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The Financial Volume no. IV Issue no. III April 2014

Senior Team Prakash Nishtala Vidhi Shah

Creative, Design and Content Ajit Nayak K V Bhuvanesh Kumar

From the Editor’s Desk

Dear Readers, Greetings from Team Finomenon! We are living in one of the most interesting times where all the much-awaited events are converging in a jiffy. In a matter of few months, we’ll get to know RBI is banking upon which new players, nation is backing up which new government and the markets, which now have become the barometer of our excitement, are reaching what magical figures. There’s so much to be discovered in this frenziedness that one might easily forget even to complete the financial-year end formalities. Of all these events, general elections are definitely the most looked after as it holds the key for what is to come our way for next 5 years. The longest elections in Indian history are round the corner. In the run for the world’s largest celebration of democracy, economic aspect of the election manifesto plays a crucial role. In this issue, we discuss the points which the next government should highlight upon. With the current unstable world economy, the steps need to be quick and agile. The Financial, through the theme for this edition, “Economic Manifesto for the New Government” invited the budding finance mavericks from across the top B-schools to share their views on key economic points in the new to-be formed Government. We are happy to bring to you, with this revamped issue, a 3600 view of the financial world. In this issue, we have delved into the viewpoints on a wide array of contemporary topics. The perspectives put forward by the budding managers from across the B-schools are sure to give a new dimension and importance to this issue. The process of evolution of ‘The Financial’ will see a deliberate attempt from Finomenon, to involve the readers as much as possible. The aim this time is not to have an article end with its last word in the magazine but to take it beyond through comments and discussions. Feel free to contact the writers of each article and discuss their views or to even dispute them! As always, I hope you enjoy this issue! Let us know how you feel about the content. Criticisms, suggestions, requests, and jokes, they are all more than welcome. We thank one and all for their valuable contributions to this magazine and hope you enjoy the articles. ‘The Financial’ is an interactive magazine and, beyond just a magazine, a two-way interactive channel. As we exchange ideas, we will evolve and grow to greater heights.

Signing off, one last time and wishing you great times ahead with ‘The Financial’! Prakash Nishtala Finomenon NMIMS ,Mumbai

Editor-in-chief, The Financial

All design and artwork are copyright work of Finomenon NMIMS Mumbai






Economic manifesto for the new government BY AJIT NAYAK K V, NMIMS– MUMBAI As the largest democracy in the world goes for polls in two weeks and the new government makes its way to Parliament it is imperative to look back upon past and introspect. India in the last 10 years has been marred by innumerable scams, volatile global and domestic markets, flagging investor sentiments. As the world recovers from this period of gloom, we look forward for better economic climate. The new occupants at North and South Block in Delhi will have a daunting challenge ahead of them with both local and global factors affecting every decision that they make. With every political party coming up with a manifesto of their own trying to please their electorate, there are a few agenda points which are sacrosanct and cannot be compromised on. This paper lists the economic manifesto which the new government ought to implement in its policies. Bring in a uniform tax code UPA-II had DTC and GST on its agenda back in 2009. But, due to vehement protests from the states and lack of intent from the govern-

ment both the tax codes were unable to be implemented. This disappointed the India Inc. and to make matters worse the Supreme Court ruling was overturned and retrospective tax amendments was introduced in the case of Vodafone-Hutchinson-Essar deal. This angered the investors which was reflected in fall of the FII inflows and India is increasingly being viewed as a hostile place to conduct business. The need of the hour is a seamless and friendly tax environment which stimulates entrepreneurship and improves ease of starting a business.


Ajit Nayak K V is a first year MBA student at NMIMS, Mumbai. He holds a B.E from MSRIT, Bangalore and has a worked for in Infosys and an NGO. His interests include Football, Teaching and listening to heavy metal. E m a i l I D n



The postponing of tax avoidance rule GAAR to 2016 and lack of firm tax structure has given room to ambiguity in the business environment. The recommendation by Parthasarathi Shome committee which suggested rollback on GAAR and retrospective tax amendments being implemented only in the rarest of the rare cases must be brought in place and GST and DTC should be implemented on priority. Boost the manufacturing sector During his hour long speech during the interim-budget on February 17 finance minister P.Chidambaram


summed up the current scenario aptly when he said ‘Manufacturing is the Achilles heel of Indian Economy. The deceleration in the investment in manufacturing is worrying’. 2013-14 has been the worst year for manufacturing since 1999/2000 with 0.2 per cent decline in growth. With 15% share in manufacturing in GDP for the past 30 years, the sector remained stagnant. This is in contrast to China’s 34 per cent share of GDP constituted by manufacturing. This lackluster performance is mainly due to high interest rates, slow-decision making, and weak domestic demand and infrastructure bottlenecks. The new rule should instill the belief in India Inc. that we can be a manufacturing powerhouse. To do this, firstly power and infrastructure bottlenecks needs to be reduced by designing a single window clearing mechanism for all the power and infrastructure projects. Secondly, develop clustered growth of NIMZs (National Investment and Manufacturing Zones) not just on paper in the form of MOUs but bring them into action. Finally, industrial corridor between Delhi and Mumbai, Bangalore Mumbai Economic corridor project must be developed into major manufacturing zones. Disinvestment not just fill the coffers Divestment which were originally meant to have a more broad-based equity and autonomous management in PSU’s has become a mere financial exercise

to reduce the fiscal deficit. The government of India was able to disinvest a paltry 4 per cent of the ambitious 40,000 crore that it had planned to divest at the beginning of the fiscal year. The government should approach disinvestment in a systematic manner and use the proceeds in asset generation rather than plugging the fiscal deficit hole.

Fiscal Consolidation Fiscal consolidation are the steps employed by the government that are aimed at minimizing the deficits and prevent accumulation of debt. Finance Minister P. Chidambaram had set a fiscal deficit target of 4.6% of GDP at the beginning of the year, but this target is well on its way to being missed with economists predicting that the key parameter might hover around 4.74.8%. Wasteful government expenditures must be curbed, unnecessary subsidies must be done away with, many of the ministries such as textiles, culture, and steel have had sinecurial existence for life. These ministries are siphoning off taxpayers’ money, thus should be temporarily disbanded. These measures should be coupled with strict auditing of finances and performances. 4.6% is considered as the red line of fiscal deficit; the new government should spend considerable efforts in not breaching this target. Bring back the black money Economists and research bodies vary in their estimates of black money stashed away in tax havens such as Switzerland, Liechenstein, Luxembourg, Cayman Islands, Seychelles, Mauritius, Macau, etc.


The total black money by Indian nationals in these havens is believed to be between 500 billion to 1 trillion USD, which is an astronomical amount. This amount constitutes 50-60% of India’s GDP. Repatriation of even a miniscule amount of these funds would clear all our external debt, fund education and health care sector and do away all the ills afflicting Indian economy. A major part of the black money is stashed away through Hawala transactions, transferred as kickbacks received by various civilian and defense projects. Names of celebrities, sports stars, politicians, business moguls have been dug-up in recent times due to the advent of reports by the Swiss banks and WikiLeaks documents. Although the names of some of the top-notch businessmen were present in the report, the Government of India failed to reveal the names fearing political backlash. Whether the new government will follow the ‘status quo’ or will express interest in the repatriation of funds, one needs to wait and watch. Promote micro, small & medium enterprises MSMEs are only after agriculture in employment generation, they employ around 6 crore people. They contribute to 8% of our GDP. But this sector has been inflicted by several regulatory roadblocks. For example, the definition of MSME under MSME Development Act needs a re-look. A small enterprise in services and manufacturing sector must have an investment of Rs. 10 lakh – 2 crore and Rs. 25 lakh – 5 crore respectively. If the small firm wishes to expand, credit is hard to find as credit flows only to large companies or those MSME’s which fall under the government’s definition. Hence, an overhaul of the current definition is required to have clarity as to what defines a MSME. Easy access to power, infrastructure and tax rebates should be made available to these growth driving sector so that it can take-off. Pass Crucial Legislations The recently concluded 15th Lok-Sabha will go

down in history as the worst performing house since independence. As issues like Statehood of Telangana, 2G, Coalgate and CWG scams rocked the house, they ate away precious time due to which legislative machinery took the beating. Important bills that remained pending were Coal Regulatory authority Bill which sought to implement independent regulatory body after the coal scam, The Direct Taxes Bill which seeks to consolidate direct-taxes, Mines and Minerals bill which promised transparency in Mining sector and many more. In total, 128 bills are still pending in both the houses of parliament. A strong consensus must be established across parliamentarians cutting across party lines to implement these bills as early as possible.

More emphasis on social sector The prosperity of a nation is judged not just on the basis of number of billionaires or the investment climate and business environment but on the well-being of the citizens of the nation i.e the standard of living. Although there have been few positives in this area (such as India was recently declare polio free), a lot is yet to be done. India ranks 136 in the HDI rankings way behind less developed countries such as Iraq and Philippines. As a first step, our social sector spending has to be increased to reach global average.(For ex: India spends 1% of its GDP on healthcare, one of the lowest in the world, only countries like Yemen, Chad spend less than India). Healthcare and Education are two best investments that India can make which will generate a strong and able future workforce. In education, focus should be on reducing drop-out rate in schools, to eliminate the skill gap that exists today between the industry and universities, to incentivize private sector to invest in education. As for Healthcare, as said before increase the spending in healthcare. Healthcare must be made accessible and affordable to the poor especially in rural areas, the enormous gap that exists between healthcare supply and demand must be met by scaling up the supply of doctors, medical facilities.


Bitcoin: The next monetary system? BY GAURAV CHATTOPADHAY & PUNEET MHATRE, SIMSREE “Bread, cash, dosh, dough, loot. Call it what you like, but money matters more than ever” (Niall Ferguson). We could trace money from it being a store of value in the form of gold, to a gold convertible paper currency i.e. the gold standard for facilitation of trade and ease of exchange. When we could not get enough gold to support our currency, we went on to back our currency with faith i.e. fiat system. But now we see a new kid on the block challenging the very foundations of our monetary system viz. bitcoin.

Bitcoin is described as a “Ponzi scheme” to the “next big thing” and everything in between. But we may love it or may loathe it; we simply cannot ignore bitcoins anymore. As we go on, we will engage with the hurdles faced by the above mentioned monetary systems and ponder whether that very kid could surpass his predecessors. Creation of Money When gold used as a currency, though there were questions regarding the purity of gold, the government (Feudal Lord) had less control on the gold that was entering the system. In case of the current fiat monetary system or even the gold standard, there is a central issuing authority namely the central bank. The advantage of the central issuing authority is that it can arbitrarily decide, if necessary, to create new money. Bitcoin is a decentralized currency, beyond government control. Money that comes

into the bitcoin ecosystem is constrained by algorithms. Like gold, bitcoins are “mined”. In case of gold, we mine it by the sweat of our brow while in case of bitcoins; we unearth them in exchange for the computing resources given out. Availability Long back when gold was used as a medium of exchange, the ability to mine gold was a serious constraint in the money supply. In the gold standard era, the amount of money that could be printed was limited to the amount of gold that the issuing authority had, while in the fiat monetary system, there is practically no limit on the amount of money that can be printed. As we have seen from the Quantitative Easing, the Federal Reserve practically went on a money printing spree and created “money out of thin air”. However, there are only 21 million bitcoins to be unearthed. As of March 2014, about 12.4 million have been mined and put up in circulation and the last bitcoin is estimated to be mined in 2143. With each new batch mined, the bitcoin ecosystem makes it harder to unearth bitcoins, which leads to a steady flow of bitcoins being created unlike the fiat monetary system. The most popular way to acquire bitcoins is via bitcoin exchange, the most well-known being the Japanese site Mt. Gox, which accounted for about 70% of all bitcoin transactions until its infamous crash. It could connect to our bank account

Gaurav is 1st year student of SIMSREE, he has completed his B.E in Computer and then worked at Tata Consultancy Services for two years. E m a i l I D gaurav.chattopadhay@sim

Puneet is currently pursuing MBA in Finance from SIMSREE. A computer engineer, he has w orked w ith Accenture. E m a i l I D puneet.mhatre@simsree. net


and convert our fiat money into bitcoins and store it in our digital wallet. Money as a store of value

be divided into 100 cents. So in the long run, the value of bitcoin with respect to the USD will eventually rise due to demand supply dynamics; if at all bitcoins make it till 2040. If we compare it with the historic trend in the USD monetary base below, we could easily see a significant increase in the monetary base due to Quantitative Easing (QE). Probably this could be the reason why hoarding of bitcoins is so much prevalent.

In the gold standard age, the value of the currency was related to the amount of gold it can be converted back into. There is no doubt that the shiny metal has intrinsic value as it can be molded into jewelry. In the fiat system, money technically has no intrinsic value. It is just plain old paper with some fancy official print on it. The value of the fiat (Latin for “it shall be”) currency depends on the people’s faith on respective issuing governments and Figure 1 Total bitcoin over time ( the dynamics of demand and supply. What gives bitcoin its value? It has value only because of its amazing utility as a medium of exchange. The sudden rise in the value of bitcoin is solely based on speculation. 50% to 90% bitcoin transactions are estimated to been speculative in nature. Bitcoin is a very volatile high risk currency. A year ago its value was under 100 USD, which peaked at 1100 USD in December and is currently (as of 7 March 2014) valued at USD 604.5. However, bitcoin has no intrinsic value and it can vanish even by some mishap in the bitcoin ecosystem.

Ease of Exchange

Lack of divisibility of gold posed a severe impairment on the gold as a medium of exchange. Gold standard was an evolution which overcame this impairment. The same ease was applicable for fiat currency as well. Currently technology has enabled people to exchange money over the internet and most of the money in circulation has been digitized. Bitcoin is an evolution to the digital fiat currencies where 100% of the money is digital.

The thing that differentiates bitcoins from fiat currencies is that no bank or credit company can monitor bitcoin transactions. However, that means any user error or mistake even as small as loss of password can result in permanent loss of bitcoins not only from your account but Figure 1 shows that also from the Figure 2 U.S monetary base ( as the years go by, bitcoin economy. Since all the number of bitcoins that can be bitcoin transactions are irreversible, we cannot rectify mined every year reduces drastically. This could acour folly of entering wrong sender details, unless the tually squeeze out the liquidity out of the system. Good Samaritan, who received our funds, returns But the unique feature of bitcoin which overcomes this issue is that one bitcoin can even be divided them. Bitcoin transactions are not anonymous. Anyeven into 100,000,000 parts while a USD can only one can see the balance and transactions of any bitcoin address. However, the identity of the address 8

is hidden, until the information is revealed at the time of purchase/transfer or otherwise.

constant concern. In fact for money, risk of theft is ever present.

Risk of Loss/Theft

Usage and Acceptance of the masses Though the digital format is a convenient method of exchange, it can Traditionally, gold also be exploited and the gold standard to easily steal currency have been our money. Theft accepted by the of bitcoins by masses as a medium hackers is a great of exchange. Lack of risk. In late Feboptions and governruary, Mt. Gox ment’s stamp of auwent offline and thority has cemented filed for bankthe acceptability of ruptcy in Japan, the fiat currency. But after reporting a bitcoins is a new oftheft of 850,000 fering which is curbitcoins ($480 rently only being Figure 3 Bitcoin vs. USD ( million) by hackers, leaving 127,000 adopted by people who want to take a bet robbed customers in peril. on it. Soon after, Flexcoin, a bitcoin “bank” was forced to close after hackers stole 896 bitcoins, worth over $600,000, stored in the “hot wallet”, bitcoins stored in an online wallet. However, users who put their bitcoins in “cold storage”, in offline accounts were saved. At least 150 phishing software and malwares designed to steal bitcoins exist as per a report by DellSecureWorks. The crypto currency is largely uninsured against theft or loss. However, The London-based Elliptic, a “cold storage” service offers insurance for bitcoin investors should their bitcoins disappear (as in the case of Mt. Gox or Flexcoin) and claims that its bitcoin "vault" is insured by Lloyd's of London. Falcon Global Capital, a San Diego firm announced launching a similar facility. Similar risks could be applicable for digitized fiat currency and perhaps even in the gold standard if there was any digitization in those days. For pure gold as currency, physical theft and robbery was a

Bitcoins can be used for purchases in various online ebusinesses including, but fewer brick and mortar establishments like pubs and restaurants and it is gaining acceptance. Currently, more than 30,000 Indians hold about 1% of the total 12 million bitcoins in circulation. In January, Highkart became the first (and the only) e-commerce site in India to start accepting bitcoin payments. WeRwired, a Bangalore-based geospatial, security and entertainment consulting firm accepts bitcoins. Castle Bloom, a Chandigarh beauty parlour and spa became the first brick and mortar establishment to accept bitcoins, but soon backed out after raids on Indian bitcoin exchanges. India is not a hot spot on the bitcoin market; however the world is accepting bitcoins for various purchases. Using bitcoins, one can pay it for online dating (, buy land in Nicargua, buy homes in the Hamptons (US) and the Alberta Province (Canada), study in University of Nicosia in Cyprus and even reach space by buying a seat on the Virgin 9

Galactic. The anonymous online marketplace ‘Silk Road’, described as “ of illegal drugs”, also accepts bitcoins. Government Acceptance Bitcoin has emerged as a shadow tax free currency popular with outlaws; its use in the online black market did not bode well with governments. Government reactions have been diverse. From an outright ban on bitcoins (now revoked) in Thailand to China - world's biggest market for trading bitcoins curbing all real world use of the crypto coin by barring banks and payment systems to deal with it. Russia considered them as “potentially suspicious”. While Germany and Norway classified bitcoins as a ‘unit of account’ and an asset respectively, preparing to tax the virtual currency; bitcoin-friendly. Denmark, Poland, and Singapore advocate no regulation on bitcoins for now. While US’s Federal Reserve gave “tacit approval” to bitcoins; IRS warned against its use, so did European Union and our very own RBI. The RBI talked about the theft and loss of bitcoins, lack of a legal framework to redress complaints/disputes, no asset backing the currency as well as bitcoins being a tool for money laundering. In December, the Enforcement Directorate (ED) raided, the biggest Indian bitcoin exchange, suspecting a ‘hawala scam’. Following the

raid and the stern RBI warning, almost all Indian bitcoin exchanges closed in late December. While concerns are genuine, bitcoins are a threat to the government’s birth right to create money. In fact, no government would endorse ‘parallel currencies’. If governments accept bitcoin as a valid alternative to their own currencies, they might end up opening a Pandora’s Box, because bitcoin is not the only virtual currency in the world. At least 120 “siblings” of bitcoins exist, which would make the job of controlling them difficult for the regulators. But then community currencies have co-existed with fiat money in harmony in UK and Canada, but they are constrained in geographical limits, unlike the cryptocurrencies which transcend national boundaries. Conclusion We have dwelled on all the major monetary systems that have been prevalent in the world since ancient times and the various factors in which they differ. The thing that is holding back bitcoins is lack of intrinsic value and no prior history of acceptance. But with time there can be a hope that bitcoins will be accepted in the mainstream. Ultimately, “All money is a matter of belief” (Adam Smith). Bitcoins may be a step towards F. A. Hayek’s idea of denationalization of money; a monetary revolution or just another case of ‘Tulip Mania’. Only time will tell.


Banking licences - the story so far BY SUNIL RAMAVARAPU, NMIMS– MUMBAI “It is still possible that not all eligible applicants might get licenses” – Dr. D Subba Rao during his tenure as RBI Governor

the way we do banking and bring about radical changes in the banking industry at large.

“We hope to start handing out the licenses” – Dr. Raghuram Rajan, RBI Governor

The first modern banks in India were Bank of Hindustan (1770) and The General Bank of India (1786) and both are non-operational. The oldest bank which is still operation is State Bank of India, erstwhile Imperial Bank of India formed by the merging of Bank of Calcutta, Bank of Bombay and Bank of Madras. The Reserve Bank of India was established in 1935 and regulated the banking industry in our country after Independence.

"I sincerely hope that when new bank licenses are given out, they are given to people with innovative models.” – Chidambaram, Finance Minister In the midst of speculations on licenses, there are a group of people meticulously working on a common goal. And they made headlines few days back. “We have submitted report to RBI,” – Mr. Jalan, former RBI Governor

Brief History of Banking in India

Sunil Ramavarapu is a first year student from NMIMS Mumbai. I n te r e s t a r e a s include banking industry and equity markets. E m a i l i d sunil.ramavarapu@n

In 1969, Government of India nationalized all the major banks at that time bringing about 85 percent of deposits in the country under its

This news was loved the most by media as they have something to munch upon. And once again, discussions about Figure 1 Indian Banking at glance (Source: RBI's Financial Stability Report, 2013) new banking licenses starts on news forums, online portals and control. status updates on FB and tweets on twitter either criticizing or appreci- A second round of nationalization happened in 1980. After the BoP criating RBI and Government. sis in 1991, the banking sector was Let us try to look at things objec- again opened to private players by tively and understand whether the issuing licenses. By the end of 20th new banking licenses really change century, Indian banking comprised of


state run banks, private banks and foreign banks. The last time the RBI issued licenses was in the year 2003-04 when Kotak Mahindra Bank and Yes Bank have acquired the permission to setup banks. Banking Licenses The Union Finance Minister had made an announcement in his budget speech for 2010-11 that the RBI was considering giving some additional banking licenses to private sector players. In pursuance of the budget announcement, the RBI put out a discussion paper on its website on inviting feedback and comments which elicited wide response. Later, it released a set of eligibility criteria to apply for the banking licenses shown in the figure below.

Ltd have withdrawn their applications citing economic and operational impact on their existing businesses. Mahindra also withdrew its plans to apply citing the same reason. The four main obstacles before the applicants are: 

  

Companies will have to set up non-operative financial holding company and transfer existing financial business to the bank Meeting PSL target of 40% right from the first year of operation Maintaining SLR and CRR as the existing banks in business for many years Setting up of 25% of the branch network in the unbanked rural areas

Also there are company specific challenges. Indian Post needs to set up a holding company and list the  Rs. 500 crore initial promoter companies. Bropaid up capital kerage firms like India Infoline and Edelwiess need  Public enterprises, to list themselves as proprivate corporates as moters and move their well as NBFCs with broking business to a new 10 years of good subsidiary. MFI compatrack record, credennies also need to list themtials and integrity selves as promoters and  40% of paid up capimove their existing busital to held by holding ness to a new subsidiaries. company Infra financing companies  25% of branches to like IDFC needs to be be setup in unbanked listed as a promoter, move rural areas its infra business to bank  Foreign shareholding but will have to build the capped at 49% for retail from scratch. IFCI Figure 2 Eligibility Criteria (Source: RBI website, Image – The Hindu) the first 5 years would face challenges in maintaining SLR and CRR.  Banks to raise capital within 5 yars through pubIn case of NBFCs, L&T Finance may need to keep the lic issue and private placement leasing business out.  Equity capital to be brought down to 40 % in LICHF to be a holding company, moves its financing first three years of operation business into bank and offer the shares of the new  Promoter holding to be lowered to 20 and then to bank to existing shareholders. For Magma Fincorp, 15 within ten and twelve years respectively. the PE firms like KKR, IFC and Macquarie need to Aspirants and their challenges dilute their holding from existing level of 43.5%. All The list of aspirants who applied for the banking li- these challenges need to be sorted out by respective censes are shown in the figure 3. Out of the 26 appli- company in case it is given the license to run a new cants, two of the applicants, Tata Sons Ltd and Val- bank. ue Industries that is affiliated to Videocon Industries The major eligibility criteria being:


Challenges in Indian Banking Finance Minister P Chidambaram called for more innovative business models in banking. Adding on to what was said by him in the beginning of this article, he went on saying " It will be a pity if the new banks are clones of existing banks.....We need different kinds of banks to cater to different segments of Indian society." The Finance Minister, a person who controls more than seventy percent of the banking industry, should also introspect as to why the banks in the public sector are unable to innovate. Though what he said was right, we should also understand the fact that Government has also equally contributed to this deteriorating environment for innovation. This is the reason why there is an absence of undifferentiated banking in India. This when combined with regulatory over-caution resulted in creating the clones of the same business models in the Indian banking industry. At the same time, it is also worth noting out that private players have introduced new banking models in in the 1990s. The innovations like Internet banking, seamless trading, any branch banking, and large scale retail banking are made possible with the entry of private players. Today almost any financial or physical product can be bought or financed by the click of a mouse, and banks today are the biggest custodians of investor wealth. They have seamlessly integrated banking, broking and demat accounts. But banks in public sector could not take it off the way their private counter parts have done. It does not come as a surprise that PSBs, once the pioneers of mass banking in our country after nationalization, are also parroting the private banks. This once again shows the Government in the bad light as it starts to impact the innovation of the private banks too as the

competition from PSBs are weak. They are also impacted by the huge amount of the bank loans given to the politically mandated lending to favored sectors with crony capitalists being indulged endlessly. The situation now is so worse that public banks require high spread to cover their NPAs while the private sector is using this same spread to make super profits. When the private banks are able to get high profits which is also aided by the inefficient PSBs, they are not willing to take risks by coming up with innovative business models. Government ownership also comes with low levels of financial and managerial autonomy. Let’s consider SBI and HDFC Bank. Since its inception, HDFC Bank has had only one CEO, Aditya Puri As against that, SBI has had around 19 chairmen weaving in and out since 1994 (with one exceptionOP Bhatt), they had tenures ranging from as little as two months to an average of two-three years. Forget innovation, even long-term vision will go out of the window. The Government also started to intervene on how to conduct business. For example, a new form of inclusive banking took hold when NBFCs started lending against gold. The RBI and FM banned banks from selling gold and curtailed lending against it, killing off growth in this business. Is it the FM's business to decide which businesses banks should do or not do? In the last budget, Government announced the creation of a women's bank - without any rational thinking on why women would need a separate bank. It has also been pressuring other banks to cut lending rates at a time when inflation is still high. Is it Government’s business to tell banks what to do? If banks are told how much to lend and to whom, at what rate to lend and for what tenures, where is the scope for innovation?


Recommendations 

The safeguards are put in place by the RBI including the fit and proper criteria and group exposure norms to prevent banks promoted by industrial houses from cosying up to their industrial owners. Are they going to be effective is the question RBI should introspect upon. The existing fit and proper criteria are subjective, ambiguous and open ended, leaving the doors open for arbitrariness and favoritism. It should be more precise, coherent and objective yardsticks to assess the credentials of the applicants in a uniform manner. For instance, an FIR filed against Kumar Mangalam Birla, in his capacity as the chief promoter of Hindalco in the coal scam, has led to speculation, whether the A. V. Birla group, one of the top eligible contenders for a bank license, will be disqualified. There being no precedent, it would be interesting to see whether a totally extraneous development can derail the bid of one of India’s most admired groups. Highlighting the need for sustainability, RBI can increase the minimum capital requirement for setting up a new bank be doubled to Rs. 1000 crore. The pitfalls of misappropriation of banking resources must be avoided especially in the area of

lending to entities associated with promoters or even lending within the proposed non-operating financial holding company. 

The need sharp, but differentiated, regulation. India already has a large variety of banks from commercial banks to cooperative banks to RRBs to urban banks. But the regulation is either the same or diffused. We need wide banks (that do everything), narrow banks (that only collect deposits), urban banks and rural banks, wholesale banks and retail banks, and non-bank financial institutions. There should also be a path of migration from one form of banking to another and back.

The new banks to be created in the public sector the women's bank and the Post Bank of India (if given a license) can be used to create innovative models. For example, Post Bank, instead of trying to be a full-fledged bank be a narrow banks that merely collects deposits and sells financial products. It can then lend wholesale money to those who need it. The Women's bank be a focused lender to women's self-help groups and women entrepreneurs.

Finally, start merging the PSBs to make two or three banks that match international banks, few national banks servicing across the country and regional banks confined to a region. This should happen in the long run and not in a period of one five year plan.




Election 2014: Position Carefully and Own Quality BY VARUN KHANDELWAL, BULLERO CAPITAL No election in recent memory has assumed such serious economic significance as the 2014 Lok Sabha elections. The elections happen in the backdrop of a stagflationary economy in India with GDP growth remaining below 5% for several quarters and inflation remaining ranged between 8-10% for well over two years. In this article I will discuss the possible political outcomes and the implications they will have for economic growth, exchange rates, and the stock market. At the outset, I take cognizance of the high probability of the BJP getting 200-220 seats and forming the government with Modi as the Prime Minister. This has been the dominant outcome projected by most opinion polls conducted and reported by the media. One hears the phrase ‘Modi wave’ at almost every discussion on the elections. Having recognized that Modi becoming the Prime Minister is a high probability event, let us also understand very clearly that it is a ‘probability’ not ‘certainty’. One need only rewind back to December 2013 to see how embarrassingly inaccurate a majority of opinion polls, and to some extent even exit polls, can be - they grossly underestimated the popularity of the Aam Aadmi Party. Similar gaps

between projections and outcomes can be seen you rewind back to other assmebly elections and to some extent, even the last two general elections. Lets look at the different possible political scenarios if the opinion polls are inaccurate and a lower number of seats are won by the BJP than expected. If Congress does not perform as poorly as projected and is able form the government, it will most likely be a weaker government than the present one with a greater reliance on a motley group of allies. An alternative, but more likely scenario is that the seats lost by the Congress are not gained substantially by the BJP but go to a various regional parties. In this case the BJP may be able to form a rather weak government with potentially another PM candidate to replace Mr. Modi who has at various times expressed his aversion to becoming the PM if the BJP does not cross the 200 seat mark. Another, rather remote possibility, is the feared ‘Third Front’. My purpose in this discussion is to enumerate the realm of possibilities and project the likely scenarios for India.


Varun Khandelwal is the principal officer at Bullero Capital. He has been responsible for managing the proprietary desk spanning equities, fixed income, and options at Bullero since 2010.Varun served as a Visiting Faculty in Finance at Birla Institute of Management Technology from 2011-2012. He holds a MSc Economics from the University of Warwick, UK and a BA (Hons) Economics from Delhi University.


S P E A k

If the most likely scenario plays out, and Modi does become the PM with a strong support base in the Lok sabha


the economic outlook for Indian looks better. Modi is seen as a reformer and a pro-industry person. Of the entire political spectrum, he is the only candidate who has an economic vision for the country. Further, he evokes confidence in corporate sector which has shrunk its activity in recent years due to a hostile investment climate. Even Foreign Institutional Investors seem to prefer him - case in point are the Goldman Sachs and CLSA India reports that present a bullish case for India if Modi becomes PM. The immediate reaction of the equity and foreign exchange markets will be one of euphoric bullishness on India. While the foreign exchange markets will continue to remain stable given the already improved balance of payments and higher foreign exchange reserves, the stock market is a different beast. At the time of writing this article, it has already starting pricing in a Modi victory. One needs to tread with caution in the equity markets - Modi may be an able administrator, even a reformer, but he is no magician! India has been in a balance sheet style slowdown for the last few years. Banking and corporate balance sheets have seen severe stress and impairments which will take years to improve and in many cases will need outright equity infusion. A case in point are public sector banks and many infrastructure firms. The delays in projects have substantially eroded the time value of many projects which will simply not recover. Similarly, many loans made by PSU banks are beyond recovery due to the ill health of the corporate balance sheets which have taken hits from poor investment decisions, project delays and permit delays that have eroded time value of their projects. This logic determines the kinds of stocks one should be invested (or not invested) in. Companies with stretched balance sheets should be avoid as many will require severe equity dilution to become viable again to enter new business segments and generate cash flows to service existing debt. Many businesses have lost too much money to be able to get back in the black. They will go bust regardless of whatever sort of recovery the economy poses. Kingfisher is a

case in point - even the airlines takes off again, the existing shareholders will be diluted to oblivion if the amount of capital required for the business to take off again is infused into the company. Similarly, many PSU banks and some private ones will see a lot of loan write-offs and will need fresh capital infusions especially with Basel III norms around the corner. Good spaces to invest in are companies with strong balance sheets, exporters (primarily IT and Pharma) even if the rupee appreciates. There are many plays in these spaces which are still cheap and can offer substantial capital appreciation. Substantial money is there to be made in companies where the balance sheets are very stressed but which are able to generate positive operating cash flows, are able to make interest payments, even if the debt is high. In these cases, if the companies are leveraged, even better as they will be able to take on newer opportunities in a growing economy which can generate the required profits and cash flows to slowly deleverage their balance sheets. Leveraged companies that are able to deleverage without compromising the core business will go on to become multibaggers. The alternative political scenario where Modi is not the Prime Minister but we have a similar UPA II type government, or a weak BJP government is not a disaster, but economic growth will continue to languish. The scary scenario is where regional parties are able to gain a majority of the seats lost by the Congress and a motley group of political parties are able to form the government a la HD Deva Gowda or IK Gujral. This might trigger a ratings downgrade by international rating agencies precipitating a capital outflow from India which will make August 2013 seem like a walk in the park. The downside to the equity markets and the rupee are in excess of twenty percent in this scenario. The next two months will be pivotal for India’s future. To re-iterate, the most likely outcome is a Modi victory. The risk/reward remains firmly skewed in favour of owning quality companies. Callous positioning may be severely punished.


Non-performing asset - an economic perspective BY SNEHA SRIVASTAVA, IIM-RAIPUR Background analysis In the light of a recent dilemma faced by the United Bank of India (UBI), it is imperative for the Indian banking sector to go back and introspect. According to the Bloomberg stats, in February 2014, UBI reported a loss of Rs. 1238 crore in comparison to the Rs. 42 crore profit of the last year. Its bad debt rose to Rs. 8546 crore this year because of the accumulation of the nonperforming assets. Most of the Indian public sector banks are in the same boat.

debts is not just because of the uncontrollable factors. Lack of proper management also contributes to this predicament. Here is the list of few possible reasons responsible for this disturbing scenario. 

Cosy relationship between the bankers and the corporate borrowers: Banks are liberal towards their big corporate borrowers. And the incentive behind such practice is the continuous flow of money from these corporates. This helps in keeping their balance sheet healthy. This is a kind of mutual benefit that both of them enjoy and in turn banks make their situation vulnerable with the generous policies.

Lack of monitoring system: Indian banking sector does not have proper credit appraisal system. This prevents a proper and timely check on the malpractices that is being adopted in the banking sector.

Lack of stability in the position of responsibility: In most of the public sector banks, the tenure of the chairman or the top officials is short because of the mismanagement and bureaucracy

The burgeoning cases of defaults by the borrowers is putting pressure on the Indian banking sector and in turn jeopardizing our country’s economic situation. Non-Performing Assets In a layman’s term, the loans that are in risk of default are called nonperforming assets. According to the rules, if a borrower fails to make interest or the principle payment for 90 days, the loan is considered to be a non-performing asset. In that case bank has the right to take legal actions against the borrower, in order to recover their loss. The bad practices The alarming situation that has been created because of the bad

Sneha Srivastava is a PGP 2 0 13 -2 0 15 s t u d e nt studying in IIM Raipur. She has worked as a business analyst for two years with Mu Sigma Business Solutions Pvt. Ltd. E m a i l I D pgp13110.sneha@iimraipur.


Top management keeps changing and to avoid the risk of exposure and to exit with a healthy record, they cover the real situation until it goes beyond their control. Current methods to handle bad loans In order to clear the balance sheet and recover the losses, banks follow certain methods. Write off: When there is no possibility of recovering the bad debt, banks write off the uncollected debt. They record that amount as an expense. This reduces the taxable income in their balance sheet but still this indeed is a loss for the banks. Restructuring of debts: There are certain instances when the borrower is not able to pay off his/her debts because of some reasons like economic downturn or delay in the clearance of their project. In that case banks restructure the loan to alleviate their stressed assets. They go for the increase in the loan repayment period or deferred interest payment. This method is considered to be less expensive and is preferred over bankruptcy. Sell assets through asset reconstruction companies (ARCs): ARCs have greater expertise in dealing with the defaulters. For this reason banks sell their NPAs to the asset reconstruction companies. However there is mismatch between the valuation of loans that banks seek and the amount that ARCs are willing to pay. Legal method: In most of the cases banks approach courts to recover their losses. But there is a marginal possibility that they get justice in a short duration of time. Generally the case goes on and huge amount of time and money is invested by the bank. That’s why it is considered to be an unconventional way handling the stressed assets. SBI versus ICICI- An analysis of the trend of the NPA The graph shown above gives a very clear picture of the difference in the asset quality management practices that the two banks follow. On one hand SBI’s gross NPA has increased over the period of time, on the other hand ICICI has managed it well.


ICICI According to the report published by the Livemint, a business newspaper, ICICI takes the help of recovery agents to r ecover their bad debts. And because of the fear of these agents there has been a substantial decrease in the NPA in the balance sheet of ICICI. Now the question arises does this policy is in sync with the business ethics. May be yes, because the main aim of any organisation is to maximize the shareholder’s profit. Then in that case why not other banks also adopt the same policy. It is worth to think over it. Case - Kingfisher Airlines

In 2010, Vijay Mallya’s Kingfisher Airlines accumulated huge amount of debt and was unable to repay it. The loss making carrier requested for restructuring of its debt. And the bank extended their tenor and deferred the interest payment by two years. But the carrier could not recover from its debt and kept defaulting. For this reason it was grounded in October 2012. In 2013, lenders had to categorise the debt given to kingfisher airlines as NPA in their accounting books.



Apart from the short term loss that the bank incurs because of bad debt, there is collateral damage too. Here is the list of some additional problems that banks face when bad debts increase phenomenally.

It has been decided to set up special branches for the speedy and efficient disposal of the SARFAESI cases under the SARFAESI Act of 2002, which allows banks to auction properties of defaulters.

It has been planned to provide expensive loans to the borrowers whose credit worthiness is less.

Number of days assigned for debt restricting is supposed to get reduced to 17100 days instead of the earlier duration of 180 days.

Credibility loss: Huge amount of loss shown in the financial statement of banks creates fear of bankruptcy in the minds of customers. This will make them withdraw their cash and keep it somewhere else to avoid losing it in case the bank become insolvent.

Central Repository of Information on Large Credits (CRILC), a joint lenders’ forum for the collection and storage of credit data to the lenders. This will prevent customers who have already defaulted with one bank to go to some other bank and apply for loan. 

Fall in the share price: Loss of credibility leads to the decrease in the share price of the financial institutions carrying huge amount of bad debts. Money not available for further lending: Because of credit crunch that banks face because of bad debts, further lending is not possible to the borrowers who could have actually used that money for the useful purposes. Measures taken by the Reserve Bank of India RBI has developed an action plan for early identification and resolution of the bad loan cases. The following measures have been taken to deal with this problem. 

Earlier bank used to wait for 90 days to take action against the defaulters. Now it has been planned to reduce this duration to 30-60 days.

Insights Tackling the issue of bad loans is a challenging task faced by the Indian banking sector. Apart from impacting the bank’s financial statement it has a direct impact on the India’s economic situation. The reason behind this is the unavailability of loans to genuine borrowers who want to use that money for useful purposes that could indirectly help in the development of our country. The problem can only be handled by the transparent and efficient policies of the banking sector. Apart from this a proper credit appraisal system and timely review has to happen to keep the bad practices in check. The need of the hour is to cure this contagious issue before it goes beyond the control.


f I

Will growth be a casualty in the battle of fiscal deficit and Current account deficit? BY DIYVA SHREE .S , IMT - GHAZIABAD Background “Everything in the world is endured except continued prosperity”- Johann Von Goethe. This quote seems to be apt if we look at incidents like the financial crisis in 2008 and its huge impact of crippling the economies of various countries. Other common problems like unmanageable debts, high inflation and so on also bothers the government of various countries. But, governments always try to fight against these odds to foster growth. Continuous prosperity is achieved through various initiatives or policy changes done in an economy. Fiscal Deficit & Current Account Deficit are also among those common problems which carry with them a baggage of serious concerns for an economy, hampering growth. To what extent is growth a causality in the process of curtailing Fiscal deficit (Fiscal Consolidation) and CAD and the way ahead, would be discussed in detail later. Fiscal Deficit refers to the difference between total government’s

expenditure and total non-debt receipts. And, Current Account Deficit refers to the difference of total export of goods, services & transfers from the total import of goods, services & transfers. India currently (2013-14) has a fiscal and current account deficit of 4.6% (“State’s fiscal”, 2014) & 0.9% (CAD for the current quarter but expected to be 2.5% for the entire fiscal year) (“Q3 CAD”, 2014) of the country’s GDP, respectively. Though these figures were lowered compared to the previous years, India still has a threat of a possible downgrade from the credit rating agencies like Moody, S&P to junk status from its current Baa3 sovereign rating.


K Divya Shree S is a 1st year PGDM—IB (Finance) student of IM T Ghaziabad, she is a member of FinNiche the finance club of IMT-G

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So, to cope up with the current situation certain measures like lowering government expenditure, increasing revenue and capital receipts, decreasing imports and so on are to be taken into consideration. These corrective actions would certainly have an impact on growth of the economy. So, let us now discuss how adversely 20

or positively does growth gets affected. Scrutinising Fiscal deficit

rise in interest rates and thus crowding out private investments from various projects.

Mathematically, Fiscal deficit can be written as

FD = G-T+TR Where, G- Government expenditure T- Tax receipts TR- Transfer payments or Subsidies Going with the simple mathematics, fiscal deficit can be reduced in the following 2 ways  Decreasing the spending/ subsidies by the Government or  Increasing the collection of tax receipts Implementing the first option can adversely affect the growth of an economy. As, there would be less contribution from the government side, be it in the development of projects or in cutting of certain benefits to the weaker sections of the society. So, let us now check the viability of the second alternative which is increasing the taxes. It can also affect the growth, as the demand for goods decreases leading to decrease in production output, called the multiplier effect. It can also have an effect on employment, which is undesirable. Pitfalls of Fiscal deficit Fiscal deficit shows the total debt taken by government to finance the total budget expenditure. The debt taken is justified (to a certain limit) until the money is spent on creation of national assets. But higher fiscal debts have many worse consequences to be borne, like: Negative

impact on employment and income generation. This can be explained by the increased demand from government side to take loans leading to

Higher trade deficit, a situation called Ceteris Paribus. This occurs due to the increased tendency to borrow from foreign countries, which is followed by huge dollar inflows, resulting in the appreciation of our Rupee. This makes imports cheaper and thus widening the trade deficit. 

Bankruptcy of the government

Inspecting CAD Mathematically, B=X-M(Y) Where, B=Balance of payments X=Exports of goods & services M= Imports of goods & services M(Y) = Imports as a function of domestic output As per the current situation (negative balance of payments because of our imports exceeding exports) the above equation can be re-written as, B= M(Y)-X Again from the basic understanding of mathematics, there are two possibilities to reduce the magnitude of negative ‘B’,  Decrease imports of goods and services or  Increase exports of goods and services Restricting imports is an important task at hand as imports are being costlier due to rupee depreciation. Recently, gold imports have been reduced, which played a significant role in reducing the deficit. But, the major imports of India are oil and coal. Due to their higher prices, cost of production in all industries which uses them as a source of energy, increases. This leads to supply shock and further shortage results in cost push inflation. The lower demand, in this situation adversely affects the employment and output. . On the other hand, the current scenario is encouraging for the exporters as the dollar value is appreciating.


Recent rise in exports, a major contributor of it was from IT services, helped in reducing the deficit. But exports cannot be raised indiscriminately as it may lead to the shortage of supply in our own country leading to inflation.

done in the case of subsidies. The huge money spent on subsidies adds fuel to the fire of inflation by increasing the Purchasing Power Parity of people.  Demand

A General Growth Trend From the above graph it can be observed that GDP growth and debt taken are on the decreasing trend and also BOP, but on the negative side. The imports and exports are in an increasing trend, with imports growing at a faster pace than the exports, thus creating deficits.

supply chain etc. 

Regulations in various sectors can be relaxed, without hurting the interests of domestic producers. It can help injection of dollars into the system which helps in boosting the Rupee growth, ultimately strengthening our economy in view of investors.

Another possible way of improving productivity would be to reduce the tax rates, which are considerably higher in our country. Though increase in tax receipts is a way to reduce the fiscal deficit, this issue has to be looked upon because without increase in the base income (depends on the overall growth) of people increased taxes can have a negative impact on employment.

Big Challenge The major challenge present on table is handling growth vis-à-vis managing the deficits. Is the situation out of control? As our country is crumbling under the pressures of likely decline in sovereign rating, (“India’s fiscal”, 2014) making India not an investor friendly place, policy paralysis, high inflation, rupee depreciation, high deficits and so on. Way Ahead! Sustainable development in India can be achieved by moving ahead in the following direction: 

Government taking care that the money spent by it will ultimately lead to creation of assets. Taking the example of MNREGA programme, jobs provided should though it should lead to creation of assets like roads, dams etc., which can be leveraged later. Otherwise it would just increase liquidity in the market arousing greater demand for a given amount of supply, creating an imbalance. Programmes should not be initiated for gaining short term benefits like gaining votes etc., as

pull inflation, created most often, can be reduced by improving the storage conditions of grains, proper transportation, decreasing middlemen in the entire

Finally to conclude, a doctor’s immediate concern when a child is ill would be to make the patient recover from illness. At this stage no one would think of person losing weight or other growth aspects of the body and give food that may improve growth but delays recovery. Similarly, Indian economy should first try to get away with the concerns of deficits and inflation (illness) even if that slows down growth for a short while. Because, once recovery is ensured (after curing illness), attaining growth could be focused upon and its achievement would be much easier. Thus, portraying India in a better picture.


Is whatsapp worth $19 billion?! BY RAMESH PRADHAN, SYMBIOSIS INSTITUTE OF MANAGEMENT STUDIES—PUNE Jan Koum and the rest of the team have done some amazing work to connect half a billion people. I can’t wait for them to join Facebook and connect rest world, “ says Zuckerberg after making the deal to buy WhatsApp, the mobile messaging service for a whopping $19 billion. Quite a deal !! Ain’t it… For someone like Zuckerberg who has always seen the bigger picture, this decision to buy WhatsApp couldn’t have come at a better time. After buying Instagram in 2012 the roadmap for Facebook was well laid down. Acquiring photo sharing platform then to an IM App now is really commendable. Founded by two former Yahoo! employees Brian Acton and Jan Koum in 2009 this cross-platform IM service came out with many features like video messages, audio messages , images sharing etc. An app which spread like a wildfire reaching to almost half a billion users in no time is now a Facebook entity. Sounds pleasing if not Google then Facebook. When you miss out on a deal like this, it does hurt. Facebook pounced upon the opportunity by buying WhatsApp at a price which seems higher but is

surely a strategic one ,one which will help Facebook stand in good stead in the times ahead.

A social networking site as famous as Facebook buying an IM App sounds very peculiar and that too by paying 35% of its cash in hand. A transaction of this measure of which $16 billion will be paid in cash and the rest $3 billion in restricted stock over the next four years. There are many pre-

Ramesh Pradhan is a 1st year MBA– Finance stuent of Symbiosis Institute of Management Studies, Pune. His interes ts inc lude blogging, numismatics, football, reading E m a i l i d ramesh.chandra2015@s

sumptions evidently which followed this major event. Some said it’s foolhardy on the part of Facebook to have such an amount just for buying an IM App. While the others said it a smart move considering WhatsApp might get subsumed to Facebook Messenger as many users find it pretty slow at times. So what made WhatsApp an instant success? Is it the platform friendliness, or is it the easy accessibility? Or is it the about functionalities that it offers? Infact WhatsApp has all in its package which makes it a great IM that it is. Sharing photos, videos, voice messages etc. through an IM App was very well thought out by the entire WhatsApp team. 23

A team of 55 members thus changed the way people used to text or chat. A look at WhatsApp’s user growth in the first four years as compared to other networks like Facebook, Skype or Twitter it can be seen how rapidly has WhatsApp grown. WhatsApp has grown three folds more that Facebook in the initial four years. If Facebook was competing with MySpace and Orkut, WhatsApp on the other hand was competing with Line, Viber and WeChat. What differentiates WhatsApp from a competitor like WeChat is the User Interface that it has. WeChat has a very confusing UI which many a times suffers from network glitches as well. In addition, WhatsApp has features like ‘last seen at’ and ‘double tick’ showing message has been received at the other end. Zuckerberg while commenting on the scope of WhatsApp in their business said, “the messaging volume running through WhatsApp is approaching the scale of the entire telecom SMS messaging volume”. The time is not very far when the messaging services provided by the various telecom networks will be redundant and WhatsApp will reach each and every corner of the world. Also the privacy issues which have caused regular dents in Facebook’s user-base growth over the years will be taken care by a service like WhatsApp which fends off all such privacy related concerns. Also the pain of logging in to the Facebook to chat is not required and moreover WhatsApp is a real-time messaging platform. Photo sharing, video sharing etc. can be done in a faster and easier manner. The scope that WhatsApp brings in is that, being an App based out of Europe is got the maximum attention in Europe as well as some other regions like Latin America, Asia. So it has a huge potential to increase its user base in North America where Facebook’s penetration is very high. As it is evident from the fact that, Facebook earned 50% of its revenue in the FY’13 from US and Canada itself. Also from the

data point of view WhatsApp processes about 50 billion messages everyday. And astoundingly a team of 32 engineers handle all this bulk with no expense and personnel dedicated for marketing and public relations. Charging only $1 per year is something they have done very smartly, which will not only give them a nominal price for their IM service but also will also help them in maintaining and bringing about new changes in the newer versions. Even with its burgeoning popularity in the recent times Jan Koum has been wary of raising capital through IPO or selling off. But then it needed all those meetings between Zuckerberg and Koum to finally sign the deal. Both could see the mutual benefit from it. While for Facebook its ambitions of becoming a social network and IM giant got a new vibe, for WhatsApp it could be the capital they raised where employee is supposed to get a whopping $345 million as well as getting employed with Facebook. Facebook was advised by Allen & Co. LLC and Weil, Gotshal & Manges LLP while Morgan Stanley and Fenwick & West LLP did the same for WhatsApp, without which the deal might not have been possible. Another major determinant of future of Facebook is the rise in number of smartphone users worldwide. With the global smartphone users expected to touch somewhere around 1.75 billion by the end of 2014, the assumptions of Zuckerberg may be very befitting. Adding the 0.5 billion WhatsApp users with Facebook’s current userbase and makes it about the same figure considering the monthly rate of addition of users to WhatsApp is in millions. So there is no doubt that WhatsApp’s strong presence in direct and private messaging and global markets as well as smartphone penetration make it a highly strategic investment for Facebook and a very well timed one as well.


This therefore will have help WhatsApp in reaching faster to the people. But then $19 Billion? Is that sum that Facebook should have spent just for an IM App? As we have analysed and predicted the benefits that Facebook will be reaping out of this is multifarious, it only a matter of time then. A company 10 years into its existence has done remarkable things, things which have changed how we socialise and challenged how we see the data around us. The challenges though are ingrained whenever technology is involved, and this then leads to change and upgradation of the existing ones. The challenges though will be many, which only time will tell. This will pose challenges to technologies BigData which boasts of handling humungous amount of data. Everyday 600 million photos and

about 100 million videos are being shared on WhatsApp, and this number will only increase in the times coming. This being the 3rd largest technology takeover ever, speaks volumes of the decisionmaking and foresight of the man himself, Mark Zuckerberg. So the decision might seem overvalued to many but to Zuckerberg and his team it’s hitting the nail on its head. Though its early days to do any prophecy per se, but the numbers and figures are there for all to see. Zuckerberg’s statement few days back saying WhatsApp will operate as a standalone service also gives an indication of the ethics on which that man runs his business and the promises that Facebook has made to WhatsApp. All said and done, let’s hope Facebook someday connects the entire globe and bring a revolution which the world as of now can only…. IMAGINE !!


Ebbing the Japanese Deflation BY JEENOY PANDYA, NMIMS - MUMBAI Japan is not a country to which that a little inflation is always Prime Ministerial comebacks are healthy. But the scenario in Japan associated. The person in focus was was the other way round; it was sufhurtling towards oblivion after his fering from prolonged deflation first term as the Prime Minister of which restricted the GDP growth. the 3rd largest economy in the Abenomics’ bold answer to this was world. This threeis the story pronged; of how he massive fismiraculouscal stimulus ly resurrectto encourage ed his politconsumer ical career spending, and the Japaggressive anese econquantitative omy from easing to nearly two increase the decades of availability stunted of money in Shinzo Abe growth by the market & preaching his reform oriented eco- substantial structural reforms to imnomic policies popularly known as prove competitiveness. ‘Abenomics’. In the first stage of Abenomics, a fisOne can draw an analogy between cal stimulus package to the tune of Shinzo Abe’s own life & history to approx. 20 trillion yen ($210 billion) the performance of post-war Japa- was introduced. The investment was nese economy; both were a hit ini- made chiefly in infrastructure which tially but eventually fizzled out. aims at generating 600 thousand jobs Abe belonged to a prominent polit- in a period of 2 years. This would in ical family & achieved a feat by turn encourage consumer spending & becoming the youngest post-war investment which are precursors to Prime Minster of Japan but was economic growth. The step was abreplaced just shy of an year at the solutely essential in Japan where the helm due to political turmoil. The liquidity preference is the highest Japanese economy on the other among advanced economies. hand saw unprecedented economic In the second stage, Bank of Japan growth in the 1980’s but has been introduced quantitative easing in the grappling with recession for the form of a bond buy-back program two decades since. similar to that of the US federal bank Simple economics says that for economic growth to occur, consumer spending must increase &

Jeenoy Pandya is a B.E. (Mechanical) from MS University, Baroda & he is presently pursuing MBA from NMIMS, Mumbai. Email ID: jeenoypandya

to pump in capital into the economy. This monetary policy targets a 2% rate of inflation by 2015, which is a


healthy rate for an advanced economy like Japan. The easy availability of money has also led to the devaluation of Yen by as much as 25% which encourages exports by making them cheaper & hence more attractive. Presently Abenomics is in its 3rd stage which is to bring about farreaching structural reforms some of which include government deregulation, labour reforms, privatization of public entities, freer trade, a major revamp of immigration policies and recalibration of tax rates. It is also the most crucial stage as only these reforms can sustain the growth conceived by the first two stages & promise an even better future. Failing on this front may have devastating results similar to the previous attempt in 1990 to reinvigorate the economy which was followed by a decade of recession. To affect change will also be challenging due to opposition by industrialists, the fickle political scenario, the conservative nature of the Japanese & external unrest.

The economy has so far been responding positively to Abenomics; primarily evident from a staggering increase of 3.5% in the GDP growth rate in the Q1 of 2013 against Q1 2012. The inflation as pegged by Bank of Japan is at a promising 1.5%, Nikkei is up by as high as 70% since the inception of Abenomics & the unemployment rate is down by an impressive 0.3% to 3.7%. The fact that the aye-sayers far outnumber the nay-sayers alludes to an optimistic outlook towards Abenomics & the Japanese economy itself. Shinzo Abe, in his 2nd term as the Prime Minister of Japan, came in as a force to be reckoned with, pushed sweeping reforms & has so far delivered on the promises made by Abenomics. With his approval ratings skyrocketing to as high as 70% there’s a good chance that he will see Abenomics to its logical conclusion of making Japan the land of the rising sun once again. The future of samurais sure looks flowery.


The “Fragile Five” againsT The “Mundane Three”- Emerging markets, hedging investor fears BY SIRSA MAJUMDAR & SOHAM BAGCHI, IMT - NAGPUR Introduction: An analyst at Morgan Stanley, in recent articles, has been using the term Fragile Five to represent a set of markets which are facing downturns due to several macro economic reasons. The 'big' names includeTurkey, Brazil, South Africa, India and Indonesia. The fragile five countries, which experienced a rapid economic growth during a time when investors had lost confidence on the “Mundane three”, namely U.S.A, U.K. and Japan, are in deep trouble at present with high volatility in exchange rate, slowdown in economic growth and other economic problems. A multitude of push and pull factors had contributed to the stellar growth of these emerging markets. This paper looks into the factors that resulted in the advent of these markets and the reasons for their present uncertain volatile situation. This paper argues that in spite of the present uncertainty and volatility, there is ray of hope that with the use of proper policy mix these countries will bounce back with good performance. Advent of the Fragile Five: Let us understand the raison d'être for the advent of such emerging markets. 1. Turkey- Turkey occupies a strategic location in the Asian continent. It is the largest national economy in Central Europe and the Middle East. When the Euro zone was encountering a crisis period, investors were looking for safe ha-

vens for investment. That is when they realized the potential of the country. Turkey had a viable capital market that was akin to that of Asian markets and promised investment opportunities to yield deficit investors. A steady GDP and moderate inflation rate made Turkey a global attraction. 2. Brazil- Brazil had promised what USA failed to meet- safe and higher returns. As the major part of the world was recovering from the aftermath of the sub-prime and Euro zone crisis, Brazil was growing at a rate of 7.5% in GDP. Also, in 2011, Brazil surpassed the United Kingdom to become the sixth-largest economy in the world. A politically stable nation with increased FDI, infrastructural developments, deft government institutions coupled with international ties made Brazil an emerging market that investors could trust. 3. South Africa- This country’s competitive advantage is its cheap labour that boosts the economy. A country rich in resources such as diamonds, platinum and gold; it is now attracting foreign investments aplenty, intending to use the nation as a hub for space exploration, high technological innovation leveraging its solid, sophisticated banking system. This economy is also expected to grow at the rate of 2.8% by the end of 2014.

Sirsa Majumder is a Commerce graduate from the University of Calcutta in 2012 in Commerce (Accountancy hons). She is currently pursuing a PGDM- Finance at IMT-Nagpur E m a i l i d :

Soham Bagchi is a Science (Microbiology) graduate from the University of Calcutta in 2012. He is currently pursuing a PGDM - Marketing and Economics from IMTN a g p u r . E m a i l i d :

4. India- India was basking in glory when USA suffered the sub-prime lending shock. The Sensex reached an all time high of 21000. India allowed FDI and FII under liberalized terms and conditions, which attracted 28

huge amounts of foreign investment. India’s young talent pool, majority of whom, could speak in English, was a cheap source of labour for foreign markets. 5. Indonesia- Indonesia’s strength lies in its economic structure. More than half the population is under 30 years of age. Foreign investors invested a hefty sum of $16.1 billion in 2010 in the Jakarta stock market that saw a 133% jump in the market. Rampant export of commodities to the Asian market, comparatively rich rural market and its savior in times of crisis- thermal coal have boosted the third most populous nation in Asia. Indonesian Government is investing heavily in infrastructure to build ports, highways and bridges; thus companies involved in such projects are sure to get a high ROI. These fast growing countries are facing an imminent and ongoing withdrawal of foreign capital from their markets.

The fear, the investors investing in these markets are grappling with, are deeply rooted- not in their own land, but in the developed countries like USA, Japan and UK. The news of the Federal Reserve’s decision on tapering the bond buying program from $85 billion to $65 billion per month has increased the yield on their bonds thereby pulling out money from the emerging markets. India, Indonesia and Brazil primarily are experiencing capital flight from their stock markets which is straining the Balance of Payment and also exchange rate of the countries.

The Chinese manufacturing sector which had shown promises of high return earlier the previous year has slowed down significantly in the current year. The service sector had also reached a five-year low in January, 2014. Countries like India and Brazil are suffering from high inflation and a contracting monetary policy stance from the Central banks. This has adverse effects on their growth. The value of the Indian Rupee, Turkish Lira and South African Rand has been depreciating against the US Dollar lately. The exchange rates have also put a pressure on imports. Prices of crude oil and natural gas have made imports costlier. These are also used as inputs in manufacturing commodities, thus increasing cost of final goods produced. All such imperfections have made the emerging markets extremely vulnerable. The table below shows the recent changes in primary indicators in the Fragile five.

The currency crisis in these countries is a major issue triggering the investors to resort to extreme decisions of investing in safer havens like U.S. Treasury bills which have no risk of default. The drop in currency is evident in the exhibit below. The hardest to be hit was the Argentinean peso that decreased 35 points. Indian Rupee has also been volatile. The depreciation has been about 3%-15% over the last year. This suggests a stronger Dollar and recovering developed economies. Investors are more faithful in developed countries that have suffered the wrath of their own fallacies and yet is picking up their pace over emerging markets which had shown promise but is going through economic disorder. China will also 29

also impact the Fragile Five markets due to its slowing economy and low imports from all over the world. India Stands Strong through the storm: All this being said; it has been seen that India has been doing comparatively well as compared to other nations. Its ample foreign reserves, internal debt sourcing and flexible exchange rates have built trust among investors. It is difficult to predict its frailty given the strong monetary system it follows. To ensure that robustness prevails in these markets, both Central Banks and Government have to work in tandem with each

other. Keeping a check on current account deficits, exchange rates and inflation will allow the emerging markets to grow at their pre-determined pace. There is still a ray of hope to restore these markets to their former glory of “emerging markets” and Fragile Five countries. Some of these emerging markets have also shown better stock performance like the SENSEX reaching an all time high of about 21,800 points. The idea is to keep faith and have a bullish approach. This sums it all in the words of Virgil, “Fortune sides with him who dares”.


The year that was—in numbers and charts 1/2


The year that was—in numbers and charts 2/2

By Sriram D.S & Mohit Gupta, NMIMS - Mumbai


Dividend for gains AT stock market–is it the right choice? BY PRIYO RANJAN, XISS - RANCHI Against the popular belief of most investors prevailing in this country with respect to the dividend policy paid by the companies, the facts and reality lies distant. While the tale of the town supports the “More the dividend, more the efficient/ better is the company for investment”, the grim reality lays very different altogether. Under such cloudy shades of misconception, we need to break the barriers and understand what actually the truth is? Well, looking at the scenario let me break the fact that some of the best companies in the world do without paying dividend or rather paying very low dividends. In order to understand this phenomenon let us understand as to what the reasons behind such a dividend policy could be. Well, the dividend policy largely depends on the broad and well laid out objectives with respect to the mission and vision of the company. The path chosen by the company may vary. However, the companies aim at roughly achieving the same end results- maximization of shareholder’s wealth. When we analyze with respect with respect to this objective, the company’s position should stand clear. Another fact to this point of view is

the company’s requirement to grow and expand. This expansion would further require capital which would be acquired by:

 

Issue of fresh shares in case of which the ownership of shareholders gets diluted Bank loans which require huge interests to be paid A cut from the profits accumulated from the share of dividends that has been paid. This lies as the safest option as the money of the owners grows at the maximum rate under such investment circumstances.

Priyo Ranjan is a 1st year PGDM student at XISS. He finished his B.E (IT) at VTU, Belgaum. He has worked at Infosys Technologies Ltd. E m a i l I D m

Now, the next big question lies as to how and why would the investors invest in such a company of they don’t get dividends? How would they know that their money is growing? Well like the saying goes ”Patience shimmers while haste quivers”. The very simple fact that would convince investors that they need to look at long term prospects rather than the short term small gains. The companies would offer a much better return and be at a better position to offer them over a considerable period of time. Your money invested in business would work out/suit much better than it being invested elsewhere over a 33

a period of time as a company always has much higher scope of growing than the money being invested elsewhere. Capital gains is the term that would satisfy investors to the core of their hearts and keep the market value of the shares of the company high, a significant factor to be observed from the company’s viewpoint. The company can utilize money more efficiently than the money being invested elsewhere.

the stars for many it’s a disciplined science for others. This excess speculation has also praised the dividend policies those failed and criticised some of the most successful ones at the time of their inception.

Amongst all dividend policy theories proposed upon there is none that has proved to be absolute and this reflects with the volatility of shares existing in the market. However, while the giant companies have withstood the test of time as against their interesting These shackles of wrongly developed notions need dividend policies many have failed trying to follow to be broken off their footsteps. and people be NAME OF COMPANY TRADING AS MARKET Indeed it is ramade aware of the VALUE ther difficult to long term benefits (Billions) predict the marof their invest- GOOGLE GOOG 291.9 ments in the form BERKSHIRE-HATHAWAY ket reaction toBRKB 187.3 of capital gains AMAZON.COM wards any AMZN 126.1 over the long run. GILEAD SERVICES GILD 80.7 changes in the The dividend poliE-BAY EBAY 66.8 dividend policy cy is not merely a AMERICAM INTERNATIONAL AIG 66.9 as it’s more of a tool and necessity YAHOO YHOO 29.3 of the companies short jerk and ADBE 22.1 to maintain their ADOBE levelling out CTSH 201 stand rather the COGNIZANT TECHNOLOGY thing or it can companies need to even lead to drastic changes –sometimes to cataclear out to their investors their long term objectives and how are they safeguarding their stockholder’s strophic levels for a company. interest over the long term. If a company which has been paying dividends sudWarren Buffet’s Berksire- Hathaway is a perfect ex- denly resorts to change and reduces it the investors ample- an active acquirer of businesses that retaining might interpret in many ways. Again the market sencash flow is a key ingredient of success. This tells us timents as well as the speculations may create chaos. that-“Don’t just focus on companies that don’t yet This in turn would thereby make the price of the have dividends. Some companies that have the potential for robust dividend growth like the FORD shares to fall even if the company wanted to save for (NYSE) could triple its current 40% a share divi- improving upon its business and aiming at long term dend over the next few years without making a dent benefits. in the balance sheet.” In the other case round if a company paying little divi“Patience and dedication is the key”. The shareholder is like a long term guardian with personal interest dends starts paying dividends initially there would be who becomes family to the happiness or distress, the a tear of happiness on the benefits offered and huge growth or ruins, the please and the pains, the turmoil buy outs would occur moving the stock prices up but and the walk-away of the firm invested in. What after some time the prices would again slowly go needs to be understood is that a good investment cli- down. But there are chances in for a surprise in such mate is reflected sharply by the share markets? Also, cases too. So think and think hard before putting your another feature is the market sentiment. bets in the stock markets as a sound peek into the naSpeculation is good for any market. However, too ture of benefit you are looking for and the time frame much of speculation can be worrisome and raise doubts of stability and sustainability of the market you consider to achieve it in, you may have to link which none of the governments or regulatory or pa- yourself strongly to the dividend policy of the comparental bodies would want to exist. A safe market ny being considered. The “More risk more gain” statekeeps the money rotating and while it is a game of ment is nonetheless true. 34


The Senior Committee 2013 - 14


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The Financial - April 2014