FROM THE DEAN’S DESK Prof. Arabinda Tripathy Dean, VGSOM, IIT Kharagpur Prof. Tripathy has moved to academics after working in industry for over 12 years. He has taught at the Indian Institute of Management, Ahmedabad for nearly 25 years. He was founder Director of Institute of Petroleum Management, Gandhinagar and L&T Institute of Project Management. Prof. Tripathy has published several research papers in different national and international referred journals.
ACADEMIC CAREER B.Tech. (Hons.) (IIT Kharagpur) PGDBM (XLRI) M.Sc (O.R.) (London School of Economics) Ph.D. (O.R.) (London School of Economics)
SPECIALIZATION Operations Management, Operations Research, Quantitative Techniques and Project Management
MARK2MARKET VOLUME I, ISSUE I 2
Dear Readers, I would like to take the opportunity of addressing you all through the pages of the maiden issue of Mark2market, the Finance magazine of VGSoM. I really appreciate this initiative of Finterest, the finance club of VGSoM, as well as the efforts which the students have put in. Hope this enthusiasm surges even more and we are able to learn and improve with each step of ours. The importance of Finance, as a domain, is a known fact. In light of the issues haunting the world economy, it becomes all the more necessary to keep a tab on what's happening around. The aim of the Finterest is to provide the students with a platform to develop their financial acumen in a better way. With this vision to guide us, a further step has been taken in the form of a quarterly magazine, Mark2market. Through this magazine, the students would have a great tool to know about the burning issues in the finance field and also learn the nuances of analyzing them. It will bring to the forth insightful articles, trivia, crosswords and much more. I hereby conclude with a sincere hope that all will have a great time going through this issue. Happy Reading!
FROM THE DESK OF FACULTY ADVISER, FINTEREST Prof. Chandra Shekhar Mishra Faculty Adviser, Finterest Prof. Mishra has twelve years of teaching and research experience. His research interests include valuation, Mergers & Acquisitions, and Financial Reporting. He has published several papers in referred journals. He is a Research Scholar at Institute of Public Enterprise.
Dear Students/Fellow Readers, Finterest - The Finance Club of Vinod Gupta School of Management, IIT Kharagpur is dedicated to nurturing and enhancing the fin-quotient of students and also to increase industry interaction with our college. Fin-O-Menal, the fortnightly newsletter of Finterests’ is one of its numerous initiatives and has been quite successful over the years. Finterest is taking a leap and introducing its first ever magazine “Mark2Market”. The national level magazine aims to create new avenues for learning with varied perspective from future managers and include industry & faculty perspective. Students have worked very hard to make it a success, wide ranging participation from colleges across India has been a heartening experience. I would like to thank them all for their participation and support. I would also like to thank Mr. Suranjan Bhattacheryay, Credit Head, SREI-BNP Paribas and Prof Prabina Rajib, VGSoM-IIT Kharagpur for providing their valuable perspective for the magazine.
ACADEMIC CAREER Current Assistant Professor at IIT Kharagpur Past 1. Assistant Professor at Institute of Management Technology Ghaziabad 2. Faculty Member at ICFAI Business School 3. Faculty Member at Vivekananda School of PG Studies M.Com., Ph.D. (Utkal University)
SPECIALIZATION Finance Accounting
I wish Mark2Maket a grand success and hope it becomes a brand to cherish by virtue of its excellence in content, quality and reach.
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FROM THE EDITOR’S DESK EDITORS Mouli Ghatak Rahul Ravi Sagar Kapoor Sumit Pal Singh
TEAM MARK2MARKET Alka Katiyar Abhinav Gupta Abhinav Minnala Balajee Rao Diwakar Shukla Kunal Verma Neelesh Khattar Partha Prathim Yash Mehta
MENTORS Harish Thangaraj Lavanya R
Robert W. Sarnoff once remarked,
“Finance is the art of passing currency from hand to hand until it finally disappears.” Little can be deciphered about the all pervasive world of finance from this simple statement. Time and again, this variegated domain has put even the best minds to test. To make a foray into getting to know this subject in a better way (in addition to the curriculum odyssey, of course), Finterest, the Finance club of VGSoM was formed. As part of the club’s various initiatives, a fortnight newsletter, Fin-O-Menal was being published. This time we decided to take a grand step ahead with our quarterly magazine, Mark2market! The modern day adaptation of the very famous, Lilliput versus Gulliver saga, albeit in a very different context has been chosen as our cover story! The analogy has been beautifully woven to bring into focus how the company, Lilliput Kidswear, is suffering owing to the warring factions. No matter which way the story unfolds, both the sides stand to lose! Another glaring example of human greed failing a company, which was until recently deemed successful. The industry interaction section has some discerning opinions from
MARK2MARKET VOLUME I, ISSUE I 4
experts to capture the wisdom of people who have “been there and done that”. We have featured a gamut of topics for the Finventory section wherein there are some incisive analyses done by the students. From, who could succeed the U.S dollar as the next world currency to the inclusion of new members in the Banking sector to the nitty-gritty of housing finance in India, several other pressing issues have been covered. We express our heartfelt thanks to all those who have sent their entries for the magazine and those who have made contributions to the magazine. As a token of our gratitude, we have decided to award the best three articles with cash prizes. Read on to find more! We would also like to mention that apart from the best three articles, four other articles were really insightful. The Mark to Market team will like to give a special mention to the authors of these articles, viz., Pooja and A.N.V. Mallika from NMIMS, Balajee Rao, Jayati Singh and Sauvik Seal, from VGSoM. There is also a section on Fin-cross, to help you figure out how spot on you can be with your finobulary. With great aplomb, we present to you, the maiden edition (autumn edition) of our magazine! Happy reading!
06 ___ COVER ARTICLE 06
55%-ENDIANS & 45%-ENDIANS
09 ___ INDUSTRY INTERACTION AT VGSOM INTERVIEW WITH SURANJAN BHATTACHERYAY
11 ___ FINVENTORY 11 14 17 19 22 26 29
WHAT WENT WRONG WITH EUROPE? HOUSING FINANCE MARKET IN INDIA THE CHANGING RULES OF BANKING SECTOR AN AWAKENING DRAGON I.P.O.s: AN EMPIRICAL STUDY ENTRY OF THE NEW PRIVATE SECTOR PLAYERS IN THE INDIAN BANKING INDUSTRY CREDIT RATING AGENCIES -AUTHORITY WITHOUT RESPONSIBILTY?
CONTENTS
09
33 ___ RECENT EVENTS AT VGSOM 33
VIKRIINIITE, SAAMANJASYA’11
34 ___ FIN-CROSS
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55%-Endians & 45%-Endians The numbers do not match up to 100-Ends
COVER STORY In 1989, Mr. Sanjeev Narula started the apparel company. In 1994, the company started focusing on children and kids’ wear. During 2006 to 2010, a private equity company Everstone invested around Rs.120 crores. In April 2010, Narula sold a partial stake in the company along with Everstone’s complete ownership to private equity players’, Bain Capital and TPG Growth.
ABOUT THE AUTHOR Prof. Prabina Rajib Professor, Vinod Gupta School of Management, IIT Kharagpur MBM, Ph.D. (Indian Institute of Technology, Kharagpur) Specialization: Finance, Capital Markets Prof. Rajib has received Fulbright fellowship and pursued part of her Ph.D. Research at Purdue University, U.S.A. She has co-authored a book on Capital Market and has several research publications.
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In the land of Lilliput, (Gulliver’s Travels by Jonathan Swift, published in 1927), Lilliputians used to break the boiled eggs from the larger end (Big-endians) before eating them. That was the age old custom followed. But long time before Gulliver travelled to the land of Lilliput, the then emperor passed (great grandfather of the ruling emperor when Gulliver reached the Lilliput) an edict that everybody must break an egg from the smaller end (Small-endians) as one of the royal kids cut his finger while breaking the egg from the larger end. It was also told that anybody flouting the new norm would be penalized. As the story goes, the new law gave rise to a civil commotion spanning three generations in which eleven thousand Lilliputians suffered death, rather than submit to the practice of breaking their eggs at the smaller end! As the prolonged civil commotion was kept alive by none other than the imperial family of neighboring country Blefuscu, both empires fought many wars. And in all these wars, both countries have lost best of their seamen and soldiers, vessels, fleets and many more.
In the land of Lilliput Kidswear Ltd. things probably are no less proportional than eleven thousand deaths!
In 1989, Mr. Sanjeev Narula started the apparel company. In 1994, the company started focusing on children and kids’ wear. During 2006 to 2010, a private equity company Everstone invested around Rs.120 crores. In April 2010, Narula sold a partial stake in the company along with Everstone’s complete ownership to private equity players’, Bain Capital and TPG Growth. Bain Capital and TPG Growth together took 45% ownership of the company with an investment of Rs. 270 crore and Rs.120 crore respectively. Mr. Narual owned the remaining 55%. As the newspaper report goes, on 23rd September 2011, the company board approved the IPO issue. On 26th September, just before the company was about to file its draft red herring issue prospectus, both PE partners, withdrew the consent for the IPO citing reason that they received anonymous calls raising doubts over the company’s audited financial statements.
On September 28, the company board disapproved the financial statement for 2010-11. On the same day, six directors of the company (4 independent directors and two representing the PE investors’) as well as the external auditor resigned (Lilliput’s account was being audited by SR Batliboi & Associates, the
audit arm E&Y).
of
In the first week of October 2011, Mr. Narula approached Delhi High Court to prevent both PE firms from selling their stake. The high court granted injunction against both PEs. Along with the high court, Mr. Narula simultaneously approached the Company Law Board under Section 397 and 398 (Petition to exercise powers in case of prevention of oppression and/ or mismanagement) against both PEs for obstructing the functioning of the company. On 5th November 2011, Delhi High Court appointed SS Kothari Mehta & Company, as the new auditor for Lilliput Kidswear to review the audit by S R Batliboi. The court also appointed an arbitrator to settle the dispute between both warring parties.
Amidst all these, on 20th October 2011, ICRA downgraded Lilliput’s rating after the company could not pay its loan obligation due in October. The analysis of the whole act of accusations and counter accusations does throw some important questions.
Did the company fudge its accounts? If so, why this was not found out by an experienced audit firm like S R Batliboi? Was the audit firm hand-in-glove with Mr. Narula to beef up the company report just before the IPO issue? Why the company board disapproved the financial statement of the company within just 5 days of approving the IPO issue? Why both PEs acted (reacted) only after they received
DID YOU KNOW The Sarbenes-Oxley Act of 2002, popularly known as SOX, is a United States Federal Law enacted as a reaction to a number of major corporate and accounting scandals like Enron, WorldCom, Adelphia.
anonymous phone calls informing them about the fudged accounts? What are the two directors (Matthew Levin and Scott Gilbertson) representing PEs doing all along? What did the four independent directors do when the company board approved the IPO issue? What role did the independent directors play? Why all four of them resigned on the same date? Keeping in mind the bigger scheme of things, some other pertinent questions are:
What kind of due diligence these two PEs did a year back when they first took 45% ownership? Was S R Batliboi the auditor then? What was the investment horizon of both PEs in Lilliput?
The Lehman Brothers in 2008, WorldCom in 2002, and Enron in 2001 had to file for “Chapter 11 Bankruptcy” after a series of revelations involving irregular accounting procedures.
DID YOU KNOW In India, Satyam Computer Services overstated cash ($1.5 Billion) and receivables by $100 Million and understated liabilities by $250 Million. Taken together Satyam’s assets were inflated by $1.85 Billion.
As outsiders, we may not have answer to most of these questions. Also as the story is yet to unfold – the newly appointed auditors are yet to give their report and CLB is yet to give its verdict – nothing should be preempted.
However, it may be quite likely that the company has fudged its accounts. The company is firing all its cylinders (it is MARK2MARKET VOLUME I, ISSUE I 7
DID YOU KNOW In business, a White Knight or a friendly investor refers to the friendly acquiral of a target firm in a hostile takeover attempt by another firm. The intention of the acquisition is to circumvent the takeover of the object of interest by a third unfriendly entity, which is perceived to be less favorable. Alternatively, a Grey Knight is an acquiring company that enters a bid for a hostile takeover in addition to the target firm and the first bidder. It is percieved as more favorable than Black Knight (unfriendly bidder) but less favorable than White Knight.
expanding its retail presence at an unbelievable rate). To ramp up its business, the company took loans form Oriental Bank, Allahabad Bank and ICICI bank by hypothecating all its assets – receivables, raw material, WIP, Finished goods, movable plant and machinery. Mr. Narula also pledged his own properties as a bank guarantee to avail loans for the company. To sustain the growth momentum, the company needs cash. The company has borrowed to the hilt, and getting another round of funding from others PEs might be a remote possibility. Mr. Narula may not want to get funding from both PEs as it would dilute his own stake. Only option left for him is to approach the capital market through IPO.
With the recent spate of poor performance at the IPO market, the company’s IPO can succeed only when it is backed by good financial figures. Hence, probably the easiest way to achieve the desired goal is to do some minor changes! Of course, anything is possible in a country like India.
To conclude, some other important questions can also be asked in this regard.
Did both PEs wanted the company to wait a little longer before it tapped
8
If Lilliput has really “fudged its account”, then it might be the end of road for Mr. Narula. If PEs have made use of “account fudging”, then it might be quite a long road for them to achieve their Indian dream – however small that might be. As the story unfolds, the true picture is likely to emerge.
But in this war, like Lilliputians and Blefuscuians, both parties have bled. There is no winner as of yet – neither the 55%-endian nor the 45%-endians.
If Swami Agnivesh can enter into the Big Boss house to make Indians aware of issues like hunger, poverty, distress and displacement through his interaction with house inmates of questionable IQs, then why a company cannot do a little nudge here and there, just before a big event like an IPO issue! A successful IPO also helps the pre-issue investors to cash out their investment at a high premium. Stalling an IPO just for some extra number here and there seems incongruous—as cashing out in an IPO market is just like the light at the end of the tunnel!
MARK2MARKET VOLUME I, ISSUE I
the IPO market? Was their investment horizon longer than 1 year? Did both PEs want to increase their shareholding by pumping more capital, keeping in mind Lilliput’s growth momentum? Did both PEs fear that IPO issue will make them marginalized owners? Finally the bigger question lies in, did Lilliput really fudge its accounts?
The author’s views are her personal. Those who want to read the free e-book of Gulliver’s Travel, can visit the http://www.literatureproject.com/gullivertravel/index.htm Chapter 3 of the e-book mentions the fight between Big and Small Endians
INDUSTRY INTERACTION AT VGSOM Interaction with Mr. Suranjan Bhattacheryay As part of the guest lecture series, Vaarta’2011, organized by the Corporate and Media Interaction cell of VGSoM, Mr. SURANJAN BHATTACHERYAY, Ex. Head Credit (Senior Vice President-Credit) at SREI BNP Paribas (JVs) addressed the students.
Some excerpts of his tete`-a-tete´ with the Finterest team:
PROFESSIONAL CAREER
Finterest It’s very intriguing that BNP Paribas, a three year old joint venture, which had only infrastructure projects, simultaneously ventured into various domains, viz. healthcare, education. Can you please shed some light on the strategy behind this move?
Ex. Head Credit (Senior Vice President-Credit) Srei BNP Paribas (JVs) March 2010 – October 2011 (1 year 8 months)
Mr. Bhattacheryay Infrastructure Business is booming in India and thereby the government has planned a lot of expenditure in this domain. Since there is a lot of gap in the field of infrastructure development in India, many other financial banks have also entered this domain. At that time we thought some diversification is must to maintain our profitability and also to take care of all stakeholders’ and shareholders demands. That is the main reason for the market penetration by diversifying into a multitude of other fields. Finterest What are the major differences between financing a project in IT or Agriculture sector and that in the Infrastructure sector? Mr. Bhattacheryay Infrastructure project was an established one and we had the requisite expertise but for the new fields ventured into, it was different. In IT we are making funding on the basis of software and hardware. For
example, Oracle is giving software(s) on rent basis or on loan basis. We are financing it as per the receivables. If it is under lease financing, we are making rental receivables and if it is under loan financing we are making receivables financing. We have an agreement with Oracle for such financing and we will be keeping upfront money to them. Oracle is giving software to its reputed customers so our credit mitigation is taken care of. So I can say our portfolio is fantastic in IT.
If we talk about the medical sector, it is booming in India and there is a lot of gap in the demand and the facilities available. So we should penetrate this market. Although we have a low profile in this area but we are concentrating on medical equipments, particularly in Hospitals and boot diagnostic centres but not individual doctors. We are also having some tie ups with Wipro and Philips. So our cashflow is assured and thereby funding such projects is safe. Finterest As we know that almost half of the capital comes from BNP Paribas and that it has a huge exposure in France. Given the
INTERVIEWED BY Manish Gupta Coordinator, Finterest
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ACADEMIC PROFILE Qualified as BSc(Honours in Physics) from Calcutta University in the year 1971, 1979 – 1985 Institute of Bankers(CAIIB) CAIIB, Banking Institute of Cost and Works Accountants of India - ICWAI 1982 – 1988, AICWA, COST & MANAGEMENT ACCOUNTING Chartered Institute of Bankers, London(ACIB), 1988 – 1991, ACIB; Merit, International Banking; Multinational Corporate Banking, Finance & Investments
soverign crisis there, do you think that there is a possibility that France can be downgraded? How do you think it would affect your organization? Mr. Bhattacheryay It is a totally economy based deal. Even if there is any downgrade in France it will not affect us because we are doing business from an Indian economy perspective. If you see the subprime crisis of USA, India was not affected much because growth of the economy was enormous, around 10-12%. India’s economy is untapped. So anything going on there will not hamper India. Infact BNP has already infused 500 crore to the business, because they are taking India as a very secured market for investment as per the latest happennings. Finterest How has the recurring hike in the interest rates by the RBI to curb inflation has affected the Infrastructure sector in particular and the Finance sector in general? Mr. Bhattacheryay Actually, food inflation is high, primarily owing to the mismatch between the demand and the production of food, given the huge population we have. Also there is a distribution problem so food inflation would continue to be high. High inflation will lead to high interest rates.
We are taking loan from foreign investors and banks for making investments so the cost of fund is high. But for banks, the cost of fund is very less than ours so we are less competitive than the bank. But since our penetration and our business models are good we are able to do business. We are marginally making profit. So you can say that our profitability has come down due to the interest rate hikes. Finterest Fight between CCI and DLF is going on. It’s a major dispute in the Infrastructure industry, how do you see the impact of this?
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Mr. Bhattacheryay Many such cases are there and these sort
of issues keep coming. I believe DLF can manage it. It is a big giant. Finterest This seems to be a cascading effect as investigation of other builders’ are also going on. It seems like it can have a big impact on the real estate. Mr. Bhattacheryay No, I do not think so. I have the opinion that if at all they face some issue, they will manage.
Real estate will be impacted only due to the non-availability of cash in the market or when people are not willing to invest cash in the real estate market. If the capital market is down, then only the people will invest in the real estate market. As the capital market is balanced now, the people will not move here, as they have lost heavily in 2008-09. Finterest Finally, I would like to get some advice for students’ who want to make a career in Portfolio management or financial sector in general. Mr. Bhattacheryay Every day you have to read Economic newspapers. It is a compulsion for you to be aware of the markets. What I am doing now as I am the head of Pan India, I am having 9 regions and 100 branches so until and unless I have an in-depth knowledge of local markets, taking decisions is very difficult. I have to take into account what are the situations in different geographical areas. multo, in commoveo quibus premo tamen erat huic.
FINVENTORY
Articles Contributed By Students From B-schools Across The Country
1. What Went Wrong With Europe 2. Housing Finance Market In India 3. The Changing Rules Of Banking Sector 4. An Awakening Dragon 5. Ipos: An Empirical Study 6. Entry Of The New Private Sector Players In The Indian Banking Industry 7. Credit Rating Agencies - Authority Without Responsibilty?
What Went Wrong With Europe
Perspectives on the European Debt Crisis and the rescue measures adopted. The Eurozone, established on 1st January, 1999, is an economic and monetary union (EMU) of 17 European Union nations which have officially adopted the Euro as their common currency. The Euro, which had been hailed as a path-breaking episode in the history of international monetary economics, is currently the second largest traded currency in the world, after the US dollar. However, since late 2009, the Euro has been immersed in troubled waters, as various nations of the Eurozone have landed themselves in a grave economic crisis. At the time of its inception, the eleven founding nations of the Euro agreed, as per the Growth and Stability Pact, that they would keep their government debts below 60 % of their country’s GDP, and their government spending would be less than or equal to 3 % of their GDP. The Maastricht treaty also defined a “convergence” criteria for nations seeking membership to the Eurozone, which included among other things, low and stable inflation and interest rates, to ensure that the countries entering the common currency zone were economically fit enough to join the single currency union.
However, a problem occurred with these criterias when the economic health of Germany and France, two major economies of the Eurozone, were found to be in violation of the treaty. These countries had, for many years in a row, excessive deficits compared to the levels the pact’s definition allowed a member nation to have. Hence, these rules were relaxed in 2005. Further, even as per the original plan, there was no accord on consistent criteria to administer the reporting by member nations, and the Economic and Monetary Union (EMU) did not contain in it a mechanism for the enforcement of the guidelines that were agreed upon in the pact. Thus, the monetary union had to rely on individual governments to take the actions necessary to meet the norms set by the EMU, as it did not have the power to dictate the fiscal policies of the members. As years passed, the global growth bloomed and the financial system abounded in liquidity, and therefore, none of the aforementioned anomalies mattered much to the EMU in the first few years. As growth in Germany was still slow for most of the past decade, smaller nations benefitted from low interest rates and ample credit availability due to the elimination of
ABOUT THE AUTHOR Saurabh Srivastava Master of International Business 2012 Department of Commerce Delhi School of Economics, University of Delhi E mailsaurabh.dse@gmail.com
THIRD PRIZE ARTICLE
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exchange-rate risks. Credit markets practically ignored the large current account deficits, the public finance practices and the escalating real estate prices in these peripheral nations.
DID YOU KNOW Greece has highest Debt to GDP ratio in Europe at 143%, Italy comes second at 119%, and Belgium comes third at 101%. Data collected from CIA World Factbook 2011
DID YOU KNOW
Macro-Economic Exposed
Weaknesses
The lack of sound economics in the Union was exposed when the debt crisis emerged in various nations. The structural and financial loopholes became evident and crevices in the fiscal policies of the members widened. In a monetary union, the amount of success an economy is going to achieve is reliant on its flexibility and efficiency in both labour and product markets, since it can no longer employ currency depreciation as an instrument to realign its costs. High levels of liquidity in the union as a whole concealed the fact that the fringe economies had weakened steadily after the introduction of the common currency. Although core nations like Germany remained loyal to a strict reform process of holding labour costs within limits, wages in nations like Italy, Portugal and Spain rose much faster than productivity, thereby seriously decreasing their competitiveness. Greek Unit Labour Costs increased to a whopping 37 % over the last 10 years as opposed to a rise of mere 5 % in Germany (see figure 1).
Globally, Japan has the highest Debt to GDP ratio at 198%, and outside Europe, Singapore comes second at 106%. Data collected from CIA World Factbook 2011
Figure 1
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Especially for Greece, this blow on competitiveness had devastating repercussions. Having the lowest exports-to-GDP ratio in the entire Euro area, membership to the Eurozone seemed pragmatically more advantageous in terms of access to inexpensive imports as compared to the adoption of a path to higher productivity.
With a public-debt-to-GDP ratio of 127 % and a budget deficit of 15.4 % of GDP, questions about the risk associated with Greece’s sovereign debt started emerging prominently in the market. Ireland had low public debt going into the crisis, but the declining tax revenues and the cost of bailing out of the banking industry (affected by the housing sector bubble burst) sapped the government. As of May 2011, the European Commission predicted public debt above 100 % of GDP for both Ireland and Portugal by the end of 2011. Greece would likely cross the 160 % threshold soon (see figure 2).
Perspectives on the Rescue Plan
Plummeting confidence in the European government bonds led to an everincreasing risk premiums on them in the international bond markets. Meanwhile, in May 2010, country leaders came together and conceptualized a €750 billion rescue package. It comprised the European Financial Stability Facility (EFSF) along with the guarantees by the International Monetary Fund (IMF). Greece received a bailout package of €110 billion ($158 billion) worth, which was thought to put the country back to borrowing from the private capital market within three years. Moreover, Ireland and Portugal also had to be given rescue funds and it became obvious that Greece would be in need of a second rescue package of almost the same quantum as the first, and soon. How would the rescue plan be financed was a controversial issue. The answer depended on the extent to which the private creditors would participate – something Germany in particular had been pushing for, while the negotiations dragged on. Initially, the ECB was opposed to any form of re-profiling of the debt as that could affect its own portfolio if the restructuring was judged as a credit event by rating agencies. On the other hand, restructurings envisaged by the European leaders in March 2011 lacked a comprehensive long-term solution. The “Pact for the Euro” aspired to reinforce consistency in the singlecurrency area through economic devices such as greater wage flexibility and
binding fiscal regulations to correct public finances. The temporary rescue fund was planned to be metamorphosed into a permanent European Stability Mechanism (ESM) with an effective lending capacity of €500 billion by 2013.Markets were, howsoever, not convinced of the long-term efficacy of these measures. Credit rating agency Standard & Poor’s downgraded the Greek government debt to CCC in June 2011, thereby making it the lowest rated sovereign debt globally. The high level of interest rates on Greek debt meant that the
Figure 2 state would have had to make interest payments equivalent to around 12 % of GDP in 2011.
The rescue measures adopted by the European Union so far.
The most striking ones are providing immediate relief to Greece, spurring private sector involvement and creating tools for restructuring. The aggregate official financing would sum to an approximate €109 billion, with the refinancing profile of Greece enhanced through lower interest rates (abridged in the Eurozone’s portion from about 5.5 % to 3.5 %) and extended maturities. The IMF will carry on financing and the EFSF would help it in this role. Recapitalization of the Greek banks will also be done, if the need arises. Roughly one third of the €109 billion cost of the package (€37 billion) will be absorbed by the private sector through write-downs. Further, a debt buyback program would contribute another €12.6 billion, expanding the total to €50 billion. For the period 20112019, the net contribution of the private sector has been estimated at €106. To enhance the efficacy of the EFSF and the ESM and address contagion in the
long-term, the new financial stability facility would be made more elastic to mediate in secondary markets and offer recapitalization of financial institutions when and where required. These measures are intended to address the markets’ most immediate reservations and lead to easing stress in Eurozone bond markets. Furthermore, for the long term, a consensus has finally been reached to take the integration of the Eurozone to the next level, with plans for greater fiscal alignment and economic governance. Public deficits in all countries (except those under a program) would be brought under 3 % by 2013. Leaders from the Eurozone have further committed to implement the national fiscal frameworks envisaged in the fiscal directive by the end of 2012.
To conclude, it can be deduced that any immediate solution to the European debt crisis would have to come with sustained and some basic economic reforms. With the path towards the same already being taken, Europe has a brighter future if it could commit to it. A long-term solution for the debt crises in Europe involves tackling two issues (1) providing immediate relief for the indebted peripheral nations and convincing markets that a working system is in place to handle any debt crisis that emerges in future and (2) agreeing on an understanding over fiscal discipline and creating the instruments for enforcing it. The road ahead would certainly not be an easy one, and fringe nations would require a lot of assistance in times to come to put their economies back on a sustainable growth path. How far the monetary union is able to devise sound economic policies and measures to ensure that these issues are aptly taken care of, would determine how strongly it emerges post crises. References:
1. “If Greece goes…”,The Economist, June 23, 2011 2. IMF World Economic Outlook, April 2011 3. IMF Global Financial Stability Report, April 2011 4. Deloitte Global Outlook, Quarter 3, 2011 5. The financial and economic crisis - facts, analysis and policies, European Commission, May 2011 6. Statement by the heads of state or government of the Euro Area and EU Institutions, Brussels, July 21, 2011
Has the Euro-zone been crippled forever?
DID YOU KNOW In the 1950’s, six European countires decided to pool their economic resources and setup a system of joint decision making on economic issues, and formed three organisations; The European Coal and Steel Community (ECSE), The European Atomic Energy Community (Euratom), and The European Economic Community (EEC). These three communities formed the basis of what is today the Euopean Union.
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Housing Finance Market In India ABOUT THE AUTHOR Ankit Goel PGDM Indian Institute of Management, Bangalore E mail ankit.goel10@iimb.ernet.i n
FIRST PRIZE ARTICLE
DID YOU KNOW The National Housing Bank (NHB), a fully owned of subsidiary of the Reserve bank of India, was setup in 1988 to accelerate housing finance activity in India and act as a regulatory body. As per ICRA report, both SBI and HDFC have 17% market share while the ICICI bank has 13% market share and LIC housing finance has 8% market share in domestic housing finance.
1977: HDFC - The first private 1971: sector retail HUDCO housing established finance institution established
2008: A Housing Late 1990’s: finance Commercial recognized 1988: banks get as non NHB active in commodity established housing with very in response finance few players to need market in business for a supervisory body
Evolution of the Housing Finance Industry (Government Intervention)
Indian Housing Finance Market – An Introduction A lot has been written about India’s growing strength as an emerging nation. We would however, still like to highlight the following points to build up a base for further discussion: 1. GDP growth rate averaging over 8% from 2003-2010. 2. Rapid Urbanization, Rising middle Class. 3. Increasing political stability with re-election of last government. 4. Forex Reserves over $250bn. 5. Service Sector contributing 60% of GDP.
Importance of Housing in Indian Scenario 1. 2nd Largest employment generated in this sector (after agriculture). 2. Fosters development of ancillary industries via strong vertical linkages (forward & backward). 3. US $110 bn market size.
Indian Housing Finance Market – The problem The major problem plaguing the Indian housing industry is the consistent demand-supply mismatch in housing as
Estimated Housing Shortage in India (2007) Rural 14.1 mn units Urban 10.6 mn units MARK2MARKET VOLUME I, ISSUE I 14
The Indian housing finance market is in its nascent stage of development. Since this is a new formed market for a hitherto unaddressed product, there will be huge first mover advantages. The drawbacks stem only from the event of unfavorable policy changes or uneven competition from state. Both the drawbacks are relatively unlikely on the basis of government’s current policy trends. pointed out earlier. The shortage was 23.3 million units in 1981, 22.90million in 1991, ~20 mn in 2001 and so on. Although a clear downward trend has been visible the fact is that the rate of closure of this gap has been decreasing over time. The recent figures in this respect are worse. Refer to the table above. Moreover the growth rate in urban areas is clearly above that in rural areas signifying the urbanization phase India is currently undergoing with more and more people migrating from the rural to urban areas. Also, India has the following features, which signify the need of ease of access to housing finance for the masses. 1. Rapid Population Growth. 2. Increasing disposable income. 3. Very High population density. 4. Lack of supporting financial products. 5. Low competition. 6. Regulation & Exchange Risk. However there is a huge demand-supply disconnect here.
We see that whereas a huge demand for housing finance exists in India, the mortgage/GDP ratio, which is a key indicator of Housing finance penetration, is one of the lowest in the world. In India, it is around 7%, while in USA and UK, it is above 80%. This naturally is a great opportunity waiting to be tapped.
Competition in Housing Finance Sector in India The following are providers of housing finance in India, in one form or another: 1. Commercial Banks: They are the largest mobiliser of savings and also in respect of coverage. Their role has traditionally been limited to providing the working capital needs of business, industry and commerce and hence, they have not been very active participants in the housing finance market. Another reason for the same is that they are funded by short-term resources which cannot be profitably employed in long term lending. 2. Cooperative Banks: They deploy funds from a common pool of resources to provide for various needs of its members. In Indian Scenario, a lot of reluctance has been noticed by these cooperative banks to provide loans for housing finance. Our analysis states the major reason for this is the high risk and illiquidity in giving housing loans from common corpus. 3. Regional Rural Banks: Again, they have not been very active in housing finance sector because of the large amounts and low creditworthiness involved leading to illiquidity and losses. 4. Agricultural and Rural Development Banks: The major function of these banks again is not the provision of housing finance. Consequently, there is low threat from these too. 5. Housing Finance Companies: These are companies with principal objective of lending for housing finance. However, the noticeable aspect our research has revealed is that there are only about 20 companies accounting for greater than 90% of total housing loans provided.
6. Cooperative housing finance societies: These are specialized institutions established and subsidized by NHB to cater to the housing needs of the masses. These institutions do not have adequate technical expertise to be able to design the right product for the right target. However, the state subsidy is a major factor in their favour.
AVG. TENURE 16Y-20Y 15% 5Y-10Y 39%
11Y-15Y 46%
Current Housing Credit Products We visited several banks as customers for housing finance products. In general most of them are providing slight modified schemes of the same basic version. Herein we describe the basic version of Standardized fixed rate mortgage.
INCOME GROUP
5.1-10 Lakh 33%
1.5-3 Lakh 50%
3.1-5 Lakh 17%
We can see from the table collated below, as to how the basic structure described above is used in Indian Context by various housing finance institutions. We did not observe any significant difference between the terms offered to salaried and self-employed people The only significant difference was the requirement for security was much stricter in case of self-employed individuals rather than for salaried individuals.
Refinancing options We came across the following sources from which these housing finance institutions fund their products apart from Internal Funding / Ploughing back of profits which is basically Interest income and principal
INTEREST RATED CHARGED 14-15% 8%
15Y 8%
8-10% 42% 11-13% 52%
MARK2MARKET VOLUME I, ISSUE I 15
LTV OFFERED 76-85% 8%
60-65% 31%
66-75% 61%
MAX LOAN TENURE 10Y 15%
25Y 8%
20Y 69%
LTV TAKEN 71-85% 17% 50-60% 50%
61-70% 33%
MARK2MARKET VOLUME I, ISSUE I 16
repayments redeployed in these INSURANCE GOVERNMENT businesses that is PREMIUMS CONTRIBUTION FUNDING used for extending BANK DEPOSITS FROM MEMBERS further credit to its clients. Also, securitiThese are the Mostly, in case of They render In case of insurance zation is a very major sources of cooperative banks financial assistance companies having common process to refinancing in the or other in the form of hosuing finance refinance the loans, case of commercial cooperative subsidies or by branch like the banks. A notable societies, housing refinancing LIC housing but it basically means feature of there credit is financed through loans finance, insurance transfer or sale of bank deposit is the through or sharing arms provides loan assets and very low interest contribution from bad debt adequate funding. cost that banks its members losses. Insurance arm of hence somewhat have to bear these conglomerates different from for this. However are cash rich and refinancing in the these are short long term in nature. traditional sense. term in nature. Consequently these are a better match The others are as for refinancing follows: housing credit. 1. Bank Deposits (including interbank Increasing order of duration for which refinancing is available participation certificates). GDP ratio, Government Support, 2. Insurance Premiums. Refinancing’s Support. 3. Contribution from members. 4. Central & State Government funding Threats (including refinancing) and International Threat from Housing Finance Companies funding. and Cooperative Housing Finance SocietArranging in increasing order of duration ies, Non-availability of wide long term (from left to right – bank deposits being the refinancing options, Capability Constraints, shortest and insurance premium, the Internal Policy Challenges. longest) for which these refinancing options are available gives us the above The Indian housing finance market is in its chart. nascent stage of development. Since this is a new formed market for a hitherto unadConclusion dressed product, there will be huge first mover advantages. The drawbacks stem From the above analysis, we can now draw only from the event of unfavorable policy an Industry Analysis Map of the Indian changes or uneven competition from state. Housing Finance Market. Both the drawbacks are relatively unlikely on the basis of government’s current policy Strengths trends. Second largest employment generated in this sector (after agriculture), fosters develHence, we conclude that the Housing opment of ancillary industries via strong Finance market in India is very attractive vertical linkages (forward & backward), US and forms a good case for investment. $110 bn market size. Weaknesses Infrastructure Issues, Government's Participation & Regulation, Fragmented industry with power concentration in hands of few players. Opportunities Consistent demand-supply mismatch, Urbanization phase India, Low Mortgage to
References 1. For section on Refinancing: http://rbidocs.rbi.org.in/rdocs/notification/PDFs/71235 .pdf 2. For section on Indian Highlights and the problem: http://www.apuhf.info/Presentation/DSouza_HDFCIndia_Presentation.pdf 3. Current Products : http://www.hdfc.com/pdf/HDFC-IUHF04.pdf
The Changing Rules Of The Banking Sector!!! Financial institutions, predominantly banks running shop in Asia are pitted against major challenge“changing consumer behaviour� with implications for both local as well as international players. There has been a marked shift of increased loyalty towards local banks as compared to multinational organisations, a more cautious approach to borrowing and a greater acquaintance of e-banking and mobile banking in the new millennium.
The changing trend in banking relations, coupled with the demand of products and services and the various mediums of banking in both the emerging and the developing economies of the most diverse continent has been reflected in a survey conducted by a leading consultancy firm across 15 Asian markets. The most obvious reason that clearly surfaces is that the reputation of the overseas banks has taken a hit, post the financial crisis of 2008. The following exhibit shows us a statistical shift in the trends, where people felt it was more important to bank with a local institution as compared to a multinational one, with the Indian consumers showing the highest loyalty towards local banking. The effect was more pronounced in the upper middle class and the mass affluent sections of the society. Mass affluent refers to that part of the income strata, which saves more than it spends and invests for future purposes. This is a clear indication that the multinationals need to pull up their socks and reposition their brand value. Keeping in mind the emotional quotient of the Asian community, international banking institutions must localise their products and services and
ABOUT THE AUTHOR Balajee Rao 1st Year, MBA Vinod Gupta School of Management, IIT Kharagpur E mail: myempire.balajee@gmail .com
improve the overall customer experience. An initial step in this direction would be to do away with expatriate managers and embrace local professionals who would be better at establishing connect with the customers and setting up a better customer-centric model.
Asia has witnessed a dramatic plunge in the customer loyalty, post the 2008 crisis, despite of the high satisfaction levels. The percentage of respondents who said they would recommend their banking institution to a friend dropped 10 percentage points in China, to 47 percent, while Taiwan and the Philippines had the highest loyalty levels of 72 % and 71% respectively. Japan remained the least loyal market in Asia with loyalty parameters of 13%. The decreased loyalty has eventually resulted in a marked increase in the number of banking relationships across the continent- up 22% in 2011 from 2007. The mass affluent strata in developed Asian economies had 4.7 banking relations in 2011 as compared to 3.6 to 2007. This presents an opportunity for banks that are ready to offer their customers a comprehensive package. MARK2MARKET VOLUME I, ISSUE I 17
Hong Kong and South Korea. In China, around 18 percent of all people who patronise banks now use the Internet and mobile banking as compared to 3 percent in 2007, which is enough proof of the increased penetration of the once remote channels. The statistical data mentioned, indicates that the prime movers of loyalty reflect the quality of customer experience and the services a bank offers. Most retail banks focus on metrics such as – bank location, better products or pricing of products and services. But what they miss is that consumers favour banks that are personal, proactive and most importantly have employees who go out of their way to help resolve customer issues. Customer connect is definetly the buzz word for this sector. The global financial crisis of 2008 has had a great impact in shaping consumer outlook.
The number of respondents across Asia who observed, “Borrowing is always risky�, galloped from 43% in 2007 to 70% in 2011. The response was more biased in the developed economies of Asia- in China the percentage more than doubled from 39% in 2007 to a whopping 84% in 2011 and doubled to 60% in Taiwan. Although undeterred by the daunting statistics, Credit service organisations will continue to offer opportunities for consumer finance, mortgages and automobile loans. The arrival of new and convenient channels in the banking sector has influenced a 27% drop in the usage of traditional banking channels, since 2007. Asian consumers are being directed away from brick and mortar branches to more sophisticated methods of banking- Internet and mobile banking. This trend is more pronounced in developed Asian markets such as Taiwan, MARK2MARKET VOLUME I, ISSUE I 18
A growing number of customers, cutting across various income segments, are getting accustomed to and comfortable with them for both sales and service transactions. To garner market share in a multichannel environment, players need to identify the role of each channel, keeping in mind the ever-changing nature of the market and consumer behaviour. For example, outsourcing customer service to call centres and empowering the internet to play a central role in acquiring customers and sales across segments. The first decade of the new millennium has seen rapid growth in personal finance services business, which has boomed by capturing ground in under-penetrated and supply-constrained markets. The crux of competition in the new decade will be better understanding of customer expectations and intelligent use of channels. Players that follow the customer-centric approach and focus on the right metrics will build greater customer equity and eventually be profitable and capture a larger pie of the market cake. References: 1 . http://www.ibtimes.com/articles/78073/20101102/priv ate-banking-asia-trust-confidence.htm 2. http://www.wiley.com/WileyCDA/WileyTitle/productCd -0470824743.html
An Awakening Dragon The global sub-prime crisis unveiled the weakness of the dollar and the euro-zone crisis has proven that the common currency of the European sovereigns is not that robust either.
ABOUT THE AUTHOR Sauvik Seal 1st Year, MBA
Many economists have been considering the Yuan as the next currency to dominate the global economy.The progress of China has been outstanding over the last few decades and its growth nonpareil. But whether China can prove to be the next economic power is debatable and its economic strength is still subject to analysis.
The emergence of China as a global economic power Till the last few decades, China was relatively oblivious to the global economic trends and was controlled by stringent economic policies of its communist government. After 1978, capitalist relations have been created throughout the state-owned enterprise sector, which brought China's industries under the banner of a state-owned capitalism. Recent advancements, amendments of trade policies and loosening of the authoritative strictness have helped China to have a strong foothold in the global arena.
Of recent China has shown massive growth, being the fastest growing economy of the world (9.5% at present). Its business with the U.S is among the largest international trade deals. Besides, Chinese economic policies have been robust enough to absorb the shock waves of the global economic crisis and keep its citizens’ immune. But behind the glorious story is the telling tale of the Chinese working class. The per capita consumption is not very high
Vinod Gupta School of Management, IIT Kharagpur E mail: sauvik36@gmail.com
(nominal GDP per capita being 4382 $). With an enormous supply of labour resulting in minimal wages, Chinese industries produce quality goods at lesser costs and hence sell them cheap to gain a competitive edge in international markets. Thus, the economy is primarily export driven and the poorly paid populace does not have the means to consume much of the goods produced. Critics have been holding up Ordos as a prime example of a real estate bubble just waiting to burst. Ordos is a beautifully planned housing with lavish residential buildings. But it couldn’t get hold of enough buyers as the common man doesn’t have the means to make heavy investments.
Chinese economy also suffers from a not so efficient banking system and glaring income disparities. Moreover, the recent actions by the Chinese government to stimulate their economy have only added to a huge industrial overcapacity and commercial real estate vacancy problems. Many of China's challenges could be addressed with the aid of a stronger Yuan. Given China's obsession with control, a big move is not likely. Growth has been not been uniform over all of China with higher
DID YOU KNOW The poverty rate in china went from 53% in 1981 to 8% in 2001. Approximately, 91% of the Chinese population is literate. Shanghai stock exchange index rose 130% in 2006.
MARK2MARKET VOLUME I, ISSUE I 19
DID YOU KNOW As per Mckinsey report, “Preparing for China’s urban billion”, China will build 10 cities like New york by 2025.
growth occurring in the coastal areas thus once again underscoring the overdependency on exports. The gross domestic product increased 9.1% in the third quarter from a year earlier, the slowest growth since early 2009 and down from a 9.5% increase in the second quarter. Last year, Beijing has raised interest rates five times and the reserve requirements for banks nine times. An effort made to mop up liquidity actually drove inflation to exceed 6% over the summer. Experts say the main risks to the Chinese economy are now a steep fall in demand for exports with a stagnant global economy.
The recent changes in economic policy
DID YOU KNOW China’s main export partners are United States (20.03%), Hong Kong (12.03%), Japan (8.32%), South Korea (4.55%), and Germany (4.27%). The main import partners are Japan (12.27%), Hong Kong (10.06%), South Korea (9.04%), United States (7.66%), Taiwan (6.84%), and Germany (5.54%).
MARK2MARKET VOLUME I, ISSUE I 20
So long, China has been using the remnibi only as an internal currency and international trade was being done in dollars. Dollars had to be converted into Yuan by the Central Bank for the exporters. Now the world's second-largest economy realizes that as a global power it must have a global currency. It looks up to a globally traded Yuan, which could emerge as a store of value on par with the dollar, euro and yen. Bank of China, which is 70%-owned by the government (after the changes in policies), allows companies and individuals to buy and sell the Chinese currency through accounts with its U.S. branches. China began to let its currency rise in June 2010 and it has strengthened it to more than
5.5% against the U.S. dollar. Earlier, the buying and selling of Yuan had largely been restricted to mainland China by the country's strict capital controls. But in July, it opened the currency to trading in Hong Kong. Daily trading has since ballooned from zero to $400 million.Internationalisation of the Yuan would mean that its value can not be controlled that easily by the policymakers. An artificially cheap Yuan has been one of the biggest drivers of China’s export-led boom over the past two decades. Banks have been able to offer low interest rates, benefiting big business and helping to fuel a surge in investment in domestic real estate and other markets.
The Battle with the $ China is the largest exporter to the U.S (169.6 Billion USD in September 2011) and the U.S the biggest importer of Chinese goods.
China sets the value of the Yuan, to a set amount of a basket of currencies, which includes the dollar and buys dollars through U.S. Treasuries to support it upon devaluation. It keeps the Yuan’s value lower than the dollar, thereby always gaining on its exports to the U.S.
China exports a whole load of cheap goods of a very high quality to the U.S thus having a lion’s share in the U.S market and making it difficult for homegrown products to have a footing. U.S companies that cannot compete with cheap Chinese goods must lower their costs to stay in business. As such, many companies have started outsourcing to India and China, adding to U.S. unemployment woes. In fact, the U.S Government is looking for changes in its trade policies to put a blockage over China’s tendencies of manipulating the value of the Yuan with respect to the dollar. China’s moves to internationalize the Yuan might not be applauded by the U.S since it may provoke Beijing to diminish its holdings of U.S. debt. China purchases U.S Government bonds to strengthen the dollar and thereby gain in exporting to a stronger economy. In November 2010, China owned $895 billion in U.S. Treasuries, 32% of the total $2.8 trillion outstanding. There is a growing concern that this gives China a political leverage over the U.S. fiscal policy, since it could theoretically call it as a loan. However, the U.S being the biggest importer of Chinese goods it is unlikely that China would look to lower the value of the dollar. The trade between U.S and China is one of the most interesting aspects of the global economy and can emerge as the determining factor for the 21st century international trade.
The $ of tomorrow? While the first two world wars were fought with weapons, the next may be fought with currency. Of late there has been much debate on whether the Yuan can topple the dollar in the global economy. The dollar itself has weakened as an aftermath of the subprime crisis and its dominance over the world economy has been questioned. Economists have been watching the progress of the emerging economies of China and India and many have been looking up to China as the next global economic super power. While China is the fastest growing economy, its progress has now been
restricted. An export driven economy now suffers from the lack of demand for exports due to the overall weakening of the global economies in the recent years. The State Owned Enterprises Sector (SOE) employs 70% of the workforce but mostly works in marginal profits or deficits. China needs to address its internal issues, accelerate domestic consumption, enhance the purchasing power of the masses, narrow the disparities in income across the nation and strengthen its economy overall. Although it has massive investments of U.S Government bonds, selling the same would only devalue the dollar and reduce the healthy trade surplus China enjoys. Thus, chances of it influencing the U.S fiscal policies are low.
DID YOU KNOW In World Bank’s Ease of Doing Business index, China is ranked at 79th position in 2011, while Singapore and Hong Kong occupy first and second position respectively.
A Chinese dominance of world economy cannot be ruled out and it ought to be given a serious consideration if China improves upon its internal economic environment.
References 1.http://www.acbc.com.au/deploycontrol/files/upload/ Newsletter_NT_111102.pdf 2.http://dailyreckoning.com/chinese-yuan-nextworld-reserve-currency/ 3.http://online.wsj.com/article/SB1000142405274870 3791904576076082178393532.html 4.http://finance.fortune.cnn.com/2011/07/12/dontblame-chinas-currency-for-its-trade-surplus/ 5.http://www.nytimes.com/2010/10/20/business/globa l/20ghost.html?pagewanted=2&_r=2&ref=business 6. http://www.wikipedia.org/
DID YOU KNOW China’s oil consumption per person is 0.006 barrels per day as compared to 0.064 barrels per day for USA. If China catches up with USA, we would need seven more Saudi Arabia’s to meet their demand.
MARK2MARKET VOLUME I, ISSUE I 21
IPOs: An Empirical Study
ABOUT THE AUTHOR Mr. Vikas U. Maskeri MBA (Finance) student Shailesh J Mehta School of Management, IIT Bombay E mail: vikas.maskeri@iitb.ac.in
SECOND PRIZE ARTICLE
Initial Public Offering
Ever since the Indian economy was opened up as a part of the globalization initiatives and the financial sector reforms post-1991, India’s primary and secondary market have witnessed significant growth and activities in the past few years.
The main reasons are that India emerged as a natural choice from amongst the other peer economies is that India has been successful in achieving stable GDP growth of near 8% per annum, coupled with huge domestic consumption of a growing and young middle class population. Other factors have been the rise of industrial activity by both unlisted and listed firms have attracted capital not only from domestic investors but also from foreign corporates, hedge funds and foreign institutional investors in the form of Foreign Direct Investment (FDI) and also through the secondary market route in Indian listed securities. India continues to be one among the top emerging economies in the world and hence continue to attract capital from all over the globe. India’s strong regulated financial system protected the markets and the institutions from the perils of global financial crisis to a
great extent. It may be observed that that both the variables viz. No. of IPOs and the amount of capital raised from public are showing a rising trend albeit the bad phase during the financial crisis of 2008-09. 2010 saw a 200% rise in the no. of issues and 100% rise in the capital raised from 2009. In 2010, we also saw the listing of Coal India which became the largest IPO in Indian history till date. The issue has also delivered a return of 40% on listing and 35% till 1st Oct 2011. However not all the issues that hit the markets for raising subscription of capital have been so successful. Some of the issues have eroded investor wealth significantly. What’s more disturbing is the magnitude and timing of fall. The magnitude has been as large as 88%. The timing of fall is also critical and significant with many of the stocks steeply falling on the day of listing itself. We are therefore focussing on analysing the issues which were listed during the period from October 2009 to October 2010.
Empirical analysis
MARK2MARKET VOLUME I, ISSUE I 22
It is important to consider and examine whether issues belonging to certain sectors have performed vis-a-vis issues of other sectors by following the broad parameters mentioned below:
Packaging
Travel Agencies
Computer Hardware
Electric Equipments
Diversified
jewellery
Power Generation and Supply
0.00%
DID YOU KNOW
-5.00% -10.00%
Agricultural Bank of China raised $22.121 Billion thorugh IPO. It is considered to be the world’s largest IPO to-date.
-6.58%
-15.00% -15.78%
-20.00%
-16.36% -20.35%
-25.00% -30.00%
-29.07%
-35.00%
-35.45%
-40.00%
1. Compute the returns of the stock on listing w.r.t. issue price. 2. Compute the returns of the stock 1 year from listing w.r.t. issue price. 3. Find the relative gain/loss of the stock w.r.t. a benchmark index (here Nifty) to compensate for the systematic risks. 4. If the relative returns of the stock is in negative, then we shall consider that IPO as “Failure”. It is observed that of the total 56 IPOs which got listed between October 2009 and October 2010 considered for this study, 41 of them delivered negative returns and 39 delivered relative negative returns i.e. relative performance of the stock with respect to Nifty.
-36.33%
In 1602, the Dutch East India company was the first company in the world to issue stocks and bonds in the Initial Public Offering.
The retail investor very often desires to invest in those sectors where he would expect to make positive gains on listings and also over a period of time. Hence, the analysis throws light on the following: 1. Returns on listing as compared to issue price: When we consider the listing price to evaluate the sector and issue which has had the best opening on the secondary markets, the leading sector was Computer Hardware with Thinksoft Global Services giving a return of 146% on listing day itself. The near second has been Education with its listing of Career Point Infosystems which saw a rise of 102% on listing. It is worth noting here that during the same period, the CNX-IT index declined by 9%.
The average returns provided by IPO listings in the time period considered are Sectors with highest returns on listing 11.7%.
DID YOU KNOW The sale (allocation and pricing) of shares in an IPO can take several forms like: - “Best Efforts Contract” - “Firm Commitment Contract” - “All or None Contract” - “Bought Deal” - “Dutch Auction”
ou s So ftw ar e Pu bl ish in Pe g rs on al Ca re
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At the other end of spectrum are those sectors which have delivered the highest negative returns upon listing. Emmbii Polyarns belonging to the packaging segment saw a 36% fall from its issue price. 2. Relative returns 1-year to listing as compared to Nifty MARK2MARKET VOLUME I, ISSUE I 23
DID YOU KNOW Stack Profit is a stock market term used to describe a situation before and immediately after a company’s initial public offering.
returns during the same period: It is important to examine the performance of the stock after a significant time since the date of listing of the issue on the stock exchanges. Doing so serves 2 purposes. Firstly, it takes care of any favourable/unfavourable market conditions which could have been present on or around the day of listing and owing to which the issue may not have got the listing it deserved. Therefore giving a year’s time for the stock to adapt itself to the market conditions would be more suitable and
No. of Failed Issues
No. of issues
Failure rate
Average annual relative returns
Agrochemicals
1
1
100.00%
-38.66%
Banks
0
1
0.00%
52.11%
ConstructionInfrastructure
7
9
77.78%
-33.71%
Diversified
1
1
100.00%
-5.74%
Education
0
1
0.00%
2.55%
Electic Equipment
2
2
100.00%
-65.74%
Electronics
1
1
100.00%
-54.21%
Engineering
4
4
100.00%
-35.18%
Entertainment
1
2
50.00%
-1.68%
Financial Services
2
2
100.00%
-56.69%
Foods
0
1
0.00%
241.10%
Hardware
1
1
100.00%
-79.67%
Jewellery
2
3
66.67%
0.66%
Mining
1
1
100.00%
-19.14%
Miscellaneous
2
3
66.67%
-25.84%
Packaging
1
1
100.00%
-77.98%
Personal Care
1
1
100.00%
-6.90%
Pharma
2
2
100.00%
-60.65%
Plastics
1
1
100.00%
-69.61%
Power- Generation & Supply
5
5
100.00%
-39.43%
Publishing
1
2
50.00%
-6.72%
Retail
1
1
100.00%
-65.54%
Software
0
2
0.00%
11.34%
Steel
1
3
33.33%
8.06%
Textiles
1
2
50.00%
-1.89%
Transport
1
2
50.00%
7.76%
Travel Agencies
1
1
100.00%
-32.95%
41
56
73.21%
-20.89%
Sector
MARK2MARKET VOLUME I, ISSUE I 24
which would eventually even out extreme bouts of high volatility in secondary markets owing to a variety of reasons influencing the market dynamics. Secondly, anecdotal evidence also alleges that sometimes the promoters and the merchant bankers systematically support the price of the stock for a few days postlisting. Therefore an examination of returns of the stock after a year of listing will give more equitable price. An additional parameter being considered for evaluating the success/failure of any
Total
issue would be its relative performance against a benchmark index like NIFTY.
Therefore the relative market returns would also factor the performance of the stock and sector keeping in mind the broad markets it is functioning in. The annual average relative return for the IPOs under analysis is -20.89%. Some of the interesting findings post 1-year of listing is that issues belonging to Electronics and Plastics sector which received spectacular listing gains are amongst the lowest return achievers now. On the contrary, Jubilant Foodworks which had an average opening is the clear outperformer and has earned a 2x returns in the same time duration.
What is the probability that an IPO would fail? Having seen the analysis concerning the IPOs for one year, we can develop a database to equip the investors of future IPOs as to what sectors they need to be watchful because of their failure rates and what is the average annual returns they can expect. The table above captures the expected returns and probability of failure if extrapolated from historic returns Any investor can make use of this simple table to assess the probability of failure of any new IPO knowing which sector the new issue belongs to. For e.g., All the 5 IPOs of Power Generation & Supply sector have failed with an average return of -39%. Therefore looking at the above information, an investor may decide not to invest in any issue which belongs to “Engineering” sector. Although there can be some
DID YOU KNOW In the United States, there are two quiet periods during an IPO’s history.
anomalies for those sectors where there are very less no. of IPOs (< 3).
Another pitfall of this study and findings is that it neither considers the risk-return profile of the individual investor nor the existing portfolio of the investor. The work of carrying out these tasks is left at the hands of the investor.
Conclusion
The first is the period of time following the filing of the company but before the declaration of the registration statement as effective by the regulators.
The second is a period of 40 calendar days following an IPO’s first day of public trading. During this time, insider and any under-writer involved in the IPO are restricted from issuing any earning forecast or research report for the company.
This study aims to serve as an additional source of information and a tool for investors to make a decision of whether or not to invest in an IPO. From the above analysis, we can conclude that certain sectors such as Power generation & Supply have shown significant wealth erosion and hence advisable to stay away from during IPOs. This trend also supports the performance of Electric Equipment sector. Also the investor can have a rough estimate of the returns that the issue will generate over a period of 1-year.
References: 1. Securities and Exchange Board of India: www.sebi.gov.in 2. National Stock Exchange: www.nseindia.com 3. Bombay Stock Exchange: www.bseindia.com 4. Yahoo Finance: http://finance.yahoo.com/ 5. E&Y report on “Global IPO trends 2011”: www.ey.com 6. Moneycontrol: www.moneycontrol.com MARK2MARKET VOLUME I, ISSUE I 25
Entry Of The New Private Sector Players In The Indian Banking Industry
ABOUT THE COAUTHORS
RBI has been extremely cautious, taking more than a year in carving out the guidelines which would provide directions for selecting or rejecting a particular private player for the assigning of a banking license.
Pooja N Joukani MBA Capital Market Narsee Monjee Institute of Management Studies Batch 2010-2012 E mail:
poojajoukani512@gm ail.com
A.N.V Mallika MBA Capital Market Narsee Monjee Institute of Management Studies Batch 2010-2012 E mail: mallika.appana@gmail.c om
Banking
industry is the backbone of any economy and hence has always attracted the attention of policy makers, industrialists as well as of academicians. Historically, banking industry in India had been dominated by a handful of industrialist, who exploited it for their personal benefits. Post independence Government tried to increase the reach of banks through measures like nationalization initially and later on through liberalization but unfortunately banking industry has remained concentrated only in urban areas leaving poor people outside its reach.
UPA government in its election manifesto had promised to increase the pace of financial inclusion and since then has taken measures like Unique Identification Number (UID) initiative, which would do away with the hassles of KYC (Know Your Customers) norms. RBI has also taken a crucial step to achieve this objective by coming up with a proposal of issuing banking licenses to the private sector. It intends to provide an opportunity to not only the NBFCâ&#x20AC;&#x2122;s but also, for very first time to the industrial houses to participate in financial inclusion by expanding banking net to the lower strata of the society.
Key Guidelines and Rationale MARK2MARKET VOLUME I, ISSUE I 26
RBI has been extremely cautious, taking more than a year in carving out the guidelines which would provide directions for selecting or rejecting a particular private player for the assigning of a banking license. As per RBIâ&#x20AC;&#x2122;s draft on guidelines for banking licenses issued in September 2011:
The initial minimum paid-up capital for a new bank shall be Rs 500 crore and that a wholly-owned non-operative holding company (NOHC) will hold the existing businesses and the newly created bank within itself. Only the non-financial companies can have a shareholding in the NOHC. The minimum capital requirement of 500 crore is neither significantly high nor meager. A very low requirement (say 200 crore) could attract non-serious entities without adequate financial resources leading to operational-inefficiencies and there would be a risk of early wipe off, of the initial-capital. A very high requirement (say 1000 crore) would evince only those with high funds who would be profit oriented and could divert funds to big-ticket corporates thereby diluting the purpose of financial inclusion. Thus, the requirement of optimum capital (neither too high nor too low) is the solution. This can be fulfilled by entities with large surplus of funds (that are readily available with the industrial houses). It could also act as contingent capital for banks during financial-crisis.
The creation of an NOHC would enable separating of activities of all the subsidiary companies and help in greater regulation by separate regulators in each of the segmented spheres.
Except the promoters/promoter groups generating more than 10% of revenues /having 10% of assets in real-estate or broking services, all private sector players are eligible to promote banks. The exposure of the bank to any entity in the promoter group shall not exceed 10 % and the aggregate exposure to all the entities in the group shall not exceed 20 % of the paid-up capital and reserves of the bank. A clear NO to the businesses involved in broking services (like India-Bull) which comes as a lesson from international experiencesâ&#x20AC;&#x2122;. The recent financial crises, due to the real estate bubble, have led to closure of the broking companies along with the banks associated with them. The cap on the holding limit of 10% by banks in the promoter group company is to prevent the sub-version of Chinese wall between the bank and the rest of the group.
Groups with diversified ownership, sound credentials and integrity, having a successful track record for at least 10 years shall be eligible to promote banks and RBI may seek feedback on applicants from other regulators and agencies. Thus, the first-generation entrepreneurs have been kept out of the race.
Newly formed banks must have 25 % of their branches in unbanked rural areas. This is to ensure financial inclusion.
Major considerations for Allowing/Disallowing Industry houses to run banking services
DID YOU KNOW The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal.
Faster Processing: Loans sanctioned to the existing customers, vendors, dealersdistributors of the industrial unit are processed 40-45% times faster than those done by other banks due to quicker duediligence of the clients through already available data. Knowledge-Transfer: The existing industrial houses can also extend the management and strategic expertise of their existing NBFC experience to the affiliated banks. Self-Dealing: Routing of funds by the parent industrial company that set up the bank for its own purposes without considering the depositorsâ&#x20AC;&#x2122; interests. A bank affiliated to a commercial firm may even deny loans to its competitors.
This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Nationalized Imperial Bank of India, which, upon India's independence, became the State Bank of India.
Connected-Lending: Lending to companies/suppliers within the group which would make it difficult for the regulator to trace the sources/utilization of funds.
Analysis of the major companies planning to apply for the Banking License LIC Housing Finance: The company having 21 years of experience in Financial Services provides long term finance to individuals for purchase, construction, repair and renovation etc. Its exposure to real estate loans as on January 2011 was 10-11% which is more than that prescribed in guidelines. Also it has future prospects of launching venture capital fund to invest in real estate further MARK2MARKET VOLUME I, ISSUE I 27
DID YOU KNOW Among foreign banks, the Comptoire d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Puducherry, then a French colony, followed. HSBC established itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking center.
increasing its exposure to the prohibited sector. Probable Outcome: Low chances of bagging the license due to exposure in realty sector. Mahindra & Mahindra Financial Services Limited: The company is primarily involved into financing (for vehicles) since 1993 through its NBFC. It shows a diversified business by financing utility vehicles, tractors, cars (which focus on the rural and semi-urban sector thus having a huge rural presence as financial services). It has around 540 branches, majority of which are in rural areas. Probable Outcome: High chances of bagging the license because of rural presence. L&T Finance: The company is into infrastructure-lending, insurance, financing small/ medium businesses. It has a tie up with National Collateral Management Services (NCMSL) to provide receipt financing which involves collateral management and warehousing services to farmers and small businesses, thus assisting them in financing their working capital requirements at all stages of the supply chain. NCMSL plans to build its own warehouses at 40 locations across 12 states. Probable Outcome: Fair chances of bagging the license due to high rural reach. Aditya Birla Group: The group has a highly diversified business-structure, involving apparels, agri-business, cement, financial services etc, reaching across 3000 villages. It is known for its corporate governance. Its initiative of ‘Center for Community Initiatives and Rural Development’ focuses on the complete development of the communities around the plants of this group usually located in remote rural areas and tribal belts. Probable Outcome: Bright chances of securing the license owing to its rural reach, corporate governance and sound management.
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Tata Group: The group is involved into IT, consumer goods, automobiles, telecom, steel etc. Tata group has taken several initiatives like Tata Chemicals Society for Rural Development, etc. for social reforms, rural welfare and women’s development. Probable Outcome: High chances of securing the banking license due to highly diversified business and sound promoter track.
Conclusion The guidelines incorporate a lot of subjectivity in terms of ‘diversified ownership’, ‘soundtrack record of promoters’ etc. This suggests that the guidelines are merely a signpost for issuance of the banking licenses; the final say still rests at the discretion of RBI. The detailed study of the guidelines and of the various companies applying for the licenses indicates that this step would be instrumental in achieving Financial Inclusion, provided appropriate regulations are in place.
References: www.rbi.org.in/ www.moneycontrol.com www.bseindia.com www.economictimes.indiatimes.com/ www.financialexpress.com
CREDIT RATING AGENCIES
AUTHORITY WITHOUT RESPONSIBILTY? “Trust is essential for an Economy. Fear can lead it to a standstill.”
ABOUT THE AUTHOR Jayati Singh
This statement illustrates the importance of ratings assigned by the Credit Rating Agencies which reduces the information asymmetry in the modern capital markets and gives investors inputs for taking informed investment decisions.
In U.S and Europe faulty ratings are believed to be key proponents of global financial crisis .They have been extensively criticized for their role in fueling the growth of unsustainable asset based structured debt market which led to the global crisis. Additionally, the revision of financial architecture by Basel Committee on Banking Supervision (BCBS) is expected to make the Credit Rating Agencies more important in the management of corporate and sovereign risk.
WHAT ARE CREDIT RATING AGENCIES? Credit Rating Agencies are commercial concerns engaged in the business of credit rating of any debt obligation or of any project or program requiring finance, whether in the form of debt or otherwise, and includes credit rating of any financial, obligation, instrument or security, which has the purpose of providing a potential investor or any other person any information pertaining to the relative safety of timely payment of interest or principal.1 As informed decision making is the hallmark of corporate governance and this is the role and rationale of Credit Rating
2nd Year, MBA Vinod Gupta School of Management, IIT Kharagpur E mail: singhjayati1@gmail.com
Agencies (henceforth ‘CRAs’): to inform the investor upon the credit worthiness of the instruments and the pros and cons of investing in them especially in a complex securitized instruments where information available in public domain is limited. Hence, CRAs influence investor behavior and regulate issuers’ access to financial markets and in this capacity; they act as markets’ ‘gatekeepers’. The need for an independent rating agency capable of opining about the creditworthiness of borrowers was felt when corporates started mobilizing resources directly from savers instead of accessing it from the banks, which led to a basic credit risk for the investors. The history of systematic credit rating, however, is a century old beginning with rating of US railroad bonds by John Moody in 1909. During this one century, CRAs have undergone major growth and adaptation and post the U.S. sub-prime crisis, their role has legitimately come increasingly under scrutiny.
DID YOU KNOW India is currently rated at a Stable BBB- by S&P and Fitch, Baa3 Stable by Moody's.
In India, the credit rating industry presently consists of five agencies registered with SEBI: These agencies provide credit ratings for different types of debt instruments of short and long terms of various corporations. Very recently, they have also commenced MARK2MARKET VOLUME I, ISSUE I 29
Name CRISIL
Year of commencement of operations 1988
Majority Shareholding Company S&P
DID YOU KNOW
ICRA
1991
Moody’s
BBB- and above, Baa3 and above are considered as Investment Grade.
CARE
1993
IDBI
Fitch India Brickworks
1996 2008
Fitch -
credit rating for SMEs. Apart from that, ICRA and CARE also provide credit rating for issuers of debt instruments, including private companies, municipal bodies and State Governments.
What is a ‘Rating’?
DID YOU KNOW The Scandinavian countries, Denmark, Norway and sweden, occupy the top positions in the list of least risky countries for investment
MARK2MARKET VOLUME I, ISSUE I 30
A rating is a simple alphanumeric symbol such as ‘AAA’ or ‘P2+’ used to convey the credit worthiness of the ratee. It is simply an ‘opinion’ on the probability of default of the issuer of a debt instrument on a debt instrument relative to respective defaults of other issuers in the markets. Ordinarily, CRAs rate the instrument but the issuer company which has issued the instrument gets strength and credibility from the grade of rating awarded to the credit instrument. What is the Rating Process? Rating is a multilayered decision making process. The process commences with a rating request from the issuer and signing of a rating agreement. This is followed by a discussion with the company management regarding the competitive position, strategy, financial policy, historical performance, ownership & changes in business concern and short and long-term financial and business outlook. Post these discussions; the rating analyst prepares a report estimating the issuers’ business risk, technology risk, operational risk, industry risk, market risk, financial risk and management risk. Business risk analysis covers industry analysis, operating efficiency, market position of the company whereas financial risk covers accounting quality, existing financial position, cash flows and financial flexibility.
Comparative Rating Quantitative Symbols for Long Criterion Term Rating AAA Probability of default (PD) LAAA Expected loss (EL) CARE AAA Expected loss (EL) AAA(Ind) Both PD & EL -
Under management risk analysis, an assessment is made of the competence and risk appetite of Is made by the management. On finalization of the rating by the CRAs based on information by the rating analyst’s report, a rating is decided upon which is then communicated to the issuer. If the issuer chooses to disagree the rating remains unpublished. Areas of Major Concern Internationally in view of the inadequacies observed in the functioning of CRAs, particularly in the wake of the sub-prime financial crisis, there is a growing concern among the regulators about the potential gap between expectation and realizationbetween reliance on credit ratings and the reliability of such ratings. The many issues that need to be looked into, are:Credit Rating quality: The literature on India’s credit rating industry is scanty. However, the few studies available point to the low and unsatisfactory quality. In a study1 analyzing the ICRA ratings for the period 1995-2005, it is observed that many of the debt issues that defaulted during the period were placed in ICRA’s ‘investment grade’ until just before being dropped to the ‘default grade’. These were not gradually downgraded; rather they were suddenly dumped into ‘default grade’ at the last moment from an ‘investment grade’ category. Broad Rating Failures: Examples include their failure to foresee financial problems of sovereign issuers (as in Latin American debt crises, the Asian Crisis and the 2001 collapse of Argentina) and established
DID YOU KNOW
corporations (Enron, Worldcom etc.), including in the current crisis. Many suggest that ratings have little informational value and that rating changesgenerally lag the market. They are ordinal in nature and although ratings may represent relative credit risk fairly well, they may be less reliable as indicators of absolute risk. Low penetration of Credit Rating: Another important issue in Indiaâ&#x20AC;&#x2122;s credit rating industry is the low penetration. In an-all India survey of investorsâ&#x20AC;&#x2122; preferences, it was found out that 41.29% of investors were not aware of CRAs. Inadequacy of existing methodologies for rating Structured Products: Methodologies adopted by CRAs for structured products given their complexity, multiple tranches and their susceptibility to rapid, multiple-notch downgrades which are pro-cyclical are grossly inadequate. This perpetuated the U.S. sub- prime crisis. General lack of accountability: CRAs do not have a legal duty of accuracy and are often protected from liability in case of inaccurate ratings.
capital requirements, the ratings should be solicited by the companies themselves, and not by the banks. There even have been cases of Credit rating agencies manipulating the credit to increasing the volatility of capital flows from market leading to major financial crises. This is even done to forces on certain portfolio managers to sell. The credit rating in India is governed by Credit Information Companies (Regulation) Act, 2005, State Bank of India Act, 1955, Banking Regulation Act of 1949, Banking Regulation Act of 1949 and Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999 even then few important aspects of credit rating system are untouched.
The Way Ahead Few recommendations that will improve the transparency in the functioning of the CRAs through greater transparency, strengthen position on conflict of interest and increase the accountability are :
Barriers to entry & Exit
A lead regulator model for CRAs: Under this model, SEBI would be the lead regulator and all entities carrying out the activity of credit rating would need to be registered with SEBI. The CRAs so registered with SEBI would be required to acquire further accreditation with other regulators (RBI, IRDA, PFRDA etc.) if felt necessary, for rating products that come in the regulatory domain of the other regulators.
Issuer-pay Model: The Reserve Bank of India, under Basel II guidelines, has stipulated that even though ratings are used by the banks for determining their
Disclosure of other activities carried out by CRAs or their subsidiaries: Many CRAs float subsidiary companies for undertaking other activities such as
Conflict of Interest: CRAs sometimes provide ancillary services in addition to credit ratings. The issuer may use the incentive of providing the CRA with more ancillary business in order to obtain higher ratings. There is a clear conflict of interest in offering advisory services or consulting services to entities rated by the CRA.
If an individual received a credit score of 400 on Monday because he had a history of defaults, and then won the lottery on Tuesday, his credit score would remain 400 on Tuesday because his credit report does not take into account his improved future prospects.
DID YOU KNOW Fitch withdrew all ratings for Iran following the maturity and full repayment of the last outstanding sovereign eurobond on 21 April 2008
MARK2MARKET VOLUME I, ISSUE I 31
consulting, software development, knowledge process outsourcing, research etc. CRAs should not be allowed to enter into any business that may directly or indirectly have conflict of interest with the job of rating.
official reports (such as FSF in 2008 by U.S. Senate , Report by European Commission in 2009) have pointed out how the incorrect ratings of structured financial products in 2008 were due to methodological shortcomings.
Minimizing Conflict of Interest: Accordingly, it is proposed that while disclosing the rating / rating rationale to the general public through stock exchange/press release/web-site, a CRA shall disclose sources of conflicts of interest including details of fees collected by CRA/its subsidiary from the ratee for the past 3 years .Also details of money collected as a result of transactions with the promoters of ratee company should be made public.
Against this backdrop, CRAs have introduced many positive measures like transparency of rating procedures, internal governance, revamp of rating methodologies & rating system and compliance with international code of conduct nevertheless there is a need to further improve the process.
Compliance with IOSCO Code of Professional Conduct :It is proposed to insert an appropriate clause in the SEBI (CRA) Regulations to make it mandatory for CRAs to disclose on their web-sites their code of conduct and how it complies with the IOSCO (International Organization for Securities Commission) Code and in case of any deviation.
DID YOU KNOW On July 14, 2010, Dagong Global Credit Rating Co. from China released a credit rating that aims to compete with the other three western credit rating agencies
Greater due diligence by regulator and governance reforms. Separate rating for corporate bond and securitized products given the different risk characterstics. Check on ‘Rating Shopping’ by ratee companies by mandatory disclosure of all preliminary ratings. There is no doubt that the role of CRAs has been pivotal in the growth of international financial market especially in the market for structured products, which could not have developed without the clear , objective indicators provided by the rating of risk of defaults of the inherently complex instruments. However, over the past three years the changes in the rating have been far more volatile and asymmetric with many downgrades. This has precipitated directly not into severe financial crisis but also undermined the credibility of CRAs. A number of
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CRISIL have introduced an independent Policy Governance Group to approve all new rating policy and procedures, increased disclosure and verification of integrity of historical data. Fitch is considering new and complementary indicative scale for structured products. CARE is also carrying out a closer examination of assumptions, models and other sources of uncertainties affecting the ratings. Additionally , the security industry have formed a global , industry led task force SIFMA( Security Industry and Financial Markets Association ) for better monitoring. The measures taken both by the securities industry and the rating agencies to date are in general commendable and necessary but are they sufficient for confidence to be restored or, more importantly, to avoid a repeat of prior rating problems? Time will tell.
References: 1. Ministry of Finance- Capital Market Division. 2. Report of Committee on Comprehensive Regulation of Credit Rating Agencies, December’09. 3.http://cenexcisenagpur.nic.in/ServiceTax/ stdef.htm 4. http://rbi.org
RECENT EVENTS AT VGSOM VIKRIINIITE SAAMANJASYA’11
WINNERS
“Saamanjasya” is a unique endeavor pioneered by the students of Vinod Gupta School of Management, IIT Kharagpur. It is the first and only social event of IIT Kharagpur. Saamanjasya is being organized with the aim of bringing together Corporate, NGOs, and academicians on a common platform to ensure inclusive growth and inculcate a culture of giving back to the society in our aspiring and educated youth.
Under the umbrella of the flagship event of VGSOM, Saamanjasya, a case study competetion specifically catering to the Finance enthusiasts, Vikriiniite was organized. Sustainable development strategy and using business acumen to find out the possible solutions that can lead to growth in Micro Insurance was the theme of Vikriiniite (in association with LIC). It was held on 22nd of October, 2011 at VGSoM. The dignitaries present were Mr H Bhargava (Executive Director, Micro Insurance, LIC India), Mr M Biswas (Regional Manager, Micro Insurance, LIC East India), Mr B Pradhan (Senior Divisional Manager, LIC Kharagpur), Mr A Tripathi(Dean, VGSoM, IIT Kharagpur) and Mr Pulak Misra (Assistant Professor, HSS Deptt., IIT Kharagpur). The participating teams from the top notch B-schools across the country like IIM Rohtak, IMI, TAPMI and the home teams from VGSoM tabled intriguing ideas through their presentations regarding Micro Insurance in India. The teams figured out that the main boulders in the way of growth for Micro Insurance primarily in the rural areas are mismatch in health care financing, lack of awareness, poor infrastructure (hence less outreach), affordability and willingness to pay. The teams proposed various new insurance plans like Grameen Sewa Plus, Mahamaari Suraksha Bima Yojana, Mus-
The team from IIM Rohtak emerged as the winners. VGSoM team was adjudged the runnersup.
kaan Policy etc. so as to solve these underlying problems and increase the penetration of micro finance in the concerned areas. The teams also discussed about the distribution channels, which the insurance companies should seek to ably reach the beneficiaries. The theory of 4Ps was also introduced here to better serve the 90% uninsured population amongst the 70% rural population of India. The teams sought out ways to counter the ineffectiveness that prevailed in the micro insurance/finance industry by introducing appraisal systems that would minimize delay in claim settlements, increase awareness about the complicated products, improve the infrastructures and the purchasing power of the beneficiaries. They also proposed insurance plans that were simple, understandable, accessible and valuable; laid out marketing campaigns for these plans and sorted out ways for the distribution channels to make the plans more effective for the masses. A few teams did a feasibility analysis of the plans and how productive these plans may be for the companies in the long run. To sum it up, it was an exciting event with a lot to learn for the audience about insurance sector in general and micro insurance in particular. They came to know of the basics of handling the operating costs when dealing with any venture.
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FIN-CROSS
Across 1. A bookkeeping worksheet 5. Having less than five years to run before redemption 8. First-rate 10. Amalgamation 11. Ingests 13. Ordinary shares 16. Legally established as a corporation 17. Act of selling again 18. Effective 19. Type of a rock music 20. Euro forerunner 21. Cake-Walk 22. Wrestling hold 23. Nice to have this 24. Accept 25. Common Market inits. 26. Burden
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Down 2. Gap 3. Conversion of a liability 4. Affirmative vote 6. Notes, coins 7. Deduction Rate 9. Similar to 10. Leadership post 12. A Union 14. A four sided shape 15. A business professional 22. Plenty
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Check out the answers in the next issue. MARK2MARKET VOLUME I, ISSUE I 34
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E E T ST N I F GP
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VGSO
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VINOD GUPTA SCHOOL OF MANAGEMENT established in 1993, was the first school of management to be setup within the IIT system. It was initiated by a distinguished alumnus & a Life Time Fellow of the Institute, Mr. Vinod Gupta, whose generous endowment was matched by liberal support from the Government of India.Today, VGSOM is one of the best and leading B-Schools in India. FINTEREST, the Finance club of VGSoM, is dedicated to nurturing and enhancing the finquotient of students and also to increase industry interaction with our college. The club keeps its members updated on the latest trends and developments in corporate finance, capital markets, investment banking and other related areas.
Contact Information Vinod Gupta School Of Management IIT Kharagpur, Kharagpur West Bengal - 721302 Mark2Market: mark2market.vgsom@gmail.com Finterest: finterest.finclub.vgsom@gmail.com