Senior analyst jan 11(1)

2 The Senior Analyst

CONTENTSWorld Section

• Will the Chinese Yuan be the next reserve currency?

Special Feature : Financial Inclusion• Financial Inclusion:Congealing Altruism & Profitability to

mitigate financial disparity• Using Microfinance for social upliftment through Financial

Inclusion.

Stock Analysis• Equity Research Report::Nahar Spinning Mills

Economics• Analysis of Private Equity Investments in India in Second

half of 2010 and Beyond.• Key Trends & Issues in the Global Banking Sector.• Why Disinvestment For Indian Economy• The Demise of the Celtic Tiger

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In the past few months we

have seen that there has been

a lot of speculation

and hype about the Chinese

Renmimbi (RMB) or the

Yuan becoming the next reserve

currency. In this article we

will focus on the various factors that

can help and also the factors that are against the speculation

regarding the Yuan,

considering the global

dynamics of politics and

trade.

WILL THE CHINESE YUAN BE THE NEXT RESERVE CURRENCY?In the past few months we have seen that there has been a lot of speculation and hype about the Chinese Renmimbi (RMB) or the Yuan becoming the next reserve currency. In this article we will focus on the various factors that can help and also the factors that are against the

speculation regarding the Yuan, considering the global dynamics of politics and trade.Let us first understand what exactly is meant by a reserve currency. A reserve currency is one that forms significant part of foreign exchange reserves of governments and institutions which enables a country to meet international debt obligations and to influence their domestic exchange rate.

Factors that influence the use of a currency for reserves are as follows:• The size of the economy• The importance of the economy in international trade• The openness of the financial markets• The convertibility of the currency

• Use of the currency as currency peg• Macroeconomic policies, as it influences the domestic environmentA Brief on China’s past and current status of economyChina’s success story is not new. Till the end of 15th century, China was the leader in technology & had the highest per-capita GDP on the planet. Europe overtook China in per

capita GDP around 1500 but China remained the world’s biggest economy until well in the 19th century. In fact in 1820, the middle kingdom accounted for one third of World’s economy. However the tide turned against China & by 1950 it suffered with one of the lowest per capita GDP in the World and accounted for less than 5% of world GDP. Since 1980s growth took off again, owing to demographic dividend, export driven growth, cheap &

abundant labour availability coupled with potential to become the world’s largest consumer market. With help of State initiatives, China’s fiscal revenues have increased 30 times over the past 20 years. Having maintained a phenomenal GDP growth rate of 9.5% for decades, China is now the World’s second largest economy.Problems with the US dollar as global reserve currency

Currently US Dollar is the most widely held reserve currency as two thirds of the foreign reserve of nations is in US Dollar terms. But things are no longer as smooth for the US Dollar as it used to be. There has been a steady decline in the dollar reserve holding percentage by various countries. The global economic crisis of 2008 leading to rising US debt (The U.S.’s ratio of total debt to GDP is likely to exceed 90% this year) which keeps US dependent on

foreign financing and the increasing influence of China as a global power along with demand of countries like Russia for a new reserve currency have brought in the possibility of the Chinese Yuan as the next reserve currency. But being the most widely accepted reserve currency is no easy job and there are various factors at play which go for and against the Yuan. Inspite of the above mentioned facts, one important reason the US dollar remains the

reserve currency is that the U.S. treasury market is the most liquid market which allows central banks to intervene in foreign exchange markets in order to smooth currency fluctuations.


Now let us look at the factors which might prompt the Chinese government to work towards making the Renmimbi the next reserve currency. The most important reason is overwhelming dependence of the Chinese on the US dollar. It is estimated that Beijing holds about $2 (2.6) trillion of dollar assets mainly accumulated through purchase of US Treasuries and through exports to the USA. The USA

has been incurring rising budget deficits in recent years. This is major concern for the Chinese government as a weakening dollar could seriously dent the Chinese reserves. Movement towards global reserve currencyThere have been many steps taken by the Chinese government aimed at strengthening the cause of Yuan and improving its visibility. Recently Beijing carried out a series of currency swaps with central banks of countries like Argentina, Hong Kong, Malaysia and South

Korea. This currency swap will remove the need for using the Dollar when it comes to trade with these countries. It also carried out a trade deal with Brazil valued at $95 billion in two other currencies other than the Dollar. The Chinese government is even thinking of issuing bonds and loans to trading companies in Yuan rather than in Dollar. In fact banks like HSBC, Standard Chartered Bank are said to have agreed to issuing bonds in Yuan. China has recently allowed Yuan to trade off shore in Hong Kong. Though the Yuan still remains a foreign currency market for Hong Kong and the local currency is still the Hong Kong dollar, but the offshore financial centre is being used

as a laboratory to internationalize the Chinese currency. Problems that needs to be tackledIn spite of the steps taken by the Chinese government there are various factors which pose practical and huge challenges to the Yuan being the next Reserve Currency. The main challenge is that the dollar is too entrenched in the international currency market. However the bigger issue is making the Yuan convertible with its value being determined by market conditions, governments and companies

around the world who would be allowed to freely trade, buy and sell the currency. Given the authoritarian nature of the Chinese government, lowering of these financial trade barriers and allowing foreign trade access to the Chinese securities market seems like a remote possibility. The absence of a large market for Yuan bonds is also seen as a hindrance. Currently only the Chinese Banks and the Asian Development bank sell Yuan dominated bonds. According to some experts it is numerically impossible for the Yuan to become the reserve currency as then China would have to run a large current account deficit so that the governments and the institutions which trade

in Yuan would get a chance to accumulate it. But currently China has a huge current account surplus which does not give foreigners to accumulate the Yuan.Things that China can do to favour its caseIf the Chinese government does decide to make the Yuan as the next reserve currency, the expected time line is expected to be around 10 to 15 years. It has to push through the reforms before Yuan can be allowed to float freely against the dollar. It can easily take China

around 5 to 10 years to bring about a change through its land reforms, reforms in the energy sector, social welfare. China would have to gradually make the Yuan convertible on the capital account. It needs a more liquid foreign exchange market, as the US treasury market is currently the most liquid market. The bond markets and banking system needs to be more developed and there has to be proper monitoring of cross-border capital flows. The importance of having functioning capital markets cannot be understated as investors and Central Banks buying Yuan would not want to simply invest in paper currency and instead would want stocks and bonds that trade

transparentlyAlternatives to the Yuan In this context there are various other alternatives which are possible. One such possibility is establishing a multi currency system and the use of Special Drawing Rights (SDR) which is based on a basket of currencies. The Euro is also gaining prominence and the developing economies are also playing an increasingly dominant role in world economic order.

Whether the world order changes to accept Yuan or any other currency like Euro or a mixed bag of currency as the next reserve currency is for all of us to see. The fact remains that hold of US dollar as the reserve currency is slipping and China on its part is using its economic might through trade exports to penetrate world market to garner support for the Yuan as the next global reserve currency. -Ankit Agarwal & Shachi Prakash(FMS)

Whether the world order changes to accept Yuan or any other currency like Euro or a mixed bag of currency as the next reserve currency is for all of us to see.


Congealing Altruism &

Profitability to mitigate financial

disparity

Financial Inclusion

INTRODUCTION: UNDERSTANDING THE NEEDFinancial inclusion is delivery of banking services at an affordable cost to the vast sections of disadvantaged

and low income groups. This inclusion f o r m s t h e b a s i s o f e c o n o m i c opportunity. It enables the poor to build savings, make investments and insure themselves against income

shocks thereby entailing progress of the nation. Yet the statistics on financial ‘exclusion' in India are disheartening. Out of the 600,000 habitations in the country, only about

30,000, or just 5 per cent, have a commercial bank branch. Just about 40 per cent of the population across the country has bank accounts, and this ratio is much lower in the north-

east of the country.

ALTRUISM & PROFITABILITY CAN CO-EXIST

Financial inclusion is a potentially viable business proposition; it is the key driver for social change and can

greatly ameliorate the imbalances in society. Envisioning a plan for financial inclusion which is profitable while concurrently being altruistic can lead to rapid growth both in urban and rural

areas, thereby creating a country that witnesses all-round development.1> One such format was established by Muhammad Yunus. He started off in the village of Jobra with a belief that

financial credit is “A Human Right” and created a whole system that we now

call microfinance; a method of injecting capital into highly industrious groups of people in villages across the

developing world. It was a perfect example where profitabil ity and altruism went hand in hand leading to financial inclusion. Grameen Bank made a profit of $ 680,000 in 2007

while providing access to credit to m i l l i o n s o f u n d e r p r i v i l e g e d Bangladeshi’s. The bank expects to loan $1.4 billion in 2010 and continues to challenge conventional banking

wisdom by banking the "unbankable". 2> The success story of Dharavi, a bustling industrial-slum in Mumbai is another heartening example where Financial inclusion proved to be a

viable business proposition. Hindu Business line reports that Dharavi exports goods worth $500-650 million every year. Initially though, Dharavi, being situated right in the heart of

Mumbai, the most banked city in the country, did not have a commercial bank branch for a long time. The first commercial bank branch was opened in February 2007. In just three years,

the bank registered business in excess of Rs 44 crore. Today, there are nine ATMs in Dharavi, all of them being actively used. This proved that money management is a well-understood part

of everyday life of the poor, and therefore a viable business proposition.From the above successful models of financial inclusion, it can be stated that banking the unbanked can indeed be a

win-win opportunity. However, such incidences of profitability cum altruistic


The primary objective of any business is to make profits. A failure to achieve this goal makes an organization unsustainable, thereby all other goals redundant. Financial inclusion from this perspective is a secondary objective. Although there have been instances where altruism and profitability have gone hand in hand, there is no denying the fact that tailoring your organizational goals to meet the goals of social upliftment can introduce a significant amount of

risk to your returns.The second aspect to be considered is the relevance of Micro Finance Institutions in a realm where they charge exorbitant interest

rates. Interest rates of MFIs are currently in the bracket of 35-40 % which sounds very high. But we should not forget that it is high because of huge risks involved and the demand of funds outstrips the supply. The alternative the consumer faces is that of private lenders whose interest rates vary from 350-400 % depending on the desperation of customer. Hence, we are stuck in a conundrum where MFIs, though providing relief from the clutches of private lenders, cannot be considered an effective medium to eradicate poverty. Loans provided at 30% interest rate cannot be considered a platform for altruism rather resemble more of a profit accruing venture.

The third aspect is the government policy which forces banks to lend to categorized priority sectors. As the recent report on Non-Performing Assets of banks has shown, the banks NPAs have grown due to priority sector lending norms. This trend if left unchecked could well lead to financial crisis. For example the compulsory priority lending requirement has resulted NPAs raising to 3.4% from last year’s 2.5%. The numbers tell the tale of a clear dichotomy between profitability and altruism with severe repercussions looming large.

Finally, the market tend to meet the demand for credit (if there are not too many impediments) only if it makes business sense. The very fact that market has not yet considered this segment as profitable shows that it makes very little business sense or the returns are too insignificant to be considered desirable. In such a scenario it becomes more pertinent to eradicate barriers which might be preventing entry while simultaneously creating an enabling environment which would allure institutions to consider delivering a financial inclusion model which balances altruism as well as profitability.

CONCLUSIONIn today’s world financial exclusion can lead to social exclusion and in order to address this shortfall one needs a holistic approach on

the part of government and private players to bring about innovative financial products.After taking a comprehensive look towards the various possibilities and obstructions in amalgamating altruism and profitability it can

be said that banks need to redesign their business strategies to incorporate specific plans to promote financial inclusion of low income group, treating it both as a business opportunity as well as a corporate social responsibility. They have to make use of all available resources including technology and expertise available with them as well as the MFIs and NGOs. Taking banking to the sections constituting “the bottom of the pyramid”, might appear to be considerably difficult and loss-making proposition however it should always be remembered that even the relatively low margins on high volumes can be a very profitable proposition. Financial inclusion can emerge as a commercially profitable business provided the government makes the right policy decisions and banks are prepared to think outside the box!

-Alnoor S Venkani & Clement Joy Kingsly(FMS)

ALTRUISM & PROFITABILITY ARE

A MISMATCH

In today’s world financial exclusion can lead to social exclusion and in order to address this shortfall one needs a holistic approach on the part of government and private players to bring about innovative financial products.


“Financial inclusion is the timely delivery of financial services to

disadvantaged sections of society.

Firstly, financial inclusion refers to a

customer having access to a range of

formal financial services, from simple

credit and savings services to the more

complex such as insurance and

pensions. Secondly, financial inclusion

implies that customers have

access to more than one financial services

provider, which ensures a variety of

competitive options. In the Indian context,

financial inclusion, according to the

Finance Minister’s 2006-07 budget

speech, was defined as “the process of

ensuring access to timely and adequate credit and financial

services by vulnerable groups at an

affordable cost”

USING MICROFINANCE FOR SOCIAL UPLIFTMENT THROUGH FINANCIAL INCLUSIONSo why is financial inclusion so important in the Indian context, to the extent of being a compulsion, not a choice? There are ample theoretical and empirical evidence to show that

financial inclusion leads to economic growth and economic growth to poverty reduction. The works of Levine (1997) and Honohan (2004) show that a robust financial system can become an effective poverty alleviation tool. There are large costs to small and poor entrepreneurs due to the market imperfections in a poorly developed financial system. These burdens include informational asymmetries, transaction costs, and contract enforcement costs, compounded

by lack of collateral, credit history, and contacts. For these entrepreneurs, access to financial services would smooth project financing, positively impacting growth and poverty alleviation. Access to finance is also an important incentive for new ideas and technologies. Additionally, a strong financial system encourages expansion in the market and competition for existing firms. It ensures that poor households and small entrepreneurs need not depend on

middlemen. On the other hand, an underdeveloped financial system can be uncompetitive, conservative and inimical to poor or small entrepreneurs. In a seminal study looking at India’s vast banking system, Burgess and Pande (2003) show that the rural bank expansion programme, mandated by the Indian government from 1977 – 1990, can explain approximately half of the drop in poverty from 61% in 1967 to 31% in 2000. India needs

financial inclusion to make available the fruits of sustained 8% growth to all its citizens, especially the minority and the backwards. This can prove to be the answer to a lot of problems we face in our times like rising extremism, naxalism, rising income disparity and so on.

A look back at India’s financial inclusion history might be appropriate at this point. One of the major tipping points for the nationalization of banks in 1969 was ensuring credit access to agriculture and small-scale cottage industries. Towards this end, RBI stipulated that at least

40% of bank lending go towards this sector termed as the Priority Sector, 25% of which had to be extended to the weaker sections within the Priority Sector. Other features of nationalised banking included the ‘Service Area Approach’ (SAA) wherein a single bank was

assigned 15-20 villages, after which other banks could set up branches upon obtaining the initial bank’s approval. Similarly, the 1:4 license rule was established in 1977 dictated that a bank could open a branch in a banked location only after opening four branches in

unbanked locations. As a result the share of these sectors in the total advances of scheduled commercial banks rose from 14% in 1969 to 33% in 1980. However, the reforms introduced since 1991 in the banking system have had a heavy toll on small borrowers. The spread of

banking credit facilities has not only halted but the number of small borrowers getting financial facilities too sharply declined in the post-liberalization period. From 1990-91 to 1996-97, loan accounts to agriculture fell by 5 million. While 52% of bank credit in rural areas went towards agriculture in 1985, the proportion fell to 38% in 1998. In fact, the present share (percent) of rural bank offices to total bank offices is

equal to that of the 1980s, i.e., 45.69% in 2005 and 45.72% in 1980s.


Financial inclusion in a financial system can be measured by its “depth” and its “breadth”. While depth is the extent to

which the system is developed and works properly, breadth refers to the extent of outreach of the system to the population. Thanks to the nationalization program India is better p laced than many other

developing economies. There are over 32,000 rural bank branches (with a total of 68,000 rural and semi-urban branches) including public and private sector banks and RRBs. There are more than 15,000

branches of RRB. Rural co-operative banks comprise about 98,000 retail outlets of Primary Agricultural Credit Societies (PACS). The post office system, comprising 154,000 post office branches, has about

114 million savings accounts and services 110 million money orders. One of the major indicators of health of a financial inclusion of a system is “access to credit”. Despite this vast network of banks, only about 30%

of Indians have a savings account. All of us have heard stories of rural families literally selling themselves off to moneylenders as a result of not being able to service the exorbitant rate of interests (an average of

48%, as compared to 12.5% in commercial banks). There has been a disturbing trend of rise in borrowings from moneylenders post 1991, after steady decline post nationalization.

So what is stopping us from utilizing the full potential of our banking infrastructure and

alleviating ourselves from poverty? The answer lies in looking at the problems of financial inclusion on this country. It is still

a dream to see a bank that offers savings accounts for the poor with cheque book facility unless she/he keeps Rs 1,000 minimum balance. The health insurance companies set very low hospital tariffs for

re imbursement which makes them unattractive. Operational service is lacking as most insurance companies are ill equipped to handle the necessary large

volumes that translate low premiums into fair profit. The Dr Rangarajan Committee report states that 49.77% of Scheduled

Caste households, 63.68% of Scheduled Tribe households and 48.58% of Other Backward Class households are financially excluded. There is denial from the government machineries to extend the

credit to the Scheduled Castes because direct funding from banks is a problem. Most schemes require paper work, r e c o m m e n d a t i o n s , f o r w a rd i n g o f applications, and other processes which

they can’t facilitate. Existing societal mechanisms continue to regulate and

enforce the customary norms and rules of the caste system. Those, who challenge the system face opposition in the form of

social and economic boycott, violence, etc, which negate their right to development. A major problem is the barriers to credit access that these people face. A survey by Invest India Market Solutions (IIMS) shows

that there is a strong link between annual income and ownership of bank accounts by occupation group.A survey of bank managers in M a d h y a P r a d e s h re v e a l e d a

perception that women borrowers were more trustworthy and less of a default risk (United Nations, 2006). However, a greater percentage still believed that women were simply

being used by men to gain loans. One more reason is the self exclusion by the low income households from banking facilities as they get intimidated and develop a belief that banks are intended for

more educated and richer individuals. Also, almost 90% of the loans disbursed need collaterals, which in case of rural poor is land. Hence, a major part of the landless poor get excluded. Plus, a 2006 UN survey

suggests that 10-20% of the loan amount

is eaten up as bribes in all forms of financial institutions.How can India achieve its intention of Total

Financial Inclusion by 2012? To be frank, standing at the current date, it is next to impossible. For this certain measures are already in place, but need to pursue them more actively.

Changes at the policy level: A policy change to encourage the public to invest their savings should be brought about. RBI has already introduced policy changes in 2005. These include introduction of no frills

accounts without minimum balance clauses and Kisan Credit Cards for easy

transactions, relaxation of Know Your Customer (KYC) forms for accounts having balance of less than 50,000 and less than

100,000 as loans annually, and reasonable pricing by banks for services rendered.Another crucial step is the encouragement of microfinance institutions who have tried to fill up the void created after the

commercial banks left rural market. More and more developmental agencies are using microfinance as a tool for sustainable development, a trend started by Self-Employed Women’s Association, SEWA.

In conclusion, it can be said that, despite having the requisite infrastructure in place, the sheer apathy and lack of policy implementation is holding back the poor 400 million Indians from realizing their

potential fully. But change can’t be brought from one side. A population low on awareness and education can’t fully utilize the benefits of institutional finance. For that, policies like right to education are

crucial to raise the general education level, especially the rural poor and backwards. Also, strict vigil on eliminating social ostracization has to be brought in to give everybody an equal opportunity to

determine their own destiny.-Soumyadipta Chakraborty & Yashowardhan Chaturvedi(XLRI)


BSE Code:500296

NSE Code: NAHARSPING Industry: Textile

Group: B Market Cap :402.13cr

Promoter holding:63%

RESEARCH REPORT::NAHAR SPINNING

NAHAR SPINNING MILLSIntroduction about Nahar Spinning MillsIt was started as a spinning and hosiery unit in Ludhiana .The Company is the part of Nahar Group of Companies. The group`s portfolio include wool combing, spinning, knitting, fabric, hosiery garments etc. Nahar spinning mills is a blue chip in its group. Nahar Spinning’s T-shirts are being exported to reputed international brands such as GAP, Arrow, Old Navy, Pierre Cardin, Izod, and Quicksilver. Recently the company got Golden Trophy by the Apparel Export Promotion Council and Gold Trophy by The Cotton Textiles Export Promotion Council.

Key Highlight of the company • The company is the best amongst its peers and has an attractive P/E ratio of 4.77 and industry P/E is 9.06• Spreads of cotton yarn is increasing continuously • The company is developing its own retail brand Cotton County • The board has approved for a capital expenditure of 400 Crore under TUFS with a capacity expansion of about 33 percent of current capacity

Textile Sector AnalysisIndian Textile industry is having significant presence in domestic and global economy. Indian textile industry plays a major role in Indian economy by

contributing 14 % in total industrial production, 17 % in foreign exchange and 4% in GDP. Government policies like Technology up-gradation fund scheme (TUFS),Scheme of Integrated Textile Park(SITP) technology Mission of Cotton (TMC) and 2 % interest subvention from exports has helped this sector to grow at a rapid rate. From the recent past the India Textile products have become cheaper than of china due to the appreciation of Chinese Yuan and wage inflation in China. The domestic factor which supports the growth of this industry are increasing purchasing power of both domestic and rural markets and growing organized retail in India.

Segmented RevenueNahar has a current capacity of 3.35 lakh spindles to produce cotton yarn/Synthetic yarn respectively .It has planned for an addition of 90000 spindles by July 2011. In the textile and hosiery garments has a current capacity of 14 lakhs pieces per year. The current capacity utilization of garments is 50.57% .The domestic and international demand for garments will have the capability to push the capacity utilization to 87 % by 2013.The wastes are the material waste generated in spinning and garments manufacturing sold at a cheaper price. Around 65-70 percent of the revenue comes from exports.


Expenditure AnalysisThe major part of the expenditure are

contributed by Raw material cost and power and the fuel cost .The major part of the raw material consumed by the

company are Raw cotton and cotton yarn .In the fiscal year 2010-2011 the cotton prices had a huge price fluctuations at the end the Raw cotton per Kg in January 2011 quoted at Rs 80/- in New

Delhi according to CMIE. Nahar has a strategy to hold more inventory of Cotton which forms around 90 percent of the raw materials to avoid price fluctuation and weather fluctuations. Power crisis is one of

the major threat to the company .The company has mitigated the power risk by

installing captive power plant of 4.1 MW capacity in July 2011.

Interest AnalysisInterest is one of the major expenses to the company. In the fiscal year 2008-2010 because of the economic recession the company in order to meet the financial

obligations of the company .The financial leverage has shown a huge variation in that particular year. The term loans and the working capital loans are contracted at interest rate of 5-8% .The weighted

average cost of interest rate is 5.75%. The company plans to obtain 400 Cr term loans at an interest rate of 5% with the help of TUFS under textile ministry in fiscal year 2011 and 2012.

Depreciation Analysis The plant and machinery, Land and building are the major fixed assets in the

organization. As per the previous financial statements the depreciation for plant and machinery is at the rate of at 10 percent y-o-y .The depreciation for land and building is at the rate of 12 percent y-o-y. In fiscal

year 2010-2012 it has added machinery in the yarn segment.

Considering the stock will trade at 5.5X PE the stock will reach a target

price of Rs200/- in 24 months with a growth rate of 79 percent.

-Sanjeev Kumar & Selva Kumar(NITIE)


PE Investments in 2010After two years of drooping Private Equity Investments in India, year 2010 saw a major shift with around 100% jump. The level of PE

Investments in 2010 came out to be 7974Mn $ with around 325 deals. Moreover, the average investment per deal also rose from 14Mn to 24.5Mn per deal signifying investments in even bigger projects in 2010. Interestingly, the level of PE investments in 2010 nearly equaled the prior slowdown year investments of 2006 of 7485Mn $. The effect of Global Economic scenario causes the roller coaster ride of PE investments in India.However, there are many internal factors which are impeding the growth of PE investments:• Strong macroeconomic fundamentals are making India an attractive destination for PE investments. However, decreasing investment opportunities in developed countries is fuelling enough completion in India.• Removing legal roadblocks by regulators, which block PE investments in some sectors. Thereby, diminishing its potential.• Reluctance of Indian businesses working with the PE/VC investors may cause their businesses remaining untapped. Promoters can enhance their business value by aligning with partners having similar vision.• PE firms need to understand the intricacies of the business in India through honing their investment capabilities along each phase of investment life cycles.Average deal size in India has been relatively small when compared to China/other

ANALYSIS OF PRIVATE EQUITY INVESTMENTS IN INDIA IN SECOND HALF OF 2010 AND BEYONDOverview of PE Investments in India during July-Dec 2010 Deal volumes reported in September and October were lower compared to August.

Real Estate remained the favorite sector in September and October, unlike Energy in August. Most of the investments in energy sector came from Blackstone investing in Moser Baer for around $ 300Mn. Healthcare industry although having large number of deals remained small in terms of value due to smaller deal sizes. HDFC VC’s 10% stake purchase in Lodha Group’s “World One”, the world’s tallest residential project

for $ 111Mn was the largest PE deal during the given period in Real Estate, followed

by Kotak Realty Fund’s $ 55.56Mn in EmaarMGF.Month wise analysis of PE investmentsJuly was the gloomiest period during the past four months, with the number of deals

being the least. Also the deal volume was very relatively small. India was witnessing greater inflow of Private equity inflow into the country after the financial meltdown. There were two prime reasons for this drive:• Stocks of Indian markets were battered during the slowdown and were trading at very low premiums, which provided ample opportunity for PE and VC firms to invest

in some good companies.• Signals of strong economic growth in the emerging countries while the US and Europe still not showing signs of recovery from the economic recession. • Easy availability of cheap capital in from the US encouraged them to invest in some undervalued firms through Private equity.


During the month of August, PE firms started investing in India through the debt market for the first time. Therefore, the deal

volume during August shot up by around 100%. KKR Private Equity was the first to it through their global NBFC arm. The prime advantage is enhancing company’s va luat ion, thereby bu i ld ing bet ter

relationship with the promoters, enhancing the chances of conversion of PE Deal.

Sector wise Analysis of PE Investments in India

a)Real EstateAlthough the poor infrastructure sector in India being one of the major deterrents for PE investments coming to India, it is finding the highest preference among the

PE Investors in recent times. Thereby, Energy, Real Estate & Construction together accounted for nearly two-thirds of all PE investments by deal size. The largest deal during the six month period came

from Blackstone group investing about $ 300Mn in Moser Baer for investing in power sector. Blackstone is reported to further invest $ 1Bn for investing in infrastructure for next few years, signifying

the continuing dominance of infrastructure sector.b) BFSI, IT & HealthcareBFSI, IT and Healthcare sectors attracted deals of relatively smaller value; however

they remained relatively significant in terms of total investments made.c) Retail and Food & Beverages

IndustryInvestments in retail remained miniscule largely due to the untapped retail sector.

However, the impending decision on multi branding retailing brings possibility for huge investments. Unlocking the retailing

sector would also enhance investments in food and beverages industry. Rising incomes and inflation are creating

favorable condition for investments in this sector.d)EducationEducation Industry which saw three fold raises in 2009 remained as one of the most

lucrative sector. With impending reforms in the sector, the sector might witness phenomenal investments in recent years. However, the investment size mismatch is acting as a major deterrent, due to limited

number to educational assets to be employed with investments over $ 25Mn which PE firms are targeting.e) A l t e r n a t e E n e rg y a n d C l e a n Technology

Alternate Energy & Clean Technology is emerging as one of the major PE investments in recent years as India s t rugg les w i th power defic i t and environmental worries. Moreover, the

policies of the government are encouraging investors to some extent, like levying tax on the use of coal to fund the renewable energy projects. I n t e r n a t i o n a l F i n a n c e

Corporation (IFC) made 5 deals alone since the month of August in this sector. f)LogisticsInvestment in the logistics

s e g m e n t h a s s h o w n significant decl ine, the primary reason being the

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

t h e d e a l sizes. While PE players are looking at deals of at least $

50Mn, logistics companies are agreeing for deals up to $ 20Mn.5) Roadmap for the Private Equity Investment

in 2011Like 2010, PE investments are expected to flow into I n d i a w i t h t w i c e t h e

investments in 2010 and even greater

returns. Nearly $ 30Bn is waiting to be deployed next year, creating chances of even bigger deals. In 2010, PE firms employed $ 8.3Bn through 376 deals,

compared to investing $ 4.7Bn last year through 331 deals in Infrastructure sector.Infrastructure sector is likely lead the PE

investment in 2011, leaving behind the financial services sector, which received the highest investment in 2010, primarily due to increasing interest in real estate post financial meltdown. Due to large

amount of PE capital being absorbed by the infrastructure sector, the financial services firms might receive much lesser PE investments compared to $ 2.1Bn in 2010.

About 20-25% of PE investments would be done in infrastructure sector, primarily due to banks unwilling to lend them and secondarily due to small corporate bond market. Thereby, the PE funds would play a

crucial role in the infrastructure investment sector of India in 2011. Blackstone Group alone may invest more than $ 1Bn in India next year.Indian PE firms may face stiff competition

from the foreign PE firms finding good investment opportunities in 2011. Other

than the IPO exit route, secondary sales are likely gain popularity next year, after 18 secondary sales in 2010. Primarily due to

the lack of sufficient capital for next stage of growth by small Indian PE firms. Like, Warburg Pincus buying ICICI Venture fund’s stake in Metroplis Healthcare. 2011 might witness an increasing number of

fund managers leaving their jobs with global PE firms to open their own venture, with economy thriving and opening opportunities.

-Shashank(National Institute of Industrial Engineering)


After a catastrophic

2008 and a fragile 2009, the

global banking industry showed

signs of revival in the year 2010

even as numerous

challenges, both remnants of the past and some emerging over

the year, continued to lay

siege to its strong and sustained

recovery. The unprecedented

easing in liquidity through liberal monetary and fiscal policies

helped no doubt, as did the revival

in the equity market.

KEY TRENDS & ISSUES IN THE GLOBAL BANKING SECTOR (2010)IntroductionAfter a catastrophic 2008 and a fragile 2009, the global banking industry showed signs of revival in the year 2010 even as numerous challenges, both remnants of the past and some

emerging over the year, continued to lay siege to its strong and sustained recovery. The unprecedented easing in liquidity through liberal monetary and fiscal policies helped no doubt, as did the revival in the equity market. The banking sector as a whole showed a rise in net income, even though the earning quality remained a major issue, as most of it came from sources other than traditional interest income. Questions also remain over the capital levels in

the banks as the Governments start to withdraw the stimuli effects and the norms of the enhanced Basel II regime come into force.

Stricter RegulationsAs the epicentre of the financial crisis lay in the banking industry itself, attempts were made to subject it to stricter regulation. The Basel Committee on Banking Supervision introduced

‘The Capital and Liquidity Reform Package’ in July, 2010 introducing new agreed upon definitions in the treatment of capital, counterparty credit risk, leverage ratio, regulatory buffers and global liquidity standards. The Committee also stressed on introducing counter cyclical provisions and buffers and credit-to-GDP gap was accepted as the best performing indicator for calibrating the same. In September 2010, the Committee introduced the

enhanced Basel II regime which significantly increased the capital requirements from the existing Basel II norms. In order to prevent the banks from facing immediate liquidity threats, a phased implementation of the same was suggested, starting from 2013 and continuing till 2019. Also, a counter cyclical buffer measure was proposed in addition to the existing capital norms of Basel II.


Global Financial MarketsThe year 2007 and 2008 has seen an unprecedented contraction in the global

money market as counterparty risk increased tremendously and the LIBOR-OIS spread reached new heights. However, the sustained efforts of the Governments and Central banks around the world helped

the money market to settle down in 2010. Nasty surprises still lay in store though as the sovereign debt crisis in Europe again put the money market under renewed stress in the middle of 2010.

The sovereign debt crisis posed one of the strongest challenges to the global financial industry during the year. Governments all over the world and especially those in the fringes of Europe, struggled to recover

from the financial crisis and huge Government stimuli after years of over-spending, low taxation and massive welfare schemes. The tipping point came in the end of April 2010 when Standard and

Poor’s downgraded the Greek bonds to ‘junk’ status and at the same time also lowered the ratings of the Spanish and Por tuguese bonds. The EU had to stitch

together a bail-out package for G r e e c e a n d t h e G r e e k Government had to undertake painful cost cutting measures. This was followed by a period

of relative calm until history was repeated again, this time with Ireland. However, the biggest worry still remained in Spain which had much bigger economy

than Greece, Portugal or Ireland and a failure which can throw the global economy into disarray. As the year came to a close, the last word had not yet been spoken on the European debt crisis.

Equity markets across the world moved in tandem and continued their recovery from the rock bottom of early 2009. However, the sovereign debt crisis and sluggish recovery in the advanced economies again

weakened the equity market in the d e v e l o p e d e c o n o m i e s . E m e rg i n g economies, however, had an altogether different story to tell and the US Fed policy to keep interest rates at a historic low level

opened up huge foreign investment in them. Bank stocks in the developed economies continued their slow progress from the nadir but were unable to

completely recover their losses. The opposite was true, however, for bank stocks in the emerging

countries, which almost came back to the pre-crisis level as a result of strong balance sheets and better growth prospects.Similar trend was observed for

credit market which continued its tedious progress from the freezing over during the financial crisis. Initially aided and abetted by the p o l i c y m e a s u r e s o f t h e

Government, it began to recover on its own as the liquidity and market risks eased at the end of 2009. However, a large chunk of the global credit demand is still

coming from Governments and other sovereign entities while private credit market continue to remain stagnant. The corporate bond spread also eased a little during the year even as the

recovery was affected by the sovereign debt crisis of Europe.

Fig: Growth Percentage in Credit Markets

Key Trends in Performance of Banks

As a general rule in the developed economies, income of banks rose during the year although major part of the same came from trading fees, foreign exchange gains, etc. Rising equity markets eased the

pressure on banks and helped them become profitable by providing them with alternative profit sources. Better primary markets also allowed a lot of banks to subst i tute capi ta l f rom the same.

Regulatory capital as percentage of risk-weighted assets thus increased for banks across geographies. The problem of loan losses and write downs continued, however, as the percentage of non-

performing assets kept increasing.

Fig 1: Change in Return of Equity of Banks Across Regions Fig 2: Gross NPA as percentage of total

loans in banksBanks in the emerging economies, which constitute 25% of global banking market,

recovered quickly from the financial crisis. Their business model, which is

to act predominantly as gatherers of savers as opposed to aggressive lenders like the western banks, thrived in the economic conditions with rise in domestic savings and

easy monetary policies. Banks in China have seen a period of boom in the year 2009, lending twice as much in 2009 than in 2008.

The Challenges Ahead

Looking forward to the days ahead, some of the biggest challenges of the banks over the world would to be to meet increasing capital requirements, address the issue of rising delinquencies, recover from the

withdrawal of liberal monetary and fiscal pol ic ies, redressing balance sheet weaknesses and dealing with a weak credit market. The biggest market risk may come sometime in 2011 when the big spending

European nations as well as USA will have to roll over their sovereign bonds and the subsequent pressure on the primary bond market may throw it into haywire. How banks cope with these challenges may

very well determine their role in the new world economy.

-Sayan Majumder & Shifa Shalini Tirkey(XLRI)


Public sector undertakings

were established in India as a part

of mixed economy with

the objective of providing

necessary infrastructure for

the fast growth of economy & to

safeguard against

monopoly of industrialist community.

However, the entire

mechanism did not turn out as

efficient as it ought to be, all

thanks to the prevailing

hierarchy and bureaucracy.

WHY DISINVESTMENT FOR INDIAN ECONOMYPSUs… Why after all?To illustrate the trailing scenario, the average return on capital employed (ROCE) by PSUs have been way too low as compared to the cost of borrowing. For instance, between 1940 and 2002, the average ROCE was 3.4% as against 8.6% average cost of borrowing. PSE

survey by NCAER shows that PAT has never exceeded 5% of sales for or 6% of capital employed. The government pays a higher interest though, by at least 3 percentage points.

As per an NCAER study report the cost structure of PSES is much more than the private sector (the following table shows a comparative scale) :

PSESPrivate sectorPOWER & FUELS/NET SALES 19.55Wages/net sales 23.3 6.5Interest/net sales 11.74.7

Lack of autonomy, political interference, nepotism & corruption has further deteriorated the situation. For instance, the head of a PSU is appointed by the Government, who in turn appoints all employees who play major roles in the organization. So directly or indirectly the Government itself controls the appointment of all manpower in these organizations. It is not

the business of the Government to do business, i.e. it is best controlled by experts and professional managers.If we look at figures, on 31.3.1997, 242 central PSUs had a investment of Rs.1,93,121 crores. By the end of year 2000-01, total investment was touching Rs.274,114 crores. Of these, 104 were making losses and about 53 were performing below expectations. Profit making

enterprises are mostly in sectors like petroleum and allied sectors, because they are benefitted from State monopoly. losses of the 104 loss making units were around Rs. 58,620 crores as on 31.3.1997.which put pressure on capital expenditure and contribute to fiscal deficit.These losses are a permanent phenomenon and keep borrowing just for their functioning is a temporary unsustainable solution.

In this year’s budget revenue expenditure has increased due to interest payments, wages and salaries of Government employees and subsidies. This leaves Government with very less money for capital expenditure on social and physical infrastructure. Government is forced to put aside resources for the sustenance of many non-viable PSEs. In addition to that there is a huge amount of debt overhang, which needs to be serviced and reduced before money is

available to invest in infrastructure. Disinvestment of the Maruti Udyog Ltd.will work as a beacon for future.


In an era of globalization, liberalization and dissolution of boundaries between nations, industrial competitiveness has especially assumed an important role, necessitating privatization or disinvestment of PSUs. Though it is claimed by many that ownership isn’t all that an important indicator of an organization’s functioning as is its management, it has been proven by an ample number of examples that private controls of an organization bring about drastic changes in its effectiveness. This is especially true today when competitiveness is essential not only for leading the industry but for mere survival.

Bureaucracy has been an inherent part of PSUs and attempts to overcome it have been unsuccessful if not inadequate. Private management has proven to be a panacea in most such cases, including VSNL and Delhi Vidyut Board. The success of these organizations after privatization has been evident by turning from red to black within a short span of time. PSUs no longer enjoy the privileges as they did in past times in terms of reputation and awe, on the contrary are stigmatized by the lack of efficiency and social considerations of past times.

Despite huge injection of funds in the past decades the functioning of many public sector units (PSUs) has traditionally been characterized by poor management, slow decision making procedures, lack of accountability, low productivity, unsatisfactory quality of goods, excessive manpower utilization, labor intensive units, lack of technological up gradation, inadequate attention to R&D, inadequate human resource development and low rate of return on capital. However, with increasing privatization, disinvestment or change of control into hands of professional managers, many organizations have seen the tables turn. Some examples are IRCTC and CRIS to facilitate the functioning of Indian Railways etc.

Inefficient PSU’s contributed largely for the macro-economic crisis faced by India during 1980’s. Primary purpose to establish them was to provide employment and help the government to generate revenue surplus. But they were unable to perform to the expectations. Experts are in consensus that disinvestment is unavoidable for the success of second generation reforms. Health of the stock market is also linked with the progress of economic reforms.

We have seen every socialist country adopt industrialization, rather efficient industrialization, for appropriate growth, be it China or Russia. We preferred Russia’s old model. Now that we have seen even the social countries succeed with privatization and fail without it, it is high time we implement it too in major respects. Implications of Disinvestment on Indian Economy:If India wants a continuous increased growth, it has to scale to the next level of performance. This is not an option but a necessity and disinvestment is a tool to get there. Increased population, unemployment, and poverty levels are main reasons why India needs to scale. The cost of not scaling to the next level will see India eclipsed by China and other South East Asian aspirants leaving India to its internal chaos. It needs a 10% rate of growth every year in its GDP to continue to be competitive with China and potential emergent nations in South East Asia.In the context of macroeconomics, time

has shown us how countries like Chile ,UK, China , New zealand ,Poland successfully used disinvestment to achieve new economic heights. Many countries used disinvestment as a sure means of restoring budgetary balance & to revive growth on a sustainable basis after facing economic crisis in 80s.Analysis of these countries before & after disinvestment shows that market-driven economies are more efficient than the state-planned economies

At the micro level, the change in ownership will increase domestic competition, hence efficiency; and encourage public participation in domestic stock market – all of which will promote ‘popular ‘capitalism that rewards risk taking and private initiative, that is expected to yield superior economic outcomes. Disinvestment shows that govt means business which will attract FDI, FII to finance projects in India.

Disinvestment will provide positive signs for the Indian equity markets and will work as a magnet to attract foreign and domestic money into the markets. It will allow PSU to raise capital to fund their expansion plans and improve resource allocation in the economy. Disinvestment will help government in stimulating the economy while accessing less debt market borrowing. Disinvestment will allow government to have much better control over the market economy without upsetting norms of market behavior.

In future disinvestment will assume the role of a major instrument of policy intervention by government as 48 PSUs listed on BSE as of February 8, 2010, account for close to the 30% of the total market cap of the exchange. This is significant as a total of 4,880 odd companies were listed on the exchange. As of February 8, 2010, the BSE PSU index had a total market cap of Rs 17,14,466.96 crore.

As certain no. of shares are reserved for retail investors & Splitting the stocks of some big PSUs ,will attract more retail investors. Market cap of PSUs can go higher in future & can provide extra money in the kitty of govt. 5% Reservation for employees will work as an incentive & will keep momentum going. This will be true democratization of capital. Disinvestment would encourage citizens’ participation in management of public enterprises and improve the capitalization of stock markets. When companies get listed on the bourse they

adds certain economic and financial benefits to the economy. Which is called financial deepening, a term coined by development economists. Financial deepening improves the efficiency of the financial system as well as contributes to GDP growth.

Latest loan bribery case(in LIC,PNB etc.) has shown the wrongdoing, loopholes & drawbacks in the working of PSUs. If India has to become a economic super power, working way of PSUs have to be changed. PSUs contribute about more than 1/4th in the GDP of India & a large chunk of working population is employed in PSUs .Economic super power dream is not possible without PSUs coming at par with private sector. -Jagriti Gupta & Vipin Patel(FMS)


Eschewed sovereign bonds. Record high government borrowings. Large fiscal deficit. Collapsing banking sector. So many

problems and still the government of Ireland was not willing to agree to external rumours that it needed an aid package. The Irish government kept supporting its claim by stating just two reasons. Firstly,

their loan was not supposed to be refinanced till 2011 and secondly, they did not want to lose control over their fiscal policy and end up discouraging foreign investment which is the key driver of the

country’s growth for almost two decades now.Finally on 21st November, the Irish government gave in and announced that to uplift the deteriorating condition of the banking sector, an external state financial aid was required.What led to the bailout?The economy was a hub for financial investors since the 90’s as it charged a

corporate tax rate of 12.5% which is the lowest among the EU nations. This has attracted many companies to setup their base in the country and due to this the economy had been booming. The first

major setback came with the burst of the real estate bubble in 2008. This was closely followed by the fall of Lehmann Brothers which sent the world economies into recession mode. The Irish banks were

severely hit by both these developments. Since then the budget deficits have been constantly increasing and have reached a high recently, amounting to about one-third of the economic output this year. This led

to a rapid surge in bond yields which are currently at an all-time high. The Finance Minister, Mr. Lenihan announced that the increasing interest rates would make it impossible for the government to raise

money the next year and hence the banking sector would need a back-up fund to support itself.This deteriorating financial health of the economy was immediately perceived by

the citizens and they started withdrawing their funds. The government holds a major stake in many large banks but provides only a blanket guarantee to them. Due to this, the two largest banks of the country,

Allied Irish Bank and Anglo Irish Bank were finding it immensely difficult to get any deposits from the market. Allied Irish Bank

reported a 13 billion euros decrease in its deposits this year, which is almost 17%.The crisis hit banks were the most

concerning factor for the government as they somehow needed funds to support the sector and revive the declining economy. Apart from this, currently the country is spending close to 19 billion

euros which is more than what it receives from its revenues and taxes. The rising budget deficits are yet another factor of concern for the al ready burdened government.

The plan of ActionThe country was coming under pressure from all the Eurozone members to accept the fact that the economy was not in a condition to survive on its own as they

feared that the damaging effects might spread to other debt ridden European countries like Portugal and Spain. The belief was unanimous that Ireland asking for a bailout package might actually result

in relaxing the tense atmosphere and in fact ease pressure on other countries with mounting debts.– the Eurozone, EU and the IMF. Each contributed 22.5 billion euros which

amounts to roughly 29.8 billion USD. The rest of the amount was given by Sweden, Denmark and Britain as bilateral loans.Irish PM, Brian Cowen disclosed that the package would be having two major steps.

First would be to revamp the deteriorated Irish banks and make them much smaller than they were. Second would be to reduce the budget deficits by decreasing government spending and increasing

taxes.To address to the first step, 10 billion euros have been immediately given to the government-backed banks so that they have sum back-up funds for their

sustenance. Another 25 billion euros have been set aside particularly for the banking sector only. The rest of the loans have been set aside for the second step. Ireland has been given time till 2015 to decrease its

annual deficit to 3%, which currently is at an all time high of 32%. As far as the taxation rules were concerned, Ireland got its way and the government was given full freedom to set

its own tax plans. Regarding this, Mr. Cowen commented that the 12.5% corporation tax would remain unchanged

as it is the major economy driver and it would be drastic setback for the growth opportunities if it were to be altered.

The package is a bit different from the one given to Greece earlier. The interest rate for the package is higher than Greece’s but Ireland has 10 years to pay-off its loans whereas Greece was only given a time of 3

years. The first instalment would be due within 4.5 years.Has it worked?The bailout package has been paid out and everyone had positive expectations from it.

But have these expectations been met? The answer to the question can be seen from the fact that private investors have still no urge to buy Irish government bonds. The demand for bonds which was lacking

initially is still the same and government is not likely to be able to raise more money from the market. So what exactly went wrong? The main cause for the failure of the bailout

mechanism is that EU members have a common centralized monetary authority but a decentralized fiscal authority. This leads to a situation where the two policies don’t complement each other making it

impossible to solve these situations.The bailout mechanism relies on getting money from stronger countries like Germany, which in fact is from the common tax payer there. The complaints from them

being troubled for no reason at all continuously increase. This money is then transferred to an affected economy which is forced to cut its spending and survive under severe austerity measures. The

whole concept is flawed from within as it simply adds more debt to a country’s economic situation which is already under a load of debt.All in all, the money has been forwarded to

the country, the measures and the deadlines have been set, but the effect which was perceived is far from achieved. Jean Claude Trichet, the head of Europe’s monetary authority has a very major role to

play now. He must review the policies being used in EU, related to the common monetary authority and the common currency and also he must check the efficiency of loaning large amounts to

already debt stricken countries, or in other words what they call the bailout package.

-Harpreet Singh & Vaibhav Juneja(FMS)

The Demise of the Celtic Tiger

Economy & Finance

Senior analyst jan 11(1)