FINANCE & INVESTMENT CLUB
NIVESHAK
COVER STORY
FINVIEW
SNSO
Russian Invasion: Cold Water Turned Hot
Mr. Dhinal Shah, Founder, Dhinal Shah Associates
Polygon: The Ethereum enhancing startup
ISSUE VI • VOLUME XV • FEB'2022
NIVESHAK
FEB'22
E D I T O R ' S N O T E QUI N'AVANCE PAS RECULE
Dear Niveshaks, We are delighted to present to you the February edition of Niveshak. This edition highlights the major global events with everlasting impact and some of the subject matters that require financial discipline. February month witnessed significant turbulence in the market due to Russia’s invasion of Ukraine, skyrocketing oil prices, and FII outflows because of expected rate hikes by Federal Reserve. The Nifty 50 closed at ₹16,793.9 with a 3.15% drop from the January close. This edition begins with the unfolding of important news stories of February 2022, including RBI’s announcement of the launch of Central Bank Digital Currency (CBDC), the launch of green hydrogen policy, HDFC bank’s finance of Asia’s largest Bio-CNG plant, Edelweiss General Insurance partnership with Ashv Finance, EU’s new data act & Biggest currency crash in Russian history. 1 | EDITOR'S NOTE
TEAM NIVESHAK
Aagam Parikh
Aayush Jain
Akriti K.
Akshat Sharma
Darshan K.
Nikhil Chadha
Shashwati A.
Shreyansh D.
Unnati Tanwar
Aritro Dutta
Arushi Mathran
Hardik Goyal
Manish Kumar
Nihar Mehta
Pratyush Kumar
Rakesh M K
Sandhaan G.
Vasundhra Misra
NIVESHAK
A snapshot of the Niveshak Investment Fund's performance is also shared in the NIF section. The cover story of this edition talks about the impact of the Russia-Ukraine war and how is it not a bilateral war that could spur global operations. In this section, we provide a brief background of the event, the importance of both the countries in a global context, implications of the same in the Indian economy, and how India is positioned to benefit from the massacre. In the Finview section, Mr. Dhinal Shah, Ex-Partner of EY, talks about amendments in IBC, inflationary pressure posed by higher government expenditure, crowding out stemming from the previous point, bonus stripping, and how the travel industry can be brought back to playing hands. Know your sector focuses on the Insurance sector. This section will help you understand the dynamics of the industry, its growth catalysts, the business model, key metrics to analyze companies in the sector, and what the future underlies. Consequently, helping you evaluate the biggest IPO in Indian history. Our 'Deals Brewery' section covers the acquisition of Tower Semiconductors by Intel and how the association is planning to make a leap in the coveted industry.
FEB'22
FinSupervise' of this edition talks about Estate planning. This section will help you understand the benefits, ways to undertake, selecting the right advisor, and forced heirship of Estate Planning. Finally, test your finance, economics, and market awareness with this edition's newly designed crossword for you. Don't have a physical copy? Don't worry, scan the QR code and 'Go Digital'! We would love to hear your thoughts, feedback, and ideas. Please feel free to reach out to us to let us know what you think! We hope you derive something from this edition and stay safe and sound in these exciting times! Stay Invested, Team Niveshak
All images, design, and artwork are copyright of IIM Shillong Finance Club © Finance Club Indian Institute of Management, Shillong Disclaimer: The views presented are the opinion/work of the individual author and the Finance Club of IIM Shillong bears no responsibility whatsoever.
EDITOR'S NOTE | 2
CONTENTS Niveshak Investment Fund
The Month That Was
Know Sect
Monthly performance of NIF
Insurance
17-1
7-8
The Finance Bulletin
5-6 7-8
13-16
9-12
Russia Invasion: Cold Water turned Hot
Cover Story
13-16 Views of Mr. Dhinal Shah
FinView
19-2
Taper T Inevitabi Econ Allite
Arti of t Mon
w Your tor
e Industry
18
FinSupervise Deals Brewery Intel + Tower Semiconductor Deal
Estate Planning
25-26
The Crossword
29
23-24
24
22
27-28
Tantrum: ility of the nomic eration
Polygon
icle the nth
Let's Fin Up
Something New Something Offered
NIVESHAK
FEB'22
T H E M O N T H T H A T W A S THE FINANCE BULLETIN
India Announces the launch of Central Bank Digital Currency (CBDC) Spurred by the substantial danger posed by the quick adoption of decentralized digital currency, RBI will introduce its digital currency. The Digital Rupee will give RBI the freedom to track transactions because it is "centralized" and "controlled." CBDC has the potential to improve the coordination of fiscal and monetary policy. Moreover, it is expected to significantly lower the financial system's settlement risk. Interbank settlement will become redundant as the new system would transact using digital currencies rather than bank balances, much like cash. India's high currency-to-GDP ratio necessitates the use of CBDCs.
India’s Green Hydrogen Policy India's green hydrogen policy will provide renewable energy, used to create green hydrogen, with open 5 | THE MONTH THAT WAS
access without a central surcharge and no inter-state transmission tariffs for 25 years for projects commissioned before 2025. The strategy gives extensive flexibility for hydrogen producers and several incentives for renewable electricity sourcing and development. Green hydrogen will link rising and sustainable renewable electricity generation and hard-to-electrify sectors, thus decarbonizing India's transportation sector. With India's low renewable energy cost advantage, the country is anticipated to generate green hydrogen at roughly one-fourth the cost of global levels, potentially making India the lowest-cost producer on the planet.
HDFC Bank finances Asia’s largest Bio-CNG plant HDFC Bank has joined hands with Indore Clean Energy Private
NIVESHAK
FEB'22
Limited (ICEPL) under its ESG commitment to developing 550tonnes-per-day of Municipal Solid Waste (MSW) to Compressed BioGas (CBG) plant, Asia's largest Bio-CNG plant. Green Growth Equity Fund (GGEF), India's largest climate impact fund with anchor investors such as NIIF and the UK government, is promoting Indore Clean Energy Pvt Ltd (ICEPL). The plant is expected to process 50% of municipal waste generated in Indore City and convert to 100% green products (biogas and manure), making it the largest waste-to-energy project supported by HDFC Bank under its ESG commitments.
Edelweiss General Insurance partners Ashv Finance
with
The digital insurer, Edelweiss General Insurance (EGI), has partnered with Ashv Finance, a tech-driven NBFC with over 100 branches throughout India, to provide financial protection to all its business loan borrowers. While Ashv will provide timely loans to small firms and MSMEs, EGI will offer health insurance to all customers of Ashv Finance in all major cities across the country. The policy will give protection against the business loan in case the borrower suffers from a critical illness or is involved in an accident. In the event of a hospitalization, the coverage will also provide a daily cash benefit.
EU's new Data Act The EU Commission has proposed new rules on who can access and use data generated in Europe across all economic sectors. The Data Act will ensure fairness in the digital environment, which will stimulate competitive data markets and foster prospects for data-driven innovation. The new laws are projected to open up more data and contribute €270 billion in GDP by 2028. The bill aims to assist small firms to stay competitive in a battle to benefit from the large amount of nonpersonal data provided by connected products ranging from smart appliances to automobiles.
Biggest Currency Crash in Russian History Russia's war on Ukraine proved disastrous for the country. Nations worldwide stopped Russian banks from the SWIFT international payment system, limiting Russia's access to its vast foreign currency reserves. As a result, the Russian currency, the ruble, fell more than 30% against the US dollar, reaching a new low of less than 1 US cent. This action will impact Russia's funding worth "hundreds of millions of dollars." As a result of the crash, the Russian central bank doubled interest rates by more than 20%. The ordinary Russians have rushed to banks after suffering the outbreak of Vladimir Putin's action, which makes one wonder if the invasion was worth it!
THE MONTH THAT WAS | 6
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FEB'22
N I V E S H A K I N V E S T M E N T F U N D PERFORMANCE EVALUATION
NIF SINCE INCEPTION
Sensex Scaled Value
Portfolio Scaled Value
Return measures Total investment value: ₹10,00,000 Current portfolio value: ₹29,49,068 Change in portfolio value: (5.67)% Change in Sensex: (1.61)%
NIF FEBRUARY PERFORMANCE
Sensex Scaled Value
Portfolio Scaled Value
Risk measures Standard Deviation NIF: 48.43% Standard Deviation Sensex: 45.18% Sharpe ratio: 4.05 (Sensex: 4.02) Cash remaining: ₹1,84,140
Comment on equity markets & NIF performance The total equity market capitalisation (m-cap) has dropped to a six-month low of Rs 2,52,39,045.09 crore in February 2022. However, the market valuation has jumped 25.68 per cent in comparison to February 2021, when it stood at Rs 2,00,81,095.73 crore. During the month under review, equity m-cap was at its lowest on February 24 at Rs 2,42,24,179.79 crore, the day Russian President Vladimir Putin announced a military operation in Ukraine. The market-cap depends entirely on the market trend, which in turn, is entirely swayed by news from the Ukraine front now. If the Ukraine crisis ends soon, there will be a sharp uptrend in the market for a while. NIF saw a portfolio change of (5.67)% (Sensex: (1.61)%) and stood at a net value of ₹29,49,068. 7 | NIF
NIVESHAK
FEB'22
INDIVIDUAL STOCK WEIGHTS & MONTHLY PERFORMANCE Portfolio Weight
Performance
TOP GAINERS - FEBRUARY 22
41.74%
- Speciality Restuarent
4.72%
- Titan
2.72%
- Avenue Supermarket
TOP LOSERS - FEBRUARY 22
(29.92)%
- Indiabulls Hsg
(28.33)%
- Manappuram Fin
(23.31)%
Tirumalai Chem
NIF SECTORAL WEIGHTS
NIF | 8
NIVESHAK
FEB'22
C O V E R S T O R Y RUSSIAN INVASION: COLD WATER TURNED HOT
Background The armed confrontation in Ukraine began in early 2014 and swiftly devolved into a lengthy standoff, with frequent shelling and skirmishes taking place along the front line between Russian and Ukrainian-controlled border territories in the east. Since Russia launched a full-scale military assault into Ukraine on February 24, 2022, combat has resulted in several civilian deaths and tens of thousands of Ukrainians fleeing to neighboring nations, notably Poland, where US forces are poised to aid. Russia began mobilizing troops and military equipment near the border with Ukraine in October 2021, reigniting fears of an attack. Armor, rockets, and other heavy armament were seen traveling to the Ukrainian borders in November and December 2021, according to commercial satellite images, social media reports, and publicly available intelligence. By December, more than 100,000
9 | COVER STORY
Russian troops had been stationed along the Ukraine-Russia border, and US intelligence sources warned that Russia could be plotting an assault for early 2022. Russia's foreign ministry released a set of demands in mid-December 2021, requesting that the United States and NATO suspend all military activities in Eastern Europe and Central Asia, pledge to no further NATO expansion toward Russia, and prohibit Ukraine from joining NATO in the future. These demands were refused by the United States and other NATO partners, culminating in Russia's invasion of Ukraine.
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Why Russia and Ukraine are important? By the end of February, Russia's invasion of Ukraine had pushed Brent crude oil prices above $100 per barrel, jeopardizing the global economy's weak post-pandemic recovery. Wheat prices have also risen by more than 60%, raising the risk of starvation and social upheaval in nations that can no longer afford to subsidize bread and rely heavily on wheat imports from Russia and Ukraine – primarily those in the Middle East, North Africa, and South Asia. In addition to natural gas, crude oil, and wheat markets, Russia exports almost 14% of all worldwide coal briquettes, making it the world's third-largest exporter of this vital commodity utilized extensively in power generation and energy-intensive industries. Coal accounted for
FEB'22
more than 27% of total global energy use in 2020, second only to oil. Coal, in particular, accounts for the majority of the world's electrical producing capacity. Coal-fired power stations generated more than 35% of the world's electricity in 2020. Russia and Ukraine contribute 7.5% of world iron and steel exports, with Russia in fifth place with 5.2 % and Ukraine in fifteenth place with 2.3 %. Infrastructure, structures, machinery, defense, transportation, appliances, furniture, and various other home and manufacturing industries require these metals to operate. As a result, disruptions in iron and steel production in Russia and Ukraine could harm global economic activity. Furthermore, Russia exports 16 % and 24 % of world platinum and
COVER STORY | 10
NIVESHAK
palladium, respectively. Jewellery, dentistry, and electronic equipment all employ these metals. Palladium is also utilized in the semiconductor sector, which has recently experienced supply shortages and demand shocks due to COVID. As a result, supply disruptions in platinum and palladium will affect many products, from household appliances and automobiles to industrial machinery and other electrical devices. Neon is a by-product of steel production and is essential to the semiconductor industry, and Russia and Ukraine supply over half of the world's neon. The devastating impact of neon shortages on an already struggling semiconductor sector and its ripple effect would reach far across the global economy.
Implications for Indian Economy The impact on commodities, particularly energy, is the critical source of concern for the Indian economy. Rising petroleum prices inevitably lead to a depreciation of the rupee, an increase in inflation and the budget deficit, and a slowing of GDP growth. A 10% increase in petroleum prices is predicted to lower GDP growth by 20 basis points, increase inflation by 40 basis points, and expand the current account deficit by 30 basis points. Furthermore, a higher current account deficit might tighten the exchequer's position to stick to the budgeted fiscal deficit target without 11 | COVER STORY
FEB'22
cutting expenses, particularly from the much-lauded budgeted capital expenditure. This might inhibit the overall medium-term growth prospects of the Indian economy. The Indian economy, fortunately, can survive the agony of increasing oil costs and the interruption produced by the Russia-Ukraine conflict, given the historically highest levels of foreign reserves available with the Central Bank. Other reasons why the country is better positioned to weather the current account deficit and rupee volatility are more remittances and services exports. There will undoubtedly be a slowdown in growth, but it will likely be manageable. The conflict might result in the withdrawal of monetary support by central banks worldwide, which must be handled with considerable caution. The chances of liquidity continuing abundant and interest rates remaining low have increased. In the face of current market volatility, accommodating
Impact on Indian Rupee (Source: CMIE Economic Outlook)
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policies in the Western world can provide the Reserve Bank of India with the requisite cushion to deal with the ongoing crisis and also support the economic revival measures taken up by the fiscal policymakers.
Potential Silver Bullet If India can resuscitate the RupeeRuble trade and become Russia's favored supplier, there is a silver lining to the black cloud. Russia will require the assistance of a large economy such as India to plug the gaps in its economy that the sanctions have severely harmed. Due to India’s size and proximity, there will be sufficient spoils to divide with China, Russia's first choice. India should make a concerted effort to entice Russian capital to invest in Indian companies. Compared to western markets, these investors would find their investments much safer and more profitable in India. The sanctions imposed on Russia could boost India's travel and tourism sectors, as India could emerge as more than just a transit hub for Russian travelers For higher education, India sends many students to Ukraine and Russia. This need should be channeled into expanding India's own educational system. Currently, billions of dollars are being spent on foreign exchange to pay for education abroad. Instead, India should leverage the
Source: Business Today India
current crisis to educational sector scope and size.
expand the in terms of
The western world will seriously examine lowering supply chain concentrations, and the "China + 1" strategy will be pushed with greater zeal. India might significantly benefit from this move, especially in industries where the government has implemented performance-linked incentive plans. This will help India maintain its export momentum while also integrating more deeply into global supply networks. To encourage entrepreneurs to seize this opportunity, there is a dire need to improve the ease of doing business and the rule of law. These are exciting and challenging times, and how India and the rest of the world chart through the high and low tides simultaneously will decide the scope and trajectory of their respective economic recoveries.
COVER STORY | 12
NIVESHAK
FEB'22
F I N V I E W SPOTLIGHT ON SUCCESS
Mr. Dhinal Shah Founder Dhinal Shah Associates
Our honourable finance minister has proposed amendments to the insolvency and Bankruptcy Code in her budget speech, could you shed some light on what these essentially are and the impact that these amendments may have on businesses in India? So when the insolvency Bankruptcy Code was implemented on 1st December 2016, cross-border insolvency was not part of the law. When the banking law reforms committee suggested the draft IBC code they had suggested and based on unicentral law, the cross border insolvency should be introduced. Based on that the Ministry of corporate affairs constituted a committee and issued a draft report and then there has been a number of debates and discussions about the introduction of the cross border 13 | FINVIEW
insolvency. Because what happens in real-world is that if I am an Indian company, and there is a subsidiary outside India, then legally today under the existing law, the insolvency professionals do not have access and control over the subsidiary outside India or vice versa. So, the cross-border insolvency will help the government and the insolvency professional to expand their practice to have control an excess on the overseas entities and vice versa. There will be certain coordination between the adjudicating authority in India, which is NCLT and NCLAT, and the foreign courts. In one of the cases called Jet Airways, this issue was debated before the NCLT Mumbai, But in the absence of cross border insolvency, the NCLT Mumbai did not accept this argument of Jet Airways counsel about the cross border insolvency. So, in my opinion, the cross-border insolvency will really help to access the overseas assets and the other data and the information and vice versa. The intention of the government today is to base
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on Uni-Central law, but based on unicentral law, the government will have to frame certain guidelines, particularly on the coordination between and the adjudication of the orders. And one of the underlying principles under cross border is a COMI (Centre of Material Interest) that will be one of the very critical aspects of this entire implementation of the cross border insolvency. With public expenditure expected to be Rs.7.5 lakh crore for FY23, do you believe that this may drive in inflationary pressures and if so, how can how can we expect the RBI to behave in the backdrop of such a growth oriented budget?
So, with every capital expenditure and the infrastructure budget which the government is introduced, which is 7.5lakh crore, it will ultimately help in generating additional income, it will also help in generating incremental employment. And with this, ultimately the disposable income of the people will increase. Now, when a disposable income increases, there will be increased consumption and with increasing consumption, it has to also meet the supply side. And therefore, every growth in the economy and with every growth or the incremental expenditure on the capital will always have some inflationary effect. And therefore, RBI will have to monitor this on a periodical basis and try to maintain this through the interest
FEB'22
rate and the repo rate. So, ultimately the inflationary aspect is balanced between the growth of the economy and the availability of disposable income and the supply side. So that overall impact on the economy is not substantial. But I must admit that, with every growth in the economy, it has an incidental impact on inflation. In corollary to the last question, there seems to be much euphoria about the enhanced capex, which will be primarily financed with the bond market, given that the central bank might have to push the policy rate out to empty inflationary pressures. Do you think such a situation could trigger a crowding out effect inhibiting the much anticipated crowding in effect for the private investors?
With every incremental growth in the economy, and I think a disposable income and when the inflation has an impact on the interest rate, the cost of borrowing for the private sector increases, and the stability and sustainability to bear these incremental borrowing costs for the private sector, which ultimately impact on your crowding-out effects. Now, the issue is, then how do you balance between these crowding-out effects for the private sector by supporting the policy measures, and by monitoring and balancing the interest rate cuts for the private sector? The intention of the government is to privatize and also to have PPP model on many, FINVIEW | 14
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many sectors are actually helping the private sector to grow much faster than the government sectors, which is ultimately the intention of the government also to disinvestment in privatization. And therefore, the important part would be how do you support the private sector from the cost of borrowing from the incremental subsidy or one of the other important factors is the profit link incentive PLI, which has also been introduced in 14 sectors to support the private sector. So I would believe that with the increasing Capex, ultimately it has an effect on increased employment and disposable income. And with this, if the cost of borrowing and the government supports like PLI sectors, like subsidy in certain select sectors, like fertilizers in agriculture, ultimately, the private sector should be able to grow and become stable for a period of time. But I must also add, that the support should also be extended more and more to MSME and of small-sized businesses because that is ultimately a foundation for any large industry in the supply chain parameter pyramid. The union budget talks about the scope of bonus stripping, to disallow squaring future market gains with cash equity losses? How will this affect the investment choices of high net worth individuals and large institutional investors who may end up paying more taxes on derivative profits? 15 | FINVIEW
FEB'22
The background of section 94 subsection eight of the Income Tax Act is that if you do dividend stripping and bonus stripping, then the loss because of the dividend bonus stripping was not allowed as a tax-deductible loss. Basically in simple terms, I buy the share four units, then there was a likelihood of a bonus declaration of a dividend declaration which is called accounting terminology cumbonus and cum-dividend, and then immediately after the record date, I sell off those investments and therefore, I will incur a loss because then I bought it was cumdividend and cum-bonus, but when I sold off it was ex-dividend ex-bonus. So, therefore, the rate would reduce earlier the dividend was exempt till March 31, 2021, because of dividend distribution tax after the first April 21 dividend is anyway taxable and therefore, earlier people were trying to generate loss and claim exempt dividends. Now, this benefit is actually gone away after the first every 21 Because many dividends are anyway taxable and loss will be allowed to be deducted subject to certain conditions. But what certain large institutional investors and HMI were doing, that today law was only applicable to a unit of mutual fund, but they were using this dividend stripping through shares and securities. So, now, this law is extended to shares and securities and also the units which are in the innovates REITs AI ETF, etc. So, all sorts of units are now covered and also
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the securities are covered. So that arbitrage which people were doing between units and securities is now gone. But in all honesty, this provision is now after the introduction of a taxability of dividend in the hands of the shareholder. This particular provision is not much attractive today. Because anyway, dividend is taxable. The travel and tourism industry, which has been a key contributor to India's GDP and brings in valuable foreign exchange earnings is one of the sector's which has borne the brunt of two consecutive years of the pandemic, yet the budget allocations channelized towards it seem tepid. Moving forward, what kind of support do you think that the government should offer to bring back the sector on the growth track? So, I agree that the traveling and tourism sector was the most affected sector in the country. Even in the third wave, when everything started with Omicron, and when the flight started reducing their frequency, the hospitality sector is one of the most affected. the second is also with the COVID Many things have become virtual like what we are talking now, instead of traveling, and therefore, people have also now used to virtual meetings and virtual travel. So, my view is that government should support by giving out substantial reduced rate of interest loans. Also in certain countries of the world, the Centre
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also recoups certain periods of expenditure, like fix overheads of their people, infrastructure and everything. So then they are able to bear that cost because if my business is closed, I don't have revenue, but I have to still incur a fixed cost of salary, rent, and other expenses, how many months or how many years I can continue without earning an income. Therefore, the government should support this particular industry. Even by reducing GST for example, on the hotels and restaurants, the rate of GST could be reduced even for a certain period of time, particularly, the certain exemption also could be considered on the income tax side that for one or two years, we would learn we would levy an only half income tax. So that ultimately the cash is saved with them and they are able to have more disposable cash so that they are able to meet their fixed overheads. So I think certain incentives on the tech side, on GST side, low cost of borrowing and also meeting certain fixed overheads ultimately will help but I also appreciate the government challenge, that if they do extra for one sector, then there are many other sectors which have also been affected, and therefore how do you discriminate between different sectors of the business and therefore that is also a challenge to the government. Therefore, I think, in the first wave government reasonably took a balancing stand. Now I think life is becoming more and more normal and accepting COVID. FINVIEW | 16
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FEB'22
K N O W Y O U R S E C T O R INSURANCE
Introduction The Indian insurance sector is categorized into life insurance and non-life insurance. Non-life insurance, is often known as general insurance. Compared to global rivals, India's insurance market has been fast rising, with overall insurance premiums increasing rapidly. India's insurance industry is vital to the country's economic health. It significantly boosts individual savings prospects, protects their future, and aids the insurance industry in forming a large pool of assets.
prospective future insurance company listings. Increased awareness, enabling digitalized payments infrastructure, the emergence of ecosystems, big data, journey simplification, and overall digital enablement will all contribute to the growth of Indian life insurance. Demographic factors such as a growing middle class, a young insurable population, and a growing awareness of the need for protection and retirement planning will all contribute to the growth of the sector Life Insurance Premium(US$ Bn) New Business Premium
Growth catalysts Low insurance penetration and density rates prevail in India. However, rising consolidation to expand a company's portfolio and increased capital markets activity, the most notable being India's largest insurer's planned IPO, are expected to be game-changers for the industry. In many ways, the IPO would influence how the market views the sector and
40
20
0
FY20
FY21
FY22*
Gross Premium Written of non-life insurers(US$ Bn) 30
20
10
0
FY20
FY21
Source: IBEF
17 | KNOW YOUR SECTOR
Renewal Premium
60
FY22*
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Business Model Revenue streams of an insurance company includes underwriting income, investment income, loss ratio, premium loading, fixing insurance contract price, and premium amount and paid-up amount at the time of a claim. Non-Life Insurance Gross Direct Premium FY22* Marine Total 3.2%
Other 8.8%
Health 39.8%
Motor Total 21.9%
Fire 23.4%
Source: IBEF
Key Metrics To delve deeper into analyzing the financial health of the players using key metrics. Value of New Business(VNB) Margins VBN margin is calculated by dividing the Value of New Business by Annualized Premium Equivalent (Regular Premium +10% of Single Premium). It indicates the profit margin of Life Insurance Company. The YoY VNB Margin of HDFC Life is 40.2%, for IRPU Life is 78.1% and for SBI Life is 50% for 1QFY22. Annualized Premium Equivalent (APE) APE = Annualized regular premium + 10 % of single premium (Including top-up premium).
It is a common measure of ascertaining business sales in the life insurance industry. APE of HDFC Life is 15.6, for IRPU Life is 12.2 and for SBI Life is 16.3 in INR Billion for 1QFY22. Persistency Ratio Persistency ratio is calculated as the number of policyholders paying the premium divided by net active policyholders, multiplied by 100. It helps to understand how persistent customers have been in renewing their policies every year. It is measured at different intervals —13th month, 25th month, 37th month, and 61st month. 25th-month Persistency Ratio of HDFC Life is 84.8%, for IRPU Life is 73.7% and for SBI Life is 76.7% for 1QFY22.
Zooming into the future While the pandemic had a significant emphasis in FY21 and part of FY22, the Indian insurance industry is projected to focus more on growth in the future. Consolidation, possible increasing foreign capital, capital market activity, ecosystems, technology, and big data, as well as solvency and reporting, will be the overarching themes. With various changes in the regulatory framework, the life insurance sector's future looks bright. This will lead to even more changes in how the industry conducts business and interacts with its clients.
KNOW YOUR SECTOR | 18
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NIVESHAK
A R T I C L E O F T H E M O N T H TAPER TANTRUM – INEVITABILITY OF THE ECONOMIC ALLITERATION BY RAJAS SHAHADE IIM BANGALORE
While the phrase Taper Tantrum can be easily passed off as a fancy tongue twister, it is actually a very interesting concept having widespread implications on the global economy and stock markets. If you pick up any financial newspaper nowadays, you would have read about the term being thrown around by eminent and learned people in the economic space, with some people saying that there is a possibility of this phenomenon repeating while others discounting it completely. The respected Finance Minister of India, Nirmala Sitharaman even defended the Reserve Bank of India’s accommodative stance with a focus on the possibility of a Taper Tantrum. So, let’s set some context and try to find out why this interesting economic concept is suddenly relevant again and will it come back to haunt us again with its effect on the stock market and the global economy in general!
19 | ARTICLE OF THE MONTH
Rolling back the clock Let’s roll back time by a few years. 2008. The housing bubble had burst to pieces in the United States, taking down the stock market with it. The world had witnessed an unparalleled crash with the S&P 500 falling more than 20%. Within 18 months, the Dow had also dropped by more than 50%. The economy was reeling under an unprecedented recession with activity levels bottoming out. It was time to take some rampant decisions to save the economy and this is where the Federal Reserve stepped in. As a reactionary measure, it increased liquidity in the market by buying bonds to pump more money into the banking ecosystem with the hope that the transfer of cash in hands of the people would lead to improvement in overall demand and stability. This is referred to as quantitative easing in economic parlance. Owing to these easing norms, the dents made by the crash were being straightened out and the economy seemed to be
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slowly again.
FEB'22
getting
back
on
its
feet
However, with so much money into the economy, an interest rate fall was inevitable – rates fell from 5.25% in September 2007 to 2% in April 2008. While this was good news for the borrowers, a fall in interest rate always has a flipside. With abundance of money, US investors started looking for alternative investment destinations since the returns (in the form of interest) did not remain competitive in the home market. This search for higher returns led to this US money going around the world. And this is where emerging markets like India, Brazil and Indonesia, South Africa, and Turkey (the Fragile Five) started getting pieces of the US investment pie. These economies were expected to boom in the coming years and the US investors saw enough potential to park their funds in these markets. It also allowed these investors the opportunity to diversify their holdings and invest in these markets which were once frowned upon by the general investor class. This was essentially great news for these economies! When the US market shows confidence in your economy’s potential, it is bound to attract more investment owing to a positive signaling effect. The emerging markets finally were armed with the necessary capital to go above and beyond.
Calling it a day With so much money going around in the US, the economy started standing on its feet, let alone getting back on it, which was the original purpose of the stimulus. This much liquidity in the market had a positive impact on the overall growth and demand scenario in the US. As a result, there was no more incentive for the Fed to keep pumping the economy with more money owing to its self-sufficiency. So, when this US economic revival became evident, one fine day, the Fed decided that it would stop putting more money into an already overloaded economy. It announced, in 2013, that there would be a tapering of the quantitative easing norms put in place. Now, what impact would this have? Think of money as a commodity. When a commodity is in short supply, basic economics tells us that the price of that commodity will eventually rise. In the case of money, the price is the interest rate. Accordingly, when money is suddenly in short supply, the interest rates are expected to rise.
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Emerging economies did not take this announcement in the best spirits as they believed that such a reversal would eventually restore interest rates in the US, with investors pulling out their invested money from these countries. And this is exactly what happened! Rising interest rates were followed up by huge outflows. This further led to tantrums thrown by the stakeholders of these emerging economies, with the stock markets taking a hit for this disaster. Now how could the suddenness of this announcement and its impact have been better managed? After all, didn’t the shareholders already know that someday, post revival, the US money was eventually going to return home? These questions remained unanswered back then. 21 | ARTICLE OF THE MONTH
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While the Indian economy remained largely insulated from such an announcement, with a few minor hiccups, the intensity of the ripples was stronger in other emerging countries. The eventual outflow of US dollars led to depreciation of various local currencies in the range of 20%-45%, leading to harmful effects such as expensive imports, the need to increase rates, and a fall in activity levels. A combination of these factors had an adverse impact on the stock market due to dwindling investor sentiments about their country’s economic strength. Given below is a chart of the Fragile Five’s currencies responded, essentially dwindled downed and lost value, for about a year and a half post the episode.
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Back to the future The big question now is whether such an episode is expected to recur? If we compare the situation in 2008 to the one now, the resemblance of US policy response is uncanny. The Fed has pumped in a lot of money in its economy (asset values increased from $4.7 million in March 2020 to $7.8 million in April 2021) to pull it out of pandemic’s disruption and a huge chunk has found its way across the world, which will be removed once the pandemic’s effects subside. However, this time around, the Fed has been more transparent in its signaling and the scaling back is expected to be gradual and smoother. The recent rise in the US interest rates has also been passed off as being fleeting in nature with a focus on global financial interconnectedness. The Reserve Bank of India has also recently announced the maintenance of its accommodative stance, with a focus on growth. Since the inflation is within the tolerance band (2%-6%), the RBI doesn’t seem to be interested in increasing the interest rate and curbing growth.
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However, this announcement has received polarizing opinions with former RBI governor D Subbarao and current Monetary Policy Committee member Jayanth Verma opposing the RBI’s stance. These voices, being very strong and important, indicate that an interest rate hike to curb the inflationary pressure may be on the cards sooner rather than later. Time will eventually tell its tale. But if I am an investor in any of these emerging markets with US money, I would be treading very carefully since the likelihood of a widespread market correction cannot be discounted. Remember, all it takes is a single announcement!
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D E A L S B R E W E R Y INTEL & TOWER SEMI-CONDUCTOR DEAL: THE ACQUISITION SAGA
Deal Highlights In an all-cash deal, Intel corporation has signed an agreement to acquire the Israelibased Tower Semi-conductor. Intel will pay USD 5.4 billion at USD 53 per share. Intel is expecting Tower’s ‘established foundry footprint to offer broad coverage to their combined customers across the globe. The acquisition is in line with the company’s IDM 2.0 strategy to expand its manufacturing capacity, global footprint, and technology portfolio
with a view to tide over the chip crisis. Intel is trying to adopt more industry-standard flows like product design kit (PDK) capabilities, an area they need a lot of help with. Tower’s capabilities in specialty niche technologies really boost its ability to create and offer flexible and extensible PDKs. The acquisition plugs the gaps in Intel’s foundry offerings on the basis of types of process nodes. It gives them teams who have been profitably running specialty technologies that interface with multiple external clients in a successful manner.
Tower’s specialty technology portfolio, geographic reach, deep customer relationships, and services-first operations will help scale Intel’s foundry services and advance our goal of becoming a major provider of foundry capacity globally
- Pat Gelsinger, CEO of Intel Corp.
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Earlier, Intel had been mostly using flows that were customtailored to their internal needs. Tower gives them a way to offer more standardized flows. This deal can drive meaningful growth opportunities and offer even greater value to the customers through a full suite of technology solutions and nodes and a greatly expanded global manufacturing footprint.
About Intel Intel Corporation (Intel) was founded in 1968. It was an enabler for the rise of Silicon Valley as a high-tech center. Based in California, It is the world's largest semiconductor chip manufacturer by revenue. In 2021, a new strategy called IDM 2.0 was announced. It includes investments in manufacturing facilities, use of both internal and external foundries, and a new foundry business called Intel Foundry Services (IFS).
About Tower Semi Conductors Tower Semi-Conductors is an Israeli company. It manufactures integrated circuits using specialty process technologies, including SiGe, BiCMOS, SOI, mixed-signal and RFCMOS, CMOS image sensors, non-imaging sensors, power management, and non-volatile memory as well as MEMS capabilities.
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Tower Semiconductors serves high-growth markets such as mobile, automotive, and power and operates a geographically complementary foundry presence with facilities in the US and Asia. It also caters to fabless companies (a company that designs and markets hardware while outsourcing the manufacturing of that hardware to a third-party partner) and IDMs (integrated device manufacturers). It offers more than 2 million wafer starts per year of capacity.
Deal Synergies The deal will allow Intel to offer a range of leading-edge nodes and differentiated specialty technologies on mature nodes. Intel intends to break Asia’s domination in the foundry business. Today, Asia manufactures 80% of the chips. Taiwan Semiconductor Manufacturing Company (TSMC) controls about 50% of the global chip market. The latest deal will help IFS to become an end-to-end foundry.
Together with Intel, we will drive new and meaningful growth opportunities and offer even greater value to our customers through a full suite of technology solutions and nodes and a greatly expanded global manufacturing footprint
- Russell Ellwanger, Tower CEO
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FINSUPERVISE ESTATE PLANNING
Overview Estate planning, in its most basic form, refers to the transfer of assets or investments from one generation to the next. You determine how much of your estate – property(s), car(s), personal honors, financial assets, and so on – you wish to leave to whom and how after your death. It is a dynamic process that must be reviewed on a regular basis in order to absorb any changes that may occur in our lives or in the laws of the country.
Benefits of Estate Planning Prevents financial and legal grief to your loved ones When your family is emotionally exhausted, financial and legal grief is the last thing you want them to go through. The long-term financial interests of your loved ones can be secured, and legal rigmarole can be minimized, with sensible estate planning.
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Ensures that all assets are passed on to your loved ones Estate planning guarantees that all of your assets – physical, financial, and online – are passed on to the individuals you want to inherit them after your death. If you die intestate, the law may not take your personal ties or preferences into account while distributing your possessions. Estate planning helps the beneficiary reduce tax outgo on account of inheritance Instead of passing on assets after death, you might give them to your loved ones while you are still living, because if you leave them to the current intestacy rules, you may face a larger tax on your property and other assets. Helps to prepare for contingencies You may even decide who will handle all of your financial issues if you become incapacitated tomorrow with thorough estate planning.
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Ways to undertake E s t a t e P l a n n i1.9 ng
Selecting the right Estate Planner
1.9 Wills A Will is the legal declaration of the intention by the one making it – the testator –with respect to property that he/she desires to be carried into effect after his death. A will can who is 18 mind, and fraud, and
An estate planner plays a very important role in estate planning. It’s important that you discover the comfort factor with your estate planner because after all, it is a long-term relationship.
be prepared by anyone years of age, of sound free from any coercion, undue influence.
Trusts A trust is an agreement between the settlor and the trustees to transfer the legal ownership of assets/property to the trustee with the obligation that the same should be held for the benefit of the beneficiaries as specified in the trust deed. There are two types Public & Private
of
Trusts-
Wills Vs Trusts By going the Trust path, a person might avoid concerns that emerge in a Will, such as the legitimacy of the Will, the mental soundness of the person creating the Will, and claimed forgery, among other things. There are several grounds for contesting a will. Furthermore, obtaining probate on a challenged Will could take several years and be costly. On the other hand, a Trust deed is never disclosed to anyone and is highly confidential and there is no need to obtain probate.
Forced Heirship Forced Heirship is a legal principle that states that an individual is not free to choose who will inherit his estate upon his death. It automatically gives selected individuals the authority to bequeath a portion of the deceased's estate. These people are known as 'protected heirs,' and they often include the deceased's surviving spouse, children, and/or other relatives. Family protection is the rationale behind Forced Heirship.
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SOMETHING NEW SOMETHING OFFERED POLYGON: THE ETHEREUM ENHANCING STARTUP
Overview Polygon is a Bangalore-based startup, founded in 2018 by Jayanti Kanani, Sandeep Nailwal, Anurag Arjun, and Mihailo Bjelic. Polygon is an interoperability and scaling framework for Ethereum, which aims to make the Ethereum blockchain faster, safer, and cheaper. The company seeks to address some of Ethereum’s biggest concerns such as throughput, poor user experience, and lack of community governance, using a novel sidechain solution. Polygon uses L2 (Layer 2) sidechains, which are semiindependent blockchains that work in tandem with an associated 'main chain'—usually to improve the main chain’s speed or capabilities. This enables polygon to process transactions 10-15 times faster than the main Ethereum chain. The company, formerly known as Matic Network, started out by using a technology called Plasma 27 | SOMETHING NEW SOMETHING OFFERED
TOTAL FUNDING: $ 450.5 Million VALUATION: $15.6 Billion USER AGE: 21 - 45 MATIC TOKEN RETURNS (1Y): 101%
to process off-chain transactions but now, like Polygon, provides an entirely independent platform to help developers launch pre-set blockchain networks that tailor-fit attributes in addition to a large number of modules to improve specific functionality. The company uses its in-house token called MATIC for the purpose of raising funds.
About the Founders Sandeep Narwal, who hails from New Delhi, studied engineering and computer science, before working as a software engineer. After pursuing his MBA from the National Institute of Industrial Engineering and specializing in Information Technology, Nailwal
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worked with Deloitte and was the CTO of Welspun E-Commerce. After a failed attempt at creating a Flipkart-like aggregator service for white-collar services, Nailwal, intrigued by emerging technologies like Artificial Intelligence and Blockchain, went back to programming. He met his co-founder Jayanti Kikani, who was also a computer science engineer working with Housing.com as a data scientist. Kikani too had previously tried his hand at building apps such as a prediction market for Game of Thrones, but the lack of a global payment system to help him scale his business brought him to the doors of Blockchain. The third founder, Anurag Arjun is also a serial entrepreneur, who had launched a GST-related startup, before joining his cofounders at Polygon. Mihailo Bjelic, the fourth co-founder, is of Serbian descent and was working on a similar solution as Matic and joined the other three at the time
JAYNTI KIKANI
SANDEEP NAILWAL
ANURAG ARJUN
MIHAILO BJELIC
of the rebranding exercise from Matic to Polygon.
Road Ahead Polygon’s success is directly linked to Ethereum’s success and its widespread adoption. Although the much-awaited launch of Ethereum 2.0 promises to solve a lot of the issues that Polygon targets, the company’s product offerings may remain relevant, largely due to its success in integrating a large network of enterprises and partners. Polygon has also made strong headways in the blockchain gaming industry. According to a DappRadar study, the Unique Active Wallets (UAWs) associated with gaming make up a whopping 55% of the entire blockchain industry. Polygon has shown unique wealth creation in this sector. The layer 2 solution improved the UAWs connected to famous polygon-based games like Bloktopia, Aavegotchi, MetaSoccer, and Crypto Unicorn by a whopping 250% month-onmonth. SOMETHING NEW SOMETHING OFFERED | 28
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LET'S FIN UP! THE CROSSWORD
Don't have physical copy? Don't worry! Scan this QR Code! Across 1. To trade regularly with (9) 5. Interest paid on interest previously earned (8) 6. A bond that does not have an investment-grade credit rating (4) 7. Fraud that pays existing investors with funds from new investors (5) 8. Account held by an impartial third party in a transaction (6) 11. Fund that makes consistent withdrawals from invested capital (9) 12. Person who holds a legal relationship of trust with other parties (9) Down 2. No. of related securities offered as part of the same transaction (7) 3. Option having features making it complex than vanilla options (6) 4. Fund saved over time for a large purchase (7) 9. Difference between the bid and the ask price of an underlying (6) 10. Sensitivity of a security's return to a systematic risk (4) LET'S FIN UP! | 29
ANNOUNCEMENTS Team Niveshak invites articles from participants from all colleges across India. We are looking for original articles related to Finance and Economics. Participants can also contribute puzzles and jokes related to Finance and Economics. References should be cited wherever necessary. The best article will be featured as "Article Of The Month" and would be awarded a cash prize of 3000/- along with a certificate. The runner-up article would be awarded a cash prize of 2000/- along with a certificate.
INSTRUCTIONS Send in your articles to niveshak.iims@gmail.com Mail subject line must be "Article For Niveshak_<Title>" Mention your Name & Institute Name along with the article Ensure that article has a word count between 1200 - 1600 Please DO NOT send PDF Files and stick to the format Number of authors is limited to 2 for each article Also certain entries which could not make the cut to the magazine will get featured on our website
FORMAT Microsoft Word Font: Times New Roman Size: 12 Line Spacing: 1.5
ISSUE VI • VOLUME XV • FEB'2022