exploit the loopholes in the DTAA by routing their investment through the co unt r i e s I n d i a h a s DTAA with. While the re is n o w ro n g i n h avi n g a hold ing compa ny the re, i t o f t e n t u r n s o u t t o b e a s h e l l c o m p a n y. Thus, to tax such transactions, GAAR (General Anti Avoidance Rules) was introduced in the Union Budget of 2012-13.

Direc t Tax

Just about 2.8 %! Compare this with over

But, it was received with apprehension

4 5 % fo r U S A . Th u s t h e re i s a n e e d to b r i n g

because of lack of clarity and cer tain pro-

m o re p e o p l e un d e r t h e a m b i t o f t h e I n co m e

visions related to its retrospective nature.

Ta x . DTC i s p r o p o s e d t o a c h i e v e t h i s g o a l . The investor confidence took a dip and the FII

Th e tre nd looks h ear ten in g. I n f ac t t h e rate o f growth has outpaced the GDP growth rate by a

DTC i s s a i d t o r e p l a c e t h e e x i s t i n g I n d i a n

S o m e o f i t s s a l i e nt fe at ure s a re a b o l i t i o n o f

inflows took a U-turn. In contrast to high invest-

huge margin. But, if we look at this with a back-

I ncome Tax Ac t, 1961. I t seeks to consolidate

s urc h a rg e, e d uc at i o n ce s s a n d Le ave Trave l

ment in stock market in the Jan-Mar quar ter, FII

d ro p o f t h e p i l i n g f i s c a l d e f i c i t , p l u m m e t i n g

a n d a m e n d t h e l aws u n d e r I T Ac t a n d f a c i l i -

Allowance. Deductions up to 1.5 lakhs,

i n f l ows we re n e g at i ve for the month of Apr il.

investor confidence and widening trade deficit

tate voluntar y compliance to help increase

u n d e r ‘ S e c 8 0 C ’, t o b e a l l o w e d . N o d i f f e r -

The stock market saw a gradual fall from about

we’ l l u n d e r s t a n d w hy t h e f i n a n ce m i n i s t r y i s

the tax- GDP ratio.

e n ce i n t a x s l a b s fo r m a l e a n d fe m a l e s a n d

17500 points in March end to about 16000

m a ny m o re. Th e s e c h a n g e s a i m to i n c re a s e

points in May end. Thus to boost investor confi-

L e t ’s f o c u s o n t h e t a x r e f o r m s r e l a t e d w i t h

the compliance base and thus increase

dence CBDT, in May, formed a six-member com-

I nco m e Tax and Co r po rate Tax.

t h e Ta x r e c e i p t s . T h e c h a n g e s a r e b e i n g

mittee to draf t guidelines for enforcing GAAR.

b u sy look i ng for aven ues to in crease re ceipts. Th e broa d s tr uc ture o f t h e t ax system and the associated tax refor ms are shown in the figure

i m p l e m e n t e d s t e p b y s t e p e v e r y y e a r.

InFINeeti Annual Issue | September 2012

GOV ER NM ENT AND TAXES

GOV E RN M E N T A N D TAX E S

D ut y, St ate Exc i s e D ut y, Ad d i t i o n a l Exc i s e D ut y,

S e r vi ce Ta x R e gi me

S e r v i c e Ta x , S a l e s Ta x , C u s t o m s , A d d i t i o n a l Customs D ut y, Special Additional D ut y, VAT etc.

S h a r e o f s e r v i c e s e c t o r i n c o u n t r y ’s G D P

Vi e we d t h ro ug h a f i s c a l l e n s, t h e co unt r y i s n o t

h a s r i s e n f ro m 5 0 .4 % in 2000- 01 to 59.0% in

one market, but 28 states, each with its own tax-

2 0 1 1 - 1 2 . B ut, s h a re of S e r v ice Ta x is a little

raising powers, which they are not afraid to use.

m o re t h a n 1 % o f t h e G D P. We h ave co m e a long way since 1994 when the ser vice tax

Draft

guidelines

June

end

released

majorly

included

Co m p l i c a te d l aws, c a s c a d i n g, s q u a b b l i n g ove r

was introduced. Since then a positive list

what constitutes a good and what is a service etc are

approach. i.e. ser vices included in the list will

some major issues with the present web of taxes.

h ave to p ay s e r vi ce ta x, ha s be e n followe d.

This multiple tax regime across sectors of

There is an alternate concept of inter-

production and states leads to distortions

nationally followed negative list accord-

in allocation of resources thus introduc-

ing to which the services included in the

ing inefficiencies in domestic production.

negative list will be exempt, rest all ser-

1. The tax rules will apply to income

vices will have to pay the service tax.

accruing only on or after April 1, 2013 and that a monetary threshold is a

Once GST is implemented apar t from making

must

life easy for local industries, it will attract

A s a m o ve t o w a r d s i m p l e m e n t i n g t h e G S T,

foreign fund flows. According to estimates it

ser vice tax regime based on negative list

w i l l l e a d to a n i n c re a s e i n G D P o f 0 .7 % to 1 .7 % .

was implemented from July 1st. , 2012

One of the major challenges in implement-

States have raised concerns to cer tain items,

3. GAAR provisions will not apply in cases

ing GST is arriving at a revenue neutral rate.

w h i c h t h e y s ay a re l e a d i n g to d o u b l e t a x a -

where tax treaty agreements are not invoked.

A re ve n u e - n e u t ra l rate i s o n e at w h i c h a s t ate

tion. As of now some of these items have been

a s co nt rove r s i a l p rov i s i o n s a n d u s h e r i n m o re

wo ul d n o t re co rd a ny g a i n o r l o s s a f te r s w i tc h -

added to the negative list and a consensus will

clarity and transparenc y in the draf t guidelines.

i n g to G S T. Th e h i g h e r a s t ate’s re ve n ue - n e ut ra l

be reached when the GST gets implemented.

for

invoking

GAAR

provisions.

2. GAAR will be invoked only if an FII

takes

the

Setting

not

less

benefit

an than

any

approving three

D TA A .

panel

rate, the more compensation it would seek from

members.

Co n c l u s i o n

The overall sentiment since then has been posi-

the Centre. Other challenges include imple-

I t a l s o p rov i d e d a n i n d i c at i ve l i s t o f d e a l s /

tive and the return of confidence is evident by the

m e n t a t i o n o f I T I n f r a s t r u c t u r e, C o n s t i t u t i o n a l

transactions/arrangement where GAAR

rally at the stock markets from a low about 16 thou-

Amendment, Dispute resolution mecha-

These

w i l l b e i nvo k e d. W h i l e t a x m i t i g a t i o n u s i n g

sand points in May end to about 17500 in August.

nism and credit mechanism between states.

help us in substantiating our stance

I nd irec t Tax

A co m m i t te e h e a d e d by G ovi n d a R a o h a s b e e n co n s t i t ute d to a r r i ve at a re ve n ue n e ut ra l rate

These new guidelines too did not go well with

GST (Goods & Ser vices Tax) is an ambitious prop-

fo r e a c h s t ate. L ate l y t h e re h a s b e e n s o m e co n -

all the stake holders.Thus, PM Manmohan

o s itio n to c reate a s eam l es s natio nal co m m o n

sensus among states regarding dispute res-

S i n g h , i n c h a rg e o f t h e f i n a n ce p o r t fo l i o i n

market, by subsuming most of the indirec t taxes

olution and credit mechanisms. The states

June, set up a committee to begin the process

imposed by the state and the government.

have agreed that petroleum products can be kept within GST as long as they are allowed

of consultations with various stakeholders in a bid to fine -tune what had hitherto been viewed

reforms

would

definitely

and would strongly portray our image

available provisions in the law is allowed, i t i s t a x avo i d a n c e t h a t G A A R w a s t o d e t e r.

tax

Indirec t taxes are a hotch-potch of Union Excise

to levy additional levies to protect revenue.

being

the

– ‘Incredible

India’ .

InFINeeti Annual Issue | September 2012

W ORLD ECONOMY

WORL D E CO N O MY

Is it the end o f D ollar as Wor ld ’s reser ve Cur renc y?

Japan & Germany along with the US will be side l i n e d l e a d i n g to a s h i f t i n t h e e co n o m i c p owe r

O P E C co u nt r i e s f ro m t h e Pe t ro d o l l a r s ys te m .

b a l a n ce a s s t ate d e a r l i e r.

I n s uc h a s ce n a r i o , p etrole u m be ing a ma jor commodity transacted in the world market,

Th e f ut ure o f t h e p re s e nt l y a i l i n g U S e co n o my

will cause the breakdown of dollar as the world

A B r ief H isto r y o f t h e US

U S S R r e i n fo r c e d t h e p r e d o m i n a n c e o f d o l l a r

would be influenced greatly by short term

re fe re n ce c ur re n c y a s ma jor it y of the nations

D o llar

as a wor ld cu r renc y. St abilit y has b e e n a k e y

global factors like an oil shock or a natural

wo ul d n o t p urc h a s e Pe trole u m from the O PEC

f a c t o r fo r t h e a d o p t i o n o f U S D o l l a r a s o f f i -

d i s a s te r ,e tc. Th e s us te n a n ce o f t h e U S D o l l a r

countries using Dollars but by some other cur-

hegemony would depend upon the per for-

re n c y t h at gi ve s b e t te r re tu r ns.

The dollar was chosen as the

cial currenc y by several countries. Devaluation

currenc y of United States by

h a s n e ve r h a p p e n e d w i t h t h e U S D o l l a r. Th e

t h e passage o f t h e Co inag e

emergence of the Japanese Yen in 1980’s posed

Ac t o f 1792, reco mmended

a s e r i o u s t h r e a t t o t h e D o l l a r a s w o r l d c u r-

by Alexander Hamilton, the treasur y secre -

renc y bu t thank s to the reces s io n i n Ja p a n i n

t a r y the n. M any t h eo r ies ex ist o n t h e o r igin o f

1 9 9 0 ’s ave r te d t h at t h re at . Th e a r r i va l o f t h e

t h e s y m b o l o f t h e d o l l a r ( $ ) s u c h a s T h e Pe s o

Eu ro had al s o po s ed a threat to th e D o l l a r a s

Abbreviation Theor y(the most widely accepted

wo r l d c u r renc y.

t he o r y now) , The U S Ab breviat io n Th eo r y, The S h i l l i n g A b b r e v i a t i o n T h e o r y, e t c . T h e Pe s o

The US Abbreviation Theory states that the dollar sign has been derived from the initials of the US

Threat to the D o l l ar ? The shift in the economic power from the

m a n ce o f t h e U S Eco n o my. A p o te nt i a l t h re at

western hemisphere to the eastern hemisphere

t o t h e U S e c o n o my c o u l d b e t h e o p e n i n g u p

is the eminent danger that lurks over the

o f a n o t h e r wa r f ro nt i n a p l a ce l i k e I ra n / Syr i a .

Abbreviation Theor y puts for ward the fac t that

supremac y of the US Dollar. A study conduc ted

The failure of a couple of M ajor US banks could

This could be a reality within a generation.

t he dollar s y mbol is der ived f ro m t h e S panis h

by I M F h a s p ro j e c te d t h e s h i f t i n Pu rc h a s i n g

p l u n g e t h e U S e c o n o my i n t o a d e e p e r a b y s s.

I f at a l l t h e D o l l a r i s ou ste d a s the re fe re nce

Pes o.

Power Par it y of the wor ld from the west to the

Th e s e a re s o m e o f t h e m a j o r f a c to r s t h at co ul d

cur renc y and if there is no cur renc y to occupy

eas t w ithin a tim e s pan o f 1 8 year s .Th e m o s t

affec t the US economy thereby having a poten-

that position , then global inflation would rise

likely contender to substitute the Dollar would

t i a l to i n f l i c t s e ve re d a m a g e o n t h e s t a t u s o f

as impor tant commodities like oil ,precious

be the C hines e Yu an. The grow th tra j e c to r y o f

the US Dollar as the world’s reference currenc y.

metals & agricultural goods would rise sub-

Unofficial Dollarization might lead to inability of local governments to control inflation & fiscal policy

China shows that it would over take the US to be

A Wo r l d w i t h o ut D o l l a r ?

stantially to compensate for the same. This will

the world’s largest economy by 2020(Economic

The present economic crisis has also led the US

Times Repor t). Some of the banks have already

G over nment to reduce the interest rates to the

I t wa s i n 1944 th e U S do llar replaced t h e UK ’s

star ted given a higher impor tance to the Yuan

minimum possible so as to stimulate investment

H owe ve r, we s h o u l d a l s o a n a l y ze t h e s u b s t i -

Po u n d S t e r l i n g a s t h e w o r l d ’s r e f e r e n c e c u r -

in comparison to the US Dollar by adopting

i n t h e e co n o my. H owe ve r, t h i s m ove w i l l b e a

t u te s ava i l a b l e, o t h e r t h a n t h e C h i n e s e Yu a n

renc y. This was agreed af ter the Bretton Woods

Yu an as the S ettl em ent Cu r renc y.

deterrent for the OPEC nations (barring Iran

w h i c h h a s b e e n d i s c usse d e a r lie r. Le t u s look

) t o c o n d u c t O i l Tr a n s a c t i o n s i n D o l l a r s . T h i s

at the some of the different possible substitues

D o l l ar i z ati on

Co n fere nce of 1944 , wh en t h e exch an ge rates

hit the emerging markets like China, India ,etc.

were pegged against the US Dollar which

From the forecast above , the emphasis should

i s b e c a us e t h e p e t ro d o l l a r s ys te m w i l l b e l e s s

could be exchanged for a fixed amount of

be l aid o n the em erg ence o f 2 new e co n o m i c

allur ing to them on account of the lower inter-

1.Euro - I f we look at the European Union now ,

g o ld the re by s tren gt h en in g t h e po sit ion o f US

s u per power s – C hina & I ndia. The ro l e p l aye d

e s t rate s t h at t h e U S S e c ur i t i e s wo ul d p rovi d e

what is visible is that there are a large number

Dollar as the world currenc y. The collapse of the

by the traditio nal eco no m ic power h o us e s l i k e

t h e m . Th i s w i l l l e a d to t h e s h i f t i n g away o f t h e

of countries that are facing sovereign debt

InFINeeti Annual Issue | September 2012

W O RL D ECO N O MY crisis. Some of them are tr ying to distance

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

t h e m s e l v e s f r o m t h e E u r o. T h i s i s p r i m a r i l y

sequent to occurrences of

due to the different growth rates of countr ies

J apan. Hence the this inval idates t h e co m p e -

t hat h ave a d opted a sin gle cur ren c y, Euro. I t

titio n po s ed by Yen.

earthquakes in

CORPOR AT E TALK

M r. S i d d h a r t h K u m a r - A s s i t a n t V i c e P r e s i d e n t , I nvest m ent b ank ing, B arc lays Cap i t t a l

3. Gold- Though gold is one among the

Q u e s t i o n : Yo u h a v e h a d a n

w h i l e fo r J a p a n a n d K o re a t h i s s t a t i s t i c g o e s

oldest forms of money , the cost involved

experience of working in the

up to 4 0 % a n d 5 0 % re spe c tive ly. S o, ca n we

i n u s i n g g o l d i n t ra n s a c t i o n s a l o n g w i t h t h e

Indian Capital Markets, espe -

co n c l ud e t h at t h e re i s a cor re lation be t we e n a

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

cially the debt market, for a

countr y ’s economic development and the evo -

b eco me s di ffi c u lt to maint ain t h e same inter-

a costly replacement for dollar as a world

s p a n o f 5 ye a r s. H ow h a s yo ur

lution of its debt market? Or should we say that

e st rate throughout all t h e memb er co untr ies

c u r renc y.

entire experience of work ing in

i t i s j us t a n o t h e r s t at i stic?

The Euro is adopted by top performing economies like Germany & France as well as by faltering economies like Greece & Spain.

t h i s p a r t i c ul a r m a r k e t b e e n ?

b e c a u s e o f t h e v a r y i n g g ro w t h r a t e s. H e n c e Zone

Hence , what is evident is that though the

d e em s the Eu ro un f it to replace t h e D o l l ar as

do l l ar is in a dang er zo ne , it wo ul d s t i l l co n -

Answer: The Indian Debt Capital Market is quite

t i o n o f c a p i t a l m a r k e t s i s a n a t u r a l o u tco m e,

a wo r ld re fe re nce cur ren c y.

tinue to be the exchange currenc y of the world

a c t i ve. W h e n I j o i n e d, t h e I n d i a n m a r k e t w a s

regardless of whether the market is domi-

fo r at l eas t a co u pl e o f dec ades.

n o t re a l l y i n i t s fo r m at i ve p h a s e ; rat h e r, i t h a d

nated by debt instruments or equity instru-

d e ve l o p e d to q ui te a n ex te nt. S p e a k i n g o f t h e

m e n t s. S o, o n e c a n s a y t h a t t h e re i s a c o r re -

n a t u re o f t h e m a r k e t , i t d o e s n o t h ave m u c h

lation to the extent that as economies grow

s i m i l a r i t y w i t h t h e m a r k e t s i n t h e d e ve l o p e d

a n d p ro gre s s, b o r row i ng a nd le nd ing te nd to

world. So, to an ex tent, a niche market is devel-

i n c re a s e. H owe ve r, o n e c a n n o t co n c l u d e t h at

oping in India.

one particular parameter will influence the

the inherent instability in the Euro

An s we r : As t h e e co n o mie s d e ve lop, the e volu -

o t h e r p a ra m e te r. The exper ience, as such, has been ver y enr iching, given the fac t that the scenar io of a class-

Question: Islamic bonds took of pretty well

room is ver y different from that of a work place.

i n 2 0 0 7 . S o, t a l k i n g o f the m a long with othe r

I t fe e l s g o o d to b e i n t h e m i d d l e o f a c t i o n .

Shariat compliant products, do they have a f ut ure, i f l a un c h e d i n I nd ia ?

Question: Given the current context, do you s e e a m a j o r t re n d d e ve l o p i n g i n t h i s m a r k e t ?

An s we r : We l l to b e h o ne st, spe a k ing of I sla mic b o n d s a n d o t h e r S h a r i at co m p l a i nt p ro d u c t s,

2 . J a pane s e Ye n- Th e lo cat io n o f Japan in “ The R i n g of Fi re” wi ll n ever en sure t h e st ab il it y o f t he Ye n a s the co unt r y will be f requentl y hit

S a n o o p S r e e d h a r -T h e a u t h o r i s a student of FMS ,D elhi

Answer: Considering a timeframe of 12-18

I d o n o t s e e t h e m h aving mu ch of a fu tu re in

months, the trend will likely be of more domes-

I n d i a . Th e s p i r i t a n d or igin of I sla mic fina nce

t i c a c t i vi t y i n t h e m a r k e t s. Th i s i s m a i n l y d ue

i s f ro m co unt r i e s w h e re it is re g a rd e d a ta boo

to t h e f a c t t h at t h e re i s l a c k o f f a i t h o f fo re i gn

t o c h a r g e i n t e r e s t . S o, i n t h i s g i v e n c o n t e x t ,

investors in the Indian capital markets, coupled

co n s i d e r i n g t h at I n d i a is e sse ntia lly a d e moc -

w i t h t h e f a c t t h at c a p r i c i o us p o l i c y m a k i n g by

ra c y, i t wo n’t b e fe a s i ble for I sla mic bond s to

the government has put barriers for their entr y.

b e l a un c h e d i n I n d i a .

Question: A recent repor t stated that 10.6 % of

Q u e s t i o n : We l l c o m i n g t o t h e l a s t t e c h n i c a l

by natural disasters which inturn would affec t t h e s to c k m a r k e t s a s we l l a s t h e c u r re n c y o f

the GDP of China is funded by Corporate Bonds,

InFINeeti Annual Issue | September 2012

CORP OR AT E TA LK

question on debt, recently the FII limit has been

res pec t to po l ic y al o ng w ith refo r ms l i k e F D I

m o re p ro a c t i ve i n re a c h i n g o ut to t h e a l um n i ,

ra i s e d by USD 5 B illio n . Also, we are s eeing a

in various sectors such as retail and insur-

basically having an ‘in your face approach’. I feel

new set of reforms tak ing place. In this scenario

ance. There are many such which should

t h a t e ve r y a l u m n u s o f t h e c o l l e g e d o e s h a ve

what are the reforms that you think will help in

have been do ne l o ng bac k . S im il ar l y, t h e R B I

some feeling of affiliation to his alma mater and

d e ve lopi ng the debt mar k et in I n dia?

has a cap on how much Indian companies

w a n t s t o c o n t r i b u t e t o t h e c o l l e g e. H o we ve r,

a r e p e r m i t t e d i n t h e fo r m o f E C B f r o m o f f -

d ue to va r i o us re a s o n s, t h e y a re n o t a b l e to d o

A n s we r : Th e g ove r n m e n t i n c re a s i n g t h e l i m i t

s h o re m a r k e t s, m a k i n g i t a l m o s t i m p o s s i b l e

so. The basic fac t is that you have to be in their

by 5 billion from 20 billion to 25 billion is a

fo r I ndian co m panies to tap c apita l f ro m t h e

f a ce. Th e y m ay i gn o re yo u, b ut t h e y wo n’t t ur n

reform that is not going to make a great deal of

o f fs ho re m ar k ets. Hence, inc reas in g t h e c a p

yo u d o w n . S o, yo u h a ve t o k e e p o n t r y i n g t o

change, because even the in the current quote,

p u t o n t h e I n d i a n co m p a n i e s wo u l d a l s o b e

engage with the alumnus, because he/she won’t

a lot of headroom is available which is not used.

beneficial. S o, possibly these are some of the

give you time half-hear tedly. One has to realize

thing s o ne co u l d l o o k at.

t h at t h e y d o h ave a d e s i re to b e i n to uc h w i t h t h e va r i o us a c t i vi t i e s i n t h e co l l e g e, i t i s o n l y

Question: So what reforms do you think will ac tually help in changing the climate of capital

Question: Now we would like to ask you a

m a r ke ts i n I nd i a?

fe w q u e s t i o n s p e r t a i n i n g t o t h e c o l l e g e, a s

a b o ut i n f l ue n c i n g t h at d e s i re.

to how the various experiences you had in Answer : Well, as such the government is begin-

yo u r 2 ye a r s o f M B A . H ow h a s a n M B A f ro m

ning to take steps. For instance, the tax on off-

IIF T hel ped yo u in yo u r c areer ?

shore borrowing has been reduced from 20% to 5%. But i ns tr ument s lik e cre dit def a ult swaps

Answer : Well, IIFT is the place where I had my

have not re a lly taken o f f. I n all, t h e o n e s im pl e

f ir s t expo s u re to Finance as a do m a i n . I h a d

thing that the government can do is to be more

a g o o d i n t e r n s h i p w i t h A d i t y a B i r l a G r o u p,

co ns i s te nt wi th t h eir p o lic y mak in g. The po l i-

s o my interes t in f inance s tar ted f ro m t h e re.

c i e s s h o u l d n o t b e s u c h t h at t h e g ove r n m e nt

I n the 2 nd year, we had s o m e ver y g o o d p ro -

c a n c l aw b a c k m o n e y t h at t h e i nve s to r s h ave

fes s o r s, w ho hel ped in nu r tu r ing my i nte re s t

m a d e on the i r i nvest ment.

i n f i n a n ce. Al s o, t h e b atc h t h at I wa s a p a r t o f had a s et o f co m m o n interes ts, w h i c h we

O the r than t h at, I n dia co min g up with s ov-

shared amongst ourselves. Hence, the two

ereign bonds could draw more attention to the

years of MBA gave me a holistic development

countr y. This may enable investors from Europe

f ro m al l as pec ts.

and United States to become more open about ente r i ng the I ndian mar ket.

Q u e s t i o n : We a r e p l e a s e d t o t e l l y o u t h a t this inter view would be published both in

Question: Given the current economic outlook ,

the finance magazine as well as in the alumni

d o you thi nk i t is ac t ually co r rec t fo r I ndia to

m ag azine. What acco rding to yo u sh o ul d t h e

co m e up wi th s overeign bo n ds?

co l l eg e al o ng w ith the al u m ni co mm i t te e d o to better eng ag e m o re and m o re al um n i ?

An s we r : We l l, i n t h e co m i n g ye a r o r s o, i f t h e government is able to show some progress with

Answer: The college should look to being

M r. S i d d h a r t h K u m a r i s t h e A s s i s t a n t Vi c e President of the I nvestment Bank ing divis i o n a t t B a rc l ays Ca p i t a l. Pr i o r to j o i n i n g Barclays Capital, he worked as the manager of the global invetment banking divis i o n a t I C I C I b a n k . H e h a s a to t a l e x p e r i ence of more than 5 years in the bank ing a n d f i n a n ce i n d u s t r y. H i s a re a o f i nte re s t includes Struc tured Finance, Debt Capital Markets, Syndicated Loans, Securitization

CORPOR AT E TALK

InFINeeti Annual Issue | September 2012

I N DIA N ECO N O MY

Is M o n e t ar y Po l ic y th e best a n swer we have for I n f l at io n ?

IND IAN ECONOMY

Demand-Pull

Inflation

Theory

Cost Push Inflation: On the other hand,

Inflation

Theory.

Cost-Push Inflation occurs when busi-

Cost-Push

nesses respond to rising production

“I nflation is always and ever y where a monetar y phenomenon.”-M ilton Fr iedman

Th e s e c a n b e ex p l a i n e d i n te r m s o f i nte r s e c -

costs, by raising prices in order to main-

tion of shor t run aggregate supply (SRAS) and

tain their profit margins. There are

aggregate demand cur ves as shown in the

many reasons why costs might rise:

was par tially a result of the

f i g ure. I n a s h o r t t i m e s p a n Lo n g r un a g gre -

oes this hold true

monetary authority irre -

gate supply (LRAS) cur ve is assumed con-

i n t o d a y ’s s c e n a r i o ? C a n

sponsibly borrowing money

s t a nt a n d i s t h e l e ve l o f G D P at e q ui l i b r i um .

t h is be said fo r t h e co u n-

to pay al l its expens es and

t r i e s i r re s p e c t i ve o f t h e i r

f u nding q u as i-f is c al ac tiv i-

Demand Pull : In a range when SRAS

economic

ties (which are normally left

b e c o m e s i n e l a s t i c a n d t h e r e i s f u l l e m p l o y-

3. Higher indirect taxes imposed by the

to Central Government).

ment of resources, an increase in demand

g ove r n m e nt

Few

leads to increase of pr ices. Few of the

structure?

Inflation is a general increase in the overall price level of the goods

the

prominent

effects of inflation can be jotted down as-

1 . R i s i n g i m p o r te d raw mate r ia ls costs 2 . R i s i n g l a b o ur co s t s

major reasons for increase in demand are:-

Cost-push inflation can be illustrated by an inward shift of the shor t run aggre-

a n d s e r v i c e s i n t h e e c o n o m y. I n f l a t i o n r a t e refers to a general rise in prices measured

( i ) E r o d e s t h e b u y i n g p o w e r o f t h e c u r r e n c y.

a g a i ns t a s ta ndard level o f p urch asin g power.

(ii) Decrease in real wage rate. (iii) Decrease in

The most well known measures of Inflation

real rate of retur n for debt holders.(iv) I nstead

a re t he C PI whi ch measures co n sumer pr ices,

of saving, consumers may star t borrowing.

a n d t h e G D P d e f l ato r, w h i c h m e a s u re s i n f l a -

Consumers tend to borrow more and spend even

t i o n i n t h e w h o l e o f t h e d o m e s t i c e c o n o my.

more.(v) Inflation causes uncer tainty which

1 . A re d u c t i o n i n d i re c t o r i n d i re c t t a x a t i o n

d i a gra m b e l ow. A f a l l in SR A S ca u se s a con2. The rapid growth of the money supply

traction of real national output together with a rise in the general level of prices.

3. A depreciation of the exchange rate

increases risk . Higher risk means businesses are

4. Rising consumer confidence and an

Inflation today has become a major concern for

less likely to invest. (vi) Input prices (raw mate -

increase in the rate of growth of house prices.

m a ny cou ntr i e s acro ss t h e glo be. D evel o ping

rials, wages and supplies) rise so business costs

countries specially have been grappling to

rise. Wages are of ten the largest business cost,

This effect is explained in the diagram

t a m e i n f l a t i o n i n re c e n t ye a r s. I n d i a f a c e d a

and there co u l d be a dang er o f a ‘ wa g e - p r i ce’

where increase in demand has caused

high of 14.97% (CPI) inflation rate in FY09; RBI

spiral where rising costs leads to higher prices,

prices of goods in economy to increase.

was par tially able to control the inflation rate

wo r k er s as k fo r a pay r is e in co m pen s at i o n , s o

a nd h as brou ght it down to 6. 87% in Ju l y ’ 12 .

costs rise again, so prices rise again, and so

C h i na ra i s e d i nterest rates fo r t h e fo ur th tim e

o n. (v ii) Diver s io n o f res o u rces f ro m m o re p ro -

s i n ce the e nd of t h e glo b al f in an cial cr is is to

ductive uses to controlling inflation holders

restrain inflation and limit the risk of asset

gate supply cur ve. This is shown in the

For years now, the most common tool w h i c h c e n t r a l b a n k e r s h ave i n t h e i r

To g e t t o t h e c r u x o f i t , w e n e e d t o u n d e r -

h a n d to co nt rol the inflation is te m-

stand the basics of inflation and factors

p e r i n g w i t h t h e m o n e y s u p p l y. I d e a

I n f l a t i o n a f fe c t s t h e d i f fe re n t s e c t o r s o f t h e

giving r ise to it. There is no single cause which

behind it being that money supply

economy and if kept unchecked can shake the

is agreed upon by all, but there are at least

controls the growth of demand

e co n o m i c s t a b i l i t y o f a n at i o n . Fo r i n s t a n ce,

two theories which are generally accepted:

t h ro ug h a n i n cre a se in inte re st rate s

bubbles in the fastest-growing major economy.

Zimbabwe’s hyper-Inflation of 24,000% in 2009

a n d a co nt ra c t ion in the re a l mone y

InFINeeti Annual Issue | September 2012

IND IAN ECONOMY

I N DIAN E CO N O MY

cause is excess demand for goods and ser vices,

t o e xe rc i s e m o d e r a t i o n i n w a g e n e g o t i a t i o n s.

s u s t a i n e d e co n o m i c grow t h a n d f a l l i n g i n f l a -

then gover nment polic y should look to reduce

Th i s i s ra re l y s uf f i c i e nt o n i t s ow n . Wa g e i n f l a -

tion. This can be attributed to shifting of power

Ba nk rate poli c y : I t is used as t h e main ins tr u -

the level of aggregate demand. If cost-push

tion normally falls when the economy is heading

away from employees towards employers.

ment of monetar y control during the per iod of

inflation is the root cause, production costs need

into recession and unemployment starts to

i n f l a t i o n . Th e i n c re a s e i n b a n k rate i n c re a s e s

to be controlled for the problem to be reduced.

rise. This causes greater job insecurity and

the cost of borrowing which reduces com-

To s er ve this pu r po s e var io u s m ethod s c a n b e

s o m e wo r k e r s m ay t r a d e o f f l o we r p ay c l a i m s

mercial banks borrowing from the central

a d o p t e d fo r s h o r t t e r m o r l o n g t e r m e f fe c t s.

for some degree of employment protection.

s u p p l y. Fe w o f t h e m e a s u r e s a d o p t e d a r e : -

b a n k . Co n s e q u e n t l y, t h e f l o w o f m o n e y f ro m the commercial banks to the public gets

Th e e q ui l i b r i um l e ve l of re a l nationa l income increases and the average price level remains rel-

S h o r t-ter m po l ic ies

Long-ter m poli ci es

reduced. Therefore, inflation is controlled to t h e ex te nt i t i s c a u s e d by t h e b a n k c re d i t.

Supply side refor ms

atively constant. A classic example is of Turkey ’s ce nt ra l b a n k re d uc i n g inte re st rate s to shie ld

An appreciation of the exchange rate

Fiscal Polic y

t h e e co n o my f ro m t h e impa c t of the Eu rope a n d e b t c r i s i s a n d s l o w i n g g r o w t h i n t h e U. S .

C a s h R e s e r v e R a t i o ( C R R ) : To c o n t r o l i n f l a -

A n a p p r e c i a t i o n i n t h e e xc h a n g e r a t e m a k e s

• H i g h e r d i re c t t a xe s ( c a us i n g a f a l l i n d i s p o s -

tion, the central bank raises the CRR which

expor ts more expensive and should reduce the

a b l e i n co m e )

re d u ce s t h e l e n d i n g c a p a c i t y o f t h e co m m e r-

vo l u m e o f e x p o r t s a n d a g gre g a te d e m a n d. I t

c i a l ba nks. Cons equent ly, f low o f mo n ey f ro m

al s o prov ides f ir m s an incentive to ke e p co s t s

co m m e rc i a l banks to p ublic decreases. I n the

down to remain competitive in the world

process, it halts the r ise in pr ices to the ex tent

market. A stronger currency reduces impor t

• A reduction in the amount the government

supply-side policies have been introduced

it is caused by banks credits to the public.

prices and this makes firms’ raw materials

s e c to r b o r rows e a c h ye a r

into the British economy in recent years.

S up p l y s i d e re fo r m s s ee k to incre a se the pro d u c t i ve c a p a c i t y o f t h e e c o n o my i n t h e l o n g

• Lowe r G ove r n m e nt s p e n d i n g

run and raise the trend rate of growth of l a b o u r a n d c a p i t a l p ro d u c t i v i t y. A n u m b e r o f

a n d c o m p o n e n t s c h e a p e r, t h e r e f o r e h e l p i n g O p en M a r ke t Operat io n s: Op en mar k et o pera-

them control costs. A rise in the value of

Th e s e f i s c a l p o l i c i e s i n c re a s e t h e rate o f l e a k-

Productivity gains help to control unit

tions refer to sale and purchase of government

t h e e xc h a n g e r a t e m i g h t b e a c h i e v e d b y a n

a g e s f ro m t h e c i rc u l a r f l o w a n d re d u c e i n j e c -

labour

s e c u r i t i e s a n d b o n d s b y t h e c e n t r a l b a n k . To

inc reas e in interes t rates o r thro u g h t h e p ur-

tions into the circular flow of income and

cost-push inflation) and put less pres-

control inflation, central bank sells the govern-

chase of currency via Central Bank inter-

will reduce demand pull inflation at the

sure on producers to raise their prices.

ment securities to the public through the banks.

vention in the foreign exchange markets.

cost of slower growth and unemployment.

Th i s re s ult i n tran sfer o f a p ar t o f b an k d epo s i t s to ce ntral ba nk acco unt an d reduces c redit

costs

(an

important

cause

Clearly it can be seen that inflation curbing

Direct wage controls - incomes policies

Labour mar ket refor ms

creation capacity of the commercial banks.

today needs much more than just monetar y pol icies and the key to controlling inflation in the

Incomes policies (or direct wage controls)

T h e w e a k e n i n g o f t r a d e u n i o n p o w e r, t h e

l o n g r un i s fo r t h e a ut hor itie s to ke e p control

best

set limits on the rate of growth of wages

growth of par t-time and temporar y working

of aggregate demand (through fiscal and mon-

Inflation?

and have the potential to reduce cost infla-

along with the expansion of flexible working

etary policy) and at the same time seek to

t i o n . T h i s p o l i c y h a s n o t b e e n u s e d t h a t f re -

h o u r s a re a l l m o ve s t h a t h a ve i n c re a s e d f l e x -

achieve improvements to the supply side of the

But are such monetar y policies the only source

q u e n t l y i n c u r re n t t i m e s, b u t i t d o e s s t i l l t r y

ibility in the labour market. If this does

economy. The credibility of inflation control pol-

of inflation control? Or are they enough consid-

to influence wage growth by restricting pay

allow firms to control their labour costs it

icies can also be enhanced by the introduc tion

ering the current world scenario where all econ-

r is es in the pu bl ic s ec to r and by s et t i n g c a s h

may reduce cost push inflationar y pressure.

o f i n f l at i o n t a rg e t s w h ich shou ld be me t with.

o m i e s a re m u c h m o re c o m p l i c a t e d t h a n e ve r

l im its fo r the pay o f pu bl ic s ec to r emp l oye e s. In recent years the UK and German economy

Himanshu Kundoo and Palnik a H e m n a n i -T h e a u t h o r s a r e s t u d e n t s of IIFT

Monetary

answer

have

policy for

b e fo re ? E f fe c t i ve p o l i c i e s to co nt ro l i n f l at i o n need to focus on the underlying causes of infla-

I n the pr ivate s ec to r the g over nm ent m ay t r y

has not seen the acceleration in wage infla-

t i o n in the e cono my. Fo r in st an ce, if t h e m ain

moral suasion to persuade firms and employees

t i o n n o r m a l l y a s s o c i ate d w i t h s e ve ra l ye a r s o f

InFINeeti Annual Issue | September 2012

BA N KIN G

Impact of BASEL III norms on Indian Bank ing minimum total capital

BANKI NG

2 0 1 3 Pa r a l l e l r u n I : T h e l e v e r a g e r a t i o a n d

t h e r e t u r n o n e q u i t y. T h e c a p i t a l c o n s e r v a -

i t s co m p o n e nt s to b e t ra c k e d by s up e r vi s o r s

tion and counter c yclical buffers look to put a

w h i c h a r e n e i t h e r d i s c l o s e d n o r m a n d a t o r y.

c h e c k o n t h e d i f fe re nt ia l a mou nts of le nd ing at times of ups and downs in the business

“ W hatever was on the

p e r ce nt a g a i n s t 8 p e r ce nt

2015 Parallel run II: The leverage ratio

cycles, thus helping to keep the risk build-

left-hand side (liabilities)

prescribed by the Basel

and its components to be tracked which

up of banks at stable levels throughout all

was not right and what-

committee

a re n e i t h e r d i s c l o s e d n o r m a n d ato r y.

b us i n e s s c yc l e s. H owe ve r look ing at the fa c t

e ve r wa s o n t h e r i g ht- h a n d

risk

weighted

total

that India has undergone moderate cycles,

assets.

side (assets) was not left”-

2 0 1 7 Fi n a l a d j us t m e nt s : B a s e d o n t h e re s ul t s

t h i s n o r m c o u l d b e a d a m p e n e r re s u l t i n g i n

This quote characterized

•Common Equity Tier 1

o f t h e p a r a l l e l r u n p e r i o d , a ny f i n a l a d j u s t -

reduced lending and lesser percentage of

t h e wo r l d ’s b a n k i n g s ys te m

(CET1) capital must be at

ments to the leverage ratio to be made.

sanc tions than in normal conditions. The rules

d u r i n g e a r l y 2 0 0 8 a n d u s h e re d i n t h e g l o b a l

would make systems more robust and central -

least 5.5 per cent of RWA’s. (Risk Weighted Assets) 2018

fi n a n ci a l c r i s i s that sent t remo rs acro ss e co n-

Mandatory to

Basel

i ze d a n d gi ve n t h e c h a lle ng e fa ce d by ba nks

manda-

of getting timely and accurate data from a

requirements.

myriad of systems, it would prove to be a great

o m i e s t h e w o r l d o v e r. T h i s w a s i n s p i t e o f

Under these norms banks will have to main-

leverage

the protective safeguards of the BASEL II

tain their total capital ratio at 9%, higher

tory

norms and has led the Basel Committee on

than the minimum recommended require -

Banking Supervision (BCBS) to come out

ment of 8% under the Basel III norms. The

The Indian regulator has been more strin-

s ys te m . O n e o f t h e m ost impor ta nt ne e d s of

w i t h t h e B A S E L I I I n o r m s p rov i d i n g a b ro a d -

norms also require banks to maintain Tier

gent. For I ndian banks, common equit y

s t a n d a rd i z at i o n o f re p or ting stru c tu re a cross

e n ed f rame wor k o f t ighter regulat io n s a im ed

I capital at 7% of risk weighted assets.

should be at least 5.5% of the asset base,

braches would also be ser ved by these norms.

part

ratio

The

requirement: become III

contributor towards a more robust banking

whereas the international norm suggests

at strengthening both sides of the balance s h e e t fo r b a n k s a ro u n d t h e wo r l d. Th e B a s e l

Following is the summar y of the rules

4 . 5 % . Ti e r I c a p i t a l , o r c o r e c a p i t a l , i n c l u d e s

Th e re fo re i t c a n b e co n c l u d e d t h at B A S E L I I I

III guidelines envisage increase in capital

pertaining

a b a n k ’s e q u i t y c a p i t a l a n d d i s c l o s e d

wo u l d u s h e r i n a w h o l l y n e w e ra o f b a n k i n g

reser ves. Capital ratio is the percentage of

re g ul at i o n w i t h ce nt ra lize d a nd sta nd a rd ize d

a b a n k ’s c a p i t a l t o i t s r i s k - w e i g h t e d a s s e t s .

re p o r t i n g s ys te m s w h i c h i s a n i m p e rat i ve to

and liquidity

the

Indian

scenario:-

requirements worldwide. 2013

Minimum

capital

requirements:

In early May 2012, RBI announced new

Start of the gradual phasing-in of the

norms for the Indian banking sector with

higher

minimum

capital

requirements.

w i t h s t a n d s t re s s e ve nt s i n a n e ve r c h a n gi n g Impact

ments seem difficult to maintain and could

stricter regulations than the BASEL III to Given that the regulations set by RBI on capital

h ave a n i m p a c t o n t h e grow t h o f t h e I n d i a n

require-

adequacy are already stringent the Indian

economy which needs banking suppor t to

implemented.

banks should find it relatively easier to adhere

boost its growth. Hence, there is a need to

to t h e c a p i t a l re q ui re m e nt n o r m s a s m o s t o f

balance between financial stability and the

2016 Conser vation buffer: Initiation of the

the Indian banks have maintained their capital

reality that financial services are essen-

gradu al phas ing -in o f the co ns er vation b uf fe r.

well above the minimum requirements. The

tial for economic growth.

only concern is the requirement of capital ade -

e n d s u p w i t h t h e fo r m e r, t h e l a t t e r o r b o t h

2019 Cyclical Conser vation buffer: The con-

quac y may create pressure on PSUs who are in

is a question that only time can answer!!!

ser vation buffer to be fully implemented.

a c re d i t c r un c h s i t uat i o n d ue to t h e i n c re a s -

be effected in a phased manner within five

2015

f i s c a l y e a r s s t a r t i n g f r o m J a n u a r y, 2 0 1 3 .

Higher ments

Minimum

capital

minimum to

requirements:

capital

fully

Let us look at these norms and their probable impact on the Indian Banks. The rules can be broadly classified as bellow :•The capital requirements for the implementa-

ing of NPAs. The str ic ter nor m of Tier 1 capital

tion of Basel III guidelines may be lower during the initial periods and higher during the later years. • Th e gu i d e li ne s require ban k s to maintain a

wo r l d e co n o my. H owe ve r the ca pita l re qu ire -

2011 Supervisory monitoring: Developing

wo ul d l i k e l y re s ul t i n a n i n c re a s e i n t h e co s t

templates

ratio

o f l e n d i n g re s ul t i n g i n l o a n s b e co m i n g m o re

components.

ex p e n s i ve. I t wo ul d a l s o l e a d to a l owe r i n g o f

and

the

track

the

underlying

leverage

Whether India

S o u my a S e n a n d S o u r a v D u t t a -T h e authors are students of IIFT

InFINeeti Annual Issue | September 2012

W ORLD ECONOMY

W O RL D ECO N O MY

M I ST or BRIC S -Wh o will win t h e growt h bat t le?

J im O ’ Neill, ch air m an o f

1 . Eco no m ic po tential

Goldman Sachs ushered

markets, including the BRICs (excluding Russia).

a cco unt d e f i c i t h a s shot u p to21.2$ bn d u e to

B ut B R I C S co unt r i e s re p re s e nt 3 b i l l i o n p e o p l e

r i s e i n i m p o r t b i l l. Cu r re n t a c c o u n t d e f i c i t o f

with combined GDP of 13.7$ trillion and has

Brazil is l 5.4$ bn which has widened from 3.59$

h i g h e r ave ra g e

b i l l i o n l a s t ye a r.

G D P g ro w t h o f

Russia on the

5.8% compared

other hand has surplus of 42$

i n a d e c a d e - l o n g i nve s t-

The MIST economies more than doubled in size

with

ment boom in 2001 when

in the pas t dec ade. I n M exico, Latin Am e r i c a’s

average

h e co i n e d t h e te r m B R I C

s eco nd-big g es t eco no my, reco rd auto ex p o r t s

5.6% in 2011.

also decreased.

fo r t h e largest em erging

a r e h e l p i n g g r o w t h o u t p a c e B r a z i l ’s f o r a

So, still there is

C h i n a’s S u r p l u s

markets. In 2010, South

second year amid waning Chinese demand

much to cover

Africa began effor ts to

fo r the S o u th Am er ic an natio n’s co m m o d i t i e s.

fo r M I S T c o u n -

d e cre a se of 14%

j o i n t h e B R I C g r o u p i n g. T h i s y e a r, a l e s s e r -

I ndonesia’s domestic spending and investment

tries to take-

f r o m l a s t y e a r.

k nown acronym that the Goldman Sachs chair-

hel ped the natio n’s eco no m ic grow t h a cce l e r-

ove r B R I C S .

South

man has coined is catching fast. The term MIST

ate to 6.37 per cent in the second quar ter, sur -

ha s be e n coi ned to descr ibe t h e n ex t tier o f

pr is ing eco no m is ts w ho fo rec as t a s l owd ow n .

large emerging economies - Mexico, Indonesia,

For most poor countries, South Korea is a model

S o u t h K o r e a a n d Tu r k e y. T h e y a r e t h e n e w

of growth, a better exemplar than China, which

B R I C S c re d i t rat i n g s a re g o i n g s o ut hwa rd s

year 5.7$ bn. Indonesia’s current account deficit

oppor tunities. All four have in common a

is too vast to copy, and better, too, than Taiwan,

d ue to g l o b a l s i t uat i o n w h i l e MI S T co nt i n ue s

o f 1 .8 $ b n h i g h e s t i n re ce nt ye a rs. S ou th Kore a

to re m a i n s t a b l e d e s t i n at i o n fo r rat i n g a g e n -

re co rd e d c u r re nt a cco u nt s u r p l u s o f 5 . 8 4 $ b n

which

59$

has

Africa

recorded huge 2 . Cre d i t rat i n g s

d e f i c i t o f 1 5 2 .6 $ b n .M exico’s cu r re nt a ccou nt d e f i c i t i s 3 .5 $ b n w hich is a d e cre a se from la st

number of fac tors:

Singapore

a large population

H o n g K o n g. A l l

c i e s. Th at i s t h e re a s o n fo r t h e up b e at fo re -

u p f r o m 3 . 5 7 $ b n l a s t y e a r. Tu r k e y ’s c u r r e n t

a nd m ar ke t, a big

three are r icher

c a s t by G o l d m a n S a c h s.

a cco unt d e f i c i t n a r rows to 5$ bn from 7.7$ bn

economy at a bout

t h a n K o re a b u t

1% of global GDP

all are, in dif-

each,

ferent

and

all

MIST

l a s t ye a r.

ways,

4 . Fo re ign R e se r ve s

are members of

exceptions:

theG20. They are

Singapore and

The combine foreign reser ves

termed as new

Hong

Kong

of BRICS stand at 4.25$ trillion

opportunities as

are city states,

which accounts for more than

growth in BRICS

w h i l e Ta i w a n ' s

4 2 % of wor ld ’s re se r ve s. China’s

countries

has

disputed sov-

fo re i gn re se r ve s a re the hig he st

s l o w e d r e c e n t l y.

ereignt y m a k e s

a m o ng the m at 3.2$ tr illion. The

Let us compare

it sui generis.

re s e r ve s of Bra zil sta nd s a rou nd

t h e s e t wo g ro u p s

According

on var ious param-

the World Bank ,

e ter s to be tte r un derst an d t h e p o tential. Co mpar i ng MIS T again st B RI CS

3 . B a l a n ce o f Paym e nt s

365$ billion, Russia at 513$ billion, India at 2 8 6 $ b i l l i o n . D u e t o n e g a t i ve g l o b a l m a r k e t s

Tu r k ey ’s rate o f 11 % eco no m ic grow t h l e d t h e

Comparing the Balance of payment data for last

re s e r ve s h ave d e c re a s e d i n i n f l ow o f f u n d s i n

world in 2011. GDP per capita is $12,300, below

4 m o nt h s gi ve s b e t te r p i c t u re fo r M I S T co u n -

B R I C S co unt r i e s

Eu ro pean l evel s, bu t ahead o f m o s t e m e rgi n g

tries as BRICS deficit is widening. India’s current

InFINeeti Annual Issue | September 2012

W O RL D ECO N O MY

INTER NSHIP EXPERI ENCE

Summer Internship at Goldman Sachs

The foreign reser ves of MIST countries stand at

e m e rgi n g e co n o m i e s m ay b e u p a n d co m i n g,

655$ billion. South Korea accounts for maximum

s a i d p l a ce m e nt a g e n c y Pro b i t a s Pa r t n e r s i n a

reser ves of 312$ billion. The reser ves of Mexico

recent repo r t. M exico, I ndo nes ia, S out h K o re a

stands around 190$ billion, I ndonesia’s around

and Tu r k ey – the M IS T co u ntr ies – are at t ra c t-

1 0 6 $ b i l l i o n a n d t u r k e y ’s a ro u n d 8 7 $ b i l l i o n .

ing increasing attention from institutional

Q. Wh at s k i l l s d i d yo u

10 am- 11am: Checking e -mails, completing

Reser ves for most MIST countries have increased

investors, according to the repor t based on

d e ve l o p w h i l e wo r k i n g at

last day's left over work approaching dead-

o r rem ai ne d s tab le.

a Pr o b i t a s s u r v e y i n l a t e 2 0 1 0 o f 1 8 0 g l o b a l

Goldman Sachs that you

lines, sur fing financial websites till the mentor

investors. The MIST countries stand out, in par t

believe will be useful in

o r t h e wo r k a r r i ve s

because of their comparatively high per- capita

yo ur f ut ure c a re e r ?

5 . Po li ti c a l S ce nar io

income. The per capita gross domestic produc t

1 1 - 1 2 n o o n : Tr a i n i n g s e s s i o n s , o c c a s i o n a l

China and Russia are authoritarians whereas

o f S o u t h K o re a , fo r i n s t a n ce, i s fo re c a s te d to

A. During the course of

Speaker sessions & HR sessions involving inter-

Bra z i l and I nd i a are demo cracies. Amo n g M IS T

be the second largest in the world, nex t to that

my summer internship

a c t i o n s w i t h co m p a ny he a d s

a ll co untr i e s a re demo crac y. D ecisio n m ak ing

o f the U. S . , by 2 05 0, w ith M exico ex p e c te d to

a t G o l d m a n S a c h s, I d e ve l o p e d t h e s k i l l s o f

is fast in China and Russia as compared to

r e a c h 9 t h p l a c e b y t h a t t i m e, a c c o r d i n g t o a

taking a holistic view of any problem and

1 2 - 2 p m : C h e c k i n g e - ma ils, wor k a ssigne d by

I n d i a a n d B ra z i l. A l o t o f co r r u p t i o n s c a n d a l s

G o l dm an S ac hs fo rec as t.

wo r k i n g i n vi r t ua l te a m s. I l e a r nt t h e i m p o r-

yo ur m e nto r, re ce i vi n g comme nts on the wor k

t a n ce o f n e t wo r k i n g a n d o f h avi n g a p ro fe s -

d o n e e a r l i e r, m a k i n g e d its a nd re -wor k ing on

sional attitude towards work- the impor tance

t h e p i tc h b o o k s, f i n d ing time to catch lu nch

ha s affe c te d I nd ian po lit ical image in a neg at i ve way. Bra z i l has been recent ly in n e ws fo r

Co nc l u s io n

corruption in adver tising budgets and pension fu nd s.

To be s u re, the B RIC S natio ns wo n’t f a d e away fo r s o m e t i m e. C h i n a , B r a z i l, I n d i a a n d S o u t h

Mexico proximity to the US, and links with

Africa still top the list of most attractive emerg-

Ce n t ra l a n d S o u t h A m e r i c a n m a r k e t s, a s we l l

ing m ar k ets, acco rding to s u r vey resp o n d e nt s

as its Hispanic culture, underpins interna-

as k ed abo u t their o u tl o o k fo r 20 11 . Wh i l e o ut-

tional investors' and multinational corpora-

per fo r m ing them in grow th this year, t h e MI S T

t i o n s ' c h o i ce o f M e x i co a s a s t r a te gi c i nve s t -

natio ns do n’t appro ac h the B RIC s in e co n o m i c

m e nt l o c at i o n . I n d o n e s i a , t h e m o s t p o p u l o u s

output or population. Inflation risk is also a

Muslim nation in the world, is one of the rising

concer n for investors in MIST countr ies. Tur key

stars in the global economy South Korea is

is having hig hes t am ong them , at 9. 07 % C PI as

n o t o r i o u s l y u n p re d i c t a b l e i n p o l i t i c a l t e r m s.

per latest data. But MIST countr ies offer newer

There are issues of militar y inter vention in

oppor tunities for investors. The MIST countries

Turkey politics which saw many failed attempts

are likely to be the next group of emerging

& seriousness of the word "deadlines". Finding

2-8 pm: Check ing e -mails, receiving new dead-

coup plots. Things have improved but there are

m ar k et targ ets af ter the B RIC S .

t i m e to unw i n d - ' Wo r k h a rd, p a r t y h a rd e r ' i s

lines, reading repor ts, work ing on excel models

j us t n o t a p h ra s e h e re b ut a way o f l i fe.

& pitch books requiring work or re -work,

i s s u e s re l a t e d t o n e w c o n s t i t u t i o n fo r m a t i o n t hat are s ti ll ne ed to be wo r k ed o ut. 6 . Fu tu re pros pe c t s

Vik as Gupta-The Author is a student of IIFT

at te n d i n g c l i e nt te a m- ca lls Question. Describe a t ypical day for an intern at G o l d m a n S a c h s

9 p m : Fi n d i n g t i m e t o w o r k o n t h e S u m m e r I nte r n gro u p p ro j e c t s- S e a rching fo r re l e va nt

Th e B RIC countr i es – B razil, Russia, I n dia n and C h i n a – h ave b e e n d a r l i n g s o f p r i v a te e q u i t y investors for some time. Now another group of

An s we r. 1 0 a m : R e p o r t i n g to wo r k

repor ts, building excel models, getting freaked o ut by o t h e r te a m s ' progre ss

InFINeeti Annual Issue | September 2012

R ISK MANAG MENT

R ISK MANAG ME N T 12-Depending how lucky your day is: Check ing

employees and how they treat them as their

e -mails, Receiving new deadlines and heading

real as s ets - ref l ec ted in the training s e s s i o n s,

ho me fi na lly

social get-togethers, speaker sessions with the

R isk M anagem ent measures in t h i s e ve r c hanging comp et it ive b ank ing l a n ds c a p e

w ho s e -w ho o f the co m pany. The s o c i a l awa re Th e day mi ght be as event f ul as t h is o r l es s er

n e s s p r o g r a m o f t h e c o m p a n y, C o m m u n i t y

(or more), but at the end of the day you realise

Te a mwo r k s, i s a g l o b a l vo l u nte e r i n i t i at i ve o f

t hat the le ar ni ng yo u gain ed to day co ul d no t

Goldman Sachs that allows its employees to

R isk management is at the

the crisis were bad governance, bad incen-

have been achieved in any 20-hour credit

tak e a day o u t o f the o f f ice vo l u ntee r i n g w i t h

core of ever y financial insti-

c ur re nt s i t uat i o n d e m and s that the be st pra c -

co u r s e of colle g e.

l o c a l n o n - p ro f i t o rg a n i z at i o n s. Eve r y s u m m e r

t u t i o n t o e n s u re i t s a b i l i t y

t i c e s f ro m r i s k m a n a g e m e n t b e i m p l e m e n t e d

inter n was al so s u ppo sed to par tic ipate in th i s

to conduct its ongoing busi-

at the earliest to bring stability to banks.

Question: What challenges did you encoun-

i n i t i a t i ve a n d l e a r n f ro m t h e c ro s s d i v i s i o n a l

ness and take benefit of

te r dur i ng the co urse o f t h e pro jec t ? How did

team -bas ed s o c ial pro j ec ts.

opportunities to enhance

Th e ove ra l l re s p o n s i b i lit y of r isk ma na ge me nt

i t s b us i n e s s. I t i s i m p o r t a nt

re s t s w i t h t h e B o a rd o f Dire c tors which ne e d s

Q u e s t i o n : W h a t we re t h e e x p e c t a t i o n s o f t h e

to note that risk management as commonly per-

to un d e r s t a n d, d e f i n e and ma na g e the org a ni-

co m pany f ro m yo u ?

ce i ve d d o e s n o t m e a n m i n i m i z i n g

yo u ta c k le the m? An swe r : B e i ng a f resh er, I h ad n o pr io r u nder-

t i ve s y s t e m s a n d p o o r r i s k m a n a g e m e n t . T h e

risk , rather it means optimizing the

standing of the 'corporate culture'. The differ e n ce s i n t h e t h e o re t i c a l a n d p ra c t i c a l a p p l i -

Answer: At Goldman Sachs, they expect a ‘Ready

risk-reward trade - off. In today ’s sit-

cation of financial concepts, dynamism of

t o l e a r n a t t i t u d e’ a n d a t t e n t i o n - t o - d e t a i l s by

uat i o n w h e re t h e wo r l d i s b r i d l e d

t he indus tr y and maint ain in g t h e mo t ivatio n

their interns. Being highly motivated at all

with the economic crisis, banks will

throughout the long work ing hours were some

tim es is w hat hel ps s ail thro u g h s m oo t h l y.

need to manage risk more care fully, notwithstanding the fac t that

o f t h e c ha lle nges I f aced at G o ldman S ac hs.

t h e y a re i n t h e b us i n e s s o f t a k i n g risk . I t appears that the staggering

What helped along was the friendly and alwaysready-to -help attitude of ever yone on the IBD flo o r and the br illiant guidan ce at ever y s tep by my me ntor an d t h e wh o le TMT-EMEA team I wa s as s oc i ate d wit h . Fin an cial & o t h er train-

S akshi G arg- Student of IIFT. She has done her inter nship at G oldman S achs. Here she enumerates her t wo months of exper ience in the company.

losses faced due to the crisis would d e c re a s e b a n k s’ a p p e t i te s fo r r i s k , b ut t h e b a i l o ut s t h at h ave h e l p e d to prevent fur ther meltdown could

i n g se s s i ons con duc ted by G o ldman S ac hs in

l e s s e n t h e ave r s i o n to r i s k . I n a ny

t h e s t a r t i n g we e k o f t h e i n t e r n s h i p a n d t h e

c a s e, a b a n k ’s a b i l i t y t o m e a s u re,

ver y dedicated HR depar tment of the company

m o n i to r a n d s te e r r i s k s i n a co m -

holding bi-week ly catch-ups to address any of

prehensive fashion is becoming increasingly

z at i o n’s r i s k a p p e t i te using the ir bu sine ss a nd

o u r conce r ns help ed me en co unter t h e c hal -

decisive for its strategic positioning. Let us

r isk exper tise. The policies that they for mulate

le n g e s I i ni ti ally f aced.

take a look at what lies at the hear t of effec tive

s e t t h e s t rate gi c d i re c t ion in which the se nior

risk management for banks and the trends that

m a n a g e m e nt n e e d s to s te e r t h e o rg a n i z at i o n

we a re l i k e l y t o s e e i n t h e c o m i n g fe w ye a r s.

through proper execution and implementation

Q u e s t i o n : Te l l u s s o m e t h i n g n e w t h a t y o u

of policies. A ver y impor tant aspect of the imple -

l e a r n e d a b o u t t h e c o m p a ny w h i l e y o u w e r e wo r k i ng the re. Answer: The investment they make in their

Th e re s e a rc h o f to p g l o b a l m a n a g e m e n t co n -

mentation of the policies is ensur ing that they

sulting firms indicates that the culprits

are embedded in the ver y culture of the organi-

behind the losses faced by banks during

zation. Not all risks are quantifiable. Hence, it is

InFINeeti Annual Issue | September 2012

R I SK MANAGME N T

R ISK MANAG MENT

G i ve n t h e l e ve l o f c o m p l e x i t y f a c e d by b a n k s,

to ensuring that the policies and procedures

i m p o r ta nt that q ualit at ive r isks can b e co m m u -

limit monitoring must be done and segrega-

t h e y w i l l h ave to p a r t n e r w i t h t ra d i t i o n a l co m -

approved by the Board are being followed. They

ni cate d a s gu i d e lin es an d can b e in fer re d f ro m

tion of duties should be clear and enforced.

petitors and peers and IT and change specialists

m us t b e e m p owe re d to e nforce the ir find ings.

management business decisions. I t is also important that senior management officials are in sync

A significant challenge facing vir tually all banks

wi t h e a c h othe r to en sure smo o t h executio n o f

is the need to integrate and har nes s t h e te c h -

the vision set by the board. There is of ten a lack

n o l o g i e s i n a w a y w h i c h w i l l b e t t e r s e r ve t h e

o f co n s i s te n c y b e t we e n C R O s a n d C F O s a c ro s s

business and deliver the outputs required to

p ro ces s e s, s ys te ms an d dat a. Co n f lic t in g pr io r i-

o u tpace the co m petitio n. O ver the ye a r s, d at a

ties and messages created unintentionally by the

volumes along with regulator y and business

t wo s i d e s t a l k i n g a

requirements have

d i f fe re n t l a n g u a g e,

driven

le a d s to c ha lle ng es

tak e a l e a d i n g p o s i -

for the organiza-

t i o n i n t e c h n o l o g y,

tion. It is impera-

developing

new

tive that there is

automated

solu-

tighter alignment

t i o n s, a n d d e ve l o p -

i n f ut ure to m a n a g e t h e i r r i s k e f fe c t i ve l y. C R O s

Bank managers need to establish a strong

and collaboration

ing more complexity

w i l l h a ve t o d e m o n s t r a t e t h e b e n e f i t s a n d t i e

risk management culture that per vades the

between the CRO

covering more coun-

the outcomes of risk management projec ts more

entire organization. Alongside the develop-

and CFO and thus,

tries and business

direc tly to business outcomes and tangible cost

m e nt o f t h e s c i e nt i f i c a n d te chnica l a spe c ts of

more consistency

a c t i v i t i e s. H o w e ve r,

re d u c t i o n s. I n o rd e r to a c h i e ve t h i s, o rg a n i z a -

risk management, it is important to establish

across finance and

these requirements

tions will have to seek collaborations in new ways.

g o o d g ove r n a n ce a n d a he a lthy r isk cu ltu re to

risk. The CRO and

have

the Chief Human

sively contributed

O n e o f t h e m o s t i m p o r t a nt a s p e c t s i n r i s k m a n -

R e s o u rce O f f i ce r s h o u l d d e te r m i n e t h e p ro p e r

to a d ra m at i c i n c re a s e i n I T co s t s a s d e m a n d s

a g e m e nt p h i l o s o p hy i s to m a k e s ure t h at t h o s e

training needed to ensure that all employees

h ave b e co m e m o re co m p l ex a n d t h e re s u l t i n g

w h o t a k e o r a cce p t r i s k o n b e h a l f o f t h e i n s t i -

understand their role in managing risk at the

s ys te m s m o re d i ve r s e. O n e i m p o r t a n t te c h n o -

t ut i o n a re n o t t h e o n e s w h o m e a s ure, m o n i to r

organization. Risk management must be per-

l o g i c a l c h a n g e d e s i g n e d t o m e e t t h e i n c re a s -

and evaluate the risks. The managerial struc -

va si ve to the organ izat io nâ&#x20AC;&#x2122;s cult ure, an d no t be

ing dem ands is in the way that the a p p l i c at i o n

t ure a n d h i e ra rc hy o f r i s k re vi e w f un c t i o n m ay

the responsibility of just the risk func tion alone.

a r c h i t e c t u r e i s b u i l t . Tr a d i t i o n a l l y, t h e a p p l i -

var y across banks depending upon their size

cation landscape was built layer upon hori-

a n d n at ure o f t h e b us i n e s s, b ut t h e k e y i s i n d e -

Lo ng -s i ghte d ne s s is an o t h er k ey to pro p er r is k

z o n t a l l a y e r. S o e a c h l a y e r c a r r i e d a f u n c t i o n

p e n d e n ce. To b e e f fe c t i ve, t h e re vi e w f un c t i o n s

management. Discussions about new prod-

and inter faced with the other layers through

s h o ul d h ave s uf f i c i e nt a ut h o r i t y, ex p e r t i s e a n d

ucts, existing and new positions and other

t ra n s fo r m at i o n a l r u l e s, l e a d t i m e s, s h o r t c u t s,

co r p o rate s t at ure s o t h at t h e i d e nt i f i c at i o n a n d

issues must be broad and not limited to

co m p l e x re p o r t i n g r u l e s, a n d s o o n . H owe ve r,

repor ting of their findings can be accomplished

m e e t i n g q u a r t e r l y t a r g e t s o r a ny o t h e r s h o r t -

that horizontal struc ture is changing to become

without any hindrance. The findings of their

term goals. Both the front office and the top

m u c h m o r e v e r t i c a l . C o n s e q u e n t l y, i n d i v i d -

re v i e ws s h o u l d b e re p o r t e d t o b u s i n e s s u n i t s,

management must have reliable and consis-

ual pieces of information will be gathered

senior management and if required, to the Board.

te nt i n fo r m at i o n w i t h re s p e c t to t h e p o s i t i o n s

f r o m t h e b o t t o m u p, e l e v a t i n g t h e r e p o r t i n g

Audit teams must per form a comprehensive crit-

a nd t h e r i s ks they are t ak in g. Limit set ting and

l i n e s a n d d a t a g o v e r n a n c e w h e r e n e c e s s a r y.

i c a l re vi e w o f p o te nt i a l we a k n e s s e s i n a d d i t i o n

banks

progres-

give banks a stable foundation to rest upon.

Shilpi Ghosh-The author is a student of IIFT

InFINeeti Annual Issue | September 2012

R EGUL ARS

REG ULARS

M O NTH LY C HR ONICLE

Banks need Rs 5 lakh cr to meet Basel-III n o r ms : RBI

risk-weighted assets. In other words, banks’ minimum capital adequac y ratio should be 11.5 per cent. Currently, I ndian banks have to main-

Indian banks would need about Rs 5 lakh

tain a capital adequacy ratio of at least nine

c ro re o f a d d i t i o n a l c a p i t a l to m e e t t h e B a s e l -

p e r ce nt.

III norms, the Reser ve Bank of India (RBI) said in

G over n ment to n o ti f y th e ru les for a dva n ce p r ic ing a r ra n gement soon

Bhar t i Air tel shor tlists banks for I nfratel IPO

i t s a n n ua l re p o r t fo r 2 0 1 1 - 1 2 . St ate - r un b a n k s would need a majority of these funds — Rs

S m a l l m u t u a l f u n d s u n h a p p y o v e r S e b i ’s new rules

1.4-1.5 lakh crore of common equity and Rs 2 .6 5 - 2 .7 5 l a k h c ro re o f n o n - e q ui t y c a p i t a l.

Bharti

Airtel

O fficia ls of sma lle r mu tu a l

has

banks

As m a j o r i t y s h a re h o l d e r i n t h e p u b l i c s e c to r

fu nd s have

soon be able to nego -

including Standard

b a n k s, t h e Ce nt re wo ul d h ave to i n f us e a s i g -

expre sse d

t iate wit h I n dian

Chartered

n i f i c a nt a m o unt i f i t wa nt s to re t a i n i t s 5 8 p e r

d isa ppoint-

t ax aut h o r it ies their

J PM o rg a n t o m a n a g e a s h a re f l o t a t i o n fo r i t s

ce nt s t a k e — t h e g ove r n m e nt ’s s t ate d p o l i c y.

me nt ove r

M ult in at io n a l s w il l

p o te nti al ta x liabililt y in respect of their transactions with their

shortlisted

and

S e bi ’s d e ci-

t e l e c o m s t o we r u n i t t o r a i s e m o re t h a n $ 7 5 0 m il l io n.

lo ca l ar m s or th e lo cal co mp any dealing w ith

Pr i v a t e s e c t o r b a n k s w o u l d n e e d R s 7 0 , 0 0 0 -

sion last week

85,000 crore to meet the new capital adequac y

to a l l ow t h e i n d us t r y to colle c t ex tra cha rge s w i l l b e n e f i t t h e i r l a rg e r pe e rs.

its parent, helping avoid frequent transfer

The biggest Indian mobile phone carrier has

n o r m s. O f t h i s, R s 2 0 ,0 0 0 - 2 5 ,0 0 0 c ro re wo ul d

p r i c i ng li ti gati o n wit h fo reign co mp anies that

al s o s ho r tl is ted B ank o f Am er ic a M e r r i l l Lyn c h ,

be common equit y. RBI said these projec tions

ha s s oure d i nvest ment sent iment.

H S B C , U B S a n d K o t a k M a h i n d ra fo r t h e i n i t i a l

we re b a s e d o n a co n s e r vat i ve a s s um p t i o n o f

T h e m a r k e t r e g u l a t o r, i n a p r e s s r e l e a s e s a i d

pu bl ic s hare o f fer (IP O). B har ti m ay f i l e a p ro -

un i fo r m a n n ua l grow t h o f 2 0 p e r ce nt i n r i s k-

mutual funds can charge an extra 30 basis points

I nd i a wi ll noti fy t h e rules fo r Advan ce Pr ic ing

s pec tu s fo r the IP O w ith the m ar k e t re g ul ato r

weighted assets for each bank. The central

( 0 .3 % ) a b ove t h e ex i s t ing fe e of 2.25% if the y

Agreements (APA) that signal a shif t away from

S E B I nex t m o nth.

b a n k a l s o f a c to re d i n l e n d e r s’ a s s e s s m e nt o f

ra i s e d 3 0 % o f t h e i n f l ows from pla ce s ou tsid e

t h e i r i nte r n a l a cc r ua l s.

the top 15 cities. Prima facie, the step appeared

aggressive tax approach that resulted in trans-

to be almost in line with what the industr y was

fe r p r i c i n g a d j u s t m e n t s a s h i g h a s o ve r R s 1

Th e u n i t, B h a r t i I n f rate l, i s e ye i n g a l i s t i n g i n

la k h c rore i n th e last t wo f in an cial yea r s.

the f ir s t hal f o f 2 01 3. I t has m o re t h a n 3 3 ,0 0 0

Concern was raised on whether the Centre

expecting, but the fine print revealed the norms

“All machiner y has been put in place. Guidelines

mobile phone masts, and also holds a 42 %

might find it difficult to capitalise public

h ave a w i n d f a l l i n s to re fo r the l a rg e r m u tu a l

s h o u l d b e n o t i f i e d s o o n ,” s a i d a n i n co m e t a x

s t a k e i n j o i n t ve n t u re I n d u s To we r s, w h i c h i s

sector banks, owing to the widening fiscal

f u n d s . T h e a d d i t i o n a l 3 0 b a s i s - p o i n t fe e w i l l

d e pa r tm e nt off icial.

t h e w o r l d ’s b i g g e s t t e l e c o m s m a s t c o m p a ny,

d e f i c i t . R e c e n t l y, R B I G o v e r n o r D S u b b a r a o

be charged on the entire fund, not just on new

with about 110,000 masts. Bhar ti Air tel had

h a d e x p re s s e d d o u b t s o n w h e t h e r t h e g o v-

i nv e s t o r s , r e s u l t i n g i n e x i s t i n g i nv e s t o r s a n d

A n A PA i s a n a g re e m e n t b e t we e n a t a x p aye r

ear l ier s aid it was co ns ider ing a s a l e o f up to

e r n m e nt co ul d i n f us e t h i s a m o unt o f c a p i t a l.

investors residing in top cities subsidising new

a nd the ta x a u th o r it ies t h at allows bo t h to s et

10 percent o f I nf ratel in the IP O.

i nve s to r s f ro m t h e h i nte r la nd s. According to Basel-III norms, Indian banks

out in advance, the method of determining the transfer pricing for inter- company transac-

Bhar ti has repor ted 10 consecutive quar ters

h ave to m a i nt a i n a c a p i t a l a d e q ua c y rat i o o f

A back- of-the - envelope calculation shows that

tions, helping avoid post transac tion disputes

o f p ro f i t d e c l i n e, w i t h s h a re s d o w n a b o u t 2 8

at least nine per cent, in addition to a capital

t h e i n d us t r y, hyp o t h e tica lly, will pocke t close

apart giving multinationals certainty about

percent s o f ar this year, u nder per fo r m i n g t h e

co n s e r vat i o n b u f fe r, w h i c h wo u l d b e i n t h e

to Rs 583 crore if it charges 30 basis points

t he ir ta x li abi li t y.

broader market that is up more than 16 percent.

form of common equity of 2.5 per cent of

on the existing equity asset base (combined

InFINeeti Annual Issue | September 2012

R EGUL A R S AUM of equit y, balanced and ELSS funds) of Rs

s w e e t e n i n g i t s o f fe r s i n t h e t w o f i r m s , b u t a

1 , 9 4 , 3 2 0 c ro re. Th e i n d u s t r y h a d a to t a l AU M

c o m p a ny s p o k e s p e r s o n s a i d t h a t i t i s j u s t a n

o f R s 7,30,000 c ro re o n July 30.

“enabling provision” and no new offer has been

REG ULARS

F U N WI TH F I N

m ade yet to the g over nm ent. O u t o f the total Rs 583 cro re, at least 80 % o f

1) Identify the picture below, which represents the most basic form of many financial instruments.

the additional fee will be pocketed by the

I f it g o es thro u g h, this deal al o ne co ul d m e e t

t o p f i ve f u n d h o u s e s i n c l u d i n g H D F C M u t u a l

over 72 per cent of the government ’s disinvest-

Fu n d, R e l i a n ce M u t u a l Fu n d, I C I C I Pr u d e n t i a l

m ent targ et o f Rs 3 0, 00 0 c ro re fo r th i s ye a r.

M u t u a l Fu n d, U T I M u t u a l Fu n d a n d B i r l a S u n L i fe M u tua l.

L o n d o n S t o c k E x c h a n g e - l i s t e d Ve d a n t a h a d

Another point of discontent among small

acquired 51 per cent stake in Balco in 2001

mutual funds is the way exit loads can be

and 64 . 9 per cent s tak e in H indu s ta n Z i n c Ltd

c h a rg e d. S e b i s a i d f u n d s w i l l h ave to p l o u g h

(HZL) du r ing 2 00 2-2 00 3. I n J anu ar y, t h e gro up

b a c k t h e e nt i re e x i t l o a d - t h e fe e i t c h a rg e s

had offered Rs 15,493 crore for buying 29.5 per

for premature investor exit - into the schemes.

cent in HZL, and Rs 1, 78 2 c ro re fo r 4 9 p e r ce nt

Fu n d h o u s e s d o n o t h ave a ny re s t r i c t i o n s o n

res idu al ho l ding in B al co.

h ow m u c h t h e y c h a rg e a s ex i t l o a d, b u t t h e y

2 ) Th i s i n d i vi d ua l ’s i d e a t h at h i s co m p a ny “d i d n’t re a l l y n e e d a ny a s s ets”, he ra ld e d a g gre ssive

u s u a lly c harge 2% o f wh ich 1% is p o cketed by

i nve s t m e nt by t h i s co m p a ny, a n d l e d to h i m b e i n g d e c l a re d C EO o f t h i s compa ny, be fore spe c -

t he m.

t a c ul a r l y l ate r t h at ye a r, t h e co m p a ny fo un d e re d. Wh i c h i n d i vi d ua l a re we ta lk ing a bou t?

N ow o n, f und ho us es will h ave to b r in g back

3 ) Af te r t h i s d o c um e nt a r y c a m e o ut, a H o n g K o n g b a s e d m e rc h a nt b a n ke r obse r ve d, “For a boy

the entire exit load back to the fund. However,

f ro m Wat fo rd to b r i n g a gra n d f i r m d ow n , I m e a n i t wa s a s o c i a l i n s ul t a s we ll.” Who is the “ boy

f u n d s h a v e b e e n a l l o we d t o c h a r g e a n a d d i -

f ro m Wat fo rd ”, a n d w h at i s t h e “gra n d f i r m” a re fe re n ce to ?

tional expense ratio of 20 basis points from t he ove rall fund ir respec t ive o f t h e to t al exit

After shareholders approval, the company

4 ) Th e co m p a ny w h i c h h a d t h i s l o g o h a s t h e c l a i m to f a m e fo r b r i n gi n g ou t some thing for the

lo a d colle c te d.

board would have the powers to raise the

f i r s t t i m e i n t h e wo r l d, w h i c h a l l co m p a n i e s s t a r te d to d o s i n ce t h e n . Id e ntify the compa ny.

offer pr ice up to Rs 18,606.10 crore (USD 3.378 bil l io n) fo r HZL, and u p to Rs 3, 02 8. 7 8 c ro re ( $

Vedanta may up offer for HZL, Balco stakes by 2 5 %

5 50 m il l io n) fo r B al co. The 15 per cent inc reas e in the previ o us o f fe r

Ve d anta G roup may sh ell o ut Rs 21, 635 c ro re,

o f $ 2. 93 8 bil l io n (Rs 15 , 4 93 c ro re), fo r w h i c h

up to 25 per cent more than previously offered,

s h a re h o l d e r s’ n o d h a s b e e n s o u g h t , a m o u n t s

for buying the gover nment ’s remaining stakes

to $ 3 . 3 78 bil l io n (abo u t Rs 1 8, 60 6 cro re at t h e

in Hindustan Zinc and Balco as its earlier offers

d o l l a r- r u p e e exc h a n g e rate t a k e n by Ve d a nt a

have not be e n a ccepted so f ar.

o n Au g u s t 7 ).

5 ) Th i s p a r t i c ul a r b a n k i s ro o te d i n t h e i d e a s o f Fr i e d r i c h Wi l h e l m R a i fe isse n, a fou nd e r of the co o p e rat i ve m ove m e nt w h o c re ate d t h e f i r s t f a r m e r s’ b a n k i n G e r m a ny in 1864. O ne of his fol-

Ve d a nt a h a s c a l l e d s h a re h o l d e r s m e e t i n g on August 28 in London, alongside its a n n u a l g e n e r a l m e e t i n g, t o s e e k n o d fo r t h e

l owe r s, a c l e rg ym a n by t h e n a m e o f G e r l a c us va n d e n El s e n , s to o d at t h e ba sis of loca l fa r me rs’

Contr ibuted by-R ohit K hattar

un i o n s i n a n o t h e r co unt r y. Th i s b a n k i s s t i l l d e e p l y ro o te d i n a gr i c ul t ure, a nd the ce ntra l org a n i z at i o n i s t h e d a ug hte r o rg a n i z at i o n o f t h e l o c a l b ra n c h e s, rat h e r t ha n the othe r way rou nd.

InFINeeti Annual Issue | September 2012

REGUL AR S

Wh i c h ba nk has this un ique h isto r y an d h ierarc hy ? 6 ) I d e nti fy thi s logo o f a ver y f amo us co m pany, a behem o th in its f iel d.

7 ) Who was the fi rst Fin an ce M in ister o f independent I ndia? 8 ) Co n ne c t the fol lowin g: a mat h emat ical g am e o f s trateg y, a t y pe o f s er ver, and a per fo r m a n ce m ea s ure for fi na ncial in st it ut io n s. 9 ) Whi c h fi nanc i a l in st rument, k n own to be pr inc ipal pro tec ted, c an be tho u g ht o f as a co m b i n at i o n of a ze ro - co up o n bo n d an d an equ it y o ptio n? 1 0 ) Whi c h wa s the wo r ld â&#x20AC;&#x2122;s f irst co mmo dit y f u tu res m ar k et? S o l u t i on to la s t e dit io nâ&#x20AC;&#x2122;s cro sswo rd:

Contr ibuted by-J R ahul