Niveshak October 2013

8/14/2019 Niveshak October 2013

1/30NEW BANKING ENTRANTS: THE ROAD AHEAD

, Pg. 24

US SHUTDOWN: A BATTLE OF

PUBLIC FUNDiNG AND ITS DEBT, pg. 08


2/30Disclaimer: The views presented are the opinion/work of the individual author and The Finance Club of IIM Shillong bearsno responsibility whatsoever.

F R O M E D I T O R S D E S K

NiveshakVolume VI

ISSUE X

October 2013

Faculty Chairman

Prof. P. Saravanan

Editorial Team

Anchal Khaneja

Anushri Bansal

Gourav Sachdeva

Himanshu Arora

Ishaan Mohan

Kaushal Kumar Ghai

Kritika Nema

Neha Misra

Nirmit Mohan

All images, design and artwork

are copyright of

IIM Shillong Finance Club

Finance Club

Indian Institute of Management

Shillong

www.iims-niveshak.com

THE TEAM

Dear Niveshaks,

Aer a bloody month of September where Rupee witessed nothing but ee-fall,the month of October brought some respite for the Indians and specically Mr

Raghuram Rajan. The Rupee has revived (though only just) to the levels of 61-62

and has stayed there for most par of the month. But, what is beer is the rn of

the Sensex this month. The value briey touched 21000 mark and is all set to make

histor come Diwali. Speaking of Diwali, no one would be happier than perhaps

the most discriminated section of our societ, the people with HIV. The IRDA has

issued dra gidelines to make life insurance for people with HIV/AIDS a realit in

the time to come. Niveshak will be keep an intent eye on the developments in this

sector and will update you with the latest happenings. The Forex reseres for India

were also up at the $281.12 billion mark for the week ended Oct 18. The gre gained$1.88 billion in the week ending on Oct 18 and $1.51 billion in the week before that.

The Diwali might not be so cheerfl for people in the states of Odhisa, Andhra

Pradesh & West Bengal where rains have caused havoc aer cyclone Phailin hit

the Easter Coast of the count on October 12. Our disaster management system

deseres a special mention which saved the lives of millions of people, but the aer

eects still continue to wreak havoc in the aforementioned states. The losses to the

economy will rn into billions of dollars. The month of October also witessed the

announcement by the Lile Mater to retire om the game of cricket aer he has

played his 200th test match in the forhcoming series against the West Indies. This

development isnt good news for the economy either. Cricket might lose some of its

devotees and brands many potential customers.Talking about the contents of this months Niveshak, The Aricle of the Month for

October discusses the US Shutdown and its impact on the global and Indian econ-

omy. The 16 day long shutdown was the third longest in the histor of the States

and forced more than 80,000 employees to go on unpaid leave. The cover Stor

for the Month takes a birds eye view at the aviation sector of our count and how

the ent of Tatas might be a game-changer. Niveshak also brings some more good

reads for you in this issue the FinGyaan of the issue throws some light on the new

proposed SEBI gidelines for the Mutal Funds in India. Fin-Sight for the month

of October debates whether and how the new banks that will be fored om the

new banking licences om the RBI, will be able to compete with the establishedbanks in the count. Then there is the stor of the Stock Market Crash on October

19, 1987, more popularly known as the Black Monday. The Dow Jones fell by 22.6%

in a single day and couldnt recover for years. The issue also exlains the commonly

talked about Hedge Funds and its ni-giies through our much cherished Class-

room Section.

To end this brief note, its imporant that we thank you, our readers, for your con-

stant suppor and appreciation. Thank you! It is your endless encouragement and

enthusiasm that keeps us going. Kindly keep pouring in your suggestions and feed-

back to [email protected] and as always,

Stay invested.

Team Niveshak


3/30

C O N T E N T S

Niveshak Times

04The Month That Was

Article of the month08 US Shutdown: A Battle ofPublic Funding and its Debt

Cover Story

12 Planes of Different FeatherFlock Together

FinGyaan16SEBI: MF AdvisoryGuidelines

Finistory20 Stock Market Crash: 1987Black Monday

Finsight

24New Banking Entrants: TheRoad Ahead

CLASSROOM

27Hedge Funds


4/30OCTOBER 2013

India Looks to import Onions from Pakistanand China

India issued an import tender for onions to surge over

a crippling shortage of the vegetable staple that has

contributed to stubborn food inflation and brought

scathing political criticism about the governments

food management. State-run National Agricultural

Cooperative Marketing Federation of India (NAFED)

issued a statement which said that it was interestedin buying onions from Pakistan, Iran, China and

Egypt. However, no quantity or purchase price was

mentioned in the same. The federation expected to

complete the procurement by 29th October. India is

one of the largest producers of onions in the world

and is usually a net exporter but heavy rains during

the recent monsoons washed out large portions of

the crop in northern and western India and to cover

up for the losses, some imports of the vegetable have

already been made from China, Egypt and Pakistan

in the last three to four months. Notwithstandingany of the measures taken by GOI, the price of a

kilogram of onions has more than quadrupled from

last year to a record 90 rupees-100 rupees this year.

Twitter Ipo Conservatively Valued At $11Billion

Twitters initial public offering would raise up to

$1.6 billion and value the company at up to about

$11 billion, amidst widespread comments that the

company was

treading the pathcarefully and is

avoiding going

overboard with

its plan in the

light of Facebook IPO debacle last year. The company

has revealed that 70 million shares of it will be sold

between $17 and $20 apiece, raking in up to $1.4

billion for the company. If underwriters choose to

sell an additional allotment of 10.5 million shares,

the offer could raise as much as $1.6 billion. At a

roughly $11 billion valuation, Twitter would be worthmore than Yelp Inc and AOL Inc combined, but only

a fraction of tech giants like Google Inc and Apple

Inc, worth $342 billion and $483 billion respectively.

Facebooks market value is now around $128 billion.

Reliance to enter into chicken business indirect competition with KFC

Mukesh Ambani-controlled Reliance Industries plans

to run an exclusive chicken restaurant chain in

India in partnership with a UK-based company as

he seeks a bite of the quick service restaurant (QSR)

pie, which is pegged to grow at 30% per annum. The

chain, to be called Chicken came First will directly

compete with KFC.

RIL has picked up a 45% equity stake in Two Sisters

Foods India (TSFI), which belongs to 2 Sisters Food

Group (2SFG), the third largest food company in

UK. The group supplies poultry, red meat, fish, and

bakery and chilled/frozen products to the retail, food

service and food manufacturing sectors in UK. The

stake has been picked through Reliance retail for an

undisclosed sum. What is known, however, is that

Reliance Retail has already invested in a state-of-

the-art food innovation lab to support new products.

Uk Gdp: Fastest Growth For Three YearsThe UKs economic output grew by 0.8 per cent

between July and September, the fastest quarterly

growth in three years, according to official GDP

figures from the Office for National Statistics. The

figures, which were in line with expectations, saw

all sectors of the economy grow, including a 2.5 per

cent surge in construction - a sector bolstered by

Government initiatives such as Help to Buy. Overall

GDP was 1.5 per cent ahead of the same period last

year. However, the economy remains 2.5 per cent

off its pre-recession peak at the start of 2008 with

construction remaining 12.5 per cent off its pre-crisis

peak. Production grew by 0.5 per cent, though this

remains 12.8 per cent off its 2008 level, while within

this manufacturing improved 0.9% in the third

quarter. It is 8.9 per cent off the level five years ago.

Meanwhile, the powerhouse services sector, which

represents three-quarters of economic output, grew

by 0.7 per cent and is now 0.6 per cent above its

pre-crisis peak. The largest contributions here came

from business services and finance, followed by

distribution, hotels and restaurants. The UK economy

is now larger than the Bank of England expected it to

be at the end of the year.

Rising Global Cocoa Prices To Hurt Indian

The Niveshak Times


IIM Shillong

Team NIVESHAK

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Chocolate Buyers

With demand for confections going to peaks due to

the festival of Diwali arriving, biting cocoa prices

have left a bitter taste in the mouths of chocolate

makers such as Nestle SA and Cadbury in India. More

than half of the input costs for making chocolates

is accounted by cocoa and its prices has risen

21.5% since March, which has seized the margins

of chocolate makers. To make matters worse, the

prices of other raw materials such as milk have also

risen.

It is feared that rising prices might lead to dampeningof demand, making consumers to go for traditional

sweets and nuts instead of chocolates during Diwali.

Estimated by a market researcher, chocolate sales,

at INR 6007 crore in 2013, usually receive a boost

during the festival season. It is expected that sales

will rise 22.24% in 2013 from INR 4,914 crore in 2012.

Chocolate prices are estimated to rise 9.84% to

Rs.574.70 per kg in 2013 from an average of Rs.523.20

per kg in 2012. According to data portal Index Mundi,

the monthly price of cocoa beans remained around

$2,275 per ton in January and rose to $2,616 per ton inSeptember. For chocolate makers, rising cocoa prices

are not the only concern. It is also expected that

inflationary pressure on milk is likely to continue.

The cost of milk production has grown at an average

annual pace of 14%. Due to Diwali being early this

year, it is expected that global cocoa prices hike may

not effect sales.

Small Firms, Start-Ups Can List Without Ipos

In order to help small firms and start-ups, Indias

capital market regulator announced that these

companies will be able to raise public money and

trade their shares on exchanges without an initial

public offering (IPO). They will be able to list &

trade their shares on a special platform that is to

be called the Institutional Trading Platform (ITP) in

SME exchanges. This move will also bring relief to

private equity & venture capital funds which usually

fund such firms and have been looking for easier

exit options.

It is believed that the ITP platform will offer exit

routes to early-stage investors but it will not open afloodgate of start-ups and SMEs looking to list. The

biggest advantage of listing on the ITP is that an

investor can take the benefit of not paying capital

gains tax on a transaction. Short-term gains on

transactions on a non-market platform attract such

levies of as much as 20%. According to Sebi, onlythose companies can list on the ITP that are younger

than ten years and whose revenues havent exceeded

INR 100 crore in any year. The paid-up capital of

such SMEs and start-up firms must be below INR 25

crore. There would be difference between ITP and

the usual share-trading platforms. Individuals and

institutions that can trade in a minimum lot of INR

10 lakh will be able to access the platform. Small

firms that have received money from a scheduled

bank for their project financing or working capital

needs can also opt for listing on the ITP after threeyears of such financing and full utilization of such

funds. Companies which are listed on the ITP can

exit the platform and choose to be listed on any of

the main bourses only after receiving approval to do

so from at least 90% of their shareholders.

Bcci Terminates Pune Warriors From Ipl

The BCCI has terminated Pune Warriors from the IPL

when the Sahara-owned franchise defaulted on its

payments and refused to furnish the bank guarantee

for the next season. Sahara Group mentioned that itwas forces to take this decision as the board has

always acted in betrayal of trust and not fulfilled its

part of obligations. It also said that the reduction

in the number of IPL matches by the BCCI from the

number stipulated in the franchise agreement was

at the center of the whole dispute. As per Sahara

group, reduction in the number of matches has had

a substantial financial

impact due to the

reduction in the central

revenues under theFranchise Agreement.

Sahara Group has

been demanding the

completion of the

arbitration proceedings

on the issue of franchise

fee, which, it feels, should be lowered since the BCCI

did not deliver on its promised number of IPL matches

for the team. Sahara had bought Pune Warriors for

$370 million in 2010. It was the most expensive

franchise on the IPL roster and its termination wouldcause substantial financial loss to the BCCI.

The Niveshak Times

www.iims-niveshak.com 5NIVESHAK

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FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG


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MARKET CAP (IN RS. CR)BSE Mkt. Cap 6,700,678

Index Full Mkt. Cap 3,298,771

Index Free Float Mkt. Cap 1,696,202

CURRENCY RATESINR / 1 USD 61.63

INR / 1 Euro 85.14

INR / 100 Jap. YEN 63.48

INR / 1 Pound Sterling 99.94

POLICY RATESBank Rate 9.50%

Repo rate 7.50%

Reverse Repo rate 6.50%

Market Snapshot


RESERVE RATIOSCRR 4.00%

SLR 23%

LENDING / DEPOSIT RATESBase rate 9.80%-10.25%

Deposit rate 8.00% - 9.00%

Source: www.bseindia.com www.nseindia.com

Source: www.bseindia.com

Source: www.bseindia.com28th September to 25th October 2013

Data as on 25th October 2013

MarketSnapshot

CURRENCY MOVEMENTS


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MarketSnapshot

BSEIndex Open Close % changeSensex 19893.85 20683.52 3.97%

MIDCAP 5627.58 5965.48 6.00%

Smallcap 5479.62 5825.75 6.32%

AUTO 11192.48 11794.35 5.38%

BANKEX 11494.65 12445.26 8.27%

CD 5890.02 5945.84 0.95%

CG 8052.67 8886.59 10.36%

FMCG 6896.44 6860.19 -0.53%

Healthcare 9475.89 9573.3 1.03%

IT 7829.4 8443.43 7.84%

METAL 8720.76 8975.44 2.92%

OIL&GAS 8349.93 8692.63 4.10%

POWER 1565.00 1567.66 0.17%

PSU 5586.99 5615.44 0.51%

REALTY 1213.23 1323.91 9.12%

TECK 4471.09 4769.11 6.67%


Market Snapshot

% CHANGE

IT


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Terming the present debt crisis inAmerica as mission-critical, the IMFManaging Director Christine Lagarde said,The current political uncertainty overthe budget and the debt ceiling does nothelp. The government shutdown is bad

enough, but failure to raise the debt limitwould be far worse, and could terriblydamage not only the US economy, but theentire international economy,What led to this shutdown?The Patient Protection and Affordable CareAct continues to be very controversial fora variety of reasons. Republican party(also referred to as the Tea party) afterfailing to stop passage of the original actin 2010, failing to pass myriad repeals

between 2010 and 2013, losing the caseat Supreme Court in 2012, and failing towin the 2012 U.S. Presidential Electionwhich could have led to repeal of thatact attached a provision to a spendingbill that required eliminating funding forthe implementation of the ObamaCare inorder to fund the rest of the U.S. FederalGovernment.The ongoing shutdown isdue to this budget standoff betweenPresident Barack Obama and Congress.They are unable to come to a consensusas to how the country should be fundedfor the next fiscal year.

8 NIVESHAK

US SHUTDOWN

What is ObamaCare?ObamaCare is the unofficial name for The PatientProtection and Affordable Care Act which wassigned into law on March 23, 2010. ObamaCareshealth care reform does a number of important

things including setting up a Health InsuranceMarketplace where Americans can purchasefederally regulated and subsidized healthinsurance.A few highlights about ObamaCare are as follows: The proposed system contains over a thousandpages of reforms for the insurance and healthcareindustry of US in order to cut government healthcare costs and to provide affordable healthinsurance to all Americans Earlier a citizen could be denied of Insurance

coverage or treatment because he/she had beensick in the past or be charged more or be droppedmid-treatment for making a simple mistake inthe application, and had limited options to fightinsurance related grievancesAs per estimates, there are around 44 millionAmericans who currently are unable to accesshealth insurance. One of the major thingsObamaCare does is help individuals to gethealth insurance through expanding Medicaid

and Medicare and offering cost assistance toAmericans who cannot currently afford health care

IEHE, BHOPAL

Paridhi GuptaA battle between public funding and its debt



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Under ObamaCare, President Obama and theDemocrats wanted to introduce a new healthcaresystem into the United States, which theybelieved will make healthcare more affordablefor most Americans.The GOP continued to fight against the AffordableCare Act, saying it costs too much governmentcash. They believe that its not right for UScitizens to be forced to pay insurance money,and that passing of this bill could take US

economy into ICU as the law imposes too manycosts on business and with many describing itas a job-killer. They have also described itas an unwarranted intrusion into the affairs ofprivate businesses and individuals. And becauseof this, the Republicans didnt want to sign thebudget plan for the next year, as it included theAffordable Care Act - which is something they

dont want. The shutdown has left more thanseven lakh employees on unpaid leave andclosed national parks, tourist sites, governmentwebsites, offices and more. Its the firstshutdown since 1995 when Bill Clinton and theHouse of Representatives (and its spokespersonNewt Gingrich) also failed to agree on a plan tofund federal services. That row ran for 28 days(over two stages). But it was a more regularevent in the eighties, usually for a couple of

days at a time. In total, the federal governmenthas partially shut down on 17 occasions beforethis one.So whats next?If this shut down continues US will run out ofmoney as the borrowing limit cannot be raisedsince the president alone cannot raise theceiling, it requires the permission of House of

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Under ObamaCare, a new

healthcare system will beintroduced in the United States,which they believe will makehealthcare more affordable

Fig 1: Debt Ceiling of US over the years


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1010

Senate and Representatives and then they setthe law on how much treasury department canborrow and as Republicans and Democrats areat a tiff it is impossible to pass the budget.Consequences, can lead to a debt default of2008 or worse and its effect are going to be

catastrophic. According to Congressional BudgetOffice US debt is 73% of GDP which is twiceas much as that of 2007. If the debt limit isnot raised it would cause delays in paymentsincluding benefits and government employeessalaries and result in default on governmentliability. President Obama urged Congress toraise the debt limit without conditions to avoida default by the US on government debt. Raisingthe debt limit is also supported by Bernanke,chairman of the Fed.But Republican Speaker , John Boehner andthe Senate Republican minority leader, MitchMcConnell as well as other Republicans arguethat the debt limit should not be raised unlessoutlays are cut by an amount equal to or greaterthan the debt limit increase.What defaults mean to the rest of theworld?A default would send a shock through thefinancial markets. US bonds, known as

treasuries, have always been seen as a safeinvestment and trillions of dollars are investedin them. Analysts say it is hard to know whatwould happen and a lot would depend onhow long the default lasts. Investors may beprepared to wait out a short disruption. But alengthy default might see money switch intoother perceived havens, such as German andSwiss debt. There might also be a rush intogold, which is seen as a safe investment.Effects: If it lasts for 10-14 days then the

impact will be very limited but then there isanother risk as well of debt ceiling. If it lastsa month then it could lead to 1-2 % decreasein the fourth quarter GDP growth in the US,which could impact the demand for Asia. Asianeconomies like Singapore, Malaysia, Taiwan andSouth Korea are mostly export intensive and

NIVESHAK

have biggest share of exports going directly toUS would be most affected. Partial shutdown of the federal govt. wouldcost the US at least $300 million a day in losteconomic output at the start, according to IHSInc. While that is a very less part of the countrys

$15.7 trillion economy, the daily impact of theclosure is likely to accelerate if it continuesbecause it decreases investors confidence andspending by businesses and consumers.Massachusetts-based IHS estimates that itsexpected 2.2 percent annualized growth in thefourth quarter will be reduced by 20 basis pointsin a week-long shutdown. A 21-day closing likethe one in 1995 could cut growth by 0.9 to 1.4 %point, according to Guy LeBas, CFIS (Chief FixedIncome Strategist) at Janney Montgomery Scott.South Koreas economy could face someadverse impact if the shutdown is prolonged,it will effect American consumption and the USeconomic recovery. Internationally, Americasfiscal shenanigans might be particularly harmfulfor Euro zone countries trying to get their owndebt problems under control and strengthentheir economic recovery. Instability in theworld of financial markets is the last thing thatthe likes of Greece, Ireland and even France

need. And with the UK economy excessivelydependent on its financial sector, the storms inWashington DC could turn into a tempest for theCity of London.If the U.S. imbroglio results in a debt defaultnext month, it will serve as a very bad exampleto EU countries which are undergoing austeritymeasures to cure their indebtedness.

What it means to India?1. On macroeconomic front, a prolonged

shutdown will affect US growth as well asconsumption. This will lead to decrease inIndian exports in the coming months.2. Closure of non-emergency functions of USgovernment will delay many approvals. Tocount a fewa. Visa issuance and renewals will get

A lengthy default might see money

switch into other perceived havens,such as German and Swiss debt



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accumulated at Embassies. This would impactcurrent deliverables of Indian IT/ITeS companies.b. The commercial harbors do not come underessential services category. So harbor serviceslike unloading of goods, custom clearancesetc. would be delayed due to staff shortage.

This may result in huge losses for exporters oneconomic cost.c. Raising capital in US could take time asprocessing and approving applications will bediscontinued during the shutdown.d. Pharma companies could lose some businessas the drug company waiting for a decision fromFDA could see delays.Though Indian IT companieshave very less exposure to Government backedIT projects, but the shutdown would effectsthese billings too.

But this shutdown has a positive sidetoo for the Indian marketA delay in tapering of the plan would raiseuncertainty for the US economy and inflowsinto emerging market would continue includingIndia.1. A delayed Fed tapering and higher riskaversion in dollar assets could particularlybenefit India with global investors likely toincrease their allocation to Indian markets2. The rupee may gain as the US dollar weakensagainst the basket of global currencies.3. The more likely situation is that a defaultwill be avoided, but the fear that is imminentand will keep worrying the investors is that itcould easily happen again this time next year.Foreign creditors willingly lend to the U.S. asthey consider it a safe bet in an uncertainworld. But if its dysfunctional politics makes itlook unsafe, they will look elsewhere.4. Right now nothing can be said for how long

the shutdown will last, it will all depend on howRepublicans and Democrats negotiate on theissue. As of now it appears that no one wantsto do the talking but Obama will have to dosome walking otherwise the consequences willbe horrendous.

A delay in tapering of the planwould raise uncertainty for the

US economy and infows intoemerging market would continue

including India.

FIN-Q Solutions

SEPTEMBER 2013

1. Unit Trust of India -UTI

2. Connaught PlazaRestaurants Pvt. Ltd.CPRL

3. X - Sahara India

Y - Optionally FullyConvertible DebenturesOFCD

4. IRCTC, maximum numberof tickets5.72lakh werebooked on a single daythrough IRTCVeto SwitchGears and Cables Ltd.

5. Fast market rule

6. PFRDA

7. LG Electronics

8. Margin Call


12/30OCTOBER 2013

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sector today in the sense that the chances are thatyou would have a great deal of competition whichwould be unhealthy competition. DestructiveCompetition was the reason he quoted when headded, Overseas, people go bankrupt or companiesgo bankrupt. Here they never do, they continue to

be sick and still operate. Then they are operating tokill you.

Do not both the aforementioned ventures runcounter to this statement of Mr. Tata? What changedwithin months in the Indian skies that they suddenlybecame so attractive to foreign players and domesticgiants alike? For the case of Tata alone, it could betwo prominent reasons, recalling that the FDI normswere relaxed in September 2012, months before theinterviews of Tata one, Kingfisher was too broke toreally offer a competition and was in its deathbed,leaving in its stir injured contenders and creatingan opening for aspirants and two, Jet Airways, oncethe master of Indian skies, was now a shadow of itsold self. As a newspaper put it nicely, There was noHarvard textbook kind of strategizing (in decidingto enter into aviation by Tata). Rather, they werepurely opportunistic, made possible by deregulationin Indian aviation.

Introduction

Frank Zappa once said, A countrys worth somethingif it has its own beer and airline. India fits the billrather too perfectly: it has four privately ownedairlines and a national carrier. Till recently, it evenhad an airline named after a beer!

Before we take off with aviation in India in a broaderperspective, one thing remains clear if there is one

Do you have an unfinished agenda still?

Oh yes. I would be a hypocrite if I said I did not.

So what is it that remains to be accomplished?

I think it would not be correct at this point in timeto talk about what one would have liked to do; itwould not be fair to my successor for me to say. Ithink he has to have his arena to perform in.

These are the excerpts from an interview that RatanTata, the former chairman of the Tata Group gavearound three weeks before he retired in December2012. Today, when the group is moving aheadwith not one, but two airline companies, it can beconfidently deciphered what he meant when hewrapped his unfinished agenda under that wouldnot be fair to my successor blanket. One of theirventures is with Singapore Airlines (SIA) to set upa new full-service carrier (FSC) based out of New

Delhi with an initial investment of $100 million ofwhich Tata Sons will own 51% and another is withMalaysia-based AirAsia Bhd and Telestra TradeplacePvt. Ltd to form a local low-cost carrier (LCC)AirAsiaIndia. The latter is still awaiting the Indian aviationregulators final go-ahead and has 49% ownershipheld by AirAsia Bhd, 30% by Tata Sons, and rest byArun Bhatia of Telestra.

Yet, if we just go a few weeks further into the past,Ratan Tata, in another interview, had said that it wasunlikely that the salt-to-software conglomerate is

ever going to venture into an airline. He had said,It (aviation) is a different sector today than it wasat that time (1998). It is somewhat like telecom. Itis proliferated by many operators, some of themin financial trouble. I would hesitate to go into the

TEAMNIVESHAK

Gourav Sachdeva


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post a six-fold increase in its numbers.

Enough of the Indigo praises already? What aboutthe critics who remain unconvinced by Indigonumbers and claim that the company generatesprofit by entering a sale and lease back deal withaircraft manufacturers? Well, the company released

its operating profit data at INR 1,758 crore on anoperating margin of 18.6% (For newbies, this numberis calculated before taking sale and lease backbenefit). Compare that with Jet Airways reportedoperating margin of 7%, or with SpiceJet which isbarely profitable at operating levels.

There are a slew of measures behind this exceptionalperformance of Indigo which stands as the solesoldier in a Warfield when all its foes and friendsalike are falling apart. The airline did not enter intoprice war when every other airline was rooting onKingfishers fall to earn numbers and it continuesto stick to its operating format. Indigo, in cricketparlance, has stuck to its basics by taking singles.To be precise, Indigo has stuck to its low-costmodel rather than moving onto low-fare model. Itoperates just one type of aircraft which facilitatesinterchangeability of crew members, thereby cuttingon hiring, training, and upgradation cost of staff.Indigo carries more passengers per plane (indicatedby higher PLF) and its planes make more trips perday. This is possible since the airline has one of thebest turn-around times (time taken between landing

and the next take-off) of 30 minutes. And how is thatmade possible? Indigo is probably the only airline inthe world to use sloping ramps to enable passengersenter and exit its planes instead of staircases. Stairscause delay especially when children, older peopleor those with luggage are using them. Low slopingramps are not only fun, but also result in a smoothflow of customers. So, there are smaller details beingtaken care of behind that stellar performance isdelivered quarter after quarter. And there are more!Indigos pilots switch off an engine when taxing

the runway, thus reducing fuel cost. They plan theflight and airplane speed in such a way that fuel isnot wasted in circling over airports, especially busyones like Mumbai. Even their sale and lease backpolicy is valid for six years, after which the aircraftis changed. This means lower maintenance becauseof a younger fleet.

The Jet-Etihad Deal

Etihad airlines, national airlines of UAE, purchaseda significant minority stake in only private FSC ofIndia around September this year. Under the said

deal, Etihad will invest USD 600 million in Jet Airwaysincluding an equity investment of USD 379 million,giving Etihad Airways 24% of an enlarged sharecapital of Jet Airways. Etihads investment was madepossible since India recently, after much delay,

sector that probably makes more news than anyother in India, it has to be the one we are talkingof here. Marred by heavy losses on one hand andelated by entry of new players on the other, thisis a sector that sends out contradictory vibes likeno other! There is no doubt about the fact thataviation brings about enormous benefits with itself

to communities and economies around the globeand that it is a vital catalyst of economic growth,social benefit and tourism.

India is currently the 9th largest aviation markethandling 121 million domestic and 41 millioninternational passengers. Today, more than 85

international airlines operate to India and 5 Indiancarriers connect over 40 countries. Air passengertraffic in India is increasing on a tremendouspace. The sub-continents airport infrastructureis undergoing tremendous overhauling with theintroduction of most advanced facilities. It includessetting up of new Greenfield airports and installationof security, surveillance and air traffic navigationsystems. Still, the airline seat per capita in India isonly 0.07 compared with 3.35 of Australia, 2.49 forthe US, 1.38 for Canada and 1.05 for Japan, accordingto aviation consultancy Centre for Aviation (CAPA).

The Indigo Story Only Airline Still Flying!

The IndiGo brand of austerity is the hallmark ofevery successful global low-cost airline. The airlinehas shunned frequent flier programmes, airportlounges, special check-in counters for a particularclass of passengers and TV screens on board. It is,perhaps, to silence their critics that the otherwisesubtle Indigo Airlines publicly announced its netprofit to the tune of INR 787 crore for the year endingMarch 2013. Not being listed on the bourse doesnot compel the company from going public with itsnumbers. To put things into right perspective, Jet

Airways, SpiceJet and Air India, in the same period,posted a collective loss of INR 5,869 crore. The trafficfor Indigo increased by 27% while it fell by around5% for the industry. The depreciated rupee andincreased fuel prices could not deter the airlines to

Indigo Spice-Jet

Jet Air-ways

AirIndia

Net Revenue, 9,458 5,715 17,070 16,130

Profit/(Loss), 787 -191 -480 -5,198

Aircrafts 70 55 120 108Destinations 34 54 75 95

Flight per day 447 370 620 400

Load Factor, % 80.8 74.31 78.8 64

Market Share,%

29.1 17.2 25.1 19.9

Table 1 Relative Position of Various Airlines of India (Figures inINR Crore)


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moved to allow expanded foreign airline ownershipof Indian carriers. Ironically, the long delay inintroducing the change was mostly due to JetAirways influential opposition, as it feared that itsown position would be eroded if other airlines likeKingfisher were strengthened by receiving foreign

airline support.Now, in the current circumstances, with Kingfisherout of the picture, the impact of the Etihad-Jetcombination will be devastating for the countryslargest international carrier, Air India, just as it wasstarting to show signs of improvement.

To sweeten the Etihad and Jet partnership, the UAEand India signed a bilateral agreement to increasethe number of seats available each week on flightsbetween India and the Emirates to 50,000 from13,330 over the next couple of years.

With now the largest FSC effectively establishing itsbase at Abu-Dhabi, Kingfisher long since groundedand Air India struggling, there is no longer an Indiancarrier with the ambition and capability to supportthe development of hubs at Delhi and MumbaiAirports. This surely has implications for the privateoperators of Indias gateway airports and for futureairport investment.

Air Costa takes off

This no-noise domestic airline flew its first (of thejust two that it currently has while it waits for

the third one) Embraer jets on 15th October 2013.Claiming to be Indias first regional airline, Air Costa,promoted by a little known infrastructure companyLEPL Group Ltd, plans to invest $150 million in thenext two years. It plans to go pan-India by 2015 andglobal by 2018. Given that the annual growth rateof air travel stands at 20 per cent and air trafficexpected to cross 70 million by 2014, the companybelieves that the underserved and lesser competitiveroutes between bigger and smaller cities have higherdemand in terms of revenues per kilometer and has

based its business model on the same philosophy. Itwill initially serve Vijayawada, Hyderabad, Chennai,Jaipur, Bengaluru and Ahmedabad.

No matter, how humble the beginning, it will beinteresting to watch the growth of this regionalairline, in the hands of an aviation first timer.

New Giants on the block!

The role of Tata in entire aviation business is stillmysterious in ways more than one. The groupalready holds small minority stake in Spicejet and isnow coming up with two new airlines altogether! As

shown in the info-gram alongside, the airlines fill inthe missing link in the Tatas aviation business. Andit is not for the first time that Tata is trying to enterinto an airline business. Not even counting the TataAviation Service (a forerunner to Tata Airlines which

became Air India in 1946 when it went public andwas later nationalized against the wishes of JRD in1953) that marked the birth of civil aviation in Indiain 1932 when JRD Tata himself flew from Karachi toMumbai, there were at least two other occasionswhen the house of Tatas seemed eager to enter

the skies once in 1990s when it partnered withsame Singapore airlines to start a new airline but itsapplication could not move beyond foreign investmentpromotion board and then in 2001, when its bid tobuy 40 per cent in the state-owned Indian Airlineswas thwarted. Indeed, Ratan Tatas enthusiasm foraviation is no lesser renowned FlightSafety, theWarren Buffet-owned aviation training company,uses Tatas endorsement as the first testimonialon its website but the airline business remainedelusive while he held the groups reins. The closesthe ever got to the business was when he briefly ledAir India as nonexecutive chairman in the eighties.His dreams are finally taking shape now when hecan only smile from behind the curtains!

The Tata-SIA and Tata-AirAsia partnerships,

Table 2 The Tatas in Aviation; Source EconomicTimes



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mentioned in the opening remarks of this story,have the potential to be the game-changers forIndian aviation. Important questions first Whatare the chances that the two proposed airlines willbe a success, especially since (a) Indian aviation isusually considered an unattractive industry, (b) ATF

is considered the only cash cow for oil companieswhich pass-on all price increases plus more tothe airlines regularly, (c) airports, driven by hugeinvestments in new infrastructure are constantlytrying to raise airline and passenger user charges,and (d) buyers in India are extremely price consciousand offer no respite to full service carriers? Add toit the perishable nature of offering (the seats) andperceived lack of differentiation and you have anextremely tough environment to steer your businessthrough.

With the exception of Indigo, any other LCC has notreally succeeded in India. The pioneer Deccan wassold off to Kingfisher which later became groundedand Spicejets southbound fortunes have madeauditors question its ability to be treated as a goingconcern already.

All the above facts make us suspect that, contraryto what Tony Fernandes would like us to believe,AirAsia would make a stormy entry into Indianmarket. It will take quite some years before it is atsame footing with home-grown Indigo in terms ofoperational excellence and hence, operating profits.What remains to be seen, then, is what happenswith Tonys comment regarding making profits thevery first year in India.

Talking about the Tata-SIA FSC, the only plausiblereason that can be offered is the increasing influenceof Etihad and Emirates in India which threatensSingapore airports aspirations of becoming entryhub for south-east Asia (it is an altogether separateissue that India also once shared the same aspirationand was perhaps more strategically located tobecome that hub as well but for the series of wrong

steps that it cant even be considered in that raceanymore). It remains to be seen in this case if theproposed airline leads to a grant of additional seatson the India-Singapore sector for Singapore Airlinesin a manner similar to what has been done forEtihad airlines.

Some analysts have also raised questions about theviability of two airlines being run by same businesshouse. Their fears are not misplaced as evidencedby the frequent objections raised by erstwhile IndianAirlines about Air Indias domestic operations; and

Air India did the same with regard to Indian Airlinesinternational flights on the grounds that it washurting its commercial interests by charging lowerfares. More so when the full-service Tata-SIA airlinewill also fly only in domestic skies at least for coming

five years as mandated by current regulations (whichdo not permit an airline to fly internationally till it hasmet two primary conditions: five years of domesticoperations, and a fleet of 20 aircraft). Let us notforget that LCCs -- IndiGo, SpiceJet, Jet Konnect andGoAir - enjoy over 60 per cent market share, while the

legacy carriers Air India and Jet Airways account forjust the rest 40%. It is, but natural then, to questionthe profitability of Tata-SIA new airline which will beserving only a part of the under-40 per cent segmentof the domestic market. If the rule of not goinginternational before 5 years of domestic flying isrelaxed (which may actually be the case seeing theexcitement government seems to be in promotingaviation business), Tata-SIA may get a much neededboost. Also, the same skeptics concede that Tatashave the advantage of managerial expertise of SIA,one of the worlds most respected airlines, as well asits own financial strength. Taina Erajuuri, a Helsinki-based portfolio manager at FIM India, which ownsshares in Tata Consultancy Services and Tata Motors,said, Tata is famously called the salt-to-softwareconglomerate. They manufacture Jaguars and LandRovers and the cheapest car globally Nano. Theexecution in all these businesses has been spot on.Hence, creating a new vertical through airlines isunlikely to be an execution challenge. They believein creating a strong layer of management.

The Last Word

The Indian skies are unforgiving. But as a group,none other than Tata commands the same respectand dignity. The employee friendly perception,amazing management understanding, a knowledgepower-house about the sector in the form of RatanTata (few in India can boast of such knowledgeabout aviation as him) and deep pockets give themunmatched head start in this business. However, itwould be nothing short of utopian to imagine thatthe sailing will be smooth, especially after what thehistory books show us about various players. Indian

consumers can be toughest in the world to woo, ifthey show their true colors!

According to Consulting firm CAPA, Indias aviationindustry would have to eventually move to a hybridbusiness model, combining low costs and premiumservices given the countrys limited market for full-service airlines.

In the light of all thats happening, would we bewrong to think that situations could actuallydramatically improve for everybody if, instead of allthese new airlines cropping up and Air India going

down, Air India was handed back to Tatas to run andturn profitable?


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Also to be noted is the AUM/GDP ratio for India(Figure 4) which is very low when compared tothe rest of the world. The ratio for India is a

mere 4.7% while for US its a staggering 77%.So there lies a huge scope for investments inmutual funds. SEBI with its newer guidelineswould be hoping that it will be able to providea major boost to the mutual funds industry inIndia.

Introduction

World over, Mutual Funds (MFs) have playeda remarkable role in defining the financial

topography of the investors. Myriad changes aretaking place with respect to the mutual fundssettings in India. In spite of being one of thesafest investing avenues, MFs have failed at thedoorstep of the Security and Exchange Board ofIndia. It has now come up with a proposal forthe amendment of the regulatory framework(Mutual Fund Regulations, 1996) concerningmutual funds in India. These amendments arebased on the recommendations given by theMutual Fund Advisory Council.

Current Scenario

AUM saw a drop in the year 2010 and 2011, ithas been on the rise again since 2012. This isa healthy sign for the mutual fund industry.Another important observation which can beobserved in Figure 2 is that a major chunk(almost 85%) of the AUM is being contributedby the top 15 cities. Low penetration has marredthe growth of the mutual fund industry for a

long time now. One of the major aims of SEBIwith its new set of guidelines is to reach outto the smaller investors in the Tier III, IV and Vcities.

IIM RAIPUR

A. Sindhuja & Bhairav Mehta

SEBI: MF Advisory

GUIDELINESFinGyaan

Fig 1: shows that the Asset under Management (AUM) in Indiahas been steadily increasing.

Fig 2: AUM based on Geography as on Dec12

Fig 3: Net ow of assets per year

Fig 4: Country wise rate of AUM vs GDP


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Concentration in certain major cities and lowpenetration has been pain points for the industryfor a long time now. So the new guidelines willcome as a breath of fresh air for the AMCs andit will serve as an incentive for them to reachout to the Tier II and Tier III cities. Though the

investors will be hurt by the increase in TER inshort run, they will be benefited by the increasein AUM in long run.

Single Plan Structure

For bringing all the investors under the sameexpense structure, SEBI has made it compulsoryfor all AMCs to have a single plan structure

for both theexisting as wellas new schemes.

The presentschemes whichhave been issuedwith multipleplans basedon the amountinvested (retail,institutional orsuper-institutional)will have to acceptpayments under

one plan only.IMPACT

Equity funds arerarely offeredunder multipleplan schemes. Itsthe debt funds thatare offered undermultiple plans. So

the single plan structure will affect the debtfunds more.

Some funds have chosen to continue with theretail plans whereas some have gone for theinstitutional plan. In case of the latter, theminimum investment amount has been reduced.The discontinuation of any plan will not affectthe already existing investment as peoplecan redeem their investments anytime theywant. Also, where the investors have chosenSystematic Transfer Plan (STP) or SystematicWithdrawal plan (SWP), such schemes will becontinued till they have sufficient balance under

the plan.

The single plan structure wont have any majorimpact on the retail investors. Also variouscategories of investors will not be differentially

GUIDELINES- WHATS NEW?

Total Expense Ratio (Ter)

Under the new advisory guidelines of SEBI for themutual fund industry, the Asset ManagementCompanies (AMC) will be allowed to charge an

additional expense ratio of up to 0.3% if 30 %of the net sales or 15% of the AUM (higher ofthe two) comes from beyond the top 15 cities(based on the Association of Mutual Fund inIndias data about the AUM under geography).If the net inflow from cities other than these 15cities is lesser than 30%, then the proportionalamount can be charged as an additional TER(on the whole corpus)by the AMCs. However,if the amount invested

is redeemed within ayear then additionalTER can be reclaimed.Service tax of 12.37%on advisory fees andinvestments which waspreviously borne by theAMCs now has to beborne by the investors.This is in congruencewith SEBIs move to

bring the mutual fundindustry at par withother sectors.

IMPACT

A point of concern isthat it will be difficultto put the proposalto practice, as certaindistributors in orderto take advantage, might give address of theinvestor (who actually belongs to one of the

fifteen big cities) as cities which might not bea part of the 15 big ones. Also the burden ofincreasing the penetration will go down on theexisting investors.

The additional TER of 0.3% and the service tax willresult in overall increase in the cost by around0.4%. This may not be a burden on the schemeswhich have been continually performing welland giving returns of around 10%, but for theschemes which have not been doing well.

Additional TER will further hurt the investorsof MF for whom the returns are already lowbut it will encourage the AMCs to better theirdistribution network and further expand theirreach geographically.


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will become crucial.

Direct Plan

To encourage direct investments in the mutualfunds, SEBI has mandated that each schemein mutual funds will also have an equivalent

direct plan. This direct plan shall eliminate thedistributor and shall also have a lower expenseratio as no commissions will be included in theexpenses. As a result it will have a separate NAVcompared to the normal scheme. Also the directplan will be implemented on both the new aswell as the existing schemes.

IMPACT

A direct plan without the commissions willdefinitely reduce the costs and will make for a

better return to the investors. It might lower theexpense ratio by about 0.75%. A direct plan withits lower costs will definitely attract investmentsfrom self-investors.

Even though the MFs are relatively simpleinvestment medium, investing in them is abit tricky. So if an investor chooses to go for adirect plan then it might not be all that easy.The investors have multiple plans and schemesto choose from. Also, maintaining a balancedportfolio is not that easy. So the entire process

might be cumbersome. Investors may alsorequire help to handle a variety of servicerequests throughout the investment time. In anormal scheme, all these activities are takencare of by the advisors.

The distributors might not be too happy withthe direct plan as they feel that many investorswill go for the Direct Plan and as a result theywill be losing a sufficient amount of business.

So if one is confident to invest on his own thenDirect Plan definitely offers an attractive route

as costs involved will be much lower. But it is adouble edged sword as it might prove to be costlyin the long run. Therefore, it is important for theinvestors to find out the actual involvement oftheir advisor before choosing the Direct Plan.

Product Labeling & Focus On InvestorEducation

SEBI has mandated that from now on the Fundhouses will have to label their products basedon their risk and return. All the products will

come with a color code signifying the amountof risk associated with them. Mutual funds willalso have to include a statement of objectivefor the scheme followed by the type of product.

The different color indicators will be blue for lowrisk, yellow for medium risk and brown for veryhigh risk. There will also be a disclaimer statingthat investors need to consult their advisors incase they are not clear on the suitability of theproduct.

Also, financial literacy ratio and lower awarenesshave hindered the inflow of household savingsinto mutual funds. SEBI has made it compulsoryfor the AMCs to keep at least two basis points oftheir daily net assets for the campaign to spreadawareness among the investors. The AMCs arealso required to make disclosures regarding theawareness campaign.

IMPACT

The product labeling will help the investors tochoose the fund according to their risk profile.It will also help to determine the suitabilityof products to different customer classes andobjective of the scheme whether it is intendedfor wealth creation or providing regular incomedepending on the timeline. All this, in turn, willhelp in reducing the chances of miss-selling bythe agent.

If the amount to be kept aside for the investoreducation is spent in a careful and well thoughtout manner, it will not only lead to expansion

of the customer base but will also help theinvestors to take informed decisions and thusreap in greater profits from their investments.

Exit Loads

Before the investors were charged with exitload, if the amount of investment was redeemedbefore one year, then this exit load payment wasused by the AMCs for marketing and distribution.But now SEBI has mandated that the whole ofexit load will have to be added back to thecorpus. However, the guidelines allow the AMCs

the liberty to include a maximum of 20 bps inthe expense ratio to overcome the loss due toexiting investors.

IMPACT

This move will be beneficial to the continuinginvestors as they wont have to feel the brunt ofthe outgoing customers. The NAV of the schemewill rise due to the amount going back to thecorpus. But at the same time the guidelineshave also allowed the AMCs to recover theamount by giving them the choice of increasingthe expense ratio by about 2 bps. So overall theeffect remains the same. The part coming to thedistributors from the exit load will no longer be

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available and hence distributors have a reasonto feel dejected.

Smaller investors who were previously affecteddue to the moving out of the bigger investorswill welcome this amendment in the exit loadrule as now they wont be as vulnerable as

before due to the exit load going back to thecorpus.

Role Of Advisors

The advisors will now need to have a minimumqualification without which they wont beeligible to provide their services. The role ofthe advisors will be defined by SEBI. All advisorsneed to register with SEBI and conform to all therules and responsibilities defined for them. Theadvisors will be free to charge their fee from

their client but will no longer be eligible for thecommissions from the AMCs for the sale oftheir products.

IMPACT

This will come as a relief for the investors.Since the advisors wont be able to receive anycommissions on the products sold, so there isa high probability that miss-selling will comedown to some extent. Also it will help theinvestors in distinguishing genuine advisors andwill bring in a certain amount of transparency

in the advisory system. Quality of service isalso expected to improve due to the minimumqualification clause. The new guidelines aim todevelop sound advisors instead of mere productpusher. But it will be interesting to see as tohow many investors would be opting to go foradvisors as in general investors do not payadvisory fees for financial products. It will besometime before the whole advisory modelstakes shape becomes effective.

Encouraging Smaller Investors

The compulsory requirement of having a PAN ora bank account has been relaxed and the smallerinvestors can have transactions in mutual fundsup to INR 20000 in cash per financial year. Thishas been done so that the MF companies cantarget the Tier IV and Tier V cities to increasetheir geographical footprint and expand theircustomer base.

Also to make the distribution network widerand more efficient and to ease the distribution

registration process, the distributors will includepersonnel such as retired government official,bankers, teachers and other people fromsimilar profession for the distribution of simple

products.

IMPACT

This easing of registration and allowance totransact in cash up to INR 20,000 per financialyear will no doubt help the mutual fundcompanies to attract smaller investors. InIndia there exists a sizeable population withlower income levels. So the new guidelines willdefinitely help the mutual fund companies totap into the market of smaller investors. Onecaution with this regulation is that chances ofmiss-selling might increase as the investorsmight not have the sufficient knowledge andawareness of the different schemes.

Steps To Improve Regulations

One of the major reforms required in the

mutual industry is in relation to the regulationso that the whole industry can become moretransparent and efficient. In congruence withthe requirements SEBI has mandated that theAMCs are required to upload their half-yearlyresults along with monthly portfolio disclosureson their websites. AMCs also need to providethe details of the net inflow and gross inflowbased on the distribution. Along with it, SEBIhas asked its panel to look into the regulatoryframework in other countries like US and UK so

that the whole mutual fund industry can expandand at the same time become more efficient.

Conclusion

In short term the investors will be hit with theincrease in expense ratio and their returns willbe marginalized. This will definitely create abig impact on the investors as the costs willincrease.

In spite of the expense ratio increasing, thereare some definite positives for the long term.

The amendments such as exit load, single planstructure, cost-effective direct plan, introductionof product labeling and improvements inregulation will give the investors something tocheer about. Also, steps to expand the network,easing of the KYC norms, relaxed distributionregistration process might go a long way toincrease the geographical footprint of themutual fund industry in India.

Mutual funds for long have been waiting forreforms that will increase the inflow of funds

and make them most preferred investmentavenue and SEBI with its new set of guidelinesmight just have given the boost required for theindustry to prosper.

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FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

1987

Stock market is a world of fluctuations andspeculations in which value of a stock rises orfalls multiple times during a span of a day. One ofthe major instances when stock market aroundthe world crashed within a short span of timewas on Monday, October 19th, 1987. Its impactwas much larger than the one which happenedin 1929 and it sentthe world into a

great depressionwhich lasted for adecade. This dayis memorized asa Black Mondayin history of theworld. The crashbegan in HongKong and thenspread west toLondon, Paris, and

then hitting theUnited States afterother marketshad declinedby a substantialmargin.

One of the keymarket indicatorswas drop of DowJones IndustrialAverage (DJIA) by 508.32 points to 1738.74(22.61%). In the Wall Street history, it wasthe worst week and in the aftereffects manypeople wondered anxiously if a global economiccatastrophe would follow. According to Facts on

File, which is an authoritative source of current-events information, the crash in 1987 markedthe end of a 5-year bull market which had seenthe Dow rise from 776 points (August 1982) to ahigh of 2,722.42 points (August 1987).

Contrasting with the happenings in 1929, themarket recoveredpartially after thecrash. Very next day,it posted a recordone-day gain of 102.27and gain of 186.64points on Thursday.It took two yearsfor the Dow index torecover completely. BySeptember 1989, themarket had recoveredmost of its value thatit had lost in the 87crash.

Timeline & Impactof The Crash

Wednesday, October14 Friday, October16, 1987

Wednesday: Twoevents that happenedon Wednesdaymorning can be

thought upon as starting of the decline in thestock market which continued for the rest ofthe week:

1. Ways and Means Committee of the U.S. House

IIM SHILLONGAshish Singla

Finistory STOCK MARKETCRASH

1987BLACK MONDAY



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of Representatives filed a legislation to eliminatethe tax benefits associated with mergers andacquisitions. Stocks values were re-examinedas investors reduced the odds that certaincompanies would be take-over targets.

2. Commerce department announced tradedeficit which was above expectations. Due to this,dollar declined and expectations of tightening ofpolicy by Federal Reserve increased. Downwardpressure on equity prices increased due to risein interest rates.

Thursday: On Thursday, October 15th, 1987,equity markets declined continually. Some ofthis decrease was due to anxiety among theinstitutions, especially towards pension funds,and among individual investors, which led tothe movement of funds from the stocks intorelative safety investments, bonds. There washeavier selling of the stocks during the last half

an hour of the day.Friday: Due to the anxiety created in themarket and high selling of the stocks, marketscontinued to decline on Friday too. Lot of stockindex options expired and investors startedto invest more into the futures market wherethey sold futures contracts as a hedge againstfalling stocks. Due to the increase in the sales offutures contracts, price discrepancy was createdbetween the value of the stock index in the

futures market and the value of the stocks onthe NYSE. By the end of the day on Friday, withthe S&P 500 down over 9 per cent for the week,markets had fallen considerably. These were

signs of huge market fall for the next week.

On Monday morning, there was huge sellingpressure and there was large mismatch in thenumber of selling orders as compared to the buyorders. Due to this, many stocks did not open fortrading during the initial hours. According to theWall Street Journal, around 11 of the 30 stocksin the Dow Jones Industrial Average opened late.With some of the stocks not trading, the quotesused to construct market indexes were fusty, sothe values of these indexes did not decline asmuch as they might have. On the other hand,the futures market opened on time with heavyselling.

With stale quotes in the cash market anddeclining prices in the futures market, a gapwas created between the value of stock indexesin the futures market and in the cash market.Due to huge selling, equity prices started todrop during the latter half of the trading. TheDow Jones Industrial Average, Wilshire 5000 andS&P 500 declined between 18 and 23 per centon the day amid deteriorating trading conditionswhile the S&P 500 futures contract declined 29per cent.

Tuesday, October 20, 1987

Before the financial market got opened onTuesday, Federal Reserve issued a statementstating that National Central Bank will try tomaintain liquidity in the market in order to

support the economic and financial system. Thiswas issued to support the market sentimentswhich was not in favour of the then currentconditions. On Tuesday, around 7% of the stocks


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were closed for trading. Before the tradinggot started, the NYSE moved to prevent indexarbitrage program traders from using DOT systemto execute trades, which might have affected thedepth of the market.

On October 20, two CME clearinghouse members

had not received margin payments due tothem by noon, which started buzzes aboutthe solvency of the CME and its capabilityto make these payments. These rumoursproved baseless, but nevertheless reportedlydiscouraged some investors from trading on theCME. Bid-ask spreads broadened, and tradingwas characterized as disorderly.

Due to number of trading halts on the NYSE forindividual stocks and also due to the possibilitythat the exchange might close, trading of many

stock-index derivative products was adjournedon the Chicago Board Options Exchange (CBOE)at 11:45 am and on the CME at 12:15pm. Theseclosures completed de-linkage between thefutures and cash markets and stocks on the NYSEbegan to rebound.

However, the stock market declined again oncethe futures markets re-opened just after 1:00 pm.Later in the afternoon, there was a sustained risein financial markets as corporations announcedstock buyback programs to support demand for

their stocks.Causes of Stock Market Crash

Computer Trading/Program Trading

Many of the investors think that computer

trading (also known as program trading) wasone the main reasons for the stock marketcrash. In program/Computer trading, computersare programmed to order large stocks in casecertain market trend follows. Many peopleblamed trading strategies for blindly selling

of the stocks when market fell, which furtherexacerbated the decline. Some economists alsothink that the speculative boom leading up toOctober was also caused by program trading.

Illiquidity

During the Crash, there was a large flow of sellorders and the trading mechanisms in financialmarkets were not able to deal with these flows.Most of the common stocks were not tradeduntil late in morning of Monday, October 19,

because the investors were not able to findenough buyers to purchase the amount of stocksthat sellers wanted to sell at certain prices.As a result of this, trading was terminated inmany listed stocks. Due to this, price quotesfor stock and stock indexes were not reliable.This insufficient liquidity had a significant effecton the size of the price drop, as investors hadoverestimated the amount of liquidity.

Derivative securities

Another cause of stock market crash was thefailure of the synchronization between indexoptions and future markets and the stockmarkets. In case of stock markets, peopleactually buy shares but in case of derivatives

Fig 1:Other Impacts



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people only purchase rights to sell or buy thestocks at a particular price in future.

U.S. Trade and Budget Deficits

Another possible cause of stock market crash isthe announcement of U.S. trade deficit on 14th

October. It led to the fear that dollar will fall onforeign exchange markets. Thus the fear of adollar loosing value led the foreigners to pull outof dollar-denominated assets, leading to a sharprise in interest rates.

Overvaluation

Many analysts agree that stock prices wereovervalued in September, 1987. Price/Dividendand Price/Earnings ratio were too high during thatperiod.

Factors Responsible For Stabilization Of

CrashAccording to some of the analysts, crash couldtrigger a recession. But fallout from the crashturned out not to be much large. There weremultiple stabilizing factors which helped tominimize the effect of crash on economy:

Federal Deposit insurance: In 1929, people hadmade a run on the financial banks. But this time,banks seemed a far safer repository for savingsthan the stock market.

Quick response of Federal Reserve In 1929,Federal Reserve was strongly criticized forshrinking supply of money and credit into themarket which exacerbated the financial debacle.But this time reserve made money available asmuch as required. It pumped enough money intothe banks which led in the drop of the interestrates.

Government response: After denying for fewdays that the crash was anything worse than acorrection, President acknowledged that federal

deficits were one reason for market crash, andindicated that he would go for a modest taxincrease as part of a deficit-reduction package.

Conclusion

The stock market crash of 1987 was a blow to thestability of the financial system, not just becauseof the size of the drop in price, but importantlybecause market functioning was significantlyimpaired. Though stock market crash of 1987 wassevere in nature, but due to government policiesand interventions at right time, the world was

saved from falling into the great recession. Themarket began a slow and steady ascent almostimmediately following the crash. In effect, beforethe end of 1989, the Dow Jones Industrials wasonce again setting new record highs. In order to

Finsig

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prevent further crashes like this, following stepswere taken:

Margin Requirements: The SEC modified themargin requirements in order to lower thevolatility of common stocks, stock options, andthe futures market.

Circuit Breakers: The New York Stock Exchangeand the Chicago Mercantile Exchange (CME)presented the concept of a circuit breaker. Thecircuit breaker halts trading on both of theseexchanges for one hour if the Dow fall morethan 250 points in a day, and for 2 hours, if Dowfall more than 400 points.

New Computer Systems: Stock exchangeswere changed to adopt new computer systemswhich increase data management effectiveness,

accuracy, efficiency, and productivity.

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The Reserve Bank of India is once againpoised to give banking licenses and hasalready received 26 applications in June2013 for the same. The RBI has been issuingnew licenses from time to time since 1993.

But the question to be asked is will the newbanks preparing to enter the market be assuccessful as their predecessors like HDFCBank, ICICI Bank, etc.?

Who are the New-Generation Banks?

The New-Generation banks referred here arethe banks which have come into existenceafter 1992-1993 up to 2003-04. Some of thesebanks were merged with other banks eithervoluntarily or compulsorily. The prominent

new generation banks are HDFC Bank, ICICIBank, Axis Bank, IndusInd Bank, KotakMahindra Bank and Yes Bank.

Success of existing New-GenerationBanks:

To look how successful these New-Generationbanks have been we need to see how theyhave captured around 14.5% of total bankcredit in 2012 from next to nothing in 1993. Toput that in perspective, the total credit of the

New-Generation banks is at Rs.736300 croreas in 2012. The New Generation banks had aphenomenal rate of growth over the years.These banks expanded both organically as

well as inorganically, absorbing banks andother financial institutions, and setting upnew branches across the country. Theyprovide end to end services and solutionsto their customers. These banks are also

among the most profitable banks in theindustry today.

Challenges in matching the successof New Generation Banks

The new banks will have a herculean taskof meeting the same kind of success of thelikes of HDFC Bank, ICICI Bank etc. This ispartly because of the different conditionsput forward by RBI this time, increasedregulation, and also prevailing market

conditions and competition. Some of thedifficulties which the new banks will befacing are as follows:

RBI rules on opening branches in unbankedrural areas:

The new banks would have to compulsorilyopen 25% of their branches in unbankedrural areas with population of less than10,000. This would be a drag on thesebanks profitability. RBI in the past required

New-Generation banks to have 25% oftheir branches in Semi-Urban areas, withpopulation up to 100,000 persons. Alsothese places need not have been unbanked,

IBS, HYDERABADRohit G. Mehboobani & Kartik Sharma



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so the private sector could open branches inlucrative semi urban areas too. This enabledthe older new generation banks to open insuburban parts of large cities and still fulfiltheir financial inclusion obligations, whichwill not be the case for the upcoming new

banks.No concession on CRR, SLR, etc.:

RBI also said in a circular to the new aspirantsthat no relaxations would be provided withregard to CRR, SLR or other conditions. Thesebanks would need to conform to CRR, SLR,and Branch presence from day one. While inthe past the RBI allowed the new generationbanks some relaxations regarding to CRR,SLR, promoters shareholding requirements

etc. With these conditions, new aspirantsmay find it difficult to be profitable in theinitial years.

Conditions on conversion of NBFCs:

Existing NBFCs would find it difficult toconvert to banks because of CRR, SLR, branch& other requirements, without relaxationsfrom RBI. RBI also said that different bankinggroups would have to maintain all lendingactivities of the group within the bank itself

(except for those activities that banks arenot allowed to do). These conditions werenot present or were relaxed for banks likeICICI Bank, HDFC Bank, Kotak MahindraBank.. This would make it difficult for thenew banks to attain a large scale as largeNBFCs will find it difficult to convert to abank.

Saturation of Urban Markets:

Today majority of banks lending is inmetropolitan and urban areas. Thesemarkets are already saturated with bothprivate and public banks, increasing theirbranch presence in these areas over the

years. Banks haveincreased theirquality of serviceover the years.Private Banksinitially attracted

large number ofcustomers becauseof the difference intheir service quality

with respect to the existing banks at thattime. This would be hard to replicate for newbanks today because of the presence of highservice quality offered by private banks andimproved service offerings by public sectorbanks as well.

Public Sector Banks better equipped tohandle competition:

Another important thing to consider isthat the public sector banks in the early1990s were not used to competition. Thenew generation banks were able to outmanoeuvre the slower and more bureaucraticpublic banks, enabling them to eat intotheir market share. Today the PSU banks aremore competitive and have learnt to live

with competition. They have upgraded theirtechnology and have reduced employeecosts. With the presence of private banks,the market has become highly competitive.It will be difficult for the new banks to handlethe competition.

Difficulty in raising CASA and high cost offunds:

The new banks would also find it moredifficult to raise low cost funds in the form

of Current account and Savings Accounts(CASA). After the deregulation of savingsbank interest rates, many banks havesubstantially increased the interest rateson savings bank accounts. Some potentialexists in rural areas which still have lowamount of deposits but achieving a largescale would be difficult. It would take timefor these banks to create a large enoughbranch network to attract large amount of

CASA. Hence, the new aspirants would facehigher cost of funds in the initial yearsbecause of both more costly CASA as well aslower levels of CASA.

Promoter shareholding requirements:

RBI has directed that new banks shouldbring down promoter stake to 40% within3 years, 20 % in 10 years and 15% within12 years from getting a license. Consideringthe condition put on financial inclusion and

lower CASA, promoters may not be able toget attractive valuation for the bank in thistime frame. On the flip side this may leadto promoters not following best industry


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practices and follow strategies which areriskier to improve performance in the shortterm.

Large corporates already well banked:

Large corporates form a major part of loansfor banks like Axis Bank, Yes Bank, ICICI Bank,

HDFC Bank. These banks provide varioussolutions like Cash Management Services,treasury services etc. Also the new bankswould not be able to match the cost of fundsof other banks that have much larger branchnetworks. With long established relationspresent, new banks would find it hard toattract large corporates.

Advantages new banking aspirants have

The new banks do have some things going intheir favour. There are still opportunities forthem to grow. Some of the factors favouringthe new banks are:

Large economy & favourable macro factors:

There is still plenty of room for growth ofbanks in India. Credit penetration in Indiais still quite low. There are many regionalimbalances in credit growth. With the growthof GDP and money supply in the country

there is a large scope for banks in generalto increase their presence. This is especiallytrue for suburban and rural areas wherecredit levels are very low. This presents anopportunity for all banks in general to growin the country.

Large NPAs in the banking system at present:

Considering the slowdown in the economy,NPAs or non-performing assets at existingbanks are set to rise. At this time new banks

would have a clean balance sheet. Thesebanks would be more cautious in givingloans and grow their books with betterquality assets. This would enable them toenjoy clean growth in the initial years.

PSU banks under-capitalized:

Considering tighter norms prescribed byRBI regarding restructured loans, increasingpressure on asset quality, increase in capitalrequirements, etc., several public sector

banks would become undercapitalized andrequire equity infusion from the government.In the interim, they would have to slow theirbalance sheet growth till capital is infused.This could create a gap in credit which could

be exploited by the new banks.

Migration to Advanced approach in riskmanagement:

The new banks would also find it mucheasier to migrate to advanced approaches inrisk management. This would enable them to

increase their leverage and increase the sizeof their balance sheet. Existing banks wouldtake a longer time to implement this becauseof technology, cost and implementationissues. Advanced approach would also givebanks a better understanding of the riskthey are taking. Thus the new banks couldhave a slight advantage in this regard.

Latest Technology:

The new banks would also have superiortechnology compared to existing playerswhich could help them manage costs. LikePrivate Banks entry forced PSU banks toupgrade technology, so will new banks forceexisting banks to upgrade technology. Thisdifference would not be as sharp as whatwas witnessed in the past but the newbanks would still have a technological edge.

Mergers & Acquisitions:

Mergers and acquisitions by new banks ofsome of the old private banks could helpthem achieve substantial scale. Acquisitionsand mergers might make more sense forthese banks rather than older players.However, this is something which is hardto predict and would depend on a host ofdifferent factors. But the new banks successwould strongly depend on their success inthe M&A game.

Conclusion

In the end considering all factors, newbanks could be quite successful, probablynot as successful as their predecessors.Their prowess in mergers & acquisitionsand technology could play an important rolein their success. But even more importantwould be their ability to make rural bankingviable. If these banks could tap the ruralmarkets they could be extremely successfulon multiple fronts. Financial inclusion isprobably the biggest challenge but also anopportunity for the new banks. Even sothe success of the existing new generationbanks would be difficult to match.



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Sir, recently a friend of mine wasappointed as a hedge fund manager withXYZ Securities Ltd. Can you explain what ishedging and what are hedge funds?

Hedging can be thought of as aninsurance. It means controlling or reducingrisk by using instruments to offset the risk

of price fluctuations. However, a hedge fund involvesvaried investment techniques such as long and shortpositions, use of arbitrage, buying and selling ofundervalued securities, trading in options or bonds,and investing in almost in any market opportunitywhere it foresees impressive gains at reduced risk.Some hedge funds focus on maximizing returns on

investment with an aggressively managed portfolioof investments.

Then, why is it called a hedge fund?

The idea was conceived in order togenerate positive returns without taking intoaccount the market movement. As the nameimplies, these funds often try to hedge theirinvestments in the principal markets theyinvest in by using different methods. Over

the years, it has been applied to many funds that

actually do not hedge their investment and in fact usehedging that increases the risk instead of reducingit, while at the same time increasing the expectedreturns. Eventually these funds have become moreand more varied in style

Sir, the hedge fund sounds similar tothe mutual fund. What is the differencebetween the two?

Hedge funds focus mainly on absolute

returns whereas mutual funds focus onrelative returns. Unlike mutual funds whichare setup in a risk controlled environment,

hedge funds are unregulated. Hedge funds can investin any asset class such as stocks, bonds, real estate,

commodities, and private partnerships, or even inexotic debt products. Also, hedge funds are open onlyto accredited investors.

Sir, who qualifies as an accreditedinvestor?

Presently, if you can meet one of the

following criteria, you are an accreditedinvestor:

Earnings of an individual incomeexceeding $200,000 per year, or cumulative incomeof $300,000 in last two years and expect to reasonablymaintain the same level of income

Have a net worth exceeding $1 million, eitherindividually or jointly with his or her spouse

Be a general partner, executive officer, directoror a related combination thereof for the issuer of a

security being offered

Sir, if I may interrupt, could you explainwhat do you mean by general partner?

The general/limited partnership modelis the most common structure for thepool of investment funds that make up ahedge fund. In this structure, the generalpartner assumes responsibility for the

fund operations, while limited partners can makeinvestments into the partnership and are liable onlyfor their paid-in amounts. It is common for newhedge funds to open up with minimum investmentsof $250,000 or $500,000. Established funds can havemuch higher limit which can go up to $10,000,000. TheGP can also waive this limit. This is done for investorswho do not want to start with large investment butrather intend to make an investment equal to orgreater than the stated limit over the time.

Thank you Sir for this session. Now Ifully understand which field my friend isgetting into.

CLASSROOM

FinFundaof theMonth

Hedge Funds

NIVESHAK 27

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IIM ShillongJoAnne FernAndes.


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F I N - Q

All entries should be mailed at [email protected] by 10th November, 2013 23:59 hrs

One lucky winner will receive cash prize of Rs. 500/-

1. Find the missing link:

2. X is a Euro-American multinational financial services corporation and is responsible for

operating multiple securities exchanges. In June 2013, the European Commission approved

Xs proposed takeover by the Inter Continental Exchange. Identify X.

3. An average of high, low & closing prices from the previous trading day is used to deter-

mine the market trend over different time frames. Trading above this level indicates ongo-

ing bullish sentiment and vice-versa. What is this level called?

4. Company X has risen close to $540 million in the last six years out of which $360 million

of funds have come this year itself. Founders of Company X are alumni of IIT. Identify X.

5.This merger left many Germans unhappy as, such a large German Company was never ac-

quired by any foreign owner. This is still the largest merger that has ever been undertaken

with the deal size crossing $200 billion. Identify the two companies involved in the deal.

6. The airline XYZ had Q2 (July-September, 2013) net loss which crossed its highest ever net

quarterly loss of more than INR 700 crores. This was mainly due to slowdown in air travel

and also due to high fuel cost. Identify XYZ.

7. Which Indian financial Institution has Dog in its Logo?

8. He is the pioneer in mutual fund industry and often referred as the Father of Index Fund

investing. He created the first S&P 500 Index fund. Identify this famous person.

9. Identify a term that describes a stock resembling a sinking battleship that goes downfast until it hits the bottom.


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Article of the MonthPrize - INR 1000/-

Paridhi GuptaIEHE, Bhopal

W I N N E R S

A N N O U N C E M E N T SALL ARE INVITED

Team Niveshak invites articles from B-Schools all across India. We are looking fororiginal articles related to finance & economics. Students can also contribute puzzlesand jokes related to finance & economics. References should be cited wherever nec-essary. The best article will be featured as the Article of the Month and would be

awarded cash prize of Rs.1000/- along with a certificate.

Instructions Please send your articles before 10th November, 2013 to [email protected] The subject line of the mail must be Article for Niveshak_ Do mention your name, institute name

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