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MAY 2013


A Road less taken... OPPORTUNITY COST: a NOT SO SIMPLE COST, pG. 17


FROM EDITOR’S DESK Dear Niveshaks, Niveshak Volume VI ISSUE V MAY 2013 Faculty Mentor

Prof. P. Saravanan

THE TEAM Editorial Team Anchal Khaneja Anushri Bansal Gourav Sachdeva Himanshu Arora Ishaan Mohan Kaushal Kumar Ghai Kritika Nema Neha Misra Nirmit Mohan

All images, design and artwork are copyright of IIM Shillong Finance Club ©Finance Club Indian Institute of Management Shillong

The figures for GDP 2012-2013 were out recently and the performance of our nation, to put it mildly, was below the mark. We grew by 5% in the last year which is our slowest pace in the last decade. That’s a huge worry for Manmohan Singh. But our cover story may feel like a stroke of cool breeze to him. We claim that this number is as meaningless as it can get! There are far more important things to look at but we won’t even have a glimpse at them since neither that is the latest fad in international circles nor is the panic situation here yet. However, an increasing number of leaders – social, political, business and environment leaders – are seeing ‘Natural Capital Accounting’ as having truly arrived. Niveshak brings to you the new age, yet-to-take-its-proper-shape, in-line-with-IIM Shillong’s core theme of sustainability Natural Capital Accounting!!! We suggest that we value the air, water, soil, ecosystem and all that we essentially use for free in our companies in our financial statements and pay the true cost of our actions. Niveshak also brings some more good reads for you in this issue – the highlight is the guest column by one of our Professors, Dr. Sanjeeb Kakoty, as a supplement to our cover story. Let me not forget to mention that he was the sole educationist from India to be invited to Rio+20 summit last year and hence, has enormous perspectives to offer on the subject. So, sit back and think as he takes you through the intricacies of Natural Capital Accounting in his own interesting way. Then there is the story of ‘miraculous’ growth of Japan after the Second World War. What was the miracle involved is something you will discover only after you read the issue’s Finistory but one thing is certain – that the path chartered by the nation after facing the nuclear disaster is a continuing inspiration for many other nations. FinGyaan of the issue talks of the much deliberated ‘Opportunity cost’ but in a refreshingly new way! And you will agree, that’s something Niveshak is known to bring to every topic! To end this brief note, it’s important that we thank you, our readers, for your constant support and appreciation. Thank you! It is your endless encouragement and enthusiasm that keeps us going. We hope your internships went on well and you did leave great impressions on your employers. Kindly keep pouring in your suggestions and feedback to and as always,

Stay invested.

Team Niveshak

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

CONTENTS Cover Story Niveshak Times

04 The Month That Was


08 Perspectives on Natural Capital Accounting


17 Opportunity Cost: A Not

So Simple Cost

11 Natural Capital Accounting: A Road Less Taken


22 Let’s Bank on Women


19 Japan’s Economic Miracle Post World War II


25 Know Your Customer

The Month That Was



The Niveshak Times Team NIVESHAK

IIM Shillong

Rupee sinking below 56. No need to panic said Raghuram Rajan The Rupee breached the key psychological level of 56 to fall as low as 56.01 per dollar on 23rd May, a level last seen on September 6, 2012. Though it closed above 56, the downfall was a continuous fifth day fall to mark its longest losing streak in over three months. Forex dealers said the American currency remained in demand even as the Reserve Bank of India imposed restrictions of forward contracts by banks and arbitrage trading. It seems capital outflow of foreign funds from falling markets remained a major driver behind the rupee’s fall as dollar surges because investors are finding the American currency a safer bet amid concerns that Greece might exit the euro-zone. “We are not the worst, but we are also not the best either in terms of depreciation. I won’t say it is out of sync with what is happening in other countries. There is no panic-based need for new measures (on rupee). I don’t see any reason for apprehension,” Chief Economic Adviser in the Finance Ministry Raghuram Rajan told. RBI’s upcoming inflation indexed bonds look beneficial for investors Inflation erodes the purchasing power of money. Most debt products such as fixed deposits or regular bonds provide returns that are not protected against inflation. If a bank FD pays an interest rate of 9% per annum a n d inflation averages 9.5% that year, the investor loses money in real terms. To cushion investor’s savings against rising prices, the RBI will soon

JUNE 2013

issue inflation-indexed bonds (IIBs). IIB adjusts its interest payments depending on the inflation rate. As the inflation rate changes every year, so does the cash flow from the IIB. The other advantage of the IIB is that it not only adjusts the interest payments to inflation but also the principal repaid to the investor at the end of the bond’s tenure. In the final year, the higher of the original principal or the inflation-adjusted principal is paid to the bond holder. These financial instruments are meant to encourage savings and wean investors away from gold. Whether the central bank succeeds in reducing the attraction of the yellow metal remains to be seen, but the launch of these bonds does give Indian investors a low-risk option for protecting their savings from inflation. J P Morgan shareholders support Dimon’s dual roles of Chairman and CEO Jamie Dimon will keep his titles of chairman and CEO of JPMorgan Chase & Co. after shareholders voted down a proposal to split the company’s top two jobs. Despite a year that severely tarnished Dimon and the firm’s reputation as the best risk managers in the banking i n d u s t r y, the vote to split the top two jobs received only 32.2 percent of the total votes. Earlier to this, Dimon had suggested that he may eventually leave the bank if he lost the vote. The nation’s largest banking company, also saw its entire board of 11 directors re-elected. Among big-bank CEOs, Dimon ranks first for stock returns and has been praised for leading the bank through the financial crisis with no quarterly losses and a strong balance sheet. If Dimon had lost the vote and left the bank, the bank’s shares could have fallen as much as 10 percent and erase about $20 billion in market value, according to Mike Mayo,


a bank analyst with brokerage CLSA. RBI, Sebi to get more teeth An inter-ministerial group (IMG), constituted in the beginning of May to ensure strict enforcement of rules governing firms operating collective investment schemes, non-banking finance companies and multilevel marketing firms and to suggest regulatory changes in this regard, is set to recommend giving more teeth to Sebi and RBI to regulate chit fund frauds and ponzi schemes. Sebi is expected to get the power to attach immovable properties, search and seize assets and seek information from any entity in connection with its investigations. The relevant Acts would be amended for this purpose. Though collective investment schemes fall under Sebi’s jurisdiction, investments made in chit funds are currently regulated by the Chit Fund Act, 1982, which has to be enforced by the respective state governments. To plug this loophole, Sebi had sought direct powers so that effective action can be taken if the concerned entity has either disappeared, or raised money in violation of securities laws, or has fraudulently diverted public money. Such an overhaul of securities laws was first proposed by Sebi in June 2009. CAD to climb again after improving in previous quarter : Nomura India’s current account deficit is expected to show some improvement in the January-March period at 4-4.5 per cent of GDP, but is likely to worsen again in the current quarter due to sluggish exports, high gold demand and seasonal rise in imports, Nomura has said. After hitting a record high of 6.7 per cent of GDP in Q4 2012, in the first quarter of this year CAD is likely to narrow to 4-4.5 per cent of the GDP, owing to some improvement in trade deficit. CAD represents the difference between inflows and outflows of foreign currency. The Japanese brokerage

Yahoo! buys Tumblr and PlayerScale Yahoo! was on its shopping spree this month as it acquired two companies – Tumbr at $1.1 billion on 20th May and PlayerScale at undisclosed price on 24th May. While the purchase of hip blogging service, Tumblr, was seen as part of a move to woo a younger online audience by Yahoo!, acquisition of a startup that powers g a m e s played on smartphones, tablets, consoles or personal computers came as a surprise to many. Tumblr claims to have 300 million monthly unique visitors and 120,000 sign-ups every day, with about 900 posts a second. And PlayerScale is a 4 year old company that powers games played by over 150 million people worldwide and adding over 400,000 new users every day. Since former Google executive Marissa Mayer became chief at Yahoo! in July of last year, the company has racked up a series of acquisitions including startups Alike, Stamped, Snip. it and a Summly application built by a British teen.

firm said, “CAD is likely to worsen in the April-June quarter as the country’s trade deficit has worsened again to USD 17.8 billion in April and we expect it to deteriorate further to USD 20.8 billion in May.”


The Month That Was

The Niveshak Times




Article Market of Snapshot the Month Cover Story

Market Snapshot


MARKET CAP (IN RS. CR) BSE Mkt. Cap Index Full Mkt. Cap Index Free Float Mkt. Cap

6,801,181 3,283,167 1,719,989

LENDING / DEPOSIT RATES Base rate Deposit rate

9.70%-10.25% 7.50% - 9.00%


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

55.74 72.03 54.65 84.17



4.00% 23%

POLICY RATES Bank Rate Repo rate Reverse Repo rate

8.25% 7.25% 6.25%

Source: 27th April to 28th May 2013 Data as on 28th May 2013

MAY 2013


BSE Index Sensex

Open 19286.72

Close 20160.82

% change 4.53%


6275.12 6023.86 10848.28 14343.35 7288.34 9756.89 6116.45 8624.83 5614.92 8636.85 8691.77 1732.5 6837.6 1892.92 3413.32

6498.66 6068.62 11076.54 14799.81 7744.4 9679.51 6757.8 8805.66 6061.33 8864.14 8950.96 1790.24 6814.47 1832.18 3638.75

3.56% 0.74% 2.10% 3.18% 6.26% -0.79% 10.49% 2.10% 7.95% 2.63% 2.98% 3.33% -0.34% -3.21% 6.60%



Article Market of Snapshot the Month Cover Story

Market Snapshot



Article Guest of Column the Month Cover Story


Perspectives on Natural Capital Accounting Professor Sanjeeb Kakoty Prof. Sanjeeb Kakoty did his MA in history from NEHU and went on to do his PhD by adopting technology and social formation to understand and explain historical change. Currently a faculty memeber at IIM Shillong, he has been a sole educationist from India to be invited to Rio+20 summit last year and hence, has enormous perspectives to offer on the subject. So, sit back and think as he takes you through the intricacies of Natural Capital Accounting in his own interesting way Professor Sanjeeb Kakoty

IIM Shillong

The term Natural Capital is gaining wide currency, especially after the UN Earth summit at Rio in the month of June last year. As a matter of fact, Rio saw concerted efforts to incorporate the concept of Natural Capital Accounting into mainstream accounting practices of business organizations. The primary argument for this goes that the Earth’s natural resources, be it soil, air, water or flora and fauna, combine to create what we term as the ecosystem. It is this complicated ecosystem that gives rise to life and sustains it. Human beings have succeeded in using a variety of goods and services from this eco system to support life and promote civilization. In the process, the goods and services elicited from nature has been transformed into tradable items. The accounting system developed to track the flow of goods and services normally takes into account the tradable goods and services produced from nature but interestingly the accounting practices do not take into account the basic Natural Capital! The accounting systems that are currently used incorporate the financial capital account of businesses while also attempting to include the aspects of social accounting. What is conspicuous is the absence of any system of natural capital

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accounting. This absence is amazing when one considers the fact that the fundamental wellbeing of man and the very survival of modern day civilization are dependent on natural capital management, and yet we have no accounting system for it! It goes without saying that the use of any capital, especially natural capital, without an accounting system is sheer madness. It is imperative that we account for the use of Natural Capital and debit the true cost of economic growth and thereby take the first step towards a sustainable future. The study of natural capital accounting must start from the basic understanding that the ecological balance of the earth is extremely fragile and is maintained through the intricate symbiosis of different life forms. For the natural system to sustain itself, the earth would require a minimum level of natural resources at all times. While using natural resources, one has to remember the fable of killing the goose that laid the golden egg. Instead of being happy with a golden egg a day laid by the goose, the greedy owner decided to kill the goose and take away all the eggs inside it, only to discover to his utter dismay that there were no more eggs inside and the goose was also dead by then! Maintaining a basic minimum


may cite the case of diminished catches from overexploited fish stocks or decreased crop yields from degraded soils. Abuse and misuse of natural systems result in impaired production of biomass and oxygen, and the disruption of hydrological and atmospheric cycles which in turn adversely affects the natural capital. While it may be easy to put a monetary value on products arising out of natural capital that are traded, be it agricultural commodities, minerals or other natural resources, there are difficulties in assigning economic values for the benefits that natural capital provides if they do not have a precise traded market value. In fact, the traded value often externalizes many hidden costs, such as impacts on air quality, water resources and biodiversity. It is the biodiversity that gives rise to the varied ecosystems that prevail in different parts of the world. Ecosystems are composed of a symbiosis of the physical, biological and chemical components such as soils, water, organisms and nutrients interacting with each other and giving rise to a unique ecology. It incorporates sub systems such as the nutrient cycle and the hydrological systems. These are fundamental to an ecosystem and ensure that it maintains its integrity. These interactions between structures and processes, be it physical as in infiltration of water or chemical as in oxidation or biological as in photosynthesis, all testify to the basic premise of biodiversity. The different subsets of genes, species variety and ecosystems delicately combine to present itself to us as the natural resource systems! In other words, we have to understand that the natural resource system is dependent upon the health of the ecosystem. There have been attempts, with varying results, to incorporate eco system valuation with natural capital accounting. For instance, the Millennium Ecosystem Assessment (MA) presented eco services into four categories: food and water were classified as provisioning services, flood and disease control under regulatory services, spiritual and recreational activities were grouped under cultural services and under the category of supporting services were placed activities


Guest Article ofColumn the Month Cover Story

level is imperative to ensure regeneration and also allow the bare minimum required for all life forms to survive and also thrive. Unless we monitor effectively the use pattern of our natural resources within the above frame work, it will lead to degradation and ultimately the extermination of all life form. Any study of Natural Capital reveals that there are two types of resources, renewable and non renewable. The large scale and unrestricted use of non renewable resources has already pushed our Natural Account Balance Sheet into the red and the mindless use has put a severe strain on the renewable natural resources be it in the form of pollution, loss of habitat and biodiversity l e a d i n g to climate change. The natural account frameworks, at present, do not even try to enter into the larger sustainability debate which takes into account all life forms. Instead, it only talks about ensuring that the national account frameworks should incorporate into its frame work the risks of incurring massive costs to future economic productivity by not taking into account the natural capital stocks available today! In this context, the term ‘capital’ is used to describe a stock or resource from which revenue or yield can be extracted. Since the concept of human wellbeing is inextricably linked to the combination of different types of capital, such as social capital, human capital and economic capital; all of which are based on natural capital. In this regard, it may be pertinent to acknowledge that there are four basic categories of natural capital viz. air, water which includes fresh, groundwater and marine, land, and habitats including the ecosystems, flora and fauna. Over the millennia, it has become apparent that that the degradation of ecosystems often leads to irreversible changes, leading to extinction of species and disruption of natural cycles leading to calamities and disease. Under such circumstances, it becomes impossible to regain or restore natural capital. In the event of the quantitative depletion of natural capital assets or the qualitative degradation, it adversely impacts the flow of beneficial services to the people. One



Article Guest ofColumn the Month Cover Story


such as soil formation, photosynthesis and nutrient cycling that maintain the conditions for life on Earth. Arguably, ecological functions that contribute to an ecosystem at large may be classed as a service in its own right. The Globe International Commission on Land Use Change and Ecosystems has drafted a Natural Capital Action Plan on the theme of ‘Parliamentarians and Biodiversity’. This action plan has recommended that a ministerial position be created within the ambit of either the finance ministry or the treasury department for managing natural capital. They should also be vested with the responsibility to develop a comprehensive set of natural capital accounts. In addition, there should be a report highlighting the effects of integrating the true value of ecosystem services into policy decisions. To create better synergy within all arms of the government, it was felt that it is advisable to create an inter-departmental Ministerial Committees on Natural Capital which would be advised by an expert technical advisory group. Each government departments would also individually draw up natural capital inventories of natural capital assets which would be synchronized with the larger inventory. In turn, this would be linked to the development of national-scale accounting and performance assessment for natural capital stocks. It would measure the status and flow of resources and link itself to the conventional national income accounting. In other words, the accounting framework would incorporate both the stock and flow of natural capital, and more importantly lend itself to an analysis of the interactions between the economy and the environment. While the management of such natural resources such as forests would be much simpler, such as interlinking the rate of timber supplies to the rate at which the overall stock of the forest is maintained and regenerated to avoid damaging the ecology, accessing the stock of natural capital and arriving at figures to ensure future flows of benefits would be a much contested and more complicated process. Attempts are being made to arrive at acceptable modalities for natural capital accounting systems. One such is the Ecosystem Service Valuation Framework. It suggests that instead of attempting to arrive at a complete valuation of every aspect of the environment, it may be better to understand the complex nature of interactions between it and humans. In the

MAY 2013

process, it would also try to clarify the nature of resources stock, flow, use and regeneration. Similar valuation concepts and yardsticks for

accounting have also emerged from numerous organizations. Agencies such as the US National Research Council, the Natural Capital Project, the US Environmental Protection Agency Science Advisory Board, the French Council for Strategic Analysis, The Economics of Ecosystems and Biodiversity (TEEB) and the UK National Ecosystem Assessment, have all attempted to contribute to the debate. However, it has been difficult to arrive at a consensus on the scale and relative importance of ecosystem services to human beings both at the local and global level. This lack of a universally accepted modality for measurement and accounting is a difficult hurdle. To overcome some of these problems the European Environment Agency has suggested a ‘Common International Classification for Ecosystem Services’ (CICES). This would be consistent with existing yardsticks such as the Millennium Ecosystem Assessment (MA), and compatible with the integrated environmental and economic accounting methods being considered in the UN System of Environmental and Economic Accounts. The importance of the CICES is heightened by the lack of any classification of ecosystem services for accounting purposes. The current frameworks primarily address individual policy decisions, rather than act as a broad system to be used for economic and environmental accounting. Notably, majority of the environmental assets are not traded in markets. In addition,



Guest Column Cover Story

those that are, such as, minerals, fish or timber do not have a system to incorporate depletion realistically. Accounting methods for these items are often done on the basis of the extraction costs. The price of traded natural resources has no correlation to actual environmental costs. Many developed countries have tried to address this lacuna by trying to include such factors as pollution damage and control costs and material and energy flows. They however stop short of accounting for the depletion and degradation of natural resource systems. To overcome some of these issues, the 2012 UN SEEA revision was sought to be split into two volumes. The first was to be a set of standardized methods for environmental accounting. This in turn would sought to be integrated with the System National Accounts (SNA), including the existing four categories, with the second volume including sectors such as ecosystem accounting, that are yet to find incorporation till now. There is no doubt that there are huge challenges to the proper development of natural capital accounting procedures. The first colossal step would be the systematic description of both the ‘costs’ and ‘benefits’ associated with ecosystem service. To ensure sustained supply from the ecosystem the issue of reinvestment in the stocks of natural capital has to be given primacy. This would include necessary investments to conserve biodiversity. The concept of

reinvestment in natural capital has to include not only preservation and protection, but also restoration and even limiting or desisting from the use of natural capital assets to ensure sufficient time for natural regeneration and renewal. However, the lack of knowledge and concurrence about the level of natural capital required to maintain ecosystem capacity while focusing entirely on resource requirement to drive economic growth is the major impediment to the development of the needed accounting systems. It goes without saying that if mankind were to stay alive in the business of survival, all of this has to figure in the book of accounts and we need to determine the profit and loss account at the end of each quarter!


Cover Story Cover Story




Anchal Khaneja & Gourav Sachdeva

Team Niveshak We are all rather too familiar with the term sustainability. But as finance enthusiasts that we all are, do we ever think of it while projecting that balance sheet for the next so many decades? Or do we ever put a star mark over that projected profit for the eighth year from now? Well, we should. And that is what we deal with in this story on ‘Natural Capital Accounting’. That projected profit of yours for the eighth (or probably just the second) year from now will not actually exist if there be no water left to be used by your firm or in the extreme case, we run out of the air that we breathe! As the diplomats from across the world have supported the idea of Natural Capital Accounting at Rio+20, a new era began. A concept, which was largely considered only academic, is now making its inroads into the main stream measurement of a country’s growth. Country after country and

company after company – represented by finance, development, or environment ministers, CEO’s, CFO’s or CRO’s – now talk about how natural capital accounting fit their priorities and how it can be a tool to address some of their key policy challenges. Existing Scenario In the present day scenario, GDP is a widely accepted measure of a country’s growth and development. But it accounts for only a part of the actual performance, i.e. the income, while ignoring the assets that are crucial in that income formation. When a country over exploits its resources, it does generate income but simultaneously causes depletion of wealth. And thus, adopting GDP as the sole measure of economic performance can project a wrong picture, showing growth in the short run, and hamper the overall growth in the long run. It has

Fig 1: Natural Capital, a part of wealth and overall well being hierarchy

MAY 2013


Mr. Jean-Marc Huët, CFO of the giant Unilever also said very accurately, “The current financial reporting model only tells half the story about a business’s true performance and potential. The numbers say little of its reliance and impact on natural capital, factors that will increasingly influence competitiveness in a resource-scarce world.” However, many corporations believe that businesses solely rely on financials and are driven by their “bottom lines”. Still, even those concerned only about the bottom lines - and not the fate of nature - must now begin to realize that the sustainability of business itself depends on the long-term availability of natural capital. What is Natural Capital? Natural Capital includes all the resources such as minerals and energy, agricultural land, timber, fisheries and water. It includes in its purview the ecosystems which are otherwise ‘invisible’ to people such as air and water filtration, flood protection, carbon storage, pollination for crops, and habitat for fisheries and wildlife etc. Natural Capital is an asset of great importance and constitutes a giant share of a country’s wealth. And more so, for low-income countries where the mere survival of communities is largely dependent on healthy ecosystems. Thus, incorporating this critical asset into our national accounts can definitely lead

Fig 2: Composition of Natural Capital

to better decision making for development. Figure 2 shows how Natural Capital forms a considerable part (36 per cent) of the total wealth of a sample in a low-income country. Increasingly, it seems, nature is actually money. The concept of natural capital has existed for more than 30 years. But the shift towards including the concept into our main stream accounting has been really slow. The contemporary moment of global crisis in both ecological and economic spheres marked the moment wherein ‘Nature’ is now being refashioned as ‘Natural Capital’. This marks a material shift, one which allows the businesses to understand the effects of expansion on the environment and its sustainability. Natural Capital accounting is even more important now as we seek to measure the success of Millennium Development Goals and Sustainable Development Goals in the post-2015 debate. An inclusive growth can only be achieved in the context of sustainable development. And this requires wealth accounting and valuation of the ecosystem. How else can we know that achievement of goals will build prosperity sustainably for today’s generation and tomorrow’s? How to Get There Natural Capital Accounting can lead to better decision making for inclusive growth. It can provide a detailed framework for improved management of an economy by assessing the value of various resources. It’s not only a means to maximize growth but also a tool to assess the benefits and costs of ecosystem changes. That is all well but the key question that remains is how do we include natural capital into our books? The development of national-scale accounting and performance assessment for natural capital stocks and flows needs to be consistent with conventional national income accounting, the principles of the underlying ecology and measured consistently over time. The stock and flow of natural capital should be comprehensively described by the proposed accounting framework and the interactions between the economy and the environment should be accounted for and analyzed. With some forms of natural capital, such as forests, the flow of benefits (timber) needs to be exploited at a rate which the overall stock (the forest) is maintained over time to avoid damaging the ecological infrastructure that supports it. The present value of a stock of natural capital incorporates a measure of the future flows of benefits that it can generate. The changes in the ecosystem’s quality and/or quantity can be


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been rightly pointed out by Nobel laureate Joseph Stieglitz, “a private company is judged by both its income statement and balance sheet, but most countries only compile an income statement (GDP) and know very little about the national balance sheet.” Wealth accounting, including natural capital accounting, is needed to assess whether growth is sustainable or not.


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detailed by proposed accounts either in physical units based on different indicators of ecosystem functioning, or on changes in the monetary value of benefits flowing from an ecosystem. The stock of an ecosystem will change over time depending on its degradation or restoration due to varied human uses, and the quality of the stock of ecosystems may change with the level of pressures that impact on ecological processes. Broadly speaking, accounting frameworks require at least three things: the definition and measurement of quantities; the aggregation or adding-up of those quantities; and, weights for the individual elements in the aggregation index. Institutional Framework A major step en route to Natural Capital Accounting is the adoption of the concept by the UN Statistical Commission of the System for Environmental and Economic Accounts (SEEA). The SEEA allows the countries to use an internationally agreed method, on par with the current System of National Accounts, to account for material natural resources like minerals, timber, and fisheries. There is now a wide consensus on the need to put the concept of natural capital accounting into action. This has led to an increased momentum with the finance and environmental ministries of various nations who now want to account for natural capital in their national incomes. Countries are now prioritizing their natural capital accounts. Say, if a country’s current concern is the fast depleting coal reserves, it begins by compiling energy accounts while keeping the other accounts on hold. Many countries such as Botswana, Spain and Australia are developing material resources’ accounts. Following 3 approaches have seen considerable support from various forums as preferred over the others for valuing environmental issues:

with the management of many environmental impacts and can be used to measure the same. For example, the cost of disposing of waste, charges paid for water abstraction and use, or the traded price of carbon (e.g. in the European Union Emissions Trading Scheme). However, these prices reflect the supply and demand conditions in imperfect markets and are not generally a good approximation of the costs to society of the impacts associated • Abatement costs: The cost of reducing emissions or impacts, for example through adopting different manufacturing practices, is termed the abatement cost. However, the cost of abatement varies across different technologies, each offering a given potential for emission reductions at a different cost There are, however, some instances where an item or issue might be easily measurable in financial terms and therefore included in the quantitative elements of the accounts. Some examples are given here: • Significant and sustained drops in share price may occur as a result of the refusal of planning permission motivated by environmental concerns. Canadian gold mining company, Infinito Gold, lost over 50% of its share value as a result of the withdrawal of a mining concession in Costa Rica due to concerns about the potential impacts on agriculture, endangered species and forests (Figure 3) • Clean-up costs from the 2010 Gulf of Mexico oil spill, and associated compensation claims for ecological damage, affected both BP’s balance sheet and its profit and loss. In the company’s 2011 annual report, a $3.5 billion provision related to

• Environmental Valuation - The environmental valuation approaches attempts to quantify in monetary terms the changes in human welfare which result from a company’s environmental impacts. It employs a wide range of techniques to estimate changes in human welfare, sometimes eliciting estimates directly from affected parties (for example, by asking how much they would be willing to pay to achieve a particular environmental outcome), or indirectly, by using estimated willingness to pay or accept compensation for changes known to be caused by environmental factors (for example, particular health outcomes) • Market prices: Market transactions are associated

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Fig 3: Infinito Gold lost more than half its value when the Costa Rican court annulled a gold mine concession



clean-up costs, and a $7.8 billion provision related to litigation and claims associated with the spill.

Challenges Procedures



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• Newmont mining company in Peru experienced significant delays as a result of concerns regarding the impact of the mine on water availability. Overcoming these concerns has required a $150 million investment from partner, Minera Yanacocha, to build water reservoirs to compensate for the mine’s impact on local water supplies. Accounting

In order to integrate the concept of natural capital accounting into the existing accounting procedures, it is important to provide for both the ‘costs’ and ‘benefits’ associated with the natural capital. The investment in the management of natural capital signifies the costs of maintaining the ecosystem. For example, management measures to conserve biodiversity at levels sufficient to maintain the flow of an ecosystem service is a cost arising from provision of benefits from ecosystems. But there are no concrete procedures to measure the same. Also the reinvestment can take different forms such as protection and restoration of the natural assets to ensure their usability. Some of the specific challenges to developing an overwhelmingly acceptable and practical methodology include: • Untangling the value of ecosystem service and the benefit that personifies the intrinsic value. For example, the water quality and drinking water • The low incremental economic value of individual environmental impacts versus the long-term cumulative environmental cost of such impacts. For example, although a small area of habitat may have a low current economic value, the cumulative impacts of the losses of lots of small areas of habitat over an extended period will have large impact on the ecosystem services supported by that habitat in a given area • The multi-dimensional effect of change in natural capital stock on service outputs. For example, halving the area under forest just reduces the provisioning service of wood production by half but it leads to a much greater loss of host of other services such as carbon sequestration and recreational services. Many of the world renowned companies have tried, in their own capacities – small and big, to account for natural capital they utilize. But the success stories are limited in number. One of the most impressive among them is what PUMA did in 2010. It

Fig 4: PUMA E P&L results by environmental indicator

actually published an environmental profit and loss account for a full calendar year. As Puma’s mission statement says, it aims to be the world’s most desirable and sustainable Sportlifestyle Company. In the opening foreword of the e-P&L statement, its CSO (Chief Sustainability Officer) Jean Paul Sartre beautifully said, “Once we know and are aware, we are responsible for our action and our inaction. We can do something about it or ignore it. Either way, we are still responsible.” An e-P&L statement was defined as a means of placing a monetary value on the environmental impacts along the entire supply chain of a given business and in it, a profit was any activity that benefits the environment while a loss was any activity that adversely impacts the environment. Puma wanted to know how much it would need to pay for the services nature provides so that it can produce, market and distribute all its products – footwear, apparel and accessories made of leather, cotton, rubber or plastic – for the long run. It also wanted to know how much compensation it would have to provide if nature was asking to be paid for the impact done through its manufacturing processes and operations. Puma focused first on its greenhouse gas emissions and water usage and later added land use, air pollutants and waste throughout its operations and supply chain. The total results revealed, that if Puma treated our planet as it treats any other service provider, it would have to pay EUR 8 million to nature for services rendered to its core operations such as its offices, warehouses and stores in 2010, alone. An additional EUR 137 million would be owed to nature from Puma’s



Article Cover of the Story Month Cover Story



5: Natural Capital & Financial Statements

1. In order to demonstrate how natural capital may affect or be included within financial accounts, the following set of financial statements has been prepared and annotated. 2. Some companies will have direct impacts or dependencies on natural capital (such as forestry companies), while others (such as retailers) will have indirect impacts or dependencies on natural capital. 3. The annotations included in the diagram below can be applied to either case. 4. Please note, the figures included below are for illustrative purposes, and do not relate to any real organisation.

supply chain of external partners that it shared with numerous other companies, and where it had less influence. Figure 4 reveals the distribution of this amount (EUR 45 million) as shared by environmental indicators. As the first company to attempt to transparently lay out its environmental footprint from cradle-togate, Puma obviously caused some waves in the corporate world. Many companies followed the suit with some being successful and some not so successful. Companies like Coca-Cola are working one-on-one with organizations such as The Nature Conservancy (TNC) and the World Wildlife Fund to assign a monetary value to natural resources, such as clean water, and the services they provide and then use these calculations in making business decisions. Coca-Cola is also working with the World Wildlife Fund to set up water funds that collect fees

MAY 2013

from local water users such as Coca-Cola, distilleries, and paper processing mills. Other companies doing work on natural capital include Disney, Miller-Coors and Xerox. Disney has committed to fund 6,000 acres of reforestation projects by 2015, not only to lower the company’s net carbon emissions, but also to protect watersheds and habitats that wildlife and communities depend on. “These goals are rooted in the recognition that a healthy environment is essential to Disney’s long term success,” the company has said. Miller-Coors is working to improve business practices to protect freshwater. The project can serve as a model for other beer producers. SABMiller, MillerCoors’ parent company, is also partnering with TNC to start water funds in Colombia, Ecuador, Peru, and Panama. Xerox is working with TNC to establish a methodology for quantifying carbon emission reductions from improved forest management that can be used by other companies in the paper industry. The tools will lead to a more sustainable paper supply chain and also support local communities, the company says.


A not so simple Cost Vishwas M. Virani

IRMA The word opportunity cost requires a sincere attention be defined properly with reasonable arguments. Opportunity is, in simple terms, a combination of different outcomes. These outcomes are either positive, in a subjective context or negative, again in a subjective context. Although opportunity is usually perceived to have an affirmative connotation, it should not be the case. It should be scrutinized from all possible angles. Opportunity approaches a person with a pile of nuances. These nuances, if encountered effectively, can yield a desired outcome or result for any firm or person. In any mercantile entity, this applies pervasively. Say, a firm in Ahmedabad produces and sells only mango pickle with khatta and Meetha variants. Its raw material, i.e. raw mangoes, is supplied by a small firm from Valsad, Gujarat. The main input cost turns out to be around ₹ 50 lakhs per annum. This cost includes ordering cost, carrying cost, purchase cost, handling cost and waste or spoilage cost. The company has not paid much attention to efficient materials handling due to heavy demand and steady operations of business. Now, the valsad-based firm comes with an offer of

acquisition and values its firm at ₹ 4 crores. Assuming this value to have been estimated through a sound valuation model, the firm makes first offer in market to this pickle company. The company has simply two options, either to accept offer and have an exposure to mango-farming and its subsequent benefits or to carry on its business without getting into capital budgeting and incur input cost worth ₹ 50 lakhs every year. If it is assumed, for simplicity of calculation, that cost of capital of the pickle company is known and is 10%, the total amount of perpetual benefit would come around ₹ 5 crores i.e. V = Benefit per annum/cost of capital. Now, Simple application of Net Present Value concept generates ₹ 1 crore of possible gain (difference between total benefit and total cash outlay) given this offer is accepted. In general situation, entrepreneur is likely to accept this offer of acquisition. Now, the opportunity cost of this offer is possible gains on the amount spent for acquisition i.e. ₹ 4


The concept of opportunity cost has gained significant attention in fields of economics and finance. In simple terms, it means the benefits lost by not selecting the second best alternative in decision-making. Although it is simple to comprehend, it is difficult to quantify originally. Moreover, opportunity cost has two main characteristics: Recurring nature and incremental opportunity cost and Multi-entity cost.

FinGyaan Article of the Month Cover Story

Opportunity Cost


FinGyaan Article of the Month Cover Story



crores. A conventional concept would consider interest amount that can be earned on ₹ 4 crores as opportunity cost. For simplicity of calculation again, assume the interest rate is 10%. If the company had not invested money in acquisition, it would have earned ₹ 40 lakhs per annum as interest. A conventional concept doesn’t take into account the possible gain that can be garnered from this interest amount. Say there are 3 possible options for utilizing this income: 1) It is possible that the company may invest this interest amount in diversified portfolio of equity, preference and bonds or debentures with overall possible return of 10% on an investment. An additional income of Rs. 4 lakhs per year would be generated. This shows recurring nature of an opportunity cost. It is, unlike traditional concept, not only the interest amount that is about to be lost but also the amount that can be gained on interest amount. 2) The company may start to produce Lemon or Chilly pickle. The profitability lost on sales of these products is also an opportunity cost for the firm. 3) The company can itself develop better facilities for materials management from income of interest and bring down its input cost significantly. Now, say if the cost (input cost) is brought down to Rs. 40 lakhs per annum, the whole capital budgeting decision of acquisition of supplier firm proves fallacious because at input cost of Rs. 40 lakhs,

Fig 1: Opportunity cost eminates from Scarcity of Resources

MAY 2013

the Net Present Value of project would be zero. Opportunity cost is hard to quantify at times taking into consideration time, energy and other factors. More importantly, its principles of multi-entity opportunity cost and incremental opportunity cost should be paid more heed to. These principles apply pervasively and can be seen in any commercial or personal relationship. Say, a 21 year old boy has been in love with a girl in his class but out of apprehensions and shyness, he doesn’t enable his mind to peel back curtain on what is going on inside a heart. The boy has been facing this dilemma for last 6 months and has evidently lost possible affirmation of girl, who also somewhat likes him. This possible-tobe committed relationship is a boy’s opportunity cost. Because since the time he fell in love, his mind has somehow always chosen ‘silence’ as the best option and probably ‘speaking up’ as second one. Moreover, the boy is bound to face incremental opportunity cost gradually and episodically. An opportunity cost of possible committed relationship gets enhanced with the passage of time. Say, the boy begins to be more defensive or even desperate for this matter, the opportunity cost gets enhanced. If the boy plans not to talk to her to avoid emotive reactions, this cost adds another incremental cost of losing out girl’s attention more and probably increasing an opportunity for another guy. This incremental cost is linear in relationship with time and actions of the boy. This is, however, a single-entity opportunity cost approach. The girl may also be waiting for this boy’s proposal for a long time and she drifts her mind away gradually thinking boy’s indifference towards the idea of love or any other stereotype for that matter. Her first best option still remains same – to silently wait for his initiative and at the end of the day; a multi-entity opportunity cost comes into picture. The cost of not being able to be the best expressive possible is the summation of both cost borne by a boy and his girl. Hence, an opportunity cost is not simply the benefits lost by not choosing the second best alternative!



Prasanna Kumar V L V

IIM Shillong Studies into the Wealth of Nations have been the aim of every economist. However, the spectacular rise of some economies, as the rise of Germany and Japan from the ashes of World War II or the rise of South Korea from one of the poorest countries in the world to the league of OECD members and later the rise of China are termed to be economic miracles. It has always been a point of debate if there was anything miraculous in the development of their respective economies or was it just “getting the basics right”. If they are really economic miracles, are there any ways to emulate these economic performances? Can we learn a few lessons from the “economic miracles” of the past for the future development of other economies? After the World War II, the United States emerged as the most powerful nation, while Europe and Asia had experienced extensive destruction and loss of life. The reconstruction of a new global economy started in the 1950s. Between 1950 and 1973 the economic growth among the world nations was smooth, without any recessions. During this period annual real GDP growth of developed market economies averaged around 5 percent. Over time many Asian and European countries closed the technological and productivity gap with the United States. Japan was one of the first countries to bridge this gap with US and become the second largest capitalist economy in the world by 1970. Japan was devastated during the World War II. The human loss amounted to 1.85 million, while the material loss was about 25% of the nation’s wealth. Post war, the industrial production has reduced to one-tenth of that of the pre-war level. The increase in expenditure and commodity shortage resulted in hyper-inflation. With the economy highly dependent on the US aid, the government of Japan laid economic and corporate strategies with a common purpose of catching up with the US economy.

Role of Japanese government in the post war reconstruction process: With high government activism in national planning and implementation along with powerful monetary and fiscal policies, Japan witnessed a phenomenal economic growth during the period from 1950 to 1971. During this period, Japan’s annual growth in real output was 9.45% while the industrial production grew at an astonishing 14.56% per year. Stable relationships were built on a foundation including (1) the long-term employment system, (2) corporate governance built on cross shareholdings among businesses and with other financial institutions, and (3) the main-bank system. The Ministry of International Trade and Industry (MITI), which coordinates national industrial policies, played a significant role in this economic and social growth of Japan. Japan’s post war economic reforms: In an attempt to democratize Japan on both political and economic fronts, the so-called ‘economic democratization’ reforms were carried out first. Zaibatsu dissolution and Agricultural reform: Zaibatsu were big conglomerates of major companies and banks, often controlled by a share-holding company. To eliminate concentration of economic power in a limited number of companies, financial institutions and landlords’ hands, zaibatsu were dissolved. In line with the zaibatsu dissolution, the government acquired all the tenant land in excess of one hectare from the landlords and sold them to tenant farmers at nominal prices. This resulted in the drop of percentage of tenant lands from 46% to 10% and increased the number of Independent farmers. Priority sector production strategy: To rapidly reconstruct the economy despite shortages of commodities and investment funds, MITI selected


Finistory Article of the Month Cover Story

Japan's economic miracle post World War - II



Article of the Month Cover Story Finistory


Fig 1: Factors to Support investment

and nurtured the industries that were targeted as important to Japan’s future economic growth. Industries so targeted were steel, coal mining, electricity, shipbuilding, marine and railway transportation, and chemical fertilizer. Labor reforms: The rapid creation of labor unions were caused in part by the breakup of the zaibatsu and poor working conditions with low wages in Japan, and in effect, formed The Trade Union Law. Banking: Shortage of savings was one of the biggest macroeconomic challenges that Japan faced during the postwar period. In order to avoid the risk of falling into the “savings shortage trap” where a shortage of savings leads to a shortage of industrial funds, which in turn leads to a limited production capacity, to stagnant income, and finally comes back to aggravate the savings shortage, Japanese government implemented certain policies that were targeted to direct the funds to key industries. The policies include the introduction of the fiscal investment and loan program (FILP) and establishment of commercial banks. FILP channeled public funds to key industries while the commercial banks actively lent to various business sectors. Favorable factors: Due to the newly formed labor law, the early improvements in real wages and working conditions were significant. In addition, the unions

had compelled management to accept the lifetime employment system with restrictions of dismissing employees in return for promise of loyalty and priority to the company. The improved working conditions and higher wages achieved by the labor unions expanded the domestic consumption markets and contributed greatly to the development of the economy. Investment as a percentage of GDP increased gradually and high productivity growth was brought about by the introduction of foreign technology and ‘improved engineering’. The younger-generation workforce has been migrated from the rural area to cities by ‘collective employment’ scheme. Due to the break out of the Korean War in 1950, the demand for military equipment increased steeply and triggered rapid reconstruction of the Japanese economy. In addition, the world free trade boom created a favorable situation for Japanese exports. Rapid Growth Period: Eventually, the Japanese economy entered an economic growth process with positively reinforcing feedback: demand expansion—production expansion—increases in income—consumption expansion—further income expansion—increases in savings—investment growth and an expansion of production capacity. This virtuous cycle particularly benefited big businesses in heavy industries such as metal, chemicals, energy and machinery. Employers in Japan’s manufacturing export sector, with its extremely high growth in labor productivity, bid vigorously for both skilled and unskilled workers subject to remaining internationally competitive at the fixed exchange rate. The wages increased rapidly resulting in increased purchasing power of the workers. As in the Scandinavian Model, these high wage settlements spread into the rest of the economy, such as non-tradable services, where productivity growth was much lower. This resulted in the increase of prices of services relative to the prices of the goods. Hence, for 1950-71, Japan’s CPI,

Fig 2: Key Economic Indicators foor Japan and US, 1950-71

MAY 2013


Fig 3: Sustainale Growth

International Monetary Fund and the International Bank of Reconstruction and Development (the World Bank) in 1953, and the General Agreement on Tariffs and Trade in 1955. Economic Plans that Played a Significant Role: In 1960, Prime Minister Hayato Ikeda, regarded as Japan’s most charismatic postwar prime minister, challenged Japan to double its income in the next decade. Under the Income Doubling Plan, consumption was boosted by cutting taxes, bolstering welfare, raising farm prices and reducing income inequality. Subsequent plans such as the ‘Economic and Social Development Plan’ (1967—1971) and the ‘New Economic and Social Development Plan’ (1970—1975) addressed problems that emerged as a result of this rapid growth, such as pollution, income inequality, and rapid urbanization and concentration. These plans shed light on the importance of balanced economic development.

How did it end? The 1973 world oil crisis and its aftermath severely shook Japan’s trade-dependent economy. In 1974, the GNP actually shrank by 1.8%, the first such negative growth in three decades. Inflation soared in the economy and unemployment problem arose, causing Japan to go into a recession for a short period of time. However, the Japanese government managed to keep economy under control by its tight money policies and again achieved successful recovery. For example, Japanese companies started manufacturing automobiles that used less oil to run. The economy after the oil crisis stabilized due to government’s quick response and high technological level already achieved. The Japanese also began focusing on producing electronics such as transistor radios and televisions. The key to recovery was the boom in exports of cars, electronics, and other products, which grew far more rapidly than imports. By 1977 Japan’s burgeoning trade surplus had become a global issue. Explaining the miracle: Was the rapid growth really that miraculous? To answer this question, we need first to recognize that during the rapid growth period, there was a dramatic increase in working population as well. Many of these workers were moving from relative low productivity rural jobs to more high-tech urban ones. Helped by a favorable geographic location in the middle of the rich raw materials and consumer markets of the Pacific rim countries, the availability of technology that could be purchased cheaply, low defense expenditures, cheap raw materials (at least until the 1970’s), a favorable exchange rate deliberately set by the United States at Y360 to $1, and open export markets, Japan was bound, “miracle” or not, to overcome the two decades of lean years caused by militarism and war. To this must be added such human factors as a legal system that encouraged big business, an education system geared to producing highly skilled workers and a high rate of personal savings (up to 25% of family income or four times that of the average US family in this period) that helped Japan find capital to invest in export oriented industries. In addition to these basic factors, the government’s activism in designing suitable policies and implementing them effectively also contributed its bit. Knowing that any other might not face the exact social and economic conditions, it might not be possible emulate this stellar economic performance. However, the learning from Japan’s rapid growth period can certainly be applied wherever possible in the amount applicable.


Finistory Article of the Month Cover Story

which includes services as well as goods, began to increase much faster at 5 percent per year than its WPI, which contains only goods. But Japan’s international competitiveness in its high-growth tradable sector remained balanced with the United States. Shifting focus from industries that require expensive imports to industries like cars that require less imports made Japanese exports less expensive. Even though Japan’s miracle was not export-led and the country did not begin substantial exporting until the 1960s, when the export boom did occur in Japan, it made a strong economy even stronger. Return to the International Community: In 1951, the San Francisco Peace Treaty was cosigned with the major allied-force countries, and Japan regained independence. Japan joined the United Nations in 1956. Japan also joined the



Article Finsight of the Month Cover Story


Let's Bank on Women

India’s first women-only bank proposed : Do we really need one? Rohit Ranjan

SIIB Pune I was eagerly waiting for this year’s union budget after dismal performance of UPA 2 seems all encapsulated with scams and scandals. But “women centric” budget is like thinking out of the box and it completely took me with surprise. Will it be the last dice thrown by FM before the next year general elections or will it be going to generate more women entrepreneurs in future? Let us analyze it in detail. Quite naturally, there are positives as well as negatives by opening a women-oriented public sector bank (PSB) with an initial capital infusion of ₹ 1,000 crore. The question is – how much will such a move create an impact? But one thing that remains undoubtable is that terms like “women empowerment” and “financial inclusion” will surely get a boost. Women customers will certainly feel comfortable on being serviced by women bankers. Penetration of such banks in rural areas will

encourage more of women participation and SHGs in availing microfinance. There will be a sense of freedom among the women in starting their own ventures. But the questions that arise here are hard to deal with like “Will this bank for women serve the entire country? If yes, how long will it take to roll out across the length and breadth of India? Will it go to the hinterlands, where bulk of our disempowered and un-creditworthy women live? What is that “extra” which will make it work even when nationalized banks and micro-credit institutions are struggling to “include” people at scale in rural areas?” In the era of online and mobile banking, people hardly bother to visit banks. So opening up women banks will require a huge investment and infrastructure to be built. Such banks will be more profitable and will be able to generate more business in rural areas. Many microfinance institutions have

.. Women banks will be more profitable and will be able to generate more business in rural ares

MAY 2013




Fig 1: “First Women Bank Ltd” , an all-women bank in Pakistan

opposed this move but I think it’s a positive move for poor women sections of society who borrow money from private money lenders to run their business. Competition will definitely get stiffer but opportunities do seem to emerge from it. Addressing the gender related aspects of empowerment; it will certainly fulfill a social goal. A women run banks are likely to attract women clients, promoting inclusive financing and other women livelihood schemes. But did we need to start something new like this in a country where there are 26 nationalized banks, 21 private sector banks, 34 foreign banks and numerous cooperative and local banks? Such moves create a serious doubt on our own available resources. To look at an example, a similar banking model was started in Pakistan 14 years back in the name of “First Women Bank” but it didn’t go a long way. It currently has only 38 branches all over and the work culture is corporatish. On the contrary, let us witness the success story of India Post which, through its infrastructure and network, has implemented many plans into action. It has more than 1.54 lakhs post office

branches out of which around 90% are in rural and semi-urban areas. Each post office has been providing banking services like Post Office Savings Bank to people for decades. People who grew up in rural areas without banks, or in places where petty bankers were too strict to entertain the illiterate villagers, know where to go for the safe-keep of their precious money – that little window at their neighborhood post office. It’s not a long trek to the post office. There is a post office for every 7176 people in the country. In rural areas, the coverage is even better – one for every 5682 people. Even when the same UPA government was struggling to find a way to transfer the wages for NREGA beneficiaries, it was this network that came to its rescue. About 2.2 crore people get their NREGA payments through the post offices today. People in rural and semi-urban areas who are familiar with the post office savings banks also know that it is the most women-friendly and inclusive banking system where agents even come home to take your money, update your passbooks and even return the money on maturity. In rural areas, there are about 2.69 lakh

.. A women run banks are likely to attract women clients, promoting inclusive financing and other women livelihood schemes. © FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

Article Finsight of the Month Cover Story



agents who come home to help people, mostly women, with banking. Almost all these agents are also people from the neighborhood and are familiar with the beneficiaries. It is a unique banking eco-system that only Indian Post can claim credit for. It is a model that has evolved over time and is very hard to replicate because it is driven by the sheer needs of people, and nourished by trust and relationships. It will be difficult to establish another system like India Post with such network and coverage anywhere in the world. Currently post offices

FIN-Q Solutions FEBRUARY 2013 1. Basis swap 2. Idiosyncratic risk 3. George Soros 4. Bank’s Name: Shri Mahila Sewa Sahkari Bank City: Ahemdabad

provide only savings facilities. However, it has decided to set up Post Bank of India and is all ready to apply for banking license by July under new RBI guidelines to operate as complete banking system. P. Chidambaram would have been more prudent in utilizing this network to provide financial services to women at minimal cost. It will take around decades to establish numerous women banks all over India. Will it employ women agents to provide door to door service to women? What kind of banking guidelines will it follow? There are many questions which have been left unanswered. Last time they lured farmers by announcing a relief package which included the complete waiver of loans given to small and marginal farmers. Called the Agricultural Debt Waiver and Debt Relief Scheme, the 600 billion rupee package included the total value of the loans to be waived for 30 million small and marginal farmers (estimated at 500 billion rupees) and a One Time Settlement scheme (OTS) for another 10 million farmers (estimated at 100 billion rupees). This time it should not be women who fall prey into UPA hands since I have a deep regard for poor women and I truly believe in saying that “They are Bankable”.

MAY 2013

5. Post office savings bank / India post 6. Mr. Deepak Parekh, HDFC, Central Bank of India 7. Disposition Effect 8. Notching


Know Your Customer Himanshu Arora IIM Shillong

Is KYC mandatory?

Sir, one of my friends, working with an NBFC called me up yesterday and asked me to invest in an SIP. While mentioning the required documents he also mentioned something like Know Your Customer details. I couldn’t reply anything as I have no idea about what it means. Can you please elaborate what does KYC signify? “Know your Customer” is a term commonly used for Customer Identification Process. RBI first introduced this process through The Prevention of Money Laundering Act, 2002 (“PMLA”). KYC involves making reasonable efforts to determine true identity and beneficial ownership of accounts, source of funds, the nature of customer’s business, reasonableness of operations in the account in relation to the customer’s business etc. How does KYC help a financial institution?

Yes. According to The Prevention of Money Laundering Act, 2002 (PMLA) which came into force from July 1, 2005, the Banks, Financial Institutions and Intermediaries need to ensure that they follow certain minimum standards of KYC. Also, on the part of the customers, with effect from January 1, 2011, KYC has become mandatory for all classes of investors in Mutual Funds (SIP and Lump sum) irrespective of investment amount. What is the procedure for complying with the KYC guidelines? To be KYC compliant, you need to fill a KYC form which is available with your investment or the mutual fund consultant. Along with that you need to submit a valid identity and address proof. The data is then updated into Credit Information Bureau India Limited (CIBIL) database and checked for your credit worthiness.

Is KYC a one-time process? The major objective of KYC is to combat money laundering. Many criminals get their For investment in Mutual funds, KYC is money into the bank accounts using a false a one-time verification process and need not identity and address. The funds so deposited be done again though you might be investing can be transferred to other accounts and be in multiple mutual funds. On the other hand, used for buying goods or services. Such transactions banks can ask for your details again even if should be traced by the bank and stopped. KYC guidelines they had complied with the KYC norms while opening prevent the banks and other financial institutions from the account. This happens when the transactions in the being used intentionally or unintentionally by criminal account are observed not consistent with the profile. This elements for money laundering. is just to confirm that the account is not being used for any Money Laundering or any other criminal activities. What are the benefits of KYC to the customers? Is government doing something to bring awareness about the KYC process amongst the That is a very important question. A key customers? defence against money laundering is to prevent accounts being opened in false identities. The RBI is determined to bring awareness Anyone wishing to open an account will, about this concept among all of us. With the therefore, be asked for proof of their identity same in mind, KYC day is celebrated on August and address. This does not imply that you are being 1 every year in major banks around the country. suspected of money laundering but, it is to ensure that no criminal can falsely use your identity to make transactions that can be potentially harmful to the interests of many. Thank you so much SIr, for the explaination. Hence, KYC protects your identity from being misused and provides safety to your investments.


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CLASSROOM FinFunda of the Month



FIN-Q 1. Name a famous Hollywood star after whom a stock index is named including the names of all companies that have a connection to the star 2. What is the term for an agreement between a company and its top executives giving substantial benefits (usually in the form of stock options or cash bonuses) in case the employment is terminated? 3. X, perhaps the most important asset anyone can possess, is a fabric composed of 25% linen and 75% cotton. X has tiny red and blue synthetic fibers of various lengths evenly distributed throughout the length and breadth. Identify X. (Niveshak wishes you have lots of X in your life) 4. X is the bond index named after Y, an U.K. headquartered bank. Y was also involved during the LIBOR scam. Identify X? 5. Bullish market refers to an upward trend in the market. What is the term that refers to no significant movement of the stock market index? 6. He started his career as a ‘runner’ in bank whom he mistook as a law firm by its name in the employment ad and later went to introduce one of the most important derivatives in 1972. He is currently the Chairman Emeritus in the same exchange which launched that derivative. Name the person. 7. This term is used as a charge when a company does not do something intentionally but recklessly ignores a problem which it has been made aware of. Name the term. 8. Give the term for the practice of using of unrealized gains on the existing futures position as margin to increase the size of the position, usually in small increments. 9. In money market, what is known as non-convertible paper money?

All entries should be mailed at or You could also submit your Fin-Q answers on the link given below: by 15h June, 2013 23:59 hrs. One lucky winner will receive cash prize of Rs. 500/-



Prize - INR 500/-

Nishanth Shourie IIM Shillong

ANNOUNCEMENTS ALL ARE INVITED Team Niveshak invites articles from B-Schools all across India. We are looking for original articles related to finance & economics. Students can also contribute puzzles and jokes related to finance & economics. References should be cited wherever necessary. The best article will be featured as the “Article of the Month” and would be awarded cash prize of Rs.1000/- along with a certificate. Instructions »» Please send your articles before 15th June, 2013 to »» The subject line of the mail must be “Article for Niveshak_<Article Title>” »» Do mention your name, institute name and batch with your article »» Please ensure that the entire document has a wordcount between 1200 - 1500 »» Format: Microsoft WORD File, Font: - Times New Roman, Size: - 12, Line spacing: 1.5 »» Please do NOT send PDF files and kindly stick to the format »» Number of authors is limited to 2 at maximum »» Mention your e-mail id/ blog if you want the readers to contact you for further discussion


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IIM Shillong Niveshak May 2013  

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