Volume 1 February 2012

YES-CFO Insights

Investment and Growth Opportunities in FY13

- CFO on the centre stage

Issue I Feb 2012

A comprehensive compilation of thought leadership articles

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It gives me immense pleasure to present the first edition of , a

quarterly publication which aims to become a valuable repository of experiences,

thoughts, and insights of erudite CFOs across India. The covers

contemporary themes, and includes contributory articles on topics pertinent to recent

economic developments and policy changes that will help CFOs to make far-sighted

decisions and seize hidden opportunities leading to consistent growth of their

organizations and industry at large.

I am also pleased to share with you that further to the successful launch of the

YES BANK - National CFO Forum on September 7, 2011 in Mumbai, we have launched the

New Delhi Chapter of the Forum on February 14, 2012. The

has been conceived to recognize the deeper role of CFOs, and provide them with a unique knowledge and

thought leadership exchange platform.

The Indian economy has been one of the fastest growing economies in the world; however, in the past one

year, it has witnessed volatilities on the back of the global crisis. Despite the magnitude and proliferation of the

financial challenges, India Inc. has been able to effectively showcase its combined abilities and competencies in

managing and responding to the new economic global order, and is now looking forward to take a giant leap in the next

growth cycle.

As we move to the new financial year, the introductory edition of YES - CFO Insights has attempted to collate

opinions of some renowned thought leaders and industry experts on the theme ‘

.

My sincere thanks to

, for sharing their valuable thoughts with fellow CFOs, and the industry at large, towards the

formation of this treasure of innovative ideas, key insights and valued experiences. I look forward to the continued

support and active contribution from all Forum members in the future editions of YES - CFO Insights.

Thank you.

Sincerely,

Founder, Managing Director & CEO - YES BANK

Chief Mentor - Governing Council - YES BANK National CFO Forum

YES – CFO Insights

YES – CFO Insights

YES BANK – National CFO

Forum

Investment and Growth

Opportunities in FY13 - CFO on the centre stage’

Dr. Rana Kapoor

Mr. Y.M. Deosthalee, Mr. Deepak Amitabh, Mr. Gautam Sen, Mr. Milind Sarwate,

Mr. O K Balraj, Mr. P K Goyal, Mr. Prabal Banerjee, Mr. Rajender Prasad, Mr. Shekar Viswanathan and

Mr. T.N. Subramaniyan

Foreword

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Message from the Chairman’s Desk

We are indeed in the midst of challenging times. The world is grappling with

lower growth, high indebtedness and fiscal consolidation. Overall, there is stress in the

financial system.

India has huge potential and opportunities to gain position of significance,

globally. However, India needs to focus on growth, better fiscal management and a

disciplined approach in decision making. Economic agenda needs to be separated from

political ambitions and the country needs to march ahead at a galloping pace.

In such testing times when the Balance Sheets of many companies are stretched,

capital is scarce, liquidity continues to be challenging. There are tremendous

responsibilities on CFOs to strike a delicate balance between judicious capital allocation and

growth. While there is no doubt that Cash is King, CFOs should not lose opportunities to help the organization gain

market share and consolidate their position in the business.

There are several ways in which CFOs can add value. It is time to create in services. It

is a difficult concept for the businesses to accept. However, sharing a common technology platform, promoting

operational excellence in areas such as Human Resources, Accounts and Procurement will go a long way in creating an

efficient organization.

Every organization needs to have a Risk Management framework. Given the volatility in markets, dealing

with all aspects of Risk including Financial, Business, Regulatory, Market and Reputational Risk is essential. CFOs

have a major role to play in establishing such a Risk Management Framework. They need to look at global practices

and emulate relevant practices within the organization.

One of the important attributes of a successful CFO is efficient and responsible communication within and

outside the organization. They are a link between the Investors and the Management. The process of communication

has to be continuous and both ways. Most of the CFOs today regularly interact with media and are important

constituents in the value growth journey of organizations.

The economic landscape of the world is changing very rapidly and Indian companies are aspiring to be

global. Creating a global mindset is central to exploiting global opportunities.

CFOs have played a very crucial role in shaping their organizations. They need to continuously work

smartly with speed. These challenging times will also throw opportunities for career growth and personal

development.

My best wishes for the CFO Forum.

' '

Deosthalee

Centres of Excellence'

Mr. Y. M.

Chairman and Managing Director - L&T Finance Holdings Ltd.

Chairman – Governing Council - YES BANK National CFO Forum

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In common parlance, making a distinction among uncertainty, risk, and volatility can be tricky.

Uncertainty describes a situation where several possible outcomes are associated with an event, but the

assignment of probabilities to the outcomes is not possible. Risk, in contrast, permits the assignment of

probabilities to the different outcomes. Volatility, on the other hand is allied to risk. Volatility provides

a measure of the possible variation or movement in a particular economic variable or some function of

that variable, such as a growth rate.

After the Great Moderation observed in the world economy during 2002-07, a period which was

characterized by low unpredictability in asset prices and economic variables, the period thereafter has

seen quite the contrary. The growing linkages of national markets in currency, commodity and stock with world markets and

existence of common players, have given volatility a new importance – Based on the property of its speedy transmissibility

across markets. Since the collapse of the Lehman Brothers in 2008, volatility has seen a structural shift upwards for most of

the asset classes like currencies, equities, and commodities. Measured by the five year moving average of the coefficient of

variation, the trend in volatility has almost doubled for the Rupee, BSE Sensex, and Crude oil in the last fifteen years!

The speed and severity of the global economic

downturn and the accompanied surge in

volatility, illustrate the importance of a

comprehensive risk management strategy and

the need to be attuned to changing forces

across the business landscape. It is perhaps

difficult to recall a more challenging

environment of enduring volatility, mitigating

risks and struggling for growth. Experiences

such as these prepare all including us as banks

to focus on coping with short-term headwinds

while positioning for creation of long-term

safety nets simultaneously. Managing

volatility thus requires institutions including

banks to promote domestic financial stability,

ensure that domestic instability is not

transmitted internationally, and guarantee that

international institutions and the rules of the game are not themselves a cause of volatility.

With business cycles becoming shorter and harder to predict in terms of turnaround, businesses and industry have

inevitably to contend with, and manage, not just their normal core business risks, but also financial risks like foreign

exchange, interest rate, and commodity price risks. Financial institutions, and, in particular, banks, are supposed to and

must build up their resilience to both expected (i.e., risks) and unexpected (i.e., shocks) losses. Creation of a three tier risk

management structure as a proactive measure within banks can be constructive. At the first level, the top management must

play a critical role to create controls to ensure that overall risk remains within acceptable levels and rewards compensate for

the risks taken. The second level could be at a macro level, encompassing measures to manage risk within a business area.

The third and perhaps the most crucial is the mitigation of risk at a micro level – with measures performed by individuals

who take risk on behalf of the bank.

From a micro perspective, managing volatility pertains to the effective management of expected risks. Although expected

risk induced volatility falls into the realm of known unknowns, it is important for firms to determine their level of threshold

for pain and tolerance, and then adequately align their internal policies around them. Besides maintaining adequate capital,

the banking system can consider some of the following:

Managing Volatility and Risk in the current Global Economic Scenario

- Shubhada Rao, President & Chief Economist, YES BANK Ltd.

Source: YES BANK, Bloomberg

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Carve out a Volatility Fund from their capital to deal with any exigency

Prepare robust internal models for predicting turning points for business cycle through a framework of leading indicators

Submitting internal projections to regular stress testing and ring fencing balance sheet operations from asset price

volatility to the extent possible through a judicious use of hedging techniques

Not only are the internal strategies crucial, but as a bank, playing an indomitable role in the economy's financial

intermediation, it must disseminate and share with its clients across all sectors, the in-depth knowledge and technical

expertise to improve both technical and financial soundness of projects.

YES BANK has placed risk and volatility management at equal footing with revenue and cost management. The approach

towards de-risking has been a continuous process through judicious utilization of proactive rather than reactive policies. On

the relationship side, our knowledge based prescient approach not only helps us in understanding our customers better, but

it is also instrumental in mitigating credit risk to a large extent. An advanced technological support system further fortifies

the early warning signals that are in sync with the regulatory environment.

From a macro perspective, greater financial development (measured by credit to the private sector as a ratio of GDP) is

associated with lower growth volatility as long as the supporting institutions are strong. Alignment of monetary and fiscal

policy to the business cycle helps in reducing policy induced volatility. The overall regulatory and financial architecture has

to support the evolving nature of financial development through effective technological intermediation.

The views expressed here are solely those of the author, and do not necessarily reflect the views of YES BANK Ltd.

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Policy interventions to further accelerate FDI / FII inflows and toarrange finance for capital creation / infrastructure development

- Gautam Sen, Director Finance, RCF Ltd.

Capital flows into India have been predominantly influenced by the policy environment. Recognizing

the availability constraint and reflecting the emphasis on self-reliance, planned levels of dependence on

foreign capital in successive Plans were deliberately held at modest levels. Economic growth in the

recourse to foreign capital was achieved through import substitution industrialization in the initial

years of planned development. The possibility of exports replacing foreign capital was generally not

explored until the 1980s.It is only in the 1990s that elements of an export-led growth strategy became

clearly evident alongside compositional shifts in the capital flows in favour of commercial debt capital

in the 1980s and in favour of non-debt flows in the 1990s. The approach to liberalization of restrictions

on specific capital account transactions, however, has all along been against any "big-bang". India

considers liberalization of capital account as a process and not as a single event.

While relaxing capital controls, India makes a clear distinction between inflows and outflows with asymmetrical treatment

between inflows (less restricted), outflows associated with inflows (free) and other outflows (more restricted). Differential

restrictions are also applied to resident's vis-à-vis non-residents and to individuals' vis-à-vis corporate and financial

institutions. The control regime also aims at ensuring a well diversified capital account including portfolio investments and

at changing the composition of capital flows in favour of non-debt liabilities and a higher share of long term debt in total debt

liabilities.

Thus, quantitative annual ceilings on External Commercial Borrowings (ECB) along with maturity and end use restrictions

broadly shape the ECB policy. Foreign Direct Investment (FDI) is encouraged through a progressively expanding automatic

route and a shrinking case-by case route. Portfolio investments are restricted to select players, particularly approved

institutional investors and the NRIs. Short-term capital gains are taxed at a higher rate than longer-term capital gains. Indian

companies are also permitted to access international markets through GDRs/ADRs, subject to specified guidelines. Capital

outflows (FDI) in the form of Indian joint ventures abroad are also permitted through both automatic and case-by-case

routes. The Committee on Capital Account Convertibility (Chairman: Shri S.S. Tarapore,2006) which submitted its Report in

2006 highlighted the benefits of a more open capital account but at the same time cautioned that Capital Account

Convertibility (CAC) could cause tremendous pressures on the financial system.

The purpose of the flow of capital to underdeveloped countries is to accelerate their economic development upto a point

where a satisfactory growth can be achieved on a self sustaining basis. Capital flows in the form of private investment,

foreign investment, foreign aid and private bank lending are the principle ways by which resources can come from rich to

poor countries. The transmission of technology, ideas and knowledge are other special types of resource transfer. The

capital flow of countries increases due to the amount of resources available for capital formation, over and above what can

be provided by domestic savings. It also raises the recipient economy's capacity to import goods: capital flow provides

foreign exchange and eases the problem of making international payments.

Indian policy is following a determined gradual path towards economic liberalization and international integration.

Following the liberalization of transaction on the current account, restrictions on capital inflows have been relaxed steadily

with an emphasis on encouraging long-term investment and saving. The pattern of liberalization of capital inflows in India

has been the gradual easing of quantitative restrictions on inflows and the size of flows that are automatically approved.

To sustain GDP growth rate at 9 percent per annum in the medium term, investment in infrastructure would have to be

substantially augmented. According to the Government, India would need about USD 1 trillion investments in various

infrastructure sectors during the 12th Five Year Plan (2012-17). One of the key constraints in infrastructure financing is the

lack of availability of risk capital to support debt raising. Adequate flow of equity capital into infrastructure sectors has not

been forthcoming, despite the fact that the domestic equity market is well developed. This underlines the need for

developing the market for other forms of risk capital such as mezzanine financing, subordinated debt and private equity.

Shortage of risk capital in the domestic market is the ground for seeking larger FDI into infrastructure, which would not only

rate of

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narrow the risk capital gap, but also usher in requisite skills to implement and monitor projects in line with global best

practices.

Improving intermediation of domestic financial savings so that they are channeled to meet the specific requirements of

infrastructure investment such as those relating to risk, tenor and scale

Facilitating targeted access to foreign financial savings

Distributing financial risk more widely and efficiently across the domestic financial system and abroad, to avoid

excessive concentration

Making infrastructure financing--especially in sectors where it has not been traditionally forthcoming--relatively more

attractive for a wide spectrum of investor/ financier classes by providing more liberal regulatory regimes for

infrastructure vis-à-vis non-infrastructure sectors and in some cases, offering well-designed fiscal incentives

Achieving all the above through facilitating (rather than directive)

The Government’s strategy has been to focus on creating incentives for the private sector as well as participate directly as a

key investor. Some of the steps taken in this direction are:

Progressively reducing Government control and allowing easy entry of the private sector. Foreign Direct Investment

norms have been continuously eased with 100 per cent investment allowed in most of the sectors.

Announcing consistent long-term policy measures and delegating control to independent regulators. The enactment of

the Electricity Act in 2003 and the establishment of the Telecom Regulatory Authority of India (TRAI) are important

examples.

Undertaking programmes to step up the quantum of infrastructure facilities through public-private partnerships.

Some of the Policy Initiatives the Government could consider going forward

Enhancing the foreign holding in and tapping the potential of the insurance sector

Providing incentives for banks’ and NBFCs’ participation in infrastructure financing

Facilitating equity flows from overseas into infrastructure

Inducing foreign investments into infrastructure

Utilizing foreign exchange reserves

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In the past decade, the role of emerging economies in the global economy has increased significantly.

The rise of BRICS countries (Brazil, Russia, India, China and South Africa) is changing power dynamics

in world affairs. The huge market size (40 % of world's population and 25 % of global GDP) and cost

advantage of these countries have been creating various opportunities for Foreign Direct Investment

(FDI) and Foreign Institutional Investors (FIIs). All these countries have surpassed the growth

expectations in the last decade, since the term BRIC was coined by Goldman Sachs, and have emerged

virtually unscathed from the global financial crisis.

However, a detailed analysis of the growth of these countries in last decade shows that India's record on

productivity, FDI and reform has been mostly disappointing. FDI inflows in India have been lower than the rest of the BRIC

countries every year (see chart below). The story of FIIs is not encouraging either. Though FIIs have been selling across

markets and pulling out money, their outflow was the highest from India in 2011 (USD 4 Bn) when compared with BRIC

peers.

What could be the possible reasons for this

apartheid of global investors against India?

There are various potential variables like

Market Size, Economic Stability and Growth

Prospects, Labour Cost, Infrastructure

Faci l i t ies , Trade Openness , Currency

Valuation etc. that determine FDI inflows to a

country. India scores fairly well in some of

these variables while it lacks in some

important ones like infrastructure facilities,

trade openness etc. Most importantly it is the

ability of the leadership of the country to

implement reforms in letter and spirit which

plays a vital role.

Many sectors in India allow for 26% or 49%

FDI. This restrictive policy of the government is a

big barrier. When a foreign investor invests in a country, it would like to have controlling stake in the investment; as it brings

intellectual and financial capital and hence would like to drive things in its own proven way. It sees no benefit in having

non-controlling stake despite of putting heavy investment.

Even where 100% FDI is allowed, the path is not smooth. For instance, in the power sector, 100% FDI is allowed but the sector

is yet to realize any substantial benefit out of it. the Government of India (GOI) initiated many fast track projects after

liberalization in 1991. One such project was Enron's Dhabol Power Project, the most promising projects of its time. However,

due to disputes between the owner (Enron) and the off-taker (Maharashtra State Electricity Board (MSEB)), the project ran

into trouble. The Power Purchase Agreements (PPA), though expertly drafted and legally a sound document, could not be

implemented. Later on, Enron also collapsed as a company. The ripple effects of this one investment which went bad are still

in the minds of foreign investors, keeping them away from the Indian Power Sector in spite of 100% FDI.

If we have a look at the sectors which have been able to attract more FDI, it is clear that opening up of the sector (s) is the key.

Services, IT and Telecom sectors have been attracting more FDI than any other sector in India since the past 6 years and the

benefits are evident. These sectors now comprise a major portion of our GDP. Infrastructure, especially the Power sector has

not been able to draw much foreign investment mainly due to regulatory hurdles. The main objective of any regulator should

be to ensure level playing field that encourages greater but fair competition so as to provide the consumers large gamut of

Source: World Investment Report, 2011; Columbia FDI Profiles; India Brazil Chamber of Commerce

FDI/FII Inflows in India – Problems and Way Forward

- Deepak Amitabh, Director Finance, PTC India Ltd.

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services at affordable prices.

The Government's recent decision of allowing 100% FDI in single brand retail is a welcome step and is expected to create

millions of jobs. The mandatory 30% sourcing from micro and small industries will help the local enterprises achieve higher

growth but many big brands are not enthusiastic about this condition. There is also a fear of rollback due to political pressure.

The FDI cap in the insurance sector should also be raised to more than 50%.

India has massive inherent growth advantages including the most favorable demographics in the world, and the

fundamentals that attracted investors remain intact but it isn't able to get its act together on reforms. As Jim O' Neil of

Goldman Sachs says “India is the greatest mystery among the BRICS” with problem of state of mind and leadership. The GOI

must realize that reforms and liberalization are not once in a lifetime events, but a continuous process. It has to provide

transparency and better infrastructure. If we can tackle the barriers listed above, large scale investment is waiting to come to

India and we can achieve faster and sustainable growth.

India is one of the most under-insured countries

and stalling the reform process will hurt the sector's growth. When FDI cap in banking sector is 74%, there is no reason why it

should not be raised in the insurance sector. Similarly, FDI in pension funds may be allowed. In the 12 Five Year Plan, total

infrastructure investment required would be US$ 1 trillion (Planning Commission estimate). An Assocham study estimates

that 30% of the equity FDI investment in pension funds can meet 10% of the infrastructure investment required in the next

plan.

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External Commercial Borrowings in India: A Treat or Threat

- P K Goyal, Director Finance, IOCL

There has been tremendous growth in External Commercial Borrowings in India in the last about five and half

years. External Commercial Borrowings have grown by about 281% from USD 26 billion in March ‘06 to USD

99 billion in Sep ‘11.

A careful analysis of Commercial Borrowings in the external debt of India reveals that by end of March 2006,

External Commercial Borrowings were 19% of the total external debt and by Sep ‘11, it increased to 30% of the

total external debt.

The trend of increase in commercial borrowings has been as under:

Financial literature is replete with the reasons as to

why a corporate would borrow from overseas.

However, the cardinal reason of borrowing from

overseas market is Interest Rate Differential

(Arbitrage) between domestic and overseas interest

rates. Around this cardinal reason revolve various

peripheral reasons like limitations of domestic

market (in terms of lack of liquidity, legal

requirements of issuance e.g. in India long term

Rupee bonds need to be issued against security),

diversification of debt portfolio (in terms of different

currencies and different investors), application of

natural hedge (in terms of matching foreign currency

receivables against foreign currency loans),

acquisition of credibility (in terms of issuer of

overseas paper) etc.

In the context of external Commercial Borrowings in India, while the peripheral reasons did play a major role, the cardinal principle

was the key driver of increase in Commercial Borrowing.

The London Interbank Offered Rate (LIBOR) followed

an upward trend till FY 06-07 from an average 1.70% in

FY 02-03 to an average 5.40% in FY 06-07. However, it

was reasonably clear that LIBOR was peaking in FY 06-07

as IRS (Interest Rate Swap i.e. Fixed rate in lieu of floating

LIBOR), was nearing the prevailing LIBOR. The

downtrend of LIBOR after FY 06-07, shown in the chart,

was a treat to borrowers and source of widening the

interest rate differential.

In the domestic bond market, mainly due to inflationary

pressure in the economy, interest rates were following an

upward trend. Since, FY 06-07 to Sep ‘11, average AAA

yield on 5 and 10 years bond has been 9.06% and 9.24%

respectively.

The differential between domestic and overseas interest rates would give rise to arbitrage only if the differential is more than the

spread over LIBOR, tax (if any) and forward premium. Here, an interesting point is that high inflation results into high domestic

rates and therefore theoretically exchange rates should move (domestic currency to depreciate) in such a fashion as would

neutralise the interest rate differential between domestic and overseas interest rates. However, emerging countries like India have

been growing at a pace much faster than that of the developed countries and therefore this pace of growth has given rise to the

Treat

Source: Reuters Data

Source: Department of Economic Affairs, Ministry of Finance, GoI

Mar-06Mar-01 Sept-11

Commercial Borrowings (USD Billion)

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expectation of appreciation or lesser depreciation of domestic currency. Based on this expectation, corporates could leave external

borrowings unhedged resulting into a greater opportunity of arbitrage. In the Indian context, this expectation has been realistic as in

the last about six and half years, the Indian Rupee has depreciated by only about 0.7% (from average Rs 44.95 in FY 04-05 to average

Rs 45.26 in FY 11-12 (till Sep 2011).

While Commercial Borrowings in terms of loans were the outcome of widening interest rate differential, commercial borrowings in

terms of Foreign Currency Convertible Bonds (FCCBs) was the outcome of the boom period from 2005-08 in the Indian capital

markets. On a yearly average basis, the Sensex rose by about 42% annually from average 5740.44 in FY 04-05 to average 16568.89 in

FY 07-08. RBI in the Financial Stability Report, Jun 2011, has mentioned that during the three financial years in FY 05-06 to FY 07-08,

Indian firms raised foreign capital through Foreign Currency Convertible Bonds (FCCBs) which were very popular at the time. The

conversion price on such bonds was 25 - 150 per cent higher than the prevailing stock price at the time of issuance and they carried

zero or very low coupons.

External Commercial Borrowings are an important means to meet the investment requirements of the country. However, the

financial world has been rather more uncertain in

the past few months. The uncertainty is

emanating mainly from Euro zone, which is

impacting the flow of funds in terms of amount as

well as interest rates. The initial indication is a

drop in applications to RBI for availment of ECBs,

which is depicted as below:

RBI in the Financial Stability Report, Dec 2011,

has mentioned that the recent tensions arising

from Europe may potentially impact the flows

under ECBs. RBI further concludes that the

environment for carrying out refinancing of

FCCB (and ECB) liabilities by firms over the next

few quarters has worsened due to correction in

domestic equity markets, depreciation of the

Indian rupee and rise in domestic interest rates.

Translation and transaction exposures that remain

unhedged could cause hardships to some firms. It may be mentioned that during FY 2012-13, External Commercial Borrowing of

about USD 16 billion (including FCCB of about USD 4 billion) are maturing.

Keeping the above in view, it is likely that repayment of maturing ECBs in near future may put pressure on the country’s foreign

exchange reserves. However, if the Euro zone crisis worsen, it may have an impact on growth and consequently on oil consumption

and prices. OPEC (Organisation of Petroleum Exporting Countries) in January 2012 MOMR (Monthly Oil Market Report) states that

if the situation (Euro zone crisis) was to worsen, the effect on the oil market could be seen not only through a further decline in oil

demand in Europe but also with spill over effects on oil demand in the emerging economies, amid an adequately supplied market.

Here it may be interesting to mention that as India imports about 164 million tons of crude oil per year, a decrease of USD 13.34 / bbl

would result into saving of about USD 16 billion i.e. equivalent to the maturities of ECBs happening in next fiscal. But the irony is if

the price of oil increases, it may result into a double whammy.

From the above, it is evident that External Commercial Borrowings, which till very recent were a treat to Indian firms in terms of low

interest rates are in the wake of current global scenario more of a threat as these low cost debts might be replaced with high cost

domestic funding in the months to come, should Euro zone crisis deepen.

Threat

Impact of Oil Prices on Foreign Exchange Reserves

On the guard


Source: RBI, Based on Form 83 submitted for allotment of Loan Registration Number

Applications for ECB to RBI (USD Billion)

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FCCB / ECB Repayment - Predicament In FY-2012-13

- Prabal Banerjee, CFO, Adani Power Ltd.

If I am allowed to present a Contrarian Opinion, in my view, FCCB Repayment hurdle should be treated as anormal repayment obligation for any corporate loan – and there should hardly be any occasion for concern.

For the country as a whole, it could be an issue of clustered dollar demand, which can weaken the Rupeefurther due to Dollar Demand Spree for FCCB repayment – and there is no denying the fact that this wouldimpact the redeeming corporates since their payment will be higher in weakening Rupee scenario.

Without going into statistics of how much FCCB redemption will be there in Financial Year 2013 – it may beworth its while to deep dive into reasons of such redemption coming up and then explore possible way outs –if at all.

But before we start such an exercise, my initial reaction would be – as a corporate – I am happy if I am paying back the FCCB since –

Cannot get a Cheaper Debt than FCCB due to its inherent Equity Optional Value.

Do not have to dilute Equity and can Refinance the FCCB with another Debt and get Tax shielded FCCB Interest in myprofitability.

With that positive frame of mind, let us see what belied our conversion expectation in the first place:-

The Credit Default Swap (CDS) of most Corporates moved up substantially thereby disrupting the Implied Bond Floor andEquity Option Value.

While the Implied Volatility of Stocks has become more aggressive, it has still failed to match the original Conversion Premiumthat was fixed so aggressively.

With Indian Equity Market not at its peak and growing, obviously the originally thought out Investor's Conversion PremiumHurdle is not going to be met in foreseeable future.

With such conditions of Equity Markets in India, Bond Holders are segregating outstanding Bonds in four categories:-

Distressed / Default Category

Debt Category

Balanced – Debt / Equity Category

Equity Category

In each of above category of bonds, the following four variables are in different axis of value to Investors

CB Value

Bond Floor

Parity

Issue Price

and consequently, option values are different at different zones for different issuers.

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Buyers of these assets themselves are stretched – from Distressed Debt Funds, Special Situation Funds to Fixed Income and CBInvestors. One fact that can hardly be ignored here is that there will not be many buyers of Indian CB papers in today's marketmainly due to the lackluster performance of the local Capital Market. Indian Corporates appears to have no other option than toredeem FCCBs today – and Re-financing also will be extremely difficult in today's global market environment.

Depending on the Company's Cash Position, CAPEX Plans, DE Ratio, Equity Hedge, Market Capitalization, etc. some of thepossibilities open to corporates to reduce their FCCB payment could be as below:-

If one has the Cash, they can, subject to RBI guidelines, buy the CBs at a substantial discount – since most of the Indian CBs todayare trading at a discount. With 2012-13 corporate results not likely to be stellar, most of the CBs are expected to trade near theirBond Floor Value with low Equity Sensitivity. Right Time to buy and extinguish them, if you ask me.

If one has prior capital commitment and yields are better with capital deployed elsewhere – management may decide to reducethe Conversion Price suitably and achieve conversion as part of the gradual process – though it may have a negative impact onmarket capitalization in the long term horizon. Such reduction of Conversion Premium is a smooth way for Forced Conversionwhich will help corporates to minimize the outgo and certain the route to Dilution. Hence, it also depends on the shareholdingof each corporate if they would be willing to adopt such a route.

One other route for Corporates could be to refinance FCCBs from the Indian Loans Markets instead of going to the Bond Market.This would not increase the DER of respective companies being a replacement – and if one wants to convert the liability intoFOREX as it was before the Refinancing of the FCCB – then they may well avail of POS (Principal Only Swap) or FCS (FullCurrency Swap) which will bring them somewhere close to the same standing as FCCB in the books – but without any dilutionrisk. Hence, such corporates will carry all risks and benefits of FCCB but without any dilution risk.

Other option for FCCB redeeming corporates could very well be refinancing, through Zero Coupon Exchangeable Bonds orPerpetual Bonds which are useful in replacing the FCCBs by an Equivalent Forex Exposure in the Balance Sheet.

With above in the background, I am of the opinion that

Repayment of FCCB should hardly be a real constraint for a reasonably performing company.

Repayment, if planned in advance, can be refinanced easily through refinancing from the Loan Market or Bond Market – eitherin Foreign Currency or Indian Rupee.

Stronger Companies with resources should find it useful to buyout FCCBs at a discount and Extinguish Debt.

For ECBs, Corporates are supposed to repay ECBs in normal course – hence they will have no other option. The difference betweenECB and FCCB is that ECB is repaid over a period of time whereas FCCB is mostly bullet repayment, though, ECB can also be re-financed in the same process as FCCB.

While India Inc. is concerned with FCCB and ECB repayment, in my opinion, they should be more concerned with Equity Dilution,and Re-finance the FCCB / ECB after enjoying the tax deductable but low cost FCCB through any methods, mentioned earlier.

Possibly, that is the best option available for Indian CFOs today who are faced with FCCB / ECB repayment.

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Power Projects Financing

- T.N. Subramaniyan, COO-Finance, Lanco Infratech

Significant rise in investment required

Funding sources have dried up

Sweeping reforms should replace incremental attempts

The Planning Commission has proposed an investment of USD 1,046 Billion for Infrastructure in the12th Five-Year Plan, which is more than double of the 11th Five-Year Plan commitment. Investmentrequirement in the electricity sector alone for the 12th Five-Year plan is stated to be around USD 323Billion. The Working Group on Power for the 12th Five-Year Plan has now proposed a target of 75,787MW for power generation installed capacity addition. There is a high likelihood of not meeting thistarget, unless sweeping reforms take place urgently addressing the Indian power sector concerns.

The execution of power projects is done mostly through the formation of a Special Purpose Vehicle (SPV) under projectfinance mode with limited or non-recourse to the parent company's balance sheet. It exclusively relies on the project's assetsand cash-flows. On account of immense challenges being faced by the industry, the perceived risk of power projects hasgrown manifold. Acute shortage of domestic fuel, high cost of imported fuel, lesser power off-take due to mounting financiallosses of distribution companies (discoms) and SEBs, non-payment of dues by discoms, transmission bottlenecks and severedelays in project execution owing to intractable issues in land acquisition, environmental and forest clearances have acted asmajor hindrances.

Equity funding for the power projects has been brought in through promoters' equity, internal accruals, primary markets,QIP, and private equity funding. In the current market conditions, raising equity through primary markets for the funding ofnew power projects is becoming even more difficult. Since promoters have a limited amount of capital, the participation offinancial investors is important to enable developers to meet the equity requirements for fresh projects. However, theparticipation of Private Equity (PE) and Foreign Direct Investment (FDI) sources is subdued due to enhanced risk perceptionof the power projects. It is understood that a few financial institutions plan to set-up a joint venture private equity fund forthe financing of power projects. It would benefit the nation's economic interest, if this plan can be executed in a fast-trackmode.

Debt financing has traditionally constituted about 70-80% of power project costs. Historically, most of the funding has comefrom Commercial Banks and Financial Institutions (FIs). It is unlikely that banks and FIs alone can fund this sector goingforward, primarily on account of two reasons. One, the size of funding requirement has grown drastically; the aggregatefunding requirement of the electricity sector in the 12th Five Year Plan (2012-17) is double the size of that in the 11th Five YearPlan (2007-12).Two, most of the banks have approached or are fast approaching the group exposure limits (for lending tolarge infrastructure players) set by the respective boards. Given the ceilings on individual and group lending and theprudential credit exposure limit laid down by the RBI, the amount of additional debt the commercial banks can provide tonew power projects is very limited. Moreover, power projects have to compete with other infrastructure projects to securedebt funding.

Long term financing agencies such as pension funds and insurance companies are small sources of finance for power projectsdue to the norms and statutory guidelines set for investment in infrastructure projects. According to the investmentguidelines set by the Insurance Regulatory and Development Authority (IRDA), insurance companies have to invest 15% ininfrastructure. However, insurers can invest only in AA rated infrastructure papers. It is improbable for a greenfield privatepower project being implemented through the SPV route to get AA ratings. Credit Enhancement measures by theGovernment of India institutions could bridge this gap. These measures include taking effective steps to contain and reducelosses of the discoms and SEBs, making it mandatory to revise tariff each year, improving collection efficiency, andprovisioning of escrow accounts to service debt. Refinancing

Commercial banks are severely constrained by the asset-liability mismatch. Lending by banks is at best restricted to 15 yearsdoor to door tenor despite the projects having a Power Purchase Agreement (PPA) of 25 years. In order to address this issue,the Government of India attempted to initiate take-out financing, through the creation of India Infrastructure Finance

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Company Limited (IIFCL), which can take out some of the banks' loans and provide long term financing to the developers.This scheme is purported to free up more capital for enhanced lending, once the projects attain commercial operation.However, the banks are reluctant to transfer an operating asset, since they have taken the crucial funding risk during theconstruction period. This scheme has so far failed to take-off due to intricate issues that deserve to be sorted out at theearliest.

The Reserve Bank of India has also allowed take-out finance through External Commercial Borrowings (ECBs), under theapproval route, to refinance rupee loans taken from domestic banks. However, there are critical issues related to thejurisdiction of domestic courts in case of overseas lender, and the jurisdiction of foreign court in case of domestic lenders andborrowers (in case of tripartite agreements). Further, the borrowing of US dollars has become more expensive with theperceived dollar scarcity in the market. Moreover, foreign lenders are less comfortable taking non-recourse long-termfinancing risks for these projects.SecuritizationPost commercial operation, a developer can leverage the project further byborrowing additional loans based on the project's cash flows. Typically, the interest rate for the new borrowing should belower as compared to the original borrowing, due to a reduction in project risk. The additional debt raised can be utilizedtowards equity infusion in future projects. However, in the current grim scenario, securitization transactions have dried updue to increased risk perception of the industry.

Recently the ECB policy has been liberalized to enable upto US$ 750 Million per year under automatic route without anychange in the prevailing all-in-cost ceilings. However, under the prevailing scenario, wherein the risk premium sought forpower projects is higher, it would be difficult for the SPVs to gain direct access to ECBs or through financial intermediaries(which requires prior approval of RBI) at the all-in-costs ceiling. ECA FundingAs an alternate source of funding, developersare keenly looking at the possibility of ECA funding from countries, where the equipment is being sourced from. Though it isunderstood that discussions are being held by developers with ECAs such as US-Exim and China-Exim, no significantprogress has been made on this front barring the one-off kind of transactions being heard.

The banks and FIs in India normally lend at floating rates of interest for 15-20 years. In India, such interest rates have movedfrom 7% in 2006 to 14% in 2011. Assuming that infrastructure projects are funded on 75:25 debt-equity ratio, if the actual banklending rate exceeds the originally assumed bank financing rate by about 5%, then the developer stands to get almost 0%Return On Equity (ROE) as against the originally planned 16% ROE. The reverse is also true and in that case, the developersstand to make extra-ordinary returns while the end consumer will continue to pay higher infrastructure costs despite thedecrease in interest rates.

To mitigate the risks of lenders and developers neutrally and to serve the nation's economic interests better, the solutioncould be to give actual infrastructure costs to the end consumer. When a developer wins the bid, the prevailing SBI linkedinterest rate plus or minus 1% can be borne by the developer during the course of the project. The impact of any movement ofinterest rate, either up or down, beyond 1% should be passed on to the end consumer. This would bring risk-neutrality andtransparency in financing costs. It would encourage the development of projects and lending by banks by reducing the risk ofmacro-economic uncertainties. The only alternative solution is for lenders to give 15-20 years of fixed rate loans, which is apipe-dream for now.

In the backdrop of limited sources of funding, the Government of India and allied agencies have to ensure that the barriers tothe existing modes are addressed well and if possible, also bring out innovative means of financing. It is high time that allstakeholders recognize the crying need and press hard to bring in sweeping financial reforms that can propel the Indianpower sector growth back on track.

It is important to distribute the risks of financing power projects widely across the domestic financial system. Solving theinterest rate risks conundrum would help the Indian economy.

The Government of India urgently needs to take potent measures to encourage take-out finance by domestic financialinstitutions as well as overseas lenders.

The participation of pension funds, insurance companies and other financial institutions in long term financing of thepower projects needs to be enhanced in order to create a deep and liquid corporate debt market.

Safeguarding the overall economic interests of lenders and developers

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Challenges of Corporates in Global Crisis

- Rajender Prasad, President and CFO, SRF

The prevailing financial crisis that began in 2008 with the bursting of United States' housing bubble isundoubtedly the worst that we have experienced in our lifetime. The sovereign debt crisis of Europe thatengulfed Portugal, Ireland, Italy, Greece and Spain, has made the environment that much more uncertain.The global terrorism combined with political turmoil as seen in many countries such as Libya, Egypt, Yemenand Syria further compound the matter. The results have been disastrous. In such a situation it is but natural,that the corporate world too would have had its share of nightmares.

are twins which partner economic crisis on most occasions. Without one of thetwins, the crises would lose its edge. In both the cases, corporates don't know how to plan and what to planfor. As late as July 2008 there was no indication of an impending crisis that erupted soon after and snowballedrapidly, entering by September into a full blown economic crisis.

Following are certain examples that highlight the impact of volatility on industry:

With USD ranging between Rs.44 to Rs.50+ per dollar in a span of 7 months, which was not steady but a roller coaster ride,businesses which have any link with exports or imports would have had to cope with this volatility.

If one had to cope with only the foreign exchange related upheavals, life could still be simple, but there is volatility everywhere – inforeign currency markets, in interest rates, in commodities.

While some factors impact economic activity as a whole, there are others which impact specific sectors or industries.

Recently a manufacturing company with diverseproducts and multiple sites went through the mid-year business review. While the past 6 monthsperformance was relatively easily explained andanalysed with the benefit of hindsight, none of theexperienced leaders were prepared to take a view onthe next six months performance. The consensusview was that no estimates can be made.

Even where the corporates have only simpleobligations to meet like – repayment of loans,payment of interest and dues to creditors – it hasbecome impossible for them to plan and scheduletheir activities.

These examples clearly illustrate the wide rangingextent and depth of the existing volatility, and thattoo only in one or few aspects of the externalenvironment. Add to this other variables in the external environment like – government regulations, power supply, civilcommotion etc. which happen on a daily basis. Yet, industry as well as the government and banks do have to make some plans tobase the future on however uncertain they may be.

The expanse of the crisis highlighted the inter-linkages between countries. Even though India is a domestic consumption country,but part of the consumption comes from those businesses or households or individuals whose fortunes are hitched to the globalbandwagon. Industry has increasingly been cognizant of what is happening in the world around it, but it would need to build itscapability to predict what is likely to happen in the future, not only to itself but also to its partners as well, and cope with it when ithappens.

India & China are unique since they have been experiencing high inflation, while developed countries have minimal inflation. RBIhas increased interest rates 12 times in 15 months. While inflation continues to rise, industry suffers from high interest cost. Thetreasury management of companies needs to identify linkages – precedents and dependencies – which have correlation to interestrates. Innovative models need to be thought out so that the impact of interest costs is reduced.

Volatility and uncertainty

Interdependency and inter-linkages:

Inflation and interest rates:

Source: SRF Ltd.

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Buoyed by the booming economy between 2009 and part of 2010, many corporates embarked upon aggressive growth. This wasfuelled by optimism and largely funded by debt. Borrowing, which was not an exceptionally bad step, except where companieswent over-board, was made in the hope that as the projects took shape and progressed, the debt would be replaced by issuing freshequity.

However, the sentiment reversed and equity raising activity came to a grinding halt. The corporates with high borrowings werestuck with the high debt with no way out. Besides the challenge of servicing the existing debt, corporates now face the risk of debtroll-over at higher interest rates.

There is a widely held view that America is on a decline. However, it continues to be a leading innovation country in the world.While in the short term, i.e. 5 to 10 years, it may face growing challenges; ultimately the ideas and innovation that emerge will bringit back to a powerful nation status. It must be recognized that while American corporates spend large amounts of their budget onR&D, most of the scientific discoveries are based on government funding and government R&D programs.

While India ranks quite high in citable scientific papers published, but it is still a long way behind the developed world. Developinga culture of research and innovation, topped with a quality approach would hold the corporates in good stead.

For continuous growth of any economy, investment in capital goods, which are involved in creating employment and enhancingGDP, is essential. Unfortunately, this activity, because of generally large amounts involved, risks associated and high interest costs,is the first casualty of uncertainty prevailing in the environment, specially in the case of private sponsored capital outlays. Anyslowdown in investments also leads to revenue loss for the government impacting its fiscal deficit negatively. Political will andappropriate intervention is needed to continue investment in capital goods and infrastructure.

The challenges are not just limited to monetary side of the business, but to the human aspect as well. Acquiring talent withappropriate skills, and retention of employees are other challenges which the corporates face. India has been experiencing rapidgrowth for the past few years and hence the demand for employable talent has increased to an extent that the required talent is sorelyin short supply. The labor arbitrage which Indian corporates enjoyed over developed nations, is rapidly vanishing, which againputs industry and India at a disadvantage.

While institutions of higher learning are producing more graduate students they are very often not employable. This leads to thequestion; why is every Indian trying to become an unemployable graduate? Why are they not seeking vocational skills which are ingreat demand. Perhaps it has to do something with the false perception of white collar versus blue collar workers particularly in theminds of parents even though skilled blue collared workers may be far better paid than somebody from the unemployable graduatepool. This mindset has to change in tandem with opportunities for good vocational training institutes being established.

Industry in general and companies in specific face a host of complex and conflicting situations both external and internal. There isenough evidence to show that companies that have high ethical standards and robust governance policies and procedures, have agreater chance of survival for longer periods of time, and in difficult times too.

In times of crises, corporates could be driven to take desperate measures which may not go down well with various stakeholders –regulators, lenders, shareholders, vendors and above all customers. The key challenge for any corporate in crunch situations is howto retain its esteem, prestige and market standing without sacrificing its existence. Communication with stakeholders andtransparency in all actions is the key for long term gains, even though in the immediate situation other less truthful actions mayseem more attractive.

Industry & corporate cannot shy away from their social responsibility. We must remember that CSR often dovetails with the need toincrease skill, talent and employability. This challenge poses a win-win opportunity for the industry and the society at large. In myview, corporates with higher levels of consciousness involve themselves or promote activities centered around social bettermentnot only for the benefit of the society, but for their own survival as well.

From the entrepreneurs' perspective, demand growth is slowing, global capital markets are weak, high material prices are hurtingmargins, higher interest rates are resulting in higher cost of capital and tailwinds of corruption-related investigations are affectingsentiment. To say the least, the landscape is challenging and daunting. This is the time when our values would be tested.

Managing uncertainties and volatility – Success factors:

Innovation:

Capital outlay:

Talent acquisition and retention:

Ethics and governance:

Image Management and transparency:

Social responsibility:


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Development of a Robust Corporate CSR Strategy

- O. K. Balraj, Group CFO, Escorts Limited

Corporates in India or for that matter anywhere in the world cannot or should not take their socialresponsibility lightly. Despite phenomenal economic growth that we have witnessed, we as a country stillcontinue to face major challenges on the development front and the gap between haves and have-notscontinues to widen. Poverty, illiteracy and lack of environmental hygiene continue to affect a large section ofour society. Most top global organizations have acknowledged their social responsibility in their respectivecountries and spell out their CSR plans from time to time. We should pursue this in India as well.

Having said that, there are many challenges in evolving an effective and sustainable CSR strategy from acompany's perspective, the most important being the sum available to spend on CSR. Many corporates maynot be able to afford large sums to be spent on CSR on an ongoing basis. So, personally I do not want to give anumber say 2% or 5% of profit and so on and so forth. All we need to emphasize and realize as corporatemanagement is that we have a social responsibility to fulfill as we roll out our business strategies and a sum has to be set apartexclusively for this purpose.

The choice of the CSR program will of course depend on the corporate and their core business. The CSR objectives should becarefully crafted so as to spread awareness around. Many corporates would like to discharge their social responsibility in line withtheir main activities so that it helps in building up their brand image. There is nothing wrong in this. The mission and vision shouldreflect the values a corporate would like to own, propagate and cherish.

To begin with, some of the Corporate Social Responsibility Focus areas, Strategies and Endeavors by a few of the leading corporategroups from India are as follows:

CSR Focus and Strategies of Leading Corporates*

Corporate Area of Business CSR Focus CSR Strategy/Key Endeavors

Aditya BirlaGroup

Conglomerate�

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Education

Health Care

Sustainablelivelihood

Infrastructure

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All projects are identified in a participatory manner.

Prior to the commencement of projects, a baseline study of the villages iscarried out, based on which a 1-year plan and a 5-year rolling plan aredeveloped.

The Aditya Birla Centre for Community Initiatives and RuralDevelopment provides the vision.

Collaborative partnerships are formed with the Government, theDistrict Authorities, the village panchayats, NGOs and other like-minded stakeholders.

A specific budget is allocated for CSR activities. This budget is projectdriven.

The Company's engagement in this domain is disseminated on itswebsite, annual reports, and house-journals and through the media.

Board of Directors, Management and all employees subscribe to thephilosophy of compassionate care.

Coal Mining�

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Education

Water supply

Health Care

Environment

Socialempowerment

Infrastructure

Sports &Culture

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A Corporate Social Responsibility Committee interacts with theconcerned State Officials/Govt. officials and NGOs for identificationand implementation of activities.

A budget is decided based on the total activities to be undertaken. Thefund for the CSR is allocated based on 5% of the retained earnings of theprevious year.

The Committee monitors and reviews the progress of activitiesundertaken/completed.

An annual audit of all activities undertaken by the company is done bylocal Authorized auditors. The CSR activities are reflected in the AnnualReport and Accounts of Coal India Limited under Social Overhead(CSR).

Coal IndiaLimited

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YES BANKLimited

Banking�

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Sustainablelivelihood

Food Security

Public Health

Education

Climate Change

Program called Responsible Banking with the objective of developinginnovative business solutions to social and environmental problems. Keyinitiatives include Thought leadership, Responsible CorporateCitizenship Advisory, YES Community, Agribusiness, Rural & SocialBanking and Sustainable Investment Banking etc.

Conglomerate�

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Education

Environment

Health

Culture

Sports

Various Schools, Colleges, Education Grants and Scholarships,Sponsorship program, Environment initiatives (LEED certifiedresidences, energy conservation initiatives), Lifeline Express, Healthinstitutes and various other initiatives have been rolled out by MahindraGroup.

Mahindra &Mahindra

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Awareness generation campaigns in the rural areas on effectiveagriculture and horticulture practices.

Provide assistance to farmers by making available certified seeds,fertilizers and pesticides.

Liaisoning with banks and district agencies for the generation of bankloans and government subsidies, or educating the farmers onpreservation of food grains.

“Social Forestry Program” in order to improve the environment in andaround the villages of rural Haryana.

Support NGOs working in the field of community development.

Program on “quality reproductive health care services”, covering 25villages.

Program in collaboration with the National Association for the Blind.

Funding for other agencies, working in the field of improving ruralenvironment

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Horticulture &agriculture

Environment

Community

Development

Healthcare

RuralEnvironment

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GAIL allocates 2% of its previous year's Profit after Tax (PAT), as itsAnnual CSR Budget.

To the extent feasible, Strategic CSR initiatives are undertaken in theareas that align to GAIL's business operation.

Based on above, seven 'Thrust areas' are identified. CSR programmesare undertaken to the best possible extent within the defined ambit ofthe identified 'Thrust Areas'.

At least 60% of the CSR programmes are executed in and around the areasadjoining GAILinstallations inremoteareas/along theGAILpipeline.

Project activities identified under CSR are to be implemented byspecialized agencies.

Aproject monitoring mechanismisput inplaceby thework centrehead.

CSR initiatives of the Company are reported in the Annual Report of theCompany.

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Environment

Infrastructure

Drinkingwater

Healthcare

CommunityDevelopment

Education

Empowerment

GAIL (India)Limited

Gas Transmissionand marketing

EscortsGroup

EngineeringConglomerate

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A dedicated organization – ICICI Foundation for Inclusive Growth is setup to take charge of all CSR initiatives.

ICICI Foundation works within public systems and specialisedgrassroots organizations to support developmental work in fouridentified focus areas.

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PrimaryHealth

ElementaryEducation

SustainableLivelihood

Access toFinance

ICICI Group FinancialServices

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ACC Limited Cement�

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Rural Welfare

Education

Healthcare

HIV/AIDS

Disaster relief

Mason'straining

Conservationof Heritage

ACC's focus revolves around the community residing in the immediatevicinity of its Cement Plants and Mines where it seeks to actively assist inimproving the quality of life and making this community self-reliant.

*Source: Company websites/CSR Policies

Of course, above are some of the biggest names in the Indian industry and the ones which follow CSR best practices. What is

important to note is that first, all of them make a public commitment to CSR efforts. Their senior management recognizes that CSR is

important and they convey this to the public in a transparent manner! In most cases, a senior committee decides on the projects to be

taken up and approves the budget. So there is absolute clarity both externally and within the company.

Second, these corporations treat their CSR efforts as an integral part of business objectives and strategy. E.g. GAIL mentions “To the

extent feasible, Strategic CSR initiatives are undertaken in the areas that align to GAIL's business operation”. This is an important

preposition - CSR goals contribute to the achievement of GAIL's business objectives. Similarly, ICICI Foundation for inclusive

growth focuses on “Access to Finance”. Personally I believe that CSR vision should be derived from the mission and vision of the

corporation.

Third, it may be a good idea to seek partners in the CSR initiatives as there are quite a few organizations that have developed

expertise and identified gaps in the social sector, so that the funds are spent judiciously.

Finally, there is a need for ongoing monitoring mechanism. Clear performance metrics or key performance indicators that can help

measure the impact of the entire CSR effort. This is very important if one has to prove the effectiveness of the effort and sustain it

over time.

To summarize, while charting out a robust Corporate CSR Strategy, one should focus on the following:

a. CSR initiatives should be made as transparent as possible and communicated.

b. From a Corporate's perspective, should undertake initiatives which are sustainable going forward.

c. Monitoring end use is crucial, so that focus is not lost.

d. Seeking the assistance of partners who are engaged in CSR, could be of help to provide the guidance and also the right project.

I am sure that, going forward, our organizations and their leaders will wake up to this reality and play a pro-active role in promoting

our social responsibility. Our government has already made a head-start through various initiatives such as:

a. National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business were released by

Ministry of Corporate Affairs, making it mandatory for India Inc to disclose its CSR activities to stakeholders.

b. It is now mandatory for all public sector oil companies to spend 2 per cent of their net profits on corporate social responsibility.

c. The government is also ensuring that the public sector companies participate actively in CSR initiatives.

d. Department of Public Enterprises (DPE) has prepared guidelines for central public sector enterprises to take up important

corporate social responsibility projects.

e. Ministry of Shipping has directed 12 major ports in the country to create a mandatory CSR budget.

The Indian Government's corporate governance and CSR efforts are undoubtedly laudable and will go a long way in helping grow

acceptance for CSR among Indian Corporates. It is up to us, the corporates, to now rise to the occasion and do our bit towards giving

back to the society which enables our existence.


Building the CSR strategy of the company In lightof increased emphasis on inclusive growth

- Milind Sarwate, Group CFO & CHRO, Marico Ltd.

Corporate Social Responsibility (CSR) has gained increasing importance as an area of corporate

strategy. This is in line with the evolution of the corporate sector in India as a strong responsible pillar of

the society.

CSR as a strategy area is critical since it seeks to institutionalize the role that business would play in the

society. Strategizing about CSR also brings in the long term angle which is so essential to distinguish a

one-off effort at helping someone from concerted long term efforts to bring about specific sustainable

improvements in the lives of people in the society. CSR Strategy helps to achieve a shift from 'charity' to

'philanthropy'. It encourages us to note and work upon the difference between tackling causes rather than

symptoms. Social Contributors must be strategic in their giving.

The term “inclusive growth” too has gained currency in recent times. To my mind, inclusive growth sits on the same page as

sustainability. We would like business to behave responsible and keep sustainability as the primary lens in its operations.

This ensures that business activities are sustainable over a long term with only an optimum use of natural resources.

Similarly, viewed from the social lens, business must look at leveraging of human resources around it in a sustainable manner.

Social sustainability is achieved only with the belief in and practice of true interdependence of the various parts of the society –

business or non business. The business which targets social sustainability promotes interdependence and through that inclusive

growth, because such a business is built to practice the motto of “Together, we grow”.

CSR, or for that matter many of the concepts that I have mentioned above, are highly vulnerable to platitudes. There is also a

danger of displaying far more than what has been or will be done. Therefore it is necessary to avoid these traps as one builds

the CSR strategy around inclusive growth.

It is best to begin with what the corporate already has – namely, the set of business associates which have helped bring that

company to its present state. It is easy to work with them and ensure that the company helps them elevate their own

standards of business management, governance, talent management and sustainability. Making associates capable of

sustainable growth can be a very meaningful CSR strategy. The CSR efforts of the company in the inclusive growth area

should typically trickle sideways in all directions. If they are marshaled properly, they could be sustained over several years.

Here is what I can share from Marico's experience.

Marico is a beauty and wellness products and solutions company, with strong

roots in the Indian economy and society. It has an intense connection with agri-

products such as Copra (dried coconut Kernel) and Kardi (Safflower). We, at

Marico, have sought to constantly add value to our associates in these two crops.

We have encouraged farmers to improve their individual productivity and find

better means of delivering quality. We have also helped them by providing them

direct access to the company instead of going only through middle men.

We encourage use of Information Technology, such that the farmers are able to

transact with Marico using IT. These efforts from Marico have no doubt helped

Marico's business. However, in the process, they have also helped Copra and

Kardi farmers and convertors to grow not only as farmers but also as

individuals with access to means of productivity improvements. We believe we

have practised our purpose statement here – Be more. Every day.

Marico also leverages a formidable sales and distribution system with over 30

depots across the country catering to over 27 lac retail outlets through over 800

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distributors. Here, we have sought to be thought leaders and action leaders in development of Information Technology in

sales and distribution. Over 75% of our distributors use IT systems developed by Marico (appropriately called MIDAS,

the system with the golden touch). These systems are not restrictive as they allow distributors to transact business with

companies other than Marico too. These enable distributors to pull Marico products from the Marico supply chain system,

without the burden of Marico dumping stocks on them at its own will. Marico's Vendor Management Inventory approach has

enabled distributors to improve their return on investment. This helps Marico's business for sure but more importantly it creates

a strong IT capability amongst our distributor associates. It enables them to think in a systematic manner and run their business

better. Here again, we believe, we have created capabilities which are sustainable. We have also taken steps to help our

distributors optimize their cost structure thereby increasing their long term profitability

Finally, one cannot overlook the importance of the Corporate Brand in CSR. An Inclusive growth approach to CSR must

leverage the three B's- Business, Beliefs and Brand.

The CSR strategy should draw energy from the strengths of the company's Business.

It should also take into account the softer aspects of the Company philosophy and its Beliefs.

The strategy should fit into and nurture a strong corporate Brand.

A strong corporate brand, supported by leadership beliefs and business strengths, ensures that CSR efforts are recognizable

and sustainable. That way, the efforts can also be more and more inclusive.

I believe that the stronger the Corporate Brand, greater is the circle of influence of that corporate. A company with a wide

circle of influence can afford to keep a wide circle of concern and over time encompass large number of CSR ideas. The wider

the circle of concern gets the more inclusive the company's growth and more influential its efforts. I feel satisfied that Marico

is well on this journey with a firm belief in our Purpose Statement - Be More. Every Day.

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Building the CSR strategy, profitability and inclusive growth

- Shekar Viswanathan, Deputy Managing Director, and Asia Pacific Regional Officer, Toyota Kirloskar Motor Private Limited

In recent times, spurred by political developments, there has been intense debate within the corporate

sector on various aspects of Corporate Social Responsibility (CSR). Key questions that are being asked

and answered focus on how much spending should be undertaken, what projects would qualify, the

basis of selection of such projects, the long term resource planning for conceiving and executing such

projects, and finally of course the focus on corporate profitability as the means to promoting social

responsibility and inclusive growth.

The most popular interpretation of inclusive growth is often related to the overall prosperity of the vast

majority in the country and includes every person; whether he is skilled or not, educated or otherwise,

hardworking or lazy. The hardworking and prosperous are expected to share their hard earned gains with everybody else

who may or may not be as hardworking as they have been. However, the more practical approach to inclusive growth on the

part of a Corporate would be one that is limited in its sweep but certainly more focused in its effectiveness. Let us now look at

an example.

When a Corporate sets up shop by acquiring land for a mega project (say around 300 to 1,000 acres), it brings prosperity and

sometimes fortune to those who find employment at the Corporate- be it a petrochemical plant, an automobile plant, or a

steel plant. Many of them find their wages and economic standards of living going up dramatically as the Corporate

establishes itself in the market place. But it also brings with it the promise of contracts for infrastructure development,

employment, appreciation in property prices and better road connectivity; just to name an illustrative list of benefits that

accrue to the landscape and those who inhabit them. However, the key point to note is that many of them who were part of

the landscape before the mega project was established may find that their economic future has not brightened at all– the

villages that surround the project site continue to languish without sanitation, without electricity in many cases, no drinking

water supply, poor school facilities, and there is little chance for some of the many inhabitants to acquire any skills or be

gainfully employed.

Clearly a Corporate that has gone to a particular area has, in the broadest sense, brought prosperity to the region where it has

invested. Apart from the employees who gain through the growth of the company, those who live in nearby towns or in the

catchment area benefit through the increased economic activity that the project generates– scrap dealers thrive, downstream

units spring up, tea stalls mushroom, ATM centers come up, more auto rickshaws ply, the demand for reasonable

accommodation goes up along with rental incomes, the demand for quality eateries experiences a surge, and secondary and

tertiary employment opportunities go up. But for many this increased economic activity does not touch them at all for a

variety of reasons.

Therefore, in the ultimate analysis, the focus shifts inevitably to those who have been left behind in the prosperity

sweepstakes and it is with this group that the Corporate must focus their efforts on and engage effectively.

In the above scenario how should a Corporate fashion its CSR strategy? Should it become a cash dispensing unit for the local

population to celebrate village festivals, or should a more equitable method of spending corporate money be found?

Corporates often find that the expectations from the local community are ever increasing– that the appetite for corporate

largesse and freebies is insatiable.

Many Corporates have over the years established schools, colleges, technical training institutes, hospitals and similar

institutions, all of which are targeted at giving back some of their fortune to the deserving but less privileged sections of the

society. This inevitably begs the question as to how much should they give?

The latest Companies Bill states that “the Board of every company shall make every endeavor to ensure that the company

spends in every financial year at least 2 pct of the average net profits of the company made during the 3 immediately

preceding financial years in pursuance of its Corporate Social Responsibility policy.” This has been made applicable to all

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those companies who have a net worth in excess of Rs. 5 billion or a turnover in excess of 10 billion or a profit level of Rs.50

million or more in a financial year. So the question has already been answered by the intended passage of the Companies Bill

2011.

However, can a company that has started a programme of activities afford to stop, in part or whole, citing the lack of

profitability or the threat of continued losses a programme that is of immense economic value to the targeted recipients? For

example, having started a technical institute that will take in 100 students a year, can the company afford to skip the intake of

students in any particular year for want of profitability? Or can, for example, a company that regularly conducts a health

camp in nearby villages where over 10,000 people receive benefits such as free spectacles, dental attention etc., suddenly be

deprived of this only source of receiving medical attention?

Clearly no Corporate can, should, or will cut back on funds earmarked for the less privileged sections- particularly where the

activity has already commenced. Very often even if profitability is severely dented, or a company starts making losses; it has

the responsibility to continue its CSR activities– it is a fixed cost.

As part of its CSR strategy, should a company spend money on activities in areas where it is not present? For example, can a

company spend money on education facilities in Jharkhand while its operations are in generally prosperous Gurgaon? Or

would it be more appropriate for it to institute academic scholarships for the poor and needy throughout the state of Haryana

to enable children to attend school.

Clearly, the CSR strategy must be fashioned to target not only those who are in need of economic attention, but also those

who touch the spheres of economic activity the Corporate operates within. In this manner alone can we ensure that the

money is spent for the benefit of those for whom it is intended. Furthermore, such activity will then be valued by those who

receive its benefits. The establishment of a social contract between beneficiaries and benefactors is crucial if the goals of a

CSR policy and inclusive growth are to be achieved and the Corporate is to prosper.


As a member of the I shall facilitate the recognition and

appreciation of the broader role of the CFO and also provide practitioners' insights to the industry

at large.

I further affirm that I shall endeavor to champion the objectives of

within my internal and external stakeholders.

I will promote the foregoing values industry-wide and amongst my peer group through sharing

insights, best practices and knowledge sharing initiatives:

YES BANK - National CFO Forum

Sustainable Value Creation through

Transparency, Governance & CSR

1.

2.

3.

,

4.

select institutes like ICAI, Business

Schools etc.

CFO Conclaves

CFO Insights

quarterly contributory articles

CFO Value Chain

Regional Roundtables and mentorship platforms

CFO – Talent Management

A “By Invitation” only annual off-site event, which will be a platform for intense & practical

interaction and debate amongst CFOs, peer networks and International Experts to recognize

CFOs and their Industry Best Practices. It will also provide a peer level networking opportunity

to the CFO's teams – as a means to fast track his/ her development.

YES BANK – National CFO Forum will publish on pertinent

topics including macroeconomic indicators - global & domestic, regulatory changes, industry

best-practices, issues relating to Governance & CSR etc. This publication will be circulated /

made available to all member organizations, as well as the industry at large.

The YES BANK – CFO Value Chain will endeavor to develop and up-tier the SMEs in areas of

Finance & Accounting, adoption of best practices, being compliant to international norms &

standards etc. This will be achieved through

facilitated by select CFOs, as part of their industry leadership role.

The YES BANK – National CFO Forum will partner with

and provide inputs towards curriculum setting and training interventions in order

to prepare students for better careers.

Sustainable Value Creation through

Transparency, Governance & CSR

KNOWLEDGE

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SEVEN YEARS OFINSTITUTIONAL EXCELLENCE

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Since inception in 2004, YES BANK has created a new

paradigm in Indian Banking, through continuous Innovation

and Excellence. On our 7 Anniversary, as a full-service

commercial and retail Bank, we re-dedicate ourselves

towards delivering the Finest Banking Experience in India.

th

Volume 1 February 2012

Documents

Transcript of Volume 1 February 2012