InFINee� | Annual Issue | August 2013
InFINee� | Annual Issue | August 2013
InFINee� | Annual Issue | August 2013
D ear Friends,
Greetings from Team InFINeeti…
Financial markets have been tumultuous as the economy continues to experience financial hiccups and upheavals. After a ray of
hope for recovery, the ghost of the recent past has come back to haunt the markets. Besides Policy logjam, weak consumer & in-
vestor sentiment and stubborn inflation, the new pressure point that has emerged lately on the India's macroeconomic front is
volatility in the rupee against the dollar.
The highlight of the last quarter has been the downslide of rupee which has touched a new all-time low, this quarter. The rupee
seems to be hitting new troughs every week, while inflation gallops, the imports are becoming dearer and the oil bill getting inflat-
ed further, the balance of payment position more unstable than ever before. RBI is taking the stock of the situation as does the
central government to prevent these continual disorders before the new crises looms up. This does not bode well for the economy
in general and industrial output in particular.
Consequently, Gold is back in demand as falling rupee and melting equities leaving no place for investor to park their funds. Also,
the better-than-expected US economic data has led to hardening of US treasury yields and has also triggered fears of early with-
drawal of QE. Such a change in sentiment is adding further selling pressure on equities as an asset class thereby causing mayhem
in debt and currency markets, as these are ultimately weighing on equities.
Are emerging markets losing their luster? Will the rising level of NPAs severe threat to the banking sector in India? Is it the right
time to deregulate the fuel prices? These are some of the questions that the authors have tried to answer in this edition of the
magazine.
Many economists are equating the current situation with that in 1991. Though it would be an amplification of the situation, with
the rising external debt and falling reserves, the economy is heading in the similar direction thereby necessitating some urgent and
far-reaching actions.
Team InFINee had a candid talk with Mr. Prashant Joshi (Execuve Director, UBS Wealth Management- USA) who expressed their
views on the shi&ing trends & changing regulaons in the US Banking sector and the likely impact on the emerging markets.
Besides, the edition features regular columns like “FIN Trivia”, FIN-lingos, News chronicles and Market Pulse. Besides the regular
columns, this edition contains an in-depth analysis of the Jet-Etihad deal column containing some mind-boggling facts & figures.
We also take extreme pride and pleasure in announcing that IIFT has completed its 50 years of excellence in leadership in Interna-
tional Business and this year marks a special mention.
Happy Reading..!!
FROM THE EDITOR’S DESK 1
InFINee� | Annual Issue | August 2013
CONTENTS 2 CONTENTS 2
>>> Page 3 >>> Page 20 >>> Page 26
QE T�����
Consequences for the emerging markets
3
B��� ��� �
R�� �����:
S���� �� ��� S�����
The true story behind the US mess
7
NPA– T����� �� ���
���� ������
Causes | Impact | Rec-ommends
14
���� ������ ��
������ �������:
T���� �� M���
Will the emerging econo-mies be able to deliver
20
T��� ��� �����
Is it the right me to fully
deregulate the fuel pric-es
23
M��� ���� ��
��������� ����-
��� �������
Redefining the role of a regulator
26
COVER
STORY
EMBATTLED
RUPEE &
INDIA’S RISING
EXTERNAL DEBT
“Falling into a dark abyss!”
11
D��� A�����: J��-
E���
An in-depth analysis of the proposed and the revised version of the stake sale by Jet airways
30
C����� �� ���������
Summer internship experi-ence in investment bank
41
F T���
N��� �������� 45
F ���� 47
H���� ������
Candid chat with Mr. Prashant Joshi (Execuve
43
48
M����� P����
Sector-wise performance & Ni�y movement analy-
sis
33
F� ��� � 50
Regulars
E)���� ������
Expert analysis of why banking sector will be the forerunner in next bull run
38
InFINee� | Annual Issue | August 2013
3
INTRODUCTION
R aising of interest rates a�er periods of loose monetary
policy by the Fed contributed majorly to the La�n
American debt crisis in the 1980s as well as the Southeast Asian
crisis in the 1990s. In both cases, higher interest rates in the US
caused investors to quickly pull out funds which were earlier flowing
into these emerging countries and this caused sudden deprecia�on
of their local currencies- the shock was too much for these fragile
economies which faced many problems including difficulty in repay-
ment of debt and reduced growth because of lower liquidity. Rise of
interest rates was more of a trigger than the cause of these crises
and the actual cause points more towards the unsustainable debt
levels these countries had, when investments came their way. In the
present scenario when the emerging economies and structurally
stronger, a crisis may not ensue; but careful monitoring of QE un-
winding will have to be done and ac�ons taken on the monetary
front in par�cular, to ensure that infla�on is in control and growth is
not affected.
The following diagram illustrates the hike of interest rates star�ng in
1979 which triggered the La�n American crisis in the early 80s and
the rise in interest rates in the mid-90s, triggering the Southeast
Asian crisis from 1997:
QE’s purpose was to ar�ficially increase the demand for low-risk US
assets and thus bring down their yields, thus forcing investors into
riskier assets that drive US growth. However a large amount of capi-
tal has flown into emerging markets as well. Thus, when QE is with-
drawn, the ar�ficial demand for low-risk assets is reduced and thus
their yields rise, promp�ng investors across the world to invest in
the safe US sovereign bonds in par�cular and this results in capital
ou,lows par�cularly those of FIIs from the rest of the world. This in
turn has several consequences that affect exchange rates, capital
markets, infla�on etc. in these countries. Emerging economies, the
QE TAPERING CONSEQUENCES FOR EMERGING MARKETS
- Sarah K All & Srimaitri Yalamarthi
Symbiosis Institute of Business Management, Pune
Q uan�ta�ve Easing (QE), the unconven�onal monetary policy that the Federal Reserve (Fed) adopted a�er the sub-prime crisis to
inject liquidity has reached the �pping point and the Fed Chairman Ben Bernanke’s recent comments suggest slow withdrawal
of QE by reducing the present 85 billion $ per month asset purchases- provided the US economy recovers sa�sfactorily
(unemployment 6.5% and infla�on 2%), and this according to him could be as early as mid- 2014. A policy meant for the welfare
of US ci�zens, ironically has more implica�ons for the world as a whole than the US alone, thanks to the huge size of the US economy as well as
the enormous magnitude of the programme. The Fed announcement triggered sell-offs in most markets across the world and its long term
implica�ons are not yet clear.
Withdrawal of QE is inevitable considering the probability of asset bubbles being created, and �ming is the crucial aspect- if the process is too
sudden, it may affect growth of not just US, but also other countries and leaders of the delicate emerging market economies in par�cular
should be aware of the dangers arising out of it.
InFINee� | Annual Issue | August 2013
4
largest of which are the BRICS and Mexico, Indonesia Turkey etc.
have done poorly since 2009 while the rest of world has recovered
quicker. These countries are all capital thirsty and thus the with-
drawal of capital may further affect their growth figures.
The following chart shows the reduc�on in emerging market GDP
growth (at PPP) reducing, compared to the world:
EFFECTS ON THE FINANCIAL SECTOR
A�er the May 22 and June 19 indica�ons of QE withdrawal by the
Fed, US bond yields spiked and thus capital flew from the riskier
emerging economies to the safer US assets. This resulted in their
currency deprecia�on and speculators would expect the deprecia-
�on in countries with high CAD to be more severe, sold them off at
much larger amounts. The following diagram shows the worst
affected currencies and as expected, all of them have current ac-
count deficits. Other factors such as external debt as well as support
from the central banks also affect the deprecia�on and hence the
amount of deprecia�on is not exactly propor�onal to the current
account deficits.
The following figure shows the gross external debt of emerging
economies. High external debt indicates low repayment capacity if
the currency depreciates and hence speculators tend to sell-off the-
se currencies resul�ng in a self-fulfilling prophecy. The danger is
acute when high a high CAD economy has high external debt:
The following diagram shows how the 10 year bond yields have
risen a�er the June 19 announcement and due to RBI steps taken
a�erwards. Similar pa;erns can be observed in almost all emerging
economies.:
India in par�cular faces the threat of infla�on as a depreciated ru-
pee implies costlier oil imports (which have inelas�c demand) which
are either passed on to the customers- resul�ng in cost infla�on, or
subsidised by the government which fuels a higher fiscal deficit
which may be mone�sed and hence cause infla�on. Apart from the
usual nega�ves, high infla�on causes a further deprecia�on of the
rupee and thus fuels a cycle of deprecia�on. Separately, the wors-
ened current account deficit due to oil imports will also cause depre-
Source : Economist.com
InFINee� | Annual Issue | August 2013
5
cia�on unless enough capital flows in from abroad, since the RBI
does not have enough reserves (around 300 billion $) to support the
rupee. RBI has thus taken steps to increase interest rates to a;ract
capital flows, in spite of poor growth figures. It may be noted that
infla�on due to oil imports has a �me lag and the effects are not
evident yet, since most oil is purchased in the futures market usually
with 3-month contracts.
The following flowchart illustrates the deprecia�on cycle, applicable
especially for India:
Oil imports are inelas�c and this is the reason the CAD worsens
when oil prices go up, while IT exports have not shown a tendency
to increase much. Thus having inelas�c imports and exports worsens
the situa�on since it further deteriorates the CAD when there has
been some deprecia�on.
The stock markets have not been affected to the same extent as the
bond markets. This may be since the stocks are not �me-bound
investments and hence their pricing is not affected as much as
bonds, which may pay regular coupons and may have short maturity
and thus a depreciated rupee affects dollar returns of FIIs greatly.
There was vola�lity however especially a�er the May 22 announce-
ment and also on June 19 when there was a steep fall, but there has
since been a recovery.
Thus the main effects of QE withdrawal are thus:
▪ Asset sell offs
▪ Deprecia�on of currency
▪ Higher interest rates
And the most affected countries have:
▪ High CAD
▪ High foreign debt
▪ High FII inflows during QE and low capital controls
▪ Low forex reserves
▪ Inelas�c imports and exports
EFFECTS ON THE REAL SECTOR
The impact of QE withdrawal on the real sector is of more concern
to these countries and even short-term effects are important as
Keynes once said- “In the long run, we are all dead”. However the
effects cannot be no�ced instantly and the impact is not as clear as
that on the financial markets. The effects of the May and June an-
nouncements are also not clear as of now. However, qualita�ve
es�mates of possible future effects can be made.
There are several factors (from the corporate and government point
of view) which determine the impact on the real sector and depend-
ence on foreign capital is the most important factor. Countries
which depend greatly on foreign capital- as FDI or as foreign debt,
may find raising capital more difficult in the future and this may
affect their investments and thus their GDP. Another important
factor is the sensi�vity of the economy to interest rates. Highly in-
terest-rate sensi�ve sectors such as manufacturing are bound to
suffer and thus economies dependent on manufacturing, retail etc.
will face trouble. Fiscally strong economies may be able to over-
come these difficul�es by being more spendthri� and suppor�ng
growth. Countries with fiscal deficit may choose to borrow from the
central banks (instead of prin�ng) and thus results in crowding out.
Countries with high fiscal deficit are thus more prone to a lower GDP
growth.
The most affected countries thus have:
▪ High dependence on foreign capital
▪ Dependence on interest rate sensi�ve sectors
▪ High fiscal deficit
Source : FT.com / Emerging Market Deficits diagram
InFINee� | Annual Issue | August 2013
6
CONCLUSION
Emerging economies would do well to an�cipate the effects of QE
withdrawal and the economies most prone to it should be alert. This
will help reduce the impact to the short-term and not affect these
economies’ growth. India for instance has taken several steps in
June and July- it has tried to address the CAD by puBng restric�ons
on gold imports and the finance ministry has been trying to a;ract
foreign investors to manage the rupee fall and avoid the deadly
deprecia�on cycle illustrated earlier. The RBI has taken steps to
increase the interest rates (in par�cular the overnight lending rates)
indirectly by reducing inter-bank liquidity, to support the rupee and
to control infla�on. Another effec�ve step by the RBI was the short-
term ban on proprietary trading by banks which caused specula�ve
investors to sell rupees. One important step that India can take to
make the financial markets more robust is to make Indian ci�zens
more aware of investment and thus reduce the effect of Ins�tu�on-
al capital inflows and ou,lows.
It must be kept in mind that the withdrawal of QE is not all bad news
for these economies. Firstly, it is a signal that the US growth is finally
back on track and a number of these countries depend on the US for
exports as well as employment. Secondly, cheaper commodity pric-
es can be expected if these countries manage to control their cur-
rency deprecia�on, since dollar price of commodi�es including oil
will decrease. Thirdly, the currency and asset markets in these econ-
omies will be more stable a�er QE- high vola�lity was present dur-
ing QE due to high liquidity. And finally, shocks like the one on June
19 may not repeat as QE withdrawal has been mostly factored in by
global investors.
InFINee� | Annual Issue | August 2013
7
“ US is healing... if the Fed doesn't screw it up”, the buzz line
is in the news all over, and the ques�on arises, is there any-
thing le� to screw up, that the media is s�ll hoping them
not to screw it up. Absurd statement but that is the truth.
Fed Chairman Ben Bernanke, God of the Modern World, one state-
ment on an issue and markets all around the globe react. His stances
in recent �mes, which is challengeable and the same shall form the
crux of this ar�cle, being that ‘quan�ta�ve easing shall have to con-
�nue un�l some�me now’. Obviously, a�er making a withdrawal
statement in June, the reasons for reversal had to be issued, and
that was, the dual mandate needs to be met, unemployment and
infla�on, was this not known before?
Both the mandates men�oned for con�nuing easing for a probable
be;er present but surely an unfit future are vague and in the air.
Unemployment is not high, its skyrocket and infla�on is not low, it is
already over the roof so, what mandates are we talking of?
Our god says, infla�on in the United States needs to be higher. This
seems to be an event of purposely hur�ng the middle class, which
has been the game since Globaliza�on in 1980’s. The official infla�on
rate in the United States is siBng at about 1% and yes, if that is what
actually exists, then what Bernanke insists that such a low rate of
infla�on is not good for the economy certainly makes sense. Howev-
er, what will never be admi;ed is that the official infla�on rate is a
counterfeit. The way infla�on is calculated in America has changed
more than 20 �mes since 1980’s. If we calculate the way infla�on
was calculated back in 1980, it would be a stunning 8%. However,
carefree people, who have many other things to worry about, do not
happen to no�ce and the claim that infla�on is "too low" sustains.
Many of them know that infla�on is out of control and that, they are
spending a lot more on things they buy on a regular basis than they
used to. For example, when Obama entered the House, price of a
gallon of gasoline was $1.84 and today the price has nearly doubled.
This is the case with gasoline and therefore we can imagine the im-
pact on other commodi�es, as this carries a direct influence on al-
most everything that we buy.
BREADWINNER & RISING PRICES STORY OF THE STATES
- Prakarsh Jain S P Jain School of Global Management, Singapore
InFINee� | Annual Issue | August 2013
8
That might look like a one of example and therefore let us consider
some others. Electricity bills have risen faster than the rate of infla-
�on claimed for five years in a row, and as USA Today men�ons,
water bills have tripled over the past decade.
LOW INFLATION, EXCUSE ME?
Take another example, health insurance. In the era of post crisis,
health insurance premiums have risen at an average of between 8
and 9%.
Where is this low infla�on found? Consider college tui�on fees.
Since the 1980’s, cost of tui�on fees in the States has risen by 498%.
The above might sound some big-�cket items and therefore let’s
consider the supermarket. Individuals who shop for groceries on a
regular basis actually would know this.
Benny Johnson in The Blaze details out how the prices of many of
the things that are bought on regular basis have soared between
2002 and 2012. Eggs: 73%, Coffee: 90%, Milk: 26%, White Bread:
39%, SpagheB: 44%, Orange Juice: 46%, Red Delicious Apples: 43%,
Beer: 25%, Wine: 60%, Margarine: 143%, Turkey: 56%, Ground Beef:
61%
MOREOVER, WE ARE TALKING THAT INFLATION IS LOW
Let’s now have a quick look at a graphical representa�on of what
has the policies led out by god of modern world done to the prices
of commodi�es:
Source : USA Today
InFINee� | Annual Issue | August 2013
9
Considering the whole of infla�on, pay checks are not rising at the
pace that infla�on is, not even near to that rate. In fact, the house-
hold income in the States has fallen for four years in a row. There-
fore, the cost of living just keeps rising and in consequence, the
middle class inflow has not shi�ed or has shi�ed downward.
The only and only big reason for this is the quality of jobs. Only 47%
of adults in US have a full-�me job and 53% of the workers make
less than $30,000 per annum.
What is god thinking; is he planning to increase the pay checks of
workers, in order to make up for the "infla�on tax" that shall be and
is being imposed?
Apparently, the number of individuals losing their jobs is star�ng to
move upward again and is geBng close to 400,000 mark. Since the
act of globaliza�on, the American middle class is shrinking each
passing day and Ben seems clueless.
A;emp�ng to find a job today has been an incredibly frustra�ng
experience. Most of the jobs across pay very li;le, and the intense
compe��on for just about any job that is open kills the whole sense
of availability. Things were surely not this in the past.
For example, in current economic environment, when McDonalds
conducted a hiring event, the same resulted in a million job applica-
�ons and only a small percentage were actually hired. An apparent
observa�on in recent years has been an explosion in the number of
"temp workers”. To surprise, this phenomenon has also been ob-
served at large companies and sadly, those that work in the "temp
industry" o�en happen to work in deplorable condi�ons for li;le
pay. This is one of the elemental reasons, why the middle class is
shrinking.
It is impossible to support a family on this job pay, but to no sur-
prise, the economy is producing only of this instead of the high qual-
ity full-�me jobs.
Some addional signs, which indicate that quality of jobs, are de-
clivitous:
▪ Even though the economy has created nearly 200 thousand
jobs in June, the number of full-�me jobs has actually de-
creased.
▪ There are approximately 3 million “temp workers” a new all-
�me high.
▪ 1 out of 10 jobs are now filled through a temp agency.
▪ 76% of the popula�on is living on pay check to pay check.
▪ 1 out of 4 workers, has a job that pays $10 or less an hour.
▪ America actually has a higher percentage of workers doing
low wage work compared to any other industrialized na�on.
▪ Currently only 24.6% of jobs available in the States qualify
as "good jobs"
There was a �me when just about any adult who was willing to work
hard could go out and find a good paying job and which would sup-
port a good middle class lifestyle. Nevertheless, those days seem to
have gone forever. As the number of good jobs decrease, the num-
ber of people who can take care of family without government assis-
tance con�nues to explode.
In addi�on, thanks to the governments for crea�ng the environ-
ment, which is incredibly, toxic for small businesses, and which
could have acted as a breadwinner. In fact, today the percentage of
self-employed workers is at an all-�me record low.
InFINee� | Annual Issue | August 2013
10
Taking all this into circumstance too, America unfortunately con�n-
ues to outsource thousands if not millions of good jobs overseas,
and government con�nues to pursue laws, which is making the busi-
ness environment virulent.
The answer God would give us for every economic problem as al-
ways shall involve prin�ng of money. Gratefully, the trillion dollars
of money that has been squirrelled away at the Fed remains there
un�l today. Nevertheless, the day is not far when this money will be
loosed up in the economy, and that will create stul�fying infla�on.
Regre;ably, Ben does not seem to be concerned about the muckle
of currency that is posi�oned at Fed. The happy moments for him
are that his reckless prin�ng has helped the stock market to new
highs.
Fixing of this system, which is so mingled, shall not be an easy task.
US ship is in the middle of the ocean, and its motor system has been
damaged. The next wave of collapse is rapidly approaching, and this
one is going to be a lot more painful than ever.
God of modern �mes should enjoy his li;le period of euphoria le�
because when this bubble bursts and as all false financial bubbles
eventually do, the foolishness of Bernanke will be glaringly apparent
to everyone.
Source : adamsviewimaging.blogspot.com (US Federal Reserve)
COVER STORY 11
- Avinash Kumar
Indian Institute of Foreign Trade, Kolkata
COVER STORY 12
R upee collapsed from Rs 39 for a dollar on Jan’
2008 to 61 for a dollar on Jul’ 2013. Since Jun’
2013, it seems that Rupee is on downslide journey on every subse-
quent day touching its new low. Between May and July 2013, rupee
depreciated by approximately 5 % from 55.6 for a dollar to 61 for a
dollar. Vola�lity in currency is a sign of weak economy. It eroded the
confidence of Foreign Investors making them withdraw their money
from the Indian market or hold their investment projects in India. In
the past few weeks, foreign ins�tu�onal investors (FIIs) has sold
their stakes in the Indian equity market and withdrawn billions of
dollars, thereby compounding the rupee’s woes.
Fig. 1 Deprecia�on of Rupee against USD in last 2 months
USA economy is slowly and steadily recovering from the recessions
since Obama administra�on took office. US Federal Reserve’s quan-
�ta�ve easing policy has also helped in the apprecia�on of the US
dollar. Thus the currencies of all the emerging markets like Indone-
sia, Brazil, Thailand, India has depreciated. But the rate of deprecia-
�on for the Indian Rupee is spectacular.
There are several reasons responsible for the downslide of rupee,
some of them are:
▪ India’s rising external debt: India’s external debt has risen
to $ 390 billions in 2012 from $ 112 billions in 2004, a whop-
ping 350% rise. Our external debt has increased by $ 45
billions last year
▪ Persistent infla�on: Infla�on in India is hovering between
7% to 8 % much above compared to that of developed na-
�ons (<2%). Reserve Bank of India took several monetary
measures to contain it, but it couldn’t be brought down
below 7 %. Persistent infla�on reduces purchasing power of
a common man, reducing demand in the market
Fig.2 Deprecia�on of Rupee against USD since Jan’ 2008
Source: rbi.org.in
▪ Slowing Economy: GDP growth rate has been reduced to 4.8
% in the last quarter. Growth and rupee’s value go together.
A growing economy would export more, create posi�ve
expecta�on, a;ract foreign investor a;en�on, draw in more
FDI and FII and finally strengthen the rupee.
▪ Rising Current Account Deficit: Voicing concern over high
Current Account Deficit, Reserve Bank Governor D Subbarao
today said: "Current Account Deficit a year before last year
was 4.2 per cent, last year it was 4.8 per cent. It is a ma;er
of concern... We should be working towards reducing the
Current Account Deficit to sustainable levels to 2.5 percent”.
Our current account deficit needs to contain within a limit.
We need to restrict our gold imports.
▪ Uncontained Fiscal Deficit: Current Fiscal Deficit stood at
4.89% of GDP. Fiscal deficit leads to excessive government
borrowing, rise in infla�on, greater import leading to widen-
ing of Current Account Deficit.
InFINee� | Annual Issue | August 2013
COVER STORY 13
▪ Weakness in domes�c equi�es: The vola�lity in the ex-
changes has triggered a panic leading to selloff by foreign
ins�tu�onal investors, causing further vola�lity of rupee
Fig. 3 Infla�on (WPI)
Source: LOK SABHA SECRETARIAT
RISING EXTERNAL DEBT
F oreign debt is a necessary evil that is needed by de-
veloping countries to sustain GDP growth rate, devel-
op infrastructure etc. Usually such addi�on of infra-
structure results in long term asset building that adds to improved
produc�vity of the na�on. However in India's case the rise of exter-
nal debt has been primarily to fund the current account deficits
catering largely to the working capital needs and funded through
the short term loan at higher interest rates. This short term debt is
also responsible to the vola�lity of rupee.
By 2009 the short term borrowings was around 17.2 percent and by
March 2013 the short term external debt rose to a whopping 33.1
percent of the Forex reserves. And Forex reserves have fallen to $
292.65 billion.
Repayment of short term debts would cause large ou,low of dollars
and put pressure on the currency intermi;ently. For example during
May 22 and June 19 there was a net debt ou,low of $4.7 billion,
At end
March
External Debt
( $ billion)
External
Debt to
GDP
Foreign Exchange Re-
serves to Total External
Debt
Short term to Foreign
Exchange Reserves
Short Term to
Total External
Debt
2004-05 112.4 17.3 101.7 3.9 3.97
2005-06 139.1 16.8 109.0 12.9 14.0
2006-07 172.4 17.5 115.6 14.1 16.3
2007-08 224.4 18.0 138.0 14.8 20.4
2008-09 260.9 18.3 106.8 18.8 20.0
2009-10 305.9 17.8 99.6 21.3 21.2
2010-11 305.9 17.8 99.6 21.3 21.2
2011-12 345.8 20.0 85.1 26.6 22.6
2012-13 390.1 21.9 74.9 33.1 24.8
Fig.4 India’s rising external debt Source: Ministry of Finance
InFINee� | Annual Issue | August 2013
14
INTRODUCTION
F or any country to prosper, to grow and being stabilized,
needs to have a sound financial system. Whenever a
financial system has crashed it has taken the economy to
the deepest of crisis.
US subprime crisis (2008) which started with the financial system
crash bringing down the major banks such as Lehman Brothers, Bear
Stearns, Merrill Lynch, overall impac�ng the US economy to an ex-
tent that the whole world is s�ll struggling to come out of it.
Financial system comprises of banks, insurance, Non-banking finan-
cial companies, mutual funds, hedge funds, ins�tu�ons, markets etc.
In India, banks form 60% of the en�re financial sector. Other seg-
ments such as capital markets, bond markets are not developed
unlike United States, United Kingdom. Therefore Indian economy is
highly dependent on the performance and efficiency of banks in
par�cular.
NON-PERFORMING ASSETS
If we look at the present scenario, the core of financial problems of
the bank is formed by NPAs. Any loan or advance is considered as
non-performing asset (NPA) if:
▪ The interest or instalment of principal of a term loan re-
mains overdue for a period of more than 90 days
NPA - THREAT TO BANK-ING SYSTEM
CAUSES | IMPACTS | MEASURES
- Deepak Bedi & Nimisha Jain Great Lakes Institute of Management , Chennai
T he lesson of history is that you do not get a sustained eco-
nomic recovery as long as the financial system is in crisis
-- Ben Bernanke
InFINee� | Annual Issue | August 2013
15
▪ In case of overdra�/cash credit account, the account re-
mains ‘out of order’ for more than 90 days
▪ In case the loan/advance is granted for agricultural purpose,
interest or principal payment is overdue for 2 harvest sea-
sons or two and a half years whichever is lower
In layman’s language, NPA represents the bad loans and advances
where the borrowers were incapable of mee�ng the repayment
obliga�ons .
GROSS NPA
Gross NPA is an advance which is considered irrecoverable, for bank
has made provisions, and which is s�ll held in banks’ books of ac-
counts.
NET NPA
Net NPA is obtained by deduc�ng items like interest due but not
recovered, part payment received and kept in suspense account
from Gross NPA.
CLASSIFICATION OF NPA
▪ Standard Assets: A standard asset is a performing asset.
Such assets carry a normal risk and are not NPA in the real
sense.
▪ Sub-Standard Assets: All those assets (loans and advances)
which are considered as non-performing for a period of 12
months are called as Sub-Standard assets.
▪ Doub�ul Assets: All those assets which are considered as
non-performing for period of more than 12 months are
called as Doub,ul Assets.
▪ Loss Assets: All those assets which cannot be recovered are
called as Loss Assets.
A�er this the assets are handed over to recovery agents for sale.
NPA - CRITICAL ASPECT OF INDIAN BANKING SYSTEM
The level of NPA act as an indicator showing the bankers credit risks
and efficiency of alloca�on of resource
In India, 75% - 86% of total income of banks are interest income
driven and remaining are fee based. Therefore Net Interest Margin
(NIM) is higher which is good if we think from the earning point of
view but at the same �me, banks are taking high chances when it
comes to risk and high probability of defaults by borrowers. Since it
is in-build in our system therefore managing NPA is a cri�cal aspect
for banks.
If the banks invest more in safer instruments and fetch lesser re-
turns, the chances of default decrease and at the same �me the
returns fetched in both the cases are nearly same as provisions and
wri�ng off bad debts in case of loans bringing down overall returns.
According to the RBI, "Reduc�on of NPAs in the Indian banking sec-
tor should be treated as a na�onal priority item to make the system
stronger, resilient and geared to meet the challenges of globaliza-
�on."
Banking Sector Expanded—Handbook of Sta�s�cs
InFINee� | Annual Issue | August 2013
16
CAUSES OF NPA
Till 1991, Asset quality was not the prime concern for the Indian
Banking industry.
A�er 1993, when RBI issued guidelines, NPA was started being
looked as the Na�onal Priority in the banking domain. Some of the
key reasons for the NPA can be a;ributed to:
1. Direct Loan System: Under this lending policy, the commer-
cial banks are required to lend 40% of their credit to ‘priority
sectors’.
2. In case of ‘micro sector’ businesses, if some of their units
become sick and weak, it becomes difficult to recover loans.
3. Money granted under poverty eleva�on these schemes was
not recovered due to poli�cal manipula�on, misuse of funds
and non-reliability of target audience of these sec�ons.
InFINee� | Annual Issue | August 2013
17
4. Poor communica�on to the borrowers regarding their repay-
ment schedule and consequences.
5. Weak credit appraisal system.
6. Legal impediments that make the asset disposal process
complex and �me consuming.
IMPACT OF NPA
Return on assets is the major criteria considered to know the well-
being of a bank. Banks do not get interest generated from NPA but
have to make provisions for the same from the current profits.
If the level of NPA is not curtailed �mely it may lead to:
1. Rise in the cost of capital.
InFINee� | Annual Issue | August 2013
18
2. Widening of the Asset-Liability mismatch.
3. Reduc�on in the earning capacity and ROI.
4. Larger provision for the NPAs and lesser capital adequacy
and profitability.
5. Deteriora�on of economic value added (EVA) because
EVA=Net Opera�ng Profit – Cost of Capital
MEASURES
Preven�ve:
Credit Assessment and Risk Management Mechanism: This should
be in place to check the disbursement of loans, asset quality and
poten�al danger of addi�on to the NPAs stock.
Organiza�onal restructuring: Improvement in the managerial effi-
ciency, skill up grada�on for proper assessment of credit worthiness
and a change in the aBtude of the banks towards legal ac�on, is
necessary.
Reduced Dependence on Interest: Banks should aim at income from
Fee based sources rather than Interest based. The banker can earn
sufficient net margin by inves�ng in safer securi�es though not at
high rate of interest.
Criterion for Gran�ng a Loan
Small Medium Enterprises
1. Experience
▪ If a person is working and then wishes to start a
business:
i. If experience > 5 years, he is less likely to
default – Can Lend.
ii. Check for a stake holder in the business who
was from the same line of business as the
venture.
▪ Person closing one business and opening another
may be the case that he defaulted on creditors –
Don’t Lend.
▪ Make young entrepreneurs aware of the CIBIL.
2. Succession Plan
▪ If the promoter is aged and has his son/daughter
involved in the business – Can Lend otherwise Don’t.
3. Team vs. Individual
▪ If the business is run by a team – Can Lend.
4. Technology used in the Business
▪ If customer is selling B to C, it must have online pres-
ence.
▪ Manufacturing companies should have energy effi-
cient measures.
▪ Check if systems like ERP are in place.
5. Past Track Record
▪ Should be posi�ve.
6. Cri�cal Dependence on Business
▪ If the promoter’s only survival source is the exis�ng
business – Can Lend.
7. Auditor
▪ If the audi�ng firm which carried out audi�ng is well
established firm then – Can Lend.
8. Ra�ng
▪ Check if the company’s ra�ng is good or bad.
If out of these 8 points, a SME is valid in 4 points we can lend them
money to the tune of say 1-2crore.
Mid Corporate
Apart from the above men�oned 8 points as SME loan criterion, Mid
Cap corporates should be checked on addi�onal points:
1. HR System should be present in the organiza�on
2. Check if the business is rela�onship driven or efficiency driv-
en. If later is the case – Can Lend.
3. Corporate governance should be strong/high.
Large Corporates
Apart from the above men�oned points for both SME and Mid Cor-
porates, following criterion should be looked into:
InFINee� | Annual Issue | August 2013
19
1. Ins�tu�onal holding
2. Market borrowing capacity
Cura�ve:
1. One Time Se$lement Schemes: As per the OTS scheme, for
NPAs up to Rs. 10crores, the minimum amount that should
be recovered should be 100% of the outstanding balance in
the account.
2. Lok Adalats: It help banks to se;le disputes involving ac-
count in “doub,ul” and “loss” category, with outstanding
balance of Rs. 5 lakh for compromise se;lement.
3. Debt Recovery Tribunals (DRTs): These are the appellate
authority for appeals filed against the proceedings ini�ated
by secured creditors.
4. Corporate Debt Restructuring (CDR): This framework aims
at minimizing the losses to the creditors and other stake-
holders through an orderly and coordinated restructuring
programme.
CONCLUSION:
The problems of NPA can be resolved if banks prudently follow few
measures such as credit assessment of the borrower before making
an investment, Recovery performance is be;er with respect to indi-
vidual small borrowers but it is slow in case of corpora�ons and
ins�tu�onal borrowers.
Therefore banks can follow the criterion for deciding the credit wor-
thiness of the loan taker. PSBs can reduce their NPAs by providing
higher provisions for the NPA as well as being more systema�c in
the opera�ons.
CDR- corporate debt restructuring as discussed in earlier paragraphs
is in a nascent stage. It will change the scenario dras�cally if proper-
ly implemented and executed.
InFINee� | Annual Issue | August 2013
20
THE STORY SO FAR
“ When a champion sprinter falls short of his best speeds, it
takes a while to determine whether he is temporarily on
poor form or has permanently lost his edge.”
The same is true with emerging markets, the world economy’s 21st-
century sprinters.
In 2003, Goldman Sachs report "Dreaming with BRIC's" predicted
that BRIC economies will account for over half the size of G6 coun-
tries by 2025 and will emerge as a major force in the world economy
by 2050. The prime reason cited for such op�mis�c forecast was
that the developing na�ons have less capital per worker than devel-
oped economy yielding higher returns. They were also expected to
grow richer on the back of apprecia�ng currency which was sup-
posed to be way below PPP rates. There was accelera�on in growth
during 2003–07 in emerging market, even as growth in advanced
economies weakened. This s�mulated a vigorous debate on wheth-
er emerging market and developing economies had decoupled from
the advanced economies. The debate was soon silenced by the glob-
al meltdown that emanated from the US and Europe. This slum pun-
ished the developed na�ons but the emerging markets were not
isolated either. But they quickly bounced back, and during 2010–11
many of them grew at or above pre-crisis rates.
Emerging-markets stocks, foreign exchange and credit returned
19%, 6.8% and 11%, respec�vely, from 2003 to 2010, compared
with a 4.1% return for the Standard & Poor's 500-stock index, ac-
LOSING LUSTRE OF
EMERGING MARKETS
TRUTH OR MYTH ?
- Abhishek Singh & Vipul Arun
Indian Institute of Management, Rohtak
Source : Economist.com
InFINee� | Annual Issue | August 2013
21
cording to Goldman Sachs.
Later as U.S market started to recover and talk of cuBng back Quan-
�ta�ve Easing, clubbed with weakness in commodity prices and
increased poli�cal risks made emerging Na�ons not so a;rac�ve
des�na�on as before. In fact these Emerging markets soon emerged
to be the ugly ducklings of financial world. Their currency plummet-
ed to historical lows as investors withdrew their money from their
markets. Economies are now struggling with high infla�on, currency
deprecia�on, slowing GDP growth and increasing deficits. Cynics
believed the problem in emerging economies is not only cyclical but
more worrisome structural ones too.
FAIRYTALE FOR THE EMERGING MARKETS IS OVER
For almost a decade, emerging markets were quite the flavour of
the season, and held out the promise of higher growth and superior
returns on investments. Slower economic growth in emerging-
market countries forms the backdrop to rising popular discontent. A
handful of experts believed that although emerging markets profit-
ed from the favourable external environment in the early phase of
their growth cycle but they failed to make the most of the window
of opportunity afforded them. Structural reforms which were the
need of the hour, if implemented, would have set the ladder for
these economies on the path to higher growth but instead they
celebrated too soon to squander the advantage.
This period cannot be called just a momentary growth slowdown as
a graver problem lies ahead of them which might hinder the sus-
tained, meteoric growth in emerging markets.
The growth drivers which were supposed to be aid to these markets
in the past few decades like the arbitrage of low-cost labour, op�-
mal popula�on profile, the advantages of supply chain globalisa�on,
are no longer valid. The rise of automa�on calls back for the cheap
labour advantage these countries previously banked upon.
Strong US economy which acted as a centre for demand for these
emerging markets can come forward as a compe�tor for emerging
markets posing further threat to the already shaking growth rate.
The loosing lustre of emerging markets has more to do with high
expecta�ons than with high vola�lity. Emerging markets equi�es are
one of the most vola�le asset classes, but investors have been will-
ing to afford the risk with an incen�ve for higher returns. Their low
correla�on to US equi�es, in the past made them a;rac�ve choice
for por,olio diversifica�on. But with the emerging markets moving
onto centre stage and their leading companies matching up with
their counterparts in developed na�ons, that configura�on of risk,
return and correla�on may be changing structurally. More stability
might push these markets back, down the risk fron�er (i.e. becom-
ing less risky), thus lowering the probability for outperformance.
Un�l emerging markets are able to convince ba;le-scarred investors
that they can put together a broad-based long-term recovery, inves-
tors are likely to be dubious about their prospects.
STORY IS NOT OVER YET: THE BOUNCE BACK
On the other hand some economists believed that this �me a broad
emerging-market bust looks unlikely. China, for instance is in the
midst of a precarious shi� from investment-led growth model to a
Source : Economist.com
InFINee� | Annual Issue | August 2013
22
more balanced, consump�on-based model. Though its investment
surge has prompted plenty of bad debt, but the central government
has the fiscal strength not only to absorb losses but to s�mulate the
economy if necessary. That is a luxury emerging economies did not
had in the past but the risk appe�te has come a long way since then.
It makes disaster much less likely. There
seems to be low probability for the monetary
condi�ons to �ghten suddenly. Even if they do
so, the emerging markets have be;er defenc-
es than ever before, with flexible exchange
rates, substan�al volume of foreign-exchange
reserves and rela�vely less debt. The stra�fica�on of the growing
consumer classes in these markets are welcoming millions of new
middle class households which is supposed to grow each passing
year. Poli�cal risk is s�ll a factor that lies in the deep roots of these
countries. But it’s not as big a problem as it was in the days of the
La�n American debt crises of the early 1980s or Russia’s default on
its sovereign debt in 1998 or Indian crisis in early 90’s which led to
liberalisa�on of Indian economy. Also the companies in the emerg-
ing markets are less mature than in the developed world and with
more new enterprises surfacing up, there is a percep�on among
investors that there is significant poten�al for them to make profits
during the exponen�al growth phase of these companies. The ever
increasing demand for commodi�es is yet another reason emerging
markets to perform well. This year will be the first in which emerg-
ing markets will account for more than half of the world’s GDP on
the basis of purchasing power as per IMF. Since much of the world's
output of commodi�es is in emerging markets, so the strong de-
mand will eventually leads to higher profits. As Chinese market re-
covers through its restructuring, economies of closely linked coun-
tries like Brazil and Russia will be revitalized accordingly. Improve-
ments have already started to reflect in financial reports, achieved
through growth in earnings and reduc�on in debt. The modernisa-
�on of the regulatory environment with improved corporate gov-
ernance and greater liquidity is also being experi-
enced by these countries. The reasonable level of
debts, controlled infla�on signals towards a be;er
future for these economies. The current problems in
emerging markets could be more of cyclical in na-
ture and on the structural side. These emerging mar-
kets have grown with strong fundamentals which accounts for good
�mes in the past, such as strong demographics, opportunity for
rapid GDP growth and harnessing of untapped resources. Moreover
the QE (Quan�ta�ve Easing) tapering seems improbable in the near
future. As far as vola�le currency in the emerging economies is con-
cerned, they have always been viewed vola�le by investors especial-
ly in South East Asian countries. Investors have always hedged
against prevailing currency risk in these economies so currency vola-
�lity should not be much of a concern.
CONCLUSION: ONLY TIME WILL TELL
The present scenario indicates no doubt on the fundamental flaws
which exist in emerging economies to varying degree. The emerging
markets had it easy during the past decade to fuel their growths
with easy money but with the change in the domes�c and the global
market, only the countries with strong fundamentals will be able to
deliver on their promise. Countries whose growth is driven more by
domes�c consump�on than exports will be less prone to global
shocks and their growth model will be self sustainable and less de-
pendent on others. Globally, inferior growth could focus leaders on
amplified co-opera�on and a new thrust for liberalisa�on. However
the affluent world is more vigilant about globalisa�on than it was a
decade back, and more concerned in retaining its export compe�-
�veness. The current propaga�on of regional trade agreements
could gesture a move towards frac�onalisa�on of the world econo-
my. Sluggish growth in the BRICs could lead to the sort of inner ten-
sions that Na�ons can relocate by picking external fights. Whether
or not the world can construct on a outstanding era of growth will
rely in large part on whether the new giants tread a path towards
superior global co-opera�on—or trip, drop and, in the worst case,
clash.
InFINee� | Annual Issue | August 2013
23
DEREGULATION: A RETROSPECTION
S ince independence, the Indian government, in view
of the poor economic health of the country, has im-
posed a myriad of regula�ons on various sectors in the industry. The
one which has gained increasing prominence over the last few years
is the regula�on of fuel prices. This includes providing subsidies on
petrol, diesel, LPG, kerosene, and natural gas.
However, this subsidy has been gnawing at Indian finances for quite
some �me, �ll the �me it reached alarming propor�on in 2010, with
under recovery of petrol and diesel totalling to approximately 22000
crores, and overall
under recovery
touching Rs 79,000
crores. The prices
were the lowest in
the South East
Asian region. The
government called
for par�al deregu-
la�on of diesel
prices and aligning
of petrol prices
with the market.
Since then, dis-
putes over the
pricing mechanism
have ensued. In
January 2013, the
government gave approval for stepwise deregula�on of diesel pric-
es.
WHAT IT ENTAILS
The basic mechanism for fuel to be sold in the company begins with
NOCs, i.e. Na�onal Oil Corpora�ons. These include Oil India Limited
and Oil and Natural Gas Corpora�on.
These NOCs extract oil from oil wells such as those in Bombay High,
and refine them using a variety of processes. During various stages
in these processes, products such as petrol, diesel, kerosene, etc.
are obtained. These are siphoned off and stored. These NOCs then
sell them to Oil Marke�ng Companies (OMCs) at the market price.
These OMCs include HPCL, BPCL, IOC and Reliance. These OMCs
then sell the fuel to retailers, which eventually reaches the consum-
ers.
Now, the price at which OMCs sell the fuel to retailers is much lower
than the price they
purchased it for from
NOCs. This difference
in prices is called Un-
der recovery. A part of
this is borne by the
government. This is
essen�ally the fuel
subsidy which the
government gives so
as to reduce the mon-
etary burden on the
ci�zen.
AN ECONOMIC
OUTLOOK
Currently the govern-
ment bears a fiscal deficit of 4.9% of the GDP, and the figure is grow-
ing every year. A huge por�on of this burden is comprised of subsi-
dies borne by the government, of which fuel forms a large part. The
fiscal deficit, at this rate, is a looming sign of financial stress which
TAKING THE PLUNGE IS IT THE RIGHT TIME TO FULLY DE-
REGULATE FUEL PRICES
- Saquib Hasnain & Shreyas Dwivedi
Indian Institute of Foreign Trade, New Delhi
Topic Cartoon Source : Tooningin/Jayanto
InFINee� | Annual Issue | August 2013
24
scares off investors before they even begin to consider India. How-
ever, even the current par�al deregula�on of diesel impacts the
prices of various consumer goods and thus further strains the com-
mon man, already reeling under accelerated infla�on.
A CORPORATE PERSPECTIVE
The regula�on in fuel prices has reduced our OMCs to toothless
�gers. Their compe��veness has taken severe hits, with most of
them relying on government interven�on to remain stable. In 2012,
the net losses of OMCs were es�mated to be about Rs 1, 60,000
crores. Out of this, approximately 80,000 crores was handled by
government subsidies, about 60,000 crores by upstream firms like
ONGC, and Rs 20,000 crores was s�ll unaccounted for, and expected
to be carried forward into 2013.
Regula�on has also scared off poten�al FDI in this sector, with glob-
al players unwilling to commence opera�ons without the prices
being aligned with market movements. These corporates could
bring significant capital as well as technical exper�se to the industry.
Thus, India loses the opportunity to explore currently unreachable
deposits as it s�ll keeps out the latest technologies and techniques.
THE POLITICAL QUESTION
Obviously deregula�on is easier said than done, at least poli�cally.
Due to its impact on the common man, fuel and its price is one of
the major instruments used to wield poli�cal power, with the oppo-
si�on lining up to cri�cize the government about being unable to
manage costs and burdening the already stressed average Indian
ci�zen. Statements by Mamata Banerjee, M Karunanidhi, and mem-
bers of the BJP all endeavour to cash in on the simplis�c view of fuel
prices taken by the average voter. None of them can come up with
concrete solu�ons as to what should be done to stabilise fuel costs
at a macro level, but then, poli�cs has never been about finding
solu�ons.
THE COMMON CITIZEN- A MYOPIC VIEW?
With infla�on sky-rocke�ng to 9.31%, rising prices of various com-
modi�es and services was already the biggest problem for the Indi-
an Consumer. Thus, the deregula�on (however par�al), acted as a
metaphorical final nail in the coffin. And deregula�on of diesel pric-
es would directly impact prices of almost every commodity which is
transported using trucks, which is a huge basket.
Another pressing issue is the ci�zen’s spending on State Road
Transport Corpora�ons (SRTCs), which are the major users of diesel
(14%), and would thus be severely impacted. The fares would see a
substan�al hike (about 18%), and passenger intake would be affect-
ed. This would thus impact state revenues from SRTCs. However,
SRTCs were already struggling, with losses totalling to 0.08 % of the
GDP.
One of the results of government regula�ons on petrol and not die-
sel (�ll Jan 2013) was the flurry of favouri�sm towards diesel cars in
the automobile sector. This has resulted in almost 70% of the owned
vehicles being diesel-run. Now, par�al deregula�on will have a sig-
nificant impact on the car industry based on diesel cars.
A diesel-dependent product which will also face a crisis now is the
portable electric generator, which became extremely popular due to
the government’s reluctance to deregulate diesel prices. These were
InFINee� | Annual Issue | August 2013
25
purchased in bulk, and are s�ll extensively used in both urban and
rural areas. However, now their cost-effec�veness will become
ques�onable.
Most worrying is the impact that diesel will have on the most profli-
gate variety of com-
mon man-the farmer.
Tractors and other
farm machines primar-
ily run on diesel, and
the price hike will im-
pact the Indian farmer,
who is already suffer-
ing losses and com-
miBng suicides. This is
also another ques�on
from the poli�cal angle
-is the government
worried about the
majority of its popula-
�on, which is agro-based.
However, a major part of the ci�zen’s burden is due to the poor
macroeconomic situa�on of our country, and the fiscal deficit is a
huge contributor to that cause. More regula�on and subsidies at
this �me would only ramp up the collec�on of even greater debt for
the coming years.
FULL DEREGULATION: AN OPINION
Evalua�ng the pros and cons of this no�on, the writers were forced
to consider a number of facets.
Firstly, the prospect of significantly reducing our fiscal deficit to
reach targeted levels of 4.8% of GDP seems to be an extremely allur-
ing one. India as an economy, needs some s�mulus to take it out of
the current macroeconomic stalemate it is in with various MNCs and
countries.
Secondly, the major OMCs in India are PSUs, and their compe��ve
health needs all the help we can give it. Deregula�on would bring
some much-needed capital to our PSUs.
Thirdly, relying on basic economic principles, it seems to be logical
to align price levels with market forces, as government interven�on
can only steer the ship so far.
Also, increased fuel prices would also mo�vate the use of alterna-
�ve energy sources and
judicious use of fuel.
However, looking at the
current infla�on rate
(4.86%), as well as current
prices and macroeconom-
ic context, the writers
strongly believe that full
deregula�on at this point
of �me, though making
sense in the long-term
economic outlook, would
put too much infla�onary
pressure on an already
s�fled populace. Thereby, the writers recommend con�nuing the
stepwise rollout while taking into account current infla�on and ad-
jus�ng the amount of the fuel hike as per the needs of the hour.
InFINee� | Annual Issue | August 2013
26
T wo of the largest deposit taking companies in West
Bengal has Rs. 4220 crores of outstanding amounts
that they owe to millions of investors. Such an
amount can create social unrest and other undesirable consequenc-
es if the projects in which these sums have been invested go wrong.
Both the companies had been summoned by SEBI in recent �mes
and ordered to stop the schemes which did not follow the guidelines
laid down by the regulator. Taking advantage of the loopholes in the
present regula�ons, lack of proper supervision, judicial delays and
poli�cal clout these companies have con�nued with their opera�ons
claiming no wrong doing on their
part. Not only are the investors un-
safe but the states like West Bengal
are suffering from much lesser small
savings collec�on in post offices
affec�ng the much needed funds to
finance their deficits. In what follows
we discuss the nature of such
schemes in India and other countries
and try to understand the causes
behind their prolifera�on and then
discuss some of the possible reme-
dies.
Collec�ve Investment Schemes (CIS) are regulated by a variety of
ins�tu�ons in India (SEBI, Coopera�ve Socie�es Act, Insurance Act,
Companies Act etc.) depending on the kind of organiza�ons floa�ng
the scheme. Under such schemes agents regularly collect small
amounts from individuals, majorly lower middle class and lower
income group people (from both urban and rural areas). The money
so collected is then invested in businesses ranging from planta�ons,
real estate, entertainment (including resorts and hotels, television
channels etc.). The hallmark of such schemes is that they offer high-
er than average returns while in some circumstances promised re-
turn may go up to as high as 500%. Such ridiculously high returns are
made believable by convincing gullible investors about the unique-
ness of such schemes through personal interac�on with the clients,
adver�sing etc. The promoters of such schemes exploit their net-
work in both banked and unbanked areas targe�ng people with li;le
or no �me to go to banks (like shopkeepers, vegetable vendors etc.)
or exploit their aversion to paper work or stringent formali�es (like
KYC norms) excluding them from the ambit of formal financial ins�-
tu�ons. In rural areas per capita savings being low among poorer
people along with almost negligible
inves�ble opportuni�es coupled
with low level of awareness is a
fer�le ground for prolifera�on of
such schemes. Agents are paid high
commissions including foreign visits
and gold bars for best performers
making the schemes more vulnera-
ble and risky.
These schemes are akin to Ponzi
schemes (named a�er US scamster
Charles Ponzi) where fresh inves-
tors and investments are required
to grow exponen�ally to pay high returns promised to earlier inves-
tors. Millions of rupees are collected through small contribu�ons
from large number of people. The smallness of the amount collect-
ed, to a large extent, reduces the inhibi�ons against such schemes in
the mind of the investors. Instances of other investors who have
been rewarded handsomely with high returns are o�en cited as
success stories to rope in new clients. Investors are also influenced
by innova�ve projects (viz. planta�ons or media) which have the
MAKING SENSE OF
COLLECTIVE INVESMENTS
PYRAMID SCHEMES
- Dr. Bibek Ray Chaudhuri
Assistant Professor, Indian Institute of Foreign Trade, Kolkata
InFINee� | Annual Issue | August 2013
27
poten�al to earn higher returns. Most of the �mes, local persons
known to the investors are used as collec�on agents. Prior rela�on
or acquaintance is thus used to push the products. Investors are
a;racted by higher returns and door-step service of such schemes.
New companies, which may have difficul�es in obtaining loans from
the banks or finances from the capital markets, use these schemes
to generate the ini�al capital required to start their ventures. Many
such schemes are actually not intended to dupe the investors but
turns out to be so given the high promised returns and commissions
to a;ract the savings, which a�er certain point in �me becomes
unsustainable. This said though, numerous instances are there, not
only in India, where money laundering was the primary mo�ve be-
hind such schemes. In recent cases, local collec�on agents have also
joined the duped investors in agita�ons against administrators of
such schemes where the firms vanished with the collected money
(collected by these very agents using their local contacts). This
shows that in many cases even the agents are not aware of inten-
sions of the promoters. The plight of the investors can be easily
imagined.
EXPERIENCE WORLD-WIDE
One of the first such schemes was reported in as early as 1920s
when Charles Ponzi an US scamster tried to exploit the difference in
prices of ‘interna�onal reply coupons’ across different places. Buy-
ing from a place where the price was less and selling it where the
price was high-
er. He even
bought a local
bank with the
money collect-
ed from inves-
tors and
caught the
a;en�on of
the local regu-
lators when an
audit of his
accounts re-
vealed that he
held much
more money
than total value of the interna�onal reply coupons in circula�on.
The scam was busted when it was discovered that Ponzi had accu-
mulated a huge debt due to payments made to investors whom a
high return was promised and subsequently his accounts were fro-
zen. He was later on convicted and jailed for financial fraud. The
case of Bernard Madoff whose crimes were detected in as late as
2008 is the biggest Ponzi scheme ever valued at $65 billion duping
thousands of investors. Madoff was a pioneer in computer-based
trading and used his influence with the moneyed to collect such
huge sum of money. Even though frauds have been detected in
countries like the US, Ponzi
Schemes are more prevalent in countries with weaker regulatory
structures. Instances like that of Albania in 1997 can be cited as a
country badly affected by fraudulent schemes. Riots had resulted
from such financial frauds leading to several deaths and toppling of
governments. Jamaica lost almost 12.5% of its GDP due to such
scams which also affected other countries in Caribbean jurisdic�ons.
Columbia was severely affected by one such scheme when loss
amounted to as high as $1 billion and riots spread over 13 ci�es.
One such scheme in Lesotho caused loss of money for 1, 00,000
investors who were poor and vulnerable.
MAJOR DRIVERS
Both demand and supply-side factors are the major drivers behind
such schemes. As already men�oned, an important supply-side fac-
tor would defi-
nitely be the lack
of regula�on and
effec�ve supervi-
sion. In case of
India though in
pen and paper
the regula�on of
collec�ve invest-
ment schemes
(CIS) is opera-
�onalized
through SEBI
(CIS) Regula�ons
1999, in prac�ce
the regulator
finds it difficult to monitor each and every scheme which are offered
Recent Ponzi Schemes World wide Amount Invested /lost
Country Name Year of
Collapse
U.S. Dollars % of
GDP1
An�gua and Bar-
buda
Stanford Financial Group 2009 8 billion n.a.2
Grenada SGL Holdings 2008 30 million 5.0
Jamaica OLINT, Cash Plus etc. 2008 1 billion 12.5
United States Madoff Investment Securi�es 2008 65 billion 0.5
Colombia DRFE, DMG etc. 2008 1 billion 0.4
Lesotho MKM Burial Society 2007 42 million 3.0
Albania VEFA, Gjallica, Kamberi etc. 1997 1.7 billion 79.0
1All references are with respect to home country GDP, although some schemes a�racted non-resident investors
2An�guan investors were not permi�ed to invest in this offshore ins�tu�on
Reference: Monroe and Pa�llo, Finance and Development, March 2010
InFINee� | Annual Issue | August 2013
28
to investors. On top of it the district courts where the cases related
to such schemes are tried takes a long �me to give a verdict limi�ng
SEBI’s ability to stop such schemes. It has also been found from ex-
periences world-wide that such schemes proliferate due to macroe-
conomic factors like economic growth, an asset bubble, availability
of higher number of investors and higher inves�ble resources due to
easy availability of credit or higher savings. In case of India; high
growth rate, huge popula�on and savings rate provides a fer�le
ground for such schemes. The vastness of
the country with low penetra�on of bank
branches makes people suscep�ble to
such schemes. Lack of enough trained
manpower makes it difficult for regula-
tors to effec�vely monitor such schemes.
Demand side factors, like low-level of
awareness about financial products
among poten�al clients makes the situa-
�on more difficult. On top of that high
infla�on especially food prices have
affected the economic condi�ons of the
people which may have induced them to
look for higher returns from the li;le money they had to insulate
them from future expected higher prices. Besides, cash injec�on in
rural areas through schemes like MNREGA, Indira Awas Yojana,
might have also increased the supply of cash available to rural peo-
ple leading to higher demand for such schemes. Phenomenon like
‘herd behaviour’ is very o�en observed among investors. Especially,
in rural areas where community feelings are stronger, high ini�al
returns earned by some people can lead to huge number of people
op�ng for such schemes. The likelihood of such occurrences is high-
er in densely populated areas which may explain higher incidence of
such schemes in states
like West Bengal.
POSSIBLE REMEDIES
Surely, the investors
cannot be le� in the
lurch and allowed to be
duped by fraudulent
schemes. There should
be ways to reduce the
incidence of such
schemes harming the small investors. On the demand side, to facili-
tate investors to take informed decisions, ‘Investor Educa�on Work-
shops’ may be organized by SEBI in conjunc�on with the corre-
sponding departments in the states. Demand side analysis about
client requirements needs to be taken up in order to design appro-
priate subs�tute products (some of them are discussed below).
Higher returns, at least par�ally guarding against infla�on, easy
accessibility, secure and easily understandable instruments may go a
long way to generate demand for such prod-
ucts and can become viable alterna�ves to
fraudulent/risky pyramid schemes. Idea is
not to stop pyramid schemes (which would
be quite difficult) but to ensure that the
schemes are ini�ated by following proper
procedures and appropriate internal control
mechanisms are at place. Timely detec�on
of schemes which are not following the
direc�ves is absolutely essen�al and hence
SEBI must be strengthened (if separate reg-
ulator is not iden�fied) by induc�ng proper-
ly trained manpower in large numbers to
tackle the menace of fraudulent schemes before it leads to major
disasters observed in other countries. A delicate balancing act is
required from the regulator, as ac�ng too has�ly may invite investor
wrath because they may lose money because of such ac�on. Moreo-
ver, if ac�on is taken, late investors may accuse the regulator of
doing precious li;le.
On the supply side, crea�ng viable subs�tutes for such schemes
should be a;empted. I would men�on a few of the already exis�ng
ones with some suggested modifica�ons. The idea is to give the
people more alterna�ves when it comes to deploying their savings.
MICROFINANCE INSTITUTIONS
(MFIS)
Established (defini�on should be
provided by RBI) MFIs may be al-
lowed to collect savings from the
general public. Currently regula�on
allows NBFCs and Coopera�ves to
collect deposits. Coopera�ves can
only collect deposits from its mem-
In case of India; huge popula-
tion, high growth and savings
rate provide a fertile ground
for such schemes.
The vastness of the country
with low penetration of bank
branches makes people suscep-
tible to such schemes
InFINee� | Annual Issue | August 2013
29
bers. In case of NBFCs, only investment grade ins�tu�ons are al-
lowed to take deposits. Currently none of the NBFC-MFIs fall under
this category. Thus, no MFIs collect deposits. The network these
ins�tu�ons have in remote areas would come in handy for such a
scheme to work. It can solve a number of problems simultaneously
provided this scheme is properly designed. The rate the MFIs would
offer for the savings should be made flexible so that they can com-
pete with CIS operators and other schemes available. For MFIs this
can be a viable source of funds other than bank loans and donor
capital. But, if CIS are so open ended and con�nue even when SEBI
had given orders to stop opera�ons why can’t MFIs (established
ones) be given a chance at least to collect deposits as a pilot
scheme?
NATIONAL RURAL LIVELIHOODS MISSION (NRLM)
The exis�ng SGSY scheme has been restructured by the Ministry of
Rural Development into NRLM. Under this scheme among other
things funds would be deployed in the rural areas to strengthen the
forma�on of Self Help Groups(SHGs) and to see to it that they are
accorded highest priority when it comes to providing the necessary
infrastructure, capacity development and distribu�on of work by the
local government machinery. One of the
policies that is being implemented relates
to encouraging the SHG members to save
voluntarily and use the combined funds as
a corpus to extend credit by the group
thereby providing an addi�onal avenue for
the members to benefit out of the returns
generated from these ac�vi�es (touted as
SHG-II). In SHG-I only the compulsory sav-
ings concept was introduced where the corpus formed by repeated
savings by members was used to open an account in a bank.
The bank in turn (�ll December 2011) gave a term loan to the group
to be lent to its members. In SHG-II voluntary savings along with the
compulsory one is being emphasized. The members can deposit the
voluntary savings in the bank or use them to lend within the group
genera�ng a higher rate of return (as SHGs lend at 2% per month
interest rate). This policy if properly implemented can viably com-
pete with CIS since rates of return can be high.
BANKING CORRESPONDENT (BC) AND BANKING FACILITA-
TOR (BF) MODEL
These two channels were mooted by RBI to tackle the problem of
low penetra�on of bank branches especially in rural areas. BC can
provide banking services like a one-man mobile branch by collec�ng
savings and giving loans with specified caps on value of transac�ons.
BF model on the other hand uses exis�ng informal channels in rural
areas to increase banks’ customer base. BC model according to
many studies have failed because per client revenue is lower than
per client cost. The problem with this model is that ini�al cost of
loca�ng a client by the channel partners is very high and needs to be
heavily subsidized by the government. The poten�al of lower per
unit costs as the number of clients goes up is higher for such ac�vi-
�es. As an experiment mutual fund products may also be sold
through these channels giving the clientele in remote loca�ons the
opportunity to get higher returns. Investment opportuni�es in
standard instruments may effec�vely compete with CIS related to
non-standard investment opportuni�es promising ridiculous re-
turns.
In many countries Ponzi schemes also thrive because of their pro-
moters’ clout with the poli�cal par�es and generous dona�ons they
make for charitable purposes. Recent cases
in the state of West Bengal have again
pointed fingers at nexus between the ruling
poli�cal party and big companies floa�ng
CIS. It is not the ques�on of who is patroniz-
ing such schemes; rather the concern is
whether they are becoming too big to pose
a danger to the social and economic wellbe-
ing of the country as had happened in some
countries. Thus the need of the hour is a joint effort by the govern-
ment and the regulatory agencies to prevent such schemes from
going out of propor�on through proper investor educa�on, protec-
�on and preven�on measures.
InFINee� | Annual Issue | August 2013
30
T he Jet-E�had deal, which came a�er months of nego�a-
�ons, is the first investment by an overseas operator in
an Indian Airline since the government introduced FDI of 49% in the
avia�on sector. A�er much turbulence in the deal, finally E�had has
agreed to acquire a 24% stake in Jet Airways for $379mn (~2058 Cr)
THE DEAL MAKERS
In August 2012, Jet Airways and E�had airways teams met in Abu
Dhabi to carry out due diligence exercises. The team of E�had in-
cluded PWC, HSBC Holdings Plc., and its auditors – KPMG. On the
other hand, Jet Airways engaged consul�ng firm Ernst & Young to
conduct its own
due diligence
on E�had. The
nego�a�ons
gathered pace
in September
a�er the policy
announcement by Indian Government .Jet airways nego�a�ng team
consisted of K.G Vishwanath, Raj Sivakumar, and Hameed Ali. The
nego�a�ons were vola�le with both par�es staging walkouts. While
E�had walked out once, Jet Airways walked out at least thrice over
differences on valua�on
DIFFERENCES IN VALUATIONS
E�had ini�ally valued Jet at a mere $500mn, leading to a walkout by
Jet. They then raised the valua�on to $800mn and finally raised it to
$1.2bn while Jet pushed for a valua�on of $1.6bn.
The two airlines mutually agreed on several terms and the Jet team
flew back to India with the deal almost sealed. Jet airways called a
board mee�ng in the second week of February to close the deal, and
commerce minister, Anand Sharma, was set to announce it in his
visit to Abu Dhabi on 18th February.
One day before the visit, Jet Airways received another shock. E�had
Airways chairman Sheikh Hamed bin Zayed al-Nahyan said that the
airline needed to revise its deal to buy a stake in Jet Airways, and it
was s�ll �me for the final agreement to be struck.
Many said that the reason behind this was the lack of policy clarity
in the SEBI guidelines.
POLICY CHANGES BY DGCA
To facilitate the Jet-E�had deal, DGCA issued fresh guidelines as
approved by the
ministry of civil avia-
�on. The changes,
as pointed by mon-
eylife, are as fol-
lows:
DEAL ANALYSIS
JET - ETIHAD
- Raghav Kapila & Shubham Agarwal
IIFT, Kolkata
Jet E�had
Started Operaons May, 1993 November, 2003
Hub Mumbai Abu Dhabi
Desnaons 20 Internaonal + 52 Indian 84
Fleet 100 66
Staff 13,945 8000
Revenues Rs 16,898 Cr (2011-12) $4.8 Billion (2012)
InFINee� | Annual Issue | August 2013
31
2008 - Clause 1.7
states “A Sched-
uled Air Transport
Service/Domes�c
Scheduled Passen-
ger Airline shall not
have agreements
such as sharehold-
ers agreements,
etc. with a foreign
airline, containing
provisions/
arrangements em-
powering such
foreign airlines or
others on their behalf to have effec�ve control in the management
of the domes�c airline”.
Clause 1.7 was deleted on 1 March 2013
2008 - Clause 1.8 states “A Scheduled Air Transport Service/
Domes�c Scheduled Passenger Airline shall not enter into an agree-
ment with a foreign airline which may give such foreign airline the
right to interfere in the management of the domes�c operator.”
1 March 2013 - replaced by Clause 1.5 that states “A Scheduled Air
Transport Service/ Do-
mes�c Scheduled Passen-
ger Airline other than
those who have FDI by
foreign airlines shall not
enter into an agreement
with a foreign airline,
which may give such for-
eign airline, the right to
interfere in the manage-
ment of the domes�c
operator”
The above clauses show that a foreign carrier, through its invest-
ment in a domes�c operator, can now interfere with the manage-
ment of the Indian carrier. These changes in guidelines are in total
contradic�on to the policy, which mandates the effec�ve control in
the hands of an Indian shareholder. It is therefore obvious as to why
this clause has been diluted and the clause earlier referred to name-
ly, Clause 1.7 has been delegated—the reason to dilute the defini-
�on of effec�ve control.
In order to facilitate Jet in receiving the considera�on of $300 mil-
lion through a so� loan at 3% the guidelines were required to be
changed.
2008 - Clause 1.9 states “A Scheduled Air Transport Service/
Domes�c Scheduled Passenger Airline may enter into financial ar-
rangements with a bank and/or other financial ins�tu�ons for the
purpose of lease-finance, hire-purchase or other loan arrangements,
but such a �e-up shall not be permi;ed with a foreign airline”.
1 March 2013 - Clause 1.6 states “A Scheduled Air Transport Ser-
vice/Domes�c Scheduled Passenger Airline may enter into financial
arrangements with a bank and/or other financial ins�tu�ons includ-
ing foreign airline for the purpose of lease-finance, higher purchase
or other loan arrangements”.
MORE TURBULENCE IN THE DEAL
SEBI’s Concerns (As told to DEA)
▪ Commercial pact should not be
entered into, as it gives E�had the upper
hand in opera�onal ma;ers
▪ E�had, under the pact, gets rights
to source candidates for senior manage-
ment posi�ons
▪ The airlines plan to shi� network
and revenue management func�ons to
Abu Dhabi and consolidate sales office/
general sales agreement to support Jet’s
sales in UAE
▪ Lead role in nego�a�ng with
suppliers, according to pact, will be E�-
had’s
▪ Corporate-governance code clauses should be amended for
passage of board resolu�ons by simple majority. Under current
InFINee� | Annual Issue | August 2013
32
arrangement, resolu�ons are passed with three-fourths majori-
ty, giving E�had the right to approve all decisions
▪ The nomina�ons commi;ee should not have exclusive powers
to recommend appointment or removal of all independent
directors and the CEO. These powers are against the provisions
of the Companies Act
DIPP’s concerns on the revised shareholders’ agreement
▪ Effec�ve control and ownership lie with E�had, and not Jet
▪ If Naresh Goyal’s stake is included, the 49% FDI limit is
breached
▪ Under the FDI norms, rights for vo�ng and nomina�on should
stay with Jet
On July 24th, Foreign Investment Promo�on Board (FIPB) gave its
approval on the commercial agreement to Jet and E�had, with
few revisions which includes:
1. It ensured that the control is not passed from Jet to E�had
2. The rule of FDI in avia�on were redefined to clearly state that
permission would be granted only if “substan�al ownership
and effec�ve control is vested in Indian na�onals”.
3. Any changes in the SHA (Share Holders Agreement) with E�had
would require permission from GoI by Jet
4. The revised SHA also says that Indian laws would be used for
trying the shareholder disputers over English laws which can
s�ll be used for other arbitra�ons
5. The veto power lies with Naresh Goyal
6. E�had would have two rather than three seats in the 12 mem-
ber board as was planned earlier
7. Jet board can now take its call on the various boards being set
up in Abu Dhabi which mostly implies for the opera�onal and
commercial decisions
The final shareholding pa;ern a�er the deal is:
▪ Naresh Goyal: 51% (even though being an NRI, this breaches
the 49% FDI limit in avia�on which is yet to be decided upon
GoI)
▪ E�had: 24%
▪ Others: 25%
SYNERGIES FROM THE DEAL
Benefits for Jet Airways
If the deal goes through the following benefits would accrue:
▪ Jet Airways increase its interna�onal reach and reduce some of
its debt burden.
▪ The Indian carrier will get access to much-needed funds
▪ A global network, latest technology and best management prac-
�ces
▪ Indian passengers will gain from increased compe��on that is
expected to lead to be;er offerings, seamless travel through
code-shares and cheaper airfares
Benefits for E�had Airways
▪ The global carrier will get access to traffic origina�ng from India’s
interiors
▪ E�had an opportunity to tap into the fast growing Indian out-
bound market
▪ In addi�on, it will mean that E�had will not need to wait for the
Indian Government to allow it to operate more flights into India
because of a cap on bilateral air service agreements with other
countries
InFINee� | Annual Issue | August 2013
“NIFTY in a real sense is not really at 5500+ levels” are what many analysts on street are saying these days. The “NIFTY in a real sense is not really at 5500+ levels” are what many analysts on street are saying these days. The
carnage and vola�lity that have been witnessed in the Indian Markets are at its peak. India’s Vola�lity Index carnage and vola�lity that have been witnessed in the Indian Markets are at its peak. India’s Vola�lity Index
(VIX) have gained around 66% in past three months. Whether Sonianomics is to blame for rupee, Sensex crash-(VIX) have gained around 66% in past three months. Whether Sonianomics is to blame for rupee, Sensex crash-
es or are we facing the brunt of revival in US Economy, or both?? Whatever be the reason, we are fast losing es or are we facing the brunt of revival in US Economy, or both?? Whatever be the reason, we are fast losing
the shine of a fastthe shine of a fast--growing emerging na�on with a fear of possible downgrades by credit agencies.growing emerging na�on with a fear of possible downgrades by credit agencies.
InFINee� | Annual Issue | August 2013
34
Asset/Index 1st
May 31st
July %change
Gold(MCX)/10 grams 27,503 28,211 +2.6%
Sensex 19,504 19,345 -0.8%
Ni�y 5,930 5,742 -3.1%
Rupee/$ 53.8 60.81 -13.03%
A-May 17 Ni�y: 6187
Ni�y reached 6187 following global cues with the US indices reaching all �me highs, April infla�on easing to a 41-month low and high liquidity ex-
is�ng in the markets. CNX Bank Ni�y rallied over 500 points on hopes of rate cut by the RBI. Bank stocks like IndusInd Bank, Kotak Mahindra Bank
and HDFC Bank reached 52-week highs. Other rate sensi�ves such as auto and realty also rose to higher levels. Ni�y could have gone on towards
6300 if a key resistance level formed in January 2011 was breached. Ni�y could not break the resistance and moved lower therea�er.
B- June 26 Niy: 5588
From being at 6100 levels at May end Ni�y had a bear run in June going below 5600 levels for the first �me since April 16. Big names like BHEL, JSPL,
DLF and Ranbaxy reached 52-week lows. Weakness in Rupee and the concerns over tapering down in the bond buying exercise of the US Federal Re-
serve also pushed Ni�y lower. Overseas investors pulled out around $5 billion from the Indian debt and equity market in less than a month.
C- July 23 Ni�y: 6077
RBI introduced a number of measures to squeeze liquidity in the markets to fight the deprecia�on of rupee. It raised the interest rate of Marginal
Standing Facility (MSF) by 100 bps to 10.25 percent and also made some changes in the rules of CRR and LAF (Liquidity Adjustment Facility) to arrest
the fall of rupee. Short covering was seen in stocks along with buying in beaten down sectors like banking and auto sectors. Stock-index futures
gained amid signs the RBI won’t �ghten monetary policy at its meet.
D July 31 Ni�y: 5742
July 24th
saw Ni�y tumbling as a result of profit booking in rate sensi�ve and capital intensive sectors along with July series expiry. There were also
concerns related to infla�on with the fall in rupee. Borrowing costs for many companies have risen above 10 percent. Corporate bond sales plunged
96 % in July as yields surged a�er RBI’s measures .The rupee crossed the 60 level showing no signs of a relief. Global fund houses sold $1.05 billion of
Indian stocks in July a�er June’s $1.8 billion sell-off.
NIFTY Chart (May-July 2013)
InFINee� | Annual Issue | August 2013
35
The FMCG industry has been growing at a fast pace in the past few
years backed by robust economic growth and rising rural income.
Growth drivers such as premiumiza�on, rapid urbaniza�on, evolving
consumer lifestyles and emergence of modern trade have shielded the
industry from the slowdown un�l �ll recently.
The Fast Moving Consumer goods (FMCG) sector is valued at Rs 1.8
trillion (Source: Nielsen). The industry is urban-centric with 66% share
of the goods being consumed by urban India. Metropolitan ci�es &
small towns (popula�on of 1-10 lakh) have been driving the FMCG
consump�on in urban India since 2002. In fact middle India, compris-
ing of the small towns and consuming 20% of overall FMCG sales, has
been growing the fastest across rural and urban segments. As per
Nielsen, USD 13 billion as of 2012. This sector is expected to grow to a
USD 33 billion industry by 2015.. Rural India, where 70% of the popu-
la�on resides but only 34% consume FMCG goods, presents the big-
gest market poten�al for the industry. Backed by low unit packs and
aggressive distribu�on reach, rural market size has expanded nearly
four �mes. Companies such as Hindustan Unilever and Dabur which
derive nearly half their sales from rural India have been increasing
their reach.
CNX FMCG has a been sluggish from few weeks due to the decrease in
domes�c demand impac�ng the companies stock prices. It has strong
support at 16,724 levels. The top line growth has been sluggish for
some�me now with major FMCG companies like HUL, ITC, Dabur,
ColPal, Britannia witnessing stress on their revenues.
Though these companies have improved on their opera�onal efficien-
cy, revenue growth remains an issue
What affects the industry :
• Demand : Favorable macroeconomic drivers such as GDP and pop-
ula�on growth, coupled with rising income levels and lifestyle
changes are the main drivers for FMCG sector demand.
• Supply : India is a compe��ve market in terms of product offer-
ings. In each category of FMCG product Z there are organized play-
ers as well as unorganized. However, lately with incomes rising
consumers tend to move towards the more organized players who
sell branded products.
• Expenses : The major expenses that impact this industry include
raw materials and adver�sing expenditure.
CNX FMCG Index (May– July 2013)
Market Performance (%)
Growth Posi�on (%) Shareholding Pa ern (%)
Valua�on (x)
Data : FY 12-13 / Source : Bseindia.com
Peer Comparison
InFINee� | Annual Issue | August 2013
36
Telecom has been one of fastest growing sectors of the Indian econo-
my in the past few years. A�er priva�za�on of the sector, companies
like Bhar� Airtel, Vodafone, Tata Telecom, and Idea have emerged as
major players while state monopolies MTNL and BSNL have signifi-
cantly lagged behind.
The Indian telecom sector has seen massive growth once the sector
had been opened up to the private sector. The compe��on in the
sector has increased with local tariff rates at close to 40 paise/minute
which is one of the lowest in the world. Mobile is now seen as a major
driver of reach to the Indian consumer with the tele-density being so
high at greater than 65% versus a low internet penetra�on at 4% to
5%. Newer technologies are increasingly geBng integrated through
the mobile phone, third genera�on technology which enables greater
integra�on could make this a reality.
What affects the industry :
• Demand : Favorable demographics and rising incomes of a
country provide a spur to the telecom sector. Telecom is in-
creasingly seen as a u�lity now versus earlier years when it
was seen as a more discre�onary service. India being one of
largest consumer countries could see con�nued growth in
telecom even a�er significant penetra�on is achieved.
• Supply India is a compe��ve market in terms of number of
telecom players. Recently a�er implementa�on of Mobile
Number Portability (MNP) the compe��on in the sector has
only gone up since operators have to lure and retain exis�ng
customers along with winning over new customers. With at
least 4 to 5 large players in each of the 22 circles (service are-
as), the supply of services is very strong. However with the
recent corrup�on cases of some players, pricing power has
returned to the incumbents.
• Expenses The major expenses of retailers include network
charges, staff costs and interest on debt. Apart from these
payments for addi�onal spectrum, 3G licenses put strain on
long term finances.
CNX BSE TecK Index (May– Juy 2013)
Market Performance (%) Valua�on (x)
Growth Posi�on (%) Shareholding Pa ern (%)
Data : FY 12-13 / Source : Bseindia.com
Peer Comparison
Market Performance (%) Valua�on (x)
InFINee� | Annual Issue | August 2013
37
The Banking Industry, one of the essen�al pillars of the Indian Finan-
cial System, serves as a financial intermediary by accep�ng capital
surpluses as deposits and pools those funds to provide the par�ci-
pants that have capital deficit as credit. Because of the important role
depository ins�tu�ons play in the financial system, the banking indus-
try is highly regulated, with certain government restric�ons on finan-
cial ac�vi�es by banks.
Mainly banks are classified as either PSU or Private. Currently, in India
165 scheduled commercial banks exist including 26 public sector
banks, 21 private banks and 32 foreign banks. They have a combined
network of over 71,000 offices and 9, 44,000 employees. Public sector
banks hold over 77 % of total business of the banking industry, with
the private and foreign banks holding of 18 % and 5% respec�vely.
In terms of quality of assets and capital adequacy, Indian banks are
considered to have clean, strong and transparent balance sheets rela-
�ve to other banks in comparable economies in its region. Since Indian
economy is witnessing strong growth the demand for banking ser-
vices, especially retail banking, mortgages and investment services are
expected to be strong.
WHAT AFFECTS THE INDUSTRY:
Demand The demand for credit is directly linked to the industrial and
economical growth. The banking industry growth has a posi�ve corre-
la�on with the country's gross domes�c product (GDP) and has a mul-
�plier effect of 2x to real GDP.
Supply: Supply of liquidity is dependent upon several economic varia-
bles like RBI policies, economic growth and infla�on. Higher the infla-
�on, interest rates and slower economic growth less is the off take of
credit in the market and vice versa
Barriers to entry : Entry barriers are high in banking sector as one will
require banking license from RBI which is allo;ed a�er stringent due
diligence and huge infrastructure for branch developments.
Compe��on : There is high compe��on in the banking sector as there
are private banks, public banks, co-opera�ve banks, NBFC's and also
private lenders. RBI is also looking at issuing new licenses which will
further intensify compe��on in the sector.
S& P BSE Bankex has broken its major support of 11,000 decisively.
The daily charts have formed an Evening Star candles�ck pa;er which
might signify more downside in the upcoming weeks.
Market Performance (%) Valua�on (x)
Growth Posi�on (%) Shareholding Pa ern (%)
Data : FY 12-13 / Source : Bseindia.com
Peer Comparison
“Please refer to the page 42 for the impact of RBI
measures on Banking Sector and an economy as a whole”
InFINee� | Annual Issue | August 2013
38
T hat the global economy is going through some of the toughest
�mes is a no brainer. Indian economy including INR hiBng historic
lows against USD has become a ‘Breaking News’ on daily basis. INR has
already breached the 68 mark and seems headed to the psychological
70 mark.
Fruits to vegetables to electricity to fuel, every item is geBng more
and more expensive and some have gone up mul�ple �mes. Tough
�mes indeed! However, tough �mes don’t last, tough people do!
Sooner or later the �mes will change. And if you are at the right place
at the right �me, you can see your career moving up and ahead in
leaps and bounds!
While the naysayers are having a field day, there are s�ll certain pock-
ets of economy that have stood out. As and when the economy has
looked up, these Sectors have headed north with sheer tenacity. The
idea of wri�ng this ar�cle is to iden�fy such sectors/Industries.
It is obvious that the stock markets are said to be the barometer of
any economy’s health. Their direc�on signifies if and whether the
economy is doing well or otherwise. I shall a;empt to extract data
from the Na�onal Stock Exchange and analyze that for the benefit of
the students who at their age are a worried lot. Would they or would-
n’t they get a job opportunity? Would the career offered be to their
liking or otherwise? Is there any growth in the industry/organiza�on
of their employment? And these fears are not unfounded. There have
been numerous reasons to be worried of late.
SECTOR GROWTH
NIFTY 130%
Infra 119%
Energy 112%
IT 105%
Commodi�es 93%
Metals 88%
Let me scien�fically present the data for you. I have taken the Na�on-
al Stock Exchange (NSE) NIFTY as basis for the analysis. The various
sectoral indices have been pi;ed against this benchmark index and a
view is thus formed based on their performance versus NIFTY. All this
data is authen�c to the best of my understanding and belief.
NIFTY recently enjoyed nearly 17-month bull-run from the low of 4531
made on 23-Dec-2011 to a high of 6229 made on 20-May-2013. This
move of approx. 1700 points up move translates to about 30% (See
Chart-1 above) :
While many Sectors dras�cally underperformed NIFTY which went up
by 130%, the following could not even play the catch up game even
during the good �mes:
So, which Sectors were happier when NIFTY was happy?
Table-1: Bull-run from 23-Dec-11 to 20-May-13 (UNDERPERFORMING Sectors)
Chart-1: Bull-run from 23-Dec-11 to 20-May-13 (NIFTY Vs BANKNIFTY)
WHEN THE SUN SHINES AGAIN FOR INDIAN ECONOMY
- Mr. Rituraaj Juneja
An IIFT Alumni & Founder of simpletrades.in
Website URL : h&p://simpletrades.in/
InFINee� | Annual Issue | August 2013
39
So, here are the secrets! These sectors would be the ones to focus on.
Isn’t it obvious that the right organiza�ons in these sectors that are
growing even above the respec�ve Sectoral average would not only
offer stable career opportuni�es, but also a fast-track growth? They
would also be hiring more than the others since growth shall also fuel
manpower requirements. It actually does not end here. The perfor-
mances would be rewarded with higher compensa�on, increments
and perks!
To validate my findings, let me take you back and analyze the earlier
mega bull-run when NIFTY moved from the lows of 2252 hit on 31-Oct
-08 to the highs of 6338 on 05-Nov-10. This up move of almost 4100
points translates to about 218% (See Chart-2 below):
It is noted that even in this earlier mega up move, BANKS stood out
with BANKNIFTY gaining by 293%.
Placed in simpler words, BANKS are happier when the economy is
happy! Simple.
With the Banking reforms being announced and the applica�ons for
new bank licenses being filed, this sector is very likely to outperform
the benchmark index yet again!
While excellent opportuni�es would show up in the other sectors as
well (see Table-2), Banks are making a strong case for considera�on.
Here are some more facts:
▪ 85,000+ PSU banks vacancies pan-India (2013-14)
▪ 300,000 to be hired by PSU banks in the next 3years
▪ 10,000+ more jobs will get created through new Banks
▪ Banking sector is known to be compara�vely more stable
▪ Banks invest to keep team agile & sharp to stay compe��ve
▪ Rounded careers & excellent growth opportuni�es
▪ Work place closer to home (bank branches are everywhere, even in �er-2 towns)
▪ Offer far higher mobility in case of change of city/residence
With more and more employees being recruited for Retail Banking,
SME, Credit, Rural, Agri & FOREX management, Interna�onal Financial
Management & Interna�onal Business are likely to remain the main-
stream offering excellent career op�ons to the IIFTians.
In the nutshell, FMCG, Banks, Media, Pharma & Auto are likely to see
the thick of ac�on when the Sun decides to shine again for the Indian
economy. The big ques�on is – would you be aligned to harness its
poten�al?
SECTOR GROWTH
NIFTY 130%
FMCG 165%
Banks 159%
Media 158%
Pharma 148%
Auto 139%
Table-2: Bull-run from 23-Dec-11 to 20-May-13 (OUTPERFORMING Sectors)
Chart-2: Bull-run from 31-Oct-08 to 05-Nov-10 (NIFTY Vs BANKNIFTY)
Mr. Rituraaj Juneja is an IIFTian with over 23 years of Interna�onal
Business Development experience in IT, Automobile, Electronics &
Semiconductor industries and a simultaneous 12 years in Educa�on &
Training.
A much sought-a�er speaker & trainer across top Business Schools; he
is an entrepreneur by heart and a mentor to many startups.
He is a passionate Technical Analyst of Stock Markets and offers mar-
ket analysis through his website - www.SimpleTrades.in. His simple,
effec�ve and impeccable analysis has won him many fans & admirers.
InFINee� | Annual Issue | August 2013
40
A month has passed since the Reserve Bank of India (RBI) unleashed a barrage of liquidity-�ghtening measures to rescue the rupee. Despite those measures, the local
currency plunged to a historic low of 61.81 against the dollar on 6 August. The central bank’s ac�ons primarily targeted currency speculators on mul�ple fronts—by
halving the amount Indian banks can borrow from RBI and simultaneously raising the borrowing cost for banks from the marginal standing facility (MSF) by 200 basis
points. RBI also increased the daily balance requirement for banks to maintain the cash reserve ra�o—the por�on of deposits they must keep with the central bank—
and launched a large-scale sale of short-term papers in the market at higher yields to drain every bit of loose cash floa�ng around in the banking system.
Source : Livemint
InFINee� | Annual Issue | August 2013
41
Team InFINee�: What do you think could be the impact of the new
chairman of the Federal Reserve on the policy for US economy, the
emerging markets and India?
Peasant Joshi: I don’t think we can expect drama�c changes in the
policy. The Chairman alone is not responsible, when it comes to a
policy change, it is a group of 12 people who decide, and the policy
will remain for the long term. It involves a group of twelve people
who decide upon a policy and it remains for a long term. Coming to
narrowing down to the next two front runners, one of them has
been the President confidant from the very beginning. He had
helped him in his elec�on campaigns as leader of his economic
team. While the other being the current Fed Vice Chairman who
represents a region. She is apoli�cal but understands Bernanke very
well. But, as it seems now, the new chairman will not bring about
any drama�c changes
TI: US GDP growth rate for second quarter of this year have beaten
the es�mates of 1.1% to grow at 1.8%, at the same �me the unem-
ployment rate is at a three year low of 7.6%. Do you think this is
just a short term implica�on or the US economy can sustain it for a
longer �me?
PJ: Firstly about Jobless rate. Even though on paper it is 7.6% which
is at a 3 year low, but it is s�ll higher than the pre-recession rate of
4.5% to 4.8%. What is not accounted in this rate calcula�on is the
large number of people who have stopped looking for work. Thus,
the actual unemployment rate would be in two digits. Moreover,
they have lost the skill-sets, which they have to regain in the new
economy; hence we cannot say if this is the true rate.
I think it is a slow recovery because the US economy will grow slow-
ly. Hence 1.6% or 1.8% is the maximum rate at which they can grow.
The ideal growth rate which is required to reduce unemployment is
3% or 4% which looks difficult for US. Hence, it is a slow-slow recov-
ery. Moreover, the GDP es�mate was based on last year data, which
I don’t consider important at 1.1%. Also, Q2 is going to be one of the
bigger quarters as compared to others.
TI: What do you think would be the effect of changing regula�ons
in the US, especially in the light of the current happenings?
PJ: It is having a big impact, especially on the financial sector. The
change of regula�ons has made a lot of people on the defensive.
They are not ready to make the decisions, be it the changes or in-
vestments. Especially the Dodd-Frank Act, which represents the
most comprehensive financial regulatory reforms since great de-
pression, with in-numerous sum component and interpreta�ons,
the way it is going to be viewed.
Also about the Basel III recommenda�ons on what needs to be im-
plemented as far as the financial ins�tu�ons hold, they do not know
what the future is like. Another reason for it is that people are not
IN CONVERSATION WITH MR. PRASHANT JOSHI
EXECUTIVE DIRECTOR - UBS WEALTH MANAGEMENT, USA
Team InFINeeti had a candid talk with Mr. Prashant Joshi (Executive Director - UBS Wealth Man-
agement, USA) who expressed his views on the shifting trends & changing regulations in the US
Banking sector. Also, he spoke his heart out on the likely impact of the new Fed chief, expectations
regarding Quantitative tapering and its likely impact on the emerging markets
InFINee� | Annual Issue | August 2013
42
inves�ng, the trade market is �ght and the unemployment rate is
not going down as fast it is required to go and as I men�oned earlier
the GDP is also not growing at the pace it should grow. Overall, the
cost of compliance with the regula�ons, and decision making pro-
cess involved in the regula�on is also not helping the cause.
TI: With the US poten�ally coming out of QE, how will Asian econ-
omies be impacted by the Fed’s decision? Has the world changed
since the 1980s and ‘90s?
PJ: The world has changed as far as the financials work since 1980s
and ‘90s. Previously people had a blind trust for the US policies and
would never doubt it. Now it has changed. Today it is not the case
especially when we look at the big banks. One can never get the
same kind of scope and access since the banks would be in constant
pressure over regula�on and scru�ny for at least the next decade.
This is not going to change unless some behaviour changes, it will be
the status quo.
TI: Should China fret over the US move on QE, as China's interests
are aligned very strongly in the same direc�on as the United
States?
PJ: A very tricky ques�on, China is an export oriented economy. In a
way their currency is not fully conver�ble. If they don’t open up the
market, they will not grow. As what I see, they need at least 7-8%
growth. They need to have internal mechanism for internal growth.
As far as the US is concerned, it has always been concerned for the
long term growth and there will be several measures in the Chinese
markets which will help the US for this.
TI: Quan�ta�ve Easing policy by the Federal Reserve is causing
other assets to be mispriced and bubbles are being formed. For
example, with interest rates ar�ficially low, investors are taking
greater risks in trying to obtain yield. Since Fed has already an-
nounced that it will begin to reduce its quan�ta�ve easing pro-
gram, this would mean that the price of these assets will decline
significantly. What are the a<er-effects of such an ac�on?
PJ: The concern is there; however, impact is not seen. Nobody
knows where it will end as the change is slow and not as required. A
bigger concern which exists is that a lot of companies are showing
profit and the stock market is going up; but the people are not
geBng impacted in their day to day lives. Hence, the free money is
being used for the benefit of their own investments.
It is easier to get money from the markets; slowly it will change,
treasury rates, the bond prices will change but it will not be an over-
night change not a huge change unless & un�l it reaches a thresh-
old. As QE went up slowly, it will come down slowly; affec�ng the
people and the price of the assets, but it will not be a significantly
huge change. Nobody knows when the QE will end, since nothing of
such massive sorts has been done before. Moreover, there is no
100% certainty that it will happen; the chances are always 30:70 or
even 40:60
TI: Extraordinary efforts to s�mulate economies with QE had
pushed gilt and government bond yields to 'unprecedented' lows,
requiring income investors to move into higher yielding corporate
bonds and shares. Are Central banks forcing investors up the risk
spectrum?
PJ: No, they are not but some are totally impacted. The common
retail investors, the one who plan to invest in the stock market and
re�re peacefully are now forcing backwards, they are totally away
from the markets. Investors in the fixed income markets are badly
impacted & investors in these markets are not those normal inves-
tors but they are big professionals. Once they understand the mar-
ket- they will understand when the asset price will go down and
when bubbles will be formed. However the benefit of QE on normal
investors is li;le lesser; when interest will go up & they will earn
some money- currently they are not making any money.
TI: Reuters recently published the ar�cle "How Much is Fed Aid to
U.S. Corporate Profits Worth?" which suggested that con�nued
low interest rates are ar�ficially boos�ng corporate profitability.
What impact will tapering of quan�ta�ve easing have on stock
prices if this is true?
PJ: Yes, it is true. The benefit of QE is more of a corpora�on- they
are taking advantage of low interest rate. The ar�cle is right in way
that US companies are taking advantage as their profitability looks
good. A simple statement from the fed chairman, a month back,
which says that QE may be ending sooner than I expected made a
lot of market turbulence. All the policies are made on what the Fed
says and the guidelines set for the next 3-4 years.
InFINee� | Annual Issue | August 2013
43
Team InFINee�: How would you describe a typical day for a sum-
mer intern at HSBC?
Var�ka Singh: When we joined HSBC for internship, we had a small
induc�on and were given brief training on valua�on, pitch books
etc. and of course the compliance which is a cri�cal part of IB. How-
ever, the majority was on job training due to paucity of �me in in-
ternship.
During internship typically my day started at 10 am. The first thing I
was required to do was check my mailbox for the review and feed-
back about the previous day deliverables and also to see if any work
has been assigned from outside India geographies where generally
the communica�on would firstly be through mail and then schedul-
ing further calls.
Work comprised of preparing pitch books, analysing various reports
for valua�on or sugges�ng and substan�a�ng any strategy. Typically
one can get 2 or 3 company profiles in a day, but apart from those,
small tasks would be given with very short deadline, may be 2-3
hours. It required going through lots of reports and databases and
used to consume most of the day. Interns were op�mally allocated.
In case I finish up the work by 8pm then I would be briefed about
the next day work and before I leave for the day I used to have a
look at the work so that I can plan accordingly for the next day. So
on an average the day would end by 11 pm. But frequency of staying
�ll 1 am or 2 am was also very high. It was a very different experi-
ence, but one which I thoroughly enjoyed. I got to learn a lot from
my seniors at HSBC, how well they managed their work and handled
cri�cal situa�ons.
TI: What were the expecta�ons of the company from you?
VS: From interns they do not expect much of prior knowledge, but
the ability to learn. Quick grasping power is always acknowledged.
But one basic expecta�on was accuracy in work. The guiding princi-
ple would be to rather ask for an extra hour than to deliver any in-
correct informa�on.
Also in IB you do not get long �meline projects, for any task you
have to give the update or submit the deliverable in 3-4 hrs. So you
are expected to keep the mentors in loop and inform the team
members immediately in case the situa�on looks out of control
because there is no scope to invest more than the es�mated �me
on any task. Also it was expected to keep no work pending, so that
the maximum �me usage is possible, avoiding any cri�cal situa�on
to occur.
TI: What challenges did you encounter during your internship in
the project(s) which you worked on? How did you tackle them?
LIFE IN HSBC
- Vartika Singh
Indian Institute of Foreign Trade, Kolkata
Team InFINeeti talks to Vartika Singh (MBA (IB), 2012-14), Summer In-
tern at HSBC - Strategic Transactions Group, who gives her valuable insights
on her summer internship experience - what she learnt, the challenges she
faced and her advice to future aspirants who want to join HSBC.
InFINee� | Annual Issue | August 2013
44
VS: Main challenges occurred because of the difference in the na-
ture of work at IB. Unlike other industries, in one gets very short
deadlines, and it becomes more difficult for interns since they are
not very proficient in using databases and excels. Delivering on �me
and maintaining the accuracy was a challenge in the beginning.
Also in the ini�al few days one gets totally bombarded with lots of
new informa�on and at the same �me have some deliverable to
complete. Thus, according to me retaining those instruc�ons and
applying them wherever needed was a challenge in itself. Making
notes of instruc�ons helped in this. I also avoided seeking seniors’
advice for the same thing again and again. However, these difficul-
�es persisted for ini�al 1-2 weeks. Though once you become accus-
tomed to the work you can easily overcome all this.
TI: What skills did you develop as an intern at HSBC? How do you
think these skills will be useful in your future career?
VS: Being a so�ware engineer, two months of internship in a finance
company and that too in an investment bank role was a different
experience. It gave me a pla,orm to apply my knowledge at a much
bigger pla,orm. Instead of being allocated to only one sector, I was
rather engaged with different sectors on rota�on basis which gave
me hands-on in variety of sectors. Working on different mergers &
acquisi�ons related tasks led to be;er understanding of inorganic
growth of companies, analysis of various opportuni�es and the in-
terrela�on of the deals taking place across the globe. I got to work
on complex valua�on models, made plenty of presenta�ons which
eventually made me proficient in excel and power point.
TI: What did you learn about the company - your expecta�ons v/s
your experiences?
VS: I did not have any prior experience in IB, so basically I didn’t
start with many expecta�ons. In fact I did not expect much from
short dura�on of 2 months but I am thankful to HSBC which offered
me lot of opportuni�es in such a small span of �me. The extent of
learning totally depended on the ability of an intern to complete
tasks as fast as possible and to be assigned to more assignments.
More work meant more learning. HSBC summer internship program
is very well designed and is conducive to learning; teams are very
coopera�ve and there are no communica�on barriers. The interns
are in fact employed like full �me analysts and are involved in
mee�ngs and discussions and were encouraged to share their view-
points.
TI: Would you like to share any other informa�on/experience/
advice with the future batches/readers of the magazine?
VS: One general advice to those interested in doing internship in IB
is improve proficiency in excel and PowerPoint as these will be the
most used tools with a clear understanding of the basics of financial
concepts.
TI: How difficult was the transi�on from a typical MBA college life
to a typical corporate culture? How far were you able to apply the
classroom learnings to the prac�cal scenario?
VS: Before MBA I had worked with Infosys for more than a year. So
actually I didn’t find much difference as such in context of corporate
culture. In fact my work ex helped me geBng into the role easily, in
understanding organiza�on structure and in assimila�ng well into
the HSBC culture.
Coming to the MBA classroom learning, it was definitely helpful. For
a person like me without any financial background, classroom learn-
ing and compe��ons in which I par�cipated during MBA were of
real help. Also the presenta�ons, which are an integral part of MBA
curriculum, case studies, financial accoun�ng are few of the things
which were of help during the internship.
InFINee� | Annual Issue | August 2013
45
India's gold consump�on at 310 tonnes in Q2, highest in 10
years
India's consump�on of gold rose to 310 tonnes in the second quar-
ter ended June, highest in the
last 10 years, despite govern-
ment curbs to restrict imports
to rein in burgeoning current
account deficit, a WGC report
said on 15th August. Much of
the demand was met by stocks
that had been built up to healthy levels following the April price
drop. Imports more than doubled to 338 tonnes in April-June of this
calendar year, it said. Gold consump�on stood at 181.1 tonnes in
the same quarter last year.
Costlier onion, veggies push infla�on to 5-mth high of 5.79 %
Rising prices of onions and other vegetables pushed infla�on to a
five-month high of 5.79 per
cent in July even as the gov-
ernment and RBI ba;led to
stabilise the rupee. Infla�on
based on the Wholesale Price
Index (WPI) was at 4.86 per
cent in June. In July 2012, it
was 7.52 per cent.
RBI moves to limited capital controls to save Indian rupee
With the rupee dri�ing down to a life�me low of 61.44 to the dollar,
despite measures to �ghten liquidity and push up interest rates, the
Reserve Bank of India (RBI) on Wednesday changed tack, choosing
to defend the currency by moving towards capital controls. The
central bank put restric�ons on the amount of foreign exchange
Indian companies and individuals can invest, remit or spend over-
seas in an a;empt to curb dollar ou,lows from the country. Indian
companies can now send out
only 100% of their net worth
as overseas direct investment
(ODI), way below the current
cap of 400%, under the auto-
ma�c route. The restric�ons,
however spare Navaratna
public sector en��es ONGC and Oil India, the RBI said in a release.
NRI deposits fall 16% in Q1
Even as the government and RBI are trying to lure in more dollars
into the country, flows from non-
resident Indians into bank deposits
has been falling. During April-June,
NRIs put $5.50 billion into Indian
banks' deposits, down 16.11%
from a year ago. As on June end,
NRIs held $71.07 billion in bank
deposits, marginally lower than $71.69 billion in May. The sharp
vola�lity in the rupee may have prompted NRIs to refrain from
puBng money into bank deposits. The rupee weakened 2.4% during
June and has since then fallen to fresh all-�me lows of 61.81/$.
Index of Industrial Produc�on: Output contracts 2.2%, dash-
ing hopes of recovery
Dashing hopes of a recovery, industrial produc�on contracted 2.2
per cent in June, the second straight monthly drop, on account of a
poor show by the manufacturing, mining and power sectors and a
decline in produc�on of capital goods.
Factory output measured in terms of the Index of Industrial Produc-
InFINee� | Annual Issue | August 2013
46
�on (IIP) had contracted 2 per cent
in June last year, as per the data
released by the Central Sta�s�cal
Organisa�on.
Germany poised to overtake US as world's No 2 exporter
this year: DIHK
Germany could overtake the United States to become the world's
second-biggest exporter this year, but its share of global trade is
likely to dip as its ex-
ports lag global expan-
sion, German chambers
of commerce said on
Thursday. Europe's big-
gest economy, currently
the world's third-biggest
exporter a�er China and the United States, has seen its share of
world trade fall to 7.5 percent by last year, from a post-German
unifica�on peak of 11 percent in 1991-92, according to DIHK Cham-
bers of Commerce.
SingTel raises stake in Bhar� Airtel to 32.34% for $302.2 Mn
Singapore Telecommunica�ons Ltd said on Thursday it will increase
its effec�ve interest in India's Bhar� Airtel Ltd to 32.34 per cent
from 30.76 per cent, paying
around S$383.6 million ($302.2
million). SingTel, Southeast
Asia's largest telecommunica-
�on operator, said it had agreed
to buy 788,538 shares, or 3.62
per cent, of Bhar� Telecom
Ltd. Bhar� Telecom holds approximately 43.57 per cent of Bhar�
Airtel. "The acquisi�on would allow SingTel to increase its effec�ve
stake in BAL (Bhar� Airtel), and is in line with SingTel's strategic fo-
cus on maximising the value of its exis�ng businesses, which in-
cludes reviewing opportuni�es to increase shareholdings in exis�ng
associates," the Singapore firm said.
India's first all women bank to have 25 branches by end of
the year
Government plans to set up about 25 branches of the proposed
public sector Bhara�ya Mahila Bank,
India's first all women bank, by the
end of this fiscal. "The Bhara�ya
Mahila Bank proposes to complete
the first six branches at Mumbai,
Delhi, Kolkata, Chennai, Indore and
Guwaha� by October 15 and take
the total to 25 by March 31, 2014," an official said. The government
has already approved Rs 1,000 crores seed capital for the women
focused public sector bank, announced by Finance Minister P Chid-
ambaram in his budget speech.
Metropolis eyes acquisi�ons in India, Africa for expansion
Diagnos�cs chain Metropolis Healthcare is looking for acquisi�ons in
India and Africa as part of its expan-
sion plans. The Mumbai-based firm,
which has earmarked Rs 100 crores
to fund expansion and acquisi�ons,
said it is targe�ng up to three do-
mes�c acquisi�ons in the on-going
fiscal apart from looking for similar
opportuni�es in West Africa in future. It also plans to open 14 new
laboratories across the country in this fiscal as part of its expansion
plans. "We are planning two to three acquisi�ons in FY13-14 in the
country. We are already in talks for these," Metropolis Healthcare
MD & CEO Ameera Shah told PTI
UIDAI issues more than 40 crores Aadhaar numbers �ll date
Government today said the Unique Iden�fica�on Authority of India
(UIDAI) has issued more than 40.29 crores Aadhaar numbers �ll date
and the body will achieve the target 60 crores enrolments by 2014.
"UIDAI has reiterated that the target of 60 crores Aadhaar enrol-
ments will be achieved by 2014. More than 40 crores 29 lakh
Aadhaar numbers have been issued �ll date and the process is con-
�nuing at a healthy pace," Planning Commission said in a release.
According to the release, only in the month of July, 2013, about two
crores Aadhaar numbers have been generated.
InFINee� | Annual Issue | August 2013
47
BITCOIN
A digital or virtual cur-
rency that uses peer-
to-peer technology to
facilitate instant payments. Bitcoin
is a type of alterna�ve currency
known as a crypto-currency, which
uses cryptography for security,
making it difficult to counterfeit.
Bitcoin issuance and transac�ons are carried out collec�vely by the
network, with no central authority. The total number of Bitcoins
that will be issued is capped at 21 million to ensure they are not
devalued by limitless supply.
RELATIVITY TRAP
A psychological or behavioural trap that leads people to
make irra�onal choices when making spending deci-
sions. The
rela�vity trap is frequent-
ly exploited by savvy mar-
keters to coax consumers
into making a spending
decision that maximizes
their profit. It arises be-
cause the human brain
works in a rela�ve way while making comparisons and finds it diffi-
cult to compare across different categories. Innumerable experi-
ments on this subject find that the rela�vity trap is a potent issue
that affects financial decisions for a great number of people.
GUERRILLA TRADING
A very short-term trading technique that aims to generate small
profits while taking on very li;le risk per trade and repea�ng this
mul�ple �mes in a trading session. Guerrilla trades typically have a
shorter dura�on than scalping
or day trades and seldom last
for more than a few minutes, at
the most. Because of its high
trading volume and limited re-
turn nature, low commissions
and �ght trading spreads are prerequisites for successful guerrilla
trading. As it also demands considerable trading exper�se, guerrilla
trading is generally not recommended for novice traders.
PRIME OF PRIME – POP
A brokerage that provides service to traders (especially
Forex traders) who need micro-contract trades. Prime
of Prime (PoP) brokerages also o�en allow for trades of
greater leverage and, as a result, more risk. Many of the brokers
using PoP brokerages are small regional banks with clients that need
smaller currency trade op�ons.
CIRCUS SWAP
A combina�on of an interest rate swap and a currency
swap in which a fixed-rate loan in one currency is
swapped
for a floa�ng-rate
loan in another cur-
rency. A circus swap
therefore converts
not just the basis of
the interest rate liabil-
ity, but also the currency of this liability. The floa�ng rate in a circus
swap is generally indexed to U.S. dollar LIBOR. The term is derived
from the acronym CIRCUS, which stands for Combined Interest Rate
and Currency Swap. Also known as a “cross-currency swap” or
“currency coupon swap".
InFINee� | Annual Issue | August 2013
48
LARGEST ROBBERY IN HISTORY!
M oments before the US started bombing Baghdad; nearly $1
billion dollars was stolen from the Central bank of Iraq and consid-
ered the largest robbery in histo-
ry. $650 million was later recov-
ered in the walls of one of Sad-
dam’s palaces but the balance is
s�ll missing.
PERFECT CRISIS PREDICTOR!
R obert Shiller, a professor at Yale University, predicted both
the .com and housing bub-
bles. Nobody listened to him.
So, you might want to check
when his next book will be com-
ing out before deciding to invest
your money somewhere!
HOW US INVESTMENT MARKET WAS BORN?
I n 1790, the federal government refinanced all federal and state
Revolu�onary War debt, issuing $80
million in bonds. These bonds be-
came the first major issues of pub-
licly traded securi�es, marking the
birth of the U.S. investment mar-
kets.
ATMS INTERESTING FACTS!
▪ In Singapore, you can apply
for an IPO at an ATM
▪ In Romania, more than 80%
of the populace don't have
bank accounts. Ci� has in-
stalled ATMs that let people
pay their bills by deposi�ng cash at the ATMs. Merchants pay a
fee for the service
WHEN IT WAS BUILT, CITICORPS CENTRE HAD A
HIGH CHANCE OF FALLING DOWN
W hen Ci�corp’s
building was built it had
high chance of crumbling.
William J. LeMessurier was
the structural engineer on
the project. LeMessurier
decided to take responsibil-
ity, but secretly.
He hatched a plan that involved workers to fix all 200 joints of the
building's structure and hired people to oversee the work carefully.
He managed to do it without anyone knowing for twenty years!
APPLE DECIDED TO STOP USING THE WORD
‘LAPTOP’ BECAUSE OF POTENTIAL INJURIES!
I n 2006, Apple decided to
stop using the word 'laptop'
because poten�al injuries can
ensue if your laptop is le� on
your lap for extended periods
InFINee� | Annual Issue | August 2013
49
JP MORGAN IN A ROLE OF FEDERAL RESERVE
I n 1913, the Federal Reserve was es-
tablished to replace J.P. Morgan as lend-
er of last resort. It is interes�ng to see
how one man was rich and powerful
enough to bail out the whole economy in
those days. JP Morgan Chase is one of
the four US “super-banks”.
WHAT’S THERE IN A NAME - A LOT!
T he highest publicly re-
ported amount of money
paid for a domain name is $7.5
million! Paid for business.com
HAPPY BIRTHDAY SONG IS NOT FOR FREE!
A company, Warner
Communica�ons paid $28
million for the copyright to
the song 'Happy Birthday'.
Jennifer Nelson is a filmmaker
with a mission: To make Hap-
py Birthday free for anyone to sing.
HOW IKEA GOT ITS
NAME?
The ini�als of founder Ingvar
kampard plus the ini�als of the
property and village he grew up
in , Elmtaryd Agunnaryd.
IF FB WERE A COUNTRY…
I f Facebook were a country, it would be the third-largest country
in the world, a�er China, India.
WHAT WAS YAHOO
ORIGINALLY CALLED?
Y ahoo was originally called Jery’s Guide to the World
Wide Web a�er founders Jerry Yang and David Filo.
UPS SAVING MORE THAN 10 MILLION
GALLONS OF GAS BY STOP MAKING LEFT TURNS!
I n 2004, UPS asked their
drivers to not to make a le�
turn unless it's absolutely
necessary. This development
has led to UPS saving more
than 10 million gallons of gas
since 2004, and reducing carbon emissions by 100,000 metric tons,
or the equivalent of 5,300 cars being off the road for a year.
MCDONALDS REJECTION RATE MORE THAN HAR-
VARD!
M cDonalds is a popular first
job for many high school kids in the
United States. However, as the econ-
omy struggled in the years surround-
ing 2011 Na�onal Hiring Day, McDon-
alds only accepted 6.2% of people
who applied. Compare that to Harvard, which accepts 7% of their
applicants.
InFINee� | Annual Issue | August 2013
50
2 Federal income __
6 Confiden�ality agreement, for
short
8 Used to be the standard for the
dollar
9 One kind of insurance
11 ___ ra�o: A stock's price/earnings
ra�o divided by its year-over-year
earnings growth rate
14 Decide to opt out of an oppor-
tunity
15 Income a�er deduc�ng for oper-
a�ng expenses but before de-
duc�ng for income taxes and
interest (abbr.)
16 Raise money through sale of debt
or equity
17 Ownership papers
19 Possible set of future events
21 Investment made in order to
reduce risk of adverse price
movements in a security, by
taking an offse$ng posi�on in a
related security
22 Smith and Keynes
23 Net worth of a business
26 Wise adviser
27 Land of the euro, for short
29 Cancel a stock order
31 Ended a stock posi�on due to an
execu�on of a market order to
buy or sell a security if a specific
price is reached
32 Put money down.... hoped for a
return
34 Combine, of two en��es
1 Name of a char�ng method in
stock analysis
3 Vietnam currency symbol
4 Using money borrowed from a
broker to purchase securi�es
5 Condi�onal expression
7 Rework the mortgage
8 The ___/fear oscillator (investor's
emo�onal swings )
10 Accumulate
12 Making insurance policy effec�ve
13 Fail to connect
14 Equality
15 Index that tracks the ac�vi�es of
experienced and inexperienced
investors
16 Bank's house takeover
18 Fund that tracks an index
20 Foreign exchange market
23 Dem and of an insurance policy
24 The� of this has become a major
concern for financial ins�tu�ons
25 It was Black in 1869
28 Mutual or money market?
30 Who provides money-at certain
price
33 The 'I' thing
35 Overall so�ware integra�on for
all the company's processes
(abbr.)
Across Down
InFINee� | Annual Issue | August 2013
MEET THE TEAM 51 CREDITS
EDITOR-IN-CHIEF
Vaibhav Garg
EDITORIALTEAM
Aakanksha Hajela
Bhushan Kanathe
Kunal Maheshwari
Mohmammad Umair Ansari
CONTRIBUTIONS FROM
Ankit Tiwari
Ashutosh Deshpande
Raghav Kapila
Shubham Agarwal
C� ���������C����� ���
�������
Mohit Jethwa
FEEDBACK/QUERIES
Published by students of
Indian Ins�tute of For-
eign Trade
New Delhi | Kolkata
ALL RIGHTS RESERVED
AAKANKSHA HAJELA is an engineer and specializing in
Finance & Marke�ng. She comes with a prior work experi-
ence with IBM and has interned with ICICI Bank's Wholesale
Banking Division involving offloading of a distressed por,o-
lio to an MFI Client & the feasibility study for the same . She
writes for business blogs and magazines. She plans to work
in the field of Consul�ng & Strategy
BHUSHAN KANATHE is an engineer with a mo�va�on to
specialize in Finance. He has cleared CFA Level 2. He
regularly tracks the stock market and wants to pursue a
career in investment banking. He has interned with Bajaj
Allianz Life Insurance Co and was involved in strategy
formula�on for acquiring clients & development of mi-
cro-insurance products
KUNAL MAHESHWARI is a qualified Chartered Account-
ant with Ar�cleship experience from KPMG and aims to
make a career in the field of financial consultancy. He has
interned with Mahindra & Mahindra Financial Services
Ltd with their strategy team on building a roadmap for
Mahindra Finance for expansion in rural India. He enjoys
reading, listening to music and keeping himself updated
with current affairs
MOHMAMMAD UMAIR ANSARI is an engineer who
aspires to build a career in Interna�onal Business &
Trade. He is an avid reader and a current affairs buff. He
has interned with Wipro Ltd at their corporate office in
Bangalore in their Strategic Client Acquisi�on Group -
Telecom Ver�cal. He was responsible for iden�fying op-
portuni�es for Wipro to target Telecom Service Providers
in the CRM Space
VAIBHAV GARG is a qualified Chartered Accountant
and graduate from DU. He aims to specialize in Finance
& Trade. During his internship with Reserve Bank of
India (RBI), he has done a project on 'Real Bo;lenecks
in implementa�on of Basel III capital norms' under
Department of Banking Supervision He follows the
stock and commodity markets and likes to update him-
self with the recent happenings in the field of finance
InFINee� | Annual Issue | August 2013
InFINee� | Annual Issue | August 2013
CONTENTS 2 FROM THE EDITOR’S DESK 1
Companies Gracing The Event
▪ C o g n i z a n t B u s i n e s s
C o n s u l t i n g
▪ W a l M a r t
▪ H e w l e t t P a c k a r d
▪ D e l o i t t e
▪ I B M
▪ D a s s a u l t S y s t e m e s
▪ I n t e r g l o b e T e c h
▪ P W C
▪ K P M G
NationalITConclave2013
On
‘TheParadigmShiftinGlobalITIndustry’
Indian Institute of Foreign Trade (IIFT) is organizing this conclave to provide a platform to share knowledge and ideas among intellectuals from leading Technology companies, corporate houses, international institutions, regulatory bodies, subject matter experts and B-school fraternity to deliberate upon some of the pressing issues present before the IT Industry.
The event will be graced by the business leaders from all over the country, to deliberate upon the impact of Information Technology in the field of Consulting, Operations, Marketing & Human Resources.
Date: 7th September, 2013 Venue: Taj Bengal, Kolkata
For Passes and Queries contact, Coordinators Systemix Club - IFT:
Rohit Shukla | Samarth Shukla M - 9674042465 | M - 9163055599 Email: [email protected]
Indian Ins�tute of Foreign Trade
In associaon with
Electronics & Computer So�ware Export Promo�on Council
Presents
InFINee� | Annual Issue | August 2013
Contact Team InFINeeti: [email protected] | [email protected]
Published by Indian Institute of Foreign Trade, New Delhi and Kolkata
All Rights Reserved