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Senior Team

Prakash Nishtala

Vidhi Shah

Dear Readers,

Greetings from Team Finomenon!

We are living in one of the most interesting times where all the much-awaited events are converging in a jiffy. In a matter of few months, we’ll get to know RBI is banking upon which new players, nation is backing up which new government and the markets, which now have become the barometer of our excitement, are reaching what magical figures. There’s so much to be discovered in this frenzied-ness that one might easily forget even to complete the financial-year end formali-ties. Of all these events, general elections are definitely the most looked after as it holds the key for what is to come our way for next 5 years. The longest elections in Indian history are round the corner. In the run for the world’s largest celebra-tion of democracy, economic aspect of the election manifesto plays a crucial role. In this issue, we discuss the points which the next government should highlight upon. With the current unstable world economy, the steps need to be quick and agile. The Financial, through the theme for this edition, “Economic Manifesto for the New Government” invited the budding finance mavericks from across the top B-schools to share their views on key economic points in the new to-be formed Government.

We are happy to bring to you, with this revamped issue, a 3600 view of the finan-cial world. In this issue, we have delved into the viewpoints on a wide array of contemporary topics. The perspectives put forward by the budding managers from across the B-schools are sure to give a new dimension and importance to this issue. The process of evolution of ‘The Financial’ will see a deliberate at-tempt from Finomenon, to involve the readers as much as possible. The aim this time is not to have an article end with its last word in the magazine but to take it beyond through comments and discussions. Feel free to contact the writers of each article and discuss their views or to even dispute them! As always, I hope you enjoy this issue! Let us know how you feel about the content. Criticisms, sug-gestions, requests, and jokes, they are all more than welcome.

We thank one and all for their valuable contributions to this magazine and hope you enjoy the articles. ‘The Financial’ is an interactive magazine and, beyond just a magazine, a two-way interactive channel. As we exchange ideas, we will evolve and grow to greater heights.

Signing off, one last time and wishing you great times ahead with ‘The Finan-cial’!

Prakash Nishtala

Editor-in-chief,

The Financial

From the Editor’s Desk

The Financial

Volume no. IV

Issue no. III

April 2014

Finomenon

NMIMS ,Mumbai

All design and artwork are

copyright work of Finomenon

NMIMS Mumbai

Creative, Design

and Content

Ajit Nayak K V

Bhuvanesh Kumar

3

C

ON

TE

NT

S

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As the largest democracy in the world goes for polls in two weeks and the new government makes its way to Parliament it is imperative to look back upon past and intro-spect. India in the last 10 years has been marred by innumerable scams, volatile global and domestic markets, flagging investor senti-ments. As the world recovers from this period of gloom, we look for-ward for better economic climate.

The new occupants at North and South Block in Delhi will have a daunt-ing challenge ahead of them with both local and global factors affect-ing every de-cision that they make. With every political party coming up with a manifesto of their own try-ing to please their electorate, there are a few agenda points which are sacrosanct and cannot be compro-mised on. This paper lists the eco-nomic manifesto which the new government ought to implement in its policies.

Bring in a uniform tax code

UPA-II had DTC and GST on its agenda back in 2009. But, due to vehement protests from the states and lack of intent from the govern-

ment both the tax codes were unable to be implemented. This disappointed the India Inc. and to make matters worse the Supreme Court ruling was overturned and retrospective tax amendments was introduced in the case of Vodafone-Hutchinson-Essar deal. This angered the investors which was reflected in fall of the FII inflows and India is increasingly be-ing viewed as a hostile place to con-duct business. The need of the hour is a seamless and friendly tax envi-ronment which stimulates entrepre-

neurship and improves ease of start-ing a busi-ness.

The postpon-ing of tax avoidance rule GAAR to 2016 and lack of firm tax structure has given room to am-

biguity in the business environment. The recommendation by Parthasara-thi Shome committee which suggest-ed rollback on GAAR and retrospec-tive tax amendments being imple-mented only in the rarest of the rare cases must be brought in place and GST and DTC should be implement-ed on priority.

Boost the manufacturing sector

During his hour long speech during the interim-budget on February 17 finance minister P.Chidambaram

Economic manifesto for

the new government

BY AJIT NAYAK K V, NMIMS– MUMBAI Ajit Nayak K V is a first

year MBA student at

NMIMS, Mumbai. He holds a

B.E from MSRIT, Bangalore

and has a worked for in

Infosys and an NGO. His

interests include Football,

Teaching and listening to

heavy metal.

E m a i l I D -

ajit.nayak.k.v@nmims.edu.i

n

C

O

V

E

R

S

T

O

R

Y

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summed up the current scenario aptly when he said ‘Manufacturing is the Achilles heel of Indian Econo-my. The deceleration in the investment in manufac-turing is worrying’. 2013-14 has been the worst year for manufacturing since 1999/2000 with 0.2 per cent decline in growth. With 15% share in manufacturing in GDP for the past 30 years, the sector remained stagnant. This is in contrast to China’s 34 per cent share of GDP constituted by manufacturing. This lackluster performance is main-ly due to high interest rates, slow-decision making, and weak domestic demand and infrastructure bottle-necks.

The new rule should instill the belief in India Inc. that we can be a manufac-turing power-house. To do this, firstly pow-er and infra-structure bottle-necks needs to be reduced by designing a sin-gle window clearing mecha-nism for all the power and infrastructure projects.

Secondly, develop clustered growth of NIMZs (National Investment and Manufacturing Zones) not just on paper in the form of MOUs but bring them into action. Finally, industrial corridor between Del-hi and Mumbai, Bangalore Mumbai Economic corri-dor project must be developed into major manufac-turing zones.

Disinvestment not just fill the coffers

Divestment which were originally meant to have a more broad-based equity and autonomous manage-ment in PSU’s has become a mere financial exercise

to reduce the fiscal deficit. The government of India was able to disinvest a paltry 4 per cent of the ambi-tious 40,000 crore that it had planned to divest at the

beginning of the fiscal year. The government should approach disinvestment in a systematic manner and use the pro-ceeds in asset gen-eration rather than plugging the fiscal deficit hole.

Fiscal Consolida-tion

Fiscal consolida-tion are the steps employed by the government that are aimed at minimizing the deficits and prevent accu-mulation of debt. Finance Minister P. Chidambaram had set a fiscal deficit target of 4.6% of GDP at the beginning of the year, but this target is well on its way

to being missed with economists predicting that the key parame-ter might hover around 4.7-4.8%.

Wasteful gov-ernment ex-penditures must be curbed, un-necessary subsi-dies must be done away with, many of the ministries such

as textiles, culture, and steel have had sinecurial exist-ence for life. These ministries are siphoning off tax-payers’ money, thus should be temporarily disbanded. These measures should be coupled with strict auditing of finances and performances. 4.6% is considered as the red line of fiscal deficit; the new government should spend considerable efforts in not breaching this target.

Bring back the black money

Economists and research bodies vary in their esti-mates of black money stashed away in tax havens such as Switzerland, Liechenstein, Luxembourg, Cay-man Islands, Seychelles, Mauritius, Macau, etc.

6

The total black money by Indian nationals in these havens is believed to be between 500 billion to 1 trillion USD, which is an astronomical amount. This amount constitutes 50-60% of India’s GDP. Repat-riation of even a miniscule amount of these funds would clear all our external debt, fund education and health care sector and do away all the ills afflicting Indian economy.

A major part of the black money is stashed away through Hawala transactions, transferred as kick-backs received by various civilian and defense pro-jects. Names of celebrities, sports stars, politicians, business moguls have been dug-up in recent times due to the advent of reports by the Swiss banks and WikiLeaks documents. Although the names of some of the top-notch businessmen were present in the report, the Government of India failed to reveal the names fearing political backlash. Whether the new government will follow the ‘status quo’ or will ex-press interest in the repatriation of funds, one needs to wait and watch.

Promote micro, small & medium enterprises

MSMEs are only after agriculture in employment generation, they employ around 6 crore people. They contribute to 8% of our GDP. But this sector has been inflicted by several regulatory roadblocks. For example, the definition of MSME under MSME De-velopment Act needs a re-look. A small enterprise in services and manufacturing sector must have an in-vestment of Rs. 10 lakh – 2 crore and Rs. 25 lakh – 5 crore respectively. If the small firm wishes to ex-pand, credit is hard to find as credit flows only to large companies or those MSME’s which fall under the government’s definition. Hence, an overhaul of the current definition is required to have clarity as to what defines a MSME. Easy access to power, infra-structure and tax rebates should be made available to these growth driving sector so that it can take-off.

Pass Crucial Legislations

The recently concluded 15th Lok-Sabha will go

down in history as the worst performing house since independence. As issues like Statehood of Telangana, 2G, Coalgate and CWG scams rocked the house, they ate away precious time due to which legislative ma-chinery took the beating. Important bills that remained pending were Coal Regulatory authority Bill which sought to implement independent regulatory body af-ter the coal scam, The Direct Taxes Bill which seeks to consolidate direct-taxes, Mines and Minerals bill which promised transparency in Mining sector and many more. In total, 128 bills are still pending in both the houses of parliament. A strong consensus must be established across parliamentarians cutting across par-ty lines to implement these bills as early as possible.

More emphasis on social sector

The prosperity of a nation is judged not just on the basis of number of billionaires or the investment cli-mate and business environment but on the well-being of the citizens of the nation i.e the standard of living. Although there have been few positives in this area (such as India was recently declare polio free), a lot is yet to be done. India ranks 136 in the HDI rankings way behind less developed countries such as Iraq and Philippines. As a first step, our social sector spending has to be increased to reach global average.(For ex: India spends 1% of its GDP on healthcare, one of the lowest in the world, only countries like Yemen, Chad spend less than India).

Healthcare and Education are two best investments that India can make which will generate a strong and able future workforce. In education, focus should be on reducing drop-out rate in schools, to eliminate the skill gap that exists today between the industry and universities, to incentivize private sector to invest in education. As for Healthcare, as said before increase the spending in healthcare. Healthcare must be made accessible and affordable to the poor especially in ru-ral areas, the enormous gap that exists between healthcare supply and demand must be met by scaling up the supply of doctors, medical facilities.

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“Bread, cash, dosh, dough, loot. Call it what you like, but money matters more than ever” (Niall Fer-guson). We could trace money from it being a store of value in the form of gold, to a gold convertible paper currency i.e. the gold stand-ard for facilitation of trade and ease of exchange. When we could not get enough gold to support our cur-rency, we went on to back our cur-rency with faith i.e. fiat system. But now we see a new kid on the block challenging the very founda-tions of our monetary system viz. bitcoin.

Bitcoin is described as a “Ponzi scheme” to the “next big thing” and everything in between. But we may love it or may loathe it; we simply cannot ignore bitcoins anymore. As we go on, we will engage with the hurdles faced by the above men-tioned monetary systems and pon-der whether that very kid could sur-pass his predecessors.

Creation of Money

When gold used as a currency, though there were questions re-garding the purity of gold, the gov-ernment (Feudal Lord) had less control on the gold that was enter-ing the system. In case of the cur-rent fiat monetary system or even the gold standard, there is a central issuing authority namely the central bank. The advantage of the central issuing authority is that it can arbi-trarily decide, if necessary, to cre-ate new money. Bitcoin is a decen-tralized currency, beyond govern-ment control. Money that comes

into the bitcoin ecosystem is con-strained by algorithms. Like gold, bitcoins are “mined”. In case of gold, we mine it by the sweat of our brow while in case of bitcoins; we unearth them in exchange for the computing resources given out.

Availability

Long back when gold was used as a medium of exchange, the ability to mine gold was a serious constraint in the money supply. In the gold stand-ard era, the amount of money that could be printed was limited to the amount of gold that the issuing au-thority had, while in the fiat mone-tary system, there is practically no limit on the amount of money that can be printed. As we have seen from the Quantitative Easing, the Federal Reserve practically went on a money printing spree and created “money out of thin air”.

However, there are only 21 million bitcoins to be unearthed. As of March 2014, about 12.4 million have been mined and put up in circulation and the last bitcoin is estimated to be mined in 2143. With each new batch mined, the bitcoin ecosystem makes it harder to unearth bitcoins, which leads to a steady flow of bitcoins be-ing created unlike the fiat monetary system. The most popular way to ac-quire bitcoins is via bitcoin ex-change, the most well-known being the Japanese site Mt. Gox, which ac-counted for about 70% of all bitcoin transactions until its infamous crash. It could connect to our bank account

Bitcoin: The next monetary

system?

BY GAURAV CHATTOPADHAY & PUNEET MHATRE, SIMSREE

Gaurav is 1st year student

of SIMSREE, he has

completed his B.E in

Computer and then worked

at Tata Consultancy

Services for two years.

E m a i l I D

gaurav.chattopadhay@sim

sree.net

Puneet is currently

pursuing MBA in Finance

from S IMSREE. A

computer engineer, he

has w orked w ith

Accenture.

E m a i l I D

puneet.mhatre@simsree.

net

8

and convert our fiat money into bitcoins and store it in our digital wallet.

Money as a store of value

In the gold standard age, the value of the currency was related to the amount of gold it can be converted back into. There is no doubt that the shiny metal has intrinsic value as it can be molded into jewelry. In the fiat system, money technically has no intrinsic val-ue. It is just plain old paper with some fancy official print on it. The value of the fiat (Latin for “it shall be”) currency depends on the peo-ple’s faith on re-spective issuing governments and the dynamics of de-mand and supply.

What gives bitcoin its value? It has value only because of its amazing utility as a medium of exchange. The sudden rise in the value of bitcoin is solely based on speculation. 50% to 90% bitcoin transactions are estimated to been speculative in nature. Bitcoin is a very volatile high risk currency. A year ago its value was un-der 100 USD, which peaked at 1100 USD in December and is currently (as of 7 March 2014) valued at USD 604.5. How-ever, bitcoin has no intrinsic value and it can vanish even by some mishap in the bitcoin ecosystem.

Figure 1 shows that as the years go by, the number of bitcoins that can be mined every year reduces drastically. This could ac-tually squeeze out the liquidity out of the system. But the unique feature of bitcoin which overcomes this issue is that one bitcoin can even be divided even into 100,000,000 parts while a USD can only

be divided into 100 cents. So in the long run, the value of bitcoin with respect to the USD will eventually rise due to demand supply dynamics; if at all bitcoins make it till 2040. If we compare it with the historic trend in the USD monetary base below, we could easi-ly see a significant increase in the monetary base due to Quantitative Easing (QE). Probably this could be the reason why hoarding of bitcoins is so much preva-lent.

Ease of Exchange

Lack of divisibility of gold posed a se-vere impairment on the gold as a medi-um of exchange. Gold standard was an evolution which overcame this im-pairment. The same ease was applicable for fiat currency as well. Currently technology has ena-

bled people to exchange money over the internet and most of the money in circulation has been digitized. Bitcoin is an evolution to the digital fiat currencies where 100% of the money is digital.

The thing that dif-ferentiates bitcoins from fiat currencies is that no bank or credit company can monitor bitcoin transactions. How-ever, that means any user error or mistake even as small as loss of password can re-sult in permanent loss of bitcoins not only from your account but also from the

bitcoin economy. Since all bitcoin transactions are irreversible, we cannot rectify our folly of entering wrong sender details, unless the Good Samaritan, who received our funds, returns them. Bitcoin transactions are not anonymous. Any-one can see the balance and transactions of any bitcoin address. However, the identity of the address

Figure 1 Total bitcoin over time (www.ajaxfinancial.com)

Figure 2 U.S monetary base (www.ajaxfinancial.com)

9

is hidden, until the information is revealed at the time of purchase/transfer or otherwise.

Risk of Loss/Theft

Though the digital format is a convenient method of exchange, it can also be exploited to easily steal our money. Theft of bitcoins by hackers is a great risk. In late Feb-ruary, Mt. Gox went offline and filed for bank-ruptcy in Japan, after reporting a theft of 850,000 bitcoins ($480 million) by hackers, leaving 127,000 robbed customers in peril.

Soon after, Flexcoin, a bitcoin “bank” was forced to close after hackers stole 896 bitcoins, worth over $600,000, stored in the “hot wallet”, bitcoins stored in an online wallet. However, users who put their bitcoins in “cold storage”, in offline accounts were saved. At least 150 phishing software and malwares de-signed to steal bitcoins exist as per a report by DellSecureWorks.

The crypto curren-cy is largely uninsured against theft or loss. Howev-er, The London-based Elliptic, a “cold storage” ser-vice offers insurance for bitcoin investors should their bitcoins disappear (as in the case of Mt. Gox or Flexcoin) and claims that its bitcoin "vault" is in-sured by Lloyd's of London. Falcon Global Capital, a San Diego firm announced launching a similar fa-cility.

Similar risks could be applicable for digitized fiat currency and perhaps even in the gold standard if there was any digitization in those days. For pure gold as currency, physical theft and robbery was a

constant concern. In fact for money, risk of theft is ever present.

Usage and Acceptance of the masses

Traditionally, gold and the gold standard currency have been accepted by the masses as a medium of exchange. Lack of options and govern-ment’s stamp of au-thority has cemented the acceptability of the fiat currency. But bitcoins is a new of-fering which is cur-rently only being

adopted by people who want to take a bet on it. Bitcoins can be used for purchases in various online e-businesses including Wordpress.com, but fewer brick

and mortar estab-lishments like pubs and restaurants and it is gaining ac-ceptance. Current-ly, more than 30,000 Indians hold about 1% of the total 12 million bitcoins in circula-tion. In January, Highkart became the first (and the only) e-commerce site in India to start accepting bitcoin payments. WeR-

wired, a Bangalore-based geospatial, security and en-tertainment consulting firm accepts bitcoins. Castle Bloom, a Chandigarh beauty parlour and spa became the first brick and mortar establishment to accept bitcoins, but soon backed out after raids on Indian bitcoin exchanges. India is not a hot spot on the bitcoin market; however the world is accepting bitcoins for various purchases. Using bitcoins, one can pay it for online dating (okcupid.com), buy land in Nicargua, buy homes in the Hamptons (US) and the Alberta Province (Canada), study in University of Nicosia in Cyprus and even reach space by buying a seat on the Virgin

Figure 3 Bitcoin vs. USD (coinbase.com)

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Galactic. The anonymous online marketplace ‘Silk Road’, described as “Amazon.com of illegal drugs”, also accepts bitcoins. Government Acceptance Bitcoin has emerged as a shadow tax free currency popular with outlaws; its use in the online black market did not bode well with governments. Gov-ernment reactions have been diverse. From an out-right ban on bitcoins (now revoked) in Thailand to China - world's biggest market for trading bitcoins - curbing all real world use of the crypto coin by bar-ring banks and payment systems to deal with it. Rus-sia considered them as “potentially suspicious”. While Germany and Norway classified bitcoins as a ‘unit of account’ and an asset respectively, preparing to tax the virtual currency; bitcoin-friendly. Denmark, Poland, and Singapore advocate no regu-lation on bitcoins for now. While US’s Federal Re-serve gave “tacit approval” to bitcoins; IRS warned against its use, so did European Union and our very own RBI. The RBI talked about the theft and loss of bitcoins, lack of a legal framework to redress com-plaints/disputes, no asset backing the currency as well as bitcoins being a tool for money laundering. In December, the Enforcement Directorate (ED) raided buysellbitco.in, the biggest Indian bitcoin ex-change, suspecting a ‘hawala scam’. Following the

raid and the stern RBI warning, almost all Indian bitcoin exchanges closed in late December. While concerns are genuine, bitcoins are a threat to the government’s birth right to create money. In fact, no government would endorse ‘parallel currencies’. If governments accept bitcoin as a valid alternative to their own currencies, they might end up opening a Pandora’s Box, because bitcoin is not the only virtual currency in the world. At least 120 “siblings” of bitcoins exist, which would make the job of control-ling them difficult for the regulators. But then com-munity currencies have co-existed with fiat money in harmony in UK and Canada, but they are constrained in geographical limits, unlike the cryptocurrencies which transcend national boundaries.

Conclusion

We have dwelled on all the major monetary systems that have been prevalent in the world since ancient times and the various factors in which they differ. The thing that is holding back bitcoins is lack of intrinsic value and no prior history of acceptance. But with time there can be a hope that bitcoins will be accepted in the mainstream. Ultimately, “All money is a matter of belief” (Adam Smith). Bitcoins may be a step to-wards F. A. Hayek’s idea of denationalization of mon-ey; a monetary revolution or just another case of ‘Tulip Mania’. Only time will tell.

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“It is still possible that not all eli-gible applicants might get licens-es” – Dr. D Subba Rao during his tenure as RBI Governor

“We hope to start handing out the licenses” – Dr. Raghuram Rajan, RBI Governor

"I sincerely hope that when new bank licenses are given out, they are given to people with innovative models.” – Chidambaram, Finance Minister

In the midst of speculations on li-censes, there are a group of people meticulously working on a com-mon goal. And they made head-lines few days back.

“We have submitted re-port to RBI,” – Mr. Jalan, former RBI Governor

This news was loved the most by media as they have something to munch upon. And once again, discus-sions about new banking licenses starts on news forums, online portals and status updates on FB and tweets on twitter either criticizing or appreci-ating RBI and Government.

Let us try to look at things objec-tively and understand whether the new banking licenses really change

the way we do banking and bring about radical changes in the banking industry at large.

Brief History of Banking in India

The first modern banks in India were Bank of Hindustan (1770) and The General Bank of India (1786) and both are non-operational. The oldest bank which is still operation is State Bank of India, erstwhile Imperial Bank of India formed by the merging of Bank of Calcutta, Bank of Bom-bay and Bank of Madras. The Re-serve Bank of India was established in 1935 and regulated the banking industry in our country after Inde-pendence.

In 1969, Govern-ment of India na-tionalized all the major banks at that time bringing about 85 percent of deposits in the country under its

control. A second round of nationalization happened in 1980. After the BoP cri-sis in 1991, the banking sector was again opened to private players by issuing licenses. By the end of 20th century, Indian banking comprised of

Banking licences - the

story so far

BY SUNIL RAMAVARAPU, NMIMS– MUMBAI Sunil Ramavarapu is

a first year student

from NMIMS Mumbai.

I n t e r e s t a r e a s

inc lude banking

industry and equity

markets.

E m a i l i d

sunil.ramavarapu@n

mims.edu.in

Figure 1 Indian Banking at glance (Source: RBI's Financial Stability Report, 2013)

12

state run banks, private banks and foreign banks. The last time the RBI issued licenses was in the year

2003-04 when Kotak Mahindra Bank and Yes Bank

have acquired the permission to setup banks.

Banking Licenses

The Union Finance Minister had made an announce-

ment in his budget speech for 2010-11 that the RBI

was considering giving some additional banking li-

censes to private sector players. In pursuance of the

budget announcement, the RBI put out a discussion

paper on its website on inviting feedback and com-

ments which elicited wide response. Later, it re-

leased a set of eligibility criteria to apply for the

banking licenses shown in the figure below.

The major eligibility criteria being:

Rs. 500 crore initial paid up capital

Public enterprises,

private corporates as

well as NBFCs with

10 years of good

track record, creden-

tials and integrity

40% of paid up capi-

tal to held by holding

company

25% of branches to be setup in unbanked rural areas

Foreign shareholding capped at 49% for the first 5 years

Banks to raise capital within 5 yars through pub-lic issue and private placement

Equity capital to be brought down to 40 % in first three years of operation

Promoter holding to be lowered to 20 and then to 15 within ten and twelve years respectively.

Aspirants and their challenges

The list of aspirants who applied for the banking li-

censes are shown in the figure 3. Out of the 26 appli-

cants, two of the applicants, Tata Sons Ltd and Val-

ue Industries that is affiliated to Videocon Industries

Ltd have withdrawn their applications citing economic

and operational impact on their existing businesses.

Mahindra also withdrew its plans to apply citing the

same reason.

The four main obstacles before the applicants are:

Companies will have to set up non-operative fi-

nancial holding company and transfer existing fi-

nancial business to the bank

Meeting PSL target of 40% right from the first

year of operation

Maintaining SLR and CRR as the existing banks

in business for many years

Setting up of 25% of the branch network in the

unbanked rural areas

Also there are company specific challenges. Indian

Post needs to set up a holding company and list the

promoter companies. Bro-

kerage firms like India In-

foline and Edelwiess need

to list themselves as pro-

moters and move their

broking business to a new

subsidiary. MFI compa-

nies also need to list them-

selves as promoters and

move their existing busi-

ness to a new subsidiaries.

Infra financing companies

like IDFC needs to be

listed as a promoter, move

its infra business to bank

but will have to build the

retail from scratch. IFCI

would face challenges in maintaining SLR and CRR.

In case of NBFCs, L&T Finance may need to keep the

leasing business out.

LICHF to be a holding company, moves its financing

business into bank and offer the shares of the new

bank to existing shareholders. For Magma Fincorp,

the PE firms like KKR, IFC and Macquarie need to

dilute their holding from existing level of 43.5%. All

these challenges need to be sorted out by respective

company in case it is given the license to run a new

bank.

Figure 2 Eligibility Criteria (Source: RBI website, Image – The Hindu)

13

Challenges in Indian Banking

Finance Minister P Chidambaram called for more

innovative business models in banking. Adding on

to what was said by him in the beginning of this arti-

cle, he went on saying " It will be a pity if the new

banks are clones of existing

banks.....We need different

kinds of banks to cater to

different segments of Indian

society."

The Finance Minister, a per-

son who controls more than

seventy percent of the bank-

ing industry, should also

introspect as to why the

banks in the public sector

are unable to innovate.

Though what he said was

right, we should also under-

stand the fact that Govern-

ment has also equally con-

tributed to this deteriorating

environment for innovation.

This is the reason why there

is an absence of undifferentiated banking in India.

This when combined with regulatory over-caution

resulted in creating the clones of the same business

models in the Indian banking industry.

At the same time, it is also worth noting out that pri-

vate players have introduced new banking models in

in the 1990s. The innovations like Internet banking,

seamless trading, any branch banking, and large

scale retail banking are made possible with the entry

of private players. Today almost any financial or

physical product can be bought or financed by the

click of a mouse, and banks today are the biggest

custodians of investor wealth. They have seamlessly

integrated banking, broking and demat accounts.

But banks in public sector could not take it off the

way their private counter parts have done. It does

not come as a surprise that PSBs, once the pioneers

of mass banking in our country after nationalization,

are also parroting the private banks. This once again

shows the Government in the bad light as it starts to

impact the innovation of the private banks too as the

competition from PSBs are weak. They are also im-

pacted by the huge amount of the bank loans given to

the politically mandated lending to favored sectors

with crony capitalists being indulged endlessly. The

situation now is so worse that public banks require

high spread to cover their NPAs while the private sec-

tor is using this same

spread to make super prof-

its. When the private

banks are able to get high

profits which is also aided

by the inefficient PSBs,

they are not willing to take

risks by coming up with

innovative business mod-

els.

Government ownership

also comes with low levels

of financial and manageri-

al autonomy. Let’s consid-

er SBI and HDFC Bank.

Since its inception, HDFC

Bank has had only one

CEO, Aditya Puri As

against that, SBI has had around 19 chairmen weaving

in and out since 1994 (with one exceptionOP Bhatt),

they had tenures ranging from as little as two months

to an average of two-three years. Forget innovation,

even long-term vision will go out of the window.

The Government also started to intervene on how to

conduct business. For example, a new form of inclu-

sive banking took hold when NBFCs started lending

against gold. The RBI and FM banned banks from

selling gold and curtailed lending against it, killing off

growth in this business. Is it the FM's business to de-

cide which businesses banks should do or not do?

In the last budget, Government announced the crea-

tion of a women's bank - without any rational thinking

on why women would need a separate bank. It has

also been pressuring other banks to cut lending rates

at a time when inflation is still high. Is it Govern-

ment’s business to tell banks what to do? If banks are

told how much to lend and to whom, at what rate to

lend and for what tenures, where is the scope for inno-

vation?

14

Recommendations

The safeguards are put in place by the RBI in-

cluding the fit and proper criteria and group ex-

posure norms to prevent banks promoted by in-

dustrial houses from cosying up to their industri-

al owners. Are they going to be effective is the

question RBI should introspect upon. The exist-

ing fit and proper criteria are subjective, ambigu-

ous and open ended, leaving the doors open for

arbitrariness and favoritism. It should be more

precise, coherent and objective yardsticks to as-

sess the credentials of the applicants in a uniform

manner.

For instance, an FIR filed against Kumar Man-

galam Birla, in his capacity as the chief promoter

of Hindalco in the coal scam, has led to specula-

tion, whether the A. V. Birla group, one of the

top eligible contenders for a bank license, will be

disqualified. There being no precedent, it would

be interesting to see whether a totally extraneous

development can derail the bid of one of India’s

most admired groups.

Highlighting the need for sustainability, RBI can

increase the minimum capital requirement for

setting up a new bank be doubled to Rs. 1000

crore.

The pitfalls of misappropriation of banking re-

sources must be avoided especially in the area of

lending to entities associated with promoters or

even lending within the proposed non-operating

financial holding company.

The need sharp, but differentiated, regulation. In-

dia already has a large variety of banks from com-

mercial banks to cooperative banks to RRBs to

urban banks. But the regulation is either the same

or diffused. We need wide banks (that do every-

thing), narrow banks (that only collect deposits),

urban banks and rural banks, wholesale banks and

retail banks, and non-bank financial institutions.

There should also be a path of migration from one

form of banking to another and back.

The new banks to be created in the public sector -

the women's bank and the Post Bank of India (if

given a license) can be used to create innovative

models. For example, Post Bank, instead of trying

to be a full-fledged bank be a narrow banks that

merely collects deposits and sells financial prod-

ucts. It can then lend wholesale money to those

who need it. The Women's bank be a focused

lender to women's self-help groups and women

entrepreneurs.

Finally, start merging the PSBs to make two or

three banks that match international banks, few

national banks servicing across the country and

regional banks confined to a region. This should

happen in the long run and not in a period of one

five year plan.

15

No election in recent memory has

assumed such serious economic

significance as the 2014 Lok Sabha

elections. The elections happen in

the backdrop of a stagflationary

economy in India with GDP

growth remaining below 5% for

several quarters and inflation re-

maining ranged between 8-10% for

well over two years. In this article I

will discuss the possible political

outcomes and the implications they

will have for economic growth, ex-

change rates, and the stock market.

At the outset, I take cognizance of

the high probability of the BJP get-

ting 200-220 seats and forming the

government with Modi as the

Prime Minister. This has been the

dominant outcome projected by

most opinion polls conducted and

reported by the media. One hears

the phrase ‘Modi wave’ at almost

every discussion on the elections.

Having recognized that Modi be-

coming the Prime Minister is a

high probability event, let us also

understand very clearly that it is a

‘probability’ not ‘certainty’. One

need only rewind back to Decem-

ber 2013 to see how embarrassing-

ly inaccurate a majority of opinion

polls, and to some extent even exit

polls, can be - they grossly under-

estimated the popularity of the

Aam Aadmi Party. Similar gaps

between projections and outcomes

can be seen you rewind back to other

assmebly elections and to some ex-

tent, even the last two general elec-

tions.

Lets look at the different possible

political scenarios if the opinion polls

are inaccurate and a lower number of

seats are won by the BJP than ex-

pected. If Congress does not perform

as poorly as projected and is able

form the government, it will most

likely be a weaker government than

the present one with a greater reli-

ance on a motley group of allies. An

alternative, but more likely scenario

is that the seats lost by the Congress

are not gained substantially by the

BJP but go to a various regional par-

ties. In this case the BJP may be able

to form a rather weak government

with potentially another PM candi-

date to replace Mr. Modi who has at

various times expressed his aversion

to becoming the PM if the BJP does

not cross the 200 seat mark. Another,

rather remote possibility, is the

feared ‘Third Front’. My purpose in

this discussion is to enumerate the

realm of possibilities and project the

likely scenarios for India.

If the most likely scenario plays out,

and Modi does become the PM with

a strong support base in the Lok sa-

bha

Election 2014: Position

Carefully and Own Quality

BY VARUN KHANDELWAL, BULLERO CAPITAL Varun Khandelwal is the

principal officer at

Bullero Capital. He has

been responsible for

m a n a g i n g t h e

p r o p r i e t a r y d e s k

spanning equities, fixed

income, and options at

Bullero since 2010.Varun

served as a Visiting

Faculty in Finance at

B irla Inst itute of

Management Technology

from 2011-2012. He holds

a MSc Economics from

the Univers ity of

Warwick, UK and a BA

(Hons) Economics from

Delhi University.

E

X

P

E

R

t

S

P

E

A

k

16

the economic outlook for Indian looks better. Modi

is seen as a reformer and a pro-industry person. Of

the entire political spectrum, he is the only candidate

who has an economic vision for the country. Further,

he evokes confidence in corporate sector which has

shrunk its activity in recent years due to a hostile

investment climate. Even Foreign Institutional In-

vestors seem to prefer him - case in point are the

Goldman Sachs and CLSA India reports that present

a bullish case for India if Modi becomes PM.

The immediate reaction of the equity and foreign

exchange markets will be one of euphoric bullish-

ness on India. While the foreign exchange markets

will continue to remain stable given the already im-

proved balance of payments and higher foreign ex-

change reserves, the stock market is a different

beast. At the time of writing this article, it has al-

ready starting pricing in a Modi victory.

One needs to tread with caution in the equity mar-

kets - Modi may be an able administrator, even a

reformer, but he is no magician! India has been in a

balance sheet style slowdown for the last few years.

Banking and corporate balance sheets have seen se-

vere stress and impairments which will take years to

improve and in many cases will need outright equity

infusion. A case in point are public sector banks and

many infrastructure firms. The delays in projects

have substantially eroded the time value of many

projects which will simply not recover. Similarly,

many loans made by PSU banks are beyond recov-

ery due to the ill health of the corporate balance

sheets which have taken hits from poor investment

decisions, project delays and permit delays that have

eroded time value of their projects.

This logic determines the kinds of stocks one should

be invested (or not invested) in. Companies with

stretched balance sheets should be avoid as many

will require severe equity dilution to become viable

again to enter new business segments and generate

cash flows to service existing debt. Many businesses

have lost too much money to be able to get back in

the black. They will go bust regardless of whatever

sort of recovery the economy poses. Kingfisher is a

case in point - even the airlines takes off again, the

existing shareholders will be diluted to oblivion if the

amount of capital required for the business to take off

again is infused into the company. Similarly, many

PSU banks and some private ones will see a lot of

loan write-offs and will need fresh capital infusions

especially with Basel III norms around the corner.

Good spaces to invest in are companies with strong

balance sheets, exporters (primarily IT and Pharma)

even if the rupee appreciates. There are many plays in

these spaces which are still cheap and can offer sub-

stantial capital appreciation. Substantial money is

there to be made in companies where the balance

sheets are very stressed but which are able to generate

positive operating cash flows, are able to make inter-

est payments, even if the debt is high. In these cases,

if the companies are leveraged, even better as they

will be able to take on newer opportunities in a grow-

ing economy which can generate the required profits

and cash flows to slowly deleverage their balance

sheets. Leveraged companies that are able to delever-

age without compromising the core business will go

on to become multibaggers.

The alternative political scenario where Modi is not

the Prime Minister but we have a similar UPA II type

government, or a weak BJP government is not a disas-

ter, but economic growth will continue to languish.

The scary scenario is where regional parties are able

to gain a majority of the seats lost by the Congress

and a motley group of political parties are able to form

the government a la HD Deva Gowda or IK Gujral.

This might trigger a ratings downgrade by internation-

al rating agencies precipitating a capital outflow from

India which will make August 2013 seem like a walk

in the park. The downside to the equity markets and

the rupee are in excess of twenty percent in this sce-

nario.

The next two months will be pivotal for India’s future.

To re-iterate, the most likely outcome is a Modi victo-

ry. The risk/reward remains firmly skewed in favour

of owning quality companies. Callous positioning

may be severely punished.

17

Background analysis In the light of a recent dilemma faced by the United Bank of India (UBI), it is imperative for the Indi-an banking sector to go back and introspect. According to the Bloomberg stats, in February 2014, UBI reported a loss of Rs. 1238 crore in comparison to the Rs. 42 crore profit of the last year. Its bad debt rose to Rs. 8546 crore this year because of the accumulation of the non-performing as-sets. Most of the Indian public sec-tor banks are in the same boat. The burgeoning cases of defaults by the borrowers is putting pres-sure on the Indian banking sector and in turn jeopardizing our coun-try’s economic situation. Non-Performing Assets

In a layman’s term, the loans that are in risk of default are called non-performing assets. According to the rules, if a borrower fails to make interest or the principle payment for 90 days, the loan is considered to be a non-performing asset. In that case bank has the right to take legal actions against the borrower, in order to recover their loss.

The bad practices The alarming situation that has been created because of the bad

debts is not just because of the un-controllable factors. Lack of proper management also contributes to this predicament. Here is the list of few possible reasons responsible for this disturbing scenario. Cosy relationship between the

bankers and the corporate bor-rowers: Banks are liberal towards their big corporate borrowers. And the incentive behind such practice is the continuous flow of

money from these corporates. This helps in keeping their bal-ance sheet healthy. This is a kind of mutual

benefit that both of them enjoy and in turn banks make their situ-ation vulnerable with the gener-ous policies.

Lack of monitoring system: Indi-

an banking sector does not have proper credit appraisal system. This prevents a proper and timely check on the malpractices that is being adopted in the banking sec-tor.

Lack of stability in the position of

responsibility: In most of the public sector banks, the tenure of the chairman or the top officials is short because of the misman-agement and bureaucracy

Non-performing asset - an

economic perspective

BY SNEHA SRIVASTAVA, IIM-RAIPUR Sneha Srivastava is a PGP

2 0 13 -2 0 15 s t u d e n t

studying in IIM Raipur. She

has worked as a business

analyst for two years with

Mu Sigma Business

Solutions Pvt. Ltd.

E m a i l I D

pgp13110.sneha@iimraipur.

ac.in

18

Top management keeps changing and to avoid the risk of exposure and to exit with a healthy record, they cover the real situation until it goes beyond their control. Current methods to handle bad loans In order to clear the balance sheet and recover the losses, banks follow certain methods. Write off: When there is no possibility of recovering the bad debt, banks write off the uncollected debt. They record that amount as an expense. This reduces the taxable income in their balance sheet but still this indeed is a loss for the banks. Restructuring of debts: There are certain instances when the borrower is not able to pay off his/her debts because of some reasons like economic down-turn or delay in the clearance of their project. In that case banks restructure the loan to alleviate their stressed assets. They go for the increase in the loan repayment period or deferred interest payment. This method is considered to be less expensive and is pre-ferred over bankruptcy. Sell assets through asset reconstruction companies (ARCs): ARCs have greater expertise in dealing with the defaulters. For this reason banks sell their NPAs to the asset reconstruction companies. However there is mismatch between the valuation of loans that banks seek and the amount that ARCs are willing to pay. Legal method: In most of the cases banks approach courts to recover their losses. But there is a marginal possibility that they get justice in a short duration of time. Generally the case goes on and huge amount of time and money is invested by the bank. That’s why it is considered to be an unconventional way handling the stressed assets. SBI versus ICICI- An analysis of the trend of the NPA The graph shown above gives a very clear picture of the difference in the asset quality management prac-tices that the two banks follow. On one hand SBI’s gross NPA has increased over the period of time, on the other hand ICICI has managed it well.

According to the report published by the Livemint, a business newspaper, ICICI takes the help of recovery agents to recover their bad debts. And because of the fear of these agents there has been a substantial decrease in the NPA in the balance sheet of ICICI.

Now the question arises does this policy is in sync with the business ethics. May be yes, because the main aim of any organisation is to maximize the shareholder’s profit. Then in that case why not other banks also adopt the same policy. It is worth to think over it. Case - Kingfisher Airlines In 2010, Vijay Mallya’s Kingfish-er Airlines accumulated huge amount of debt and was unable to repay it. The loss making carrier

requested for restructuring of its debt. And the bank extended their tenor and deferred the interest payment by two years. But the carrier could not recover from its debt and kept defaulting. For this reason it was grounded in October 2012. In 2013, lenders had to categorise the debt given to kingfisher airlines as NPA in their accounting books.

SBI

ICICI

19

Consequences Apart from the short term loss that the bank incurs because of bad debt, there is collateral damage too. Here is the list of some additional problems that banks face when bad debts increase phenomenally. Credibility loss: Huge amount of loss shown in the financial statement of banks creates fear of bank-ruptcy in the minds of custom-ers. This will make them with-draw their cash and keep it somewhere else to avoid losing it in case the bank become in-solvent. Fall in the share price: Loss of credibility leads to the decrease in the share price of the finan-cial institutions carrying huge amount of bad debts. Money not available for further lending: Because of credit crunch that banks face because of bad debts, further lending is not possible to the borrowers who could have actually used that money for the useful purposes. Measures taken by the Reserve Bank of India RBI has developed an action plan for early identifi-cation and resolution of the bad loan cases. The fol-lowing measures have been taken to deal with this problem. Earlier bank used to wait for 90 days to take ac-

tion against the defaulters. Now it has been planned to reduce this duration to 30-60 days.

It has been decided to set up special branches for the speedy and efficient disposal of the SARFAE-SI cases under the SARFAESI Act of 2002, which allows banks to auction properties of defaulters.

It has been planned to provide expensive loans to

the borrowers whose credit worthiness is less. Number of days assigned for debt restricting is

supposed to get reduced to 17-100 days instead of the earlier duration of 180 days. Central Repository of Infor-mation on Large Credits (CRILC), a joint lenders’ forum for the collection and storage of credit data to the lenders. This will prevent customers who have already defaulted with one bank to go to some other bank and apply for loan.

Insights Tackling the issue of bad loans is a challenging task faced by the Indian banking sector. Apart from im-pacting the bank’s financial statement it has a direct impact on the India’s economic situation. The reason behind this is the unavailability of loans to genuine borrowers who want to use that money for useful pur-poses that could indirectly help in the development of our country. The problem can only be handled by the transparent and efficient policies of the banking sector. Apart from this a proper credit appraisal system and timely review has to happen to keep the bad practices in check. The need of the hour is to cure this contagious issue before it goes beyond the control.

20

Background “Everything in the world is en-dured except continued prosperi-ty”- Johann Von Goethe. This quote seems to be apt if we look at incidents like the financial crisis in 2008 and its huge impact of crippling the economies of vari-ous countries. Other common problems like unmanageable debts, high inflation and so on also bothers the government of various coun-tries. But, gov-ernments al-ways try to fight against these odds to foster growth. Continuous prosperity is achieved through various initiatives or policy changes done in an econ-omy. Fiscal Deficit & Current Account Deficit are also among those com-mon problems which carry with them a baggage of serious concerns for an economy, hampering growth. To what extent is growth a causality in the process of curtail-ing Fiscal deficit (Fiscal Consolida-tion) and CAD and the way ahead, would be discussed in detail later. Fiscal Deficit refers to the differ-ence between total government’s

expenditure and total non-debt re-ceipts. And, Current Account Deficit refers to the difference of total export of goods, services & transfers from the total import of goods, services & transfers. India currently (2013-14) has a fiscal and current account deficit of 4.6%

(“State’s fiscal”, 2014) & 0.9% (CAD for the current quarter but expected to be 2.5% for the en-tire fiscal year) (“Q3 CAD”, 2014) of the coun-try’s GDP, respective-ly. Though

these figures were lowered compared to the previous years, India still has a threat of a possible downgrade from the credit rating agencies like Moody, S&P to junk status from its current Baa3 sovereign rating. So, to cope up with the current situa-tion certain measures like lowering government expenditure, increasing revenue and capital receipts, decreas-ing imports and so on are to be taken into consideration. These corrective actions would certainly have an im-pact on growth of the economy. So, let us now discuss how adversely

Will growth be a casualty in

the battle of fiscal deficit

and Current account deficit?

BY DIYVA SHREE .S , IMT - GHAZIABAD Divya Shree S is a 1st

year PGDM—IB (Finance)

s t u d e n t o f I M T

Ghaziabad, she is a

member of FinNiche -

the finance club of IMT-G

E m a i l I D

sdivyashree9@gmail.co

m

f

I

n

K

n

O

L

W

D

g

e

21

or positively does growth gets affected. Scrutinising Fiscal deficit Mathematically, Fiscal deficit can be written as FD = G-T+TR Where, G- Government expenditure T- Tax receipts TR- Transfer payments or Subsidies Going with the simple math-ematics, fiscal deficit can be reduced in the following 2 ways Decreasing the spending/

subsidies by the Govern-ment or

Increasing the collection of tax receipts

Implementing the first option can adversely affect the growth of an economy. As, there would be less contribution from the govern-ment side, be it in the development of projects or in cutting of certain benefits to the weaker sections of the society. So, let us now check the viability of the second alternative which is increasing the taxes. It can also affect the growth, as the demand for goods decreases leading to decrease in production output, called the multiplier effect. It can also have an effect on employ-ment, which is undesir-able. Pitfalls of Fiscal deficit Fiscal deficit shows the total debt taken by gov-ernment to finance the total budget expendi-ture. The debt taken is justified (to a certain limit) until the money is spent on creation of nation-al assets. But higher fiscal debts have many worse consequences to be borne, like: Negative impact on employment and income gener-ation. This can be explained by the increased de-mand from government side to take loans leading to

rise in interest rates and thus crowding out private in-vestments from various projects. Higher trade deficit, a situation called Ceteris Pari-

bus. This occurs due to the increased tendency to borrow from foreign countries, which is followed by huge dollar inflows, result-ing in the appreciation of our Rupee. This makes imports cheaper and thus widening the trade deficit. Bankruptcy of the government Inspecting CAD

Mathematically, B=X-M(Y) Where, B=Balance of payments X=Exports of goods & services M= Imports of goods & services M(Y) = Imports as a function of domes-tic output

As per the current situation (negative balance of pay-ments because of our imports exceeding exports) the above equation can be re-written as, B= M(Y)-X Again from the basic understanding of mathematics, there are two possibilities to reduce the magnitude of negative ‘B’,

Decrease imports of goods and services or Increase exports of goods and services Restricting imports is an important task at hand as imports are being costlier due to rupee depreciation. Recently, gold imports have been reduced, which played a significant role in reducing the deficit. But, the major imports of India are oil and coal. Due to their higher prices, cost of production in all industries which uses them as a source of energy, in-creases. This leads to supply shock and further shortage results in cost push inflation. The lower demand, in

this situation adversely affects the employment and

output. . On the other hand, the current scenario is encouraging for the exporters as the dollar value is appreciating.

22

Recent rise in exports, a major contributor of it was from IT services, helped in reducing the deficit. But ex-ports cannot be raised indiscrimi-nately as it may lead to the short-age of supply in our own country leading to infla-tion. A General Growth Trend From the above graph it can be ob-served that GDP growth and debt taken are on the decreasing trend and also BOP, but on the negative side. The imports and exports are in an increasing trend, with imports growing at a faster pace than the exports, thus creating deficits. Big Challenge The major challenge present on table is handling growth vis-à-vis managing the deficits. Is the situa-tion out of control? As our country is crumbling un-der the pressures of likely decline in sovereign rating, (“India’s fis-cal”, 2014) making India not an investor friendly place, policy pa-ralysis, high inflation, rupee de-preciation, high deficits and so on. Way Ahead! Sustainable development in India can be achieved by moving ahead in the following direction: Government taking care that the money spent by

it will ultimately lead to creation of assets. Tak-ing the example of MNREGA programme, jobs provided should though it should lead to creation of assets like roads, dams etc., which can be lev-eraged later. Otherwise it would just increase liquidity in the market arousing greater demand for a given amount of supply, creating an imbal-ance.

Programmes should not be initiated for gaining short term benefits like gaining votes etc., as

done in the case of subsidies. The huge money spent on subsidies adds fuel to the fire of inflation by increasing the Pur-chasing Power Parity of people. Demand pull in-flation, created most often, can be reduced by im-proving the stor-age conditions of grains, proper transportation, de-creasing middle-men in the entire

supply chain etc. Regulations in various sectors can be relaxed,

without hurting the interests of domestic produc-ers. It can help injection of dollars into the system which helps in boosting the Rupee growth, ulti-mately strengthening our economy in view of in-vestors.

Another possible way of improving productivity

would be to reduce the tax rates, which are consid-erably higher in our country. Though increase in tax receipts is a way to reduce the fiscal deficit, this issue has to be looked upon because without increase in the base income (depends on the overall growth) of people in-creased taxes can have a negative impact on employment. Finally to conclude, a doctor’s immediate concern when a child is ill would be to make the patient

recover from illness. At this stage no one would think of person losing weight or other growth aspects of the body and give food that may improve growth but de-lays recovery. Similarly, Indian economy should first try to get away with the concerns of deficits and infla-tion (illness) even if that slows down growth for a short while. Because, once recovery is ensured (after curing illness), attaining growth could be focused up-on and its achievement would be much easier. Thus, portraying India in a better picture.

23

Jan Koum and the rest of the team have done some amazing work to connect half a billion people. I can’t wait for them to join Face-book and connect rest world, “ says Zuckerberg after making the deal to buy WhatsApp, the mobile mes-saging service for a whopping $19 billion. Quite a deal !! Ain’t it…

For someone like Zuckerberg who has always seen the bigger picture, this deci-sion to buy WhatsApp couldn’t have come at a better time. After buying Instagram in 2012 the roadmap for Facebook was well laid down. Acquiring photo sharing platform then to an IM App now is really commendable.

Founded by two former Yahoo! employees Brian Acton and Jan Koum in 2009 this cross-platform IM service came out with many features like video messages, audio messages , images sharing etc. An app which spread like a wildfire reaching to almost half a billion users in no time is now a Facebook entity. Sounds pleasing if not Google then Facebook. When you miss out on a deal like this, it does hurt. Facebook pounced upon the opportunity by buying WhatsApp at a price which seems higher but is

surely a strategic one ,one which will help Facebook stand in good stead in the times ahead.

A social networking site as famous as Facebook buying an IM App sounds very peculiar and that too by paying 35% of its cash in hand. A transaction of this measure of which $16 billion will be paid in cash and the rest $3 billion in restricted stock over the next four years. There are

many pre-

sumptions evidently which followed this major event. Some said it’s fool-hardy on the part of Facebook to have such an amount just for buying an IM App. While the others said it a smart move considering WhatsApp might get subsumed to Facebook Messenger as many users find it pret-ty slow at times.

So what made WhatsApp an instant success? Is it the platform friendli-ness, or is it the easy accessibility? Or is it the about functionalities that it offers? Infact WhatsApp has all in its package which makes it a great IM that it is. Sharing photos, videos, voice messages etc. through an IM App was very well thought out by the entire WhatsApp team.

Is whatsapp worth $19

billion?!

BY RAMESH PRADHAN, SYMBIOSIS INSTITUTE OF MANAGEMENT

STUDIES—PUNE Ramesh Pradhan is a

1st year MBA– Finance

stuent of Symbiosis

Institute of Management

Studies, Pune. His

i n teres ts inc lude

blogging, numismatics,

football, reading

E m a i l i d

ramesh.chandra2015@s

ims.edu

24

A team of 55 members thus changed the way people

used to text or chat. A look at WhatsApp’s user

growth in the first four years as compared to other

networks like Facebook, Skype or Twitter it can be

seen how rapidly has WhatsApp grown. WhatsApp

has grown three folds more that Facebook in the ini-

tial four years. If Facebook was competing with

MySpace and Orkut, WhatsApp on the other hand

was competing with Line, Viber and WeChat. What

differentiates WhatsApp from a competitor like

WeChat is the User Interface that it has. WeChat has

a very confusing UI which many a times suffers

from network glitches as well. In addition,

WhatsApp has features like ‘last seen at’ and

‘double tick’ showing

message has been re-

ceived at the other end.

Zuckerberg while com-

menting on the scope of

WhatsApp in their busi-

ness said, “the messaging

volume running through

WhatsApp is approaching

the scale of the entire tel-

ecom SMS messaging

volume”. The time is not

very far when the mes-

saging services provided by the various telecom net-

works will be redundant and WhatsApp will reach

each and every corner of the world.

Also the privacy issues which have caused regular dents in Facebook’s user-base growth over the years

will be taken care by a service like WhatsApp which fends off all such privacy related concerns. Also the pain of logging in to the Facebook to chat is not re-

quired and moreover WhatsApp is a real-time mes-saging platform. Photo sharing, video sharing etc. can be done in a faster and easier manner.

The scope that WhatsApp brings in is that, being an

App based out of Europe is got the maximum atten-tion in Europe as well as some other regions like Latin America, Asia. So it has a huge potential to increase its user base in North America where Face-

book’s penetration is very high. As it is evident from the fact that, Facebook earned 50% of its revenue in the FY’13 from US and Canada itself. Also from the

data point of view WhatsApp processes about 50 bil-lion messages everyday. And astoundingly a team of

32 engineers handle all this bulk with no expense and personnel dedicated for marketing and public rela-tions. Charging only $1 per year is something they

have done very smartly, which will not only give them a nominal price for their IM service but also will also help them in maintaining and bringing about new

changes in the newer versions.

Even with its burgeoning popularity in the recent times Jan Koum has been wary of raising capital through IPO or selling off. But then it needed all those

meetings between Zuckerberg and Koum to finally sign the deal. Both could see the mutual benefit from

it. While for Fa-cebook its ambi-

tions of becoming a social network and IM giant got

a new vibe, for WhatsApp it could be the capi-

tal they raised where employee is supposed to get

a whopping $345 million as well as getting employed

with Facebook. Facebook was

advised by Allen & Co. LLC and Weil, Gotshal &

Manges LLP while Morgan Stanley and Fenwick & West LLP did the same for WhatsApp, without which the deal might not have been possible.

Another major determinant of future of Face-

book is the rise in number of smartphone users world-wide. With the global smartphone users expected to touch somewhere around 1.75 billion by the end of

2014, the assumptions of Zuckerberg may be very be-fitting. Adding the 0.5 billion WhatsApp users with Facebook’s current userbase and makes it about the

same figure considering the monthly rate of addition of users to WhatsApp is in millions. So there is no doubt that WhatsApp’s strong presence in direct and private messaging and global markets as well as

smartphone penetration make it a highly strategic in-vestment for Facebook and a very well timed one as well.

25

This therefore will have help WhatsApp in reaching

faster to the people.

But then $19 Bil-

lion? Is that sum

that Facebook

should have spent

just for an IM App?

As we have ana-

lysed and predicted

the benefits that Fa-

cebook will be

reaping out of this

is multifarious, it

only a matter of

time then. A company 10 years into its existence has

done remarkable things, things which have changed

how we socialise and challenged how we see the da-

ta around us. The challenges though are ingrained

whenever technology is involved, and this then leads

to change and upgradation of the existing ones. The

challenges though will be many, which only time

will tell. This will pose challenges to technologies

BigData which boasts of handling humungous

amount of data. Everyday 600 million photos and

about 100 million videos are being shared on

WhatsApp, and this

number will only

increase in the times

coming. This being

the 3rd largest tech-

nology takeover ev-

er, speaks volumes

of the decision-

making and foresight

of the man himself,

Mark Zuckerberg.

So the decision

might seem overval-

ued to many but to Zuckerberg and his team it’s hit-

ting the nail on its head. Though its early days to do

any prophecy per se, but the numbers and figures are

there for all to see. Zuckerberg’s statement few days

back saying WhatsApp will operate as a standalone

service also gives an indication of the ethics on which

that man runs his business and the promises that Face-

book has made to WhatsApp. All said and done, let’s

hope Facebook someday connects the entire globe and

bring a revolution which the world as of now can on-

ly…. IMAGINE !!

26

Japan is not a country to which Prime Ministerial comebacks are associated. The person in focus was hurtling towards oblivion after his first term as the Prime Minister of the 3rd largest economy in the world. This is the story of how he miraculous-ly resurrect-ed his polit-ical career and the Jap-anese econ-omy from nearly two decades of stunted growth by preaching his reform oriented eco-nomic policies popularly known as ‘Abenomics’.

One can draw an analogy between Shinzo Abe’s own life & history to the performance of post-war Japa-nese economy; both were a hit ini-tially but eventually fizzled out. Abe belonged to a prominent polit-ical family & achieved a feat by becoming the youngest post-war Prime Minster of Japan but was replaced just shy of an year at the helm due to political turmoil. The Japanese economy on the other hand saw unprecedented economic growth in the 1980’s but has been grappling with recession for the two decades since.

Simple economics says that for economic growth to occur, con-sumer spending must increase &

that a little inflation is always healthy. But the scenario in Japan was the other way round; it was suf-fering from prolonged deflation which restricted the GDP growth. Abenomics’ bold answer to this was

three-pronged; massive fis-cal stimulus to encourage consumer spending, aggressive quantitative easing to increase the availability of money in the market &

substantial structural reforms to im-prove competitiveness.

In the first stage of Abenomics, a fis-cal stimulus package to the tune of approx. 20 trillion yen ($210 billion) was introduced. The investment was made chiefly in infrastructure which aims at generating 600 thousand jobs in a period of 2 years. This would in turn encourage consumer spending & investment which are precursors to economic growth. The step was ab-solutely essential in Japan where the liquidity preference is the highest among advanced economies.

In the second stage, Bank of Japan introduced quantitative easing in the form of a bond buy-back program similar to that of the US federal bank to pump in capital into the economy. This monetary policy targets a 2% rate of inflation by 2015, which is a

Ebbing the Japanese

Deflation

BY JEENOY PANDYA, NMIMS - MUMBAI Jeenoy Pandya is a B.E.

(Mechanical) from MS

University, Baroda & he

is presently pursuing

MBA from NMIMS,

Mumbai.

Email ID:

j e e n o y p a n d y a

@gmail.com

Shinzo Abe

27

healthy rate for an advanced economy like Japan. The easy availability of money has also led to the devaluation of Yen by as much as 25% which en-courages exports by making them cheaper & hence more attrac-tive.

Presently Abenomics is in its 3rd stage which is to bring about far-reaching structural re-forms some of which include government deregulation, labour reforms, privatization of public entities, freer trade, a major revamp of immigration policies and recalibration of tax rates. It is also the most crucial stage as only these reforms can sus-tain the growth conceived by the first two stages & promise an even better fu-ture. Failing on this front may have devastating results similar to the previous at-tempt in 1990 to reinvigorate the economy which was followed by a decade of re-cession. To af-fect change will also be challenging due to opposition by industrial-ists, the fickle political scenario, the conservative nature of the Japanese & external unrest.

The economy has so far been responding positively to Abenomics; primarily evident from a staggering in-crease of 3.5% in the GDP growth rate in the Q1 of

2013 against Q1 2012. The inflation as pegged by Bank of Ja-pan is at a promising 1.5%, Nikkei is up by as high as 70% since the inception of Abe-nomics & the unem-ployment rate is down by an impressive 0.3% to 3.7%. The fact that the aye-sayers far out-number the nay-sayers alludes to an optimistic outlook towards Abe-

nomics & the Japanese economy itself.

Shinzo Abe, in his 2nd term as the Prime Min-ister of Japan, came in as a force to be reckoned with, pushed sweep-ing reforms & has so far de-livered on the promises made by Abenomics. With his ap-proval ratings skyrocketing to as high as 70% there’s a good chance

that he will see Abenomics to its logical conclusion of making Japan the land of the rising sun once again. The future of samurais sure looks flowery.

28

Introduction:

An analyst at Morgan Stanley, in recent articles, has been using the term Fragile Five to represent a set of markets which are facing down-turns due to several macro econom-ic reasons. The 'big' names include- Turkey, Brazil, South Africa, India and Indonesia. The fragile five countries, which experienced a rap-id economic growth during a time when investors had lost confidence on the “Mundane three”, namely U.S.A, U.K. and Japan, are in deep trouble at present with high volatil-ity in exchange rate, slowdown in economic growth and other eco-nomic problems. A multitude of push and pull factors had contribut-ed to the stellar growth of these emerging markets.

This paper looks into the factors that resulted in the advent of these markets and the reasons for their present uncertain volatile situation. This paper argues that in spite of the present uncertainty and volatili-ty, there is ray of hope that with the use of proper policy mix these countries will bounce back with good performance.

Advent of the Fragile Five:

Let us understand the raison d'être for the advent of such emerging markets.

1. Turkey- Turkey occupies a stra-tegic location in the Asian conti-nent. It is the largest national econ-omy in Central Europe and the Middle East. When the Euro zone was encountering a crisis period, investors were looking for safe ha-

vens for investment. That is when they realized the potential of the country. Turkey had a viable capital market that was akin to that of Asian markets and promised investment opportunities to yield deficit inves-tors. A steady GDP and moderate inflation rate made Turkey a global attraction.

2. Brazil- Brazil had promised what USA failed to meet- safe and higher returns. As the major part of the world was recovering from the after-math of the sub-prime and Euro zone crisis, Brazil was growing at a rate of 7.5% in GDP. Also, in 2011, Brazil surpassed the United Kingdom to become the sixth-largest economy in the world. A politically stable nation with increased FDI, infrastructural developments, deft government insti-tutions coupled with international ties made Brazil an emerging market that investors could trust.

3. South Africa- This country’s com-petitive advantage is its cheap labour that boosts the economy. A country rich in resources such as diamonds, platinum and gold; it is now attract-ing foreign investments aplenty, in-tending to use the nation as a hub for space exploration, high technological innovation leveraging its solid, so-phisticated banking system. This economy is also expected to grow at the rate of 2.8% by the end of 2014.

4. India- India was basking in glory when USA suffered the sub-prime lending shock. The Sensex reached an all time high of 21000. India al-lowed FDI and FII under liberalized terms and conditions, which attracted

The “Fragile Five” againsT The

“Mundane Three”- Emerging

markets, hedging investor fears

BY SIRSA MAJUMDAR & SOHAM BAGCHI, IMT - NAGPUR

Sirsa Majumder is a Commerce

graduate from the University

of Calcutta in 2012 in

Commerce (Accountancy hons).

She is currently pursuing a

PGDM- Finance at IMT-Nagpur

E m a i l i d :

sirsa.allfriends@gmail.com

Soham Bagchi is a Science

(Microbiology) graduate from

the University of Calcutta in

2012. He is currently

pursuing a PGDM - Marketing

and Economics from IMT-

N a g p u r .

E m a i l i d :

soham.bagchi@gmail.com

29

huge amounts of foreign investment. India’s young talent pool, majority of whom, could speak in Eng-lish, was a cheap source of la-bour for foreign markets.

5. Indonesia- Indo-nesia’s strength lies in its econom-ic structure. More than half the popu-lation is under 30 years of age. For-eign investors in-vested a hefty sum of $16.1 billion in 2010 in the Jakarta stock market that saw a 133% jump in the market.

Rampant export of commodities to the Asian market, comparatively rich rural market and its savior in times of crisis- thermal coal have boosted the third most populous na-tion in Asia. Indonesian Government is investing heavily in infrastructure to build ports, highways and bridges; thus companies involved in such projects are sure to get a high ROI.

These fast growing countries are facing an immi-nent and ongoing withdraw-al of foreign capital from their markets.

The fear, the investors investing in these mar-kets are grappling with, are deeply rooted- not in their own land, but in the developed countries like USA, Japan and UK.

The news of the Federal Reserve’s decision on taper-ing the bond buying program from $85 billion to $65 billion per month has increased the yield on their bonds thereby pulling out money from the emerging markets. India, Indonesia and Brazil primarily are experiencing capital flight from their stock markets which is straining the Balance of Payment and also exchange rate of the countries.

The Chinese manufacturing sector which had shown promises of high return earlier the previous year has

slowed down significantly in the current year. The service sector

had also reached a five-year low in Jan-uary, 2014. Coun-tries like India and Brazil are suffering from high inflation and a contracting monetary policy stance from the Central banks.

This has adverse effects on their growth. The value of the Indian Rupee, Turkish Lira and South African Rand has been depreciat-ing against the US Dollar lately.

The exchange rates have also put a pressure on imports. Prices of crude oil and natural gas have made imports

costlier. These are also used as inputs in manufactur-ing commodities, thus increasing cost of final goods produced. All such imperfections have made the

emerging markets ex-tremely vul-nerable. The table below shows the recent changes in

primary indicators in the Fragile five.

The currency crisis in these countries is a major issue triggering the investors to resort to ex-

treme decisions of investing in safer havens like U.S. Treasury bills which have no risk of default. The drop in currency is evident in the exhibit below. The hard-est to be hit was the Argentinean peso that decreased 35 points. Indian Rupee has also been volatile. The depreciation has been about 3%-15% over the last year. This suggests a stronger Dollar and recovering developed economies. Investors are more faithful in developed countries that have suffered the wrath of their own fallacies and yet is picking up their pace over emerging markets which had shown promise but is going through economic disorder. China will also

30

also impact the Fragile Five markets due to its slow-ing economy and low imports from all over the world.

India Stands Strong through the storm:

All this being said; it has been seen that India has been doing comparatively well as com-pared to other nations. Its am-ple foreign re-serves, internal debt sourcing and flexible ex-change rates have built trust among investors. It is difficult to predict its frailty given the strong monetary system it follows. To ensure that robustness prevails in these markets, both Central Banks and Gov-ernment have to work in tandem with each

other.

Keeping a check on current account deficits, exchange rates and inflation will allow the emerging markets to grow at their pre-determined pace. There is still a ray of hope to restore these markets to their former glory

of “emerging markets” and Fragile Five countries. Some of these emerg-ing markets have also shown bet-ter stock perfor-mance like the SENSEX reach-ing an all time high of about 21,800 points. The idea is to keep faith and have a bullish approach. This sums it all in the

words of Virgil, “Fortune sides with him who dares”.

31

The year that was—in numbers and charts

1/2

32

The year that was—in numbers and charts

2/2

By Sriram D.S & Mohit Gupta, NMIMS - Mumbai

33

Against the popular belief of most

investors prevailing in this country

with respect to the dividend policy

paid by the companies, the facts

and reality lies distant. While the

tale of the town supports the “More

the dividend, more the efficient/

better is the company for invest-

ment”, the grim reality lays very

different altogether.

Under such cloudy shades of mis-

conception, we need to break the

barriers and understand what actu-

ally the truth is? Well, looking at

the scenario let me break the fact

that some of the best companies in

the world do without paying divi-

dend or rather paying very low div-

idends. In order to understand this

phenomenon let us understand as to

what the reasons behind such a div-

idend policy could be.

Well, the dividend policy largely

depends on the broad and well laid

out objectives with respect to the

mission and vision of the company.

The path chosen by the company

may vary. However, the companies

aim at roughly achieving the same

end results- maximization of share-

holder’s wealth.

When we analyze with respect with

respect to this objective, the com-

pany’s position should stand clear.

Another fact to this point of view is

the company’s requirement to grow

and expand. This expansion would

further require capital which would

be acquired by:-

Issue of fresh shares in case of

which the ownership of share-

holders gets diluted

Bank loans which require huge

interests to be paid

A cut from the profits accumulat-

ed from the share of dividends

that has been paid. This lies as

the safest option as the money of

the owners grows at the maxi-

mum rate under such investment

circumstances.

Now, the next big question lies as to

how and why would the investors

invest in such a company of they

don’t get dividends? How would they

know that their money is growing?

Well like the saying goes ”Patience

shimmers while haste quivers”. The

very simple fact that would convince

investors that they need to look at

long term prospects rather than the

short term small gains. The compa-

nies would offer a much better return

and be at a better position to offer

them over a considerable period of

time.

Your money invested in business

would work out/suit much better than

it being invested elsewhere over a

Dividend for gains AT

stock market–is it the

right choice?

BY PRIYO RANJAN, XISS - RANCHI Priyo Ranjan is a 1st

year PGDM student at

XISS. He finished his B.E

(IT) at VTU, Belgaum. He

has worked at Infosys

Technologies Ltd.

E m a i l I D

priyo4u.ranjan@gmail.co

m

34

a period of time as a company always has much higher scope of growing than the money being in-vested elsewhere.

Capital gains is the term that would satisfy investors to the core of their hearts and keep the market value of the shares of the company high, a significant fac-tor to be observed from the company’s viewpoint. The company can utilize money more efficiently than the money being invested elsewhere.

These shackles of wrongly developed notions need to be broken off and people be made aware of the long term benefits of their invest-ments in the form of capital gains over the long run. The dividend poli-cy is not merely a tool and necessity of the companies to maintain their stand rather the companies need to clear out to their investors their long term objectives and how are they safeguarding their stockholder’s interest over the long term.

Warren Buffet’s Berksire- Hathaway is a perfect ex-ample- an active acquirer of businesses that retaining cash flow is a key ingredient of success. This tells us that-“Don’t just focus on companies that don’t yet have dividends. Some companies that have the po-tential for robust dividend growth like the FORD (NYSE) could triple its current 40% a share divi-dend over the next few years without making a dent in the balance sheet.”

“Patience and dedication is the key”. The sharehold-er is like a long term guardian with personal interest who becomes family to the happiness or distress, the growth or ruins, the please and the pains, the turmoil and the walk-away of the firm invested in. What needs to be understood is that a good investment cli-mate is reflected sharply by the share markets? Also, another feature is the market sentiment.

Speculation is good for any market. However, too much of speculation can be worrisome and raise doubts of stability and sustainability of the market which none of the governments or regulatory or pa-rental bodies would want to exist. A safe market keeps the money rotating and while it is a game of

the stars for many it’s a disciplined science for others. This excess speculation has also praised the dividend policies those failed and criticised some of the most successful ones at the time of their inception.

Amongst all dividend policy theories proposed upon

there is none that has proved to be absolute and this

reflects with the volatility of shares existing in the

market. However, while the giant companies have

withstood the test of time as against their interesting

dividend policies many have failed trying to follow

their footsteps.

Indeed it is ra-

ther difficult to

predict the mar-

ket reaction to-

wards any

changes in the

dividend policy

as it’s more of a

short jerk and

levelling out

thing or it can

even lead to drastic changes –sometimes to cata-

strophic levels for a company.

If a company which has been paying dividends sud-

denly resorts to change and reduces it the investors

might interpret in many ways. Again the market sen-

timents as well as the speculations may create chaos.

This in turn would thereby make the price of the

shares to fall even if the company wanted to save for

improving upon its business and aiming at long term

benefits.

In the other case round if a company paying little divi-

dends starts paying dividends initially there would be

a tear of happiness on the benefits offered and huge

buy outs would occur moving the stock prices up but

after some time the prices would again slowly go

down. But there are chances in for a surprise in such

cases too. So think and think hard before putting your

bets in the stock markets as a sound peek into the na-

ture of benefit you are looking for and the time frame

you consider to achieve it in, you may have to link

yourself strongly to the dividend policy of the compa-

ny being considered. The “More risk more gain” state-

ment is nonetheless true.

NAME OF COMPANY TRADING AS MARKET VALUE (Billions)

GOOGLE GOOG 291.9

BERKSHIRE-HATHAWAY BRKB 187.3

AMAZON.COM AMZN 126.1

GILEAD SERVICES GILD 80.7

E-BAY EBAY 66.8

AMERICAM INTERNATIONAL AIG 66.9

YAHOO YHOO 29.3

ADOBE ADBE 22.1

COGNIZANT TECHNOLOGY CTSH 201

35

36

The Senior Committee 2013 - 14

37

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