InFINeeti Annual Issue | August 2013

InFINee� | Annual Issue | August 2013



D ear Friends,

Greetings from Team InFINeeti…

Financial markets have been tumultuous as the economy continues to experience financial hiccups and upheavals. After a ray of

hope for recovery, the ghost of the recent past has come back to haunt the markets. Besides Policy logjam, weak consumer & in-

vestor sentiment and stubborn inflation, the new pressure point that has emerged lately on the India's macroeconomic front is

volatility in the rupee against the dollar.

The highlight of the last quarter has been the downslide of rupee which has touched a new all-time low, this quarter. The rupee

seems to be hitting new troughs every week, while inflation gallops, the imports are becoming dearer and the oil bill getting inflat-

ed further, the balance of payment position more unstable than ever before. RBI is taking the stock of the situation as does the

central government to prevent these continual disorders before the new crises looms up. This does not bode well for the economy

in general and industrial output in particular.

Consequently, Gold is back in demand as falling rupee and melting equities leaving no place for investor to park their funds. Also,

the better-than-expected US economic data has led to hardening of US treasury yields and has also triggered fears of early with-

drawal of QE. Such a change in sentiment is adding further selling pressure on equities as an asset class thereby causing mayhem

in debt and currency markets, as these are ultimately weighing on equities.

Are emerging markets losing their luster? Will the rising level of NPAs severe threat to the banking sector in India? Is it the right

time to deregulate the fuel prices? These are some of the questions that the authors have tried to answer in this edition of the

magazine.

Many economists are equating the current situation with that in 1991. Though it would be an amplification of the situation, with

the rising external debt and falling reserves, the economy is heading in the similar direction thereby necessitating some urgent and

far-reaching actions.

Team InFINee had a candid talk with Mr. Prashant Joshi (Execuve Director, UBS Wealth Management- USA) who expressed their

views on the shi&ing trends & changing regulaons in the US Banking sector and the likely impact on the emerging markets.

Besides, the edition features regular columns like “FIN Trivia”, FIN-lingos, News chronicles and Market Pulse. Besides the regular

columns, this edition contains an in-depth analysis of the Jet-Etihad deal column containing some mind-boggling facts & figures.

We also take extreme pride and pleasure in announcing that IIFT has completed its 50 years of excellence in leadership in Interna-

tional Business and this year marks a special mention.

Happy Reading..!!

FROM THE EDITOR’S DESK 1


CONTENTS 2 CONTENTS 2

>>> Page 3 >>> Page 20 >>> Page 26

QE T��

Consequences for the emerging markets

3

B��

R�� :

S�� S��

The true story behind the US mess

7

NPA– T��

��

Causes | Impact | Rec-ommends

14

��

�� :

T�� M��

Will the emerging econo-mies be able to deliver

20

T��

Is it the right me to fully

deregulate the fuel pric-es

23

M��

�� -

��

Redefining the role of a regulator

26

COVER

STORY

EMBATTLED

RUPEE &

INDIA’S RISING

EXTERNAL DEBT

“Falling into a dark abyss!”

11

D�� A��: J��-

E��

An in-depth analysis of the proposed and the revised version of the stake sale by Jet airways

30

C��

Summer internship experi-ence in investment bank

41

F T��

N�� 45

F �� 47

H��

Candid chat with Mr. Prashant Joshi (Execuve

43

48

M�� P��

Sector-wise performance & Ni�y movement analy-

sis

33

F� �� 50

Regulars

E)��

Expert analysis of why banking sector will be the forerunner in next bull run

38


3

INTRODUCTION

R aising of interest rates a�er periods of loose monetary

policy by the Fed contributed majorly to the La�n

American debt crisis in the 1980s as well as the Southeast Asian

crisis in the 1990s. In both cases, higher interest rates in the US

caused investors to quickly pull out funds which were earlier flowing

into these emerging countries and this caused sudden deprecia�on

of their local currencies- the shock was too much for these fragile

economies which faced many problems including difficulty in repay-

ment of debt and reduced growth because of lower liquidity. Rise of

interest rates was more of a trigger than the cause of these crises

and the actual cause points more towards the unsustainable debt

levels these countries had, when investments came their way. In the

present scenario when the emerging economies and structurally

stronger, a crisis may not ensue; but careful monitoring of QE un-

winding will have to be done and ac�ons taken on the monetary

front in par�cular, to ensure that infla�on is in control and growth is

not affected.

The following diagram illustrates the hike of interest rates star�ng in

1979 which triggered the La�n American crisis in the early 80s and

the rise in interest rates in the mid-90s, triggering the Southeast

Asian crisis from 1997:

QE’s purpose was to ar�ficially increase the demand for low-risk US

assets and thus bring down their yields, thus forcing investors into

riskier assets that drive US growth. However a large amount of capi-

tal has flown into emerging markets as well. Thus, when QE is with-

drawn, the ar�ficial demand for low-risk assets is reduced and thus

their yields rise, promp�ng investors across the world to invest in

the safe US sovereign bonds in par�cular and this results in capital

ou,lows par�cularly those of FIIs from the rest of the world. This in

turn has several consequences that affect exchange rates, capital

markets, infla�on etc. in these countries. Emerging economies, the

QE TAPERING CONSEQUENCES FOR EMERGING MARKETS

- Sarah K All & Srimaitri Yalamarthi

Symbiosis Institute of Business Management, Pune

Q uan�ta�ve Easing (QE), the unconven�onal monetary policy that the Federal Reserve (Fed) adopted a�er the sub-prime crisis to

inject liquidity has reached the �pping point and the Fed Chairman Ben Bernanke’s recent comments suggest slow withdrawal

of QE by reducing the present 85 billion $ per month asset purchases- provided the US economy recovers sa�sfactorily

(unemployment 6.5% and infla�on 2%), and this according to him could be as early as mid- 2014. A policy meant for the welfare

of US ci�zens, ironically has more implica�ons for the world as a whole than the US alone, thanks to the huge size of the US economy as well as

the enormous magnitude of the programme. The Fed announcement triggered sell-offs in most markets across the world and its long term

implica�ons are not yet clear.

Withdrawal of QE is inevitable considering the probability of asset bubbles being created, and �ming is the crucial aspect- if the process is too

sudden, it may affect growth of not just US, but also other countries and leaders of the delicate emerging market economies in par�cular

should be aware of the dangers arising out of it.


4

largest of which are the BRICS and Mexico, Indonesia Turkey etc.

have done poorly since 2009 while the rest of world has recovered

quicker. These countries are all capital thirsty and thus the with-

drawal of capital may further affect their growth figures.

The following chart shows the reduc�on in emerging market GDP

growth (at PPP) reducing, compared to the world:

EFFECTS ON THE FINANCIAL SECTOR

A�er the May 22 and June 19 indica�ons of QE withdrawal by the

Fed, US bond yields spiked and thus capital flew from the riskier

emerging economies to the safer US assets. This resulted in their

currency deprecia�on and speculators would expect the deprecia-

�on in countries with high CAD to be more severe, sold them off at

much larger amounts. The following diagram shows the worst

affected currencies and as expected, all of them have current ac-

count deficits. Other factors such as external debt as well as support

from the central banks also affect the deprecia�on and hence the

amount of deprecia�on is not exactly propor�onal to the current

account deficits.

The following figure shows the gross external debt of emerging

economies. High external debt indicates low repayment capacity if

the currency depreciates and hence speculators tend to sell-off the-

se currencies resul�ng in a self-fulfilling prophecy. The danger is

acute when high a high CAD economy has high external debt:

The following diagram shows how the 10 year bond yields have

risen a�er the June 19 announcement and due to RBI steps taken

a�erwards. Similar pa;erns can be observed in almost all emerging

economies.:

India in par�cular faces the threat of infla�on as a depreciated ru-

pee implies costlier oil imports (which have inelas�c demand) which

are either passed on to the customers- resul�ng in cost infla�on, or

subsidised by the government which fuels a higher fiscal deficit

which may be mone�sed and hence cause infla�on. Apart from the

usual nega�ves, high infla�on causes a further deprecia�on of the

rupee and thus fuels a cycle of deprecia�on. Separately, the wors-

ened current account deficit due to oil imports will also cause depre-

Source : Economist.com


5

cia�on unless enough capital flows in from abroad, since the RBI

does not have enough reserves (around 300 billion $) to support the

rupee. RBI has thus taken steps to increase interest rates to a;ract

capital flows, in spite of poor growth figures. It may be noted that

infla�on due to oil imports has a �me lag and the effects are not

evident yet, since most oil is purchased in the futures market usually

with 3-month contracts.

The following flowchart illustrates the deprecia�on cycle, applicable

especially for India:

Oil imports are inelas�c and this is the reason the CAD worsens

when oil prices go up, while IT exports have not shown a tendency

to increase much. Thus having inelas�c imports and exports worsens

the situa�on since it further deteriorates the CAD when there has

been some deprecia�on.

The stock markets have not been affected to the same extent as the

bond markets. This may be since the stocks are not �me-bound

investments and hence their pricing is not affected as much as

bonds, which may pay regular coupons and may have short maturity

and thus a depreciated rupee affects dollar returns of FIIs greatly.

There was vola�lity however especially a�er the May 22 announce-

ment and also on June 19 when there was a steep fall, but there has

since been a recovery.

Thus the main effects of QE withdrawal are thus:

▪ Asset sell offs

▪ Deprecia�on of currency

▪ Higher interest rates

And the most affected countries have:

▪ High CAD

▪ High foreign debt

▪ High FII inflows during QE and low capital controls

▪ Low forex reserves

▪ Inelas�c imports and exports

EFFECTS ON THE REAL SECTOR

The impact of QE withdrawal on the real sector is of more concern

to these countries and even short-term effects are important as

Keynes once said- “In the long run, we are all dead”. However the

effects cannot be no�ced instantly and the impact is not as clear as

that on the financial markets. The effects of the May and June an-

nouncements are also not clear as of now. However, qualita�ve

es�mates of possible future effects can be made.

There are several factors (from the corporate and government point

of view) which determine the impact on the real sector and depend-

ence on foreign capital is the most important factor. Countries

which depend greatly on foreign capital- as FDI or as foreign debt,

may find raising capital more difficult in the future and this may

affect their investments and thus their GDP. Another important

factor is the sensi�vity of the economy to interest rates. Highly in-

terest-rate sensi�ve sectors such as manufacturing are bound to

suffer and thus economies dependent on manufacturing, retail etc.

will face trouble. Fiscally strong economies may be able to over-

come these difficul�es by being more spendthri� and suppor�ng

growth. Countries with fiscal deficit may choose to borrow from the

central banks (instead of prin�ng) and thus results in crowding out.

Countries with high fiscal deficit are thus more prone to a lower GDP

growth.

The most affected countries thus have:

▪ High dependence on foreign capital

▪ Dependence on interest rate sensi�ve sectors

▪ High fiscal deficit

Source : FT.com / Emerging Market Deficits diagram


6

CONCLUSION

Emerging economies would do well to an�cipate the effects of QE

withdrawal and the economies most prone to it should be alert. This

will help reduce the impact to the short-term and not affect these

economies’ growth. India for instance has taken several steps in

June and July- it has tried to address the CAD by puBng restric�ons

on gold imports and the finance ministry has been trying to a;ract

foreign investors to manage the rupee fall and avoid the deadly

deprecia�on cycle illustrated earlier. The RBI has taken steps to

increase the interest rates (in par�cular the overnight lending rates)

indirectly by reducing inter-bank liquidity, to support the rupee and

to control infla�on. Another effec�ve step by the RBI was the short-

term ban on proprietary trading by banks which caused specula�ve

investors to sell rupees. One important step that India can take to

make the financial markets more robust is to make Indian ci�zens

more aware of investment and thus reduce the effect of Ins�tu�on-

al capital inflows and ou,lows.

It must be kept in mind that the withdrawal of QE is not all bad news

for these economies. Firstly, it is a signal that the US growth is finally

back on track and a number of these countries depend on the US for

exports as well as employment. Secondly, cheaper commodity pric-

es can be expected if these countries manage to control their cur-

rency deprecia�on, since dollar price of commodi�es including oil

will decrease. Thirdly, the currency and asset markets in these econ-

omies will be more stable a�er QE- high vola�lity was present dur-

ing QE due to high liquidity. And finally, shocks like the one on June

19 may not repeat as QE withdrawal has been mostly factored in by

global investors.


7

“ US is healing... if the Fed doesn't screw it up”, the buzz line

is in the news all over, and the ques�on arises, is there any-

thing le� to screw up, that the media is s�ll hoping them

not to screw it up. Absurd statement but that is the truth.

Fed Chairman Ben Bernanke, God of the Modern World, one state-

ment on an issue and markets all around the globe react. His stances

in recent �mes, which is challengeable and the same shall form the

crux of this ar�cle, being that ‘quan�ta�ve easing shall have to con-

�nue un�l some�me now’. Obviously, a�er making a withdrawal

statement in June, the reasons for reversal had to be issued, and

that was, the dual mandate needs to be met, unemployment and

infla�on, was this not known before?

Both the mandates men�oned for con�nuing easing for a probable

be;er present but surely an unfit future are vague and in the air.

Unemployment is not high, its skyrocket and infla�on is not low, it is

already over the roof so, what mandates are we talking of?

Our god says, infla�on in the United States needs to be higher. This

seems to be an event of purposely hur�ng the middle class, which

has been the game since Globaliza�on in 1980’s. The official infla�on

rate in the United States is siBng at about 1% and yes, if that is what

actually exists, then what Bernanke insists that such a low rate of

infla�on is not good for the economy certainly makes sense. Howev-

er, what will never be admi;ed is that the official infla�on rate is a

counterfeit. The way infla�on is calculated in America has changed

more than 20 �mes since 1980’s. If we calculate the way infla�on

was calculated back in 1980, it would be a stunning 8%. However,

carefree people, who have many other things to worry about, do not

happen to no�ce and the claim that infla�on is "too low" sustains.

Many of them know that infla�on is out of control and that, they are

spending a lot more on things they buy on a regular basis than they

used to. For example, when Obama entered the House, price of a

gallon of gasoline was $1.84 and today the price has nearly doubled.

This is the case with gasoline and therefore we can imagine the im-

pact on other commodi�es, as this carries a direct influence on al-

most everything that we buy.

BREADWINNER & RISING PRICES STORY OF THE STATES

- Prakarsh Jain S P Jain School of Global Management, Singapore


8

That might look like a one of example and therefore let us consider

some others. Electricity bills have risen faster than the rate of infla-

�on claimed for five years in a row, and as USA Today men�ons,

water bills have tripled over the past decade.

LOW INFLATION, EXCUSE ME?

Take another example, health insurance. In the era of post crisis,

health insurance premiums have risen at an average of between 8

and 9%.

Where is this low infla�on found? Consider college tui�on fees.

Since the 1980’s, cost of tui�on fees in the States has risen by 498%.

The above might sound some big-�cket items and therefore let’s

consider the supermarket. Individuals who shop for groceries on a

regular basis actually would know this.

Benny Johnson in The Blaze details out how the prices of many of

the things that are bought on regular basis have soared between

2002 and 2012. Eggs: 73%, Coffee: 90%, Milk: 26%, White Bread:

39%, SpagheB: 44%, Orange Juice: 46%, Red Delicious Apples: 43%,

Beer: 25%, Wine: 60%, Margarine: 143%, Turkey: 56%, Ground Beef:

61%

MOREOVER, WE ARE TALKING THAT INFLATION IS LOW

Let’s now have a quick look at a graphical representa�on of what

has the policies led out by god of modern world done to the prices

of commodi�es:

Source : USA Today


9

Considering the whole of infla�on, pay checks are not rising at the

pace that infla�on is, not even near to that rate. In fact, the house-

hold income in the States has fallen for four years in a row. There-

fore, the cost of living just keeps rising and in consequence, the

middle class inflow has not shi�ed or has shi�ed downward.

The only and only big reason for this is the quality of jobs. Only 47%

of adults in US have a full-�me job and 53% of the workers make

less than $30,000 per annum.

What is god thinking; is he planning to increase the pay checks of

workers, in order to make up for the "infla�on tax" that shall be and

is being imposed?

Apparently, the number of individuals losing their jobs is star�ng to

move upward again and is geBng close to 400,000 mark. Since the

act of globaliza�on, the American middle class is shrinking each

passing day and Ben seems clueless.

A;emp�ng to find a job today has been an incredibly frustra�ng

experience. Most of the jobs across pay very li;le, and the intense

compe��on for just about any job that is open kills the whole sense

of availability. Things were surely not this in the past.

For example, in current economic environment, when McDonalds

conducted a hiring event, the same resulted in a million job applica-

�ons and only a small percentage were actually hired. An apparent

observa�on in recent years has been an explosion in the number of

"temp workers”. To surprise, this phenomenon has also been ob-

served at large companies and sadly, those that work in the "temp

industry" o�en happen to work in deplorable condi�ons for li;le

pay. This is one of the elemental reasons, why the middle class is

shrinking.

It is impossible to support a family on this job pay, but to no sur-

prise, the economy is producing only of this instead of the high qual-

ity full-�me jobs.

Some addional signs, which indicate that quality of jobs, are de-

clivitous:

▪ Even though the economy has created nearly 200 thousand

jobs in June, the number of full-�me jobs has actually de-

creased.

▪ There are approximately 3 million “temp workers” a new all-

�me high.

▪ 1 out of 10 jobs are now filled through a temp agency.

▪ 76% of the popula�on is living on pay check to pay check.

▪ 1 out of 4 workers, has a job that pays $10 or less an hour.

▪ America actually has a higher percentage of workers doing

low wage work compared to any other industrialized na�on.

▪ Currently only 24.6% of jobs available in the States qualify

as "good jobs"

There was a �me when just about any adult who was willing to work

hard could go out and find a good paying job and which would sup-

port a good middle class lifestyle. Nevertheless, those days seem to

have gone forever. As the number of good jobs decrease, the num-

ber of people who can take care of family without government assis-

tance con�nues to explode.

In addi�on, thanks to the governments for crea�ng the environ-

ment, which is incredibly, toxic for small businesses, and which

could have acted as a breadwinner. In fact, today the percentage of

self-employed workers is at an all-�me record low.


10

Taking all this into circumstance too, America unfortunately con�n-

ues to outsource thousands if not millions of good jobs overseas,

and government con�nues to pursue laws, which is making the busi-

ness environment virulent.

The answer God would give us for every economic problem as al-

ways shall involve prin�ng of money. Gratefully, the trillion dollars

of money that has been squirrelled away at the Fed remains there

un�l today. Nevertheless, the day is not far when this money will be

loosed up in the economy, and that will create stul�fying infla�on.

Regre;ably, Ben does not seem to be concerned about the muckle

of currency that is posi�oned at Fed. The happy moments for him

are that his reckless prin�ng has helped the stock market to new

highs.

Fixing of this system, which is so mingled, shall not be an easy task.

US ship is in the middle of the ocean, and its motor system has been

damaged. The next wave of collapse is rapidly approaching, and this

one is going to be a lot more painful than ever.

God of modern �mes should enjoy his li;le period of euphoria le�

because when this bubble bursts and as all false financial bubbles

eventually do, the foolishness of Bernanke will be glaringly apparent

to everyone.

Source : adamsviewimaging.blogspot.com (US Federal Reserve)

COVER STORY 11

- Avinash Kumar

Indian Institute of Foreign Trade, Kolkata

COVER STORY 12

R upee collapsed from Rs 39 for a dollar on Jan’

2008 to 61 for a dollar on Jul’ 2013. Since Jun’

2013, it seems that Rupee is on downslide journey on every subse-

quent day touching its new low. Between May and July 2013, rupee

depreciated by approximately 5 % from 55.6 for a dollar to 61 for a

dollar. Vola�lity in currency is a sign of weak economy. It eroded the

confidence of Foreign Investors making them withdraw their money

from the Indian market or hold their investment projects in India. In

the past few weeks, foreign ins�tu�onal investors (FIIs) has sold

their stakes in the Indian equity market and withdrawn billions of

dollars, thereby compounding the rupee’s woes.

Fig. 1 Deprecia�on of Rupee against USD in last 2 months

USA economy is slowly and steadily recovering from the recessions

since Obama administra�on took office. US Federal Reserve’s quan-

�ta�ve easing policy has also helped in the apprecia�on of the US

dollar. Thus the currencies of all the emerging markets like Indone-

sia, Brazil, Thailand, India has depreciated. But the rate of deprecia-

�on for the Indian Rupee is spectacular.

There are several reasons responsible for the downslide of rupee,

some of them are:

▪ India’s rising external debt: India’s external debt has risen

to $ 390 billions in 2012 from $ 112 billions in 2004, a whop-

ping 350% rise. Our external debt has increased by $ 45

billions last year

▪ Persistent infla�on: Infla�on in India is hovering between

7% to 8 % much above compared to that of developed na-

�ons (<2%). Reserve Bank of India took several monetary

measures to contain it, but it couldn’t be brought down

below 7 %. Persistent infla�on reduces purchasing power of

a common man, reducing demand in the market

Fig.2 Deprecia�on of Rupee against USD since Jan’ 2008

Source: rbi.org.in

▪ Slowing Economy: GDP growth rate has been reduced to 4.8

% in the last quarter. Growth and rupee’s value go together.

A growing economy would export more, create posi�ve

expecta�on, a;ract foreign investor a;en�on, draw in more

FDI and FII and finally strengthen the rupee.

▪ Rising Current Account Deficit: Voicing concern over high

Current Account Deficit, Reserve Bank Governor D Subbarao

today said: "Current Account Deficit a year before last year

was 4.2 per cent, last year it was 4.8 per cent. It is a ma;er

of concern... We should be working towards reducing the

Current Account Deficit to sustainable levels to 2.5 percent”.

Our current account deficit needs to contain within a limit.

We need to restrict our gold imports.

▪ Uncontained Fiscal Deficit: Current Fiscal Deficit stood at

4.89% of GDP. Fiscal deficit leads to excessive government

borrowing, rise in infla�on, greater import leading to widen-

ing of Current Account Deficit.


COVER STORY 13

▪ Weakness in domes�c equi�es: The vola�lity in the ex-

changes has triggered a panic leading to selloff by foreign

ins�tu�onal investors, causing further vola�lity of rupee

Fig. 3 Infla�on (WPI)

Source: LOK SABHA SECRETARIAT

RISING EXTERNAL DEBT

F oreign debt is a necessary evil that is needed by de-

veloping countries to sustain GDP growth rate, devel-

op infrastructure etc. Usually such addi�on of infra-

structure results in long term asset building that adds to improved

produc�vity of the na�on. However in India's case the rise of exter-

nal debt has been primarily to fund the current account deficits

catering largely to the working capital needs and funded through

the short term loan at higher interest rates. This short term debt is

also responsible to the vola�lity of rupee.

By 2009 the short term borrowings was around 17.2 percent and by

March 2013 the short term external debt rose to a whopping 33.1

percent of the Forex reserves. And Forex reserves have fallen to $

292.65 billion.

Repayment of short term debts would cause large ou,low of dollars

and put pressure on the currency intermi;ently. For example during

May 22 and June 19 there was a net debt ou,low of $4.7 billion,

At end

March

External Debt

( $ billion)

External

Debt to

GDP

Foreign Exchange Re-

serves to Total External

Debt

Short term to Foreign

Exchange Reserves

Short Term to

Total External

Debt

2004-05 112.4 17.3 101.7 3.9 3.97

2005-06 139.1 16.8 109.0 12.9 14.0

2006-07 172.4 17.5 115.6 14.1 16.3

2007-08 224.4 18.0 138.0 14.8 20.4

2008-09 260.9 18.3 106.8 18.8 20.0

2009-10 305.9 17.8 99.6 21.3 21.2

2010-11 305.9 17.8 99.6 21.3 21.2

2011-12 345.8 20.0 85.1 26.6 22.6

2012-13 390.1 21.9 74.9 33.1 24.8

Fig.4 India’s rising external debt Source: Ministry of Finance


14

INTRODUCTION

F or any country to prosper, to grow and being stabilized,

needs to have a sound financial system. Whenever a

financial system has crashed it has taken the economy to

the deepest of crisis.

US subprime crisis (2008) which started with the financial system

crash bringing down the major banks such as Lehman Brothers, Bear

Stearns, Merrill Lynch, overall impac�ng the US economy to an ex-

tent that the whole world is s�ll struggling to come out of it.

Financial system comprises of banks, insurance, Non-banking finan-

cial companies, mutual funds, hedge funds, ins�tu�ons, markets etc.

In India, banks form 60% of the en�re financial sector. Other seg-

ments such as capital markets, bond markets are not developed

unlike United States, United Kingdom. Therefore Indian economy is

highly dependent on the performance and efficiency of banks in

par�cular.

NON-PERFORMING ASSETS

If we look at the present scenario, the core of financial problems of

the bank is formed by NPAs. Any loan or advance is considered as

non-performing asset (NPA) if:

▪ The interest or instalment of principal of a term loan re-

mains overdue for a period of more than 90 days

NPA - THREAT TO BANK-ING SYSTEM

CAUSES | IMPACTS | MEASURES

- Deepak Bedi & Nimisha Jain Great Lakes Institute of Management , Chennai

T he lesson of history is that you do not get a sustained eco-

nomic recovery as long as the financial system is in crisis

-- Ben Bernanke


15

▪ In case of overdra�/cash credit account, the account re-

mains ‘out of order’ for more than 90 days

▪ In case the loan/advance is granted for agricultural purpose,

interest or principal payment is overdue for 2 harvest sea-

sons or two and a half years whichever is lower

In layman’s language, NPA represents the bad loans and advances

where the borrowers were incapable of mee�ng the repayment

obliga�ons .

GROSS NPA

Gross NPA is an advance which is considered irrecoverable, for bank

has made provisions, and which is s�ll held in banks’ books of ac-

counts.

NET NPA

Net NPA is obtained by deduc�ng items like interest due but not

recovered, part payment received and kept in suspense account

from Gross NPA.

CLASSIFICATION OF NPA

▪ Standard Assets: A standard asset is a performing asset.

Such assets carry a normal risk and are not NPA in the real

sense.

▪ Sub-Standard Assets: All those assets (loans and advances)

which are considered as non-performing for a period of 12

months are called as Sub-Standard assets.

▪ Doub�ul Assets: All those assets which are considered as

non-performing for period of more than 12 months are

called as Doub,ul Assets.

▪ Loss Assets: All those assets which cannot be recovered are

called as Loss Assets.

A�er this the assets are handed over to recovery agents for sale.

NPA - CRITICAL ASPECT OF INDIAN BANKING SYSTEM

The level of NPA act as an indicator showing the bankers credit risks

and efficiency of alloca�on of resource

In India, 75% - 86% of total income of banks are interest income

driven and remaining are fee based. Therefore Net Interest Margin

(NIM) is higher which is good if we think from the earning point of

view but at the same �me, banks are taking high chances when it

comes to risk and high probability of defaults by borrowers. Since it

is in-build in our system therefore managing NPA is a cri�cal aspect

for banks.

If the banks invest more in safer instruments and fetch lesser re-

turns, the chances of default decrease and at the same �me the

returns fetched in both the cases are nearly same as provisions and

wri�ng off bad debts in case of loans bringing down overall returns.

According to the RBI, "Reduc�on of NPAs in the Indian banking sec-

tor should be treated as a na�onal priority item to make the system

stronger, resilient and geared to meet the challenges of globaliza-

�on."

Banking Sector Expanded—Handbook of Sta�s�cs


16

CAUSES OF NPA

Till 1991, Asset quality was not the prime concern for the Indian

Banking industry.

A�er 1993, when RBI issued guidelines, NPA was started being

looked as the Na�onal Priority in the banking domain. Some of the

key reasons for the NPA can be a;ributed to:

1. Direct Loan System: Under this lending policy, the commer-

cial banks are required to lend 40% of their credit to ‘priority

sectors’.

2. In case of ‘micro sector’ businesses, if some of their units

become sick and weak, it becomes difficult to recover loans.

3. Money granted under poverty eleva�on these schemes was

not recovered due to poli�cal manipula�on, misuse of funds

and non-reliability of target audience of these sec�ons.


17

4. Poor communica�on to the borrowers regarding their repay-

ment schedule and consequences.

5. Weak credit appraisal system.

6. Legal impediments that make the asset disposal process

complex and �me consuming.

IMPACT OF NPA

Return on assets is the major criteria considered to know the well-

being of a bank. Banks do not get interest generated from NPA but

have to make provisions for the same from the current profits.

If the level of NPA is not curtailed �mely it may lead to:

1. Rise in the cost of capital.


18

2. Widening of the Asset-Liability mismatch.

3. Reduc�on in the earning capacity and ROI.

4. Larger provision for the NPAs and lesser capital adequacy

and profitability.

5. Deteriora�on of economic value added (EVA) because

EVA=Net Opera�ng Profit – Cost of Capital

MEASURES

Preven�ve:

Credit Assessment and Risk Management Mechanism: This should

be in place to check the disbursement of loans, asset quality and

poten�al danger of addi�on to the NPAs stock.

Organiza�onal restructuring: Improvement in the managerial effi-

ciency, skill up grada�on for proper assessment of credit worthiness

and a change in the aBtude of the banks towards legal ac�on, is

necessary.

Reduced Dependence on Interest: Banks should aim at income from

Fee based sources rather than Interest based. The banker can earn

sufficient net margin by inves�ng in safer securi�es though not at

high rate of interest.

Criterion for Gran�ng a Loan

Small Medium Enterprises

1. Experience

▪ If a person is working and then wishes to start a

business:

i. If experience > 5 years, he is less likely to

default – Can Lend.

ii. Check for a stake holder in the business who

was from the same line of business as the

venture.

▪ Person closing one business and opening another

may be the case that he defaulted on creditors –

Don’t Lend.

▪ Make young entrepreneurs aware of the CIBIL.

2. Succession Plan

▪ If the promoter is aged and has his son/daughter

involved in the business – Can Lend otherwise Don’t.

3. Team vs. Individual

▪ If the business is run by a team – Can Lend.

4. Technology used in the Business

▪ If customer is selling B to C, it must have online pres-

ence.

▪ Manufacturing companies should have energy effi-

cient measures.

▪ Check if systems like ERP are in place.

5. Past Track Record

▪ Should be posi�ve.

6. Cri�cal Dependence on Business

▪ If the promoter’s only survival source is the exis�ng

business – Can Lend.

7. Auditor

▪ If the audi�ng firm which carried out audi�ng is well

established firm then – Can Lend.

8. Ra�ng

▪ Check if the company’s ra�ng is good or bad.

If out of these 8 points, a SME is valid in 4 points we can lend them

money to the tune of say 1-2crore.

Mid Corporate

Apart from the above men�oned 8 points as SME loan criterion, Mid

Cap corporates should be checked on addi�onal points:

1. HR System should be present in the organiza�on

2. Check if the business is rela�onship driven or efficiency driv-

en. If later is the case – Can Lend.

3. Corporate governance should be strong/high.

Large Corporates

Apart from the above men�oned points for both SME and Mid Cor-

porates, following criterion should be looked into:


19

1. Ins�tu�onal holding

2. Market borrowing capacity

Cura�ve:

1. One Time Se$lement Schemes: As per the OTS scheme, for

NPAs up to Rs. 10crores, the minimum amount that should

be recovered should be 100% of the outstanding balance in

the account.

2. Lok Adalats: It help banks to se;le disputes involving ac-

count in “doub,ul” and “loss” category, with outstanding

balance of Rs. 5 lakh for compromise se;lement.

3. Debt Recovery Tribunals (DRTs): These are the appellate

authority for appeals filed against the proceedings ini�ated

by secured creditors.

4. Corporate Debt Restructuring (CDR): This framework aims

at minimizing the losses to the creditors and other stake-

holders through an orderly and coordinated restructuring

programme.

CONCLUSION:

The problems of NPA can be resolved if banks prudently follow few

measures such as credit assessment of the borrower before making

an investment, Recovery performance is be;er with respect to indi-

vidual small borrowers but it is slow in case of corpora�ons and

ins�tu�onal borrowers.

Therefore banks can follow the criterion for deciding the credit wor-

thiness of the loan taker. PSBs can reduce their NPAs by providing

higher provisions for the NPA as well as being more systema�c in

the opera�ons.

CDR- corporate debt restructuring as discussed in earlier paragraphs

is in a nascent stage. It will change the scenario dras�cally if proper-

ly implemented and executed.


20

THE STORY SO FAR

“ When a champion sprinter falls short of his best speeds, it

takes a while to determine whether he is temporarily on

poor form or has permanently lost his edge.”

The same is true with emerging markets, the world economy’s 21st-

century sprinters.

In 2003, Goldman Sachs report "Dreaming with BRIC's" predicted

that BRIC economies will account for over half the size of G6 coun-

tries by 2025 and will emerge as a major force in the world economy

by 2050. The prime reason cited for such op�mis�c forecast was

that the developing na�ons have less capital per worker than devel-

oped economy yielding higher returns. They were also expected to

grow richer on the back of apprecia�ng currency which was sup-

posed to be way below PPP rates. There was accelera�on in growth

during 2003–07 in emerging market, even as growth in advanced

economies weakened. This s�mulated a vigorous debate on wheth-

er emerging market and developing economies had decoupled from

the advanced economies. The debate was soon silenced by the glob-

al meltdown that emanated from the US and Europe. This slum pun-

ished the developed na�ons but the emerging markets were not

isolated either. But they quickly bounced back, and during 2010–11

many of them grew at or above pre-crisis rates.

Emerging-markets stocks, foreign exchange and credit returned

19%, 6.8% and 11%, respec�vely, from 2003 to 2010, compared

with a 4.1% return for the Standard & Poor's 500-stock index, ac-

LOSING LUSTRE OF

EMERGING MARKETS

TRUTH OR MYTH ?

- Abhishek Singh & Vipul Arun

Indian Institute of Management, Rohtak



21

cording to Goldman Sachs.

Later as U.S market started to recover and talk of cuBng back Quan-

�ta�ve Easing, clubbed with weakness in commodity prices and

increased poli�cal risks made emerging Na�ons not so a;rac�ve

des�na�on as before. In fact these Emerging markets soon emerged

to be the ugly ducklings of financial world. Their currency plummet-

ed to historical lows as investors withdrew their money from their

markets. Economies are now struggling with high infla�on, currency

deprecia�on, slowing GDP growth and increasing deficits. Cynics

believed the problem in emerging economies is not only cyclical but

more worrisome structural ones too.

FAIRYTALE FOR THE EMERGING MARKETS IS OVER

For almost a decade, emerging markets were quite the flavour of

the season, and held out the promise of higher growth and superior

returns on investments. Slower economic growth in emerging-

market countries forms the backdrop to rising popular discontent. A

handful of experts believed that although emerging markets profit-

ed from the favourable external environment in the early phase of

their growth cycle but they failed to make the most of the window

of opportunity afforded them. Structural reforms which were the

need of the hour, if implemented, would have set the ladder for

these economies on the path to higher growth but instead they

celebrated too soon to squander the advantage.

This period cannot be called just a momentary growth slowdown as

a graver problem lies ahead of them which might hinder the sus-

tained, meteoric growth in emerging markets.

The growth drivers which were supposed to be aid to these markets

in the past few decades like the arbitrage of low-cost labour, op�-

mal popula�on profile, the advantages of supply chain globalisa�on,

are no longer valid. The rise of automa�on calls back for the cheap

labour advantage these countries previously banked upon.

Strong US economy which acted as a centre for demand for these

emerging markets can come forward as a compe�tor for emerging

markets posing further threat to the already shaking growth rate.

The loosing lustre of emerging markets has more to do with high

expecta�ons than with high vola�lity. Emerging markets equi�es are

one of the most vola�le asset classes, but investors have been will-

ing to afford the risk with an incen�ve for higher returns. Their low

correla�on to US equi�es, in the past made them a;rac�ve choice

for por,olio diversifica�on. But with the emerging markets moving

onto centre stage and their leading companies matching up with

their counterparts in developed na�ons, that configura�on of risk,

return and correla�on may be changing structurally. More stability

might push these markets back, down the risk fron�er (i.e. becom-

ing less risky), thus lowering the probability for outperformance.

Un�l emerging markets are able to convince ba;le-scarred investors

that they can put together a broad-based long-term recovery, inves-

tors are likely to be dubious about their prospects.

STORY IS NOT OVER YET: THE BOUNCE BACK

On the other hand some economists believed that this �me a broad

emerging-market bust looks unlikely. China, for instance is in the

midst of a precarious shi� from investment-led growth model to a



22

more balanced, consump�on-based model. Though its investment

surge has prompted plenty of bad debt, but the central government

has the fiscal strength not only to absorb losses but to s�mulate the

economy if necessary. That is a luxury emerging economies did not

had in the past but the risk appe�te has come a long way since then.

It makes disaster much less likely. There

seems to be low probability for the monetary

condi�ons to �ghten suddenly. Even if they do

so, the emerging markets have be;er defenc-

es than ever before, with flexible exchange

rates, substan�al volume of foreign-exchange

reserves and rela�vely less debt. The stra�fica�on of the growing

consumer classes in these markets are welcoming millions of new

middle class households which is supposed to grow each passing

year. Poli�cal risk is s�ll a factor that lies in the deep roots of these

countries. But it’s not as big a problem as it was in the days of the

La�n American debt crises of the early 1980s or Russia’s default on

its sovereign debt in 1998 or Indian crisis in early 90’s which led to

liberalisa�on of Indian economy. Also the companies in the emerg-

ing markets are less mature than in the developed world and with

more new enterprises surfacing up, there is a percep�on among

investors that there is significant poten�al for them to make profits

during the exponen�al growth phase of these companies. The ever

increasing demand for commodi�es is yet another reason emerging

markets to perform well. This year will be the first in which emerg-

ing markets will account for more than half of the world’s GDP on

the basis of purchasing power as per IMF. Since much of the world's

output of commodi�es is in emerging markets, so the strong de-

mand will eventually leads to higher profits. As Chinese market re-

covers through its restructuring, economies of closely linked coun-

tries like Brazil and Russia will be revitalized accordingly. Improve-

ments have already started to reflect in financial reports, achieved

through growth in earnings and reduc�on in debt. The modernisa-

�on of the regulatory environment with improved corporate gov-

ernance and greater liquidity is also being experi-

enced by these countries. The reasonable level of

debts, controlled infla�on signals towards a be;er

future for these economies. The current problems in

emerging markets could be more of cyclical in na-

ture and on the structural side. These emerging mar-

kets have grown with strong fundamentals which accounts for good

�mes in the past, such as strong demographics, opportunity for

rapid GDP growth and harnessing of untapped resources. Moreover

the QE (Quan�ta�ve Easing) tapering seems improbable in the near

future. As far as vola�le currency in the emerging economies is con-

cerned, they have always been viewed vola�le by investors especial-

ly in South East Asian countries. Investors have always hedged

against prevailing currency risk in these economies so currency vola-

�lity should not be much of a concern.

CONCLUSION: ONLY TIME WILL TELL

The present scenario indicates no doubt on the fundamental flaws

which exist in emerging economies to varying degree. The emerging

markets had it easy during the past decade to fuel their growths

with easy money but with the change in the domes�c and the global

market, only the countries with strong fundamentals will be able to

deliver on their promise. Countries whose growth is driven more by

domes�c consump�on than exports will be less prone to global

shocks and their growth model will be self sustainable and less de-

pendent on others. Globally, inferior growth could focus leaders on

amplified co-opera�on and a new thrust for liberalisa�on. However

the affluent world is more vigilant about globalisa�on than it was a

decade back, and more concerned in retaining its export compe�-

�veness. The current propaga�on of regional trade agreements

could gesture a move towards frac�onalisa�on of the world econo-

my. Sluggish growth in the BRICs could lead to the sort of inner ten-

sions that Na�ons can relocate by picking external fights. Whether

or not the world can construct on a outstanding era of growth will

rely in large part on whether the new giants tread a path towards

superior global co-opera�on—or trip, drop and, in the worst case,

clash.


23

DEREGULATION: A RETROSPECTION

S ince independence, the Indian government, in view

of the poor economic health of the country, has im-

posed a myriad of regula�ons on various sectors in the industry. The

one which has gained increasing prominence over the last few years

is the regula�on of fuel prices. This includes providing subsidies on

petrol, diesel, LPG, kerosene, and natural gas.

However, this subsidy has been gnawing at Indian finances for quite

some �me, �ll the �me it reached alarming propor�on in 2010, with

under recovery of petrol and diesel totalling to approximately 22000

crores, and overall

under recovery

touching Rs 79,000

crores. The prices

were the lowest in

the South East

Asian region. The

government called

for par�al deregu-

la�on of diesel

prices and aligning

of petrol prices

with the market.

Since then, dis-

putes over the

pricing mechanism

have ensued. In

January 2013, the

government gave approval for stepwise deregula�on of diesel pric-

es.

WHAT IT ENTAILS

The basic mechanism for fuel to be sold in the company begins with

NOCs, i.e. Na�onal Oil Corpora�ons. These include Oil India Limited

and Oil and Natural Gas Corpora�on.

These NOCs extract oil from oil wells such as those in Bombay High,

and refine them using a variety of processes. During various stages

in these processes, products such as petrol, diesel, kerosene, etc.

are obtained. These are siphoned off and stored. These NOCs then

sell them to Oil Marke�ng Companies (OMCs) at the market price.

These OMCs include HPCL, BPCL, IOC and Reliance. These OMCs

then sell the fuel to retailers, which eventually reaches the consum-

ers.

Now, the price at which OMCs sell the fuel to retailers is much lower

than the price they

purchased it for from

NOCs. This difference

in prices is called Un-

der recovery. A part of

this is borne by the

government. This is

essen�ally the fuel

subsidy which the

government gives so

as to reduce the mon-

etary burden on the

ci�zen.

AN ECONOMIC

OUTLOOK

Currently the govern-

ment bears a fiscal deficit of 4.9% of the GDP, and the figure is grow-

ing every year. A huge por�on of this burden is comprised of subsi-

dies borne by the government, of which fuel forms a large part. The

fiscal deficit, at this rate, is a looming sign of financial stress which

TAKING THE PLUNGE IS IT THE RIGHT TIME TO FULLY DE-

REGULATE FUEL PRICES

- Saquib Hasnain & Shreyas Dwivedi

Indian Institute of Foreign Trade, New Delhi

Topic Cartoon Source : Tooningin/Jayanto


24

scares off investors before they even begin to consider India. How-

ever, even the current par�al deregula�on of diesel impacts the

prices of various consumer goods and thus further strains the com-

mon man, already reeling under accelerated infla�on.

A CORPORATE PERSPECTIVE

The regula�on in fuel prices has reduced our OMCs to toothless

�gers. Their compe��veness has taken severe hits, with most of

them relying on government interven�on to remain stable. In 2012,

the net losses of OMCs were es�mated to be about Rs 1, 60,000

crores. Out of this, approximately 80,000 crores was handled by

government subsidies, about 60,000 crores by upstream firms like

ONGC, and Rs 20,000 crores was s�ll unaccounted for, and expected

to be carried forward into 2013.

Regula�on has also scared off poten�al FDI in this sector, with glob-

al players unwilling to commence opera�ons without the prices

being aligned with market movements. These corporates could

bring significant capital as well as technical exper�se to the industry.

Thus, India loses the opportunity to explore currently unreachable

deposits as it s�ll keeps out the latest technologies and techniques.

THE POLITICAL QUESTION

Obviously deregula�on is easier said than done, at least poli�cally.

Due to its impact on the common man, fuel and its price is one of

the major instruments used to wield poli�cal power, with the oppo-

si�on lining up to cri�cize the government about being unable to

manage costs and burdening the already stressed average Indian

ci�zen. Statements by Mamata Banerjee, M Karunanidhi, and mem-

bers of the BJP all endeavour to cash in on the simplis�c view of fuel

prices taken by the average voter. None of them can come up with

concrete solu�ons as to what should be done to stabilise fuel costs

at a macro level, but then, poli�cs has never been about finding

solu�ons.

THE COMMON CITIZEN- A MYOPIC VIEW?

With infla�on sky-rocke�ng to 9.31%, rising prices of various com-

modi�es and services was already the biggest problem for the Indi-

an Consumer. Thus, the deregula�on (however par�al), acted as a

metaphorical final nail in the coffin. And deregula�on of diesel pric-

es would directly impact prices of almost every commodity which is

transported using trucks, which is a huge basket.

Another pressing issue is the ci�zen’s spending on State Road

Transport Corpora�ons (SRTCs), which are the major users of diesel

(14%), and would thus be severely impacted. The fares would see a

substan�al hike (about 18%), and passenger intake would be affect-

ed. This would thus impact state revenues from SRTCs. However,

SRTCs were already struggling, with losses totalling to 0.08 % of the

GDP.

One of the results of government regula�ons on petrol and not die-

sel (�ll Jan 2013) was the flurry of favouri�sm towards diesel cars in

the automobile sector. This has resulted in almost 70% of the owned

vehicles being diesel-run. Now, par�al deregula�on will have a sig-

nificant impact on the car industry based on diesel cars.

A diesel-dependent product which will also face a crisis now is the

portable electric generator, which became extremely popular due to

the government’s reluctance to deregulate diesel prices. These were


25

purchased in bulk, and are s�ll extensively used in both urban and

rural areas. However, now their cost-effec�veness will become

ques�onable.

Most worrying is the impact that diesel will have on the most profli-

gate variety of com-

mon man-the farmer.

Tractors and other

farm machines primar-

ily run on diesel, and

the price hike will im-

pact the Indian farmer,

who is already suffer-

ing losses and com-

miBng suicides. This is

also another ques�on

from the poli�cal angle

-is the government

worried about the

majority of its popula-

�on, which is agro-based.

However, a major part of the ci�zen’s burden is due to the poor

macroeconomic situa�on of our country, and the fiscal deficit is a

huge contributor to that cause. More regula�on and subsidies at

this �me would only ramp up the collec�on of even greater debt for

the coming years.

FULL DEREGULATION: AN OPINION

Evalua�ng the pros and cons of this no�on, the writers were forced

to consider a number of facets.

Firstly, the prospect of significantly reducing our fiscal deficit to

reach targeted levels of 4.8% of GDP seems to be an extremely allur-

ing one. India as an economy, needs some s�mulus to take it out of

the current macroeconomic stalemate it is in with various MNCs and

countries.

Secondly, the major OMCs in India are PSUs, and their compe��ve

health needs all the help we can give it. Deregula�on would bring

some much-needed capital to our PSUs.

Thirdly, relying on basic economic principles, it seems to be logical

to align price levels with market forces, as government interven�on

can only steer the ship so far.

Also, increased fuel prices would also mo�vate the use of alterna-

�ve energy sources and

judicious use of fuel.

However, looking at the

current infla�on rate

(4.86%), as well as current

prices and macroeconom-

ic context, the writers

strongly believe that full

deregula�on at this point

of �me, though making

sense in the long-term

economic outlook, would

put too much infla�onary

pressure on an already

s�fled populace. Thereby, the writers recommend con�nuing the

stepwise rollout while taking into account current infla�on and ad-

jus�ng the amount of the fuel hike as per the needs of the hour.


26

T wo of the largest deposit taking companies in West

Bengal has Rs. 4220 crores of outstanding amounts

that they owe to millions of investors. Such an

amount can create social unrest and other undesirable consequenc-

es if the projects in which these sums have been invested go wrong.

Both the companies had been summoned by SEBI in recent �mes

and ordered to stop the schemes which did not follow the guidelines

laid down by the regulator. Taking advantage of the loopholes in the

present regula�ons, lack of proper supervision, judicial delays and

poli�cal clout these companies have con�nued with their opera�ons

claiming no wrong doing on their

part. Not only are the investors un-

safe but the states like West Bengal

are suffering from much lesser small

savings collec�on in post offices

affec�ng the much needed funds to

finance their deficits. In what follows

we discuss the nature of such

schemes in India and other countries

and try to understand the causes

behind their prolifera�on and then

discuss some of the possible reme-

dies.

Collec�ve Investment Schemes (CIS) are regulated by a variety of

ins�tu�ons in India (SEBI, Coopera�ve Socie�es Act, Insurance Act,

Companies Act etc.) depending on the kind of organiza�ons floa�ng

the scheme. Under such schemes agents regularly collect small

amounts from individuals, majorly lower middle class and lower

income group people (from both urban and rural areas). The money

so collected is then invested in businesses ranging from planta�ons,

real estate, entertainment (including resorts and hotels, television

channels etc.). The hallmark of such schemes is that they offer high-

er than average returns while in some circumstances promised re-

turn may go up to as high as 500%. Such ridiculously high returns are

made believable by convincing gullible investors about the unique-

ness of such schemes through personal interac�on with the clients,

adver�sing etc. The promoters of such schemes exploit their net-

work in both banked and unbanked areas targe�ng people with li;le

or no �me to go to banks (like shopkeepers, vegetable vendors etc.)

or exploit their aversion to paper work or stringent formali�es (like

KYC norms) excluding them from the ambit of formal financial ins�-

tu�ons. In rural areas per capita savings being low among poorer

people along with almost negligible

inves�ble opportuni�es coupled

with low level of awareness is a

fer�le ground for prolifera�on of

such schemes. Agents are paid high

commissions including foreign visits

and gold bars for best performers

making the schemes more vulnera-

ble and risky.

These schemes are akin to Ponzi

schemes (named a�er US scamster

Charles Ponzi) where fresh inves-

tors and investments are required

to grow exponen�ally to pay high returns promised to earlier inves-

tors. Millions of rupees are collected through small contribu�ons

from large number of people. The smallness of the amount collect-

ed, to a large extent, reduces the inhibi�ons against such schemes in

the mind of the investors. Instances of other investors who have

been rewarded handsomely with high returns are o�en cited as

success stories to rope in new clients. Investors are also influenced

by innova�ve projects (viz. planta�ons or media) which have the

MAKING SENSE OF

COLLECTIVE INVESMENTS

PYRAMID SCHEMES

- Dr. Bibek Ray Chaudhuri

Assistant Professor, Indian Institute of Foreign Trade, Kolkata


27

poten�al to earn higher returns. Most of the �mes, local persons

known to the investors are used as collec�on agents. Prior rela�on

or acquaintance is thus used to push the products. Investors are

a;racted by higher returns and door-step service of such schemes.

New companies, which may have difficul�es in obtaining loans from

the banks or finances from the capital markets, use these schemes

to generate the ini�al capital required to start their ventures. Many

such schemes are actually not intended to dupe the investors but

turns out to be so given the high promised returns and commissions

to a;ract the savings, which a�er certain point in �me becomes

unsustainable. This said though, numerous instances are there, not

only in India, where money laundering was the primary mo�ve be-

hind such schemes. In recent cases, local collec�on agents have also

joined the duped investors in agita�ons against administrators of

such schemes where the firms vanished with the collected money

(collected by these very agents using their local contacts). This

shows that in many cases even the agents are not aware of inten-

sions of the promoters. The plight of the investors can be easily

imagined.

EXPERIENCE WORLD-WIDE

One of the first such schemes was reported in as early as 1920s

when Charles Ponzi an US scamster tried to exploit the difference in

prices of ‘interna�onal reply coupons’ across different places. Buy-

ing from a place where the price was less and selling it where the

price was high-

er. He even

bought a local

bank with the

money collect-

ed from inves-

tors and

caught the

a;en�on of

the local regu-

lators when an

audit of his

accounts re-

vealed that he

held much

more money

than total value of the interna�onal reply coupons in circula�on.

The scam was busted when it was discovered that Ponzi had accu-

mulated a huge debt due to payments made to investors whom a

high return was promised and subsequently his accounts were fro-

zen. He was later on convicted and jailed for financial fraud. The

case of Bernard Madoff whose crimes were detected in as late as

2008 is the biggest Ponzi scheme ever valued at $65 billion duping

thousands of investors. Madoff was a pioneer in computer-based

trading and used his influence with the moneyed to collect such

huge sum of money. Even though frauds have been detected in

countries like the US, Ponzi

Schemes are more prevalent in countries with weaker regulatory

structures. Instances like that of Albania in 1997 can be cited as a

country badly affected by fraudulent schemes. Riots had resulted

from such financial frauds leading to several deaths and toppling of

governments. Jamaica lost almost 12.5% of its GDP due to such

scams which also affected other countries in Caribbean jurisdic�ons.

Columbia was severely affected by one such scheme when loss

amounted to as high as $1 billion and riots spread over 13 ci�es.

One such scheme in Lesotho caused loss of money for 1, 00,000

investors who were poor and vulnerable.

MAJOR DRIVERS

Both demand and supply-side factors are the major drivers behind

such schemes. As already men�oned, an important supply-side fac-

tor would defi-

nitely be the lack

of regula�on and

effec�ve supervi-

sion. In case of

India though in

pen and paper

the regula�on of

collec�ve invest-

ment schemes

(CIS) is opera-

�onalized

through SEBI

(CIS) Regula�ons

1999, in prac�ce

the regulator

finds it difficult to monitor each and every scheme which are offered

Recent Ponzi Schemes World wide Amount Invested /lost

Country Name Year of

Collapse

U.S. Dollars % of

GDP1

An�gua and Bar-

buda

Stanford Financial Group 2009 8 billion n.a.2

Grenada SGL Holdings 2008 30 million 5.0

Jamaica OLINT, Cash Plus etc. 2008 1 billion 12.5

United States Madoff Investment Securi�es 2008 65 billion 0.5

Colombia DRFE, DMG etc. 2008 1 billion 0.4

Lesotho MKM Burial Society 2007 42 million 3.0

Albania VEFA, Gjallica, Kamberi etc. 1997 1.7 billion 79.0

1All references are with respect to home country GDP, although some schemes a�racted non-resident investors

2An�guan investors were not permi�ed to invest in this offshore ins�tu�on

Reference: Monroe and Pa�llo, Finance and Development, March 2010


28

to investors. On top of it the district courts where the cases related

to such schemes are tried takes a long �me to give a verdict limi�ng

SEBI’s ability to stop such schemes. It has also been found from ex-

periences world-wide that such schemes proliferate due to macroe-

conomic factors like economic growth, an asset bubble, availability

of higher number of investors and higher inves�ble resources due to

easy availability of credit or higher savings. In case of India; high

growth rate, huge popula�on and savings rate provides a fer�le

ground for such schemes. The vastness of

the country with low penetra�on of bank

branches makes people suscep�ble to

such schemes. Lack of enough trained

manpower makes it difficult for regula-

tors to effec�vely monitor such schemes.

Demand side factors, like low-level of

awareness about financial products

among poten�al clients makes the situa-

�on more difficult. On top of that high

infla�on especially food prices have

affected the economic condi�ons of the

people which may have induced them to

look for higher returns from the li;le money they had to insulate

them from future expected higher prices. Besides, cash injec�on in

rural areas through schemes like MNREGA, Indira Awas Yojana,

might have also increased the supply of cash available to rural peo-

ple leading to higher demand for such schemes. Phenomenon like

‘herd behaviour’ is very o�en observed among investors. Especially,

in rural areas where community feelings are stronger, high ini�al

returns earned by some people can lead to huge number of people

op�ng for such schemes. The likelihood of such occurrences is high-

er in densely populated areas which may explain higher incidence of

such schemes in states

like West Bengal.

POSSIBLE REMEDIES

Surely, the investors

cannot be le� in the

lurch and allowed to be

duped by fraudulent

schemes. There should

be ways to reduce the

incidence of such

schemes harming the small investors. On the demand side, to facili-

tate investors to take informed decisions, ‘Investor Educa�on Work-

shops’ may be organized by SEBI in conjunc�on with the corre-

sponding departments in the states. Demand side analysis about

client requirements needs to be taken up in order to design appro-

priate subs�tute products (some of them are discussed below).

Higher returns, at least par�ally guarding against infla�on, easy

accessibility, secure and easily understandable instruments may go a

long way to generate demand for such prod-

ucts and can become viable alterna�ves to

fraudulent/risky pyramid schemes. Idea is

not to stop pyramid schemes (which would

be quite difficult) but to ensure that the

schemes are ini�ated by following proper

procedures and appropriate internal control

mechanisms are at place. Timely detec�on

of schemes which are not following the

direc�ves is absolutely essen�al and hence

SEBI must be strengthened (if separate reg-

ulator is not iden�fied) by induc�ng proper-

ly trained manpower in large numbers to

tackle the menace of fraudulent schemes before it leads to major

disasters observed in other countries. A delicate balancing act is

required from the regulator, as ac�ng too has�ly may invite investor

wrath because they may lose money because of such ac�on. Moreo-

ver, if ac�on is taken, late investors may accuse the regulator of

doing precious li;le.

On the supply side, crea�ng viable subs�tutes for such schemes

should be a;empted. I would men�on a few of the already exis�ng

ones with some suggested modifica�ons. The idea is to give the

people more alterna�ves when it comes to deploying their savings.

MICROFINANCE INSTITUTIONS

(MFIS)

Established (defini�on should be

provided by RBI) MFIs may be al-

lowed to collect savings from the

general public. Currently regula�on

allows NBFCs and Coopera�ves to

collect deposits. Coopera�ves can

only collect deposits from its mem-

In case of India; huge popula-

tion, high growth and savings

rate provide a fertile ground

for such schemes.

The vastness of the country

with low penetration of bank

branches makes people suscep-

tible to such schemes


29

bers. In case of NBFCs, only investment grade ins�tu�ons are al-

lowed to take deposits. Currently none of the NBFC-MFIs fall under

this category. Thus, no MFIs collect deposits. The network these

ins�tu�ons have in remote areas would come in handy for such a

scheme to work. It can solve a number of problems simultaneously

provided this scheme is properly designed. The rate the MFIs would

offer for the savings should be made flexible so that they can com-

pete with CIS operators and other schemes available. For MFIs this

can be a viable source of funds other than bank loans and donor

capital. But, if CIS are so open ended and con�nue even when SEBI

had given orders to stop opera�ons why can’t MFIs (established

ones) be given a chance at least to collect deposits as a pilot

scheme?

NATIONAL RURAL LIVELIHOODS MISSION (NRLM)

The exis�ng SGSY scheme has been restructured by the Ministry of

Rural Development into NRLM. Under this scheme among other

things funds would be deployed in the rural areas to strengthen the

forma�on of Self Help Groups(SHGs) and to see to it that they are

accorded highest priority when it comes to providing the necessary

infrastructure, capacity development and distribu�on of work by the

local government machinery. One of the

policies that is being implemented relates

to encouraging the SHG members to save

voluntarily and use the combined funds as

a corpus to extend credit by the group

thereby providing an addi�onal avenue for

the members to benefit out of the returns

generated from these ac�vi�es (touted as

SHG-II). In SHG-I only the compulsory sav-

ings concept was introduced where the corpus formed by repeated

savings by members was used to open an account in a bank.

The bank in turn (�ll December 2011) gave a term loan to the group

to be lent to its members. In SHG-II voluntary savings along with the

compulsory one is being emphasized. The members can deposit the

voluntary savings in the bank or use them to lend within the group

genera�ng a higher rate of return (as SHGs lend at 2% per month

interest rate). This policy if properly implemented can viably com-

pete with CIS since rates of return can be high.

BANKING CORRESPONDENT (BC) AND BANKING FACILITA-

TOR (BF) MODEL

These two channels were mooted by RBI to tackle the problem of

low penetra�on of bank branches especially in rural areas. BC can

provide banking services like a one-man mobile branch by collec�ng

savings and giving loans with specified caps on value of transac�ons.

BF model on the other hand uses exis�ng informal channels in rural

areas to increase banks’ customer base. BC model according to

many studies have failed because per client revenue is lower than

per client cost. The problem with this model is that ini�al cost of

loca�ng a client by the channel partners is very high and needs to be

heavily subsidized by the government. The poten�al of lower per

unit costs as the number of clients goes up is higher for such ac�vi-

�es. As an experiment mutual fund products may also be sold

through these channels giving the clientele in remote loca�ons the

opportunity to get higher returns. Investment opportuni�es in

standard instruments may effec�vely compete with CIS related to

non-standard investment opportuni�es promising ridiculous re-

turns.

In many countries Ponzi schemes also thrive because of their pro-

moters’ clout with the poli�cal par�es and generous dona�ons they

make for charitable purposes. Recent cases

in the state of West Bengal have again

pointed fingers at nexus between the ruling

poli�cal party and big companies floa�ng

CIS. It is not the ques�on of who is patroniz-

ing such schemes; rather the concern is

whether they are becoming too big to pose

a danger to the social and economic wellbe-

ing of the country as had happened in some

countries. Thus the need of the hour is a joint effort by the govern-

ment and the regulatory agencies to prevent such schemes from

going out of propor�on through proper investor educa�on, protec-

�on and preven�on measures.


30

T he Jet-E�had deal, which came a�er months of nego�a-

�ons, is the first investment by an overseas operator in

an Indian Airline since the government introduced FDI of 49% in the

avia�on sector. A�er much turbulence in the deal, finally E�had has

agreed to acquire a 24% stake in Jet Airways for $379mn (~2058 Cr)

THE DEAL MAKERS

In August 2012, Jet Airways and E�had airways teams met in Abu

Dhabi to carry out due diligence exercises. The team of E�had in-

cluded PWC, HSBC Holdings Plc., and its auditors – KPMG. On the

other hand, Jet Airways engaged consul�ng firm Ernst & Young to

conduct its own

due diligence

on E�had. The

nego�a�ons

gathered pace

in September

a�er the policy

announcement by Indian Government .Jet airways nego�a�ng team

consisted of K.G Vishwanath, Raj Sivakumar, and Hameed Ali. The

nego�a�ons were vola�le with both par�es staging walkouts. While

E�had walked out once, Jet Airways walked out at least thrice over

differences on valua�on

DIFFERENCES IN VALUATIONS

E�had ini�ally valued Jet at a mere $500mn, leading to a walkout by

Jet. They then raised the valua�on to $800mn and finally raised it to

$1.2bn while Jet pushed for a valua�on of $1.6bn.

The two airlines mutually agreed on several terms and the Jet team

flew back to India with the deal almost sealed. Jet airways called a

board mee�ng in the second week of February to close the deal, and

commerce minister, Anand Sharma, was set to announce it in his

visit to Abu Dhabi on 18th February.

One day before the visit, Jet Airways received another shock. E�had

Airways chairman Sheikh Hamed bin Zayed al-Nahyan said that the

airline needed to revise its deal to buy a stake in Jet Airways, and it

was s�ll �me for the final agreement to be struck.

Many said that the reason behind this was the lack of policy clarity

in the SEBI guidelines.

POLICY CHANGES BY DGCA

To facilitate the Jet-E�had deal, DGCA issued fresh guidelines as

approved by the

ministry of civil avia-

�on. The changes,

as pointed by mon-

eylife, are as fol-

lows:

DEAL ANALYSIS

JET - ETIHAD

- Raghav Kapila & Shubham Agarwal

IIFT, Kolkata

Jet E�had

Started Operaons May, 1993 November, 2003

Hub Mumbai Abu Dhabi

Desnaons 20 Internaonal + 52 Indian 84

Fleet 100 66

Staff 13,945 8000

Revenues Rs 16,898 Cr (2011-12) $4.8 Billion (2012)


31

2008 - Clause 1.7

states “A Sched-

uled Air Transport

Service/Domes�c

Scheduled Passen-

ger Airline shall not

have agreements

such as sharehold-

ers agreements,

etc. with a foreign

airline, containing

provisions/

arrangements em-

powering such

foreign airlines or

others on their behalf to have effec�ve control in the management

of the domes�c airline”.

Clause 1.7 was deleted on 1 March 2013

2008 - Clause 1.8 states “A Scheduled Air Transport Service/

Domes�c Scheduled Passenger Airline shall not enter into an agree-

ment with a foreign airline which may give such foreign airline the

right to interfere in the management of the domes�c operator.”

1 March 2013 - replaced by Clause 1.5 that states “A Scheduled Air

Transport Service/ Do-

mes�c Scheduled Passen-

ger Airline other than

those who have FDI by

foreign airlines shall not

enter into an agreement

with a foreign airline,

which may give such for-

eign airline, the right to

interfere in the manage-

ment of the domes�c

operator”

The above clauses show that a foreign carrier, through its invest-

ment in a domes�c operator, can now interfere with the manage-

ment of the Indian carrier. These changes in guidelines are in total

contradic�on to the policy, which mandates the effec�ve control in

the hands of an Indian shareholder. It is therefore obvious as to why

this clause has been diluted and the clause earlier referred to name-

ly, Clause 1.7 has been delegated—the reason to dilute the defini-

�on of effec�ve control.

In order to facilitate Jet in receiving the considera�on of $300 mil-

lion through a so� loan at 3% the guidelines were required to be

changed.

2008 - Clause 1.9 states “A Scheduled Air Transport Service/

Domes�c Scheduled Passenger Airline may enter into financial ar-

rangements with a bank and/or other financial ins�tu�ons for the

purpose of lease-finance, hire-purchase or other loan arrangements,

but such a �e-up shall not be permi;ed with a foreign airline”.

1 March 2013 - Clause 1.6 states “A Scheduled Air Transport Ser-

vice/Domes�c Scheduled Passenger Airline may enter into financial

arrangements with a bank and/or other financial ins�tu�ons includ-

ing foreign airline for the purpose of lease-finance, higher purchase

or other loan arrangements”.

MORE TURBULENCE IN THE DEAL

SEBI’s Concerns (As told to DEA)

▪ Commercial pact should not be

entered into, as it gives E�had the upper

hand in opera�onal ma;ers

▪ E�had, under the pact, gets rights

to source candidates for senior manage-

ment posi�ons

▪ The airlines plan to shi� network

and revenue management func�ons to

Abu Dhabi and consolidate sales office/

general sales agreement to support Jet’s

sales in UAE

▪ Lead role in nego�a�ng with

suppliers, according to pact, will be E�-

had’s

▪ Corporate-governance code clauses should be amended for

passage of board resolu�ons by simple majority. Under current


32

arrangement, resolu�ons are passed with three-fourths majori-

ty, giving E�had the right to approve all decisions

▪ The nomina�ons commi;ee should not have exclusive powers

to recommend appointment or removal of all independent

directors and the CEO. These powers are against the provisions

of the Companies Act

DIPP’s concerns on the revised shareholders’ agreement

▪ Effec�ve control and ownership lie with E�had, and not Jet

▪ If Naresh Goyal’s stake is included, the 49% FDI limit is

breached

▪ Under the FDI norms, rights for vo�ng and nomina�on should

stay with Jet

On July 24th, Foreign Investment Promo�on Board (FIPB) gave its

approval on the commercial agreement to Jet and E�had, with

few revisions which includes:

1. It ensured that the control is not passed from Jet to E�had

2. The rule of FDI in avia�on were redefined to clearly state that

permission would be granted only if “substan�al ownership

and effec�ve control is vested in Indian na�onals”.

3. Any changes in the SHA (Share Holders Agreement) with E�had

would require permission from GoI by Jet

4. The revised SHA also says that Indian laws would be used for

trying the shareholder disputers over English laws which can

s�ll be used for other arbitra�ons

5. The veto power lies with Naresh Goyal

6. E�had would have two rather than three seats in the 12 mem-

ber board as was planned earlier

7. Jet board can now take its call on the various boards being set

up in Abu Dhabi which mostly implies for the opera�onal and

commercial decisions

The final shareholding pa;ern a�er the deal is:

▪ Naresh Goyal: 51% (even though being an NRI, this breaches

the 49% FDI limit in avia�on which is yet to be decided upon

GoI)

▪ E�had: 24%

▪ Others: 25%

SYNERGIES FROM THE DEAL

Benefits for Jet Airways

If the deal goes through the following benefits would accrue:

▪ Jet Airways increase its interna�onal reach and reduce some of

its debt burden.

▪ The Indian carrier will get access to much-needed funds

▪ A global network, latest technology and best management prac-

�ces

▪ Indian passengers will gain from increased compe��on that is

expected to lead to be;er offerings, seamless travel through

code-shares and cheaper airfares

Benefits for E�had Airways

▪ The global carrier will get access to traffic origina�ng from India’s

interiors

▪ E�had an opportunity to tap into the fast growing Indian out-

bound market

▪ In addi�on, it will mean that E�had will not need to wait for the

Indian Government to allow it to operate more flights into India

because of a cap on bilateral air service agreements with other

countries


“NIFTY in a real sense is not really at 5500+ levels” are what many analysts on street are saying these days. The “NIFTY in a real sense is not really at 5500+ levels” are what many analysts on street are saying these days. The

carnage and vola�lity that have been witnessed in the Indian Markets are at its peak. India’s Vola�lity Index carnage and vola�lity that have been witnessed in the Indian Markets are at its peak. India’s Vola�lity Index

(VIX) have gained around 66% in past three months. Whether Sonianomics is to blame for rupee, Sensex crash-(VIX) have gained around 66% in past three months. Whether Sonianomics is to blame for rupee, Sensex crash-

es or are we facing the brunt of revival in US Economy, or both?? Whatever be the reason, we are fast losing es or are we facing the brunt of revival in US Economy, or both?? Whatever be the reason, we are fast losing

the shine of a fastthe shine of a fast--growing emerging na�on with a fear of possible downgrades by credit agencies.growing emerging na�on with a fear of possible downgrades by credit agencies.


34

Asset/Index 1st

May 31st

July %change

Gold(MCX)/10 grams 27,503 28,211 +2.6%

Sensex 19,504 19,345 -0.8%

Ni�y 5,930 5,742 -3.1%

Rupee/$ 53.8 60.81 -13.03%

A-May 17 Ni�y: 6187

Ni�y reached 6187 following global cues with the US indices reaching all �me highs, April infla�on easing to a 41-month low and high liquidity ex-

is�ng in the markets. CNX Bank Ni�y rallied over 500 points on hopes of rate cut by the RBI. Bank stocks like IndusInd Bank, Kotak Mahindra Bank

and HDFC Bank reached 52-week highs. Other rate sensi�ves such as auto and realty also rose to higher levels. Ni�y could have gone on towards

6300 if a key resistance level formed in January 2011 was breached. Ni�y could not break the resistance and moved lower therea�er.

B- June 26 Niy: 5588

From being at 6100 levels at May end Ni�y had a bear run in June going below 5600 levels for the first �me since April 16. Big names like BHEL, JSPL,

DLF and Ranbaxy reached 52-week lows. Weakness in Rupee and the concerns over tapering down in the bond buying exercise of the US Federal Re-

serve also pushed Ni�y lower. Overseas investors pulled out around $5 billion from the Indian debt and equity market in less than a month.

C- July 23 Ni�y: 6077

RBI introduced a number of measures to squeeze liquidity in the markets to fight the deprecia�on of rupee. It raised the interest rate of Marginal

Standing Facility (MSF) by 100 bps to 10.25 percent and also made some changes in the rules of CRR and LAF (Liquidity Adjustment Facility) to arrest

the fall of rupee. Short covering was seen in stocks along with buying in beaten down sectors like banking and auto sectors. Stock-index futures

gained amid signs the RBI won’t �ghten monetary policy at its meet.

D July 31 Ni�y: 5742

July 24th

saw Ni�y tumbling as a result of profit booking in rate sensi�ve and capital intensive sectors along with July series expiry. There were also

concerns related to infla�on with the fall in rupee. Borrowing costs for many companies have risen above 10 percent. Corporate bond sales plunged

96 % in July as yields surged a�er RBI’s measures .The rupee crossed the 60 level showing no signs of a relief. Global fund houses sold $1.05 billion of

Indian stocks in July a�er June’s $1.8 billion sell-off.

NIFTY Chart (May-July 2013)


35

The FMCG industry has been growing at a fast pace in the past few

years backed by robust economic growth and rising rural income.

Growth drivers such as premiumiza�on, rapid urbaniza�on, evolving

consumer lifestyles and emergence of modern trade have shielded the

industry from the slowdown un�l �ll recently.

The Fast Moving Consumer goods (FMCG) sector is valued at Rs 1.8

trillion (Source: Nielsen). The industry is urban-centric with 66% share

of the goods being consumed by urban India. Metropolitan ci�es &

small towns (popula�on of 1-10 lakh) have been driving the FMCG

consump�on in urban India since 2002. In fact middle India, compris-

ing of the small towns and consuming 20% of overall FMCG sales, has

been growing the fastest across rural and urban segments. As per

Nielsen, USD 13 billion as of 2012. This sector is expected to grow to a

USD 33 billion industry by 2015.. Rural India, where 70% of the popu-

la�on resides but only 34% consume FMCG goods, presents the big-

gest market poten�al for the industry. Backed by low unit packs and

aggressive distribu�on reach, rural market size has expanded nearly

four �mes. Companies such as Hindustan Unilever and Dabur which

derive nearly half their sales from rural India have been increasing

their reach.

CNX FMCG has a been sluggish from few weeks due to the decrease in

domes�c demand impac�ng the companies stock prices. It has strong

support at 16,724 levels. The top line growth has been sluggish for

some�me now with major FMCG companies like HUL, ITC, Dabur,

ColPal, Britannia witnessing stress on their revenues.

Though these companies have improved on their opera�onal efficien-

cy, revenue growth remains an issue

What affects the industry :

• Demand : Favorable macroeconomic drivers such as GDP and pop-

ula�on growth, coupled with rising income levels and lifestyle

changes are the main drivers for FMCG sector demand.

• Supply : India is a compe��ve market in terms of product offer-

ings. In each category of FMCG product Z there are organized play-

ers as well as unorganized. However, lately with incomes rising

consumers tend to move towards the more organized players who

sell branded products.

• Expenses : The major expenses that impact this industry include

raw materials and adver�sing expenditure.

CNX FMCG Index (May– July 2013)

Market Performance (%)

Growth Posi�on (%) Shareholding Pa ern (%)

Valua�on (x)

Data : FY 12-13 / Source : Bseindia.com

Peer Comparison


36

Telecom has been one of fastest growing sectors of the Indian econo-

my in the past few years. A�er priva�za�on of the sector, companies

like Bhar� Airtel, Vodafone, Tata Telecom, and Idea have emerged as

major players while state monopolies MTNL and BSNL have signifi-

cantly lagged behind.

The Indian telecom sector has seen massive growth once the sector

had been opened up to the private sector. The compe��on in the

sector has increased with local tariff rates at close to 40 paise/minute

which is one of the lowest in the world. Mobile is now seen as a major

driver of reach to the Indian consumer with the tele-density being so

high at greater than 65% versus a low internet penetra�on at 4% to

5%. Newer technologies are increasingly geBng integrated through

the mobile phone, third genera�on technology which enables greater

integra�on could make this a reality.

What affects the industry :

• Demand : Favorable demographics and rising incomes of a

country provide a spur to the telecom sector. Telecom is in-

creasingly seen as a u�lity now versus earlier years when it

was seen as a more discre�onary service. India being one of

largest consumer countries could see con�nued growth in

telecom even a�er significant penetra�on is achieved.

• Supply India is a compe��ve market in terms of number of

telecom players. Recently a�er implementa�on of Mobile

Number Portability (MNP) the compe��on in the sector has

only gone up since operators have to lure and retain exis�ng

customers along with winning over new customers. With at

least 4 to 5 large players in each of the 22 circles (service are-

as), the supply of services is very strong. However with the

recent corrup�on cases of some players, pricing power has

returned to the incumbents.

• Expenses The major expenses of retailers include network

charges, staff costs and interest on debt. Apart from these

payments for addi�onal spectrum, 3G licenses put strain on

long term finances.

CNX BSE TecK Index (May– Juy 2013)

Market Performance (%) Valua�on (x)



Peer Comparison



37

The Banking Industry, one of the essen�al pillars of the Indian Finan-

cial System, serves as a financial intermediary by accep�ng capital

surpluses as deposits and pools those funds to provide the par�ci-

pants that have capital deficit as credit. Because of the important role

depository ins�tu�ons play in the financial system, the banking indus-

try is highly regulated, with certain government restric�ons on finan-

cial ac�vi�es by banks.

Mainly banks are classified as either PSU or Private. Currently, in India

165 scheduled commercial banks exist including 26 public sector

banks, 21 private banks and 32 foreign banks. They have a combined

network of over 71,000 offices and 9, 44,000 employees. Public sector

banks hold over 77 % of total business of the banking industry, with

the private and foreign banks holding of 18 % and 5% respec�vely.

In terms of quality of assets and capital adequacy, Indian banks are

considered to have clean, strong and transparent balance sheets rela-

�ve to other banks in comparable economies in its region. Since Indian

economy is witnessing strong growth the demand for banking ser-

vices, especially retail banking, mortgages and investment services are

expected to be strong.

WHAT AFFECTS THE INDUSTRY:

Demand The demand for credit is directly linked to the industrial and

economical growth. The banking industry growth has a posi�ve corre-

la�on with the country's gross domes�c product (GDP) and has a mul-

�plier effect of 2x to real GDP.

Supply: Supply of liquidity is dependent upon several economic varia-

bles like RBI policies, economic growth and infla�on. Higher the infla-

�on, interest rates and slower economic growth less is the off take of

credit in the market and vice versa

Barriers to entry : Entry barriers are high in banking sector as one will

require banking license from RBI which is allo;ed a�er stringent due

diligence and huge infrastructure for branch developments.

Compe��on : There is high compe��on in the banking sector as there

are private banks, public banks, co-opera�ve banks, NBFC's and also

private lenders. RBI is also looking at issuing new licenses which will

further intensify compe��on in the sector.

S& P BSE Bankex has broken its major support of 11,000 decisively.

The daily charts have formed an Evening Star candles�ck pa;er which

might signify more downside in the upcoming weeks.




Peer Comparison

“Please refer to the page 42 for the impact of RBI

measures on Banking Sector and an economy as a whole”


38

T hat the global economy is going through some of the toughest

�mes is a no brainer. Indian economy including INR hiBng historic

lows against USD has become a ‘Breaking News’ on daily basis. INR has

already breached the 68 mark and seems headed to the psychological

70 mark.

Fruits to vegetables to electricity to fuel, every item is geBng more

and more expensive and some have gone up mul�ple �mes. Tough

�mes indeed! However, tough �mes don’t last, tough people do!

Sooner or later the �mes will change. And if you are at the right place

at the right �me, you can see your career moving up and ahead in

leaps and bounds!

While the naysayers are having a field day, there are s�ll certain pock-

ets of economy that have stood out. As and when the economy has

looked up, these Sectors have headed north with sheer tenacity. The

idea of wri�ng this ar�cle is to iden�fy such sectors/Industries.

It is obvious that the stock markets are said to be the barometer of

any economy’s health. Their direc�on signifies if and whether the

economy is doing well or otherwise. I shall a;empt to extract data

from the Na�onal Stock Exchange and analyze that for the benefit of

the students who at their age are a worried lot. Would they or would-

n’t they get a job opportunity? Would the career offered be to their

liking or otherwise? Is there any growth in the industry/organiza�on

of their employment? And these fears are not unfounded. There have

been numerous reasons to be worried of late.

SECTOR GROWTH

NIFTY 130%

Infra 119%

Energy 112%

IT 105%

Commodi�es 93%

Metals 88%

Let me scien�fically present the data for you. I have taken the Na�on-

al Stock Exchange (NSE) NIFTY as basis for the analysis. The various

sectoral indices have been pi;ed against this benchmark index and a

view is thus formed based on their performance versus NIFTY. All this

data is authen�c to the best of my understanding and belief.

NIFTY recently enjoyed nearly 17-month bull-run from the low of 4531

made on 23-Dec-2011 to a high of 6229 made on 20-May-2013. This

move of approx. 1700 points up move translates to about 30% (See

Chart-1 above) :

While many Sectors dras�cally underperformed NIFTY which went up

by 130%, the following could not even play the catch up game even

during the good �mes:

So, which Sectors were happier when NIFTY was happy?

Table-1: Bull-run from 23-Dec-11 to 20-May-13 (UNDERPERFORMING Sectors)

Chart-1: Bull-run from 23-Dec-11 to 20-May-13 (NIFTY Vs BANKNIFTY)

WHEN THE SUN SHINES AGAIN FOR INDIAN ECONOMY

- Mr. Rituraaj Juneja

An IIFT Alumni & Founder of simpletrades.in

Website URL : h&p://simpletrades.in/


39

So, here are the secrets! These sectors would be the ones to focus on.

Isn’t it obvious that the right organiza�ons in these sectors that are

growing even above the respec�ve Sectoral average would not only

offer stable career opportuni�es, but also a fast-track growth? They

would also be hiring more than the others since growth shall also fuel

manpower requirements. It actually does not end here. The perfor-

mances would be rewarded with higher compensa�on, increments

and perks!

To validate my findings, let me take you back and analyze the earlier

mega bull-run when NIFTY moved from the lows of 2252 hit on 31-Oct

-08 to the highs of 6338 on 05-Nov-10. This up move of almost 4100

points translates to about 218% (See Chart-2 below):

It is noted that even in this earlier mega up move, BANKS stood out

with BANKNIFTY gaining by 293%.

Placed in simpler words, BANKS are happier when the economy is

happy! Simple.

With the Banking reforms being announced and the applica�ons for

new bank licenses being filed, this sector is very likely to outperform

the benchmark index yet again!

While excellent opportuni�es would show up in the other sectors as

well (see Table-2), Banks are making a strong case for considera�on.

Here are some more facts:

▪ 85,000+ PSU banks vacancies pan-India (2013-14)

▪ 300,000 to be hired by PSU banks in the next 3years

▪ 10,000+ more jobs will get created through new Banks

▪ Banking sector is known to be compara�vely more stable

▪ Banks invest to keep team agile & sharp to stay compe��ve

▪ Rounded careers & excellent growth opportuni�es

▪ Work place closer to home (bank branches are everywhere, even in �er-2 towns)

▪ Offer far higher mobility in case of change of city/residence

With more and more employees being recruited for Retail Banking,

SME, Credit, Rural, Agri & FOREX management, Interna�onal Financial

Management & Interna�onal Business are likely to remain the main-

stream offering excellent career op�ons to the IIFTians.

In the nutshell, FMCG, Banks, Media, Pharma & Auto are likely to see

the thick of ac�on when the Sun decides to shine again for the Indian

economy. The big ques�on is – would you be aligned to harness its

poten�al?

SECTOR GROWTH

NIFTY 130%

FMCG 165%

Banks 159%

Media 158%

Pharma 148%

Auto 139%

Table-2: Bull-run from 23-Dec-11 to 20-May-13 (OUTPERFORMING Sectors)

Chart-2: Bull-run from 31-Oct-08 to 05-Nov-10 (NIFTY Vs BANKNIFTY)

Mr. Rituraaj Juneja is an IIFTian with over 23 years of Interna�onal

Business Development experience in IT, Automobile, Electronics &

Semiconductor industries and a simultaneous 12 years in Educa�on &

Training.

A much sought-a�er speaker & trainer across top Business Schools; he

is an entrepreneur by heart and a mentor to many startups.

He is a passionate Technical Analyst of Stock Markets and offers mar-

ket analysis through his website - www.SimpleTrades.in. His simple,

effec�ve and impeccable analysis has won him many fans & admirers.


40

A month has passed since the Reserve Bank of India (RBI) unleashed a barrage of liquidity-�ghtening measures to rescue the rupee. Despite those measures, the local

currency plunged to a historic low of 61.81 against the dollar on 6 August. The central bank’s ac�ons primarily targeted currency speculators on mul�ple fronts—by

halving the amount Indian banks can borrow from RBI and simultaneously raising the borrowing cost for banks from the marginal standing facility (MSF) by 200 basis

points. RBI also increased the daily balance requirement for banks to maintain the cash reserve ra�o—the por�on of deposits they must keep with the central bank—

and launched a large-scale sale of short-term papers in the market at higher yields to drain every bit of loose cash floa�ng around in the banking system.

Source : Livemint


41

Team InFINee�: What do you think could be the impact of the new

chairman of the Federal Reserve on the policy for US economy, the

emerging markets and India?

Peasant Joshi: I don’t think we can expect drama�c changes in the

policy. The Chairman alone is not responsible, when it comes to a

policy change, it is a group of 12 people who decide, and the policy

will remain for the long term. It involves a group of twelve people

who decide upon a policy and it remains for a long term. Coming to

narrowing down to the next two front runners, one of them has

been the President confidant from the very beginning. He had

helped him in his elec�on campaigns as leader of his economic

team. While the other being the current Fed Vice Chairman who

represents a region. She is apoli�cal but understands Bernanke very

well. But, as it seems now, the new chairman will not bring about

any drama�c changes

TI: US GDP growth rate for second quarter of this year have beaten

the es�mates of 1.1% to grow at 1.8%, at the same �me the unem-

ployment rate is at a three year low of 7.6%. Do you think this is

just a short term implica�on or the US economy can sustain it for a

longer �me?

PJ: Firstly about Jobless rate. Even though on paper it is 7.6% which

is at a 3 year low, but it is s�ll higher than the pre-recession rate of

4.5% to 4.8%. What is not accounted in this rate calcula�on is the

large number of people who have stopped looking for work. Thus,

the actual unemployment rate would be in two digits. Moreover,

they have lost the skill-sets, which they have to regain in the new

economy; hence we cannot say if this is the true rate.

I think it is a slow recovery because the US economy will grow slow-

ly. Hence 1.6% or 1.8% is the maximum rate at which they can grow.

The ideal growth rate which is required to reduce unemployment is

3% or 4% which looks difficult for US. Hence, it is a slow-slow recov-

ery. Moreover, the GDP es�mate was based on last year data, which

I don’t consider important at 1.1%. Also, Q2 is going to be one of the

bigger quarters as compared to others.

TI: What do you think would be the effect of changing regula�ons

in the US, especially in the light of the current happenings?

PJ: It is having a big impact, especially on the financial sector. The

change of regula�ons has made a lot of people on the defensive.

They are not ready to make the decisions, be it the changes or in-

vestments. Especially the Dodd-Frank Act, which represents the

most comprehensive financial regulatory reforms since great de-

pression, with in-numerous sum component and interpreta�ons,

the way it is going to be viewed.

Also about the Basel III recommenda�ons on what needs to be im-

plemented as far as the financial ins�tu�ons hold, they do not know

what the future is like. Another reason for it is that people are not

IN CONVERSATION WITH MR. PRASHANT JOSHI

EXECUTIVE DIRECTOR - UBS WEALTH MANAGEMENT, USA

Team InFINeeti had a candid talk with Mr. Prashant Joshi (Executive Director - UBS Wealth Man-

agement, USA) who expressed his views on the shifting trends & changing regulations in the US

Banking sector. Also, he spoke his heart out on the likely impact of the new Fed chief, expectations

regarding Quantitative tapering and its likely impact on the emerging markets


42

inves�ng, the trade market is �ght and the unemployment rate is

not going down as fast it is required to go and as I men�oned earlier

the GDP is also not growing at the pace it should grow. Overall, the

cost of compliance with the regula�ons, and decision making pro-

cess involved in the regula�on is also not helping the cause.

TI: With the US poten�ally coming out of QE, how will Asian econ-

omies be impacted by the Fed’s decision? Has the world changed

since the 1980s and ‘90s?

PJ: The world has changed as far as the financials work since 1980s

and ‘90s. Previously people had a blind trust for the US policies and

would never doubt it. Now it has changed. Today it is not the case

especially when we look at the big banks. One can never get the

same kind of scope and access since the banks would be in constant

pressure over regula�on and scru�ny for at least the next decade.

This is not going to change unless some behaviour changes, it will be

the status quo.

TI: Should China fret over the US move on QE, as China's interests

are aligned very strongly in the same direc�on as the United

States?

PJ: A very tricky ques�on, China is an export oriented economy. In a

way their currency is not fully conver�ble. If they don’t open up the

market, they will not grow. As what I see, they need at least 7-8%

growth. They need to have internal mechanism for internal growth.

As far as the US is concerned, it has always been concerned for the

long term growth and there will be several measures in the Chinese

markets which will help the US for this.

TI: Quan�ta�ve Easing policy by the Federal Reserve is causing

other assets to be mispriced and bubbles are being formed. For

example, with interest rates ar�ficially low, investors are taking

greater risks in trying to obtain yield. Since Fed has already an-

nounced that it will begin to reduce its quan�ta�ve easing pro-

gram, this would mean that the price of these assets will decline

significantly. What are the a<er-effects of such an ac�on?

PJ: The concern is there; however, impact is not seen. Nobody

knows where it will end as the change is slow and not as required. A

bigger concern which exists is that a lot of companies are showing

profit and the stock market is going up; but the people are not

geBng impacted in their day to day lives. Hence, the free money is

being used for the benefit of their own investments.

It is easier to get money from the markets; slowly it will change,

treasury rates, the bond prices will change but it will not be an over-

night change not a huge change unless & un�l it reaches a thresh-

old. As QE went up slowly, it will come down slowly; affec�ng the

people and the price of the assets, but it will not be a significantly

huge change. Nobody knows when the QE will end, since nothing of

such massive sorts has been done before. Moreover, there is no

100% certainty that it will happen; the chances are always 30:70 or

even 40:60

TI: Extraordinary efforts to s�mulate economies with QE had

pushed gilt and government bond yields to 'unprecedented' lows,

requiring income investors to move into higher yielding corporate

bonds and shares. Are Central banks forcing investors up the risk

spectrum?

PJ: No, they are not but some are totally impacted. The common

retail investors, the one who plan to invest in the stock market and

re�re peacefully are now forcing backwards, they are totally away

from the markets. Investors in the fixed income markets are badly

impacted & investors in these markets are not those normal inves-

tors but they are big professionals. Once they understand the mar-

ket- they will understand when the asset price will go down and

when bubbles will be formed. However the benefit of QE on normal

investors is li;le lesser; when interest will go up & they will earn

some money- currently they are not making any money.

TI: Reuters recently published the ar�cle "How Much is Fed Aid to

U.S. Corporate Profits Worth?" which suggested that con�nued

low interest rates are ar�ficially boos�ng corporate profitability.

What impact will tapering of quan�ta�ve easing have on stock

prices if this is true?

PJ: Yes, it is true. The benefit of QE is more of a corpora�on- they

are taking advantage of low interest rate. The ar�cle is right in way

that US companies are taking advantage as their profitability looks

good. A simple statement from the fed chairman, a month back,

which says that QE may be ending sooner than I expected made a

lot of market turbulence. All the policies are made on what the Fed

says and the guidelines set for the next 3-4 years.


43

Team InFINee�: How would you describe a typical day for a sum-

mer intern at HSBC?

Var�ka Singh: When we joined HSBC for internship, we had a small

induc�on and were given brief training on valua�on, pitch books

etc. and of course the compliance which is a cri�cal part of IB. How-

ever, the majority was on job training due to paucity of �me in in-

ternship.

During internship typically my day started at 10 am. The first thing I

was required to do was check my mailbox for the review and feed-

back about the previous day deliverables and also to see if any work

has been assigned from outside India geographies where generally

the communica�on would firstly be through mail and then schedul-

ing further calls.

Work comprised of preparing pitch books, analysing various reports

for valua�on or sugges�ng and substan�a�ng any strategy. Typically

one can get 2 or 3 company profiles in a day, but apart from those,

small tasks would be given with very short deadline, may be 2-3

hours. It required going through lots of reports and databases and

used to consume most of the day. Interns were op�mally allocated.

In case I finish up the work by 8pm then I would be briefed about

the next day work and before I leave for the day I used to have a

look at the work so that I can plan accordingly for the next day. So

on an average the day would end by 11 pm. But frequency of staying

�ll 1 am or 2 am was also very high. It was a very different experi-

ence, but one which I thoroughly enjoyed. I got to learn a lot from

my seniors at HSBC, how well they managed their work and handled

cri�cal situa�ons.

TI: What were the expecta�ons of the company from you?

VS: From interns they do not expect much of prior knowledge, but

the ability to learn. Quick grasping power is always acknowledged.

But one basic expecta�on was accuracy in work. The guiding princi-

ple would be to rather ask for an extra hour than to deliver any in-

correct informa�on.

Also in IB you do not get long �meline projects, for any task you

have to give the update or submit the deliverable in 3-4 hrs. So you

are expected to keep the mentors in loop and inform the team

members immediately in case the situa�on looks out of control

because there is no scope to invest more than the es�mated �me

on any task. Also it was expected to keep no work pending, so that

the maximum �me usage is possible, avoiding any cri�cal situa�on

to occur.

TI: What challenges did you encounter during your internship in

the project(s) which you worked on? How did you tackle them?

LIFE IN HSBC

- Vartika Singh

Indian Institute of Foreign Trade, Kolkata

Team InFINeeti talks to Vartika Singh (MBA (IB), 2012-14), Summer In-

tern at HSBC - Strategic Transactions Group, who gives her valuable insights

on her summer internship experience - what she learnt, the challenges she

faced and her advice to future aspirants who want to join HSBC.


44

VS: Main challenges occurred because of the difference in the na-

ture of work at IB. Unlike other industries, in one gets very short

deadlines, and it becomes more difficult for interns since they are

not very proficient in using databases and excels. Delivering on �me

and maintaining the accuracy was a challenge in the beginning.

Also in the ini�al few days one gets totally bombarded with lots of

new informa�on and at the same �me have some deliverable to

complete. Thus, according to me retaining those instruc�ons and

applying them wherever needed was a challenge in itself. Making

notes of instruc�ons helped in this. I also avoided seeking seniors’

advice for the same thing again and again. However, these difficul-

�es persisted for ini�al 1-2 weeks. Though once you become accus-

tomed to the work you can easily overcome all this.

TI: What skills did you develop as an intern at HSBC? How do you

think these skills will be useful in your future career?

VS: Being a so�ware engineer, two months of internship in a finance

company and that too in an investment bank role was a different

experience. It gave me a pla,orm to apply my knowledge at a much

bigger pla,orm. Instead of being allocated to only one sector, I was

rather engaged with different sectors on rota�on basis which gave

me hands-on in variety of sectors. Working on different mergers &

acquisi�ons related tasks led to be;er understanding of inorganic

growth of companies, analysis of various opportuni�es and the in-

terrela�on of the deals taking place across the globe. I got to work

on complex valua�on models, made plenty of presenta�ons which

eventually made me proficient in excel and power point.

TI: What did you learn about the company - your expecta�ons v/s

your experiences?

VS: I did not have any prior experience in IB, so basically I didn’t

start with many expecta�ons. In fact I did not expect much from

short dura�on of 2 months but I am thankful to HSBC which offered

me lot of opportuni�es in such a small span of �me. The extent of

learning totally depended on the ability of an intern to complete

tasks as fast as possible and to be assigned to more assignments.

More work meant more learning. HSBC summer internship program

is very well designed and is conducive to learning; teams are very

coopera�ve and there are no communica�on barriers. The interns

are in fact employed like full �me analysts and are involved in

mee�ngs and discussions and were encouraged to share their view-

points.

TI: Would you like to share any other informa�on/experience/

advice with the future batches/readers of the magazine?

VS: One general advice to those interested in doing internship in IB

is improve proficiency in excel and PowerPoint as these will be the

most used tools with a clear understanding of the basics of financial

concepts.

TI: How difficult was the transi�on from a typical MBA college life

to a typical corporate culture? How far were you able to apply the

classroom learnings to the prac�cal scenario?

VS: Before MBA I had worked with Infosys for more than a year. So

actually I didn’t find much difference as such in context of corporate

culture. In fact my work ex helped me geBng into the role easily, in

understanding organiza�on structure and in assimila�ng well into

the HSBC culture.

Coming to the MBA classroom learning, it was definitely helpful. For

a person like me without any financial background, classroom learn-

ing and compe��ons in which I par�cipated during MBA were of

real help. Also the presenta�ons, which are an integral part of MBA

curriculum, case studies, financial accoun�ng are few of the things

which were of help during the internship.


45

India's gold consump�on at 310 tonnes in Q2, highest in 10

years

India's consump�on of gold rose to 310 tonnes in the second quar-

ter ended June, highest in the

last 10 years, despite govern-

ment curbs to restrict imports

to rein in burgeoning current

account deficit, a WGC report

said on 15th August. Much of

the demand was met by stocks

that had been built up to healthy levels following the April price

drop. Imports more than doubled to 338 tonnes in April-June of this

calendar year, it said. Gold consump�on stood at 181.1 tonnes in

the same quarter last year.

Costlier onion, veggies push infla�on to 5-mth high of 5.79 %

Rising prices of onions and other vegetables pushed infla�on to a

five-month high of 5.79 per

cent in July even as the gov-

ernment and RBI ba;led to

stabilise the rupee. Infla�on

based on the Wholesale Price

Index (WPI) was at 4.86 per

cent in June. In July 2012, it

was 7.52 per cent.

RBI moves to limited capital controls to save Indian rupee

With the rupee dri�ing down to a life�me low of 61.44 to the dollar,

despite measures to �ghten liquidity and push up interest rates, the

Reserve Bank of India (RBI) on Wednesday changed tack, choosing

to defend the currency by moving towards capital controls. The

central bank put restric�ons on the amount of foreign exchange

Indian companies and individuals can invest, remit or spend over-

seas in an a;empt to curb dollar ou,lows from the country. Indian

companies can now send out

only 100% of their net worth

as overseas direct investment

(ODI), way below the current

cap of 400%, under the auto-

ma�c route. The restric�ons,

however spare Navaratna

public sector en��es ONGC and Oil India, the RBI said in a release.

NRI deposits fall 16% in Q1

Even as the government and RBI are trying to lure in more dollars

into the country, flows from non-

resident Indians into bank deposits

has been falling. During April-June,

NRIs put $5.50 billion into Indian

banks' deposits, down 16.11%

from a year ago. As on June end,

NRIs held $71.07 billion in bank

deposits, marginally lower than $71.69 billion in May. The sharp

vola�lity in the rupee may have prompted NRIs to refrain from

puBng money into bank deposits. The rupee weakened 2.4% during

June and has since then fallen to fresh all-�me lows of 61.81/$.

Index of Industrial Produc�on: Output contracts 2.2%, dash-

ing hopes of recovery

Dashing hopes of a recovery, industrial produc�on contracted 2.2

per cent in June, the second straight monthly drop, on account of a

poor show by the manufacturing, mining and power sectors and a

decline in produc�on of capital goods.

Factory output measured in terms of the Index of Industrial Produc-


46

�on (IIP) had contracted 2 per cent

in June last year, as per the data

released by the Central Sta�s�cal

Organisa�on.

Germany poised to overtake US as world's No 2 exporter

this year: DIHK

Germany could overtake the United States to become the world's

second-biggest exporter this year, but its share of global trade is

likely to dip as its ex-

ports lag global expan-

sion, German chambers

of commerce said on

Thursday. Europe's big-

gest economy, currently

the world's third-biggest

exporter a�er China and the United States, has seen its share of

world trade fall to 7.5 percent by last year, from a post-German

unifica�on peak of 11 percent in 1991-92, according to DIHK Cham-

bers of Commerce.

SingTel raises stake in Bhar� Airtel to 32.34% for $302.2 Mn

Singapore Telecommunica�ons Ltd said on Thursday it will increase

its effec�ve interest in India's Bhar� Airtel Ltd to 32.34 per cent

from 30.76 per cent, paying

around S$383.6 million ($302.2

million). SingTel, Southeast

Asia's largest telecommunica-

�on operator, said it had agreed

to buy 788,538 shares, or 3.62

per cent, of Bhar� Telecom

Ltd. Bhar� Telecom holds approximately 43.57 per cent of Bhar�

Airtel. "The acquisi�on would allow SingTel to increase its effec�ve

stake in BAL (Bhar� Airtel), and is in line with SingTel's strategic fo-

cus on maximising the value of its exis�ng businesses, which in-

cludes reviewing opportuni�es to increase shareholdings in exis�ng

associates," the Singapore firm said.

India's first all women bank to have 25 branches by end of

the year

Government plans to set up about 25 branches of the proposed

public sector Bhara�ya Mahila Bank,

India's first all women bank, by the

end of this fiscal. "The Bhara�ya

Mahila Bank proposes to complete

the first six branches at Mumbai,

Delhi, Kolkata, Chennai, Indore and

Guwaha� by October 15 and take

the total to 25 by March 31, 2014," an official said. The government

has already approved Rs 1,000 crores seed capital for the women

focused public sector bank, announced by Finance Minister P Chid-

ambaram in his budget speech.

Metropolis eyes acquisi�ons in India, Africa for expansion

Diagnos�cs chain Metropolis Healthcare is looking for acquisi�ons in

India and Africa as part of its expan-

sion plans. The Mumbai-based firm,

which has earmarked Rs 100 crores

to fund expansion and acquisi�ons,

said it is targe�ng up to three do-

mes�c acquisi�ons in the on-going

fiscal apart from looking for similar

opportuni�es in West Africa in future. It also plans to open 14 new

laboratories across the country in this fiscal as part of its expansion

plans. "We are planning two to three acquisi�ons in FY13-14 in the

country. We are already in talks for these," Metropolis Healthcare

MD & CEO Ameera Shah told PTI

UIDAI issues more than 40 crores Aadhaar numbers �ll date

Government today said the Unique Iden�fica�on Authority of India

(UIDAI) has issued more than 40.29 crores Aadhaar numbers �ll date

and the body will achieve the target 60 crores enrolments by 2014.

"UIDAI has reiterated that the target of 60 crores Aadhaar enrol-

ments will be achieved by 2014. More than 40 crores 29 lakh

Aadhaar numbers have been issued �ll date and the process is con-

�nuing at a healthy pace," Planning Commission said in a release.

According to the release, only in the month of July, 2013, about two

crores Aadhaar numbers have been generated.


47

BITCOIN

A digital or virtual cur-

rency that uses peer-

to-peer technology to

facilitate instant payments. Bitcoin

is a type of alterna�ve currency

known as a crypto-currency, which

uses cryptography for security,

making it difficult to counterfeit.

Bitcoin issuance and transac�ons are carried out collec�vely by the

network, with no central authority. The total number of Bitcoins

that will be issued is capped at 21 million to ensure they are not

devalued by limitless supply.

RELATIVITY TRAP

A psychological or behavioural trap that leads people to

make irra�onal choices when making spending deci-

sions. The

rela�vity trap is frequent-

ly exploited by savvy mar-

keters to coax consumers

into making a spending

decision that maximizes

their profit. It arises be-

cause the human brain

works in a rela�ve way while making comparisons and finds it diffi-

cult to compare across different categories. Innumerable experi-

ments on this subject find that the rela�vity trap is a potent issue

that affects financial decisions for a great number of people.

GUERRILLA TRADING

A very short-term trading technique that aims to generate small

profits while taking on very li;le risk per trade and repea�ng this

mul�ple �mes in a trading session. Guerrilla trades typically have a

shorter dura�on than scalping

or day trades and seldom last

for more than a few minutes, at

the most. Because of its high

trading volume and limited re-

turn nature, low commissions

and �ght trading spreads are prerequisites for successful guerrilla

trading. As it also demands considerable trading exper�se, guerrilla

trading is generally not recommended for novice traders.

PRIME OF PRIME – POP

A brokerage that provides service to traders (especially

Forex traders) who need micro-contract trades. Prime

of Prime (PoP) brokerages also o�en allow for trades of

greater leverage and, as a result, more risk. Many of the brokers

using PoP brokerages are small regional banks with clients that need

smaller currency trade op�ons.

CIRCUS SWAP

A combina�on of an interest rate swap and a currency

swap in which a fixed-rate loan in one currency is

swapped

for a floa�ng-rate

loan in another cur-

rency. A circus swap

therefore converts

not just the basis of

the interest rate liabil-

ity, but also the currency of this liability. The floa�ng rate in a circus

swap is generally indexed to U.S. dollar LIBOR. The term is derived

from the acronym CIRCUS, which stands for Combined Interest Rate

and Currency Swap. Also known as a “cross-currency swap” or

“currency coupon swap".


48

LARGEST ROBBERY IN HISTORY!

M oments before the US started bombing Baghdad; nearly $1

billion dollars was stolen from the Central bank of Iraq and consid-

ered the largest robbery in histo-

ry. $650 million was later recov-

ered in the walls of one of Sad-

dam’s palaces but the balance is

s�ll missing.

PERFECT CRISIS PREDICTOR!

R obert Shiller, a professor at Yale University, predicted both

the .com and housing bub-

bles. Nobody listened to him.

So, you might want to check

when his next book will be com-

ing out before deciding to invest

your money somewhere!

HOW US INVESTMENT MARKET WAS BORN?

I n 1790, the federal government refinanced all federal and state

Revolu�onary War debt, issuing $80

million in bonds. These bonds be-

came the first major issues of pub-

licly traded securi�es, marking the

birth of the U.S. investment mar-

kets.

ATMS INTERESTING FACTS!

▪ In Singapore, you can apply

for an IPO at an ATM

▪ In Romania, more than 80%

of the populace don't have

bank accounts. Ci� has in-

stalled ATMs that let people

pay their bills by deposi�ng cash at the ATMs. Merchants pay a

fee for the service

WHEN IT WAS BUILT, CITICORPS CENTRE HAD A

HIGH CHANCE OF FALLING DOWN

W hen Ci�corp’s

building was built it had

high chance of crumbling.

William J. LeMessurier was

the structural engineer on

the project. LeMessurier

decided to take responsibil-

ity, but secretly.

He hatched a plan that involved workers to fix all 200 joints of the

building's structure and hired people to oversee the work carefully.

He managed to do it without anyone knowing for twenty years!

APPLE DECIDED TO STOP USING THE WORD

‘LAPTOP’ BECAUSE OF POTENTIAL INJURIES!

I n 2006, Apple decided to

stop using the word 'laptop'

because poten�al injuries can

ensue if your laptop is le� on

your lap for extended periods


49

JP MORGAN IN A ROLE OF FEDERAL RESERVE

I n 1913, the Federal Reserve was es-

tablished to replace J.P. Morgan as lend-

er of last resort. It is interes�ng to see

how one man was rich and powerful

enough to bail out the whole economy in

those days. JP Morgan Chase is one of

the four US “super-banks”.

WHAT’S THERE IN A NAME - A LOT!

T he highest publicly re-

ported amount of money

paid for a domain name is $7.5

million! Paid for business.com

HAPPY BIRTHDAY SONG IS NOT FOR FREE!

A company, Warner

Communica�ons paid $28

million for the copyright to

the song 'Happy Birthday'.

Jennifer Nelson is a filmmaker

with a mission: To make Hap-

py Birthday free for anyone to sing.

HOW IKEA GOT ITS

NAME?

The ini�als of founder Ingvar

kampard plus the ini�als of the

property and village he grew up

in , Elmtaryd Agunnaryd.

IF FB WERE A COUNTRY…

I f Facebook were a country, it would be the third-largest country

in the world, a�er China, India.

WHAT WAS YAHOO

ORIGINALLY CALLED?

Y ahoo was originally called Jery’s Guide to the World

Wide Web a�er founders Jerry Yang and David Filo.

UPS SAVING MORE THAN 10 MILLION

GALLONS OF GAS BY STOP MAKING LEFT TURNS!

I n 2004, UPS asked their

drivers to not to make a le�

turn unless it's absolutely

necessary. This development

has led to UPS saving more

than 10 million gallons of gas

since 2004, and reducing carbon emissions by 100,000 metric tons,

or the equivalent of 5,300 cars being off the road for a year.

MCDONALDS REJECTION RATE MORE THAN HAR-

VARD!

M cDonalds is a popular first

job for many high school kids in the

United States. However, as the econ-

omy struggled in the years surround-

ing 2011 Na�onal Hiring Day, McDon-

alds only accepted 6.2% of people

who applied. Compare that to Harvard, which accepts 7% of their

applicants.


50

2 Federal income __

6 Confiden�ality agreement, for

short

8 Used to be the standard for the

dollar

9 One kind of insurance

11 ___ ra�o: A stock's price/earnings

ra�o divided by its year-over-year

earnings growth rate

14 Decide to opt out of an oppor-

tunity

15 Income a�er deduc�ng for oper-

a�ng expenses but before de-

duc�ng for income taxes and

interest (abbr.)

16 Raise money through sale of debt

or equity

17 Ownership papers

19 Possible set of future events

21 Investment made in order to

reduce risk of adverse price

movements in a security, by

taking an offse$ng posi�on in a

related security

22 Smith and Keynes

23 Net worth of a business

26 Wise adviser

27 Land of the euro, for short

29 Cancel a stock order

31 Ended a stock posi�on due to an

execu�on of a market order to

buy or sell a security if a specific

price is reached

32 Put money down.... hoped for a

return

34 Combine, of two en��es

1 Name of a char�ng method in

stock analysis

3 Vietnam currency symbol

4 Using money borrowed from a

broker to purchase securi�es

5 Condi�onal expression

7 Rework the mortgage

8 The ___/fear oscillator (investor's

emo�onal swings )

10 Accumulate

12 Making insurance policy effec�ve

13 Fail to connect

14 Equality

15 Index that tracks the ac�vi�es of

experienced and inexperienced

investors

16 Bank's house takeover

18 Fund that tracks an index

20 Foreign exchange market

23 Dem and of an insurance policy

24 The� of this has become a major

concern for financial ins�tu�ons

25 It was Black in 1869

28 Mutual or money market?

30 Who provides money-at certain

price

33 The 'I' thing

35 Overall so�ware integra�on for

all the company's processes

(abbr.)

Across Down


MEET THE TEAM 51 CREDITS

EDITOR-IN-CHIEF

Vaibhav Garg

EDITORIALTEAM

Aakanksha Hajela

Bhushan Kanathe

Kunal Maheshwari

Mohmammad Umair Ansari

CONTRIBUTIONS FROM

Ankit Tiwari

Ashutosh Deshpande

Raghav Kapila

Shubham Agarwal

C� ��C��

��

Mohit Jethwa

FEEDBACK/QUERIES

[email protected]

[email protected]

Published by students of

Indian Ins�tute of For-

eign Trade

New Delhi | Kolkata

ALL RIGHTS RESERVED

AAKANKSHA HAJELA is an engineer and specializing in

Finance & Marke�ng. She comes with a prior work experi-

ence with IBM and has interned with ICICI Bank's Wholesale

Banking Division involving offloading of a distressed por,o-

lio to an MFI Client & the feasibility study for the same . She

writes for business blogs and magazines. She plans to work

in the field of Consul�ng & Strategy

BHUSHAN KANATHE is an engineer with a mo�va�on to

specialize in Finance. He has cleared CFA Level 2. He

regularly tracks the stock market and wants to pursue a

career in investment banking. He has interned with Bajaj

Allianz Life Insurance Co and was involved in strategy

formula�on for acquiring clients & development of mi-

cro-insurance products

KUNAL MAHESHWARI is a qualified Chartered Account-

ant with Ar�cleship experience from KPMG and aims to

make a career in the field of financial consultancy. He has

interned with Mahindra & Mahindra Financial Services

Ltd with their strategy team on building a roadmap for

Mahindra Finance for expansion in rural India. He enjoys

reading, listening to music and keeping himself updated

with current affairs

MOHMAMMAD UMAIR ANSARI is an engineer who

aspires to build a career in Interna�onal Business &

Trade. He is an avid reader and a current affairs buff. He

has interned with Wipro Ltd at their corporate office in

Bangalore in their Strategic Client Acquisi�on Group -

Telecom Ver�cal. He was responsible for iden�fying op-

portuni�es for Wipro to target Telecom Service Providers

in the CRM Space

VAIBHAV GARG is a qualified Chartered Accountant

and graduate from DU. He aims to specialize in Finance

& Trade. During his internship with Reserve Bank of

India (RBI), he has done a project on 'Real Bo;lenecks

in implementa�on of Basel III capital norms' under

Department of Banking Supervision He follows the

stock and commodity markets and likes to update him-

self with the recent happenings in the field of finance



CONTENTS 2 FROM THE EDITOR’S DESK 1

Companies Gracing The Event

▪ C o g n i z a n t B u s i n e s s

C o n s u l t i n g

▪ W a l M a r t

▪ H e w l e t t P a c k a r d

▪ D e l o i t t e

▪ I B M

▪ D a s s a u l t S y s t e m e s

▪ I n t e r g l o b e T e c h

▪ P W C

▪ K P M G

NationalITConclave2013

On

‘TheParadigmShiftinGlobalITIndustry’

Indian Institute of Foreign Trade (IIFT) is organizing this conclave to provide a platform to share knowledge and ideas among intellectuals from leading Technology companies, corporate houses, international institutions, regulatory bodies, subject matter experts and B-school fraternity to deliberate upon some of the pressing issues present before the IT Industry.

The event will be graced by the business leaders from all over the country, to deliberate upon the impact of Information Technology in the field of Consulting, Operations, Marketing & Human Resources.

Date: 7th September, 2013 Venue: Taj Bengal, Kolkata

For Passes and Queries contact, Coordinators Systemix Club - IFT:

Rohit Shukla | Samarth Shukla M - 9674042465 | M - 9163055599 Email: [email protected]

Indian Ins�tute of Foreign Trade

In associaon with

Electronics & Computer So�ware Export Promo�on Council

Presents


Contact Team InFINeeti: [email protected] | [email protected]

Published by Indian Institute of Foreign Trade, New Delhi and Kolkata

All Rights Reserved

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