Niveshak Feb16

FROM EDITOR’S DESK Niveshak Volume IX ISSUE II FEBRUARY 2016 Faculty Chairman

Prof. P. Saravanan

THE TEAM Aaron Keith Rego Abhishek Bansal Abhishek Jaiswal Aditya Kumar Jain Anisha Khurana Ankur Kumar Ankit Singhal Anoop Prakash Bhawana Saraf Devansh Sheth Maha Singh Gulati Palash Jain Prakhar Nagori Rahul Bajaj Ramesh Jaiswal Sandeep Sharma Shreyans Jain Vishal Khare All images, design and artwork are copyright of IIM Shillong Finance Club ©Finance Club Indian Institute of Management Shillong www.iims-niveshak.com

Dear Niveshaks, The month of February has generated lots of news in the financial world.

The BSE Index Sensex remained below 25,000 mark for the whole month and we also saw big fall on some days mainly due to global cues.

The month started with the good news regarding rise in Manufacturing PMI for January which was noted as 51.1 compared to 49.1 for December.

Also we saw IT behemoth Infosys announcing that it will build world’s tallest tower clock tower.

The decision regarding net neutrality by TRAI clarified the confusion where TRAI did not allow for differential pricing. Also the announcements

by Apple that it will set up tech centre in India added gold to the India’s IT glory.

The month ended with the three most important financial events of the year. Railway budget sought to explore innovative sources of financing, Economic Survey focussed more on the external factors and it forecasted unusually large range of 7 – 7.75% of GDP growth rate for FY17 and the Union Budget also stressed on the turmoil in the external sectors and renewed focus on rural sector.

On magazine front, our cover story is about how Alphabet got its valuation and how start-ups are getting so high valuations in spite of running in losses. The Article of Month describes about the shoddy practices that a Pharma company followed and earned millions. The story shows how a company which is highly valued would be following a shady business model. FinGyaan section of the magazine talks about the boundless opportunities that India possess and shows that much can be done. For FinRewind section we have chosen a topic which explains how OPEC created a financial funding option and what impact it has on the world’s economy.

FinSight explains about the behavioural aspects of finance and focuses on how human behaviour affect the financial decision. The Classroom section explains about LIBOR and what is the method of arriving at LIBOR and some other aspects.

This time we bring you interview from Vivek Agarwal, MD of MTECH INFORMATIC LTD. He talks about Indian IT hardware industry, HR policies, the impact of Land Bill and the measures that should be taken for successful implementation of Start-up India.

To end this brief note, it’s important that we thank you, our readers, for your constant support and appreciation. Please continue to motivate us so that we can come out with more insightful reads in the issues to come.

Keep pouring in.

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 Cover Story Niveshak Times

04 The Month That Was

Article of the month

10 Valeant: A cruel face of

13 Valuation: A proposition or a myth?

Pharma

FinGyaan 16 India: “Land of Opportunities”

Finsight

23 Behavioural Finance

FinRewind

19

OPEC Fund for International Development

FINVIEW

26 VIVEK AGARWAL Managing Director at MTECH INFORMATICS LTD

CLASSROOM

28 LIBOR

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Railway Budget: Balancing Populism with Pragmatism Railway Minister, Shri Suresh Prabhu presented the second railway budget of the current government in the Parliament amid wide expectations. The minister tried to find a middle path with no big announcements while focussing on ongoing projects.

The minister presented the budget for a capex of INR 1.21 lakh crore, which is 20% more than last year. Around 38% of the total capex will come from budgetary support, 14% from internal sources, another 17% from market borrowings, and rest from institutions like LIC. A key change that can be seen in this year’s budget is that the budget has tried innovative sources of finance. Railways will enter into a joint venture with states, issue rupee bonds in foreign markets, develop new PPP models and will deepen engagement with multilateral and bilateral agencies.

Further, Indian Railways will try to increase the share of non-fare earnings from 5% to around 10-20% over the next five years. This will be achieved with measures like bringing all its assets under one company, monetising passenger data, leasing out lands along the tracks for horticulture and solar energy.

A railway auto hub would be set up in Chennai.

This will facilitate transportation of automobiles through railways. Two loco factories have been planned with an order book of Rs. 40,000 crore.

One of the important measures the minister has planned is restructuring of the Railway Board on a business line instead of functional line.

The budget also announced steps to make Indian Railways more tech-savvy. Wi-Fi services in 100 stations by the end of this year and in 400 stations over the next two years, new innovation labs in workshops and production hubs, cancellation of tickets through the 139 helpline using a one-time password are some

FEBRUARY 2016

IIM Shillong of the initiatives to modernise the railways.

Indian Railways is also planning to increase its share of freight which at the moment stands at 30%. Measures like developing three dedicated freight corridors, drafting a freight time table, increasing the average speed of freight trains to 50 KMPH and building logistics parks will be undertaken to attract a higher freight movement.

Economically, it would have been more of a pragmatic budget if the fare hike was announced. However, the political compulsion might not have allowed for such a step. Now the mammoth task is to complete all the work on time and meet the increased financial stress.

Economic Survey This year’s economic survey showed a bigger concern about the world economy. The Survey stated that a major chunk of growth in the domestic economy will be dependent upon external factors.

Uncertain external situations led to the unusually wide projections of 7 - 7.75% GDP growth rate for the next fiscal. The survey also forecasts for the CPI to be around 4.5-5% which will be under the comfort level of RBI. But keeping CPI at this level would be a difficult task considering supply-side issues and the possible impact of the 7th Pay Commission recommendations.

Regarding fiscal deficit, the budget stated that the government can achieve a fiscal deficit target of 3.9% of GDP for FY16. But adhering to 3.5% target for FY17 would be difficult considering the burden of salary revisions and bank recapitalisation.

The survey expects minimal concern for the current account deficit, which would be around 1-1.5% of FY17 GDP, but declining exports is a major concern for domestic companies. The survey also mitigated concern and stated that further rupee depreciation can be expected if

capital inflows slow down.

Government should phase out tax exemptions and increase the tax base from current 5.5% of earning individuals to 20%, as stated by the survey. Also it expected that the tax revenue will be more than the budgeted levels for FY16.

The survey identified three major downside risks – turmoil in global economy, rise in oil prices and a combination of both which could push down the growth in the country.

TRAI Favours Net Neutrality Citing a rise in number of internet users and content providers in India, TRAI ruled in favour of net neutrality. The regulator took a firm stand and completely barred differential pricing of data services. A hefty fine of INR 50,000 per day, subject to a maximum of INR 5 lakh, would be levied upon companies violating the rule.

The regulator said that consumers cannot be charged based on which website, application or type of content they want to use. However, the regulator clarified that in order to bring more users online, the differential rule cannot be applied. For example, companies can offer some free internet usage but it should not be content or website specific.

Fed Rate Increase Slows Down In her testimony before the Congress, the chair of the Federal Reserve ruled out any immediate further increase in the interest rate.

Turmoil in global stock markets, weak commodity prices and weak demand from developing countries led to the Fed deciding on the move.

Moreover, the Fed chief defended the decision of rate hike last year by saying that the US economy is in “many ways close to normal”.

With unemployment close to 5% and inflation inching towards 2%, Fed is confident that the domestic US economy is improving, though there are external factors which may damp down the growth prospects.

The Fed made it clear that the monetary policy of the bank is “accommodative” and further rate increases will take into consideration global factors.

Fed could also go for a negative rate, though the possibility for such a move is very remote.

Lately, it has become quite common for banks to go for a negative interest rate. Currently five central banks - Denmark, the Eurozone, Sweden, Switzerland and Japan - have negative interest rate.

Apple Setting Up Tech Centre in Hyderabad In what could be a big thumbs-up for the Indian IT industry, Apple has said that it will build its first technology development centre outside the US, in Hyderabad. The move comes after other two IT biggies Microsoft and Google have showed interest in expanding their operations in the state of Telangana.

Apple will invest around $25 million and will employ about 4500 people. The move comes after the company got a license for single-brand retail and will use it for opening retail stores in the country. At present, it sells its products through third parties but the government relaxed the rules for single brand retail and local procurement conditions for high tech companies. The steps, in our opinion seem to materialize in the right direction.

Reliance Jio is “ready” to Roll Mukesh Ambani led Reliance Jio Infocomm is “ready” to roll out its 4G service in the country.

The company has ambitious plan of expanding to the whole country and will cover 80% of 1.3 billion people by the second-half of 2016. By the end of 2017, 90% of the population could enjoy its services.

Reliance Jio Infocomm is the only company which has a pan-India license for 4G services.

This will bring intense competition in the industry, which will push prices down for customers.

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

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The Month That Was

The Month That Was

4

6

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Article ofSnapshot the Month Market Cover Story

Market Snapshot

Article Market of Snapshot the Month Cover Story

Market Snapshot

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BSE Index BSE

DII

2,500

FII

2,000

24500

1,500

BSE

24000

1,000 500

23500

0

23000

-500 -1,000

22500

26-02-2016

25-02-2016

24-02-2016

23-02-2016

22-02-2016

19-02-2016

18-02-2016

17-02-2016

16-02-2016

15-02-2016

12-02-2016

11-02-2016

10-02-2016

09-02-2016

08-02-2016

05-02-2016

04-02-2016

03-02-2016

02-02-2016

01-02-2016

22000

-1,500 -2,000

FII, DII Net turnover (in Rs. Crores)

25000

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

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

85,83,145 Source: www.bseindia.com

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

68.63 75.08 60.78 95.20 48.52

LENDING / DEPOSIT RATES Base rate Deposit rate

9.30%-9.70% 7.00% - 7.90%

8.00%

Euro/1 USD

6.00% 4.00%

GBP/1 USD

JPY/1 USD

CRR

4.00%

-7.51% -7.00% -10.16% -9.13% -9.27% -4.36% -6.73% -8.38% -1.96% -11.28% -13.93% -13.07% -6.98% -12.16% -8.08% -11.37%

24871 17046 17604 12368 12183 7438 16305 11165 6894 9258 1838 1209 5928 10870 10417 6235

23002 15852 15815 11239 11054 7114 15208 10229 6759 8214 1582 1051 5514 9548 9575 5526

% CHANGE

SLR

21.50%

TECK, -6.98% Smallcap, -12.16% REALTY, -13.07% PSU, -11.37% POWER, -13.93% OIL&GAS, -11.28%

SGD/1 USD

MIDCAP, -8.08%

POLICY RATES Bank Rate Repo rate Reverse Repo rate

7.75% 6.75% 5.75%

0.00%

-4.00%

Close

% Change

2.00%

-2.00%

Open

RESERVE RATIOS

CURRENCY MOVEMENTS INR/1 USD

Sensex AUTO BANKEX CG CD FMCG Healthcare IT METAL OIL&GAS POWER REALTY TECK Smallcap MIDCAP PSU

% change

METAL, -1.96% IT, -8.38% Healthcare, -6.73% FMCG, -4.36% CD, -9.27% CG, -9.13% BANKEX, -10.16% AUTO, -7.00% Sensex, -7.51%

1

Source: www.bseindia.com 1st Feb 2016 to 29th Feb 2016 Data as on 29th February 2016

-6.00%

FEBRUARY 2016

© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

Performance Evaluation

Niveshak Investment Fund

Done on 30/6/14

Bank (6.73%)

HCL Tech.

HDFC Bank Wg: 6.60% Gain: 5.5%

Infosys

TCS

Wg: 4.78% Gain : 8.57%

Wg: 4.25% Gain: 33.53%

Wg: 4.11% Gain : -11.46%

FMCG(21.66%) Colgate HUL

Britannia

Wg: 5.81% Gain : 7.22%

Wg: 7.27% Gain: 173.72%

Wg: 5.00% Gain: 17.85%

Tata Motors Wg: 3.62% Gain: -33.05%

Amara Raja Wg: 4.82% Gain: 18.62%

Godrej Consm.

Wg: 7.22% Gain: 36.69%

Dr Reddy’s Labs Wg: 4.57% Gain: 4.97%

Lupin Wg: 8.58% Gain : 51.77%

Midcap Stocks (12.63%) Bharat Forge Wg: 3.94% Gain: -19.05%

Kalpataru Power Wg: 3.11% Gain: -36.86%

ITC

Wg: 4.68% Gain: -13.92%

Titan Company Wg: 4.17% Gain: --15.56%

Chemicals (8.07%)

Pharmaceuticals (12.21%)

Natco Pharma Wg: 3.94% Gain: -19.01%

175

102

165

100

155

98

145

96

135

Asian Paints Wg: 8.31% Gain: 34.94%

Textile (6.16%) Page Indus.

Wg: 5.22% Gain : -5.76%

Scaled SENSEX Scaled NIF

115

92

105

90 88

Performance of Niveshak Investment Fund since Inception

125

94

Misc. (11.04%)

Auto (8.34%)

February Performance of Nivehshak Investment Fund

95 1/2

4/2

7/2

10/2 13/2 16/2 19/2 22/2 25/2 28/2 Scaled Sensex

Scaled NIF

Opening Portfolio Value : 10,00,000 Current Portfolio Value : 1326800 Change in Portfolio Value : 32.68% Change in Sensex : 12.21%

30-Jan-14 04-Mar-14 03-Apr-14 13-May-14 16-Jun-14 17-Jul-14 20-08-2014 22-09-2014 27-10-2014 28-11-2014 31-12-2014 02-02-2015 04-03-2015 08-04-2015 12-05-2015 11-06-2015 13-07-2015 12-08-2015 11-09-2015 16-10-2015 19-11-2015 22-Dec-15 22-Jan-16 24-Feb-16

Information Technology(13.16%)

As on 29th February 2016

Value Scaled to 100

Risk Measures: Standard Deviation : 19.24 (Sensex 10.56) Sharpe Ratio : 1.49 (Sensex : 0.78) Cash Remaining: 58,000

Comments on NIF’s Performance & Way Ahead: The markets continued to experience a downward trend closing at 23,002. The run up to the budget as well as a weak global sentiment led to a sustained fall in the Indian markets.

The budget which was released on the 29th did little to soothe the market sentiments as it was viewed to be a pro-farmer budget. The Pharma and Manufacturing sectors barely saw any incentive whereas the Infrastructure sector saw a significant thrust.

The coming month will probably see sustained uncertainty as the global pressures and the budget session of parliament acting as a major trigger for any upcoming moves. The top performing stock in the portfolio for the previous month was Infosys whereas Natco Pharma was the worst performing .

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Valeant: A cruel face of Pharma AdityaPandey

IIM Shillong Introduction It was around September last year when a pharmaceutical entrepreneur jacked up the price of a life-saving drug from $13.50 to $750 – an eye-popping rise of 5000 % in a single day in U.S. The company- Turing Pharmaceuticals faced a public backlash over an attempt of price gouging. The company’s CEO: Martin Shkreli was hounded by the media and public activists for trying to dehumanize the profession.

Eventually, the glare shifted to the big fishes in the pond. Valeant- ranked 31 on Forbes list of most innovative companies was the big shark roaming around the Pharma Ocean with impunity. The company’s business model was a stark reminder of the AHPC of the 1970s – using marketing prowess rather than R & D to expand their business. Valeant took long strides under the leash of its chiefexecutive, Mike Pearson, who helped the company leapfrog all investors’ expectations through a spate of acquisitions and aggressive marketing instead of investing in R & D. Valeant stood on a slippery slope after Hillary Clinton’s pledge to crack down on price gouging. It was only a matter of time until an avalanche would bury an egregious offender among drug makers.

Shady business model: Valeant represents a true face of American capitalism. The company was a “mecca” for hedge fund managers owing to its profitmaking capabilities. Giants in hedge fund industry like Bill Ackman, Jeffrey Ubben and John Paulson were among the shareholders.

The company didn’t fail them.

Since June 2010, Valeant’s share price has appreciated by almost 500 % versus 73 percent for Johnson & Johnson and 116 percent for Pfizer. It is a quintessential five-

FEBRUARY 2016

bagger deal. Every aspect looks rosy until one sees the company’s balance sheet. The company’s acquisitions have been fueled basically by the debt available at throw-away prices. But now since the music has stopped, the irrational exuberance has given way to fear and widespread panic among investors.

Investors believe that the company’s business model is built on a weak social foundation: price gouging; secret liaison with specialty pharmacies; and focus on short-term profitability. The shares have taken a beating after the news of faulty business model came up.

The exhibit 1 demonstrates how the company’s revenue growth is disconnected to its operating income. The correlation between the two variables approximates to 0.491. Revenue growth rate has sky-rocketed after 2010 due to a string of acquisitions dominated by Bausch & Lomb and Salix Pharmaceuticals. The exhibit 2 clearly states how company’s debt has ballooned in respect to its equity. This is due to the fact that Valeant has accumulated more debt to finance its Mergers & Acquistion activities.

This is a serious cause of concern because it entails that the company pay a fixed interest payment periodically. That requires a good positive cash flow. So, in retrospect, acquisitions have become necessary to bring in cash flows to service the debt. The entire process has turned into a vicious cycle.

Allergan, in the same industry has a healthy debt/equity ratio.

Aswath Damodaran estimates the fair value of Valeant’s stock at $72.10 and dismisses the Citron Research’s idea that the stock is a bubble. “Given my perspective on the company, and it is undoubtedly flawed, I don’t see Valeant as a significantly undervalued stock. I also don’t see it as a bubble waiting to burst, a stock heading towards being worth

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Article of the Month Cover Story

Article of the Month Cover Story

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nothing.”

Price gouging strategy: Valeant price rises just do not portend well for anyone except its own interests.

The company jacked up the prices of 56 drugs: a staggering 81 % of its portfolio last year, as per analysts at Deutsche Bank. The average price increase hovered around 66 percent, compared to an industry average

of 20 percent price hike. What we are talking about is healthcare not a business unrelated to humans. Price gouging might work in the short-term, but Valeant could not go on gobbling other competitors. Eventually, I believe competition would drive the prices down and throw Valeant into a downward spiral. Also price gouging has drawn scathing remarks from House Committee

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on Oversight & Government Reform that Valeant had bloated price of drugs to attain its revenue target.

The Philidor connection: Valeant’s shares suffered a precipitous decline after a report by Citron Research dubbed the company’s stock “toxic” citing reasons that the stock exploded due to the revenues generated from Valeant’s undisclosed relationship with specialty pharma, namely Philidor RX. Valeant had been consolidating Philidor’s financials in its own books.

“It is apparent to Citron that Valeant has created a network of ‘pharmacies’ as clones of Philidor. Why do these exist? Citron believes it is merely for the purpose of phantom sales or stuff the channel, and avoid scrutiny from the auditors,” Citron wrote.

SIRF report highlights that a court filing was made by a company called R & O Pharmacy, in which the small pharmacy alleged Valeant of improper demand to the tune of $69 million for products that it had never received.

“Is this Enron part Deux?” Citron asks, rhetorically. “These similarities are too close to ignore,” it concludes.

The company came under rapid short selling pressure after the investors were left jittery over the feasibility of company’s business model, its’ future prospects and large scale scrutiny by media and other analysts.

With investors trying to reduce their exposure, Michael Pearson tried to calm the frayed nerves of investors by asserting that in the future, the company would try to rely less on revenue through price hikes and focus more on the research and development side.

This is quite contrary to its “magic potion”

FEBRUARY 2016

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business model that had allowed it to find refuge in many hedge fund portfolios. Also, the company has severed ties with Philidor.

Valeant, in its effort to grow at a healthy pace has avoided organic growth and in the process has brought disrepute to the pharmaceutical sector. It has discredited the works of various scientists, researchers and doctors who work round the clock to find cure for lethal diseases.

However, the poster boy of hedge fund industry, Bill Ackman remains optimistic about the company’s fundamentals. He even went further to buy 2 million shares of Valeant when the stock was trading at its historic low over last 2-3 years.

The R & D Jinx: The roaring success of Valeant’s business model opened an opportunity for imitation. Investors in competing companies were stranded on crossroads, unable to decide whether to pursue smaller margin growth model fueled

by R & D or go for high stakes model fueled by mergers & acquisitions.

Valeant’s move to embrace R & D after the recent debacle has been welcomed by the investors but it’s hard for me to digest. It seems more like an eleventh hour attempt to douse the fire. It seems absurd that the company which has abhorred the idea of R & D as “stupid” endorses the same idea to pacify its investors. It’s like a B + group patient being transfused with blood of AB + group. It won’t last long. Valeant is like a house of cards built on an inclined tabledoomed to fall unless real measures are taken to incorporate R & D as an ingrained machinery of the entire system.

Valuation: A proposition or a myth?

AnishaKhurana

IIM Shillong Introduction

these companies touching the figure.

In the beginning of February of 2016, Apple lost its title of the world’s highly valued company when Google’s newly restructured parent company Alphabet Inc. declared its results, but it regained its crown within a short span of two days.

Let’s think about why did this happen? Did these companies ran behind the valuation by fooling around with the investors’ expectations, or were they unable to maintain their performance after they reached the summit? Ideally, the second argument should not hold true because if a company is able to attain the $700 billion mark, it wouldn’t be hard for it to reach the $1 trillion valuation. So, Is it very tough to stay at the top or is it the expectations of the investors and analysts that become insurmountable?

The motivation behind the restructuring is to make Google, “cleaner and more accountable”.

In the words of Larry Page, CEO – Alphabet, Alphabet is a collection of companies. With this change in Google structure, investors are betting high on Alphabet Inc. and are speculating that it will reach the big $1 trillion Well, everybody knows how it works on the mark in the near future, a dream dreamt stock market. To an investor what matters in

for Apple, not so long back when it crossed $700 billion mark in the second half of 2015.

Becoming the first company to attain the $700 billion mark, all investors and analysts wondered, “How far can Apple go?” They believed strongly that Apple was a train with no intermediate stations, and that it would swiftly reach the $1 trillion valuation.

About 10-15 years ago, stocks of Microsoft and Cisco met a similar fate when they were expected to cross the magical figure of $1 trillion. However, today, continuing on the lines of Apple, these companies are also far behind the mark, and worse, nobody on the Wall Street would now place their bets on

the longer term is the growth trajectory of the business. It’s not so much about where you are now, but the difference between where you have been and where you are heading. Taking the example of Apple again, we observe that its hitherto best quarterly results for its first quarter ended December 26,2015 did not yield a substantial impact on the scrip. This happened because the market had already factored in such a high result of the company and the reality was not quite different from the expectations. On the other hand, investors of Alphabet were taken by quite a surprise when the company announced its R&D budget for the moonshot projects. This led to skyrocketing

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of Alphabet’s share price.

In addition to the investors’ expectations, another behavioral factor that affects share prices in the long-term is the quantum of risk that investors associate with the company.

Apple Inc. has always been secretive about its plans, be it product launch or geographic expansion, keeping the investors on the edge of their seats. Risk-averse investors would prefer companies which provide transparent information over the likes of Apple. On the other hand, people who believed in Apple reaped benefits when iPhone and iPod were launched and the veil of perceived risk was lifted.

In the short-term, it is a different ballgame altogether as the expectations of the analysts matters much more than the company’s performance. Organizations that have performed exceptionally well in the past have been, sometimes, punished for not meeting the expectations. For instance, the street’s reaction to the quarterly results of Amazon and Microsoft illustrates this phenomenon strikingly. Despite delivering a stellar topline performance, Amazon’s shares nosedived because the results missed Wall Street forecasts.

The company reported profits for the third consecutive quarter, which translated into an EPS of $1.00, against the analysts’ prediction of $1.58. In contrast, the share prices of Microsoft surged because it did not reveal profits as low as it was predicted.

In the current scenario, however, we see the impact of short-term expectations on the long-term trajectory of these highly valued businesses. Yes, the trends are changing to a certain extent. Alphabet was the highly valued company for just two days and soon after, Apple regained its crown.

Scenario of Indian e-commerce industry At present, the Indian e-commerce industry is in nascent stage and contributes only 0.6% to the GDP of the country compared to 1-3% in the western countries. However, the industry has grown at a steadfast rate of 34%

FEBRUARY 2016

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compounded annually from FY 2009. Online retail and marketplace sector is the fastest growing segment with a CAGR of around 56% from FY 09.

In terms of market capitalization, industry is worth USD 23 billion in 2015 from USD 3.8 billlion in 2009 and is slated to continue grow and touch a market cap of USD 100 billlion over the next 5 years with a CAGR of 35% due to rise in mobile penetration and per capita income of middle class population. India’s e-tailing channels are forecast to account for about 10% of the overall retail market in 2025.

Asset Price Bubble Indian Business Industry has reached a stage where it is experiencing a wave, in which companies with an ‘e-“ as a prefix or ‘.com’ as a suffix are riding high on valuations.

Reason can be because of Asset Price Bubble, in which, value of assets rises much faster than the value justified by fundamentals. And, after a point of time, the high prices become unsustainable and they fall dramatically until the asset is valued at or even below its true worth. In E-Commerce industry, since many of the companies are not listed, underlying would be the book value of the business.

Due to this, Eight Indian startups had become unicorns, with valuations exceeding $1 billion.

In which, Flipkart has become the flag bearer with valuation at $15.2 billion.

industry and investment gurus. In an interview, Rakesh Jhunjhunwala said that the industry is highly overvalued and that these e-commerce companies are playing a valuation game by raising funding from angel investors.

Traditionally, profitability has been an important score card for valuation. With focus on customer acquisition, the e-commerce companies have been able to improve their top-line, but, at the cost of the bottom-line due to investments in logistics, heavy discount schemes etc. At present, it seems that investors in these companies are not much concerned about profitability but are basing their decisions on the future plans of these companies. Thus, we can say that the high valuations are, once again, a mix of investor expectations and growth trajectory of the industry. However, valuations are driven more by sentiments and speculations about the future potential of business rather than the fundamentals, current earnings and profitability.

Customer satisfaction, customer acquisitions, firm acquisitions go a long way in making a firm highly valuable. But using heavy discounts to attract customers may not work in the long run as the price-sensitive customers will move to a competitor when it offers lower prices.

The e-commerce companies should focus on customer loyalty measures to limit the switching rate of customers.

According to an article published in Business Standard, in comparison to the traditional brick and mortar businesses, companies in the internet-based businesses tend to trade at high multiples of 20-50 times leading EPS due to the very nature of high growth estimates.

Long-term growth trajectory of business is an important factor in valuation instead of just customer acquisition. Valuations of a company should also be based on the profit generated so far, rate of return on investment, dividend policy, apart from a few qualitative factors such as the business model, quality of management, inherent strengths and risks of the industry. It is no doubt that due to these factors, companies such as Infosys have always been a favorite of the investors. Compared to it, Amazon declared quarterly profit results after 21 years.

But, a question arises, are the high valuations of these companies justified at this point of time?

Well, there are mixed responses from various

In words of Devangshu Dutta, Chief Executive Third Eyesight, “If a company is losing money on every transaction, then the business model

Why is this happening?

For an asset price bubble to form, probable causes can be inflation, excessive monetary liquidity and in some cases, where too much money is chasing too few assets.

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is not sustainable,”.

So, can we say that business model followed by e-commerce companies is not sustainable?

If this is the case, the focus certainly needs to shift from rapidly expanding and capturing market share to building a sustainable business with fundamental business model.

Is the Asset Price Bubble bursting?

Flipkart for the first time in history faced a drop in Market Cap from USD 15.2 billion to USD 11.1 billion. Drop is on account of Morgan Stanley slashing its investment value to $103.97 per share from $142. Almost 27% markdown will have impact on the next round of funding talks with investors.

Investment gurus are expecting correction in the sky-high valuations of these companies.

In words of Mohandas Pai, ex-Infosys Board member: “These downgrades will happen in e-commerce till there is proper business model.

The euphoria of fundraising at high valuations have to come to some reality and the current model of business is unviable because of the discount led model and high returns.”

Investors are speculating the reasons for marking down the investment as continued losses, paucity of funds and economic outlook of the country. The fall will have a domino effect on the valuations of other e-commerce players in the market. But the important question is how will these companies meet their funding needs. As per one report, the sector needs another $20 billion of funding to reach sustainability. And, it will need to spend between $950 million and $1.9 billion on logistics and warehousing.

Will the venture capitalists have this level of appetite for the risk looming over this sector?

Question which questions fundamental business model of this sector is, “If fluctuations are of such high magnitude, don’t we stand at a place where expectations of the market are to be questioned as a parameter of Valuations….

Or do we?”

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Cover Story

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ABSTRACT India is a young nation with a huge demographic potential of which 50% of the population are below age 25 and 65% are below age 35 as per 2011 statistics.

Demographic transition in India may open up new economic opportunities.

This article is about the performance of our economic growth indicators and the opportunities, threats that India is posed with. A clear idea of the strengths and weaknesses of our economy is to be known for making the best use of it. This article focuses mainly on the human capital and its impact on the economic indicators. For that purpose, Human Development Index (HDI) is used as the basis to explain how composite development could be brought in. HDI considers various parameters such as Life expectancy, Education and Income level of a citizen.

ECONOMIC GROWTH INDICATORS: 1. Income Parameters a) GDP PPP

Based on the past data, PPP is reported to have had an increasing trend, which can be substantiated by a similar trend shown by GDP per person. This is a positive outlook for economic growth. b) Poverty

The poverty head count ratio and the poverty gap at BPL criteria of $1.90/day in India have been showing a declining trend of 31% and 11% approx. respectively (1983-2011). This might seem to be a good scenario but looking at it in terms of Literacy and unemployment gives us a different picture.

Our country has reported a fairly stable trend to reduce the poverty in the past years. In the year 1993, when the economy was liberalized there were policies

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SIVA SHANMUGAM TS, CHINTAPALLI KARTHIK Bharathidasan Institute of Management

drafted especially for the increase in foreign investments into the country. This led to increase in the economic growth at the cost of income disparity in the country. This may have a negative effect of increasing crime rates in the future if the same trend continues. The income disparity has been increasing since 2000 with decreasing poverty rate, which clearly points out an area where skills can be improved to grab the opportunities.

This ultimately fills the gap between income levels of people in the country.

2. Health Care Health is more important than wealth conveys an age-old saying. For any citizen to acquire his fullest potential he must be in good health. India has done a good job in this segment but there still is a long way to go.

India has over 5 lakh Doctors with 1.6 lakh sub-centers, 22000+ Primary Health centers and 2500+ Community health centers and 2800 hospitals. Life expectancy in India has been improving over the years. This is a favorable indication. On the other side, the hygiene in our country also has to be elevated from the current situation of 58.3% of contaminated water Major issues of Health care in India are:

a) Rural and Urban divide

b) Lack of access

c) Migration to Urban Slums

d)There is a huge issue of infant

and child mortality.

- 70 out 1000 child die during the

first year and 98 before vide years.

- 22% of infants are under weight

e) Accountability of staffs in Public

health organizations 3. Skill Development The GDP of the country depends critically

COMPARING COUNTRIES

INDIA

WITH

OTHER

1. Youth Unemployment The youth unemployment rate in India is 10.69% in 2012.The countries with similar growth transition as that of India and almost similar youth unemployment rates are Malaysia and South Korea a) Malaysia

During the tenth period plan (20112015) the government of Malaysia has adopted and integrated human capital and talent development framework.

This plan was to nurture and develop Malaysians across their entire life cycle by specifically revamping the education system to significantly raise student outcomes, raising the skill of Malaysians to increase employability, reforming the labor market to transform Malaysia into a high-income nation. By working on this model it was effective in bringing down its unemployment rate. b) South Korea

South Korea is an interesting example when it comes to managing unemployment.

The youth unemployment rate in South Korea is stubbornly high that the government is helping young job seekers look over seas for work.

The youth unemployment rate reached 10.1% in June 2015, the highest in 15 years. The difficult part in implementing such overseas job option programs is about getting trade certifications.

But once India gets through the trade certification it can create a great impact in reducing the social distress that is rising in the country.

2. Health Health is an important indicator for calculating HDI. China, which has the population similar to that of India, can be taken for comparison. a) China

China has embarked on its growth path about a decade before India. They have controlled the spread of disease to a large extent. Also, public policy backed by social and resource mobilization has helped them gain an upper hand.

China has a life expectancy of 69 years for male and 73 years for female whereas

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FinGyaan Cover Story

India: “Land of opportunities”

on the productivity of its youth. It has 3 facts to be considered

A. Education/Skill formation

among youth

B. Productive employment among youth.

C. Correspondence between the

skills set supplied and demanded

in the labor market.

When comparing India to other world countries like South Korea, Japan, Germany, UK, India seems to drastically lag behind (only 2%) in terms of percentage of formally skilled work force.

This shows that the first criterion remains to be of a great concern. Based on the skill gap forecast for 2011-12 by EY there is found to be a deficit in the case of skilled and semi-skilled labor.

Taking the above facts into consideration it can be seen that India with a huge potential to tap its human capital has not fared well in this aspect. This is a great opportunity to be worked upon for a country like India, which is aspiring to grow at a rapid pace. a) Unemployment The secondary education enrollment ratio has been increasing from 24% to 72% for the period (19712011). The tertiary enrollment ratios have also shown a similar trend. The youth unemployment rate has been increasing during the same period. In 2011, it was around 10.7% due to ineffective policies. This projects a serious threat to India. But India should work on skill development and make the educated youth employable and industry ready. b) Migration of Rural Population

Rural population growth reported a decline with an increase in the urban population. This clearly shows that there is a major shift from agricultural work force to Industrial work force. The international migrant stock as a percentage of the population is showing a decreasing trend since 1985.This is a substantiation for increasing the workforce in India.

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India has 67.3 years for male and 69.6 years for female. Even though percentage of GDP spend by India is greater than China we must note that the Chinese Government spends about 38% of total expenditure in Healthcare whereas India spends only 15%.

RECOMMENDATIONS The current systems in place are not effective to ease the pressure on the resources created by the growing population. However, as India aspires to grow more and more, it needs to bring the best out of all its resources of which Demography certainly is the most important one. We have categorized our recommendations to engage the policy thought in a multi-pronged approach.

1. Education Kerala recently achieved 100% primary education and was the first state to do so. Successive governments in the state were committed to the objective and devised schemes (“Athulyam” for example) to achieve the same. The possibility of adopting Kerala’s approach elsewhere is an attractive proposition. To enable this, we propose the creation of ‘Knowledge Sharing’ mechanism where states will be able to share their best practices.

Education spending as a %age of GDP has been very low (3-3.5%, World bank).

This has to be increased to revamp ailing universities, attract best talent for pedagogy, bring about more number of quality institutions of higher education to destress the existing IITs, IIMs etc.

Encouraging high quality research and providing R&D support are other measures that can be considered.

2. Health Care The first step in improving healthcare system in India is to provide budgetary impetus to Public Health Infrastructure.

Conceive and execute the idea of a regulator that would facilitate public health development by overseeing -

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adoption of performance based system to create facilities in urban/rural local bodies, Public – Private synergy, building a system for redressal of patient grievances, risk pooling initiatives through insurance mechanisms, improved Quarantine facilities at public places (like ports, airports), ensure quality at all levels etc.

3. Skill and Employment The government should create an integrated human capital and talent development framework to increase the skilled labor in the sectors given below. The current government’s initiative of skill India portal should work towards providing skill sets to the Indian workforce so that they meet the growing industrial requirements and thus avoiding skill deficit. Skills can be developed by changing the current education system which integrates vocational and conventional education.

4. Poverty and Inequality Although the poverty levels have come down significantly over the last decade, there has been a steep increase in income inequality.

Such a situation will lead to increase in crime rates. Handling this situation will call for creation of quality employment opportunities. This in turn emphasizes the need for skill development.

The prime focus should be to develop rural infrastructure comparable to urban ones. Development of Municipal corporations, forging in professionalism and infusing accountability on their part can help in removal of poverty. This can also help them avail debts in market.

Direct benefit transfer (minimizing/ removing subsidies) through its clear focus can also help to reduce poverty.

This helps in proper channelization of resources.

OPEC Fund for International Development: Creating a Global Footprint DevanshSheth

Multilateral Development Financing Institutions A Multilateral Finance Institution (MFI) is almost the same as a Multilateral Development Bank (MDB), the only difference between the two being that MFIs have a clause of limited membership and their financing is more focused toward a specific purpose or region. Over the years many such institutions like Nordic Investment Bank, International Investment Bank, International Finance Facility for immunization, and many more have been formed in order to cater to the world’s continuously growing needs for finance.

These institutions provide financing and professional advisory services to countries in need of funds in order to help them grow and develop.

Formation of OPEC Fund for International Development The Organization of Petroleum Exporting Countries (OPEC) was formed in September 1960 at the Baghdad Conference through an agreement between Iran, Iraq, Kuwait, Saudi Arabia and Venezuela in response to the quotas on oil imports set by the U.S. government in order to bring down the oil prices. Over the years the number of members has increased to twelve. The tradition of providing flexible, untied, and highly concessional assistance has been practiced by the wider family of OPEC aid institutions for over three decades. Bilateral aid began in 1961 with the establishment of the Kuwait Fund for Arab Economic Development. Six other OPEC countries - the United Arab Emirates, Iraq, Saudi

IIM Shillong

Arabia, Venezuela, Libya, and Iran soon followed suit. The joint move into multilateral development financing came in the 1970s when OPEC Member States, acting in partnership, decided to pool resources and coordinate activities in pursuit of greater effectiveness and relevance in the field of development assistance delivery. Thus, in 1976 OPEC Fund for International Development (OFID), headquartered at Vienna, was formed with the aim to provide assistance to fellow developing and underdeveloped countries whenever required. Over the years, OFID has provided the aid to various countries in forms of loans, grants, and equity participation in an attempt to maximize the impact of the assistance delivered and to meet the changing needs of the beneficiary countries along with maintaining the status quo.

OFID Aids and Resources The OFID provides financial assistance through various forms for activities like development projects and programs, funding requirement support for Balance of Payments, trade financing, technical assistance, food aid, research activities, humanitarian emergency relief, etc. The OFID started with an initial fund of $800 million, which has increased significantly over the years, not only through contribution by the member countries, but also through returns from the loans and grants provided to developing and underdeveloped countries. In 2011, the organization, with the unanimous decision of all the member countries, received a

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funding of $1 billion in order to provide for the increasing needs of developing countries because of the negative impact the financial crisis had on these economies.

Over the years the OFID has also been increasing its footprint by providing assistance to various countries in need of financial assistance. As of 2014, OFID was serving around 134 countries, though the policy has always been to provide priority in assistance to the least developed countries. Also, it has been a norm that the member countries do not benefit out of the fund except in case of an emergency or a disaster. OFID has also assisted the International Monetary Fund (IMF), World Bank, United Nations Organization (UNO), and other organizations in their various operations across the globe.

Focus Areas Agriculture – Providing aids for the development of rural infrastructure such as irrigation systems, storage facilities, and also promoting research and innovation.

Education – Funding the education for students by building schools, providing teaching staff with proper training, and also sponsoring the participation of students at various workshops and conference.

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Energy – Funding various projects of infrastructure creation, equipment provision, research and capacity building, in partnership with UN’s Sustainable Energy for All initiative.

Financial – Channelling support through funding micro, small, and medium sized enterprises (MSMEs) through various financial intermediaries such as development banks and commercial banks.

Health – Providing aids to various countries for constructing and modernizing their health infrastructure through primary healthcare programs. OFID has also been an active partner in the global fight against HIV/AIDS through a special grant program.

Water & Sanitation – Various initiatives have been undertaken by OFID to provide clean drinking water and hygienic sanitation facilities which include investments in building water storage facilities, water treatment projects, village pumps, and school latrines.

Industry & Multi Sectoral Investments – Various undertakings in the telecommunication and transportation industries by partnering for development of infrastructure framework and improving

the current existing facilities.

Initiatives & Grants Energy for the Poor – This initiative emerged as a part of a declaration of the third OPEC Summit which took place in Riyadh in November 2007. This declaration aimed at complete eradication of energy poverty as the top priority and the OFID has also stepped on the gas ever since. In June 2012, $1 billion was allocated to fund the Energy for the Poor Initiative and OFID is also scaling up its operations in the energy sector. Because of the Energy for the Poor Initiative, OFID has become a key strategic partner in the UN’s Sustainable Energy for All program popularly known as SE4ALL whose three major goals are universal access to sustainable energy, to double energy efficiency, and to double the share of renewables by 2020 which are on the same lines as the goals of Energy for the Poor Initiative.

Public Sector Lending – OFID’s operations are mainly centred around providing loans at concessional rates to the governments of partner countries in support of their national development strategies. Almost two-thirds of the total commitments are accounted for by the public sector where the major factor for lending is the Gross National Income (GNI) of the partner country. Also, another initiative taken up by the OFID is the Heavily Indebted Poor Countries Initiative where they contribute to the 38 developing countries recognized by the International Monetary Fund (IMF) and World Bank as the countries with high levels of poverty and a huge debt, which are eligible for special assistance from the IMF and World Bank.

Private Sector Lending – In order to cater to this sector the Private Sector Facility (PSF) was established in 1998. PSF provided financial assistance to the companies or sectors covered under the national private sector development strategies of the partner countries. The aim was to promote

economic development by pushing for growth of productive private enterprise in developing countries and supporting the development of local capital markets which would help stimulate economic and social growth through generation of jobs and income, thereby reducing poverty.

Trade Finance Facility – Established in 2006, OFID’s Trade Finance Facility (TFF) broadened its means to alleviate poverty and promote economic development. TFF makes investment that are developmentally and financially sound in order to earn an expected market based return which increases the fund investments in other initiatives. The major investments are done to support the import/export of various goods where OFID can be assured of returns.

Palestine – The program has been designed to infuse growth and development in the West Bank and Gaza, as well as to provide relief in times of crisis.

Emergency Relief Aid – Tries to alleviate the suffering of the victims during any emergency by providing assistance through specialized relief agencies. This is the only initiative whose benefits can be reaped by the member countries as well.

Apart from the various initiatives taken by OFID, it has also made contributions to other specific funds and MFIs such as Common Fund for Commodities (CFC), International Fund for Agricultural Development (IFAD), International Monetary Fund Trust, which has helped these institutions in fulfilling their goals and tasks with much more ease and has also helped in providing more benefits to the developing countries.

Overview of current operations As of September 2014, the total approved commitments of OFID stood at $17,546 million. OFID’s financing is open to every non-OPEC developing country; however, the least developed and the heavily indebted countries are accorded a priority and a larger share in the funds of the

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organization. At the beginning of 2014, the resources of OFID stood at $6885 million.

By the end of September 2014, OFID had approved a cumulative amount of $11,632 million committed to 1440 public sector loans of which $7091 million had already been disbursed of which two-thirds of the outstanding loans were provided to low income countries and half of them were allocated to Africa. Under the Private Sector Facility (PSF), 214 operations had been approved by the end of September 2014 which accounted for $2266 Million being committed to these operations.

Of the committed financial aids, $1302 million had already been disbursed.

The Trade Financing Facility (TFF) had committed to investing $2250 million in risk sharing guarantees of which $1778 million had already been disbursed by the end of September 2014. 1608 grants had been approved by OFID for providing $596 Million to various initiatives and grants along with financing various MFIs and other organizations. Over 60% of the funds under every financial mechanism have been disbursed which also indicates that OFID does not just commit to an initiative but it works with all its strength and resources to achieve any task that has

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been undertaken.

Benefits of OFID to OPEC Over the years, OPEC has been able to create its global footprint through various initiatives and investments in various countries. OFID has also tried to diversify its operations and tried to be sustainable by not just providing loans but also providing aids through equity participation under which not only the country that gets aid is benefitted but also the OPEC countries are benefitted, as when the economy develops, it would provide higher returns to OFID which in turn would help in generating more funds for investment into the underdeveloped and developing economies. The fund has also created a footprint for the OPEC countries to leverage upon in this crisis situation where the oil prices have been constantly falling down due to low demand. They now have the trust of a majority of developing and underdeveloped economies as they have provided loans and grants to almost 134 countries who now owe OPEC and might feel obligated to buy from OPEC even if they have other alternatives. Thus, the vision of creating a global footprint can pay rich dividends to OPEC in the future as well.

BEHAVIOURAL FINANCE: AN EMOTIONAL ATTITUDE TOWARDS ECONOMY ParagRay

NIT Warangal (Management) INTRODUCTION Investor’s psychology always plays an effective role in financial markets by creating the investor’s bias about the financial markets. The attitude towards investment and the economic behavior of an investor are not always logical.

According to Adam Smith, there is an insight into the human psychology which is further developed today into behavioral finance. This theory gives a complete idea of how financial factors like market price, cash flow, investment, return on investment and resource allocation are profoundly influenced and affected by the emotional behavior of the individual and a specific institution. In 1900, a new term neo-classical economy coined it say about the mathematical evaluation of prices, cost, profit, sales turnover, outputs, and income distributions. This process is the base of the behavioral model of finance.

This behavioral aspect tells about the slightly less logical financial decision and its effects. This wing of finance deals with principles of anthropology, psychology, sociology and other social sciences. Again along with behavioral biases, the way to restrict is also the contents of the subject behavioral finance.

LITERATURE REVIEW Although the existence of behavioral biases among some investors is an essential component of behavioral finance, a second key strand relates to the limits to arbitrage. (Alistair Byrne, CFA University of Edinburgh, 2008).

The principle of behavioral finance is based on economic theory. Fundamental Analysis and the study of the psychological mood of the market should be examined before investment. (Dr. Deepak Sahni, Professor in Finance, Shri Guru Ram Rai Institute of Technology & Sciences, Dehradun).

According to Jay R. Ritter (2003), Behavioral finance encompasses research that drops the traditional assumptions of expected utility maximization with rational investors in efficient markets.

Intense research on behavioral property or real estate has the only intention to understand human judgment towards bias and seemingly irrational behavior.

Along with that, it also examines that whether an understanding of these helps to improve our interpretation of the way the players in the market make decisions and get some conclusions (Gallimore, 2004).

Moreover, in the presence of severe herding, the dispersion might become negative. (Jaya Mamta Prosad, 2014).

Behavioral finance contains the proper definition of investor biases. Along with it, respective solutions to solve it.

According to it, Fear and greed are the two primary factors for investors that do not allow meeting their financial needs.

(National Association of Active Investment Managers 2013).

THEORY OF BEHAVIORAL FINANCE Mainly behavioral finance contain four theories such as prospect theory, regret theory, anchoring and over-and-under reaction.

• Prospect Theory: - Whether it is the case of loss or gain, according to prospective theory different people respond differently to a particular situation. We can find that most of the investors don’t like to take risk when it comes to earning gains, and they become risk lovers when they are trying to remove loss.

• Regret Theory: - This theory says about the emotional behavior of people after they have made a mistake. In some cases, investors put their money into a bad and faulty project by buying its shares. As a result, they can face losses and out of

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regret, want to sell its shares. Investors should buy the popular stocks that cover a maximum percentage of the market, if it subsequently goes down, it can be rationalized as everyone else owned it.

• Anchoring: - It is a phenomenon in which investors take the current market price to be accurate due to lack of better information • Over-And-Under Reaction: -This theory talks about the optimistic and pessimistic behavior of investors on their decisions.

If the decision of the investors proves correct by an increment of market price and gain profit, then it gives good news otherwise bad news. They tend to become more optimistic when the market goes up

• This discipline shows the detailed structure of investor biases along with appropriate solutions to avoid them. This helps the clients in identifying the risk.

• Again this theory defines the behavioral bias in two ways such as cognitive bias and emotional bias. The first one says about the decision-making by accepting faulty reasoning even after having enough information. The second one is caused due to lack of self-control and overconfidence and is too difficult to correct.

• To avoid such biases two managerial tools are being used such as moderating the client or adjusting the portfolio. If we take both of these and make a strategy, then it will give effective solutions by

PSYCHOLOGY

SOCIOLOGY

ECONOMICS

SOCIAL PSYCHOLOGY

INVESTING

BEHAVIORAL ECONOMICS

FINANCE

BEHAVIORAL FINANCE

BEHAVIORAL ACCOUNTING

IS PSYCHOLOGICAL BIAS PRESENT?

PROFIT MARKET STABILITY JOY

and more pessimistic when the market goes down.

ROLE OF BEHAVIORAL FINANCE • It says that human beings are emotionally sensitive. Due to overconfidence and fearlessness they make mistakes by investing their money in a wrong way and after that, they become pessimistic about that and regret it.

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LOSS MARKET INSTABILITY REGRET

restricting the client from facing loss.

• Behavioral finance teaches us not to make faulty decisions by considering incorrect reasoning.

Advanced management technique helps in generating a financial portfolio for continuous investment and gains by considering even their inherent biases.

THERE ARE THREE PREVALENT THEMES IN

BEHAVIORAL FINANCES • Heuristics: -According to this theme, people often make decisions taking approximate rules of thumb into consideration and not strict logic. This causes massive loss and minimum return.

• Framing: It refers towards collecting anecdotes and stereotypes that everyone should obey the regulations which can handle the emotional imbalance and give a proper response to an event.

• Market inefficiencies: -This includes the pricing imbalance in the market and nonlogical explanation and decision making by the managers and investors.

FACTORS OF BEHAVIORAL FINANCING • Behavioral economics is that part of behavioral financing which integrates psychology and economics to determine how and why people sometimes make an irrational decision on their investment and borrowing.

• Investing is the process of money and fund allocation for a business to gain profits and obtain income.

• Economics is the science that focuses on the production, allocation, and expenditure of wealth dealing with various constraints like labor, capital, taxation, and finance.

• Psychology is the scientific investigation of behavior and cognitive processes including how these processes are influenced by an individual’s physical and mental state and surroundings.

• Sociology is the systematic study of social behavior of an individual and a group which emphasizes on the relationship between people’s attitude and behavior.

• Social psychology is the part of psychology which studies individuals in a social group.

• Finance is the primary need to start a business. It determines the values for making decisions. These functions help in resource allocation including acquiring, investing and managing.

• Behavioral accounting deals with the behavior of accountants and nonaccountants including how they process accounting information and are influenced by accounting functions.

• In the presence of psychological bias, a loss will always be there along with regret because the market would be unstable.

• In an absence of psychological bias, profit will always be there along with joy because the market would be stable all the time.

LIMITATIONS OF BEHAVIORAL FINANCE • According to Eugene F. Fama, behavioral finance is more of a collection of anomalies that just enhance results and support for the anomalies tend to disappear with changes in the way they are measured.

• In behavioral finance significant discrepancies between the market value of an investment and its intrinsic value are rare.

• Implying the impact of irrational behavior on financial market is negligible and, therefore, irrelevant. It is because according to traditional economic theories market forces will always act to bring prices back to reasonable levels.

• The term “statistically significant” does not necessarily mean that an effect is significant in magnitude. Participants of the experiments knew that they were in an experiment and behaved accordingly because of an unnatural environment to try to please (displease) the researcher.

CONCLUSION According to modern behavioral finance theories, people do act logically.

But generally, it is not true. Due to overconfidence as a part of human psychology, investors make mistakes in putting their money in a biased instrument as an investment. This makes the investors regret on their doings. Hence the research regarding psychology guides us to use the finance in a proper logical way. The different financial behavioral research areas tell us to follow proper strategies in decision making for money and property investment. So, the main reason behind the rapid growth of behavioral finance is to train the financial investors and practitioners in a proper way that their psychology towards financial markets cannot be biased and influenced.

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Managing Director at MTECH INFORMATICS LTD

While India has been a front runner in free zones; minimize license hurdles, creating software service giants like giving significant incentives, support TCS, Infosys and Wipro, we see very industry by tax holidays and allocating few indigenous hardware players in funds to drive the initiatives. the country of 1.3 billion people. What The land acquisition ordinance has according to you could be the factors expired as the government at the behind this? helm failed to gather consensus in the Gradually things are changing with Parliament. The Bill contained easy the bolster for ‘make in India’ campaign frameworks to foster industrial zone across India. What could promoted by Prime be the implications of Minister Narendra the inability to seal Modi but there are Mr Vivek grew up in a the framework? challenges that Indian hardware In order to carry business family, and complayers are pleted Masters of Finance and outd e v eseveral facing.

A lopsignificant mental and Investment from Nottingham Unichallenge o t h e r versity Business School (UK), he often is cost of activitifinance es, the follows his instincts to make the right goverchoice and believes that instead of especially n m e n t working waiting for the right business op- needs land. capital. Cost this land portunities, one needs to cre- isOften, of borrowing not owned by is very high in ate them the government. compare to other For example, if an countries.

Another industrial corridor is challenge is lack of proposed in the state infrastructure such as roads, electricity and there is a requirement of land, most of and water. We need to invest significantly it may not be owned by the government. in infrastructure so that domestic players In such a case, the government may have can get motivation and grow to global to buy the land from many other private scale. Other challenges are lack of friendly owners (such as farmers). However, ecosystem for growth, inconsistent these people may not want to sell their government initiatives, and unstable lands. This may affect the development exchange rate and so on. activities. Therefore, the land acquisition Government can play a substantial role law provides for compulsory acquisition by creating more technical parks, trade of land, subject to certain conditions and

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contemporary startups are nothing but procedure.

There are pros and cons to the bill and we a modern day version of this rich legacy. first need to understand and resolve those I really appreciate the move taken by in order to discuss about the implication Modi Government for start-ups by announcing a comprehensive policy that of inability to seal the framework.

Airbnb has decided to do away with recognizes the needs of the startup sector its HR function, replacing it with a new and helps them with simple, minimal group focused entirely on ‘employee and supportive regulation, one gateway clearance policy and tax incentive experience’. With HR being the but the successful execution most critical asset for any and implementation of the organisation, do you see Mr Vivek policy will decide the this trend evolving in future. bagged the Young India as well?

I would like to Studies indicates Entrepreneur of recommend that that the new young 2015 award government should form generation value a core committee having flexible and non-financial stakeholders such as founders, perks more than any other generation and companies need to lawyers, policymakers etc. This will react in order to stay relevant and attract enable to build a comprehensive plan for young talent and that’s exactly Airbnb smooth executions and safeguard’s the has done. The company offers world- interest of all. class health care, free daily meals and Finally, your advise to the budding snacks, education programs, annual entrepreneurs in India? travel credit, comfortable and creative “Be crazy and don’t seek too much advice working spaces, paid volunteer time and on what you propose to do” many other enviable perks.

Be prepared to fail a few times and don’t The employee centric focus is something fear doing so. Every entrepreneur fails very company should be concerned many times during the journey of starting with. At this critical junction it is not and building a business. There’s a stigma easy to comment that this trend will in India about failing. Shake off that be evolving in India but the essential stigma, dive into your own venture and question for every leader is not whether, view failure as a chance to redirect the but when and how, company will create business or close one company and open the ‘workplace as an experience’. a new one. Make sure you have a really Being an entrepreneur doing business good team. If I had to say something to an in India since 2010, what ground level entrepreneur, it would be that your idea changes would you recommend for is not actually as important as your team. successful execution of the government’s You shouldn’t be the smartest guy in the room, and you should be comfortable Start-up India initiative?

The world over, startups are changing with that. The team is really the most the economic landscapes in the important thing. countries they work in - creating immense employment and generating cascading entrepreneurship. India has a rich tradition of entrepreneurship and © FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

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CLASSROOM FinFunda of the Month

Sir, yesterday I came across a term, called LIBOR, in a financial newspaper. It was something related to the interest rate. Can you explain me that?

An ETF is a type of fund which owns the underlying Oh! Yes, Sure. It stands for London Inter-Bank Offered Rate. It is an interest rate at which banks lend to one another. It is calculated by taking averages of all the interest rate at which a group of selected banks charge each other.

Is India also a part of this process?

The interest rate is announced in five currencies which are USD, Japanese Yen, Pound Sterling, Euro and Swiss Franc.

Though India is not directly involved in the process, the interest rate is widely considered.

So, Sir, when is it announced? Do they announce it monthly, quarterly or yearly?

What is the time-period?

No, it is announced on every business day.

There is an exact process which calculates that rate.

Could you please elaborate on that mechanism?

Each selected bank is asked to submit their interest rate on the following question: “At what rate could you borrow funds, were you to do so by asking for and then accepting interbank offers in a reasonable market size just prior to 11 am London time?”.

After accepting the submissions LIBOR rate is calculated using a trimmed arithmetic mean. After receiving all the submissions, they are arranged in the descending order. Then the top and bottom 25% are excluded from the calculation. This method ensures that the outliers are not included in the final calculation. After that the remaining rates are

FEBRUARY 2016

LIBOR Ankur Kumar IIM Shillong

averaged which gives the final rate. The final rate is rounded to five decimal places.

The process is followed for each currency and maturity giving 35 rates on each working day.

The rate is calculated only for 7 maturities: one week, overnight, and 1,2,3,6 and 12 months. The most prominent rate is the 3-month US dollar rate.

I also read that there was some LIBOR scandal. What was that?

As I told you earlier that the banks submit their estimated rates. But it is not based on any prior actual transactions. So in 2008, it was revealed that the banks collided among themselves to arrive at a particular rate. They influenced each other to submit rates which were either higher or lower than what they initially estimated. This resulted in huge gains to them. Some of the prominent banks like Barclays Bank, JP Morgan, Swiss Bank UBS, Royal Bank of Scotland and Deutsche Bank had been fined by financial regulators for being involved in this practice.

So Sir, in light of these manipulations, what measures were taken to stop that from happening in the future?

Majorly two measures were taken. Firstly the oversight of LIBOR was passed from British Bankers’ Association to Intercontinental Exchange (ICE).

Secondly, now the rates are based on the actual transactions.

Finally, Sir, do we also have any Indian counterpart of such a rate?

Yes we do have. It is called MIBOR (Mumbai Interbank Offered Rate). The concept is same as that of LIBOR and the major difference is that it is calculated for banks in India in Rupees. It is calculated by NSEIL as a weighted average of lending rates of a group of

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