Download - Infineeti Annual Edition- August 2014
InFINeeti | Annual Issue | August 2014
InFINeeti | Annual Issue | August 2014
InFINeeti | Annual Issue | August 2014
Dear Friends,
Greetings from Team InFINeeti…
A lot has changed since the last time we interacted. A new government has been formed, the Union budget has been pre-
sented, the Sensex has touched a new high of 25000 and many more events. Before the elections, a slogan from BJP’s
national campaign had become famous, “ Ache Din Aane Wale Hai”. The masses have voted for the party and after three
decades, a single party has won a majority in the Parliament. There were high expectations from the new government.
The first test of the new government was to present a balanced budget which clearly lays down the roadmap for econom-
ic growth in India in both- short and long term. So, our theme for the magazine this time is based on the slogan of BJP:
“Union Budget: Has budget met the expectations of Ache Din ?“
Technology, nowadays, is touching every sphere of business. Banking is no exception. We have tried to analyse the role of
technology in shaping the banking industry. Also, we are hearing about GST for long enough. One of our articles analyses
the future of GST in India. Many people believe that the one of the reasons for the fall of the last government can be
attributed to populist schemes by the centre and corruption emanating from those schemes. We have tried to analyse
whether populism or rational economic policies work in the longer term.
Financial sector is in dire need of reforms. Most of the laws are archaic and date back to the Stone Age. In this backdrop,
FSLRC committee was formed which tabled its recommendations. One of our articles analyses the recommendations
made by the committee. In our constant tryst to innovate, we have tried to amalgamate two unrelated events into one.
One is the recently concluded FIFA World Cup and the other one is M&A. How football and M&A can be related? We have
an interesting article on it. The magazine also contains the analysis of dividend distribution tax and FDI in Insurance, and a
discussion on whether they are good or not. This is the time of the year when B-school students have returned from their
summer internship. So, we have captured the experience of one of our colleague regarding how summer internships are
important to understand the nuances of business in a MBA student’s life. We then have tried to get an insight into the
Indian Agriculture sector and Rural Finances by conducting an interview with a dignitary from NABARD. We have also in-
cluded an article on implementation of IFRS in India.
Besides the insightful articles, the edition also features regular columns like FIN Trivia, FIN-lingos and News Chronicles.
We have also added a new regular column on equity research. We hope readers will find it useful.
From the next time onwards, the readers will be greeted by our new team and we, the current team, have a sense of
pleasure, pride and at the same time are poignant as it was an excellent opportunity given to us to handle this esteemed
magazine. We hope that we have done a good job.
Till then we hope that you will enjoy reading this annual budget edition.
Do write to us regarding any suggestions, feedbacks or recommendations.
Goodbye & Happy Reading !!!
FROM THE EDITOR’S DESK 3
InFINeeti | Annual Issue | August 2014
CONTENTS 2 CONTENTS 4
>>> Page 26 >>> Page 36 >>> Page 56
Football & M&A:
A comprehensive analysis of M&As using football as an analogy
5
Budget plus 3.0: Highlights of post budget analysis at IIFT
9
Future of gst: Advantages & disad-vantages of imple-menting GST
12
Top events of 2014: Review of important events of 2014
24
Role of technology in banking:
Analysis of role of tech-nology in changing the past, present & future of banking industry
26
COVER
STORY
ANALYSIS OF THE
UNION BUDGET
“Does the budget meet the expectations of Ache Din“
18
Fslrc recommenda-
tions:
How FSLRC recommenda-
tions can bring much
needed reforms in finan-
cial sector
45
EXPERT SPEAKS
FIN LINGOS 16 EQUITY RESEACRH PRE-CURSOR
36
49
Ifrs implementation in india:
Benefits of adopting IFRS
53
NEWS CHRONICLE
Regulars
40
Dividend distribu-tion tax:
How taxing dividends is
useful to government.
Are they really benefi-
cial?
32
Faculty’s corner:
FDI in Insurance
Populism: A neces-sary evil?
Ill-effects of populist measures
Summer internship experience:
Shubham Agarwal shares his RBI experience
61
56
60
63 FIN TRIVIA
InFINeeti | Annual Issue | August 2014
5
INTRODUCTION
Football has often been used as a powerful image
representing hope, as a vehicle that binds people and
encourages them to function as one, giving them a
sense of purpose and direction. There is even an ad-
vertisement that shows kids playing football with a
rag ball in a poverty stricken locality in Africa, a strong
testament to the overwhelming sentimental appeal
and sway that football holds over the masses. Club
football has cashed in on this popularity and has
transformed itself into elaborate money making ma-
chine that is on par with the leading corporate giants
of present day, in terms of revenue streams and mar-
keting campaigns.
SOURCES OF REVENUE
How do soccer clubs make money? It is a very simple
question that many fans of the game often wonder
and postulate but seldom fully understand. Most first
answers to this question would be match-day sales,
but there are those with a deeper understanding of
the industry that know that this is not quite the full
story. Deloitte’s Football Money League reports the
revenue of top football clubs by broadly classifying
the revenue into 3 main segments: Match-day Reve-
nue (gate receipts), Broadcasting Revenue (domestic
and international), and Commercial Revenue
(sponsorship and merchandise). As per a 2013 report,
Real Madrid earned revenue of $675 million during
the last year and has a team value of $3 billion as of
May 2014, of which $1.12 billion (32.6%) is to be
earned through commercial sources, another $1.12
billion from Broadcasting, $710 million (20.6%)
through Match Day revenue and the remaining $484
million through brand value.
It is important to understand the growing similarity
between corporates of the financial world and foot-
balling clubs. For the latter, assets are-players, broad-
cast rights, kit sponsorship deals and franchise deals,
and these are used by the club to make money, not
so markedly different from the way corporates make
money. Another curious similarity that can be struck
is the concept of mergers and acquisitions (M&A).
FOOTBALL PLAYER TRADE VIS-À-VIS
CORPORATE M&A
BY-BRAJESH M & NITESH SINGH, IIFT
InFINeeti | Annual Issue | August 2014
6
The idea of M & A, though in circulation for a long
time, has started gaining purchase over the past few
months, with several big ticket deals being an-
nounced; Whatsapp- Facebook, Shire-Abbvie, Myntra-
Flipkart, to name a few.
FOOTBALL TRANSFERS AND CORPORATE M&A
The footballing world is no stranger to the idea of
M&A, though in an entirely different context. It is not
possible for football clubs to buy each other, so acqui-
sitions are limited to people: the manager, the players
and the marketing and support staff. In fact, the
transfer market, which facilitates the acquisition of
players, is the most talked about topic when transfer
windows open, and is fuelled by incessant speculation
and hectic negotiations. Before we further develop
this analogy, let’s take a step back and try and under-
stand why companies in the financial world go in for
M&A. Though the reasons for such activities would
vary from case to case, they can be broadly grouped
under a few categories, like capability enhancement,
expansion into other markets, reduction in competi-
tion, financial survival etc. A close examination of
transfer deals in football reveals striking similarities
with these points.
CAPABILITY EXPANSION
Capability expansion refers to a company’s efforts in
shoring up its resources and improving resistance to
possible weaknesses. One of the major reasons be-
hind acquisition is to appropriate some capability that
the target company has and that the acquirer wanted
or needed. Comcast’s 2002 acquisition of AT&T
Broadband (so it could offer more comprehensive tel-
ecommunications services) and Walt Disney’s 2006
acquisition of Pixar (to extend its animation capabili-
ties and add new films it could market to its estab-
lished audience) come under this bracket. Premier
League clubs have spent more than £4.4bn on players
since the transfer window was introduced 12 years
ago with this summer's spending set to cross £500m.
Post 2008, when Abu-Dhabi-based oil magnate Sheikh
Mansour bin Zayed Al-Nahyan bought Manchester
City FC, the club’s total cash outlay was £930.4m, of
which only £365.3m was generated from their own
operations. Chelsea’s acquisition of Diego Costa is a
clear indication of Mourinho’s intention to adding
some firepower to his long depleted strike force, and
providing support to Fernando Torres who often cuts
a lone figure up front. Luke Shaw’s move to Manches-
ter United to plug deficiencies in left back can also be
viewed similarly. Other familiar names among big
spenders are Barcelona and Real Madrid, who are
constantly on the lookout for promising new talent, to
InFINeeti | Annual Issue | August 2014
maintain their reputation of being football power-
houses. Roman Abramovich's billions have made Chel-
sea the Premier League's biggest spenders over the
past decade with £681m going on transfer fees.
EXPANSION
Another main motivation behind M&A is to expand
into a new geographic location. Examples include the
acquisition of Lucent (U.S.) by Alcatel (France) in 2006,
Bharti’s deal with Zain to buy the Kuwaiti firm's mobile
operations in 15 African countries in 2010 and South
African Breweries’ purchases of Miller (U.S.) in 2002
and Bavaria Brewery (Colombia) in 2005. Extrapolating
this argument to the world of football, a club’s mone-
tary fortunes are linked to the following that it enjoys
across the world.
The more popular a club is throughout the world, the
more point of sale opportunities it will have for fans to
purchase merchandise, thereby filling the coffers of
the football club. It would be pertinent to talk about
Manchester United’s efforts in building up a fan base
in Asia, ranging from official websites in local lan-
guages (manutd.cn, manutd.jp) to tie ups with local
mobile networks for access to free content. All of their
promotional advertisements feature Shinji Kagawa,
their Japanese midfielder, in an attempt to connect
with their fans in Japan. Another instance of clubs try-
ing to build their image in new markets is the estab-
lishment of soccer training camps and youth leagues,
as entry points to an expansion in the future.
Many a times, the rationale behind M&A is to expand
your market share by buying out competition. Acquisi-
tion of Thums up by Coca Cola in 1993 falls under this
category. Thums Up had an 85% market share when
sold, and it made sense for Coca Cola to swoop in and
bring Thums Up under its wings. There are endless
examples for this when it comes to football. A case in
point is Borussia Dortmund’s midfielder Mario Gotze’s
move to rivals Bayern Munich last summer, followed
by striker Robert Lewandowski’s exit to the same club.
Juan Mata‘s move to Manchester United constitutes a
rather curious move by Chelsea to purportedly make
life difficult for its contenders Arsenal, Liverpool and
Manchester City.
7
Source:www.wowtechy.com
Source: www.thesportsbank.com
InFINeeti | Annual Issue | August 2014
LEVERAGED DEALS
Many M&A deals take shape of a leverage deal in
which the whole, or a part of a struggling business
entity is taken over by an acquirer, often one aligned
with its field of work, so as to open up the possibility
of collaboration with the acquired business. Mi-
crosoft’s acquisition of Nokia, Sun Pharmaceuticals’
taking over of struggling Ranbaxy are examples for
the same.
A lot of football clubs resort to this measure so as to
avert the risk of financial crisis. Cash strapped Ju-
ventus, for instance, is trying to make some money
out of the significant interest that the other clubs
have in key midfielder Arturo Vidal. Chelsea veteran
Frank Lampard being offloaded to rivals Manchester
City, is akin to companies getting rid of streams that
are no longer considered core to their business.
CONCLUSION
Having talked of M&A in companies and their similari-
ties with transfers in Football, it is important to sound
a word of caution; the path to a successful deal is lad-
en with numerous obstacles in all shapes and sizes.
Instances of failed deals and failed transfers are many
in number; America Online (AOL) and Time Warner in
2007, Sprint and Nextel Communications in 2005,
Motorola and Google (2012); the list is depressingly
long. A Forbes article states that the probability of
success of an M&A deal is about 50%, a coin toss. The
football world is also replete with instances of failed
transfers; Marouane Fellaini to Manchester United,
Fernando Torres to Chelsea, Andriy Shevchenko to
Chelsea, Mario Balotelli to Manchester City. It is
therefore imperative to understand to the last detail,
the implications of a possible merger, or a player ac-
quisition, for a deal once signed cannot be undone so
easily.
Source:www.etoro.com/www.manutd24.com
Source: www.iamwire.com
8
InFINeeti | Annual Issue | August 2014
OVERVIEW
The third edition of the annual budget analysis ses-
sion, Budget Plus 3.0, was organized at Indian Insti-
tute of Foreign Trade, Kolkata. The esteemed discus-
sion panel included Dr. K. Rangarajan, Head, Kolkata
Center, Dr. Ranajoy Bhattacharyya, Professor of Eco-
nomics, IIFT, Dr.Saikat Sinha Roy, professor of eco-
nomics, Jadavpur University, Mr.Pankaj Agarwal and
Mr.Akash Mansinka from Ernst and Young. The discus-
sion was moderated by Dr. Bibek Ray Chaudhuri, Pro-
fessor, IIFT.
Dr. K Rangarajan welcomed everyone and said that
the Budget affects everyone from a housewife to a
business tycoon and how everyone has diverse views
on it. He added that IIFT has invited academicians,
faculty and industry experts to have a discussion on
the budget and what it holds for every one of us.
The Student Body gave an enlightening presentation
on the highlights of the budget. It was a succinct over-
view, throwing light on the various schemes and initi-
atives taken by the Government. Dr. Bibek Ray
Chaudhuri threw light on the “developmental per-
spectives” and spoke on how he looked forward to
the economy getting back on track with “higher
growth, stable inflation and prudent policy system”,
9
InFINeeti | Annual Issue | August 2014
although the Consumer Price Index, being double-
digit, was still a major issue of concern. The Budget
lays out the roadmap to achieve a growth rate of 7-
8%. According to him, “The Government is targeting
small savings".
Dr.Saikat Sinha Roy analyzing the budget
Dr.Saikat Sinha Roy spoke as to how, for the last two
years, the economy has not been performing well.
The trust of the investors in the Economy needs to
be restored. According to him, the budget “is a docu-
ment of intent”. The current government manifesto
included the need for an overhaul of infrastructure
by which the Government will get revenue. He said
that subsidies should be phased out “for the Indian
economy to compete with the other economies”.
Although the current government is perceived to be
“industry friendly, yet retrospective taxes have not
been taken off”. According to him, one of the fea-
tures of the budget different from the earlier ones is
that most of the changes are for more than two
years and no timeline has been specified. Moreover
tax benefits have been given to the industries that
have their own power units. Dividend distribution
tax, the tax paid by a company on its dividends paid,
“needs to be grossed up".
Students listen as experts dissect every aspect of the budget
Mr. Pankaj Agarwal spoke on the indirect taxes which
comprises the customs, excise and service tax. He en-
lightened the gathering on how Service Tax, though
introduced only in 1994, garners the highest tax reve-
nues for the Government.
He also pointed out the initiatives taken to incentivize
the use of renewable energy resources. The decision
of the Government to levy taxes on the services pro-
duced by the educational institutes will add to the
revenues of the Government.
Dr. Ranajoy Bhattacharya took a different stance from
the other panelists and remarked that he was
“disappointed by the budget”. He said that the Gov-
ernment had missed a huge opportunity. Having been
elected with an “overwhelming mandate”, it
10
InFINeeti | Annual Issue | August 2014
was time to take some hard measures. According to
him, the budget was a “pure eyewash”. He questioned
the transparency of the Government and its attempt to
“surreptitiously reduce expenditure behind the
scenes”, referring to the reduction in the expenditure
on Agriculture, Rural Development and Social sector.
He remarked that “Agriculture is the main bottleneck
in India” and enlightened us on the fact that Agricul-
ture employs 55 percent of the population yet ac-
counts for only 14 percent of the GDP. This structural
flaw needs to be addressed.
The audience, comprising of students from IIFT, were
very participative and had various questions ranging
from the duration of the long term capital gains to
increasing FDI in defense.
The panel concluded that though the budget was
“welcoming”, yet more was expected of it. They
called in for “simpler tax administration” that would
lead to larger tax compliance.
All in all, the session was quite enriching and informa-
tive as students, both from the first year as well as
from the second year got to understand the nuances
of the budget and also understood how to dissect the
nitty-gritty of the budget. So, from next time onwards
they would know what to look for in the budget and
would be in a better position to analyze it.
-By Mohd Zeeshan - IIFT
11
InFINeeti | Annual Issue | August 2014
INTRODUCTION
The most awaited Goods and Services Tax (GST), a
major reform in the Indian taxation system with re-
spect to indirect tax, has been announced in the Un-
ion Budget of 2014. Every industry is looking forward
to this transformation with the positive hopes. There
are questions in the minds of people from every sec-
tor of economy regarding the impact of the changes
that would be brought by GST. The manufacturers,
wholesalers, retailers and the consumers are waiting
to know their stake associated with the reform.
BACKGROUND
The current tax system is inefficient and complicated
due to the tussle between the central and the state
governments to generate maximum revenue for
them. Central government levies tax on the manufac-
ture of goods through CENVAT, on services through
Finance Act and on the sale of goods through Central
Sales Tax Act (CST). States again levy taxes on the
sales of good that is independent of the tax levied by
the Centre. This multi-layered tax system leads to the
cascading effect on the indirect taxation system.
However, after the introduction of VAT in 2005, the
cascading effect has been reduced to a certain ex-
tent. Moreover, the bulk of the tax revenue goes to
the central government. So in order to compensate
the state government it levy multiple indirect taxes
on the revenue generated from goods, for example
inter-state sales tax, octroi etc.
The proposed GST is aimed at replacing multiple indi-
rect taxes like central excise, VAT, service tax with the
common taxation system. And this can have major
implications on the Indian economic growth. GST
would bring in higher revenue for the government by
broadening the tax base and minimizing exemptions.
This would also redistribute the tax burden equitably
between the manufacturing and the service industry.
THE PROPOSAL OF DUAL GST
The current proposal of dual goods and service tax
will not distinguish between goods and services. And
the central and the state GST would be levied on the
taxable value of the transaction. Except few assump-
tions, all the goods and services would be covered
under this scheme.
Currently the indirect taxes on goods is around 20%
and services are taxed at around 10%. But once the
GST– IS THERE ANY
FUTURE?
BY- SNEHA SHRIVASTAVA,
IIM-RAIPUR
12
InFINeeti | Annual Issue | August 2014
The cascading effect of multistage taxation in the supply chain
GST is implemented, the final rate for GST is expected
to be around 14-16%. Further, the proposal has been
put for the dual tax structure which will impose single
tax rate for services and multiple tax rates for the
goods.
WHAT WILL EXACTLY HAPPEN?
The implementation of the goods and services tax
would impose a single tax on the goods and services.
At the end the amount of tax the consumer has to
pay will remain almost same in the short run. But the
distribution of taxes would be equal on both the
manufacturing and services sector. This will reduce
the extra burden that the manufacturing sector is car-
rying. Moreover, it will broaden the tax base by mini-
mizing exemptions and scope of corruption by mak-
ing the taxation system more transparent. The cas-
cading effect of the taxes imposed by the centre and
the state would disappear.
IMPACT ON THE SUPPLY CHAIN AND LOGISTICS:
Currently due to the complex tax structure the inven-
tory and the distribution decisions are taken so as to
avoid as much tax as possible. The manufacturers
maintain warehouses in different states to save on
central sales tax imposed on inter-state movement of
goods. This leads to the operational inefficiency. Fur-
ther, the impact of the increase in the number of
warehouses is borne by the end consumer in terms of
cost or they have to sacrifice on quality.
But the GST will bring a common and centralized mar-
ket for the sales of goods and services across the coun-
try. This will increase the operational efficiency of the
supply chain and the benefit will reach to the end con-
sumer as well.
IMPACT ON GDP:
Due to the transfer of major share of indirect tax col-
lected to the centre, state levies multiple indirect taxes
on the goods and services. To avoid this the taxpayers
play with the loopholes in the tax structure and try to
avoid paying the tax, leading to larger number of ex-
emptions. This leads to losses for the government.
But, the implementation of GST would bring in trans-
parency and reduce complexity. It will broaden the tax
base and would redistribute the burden between the
manufacture and service sector. Further, under GST all
the goods and services would be covered and the num-
ber of exemptions would be reduced. And this will gen-
erate more revenue for the government.
13
InFINeeti | Annual Issue | August 2014
The current proposal for the implementation of dual GST
The center and state will have their fixed share and
there would not be scope of either unnecessary tax
imposition or tax avoidance. This will bring more in-
vestment, generate more employment and would
promote exports. All this together would add to the
GDP of our country.
IMPACT ON THE MANUFACTURING SECTOR:
As discussed above the manufacturing sector has
been pressed with the extra burden of tax as it pro-
vides the scope for multi-stage taxation. This has
made this sector less attractive for investment.
But the GST would release the ailing manufacturing
sector from the heavy tax burden. This would make
this sector as a profitable option which would spur its
growth. As a result, cost of production will decrease
and export will increase.
IMPACT ON THE PRICE OF GOODS:
In the long run, the price of goods would decrease as
the profit earned in the upper end of the supply chain
would be transferred to the consumers as well.
IMPACT ON THE SYSTEM:
The reform will increase the efficiency of the system
by bringing in transparency. The different sectors
would be treated equally and the consumers would
have to pay the fair price for the goods and services.
The transparency will bring compliance to the govern-
ment norms and would reduce corruption.
For example, in case of the goods manufactured, sup-
pose the consumer pays the GST of 6% while buying
the product. Here the tax amount paid by the consum-
er would be shared by the manufacturers, wholesalers
and retailers equitably based on their cost of manufac-
turing or services.
ANALYSIS- FOR THE FUTURE OF GST
With respect to the prior experience - Implementation
of VAT in 2005-2008:
The implementation of value added tax (VAT) in 2005
had increased the income tax revenue for the govern-
ment of India to 5.9% of GDP in 2008 when compared
to the 3.7% of GDP in 2004. Working on the
14
InFINeeti | Annual Issue | August 2014
similar lines of VAT, GST could also reduce the com-
plexities in the tax structure which gives the scope of
corruption. It will bring transparency which will in-
crease the revenue generated from the income tax.
WITH REFERENCE TO OTHER COUNTRIES:
According to the report published by the National
Council of Applied Economic Research, implementa-
tion of GST would increase GDP by 0.9%-1.7%. Canada
experienced 1-2% increase in GDP after the imple-
mentation of GST. On the similar lines, when GST was
introduced in New Zealand in 1987, it increased the
revenue generated from tax by 45%.
Currently, there are 160 countries in the world who
have adopted GST.
WITH RESPECT TO THE BJP’S ELECTION MANIFESTO:
BJP government is strongly in the favor of bringing
transparency in the tax system and the growth and
development of all the sectors of economy. The evi-
dence collected from the implementation of VAT in
India in 2005 and the implementation of GST or VAT in
other countries shows the brighter picture. It reveals
that the centralization of the taxation system and the
single tax rate for both the goods and services would
reduce the complexity and would bring in more trans-
parency. It would reduce the scope of red tape and
tax avoidance or exemptions, which is otherwise pos-
sible in the existing taxation system.
CONCLUSION
To summarize, the implementation of GST would not
have direct impact on the consumers in the short run,
as they have to pay almost same tax for the consump-
tion of goods and services. However, in the long run
the benefits earned by the manufacturers, wholesalers
and the retailers would be passed on to the consumers
and they have to pay lesser on the purchase of goods.
Moreover, the burden on the manufacturing sector will
get reduced as there will be equitable distribution of
tax between the manufacturing and services. This will
encourage investments in the manufacturing sector,
which is currently lagging behind in our country. The
boost in the manufacturing sector will create the col-
lateral benefits like increase in employment, exports,
investments opportunities, FDI etc.
All these factors would together add to the revenue
generated from the indirect tax and would accelerate
the growth of the country.
15
InFINeeti | Annual Issue | August 2014
16
CHINESE WALL
It is the communication barrier
that should exist between
different departments of a fi-
nancial institution to avoid any
possible conflict of interest.
For example, if a firm offers both brokering and cor-
porate advisory services, the client should be able to
trust that the sensitive information which it is shar-
ing with the advisory department would not be used
by the brokering department to make undue finan-
cial gains.
INVESTMENT GRADE
It is a rating system that indicates the risk of default
for a bond issued by a company or a sovereign.
There are bond rating agencies such as Standard &
Poor’s, Moody’s and Fitch among others that assign
ratings to corporate, municipal or sovereign bonds.
These ratings correspond to the risk involved in buy-
ing these bonds.
CLUB DEAL
It is a private equity buyout in which the controlling
interest in a company rests with several different
private equity firms. This
group pools its assets togeth-
er and collectively makes the
acquisition. PE firms do this
in order to acquire expensive
companies which they would not have been able to
acquire going alone. Also, it is an effective risk man-
agement strategy since the risk is now distributed.
CONDITIONS PRECEDENT
The set of conditions that a borrower must meet
before he can request that credit facilities be made
available to him. These conditions are a part of the
lending agreement that the borrower might have
with a bank or financial institution.
Fin Lingo
InFINeeti | Annual Issue | August 2014
FALLEN ANGEL
It is a security which was once in-
vestment-grade but has since been
downgraded to junk status. Not all
fallen angels are securities of com-
panies headed towards bankrupt-
cy. For example, a company with
strong fundamentals may temporarily lose investor
confidence due to extraneous factors. This may result
in a downgrade of credit rating.
EXCHANGE TRADED FUND
An investment fund that holds stocks, bonds or com-
modities and is traded on an ex-
change like a regular stock. An ETF
tracks an index and tries to replicate
the return provided by it. For exam-
ple, when one buys into an ETF
tracking the Sensex, they are buying into a portfolio
of stocks being traded there. The objective here is not
to outdo the performance of the Sensex but to match
it.
CALL SWAPTION
Call Swaption is a category of op-
tion which gives the owner a right
but not the obligation to exercise
a swap. If exercised the buyer would have the right to
receive a pre-determined fixed interest rate. Swap-
tion is short for call swap option. It is a hedging tool a
buyer might use if he believes the interest rates are
likely to go down.
PITCHBOOK
A book of graphs, charts and market data along with
recommendations for the
market presented to prospec-
tive clients by bankers and
financial institutions. The ob-
jective is to land a mandate to
handle the client’s funds.
MATERIAL ADVERSE CHANGE (MAC)
Material Adverse Change (MAC) is a condition that is
usually included in loan agreements,
providing protection to lenders
against changes that may have a sig-
nificant effect on the business, finan-
cial condition and assets of the bor-
rower. After the occurrence of a
MAC event prior to closing of a deal, lenders usually
reserve the right to modify the interest rate or other
terms of the agreement. For already closed deals,
lenders may refuse any further drawing of cash and
demand immediate debt repayment.
Fin Lingo
17
InFINeeti | Annual Issue | August 2014
COVER STORY 14
InFINeeti | Annual Issue | August 2014
COVER STORY 19
INTRODUCTION
Election 2014 was a very high voltage affair where
many promises were made by our politicians to bring
the economy back on track. The current government
carries the expectations of a billion plus population to
salvage the economy from the deep economic mess it
is currently in. With this backdrop the Union budget
2014 was tabled on 10th July in Parliament by our Fi-
nance Minister Mr. Arun Jaitley. The Finance Minister
had limited time at his disposal to come up with any
big bang reforms. Nevertheless he was successful in
making some good decisions in the Union Budget. The
Finance minister announced a slew of measures for
correcting the economy in fields of manufacturing,
job creation, education, banking and infrastructure.
So, although the budget measures may not be the big
ticket reforms that people were expecting but these
same measures have the potential to cause transient
but critical changes in the system. Some of the key
measures that the government took could have a very
positive effect on the economy.
MANUFACTURING BOOST
The Budget has specified a number of measures to
rectify the manufacturing sector and bring it back on-
to the growth track. The budget has announced steps
to raise private consumption and make manufactur-
ing industry the future wheel that will drive the econ-
omy. Steps such as extending excise duty cuts on vari-
ous products like auto and consumer durables can
help in raising the private consumption and spruce up
capacity utilisation.
Source: Ministry of Statistics and Programme Imple-
mentation
Infrastructure push in the form of better road connec-
tivity could push the demand of automobiles in our
country thus giving a boost to the industry that has
been in stagnation for the last couple of years. The
biggest advantage of the growth of manufacturing
sector is that the effects are more prominently visible
in the rural areas than the urban areas.
BUDGET ANALYSIS : KYA ACHE
DIN AANE WALE HAI?
BY– SURYANARAYAN PANDA
-IIFT
InFINeeti | Annual Issue | August 2014
COVER STORY
So, manufacturing is the best tool to reduce the Urban
-rural income divide.
INFRASTRUCTURE PUSH
A greater thrust on the infrastructure was unmistake-
able in the Union budget. The overall spending for in-
frastructure is budgeted to increase by 24% to
₹210000 crores. The government has allocated ₹7060
crores to setup 100 smart cities. This will not only
boost the infrastructure sector but will also provide
low cost housing options to the millions of poor peo-
ple who cannot afford proper housing.
Source: Ministry of Finance
The Budget has also focussed on ways to fund the In-
frastructure push by setting up of 3P India entity and
Infrastructure bonds. This could create a massive push
for better infrastructure and the direct beneficiaries
would be the Engineering, Procurement and Construc-
tion (EPC) companies. The government has identified
that 40% of Indians do not have basic sanitation facili-
ties and the government has not provided its share of
facilities. The basic infrastructural issues like sewage
drain and access to roads could be addressed in the
Infrastructural push of the government thus improv-
ing the standard of life of average Indians.
INCREASE OF TAX EXEMPTION
The Finance Minister increased the basic tax exemp-
tion rate from the current ₹2 Lac to ₹2.5 Lac for all
individuals. For women and senior citizens between
the age group of 60 to 80 years the basic exemption
rate is increased from ₹2.5 Lac to ₹3.0 Lac. The invest-
ment related deduction under section 80C has also
been increased from ₹1.0 Lac to ₹1.5 Lac. These in-
creased tax exemption rates may cause a revenue loss
of ₹22000 crores to the government. However, the
increased tax exemptions will ensure greater money
with the consumers, thus increasing the disposal in-
come with the general public. This will increase con-
sumption and this will get reflected as higher econom-
ic activities. The indirect beneficiaries of the raising of
tax exemption could be FMCG, consumer durables,
two wheelers companies as well as the housing indus-
try in the form of increased consumption.
EASE OF DOING BUSINESS
Investor sentiment is very important for the accrual
of required investments to fund our economic growth.
Hence, the ease of doing business is a very important
factor that any country should keep in mind. Sadly,
India ranks at 134 out of 189 countries in the Interna-
tional Finance Corporation’s ‘Ease of Doing Business’
index. The Finance Minister has taken a few steps in
this regard to give a fillip to the overall operating envi-
ronment for an investor. These steps should incentiv--
20
InFINeeti | Annual Issue | August 2014
COVER STORY 21
-ise value addition, generate income and create more
jobs for an average Indian thus improving the overall
environment for doing business. Moreover it could
also make the Indian investment story attractive for
foreign companies and could attract highly needed
foreign funds.
Source: Ministry of Finance
INCREASE IN FDI IN DEFENCE
The Union budget presented a 12.43% hike in de-
fence budget to 229000 crores of rupees. The Finance
Minister, who also holds the portfolio of the Defence
ministry talked about the important task of indige-
nous production of defense equipments. To boost
home production, the Finance minister hiked the FDI
in the defence sector to 49% from the earlier 26%.
The government has taken a sound decision by de-
linking FDI up to 49% for transfer of state of the art
technology. The primary focus of the government is
to reduce the dependency of the security of the na-
tion on supplies by other countries. Given the large
domestic market and advantage of operating out of
India this new policy could give an impetus to domes-
tic manufacturing of defence equipments by domes-
tic companies. It could also attract those foreign com-
panies that were looking to invest in Indian defence
manufacturing as part of the earlier Defence Offset
Policy.
PUSH TO EMPLOYMENT CREATION
The budget has allocated ₹ 330 crores to set up 6
mega clusters around the country to boost the em-
ployment opportunities in the country. The budget
has also reduced the excise duty in labour intensive
sectors like footwear from 12% to 6% for footwear
priced between ₹500 to ₹1000 and few specific foods
packaging industries from 10% to 6%.
InFINeeti | Annual Issue | August 2014
COVER STORY
The small and medium enterprises (SME) sector em-
ploys 8% of all the employees in our country. Giving a
boost to the SMEs of our country, the finance minis-
ter announced a ₹10000 crores fund to back early
stage companies. This is a huge respite for start-ups
in need of money and this will boost their ability to
survive.
Another employee intensive industry that received
good government attention is Tourism. The budget
has proposed to create five tourist circuits at a cost of
₹500 crores and proposed to launch the E-Visa facili-
ty. Such small incremental steps like E-Visa facility for
foreign tourists can create a vast change in the num-
ber of foreign tourists’ arrivals especially when the
number of foreign tourists’ arrival proportionate to
population of our country is one of the lowest in the
world and there is a huge upside to achieve on this
front.
In our country where the working population consti-
tutes 64% of the entire population, tourism and man-
ufacturing are two spheres that could create enough
jobs. Moreover, due to requirement of less invest-
ment in tourism sector, our country can afford to in-
vest and develop this sector. The skill requirements
for an employee working in a manufacturing firm are
far less than the skill requirements of an employee
working in the service sector. Hence, boosting the
manufacturing industry could be a pragmatic way to
create low skilled or middle skilled jobs so that peo-
ple could move away from agriculture related low
paying jobs to better paying manufacturing jobs.
22
InFINeeti | Annual Issue | August 2014
TAME INFLATION
The government has encouraged states to allow
setting up of private agriculture market in order to
keep a check on the state sponsored APMCs. This will
increase efficiency in terms of timely delivery of pro-
duce as well as will reduce the food wastage. Key
measures like price stabilisation fund and higher
budgetary allocation for rural infrastructure and
warehousing were announced in the budget that will
improve the supply chain of agriculture products as
well as will ensure the timely arrival of essential sea-
sonal crops like onions etc.
ACHE DIN AANE WALE HAI
The measures undertaken by the government in the
Union budget shows the serious efforts put in by the
government. The measures may be small and incre-
mental but such small measures will go a long way in
transforming our economy locked in low growth and
high inflation. I believe that the government has put its
sincerest efforts in making the budget a pragmatic
budget that touches the life of every Indian in a posi-
tive way and hence I believe that the election promises
of ‘Ache Din Aane Wale Hai’ that was made by our poli-
ticians seem quite plausible.
COVER STORY 23
InFINeeti | Annual Issue | August 2014
MR. ARUN JAITLEY BECAME THE FINANCE MINISTER
Mr. Arun Jaitley took over the office of the Finance
minister under the cur-
rent NDA rule in the 16th
Lok Sabha. Mr Jaitley,
who holds a Law degree
from the University of
Delhi, got the plum post
along with the Defence portfolio.
AIRASIA ENTERS INDIA
Asia's biggest low-cost
carrier, the Kuala Lumpur-
based AirAsia, floated a
joint venture with Tata
Sons, the holding compa-
ny of India's largest con-
glomerate, and Telestra
Tradeplace, an investment vehicle of the Bhatia fami-
ly, to launch a new airline in India called as Air Asia
India. AirAsia will have 49% stake, Tatas 30% and
Bhatia will hold 21% in the company, which will be
headquartered in Chennai.
VISHAL SIKKA TO BE THE NEW CEO OF INFOSYS
Infosys appointed its first out-
sider to head the company, hop-
ing new blood will help in its
struggle to stay competitive, as
it tries to evolve from a low-cost
outsourcing company into a
global technology brand. India's second-largest soft-
ware exporter said Vishal Sikka, a veteran of Ger
man software company SAP, will take over as manag-
ing director and chief executive.
FLIPKART ACQUIRES
MYNTRA
Flipkart India Pvt Ltd, the
country’s largest e-
commerce firm, ac-
quired rival Myntra.com
in the largest-ever deal in the country’s e-commerce
market. Though the two Bangalore-based companies
did not disclose the merger amount, analysts’ esti-
mates suggest the cash-and-stock deal is likely to val-
ue online fashion retailer Myntra at more than $330
million.
$100B BRICS FUND TO
TURN CONCRETE IN RIO
The BRICS nations formally
announced the setting up
of a $100-billion fund,
which will help member
countries tide over a cur-
rent account deficit crisis, at their fifth summit in Bra-
zil. China will be the largest donor to this fund and is
expected to contribute around $41 billion. India, Rus-
sia and Brazil will contribute $18 billion each with
South Africa bringing in the remaining $5 billion.
SUBRATA ROY IN TIHAR JAIL
Subrata Roy, the flamboyant chairman of the finan-
cial services group Sahara India Pariwar and owner
TOP FINANCIAL EVENTS OF 2014
24
InFINeeti | Annual Issue | August 2014
of properties such as New
York’s Plaza Hotel and a
stake in India’s only For-
mula One racing team,
surrendered to police
after the nation’s top court issued a warrant in a
probe into whether he failed to refund US$3.9 billion
to his depositors.
FLIPKART VALUED AT $7 BILLION
India’s biggest online retailer has
received as much as $1 billion in
fresh capital from its existing inves-
tors including Tiger Global, Naspers and Singapore's
sovereign wealth fund GIC. Singapore's GIC became
the latest investor to put its faith in India's largest
online retailer. The fund raising, the largest-ever by
an Indian start-up and among the largest-ever by any
Internet start-up globally, values Flipkart at over $7
Billion.
TCS AT RS 5 TRILLION
TCS, India’s most valuable company based on market
cap, crossed Rs. 5 lakh crores in market value, a big
achievement considering the tough business environ-
ment it has been operating in. It has also found itself
a berth among the global top five business software
companies. The market value of TCS is more than
that of the next four Indian IT companies combined,
and exceeds that of the other
Tata Group firms put together as
well. Sustained growth momen-
tum over the past four years rel-
ative to peers is the key factor that has kept the
stock buzzing. In addition, a special dividend of ₹40
declared last week has attracted investors.
INDIA BLOCKS WTO DEAL ON TFA
India scuttled the Trade Facilitation Agreement (TFA)
which is part of the Bali
package at the WTO be-
cause it was not satisfied
with the progress on
finding a permanent solu-
tion to the issue of allow-
ing it higher public stockholding of food grains. Last
ditch attempts to meet the 31 July deadline to
make the TFA a WTO rule failed as India did not sup-
port the move. At the heart of the problem is a rule
that caps subsidies to farmers in developing countries
at 10% of the total value of agricultural production,
based on 1986-88 prices. Developing countries com-
plain that the base year is out-dated and that they
need to be provide food security
to the poor.
MICROMAX BEATS SAMSUNG
Home-grown domestic phone
vendor Micromax has unseated Samsung in India as
the top handset seller in the 2nd quarter of 2014. A
study conducted by technology market research firm
Counterpoint Research says that with a 16.6 percent
share of the mobile market, Micromax is followed by
Samsung with a 14.4 percent market share. However,
in the Smartphone segment, Micromax is still placed
second with Samsung holding nearly 25 % market.
25
InFINeeti | Annual Issue | August 2014
INTRODUCTION
Shabby interiors, grilled counters, disinterested offi-
cials, ceiling touching files, never ending queues to
spick-and-span offices, open counters and data hun-
gry computers, this has been challenging journey for
banking industry.
Ever since the inception of banking system in India
from the early establishment of Bank of Hindustan in
1770 to its current state; banking system has con-
stantly been evolving. Nationalization of major pri-
vate banks in 1969 was one of the leading milestones
in the history of banking in India that made bank ac-
cessible to unbanked population of India. But the
most significant change was the opening of Indian
economy towards the global economy that brought
the paradigm shift in the banking system in India. Lib-
eralization broke the shackles of the sector which till
then operated in restricted mode. With the arrival of
foreign tech savvy banks, the public sector banks
were forced to restructure the banking operations to
have a competitive edge.
ROLE OF TECHNOLOGY IN CHANGING
THE BANKING INDUSTRY
BY– AVIRAL VERMA &
SANJEEV RANJAN
-IIFT
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InFINeeti | Annual Issue | August 2014
EVOLUTION OF BANKING STRUCTURE
Technology has power to transform the fundamental
economics of any industry and banking is no different.
The banking industry has taken enormous strides with
the use of technology. Most of the banking transac-
tions can now be conducted over the internet. Along
with it, technology has reduced the barriers and
changed the economics of delivery.
KEY MILESTONES IN BANKING INDUSTRY
ATM: Addition of facilities such as fund transfer, bill
payment and account maintenance has reduced the
footfall at the bank branch which has brought down
the operational costs. Branches are now able to cater
more customer base from a single branch. As per
forecasts, ATMs per million populations will increase
from 85 to 170.
Plastic Money- Credit and Debit Cards: The biggest
game changer in the banking industry was the intro-
duction of plastic money. Debit and Credit card pay-
ments through payment gateway revolutionized the
banking sector and provided the individuals hassle
free transactions. Visa, which is a global payment
technology company, processes 47,000 transactions
per second reliably, conveniently and securely. Pres-
ence in 200 countries with $2.2 billion Visa cards and
2.1 million ATM (as of December 31, 2013) it accounts
for a total of 91.6 billion transactions worth $4.5 tril-
lion on 31 March 2014.
NEFT: National Electronic Funds Transfer facilitates
electronically transfer of funds from any branch to
any individual or firm. NEFT has an upper ceiling of
50,000 per transaction.
RTGS: Real time gross settlement system means con-
tinuous settlement of funds by an individual or by an
order within a span of 30 minutes. No upper ceiling in
transaction makes it the most favorable online trans-
fer mode of payment in case of larger transaction.
Mobile banking: Over the years it was felt to have a
technology which goes beyond ATM. In context of In-
dia which boast of a mammoth subscriber base of 900
million mobile users this was even more necessary.
27
InFINeeti | Annual Issue | August 2014
Mobile banking initially provided SMS alert facility but
later added services such as account enquiries, bill
payment, and fund transfer and loan requests. This
helped in enhancing customer experience and con-
venience.
CORE BANKING SOLUTIONS
With the arrival of computer and internet, manual
ways found their way out. IT revolution equipped the
banking sector with CORE (centralized online real-
time electronic) banking solutions. It helped in reduc-
tion of operational cost as printing and backup be-
came centralized. CORE banking reduced the man-
power requirement and increased efficiency by reduc-
ing the transaction cycle time. It provided to custom-
er the much required freedom to transact anywhere.
It facilitated accurate and quick implementation of
banking policies. All this helped in increasing business
opportunities which led to reduction in legal expense
and penalties.
Cheque Truncation System: CTS introduced cheque
clearance using MICR. It helped in reducing the turna-
round time in clearing of cheques and curbing cheque
frauds.
ECS Electronic Clearing Service enabled repetitive and
periodic transaction such as interest payment, salary
and pension payment towards electricity, phone and
water payments.
DATA ANALYTICS IN BANKING
Data analytics is the buzz word today. The highly com-
petitive market requires banks to convert vast
amount of data into meaningful information which
could help them in generating sales and differentiated
customer experiences. Banks utilize data analytics to
improve customer retention, cross selling, optimizing
price structure, gain customer insights and implement
real time event management.
Most private banks utilize their business analytics to
fine tune their campaign and marketing efforts. These
analytics provides insight and help to identify new
customers and reduces marketing spend per custom-
ers.
28
InFINeeti | Annual Issue | August 2014
Based out of a survey, the graph above shows the rea-
sons why banks implement business intelligence and
analytics.
IT SPENDING IN BANKING SECTOR
The upsurge in spending on IT products by banks is
encouraging and indicative of the emphasis being
placed on technology. Total IT spending in banking
sector across North America, Europe, and Asia-Pacific
will grow to US$188.0 billion in 2014, making an in-
crease of approximately 4.4% over 2013. Indian bank-
ing and securities companies have forecasted to spend
477 billion rupees on IT products and services in 2014,
which amounts to an increase of 12.7 percent over
2013 revenue of 423 billion rupees. Although Europe-
an banks are struggling when it comes to IT spending
as compared to others because of the little growth of
European economy. Still banking IT spending will rise
by .4% in 2013 to $59.5 billion, with spending ex-
pected to stay flat through 2015.
CHALLENGES
Two banks in the Persian Gulf lost $45 million in a few
hours. A British company reported that it lost $1.3 bil-
lion from a single attack. Brazilian banks say their cus-
tomers lose millions annually to cyber fraud.
While banks’ customers have turned tech-savvy and
have started using online banking services and prod-
ucts, evidence indicate that fraudsters are devising
new ways of frauds by exploiting the loopholes in sys-
tems and processes. Customers are being exposed to
Phishing, Watering hole, Pharming and Credit Card
Redirection and different malware based-attacks.
29
InFINeeti | Annual Issue | August 2014
FUTURE JOURNEY AHEAD
Bitcoin has emerged strongly as an alternative to con-
ventional internet banking. Marketed as an open
source and decentralized technology, it is finding its
user base at an exponential rate. The inclination to-
wards Bitcoin comes due to the fact that it poses no
restriction on the transaction amount and is free from
bank charges. This is why it has been witnessing in-
creasing acceptance around the globe. It is currently
values at 584 US Dollar/ per Bitcoin
The financial bodies have time and again raised con-
cerns over the use of Bitcoin as a full-fledged tool for
transactions. Currently the user base is quite small,
which limits its use as a normal currency. It is highly
volatile and as a result its value experience high oscil-
lations. Also, the software behind it is still under beta
phase and a major portion is under development.
Rupay: RBI launched India’s first ever domestic card
scheme RuPay on March 2012 with an entry level ac-
ceptance at ATM’s. Its long term aim is to evolve as
an alternative to MasterCard and Visa, but before
that it still has to cover a lot of ground.
CONCLUSION
The pre and post liberalization era has witnessed
huge changes in the banking sector and the advent of
technology in this sector has spread new colors. Now
technology has become the integral part of the bank-
ing sector right from driving the basic banking ser-
vices to the introduction of several new products and
services. It is quite evident that what we see today
won’t stay the same in coming years. Banking indus-
try will keep chasing the fast paced technology for its
betterment.
30
InFINeeti | Annual Issue | August 2014
NATIONAL IT CONCLAVE 2014
Theme: THE NEXT BIG THING IN INDIAN IT Date: 30th August, 2014
Venue: Swissotel, Kolkata FEW SPEAKERS AT THE CONCLAVE
SESSIONS
INAUGURAL SESSION - 09:30 to 11:00 am
SESSION 1 – 11:15 am to 12:45 pm
Recharging e-Governance
SESSION 2 – 02:00 to 03.30 pm
SMAC in the Indian context
SESSION 3 – 03:45 to 05:15 pm
Saturation vs Satisfaction
InFINeeti | Annual Issue | August 2014
INTRODUCTION
Decisions about the Dividend pay-out by far have
been a subject of great curiosity and interest for the
analysts, researchers and academicians for a long
time now. The objective of the Dividend Pay-out is to
determine the extent to which the company is distrib-
uting the ‘dividends’ to its shareholders out of the
earnings of the company.
Both the investors and the corporate houses were
expecting the abolition of the double taxation on divi-
dend income ever since the Government of India had
initiated financial reforms in 1991. In the budget of
1997, the Finance Minister announced the abolition
of tax on dividend income in the hands of the share-
holders. However, the budget also proposed a new
tax on the companies when they declared, distribut-
ed or paid dividend. This new corporate dividend tax
was also called as Dividend Distribution Tax (DDT).
The main objective of this was to discourage compa-
nies from increasing the dividend outflow significantly
leading to lower capital formation. Even though this
system exempted investors from paying any direct
tax, it required them to pay an indirect tax on the div-
idend at a prescribed rate.
This new system also ensured that the administration
of tax on dividend would be more efficient and effec-
tive. The DDT aimed to improve economic growth
and flexibility by eliminating the tax bias against equi-
ty-financed investments thereby promoting saving
and investment. It also aimed at reducing the tax bias
against capital gains in the earlier tax system encour-
aging investment and enhancing the long term
growth potential of the economy.
DIVIDEND DISTRIBUTION TAX (DDT) & DOUBLE
TAXATION:
There is a common notion that the dividends are
often taxed twice. There is a school of thought that
argues for tax exemption for dividend income. The
basis of their argument is that the taxation of divi-
dend income amounts to double taxation. The expla-
nation behind this concept is that the corporate
profits are subject to corporate tax. Since dividends
are paid out of the profit earned which is already
taxed, if the dividends are taxed again, it amounts to
double taxation.
REFORMS IN DIVIDEND DISTRIBUTION
TAX : IS THE STEP BY GOVERNMENT
TAKEN IN THE RIGHT DIRECTION?
BY– MOHNISH KHAINI
- IIM, SHILLONG
32
InFINeeti | Annual Issue | August 2014
This logic can be challenged on two grounds:
There is a legal distinction between the corporation
as an entity and the individual shareholders who own
the company.
Tax rates currently in place were set with the
knowledge that there was taxation at the corporate
and individual level. This means that if there is a mor-
al objection to ‘double taxation’, then, the remedial
action would also require an increase in the corporate
tax rate.
IS IT UNFAIR TO RETAIL INVESTORS?
It’s been over a decade that investors have been argu-
ing that taxing dividend is unfair and it leads to double
taxation. The argument is well grounded in a sense
that dividend is a source of income for the sharehold-
ers and it is distributed after the corporate tax is lev-
ied from the gross earning of the firm. Hence, imposi-
tion of tax on distribution is injustice to them. Howev-
er, is it really an injustice to shareholders?
In my opinion, it does not lead to double taxation.
Why? As per our legal system, a company and its own-
er both are separate entities. Various benefits are ac-
crued to the owners because of this. For example,
when a company faces in a crisis, its owners are not
liable to pay any debt from their pockets. Considering
that, when the gross earnings of a firm are taxed it is
deemed as an income tax paid by the firm and not by
its owners. Moreover, when dividends are taxed,
earnings of owners are taxed. Hence, the argument of
double taxation is definitely fallacious.
REFORMS IN DIVIDEND DISTRIBUTION TAX IN THE
UNION BUDGET 2014 – 15
The reforms brought in by the newly elected govern-
ment with respect to the direct tax will definitely be a
shot in the arm for corporate. However, the only
dampener would be the amendment made in the divi-
dend distribution tax. The amendment made was with
respect to section-115O of income tax.
This section was introduced in income tax act in 1997
which made corporates liable to pay DDT while distrib-
uting profit to the shareholders. The recent amend-
ment in the act will increase the effective dividend dis-
tribution tax as the basis for calculation of tax will be
gross distributable surplus rather than net distributa-
ble surplus.
The difference can be explained by the following ex-
ample:
Let’s assume, in 2013, Infosys made Rs.200 Crore profit
and it distributed the entire profit to its shareholders.
In this case, the DDT that Infosys is subjected to pay
would have been as follows:
Dividend distribution amount: Rs.200 Crore/1.16995 =
Rs.170.95 Crore
(The effective rate of 16.995% includes Education cess
and surcharge as well)
Tax Paid: Rs.170.95*16.995% = Rs.29.05 Crore
33
InFINeeti | Annual Issue | August 2014
In contrast, Post amendment, suppose the profit fig-
ures are considered to be same for Infosys as per the
example above, the tax that Infosys has to pay in 2014
would be,
Tax paid: Rs.200 Crore*16.995% = Rs.33.99 Crore
Dividend Distribution Amount: Rs.200 – Rs.33.99 = Rs.
166.01 Crore
Thus this example shows that a minor tweak in the cal-
culation of DDT can result in high income that the gov-
ernment is going to earn from it.
IMPLICATIONS OF CHANGES IN THE DIVIDEND DISTRI-
BUTION TAX
1 - Impact on corporates:
There is an inverse relation between dividend distribu-
tion tax and company’s dividend pay-out ratio. When
dividend distribution tax is higher, companies prefer to
retain most of their earnings for future spending. Re-
tained earnings can be used to invest in high growth
project which will help in following manner:
Need for external financing will be less which will
reduce the cost of capital for the firms.
High growth projects will give an opportunity to firms
to earn more profits which will be reflected in their
share price in the secondary markets.
2 - Impact on shareholders:
Plethora of research has been done on what do small
shareholders prefer: capital gain or cash dividends?
Majority of them claim that shareholders are more
satisfied with capital appreciation than cash dividends.
They do not raise any objection if company retains all
the earning and invest it in high NPV project as it ulti-
mately affects the share price of the company in sec-
ondary market.
Furthermore, if shareholders demand any dividends,
firms can distribute stock dividends in lieu of cash divi-
dends. Stock dividends provide many benefits to both
shareholder and a firm.
It doesn’t enforce tax liabilities on shareholders. Firms
don’t have to share its earnings and can invest in new
projects to expand quickly. Stock dividends provide
more liquidity to the stock in the secondary market.
Hence, this proposed change will hardly be a cause of
concern for the shareholders.
3 - Clientele effect:
Clientele hypothesis claims that certain type of inves-
tors prefer cash dividends since their marginal tax on
dividend is less than their income from other sources.
It is more prevalent in India as compared to the devel-
oped economies.
For example: In
2013, the maximum
salary that Reliance
can give to Mukesh
Ambani, as agreed
by shareholders, is
Rs. 38 crore. But
Mukesh Ambani
withdrew only 15 crore as a salary. However, the
amount he received from cash dividend is massive Rs.
1,240.7 crore. The rationale behind this is that his sala-
ry is taxed at 30% while the earnings through dividends
are taxed only at 15%.
34
InFINeeti | Annual Issue | August 2014
The above table shows the dividend earnings of busi-
ness persons in the financial year 2011.
This clearly shows the presence of clientele effect. Top
managers, who have a final say in dividend policy of
the company, have personal advantage in cash divi-
dends which might lead them to incline towards cash
dividends. The proposed change will not limit the gap
completely, but will surely reduce the gap.
CONCLUSION:
Tax is one of the main sources of revenues for the Gov-
ernment. Decisions regarding taxes are always given
paramount importance during the budget since these
decisions set the stage for the economy’s growth dur-
ing the course of the year. Well aware of these intrica-
cies of taxes, the new government, during its maiden
Union Budget has brought in small but effective chang-
es in key policies which would assist in streamlining the
cash flows of its treasury. small tweak in the calcula-
tion of the Dividend Distribution Tax can generate huge
revenues to the government. At the first instance, this
change gives an impression that it is going to play a
spoil sport for the corporates and investors but dwell-
ing deep into this matter, the changes also present an
opportunity for the corporates to look out for better
growth oriented projects and thereby providing share-
holders better returns on their investment by way of
capital appreciation. Hence it can be said that in spite
of having negative aspects, the positive aspects of the
proposed change outweighs the shortcomings of the
same.
Promoter Company FY11 (Rs. Cr)
Azim H Premji Wipro 1345.1
Mukesh Ambani RIL 1240.7
Rahul Bajaj Bajaj 917.4
Anil Agarwal Vedanta 790.2
Keshub Mahindra M&M 312.2
35
InFINeeti | Annual Issue | August 2014
WHAT IS EQUITY RESEARCH?
The purpose of investment research is to help inves-
tors decide which asset class – cash and cash equiva-
lents, fixed interest securities, real estate, commodi-
ties, currencies and derivatives amongst others-
would make a good investment. In Equity Research, a
sub-set of investment research, the universe of assets
is limited to stocks. There are two types of profes-
sionals in this field, namely- Sell-side analyst who
work at brokerages and independent equity research
firms, and Buy-side analyst who work for money man-
agement firms and present stock pitches to portfolio
managers.
Source: Moneycontrol
WHAT’S N IT FOR YOU?
InFINeeti from now on launches a new section, called
EQUITY RESEARCH, to this magazine which will solely
be dedicated to publishing an equity research report
on one of the happening stocks of the quarter every
edition. We, acting as a sell-side analyst, through our
reports will give you our recommendations on wheth-
er to BUY, HOLD or SELL the stock.
BUT HOW IS EQUITY RESEARCH DONE?
Before you start investing, it is best that you know
how Equity Research reports are made. Hence, in this
edition, we put forward “A Prelude to EQUITY RE-
SEARCH” so as to get you an understanding of it be-
fore you actually dive into investing.
HOW TO MAKE EQUITY RESEARCH REPORTS?
While doing an Equity Research for a particular share
or stock, the work in itself requires one to split it into
research and then future projections or estimations.
For doing so, the basic framework involves one to un-
derstand the business model of the company, read its
financial statements, use ratio analysis techniques to
compare its financial performance with those of its
closest comparable peers, value it using both intrinsic
(absolute) and relative valuation approaches, and
EQUITY RESEARCH :
A PRECURSOR
36
InFINeeti | Annual Issue | August 2014
finally, prepare a complete equity research report
with a recommendation to BUY, SELL or HOLD the
stock at its current price.
Equity Research starts with carrying out the Funda-
mental analysis of the company followed by the ratio
analysis and then finally valuation is done.
FUNDAMENTAL ANALYSIS:
Equity Research and analysis begins with an attempt
to understand the business and financial characteris-
tics of the given company. This implies the analysis of
the industry and the company. To start with, doing
the Fundamental analysis of the company becomes
extremely crucial. When analysing an investment,
Fundamentals of a company are the actual numbers
that cause movements in its stock price. In this case,
the analyst is interested in analysing firm specific data
to have an understanding of the big picture, rather
than looking at the technical aspects of an invest-
ment’s market chart.
One of the two approaches goes into the doing of
Fundamental analysis namely Bottom-Up approach or
Top-Down approach. Bottom-Up approach focuses
primarily on the individual stocks rather than on the
external factors impacting the economy. The Top-
Down approach, on the other hand, is a step wise pro-
cess starting with the analysis of the external environ-
ment using PEST analysis, then examining the industry
of the company using models like Porter’s 5 forces or
Porter’s Diamond depending upon the underlying fac-
tors involved and eventually analysing the company
using the popular SWOT analysis. After doing the
above analysis, the analyst or the investor gets an un-
derstanding on the fundamentals of the company and
can qualitatively give a rating to the company. If fun-
damentals of the company are strong, even if the
market goes wrong, the company will come back to its
position.
A simple framework for understanding the Business
Profile of the company:
FINANCIAL/RATIO ANALYSIS:
Once an overview of the business profile is done, the
financial health of the company is to be looked into.
While analysing the financial profile, one has to critical-
ly look into the aspects of Size, Profitability, Growth
profile, Return on Investment and the Credit profile of
the company. Ratio analysis helps in evaluating various
aspects of a company’s financial performance such as
its efficiency, liquidity, profitability and solvency. This
requires the analysis of the financial statements,
namely the Balance Sheet, Profit & Loss Statement,
and Cash Flows Statement of the company. But the
numbers in the company’s financial statements carry
little meaning in themselves as it doesn’t tell us how
good the business is at converting resources to earn-
ings and this is where the ratios come into help as they
provide meaningful relationships between individual
line items in the financial statements. Another im-
portant aspect of ratio analysis is that the ratios can be
37
InFINeeti | Annual Issue | August 2014
compared across different companies within the same
sector or sub-sector to get an overview of the perfor-
mance of the company against its competitors or the
industry as a whole. In the coming editions of our
magazine, we intend to restrict our use of ratio analy-
sis to the finding of ratios that will help us evaluate
five aspects of the company namely its operating per-
formance, activity levels, liquidity position, leverage
and valuation multiples.
Example of important ratios used for Power Industry:
From the above table one can easily do a comparative
analysis of the companies against the important ratios
and approximate an average ratio for the industry.
From this, one can find out how the company is per-
forming in tandem to the industry in general.
The list of important ratios used:
Source: - www.moneycontrol.com (for the year 2011)
VALUATION:
Having done the two analyses, one moves to the last
and the most important aspect of Equity Research
which is Valuation. The final stage in the research of
the target company is finding out what is the compa-
ny’s total worth. As the name goes, valuation is the
process of determining the current worth of the equi-
ty, asset or company. Valuation is the estimation of
an asset’s value based either on variables perceived to
be related to future investment returns (usually cash
flows) or on comparisons with similar assets. It is
needed in not just doing Equity Research but also in a
number of other things like Mergers and Acquisitions,
investment analysis, capital budgeting and many
more. The valuation models are used in making invest-
ment decisions as to which assets are undervalued
Operating
Perfor-
mance
EBITDA
Margin
Return on
Assets
Return on
Equity
Activity
Levels
Asset
Turnover
Inventory
Turnover
Operating
working capi-
tal Turnover
Liquidity
Position
Current
Ratio
Quick Ratio Cash Ratio
Leverage Debt/
Equity
Net Debt/
Equity
Net Debt/
Capital
Stock Val-
uation
Multiples
P/E P/S EV/EBITDA
38
Year 2011 NTPC Power
Grid
Reliance
Power
Face Value 10 10 10
Profitability Ratios
Operating Profit
Margin (%)
27.09 83.85 24.66
Net Profit
Margin (%)
15.57 28.81 55.59
Liquidity And Solvency Ratios
Current Ratio 2.48 1.05 1.94
Quick Ratio 2.23 1.02 2.26
Debt Equity
Ratio
0.76 2.05 0.44
InFINeeti | Annual Issue | August 2014
or overvalued. It is through Valuation one can quanti-
tatively rate the company.
Approaches to Valuation as put forth by Aswath Dam-
odaran, professor at NYU Stern:
Intrinsic Valuation: The value of an asset is estimated
based upon its cash flows, growth potential and risk.
The most widely used valuation model here are:
Discounted Cash Flow (DCF)
Dividend Discount Model (DDM)
In a DCF model, the forecasted future cash flows are
discounted to get to the present value. The other valu-
ation method in usage is Dividend Discount Model
(DDM). But this can be used only when the company
pays out dividends. Once the intrinsic value or the fair
value of equity is obtained, it is compared with the
Current Market Price of the share and based on this
the analyst comes to a conclusion whether the stock is
overvalued or undervalued.
Relative Valuation: Estimates the value of an asset by
looking at the pricing of ‘comparable’ assets relative
to a common variable like The above picture indicates
that the Intrinsic price of the equity is more than that
of the Current Market Price which tells us that the
stock is currently undervalued and has potential,
hence should be a BUY.
The tools of equity valuation is used to address a
range of practical problems like judging whether the
securities are fairly valued or under/overvalued, infer-
ring market expectations, evaluating corporate like
events mergers and acquisitions, divestitures, spin-
offs, management buy-outs (MBOs), leveraged recapi-
talizations etc.
Summary of the steps of Equity Research:
Understand the company’s business profile and
do the company and industry analysis
Forecast company’s performance
Select the appropriate Valuation model
Make investment decision based on the funda-
mentals and valuation.
While making an investment decision, both the Funda-
mentals and Valuation of the company matters. Finally
on the basis of the ratings of these two parameters,
investment is made. This above mentioned framework
for doing Fundamental analysis, Ratio Analysis and
finally Valuation is an essential starting point but is by
no means exhaustive. There are many other factors
like the price movements (Technical Analysis) which
are taken into account before making an investment
in the equity.
Now that an overview is given, InFINeeti Team inaugu-
rates the section on EQUITY RESEARCH. Please do look
forward to the next edition so as to start investing…
-BY GAYATHRI BHUVANGIRI, IIFT
39
Current Market Price: Rs. 250
Intrinsic Price: Rs. 262
InFINeeti | Annual Issue | August 2014
INTRODUCTION
The total number of acts and regulations governing
the financial sector in India today stands at more
than 60. Most of them are archaic and date back all
the way to the Stone Age. For example- Indian mone-
tary policy’s pillars rest on the Reserve bank of India
Act, 1934. Similarly, the Insurance Act of 1938 gov-
erns the Insurance sector in India .
Table 1: Showing India’s vintage financial laws
Yes, there have been amendments over the years but
those changes have been piecemeal and more stop-
gap than not. The results include regulatory overlaps,
regulatory arbitrage and inconsistencies. It was in this
backdrop that the Government of India constituted
the Financial Sector Legislative Reforms Commission
(FSLRC) in March 2011 to comprehensively review
and recast the legal and institutional structure of the
financial sector in India.
FSLRC committee chairman: - B.N. Krishna
The FSLRC submitted its report in October 2012 and
recommended a complete overhaul of the regula-
tions governing the Indian Financial sector. The Com-
mission recommends a draft “Indian Financial Code”
which eliminates more than 20 of the current 60+
laws governing financial markets in India and merges
some of the most powerful Indian Financial Regulato-
ry bodies into one “Unified Financial Authority” (See
table 2 in the next page).
The powers of the RBI have been curtailed compre-
hensively in the report while most other regulators
have been replaced by a single “super regulator” and
the onus of consumer-protection has been changed
from “caveat emptor” to “caveat vendor”. The report
raises the bar for consumer protection and places the
responsibility of avoiding frauds, or the sale of inap-
propriate products to the consumers, with the ser-
vice provider.
FSLRC: A GAME-CHANGER FOR THE
INDIAN FINANCIAL SECTOR & ITS
STAKEHOLDERS
BY– AMARDEEP KUMAR, IIFT
40
Act/Law Year 1st
incorporated
Public Debt Act 1944
Securities Contract
(Regulation) Act
1956
Indian Coinage Act 1906
FERA/FEMA 1973/1999
Banking Regulation Act 1949
InFINeeti | Annual Issue | August 2014
KEY RECOMMENDATIONS & THEIR IMPACTS
Let us discuss the key recommendations of the Com-
mission and their impact on the Indian Financial fir-
mament.
UNIFIED FINANCIAL AUTHORITY (UFA): - One of the
loudest amendments proposed by the Commission is
the formation of a “Unified Financial Authority” re-
placing SEBI, IRDA, PFRDA and FMC (the Forward
Markets Commission). According to the FSLRC, the
incumbent financial regime with multiple sectorial
regulators creates conflicts of interest and leads to
overlaps and gaps in regulation at the same time. For
example- while Ponzi schemes are not regulated by
any agency as of now, Securities market is regulated
by SEBI and RBI both. It makes economic sense and
creates synergy to merge regulatory bodies into one
and remove the problems of inter-regulatory turf-
wars. The FSLRC establishes a new seven agency
model to regulate and control the financial sector in
India.
It will regulate and control all activities of the finan-
cial market other than what is to be regulated by the
RBI. The proposed agency will be carrying out all the
responsibilities of all the existing regulators (other
than the RBI) like SEBI, FMC, IRDA, PFRDA etc. The
UFA will also be the first consumer interest protec-
tion regulator in the financial sector with the excep-
tion of banking and payment systems which will be
under the ambit of the RBI.
ROLE OF RBI: - The RBI gets to keep most of its pow-
ers and continues to guide the nation’s monetary pol-
icy and regulation of its banking industry. It also per-
forms the function of regulation and enforcement of
the payment systems and enforcement of the pro-
posed consumer protection law. However, it loses its
power of managing public debt. Also, its monopoly
over monetary policy formulation is in danger as the
commission proposes that the central government, in
42
Present Regulator To be replaced by ( as per the recommendations of the FSLRC)
RBI RBI ( though with reduced powers)
SEBI
FMC
IRDA
United Financial Agency (UFA)
Securities Appellate Tribunal Financial Sector Appellate Tribunal (FSAT)
Deposit Insurance and Credit
Guarantee Corporation (DICGC)
Resolution Corporation (RC)
Financial Stability Development
Council (FSDC)
It remains as it is.
New entity Debt Management Agency (DMA)
New entity Financial Redressal Agency (FRA)
Table 2: Present and proposed Indian Financial Regulatory Structure
InFINeeti | Annual Issue | August 2014
consultation with the RBI Governor, set a monetary
policy target and hold the Central Bank accountable
in case of its failure to achieve these objectives. The
icing on the cake, at least for the Government, is the
fact that the Commission wants the Central bank to
deliver on the monetary policy front by adopting a
Monetary Policy Committee having the Governor as
its Chairman and six other members.
Only one of these members will come from RBI. Of
course the Central Bank can advise the Government
on the appointment of two other members while the
remaining three members will be appointed by the
Government. Thus, the Committee effectively dilutes
the Central Bank’s autonomy on monetary policy
matters of the country. It rather places its faith in a
government which is prone to reducing rates in an
election year and is, otherwise too, gullible to being
populist at the expense of the economy.
Additionally, it places the RBI, and all regulators for
that matter, under judicial review, a step unprece-
dented in the history of India. Dr. Raghuram Rajan
has correctly warned that this provision will result
into constant questioning of regulatory decisions thus
creating paralysis of analysis as regulators will go slow
on decision making. There is also the danger of
shrewd participants in the financial system exploiting
the loop-holes to their own advantage by going for
excessive litigation.
FINANCIAL REDRESSAL AGENCY: - Consumer interest
protection is one of the key concerns of the Com-
mittee. To this effect, the FSLRC recommends the cre
ation of the Financial Redressal Agency (FRA) to
attend to consumer complaints in the financial sector
(except the banking sector) across the nation. The
FRA will replace all sector-specific Ombudsmen pre-
sent now. All financial service providers are required
to set up internal mechanisms for consumer griev-
ance-redressal and to educate the consumer of their
right to seek redressal. If the consumer is unsatisfied
with the appropriate handling of their issues by the
firm, they can approach the FRA.
FINANCIAL SECTOR APPELLATE TRIBUNAL (FSAT): -
Financial Sector Appellate Tribunal (FSAT) is the all-
important pillar proposed by the Committee, for ap-
peals against the actions of the RBI, the FRA and the
UFA. The existing Securities Appellate Tribunal will be
merged into FSAT, to which the consumer can appeal
against all financial sector regulators. FSAT will have
powers of jurisdictional oversight on the actions of
the regulators. This places regulators in a tight spot,
for their decisions are not always based on the surety
of events but more on their likeliness to happen since
they cannot wait for a tragedy to strike before acting
on it and defanging it.
28
InFINeeti | Annual Issue | August 2014
Source: - Livemint
FINANCIAL STABILITY AND DEVELOPMENT COUNCIL
(FSDC): - The Financial Stability and Development
Council (FSDC) is the only existing regulator, apart
from the RBI of course, that stays on. It will oversee
the various systemic risks and will suggest ways to
bring them down. The Committee wants to establish
a financial data cell whose primary job will be to look
for the systemic risk in the financial sector and report
the same to its parent body, the FSDC. The FSDC, be-
ing a statutory body, will then measure and manage
the risks in the system. The FSDC will be empowered
to undertake all required interventions for reducing
the systemic risks.
PUBLIC DEBT MANAGEMENT AUTHORITY: - The Pub-
lic Debt Management Authority to manage public
debt is an altogether new institution to manage gov-
ernment’s debt in the proposed regime. A Resolution
Corporation has also been proposed to handle the
resolution of financial firms.
ANALYSIS & CONCLUSION
FSLRC has produced one the most far-reaching re-
ports based on its recommendations and possible
outcomes. Its stress on having a clear framework for
monetary policy-making was what prompted the GoI
to form the “Urijit Patel Committee”. The Commis-
sion’s rap to the service-providers and the regulators
for unfair and not-so-consumer friendly practices may
begin a new era of consumer protectionism in the In-
dian financial sector and may force the authorities to
revisit their approach to the consumer and consider
mending their ways. In proposing to create a Draft
Financial Code for India, the committee has tried to
bring in some fresh air to the laws governing the fi-
nancial sector of this country.
43
InFINeeti | Annual Issue | August 2014
In trying to amalgamate various regulators into one
body, it has tried creating the much-needed synergy in
regulation. By proposing to make RBI and other regu-
lators responsible to the parliament, it has tried to
make them answerable to the people of this country.
In increasing the weight of the government in formu-
lating India’s monetary policy, it has tried to bridge
the gap between the country’s
monetary and fiscal policies and has made the govern-
ment further answerable to the people of India. In the
words of Dr. Raghuram Rajan, though he himself is
one of the biggest critic of the committee’s recom-
mendations, “FSLRC report is one of the most im-
portant, well researched as well as well-publicized re-
ports in Indian Financial History. The report’s influ-
ence will be felt for many years to come”. Enough
said.
44
InFINeeti | Annual Issue | August 2014
INTRODUCTION
International Financial Reporting Standards (IFRS),
previously known as International Accounting Stand-
ards (IAS), is a set of standards, framework and expla-
nations adopted for preparation and presentation of
financial statements.
In present scenario of globalization and liberalization,
the world has become a small place. Many corporates
in emerging economies are looking to enhance their
access to the global markets to fulfil their need of cap-
ital funding. Thus, it is of paramount importance that
there exists a system or a set of guidelines which is
consistent all across the globe, and here in lies the
importance of IFRS. Many countries have already
moved towards convergence of their respective ac-
counting principles with IFRS, while others are still
passive with their approach.
IFRS IN INDIA
In India, Accounting standards are formulated by Insti-
tute of Chartered Accountants of India (ICAI), through
its Accounting Boards Standard. Thereafter these ac-
counting standards are considered by National Advi-
sory Committee on Accounting Standards (NACAS)
which then recommends it to the Central govern-
ment. At present, 28 Accounting Standards, with cer-
tain differences, have been notified under the Compa-
INTERNATIONAL FINANCIAL
REPORTING STANDARDS (IFRS)
BY- DHAWAL LACHHWANI
- IIFT
45
InFINeeti | Annual Issue | August 2014
the Companies Act, 1956.
ICAI, in 2007, commenced the process of develop-
ment of accounting principles which converged with
IFRS. They were to be known as Indian Accounting
Standards (Ind-AS). The move to converge its ac-
counting standards with IFRS, rather than adopting it
outright, is because there exists a wide fundamental
gap between the Indian GAAP and the IFRS.
NEED FOR IFRS IN INDIA
Globalization of Economies - Globalization of Econo-
mies has created the need for a standardized practice
for reporting of important financial documents to
bring more uniformity across the globe.
For Raising Capital from Overseas - Indian Companies
raising capital overseas is a common practice nowa-
days. This requires the financial documents to be
transparent and in a format which is recognized all
over the world
To help MNCs prepare consolidated financial state-
ments- The MNCs, which are operating across various
countries, will find it easier to prepare consolidated
balance sheet once IFRS has been implemented glob-
ally
Better Quality of Information- IFRS mandates exten-
sive disclosures and hence is considered a better tool
for accounting. It is a pro impact accounting system,
which requires all outcomes that have an impact on
company’s finances to be recorded accordingly. It al-
so has very stringent Income recognition rules.
TIMELINE FOR IMPLEMENTING IFRS
India joined the IFRS bandwagon a little late, with
close to 130 countries already aligned to IFRS and
many more in the process. IFRS will be implemented
in India in three phases
Phase One- Phase One involves companies having
revenue of more than Rs.1,000 crores. A deadline of
April 1, 2015 has been set for them.
Phase Two- Phase two will begin from April 1, 2016
and will consist of companies with a turnover of more
than Rs.500cr and less than Rs.1000 crores.
Phase Three- Phase three will be applicable for the
remaining companies (companies having revenue of
less than Rs.500cr). No deadline has been set for it as
of now.
ISSUES AND CHALLENGES
In spite of its visible benefits, implementation of IFRS
in India remains a challenging prospect and is bound
to face certain issues such as:
46
InFINeeti | Annual Issue | August 2014
47
AWARENESS ABOUT INTERNATIONAL PRACTICES
IFRS adoption implies that the entire reporting of fi-
nancial statements needs to undergo numerous
changes as mentioned above. A lot of work needs to
be done to bring about an awareness regarding the
impact of IFRS among the users and the various stake-
holders.
NEED FOR TRAINING
Professional accountants’ proficiency with IFRS is
absolutely essential for its implementation. The big-
gest hurdle would be the lack of courses and profes-
sional institutions that impart knowledge about IFRS.
As its full time implementation draws near (2015),
acute shortage of trained IFRS staff is being ob-
served.
BASIS IFRS AS
Principle v/s Rule based
standards
Principle based. The underly-
ing economic substance is the
prime evaluation factor
Generally rule based. Compa-
nies act determine and guide as
to how a transaction is record-
ed
Standards v/s Local Laws International Accounting
Standards take precedence
Local regulations take prece-
dence while preparing financial
statements
Presentation of financial
statements
No prescribed format. Assets
and Liabilities need to be clas-
sified as current and Non-
current
Companies Act and other In-
dustry regulations have defined
prescribed formats
Depreciation of fixed assets Depreciation is an annual
change. Based on the estimat-
ed life of the assets
Useful lives already prescribed
in Schedule II of the Company’s
Act
Cash flow statement Mandatory Mandatory for some. Direct
method for insurance compa-
nies and indirect for other
listed companies
Valuations Provides guidance on how to
measure value of mergers,
acquisitions, take overs and
amalgamations etc.
The guidelines under IAS are
debatable as of now
DIFFERENCES BETWEEN IFRS AND INDIAN ACCOUNTING STANDARDS
InFINeeti | Annual Issue | August 2014
48
AMENDMENTS TO THE EXISTING LAWS
There is a huge gap between IFRS and existing laws
such as SEBI regulations, banking laws and regula-
tions and even the New Companies Act (2013).
TAXATION
IFRS convergence would result in a change in most of
the elements present in financial statements, conse-
quently ushering a change in tax liability. The taxation
laws should address the treatment of tax liabilities
that arise on convergence of Indian GAAP and IFRS.
FAIR VALUE
IFRS is a principle based accounting system, which
uses fair value as a parameter for recording most of
the items in financial statements. The use of fair val-
ue will bring a lot of volatility and subjectivity into the
picture. Additionally, a lot of groundwork has to be
done to arrive at a fair value that is agreeable to all.
Furthermore, whether fair value gains and losses
should be computed in calculation of distributable
profits is another debate altogether.
TRAINING & SKILL DEVELOPMENT CHALLENGES
Training and skill development are the critical issues
the government will have to address for successful
IFRS integration. All the stakeholders including inves-
tors, accountants, rating agencies, actuaries and valu-
ation experts would need to develop an understand-
ing of IFRS and its provisions. Educational institutions
will have a big role to play, and academic institutions
must include IFRS in their curriculum and students
must focus on acquiring a strong & deeper under-
standing. The proposed move to Ind-AS is definitely a
step in the right direction and it will positively result
in significant improvements to financial reporting and
corporate governance practices.
CONCLUSION
Ind-AS (converged with IFRS), despite the issues and
challenges, is clearly a must for India, if it is to move
forward and open the economy in true sense to inter-
national investors. The Government of India needs to
become proactive in taking steps to smoothen out
the phasing from Indian GAAP to IFRS.
InFINeeti | Annual Issue | August 2014
49
TEAM INFINEETI: What percentage of people, of
those targeted, has actually benefited by schemes for
microfinance designed by NABARD? Are the benefits
sustainable even after the scheme is over?
MR. SATISH: NABARD is an apex organization which
does actual field level financing. In 1990 what NAB-
ARD had realised that existing banking structure was
not sufficient to meet a large number of people who
are outside the existing banking structure and existing
financial products. Hence NABARD formulated a pilot
project called Self Help Group Bank Linkage Program,
where NGOs and other organization formed a group
of 4 people especially women, after which they start-
ed savings till they reach a level of maturity and then
linked to bank branch to give some finance- which
was in small amount and a period which was suitable
to the Self Help Group. So that basically is micro-
finance that was started in India in 91’-92’ in the form
of NABARD project. We just aimed at 500 groups but
it progressed well and it caught imagination of bank-
ers and the government. In ‘ 96 govt. made it a regu-
lar financial activity for all banks, after that time there
was no looking back and the govt supported it. The
RBI also supported unregistered group who can open
their own bank account.
By ’98-‘99 we aimed that at least 1 million groups be
formed and linked to the bank, but the achievement
was that we exceeded in formation of more than 2
million groups, especially with the support of various
state governments. Today, if we take the data of
March 2014 nearly 8 million groups, of which 80-90%
are women, are linked with outstanding credit to all
these groups must be 50k crores. But there are issues
about the benefits that are sustained at the end of
the period, and we have mixed reports from the field.
Nurturing and hand holding support is not continued
after the groups get the first dose of credit and then
sometimes the groups defunct or the group disinte-
grates, but what we get from the report on field is
that sustenance of 45-55% of the group after the
credit is over and problem is in the rest of the groups.
This is what we are concerned and currently dealing
with.
TEAM INFINEETI: How has been the recovery/
repayment and collection of the debtors who have
been provided by microcredit schemes?
EXPERT SPEAKS
MR. P. SATISH
CHIEF GENERAL MANAGER,
NABARD
InFINeeti | Annual Issue | August 2014
50
MR. SATISH: I was mentioning about the SHG con-
cept where for recovery and repayment there is no
collateral, but there is a lot of influence of peer
group. However our philosophy & practice has been
that wherever there have been group forming and
nurturing, there has to be a necessarily 100% recov-
ery which have been our experience in 97-98% of
the cases, remaining 2-3% where there has been un-
foreseen circumstances and recovery cannot be
done fully.
But what happened in ‘98-’99, government had
come up with the scheme of SGSY (Swarnajayanti
Gram Swarozgar Yojana) in order to help the SHGs.
This scheme saw a lot of bank support but it saw a
lot of deviation from the original principle of forming
and nurturing of the groups and recovery percentage
was very poor- in the range of 30-40%.Whereas the
groups covered under non-government program
supported good recovery. This happened due to the
dilution of the principles that were previously men-
tioned. You must have heard the crisis in Andhra Pra-
desh in ‘09-’10 in the microfinance movement, that
have also added to the problems of recovery. So the
segments in which you normally expect to have
100% recovery, is now facing problems with regards
to recovery percentage. The only silver lining is that
the SGSY is being replaced by National Rural Liveli-
hood Mission, negativity associated with the govern-
ment will go away and we will be able to bring the
movement back into track.
TEAM INFINEETI: What is the government policy for
the disbursement of funds for NABARD to carry out
activities such as micro financing/microcredit? Does
govt. give a lump sum or does NABARD ask for spe-
cific funds?
MR. SATISH: Most of the work which NABARD does in
this microfinance is of refinancing, which primarily
comes from our own funds. Earlier we had Micro Fi-
nance Development and Equity Fund (MFDEF), for
which the government, RBI and other banks had con-
tributed some nominal value. A lot of amount we
were ploughing back into the MFDEF. The fund does
not exist now, instead a financial inclusion fund exists-
which is also created within NABARD with initial nomi-
nal contribution from government, but more from in-
terest differential we had from other schemes. So
technically speaking neither government provides any
huge funds nor do we ask for specific funds, which we
are generating from our internal activities.
TEAM INFINEETI: How does NABARD interact or col-
laborate with NGO’s? How do you select the NGOs to
work with, and how do you blacklist them?
MR. SATISH: Basically, we look at any organization at
a grass root level and we go through its previous work
at the district level- for which we have our district de-
velopment managers. They know the NGOs in the dis-
trict and their track record very well. After which we
invite the NGOs to participate in our programs. But
whenever there is a case of financial sanction, grant or
a support, we normally look at the financial reports
and statements for the past 3 years, its working, its
governance, structure, and housekeeping along with
its track record in carrying out developmental activi-
ties.
InFINeeti | Annual Issue | August 2014
51
What we can say is that we are quite liberal and open
to NGOs who are ready to work in the field in an hon-
est and dedicated manner. For the smaller NGOs who
have smaller track record of say less than 5 years, we
give them smaller programs.
As far as the blacklisting is considered especially when
it comes to serious financial irregularities in sanc-
tioned grants or loans which they have not used up
properly, and not returned money or even in some
cases, absconding NGO office bearers such NGOs, we
discuss with the local administration and other agen-
cies and then only initiate the process of blacklisting
them and inform the government about the same.
TEAM INFINEETI: For a perspective into foreign trade-
what incentives does NABARD have for increasing the
export/foreign trade? Does it have special trade relat-
ed schemes?
MR. SATISH: One aspect is about Agri Export Zones
and for banks which are financing in Agri Export Zones
in short term or long term finance. There is a special
refinance scheme which refinances their credits to the
banks in the Agri Export Zone. NABARD also support
banks for refinance, and support export promotion for
agriculture, in terms of grading and processing of
fruits and vegetables & packaging, and credits for ex-
port related documentation. One big area where NAB-
ARD supports is cold storage and other facilities re-
quired for export, including providing freezer vans,
freezing facility etc. All of the schemes are partly sub-
sidised from Ministry of Agriculture and Food Pro-
cessing and partially through loan routed through
NABARD. In other ways we have a lot of promotional
schemes, wherein we transfer technology to farmer to
produce export quality fruits, vegetables and crops.
These include training the farmers, supplying them
with new variety of seed and planting material, plus
enabling them in usage of practices that are accepta-
ble in international standards and certifications re-
quired to fulfil the phyto-sanitary needs. We believe
that only when markets are open for agriculture and
there is free trade then only farmer is benefitted.
TEAM INFINEETI: With a new government having a lot
of expectations from a development standpoint, what
do you thing the new government must do to bring
back India’s growth story back on track and how can
NABARD contribute towards the same
MR. SATISH: We have to realise it that no government
can neglect agriculture as a sector. Though the contri-
bution to the GDP of the nation is only 14% still, 60%
employment is engaged in Agri-related activities. But
as far as present govt. is concerned, what we expect is
to have a lot of market related reforms in prices and
movements. The movement between states should be
enabled to move products in and out quickly. Now
you see the price rise in some commodities- a large
part of this is because of restriction of free movement.
Even basic cereal prices are regulated. If the markets
are freed and there is free entry and exit for suppliers
and buyers in the agricultural markets, and we have
acts such as Agriculture Produce Market
InFINeeti | Annual Issue | August 2014
52
Committee Act etc., for which for the last 10 years
there has been no discussion on reforms on the field
level, things can improve quite a lot. To add on we
have the system of fixing the minimum support price
on certain crops and restriction of export on various
goods. So, unless there is a free market as far as agri-
culture produce is concerned- sector will not grow in
this way. The government must bring in reforms so
that everyone benefits- the farmers and the consum-
ers are not taxed with too much price at its doorstep.
TEAM INFINEETI: What, according to you, is the high-
light of the budget and what are the budget’s implica-
tions in the long run?
MR. SATISH: Let me restrict to agriculture related is-
sues of the budget. One thing is that there has been a
creation of 5000cr fund for NABARD; in the last 10-15
years there is a decrease in agriculture capital for-
mation which is necessary for farm mechanization,
irrigation, horticulture etc.
Second thing is the policy on the Joint Liability Group
of landless farmers, of which Rs.5 Lacs will be spon-
sored by the government. Third is the Rs.2000cr fund
(within NABARD) for Agro Processing Unit which has
an important relation with Agro Export that we previ-
ously discussed. This is import from an export point
of view as a lot of it goes to Middle East, Europe etc.
Fourthly, climate change adaptation fund has been
created, which NABARD had initially proposed. NAB-
ARD had implemented a climate change project in
Ahmednagar, Maharashtra to help farmers adapt and
mitigate the impact of climate change. Such initia-
tives have to be taken by the government so that for
the next 5-10 years, climatic changes-be it rise in
temperature or rainfall, it is taken care of.
InFINeeti | Annual Issue | August 2014
53
INTRODUCTION
Decision to increase FDI limit in the Insurance Sector
from 26% to 49% by the Government of India is being
hotly debated. The private companies have naturally
welcomed the move seen as giving them a level-
playing field in a sector heavily dominated by state-
invested entities.
Fact is, only 3% of GDP is accounted for by this sector
out of which general insurance accounts for less than
one percent of GDP. This implies huge potential for
future growth in this sector. It has also been pointed
out that this move would bring the much needed long
-term capital in this sector. Benefits to existing com-
panies which are constrained by lack of funds and re-
duced profitability are thus understood. Implications
for the other important stakeholders like the
‘consumers’ are not that obvious. It is being stated by
optimists that new products, more coverage, higher
penetration especially in rural areas are the likely
benefits of this policy change. Question which comes
to one’s mind is whether lack of capital was the only
problem which was plaguing this sector? Is it the pan-
acea of all evils?
In this article we are going to concentrate on health
insurance to understand the present scenario and the
implications of the new policy for this particular sec-
tor. Compared to Life Insurance which has been tradi-
tionally positioned as a tax planning tool, health insur-
ance took a long time to emerge in our country. Espe-
cially, after 1990s when the economy was liberalized
and new ideas came from across the border the sec-
tor took off. And once the sector was opened up for
private participation and the per capita income of the
people increased simultaneously it experienced con-
siderable growth. Between the years 2007 and 2011
the health insurance membership increased to 300
million and is expected to touch 600 million by 2015.
Even after such growth the out-of-pocket expenses
dominate the health care spending estimated at 72%
of total expenses. India’s per capita health care
spending is only $109 compared to the global average
of $863. Hence a lot of potential growth is
FACULTY’S CORNER
WOULD INCREASE IN FDI LIMIT HELP
HEALTH INSURANCE SECTOR IN INDIA?
-BY BIBEK ROY CHAUDHARI
PROFESSOR, IIFT
InFINeeti | Annual Issue | August 2014
foreseen given the incidence of diseases in our coun-
try. What are the likely factors that have impeded the
growth of this sector?
ANALYSIS OF INSURANCE SECTOR
Like any other financial services the insurance sector
is also impacted by the problem of asymmetric infor-
mation. It becomes difficult for the insurer to detect
less risky individuals as there is an incentive to hide
details to pay lesser premium on the part of the in-
sured. The problem is more acute in rural areas. The
moral hazard problem also may be high due to the
unholy nexus between the hospital/doctor and the
customer which may give rise to false claims. Given
the state of legal institutions in India the probability
of such events are quite high. On the other hand the
third party agents entrusted with claim settlements
often create problems even in case of genuine cases.
Thus profitability of companies has come down dras-
tically due to such reasons and higher competition
from new entrants. On the other hand the consumers
have faced the music in times of need which has led
to lesser demand for such products. Information re-
garding this kind of incidents spread quickly through
word-of-mouth. Both these reasons limit the growth
of membership among the people aware of the ser-
vices.
Lack of doctors and health care infrastructure has se-
verely limited the access to such services especially in
the rural areas. Most of the people in such areas de-
pend on public health care with serious quality issues.
Whereas the little bit of private care which does exist
is not affordable for most of the people. Multi-layer
care-delivery system creates a problem for the in-
sured as movement across multiple points are re-
quired during each visit. On the other hand due to lax
medical procedures adverse drug related problems
are quite high. In terms of product offerings most of
the insurance providers offer indemnity based prod-
ucts covering critical procedures involving lump sum
payments. This bypasses the other needs of health
care seekers like regular check-ups (preventive health
care), one day procedures, maternity related care etc.
Can FDI solve these problems? Increase in FDI limit
may interest new entrants with new models of deliv-
ery and products. This is required given the supply-
demand mismatch observed in this sector. Moreover,
this would create jobs being a labor-intensive pro-
cess. Intensified competition among players would
increase efficiency of services and directly benefit the
consumers. Knowledge spillovers from international
best practices would enable the service providers to
reach out to more customers.
FACTORS AFFECTING THIS SECTOR
First, major point emphasized in the literature which
deals in FDI in health care is whether the sector is al-
ready commercialized. This is because liberalization of
this sector leads to commercialization and if it
54
Source: www.maculahealthcare.com
InFINeeti | Annual Issue | August 2014
55
is not already exposed to such phenomenon the en-
try of foreign money may create ripples for which the
market may not be ready. Since in India we have al-
ready allowed 26% foreign participation with a num-
ber of private players there seems to be room for fur-
ther commercialization and it would be less of a
shock to the system. The greatest impact on health
care financing, distribution of facilities, access to ser-
vices, etc., is thus the degree to which health care is
commercial, not whether it is foreign. Nonetheless
FDI may help
in reducing
financing con-
straints and
increase
health care access in a country like India.
Second, existing regulatory environment, and
‘resilience’, will significantly determine the economic
and health impact of FDI, the effectiveness of safe-
guard measures and the stability of commitments.
Important issue in this case is establishing the likely
balance of ‘power’ between the national regulatory
system and potential investors. Not only might regu-
lations determine the level of FDI, but opening up, or
extending, the commercial sector will require stand-
ards in care to be established and maintained. Thus
we need to determine whether the regulatory regime
will be able to handle (greater) FDI, and if not what
measures need to be enacted to do so. Thus the cur-
rent regulatory regime must be made more effective
in order to attract more FDI. Increasing the limit may
be necessary but not sufficient condition for larger
FDI flows.
Thirdly, commensurate investment in health care in-
frastructure. Lack of proper health care facilities
across locations impacts demand for health insurance
services. A
consumer
would be
inclined
buy an in-
surance
product only when commensurate health facilities are
available within their reach. Public-private partnership
may be the way forward especially in semi-urban and
rural areas. Tremendous scope of medical tourism also
may induce more investments in health care facilities
in countries like ours.
Fourthly, the model for health insurance delivery is
also equally important. Various forms of insurance,
mandatory, voluntary and community health insur-
ance cover approximately one-fourth of India’s popu-
lation. Whether insurance is offered through employ-
ment, purchased voluntarily or sponsored by the gov-
ernment for select populations, all potentially contrib-
ute towards the health systems goal of providing fi-
nancial risk protection and reducing the financial barri-
ers to quality health care. Innovative models based on
mobile devices are being suggested for greater out-
reach. All in all, it can be said that FDI in insurance has
the capability to transform this sector.
InFINeeti | Annual Issue | August 2014
56
INTRODUCTION
Populism has acquired a pejorative connotation in
recent times. It has become an adjective of choice to
describe any politician who wants to take the easy
route to popularity via appeasement. However, isn’t
that the point of a democracy? The will of the people
is supposed to be paramount. The problem lies in the
fact that short-term and long-term interests of the
society are often antithetical to each other and one
cannot rely on the masses to provide a logical vision
for the future. Populism has evolved over the last
century as a response to the inequalities inherent in
liberal capitalism. It believes in an expansionary fiscal
policy of the government which increases public em-
ployment, mobilizes the masses and blurs the distinc-
tions between leaders and institutions.
Over the years, Indian polity has thrown up many in-
stances of populist decisions taken without much
thought to economic prudence and rationality. On 29
February 2008, P. Chidambaram, the Finance Minis-
ter of India at that time, announced a debt relief
package for farmers which included the complete
waiver of loans given to small and marginal farmers.
It was called the Agricultural Debt Waiver and Debt
Relief Scheme and the 600 billion rupee package in-
cluded the total value of the loans to be waived for
30 million small and marginal farmers (estimated at
500 billion rupees) and a One Time Settlement
scheme (OTS) for another 10 million farmers
(estimated at 100 billion rupees).
Although the sentiment behind the measure was
laudable – freeing up small agriculturists from the
cycle of debt – the design of this scheme was flawed.
An important feature of the program which has been
heavily criticized is that it covers only formal sources
of credit and excludes any kind of informal loan. So
one side it benefitted wealthy and large-scale farmers
who had access to institutional credit (about 23% of
the total farmers), small and marginal farmers, who
borrow the majority of their funds from private mon-
eylenders, did not benefited from the scheme. Thus
the scheme just ended up straining our public financ-
es while the most deprived farmers remained un-
affected. This was a classic populist scheme.
POPULISM HAS BROKEN THE BACK
OF INDIAN ECONOMY. WHAT’S
WRONG WITH AVOIDING IT?
-BY ASHISH KASHYAP &
SUMIT BHANSALI
SJMSOM, IIT-BOMBAY
InFINeeti | Annual Issue | August 2014
57
ELECTIONS ARE THE TARGET
Similarly, just before the 2014 elections, the Govern-
ment of India was considering tweaking the rules for
MGNREGA program wherein the benefits to the
workers would be linked to the inflation rate in or-
der to better target the rural poor. At the end of No-
vember 2013, the Ministry of Rural Development
constituted a new committee to determine a suita-
ble index for the MGNREGA wages on the basis of
which new baseline wages will be fixed for 2014.
Currently the MGNREGA wages are pegged to the
consumer price index (agricultural laborers), or CPI
(AL), which has a large food and beverages compo-
nent.
The committee would assess the merits of using an
alternative measure, such as the consumer price in-
dex (rural areas), or CPI (R), where the food and bev-
erages category is accorded a lower weighting, and
was due to release its report in three months' time,
before the national elections to be held by May
2014. Why this logical step could not have been tak-
en in the years before eludes comprehension?
EXAMPLES OF POPULIST SCHEMES
Electoral politics has become a mechanism to
achieve some sort of redistribution of income every
five years, placating all the special interest groups
that dot the political landscape of India. Over the
years, a pattern seems to have emerged where terri-
torial groups demand special packages (for example,
Bundelkhand) or statehood (for example, Telanga-
na). Most of the Social groups are known to make
community-specific demands, such as reservations
(the recent inclusion of Jats in the Central OBC list),
special status (as in case of minority status to Jains),
or subsidies. Various state governments have also
indulged in offering exclusive benefits to certain spe-
cific communities, like unemployment allowance,
free TV sets, gold ornaments, free computers, etc.
After the DMK announced a string of freebies in its
election manifesto, bête noire AIADMK came out
with its own edition of the sop opera. If the DMK's
manifesto reads like a book about freebies, the AI-
ADMK is also following the course. In fact, AIADMK’s
J. Jayalalithaa has tried to beat her bête noire M.
Karunanidhi at his own game by taking the mad race
to a new level. Ms. Jayalalithaa has in fact promised
to give half a sovereign gold to women awaiting
marriage apart from a cash assistance of Rs.25, 000.
The Maharashtra government, as a final shot before
facing the assembly election, announced a new res-
ervation quota -- 16 percent for Marathas and 5 per-
cent for Muslims. Before this announcement Maha-
rashtra had 52 percent reservations, which crossed
the limit set at 50 percent by the Supreme Court.
With these fresh set of reservations the total
InFINeeti | Annual Issue | August 2014
58
reservations in the state has gone up to 73 percent.
Although the decision has been challenged in the ju-
diciary, it is a symptom of a larger problem afflicting
our entire political landscape.
These are direct acts of economic populism which are
easy to diagnose. We must however not ignore the
broader and subtler definition of populism and the
far-reaching implications that it has for the polity of
the country. Populist moves are not just direct eco-
nomic ones all the time; they also entail concessions
to the majority or some special minority, ideologically
suspect measures, appeasement etc. It needs a very
keen analysis to discern these subtle threats to a
more rational governance model. Let’s look a few
contemporary issues which will elucidate our point.
The new Narendra Modi Government has promised
us a lot of initiatives which reek of populism and du-
bitable logic
Interlinking of Rivers: Rivers have a religious, cultur-
al and sentimental value to India and its population.
They are also the lifeblood of the economy. Hence
interlinking of rivers is a highly visible, popular move.
However it is fraught with the possibility of potential
disaster. It is an attempt to change the geography of
the country. When comparisons are made to a na-
tional water grid on the analogy of a “power grid”, it
is extremely misleading. A river is not a human crea-
tion, they are integral components of ecological sys-
tems and inextricable parts of the cultural, social and
spiritual lives of the communities concerned. It is not
quite clear how the linking of rivers will contribute to
the objective of flood control. A significant modera-
tion of floods will call for a massive diversion of flood
waters which may not be feasible at all, or if techni-
cally feasible, it may have serious impacts on the river
regime downstream of the diversion point, on the
diversion route and in the recipient areas. On the
other hand, if only small fractions of the flood flows
are to be diverted (as seems to be the intention),
there will be hardly any flood moderation. For in-
stance, the flow in the Ganga during a high flood can
exceed two million cusecs, whereas the link canals
envisaged will divert only 1,500 cusecs. It is primarily
in the context of drought that the project might ap-
pear to be needed. However the proposed river links
(reportedly mainly by gravity, with a few modest lifts)
are no answer to drought-prone areas. Linking a river
to another will merely provide additional water to
areas already served by rivers.
New IITs, IIMs and AIIMs in every state: While IITs
and IIMs have a very prominent brand value and sig-
nificance to a large section of the population as an as-
pirational goal, this move is extremely illogical. The
current new IITs and newer IIMs already face a re-
source crisis, they have yet to acquire proper campus-
es, enough faculty and are struggling. Instead of in-
vesting more in making sure that they get to
InFINeeti | Annual Issue | August 2014
59
similar levels of competency as the older institutes,
this decision aimed at appeasing popular demands is
probably going to add to the woes of our educational
system. The need of the hour is more quality institu-
tions , rather than more institutions.
Bullet Trains: There is no evidence of any urgent
need for bullet trains in India. Since the entire tech-
nology will be imported and limited to a few sections
of the railways, we are also not sure about the bene-
fits of the technology transfer. Meanwhile, we con-
tinue to have train accidents, poor sanitation and
cleanliness in our trains and railway stations and per-
petually delayed trains.
A
more fruitful investment in the network and frequen-
cy of trains in critically overloaded sections would be
much more useful. However Bullet Trains is again a
very visible and populist move, aimed at invoking sen-
timents of chauvinism and national pride.
CONCLUSIONS
It is very clear that the ideology of democracy and
popular will has been immeasurably damaged by the
machinations of unscrupulous politicians. Populist
moves are aimed at exploiting the myopia which the
average citizen exhibits when it comes to long-term
issues. Popular democracy and Populism are not in-
separable. A more aware electorate is the need of the
hour.
InFINeeti | Annual Issue | August 2014
60
Summer Internship is an integral part of an individu-
al’s B-School life which equips one with the tools to
be used later in the professional life. It is an enabling
platform where one can learn the nuances and intri-
cacies of one’s desired field. One can get a feel of
how corporate life is going to be after an MBA. More-
over it gives one an opportunity to asses one’s own
capability and relative performance with best of the
students in the country in a dynamic environment.
From the first trimester itself I was very passionate
about finance and always was ready to walk an extra
mile to learn the intricacies associated with it. Thus, I
always had the desire to pursue an internship in the
finance domain. Finally, I had the privilege of doing
my internship with Reserve Bank of India in their Kol-
kata regional office.
The project which I got to work on was “Role of
Treasury in Liquidity Risk Management”. The ap-
proach to my project was two-fold. First I had to
study and understand the nuances of Treasury and
RBI guidelines which govern the policies of banks in
our country. Secondly, I had to analyse the treasury
investments of private sector banks and public sector
banks and then give my suggestions. I feel that fi-
nance subjects in my first year of MBA helped me a
lot in gaining an insight about the general functioning
of RBI and specifically in my project.
The atmosphere in RBI was very vibrant where every-
one from junior level to senior executives were very
enthusiastic about their work , about imparting
knowledge and aiding the interns in their work. I
would say that my learning curve was exponential in
RBI where I learnt various facets of managing risk, got
a rare opportunity to have hands on experience in au-
diting the banks based out of Kolkata on CAMELS –i.e.
Capital Asset Market Earnings Legal and Systems
framework. The investment analysis of my project
was an uphill task where I had to understand the an-
nual reports of various public and private sector banks
and then draw a comparison.
I learnt a lot from my internship where I had to work
on short deadlines, work in different groups and talk
and interact with Chief Financial officers of various
Public sector banks. During the course of my intern-
ship I also appeared for CFA Level 2 exam and the help
and guidance that I got from my mentors and peers in
RBI was hugely beneficial to me. Overall I would say
that it was an internship which involved diligence cou-
pled with equal amount of fun and a lot of learning.
SUMMER INTERNSHIP EXPERIENCE
( RESERVE BANK OF INDIA)
-BY SHUBHAM AGARWAL, IIFT
InFINeeti | Annual Issue | August 2014
RBI CUTS SLR RATE BY 50 BASIS POINT According to Mr.
Raghuram Rajan, foreign
reserves come at a cost.
Though he accepts that
higher foreign reserve is
better than lower foreign
reserve, but at the same
time, he also makes it clear that only having foreign
reserve will never buy the immunity for the Indian
economy.
He opines that if something can provide immunity to
the Indian economy, then that is nothing but credible
monetary policy. If we have low fiscal deficit, moder-
ate current account deficit and low inflation people
will want to invest here. To achieve immunity we must
get the status of a developed country. According to
him, it can happen only when the Rupee will go more
international and debt market will become more vi-
brant. That is why RBI gives emphasis on reducing and
controlling inflation so much The Reserve Bank of In-
dia has recently slashed SLR rate by 50 basis points to
22% while CRR (4%) and repo rate (8%) are kept un-
changed.
FLIPKART SIGNED MoU TO PROVIDE TRAINING IN RU-
RAL AREAS
The Retail giant from
India, Bangalore
based Flipkart, has
come forward to ex-
tend help by providing training to rural and semi-
urban people. Flipkart has signed a Memorandum of
Understanding (MoU) for the initiative. They are going
to start the training centres in Agra, Meerut, Varanasi,
Aurangabad, Pochamalli, Salem, Guwahati and Shil-
long. After the training Flipkart may well absorb them
as their employee.
COLD WAR BETWEEN RUSSIA & AUSTRALIA
A cold war has been started
between Russia and Aus-
tarlia which started over
the issue of Russia’s sup-
port to the separatist
movement for Crimea in Ukraine. On one hand Aus-
tralia openly criticised Russia’s stand on the issue, US
along with other G8 countries have been imposing
ban on Russian organizations and individuals since
middle of March 2014. As a consequence Russia has
introduced an embargo on various agricultural
61
InFINeeti | Annual Issue | August 2014
62
products like beef, pork, fruit, vegetable, poultry, fish,
milk and number of dairy products from Australia, EU,
US, Canada and others.
JAPAN FOREIGN RESERVES FALLS BY $7.89 BN
Japan’s foreign exchange reserve fell to the lowest for
the past 4 months. At the end of
July Japan’s total foreign exchange
reserve is tallying at $1.28 trillion
which is reduced by $7.89 billion in
the last month. According to finance ministry of Ja-
pan, this happened due to drop in value of foreign se-
curities held by the government because of a slump in
US Treasury bond prices.
SCAM IN BHUSHAN STEEL
CBI has arrested Neeraj Singal, Vice
chairman and Managing Director of
Bhushan steel. The allegation is
that he is involved in a scam of Rs.
50 Lakh which also involves Syndicate Bank. On 2nd
August, the CBI has arrested 6 accused, together with
the Chairman-cum-Managing Director of Syndicate
Bank S K Jain, for allegedly taking bribe of Rs 50 lakh
to increase credit limit of some companies violating
the banking rules. As a result share price of Bhushan
steel has taken a plunge of 10% in BSE.
INFIBEAM PLANNING FOR AN IPO
Ahmedabad based Infibeam Inc, the organisation be-
hind the consumer e-commerce venture called In-
fibeam.com and B2B e-
commerce platform
namely Build A Bazaar,
is going to raise Rs 500-
1,000 crore ($83-166
million) through an Initial Public Offering (IPO) in India
within the next couple of quarters as mentioned by
its founder and CEO Vishal Mehta.
UNIVERSAL COMMODITY EXCHANGE STOPPED
TRADING OPERATIONS ON 16TH JULY 2014
Universal Commodity Ex-
change (UCX): India’s 6th
commodity exchange
which started functioning
on 19th April 2013 has sus-
pended all the trading operations on 16th July 2014. It
was promoted by Commex Technology in joint ven-
tures with IDBI Bank, IFFCO, NABARD and REC. Signs
of fraudulent trade practices have been observed in
the aforementioned exchange by Forward Market
Commission in March. Similar issues were also found
with MCX when a special audit took place under pur-
view of PwC.
InFINeeti | Annual Issue | August 2014
63
KNOW ABOUT YOUR COIN!
The latest Indian one rupee coin
which has the highest circula-
tion is made up of Ferritic Stain-
less Steel (FSS), having a diame-
ter of 25mm. It weighs 4.85 gm.
The value of the coin, when
melted is estimated to be 70 paisa. The remaining 30
paisa goes to the government as seigniorage.
NUMBER OF PEOPLE LIVING BELOW THE POVERTY
LINE
A study by BBC shows
that only eight of the
Indian states constitute
poor population of 421
million which is greater
than the poor popula-
tion of 26 poorest countries from Africa, which is 410
million. According to World Bank, over 450 million
people living below the international poverty line of
$1.25 a day.
PREMJI PROMISES TO PAY 50% OF HIS WEALTH FOR
SOCIAL CAUSE
Ten out of the world’s top 150-odd billionaires are
Indians. But only one, Azim Premji, figures in the list
of 105 billionaires
who have pledged to
give away at least
50% of their wealth
for greater social
good. The Azim
Premji Foundation is now ramping up from a staff of
800 to about 5,000 in the next five years. It is check-
ing out B-schools to hire fresh MBAs for leadership
roles. Premji will build the foundation with the same
vision and rigour with which he scaled up Wipro in
the early years.
SWEDEN HAS THE HIGHEST TAX RATE IN THE
WORLD
Sweden has the
highest rate of
Income Tax in the
world. A Swedish
has to pay 56.6%
of his salary as
the income tax.
Sweden is followed by Denmark (55.4%), The Nether-
lands (52%) and Austria (50%). Though they charge a
high rate of tax, still all these taxes are duly utilised to
provide every aspect of social security to the citizens.
InFINeeti | Annual Issue | August 2014
COIN MINTING IN INDIA
Government of India has 4 mints each with a long
and distinguished history. Alipore (Calcutta) mint
and Mumbai (Bombay) mints were established in
1829 by British Government. Hyderabad mint was
established in 1903 under patronage of Nizam, later
taken over by GoI in 1950. Noida mint is the latest
one established in 1986. Each mint has special iden-
tification mark on the coin it releases.
Mumbai (Bombay) mint issued coins has a diamond
mint mark under the year of the coin.
Hyderabad mint issued coins has a star mark below
the year mark.
NOIDA mint issued coins has a thick dot just below
the date. Alipore mint leaves no mark in coins.
64
WEIRD TAXES ACROSS THE WORLD:
Google tax in France: Online tech companies need to pay to the government for online advertisements.
Used to support artists and online cultural information centre.
Jock Tax in California: Exclusively sports superheroes have to pay from match fees.
Window Tax in Scotland, England and Great Britain in 18th and 19th century.
Cow flatulence Tax: In Ireland Denmark and other EU nations, cattle owners need to pay as the cattle
produce methane causing global warming.
Beard Tax in Russia: Initiated by Peter the great, one of the most notorious Czars.
Tax deduction on Bribe: In Germany, bribery was legal under few circumstances till 2002.
InFINeeti | Annual Issue | August 2014
MEET THE TEAM 65 CREDITS
OUTGOING TEAM
Ankit Tiwari
Ashutosh Deshpande
Sanket Tandon
Sobhit Agarwal
SPECIAL THANKS TO:
Apurva Kulkarni
Kartik Puri
Shubham Agarwal
INCOMING TEAM
Adhiraj Bandhopadhyay
Gayathri Bhuvangiri
Mehul Gehrana
Suryanarayan Panda
FEEDBACK/QUERIES
Published by students of
Indian Institute of For-
eign Trade
New Delhi | Kolkata
ALL RIGHTS RESERVED
ANKIT TIWARI is a software engineer and comes with
a prior work experience in Infosys Limited . He in-
tends to specialize in Finance & Marketing. He
wants to pursue his career in IT & Banking industry.
Additionally, he is an avid reader, likes writing in his
spare time , loves reading newspaper and also loves
playing and watching Cricket .
ASHUTOSH DESHPANDE has completed his graduation
in Computer Engineering from Mumbai University,
post which he has worked with Mahindra Holidays.
He has inclinations towards Finance and Strategy.
Also, he is an avid writer, has written for various
blogs, football sites and magazines on topics ranging
from Politics, Current Affairs to European Football.
SANKET TANDON is a software engineer and has
prior work experience with Infosys Limited. He in-
tends to specialize in Finance and wants to pursue
his career in the same domain. He is an ardent Man-
chester United fan. Apart from following football he
likes to read and travel in his spare time
SOBHIT AGARWAL has completed his B.tech in Elec-
tronics and Communication engineering from NIT
Surat in year 2012. Before joining IIFT ,he worked as
Marketing Manager at Endeavor Careers Pvt. Ltd.
for 12 months. Moreover , he has a keen interest in
finance and wants to pursue a career in the same
domain.
InFINeeti | Annual Issue | August 2014
Contact Team InFINeeti: [email protected] | [email protected]
Published by Indian Institute of Foreign Trade, New Delhi and Kolkata
All Rights Reserved