Niveshak Jun14

Niveshak THE INVESTOR

VOLUME 7 ISSUE 6

June 2014

Good Times Coming!!

FROM EDITOR’S DESK Dear Niveshaks,

Niveshak Volume VII ISSUE VI June 2014 Faculty Chairman

Prof. P. Saravanan

THE TEAM Akanksha Gupta Apoorva Sharma Gaurav Bhardwaj Jatin Sethi Kocherlakota Tarun Mohit Gupta Mohnish Khiani Priyadarshi Agarwal S C Chakravarthi V All images, design and artwork are copyright of IIM Shillong Finance Club ©Finance Club Indian Institute of Management Shillong www.iims-niveshak.com

We hope that the month of June has brought forward more clarity in terms of the economic agenda of the new Government. The government after announcing its ministers and the portfolios allocated to them, took strict actions to increase the efficiency of the government officials. Also, the Government has begun well by attacking the low hanging fruits, to bring back the Indian economy on the growth path. A lot of buzz has been created due to this in the news flow of the PSU stocks, with many people expecting a large divestment program from the current government. The focus has shifted from the elections to the Budget to be announced by the new Finance Minister Mr. Arun Jaitley. A lot of sops are being seeked by the manufacturing sector in this budget. Also there are many speculations relating to the various tax structures our new Finance Minister could introduce this time.

On the business front, Mr. Vishal Sikka has been appointed as the first non-founder CEO of Infosys. He has been instrumental in his past role at SAP, Germany. With his appointment Mr. Narayan Murthy stepped and down from his post and retired from the company. Another major development from the 2 wheeler sector was that Bain Capital, which had invested $550 million (Rs.2, 800 crore) in Hero MotoCorp, in March 2011, sold part of its stake to book some profits it had made. The sale was triggered because of some undisclosed cause like Hero may have promised certain IRR (Internal rate of return) to Bain in three-four years. In the Banking sector, State-owned Central Bank of India proposes to raise an estimated Rs.540 crore by selling stake on preferential basis to Life Insurance Corporation of India (LIC). The board approved raising of additional capital by issuance and allotment of up to 71,075,753 equity shares at a face value of Rs.10 each to LIC on preferential basis. The Government of India currently holds an 88.63% stake in Central Bank. The bank recorded a 4% decline in net profit to Rs.162.44 crore in the quarter ended 31 March compared to the same quarter the previous fiscal year. In 2013-14, the bank made a loss of Rs.1, 262.84 crore, compared with a profit of Rs.1, 014.96 crore in the previous fiscal year, due to higher provisioning. The month also saw the beginning of the 2014 Football World cup and many finance professionals have tried to predict the outcome of this mega event. Brazil will beat Germany to win soccer’s World Cup and also will score the most goals, according to a survey of economists across 52 countries. The tournament’s host nation eclipsed Germany and Argentina as the top choice among 171 economists from 139 companies in a Bloomberg News poll. In another major development, BNP Paribas SA (BNP) faces harsher treatment from U.S. authorities than Credit Suisse Group AG (CSGN) with a fine twice the size of the Swiss bank’s and a business prohibition that could cause loss of clients. Regulators and prosecutors are now seeking more than $5 billion in fines and a guilty plea to criminal charges for violating U.S. sanctions. In addition, a temporary ban on transferring money into and out of the U.S. is being considered.

In this June edition of Niveshak, our editors have covered the story about the expected steps that the new Indian Government would take in order to revive the economy. The Article of the month this time is “Yuan Vs Gold- Successor to Dollar as Global Reserve” which compares the chance of Yuan and Gold of replacing dollar as the reserve currency of the world. FinGyan section covers the M-Banking situation in India and its growth prospects. Finpact section in this issue touches upon the M&A deal between Reliance Industries and BP, where RIL sold a part of its stake in the KG D6 oil wells to BP for $7.2 billion. The Finsight section gives insights into “Crowd Funding: Is it the next big Financial Idea?” . The Classroom section shares knowledge on Angel Investors. This edition also features the interview of Mr. Amit Somani, Partner, Audit Practice at KPMG India in the FinView Section.

We would like to thank our readers for their immense support and encouragement. You remain our prime motivation factor that keeps our spirits high and give us the vigor and vitality to keep working hard. Thank you.

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

08 Yuan Vs Gold: Successor to

12 Good Times Coming!!

Dollar as Global Reserve

FinGyaan 16 M- Banking: The Way Ahead for Indian Banking Sector

Finsight

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Is Crowdfunding the Next Big Financing Ideal?

FinPact

20 Reliance BP M & A Deal

FINVIEW

27 Mr. Mr. AMIT SOMANI

Partner, Audit Practice, KPMG India

CLASSROOM

31 Angel Investors

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The Niveshak Times Team NIVESHAK

IIM Shillong Markets Hit All-Time Highs The Indian markets continued to make newer and newer highs as the election verdict was announced and BJP won a clear mandate and Mr. Narendra Modi was made the next prime Minister of India.

A lot of FII and Domestic money that was waiting to enter the Indian market since the past 2-3 years and seeing the clear mandate for a pro-development party, all this money gushed in and took the market to an all-time high of 25,576. On the election result announcement day itself the Sensex rallied as much as 1400 points, driven by domestically linked stocks in hope of a revival in the Indian economy. So, much money has come into the Indian markets that even after the election results announcement the Sensex continued to make all-time highs. Stocks like Coal India, ONGC and SBI were the biggest wealth creators for the Indian masses. With this Indian markets have also moved up in valuations, with current valuations slightly above long term averages. This rapid up move has left most brokerages stunned and the entire world has turned bullish towards the Indian market, with all sorts of highly bullish price targets being put on the Indian markets.

Vishal Sikka To Reclaim The Lost Glory At a time when the software giant Infosys is troubled with the exits of senior management and when the company is no longer perceived as an industry bellwether, Vishal Sikka, a member of the Executive Board of SAP AG, is appointed as the CEO and MD of Infosys. The new CEO will have to give his best in striking a balance between growth and profitability at a time when the company is not able to attain the expected growth levels even with the addition of 238 new clients. During the same period, the competitors of Infosys such as TCS and HCL Tech improved their profitability. The only positive factor is that the company is sitting on a cash pile of $4 billion and relatively easy access to talent pool. Sikka will take over the position of CEO on August 1st, 2014.

The company has also announced that the exit of Executive Chairman N R Narayana Murthy, Executive Vice Chairman S Gopala krishnan and Rohan Murthy will take place on June 14th, 2014.

Bain Sells Hero Motocop Shares Bain Capital had invested $550 million (Rs.2, 800 crore) in Hero Investment Pvt. Ltd in March 2011. The

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money, part of the Rs.4,000 crore that the private equity firm invested along withLathe Investment Pvt. Ltd a unit of Government of Singapore Investment Corp. (Ventures) Pte. Ltd helped the Munjal familycontrolled Hero Group fund its purchase of Honda Motor Co.’s 26% stake in Hero Honda Motors Ltd, now renamed Hero MotoCorp. Investors bought as much as 65% of 8.57 million Hero MotoCorp Ltd shares (which translates to 4.29% of the outstanding share capital of the auto maker) that were put on sale by Bain Capital that holds an 8.6% stake (17.14 million shares) in India’s largest two-wheeler company. The sale was triggered because of some undisclosed cause like Hero may have promised certain IRR (Internal rate of return) to Bain in three-four years.

About investors not buying all the shares on offer, an analyst said that it is possible that the broker may not have been able to find enough buyers. In a separate bulk deal, Goldman Sachs Singapore Pte bought 1.04 million shares of Hero MotoCorp for Rs.275.41 crore. Shares of the auto maker fell 4.42% to Rs.2,588.85 a piece on a day the BSE’s benchmark index Sensex fell 1.36% to 25,228.17 points.

Central Bank Of India To Sell Additional Stake To Lic For Rs540 Crore State-owned Central Bank of India proposes to raise an estimated Rs.540 crore by selling stake on preferential basis to Life Insurance Corporation of India (LIC). The board approved raising of additional capital by issuance and allotment of up to 71,075,753 equity shares at a face value of Rs.10 each to LIC on preferential basis, Central Bank said in a BSE filing. Shares of the bank today closed at Rs.76.45 apiece. At this rate, the stake proposed to be bought

by LIC would be worth Rs.543 crore. LIC currently holds 73,420,914 shares, or a 5.44% stake, in Central Bank of India. The price for preferential allotment may be determined according to the Securities and Exchange Board of India (Sebi) regulations. Also, an “extra-ordinary general meeting” of shareholders will be held on 15 July 2014 to pass this resolution.

The Government of India currently holds an 88.63% stake in Central Bank. The bank recorded a 4% decline in net profit to Rs.162.44 crore in the quarter ended 31 March compared to the same quarter the previous fiscal year. In 2013-14, the bank made a loss of Rs.1,262.84 crore, compared with a profit of Rs.1,014.96 crore in the previous fiscal year, due to

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higher provisioning.

Economists Turn Football Pundits Pick Brazil For World Cup Credit Brazil will beat Germany to win soccer’s World Cup and also will score the most goals, according to a survey of economists across 52 countries. The tournament’s host nation eclipsed Germany and Argentina as the top choice among 171 economists from 139 companies in a Bloomberg News poll published on Tuesday. The Latin American country is also tipped to find the net the most times, topping Argentina and Spain. Projections of a sixth World Cup victory for Brazil mesh with bookmaker odds and forecasts based on economic models created

by Goldman Sachs Group Inc., UniCredit SpA and Danske Bank A/S. Paddy Power Plc and Ladbrokes Plc both rank Brazil as favourite, at odds of 3/1.

Meanwhile, the world’s biggest festival started with great pomp and show on 12th of June, 2014 at the Arena Corinthians stadium in Sao Paulo. Several big names in the music industry performed live in this event including pop-star Jennifer Lopez, rapper Pitbull and Brazilian singer Claudia Leitte.

India’s Iip Jumps To 3.4% In April After 2 Months Of Contraction India’s Factory Output, which is measured by Index of Industrial Performance, grew at 3.4 percent in April raising hopes of recovery, after contracting for two months in a row. This was attributed mainly to the improved performance of manufacturing, mining and power sectors and higher output of capital goods. IIP contracted by 1.2 percent in October, and continued contracting till December. It entered the positive zone in January but became negative again in February.

Manufacturing, which constitutes over 75 percent of the index, grew 2.6 percent in April compared to a growth of 1.8 percent a year earlier. Production of capital goods grew by 15.7 percent in April, in sharp contrast to a contraction in output by 0.3 percent in same month last year. The mining sector grew by 1.2 percent in April as against a dip of 3.4 per a year earlier while Power generation increased by 11.9 percent in the same month. Overall, 14 of the 22 industry groups in manufacturing showed positive growth in April.

CII Plans On Revival On Non-Banking Finance Sector The Confederation of Indian Industry (CII) has suggested a five-point agenda for consideration of

the finance ministry and the Reserve Bank of India to arrest the steep rise in non-performing assets (NPA) and slowdown in loan growth of non-banking financial companies (NBFCs).

The non-banking financial company (NBFC) sector needs to be integrated to the core of Indian financial system with adequate policy support to help meet the financing needs of the economy and achieve financial inclusion. While NBFCs assets as a percentage to the GDP have risen from 8.4 percent in 2006 to 12.5 percent in 2013, the NBFC sector has a share of just 8 percent in the total financial sector assets of the country’s economy. To help meet the funding requirement of the NBFC sector adequately, there is a need to support financing from major sources, including banks and mutual funds, as also to promote access of funds through other routes like corporate bond market and external commercial borrowings.

BNP Paribas Risks $5 Billion Fine BNP Paribas SA (BNP) faces harsher treatment from U.S. authorities than Credit Suisse Group AG (CSGN) with a fine twice the size of the Swiss bank’s and a business prohibition that could cause loss of clients.

Regulators and prosecutors are now seeking more than $5 billion in fines and a guilty plea to criminal charges for violating U.S. sanctions. In addition, a temporary ban on transferring money into and out of the U.S. is being considered.

The risk is more than the fine, the risk is them losing the right to do some businesses in the U.S. A fine of more than $7 billion would jeopardize BNP’s dividend and could prevent the lender from keeping its capital ratio, a measure of financial strength, above 10 percent. BNP could agree to a fine that big to avoid the payment-network prohibition. The ban would generate unnecessary operational and systemic risks the bank might not want to take.

Regardless of how much pain a temporary ban might inflict, its impact, like that of a fine, can be measured in dollars. By letting firms continue to do business after pleading guilty to criminal charges, authorities are hollowing out the deterrence effect.

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

The Month That Was

The Niveshak Times

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Article ofSnapshot the Month Market Cover Story

Market Snapshot

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

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

89,27,630.17 Source: www.bseindia.com

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

60.2785 82.0475 59.15 102.2806 48.03

CURRENCY MOVEMENTS

LENDING / DEPOSIT RATES Base rate Deposit rate

10.00%-10.25% 8.00% - 9.05%

RESERVE RATIOS CRR SLR

4.00% 22.50%

POLICY RATES Bank Rate Repo rate Reverse Repo rate

9.00% 8.00% 7.00%

Source: www.bseindia.com 26th May 2014 to 25th June 2014 Data as on 25th June 2014

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

Open

Close

% change

24693.35 8668.32 9128.04 14580.74 17523.13 8235.58 14775.05 6794.28 10073.03 8440.06 12538.05 11545.47 2287.46 8614.28 1976.96 4832.03

25313.74 9208.66 10012.79 15260.32 17459.71 8693.08 15772.1 6618 10857.53 9047 13261.59 11425.69 2256.43 8672.78 2096.75 5123.01

2.51% 6.23% 9.69% 4.66% -0.36% 5.56% 6.75% -2.59% 7.79% 7.19% 5.77% -1.04% -1.36% 0.68% 6.06% 6.02%

% CHANGE

© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

Article Market of Snapshot the Month Cover Story

Market Snapshot

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Yuan Vs Gold: Successor to Dollar as Global Reserve

Tejesh Thota

All Is China the next super power on earth? Will Yuan be the new global reserve? Recent ongoing developments say “YES”. Can Yuan survive as global reserve in long run?

China, since recent past have been accumulating the yellow metal and its gold reserves are estimated to be approximately 2710 tons till the end of 2013, the last official report by China in 2009 state the number as 1054 tons. China is planning to use gold as weapon in the currency war against US. US markets believed that gold will stay cheap for the coming years and turned up their investments towards equity market.

With India, the second largest buyer of gold imposing tariffs on gold purchase, availability of gold also increased and China bought all the available gold in the market at the prevailing low rates. China also bought gold mines across the world and directed the gold to China bypassing London gold market. Thus huge demand of gold didn’t increase the gold prices and the five bullion banks decided the price of gold only on the basis of gold in global market, that which is not true indicator of actual supply and demand.

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IMT Ghaziabad

China and its Impact China signed WTO agreement in 2001 and had a deeper integration with world economy and also participated in free trade with US. China took advantage of its low cost manufacturing conditions and established export oriented principles to encourage investments in China from outside. Additionally, Chinese Yuan that was meant to float against other currencies was devalued against dollar to increase the demand for exports. With increase in this demand, further in the long run Yuan gets stronger against dollar and to avoid this, People’s bank of China printed large amounts of Yuan to decrease the demand and devalue the currency. It infact bought the dollars in the open market by printing Yuan.

Eventually, China recorded trade surplus with all its trading partners. China with its huge dollar reserve, bought the US debt and it presently holds 1.3 trillion dollar US debt. China followed this cycle of selling cheaper goods and receiving dollar and again lending that dollar to US. China also helped US to rise debt at very low interest due to this cycle. US experienced the benefit of spending more and lowering taxes with its

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Article of the Month Cover Story

interest on debt becoming cheaper.

Though China registered trade surplus every year, government is accumulated with public debt year by year. This trade surplus and debt situation is mainly due to huge government spending and private saving respectively. Capital accumulation in China is mainly due to increase in public saving and technology. Increase in population, changes (decreases in China case) the capital per worker but not the total capital and output according to Solow growth model. Though China looks very strong from outside with its promising trade surplus, but its economy is weaker in terms of fiscal policies and government operations. In the recent years, Chinese economy is facing problems like shadow banking, threat of real estate bubble burst and debt crisis.

World trade with Gold standard International trade was done in terms of gold in the ancient times. They used gold as a medium of exchange, store of value and unit of account. This method of payment worked fine when the international trade was limited, but industrialization and globalization resulted in higher trade and posed requirement for alternative currency to avoid risk of shipping the loads of gold and silver coins. So, paper currency with face value was introduced such that it can be exchanged for gold at fixed rate.

Currencies all around the world are pegged to gold and the intrinsic value of currency is determined. By 1880, world’s major currencies like United States, Japan and Germany were pegged with gold. Gold standard maintains balance of trade equilibrium among between trade partners eliminating the exchange risk.

Evolution of dollar as Global reserve Until the start of World War I, with classical gold started each unit of dollar is backed with equivalent amount of gold in treasury with 100% reserve ratio. During the World War I, from 1914 -1918, US with many nations printed money to finance the war expenses. This resulted in the money supply greater than the amount of gold backed in the vault. Under gold exchange standard, dollars were partially backed by the gold.

During the World War I, for the first four years, Europe imported consumer goods and food from United States and in turn paid them back with gold. This repeated again during the World War II. With these both wars, US were able to increase its gold reserves substantially. By the end of World War II, US owned two-thirds of world’s gold and Europe had very less reserves.

With this phenomenon, world monetary system was no longer going to continue and was ready to collapse. US provided loans to European countries and flooded them with dollars for

When world monetary system was ready to collapse after World War II, US provided loans to European countries and flooded them with dollars to run their economy © FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

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their economy to run.

In 1944, Representatives around the world came up with a new world monetary system known as Bretton woods system.

Where all the major currencies on the planet will be backed by US dollar that is backed

by Gold at USD 35 per ounce of gold. This induced the confidence among world economies and currencies were pegged to each other that eliminated exchange risk.

But under the Bretton woods system there was no reserve ratio established. So, US made a deficit spending on Korea war, Vietnam war and Johnson’s great society program. In 1960’s Charles de Gaulle, president of France realized that US doesn’t have enough gold to back the dollars. Countries stated to convert the dollars to Gold and as a result US lost 50% of its gold between 1959 and 1971. The then US President Nixon, took off the Gold standard completely and all the world currency became Fiat currency. The world monetary system is changing every 35 years on average.

Reasons for the death of Dollar The trade developments since 2010 clearly indicates that world learnt lessons from the 2008 financial crisis that exposed the inefficiency of US economy.

US had been injecting liquidity into economy with QE since then to improve the situation.

Though Ben Bernanke, termed the Quantitative easing as asset creation on the Federal Reserve balance sheet, its main intention was to stimulate economy artificially by increasing money supply. US Federal Reserve being the highest debt holder of US government accepts the treasury bonds and prints the currency that is not backed by anything. 2008 financial crisis added 1.25 trillion dollars to the base and Quantitative Easing 3 which was expected to continue till 2015 is currently adding 45

billion dollars to the base every month. World economies got this Ponzi game and want to store their reserves with something that have intrinsic value to hedge the risk and don’t want to bet on US dollar. The QE process has a major influence in terms of inflation on developing economies around the world. Only way they can avoid this is by untie their currency with dollar.

The US dollar is about 60% of the value of all the currency on the planet and more than half of the dollars reside outside the United States. Main reasons for US dollar usage as reserve currency are that international transactions were made in dollars. But this culture is changed and oil is no more traded for dollars. Iraq is selling its Oil for Euro’s while Iran and Libya started to sell their Oil for Commodities and Gold respectively. Bilateral agreements were made between India- China, China- japan, China – Russia Countries like India, China, japan and Russia are avoiding dollars in trade by signing bilateral agreement holding each other currency for trade. BRICS nations planned to set up bank to perform trade among the countries without using dollars. In addition to this, large amounts of gold accumulation and repatriation took place around the world.

Gold to be the Best alternative When Dollar fails as global reserve currency, the world needs a new monetary system.

Economists came up with three interesting systems such as multiple reserve currency, SDR currency system and Gold as currency. The first two solution would again give rise to a problem that dollar face today, multiples reserve currency without an anchor currency would eventually create trade imbalances and would give rise to power thirst, while SDR’s are also fiat currency that are not backed by anything.

BRICS nations planned to set up bank to perform trade among the countries without using dollars. In addition to this, large amounts of gold accumulation and repatriation took place around the world.

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economy. From 2005 to 2008, the correlation of currencies with dollar was high when compared to Yuan. But the situation reversed after 2008.

Basically gold backed currency system in the current world is not sustainable in the long run for the reasons huge amount of currency in circulation is to be backed and an ounce of gold equals to thousands of units of currency. Credit cards and currency printing press are creating huge money in circulation that in any particular instant, value of gold in the reserves may not match its backed currency value. Every country is hardwired to print the currency at every stage to heathen up their economy. Even China prints money to devalue its currency and it do have public debt. China will face the same situation as US during Bretton woods system in the long run. Gold standards do not work over long periods of time but gold itself does. But China can establish its Yuan as global reserve currency for a few years till world completely shifts to Gold as currency, which is not so far to see.

Š FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

Article of the Month Cover Story

Where as gold is the metal that world believed and valued since 5000 years.

If the world goes back to gold, the governments cannot scam people the way they did with paper currency printing press, as gold cannot be printed. And it limits their ability to transfer the wealth from people to the government and banks. Gold has its intrinsic value and thereby problems of inflation can be ended.

Inflation being the main reason for the economic imbalances creates exchange rate fluctuations, which in turn creates imbalances in trade balance. Problem faced during ancient times with exchanging the gold for trade can be eliminated with usage of cheque or any certificate of agreement by maintaining gold in a vault.

Gold backed Yuan and its chances to survive China, by acquiring huge gold reserves is ready to back its currency with Gold. It already predicted that null backed dollar would lose its value and felt that they can establish faith in global market by backing Yuan with gold.

In the present world economy China being the biggest player in international trade, can easily influence the world to put gold backed Yuan in their foreign reserves to trade with. This will eventually result in countries exchanging their existing US dollars from their reserves to Yuan bringing surplus in dollars supply and dollars get devalued creating further disorders in US

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Good Times Coming?

Apoorva Sharma & Mohit Gupta

IIM Shillong 2014 elections have certainly been one of the most legendary elections when Indian economy was in the lookout for a miracle that could bail out a fragile economy marred by corruption and policy paralysis. In the decade from 2000 to 2010, India registered a phenomenal annual growth rate of nearly nine percent in gross domestic product, the time when investors twinned China with India. There was a wave of liberalization in the nineteen-nineties, introduced by Mr. Manmohan Singh, the then finance minister.

India had begun burgeoning with cuts in budget deficits, scraping infamous licensing restrictions and opening up the economy to foreign investments. The scenario, however has detonated in the past few years with 2013-2014 fiscal reporting a GDP growth rate of merely five percent. Hence, the new government needs to move beyond procrastination and revive the sinking economy.

Expectations from our new prime minister, Mr. Narendra Modi are sky high. He has promised to revive the growth rate by attracting foreign investment, reducing red tape and improving the infrastructure of the nation. Mr. Modi has been applauded for the success during his tenure in Gujarat that oversaw a GDP growth rate exceeding the national average. Gujarat is known for being business friendly. The state has progressed in agriculture, irrigation facilities, education, gender ratio, healthcare and even tourism. The international kite flying festival in Gujarat has become a source of livelihood for the poorest of the poor with the kite market

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crossing INR 500 crore. Gujarat’s tourism growth is double the growth rate of the nation.

Capitalizing on this success, he organized a series of conferences for international investors that he called Vibrant Gujarat. Hoping for similar reforms, India is beaming with optimism and chanting the viral slogan “Acche din aane waale hain” Some changes which are already evident like transparency among the bureaucrats and uprooting the practice of bribes. Governance seems to have improved at the centre. It has been claimed by Mr. Modi that there will be less of government and more of governance. For decades we have had very large Governments but the quality of Governance was not as expected.

Narendra Modi is paying more attention to quality rather than quantity. He believes that the role of a Government in businesses should be like that of a facilitator. Another aspect of the Governance of Narendra Modi is Gandhiji’s principle of Swaraj. Like Gandhiji, Modi believes in self-governance that is every village must be empowered to solve its local issues. Let us have a look at some of the likely reforms.

Doing away with widespread bottlenecks and inefficiencies is one herculean task but nonetheless on the agenda. Official estimates are that 303 public sector projects in sectors ranging from power, petroleum, industry, coal, shipping, chemicals, mining, railways, roads and steel, all of which are ready to go but are still waiting for an official sign-off, totalling to a massive $116.9 billion. Policy inaction was

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to India.

The UPA government’s flagship scheme, MNREGA is likely to focus more on the creation of infrastructure assets and not just dispensing wages to labourers under Mr. Modi. India’s Federal structure is also at the cusp of change.

A transformation from the traditional model of authority and placing orders to state, needs to be evolved into more of a partnership one with the executives and legislative bodies at the centre working in tandem with those at the state level.

Setting up coal regulators and reviving mining are other priorities for the new government.

Allocation of natural resources needs to be more transparent. Clearances will be faster. The government also plans to build a cross-country power grid.

The stock market movements have been dramatic. Amidst all the turmoil, there were investors who booked their profits and those who invested with bullish expectations. The stock market outperformed by huge margins as investors turned their focus on domestic stocks.

The valuation of equity went up, with the assumption of 10-12 percent growth in industrial production contrary to the flat and negative figures as of now. This coupled with the cheaper global capital with Libor falling to its lowest in the past 30 years is a stimulus for foreign investors to invest in India. The Sensex is riding, investors are bullish and many companies are raising equity to reap the benefit of investor sentiments. Foreign investors poured more than $16 billion into Indian stocks and bonds in the past six months and now hold over 22 percent of Mumbai-listed equities. Rupee strengthened against the dollar to an eleven month high and IT outsourcers and drug makers suffered loses.

Prime Minister Narendra Modi has warned of tough decisions over the next couple of years to improve the country’s financial health, which he said may not go down well with some sections. India’s fiscal deficit is overburdened by subsidies on basic commodities which costs more than two percent of the GDP. The subsidies as a percentage of the government spending has raised from 9% to 14% in the last 10 years and is a drag for the nation’s financial performance and therefore needs revision. To foster greater fiscal discipline, we can expect subsidy cuts in petroleum, fertilizers and other sectors with increase in prices. The UPA government had repeatedly protested against any price rise for cooking gas and diesel backing the Food Security Act that supplies subsidized grains.

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Cover Story

one of the primary reasons which weighed down the second avatar of the UPA government.

Faster decision making by empowering prime minister’s office and technocrats will certainly reduce the red tape. Mr. Modi has cleared seven investment projects worth ₹ 21,000 crores ranging from environmental issues to financing problems.

The BJP government is ready to take a string of steps that would not require legislative approval including a time-bound implementation plan for infrastructure projects, conceding the topmost priority to building highways. A target of building about 25 kilometre a day of new highways is on the cards.

It is anticipated that the government will implement the DTC (Direct tax Code) and GST (Goods service tax) by April, 2015. DTC plans to plug the loopholes in the current archaic income tax laws. It will widen the tax net so that the burden on individual tax paying entities reduces. The bill also ensures that foreign companies don’t evade taxes on deals where the underlying assets are in India. GST, on the other hand plans to replace the multi-layered indirect taxes with a single tax. Both of these had been introduced in the year 2011 but have lapsed since then.

The government is planning to amend rules of the new land acquisition Act to make it easier for industries to acquire land keeping it less costly.

Proposals to roll back retrospective tax laws will be taken up. Tax and labour market reforms, backed by a gradual opening up to foreign investment, would seek to create the 10 million jobs that Asia’s third-largest economy needs every year to absorb young people entering the workforce. Accepting the report of a committee on rationalizing definitions of FDI and FII, any foreign investment of 10 percent or more in a listed company will now be treated as FDI. FDI to be allowed in a wider variety of sectors including India’s vast railway network and e commerce.

The government has also proposed to liberalise FDI in the country’s defence sector. This move will raise manufacturing capability and could be used to achieve self-reliance in critical defence technologies. The Ministry of Commerce & Industry has planned to enhance foreign direct investment (FDI) levels in defence beyond 26 per cent to higher levels up to 49 per cent, 74 per cent or even 100 per cent in exceptional cases.

The cap on foreign investment in insurance sector stands at twenty-six percent and is likely to be increased. All these steps are directed at boosting investor sentiments and wooing them

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But, deregulation of prices is long dew and inevitable. The new fuel policy will be raising prices to spur investment and cut imports that account for 80% of the nation’s crude oil and more than 30% of its natural gas needs. An increase of INR 250 per cylinder of subsidized cooking gas with a cap on the number of subsidized cylinders to reduce below twelve, is expected. First increase in natural gas prices in four years was to be originally effective from April 1. However, before a new rate could be unveiled, the general elections were announced and its implementation got deferred. The ministry will announce a new rate after getting clarity on the Rangarajan formula, which would double the gas price. The fertilizer subsidies will also be slashed with new urea pricing policy. Reduction in subsidies will reduce government borrowings, thus paving the way for RBI to reduce interest rates which will stimulate investment by private sector. A similar change will also be noticed in the railways with passenger fares being hiked by 14.2% and freight rates by 6.5%. The common man has some major tax expectations from the new Government. People want the tax benefit on housing loan interest for self-occupied property to increase to around 3 lakhs. It has remained constant at Rs. 1.5 lakh since 2001.

The increase in exemption limit from Rs15000 to around Rs50000 for medical expenses by the government will be a welcome step. Keeping up with the inflation the tax saving limit should also be increased from the present 1 lakh to around 3 lakhs. More disposable income will increase the spending power of people and help in the growth of economy. The Government must look to bridge the gap between fiscal deficit and people’s expectations. For any development, funds are required and it is better that subsidies are taken off as necessary and tax payer’s money are used for development. However, hike in IT exemption limit will compensate people to some extent.

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Narendra Modi’s 10-point Road Map Reforms in infrastructure and investment areas Addressing concerns relating to the economy Promoting e-auction to push transparency Reviving confidence in bureaucracy Focusing on innovative ideas in the government and work freedom for officials

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Narendra Modi’s 10-point Road Map 6 Bringing a people-oriented system in government machinery 7 Health, water, education, roads, energy priority areas 8 Sorting inter-ministerial issues through efficient system 9 Bringing stability and sustainability in govt policy 10 Executing policies in a time-bound manner Narendra Modi realizes that for any Government to be successful it is very important that the people participate in policy formulation as well as execution. By doing that he gives a sense of empowerment to the people and thus people take the ownership of the projects and leave no stone upturned for the success of the policy or project. He made a very strong statement on the lines of this matter that if every person takes one step forward the nation would march 1.25 billion steps forward.

The centre has made a significant announcement regarding delegations to foreign countries.

Centre has stated that all scientific delegations to foreign countries will now be led by eminent scientists and not by ministers. This is a very important step taken by the new government. It will be a great advantage for our country if the subject matter experts go to the seminars and conferences in foreign countries.

Narendra Modi is expected to revive ‘Brand India’, riding on its strengths of five ‘T’s -tradition, talent, tourism, trade and technology and will pursue foreign policy on the basis of “enlightened nationalism” and mutually beneficial relationships. His first foreign tour has been to Bhutan as a goodwill visit. In July he is stated to meet Shinzo Abe, the Prime Minister of Japan. He has also accepted the invitation of Barack Obama and will be visiting USA in September.

It will also be important for the Modi administration to improve relations with Pakistan. He will also need to put relations with India’s arch rival, China, on a sound footing. Border disputes has to be resolved. By looking upon Narendra Modi’s desire to increase trading ties, relations with both these neighbours may improve. Modi’s first major foreign policy initiative of inviting Saarc leaders for his swearing-in had sent out a message to the world about India’s strength.

People have a lot of expectations from the new

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socialist concerns. India will need to improve its business climate for potential foreign investment, secure intellectual property rights and improve recourse to legal remedies in the case of dispute.

Thus, the new government faces enormous challenges both at home and abroad. Mr Narendra Modi has become the Prime Minister and now he will have to show that he has the stature required to unite and lead India through what promises to be a very challenging period.

The reforms taken are like harsh economic medicine which should have been administered way back but was being deferred for maintaining a socialist image. It is too early to claim that India awaits eutopia. We cannot have true progress or acche din with an acchi sarkar alone. We need one more variable. We need a society with good people. And if these two work in tandem then only we can expect India to become a superpower in the coming years.

In a country like ours, a mix of capitalism and socialist concerns is important and then only can we expect that the urban legend of “Acche din” can come true.

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Government. Modi has to continue the process of modernizing India and making the country fit for the 21st century. With 500 million people on or below the poverty line this is a Herculean task.

Thrust on digitisation is also required from the new government. India have over 240 million internet users. The new government should move towards more transparent mechanism of digitization, like digitizing land records, databases, governance-vendor selection, procurement, which will help in reducing time and cost. Focussing on the macro picture, there are three concern areas to be looked upon by the new Government, which are – 1) Tackling weak monsoon, 2) Tackling inherited fiscal deficit, 3) Tackling high inflation.

Once the supply side inflation is controlled by focussing on manufacturing sector coupled with subsidy cuts, the RBI will be in a position to reduce interest rates and create infrastructure by clearing all stalled projects, reviving the investment cycle. It is now for the new government to deliver up to its expectations and promises, to rebuild infrastructure by increasing capital expenditure without alienating the

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FinGyaan

FinGyaan

M- Banking: The Way Ahead for Indian Banking Sector Heena Motwani

IIM, Shilong

Introduction M-Banking is nothing but the use of mobile device to carry out financial transactions by the customers of financial institution. As per Juxt’s study ‘India Mobile Landscape’, India has 55.48 crore mobile users out of which 54% (29.8 crores) are based in rural areas as compared to 25.6 crores in cities and towns which illustrates the emerging phase of M- Banking in India.

With 898 million subscribers, India is the world’s second largest telecommunication market (as on March 2013). Its revenue grew by 13.4% to reach US $64.1 billion in F.Y.12. This fast paced growth has not only enabled the provision of communication & information based services but has also offered growth in ground-breaking mobile applications that assist in M-Banking and M-Payment sectors.

In order to excel in the Telecom sector, to achieve higher financial inclusion and to improve service quality for the stake holders, the Indian Financial Services sector has found Mobile Banking to be an

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apt solution. However, till now there hasn’t been an established and successful business model to provide financial services by the regulators, service providers, and technology players over mobile devices. While, the opportunity in the mobile based financial services– M-Banking, M-wallet and M-Payments is recognized, the consumer proposition, regulatory environment and delivery mechanism of the services is still being designed to find the sweet spot.

The Journey so far The instances at which the development have taken place in Indian Banking Industry could be described in phases ranging from Introduction to Growth and then to Maturity. Starting from the launch of Branch Banking to the emerging Mobile banking technology, we have seen great potential in the Telecom sector. With growing technology and its adoption into various field including Banking services, there has been an improvement in the processes and the efficiency with which the operations carried out.

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Fig 1: Timeline of events in Indian banking Industry

Its adoption by the general mass has played a major role in carving the growth curve of Telecom and Banking Industry.

M-Banking The evolution of M-Banking and M-Payments in India have been from basic services like information alerts to complex ones like money transfer. There have been some models on which M-Banking is based on: • Account Based Model: In this, a bank account is operated using a mobile based application.

Either the applications are pre-installed on the SIM card (SIM Tool Kit- STK) or on the handset or can be downloaded using SMS or data (e.g.

mChek pre-loaded on Airtel SIM). Banking applications like ICICI’s iMobile or IMPS are also examples of account based models that offer interoperable platform for payment related services.

• Prepaid Wallet: This service is offered through a semi-closed loop instrument operated via mobile phones, primarily by telecom companies (e.g. Airtel Money Power). In ‘semi closed’ programs, a prepaid card is accepted by a wider range of merchants- such as in a shopping mall or online e-commerce sites.

Example: Payroll, Transit, Government Disbursements, Insurance

Fig 2: The Journey So Far

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Fig 3: Timeline of Mobile Banking in India

• No Frill Account: Organizations with large distribution networks have partnered with banks to offer “open loop” prepaid services through mobile devices (e.g. Super account of Airtel Money). In an open- loop program, cards can be accepted and processed anywhere by any merchant (MasterCard/Visa) and can also be used to withdraw the money from ATMs. Example: In B2C, e-money related products like reloadable cards with redemption, ATM, Remittance features etc.

All three models have evolved under the regulatory requirements and the encouragement given by Indian Government.

The figure above describes about the timeline of Mobile Banking in India. From basic Mobile banking services like SMS alerts to complex ones like m-Paisa, the M-Banking services have been growing steadily in India.

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Impact on Consumers With the advent in mobile device technology from being device-driven to consumer-driven, there has been a corresponding shift in the way a consumer use mobile devices. Gone are the days, when a user felt intimidated by technological impact, today’s consumer is exposed to unparalleled levels of information a n d a w a re n e s s .

T h i s evolution in the usage of mobile phones in sync with the advent of technology has resulted in a significant impact in the banking industry.

Challenges Ahead The integration of technology in a way that it eases out the accessibility and its usage for the common man is one of the challenge ahead that the experts should look upon. Also, security

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Fig 4: Mobile Banking Transactions for Banks

through common channels should be taken care of, as any breach will undermine customer confidence and discourage them from using the online banking services. There also exist a problem in interoperability among different service providers and banks. The designing of processes for conducting the migration of consumers from one bank to other, and protection of bank account while conducting transactions online and offline should be considered. The methodology required in order to conduct banking transactions online require literacy of the public. This in turn needs encouragement that should be provided to the public.

Conclusion M-Banking is a developing field in India and requires much attention in terms of technological and methodical development.

A coordinated approach should be followed by task synchronization among the regulators and players in the Telecom and the Banking Industry. This would ensure an effective and efficient service delivery by educating the users about the security of the banking transaction conducted.

There are around 75% of people having cell phones out of which 60% people use banking services. This gap can be filled up by taking

certain steps like the one suggested by the RBI governor, Mr. Raghuram Rajan to constitute a technical group in order to study the feasibility of using an encrypted message (SMS) based application for fund transfer. Looking at the trends of mobile banking usage in countries like US where Cheque 21 facility (Cheque truncation) via phone is available, where NFC technology in cell phones is planned to be used as a virtual credit card, there is ample scope of mobile banking growth in India.

There indeed are many advantages of using Mobile Banking ranging from ease of accessibility, faster money transfer to reduced costs. Encouragement and more than that, collaboration among all stakeholders is the need of the hour, on which success of Mobile Banking is dependent upon.

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Article of the Month FinPact Cover Story

Reliance BP M&A Deal Ankita Prasad

IIM Shillong

About Reliance Power: It is a division of the Reliance Anil Dhirubhai Ambani Group (ADAG) which was set up to design, build, and run power projects in the international and domestic markets. Reliance Energy Limited, the promoter of the company, is a private sector utility company based in India.

Accompanied by its subsidiaries, Reliance Power is setting up 13 medium and big-scale power projects with a collective plan and to achieve an installed capacity of 33,480 Megawatts.

About BP: Considered as the second biggest publiclytraded oil company in the world, BP or British Petroleum is vertically integrated and is involved in different types of business such as oil exploration and production, supply and marketing, refining, petrochemicals, and power generation and trading. The company also has its involvement in renewable energy operations such as hydrogen, biofuels, wind and solar power.

Headquartered in London, United Kingdom, the company is an oil and gas super major and runs business in more than 80 countries across the

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world.

Oil and Gas Industry in India: After liberalisation and globalisation of its economy in 1991, exceptional levels of economic expansion has been witnessed in India which was primarily driven by rapid industrialisation, demographic changes and a strong exportoriented services framework which led to a 3.3 times growth in India’s gross domestic product from 2002 to 2012. As the economy flourished, the demand for energy in the country rose by more than 70 percent. Moreover, this drift is expected to continue for the next 10 years making India the 3rd largest global energy consumer by 2020.

Oil and gas represents more than 45 percent of India’s total energy consumption because of the growth in various sectors like automobile, power, fertilizers, etc. Given the enormous energy needs of the country, the complexity of technologies involved, huge amount of investments required, and the political obstacles, it is a formidable task for the country to ensure a long-term energy self-sufficiency. Despite all these challenges, the

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to completion adjustments, for the interests to be acquired in the 23 production-sharing contracts. Future performance payments of up to $ 1.8 billion is planned to be paid based on exploration success that would result in development of commercial discoveries. RIL would continue to be the operator under the production-sharing contracts.

This is the third biggest M&A contract in India.

This planned alliance was a major step towards attaining the objective of operating across the gas value chain in India, from exploration and production to distribution and marketing.

The completion of this deal marked one of the largest and most profitable foreign direct investments into India. This formation of a 5050 joint venture for these two companies also aimed at sourcing and marketing of gas in India which would accelerate the creation of infrastructure for receiving, transporting and marketing natural gas. They targeted to provide, advertise, and sell natural gas, combining LNG, which can supply the energy to countless houses in India lowering the requirement of subsidized liquefied petroleum gas (LPG). As indicated by the Experts, Reliance can get LNG from international plants of BP.

Fig 1: Oil Exploration Rig

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likelihood of growth in the oil and gas sector is high. Only half of the country’s potential basins have been explored, and large blocks offshore still remain untested. This presents countless opportunities for companies across the oil and gas value chain to be involved in the industry’s growth.

Reliance BP Deal: On February 21, 2011, Reliance Industries Limited (RIL) and British Petroleum (BP) announced a strategic partnership between the two companies and signed the relationship framework and transactional agreements. This partnership across the full value chain comprised BP taking a 30% stake in 23 oil and gas production sharing contracts that Reliance drives in India, including the giant KG-D6 block. The partnership targeted to align BP’s deep-water exploration & development capabilities with Reliance’s project management and operations expertise. The two companies also formed a fifty-fifty joint venture for the sourcing and marketing of gas in India and bid together for incremental opportunities in the deep-water blocks in the eastern coast of India.

BP had paid Reliance Industries Limited an aggregate consideration of $ 7.2 billion, subject

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Mukesh Ambani, Chairman and Managing Director, Reliance Industries, said that this alliance with BP would boost their efforts to realise the true potential of India’s hydrocarbon reserves. He also expected to best align the globally renowned expertise of BP and the indepth domestic experience of Reliance to make for a challenging alliance which would deliver a supreme value for the country in its pursuit of energy security. The Chief Executive of the BP group, Bob Dudley, anticipated that this formation of alliance with strong national partners would create a long term value for them which in turn would help them acquire material positions in significant hydrocarbon basins and increase their exposure to growing energy markets.

In November 2011, RIL and BP declared the formation of an equal joint venture in India that would concentrate on global sourcing and marketing of natural gas in Asia’s third-largest economy. This joint venture, India Gas Solutions,

was planned to develop infrastructure to hasten transportation and marketing of natural gas within the country. India Gas Solutions will begin operations with 30 employees seconded from BP and RIL, with deep know-how in the gas business both, in India and internationally.

Story behind: British Petroleum’s Macondo well was spewing thousands of barrels of oil daily into the Gulf of Mexico which led to killing of birds and sea life ruining the livelihood of fishermen. As a consequence of causing one of the greatest environmental disaster, the share price of the company halved and had been obliged to suspend dividends and put $20 billion into an escrow account from which damages would be paid. Mukesh Ambani took advantage of this disaster and took this opportunity to take over this 4th largest company in the world. The stock

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market had driven down BP’s market value to just $100 billion, not far above Reliance’s $80 billion.

Mukesh Ambani had a number of options. He could have offered a merger in which for every BP share, two Reliance shares would be exchanged giving the BP shareholders a substantial premium over the current market value. But, this carried the risk of plummeting Reliance, had BP been driven into bankruptcy by a failure to plug the Macondo well. Thus, a less risky option was buying of 10% to 15 % stake in BP, which at prices then would have cost between $10 billion and $15 billion. This would have given Mukesh Ambani a seat in the Board of Members of the company, if not the total control of BP, with his aspirations of increasing his stakes later and acquiring control once the Macondo well was capped still alive. Considering the fact the RIL had a strong balance sheet, with cash in hand of $5 billion for the year, borrowing $10 billion to $15 billion for this strategy was an easy option for a company with a market value of $80 billion. Moreover, borrowing this amount would still have left Reliance with a very respectable debt-equity ratio of less than one. Despite the risk, BP was well worth taking over. The cost due to damage was affordable if spread over five to ten years. Along with Reliance’s own sales, a BP takeover would have put the company in a strong position to become world number one.

As a consequence of the Gulf of Mexico oil spill, BP was continuing to incur costs and had also recognized liabilities for future costs. Liabilities of ambiguous timing or amount and contingent liabilities were accounted for and/or disclosed in accordance with IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’. Key aspects of the accounting for the oil spill are summarized below.

• The financial impacts of the Gulf of Mexico oil spill on the balance sheet, income statement, and cash flow statement of the group are shown in the table below • The amounts for obligations are not accounted for in the aggregate income statement charge that BP considers are not possible, at this time, to measure reliably Business Combination: The transaction with Reliance India Ltd. was accounted for as a business combination using the acquisition method. During 2012, measurement period adjustments amounted to an overall decrease

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giving even more choice for the energy-starved economy.

This Reliance power project deal with BP has the strength to become the biggest individual foreign direct investment (FDI) in India.

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of $115 million in the net fair value of the identifiable assets and liabilities acquired, an increase of $46 million in the goodwill arising on acquisition and an adjustment to reduce the contingent consideration to nil. Goodwill of $2,569 million arose on acquisition, attributed to market access and other benefits arising from the business combination.

Impact of the Deal: With only one block allotted through Indian Government auctions, British Petroleum is now paying privately-owned RIL for a 30 percent stake in 23 of its blocks which included the huge gas producer D6 in the Krishna Godavari basin. The blocks now yield about 1.8 billion cubic feet/ day (bcf/d) which is much more than 40 percent of India’s total production and more than 30 percent of total consumption. The British-based company evaluated that there are at least 15 trillion cubic feet (tcf) of gas resources in the blocks which are enough to meet India’s current rate of consumption for seven years.

British Petroleum: It is BP’s most crucial investment in exploration and production in Asia, with a prospective total of $20 billion linked to exploration successes. At the same time, BP could use its technical expertise to boost yield at Reliance’s D6 block. It is India’s biggest gas discovery but the output has slipped, because of technical problems, to about 52 million cubic meters a day (mcm/d) from 60 mcm/d in October and is short of a target of 80 mcm/d.

Reliance Industries Limited: This is a beneficial venture for Reliance as it will be able to take advantage of BP’s technical capabilities which will in turn enhance the valuation of the existing assets of India’s biggest company.

Blazing inflation, elevated demand: As India’s coalition government is struggling to balance the need for growth to help half a billion poverty stricken people out of poverty with pressure to keep the lid on for scorching fuel and food inflation, this merger provides it with a chance to lift the domestic production. As per the expectations of BP, the gas demand in India would grow nearly five percent per year till 2030 thus leading to an increase in consumption by 15 bcf/d by then.

Reliance and BP are also planning to join aussi together to source and market gas in India -likely to focus on liquefied natural gas (LNG) and potentially the construction of a terminal,

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Is crowd funding the next big financing idea?

Pragyanshree Jagati

IMT-Ghaziabad

The need for entrepreneurship in a developing nation like India cannot be denied. Besides creating employment opportunities, it generates wealth which boosts the GDP of the country.

Today, India is proud of entrepreneurs such as Jamshedji Tata, Dhirubhai Ambani, Narayan Murthy, Kiran Mazumdar Shaw, to mention a few. According to a recent report by McKinsey, India must establish a minimum of 8,000 new businesses in order to achieve an IT sector worth US$ 87 billion. Ten years down the line, 110-130 million Indians will be looking for jobs.

Out of these, 80-100 million citizens will be the ones who will be looking for their first jobs.

Funding – the Formidable Challenge However, entrepreneurs in India face a number of challenges while establishing a start-up.

Doing Business Report 2014, released by the World Bank during last October has invoked doubt about future growth rate of Indian economy. The Report has put India’s rank as 134 out of total 189 nations considered for review.

Doing Business gives relative indication on how easy or difficult it is for a local entrepreneur to open and run a small to medium business when complying with relevant regulations of the country. Although, there are various political, economical and legal factors adversely affecting India’s Doing Business rank, one formidable

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challenges is ensuring the availability of funding, both in terms of adequacy of amount and cost of fund. No innovation can materialize and taste success without financial capital, howsoever breakthrough it might be. In this context, crowd funding can play a crucial role.

Traditional Funding Options and Underlying Impediments The funding options available today are the angel investors, the venture capital investors, and the loans from NBFCs and banks.

The angel investors provide quick access to funds; a deal typically closes within a day to three months of duration. However, angel investors are not easy to find. Moreover, the reputation of the entrepreneur plays a key role in bagging the funding.

The venture capitalists do provide the access to a greater amount of capital, as compared to the angel investors. However, this availability comes only after the product or service has been established. The funds are not available during the seed-stage or when the idea is just a concept.

Moreover, even if funds are provided, the access to the same is not quick as it typically takes 3-6 months to close the deal. This is accompanied with preference for certain sectors which have exhibited growth in the recent years such as IT. According to an article in the times of India, the

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together make contributions which results in pooling of money needed for the project.

Crowd funding truly overcomes the formidable challenge of fund raising by working on the principle of small drops of water can form a big ocean.

By virtue of connecting the investors with the entrepreneurs, crowd funding provides quick access to the funds. Thus, the tedious task of establishing connections with leading financial institutions, creditors and the venture capitalists is done away with. For instance, Kickstarter, the world’s largest online crowd funding platform, was instrumental for the success of creating Ouya, a video game console. It was created by a team of individuals who were earlier working with companies behind XBox 360 and PlayStation3.The target amount was $950,000.

However, Kickstarter could raise more than $8.5 million within a period of 31 days.

Added Advantage of Crowd funding Model There is a diversification of the investor base. Even a person with a little capital is eligible to invest. Thereby, he also becomes eligible to reap the dividends.

Thus, the wealth generated is no more concentrated in the hands of the few.

Ideas which appear to be disruptive innovations will also get funded. These are likely to be rejected funding by the traditional sources as their cash flow estimation cannot be carried out easily. The Smartwatch, Pebble, was created successfully with crowd funding In the initial stages it did seek venture capital.

However, it was not successful in attracting funding via the traditional means. Hence, it looked to crowd funding. The target was $100,000. However, within a year, the capital raised was $10,266,844.

In addition to raising capital for the reject, crowd funding simultaneously creates awareness among the prospective customers. The investors who have provided the seed capital, eagerly look forward to the launch of the promised product or the service .They also inform others by the word of mouth or through ever spreading social networking. Hence, crowd funding offers an inherent promotion strategy. In July, 2012 a survey was carried by Wharton professor Ethan Mollick and Jeanne Pi in order to study

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Finsight Classroom Cover Story

venture capitalists expect an Internal Rate of Return to be 25% in the first 4-5 years of the project. To meet this criterion, the companies should have a CAGR of nearly 25%. This presents a major challenge to the start-ups.

Loans from NBFCs and banks often require that the company should have operated for a minimum period of 3 years so that its credit history can be tracked and cash flow can be estimated. This too presents a shortcoming for the start-ups.

There are some other challenges which the entrepreneurs encounter while trying to obtain the funding. Many venture capitalists seem to be inclined towards export-oriented industries such as IT. However, sectors such as health and energy which meet more of the domestic demands, do not receive the same favour. The investment funds and the local entrepreneurs are not well connected. This leads to funding by global investors. However, the foreign investors may fail to understand the characteristics unique to India’s business culture. This gives rise to the need for local funding.

All the above enlisted problems become all the more pronounced if the projects involve women entrepreneurs. The creditors are reluctant in extending financial assistance to them as they are more apprehensive about their credit worthiness.

The situation worsens with the involvement of middlemen.

The middlemen add to their profit margin. This results in a lowered profit.

Crowd Funding – An Innovative Fund Raising Model With all these challenges, ‘Crowd Funding’ as a funding option seems to be the way ahead.

Let me briefly explain as to how this works.

Crowd funding models involve 3 types of participants. The first category represents the people or organizations from where the idea originates and has to be implemented. Next is the crowd of people who support the proposal by investment of their funds. Crowd funding is then supported by an organization (better known as the platform) which brings together the project initiator and the crowd. The model involves raising money via an online portal for the underlying project. A group of individuals

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what determines the success or failure of an idea at KickStarter. One of the observations was that when the products were featured on the homepage of Kickstarter’s website, their chances of being successful was 89%.

Today’s market is primarily driven by the customers. The success of any product or service is determined by its acceptability by its consumers. Hence, the quicker the feedback given by the consumers, the better it is for the business as they can improve upon their offerings. In crowd funding, the consumers are involved in the design of the offerings from their very inception. The very decision of funding the project comes only after the idea gains acceptability among the prospective consumers. This places the entrepreneurs at an advantageous position in comparison to those who discover the customer response to their products at a much later stage.

According to Small Business Administration, about 6, 00,000 businesses are started in the US each year. Out of these, only 300 start-ups are funded by the VCs.This implies that the probability of a start-up getting the funding by a VC is only 0.0005(300/600000). This, in effect means that 99.95% of the entrepreneurs will not get a VC at start-up. Rather, by getting funded in the initial stages by crowd funding and exhibiting a growth potential, which most of the VCs look for in a project, a firm can improve its chanc3s of being funded by a VC in its later stages.

Also crowd funding lets the owner of the project to retain the control of operations in his or her hands unlike issue of shares wherein some amount of ownership is transferred to the shareholders. Loan involves a certain rate of interest which at times may prove to be costly for the borrowers. However, by crowd funding, the cost of borrowing is not so high. KickStarter charges 5% of the funds raised only if the product is successful. In addition, Amazon charges 3-5%.

Crowd funding does away with middlemen. For example, Kickstarter enables creators from the USA or the UK to connect with financial bankers from any part of the world Challenges of Crowd funding However, like any other concept, crowd funding has its own set of challenges. The major challenge is that of protection of intellectual property. When the project owner shares the idea with the crowd for raising funds, the idea is very much likely to be leaked to the competitors.

This must be dealt with by enforcing strict legal compliances so that the spirit of innovation is not

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defeated. Also, an initial failure of the product may discourage the crowd from investing in the future. An equally important challenge is that very often fraudulent parties make claims for innovation to earn money. This erodes the faith of investors, as a result of which genuine innovators suffer. Further, as large number of small investors would be involved in a crowd funding model, there is requirement for a simple but effective legal mechanism which can safeguard the interest of the small investors against any fraudulent practice.

Thus, to sum up it can be said that today, crowd funding can emerge as the ideal option for funding in the seed stage, for a country like India where large number of management graduates are emerging every year with urge of setting up of own enterprise. With sound technical knowledge, management skill in their armoury, the resourcing of capital through crowd funding can successfully implement their dream project, thus creating a lot of new jobs besides enriching Indian economy. Indian policy makers should start selling the idea of such financing model with appropriate legislation in order to give confidence to the prospective investors. A bill like The Jumpstart Our Business Start-ups Act or JOBS Act, as enacted in USA in 2012 which intends to encourage funding of small businesses may be examined in the Indian context.

MR. AMIT SOMANI Partner, Audit Practice, KPMG India

Since you have been in close contact with Indian IT companies, how do you see them shaping themselves around the recently implemented new Companies Act, 2013?

What could be the most immediate impact on the functioning of companies?

Let me begin by explaining that the new Companies Act is replacing a legislation, which is around 60 years old, and is bringing a new perspective within corporate India.

Some of the key impacts expected on IT companies : better corporate governance through the presence of independent directors, enhanced representation of women directors and adoption of an inclusive agenda through mandatory participation in CSR initiatives where 2 per cent of the Profit before tax (PBT) will have to be spend, applicable to some qualifying private and public companies.

The Institute of Chartered Accountancy is working towards framing directives on how to account for CSR initiatives, and companies are setting up ways in which they can implement it. One could put money in the Prime Minister’s Relief Fund, which is something not everybody may wants to do. Some renewable energy methods can also be adopted, such as spending on a green environment, which is an interesting option that people could start looking at. There is an increased responsibility on the Board of Directors of all companies, including the independent directors, due to the inclusion of the class action suit which says that if any shareholder is holding more than 10 per cent in the company he/she can file a class action suit not only against the Board of Directors, but also the auditors and the management including the CFO. A key thing, which is changing, is the affirmation on the adequacy and operative effectiveness

of internal financial control. This is mandatory for listed companies, as far as the directors are concerned. But the major impact is for the auditor because now auditors have been made mandatory for all the companies, who have to certify the internal financial controls. On this aspect I feel many small companies are still not ready because the guidance on internal financial control is yet to be out. The biggest issue that might occur is where the companies are required to certify. Certainly they have the inclination to do all the things in the right manner, however, companies are not required to certify everywhere; the auditors are required to certify.

A framework is being worked around it, which is likely to be as per the international standards.

Although I am not quite sure how quickly the companies can transition, since within a year it will likely requires many systematic changes, on the people side, IT side and overall behavioral aspects within the company.

The definition of related parties has also been expanded and various approvals have been setup, which are required from the board and the shareholders, to enter into contracts that have multiple stages depending on the associated audit committees. The related parties would have to be identified at the beginning of the year, which currently could be a bit of a struggle as its definition is quite wide. For example, earlier, internationally, only the dependent siblings were covered, where as now even the siblings that are not dependent come under related parties. The information sharing in this respect will be a little difficult.

Another major change is that fraud has been given an all-inclusive definition. Now even if you have an inflated expense claim, it could be considered a fraud. So if there is a fraud conducted by an officer or an employee of the

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company, then the auditor is required to report to the central government in a time bound manner, and that poses a significant challenge in terms of reporting. Also, it is not necessary that the central government will have the necessary machinery to deal with it. There is a guidance note being worked out on how the reporting will span out, but here the Ministry of Corporate Affairs will be required to clarify if petty fraud should be covered.

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The Auditor’s Rotation Goals have also been covered in the Companies Act that also includes independent directors. So there are a defined number of years that one can serve as an auditor or independent director, after which one has to rotate and serve the cooling-off period.

That is a significant change because most of the countries around the world have not adopted this approach. In the European Union they are trying to go through the auditor rotation changes, but this is something that India has already adopted. The idea is to improve the quality of audit but it has to be seen from data over time. This step is to help ensure greater independence and objectivity on the part of the people who are involved in the governance and in certifying the financial statements.

Now, various non-audit services have also come under the rules governing what is prohibited and what is not, and there is also an audit committee approval required. Further, consolidated financial statements have also been made mandatory for companies.

The IT companies, particularly the big ones are still fine, but the smaller ones may find it tough and that is where a deep dive in terms of diagnostic studies is important. Further, the Act has also not been given much transition time, which might pose certain difficulties.

These are some of the top level things and a detailed study is recommended as far as all IT companies are concerned, whether in-house or through an expert, but the challenge is that there are gaps and the time is too short to fix them, because from 1st April 2014 the sections are effective.

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Despite the presence of a legislation like the Companies Act of 1956, a case like the corporate scams happened. So do you thing the implementation of this new Companies Act, 2013 can help make the stake holders more assured?

The popular view is that the new Companies Act is trying to deal with an exceptional situation. It is putting a huge amount of responsibility and pressure on existing companies. There should ideally have been better thought put into what should be brought in and what should not be brought in. I think it has gone to another extreme of the pendulum, trying to cover several aspects in one go.

How do you think would bringing in a policy like Sarbanes-Oxley in India benefit the interests of the stakeholders?

Bringing something similar to Sarbanes-Oxley in India can bring a better investor protection, but a couple of things should be noted. One is that SOX is only mandatory for listed companies and the new Companies Act should also have focussed mainly on listed companies. Secondly, there is an act called the JOBS Act, which has said that if the revenue of the company is less than a billion dollars than in the SOX certification, then the auditor is not needed, a management certification is good enough. Although the whole idea of this legislation compliance is to bring better investor protection, there is a cost and benefit analysis. For the small companies, the cost of compliance is very high. In my view, internal financial control should have been restricted to the listed companies, otherwise we are not really protecting anyone in a private company that may be significantly owned by any individual or group. It is the listed companies, where you need investor protection.

In a way the new Companies Act has brought in internal financial control certification, which is a step towards what Sarbanes-Oxley intends, but that certification is needed for a wider set of companies. I think the focus on listed companies could have been higher than the private companies. As the economy is improving, we will likely see a lot more listing over the next

few years because the interest rates are high and there is a need for capital. Companies may access the public market for this, increasing the number of listings. And for a better quality of investor protection, these regulations, at that point of time, can become very handy.

together in many of the key areas like bringing in tax stability. And once you have tax as well as policy stability and there is a policy clarity, foreign investors should feel comfortable in the Indian economy. If Indian businessmen are given appropriate incentives, I think then there is a lot that can happen in the next three to What impacts could the potentially four years. The biggest push could be in the aggressive growth policy of the new infrastructure and the energy space. government have? Will the wish of the new government to outperform in the There has been a long-standing debate first 100 days of governance fling back about the removal of Indian GAAP and the the Indian economy on the growth path, IFRS, which lead to the formulation of or will Mr. Raghuram Rajan’s approach the Indian Accounting Standards which to curb inflation first, at the cost of converged with IFRS. What are your economic growth, prevail? views on this and how much penetration From my perspective, the Prime Minister has set do you see of the Ind ASs, in terms of a 10 point agenda. In his oath ceremony he got, Indian companies adopting them and along with the international political leaders, the international community accepting the business leaders as well, which shows that them in the wake of globalisation. he wants to work with them and instill proper My personal view is that we trying to converge political stability. The Ministry of Finance that with IFRS is not a good idea; rather we should is headed by Mr. Arun Jaitely is expected to have adopted IFRS. Currently, if the companies work in close coordination with Mr. Raghuram are getting listed abroad, they will have to Rajan, so that growth and inflation are balanced prepare their financial statements in two GAAPs, out. The key issue on currency can be related Ind AS and IFRS. Only IFRS would have had more to three kinds of goods that we import, which mileage. And as far as Ind AS is concerned, there are part of the balance of payment; gold, oil has not been much clarity until off late, whereas and defense equipments. I feel that Mr. Modi for listed companies they have come up with a will try to see how defense related equipment time frame. There were some companies that can be manufactured in India so that we are wanted to do benchmarking exercise in terms of not dependent on the foreign market and we what is the kind of change that could happen in are able to create a surplus that we can export their company from the IT, people and accounting in the future. Our dependence on oil is huge perspective and how they could deal with it. and Mr. Modi seems to be interested in working Some companies started the project but some on alternative energy sources i.e., such as companies abandoned it. Some companies that harnessing solar energy. etc. Till the time we are already listed abroad are anyways following are able to build proper energy resources, IFRS. Ind AS is very close to the international oil will continue to exert the pressure on the standards but they have still kept certain currency. For With regards to gold, the people in differences, and when you go abroad for listing, our country consider it as a safe bet because of IFRS will need to be followed. The things that which the imports will likely continue to remain changed from the perspective of the Indian high. In the past, the government had increased GAAP are; firstly on the revenue recognition front the import taxes that may now gradually be where there is a lack of guidance for the current brought down, but this may be driven more by GAAP and in IFRS, there is lot more guidance demand. The key thing is to create the most available. Secondly, the change will come in the energy efficient environment that can bring accounting of a business combination. There down the oil bill, and defense related costs. are a couple of places where alternatives are The government and the RBI will have to work available under IFRS but Ind AS has gone with Š FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG

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one of the alternatives.

Income tax will see a lot of changes particularly on the deferred tax area and on dealing with some uncertain tax positions under the income tax rule.

If somebody is under IFRS, not a very significant change is happening in Ind AS for the majority of the sectors. But somebody who is under the old AS, a complete shift of mindset, IT systems and accounting will happen. Though in both the cases, IFRS and Ind AS, there is a transition standard that tells you what to do and how to deal with certain things and there are exemptions that one can take the benefit of.

But this is something on which the companies will have to carry out a very detailed exercise to understand how each line item is impacted and what are the exemptions and transitions. It needs to be seen whether the money that India Inc. is borrowing as a part of external commercial borrowing, and the lenders who are mostly European set-ups will be comfortable with the Ind AS, as an acceptable GAAP, or whether they will look forward to IFRS. Current companies that are following IFRS will have to also follow Ind AS and that will lead to an additional cost of compliance.

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What do auditing firms, including KPMG in India, look for in candidates before hiring them for the role of a financial consultant? What are the most valuable skills required for this job?

For a person who is starting as a fresher in this industry, I feel some of the key traits that any big company will be looking for while hiring are their personality, confidence, attitude, communication skills in terms of being articulate, interpersonal skills, technical skills in respect of having their domain knowledge, and understanding the environment around them.

Even academics play a part, but they are not the only benchmark and the person is expected to be smart and not a bookie. Then the person should be a solution provider, which represents a consultant’s mindset. My message would be that the person must find the right company that can suit their needs and aspirations and then keep patience and hard work to climb the

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Angel Investors

FinFunda of the Month

K Tarun IIM Shillong

Now I get the difference, Sir. But one thing I don’t get is why would someone invest so much money without putting constraints?

Hello Sir, recently I was going through an article in a newspaper and found something called “Angel Investors”. What kind of investors are these?

Angel investors typically make the most early equity investments in the startup companies. They are usually wealthy individuals and organize themselves into groups or networks called angel groups or angel investors. By doing so, they pool up investment capital and also provide advice to their portfolio companies. They provide capital for a business, usually in exchange of ownership equity.

The reason behind why they are called “angel” investors is because they typically enjoy working with companies and invest in startups before the concept of the idea has been proved to be profitable. So that means they help the startups without a real profit motive.

Oh! I see. That’s very interesting. But I have also heard about venture capitalists that they also invest in startups. What are they and how are they different from angel investors?

These kind of investors also provide capital to startup companies or support small companies that wish to expand but do not have access to bank loans. They do so in expectation of high returns, in case the companies are successful.

They may experience losses as well, but these investors are so wealthy that they can afford such losses. When we compare the angel investors side-by-side to venture capitalists, both of them are different species altogether.

There are many constraints based on which venture capitalists invest in companies. The volume of money a VC deals with is also much larger. Angel investors don’t go to board meetings, don’t have to put in lots of capital, prefer simple terms and understand the experimental idea of a business, unlike a VC.

The reasons are plenty. The angel investors are wealthy and are often retired entrepreneurs or executives. They invest in order to keep abreast of the current developments in a particular business arena or to put in their expertise to help the private startups grow. They mentor the new gen entrepreneurs and provide their valuable management advice and important contacts. Since there is no public funding and VC means so many constraints, private startups go to these type of investors.

Wow! This is so wonderful, Sir. Now please tell me what role does private equity firms have in this regard and how they are different.

Private equity is an asset class consisting of equity securities that are not publicly traded on a stock exchange. A private equity investment is usually made by a private equity firm, a venture capital firm or an angel investor with each of these having a different set of goals.

This is real great stuff. But how do I decide where do I source my funding from – a Venture Capitalist or an Angel Investor?

There is no such thumb rule on how to decide the source. All that a business must take care of is evaluate a few factors and then decide their funding source. Few such factors are size of project, type of project, amount of financing required, return expectation etc. for example, venture capitalists prefer to invest in companies having a high potential for rapid growth.

Thank you so much for you insights Sir. They were really very helpful.

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WINNERS Article of the Month

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Tejesh Thota IMT Ghaziabad

FIN - Q

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Sydenham Institute of Management Studies

Second Prize - INR 500/-

Vivekanand Tyagi IIM Shillong

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