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THE INVESTOR VOLUME 6 ISSUE 8 September 2013

FOOTBALL FIELD: NOW IN VALUA-

TION, PG. 16

WISH YOU A MERRY CRISIS: THE BUBBLE

BOMB PG. 81

I s t h e r e a n y e n d t o t h e i r

p r o w l i n g ? ?

VULTURE

FUNDS


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F R O M E D I T O R ’ S D E S K

NiveshakVolume VI

ISSUE IX

September 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,

The month of September saw a deep dip in rpee which went to its all-timelow of INR 68.80 per dollar. But aer the appointent of the new RBI Gover-

nor, things seems to be improving. The rpee and bond rates surged to one-

month highs on 19 September 2013. The rpee taded at 61.88 per dollar and

the benchmark 10-year bond yield taded at 8.18%, aer dropping to 8.14%,

it’s lowest since Augst 8, 2013. Cororates will nd dealing with this volatil-

it a challenge as several forecasters are now changing their 2013 projections

for the domestic curency.

Equit Markets also welcomed the new RBI goveror by remaining highly

volatile with a net upward movement of more than 2000 points (SENSEX) in

the past one month. Of course, the US fed decisions, China gowth gres

and RBI monetar policy had its own share of movements and uctations.

The Aricle of the Month for September discusses about the need of privatiz-

ing banks in India. It analyses the pros and cons of the goverment owner-

ship in banking sector in India and suggests a suitable way forard for the

refors in banking sector. The cover Stor for the Month of September takes

a step to throw some lights on “Vultre Funds” and how they have rined

many nations. It also ties to analyze how vultre fnds are hunting Indian

economy. Niveshak also brings some more good reads for you in this issue

– the FinGyaan of the issue brings to you how an investent banker putsall his valuation results into the football eld before pitching his valuation

to the client. Fin-Sight of the issue talks about how nancial bubbles in an

economy are a tap. It throws light on some of the major crisis that have hap-

pened in the world economy & ends by wishing the reader for being prepared

for the crisis to come. Then there is the stor of late 1970s about Chinese

economy, which talks about a series of refors known as “Secondar Revolu-

tion” which tansfored China om a planned economy to an open market

economy. The issue also exlains the most talked about plans in the Mutal

Fund Indust i.e. SIP, STP & SWP through our much cherished Classroom

Section.

To end this brief note, it’s imporant that we thank you, our readers, for your

constant suppor and appreciation. Thank you! It is your endless encour-

agement and enthusiasm that keeps us going. Kindly keep pouring in your

suggestions and feedback to [email protected] and as always,

Stay invested.

Team Niveshak



C O N T E N T S

Niveshak Times

04 The Month That Was

Article of the month08 Privatization of Banks: Needof the hours

Cover Story

12 Vulture Funds: Is there anyend to their prowling?

FinGyaan16 Football Field: Now in

Valuation

Finistory 20 Chinese Second Revolution

Finsight23 Wish you a Merry Crisis: TheBubble Bomb

CLASSROOM

27 Mutual Funds


http://slidepdf.com/reader/full/niveshaksep13 4/30SEPTEMBER 2013

Raghuram Rajan seen switching to consumer

price ination at RBI

Raghuram Rajan, the newly appointed governor of

RBI, is set to use the consumer-price inflation for

the first time. The use of CPI over WPI has been one

of the much debated topic in the recent times. This

comes after his last week’s surprise move of raising

repo rates by 25 basis points. These steps are in line

with what he said during his first speech as a RBI

governor earlier this month. Dr. Rajan underscored

the fact that the primary role of the governor is to

stabilize the purchasing power of the currency which

signals to curtail inflation even if it comes at the

expense of growth. The shift from WPI to CPI signals

further increase in the benchmark interest rates.

India’s consumer price index rose 9.52% in August

from a year earlier, the fastest pace in a basket of

17 Asia-pacific economies as per Bloomberg. Core

consumer prices climbed about 8.2% for the same

period. The rupee had slumped by over 14% versusdollar in past one year amidst the persisting high

inflation.

Allcargo Logistics buys US rm Econocaribe

Consolidators

Allcargo Logistics Ltd. on Sept. 27 announced that

it has acquired US-based Company Econocaribe

Consolidators Inc. in a $50 million deal. Econocaribe,

founded in 1968, is the third largest non-vessel

operating carrier in the US. Both the companies have

been working together in US from the last few years.

Allcargo completed the deal through its Belgium-

based subsidiary ECU line in which it acquired a

33 percent stake in 2005 and remaining shares in

2006. The acquisition will help ECU line to increase

its foothold in North America. Allcargo Logistics had

already developed a strong presence in the mutli-

modal transport operating (MTO) business throughthe wide network of ECU Line and had gained a

strong hold on the domestic MTO business. The

shares of the company had closed 11.42 percent

higher on BSE on Sept. 27 amid the announcement

of the acquisition on a day when SENSEX lost 0.84

percent or 166.58 points. The company is also

looking to grow in Australia and Europe through

increased merger and acquisition activity in the

future. This came amid the concerns raised by the

company’s customers who do want to do business

with it because of limited presence of the company

in these geographies.

SC allows voters to reject all candidates in

the election

In the pursuit of benchmarking best practices for

Elections, SC this month came up with a landmark

judgment. It held that voters will have a right to cast

negative vote, rejecting all candidates contesting

elections. This decision is expected to push eligible

voters, who are not satisfied with contestants, to

turn up for voting. The court directed the apex

body for elections (Election Commission of India) to

enable “none of the above options” at the end ofthe list of contestants in all Ballot papers as well as

EVM (Electronic Voting Machines).

This move is expected to foster purity and vibrancy

in upcoming elections and ensure increased

participation, ultimately leading to cleaner politics.

Telecom Regulator orders pan-India number

portability within six months

Going beyond the January 2011 regulation of inter

circle mobile number portability, the telecom

regulator (TRAI) has now mandated the Department

of Telecom to implement pan-India mobile number

portability. The Indian Mobile phone users will be

then allowed to continue with the same number

while permanently shifting to a different circle.

The pan-India MNP presents an opportunity for

leading mobile phone companies like Airtel, Idea

and Vodafone that have benefitted from circle level

MNP in the past, to consolidate customer base of the

Industry further, while keeping check on operational

effectiveness and oligopolistic environment. This will

also help the smaller players to take up this chanceto acquire corporate customers that bring in more

revenue.

DIPP proposes 100% FDI in railway projects

The Niveshak Times


IIM Shillong

Team NIVESHAK

NIVESHAK4

T h e M o n

t h T h a t W a s



The Department of Industrial Policy and Promotion

has circulated a cabinet note proposing 100% FDIin Indian Railways. This move of GoI is likely to

revive the iconic Indian Railways, which is currently

resource-starved, by allowing foreign investment in

development of rail lines between project sites and

existing network. The business model that will be

followed is that the DIPP will create a Special Purpose

Vehicle (SPV) in which the foreign companies will be

allowed to pick up 100% stake. To ensure smooth

excavation and flow of raw-materials, the emphasis

is on first-to-last mile connectivity as this SPV will

construct and maintain rail lines which would connectmines, ports & industrial hubs with the existing rail

network. The operations side will remain with the

Indian Railways. The current financial crunch has led

to atleast Rs. 2 lakh crore in throw-forward projects

which in turn led to the delay of infrastructure

development. This proposal is expected to give fillip

to Indian Railways’ target of raising Rs. 1 lakh crore

through PPP for the 12th five-year plan.

Government withdraws export incentives

for cotton, yarnThe Commerce Ministry has withdrawn the 4%

export incentives for cotton yarn and cotton.

According to Confederation of Indian Textile Industry

(CITI), benefits of GoI’s Focus Market Scheme and

Incremental Export Incentivization Scheme put

together result in 4% of the FOB value of exports.

The annulling of this incentive has drawn a sharp

reaction from textile industry and fiber traders in

times of subdued shipments and increasing CAD.

Currently there is no export restriction or export duty

on cotton yarn. But there is only a requirement ofregistering the export contracts with the Directorate

General of Foreign Trade (DGFT). The chairman of

CITI argues that withdrawing the export incentives

on the ground that there is restriction on export is

incorrect. The withdrawal of incentives for overseas

sales could cut exporters’ margins. Despite this

move, the buoyant demand for cotton yarn would

offset any fall in export margins. Trade commitments

for cotton yarn exports rose more than 26% in August

from a year earlier mainly due to rising demand from

India’s biggest client, China.Sebi set to overhaul listing, M&A norms

The Securities and Exchange Board of India is set

to fine-tune the various norms related to listing in

stock-exchange, securities issuance, mergers and

takeovers. The step will align the norms with the newCompanies Act which was recently passed on August

8. The recent step is aimed at improving transparency

and giving minority shareholders a bigger say in the

business transactions. Moreover, these will have far-

reaching implications encompassing the duties of the

Board of Directors, management and administration

structures, accounts and audit rules followed by the

Indian Companies. When a company goes public

through IPO, it needs to disclose its objectives for

raising money and it can change the objectives only

with the approval of shareholders. The companiesAct says that even if a single shareholder disagrees

with the change, he/she has the right to revoke

the management decision. Regulations related to

IPOs is one of the most critical areas that is set to

change owing to the step taken by SEBI. Currently,

a high court’s approval is a must in mergers and

acquisitions decisions. Once the new law is enforced,

approval from National Company Law Tribunal will

prevail over that of high court.

New gas pricing policy will apply uniformlyto all: Moily

Amidst talk of Reliance Industries Ltd (RIL) being

denied a higher price for gas due to output from KG-

D6 not matching targets, Oil Minister Mr. Veerappa

Moily on Sept. 26 said that the new gas pricing policy

will apply uniformly to all. The new policy is based

on the recommendations of Rangarajan committee.

The current rate is 4.2 mmBtu for gas produced from

D1 and D3 fields as per the current term which is

set to expire on 31 March 2014. Mr. Moily is mulling

on whether to apply these current rates or 8.4mmBtu, the price recommended under the new gas

policy. The point of contention for the oil minister is

because D1 and D3, Reliance Industries Limited (RIL)

has produced much less than the targets. According

to Directorate General of Hydrocarbons (DGH), the

output at D1 and D3 fields have falled to 10 million

standard cubic meters per day (mmscmd) from 53-

54 mmscmd achieved in March 2010 because RIL

did not drill its committed number of wells. RIL,

on the other hand, blames unforeseen geological

complexities for the fall in output and believes thereserves in D1 & D3 are actually less than one-third

of 10.03 trillion cubic feet predicted two years before

the field began output in April 2009.

The Niveshak Times

www.iims-niveshak.com 5NIVESHAK

Th e M on t h

Th a t W a s

© FINANCE CLUB, INDIAN INSTITUTE OF MANAGEMENT SHILLONG



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l e o f t h e M o n t h

MARKET CAP (IN RS. CR)BSE Mkt. Cap 6467320.15

Index Full Mkt. Cap 3,298,771

Index Free Float Mkt. Cap 1,696,202

CURRENCY RATESINR / 1 USD 61.18

INR / 1 Euro 83.42

INR / 100 Jap. YEN 62.66

INR / 1 Pound Sterling 99.49

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 9.70%-10.25%

Deposit rate 8.00% - 9.00%

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

Source: www.bseindia.com

Source: www.bseindia.com25th July to 27th September 2013

Data as on 27th September 2013

M a r k e t S n a p s h o t

CURRENCY MOVEMENTS


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BSEIndex Open Close % changeSensex 20090.68 19893.85 -0.98%

MIDCAP 5889.83 5627.58 -4.45%

Smallcap 5601.87 5479.62 -2.18%

AUTO 10698.38 11192.48 4.62%

BANKEX 12237.89 11494.65 -6.07%

CD 6364.7 5890.02 -7.46%

CG 8566.81 8052.67 -6.00%

FMCG 7521.21 6896.44 -8.31%

Healthcare 9316.57 9475.89 1.71%

IT 7255.36 7829.4 7.91%

METAL 7360.63 8720.76 18.48%

OIL&GAS 9016.73 8349.93 -7.40%

POWER 1610.32 1565.00 -2.81%

PSU 5855.45 5586.99 -4.58%

REALTY 1449.89 1213.23 -16.32%

TECK 4199.23 4471.09 6.47%


Market Snapshot

% CHANGE

IT





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© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

9

banks. Thus, when government framespolicies that are more in favour of PSBs, itis essentially allowing them to have unfairadvantage compared to private sector banks.Thus, the level playing field is absent.• TechnologyThe public sector banks are nottechnologically advanced compared to itspeers. Majority of the Indian population

is in the age of 25-35 years who are techsavvy. They are service seekers rather thancredit seekers. Technology can providebetter customer service with quick responsetime. In this regard private sector banks arebetter equipped in technology terms thanthe public sector banks and having betterinfrastructure to support it.• Financial InclusionThe government’s main focus is growthacross all strata and sector of the economy.

Hence it is imperative for the government tolend to priority sectors such as agriculture.Therefore, the responsibility of financialinclusion lies with the central governmentto ensure delivery of financial servicesat affordable costs to vast sections ofdisadvantaged and low income groups.

Private sector banks don’t open morebranches in rural areas than minimumstipulated since quality of assets are betterin urban areas. As per statistics fromInternational Institute for Strategic Studies(IISS, 2007), only 14 % of agricultural wagelabourers had a bank account, whereas thenumber was over 85 % for self-employedprofessionals. While agricultural wage

labour does have access to informal savingsschemes, that is a second-best solution (inthe economic parlance) rather than the first-best. Given such a lack of financial inclusionin rural India, comprising over 75% of India‘spopulation by most estimates, there isboth an economic and a political case forimproving access to finance.Thus, it is suggested by experts that havingmore private banks will increase the

geographic spread of the banking sector.This will increase access to credit in therural areas. It will also increase competitionamongst the banks and will indirectly leadto better service for the poor.However, there is a counterview to all thesearguments. If data is analysed from pre-1969i.e. pre nationalization era and compared

NIVESHAK 9

Majority stake of government

in banking sector is acting as ahindrance to the growth of the

economy

Fig 1: Public shareholding in Public Sector Banks



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1010

with postnationalization,then theresults showthat corporateexclusion and

gove rnmen to w n e r s h i pis crucialfor financialinclusion. Thisdata questionsthe validityof the abovearguments forentry of privateownership in

banks. Thereturns from these rural areas are generallylow and cost for doing business is high.The PSBs are able to do business in suchenvironments because of the governmentgoal of “good for all”. The private bankswhose sole aim is to maximize shareholdervalue won’t be able to sustain low ornegative returns for long periods and willeventually shut shop.

AN ANALYSIS OF VARIOUS PAPERS BYTHE RESEARCH COMMITTEES ON THEGIVEN TOPICPercy Mistry CommitteeThis committee has observed that highownership of government in banking sectoris acting as a hindrance to the growth of theeconomy. It states that “the persistence andpervasiveness of direct rather than indirectforms of public intervention in the financial

system (from ownership to directed lending)has compromised the early and smoothdevelopment of various financial marketsand concomitant institutional structuresin different financial sub segments. It alsostates that barriers have been erectedbetween different segments of financial

NIVESHAK

m a r k e t ,n a m e l yb a n k i n g ,i n s u r a n c e ,etc. Toremove these

barriers itrecommendedthat thegovernmentshould reduceits stake fromall financialfirms includingbanks to26% by the2010. It states

that thoughgovernment of India is a stakeholder and itis perfectly logical to protect its shareholdinginterest, it must give up its stake for thebetterment of India’s growth.Raghuram Rajan CommitteeRaghuram Rajan’s report “A Hundred SmallSteps” – Report on Financial sector reformsstates the advantages that the state enjoysbecause of its ownership. It observes thatpublic sector banks enjoy guaranteedsupport from government, favours byregulatory authorities, lesser costs ofbanking compared to peers. It also pointsout to that public sector banks have lesserskills and poorer incentives compared toprivate sector banks. It recommended thatthe way forward is to make institutionsownership neutral. For the public sector,this means removing the overlay of costsand benefits imposed by government

ownership. One way is bank privatization,or reducing the government’s majority stakeso that even if the government has de factocontrol, the bank is not ‘public sector’. Itgoes on to state the advantages of entry offoreign banks in India may lead to reducedcosts and increased competition. It would

Raghuram Rajan Committeerecommended that the way forwardis to make Banking Institutions

ownership neutral

Fig 1: Difference between Private and Public banks in terms of the network size



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also bring skills that are needed in Indianeconomy. It compares the profitability ofpublic sector banks with its peers in othercountries and shows that they contributevery low to the growth of GDP.Thus, it incurs that

• Additional rural branching is not veryprofitable, and when given a choice,everyone stays away from it— public sectorbanks and private sector banks alike.• When in a rural area, differences in bankownership do not significantly affect thekind of clientele that is served.• Efficiency and innovation are critical toreaching the underserved profitably. Therelatively low productivity of public sectorbanks is an important impediment in using

the public sector banks as the primaryinstrument to achieve inclusion.With respect to credit, it gives data thatsupport the theory that public sector banksgenerally lend more to priority sectors suchas agriculture. The public sector banks alsohave higher NPAs when it lends to agriculturesector than private sector banks. Since thepublic sector banks are under pressure fromthe government to help the deprived sectorof economy, many loans are either waived

or not recovered fully. It then highlights thefact that public sector with its aim of growthfor all employs significantly higher peoplethan private sector banks. This results instagnation and inability of banks to retaintalent. It, therefore states that governmentownership does not increase the efficiencywith which state owned banks carry outtheir functions, and probably imposesconstraints.Narasimhan Committee-II

Narasimhan Committee made someimportant recommendations regarding theissue of government ownership. It clearlystates that -“It attaches the greatestimportance to the issue of functionalautonomy with accountability within

Narasimhan Committe - IIrecommended the government

ownership to reduce to 33% in all public sector banks

the framework of purposive, rule bound,nondiscretionary prudential regulation andsupervision. Autonomy is a prerequisite foroperational flexibility and for critical decisionmaking whether in terms of strategy or dayto day operations. There is also the question

whether full autonomy with accountabilityis consistent and compatible with publicownership.” Thus, it recommended thegovernment ownership to reduce to 33%in all public sector banks. By reducing theownership, the government will play therole of minority stakeholder and would notplay a significant role in the policies andappointment of boards of the bank.In conclusion, it can be easily inferred thatgovernment stakes in public banks shall

be reduced. By reducing its stake in thebanking and allowing more foreign players,the government can focus more attentionon other activities that lead to growth. Itmust forego its stake and try to be neutraland independent observer in this sector. IfIndia aims to achieve the advanced state offinancial markets that countries like US have,the government must plan its exit from thissector gracefully and early.



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investors that specialize in distressed debt. As

the name suggests, these funds are like circling

vultures patiently waiting to pick over the remains

of a rapidly weakening economy. Poor nations

that are eligible for debt cancellation are highly

vulnerable. These funds have been known to chase

the debt relief process and then to buy the debt of

nations who are about to get debt relief.

A POOR NATION’S DISTRESS: OPPORTUNITY

FOR VULTURES

Vulture funds’ chances to make money rise as

problem hits an economy - the more the people

of the distressed

nation gets affected,

the better it is for the

vultures. As it is usuallymentioned, distressed

debt opportunities

are counter-cyclical

in nature. This is

particularly the case

when economic

slowdown follows a

period in which large

debt was taken. In

a scenario where a

destitute nation has

outstanding debt owed

to a government or a

commercial creditor

PICTURE THIS

Imagine a destitute nation, clambering under debt

& poverty, which can no longer make its monthly

loan payments. When this nation admits its

inability to pay back the debt, the lender, which isusually another nation or a bank, makes a last ditch

attempt to make some profit. It sells the hapless

nation under debt to a private creditor for pennies

on the dollar. Here enter the vultures. The private

creditor who bought the wretched nation’s debt

is called a vulture Fund. A vulture fund purchases

debt claims as a secondary lender. These are niche

TEAM NIVESHAK

Anushri Bansal & Neha Misra

Fig 1: A Vulture Fund’s Cycle of Prots


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IS THERE ANY HUMAN COST INVOLVED?

In 1999 and 2005, the G8 declared commitments

to call off over US$ 100 billion and US$ 55 billion

respectively in debt owed by the heavily indebted

poor nations to major multilateral institutions such

as the World Bank and the IMF. This was followed

by sustained campaigns by anti-debt groupsaround the entire world who debated that rather

than wasting a poor nations’ scarce resources on

external debt service to wealthy creditor nations

& institutions, those could be better spent on

the welfare of their citizens. Thus, debt relief was

aimed towards freeing-up funds for investments

in poverty reduction and providing health &

education to people of the nation. The actions of

vulture funds are capturing international attention,

primarily because the policymakers and the wider

public outrage that payouts to vultures transfer the

benefits of debt relief efforts from their intended

beneficiaries, i.e. the citizens of poor nations, to

speculators in sovereign debt. Litigation is also

a costly affair for the poor nation’s government

administrations. The cost is not only in terms of

dollars spent but also in the dedication of scarce

human resources & capacities to fight against

speculative litigators.

ROOTS OF THE VULTURE FUNDS

One of the leading vulture funds that has capturedheadlines for long and has been instrumental in

shaping the notorious image of vulture funds is

the investment firm Elliot Management. Putting

down roots in 1995, it purchased US$ 20 million

in Peruvian bank debt in the form of bonds

at approximately half the original value. Post-

that has not been cancelled or restructured, there

is a probability that a private financial organization

will seek to buy that debt, and that too at a

steep discount and take legal action to seek

repayment of the original amount. This is referred

to as capitalizing by firms but in the terms of debt

campaigners, this is considered as vulture activity.

ATTACK OF THE VULTURE

Taking the above mentioned example further, when

the poor nations obtain newly freed-up resources

from debt cancellation, the vulture funds pounces

in to take over the money. It hires an elite law firm

to sue the country in French, British, or U.S. courts,because the law systems of these countries usuallyhelp the creditor and not the debtor. They sue thenation for much more than what they had paid tobuy the debt, often suing for the original worth

of the debt as well as a very high interest andlegal fees. These funds often win these lawsuitsbecause there is nothing illegal about their activityin U.S., French and British law. What they do isthat they undermine the opportunity at a newstart for millions in the impoverished nation andget rich off money meant to help the world’spoorest people. IMF published a report in 2007 onVulture Funds which showed that 11 out of 24 poorcountries mentioned that they were involved inlegal cases with vulture funds and other creditors

not participating in debt relief worth a total of$1.8 billion. These have been described by theworst of terms. Some people name these funds assomething that pounce on a state like a vultureon a rotting carcass. These funds are exploitativein nature as a private creditor buys up this cheapforeign debt and sells it at a much higher cost.

Fig 2: Countries classied worldwide under HIPC Initiative



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acquisition, Elliot sued the country and won US$

56 million. However, with limited funds to disburse

for debt repayment, Peru preferred ignoring its

obligation to Elliot management. Eventually, it was

in a court in Brussels that ruled that Peru wasviolating the principle of equal treatment (pari

passu clause) and thus, was obligated to pay the

debt to Elliot. This was truly a pioneer case that

opened the door to the infamous Vulture Funds

who went on to pose a huge threat to the sovereign

secondary debt market and the poor indebted

nations worldwide.

FAILURE OF HIPC INITIATIVE

This first of the vulture fund cases also brought to

light the risk that the world debt market faced andit was during this time that IMF and World Bank laid

down the framework for ground work for a program

to assist in debt relief for poor nations. Heavily

Indebted Poor Country Initiative, launched in 1996,

was aimed at directing funds normally retained for

debt service payments towards social development

programs. These programs would aid in reducing

poverty and increasing long term developmental

infrastructure projects. However, HIPC turned out to

be a big failure when Elliot case got publicized and

similar conglomerates followed suits by exploiting

the secondary sovereign debt market. By many

standards, Elliot case was a landmark case as it

had helped lay down the ground rules on how

to achieve massive gains at the cost of some

extremely poor and indebted countries.

VULTURE FUND ABUSE IN AFRICA

And talking about poor and indebted countries, onecan’t fail to mention the African continent. It has

been one of the regions to be majorly affected by

vulture funds due to its poor and indebted status.

African nations till two years back, i.e. mid 2011,

dominated the HIPC list thus making it to the top of

the list of most vulture fund firms. With nearly 33

out of 40 HIPCs, about 80% of the countries in the

African continent were eligible for debt relief and

many were contending to become eligible under

the joint IMF and World Bank initiative. However,

two particular cases that have had devastatingimpact on the development of the African nations

owing to the huge vulture fund litigations are:

Fig 3: African nations classied as HIPC countries



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Republic of Congo

Flying high on the success of Peru, Paul Singer of

Elliot Management purchased US$ 30 million of debt

at an undisclosed price. The debt was owed by the

Republic of Congo since 1980. Post purchase, Elliot

sued the country for repayment of the full debt

plus the interest. Elliot won the litigation and was

awarded more than US$ 100 million in 2002.

Zambia

Government of Zambia had bought agricultural

equipment on credit from Romania in 1979. Soon

it was apparent that Zambia would be unable to

pay off its debt and the two countries mutually

agreed to liquidate the debt in 1999, by being part

of the debt relief program. Yet, at the last moment,

Donegal International, a third party investment firm

purchased the debt with a vulture’s eye. Donegalacquired the debt for US$ 3 million whose original

value stood at US$ 15 million. Donegal didn’t waste

any time in suing Zambia to finally settle at US$ 55

million. Zambia was forced to pay US$ 15.4 million

to Donegal in 2006 by the British High Court. The

money amounted to nearly 65% of its total relief

fund, an enhancement of the HIPC Initiative. Thus,

a large slice of the funds entitled for poverty

reduction strategies was paid off to a capitalistic

investment entity.

This was by far the most glaring example of how

vulture funds can with no difficulties wipe off any

progress made by HIPC

VULTURES HUNTING INDIA

India hasn’t been spared by these incessantly

hunting vultures either. The year 2007 saw the

economy becoming aware of this term for the first

time. Added to that, many were stating that at-

least half-a-dozen US based buyout funds were

looking around to acquire bad assets in India

In India, the main targets of these ruthless

investment arms had been loan accounts with

property collateral attached to it. Thanks to the

Securitization Act, buy out of bad loans with

underlying assets as real estate had become

possible. Most foreign funds and foreign banks

were found approaching the country’s top lenders

to buy out assets of companies that had gone

belly-up.

These firms had been pretty nonchalant about their

intentions as well. They were not attempting toturnaround the fortunes of the production units,

rather, they had wanted to develop the real estate

market, hawk it and then rifle for further prospects.

Sick units in satellite towns like Ghaziabad and

Faridabad in the North as well as far suburbs of

Mumbai and other industrial areas were being

increasingly eyed by these funds for the property

attached to them.

A blatant example in this case is Standard Chartered

Bank acquiring loans of Golden Falcon, a steel unit,

from State Bank of India at Rs. 39 crore. This was

a clear indication of the foreign banks’ developing

interest in buying out of bad loans. The main

attraction for Standard Chartered in this transaction

had been the properties at Vashi and Wadala in

Mumbai. Another, rather controversial purchase

was the bonds issued by Apple Finance by Kotak

Mahindra Primus for Rs. 80 crore. The multistoried

office of Apple Finance located in Bandra Kurla

Complex being the main lure.Even more recently in January, 2013 AION, a

special fund ( read vulture funds) jointly owned

by ICICI Ventures and promoted by ICICI Bank and

American PE firm Apollo Global had raised US$325

million to invest in distressed Indian companies.

By attempting to raise the corpus to US$ 500

million, they are clearly signaling the increasing

opportunities for such funds in a somewhat slowing

economy.

Thus, it’s time India also become aware and more

cautious of the circling vultures overhead. Vulture

funds conforming to the name connote capitalist

greed in the poorest forms. Preying on the weakest

players across the globe purely for financial gains has

jeopardized development like never before. Their

approaches of masking ownership, functioning in

offshore tax havens while establishing themselves

as fly-by-night operatives undoubtedly show that

they themselves find their work less than clothed.

In addition to this, they are known to steal from tax

payers of donor countries by not paying taxes andinstead compelling the developing nations to pay

from their development funds.

The need of the hour, thus, is to limit the profits

made by these vultures, increase transparency,

introduce an international bankruptcy framework

and prevent sale of HIPC claims to entities that will

not provide debt relief. This requires commitment

by the creditors. Europe and the US, home to a

majority of these vulture funds should lead the

pack in thwarting such activity at least within their

borders. Vulture funds are an impending threat to

not only the Indian sub-continent but to the world

at large and it’s high time that efforts are merged

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methods of valuation. A “football field”, so

named for its resemblance to a U.S football

playing field, is a summary which enables

bankers to establish a valuation range for a

company that is the subject of a merger and

acquisition (M&A) transaction. For public

companies, the football field also includes

the target’s 52-week trading range in line

with the precedent transactions in the

specified sector (e.g. 30-40%). A football field

may also reference the valuation implied bya range of target prices from equity researchreports.

Getting into a Football Field

In general, a football field will show that thevaluation range from comparable company

A company can be valued according to

different methodologies like Discounted

Cash Flow (DCF) model, Enterprise value

Multiples (e.g. EV/EBITDA), 52 weeks high/

low stock price levels of the company etc.

None of the methods can be called perfectly

right or wrong, as they provide an indicative

figure for valuation. Once various valuation

analyses have been performed, it is

important to evaluate the valuation ranges

derived from various methods and use that

information to triangulate a valuation range

for the company. Investment bankers often

summarize the result by creating a page

called “football field” to graphically depict

the valuation ranges derived using different

IFMR, CHENNAI

Lokeshwar Sinha

FOOTBALL FIELD

NOW IN VALUATION F

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Fig 1: An example of a Valuation Football Field



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Generally, strategic buyers are able to paymore than the financial buyers, since they

can take the advantage of synergies with

their own company. But, if the market allows

high leverage (as was the case from 2006 to

mid-2007), which results into higher IRRs, or

if there are specific operating strategies that

a financial buyer brings to the transaction,

then it is possible for financial buyers to

surpass strategic buyers, despite the lackof synergy benefits. If there are multiple

lines of businesses within a company, then

a break-up analysis can be included in the

football field. Depending on the industry and

the company, other valuation methodologies

can also be included in the summary.

Understanding with an Example

An example of football field can be found in

Figure 1.

As shown in Figure 1, the current stock price

of $40 is within the comparable company

analysis is lower than that of comparabletransaction analysis because a control

premium is included in the comparable

transaction analysis. However, this is not

always the case, especially when there has

not been any M&A activity in the industry for

a long time. A DCF analysis normally creates

a valuation range that is similar to the range

for a comparable company analysis, although

there are cases when it’s not so. Typically,a company’s current acquisition value falls

above the overlapping ranges given by the

comparable company analysis and the DCF

analysis, although again there are cases

when it’s not so. This is because an acquirer

should pay a control premium, which is not

included in either of the above methods

of valuation. A Leveraged Buyout (LBO)

analysis generally provides a floor value fora company, as it represents a price that a

financial buyer would be willing to pay, based

on their required internal rate of return (IRR).

Fig 2: A contrary example to the above Valuation Football Field



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l e o f t h e M o n t h analysis range of $36 to $44. The comparable

company analysis range is less than the

comparable transaction analysis range

of $42 to $51. This is generally expected

since comparable transaction multiples

include a control premium whereas tradingcomparable (from comparable company

analysis) do not. A DCF analysis might show

a valuation range of $38 to $45, unless

synergies are added, where the range

might increase to $43 to $50, assuming

cost synergies of $5. In this football field,

it is inferred that financial buyers might be

interested in the target company based on

its strong cash flow, low leverage, and smallcapital expenditure requirements, and so an

LBO valuation was completed, which shows

a valuation range of $39 to $45, based on

an assumed 20% IRR requirement. A break-

up analysis was completed, because there

are several different business lines run by

the company, and the valuation range based

on this analysis is $41 to $51, which is the

widest range due to uncertainty regardingdifferent business line values after allocating

debt and considering tax issues. Based on

this football field, investment bankers might

determine that the appropriate triangulated

value for the target company is $50 (which

might be expressed as a range of $48 to

$52), that represents a 25% premium to the

current share price of $40. However, $50

could be adjusted up or down based on theacquisition consideration (shares or cash),

probability of completion, and other factors.

Analysis & Interpretations

The comparable company analysis range is

generally in line with the DCF analysis range,

which means that, currently, investors are

properly valuing the company in the public

markets relative to its intrinsic value. The

breakup analysis range in Figure 1.1 is wider

than some of the other methods. This is not

uncommon because there is less certaintyin the values of several component pieces

compared to a single company because

there is execution risk involved with each

of the individuals sale transactions and also

because there may be uncertainty as to the

range of values for some of the component

pieces.

If the company in Figure 1 were for sale and

a buyer were to offer $50 per share, theoffer is likely to be considered “fair” from a

financial point of view due to the fact that –

1. $50 represents a $10 per share or 25%

premium to the current share price of $40.

2. $50 is on the high end of the comparable

transaction analysis range of $42 to $51.

3. $50 is greater by $5 per share than the

high end of the DCF analysis or “intrinsic”value range of $38 to $45.

This means that, assuming markets were

to properly value this company based on

a DCF valuation, the highest value a public

investor should be willing to pay for a non-

controlling interest is $45 per share. If the

financial buyer were to offer $50 per share,

the offer price would exceed the standalone

intrinsic value of the company. The onlyreason a potential buyer should be willing

to pay $50 per share for a company that is,

at most worth $45 on a standalone basis is

because the potential buyer can create more

than $5 per share of synergy value (such

that a price of $50 per share is still a value

A Leveraged Buyout (LBO) analysis generally providesa oor value for a company,as it represents a price that a

nancial buyer would be willingto pay, based on their required

IRR.

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enhancing transaction for buyer even after

paying away $5 in synergy value in order to

gain control of the target company).

If, in this example, the DCF analysis range

were $46 to $53, as shown in Figure 2, as

opposed to $38 to $45 as shown in Figure 1,the target company might not want to accept

an offer of $50 per share. If the company

believes in the integrity of its strategic plan

and its projections, it might not want to

try and realize its strategic plan and then

allow time for the market to reward it with

a higher stock price. Assuming, the market

ultimately does recognize the intrinsic value

of the company (assumed here to be the DCFanalysis range of $46 to $53); it is possible

that this company could be worth more in

the public markets than the $50 per share

offered by the buyer.

Applications

1. It helps to graphically depict the valuation

ranges derived using different methods of

valuation.2. This approach also helps in using one

method to “sanitize” the other!

3. A football field summarizes the various

metrics and assumptions used to determine

the valuation of a company or business

segment.

Conclusion

Companies are generally valued using a

combination of multiples and future cash

flows, and each of which can be taken in a

best, worst and median case scenario. For

example with a discounted cash flow, it can

be assumed that the company will have a

terminal growth rate of x%, (x+1) % or (x-

1) % which would give three different final

values. Thus, the discounted cash flow (DCF)

method will give a range of values for the

company being valued. This applies to all

valuation methods. The football field graph

shows the different mean valuations andmultiples for the different methodologies and

allows the person conducting the valuation

to decide which method to use primarily to

achieve the best possible valuation. Straight

away an investment banker can see the

share price given by the average of all of

the valuation methods and argue its range

of valuation. The valuation range is finally

tested and analysed within the context ofmerger consequence analysis in order to

determine the ultimate bid price.

A DCF analysis normally createsa valuation range that is similar tothe range for a comparable company

analysis, although there are cases whenit’s not so.

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© FINANCE CLUB, INDIAN INSTITUTE Of MANAGEMENT SHILLONG

1973

People often debate one name, the countrywhich is world’s biggest superpower today –China or the United States. Some economists areof the opinion that the dragon has already leftUSA behind but many argue that US economyis much bigger than that of China when wecompare them on a per capita basis. Whoevertops the list, the evolution of China in last 35years cannot be ignored. According to the World

Bank, GDP growth in China has averaged morethan 9 percent since 1989 and crossed even14 percent a couple of times during the sameperiod. Exports increased from USD 10 Billion ayear to almost USD 1 Trillion between 1980s and2000s. Savings increased by 14000 percent andat least 400 million people have been lifted outof poverty. Table 1.1 shows China’s GDP as apercentage of GDP of other large nations. It canbe seen how fast China has grown; especiallyafter 1978 when it opened up for the world.

Currently, China’s GDP is around 220 percent ofthat of Japan while this figure stood at only 39percent back in 1978. . China has managed toachieve all this and more through a series ofreforms generally known as “Second Revolution”which started in late 1970s. This transformed

China from a planned economy to an openmarket economy.

China before the start of economicreforms

The People’s Republic of China, establishedin 1949, adopted a planned economic systemsimilar to what followed by Soviet Union. Someof the features were state run industries and

substantial authority vested in the hands ofbureaucracy. The period between 1949 andlate 1970s saw mixed results. On one hand,rising rates of savings and investments helpedeconomy to grow while on the other, there weresome short term disruptions like Great LeapForward of the 1950s and Cultural Revolution ofthe 1960s which impacted the Chinese economynegatively. In this planned system of economy,emphasis was given to quantity and not quality

and focus was majorly on investment goodsrather than consumer products; innovationremained entirely neglected. The plannedsystem was hostile towards entrepreneurship.In an open market system, individuals andorganizations can modify volumes of sale and

IIM SHILLONG

Kaushal Ghai

Table 1: China’s GDP as a percent of GDP of other large nations

1952 1978 1990 2000 2004

United States 9.5 13.6 27.9 51.7 64.0

Japan 78.5 38.5 70.5 165.9 219.2

Germany NA 50.8 113.3 244.8 322.1

India 63.9 78.0 122.2 190.6 203.1

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price to improve customer relationships andhence improve profits, but in a planned system,everything is controlled by the state. Neitheris there an opportunity to expand nor thefear of being succumbed by the competitors,which subsequently removes the pressure of

improvement. Although China had performedwell compared to other developing nations,China’s position was weak compared to otherEast Asian countries such as Japan and SouthKorea. There was a need for economic reforms ifChina had to compete.

The Beginning of Reforms

Following Mao’s death in 1976, Deng Xiaopingemerged as the leader of China. Deng along withZhao, the third premier of the Republic of China,

initiated the series of much needed economicreforms. It was not easy for China to adopt thereforms and change from a planned economyto open market as whenever there were talksof forming relationship with foreigners a senseof fear of being exploited arose amongst thecitizens. The collapse of Soviet Union acted asthe catalyst which made Deng think to go forchange in market style. Deng’s economic reformswere summed up by the “Four Modernizations”– agriculture, industry, science & technologyand military, with the first reforms coming inagriculture.

The reforms, also referred as the “SecondRevolution”, started in a small village in eastAnhui province where some farmers signedan agreement to divide the communallyowned land amongst themselves into smallsections called ‘household contracts’. Collectivefarming in communes was abandoned andwas replaced by household cultivation. At thattime, this act would have been considered aserious crime otherwise but Deng supportedthe experiment and tried the same modelthroughout the country. This became the firstmajor breakthrough for the economic reformsof China. The privatization experiment rapidlywon support of a lot of people throughout thecountry as the Chinese farmers were alreadyfrustrated by the commune system. The shift to‘Household cultivation’ meant that the farmers

could grow extra fruits and make profit outof them rather than get a tiny share from theold collective system of farming. This schememotivated the farmers to put in more energy

which could subsequently give them betterincentives. With better incentives, farm outputjumped quickly. Figure 1 shows the agricultureoutput of China in Billions of Yuan. It can beseen that the output in years before 1978 wasstagnated around 160 Billion Yuan, but the output

increased consistently after the introduction ofagricultural reforms in 1978 and almost doubledin eight years from 1978 to 1986. The positiveimpact of reforms spread beyond agriculture toareas such as rural industries followed by urbanindustries.

After the initial success in agriculture, aim wasset to (a) revive rural and urban industries, and(b) increase market awareness and efficiencyby encouraging the producers. In order to

do so, a unique and innovative dual pricingstrategy was adopted. As per the new strategy,the transactions corresponding to most of thecommodities were split into a plan componentand a market component. Once the producerhad fulfilled the plan requirement, he could sellthe remaining goods in market at the price hewished. The new pricing scheme took care oftwo major shortcomings of the planned system.One, the rigidness in prices was controlled, asthe producers could charge flexible prices after

fulfilling plan requirement, and two, it broughtinnovation. In the planned system there wasno incentive for innovation but in the newscheme, producers could use innovative meansto increase their profitability by properly pricingthe above-plan output.

The positive impact of change in economicpolicies in China could be seen soon ascompanies which could not enter Chinesemarket earlier started changing their minds and

seeing China as a potential demand center. Itstarted in 1979 when Boeing announced the saleof its 747 aircrafts to various Chinese airlines.Soon after, beverage company Coca-Cola tooshowed an interest to open production unit inChina. The reforms marked the beginning ofinternational trade in China.

Opening of South China

Before 1978 China was almost isolated fromInternational trade. Deng’s economic reforms

gave a lot of emphasis on the establishmentof Special Economic Zones (SEZs) along thecoastline of South China. Industries establishingthere could make huge profits and avail many



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incentives in the form of low taxes, cheapland and low-cost labor, so the first SEZ wasestablished in Shenzhen in South China.

During the late 1970s and early 1980s, Hong Kongand Taiwan, the Southern neighboring countriesof China, were also experiencing a shift in theirindustries from light manufacturing to more hightech manufacturing. The businesses were lookingfor cheap labor and cheap land. The combinationof Chinese venues, low-cost Chinese labor withthe entrepreneurial capabilities and marketknowledge of foreign business people slowlydeveloped China into an export hub and tookChina forward to where it stands today, towardsits current state of economic globalization.After witnessing the initial success of SEZs, the

number of SEZs and open cities in South Chinaincreased. This was because of easy availabilityof commodities, information and tradeopportunities with the International market.

Apart from a few sectors which were shieldedfrom the external markets, almost all the othersectors saw the entry of producers from countriessuch as Japan, America, Italy, Bangladesh etc.Because of this the competition level increasedwhich pushed the Chinese suppliers to reduce

the cost of production and increase the quality tomatch global standards. The opening of economywas responsible for accelerating the shift ofChinese labor from farm sector to manufacturing

sector, and has today made China, a countrywhose biggest asset is its labor.

In a short span of just thirty years, China hastransformed a lot. Even today, China is passingthrough massive transformation; from aneconomy based on agriculture to one based onservices and manufacturing, from a commandto a market economy, and from a totally closedeconomy to an economy which is much moreopen than most countries at the same level ofincome. The reforms adopted by China in thelast thirty years have moved China to the toptrading nations in the world. The World Bank hasestimated that if China continues to grow withthe same pace, it will become the world’s largesteconomy during the first half of 21st century

itself. It has also been estimated that by 2020China would become the world’s second largestimporter and exporter of goods. It is the samecountry, which some thirty-five years ago wasunable to compete even with its neighbors suchas Hong Kong and Taiwan, and was nowherein the global economy as a whole, but sincethe beginning of reforms China has changed itsimage amongst its people and also globally byemerging as one of the today’s superpowers.

Fig 2: Agriculture Output in China



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East is “East”, all the action lies in the West.

Some might say this phrase is a thing of

the past now, others might say the G4economies are bouncing back. The truthis, in long term, we are all in debt. Lookcloser, you will see the elephant in theroom – Soaring Global Debt. From the tinystate of Cyprus racing to secure a bailoutto stave off bankruptcy, which looks like adot in the larger financial picture, to Detroitbankruptcy to the emerging markets losingtheir mojo. We are all part of it now. Banks,government and consumers, we are movingmoney around in circles. The deficit crisisand the financial bubble busts are sweepingthe economies away. With Total World Debtstanding at $190 trillion (See figure 1 for adistribution of this debt across economies),even all the World Bank Deposits can’t pay itoff. Conclusion – Financial Bubbles are goodfor economy’s health? Think about it - It’s aTRAP!

What is a bubble? When the prices of

securities or other assets rise so sharply andat such a sustained rate that they exceedvaluations justified by fundamentals, it issaid to form a bubble. However, in today’s

era , the term bubble for me, is a situationin which asset prices appear to be based onimplausible or inconsistent views about thefuture that carries the potential to desolatethe financial structure of the world.

It all began in 1637 when, speculation ofDutch Tulip Bulbs, popularly known as the“Tulip Mania”, peaked at today’s equivalentof more than $1000 per bulb and the marketcollapsed under its own weight, presentingfinancially wrenching crisis speculatorsand their backers. Then came the SouthSea Bubble of 1720 - this was a time oflavishness and opulence in Britain, withmany wealthy speculators desperate toinvest in a company that wildly promisedastronomical returns, trading wool andfleece for piles of jewels and gold. Shares inthe company quickly reached 10 times theirvalue, but when the bubble burst, manyof the country’s elite were left destitute.Railway Mania, another British phenomenon,grew throughout the early 1840s, peaking

in 1846 when a staggering 9,500 miles ofnew railway lines were authorized, arounda third of which were never actually built.As the price of railway shares increased,

IBS, H YDERABAD

Akshay Gupta



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more money poured in, largely from thenew, affluent middle classes that had arisenfrom the smoke of the industrial revolution.As few had predicted, it ultimately becameclear that building railway lines was not aslucrative and easy as investors had beentold by wily entrepreneurs. The collapsewas unavoidable, and many middle-classfamilies lost their life savings as a result.

The predominant factor of the USA’s GreatDepression known as “The Black Tuesday” of1930 was over-indebtedness and deflation;loose credit to over-indebted, which fuelledspeculation and asset bubbles. Talkingabout bubbles, how can one forget the “TheDot-Com Bubble” of 1997, one of the historic‘speculative’ bubbles of all time that leftbehind many vacant buildings and manymore failed dreams. Low interest rates by

the Fed’s and subsequent availability ofcheap credit led to over investment whichwas the main cause of the downfall. Thiswas the time when growth was preferredover profits and the market collapsed yetagain.

A classic example of low interest ratesdemolition is of the Housing Bubble Crisis(Sub-Prime Mortgage Crisis) where the USFed made more mistakes than yogi bear

reciting Shakespeare. This bubble also led tothe Eurozone Debt Crisis - a complex networkof financial derivative products (Whichaccording to Warren Buffet are nothing but

WMD’s - Weapons of Mass Destruction) heldglobally. However, this was just the tip ofthe iceberg. The solvency of some EU bankswas strained by significant exposures todomestic sovereign debt. The market valuedrop of government bonds led to liquiditystrains, as these bonds were widely used ascollateral in interbank markets and in someinstances, EU governments had to provide

funding to vulnerable domestic banks, atthe expense of their countries’ debt.

It seems like everyone is on a suicidemission with an option to blame their kill onsomeone else but the beauty of deal is thatno one is responsible, because everyoneis drinking the same cool-aid. The FederalReserve Quantitative Easing (QE) measures(a fancy term for easy money policy!) areresponsible for blowing these bubbles.

However, the reality is that a pin lies inwait for every bubble and when the twoeventually meet, a new wave of investorslearn some very old lessons: First, many inWall Street (a community in which qualitycontrol is not prized) will sell investorsanything they will buy. Second, Speculation-“The Mother of all Evil” is most dangerouswhen it looks easiest.

So are we doomed to be in financial bubbles

forever? There’s a lot of bubble talk outthere right now. Much of it is about analleged Bond Bubble that is supposedlykeeping bond prices unrealistically high and

Fig1: National Debt by Countries





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but it causes economic control problems.When central bank buys dollars, theyneed to sell local currency, increasing itsavailability and boosting the money supplyand inflation, so they sell bonds to mopup excess money. It’s an imprecise sciencemade more complicated by the US Fed’sQE policies which could sink the emergingmarkets. So does one get a déjà vu of theAsian Financial Crisis 1997? We should not

forget the example of Japan, where betsagainst government bonds (similar totoday’s QE policies) ended in grief so oftenthat the whole trade came to be known asthe “widow-maker” which was a catalyst inthe ’97 crisis.

However, every crisis contains within itselfthe seeds of success and the roots of failure.Finding, cultivating and harvesting thatpotential success is the essence of crisis

management but it seems insurmountable intoday’s era of greed, where banks, investorsare going bonkers over cheap credit and areready to repeat the same mistakes again.From the Tulip Mania to Great Depression,to the stagflation of the seventies, to theeconomic crisis caused by the housingbubble and Eurozone and now the bondbubble, every economic downturn sufferedby the developed and the emerging markets

can be traced to Federal Reserve policy.The Fed has followed a consistent policyof flooding the economy with easy money,leading to a misallocation of resources andan artificial so called ‘boom’ followed by a

recession or depression.

What’s the definition of insanity if not doingthe same thing over and over and expectinga different result every time? Can natureendure more and more people going insaneat the same time? It becomes, as Buffetsays “systemic” like cancer - it’s global andmalignant. Greed is good, but not God. Wetake a buck, we shoot it full of steroids andwe have a bubble, which are nothing but anin diffusible time bomb. The months aheadwill be choppy. There will be moments ofpanic when the markets will have to becalmed. Most of us don’t know it yet butwe are the ninja generation - no jobs, noincomes, no assets, we got a lot to lookforward to! So brace yourselves ladies andgentleman, I wish you a merry crisis.



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Sir, yesterday there was an experttalk being telecasted on the TV discussingSIP, STP and SWP in Mutual Funds. Whatare these plans all about?

As you all know, a mutual fund is aprofessionally managed type of collectiveinvestment scheme that pools moneyfrom many investors and invests it instocks, bonds, short-term money market

instrument and other securities. Mutual funds havea fund manager who invests the money on behalf ofthe investors by buying/selling market securities.

Sir, how SIPs can help us in reducingrisk associated with price movements in

the market?

As net asset value fluctuatesthroughout the year, there is no waythe investor can anticipate the maximaor minima. In case of SIP (SystematicInvestment Plan), the investor, by

deciding to invest say Rs. 3000 regularly each monthautomatically gets the benefit of the swings. He getsleast number of units in the months of high NAVs,whereas he accumulates higher number of units

during low NAVs. Thus, SIP helps in averaging cost ofacquiring units.

Sir, what is STP then?

In STP (Systematic Transfer Plan), weinvest a lump sum amount in Debt MutualFund and then a fixed sum is transferredfrom this fund to an Equity Mutual fundon mutually agreed dates of a month

and denominations. These plans outperform whenmarkets are very volatile and one doesn’t want totake risk with his money in a short span of time. Ifone invests through STP and markets falls or goesvolatile, then this situation is way better than the

one time investment option. For that matter, it is stillbetter than keeping money in Bank or a SIP, becauseat least the money is earning some returns on debtpart in STP. In a way it offers all the advantages of aSIP along with other advantages like growth of moneyand liquidity.

Sir, is there any situation wherein SIP

is more advantageous than STP?

Yes a situation does exist. Let’s say,in case market is already at the end of abear market and it can start its upwardmovement anytime. In that case STP willnot deliver the best returns like SIP, because

at that time a one-shot investment is a good choice.

Sir, can we can say that STP is suited

to investors who want to invest lump suminto debt funds and at the same time wantsome equity exposure in order to gain

higher returns on their investment.

A big YES!! But vice versa is true aswell. STP can also work as a tool to transferfrom equity fund to debt scheme giving youthe dual advantage of earning profits fromyour equity investment and preserving

capital by moving it into debt.

Sir, they also mentioned about SWP.What is that?

SWP stands for Systematic WithdrawalPlan. Here the investor invests a lumpsum amount and withdraws some moneyregularly over a period of time. This resultsin a steady income for the investor whileat the same time his principal also gets

drawn down gradually. These plans are very well

suited for retired people who get a lump sum amountof gratuity after their retirement and want a regularsource of income.

Sir, thank you for explaining theconcepts so clearly.

CLASSROOM

FinFundaof theMonth

Mutual Funds

NIVESHAK 27

Cl a s s r o

om

IIM Shillong nirmit mohan



2828

F I N - Q

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

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

1. X is a financial organization in India and is the only investment firm to be created

through Parliament Act. X remained the sole vehicle of investment in the capital market

until regulator SEBI was established in 1988. Identify X?

2. Indian partner of a joint venture (north and east operations) with the world’s leading

fast food restaurant has petitioned to the Company Law Board for his removal as the Man-

aging Director of the JV. Name the JV

3. X, an Indian company, floated an issue of a controversial financial instrument, Y, in 2008.

It collected a sum of around Rs. 19000 crores by 2011. X claims that this issue was a private

placement and not a public offer. Identify X and Y.

4. The Organization in Question has been awarded with numerous prestigious awards in

the travel industry, a few prominent ones being Genius of the Web Award by CNBC, National

Award for E-Governance for being the Best Citizen Centric Application, Most Innovative

Product in Travel & Tourism of India etc. September 2, 2013 was a new high in the history

of the firm. Identify the organization and the high it achieved on September 2, 2013.

5. A rule permits market makers to trade outside quoted ranges, when it is determined by

an exchange that the movements in the market are so sharp that quotes cannot be keptcurrent. What is this rule called?

6. GoI moved from a defined benefit plan to a defined contribution plan by making it man-

datory for its new workforce (except armed forces) with effect from 1st January, 2004. This

lead to formation of regulatory institution X to regulate and develop the sector. Identify X.

7. Which Multinational National has bought Daewoo ENTEC, a leading Korean sewage treat-

ment service providers, and is looking at more M&As to become the leading water treat-

ment company globally?

8. Movie X, an American drama film spans over the 36 hour period at a reputed Investment

bank and depicts the pre-stages of the financial crisis 2008. Identify X.



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