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September to December 2011 The flagship publication of NMIMS MBA Capital Markets

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What’s Inside

2 Letter from the Editor

3 Private Equity-A Pioneer for Sustainable Growth of India

11 Lying the dust off the gold

22 High Frequency Trading: The Good, Bad and Ugly

28 Commodity Price Dynamics

32 The Problems Plaguing the Real Estate Sector

37 Analysis On India – Latin America Trade Barriers, Tariff and Non-Tariff

Barriers, Comparison with China, Effectiveness of PTA

44 Launching REITs for India's for India's Real Estate

52 Insights into Market Efficiency

56 Investocross

People Behind this Issue

Senior Editorial Team

Vaibhav Vakharia | Mridu Chadha | Pooja Joukani | Toufiq Shaikh

Junior Editorial Team

Madusudanan Ramani | Ankit Johri | Harish Srigiriraju

Sudeep S Mallya | Sneha Aggarwal | Siddhant Anthony Johannes (Design)

Nishtha Sardana | Rachit Goyal | Ashish Aggarwal

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Letter from the Editor

2011, the year where pessimism on account of Sovereign Debt Crisis in the Developed Countries and Policy

Paralysis that mired the Indian Economy and the capital markets draws to an end. The greatest shortage in the

markets is not of liquidity, funds or stocks with good valuation but of moral leadership. The India story is

threatened by the governance deficit and the problems confronting the markets & the economy are more home-

grown than imported from the west. Markets have been starved of news about renewal of reforms which will bring

in the much needed liquidity and foreign capital required to support and drive the Indian markets. Everyone was

witness to the short-lived optimism in the surging counters of retail stocks before the FDI reforms in retail was put

back into abeyance.

The year-end saw some not so inspiring numbers in Capital Investments and IIP numbers. Successive rate hikes

by the Reserve Bank of India did not yield the desired result and had an impact on the growth of the economy.

Every sector had its own share of problems which depressed the investment climate in the respective sector.

Power Sector was mired with problems on account of lack of fuel availability and fuel linkages. Metals sector

remained affected due to depressing demand from the developed economies. Banking and financial services

sector had to face woes on account of Asset quality due to increased defaults and change in NPA recognition

method. Real estate was mired with trouble due to increasing interest rates and high level of debt on balance

sheet. Defensive sectors like Healthcare and FMCG outperformed the markets in 2011.

The 2012 is expected to be better for the economy and capital markets. Reforms and proactive government

measures would ensure certainty and flow of foreign funds. Some of the key reforms awaiting government

approval are Land Acquisition Bill, Companies Act 2011 and FDI in Retail, Insurance & Pension Fund

Management.

In the last quarter of the year 2011, the regulator SEBI drafted and enforced the new Take-Over. The year also

saw SEBI become more proactive and cracked on many offenses through the year. BSE and NSE also

announced plans to launch platform for SME firms. This platform will be similar to the OTCEI launched in 1990s,

which was really ahead of its time.

2012 promises to be filled with a lot of action. The year could set the platform to how the entire decade would

span out. Year is expected to throw clarity on how the woes of sovereign debt of the developed world are resolved

and dealt. In the domestic front, government coming out of the policy paralysis it slipped into would be a big

positive for the economy and the markets. Evolving policies of SEBI and introduction of newer financial products

would further lead to development Indian Capital Markets.

Hope this edition of Investocraft was an enriching one and do write to us (Email ID

investocraft.editorial@gmail.com) about the review and feedback.

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Private Equity-A Pioneer for Sustainable Growth of India

Deepali Sharma , Sanchit Sawhney | FMS Delhi

Introduction & History of Private Equity

The first PE fund was started way back in 1978 in USA by Kohlberg, Kravis and Roberts

(KKR) which was based on the venture capital limited partnership model. The innovative PE

model of western countries that was introduced to India got customized with time. The

underlying logic on which the western PE model was based is the” inadequate or

misallocated capital resulting in underperformance of businesses”. PE funds job is to search

for such companies and to buy them with the purpose of providing cheap debt and

institutional equity to the business and turn them around by hiving off its unprofitable

operations so as to resell the company to public at a higher price either directly (IPO) or

indirectly (trade sale).Developing countries like India differ from the developed counterparts

in terms of lacking the large, mature capital markets that not only provide PE funds their

target firms, but also help them to attract foreign investors. In addition regulatory barriers in

India further raised concerns for easy access to capital in scale resulting in undermined

western model results. Indian businesses primarily controlled by families wherein the largest

shareholders runs the firms as managers made any kind of disagreement between the two

entities over the use of cash flow almost negligible forcing the PE Industry to adapt to Indian

landscape by targeting unlisted firms that need capital to grow and expand.

KPMG Survey done in 2008 revealed the unique factor that differentiates India from other

countries that is the requirement of overseas equity, corporate governance issues, lower

fund size, longer holding periods, above-market risk with higher expected returns.

A Glance at the PE journey in India

Over the past decade PEs have adapted itself to Indian economy drawn by excellent growth

opportunities in market-oriented environment in addition to increased number of

entrepreneurs coming up constraint by lack of capital to expand their businesses as shown in

the figure.

4

Figure above provides the snapshot of the performance of PE Industry in India. India has

moved from the sixth position among the largest PE markets in the Asia-Pacific region

(including Australia) in 2004 to the top spot by 2007 due to the macro fundamentals that

suited the requirements of both PE investors and the Indian economy.

PE provided businesses with new source of capital, extensive network of connections and

expertise in management. In return, Indian Businesses rewarded PE with exceptional returns

with number of PE deals rapidly grew and reached the record levels in 2007 and 2008.The

rapid takeoff of PE industry in India came to an end in second half of 2008 with the global

financial crisis unfolded after US housing bubble collapsed that led to slowdown in global

economy especially US and Europe.

The 2007 Crisis & Impact

The impact of financial crisis started showing from the second half of 2008 when the

euphoric results enjoyed by PEs in India have been mirrored by uncertainty in the financial

world with the slowdown becoming more pronounced. As a result, PE in India witnessed a

change majorly characterised by lower volumes and fewer exits due to the unwillingness of

selling stakes at lower prices due to depressed market sentiments. However, India’s

medium and long term potential remains intact backed by its strong domestic consumption

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that offers superior investment opportunity. By the second half of 2009 Indian economy

bounced back. Private Equity in India has not recovered from recent financial downturn.

Fund raising fell by more than 70 percent in the first half of 2009 from its peak. Moreover,

the credit crunch has made leveraging cost much more expensive. Thus, PE investors

have to play a more diligent & critical role.

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Post Crisis

In 2010 Indian economy environment stabilized and price expectation become well below the

peak in 2007 although comparatively high relative to developed markets, PE space regained

strength in India. PE firms made 66 exits valued at US$2.1 billion in 2009 compared to 120

exits worth US$5.3 billion in 2010 according to financial research firm. Following Figure

shows trends in PE investments with Deal both in terms of number & value in year 2011

signifying the rise of PE investments both in value & in number of deals from the Q4 of 2009

after the crisis.

Trends: Private Equity as a Pioneer for Sustainable growth

Sustainable Growth focuses on economic growth which is a necessary and crucial condition

for poverty reduction. For growth to be sustained in the long run, it should be broad-based

across sectors. Issues of structural transformation for economic diversification therefore take

a front stage. It should also be inclusive of the large part of the country’s labor force, where

inclusiveness refers to equality of opportunity in terms of access to markets, resources and

unbiased regulatory environment for businesses and individuals. Sustainability focuses on

both the pace and pattern of growth.PE funds from around the globe are being lured by the

enormous opportunities that are on offer in many sectors of the Indian economy. Factors that

are boosting the inflow of PE funds:

Sharp drop in stock market indices that have consequently resulted in a significant fall

in stock offerings.

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Increase in interest rates that are making borrowings dearer, and tough Reserve Bank

of India norms.

Not surprisingly, most PE funds’ inflow into India has been in sectors that generally have a

relatively long gestation period. According to IndusView, the real estate and infrastructure

sectors accounted for 50 per cent of the total PE inflows in 2009.Still Private Equity has been

successful in India, the main reason being dire need of their service much more than their

money. Companies in India have different reasons for wanting private capital depending on

the type of company and what stage it is at, i.e. growing, seeking acquisitions, family owned,

or a large corporate. For an example, first generation business builders look for private

capital because they gain a considerable credibility and governance by having private equity

representative on board. This in turn will help them while bidding for international contracts or

attracting good talent.

The Indian Scenario-Inducing Sustainability

Aid the budding Entrepreneurs & act as partners than just fund providers:-In India

where the situation is characterised by family-owned companies, 8000

companies listed on the stock exchanges, abundantly available capital, and yet a

relative lack of liquidity in the market means that private equity companies will

need to position themselves as partners than just fund providers if they are to

become the preferred source of investment capital. These companies expect

private equity firms to be able to add value, as required, in strategic, operational

and human capital matters in addition to their financial contribution.

Labour Diligence:-Another issue addressed by private equity firms is due diligence.

Much of the time spent on “demand diligence” is mostly irrelevant as companies

already know there is enough demand and important question is whether the

management can actually deliver or not. And to find out the answer they need to

spend time on the shop floor for what can be called “labour diligence”. Most of

the family-owned businesses have boards consisted almost exclusively of family

members and friends. Private equity firms recognise the importance of finding

outside directors who can provide the knowledge, environmental local expertise

and experience necessary to help steer a company through its next stage of

growth or towards a public offering. For many companies, the board meeting is

purely about compliance and the real debate and decision-making happens

outside the meeting. Adjusting to a more rigorous style of board meeting can be

extremely difficult for such companies. Private equity firms often play a strong

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influencing role in helping companies attract talent, commissioning search

activity, and helping promoters to interview and assess talent & leadership.

Infrastructure/Real Estate & SEZ’z:-The Planning Commission estimates that India

needs an additional $500bn over the next five years itself to finance

infrastructure. Under the growing power and effect of global capitalists over third

world nations like India, where the state has become an easy tool to facilitate

these activities - huge investment for both industrial and non-industrial purpose

from national and foreign investors are allowed. Land acquisitions are one aspect

that draws a lot of controversial aspects related with question of national interest

versus community interest. One of the decisive factors of fast growth of corporate

sector is the impact of economic policies of liberalisation that have undergone a

sea change in the two decades, starting from 1991. The underlying theory is to

have a minimal reliability on state and more on market forces. PE has contributed

by investing in such sectors & making them economically feasible in the interest

of the nation .PE plays a key role critical growth driving sectors of the economy,

As per Deloitte Report the various sector wise requirements from PE are as

follows:

Road Ahead :

The Securities & Exchange Board of India (SEBI) proposed new takeover rules that will

make acquisitions by Indian companies easy and scrap the non-compete fee. The minimum

holding requirement to trigger an offer to minority holders has been increased to 25% from

15% for a company. Once that level is reached, the acquirer must offer to buy 26% up from

20% now.

Implications-This move by the SEBI is in the right direction as it will lead to more participation

from PE players both in terms of value and size of the deals and will also give the opportunity

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to increase their stakes in existing portfolio companies. This draft, if implemented, will also

ease the difficulties faced by the listed companies due to 15% barrier for open offer. In

Japan, the trigger for an open offer is 33.3 per cent, while in Hong Kong it is 30 per cent and

in Singapore it is 29.99 per cent. In all three, the trigger requires an acquirer to make an offer

for the entire company. The Achuthan Committee on Takeover Regulations had

recommended that an open offer ought to be for all the shares (100 per cent) of the target

company to ensure equality of opportunity and fair treatment of all shareholders no matter if

they are big and small. On SEBI abolishing non-compete fees, companies would split the

total pricing consideration (deal size) into a non-compete fee portion too so that the acquirer

spent less on the total transaction cost. The fact is very often people with a considerable

stake in a company signify some extra value for the acquirer ,that person could be a

technology innovator, a progressive leader and/or manager with in depth understanding of

the business and the environment, etc. A control premium/non-compete fee is often

recognition of this reality. With non-compete fees abolished, what is likely to happen is that

promoters may look to issue different classes of shares a practice that is legal in India, but

almost never followed – to ensure a premium. The reduction of open offer size from 100 per

cent to 26 per cent and scrapping of non-compete fees is a welcome balancing act.

Conclusion

Private Equity provides a unique edge so as to result in sustainable development of India. As

per Deloitte survey various parameters that make PE a reliable companion for funding are

shown:

To conclude the discussion, PE investments are not only a source of funds but also play

the bigger role of the partner in taking the India’s companies to next level in terms of good

governance, building capable executive teams, improving organisational capability,

enhancing evaluations, creating liquidity and global competence. Private equity is

developing into a major player in the Indian economy and there is a growing perception

Others

Private

equity

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among Indian companies that private equity firms can add value on several fronts. With

more and more companies setting up local offices and teams which work at the ground

level, this industry will continue to be successful in the years to come.

References:

Bain report on Private Equity 2010

Bain report on Private Equity 2011

Deepali Sharma is a 2nd year MBA student at FMS, Delhi.

She has completed her BE from NSIT, Delhi University and can be

reached at deepali.s12@fms.edu

Sanchit Sawhney is a 2nd year MBA student at FMS, Delhi.

He has completed her B.Com from SRCC, Delhi University and can be

reached at sanchit.s12@fms.edu

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LYING THE DUST OFF THE GOLD

Kunal Jain & Rachit Goyal | NMIMS

Gold is considered a very precious commodity across the globe and its importance in terms

of value and liquidity has gained immense pace in recent periods. In the current global

environment, gold is being considered the safest investment option on account of uncertain

macroeconomic environments in Europe and United States of America. Gold has a unique

sentiment for Indian investors, apart from the usual belief across world. In India, Gold holds a

sacred meaning for Hindu’s in particular; who believe that Hindu goddess Lakshmi came

from an egg of gold and consider it auspicious to buy gold and believe it’s a good sign, as it

brings luck. Gold is considered as a sign of security and prosperity in India.

Gold Demand by Country in

2010

India 32%

Greater China 20%

Europe and Russia 13%

Middle East and

Turkey

12%

North America 8%

Others 15%

India is the biggest consumer of gold in the world. The recent statistics of India’s gold imports

accounting for more than 30% of global imports for 2011 is a testimony to this fact. In 2010,

India accounted for 32% demand of the total gold demand in the world. The year on year

volume growth for India was 38% compared to global average of 7%. With India emerging as

a strong economy and strong fundamentals suggest that the average Indian income is bound

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to rise in future, the future prospects for gold are good. Based on the World Gold Council

estimates India owns approx 18,000 tonnes of above ground gold, which is 11% to the total

global share.

Ironically, although India is the biggest consumer of gold, it is a price taker and not a price

setter. This is due to inadequate supply of gold from within the country. Over the past decade

total Indian gold consumption has increased at an average rate of 13%, outnumbering the

inflation of 8%, real GDP of 6% and population of 12%. Indian demographics suggest that

more than half the population is below 25 years and with economy bound to grow at approx

8% for next few years, the demand for gold will only improve.

With India’s gold import for the current year already rising to 553 tonnes in the first half of

2011, there are increasing chances of it reaching the estimated 1000 tonnes a year by WGC.

Imports have already risen 34.9 percent in 2011, along with a 72% jump in 2010 to 959

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tonnes. The Centre for Monitoring Indian Economy (CMIE) has estimated that India’s gold

consumption of gold will surge 50% to 1200 tonne a year by 2020-21.

Demands for Gold

In India, categories of demand are less distinct than what is observed worldwide. In other

markets the demand for gold is well differentiated into various sections like jewellery markets,

investments, Exchange traded funds (ETF’s) and Technology. Indian investors tend to

associate the investment psychology to almost all sections and hence to make a clear

distinction is to defeat the entire mindset of investor. The two most famous sources of

investment for an average Indian is bank deposits and purchasing gold. Gold assumes

importance because of the liquidity and value preservation. With gold assuming cultural and

religious importance in the Indian atmosphere, the demand for gold can be explained in many

ways. The graph below depicts that India traditionally has a jewellery dominated market.

India historically has been a market where gold is purchased and sold for several reasons

like buying gold on auspicious occasions like Akshay Trithiya and in marriages where gold is

considered as ‘Streedhan’. People do purchase gold coins and bars for investment

purposes, but these are limited in numbers as compared to jewellery.

1. JEWELLERY MARKETS

Gold assumes a significance importance in marriages in India. The cultural tradition of

purchasing gold in marriages and passing on some wealth with daughters is a long followed

ritual. Apart from marriages, gold is being purchased by any household women for different

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reasons. Indians have been using gold for jewellery for adornment since several decades.

Incidentally gold is the most widely used metal for bridal ornaments. Gold even forms a part

of gifts on many auspicious occasions like ‘Diwali’. Men are observed to be using gold

bracelets, pedants and chains, while it holds utmost significance for women. Every woman

will be having at least some kind of jewellery. Nowadays we have seen that jewelers offer

schemes whereby one can purchase gold at certain installments. With demands for jewelry

only going to continue as time passes, the jewelry markets will continue to rise.

2. INVESTMENT DEMANDS

In India, gold is considered as one of the most liquid and safest form of investment apart from

bank deposits. It has been observed that majority of Indian households have invested in gold

in one form or the other. With the economy expected to grow at 8-8.5% annually for next five

years, the average income and savings rate will also tend to increase and so will the demand

for gold. Nowadays, investors are also looking at gold to diversify their portfolio to manage

risk; the demand for investment is only going to increase. In fact in recent years, the ratio of

investment is increasing steadily as compared to other sections.

A correlation analysis of the key financial assets with the gold price is shown below. We can

see that gold is not correlated significantly to any asset and hence provides with a good

diversification option for an investor. The net retail investment consists of purchases for gold

coins and bars. There is growing demand for gold on account of diversification and

increasing gold investment opportunities in markets. A study of the returns on gold

investment against different financial assets in rupees is calculated as shown below. The

below table reflects the fact gold investment has proved to earn much better return on

investment than other selected assets over the same period.

Table : 5-year correlations of weekly returns in INR (data ending 24 June 2011)

Gold

Lon Fix

(INR/oz)

S&P

GS Oil

Index

DJ UBS

Comdty

Index

INR 3-

month

deposit

JPM

GBI

India

MSCI

India

BSE

SENSEX

30 spot

Gold Lon Fix (INR/oz) 1.00

15

S&P GS Oil Index 0.33 1.00

DJ UBS Comdty

Index 0.43 0.79 1.00

INR 3-month deposit -0.16 -0.15 -0.08 1.00

JPM GBI India 0.04 -0.06 -0.15 0.13 1.00

MSCI India -0.03 0.24 0.19 0.07 0.11 1.00

BSE SENSEX 30

spot -0.03 0.22 0.17 0.07 0.13 0.99 1.00

Source: Barclays Capital, World Gold Council; calculations based on total return indices in

INR unless not applicable.

Table : Performance on various assets in INR (data ending 30 Jun 2011)

Gold

Lon Fix

(INR/oz)

DJ UBS

Comdty

Index

INR 3-

month

deposit

JPM

GBI

India

MSCI

India

BSE

SENSEX

30 spot

MSCI

EM

3-

month 4.6% -6.8% 2.6% 0.3% -3.6% -3.1% -1.1%

6-

month 6.4% -1.5% 4.8% 1.9% -8.0% -7.6% 0.9%

1-year 16.1% 20.8% 7.2% 4.5% 3.6% 6.5% 22.9%

3y

CAGR 18.8% -10.9% 7.3% 9.5% 11.9% 11.9% 5.7%

5y

CAGR 19.7% -0.5% 7.8% 7.7% 13.8% 13.1% 11.6%

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Source: Barclays Capital, World Gold Council; calculations based on total return

indices in INR unless not applicable.

With inflationary pressures, the individual’s purchasing power is going to reduce in real value.

The expected values for inflation remaining high in near future and hence gold would stand

as a good protection for Indian investors against rising inflation. Also, with the monetary

policy followed by the Reserve Bank of India, the interest rates are rising. But a closer look at

the real rates show that the effective return on investments are almost zero or even negative

due to rising inflation. All these reasons led to the rising demand for gold as investments in

the recent times.

Exchange Traded Funds (ETF’s): Gold ETF is mutual fund schemes that invest in standard

gold bullion. ETF are gold investments on paper and provide high exposure to physical gold.

In Feb 2007, SEBI launched India’s first Gold ETF. These ETF’s can be traded on stock

exchanges just as we can buy and sell stocks. In India, gold ETF are supposed to have at

least 90% exposure to pure gold. Although the current market for ETF, it is growing steadily

and with the advent of new financial products the demand will only surge higher. The

advantage with ETF is that one can purchase even a small amount of gold on exchange.

Gold ETFs, which have become hugely popular among investors, have gained over 32% so

far in 2011 (till August 24). Gold ETF have consistently given more than 20% returns since

2007.

India Post Gold Coins: India post, the country’s national postal service in association with the

Reliance Money and World Gold Council sells gold coins in the denomination of 0.5g, 1g, 5g

and 8g of 24 carat over 466 post offices across the country. These post office coins are sold

at discounted prices as compared to normal banks and are growing in demand due to the

lower cost. The coins are 99.9% pure and internationally certified.

3. Industrial Demand

Gold is used for industrial purposes electronic manufacturing items, microchips and other

products. Apart from these gold is used in sari-making for gold threads used in decorating the

sari. Gold is also used to some extent in artificial dental tooth and plated metals or jewellery.

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As gold prices go higher people tend to substitute them with other products. The demand for

such markets has always been low on account of price sensitivity.

SUPPLY

India has a very low refining capacity and depends mostly on the supply of scrap and gold

dores from overseas mines. Dores are semi-pure alloy of gold and silver made usually at

mining sites and then transported to a refinery for further purification. The major imports for

gold bars and coins to India are from South Africa, Switzerland and Australia. Due to the

inflexible import structure, miners face difficulty in importing dores of gold. Duty on finished

gold is Rs300 per 10 gram, while it is Rs140 per 10 gram for dore. In addition, dore has to

bear an excise duty of Rs200 per 10 gram against which a refiner gets countervailing duty

benefit. According to the Finance Bill of 2011, dore with up to 80% gold content can be

imported through nominated agencies, but under strict conditions and a complex tax

structure. The problem here is twofold; one it is very difficult to find dores with up to 80%

purity since internationally dores are available for at least 90% purity on most occasions and

secondly customs department undertakes test to verify the purity content before delivering to

refineries and this exercise usually takes approx three weeks for clearing the consignment.

As a result, government should allow free imports with no limits on purity of dores to

strengthen the supply for mining. Even in international markets there are no conditions on

limits for purity of dores. There needs to be a direct link between imports and consumption

and government should look at the import structure.

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Gold refineries currently are facing shortage of supply for many reasons like rising prices of

gold, import duty structure and hallmarking of jewellery causing reduction in supply of reused

gold. The domestic refineries operational capacity has declined to 20-25% on account of the

non-availability of adequate used gold. As per the WGC, reused gold had declined from 25

tonnes in last quarter of 2010 to 10 tonnes in first quarter of 2011. In 2010, these refineries

were operating at 35-40% of capacity. With gold prices rising globally, the amount of reused

gold is reducing as people are keeping gold for investment. Total recycled gold supply

plunged to 89 tonnes in 2010 as compared to 122 tonnes in 2009.

Rather than selling old ornament to jewelers in order to meet financial obligations, people are

pledging them with non-banking financial institutions like Manappuram Finance and

redeeming it later by paying back the dues.

Hutti Gold Mines Limited (HGML)

HGML is the only producer of gold for India, apart from gold produced as a by-product by

Hindalco from its copper mining sites. This state-owned company is the first member of India

in the WGC and has two units in Karnataka, Hutti and Chitradurga. HGML has recently

registered a phenomenal growth of around 45% in gold production by producing 689 kg of

gold in first quarter of 2011 as compared to 474 kg produced in first quarter of 2010. This

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growth has been attributed to the Sag and Mills construction which has helped improve the

efficiencies for refining. With an estimated annual 2500 kg of gold the firm is growing but will

need to refine more than current 4g of gold per tonne of ore. HGML needs to get the nod

from government for its joint venture with foreign players to further improve on its operating

capacity. HGML has been planning to enter into joint ventures with gold firms abroad to

commence mining in Davangere, Chitradurga, Tumkur, Shimoga, Gulbarga, and Dharwad

districts where gold minerals have been found.

Deccan Gold Mining Limited (DGML)

Deccan Gold mining, the first private gold-exploration sector firm has plans to setup a gold

processing plant in Karnataka. DGML engages in exploration, development and production of

gold in India and has explored prospects in the states of Andhra Pradesh, Karnataka, Kerala

and Rajasthan. The firm hopes to build a 2000 tonne-a-day plant and investing up to Rs 225

crores. Deccan is now waiting for final clearances from central and state personnel to kick off

with the plant and expects is to be operational within 24 months from approval. Deccan is

currently facing tough times as the state government recommendation of reserving 16000

hectares in Hutti Belt for state owned HGML.

Recent Happenings on Supply Side

Bharat Gold Mines Limited a PSU was India’s glory in gold mining until it was closed in 2001

due to reducing deposits and increasing costs. BGML was to operate primarily in Kolar Gold

Mines and has produced over 800 tonnes of gold over 121 years and is regarded as the

second deepest mine ever in the world. With gold prices soaring and growing more than

fivefold than what it was in 2001, BGML firm wants to reopen and has been applying for

permission from the governments. Kolar mines still have reserves which could yield 10

tonnes for next 15 years. But the government is delaying the revival plan and causing

hindrance in increasing the production of gold in India since the first application for reopening

came in 2006.

A recent discovery of gold in Goa was reported by Goan professor Dr Nandakumar Kamat.

Mineb reported in January "A very large tonnage of secondary gold deposits reportedly lies

just 60 meters below the ground, spread over 40,000 hectares". On account of this discovery

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in early January this year, many firms have applied for permission from the ministry of mines

to study the exploration for gold in Goa.

Geo Mysore India may be granted an approval from the Andhra Pradesh government for gold

mining in Jonnagiri area. The firm has already obtained the necessary approvals from Central

government in 2008. Geo Mysore proposes to invest 220 crores for setting up 1000 tonne-a-

day capacity. On similar lines, Ramgad Minerals and Mining Pvt Ltd (RMMPL), is waiting for

the nod from government to setup its gold mining plant in Gadang District in Karnataka.

According to Jaydeep Biswas, Chief Executive Officer of Astra Mining, Australian based

Astra Mining Ltd may acquire one of the 12 gold mines in Karnataka and filed for 18

preliminary licenses.

The World Gold Council had earlier stated that mere 38,000 tonnes of recoverable reserves

were left for excavation which is equivalent to nine years of global demand. This implies a

tight supply pressure globally and even if a new months is discovered it will take at least 10

years to start producing raw gold on account of several issues like prior exploration survey,

environment clearances and other mining issues.

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GOLD Foreign Reserves

India had borrowed foreign reserves worth Rs 31,490 crores to purchase 200 tonnes of gold

when International Monetary Fund decided to sell of 403 tonnes of gold. Today, this

transaction has resulted into a profit of about 50% only within 2 years, due to the soaring gold

prices. If Reserve Bank of India does plan to sell these gold today than it would certainly help

the balance of payment for India. This amount will not only help India in reducing the interest

burden from external borrowing but also relief some pressure of a high fiscal deficit in 2011.

One can argue that the foreign reserves will lower but selling gold will only result in change in

foreign reserves from gold to FCA (foreign currency assets). But a longer view would suffice

that RBI should hold on to the reserves due to the huge demand supply pressure and

uncertain global macroeconomic environment. With inflation causing a huge concern, gold

seem to even more stress on this fact.

Conclusion

Once a leading producer of gold a century ago, it now produces only around 4 tonnes

annually. India needs a more liberal policy for a deeper and more efficient gold mining

market. China is a prime example; it has contributed significantly to world demand and has

even beaten South Africa in 2008 as the leading producer of gold. India is only spending less

than 10 crore in exploration as compared to Australia which is spending nearly Rs 2,640

crores. The biggest hindrance in India’s gold mining growth is the number of approvals from

around 20 departments and duration for the same ranges from at least 3-4 years. This is the

22

biggest concern for any foreign player and hence India’s needs to come up with a liberal

policy.

Kunal Jain is a 1st year MBA student at NMIMS, Mumbai. He has

completed his graduation in Information Technology from SPCE,

Mumbai University and can be reached at kunal.jain86@gmail.com

Rachit Goyal has done B- Tech in computer science from Amity

University. He is pursing MBA in Capital Markets from NMIMS and

you can contact him onrachitgoyal.nmims@gmail.com

23

HIGH FREQUENCY TRADING: THE GOOD, BAD AND UGLY

Prashant Rishi | IIM L

It was in late 2000, when the NYSE decided to quote prices of stocks in decimals of a dollar,

as opposed to a fixed list of fractions. The event (called decimalization) sowed the seeds of

what is today popularly known as High Frequency Trading or HFT. Stated simply, HFT is

trading in stocks by computers, with minimal human assistance. Carried out by super

computers of major investment banks & hedge funds, high frequency trades range in time

from less than a second to a few hours. Today, it is estimated that majority (~60%) of all

equity trading in NYSE is done by trading algorithms. Although predominantly into equity,

HFT firms have started moving into other asset classes, like derivatives, FX and fixed income

instruments.

Figure 1: Asset classes traded by HFT firms

The obvious advantage that computers offer in trading assets is speed of processing

information and executing trades. Add to it other advantages like low cost, high execution

consistency & anonymity and you begin to understand why High Frequency Trading is so

popular among all trading desks.

24

Figure 2: Why funds prefer High Frequency Trading

Generally, trading algorithms are built on complex mathematics and statistical modeling.

They are designed by Quants (as Math PhDs are known in Wall Street lingo). The hedge

funds, who own these algorithms, protect them with as much zeal as Google protects its

proprietary search algorithm or Coke protects its secret soft-drink ingredient. Most algorithms

typically employ “flat” strategy, i.e. trading positions are closed within the same day. Profit

with one such milliseconds-long trade is sometimes only a few pennies, but it is the massive

trade volume that drives the total daily profits, which are in several thousands of dollars.

Players & Strategies

In the US equity markets, some of the highest volume high-frequency traders include

proprietary trading desks of firms like Goldman Sachs, Knight Capital Group, Getco LLC &

Citadel LLC.

25

Figure 3: Players in HFT space (US Equities)

There are 4 basic strategies employed by almost every HFT firm:

Market Making

Traditional market making involves placing limit orders to buy & sell in order to earn the bid-

ask spread. But for an HFT firm, the bid-ask spread is not the only source of money. Since

market makers provide additional liquidity to the market by being counterparty to incoming

market orders, they get rebates from exchanges for quotes that lead to execution. So, if an

HFT’s bid (buy order) of $15 for XYZ shares is matched, it might immediately post an offer

(sell order) for the same price, hoping to capture two rebates while breaking even on the

spread. Building up such market making strategies typically involves precise modelling of the

target market structure & trading volumes using stochastic control techniques.

Ticker Tape Trading

To appreciate ticker tape trading, it is essential to understand the concept of “co-location”.

Co-location is a system where in a stock exchange allows large hedge funds and i-banks to

place their computers near its own data terminals, in exchange for rental income. Proximity to

the stock exchange’s data centre ensures that any market movement (read the ticker tape) is

detected by these computers before general public. Pre-designed algorithms can thus detect

any trend in the prices, and carry out their own trades seconds before the general public

even knows about the prices, and reacts to them. To realize the importance of a few seconds

26

in computing terms, consider the case of Lotus Capital Management LP of New York. Earlier

this year, it realized that a competitor was beating it to a trade it had programmed by exactly

3 microseconds, day after day. The loss meant Lotus was forfeiting about $1,000 in daily

revenue on that particular trading strategy. Subsequently, that trading strategy was discarded

since firm did not have the infrastructure to speed up the execution by 3 microseconds.

Event Arbitrage

Event Arbitrage is very similar to Ticker Tape Trading, except that the item of interest here is

the news feed. Most HFT traders employ a class of algorithms to deal with each possible kind

of corporate event (including earnings reports, earnings outlook, mergers and acquisitions,

and analyst rating changes), and convert news into positive or negative trading signals. An

example would be a very simple algorithm that would read words like “profit”, “confidence”,

“beats expectations”, “good quarter” from a Reuters news flash, and would start buying the

stock before general public have a chance to even finish reading the news. The trick is to be

the one who makes the move first: to be the one whom has the fastest news feed, the fastest

information extraction algorithms and the fastest execution.

Statistical Arbitrage

Statistical Arbitrage strategies aim to make money by exploiting statistical mispricing of

securities, like deviations in interest rate parity in forex markets. Carried out over prices of

over hundreds of securities at a time, it is possible to detect such mispricing using extensive

data mining & complex mathematical techniques. The arbitrage strategies hinge on the

possibility that assets would obey their historical statistical relationships with each other in

long run.

The Dark Side of HFT

There is another side of the story. High Frequency Trading is in the midst of a raging debate.

Consider ticker tape trading as described above. A person who is privy to market prices

before other players is called an insider trader, but if it is only a question of few seconds, the

boundaries of law start to blur. Any firm with enough cash to buy high-tech infrastructure &

pay rents to a stock exchange can enjoy the free lunch of being few seconds ahead of the

market. HFT is, thus, accused by its critics to be a legal form of insider trading.

Now, consider market making. HFTs are in no obligation to provide liquidity to the markets.

They do so to serve their own profit purpose (bid-ask spreads and rebates from exchanges).

However, during periods of high volatility, these market making algorithms stop immediately,

leading to an almost instantaneous erosion of liquidity. A perfect example of this

phenomenon was Dow Jones Flash Crash on May 6, 2010, when DJIA plunged 900 points

27

(9%) in 5 minutes, only to recover within next 10 minutes. A July, 2011 report by the IOSCO

concluded that "the usage of HFT technology was also clearly a contributing factor in the

flash crash event of May 6, 2010." Since then, many mutual funds have moved significant

portions of their money out of US equity markets, and are considering other asset classes.

They say that the US stock markets have been reduced to computerized gambling houses

where algorithms devise microsecond-length trading strategies. All long-term valuation of

business fundamentals seems to have lost its meaning.

And it’s not just equity. In February 2010, a trading algorithm owned by Infinium Capital

Management ran amok and caused worldwide surge in oil prices by USD 1. The company

currently faces civil charges for causing a global mayhem.

Of course, advocates of HFT (read hedge funds and investment banks) are quick to dismiss

this criticism. They point that they provide the much-needed liquidity to the market, and

hence improve efficiency of the markets. While regulators are vying to bring High Frequency

Trading into the ambit of rules, there is undoubtedly a powerful lobby opposing this.

Figure 4: The Dow Jones Flash Crash of 2006

SEC recently passed a legislation banning the use of naked sponsored access, which

allowed firms to trade directly on an exchange using a broker’s infrastructure without pre-

trade risk controls. Similarly, IIROC, Canada’s financial regulator, has proposed new tariffs

28

that would charge trading desks per message, rather than per executed trade. If these costs

are passed down by trading venues to their members, it would have a marked impact on the

execution fees paid by HFTs. What now remains to be seen is will these regulations prove

effective in tightening the actions of HFT firms, or will the exodus of long-term investors from

the US equity markets continue unabated.

Bibliography

Chlistalla, M. (2011). High-frequency trading. Frankfurt: Deutsche Bank Research.

Crosthwait, A. (2011, January 7). HFT expected to grow despite new regulation. Retrieved

August 2, 2011, from Trade News: http://www.thetradenews.com/trading-

execution/regulation/5576

Firm faces civil charges for U.S. oil trading mayhem. (2010, September 23). Retrieved

August 12, 2011, from Thomson Reuters:

http://hft.thomsonreuters.com/2010/09/23/exclusive-firm-faces-civil-charges-for-u-s-oil-

trading-mayhem

Flash Crash 2010. (n.d.). Retrieved August 12, 2011, from Wikipedia:

http://en.wikipedia.org/wiki/2010_Flash_Crash

Skoko, D. (2010, July 7). Colocation and Liquidity Provisioning: An Uneven Playing Field.

Retrieved August 7, 2011, from Advanced Trading:

http://www.advancedtrading.com/exchanges/225702636

The Grahamian. (2011, June 13). Retrieved August 10, 2011, from The Grahamian:

http://thegrahamian.blogspot.com/2011/06/event-arbitrage.html

Prashant Rishi is a 2nd year PGDM - Finance student of IIM Lucknow. He

has completed his graduation in electronics and communications

engineering from Manipal University. He can be reached at

pgp26357@iiml.ac.in or on phone number 7897180796.

29

COMMODITY PRICE DYNAMICS

In spite of the consistent attempts being made for stabilizing the commodities market, it still

remains to be the most volatile one. Several steps are being taken in order to overcome the

volatility. In the agricultural commodities for example, commodity buffer stock scheme has

been used, the idea behind this is to store a part of the production in the years when there is

good harvest, thus increasing the price from what it would have been and sell the stored

goods in the years when there is less production, thus reducing the price from what it would

have been.

While the neo classical commodity market models (which promotes efficient markets

hypothesis) believe the rational speculators to be a key element in the price stability in the

commodities market, the speculators are proving themselves to be a major cause of price

instability. As per the chartists and fundamental approach, the interaction between

heterogeneous agents, chartists and fundamentalists, may cause a skewed movement of

asset prices. As per simulations, whenever the govt. imposes a minimum price to support the

producers, the volatility decreases, however the average price of the commodities declines

too. Likewise, when the government imposes a maximum price to support the consumers,

the volatility decreases; but the average price which consumers pay, increases. This puzzling

outcome is because of the dynamic lock in effect.

When the price of the commodities has crossed a critical upper limit the bull market turns into a

bearish one. When the govt. intervenes to inhibit this shift it puts a cap on the price of the

commodity. As a result, the average price becomes higher than what it would have been without

the cap. Moreover, since the price is fluctuating at a high level, it reaches the

price cap repeatedly so that the buffer stock is likely to finish rather quickly. Alternating between

a lower and an upper price boundary can be seen as one of the ways to counter this

problem. The price volatility thus gets decreased but the market still remains distorted. This

process of changing the level of price limiters and on-off switching however leads to severe

bubbles, crashes or volatility clusters. Hence commodity markets are extremely volatile and

regularly display severe bubbles and crashes. Such price dynamics may, of course,

be triggered by demand and supply shocks.

As per the cobweb model, complicated price movements can be attributed to nonlinearities.

However, apart from this there exists an additional source of market instability. As most of the

Pallav Kumar & Ashish Agrawal | NMIMS Mumbai

30

commodities are traded at stock exchanges, speculators can also prove to be the deciding factor

in commodity markets. Surprisingly, this aspect has received only little attention so far. In a

market basically three types of agents interact i.e. the consumers, the producers and the

speculators. Speculators are considered to be the heterogeneous one since they are used to

both technical and fundamental trading strategies, and, at the inception of each trading period,

they choose one of the two strategies as their own trading strategy for that given trading period.

Their behaviour can be regarded to be rational since they decide between these two strategies

depending upon the market.

We are assuming that the price adjustment on the commodity markets may be given by a log-

linear price function.

Hence, the log of price S at time t + 1 is

St+1 = St + a (Dt + WtC Dt + WtF Dt )

Here ‘a’ corresponds to the positive scaling coefficient in order to calibrate the price adjustment

speed; Dt corresponds to the excess demand of the real economy, the technical and the

fundamentalist analysts respectively at time t.

The weight of the chartists at time t is given as WtC, whereas the weight of the fundamentalists is

given as WtF

To illustrate the demand and supply decisions for the real economy we are introducing a

reduced form assuming that the supply schedules of both the consumers and the

producers are log-linear. The excess of demand for the real economy can be expressed as

Dt = m (F − St),

Here ‘m’ refers to the slopes of the supply and demand curves and F corresponds to the long-

run equilibrium price (also called the fundamental price). When the value of the price is

equal to the value of the long-run equilibrium price F, the excess demand of the real

economy turns out to be zero. We can then assume that the economic structure is

quite stable and there are no or very few permanent demand and supply shocks. As a

result, the value of F remains constant over time. In the absence of speculators,

WtC = WtF = 0,

31

In this case law of motion of the commodity’s log price has a unique fixed point at St =F,

Such a state is obviously efficient. Speculators are familiar with both technical and

fundamental analysis.

Now, to model the excess demand generated by chartists or the

technical analyst we formulate:

Dt = b (St - F)

Where ‘b’ is a positive reaction coefficient and F is the long-run equilibrium price (also called

the fundamental price). The technical analysts believe typically in bear and bull markets. As

long as the price is above the fundamental value, chartists regard the market to be bullish.

Since a further price increase is expected, chartists believe in buying the commodity.

However, if the price drops below the fundamental value then the chartists tend to lose faith

in the stock. In a bear market, chartists sell the commodity. Since changes in excess

demand are positively correlated with changes in price, it is in a broader sense consistent with

positive feedback trading.

Fundamental analysts believe that prices tend to revert back to their fundamental value. If the

price is above its equilibrium value, lower prices are expected and fundamental analysts tend to

sell the commodity. In the same way if the price is below its equilibrium value, higher prices are

expected and fundamental analysts tend to buy the commodity. The excess of

demand generated by fundamental analysts can be given as

Dt = c(F − St).

Here c is the reaction coefficient.

The Speculators tend to exploit interchangeably the bull and the bear market situations.

However, when the price deviates more from its fundamental value, speculators perceive more

risk for the bull or bear market to collapse. As a result, an increasing number of speculators tend

to go for fundamental trading. The market share of speculators who tend to apply technical

analysis may thus be given a

t =1/ 1+d (F−St) 2.

32

The higher the switching parameter d is greater than 0, faster the speculators tend to switch to

fundamental analysis.

The weight of fundamentalists is WtF = 1 − WtC

Although producers and consumers are the two primary participating agents in the commodity

markets, there are also other participants, such as speculators, who may have a definite effect

on the degree of price variability and on the success of any commodity price stabilization

scheme.

Thus we can say that the chartists are a source of market instability. Also weak reaction of the

speculators (either the fundamentalists or the chartists) can push the market to be either a bull

or a bear market and strong reaction of the speculators causes market prices to fluctuate

irregularly between bull and bear markets.

Ashish Agrawal is a 1st year MBA student at NMIMS, Mumbai. He has

completed his B.Tech in Electrical Engineering from NIT Allahabad. After

graduating, he served as an Asst. Manager, Marketing with Crompton

Greaves & Bajaj Electricals for a period of 2 years. He can be reached

at aceashish9@gmail.com

Pallav Kumar is a 1st year MBA student at NMIMS, Mumbai. He has completed his BE

in Computer Science & Engineering from MIT Manipal. After graduating, he served as a

Business Analyst with TCS for a period of 2 years. He can be reached

atpallav99@gmail.com

33

THE PROBLEMS PLAGUING THE REAL ESTATE SECTOR

Madusudanan Ramani & Pavan Nayak | NMIMS Mumbai

Real estate or immovable property is a legal term (in some jurisdictions) that encompasses

land along with anything permanently affixed to the land, such as buildings. However, in

technical terms, real estate refers to the land and fixtures themselves and real property are

used primarily in over real estate.

In the last decade, the real sector has been largely driven increasing working population,

increasing urbanization, rising income levels and easy availability of funds. The sector has a

high multiplier effects on the economy in general and a few sectors like Cement, Paints and

Steel. It had attracted more than $ 10 billion of Foreign Direct Investment (FDI) since the

year 2000. The sector has grown from a largely fragmented/unorganized market to semi-

concentrated market with growth of large listed firms in the last decade.

Problems in Plenty

From a sector once promising astronomical returns with an element of high risk is facing a

huge liquidity crisis on account of increasing interest rates and commodity prices. The sector

was carrying huge debt pile of about $ 24.6 billion in July this year as against $ 3.8 billion in

September 2005. With increasing interest rates, the sector faces twin challenges of reducing

demand and increased interest expenses, which is squeezing the profits of the participants.

The factors that were driving the sector such as increasing disposable income and availability

of funds are de-accelerating the growth in the sector in the recent times.

Figure depicts the city-wise movements of Residex in the period 2008-2011

34

Residex is an index of housing prices across major cities of the country, published by

National Housing Bank (NHB). Prices in most of the cities are either fallen or the growth has

moderated in the two quarters.

The sector is highly interest sensitive as it affects both the supply side and the demand side.

The high interest rate reduces the consumer’s ability to avail of a higher denomination of

credit. Unlike in the developed countries, the turnaround time for projects in India is high and

companies hold on to their land holding for considerably higher period of time to profit from

land appreciation during that period. Since most of this purchase of land holding is done

using borrowed funds, any increase in interest rate reduces the profitability of the firm.

The cost of material such as Cement and Steel also has a considerable negative impact on

the profitability of the sector. The sector is also plagued with the rising wage cost. The supply

of labour from states such as Bihar and Uttar Pradesh has come down significantly in the last

one year, due to increase in wage rates in these respective states. This has pushed the cost

of labour for the real estate due to short supply.

The proposed Land Acquisition Act could further add to the woes of the real estate sector in

India. Once in force, the act is expected to increase the cost of acquisition of land by real

estate participants. Other than the cost, the process of acquisition would become difficult on

issues of Rehabilitation & Resettlement (R&R) programs. Increase in cost of land would

35

affect the participants operating in the low cost housing space as this segment is the most

price sensitive. But the passing of this Bill, could give competitive edge to real estate

participants who own with large land banks already.

Financing of the Deals

The problems faced by the sector intensified by the inability of the dilute equity due to poor

stock market conditions and reluctance on the part of Private Equity (PE) investors. The

Private Equity investment into this sector have reduced sharply from the levels seen in 2007-

08, but quarterly averages show the investments have started to show some uptrend.

Weak governance, financial mismanagement, lack of transparency, execution capabilities,

market absorption, over valuation of the project and rampant malpractices are the main

reasons that inhibit flow of PE investments in the sector. The sector is expected to receive

PE investments into the sector once the regulator in place and issues of corporate

governance ease.

Chart depicts the PE investments (in $ millions) in Real Estate Sector in India during the

period Q1, 2006 to Q1, 2011.

Real estate companies have not been able to raise funds from the stock market due to poor

valuations. The performance of the all the real estate companies have not been equally bad.

Some companies like Godrej Properties have been able to give outperform the Sensex due

to their nature of operations.

36

Stock prices of participants who have low levels of debt and have not financed land

acquisition using debt have outperformed the rest of the participants. Some of the

participants have entered other business such as like insurance, mobile and hospitality trying

to build a leverage using the existing real estate business. This diversification has affected

the profitability and some of the participants have been exiting such investments of theirs.

Regulator in Pipeline

Government proposes to set up a regulator for the sector mired with issues of transparency.

This would provide welcome relief to the potential buyers from the unfair practices followed

by the developers and this would increase buying in the long term. The Real Estate

(Regulation and Development) Bill 2011 is expected to be tabled in the parliament in the

winter session, after getting approved by the cabinet.

The regulator would be responsible for –

1. Protect the potential buyers from the Fly-By-Operators.

37

2. Certifying the registration of projects or land that are 4,000 sq. metres or more in size

3. Ensure property developers comply with registration norms such as clear land titles,

and prevent diversion of customer advances for a specific project to another one.

4. At least 70% of the money collected from buyers from time to time will be put in a

separate escrow account within 15 days of its realization and will be used only for the

construction of the particular project.

5. Developers will not be able to sell or book any apartment without prior registration of

the project with the authority

Investment Opportunities

The real estate sector in India is expected to grow in the longer run on account of strong

growth of Indian Economy. The participants have to fine-tune the operations to make them

more efficient. They could reduce the turnaround time for the projects and reduce the

requirement of funds. They could improve their corporate governance projects and attract

funding from Private Equity Investors. The sector expected to grow in years to come is

expected to be valued at $ 180 billion by 2020 and investors can take positions in real estate

firms with lower level of debt.

Madusudanan Ramani is a student of MBA (Capital Markets, Class of 2013),

NMIMS. He completed his under-graduation (B.B.A) from Vivekananda College,

University of Madras in the year 2008. After graduating, He served as a Financial

Analyst with Frost & Sullivan for a period of three years. He can be reached at

Madusudanan.svr@gmail.com.

Pavan Nayak is a student of MBA (Capital Markets, Class of 2013), NMIMS.

He completed his under-graduation (B.E) from R.V College of Engineering in

the year 2010. After graduating, he served as a Software Engineer with

Huawei Technologies for a period of one year. He can be reached at

pavannayak88@gmail.com.

38

ANALYSIS ON INDIA – LATIN AMERICA TRADE BARRIERS, TARIFF

AND NON-TARIFF BARRIERS, COMPARISON WITH CHINA,

EFFECTIVENESS OF PTA

Debasmita Panja & Swapneela Biswas | IIM B

1. SUMMARY

India and Latin America have opportunities of development in each other’s’ territories. Latin

America which is valued for textiles, cosmetics, cars and pharmaceuticals and India which is

known for its specialization in IT, realized that they could successfully utilize their resources

by collaboration to improve the economic conditions in both the regions. India signed

Preferential Trade Agreement (PTA) with MERCOSUR to improve bilateral trade relations.

However, the trade between India and Latin American countries (LAC) is much less as

compared to trade between LAC and China. We have analysed tariff and non-tariff barriers

vis-à-vis China to study the underlying reasons.

2. Tariff Barriers

We have taken Argentina and Brazil for investigation as establishing trade relations with

these two countries will open up entry route into other countries because the countries are

very well connected through road transport.

The following table has tariff analysis based on the top 5 imports to India over the period of

2005-2009.1

Top 5

imports to

India

27 71 84 85 72

MINERAL

FUELS

PRECIOUS OR

SEMIPRECIOUS

STONES

NUCLEAR

REACTORS

ELECTRICAL

MACHINERY

IRON AND STEEL

From where

India

imports

Iran

(Islami

c

9.29

*

UAE 8.19 China 6.8 * China Korea 5 *

1 Source: Ministry of Commerce: http://commerce.nic.in/eidb/default.asp and

WTO: http://www.wto.org/english/tratop_e/tariffs_e/tariff_data_e.htm

39

these goods

along with

tariff(2009)

Republi

c of)

Kuwait 8.75 Switzerland 8 Germany 6.75 Singapore USA 5

United

Arab

Emirate

s

8.93 Australia 7.8 USA 6.71 Germany China 5 *

Iraq

8.33

*

Belgium 7.5 Japan 6.66 Korea Japan 5

Nigeria 5 * China 8.52 * Italy 6.8 USA Russia 5

Importance

of good for

Brazil

Top export

from Brazil in

2009

Not a top export of

Brazil

9th best export from

Brazil in 2009

Not a top

export of

Brazil

3rd best export from

Brazil in 2009

Brazil’s

tariff for

India

6.25 * 5.67 * 6.35 * 5 *

Where

Brazil

exports

USA 0.82 USA 3.4 Argentina 7.17 * EU 0.36

EU 2.57 UAE 4.58 USA 1.2 Argentina 10.38*

China 6.27 Canada 3.37 Mexico 5.68 * USA 0.33

Chile 6 * Korea 6 * Venezuela 9.83 * Korea 0.4 *

Peru 5 * Saudi Arabia 2.5 Paraguay 3.25 * China 5.98

Urugua

y

0.92

*

India 5.67

*

China 7.88 Japan 0.51

Importance

of good for

Argentina

2nd best export

from Argentina

in 2009

Not a top export of

Argentina

8th best export from

Argentina in2009

Not a top

export of

Argentina

Not a top export of

Argentina

Argentina’s

tariff for

India

5 * 0 * 5.19 * 5 *

Where

Argentina

exports

Chile 6 * Canada 4.81 Brazil 14.24 * Indonesia 3.33 *

USA 0 USA 4.26 Venezuel

a

9.89 * EU 0.42

Brazil 0.56

*

Brazil 13.5

*

USA 1.08 Paraguay 10.83 *

China 4.8 China 0 Uruguay 4.76 * Brazil 11.85 *

Paragu

ay

0.67

*

Chile 6 * Columbi

a

9.76 * Chile 6 *

Urugua

y

0.54

*

Uruguay 14.7

3 *

Chile 6 * Mexico 3.96 *

* indicates existence of Preferential Agreement

Observations:

40

27, Mineral Fuels: It is one of the top imports of India. This is the top export good of

Brazil in 2009 but the trade is not much with India, even though Brazil has less tariff

(6.25%) than the other top import partners (9.29% for Iran) of India. One of the

reasons can be Brazil has even lesser tariff with other countries like USA (0.82%) or

Uruguay (0.92%). But there are countries like Chile (6%) and Peru (5%) as well who

are top export destinations for Brazil instead of having similar tariff rate as with India.

The reason can be less distance and well transport facilities with these countries as

Mineral Fuels are heavy commodities and transporting this good to a longer distance

becomes a major non-tariff trade barrier. But then there is China which is a top export

partner of Brazil. Brazil has 6% tariff rate for China which is almost same as 6.25%

with India and distance wise also the two countries are almost similar. Still, the trade

with India is not picking up. This good has been considered in the preferential

agreement between India and Brazil but the effectiveness of that poses a big

question. But on the other hand, this is one of the highest bilaterally traded goods of

Brazil and India. Thus it can be inferred that though there is bilateral trade in this

good, the overall trade in all the goods is itself very less between Brazil and India and

also the trade in this particular good is very small as compared to trade with other

countries. This good is of potential strategic importance and should be considered

while making future policies.

Same observation follows for Argentina as well. This is the second best export good

from Argentina in 2009, but still the trade with India is not much.

Same pattern can be observed for 72, Iron and steel as well

71, Precious or semiprecious stone is included in the offer list in the preferential

agreement but it is of no interest to Brazil or Argentina as they do not export this

commodity much.

3. Other Trade Barriers

Thus the general observation from analyzing the tariff structures between India and Latin

America and comparing that with other countries in the world is that India has high tariff rates

not only with Latin America but with other countries as well. This is imposing a barrier to trade

with India. However there are several goods like mineral fuels, iron and steel etc. for which

tariff rates imposed by India on Latin America are low, yet trade flows in this category from

Latin America to India are not gaining momentum. This implies that there must be some

reason other than tariff rates which is imposing problems in trade flows. Another observation

is that in these categories of goods, tariff rates with China though similar; trade with China is

41

far exceeding trade with India from Latin America. So the next part of our analysis tries to

answer these questions by focusing on the following:

Whether distance between India and Latin America is acting as a trade barrier?

If distance is a factor, then why trade between Latin America and China is huge despite

the fact that China and India are at similar distances from Latin America?

Distance as a Non-Tariff Barrier:

Geographical distances have impeded trade between India and Latin America. There is no

direct shipping service from India to Latin America. Goods have to be shipped to Europe or

Singapore which increases freight costs and shipping times. For example, in the case of

Brazil, shipping a product from Santos directly to Mumbai would take an estimated 27 days

and 15 hours. Shipping via Singapore would take approximately 36 days and 18 hours –

almost nine days longer.2 Transport costs between India and Latin America seems to act as

a significant trade barrier between the regions. Heavy commodities are difficult to trade

between such long distances. Due to the long voyage period, perishable gods also cannot be

traded.

Comparison with China:

Some of the initiatives that China has taken to increase trade with the region are:

China is planning to build a rail link through Colombia to trade with Latin America3

China is rivalling with World Bank and Inter-American Development Bank as a major

lender to Latin America

China is opening up its embassies throughout Latin America

China is opening Confucian centres to expand Chinese culture

China is sending high-level trade delegations and encouraging ordinary Chinese to

visit Machu Picchu, Rio, and other tourism hot spots.4

2 http://www.iadb.org/en/news/webstories/2010-07-27/india-and-latin-america-trade-idb,7480.html

3 http://www.guardian.co.uk/global-development/poverty-matters/2011/feb/16/china-latin-america-trade-benefit

4 http://blogs.miis.edu/trade/2011/01/11/chinas-big-move-into-latin-america/

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4. Trade Initiatives: PTA with Mercosur5

MERCOSUR is a conglomeration of four countries - Brazil, Argentina, Paraguay and Uruguay

formed in 1991. PTA was signed between India and Latin America on January 25, 2004.

India-MERCOSUR PTA came into effect from 1st June, 2009.

4.1 Effectiveness Of PTA:

Since the PTA is very recent, there has not been any significant effect on trade between the

regions.

However it is observed that more than half the products covered under MERCOSUR’s

offer list come under the category - Organic Chemicals. This is India’s one of the top

exports to Latin America. With this inclusion, trade with India was supposed to improve in

this category. Most of the subcategories of organic chemicals have a Common External

Tariff of 2% to which India has been granted a 10% concession. Probably this being not

very significant, it has not impacted the export trends of organic chemicals from India to

LAC.

We have identified top exports of each of the four countries of MERCOSUR to India.

However when we look at the offers list of India in the PTA, it does not feature most of

MERCOSUR’s key exports. Only raw hides and skins, nuclear reactors, boilers and

machinery, and electrical, electronic equipment are covered in the list. Trade

competitiveness between India and Argentina for electrical and electronic equipment has

increased in 2009, which can have some bearing on the inclusion of this item in the offers

list of India in the PTA. But items like minerals, iron and steel are showing decreasing

trends in competitiveness for export from Argentina to India. Yet they have no presence

in the offers list of India. These are potential grounds for improvement for bilateral trade.

India has high competitiveness in organic chemicals. Tariff concessions on a number of

lines in this category have been given in MERCOSUR’s offer list. This gives advantage to

India’s exports in this category to Latin American countries. India has got concessions on

pharmaceutical products. However the lines which have been covered in this category

represent only 5% of India’s export value in pharmaceuticals to MERCOSUR. Thus the

effect of this inclusion might not be very significant.

5 Source: Ministry of Commerce: http://commerce.nic.in/trade/international_ta_indmer.asp

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Considering the exports of India to MERCOSUR, the key complementary products are

petroleum and machinery. These categories appear in MERCOSUR’s offer list. Thus this

can have a positive impact on trade.

For the exports of MERCOSUR to India, petroleum oil is a complementary product. But

this product does not appear in India’s offer list. Trade could have increased positively if

concessions are provided to MERCOSUR in this line of items.

5. Conclusions

There is huge trade potential between India and LAC bilateral trade as the economies

are almost similar. Moreover, LAC can be a potential bypass to enter into US market.

Hence, India should identify goods of strategic importance and future negotiations.

MERCOSUR countries are rich in agricultural land, labor and efficient technology.

Commodities like soybeans, corn, wheat, cereals, rice are produced in huge

quantities in these countries. India should consider investing in agriculture in these

countries for cheap and large volume sourcing.

Distance is a major non-tariff barrier for trade between India and LAC, but China has

overcome this factor and the trade is increasing with China. India can follow China’s

footsteps in taking many strategic initiatives like building shipping link, investing in

LAC countries using its huge cash surplus and offering extremely favourable tariff

rates. Building shipping link requires huge investment, but since distance will always

be a factor against trade, this investment is highly required.

The goods included in the offer list of the preferential agreement between India and

MERCOSUR are not in accordance with the needs of the two countries. There are

many goods included which are not of importance to the offered country and many

goods of strategic importance and requiring tariff concession are not included. These

issues should be resolved in future for an effective preferential agreement.

India can invest in service industries in MERCOSUR countries specially in IT i.e. India

can outsource its IT operations for US clients to MERCOSUR countries which will

help to procure low cost labour and also to overcome language and cultural barriers

for US clients.

India imports mining goods like minerals and ores in huge volume from the world.

MERCOSUR countries are rich in these commodities. India can invest in mining in

these countries for cheap souring.

44

Debasmita Panja is a 2nd year MBA student at IIM Bangalore. She has

completed her graduation in Computer Science Engineering and can be

reached at debasmita.panja10@iimb.ernet.in

Swapneela Biswas is a 2nd year MBA student at IIM Bangalore. She has

completed her graduation in Information Technology Engineering and can

be reached at swapneela.biswas10@iimb.ernet.in

45

LAUNCHING REITS FOR INDIA’S REAL ESTATE

Sujit Khanna | NMIMS Mumbai

ABSTRACT

The Indian government has realized that India’s real estate is a key component of economic

growth and is on the verge of second boom. However, there are many issues with India’s real

estate sector structure especially in financing. This article attempts to outline the working and

basic structure of Real Estate Investment Trusts or REITs and how they can institutionalize

India’s real estate sector, provide quicker financing to real estate projects and give investors

an alternate source of investment by acting as best inflation hedge around. Finally, the article

discusses the basic underlying problem with launching REITs in India and suggests

alternative solutions.

WHAT IS AN REIT?

An REIT (Real Estate Investment Trust), first introduced in the US in 1962, is a corporate

structure which invests its assets in real estate holdings. One gets its share of earnings or

losses from the REIT’s portfolio of real estate holdings. REITs distribute the profits earned

through generation of rental income (more than 90% of annual income) to their investors in

the form of dividends. This investment is comparatively more liquid as compared to traditional

physical holding of real estate. However, the downside is that one has no control over the

buying/selling/holding or managing it. The reason REITs are liquid is that they can be traded

on major exchanges, making it easier to buy and sell REIT assets/shares than to buy and sell

real estate properties in physical market. The typical structure of an REIT is shown below in

Exhibit 1.

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NEED FOR REITS IN INDIA:-

India’s real estate sector is highly unorganised. In fact, the construction sector did not even

have an industry status till a few years ago, which it badly needed to get easier access to

funds from banks and financial institutions. This resulted into inflow of a lot of black money

into the sector.

Moreover, before 2005, government did not allow FDI into the sector. Even now, FDI allowed

is only in construction development, partially blocking out the sector from financial markets.

Development of new town and cities is on the anvil and India, because of its ever-growing

population, requires them drastically. These new developments are in need for huge amount

of investment and technical expertise, which cannot be achieved under present structure as

most of the work is done in an unorganised manner. Indian government has realised that real

estate sector’s growth is key component of economic growth and any factors inhibiting its

growth will have a negative impact on the economy. Introduction of REITs will help India

overcome this problem in a big way by institutionalizing the real estate sector and will also

provide foreign investors with ample of opportunities to invest.

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REITS IN INDIA AS INVESTMENT OPPORTUNITIES

Real estate sector has provided the best return on investments in recent years and, with ever

increasing real estate projects all across India, this trend will continue at least for a few years

and REITs will act as a special vehicle for investment in the sector. REITs will provide

investors with an alternative investment class and an access to ownership in a large high

value Real Estate project at a low ticket size. Exhibit 2 shows the investment opportunity in

India’s real estate sector.

Exhibit 2

Exhibit 3

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Exhibit 3 shows that India provides a considerably good opportunity for REITs.

Inflation hedge

Along with liquidity REITs also provide the best inflation hedge, far better than that offered

gold stocks.

EXHIBIT 4

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As shown in Exhibit 4, the two assets providing the most dependable inflation protection

since January 1978 have been commodities and equity REITs. Commodities led by

exceeding the inflation 70.4%times during high inflation six month periods, while equity

REITs followed close behind at 65.8%. Stocks and TIPS (Treasury Inflation Protection

Securities) provided somewhat weaker inflation protection, with stock returns exceeding

inflation 60.8%times and TIPS exceeding 53.8% times. The weakest inflation protector has

been gold, with returns beating inflation during only 43.2% of high inflation six month period.

Exhibit 5 shows the returns when inflation is high. Best returns have come from commodities

with gold coming second and REITs third. However during periods of low inflation

commodities and gold have typically provided returns close to zero percent but listed equity

REITs have historically provided strong returns when inflation is high also when inflation is

low as shown in graph below.

Exhibit 5

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Another characteristic that made REITs popular in United States of America is the tax

benefits offered to companies incorporating REITs, provided they follow the set rules and

regulations.

Issues with launching REITs in India and its recommended solutions

Launch of REITs in India has been delayed because SEBI (Securities and Exchange Board

of India) feels that Indian property markets lack depth and liquidity required for proper

functioning of REITs.

Other problems that exists with launching of REITs in India are-

1. Institutional grade space–For the purpose of comparison these Real estate properties

are grouped into three classes Class A, Class B, and Class C with class A being the

best class of real estate. These classes represent a subjective quality rating of

buildings which indicates the competitive ability of each building to attract tenants and

a combination of factors like rent, building amenities, location and market perception.

Except for office space some of which can be classified as grade A, organised real

estate space market for other property types like health care, retail storage,

apartments and specialties do not exist in the form of income producing properties.

2. Valuation models-Currently there are no valuation models for audit and sales

purposes, no requirements to be an evaluator and lack of specialized personnel in

this domain.

3. Weak legal structure – Non uniform state taxes, title issues with land and stamp duty

on every sale and purchase which can effect IRR that is Internal Rate of Return(the

discount rate at which sum of your cash flows equals the initial cash investment) of

REITs.

4. Lack of trained employee base- REITs require asset and portfolio management

expertise along with development and leasing expertise whereas in India there is no

Real Estate education at corporate or university level and is not looked as a career

option.

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The absence of any one of the above elements could lead to an inefficient REIT market and

trigger a collapse in the entire system, rather than a failed attempt it would be wise to build up

each element over time before initiating REITs in India.

But a quicker and better alternative would be to look for offshore listing of Indian real estate

assets in destinations like Singapore Stock exchange SGX. The typical structure of an

overseas REIT is as shown below.

However one must also consider the risks involved with overseas listing, a few of them are-

1. Currency risk – Sudden changes in the exchange rates can drastically change the

price of the asset.

2. Legislative risk-Sudden changes in the regulatory and taxation frameworks.

3. Lack of BT or business trust between the participating companies.

But recent developments of a health care business trust of Indian assets being listed on SGX

suggests that companies are unfazed by the risks involved and are willing to employ

unconventional financial instruments like REITs for better financing of their projects.

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References-

reit.com

FDI in real estate and REITs for Indian assets –PWC report

http://realism.in/resources/white_papers_and_downloads/Is_India_Ready_for_REITS.pdf

http://www.accommodationtimes.com/research/student-projects/launching-of-reits-in-india/

http://yamanote.hubpages.com/hub/Internal-Rate-of-Return-for-Dummies

http://www.boma.org/Resources/classifications/Pages/default.aspx

http://prajnacapital.blogspot.com/2010/08/real-estate-investment-trusts-reits-in.html

Sujit Khanna is a student of MBA (Capital Markets, Class of 2013), NMIMS.

He completed his under-graduation (B.E) from Watumull Institute of

Electronics Engineering and Computer Technology in 2011. He can be

reached at Sujitkhanna@gmail.com

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INSIGHTS INTO MARKET EFFICIENCY

Harish Srigiriraju | NMIMS Mumbai

"I'd be a bum on the street with a tin cup if the markets were always

efficient." – Warren Buffet

Efficient market hypothesis (EMH) formulated by Eugene Fama in 1970, suggests that, at

any given time, prices fully reflect all available information on a particular stock and/or

market. This implies that the stocks always trade at their fair price or intrinsic value. Now if

this were true, does it make sense investing in stocks?

If this hypothesis is true, generating excess returns would not be possible. All investors will

perceive a stock in the same fashion, as it is assumed that all investors are fully aware of all

the information on that stock. There would be no need of performing valuation of companies

or identifying undervalued stocks. It would have not been possible for Warren Buffett to beat

the market over several years.

Now it is clear that the markets are not always efficient, but in few instances they are. It is

generally accepted by value investors that markets are efficient in the long run. So the next

question to ask is, how long is long enough? Value Investors look for undervalued stocks in

view that they will reach their true value at some point in time. This may vary from stock to

stock. A particular stock may reach its value within one year while the other may take ten

years. Now the time frame is important as our return depends on this ultimately. So how to

identify stocks which will reach its potential quickly? A stock whose information is available to

greater set of people will have better chances of reaching its fair value quickly. Consider two

stocks RIL and KCP(Assumption here is that they are undervalued) . RIL is a stock which will

be followed by a large number when compared to KCP. Now if RIL is undervalued, there will

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be many who will invest in it, which will lead to price appreciation. For KCP, there will be few

who track this and hence may take more time to reach the fair value. Definitely there will be

exceptions to this. So for the value investors out there, it should be a learning that just

investing in undervalued stocks will not suffice.

It can be conveniently assumed that more people follow Large Cap compared to Small Cap.

If a stock makes its way in the Sensex 30 or Nifty 50, then all the more attention will be given

to it due to the index funds coming into picture. So, if an investor is able to identify stocks in

them, then it can be called a safe bet. Probably this is one of the reasons why Warren Buffet

prefers to invest in Large Cap companies.

So how can we measure market efficiency for a market, say in India? Is it possible to quantify

it? One way to do it would be calculate the fair value of each and every stock in the Indian

market. Then measure the deviation with respect to the CMP. Also as mentioned earlier the

stocks would then need to be classified on basis of flow of Information. Efficiency for each

category would have to be calculated separately. Even if we were to achieve this, the biggest

criticism would be, how will you arrive at a fair value of a company? Is it not a perception and

hence will vary? There is no standard method to calculate the fair value of a stock. In most of

the research, shortcuts are used to avoid hard work. So I can do something similar here.

What can be done is, to take only few stocks in Sensex. Calculate their fair value in 2000

based on the cash flows from 2000-2005. Here we use 2 stage DCF model as it is the best

tool available for valuation. An alternative can be using Market Multiples, but it wouldn’t make

sense as the whole idea is to measure inefficiency and in Market Multiples, you assume

markets to be efficient.

Based on the fair values obtained, the deviation can be calculated with respect to the prices

in 2000. Similar methodology can be done for 2006. The resultant deviation now can be used

as a measure to compare efficiency in 2000 and 20006. This can be used in the current

scenario also. However the fair value would need to be calculated on the growth estimates

55

from 2011 and this may not be accurate. Thus we can land up with a relative measure to

compare efficiencies of different markets or different time periods.

This study will be based on the inference that the CMP is the fair value of a stock as per

EMH. However, the EMH was mainly focused on the flow of information and not on

valuations. To study this, the market needs to be observed for flow of information in various

instances like,

Stock Splits

Mergers and Acquisition

Yearly or Quarterly results

Scams

Macro Economic changes

Changes in capital structures

Buyback

Dividend Announcements

Unit root test, Co-integration Test, variance ratio tests, autocorrelation test and few other

tests are generally used to test the EMH. For a week form, a study is carried out whether the

CMP are a reflection of the previous prices. For a semi strong, a study is done to measure

the speed at which a particular piece of information affects the stock price. For a strong form,

a study can be done to check if any mutual funds, investment funds or individual investors

have generated above average returns over the years. Is a study required for a strong form?

Can we straight away say that, the markets do not have a strong form of efficiency because

there are people like Warren Buffet and Rakesh Jhunjunwala? Can we say that, there is no

strong form as there are scams like in case of Satyam where investors did not have the

56

accurate information? The answer to these is “yes”. There is only weak and semi strong form.

This will again depend on the information flow, media, investors and ultimately the rationality

of investors.

So why is it taught in many places that the markets are efficient? EMH should be taught no

doubt, but it should be also taught as to why this theory fails many a times and that it holds

true in the long term. Flow of information is something which each one should learn, as there

will be opportunities to make money. In the previous edition of Investocraft, if you have read

the article Takeover Arbitrage, we have seen how there is an arbitrage opportunity due to

lack of information equally among all investors. "Investing in a market where people believe

in efficiency is like playing bridge with someone who has been told it doesn't do any good to

look at the cards. It has been helpful to me to have tens of thousands (of students) turned out

of business schools taught that it didn't do any good to think."-Warren Buffet. The point

Warren Buffett is making is true. Phew! At least the competition is reduced if you know what

Buffett and I mean.

Harish Srigiriraju is a 1st Year MBA Capital Markets student of

NMIMS-SBM. He can be reached at harish.wb@gmail.com

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INVESTOCROSS

58

59

SOLUTION to INVESTOCROSS

60

CENTRE FOR MBA CAPITAL MARKET NMIMS

The center for Capital Market studies in NMIMS is an outcome of the synergistic

relationship between The Stock Exchange Education and Research Services (a public trust

established by the Bombay Stock Exchange) and SVKM's NMIMS since March 2005.

With the advent of global capital flows, information and technology, there was an

acute need for trained professionals to man important positions in all spheres of capital

market activity which include stock exchanges, commodity exchanges, regulatory bodies,

policy-making bodies, market intermediaries, asset management companies, corporate

bodies, etc., to name a few. With this objective in mind, a long-duration program called the

MBA (Capital Markets) was custom-designed by the two collaborators.

MBA (Capital Markets) is a two year full time programme offered by NMIMS University to

cater to the needs of requisite intellectual capital to the fast-growing financial world with a

keen focus on capital markets. The program is unique because it aptly integrates conceptual

knowledge, contemporary inputs, technology, information and skill development. The

programme is a blend of traditional core finance subjects along with capital market related

subjects such as Asset Valuation, Treasury and Investment Banking, Asset Management,

Equity Research, Industry Research, Private Equity. Its most striking feature is the Trading

Room facility. In fact it is the first Program in India with such an advanced facility

incorporating Bloomberg and Reuters. It is also the first Program in India to have been visited

61

International Financial Centers like Singapore and Hong Kong which was proposed and

supported by BSE.

The design and development of the curriculum for the MBA (Capital Markets) was

approved by the Academic Council and the Board of Management of the Deemed University.

It focuses on all major Financial Markets: Equity, Fixed Income, Forex, Commodity and

Derivatives. NMIMS has played the role of a worthy torchbearer in initiating such a well-

designed specialized course, which is essential as the economy begins to mature. The

programme intends to create capital market experts having managerial expertise; and has

been well received and appreciated by the industry.

62

Investocraft is an in-house publication of the Investocraft Editorial team, MBA capital

Markets, NMIMSMumbai and features articles and analysis by the academia. The primary

aim of this magazine is todevelop a long term interest and considerable following in the

capital markets. The Investocraft Event at NMIMS Mumbai is a unique student initiative that

collaborates with both the corporateworld and the academia to provide a platform for

students to present their views on contemporary issues in the economy pertinent to capital

markets. The committee organizes a diverse portfolio of activities throughoutthe year,

industry interaction for the students.Some of the more popular activities include the

Investocraft annual meet. The event, organized by the class of MBA Capital Markets,

attempts to capture the pulse of the Indian bourses through exciting and impactful

discussions that occur every year.Since inception, the event has witnessed overwhelming

response from our erudite Industry Stalwarts and is the largest student driven initiative in

India with nearly 600 participants comprising Management Students, Brokers, Analysts and

Investors.

Investocraft Editorial Team

www.investocraft.com

63

INVESTOCRAFT | quarterly 2011

MBA CAPITAL MARKETS

NMIMS SBM