Niveshak Aug17

FROM EDITOR’S DESK Dear Reader,

Niveshak Volume X ISSUE VIII AUGUST 2017 Faculty Chairman

Prof. P. Saravanan

THE TEAM Akshay Kaushal Anand Mittal Arjun Bhargava Dhruvika Chawalla Girraj Goyal Pratibha Sapra Sankeerth Bondugula Saurabh Gupta Vinay Gundecha Aayushi Garg Abhishek Soni Arpit Murarka Bhushan Bavishkar Mahesh M Priyanshu Gupta Samprit Shah Sheahav Doshi Sriya Gupta

All images, design and artwork are copyright of IIM Shillong Finance Club

Driven by excellence and a fervor to enrich our readers with carefully crafted content pertaining to the world of finance, we are at the cusp of completing 9 years of our journey. At this juncture, we feel immense pride in unveiling the 9th anniversary issue of our magazine.

The past month was fuelled by a number proclamation from multiple controlling bodies. The Reserve Bank of India decided to cut the key policy rates aiming to regulate inflation. The central bank also announced the dividend payout that would be given to the government, it has halved compared to the previous year. Also, the government released the second volume of the economic survey which cleared the air surrounding the impact of GST and the rising protest from the farmers. Taking cognizance of their issues, the government decided to provide crop loans at a subsidized rate of 7% and a host of other additional benefits.

BSE decided to delist 200 companies, and NSE took a landmark decision to make changes in the Nifty 50 index. Softbank announced an investment to the tune of $2.5 billion in the e-commerce space reaffirming their faith in Flipkart.

The cover story digs deep within the clandestine layers of the ‘Infosys fiasco’. An issue that has been a bone of contention for more than a year finally concluded this month with the Infosys CEO Vishal Sikka quitting the firm, blaming the constant and slanderous attacks from the founders. The incident came at a time when the industry is reeling from the automation wave that is making it impossible to generate value from labour arbitrage. The company is in dire need of strong leadership and clear vision. Irrespective of whether you fall in the league of Sikka’s sympathizers or Murthy’s moral police group, there is a clear understanding that tough times lay before Infosys.

The FinFame section throws light on Mr. Urjit Patel and his ideology, including his strategies to tackle the major issues concerning the public-sector banks. It also discusses about the pivotal role he played in stemming the growth of inflation all the while maintaining positive outlook for the Indian economy.

For FinView, we present the insights by Mr. Sumit Agrawal, founder partner at Suvan Law Advisors and former Legal advisor at SEBI. The topic for ‘Celebratio’ was ‘Global Industry Analysis’. The segment touches upon the two vital organs of Indian industry, the Pharma and the Steel sector, from the global perspective.

With this anniversary issue, we plan to dive into a new world of creative comparison in the section ‘Juxtapose’. In the end, we are thankful to our readers who have constantly supported us & have been a never ending source of motivation for us. With your love and support we assure you of bringing insightful stories in upcoming editions and make your reading worth while.

Stay Invested, Team Niveshak

Disclaimer: The views presented are the opinion/work of the individual author and the Finance Club of IIM Shillong bears no responsibility whatsoever.

CONTENTS The Niveshak Times Pg.04 - The Month That Was

Cover Story

Article of the month

Pg.12 - Crude Oil Prices and It’s Impact on Global Economy

Equity Research Report Pg.10 - Infosys Limited

Celebratio

Pg.17 - Roadmap of Steel Industry in China

Pg.24 - The Infosys Diaries What went wrong in Infosys’ search for “Acche Din”

Pg.21 - Pharma Industry in India: Is it time to change?

FinGyaan

FinView

Pg.28 - Payment Banks: Are Pg.38 - Mr. Sumit Agarwal, they going to compete with or Partner, Suvan Law Advisors complete the “Banking System Ex-SEBI Officer in India”?

FinFame

Juxtapose

FinSight

Classroom

Pg.31 - Urjit Patel: A Song of Pg.40 - Porinju Veliyath and Harshad Mehta Inflation and Insolvency Pg.35 RERA: the Infrastructre Transparent

Making Pg.41 - Helicopter Money Industry

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

4

The Month That Was

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The Niveshak Times Economic Survey - Volume II The Volume II of Economic Survey, that was floated in August, plays a key role in providing commentary on economic affairs such as Goods and Service Tax along with the raising protest by farmers. The Survey puts forth a positive viewpoint of the Indian economy with multiple positive initiatives such as GST, demonetization as well as the move to privatize Air India.

The Survey mentions actions to address the twin balance sheet problem and the macroeconomic stability provided by the structural changes in the oil market. On the other hand, the document also highlights some deeprooted faults in the Indian economy in the form of struggling telecom and power sector and possible fiscal tightening following the farm loan waivers, where the other states are expected to follow the UP model, and the total waiver bill is projected to be between 2.2 to 2.7 lakh crore. It also gave insights about how capital flows, exchange rate, monsoon and the 7th Pay Commission awards will play a vital role in inflation, which is expected to be below RBI’s 2018 medium target of 4%. Throwing light upon the previous year, the Survey notes that the real economy grew by 7.1 whereas it had grown by 8% in 2015-16. The current account deficit of India is 0.7% of GDP, contracting from 1.1%. Even though the survey comprehensively discusses the previous and the outlook for the coming year, it fails to address the issue such as distribution of income.

RBI’s dividend payout to government halves to Rs. 30,659 crore This year, RBI will be transferring only Rs. 30, 659 crores to the government as dividend payout, which is less than half the amount- Rs. 65,876 crores, the RBI transferred last year. The income earned by the central bank fell because of two reasons. Firstly, the income earned by the RBI from the foreign sources took a dip of 35.3% mainly due to the appreciation of the rupee and lower yield generation from the foreign assets.

In the same period last year, the value was as low as 0.8%. Secondly, the income from the country fell by 17.11%. This was due to the interest

AUGUST 2017

payment of Rs. 17426 that RBI had to give to the banks to remove the excess liquidity from the banking system after the announcement of demonetisation. In the previous year, the RBI had earned an interest of Rs. 506 crores from its operations on liquidity management. The lower money transfer from RBI implies lesser non-taxable revenues to the government. If all the other sources of revenue and the planned expenditure remains the same, the fiscal deficit for the current year would increase to 3.4% from the earlier estimation of 3.2%.

RBI Cuts Repo Rate to 6% The RBI, in the recent credit and monetary policy review, cut the repo rate by 25 basis points to 6%. The marginal standing facility rate and the reverse repo rate were also revised to 6.25% and 5.75% respectively. Incidentally, this is the first time RBI has reduced the key policy rates this year. The street was expecting a ratecut as the inflation rate is running much below the target level for consecutive quarters. The current repo rate devised by the central bank is the lowest since November 2010. “There is scope for banks to reduce lending rates,” said RBI governor Urjit Patel in the press conference post the policy rates were revealed. There is an expectation from the commercial banks to pass on the rate cut to the customers. While keeping an eye on the CPI inflation target of 4% for medium-term, RBI had changed its stance to ‘neutral’ from “accommodative” at the beginning of the year and retained this stance in the current monetary policy.

Changes in Nifty 50 index On 28th August, India Index Services and Products (IISL), an arm of the NSE announced that ACC, Bank of Baroda, Tata Power and Tata Motors DVR would be removed from the Nifty 50 index. The firms, Bajaj Finance, Hindustan Petroleum Corporation, and UPL, would be replacing these.

The changes in NSE’s benchmark index, Nifty

NIVESHAK

50, were part of IISL’s periodic review of the index. These changes will come into effect on September 29. After the announcement, Bajaj Finance gained 0.7 percent in the opening trade to hit a life high of Rs 1,839.70 but lost more than 1.5 percent intraday due to weak market conditions. On the other hand, UPL and HPCL rallied more than 2% intraday. Besides Nifty 50, IISL has also decided the replacement of stock on various other indices including Nifty Next 50, Nifty 500, Nifty 100, Nifty Midcap 150, Nifty Smallcap 250, Nifty Midcap 50, Nifty 200, Nifty Smallcap 50 as well as sectoral indices like Nifty IT, Nifty Realty and Nifty PSU Banks. In the banking index, Nifty PSU Bank would see the entry of Indian Bank, while RBL Bank would be included in Nifty Private Bank index.

Farmers to get crop loans at subsidized interest rate of 7% The RBI said that the loans till three lakhs would be provided to farmers at a subsidized interest rates of 7% and it may go till 4% if there is prompt repayment. “To ensure hassle-free benefits to farmers under the Interest Subvention Scheme, the banks are advised to make Aadhaar linkage mandatory for availing of short-term crop loans in 2017-18,” the RBI said in a notification to banks. If the banks provide loans up to Rs. 3 lakhs to farmers by using their own resources in their rural and semi-urban branches, the government would be providing an interest subvention of 2% to them. This step will motivate the banks to lend money to agricultural sector.

Also, to support farmers whose crop has been affected by natural calamities, the government will provide interest subvention of 2% to the banks on the restructured loan. However, this provision is only for the first year, and the loans will attract normal rate of interest from second year onwards. Owing to the trend of delaying the interest payments, the cabinet has come out with a lucarative scheme in which an interest subvention of 3% would be given to “prompt payee farmers”. The cabinet has already

approved Rs. 20,339 crores in this fiscal year as interest subsidy on short-term loans.

SoftBank invests $2.5billion in e-commerce giant Flipkart Japan-based SoftBank bought a fifth of India’s largest online retail company - Flipkart, for a whopping $2.5 billion, adding to the $1.4 billion that the company had already raised in its April funding round from Microsoft, Tencent, and eBay. This comes after SoftBank failed to merge Snapdeal with Flipkart. The investment, which has been made from SoftBank’s $100 billion Vision fund, includes direct funding as well as the purchase of shares from existing shareholders. It is expected that out of the total investment, $1 billion would be spent to buy off the shares of Tiger Global. The remaining $1.5 billion would be invested directly in the company which will take Flipkart’s cash reserve ratio to over $4 billion, and it is all set to give tough competition to the industry leader, Amazon.

SoftBank which earlier in the year had written off $1 billion in Snapdeal, now has a total investment of over $ 6 billion in India. It had recently invested $1.4 billion in digital payment platform, Paytm. It also holds the position of the biggest shareholder in India’s largest cab aggregator business, Ola. BSE delisted 200 companies BSE decided to delist 200 companies with effect from 23rd August 2017, as there has not been any trading on the exchange for the last ten years in these companies either due to liquidation or no significant business. Majority of the companies that have been delisted belong to fertilizers, pharma, finance and textile industries. BSE announced made this in 3 circulars. Also, the fulltime directors, promoters and group firms of the companies are debarred from trading on the stock exchange for the next ten years from the day of delisting. Also, SEBI has moved the companies to dissemination board of the exchange for next five years. This move came after SEBI recently suspended trading in 331 companies for a month which are suspected to be shell companies.

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

The Month That Was

The Niveshak Times

5

6

NIVESHAK

33000

2,500

BSE

DII

FII

2,000

32500

1,500 1,000 500

BSE

32000

0 31500

-500 -1,000

31000

-1,500

FII, DII Net turnover (in Rs. Crores)

Market Snapshot

Market Snapshot

-2,000

31-08-2017

30-08-2017

29-08-2017

28-08-2017

24-08-2017

23-08-2017

22-08-2017

21-08-2017

18-08-2017

17-08-2017

16-08-2017

14-08-2017

11-08-2017

10-08-2017

09-08-2017

08-08-2017

07-08-2017

04-08-2017

03-08-2017

02-08-2017

01-08-2017

30500

-2,500

Source: www.bseindia.com www.nseindia.com

MARKET CAP (IN RS. CR) BSE Mkt. Cap

1,33,40,309 Source: www.bseindia.com

CURRENCY RATES INR / 1 USD INR / 1 Euro INR / 100 Jap. YEN INR / 1 Pound Sterling INR / 1 SGD

1.00%

INR/1 USD

0.50%

0.00%

Euro/1 USD

GBP/1 USD

63.95 76.07 58.10 82.41 47.14

JPY/1 USD

SGD/1 USD

LENDING / DEPOSIT RATES Base rate Deposit rate

9.00% - 9.55% 6.25% - 6.75%

RESERVE RATIOS CRR SLR

4.00% 20.00%

POLICY RATES Bank Rate Repo rate Reverse Repo rate

6.25% 6.00% 5.75%

-0.50%

-1.00%

Source: www.bseindia.com

-1.50%

-2.00%

-2.50%

AUGUST 2017

Date as on August 31st

7

NIVESHAK

Market CoverSnapshot Story

Market Snapshot BSE Index Sensex AUTO BANKEX Capital Goods Consumer Durables FMCG Healthcare IT Metal Oil&Gas Power Realty TECK Smallcap MIDCAP PSU

Open 32515 24463 28387 17973 16467

Close 31730.49 23688.67 27440.82 17330.85 17700.91

%Change -2.41% -3.17% -3.33% -3.57% 7.49%

10094 14195 10438 12426 14190 2324 2186 5897 16094 15390 8687

10174.12 13149.26 10063.83 13284.05 15177.26 2261.46 2137.67 5708.99 15991.63 15539.79 8645.18

0.80% -7.37% -3.58% 6.91% 6.96% -2.67% -2.22% -3.19% -0.63% 0.98% -0.48%

% Change TECK, -3.19% Smallcap, -0.63% REALTY, -2.22% PSU, -0.48% POWER, -2.67% OIL&GAS, 6.96% MIDCAP, 0.98% IT, -3.58%

METAL, 6.91%

1

Healthcare, -7.37% FMCG, 0.80% Capital Goods, -3.57% BANKEX, -3.33% AUTO, -3.17% Sensex, -2.41%

Consumer Durables, 7.49%

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

NIF PERFORMANCE EVALUATION As on 2017 AsAugust on 31th31,July 2017 August Month's Performance of NIF 102

205

101

195

100

185

99

175 165

98

155

97

145

96

135

95

125

94

115

93 01-Aug-17

Performance of Niveshak Investment Fund since Inception

105 11-Aug-17 Scaled Sensex

21-Aug-17

31-Aug-17

Scaled Portfolio

Total Investment Value : 10,00,000 Current Portfolio Value : 19,08,921 Change in Portfolio Value : 90.89% Change in Sensex : 54.80%

95 Sensex Scaled values

Portfolio Scaled Values Value Scaled to 100

Risk Measures: Standard Deviation NIF: 21.79 Standard Deviation Sensex: 11.66 Sharpe Ratio : 4.35 (Sensex : 3.99) Cash Remaining: 141,150

Comments on NIF’s Performance & Way Ahead: The S&P BSE benchmark index lost 2.59% in August whereas, there was no change in NIF which shows that even in bear run the fund outperformed the market. This was the first Month after NIF was revised considering the flat performance of Large caps from past a few months. This month also saw the SEBI’s crack down on shell companies, which drove the market to bearish sentiment and market witnessed fall of more than 3% in a single week. The Quarter 1 GDP results released by CSO saw lowest GDP growth rate in last 13 quarters which shows that the impact of demonetization stills lingers on.

Also, the geopolitical arising due to North Korea sent markets across the world into jitters.

With the above news and market still waiting for the impact of GST, the NIF team expects a phase of correction in the market which could provide market participants a good buying opportunity.

For NIF, due to a class action suit filed against the Dr. Reddy Laboratories, its share fell by 17% in August, which in turn significantly affected the performance of NIF in this month. Whereas, due to GST titan saw a rise of 30% in their sales taking the stock to life time high. We expect the sales of the company to rise in coming months. Also, there was some relief for automakers as the August sales data showed a healthy growth.

NIVESHAK INVESTMENT FUND INDIVIDUAL STOCK WEIGHT AND MONTHLY PERFORMANCE

SECTORAL WEIGHTS

Monthly Performance 22%

INDIVIDUAL STOCK WEIGHTS AND MONTHLY PERFORMANCE -20% -15% -10% -5% 0%

15% 4%

5% 10% 15% 20%

Thirumalai Chem

8%

7%

10%

6%

Asian Granito Maruti Suzuki

15%

Speciality Rest Westlife Dev

14%

Avenue Supermar Manappuram Fin PVR

Auto

Paramount Comm ADF Foods NELCO Blue Dart Indiabulls Hsg PPAP Automotive NOCIL Guj Flourochem

Building and Construction

Chemical Financial Services

Entertainment

Pharma

Telecom

FMCG

Misc.

Titan Company Lupin

TOP GAINERS FOR THE MONTH • Titan Company (+14%) • Avenue Supermarts (+14%) • Asian Granito (+11%)

ITC HDFCBank GodrejConsumer Dr Reddy's COLPAL

TOP LOSERS FOR THE MONTH

Britannia BharatForg 0%

2%

4%

6%

8%

10%

Individual Weights

• Dr. Reddy’s Laboratories (-17%) • Paramount Communications (-8%) • Manappuram Fin (-6%)

10

Equity Research Report – Infosys Limited Date: 31st August 2017

Rating Matrix

Basic Information

Rating

Buy

Ticker (BSE)

500209

Target Current Market price

Rs. 1060 Rs. 915.30

Ticker (NSE)

Infy

Sector

IT

Potential Upside (1-Year)

15.8%

M- Cap

₹ 210239.40 Cr.

Growth Drivers

Corporate Governance

Business Description

Company Background

Equity CoverResearch Story

NIVESHAK

Infosys Limited (formerly known as Infosys Technologies Limited) is an Indian multinational corporation that provides business consulting, information technology and outsourcing services. It is headquartered in Bengaluru, India. It is the second-largest Indian IT services company by revenues and market capitalization and the largest employer of employees with H-1B visa professionals in the United States. Infosys was the first Indian Company to be listed on NASDAQ. Mr. Narayan Murthy, the co founder of the company was referred as father of Indian IT industry by TIME magazine for his contributions towards outsourcing in India. He served as CEO of the company for more than 20 years. The company recently replaced its existing CEO Mr. Vishal Sikka with long time Infosys loyalist Mr. UB Pravin Rao. Infosys Limited is engaged in consulting, technology, outsourcing and next-generation services. The Company, along with its subsidiaries, provides business information technology services comprising application development and maintenance, independent validation, infrastructure management, engineering services comprising product engineering and life cycle solutions and business process management; consulting and systems integration services comprising consulting, enterprise solutions, systems integration and advanced technologies; products, business platforms and solutions to accelerate intellectual property-led innovation, including Finacle, its banking solution, and offerings in the areas of Analytics, Cloud and Digital Transformation. Its segments are Financial Services and Insurance (FSI), Manufacturing and Hi-tech (MFG & Hi-TECH), Energy & utilities, Communication and Services (ECS), Retail, Consumer packaged goods and Logistics (RCL), Life Sciences and Healthcare (LSH) and digital design services.

As per latest filing with BSE, Infosys board consist of eight members , Shareholding Pattern (%) (As per BSE) one of whom is executive director while the remaining six are independent directors, constituting 75% of board’s strength which is June ‘17 March ’17 Dec ’16 more than what is required by the Companies Act, 2013 and listing requirements of SEBI. Four out of eight board members or 50% of Promoter 12.75 12.75 12.75 the board members are women. In Infosys, every independent director is nominated as chairperson of each of the boards Public 86.76 86.76 86.76 committees, namely, Audit Committee, Nomination & 0.49 0.49 0.49 Remuneration Committee, finance and investment and Corporate Others Social Responsibility (‘CSR’) Committee, risk and strategy Total 100.00 100.00 100.00 committee, Stakeholders’ Relationship Committee.

Infosys enjoys a strong reputation and brand in the market. Its banking solution ‘Finacle’ holds almost 60% of the market share. It also rides on long standing relationship with large organisations and strong client retention. However, their future success will depend largely on their current management team and talent pool that they have acquired over the past couple of years. Infosys attracts highly qualified tech professionals from top colleges of India with deep industry knowledge and expertise in technology. Further, software computing technology are transforming business fundamental of every industry around the world in a very profound manner. Innovations in various services and products over the last few years have helped Infosys increase traction in the economy. The continuous reduction in hardware cost, the explosion of network bandwidth, advance technologies and technology enabled services are fuelling rapid digitisation of business information and processes. Government of India’s push toward Digital India, automation and smart cities has created opportunities in domestic market. However, The recent internal management tussles have brought the company to the limelight, resulting in exit of the current CEO Vishal Sikka. This has not gone down well with the markets and the company’s stock has already taken a hit. The offer some support to the prices, the company has recently announced a Rs 13,000 Crore Share Buyback offer.

AUGUST 2017

11

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60.0%

Industry Rivalry – High Infosys faces fierce competition from competitors for client acquisition and retention to deliver cost effective services

ROE- Peer Comparison

40.0%

0.0%

2016

2015

2014

2013

2012

ROA-Peer Comparison 40.0%

20.0%

0.0%

2016

Technical Analysis

Rating Def.

Comparable Valuation

TCS HCL Tech

2015

2014 Infosys Tech Mahindra

2013

2012 Wipro

We have calculated the stock’s intrinsic value based on a weighted average of DCF, Forward PE and Relative valuation. Starting FY17, growth in revenues have been estimated at an average of 14%, which is consistent with previous years growth rate. Ploughed by the implementation of the H-1B reforms & a weakening dollar the revenues of the company has seen a decline and the margins are shrinking. Though IT industry is very dynamic in nature but Infosys limited has a low Beta of .69, with a WACC of 10.3%. The fundamental value stands at INR 1060 and given a CMP of INR 915.30 as on 31st August 2017, the stock is undervalued.

Industry Competition

Industry Figure

20.0%

Buyer power – High Due to high competition in the IT sector, buyers enjoy superior bargaining position and consequently exercise pressure.

Threat of Substitutes – High Since the technology environment is very dynamic and uncertain, threat of substitutes product remains high.

Threat of New Entry – Medium Off-shore presence and low cost locations of the incumbent firm is likely to intensify competition in the market.

Supplier Power – Low Infosys being a service industry is not dependent on peculiarity of any products for its end to end solutions. Hence, supplier’s power is low.

Valuation Summary Method

Value/Share Weight

Discounted Cash Flows

1080

0.33

Relative Valuation Forward PE Valuation

910

0.33

1190

0.33

BUY: If stock is expected to deliver more than 10% annualized returns over holding period NEUTRAL: If stock is expected to deliver (-)10% - 10% annualized returns over holding period SELL: If stock is expected to deliver less than (-)10% annualized returns over holding period According to exponential moving average analysis, the stock is currently is in a downtrend. The stock has a major support level at Rs 912 which limits its downside potential at the current market price of Rs 915.

Weekly RSI is 41. RSI shows positive divergence indicating a perfect time to take positions in the stock..

In the past, stock has traded and sustained in the range of RSI above 70, which is very positive. MACD at this point has shown a slightly positive divergence, which is also supported by a sharp spurt in volumes. Over the past one week, the stock has been moving closely around its median Bollinger Band, further providing a lot of upside potential.

We expect the stock the break the current resistance levels with a spurt in volumes. The stock has potential of forming a new lifetime high in the next one year.

© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

Fair Value

1060

Equity CoverResearch Story

Equity Research Report – Infosys Limited Date: 31st August 2017

12

Article of the Month Cover Story

NIVESHAK

CRUDE OIL PRICES AND ITS IMPACT ON GLOBAL Ashish Gupta ECONOMY

IMI, New Delhi

Overview The OPEC (The Organization of the Petroleum Exporting Countries) reference basket stood at $52.40/b on January 2017 where oil prices saw a good recovery after dipping twice below $30/b in early 2016.The world oil demand growth is forecasted to reach1.19 mb/d in 2017, around 0.8 mb/d higher than last year.

In 2014, the global oil supply and demand dynamics changed and oil price started to decline. In its meeting on November 2014, OPEC decided against reducing the supply and prices fell further. This move was mainly interpreted as a decision to squeeze out higher-cost competitors, including the U.S. shale oil. This new technology extracted oil using hydraulic fracturing (“fracking”). OPEC saw the birth of this technology as a major threat to its market share and hence decided to protect its share by not reducing supply.

The article focusses on how these decisions have severely impacted the global economy. Some of the nations have benefitted immensely whereas some have fallen into a severe debt spiral. The cash rich OPEC nations seem to have

AUGUST 2017

adopted a strategy where their cash reserves could be of better use to protect its future dominance.

The article covers the entire time line of major events which has affected the global oil prices. Oil being the highest traded commodity on Earth, dominates major balance sheets and financial decisions. United States being the world’s super power has 4% of the world’s population but uses 25% of the world’s oil.

One barrel of crude accounts for about 19.15 gallons of gasoline, 3.82 gallons of jet fuel, 9.21 gallons of diesel ,1.75 gallons of heated oil and about 7.3 gallons for added petrochemical products like asphalt, bitumen, etc. This alone proves to be the backbone of major industries such as automobile, manufacturing, airline, infrastructure, road transport, polymers etc.

This article aims to examine how nations with major dependencies on these raw materials strategize to remain competitive.

Introduction The World Bank estimated an economic growth of 2.3 percent in 2016 and is projected to rise to 2.7 percent in 2017. In its annual report it mentions that the growth in emerging markets and developing economies (EMDEs) is expected to pick up in

NIVESHAK

Where It All Began Crude oil was first extracted from the ground in Sichuan, China 2,500 years ago. Since then it has been evaporate to produce salt, used to pave the way with tar, distilled to light kerosene lamps, refined to produce petroleum products and also used as a base for many industrial chemicals.

1980: The energy crisis of the 1970s led to surplus

oil production in the coming years. Crude oil prices which had emaciated in 1980s at over $35 per barrel (comparable to $102 per barrel today, adjusted for inflation), fell in 1986 from $27 to below $10 ($59 to $22 today). Starting from 1980 to 1986 the OPEC decreased its oil production several times in an endeavour to maintain oil’s high prices. However, its efforts proved futile to hold on to its preeminent position as a major oil producer.

History Repeating Itself Rapidly growing demand from economies such as China began to slow down after 2010.The U.S. began extracting oil from shale foundations in North Dakota using a process known as fracking.

Meanwhile, other nations such as Canada went to extract oil from Alberta’s oil sands, the world’s third-largest reserve of crude oil. As a result of this the supply started to rise rapidly in comparison to the import demands from these overall world.

The OPEC again was facing this decision to let oil prices fall or to cut supply thereby ceding its market share, it decided to maintain its steady supply of oil. This decision was not only aimed at protecting their market share but also at crumbling these nascent technologies which had found a way to bypass OPEC. By supporting low oil prices, it hopes that nations such as Canada and U.S. will be forced to forfeit their more costly

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

Article of the Month Cover Story

2017, reflecting declining obstacles to activity in commodity exporters and sustained solid domestic demand in commodity importers. It added that poor investment and yield growth are, however, weighing on medium-term prospects across many developing nations. In these uncertain times of fragile economic growth, forecasting of future demand & supply dynamics plays as essential role in economic welfare.

Crude oil as mentioned earlier, plays a key role while deciding prices of various finished products.

It is the lifeline to many nations such as Russia, Saudi Arabia, Iraq, Iran and Kuwait. In these times when countries are now slowly drifting against globalization (Brexit and U.S. sanctions), economies are forced to diversify their offerings so that they are no longer dependent on a single product. Nations must effectively hedge against the volatility of crude oil prices and must also rethink on their strategies to tackle the falling oil prices.

13

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Article of the Month Cover Story

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production methods due to lack of profitability.

Global Economic Scenario The small shift in the supply-demand balance results in significant price changes in the oil market, because oil demand is “price inelastic.”

This is also a major factor for the volatility seen in its prices. This causes major fluctuations in production of various finished goods where crude oil or its by-products are used as raw materials.

The OPEC in its report on crude oil outlook, February 2017, expected rising demands from anticipated high vehicle sales in the US, Europe, China and India. It also has high hopes from the expanding petrochemical sectors in US and China. General consumption is also set to rise which is primarily driven by growing population.

Based on the UN World Population Prospects, world population will rise from 7.2 billion in 2014 to 9 billion in 2040. Population advancement in the OECD region is expected to be rather low,

AUGUST 2017

while Eurasia is anticipated to see its population drop in the period to 2040 driven by developments in Russia.

Impact on India India, like many other developing countries, is a net importer of energy and more than 76 percent of crude oil is being met through imports. As per EIA, India’s demand will more than double 8.2 million bl/d by 2040 while domestic production will remain relatively flat.

Inflation: The CPI measures prices at the retail consumer level. The WPI measures prices at the wholesale standard. In regards to fuel, the WPI is more sensitive to fuel prices. It assigns a weight of 14.91% to fuel as against 9.49% assigned by the CPI. The Crude Petroleum Index is used as an input to calculate the WPI. A fall in fuel prices also impacts food prices as transportation costs comes down. Food articles account for 14.3% of the WPI and 39.7% of the CPI. As a result, the impact of falling crude prices

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is magnified and leads to inflation in the economy.

Fiscal deficit: Lower crude prices reduce the government‘s expenditure. It subsidizes petroleum products—like kerosene, fertilizers, and LPG. The budgeted estimate for crude oil prices is $105–$110 per barrel. With petroleum and fertilizer subsidies standing at 634.3 billion rupees and 729.7 billion rupees, respectively, soft crude oil prices helps to reduce the value of these subsidies.

Impact on China As per Oil and Gas journal, China holds 24.6 billion barrels of proven oil reserves, which is highest in Asia –pacific region. China was a net exporter of oil until 1990s but became the 2nd largest importer in 2009 due to its thriving economy.

However, over the years, the country has overestimated its consumption/demand forecasts and is now in a process of consolidation Currently a slowdown in China’s economy and depreciation of Chinese yuan and rising debts levels in the country is resulting in further decline in crude oil prices.

Price volatility: Negative oil price shocks had strong influences on Chinese grains, metals, oil fats and petrochemicals. On the other hand, a positive oil price shock leads to significant profit increases for the Chinese petroleum and natural gas extraction industry. Also, the oil price volatility reduces the oil company index and increase the speculations in the mining index and petrochemicals index in China.

Impact on Russia Russia is world’s largest exporter of natural gas and second largest exporter of oil. The Russian reserves of oil and gas are the driving force for the economy, indirectly making the country vulnerable to fluctuations in world energy and fuel prices.

Exports: Oil and gas comprise over 60% of Russia’s exports and make up over 30% of the country’s GDP. Brent crude oil prices are considered a benchmark for Russia’s exports. Oil and gas exports contribute one-third of Russia’s budget revenue. Crude Oil Production in Russia averaged 8183.67 BBL/D/1K from 1992 until 2016.

Price volatility impacts: The Russian economy was the hardest hit by 2008-9 global crisis as oil prices plummeted and foreign credits dried up.

Between June and December 2014, the Russian Ruble declined 59% relative to the U.S. dollar.

At the beginning of 2015, Russia, along with neighbouring Ukraine, had the lowest PPP. Impact on Iraq Iraq’s energy sector is heavily based upon oil, with approximately 94 percent of its energy requirements are met with petroleum. In addition, crude oil export revenues accounted for over two-thirds of GDP in 2009.

The low crude oil prices impact Middle East oil producers and US oil and gas exploration.

However in a competitive market Iraqi oil is

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comparatively cheap as it contains high level of sulphur and sells for 10% less than Brent crude.

In April 2016, Iraq’s oil exports approached a high. Oil production in Iraq has grown drastically since the U.S.-led invasion. Iraq’s domestic oil consumption has barely increased, rising from roughly 0.5 million barrels a day in 2003 to just around 0.75 million barrels per day in 2015.

Impact on USA The effects of changes in oil prices to sectors of the U.S. economy is both direct and indirect. The price of oil also impacts shipping transportation costs for industry and commerce, and it has a direct impact on the price of othercommodities and raw materials. In 2014 alone, oil use accounted for nearly 4% of the gross domestic product.

Exchange rate impact: The more currency outflows from a nation, the weaker its currency tends to be. And in the case of the U.S., which is a chief importer, oil purchases abroad are a large cause of currency outflows. In recent years, oil imports accounts to as much as 40% of the U.S. foreign trade deficit. Transportation accounts for more than 65% of petroleum use in the U.S. The pace of oil price rise will likely depend on the renewal of global demand. Given the outlook

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for US economy, rising post Brexit uncertainty in the Eurozone and the rest of the world, and considerable downside of Chinese economy, the demand for oil may grow slightly between 2018 and 2020.

Conclusion Given the importance of oil revenues for several oil exporting countries, this report analyses the effects of oil price on their economy The recent oil price decline was driven by a combination of several factors: (i) the unexpected increase in oil production due to the surge in US shale oilproduction and the increase of Saudi Arabia production, (ii) as well as the weaker than expected economic growth in Europe and Asia, (iii) that both materialized into increasing stocks, and (iv) the appreciation of the US dollar which made crude oil more expensive for the rest of the world. The penetration of alternative fuel transportation will increase in the next two decades, but still are expected to remain at low levels in the absence of major technology breakthroughs. According to the IEF, the future oil and gas are forecasted to continue to dominate the energy mix, albeit with fluctuating trends.

Collectively, the two fuels are expected to supply around 53% of the global energy mix by 2040.

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Roshan Bhatt & Mayank Gupta IIM Shillong Introduction China established the world’s most robust steel industry capable of supporting the demand of the steel-requiring industries, but it has been encountering problems due to overcapacity.

China is the largest producer of steel with 72% market share by value in the Asia-Pacific market and around half of the global market.

The Chinese steel market had a total revenue of $374 billion in 2015 and represented a compound annual rate of change of -9.7% between 2011 and 2015. The industry started

facing the problem of overcapacity which got worsened by the China’s amended Environmental Protection Law (EPL). EPL is an effort by the government to tackle the issue of environmental pollution.

The Chinese steel market by value shrank by 27.9% whereas by volume it shrank by 2.3% in 2015. However, it is expected to grow at a CAGR of 1.4% between 2015 and 2020. Hesteel Group is the leading player in the Chinese steel market with a share of 5.9% of the pie. The

Time*

Period

Development Course

19491977

Initial Stage

19782000

Gradual Develpment

20012010

Rapid Expasion

Steel production was weak in the early years of the PRC. In response, the government established a guideline policy of ‘giving priority to the development of the steel industry,’ and launched large-scale steel production projects to ‘catch up with the UK and surpass the US.’Without a solid economic foundation, however, growth was unsustainable.

Many historical events also disrupted the development of the steel industry during this period.

The Third Plenary Session of the 11th CPC (Communist Party of China) Central Committee in 1978 outlined opening-up reform policy that allowed the steel industry to utilize foreign capital and technology.

While on his ‘Southern Tour’ of China in 1992, Deng Xiaoping set out reform targets for a socialist market economy system, further stimulating the enthusiasm of relevant enterprises. As a result, crude steel output exceeded 100 million tons in 1996 and China became the world’s biggest steel producer, accounting for 13.5% of global production.

China witnessed an economic boom after the turn of the 21st Century.

The steel industry multiplied as it fueled growth in other sectors, and by 2010 crude steel output had reached 627 million tons, accounting for 44.3% of global production. The first decade of the 21st Century became known as the ‘golden decade’ of the steel industry

Source: custeel.com

*considered since the founding of People Republic of China (PRC)

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Roadmap of Steel Industry in China

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Growth story – National Bureau of Statistics, China

Demand Drivers of the steel industry in China and their current state 1. Real Estate Sector: In the 12th five-year plan from 2010-2015, the govt invested $880 billion in building 40.93 million affordable homes. They finished building 40.93 million houses. They also rebuilt 26 million dilapidated houses. In the 13th fiveyear plan there is not direct investment by the govt in the real estate except for rebuilding 20 million dilapidated houses.

The factors from the real estate sector which attribute as the lead indicators for the growth of steel industry in China include - Personal/ corporate lending rates, Corporate bond regulations, Interest rates for down payments, land space available to be developed, conditions for home registration. The Chinese government has strategically designed port cities in line with its export oriented nature.

However, From the 13th five years plan the government started distinguishing between tiers. It announced a targeted policy to contain both oversupplies in lower tiers and high prices in tier 1. To contain the higher prices, the government increased loan down payments, land available for development and Hukou dependent registrations. To increase demand in lower tiers, the government eased the hukou restriction policies, down payment rules, gave tax subsidies & preferential interest rates.

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2. Infrastructure Sector: This sector, as seen in the world scenario, is highly correlated with the growth for steel in the economy. In Chinese situation, the state is the primary source of investment. It has been observed that State investment happened in the following three scenarios a. GDP growth goes below the target level b. GDP growth is at the target level c. GDP declines rapidly even though it is higher than the target level Beijing-Tianjin-Hebei development: A total of RMB 40 trillion worth of projects are being planned under this, which include Beijing airport, shopping centers, high-density rail networks, metro rails and arterial rail.

Most of the infrastructure development is in transportation.

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3. Transport Sector: Small passenger vehicles account for more than 50% of the vehicle weight in China. This sector, over the past, has created a lot of demand for steel. With the rising per capita income, this is poised to grow exponentially in the coming years. The state has invested heavily in the infrastructure which is deemed to show its effect in this sector. The state investment in electric vehicles, however, can pose a threat to the demand for steel.

Manufacturing & equipment Sector: Traditionally, this sector has been a primary driver for steel demand. However, the outlook for the industry has been changing over the few decades. The share of tertiary sector increases as the share of manufacturing sector decreases.

But this sector is increasingly being replaced by advanced manufacturing. In the future, equipment required for this sector will increase and so would the demand for specialized steel.

Current Situation Market demand for steel products led to the increase in the capacity in China. But the poor quality, poorly designed layouts, and repetition have resulted in overcapacity. The capacity utilization rate fell from 79% in 2010 to 70% in 2015. The debt levels of large and mediumsized enterprises were around 70%. Oversupply led to a reduction in prices; steel companies started scaling down their productions; capital debt put pressure on banks and governments and workers were laid off.

The three leading causes which can be attributed to the problem are economic slowdown, irrational industrial structure and failure to draw backward capacity.

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Yangtze river development: A total of RMB 45 trillion worth of projects are planned under this. Waterways and port led development play a significant part here. It also includes the development of a high-speed railway and metro network of more than 13000 km by 2020. These projects will eventually drive the need for steel (high alloys).

Railways, ports & channels, waterways, airports and other logistics infrastructure form a major part of this infrastructure development.

Competitive Landscape Suppliers of this industry are those giant mining companies which provide the steel industry with the necessary ores and hence wield substantial bargaining power. Steel companies often strategize to integrate backward.

Major consumers such as automobile industry, shipping industry, and consumer durables industry enjoy high bargaining power, but small retail customers do not enjoy such benefits.

Moreover, steel products are undifferentiated which reduces the bargaining power of the buyers.

High capital outlay and commitment prevents new entrants to enter into this industry and hence lead to long rivalry among the present players. Substitutes in the form of aluminum and composites exist and pose a threat to the overall industry.

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1. Economic slowdown: Since 2011 China’s GDP growth and industrial output have been declining. The growth rate of investment in manufacturing and real estate fell from 30% in 2011 to 10% in 2015.

Companies built excess capacity to furnish demand in times of high growth but couldn’t manage a slowdown in demand leading to excess capacity.

2. Irrational industrial structure: Steel companies make huge profits out of their investments and also stimulate the economy.

Hence, the government passed various projects without proper checks of the supply chain, raw material sourcing, quality of the facility and other background checks. But such enterprises could not tolerate variability in raw material prices and logistic services which led to decrease in their profitability and hence were proclaimed ‘zombie enterprises’. In the long run, capacity addition a poor quality led to overcapacity.

3. Failure to drawback backward capacity: The Chinese government developed a plan to eliminate the backward capacity in 11th and 12th Five-year-plan. The aim was to eliminate energy consuming, highly polluting and backward production capacity. But due to inadequate supervision and connection of steel industry with economic development and employment level failed to execute properly leading to overcapacity.

Future for Chinese Steel Industry Factors of production: • Economic entities under all forms of ownership have equal access to all factors of production.

• Factor price determination by market • Phase out fossil fuel subsidies • Central real estate registration system Financial reforms: • Debt-to-equity swaps to help debt laden companies

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market play a decisive role in giving financial assistance • Business tax to value added tax reform to eliminate double taxation • Shanghai Free trade zone pilot State Owned Enterprise reforms: • M & A of big steel enterprises. 60% steel capacity to be concentrated in the top 10 steel companies by 2025.

• Investor diversification • Increase dividend payout ratio • Standardize corporate governance & market procurement of management personnel • Improve process of nominating and selecting board personnel Others: • Environmental measures • Adhere to specific timelines for security review over mergers and acquisitions by foreign investors • Enhance foreign investor approval system • Record filing instead of approval and verification

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Pharma Industry in India: Is it Time for Change?

Atul Singh XLRI, Jamshedpur Is there a reason to worry?

Indian pharmaceutical industry is in a healthy position as far as growth is concerned.

Between 2005 and 2016, the pharmaceuticals market reported a stellar compound annual growth rate (CAGR) of 17.46 per cent and the expectation is for it to clock a CAGR of 15.92 per cent from here on and reach US$55 billion by 2020. Indian pharma is also expected to become the sixth highest in the world by value by 2020. On the surface, everything looks good and rosy for Indian pharmaceutical industry.

Now let us have a look at how the US pharma is faring, especially their generic drug market.

After registering a 15% CAGR in 2010-15, it is expected to slow down to 5% CAGR in

2016-20. This is worrying for Indian pharma because 70% of the revenue consists of generic drugs. US being India’s largest importer, imports 27% of India’s total exports. And India exports more than half of what it produces. These facts present a worrisome picture and prompts us to ask questions about whether the industry is really doing well and is the business model sustainable in the long run. Before making any quick conclusions, let us look at a brief history of Indian pharma and its current market structure to have a better understanding of the problem.

A brief history: Indian pharmaceutical industry was nothing one would boast of till 1960s when the government

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started promoting manufacturing of drugs by Indian companies. The first landmark decision came in the form of Patents Act in 1970. This act made it possible for companies to get only their processes patented and not their compositions.

The effect of this was that now one-fifth of total generic drugs of the world are made in India.

Furthermore, this act granted patents only for 5-7 years as compared to 20 years in the USA. Moreover, evergreening is not allowed in India.

Evergreening is a process by which companies get their patents extended by making some minor changes in their drugs’ compositions.

All of this made India a very undesirable market for global companies whose main driver of profit is their patented drugs. So, a lot of Indian companies started manufacturing generics using innovative reverse engineering techniques and carved a niche for themselves both in Indian as well as global markets. After liberalization, Indian pharma took the world by storm and registered huge growth rates especially in generics and active pharmaceutical ingredients as well as bio pharmaceuticals.

India is now becoming a favorable alternative in the field of outsourced clinical research as well as contract manufacturing and research .

The present structure: Generic drugs form 70% of the market by revenue, followed by over the counter medicines which constitute 21% and patented drugs which constitute the remaining 9% of a total revenue of US $20 billion. It is an export driven industry with majority of the revenues coming from exports. USA is the biggest exporter followed by the UK. The industry is highly fragmented with 250 of the largest companies holding only 70% of the market. Most of the players are smallto-medium enterprises. Indian pharma uses a low pricing structure to maintain and boost its share in the world exports where it accounts for 20% of total generics manufactured.

Coming back to the problem : After a dreamy run till 2017, companies started registering a decline in profit margins as well as a slight decline in revenue. Sun Pharma

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which looked unstoppable a year ago expects a single digit decline in revenue this fiscal.

Reasons for this decline: There are multiple reasons for this decline.

Firstly, prices are falling steeply due to increasing competition. US generics market is expecting to witness a 10-12% decline in prices from here on as compared to 7-8% currently. This decrease in price is in part fueled by an increasing rate of new product approvals and in part by the new companies entering US market. There has been an increased participation from Chinese firms in generics market which were earlier confined only to the manufacturing and export of active pharmaceutical ingredients. Also,

there are a plethora of patented drugs which are expiring in this period resulting in their lowering of prices. And even though most of the times, it’s the same thing; people prefer low cost patented drugs over their generic versions.

The second big reason for this decline is that distributors are now buying as part of consortiums. This has led to an increase in their negotiating power. Top 4 pharmacy chains bought 55 percent of generic drugs in US in 2012. Looking at the benefits, smaller distributers joining these chains thus forming large consortiums and as a result top 3 consortium bought 90% of total generics in US in 2016.

The third reason is quality issues. The US Food and Drug Administration sent out 42 warn-ing letters to manufacturing facilities over lapses in the rigorous standards set by the department.

Out of these 9 were sent to Indian facilities. It

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Is it time for a change?

The winds of change are here. For a long time, Indian companies have found pride in finding workarounds for dealing with a situation. But there is a dire need now for not only a change in attitude but for a change in culture. Indian scientists have been brilliant till now in making cheap formulations of patented drugs and have been proved to be a boon for people needing lifesaving drugs but not having the money. Be it AIDS ravaged Africa or the US couple who came to India for cancer treatment, these generic drugs have been nothing less than miraculous but it is not enough to make this industry sustainable in the long run.

There is a need for change and the need is urgent.

The Change: A focus on innovation is what is required right now. An increased expenditure in R&D will not ensure short-term or guaranteed profits but not making the correct investments will ensure doom.

Growth can come via 2 ways, organically and inorganically. Organic growth can be ensured by streamlining operations to reduce cost & increase productivity. There are large operational inefficiencies in the entire pharma supply chain which were earlier neglected due to high profit margins. Field force size needs to be increased to ensure a better connectivity with the healthcare eco-system as well as expanding product portfolios and reaching out to tier 2 & 3 cities. Inorganic growth is more important as Indian companies do not have the capabilities or resources to develop blockbuster patented drugs like the global giants. Acquisitions are also out of the picture to an extent because of the higher asset values. So, there needs to be intelligent licensing and partnerships to acquire specialty and complex generics and biosimilars. There is still a long way to go to develop an environment ripe for innovative patented drugs and that would come when there is continuous large-scale investment in R&D, industry-academia partnerships and increased support by the government.

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constitutes about 20 percent of total lapses caught by US FDA which is an alarming figure.

India’s filing for generic drugs in US has reached 40 percent of total filings. While this indicates a higher acceptance in US markets, it also means that the quality inspections are going to increase in frequency as well as in number.

India has 572 FDA approved facilities out of which 190 have not been inspected in the last 5 years. FDA aims to complete their inspections in the next three years. FDA has decreased its intimation time for inspection from 25-30 days to just 24 hours. Warning letters can stall export for a long time. It could take as long as 16-20 months in some cases to resolve the issue.

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The Infosys Diaries FinanceClub

IIM Shillong What went wrong in Infosys’ search for “Acche Din” Introduction “I wish him the best of everything in his effort to bring back ‘achhe din’ to Infosys”, these were the words of Narayan Murthy when Nandan Nilekani was appointed the chairman after Vishal Sikka’s acrimonious exit from the board along with four members of the board, including chairman R Seshasayee & independent directors Jeffrey Lehman and John Echtemendy. One can’t help but feel, however, that these must have been the same thoughts in Mr. Murthy’s mind when he appointed Sikka as the CEO barely 3 years ago in 2014. “Sikka will mean a lot of money to Infosys” were his exact

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words to be sure and the bonhomie that the two shared seems to have completely vanished only to be replaced by open distrust and vitriol.

So, what caused the corporate leadership of the darling of the Indian IT industry to disintegrate so spectacularly? What transpired behind the scenes that caused stalwart and his protégé to descend to thinly veiled name calling? It is easy to subscribe to the age-old rhetoric of the old guard versus the new, and blame the now relegated founders for continuing to meddle with the company affairs. After all it did take an inordinate amount of pressure from the investors to finally convince Murthy to bring

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Humble Beginnings The story of Infosys starts with 7 middle class men who dared to think big. It is the quintessential underdog story that made people fall in love with it. But what kept them hooked is the way the company is run. Based on core principles of exemplary governance and equitable pay, the company has values that run deep through its veins and it is something that it takes pride in. The company has, throughout its existence, set the bar in terms of transparency and accountability and is one of the most respected firms both on BSE and NASDAQ. The founders exemplify this high moral and ethical standards founded in humility and have led the company for years by it. In fact, the governance policy of the company emphasizes in upholding the spirit of the law as opposed to following the law by the letter. That the company was started on a 10000 rupees loan from Murthy’s wife Sudha is a part of the corporate folklore.

Sikka Story When Sikka came in however, the company, with its values imbued so deep, was in for a rude awakening. The very reason why Sikka was appointed as the first non-founding CEO was that a need was felt for a fresh pair of hands with exposure to modern technologies and radical outlook. Sikka, a doctorate from Stanford, having successfully run and sold 2 startups and a successful stint with SAP was handpicked

by Murthy himself. Murthy in his own words, “enjoyed talking to Vishal on mathematical and Computer Science-related abstract minutiae”. The first signs discontent was felt in

the upper management when Sikka bought in sweeping changes to the personnel. The old dogs were derided as deadwood and were promptly dispatched. They were replaced by new people who among then had about 50 exSAP employees who were hired in high paying upper executive positions - Ritika Suri, one such former SAP colleague, was made the head of the M&A department. This gave to accusations of nepotism and many of the fired employees were reported to have approached Murthy feeling unjustly terminated. There was also discontent that many of the newer employees did not buy into the companies’ traditions and value systems. That new employees travelled exclusively in business class was in stark contrast to the earlier practice where everyone including the founders travelled in economy to save costs. Sikka himself was regularly seen jet setting across the globe in charted planes to his Palo-Alto residence. Other appointments like the appointing Punita Sinha, wife of union minister Jayant Sinha, to the board drew similar ire with the move being seen as an attempt to curry favors. The was one of the first instances of growing rift between Sikka and the promoters, with Murthy abstaining to vote in the meeting called to ratify her induction into the board.

R Seshasayee, a trusted member of Sikka’s inner circle maintained that as an eminent investor having held positions at Blackrock and Oppenheimer, she had excellent qualifications and was selected based purely on merit and dismissed the accusations out of hand.

The Panaya Fiasco In the eye of the storm is however the acquisition of the Israeli automation technology company “Panaya”, bought as a part of the “New and Renew” strategy. It was acquired at a price that many perceived as overvalued at $200 million.

In fact, just before its acquisition by Infosys the

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in the first non-founder CEO Infosys has ever had. But the issue seems to be far deep rooted than that and can be broken down into few key issues.

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firm experiencing poor sales volume, laid off half its employees and was valued at about $150 million. While it is increasingly evident that the move was a poorly thought out move, Sikka loyalists point out to the acquisition of Loadstone consultancy services just a couple of years ago under Murthy’s oversight as a counterexample to how such investments are risky and can pan out either ways. But the issue under contention is not the acquisition itself but the way it was acquired. The decision to purchase the company was taken almost unilaterally by Sikka and his team while alienating the rest of the executive officers who felt they were being kept out of the loop.

The then CFO, Rajeev Bansal, in fact walked out of the board meeting held to approve the acquisition citing those very reasons and adding that he felt that “ill-thought-out” and that it “would not offer much by way of value to Infosys”. The aftermath of this episode led to the resignation of Bansal from the company.

The severance paid by the company to Bansal totaled to Rs 17 crores which was his full 2 years compensation including 100% variable component. This was a key part of what Murthy pointed out in his letter pointing out that such a large severance package was unprecedented and at a time when many of the top performing employees earned only 80-90% of their variable pay. This episode is further complicated by the fact that Panaya was part owned by Hasso Plattner cofounder of SAP an Sikka’s mentor.

Acquisitions of kickbacks and underhand dealings were dismissed as “baseless and unfounded” by Sikka and he is backed by audits by two independent law firms who audited the deal and concluded that there was no monetary gain by any board member. But the problem is that the company is staunchly refusing to make public either of the audit reports. While I subscribe to the “innocent until proven guilty” doctrine, there is simply too much smoke to

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not suspect fire. Murthy accused the board of appointing the judge itself and declaring itself innocent. Rajiv Bansal says he refused to ratify the purchase because of various errors in “commissions and omissions” and his payout of 17.5 crores was seen by many as an attempt to buy his silence. While none of this proves any willful wrongdoing on Sikka’s part, the entire matter could be put to rest by a more transparent governance, something that has been a hallmark of Infosys.

Confounding Compensations Then comes the issue of inflated compensation.

His salary was hiked from $7.08 million in 2016 to $11million, annually, in 2017. While Sikka’s defence is that majority of the pay is in the form of restricted stock units (RSUs) against extremely steep targets, this hike of more than 50% is in the backdrop of most of the employees who are getting hikes of 6-7%. The company has also prided itself on its long-standing philosophy of “compassionate capitalism” where the ratio between highest and median compensation is around 50 to 60, the hike puts it firmly out of this range. Sikka claims that his pay is in line with the global standards, the fact of the matter is that it is much higher than his counterparts in the industry with Wipro CEO Abidali Neemuchwala’s earning Rs 12 crore and TCS chief N Chandrasekaran was paid Rs 25.6 crore in 2015-16. Performance wise too, Infosys under Sikka was average, if at times erratic, compared to its peers. Its revenues improved to about $11 Billion from $7 billion with its operating margin on slipping and profits improving marginally to 2.4 billion. The core issue, to reiterate, is not with the economic performance but the corporate governance and accountability. Murthy acknowledges Sikka’s efforts and leadership of the company.

However, looking beyond the balance sheet, the company is clearly slipping up in the high

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Revenue

PAT

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80,000

15,000

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5,000

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FY'13

FY'14 Infosys

Wipro

ethical standards that it set for itself. Seldom are things in life black or white, the issue is Sikka chose to operate at the other end of the spectrum to what the founders expected.

It is important to point here the difference between the Infosys and the Tata sons case with Cyrus Mistry. Sikka throughout his tenure had complete backing of the board. Just recently, Kiran Shaw tweeted out her support for Sikka saying “Exciting new business opportunities which VSikka and his brilliant team are leading to new frontiers of growth.” The promoters with 12.3% stake could not unilaterally remove him.

Murthy knew what effect his public comments would have on Sikka and played his cards well. He got the result he wanted with Sikka resigning citing the “false, baseless, malicious and increasingly personal attacks” against him.

That said, the constant rhetoric from the Sikka camp has always been that the core business of the company has stabilized and improved. To prove their point, they parade a list of statistics that, but of course, substantiate their point

TCS

FY'16

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of view. A objective selection of parameters to compare Infosys among its peers however calls into question how much that argument holds water. The comparisons of PAT, revenue, enterprise value and the net profit per share are among a multitude of parameters that do not agree with Mr. Sikka.

Sikka had lofty ambitions and a plan to achieve them. He envisaged a $20-billion company with a 30% operating margin and $80,000 revenue per employee by 2020. Out of the $20 billion, $16.5 billion is to come from existing business, $1.5 billion from acquisitions and $2 billion from new businesses. But his scorched earth policy did not work out too well for him in the end. It is too easy to overlook that he gave Infosys its mojo back and steadied a faltering ship. Interim CEO Pravin Rao and Nilekani have enough on their plate with the eroding business, threat of automation and shifting business focus. They better get their act together if Infosys is to ever see the dawn of “Acche Din”.

Enterprise value

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200 180

500,000

160 140

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100 80

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PAYMENT BANKS: Are they going to compete with or complete the ‘Banking system in India’?

Uday Kumar Singh IMI, NEW DELHI What are Payment Banks?

In India, payment banks can be defined as a type of bank which is not a full-service niche bank i.e., they can only receive deposits and provide remittances; they cannot carry out lending activities (except few of them). Also, they can issue ATM / debit cards, but not credit cards.

Genesis of Payment Banks: In September 2013, a committee headed by Nachiket Mor (herein called Mor Committee) on COMPREHENSIVE FINANCIAL SERVICES for small business and low income households was formed by the RBI. In January 2014, the Mor committee recommended the formation of a new category of banks called payment banks.

In the 2014-2015 budget, the union government decided that after making suitable changes to the current framework, a structure will be put in place for continuous authorization of universal banks in the private sector. RBI will create a frame work for licensing small banks, payments banks etc. and will contemplated to meet credit and remittance needs of business, unorganised sector, low-income households, farmers and migrant workforce.

Following this, RBI issued the guidelines on payment banks. After some iterations and improvements, the central bank finally presented the guidelines in November 2014 thus opening

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the window for entities to apply for licenses to start such a bank. In the beginning, 13 licenses were issued. Among them, two surrendered the license. At present, there are 11 payment banks in India.

RBI has outlined the objective behind the creation of payment banks in its guidelines. Highlighting the need for financial inclusion the guideline states the following, “the objective of setting up of the payment banks will be to further financial inclusion by: • Small banking accounts • Payment/ remittance services To the migrant labour workforce, low-income households, small businesses, other unorganised sector entities and other users”.

Scope of Operation: • They are not allowed to offer loans but can raise deposits of up to one lakh and pay interest on these deposits like any other bank in India.

• They can offer mobile banking; they can enable transfer and remittances through a mobile phone and can offer services like chequeless transactions, automatic bill payment and cash less purchase through smart phones.

• They can offer forex card service to customers at a transaction charge lower than that of other banks.

• They cannot offer credit card to the customers.

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Impact on India Population: The Indian finance minister ,Mr. Arun Jaitley has said, “Payment banks will change the way people think, change the way they keep the money, the way they pay”.

We know that only 53% of the Indian population is the part of the banking system of India. Also, the Indian banking sector is valued at Rs. 115 lakh crores which is expected to reach a value of Rs. 288 lakh crores by the end of the year 2020. Compared to other countries the Indian banking industry is expected to be at the fifth position by the year 2020 and third position by the end of the year 2025 in terms of book value. Realizing the opportunities, RBI took the step of bringing payment banks to accelerate the financial inclusion process in the country.

It is, therefore, a step to redefine the banking system in India, as it targets migrant labourers, low-income households and small businesses, with a low-cost transaction saving accounts and remittances. The payment banks can use the digital platform (mobile) to provide the basic banking transactions along with payment of services and subsidies through the digital platform (mobile).

The Indian domestic remittance market has been estimated at a value of about Rs. 800-900 billion and is growing. With the introduction of payment bank with mobile banking facility, a big chunk of this untapped market, especially that of migrant labourers can be brought under the umbrella of banking services. The Indian economy very much relies on cash currency.

Infact the cash to GDP ratio in the country is 12%.

But the good news is that, India is moving into a new type of economy that will be cashless. With payment banks coming into the picture, using technologies like mobile phones and bio-metric systems (aadhar card enabled bank accounts) the use of the cash currency will decrease drastically, payment of the utility bills, tax payments and small business transactions will be smooth and the problem of forged notes in the economy will

be scaled down considerably.

Further, payment banks are going to offer a secured investment option to the growing middle class of India. The investments made in the payment banks are secured because of following two reasons: • They have capped the investment limit at Rs one lakh and this - is covered by the DIGC (Deposit Insurance and Credit Guarantee Corporation) • They are mandated to invest their mobilised funds (75% at least) in government securities.

Thus it may be classified as the narrow banking model, which is the safest model of banking as it is free of credit risk. This makes it a preferred choice of investment for rural people as well as low-income earners.

It will also indirectly improve the customer service level for the bank customers. The CASA ratio for most of the banks lies in the range of 40%-50%, and the cost of maintaining this CASA deposits range from 0%-4%. With payment banks coming into the picture, the banks are going to find it difficult to maintain their CASA ratio and will force banks to go for treasury borrowings. To overcome this, commercial banks will require improving their customer service levels and developing technology oriented customer friendly products to retain the existing customers.

Impact on Indian Banking and Financial Sector The payment banks are changing the landscape of the whole banking and financial sector of India.

And at the core of this whole process of change are mobile phones. India’s payment market is growing exponentially and at present it is valued at $ 15.5 trillion (excluding interbank clearance and CCIL), according to a research report by the America financial house Merrill l Lynch, Indian mobile banking is growing at a rate of 0.1% and it will reach a rate of 10% in the coming seven years, with the absolute value growing by almost 200 times to a value of $ 3.5 billion. Also, it has been estimated that the payment through paper is growing to reduce by almost 2% in a period of three years because people are likely to use mobiles for making payments through all key channels of online payment. Given this scale of transformation, there will be a significant change in the way banks in India operate. Keeping the size of the Indian banking industry in mind, while it is very clear that the payment banks are not going

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However, they can offer debit card usable at any location to its customers.

• They can transfer money for its customers to any bank at nearly zero cost by becoming part of a common gateway system that connects all the banks with one other.

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to be big disruptors in the near future, they definitely will make life difficult for incumbents in the banking industry.

But given the fact that the technology driven and cost efficient operations of payment banks will create a threat to small and budding banks and will probably lead to a dog- eat-dog market created by corporate entities holding licenses for operating payment banks, with deep pockets this might unleash a rate war.

Also, given the exposure and support that these entities are getting from the government through various tie ups such as Vodafone MPesa for money transfer similar to the banks Jan Dhan Yojna accounts a contest is likely to ensue for increase in wages/subsidies. All these could create hurdles for new and small banks.

The good news is that these will also result in enhanced levels of customer service, deep penetration of markets in rural India, leading to a great boost to the financial inclusion process envisaged by the government.

Payment banks are thus helping India to move into the phase of “Anytime – Everywhere� banking. The number of transactions carried out on IMPS (Immediate payment services) has multiplied four times in the last one year. In May 2015, it was recorded that around transactions of around Rs. 1.46 crore was facilitated through IMPS compared to just 35 lakh transactions in May 2014. Besides the numbers, the transaction value has also increased at almost the same rate, touching close to Rs. 11,000 crore worth transaction in May 2015 through IMPS as compared to nearly Rs 7,500 crore in May 2014. This is ultimately going to help the banks expand their knowledge about their customers using the data base of their earning and spending patterns. In turn, this will help banks design and sell products accordingly tuned to the specific needs of varied customers.

When it comes to saving pattern, India stands second globally. This though is not good for a developing economy like India, The growth of digital banking will help banks reach and tap the unserved customers and encourage them to fast track the economic cycle of the country.

Future of Payment Banks Keeping the present scenario of Indian banking industry and the constraints under

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which the payment banks have to operate, the future scenario for payment banks in the country looks interesting. So, how exactly are they going to survive in the absence of income through lending?

Going forward, the profitability of payment banks will be driven not only through transaction values and volumes but importantly also through the various channel- mix that these transactions deploy, which in turn will impact the profitability of payment banks. The payment banks have adopted a method of low-cost digital channels, and so their profit will be driven by transaction volumes. Thus even a charge of 1-2% on a large volume can be lucrative on normal cash transfers that take place.

The flip side to this is that this model will focus only large customers neglecting new entrants or small payment banks.

The next major concern for the payment banks is the digital infrastructure and the high-quality network coverage which is a prerequisite for growth and success in India. India still lacks a sound digital infrastructure. Adding to it, the average data consumption in India is very low.

Globally, the average data consumption ranges between 850mb- 1 GB wherein India it is just 750mb. Even this is heavily skewed in favour of tier-1and 2 cities. The average data consumption of tier -3 cities is much lower and hovers around 250 -375mb; so we can easily gauge the condition in villages, given the fact that 70% of India comes under villages. So, it will be a tough task ahead for the payment banks to find a way out of it and survive in these conditions. The other loop hole in the Indian digital infrastructure is the issue of security. Payment banks will need to prove and win the faith of the Indian population regarding the security of transactions. They need to reassure the masses that their money with them is as safe as it is with any bank in India. This again is in itself a tough task.

But the good news again is that keeping in mind the a growth rate of 50.58% in the e-commerce, 85% increase in data consumption, 50.75% increase in the number of smart phone users in India in the past one year and increase in the online banking habits of the Indian people, the future market looks promising for the payment banks. It will, however, be interesting to see how payment banks capitalise on all these opportunities and address the daunting challenges that lie ahead of them.

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Urjit Patel: A song of inflation and Insolvency SampritShah IIM Shillong The first image that splashes before the eyes when the word “Hawk” appears is a high voltage prey-predator battle, wherein the predator known for his sharp vision picks the prey with precision & through a sudden volley of attacks renders it lifeless. But the question arises as to why am I talking like an ornithologist in a finance magazine?

Well, the man in discussion today is no different from a “hawk”; known for his precise vision & the persistence of raging a bloodless battle against inflation is Mr. Urjit R Patel, the governor of Reserve Bank of India(RBI).

The 24th governor of Reserve Bank of India is a man of few words but plenty of action. Mr. Patel has an outstanding academic journey & a career spanning over two and a half decades.

The 54-year old RBI governor holds a Bachelor’s degree in Economics from London School of Economics. In the year 1986 he received the M.Phil degree from Oxford University & completed his doctorate in Economics from the prestigious Yale University. His graduate advisor T.N. Srinivasan is a fan of his persuasion skills & termed him the perfect fit for the job. His professional journey began from the IMF where he worked on US, India, Myanmar & Bahamas desks till 1995. After, that he served the RBI on deputation from the world bank & advised the RBI on a number of issues. During this period, he counselled the RBI on issues ranging from development of the debt market, banking sector, pension fund reforms, real exchange rate targeting and evolution of the foreign exchange market. After his stint at the IMF he

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was assigned as consultant to the Ministry of Finance between 1998 to 2001. Later on he gave his insights by working on various government panels on indirect taxes, infrastructure, civil aviation systems & government pension councils. He also served as board member in the governing body of Gujarat State Petroleum Council. His private sector stints include working with Reliance industries as President of business development & later working as a consultant for Boston Consultancy services in energy & infrastructure division. Later on he served as deputy governor of RBI & a director of the state run SBI. On 5th September 2016 he took the charge as the governor of RBI. A dissection into the mind of the governor During his professional voyage he published articles & research papers on a myriad of topics. His primary focus has been on inflation targeting as a policy making for central banks & has worked on topics related to financial management & regulations as a means of fiscal consolidation for central government.

In the paper titled “Fiscal rules in India: are they effective?”, which he published in association with William H Buiter; he talks about the effects of execution of Financial Responsibility & Budget Management Act. While commenting on the expected outcome of FRBMA, in the

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year 2005, he wrote “The requirement that the revenue budget be in balance or surplus is very likely to be the binding constraint on the central government, with the 3 percent ceiling on its overall financial deficit a nonbinding constraint” The words tacitly hinted at government’s non committal stance to regulatory fiscal consolidation. His opinion on farm loan waiver as a “moral hazard” leading to financial slippages can be traced back to his research work where he claims populist moves as the biggest hurdle to fiscal consolidation.

On monetary policy transmission & base lending rate fixed by the RBI, his stance & likely decisions can be explained from his RBI working paper published in association with Amartya ahiri and his view expressed during media interactions. Mr. Patel opines that instruments like statutory liquid ratio, which force banks to compulsory invest a portion of their deposits in government bonds, pose a significant threat to monetary transmission. He strongly believes that a binding SLR can invert the monetary transmission mechanism. A binding SLR removes all substitutability between bank assets, forcing the banks to lend to private sector & invest in government bonds in fixed proportions & that can reduce the transmission of reduction in interest rates to the customers effectively. From the opinions of Mr. Patel it can

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be inferred that he is someone who believes in sound policy framework & may not succumb to Lutyen Delhi’s demand of frequent & large rate cuts.

Controversies & opinions There was an air of controversy surrounding the appointment of Mr. Patel as RBI governor.

Allegations were leveled of industrial lobbying playing a part in his appointment. His relations with premier business houses have been in question since the time he was working with Gujarat State Petroleum Council. Mr. Patel through his work has managed to silence all critics who nodded in affirmation to such allegations. His firmness in taking policy decisions & not working like a hand-maiden of government lends a lot of credibility to his agenda of inflation targeting as a policy measure. Owing to such stiff stances the industry labelled him “the hawk” of the RBI, a title he carries with exuberance & pride.

As compared to his predecessor he has avoided the lime light as much as possible. While some

have raised questions on his silence on key issues like demonetization many call him a diligent silent killer. He opines that GST is a measure that will help significantly in controlling inflation & believes that a revolutionary move like this will help increase the tax base. He has rated GST to have a positive impact on the economy & considers it a driver of growth after initial teething problems cease. He has frequently expressed his views in favor of recapitalization of banks & has advocated that for credit growth in the country it is imperative that banks have enough free cash to offer. He supported the idea of banks consolidation to create global scale behemoths & termed it as a vital organ of bank recapitalization plan. In stark similarity to his predecessor he has advocated the use of bankruptcy & insolvency laws to clean the stressed balance sheet of banks & has batted for legal means for recovery of bad loans to resolve the twin balance sheet problem. His opinion in favor of legal recourse for recovery of bad loans can be counter productive & have an adverse impact on credit growth since it can

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increase the red tape in loan disbursing procedures. In an era when Indian economy is on the cusp of landmark economic & financial reforms the onus will be on the RBI to take policy decisions that can help boost the

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economy. Considering that inflationary levels have already been hunted down, it will be interesting to see what next the hawk sets his heart on & how stealthily he can gun down his next prey.

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RERA : Making the Infrastructure Industry Transparent Kiran Ramakrishna

KJSIMS A Glimpse of The Real Estate Sector in India The real estate sector is one sector which always nurtures growth with the growing urbanization. In India, real estate is the second largest employer after agriculture and is slated to grow at 30 per cent over the next decade. Moreover, the growth of this sector is well accompanied by the growth of the corporate environment and the demand for office space as well as urban and semiurban accommodations. The real estate sector can be categorized into four subsectors: hospitality, offices, residential and retail. Š FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

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consequentially, the handover was delayed.

The clearance of the projects had to go through several stages which made delays inevitable.

Obstacles faced after the project launch such as digression of funds to other projects, regulation changes, clearance from the environment ministry further added fuel to delays. Rapid demand and the growth in urbanisation are the other primary factors why RERA has to set straight the unorganised sectors.

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Future Growth The Indian economy experienced strong growth and is touted to be one of the fastest growing economies in the world. Though the estimated GDP has gone down due to demonetisation, it will not affect the growth in real estate sector in any manner.

The infrastructure industry experienced a dull phase during demonetisation, but this phase is bound to diminish soon. The FDI inflows will influence tremendous opportunities for expansion in future.

A survey by India Brand Equity Foundation (IBEF) states that: • The Indian real estate market is expected to touch US$ 180 billion by 2020. Demand for commercial property is also growing with the economic growth of India • FDI in the real estate sector is estimated to grow to USD 25 billion by FY22 • Real estate and construction sector in India i expected to pip agriculture as the largest employer by 2022 • The housing sector alone contributes 5-6 per cent to the country’s Gross Domestic Product (GDP) • Demand to grow at CAGR 2% across top 8 cities in India. NCR is expected to create maximum demand in middle and high income group Why RERA? For several decades, buyers have suffered due to the non- transparency of the builders and promoters.

The houses were never completed on-time and

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It is quite evident that the government is introducing a series of transformational reforms like demonetisation, The Goods and Services Tax (GST), Change in Accounting standards IFRS and relaxations in FDI investments. These reforms are aimed towards chucking out the unorganised sector and making way exclusively to the existing and the new industrial players who follow sound business practices. The Real Estate Regulation and Development (RERA) act is no different from these. RERA will help in rise of the transparency and trust factor between buyers and developers.

Keeping in frame the protection of interests of buyers and the emphasis on the pellucidity in the growing infrastructure industry, RERA act will come as a breath of fresh air.

Features Of RERA Act • The official rules and regulations for developers, promoters and agents are listed at

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How RERA Will Impact Other Sectors RBI is looking towards increasing the lending in the real estate, especially housing segment.

Affordable housing is what government aims to achieve before 2025 on the banks of rapid urbanization. RBI has drastically reduced the risk weightage for housing loans above 75 lakh to 50% from 75%. More lending will increase the supply of money and this, coupled with RERA

act, will create a strong platform to create an effective realty sector.

With RBI reducing provisions for individual housing loans, home loans are about to become inexpensive. The lenders will look to acquire existing loans from each other thereby reducing housing loan rates. With lower cost of funds and surplus liquidity for the banks, lending rates by commercial banks will come down facilitating further investment in the sector. Banks may further relax their margin requirement stipulations for the home loans.

The increased credit of housing loans will make affordable housing a reality. The increased demand in housing industry will, in turn, increase the demand for furniture and electronic appliances, creating demand and a positive ripple effect for the other industries.

Hence, it can be seen that the implementation of RERA act will create an optimistic market sentiment for the real estate sector and the other complementary sectors.

Gret Areas In RERA Act RERA is faced with lots of ambiguities. RERA is looking to create online portals specific to each state for registration of stakeholders and developers. It is still unclear whether the existing projects will also be registered under the RERA or only the new ones.

The success of RERA heavily depends on how quick the states implement the act. Each state has the responsibility to notify RERA rules and set up local regulators. How the states entrust those responsibilities and consider the regulatory practices still remain questionable.

Conclusion RERA will be a win – win situation for both, the buyers and developers. The confidence shown by the consumers towards the developers will be stronger alongside support from investors sitting nationally or globally. This will help the investors to explore new avenues in the real estate sector of India and boost the economy.

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http://www.reraconsultants.com/.

Few important of those are given below: • A real estate project needs to be compulsorily registered with state regulatory authority before it is offered for sale to public. This law will govern both commercial and residential real estate transactions. Failing to do so will entice a penalty of up to 10% of the project cost and a recurrent violation will send the developer in jail.

• Before starting the project, a minimum 70 per cent of the money from investors and buyers will have to be deposited with state regulatory authorities. This money can only be used for the construction of the project and towards the land.

• The promoter of any infrastructure development firm has to maintain a separate escrow account for each of their projects. The money will be deposited in an escrow account created solely for the purpose of the specified real estate project.

• The developer’s responsibility lies in keeping the buyers clearly informed of their current projects. The law also mandates developers to post all important details such as layout, government approvals, project plan, land title status, and sub-contractors to the project, scheduled for completion with the State Real Estate Regulatory Authority.

• The new law will make it illegal to sell the property to buyers on the basis of super built-up area. Hence, the property will be sold only on the basis of carpet area.

• A developer may serve a maximum jail term of three years (with or without a fine) if he/she fails to comply with the order of the appellate tribunal of the RERA.

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A graduate of NLU Jodhpur, Sumit Agrawal is a founding Partner of Suvan Law Advisors and former Assistant Legal Advisor, SEBI. He advises listed companies, commodity/stock exchanges and other market intermediaries on regulatory issues, including on insider trading, fraud, takeover, listing requirements, etc. He is also a member of FICCI Capital Markets Committee and CII National Committee on Financial Markets.

1. Recently the government has drawn up a list of 16794 shell companies responsible for illicit behaviors like tax evasion and frauds. Of which over 400 companies are stock & commodity trading firms alleged for helping wealthy individuals evade tax and manage their cash during demonetization. Such a crackdown by government will have some impact on the functioning of brokerage firms, wherein scrutiny and compliance to SEBI guidelines will increase. What are the likely consequences of such investigation and what is your take on that?

In the context, some clue could be taken from SEBI’s recent action taken against the 331 shell companies on the basis of the list of suspected shell company given to it by Ministry of Corporate Affairs (MCA). While it is significant that trading in those companies which are shell companies without any business operations should have been prohibited, it is evident that there existed few other companies in the list which were not only operating but were also making profits. Restricting trading in such Companies faced resistance, even from Securities Appellate Tribunal (SAT). In all of these cases, process and manner will become important to achieve the noble object.

A similar approach was taken by SEBI in the past, in the alleged abused of Long Term Capital Gains (LTCG) matters wherein SEBI had initiated investigations and had also passed orders on the basis of report submitted by Tax Department.

In such cases as well, several appeals have been filed before the SAT and are pending decisions.

The plausible actions that could be taken by SEBI against Shell Companies may include restricting such companies from trading, put sanctions on their promoters and directors, impose monetary penalties, as well as to even delist it from stock exchanges altogether. In deserving cases,

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public name-and-shame after a preliminary hearing process would be a welcome measure.

Hon’ble Prime Minister Shri Narendra Modi also endorsed the crackdown on shell companies on his recent Independence Day speech.

Henceforth, I see many more orders coming from the Authorities including SEBI. 2. In the U.S.A. the “Securities Act Rule 405 and Exchange Act Rule 12b-2 defines a Shell Company as a company, other than an assetbacked issuer, with no or nominal operations”.

Considering the fact that, every shell company will not be an illegal entity; do you think the Government of India should indulge in a regulatory framework that helps define a shell company and lay down rules for its operation?

While dormant company is defined under Companies Act, the term ‘shell company’ has not been defined under any legal or regulatory framework in India including under SEBI Act or it’s Regulations, Companies Act or Income Tax Act. Accordingly, prima facie such companies can’t be ticketed as an illegal entity merely by virtue of their being a shell company, unless they violate any of the existing legal frameworks.

However, considering the basic approach adopted for incorporation of such companies i.e. in many of the cases is to create a layer to hide holding of the beneficial owner and to escape the tax obligations and from complying with other legal obligations, it is need of the hour to have in place proper statutory framework defining the term ‘shell company’ with detailed criteria to determine so. Under SEBI Act, SEBI has wide powers to take action against any such company to protect the interest of investors in securities market. However, looking into the lacunas that have emerged recently due to non-existence

of any defined legal framework pertaining to regulation of such companies, yes, it could be suggested that Government should come up with defined policy framework pertaining to same at earliest.

3. There has been a lot of talk about issues of corporate governance in small companies & even in conglomerates. What is your opinion on the issue? To what extent the findings of Uday Kotak panel should be executed?

Corporate Governance is undoubtedly indispensable to ensure fair functioning of an entity and it becomes more important in cases of small private entities where the authority lies under the control and management of few.

For complying with corporate governance principles, size of the entity should be immaterial on questions of transparency.

Indian markets have had examples of small and conglomerates both being abused structurally to gain undue benefits and avoid taxes.

Dialogues and disclosures are the key to corporate governance and the securities market is awaiting the report from Kotak Committee to dwell on it.

4. SEBI is planning to detoxify the ‘highturnover, high-risk derivatives trading’ where it believes that volumes traded are 15 time the volumes on equity cash market. Traders argue that such data is misleading and actual value is not more than three time that traded in cash?

If we look from a legal perspective how much is SEBI’s point of view valid and can it go on to take such legal steps?

SEBI has wide powers under section 11B of the SEBI Act to take actions in any case to protect the interest of investors and for proper development and regulation of securities market. It can initiate the preliminary investigations on the basis of the records available to it. However, it is pertinent that any adverse steps should be taken by SEBI only

after the completion of detailed investigation and by passing of reasoned final order only.

Process of hearing is important on which many SEBI cases are challenged in SAT. It should be noted that, as a resort to any action of SEBI taken against a person or entity that it considers to be illegal or invalid, they always have an option to move to SAT. 5. What is your stance on the current form of Insolvency and Bankruptcy code? Do you think it is potent enough to solve the issues it is designed for & how much of effect it can have on Ease of Doing business in India?

The new IB Code introduced in year 2016 is undisputedly a significant statute having potential to fix the loopholes existing under previous laws. The detailed provision under the new law relating to reorganization and insolvency resolution of corporate persons, partnership firms as well as individuals to be carried out in a time bound manner and considering the pace with which and looking into the number of insolvency cases that had already been filed and disposed of, it won’t be wrong to say that the Code has provided for the purpose with which it was enacted.

Howsoever, given the developing stage of the new regime, varying facts and circumstances of every case, yet to be developed infrastructures including Information Utility (IU) are few of the factors that practically affect the effective implementation of the Code. Also, as can be seen in various recent cases wherein different provisions of the Code are given varying interpretations by NCLT and NCLAT (even two Supreme Court Judgements recently took varied positions), it should be understood that the law being in its nascent stage should require some time to be properly understood and to attain its core objective. But, once the same is implemented to its full effect, the Code will definitely aid the ease of doing business in India by resolving one of the biggest bad loans issues in India.

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PORINJU VELIYATH

HARSHAD MEHTA

Being one of the most successful stock market investor in India, he has been associated with the market for 26 years now. His first major investment was in ‘Geojit Financial Services’ which was not so preferred stock. But as the luck had its way, it gained ground and soon he bought back the house he was forced to sell previously. In 2002, he started ‘Equity Intelligence’ which now manages client fund of more than 400 crore.

A stock broker by profession, also known as the Big Bull of the Indian Stock market. He was the founder of GrowMore Research and an Asset Management firm, which started receiving investment in 1990.His sense of stock market was used by the then commerce minister P. Chidambaram for his own shell companies. He was charged as major culprit of the 1992 Stock Market Scandal.

There is a Bollywood movie ‘Gafta’ about the scandal. Do watch!

Sounds Interesting

Sounds Interesting

By using the value investing method, he has been able to earn a return of 42% for FY 16-17 on his portfolio.

According to a WikiLeaks document, 2011 Harshad Mehta had funds of ₹ 135,800 Crore with a swizz bank.

The Jinx of October October is the most feared month for the superstitious stock brokers as two of the world’s worst stock market crashes occurred in October.

First of which came in 1929, which show the start of Great Depression with a dip in 25% in share prices. Towards the end of the depression, the prices of share where left as low as 20%.

Followed by October 1987, the value of stock dipped by 25%, which is till date the worst performance by stock in a single day.

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FinFunda of the Month

Ma’am what is this concept of Helicopter Money all about?

The concept of Helicopter Money was proposed as an alternative tool of monetary easing in the year 1969 by American economist Milton Friedman. The reasoning was to distribute free money to people which in turn would stimulate private demand in the economy.

This was supposed to be a unique event that would be used only in times of crisis.

Could you please explain the need of using such extreme measures?

Don’t we have other monetary policy tools to combat such situations?

Yes, we do have a number of other traditional monetary policy tools. There have been numerous instances in the past when the interest rates have gone into the negative territory. In such times, the traditional tools lose their relevance and we are forced to look for alternative ways to stimulate our economy.

Desperate times call for desperate measures.

Helicopter Money Finance Club IIM Shillong

Why has no country implemented this proposal until now?

There are multiple reasons for the same.

Firstly, there is no guarantee that people will flock to spend the newly earned money.

Instead, people might believe that there are turbulent times ahead and hence start hoarding money. Also, any attempts of distributing such large amounts of money is sure to bring in hyperinflation in the economy which may end up doing more harm than good.

So how is this concept relevant in the current times? Has it been used anywhere till now?

A lot of advanced economies are currently hovering around zero percent rates.

Countries such as Japan already have negative interest rates. Central Banks across the globe are looking for of now, there have been no instances of application of Helicopter Money. © FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

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ANNOUNCEMENTS ALL ARE INVITED Team Niveshak invites articles from B-Schools all across India. We are looking for original articles related to finance & economics. Students can also contribute puzzles and jokes related to finance & economics. References should be cited wherever necessary.

The best article will be featured as the “Article of the Month” and would be awarded cash prize of Rs.1500/- along with a certificate.

Instructions »» Please send your articles before 24th September, 2017 to niveshak.iims@gmail. com »» The subject line of the mail must be “Article for Niveshak_<Article Title>” »» Do mention your name, institute name and batch with your article »» Please ensure that the entire document has a wordcount between 1500- 2000 »» Format: Microsoft WORD File, Font: - Times New Roman, Size: - 12, Line spacing: 1.5 »» Please do NOT send PDF files and kindly stick to the format »» Number of authors is limited to 2 at maximum »» Mention your e-mail id/ blog if you want the readers to contact you for further discussion »» Also certain entries which could not make the cut to the Niveshak will get figured on our Blog in the ‘Specials’ section

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