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Transcript of The Financial - April 2014
2
Senior Team
Prakash Nishtala
Vidhi Shah
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 frenzied-ness that one might easily forget even to complete the financial-year end formali-ties. 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 celebra-tion 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 finan-cial 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 at-tempt 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, sug-gestions, 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 Finan-cial’!
Prakash Nishtala
Editor-in-chief,
The Financial
From the Editor’s Desk
The Financial
Volume no. IV
Issue no. III
April 2014
Finomenon
NMIMS ,Mumbai
All design and artwork are
copyright work of Finomenon
NMIMS Mumbai
Creative, Design
and Content
Ajit Nayak K V
Bhuvanesh Kumar
3
C
ON
TE
NT
S
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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 intro-spect. India in the last 10 years has been marred by innumerable scams, volatile global and domestic markets, flagging investor senti-ments. As the world recovers from this period of gloom, we look for-ward for better economic climate.
The new occupants at North and South Block in Delhi will have a daunt-ing challenge ahead of them with both local and global factors affect-ing every de-cision that they make. With every political party coming up with a manifesto of their own try-ing to please their electorate, there are a few agenda points which are sacrosanct and cannot be compro-mised on. This paper lists the eco-nomic 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 be-ing viewed as a hostile place to con-duct business. The need of the hour is a seamless and friendly tax envi-ronment which stimulates entrepre-
neurship and improves ease of start-ing a busi-ness.
The postpon-ing of tax avoidance rule GAAR to 2016 and lack of firm tax structure has given room to am-
biguity in the business environment. The recommendation by Parthasara-thi Shome committee which suggest-ed rollback on GAAR and retrospec-tive tax amendments being imple-mented only in the rarest of the rare cases must be brought in place and GST and DTC should be implement-ed on priority.
Boost the manufacturing sector
During his hour long speech during the interim-budget on February 17 finance minister P.Chidambaram
Economic manifesto for
the new government
BY AJIT NAYAK K V, NMIMS– MUMBAI 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
C
O
V
E
R
S
T
O
R
Y
5
summed up the current scenario aptly when he said ‘Manufacturing is the Achilles heel of Indian Econo-my. The deceleration in the investment in manufac-turing 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 main-ly due to high interest rates, slow-decision making, and weak domestic demand and infrastructure bottle-necks.
The new rule should instill the belief in India Inc. that we can be a manufac-turing power-house. To do this, firstly pow-er and infra-structure bottle-necks needs to be reduced by designing a sin-gle window clearing mecha-nism 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 Del-hi and Mumbai, Bangalore Mumbai Economic corri-dor project must be developed into major manufac-turing zones.
Disinvestment not just fill the coffers
Divestment which were originally meant to have a more broad-based equity and autonomous manage-ment 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 ambi-tious 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 pro-ceeds in asset gen-eration rather than plugging the fiscal deficit hole.
Fiscal Consolida-tion
Fiscal consolida-tion are the steps employed by the government that are aimed at minimizing the deficits and prevent accu-mulation 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 parame-ter might hover around 4.7-4.8%.
Wasteful gov-ernment ex-penditures must be curbed, un-necessary subsi-dies must be done away with, many of the ministries such
as textiles, culture, and steel have had sinecurial exist-ence for life. These ministries are siphoning off tax-payers’ 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 esti-mates of black money stashed away in tax havens such as Switzerland, Liechenstein, Luxembourg, Cay-man Islands, Seychelles, Mauritius, Macau, etc.
6
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. Repat-riation 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 kick-backs received by various civilian and defense pro-jects. 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 ex-press 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 De-velopment Act needs a re-look. A small enterprise in services and manufacturing sector must have an in-vestment of Rs. 10 lakh – 2 crore and Rs. 25 lakh – 5 crore respectively. If the small firm wishes to ex-pand, 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, infra-structure 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 ma-chinery took the beating. Important bills that remained pending were Coal Regulatory authority Bill which sought to implement independent regulatory body af-ter 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 par-ty 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 cli-mate 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 ru-ral areas, the enormous gap that exists between healthcare supply and demand must be met by scaling up the supply of doctors, medical facilities.
7
“Bread, cash, dosh, dough, loot. Call it what you like, but money matters more than ever” (Niall Fer-guson). 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 stand-ard for facilitation of trade and ease of exchange. When we could not get enough gold to support our cur-rency, we went on to back our cur-rency with faith i.e. fiat system. But now we see a new kid on the block challenging the very founda-tions 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 men-tioned monetary systems and pon-der whether that very kid could sur-pass his predecessors.
Creation of Money
When gold used as a currency, though there were questions re-garding the purity of gold, the gov-ernment (Feudal Lord) had less control on the gold that was enter-ing the system. In case of the cur-rent 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 arbi-trarily decide, if necessary, to cre-ate new money. Bitcoin is a decen-tralized currency, beyond govern-ment control. Money that comes
into the bitcoin ecosystem is con-strained 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 stand-ard era, the amount of money that could be printed was limited to the amount of gold that the issuing au-thority had, while in the fiat mone-tary 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 be-ing created unlike the fiat monetary system. The most popular way to ac-quire bitcoins is via bitcoin ex-change, the most well-known being the Japanese site Mt. Gox, which ac-counted for about 70% of all bitcoin transactions until its infamous crash. It could connect to our bank account
Bitcoin: The next monetary
system?
BY GAURAV CHATTOPADHAY & PUNEET MHATRE, SIMSREE
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
sree.net
Puneet is currently
pursuing MBA in Finance
from S IMSREE. A
computer engineer, he
has w orked w ith
Accenture.
E m a i l I D
puneet.mhatre@simsree.
net
8
and convert our fiat money into bitcoins and store it in our digital wallet.
Money as a store of value
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 val-ue. 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 peo-ple’s faith on re-spective issuing governments and the dynamics of de-mand 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 un-der 100 USD, which peaked at 1100 USD in December and is currently (as of 7 March 2014) valued at USD 604.5. How-ever, bitcoin has no intrinsic value and it can vanish even by some mishap in the bitcoin ecosystem.
Figure 1 shows that as the years go by, the number of bitcoins that can be mined every year reduces drastically. This could ac-tually squeeze out the liquidity out of the system. But the unique feature of bitcoin which overcomes this issue is that one bitcoin can even be divided even into 100,000,000 parts while a USD can only
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 easi-ly 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 preva-lent.
Ease of Exchange
Lack of divisibility of gold posed a se-vere impairment on the gold as a medi-um of exchange. Gold standard was an evolution which overcame this im-pairment. The same ease was applicable for fiat currency as well. Currently technology has ena-
bled 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 dif-ferentiates bitcoins from fiat currencies is that no bank or credit company can monitor bitcoin transactions. How-ever, that means any user error or mistake even as small as loss of password can re-sult in permanent loss of bitcoins not only from your account but also from the
bitcoin economy. Since all bitcoin transactions are irreversible, we cannot rectify our folly of entering wrong sender details, unless the Good Samaritan, who received our funds, returns them. Bitcoin transactions are not anonymous. Any-one can see the balance and transactions of any bitcoin address. However, the identity of the address
Figure 1 Total bitcoin over time (www.ajaxfinancial.com)
Figure 2 U.S monetary base (www.ajaxfinancial.com)
9
is hidden, until the information is revealed at the time of purchase/transfer or otherwise.
Risk of Loss/Theft
Though the digital format is a convenient method of exchange, it can also be exploited to easily steal our money. Theft of bitcoins by hackers is a great risk. In late Feb-ruary, Mt. Gox went offline and filed for bank-ruptcy in Japan, after reporting a theft of 850,000 bitcoins ($480 million) by hackers, leaving 127,000 robbed customers in peril.
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 de-signed to steal bitcoins exist as per a report by DellSecureWorks.
The crypto curren-cy is largely uninsured against theft or loss. Howev-er, The London-based Elliptic, a “cold storage” ser-vice 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 in-sured by Lloyd's of London. Falcon Global Capital, a San Diego firm announced launching a similar fa-cility.
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
constant concern. In fact for money, risk of theft is ever present.
Usage and Acceptance of the masses
Traditionally, gold and the gold standard currency have been accepted by the masses as a medium of exchange. Lack of options and govern-ment’s stamp of au-thority has cemented the acceptability of the fiat currency. But bitcoins is a new of-fering which is cur-rently only being
adopted by people who want to take a bet on it. Bitcoins can be used for purchases in various online e-businesses including Wordpress.com, but fewer brick
and mortar estab-lishments like pubs and restaurants and it is gaining ac-ceptance. Current-ly, more than 30,000 Indians hold about 1% of the total 12 million bitcoins in circula-tion. In January, Highkart became the first (and the only) e-commerce site in India to start accepting bitcoin payments. WeR-
wired, a Bangalore-based geospatial, security and en-tertainment 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 (okcupid.com), 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
Figure 3 Bitcoin vs. USD (coinbase.com)
10
Galactic. The anonymous online marketplace ‘Silk Road’, described as “Amazon.com 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. Gov-ernment reactions have been diverse. From an out-right 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 bar-ring banks and payment systems to deal with it. Rus-sia 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 regu-lation on bitcoins for now. While US’s Federal Re-serve 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 com-plaints/disputes, no asset backing the currency as well as bitcoins being a tool for money laundering. In December, the Enforcement Directorate (ED) raided buysellbitco.in, the biggest Indian bitcoin ex-change, 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 control-ling them difficult for the regulators. But then com-munity 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 to-wards F. A. Hayek’s idea of denationalization of mon-ey; a monetary revolution or just another case of ‘Tulip Mania’. Only time will tell.
11
“It is still possible that not all eli-gible applicants might get licens-es” – Dr. D Subba Rao during his tenure as RBI Governor
“We hope to start handing out the licenses” – Dr. Raghuram Rajan, RBI Governor
"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 li-censes, there are a group of people meticulously working on a com-mon goal. And they made head-lines few days back.
“We have submitted re-port to RBI,” – Mr. Jalan, former RBI Governor
This news was loved the most by media as they have something to munch upon. And once again, discus-sions about new banking licenses starts on news forums, online portals and status updates on FB and tweets on twitter either criticizing or appreci-ating RBI and Government.
Let us try to look at things objec-tively and understand whether the new banking licenses really change
the way we do banking and bring about radical changes in the banking industry at large.
Brief History of Banking in India
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 Bom-bay and Bank of Madras. The Re-serve Bank of India was established in 1935 and regulated the banking industry in our country after Inde-pendence.
In 1969, Govern-ment of India na-tionalized all the major banks at that time bringing about 85 percent of deposits in the country under its
control. A second round of nationalization happened in 1980. After the BoP cri-sis in 1991, the banking sector was again opened to private players by issuing licenses. By the end of 20th century, Indian banking comprised of
Banking licences - the
story so far
BY SUNIL RAMAVARAPU, NMIMS– MUMBAI Sunil Ramavarapu is
a first year student
from NMIMS Mumbai.
I n t e r e s t a r e a s
inc lude banking
industry and equity
markets.
E m a i l i d
sunil.ramavarapu@n
mims.edu.in
Figure 1 Indian Banking at glance (Source: RBI's Financial Stability Report, 2013)
12
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 announce-
ment in his budget speech for 2010-11 that the RBI
was considering giving some additional banking li-
censes to private sector players. In pursuance of the
budget announcement, the RBI put out a discussion
paper on its website on inviting feedback and com-
ments which elicited wide response. Later, it re-
leased a set of eligibility criteria to apply for the
banking licenses shown in the figure below.
The major eligibility criteria being:
Rs. 500 crore initial paid up capital
Public enterprises,
private corporates as
well as NBFCs with
10 years of good
track record, creden-
tials and integrity
40% of paid up capi-
tal to held by holding
company
25% of branches to be setup in unbanked rural areas
Foreign shareholding capped at 49% for the first 5 years
Banks to raise capital within 5 yars through pub-lic issue and private placement
Equity capital to be brought down to 40 % in first three years of operation
Promoter holding to be lowered to 20 and then to 15 within ten and twelve years respectively.
Aspirants and their challenges
The list of aspirants who applied for the banking li-
censes are shown in the figure 3. Out of the 26 appli-
cants, two of the applicants, Tata Sons Ltd and Val-
ue Industries that is affiliated to Videocon Industries
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 fi-
nancial holding company and transfer existing fi-
nancial 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
promoter companies. Bro-
kerage firms like India In-
foline and Edelwiess need
to list themselves as pro-
moters and move their
broking business to a new
subsidiary. MFI compa-
nies also need to list them-
selves as promoters and
move their existing busi-
ness to a new subsidiaries.
Infra financing companies
like IDFC needs to be
listed as a promoter, move
its infra business to bank
but will have to build the
retail from scratch. IFCI
would face challenges in maintaining SLR and CRR.
In case of NBFCs, L&T Finance may need to keep the
leasing business out.
LICHF to be a holding company, moves its financing
business into bank and offer the shares of the new
bank to existing shareholders. For Magma Fincorp,
the PE firms like KKR, IFC and Macquarie need to
dilute their holding from existing level of 43.5%. All
these challenges need to be sorted out by respective
company in case it is given the license to run a new
bank.
Figure 2 Eligibility Criteria (Source: RBI website, Image – The Hindu)
13
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 arti-
cle, 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 per-
son who controls more than
seventy percent of the bank-
ing 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 under-
stand the fact that Govern-
ment has also equally con-
tributed 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 pri-
vate 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 im-
pacted 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 sec-
tor is using this same
spread to make super prof-
its. 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 mod-
els.
Government ownership
also comes with low levels
of financial and manageri-
al autonomy. Let’s consid-
er 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 inclu-
sive 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 de-
cide which businesses banks should do or not do?
In the last budget, Government announced the crea-
tion 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 Govern-
ment’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 inno-
vation?
14
Recommendations
The safeguards are put in place by the RBI in-
cluding the fit and proper criteria and group ex-
posure norms to prevent banks promoted by in-
dustrial houses from cosying up to their industri-
al owners. Are they going to be effective is the
question RBI should introspect upon. The exist-
ing fit and proper criteria are subjective, ambigu-
ous and open ended, leaving the doors open for
arbitrariness and favoritism. It should be more
precise, coherent and objective yardsticks to as-
sess the credentials of the applicants in a uniform
manner.
For instance, an FIR filed against Kumar Man-
galam Birla, in his capacity as the chief promoter
of Hindalco in the coal scam, has led to specula-
tion, 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 re-
sources 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. In-
dia already has a large variety of banks from com-
mercial banks to cooperative banks to RRBs to
urban banks. But the regulation is either the same
or diffused. We need wide banks (that do every-
thing), 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 prod-
ucts. 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.
15
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 re-
maining 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, ex-
change rates, and the stock market.
At the outset, I take cognizance of
the high probability of the BJP get-
ting 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 be-
coming 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 Decem-
ber 2013 to see how embarrassing-
ly inaccurate a majority of opinion
polls, and to some extent even exit
polls, can be - they grossly under-
estimated 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 ex-
tent, even the last two general elec-
tions.
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 ex-
pected. 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 reli-
ance 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 par-
ties. In this case the BJP may be able
to form a rather weak government
with potentially another PM candi-
date 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.
If the most likely scenario plays out,
and Modi does become the PM with
a strong support base in the Lok sa-
bha
Election 2014: Position
Carefully and Own Quality
BY VARUN KHANDELWAL, BULLERO CAPITAL Varun Khandelwal is the
principal officer at
Bullero Capital. He has
been responsible for
m a n a g i n g t h e
p r o p r i e t a r y d e s k
spanning equities, fixed
income, and options at
Bullero since 2010.Varun
served as a Visiting
Faculty in Finance at
B irla Inst itute of
Management Technology
from 2011-2012. He holds
a MSc Economics from
the Univers ity of
Warwick, UK and a BA
(Hons) Economics from
Delhi University.
E
X
P
E
R
t
S
P
E
A
k
16
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 In-
vestors 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 bullish-
ness on India. While the foreign exchange markets
will continue to remain stable given the already im-
proved balance of payments and higher foreign ex-
change reserves, the stock market is a different
beast. At the time of writing this article, it has al-
ready starting pricing in a Modi victory.
One needs to tread with caution in the equity mar-
kets - 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 se-
vere 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 recov-
ery 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 sub-
stantial 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 inter-
est 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 grow-
ing economy which can generate the required profits
and cash flows to slowly deleverage their balance
sheets. Leveraged companies that are able to delever-
age 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 disas-
ter, 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 internation-
al 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 sce-
nario.
The next two months will be pivotal for India’s future.
To re-iterate, the most likely outcome is a Modi victo-
ry. The risk/reward remains firmly skewed in favour
of owning quality companies. Callous positioning
may be severely punished.
17
Background analysis In the light of a recent dilemma faced by the United Bank of India (UBI), it is imperative for the Indi-an 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 non-performing as-sets. Most of the Indian public sec-tor banks are in the same boat. The burgeoning cases of defaults by the borrowers is putting pres-sure on the Indian banking sector and in turn jeopardizing our coun-try’s economic situation. Non-Performing Assets
In a layman’s term, the loans that are in risk of default are called non-performing 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
debts is not just because of the un-controllable 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 bor-rowers: 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 bal-ance sheet healthy. This is a kind of mutual
benefit that both of them enjoy and in turn banks make their situ-ation vulnerable with the gener-ous policies.
Lack of monitoring system: Indi-
an 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 sec-tor.
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 misman-agement and bureaucracy
Non-performing asset - an
economic perspective
BY SNEHA SRIVASTAVA, IIM-RAIPUR Sneha Srivastava is a PGP
2 0 13 -2 0 15 s t u d e n t
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.
ac.in
18
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 down-turn 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 pre-ferred 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 prac-tices 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.
According to the report published by the Livemint, a business newspaper, ICICI takes the help of recovery agents to recover 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 Kingfish-er 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.
SBI
ICICI
19
Consequences 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. Credibility loss: Huge amount of loss shown in the financial statement of banks creates fear of bank-ruptcy in the minds of custom-ers. This will make them with-draw their cash and keep it somewhere else to avoid losing it in case the bank become in-solvent. Fall in the share price: Loss of credibility leads to the decrease in the share price of the finan-cial 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 identifi-cation and resolution of the bad loan cases. The fol-lowing measures have been taken to deal with this problem. Earlier bank used to wait for 90 days to take ac-
tion against the defaulters. Now it has been planned to reduce this duration to 30-60 days.
It has been decided to set up special branches for the speedy and efficient disposal of the SARFAE-SI 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 17-100 days instead of the earlier duration of 180 days. Central Repository of Infor-mation 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.
Insights Tackling the issue of bad loans is a challenging task faced by the Indian banking sector. Apart from im-pacting 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 pur-poses 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.
20
Background “Everything in the world is en-dured except continued prosperi-ty”- 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 vari-ous countries. Other common problems like unmanageable debts, high inflation and so on also bothers the government of various coun-tries. But, gov-ernments al-ways try to fight against these odds to foster growth. Continuous prosperity is achieved through various initiatives or policy changes done in an econ-omy. Fiscal Deficit & Current Account Deficit are also among those com-mon 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 curtail-ing Fiscal deficit (Fiscal Consolida-tion) and CAD and the way ahead, would be discussed in detail later. Fiscal Deficit refers to the differ-ence between total government’s
expenditure and total non-debt re-ceipts. 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 en-tire fiscal year) (“Q3 CAD”, 2014) of the coun-try’s GDP, respective-ly. 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. So, to cope up with the current situa-tion certain measures like lowering government expenditure, increasing revenue and capital receipts, decreas-ing imports and so on are to be taken into consideration. These corrective actions would certainly have an im-pact on growth of the economy. So, let us now discuss how adversely
Will growth be a casualty in
the battle of fiscal deficit
and Current account deficit?
BY DIYVA SHREE .S , IMT - GHAZIABAD Divya Shree S is a 1st
year PGDM—IB (Finance)
s t u d e n t o f I M T
Ghaziabad, she is a
member of FinNiche -
the finance club of IMT-G
E m a i l I D
m
f
I
n
K
n
O
L
W
D
g
e
21
or positively does growth gets affected. Scrutinising Fiscal deficit 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 math-ematics, fiscal deficit can be reduced in the following 2 ways Decreasing the spending/
subsidies by the Govern-ment 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 govern-ment 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 employ-ment, which is undesir-able. Pitfalls of Fiscal deficit Fiscal deficit shows the total debt taken by gov-ernment to finance the total budget expendi-ture. The debt taken is justified (to a certain limit) until the money is spent on creation of nation-al assets. But higher fiscal debts have many worse consequences to be borne, like: Negative impact on employment and income gener-ation. This can be explained by the increased de-mand from government side to take loans leading to
rise in interest rates and thus crowding out private in-vestments from various projects. Higher trade deficit, a situation called Ceteris Pari-
bus. This occurs due to the increased tendency to borrow from foreign countries, which is followed by huge dollar inflows, result-ing 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 domes-tic output
As per the current situation (negative balance of pay-ments 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, in-creases. 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.
22
Recent rise in exports, a major contributor of it was from IT services, helped in reducing the deficit. But ex-ports cannot be raised indiscrimi-nately as it may lead to the short-age of supply in our own country leading to infla-tion. A General Growth Trend From the above graph it can be ob-served 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. Big Challenge The major challenge present on table is handling growth vis-à-vis managing the deficits. Is the situa-tion out of control? As our country is crumbling un-der the pressures of likely decline in sovereign rating, (“India’s fis-cal”, 2014) making India not an investor friendly place, policy pa-ralysis, high inflation, rupee de-preciation, 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. Tak-ing the example of MNREGA programme, jobs provided should though it should lead to creation of assets like roads, dams etc., which can be lev-eraged later. Otherwise it would just increase liquidity in the market arousing greater demand for a given amount of supply, creating an imbal-ance.
Programmes should not be initiated for gaining short term benefits like gaining votes etc., as
done in the case of subsidies. The huge money spent on subsidies adds fuel to the fire of inflation by increasing the Pur-chasing Power Parity of people. Demand pull in-flation, created most often, can be reduced by im-proving the stor-age conditions of grains, proper transportation, de-creasing middle-men in the entire
supply chain etc. Regulations in various sectors can be relaxed,
without hurting the interests of domestic produc-ers. It can help injection of dollars into the system which helps in boosting the Rupee growth, ulti-mately strengthening our economy in view of in-vestors.
Another possible way of improving productivity
would be to reduce the tax rates, which are consid-erably 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 in-creased taxes can have a negative impact on employment. 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 de-lays recovery. Similarly, Indian economy should first try to get away with the concerns of deficits and infla-tion (illness) even if that slows down growth for a short while. Because, once recovery is ensured (after curing illness), attaining growth could be focused up-on and its achievement would be much easier. Thus, portraying India in a better picture.
23
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 Face-book and connect rest world, “ says Zuckerberg after making the deal to buy WhatsApp, the mobile mes-saging service for a whopping $19 billion. Quite a deal !! Ain’t it…
For someone like Zuckerberg who has always seen the bigger picture, this deci-sion 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-
sumptions evidently which followed this major event. Some said it’s fool-hardy 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 pret-ty slow at times.
So what made WhatsApp an instant success? Is it the platform friendli-ness, 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.
Is whatsapp worth $19
billion?!
BY RAMESH PRADHAN, SYMBIOSIS INSTITUTE OF MANAGEMENT
STUDIES—PUNE Ramesh Pradhan is a
1st year MBA– Finance
stuent of Symbiosis
Institute of Management
Studies, Pune. His
i n teres ts inc lude
blogging, numismatics,
football, reading
E m a i l i d
ramesh.chandra2015@s
ims.edu
24
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 ini-
tial 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 re-
ceived at the other end.
Zuckerberg while com-
menting on the scope of
WhatsApp in their busi-
ness said, “the messaging
volume running through
WhatsApp is approaching
the scale of the entire tel-
ecom SMS messaging
volume”. The time is not
very far when the mes-
saging services provided by the various telecom net-
works 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 re-
quired and moreover WhatsApp is a real-time mes-saging 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 atten-tion 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 Face-
book’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 bil-lion messages everyday. And astoundingly a team of
32 engineers handle all this bulk with no expense and personnel dedicated for marketing and public rela-tions. 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 Fa-cebook its ambi-
tions of becoming a social network and IM giant got
a new vibe, for WhatsApp it could be the capi-
tal 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 Face-
book is the rise in number of smartphone users world-wide. 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 be-fitting. 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 in-vestment for Facebook and a very well timed one as well.
25
This therefore will have help WhatsApp in reaching
faster to the people.
But then $19 Bil-
lion? Is that sum
that Facebook
should have spent
just for an IM App?
As we have ana-
lysed and predicted
the benefits that Fa-
cebook 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 da-
ta 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 tech-
nology takeover ev-
er, speaks volumes
of the decision-
making and foresight
of the man himself,
Mark Zuckerberg.
So the decision
might seem overval-
ued to many but to Zuckerberg and his team it’s hit-
ting 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 Face-
book 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 on-
ly…. IMAGINE !!
26
Japan is not a country to which Prime Ministerial comebacks are associated. The person in focus was hurtling towards oblivion after his first term as the Prime Minister of the 3rd largest economy in the world. This is the story of how he miraculous-ly resurrect-ed his polit-ical career and the Jap-anese econ-omy from nearly two decades of stunted growth by preaching his reform oriented eco-nomic policies popularly known as ‘Abenomics’.
One can draw an analogy between Shinzo Abe’s own life & history to the performance of post-war Japa-nese economy; both were a hit ini-tially but eventually fizzled out. Abe belonged to a prominent polit-ical family & achieved a feat by becoming the youngest post-war Prime Minster of Japan but was replaced just shy of an year at the helm due to political turmoil. The Japanese economy on the other hand saw unprecedented economic growth in the 1980’s but has been grappling with recession for the two decades since.
Simple economics says that for economic growth to occur, con-sumer spending must increase &
that a little inflation is always healthy. But the scenario in Japan was the other way round; it was suf-fering from prolonged deflation which restricted the GDP growth. Abenomics’ bold answer to this was
three-pronged; massive fis-cal stimulus to encourage consumer spending, aggressive quantitative easing to increase the availability of money in the market &
substantial structural reforms to im-prove competitiveness.
In the first stage of Abenomics, a fis-cal stimulus package to the tune of approx. 20 trillion yen ($210 billion) was introduced. The investment was made chiefly in infrastructure which aims at generating 600 thousand jobs in a period of 2 years. This would in turn encourage consumer spending & investment which are precursors to economic growth. The step was ab-solutely essential in Japan where the liquidity preference is the highest among advanced economies.
In the second stage, Bank of Japan introduced quantitative easing in the form of a bond buy-back program similar to that of the US federal bank to pump in capital into the economy. This monetary policy targets a 2% rate of inflation by 2015, which is a
Ebbing the Japanese
Deflation
BY JEENOY PANDYA, NMIMS - MUMBAI Jeenoy Pandya is a B.E.
(Mechanical) from MS
University, Baroda & he
is presently pursuing
MBA from NMIMS,
Mumbai.
Email ID:
j e e n o y p a n d y a
@gmail.com
Shinzo Abe
27
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 en-courages exports by making them cheaper & hence more attrac-tive.
Presently Abenomics is in its 3rd stage which is to bring about far-reaching structural re-forms 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 sus-tain the growth conceived by the first two stages & promise an even better fu-ture. Failing on this front may have devastating results similar to the previous at-tempt in 1990 to reinvigorate the economy which was followed by a decade of re-cession. To af-fect change will also be challenging due to opposition by industrial-ists, 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 in-crease of 3.5% in the GDP growth rate in the Q1 of
2013 against Q1 2012. The inflation as pegged by Bank of Ja-pan is at a promising 1.5%, Nikkei is up by as high as 70% since the inception of Abe-nomics & the unem-ployment rate is down by an impressive 0.3% to 3.7%. The fact that the aye-sayers far out-number the nay-sayers alludes to an optimistic outlook towards Abe-
nomics & the Japanese economy itself.
Shinzo Abe, in his 2nd term as the Prime Min-ister of Japan, came in as a force to be reckoned with, pushed sweep-ing reforms & has so far de-livered on the promises made by Abenomics. With his ap-proval 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.
28
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 down-turns due to several macro econom-ic reasons. The 'big' names include- Turkey, Brazil, South Africa, India and Indonesia. The fragile five countries, which experienced a rap-id 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 volatil-ity in exchange rate, slowdown in economic growth and other eco-nomic problems. A multitude of push and pull factors had contribut-ed 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 volatili-ty, 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 stra-tegic location in the Asian conti-nent. It is the largest national econ-omy 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 inves-tors. 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 after-math 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 insti-tutions coupled with international ties made Brazil an emerging market that investors could trust.
3. South Africa- This country’s com-petitive advantage is its cheap labour that boosts the economy. A country rich in resources such as diamonds, platinum and gold; it is now attract-ing foreign investments aplenty, in-tending to use the nation as a hub for space exploration, high technological innovation leveraging its solid, so-phisticated banking system. This economy is also expected to grow at the rate of 2.8% by the end of 2014.
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 al-lowed FDI and FII under liberalized terms and conditions, which attracted
The “Fragile Five” againsT The
“Mundane Three”- Emerging
markets, hedging investor fears
BY SIRSA MAJUMDAR & SOHAM BAGCHI, IMT - NAGPUR
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 IMT-
N a g p u r .
E m a i l i d :
29
huge amounts of foreign investment. India’s young talent pool, majority of whom, could speak in Eng-lish, was a cheap source of la-bour for foreign markets.
5. Indonesia- Indo-nesia’s strength lies in its econom-ic structure. More than half the popu-lation is under 30 years of age. For-eign investors in-vested 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 na-tion 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 immi-nent and ongoing withdraw-al of foreign capital from their markets.
The fear, the investors investing in these mar-kets 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 taper-ing 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 Jan-uary, 2014. Coun-tries 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 depreciat-ing 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 manufactur-ing commodities, thus increasing cost of final goods produced. All such imperfections have made the
emerging markets ex-tremely vul-nerable. 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 ex-
treme 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 hard-est 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
30
also impact the Fragile Five markets due to its slow-ing 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 com-pared to other nations. Its am-ple foreign re-serves, internal debt sourcing and flexible ex-change 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 Gov-ernment 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 emerg-ing markets have also shown bet-ter stock perfor-mance like the SENSEX reach-ing 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”.
31
The year that was—in numbers and charts
1/2
32
The year that was—in numbers and charts
2/2
By Sriram D.S & Mohit Gupta, NMIMS - Mumbai
33
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 invest-
ment”, the grim reality lays very
different altogether.
Under such cloudy shades of mis-
conception, we need to break the
barriers and understand what actu-
ally 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 divi-
dend or rather paying very low div-
idends. In order to understand this
phenomenon let us understand as to
what the reasons behind such a div-
idend 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 share-
holder’s wealth.
When we analyze with respect with
respect to this objective, the com-
pany’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 share-
holders gets diluted
Bank loans which require huge
interests to be paid
A cut from the profits accumulat-
ed from the share of dividends
that has been paid. This lies as
the safest option as the money of
the owners grows at the maxi-
mum rate under such investment
circumstances.
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 compa-
nies 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
Dividend for gains AT
stock market–is it the
right choice?
BY PRIYO RANJAN, XISS - RANCHI 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
34
a period of time as a company always has much higher scope of growing than the money being in-vested 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 fac-tor to be observed from the company’s viewpoint. The company can utilize money more efficiently than the money being invested elsewhere.
These shackles of wrongly developed notions need to be broken off and people be made aware of the long term benefits of their invest-ments in the form of capital gains over the long run. The dividend poli-cy is not merely a tool and necessity of the companies to maintain their stand rather the companies need to clear out to their investors their long term objectives and how are they safeguarding their stockholder’s interest over the long term.
Warren Buffet’s Berksire- Hathaway is a perfect ex-ample- an active acquirer of businesses that retaining cash flow is a key ingredient of success. This tells us that-“Don’t just focus on companies that don’t yet have dividends. Some companies that have the po-tential for robust dividend growth like the FORD (NYSE) could triple its current 40% a share divi-dend over the next few years without making a dent in the balance sheet.”
“Patience and dedication is the key”. The sharehold-er is like a long term guardian with personal interest who becomes family to the happiness or distress, the growth or ruins, the please and the pains, the turmoil and the walk-away of the firm invested in. What needs to be understood is that a good investment cli-mate is reflected sharply by the share markets? Also, another feature is the market sentiment.
Speculation is good for any market. However, too much of speculation can be worrisome and raise doubts of stability and sustainability of the market which none of the governments or regulatory or pa-rental bodies would want to exist. A safe market keeps the money rotating and while it is a game of
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
dividend policies many have failed trying to follow
their footsteps.
Indeed it is ra-
ther difficult to
predict the mar-
ket reaction to-
wards any
changes in the
dividend policy
as it’s more of a
short jerk and
levelling out
thing or it can
even lead to drastic changes –sometimes to cata-
strophic levels for a company.
If a company which has been paying dividends sud-
denly resorts to change and reduces it the investors
might interpret in many ways. Again the market sen-
timents as well as the speculations may create chaos.
This in turn would thereby make the price of the
shares to fall even if the company wanted to save for
improving upon its business and aiming at long term
benefits.
In the other case round if a company paying little divi-
dends starts paying dividends initially there would be
a tear of happiness on the benefits offered and huge
buy outs would occur moving the stock prices up but
after some time the prices would again slowly go
down. But there are chances in for a surprise in such
cases too. So think and think hard before putting your
bets in the stock markets as a sound peek into the na-
ture of benefit you are looking for and the time frame
you consider to achieve it in, you may have to link
yourself strongly to the dividend policy of the compa-
ny being considered. The “More risk more gain” state-
ment is nonetheless true.
NAME OF COMPANY TRADING AS MARKET VALUE (Billions)
GOOGLE GOOG 291.9
BERKSHIRE-HATHAWAY BRKB 187.3
AMAZON.COM AMZN 126.1
GILEAD SERVICES GILD 80.7
E-BAY EBAY 66.8
AMERICAM INTERNATIONAL AIG 66.9
YAHOO YHOO 29.3
ADOBE ADBE 22.1
COGNIZANT TECHNOLOGY CTSH 201
35
36
The Senior Committee 2013 - 14
37
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