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OCTOBER, 26 | 2014 | A FINNICHE INITIATIVE
Green Shoe Option | 6
Comprehensive Win for
BJP in Haryana &
Maharashtra |12
Christine Lagarde |11
Pace of Modi’s Reforms | 4
Samvat 2071: A Year of
Hope or Despair
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Samvat 2071: A year of
Hope or Despair
Pace of Modi’s Reforms
Green Shoe Option
Christine Lagarde
October 26 | 2014 | Volume 18
Hope you all had a wonderful Diwali and enjoyed your holidays to the fullest.
With the nearing of examinations, hope juniors maintained a perfect balance
between their festive mood and studies on the other hand. Club FinNiche would
like to take this opportunity forward to wish the entire junior batch all the best for
their upcoming examination.
With the junior batch having their exams in focus FinNiche launches yet another
edition of FinXpress with the In Focus section highlighting “Samvat 2071” which
makes a comprehensive coverage about Samvat either as an year of hope or
despair. The Opinion on the other hand gives an overview on the Pace of the
Modi’s Reforms and its progress in light of the promises made by the
Government.
The term of the week describes “Green Shoe option", as a method of protecting the
company against the oversubscription and under-subscription of shares. Do have
a look at the personality of the Week, Christine Lagarde, Managing direct of the
MF and the non- finance section highlighting the results of the recent election
revamp and its result based on Modi aura spread.
Hope everyone likes this edition of magazine. Club FinNiche welcomes any
comments, suggestions or criticism regarding the magazine. Please do write to us
and share your ideas.
Best wishes to the Junior Batch.
Happy Reading!
Regards
The Editorial Team
Club FinNiche
Disclaimer: FinXpress takes no responsibility for the opinions expressed in the magazine.
Page 3
After a dismal first half of the
year, primary markets are
abuzz with action, with ten
firms filing offer documents in
last two months
The Sensex gained 5590
points, which translated to a
growth of 26.37%, in Samvat
2071
Samvat 2071: A Year of Hope or Despair
- By Aditya Agrawal
At approximately 6.30pm on 23rd October,
the markets rang in Samvat 2071, with its
symbolic Mahurat Trading session. Nearly
27,200 crore was added to the total market
capitalization of the market.
Samvat 2071 has opened up a can of questions
about the plausible market movements up
ahead. The general mood in Dalal Street
during mahurat trading had a bullish
undertone to it. This though was also mixed
with a pinch of caution.
This caution though, is not without warrant.
The global economic scenarios are not the
most positive at the moment from India’s
perspective.
The US Federal Reserve is faced with the
unique scenario, wherein after months of
continued focus towards improving the
condition of the labor markets, they face the
challenge of low inflation being heavily
entrenched into the economic genesis. The last
FOMC meeting having provided an optimistic
scenario for the United States, had brought
expectations for an aggressive increase in
interest rates. This though has weakened in
the past month. There has been an extended
period of oil prices sliding, which are
expected to remain in this phase for a
considerable time frame.
The CPI for the month of September rose
marginally by 0.1 percent, further painting a
picture of weak inflation, on account of rise in
food costs. This though is not expected to
sustain in the coming months.
This has led to expectations from certain
quarters of the Federal Reserve pushing the
interest rate hike back in its upcoming
meeting. There is also speculation about it
having renew asset buying to pump in money
into the markets.
The problems faced by the United States is
being coupled with the slowdown in the
Chinese economy. China is expected to have
its slowest growth rate in the past 24 years,
which is expected to slow down even further
in 2015. The growth for 2014 is expected to be
in the range of 7.4 percent, which is shy of the
expectations of the Chinese government. This
is expected slow down further to 7.1 percent
in the upcoming year. This slowdown has
been fuelled by the relative cool down faced
by the real estate sector and the overcapacity
of its manufacturing sector. The global
economy across all nations would be hit
Page 4
Crude oil prices fell down to
$80.52, its lowest price since
June 2012, on the NYSE
Greece is expected to return to
its growth path in the third
quarter of this year, for the first
time since the crisis of 2008. It
is expected to show an annual
growth of 0.6 percent for the
year
deeply by this slowdown, due to the
substantial decrease in demand arising from
the China, impacting local production.
Emerging Asian economies would be most
hit by the Chinese slowdown. Most Asian
economies have traditionally shown erratic
exports, policy uncertainty, domestic
demands being sluggish and capital outflows
Economists in a recent survey left estimates,
for GDP growth for 2015, unchanged for
nearly nine economies. This was primarily
driven by the lackluster demand potential
exhibited by most of the trading partners of
these economies in the West. This gets
further accentuated by the high level of
investments in China, which is primarily
financed using debt. With the expected drop
in the real estate sector of China, the highly
leveraged economy would induce a further
drag on the consumer demands.
Impact of this slowdown was seen in Japan
as well. Exports for Japan rose at the fastest
level in seven months for the month of
September. This trend though, is under deep
pressure with its two biggest markets, China
and Europe, both experiencing problems in
their respective economies. There is an
unprecedented pressure on the Japanese
government to increase support through
policy changes. With a number of companies
shifting production out of Japan, the
Japanese economy shrank by an annualized
amount of 7.1 percent in the second quarter
of 2014.
Adding into the rut is the problems being
faced by Germany, which also shrank by 0.2
percent in the second quarter. This though is
again rooted to the slowdown of the Chinese
economy, among other reasons. The high
power price of Germany does nothing more
than add to these problems, with firms
staring to relocate to take advantage of lower
energy prices. A point example can be the
relocation of a BMW factory to America,
where energy prices are nearly 80 percent
lower to Germany.
India, though on the other hand is
considered as one of the bright spots out
there at the moment. This can be gauged
from the positivity of the fund managers
during the mahurat trading session, wherein
they expect a once in a lifetime rally to take
place. The positivity comes from the removal
of policy paralysis which had been a
nuisance over the past couple of years. This
positivity gets reflected in the Rs 988 crore of
FDI proposals which was approved by the
government the day following Diwali. Rise
in demand can have a no better gauge than
the jump in sales of gold by 20% during
Diwali.
Growth in India is expected to rise to its
fastest pace since the fiscal year 2010-11.
India is expected to grow at 5.5 percent this
year and at 6.4 percent in 2015. This though
is coupled with a fluctuating PMI data,
showing uncertainty in market conditions.
The market is also expected to correct by 6 to
8 percent in the medium term to factor in the
global economic stress.
This leaves open the question, whether
Samvat 2071 will show an unprecedented
growth, giving brilliant returns, or will it be
bogged down by the weak global economy
and struggle to keep up to expectations.
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Since we are in the cusp of
reforms , in the long run it is
better to have a thoughtful and
permanent ones!
- S Divya Shree
Several reforms have been introduced by
Modi’s government in this current week, be it
the changes in energy policies or the labour
market. First the deregulation of diesel prices.
Second the natural gas prices hike. Another
one is to cap the cooking gas subsidy on the
domestic gas cylinders. Next is the response
given to the court’s order of coal mines
cancellation allocated to the private firms.
The deregulation of diesel prices is the
culmination of steady monthly rise of
Rs.0.50,originally started in February’13.
Taking advantage of steep decrease in oil
prices this reform seems to be a good
approach, as public is least burdened
especially in the scenario of poor income
growth. But the real challenge lies in tackling
the situation when the oil prices rise in future!
Capping of cooking gas subsidy is
implemented with a view to shield the public
balance sheet from an automatic expansion
when the prices rise. Currently the cap is put
on the subsidised cylinders, 12 per consumer
each year at a cost of Rs. 466 per cylinder.
The cap on total public resources outgo can
imply 2 things
1. To get consumers used to price
fluctuations beyond the cap
2. Re-examine the beneficiaries again to
remove a few of them who can afford the
market prices
The former may not be a better option as it
may lead to consumer discontent.
The current coal shortage problem is solved
by the government through an
announcement of a transparent coal block
allocation process, e-auction. This gives the
power and steel companies which are
dependant on coal a clarity on the supply
rather than the murky and easily corrupted
bidding process existent earlier.
It can be treated less as a reform and more as
a short term fix as it falls short of
denationalizing the coal sector which is
ultimately the solution for India’s power
shortage problem.
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In the competitive Indian market, Flipkart,
Amazon and Snapdeal are constantly
engaged in an aggressive price battle to gain
customers. Just after the Flipkart raised a
fund of $1 billion, Amazon’s chief executive
announced that it would like to invest $2
billion in India’s business. Recently, Flipkart
had its big billion day sale to attract
customers and it was in response to it that
Snapdeal also lowered its prices. Although
this gave a negative publicity to many of the
companies.
India’s e-commerce market, excluding travel
services and tickets, is worth $3.1 billion and
is estimated to grow to $22 billion in five
years, according to CLSA’s November 2013.
If Snapdeal has to become a part of this
exponential growth, it will have to compete
with Flipkart’s aggressive business model,
especially in the area of exclusive brand
launches. Flipkart has managed to bag
important deals with brands like Xiaomi,
Huawei, Asus, Alcatel and most notably
Motorola for launching their devices
exclusively through its distribution
channels. This is where Flipkart has taken a
lead in brand penetration and customer
reach. Even Amazon has managed to bag a
few deals with Samsung. Thus Snapdeal
should use its fresh round of investments in
devising new strategies to establish
corporate partnerships & customer base.
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The flexibility to respond quick-
ly to rising or falling demand
for the shares is a huge posi-
tive of the green shoes. For the
issuer and the corresponding
banks may have the potential
to place a maximum num-
ber of shares that may be is-
sued at the same time will act
as a risk buffer. So, in case the
demand is low the exercise of
the green shoes is waived and
the issue will still be successful
If the green shoe is connected
with the issuance of new
shares, there is an appropriate
exercise of its dilutive effect on
other shareholders, which is
often seen negatively.
Green shoe option is the provision provided in
the underwriting agreement wherein the
underwriter can issue more shares than
initially planned. Also referred as
Overallotment option, this option was named
after Green Shoe Company for which this was
first used in 1960. The Green Shoe option is a
clause in the underwriting agreement of an
IPO, which allows to sell additional shares,
usually 15%, to the public if the demand
exceeds expectations and the stock trades
above its offering price.
How Green-Shoe Option Works ?
As already mentioned above, green shoe
option works on the concept of over allotment
of shares. Let us understand it with the help of
an example. Say, for instance, a company is
planning to issue 100,000 shares but due to
high demand it actually issues 115000 shares.
Point to be noted is that company did not
actually issue extra 15000 shares. The 15000
shares that are used for overallotment are the
ones that are borrowed from the company’s
promoters with whom the stabilising agent
enters into a separate contract. For the
subscriber of the public issue, it makes no
difference whether the company is allotting
the shares from the 100000 freshly allotted
shares or from the one that are borrowed from
the promoter. To an investor, a share is just
another share.
Though for the company the situation is
completely different. The money received the
company from over-allotment of the shares
has to be kept in a separate account known as
GSO bank account.
The task of the stabilising agent starts only
after the shares are allotted and their trading
starts on stock exchange. While trading, two
possibilities could arise for the price of the
share:
In case the shares are trading at a price
lower than the offer price, the stabilizing
agent would start buying the shares from
the money that is lying in the bank
account. Hence by buying the shares from
the market while others are selling kind of
negate the falling prices and stabilizes
share prices. The share so bought are given
to the promoters from whom the shares
were bought for over-allotment.
Other case could be that the price of the
shares starts to rise. In such a case, the
stabilizing agent won’t buy the shares
from the market. Instead the company can
exercise their green shoe agreement and
issue new shares to the stabilizing agent
who will return these shares to the
promoters.
Since these options protect both company as
well as shareholders against falling price,
hence it is quite commonly used as a hedging
mechanism by the companies issuing fresh
equity. One famous example where Green-
Shoe Options were used was during Facebook
IPO release.
Page 8
INDIAN MARKETS
The data released for the week how signs of slow growth in the markets world over.
The BSE SENSES n India dropped below 27000 showing signs of weak investor senti-
ment triggered by the end of quantitative easing and expectation of interest rate hike.
Amidst all this , China GDP data showed much lesser than expected rise in production
which led to gloomy outlook which various indices worldwide marking a decline in
their values. At this point in time, the volatility in the world stock markets are reaching
their heights. The time will act as the best predictor of way the markets and investors
make their move.
BSE SENSEX
GOI clears 20 FDI proposals
worth Rs. 988 crore
The Bank of England and Euro
monetary policy committee
remains against interest rate
hike
India focused hedge funds up
25% year to date.
Open High Low Close
SENSEX 26889.51 26930.23 26827.68 26851.05
NIFTY 8027.70 8031.75 8008.25 8014.55
Page 9
FED is expected to hold a
stress meet with the concerned
nations on how to tackle the
rising pressure on the global
economy
Tensions persist between
OPEC nations and Saudi
Arabia over falling crude oil
prices
COMMODITIES
EXCHANGE RATES
INTERNATIONAL MARKETS
Open High Low Close
NYSE Comp 10529.28 10581.05 10496.1 10551.93
NASDAQ 4459.56 4475.02 4445.02 4463.32
S&P 500 2006.10 2006.86 1980.54 1985.54
FTSE 100 6419.15 6419.15 6374.24 6388.73
CAC 4137.92 4153.07 4119.27 4128.90
DAX 9008.6 9044.85 8956.99 8787.80
NIKKEI 225 15354.35 15377.05 15232.00 15291.64
SSE 50 2326.43 2343.08 2303.27 2331.95
Hang Seng 23311.88 23352.59 23157.48 23302.20
Commodity Unit Rs / Unit % Change
Gold 10 grams 27184 0.22
Silver 1 kg 38125 0.15
Crude Oil 1 bbl 4982 -0.88
INR/ 1 USD 61.16
INR /1 EURO 77.45
INR/ 100 JAPAN YEN 56.72
INR / 1 POUND STERLING 98.37
Page 10
Fiat banks on three pillar strategy, launches Avventura
Brand Fiat has been around for decades in India. But the company has no significant
presence in the Indian automotive market, with barely 0.5 percent market share. After
its return to the country in 2012, Fiat has announced a three-pillar strategy to ramp up
Indian operations: focus on distribution, branding and products. Of the four products
promised earlier, three (new Linea, Punto Eva and Avventura) are already in the
market. The fourth, Abarth 500, will also be launched before December as a CBU.
Launched last week, the Avventura compact utility vehicle at a starting price of Rs
5.99 lakh for petrol version and at Rs 6.89 lakh for the diesel variant. On the network
front, Fiat has already built 125 exclusive dealerships across 93 cities in India after its
breakup with the Tatas. It has identified 200 commonly needed spare parts which are
now stocked at each of its dealerships. For other, the company has set up a 6,000 square
feet warehouse in Chakan (Pune) from where these are shipped to dealerships on de-
mand.
MIS for Swachh Bharat Abhiyan
Urban Development Ministry will put in place management information systems (MIS)
that will enable the Prime Minister's Office to chart the progress of various activities
across India. As per the plan, all the states and 4,041 urban habitations to be covered
under the mission should be enabled to regularly upload information regarding the
progress of work in respect of construction of household and public and community
toilets along with solid waste management and awareness generation activities. This
will also enable online submission of proposals and approvals for various projects
besides electronic submission of utilization certificates and release of funds for speedy
implementation of works. The ministry will finalize guidelines for implementation of
the Rs 67,000 crore mission in urban areas under which over 1 crore household toilets,
besides over 5 lakh public and community toilet seats, are to be constructed by 2019.
Deregulating diesel prices
The government on Saturday announced the decision to deregulate diesel prices. After
this decision the price of diesel was reduced by around Rs 3.50 per liter. This was the
first cut in the price of diesel since January 2009. In the last two financial years the total
petroleum subsidy (subsidy for diesel, cooking gas and kerosene) amounted to Rs
1,82,359.9 crore. Around half of that was for diesel. Before diesel prices were freed,
economists estimated that a $1 per barrel rise in the global price of oil would increase
India’s subsidy bill by around $1 billion a year. The decision will be tested when oil
prices rise again.
Centre has agreed to provide
a grant of Rs 500 crore towards
development of 2,500 MW
solar parks in Andhra Pra-
desh. For 500 MW grid con-
nected solar photo-voltaic pro-
jects, the cumulative
capacity offered by the bidders
is 619 MW with tariff up to
Rs. 5.99 per unit.
SKS Microfinance has complet-
ed the securitization transac-
tion of Rs. 316.25 crore. The
pool has been rated by “AA
(SO)” by a leading rating agen-
cy and qualifies for priority
sector treatment as per RBI’s
priority sector lending guide-
lines.
Page 11
Apple Inc and IBM have signed
up about 50 initial corporate
clients for software solutions
and apps developed jointly
under their alliance. They
would team up to sell iPads
and iPhones with specialized
software to corporate and gov-
ernment customers.
Union Minister for Urban
Development M Venkaiah
Naidu announced that he,
along with Swarna Bharat
Trust of Nellore, would adopt
Hudhud affected villages in
Vizag, AP. The Minister also
promised to donate his one
month salary of Rs. 1 lakh as
his personal contribution for
relief and Rs. 25 lakh from his
MPLADS funds for
rehabilitation.
BJP win in Maharashtra, Haryana could mean tough time for Amazon, Flipkart
After the BJP has swept to victory in two more state elections, offline retailers are now
further emboldened that their pleas against the "excesses" of e-commerce will now be
heard. The BJP is known for its anti-FDI stance in retail trade. The small store retailers,
have been eyeing the success of e-tailers with suspicion, especially after the recent spate
of mega sales by Flipkart, Snapdeal, Amazon and eBay. Now, they want a plethora of
investigations opened againt e-tailers for daring to offer goods at unheard-of discounts.
CAIT representatives will be meeting Commerce Minister Nirmala Sitharaman and
Finance Minister Arun Jaitley this week to seek a comprehensive policy on e-commerce
in India. Sitharaman has already said allegations of anti-competitive behavior by
e-tailers will be looked into, though the CCI has not found a case for it till now.
Will Indian defense agencies trust Xiaomi ?
Chinese Smartphone maker Xiaomi is making waves in India with heavy demand for its
cheap smart phones. Earlier this week, the Indian Air Force (IAF) had accused Xiaomi
phones of possibly snooping and stealing data. What got the IAF's radar buzzing was
the fact that user data was sent to servers remotely located in China. In fact, IAF is also
believed to have alerted all its Commands and Squadrons and suggested that Indian Air
Force officers and their families should refrain from using Chinese mobile devices.
Aditya Birla Group signs health insurance JV with South Africa’s MMI
Aditya Birla Financial Services Group, said on Tuesday that it had signed an agreement
to form a health insurance joint venture with MMI Holdings (MMI) of South Africa.
The two will enter into a formal joint venture in which the foreign partner will hold a
26% stake. MMI is one of the largest insurers in South Africa. It has business in 12 other
African countries and in the UK, too. Currently the Mumbai-headquartered Aditya Birla
Group is present in the life insurance segment through a joint venture with Canada's
Sun Life. The latest entrant into the segment is Cigna TTK, a joint venture between US-
based Cigna and India's TTK Group. Apollo Munich, Max Bupa, Star Health & Allied
Insurance and Religare are the other standalone companies in the sector.
Page 12
January 1, 1956
Paris West University Nanterre
La Défense (Masters)
Institut d'études politiques d'Aix
-en-Provence (Masters)
Minister of Finance, France
Minister of Agriculture, France
Minister of Commerce and
Industry, France
Chairman, Baker & McKenzie
A noted labor and antitrust lawyer, Christine
Lagarde has many firsts attached with her
name. She is the first woman ever to run a
188 country wide financial organization
where she spent much of her first three years
as the Managing Director in crisis mode.
Soon after her appointment, Lagarde's main
challenge was to try and ease the enormous
eurozone debt crisis, and in particular the
bailout required for Greece. More recently
she has been dealing with escalating tensions
between Ukraine and Russia and also
approved a $17 billion loan for the troubled
Ukraine in April 2014. Her appointment as
the Managing Director is the 11th consecutive
appointment of a European to head the IMF.
Lagard is also credited with becoming the
first female Chairman of Baker & McKenzie,
an international law firm. She was also the
first women to become the Finance Minister
of France, or any G8 economy. On November
16, 2009, Financial Times ranked her the best
Finance Minister in the Eurozone. In June
2011, she was appointed as the next MD of
the IMF for a term of five years, replacing
Dominique Strauss-Kahn. In 2014, Forbes
ranked her as the 5th most powerful woman
in the world.
As a teenager, Lagarde was member of the
French national swimming team. After
completing her baccalauréat in 1973, she went
on American Field Service scholarship. She
holds master's degrees in English, social law
and labor law from the Paris West University
Nanterre La Défense. She also obtained a
master's degree from the Institut d'études
politiques d'Aix-en-Provence.
She is an advocate for women in the
workforce, and in 2013 commissioned an IMF
report on the topic "All economies have
savings and productivity gains if women
have access to the job market. It's not just a
moral, philosophical or equal-opportunity
matter. It's also an economic cause. It's a
no-brainer." According to Kenneth Rogoff, a
former IMF chief economist, "She is
enormously impressive, politically astute and
a strong personality. At finance meetings all
over the world, she is treated practically like
a rock star."
Page 13
- By Pragun Aggarwal
Mauling Congress once again, the Modi wave continued to work its magic by storming BJP to power in Haryana on its own. Maharashtra was no different where BJP notched up maximum seats in its kitty and is set to form government with support from either Shiv Sena or NCP. Riding on the Lok Sabha success, the assembly elections were seen as the first major test for Narendra Modi led BJP. In Haryana, the party managed a total turnaround from a meager 4 seats in the last elections to gaining majority on its own by winning 47 of the 90 seats. Congress, was reduced to 15 from its past tally of 40 seats. Indian National Lok Dal won on 19 seats and came second. The BJP also put up a splendid show in Maharashtra state elections, by winning 122 seats in the 288-member Assembly. It fell short
by 23 from majority figure of 145.The party won 47 in the last elections that combined with its separation from ally Shiv Sena reinforces the idea of change in ‘governance’ style which the people are voting for. Shiv Sena could muster only 63 seats followed by NCP with 41 seats. The head of the government till now, Congress, was reduced to 42 seats from its past tally of 81. Raj Thackeray led MNS was routed getting only one seat. The state assembly results are seen as a stamp
of approval on initiatives, policies and
performance of the Modi government and
drives home the claims of Modi supporters
that the Modi wave was far from over yet.
With Congress not been able to qualify for
even the post of Leader of Opposition in both
the states, these electoral victories are coined as
“two more steps towards Congress-free India”