Adios * Au revoir * SayĹ?nara
Dear Niveshaks,
The important news in the financial and economical world, this month, had a mixture of positives and negatives for India. The month began with the hike in repo rate by RBI, something which last happened almost four years ago. The country observed the first anniversary of the implementation of GST in the country. The Indian rupee continued to
weaken against US Dollar owing to withdrawal of foreign investments. The divestment plan of the government had a major blow as the 76% stake of Air India received no bids. In a move to reduce the problems of the rising NPA accounts in the country, the government fast streamed the resolution process through IBC. This month’s cover story focuses on the woes
associated with the NPA accounts in the power sector, which is the biggest contributor by far. Taking a step ahead in improving the economic condition of the country and finding solutions on the issue of NPA, the Article of the Month focuses on the reformation required in the Indian banking sector. To observe the reformation in the international front, the FinGyan section deals
with the economics of the Saudi Arabia’s vision of 2030. To enhance the knowledge of our readers with the latest policy changes, we have included the details about the E-Way bill in the classroom section. Also, the Juxtapose section compares the laws related to the insolvency process in the developed countries. The views of Mr. Pramod Vaidya, a veteran in the finance and economic world, on the recent changes in the economical condition of the country are presented in the FinView section. Hope you have as much fun in reading the magazine as we had in making it! To download the magazine, please go to our website: https://niveshak.wixsite.com/ home/archive Stay Invested, Team Niveshak
THE TEAM Aayushi Garg Abhishek Soni Arpit Murarka Bhushan Bavishkar Mahesh M Priyanshu Gupta Samprit Shah Sheshav Dosi Sriya Gupta
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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
Contents NIVESHAK: JUNE 2018
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The Month That Was
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Cover Story: Power Sector Woes
22
Juxtapose: Comparison of Insolvency Process
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10
Niveshak Investment Fund
Article of The Month: Reforming the Indian Banking Sector
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FinGyaan: The Economics of Saudi Arabia’s Vision 2030
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Classroom: E-Way Bill
FinView: Pramod Vaidya
Niveshak June’18
The Month That Was MPC hikes Repo Rate be 25 No bidders for Air India basis points The government of India decided to sell 74% share in Air India and for the same asked the interested parties to bid for it. Even after increasing the last date to bid from 14th May 2018 to the last day of the month, the Airline Company could not find a single bidder. Indigo Airline was initially interested in buying the stakes but backed out after the government introduced unfavourable terms and conditions.
The Monetary Policy Committee by Reserve Bank of India on 7th June 2018 decided to hike the repo rate by 25 basis points to 6.25 percent. The decision was a result of unanimous voting for a rate hike by all the MPC members. This is the first rate hike in more than four years, with the last one in January 2014. The reverse repo rate and bank rate stand at 6 and Air India currently has a debt of over Rs. 50000 Crore 6.5 percent respectively. out of which Rs 33000 Crore + is supposed to be sold The hike was anticipated seeing the increase in in- off to the bidder. The Aviation Minister has made it flation figures owing to two primary reasons. One clear that the government will sell off the company being the increased minimum support price for only if it finds a suitable bidder. This acts as a setback summer crops and second is the general increase in to the Modi government’s reformist image ahead of overall spending by the central government as the national elections which are due next year. elections come nearer. From a broader perspective, the rate hike is not very large and is still expected to hike further in coming months.
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The Month That Was
One Year of GST At the eve of One year of GST, there were many surveys which lead to the conclusion that the GST transformation has failed at the technological level and to which the Finance Secretary Hasmukh Adhia said that he had already referred somewhere that the transition will fail at technical front. He also mentioned that except the technical glitch, the otherwise impact of the GST reform has been good on the Indian economy, although the scope for improvement exists. GST is one of the most important reforms introduced by Modi government and is expected to affect the sentiments of voters for the upcoming national elections.
The Rupee weakened multiple times over the past month, with the overall change from Rs. 67.64 to Rs. 68.46 for each $1. The value rose to Rs. 66.87 on June 7th, but then hit the low of Rs. 69.10 before recovering 64 paise. The major cause for this fall in value is the result of the pull out of Foreign Portfolio Investment from the emerging countries. In the first six months itself, the FPIs have made net sales of Rs 4,693 crore. Also, the trade deficit of India has been negative for the past financial year and is expected to worsen in the coming year, due to rise in oil prices. The current trade deficit stands at 1.9% of GDP up from 0.6% from the previous year.
LIC’s stake in IDBI
Tata steel-Thyssenkrupp JV
The news came on 26th June that LIC (Life Insurance Corporation of India) may acquire 30% additional stakes in IDBI Bank. Right now LIC share is 10.82%, and the increase is supposed to be supported by the issuance of fresh equity shares. But LIC will not control equal stake in the management of the Bank. According to the current prices, LIC will pay Rs 13000 Crore to take its share in IDBI to 40%. Currently, the government has been thinking of reducing its stake in IBDI to below 50%. This will require an amendment in the Article of Association. Also, two days after this announcement, LIC got approval from the board of Insurance Regulatory and Development Authority of India (IRDA) to this acquisition of stake by LIC seeing the precarious financial position of IDBI Bank.
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Rupee weakens
Tata Steel Europe and ThyssenKrupp Steel plan to set up a joint venture. The news of the same broke out early this month when the Tata Steel’s European labor representative body remained unconvinced on the various terms and conditions which were discussed by the two countries. According to them, the JV can be valuable from the business aspect of the company but will cause a problem for the company’s operations and employees if not detailed out with the Dutch workers. The problem was later solved with enough support from both company’s labour union leaders supporting the JV. The deal is said to be valued at $17.4 billion to combine the two company’s assets into a steel giant in Europe. The Deal compromises of cash payment to ThyssenKrupp, changing the 50-50 ownership structure of the venture, lowering the debt to be transferred to it, or limiting dividend payments to Tata Steel for some years.
NIF
NIF PERFORMACE EVALUATION th, 2018 As onAs June on 30 31th July 2017
June Month's Performance of NIF
Scaled Sensex
29-Jun-18
27-Jun-18
25-Jun-18
23-Jun-18
21-Jun-18
19-Jun-18
17-Jun-18
15-Jun-18
13-Jun-18
11-Jun-18
09-Jun-18
07-Jun-18
05-Jun-18
03-Jun-18
01-Jun-18
102 101 100 99 98 97 96 95 94 93 92
Scaled Portfolio
265 255 245 235 225 215 205 195 185 175 165 155 145 135 125 115 105 95
Performance of Niveshak Investment Fund since Inception
Sensex Scaled values
Portfolio Scaled Values Value Scaled to 100
Total Investment Value : 10,00,000 Current Portfolio Value : 23,32,219 Change in Portfolio Value : 133.22% Change in Sensex : 72.81%
Risk Measures: Standard Deviation NIF: 32.19 Standard Deviation Sensex: 15.03 Sharpe Ratio : 3.89 (Sensex : 4.29) Cash Remaining: 96,190
Comments on Equity market and NIF’s Performance: The month of June made an important mark in the global history as the much talked ‘Trump-Kim Summit’ finally took place on 12th. Later on 22nd, OPEC decided to increase its oil production amid the US sanctions on Iran. These geopolitical factors played significant role in shaping the global equity markets. With USD/INR crossing 69 for the first time, Rupee has fallen by almost 8% in the year 2018. For Sensex there was no significant change, but Small Cap and Mid Cap indices made new lows of 2018 in the month of June. For NIF, Pharma companies gave good returns in June. With Lupin and Dr.Reddy’s giving 18% and 14% returns it was good month for the Pharma sector. But NOCIL fell by more than 27% in the same month. Going ahead the NIF team believes that Small Cap and Mid Cap shares will outperform the market, given the correction of more than 20% in the Small Cap and Mid Cap indices. NIF team also recommends buying of these stocks at current valuation.
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Niveshak June’18
NIVESHAK INVESTMENT FUND INDIVIDUAL STOCK WEIGHT AND MONTHLY PERFORMANCE
NIF Sectoral Weights
Monthly Performance Portfolio Weight
6.88%
8.29%
14.70%
2.04% 7.07%
13.21%
12.14% 4.63%
1.53%
29.51%
Auto
Infrastructure
Chemical
Media
Financial Services
FMCG
Pharma
Telecommunication
Misc
Services
TOP GAINERS FOR THE MONTH • Lupin (+18.42%) • Dr. Reddy’s(+15.06%) • Britannia(+6.71%) TOP LOSERS FOR THE MONTH • Asian Granito(-27.08%) • ADF Foods (-14.06%) • NOCIL(-11.57%)
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Niveshak June‘18
Article Of the Month
Aniket Gaurav IIM Kashipur
Reforming The Indian Banking Sector- Beyond the universal banking model
Introduction
banking sector specially the public sector banks since they have to shoulder the social responsibilities as well as take into account electoral politics. In this regard, the cumulative losses of the public sector banks for the financial year 2017-18 stood at Rs 87,357 crores while the total NPAs hit a record high of 7.34 lakh crores. The numbers paint a sorry picture but finer analysis reveals that it is the corporate loans which are ruining the show. The public sector banks disbursed roughly 37 per cent of their total credit to the industry sector, however the corporate and industry loans cornered about 73 per cent of the total NPAs of the banking sector in fiscal year 2016-17.
Banking and financial institutions form the backbone of any nation’s economy. They not only act as the custodians of nations wealth and savings but also as resources to spur investment and moderate consumption in the economy. For a developing country like India, a sound and robust banking system is even more important given the pressing need to create jobs for more than 30 million labor force. Against this backdrop, Indian banking sector is a study of opposites. On one side it is supporting the world’s fastest growing major economy but is grappling with rising bad loans. The menace of NPAs (non-performing assets) coupled with rising cases of poor corporate governance call for To tackle this grim scenario, the finance ministry has structural reforms in the banking sector which can re- come up with the EASE (Enhanced Excellence and Service Excellence) plan which seeks to bring down duce the unsystematic risk in the sector. the corporate exposure of Public sector banks to 25 % The gamut of these structural reforms stem from the of the total risk-weighted assets. The government on cause and nature of the NPA’s which have burdened the its part has put forth the Insolvency and Bankrupt-
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Article of the Month cy code to ensure recovery from bad loans. However, limiting credit supply has ramifications like lack of working capital for corporate sector which might lead to economic slowdown. For example, the gems and jewelry sector are grappling from lack of cash which has in turn pulled down India’s jewelry export by 16.6 per cent as compared to last year. This in turn would lead to more such firms going bankrupt adding to the non-performing assets. Moreover a fall in corporate investment would make the government’s job all the more difficult to script a speedy economic recovery across all segments of the economy, as mentioned by the economic survey report 2017-18. Against this backdrop, it is imperative for the Indian economy to develop a bank dedicated to wholesale lending. This wholesale lending bank would focus on financing long-term infrastructure projects requiring high capital infusion. Since these would have no exposure to retail loans or saving deposits, these banks could devise customized sophisticated financial products so as to absorb the risks such as long gestation period of such projects, economic cycle, changing technology etc. The RBI on its part has set the ball rolling by issuing a discussion paper on ‘Wholesale & Long-Term Financing Banks’. According to the report ‘A Hundred Small Steps’- Report of the Committee on Financial Sector Reforms, would help the government to better channelize liquidity for infrastructure projects while reducing regulatory hurdles. To further increase liquidity, RBI has proposed to reduce CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio) for such banks.
ing bank will be better suited to not only free up capital but also ensure better flow of capital. Moreover the 12th five year plan envisages the infrastructure financing requirements of the country to be $ 1 trillion out of which only 45 % is stipulated to come from budgetary support which buttresses the need for a bank dedicated to long term financing. Furthermore the government had pledged to bring down logistics cost from 18 percent to 8 percent by 2020 which would require significant investment and hence would be better served by a long term financing bank. These banks could also double up as market-makers in various securities like credit derivatives, take-out financing, corporate bonds etc., This would allow these banks elbow room to refinance other lending institutions and hence mitigate risks by aggregation. For instance, such wholesale bank could fund big ticket defense projects which are being undertaken by private sectors. Since a lot of money would be spent on R&D in such cases, such a bank would be in a better position to collaborate with the government and the private player simultaneously to ensure that proper flow of capital infusion is maintained. As these banks won’t be dealing with retail loans, they won’t require huge workforce. Hence they could hire specialist from the industrial sector to give a better picture of the project. This would not only ensure proper risk assessment but also streamline the whole process reducing red tapism.
Another source of profit for these banks would be by providing funds as equity participation. These banks in the process of disbursing loans could pick up an equity stake in the project if the project is being promoted by the private players. On completion of the project The concept of dedicated wholesale bank is not new by selling the equity, these banks could clock profit. to the Indian economy. In fact the first such bank was The concept of equity participation could be particestablished way back in 1948 with the name IFCI (In- ularly lucrative for companies in sectors like telecom dustrial Financing Corporation of India) to speed up which are highly leveraged as this would ensure that the process of industrialization, to be followed by IDBI the companies have required capital to invest in new (Industrial Development Bank of India) and ICICI ( technologies. Industrial Credit and Investment Corporation of India). Furthermore, to raise money for infrastructure projects the government has come up with certain tools which In the present scenario, given the lending constraints are sector specific. For instance the NHAI (National of the public sector banks, the wholesale lending bank Highway Authority of India) came up with a bond issue might be the panacea to speed up infrastructure cre- offering coupon rates of more than 7 percent to fund ation and enabling the core sector industries to gain the ambitious Bharatmala project. A wholesale and capital for scripting a turnaround. To sustain high eco- Long term financing bank can issue similar bonds for nomic growth, capital is must and a long term financ- other sectors like shipbuilding, construction of trans-
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Niveshak June’18 portation infrastructure etc. With regards to funding, these banks are stipulated to accept deposits above 10 crores so as to ensure the required liquidity. Another source of funding for these banks would be issuance of bonds in foreign markets. However, there are several challenges which need to be addressed. In the universal banking model, there is a cushion from retail earnings, so a scope exists to build provisions to account for the cyclical nature of the industrial project. Since these banks would not be having retail operations, they would not have the luxury of building such a war chest. Moreover, raising long term sustainable funds without sovereign guarantee would be very difficult which might push up the cost of
lending thus making these banks unviable. So any such bank has to be backed strongly by the government. However, given the fiscal constraints the government might not be too enthusiastic to bite the bullet. So in nutshell opening up of Long Term financing bank could ensure availability of capital to private sector for critical infrastructure projects having long gestation period and while making the country a better investment destination. Hence the government and the RBI should deliberate on forming such a bank so as to clean the NPA mess and ensure that in future the banking system is in a more robust and healthy state to withstand economic slowdown.
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Niveshak June’18
Cover Story
Power Sector Woes – No End in Sight The RBI’s NPA resolution mechanism through the IBC is set to face its biggest challenge yet. By the September of this year up to Rs. 3.8 Lakh Crores worth of assets are set to come up for resolution spread over 70 accounts. The biggest contributor by far is the power sector with contributing 52% of that figure. Expecting a resolution similar to that of the steel sector would be foolhardy. Lenders are said to expect a haircut of upwards of 50%. The expectation is an average loss of up to 75% on these loans. This in a country where
there is an acute shortage of power across the country is irony at its finest. India’s power plant at present operates at a power load factor of just above 65%. This metric which measures the effective utilisation of the power plant shows precisely where the problem lies. The problem in India is due to extreme inefficiency. This is bought about by a myriad of problems ranging from lack of assured coal supply, lack of a pre-purchase agreement, inefficient plants and so on. The Allahabad court injunction in favour of the Inde-
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Cover Story pendent Power Producers Association of India does bring in some respite to the sector. The court observed that “the projects under electricity sectors have suffered due to many factors like fuel shortage, sub-optimal loading, the absence of fuel supply agreements
(FSA) or lack of power purchase agreement (PPA)” and advised against the mechanical implementation of the RBI’s IBC. The RBI, however, believes that the 180 day period within which the loans should be resolved provides sufficient time for resolution.
In this edition of Niveshak, we examine what lead the power sector of the country to come to such dire straits and what is the way back, if any. coal imports stood at 217 million tonnes in 2017-18. Lack of Coal Linkages To add more colour to the picture, the average coal With the growth in supply lagging behind the demand, stocks stood at just ten days in 2017-18 while 56 staplants face a huge shortage of assured coal without tions faced critically depleted inventory levels. there being a defined contract or coal linkages. The prices of coal on the spot markets are prohibitively high making it impossibly high to produce power at economical rates. The situation is so dire that some powerplants find it easier to import coal than to rely on the capricious availability of coal. The problem is not just of lack of coal linkages which guarantee the availability of coal; it’s the production of coal itself with the demand supply gap for the year 2016-2017 totalling 53 MT. Coal India which produces about 80% of the coal in the country has faced difficulty in meeting the country’s demand with its target to produce 1 Billion MT now expected to be met only by 2022.
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Scheems like the coal swapping scheme, ‘Coal Mitra’ where PSUs and coal producers may swap coal are definitely welcome and will help ease situations where old and inefficient power plant have coal linkages while efficient ones do not. An estimated 30000 MW of plants do not have any coal linkages.
While the Supreme Court’s decision scrap 214 coal blocks that were allotted on procedural grounds is indeed justified, the lack of any alternative means a 25000 MW of coal plants have been deallocated with no alternative in sight. The Shakti scheme was implemented to help in this issue and enjoyed success but “The nation as a whole has sufficient supply of coal. was limited in both scope and duration. Even if no coal is mined for the next 50-60 days, the power industry can be rest assured that it would get an Lack of PPAs uninterrupted supply of coal to keep plants running” The biggest challenge facing the power sector is not the said Mr. Piyush Goyal in 2016 assuring the power pro- availability of fuel but lack of offtake of generated powducers that “no power plant will be stranded for want er. The power plants are extremely reliant on having a of coal.” His position seems hard to defend given that
Niveshak June’18 Pre-Purchase Agreement which stipulates that state will buy a predetermined amount of power at set rates. Any other power will have to be bought and sold on the free market where the prices fluctuate wildly. The problem is further exacerbated by a spate of new coal power plants which have cropped up competing for the same market. The result is that the load factor in the country is at a measly 65%, down 10% in seven years, making the operation of coal plants uneconomical. Many of these coal plants cropped up assuming the country would continue to grow upwards of 8% perpetually. The central electricity authority estimates that the country does not need a new power plant until at least 2022.
At the root of this problem lie the state run DISCOMS which would rather cut power than buy power at higher rates. The DISCOMS typically buy power through PPAs but have figured that power is cheaper when sourced through the open market without a PPA. The last PPA was signed in 2016 but the UP government back in 2016. The lack of quality in the power grid to transmit power over longer distances – the north and south grid were not connected until 2014 – means the transmission is costly. The DISCOMs enjoy an unfair bargaining power and have forced the power prices to be unviably low without there being an PPA. To this effect, the idea of a central DISCOM which can mop up the extra power generated has been mooted but faces stiff opposition by the states which maintain the power purchase is a state matter and that the central government should stay away.
The Uday yojana should help in this regard with the quasi-state guarantee on the loans. But they DISCOMs should be disincentivised actively against power cuts in return for the government backing. The government could also centrally buy and allocate power instead of through exchanges as is done now.
Fancy Named Scheme Potluck
The Indian power sector has a veritable range of imaginatively named schemes from Shakti to Saubhagya to URJA schemes. Whoever comes up with these schemes does not care for either content or continuity. The schemes are a jumble of intensions with one contradicting the next and displaying a clear lack of foresight. The latest one among these is the Sashakt scheme. The 5-point plan is remarkably low on substance. The scheme which is supposedly the best that a “high powered banking committee” could come up with was unveiled by the Finance minister Piyush Goyal earlier this month, and it essentially espouses horses for courses structure where the lead creditor has authority to resolve the NPA in 180 days. It advocates different measures based on the size of the default with a SME Resolution approach for a smaller size, AMC approach for medium size and the IBC/NCLT approach for large defaults. How this will help or change the bulk of the banking sectors problems, the power sector in particular is anybody’s guess. These defaults are too big to be categorised as small and the NCLT approach is the one already in place. Even if you do set up an AMC/ Alternate Investment fund, how this fund will turn the business around without any structural changes to the business is unclear. AMCs are typically used to deal with sectors like real estate that are cyclical in nature. Ones where the industry just needs more time to recover but are weighing on the banks books preventing them from lending. Setting up an AMC in this case helps the bank generate more money by giving more credit while the AMC can then turn it at a later date for profit. The power sector here isn’t going through a down cycle, it has deeper lying issues which need to be fixed. The sector will be fine in no time of the basic issues of assured offtake and reliable supply are taken care of.
The DISCOMs have been facing difficulties of their extreme inefficiency – 54% of their costs are related Until that happens, the power sector woes have no end to administration and employee expenses, and many in sight. of them are facing trouble repaying their own loans.
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Niveshak June’18
FinGyan: The Economics of Saudi Arabia’s Vision 2030
Karthik BM NMIMS Mumbai
The slump in oil prices from highs of above US$ 100 a barrel in mid-2014 to under US$ 30 a barrel in 2015 had thrown the Kingdom of Saudi Arabia into turmoil. Concerned over the declining dependency of countries on oil, Saudi Arabia undertook to transform its oil-dependent economy. Saudi Vision 2030 aimed to propel the kingdom’s ranking from the world’s 19th largest economy to a rank among world’s top 15. Economists believed that it would take many years for the plan to be implemented and the results to become visible. Prince Mohammed himself opined it would take time to see the reforms translate into growth.
of crude oil at 7.4 Million Barrels per day. It is thus no surprise that the contribution by petroleum sector to GDP is a staggering 55%. This goes on to prove how oil dependent their economy is and thus the need for diversification arises soon. Saudi Arabia is a desert nation despite which the per capita GDP stands at US $20,150, ranking 36th in the world. The above facts prove the good health of the country’s economy and few countries in the world come close to such numbers.
Crude Oil OPEC Reference Basket
Saudi Arabia Overview
Oil and Petroleum Exporting Countries (OPEC) is an organisation of countries that have large oil reserves Located in the middle East, Saudi Arabia is the sec- and is very powerful owing to its significant control ond largest producer of oil in the world after Russia. over oil prices in the world and thus the world econIt also holds one-fifth of the world’s oil reserves and omy. ranks second when it comes to having oil, only next to Venezuela. Saudi Arabia is also the biggest exporter
* Modified abridged vesrion
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FinGyan Consider the above historical analysis of OPEC Basket. Saudi Arabia GDP Above trends suggest that the prices of oil have been affected majorly due to political events and crises. The GDP of Saudi is mainly contributed by agriculture Starting from the oil crisis back in 1973, which saw the and mining at 60% (evidently from crude oil exports) first steep increase in oil prices due to an embargo by and 18% respectively. the members of the Arab Petroleum Exporting Countries, every major change in oil prices are a result of major events happening in the world. Oil prices had increased during the Iranian revolution in 1979, IranIraq War of 1988, Gulf War of 1990, 9/11 attacks in 2001, recession of 2008, etc to name a few. There have been sharp decreases in oil prices due to the Asian Financial Crisis in 1997, OPEC Price Cuts 1996 and in 2014 due to the strong US Dollar, oversupply, declining demand and the Iran Nuclear Deal. Currently, due to looming consumer shift away from petroleum and oil supply glut, the prices of crude oil are expected to remain low.
that GDP in Saudi Arabia averaged US $223.63 Billion from 1968 until 2016, reaching an all-time high of US the GDP and its growth is in alignment with the dis$756.35 Billion in 2014 and a record low of US $4.19 covery of crude oil in Saudi Arabia and the crude oil Billion in 1968. From the above graph, it is evident prices, suggesting heavy dependency on the mining
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Niveshak June’18 Saudi Arabia’s Vision 2030 was made public in the Comparison of Saudi PIF with other year 2018. The percentage change in GDP since then was highest in the Gross Fixed Investment Category at country’s funds 4.6% as opposed to Private Consumption at 3%, Government Consumption at 2% and Import of Goods Saudi Arabia’s Sovereign Wealth Funds, also known as and Services at 3.5% respectively. This drastic change Public Investment Funds (PIF), have a reserve of US in the Gross Fixed Investment is an indicator of Saudi $697 Billion. Arabia’s plans to diversify its economy.
This is the fourth highest in the world after China, UAE and Norway. China, Singapore and Hongkong are non-producers of oil. But despite that they have a higher or comparable wealth funds to that of Saudi Arabia. China’s economy boomed due to manufacturing and so did Hongkong. But Singapore neither has a manufacturing setup nor large reserves of oil. The large reserves of sovereign wealth funds is thus due to the strong services sector, expecially banking. Saudi Arabia can leverage the learnings of these companies to diversify their economy. The high increase in Gross Fixed Investment should thus be focused towards sectors other than mining such as services or maybe even tourism as in the case of United Arab Emirates.
Buying power of Saudi Public Investment fund
invest up to $45 billion over the next five years in the tech sector. The Saudi PIF recently ploughed US $3.5 Billion into Uber, acquiring a 5% stake, as part of an economic strategy to reduce its reliance on oil over the next 15 years. The kingdom seeks to list 5 % of Aramco’s shares. Saudi Aramco is the official oil company of Saudi Arabia with a revenue of US $456 Billion. It would be worthwhile to mention the new city planned by the prince that would attract tourism and businesses. The city named NEOM will be constructed in 3 phases till 2030 with an estimated area of 26,500 km and will be powered by wind and solar energy. There would be no fossil fuel consumption and city will have easy access to Asia, Europe and Africa. The estimated investment in this ultra-mega project is pegged at US $0.5 Trillion.
Saudi Arabia credit risk
Saudi Arabia has a high ambition of increasing its PIF from US $697 to US $ Trillion by 2030. To diversify its All the huge numbers in terms of dollars come at a economy, many steps are being taken by the Prince. cost and the cost here is the risk associated with such Saudi Arabia signed a MoU with the PIF for the esinvestment. tablishment of a SoftBank Vision Fund which aims to
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FinGyan
Given the large stock reserves and the fast-growing debt stock, Saudi will be able to mitigate its sovereign risk. The currency risk rating is undermined by declining foreign reserves. But having said that, the Central Bank has healthy reserves with which to support the US dollar currency peg. There is a fair amount of risk in the banking sector as well but clearing of government debt arrears should ameliorate non-performing loans resulting from slowdown in economy. As for political risks, there are no political risks to stability that could damage creditworthiness despite appointment of the young prince as he does not control vital state functions. The last kind of risk is the economic structure risk due to heavy exposure to oil market volatility till the time the economy diversifies and moves away from oil.
Executive program under Vision 2030
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There are many executive programs planned under vision 2030. The Public Investment Restructuring Program which aims at broader portfolio and management of current and new assets. The Human Capital Program to measure, assess and analyse the efficiency of their civil service. The National Transfer Program to come up with innovative administrative and funding approaches. A Privatisation Program for International best practices, transfer knowledge and achieving goals. And finally, among many others, a Strategic Partnership Program to Create a trade hub connecting three continents and enhance exports. Although it seems an arduous task, which itself is an understatement, moving away from an oil-based economy to a diversified economy is more a necessity than a possibility for Saudi Arabia. Other countries should soon follow suit if there is even a reasonable proof of success of Vision 2030.
Niveshak June’18
FinView: Mr. Pramod Vaidya after completing 33 years in banking industry, He decided to offer consultancy in risk management and implementation of Basel II accord compliant risk management systems and practices in financial services industry, With his scepeciallity being credit risk, operations risk and market risk as part of Enterprise-wide risk management. He did his PGDBA from MDI, Gurgaon and was a faculty at CRISIL. He is also a visiting faculty at IIM Shillong and IIM Indore. Q1) 2018 is expected to be a volatile year, given high crude oil prices, state elections and the political uncertainty because of general elections early next year. How do you expect 2018 to pan out? What are the key risks and opportunities that should be watched out for? As you have already pointed out Crude oil prices and political uncertainty are likely to impact business imparting volatility. I personally believe that our business and industry manages political uncertainty quite well if last general elections are to be taken as proof. What appears to cause significant impact is maverick action like demonitisation which came as a real shock. Even GST was in the making for a long time giving business enough time to prepare for it. Excepting exports based sector which bore the brunt of Government’s inefficiency in handling refund claims, other industries could take it in their stride. My experience is that a wide range of factors keep shaping the environment within which the industry and business have to survive and prosper. Estimating in quantitative terms how each individual industry/ sector will face the environment with confidence is almost impossible even with the best of modelling effort. Making forecast in qualitative terms is a little easier. Lot of data is available for analysis and one needs to cross check data from at least two sources before basing any conclusions on the same with any level of confidence.
Personally I do place business sentiment survey as very useful because the respondents are also decision makers or influencers and their understanding and biases play an important part in business strategies which finally get reflected in the quantified financial results that we get to see in public domain. Some key favourable/unfavourable factors which I can think of are • Likely improvement in our export performance Favourable but delay in processing of GST refunds are likely to continue • Expectation of average rainfall this monsoon season coupled with MSP will mean better spending power in rural sector Favourable • Boost to GDP on account of additional Govt. spend prior to election year. Favourable • Stabilisation of GST regime Favourable • Boost to business confidence which is already visible in results Favourable but lack of clarity on whi will fund the capex is a spoilsport.
Q2) The monetary policy committee recently lifted the repo rate by 25 basis points to 6.25 per cent, the first increase since January 2014. The 10-year G-Sec spread over the repo rate has been above the long-term average spread. Is this a good enough indicator that the market is already discounting multiple rate hikes by the RBI?
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Finview Whatever noise is made about change in interest rates, this gets factored into decisions of investors in debt market very quickly because it is dominated by professional players. Equity markets also follow suit with a lag. Users of debt do make lot of noise whenever interest rates are raised but interest rate impact can be better managed by improving efficiency in use of capital whether long or short term. Increasing interest rates in small doses as is the case of monetary policy announced does get compensated at least partially by benefit of increase inventory valuations and speculative gains of commodity price increases at wholesale and retail level. Working capital demand generally goes up in upward phase of business cycle despite increase in interest rates. Long term capital investments decisions are based more on business confidence derived from sustained improvement of utislisation of capacities over a period of time, though interest cost does play an important but not critical role.
been talked about in the past couple of years. A lot of projections have also gone haywire. Do you think we now have enough indicators to believe that in the next six months to one-year, private capital will take off? Not yet. Financial results of capital goods sector and their order-book are indicators of capex already in progress and future capex respectively, we need more data on both counts. Even more importantly who is going to finance the debt part of the future capex is very hazy right now.
Q5) Banks have been struggling with NPAs for quite some time now, public sector banks in particular are in a bad shape. IDBI has recently received a lifeline from Q3) Are corporate India’s earnings reviv- LIC. What steps do you think can be taken ing finally? Analysts are saying that the to come out the NPA mess that we are in? FY18 results have shown green shoots. Writing off all the losses as quickly as possible and start What is your take on this? Early announcement of results is a fair indicator of times to come and so far this seems to point to better times ahead. Higher upgrades in credit rating agencies compared to downgrades also indicate improvement is financial position of larger and rated companies. Since number of companies coming out with such results is still small it is indeed better to compare such results to green shoots. I am little worried that number of such companies is still too small. If you check data available on CMIE database you find that 2018 results data is still incomplete. In really good times larger number of companies comes out with results faster to flaunt the efficiency of their respective managements. In bad time announcement of results means taking responsibility for poor results and this is delayed as much as possible within regulatory space available.
Q4) Private capex is something that has
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with a clean balance sheet for public sector banks is the need of the hour if we wish to see new capex investment financed by banking sector. Massive capital infusion by the main shareholder of public sector banks is unavoidable. Patchwork like LIC buying Govt. stake is not the real answer. The banks must write off the losses and clean their balance sheets after capital infusion and after that they need to be privatised in real sense to bring real shareholder scrutiny and discipline. Privatisation is not a panacea but at least it will start the process of rebuilding the banks. From the experience of what has happened in the case of Air India and IDBI Bank, it appears very clear that no Govt. will be ready to let go control on banks so easily so we will keep on plodding and muddling through the crisis. IBC legislation was a good start but Govt. is now backtracking on it by proposing some absurd scheme one after the other to avoid taking the hard decisions. We have been pushing the problems under the proverbial carpet for far too long.
Niveshak June’18
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ju ta pose Comparison of Insolvency Process As the Insolvency and Bankruptcy Code matures and costs first before making any other payments. new facets of the law are defined and discussed, it is important to compare it with existing laws in devel- 5. Regulation by a Board: oped economies. In the UK, there are multiple self-regulating bodies including ICAEW, ACCA and ICAS. There is a common board, which oversees the functioning of all the Similarities: self-regulating bodies. In India as well, the regulations provide for multiple IPAs to be formed under the IBBI.
1. Insolvency Professionals Drive The Process For Creditors:
Operational and financial creditors can file for insol- Key differences: vency but the process is run by professional who have fiduciary responsibility of saving the value of the firm. 1. Creditors’ involvement: In the UK, the IP is an officer of the court and once 2. Any creditor or the debtor can initiate the pro- the appointment and remuneration are approved by the creditors, the IP is generally not required to take cess: Both creditors and debtors are allowed to file insolven- any further approvals from the creditors. Insolvency Process in India ensures greater participation by the cy petition and the process is similar. creditors of the firm.
3. Moratorium Period:
Once the insolvency process is initiated, the company goes under moratorium and no further insolvency suits or litigation can be filed against it in order to preserve the value.
2. Performance security/bond by the IP:
In the UK, Insolvency Professionals are required to provide a general and a specific bond based on the value of assets. The bond is to cover a situation if any fraudulent act is committed by the IP. Further, while only an individual can be an IP in the UK, as per the 4. Liquidation Waterfall: regulations in India, individuals and partnership firms Under both the UK and the India regime, the liquida- (with unlimited liability) can take IP appointments. tion order has been clearly mentioned, giving priority of payment to secured and preferential creditors. 3. Voting rights of creditors: During liquidation, the liquidator pays the liquidation In the UK, all creditors, including operational cred-
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Juxtapose itors, have voting power in proportion to their debt resolution plan is put to vote for approval. However, in India, only financial creditors are a part of the creditor committee. Committee of Creditors must ensure that a minimum of “liquidation value’ is provided to the operational creditors during CIRP. In India, three-fourth of the creditor committee, or 75% of the financial creditors, have to approve the resolution plan whereas in
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UK a simple majority can approve or disapprove the plan.
4. Deadline:
The Code specifies that the resolution plan must be approved within 180 days, with a 90 day extension available, of commencement of CIRP, company must be liquidated. There is no such timeline in the UK law.
Niveshak June’18
Classroom :
E-Way Bill The E-way bill, is a document generated online under the GST Act, when goods of value of more than Rs. 50,000 are shipped. The E-way bill must be raised before goods are shipped and should include details of goods, their consignor, recipient and transporter. The transporter is required to carry the invoice and a copy of E-way bill as support document for the movement of goods. He can also carry E-way bill number, mapped to an RFID. One of the major arguments in favour of GST was, it would be able to unify India as one market which will remove bothersome inter-State check-post. Data from the Ministry of Road Transport and Highway, suggests that a usual truck in India spends 20 per cent of its time
in such check posts. As per a report by McKinsey, these logistical speed-breakers cost the Indian economy $45 billion or 4.3 per cent of the GDP every year. A survey by the World Bank in 2014 put logistics costs at 14 per cent of the total value of goods transported in India, while it is only 6-8 per cent in other major countries. The E-way bill is expected to end such transit delays, while at the same time controlling tax evasion. Every E-way bill generated by a sender or buyer of goods is to be automatically updated in the outward sales return. In the previous tax regime, tax officials had to manually check the waybill with the returns filed, to verify if all the consignments came within the tax net. The E-way bill is expected to cut logistics costs by 20 per cent.
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