Special featureinfineeti research

HoneSt anSwerSJoy Bhattacharjya

page 52

microfinancea fairy tale into nightmare >>> page 20

currency riSk managementembarking on new growth paths >>> page 30

annual i ssuethe monthly finance magazine f rom i ift

cHanging pHaSe of india’S financial SyStem

cover Story >>> page 26

uS deBt ceiling criSiSHow it all started and its effects >>> page 45

cHanging pHaSe of india’S financial SyStemi n the cover stor y, our editor ia l team presents the changing face of

i ndian f inancia l scenar io. this i ssue covers myr iad domains of i ndian

f inancia l scenar io. Sme debts and microf inance industr y is in focus.

t he wor ld i s a d i f ferent

p l a c e p o s t 2 0 0 8 . t h e

d e ve l o p e d p a r t o f t h e

g l o b e i s s t i l l s t r u g g l i n g. th e

euro Zone is current ly t r y ing

v e r y h a r d t o a v o i d a n o t h e r

f inancia l f iasco. on the other

h a n d , t h e u S a h a s i t s k i t t y

f u l l w i t h c o n g r e s s a p p r o v -

ing the b i l l to ra ise the debt

c e i l i n g a t t h e l a s t m o m e n t .

a m i d s t a l l t h i s u n c e r t a i n t y,

e m e r g i n g e c o n o m i e s a r e

f i n d i n g i t i n c r e a s i n g l y d i f -

f i c u l t t o s u s t a i n t h e g r o w t h

stor y. i ndia is fac ing the heat

o f a l l t h i s g l o b a l m a c r o e c o -

nomic turbulence. inf lat ion in

the countr y has redef ined the

word “stubborn”. the reser ve

B a n k o f i n d i a h a s r a i s e d t h e

i n te re s t ra te s 1 1 t i m e s s i n ce

m a rc h 2 0 1 0 . th i s h a s l a rg e l y

been held responsible for the

slowing growth rate but inter-

e s t i n g l y, r e a l i n t e r e s t r a t e s

w e r e n e g a t i v e f o r t h e s a m e

t i m e p e r i o d . i t i s s a i d t h a t

the benef i ts of Shining i ndia

a r e n o t r e a c h i n g t h e a r e a s

t h a t m o s t d e s i r e a n d n e e d

them. therefore, the gover n-

ment of i ndia has procla imed

f i n a n c i a l i n c l u s i o n to b e t h e

f lag bearer of future growth.

i n this annual i ssue, we have

focussed on some of such core

issues af fec t ing our economy.

ar t ic les f rom corporates, aca-

d e m i a a n d s t u d e n t s p r e s e n t

t h e s i t u a t i o n o f t h e c o r p o -

rate bond market, reasons and

e f fe c t s o f u S d e b t c r i s i s a n d

S m e f i n a n c e i n i n d i a a l o n g

w i t h o t h e r p r e s s i n g t o p i c s .

Happy reading!

a r J i t J a i n i s s p e c i a l i s i n g i n

f i n a n c e . H e i n t e r n e d w i t h

m a h i n d r a a n d m a h i n d r a

a n d h a s w o r k e d i n r e l i a n c e

i n d u s t r e s l i m i t e d . a n a v i d

reader, he is learning the build-

ing blocks of economics at i ift.

avai lable a long with the annual i ssue

infineeti reSearcHr e s e a rc h s e c t i o n o f i n f i n e e t i s h owc a s e s t h e w i n n i n g e n t r y o f n a t i o n a l r e s e a r c h p a p e r c o m p e t i t i o n b y s t u d e n t s o f n i t i e . e q u i t y r e S e a r c H c e l l o f i i f t c o m e s u p w i t h t h e r e s e a r c h r e p o r t o n r o l t a i n d i a l i m i t e d .

i n f i n e e t i | a n n u a l i s s u e 2 0 1 1

3meSSage from editor- i n - c H i e f

» p.20 » p.45

e d i to r - i n - c H i e f

arj i t Ja in

e d i to r i a l B oa r d

archie g angrade

n ishtha anand

Shivaj i yadav

Sunandan Sr idharan

Vineet Bakshi

co n t r i B u t i o n S f r o m

ak ash S

apoor v Jayavant

kunal pat i l

pal lavi Saxena

pr iya Juneja

pr iya S ingh

rohit k hattar

Soumya S en

Suman tiwar i

d e S i g n

team i nfineet i

f e e d B ac k / q u e r i e S

inf ineet i@i i f t .ac. in

inf ineet i@gmai l .com

p u b l i s h e d m o n t h l y b y s t u d e n t s o f i n d i a n i n s t i t u t e o f f o r e i g n tr a d e , n e w d e l h i a n d kolk ata

all rigHtS reSer Ved

a r c H i e g a n g r a d e is an avid learner

and has keen interest in finance. She

h a s co m p l e te d c fa le ve l 1 . S h e h a s

interned with tata consultancy Services

in corporate finance and has worked

i n co m p u t e r S c i e n c e s c o r p o r a t i o n .

n i S H t H a a n a n d i s s p e c i a l i s i n g i n

finance. She has interned with deloitte

i n d i a p v t l t d i n t h e i r S t r a t e g y &

operat ions prac t ice. She plans to jo in

the f ie ld of m anagement consultanc y.

S H i Va J i ya d aV i s a c h e m i c a l e n g i -

n e e r, w h o t a k e s k e e n i n t e r e s t i n

finance and trade. He has completed

c fa le ve l 1 . H i s i n t e re s t s l i e i n fo l -

l o w i n g c o m m o d i t i e s a n d h e a s p i re s

t o b e a t r a d e r i n t h e n e a r f u t u r e .

S u n a n d a n S r i d H a r a n i s s p e c i a l -

i z i n g i n f i n a n c e . H e h a s i n t e r n e d

w i t h ta t a c a p i t a l t h i s s u m m e r a n d

l o o k s f o r w a r d t o w o r k i n t h e c h a l -

l e n g i n g B a n k i n g a n d f i n a n c i a l

S e r v i c e s i n d u s t r y, p o s t g r a d u a t i o n .

V i n e e t B a k S H i i s a c i v i l e n g i n e e r

with diverse interests. He has interned

w i t h tata S t e e l . a h i g h l y e n e r -

g e t i c a n d m o t i v a t e d p r o f e s s i o n a l ,

h e h a s i n t e r e s t s i n v a r i o u s f i e l d s .

» p.6

6 trendS make money

Sudarshan Suk hani

8 india’S eVolVing m&a landScape

Suni l Shirole

12 Vc and pe inVeStmentS in india

Snehal desai

14 alice in wonderland - t wo wordS of finance

r antej S ingh

20 microfinance a fairy tale into nigHtmare

m S Shr i ram

30 currency riSk management - emBarking on new grow tH patHS

prof. Hark i rat S ingh

36 reSource plan-ning in Sme’Sreuben r ay

39 keyneS and paScHimBanga

dr. r anajoy Bhattachar y ya

42 So you tHougHt tHe uS would default

m ritunjay kumar

45 uS deBt ceiling criSiS: How it all Started and itS effec tS

tir thak r i t muk her jee

48 indian corporate deBt market - need of tHe Hour

52 HoneSt anSwerS Joy Bhattachar jya

coVer Story26 cHanging pHaSe of india’S

financial SyStem

regularS

55 campuS to corporate:

tata capital

56 Summer internSHip:

tata capital

58 fun witH fin: croSSword

i n f i n e e t i | a n n u a l i s s u e 2 0 1 1 i n f i n e e t i | a n n u a l i s s u e 2 0 1 1

4 5mee t tHe teaminfo contentS

trends make moneyexcerpted f rom the book , trading tHe marke tS witH SudarSHan SukHani . publ ished by Vis ion Books (w w w.vis ionbooksindia .com). m r Suk hani wr i tes a blog cal led trading Steps at w w w.sudarshanonl ine.com

t h e i d e a s t h a t “ t re n d s m a k e

m o n e y ” a n d “ b u y l o w, s e l l

high” appear contradictor y. i n

a n u p t re n d, p r i ce s a re g o i n g

up. i f they are going up, then

how can you “buy low ”?So we

ask , what is the low? i f Sneha

can sel l her share for 50 then

her purchase pr ice of 40 i s a

low. after al l , the purpose is to

se l l h igher. i f she ant ic ipates

t h a t t h e p r i ce w i l l r i s e , t h e n

the current price is a low since

she may be able to sel l higher.

f i g u r e 1 . 1 : t r e n d s m a k e

m o n e y. t h e c h a r t s h o w s a n

u p t r e n d i n p n B a s t h e p r i c e

g o e s u p f ro m r s . 3 5 0 - 1 , 0 5 0

t h e r e f o r e , w h e n w e s a y

“ b u y l o w ” w e a r e r e f e r -

r i n g t o a r e l a t i v e l o w .

S ometime in 1989, r el iance’s

share price hit a low below 50.

at t he t ime of t h is wr i t ing i t

was t rading at ` 1 ,000 ( there

were bonus issues a lso in the

inter im but we wi l l leave that

for now). does the “buy at low ”

rule require us to wait for 50

in rel iance? i hope not , s ince

this pr ice may not be seen for

a long t ime. a low, therefore,

is a price from where we antic-

i p a te h i g h e r p r i ce s . i f p r i ce s

move up from our buying level,

we h ave f u l f i l l e d t h e g o l d e n

a x i o m “ b u y l o w, S e l l H i g h”,

a n d, we h ave m a d e a p ro f i t .

the move f rom 40 to 50 is an

uptrend. Buyers make money

w h e n p r i c e s g o u p. i n o t h e r

w o r d s , b u y e r s m a k e m o n e y

w h e n t h e r e i s a n u p t r e n d .

the same pr inciples apply to

downtrends. Here also, money

i s m a d e w i t h t h e p r i n c i p l e

“buy low, sel l high’ except that

w e f i r s t s e l l h i g h a n d t h e n ,

l a t e r, b u y a t a l o w e r p r i c e .

S h o r t s e l l e r s m a k e m o n e y

w h e n t h e r e i s a d o w n t r e n d .

tr e n d s m a k e m o n e y i n t h e

m a r k e t . w h e n p r i c e s m o v e

f r o m l o w t o h i g h , w e h a v e

an uptrend. when they move

f r o m h i g h t o l o w, w e h a v e

a d o w n t r e n d . e i t h e r w a y, a

t rend is necessar y in order to

make money. the impor tance

of t rend must be understood.

when share pr ices fa l l , there

i s a d o w n t re n d. m a ny i nve s -

tors wil l buy shares in a down-

t re n d b e c a u s e t h e y fe e l t h at

p r i ce s h ave b e co m e to o l ow.

what they real ly mean is that ,

soon enough, pr ices wi l l s tar t

r i s ing. therefore, they ant ic i -

p a te a c h a n g e i n t re n d f ro m

d o w n t o u p. i n o t h e r wo rd s ,

s u c h i nve s to r s a re a nt i c i p at -

i n g a t r e n d r e v e r s a l b e f o r e

the reversal actual ly happens.

t h e s e i n v e s t o r s a r e c o u n -

te r - t re n d i nve s to r s . th e y a re

t a k i n g a p o s i t i o n w h i c h i s

a g a i n s t t h e c u r r e n t t r e n d .

m e a n w h i l e , o t h e r i n v e s -

t o r s w i l l n o t b u y. t h e y w a i t

p a t i e n t l y fo r p r i ce s to b e gi n

r i s i n g b e f o r e t h e y b u y. t h i s

group is wait ing for the t rend

t o a c t u a l l y r e v e r s e b e f o r e

b u y i n g. th i s gro u p a re t re n d

following investors. the group

t h a t m a k e s t h e m o s t m o n e y

are t rend fol lowing investors.

t h e p ro b l e m w i t h a n t i c i p a t-

ing a change in t rend is that

s o o n e r o r l a t e r t h e i nv e s t o r

b e g i n s t o “ p l a y g o d ”. w h o

k n ows t h e f u t u re ? th e co u n -

ter-t rend investor c la ims that

h e d o e s . H e i s b u y i n g e v e n

before the trend has changed.

H e i s s a y i n g t h a t t h e r e w i l l

be a t rend change and pr ices

wil l go up. How can he be sure

a b o u t t h a t ? w h a t h a p p e n s

i f p r i c e s d o n o t g o u p ?

t h e t r e n d f o l l o w i n g i n v e s -

tor, on the other hand, waits

p a t i e n t l y fo r p r i c e s t o a c t u -

a l l y b e gi n m ov i n g u p b e fo re

h e t a k e s a b u y i n g p o s i t i o n .

figure 1.2: no trend, no money.

t h i s c h a r t o f H i n d u n i l e v e r

shows the absence of any trend

a s s u m e t h a t t h e o n g o i n g

trend wi l l cont inue.

we a l w a y s a s s u m e t h a t t h e

ongoing t rend wi l l cont inue.

a f t e r a s u s t a i n e d u p m o v e ,

m a n y t r a d e r s b e l i e v e p r i c e s

h a v e r i s e n s o m u c h t h a t a

re t ra ce m e n t , o r e ve n a co m -

p l e t e r e v e r s a l , o f t r e n d i s

l i k e l y. B a s e d o n t h i s b e l i e f ,

traders go and sell the market.

Sell ing at what is currently the

top of the market is an exhi la-

rat ing exper ience. the trader

f e e l s l i k e a k i n g , a n n o u n c -

i n g t h e e n d o f a t r e n d . we

a l l l ove to c a tc h t h e h i g h o r

l o w o f a m o v e. i t m a k e s fo r

g o o d s t o r y t e l l i n g . B u t , i n

real i t y, t rends are pers istent .

o n c e a m o v e s t a r t s , i t c a n

c o n t i n u e fo r l o n g e r t h a n we

imagine. when a market is in

a t r e n d , y o u s h o u l d a s s u m e

t h at t h e t re n d w i l l co nt i n u e.

tre n d s m a k e t h e b i g m o n e y.

a u t h o r p r e s e n t s h i s v i e w s i n c n B c t V - 1 8 . H e i s a f u l l t i m e t r a d e r .

S n e h a b u y s a s h a r e a t

4 0 a n d s e l l s i t a t 5 0 .

S h e m a k e s m o n e y o n

t h e i n v e s t m e n t . w h y ? S h e

m a k e s m o n e y b e c a u s e t h e

s h a r e ’s p r i c e m o v e d h i g h e r

t h u s g i v i n g a p r o f i t . c o u l d

s h e m a k e m o n e y i f t h e p r i ce

fe l l to 30? no, she would have

l o s t m o n e y b e c a u s e t h e l a w

of mathematics says that the

o n l y w a y t o m a k e m o n e y i n

t h e m a r k e t i s t o f o l l o w t h e

r u l e : B u y l o w a n d s e l l h i g h .

i n f i n e e t i | a n n u a l i s s u e 2 0 1 1 i n f i n e e t i | a n n u a l i s s u e 2 0 1 1

6 7tecHnical analySiS

india’s evolving m&a landscape Suni l Shirole, m anaging direc tor & ceo, yen capita l advisors

best exempl i f ied by the high

p r o f i l e t a k e o v e r o f J a g u a r

l a n d r o v e r ( J l r ) b y ta t a

m o t o r s . fo l l o w i n g t h i s t h e

company immediately moved

to begin produc t ion in i ndia ,

a l lowing i t to take advantage

of india’s labour and cost arbi-

trage and apply its knowledge

of the local market .

S econdly, severa l i ndian cor-

porate (as wel l as the govern-

m e n t ) i nve s t a b ro a d a s t h e y

s e e k t o s e c u r e e n e r g y a n d

r a w m a t e r i a l / m i n e r a l s u p -

pl ies to achieve their growth

o b j e c t i v e s . t h e a c q u i s i t i o n

of greate r n i le in Sudan and

r u s s i a ’s S a k h a l i n b y o n g c ,

and general chemicals by tata

c h e m i c a l s a r e e x a m p l e s o f

such takeovers. lat in america

a n d a f r i c a a r e e m e r g i n g a s

m & a t a rg e t s fo r i n d i a n co m -

panies because of r ich natural

re s o u rc e s i n c l u d i n g o i l , g a s ,

i r o n o r e a n d c o a l . r e s o u r c e

m o t i v a t i o n s a c c o u n t e d f o r

20% of al l foreign acquisit ions

bet ween 2000 and 2007.

l a s t l y , f o r e i g n a c q u i s i -

t ions with the a im of acquir-

i n g k n o w l e d g e a n d t e c h n o l -

o g y h a v e a l s o c o n t r i b u t e d

t o t h e g r o w t h o f o u t b o u n d

m & a s . B p o s , i t e n t e r p r i s e s

and phar mas seek to acquire

patents, trademarks and copy-

r i g h t s t o s t r e n g t h e n t h e i r

k nowledge base.

t h e a v a i l a b i l i t y a n d a c c e s s

to capita l , coupled with high

v a l u a t i o n o f i n d i a n c o m p a -

n i e s , i s a s i g n i f i c a n t d r i v e r

f u e l l i n g o u t b o u n d m & a .

d e - l e v e r a g i n g o f b a l a n c e

sheets, robust capital markets

a n d e m e rg e n ce o f l e ve ra g e d

f i n a n c e h a s h e l p e d c o m p a -

n i e s t o i n c re a s i n g l y l o o k fo r

o u t b o u n d m & a . a l s o w h a t i s

notable i s the growing t rend

a m o n g i n d i a n c o r p o r a t e s

o f a c q u i r i n g c o m p a n i e s f a r

larger than themselves in of f -

shore jur isdict ions. the acqui-

s i t i o n o f c o r u s , a c o m p a n y

with a capacity of 18.3 mil l ion

t o n n e s a ye a r, b y ta t a S t e e l ,

whose capacit y at the t ime of

a c q u i s i t i o n w a s a m e r e 5 . 9 3

i n the last 3 years, india inc.

has acquired foreign assets

w o r t h $ 2 7 . 2 5 B i l l i o n ( r s .

1 2 2 6 t h o u s a n d c r o r e s ) . t h e

d e p re c i a t i o n o f m a j o r wo r l d

currencies, the weak interna-

t i o n a l e c o n o m y a n d s u b s e -

quent lack luster international

demand have a l l contr ibuted

to mak ing foreign companies

a t t r a c t i v e t o i n d i a n b u y e r s .

But more impor tant has been

india inc ’s growing confidence

in i tse l f on the back of rapid

growth and unshackling of the

l icense r aj .

t h e m o t i v a t i o n f o r a c q u i s i -

t ions abroad are manifold, pri-

mari ly acquir ing market share,

ip, brands and an establ ished

knowledge and resource base.

why outbound m&as?

f i r s t l y , i n d i a n c o m p a n i e s

l o o k t o a c q u i r e e s t a b l i s h e d

brand names, as wel l as mar-

k e t i n g , s a l e s a n d d i s t r i b u -

t ion channels in h ighly com-

p e t i t i ve m a r k e t s l i k e t h e u S ,

e u r o p e a n d t h e u k . t h i s i s

m i l l i o n t o n n e s a y e a r, f o r

$12.9 bi l l ion in Januar y 2007

is a case in point. also notable

i s the acquis i t ion of novel l i s

b y H i n d a l c o i n d u s t r i e s f o r

$6 bi l l ion in m ay 2007. whi le

i ndian corporates are aggres-

s i v e l y e x p a n d i n g t h e i r h o r i -

zo n s , t h e i r co u n te r p a r t s o f f -

s h o re a re s i m i l a r l y t a rg e t i n g

a n d a c q u i r i n g o r s e t t i n g u p

operat ions within i ndia .

i n b o u n d m & a : i n d i a top target among Brics af ter china

w h i l e i n d i a n c o r p o r a t e s a r e

aggress ively expanding thei r

h o r i z o n s , t h e i r c o u n t e r p a r t s

of fshore are s imi lar ly target-

i n g a n d a cq u i r i n g o r s e t t i n g

u p o p e r a t i o n s w i t h i n i n d i a .

Vo d a f o n e ’s l o n g - d r a w n - o u t

a c q u i s i t i o n o f a 6 7 p e r c e n t

s t a k e i n H u t c h i s o n e s s a r a t

$ 1 1 . 1 b i l l i o n w a s o n e o f t h e

l a r g e s t f o r e i g n i n v e s t m e n t

t ransac t ions in i ndia to date.

f u n d a m e n t a l s o f i n b o u n d

m & a r e m a i n i n t a c t a s o v e r -

s e a s a c q u i r e r s c o n t i n u e t o

view india as strategic market

for their g lobal growth plans,

a l though premium valuat ions

m a k e i n d i a n b u s i n e s s e s l o o k

unattrac t ive at face value.

the interest of foreign compa-

nies in indian entit ies is l ikely

to continue trending upwards

as companies f rom korea and

r u s s i a a re ex p e c te d to e nte r

i n d i a , a l o n g w i t h c o u n t e r -

par ts from the uS, europe and

Japan. two keys areas of inter-

est remain the infrastruc ture

and f inancia l sec tors.

the oppor tunity is substantial

i n t h e fo r m e r, w i t h t h e g ov -

e r n m e n t l o o k i n g t o f u r t h e r

t h e p a r t i c i p a t i o n o f p r i v a t e

players, and earmarking about

u S d 1 tr i l l i o n t o s p e n d o n

t h e s e c t o r i n c o m i n g y e a r s .

m o r e o v e r, v a l u a t i o n m u l t i -

p l e s i n t h i s s p a ce l o o k m o re

a t t r a c t i ve w i t h s e c to r v a l u a -

tions below those of the wider

i n d i a n m a r k e t . th e co u nt r y ’s

f i n a n c i a l s e c t o r, w h i c h h a s

seen a wave of m&a deals and

ipos, could expand fur ther as

a n t i c i p a t e d b a n k i n g re fo r m s

m a y o p e n t h e s e c t o r f o r

greater foreign par t ic ipat ion.

c o n s o l i d a t i o n d r i v e r s for domest ic m&a

corporate reorganization and

c o n s o l i d a t i o n w i t h i n “ f r a g -

m e n t e d ” s e c t o r s a c t a s c a t -

a l y s t s f o r d o m e s t i c m & a .

c o m p a n i e s a r e a c t i v e l y

l o o k i n g a t c o n s o l i d a t i o n a s

a means to rat ional ise costs .

th i s h a s g i ve n r i s e to a n e w

g e n e r a t i o n o f t r a n s a c t i o n s

t h a t a r e b u i l t o n t h e b a s i s

o f a s h o r t - t e r m n e e d t o b e

able to cut costs, consol idate

a n d b r i n g l a rg e r re ve n u e o n

t h e t a b l e , n o t o n t h e b a s i s

of long-term strategic needs.

w i t h s t r o n g b a l a n c e s h e e t s

a n d w i l l i n g l o c a l l e n d e r s ,

i n d i a n c o m p a n i e s a r e w e l l

posit ioned to pursue consol i -

dat ion and expansion.

acquis i t ion financing

t h e e n v i r o n m e n t f o r

i n f i n e e t i | a n n u a l i s s u e 2 0 1 1 i n f i n e e t i | a n n u a l i s s u e 2 0 1 1

8 9m&a

a cq u i s i t i o n f i n a n ce h a s s i g -

n i f i c a n t l y i m p r o v e d , a l l o w -

ing i ndian corporates to tap

mult iple sources of funding.

t h e l i q u i d i t y p o o l a n d

f u n d i n g o p t i o n s f o r i n d i a n

c o r p o r a t e s , i n g e n e r a l , a n d

f o r m & a h a v e e x p a n d e d .

i n d i a n e q u i t y m a r k e t s h ave

p e r f o r m e d w e l l , p r o v i d i n g

v a r i o u s f u n d ra i s i n g o p p o r-

tuni t ies , inc luding the i ssu -

a n c e o f i n n o v a t i v e h y b r i d

s e c u r i t i e s . t h e d e c l i n e i n

borrowing costs has a l lowed

i ndian companies to replace

d e b t w i t h c h e a p e r f i n a n c -

ing, putt ing them in posit ion

n o w t o b e m o re a g g re s s i ve

on acquis i t ions.

i n r e l a t i o n t o a c q u i s i -

t i o n f i n a n c i n g b y b a n k s i n

i n d i a , b a n k s a r e p e r m i t -

t e d t o f i n a n c e t h e a c q u i s i -

t i o n o f c o m p a n i e s t h a t a r e

engaged in implementing or

o p e r a t i n g a n i n f r a s t r u c t u re

projec t . financing by banks

o f a c q u i s i t i o n o f s h a r e s o f

a n o f f s h o r e c o m p a n y b y a n

i n d i a n co m p a ny, i s a l s o p e r-

m i t t e d . B a c k - u p f i n a n c i n g

i n s t r u m e n t s s u c h a s g u a r -

a n t e e s , s t a n d - b y l e t t e r s o f

credit , keep -wel l agreements

e t c a r e u s u a l l y u s e d e i t h e r

where the f inancier is a group

c o m p a ny o r a m u l t i n a t i o n a l

b a n k c a t e r i n g t o t h e g r o u p

o r w h e re t h e a c t u a l i n te re s t

of the f inancier i s in a paral -

le l t ransac t ion.

new financing structures have

a l s o b e e n e x p l o re d w h e re by

s p e c i a l p u r p o s e ve h i c l e s a re

set up outs ide i ndia to ra ise

f u n d s o f f s h o r e f o r m a k i n g

acquis i t ions in i ndia . fur ther,

this has led to increased usage

of hybr id f inancing produc ts,

such as fu l ly / par t ly conver t-

i b l e i n s t r u m e n t s , w a r r a n t s ,

e t c . S u c h i n s t r u m e n t s a r e

a lso common in case of l i s ted

companies s ince by v i r tue of

these, the f inancier can avai l

o f b e n e f i t s o f a f l u c t u a t i n g

c a p i t a l m a r k e t b y p h a s i n g

out convers ions ; and can a lso

aver t public offer r isks related

to indirec t acquis it ion of sub -

stantial shares or voting r ights

in the l i s ted target company.

the benign debt market envi -

r o n m e n t , e s p e c i a l l y f r o m

t h e s e co n d h a l f o f 2 0 1 0 , h a s

he lpe d s e ve ra l cor porates to

r e f i n a n c e t h e d e b t o r r a i s e

long-term funds at attrac t ive

costs. the rupee bond market,

w h i l e s t i l l a t a r e l a t i v e l y

nascent stage, has deepened.

i n J a n u a r y 2 0 0 9 , c i t i h e l p e d

o n g c V i d e s h r a i s e o v e r $ 1

b i l l i o n i n t h e d o m e s t i c co m -

mercia l paper market to fund

i ts acquis it ion of i mperial plc.

indian banks have stepped up

their lending ac t iv i t y as wel l .

i n Januar y 2010, SBi provided

a loan of more than $1 bi l l ion

to gtl i nfrastruc ture to help

fund i t s acq uis i t ion of a i rce l

to w e r s ( w h i c h w a s s t r u c -

t u re d a s a n a s s e t p u rc h a s e ) .

moreover, leveraged loans are

a v a i l a b l e e s p e c i a l l y f o r t h e

r ight deal and the r ight credit

st ruc ture.

pr ivate equit y funding

india has witnessed increased

u s a g e o f i n n o v a t i v e f i n a n -

c ia l instruments to fund such

a c q u i s i t i o n s , s o m e o f w h i c h

a re a t t r i b u t a b l e t o e x p o s u re

t o p r i v a t e e q u i t y p l a y e r s .

p r i v a t e e q u i t y p l a y e r s h a v e

been the most ac t ive players

with 2.03 bi l l ion $ wor th deals

i n t h e ye a r o f 2 0 0 5 r i s i n g to

23 bi l l ion $ in the year 2010.

V e n t u r e c a p i t a l f u n d s a n d

foreign inst itut ional investors

are a lso s igni f icant players in

acquis i t ion f inance markets.

p r i v a t e e q u i t y p l a y e r s a r e

a d d i n g v a l u e i n m u l t i -

p l e a s p e c t s a s p a r t n e r s i n

t h e a c q u i s i t i o n p r o c e s s .

companies are able to lever-

age on the exper ience of the

p e p l a y e r s i n m & a p r o c e s s ,

negot iat ions and establ ished

c r e d i b i l i t y . d u r i n g t h e b i d

process and post acquis i t ion,

pe f i rm can infuse capita l on

a s h o r t n o t i ce d e p e n d i n g o n

t h e n e e d a n d t h e o b j e c t i v e .

pe players a lso have the f lex-

ibi l ity in structuring the trans-

a c t i o n . t h e y c a n i nve s t m e n t

at the parent level as wel l as

i nvest at the SpV level i .e . in

t h e o v e r s e a s e n t i t y a c q u i r -

i n g t h e t a r g e t . t h e i r e x p e r i -

e n c e s a l s o c o m e h a n d y w i t h

respec t to restruc tur ing post

acquisit ions as they are famil-

iar with local laws and regu-

l a t i o n s , h a v e b e t t e r u n d e r -

s t a n d i n g o f t h e c u l t u r e &

w o r k e t h i c s i n t h e c o u n t r y

o f t h e t a r g e t a n d a r e l i k e l y

to have local contac ts , inf lu-

ence which could help in the

conduc t of business.

out look

l o o k i n g f o r w a r d , t h e r e i s

e ve r y re a s o n to b e l i e ve t h a t

m & a v o l u m e s c a n b e s u s -

ta ined. corporate conf idence

h a s re b o u n d e d s t ro n g l y a n d

indian ceos are wil l ing to con-

s ider t ransfor mat ional deals .

However, successful m&a per-

formance by india inc is largely

dependent on the regulator y

landscape. Successful accom-

plishment of the complex m&a

process in today ’s t imes needs

enabl ing steps f rom the gov-

e r n m e n t a n d r e g u l a t o r s , a s

well as the strategies fol lowed

by co n s o l i d at i n g co r p o rate s .

w h i l e g o v e r n m e n t n e e d s t o

b r i n g i n f a c i l i t a t i v e p r o v i -

s ions through changes in the

companies Bi l l , combinations

r e g u l a t i o n s , ta k e o v e r c o d e

and foreign investment policy,

corporates are focusing their

s t r a t e g y b a s e d o n i m m i n e n t

c h a n g e s d u e t o p r o p o s e d

convergence with ifrS, avai l -

a b i l i t y o f a cq u i s i t i o n f i n a n c -

i n g a n d l o n g - t e r m p a r t n e r -

ship potent ia l whi le conclud-

ing the deal think ing through

integrat ion issues.

a g a i n s t a b a c k d r o p o f e c o -

n o m i c u n ce r t a i nt y i n ce r t a i n

e u r o p e a n r e g i o n s , a s w e l l

a s m o d e r a t i n g g r o w t h a n d

d e m a n d , i n c r e a s i n g i n t e r -

e s t r a t e s , i n f l a t i o n i s s u e s

a n d t h e m e rg e r c o n t ro l p ro -

v is ions being not i f ied by the

c o m p e t i t i o n c o m m i s s i o n o f

i ndia , m&a ac t iv i t y in i ndia in

the f i rst half of 2011 has resi l -

i e n t l y k e p t p a c e w i t h 2 0 1 0

levels .

aBout tHe autHor

a cor porate finance specia l -i s t , S u n i l S h i r o l e h a s m o r e t h a n 2 4 y e a r s e x p e r i e n c e i n the f ie ld of Bank ing & finance holding senior posit ions with cit ibank , Standard char tered a n d d e u t s c h e B a n k . H e w a s i n v o l v e d w i t h s e v e r a l l a n d -mark m&a transactions such as t h e B h a ra t fo rg e a cq u i s i t i o n of cdp germany and uni lever a cq u i s i t i o n o f r o s s e l te a . H e has ra ised more than uS$ 500 m i l l i o n i n t h e i n t e r n a t i o n a l b o n d s m a r k e t s . H e i s t h e f o u n d e r o f y e n c a p i t a l ad v i s o r s a n d co n ce p t u a l i ze d t h e i n d i a pr i v a t e e q u i t y fa i r – i n d i a ’s f i r s t B 2 B p l a t f o r m i n pr i vate eq u i t y. H e h o l d s a B a ( e co ) f ro m t h e fe rg u s s o n c o l l e g e , p u n e a n d a n m B a f ro m t h e Sy m b i o s i s i n s t i t u te of Business management.

i n f i n e e t i | a n n u a l i s s u e 2 0 1 1 i n f i n e e t i | a n n u a l i s s u e 2 0 1 1

10 11

Vc and pe investments in india Snehal desai , deput y gm adani group

the current Vc investment in

i ndia is s t i l l predominant ly in

the sof t ware sec tor fo l lowed

b y b i o t e c h n o l o g y a n d l i f e

s c i e n c e s . c l e a n t e c h n o l o g y

c o m p a n i e s a r e a l s o a t t r a c t -

i n g t h e i n t e r e s t o f V c s , b u t

a s e a s y m o n e y h a s n o t b e e n

avai lable due to the dear th of

u n i q u e i d e a s , i n v e s t m e n t i s

t a k i n g p l a c e i n t h e ve r t i c a l s

of establ ished industr ies. for

example, companies involved

in the manufac tur ing of solar

p h o t o v o l t a i c ( p V ) c e l l s h a v e

a t t r a c t e d V c i nv e s t m e n t s a s

india is st i l l ranked among the

t o p 1 0 m a n u f a c t u r i n g c o u n -

tr ies (a lthough it is not a high

value addit ion process in the

i n d u s t r y ) . B u t p V c e l l s h a v e

h u g e a p p l i c a t i o n s i n s o l a r

based i r r igat ion pumps, solar

energy capt ive powe r and in

back up power for ce l l phone

towers apar t from solar energy

u s a g e . a n o t h e r e x a m p l e o f

ver t ica l investment i s - com-

p a n i e s w o r k i n g i n c u s t o m -

ized dr i l l b i ts (des igning bits

based on the strata of geogra-

phy rather than using globally

qual i f ied bits) which have got

Vc funding. as unique ideas

become scarce Vc investments

are more dr iven towards r & d

c o m p a n i e s ( B u t a V c i nve s t -

m e n t n e v e r g e t s c l a s s i f i e d

a s a n r & d i n v e s t m e n t ) .

the area which has surpr ised

Vcs is the whole new hor izon

of apps. with the emergence

o f i pa d, i p H o n e a n d s i m i l a r

p r o d u c t s , a n e w s e g m e n t

f o r a p p s h a s e v o l v e d . t h e

numbers of downloaded apps

a r e h u g e a n d s h o c k i n g. t h e

r e a s o n f o r t h e a p p s h a v i n g

a h u g e m a r k e t i s g l o b a l i z a -

t ion. i r respec t ive of whether

you are an indian or a Brazi l in,

i n u k , u S a o r i n c h i n a , y o u

c a n b e a n a p p d e ve l o p e r o r

a u s e r. g o o g l e c l a i m e d t h a t

i t w a s h a n d l i n g 5 5 0 0 0 0 n e w

a n d r o i d a c t i v a t i o n s e v e r y

d a y. a p p l e , f r o m J u l y 2 0 0 8

t i l l march 2011, has witnessed

33 mi l l ion app downloads per

day. i f one sees the revenues

from these apps, it is huge and

s u s t a i n a b l e a n d t h a t i s w h a t

Vcs are eyeing. i ndia is hence

b e i n g v i e w e d a s a p o t e n t i a l

application developer market.

whi le many Vcs are focus ing

on establ ished industr ies and

e m e r g i n g s e c t o r s l i k e a p p s

a n d c l o u d t e c h n o l o g y, t h e

c lass ica l V cs are s t i l l search -

i n g f o r b r e a k t h r o u g h

whi le many Vcs are focus ing

on establ ished industr ies and

e m e r g i n g s e c t o r s l i k e a p p s

a n d c l o u d t e c h n o l o g y, t h e

c lass ica l V cs are s t i l l search -

ing for breakthrough innova-

t i o n b a s e d c o m p a n i e s .

i n t e r n e t h a s g i v e n b i r t h t o

many “me too” ideas and com-

p a n i e s . B u t b r e a k t h r o u g h

i d e a s c h a n g e t h e i n d u s t r y .

t h e y h a v e a v a s t i m p a c t o n

b u s i n e s s m o d e l s a n d o n

s o c i e t y. t h e o n l y r i s k s w i t h

these k inds of companies are

either you are there or you are

not there. So r isk return is at

i ts best . for example, funding

the wor ld ’s fastest and smal l -

est (but usable) computers or

the fastest and the best rocket

companies. Here the idea is to

i n t r o d u c e n e w p r o d u c t s a s

good as the exist ing ones but

f a r s u p e r i o r i n t e r m s o f fe a -

tures and cost . i t i s a l l about

creat ing a future mark rather

t h a n f o l l o w i n g t h e i n d u s t r y

b e n c h m a r k . i n d i a i s b e s t a t

th is when i t comes to l i fe -sc i -

e n c e s , s o f t w a r e o r b i o t e c h .

i n p r i vate e q u i t y i nve s t m e nt

i n d i a n co m p a n i e s h ave d o n e

f a r b e t t e r a s c o m p a r e d t o

at t ra c t i n g V c i nve s t m e nt s . i t

i s natura l because pe invest-

m e n t s d o n o t n e c e s s a r i l y

c o m e i n w i t h n e w o r u n i q u e

i d e a s . i n d i a n e n t r e p r e n e u r s

h a ve s h o w n t h e h u n g e r a n d

competence to build large and

great bus inesses. emergence

o f i n d i a n m n c s a n d a t a g o f

a n e m e r g i n g e c o n o m y h a v e

m a d e i n d i a a p re fe r re d d e s -

t i n a t i o n f o r p e i n v e s t o r s .

according to a kpmg sur vey,

s t a r t i n g f r o m a m e a g e r f i v e

d e a l s a n d a to t a l i nve s t m e nt

of uSd20 mi l l ion in 1996,uSd

1 7 . 1 3 b i l l i o n h a s b e e n

i nve s t e d a c ro s s 3 3 9 d e a l s i n

2 0 0 7 , m a k i n g i n d i a o n e o f

t h e to p s e ve n p e i nve s t m e nt

d e s t i n a t i o n s i n t h e w o r l d .

th e p a s t ye a r h a s w i t n e s s e d

p e i n v e s t o r s m o s t l y i n v e s t -

i n g i n f a m i l y r u n o r g a n i z a -

t ions that have been in ex is -

tence for more than 10 years

h a n d l i n g t h e s a m e b u s i n e s s .

the reason for choosing such

o r g a n i z a t i o n s i s o b v i o u s :

t h e p r o m o t e r s u n d e r s t a n d

t h e b u s i n e s s f r o m s c r a t c h

a n d h a v e a b s o l u t e c o s t a n d

q u a l i t y c o n t r o l w h i c h m a k e

t h e m g l o b a l l y c o m p e t i t i v e .

t h e s a m e g e t s u p p o r t e d

w i t h t h e i r a b i l i t y to g e t i nto

unchar ted terr itor y and estab -

lished businesses. for example

welspun today i s the wor ld ’s

b i g g e s t p i p e l i n e c o m p a n y.

t h e p e s p r e fe r a r i s i n g a n d

a m a c ro t a i l w i n d s e c t o r a n d

within the sec tor they prefer

m a r k e t l e a d e r s w i t h p r i c i n g

power or cost power. naturally

there is no substitute for great

management. major pe invest-

ments have happened in real

e s t a t e . e n e r g y, p a r t i c u l a r l y

p o w e r g e n e r a t i o n c o m p a -

n i e s s u c h a s d o m e s t i c f e e d

based companies are gett ing

a better pr ice as compared to

f o r e i g n f e e d l i n k a g e b a s e d

c o m p a n i e s . p h a r m a c e u t i c a l ,

s o f t w a r e & i t e S , e d u c a t i o n

and asset backed businesses

a r e p r e f e r r e d i n v e s t m e n t

c o m p a n i e s f o r p e i n v e s t o r s .

overseas investors are excited

a b o u t i n v e s t m e n t s i n i n d i a

b u t t h e c h a l l e n g e i s t h e

h i g h e r v a l u a t i o n t h a t i n d i a n

e n t r e p r e n e u r s a r e d e m a n d -

i n g . t h e o t h e r c h a l l e n g e

t h at t h e i nve s to r s a re f a c i n g

i s t h e i n d i a n e n t r e p r e n e u r s ’

p s yc h e o f t re a t i n g p e a s p re

ipo t ransac t ions to establ ish

i p o v a l u a t i o n b e n c h m a r k s .

S ince the world debate on

the 2008 recess ion was

a b o u t t h e” V s h a p e” o r

the “ w shape”, venture capital-

is ts and pr ivate equit y inves-

tors across the globe and also

in india are busy searching for

g o o d e n t re p re n e u r s a n d l ow

valued deals . i t has normal ly

b e e n o b s e r v e d t h a t t h e V c

and private equity investment

cycles start during recession or

stagnation and get completed

d u r i n g t h e g r o w t h p h a s e o f

the economy as it is crucial for

equit y investors to enter into

a d e a l d u r i n g t h e b a d p h a s e

of the investment. Both types

of equity investors fol low cre -

a t i v e d e s t r u c t i o n c o n c e p t s

k n o w i n g l y o r u n k n o w i n g l y.

th e ve n t u re c a p i t a l i n d u s t r y

in i ndia has a l ready matured

a n d t h e r e h a s b e e n a l o t o f

f o r e i g n i n v e s t m e n t i n t h e

c o u n t r y. t h e i n d u s t r y w h i c h

was init ial ly in a nascent stage

p r o m o t e d b y m u l t i l a t e r a l

a g e n c i e s a n d t h e s t a t e g o v -

ernments i s now obser ving a

m u l t i t u d e o f p r i vate p l aye r s .

i n f i n e e t i | a n n u a l i s s u e 2 0 1 1 i n f i n e e t i | a n n u a l i s s u e 2 0 1 1

12 13alternate inVeStmentS

t here are t wo wor lds

of finance – one that

c o - e x i s t s w i t h t h e

r e a l w o r l d , a n d t h e o t h e r

that creates i ts own vi r tual

r e a l i t y . t h e f o r m e r p r o -

vides construc t ive input to

t h e l a r g e r e c o n o my w h i l e

t h e l a t t e r e x i s t s p r i m a r -

i l y t o s e r ve i t s o w n i n t e r -

e s t . t h e f o r m e r c o - e x i s t s

closely with the main-street

bus iness and has i ts inter-

e s t s a l i g n e d w i t h t h e s t a -

bi l i ty and long term growth

of the economy, the lat ter

focus es pr imar i ly on shor t

term gains which are some -

t i m e s a t o d d s w i t h t h e

w e l f a r e o f l a r g e r m a r k e t .

d i f f e r e n t i a t i n g b e t w e e n

these two worlds of f inance

h e l p s i n d e v e l o p i n g a

better understanding of the

interac t ion bet ween f inan-

c ia l industr y and the larger

business eco -system. more

of ten than not , the greater

t h e d i s t a n c e b e t w e e n t h e

r e a l w o r l d a s s e t s w h i c h

a r e t o b e f i n a n c e d a n d

t h e e n t i t y t h a t e n d s u p

t a k i n g t h e o w n e r s h i p / r i s k

e x p o s u r e o n t h e u n d e r l y i n g

asset , the more complex and

r i s k p r o n e t h e b u s i n e s s e c o

s y s t e m b e c o m e s . S u c h c o m -

plexity of ten ser ves the inter-

e s t s o f t h e ‘ i n s i d e r s ’ a t t h e

cost of the rest of the market .

looking at the entire f inancial

industr y as a homogeneously

malevolent force doesn’t lead

t o p r o d u c t i v e s o l u t i o n s . a t

the same t ime, expec t ing the

f inancia l industr y to exerc ise

rational self control is unlikely

to wor k s ince the industr y i s

s t r u c t u r e d t o b e i n c e n t i v -

i z e d b a s e d o n e v e r i n c r e a s -

ing quar ter on quar ter growth

i r re s p e c t i ve o f e x te r n a l e co -

nomic c ycles.

the ‘real wor ld ’ f inance

the wor ld of f inance that co -

exists with the real world is the

one that provides money as an

essential input in the l i fec ycle

o f a b u s i n e s s . a l l b u s i n e s s e s

t h at p ro d u ce g o o d s a n d s e r-

v ices, which create the bas ic

e l e m e n t s o f o u r c i v i l i z a t i o n ,

need to buy raw mater ia l , pay

s a l a r i e s t o t h e i r e m p l o y e e s ,

provide credit to their c l ients

a n d k e e p c a s h r e s e r v e s f o r

m e e t i n g c o n t r a c t u a l o b l i g a -

t ions. an entrepreneur or the

company doesn’t a lways have

a m p l e c a s h i n i t s p o c k e t s to

pay for these business require -

ments. this is where the world

o f f i n a n c e s t e p s i n – i t p ro -

v i d e s t h e s e e n t r e p r e n e u r s /

c o m p a n i e s w i t h t h e f u n d i n g

to f i l l in the gap from the t ime

w h e n m o n e y i s r e q u i r e d b y

the business t i l l the t ime the

business is able to pay i t back

by sel l ing their goods and ser-

v ices to their c l ients.

t h e f i n a n c i n g e n t i t y i n t h i s

c a s e c h a rg e s a r a te o f i n te r -

e s t propor t ionate to the r i sk

p r o f i l e o f t h e b o r r o w e r f o r

p r o v i d i n g t h e c r e d i t . t h e

f inancing in such cases could

c o m e f r o m a w i d e a r r a y o f

e nt i t i e s – co m m e rc i a l b a n k s,

n B f c s , p r i v a t e i nv e s t o r s e t c

and could be in the shape of

v a r i o u s i n s t r u m e n t s – p l a i n

vani l la bank credi t produc ts ,

t r e a s u r y m a n a g e m e n t p r o d -

u c t s , s t r u c t u r e d c o r p o r a t e

f i n a n ce, p ro j e c t f i n a n ce e tc

… the range is endless. al l of

these are diverse instruments

a n d e a c h o n e h a s i m m e n s e

b r e a d t h a n d d e p t h w i t h i n

itself – but the common thread

between them is that they are

a l l ver y c lose ly l inked to the

real wor ld businesses.

trade finance

let us look at some examples

o f s u c h ‘ r e a l w o r l d ’ f i n a n c e

p r o d u c t s . tr a d e f i n a n c e i s

t h e m o t h e r o f m o d e r n c o m -

mercia l bank ing - i t probably

or iginated thousands of years

a g o w h e n c i v i l i z at i o n gra d u -

a t e d f r o m b a r t e r s y s t e m o f

t rade to money based system

of t rade. i n i ts s implest form,

a trader buys goods at point a

for a low pr ice and sel ls them

a t p o i n t B a t a h i g h e r p r i c e ,

thus making a profit . However,

t h e t r a d e r n e e d s m o n e y t o

p u r c h a s e g o o d s i n t h e f i r s t

p l a c e . t h a t ’s w h e r e a t r a d e

f i n a n ce r e nte r s t h e e q u at i o n

by providing the trader credit

to buy the goods and cover his

expenses t i l l the goods can be

sold at a prof i t . o ver the ages

t r a d e f i n a n c e h a s e v o l v e d

with t ime to ref lec t the wor ld

around it . with the emergence

of colonia l era , businesses in

p a r e n t c o u n t r i e s o f e u r o p e

n e e d e d t o c a r r y o u t t r a d e

with their d istant colonies in

t h e a m e r i c a s a n d a s i a . t h i s

l e d to e m e rg e n ce o f m o d e r n

day international banks which

e n a b l e d t r a d e r s t o e x p o r t

goods safe in the k nowledge

t h a t t h e b a n k a t t h e d i s t a n t

s h o r e s w o u l d m e e t i t s c o m -

mitment to pay as long as the

expor ting par ty met the terms

and conditions of the underly-

ing trade contract. Soon there

we re m o re s p e c i a l i ze d t r a d e

f i n a n c e p ro d u c t s c o ve r i n g a

whole gamut of internat ional

t r a d e o p e r a t i o n s ; t o d a y w e

even have some trade f inance

focused investment funds that

v e n t u r e i n t o t h e n o n - t r a d i -

t i o n a l t r a d e f i n a n c e t r a n s -

a c t i o n s t h a t c o n v e n t i o n a l

b a n k s - w i t h a l l t h e i r i n h e r-

ent process r igidi t y, f ind di f -

f i c u l t t o s t r u c t u re . H o we ve r,

n o m a t t e r h o w c o m p l e x t h e

t r a d e f i n a n c e i n s t r u m e n t , i t

ser ves the inherent purpose of

f inancing the underlying busi-

n e s s t r a n s a c t i o n i n t h e r e a l

wor ld. the f inancing ent i t y i s

u s u a l l y u n a m b i g u o u s a b o u t

the nature of the under ly ing

r e a l w o r l d t r a n s a c t i o n a n d

t h e a s s o c i a t e d r i s k s b e f o r e

p u t t i n g i t s m o n e y o n t h e

table. this ensures that whi le

the money oi ls the wheels of

global trade, a real ist ic r isk to

return equation is maintained

which discourages i r responsi-

ble r isk tak ing.

projec t finance

S i m i l a r l y p r o j e c t f i n a n c e , a t

l e a s t i n i t s s a n e fo r m , t a k e s

a h o l i s t i c v i e w o f a p r o j -

e c t ’s l i f e c y c l e a n d s t r u c -

tures the payment and repay-

m e n t c yc l e s s u c h t h a t w h i l e

the projec t management has

enough money at a l l t imes to

m e e t i t s f i n a n c i a l n e e d s fo r

p r o j e c t e xe c u t i o n , i t i s a l s o

k e p t o n i t s to e s to m e e t t h e

p r o j e c t m i l e s t o n e s o n t i m e .

t h e c l a u s e s i n b u i l t i n t o a

g o o d p r o j e c t f i n a n c e s t r u c -

t u r e e n s u r e f i n a n c i a l p r u -

dency of the project execution

team, fai l ing which the under-

l y i n g a s s e t – i . e . t h e p ro j e c t

i t s e l f c a n b e t a k e n o v e r b y

the f inancing agenc y. projec t

f inancing al lows construc t ion

of mass ive ref iner ies, b ig fac-

t o r i e s a n d h i g h i n v e s t m e n t

long gestat ion infrastruc ture

p ro j e c t s l i k e ro a d s , a i r p o r t s ,

sea-por ts etc. al l of these con-

tr ibute to overal l growth and

development of the real br ick

a n d m o r t a r w o r l d . ag a i n , i n

most cases, a projec t f inanc -

i n g a g e n c y i s a h a n d s - o n

e n t i t y w h i c h u s u a l l y h a s a

c l e a r g r i p o n t h e r i s k s a n d

re w a rd s a s s o c i a t e d w i t h t h e

u n d e r l y i n g re a l wo r l d t r a n s -

ac t ion – i .e . the projec t being

f inanced.

‘al ice in wonder land’

alice in wonderland - the two worlds of financer antej S ingh

i n f i n e e t i | a n n u a l i s s u e 2 0 1 1 i n f i n e e t i | a n n u a l i s s u e 2 0 1 1

14 15f i n a n c e

t h e p i c t u r e g e t s h a z i e r

a n d c r a z i e r a s t h e d i s -

t an ce be t wee n t he un d er-

ly ing rea l wor ld asset and

t h e e n t i t y f i n a n c i n g i t

i n c r e a s e s . m u l t i p l e l a y e r s

of intermediat ion bet ween

t h e r i s k o r i g i n a t o r s a n d

t h e r i s k o w n e r s c re a t e a n

i m p o s s i b l y i n t r i c a t e m a z e

w h i c h e ve n ve te ra n i n s i d -

ers are unable to unravel .

mathematical models have

been created as an attempt

to measure r isks associated

with these scenarios, but as

r e p e a t e d m a r k e t b u b b l e s

a n d b u s t s o v e r t h e l a s t

centur y have shown, these

m od e l s are wo ef u l l y i n ad -

e q u a t e i n c a p t u r i n g t h e

c o m p l e x i t y o f r e a l w o r l d

and depic t ing them in the

form of few numeric values.

o ver dependence on these

models has cost ly impl ica-

t i o n s f o r t h e l a r g e r b u s i -

ness eco system.

cdo, cdo-square and the crash

take the example of home mort-

gages. m r. Joe buys a home in

a suburb of some mid western

town in the uS and gets a home

l o a n f r o m h i s n e i g h b o r h o o d

bank . the neighborhood bank

needs l iquidity to provide loans

to more people so it sel ls down

m r. Joe’s mor tgage to a bigger

bank , and in the process keeps

a smal l prof i t margin for i tse l f.

t h e b i g g e r b a n k a g g r e -

g a t e d m a n y s u c h l o a n s f r o m

v a r i o u s s m a l l b a n k s a n d s e l l s

t h e m t o a n i nv e s t m e n t b a n k ,

a g a i n k e e p i n g a s m a l l m a rgi n

o f p r o f i t f o r i t s e l f . S o f a r s o

g o o d. . . t h e p ro c e s s o f s e l l i n g

down the mor tgage helps the

b a n k s t o e x t e n d t h e i r s e r -

v i c e s t o m o r e h o m e b u y e r s .

the investme nt bank s are not

i n t h e h a b i t o f k e e p i n g s u c h

assets on their books for long,

so they bunch together var ious

mor tgages and cut & sl ice them

in tranches based on perceived

r i s k o f d e f a u l t a n d p r i o r i t y

o f r e p a y m e n t . t h e y c a l l t h e m

col lateral ized debt obl igat ions

(c d o s ) a n d s e l l t h e m to o t h e r

i n v e s t m e n t b a n k s o r h e d g e

funds, whi le keeping a neat cut

of prof i t for their ef for t in cre -

at ing these ‘ innovat ive’ f inance

instruments. these new owners

t h e n f u r t h e r s l i c e a n d re p a c k-

a g e v a r i o u s c d o s i n t o n e w

t r a n c h e s – c d o s q u a r e s , a n d

s e l l t h e m d o w n t h e l i n e . t h i s

process cont inues ad- inf in i tum

ti l l in the end no one knows who

owns what ! S oon the debt or ig-

i n a t i n g b a n k s / e n t i t i e s a t t h e

bot tom of the mor tgage chain

r e a l i z e d t h a t n o m a t t e r h o w

b a d t h e q u a l i t y o f t h e m o r t -

g a g e , t h e r e w o u l d a l w a y s b e

s o m e o n e w i l l i n g t o b u y t h e

s a m e b e c a u s e i n t h i s ‘a l i c e i n

wonder land ’ wor ld, mathemat-

ica l models provided by credit

r a t i n g a g e n c i e s a n d m o r tg a g e

i n s u r a n c e c o m p a n i e s c o u l d

associate a reasonable pr ice to

a n y k i n d o f m o r t g a g e i n s t r u -

m e n t . c o n s e q u e n t l y , h o m e

l o a n s w e r e g i v e n t o p e o p l e

with no i ncome no Job (ninJa

loans) to buy second and third

h o m e s a n d e v e r y o n e d a n c e d

t h e i r w a y t o t h e hy p e r m a r k e t

to buy super-s ized goods! as a

re s u l t h o m e p r i ce s k e p t g o i n g

u p a n d t h e p a r t y l a s t e d t i l l i t

l a s t e d . B u t w h e n i t c r a s h e d i t

p u l l e d t h e e n t i r e w o r l d d o w n

with i t . when m r. Joe defaulted

o n h i s h o m e l o a n i n s t a l l m e n t ,

a remote munic ipal i t y in snow

c o v e r e d i c e l a n d , w h i c h h a d

invested in some der ivat ive of

m r. J o e’s a m e r i c a n s u b u r b a n

mor tgage, went bank rupt and

was lef t with no money to pay

the salar ies of i ts public school

teachers.

credit r at ing agencies, jurors

of the wor ld

t h i s p ro c e s s o f s e l l i n g f i n a n -

c ia l instrument down the l ine

i s f a c i l i t a t e d b y c re d i t r a t i n g

agencies that give r isk rating to

a lmost anything on the planet

– f rom mor tgages to sovereign

g ove r n m e n t s t o p r i v a t e c o m -

panies to any t ype of t radable

i n s t r u m e n t s . c r e d i t r a t i n g

a g e n c i e s a r e t h e m s e l v e s a

p r i m e e x a m p l e o f a s y s t e m

i n w h i c h t h e m o d e l d o e s n’ t

r e f l e c t t h e r e a l i t y b u t r a t h e r

c r e a t e s t h e r e a l i t y i t d e s i r e s

– c lass ic case of ‘ ta i l wagging

the dog’ rather than the other

way around. the credi t rat ing

agencies – essential ly the three

m a j o r p l aye r s – S & p, m o o d y ’s

and fi tch r at ings, are the jur y

that judges the wor ld.

ye t t h e r e i s a n o v e r w h e l m -

i n g i r o n y i n t h e i r c o n t i n u e d

p r o m i n e n c e . t h e s e a r e t h e

same f i rms that are blamed for

i n s t i g a t i n g o n e o f t h e g r e a t -

est f inancia l cr ises of last 100

y e a r s . t h e y f r e e l y g a v e a a a

r a t i n g s t o u l t i m a t e l y w o r t h -

l e s s s t r u c t u r e d m o r t g a g e

produc ts. Just to keep matters

i n p e r s p e c t i v e , a a a r a t i n g i s

many notches higher than the

r a t i n g s g i v e n b y t h e s e a g e n -

c ies to sovere ign gover nment

b o n d s o f s o m e o f t h e f a s t e s t

grow i n g e m e rgi n g m a r k e t s o f

t h e w o r l d l i k e i n d i a . S o h o w

d o t h e s e a g e n c i e s i m p a c t t h e

re a l wo r l d ? pu t s i m p l y, a b a d

c r e d i t r a t i n g b y t h e s e a g e n -

cies feeds into the r isk adjusted

returns debt models that push

u p t h e i n t e re s t r a t e a t w h i c h

a l e n d e r w i l l l e n d m o n e y t o

t h e b o r r o w e r. t h i s c r e a t e s a

v i c i o u s c i rc l e fo r t h o s e g i ve n

a l owe r rat i n g by t h e s e a g e n -

c ies. the sovereign bonds of a

developing countr y or corpo -

rate bonds of a medium s ized

c o m p a n y g e t a l o w e r r a t i n g

t h u s i n c re a s i n g t h e i r c o s t o f

r a i s i n g c a p i t a l , p u t t i n g t h e m

at a perennial competit ive dis-

advantage compared to those

who get a h igher rat ing. thus

t h e r a t i n g m o d e l c r e a t e s i t s

o w n r e a l i t y . t h e d e v e l o p e d

w e s t e r n m a r k e t s a r e f a c i n g

t h i s p a i n fo r t h e f i r s t t i m e i n

l iving memor y, while the devel-

oping economies have been at

t h e p a i n f u l e n d o f t h i s s t i c k

fo r e ve r. th i s wo u l d s t i l l h ave

b e e n u n d e r s t a n d a b l e h a d

t h e s y s t e m n o t b e e n c o m -

p r o m i s e d b y i n h e r e n t c o n -

f l ic ts of interest . the judges

( rat ing agencies) charge the

judged ( the company whose

instruments are to be rated)

f o r j u d g i n g ( r a t i n g ) t h e m .

a s a r e s u l t , t h e m o r e t h e

aaa rat ings that these agen-

c i e s d o l e d o u t t o i n s c r u t a -

ble f inancia l produc ts, more

the business they got … and

h e n c e h i g h e r t h e b o n u s e s

t a k e n h o m e b y t h e i r a n a -

lysts and managers ! despite

t h e s u b s e q u e n t m a y h e m i n

t h e m a r k e t s , n o t m u c h h a s

c h a n g e d – n o t m a n y h a v e

learnt the lesson that depen-

dence on the r isk rat ing pro -

vided by an ex ternal agenc y

is no a lternat ive to thorough

self assessment of the under-

ly ing r isk .

Hft, speculat ion on steroids

a n o t h e r e x a m p l e o f m a t h e -

matical models creating their

o w n s e l f s e r v i n g r e a l i t y i s

t h e f i e l d o f H i g h fre q u e n c y

tr a d i n g ( H f t ) i n e q u i t i e s .

Buying and sell ing of equities

i s s u p p o s e d to b e b a s e d o n

ca lculat ing fa i r va lue of the

stock depending on the com-

p a n y ’s p r e s e n t a n d f u t u r e

earning potential, thus result-

ing in ef f ic ient a l locat ion of

capital . i n theor y, companies

with better market strategies

i n f i n e e t i | a n n u a l i s s u e 2 0 1 1 i n f i n e e t i | a n n u a l i s s u e 2 0 1 1

16 17

s h o u l d f i n d i t e a s i e r t o r a i s e

g r o w t h c a p i t a l . t h i s w o u l d

i n v o l v e t h o r o u g h q u a n t i t a -

t ive and qualitative analysis to

reach a broad range of equit y

valuations – i t is in equal mea-

s u r e s a s c i e n c e a n d a n a r t .

High frequenc y trading makes

no such c la ims – i t uses brute

computing power and complex

a l g o r i t h m s t o a u t o m a t i c a l l y

evaluate market data and take

buy and sel l decis ions in f rac-

t ions of a second. Some of the

black box Hft systems conduct

t r a d e s i n 2 5 0 m i c ro s e c o n d s,

i . e . fo u r t h o u s a n d t i m e s i n a

second.

H f t s y s t e m s a c t u p o n t h e

w i d e r m a r k e t s e n t i m e n t a n d

m o v e m e n t o f n u m b e r s ; f a i r

valuation or nature of underly-

ing asset ( in this case, equit y)

d o e s n’ t m a t t e r – t h e s e a l g o -

r i t h m s m i g h t a s w e l l b e

t r a d i n g c h i c k e n s . H f ts d o

n o t h o l d a n y p o s i t i o n f o r

l o n g , t y p i c a l l y s q u a r i n g o f f

the i r pos i t ions by end of day

ever y day. today Hfts control

a b o u t 7 0 % o f g l o b a l t ra d e i n

e q u i t i e s . p r o p o n e n t s o f H f t

argue that i t enhances l iquid-

i t y i n t h e m a r k e t t h u s b e n e -

f i t ing the market on a whole.

o t h e r s a r e n o t s o e n t h u s e d

by this argument. i t i s argued

t h a t H f ts c a u s e a n ‘a d v e r s e

selec t ion’ problem. i nstead of

b e i n g b e t t e r i n fo r m e d a b o u t

a c o m p a n y, H f t o u t f i t s a r e

s i m p l y s e e i n g a n d a c t i n g o n

market prices sooner than com-

petitors thus they are better at

speculating than others. there

is nothing new about specula-

t ions cre at ing b izar re mar k e t

s c e n a r i o s . e . g . i n 1 6 3 7 , t h e

contract prices for tulip f lower

buds reached an extraordinar y

pr ice of ten t imes the average

a n n u a l i n c o m e o f a s k i l l e d

dutch craf tsmen at that t ime,

before crashing spec tacular ly.

Hft, however, puts the specu-

lat ion markets on super – ste -

r o i d s . S o w h e n t h e m a r k e t s

b e g i n t o t u r n s o u t h w a r d s ,

Hfts read the market informa-

t ion before others and rapidly

m a gn i f y t h e d ow nwa rd t re n d

t h u s c r e a t i n g ‘ f l a s h c r a s h e s ’.

the biggest losers in such sce -

n a r i o s a r e i n d i v i d u a l i n v e s -

t o r s a n d p e n s i o n f u n d s t h a t

can never match the destruc -

tive power of Hfts during such

downtrends. Seen in this l ight,

the Hfts don’t seem so distant

and cut off from the real world

– the r ipples from their impact

h i t t h e c o m m o n m a n o n t h e

street .

m & a a n d t h e m y t h o f ‘ f a i r

va luat ion’

final ly let ’s have a quick look

a t t h e m & a i n d u s t r y . m & a

bankers p lay a cruc ia l ro le in

t h e m a r k e t b y b r i n g i n g t h e

b u ye r s a n d s e l l e r s o f co m p a -

nies on the same table. without

the m&a bankers, i t would be

v e r y d i f f i c u l t , i f n o t i m p o s -

s i b l e , fo r o r i g i n a l ow n e r s to

f i n d w i l l i n g b u ye r s fo r t h e i r

businesses thus vast ly reduc-

i n g t h e i n c e n t i ve fo r e n t re -

preneurs to create new busi -

n e s s e s . m & a b a n k e r s a l s o

m a k e i t p o s s i b l e f o r w e l l

managed companies to grow

inorganical ly. i n order to do

s o , t h e m & a b a n k s e m p l o y

ar mie s of e ag e r-be aver ana-

l y s t s w h o p u t i n 1 0 0 h o u r

w e e k s s l o u c h e d o v e r t h e i r

laptops work ing on complex

v a l u a t i o n m o d e l s . a n y o n e

who k nows this exerc ise wi l l

v o u c h fo r t h e f a c t t h a t yo u

c a n p u t y o u r f i n g e r o n a ny

d e s i r e d e n d - r e s u l t w i t h i n

a b r o a d v a l u a t i o n r a n g e

a n d t h e n j u s t i f y t h a t f i g u re

u s i n g a p p r o p r i a t e a s s u m p -

tions. there are just too many

assumptions in the process –

a s s u m p t i o n s a r o u n d f u t u r e

c o s t s , r e v e n u e s , c a s h f l o w s

and to top them al l , assump -

t ions around the appropr iate

discount factor to be used for

c a l c u l a t i n g t h e n e t p r e s e n t

value. the complex valuat ion

m o d e l s a re m o re o f te n t h a n

n o t a r e a s o n u s e d b y m & a

b a n k s t o j u s t i f y a h e f t y fe e

fo r t h e i r s e r v i ce s . i n re a l i t y,

i n a m a j o r i t y o f t h e c as e s, a

free to download simple excel

s h e e t b a s e d a p p l i c a t i o n i s

j u s t a s a c c u r a t e ( o r i n a c c u -

rate) in

c a l c u l a t i n g t h e ‘ f a i r v a l u e’

o f a c o m p a n y . r e s e a r c h

p rove s t h at m o re t h a n t wo

thirds of m&as destroy value

for the acquir ing company.

S o w hy d o c o m p a n i e s s t i l l

carr y out these over-pr iced

m & as a n d p ay h i g h fe e s i n

t h e p ro ce s s ? th e a n s we r i s

rather s imple –al l the deci -

s ion makers involved in the

process - the m&a bankers,

c o n s u l t a n t s , l a w y e r s a n d

s e n i o r m a n a g e m e n t t e a m s

o f a c q u i r i n g a n d a c q u i r e d

c o m p a n i e s e n d u p m a k i n g

l o t s o f m o n e y . t h e r e a l

losers are the share holders

o f t h e a c q u i r i n g c o m p a ny.

S o w h i l e t h e m & a i n d u s t r y

provides a valuable transac-

t i o n a l s e r v i ce to t h e w i d e r

m a r k e t s , i t a l s o c re a t e s a n

e c o - s y s t e m i n w h i c h t h e

i n s i d e r s m a k e e x t r a - o r d i -

n a r y p r o f i t s a t t h e c o s t

o f o u t s i d e r s . S u b s e q u e n t

ba lance sheet wr i te - downs

b y t h e a c q u i r i n g c o m p a ny

a re t h e p ro o f o f t h i s o f t –

repeated phenomenon.

Summar y

i t is impor tant to differentiate

bet ween the e lements of the

f i n a n c i a l i n d u s t r y t h a t c o n -

s t r u c t i v e l y e n g a g e w i t h t h e

‘real wor ld ’ and the e lements

t h at c re ate t h e i r ow n v i r t u a l

real i t y in order to ser ve their

s e l f i n t e r e s t . w h e n e v e r t h e

g a p b e t we e n t h e ‘re a l wo r l d ’

a n d t h e ‘ v i r t u a l r e a l i t y ’ o f

f inancia l models become too

big to ignore, a market crash

occurs. look ing at the ent i re

f inancia l industr y as a homo -

g e n e o u s l y m a l e v o l e n t f o r c e

d o e s n’ t l e a d t o p r o d u c t i v e

s o l u t i o n s . a t t h e s a m e t i m e,

expecting the f inancial indus-

t r y t o e xe rc i s e s r a t i o n a l s e l f

c o n t r o l i s u n l i k e l y t o w o r k

s i n c e t h e i n d u s t r y i s s t r u c -

tured to be incentivized based

o n e v e r i n c r e a s i n g q u a r t e r

o n q u a r t e r g r o w t h i r r e s p e c -

t i v e o f e x t e r n a l e c o n o m i c

c y c l e s . t h i s l e a d s t o a s c e -

nar io in which reck less dec i -

s ion makers within the indus-

tr y make large bonuses in the

shor t term, leaving bystand-

e r s t o p a y fo r t h e s a m e i n

l o n g t e r m . H e n c e t h i s d i f -

f e r e n t i a t i o n a n d i s o l a t i o n

b e t we e n t h e d i s p a rate e l e -

ments of the industr y needs

to b e fo rce d t h ro u g h i n d e -

pendent ex ternal agencies –

a n d t h at i s w h e re e f fe c t i ve

f inancia l regulat ion plays a

c r i t i c a l p a r t i n m a i nt a i n i n g

systemic f inancia l s tabi l i t y.

aBout tHe autHor

r a n t e j S i n g h i s H e a d - Strategy for reuters m arket l i g h t , t h o m s o n r e u t e r s . r antej i s a lso a co -author of ‘prac t i t ioners Book on trade finance’“

any v iews expressed in this a r t i c l e a r e t h e p e r s o n a l v iews of the author and do not in any way represent the v iews of thomson reuters.

i n f i n e e t i | a n n u a l i s s u e 2 0 1 1 i n f i n e e t i | a n n u a l i s s u e 2 0 1 1

18 19

microfinance: a fairy tale turns into nightmarem S Sr i ram

i t w a s i n e v i t a b l e t h a t t h e commercial model of micro-f i n a n c e i n i n d i a , w i t h i t s minimalist and standardised m o d e l o f l e n d i n g , w o u l d grow into a bubble and run into t rouble. m any microf i -n a n c e c o m m e r c i a l o r g a n -i s a t i o n s h a v e e n t e r e d t h e market in search of prof i ts and are competing to lend to the poor. i n the process t h e y h ave p u t t h e “u n d e r -s t a n d i n g” o f t h e n e e d s o f t h e p o o r a s i d e a n d h a v e star ted chasing targets and numbers. for these inst i tu-t ions, the poor are not seen a s h u m a n b e i n g s h a v i n g i n d i v i d u a l i d e n t i t i e s a n d needs. instead they are seen as data points that add up i n t h e i r p ro f i t s t a te m e n t s . t h e a n x i e t y f o r g r o w t h i s d i c t a t e d b y t h e f a c t t h a t the investors in the market-based models are impatient and look for h igh returns – and then exit !

t here is a new intensit y

i n t h e d i s c u s s i o n o n

m i c r o f i n a n c e – a b o u t

m u l t i p l e l e n d i n g , i n t e r e s t

rates and on whether a bubble

is being bui l t around lending

to the poor. there is a heated

debate about the interest rates

o f m i c r o f i n a n c e i n s t i t u t i o n s

(mfis) and whether they could

be termed usurious. there has

a lso been a boardroom fracas

at SkS microfinance – an event

u n r e l a t e d t o t h e l a r g e r o n e

a b o u t t h e d e l i c a t e r e l a t i o n -

s h i p b e t we e n m f i s a n d t h e i r

c l ients, but i t i s never theless

hogging equal headline space

in the press . the commerc ia l

s e c t i o n o f t h e i n d u s t r y h a s

r e a c t e d w i t h t h e i n d u s t r y

association – the microfinance

i n s t i t u t i o n s n e t w o r k ( m f i n )

– co m i n g o u t w i t h a co d e o f

c o n d u c t . t h e S t a t e h a s i n d i -

c a t e d i t s d i s p l e a s u r e a b o u t

t h e l e v e l o f i n t e r e s t r a t e s

a n d i t h a s s e n t a n a d v i s o r y

t o t h e c o m m e r c i a l b a n k s .

t h e g o v e r n m e n t o f a n d h r a

pr a d e s h , f a c i n g a l o t o f f l a k

f ro m t h e l o c a l p re s s a n d t h e

o p p o s i t i o n p a r t i e s , h a s p ro -

m u l g a t e d a n o r d i n a n c e i n

order to “re in in” mfis . there

is indeed a sense of déjà vu to

the entire episode – of a cr is is

fo l lowing heady success. the

success had culminated in the

o v e r s u b s c r i p t i o n o f t h e S k S

m i c r o f i n a n c e i n i t i a l p u b l i c

o f fe r i n g, a l l o t m e nt o f s h a re s

at the upper end of the indic-

ative pr ice band, l ist ing of the

s c r i p a t a p r e m i u m , a n d i t s

cont inuous r ise thereaf ter. as

this was sinking into the minds

of the players in the microf i -

nance mar ket – and with the

next rung of institutions ready

to har vest the gold rush – the

s a m e S k S m i c r o f i n a n c e w a s

in the news for a l l the wrong

reasons.

three models

this ar ticle looks at the growth

in microf inance, keeping the

current developments in per-

s p e c t i ve . B u t b e fo re l o o k i n g

a t t h e c u r r e n t e p i s o d e, i t i s

impor tant to have a perspec-

t ive on how the microf inance

s p a c e i s o r g a n i s e d a n d w h o

the di f ferent of p layers in the

m a r k e t a r e . a t t h i s p o i n t o f

t i m e t h e re a re t h re e s i g n i f i -

cant inter vent ions in the pro -

v i s i o n o f u n i ve r s a l a cce s s to

f inancia l ser v ices.

( 1 ) t h e p e o p l e ’s m o v e m e n t

w h i c h h a s e x i s t e d o u t s i d e

o f t h e g ove r n m e n t s c h e m e s,

banks and other inter ventions

by e nt re p re n e u r s . th i s i s l e d

by non- gover nmenta l organ-

i s a t i o n s ( n g o s ) t h a t h a v e

remained true to the commu-

n i t y - b a s e d m o d e l a n d h a v e

emerged by organising people

to sor t out their f inancial mis-

matches without the inter ven-

tion of the external world, and

i f t h e re i s a n i n t e r ve n t i o n i t

i s a co n s c i o u s c h o i ce co l l e c -

tively exercised by the people.

( 2 ) t h e i n t e r v e n t i o n b y t h e

g o v e r n m e n t p r e - e x i s t e d t h e

p e o p l e’s m o ve m e n t a n d w a s

expressed in the fo r m of the

se l f -help groups (SHgs) . this

h a s u s u a l l y b e e n s u p p l y -

d r i ve n , a d d re s s i n g t h e i n s t i -

t u t i o n a l a n d p h y s i c a l i n f r a -

s t r u c t u r e n e e d s a n d o f f e r -

i n g s t a n d a r d i s e d s u p p l y -

s i d e s o l u t i o n s o r “s c h e m e s”.

i n a n d h r a pr a d e s h t h e S t a t e

has a lmost usurped the com-

m u n i t y m o d e l t h r o u g h t h e

i ndi ra k rant i patham scheme

( e a r l i e r k n o w n a s Ve l u g u ) .

clear ly the role of the govern-

m e n t i n a n d h r a pr a d e s h h a s

moved beyond being an inde -

pendent obser ver. in this case

the State is in a pecul iar posi -

t ion of being a player as wel l

as an arbiter of microf inance

prac t ices.

( 3 ) th e m a r k e t fo rce s , w h i c h

look at the poor as a market ,

h a v e fo u n d a m e c h a n i s m t o

d e l i v e r c r e d i t t h r o u g h a n

e f f i c i e n t d e l i v e r y m o d e l .

t h i s a p p r o a c h i s m o r e t h a n

a d e c a d e o l d a n d h a s m a d e

r a p i d g r o w t h . t h i s g r o w t h

has encouraged us to look at

t h e b u s i n e s s t h r o u g h a d i f -

f e r e n t l e n s . e a c h o f t h e s e

i n t e r v e n t i o n s h a s a d i f f e r -

ent approach and uses a d i f -

ferent methodology to reach

out to the poor. these meth-

odologies have an impor tant

b e a r i n g o n t h e p r o c e s s a n d

p a c k a g i n g o f f i n a n c i a l s e r -

v i c e s . t h e S H g m o d e l w a s

promoted as an a l ternat ive to

the avai lable options of f inan-

c ia l intermediat ion. i t was at

one level rooted in the com-

m u n i t y a n d a t a n o t h e r l e ve l

was integrated with the larger

bank ing system. the deal ings

were on the bas is of mutual -

i t y, thus providing the power

of a col lec t ive. the approach,

by def in i t ion, was a s low one

b e c a u s e t h e r e h a d t o b e a

g o o d u n d e r s t a n d i n g o n h ow

a collective based on the prin-

c iples of mutual i t y worked. i t

re q u i re d p a t i e n ce, to l e r a n ce

a n d a n a p p r e c i a t i o n o f t h e

c o n s t r a i n t s t h a t t h e f e l l o w

SHg members faced. i t made

m e m b e r s t h i n k a b o u t t h e i r

f i n a n c i a l s e r v i c e s n e e d s o f

t h e i r h o u s e h o l d s , a n d a l s o

those of their neighbours who

we re m e m b e r s o f t h e co l l e c-

t ive. this helped the members

t h i n k r e s p o n s i b l y b e c a u s e

t h e y we re d e a l i n g w i t h t h e i r

ow n m o n e y o r t h e m o n e y o f

the members of the collective.

t h i s m e t h o d o l o g y e n s u r e d

t h a t p e o p l e w e r e t o g e t h e r

t o n a r r a t e a g r o w t h s t o r y, a

stor y of their conf idence and

how they were tak ing charge

of their own l ives. this move -

m e n t i s v e r y t i m e - c o n s u m -

i n g. th e co l l e c t i ve h a s to g o

t h ro u g h t h e m a ny p h a s e s o f

f o r m i n g , s t o r m i n g , n o r m i n g

a n d p e r fo r m i n g. e v e n i f t h e

p r o c e s s i s s l o w, t h e e d i f i c e

wil l be strong and lasting. this

edi f ice can cont inue to ser ve

the poor and the marginalised

on an auto -pi lot bas is once i t

s tabi l ises. once this happens,

i t s h o w s t h a t t h e p o o r c a n

n o t o n l y t a k e c o n t r o l o f

t h e i r re s o u rce s , b u t a s t h e s e

resources grow they can hire

p ro fe s s i o n a l h e l p to m a n a g e

t h e i r r e s o u r c e s . t h i s t r a n s -

f o r m a t i o n d o e s n o t h a p p e n

overnight, but through a long

p ro c e s s o f c o m m u n i t y i n t e r -

vent ion. unfor tunately, there

is impat ience, and then there

i s t h e S t a t e . i f t h e g r o u p s

s u c c e e d, t h e re i s a n u rg e t o

r e p l i c a t e t h e m o d e l q u i c k l y

i n f i n e e t i | a n n u a l i s s u e 2 0 1 1 i n f i n e e t i | a n n u a l i s s u e 2 0 1 1

20 21m i c r o f i n a n c e

across the country. the success

of communit y- centred micro -

f inance has attracted the gov-

ernment. the State deals with

large numbers and i ts anxiet y

t o d e l i ve r d e ve l o p m e n t a t a

p a c e t h a t c a n d o j u s t i c e t o

t h e i n c u m b e n t c o m b i n a t i o n

i s u n d e r s t a n d a b l e . th e S t ate

l e a r n t q u i c k l y f ro m t h e S H g

m o v e m e n t a n d d e c i d e d t o

adopt it as one of its “schemes”.

the bank l ink age programme

has been going on for years ,

and each year the government

i n c r e a s e s t h e t a r g e t s t o t h e

b a n k s fo r l i n k a g e a n d p o r t s

several other welfare schemes

on to the groups.

m arket for i nc lus ion

t h e l a s t t y p e o f p l a y e r i n

t h e i n c l u s i o n m a r k e t i s a

p ro d u c t o f m a r k e t fo rc e s . i n

t h e l a s t d e c a d e t h e r e h a v e

b e e n s e ve ra l p e o p l e w h o fo r

years worked in the develop -

m e n t s e c t o r w i t h c o m m u n i -

t ies and became impatient for

growth. they embraced a mar-

ket-based model of inc lus ive

f i n a n ce. th e i d e a w a s t h a t i f

we are able to make this activ-

i t y of inc lus ive f inance inher-

e n t l y p r o f i t a b l e , t h e n m o r e

a n d m o re p e o p l e ( w h o wo r k

fo r p ro f i t s ) w i l l s e e m e r i t i n

operat ing in this market . and

with a good number of players,

t h e m a r k e t w i l l n o t o n l y

expand, but because of com-

p e t i t i o n t h e p o o r c u s t o m e r s

would eventual ly get a good

deal.unfor tunately there have

b e e n n u m e r o u s i n s t a n c e s

where our belief in the market

has been bel ied and microf i -

nance adds to the scept ic ism

about the school that believes

o n l y i n m a r k e t s . d u r i n g t h e

i n i t i a l p h a s e s o f t h e i n t e r -

vent ion by the market model

of mfis, most of us looked at

t h e g r o w t h o f t h e s e o r g a n i -

z a t i o n s w i t h a s e n s e o f awe.

th e s e o rg a n i z at i o n s b ro u g ht

e f f i c i e n c y t o t h e i r o p e r a -

t ions. But g a ins in e f f ic ie nc y

are usual ly a func t ion of stan -

d a rd i s a t i o n . S t a n d a rd i s a t i o n

worked at t wo levels :

( a ) t h e o r g a n i s a t i o n s t h e m -

s e l v e s o f f e r e d s t a n d a r d i s e d

p ro d u c t s , t h a t a l l owe d t h e m

to reduce operat ing costs.

(b) the indiv idual ident i t y of

e a c h o r g a n i s a t i o n a n d w h a t

i t s t o o d fo r v a n i s h e d. i n t h e

f ie ld one could therefore see

l i t t le d i f ference bet ween one

m f i a n d t h e o t h e r w r i t i n g

about mfis in Bol iv ia has sa id

t h a t t h e i n s t i t u t i o n s te n d to

converge operat ional ly to the

dominant microf inance para-

d i g m . th e p a r a d i g m o f co m -

m e r c i a l m i c r o f i n a n c e i s t h a t

o f m i n i m a l i s m . t h a t c r e d i t

should be provided eff iciently

a n d q u i c k l y a n d a s h a r p e n -

ing of f inancia l v iabi l i t y have

inf luenced inst i tut ions oper -

at ing in this space.

Bol iv ian exper ience

i n m i c r o f i n a n c e i t s e l f , t h e r e

w e r e s i g n i f i c a n t l e s s o n s t o

b e l e a r n t f r o m B o l i v i a . fo r

i n s t a n c e , r h y n e i n d i c a t e s

t h a t t h e n u m b e r o f i n s t i t u -

t ions that had a subsidy dras-

t ical ly fel l in about four years,

and each of these inst i tut ions

l o s t i t s co re i d e n t i t y. f i e , a n

mfi k nown for technical assis-

tance to a s ingle communit y-

based enterpr ise,

fa d e s , w h i c h u s e d t o f o c u s

o n l e n d i n g f o r c o m m u n i t y

i n f r a s t r u c t u r e p r o j e c t s , a n d

pr o m u j e r, w h i c h s p e c i a l i z e d

in empowerment t ra ining; a l l

d ro p p e d m o s t o f t h e o p e r a -

t ional prac t ices that di f feren-

t i a t e d t h e m f r o m t h e d o m i -

nant paradigm.

this “convergence” is happen-

ing in i ndia as wel l . the mini -

mal ist model d isburses credit

i n a s e f f i c i e n t a m a n n e r a s

sell ing soaps and shampoos. i t

has its merits. for instance, in a

largely agrar ian society where

large cash inf lows take place

only during the har vest season

and the local economy oper-

a t e s o n p e a k i n g o f f i n a n c i a l

act ivity in this season, forcing

a week ly repayment is by def-

i n i t i o n d e f y i n g t h e l o g i c o f

agrar ian cash f lows. However,

by fo rc i n g t h i s we e k l y d i s c i -

p l ine these inst i tut ions have

possibly expanded the market

for credit – persuading people

to think about ac t iv i t ies that

g i ve a we e k l y c a s h f l ow t h at

c a n s e r v i c e t h e i r l o a n . t h i s

c o u l d t h e r e b y h a v e m a d e

more cash move through the

hands of people and reduced

t h e i r v u l n e ra b i l i t y. H owe ve r,

t h e d ow n s i d e o f a s t a n d a rd -

i z e d m o d e l i s t h a t u n l e s s

t h e c u l t u r a l a n d e c o n o m i c

nuances of each locat ion are

u n d e r s to o d, 4 t h e re co u l d b e

cracks. a standardised model

c l o s e s i n n o v a t i o n , r e d u c e s

respons iveness and prevents

c u s t o m i s a t i o n a n d o n c e i t

r e a c h e s s t a b i l i t y i t e x p e c t s

to grow at a s co rc h i n g p a ce.

w h e n s o m e t h i n g – p a r t i c u -

l a r l y i n f i n a n c i a l s e r v i c e s –

grows at an unnatural pace, i t

is going to build into a bubble

sooner or later. Such a process

i n t h e m a r k e t- b a s e d m i c ro f i -

nance sec tor may be happen-

i n g n o w. t h e h o p e t h a t t h e

d e m o n s t r a t i o n o f o n e m a r -

k e t - b a s e d e x p e r i m e n t w i l l

attract more players has come

true. many more organisations

have entered the market and

are competing to lend to the

poor. in the process they have

put the “understanding” of the

n e e d s o f t h e p o o r a s i d e a n d

h ave s t a r te d c h a s i n g t a rg e t s

and numbers. for these inst i -

tut ions, the poor are not seen

a s h u m a n b e i n g s h a v i n g a n

i n d i v i d u a l i d e n t i t y, c h a r a c -

terist ic and need. instead they

a re s e e n a s d a t a p o i n t s t h a t

a d d u p t o t h e i r p ro f i t s t a t e -

ments. this anxiety for growth

is dictated by the fact that the

investors in the marketbased

models are impatient and look

for returns (and then exit!) . the

evidence from Bol iv ia is avai l -

a b l e b e fo re u s . m i c ro f i n a n ce

in that countr y went through a

phase of intense competit ion,

leading to over- indebtedness

and even the col lapse of a few

inst i tut ions. a reading of the

m i c r o f i n a n c e m o v e m e n t o f

Bol iv ia in the 1990s looks l ike

a co n te m p o r a r y i n d i a n co m -

m e n t a r y . a l l t h e e l e m e n t s

– c l i e n t p o a c h i n g, c o m p e t i -

t i o n , re c k l e s s l e n d i n g, o ve r -

i n d e b te d n e s s o f t h e c l i e n t –

that eventual ly caused cracks

in the eff ic ient credit del iver y

m e c h a n i s m s we re p re s e n t i n

Bol iv ia .

e f fec ts of r apid growth

o n e o f t h e v i s i b l e i n d i c ato r s

of the standardized model i s

i ts re l igious bel ief in zero tol -

erance of default . the organi-

zat ions fo l lowing the mar ket

m o d e l h a v e p o s s i b l y s e e n

t o o m u c h o f i n d i s c i p l i n e i n

t h e d e l i ve r y o f c re d i t t o t h e

p o o r a n d h a v e r e a l i z e d t h a t

t h i s i s o n e v a r i a b l e t h a t h a s

t o b e c o n t r o l l e d a t a l l c o s t .

t h e s t o r y o f o r g a n i z a t i o n s

having a near 100% recover y

rate for years i s a fable di f f i -

cult to bel ieve, given that no

household or economy can be

insular to shocks a l l the t ime.

ye s , t h e c o m m e r c i a l m o d e l s

have been able to control one

cause of default – intent . But

i t i s we l l k n ow n t h at d e f a u l t

a lso happens when the abi l i ty

to repay is impaired. the new

g e n e r a t i o n o f m f i s h a s p o s -

s i b l y n o t l e a r n t to d e a l w i t h

t h i s a s p e c t . fo r a l o n g t i m e,

whi le the mfis were growing

at an unnatural pace through

g e o g r a p h i c d i v e r s i f i c a t i o n ,

t h e b o r r o w e r s w e r e p r o b a -

bly growing at a normal pace.

i n f i n e e t i | a n n u a l i s s u e 2 0 1 1 i n f i n e e t i | a n n u a l i s s u e 2 0 1 1

22 23

wi t h co m p e t i t i o n s e t t i n g i n ,

more and more mfis concen-

t r a t e d o n t h e s a m e g e o g r a -

phies. with the c l ient gett ing

m u l t i p l e c h o i c e s a n d t h e

anxiet y of the c l ient to get as

much

o f f i n a n c e a s p o s s i b l e f ro m

mult iple inst i tut ions and this

coupled with the over zealous

suppl iers of credit meant that

t h e c l i e n t h e r s e l f w a s t r y i n g

to grow at an unnatural pace,

o r t h at t h e c l i e nt h a d b e g u n

to resor t to adverse usage of

credit. unfor tunately the stan-

dardised models do not have

t h e p a t i e n ce to e n g a g e w i t h

t h e c l i e n t . i t i s o n e t h i n g t o

just i fy the high cost of credit

a t l o w e r l e v e l s , b u t w e a l s o

have to real ise that at h igher

levels of indebtedness, inter-

est rates become onerous from

the point of v iew of the poor

households. Ser vicing f ive mfi

loans of rs 10,000 each at 28%

i s n o t t h e s a m e a s s e r v i c i n g

one such loan. and s ince the

mfis have not provided them-

s e l v e s w i t h a m e c h a n i s m o f

coping with default , the pres-

sure on the borrower turns out

to be intense. and th is pres-

s u r e c o u l d p o t e n t i a l l y l e a d

to s u i c i d e s . we d o n o t k n ow

whether the current spate of

suic ides in andhra pradesh is

a result of the mfi loans and

t h e i n te n s e re p ay m e n t p re s -

sure on the c l ients. these are

c la ims made by the state gov-

e r n m e n t . V i k r a m a k u l a , t h e

chairman of SkS m icrof inance

ack nowledged that 17 of the

30 suic ide cases were re lated

t o b o r r o w e r s o f S k S ( i n d i a n

e x p r e s s , 1 5 o c t o b e r 2 0 1 0 ) .

H o w e v e r h e i s n o t h e l p i n g

t h e c a u s e o f t h e m f i s b y

s t a t i n g t h a t “ t h e d e c e a s e d

b o r ro we r s we re n o t d e f a u l t -

e r s o f S k S a n d t h e y w o u l d

have been dr iven to suic ides

by other fac tors such as pres-

sure for repayment of dues by

o t h e r m f i s t h a t l e n t m o n e y

to the same borrowers” (m int ,

15 oc tober 2010) . the col lec-

t i v e r e s p o n s e o f t h e m i c r o -

f i n a n ce i n s t i t u t i o n s h a s a l s o

been found want ing. al l that

they have of fered is a code of

conduc t, which is obser ved in

v iolat ion! a meta level credit

b u r e a u m a k e s a m o c k e r y o f

what is c lear ly ack nowledged

on the f ie ld. you do not need

a d a t a b a s e o f c l i e n t s a n d

loans. the c l ients themselves

are openly ta lk ing of mult iple

borrowings.

governance issues

u n fo r t u n a t e l y, t h e c e l e b r a -

t i o n o f t h e m a r k e t e n d o r s e -

m e n t o f t h i s b u s i n e s s a t t h e

“bottom of the pyramid” could

not have been more i l l - t imed.

at the ground level, the stress

w a s s h o w i n g . c l i e n t s ( f o r

whatever reasons) were com-

mitt ing suic ides. at the inst i -

t u t i o n a l l e v e l , i t a p p e a r e d

t h a t t h e b o a r d r o o m b a t t l e s

were a l l about stock opt ions,

c a s h i n g i n , c a s h i n g o u t a n d

s e v e r a n c e p a c k a g e s , w h e n

each of the boards should have

been discussing whether their

bus iness model was showing

cracks. instead of being intro -

spec t ive, the response of the

m f i s h a s b e e n s t u b b o r n a n d

defensive.

State response

the response of the State has

a l s o n o t b e e n i n t h e d e s i r -

able d i rec t ion. obvious ly, a l l

t h e a c t i o n i s ce nt re d a ro u n d

a n d h r a p r a d e s h w h i c h h a s

the h ighest concentrat ion of

mfis and the largest exposure

through the SHg-Bank l inkage

m o d e l . t h e g o v e r n m e n t h a s

responded with a heav y hand

by pass ing an ordinance that

h a s s h i f t e d t h e d i s c o u r s e

f r o m t h e b a s i c p r o b l e m t o

a l e g a l f r a m e . t h i s a l m o s t

appears l ike the gover nment

t a k i n g r e v e n g e o n t h e c o m -

p e t i t i o n w i t h i t s m o n o p o l i s -

t i c r e g u l a t o r y p o w e r. w h i l e

there are nuances in whether

t h e g o v e r n m e n t o f a n d h r a

pr a d e s h h a s t h e a b i l i t y a n d

t h e i n c l i n a t i o n to d i g e s t t h e

a d m i n i s t r a t i v e i m p l i c a t i o n s

of the ordinance, i t has once

a g a i n s h o w n i t s i n a b i l i t y t o

t a r g e t t h e e r r a n t m i c r o f i -

n a n c e i n s t i t u t i o n s , a n d h a s

i n s t e a d c o m e d o w n h e a v i l y

o n t h e e n t i r e m a r k e t . g i v e n

that the State i tsel f i s a domi-

nant player in this market, this

h e a v y - h a n d e d n e s s c r e a t e s

a n u n d e s i r a b l e c o m p e t i t i v e

barrier to an alternative model

o f c r e d i t d e l i v e r y . i n s t e a d

o f h a r p i n g o n c a p s o n i n te r -

e s t r a t e s a n d t h re a t e n i n g t o

remove microfinance from the

p r i o r i t y s e c to r l i s t , i t i s n e c -

e s s a r y fo r t h e S t a t e / r e s e r ve

Bank of i ndia to look at spe -

ci f ic instances and pul l up the

del inquent organisat ions. the

rBi has set up a committee to

l o o k i n to t h e i s s u e s p e r t a i n -

ing to mfis and has asked the

committee to submit a repor t

within three months. But what

i s n o t c l e a r i s w hy t h e r B i i s

n o t c a r r y i n g o u t a r o u t i n e

i n s p e c t i o n o f t h e p o r t f o l i o

o f s o m e m f i s t h a t a re u n d e r

i ts pur view in order to under-

s t a n d t h e i s s u e s o f g h o s t

c l i e nt s a n d m u l t i p l e b o r row-

ings and take ac t ion to disc i -

pl ine the err ing organisations.

S o m e o f t h e s e o rg a n i s a t i o n s

h a v e s e r i o u s g o v e r n a n c e

i s s u e s t h a t a r e n o t b e i n g

investigated. the institutional

representatives on the boards

o f t h e s e m f i s h ave n o t exe r-

cised their independence. the

p ro m o te r s h ave g o t te n away

w i t h s i gn i f i c a n t i n s t a n ce s o f

s k i m m i n g a n d t h e r e s e e m s

t o b e n o d i s s e n t v o i c e d o n

t h e g r e e d y e x e c u t i v e c o m -

pensat ions and shor t-s ighted

behavior of the management

of the top mfis. So on the one

hand, whi le the larger d i rec-

t ional of the movement of the

State/ rBi in terms of f inancial

inc lus ion seems to be good –

d i r e c t i n g p a y m e n t s t h r o u g h

b a n k s , c a l l i n g f o r f i n a n c i a l

i n c l u s i o n p l a n s , o p e n i n g u p

b r a n c h l i c e n c i n g , r e m o v i n g

t h e c a p o n e n d u s e i n t e r e s t

rates and so on – i ts response

to the rapid growth of micro -

f i n a n c e h a s b e e n s o m e w h a t

a lar mist . Hopeful ly the State

and the rBi would do what is

we l l w i t h i n t h e i r m a n d ate i n

speci f ic cases. this would be

a superior approach compared

to the policy-level clampdown

t h a t t h e y h a v e b e e n t a l k i n g

about .

aBout tHe autHor

m S S r i r a m ( m s s r i r a m @g m a i l . c o m ) i s a n i n d e p e n -d e n t re s e a rc h e r a n d c o n s u l -tant based in Bangalore. He is a n a d j u n c t p ro fe s s o r a t i i m ahmedabad and i im i ndore.

i n f i n e e t i | a n n u a l i s s u e 2 0 1 1 i n f i n e e t i | a n n u a l i s s u e 2 0 1 1

24 25

changing phase of india’s financial System - embarking on new growth pathsarchie g angrade, pr iya Juneja , pr iya S ingh

global financia l System.

i n c l u s i ve g ro w t h : a u t o p i a n

dream or a real i t y?

“ to w a r d s f a s t e r a n d m o r e

inclusive growth “– the theme

of the e leventh five year plan

c l e a r l y d e p i c t s t h e w i l l a n d

i nte nt i o n o f t h e g ove r n m e nt

to f ind a susta inable balance

b e t w e e n g r o w t h a n d i n c l u -

s ion. the par l iamentar y e lec -

t i o n c a m p a i g n o f 2 0 0 4 , w i t h

i t s ‘ i n d i a S h i n i n g ’ v s . ‘a a m

a a d m i ’ c o n f r o n t a t i o n , h i g h -

l i g h t e d a n a p p a r e n t l y w i d e -

s p r e a d p e r c e p t i o n t h a t t h e

benef i ts of economic growth

were s imply passing too many

people by. inclusive growth by

i ts ver y def in i t ion impl ies an

e q u i t a b l e a l l o c a t i o n o f

resources with benefits accru-

ing to ever y section of society.

th e re fo re , a k e y e l e m e n t o f

t h e s t r a t e g y f o r i n c l u s i v e

g r o w t h m u s t b e “ t o p r o v i d e

t h e m a j o r i t y o f o u r p e o p l e

access to bas ic fac i l i t ies such

a s h e a l t h , e d u c a t i o n , c l e a n

d r i n k i n g w a t e r e t c , a n d t h a t

g o v e r n m e n t s a t d i f f e r e n t

levels have to ensure the pro -

v is ion of these ser v ices”. the

t h r u s t o f t h e g o v e r n m e n t i s

t h a t t h e e c o n o m i c b e n e f i t s

accrued as a result of g lobal-

i z a t i o n s h o u l d b e i n c l u s i v e

and that the issues of employ-

m e n t g e n e r a t i o n , p o v e r t y

re d u c t i o n a n d h u m a n d e ve l -

o p m e n t m u s t b e a d d r e s s e d .

th e q u e s t i o n to b e a s k e d i s ,

“ i s i t p o s s i b l e to i n c l u d e t h e

m o s t d i s a d v a n t a g e d i n t h e

p r o d u c t i o n a n d d i s t r i b u t i o n

o f p r o d u c t s a n d s e r v i c e s ? ”

and the answer to this i s that

i t i s indeed poss ible, and that

innovat ion is the way. at the

bottom of the pyramid access

to real oppor tunit ies to create

w e a l t h h a s t h e p o t e n t i a l t o

transform l ives in an inclusive

w ay. S e c to r s s u c h a s h e a l t h -

care, energy, clean water, edu-

c at i o n , a n d h o u s i n g, p re s e nt

oppor t uni t ie s which are r ipe

for innovat ion.

the ack nowledgement by the

government of the t wo major

s e c t o r s l e a d i n g t o i n c l u s i v e

g r o w t h – a g r i c u l t u r e a n d

i n f r a s t r u c t u r e , i s t h e f i r s t

m a j o r s t e p t a k e n i n t h i s

r e g a r d . t h e r e i s a h u g e

p ro b l e m o f p ro d u c t i v i t y g a p

i n t h e s e s e c t o r s e ve n a t t h e

exist ing levels of technology.

i n s imple words i f we can get

farmers to adopt better cult i -

vat i o n p ra c t i ce s , m o re rat i o -

n a l u s e o f i n p u t s a n d s o o n ,

we c a n g e t a y i e l d i n c re a s e .

However, i t is not as effor t less

as it seems. i t majorly involves

the issues of knowledge trans-

m i s s i o n a n d s y s t e m p e r f o r -

mance, absence of any one of

t h e m wo u l d n o t g i ve u s t h e

d e s i r e d r e s u l t . o n e c a n t e l l

t h e f a r m e r s t o m o v e t o a n

o p t i m a l w ay o f s e e d i n g, b u t

t h e re m u s t b e t r u s t e d c e r t i -

f i e d s e e d s a v a i l a b l e . o n t h e

other hand, k nowledge trans-

miss ion is a lso a cr i t ica l i ssue

w i t h t h e f a r m e r s b e i n g r i g i d

a n d o r t h o d o x i n t h e i r

approach.

i n addit ion to agr iculture and

inf rast ruc ture, the t wo other

cr it ical areas we need to focus

o n a re e d u c a t i o n a n d h e a l t h

c a r e . t h e o t h e r i m p o r t a n t

aspec t of inclusiveness is that

w h e n t h e g r o w t h p r o c e s s

t a k e s o f f , t h e d i s p e r s i o n o f

sk i l l s across the populat ion is

not uni form. that is why i t i s

essent ia l to revamp the edu -

c a t i o n a l s y s t e m a n d d o i n g

that in a way which improves

access is ver y impor tant .

al l these areas require a lot of

p a r t i c i p a t o r y w o r k b y t h e

co m m u n i t y. an d i n a v i b ra nt

d e m o c ra c y s u c h a s o u r s i t i s

i m p o r t a n t t h a t t h e a f f l u e n t

s e c t i o n s o f s o c i e t y r e a l i z e

t h e i r w i d e r s o c i a l

responsibi l i t y.

as the pm said in his recent cii

a d d r e s s , “ fo r i n d i a t o b e a

global p layer i t i s essent ia l to

understand the need to make

o u r g r o w t h p r o c e s s m o r e

i n c l u s i v e ; t o s a v e m o r e a n d

w a s te l e s s ; to c a re fo r t h o s e

w h o a r e l e s s p r i v i l e g e d a n d

less well off ; to be role models

o f p r o b i t y, m o d e r a t i o n a n d

c h a r i t y. t h i s r e a l i z a t i o n h a s

m a d e u s w i s e r t o d a y o f t h e

co n s e q u e n ce s o f o u r a c t i o n s

and thus col lective movement

towards this ‘seeming utopia’

i s w e l l u n d e r w a y. a n d a s a

n at i o n s t i l l i n t h e p ro ce s s o f

d e v e l o p i n g i t s e l f , i t w o u l d

perhaps be ver y premature to

let go of the dream of inc lu-

s i v e g r o w t h b u t w i t h s o m e

hard real i t ies thrown in too.”

B a n k i n g i n i n d i a u n d e rg o i n g

metamorphosis

i n d i a w a s r e l a t i v e l y u n a f -

fe c te d by t h e f i n a n c i a l c r i s i s

thanks to the reser ve Bank of

india (rBi) ! the str ingent rules

la id down by the rBi brought

us safe ly onto the other s ide

of the financia l turmoi l .

t h e i n d i a n c e n t r a l B a n k i s

ve s t e d w i t h p o we r s t o i s s u e

guidel ines on any issue re lat-

i n g t o t h e f u n c t i o n i n g o f

banks. Various prudent guide -

l i n e s o f r B i i n c l u d e l i q u i d i t y

m a i n t e n a n c e , c a p i t a l a d e -

q u a c y, i n c o m e r e c o g n i t i o n ,

asset c lass i f icat ion and provi-

s i o n i n g , c o n n e c t e d l e n d i n g

and prudential norms on large

e x p o s u r e s . t h e B a n k i n g

r e g u l a t i o n ac t ve s t s p owe r s

i n t h e r B i t o e n s u re c o m p l i -

ance with i ts provis ions. and

thus a l l these guidel ines and

t h e B a n k i n g r e g u l a t i o n a c t

t o g e t h e r h a v e r e s u l t e d i n a

r o b u s t B a n k i n g S e c t o r i n

i ndia .

the need of the hour for the

i n d i a n B a n k i n g s e c t o r i s t o

increase penetration of formal

bank ing ser vices in unbanked

r u ra l a re a s . as p e r s t at i s t i c s ,

a m o n g i n d i a’s p o p u l a t i o n o f

1 .2 bi l l ion, 50% are yet to be

covered under formal banking.

w i t h d o u b l e d i p

r e c e s s i o n i n s i g h t

a n d t h e w o r s t o f

t h e f i r s t d e c a d e o f t h e 2 1 s t

c e n t u r y, w e h a v e s e e n t h e

re s i l i e n c e a n d ro b u s t n e s s o f

t h e i n d i a n fi n a n c i a l Sy s t e m .

pol ic y makers are think ing of

r e f o r m s d a y a n d n i g h t a n d

m a n y o f t h e s e a r e g e t t i n g

i m p l e m e n t e d t o c h a n g e t h e

face of india. though india has

graceful ly steered clear of the

g l o b a l s l o w d o w n , t h e t a s k

ahead is not s imple. i ndia has

to keep work ing for maintain-

ing the growth rate of 9% or

even taking it to double digits.

in an effor t to achieve al l this,

let us revis i t the ef fec t of the

inclusive growth pol ic y of the

government and the proposal

o f t h e r e s e r ve B a n k o f i n d i a

to co m e u p w i t h n e w b a n k s .

a n d t h a t i s n o t a l l ; i n d i a i s

changing the pattern of global

i nve s t m e n t s i n t h e wo r l d . i n

the dark ness of the financia l

crisis, let us revisit the reforms

and pol ic ies which are chang-

ing the face of india under the

i n f i n e e t i | a n n u a l i s s u e 2 0 1 1 i n f i n e e t i | a n n u a l i s s u e 2 0 1 1

26 27coVer Story

a p p l y f o r n e w b a n k i n g

l i c e n s e s . th e t r a c k re c o rd o f

the promoters wi l l be ascer t-

t a i n e d f r o m o t h e r b a n k s ,

s u p e r v i s o r y / r e g u l a t o r y

d e p a r t m e n t s a s we l l a s f ro m

S e B i , t h e c a p i t a l m a r k e t

regulator. financia l s t rength

o f t h e p r o m o t e r s a n d l o n g -

te r m v i a b i l i t y a re t h e i m p o r-

tant fac tors which wi l l a f fec t

t h e d e c i s i o n o f t h e r B i . i n e d

f r o m o t h e r b a n k s , s u p e r v i -

sor y/reg ulator y depar t me nt s

a s w e l l a s f r o m S e B i , t h e

c a p i t a l m a r k e t r e g u l a t o r .

financia l s t rength of the pro -

moters and long-ter m v iabi l -

i t y are t he impor t ant fac tor s

which wi l l a f fec t the decis ion

of the rBi .

i n a d d i t i o n t o t h i s , n o n -

Bank ing financia l companies

are a lso in ta lks with the rBi

f o r t h e i r c o n v e r s i o n i n t o

banks. i f nBfcs are al lowed to

be conver ted to banks then i t

would el iminate the arbitrage

o p p o r t u n i t i e s a v a i l a b l e t o

t h e m d u e t o l i g h t e r

r e g u l a t i o n s . r e g u l a t i o n s o n

nBfcs are not sof t e i ther. no

n B f c c a n c a r r y o u t i t s b u s i -

ness without obtaining a cer-

t i f i c a t e o f r e g i s t r a t i o n f r o m

the rBi . also, maintenance of

l i q u i d a s s e t s a t a s p e c i f i e d

percentage of publ ic deposits

i s co m p u l s o r y. B u t i n a g gre -

gate these regulations are less

str ict than those for banks and

thus it makes arbitrage oppor-

tunities possible. another way

we can approach this conver-

s i o n i s t h a t o n l y s t a n d a l o n e

nBfcs are considered for con-

vers ion to banks and not the

o n e s w h i c h a r e a s s o c i a t e d

with any corporate. in the real

w o r l d h o w e v e r, n B f c s w i t h

c o r p o r a t e b a c k i n g l i k e

S i e m e n s f i n a n c i a l S e r v i c e s

pr ivate limited, mahindra and

m a h i n d r a fi n a n c i a l S e r v i c e s

l imited have strong f inancia l

back ing of thei r parent com-

p a n i e s f o r c o n v e r s i o n t o

banks.

with new branches in the rural

sector, new licenses in banking

and with the poss ible conver-

s i o n o f n B f c s t o b a n k s , t h e

r eser ve Bank of i ndia i s wel l

on track in making the banking

industr y more dynamic and to

increase the reach of f inancial

ser v ices.

changing patter ns of invest-

ments – domestic and foreign

t h e e c o n o m i c c r i s i s o f 1 9 9 1

led to the opening up of the

i n d i a n e c o n o m y a n d t h e

i m p a c t i t c r e a t e d i s v e r y

visible from the fact that india

grew from a small $132 mill ion

e c o n o my i n 1 9 9 1 - 9 2 t o $ 5 . 3

b i l l i o n i n 1 9 9 5 - 9 6 . H o we ve r,

the mexican cr is is (1996) and

South east as ian cr is is (1998)

w e r e s o i n t e n s e t h a t t h e

r e s p e c t i v e e c o n o m i e s w e r e

p u s h e d b a c k b y t w e n t y f i v e

y e a r s , w h i c h r e i t e r a t e d t h e

f a c t t h a t t o o m u c h d e p e n -

dence on foreign capital could

be harmful. at that t ime, india

adopted a caut ious approach

by not al lowing foreign invest-

ments in var ious sec tors.

i n t h e p r e - r e f o r m p e r i o d ,

f o r e i g n d i r e c t i n v e s t m e n t

(fdi) accounted for only 0 .3%

of gdp, whi le as of 2008-09 i t

s t o o d a t 3 . 5 5 % o f g d p . t h e

c o m p o s i t i o n o f f d i h a s a l s o

undergone a tremendous shif t

f rom fdi in pr imar y and man-

u f a c t u r i n g s e c to r s to t h a t i n

t h e s e r v i c e s s e c t o r . t h e

p a t t e r n o f f d i w i t h i n t h e s e

sectors has also changed dras-

t ical ly. for example, there has

b e e n a s h i f t f r o m f d i i n

c h e m i c a l i n d u s t r y t o f d i i n

f m c g , e v e n t h o u g h a l l t h e

a r e a s h a v e i m p r o v e d i n

nominal terms. there has been

increas ing expor t or ientat ion

of fdi ever s ince 1991 which

can be pr imar i ly attr ibuted to

t h e i t s e r v i c e s a n d g e n e r a l

increase in share of expor ts.

S i m i l a r l y, a f t e r t h e e n t r y o f

foreign institutional investors

( f i i s ) t h e m a r k e t d e p t h h a s

i n c r e a s e d t r e m e n d o u s l y .

pr e s e n t l y, a l o t o f d e b a t e i s

g o i n g o n a b o u t w h e t h e r o r

n o t t o o p e n u p f d i i n m u l t i

b r a n d r e t a i l . f d i i n r e t a i l

would lead to improvement in

s u p p l y a n d t h e o p e r a t i o n a l

s ide, thus fur ther strengthen-

ing the reta i l sec tor by bui ld-

i n g a s t r o n g b a c k e n d i n f r a -

struc ture. the back ward inte -

grat ion by mult i brand would

l e a d t o b e t t e r p r i c e s fo r t h e

farmers, and their technology

wo u l d h e l p u s e n h a n ce fo o d

secur ity by reducing wastage.

from the patterns and trends

in fdi inf lows of i ndia , i t can

be seen that while the reforms

of 1991 have led to impressive

growth, they ’re st i l l minor in

c o m p a r i s o n t o t h e c o u n t r y ’s

p o te n t i a l . i n f a c t , l o o k i n g a t

the graph of the indian growth

s t o r y, i t i s e v i d e n t l y v i s i b l e

that the economy needs to be

o p e n e d u p e v e n m o r e f o r

i n c r e a s i n g t h e g r o w t h r a t e .

e v e n t h o u g h t h e p r o j e c t e d

grow t h r a te fo r 2 0 1 1 - 1 2 w a s

9%, the f i rst quar ter showed a

p o o r g r o w t h o f 7 . 8 % .

f u r t h e r m o r e , i t i s h i g h l y

u n l i k e l y t h a t t h e p r o j e c t e d

growth rate would be achieved

due to other per t inent struc -

tural and circumstantial issues

prevalent in i ndian economy.

authors are students of indian i n s t i t u t e o f fo r e i g n tr a d e , delhi and kolk ata .

this just i f ies the requirement

t o s t e p u p t h e o p e n i n g o f

branches in rura l areas so as

t o m e e t t h e o b j e c t i v e s o f

i n c re a s i n g b a n k i n g p e n e t r a -

t i o n a n d f i n a n c i a l i n c l u s i o n

rapidly and meet the targets

set out for providing bank ing

ser v ices in v i l lages with pop -

u l a t i o n o v e r 2 , 0 0 0 . fo r t h i s

purpose Banks are advised to

p re p a re t h e i r a n n u a l B r a n c h

e x p a n s i o n p l a n w h e r e t h e y

s h o u l d a l l o c a t e a t l e a s t 2 5

percent of the total number of

b r a n c h e s p r o p o s e d t o b e

opened dur ing the year in the

unbanked rural areas. this wil l

benefit a huge number of rural

p o p u l a t i o n s i f a p p ro p r i a t e l y

appl ied but more such in i t ia-

t ives are needed.

acco rd i n g to t h e wa l l S t re e t

Journal, reser ve bank of india

i s l i k e l y t o i s s u e f o u r n e w

b a n k i n g l i c e n s e s i n o rd e r t o

i n c l u d e a l a rg e c h u n k o f t h e

c o u n t r y ’s p o p u l a t i o n i n t h e

formal banking system. one of

t h e m a i n r e a s o n s f o r r a p i d

t r a n s f o r m a t i o n o f b a n k i n g

s e c to r i s fi n a n c i a l i n c l u s i o n .

advent of new players in the

market wil l foster competit ion

and thereby reduce cost while

i m p r o v i n g s e r v i c e q u a l i t y .

according to the regulat ions

set by i ndia’s centra l Bank i t

would be planning to impose

a condit ion which wi l l ensure

o n l y t h o s e c o r p o r a t e s w i t h

s o u n d f i n a n c i a l b a c k i n g c a n

i n f i n e e t i | a n n u a l i s s u e 2 0 1 1 i n f i n e e t i | a n n u a l i s s u e 2 0 1 1

28 29

touched the all t ime high of rs.

5 2 a g a i n s t u S d. th i s c h a n g e

was not unidirectional ; erratic

a p p r e c i a t i o n a n d d e p r e c i a -

t i o n w a s s e e n p e r i o d i c a l l y .

S u c h l a r g e m o v e m e n t s i n

e x c h a n g e r a t e s a d v e r s e l y

af fec ted the prof i tabi l i t y and

c o m p e t i t i v e n e s s o f i n d i a n

e n t e r p r i s e s o p e r a t i n g i n t e r -

n a t i o n a l l y . c o r p o r a t e i n d i a

a d o p t e d a s l e w o f h e d g i n g

s t ra te gi e s by u s i n g d i f fe re n t

t ypes of st ruc tured produc ts,

but in the majority of the cases,

i t resulted in a negative effect

on the f inancia l per formance.

l e t u s c o n s i d e r t h e c u r -

r e n c y m a n a g e m e n t t e c h -

n i q u e s a n d t h e i r e f f e c t i v e -

n e s s f o r t h e t h r e e m a j o r

i n d u s t r i e s i . e . i n f o r m a t i o n

te c h n o l o g y, p h a r m a c e u t i c a l

& a u t o i n d u s t r y. t h e r a t i o -

n a l e b e h i n d c h o o s i n g t h e s e

s e c to r s i s t h e i r ra p i d grow t h

and increas ing internat ional-

ization. the main currencies at

p lay are uSd, gBp, eur & Jpy.

p h a r m a s e c t o r d i s p l a y e d

aggressive currenc y r isk man-

a g e m e n t a n d u s e d c o m p l e x

d e r i v a t i v e i n s t r u m e n t s .

H o w e v e r, t h e r i s k f e a t u r e s

o f t h e s e i n s t r u m e n t s w e r e

i g n o r e d b y , b o t h t h e c o r -

p o r a t e s , a n d t h e i r b a n k e r s .

a u t o s e c t o r w a s d o m i -

nated by a myr iad of fore ign

players, such as the Japanese,

e u r o p e a n s , a m e r i c a n s a n d

k o r e a n s . t h e m n c s a v o i d e d

the use of exot ic opt ions and

re s t r i c te d t h e m s e l ve s to t ra -

d i t i o n a l m e a n s o f h e d g i n g .

t h e y a l s o u s e d o p e r a t i o n a l

h e d g i n g t o m e e t t h e i r l o n g

term, uncommitted exposures.

f or e X r i Sk a nd corpor ate

india

d u r i n g 2 0 0 7 - 2 0 0 8 w h e n i n r

was appreciating against uSd,

i n d i a n c o m p a n i e s e n t e r e d

into foreign exchange der iva-

t ive contrac ts, some of which

turned sour, resulting in a mark

to market loss of 3 ,17,190m n

i n 2 0 0 8 . a s p e r t h e t i m e s o f

india, as on 31.12.2008, indian

firms had a total of $2.4 tril l ion

as der ivat ive posi t ions, more

than 2 t imes the i ndian gdp.

f l u c t u a t i o n i n t h e i n r r a t e s

r e s u l t e d i n s e v e r a l c o r p o -

r a te s s u f fe r i n g h e av y l o s s e s ,

as a result of which many com-

p a n i e s to o k t h e i r b a n k e r s to

cour t . the companies a l leged

t h a t t h e b a n k s h a d s t r u c -

t u r e d t h e p r o d u c t s t h a t

a i m e d f o r t r a d i n g p r o f i t s

rat h e r t h a n fo r h e d gi n g. th e

c o u r t o rd e re d a c B i e n q u i r y

i n t o t h e a l l e g e d i r r e g u l a r i -

t i e s i n d e r i v a t i v e d e a l s t h a t

b r o u g h t m a n y c o m p a n i e s

t o t h e b r i n k o f b a n k r u p t c y.

i t i s w o r t h y t o n o t e h e r e

t h a t t h e m a j o r i t y o f t h e

i n d i a n c o m p a n i e s d o n o t

h ave a we l l d e f i n e d h e d gi n g

p o l i c y , g i v i n g l a t i t u d e t o

t h e t r e a s u r y d e p a r t m e n t t o

c o n d u c t s p e c u l a t i v e fo r e i g n

e x c h a n g e t r a n s a c t i o n s .

tr e a s u r y o f c o m p a n i e s u s e d

z e r o c o s t o p t i o n s t o h e d g e

c o m m i t t e d , u n c o m m i t t e d

a n d f o r e c a s t e d c u r r e n c y

e x p o s u r e s . t h e s e e x p o s u r e s

were covered without paying

a t t e n t i o n t o t h e i r d u r a t i o n

a n d l o n g - t e r m u n m a t c h e d

h e d g i n g s t r u c t u r e s w e r e

u s e d. m a j o r i t y o f s u c h d e a l s

w e r e c o n d u c t e d d u r i n g t h e

p e r i o d w h e n t h e r u p e e

appreciated and forex der iva-

t ives were incorrec t ly sold by

pr ivate, foreign and nat ional-

ized banks to i ndia i nc, i t was

f u r t h e r u s e d w i t h o u t u n d e r -

s t a n d i n g t h e r i s k e l e m e n t s

o r i m p a c t o n p r o f i t a b i l i t y .

foreign currency loanS

d u r i n g t h e p e r i o d o f r u p e e

a p p r e c i a t i o n , t h e i n t e r e s t

rates for foreign currenc y bor-

r o w i n g s w e r e s i g n i f i c a n t l y

l o w ; t h i s i n d u c e d a l a r g e

number of i ndian companies

t o b o r r o w a b r o a d t o m e e t

the i r f inancing needs. d ol lar

– rupee changes af fec ted the

l iabi l i t y and ser v ic ing of such

loans in a s igni f icant manner.

a s p e r i n d u s t r y e s t i m a t e s ,

o v e r a l l f o r e x l o s s e s i n

f o r e i g n c u r r e n c y l o a n s f o r

i n d i a n c o m p a n i e s d u e t o

s u c h d e p r e c i a t i o n , w e r e t o

t h e t u n e o f r s 4 0 , 0 0 0 t o

r s 5 0 , 0 0 0 m n p e r q u a r t e r.

t h e s e l o s s e s w e r e p r i m a r i l y

d u e t o i m p r u d e n t c u r r e n c y

h e d g i n g s t r a t e g i e s t o c o v e r

the huge foreign currency loan

e x p o s u r e s a n d r e s t a t e m e n t

o f f o r e i g n c u r r e n c y l o a n s .

t h e d r i v i n g f a c t o r fo r t h e s e

t r a n s a c t i o n s w a s l o w i n t e r -

est rates of dol lar and stron-

g e r t r e n d o f u S d a g a i n s t

S w i s s , f r a n c a n d y e n .

B h a r t i a i r t e l a c h i e v e d 2 7 %

i n c r e a s e i n q u a r t e r l y p r o f i t

o n a c c o u n t o f r e c o r d a d d i -

t i o n o f n e w c o n n e c t i o n s .

a m e re g l a n c e t h ro u g h

the for tune 500 com-

panies is suf f ic ient to

c o nv i n c e t h a t , t o b e a g re a t

company, one has to venture

abroad. and it takes no rocket

science to conclude that going

a b r o a d e n t a i l s o p e r a t i n g i n

s e v e r a l c u r r e n c i e s . H e n c e ,

cur renc y r i sk management i s

an unavoidable devi l for any

g r o w i n g c o m p a n y c o n d u c t -

i n g i n t e r n a t i o n a l b u s i n e s s .

fluc tuationS in inr rateS &

corporate india

according to the rBi repor t on

internat ional t rade (2008-09) ,

85% of the international trade

h a p p e n s i n u S d, a n d fo r t h e

f i r s t t i m e i n h i s to r y, i n r s aw

unforeseen f luc tuat ions v is -à

- v is a l l major currencies and

c o r p o r a t e i n d i a a d o p t e d a s l e w o f hedging st rategies by us ing d i f ferent types of structured products, but in the majority of the cases, it resulted in a nega-tive effect on the financial per formance.

currency risk management: an india inc perspective prof. Hark i rat S ingh

i n f i n e e t i | a n n u a l i s s u e 2 0 1 1 i n f i n e e t i | a n n u a l i s s u e 2 0 1 1

30 31currency

B u t t h e p r o f i t f r o m t h e

e n h a n c e d b u s i n e s s t u r n o ve r

w a s d r a g g e d d o w n b y fo r e x

l o s s i n t h e s a m e q u a r t e r .

we a k e n i n g t re n d s o f fo re i gn

c u r r e n c y a f f e c t e d t h e p r o f -

i t a b i l i t y o n a c c o u n t o f t h e

i n c r e a s i n g l i a b i l i t y o f u S d

l o a n s a n d p a y m e n t o f i n t e r -

e s t s e r v i c e c h a r g e s o n

f o r e i g n c u r r e n c y l o a n s .

B h a r t i , ta t a S t e e l , r a n b a x y,

tata motors, tata consultanc y

Ser vice etc. made forex losses

o n t h e i r f o r e i g n c u r r e n c y

f u n d i n g o p e r a t i o n s t o t h e

tune of rs5860 mio, rs3450

m i o, r s 3 1 1 0 m i o, r s 2 8 5 0

m io and rs2610 m io respec-

t i v e l y d u e t o d e p r e c a t i o n

a g a i n s t t h e l o a n c u r re n c y o f

uSd. S imilar ly, Suzlon energy,

t h e c o u n t r y ’s b i g g e s t m a k e r

o f w i n d t u r b i n e s r e p o r t e d

l o s s e s o f a p p r o x i m a t e l y

r s . 1 3 0 0 m i o d u e t o r e s t a t -

i n g o f i t s f o r e i g n c u r r e n c y

c o n v e r t i b l e b o n d l i a b i l i t y .

foreX deriVatiVeS Selection

- india inc

t h e s e l e c t i o n o f d e r i v a t i v e

p ro d u c t s w a s d r i ve n , n o t b y

t h e o b j e c t i v e t o h e d g e , b u t

by t h e gre e d o f t h e t re a s u r y

teams to earn t rading prof i ts .

c o m p a n i e s t r i e d t o p r e d i c t

t h e f u t u r e v a l u e o f r u p e e

and selected forex der ivatives

based on their convic t ions. i n

majority of such cases, predic-

t ion of st rong or weak i ndian

r u p e e , p r o v e d w r o n g a n d

c o m p a n i e s l i k e wo c k h a r d t ,

r a n b a x y , i n f o s y s , w i p r o ,

S a t y a m , B h a r t i , ta t a S t e e l ,

S u z l o n e t c . i n c u r r e d h e a v y

forex losses in some quar ters.

i t can be obser ved that i ndia

inc. did not have the adequate

u n d e r s t a n d i n g o f h e d g i n g

s t r a t e g i e s o r o f t h e o p e r a -

t i o n s o f t h e f o r e x m a r k e t s .

i t w a s fo r t h e f i r s t t i m e t h a t

i n r s a w l a n d s l i d e d e p r e c i a -

t ion f rom rs 39 to the dol lar

t o r s 5 2 ; h e n c e , t h e y f a i l e d

t o t a k e a d e q u a t e m e a s u r e s

to protec t their interests . the

r B i o b s e r v e d t h a t t h e a d v i -

s o r y s e r v i ce p rov i d e d by t h e

i ndian banks was ver y unpro -

fessional and lacked foresight.

e x c h a n g e r a t e f l u c t u a t i o n s

c r e a t e d e x t r a p r o f i t s a n d

h u g e l o s s e s i n t h e d i f fe r e n t

q u a r t e r s , d e p e n d i n g u p o n

t h e n a t u re o f e x p o s u re s a n d

m o v e m e n t o f m a j o r c u r r e n -

c ies against inr. companies

used for wards, swaps and zero

cost and leverage st ruc tured

o p t i o n s e t c . t o h e d g e t h e i r

c u r r e n c y e x p o s u r e s i n u S d,

c H f a n d ye n e t c . S o m e o f

t he companie s us e d stepped

f o r w a r d a n d r o l l o v e r c o n -

t r a c t s t o c o v e r l o n g t e r m

e x p o s u r e s i n s t e a d o f s w a p s .

e f f e c t o f u S p H a r ma a n d

auto induStry

i n f o r m a t i o n t e c h n o l o g y

i ndustr y

r u p e e a p p r e c i a t i o n a g a i n s t

u S d a d v e r s e l y a f f e c t e d t h e

prof i ts of the companies that

w e r e d e p e n d e n t h e a v i l y o n

t h e u S m a r k e t . i n p a r t i c u l a r,

i t a f fe c t e d t h o s e c o m p a n i e s

which used uSd as i ts invoice

c u r r e n c y. d u r i n g t h e p e r i o d

2 0 0 7 - 2 0 1 0 , t h e r u p e e m o ve -

m e n t w a s n o t u n i f o r m w i t h

respect to all major currencies;

i t was par t icular ly depreciat-

ing against the european cur-

r e n c i e s . to m a k e m a x i m u m

out of this, it industr y star ted

d i v e r s i f y i n g b u s i n e s s t o

e u r o p e a n c o u n t r i e s , s o t h a t

they can change their invoice

c u r r e n c i e s t o g B p a n d e u r .

B u t s o o n r u p e e a p p re c i a t e d

6.5% against gBp moving from

rs 86.23 to rs 81.23. against

e u ro, i t a p p re c i a t e d f ro m r s

5 8 . 5 5 t o r s 5 5 , a r i s e o f

6 .1%. maximum appreciat ion

of 8 .6% was against uSd from

r s 4 4 . 2 4 to r s 4 0 . 4 2 . r u p e e

appreciated against a l l major

currencies i .e . eur, gBp, uSd

& J py. i t w a s o b s e r ve d t h a t

f o r e v e r y 1 % a p p r e c i a t i o n

i n r u p e e , t h e r e w a s 0 . 4 0 %

– 0 . 4 5 % r e d u c t i o n i n t h e

n e t m a r g i n s o f i t i n d u s t r y.

thereafter, rupee appreciated

over a l l the major currencies

due to f low of foreign invest-

m e n t s a n d h i g h g d p g row t h

rate in india. industr y felt the

n e e d fo r o t h e r e f fe c t i ve a n d

e f f i c i e n t h e d g i n g a p p r o a c h

to meet chal lenges of overal l

a p p r e c i a t i o n o f r u p e e

a g a i n s t a l l m a j o r c u r re n c i e s .

to counter this , the it indus-

tr y star ted factoring exchange

r a t e f l u c t u a t i o n s i n t h e i r

s a l e c o n t r a c t s . S u c h a d j u s t -

m e n t s h a d a p r o v i s i o n o f

n e u t r a l z o n e f o r e x c h a n g e

r a t e c h a n g e s a n d w i t h p a s s

o r s h a r e t h e e x c h a n g e r a t e

change to concerned par t ies.

Such currenc y rate protec t ion

in sales contract, touched 60%

of the total long term expor t

c o n t r a c t s d u l y e x e c u t e d

b y t h e i n d i a n i t i n d u s t r y .

pharmaceut ical industr y

r a n b a x y, o n e o f t h e l a r g e s t

i ndian pharmaceut ical major,

h a d e x t e n s i v e e x p o s u r e s t o

u S d. t h e y m a i n l y u s e d z e r o

cost opt ions to protec t them-

s e l v e s f r o m f o r e x l o s s e s .

i n i t i a l l y, t h e y m a d e s i g n i f i -

cant t rading prof i ts , but due

t o l a c k o f t i m e l y re ve r s a l o f

p o s i t i o n s , t h e y f a c e d l o s s e s

t o t h e t u n e o f r s 7 6 1 0 m n .

f o r e i g n e x c h a n g e f l u c t u a -

t ions caused 52% drop in the

t o t a l p ro f i t o f t h e c o m p a ny.

r anbax y incurred rs 1158.0

m i l l i o n l o s s e s o n i t s fo re i g n

cur renc y bor rowings bes ides

r s 2 3 3 6 0 m n f o r e x l o s s o n

f o r e i g n c u r r e n c y o p t i o n s

d e r i v a t i ve s . t h e fo re x l o s s e s

ove r - s h a d owe d h i g h e r o p e r -

at ing margins of 20% for the

m a rc h q u a r te r. fo re x d e r i v a -

t ives created huge cash losses

f o r a n o t h e r m a j o r i n d i a n

pharma company, wock hardt

ltd. due to numerous, complex

hedging strategies. company

conduc ted forex deals in the

absence of clear forex hedging

p o l i c y a n d f a c e d h u g e e s t i -

m a t e d m a r k t o m a r k e t

l o s s e s a r o u n d $ 3 0 0 m i l l i o n

o n d e r i v a t i v e c o n t r a c t s .

c o m p a n y a l s o a l l o w e d i t s

f o r e i g n s u b s i d i a r i e s , u n d e r

i t s g u a r a n t e e s , t o i n d u l g e

i n c a r r y t r a d e a n d d e r i v a -

t i ve t ra n s a c t i o n s i n ove r s e a s

m a r k e t s . i t u s e d s t r u c t u re d

zero cost options with var ious

i ndian banks to cover expor t

b i l l receivables. i t used struc-

t u re d ze ro co s t o p t i o n s w i t h

var ious i ndian banks to cover

expor t b i l l receivables. those

structures star ted giving extra

p ro f i t s b e c a u s e o f f avo r a b l e

m o v e m e n t o f r u p e e a g a i n s t

u S d i n i n d i a n fo r e x m a r k e t

and uSd against cHf and yen

in international forex markets.

t h i s i n c r e a s e d t h e i r g r e e d ,

a n d t h e c o m p a n y e n t e r e d

i n t o l e v e r a g e d d e r i v a t i v e

s t r u c t u r e d c o n t r a c t s w i t h a

number of i ndian and foreign

b a n k s w i t h o b j e c t i v e t o

c re a te m o n e y f ro m n o n - co re

c o m p a n i e s t r i e d t o p r e d i c t t h e

f u t u r e v a l u e o f r u p e e a n d s e l e c te d f o r e x d e r i v a t i v e s b a s e d o n t h e i r co n -vic t ions. i n major i t y o f s u c h c a s e s , p r e -d i c t i o n o f s t ro n g o r we a k i n d i a n r u p e e, p r o v e d w r o n g .

i n f i n e e t i | a n n u a l i s s u e 2 0 1 1 i n f i n e e t i | a n n u a l i s s u e 2 0 1 1

32 33currency

business ac t iv i t ies. currenc y

p r e d i c t i o n s w e r e m a d e b y

t h e c o m p a n y a n d s t r a t e -

gies developed on such fore -

c a s t i n g c o n v i c t i o n s p r o v e d

to ve r y co s t l y to wo c k h a rd t .

Subsequently, rupee, cHf, yen

m o v e d a g a i n s t t h e h e d g i n g

s t r a t e g i e s o f t h e c o m p a n y

and over indulgence in struc -

t u re d d e r i vat i ve i n s t r u m e nt s

created huge losses. fur ther,

under pressure f rom overseas

b a n k , fo re i gn s u b s i d i a r i e s o f

wo c k h a rd t l t d . h a d t o c l o s e

der ivat ive deals with offshore

b a n k s . m o r e o v e r, c a n c e l l a -

t i o n a n d m a r k t o m a r k e t o f

der ivat ives resulted in a huge

cash crunch in the company.

w o c k h a r d t h a d m o b i l i z e d

substant ia l fore ign de bt s ( to

the tune of uSd 450 mi l l ion) ,

w h i c h we re r a i s e d to re d u ce

t h e c o s t o f f u n d s . d u r i n g

d e p r e c i a t i o n a g a i n s t u S d

p h a s e, t h e m a t u r i t y o f s o m e

o f t h e fo re i gn c u r re n c y d e b t

r e q u i r e d i m m e d i a t e c a s h

a s s i s t a n c e f r o m i t s b a n k s .

co m p a ny h a d s o u g h t co r p o -

ra te d e b t re s t r u c t u r i n g f ro m

b a n k s t o d e a l w i t h s e r v i c -

ing and repayment of foreign

d e b t s . H e n c e , t h e y i n c u r r e d

a heav y cost due to ef f ic ient

c u r r e n c y r i s k m a n a g e m e n t .

a u t o m o b i l e i n d u s t r y

J a p a n e s e , e u r o p e a n a n d

a m e r i c a n c a r m a n u f a c t u r e s

h a v e a s i g n i f i c a n t p r e s e n c e

i n t h e l o c a l a u t o i n d u s t r y .

t h e s e c o m p a n i e s w e r e a l s o

exposed to change in va lue

a g a i n s t m a j o r c u r r e n c i e s i n

f o r e x m a r k e t s . e u r o p e a n &

a m e r i c a n c a r m a n u f a c t u r -

i n g co m p a n i e s i n i n d i a u s e d

l o c a l s u p p l y o f c o m p o n e n t s

for the produc t ion of cars , as

a h e d g i n g s t r a t e g y a g a i n s t

r u p e e d e p r e c i a t i o n . t h i s

h e l p e d by re d u c i n g t h e co s t

of impor ted components from

t h e p a re n t co m p a n i e s w h i c h

f u r t h e r re d u c e d t h e c o s t o f

i m p o r t s f o r t h e i r c a r m a n u -

f a c t u r i n g b u s i n e s s i n i n d i a .

J a p a n e s e c a r m a n u f a c t u r i n g

companies in i ndia a lso faced

u n i q u e s i t u a t i o n i n t h e a re a

of currenc y r isk management

with yen appreciat ing against

u S d a n d r u p e e d e p re c i at i n g

against uSd. as a result , com-

ponent impor t f rom Japan for

t h e i r m a n u f a c t u r i n g a c t i v -

i t i e s i n i n d i a b e c a m e v e r y

c o s t l y a n d d e c r e a s e d t h e i r

aBout tHe autHorp r o f . H a r k i r a t S i n g h i s a p r o f e s s o r a n d c o n s u l t a n t a t i i f t, d e l h i , h e i s a l s o t h e v i s i t i n g fa c u l t y t o a n u m b e r o f p r e m i e r m a n a g e m e n t i n s t i t u t e s i n i n d i a a n d a b r o a d , h e i s a c o n -s u l t a n t t o a n u m b e r o f c o m p a n i e s i n t h e a r e a o f i n t e r n a t i o n a l f i n a n c i a l & c u r r e n c y r i s k m a n a g e m e n t . H e h a s o v e r 2 5 y e a r s o f e x p e r i e n c e i n i n t e r n a t i o n a l B a n k i n g, f o r e x d e a l i n g a n d h a s a l s o b e e n i n c h a rg e o f e x p o r t , i m p o r t , r e m i t t a n ce s , i nve s t m e n t a n d co r re s p o n d e n t B a n k i n g. H e h a s b e e n t h e c h a i r m a n o f fo r e x c l u b o f i n d i a , d e l h i c h a p t e r f o r t w o t e r m s .

competit iveness in the i ndian

market against european and

a m e r i c a n c a r m a n u f a c t u r i n g

units . these competing com-

p a n i e s we re u s i n g h i g h p e r -

centage of i ndian made com-

ponents for their manufac tur-

ing activities and making them

i m m u n e t o r u p e e d e p r e c i a -

t ion against home currencies.

J a p a n e s e a u t o c o m p a n i e s

a n a l y z e d t h e s t r a t e g i e s o f

their competitors in the indian

market . to reduce the cost of

J a p a n e s e i m p o r t e d c o m p o -

nents they a lso shi f ted to the

local vendors for i ndian com-

ponents instead of using forex

derivatives to hedge yen rupee

e x c h a n g e r a t e f l u c t u a t i o n s .

the picture presented is a news

paper c l ipping that was pub -

l ished in the economic t imes

on the 19th Januar y 2011, at

the author ’s request; infineeti

i s p u b l i s h i n g t h i s a r t i c l e fo r

t h e b e n e f i t o f t h e r e a d e r s .

disc la imer : this i s a summar ized vers ion o f t h e c a s e p r e p a r e d b y t h e a u t h o r, a f t e r e x t e n s i v e r e s e a r c h . r e a d e r s m a y g e t i n t o u c h w i t h pr o f . H a r k i r a t Singh at hark irat@ii f t .ac. in for f u r t h e r d i s c u s s i o n / d e t a i l s . al l opinions expressed are the a u t h o r ’s p e r s o n a l o p i n i o n s .

i n f i n e e t i | a n n u a l i s s u e 2 0 1 1 i n f i n e e t i | a n n u a l i s s u e 2 0 1 1

34 35currency

resource planning in Smes – is less very little?reuben r ay ; Head - wholesalelending at i ntel lecash

m o d e l t h a t d o e s n o t s p e n d

optimal ly based on long-term

strategy (both the banker and

t h e i n v e s t o r s e e k i n g p r o f i t -

a b l e re t u r n s w i t h i n t h e f i r s t

s t a g e o f o p e r a t i o n s w i t h o u t

c a r i n g f o r r e s o u r c e - i n v e s t -

i n g ) . a d d i t i o n a l l y, n o r d o e s

the regulator require f i rms to

h ave b a s i c f a c i l i t i e s i n p l a ce

t o e x p l o r e t h e e n t e r p r i s i n g

spir i t in the f i rst p lace. whi le

i t may sound highly naive to

s u g g e s t h a v i n g a l l i n p l a c e

b e f o r e t a k i n g t h e p l u n g e ,

i s n’t t h i s t h e l e s s o n we h ave

learnt while tak ing our annual

vacat ions, cook ing up a meal

or for t hat mat te r, pre par ing

for exams? Some of the issues

related to Sme financing which

n e e d t o b e e x a m i n e d a r e :

regulator y framework : the

regulator while being too busy

i n re g u l at i n g h a s to p e r h a p s

now look deeper in retrospec-

tion as to why there is so much

n o i s e a b o u t f i n a n c i n g t h e m ;

p e r h a p s t h e f a c t t h a t e v e r y

o t h e r y o u n g s t u d e n t c a r r i e s

t h a t v i s i o n i n t h e i r h e a d s ,

ever y middle - income salar ied

c l a s s b e l i e ve s t h a t t h e o rg a -

n i z a t i o n c a n b e d o n e b e t t e r

and ever y smal l vendor keeps

brewing secret wishes of out-

doing i ts pr incipal some day.

now whi le that sounds quite

enterpr is ing and needs ac t ive

e n c o u r a g e m e n t , t h e r e a s o n

w hy w e h a v e n o t b e e n a b l e

to create too many industr ia l

b i g g i e s s i n c e i n d e p e n d e n c e

is perhaps the fac t that ever y

s m a l l e n t e r p r i s e h a s t r i e d

t o t a k e t h e s h o r t e s t r o u t e

t o s u c c e s s w i t h o u t i n v e s t -

i n g c o m p l e t e l y i n r e s o u r c e s

t o s c a l e u p a n d c a p t u r e t h e

enterpr ise’s t rue wealth . and

this is largely due to the regu-

lator for the sec tor only inter-

ested in f raming pol ic ies with

re g a rd to ow n e r s h i p, re p o r t-

i n g s t a n d a r d s a n d c u s t o m e r

ethics. what about the scope

o f g ro w t h o f t h e e n t e r p r i s e ,

i m p o r t a n c e o f i t s s e r v i c e i n

o u r e co n o my a n d t h e n e ce s -

s i t y t o f i r s t i nve s t c l e a r l y i n

its resources before tak ing the

b i g p l u n g e ? e l s e , r e s o u r c e s

w i l l b e u s e d u p a n d h i g h l y

w hy d o B a n k s o f t e n

s h y a w a y f r o m

f i n a n c i n g e a r l y -

s t a g e S m e s i s a q u e s t i o n

t h a t o f te n b o t h e r s m e ; m o re

s o a t t h i s p a r t i c u l a r h o u r o f

h igh inf lat ion and no tools to

t a m e i t . i h ave b e e n o b s e r v -

i n g S m e s a n d t h e i r w a y s o f

ra is ing funds a long with their

measures to control spending,

which in turn is leading to an

asymmetric pattern of lending

and growth for these ent i t ies.

m a n y S m e s w i t h t r u e p r o m -

i s e s a n d l i fe c h a n g i n g s o l u -

t i o n s t o m o d e r n d a y p r o b -

l e m s a re f a c e d w i t h a s i n g l e

a g e n d a - h o w d o i o f fe r my

s e r v i c e s t h a t a r e r e l e v a n t ,

c a n h o l d t h e i m a g i n a t i o n o f

a n i n d i a n m i n d s e t t h a t d o e s

n o t w i l l i n g l y e x p l o r e f r e s h

s o l u t i o n s b u t l a r g e l y i m i -

t a t e s p r a c t i c e s e l s e w h e r e ,

a n d h o w d o i r a i s e e n o u g h

f u n d s to s t a r t a n e n te r p r i s e .

r e a l i t i e s h i t t h e s e e nte r p r i s -

ing entrepreneurs hard when

they real ize how they have cut

c o r n e r s t o b u i l d a b u s i n e s s

wa s te d ; t h e p ro o f l i e s i n t h e

h u g e l y u n d e r u t i l i ze d c a p a c i -

t i e s i d l i n g a c ro s s t h e l e n g t h

a n d b r e a d t h o f t h e c o u n t r y

w i t h n o r e g u l a t o r y q u e s -

t i o n s o r s u p p o r t f r a m e wo r k .

credit r isk : needless to say,

a we l l c a p i t a l i ze d e nt i t y w i l l

grow faster. i t wi l l need lesser

credit going for ward and wi l l

br ing about faster acceptance

o f i t s p r o d u c t s a n d s e r v i c e s

n o t o n l y w i t h i n t h e n a t i o n ,

but also globally. Big f irms are

h ighly invested in resources,

a n d h a v e n o t f o c u s e d i n

t u r n i n g t h e t i d e i n a ye a r o r

t w o b u t r a t h e r e n s u r e t h e y

are ready to take on when the

market tsunami of their of fer-

ings h i ts them with demand.

w h a t w e s e e i n a n a t i o n a l l y

b i g - s c a l e p l a y e r i s y e a r s o f

sustained investment coupled

w i t h a c h u n k y i n i t i a l i nve s t -

m e n t . H owe ve r, n o t a l l S m e s

need to become the mult ina-

tionals that we see around, nor

d o a l l a s p i re . H owe ve r, co m -

p a r e d t o o n e s u c c e s s s t o r y,

t h e r e a r e p r o b a b l y a d o z e n

stor ies which have fa i led, due

par t ia l ly to the f inancial advi-

sors in the forms of Banks, f i ’s

and nBfcs not advis ing them

on resource - invest ing. with a

c lear focus to get their money

b a c k , b a n k e r s f a i l t o p r o b e

deeper with quest ions about

the model , the scope to scale

up and hence a detailed inves-

tigation on resources required

and the f inancia l suppor t to

create them thereon. i am yet

t o c o m e a c r o s s a s a n c t i o n

letter which states a fur ther

l i n e o f ‘ x ’ t ow a rd s c a p a c i t y

bui ld ing once the ent i t y has

a c h i e ve d c e r t a i n s c a l e a n d

m a s s t h r o u g h a n o n - g o i n g

lending program. credit r i sk

p r a c t i t i o n e r s b e l i e v e t h e y

can well handle the entity by

covenants and l imited scope

o f f i n a n c i a l f l e x i b i l i t y, b u t

t h a t s t i f l e s t h e v e r y b a s i c s

of any enterpr ise that keeps

wishing to chal lenge i ts own

l imits and grow beyond what

even the founder dreamt of.

r a t h e r t h a n r e d u c e t h e

ent i t y to a r isk-abiding bor-

r o w e r, c r e d i t r i s k c a n b e

b e t t e r c o ve re d b y a l l o w i n g

the enterpr ise to scale up by

s u p p o r t i n g i t w h o l e - h e a r t -

edly through additional l ines

without h igh secur i t y cover

a n d c o l l a t e r a l s , b y h e l p i n g

i t grow and see debt capita l

r e t u r n i n h i g h e r m e a s u r e s .

r ather than worr y ing about

credit r isk , the lender should

w o r r y a b o u t h o w w e l l -

equipped is the entity to take

t h e n e x t s t e p ; s a d l y w e d o

not measure next-step capa-

b i l i t i e s t h r o u g h r e s o u r c e

m a p p i n g t o g r o w t h . a l s o

a d d t o t h e f a c t t h a t s i n g l e

parameters of credit r i sk are

a p p l i e d a c r o s s i n d u s t r i e s ,

fa i l ing to recognize the f iner

n u a n c e s o f i n d u s t r y - b a s e d

resource metr ics that need to

b e f i n e - t u n e d a n d b a l a n c e d

for the ent i t y not being stuck

in a s ingle orbit of scale, but

soar higher and higher up the

e c o n o m i c s c a l e o f c o n t r i b u -

tion to the nation’s gdp. this is

the need of the hour to tack le

supply s ide inf lat ion that has

been the buzz word of late in

this par t of the sub-continent.

markets to distr ibute r isk : r i s k s i n B a n k s a r e l a r g e l y

r e t a i n e d i n t h e p o r t f o l i o s

t h a t m a n a g e t h e m . H e n c e

i t b e c o m e s d i f f i c u l t t o l o o k

beyond the current oppor tu-

nit ies and address the for ward

i s s u e s t h a t m a y c r i p p l e t h e

o r g a n i z a t i o n g o i n g fo r w a r d .

most medium s ize companies

have mult iple bankers s i t t ing

in i ts books, who are t ra ined

to take f inancia l r i sks on the

e n t i t y t h e y l e n d . H o w e v e r,

w h i l e t h e y a r e m o r e t h a n

a d e q u a t e l y c o ve re d t h ro u g h

p r i m a r y a n d c o l l a t e r a l s e c u -

r i t y , a c t u a l r i s k - b e a r i n g

b e y o n d a s e c u r i t y c o v e r i s

w h a t n e e d s t o s h i n e f o r t h .

e lse, government money col -

l e c te d t h o u g h t h ro u g h t a xe s

s h o u l d b e l e n t f re e o f i n t e r -

e s t to h e l p e n te r p r i s e s grow

a n d f l o u r i s h b y a i d i n g t h e i r

scal ing up journey. this i ssue

o f h i g h e r r i s k a p p e t i t e c a n

a lso be addressed by creat ing

a separate market to play the

r isk and reward games based

o n p e r fo r m a n ce, ra t h e r t h a n

i n f i n e e t i | a n n u a l i s s u e 2 0 1 1 i n f i n e e t i | a n n u a l i s s u e 2 0 1 1

36 37Sme finance

measurement of r isk by f inancial

e x p o s u re . to d ay we h ave i n d i -

viduals and bodies who can con-

f idently and accurately check on

t h e r e s o u r c e s o f t h e c o m p a ny

t o m e a s u r e d e l i v e r a b l e s a n d

s c a l i n g f o r o p t i m u m u t i l i z a -

t i o n o f re s o u rce s to d e l i ve r i t s

product t i l l i ts own last mile. the

idea is to create a market around

i t , which helps cover the infra-

st ruc ture bui ld ing r i sk in Smes

and enterpr ises that are br ing-

ing good name and value to the

countr y whi le a id ing economic

growth. the government can do

i ts par t by bui lding roads, por ts

and br idges; a l l these are meant

t o a i d o u r b u s i n e s s e s b u t n o t

m u c h c a n b e d o n e w h e n t h e y

f ind themselves cr ippled due to

lack of resources which were not

planned in a phased manner and

not being advised by the lenders

a n d r e g u l a t o r s a l i k e . d o e s a n

entity need to spend adequately

o n m a r k e t i n g o f i t s g o o d s ? o r

do we pat them on the back for

g o o d w o r d - o f - m o u t h m a r k e t -

i n g a n d h e n c e n i l b u d g e t s fo r

mar ket ing! look at your fe l low

counterpar ts across the atlantic

or even in the South-east as ian

economy who sel l more in i ndia

than in their own countr y. How?

w h y a r e i n d i a n b r a n d s y e t t o

create a global hype and inter-

e s t a c ro s s s e c t o r s ? we a re t h e

l owe s t co s t p ro d u ce r s o f m a ny

c o m m o d i t i e s , y e t n o t m a n y

beyond our shores ack nowledge

their presence in global markets.

w h a t a re t h e to o l s to m e a s u re

o p t i m u m p e r f o r m a n c e g i v e n

a d d e d r e s o u r c e s t h a t c o u l d

ra ise the per formance fur ther?

How can our produc ts not only

m e e t , b u t e xc e e d t h e q u a l i t y

s t a n d a r d s m o r e o f t e n t h a n

not? indian mindset of measur-

i n g a g a i n s t p ro j e c t e d p e r fo r -

mance is applauded for being

conser vative - perhaps we hate

b e i n g p u s h e d t o t h e l i m i t s

w i t h r e g a r d s t o p e r f o r m a n c e

a n d q u a l i t y a l i k e . pe r h a p s a l l

t h i s h a s to d o w i t h n o t c re at -

ing a market to empower them

with enough funds, having no

regulator y f ramework to ins ist

lending based on an addit ional

parameter of scope to optimize

a n d s c a l e t h e u s e o f r a p i d l y

reducing e lements l ike miner -

a l s , co a l a n d wate r, to e n s u re

they have necessar y resources

to go beyond the ordinar y and

p l a c e i t s f o o t p r i n t g l o b a l l y

t h a t p ro u d l y s p e l l s i t s i n d i a n

or igins. the cr is is with lenders

l i e s w i t h n o s c o p e t o d i s t r i b -

u t e t h e r i s k a c c u m u l a t e d i n

t h e i r a s s e t b o o k s . c r e a t i n g

a n a l t e r n a t i v e m a r k e t w h e r e

fund houses help to distr ibute

r isk and ra ise fur ther funds to

a i d t h e c a p a c i t y b u i l d i n g a n d

ut i l izat ion stor y in our back-

yards i s one of the answers .

also unner ving are the real i -

t ies of how Smes are encour-

aged to produce with l imited

resources, l imited power and

f u e l s o u r c e , a n d n o k n o w l -

e d g e b a n k , r e l y i n g h e a v i l y

o n t h e i r o w n e x p e r i -

e n c e a n d v i s i o n o f t h e

i n d u s t r y t h e y s e r v e . i f

banks are wil l ing to look

beyond lending only for

t h e p ro p o s e d c a p e x o r

working capital, the reg-

u l ato r n e e d s to s te p i n

by creat ing a window to

distr ibute their r i sks beyond

t he s e cur i t izat ion route and

a l l o w f o r a s t u d y c o u p l e d

with broad arms to welcome

larger investment into these

areas with scope for nat ion-

b u i l d i n g, b e f o r e r e g u l a t i n g

t r a d e . e l s e r e g u l a t o r s w i l l

regulate, not procreate or co-

create, lenders wi l l lend but

not r isk and india wil l keep its

status quo of ‘sab chalta hai ’.

aBout tHe autHor

m r. r e u b e n r a y w a s c l u s t e r h e a d a t ta t a c a p i t a l b e fo re t a k i n g u p t h e o p p o r t u -n i t y o f h e a d i n g t h e w h o l e -s a l e l e n d i n g d i v i s i o n a t i n t e l l e c a s h . a r t i c l e r e f l e c t s personal v iews of the author

keynes & paschimbangadr. r anajoy Bhattachar y ya

J o h n m a y n a r d k e y n e s h a s

a l w a y s b e e n r e v e r e d f o r

c o m i n g u p w i t h e f f e c t i v e

r o u t e s o f e s c a p e w h e n a n

e c o n o m y f i n d s i t s e l f a t t h e

w r o n g e n d o f t h e b u s i n e s s

c yc l e . t h e m a i n a r g u m e n t i n

k e y n e s’s f r a m e wo r k w a s t h a t

t h e g o v e r n m e n t c a n s t e p i n

s u c c e s s f u l l y w h e n re c e s s i o n -

a r y m a r k e t s m a k e a m e s s o f

giv ing employment to a l l who

a r e w i l l i n g t o w o r k . t h o u g h

t h i s i s t h e e x a c t c o n t e x t i n

w h i c h h e w r o t e h i s m a g n u m

o p u s , t h e g e n e r a l t h e o r y o f

e m p l o y m e n t , i n t e r e s t a n d

m o n e y t h e r e i s n o t h i n g i n

t h e p o l i c i e s t h a t m a k e t h e m

e x c l u s i v e t o t h a t s i t u a t i o n .

for instance, there are a lways

people who are wil l ing to work

and are unable to f ind jobs in

underdeveloped countr ies. i n

t h e s e c o u n t r i e s p o l i c i e s l i k e

the ones proposed by keynes

c a n b e u s e d b y t h e g o v e r n -

m e n t a t a n y p o i n t o f t i m e ,

i r respec t ive of the economy ’s

exact location on the business

c ycle.

i t s p o p u l a r i t y a n d h u r t l e d

t o w a rd s d i s a s t e r a p p a re n t l y

for doing the r ight thing, v iz ,

br inging west Bengal back to

the path of industr ia l g lor y.

this br ings us to the second

i s s u e n e c e s s a r y t o p i e c e

together our argument. what

a r e t h e p r o b a b l e c a u s e s

f o r t h e l e f t fr o n t d e b a c l e ?

Hundreds of hours have been

d e v o t e d o n t h i s e s p e c i a l l y

i n l o c a l l a n g u a g e t e l e v i s i o n

n e w s c h a n n e l s . S c o r e s o f

r e a s o n s f r o m t h e a r r o g a n c e

of the lef t front government

to the fai lure to devise a com-

p e n s a t i o n p a c k a g e f o r t h e

land losers were debated and

contested. one issue however

remained unaddressed – the

i s s u e o f we s t B e n g a l ’s r a p i d

g r o w t h r a t e s i n c e t h e m i d

1990s. a fast pace of growth

b r i n g s w i t h i t a n e w s e t o f

c h a l l e n g e s – c h a l l e n g e s

associated with the pressure

c o o k e r t y p e s i t u a t i o n t h a t

r e s u l t s f r o m a n o v e r h e a t -

i n g o f t h e s t a t e e c o n o my. i f

w e l o o k b a c k u p o n i n d i a ’s

B y re c o g n i z i n g t h e v a l i d i t y o f

h i s p o l i c i e s a ny t i m e a n d a ny -

w h e re p rov i d e d t h e re i s i nvo l -

u n t a r y u n e m p l o y m e n t p o s s i -

b l y d e m a n d c o n s t r a i n e d , w e

c a n a p p l y i t t o m u l t i t u d e o f

s i t u a t i o n s i n c l u d i n g t h a t o f

west Bengal (now rechr istened

pa c h i m b a n g a ) . to b r i n g we s t

Bengal into the pic ture we f i rst

n e e d t o l o o k i n t o a c o u p l e o f

i s s u e s . th e f i r s t i s f a c t u a l . fo r

t h e m a j o r i t y o f t h e ye a r s t h a t

the left front ruled west Bengal,

the corporate lobby abhorred it .

i ndustr ies migrated and indus-

t r i a l i s t s a c r o s s t h e s p e c t r u m

a n d t h e i r p ro t é g é s s o m e t i m e s

u s e d p r e t t y s t r o n g l a n g u a g e .

B y s p e a k i n g o u t a g a i n s t t h e s e

‘d e s t r o y e r s o f i n d u s t r i e s ’ t h e

co r p o rate s p o k e s p e r s o n s m u s t

h a v e t h o u g h t t h a t t h e y w e r e

mak ing a strong case in favour

o f t h e p e o p l e o f we s t B e n g a l

whose l ive l ihoods were c lear ly

at stake and who they thought

were shameless ly being bul l ied

to vote for them. the same set

of people must have been com-

p l e t e l y i n t r i g u e d w h e n t h e

l e f t f r o n t g o v e r n m e n t l o s t

i n f i n e e t i | a n n u a l i s s u e 2 0 1 1 i n f i n e e t i | a n n u a l i s s u e 2 0 1 1

38 39economy

p e r fo r m a n ce s i n ce t h e m i d

1990s and its sudden growth

a c c e l e r a t i o n s c e n a r i o f ro m

t h e ‘ H i n d u r a t e ’ o f 3 . 5 o r

thereabouts in the pre 1990s

p e r i o d t o a r o u n d 8 % i n

recent years we can v isual -

ize some of these challenges

– a perceived r ise in inequal-

ity and especial ly discontent

a m o n g t h e p o o re r s e c t i o n s

o f t h e s o c i e t y. th i s d i s co n -

t e n t w a s e f f e c t i v e l y u s e d

b y t h e m a o i s t s t o p u r s u e

t h e i r o w n a n t i - d e m o c r a c y

a g e n d a . i n f a c t t h e d i s co n -

tent had reached an ex tent

w h e r e s o m e o f t h e l e f t

m i n d e d p e o p l e s t a r t e d t o

cal l the growth ‘predator y ’.

for west Bengal the contrast

i n g r o w t h r a t e h a p p e n e d

more abruptly. after a lacuna

of about three decades from

1970s to end of 1990s when

t h e g r o w t h r a t e w a s j u s t

a b o u t 4 % , t h e g ro w t h r a t e

s u d d e n l y z o o m e d t o m o r e

than 7% in the last decade.

c h a l l e n g e s we re i n e v i t a b l e

e s p e c i a l l y f r o m t h e s e t o f

people to whom the benef i t

d id not accrue immediately,

or who tur ned out to be at

the receiving end at least for

the f i rst par t of the growth

process – prominent among

whom were the farmers who

w e r e t o l o s e t h e i r l a n d t o

make way for industr ies.

n o w t o t h e l a s t i s s u e i n o u r

c h a i n o f r e a s o n : t h e r o l e o f

e x p e c t a t i o n s i n s h a p i n g e c o -

nomic and pol i t ica l outcomes.

to appreciate this we must f i rst

appreciate that keynesian f iscal

p o l i c i e s , l i k e b u i l d i n g a r o a d

w i t h g o v e r n m e n t m o n e y, a r e

a s m u c h s y m b o l i c a s t h e y a re

e f fe c t i ve i n p u t t i n g m o n e y i n

the hands of those work ing in

t h e p ro j e c t . o f te n j u s t a ‘g ov-

e r n m e n t i s b e h i n d m e’ s i g n a l

m ay wo r k wo n d e r s i f t h e y a re

proper ly t imed and adver t ised

in the media . there are numer-

ous examples in history – indeed

b r a n c h e s o f e c o n o m i c p o l i c y

research – where just a formal

declarat ion from a government

turns the t ide in favour of a par-

t icular individual or a company

by g i v i n g i t a d e c i s i ve s t r a te -

gic advantage. a s imple ex ten-

s ion of th is logic to the rea lm

o f p u b l i c l i fe t a k e s u s t o t h e

real izat ion that a government

can create a space for pol ic ies

that are re lat ive ly unpopular

to the common man by man-

a g i n g p e o p l e’s e x p e c t a t i o n s

through a paral le l set of pol i -

c ies tai lor-made for obtaining

his conf idence.

S i n c e t h e m i d 2 0 0 0 s , t h e

ce n t r a l g ove r n m e n t b e g a n a

ser ies of pol ic ies that ra l l ied

publ ic opinion in the govern-

m e n t ’s f a v o u r w i t h o u t s a c -

r i f i c i n g t h e m o m e n t u m o f

g r o w t h . t h e s e p o l i c i e s l i k e ,

for instance, the r aj iv g andhi

g r a m S a r a k yo j o n a a n d t h e

n a t i o n a l r u r a l e m p l o y m e n t

guarantee ac t ef fec t ively dis-

a r m e d t h e c r i t i c s o f g r o w t h

and hushed them into s i lence.

wi t h c l e a r s i g n a l s o f a p r o -

p o o r g o v e r n m e n t , t h e s e c u -

r i t y a g e n c i e s w e r e b e t t e r

placed to ident i fy and target

the pro -violence lobby of the

ultra lef t . though hitches l ike

the farmer ’s revolt in western

u p s t i l l r e m a i n , f r o m w h a t

a p p e a r e d t o b e a s e e t h i n g

cauldron in the mid 2000s the

s i tuat ion improved enough to

a l low the government to con-

tinue with relatively high rates

of growth.

the lef t front government in

west Bengal missed this point

completely. r ather than inst i -

t u t i n g s u c h k e y n e s i a n - s t y l e

m a c r o m a n a g e m e n t p o l i c i e s

w i t h g o v e r n m e n t f u n d s t h e y

at te m p te d to u s e b r u te fo rce

in bul ldozing their way into an

industrial nir vana. taking a leaf

out of the central government ’s

pol ic ies the lef t front govern-

m e n t s h o u l d h a ve p u r s u e d a

ser ies of steps s imi lar to what

t h e c e n t re h a d t a k e n a n d fo r

s i m i l a r c o n f i d e n c e b u i l d i n g

exercises. these pol ic ies would

h a v e a c t e d l i k e s a fe t y v a l v e s

c h a n n e l i n g o u t t h e e x c e s s

steam at a t ime when the state

was gett ing overheated f rom a

sudden burst of energy on the

par t of government that was in

a s t a t e o f s t u p o r fo r t h e p a s t

three decades.

B y forc ing the people of west

B e n g a l t o r e m o v e t h e m f r o m

p owe r at a p o i nt w h e n i n d u s -

t r i e s w e r e j u s t b e g i n n i n g t o

re a p p e a r i n we s t B e n g a l , t h e

Buddhadev Bhattachar yya gov-

ernment did a huge disser vice

to the state. the momentum is

now lost and i t wi l l take a her-

c u l e a n e f fo r t t o re v i ve i t . le t

us hope that the new govern-

ment wi l l be more sens ib le in

i t s p u r s u i t o f i n d u s t r i a l i z a -

t i o n i f a n d w h e n t h e y t a k e

up the challenge. and unlike

t h e i r p r e d e c e s s o r s t h e y

s h o u l d a l w ays k e e p a co py

o f th e g e n e r a l th e o r y a t a

place where i t can eas i ly be

found.

aBout tHe autHor

author is a professor at indian i n s t i t u t e o f fo r e i g n tr a d e , k o l k a t a c e n t e r. H e i s t h e r e c i p i e n t o f t h e fu l b r i g h t Scholar in r es idence award i n 2 0 0 7 – 0 8 a n d t h e a s i a fe l l ow s aw a rd i n 2 0 0 2 - 0 3 . He has also been the advisor ( r e s e a r c h ) f o r J o i n t S t u d y group on indo-russian trade (2006 – 2007) under ministr y o f co m m e rc e , g o ve r n m e n t of i ndia

i n f i n e e t i | a n n u a l i s s u e 2 0 1 1 i n f i n e e t i | a n n u a l i s s u e 2 0 1 1

40 41economyeconomy

b e g e n e r o u s a n d l e a v e y o u

a l l h a l e a n d h e a r t y. S & p d i d

downgrade the uS. yes we can

obama sett led for $2.4 tr i l l ion

cuts over a per iod of 10 years

a n d r e p u b l i c a n s s e t t l e d f o r

$ 2 . 1 t r i l l i o n i n c re a s e i n d e b t

c e i l i n g . S & p w a n t e d d o u b l e

of those cuts and less bicker-

i n g. B i c k e r i n g, i u n d e r s t a n d

helps no one. in fact our polit-

i c a l c l a s s s h o u l d s e e t h e i l l

e f fe c t s o f i n te r n e c i n e p o l i t i -

cal batt les. But the cuts? after

much bravado, captain obama

w e n t d o w n w i t h t h e r e p s

holding a gun to his head. the

reps must have been embold-

ened by yes we can obama’s

c a p i t u l a t i o n . l e t u s w a i t

f o r n o v e m b e r t h a n k s g i v i n g

d a y w h e n m o r e o f a c t i o n i s

expec ted again .

S o h ow s h o u l d a l ay m a n n o t

w a n t i n g t o g o r g e o n r e a m s

o f n e w s p r i n t a n d m a c r o -

e c o n o m i c s s t u f f m a k e s e n s e

o f a l l t h i s d r a m a ? fo r s u c h

souls i wi l l t r y to make things

fa i r ly s imple. the downgrade

w o u l d m e a n t h a t t h e i n t e r -

e s t r a t e o n tr e a s u r y s e c u r i -

t ies should r ise. (now do not

b e o v e r - a w e d b y t h e t e r m

tre a s u r y s e c u r i t i e s . th e y a re

just pieces of paper which the

u S g ove r n m e nt u s e s to f u n d

i t s u m p t e e n p r o g r a m m e s . a

s o p h i s t i c ate d i n s t r u m e nt fo r

r a i s i n g d e b t . fo r a n ave r a g e

Joe, loans do the same tr ick as

the t reasur y secur i t y does for

the government. ) that would

mean that the car which you

wanted to gi f t to your dad or

yo u r g i r l f r i e n d, o r t h e v a c a -

t i o n t h a t yo u we re p l a n n i n g

for your fami ly ( thanks to the

b a n k s ) w o u l d b e c o m e c o s t -

l ier for you. How? S imple. the

mor tgages and other loans are

pegged to the treasur y secu-

r i t y r a te s , s o a s t h e t re a s u r y

i n t e r e s t r a t e s r i s e s o w o u l d

y o u r e m i s . i n f a c t t h e c o r -

nerstone of modern f inancia l

model ing cal led as the capm

m o d e l u s e s tr e a s u r y s e c u -

r i t y r a t e a s a r i s k f r e e r a t e .

the increas ing burden would

severely hur t Jane’s and Joe’s

sent iments. that would make

the overal l demand go down.

pe o p l e w i l l n o t w a n t t o b u y

saying, “oh! the atmosphere is

so gloomy.” and so the growth

r a t e w o u l d p l u m m e t . n o w

what? no growth would imply

no jobs are created. the unem-

ployment rate would r ise. S o

the recover y gets prolonged.

So what do the cuts mean for

the hoi pol lo i? no i t wi l l not

h ave a ny i m p a c t o n d e fe n s e

b u d g e t s . n o, b o d y b a g s w i l l

not stop coming from iraq and

a fg h a n i s t a n . n o, t h e B u f fe t s

wil l not have to shell out extra

as taxes. i t wil l hit those at the

l o we s t r u n g o f t h e d e ve l o p -

mental ladder. Social security,

hous ing, in f rast ruc ture, edu-

c a t i o n , h e a l t h a n d c o m m u -

n i t y s e r v i c e s m u s t b e a r t h e

brunt . But should i t matter to

f inance capi ta l . S o you th ink

t h e i r h e a r t s w o u l d m e l t a t

t h e p l i g h t o f p e o p l e . a f t e r

a l l are human beings not just

r e s o u r c e s l i k e a ny o t h e r. S o

what i f the glor i f ied jargon of

b u s i n e s s a n d f i n a n ce c a p i t a l

c h o o s e s t o c a l l t h e m h u m a n

resource?

c o m m o n s e n s e i s n o t s o

common after all. the economy

i s t o t t e r i n g w i t h q 1 g r o w t h

at 0 . 3 % a n d q 2 at 1 . 3 % . a n d

you tr y to force cuts down the

t h u s r a n g m a c b e t h ’s

l a m e n t i n m y a u r a l

region (par ticularly the

l a s t t wo s t a n z a s ) s e e i n g t h e

hoopla around the impending

d e b t d e f a u l t b y u S . w h a t a

p o o r p i e c e o f s h o w m a n s h i p

i t w a s . t h e u s u a l i n g r e d i -

e n t s o f a c - gr a d e B o l l y wo o d

t h r i l l e r w h e re yo u k n o w t h e

end even when the cast ing is

s t i l l p l a y i n g o n . a f t e r b e i n g

f u l l o f s o u n d a n d f u r y s i gn i -

fy ing nothing what came out

at the end was a meow. So you

real ly thought that the poster

boy of free markets and global

c a p i t a l i s m w a s t o b e c o n -

sumed by the ver y forces that

i t h a d r e a r e d w i t h s o m u c h

o f a f fe c t i o n . S o yo u t h o u g h t

t h a t t h o s e v u l t u r e s w o u l d

b i t e t h e s a m e h a n d s w h i c h

had fed them just a couple of

y e a r s a g o. ( i a m a l l u d i n g t o

t h e 2 0 0 7 -0 8 re ce s s i o n where

f i n a n c e c a p i t a l e a g e r l y t o o k

the bai lout pack ages) .

B u t t h e f i n a n c e c a p i t a l d i d

h a v e i t s p o u n d o f f l e s h . S o

y o u t h o u g h t S h y l o c k w o u l d

So you thought the uS would default: layman’s financem ritunjay kumar

the way to dust y death. out , out , br ief candle!l i fe’s but a walk ing shadow, a poor playerthat struts and f rets h is hour upon the stageand then is heard no more. i t i s a ta letold by an id iot , fu l l of sound and fur y,S igni fy ing nothing.

-macbeth (ac t V, Scene V )

i n f i n e e t i | a n n u a l i s s u e 2 0 1 1 i n f i n e e t i | a n n u a l i s s u e 2 0 1 1

42 43d e B t c r i S i S

t h r o a t o f a h a p l e s s p o p u l a -

t ion st i l l rebui lding their l ives

af ter the great recession. wil l

t h e re b e s o m e s o r t o f m a gi c

to re juvenate the economy i f

the demand does not pick up?

people would need to loosen

t h e i r p u r s e s t r i n g s a n d n o t

k e e p i t i n t h e i r c u p b o a r d s .

amer ica needs to get back to

work and for that it needs more

funds even i f i t runs up excess

def ic i t in the shor t term. euro

zone is in ser ious mess due to

the non-avai labi l i t y of mone -

tar y pol ic y instrument. there

a lso the messiahs have forced

cuts down the throats of pro -

t e s t i n g p o p u l a t i o n s , b u t t h e

results have not been desired.

the process is such that when

you need the funds the most ,

the process has been made so

m u c h d i f f i c u l t . S o w hy m a k e

the interest rate higher when

we need it most. why shut the

tap when we need water the

most. i remember a scene from

t h e r e c e n t r i b - t i c k l e r d e l h i

Bel ly. there is no water in the

to i let so the more expens ive

option needs to be used (read

juice) . the avai lable juices are

rather a ver y cost ly opt ion in

this case.

well before i close shop, i must

s a y a l l i s n o t l o s t . t h e re a re

a number of caveats without

w h i c h t h e e a r l i e r s c e n a r i o

m ay n o t p l ay o u t . th e d o l l a r

t h o u g h a n e m a s c u l a t e d c u r -

r e n c y t o s o m e e x t e n t s t i l l

h o l d s i t s p o s i t i o n a t t h e to p

a n d n o o n e i n s i g h t t o c h a l -

lenge its supremacy (i yuan has

got much distance to cover) .

tr e a s u r y s e c u r i t i e s a r e s t i l l

considered a safe instrument.

d u r i n g t h e 2 0 0 7 b l o o d b a t h

in the markets, investors f led

t o t a k e r e f u g e i n d o l l a r a n d

treasur y secur i t ies. Strangely

t h e b l o o d b a t h t r i g g e re d b y

t h e r e c e n t d o w n g r a d e s a w

i nve s t o r s s c u r r y i n g fo r t re a -

sur y security as a cover. i must

c o n c e d e , “ S t r a n g e a r e t h e

w ays o f f i n a n ce. S t r a n g e a re

the ways of f inance”.

finance capita l needs to have

a hear t after al l . i know money

never s leeps. But t r y imagin-

i n g t h i s . fi n a n ce c a p i t a l i s a

ruthless guy with no hear t and

m icroeconomics is a beauti ful

d a m s e l w i t h a h e a r t o f g o l d.

( n o o f f e n c e m e a n t t o w a r d s

any sex. wall Street, the mecca

of f inance is a general ly con-

s i d e re d a p l a ce fo r h i g h te s -

tosterone level men and f rom

t h e r e i h a v e t a k e n t h e c u e. )

B y a s t r a n g e s e t o f c i r c u m -

s t a n c e s , t h e g u y m e e t s t h e

b e a u t i f u l d a m s e l a n d l o v e

f l o w s b e t w e e n t h e t w o. t h e

d a m s e l p l a n t s a s o f t k i s s o n

his cheek . and as the hippies

exhor ted dur ing the swinging

s i x t i e s i u rg e f i n a n ce c a p i t a l

to make love and not war with

m a c r o e c o n o m i c s . t h e r e s u l t

i s a soothing atmosphere for

entrepreneurship and growth

for the wor ld. But a las i t i s a

dream. alas !

i a m a n o p t i m i s t t h o u g h . an

inveterate opt imist .

a B o u t t H e a u t H o r

m r i t u n j a y i s a n a s s i s -t a n t m a n a g e r w i t h S t a t e tra d i n g co r p o rat i o n o f i n d i a l i m i t e d . H e w o r k s i n t h e Bul l ion div is ion and has com-p l e t e d h i s m B a f r o m i n d i a n i n s t i t u t e o f f o r e i g n tr a d e . fo r q u e r i e s a n d c o m m e n t s please wr i te to h im on: (mr i -t u n j a y _ o g s @ y a h o o . c o m )

uS debt ceiling crisis: How it all started and its effectstir thak r i t muk her jee

federal government agencies.

this debt comprises of t wo

components – debt held by

government accounts and

the debt held by the publ ic .

the largest foreign owners

of the uS publ ic debt are

the centra l banks of china,

Japan, the united k ingdom

and Brazi l .

what is debt cei l ing?

the debt cei l ing is an ar t i f icial

spending l imit which is set by

the congress and the amount

i s d e c i d e d a n d a g re e d u p o n

t h ro u g h a s u cce s s f u l vo te i n

congress and the subsequent

s i g n i n g i n t o l a w b y t h e u S

p re s i d e n t . i n s i m p l e r wo rd s ,

i t ’s h ow m u c h m o n e y t h e u S

g o v e r n m e n t c a n b o r r o w t o

pay i ts annual b i l l s . when the

d e b t c e i l i n g i s r e a c h e d , u S

c a n n o t i n c u r a ny m o re d e b t

and the uS treasur y wi l l need

t o p r i o r i t i z e w h i c h d e b t s t o

p ay a n d w h i c h n o t , a n d t h a t

is cer tainly not a s ituation the

government would want to be

a s i wr i te this

ar t ic le on 9th

august , 2011 the

total publ ic debt of uSa

stands at $14, 590, 253,

225, 0662 according to uS

debt c lock , inc luding the

$238 bi l l ion by which the

uS debt shot up as soon

as the debt cei l ing was

ra ised just before august

2nd and at the current rate

i t i s a l l set to grow to $15

tr i l l ion by the t ime 2011

ends. uS debt is a l ready

hover ing near to 100% of

i ts gdp. and f inal ly, with

the current uS populat ion

at 308 mi l l ion, the gross

ex ternal debt per capita

is about $47,000. af ter

the f inancia l cr is is and

recess ion, the government

spending has soared

at a fast rate whi le tax

revenues have suffered

thus increas ing the

government ’s def ic i t .

the uS government

par t icular ly the uS

treasur y borrows money

f rom the publ ic to fund the

government expenditures.

the government spends

i ts money on ent i t lements

l ike medicare, medicaid and

other socia l secur i t y benef i ts .

wel l , th is inc ludes the cost ly

wars in i raq, afghanistan

and bai l ing the guys who

were responsible for the

global financia l cr is is in the

f i rst p lace. this makes up

a lmost hal f of the budget .

But , the only major sources

of revenue are income and

socia l insurance taxes which

account for 90% of the

revenue amounting to only

$2.6 t r i l l ion ever y year. the

tax season is the only one

or t wo posit ive months in a

year for the government. the

government ac tual ly pays

more than $1 bi l l ion a day

in interest on i ts debts - and

spends $10 bi l l ion a day on

doing ‘government stuf f ’. the

federal government of the

united States borrows money

through the issue of secur i t ies

by the treasur y and other

i n f i n e e t i | a n n u a l i s s u e 2 0 1 1 i n f i n e e t i | a n n u a l i s s u e 2 0 1 1

44 45d e B t c r i S i S

in. uSa is one of the few coun-

tr ies in the world where there

i s a ce i l ing on the spending.

However, according to warren

B u f fe t , t h e d e b t c e i l i n g i s a

waste of t ime and should be

e l i m i n a t e d . t h e f i r s t d e b t

l imit was set in 1917 at $11.5

bi l l ion and i t has been ra ised

7 4 t i m e s s i n c e m a r c h 1 9 6 2

with a maximum of 18 t imes

under ronald reagan.

w H at i S t H e d e B t c e i l i n g

criSiS all aBout?

o n 1 6 t h m a y, 2 0 1 1 u n c l e

S a m’s c re d i t c a rd ra n o u t o f

c o n t r o l a n d i t w a s m a x e d

o u t . t h e $ 1 4 . 3 t r i l l i o n l i m i t

o n f e d e r a l b o r r o w i n g w a s

r e a c h e d , w h i c h l e f t t h e

co n g re s s 1 1 we e k s t o r a i s e

the debt ce i l ing or face the

wrath of f inancia l c r i s i s 2 .0 .

tre a s u r y S e c re t a r y t i m o t hy

g e i t h n e r m a n a g e d t o k e e p

a m e r i c a a f l o a t b y t a k i n g

“ex traordinar y measures” by

s u s p e n d i n g p a y m e n t s i n t o

t wo fe d e r a l p e n s i o n f u n d s ,

p ledging to repay the money

once congress has approved a

higher debt cei l ing and not i -

f ied congress that he wi l l be

o u t o f o p t i o n s a f t e r a u g u s t

2 n d . i f t h e c o n g r e s s d i d n’ t

ra ise the debt cei l ing by that

t i m e , t r e a s u r y w o u l d n o t

have author i t y to borrow any

m o re m o n e y. a p a r t f ro m t h e

f a i l u re to p ay e s s e n t i a l o b l i -

gat ions l ike ac t ive dut y mi l i -

tar y, federal workers, taxpay-

ers due refunds af ter sat is fy-

ing existing interest payments

t o b o n d h o l d e r s , m e d i c a r e

payments, Social Security pay-

m e nt s , u n e m p l oy m e nt i n s u r-

ance and defense contrac tors

, i t w o u l d a l s o m e a n a f fe c t -

i n g t h e g ove r n m e n t ’s a b i l i t y

to borrow quick ly or at lower

c o s t , d u e t o a p e r c e p t i o n

o f i n c r e a s e d r i s k i n l o a n i n g

money to the uS government.

t h e e c o n o m i c i m p a c t c o u l d

b e l a rg e d u e t o t h e u S g o v -

e r n m e n t ’s v e r y l a r g e r o l e i n

global markets. the congress

being unable to raise the debt

ce i l ing by august 2nd would

h a v e m e a n t c u t t i n g g o v e r n -

m e n t s p e n d i n g d r a m a t i c a l l y,

co m i n g u p w i t h $ 7 3 8 b i l l i o n

i n n e w t a x r e v e n u e ( w h i c h

i s n e e d e d t o g e t t h r o u g h

t h e f i s c a l y e a r t h a t e n d s o n

S e p t e m b e r 3 0 t h ) i n c r e a s i n g

b y 6 6 % t h e $ 1 . 1 t r i l l i o n t h e

g o v e r n m e n t i s e x p e c t e d t o

col lec t in taxes in the second

h a l f o f t h e f i s c a l ye a r. i f t h e

i n v e s t o r s a r e c o n v i n c e d t h e

uS wi l l not be able to pay i ts

d e b t s , t h e y ’ l l s e l l tr e a s u r y ’s

t o a v o i d t h e r i s k t h a t t h e

g ove r n m e nt m i g ht n o t m a k e

g o o d o n t h e m . t h a t w o u l d

d r i v e tr e a s u r y p r i c e s d o w n

a n d p u s h i n t e r e s t r a t e s u p,

raising the borrowing costs on

ever ything from mor tgages to

cars. Higher rates would l ikely

s lower the economy which is

a l r e a d y r e c o v e r i n g a t a l e s s

t h a n e x p e c t e d s l o w p a c e

e ve n a f t e r t wo b a c k t o b a c k

quant i tat ive eas ing.

B a r r a c k o b a m a c a n n o t r a i s e

t h e d e b t l i m i t o n h i s o w n

because the under the uS con-

st i tut ion, a l l government bor-

rowing has to be approved by

congress, and this has led to a

protracted stalemate between

r e p u b l i c a n s a n d d e m o c r a t s .

the republ icans, who control

the House of representat ives,

i n s i s t e d t h a t t h e g o v e r n -

m e n t m u s t c u t t h e d e f i c i t

f i r s t b e f o r e a n y a g r e e m e n t

on ra is ing the debt l imit can

b e re a c h e d. t h e re p u b l i c a n s

f e e l t h a t w i t h t h e r e c o v e r y

under way, more must be done

t o p a y d o w n t h e d e b t . B o t h

s i d e s a c c e p t t h a t t h e d e f i c i t

n e e d s t o b e b r o u g h t u n d e r

c o n t r o l , b u t h a v e d i f f e r e n t

ideas about how to go about

i t . t h e m a i n s t i c k i n g p o i n t s

h a v e b e e n t h e r e p u b l i c a n s ’

r e s i s t a n c e t o t a x r i s e s a n d

cal ls for bigger spending cuts

than have been backed by the

d e m o c r a t s . t h e d e m o c r a t s

also want to shield healthcare

programs for the e lder ly and

poor f rom the cuts. final ly on

august 1st , the u.S . House of

representat ives passed a bi l l

t o r a i s e t h e c o u n t r y ’s d e b t

c e i l i n g i n e xc h a n g e fo r c u t s

in government spending.

uS deBt deal fac tS

i t a l l o w s t h e d e b t c e i l i n g

t o r i s e by u p t o $ 2 . 4 t r i l l i o n

- enough to keep the countr y

borrowing money unt i l 2013.

i t i n c l u d e s s p e n d i n g c u t s

that could reach $2.5 t r i l l ion,

to exceed the amount of the

debt cei l ing increase.

i t in i t ia l ly cuts spending by

a t l e a s t $ 9 0 0 b i l l i o n ove r 1 0

years, and creates a bipar tisan

budget committee to f ind addi-

t i o n a l d e f i c i t r e d u c t i o n o f a t

least $1 .5 t r i l l ion.

i f the committee fa i ls by late

n o v e m b e r t o f i n d a d d i t i o n a l

ways to reduce the def ic i t , the

fa i lure would t r igger automatic

c u t s a c ro s s t h e g ove r n m e n t to

take effect in 2013. among them

would be the f i rs t reduc t ion in

d e fe n s e d e p a r t m e n t s p e n d i n g

in decades.

the deal does not include the

republ icans’ goal of requir ing a

balanced-budget amendment. i t

a l s o l e ave s o u t t h e d e m o c rat s ’

plan to end some tax cuts for the

wealthy.

th e u n i te d S t a te s l o s t i t s to p -

t i e r a a a c r e d i t r a t i n g f r o m

Standard & poor ’s on 6th august

a f t e r t h e p o l i t i c a l b a t t l e t h a t

t o o k t h e c o u n t r y t o t h e b r i n k

of a default . S&p lowered long-

term sovereign credit rat ing on

the united States to ‘aa+’ f rom

‘a a a’ a n d a f f i r m e d t h e ‘a - 1 ’

shor t-term rating. in my opinion,

the hype about S&p downgrad-

i n g u S i s n o t i m p o r t a n t a t a l l .

we a l l k n o w t h e c r e d i b i l i t y o f

the rat ings af ter the fate of the

aaa rated assets in 2008, by top

n o tc h r a t i n g co m p a n i e s o f t h e

wo r l d . S & p d o w n g r a d e d J a p a n

in 2002 and nothing happened,

n o t e v e n t h e i r r a t e s c h a n g e d .

the historical ly low and nominal

r e a l y i e l d s o n u . S . tr e a s u r y

s e c u r i t i e s a r e s i g n a l i n g l o u d

and c lear that investors expec t

n e i t h e r d e f a u l t n o r s i g n i f i c a n t

i n f l a t i o n . n e g a t i v e n o m i n a l

i nte re s t rate s o n s h o r t te r m

t - B i l l s d e m o n s t r a t e t h a t

i n v e s t o r s a r e s o c o n f i d e n t

a b o u t t h e s o l v e n c y o f t h e

u.S. treasur y that they are l it-

e r a l l y w i l l i n g t o p ay m o n e y

fo r t h e u. S . tre a s u r y to s a fe

keep their money. the down-

grade wi l l have a shor t term

bearish impact on the market

cer ta inly , but the 15% fa l l in

d J i a i n l a s t 1 3 d ays d o e s n’t

m e a n t h e w o r l d i s f a c i n g a

d o u b l e d i p a l r e a d y ( n o t y e t

at least ) but i t i s growing at

a s low pace and investors are

s h i f t i n g t o s a fe r a s s e t s l i k e

gold.

aBout tHe autHortir thakrit is student at indian inst itute of foreign trade. He t racks di f ferent commodit ies and uses his sk i l l s of analys-i n g s to c k s e f fe c t i ve l y i n t h e market .

i n f i n e e t i | a n n u a l i s s u e 2 0 1 1 i n f i n e e t i | a n n u a l i s s u e 2 0 1 1

46 47

m a r k e t s e c t o r w h i c h i s c o n -

tr ibut ing only around 14% of

the total debt market, a f igure

ve r y l e s s w h e n c o m p a re d t o

other countr ies.

n e e d fo r a we l l d e ve l -o p e d d e b t m a r k e t f u n d i n g t h e i n d i a n growth Stor y-

a reasonably wel l developed

b o n d m a r k e t c o u l d s u p p l e -

m e n t t h e b a n k i n g s y s t e m i n

meet ing the requirements of

the corporate sec tor for long

t e r m c a p i t a l i nve s t m e n t a n d

asset creat ion.

S p a r e t i r e t h e o r y - a m u c h

c i t e d s i m i l e c o i n e d b y a l a n

g r e e n s p a n ( 2 0 0 0 ) i s t h a t

b o n d m a r k e t s c a n a c t l i k e a

“s p a r e t i r e”, s u b s t i t u t i n g fo r

b a n k l e n d i n g a s a s o u r c e o f

c o r p o r a t e f u n d i n g a t t i m e s

w h e n b a n k s ’ b a l a n c e s h e e t s

a r e w e a k a n d b a n k s a r e

rat ioning credit . this was the

c a s e d u r i n g t h e 2 0 0 8 f i n a n -

c i a l c r i s i s w h e n b a n k s h a d a

l i q u i d i t y p ro b l e m , w h e re we

s aw a n u n p re ce d e nte d q u a r -

ter- on- quar ter growth of 130

per cent in pr imar y debt issu-

a nces in th e th i rd q ua r ter o f

2008-09. the economic cr is i s

t h u s s e r ve d to h i g h l i g h t t h e

i m p o r t a n c e o f a r o b u s t a n d

res i l ient debt market in i ndia .

Huge i nfrastruc ture funding-

a d e v e l o p e d b o n d m a r k e t

c a n b e a n a p p ro p r i a t e ro u t e

o f c h a n n e l i z i n g t h e s a v i n g s

of the countr y in capita l for-

m at i o n . a co n s t ra i nt i n b a n k

funding of infrastructure proj-

ects is the long term nature of

the infrastructure funds which

c a u s e a n a s s e t l i a b i l i t y m i s -

match for banks.

Bank funding regulat ions-

t h e b a n k i n g i n d u s t r y f a c e s

s e v e r a l l e n d i n g r e s t r i c -

t ions such as maximum posi -

t i o n e x p o s u r e , s e c t o r e x p o -

s u re e tc w h i c h p l ay a ro l e i n

t h e l e n d i n g d e c i s i o n s . d e b t

market a l lows the corporates

t o r a i s e f u n d s d i r e c t l y f r o m

t h e p u b l i c b y p a s s i n g t h e

intermediar ies.

mopping publ ic Savings-

corporate debt could a lso be

an attractive investment alter-

nat ive for investors as i t pro -

vides them with higher returns

as compared to t ime deposits ;

th is would help in accelerat-

ing the mobi l isat ion of funds

to savings which again can be

used in the investment by the

companies concerned.

r e a s o n s f o r f a i l u r e o f corporate debt market in i ndia

t h e r e a r e n u m b e r o f i s s u e s

w h i c h h a v e p r e v e n t e d t h e

d e v e l o p m e n t o f c o r p o r a t e

d e b t m a r k e t i n i n d i a . t h e

m a i n i s s u e s a m o n g t h e m a re

as fo l lows:

1 ) t h e d e m a n d f o r c o r p o -

r a t e b o n d s i s r e s t r i c t e d t o

o n l y h i g h l y r a te d i s s u e s a n d

g e n e r a l l y t h e i n v e s t o r s a r e

p e n s i o n f u n d s , c o m m e r c i a l

b a n k s a n d i n s u ra n ce co m p a -

nies. the problem with this i s

t h at B a n k s & i n s u ra n ce co m -

panies are l imited by restr ic -

t ions on the amount of money

t h e y c a n i nve s t i n co r p o rate

paper.

2 ) i n v e s t i n g i n b o n d g e n e r -

a l ly carr ies t wo k inds of r isks,

credit r isk and interest r isk . in

case of government bonds only

i n t e re s t r i s k e x i s t s , h o we ve r

without a wel l developed sec-

o n d a r y m a r k e t fo r co r p o ra te

b o n d s , b o t h c r e d i t r i s k a n d

i n t e re s t r i s k a re p re s e n t ( a n

e f f i c i e n t l y f u n c t i o n i n g s e c -

ondar y market system, where

t rades are sett led and where

t h e c l e a r i n g s y s t e m e n s u r e s

p r o t e c t i o n f r o m d e f a u l t b y

i n d i v i d u a l m a r k e t p a r t i c i -

pants, erases the credit r i sk) .

3) r isk management: absence

o f l i q u i d m a r k e t f o r c d S

( c r e d i t d e f a u l t S w a p ) a n d

o t h e r i n t e r e s t r a t e o p t i o n s

have prevented investors from

gett ing into the debt market

a s a w h o l e . t h e s e i n t e r -

e s t r a t e i n s t r u m e n t s h e l p i n

i n d i a h a s a g g re s s i ve t a r g e t s

f o r g d p g r o w t h r a t e a t 8

p e r c e n t t o 1 0 p e r c e n t p e r

annum and would require uSd

1 t r i l l i o n t o f u n d i n f r a s t r u c -

ture requirements dur ing the

twelf th five year plan per iod.

in order to achieve this target,

i t re q u i re s a m a s s i ve c a p i t a l

f o r w h i c h d e b t m a r k e t c a n

contr ibute s igni f icant ly.

a l though the cor porate debt

market is an alternative source

o f f u n d i n g , i t i s s t i l l a t i t s

n a s c e n t s t a g e i n i n d i a . t h e

corporate debt market in india

i s m e r e l y 6 . 5 % o f t h e g d p

whereas the government debt

s e c t o r i s n e a r l y 4 0 % o f t h e

gdp. this f igure is ver y ins ig-

n i f i c a n t w h e n c o m p a r e d t o

t h a t o f i n u S , S o u t h k o r e a ,

Braz i l . the table below gives

t h e g o v e r n m e n t a n d c o r p o -

rate d e b t a s a p e rce nt a g e o f

gdp for d i f ferent countr ies.

t h e t a b l e g i v e s t h e c o r p o -

rate d e b t a s a p e rce nt a g e o f

t h e t o t a l d e b t . i t i s e v i d e n t

f rom the f igures that i ndia is

lagging far behind other coun-

t r i e s i n t h e c o r p o r a t e d e b t

tHe indian corporate deBt market- need of tHe HourVarun k hanna, pr iyank a padmanabha and prat ik agrawal

Source: BiS repor t - the internatinal bank ing market 2010

i n f i n e e t i | a n n u a l i s s u e 2 0 1 1 i n f i n e e t i | a n n u a l i s s u e 2 0 1 1

48 49corporate deBt

f ro m i s s u i n g b o n d s t o re t a i l

i n v e s t o r s ( e i t h e r d i r e c t l y o r

t h r o u g h m u t u a l f u n d s ) , a n d

t o l o n g - t e r m i n v e s t o r s l i k e

i n s u r a n c e c o m p a n i e s , p r o v i -

dent and pension funds.

6) the corporate bond market

i s q u i t e f r a g m e n t e d a s t h e

bonds are issued as and when

money is required .the compa-

nies prefer private placements

route rather than publ ic issue

which results into creat ion of

l a r g e n u m b e r o f s m a l l d e b t

issues. this makes the market

i l l iquid.

7) the l iquidit y of the corpo -

rate bond markets has been an

i ssue and there i s a press ing

n e e d f o r a r o b u s t e xc h a n g e

t r a d e d s e c o n d a r y m a r k e t .

the larger and credi t wor thy

corporates f ind i t cheaper to

r a i s e b o n d s i n t h e i n t e r n a -

t i o n a l m a r k e t t h r o u g h e c B ’s

& f cc B ’s . t h e p r o b l e m w i t h

an i l l iquid market i s that the

investor cannot get his money

back and is exposed to inter-

est rate r isk i f he holds on t i l l

the matur i t y. also there is no

proper pr ice discover y and i t

leads to improper valuation of

the bonds.

8 ) o n e o f t h e m o s t i m p o r -

tant miss ing l inks is a market

m a k e r w h o o f f e r s t w o w a y

q u o t e s fo r t r a d i n g i n c o r p o -

rate bonds, just as i t i s being

done in case of g-secs which

h a v e i n c r e a s e d t h e i r l i q u i d -

i t y. market maker would a lso

h e l p i n gre ate r p r i ce d i s cov-

e r y, l i q u i d i t y a n d i n s u r a n c e

against default .

9 ) th e d e m a n d fo r i s s u a n ce s

of corporate bonds is l imited

f r o m t h e b a n k i n g s e c t o r, a s

b a n k s p re fe r g i v i n g l o a n s to

b u y i n g b o n d s a s b o n d s a r e

marked-to -market, which may

l e a d t o n e g a t i v e i m p a c t o n

t h e b a l a n c e s h e e t s o f b a n k s

( e r o s i o n o f c a p i t a l ) d u e t o

ne g at ive move me nt of inter -

est rates.

Steps taken to address s o m e o f t h e i s s u e s , revive the bond market and the road ahead

1 ) B e f o r e 2 0 0 7 o n l y b o n d s

h a v i n g c r e d i t r a t i n g o f

i n v e s t m e n t g r a d e o r a b o v e

c o u l d b e i s s u e d . m o r e o v e r

bonds had to be rated by t wo

credit agencies. these norms

were re laxed by SeBi in 2007,

thereby al lowing more corpo -

r a t e t o r a i s e m o n e y t h ro u g h

debt and lower the cost of a l l

corporate debt issuances.

2) SeBi recently simplified doc-

u m e n t a t i o n a n d d i s c l o s u r e s

for companies which are l isted

on an i ndian exchange. these

l i s t e d c o m p a n i e s n o w h a v e

m i n i m a l a d d i t i o n a l d i s c l o -

sures requirements for publ ic

i ssue or pr ivate placement of

c o r p o r a t e d e b t . t h e s e p o s i -

t i ve i n i t i a t i ve s h ave l owe re d

the cost of issuances and have

made the debt market attrac-

t ive for corporate.

3 ) r e c e n t l y t h e c o r p o r a t e

bonds having a rat ing of “aa”

o r a b ove h ave b e e n a l l owe d

to be used in the repo market

as col latera l (with a minimum

25% haircut to contain lever-

a g e ) . th i s m ove wo u l d a g a i n

i n c r e a s e l i q u i d i t y w h i c h i s

much needed in the corporate

bond market .

4 ) r i s k o f c o r p o r a t e d e b t

c a n b e m a n a g e d by h e d gi n g

t h e i r c r e d i t o r d e f a u l t r i s k .

i n t r o d u c t i o n o f h e d g i n g

i n s t r u m e n t s s u c h a s p l a i n

Va n i l l a c re d i t d e f a u l t Sw a p s

(cdS) i s being considered by

the rBi .

5) to increase l iquidit y in the

s e co n d a r y m a r k e t fo r co r p o -

r a t e d e b t , c u r r e n t p r i m a r y

d e a l e r s w h o a c t a s m a r k e t

makers for government secu-

r i t i e s c o u l d b e u t i l i z e d f o r

mar ket mak ing of h igh rated

b o n d s a s a p i l o t t e s t . i f t h e

experiment leads to increase in

secondar y t rading by attrac t-

i ng t he i nte res t of i nve s tor s ,

the idea can be repl icated for

lower grade bonds as wel l .

an ef f ic ient domest ic cor po -

r a t e b o n d m a r k e t n e e d s t o

h a v e g r e a t e r t r a n s p a r e n c y,

p r i c e d i s c o v e r y , c r e d i b l e

rating agencies, wide range of

corporate debt securit ies, eff i -

cient disclosure norms for cor-

porates and a wider range of

investors with var ied r isk pro -

f i les. this would not only help

c re ate a n i m p o r t a nt a l te r n a -

t i ve f u n d i n g s o u rce i n t i m e s

o f d i s r u p t i o n s i n s o u r c e s o f

ex ternal f inancing, but would

also reduce the cost of capital

fo r co r p o rate s . i t wo u l d a l s o

d i v e r s i f y s o u r c e s o f d e b t

f u n d i n g f o r c o r p o r a t e s a n d

e n a b l e g re a t e r t r a n s p a re n c y

i n p r i c i n g o f c re d i t r i s k . fo r

creat ing a v ibrant and t rans-

parent corporate debt market,

i t i s impor tant that appropr i -

a te p o l i c y re fo r m s a re i n t ro -

duced to put in p lace neces-

sar y market infrastructure that

would faci l i tate the growth of

an active primar y and second-

ar y corporate bond market .

aBout tHe autHorS

authors are students of indian i n s t i t u t e o f f o r e i g n tr a d e - kolk ata .

hedging some of the r isk and

are sought af ter general ly by

i nv e s t o r s p u r c h a s i n g c o r p o -

rate debt .

4 ) ta x d e d u c t e d a t S o u r c e

( t. d . S . ) h a s b e e n a n o t h e r

issue which has hindered the

growth of debt market . af ter

r e c o m m e n d a t i o n b y t h e r B i

t o g o i , i t w a s a b o l i s h e d fo r

g ove r n m e nt b o n d s, h owe ve r

i t s t i l l co n t i n u e s to e x i s t fo r

c o r p o r a t e b o n d s , b u t i n s u r -

a n c e c o m p a n i e s / p e n s i o n

funds have been spared. this

par t ial treatment makes it dif-

f icu l t to introduce a uni for m

computer ized trading system.

5 ) S t a m p d u t y h a s b e e n o n e

o f t h e m a j o r d e te r re nt s a s i t

i s l e v i e d b o t h a t t h e t i m e o f

i s s u e a n d t r a n s f e r. a l s o t h e

stamp dut y appl icable di f fers

according to the class of inves-

tors d iscouraging cor porates

i n f i n e e t i | a n n u a l i s s u e 2 0 1 1 i n f i n e e t i | a n n u a l i s s u e 2 0 1 1

50 51

HoneSt anSwerSteam i nf ineet i ta lks to Joy Bhattachar jya , ceo of kolk ata k night r iders about running the spor ts business and his associat ion with quizz ing

it seeme d to s u i t bot h of us .

S o n o w, i h a v e b e e n t h e r e

f rom past 4 years.

q. So how do you l ike work ing

with the team?

a . i t i s a n a m a z i n g t e a m .

l e t m e t e l l y o u s o m e t h i n g .

i f i n d i a l o s e s , yo u d e f i n i t e l y

f e e l b a d a b o u t i t b u t y o u

h a v e t o p u t y o u r s p i r i t u p.

w h e n y o u a r e w o r k i n g w i t h

a team you go through much

higher highs and much lower

lows. i f you think about i t , i t

i s to u g h w h e n yo u l o s e by 2

r u n s . H o w e v e r, y o u c a n n o t

s h o w i t ( yo u r e m o t i o n s ) – i f

the management star ts or the

co a c h s t a r t s s h ow i n g i t t h e n

t h e t e a m fe e l s b a d a b o u t i t .

a l s o t h e re i s a s h e e r e xc i t e -

ment. when i joined television

i n 1 9 9 5 - 9 6 , m o s t t e l e v i s i o n s

w e r e j u s t s t a r t i n g i n i n d i a .

S imilar ly here, r ight now, pro -

f e s s i o n a l c l u b s p o r t s i s j u s t

s tar t ing. S o exper ience wise,

yo u c a n c o m p a re i t t o s t a r t -

ing m anchester united when

i t s tar ted. i t i s impor tant get

your basics r ight. you may win

a few and you may lose a few

b u t i f y o u c r e a t e a c r e a t e a

c u l t u re , i t w i l l s t ay t h e re fo r

t h e n e x t fo r t y y e a r s . t h a t i s

more impor tant .

q. k o l k a t a k n i g h t r i d e r s a re

a p p r e c i a t e d fo r t h e i r b r e a k-

even. your comments on that .

a . t h e s p o n s o r s w e r e n o t

buying kolk ata k night r iders,

they were buying Shah ruk h.

S h a h r u k h a l o n e b r o u g h t

c r o r e s . we u s e d t o t h i n k we

we re f a n t a s t i c i n m a r k e t i n g,

b u t t h e t r u t h i s t h a t S h a h

ruk h is such a big name that

so many adver tisers wanted to

be a par t of i t . that i s why we

broke even. i t was not about

archie and arj it from our team

g o t t h e o p p o r t u n i t y t o t a l k

with m r. Joy Bhattachar jya on

the way to inquiZition where

he was the quiz master. Here

i s t h e c o n v e r s a t i o n f o r o u r

readers.

q. S i r, te l l us about your asso -

c i a t i o n w i t h k o l k a t a k n i g h t

r iders (kkr) and the jour ney

so far.

a . i h a v e b e e n i n s p o r t s

fo r a v e r y l o n g t i m e . i h a v e

worked in eSpn for 7-8 years.

k k r c a m e t o m e l o o k i n g

f o r s o m e o n e t o u n d e r s t a n d

t h e o p p o r t u n i t y a n d h o w t o

p u t t h i n g s fo r t h e f r a n c h i s e

f o r w a r d . we m e t t w i c e , b u t

n o t h i n g w a s s p e l l e d o u t . we

star ted work ing together and

o u r m a r k e t i n g a b i l i t y ; j u s t

that Shah ruk h is a market ing

and adver t is ing genius.

q. w h e n i t c o m e s t o a d ve r t -

ing and market ing, kkr is the

te a m t h at i s m o s t p ro m o te d.

te l l u s s o m e t h i n g a b o u t t h e

promotion mechanism.

a . m o h u n B a g a n a n d e a s t

B e n g a l h ave b e e n i n k o l k at a

f o r s o l o n g . S o, t h e p e o p l e

here understand the meaning

o f s u p p o r t i n g a c l u b . k k r

i s t h e o n l y r e a l b i g s p o r t -

ing uni t in the c i t y. S o many

p e o p l e w h o w e r e b o r n a n d

b r o u g h t u p h e r e , h a v e l e f t .

the entire diaspora is incl ined

t o w a r d s s o m e t h i n g l i k e k k r

because i t their b iggest hold

on to west Bengal . when you

h ave p l aye r s l i k e S h a k i b a n d

S h a h r u k h , yo u h ave a h u g e

s u p p o r t e ve n i n B a n g l a d e s h .

that is why - i t i s a ver y inter-

e s t i n g p o i n t – a t e a m f r o m

punjab cal ls itself the king’s Xi

punjab. they don’t ca l l them-

s e l v e s c h a n d i g a r h b e c a u s e

c h a n d i g a r h i s a v e r y s m a l l

par t of punjab. they want to

appeal to the ent i re diaspora

of punjab, which is huge and

spread a l l over the wor ld.

q. How do you see the oper-

a t i o n s o f t h e t e a m e v o l v i n g

over the years?

a . t h e re a re t wo i n t e re s t i n g

t h i n g s . l o o k a t t h e e n g l i s h

p r e m i e r l e a g u e . a n y c l u b

h a s l i k e 2 0 co m p e t i to r s . yo u

m i g h t w a t c h a l l t h e c h e l s e a

matches i f you are a c helsea

s u p p o r t e r a n d t h r e e - f o u r

o t h e r b i g g a m e s . S i m i l a r l y ,

over the years, we expec t the

k k r s u p p o r t e r s w i l l w a t c h

a l l t h e k k r g a m e s a n d f e w

o t h e r g a m e s o n t h e w e e k -

e n d s . t h e r e f o r e , v i e w e r s h i p

w i l l c o m e d o w n . B u t o n c e

i t c o m e s d ow n , i t w i l l s t a b i -

l ize. where we get nowhere is

merchandis ing and even tele -

v i s i o n d e a l s . t h e re a re h u g e

o p p o r t u n i t i e s i n m a ny o t h e r

s e c t o r s . m a n c h e s t e r u n i t e d

makes 35-36% of their revenue

f r o m t i c k e t s a l e . tr y b u y i n g

a m a n c h e s t e r u n i t e d s e a s o n

t i c k e t – i t i s c l o s e to i m p o s -

s ible. the business models of

a l l ipl teams must evolve l ike

that .

q. S o, the bus iness model of

i p l t e a m s wo u l d b e l i k e t h e

b u s i n e s s m o d e l s o f t h e e p l

teams?

a. they cannot exac t ly be the

s a m e. e p l te a m s a re p l ay i n g

l ike 9-10 months a year whi le

i p l t e a m s d o n’ t . r o u g h l y a

s p o r t s f r a n c h i s e m a k e s i t s

money f rom t icket sa les, mer-

c h a n d i s i n g, te l e v i s i o n r i g h t s

and sponsorships. in our case,

w e h a v e t o p a y a f r a n c h i -

s e e fe e ; w e h a ve t o p a y o u r

players and the administrative

and logist ic costs.

q. as t h e ow n e r o f t h e te a m

is there a conf l ic t of interest?

for example, arsenal has not

won the league in the last few

years but st i l l they are making

money.

a. the beauty of the ipl teams

is that ever yone has $9 mil l ion

to s p e n d. yo u h ave to s p e n d

y o u r $ 9 m i l l i o n . n o f r a n c h i -

s e e c a n s p e n d $ 5 m i l l i o n n

a n d k e e p $ 4 m i l l i o n b e c a u s e

their fans by and large wi l l be

against i t and ask why didn’t

t h e y s p e n d i t . t h e p r o b l e m

a r i s e s w h e n i a m m a k i n g 1

rupee and spending 3 rupees.

th at w i l l n o t b e s u s t a i n a b l e.

the small teams of the english

league cannot spend the k ind

of money that chelsea spends.

H o w e v e r , w h e n t h e s e b i g

spenders are gone, suddenly

you wi l l o l lapse. models have

to b e s u s t a i n a b l e . i w i l l g i ve

yo u a n o t h e r b e t te r ex a m p l e.

the indian football federation

s t a r t e d t h e i - l e a g u e . t h r e e

y e a r s b a c k pr i y a r a n j a n d a s

m u n s h i w a s t h e h e a d o f t h e

a i f f a n d t h e o i l m i n i s t e r.

o n g c p a i d s i x c ro re s fo r t h e

sponsorship. once m r. munshi

f e l l i l l , o n g c s a i d t h e y a r e

n o t i n t e r e s t e d i n f o o t b a l l .

o n l y p r o f i t a b l e s y s t e m s a r e

susta inable.

q . k k r p l a y s o n a l o t o n

S h a h r u k h k h a n , h e n c e

w h a t i s t h e e x p e n d i t u r e o n

adver t isement?

i n a countr y l ike i ndia , spor ts comes only af ter the bas ic needs have been met. the tragedy l ies in the fac t that despite the bad state of i ndian spor ts bodies, spor tsper-sons have excel led in their respec-t ive f ie lds.

i n f i n e e t i | a n n u a l i s s u e 2 0 1 1 i n f i n e e t i | a n n u a l i s s u e 2 0 1 1

52 53i n t e r V i e w

my Journey with tata capitalmehak g andhi , m anagement tra inee, tata capita l ltd.

a. we do not spend on adver-

t isements unl ike some teams.

But we do adver t ise through

s o c i a l m e d i a a s i t ’s c h e a p.

a l s o f o r m e d i a i n t e r a c t i o n

we have our media par tners.

i p l b y i t s e l f i s a b i g e n t i t y

t h at i t d o e s n’t re q u i re m u c h

of adver t is ing as i t attrac ts a

lot of publ ic i t y. many a t imes

i t h a p p e n s t h a t w e n e e d t o

co n t ro l t h o s e o u tc o m e s d u e

to t h i s p u b l i c i t y ra t h e r t h a n

a i r ing our produc ts.

q H a r s h a k i k h o j w a s y o u r

brainchild. How was the expe -

r ience? what is the potent ia l

f o r s u c h t a l e n t h u n t i n i t i a -

t ives in future?

a. Harsha k i k hoj was star ted

in 2004. i t was a huge success

b u t e S p n d i d n’t d o m u c h t o

capita l i se on i t . i t g ives us a

p o s s i b i l i t y fo r e ve r y b o d y t o

b e a p a r t o f s p o r t s i n d u s t r y

f r o m o u t s i d e t h e f i e l d . a s

i n d i a i s i n a b e t te r s i t u at i o n

n o w, s h o w s l i k e t h i s w i l l b e

seen more in the near future.

i t i s ver y impor tant to under-

s t a n d t h a t i n a c o u n t r y l i k e

india, spor ts comes only af ter

t h e i r b a s i c n e e d s h ave b e e n

m e t . th e re a l t ra g e d y l i e s i n

the fac t that despite the bad

state of i ndian spor ts bodies,

s p o r t s p e r s o n s h ave e xce l l e d

in their respective f ields. now,

people are tr ying to give their

k i d s t h e o p p o r t u n i t i e s t h e y

were depr ived of.

q. wh a t d o yo u t h i n k a b o u t

S p o r t s m a n a g e m e n t a s a

subjec t or a career?

a . i t h a s a l re a d y b e e n i n t ro -

duced in the system. although

i t ’s a l u c r a t i v e i n d u s t r y, t h e

r e s p o n s e h a s n ’ t b e e n a s

good. i t i s l ike an adver t is ing

i n d u s t r y 2 5 y e a r s a g o w h e n

there was no specialization for

it and the industr y was scepti-

cal about such specia l izat ion.

there are enough oppor tuni-

t ies to be developed.

q fans are the consumers for

c lubs. as ipl season is shor t ,

h ow d o yo u e n s u re t h a t k k r

i s c o n n e c t e d w i t h t h e i r f a n s

throughout the year?

a. we have been advertising on

social media as well as normal

media. normal media is a one

way product and Social media

is a l l about k nowledge. Social

m e d i a i s t h e o n e w h i c h f a n s

use to vent out their f rustra -

t i o n . t h e c h a l l e n g e fo r k k r

and other teams is to remain

in the eyes of the people for

t h e r e s t o f 9 m o n t h s w h i c h

c a n b e e a s i l y d o n e t h r o u g h

s o c i a l m e d i a . a l s o, t h e c o s t

factor plays an impor tant par t

i n d e c i s i o n m a k i n g. k k r h a s

b e e n a c t i v e o n fa c e b o o k a s

well as twitter, this year publi-

c iz ing the pre and post match

events. i t is impor tant to note

that S ocia l media is a par t of

ever ybody ’s l i fe now and a lso

e v e r y b o d y f e e l s h e / s h e i s a

par t of socia l media .

q . w e g o t a n o p p o r t u n i t y

to p a r t i c i p a te i n a q u i z co n -

d u c t e d b y yo u. w h a t i s yo u r

t ak e on t he q uizz ing cul ture

in i ndia with us.

a . m y f i r s t i n t e r a c t i o n w i t h

s e r i o u s q u i z z i n g h a p p e n e d

w h e n i r e a c h e d 1 9 8 8 i n d i a

f i n a l s . r e g a r d i n g q u i z z e s , i

set my own quizzes. i n a year

i normal ly set 6-7 quizzes and

a l s o c h o o s e my o w n i n s t i t u -

t ions. talk ing about quizz ing

c u l t u re i n i n d i a , i t wa s m o re

p re v a l e nt at o u r t i m e s. n ow,

with induc t ion of kBc, i t has

become more specia l ized and

incentive specif ic. also people

te n d to fo rg e t t h a t q u i z z i n g

is not only about k nowledge

b u t a l s o a b o u t i n t e l l i g e n t

guess ing.

we t h a n k m r. J o y fo r t a k i n g t i m e o f f f o r u s . H o p e o u r r e a d e r s e n j o y e d t h e c a n d i d chat .

was so inspi red by the g lor i -

ous histor y of the group that

i w e n t a h e a d a n d r e a d t h e

much-acclaimed books by Shri

r .m. lala , an esteemed author

on the resplendent tata Stor y.

at tata capita l , m anagement

tr a i n e e s u n d e r g o a u n i q u e

tr a i n i n g pr o g r a m m e o f f o u r

quar ter ly rotat ions spanning

a ye a r t h a t e x p o s e s t h e m t o

d i f f e r e n t f u n c t i o n s i n t h e

o r g a n i z a t i o n . to m a i n t a i n

t h e c o n t i n u i t y o f l e a r n i n g ,

t h e f i r s t t h r e e r o t a t i o n s a r e

i n t h e s a m e d i v i s i o n , w h i c h

i s c o r p o r a t e f i n a n c e i n m y

c a s e . t h i s e n s u r e s t h a t w e

get to exper ience the var ious

prof i le facets – S a les, credit ,

o p e r a t i o n s , r e s e a rc h a n d s o

o n i n o r d e r t o u n d e r s t a n d

t h ro u g h re a l - l i fe e x p e r i e n c e

where our pass ion l ies. i cur-

re n t l y wo r k w i t h t h e pro j e c t

f i n a n c e t e a m a t n e w d e l h i ,

w h e re we p rov i d e l o n g te r m

f i n a n ce fo r e s t a b l i s h i n g n e w

i n d u s t r i a l a n d i n f r a s t r u c t u re

projec ts as wel l as for expan-

sion, diversi f icat ion and mod-

ernization of existing projects,

r a n g i n g f ro m r o a d wo r k t o a

te l e co m towe r pro j e c t to a n

airpor t to a Solar power plant

t o s e t - u p o f a n e w c e m e n t

fac tor y. i n f rast ruc ture i s one

o f t h e k e y s e c t o r s i n i n d i a

today and there is an ocean of

oppor tunit ies we are tapping

i n t o . e v e n a s a n e w c o m e r,

i h a v e b e e n e n t r u s t e d w i t h

h a n d s - o n w o r k t h a t e n a b l e s

m e t o m a k e a d i f f e r e n c e .

fro m d e t a i l e d re s e a rc h o n a

H ydro -power plant to analyz-

ing balance sheets of poten-

tial c l ients to attending a day-

l o n g c o n fe re n c e b y m i n i s t r y

o f n e w & r e n e w a b l e e n e r g y

to prepar ing credit appraisa l

memorandums to brainstorm-

i n g w i t h m y t e a m o v e r n e w

ideas to grow, the var iet y and

depth in the work is a motiva-

t ion in i tsel f. today, i can con-

f ident ly say that i understand

the end process of f inancing a

large project – r ight from lead

g e n e ra t i o n to c l i e n t i n te ra c -

t i o n t o e v e r y s t e p o f d o c u -

mentat ion to credit appraisa l

to the f inal disbursal of funds.

this k ind of learning has been

poss ib le only because of the

w h e n i l a n d e d i n

m u m b a i o n a ra i ny

S u n d a y e v e n i n g ,

l i t t l e d i d i k n ow t h at my l i fe

w o u l d b e t r a n s f o r m e d t h e

nex t day, when my journey at

tata capital would begin with

t h e i n d u c t i o n p r o g r a m m e .

d ur ing the week- long induc-

t i o n , w e i n t e r a c t e d w i t h

t h e t o p m a n a g e m e n t a t t h e

company which comprises of

some of the best brains in the

f inancial industr y. the senior-

most managers of the var ious

d e p a r t m e n t s – i n c l u d i n g

co m m e rc i a l & i n f r a s t r u c t u re

finance, i nvestment Bank ing,

pr ivate equity, tata Securit ies,

consumer finance & advisor y

S e r v i c e s a n d ta t a c a r d s &

fo rex S e r v i ce s – s h a re d w i t h

us not only the f iner aspec ts

of their produc t por t fol io but

their st rategic intent as wel l .

t h e i n d u c t i o n a l s o i n c l u d e d

a day-tr ip to the revered tata

m a n a g e m e n t tr a i n e e c e n t r e

( t m t c ) a t p u n e w h e r e w e

r e c o n n e c t e d w i t h t h e r i c h

values of the tata group and

g o t a n i n s i g h t i n t o t h e l i ve s

o f o u r l e g e n d a r y l e a d e r s . i

i n f i n e e t i | a n n u a l i s s u e 2 0 1 1 i n f i n e e t i | a n n u a l i s s u e 2 0 1 1

54 55inter Vie w campuS to corporate

m o nt h s. d e s p i te t h e i r h e c t i c

schedule, they were more than

happy to take me under their

wing and make my in i t iat ion

smooth and hassle free. as the

week progressed, i engrossed

mysel f in my projec t , hoping

t o p r o d u c e q u a l i t y w o r k

w h i c h w o u l d r e f l e c t w e l l

o n m e a n d m y i n s t i t u t e .

m y projec t pr imar i ly involved

prepar ing presentations to be

p re s e nte d by t h e c f o to t h e

b o a r d o n t h e a n n u a l a u d i t

a n d c o n s o l i d a t e d r e s u l t s . i

was a lso ass igned the task to

value a f inancia l asset invest-

m e n t b y ta t a c a p i t a l f o r

p u r p o s e o f a s c e r t a i n i n g t h e

impai r ment f igures for prep -

a r a t i o n o f f i n a n c i a l s t a t e -

ments. i t was the f i rst t ime, i

g o t t o u s e v a l u a t i o n m o d e l s

and apply my classroom learn-

i n g . i t w a s a t t h i s m o m e n t

t h a t t h e i m p o r t a n ce o f w h a t

is taught to us dawned on me.

af ter my in i t ia l week ly prog-

r e s s r e p o r t s w e r e a p p r e c i -

a te d by my m e n to r, i g a i n e d

c o n f i d e n c e i n m y a b i l i t y t o

m a k e a m e a n i n g f u l c o n t r i -

b u t i o n d u r i n g m y t e n u r e .

d u r i n g t h e l a t t e r s t a g e o f

m y p r o j e c t i w a s a s k e d t o

execute a few more tasks that

a l i g n e d m y i n t e r e s t s w i t h

t h e o r g a n i z a t i o n s r e q u i r e -

m e n t . i w o u l d p a r t i c u l a r l y

l i k e t o t h a n k m r . r a k e s h

B h a t i a , f i n a n c i a l c o n t r o l l e r

a n d m r. a m o l d a l v i , d e p u t y

Vice president, control lership

depar tment for having guided

m e t h r o u g h o u t m y t e n u r e .

a l o n g w i t h t h e k n o w l e d g e

t h a t i g a i n e d f r o m w o r k i n g

w i t h i n d u s t r y e x p e r t s , m y

l e a r n i n g i n t e r m s o f u n d e r -

s t a n d i n g c o r p o r a t e c u l t u r e

i s e q u a l l y i m p o r t a n t , i f n o t

m o r e s o. m y f r e q u e n t i n t e r -

a c t i o n s w i t h my m e n t o r a n d

team member and their va lu-

a b l e i n p u t s h a v e h e l p e d i n

b ro a d e n i n g my h o r i zo n s a n d

h e l p e d m e d i s cove r ave n u e s

t h a t i n e v e r k n e w e x i s t e d .

to w a r d s t h e e n d o f m y t w o

m o n t h s a t ta t a c a p i t a l , i

w a s re q u i re d to m a k e a p re -

s e n t a t i o n o f my w o r k t o my

m e n t o r a n d t h e H r t e a m . i

was pleased to note that the

m a n a g e m e n t s h o w e d k e e n

i n t e r e s t i n t h e p r e s e n t a -

t i o n . i n c o n c l u s i o n , my t i m e

w i t h ta t a c a p i t a l h e l p e d m e

a u g m e n t my k n ow l e d g e a n d

o p e n e d n e w p a r a d i g m s o f

thought. i am proud that i was

a b l e to m a k e a p o s i t i ve co n -

tr ibution dur ing my t ime with

t h e o r g a n i z a t i o n a n d f i r m l y

b e l i e ve t h a t t h i s t wo m o n t h

exper ience wi l l prove instru-

mental in the years to come.

br i l l iant , encouraging super i -

o r s a n d t a l e n t e d t e a m m a t e s

i am pr iv i leged to work with .

at tata capita l , we focus not

only on what we do but how

w e d o i t . t h e j o u r n e y i s a s

impor tant as the dest inat ion.

t h a t i s w h e r e t h e d i s c e r n -

i n g va l u e s o f t h e tat a g ro u p

g u i d e o u r p a t h . we n o t o n l y

s t r i ve fo r e xce l l e n ce i n w h at

we do, we ensure that we set a

benchmark for trust and integ-

r i t y i n a wo r l d w h e re p ro f i t s

often dominate principles and

w h e r e g r a n d f i n a n c i a l i n s t i -

t u t i o n s h ave c r u m b l e d w h e n

t h e y d i v e r t e d f r o m e t h i c a l

d e v e l o p m e n t . to s a y t h a t

tat a ca p i t a l i s a n e m p l oye e -

fr iendly company would be an

u n d e r s t a t e m e n t . i c a n s ay i t

through personal exper ience

that the Hr team goes out of

the way to ensure that ever y

e m p l o y e e i s l i s t e n e d t o a n d

genuinely valued. even within

only 4 years of the tata group

foraying into the f inancial ser-

v ices domain with this nBfc,

the results are there for a l l to

s e e . i fe e l v e r y fo r t u n a t e t o

b e a p a r t o f t h i s c o m p a ny ’s

growth in i ts in i t ia l years. the

c u r r e n t o p p o r t u n i t i e s h e r e ,

a l o n g w i t h t h e l e a r n i n g a n d

e x p o s u r e , a r e u n m a t c h a b l e .

m y j o u r n e y s o f a r w i t h ta t a

capital has been a truly enrich-

i n g e x p e r i e n c e a n d i k n o w

t h i s i s o n l y t h e b e g i n n i n g…

t o profess k nowledge is

one thing, but to put i t

in to practice is another

e n t i r e l y . a t a B - S c h o o l , a

student is exposed to numer-

o u s c o n c e p t s , t h e o r i e s a n d

t e c h n i q u e s a n d w h i l e o n e

c a n d u l y i m b i b e t h e m o v e r

the course of the curr iculum,

t h e y m u s t b e a p p l i e d i n t h e

rea l wor ld to be t ru ly appre -

c i a t e d . t h e s u m m e r i n t e r n -

ship ac ts as a precursor, both

for the students as wel l as the

i n d u s t r y. fo r u s , i t i s a t a s te

of th ings to come, a g l impse

o f t h e f u t u re . fo r t h e i n d u s -

t r y, i t i s a c h a n c e t o a s s e s s

t h e n e x t c r o p o f m a n a g e r s

who wi l l be induc ted into the

c o r p o r a t e w o r l d i n a b o u t a

year. for a f resher l ike me, for

w h o m t h e i n t e r n s h i p i s h i s /

h e r f i r s t b r u s h w i t h t h e c o r -

porate wor ld, the proposit ion

c a n b e q u i t e d a u n t i n g a n d

c h a l l e n g i n g . B u t , t h e p r o s -

pec t of mak ing one’s mark on

one’s organizat ion, and being

appreciated for i t , i s an excit -

ing one indeed. moreover, i t is

a pr iceless oppor tunity to get

some exper ience under one’s

b e l t . i t w a s t h e s e a n d m o r e

thoughts running in my mind

that i approached my f i rst day

at tata capital. my mentor had

been kind enough to talk to me

pr ior to my jo ining his team,

which had give n me a vague

idea of what was in store for

m e. n e ve r t h e l e s s , i w a s s t i l l

apprehensive and ner vous as

i w a l k e d u p t o re p o r t t o my

mentor. i t was c lear f rom the

ver y f i rst moment that he had

a d e f i n e d r o l e s a n d r e s p o n -

s i b i l i t i e s a s s i g n e d f o r m e . i

was both proud and terr i f ied

t o f i n d o u t t h a t t h e p r o j e c t

a s s i g n e d t o m e w a s a m o n g

t h e k e y d e l i v e r a b l e s o f t h e

c o n t r o l l e r s h i p d e p a r t m e n t .

i was later introduced to the

other members of my team, my

co l l e a g u e s w h o m i wo u l d b e

work ing with for the nex t two

internship with tata capitalSunandan Sr idharan

i n f i n e e t i | a n n u a l i s s u e 2 0 1 1 i n f i n e e t i | a n n u a l i s s u e 2 0 1 1

56 57Summer internSHip

acroSS

1: roger a lone is not what th is p lace is

famous for (5)

3 : John maynard ________ (6)

5 : m is leading scent in f inance? (3 , 7)

7 : gnp less depreciat ion (3)

10: flower name less one letter (4)

11 : realm of the “k ing of wal l Street ” (7)

12: $70bn is what this company raised in

i ts 2010 ipo (9)

15: marr iage of equals , so to speak (6)

16: lightning in dalal Street? (Hint: think

computers) (4)

17: defunc t woods (7)

down

2: i ndian watchdog (4)

3 : Bernanke’s famous student (7)

4 : agenc y quicker than S&p to cut uS to

s ize. (4 ,5)

6 : cost of inac t ion (11)

8 : Vi r tual storage (5)

9 : london based v i ta l benchmark (5)

11: laureate made by hedge fund fa i lure (7)

13: Shareholders’ prerogat ive (5)

14: novel subscr ipt ion method (4)

By : r ahul Jayasank aranr ahul i s a student of i ift kolk ata

i n f i n e e t i | a n n u a l i s s u e 2 0 1 1

58 croSSword

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