Page 1





Participatory Notes

The Debacle of Arthur Andersen

Margin Call

Fi nance and Inve stme nt Cl ub





Audentes Fortuna Iuvat

Dear Niveshaks, This monthly edition of the magazine brings to you a sneak peak into the current happenings of the past month under the TMTW section. The latest happenings covered are Airtel’s attempt to expand it’s operations in Africa through issue of new equity; replacement of Mrs. Chanda Kochhar as the CEO of ICICI Bank, who held the position from May 1, 2009 onwards till October, 2018, with Mr. Sandeep Bakshi; drop in FDI flows to hit a record low in four years are amongst the few. The Article of the month, is a detailed study on how can India achieve financial inclusion. The article is a contribution by Mr. Rohit Dudi, IIM Lucknow. The Cover Story this month tries to decode the IL&FS, financing and investment crisis. While analyzing the fallout of the Finance and Investment Bank, the article also talks about the way ahead.

NIVESHAK | OCTOBER 2018 The FinFails section of this month covers the failure of Arthur Andersen, which was one of the top accounting and audit firms till the time of its failure. This debacle left the world with only top 4, including Deloitte, E&Y, KPMG and PwC. The Fingyan section is a detailed study on the scope of Singapore Venture Capital Market. It is a contribution by Sumit Mehta, PGDMRBA (2017-2019), Welingkar College, Mumbai. The section on FinView is an interview of Mr. R.K. Arora who is the CEO of Smart Equity Brokers and a trainer of financial markets to ICICI Securities and various financial institutes such as Institute of Chartered Accountants of India (ICAI), NSE Academy Certification in Financial Markets, BSE Institute Limited, Pearl academy, among others and a market forecaster on the current happenings in the finance and investment domain. The Classroom section of the month, decodes the theory and concept of Participatory Notes while the Movie Review section is a assessment of the ‘Margin Call’.

Stay Invested, Team Niveshak All images, design and artwork are copyright of IIM Shillong Finance Club © Finance Club Indian Institute of Management, Shillong Disclaimer: The views presented are the opinion/work of the individual author and the Finance Club of IIM Shillong bears no responsibility whatsoever.


Aayushi Abhishek Soni Arpit Murarka Bhushan Bavishkar Mahesh M Priyanshu Gupta Samprit Shah Sheshav Dosi Sriya Gupta Aman Jain Harsh Jain Rajat Magotra Rohit Garg Shreyansh Parakh Suchitra Mandal Trisha Waghela Vinti Singla Yukti Rajpal




06 08 10 The Month That Was

Niveshak Investment Fund

Article of the Month: An Empirical Study

15 19 21

Cover Story: The IL&FS Debacle


FinView: CEO, Smart Equity Brokers

FinFails: Arthur Andersen

FinGyan: Scope of Singapore VCM

31 33

Classroom: Participatory Notes



Movie Review: Margin Call




Mr. Sandeep Bakshi will now hold the CEO position for next 5 years. Mrs. Kochhar was stuck in controversy for influencing a ₹ 3250 crore loan to the Videocon Group headed by Venugopal Dhoot, who had set up NuPower Renewables in a Joint Venture with Chanda’s husband Mr. Deepak.

Airtel Africa raised $1.25 billion to reduce existing debt and grow operations in Africa After a primary equity issue of $1.25 billion, the telecommunications company stood at $4.4 billion. The amount raised from six global investors would be primarily used to reduce existing debt of about $5 billion and grow operations in Africa. The move has come up in a time when the company is trying to reduce debt and aggressively win customers. This investment also shows the confidence global investors have vested in company’s robust growth and profitability.

Indian economy projected touch $5.9 trillion by 2030


In a report published by HSBC titled ‘The World in 2030’ projections are made that the Indian economy will touch $5.9 trillion from its current position at $2.8 trillion, growing by an average 6.2% This estimate was different from what Niti Ayog’s chairman Mr. Amitabh Kant made, wherein he assumed an average growth of 10%. Despite these projections, India is still far away from a faceoff with China, whose economy is expected to be $11 trillion bigger than the Indian economy.

Chanda Kochhar quit as CEO of ICICI Bank After a career that lasted for more than 3 decades, Chanda Kochhar pulled out of ICICI Bank last month amidst the on-going probe into loan sanctions that were made during her CEO tenure. After Chanda’s early retirement, [6]



Reliance Jio to ensure pricing of 5G devices comparable to current 4G devices

FDI from China dropped to $141 million, lowest in 4 year period

To broaden its customer base over 265 million households, Reliance Jio is looking for comparable pricing for its 5G devices to make them more affordable. Though the commercial launch of 5G will happen sometime in 2020, Jio may conduct tests with Samsung much before in Q1 2019. These moves have come up in a time when the outside world is preparing for the commercial launch of services while the Indian government is yet to put forth a clear roadmap for spectrum auctions.

Though India remains an attractive investment destination, FDI inflows from China have dwindled to reach a record low point of $141 million in last 4 years. One of the reasons cited behind this were the tougher clauses put in place by Beijing. Though the Indian government is unsure of investment demands, the Chinese government is pushing for more industrial parks allocation for Chinese firms along with discussions on an investment treaty.




As on October 31st, 2018 As on 31th July 2017

Performance of Niveshak Investment Fund since Inception

Scaled Sensex

Scaled Portfolio
















102 100 98 96 94 92 90 88 86


October Month's Performance of NIF

265 255 245 235 225 215 205 195 185 175 165 155 145 135 125 115 105 95 Sensex Scaled values

Portfolio Scaled Values Value Scaled to 100

Total Investment Value: 10, 00,000 Current Portfolio Value: 20,04,911 Change in Portfolio Value: 100.49% Change in Sensex: 77.00%

Risk Measures: Standard Deviation NIF: 35.37 Standard Deviation Sensex: 18.43 Sharpe Ratio: 2.73 (Sensex: 3.47) Cash Remaining: 37,788

Comments on the Equity market and NIF’s Performance: The Indian equity benchmarks indices registered their worst two-month decline since February 2016, despite rally at the last day of October, amid a growing discord between the government and the central bank.Nifty50 appears to be losing momentum on the downside given the upward push in the market. In early days of 2018 the market experience serious correction for a few weeks and thereafter it reversed. Same is the case with current time, the market has already corrected as of now and a short term reversal can be expected. Sensex and nifty both recorded -6.51% and -5.64% movement in October. The national currency pared a decline after the finance ministry moved to disperse growing tensions with the RBI. India leapfrogged 23 position on the World Bank’s Ease of Doing Business Index due to major reforms proposed and implemented. Parameters which helped are convenience to start a business, ease to get construction permits and quicker cross-border commerce. A revival plan was submitted before NCLT by IL&FS Ltd. today, clearing the way for resolution of the debt-laden troubled conglomerate. The government to keep with its divestment plan decided stake sale of 9% in Coal India a 2 day offer for sale starting 31st October. This move will fetch the government about Rs 140 billion at the floor price, including a green shoe option.




NIF Sectoral Weights

Monthly Performance Portfolio Weight

7.38% 7.74%

13.58 %


14.22 %



12.24 % 28.72 %


Auto Infrastructure Chemical Media Financial Services FMCG Pharma Telecommunication Misc

TOP GAINERS FOR THE MONTH • Paramount Comm (25.21%) • Guj Flurochem (12.05%) • PVR (11.23%) TOP LOSERS FOR THE MONTH • Maruti Suzuki (-11.47%) • Godrej Consumer (-9.06%) • Indiabulls Housing (-7.87%)



HOW CAN INDIA ACHIEVE FINANCIAL INCLUSION? By: Rohit Dudi, IIM Lucknow As per The Committee on Financial Inclusion, chaired by Dr. C. Rangarajan, Financial inclusion is defined as a process to ensure access to financial services and to provide timely and adequate credit as and when needed by most vulnerable groups like low-income section and the weaker groups of the society at an affordable cost. Does not just include only banking products but also includes other financial services like equity products and insurance. Benefits: •

It develops a great culture of savings among a very large segment of rural population. It brings population of low-income groups in the perimeters of formal banking sector thus protecting their financial wealth in exigent circumstances. It reduces the chances of exploitation of vulnerable sections by the dishonest money lenders by providing easy access to formal credit. [10]

As per NSSO 59th Round Survey results, 52% of farmers in rural households are financially excluded from both formal banking sector. Of the total farmers in rural households, only 30% have access to formal sources of credit. More than 75% of farmer households have no or limited access to formal sources of credit. Problem of financial exclusion is more severe in Central, North-Eastern and Easter regions. But the situation has improved in last few years as shown in infographic below.


NIVESHAK | OCTOBER 2018 Financial Inclusion planned and taken up: •


All banks have been advised to open Basic Saving Bank Deposit (BSBD) accounts which come along with minimum common facilities which include but not limited to no minimum balance, facility of providing ATM card, receipt/ credit of money through electronic payment channels, deposit and withdrawal of cash at bank branch and ATMs. Simplified and relaxed KYC norms so as to facilitate opening of bank accounts easily and with no minimum balance requirements. The condition of introduction by existing customers has also been given away. UIDAI Aadhar Card can now be used both as an identity proof and as an address proof. Simplified Branch Authorization Policy is helping to address the serious issue of uneven spread of bank branches. Domestic Scheduled Commercial Banks (SCBs) have been given permission to open branches in tier 2 and below cities freely There has been mandate of compulsory requirement of opening of branches in un-banked villages. Moreover, banks have been directed for allocation of at least 25% of the total number of branches in un-banked rural centers, which were to be opened during that year. [11]

Initiative of opening intermediate brick and mortar structure which will help in effective cash management, close supervision of BC operations, redressal of customer grievances and documentation • Public and private sector banks were asked to submit three-year Financial Inclusion Plan (FIP) approved by board. RBI monitors these plans on a monthly basis. These FIPs must be disaggregated and should be percolated down up to individual branch level. • Financial Literacy Centers (FLCs) have come up. They help in scaling up financial literacy efforts by conducting outdoor Financial Literacy Camps at least once a month. 800+ FLCs have been set up providing literacy to a total of 2.5 million people through seminars and lectures, awareness camps or Choupals. • Innovative business models are aimed at further improving financial inclusion plans and efforts are being put in to look closely into processing of applications for banking licenses. FIP is now an important criterion for getting new bank licenses as suggested by Dr. D Subbarao. It is due to honest and concerted efforts since 2005 by RBI which has led to the increase in number of branches of Scheduled Commercial •



Banks which have increased multiple times. As a comparison with rural areas, the number of bank branches in semi-urban areas have increased more rapidly. Issuing Kisan Credit Cards (KCC): Banks are issuing KCCs to small rural farmers so that they can meet their credit requirements. More than 40 million KCCs have been issued so far with an outstanding credit of Rs. 3000 billion. Issuing General Credit Cards (GCC): Banks have introduced General Credit Card facility for amount up to Rs. 25000 at rural and semi-urban branches. Close to 4 million GCCs have been issued with [12]

the credit amount amounting to Rs. 80 billion. Through BCs, ICT Based Accounts: To provide cost-effective and efficient banking services in the un-banked and remote corners of the country, RBI has directed all commercial banks to provide banking services based on ICT, through BCs ATM Network Expansion: Number of ATMs in rural part of India has witnessed a CAGR of 35%. The number has increased from 5500 to 13000. Financial stability, Financial inclusion and financial education are three important elements of an integral strategy. Financial inclusion works from the supply side by providing access to different financial services, financial education works from the demand side



for promoting awareness among the citizens about the benefits and needs of financial services which are offered by banks and other financial institutions. SHG-Bank Linkage Growth: Helps in bringing many people under the umbrella of sustainable development in a very cost-effective manner within a short period of time. As per NABARD,


Status of Microfinance in India, 8.5 million saving linked SHGs having a total aggregate savings of Rs.80 billion. MFIs growing: RBI is following thebank-led model in order to achieve financial inclusion. Many NBFCs are supplementing efforts for financial inclusion at ground level. Micro credit is recognized as a separate category under NBFCs named as NBFCMFIs. Bank Credit to MSME sector: The sector has a large employment potential of 65 million persons over 28 million Organizations and is rightly considered as an engine for economic growth and for promotiob of financial inclusion in rural areas. Bank credit to MSME sector has increased at a CAGR of 33%. Insurance Penetration in India: The total life and non-life insurance penetration in terms of the ratio of insurance premium as a percentage of total GDP has increased from 2.32 to 5.10 in last one decade. There is a huge untapped potential as when it comes to insurance penetration. Financial Inclusion Initiatives as taken up by Private Corporates: Projects such as E- Sagar/ EChoupal(ITC), Project Shakti (HUL), Haryali Kisan Bazaar (DCM) etc. These are pioneering projects that have brought a huge improvement in the lives of the people who participate and prepare the base for economic development.


NIVESHAK | OCTOBER 2018 Ensuring that agents are “transaction ready” is very important. The success relies on the innovative model of usage of small corner stores which can act as agents for banks where people can have option to deposit and withdraw money directly from their accounts and do other transactions. Building of a trust environment and an acceptance network is required: Every account holder will be getting their debit cards in the mail. Acceptance network for such cards is virtually non-existent. We can solve this problem to develop the network quickly and India can partner with global players to make that happen. Emphasizing on usage of mobile: Bigger efforts can be made to use mobile channels as catalysts for financial inclusion. India is way behind other nations when it comes to leveraging mobile channels to the fullest. The Intermedia Financial Inclusion Insight (FII) Survey suggest that only 0.3% of the Indian adults use mobile money, way less than many African and small Asian nations. Leveraging payment banks: Allowing the Payments Banks to process different government payments will break the monopoly of public sector banks and will be a boon for the customers. Enabling Regulation: In June, RBI need to ease the regulations so that even start-up banks and other small banks can come up to help in

financial inclusion in India by providing banking services to unbanked areas. Government Usage of New Payment Channels for subsidies: India is home to USD 70 billion worth of retail subsidies and social programs. Government is switching to targeted benefit payment from its older way of providing generalized subsidies thus, shifting all payment flows from cash mode to digital channels. India is estimated to have USD 70 billion in international remittances. These flows can very well contribute towards the economic viability of banking channels which are new and expanded. Creating an infrastructure which can handle every aspect of banking service such a very large segment of the Indian population. Many solutions can be BBPS, NeSL BHIM, UPI. A Financially Inclusive India India’s financial inclusion program has sparked an interest in other countries who seek to overcome similar kind of challenges. If India’s program can go beyond the initial sprint towards meaningful financial inclusion, it can actually be a useful example for other nations to follow.





NIVESHAK | OCTOBER 2018 “Widely acknowledged as the pioneer of Public-Private Partnership (PPP) in India, the IL&FS Group has, through a variety of projects, benchmarked the private sector’s role in and commitment towards infrastructure development in India.” - IL&FS website Through their three decades of existence, the brainchild of late MJ Pherwani, Infrastructure Leasing & Finance Services (IL&FS) has played an essential role in developing worldclass infrastructure in the country, with the Chenani - Nashri Tunnel (India’s longest road tunnel) being the prime example of the same. The company was also ranked 422 and 460 for the years 2016 and 2017 respectively on the Fortune India 500 list. But on 21st September 2018, the mess that had become IL&FS unleashed its fury on the stock market. Coupled with other factors, the defaulting of IL&FS built up a fear of a crisis in the debt market which subsequently lead to a 0.8% intra-day fall in the equity markets. Many experts described it as a free fall in the market with almost no place to hide. But how did the management, the government or the even the credit rating agencies not see this coming? What may be the repercussions and the way ahead? Fallout A recent release by the RBI points out that corporate borrowing has moved back to the banks as they have become wary of the bond market as a

result of lack of liquidity following the IL&FS debacle. The non-food credit growth grew more than INR 11,00,000 crore for the one year period ending on October 2018. The growth has been steady and in the double digits since December of last year after it dropped to an all-time low of 2 percent in April 2017. Also, data released by SEBI indicates that as of September 2018, outstanding corporate bonds have increased by 9.7 percent year on year to approximately INR 28,50,000 crore.

Image Source:

This increase in activity for the banks is because interest rate transmission is quicker in the bond market as compared to bank lending rates. It presents an excellent opportunity for the banking industry which has been reeling under the pressure of NPAs to re-establish themselves in the credit market. SEBI is planning a significant change in the role that credit rating agencies play in the market. The proposal tries to set aside the rating business and the non-rating business of the entities so that there is no conflict of interest



NIVESHAK | OCTOBER 2018 on the part of the rating agencies. The regulator is also looking at installing a framework to determine the compensation for the agencies so that there is little incentive for them to assign aggressive ratings. Another part of the proposal under consideration is the rotation of rating agencies and also for companies having listed debt to have two rating agencies. All these are crucial steps for reforming the credit rating agencies as they are seldom behind the curve and have failed to foresee signals of future volatility. Were Rating Agencies Oblivious? It is perplexing that none of the rating agencies could foresee the mess that the IL&FS had turned into before the ensuing crisis. The debt to equity ratio of the group was 18.7, and the total debt amounted to close to INR 91,000 crore. Of this INR 91,000 crore, around

INR 60,000 crore is stuck at the project level which includes roads, water, and power projects, which as one can guess will take a lot of time to materialize. Another pointer for the agencies was the fact that in March 2015, the debt obligation of the conglomerate increased by 44 percent. In spite of all the signs, no major rating agencies cautioned against the looming crisis in one of the biggest infrastructure finance companies of the nation. Up until July 2018, all major credit rating companies of India had investment-grade ratings on the conglomerate despite it bearing 2 percent of outstanding commercial paper, 1 percent of debentures and about 0.7 percent of the whole banking system loans by itself. The funding cost for the industry too had gone up as interest rates hit multi-year

Image Source: IL&FS 2018 Annual Report



NIVESHAK | OCTOBER 2018 highs. Some projects undertaken by the company required large-scale land acquisition which was made difficult by the 2013 land acquisition law which further lead to cost escalation in the projects. The group’s investment grade rating was based on the fact that it had the backing of some of the strongest investors namely LIC (country’s largest insurer), SBI (country’s largest bank), HDFC (country’s largest mortgage lender) and many others. Rating agencies need to be proactive and should go beyond measuring the viability of projects and assets by analyzing historical data and past estimates. They need to factor in changes on the ground too which may not always be in quantitative terms and must take into account changes in leadership, market environment, and cash flow management in the recent past and similar developments. The Way Ahead • IL&FS has assets (both infrastructural and financial) worth INR 1,15,000 crore, and it has identified 25 projects for sale which amount to INR 30,000 crore. The company should sell these off and reduce its debt burden as it faces further debt payments in the

next six months. The issue here is that the sale of these assets might take more than a year to complete •

Instilling confidence in LIC and SBI to infuse more money into the group by coming up with a longterm action plan as it highly unlikely that ORIX Corporation or Abu Dhabi Investment Authority, the private investors in the group would bail the company out

Selling off some of the 24 direct subsidiaries of the group to increase liquidity

Infusing credibility in the company with the help of the new board (under the supervision of the NCLT) as the previous regime has been accused of taking considerable pay-outs in spite of severe cash crunch

Initiating talks and compromising with creditors to increase liquidity for the company in the long run

Instituting pay cuts for the board and committees of the company and installing checks and balances in the decision-making process of the company to make it more transparent




DOWNFALL OF ARTHUR ANDERSEN Audit Share of Fortune 100 Firms for Big “five� Accounting firms,1998

KPMG 15%

Deloitte and Touche 18%

Ernst and Young 15% Arthur Andersen 19%

PwC 33%

Arthur Andersen was set up as a partnership in 1913 was an American holding company. The firm provided auditing, tax, and consulting services to large corporations and institutions. The company practiced high accounting standard and had a strong reputation for diligent audit. Arthur Andersen changed a lot of accounting standards. It was also the first to identify sub-prime bust. The firm also dissociated itself from some clients in the 1970s. When stock option emerged as a form of compensation, Arthur Andersen was the first accounting firm to propose the FASB that stock option should be included on expenses thus impacting the net profit as cash compensation effects. During the 1980s standards throughout the industry fell as [19]

accountancy firm struggled to balance their commitment to audit independence against the desire to grow there burgeoning consultancy practices. The firm had a strong foothold in IT consultancy in the 1980s. The firm expanded its consultancy practice to the point where the bulk of revenue came from consultancy. The audit partners encouraged existing clients to take the consultancy service of the firm The firm revenue base shifted from audit to consulting and the revenue contribution of consulting had almost become three times of auditing revenue. Both consulting and audit business grew stronger, the partnership was restructured, and two separate entities were formed. Andersen Worldwide was


created as the partnership holding company of Arthur Andersen and Andersen Consulting. The company separated the consulting from auditing in the year 1987. There was a series of consolidation among the big accounting firms during the 1990s which turned the big eight accounting firms into big five firms. During this time the firm shifted its focus to consulting and advisory services. Consulting services was at a boom stage, and the revenue picked up for the firm. The Enron scam came to light during the year 2001 and this changed the reputation of Arthur Andersen. Enron reported $100 billion in revenue through institutional and systematic fraud. The corporate wrongdoing changed the accounting world forever. Andersen had agreed to surrender its license on August 31, 2002, as SEC would not except audit from firms following unethical practices.


The firm winded its American operations and sold its business to KPMG, Deloitte, EY, and Grant Thornton. This also destroyed the firm’s reputation internationally, and most of the local companies took over the business of Andersen. The firm also found guilty of obstructing the justice as it shredded the documents related to Enron. In July 2002, Sarbanes Oxley enacted that established different laws. The notable decision was the separation of auditing firms from providing nonaudited related services to companies which they audit. The provision was also formed to prevent the corporate analyst from benefiting conflict of interest including public disclosure of any potential conflict of interest. This move will help in increasing transparency.




SCOPE OF SINGAPORE VENTURE CAPITAL MARKET By: Sumit Mehta PGDM- RBA (2017-2019) Welingkar College, Mumbai History of Singapore economy Upon independence from Malaysia in 1965, Singapore faced a small domestic market and high levels of unemployment and poverty.70% of Singapore's households lived in badly overcrowded conditions, and a third of its people squatted in slums on the city fringes. Unemployment averaged 14%, GDP per capita was US$516, and half of the population was illiterate. In response, the Singapore government established the Economic Development Board to spearhead an investment drive, and make Singapore an attractive destination for foreign investment. FDI inflows increased greatly over the following decades, and by 2001 foreign companies accounted for 75% of manufactured output and 85% of manufactured exports. As a result of this investment drive, Singapore's capital stock increased 33 times by 1992, and achieved a [21]

tenfold increase in the capital-labor ratio. Singapore's economic strategy produced real growth averaging 8.0% from 1960 to 1999. The economy picked up in 1999 after the regional financial crisis, with a growth rate of 5.4%, followed by 9.9% for 2000. However, the economic slowdown in the United States, Japan and the European Union, as well as the worldwide electronics slump, had reduced the estimated economic growth in 2001 to a negative 2.0%. The economy expanded by 2.2% the following year and by 1.1% in 2003 when Singapore was affected by the SARS outbreak. Subsequently, a major turnaround occurred in 2004 allowed it to make a significant recovery of 8.3% growth in Singapore, although the actual growth fell short of the target growth for the year more than half with only 2.5%. In 2005, economic growth was 6.4%; and in 2006, 7.9%. As of 8 June 2013, Singapore's unemployment rate is around 1.9% and the country's economy has a lowered growth rate, with a rate of 1.8% on a quarter-by-quarter basis—compared to 14.8% in 2010. Singapore’s experience in venture capital industry is relatively recent. One of the first venture capital funds to be established in Singapore was South East Asia Venture Investment (“SEAVI”) in 1983, with participation from the U.S venture capital firm Advent International. In 1985, the Singapore government, through the


NIVESHAK | OCTOBER 2018 Economic Development Board (“EDB”) established the EDB Venture Capital Program and introduced tax incentives to promote the growth of the industry in Singapore. Since then, a number of international venture capital firms had established presence in Singapore, attracted by the availability of generous tax incentives and funding from the government and government-linked venture funds. Many venture capital firms also chose Singapore because of its excellent physical infrastructure. Statistics of the Venture Capital market in Singapore The total value of M&A (Mergers and acquisitions), PE (Private Equity) / VC (Venture Capital) investments and IPOs (Initial Public Offer) in Singapore exceeded US$100 billion, with a growth of over 15% compared to 2016, led by PE Buyouts. IPO capital raised in Singapore nearly doubled in 2017 over the prior year and is at a four-year high. In 2017, the region recorded total deal activity valued at over US$130 billion spread across 1,420 deals, with over 20 transactions valued at more than a billion dollars each. Globally, about 36,700 deals valued at over US$2.8 trillion were registered in the same period. Singapore recorded a total of 842 deals (M&A, PE/VC and IPOs) worth US$101.9 billion for 2017 as compared to 800 deals worth US$88.1 billion for 2016. PE/VC investments in Singapore companies achieved record levels at

US$22.8 billion in 2017 as compared to US$3.5 billion in 2016. Fig 1 This significant jump in value was attributable to some notable buyout / privatization deals such as the acquisition of Global Logistic Properties by China Vanke Co Ltd, Hopu Investment Management and other investors valued at US$11.6 billion; as well as Global Infrastructure Partners and other investors’ US$5.0 billion investment into Equis Energy. Over the past three years, the technology sector has been one of the largest contributors to PE/VC deals in the region. PE/VC investments into tech companies have grown by about 9 times from US$672 million in 2015 to US$5,892 million in 2017. During 2017, the top deals in the technology sector included the US$2.5 billion investment into Singapore-based Grab by Softbank Group Corp, Didi Chuxing and Toyota Tsusho Corp, and the US$1.2 billion investment into Indonesia-based Go-Jek by Tencent Holdings Ltd, JD.Com Inc. and other consortium investors, reflecting positive investor interest in transport-related tech start-ups. Duff and Phelps report, Transaction Trail 2017




space, perhaps a signal that attention is being directed to high growth areas ASEAN-Focused Private Equity Funds in Market by Type (As at April 2017) SVCA & Preqin Factsheet

* H1 2017 and H2 2017 deal data taken from the period between December 2016 to June 2017; and July 2017 to November 2017 respectively. Fig 1 Sector wise allocationPE/VC deals transacted in 2017 amounted to 183 deals with combined deal value of approximately US$ 26.2 billion. For most large transactions in the PE/VC space, investors included both funds and corporates. Singapore was the largest contributor with total deal value of approximately US$ 22.8 billion. Real Estate was the top contributing sector in the region, accounting for an estimated 45% of deal values overtaking Technology after 2 years, mainly attributable to the US$ 11.6 billion investment into Singaporebased Global Logistic Properties Ltd.

In 2016, the assets under management (AUM) of private equity & venture capital (PE/VC) fund managers in Singapore grew more than 20% to exceed US$35bn. Fig 4 Singapore-Based Private Equity & Venture Capital Assets under Management, 2014 – 2016

Deal value by sector

10% 3%


Technology Energy Real Estate

20% 45%

Fig 3

Telecom Others

The majority (59%) of the 17 funds closed in 2016 were growth funds, while the remainders were venture capital vehicles. Interestingly, no buyout funds closed in 2016, the first time this has happened in seven years. Furthermore, none of the ASEAN-focused funds on the road are seeking investments in the buyout


*Top 10 Venture Capital firms in Singapore (domestic and global) 1) B Capital Group One prominent angel investor in Singapore is Facebook’s co-founder Eduardo Saverin, and his venture capitalist firm B Capital Group which he launched in 2014 with a $144 million venture fund focused on India, South-east Asia and the US.


NIVESHAK | OCTOBER 2018 B Capital Group backs the next generation of ground-breaking technology companies and has offices in Los Angeles, San Francisco, and Singapore. It has partnered with the Boston Consulting Group and its incubation arm BCG Digital Ventures. 2) Golden Gate Ventures With founding partners in Singapore and San Francisco, this is an earlystage VC firm in Southeast Asia bridging Silicon Valley and Asia through investment, experience, and relationship building, and has over 30 investments across seven countries. One of the founding partners of the firm is Jeffrey Paine who invests in consumer internet, social media, digital entertainment, e-commerce and crowd-sourcing. Some of his latest investments are Aptoide, Xfers and MyMusicTaste. 3) Jungle Ventures A VC firm partners regional consumer internet category leaders in retail, financial services, travel and hospitality, healthcare and several other sectors. It aims to tap into ASEAN’s high-growth cities and their rapid growth in online consumer behavior in terms of online media, social networks, mobile apps and aspirational consumption habits. The firm, under its Managing Partner and founder of Sony Entertainment Television Jayesh Parekh, has invested in 500 Startups, PubNub, and Artiman Ventures. 4) 500 Startups [24]

500 Startups is a global venture capital seed fund with a network of startup programs head-quartered in Silicon Valley with over US$350 million committed capital across four main funds and 13 micro funds. It has invested in +1,700 technology startups all over the world since its inception in 2010 including Twilio, Credit Karma, Grab, Udemy, Talkdesk, Intercom, and MakerBot. 5) Singtel Innov8 Singtel Innov8 is a US$250 million corporate venture capital fund with its own set of decision-making, approval and funding processes and owns presences in Singapore, Silicon Valley, Tel Aviv and other markets. The fund focuses its investments on technologies and solutions that lead to quantum changes in network capabilities, next-generation devices, digital content services and enablers to enhance customer experience. It works closely with the ecosystem of leading innovators, developers, government agencies, and R&D and capital providers to bring cutting-edge technologies and solutions to the various markets the Singtel Group operates in. 6) Sequoia Capital In aggregate, Sequoia-backed companies account for more than 20 percent of NASDAQ’s total value. In the last 45 years, Sequoia has worked with Steve Jobs, Larry Ellison, John Morgridge, Jerry Yang, Elon Musk, Larry Page, Jan Koum,


NIVESHAK | OCTOBER 2018 Brian Chesky, Drew Houston, Adi Tatarko and Jack Dorsey, among many others. Rikvin Blog

managed by fund managers based out of India if regulatory changes are carried out. Unless that happens, fund managers in India who want to attract foreign capital will keep shifting offshore, leading to loss of employment and tax revenue for India. There are two ways in which regulations can enable fund managers based in India to manage offshore pools of capital—allow them to manage offshore funds from India without taxing the offshore fund as an Indian entity, and permit foreign investors to directly invest in funds set up in India. For both these cases, regulatory changes need to be carried out. The most important regulatory change required is to ensure that an offshore fund will not be taxed as an Indian entity just because it is being managed by a fund manager located in India. A beginning was made in Finance Bill 2015. Under the newly introduced Section 9A of the Income-tax Act, 1961 (ITA), it was clarified that the income of an “eligible” offshore fund would not be taxed in India merely because the innovative technologies, whether AI (artificial intelligence) and machine learning or block chain, to different sectors will likely keep investors focused and investment high regardless of any pauses among specific industries. “There is a huge market potential in Southeast Asia,” said JP Lee, partner and managing director of SoftBank Ventures Korea, which has

7) Monk’s Hill Ventures Monk’s Hill Ventures is a partnership of seasoned entrepreneurs who have built and backed global companies based both in Silicon Valley and Asia. It’s a VC firm investing in post-seed stage tech startups that will take advantage of the fast growing Southeast Asian markets. The firm’s co-founder Kuo-Yi Lim, hasinterests in enterprise software, mobile consumer internet, and Big Data; and has invested in DataXu, Gengo, Kalibrr and Reebonz. 8) Quest Ventures Quest Ventures, based in China and Singapore, is a leading venture fund for companies that have scalability, and are replicable in large internet communities. 9) Life.SREDA This is an international VC firm, headed by Slava Solodkiy and established in received in FY17, $24 billion was invested via Mauritius and Singapore. Both these jurisdictions have emerged as the preferred destination for fund managers to set up their operations. Compared to this, the domestic pool of capital managed by India-based asset managers under the Securities and Exchange Board of India’s (Sebi) alternative investment fund (AIF) guidelines is only $7 billion. A significant chunk of the offshore capital flowing into India can be [25]


NIVESHAK | OCTOBER 2018 backed Indonesia’s Tokopedia. “There is economic growth, government support and appreciation for talent. We plan to do more work there.” The stats and data related to past performance of VC coupled with promising policies by the government suggest that there is good future prospective for VC in Singapore. KPMG report Current relations and policy requirement of India and Singapore with regards to the cross-country investments in the VC market. Foreign investment flowing into India is primarily pooled and managed in offshore jurisdictions. This is because our regulatory framework discourages asset managers based out of India from managing offshore pools of capital. As a result, several offshore funds which target investing in India have fund managers of Indian origin who have relocated to offshore locations. It is high time we enable offshore fund activity to shift to India, giving a boost to the domestic fund management industry. Of the $43 billion of foreign direct investment (FDI) inflows which India 2012 in Singapore. It has already invested in more than 20 FinTech companies around the world through its two funds Life.SREDA I (US$40M) and Life.SREDA II Asia (US$100M 10) Wavemaker Partners As part of the Draper Venture Network, which has 10 funds across four continents, this VC firm can help

startupsgain access to global insights and scale. Paul Santos who is the Managing Partner at the firm has made investments in Ardent Capital, Luxola, and TradeGecko The future of VC in Singapore Venture capital (VC) activity in Singapore will remain robust in 2018, going by a latest KPMG report that was released recently. Key reasons include the launch of more early-stage (seed and Series A) corporate VC funds, and the regrouping of VC funds to focus on later-stage (Series B to D) deals. Chia Tek Yew, head of financial services advisory at KPMG Singapore, added that Singapore companies are likely to be more aggressive in seeking earlier and larger rounds of funding from the local, US, China and overseas markets. For the fourth quarter of 2017, Singapore recorded 17 VC deals totaling US$205 million, 57.2 per cent higher from a year ago. For the whole year, Singapore recorded 112 deals totaling US$1.2 billion. Cross-industry solutions will be a key focus of VC investments in the next few quarters, the KPMG report predicted. Mr. Chia said: "The applicability of fund is being managed by a fund manager located in India. The objective of Section 9A was to allay fears that the presence of a fund manager in India would lead to the offshore fund being taxed in India



NIVESHAK | OCTOBER 2018 at domestic tax rates, rather than lower rates specified under various double taxation avoidance agreements (DTAAs). Unfortunately, the conditions specified under the Section are so strenuous that for all practical purposes, they remain unachievable. For instance, one of the conditions specifies that an investor’s share in the fund, directly or indirectly, should not exceed 10%. This is a very restrictive condition when it is common for funds to have a sponsor or anchor investor whose share in the fund generally exceeds 25%. Also, most funds are targeted at a specific group of investors, which does not exceed 10. Further, fund managers may consciously want to cater to a small set of investors who can make large investments. Regulators should relax this condition by looking beyond the investor and also including the investor’s beneficiaries. This is because an investor in a fund could be a pool of several other investors. Thus “look through” provisions will enable several offshore funds to be classified as eligible funds under Section 9A. Also, given that Sebi-registered foreign portfolio investors (FPIs) already meet broad-based requirements of being diversified in terms of investor participation, they should automatically be regarded as an eligible investment fund. Another debilitating condition Specified under Section 9A is that offshore funds should not control or manage any business in India.

Offshore private equity funds, during the course of the fund tenure, may be required to acquire a controlling stake in the investee companies to protect their initial investment. Further, even in cases where the fund has only a minority stake, exercising any minority interest protection rights could be classified under existing law as resulting in control over the investee company in India. Furthermore, the benefits of Section 9A are available only to PMS (portfolio management services) asset managers and investment advisers registered with Sebi. Investment managers of AIFs and mutual funds are not covered under the list of eligible investment managers that can make use of Section 9A. This limits the number of fund managers who can make use of the regulatory relaxation. Given these difficulties, the alternative is to have foreign investors directly invest in funds registered in India. Changes in regulations to permit this have been more encouraging. In November 2015, the Reserve Bank of India permitted automatic approval for foreign investors to invest in AIFs, real estate infrastructure trusts and infrastructure investment trusts. Previously, investment in these vehicles required specific approvals from the foreign investment promotion board. Further, in the Finance Bill 2016, it was clarified that foreign investors investing in India- based funds would be taxed [27]


NIVESHAK | OCTOBER 2018 at rates mentioned under the various DTAAs. However, given that not all foreign investors are comfortable directly investing in India, there is still a need to enable fund managers in India to manage offshore funds. Regulatory changes to permit this can midwife a truly multinational asset management industry in India. Recommendations for investing in VC in Singapore by an Indian We can have multiple smaller investments in the VCs of Singapore. Since there is a cap of 10% investment by Indian cos to invest offshore, a subsidiary can be opened in Singapore to make larger investments. While investing it is necessary to keep in mind the cash flows generated by the target company. Example: A company wants to invest in an agro-tech firm via venture capital model in Singapore. It should consider the following aspects of the business before investing:Financial strength of the company: The cash flow, the balance sheet and the income statement of the target company must be gauged properly. Investment is generally for duration of 5-7 years. In such case the debt equity ratio, profitability ratios should be thoroughly checked.

Future prospects of the industry: A comprehensive analysis of the long term industry growth must be done. Agricultural policies in the country, technological advancement and adoptability by the farmers, political conditions, export import laws for agricultural products and other relevant factors should be considered before investment decision is made. Performance of the company: Since the company is possibly new, the performance cannot be easily determined. However methods like Discounted Cash Flow, Pay Back Period, and Capital Budgeting can be used to calculate Return on investment that can be expected 5 years down the line. Tax risk: As per latest amendments in. tax, a company that has place of effective management or POEM located in India is eligible for tax as per Indian laws. However, if the company is not managed in India, it would not be liable to pay tax in India. According to such law changes the company should decide where the investing company should be located. Previous examples: 3 major investments were made in agro-tech domain in 2016 by Temasek, one of the prominent investor in Singapore. VoloAgri HappyFresh Modern Meadow Performance of these companies should be monitored and investment decision should be taken accordingly. [28]



R.K. ARORA CEO, Smart Equity Brokers, is a trainer of financial markets to ICICI Securities and various financial institutes such as Institute of Chartered Accountants of India (ICAI), NSE Academy Certification in Financial Markets, BSE Institute Limited, Pearl academy, etc. and market forecaster. Q-1) With bears attacking the market, do you think is it the good time to invest in the equity market or there’s more correction yet to be seen? Ans.) Valuation were very expensive in the past period. If look at the historical data, we find that whenever PE ratio of Nifty50 / Sensex30 reach near 28, market prices retreat and fall sharply, although there have been instances where after the fall of some points from high, prices try to retest the high again and then fall. Its natural behaviour or expected phenomena. In my blog I clearly mentioned of bear attacking on Oct. 1, 2018.

Now from here, there is still possibility to fall further. There can be two scenarios, Nifty can again attempt for previous high and drop or it may directly plunge from here. Q-2) Markets have been in a very volatile phase in the last one and half a month thereby creating several problems for small investors. What do you recommend to retail investors in this volatile phase and when can we expect markets to stabilize? Do general elections of 2019 also have some role to play in the recent volatility?

Ans.) My suggestion to investors is they should wait for new investments for another one year or so. Let the mud settle. If they have surplus to invest then they can invest in Nifty only for the reason of its diversified portfolio. Nifty 50 is the best diversified portfolio. Second, its on auto-tracking, i.e. performing stocks get the entry against non-performing stocks in Nifty 50. I will not advise to invest in MidCap or Small Cap companies at this point. Best time to invest in Mid or Small Cap companies is when Nifty 50 PE is below 16, for the simple reason that these companies have higher beta. About election 2019, I think before and after the elections market will remain highly volatile. This volatility may settle near April 2020 (by that time there will be more clarity of new government policies), where risk will be low and growth potential will be high.



NIVESHAK | OCTOBER 2018 If we count on last budget, government planned to invest near to 4 Lac crores in infrastructure in next 2 to 3 years. This is going to be the main driver of the economic growth. Real estate is not at all participating in current growth. As per real estate cycle its in down trend for minimum 10 years. By 2020, real estate activities of downward cycle will be completed. Real estate sector in India is expected to reach a market size of US$ 1 trillion by 2030 from US$ 120 billion in 2017 and contribute 13 per cent of the country’s GDP by 2025, if it grows by 18% compounding per annum, on the demand of IT sector, hospitality and retail. As we are in transit period of reforms, adopting all new policies and procedures, participation of private sector is at the lowest level at this point. More clarity of government policies after election will trigger capital expenditure by private players. That would be the point when economy will move northward for a longer period may be till 2026-27. Q-3) What is your take on USD/INR with Indian Rupee hitting its all-time low at Rs 74.49 against USD. Where can we see Rupee settling and in your views what role RBI has to play in this scenario? Ans.) USDINR is a concern now. But as you know from 2014-2017 there was no depreciation in Rupee. A parity condition is an economic explanation of the price at which two currencies should be exchanged,

Based on factors such as inflation and interest rates. As per theory Indian Rupee should have depreciated by 5% every year but from 2014-2017 it was stable or rather appreciated. In year 2018, it has complimented all that depreciation of 4 years in 6 months. It is the natural adjustment that is taking place. Q-4) What are your views over the current turmoil going in the private banking sector with CEO’s of different banks are asked to vacate their positions by Reserve Bank of India? Ans.) Public and private banks are facing numerous problems, when regulators are vigorously vigilant and not leaving any stone unturned in unearthing the bad loans (specially in case of public sector banks). This is first time India is learning risk management, honesty! We have few good norms in banking sector like not having exposure in one particular sector more than 15-20% of total deposits. Second rule which is making banking more stable is right to acquire personal assets of wishful defaulters. Continuous process of reform in banking sector is generating some hopes that in future our banking system will be able to perform in much better environment and will be able to boost the economic growth of the country. To best of my knowledge in next 2 years most of the concerns will be addressed in well manner and new growth will start.





Image credits: DreamGains investment advisor

Participatory notes are international derivative financial instruments used by hedge funds, private institutions and investors to invest in Indian securities without registration with Securities and Exchange Board of India (SEBI). Participatory Notes or P-Notes are essentially derivative instruments. They derive their value from the existing price of an underlying asset. There are two essentially risk elements of a participatory note: 1.Asset Value Risk – This refers to the risk borne by the holders of the PN’s with regard to the price or value of the underlying asset. If the price of the underlying asset depreciates, then the price of the P-Note will also reduce. 2.Exchange Rate Risk – When an international hedge fund or investor


purchases a P-Note, they also incur exchange rate risk. The possible benefit or loss in the exchange rate between the two currencies, between the time the PN is bought and sold is borne by the buyer of the PN. International hedge funds usually purchase these notes to gain the dual benefits of appreciation in the value of the underlying asset and the increase in the value of the domestic currency. These P-Notes are unregulated and the hedge funds buying these notes are not registered with Indian authorities. This means that there is no way to know the identity of the buyers of these notes. This means that these notes can be misused and pose a problem of hot money for the capital markets in India.

NIVESHAK | OCTOBER 2018 Issuance ProcessP-Notes represent an anonymous form of investment channel and the issuance process also ensures privacy. A registered entity in the Indian stock market, usually a big brokerage firm or a foreign institutional investor, buys a defined quantity of a security from the market. This entity then issues Participatory Notes to the contributors against the underlying security in their possession.

CLASSROOM All risks and benefits, apart from the voting rights, are transferred to the buyer of the P-Notes. Thus, in the Register of Members of the company, the shares are listed in the name of the entity that has issued the P-Notes. In order to maintain secrecy, P-Note investors route their funds through an OFC (Offshore Financial Centre) or a Tax Haven. This allows them to manage their investment through secure channels without revealing their identity.











Glorification of money has been the part and parcel of almost every piece of literature and movie that is considered under the domain of finance. However, Margin Call depicts how much those at the top of the chain will actually stoop low to save their own hide as the inevitability of a crash makes them desperate. Set in the backdrop of the 2008 financial crisis, Capitalism rears its ugly head in this movie and there is nothing to be done but sacrifices. Not for the investment company of course whose fate is hanging by the thread as Peter Sullivan (Zachary Quinto) a mere Analyst completes his Boss’s work who was laid off that day by the company very conveniently and which gave the indication that something is not right. No, the Sacrifice is the unassuming clients on whose lap thousands of financial products will be thrown whose value will be rendered useless sooner rather than later. No, the movie does not portral booze, [33]

sex or drugs that is the common perception of a wall street / Investment Banking movie rather it shows a different addiction. “How much do you think he made last year?” finds its way throughout the movie quite a few times depicting the never satisfying hunger even for those better off than the rest. We almost see a ray of hope when Sam Rogers (Kevin Spacey) defies his Boss John Tudd (Jeremy Irons) by putting the firm’s and the Clients’ interest giving the viewers the optimism that maybe the financial world is not as hollow as depicted. Trying to pass on the burden of their wrong decisions on people from who they try to earn their living comes naturally to Mr.Tudd. As he rightly remarks, “It’s not the brains that got me here”. It’s not one fish who will make the pond dirty rather the whole pond tries to make the fish corrupted. One of the most unapologetic portrayals of the 2008 Crisis.



#StraightFromCampus IIM Shillong recently concluded its annual management fest, “KHLURTHMA” on the 26th and 27th of October. The Finance and Investment Club, Niveshak, organized the event called del’FIN’us during the fest. The event comprised of two rounds. Round 1, of the game was an online quiz which contained questions from the Finance and Investment domain. The first round witnessed a healthy participation from around 80 teams from outside and within the campus. Five teams scoring the top results in round 1 were moved to round 2. These included teams from ISB Mohali, IIFT Kolkata and three teams from IIM Shillong. Round 2 of the game was a Mock Stock Event where the young investing enthusiasts were engaged in a forty minute invigorating action in an attempt to maximize the value of their portfolios. It was a simulation round, where teams had to use their best judgment to buy and sell stocks to up the value of their portfolio. In the trading and investing arena, “you are right if the market agrees with you”; following the logic, the teams took positions in stocks to finally wait and see if the other investors in the market think likely. The winners of round 2 were teams with the highest portfolio value in the end, which were team Boffins from IIM Shillong and the runners-up, team Dracarys from IIM Shillong. [34]



WINNING TEAMS TESTIMONIALS Winner: Team Boffins, IIM Shillong Being a part of Del’FIN’us was an amazing experience. The concept of live trading was thrilling and kept us on our toes throughout the event. -Venkat Vivek PGP 2017-2019, IIMS

Runners-Up: Team Dracarys, IIM Shillong It was a wonderful experience. Event was great and created a feel of what actual trading might look like. To compete with people filled with enthusiasm on wonderfully built and managed platform by the team was amazing. -Priya Rathi PGP 2017-2019, IIMS



ANNOUNCEMENTS ALL ARE INVITED Team Niveshak invites articles from participants from all B-Schools across India. We are looking for original articles related to finance and economics. Participants can also contribute puzzles and jokes related to finance and economics. References should be cited wherever necessary. The best article will be featured as ”Article Of The Month” and would be awarded cash prize of Rs. 2000/- along with a certificate.

Instructions: • Send in your articles before 25th November, 2018 to • The subject line of the mail must be ”Article For Niveshak_<Title>” • Do mention your name, your batch and institute name along with the article • Please ensure that the article has a word count between 1500—2000 • Format: Microsoft Word; Font: Times New Roman; Size: 12; Line Spacing: 1.5 • Please DO NOT send PDF Files and stick to the format • Number of authors is limited to 2 for each article • Mention your mail id/blog if you want readers to contact you for further discussion • Also certain entries which could not make the cut to the magazine will get featured on our website.

SUBSCRIBE Get your own copy delivered to your inbox Drop a mail at Thanks, Team Niveshak



Niveshak Oct 18  
Niveshak Oct 18