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TABLE OF CONTENTS
1. Brakes on BRICS 2
2. Academia Speaks 5
Ailing Economy Wailing India: Lack of Diagnostics 6
Impact Investing – Putting a human face to finance 9
3. Industry Speaks 12
GST: Game changer or name changer 13
FDIC Interview 16
Birds: Five Good Money Habits 18
4. Students Speak 20
The Slowdown of BRICS 21
Islamic Banking: A catalyst to financial inclusion in India 24
QE3: The idea that shook QE2 26
Credit Unwinding and EM Growth 28
5. Financial Technology 30
Treasury Management in Banks: A technological perspective 31
Algorithmic Trading interview 34
6. Sector Talks: Indian Retail Sector 36
7. Mergers and Acquisitions 41
Microsoft Nokia Deals 44
Vodafone Verizon Deal 45
8. Personality Profile 47
Patrick Dlamini 48
Xi Jinping 49
9. News Round Up 50
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Team Bottomline:
Chief Editors
Romil Johri
Shashank Shekhar
Senior Coordinators
Abhishek Agarwal
Gaurav Pandey
Gautam Sridharan
Lavanya Pandey
Mehak Chopra
Nikhil Jalan
Pratik Jaipuriar
Shobhit Agarwal
Editorial Team
Akhil Mittal
Akshat Kumar Sinha
Devesh Jhalani
Jyoti Nathany
Rahul Ghosh
Shomrita Pal
Shubham Agarwal
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TEAM NETWORTH
Dear Readers
We are pleased to present to you the first
edition of ‘BottomLine’, the bi-annual finance
magazine of Indian Institute of Management,
Bangalore brought to you by Networth – The
Finance Club of IIMB. The endeavor of this
magazine is to bring to you insightful views in
the field of finance and economics from some
of the best academicians, industry practitioners
and students. We also bring to you a round-up
of economic news, M&A activity and sector
research.
The cover story for this edition of the magazine
was chosen as “Brakes on BRICs” which
represents the slowdown of growth in the
emerging economies of Brazil, Russia, India
and China. While these nations have been in
the news ever since the US Fed announced its
decision to scale down its unconventional
monetary policy of QE, we try to look beyond
just this factor and get to the bottom-line of the
factors inhibiting growth in these countries.
We would like to thank Prof. Charan Singh,
Prof. Utkarsh Majmudar, Mr. Abhishek A.
Rastogi, Mr. Dhananjay Sahasrabudhe, Ms.
Radha Valisetty and Kotak Mahindra Bank for
contributing to this edition of the magazine.
We would also like to thank the students for
the amazing response we received for the
student articles section.
We would love to hear from you about our
magazine. Feel free to send in your feedback,
comments and suggestions to the following
email id: [email protected]
Editorial Team
BottomLine
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When Jim O’Neill of the Goldman Sachs coined
the term ‘BRIC’ in 2001 while referring to the
tremendous growth potential of these economies,
global investors flocked to these countries. And
these countries didn’t disappoint, at least for the
first decade of the 21st century. However, the pace
of growth has slowed down significantly in these
countries. While part of it is due to cyclical
adjustments, quite a bit of the blame can be
apportioned to domestic issues in these countries.
The rise…
Brazil, Russia, China and India (the so called
BRIC nations) experienced a period of significant
growth at the turn of the new millennium.
Together they contributed more than 40% to the
worldwide GDP growth at the turn of the first
decade as the developed economies struggled to
attain even 2-3% growth rates. While China was
the clear leader with consistent growth rates in
double digits, India grew at about 8-10%, Brazil
and Russia grew at 2-6% and 5-8% respectively.
In PPP terms the share of GDP of these four
countries in the world GDP has grown from about
21% in 2000 to nearly 30% today. The growth
projections for these countries highlighted their
increasing importance in the global economic
landscape.
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EDITORIAL
However the projections for the second decade
did not fructify and the fall from grace of these
countries (so far) has been as fast, if not faster,
as their rise to prominence. In an interview
earlier this year, Jim O’Neill mentioned that
the only country in the BRIC group that
remains worthy of being in there is China.
GDP growth has fallen across the board, and
pretty precipitously in the case Russia and
Brazil. While part of it can be attributed to
cyclical adjustments that were inevitable, a lot
of it is due to the fiscal and/or monetary policy
issues that were not addressed by these
countries.
BRAKES ON BRICS
The tremendous growth witnessed by the
emerging economies in the first decade of the
millennium seems like a thing of the past.
Plagued by domestic issues and slowdown in
global demand these economies are beginning
to stumble.
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Brazil’s growth was driven by global
commodity demand which kept spurring
Brazilian iron ore and agricultural exports. The
graph below shows the change in the index of
commodity prices (CRY Commodity Index)
and Brazilian GDP growth. It depicts how
Brazil’s growth follows commodity price
movements. The lack of GDP expenditure on
investments (just 18% of GDP for the last
year) has also been a major impediment in
sustaining the high growth rates.
On the monetary front, Brazil has not been
able to control its inflation which has averaged
nearly 6% for the last 5 years. A part of the
problem was also the constant inflow of
foreign capital (chasing higher yields) which
led the Brazilian Real to appreciate to
uncompetitive levels.
Russia’s growth was primarily driven by
commodity prices and world demand, the
slump in global demand due to the US
financial crisis followed by the Eurozone crisis
and the slowdown in China led to collapse of
growth in Russia. GDP growth has fallen from
a high of 8.5% in 2007 to about 3%.
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EDITORIAL
India’s growth has been stifled due to lack of
reforms and policymaking that India badly needed
but was ignored during a time when it could have
implemented these easily. Crucial reforms on land
acquisition, tax related issues have been in limbo
for way too long to infuse confidence amongst
global investors. A bloated deficit has made India
vulnerable to external capital flows. After having
seen a year of double digit GDP growth, the only
economic indicator close to double digits in India
right now is inflation. India’s central bank missed a
trick when it tried to fight the currency depreciation
at the expense of domestic monetary policy.
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China’s growth had been due to over-reliance
on state driven investment and an export sector
propped up by a managed currency. The ratio
of Investment to GDP in China is close to 47%
and has been consistently above 40% for the
last 10 years. Although China can still boast of
7.5% growth rates, the sustainability of its
growth depends on rebalancing from
investment based to domestic consumption
based growth.
The way forward…
Whether these nations achieve the growth
which they saw in the first decade of the
century is hard to predict. But to recover to
more sustainable levels of growth these
countries need to bring about more stability at
the macroeconomic level. They need to ensure
they have greater control on inflation and that
high inflation levels do not become an
impediment for growth.
There needs to be greater fiscal prudence and
political stability to ensure the necessary
conditions for growth are made available.
Most importantly, the economies need to move
away from investment driven model to
domestic consumption driven model of
growth. This would not only allow for better
distribution of the benefits of growth, it will
also reduce dependence on foreign demand
and capital flows.
The BRICs have certainly slowed down along
with the other emerging economies. But the
potential GDP growth rates of these nations
have not gone down and if the macro and
fiscal scene is made conducive for growth they
can still return to the growth rates which were
seen consistently in the last decade.
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EDITORIAL
China Only BRIC Country Currently Worthy of the Title -O’Neill (http://blogs.wsj.com/moneybeat/2013/08/23/china-only-bric-country-currently-worthy-of-the-title-oneill/) Data Source: Bloomberg
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ACADEMIA SPEAKS
Ailing Economy Wailing India: lack of Diagnostics, Prof. Charan Singh
Impact Investing Putting a human face to finance, Prof. Utkarsh Majmudar
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DR. CHARAN SINGH
ACADEMIA SPEAKS
Ailing Economy – Wailing India: Lack of
Diagnostics
CHARAN SINGH.
The Indian economy has been passing through
an extremely critical situation which has been
acknowledged by the PM and the RBI last
week. The economy is suffering not only from
the global spillovers but also from domestic
ailments for quite some time now. This is
reflected not only in the lower growth rate of
4.4 percent in the first quarter of 2013-14 but
also in the spluttering exchange rate. The
global spill overs are expected to continue,
probably worsen, once the unwinding of the
unconventional monetary policy actually
begins in the US. The scenario is expected to
be challenging amid the ever widening current
account deficit (CAD), worsening fiscal
targets, persistence of high inflation, slowing
growth, deteriorating asset quality of banks
and depleting levels of confidence of the
markets in governance.
These challenges are not easy to face for any
country. But first, we must have the correct
diagnostics and only then can we strategize to
stage a respectable recovery. The first signs of
deterioration in the economy, if analyzed on a
quarterly basis in a dis-aggregated manner,
began in 2009-10, with CAD of more than 3
percent of GDP in three quarters. In 2010-11,
manufacturing had succumbed to lower
growth and by 2011-12, services and
construction.
Prof. Charan Singh is the RBI Chair Professor
at IIM Bangalore. His research areas include
Monetary & Fiscal Policies and Issues; Debt
Management; International Reserves;
Financial Markets; Banking; Infrastructure.
Thus the country has been in ICU, in the
economic sense, for more than a year with a
multi-organ failure, or complicated terms.
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The index of industrial production has been
stagnating at very low levels since the last two
years. The pervasiveness of the slowdown is
reflected in a wide range of industries. The
growth rate of manufacturing of 2.7 percent
and 1.0 percent in last two years compared to
11.3 in 2009-10 seems appalling. Some
industries like motor vehicles have registered
contraction. The services sector has recorded
the lowest growth in 11 years at 6.8 percent
during 2012-13.
The growth rates in construction, tourist
arrivals, and cargo traffic have declined over
the last two years. And in the absence of a
credible measure of real interest rate, national
savings and investments have also been
declining. To curtail the CAD, the government
has imposed import duty as well as other
measures on gold.
This, as would be expected, has resulted,
according to press reports, in higher smuggling
of gold. However, despite the efforts of the
government and stringent measures by the
Reserve Bank of India (RBI), CAD during
April to June 2013 continues to be high. On
the other hand, to contain the GFD, oil subsidy
has been reduced with a monthly reset. But the
additional expenditure on Food Security Bill
(FSB) would probably compensate the
reduction in oil subsidy and GFD would
continue to be high. In such a depressing
situation, recovery on account of a good
monsoon can neither be immediate nor
substantial. After all, agriculture only accounts
for about 13.7 percent of the total GDP.
And, in view of the FSB, the assessment of
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ACADEMIA SPEAKS
agriculture production and food grain
requirement would also change. The impact of
Land Acquisition Bill, on both industry and
agriculture, has yet to be assessed.
To stage a respectable recovery, some concrete
steps would be required. First, there is a need
to reduce the twin deficits. The best antidote
against these deficits is high-growth. To
achieve high growth, the government has to
identify sectors which have potential growth
and initiate targeted measures. In a weak
economy, revenue led fiscal correction is rather
difficult. Expenditure compression may also
be difficult unless there is a sharp reduction in
capital outlay or substantial increase in
government borrowings. A reduction in capital
expenditure would imply lower accumulation
of assets and increased borrowings leading to
higher interest payments, both burdensome in
an inter-generational sense. Thus, the complex
situation demands a careful analysis.
Exchange rates play an important role in
exports and imports and could an over-valued
currency could also be a cause of high CAD. In
determination of exchange rates, inflation
differential between two countries is a crucial
factor. As inflation has been high in India as
compared with the US, exchange rate should
be permitted to adjust according to market
forces.
China prefers to have a highly depreciated
currency while, it seems, India prefers to have
an overvalued currency. China, prefers the
beggar-thy-neighbor policy to grab larger share
of global exports while India, it seems, prefers,
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enrich-thy-neighbor policy, by insisting on
maintaining over-valued currency, losing its
share in global exports.
As a citizen, it is clear that the Ministry of
Finance (MOF), Government of India and the
Reserve Bank of India (RBI) are aware of the
grim situation. But what is not clear is whether
the RBI and the MOF have a common view on
the diagnostics of the problem? Is it high
interest rates, policy paralysis, governance
deficit or simple uncertainty that is the cause
of lack of demand and slow growth?
There are heaps of analysis in the media but
critical investment decisions cannot be based
on scattered media reports and individual
analysis. In the absence of credible and
common diagnose, at least in the perception of
common public, how would a strategic
recovery path emerge that inspires confidence
in the course of treatment? It is this lack of
direction and forward guidance that probably
is confusing the market.
To move ahead, and beyond the blame games,
and to navigate the economy through such a
turbulent period, it would be helpful for the
country if a committee of economic experts, be
constituted and mandated to arrive at a
consensual approach forward, similar to the
National Advisory Council or a panel of
doctors treating multi-organ failure. That is the
need of the hour, irrespective of ideologies,
and a common Indian, even if illiterate, is
neither new nor afraid of facing challenges.
.
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ACADEMIA SPEAKS
But responding to uncertainty, and confusion, off
course is a different story and legend of
Ashwathama, is an apt illustration.
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IMPACT INVESTING – PUTTING
A HUMANE FACE TO FINANCE*
UTKARSH MAJMUDAR
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Consider the facts. Two billion people on the
planet do not have access to safe water, heath
care, or financial services. A billion people do
not have access to electricity. Two hundred and
fifty million children do not have access to
education or childhood immunization. The
problems are immense and need speedy
solutions. With public funds being limited the
need for private investment in public areas is
acutely felt. Impact investing expands the role
for private enterprise in addressing the world’s
most pressing social problems.
Impact investing is defined by The Global
Impact Investing Network (GIIN) as:
“investments made into companies,
organizations, and funds with the intention to
generate measurable social and environmental
impact alongside a financial return.” Impact
investing also goes by several other names –
socially responsible investing, social investing,
mission driven investing, responsible investing
etc.
The social investing ecology is best described
in Figure 1. Although, traditionally
foundations, development financial institutions
and high net worth individuals have
contributed recent studies indicate that other
investors are getting attracted to the potential
of impact investment.
* By Utkarsh Majmudar. The author is an educator, trainer and a
consultant. His interest areas include corporate finance,
behavioral finance and corporate social responsibility. He can be
reached at: [email protected]
References:
“About Impact investing,” GIIN, accessed on October 3,
2013,
http://www.thegiin.org/cgibin/iowa/resources/about/index.
html
Social impact bonds,
http://www.socialfinance.org.uk/sites/default/files/SIB_repo
rt_web.pdf Accessed October 3, 2013.
World Economic Forum, From the Margins to the
Mainstream Assessment of the Impact Investment Sector
and Opportunities to Engage Mainstream Investors
http://www.weforum.org/news/new-report-bringing impact-
investing-margins-mainstream
Charan Singh’s Photo
ACADEMIA SPEAKS
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Impact investors also create new financial
instruments such as social impact bonds - a
contract with the public sector in which a
commitment is made to pay for improved
social outcomes that result in public sector
savingsThe growth, and visibility, of the
impact investment industry has been
remarkable. However, significant challenges
remain. It has generally been pointed out that
the lack of track record of successful
investments is a main concern and that too few
established players are active in impact
investing. One of the key challenges is a
measurement ‘problem.’ As an example, if the
impact of an investment is creation of three
jobs then the outcome is increased wages to
the workers, higher taxes to the state and
reduced government subsidies. On the other
hand, if one of the workers would have found
a job without the investment then the benefit
would have been a net of two persons. Hence
it is not easy to track impact over time.
Measurement issues are being addressed by
three distinct but complementary tools: IRIS,
PULSE, and GIIRS.
Another area of challenge is the much stricter
fiduciary obligations of institutional investors.
Lack of successful track record and shortage
of scalable and attractive investment
opportunities create barriers to impact
investing. Layering of financial instruments
(e.g. grants and PRIs) also makes it harder to
precisely define impact of investing.
Governance is an area of significant concern.
Profiting from the poor is a grey area and
significant attention needs to be paid towards
creating frameworks that build an independent
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third party monitoring mechanism.
Other roadblocks include investor skepticism
about achieving both financial returns and
creating social impact together; imperfect
information regarding investment opportunity
set; limited exit strategies due to insufficiently
developed and illiquid markets.
Despite the challenges, impact investing is set
to soar. Industry research suggests that
approximately 2,200 impact investments worth
$4.4 billion were made in 2011.This is almost
doubling of investments from 2010. In India,
the impetus is likely to come from the new
Companies Bill (2012) that mandates 2%
investment in CSR activities subject to certain
criteria. Growth in impact investing is likely to
come from four sources:
1. Massive pent-up demand at the bottom
of the pyramid – a large number of
consumers and producers in this segment
will join the market
2. Driving green growth – investment in
renewables are forecast to grow at a steep
rate
3. Reconfiguration of the welfare state –
fundamental shifts in the ways in which we
approach public good output will create
opportunities for the private sector
4. Emerging lifestyles of health and
sustainability segment at the top of the
pyramid – this is already a fast and
growing segment
Despite several roadblocks impact investing is
likely to grow and become part of the
mainstream finance.
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Case Study – Vaatsalya Healthcare
The poor in tier two and three cities in India
have limited access to healthcare services, as
primary and secondary healthcare
infrastructure is inadequate and tertiary
healthcare infrastructure is largely
concentrated in metropolitan areas or larger
cities.
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Vaatsalya addresses this gap in primary and
secondary healthcare infrastructure by offering
high quality, no-frills, affordable primary and
secondary healthcare services. Vaatsalya
currently operates across 17 tier-two and -three
cities in South India, such as Mysore,
Shimoga, and Ongole. (www.vaatsalya.com)
Figure 1 Impact Investing eco-system3
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GST: Game changer or name changer!!!
ABHISHEK A. RASTOGI
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As India, an aspiring superpower, enters into
the general election environment, the entire
World bracing a slowdown or dealing with a
fiscal cliff is again peering at the reforms
bubbling in India’s cauldron. To keep the pot
boiling, the Government realized that the
issues gyrating around fiscal bloat, fragile
investments, obdurate prices and reforms need
greater deliberation so that the economy can
hop back to a decent growth trajectory by
2014.
The Government’s strategy can be discerned
by various initiatives with respect to
Companies Act, Goods and Services Tax
(GST) and Direct Tax Code (DTC). While the
Companies Act has received the Presidential
assent, the DTC will be finalized based on the
best international practices so that the robust
draft of the Code can be soon introduced.
Further, in an attempt to refurbish the horribly
antiquated indirect tax system, the
Government has taken initiatives for
implementation of the GST which will always
be considered a “transformational change” in
the history of indirect taxes in India.
It is an acknowledged fact that the services
sector has been a vital force steadily driving
growth in the Indian economy which has
navigated the turbulent years of the recent
global economic crisis.
ABHISHEK A. RASTOGI
Abhishek is an Associate Director with Pricewaterhouse
Coopers. He has authored eight books on the GST and
service tax published by Taxmann Publications and
Lexis Nexis.
Various measures have been taken on the
service tax front in the last eighteen months
including introduction of negative list and
place of provision of services rules.
Charan Singh’s Photo
INDUSTRY SPEAKS
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The fundamental reason for adopting the
comprehensive basis of taxation framework is
to circumvent the current patchwork of
indirect taxes that suffer from infirmities,
mainly in the form of exemptions and multiple
rates. In addressing this issue, the new service
tax framework has opened a window of
opportunities as well as a Pandora’s Box of
threats for the country’s proletarian class.
Thus, in the negative list regime, it is
imperative to examine the new concept of
‘service’, details of the negative list, details of
exemptions mentioned in the mega exemption
notification, and broad contours of the point of
taxation and place of provision of services.
These significant legislative changes ensure
that the current model is closer to the GST
regime and that the implementation of the
GST would not be from scratch.
It is also important to probe into the diverse
impacts that variegated sectors may potentially
have. To encourage voluntary compliance and
increase service tax collection, Voluntary
Compliance Encouragement Scheme has
been introduced in 2013 for providing one
time amnesty to the stop filers, non-filers, non-
registrants or service providers if they have not
disclosed true liability in the returns filed by
them during the period from October 2007 to
December 2012. The scheme provides
amnesty by way of complete waiver of
interest/penalty and immunity from
prosecution.
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The fundamental reason for adopting the GST
framework in India is to not only get rid of the
current patchwork of indirect taxes that are
partial and suffer from infirmities, mainly
exemptions and multiple rates but also improve
tax compliance.
The spread of Value added tax (also called the
Goods and Service Tax) in different countries
has been one of the most important
developments in taxation over the last six
decades. Owing to its capacity to raise revenue
in the most transparent and neutral manner, the
GST has been adopted by a host of countries.
This transaction model has already spread to
more than 150 countries and attracts more
countries to be on the same platform. With the
increase of international trade in the arena of
services, the GST has become a preferred
international standard. So much so that all the
OECD countries except the USA follow the
VAT which makes international trade a much
easier reality.
India too has been moving slowly and steadily
towards the GST regime. The exercise began a
long back and was phased out in steps such as
implementation of VAT, rationalisation of
excise duty rates, introduction of service tax,
integration between excise duty and service
tax, introduction of the negative list of
services, implementation of point of taxation
and formulation of place of provision of
services rules.
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The Centre and the States are now embarked
on the design and implementation of a uniform
GST across the country. The unified tax will
take the form of a ‘Dual’ GST, to be levied
concurrently by both the levels of government.
The unified tax will comprise of a Central
GST and a State GST and both the Centre and
the States will legislate, levy and administer
the Central GST and State GST respectively. It
is important to stress on the key words
“legislate, levy and administer” as these words
clearly show that both Centre and States will
legislate the respective GST Acts and that both
Centre and States will have power to
administer the taxes. It is pertinent to mention
that under the dual GST system, the same
taxable base will be subject to the Central GST
and State GST.
The proposed tax system will subsume a
variety of Central and State levies such as
Central Excise Duty, Service Tax and VAT,
thereby simplifying the complicated tax
structure and reducing compliance costs. For
tackling the complicated issues related to inter-
state transactions, an innovative concept of
IGST (Integrated Goods and Services Tax) is
also under consideration. The Parliamentary
Standing Committee submitted its report on
August 7, 2013 with respect to the
Constitutional amendments which would mark
the beginning towards introduction of the
GST.
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Some of the important developments revolve
around the following key aspects:
Establishment of a GST Council
Design of the GST
Compensation mechanism for States
IGST model to tackle inter-state
supplies
Flexibility for States to retain state
autonomy
SGT dispute settlement authority
Harmonised tax structure
The report of the Parliamentary Standing
Committee headed by Yashwant Sinha will act
as a significant stride towards implementation
of the much awaited GST. Although lot of
changes have already been introduced in the
current service tax regime, there are still
disputes over various activities whether such
activities would qualify as ‘goods’ or
‘services’. There have also been disputes on
the constitutional validity of taxing various
activities. The litigation is still pending in
various cases where there are disputes as to
who is the service provider and who is the
service recipient. With the recent changes in
the indirect tax regime in a country of India’s
magnitude, a deep deliberation and analysis on
the impact of the new service tax structure on
various sectors is certainly the need of the
hour. These interesting service tax issues will
be discussed in the subsequent articles.
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FDIC INTERVIEW
WITH RADHA VALISETTY
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What is your opinion about the health of the
US banking system at present and the lending
practices followed by banks?
The health of the banking industry in the US is
improving slowly, but the improvement can be
partially attributed to the natural ebbs and
flows of the industry. The lending practices
have done very little to improve the condition
of the consumer.
With so much of analysis going on regarding
the tapering of assets purchases by the Fed,
how equipped are banks to handle an increase
in the fed rate?
The Federal Reserve announced that it will
make no changes in its asset purchase program
suggests that U.S. bank liquidity will remain
near record high, as securities held on the
Fed’s balance sheet continue to grow. When a
tapering of quantitative easing (QE) does
eventually begin, the impact of reduced bond
buying will have little effect on banks’ lending
capacity and funding costs in the near term.
.
Are the US banks in a position to cope with the
stringent capital requirements as mandated by
Basel III norms?
Implementation date for Basel iii for US banks
has been pushed to Jan 1, 2015. Once
implemented these rules will have a broad
impact on the capital planning and investment
strategy of US banks.
RADHA VALISETTY
Radha Valisetty works as a Business and Systems analyst at the FDIC,
Govt. of United States
FDIC, or the Federal Deposit Insurance Corporation is a US Government agency providing deposit insurance in member banks
INDUSTRY SPEAKS
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Do you feel that the requirement for higher
capital is having an adverse impact on bank’s
lending and subsequent economic activity?
The goal for mandating stricter capital reserve
standards is to create a stronger, more resilient
industry better able to withstand environments
of economic stress in the future, so even if the
lending standards make capital less available it
is a smaller pain in the near term to avert
bigger future catastrophes.
With so many banks failing after the 2008
crisis, what challenges does it pose for you?
How has risk assessment changed post 2008?
Prior to 2008 the regulators trusted the risk
management strategies and practices of the
banks themselves, whereas after the financial
crisis the regulators have done some
independent assessment of the reasons for the
crisis and are trying to mitigate similar risks as
much as possible in addition to trying to bring
more transparency to the risk management to
understand better what policies worked and
why, and conversely why some policies
failed.
FDIC had recently been filing a considerably
large number of law suits against the leaders
of the failed banks, how, according to you, did
these leaders lead the banks to doom?
In the 2008 financial crisis bank executives
paid little attention if any to mortgage-related
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risks. Executives at the American International
Group were found to have been blind to its $79
billion exposure to credit-default swaps. The banks
hid their excessive leverage using derivatives, off-
balance-sheet entities and other devices. Law suits
against bank officers are one of the many means for
recovering the costs of closing banks where fraud
and negligence occurred to protect the deposit
insurance fund.
What are the new challenges and initiatives from
FDIC under the Dodd Frank Act for assessment of
risk in the largest, systemically important financial
institutions?
The implementation and enforcement of DFA is
very complicated. FDIC has successfully made the
big banks identify dissolution plans and recorded
them. The biggest challenge would be to see how
realistic these plans are and if the FDIC can handle
failures of such institutions with minimal impact to
the depositors.
FDIC recently decided not to provide insurance for
cash held outside the country. What do you think
about it?
According to the chairman this rule protects the
Deposit Insurance Fund while at the same time
recognizing both the FDIC’s commitment to
maintaining financial stability through the prompt
payment of deposit insurance.
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32
GOOD MONEY HABITS CAN
CHANGE YOUR LIFE
BIRDS – Five Good Money Habits – that will
help you manage your money better
Networth - The Finance Club of IIMB | [email protected] 18
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This article created by collating the views of
the Senior Leadership Team at Kotak
Mahindra Bank talks about the money we
spend. The acronym BIRDS signifies the five
key investor money habits - ‘B’ stands for Budget; it always pays to have
your budget in place ‘I’ stands for manage your Investments well
‘R’ is for plan for your Retirement ‘D’ stands for manage your Debt
‘S’ stands for Secure your family These are the five key mantras- 5 Good Money Habits that will help you manage your money better.
B You can always become rich either by making
money or saving money. Avoiding impulsive
purchases with a reasonable, realistic Budget
is the first step to achieving that dream. To
keep track of your budget, there are lots of
tools available, like Money Manager, money
management tools etc. Also, ensure that you
use whatever loyalty points you earn on
various cards and all discounts available from
service providers.
I
Managing your Investments is about setting
right and realistic goals. So the first point is to
set the right goals and the second is to avoid
investing into complex instruments. You must
decide an investment allocation based on your
risk appetite and stick to it, irrespective of what
the market dictates.
The rule of 100: A formula for Investment Allocation
Deduct your age from 100, and that would be
your ratio between debt and equity. The thumb
rule is that the younger you are, the longer you
have to plan your investments and therefore the
higher should be you equity allocation. Debt is
supposed to give you steady returns in the long
run but equity can give higher returns. So if
you are 25 years old, and you put 75% of your
money in equity, it is expected to grow well.
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Charan Singh’s Photo
INDUSTRY SPEAKS
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Coming back to risk appetite, if you have
aggressive risk appetite, then you would invest
more in equity: in which case even 80%
investment in equity is good. But if you are a
conservative type, even 10-20% is high. All
these things put together, it's a good idea to
have an investment advisor. The earlier you
start the better!
R If you plan for retirement, plan for long-term
goals. Retirement is one of the biggest goals.
The idea is to invest regularly, save regularly -
here instruments like recurring deposits,
systematic investment plans and insurance
come in handy. The rule of 72: A formula to double your money
This rule of 72 is not perfect, but it points a person in the right direction. Say, you want to double your money in 10 years. Then, your rate of investment should be 72 divided by 10, that is, 7.2 years. Similarly, if you are getting 10% returns today, it will take you about 7.2 years to double your money. One should not try to time the markets, they should continue
with regular investments, having allocations and sticking to it. The common man should take note of the power of compounding. Einstein once said that the biggest force on earth is that of compounding. That's how `1 lakh turns into `7.5 lakh in 20 years; all because of compounding, where your principle earns interest and the interest too earns interest in turn.
D
Debt can be a killer!Let us look at credit cards.
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You spend money and then pay only the 5%
minimum that is required on your card
payment. This is debt. Rates on credit cards
vary between 24 and 36%, while a typical
home loan would cost you about 10 to 11.5%.
Cards add up debt for wrong reasons, unlike a
home loan which is for a good reason. So
control your buying impulses, control the card
expenditure and don't stack up debt on cards.
Also, repay the debt as early as you can.
Because compounding works in reverse too.
The best thing to do is to repay your debt
before doing anything else.
S
It's extremely important to plan for any
eventuality - for the Security of your Family!
For instance, when you have a house in a
corporative society it is important to have a
nominee or the house should be in two persons'
name. Even investments – fixed deposits, bank
accounts etc. should have either nominations or
joint holders, because if something were to go
wrong, the process of getting that money
becomes much easier for the family. Second,
everyone should have a will, so that your
property (whatever you have; you needn't be
rich) can be amicably divided. Third,
insurance: you must have life and medical
insurance. Also, if you have debt, make sure
your insurance policy will pay off your debt.
To leave behind debt to the family would be
very, very cruel. Any insurance policy you take
should protect at least 60-70% of your current
income, because protecting the family if
something unforeseen happens is an extremely
important part of Good Money Habits.
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The slowdown of BRICS BY BHANUPRIYA GUPTA
Networth - The Finance Club of IIMB | [email protected] 21
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INTRODUCTION
BRIC(S) was one such idea, when Jim O’Neil,
coined the term in 2001. These five emerging
economies (Brazil, Russia, India, China and
South Africa) today account for roughly 33%
of the world’s population and 25% of GDP.
But that confidence seems to be dwindling
now with the BRICS economies facing
challenges like slowing growth, falling
markets, reducing investments which have put
brakes on their growth.
WHY BRICS LOOKS UNATTRACTIVE
NOW
BRICS along with other emerging economies
were dependent on foreign investments, but
they are feeling the global financial heat with
investors fleeing away from these markets.
The economic growth in the BRICS countries
has slowed down. The MSCI BRIC Index had
tumbled about 17% so far this year and about
37% from its 2007 peak. According to EPFR,
between 2001 and 2012, BRICS attracted an
inflow of $ 184.1 billion in the capital markets
against an outflow of $ 13.4 billion since
January this year.
HSBC expects the GDP of BRICS nations to
expand at 2.4% for Brazil, 2.5% for Russia,
5.1% for India and about 7.4% for China.
Even the research by CME group also shows
how the GDP growth for these economies is
slowing year over year.Factors responsible for
this slowdown are:
Global economic slowdown has led to
the recent drop in investments.
Eurozone recession along with
volatility in global markets and
exchange rates due to murmurings
about the ‘tapering’ of financial
stimulus by US Fed has resulted in
shifting of investor’s sentiments from
the uncertain markets (like BRICS)
towards relatively stable US market
(due to strengthening dollar, record
setting performance of equity market
and improvements in labour market).
STUDENTS SPEAK
This article has been contributed by Bhanupriya
Gupta, a PGDM student at Indian Institute of
Management Raipur.
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BRICS nations are finding it difficult
to attract investments due to factors
like lack of promptness and
transparency in government operations,
infrastructure bottlenecks, corruption
and under-development of the modern
legal framework.
Factors like inflation, depreciating
local currencies, rising commodity
prices and asset bubbles in these
economies have resulted in the social
and financial upheaval, further
deteriorating the condition as evident
from the figure below.
OTHER OPTIONS
Some other emerging markets like
MIST and other N-11 nations look
attractive.
Significant investments are taking
place in Mexico, Indonesia, South
Korea and Turkey (MIST) due to the
improved business climate, ease of
doing business, extensive trade
agreement networks and increasing
population with growing purchasing
power.
Indonesia demonstrated stable growth
of around 6%, surpassing even India,
and attracted a total of $34.1bn
investments in 2012. Similarly, South
Korea had maximum FDI inflow
growth among the four MIST nations
as depicted below:
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Today it is BRICS, tomorrow it could be MIST
and day after it could be any other destination.
The bottom-line is that investors look forward
to generate value for their investments. Any
nation can assure this with right policy and
legal framework, by improving ease of doing
business, stronger infrastructures, extensive
FTA networks and such other initiatives to
attract investments and propel ahead on the
path of growth.
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REFERENCES:
The Rise of BRICS FDI and Africa,
UNCTAD Report (2013)
MIST: The next big thing or just hot
air?, Grail Research Report (2012)
BRIC Country Update: Slowing growth
in the face of internal and external
challenges, CME Report (2012)
How Solid are the BRICS?, Goldman
Sachs Report (2005)
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http://www.efinancialnews.com/story/2
013-07-17/cracks-appear-in
brics?ea9c8a2de0ee111045601ab04d6
73622 Accessed on 28.08.2013
http://blogs.ft.com/beyond-
brics/2013/01/22/indonesia-fdi-rolls-
on/#ixzz2d6SyOkCZ Accessed on
28.08.2013
http://www.chinadaily.com.cn/cndy/201
3-07/29/content_16844825.htm
Accessed on 27.08.2013
https://ktwop.wordpress.com/2013/08/2
0/brics-is-losing-bis-as-the-financial-
crisis-bites/ Accessed on 29.08.2013
http://money.cnn.com/2013/08/04/inves
ting/bric-markets/index.html
Accessed on 28.08.2013
http://growingcapacity.blogspot.in/201
3/05/indonesias-gdp-and-fdi-success-
story.html Accessed on 28.08.2013
http://www.businessweek.com/articles/
2013-03-21/bric-investors-lose-their-
taste-for-stocks Accessed on
30.08.2013
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32
ISLAMIC BANKING: A CATALYST TO
FINANCIAL INCLUSION IN INDIA?
BY Y. VENKATA ACHYUTH KUMAR
“The non-availability of interest-free
banking products results in some Indians,
including those in economically disadvantaged
strata of society, not being able to access
banking products and services due to reasons
of faith.” - Raghuram Rajan (A
Hundred Small Steps)
Networth - The Finance Club of IIMB | [email protected] 24
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This was the view expressed by
Raghuram Rajan in ‘A Hundred Small Steps’,
which was the report of his committee on
financial sector reforms, published in 2008.
Financial inclusion came into lime light in
India, after the recommendations of Khan
Commission (2004) were incorporated into the
mid-review of RBI’s 2005-06 policy. In
simple words, financial inclusion is the
delivery of financial services at affordable
costs to vast sections of disadvantaged and low
income groups. In ‘A Hundred Small Steps’,
the committee felt that provision of interest-
free banking is the most important area in the
ambit of financial infrastructure for financial
inclusion. The main purpose of inclusion is to
expand the coverage of the financial system in
the country, which is the key objective for the
emerging economies.
Islamic Banking, an alien concept in India’s
conventional banking system, is a Sharia Law
based banking system which promotes profit
sharing, but prohibits the charging and paying
of interest. Islamic banks are operational in 75
countries with assets touching $1.1 trillion and
have grown at a rate of 15%.
These countries include non-Islamic nations
like UK, USA, Germany, France, Singapore
etc. These developments across the world seem
promising for implementing the same in India.
Recently, the RBI gave nod to Kerala
government to launch financial institution
following Islamic finance.
Currently, India has a network of 82,000
branches of commercial banks across the
country, but only 5% of villages are catered for
where 70% of the population resides.
‘Mudarabah’, a kind of financing agreement,
involves one party supplying the capital and
the other supplying the labour, with both the
lender and the borrower sharing the risk.
STUDENTS SPEAK
This article has been contributed by Y. Venkata
Achyuth Kumar, a 2nd
year PGDM student at Indian
Institute of Management Raipur.
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This is helpful to the low income group,
especially less wealthy farmers who otherwise
would not be able to provide collateral. ‘Riba’,
which means a ban on interest payments and
collections, prevents the accumulation interest
payments, when the farmer or business person
becomes bankrupt. This is possible because,
the Islamic banks not only share profits but
also losses thereby preventing the pile-up of
interest.
According to Sachar Committee report,
Muslims avail just 4% and 0.48% of the credit
from NABARD and SIDBI respectively. And
the Muslims credit deposit ratio is only 47%
compared to the average of 74%. In places like
Lakshadweep with 95% Muslim population,
the credit deposit ratio is mere 9.3%. This
reflects injustice in part of Indian Muslims to
utilize their savings for economic growth.
On the flip side, devising a regulatory
framework satisfying both Islamic and
conventional banking systems would be a
challenging task for RBI. Educating the people
about the new banking system would be tough,
given the low awareness levels of conventional
banking system. There is a serious dearth of
Islamic banking experts in India who can
manage the banks in the current competitive
environment. Nevertheless, the interest-free
solutions of Islamic Banking could restore
equilibrium in Indian society by providing
succour to debt ridden farmers, labourers and
other marginalized groups. Hence, Islamic
Banking has potential as a tool of financial
inclusion.
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.
References:
1. ‘A Hundered Small Steps’, Report of the
Committee on Financial Sector reforms,
Planning Commission, Government of
India.
2. ‘Why India need Islamic Banking’ thought
paper, Infosys Finacle.
3. http://www.scief.es/blog/shariah-banks-
look-to-farmers-2011-04-04/
4. http://www.dnaindia.com/analysis/1877270/
standpoint-why-islamic-banking-in-india-is-
a-good-idea
5. http://www.businessworld.in/news/finance/b
anking/rbi-allows-non-bank-islamic-
finance-firm/1040826/page-1.html
6. http://www.ethicainstitute.com/webinar/Ach
ieving_Financial_Inclusion_For_Indian_M
uslims.pdf
7. http://www.economicinitiatives.com/Indian_
Economy/Inequality_in_Disbursement_of_
Credit_among_various_states.html
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QE TAPER– THE IDEA THAT SHOOK
Q2
AKSHAT SINHA
Networth - The Finance Club of IIMB | [email protected] 26
26
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It was May 22 afternoon. The environment
was brimming with expectations – investors,
TV reporters, government officials – everyone
was anxious to listen to the Director of the
much talked thriller, FOMC QE3, Mr. Ben
Bernanke. However, when he did come out
and speak, the audience all over found their
dreams shattered – the Dow finished the day
1.4%, lower, at 15,112 while the S&P 500
dropped 1.4% to 1,629 -the Director had
announced plans of QE tapering through the
FY 2013-14.
But before we discuss what went wrong and
why the market reacted the way it did and
when the tapering would actually start, let’s
start with the basics – What is this QE and
why should I care? Well, we all must have
used a photocopier, right? So QE employs
exactly the same principle. Whenever the Fed
wants to increase money supply and the
conventional interest rate approach doesn’t
work (well, it’s already 0.1%, how much lower
can you have it?), it loads papers into the tray,
currency onto the glass panel, and presses
copy. The number of copies depends on your
requirement. In this case, it has been around 85
billion. So essentially “pretending money” out
of thin air.
.
After the financial crisis in 2008 and the post
crisis recession that slumped US growth, the
Fed had to resort to asset purchases such as
government securities, MBS etc. to ensure easy
credit for industries and businesses and
increase consumption. To give you a feel, the
Fed has expanded its balance sheet by a
whopping $2900 billion since 2009. But now,
according to Mr. Bernanke, the US economy is
"continuing to grow at a moderate pace" and
"risk that the economy has entered a substantial
downturn appears to have diminished over the
past month or so".
Akshat Kumar Sinha is a first year student of IIM Bangalore. He has worked in the financial technology
space after graduating from IIT Kharagpur
STUDENTS SPEAK
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But if the US economy is on the uphill, then
why should we be anxious? The problem is not
here. It lies in the fact that this “copying
process often creates a vacuum of hot gases
around”, particular in form of hot money in
super-funded industries. Given the low interest
rates and stagnant economy in the USA (and
Euro Zone), much of this easy credit was
leaked out in the form of capital outflows to
emerging countries where yields were higher.
Thus most of the emerging countries,
particularly India, with high FII investment
and capital inflow, could weather off the
economic recession in 2009-11. But the
announcement has led to large scale sell-off in
these markets as people fear tapering is going
to happen sooner than later, and with these
economies already reeling with high CAD and
increasing inflation, this declaration has
slumped growth trajectory and caused the
markets to become bearish. The announcement
was backed by recent reports showing
encouraging signs for inflation and
unemployment rate, and was meant to act as a
forward guidance and signal, but it failed
miserably in shaping expectations as it did not
give a timeline for the tapering to start. This
resulted in extreme hysteria in the market and
no one was sure when tapering would begin.
However, the Fed was quick to realize this
mistake, and soon came up with the famous
“Evan’s Rule” for guiding the tapering
process. According to this, Fed will start to
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slowdown its LSAP program once the
unemployment level reaches below the 6.5%
target and inflation crosses the 2% mark. With
the inflation hovering around 1.7% and the
unemployment rate nearing 7%, the period that
followed was one that of speculation – Will it
happen in September, or December, or Mid
2014, or will it begin no earlier than Early
2015? The period through June and July added
to this hysteria as the US economy grew at a
modest rate and the unemployment rate
reached 6.7% (“temporarily” vindicating Fed
of its announcement). Though many started the
“Sep taper” cry, yet a few pointed out fallacies
in industry data. While the unemployment rate
had reduced, employment hadn’t increased – it
was just that the labor force participation rate
had declined. This created a perplex situation
for the Fed – People wanted to know whether
Fed will continue with its tapering decision
even in the backdrop of this new finding. It
was argued that even the inflation levels are
quite low, and a decision to slowdown might
lead it to lower levels. Moreover, it was
suggested that decision should be postponed
until December, when we will have a better
assessment of the economic momentum. The
Fed played sensibly, and on Sep 18th
announced that it will postpone its tapering
plan until conclusive evidence about the upturn
is found. While this decision has surely calmed
a few nerves, but December is not far away,
and only time will tell whether the taper will
happen this year or not.
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Credit unwinding and EM growth
BY RAHUL GHOSH
Networth - The Finance Club of IIMB | [email protected] 28
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Since the “great recession”, most of the
economies around the world launched stimulus
programmes to spur growth. The low interest
rates and the unconventional monetary policy
increased the debt to gdp ratio of these
countries. Off late they have started or are
planning to decrease their debt. The United
States (US) Federal Reserve (Fed) has already
started planning its gradual exit from the
quantitative easing (QE) program. At the same
time China, whose ratio of credit to gross
domestic product ballooned from about 134%
in 2008 to 173% at the end of 2011, is also
deleveraging. This dual unwind can have
severe consequences on the EM economies. It
affects their capital accounts and hampers their
growth prospects directly.
Unwinding US Quantitative Easing
The Fed continued its QE program, to boost
the feeble US economy. Of late, recent US
economic data have started pointing towards
an improving economy with unemployment
rate at 5 year low. Moreover, the incremental
benefits of QE are being questioned.
In other words each additional dollar being
pumped into the US economy is producing
diminishing benefits. All of these factors
combined with the greater risk in the economy
.
caused by the drastic increase in US liabilities
have caused Fed to consider a gradual exit
from the QE program. This results in a base
case of higher real interest rates in US and an
appreciating US dollar (USD). As a result of
the rising interest rate in the US, the capital
that flew into the EMs in search of a higher
yield will flow back into the US. This will
deteriorate the capital account of the
economies. Not only is this true for the already
committed capital but also for any new
investments that are about to enter the EMs.
Rahul Ghosh is a first year student of IIM Bangalore. He has worked in the financial
trading space after graduating from IIT Kharagpur
STUDENTS SPEAK
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Additionally, the higher USD results in
depreciation of the EM currencies. To protect
the currencies the respective central banks will
tighten their respective monetary policies
further in order to attract foreign capital.
Higher real rates could trigger a faster unwind
of credit growth. This will hurt growth
particularly in economies where the credit
growth has been ‘excessive’ (Higher interest
rates make refinancing debts more difficult).
Hence, the higher US interest rate will attract
capital back into the US and the strengthening
USD will cause the EM central banks to
tighten their money supply. Both the factors
will result in slowdown in the EM economies.
Unwinding China’s leverage:
China achieved a massive credit fuelled
growth. As it attempts to achieve a “beautiful
deleveraging” act, it restricts the availability of
cheap money and hence curbs demand. This
affects the EMs in three ways.
Firstly, the countries that export manufactured
goods to China are witnessing a decline due to
reduction in import demand from China.
Countries such as Taiwan and South Korea
that export large quantities of manufactured
goods to China are affected most due to this
factor. Secondly, China has been a massive
importer of commodities from certain EMs
during its rapid growth phase.
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The deleveraging is causing a reduced demand
for commodities and countries such as Chile
and Brazil that are primarily commodities
exporting economies are suffering.
However, there are certain countries that have
low export exposure to China and are net
importers of fuels and hard commodities. They
will stand to benefit from China’s slowdown as
commodity prices will cool off due to reduced
overall demand from China. India and Turkey
are among such economies. Therefore, the
impact of China unwinding depends on the kind
of trade relationship a country has with China.
While some countries are at a greater risk of
current account degradation, some other
countries are actually benefitting from it
through reduced commodity prices.
Hence, the primary fear that the EM economies
face right now is what will happen if both the
factors strike simultaneously. The effect of the
change in Fed’s stance in its monetary policy
will cause flight of capital from EM economies.
Moreover, those economies that followed the
path of strong credit led growth and are net
exporters to China seem to be at the greatest
risk whereas those which contained credit
expansion and are not large exporters to China
will benefit on this front.
References
http://online.wsj.com/article/SB1000142405270
2303360504577411151135639534.html
http://www.bls.gov/news.release/pdf/empsit.pdf
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FINANCIAL TECHNOLOGY
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Treasury Management in Banks:
A Technological Perspective
ROMIL JOHRI
Romil is a first year student at IIM Bangalore. Prior to
this he has worked for two years in the financial
consulting space, after graduating from IIT Kharagpur.
Treasury Management in Banks:
A Technological Perspective
Over the years, Treasury management has
come to play an increasingly important role in
banks and in general for the financial industry.
It serves various purposes such as maintaining
liquidity for the bank, managing the financial
and operational risks, and maximising the
bank`s profitability through funding and
investments in various financial products.
Treasury Department Structure
Primarily the treasury has the Fixed Income
desk, Foreign Exchange desk and the Equities
desk to handle transactions in these asset
classes. Often banks have other desks
allocated for various other types of asset
classes as well. A bank`s treasury structure can
be broadly divided into Front Office, Middle
Office and Back Office. Front Office is
responsible for the generation of trades,
Middle office for the analysis and risk
handling of trades and Back Office for the
daily valuation and payment transfers for these
trades. Each of them is an extremely crucial
pillar for the growth of the bank.
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FINANCIAL TECHNOLOGY
A deeper look into Treasury Operations Treasury departments are supported by software
systems called the Treasury Systems. Thousands of
transactions happen on a daily basis by the bank`s
treasury. These trades are booked on various
complex derivatives and Kondor Plus, Calypso etc.
Banks buy these systems from the vendors and
implement them by customizing them to their
requirements.
Treasury Systems in detail These systems provide various functionalities such
as trade repositories, deal booking functions, risk
management tools, payment handling, market data
integration, static data capabilities, database
management etc. Usually they are very large and
comprehensive in their coverage but different
Treasury Systems are strong and weak in different
aspects. Two most commonly used treasury
systems are detailed in Fig-1.
In India Murex and Kondor Plus are two primary
systems used by various private and public banks.
Some of the examples are: ICICI uses Murex, ING
Vysya uses Kondor plus, Kotak Mahindra uses
Kondor Plus; internationally ANZ uses Murex and
United Overseas Bank uses Wall Street. Often
banks decide on these Treasury systems based on
the kind of product-trades they are involved with.
Murex for instance offers a very wide range of
financial products that can be handled by it ranging
from simpler loans/borrowings to more complex
ones such as the accumulators. Hence banks
dealing with such complex products find it suitable
to use Murex. Kondor Plus is generally considered
very effective in Forex Trades.
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With the advancements in the financial models
and mathematical analysis in today`s banking
industry, role of these Treasury systems have
increased manifolds. Post the financial crisis,
the risk management capabilities of these
systems are being used extensively to analyse
the credit and interest rate risks. This analysis
is required for effective hedging of trades and
deciding on the capital allocation for the
trading desks. Methodologies such as Credit
Value Adjustment are becoming increasingly
prevalent to mitigate credit risk. Efficient
implementation of these in treasury systems
allows banks to monitor such risks. No
successful bank can afford to ignore the
strategic importance of a robust and state-of-
the-art treasury management system esp. in
today’s challenging regulatory environment
Data Sources: Company Websites, Wikipedia
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Provides functionalities for a
several Interest Rate Derivatives.
Very useful for banks dealing in
complex IR derivative products.
Efficient models for cross asset
structured products
Clients:
ICICI Bank
ANZ Bank
UBS
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Considered very strong in handling
Forex Trades.
Easy integration with external third
party pricing tools.
Efficient straight through processing
and flexible platform
Clients:
Kotak Mahindra Bank
ING Vysya Bank
Maybank
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ALGORITHMIC TRADING: INTERVIEW
with Mr. Saurabh Das from Silverleaf
Capital Services:
About Silverleaf Capital Services:
Silverleaf Capital Services is a Mumbai-based
firm that has emerged as one of the leaders in
the High Frequency Trading space in India
within one short year of rolling out operations.
Our work combines Machine Learning,
artificial intelligence techniques and
mathematical modelling with in-house low
latency trading capability.
About Saurabh Das:
Saurabh is a co-founder of Silverleaf Capital
Services. He is a self-taught developer who
has worked in the fields of algorithmic trading
and agent-based computational economics.
Prior to forming Silverleaf, he has worked at
KPMG in Business Consulting and at Morgan
Stanley. He has a PGDM from IIM
Ahmedabad and a Bachelor’s Degree in
Engineering Physics from IIT Bombay.
How did the idea of entrepreneurship come
about? Why algorithmic trading?
The idea of entrepreneurship didn't pop up in a
day - it's a process that took time and a lot of
thought. As with all of us who have had the
luxury of a best-in-class education, it is oft-
times difficult to drop out of cushy jobs and
into the uncertain world of entrepreneurship.
The prime reason for algo-trading was that the
financial markets are excellent proving-
grounds. It is a very level playing field for new
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FINANCIAL TECHNOLOGY
entrants as compared to most industries. Given that
I would know whether my company is succeeding
or failing in a relatively short time span,
entrepreneurship and algo-trading was very
enticing and I took the plunge.
What are the current trends that are popular in
the area of algorithmic trading? What does
Silverleaf Capital Service specialize in (solution
offered to client)?
Most firms in India are still running regular trend
following and simple statistical arbitrage systems
(dealing in underlying and its associated F&O
contracts). Market-making on incentivized illiquid
exchanges and commodity arbitrage between CME
and MCX has become popular. More advanced and
latency focused firms are detecting and trading
based on very short term patterns in the order book.
Silverleaf, drawing on our skills in mathematical
modelling, hardware & software design, specializes
in finding patterns to identify opportunities and in
building low latency infrastructure to capitalize on
them.
How is the algorithmic trading business shaping
up in India and how do you see Algotrading
business changing in future as Indian financial
markets develop further?
Brokers are now much more willing to invest in
technology for High Frequency trading than they
were a few years ago. A lot of them are investing in
developing in-house expertise rather than buying
software and hardware from vendors.
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The share of algorithmically generated volumes
is growing very rapidly leading to increased
liquidity and turnover which is normally a good
thing for algorithmic trading. Most exchanges
are providing colocation facilities for HFT.
NSE has started providing tick by tick data
along with traditional snapshot data. We expect
other exchanges to start providing tick by tick
data feeds soon because that should
automatically increase algo trading
participation and turnover
How is HFT different from Algo Trading?
Broadly speaking, algo trading is execution of
trades using an algorithm. Latency is not
necessarily critical. For example, if a mutual
fund wants to buy a very large quantity of a
stock it can run an algorithm to execute the
trade by placing orders slowly over the day to
minimize losses because of market impact.
HFT is the latency sensitive subset of algo
trading. A fraction of a second delay in
execution could cause you to either lose a
trading opportunity or even create a trading
opportunity for your competition - usually other
HFT firms.
What are your views on High Frequency
Trading (HFT)? How do they affect stability
in the markets?
In India and worldwide, it has been shown that
bid ask spreads and trading costs (market
impact) are going down because of HFT. For
example if a contract is being traded on
multiple exchanges HFT firms are competing to
ensure that a person wanting to buy the
contract, with access to just one exchange gets
a price as close as possible to the lowest among
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FINANCIAL TECHNOLOGY
all the exchanges. Research has even shown HFT to
be driving out market manipulators too.
What are the regulatory constraints you face as a
part of the business?
HFT has introduced a few new risks to market
stability for which regulations are being modified.
As per SEBI regulations exchanges ask firms to
demonstrate strategies before they are approved.
Audit trails of strategies have to be maintained and
the systems are audited regularly. New measures
like penalties for a low trade to order ratio have
been introduced. Immediate or Cancel orders have
been banned in commodity exchanges.
Regulators round the world have concerns about
the systemic risks of algorithmic trading on inter-
connected financial system. There have been
instances of malfunctions and increased volatility
in the markets. What is your opinion on that?
Most algorithms are based on models which have
been trained only for very normal market
conditions. In extreme market conditions with low
liquidity these algorithms can cause short lived
volatility. Malfunctioning algorithms can also
trigger big market moves in a very short span of
time. This is where the regulators are stepping in.
Measures like tighter circuit filters have been put in
place. Regulators have defined mandatory risk
measures which all algorithms need to have in
place. The exchanges check the functioning of
each of these risk measures before approving a
strategy to run.
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SECTOR TALK
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Current Scenario
The Indian retail sector is one of the key
drivers of the Indian economy. Contributing to
a mammoth 15-20% of the GDP and around 8-
10% of the total employment, Indian retail is a
$500 billion industry and has been growing at
around 11% for the past 3 years, with
organised retail contributing to around 8% of
share of the total retail market. A vertical –
wise break-up of the organised retail sector in
India is as under.
Beauty & Personal
Care 3%
Footwear 4% Clothing
and Apparel
33%
Jewellery 6%
Food 9%
Home and
interior 5%
Mobile & telecom
11%
Pharmacy
2%
Consumer
Electronics 8%
Others 19%
Share in Indian Organised Retail Market
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SECTOR TALK
The attractiveness of the apparel sector in
organised retail can be explained as under:
Retail Vertical Revenue/ sq ft. (per store per day)
Food, Grocery and Beverages
5000-7000
Footwear 8000-10000
Apparel 10000-12000
Consumer durables 20000-25000
The apparel vertical thus not only has a
superior revenue per square feet but also
enjoys a higher margin when compared to
other verticals, making apparel retail the most
attractive vertical especially in organised retail.
Top players – Indian retail sector:
Aditya Birla group
Over 512 supermarkets and 16 hypermarkets. Has become a bigger player after the recent acquisition of Pantaloon retail
Shoppers Stop
Around 3.5 million square feet of store area over 25 cities and around 50stores
Tata Trent
Around 120 stores with an average store area of 40000 sq feet across its 3 major formats Westside, Star Bazaar & Landmark
Spencers Retail
Store area of around 1 million sq ft over over 45 cities and 200 stores
Reliance retail
More than 1300 stores servicing around 2.5 million customers every week
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Online Retail:
Currently, a $1.6 billion market, the Indian
online retail market has grown rapidly due to
increasing internet penetration, development
of the financial services sector, increased
adoption by the youth, ease of use, additional
payment options like EMI and cash on
delivery, discounts offered, time savings,
customisation options, testimonials, reduced
inventory and real estate expenses, transparent
return policy and easy comparison shopping.
Source: Euromonitor, Mckinsey
Among the top players, only 2 players have
seen positive returns as per the latest
financials. Thus, declining margins has been a
trend in the Indian retail sector, especially in
organised retail, adversely affecting the
profitability of the players. The recent deals in
the retail sector, (Aditya Birla & Pantaloon
retail; split up of the Walmart-Bharti JV,
postponement of IKEAs entry in India etc.)
can in short be attributed to strategies to
counter dwindling profit margins
108 302 543 930 1355 2054
2005 2007 2009 2011 2013 2015 (exp)
Internet Retail in India ($ millions)
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SECTOR TALK
Aditya Birla – Pantaloon Retail
Deal to acquire 50.01% in Pantaloon retail via Aditya Birla Nuvo Ltd. (deal size estimated to be 13 times EBITDA and around Rs. 3200 crs)
Walmart JV exit Walmart exits after a 6 year long partnership with Bharti retail
Flipkart PE funding
A $ 200 mn PE funding (6th round of PE funding), from its existing investors, the largest raised by any e-commerce company in India.
Myntra PE funding
Raised around $25 million from existing investors, Accel partners and Tiger global
Arisaig India - Trent
Acquires 2.36% stake in Trent retail increasing it’s overall ownership to 9.88%
Arvind Lifestyle – Debenhams, Nautica & Next Business
The acquisition has enabled Arvind to diversify into luxury and speciality retail in the apparel sector
IKEA – entry into India
Investment proposal of Rs. 10,500 crs, approved by the cabinet via the FDI route. However, first store not likely to open before 2016
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FDI in Retail:
Source: AT Kearney Report: Global Retail
Development index
Though the government in 2012 has allowed
100% FDI in single brand retail and 51% FDI
in multi-brand retail, the reforms are yet to
yield a substantial impact in foreign currency
inflows. In 2011, India was seen to be one of
the favourable destinations for retail. However
India’s rank has slipped in the wake of
prevailing corruption, policy paralysis and
absence of transparent regulation with regards
FDI in retail due to unclear procurement
policies and opposition by various states
294 536 391
567 551
2008-09 2009-10 2010-11 2011-12 2012-13
FDI -Retail & Wholesale trade (USD
mn)
FDI -Retail & Wholesale trade (USD mn)
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SECTOR TALK
FDI inflows from retail have been stagnating in
the recent years. Also, even though the FDI
inflows into the retail sector have doubled in
the last 5 years, it just constitutes 4% of the
total FDI inflows, which isn’t substantial given
that the sector contributes to around 15% of
India’s GDP
Future Expectations:
Short term growth
The immediate growth of the industry is
heavily dependent on macro-economic factors
affecting consumer sentiment. With persistent
inflation, growing current account and fiscal
deficit and negative investor sentiment may
well impact the short term growth of the sector.
Long term Growth and challenges
The long term growth of the sector is expected
to robust, with a CAGR of 15-20% for at least
the next 5-10 years, with demand fuelled by
higher purchasing power, growth of the Indian
financial sector, changing consumption
patterns, higher investments and better
technology.
36%
7%
15% 9%
3%
3%
17%
4%
6% FDI % share
Manufacture
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Organised retail in India has been growing at a
rapid pace. Despite its low current penetration
of around 8%, organised retail is expected to
constitute around 20% of the retail market in
the next 5-7 years. Also within organised
retail, food and grocery retail is expected to
grow the least, due to lowest penetration of
organised retail, very low margins, affecting
profitability of new entrants struggling to
break-even. On the other hand long run growth
in apparel, footwear, jewellery, pharmacy,
beauty and healthcare and consumer
electronics and durables are expected to be
more robust. The vertical-wise growth
predictions of the India retail sector are as
under.
The Indian online retail industry is expected to
double in the next 2-3 years and is expected to
grow at a CAGR of around 20-25% at least for
the next 10 years.
With regards FDI in retail, Investor confidence
is still not high, this is proven by the fact that
IKEA, even after getting the cabinet approval
has decided not to open its first store before
2016. Thus just policy announcements are not
adequate. Steps have to be taken to ensure a
positive signalling effect, to encourage
investment in the retail sector, one of the
largest contributors to the GDP. This is even
more critical given India’s current account
deficit, so as to at least ensure capital inflows,
so as to strengthen the balance of payments
position and the depreciating rupee.
The retail sector in India faces huge
challenges from the point of view of financial
constraints and inferior supply chain
infrastructure. Financial constraints are faced
more by the retailers in the unorganised retail
sector.
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Low profit margins, lack of credit and huge
investments needs are the 3 key problems
faced by the retailers especially in the un-
organised sector. With unorganised retail
currently constituting a substantial 92% of
Indian retail, these problems need to be
seriously addressed, or else the sector may get
adversely affected making the businesses
financially unviable with the entry of new
players in organised retail. Protectionist
policies should not be implemented, but the
government should ensure that this sector is
given priority access to credit and should
encourage banks and other financial
institutions to extend credit to the unorganised
retail sector.
Supply chain challenges are a huge hindrance,
especially in the food and grocery retail
segment. Supply chain losses are of around 20-
30% are can be said to be one of the prime
causes of food inflation in India. Also the low
margin based food and grocery retail vertical
needs a boost and supply chain infrastructure
development can be factor reducing
procurement costs and thus increasing margins
and making food and grocery retail more
attractive. The assumption of improved supply
chain with the entrance of foreign players via
the FDI route is also flawed. Pro-active
investments in supply chain need to be
undertaken to encourage foreign players to
invest in the retail sector. Thus overcoming the
financial and supply chain challenges would
indeed further bolster the growth of the Indian
retail sector, which plays a critical role in
India’s growth story.
Data Sources: www.rbi.org, Bloomberg,
Reuters, www.michealpage.com
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MERGERS AND ACQUISITIONS
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OVERVIEW
The erratic pattern of the M&A industry since
the financial crisis has led to lukewarm
performance throughout the bulge bracket,
boutique and other firms across the globe. A
brief synopsis of the past 12 months (October
’12 – September ’13), gives the following
global picture.
Number of Deals 27059
Value $ 2.63 Trillion
Average Disclosed Deal Size
$175.75 Million
Average Premium 28.31%
Without any surprise U.S. is at the heart of
deals, while industry wise Telecom has been at
the core of consolidation – both in terms of
acquirers and targets, clearly visible in the
following charts.
.
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Topping the M&A deal table of the 10 largest
deals (globally) is the Vodafone – Verizon
deal, with a whopping deal size over $130.1
billion. Another news maker has been the
strategic deal between Microsoft and Nokia,
poised to be a game changer for Microsoft. It
has been discussed in greater detail in the next
section.
The following page contains the table with
reference to Oct- ’12 to Sept- ’13 for the top
10.
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Following is the league table which is led by the
bulge bracket firms, announced in the same time
frame.
Adviser Rank
(Market
Share)
Total Deal
Size
($Millions)
Average
Deal Size
($Millions)
Deal
Count
Goldman
Sachs &
Co
1 653,787 1,981 330
JP
Morgan
2 573,344 2,559 224
Morgan
Stanley
3 573,221 1,997 287
BofA-ML 4 560,118 2,569 218
Barclays 5 440,799 2,182 202
Citi 6 344,374 1,655 208
Deutsche
Bank AG
7 341,387 2,081 164
Credit
Suisse
8 331,441 1,563 212
UBS 9 317,194 2,143 148
Lazard
Ltd
10 235,541 1,126 209
Date Target
Name
Acquirer
Name
Seller
Name
Deal
Value
($millio
n)
02-
09-
2013
Cellco
Partnershi
p
Verizon
Communica
tions Inc
Vodafo
ne
Group
PLC
130,100
15-
10-
2012
Sprint
Communi
cations
Inc
Softbank
Corp 39,739
15-
04-
2013
Sprint
Communi
cations
Inc
DISH
Network
Corp
37,723
03-
10-
2012
T-Mobile
USA Inc
T-Mobile
US Inc
Deutsch
e
Teleko
m AG
28,976
22-
10-
2012
TNK-BP
Ltd
Rosneft
OAO 28,000
14-
02-
2013
HJ Heinz
Co
Berkshire
Hathaway
Inc,3G
Capital
27,403
22-
10-
2012
TNK-BP
Ltd
Rosneft
OAO BP PLC 26,379
15-
07-
2013
French
Republic
Caisse des
Depots et
Consignatio
ns
23,361
09-
08-
2013
Koninklijk
e KPN NV
America
Movil SAB
de CV
22,695
25-
03-
2013
Dell Inc
Blackstone
Group LP,
Francisco
Partners 21,228
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Announced Date 03-09-2013
Target Name Nokia (Devices and Services Business)
Acquirer Name Microsoft Corp
Announced Total Value $ 7.2 billion
Acquirer Financial Advisor
Goldman Sachs
Target Financial Advisor JP Morgan
Deal Sector Technology
In a game-changer, world’s largest software
maker by revenues - Microsoft Corporation
announced on 3rd
September, 2013 that they
will purchase largely all of Nokia's Devices &
Services business, license its patents, and
mapping services.
The transaction terms require Microsoft to pay
€ 3.79 billion to purchase almost all of Nokia's
Devices & Services business, € 1.65 billion to
license Nokia's patents, for a total transaction
price of € 5.44 billion in cash. Funding will be
sourced primarily through its cash resources
outside US. Nokia will pay the software giant
€ 37.9 million if its shareholders do not
approve the deal. Approximately 32,000
people are expected to transfer to Microsoft.
Nokia will retain its patent portfolio and will
grant Microsoft a 10-year non-
exclusive license to its patents. Microsoft will
grant Nokia rights to use Microsoft patents in
its HERE (formerly Nokia Maps) services.
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MERGERS AND ACQUISITIONS
In addition, Nokia will grant Microsoft an
option to extend this mutual patent agreement
in perpetuity. As part of the transaction, Nokia
is assigning to Microsoft its long-term patent
licensing agreement with Qualcomm, as well
as other licensing agreements.
The deal revolves around increased synergies,
faster innovation, unified branding and
marketing for Microsoft. Numerous reports
have dubbed Steve Ballmer’s attempt to
synchronize mobile hardware and software
services as replicating Apple’s. Nokia’s
shareholders were expecting it to make a
strategic shift to the leading mobile operating
system Android for the past one year.
Analysts’ insights suggest that poor numbers
from the exclusive Windows OS strategy
initiated in February 2011 as a major reason for
the deal.
Nokia alone constituted more than 90% of
Windows phone sales in the first half of 2013.
However Microsoft aims to leverage the
success from Lumia range of phones. Lumia
phones accounted for more than 75% of
Windows phones across the globe in 2012-13.
Lumia handsets have grown in sales in each of
the last three quarters, with sales reaching 7.4
million units in the second quarter of 2013.
Another reason doing the rounds is the close
relationship between Nokia CEO Stephen Elop
and Microsoft, with the former being erstwhile
head of Business Division in Microsoft
credited for launching Office 2010. In fact,
Nokia expects that CEO Stephen Elop and
MICROSOFT-NOKIA DEAL
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others would transfer to Microsoft at the
anticipated closing of the transaction.
A sneak peek into numbers illustrates that
operations planned to be transferred to
Microsoft generated an estimated € 14.9
billion, or almost 50 percent of Nokia's net
sales for the full year 2012. Microsoft expects
the deal to be accretive to adjusted earnings
per share in FY 15.
As part of the deal, Microsoft will procure the
Asha brand and will use the licensed Nokia
brand with existing Nokia mobile phone
products. Nokia will continue to own and
manage the brand. This provides an
opportunity to Microsoft to extend its service
offerings to a larger consumer base across the
globe, while letting Nokia's mobile phones to
serve as a platform for Windows OS phones.
It will take over Nokia's Mobile Phones
division which had sales of 53.7 million units
in Q2 of 2013.Microsoft will also immediately
make available to Nokia € 1.5 billion of
financing in the form of three € 500 million
tranches of convertible bonds.
Another important part in the deal is the
restriction up to end of 2015 from further
licensing the Nokia brand with respect to
mobile devices sales. Furthermore, the
restriction is on using the brand on its own
devices as well, which implies Microsoft will
call the shots. Fingers are crossed over the
expected synergies for the two companies
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MERGERS AND ACQUISITIONS
VODAFONE-VERIZON DEAL
Announced Date
02-09-2013
Target Name Cellco Partnership (Seller – Vodafone Plc)
Acquirer Name Verizons Communications Inc
Announced Total Value
$ 130.1 billion
Acquirer Financial Advisor
BofA ML/ Barclays/ Guggenheim Partners/ Adviser/ JP Morgan/ Morgan Stanley
Target Financial Advisor
Goldman Sachs/ UBS
Deal Sector Communication
September 2, 2013 marked a historic day in the
world of Mergers & Acquisitions when
Verizon Communications Inc. announced that
it will acquire Vodafone's 45 percent
ownership in Verizon Wireless for a whopping
$130 billion, making it the 3rd
largest M&A
deal ever. The deal size is worth more than the
GDP of more than 70% of the countries on this
planet!
It is the largest deal in more than a decade. The
previous largest deal was worth $203 billion
when Vodafone acquired Germany’s
Mannesmann AG in 2000. M&A advisory
league tables have shaken up globally with six
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investment banks leading the deal as
mentioned in the table. The transaction is
expected to be incremental to the company's
EPS by 10 percent approximately
immediately.
Verizon also announced an increase in
quarterly dividend by 53 cents per share
simultaneously with the deal. This increases
Verizon's dividend 6 cents per share, from
$2.06 to $2.12 per share YoY.
The bulk of the proceeds from the deal - 71% -
will go to Vodafone shareholders, who could
cash in their Verizon shares to take the entire
windfall as cash. The transaction would
provide Verizon with 100 percent ownership
in the US after 13 years of partnership with
Vodafone. Chairman and CEO Lowell
McAdam claims that as a wholly owned entity,
Verizon Wireless will be able to exploit the
continuing progress of consumer demand for
wireless, video and broadband services, and
also get the most out of the changing
competitive dynamics in the market. He
expects the transaction to close in the first
quarter of 2014.
Verizon Wireless’ sheer size can be adjudged
from 100.1 million retail connections, largest
4G LTE network, 73,400 employees and more
than 1,900 retail locations in the US, as of the
end of Q2 2013. It was started in 2000 as a
joint venture of Verizon and Vodafone. It
reported $75.9 billion in operating revenues in
2012, $39.5 billion in the first half of 2013,
and an impressive operating income margin of
28.7 percent in 2012 and 32.6 percent in the
first half of 2013, as per company reports.
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MERGERS AND ACQUISITIONS
The deal break up is as follows: The common
stock portion valued at approximately $60.2
billion will be distributed to Vodafone
shareholders, with a minimum price of $47 and
a maximum price of $51. The cash portion of
$58.9 billion will be funded by a $61 billion
bridge credit agreement with several banks.
The bond issue is the largest ever above
Apple’s bond issue of $17 billion. In addition,
Verizon will issue $5 billion in notes payable
to Vodafone.
Analysts suggest that Verizon was keen
towards the deal due to anticipated economic
recovery in US and rising interest rates. Also,
Verizon would no longer have to operate its
wireless and wire line business separately, and
helps it take decisions much faster. However
analysts are worried about the high price paid
at a time when growth is slowing in US
wireless industry and smaller rivals are
competing aggressively on price. Shareholders
have not been enthusiastic after the deal as
reflected by the stock prices.
Vodafone too, has been focused towards
reducing debt levels and facilitating
acquisitions particularly in Europe. The deal
also involved Verizon giving out its 23% share
in Vodafone Italia for a value of $3.5 billion as
part of the consideration. Its stock prices
indicate a positive response from the
shareholders.
Data Source: Bloomberg (including charts and
tables)
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PERSONALITY PROFILES
Patrick Dlamini Xi Jinping
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PATRICK DLAMINI
CEO, Development Bank of Southern Africa
(DBSA)
The Chief Executive Officer of the
Development Bank of Southern Africa, Patrick
Dlamini got recognized this year by
Worldwide Who’s Who for his dedication,
leadership and excellence in banking and
financial services.
Having 16 years of organizational experience,
he assumed his current position as chief
executive officer of the Development Bank of
Southern Africa in September 2012. Strategic
formulation, business management and
financial modeling are some of his areas of
expertise. He is responsible for overseeing the
management of the bank on a day-to-day basis
and implementing the financial institution’s
strategic vision.
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PERSONALITY PROFILES
Mr. Dlamini has previously held high-level
management roles including chief executive
officer of the Air Traffic and Navigation
System, business unit executive at Transnet
and
While the establishment of a BRICS
development bank was suggested at the Fourth
BRICS Summit last year, Mr. Dlamini
welcomed and appreciated the establishment of
this bank from the BRICS bloc. He believed
that it would play a critical role in advancing
infrastructure funding to promote development
and regional integration on the continent.
“This bank would ensure that the infrastructure
development needs of member states, in
particular Africa, would receive the much-
needed infrastructure funding to fill up the
infrastructural gaps of the continent" Mr.
Dlamini suggested. Also the bank would
establish a pool of money, called Brics
contingent reserve arrangement, for the
member states to be cushioned against any
economic shocks in future and lessen their
dependence on Western institutions further.
Although these aims challenge the traditional
roles of the International Monetary Fund and
the World Bank, institutions that in their 50-
year life have been dominated by Europe and
the United States.
The underlying motivation is to assert the
collective interests within the BRICS, though
they are hard to define, and do so against
established Western ones.
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XI JINPING
President of the People's Republic of China
Xi Jinping is the President of the People's
Republic of China, the General Secretary of
the Communist Party of China, and
the Chairman of the Central Military
Commission. He is also an ex officio
member of China's de facto top decision-
making body, the CPC Politburo Standing
Committee.
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PERSONALITY PROFILES
In spite of the fact that China's GDP outweigh
the combined GDP of the other four members
of BRICS, it has avoided dominance being a
cause of political strife with its partners. Xi
Jinping has been a strong proponent of
strengthening communication and
coordination, and safeguarding common
interests within the BRICS Nations. He
understands and highlights how the economy
of these countries plays a crucial role in
contributing to the joint development,
stimulating the global economic growth and
countering international financial crises.
In an informal meeting of BRICS leaders on
Sept. 5, 2013 in St. Petersburg, the Chinese
leader exchanged views and coordinated
positions on cooperation with BRICS
countries, as well as major regional and
international issues.
The strengthening Africa-China has been
another focus point in his realm. The bilateral
strategic mutual trust and support and practical
cooperation between China and Russia have
been enhanced further with President Xi
Jinping's recent visit to Russia
He has also been a promoter for speeding up
the establishment of the BRICS Development
Bank, and making a contingent reserve
arrangement as soon as possible. He is a true
believer that BRICS countries should
strengthen collaboration to pursue the common
interests.
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NEWS ROUNDUP
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BEZOS, AMAZON’S FOUNDER, TO BUY
THE WASHINGTON POST
The Washington Post, the newspaper whose
reporting helped topple a president and
inspired a generation of journalists, is being
sold for $250 million to the founder of
Amazon.com, Jeffrey P. Bezos, in a deal that
has shocked the industry. Donald E. Graham,
chairman and chief executive of The
Washington Post Company stressed that Mr.
Bezos would purchase The Post in a personal
capacity and not on behalf of Amazon the
company. The $250 million deal includes all
of the publishing businesses owned by The
Washington Post Company, including the
Express newspaper, The Gazette Newspapers,
Southern Maryland Newspapers, Fairfax
County Times, El Tiempo Latino and Greater
Washington Publishing.
The Washington Post company plans to hold
on to Slate magazine, The Root.com and
Foreign Policy. According to the release, Mr.
Bezos has asked Ms. Weymouth to remain at
The Post along with Stephen P. Hills,
president and general manager; Martin Baron,
executive editor; and Fred Hiatt, editor of the
editorial page.
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FED DECIDES NOT TO BEGIN
TAPERING QE3
The Federal Reserve announced in its
September Federal Open Market Committee
(FOMC) meet that it would not being to taper
its $85 billion a month bond-buying program
known as Quantitative easing (QE3). The Fed
will continue to purchase mortgage-backed
securities at a pace of $40bn a month and
Treasury securities at a pace of $45bn a month.
It made no change to its 6.5 per cent
unemployment rate threshold for a rise in
interest rates. The vote for the decision was 9-1
in favor.
The Fed cut its growth forecast and
confounded expectations that it would start to
slow its third round of quantitative easing as
the rate-setting FOMC said it would “await
more evidence that progress will be sustained
before adjusting the pace of its purchases”. It
further stated “The tightening of financial
conditions observed in recent months, if
sustained, could slow the pace of improvement
in the economy and labor. market.”
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The decision suggests the Fed was alarmed by
the sharp rise in long-term interest rates that
followed its June announcement of a likely
scenario for tapering its QE3 programme and
wanted to push back against markets and by
the prospect of a big fiscal showdown in the
US Congress in the coming weeks.
Q2 ROUNDUP S&P 500
Total earnings for the S&P 500 companies
were up +2.5%, with 62.6% beating earnings
expectations and a median surprise of +2.9%.
Most of this growth has come from top-line
gains, with total revenues for the companies up
+1.9% and 50.1% beating revenue
expectations, with a median revenue surprise
of +0.2%.
Strong results from the Finance sector played a
big role in giving respectability to the
aggregate Q2 data. Total Finance sector
earnings are up 30% on 8.5% higher revenues,
with beat ratios of 76.9% for earnings and
65.4% for revenues.
Excluding finance the total Q2 earnings
growth for the S&P 500 turns negative – down
2.9%. Weakness in the Technology sector
spotlights the broad growth challenge outside
of Finance, though Basic Materials (total
earnings down 11.1%) and Energy (-12.7%)
also played roles.
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NEWS ROUNDUP
Total Technology sector earnings are down
10.1% on 0.4% higher revenues, the weakest
performance from the sector in a while. The
hardware and software industries individually
bring in roughly 45% and 35% of the
Technology sectors total quarterly earnings.
Excluding Technology, total S&P 500 earnings
would be up 5.4% in Q2.
SAC CAPITAL INDICTED FOR INSIDER
TRADING
SAC Capital Advisors LP, the $14 billion
hedge fund founded by Steven A. Cohen, was
indicted for perpetrating what prosecutors
called an unprecedented insider trading scheme
that was revealed as part of the government’s
six-year crackdown on Wall Street crime.
SAC was charged with four counts of
securities fraud and one count of wire fraud in
an indictment unsealed in Manhattan federal
court. The alleged scheme, which involved
more than 20 companies and went back as far
as 1999, helped reap hundreds of millions of
dollars in illicit profits, the U.S. said.
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The charges and related regulatory action may
result in the firm’s dissolution. While Cohen,
57, wasn’t charged in the indictment,
prosecutors described him as “the fund owner”
and said he “encouraged” SAC employees to
obtain trading information from company
insiders while ignoring indications that it was
illegal. The U.S. described separate insider
trading schemes by at least eight former SAC
fund managers and analysts, including Noah
Freeman, Donald Longueuil, Jon Horvath,
Wesley Wang, Mathew Martoma, Richard
Choo-Beng Lee and Michael Steinberg.
BLACKBERRY TO BE ACQUIRED BY A
GROUP LED BY FAIRFAX FINANCIAL
BlackBerry Limited announced on 24th
September that it has signed a letter of intent
agreement (“LOI”) under which a consortium to
be led by Fairfax Financial Holdings Limited
(“Fairfax”) has offered to acquire the company
subject to due diligence.
The letter of intent contemplates a transaction in
which BlackBerry shareholders would receive
U.S. $9 in cash for each share of BlackBerry
share they hold, in a transaction valued at
approximately U.S. $4.7 billion.
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NEWS ROUNDUP
The consortium would acquire for cash all of
the outstanding shares of BlackBerry not held
by Fairfax. Fairfax, which owns approximately
10 percent of BlackBerry’s common shares,
intends to contribute the shares of BlackBerry it
currently holds into the transaction. However,
Blackberry said it was not in exclusive talks
with Fairfax and would continue to "actively
solicit, receive, evaluate and potentially enter
into negotiations" with other potential buyers.
Back in 2008, Blackberry was a $83 billion
company. Currently it is around $4.4 billion.
Just three years ago, BlackBerry had a market
share of nearly 70% among business customers
in North America, according to the research
firm IDC. This year, that figure has dropped to
around 5%, IDC says. Globally, BlackBerry's
business market share has slipped to around 8%
from 31% in 2010, according to IDC.
DETROIT FILES FOR BANKRUPTCY
The city of Detroit filed for Chapter 9
bankruptcy on July 18, 2013. It is the largest
municipal bankruptcy filing in U.S. history by
debt, estimated to be $18–20 billion,
exceeding Jefferson County,
Alabama's $4 billion filing in 2011. Detroit is
also the largest city by population in the U.S.
history to file for Chapter 9 bankruptcy, more
than twice as large as Stockton, California,
which filed in 2012. Detroit’s population
has declined from a peak of 1.8 million in 1950.
Numerous factors over many years have
brought Detroit to this point, including a
shrunken tax base but still a huge, 139-square-
mile city to maintain; overwhelming health care
and pension costs; repeated efforts to manage
mounting debts with still more borrowing.
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US UNEMPLOYMENT RATE AT 5 YEAR LOW
The Labor Department said Friday, September 6th
that
the unemployment rate dropped to 7.3 percent, the
lowest in nearly five years. But it fell because more
Americans stopped looking for work and were no
longer counted as unemployed. The proportion of
Americans working or looking for work fell to its
lowest level in 35 years.
Data suggested that most of the hiring in August was
in lower-paying industries such as retail, restaurants
and bars, continuing a trend that began earlier this
year. Retailers added 44,000 jobs and hotels,
restaurants and bars added 27,000. Temporary hiring
rose by 13,000. Manufacturers added 14,000, the first
gain after five months of declines. Construction jobs
were unchanged in August. Auto manufacturers
boosted hiring in August. Some of the jobs were
workers who were rehired last month after being
temporarily laid off in July, when factories switched
to new models. Americans are buying more cars than
at any time since the recession began in December
2007. And U.S. factories expanded in August at their
fastest pace in more than two years.
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NEWS ROUNDUP
ACTIVITIES OF TEAM NETWORTH:
Networth operates under four broad verticals:
I. Events
Animal Spirits: A series of 4 intersection
competitions for PGP1 batch to give them a
flavor of various finance domains. These
include trading events like “The PIT” &
“Munaafa”, finance quiz “FinQ” & stock
pitching “Stock 20-20”.
Vista Events: Networth conducts 3 events at
Vista, the IIMB Business festival. These
include game-theory based Get-Nashty,
portfolio trading based Master the Market, and
Convexity Calls.
Corporate Events: We aim to reach out to
market participants (buy/sell side) to conduct
workshops/seminars for the students.
Fin Gyaan Sessions: We conduct sessions for
the PGP1s to help them prepare for finance
interviews for summer internships.
II. Publications: Half-yearly IIMB finance magazine
“Bottomline”
Weekly business digests: quick overview of
the financial world through the week
Biweekly Deal-Fix: Fortnightly review of
M&A deals, new capital market offerings
Compilation of interview experiences and
questions from last year’s summer placements
Compilation of current macroeconomic
happenings around the world in “Fin Fastrack”
Budget Review
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MARKET DATA
Index
Q2 2013
Open Q2 2013 Close % Change
Q3 2013
Open Q3 2013 Close
%
Change
Half Yearly %
Change
US Markets
DJIA 14578.54 14909.60 2.22
14911.60 15129.67 1.45 3.78
S&P 500 1569.18 1606.28 2.31
1609.78 1681.55 4.27 7.16
Nasdaq Composite 3268.63 3403.25 3.96
3430.48 3771.48 9.04 15.38
Russels 2000 951.41 977.48 2.67
981.30 1073.79 8.61 12.86
European Markets
STOXX 50 2697.77 2604.51 -3.58
2604.51 2776.23 6.19 2.91
FTSE 6411.74 6215.47 -3.16
6215.47 6462.22 3.82 0.79
CAC 40 3729.28 3738.91 0.26
3763.17 4143.44 9.18 11.11
DAX 7806.12 7959.22 1.92
8000.02 8594.40 6.92 10.10
Asian Markets (excluding India)
Shanghai Composite 2229.46 1979.21 -12.64
1965.99 2174.67 9.60 -2.46
Hang Seng 22203.93 20803.29 -6.73
21004.56 22859.86 8.12 2.95
Nikkei 225 12371.34 13667.32 9.48
13746.72 14455.80 4.91 16.85
FTSE Straits Times 3308.10 3150.44 -5.00
3150.44 3167.87 0.55 -4.24
Indian Markets and sectoral Indices
Nifty 5697.35 5842.20 2.48
5834.10 5735.30 -1.72 0.67
Sensex 18890.81 19395.81 2.60
19352.48 19379.77 0.14 2.59
BSE Midcap
BSE Smallcap
Bankex 11414.95 11617.25 1.74
11597.45 9617.80 -20.58 -15.74
BSE IT 6898.91 6255.10 -10.29
6206.07 7839.26 20.83 13.63
BSE Auto 9978.50 10715.77 6.88
10690.42 10996.59 2.78 10.20
BSE Metals 8757.85 7753.76 -12.95
7760.49 8371.23 7.30 -4.41
BSE Healthcare 8032.92 8845.26 9.18
8853.74 9463.81 6.45 17.81
Commodities
WTI Crude ($/bbl) 97.36 96.56 -0.83
96.58 102.33 5.62 5.10
Brent Crude ($/bbl) 110.15 102.16 -7.82
101.90 108.37 5.97 -1.62
Comex Gold ($/oz.) 1596.80 1233.70 -29.43
1232.90 1326.50 7.06 -16.93
CRB Commodity Index 296.39 275.62 -7.54
276.76 285.54 3.07 -3.66
Copper 340.00 305.05 -11.46
303.20 332.30 8.76 -2.26
Natural Gas 3.97 3.57 -11.33
3.55 3.56 0.37 -10.30
Exchange Rates
USD INR 54.29 59.39 8.59
59.47 62.62 5.03 15.34
GBP INR 82.42 90.51 8.93
90.35 101.07 10.60 22.62
EUR INR 69.83 77.65 10.07
77.48 84.52 8.33 21.04
INR JPY 1.73 1.67 -3.60
1.67 1.57 -6.25 -9.04
Government Bond Yields
US 10 Year Yield 1.87 2.49 24.73
2.50 2.61 4.16 39.49
German 10 Year Yield 1.29 1.73 25.41
1.73 1.78 2.98 38.01
Japan 10 Year Yield 0.59 0.85 30.36
0.89 0.69 -29.74 15.49
India 10 Year Yield 7.98 7.46 -6.87
7.42 8.76 15.27 9.85
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