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InFINeeti Vivaan Edition

August 2017

FROM THE EDITOR’S DESK

Photo Caption

Dear Readers,

Greetings from Team InFINeeti! This edition of InFINeeti is coming out at a time when we are witnessing many geopolitical events like North Korea missile crisis, Middle-East standoff, American protectionism and many more across the world. Therefore it seems apt to choose “Geopolitical events and their economic impact” as the theme of our magazine. For this edition of the magazine, we received a flood of informative and in-depth articles from the best B-Schools in India. The edition also includes important contemporary and forward looking topics such as the Changing times in IT sector, Stock Analysis, REIT, etc. The editorial team hopes that there will be a surprising turnaround in the world scenario and the next edition will be full of articles celebrating the same.

Happy Reading!


InFINeeti Vivaan Edition

August 2017

CONTENTS 1

“The Times, they are a changing”

6

What are the shoeshine boys talking about now?

10

Qatar Crisis

14

Blunder of missing the bus

18

REIT: Impact on real estate market in India

23

World’s biggest IPO - Saudi Aramco

28

Quant Funds

34

What Brexit meant for India and the way ahead

38

Jio - Paradigm shift in the Indian telecom sector

43

The curious case of India-Israel bilateral relationship

47

Fall In Crude Oil Prices-Impact on Economies


InFINeeti Vivaan Edition

August 2017

From the Centre Head’s Desk

Welcome to this New Year Edition of InFINeeti!

Prof. K. Rangarajan is an Accredited Management Teacher (AMT conferred by AIMA) and is a member of several professional bodies including AIMM (Australia). He is also amongst the Board Of Directors of The State Trading Corporation of India Limited (STC). His expertise includes Business Strategy and Strategic Planning.

The fiscal regime is undergoing changes not only in India but around the Globe. The challenges are very many. The echoes of liberalization are toning down towards protectionism. The developed and developing economies are singing different tunes. The banking system has started facing new challenges posed by digitization, transparency and NPAs. The GST is awaiting entry in a big way. All quarters of the society are building scenarios of what they presume. Interest rates as a tool to bring-in growth stability is becoming more unviable due to the fragile economic environment. In the melee are caught both big and small firms alike. In this issue we are bringing in all these interesting aspects to enrich you with thoughts on the current fiscal regime. Enjoy reading!

Dr. K Rangarajan Head - Kolkata Campus, Head - Centre for MSME Studies


By Barkha Jain/Mayank Bawari, IIFT Delhi /Kolkata

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The times, they are a changing... When Bob Dylan, wrote the immortal song ‘the times they are a changing’ in the early 60‘s, no one would presume that these exact words will be used to describe the current predicament of the Indian IT sector six decades later, purposely hinting at the ephemerality of man‘s fortunes and failures. The Indian IT industry according to Nasscom is still poised to be a booming sector with an optimistic estimate of US $350 billion by the year 2025, from the current US $160 billion but the real question is what part of the market share will Indian IT enjoy, which as of now now stands at a staggering 67%, which aggravates the situation further as it stands to lose

What do the fact says?  Trump effect: Infosys to create 2,000 tech jobs in US by 2021 

Top 7 IT firms including Infosys, Wipro to lay off at least 56,000 employees this year

Capgemini India CEO says 65% of IT employ-

the most or has it already lost its competitive edge in these changing times? The above listed splash headlines are just a glance, at the barrage of articles that have filled the Indian news media since the beginning of this year, concerning the ‗blood bath‘ in the Indian IT sector, while predicting a bleak future, with massive layoffs and strenuous times ahead. Rising protectionism and closing of borders, redundant and obsolete

skills, emergent new technology, enormous headcount, slowing businesses, declining profits, currency pressures, rise of automation and AI are just some of the issues that the industry is grappling with these days. With the industry slowing to a crawl at 8% CAGR in 2017 (N) after enjoying a phenomenal double digit growth for the past decade, IT sector has certainly reached a service life cycle plateau where its enormous scale and size of 10 million plus is hampering the maneuverability and agility of the industry to cope up with the rapid and volatile


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macroeconomic factors. According to the listed graph, North America accounts for 47% of the total IT business (compiled using industry leaders), with Europe following a distant behind with 35% and rest of the world accounts for a meager 18% of the total IT business revenues. Now with protectionism on the rise in Trump‘s America, and the looming uncertainty of the post Brexit world and its impact on continental Europe, the top two markets for IT and ITES services may contribute to a vapid erosion in revenues for the associated firms, which might bring about tectonic changes in the IT world. Infosys has already promised a few thousand jobs in the US, TCS has been hiring abroad since 2015, HCL and Wipro are also increasing their foreign headcount to placate the new conservative party and appease it in the short run, and this fallout will have a domino effect on the Indian IT sector, as forced costly American

professionals will make comparatively cheaper Indian IT professionals redundant in comparison, and this is after the fact that much of the developed world is having a second look at their visa policy due to other sociocultural-political factors which prevents until now relatively unobstructed movement of Indian IT professionals in higher developed markets, further deteriorating the cost advantage edge that Indian IT provides.

The fourth industrial revolution or the second machine age, is marked with breakthrough emerging technologies such as artificial intelligence (AI), robotics, the Internet of Things (IoT), 3Dprinting and integrating them with current generation social, mobility, automation and cloud (SMAC) have opened up a Pandora‘s box of opportunities and threats for the established players .

In hindsight, ―if it is not broke, why fix it‖ business model, followed by firms at providing cost benefits and by only pushing the bottom line further without looking to improve the underlying processes, has began baring its teeth much to the dismay of industry.

On one hand highly specialized skills such as SMAC lie higher up the value chain ,with returns currently marked multiple folds above current generation technologies and other older legacy systems, which makes them highly attractive


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and on the other, this poses a problem of reskilling and re-training the huge headcount maintained by large IT firms, as these highly specialized are very expensive to develop, thereby exacerbating the problems of redundant IT skills in the near future. According to an HFS research group‘s study done in 2016 on the impact of SMAC and automation on the IT and ITES services industry, 30% or 2.1 million of the current 8.8 million jobs categorized as low skilled jobs in IT and technology will no longer exist and will be replaced by fast emerging robotic process automation (RPA) by the year 2021, this change to some extent will be offset

by medium skilled jobs increasing by 8% and high skilled jobs by a whopping 56% but in real numbers will still cause 1.3 million or 9% of the current jobs to be redundant. In the Indian market, this translates to loss of 640,000 low skilled jobs which will be offset by the optimistic increase in medium and high skilled jobs of about 160,000, which will still make a total of 480,000 jobs in Indian IT obsolete. Interestingly, the effects will be felt across all natural, artificial and virtual borders with UK

and USA losing more jobs in percentage and real numbers, and Philippines emerging as the only winner due to low headcount and less exposure to global turmoil. The only fact that plays to the advantage of the Indian


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IT sector and gives hope in this bleak and dismal future, is that this is not the first time that they have been at cross roads with uncertainty in the technology world. In the past it has always come out stronger than expected and has beaten market expectations. This is not the end of the golden age of Indian IT but the beginning of a new one only if they are willing to „adapt‟ . In a study done by Accenture Strategy on “Harnessing Revolution” in early 2017, wherein a total of 17,000 jobs were automated by Accenture with not a single layoff enforced, and this was achieved by the next stage of automation, i.e. augmentation. Indian IT professionals have enough foresight and are aware of the low shelf life and fleeting nature of contemporary and emerging technology. Therefore the constant need to upgrade and upskill has driven them to newer technologies, with manual work being automated and finally

augmented by human skills such as cognitive computing, critical thinking, analytics, creativity, empathy and complex problem solving.

catering to dedicated business verticals and industries, such as :

Optumera - Digital Merchandising Suite

Machine automation has the ability to liberate human potential, and embracing the new digital age will bring changes, which makes some excited and optimistic about the workplace of the next generation. Relearning, re-training and re-skilling of hundreds and thousands of IT professional is a tall order and it will require some might to make it viable.

iON - Cloud based ERP solution catering to the changing business needs of Small and medium business

TCS Advanced Drug Development (ADD) -platform,

HOBS - Hosted OSS/ BSS Solution

Ignio Neural Automation Platform

Multiple Indian IT firms have also started filing patents on intellectual property and innovations, whereas a few have managed to carve lasting relationships with industry leaders, since they started providing value to businesses and insisting on shared growth, rather than following the standard minimum SLA fulfillment as a business model. Product portfolio of TCS now has five new business suites and platforms

Infosys on the other hand has launched Nia™ The Next Generation Integrated Artificial Intelligence Platform TCS has also started its foray into a new world with acquisitions and offices in Latin America, a hitherto unknown and unexpected market for Indian IT firms, this marks a bold and exciting phase in the Indian IT story wherein uncharted markets are being explored by established players.


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Other players have started looking inwards, catering to and complementing Indian businesses setup with the commoditization of their IT and ITES services. Various government initiatives such as UPI, USSD, Digital India, Smart Cities etc. have also earmarked a seismic shift in adoption of IT in everyday business. “Adapt or Perish” is the new mantra that needs to percolate and assimilate through the industry in this new era of uncertainty, and should certainly define the new age of Indian IT, with the wisdom of Peter Marshall guiding their resolve “…..When we long for life without difficulty, remind us that oaks grow strong under contrary winds and diamonds are made under pressure”

August 2017


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By Ritwik Patnekar, IIM Bangalore

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What are the shoeshine boys talking about now?

Ben Graham, observes in his bestselling book, ―The Intelligent Investor‖, ―we have seen much more money made and kept by ‗ordinary people‘ who were temperamentally well suited for the investment process than those who lacked this quality even though they had an extensive knowledge of finance, accounting and stock market lore.‖ Why would – an investment banker who swears by fundamental analysis throw the intrinsic value of a company out the window and bet on the prices going up? Or a trader ignore her trusted Relative Strength Indicator screaming ―overbought‖ and buy

some more? Or the veteran investor who has suffered from the crashes of 1993, 2002 or 2009 not learn from her previous mistakes? On the other end of the spectrum lie the proponents of the socalled contrarian view which assumes that in the financial markets, the majority is almost always wrong. A popular stock market story goes this way: In 1929, a famous rich guy of those days, Joe Kennedy, got an unprecedented wakeup call when even ―the shoeshine boy began giving him stock tips‖! Figuring the market is getting too popular for its own good, Joe is said to have liquidated his entire portfolio at that very

moment, thus avoiding the infamous crash on Black Tuesday! At the time of writing this, on 27th July, the Sensex, BSE‘s 30-share barometer of the Indian economy, hit a new alltime high of 32,383. Within the past month or so, the ―all-time high‖ has revised so often, it is becoming easy to get used to this trend. Sensex has spiked close to 18% in six months becoming one of the best performers globally at a time when Dow Jones is also peaking, rising more than 16% over the year. The stellar run in India is backed by very strong economic numbers – the latest IMF report has


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The bull and bear cycles of Indian stock market maintained expected GDP growth at 7.2% – along with huge liquidity in the market. FII inflows are seeing new highs with more than Rs. 25,000 crores invested this year itself . With massive stakes in brownfield projects by multinationals helped by relaxed regulations, India‘s FDI picture has never looked better. With alternative avenues of investment such as gold and real estate – domestic India‘s go-to asset classes – not having an impressive run, , the mutual funds are witnessing an inflow of Rs. 4000 crores every month through SIPs and have been forced to invest over Rs. 26,500 in the last three months. Consumer

inflation falling to a record low of around 1.5% has spread the buzz of a potential rate cut by the RBI. Is a correction really due then? Or is the fact – that the only time we have seen such an impressive bull run has been right before some recordsetting crash – playing in our heads? Maybe it is high time to pay heed to the advice of the man who made value investing ‗sexy‘ and ―Be fearful when others are greedy!‖ All theories fail during a rampaging bull or bear run. Valuations run wild, models fail, ‗risk tolerance‘ becomes technical jargon – the market, they say, is being run by sentiments. But it

isn‘t all as random as it may seem. The market has traditionally followed a typical cycle: low valuations and stocks available at a bargain trigger the start of a bull market; slowly the pessimism dies and the market rises further; then the market catches everyone‘s attention and it soars; the peak is then reached with caution thrown to the wind; the bubble is too large now and it begins to collapse under its own weight; finally panic sets in and the market crashes way faster than it had risen giving no opportunity to book any profit; now the market becomes undervalued again and investors are wary – and the cycle repeats!


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In the last 30 years, India has witnessed three such cycles with the fourth seemingly in process right now: The Harshad Mehta boom of 1988 followed by the crash in 1993, the dotcom bubble of 1998 and global crash of 2002 followed by the FII boom in early 2008 crashing with the subprime crisis in 2009 (and if we are to believe the arithmetic progression, 2018 looks like the next peak!). At every stage of this cycle, the average investor stays perpetually behind and ends up losing big. Even the smartest minds have succumbed to these fallacies and ended up not only losing money themselves but collapsing corporations and even nations in the process. Why do emotions run the game in a domain where rational thinking and analytical skills are revered? The field of behavioural finance, brought into common parlance in large part due to Daniel Kahneman and Amos Tversy‘s work, gives a glimpse into how the eccentricities of human

Prospect Theory: Asymmetric value of losses and gains

behaviour play a role in financial decision making. One of the first experiments we learn about in Kahneman and Tversky‘s Prospect Theory indicates the preference of a sure $100 gain as opposed to betting on a coin toss with payoffs of either $200 or nothing. On the other hand, we are willing to play a gamble if we are losing either $200 or nothing on a toss against a sure shot loss of $100. It somehow just makes sense in the frame of the experiment but in the conditions of a stock market, this is counterintuitive. It explains why an investor may sell stocks prematurely for a guaranteed profit when it would make sense to wait,

or why a stock going down is held on to instead of booking the loss and letting go, or why people invest in fixed deposits and bonds rather than equity. Another interesting insight is that investors extrapolate price movements despite this invalidating the weak form of the Efficient Market Hypothesis. An explanation may lie in the Representativeness heuristic where an upward trend becomes a benchmark suggesting a continued rise in prices or vice versa. The Availability heuristic and recency effect may also be playing a role here with recent trends being more accessible.


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The opposite is sometimes in play when contrarians believe a correction is due with the slightest indication of a bull run. They may be falling prey to the Gambler‘s Fallacy which details the belief that in a series of coin tosses, a heads is due after, say, 5 consecutive tails despite them being independent. Next, the infamous ―Herd mentality‖ comes into picture where you go with the popular opinions relying on the wisdom of the crowd. The problem is that conformity becomes so strong that emotional factors begin to reign. You don‘t want to look like a fool more than you want to be right. Many veteran

investors see the signs of a bubble forming, but the market just keeps climbing making you look like the loser. Around the latter half of 2008, many investors predicting a crash had emptied their

portfolios only to get fully invested again by October due to the herd showing no signs of slowing. The crash in DecemberJanuary should not have come as a surprise to them. Lastly, a phenomenon extremely common in venture capital and private equity deals, the Greater Fool Theory examines how paying a higher price is not necessarily a bad investment as long as you can find someone who is willing to buy it at an even higher price (Ponzi scheme, anyone?!) Are the prolonged bull markets a sign of irrational exuberance then? If we are to believe some pundits, not yet. Mahesh Nandurkar of CLSA brokerage said on 28th July that the current outperformance is based on high quality stocks and thus the market is not really overheated. Yet many experts advise exercising caution to investors as the market might be one trigger away from a collapse. In the end, the market must reflect the earnings. With

future earnings incorporated in current valuations, any strong negative news – tension at the borders, high non -performing loans with public banks, the shrinking Fed balance sheet – has the potential to prompt a selling frenzy. With new all-time highs being touched every other day, the market has unfolded itself into a Shakespearean dilemma – To sell or not to sell. The bull run is going strong but fundamentals are barely playing catch up, the atmosphere is euphoric giving every reason to be scared, the Indian economy is more stable than ever before but the global economy is leaving a lot wanting, liquidity in the market is high but so is the (unwanted) popularity. So, have we reached the peak of the next market cycle? Best to keep listening to what your shoeshine boy has got to say!


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August 2017

By Shubham Srivastava/Peeyush, IIFT Kolkata

10

Qatar Crisis

The issue:

History:

On 23rd May 2017, Qatar claimed that its news agency was hacked after a series of statements given by the Emir of Qatar, Sheikh Tamim bin Hamad al Thani, was broadcast on the state news channel. The channel showed the statements which were directed towards the U.S., criticizing its foreign policy in the wake of U.S. president Donald Trump‘s visit to Saudi Arabia. The news spread like wildfire and all the Arab nations picked it up. The article also quoted Emir calling Iran an Islamic power and saying that the relations between Qatar and Israel were good during a military ceremony.

Qatar has the world‘s 3rd largest natural gas reserves and is world‘s largest supplier of Liquefied Natural Gas (LNG). Qatar‘s economy heavily relies upon natural gas which directly or indirectly accounts for about 50% of the GDP and 70% of government revenue. But before Qatar became an Oil and Natural gas power, it was supervised by external powers. For the latter part of the 19th Century, Qatar was under the dominance of the Turks and for a large part of the 20th century, it was a British protectorate. Qatar wasn‘t annexed by the British, but relinquished its autonomy pertaining to

foreign affairs in exchange for protection from all aggression from land and sea. In 1996, Qatar launched the AlJazeera and changed the brand of news coverage in the region. Al-Jazeera wasn‘t hesitant in covering regional conflicts like the Palestine-Israel conflict. It allowed an Israeli spokesperson to speak on the channel which disgruntled most of the Arab leaders. Qatar shares vast natural gas reserves with Iran, and tried to develop its relations with Iran, vexing the Saudis. This vexation turned incendiary when Qatar openly supported the Arab Springs Uprisings in Libya, Syria and Egypt. Mohammed


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Morsi, a part of the Muslim Brotherhood, backed by Qatar, became the President of Egypt and ruled for a little more than a year before being deposed by the Saudi backed Egyptian Army. In 2014, there was a diplomatic rift, which led Saudi Arabia, Bahrain and UAE to pull out their diplomats from Qatar on the pretense that it supported Islamic terrorist organizations. Qatar has been repeatedly blamed for its support of political Islamic movements such as The Muslim Brotherhood and Hamas. Its media network AlJazeera too has had its fair share of criticism from the Arab world. In 2011 during the Arab spring revolution Qatar and

Saudi Arabia were backing opposite sides which also led to bitterness in relations between the two nations. What happened next? On 5th June, Saudi Arabia, Egypt, Bahrain and UAE severed ties with Qatar and suspended the transport links in an extreme attempt to isolate Qatar. They claimed that the policies being followed by Qatar gave rise and support to extremism and terrorism. The four nations also decided to severe air and sea links with Qatar. They also blocked their nationals from travelling to Qatar and mandated Qataris to leave their countries within two weeks. Jordan also severed its ties with Qatar

and shut down the Al Jazeera‘s office in Amman. Yemen, Libya and Maldives soon followed this pursuit and severed their diplomatic relations with Qatar. Qatar‘s stock market fell by 5.5% due to this diplomatic rift. Saudi Arabia also withdrew Qatari troops from the ongoing war in Yemen against terrorists in which Saudi Arabia is leading the campaign. All this commotion created a lot of tension between the GCC (Gulf cooperation Council) nations. Effects on Economy

Qatar’s

According to the Institute of International Finance, Washington, if the current crisis


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continues for an elongated period and the relation of Qatar with the other countries worsens further; Qatar‘s GDP growth could decline to 1.2% in 2017 and 2% in 2018. This decline can be attributed to low non-natural gas growth impacted by a stricter financial environment and increased apprehensions in investment. Severance of financial and diplomatic relations can very well impact the foreign trade and ease of doing business in Qatar. The fiscal deficit might shoot up to 7.8% of its GDP in 2017. There has also been a steep decline in the travel and transport sector due to sir space blockade and travel ban of the neighboring nations. Due to this blockage Qatar Airways is no longer allowed to fly to the U.S. and Europe through Saudi Arabian and Egyptian airspace. The airlines profitability will be adversely affected as the new routes through Iran and Turkey are much longer and will push the prices of

tickets further thus lowering their demand. The dearth of connecting flights into Doha will suffocate Qatar which is trying its level best to showcase itself as a business hub. It will also hit the tourism sector which was bound to gain due to hosting of 2022 FIFA World Cup. Five airlines from UAE have discontinued their operations in Qatar. The embargo has jeopardized the Gulf‘s hard-won position as a haven of business stability within the restive Middle East. Business people who are already struggling with the lower oil price are clamoring that the embargo is pushing up costs. In per capita terms, Qatar is one of the world‘s richest nations, due to its

vast gas reserves and small population of just 2.7 million people. But with its sole land border to Saudi Arabia blocked, the country has been forced to spend significant sums of money to airlift and ship in vegetables and fruits from Iran and dairy products from Turkey. Trade has dropped from 1 billion Qatari riyals to 600 million riyals. S&P has lowered its long term rating for Qatar from AA to AA-. According to Nadi Bargouti, the managing director of Emirates Investment bank, ‖The bleeding will continue as long as the uncertainty continues‖. How is Qatar coping up: Qatar this

never expected unprecedented isolation but might survive this embargo. Oil and gas account for about half of the country‘s GDP and Qatar shares large reserves of LNG with Iran. Japan, India and South Korea are


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Qatar‘s biggest oil and gas customers and the exports are continuing without any slowdown. This should somewhat ease the pressure on Qatar‘s economy. Despite being a rich country with sky high per capita income, Qatar has never been self-sufficient in food items and grains. It is a water scarce region and imports about 90% of its food requirements from other countries. A third of its food imports came from UAE and Saudi Arabia. The embargo could‘ve disrupted the food supply and thrown the country into chaos, but the government was able to find new alternatives and the fear of food shortage attenuated. Iran has taken care of the problem by sending 100 tons of fruits and legumes every day and Turkey has come to the rescue of Qatar by sending Dairy and Chicken. The prices of the food supplies have risen but the government is trying to mitigate its effects by providing subsidies. This could go on for a short period of

time but if the crisis continues, the government will come under tremendous pressure as subsidies can‘t be provided forever. Only about 12% of the population of Qatar are Qatari citizens, rest are foreign nationals who are employed in various industries like energy and healthcare. The number of migrants was supposed to increase this year due to the high requirement of labour in buildings stadiums for the 2022 World Cup, but it can take a hit as some of the countries are now unwilling to send their nationals to a place in conflict. Due to the blockage, most companies are facing severe scarcity of raw materials and construction sites have option but to suspend their operations. If the situation continues, smaller companies might ask their employees to go on unpaid vacations or even ask them to resign. Fearing an exodus, the govt. of Qatar blocked the exit visas of some migrants to make them stay in the country. If the

migrant industry succumbs to the embargo, the situation in Qatar could worsen to a point where wide scale riots break out with unemployment looming large, and the foreign nationals stuck in Qatar would be the first ones to bear the brunt. The way Qatar:

out

for

On 23rd June 2017, Saudi Arabia made thirteen sweeping demands to Qatar. The demands included cutting off ties with Iran and shutting down AlJazeera for good. US President Donald Trump has acquired a stern stance on Qatar and asked it to stop helping the enemies of America. Qatar must hand over the terrorist leaders to their respective countries and stop being a safe haven for Islamic extremists. Qatar must change its stance as the different parties involved in the tussles are confronting it head on. They are not going soft on Qatar this time and to survive, Qatar must adapt, or perish.


By Barkha Jain/Mayank Bawari, IIFT Delhi /Kolkata

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Blunder of Missing the Bus Touted by Chinese President Xi Jinping as ―project of the century‖, the Belt and Road Initiative (BRI), launched in 2013 aims to improve connectivity and cooperation between Eurasian countries. The project is poised to have five land and one sea corridor connecting China to various parts of Europe and Asia along with developing ports in Africa. An estimated investment of over $ 900 billion over the next decade in roads, railways, pipelines, ports, power plants will make it the largest such infrastructure building initiative by a single country post US‘s Marshall Plan, which gave $190 billion (in 2016 dollar value) to rebuild Europe post WW2. Financially, $3

Trillion of foreign reserves and Renminbi‘s inclusion in IMF‘s Special Drawing Rights (SDR) basket has given China enough muscle to deliver on the project commitments. More than 60 countries including close Indian allies like Nepal, Bangladesh and Sri Lanka have come on board the BRI. The deadlock for India is the China-Pakistan Economic Corridor (CPEC), to be built with an investment of $62 billion connecting China to the Pakistani port of Gwadar and passing through POK, allegedly infringing on Indian sovereignty. Also, media rhetoric around China ―owning‖ strategic Pakistani assets in the garb of CPEC further fuels

the Indian jingoism taking the matter further away from a rational unbiased analysis. In our piece, we objectively assess how cheap credit has been instrumental to India‘s infrastructure growth, and how the fears of Chinese ―ownership‖ are unfounded and baseless. Moreover, we will argue that India would have done good keeping its strategic and economic interests separate, the way it has done with other countries and highlight how Marshall Plan has played a key role in Western European economic development without compromising on sovereignty, a similar


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role BRI is poised to play. Scanty Indian Infrastructure and current investment scenario Arun Jaitley admitted to India requiring at least $1.5 Trillion of investment in infrastructure over the next decade. Logistics cost for India is as high as $7/km vs $2.5/km for China and $3/km for Sri Lanka. Various research puts the long-term infrastructure economic multiplier to 2.5 – 3.8 (i.e. for every $1 spent on infrastructure GDP increases by at least $2.5). The outlay for infrastructure was projected to be ₹ 56 lakh crore during 12th five year plan (2012-17) but was revised downwards to mere ₹ 38 lakh crore (~70%) due to paucity of funds. Furthermore, of the actual investment made, 1/3rd came from the private sector and India was more than welcoming of the private funds. Not just private equity, India has been welcoming of capital as debt from governments and multilateral institutions to meet

its dire need of funds. For instance, Japan‘s international lending arm Japan International Cooperation Agency (JICA) has pumped in over ₹2 lakh crore as loans across 60 projects in key strategic sectors: transport (55%), water (16%) and energy (13%), making India its largest debtor. The much hyped Ahmedabad – Mumbai bullet train project will be funded by Japan through a soft loan of ₹80,000 crore (over 80% of project cost), with additional conditions on part of capital expenditure being to Japanese firms only. Also, the Delhi Metro Rail Project is funded with over 50% of capital coming from Japan as loan, despite its financial non-viability (only ₹ 3,000 crore paid back of the total outstanding of ₹23,600 crore by March 2016). At multi-lateral institutional level, India has borrowed heavily for investment. India received the largest assistance till date amongst World Bank member countries, amounting to over $100 billion in last 70 years. To put that in perspective,

the second largest borrower Brazil has borrowed only $58.8 billion. The line of credit from World Bank‘s International Development Agency (IDA) is officially poised to stop in 2017 as India‘s rising prosperity makes it ineligible as per GNI per capita (upper cap of GNI $1,215 for FY16). Foreign assistance has been instrumental in the development of infrastructure in India and successive governments have done well to shed the Nehruvian view of ―state ownership of assets‖ to successfully leverage the capital and carry out key infrastructure projects in the country, maintaining source of capital being of secondary importance to the terms of actual deal. As WB‘s line dries up and the need for funding remains as high as ever, it would have been in national interest to bring China to negotiation table to reach an amicable solution and develop


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projects beneficial to both the emerging economies of Asia. Separate Strategic and Economic Interests

Another question of relevance here is: whether Chinese favoured India on international stage before India denied being a part of BRI? We can safely conclude that far from the truth. China is vehemently opposing India‘s candidature for permanent membership in UNSC. Further, China didn‘t allow India to join NSG saying Pakistan equally deserves to join and further adding complications that a non-

signatory of NPT will not be eligible for NSG membership. Moreover, China has repeated foiled India‘s attempts to declare Masood Azhar

Indian interests while serving their own interests in a manner that has actually been detrimental to India. For instance, India has

(Chief, Jaish-eMohammad) as a global terrorist, despite his involvement in several terrorist attacks on India. Indian collaboration with China on strategic issues can be safely assumed to be non-existent and has remained like this for decades.

inked a deal with France to purchase 36 Rafales for ₹ 63,000 crores, paying ₹ 1,750 crores per aircraft – a sum that could develop three Tejas or fetch two Sukhoi-30 MKIs, the best combat aircraft in the world. As far as the, competitive edge of Tejas is concerned, Mr Manohar Parrikar has accepted that Tejas is as capable as any other aircraft in the world, just that it is a Light

Also, one more intriguing question that needs to be addressed is how India‘s ―strategic partners‖ has done a mere lip-service to


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Combat Aircraft‖. This is not even the tip of the iceberg. India‘s purchase of QRSAM & SRSAM missiles from Israel has proved to be too costly as DRDO successfully testfired indigenous QRSAMs this month and Aakash (indigenous SRSAMs) are already operational with IAF. With both France and Israel, India has excellent economic ties and bilateral agreements to further deepen the prospects of FDI to India and increasing trade cooperation. Chinese

presence

in

Indian Economy China has committed an FDI of $20 billion in India and has pumped over $900 million since 2014. It is among top 10 sources of FDI for the period 2014-17. Moreover, India had a deficit of $46 billion against the trade of $70 billion in 2016. Even anecdotal evidence like Chinese mobile phone makers gaining over 50% of India‘s smartphone market and Chinese ecommerce giant Alibaba

owning close to 40% stake in India‘s largest app-based payment interface Paytm also points to the growing presence of the Chinese in the Indian market already. Hence, fears of Chinese ownership and compromise of sovereignty are unfounded and not based on sound economic logic. Marshall Plan’s impact on Europe The United States government invested $190 billion to rebuild Western Europe and modernize industry, albeit with an ulterior motive to prevent the spread of communism. Nevertheless, the plan had a ―decisive contribution to the renewal of transport system, raising of productivity, and facilitating of intraEuropean trade‖, as Belgian economic historian Herman Van der Wee puts it. The economy of all countries involved had surpassed their pre-war levels by at least 35%.

Road Ahead India is already investing in building infrastructure in its neighbourhood and in poor African countries. For instance, India granted a combined aid of ₹ 3,000 crore in 2015 -16 to Nepal, Bhutan, Sri Lanka, Bangladesh, Afghanistan and Myanmar. Earlier this month, India approved ₹ 1,600 crore road project connecting Myanmar and Manipur. Clearly, the role China is taking at international level, has been played by India as well, albeit at a smaller scale, and the aid receiving countries have not faced any loss of sovereignty. Rather than cribbing about Chinese dominance, India will do well to let bygones be bygones and heed Kissinger‘s advice ―There are no permanent friends or enemies in foreign policy, only permanent interests.‖ and join the wagon of economic prosperity by getting on board the BRI.


InFINeeti Vivaan Edition

August 2017

By Advait K. Kawle, IIFT Kolkata

18

REIT: Impact on Real Estate Market in India

Hello Reader, Does the idea of getting rich while sleeping, as proposed by John Stuart Mill, catch your fancy? Growing up in a traditional Indian home, we are taught to adhere to the adage: ―Hard work is the key to success and riches‖. There are no two ways about the truth in the aforementioned words. But is hard work the only key to success and riches? What if there is a magical instrument which works and makes money for you while you sleep? Turns out, there is one! Real Estate Investing Real estate as we all know is an imperishable asset. It is one that almost

LANDLORDS GET RICH IN THEIR SLEEP - John Stuart Mill

always increases in value. More often than not it is considered to be the most solid security that human ingenuity has devised. Some even consider it to be the very basis of all security and about the only indestructible security.

income has long been considered as a favourable option by the people. The extra money after all the bills have been paid is a resource that can keep you afloat during volatile markets and turbulent times. Regular Income:

Benefits of Real Estate Investing Cash Flow:

Income from real estate is stable with little variation and far more predictable with a certain degree of accuracy, than most other businesses. The regularity and predictability helps individuals and businesses allocate their financial resources confidently.

Investing in real estate as a means for passive

Tax Benefits: As majority of the income

Why is it that real estate investing has gained so much traction in people‘s minds?


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coming from Real Estate investments is gathered over the long term, the tax rates are generally lower than those for other businesses. Capital appreciation:

Value

Real estate, as an investment, almost always appreciates in value. Although there are certain recessions and values go up and down, over time values do climb higher and higher. Also as the values rise in tandem, if not higher than the rate of inflation; investing in Real Estate also provides a hedge against inflation Higher degree of control over investment: Unlike with other financial investments, where the value of investment depends on market sentiments and is not in the control of the investor; in case of Real Estate investment, the investor has full control over the value proposition of the asset held by him and thereby the value of his/her investment.

If investing in Real Estate is such an amazing value proposition and everything is so hunky dory, why isn‘t every single individual invested in Real Estate? As with every other investment, along with benefits there are certain costs, drawbacks of investing in Real Estate too. Drawbacks of Estate Investing 

Real

High Ticket Size:

Unlike certain commonly used equity and debt investment options, an investment in Real Estate requires a considerable financial commitment due to the high cost of acquisition. Also, the transaction costs for Real Estate investments are high compared to the other investment options. 

Low Liquidity:

An investment in Real Estate is not as liquid as a similar investment in stocks or bonds or other similar instruments. Properties, irrespective of category of use, cannot be bought and sold quickly

without losing out on a considerable portion of the value. 

Management Maintenance Expense:

&

The property purchased for investment purposes needs to be repaired, refurbished from time to time; the taxes and utility bills need to be paid, insurance needs to be bought. All these expenses may seem considerable if the property is idling for long stretches of time. Now that both the benefits and drawbacks have been weighed in, we have a clearer picture of the scenario. Is there an instrument which maximizes the benefits and minimizes the drawbacks at the same time? Real Estate Investment Trusts What are REITs ? REITs are collective investment schemes that invest in a portfolio of Real Estate assets, both residential (housing complexes,


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The major fortunes of America have been made in land - John D. Rockefeller serviced apartments) and commercial (shopping malls, offices, hotels etc.), usually designed in such a way that they generate income for the asset holders. Investors interested in REITs, invest small sums into these schemes and become unit holders of the assets.

destinations for realestate investment in the eyes of major institutional investors. It is also the fastest-growing major economy, set for growth of 7.0% next year after this year‘s projected 7.2%, according to Thomson Reuters. With the introduction of REITs as formal investment instruments in India, the real estate sector is expected to receive a much needed impetus for growth.

How do REITs work?

Easy Exit for Property Developers

Assets held by REITs are professionally managed and revenue generated from the assets is distributed to the unit holders

Financially sound and technically competent property developers are integral to the growth of the real estate sector in India.

What are the investment goals of REITs?

Currently, developers incur huge capital expenditure. This expenditure is especially in Commercial Real Estate (CRE) towards the purchase of land, construction, interior fitouts, etc. These funds remain locked, often for a long time, even after the asset is complete, until the asset generates returns to break-even.

-Recurring income generation (Rental) -Capital Appreciation Asset)

Value (Sale of

Impact on Real Estate in India India has shot to the top of the list of preferred

Through REIT, developers can exit from the completed asset, and focus on development activity alone.


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Transparency Investors

for

Prior to the introduction of REITs, investing in Real Estate was the last option for investors looking for stable returns with a fair amount of regulation. REITs are under the regulation of the Securities and Exchanges Board of India (SEBI) REIT can provide a new investment option with on -going returns, elevated transparency and governance standards.

Wide variety of Asset Classes The funds obtained from REITs can be used to procure, operate and maintain mainly income generating residential Real Estate. Apart from this, there are other properties like warehousing, retail malls,

shopping centres, school buildings, etc. which are potential REIT worthy assets . International Interest Foreign funds such as Blackstone, the world's biggest property investor, QIA and Brookfield Asset Management have been accumulating rentyielding realty assets -mostly office space occupied by marquee corporate tenants -over the last few years in anticipation of the introduction of REITs in India . This has led to more international investors coming in,


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thereby creating a buzz in the Real Estate Sector in India. Participation Distressed Projects

in

Firstly, Estate Regulation & Development Act (RERA) will bring unprecedented transparency and accountability requirements for developers into the system, and do a lot to increase consumer confidence. Consumer participation will increase in distressed on-going projects. Investing in REIT can be compared to investing in Gold Bonds. Indians are partial to buying physical gold rather than in Gold Bonds, implying that having one‘s own investment in property will always provide Indians greater satisfaction than mere paper investments. The Indian property market is now almost stabilized and it is the right time to buy self-owned homes. While it is human tendency to wait and watch, the bottom of the market cannot be fathomed

accurately at the best of times. At the end of the day, REITs are investment instruments and not a

means to acquire actual property – which is always high on every Indian‘s wish-list.


InFINeeti Vivaan Edition

August 2017

By Antra Nag, IMI New Delhi

23

World’s Biggest IPO Saudi Aramco SAUDI Aramco, the owner of the world's second largest crude oil reserves and second largest daily oil production is coming up with its IPO. It is the world‘s biggest oil company with the House of Saud in power, bankrolled 60% of the national budget in 2016, and is an epitome of efficiency in an economy which is otherwise smeared in bureaucracy. 5% of Aramco will be offered in the IPO, at a predicted price of $100 billion, which would give it a valuation of $2 trillion, making it the largest IPO ever. An IPO so big it will likely make any Silicon Valley unicorn look like a blip in the market. It will become more valuable than ExxonMobil XOM -

0.92%, Apple AAPL 0.03% or Alibaba which are the current largest players. The Saudi Arabian Oil Company, most popularly known as Saudi Aramco, is a Saudi Arabian national natural gas and petroleum company headquartered in Dhahran. The current valuation of Saudi Aramco is between US$1.25 trillion and US$10 trillion. Currently the production capacity of Aramco is 12 million barrels of oil per day and it has rights to 260 billion barrels of recoverable oil which is owned by Saudi Arabia. It operates the Master Gas System which is the world's largest single hydrocarbon network. It

holds over 100 oil and gas fields located in Saudi Arabia which includes 288.4 trillion standard cubic feet of natural gas reserves. Aramco has named J.P. Morgan, Morgan Stanley MS +0.17% and HSBC to be underwriters for its offering and the government is aiming for the IPO to take place in late 2018. For an exemplary launch and functioning, J.P. Morgan which is Aramco‘s commercial banker and Michael Klein, who was formerly of Citigroup, have been advising Aramco on the financial restructuring which is required for the process to make the company more


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attractive to the investors. Moelis, a Boutique investment firm, has been appointed as the independent advisor for the IPO. Aramco is planning to offer shares on Tadawul, the Saudi stock exchange. It is also considering several western exchanges like London, New York and Toronto for the offering to diversify its economy beyond oil exports in an era of cheap crude. All the three western exchanges have different things in basket for Aramco. London Stock Exchange (LSE) listing, would reduce Aramco‘s the risk of class-action lawsuits related to the terrorist attacks of 11th September 2001, of prosecution from tree-hugging attorneysgeneral, and of various attests on its assets that it might have to face on the NYSE. New York Stock Exchange (NYSE) has the benefit of liquidity as the listed companies on the NYSE have a combined market capitalisation of about $20trillion as compared to $4trillion on the LSE. Also

more prestige is related to the NYSE as the big peers Aramco wants to be judged against are listed there. But there is a possibility that Aramco might not meet the strict standards for an oil company so as to get listed on the NYSE. The company might be compelled by SEC regulations to disclose information about Saudi Arabia‘s oil reserves which are considered as national security secrets by Saudis. Toronto Stock Exchange (TSX) being more focussed on resources name could offer a lower cost of capital. The TSX has the largest accumulation of oil and gas companies among all exchanges in the world.

Markets are expecting that Aramco will seek increase in oil prices to increase the proceeds from investors. It would do this through OPEC (Organization of Petroleum Exporting Countries) since Saudi Arabia is the single most powerful country in OPEC. To offer tranquil launch to Aramco‘s initial public offer of shares Saudi Arabia's government has reduced the income tax paid by national oil giants. On January 1,2017, the Saudi government set a tax rate of 50% for Aramco. Earlier, it had paid 85% tax, plus a 20% royalty. This act has made it clear that Saudi Government is serious


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about Aramco‘s IPO. Also, this is a major pitching points to captivate attention of the investors as lower taxes mean the company can pay out higher dividends. According to Industry executives, the IPO will help Aramco form new partnerships with privatesector companies around the world and hence expand its business in line with current market principles. With the happy bubble of expected success comes the anticipation regarding the failure of Aramco‘s IPO. The preferment of Muhammad bin Salman, the architect of the IPO, to crown prince has undoubtedly to added more momentum to the launch of Aramco‘s IPO. However, he has the tendency to micromanage

the listing and this completely contrasts the spirit of openness and liberalisation that he says he wants for Saudi Arabia. This could backfire on the IPO heavily as his interferences would diminish the investor‘s interest in buying shares and hence the less keen investors will be to buy shares. Aramco‘s role underpinning the Saudi economy is a hefty test in valuing this IPO. On the one hand, it is comparable to blue-chip oil supermajors such as ExxonMobil and Royal Dutch Shell owing to its low costs and lean workforce. On the other hand, there is possibility that it might suffer from the stigma attached with being a national oil company (NOC) because of the political interference it might have

to face. Many NOCs, such as PetroChina and Brazil‘s Petrobras, entered the market amid the sort of pomp that Aramco is buzzing. But in a decade, they have destroyed more than $500bn-worth of value as compared to their private peers (as shown in figure). And there are contemplations that Aramco might suffer the same fate. To counter this inhibition, the sellingpoints for Aramco are strong (provided the oil price remain high enough). It has a concession for oil and gas which is 12 times more than ExxonMobil and 27 times more than Shell. Its production levels are many times higher. The number of employees are lesser, greater debt-adjusted cashflow per barrel, and enough margins in its petrochemicals and refining and businesses as well as upstream. Its advisers believe that by the time it lists, it will have a well-


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structured board similar to that of its competitors, and will be equivalent to them on a number of factors, including dividend projections, that will enable it to attract more investors. The investors are weighing the pros and cons of this IPO which is being highlighted in all good light. The investors are wise enough to measure the risks associated with it. There is a possibility that dividends would be unstable and the tax cut on Aramco could be unwound by the Royal Decree in a situation where the state would need money. The crown price plays puppet master to use Aramco as a tool to control global oil prices. But the recent fall in oil prices on June 21st 2017 to their lowest level since August 2016 despite an agreement, initiated by crown prince, by OPEC and non-OPEC producers to cut output until next March has put a question mark on the credibility of Aramco‘s upper handed position. Many will agree. The opportunity to buy

shares in one of the world‘s most buoyant oil firms will be hard to resist. Additionally, sovereign-wealth funds would be keen to become ―anchor tenants‖ of the IPO, to enhance their own countries‘ relationships with Aramco and the new crown prince. The expected listing of Saudi Aramco's widely speculated to be the world's largest, and the global competition for the prestigious event is erupting from corporate boardrooms and coming into the public. But the uncertainty involved will play a major role in influencing the decision of the investors and the actual success of the IPO.


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August 2017


InFINeeti Vivaan Edition

August 2017

By Bhavik Leuva, IIM Indore

28

Quant Funds

Definition: Investopedia definition of Quant funds says, ―An investment fund that selects securities based on quantitative analysis.‖ So basically, a Quant Fund runs on computer based predictive algorithms to determine whether to invest in a stock or not. This is completely automated system and the outputs of the system is dependent on computer model and not on humans. Quant Funds come under category of Hedge Funds. Evolution Funds

of

Quant

The origins of Quant Funds lie in the idea that Mathematical Models can do better job of predicting earnings and returns

better than humans. Louis Bachelier, a French mathematician in his Ph.D. thesis at the Sorbonne, titled The Theory of Speculation, illustrated the use of statistical techniques to study the fluctuation of stock prices. But, quantitative investing remained an academic discipline with no apparent real-world significance during the 20th century. In 1980s early versions of Quantitative Funds emerged and in next 20 years, the growth was exponential supported by

academic papers deviating from CAPM. Golden age of Quant Funds (2000-2007) During this period, quantitative managers were widely supported by the asset management practitioners. These strategies featured heavy research, moderate active risk, disciplined processes, and solid risk-adjusted returns that were supported by a long history of academic theory, borrowing from behaviourists and


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Figure 1

efficient proponents.

market

Fall of Quant (2007-2010)

Funds

The week of August 2006 marks a starting of dark period for Quant Funds. A number of Quant Funds reported extremely huge losses despite normal movement of S&P 500 index, due to sudden liquidation due to margin calls or deleveraging. These losses had a spiralling effect on other quantitative equity funds, which resulted in catastrophic outcomes for many such portfolios. After this incident, financial crisis of 2008 made investment in quant funds completely unattractive.

Quant Funds now After 2010, Quant Funds started recovering when the markets recovered from financial crisis losses and after that Quant Funds are on a rise and showing healthy growth. We can see the trend in a graph showing the total value of Quant Funds through years.

Also as a % of total hedge funds, Quant Funds have seen a rise and it is illustrated in below graph. As it the graph suggests, Quant Hedge funds are ion a rise since 2010. This can be attributed to evolution in technology as after 2010, Artificial Intelligence, Cloud Computing and Big data are on rise giving the traders an opportunity to collect, analyse and structuring data more efficiently and making the funds more accurate. How Exactly Funds work? 

Quant

Portfolio theory and Model of Risks

Modern Quantitative portfolio theory is the


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is always that higher risk should reward an investor with higher returns. The blue line shows most efficient portfolios with highest returns for given standard deviation, which will be most likely chosen by an algorithm. Simple process diagram to implement quant trading is shown below. Traditional Approach Traditional Quant techniques are based on statistical correlation i.e. Liner Correlation. Statistical methods require very large investments and has very high turnover time. The reason behind large turnover time is Liner methods can give accurate results when time into consideration is next day or next week, so it requires turnover of 52 times a year if the investment horizon is of a week. Large turnover time means we need scale to reduce the costs associated with trading (including infrastructure

costs). Another thing Quant Funds looks at is speed at which the prices are changing expressed as rate of change. Entry of Learning

Machine

Machine Learning combined with cloud computing has revolutionized the Quant Trading industry. Machine learning techniques can be applied to trading using programming languages like Python, R, C++ etc. Machine learning helps in 2 major ways 

Ability of ML to work with unstructured data such as natural speech

Non-Liner predictive models instead of predictive

Machine Learning provide faster efficient solution following algorithms

can and to

Random Forests

Support Machine

k-Nearest Neighbour

Vector

Linear Regression

Logistic Regression

Classification Regression Tree

Classic Regulatory Arbitrage

Cross-Border Regulatory Arbitrage

Inter-Agency Regulatory Arbitrage

Time Zone Arbitrage

Flash Pricing

Algorithmic Recognition

and

Pattern

These ML algorithms are used by trading firms for different purposes. Some of these include: 

Determine optimal inputs (predictors) to a strategy

Determining the optimal set of strategy parameters

Analysing historical market behaviour using large data sets

Making predictions

trade

The extent to which the


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use of machine learning is used is unknown to the outsiders and most companies do not disclose proper models used in their Quant funds. This is referred as Black Box trading. Below are some models used in Quant Funds. Models Involved Quant Funds

in

Although not a huge data is available on models, here are some models used in quant funds. 1.Short Term High Frequency data models – These are based on short term price fluctuations. The model tries to find anomalies related to these fluctuations and do fast in and out trades to take advantage those anomalies and make

money in very short term. 2.Statistical Arbitrage Type models – Uses price patterns and relationships for trading. 3.Double Agent Model: This model tries to find out who is using which model for trading and calculates their next step and exploits their weakness to gain in the market. 4. Factor Based Modelling: In this model, Independent variables such as price earnings ratio, inflation rate, unemployment rate are used to predict a dependent variable such as returns or stock price fluctuations. The formula for calculating return is given below.

Companies Pioneering in Quant Funds Below is the list of companies majorly investing in Quant Funds. DE Shaw, Two Sigma and Renaissance Technologies are biggest companies in Quant Funds. Below is a list of companies. The company size do now indicate their total investment in Quant Funds as they are also trading in other types of Hedge Funds. Will Quant Funds replace humans? With the advent of technology, Quants funds are getting more accurate. The decision of Quant Fund is machine based and it is free from biases and

Company

Size

Founded in

Headquarters

D.E Shaw

$ 48 billion

1988

New York

Quantitative Manage- $ 112 billion in total ment Associates assets Two Sigma $27 billion

1975

Newark

2001

New York

RENAISSANCE TECHNOLOGIES Alphasimplex Group

$73 billion

1982

London

NA

NA

Cambridge

Capula

$12 billion

2005

London

AQR Capital

$77.5 billion

1998

Greenwich, CT


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Managers‘ judgement is biased by Confirmation Bias, Halo effect, Information bias and some other emotions. This way Quant funds look very lucrative and it is very easy to think that it will replace human traders and managers in future. But, it is not the case. Algorithms and ML are tools and those tools needs to be programmed by humans. Also, the markets are irrational and no software can track all the movements of the market with 100% accuracy. You cannot discount years of experience and intuition with a block of code. Market data is limited and fluctuating with time which makes it really difficult for ML to come up with perfect predictions. Deep Learning algorithms are not expected to reach that level of complexity in near future and thus it is not possible for Quant Funds to entirely replace humans. Quant Investment Now Quant Funds are not performing well for past 1 year. It performed really well in the past but the

returns are as low as 0.04% for the past year falling from 1.06%. This is the time when S&P index gained 5.2%. Major issues for these funds are following the same strategy and larger focus on short term strategies. Although it is not deterring the investors as in first quarter $4.6 billion of money was invested in it. Now the Quant funds account 27% of all US stock trades by investors. Future of Quant Funds Quant funds are definitely the future of Investments. To reduce the combinations quants build context in to the algorithms, hence why they constantly need changing to keep up with market conditions. Then something interesting happens, as everyone‘s fighting amongst themselves to perfect their perfect algorithms, something or someone comes along with a contextual approach that causes the dam to spring a leak and burst. A lot of business leaders have predicted that Quant Funds are way forward but it cannot completely

replace humans and with changing markets advances in Deep Learning will be the way forward.


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CROSSWORD SOLUTIONS


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August 2017

By Bhaskar Poddar, IIM Rohtak

34

What Brexit meant for India and the way ahead In one of the most important series of events since the dawn of the 21st century, a majority of the electorate in UK voiced their opinion in a referendum that they no longer intend to remain a part of the European Union (EU). This intention, when implemented, will terminate the 4 decade old relationship the UK has shared with the EU that was based on a couple of terms, different from those of all other 27 members of EU. The exit of Britain from the European Union is coined as Brexit. This once in a life-time event is going to have a significant impact on India on economic as well as geopolitical front. Brexit is going to have a mixed affect as there are going to be initial glitches but in

the long run India is going to gain from Brexit. As a short term effect Brexit brings fresh uncertainties pertaining to Indian exports as industry rightly expects a cascading effect of global currency and stock market volatility and awaited terms of exit of Britain, which ae likely to come by 2018. Whereas in the long run, taking into account, the close ties between the UK and India and the prevalence of Indian enterprises in the UK, there is the possibility of greater opening up in the postBrexit scenario compared to a conditions before Brexit, which is mostly driven by the intraEuropean immigration of skilled labour. The prominent analysts in trade and consumer affairs, CUTS, also

expected that the positive effects outweighed the negative, keeping in mind, the effect of a shift in trade from other EU countries to India; EU and UK would compete for trade with India, which might speed up completion of the stalled trade agreement with EU and a new agreement with the UK could come rapidly. They believe that Indians investing in the UK, today approximately 800 companies, would have more leverage with constrained trades inside Europe. Considering India being the only white spot across the globe and the fastest growing of major economies, CUTS also projects that the


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investments from UK in India is going to see a hike in time to come. Moreover, the immigration from India to the UK is going to improve since the

president David Cameron. There was no sound planning of Britain‘s future relationship with EU and how trade and immigration would change

investment and this will give India a better stand to put our terms for trade.

present immigration from other EU countries to the UK will most likely decrease significantly.

with other countries in EU.

from EU is latter‘s complex Bureaucratic structure and hence Britain can be expected to be a relatively deregulated and freer market. Europe definitely wants to offset USA and China geopolitically and also need to hedge against the slowing China for its own economic interests. For this Europe will be relying on the fastest growing economy in the

The British exit will affect Indian economy in diverse ways and the initial hit will be due to uncertainties. This is because Britain didn‘t map out the future course of action in fact they were not even expected it and it was pretty evident from the fact that Brexit came as a shock to then British

Another series of impacts will be on the investment pattern. Currently India is the second biggest source of FDI for UK and this is mostly because of India‘s historical and cultural convolution with Britain. But with Brexit this is not going to be the case as these industrial houses used UK as centre of their operations for Europe. But Britain will not want to lose out on such heavy

Moreover, one of the reason of Britain‘s exit


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world and needs to resolve its pending trade issues with India as quickly as possible. India‘s interest also lies in forging ties with another country within the EU as with Brexit in picture, India has lost its gateway to Europe. Currently, Netherland is biggest recipient of India‘s FDI in EU but India is in process of developing better trading relationships with other EU countries which includes France and Germany. As Britain exits from EU, it will be in a desperate need of trading partners to ensure source of capital and quality labour. UK will be in dire need of influx of talented individuals and India provides the perfect solutions due to its English speaking population. With migration from mainland Europe set to decline Britain will be able to accommodate migration from other countries which suits India‘s interest. Moreover Britain is the most attractive destination for higher studies for students who aspire to study abroad. Presently

British Universities are forced to provide subsidised courses to students from other countries of EU but Brexit will result in freeing of these funds for students from other countries. Another set of positives out of Brexit for India is in form of bargaining power it gives to India in case of FTAs. Talks on IndiaEuropean Union Bilateral Trade & Investment Agreement (BTIA) have stalled because of resistance from industry lobbies in India, who have consistently insisted on continued protection for several sectors. The Chief negotiator for IndianEuropean BTIA visited India within a month after the referendum. Although this agreement will provide mutual progress to both the parties but Brexit definitely has oriented it in India‘s favour and also has enhanced the speed of the required processing for the agreement. India is also in talks with UK to forge another FTA after Brexit. Both the countries are exploring the option of formation of an India-UK sub-fund under the

National Investment and Infrastructure Fund (NIIF) umbrella. Brexit has provided consequences where EU and UK are in a way competing for better trade relations with India. providing India a strong chance to establish itself for good, in the European market post Brexit. The strategy for companies which are to come up with new headquarters in EU should be analysing option on various factors like strategic position, political stability, skilled workforce, labour market stability, regional and industrial diversity, productivity, Business Tax environment and domestic market. If any advantage pertaining a particular industry doesn‘t come into play, Germany beats all other options including Netherlands, Spain, France in most of the factors, with excellent central position for distribution


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to EU-members, strong academic and nonacademic education, politically stable government, minimum expense on taxes and it proves the largest market in Europe. Although Brexit has produced a negative shade of impact on Indian economy, with companies in trade with UK‘s

counterparts recording fall in revenues and even losses in many cases, it promises to be a greater boon in time to come. Brexit bring with it the myriad opportunities of growth for Indian education sector, IT sector and others too. Brexit provides an added tool to Indian negotiators for FTAs with UK as well

as EU. So, there‘s a lot more to come India just has to be watchful and capitalize on every opportunity which comes its way.


By Samiksha Gupta, Dhwani Mohan, MDI Gurgaon

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JIO – Paradigm shift in the Indian telecom sector

“The symbolic language of the crucifixion is the death of the old paradigm; resurrection is a leap into a whole new way of thinking” On September 5, 2016 the country was taken by a wave as the Reliance Industries, under its umbrella, gave birth to, what seems like a revolution. Jio- A word that rings a bell in every Indian‘s mind; an initiative that people thought would never turn out to be quite the success; an idea that changed the dynamics of the Indian telecom sector. Jio entered the Indian telecom sector confidently, but there was still a lot of apprehension in terms of how things will

pan out for the brand, given that the first few months of the services were given to the people for absolutely free. Some thought it was too risky a proposition to make since people might consume the free services and then back out, some said Mr. Ambani was in it for the long haul, heck, some even alleged that it was a way of the conglomerate channelizing its black money, thanks to the demonetization chaos (Safe to say that for a person of his stature and experience, Mr. Ambani would know how to handle his ―black‖ money without splashing it all over, if he had any black money, that is). No wonder within the first month of commercial

operations, Jio announced that it had acquired 16 million subscribers. Free services was no act of kindness, it was bait. Emerging Market Being the second largest telecommunication market and only behind China in number of Internet users, Indian telecom market has gained recognition as one of the most lucrative markets globally. Driven by strong adoption of data consumption on handheld devices, the total mobile services market revenue in India is expected to touch US$ 37 billion in 2017, registering a Compound Annual Growth Rate


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(CAGR) of 5.2 per cent between 2014 and 2017, according to research firm IDC. The industry has attracted FDI worth US $23.92billion during the period April 2000December 2016, according to the data released by Department of Industrial Policy and Promotion (DIPP). Smartphones are expected to account for two out of every three mobile connections globally by 2020 making India the fourth largest

smartphone market. India is expected to lead in the growth of smartphone adoption globally with an estimated net addition of 350 million by year 2020. The government has added icing on the cake by fast tracked reforms in the telecom sector. Its' liberal and reformist policies have been instrumental along with strong consumer demand in the rapid growth in the Indian telecom sector. The government has enabled easy market

access to telecom equipment and a fair and proactive regulatory framework that has ensured availability of telecom services to consumer at affordable prices. The deregulation of Foreign Direct Investment (FDI) norms has made the sector one of the fastest growing and one of the top five employment opportunity generator in the country. The market is all set with the red carpet for


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various telecom giants walking in with a plethora of plans. Jio, being the spotlight of the show, is giving a tough time to the contemporaries. Alleged model :-

business

An Indian‘s monthly average revenue per user

(ARPU) is INR 150, and the people who desire mobile data along with it, end up spending a lot more. Have a look at their tariff plans:There are primarily four verticals amongst which

they provide services, namely:

their

1. FREE VOICE CALLS: The Indian telecom industry hasn‘t always been quite as dynamic as it ought to be. Sure, companies have new plans and tariffs rolling out every other day, but did we ever catch up with the pace that the global

telecom sector is moving at? Jio provided free calls in all the plans which is their primary advertising focus as well. The one reason Jio got identified was because it was willing to offer what no other telecom service providing

brand was- unlimited free voice calls. All the other competitors in the market were offering partially free voice callsthere was a cap on the worth of voice calls that was allowed by the provider, beyond which calls were charged. Some others came up with the concept of

‗minutes‘ for calls along the same provider. For instance, Voda-minutes, while the others allowed voice calls along all service providers for a set value of money, but only for a set time limit, beyond which the customer would be


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charged for the calls. For instance, Airtel. Now, countries like USA work no other way than free voice calling, and it was about time India did away with paid voice calling as well. With Jio entering the market, not only have the other service providers put their rates down, giving the customers more options to choose from for services they used to pay huge amounts for, but has helped India take a huge leap forward and come neck to neck with the global telecom standards, both of which are beneficial options for the Indian customers. 2. DATA: The brand started advertising with free voice calling as its flagship service, but the add on of free high speed data is just something that comes on as a latent advantage, but their data services are, in fact, their strong suit. Jio has drawn their focus on this unconquered territory, and aims to provide the best service in this sector so as to beat all its competitors. The network that they‘ve laid

down is built of optical fiber of superior quality which has the capacity of providing services of maybe even 5G quality, in comparison with all its competitors which never really focused as much on mobile data services and don‘t have the bandwidth capacity to provide high grade services. Now, if you look closely, the plan with INR 149 gives you only 2GB of data, and every other plan following it gives unlimited data for higher prices. The next best price is that of INR 309 which is INR 159 more than the average amount spent by an Indian. This contributes to the high revenue generated. Now, if you‘re a regular user of high speed data, you would rather go for the 309 plan since it‘ll seem like a better deal, which it is. So, basically, Jio profits from eating into the business of all the other competitors without extracting too much from its customers.

provision. Again, the only plan that has a cap on it is the one with INR 149, so, you‘ll naturally be inclined towards the following plans.

3. SMS:

Jio was such a leap which the great business tycoon brought in the telecom sector. It has been a game-

This service is barely used by people these days, but everyone likes to have the

4. JIO APPS: Not a lot of people were interested in this initially, but its consumer base increased with time. These apps are applicable to all the plans, and like every other service, this one is backed with rationale as well. This vertical works like advertisements, which subconsciously program the customer and inject them with the idea that they need the product, hence, you end up buying them once you walk into a store. Jio aims at getting the consumers used to these apps gradually, and so much so, that they can‘t walk out on them. Invincible Jio: paradigm shift

The


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of the players.

existing

major

Jio did not restrict itself in providing just network services but also introduced new concepts/ models of the handset (Life Jio), Wi-fi module (JIO-fi) which were well targeted to the customers through brands and advertisements. Jio has de facto become the

primary substitute to all the different kinds of network service providers, at the basic level. Lower middle classes don‘t go to the extent of getting Wifi connection anymore. A smartphone and a Jio sim is all you need to get a portable Wifi. With the pace at which Jio is expanding into the market, it wouldn‘t be a

surprise if it comes out to be the ultimate winner by the end of this unspoken war that it has begun with the other network service providers. But the good thing is, it was about time Indian market got introduced to global standards.


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By Kashyap Dhar, IIFT Kolkata

43

The Curious Case of India Israel Bilateral Relationship

On 4th July 2017, Indian Prime Minister Narendra Modi visited the Jewish nation of Israel. This visit was a historic one as it was the first trip made by any Indian PM to the state of Israel since the ties were established between the two countries 25 years ago. Moreover, the visit wasn‘t followed by a visit to Palestine, which has been the convention followed by the Indian political leadership before, to balance India‘s relationship between the Israel and its Arab neighbour. On the economic front the visit had far reaching impacts. Both the sides decided to set up an Innovation Fund worth US$ 40 million for increasing the economic

cooperation and boost research and development between the two countries. Deals worth $5 billion were signed at the first CEO‘s Forum of Indian and Israeli companies in Tel Aviv on Thursday in addition to the launch of the Innovation Fund. In the defence sector, they also signed a $2billion-dollar deal for an advanced medium range surface-to-air missile systems (MRSAM) to India. The two sides

agreed that future developments should focus on joint development of hardware, including transfer of Israeli technology with special emphasis on the ―Make in India‖ initiative. The ―strategic partnership in water and agriculture‖ will focus on water conservation, wastewater treatment and reuse for agriculture, desalination, water utility reforms and the cleaning of the Ganges and other rivers. Apart from the above mentioned collaborations, both countries see themselves as isolated democracies threatened by neighbours that train, finance and


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encourage terrorism, therefore both countries also view their cooperative relationship as a strategic imperative. The visit will act as a stepping stone to further strengthen the relationship between the two countries and bring the relationship out from ―under the carpet‖. Considering the quantum of trade volume and defence cooperation India has with Israel, the fact that the bilateral relationship between the two countries has been sheltered defy all reason. The countries have a close defence, homeland security, and intelligence relationship—one that the two governments do not talk much about publicly. India has been Israel‘s 10th largest trading

partner with imports of $ 17.66 billion and exports of $18.67 billion. It has been Israel‘s top buyer of defence exports, buying 41% of exports between 2012 and 2016. Israel is India‘s third largest source of arms, after Russia and USA, with a share of 7.2 % in imports between 20122016 next to US. Beyond the defence and security relationship, cooperation in the agricultural sector— water management, research and development, sharing of best practice have the most on-the-ground impact, including in terms of building constituencies for Israel at the state level in India. All said and done, India Israel relations for the past few years have

started plateauing. Despite a lot of promise, the bilateral relationships between the two countries haven‘t prospered commensurately. Some of the issues that deserve special attention include: 

The previous political dispensations in India have always been vary of projecting themselves of being in support of Israel. Indian politicians have traditionally been reluctant to support Israel, not least because of the risk of angering the 14 per cent of Indians who are Muslims. Foreign policy issues between the two countries have always been dominated by issues such as Palestine and


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Iran. The current political dispensation right now seems to have ignored those apprehensions and gone ahead with the bilateral visit of the PM. 

Bilateral Trade: The bilateral trade between the two countries has moved from a meagre $200 million, peaked at $5 billion, and dropped to $4 billion and has plate. Considering the sizes of the respective economies the volume of trade between the two countries is a mere pittance. Enough diversification of trade into areas of high end technology has not taken place as expected. Unwillingness of the Israeli private businesses to venture into the Indian Markets is a thing to worry

about. Although the Indian market is notorious to be difficult to crack into, but their constant rage towards the Western Markets has been hindering investments in the Indian market. 

Future areas of cooperation that have the potential to ―revolutionise‖ the relationship include – water, agriculture, cyber security.

Water cooperation between India and Israel is critical considering the predictions of further drop in precipitation. Israel has transitioned from a water-deficit state to one with a significant watersurplus through its pioneering water

desalination techniques. Transfer of the technology to India will help in alleviating the Indian concerns. 

India is a severely water stressed country and has made things worse for itself with impractical agricultural and urban usage of this precious commodity.

Israel‘s groundbreaking utilisation of novel irrigation and agricultural techniques have greatly reduced water consumption while multiplying yield there and the same technique can reap rich benefits in


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cyber security space will be critical in securing the security infrastructure and widening the country‘s tech sector.

India. 

Israel‘s success in incubating the world‘s most sought after start -ups in cyber security is well known. Indian govt. through its flagship program of ‗Start Up India, Stand Up India‘ is also working on the same lines. An Indo Israel partnership in the field of strengthening the

Modi‘s trip to Israeli was the final step in fully normalizing ties between India and Israel. It signaled that India was willing and able to pursue independent relationships with both

the Israeli and Palestinians, but not through the prism of the conflict. In a significant break from its past practice, India would finally de-hyphenate the two from one another.


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By Sourav Dey, IIT Roorkee

47

Fall In Crude Oil PricesImpact on Economies

The decline in the crude oil prices has been dramatic since the last few months. This event can be attributed to two major factors: 1. Increase in production by non OPEC countries like US 2. Reluctance by Organization of Petroleum Exporting Countries (OPEC) to cut production Slowing economies of China, Japan and Europe have also impacted the price by showcasing low demand as this forms the major importing group of the world. Gainers Simply put the net importers would gain and the net exporters would be worse off. However an overall effect would be

positive taking the world economy as a whole. Talking about the fall in the crude oil prices Christine Lagarde, managing director, International Monetary Fund was quoted as saying ―Assuming we have a 30% decline, it‘s likely to be an additional 0.8% (in economic growth) for most advanced economies, because all of them are importers of oil.‖ China is a major beneficiary of the current situation. As it is one of the largest importers of crude oil, weakness in the prices of the oil in the international market is in favour of the country. Every drop of $1 in the price of oil saves around 3% of the import bill. Impact on America is mixed as it is one of the

biggest importer, consumer and exporter of oil in the world. So the net effect is neutralized by savings from import and loss from exports. India also forms part of the gainer category as 70% of the oil requirement is imported. It will help government in lowering the subsidy burden and will help contain the fiscal deficit (difference between Government‘s income and expenditure). Government will also be able to decontrol the diesel prices following further fall in the crude oil prices. Macquarie Capital stated that a $10 per barrel fall in the price of the crude


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oil helps in reducing the import bill by $9.2 billion. Curbing inflation through decrease in Current Account Deficit (CAD) and import bill is another advantage for India. Taking in view the industries that would be the biggest beneficiaries are airline, energy, logistics and transport industries for which oil forms the largest part of cost incurred. Consumer sector companies would also enjoy cost benefits in the form of easing of cost of the raw materials. In general, companies in this sector pass on any extra cost to the consumers but due to ease of the raw materials cost, the price

of the end products could be kept low thus boosting the overall margins. Losers All the exporting countries will form part of this group. Saudi Arabia being the world‘s largest exporter of the oil took the largest blow. Its budget has certainly gone into red. But considering the foreign reserves of the nation it could bear any losses arising for couple of years to come. The major impact is still on smaller countries which draw majority of the GDP revenue from oil exports. The most notable of the countries that form part of this group are Iran,

Venezuela and Russia. Predecessor of the current president of Venezuela dismantled a welfare fund to meet with the expenses magnified due to the losses generated. This has pulled the foreign reserves at decade low levels. Every dollar of dip in the prices of crude cuts around $450 million off the export earnings. This has created a panic situation in the country. Last year fiscal deficit of the country touched 17% of GDP last year due to which the central bank was forced to print currency further resulting into increase of inflation. Standard and


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Poor has downgraded the country‘s debt to CCC+ impacting the goodwill of the country. On the same line Iran is facing the heat. In terms of vulnerability it is worse positioned than Venezuela. It is spending on the subsidies constituting around 25% of the GDP. Sanctions have limited the country to borrow further. The current government is taking measures in the right direction forming reforms to take the country out of the crisis which is reflected by the growth numbers. But the fall in prices of crude oil may force Iran to deal with America over the nuclear mission. With the steep fall of the currency assisted by decrease in the price of oil Russia is facing the slowdown. The slide in the currency is impacting the living standards of the people and as with the case of Iran due to the sanctions offered by the west the capacity to borrow has decreased with time. According to Analysts, growth will hover in the range 0.52% as compared to 4% last year.

Thus, the steep fall in the prices of oil is having an impact on the economy of the world and is being treated as one of the major events in the history of the world. All the countries are in the process of taking measures to analyse the situation both from long term and short term perspective and trying to position reforms for the well-being of the economy of the respective countries.


InFINeeti Vivaan Edition

MEET THE TEAM - JUNIOR EDITORS

W Vikas Rao  

Electronics and Instrumentation Engineer from SGSITS Indore Likes reading fantasy and speculative fiction.

Sidhartha Rana 

Electrical and Electronics Engineer from NIT Hamirpur

Former Automation Test Engineer, Verizon

Music enthusiast, plays Bass guitar

Shubham Srivastava 

Electronics and Communication Engineer from BIT Mesra

Likes writing articles and cares for animals

Loves drumming and watching football

Siddharth Gupta 

Civil Engineer from PEC

Former Business Operation Associate, ZS Associates

Loves to travel, like reading classic fiction and Chelsea Fan

August 2017 46


InFINeeti Vivaan Edition

August 2017

MEET THE TEAM - SENIOR EDITORS

Nilesh Daklia 

IT Engineer from Nirma University

Interned at Future Group

Loves to play cricket and follows Warren Buffet religiously

Sarthak Khanna 

Electronics and Communication Engineer

Interned at Axis Bank

Loves to play Table Tennis and spend time on novels

Shashank Sharma 

Electronics Engineer from Panjab University, Chandigarh

Former Systems Engineer, Infosys

Interned at Robert Bosch

Devottam Bhattacharya 

Engineer from VIT University

Interned at AkzoNobel

Football fan, loves reading


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